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Islamabad is pressing IMF to raise the level of funding

From Shamim Ahmed Rizvi, Islamabad
Oct 23 - 29, 2000

After recent devaluation of rupee the government of Pakistan has fulfilled all the conditionalities of the International Monetary Fund (IMF) except resolving the HUBCO issue, the fund is still not willing to resume $3.5 billion 3 years assistance under poverty alleviation and growth programme. Instead, as the latest indications from IMF sources indicate, Pakistan may receive about 1.5 billion US dollars for one year under standby arrangement at a higher rate of interest. In addition rescheduling of $2.2 billion debt service may be arranged to enable Pakistan to save itself from default till Sept. 2001.

It is for the second time that debt service payments would be rescheduled. The bilateral donors including Paris Club members rescheduled 3.1 billion dollars payment due from July 1,1998 to 31st December 2,000. Islamabad had approached Paris Club in January 1999.

Official sources said that the financial package is designed to take care of the current account deficit for about a year, though bulk of the disbursements would made before end of June 2001. The disbursements would include 520 million dollars out of the 800 million dollar Asian Development Bank, the 350 million dollar World Bank Structural Adjustment Loan and major portion of the IMF financial assistance of 600-700 million dollars.

An agreement has been reached with the IMF management but the exact quantum (of assistance) would be known only after the approval of the executive board of the Fund, anticipated by official in the second week of November. The first installment will be paid immediately after the board approval.

Islamabad is however pressing IMF to raise the level of funding. The level of IMF bailout package has been based on the Fund's own assessment of the current account deficit for the tenure of the funding facility, a perception and approach not shared by Islamabad. Simultaneously, Islamabad is continuing talks on conversion of the low volume short-term standby credit carrying high interest rates into larger level of longer term Poverty Reduction Growth Facility (PRGF) extended at confessional rate of interest. Sources said the IMF has agreed to consider extending PRGF after monitoring the track record in the execution of Fund's programme for six months ending march 2100. If approved, the PRGF wound become effective from next fiscal. In return IMF would expect for more radical, long term and sweeping reforms including restructuring of civil service, making tax machinery more effective and cut in tariff rates. The Fund would also monitor the exchange rate, budget deficit and economic growth. One vital area of concern for multilateral agencies is how effectively the various policies and programmes are executed.

The budget deficit has been revised upwards from original target set at 4.6 per cent of the GDP to five per cent under IMF advise, reportedly for shortfall expected in revenue collection estimated for the year. Sources said the fiscal deficit has also been revised upwards because of the stipulated 12 per cent depreciation of the rupee against the dollar that will raise the rupee cost of servicing of foreign debt and make government imports costlier. Interest rate hike will raise the financial charges for the government domestic borrowings. These factors, sources said, have been taken into account when setting the new fiscal deficit target with IMF approval.

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.

A report emanating from Washington is significant in this regard which said 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.

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".


Out of G7 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 visited Pakistan August as a part of his South Asian tour to discuss bilateral relation between Japan and Pakistan, it was 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 offered to release all the accumulated amount of suspended and once CTBT is signed by Pakistan.