The International Monetary Fund estimates that Pakistan's growth will slow down to 3.5-3 percent in the current financial year after Pakistan signs for Stand-By Arrangement (SBA) facility with the Fund. In fact, the Fund is not concerned at the annual GDP growth even if it falls below three percent because the Fund fully appreciates the facts that historically Pakistan has shown that once it is able to achieve macroeconomic stability the growth of above six percent is also achieved for a long period of time.

-- The growth path would be 'U' shaped (low growth) if the country does not increase the policy rate. The Fund, therefore, would like the growth path to be in 'V' shape if Pakistan adheres to its loan conditionalities. If Pakistan does not increase the policy rate by 3.5 percent to 16.5 percent (which is close to a 17 percent rise in CPI), the Fund fears that Pakistan's growth path would be 'U' shaped ie low growth for a longer period.

EXCHANGE RATE: The Fund team, which negotiated with Pakistani authorities in Dubai, for the last seven days, is satisfied with the present exchange rate which is market driven. However, the Fund wants the State Bank of Pakistan to let the market flows meet the oil import payments instead of utilisation of SBP reserves for this purpose.

An L/C opening bank needs to accumulate the dollars from the inflows as it knows when the L/C will be encashed. At present, SBP meets the bank needs as the lumpy payment increases the volatility in exchange rate movement. Pakistan would need to improve its forex reserves by $700 million from the present level of $7 billion at the end of one year of the programme. This estimation is based on the various Sukuk bonds and other payment due by until November 2009.

Pakistan is committed to improve its tax-to-GDP ratio to 15 percent in medium term, however, it would need to improve this ratio by at 0.6 percent to FY09 in case it awaits the Fund seal of approval. Since Pakistan has already met over 80 percent of the Fund's normal conditionalities on its own ie reduction in subsidy on oil and utilities and a market driven exchange rate - there is very little left for further discipline.

The insistence of 3.5 percent in SBP discount rate is the only real pain that the nation would need to undergo. However, the Fund would allow this policy rate to come down once it is clear that the core inflation has reversed.

It takes six to 12 months for monetary tightening measures to work through the system in Pakistan. Helping the Mutual Fund industry is likely to be acceptable to the IMF. But any bail-out or guarantees for the stock market are favoured by the Fund, say informed sources.

Copyright Business Recorder, 2008