Aug. 8 (Bloomberg) -- The International Monetary Fund agreed to increase a loan to Pakistan by $3.2 billion to buttress an economy and budget hurt by a war against Taliban insurgents and a global recession.
The expanded financing brings the total loan outstanding from the IMF to $11.3 billion, or about 6.3 percent of Pakistan’s gross domestic product, the Washington-based lender said in the statement. The entire standby arrangement also was extended by about two months until the end of 2010.
“Pakistan’s economy has continued to stabilize,” IMF Deputy Managing Director Murilo Portugal said in an e-mailed statement. “Reforms in the financial sector and the foreign exchange market have been progressing, and steps have been taken to strengthen the social safety net.”
The country turned to the IMF for a $7.6 billion credit line last year after its current-account deficit widened to a record and its foreign reserves shrank 75 percent in a year to $3.45 billion. Pakistan agreed on July 16 to cut power subsidies almost 50 percent this year to meet a condition set by the IMF for the November bailout.
The additional aid is needed to shore up the government’s finances as it fights the Taliban at an annual cost of $8.5 billion. IMF executive directors agreed to let the government use a portion of the increased loan to finance priority spending, including expenditures to help displaced people until donor pledges are received, they said.
Taliban Campaign
Pakistan’s army last month said it killed more than 1,600 Taliban militants in a 10-week offensive to regain control of the northwestern Swat district after the group seized territory in violation of an accord with the government that allowed Islamic law to be introduced in the region.
The IMF board also authorized an immediate disbursement of $1.2 billion after a second review of the original loan, while granting Pakistan several waivers for not meeting criteria including a fiscal deficit target.
“Fiscal discipline is a key issue,” Adnan Mazarei, the IMF’s mission chief for Pakistan, said on a conference call yesterday. The introduction of a value-added tax “will hopefully raise revenue and broaden the tax base.”
The IMF said the authorities’ monetary policy should “remain vigilant about preventing a resurgence of inflation.”
Pakistan’s economy has ground almost to a halt as the global recession erodes exports and deters investment. The $146 billion economy may expand as little as 0.8 percent in the year to June 2010, according to HSBC Holdings Plc, the weakest pace since 1952.
Pakistan stocks rose yesterday on reports top Taliban guerrilla commander Baitullah Mehsud, who ordered suicide bombings nationwide and had a $5 million bounty on his head, may have been killed in a U.S. missile strike.
The Obama administration hasn’t yet verified the reports, White House Press Secretary Robert Gibbs said.
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