Pakistan wins final approval for $7.6bn loan

FINAL APPROVAL: Pakistan's $7.6 billion loan from the IMF has been approved. (Getty Images)

Pakistan won final approval for an emergency $7.6 billion International Monetary Fund (IMF) loan on Monday to steady the finances of this strategically vital country amid a global credit crunch.

"The Pakistani economy was buffeted by large shocks... including adverse security developments, higher oil and food import prices, and the global financial turmoil," IMF deputy managing director Takatoshi Kato said in a statement.

Pakistan will immediately access $3.1 billion under the 23-month facility, with the rest phased in subject to quarterly review, the fund said.

The international community fear an economic meltdown in nuclear-armed Pakistan could fan popular support for Al Qaeda and other militant Islamist groups. US officials says Al Qaeda and Taliban fighters have attacked Afghanistan from bases along Pakistan's remote western borderlands.

The board's approval sanctions a decision earlier this month by the IMF to help Pakistan stave off a balance of payments crisis and work toward a broader economic revival.

Pakistan's currency, the rupee, has slumped against the dollar and the country's stock market has fallen sharply after foreign investors took flight amid a global credit crisis in which capital has flooded from emerging markets to safe havens, like the United States.

"The central bank will pursue a flexible exchange rate policy, with intervention in the foreign exchange market geared toward achieving the program's reserve targets and smoothing excessive exchange rate volatility," the IMF said.

IMF staff and the government agreed on the reform package on Nov. 15, passing it to the executive board for approval.

The programme has twin goals: to steady the economy and restore confidence by tightening macroeconomic policy, and to ensure social stability and support for the poor and vulnerable in Pakistan, the fund said.

The fund said that Pakistan would aggressively trim its fiscal deficit, halt central bank finance of government spending and curb the country's current account deficit.

Specifically, the fiscal deficit will be trimmed to 4.2 percent of GDP in 2008/2009 and 3.3 percent in 2009/2010, compared with 7.4 percent in the fiscal year to June 2008.

Pakistan and the World Bank will create "a comprehensive and effectively targeted social safety net" with existing social programs boosted in the meantime, the IMF said.

"To this end, spending on the social safety net will be increased by 0.6 percentage point of GDP, to 0.9 percent of GDP in 2008/2009," the Fund said.

In addition, the IMF plan envisages tighter monetary policy to control inflation. The State Bank of Pakistan recently raised interest rates 200 basis points to 15 percent and "stands ready to further tighten monetary conditions as needed," the fund said.

"The authorities' program requires forceful and sustained implementation to succeed. 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," Kato said. (Reuters)

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