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Approval by the IMF shows confidence in GoP policies and its determination to carry out reforms

By SHABBIR H. KAZMI
Dec 17 - 30, 2001

After successfully completing Stand-By Agreement (SBA) with the IMF, Pakistan has been able to establish itself as responsible country. This paved the way for the approval of the Poverty Reduction and Growth Facility (PRGF). Without this facility in place, it would have not been possible for Pakistan to successfully negotiate with other multilateral and bilateral lenders to restructure its external debt and fresh funds. Conclusion of the deal on the PRGF is not the end of the story. Since the installments would be disbursement after frequent reviews of conditionalities and actual performance, economic managers of Pakistan would be required to follow specific and prudent policies for the continuation of assistance under the Facility.

First of all it is necessary to say a few words about the general impression that the sole reason for the speedy and large-scale funding for Pakistan was its support for the US led coalition in the campaign in Afghanistan. The credit for getting the PRGF approved must go to present economic managers. Since they have resumed power, hectic efforts have been made to revive the economy, mobilize additional resources and bring debt servicing in accordance with Pakistan's capacity to pay. The first success was achieved when the country concluded the US$ 600 million SBA in November 2000. The second achievement is successful completion of the SBA. And yet another successful negotiations of the PRGF. The PRGF was never really in doubt but recent events leading to Pakistan's elevation to 'good friend' status have obviously speeded things up. At the IMF nothing beats vocal support from executives directors of the US, United Kingdom and Japan

Under the PRGF facility Pakistan would get US$ 1.3 billion over the next three years. The amount will be disbursed in twelve equal tranches, with the first installment becoming available with immediate effect. Loan under the PRGF carry a nominal interest rate of 0.5 per cent and are payable over 10 years with five and a half year grace period. Funds available under this facility together with financing from other multilateral institutions, grants and loans from bilateral donors and rescheduling by creditors under the Paris Club would cover the financing gap of US$ 9.5 billion in external sector.

The programme envisages continuation of the present reform agenda with emphasis on increased spending on social sector and poverty alleviation. The GoP would implement a policy framework aimed at raising growth and reducing poverty, while consolidating macroeconomic stability and external viability. The strategy will be focused to achieve sustained fiscal adjustment and will be supported by reforms in tax administration. The GoP would also be required to pursue a broad-based agenda of restructuring and privatization of public sector enterprises, ensuring that administered gas and electricity prices reflect market conditions, deepening the liberalization of the financial sector and integrating the kerb and inter-bank foreign exchange markets. The goals of PRGF supported economic programme include raising growth rate closer to 6 per cent over medium term, keeping inflation below 5 per cent and raising official reserves equal to three months of import bill. It must be recognized that most of the measures envisaged under the PRGF are in the interest of the country and the targets are not difficult to achieve.

Pakistan has entered into a new phase of relationship with the IMF. The country has been able to negotiate funding at its own terms. It will not be wrong to say that the programme is 'home grown' and its ownership must continue. Therefore, the entire approach needs to be different this time. Structural reforms and other conditionalities contained in the policy framework must be implemented in letter and spirit during the next three years to achieve the objectives of attaining a sustainable growth rate, narrowing of twin deficits and reducing poverty.

Pakistan needs large scale investment to achieve higher GDP growth rate. In the recent past investment, both local and foreign, was adversely affected due to low sovereign rating. The successful negotiation of PRGF is expected to improve Pakistan's sovereign rating and increase the inflow of foreign direct investment as well as portfolio investment.

The stake will be very high if the programme is derailed at any stage. Generous foreign assistance which came in the past was not used prudently. While the debt continued to mount without a comparable improvement in growth rate and debt servicing capacity of the country. The natural outcome was greater dependence on external sources. Continuity of present policies is a must for achieving the targets. There are all the indications that these policies will be continued. There are all the reasons to believe that economic managers would be able to meet the challenge.