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Pakistan gets $7.6 billion rescue fund

By Sridhar Krishnaswami in Washington
November 25, 2008 10:54 IST
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In its first intervention in Asia since the beginning of the current financial crisis, the IMF has approved a $7.6 billion rescue fund for Pakistan that will support the country's economic stabilisation programme.

Upon the approval of the IMF's executive board, an amount equivalent to $3.1 billion becomes immediately available to Pakistan, and the remaining amount will be phased in, subject to quarterly reviews in a 23-month stand-by arrangement under which the total amount of resources made available equal 500 per cent of the country's quota.

The arrangement was approved by the Board under the Fund's fast-track Emergency Financing Mechanism procedures.

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The IMF-supported programme aims to achieve the key objectives of restoring macroeconomic stability and confidence through a tightening of macroeconomic policies and to ensure social stability and adequate support for the poor and vulnerable in Pakistan, the Fund said in a statement.

"The programme targets a significant reduction in fiscal deficit, aimed at eliminating State Bank of Pakistan financing of the government and reducing the external current account deficit, while allowing for increased social and development spending," Takatoshi Kato, Deputy Managing Director and Acting Chairman, said following the Executive Board discussion.

The reduction, he said, will be achieved primarily by phasing out energy subsidies, better prioritising development spending, and implementing tax policy and tax administration reforms.

The authorities plan to put in place a comprehensive and effectively-targeted social safety net in close cooperation with the World Bank, Kato said in his statement.

"By providing large financial support to Pakistan, the IMF is sending a strong signal to the donor community about the country's improved macroeconomic prospects," he added.

The IMF said the intervention was necessitated as a result of the worsening of the macro economic situation in Pakistan significantly since mid-2007.

Adverse security developments, large exogenous price shocks, notably related to increases in oil and food import prices, and global financial turmoil buffeting the economy combined with policy inaction during the transition to the new government led to slower growth, higher inflation and a sharp deterioration of the external position, IMF said.

The programme initiated by the government with support from the IMF envisages a significant tightening of fiscal policy with especial emphasis on reducing fiscal deficit from 7.4 per cent of GDP in 2007-08 to 4.2 per cent in 2008-09 and 3.3 per cent in 2009-2010.

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"This fiscal adjustment will be achieved primarily by phasing out energy subsidies, better prioritising development spending, and implementing strong tax policy and administration measures," the Fund has said.

Besides the programme also envisages a tightening of monetary policy to bring down inflation and strengthen the country's international reserves position, with the central bank pursuing a flexible exchange rate policy.

A strengthening and better targeting of social assistance to provide support for the poor and vulnerable is an essential element of the programme, the Fund said. Pakistan, which joined the Fund in 1950, has a quota of Special Drawing Rights of about $1,526.6 million.

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Sridhar Krishnaswami in Washington
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