ISLAMABAD: The government, on Thursday, welcomed a $6.7-billion loan from the International Monetary Fund (IMF), but economists warn it can only be a stop-gap unless Islamabad enacts uncomfortable economic reforms.
The IMF executive board authorised a three-year loan, making an initial $540 million available to the authorities.
The remaining amount will be evenly paid out over the duration of the programme, subject to the completion of quarterly reviews, the Washington-based global lender said.
“We welcome the timely decision by the IMF board in approving the loan,” Rana Asad, spokesperson for the Ministry of Finance said.
He said Pakistan had got the loan on its “own conditions” and that the money will be used to pay off previous loans. “Basically it is for debt repayment,” he told AFP.
The aid is an extended fund facility (EFF), which is aimed at helping a country that faces serious balance of payments problems because of structural weakness that requires time to address.
The repayment period for an EFF loan is between four and a half to 10 years.
In its announcement of the loan on Wednesday, the IMF said Pakistan’s adherence to the programme would likely encourage financial support from other donors.
“Despite the challenges it faces, Pakistan is a country with abundant potential, given its geographical location and its rich human and natural resources,” the IMF said.
“The authorities’ programme is expected to help the economy rebound, forestall a balance of payments crisis and rebuild reserves, reduce the fiscal deficit, and undertake comprehensive structural reforms to boost investment and growth.”
The loan is aimed at reducing Pakistan’s fiscal deficit – which neared 9% of the gross domestic product (GDP) last year – to a more sustainable level and reform the energy sector to help resolve severe power cuts that have sapped growth potential.
Pakistan’s daunting array of problems ranges from the energy crisis to dwindling foreign exchange reserves and a sinking currency besides a law and order situation.
Economic growth has sputtered in recent years.
GDP growth came in at 3.7% in 2012 and is forecast to come in at 3.5% this year and 3.3% in 2014, according to the IMF’s latest projections.
The request for a loan came just weeks after the general elections in May that marked the country’s first democratic transition of power, putting Prime Minister Nawaz Sharif in office for a third time.
The new loan came after months of negotiations.
Pakistan abandoned a previous $11.3 billion IMF loan programme in 2011 after refusing to carry out strict financial reforms, and still owes about $4 billion to the fund.
But Muzammil Aslam, managing director of Emerging Economics Research, which provides investment advice to fund managers, warned it would be difficult for the government to abolish tax subsidies and raise electricity tarries.
“Nobody takes the Pakistani government seriously in terms of the economic reforms it is supposed to incorporate,” said Aslam.
The political situation in Pakistan is also expected to pose a challenge for the IMF.
“There isn’t any doubt that it’s going to be an extremely difficult programme for the IMF to oversee,” Jacob Kirkegaard of the Peterson Institute for International Economics told AFP.
“If Pakistan was not a nuclear-armed country, the dominant countries at the IMF board would probably be less interested in trying everything possible to stabilise the situation there.”