INO.com News - 4th UPDATE: IMF Outlines $7.6 Bln Loan To Pakistan (djn)

4th UPDATE: IMF Outlines $7.6 Bln Loan To Pakistan

(Updates with comments from analysts starting in ninth paragraph)

KARACHI (Dow Jones)--Pakistan, battling an acute balance of payment crisis, will receive a loan of $7.6 billion from the International Monetary Fund, which analysts said will help salvage the country from the current financial turmoil.

The IMF said it has reached an initial agreement with Pakistan on the key elements of the economic program.

The main objective of the IMF program will be to restore the confidence of domestic and external investors by addressing macroeconomic imbalances through a tightening of fiscal and monetary policies, a statement from the Fund said.

The 23-month loan program, under standby credit limit, will be at an interest rate ranging between 3.51% and 4.51% per annum with some changes as per market conditions, the economic advisor to Pakistan's prime minister announced Saturday.

"The IMF showed a very positive approach toward us while assessing our program. In the process they offered us access to the standby facility under exceptional provisions for an amount as much as five times our quota, which meant a fast- track processing of the request," Shaukat Tarin, who is also the de facto finance minister, told reporters.

IMF Managing Director Dominique Strauss-Kahn said in a statement later that the Fund's planned $7.6 billion loan to Pakistan will form part of a broader rescue package for the country.

"This support is part of a broader package that includes financing from other multilateral institutions and regional development banks," Strauss-Kahn said in the statement.

The beleaguered South Asian nation is on the brink of an economic collapse after the balance-of-payments deficit widened to a record level, inflation soared to a 30-year high, and the rupee plunged to an all-time low in October. The country needs about $4 billion in short order to pay for its imports and help repay its debt.

However, analysts said the loan will help Pakistan tide over the current financial crisis.

"The outlook for next six months will get better from the present crisis-like situation," said Samiullah Tariq, head of research at Investcapital, a Karachi-based brokerage.

The Pakistan government is scrambling for aid, with its foreign exchange reserves at a meager $6.73 billion as of Nov. 8, down sharply from its record high of $16.39 billion in November 2007.

"We can see commencement of a steady stream of inflows for now on, thereby eliminating the air of uncertainty in the country," Tarin said.

Pakistan and the IMF reached a broad agreement on a rescue package in Dubai late last month, he said.

The loan repayment will be made in five years, beginning from 2011, he said.

"Now we have officially gone to IMF which again seems to be a political move mainly to save the skin of clueless policy makers," said Faisal Shaji, head of research at Khoja Capital Ltd., a Karachi-based brokerage.

The IMF aid is typically conditional on recipients putting into place an economic stabilization package, which usually involves cuts in spending, higher taxes and removal of subsidies.

"We consider IMF's assistance to be very damaging for the growing economy both in medium and long term as the country is going through a phase where the cost of doing business has jumped to exorbitant levels, hurting all sectors of the economy," Shaji said.

However, Tarin said the IMF hasn't attached any condition to the loan facility.

"The only area where they counseled us was to increase the rate to curtain the core inflation, though fundamentally correct, was negotiated. Overall they felt that by and large, all our targets are reasonable, realistic and achievable provided we show discipline and determination," Tarin said, with State Bank of Pakistan Governor Shamshad Akhtar beside him at the press conference.

The central bank last Wednesday increased policy interest rates by a hefty 200 basis points to 15%, which many believe is the first step by the Pakistan authorities in accepting that it may need to take unpalatable action if it is to get its economy in order and show its willingness to the IMF and other potential donors.

"The loan from IMF will be used to support balance of payment position and will not be utilized for development plans," he asserted.

Tarin couldn't give an exact date of receiving the loan but said he expects to get the first installment by end of this month.

The IMF will make its final approval regarding the loan program after its executive board meeting, which is expected to meet to discuss the program shortly, under the Fund's emergency financing mechanism.

However, the IMF, which has more than $200 billion in lendable resources, said it is ready to process loan proposals quickly through its Emergency Financing Mechanism.

Friends of Pakistan, a group of bilateral donors including China, the U.S., the U.K. and the United Arab Emirates, also is scheduled to meet in Abu Dhabi on Monday to decide on a financial stabilization plan for the strife-torn, nuclear-armed Pakistan.

"We contacted the multilateral agencies and all our friends (for funds)...they were willing to give us a helping hand but would like us to get the endorsement of our program from the IMF," Tarin said.

According to analysts, the move to shore up the Pakistani economy is the first in Asia by the IMF since financial turmoil spread across the globe triggered by the U.S. subprime mortgage crisis.

The IMF chief also called upon the international donor community to "act quickly to support Pakistan's program in order to mitigate the impact of the current economic difficulties on the poor and ensure an adequate level of spending on development programs."

The IMF has stepped up in recent weeks to help several countries caught off guard by the financial crisis, including Ukraine and Hungary.

Like those, the Pakistan loan is being provided under the Fund's Emergency Financing Mechanism, a streamlined lending program first put into action during the Asian financial crisis in the late 1990s.

"The facility will give confidence not only to the market and our investors, but also to other foreign institutional investors and friends," Tarin said.

Standard & Poor's Ratings Services on Friday slashed Pakistan's sovereign debt rating for the second time in a little over a month, as the South Asian nation struggles to secure financial aid.

"The downgrade reflects our view that ongoing delay by Pakistan in securing external assistance essential for the immediate stabilization of its balance of payments position has further increased the prospect of near-term debt service difficulties, heralding either a rescheduling of commercial external debt or an outright payment default," S&P's credit analyst Agost Benard said.

However, Tariq said, "Endorsement of the loan will rehabilitate foreign investors' confidence and will revive Pakistan credit rating from negative to stable."

Earlier this month, Pakistan received a $200 million loan from the Islamic Development Bank, while China also pledged $500 million in assistance the government hopes will be available within a few days.

-By C.R. Jayachandran and Haris Zamir, Dow Jones Newswires; 91-11-2271-0211; chandrasekhar.jayachandran@dowjones.com

(Tom Barkley in Washington contributed to this story.)

By C.R. Jayachandran and Haris Zamir Of DOW JONES NEWSWIRES