Karachi: Pakistan obtained a $7.6 billion lifeline from the International Monetary Fund, extended by the organization to prevent the country from defaulting on debt. The loan comes even as Pakistan's foreign-exchange reserves have shrunk 75 per cent in 12 months, to $3.45 billion, and economic growth is forecast to hit a seven-year low.
With the global financial crisis and recession beginning to exact a heavy toll among nations, the IMF has cleared more than $40 billion of loans to stabilize Ukraine, Serbia and Iceland in recent weeks.
Belarus is also in line with a request for $2 billion and Turkey on standby for emergency funding.
An IMF statement in Washington said the State Bank of Pakistan has committed as part of the aid to "further tighten monetary policy as needed." It also said that the Indian sub-continent's second-largest economy would be able to immediately draw upon $3.1 billion of the loan under a 23-month facility, with the rest phased in subject to quarterly review.
The bailout will enable Pakistan to cover an international sovereign bond maturing in February.
The Pakistani currency also perked up and was quoted trading at 78.55/65 to the dollar at 9:54 a.m. (0454 GMT) Tuesday, compared with Monday's close of 78.90/79. The rupee has recovered 7.4 per cent from an all time low of 84.40 struck on 17 Oct., though it was still down 21.58 per cent since the beginning of the year.
Central bank reserves have dwindled to the equivalent of just nine weeks of imports.
"The Pakistani economy was buffeted by large shocks during fiscal year 2007 and 2008, including adverse security developments, higher oil and food import prices and the global financial turmoil," said IMF Deputy Managing Director Takatoshi Kato. "By providing large financial support for Pakistan, the IMF is sending a strong signal to the donor community about the country's improved macroeconomic prospects."
Pakistan also expects the IMF loan will help it win additional aid from a group of other lenders and donor nations, including the US, UK, China and Saudi Arabia. The group's 17 Nov. meeting in Abu Dhabi has already adopted a "work plan" for financial help to Pakistan.
To secure the IMF loan, Pakistan agreed to a "significant tightening of fiscal policy" said the IMF. Pakistan intends to reduce budget deficit to 4.2 per cent of gross domestic product in 2009 from 7.4 per cent in the past financial year, according to the international lender.
The cost of insuring a $10 million Pakistani government bond against the risk of default has more than doubled since the end of September to $2.28 million a year from $987,000 per annum, according to CMA Datavision.
Inflation jumped to a 30-year high of 25.33 per cent in August. The Fund has targeted a reduction in inflation to 6 per cent by mid-2010.
S&P cut the nation's rating to CCC on 14 Nov., one day before the latest IMF loan was announced, citing a risk of default on external debt payments.