A worker in an iron foundry in Karachi. Pakistan will seek additional support to improve social safety nets (photo: Mohammad Zargham/PPI)
South Asia
The 23-month Stand-By loan will enable the government to implement a stabilization program that envisages a significant tightening of fiscal and monetary policies to bring down inflation and reduce the external current account deficit to more sustainable levels. The program seeks to address current macroeconomic imbalances while protecting the poor and preserving social stability in the South Asian country of 170 million people.
"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," said IMF Deputy Managing Director Takatoshi Kato.
Pakistan's economic program
"The Government's program has two objectives: first, to restore overall economic stability and confidence through a tightening of macroeconomic policies, and second, to do so in a manner that ensures social stability and adequate support for the poor during the adjustment process," said Juan Carlos Di Tata, the IMF mission chief to Pakistan.
The Pakistan authorities have already taken some difficult steps to achieve these objectives: energy subsidies have been cut and the interest rate has been increased to tighten monetary policy. The authorities' program for the coming 24 months envisages a number of additional steps:
• The fiscal deficit, excluding grants, will be brought to down from 7.4 percent of GDP in 2007/08 (starting July 1) to a more manageable 4.2 percent in 2008/09 and 3.3 percent in 2009/10—in line with what it was three years ago. This fiscal adjustment will be primarily achieved by phasing out energy subsidies and strengthening revenue mobilization through tax policy and administration measures. The reduction in expenditures will create room to increase spending on the social safety net.
• The State Bank Of Pakistan (SBP) will act on monetary policy to build its international reserves, bring down inflation to 6 percent in 2010, and eliminate central bank financing of the government. The program includes measures to improve monetary management and enhance the SBP's bank resolution capacity, and avoid the use of public resources to support the stock market.
• Expenditure on the social safety net will be increased to protect the poor through both cash transfers and targeted electricity subsidies. The fiscal program for 2008/09 envisages an increase in spending on the social safety net of 0.6 percentage points of GDP to 0.9 percent of GDP. Pakistan will also work with the World Bank to prepare a more comprehensive and better targeted social safety net program.
Contribution of the IMF
The financing from the IMF will help to ease the path of adjustment and will provide a strong signal of support to the international community. Of the $7.6 billion loan, $3.1 billion will be made available by the IMF immediately to strengthen the reserve position. And the regular monitoring of the economy by the IMF will show how the macroeconomic objectives set by the Government are being met and whether they need to be adjusted in the light of changing circumstances.
"It is important to point out that the program—and its conditionality—is based on the targets and measures that the authorities have themselves set for the next two years. The IMF is convinced that the best implemented programs are the ones that are home grown and fully owned by the country," Di Tata said.
Alongside the IMF's financial support, there is an urgent need to mobilize additional donor support to strengthen Pakistan's resilience to potential shocks, help finance the expanded social safety net, and allow for higher spending on development programs. "The Fund stands ready to participate in any donor meeting to provide the economic and financial analysis that could underpin expanded support."
Implementation key to success
Success of the program could be affected by a number of risks. They arise from security and implementation uncertainties, a more severe-than-anticipated slowdown in economic activity in trading partners, and lower-than-expected private capital inflows.
"Sustained and forceful implementation will be key to the success of the program," Di Tata stated.
Previous gains
From the early 2000s to mid-2007, Pakistan's macroeconomic performance was robust. During the period 2000/01-2004/05, when Pakistan successfully implemented two IMF-supported programs, real GDP growth averaged 5 percent a year with relative price stability. The improved macroeconomic performance enabled the country to reenter international capital markets in the mid-2000s.
The macroeconomic situation, however, deteriorated significantly in 2007/08 and the first four months of 2008/09 on account of domestic and external factors. Adverse security developments, large exogenous price shocks (oil and food), and the recent global financial turmoil buffeted the economy.
Quick IMF response
The IMF has moved quickly to help emerging market and developing countries affected by fallout from the financial crisis originating in advanced economies.
The IMF has more than $200 billion in lendable resources and says it is ready to process loan proposals quickly through its Emergency Financing Mechanism. Japan has offered to provide additional resources to the IMF if needed.
Comments on this article should be sent to imfsurvey@imf.org
