IMF expected to relax targets, release $1.3b tranche

KARACHI: The International Monetary Fund (IMF) is expected to relax some of its key targets for the release of next tranche of $1.3 billion, according to a report by Sayem Ali, an economist at Standard Chartered Bank Pakistan Limited.

The IMF had put forth several requirements for the release of sixth and seventh tranches. In its recent discussions with Pakistan, the bank asked it to abolish Pakistan Electric Power Company (Pepco), adjust electricity tariffs according to the level of line losses and stop providing subsidies to the employees of power utilities.

Relations with the IMF hit a road block in June, after the government missed key performance targets in areas like fiscal deficit, borrowing from the central bank and implementation of value added tax (VAT).

However, in the aftermath of the floods, the IMF is expected to relax some of its targets and release the next tranche of $1.3 billion.

Reconstruction to boost domestic output

While Pakistan’s short-term economic prospects are worrying, reconstruction spending over the medium term is expected to provide a significant boost to domestic output.

In the wake of the 2005 earthquake, which caused an estimated $6.4 billion loss to the economy, the short-term impact on growth was negative, with growth slowing to 5.8 per cent in fiscal year (FY) 2006 from 9 per cent in FY05.

However, the economy received a boost in the next two years, expanding by an average of 6 per cent per annum, primarily owing to reconstruction spending.

Increased downward risks to rupee

Downward risks to the Pakistani rupee have increased considerably because of the floods. The trade deficit is anticipated to rise sharply on account of higher imports of food and essential commodities while exports of rice, cotton and value-added textiles are all likely to decline as a result of damage to crops.

The impact of the floods on the current account deficit could be as high as $2 billion, predicts the report, depending on the scale of the devastation and on private and official foreign aid inflows. So far, the rupee has remained stable due to higher worker remittances, as expatriates send more cash to affected families and for flood relief activity.

While large foreign aid inflows may cushion the economic impact of the floods, the downward risks to the rupee are high and are likely to be only partially covered by foreign exchange aid.

Published in The Express Tribune, September 14^th, 2010.