IMF and Pakistan agree to a $5.3-bn bailout

The bailout aims to bolster Pakistan's flagging economy and its perilously low foreign exchange reserves

The International Monetary Fund and Pakistan reached a provisional agreement on Thursday on a $5.3-billion bailout package that aims to bolster Pakistan's flagging economy and its perilously low foreign exchange reserves.

The rescue package is expected to soothe Western fears about the state of Pakistan's economy, which has slumped in recent years amid unrelenting Taliban violence and deeply rooted corruption that have shaken investor confidence. The IMF package also would provide a tangible lift for the newly elected prime minister, Nawaz Sharif, who has already become bogged down by a seemingly intractable energy crisis.

The IMF has an unhappy history with Pakistanis, some of whom are likely to see the package negatively. The last government failed to meet the terms of the previous IMF package six years ago, and the country is still struggling to repay billions of dollars of that debt.

Moreover, Sharif's government is ideologically hostile to international financial assistance, and he campaigned before the election on a platform of economic autonomy. But, analysts say, his administration had little choice but to accept Thursday's deal.

The $5.3-billion package will be used in part to service the existing IMF 1debt, but also to create confidence in the economy and alleviate the severe energy crisis, which has included crippling electricity cuts across the country, even in the capital, Islamabad, in recent months.

"It was a necessary thing," said Sakib Sherani, an economist who advised the last government. "Everyone's been on tenterhooks about the balance of payments crisis, and a possible run on the rupee. At least this will provide some stability so the new government can work on implementing its own agenda."

At a news conference on Thursday evening, Jeffrey Franks, head of the visiting IMF mission to Pakistan, said the package included provisions for a reduction in Pakistan's budget deficit — which almost hit nine per cent of gross domestic product last year — and a comprehensive energy sector overhaul.

Power shortages have been sapping Pakistan's economic growth potential, Franks said, and the bailout aims to put the energy sector on more stable footing. The $5.3-billion loan is subject to approval by the IMF executive board, which is scheduled to meet in early September. If the loan proceeds, it will carry an interest rate of about three per cent and be disbursed over three years, Franks said.

Ishaq Dar, the Pakistani finance minister, denied that his government had reneged on its election pledges of economic independence.

"We are entering into a new program for the good of the country," he said. "A better tomorrow dawns only when requisite pains are borne today."

The IMF loan is unlikely to be used to directly finance the oil imports needed to get Pakistan's power stations working at normal capacity, Sherani said. But it may provide a jolt of confidence among other international institutions that, in turn, would help finance oil imports.

Franks acknowledged Pakistan's failure to repay previous loans from his institution. But Sharif's government will not be punished for the sins of its predecessors, he added.

"We're not going to turn a country down because previous governments did not do what they had promised to do," he said.

©2013 The New York Times News Service