IMF approves $6.7 billion loan for PakistanBy MARJORIE OLSTER , Associated Press
Sep. 4, 2013 1:45 PM ET
WASHINGTON (AP) — The International Monetary Fund approved a $6.7 billion loan for Pakistan on Wednesday in an effort to help the strategic country stave off an economic crisis.
The nuclear-armed nation of 180 million, which maintains a rocky alliance with the U.S., is seen as a key player in Washington's efforts to bring peace to neighboring Afghanistan after more than a decade of war. Pakistan has been grappling for years with rampant violence by Islamic militants.
The country has also been facing a growing economic crisis with its foreign currency reserves severely depleted over the past two years. The IMF said the loan is expected to help the economy rebound, rebuild reserves and support structural changes aimed at boosting investment and growth.
The international lending agency's approval allows the release of a first installment of $540 million with the remainder of the loan to be paid out over three years.
To secure the loan, Pakistan had to commit to changes in the economy designed to increase growth and improve financial stability. The measures aim to bring down the deficit, reduce pervasive electricity shortages and increase the country's poor rate of tax collection.
The agreement comes less than six years after Pakistan's last IMF bailout, and the driving need for the money this time was to repay the institution nearly $5 billion that Islamabad still owes.
Pakistan's previous government failed to implement many of the requirements of the last loan, including reducing the deficit and improving tax collection, and ended the program early. That left the new government, which took over in June, with the difficult task of persuading the IMF that this time would be different.
Since 1988, Pakistan has signed onto eight IMF programs that demanded structural changes in the economy. But it has never managed to resolve its chronic problems.
Growth has only averaged 3 percent over the past few years, less than half the rate needed to supply jobs to Pakistan's growing population.
The deficit, which was roughly 9 percent of gross domestic product last year, must be brought down to around 6 percent this year and reduced to 3.5 to 4 percent by the end of the three-year program. This will partly be done by restructuring and privatizing loss-making state-owned enterprises.
The government has committed to undertake steps to reverse electricity shortages, which cause rolling blackouts of up to 20 hours a day in some parts of the country. The government will phase out costly subsidies that disproportionately benefit the wealthy, who use far more energy than the poor.
It will also seek to lower the cost of producing electricity by converting fuel-powered plants to run on coal. The government spends about $1 billion in foreign currency each month to run its power plants, which has rapidly drained foreign reserves.
Pakistan's foreign reserves stood at just $6.3 billion as of June 21, down from more than $14 billion two years ago. That is only enough to cover about 1.5 months' worth of imports, while the IMF considers adequate foreign reserves for any country enough to cover three months of imports.
The government also promised to reduce tax exemptions and improve collection to bring in more revenue. Taxes currently bring in only about 10 percent of gross domestic product, one of the lowest effective tax rates in the world.