IMF approves $1.2 billion payment to Pakistan

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* Pakistan praised for inflation-fighting efforts

* Islamabad missed quarterly budget deficit target

* Donors need to step up payments to Pakistan - Mazarei

By David Alexander

WASHINGTON, Dec 23 (Reuters) - Pakistan received approval for a $1.2 billion loan payment from the IMF on Wednesday, a big boost for a top U.S. ally in the fight against al Qaeda as it tries to restore stability amid political and economic turbulence.

The International Monetary Fund approved the loan from an $11.3 billion standby arrangement after conducting a review of Pakistan's economic performance and concluding it had made significant strides in reducing inflation and other areas but needed to work on budget discipline.

"Pakistan has made important gains despite a very difficult internal and external environment but much remains to be done and also the international community needs to better support its efforts," said Adnan Mazarei, the Washington-based IMF mission chief for Pakistan.

He said Pakistan had managed to cut its inflation rate to 10.5 percent from a high of 25 percent in November 2008, when a balance of payments crisis unfolded and prompted the IMF to step in with a bailout.

"Inflation continues to come down and the external position is improving," Mazarei said. "Despite fiscal problems, stabilization has taken root."

He said the country had missed a quarterly budget deficit target by three-tenths of a percent of gross domestic product in September. The IMF executive board approved Pakistan's request for a waiver of deficit criteria for the quarter.

The target was 1.2 percent of GDP but Pakistan's deficit was 1.5 percent of GDP. The target for the fiscal year ending June 2010 is 4.9 percent of GDP.

"In the months ahead, we're looking forward to Pakistan exercising better budgetary management," Mazarei said. "It's very important that they hit these targets, especially the ones for the end of this year."


He said the international community also needed to be aware of the difficulty Pakistan faces in adhering to budgetary discipline given its security situation.

The country is fighting Islamic militants in the northwest, and tens of thousands of people have been displaced by the struggle, with many relying on the government for food and shelter.

Pakistan received an IMF bailout in 2008 after its foreign currency reserves fell to $3 billion, in part because it imported high-priced oil while maintaining artificially low selling prices.

The IMF has approved a stand-by loan facility of about $11.3 billion, of which $6.54 billion has been disbursed with Wednesday's additional $1.2 billion loan.

A grouping of countries called the "Friends of Democratic Pakistan" pledged $5.7 billion in aid during a donor's conference in Tokyo in April, but payment of the funds has been slow. Mazarei said only about $100 million had been delivered.

"The donors need to fulfill on their pledges," he said, especially since the money is meant for funding development and providing assistance to people dislocated by fighting.

One of Pakistan's key problems is that it has a small tax base and poor tax administration. As a result it does not generate enough revenue to provide effective infrastructure development or an adequate social safety net.

To alleviate that problem, the government has drafted a measure creating a value-added tax that it hopes to send to parliament by the end of December, Mazarei said. If approved, a framework for the VAT would be in place by July 1, 2010.

The aim is to increase government revenue by 2 percent to 3 percent of GDP, he said.

The government also is taking steps to strengthen tax administration, Mazarei said, including selecting about 900 people and companies for tax audits.

It is moving to give its central bank greater independence and is taking other steps to try to strengthen the banking sector, including working on a bankruptcy law, he said.

(Additional reporting by Andrew Quinn; Editing by Sandra Maler and Bill Trott)

Reuters - Thomson Reuters Foundation
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