After repeated denials from the Pakistani government last month that it was seeking an IMF loan and officials insisting that seeking help from the IMF would be the last resort, Pakistan finally had to be bailed out with a $7.6 billion loan from the IMF after it became clear that its friend and allies would help only if the IMF agreed, as its loan comes with strict fiscal discipline.
Addressing a press conference, fianancial advisor to Pakistan prime minister Shaukat Tarin and State Bank Governor Shamshad Akhtar said the IMF will provide $7.6 billion loan as stand-by credit at interest rate ranging between 3.51 and 4.51 per cent, which is repayable in five years beginning 2011. The loan will be released over a two-year period and Pakistan is expected to receive $4 billion before the end of the month.
Pakistani officials and the IMF team were negotiating the loan for nearly a month in Dubai to discuss details of the country's financial restructuring plan. (See: Pakistan seeks IMF help)
Pakistan had ended its last IMF programme in 2004.
Pakistan had joined the IMF on 11 July 1950 and its allotted quota is approx $1,526.3 million and Shaukat Tarin said ''the IMF has given five times our quota, which comes to $7.6 billion.''
Pakistan is expected to send a letter of intent to the IMF next week and, according to the deal, the first tranche of $4 billion will be released within a month and Pakistan will pay $1 billion in terms of interest on foreign borrowings from this initial amount.
Strauss-Kahn, the IMF director said "the Pakistani authorities have developed a policy package to help the country meet its serious balance of payments difficulties.''
The main objective of the loan was to restore confidence of domestic and external investors by addressing macroeconomic imbalances through a tightening of fiscal and monetary policies, and to protect the poor and preserve social stability through a well-targeted and adequately funded social safety net, the IMF said in a press statement.
Though the IMF's package will save it from an immediate economic collapse, it still falls woefully short of the $10 billion to $15 billion that Pakistani requires over the next two years to fix the economy.
As early as September, Citigroup had in its report suggested that Pakistan may require the help of the IMF in view of its shrinking foreign currency reserves. (See: Pakistan in urgent need of IMF aid)
Pakistan will now seek the shortfall from the World Bank and the Asian Development Bank and it also hopes to get a substantial amount from its 'Friends of Democratic Pakistan,' a group comprising of allies such as the US, China, the EU and Saudi Arabia who are holding a meeting today in Abu Dhabi, in the United Arab Emirates.
Last week, Shaukat Tarin, said Beijing had agreed to give a $500 million loan (See: China offers $500 million to Pakistan) although there was no confirmation coming from the Chinese authorities.
"I would like to call on the donor community to work together and act quickly to support Pakistan's program in order to mitigate the impact of the current economic difficulties on the poor and ensure an adequate level of spending on development programmes," Strauss Kahn said.
Pakistan was forced to seek international help after its foreign reserves shrunk to $3.49 billion as of last week from $14.2 billion a year back, raising concern that Pakistan will not be in a position to pay the $3 billion in debt-servicing costs which is due in the next 12 months.
The Pakistani rupee plunged 21.8 per cent to an all-time low and inflation jumped to a 30-year high as oil and food prices soared and the balance of payments deficit widened. Since the beginning of the year, its stock market has fell by about 35 per cent.
Pakistan's trade deficit galloped to $20 billion in the last financial year, from $4 billion only four years ago, due to high prices of crude and the import of high-cost items, including food, garments and cosmetics.
The economic crisis was more compounded when the newly elected government led by Pakistan Peoples Party, was paralysed for almost six months because of political wrangling.
Standard & Poor's had cut Pakistan's credit rating to CCC from CCC+, the lowest level in 10 years, citing the country was at great risk in defaulting $3 billion in debt servicing costs in the coming years.
Newly appointed Pakistan's president Asif Ali Zardari said seeking help from the IMF would be the last resort and he undertaken a trip to Pakistan's steadfast ally China last month and also to its long-standing benefactor, Saudi Arabia with an entourage of more than 200 members to plead for an immediate loan of $2 billion, but had to return empty handed forcing the country to seek IMF's help.
He changed his stance later by saying "I think it's a difficult pill, but one has to take medicine to get better."
The government had cut massive subsidies on fuel and other essential goods this year that pushed its budget deficit to over 7 per cent of gross domestic product and in order to secure the IMF loan, Pakistan's central bank, last week raised its key interest rate by 200 basis points to 15 per cent.
In July, Pakistan's central bank had raised interest rates by 100 basis points to 13 per cent.
Although Pakistan officials have stated that the IMF loan has come without any conditions, media reports emanating from Pakistan state otherwise.
According to media reports, Pakistan is required to make deep spending cuts and increase its tax and also expand the tax net as only 1 per cent of the country's population of 165 million pays income tax and the IMF has asked the government of Pakistan to introduce agriculture tax in order to boost its tax revenue.
The IMF has warned Pakistan that this would be the last IMF programme to Pakistan if it fails to introduce agriculture tax.
The IMF also expects the government to levy new taxes on real estate appreciation, stock market profits and capital gains.
It will also reduce the number of posts entailing pensions in the government and semi-government departments from 350,000 to 120,000.
Initially, IMF had demanded the Pakistan government reduce its defence budget by 30 per cent between 2009 and 2013, but Pakistan had argued successfully that any reduction in defense budget would affect its war on terrorism.
Economists have cautioned that increased unemployment and cut in social expenditure would create unrest and the country has to find solutions to protect the poor who make up almost a third of the 165 million population.
The IMF has now bailed out 4 countries, including Iceland with 2.1 billion along with $4 billion loan from a group of European countries (See: Iceland to get $6 billion from IMF, Europe), in the wake of the global financial crisis.
The IMF, had pledged Ukraine with a loan of $16.5 billion (See: IMF bails out Ukraine with a $16.5 billion loan) and Hungary with $15.7 billion (See: Hungary receives $25.1 billion from IMF, EU, World Bank)