IMF aide says Pakistan might not need new loans

published on Sunday, August 17, 2008

KARACHI, Pakistan: Pakistan does not need to turn to the International Monetary Fund for money in the next 10 months if the government cuts spending and gets other sources of financing to offset its falling reserves, a senior IMF official said.

Mohsin Khan, the IMF director for the Middle East and Central Asia, said Pakistan had not sought IMF loans.

He said Pakistan would not need an IMF loan in the fiscal year to June if the government abolished all fuel subsidies by December as planned, and stopped borrowing from the central bank to pay for its budget deficit.

High oil prices have depleted Pakistan’s foreign exchange reserves to levels worth less than three months of imports, sparking concerns among investors that Pakistan may need to seek loans from the IMF to pay for imports.

Khan said the government needed to stick to its privatization plans to raise money, secure over $1 billion worth of loans from the World Bank and the Asian Development Bank, and get Saudi Arabia to defer about $5.9 billion worth of oil payments.

“If things fall right for them in all these things that they are planning to do, I don’t believe there will be any need for them to come to the IMF,” Khan, who was in Pakistan last week, said during an interview.

“Unless there is a total collapse of foreign direct investments, they can ride this out,” he said.

Pakistan, a repeat customer of the IMF, last took an IMF loan worth $1.3 billion in 2001 to help fight poverty and offset the effects of a regional war on the economy. Backing for the loan was helped by Pakistan’s support for the U.S. war on terrorism.

Pakistan’s economy is going through its toughest period after six years of healthy growth. It is wrestling widening trade and fiscal deficits, soaring inflation and dwindling investor confidence battered by the country’s political tensions.

There is mounting speculation that President Pervez Musharraf will quit after the coalition government said last week that it planned to impeach him.

The political turmoil has unnerved investors – Pakistani stocks are near two-year lows, while the rupee has lost nearly a quarter of its value against the dollar this year. Khan, who is from Pakistan and has been at the IMF for 36 years, said it was the responsibility of the State Bank of Pakistan, Pakistan’s central bank, to increase reserves.

“You must build up your reserves back to where they were a year ago. Get back to that level, at the very least, and aim higher,” he said.

Khan said the central bank should ensure that any future loans Pakistan received would add to reserves, and that it should ask commercial banks to raise deposit rates by at least 2 percent to attract more money from investors.

But he said the central bank did not need to raise its benchmark discount rate from the current 13 percent because markets would ensure that the yields for government bonds sold by the bank were above the discount rate.

Pakistan’s foreign exchange reserves fell by $797 million in July, the first month of fiscal year through June 2009. They have plummeted 40 percent from a record $16.5 billion in October last year.

Khan said the central bank was doing “exactly the right thing” by not selling dollars from its reserves to support the falling rupee.

“If the State Bank starts to lose reserves by defending a currency that is not defensible, then it will be ridiculous,” he said. “They will really be shooting themselves in the foot.

“Don’t fight the market,” he added. “So many countries have run into serious problems by trying to defend the exchange rate when the market is saying that’s not the exchange rate we like.”

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Filed under IFIs, Inflation, Pakistan

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