IMF sets Pakistan tough loan targets

A multi-billion-dollar loan package designed to whip Pakistan’s moribund economy into shape remains contingent on a new generation of officials in Islamabad being able to push through painful but necessary financial and structural reform, the IFM said.

Jeffrey Franks, the fund’s Pakistan country chief and Middle East and Central Asia advisor, told Emerging Markets the final loan package would total $12 billion, delivered in quarterly payments to a new government headed by premier Nawaz Sharif.

The fund is contributing $6.6 billion toward the package, with the remainder sourced from the World Bank and the Asian Development Bank.

Franks said the first payment of $544 million had been delivered last month, but that future disbursals would depend on Pakistan’s ability to tackle severe and pressing economic and financial constraints.

He pointed to “critically low” levels of foreign reserves, which dipped below $10 billion in the first week of October, barely enough to meet a single month’s import bill.

“Pakistan needs to rebuild [those reserves],” he noted. “The goal is to boost reserves to $15 billion over the next three years”, leading up to the expiry of the loan package in September 2016.

Other pressing economic issues include an “unsustainable” budget deficit, and dangerously high rate of inflation, which regularly tops 12%. Franks said the fund expected prices “to start rising again going forward” due to rising exchange-rate volatility and rapid growth in the money supply.

“Double-digit inflation is very damaging,” he added, noting that Pakistan’s economic performance over the past five years had been “dismal”. “They’ve had growth, but it hasn’t been high enough to generate enough jobs in a sustainable way.”

Franks added that the loan package, overseen by the IMF, would also be reviewed on a quarterly basis, with loan payments contingent on Pakistan cutting its fiscal deficit to 3% within three years, from 8% at present, while stabilizing inflation in a range around the 6% mark.

Islamabad also plans to privatize or close 31 state entities as part of its reform drive, while increasing and diversifying the tax take and eliminating thousands of tax loopholes that benefit the wealthy.

“There are areas of Pakistan’s economy that either [aren’t] inside the tax net, or where the net is full of holes,” said Franks. Officials are also targeting better enforcement of sales and excise taxes as they look to boost fiscal revenues.

Fund officials will convene in Islamabad at the end of this month to assess the extent of the loan’s initial impact. Franks said he was confident the first quarterly review would “probably go well”, allowing the fund and its partners to deliver the second, $544 million quarterly payment at the end of December.

Were Pakistan were to miss a series of fiscal and economic targets, the loan package would come under review, with officials in Islamabad needing both “to show why they are missing targets”, and how they would correct the situation.

The sense within the IMF is that Pakistan is determined to reform itself under Sharif’s new-broom leadership. “There’s a dynamic within Pakistan that is generating” this desire to reform a backward economy,” said Franks, based on a “widespread recognition that [Pakistan’s] economic circumstances were unsustainable.”