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
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.