IMF approves $8.5b economic reform loan to Pakistan

WASHINGTON (AFP) - The International Monetary Fund threw Pakistan a US$6.7 billion (S$8.5 billion) lifeline on Wednesday to help the struggling nuclear-armed country achieve economic reforms, particularly in its troubled energy sector.

The IMF executive board authorised a three-year loan, making an initial disbursement of US$540 million available to the Pakistani authorities.

The remaining amount will be evenly paid out over the duration of the program, subject to the completion of quarterly reviews, the Washington-based global lender said.

In its announcement of the loan on Wednesday to the government of Prime Minister Nawaz Sharif, the IMF said that Pakistan's adherence to the programme would likely encourage financial support from other donors.

"Despite the challenges it faces, Pakistan is a country with abundant potential, given its geographical location and its rich human and natural resources," the IMF said.

"The authorities' program is expected to help the economy rebound, forestall a balance of payments crisis and rebuild reserves, reduce the fiscal deficit, and undertake comprehensive structural reforms to boost investment and growth."

The IMF aid is an Extended Fund Facility, a type of assistance aimed at helping a country that faces serious balance-of-payments problems because of structural weakness that require time to address.

The repayment period for an EFF loan is between 4.5 and 10 years.

The loan is aimed at reducing Pakistan's fiscal deficit - which neared nine per cent of gross domestic product last year - to a more sustainable level and reform the energy sector to help resolve severe power cuts that have sapped growth potential.

The country's daunting array of problems range from an energy sector crippled by US$5 billion of debt to dwindling foreign exchange reserves and a sinking currency, all the while facing down a Taleban insurgency.

Economic growth has sputtered in recent years. Gross domestic product growth rose 3.7 per cent in 2012 and is forecast to decelerate to 3.5 per cent this year and to 3.3 per cent in 2014, according to the IMF's latest projections.

Growth has been "well below that needed to provide jobs for the rising labor force and to reduce poverty," an IMF mission in Pakistan reported in July.

The request for a loan came just weeks after May elections that marked the country's first democratic transition of power, putting Mr Sharif in office.

The new loan came after months of negotiations. Pakistan abandoned a previous US$11.3 billion IMF loan programme in 2011 after refusing to carry out strict financial reforms, and still owes about US$4 billion to the Fund.

The political situation in Pakistan is expected to pose a challenge for the IMF.

"There isn't any doubt that it's going to be an extremely difficult programme for the IMF to oversee," Mr Jacob Kirkegaard of the Peterson Institute for International Economics told AFP.

"Pakistan is a country where the military continues to have a very large role not just on national security but also on a large part of the economy," he said.

Mr Kirkegaard added that it was "very unlikely" the military would go along with certain reform measures under the IMF loan-supported programme.

"If Pakistan was not a nuclear-armed country, the dominant countries at the IMF board would probably be less interested in trying everything possible to stabilise the situation there," he said.