Lagging donor aid risk to Pakistan- IMF papers

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WASHINGTON, Jan 7 (Reuters) - Pakistan's economy is showing some signs of recovery but delays by donors in handing over promised aid threaten its ability to meet targets under its International Monetary Fund loan program, Pakistani finance officials said in documents released by the IMF on Thursday.

In a memorandum to the IMF dated Dec. 11, 2009, Pakistan's central banker Salim Raza and Finance Minister Shaukat Tarin said the aid delays have increased pressure on the budget and domestic financing, and could limit scope for more necessary spending at a time when security needs are growing.

Pakistan and the IMF have urged donors to follow through on the $5.7 billion in aid promised at a conference in Tokyo last April.

To raise its revenues, Pakistan plans to introduce a Value Added Tax. The officials said they remained committed to regulations to implement the tax by July 1, 2010.

The IMF bailed out Pakistan in November 2008 to avert a balance of payments crisis and in July increased the loan to the country to $11.3 billion from an initial $7.6 billion.

In a staff report also released on Thursday, the IMF said Pakistan's performance under the IMF program was uneven but credited it for moving forward on most key reforms despite difficult security and other circumstances.

It also raised concerns about delays in aid disbursements to Pakistan, saying the amount of aid projected to be disbursed in 2009/10 has been revised by some $900 million less than expected.

The IMF said that Pakistani officials had reaffirmed their commitment to an annual fiscal deficit of 4.9 percent of gross domestic product. However, if the Tokyo aid pledges were a lot lower than projected, the deficit would need to be reduced further, possibly by up to 0.4 percent of GDP, staff said.

They said "a fluid" political situation, security issues and the lack of broad support for economic reforms raised risks to Pakistan's IMF program and affected investor confidence.

They said underlying vulnerabilities to Pakistan's economy were high and had increased in some areas including revenue shortfalls, weak credit performance, energy subsidies and dependence on commodity imports.

Meanwhile, Pakistani banks were well capitalized but nonperforming loans are growing, according to IMF financial soundness indicators at the end of September.

The 2009/10 outlook for economic growth in Pakistan is unchanged, with inflation year-on-year rising to 11 percent from 9 percent reflecting a rebound in fuel prices and increases in electricity tariffs, the Fund added. (Reporting by Lesley Wroughton; Editing by Gary Hill)

Reuters - Thomson Reuters Foundation
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