INGTON - Pakistan will get immediate access to about $3.1 billion after the International Monetary Fund's executive board cleared the way Monday for a $7.6 billion loan to provide the cash-strapped country with much-needed financing.
The rest to be phased in following quarterly reviews, the fund said in a statement.
The 23-month standby facility is expected to form part of a broader international package to help Pakistan deal with a balance-of-payment crisis. The country needs around $4 billion in short order to pay for its imports and help repay its debt.
"The Pakistani economy was buffeted by large shocks during fiscal years 2007 and 2008, including adverse security developments, higher oil and food import prices, and the global financial turmoil," Takatoshi Kato, deputy managing director and acting chairman of the board, said in a statement.
He also blamed a delay in allowing higher prices to pass through to domestic consumers for a jump in the budget deficit and said the State Bank's financing of the deficit pushed up inflation and sharply reduced international reserves.
The IMF expects Pakistan's economic growth to slow to 3.4% in the current fiscal year, which began July 1, from 5.8% the previous year. It is forecast to recover to 5.0% next fiscal year.
The main objectives of the IMF program will be to restore the confidence of domestic and external investors by addressing macroeconomic imbalances through a tightening of fiscal and monetary policies, while maintaining social stability through targeted spending, the IMF said.
The budget deficit is expected to be cut to 4.2% of gross domestic product the current fiscal year and 3.3% the following year, from 7.4% at the end of June.
"The reduction will be achieved primarily by phasing out energy subsidies, better prioritizing development spending and implementing tax policy and tax administration reforms," said Kato.
The State Bank of Pakistan, which recently conducted a two-percentage-point hike in the discount rate, will continue to tighten as necessary to bring down inflation and shore up reserves, the IMF said. The bank is also expected to stop financing the government.
"The recent increase in interest rates and the State Bank of Pakistan's commitment to further tighten monetary policy as needed will help to bring down inflation, support the rupee and boost international reserves," said Kato. "These results will enhance confidence in the Pakistani economy, facilitating a resumption of foreign capital inflows."
The IMF-supported programme allows for further development spending if additional external funding materializes.
"By providing large financial support to Pakistan, the IMF is sending a strong signal to the donor community about the country's improved macroeconomic prospects," Kato said. "The mobilization of additional donor financial support will help consolidate the country's international reserve position and finance the expanded social safety net."
In announcing the deal earlier this month, IMF Managing Director Dominique Strauss-Kahn called on the international donor community to act quickly to support Pakistan. The country earlier this month received a $200 million loan from the Islamic Development Bank, while China has also pledged $500 million in assistance.
Friends of Pakistan, a group of bilateral donors including China, the U.S., the U.K. and the United Arab Emirates, met last week to discuss a financing plan for the troubled country, but no new announcements were expected until after the IMF deal won approval.
The adviser to the prime minister on finance, Shaukat Tarin, has said the country is seeking about $20 billion in loans from various donors over the next two years.
Demand for IMF assistance has picked up sharply in recent weeks as an increasing number of countries are being swept up in the global financial crisis. The board recently approved deals for Ukraine, Hungary and Iceland, and the fund is in talks with Latvia and Belarus.
Like the other recent deals, the Pakistan loan was fast-tracked through the Emergency Financing Mechanism, a streamlined lending programme first put into action during the Asian financial crisis in the late 1990s.
To address growing demand for its financing, the fund has also set up a $100 billion short-term lending facility for countries with generally sound macroeconomic policies, without the strict requirements usually tied to IMF help.
With concern growing that the IMF's $200 billion lending capacity won't be enough to meet the needs of crisis-hit countries, Japan has promised to lend the fund $100 billion.