IMF increases Pakistan loan to $11.3bn

WASHINGTON, The International Monetary Fund on Friday increased its loan to Pakistan by $3.2 billion to a total of $11.3 billion and said some of the money would be available immediately as the government deals with increased security costs.

The IMF said Pakistan's economy is stabilizing but the outlook for 2009/10 remains difficult, with the government needing to assist almost three million people displaced by fighting between security forces and Taliban militants.

The IMF said it would immediately release $1.2 billion to Pakistan under an IMF economic program, first agreed in November 2008 to avert a balance of payments crisis and shore up reserves.

The IMF said a portion of the new funds will be used to finance priority spending by the government until the disbursements of donor support pledged for 2009/10 are received.

The remainder will go toward bolstering Pakistan's foreign exchange reserves to ensure the economy is protected from such shocks as a surge in global oil prices.

IMF mission chief to Pakistan, Adnan Mazarei, said it was critical that donors deliver the aid without any delays.

Still, he said key economic targets under the IMF program had been met, including lower inflation, despite the difficult political and security conditions in the country.

In addition to the new financing, Pakistan would be eligible for another $1 billion in IMF resources under a special allocation of $250 billion worth of Special Drawing Rights (SDRs) for the fund's 186 member countries.

The allocation of SDRs, an international reserve asset and the fund's internal unit of account, was agreed to by a Group of 20 leaders' summit in April to help countries weather the global financial crisis.

But Mazarei said it was important to boost low tax revenue in Pakistan and urged the government to quickly implement plans for Value Added Tax and broaden tax administration reforms.

Much of Pakistan's tax burden falls disproportionally on the manufacturing sector.

"These reforms will make the economy less vulnerable, provide the steady flow of resources needed to reduce poverty and develop basic infrastructure, and strengthen the government's ability to deal with the pressing needs of the population, which are now compounded by the large number of (internally displaced people)," the IMF said.

The IMF said unresolved problems in the energy sector were undermining Pakistan's growth potential and were a major burden on public finances.

Mazarei said Pakistan had recently reached an agreement with the World Bank and Asian Development Bank on a set of measures to help improve finances of the electricity sector through increases in electricity prices.

He said by August next year electricity tariff differential subsidies would be eliminated, making additional fiscal resources available to the government.

Mazarei said fiscal discipline was a concern in Pakistan, with budget slippages caused by unexpected spending for refugees and security. In addition, there were shortfalls in revenues and excess spending by provinces, he added.

"Looking forward we're asking the authorities to maintain fiscal discipline," he said, adding that the government had put in place measures to ensure more discipline in provinces.

The IMF waived a performance target under the program related to increased supervision over banks by the central bank. Mazarei said the authorities have committed to implement the measure by Sept. 1.