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Debt servicing

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Pakistan needs $4.5 bn


Aug 21 - 27, 2000

According to the latest reports the expected funding from the IMF under Poverty Reduction and Growth Facility programme (PRGF) may not be available by the end of this year and this may put Pakistan in a precarious position as the present rescheduling of loan will expire by Dec. 2000 and Pakistan needs nearly 4.5 billion dollars to meet its debt servicing liability during the year.

About 1 billion dollar will be needed in the first quarter of 2001 and Pakistan can avoid default only either by arranging another rescheduling or persuading IMF to expedite release of funds under 3 billion dollar 3-year package under PRGF which the first installment of 500 million dollar is due in September 2000 and the second in March 2001. But the way IMF is using its delaying tactics leads to apprehensions that they are upto some other mischief and want Pakistan to agree to some other conditions cornering it into a difficult situation.

Instead of sending their normal team to Pakistan in July for the post budget review of the economic situation for preparation of their report for the consideration of the Funds Board in Sept. 2000, they have sent a 2 member technical team in the second week of August to look at the revenue and expenditure of the state and connected details. The high powered mission is expected next month for finalising its study to recommend assistance under PRGF. The mission may finalise its report by Oct/Nov. which may be considered by IMF Board in December 2000.

While the IMF officials are concerned with the details of the financial package they ultimately draw up, the extent to which Pakistan can honour its varied commitments under that, and the manner in which Pakistan can benefit economically from that, the nominees of the Group of 7 on the IMF Board have to get their political clearance from their governments. Unlike our earlier expectation of the package coming up by next month that may not be available before December and that too only if it goes through the political clearance of the Group of Seven prior to that.

A report emanating from Washington is significant in this regard which says that countries identified internationally as supporters of terrorism and those with corrupt and undemocratic regimes are not likely to get IMF assistance. According to the press report, at a recent question-answer session held at the National Press Club in Washington DC, IMF managing director, Horst Kohler, explained the Fund's policy in this regard. He, however qualified this policy by stating that the IMF on its own cannot square the circle, according to the transcript of the Q/A session put on the IMF website.

The questioner had asked if the IMF should make loans to countries identified as supporters of terrorism, Mr. Kohler in his reply said. Certainly not, but the IMF is not how should I say the Lord who knows everything. And the Fund cannot square the circle. We have an assessment. We go to the countries with all of the best experts we have in order to assess the situation. We are often in a situation, not knowing exactly all the details of the situation". He said the Fund should be even more careful, particularly in the field of corruption of undemocratic regimes, not to work with them, "but this is then, also an issue of our shareholders to come more clearly out how they see this country and the cooperation with this country".

IMF officials here say that it is the Paris Club donors who have to give the political approval for resumption of the aid suspended since May last year. The political conditions for resumption of the aid, desperately needed by Pakistan are several. Some of them are very tough conditionalities, apart from signing CTBT, like handing over Osama bin Laden to the US. The others are banning some of the militant organizations within Pakistan, like Harkatual Mujahideen, and closing some of the alleged terrorist bases. Better relations with India and less assistance to Mujahideen groups in Kashmir can also be helpful.

Out of 7 countries Japan is more friendly and sympathetic to us. It is also important to us as it is the largest single donor with an annual package of about 500 million dollars. Japan Prime Minister Yashiro Mori is to visit Pakistan from Aug 20 as a part of his South Asian tour to discuss bilateral relations between Japan and Pakistan. But it has been repeatedly made clear by Japan's Embassy in Islamabad that Japan cannot resume its aid programme suspended since 1998 nuclear explosion unless Pakistan signs CTBT and shows strong commitment to nuclear non-proliferation. Japan's Ambassador in Pakistan, while addressing a meeting of Chambers of Commerce and Industry in Karachi last month, offered to release all the accumulated amount of suspended aid once CTBT is signed by Pakistan.

Meanwhile the State Bank of Pakistan has prepared an alternate plan to meet the situation if IMF withholds the expected package or delays, that unduly, says its governor Dr. Ishrat Hussain. "If we cannot have a deal with the IMF, we have prepared an alternative to cope with the situation," he says without disclosing the details. The speculation in the country since then is on what kind of an alternative package it will. Pakistan is estimated to need six billion dollars next year primarily to meet its debt commitments after the current rescheduling of debt repayments comes to an end by December 31. Meanwhile the sinking foreign exchange reserves has gone down below 1.2 billion dollars, while Ms. Benazir Bhutto in a statement issued from abroad asserts the reserve is only 700 million dollars. And yet the State Bank is forced to use some its meagre dollar reserves to prevent the rupee sinking too low in the inter-bank market.

Drawing up an alternative package is not easy. What matters is not only the size of that package but also its duration. Even if we get the package of 3 billion dollars spread over three years it will not solve many of our problems but only a few. But getting a certificate of good economic health or getting on to the road to good health with IMF guidance is very important for our external financial dealings.

One of the measures which Pakistan can use that has been publicly mentioned from time to time is seeking a second rescheduling of loan repayments from January 1, 2001. That is to be for 5 billion dollars spread over three years. Compared to that the current rescheduling was for about 18 months and 3.016 billion dollars.