The announcement to this effect was made by Shaukat Tarin, Advisor to Prime Minister on Finance, at a press conference, along with Dr Shamshad Akhtar, Governor, State Bank of Pakistan.
Tarin said: "IMF has accepted Pakistan's formal request for funding, and an agreement with IFM has been reached on a rescue package to overcome the country's economic crisis." He said that Pakistan would receive $4.5 billion this year as part of the 23-month IMF deal, while the remaining amount would be received next year.
He said: "The interest rate on the IMF programme will be 3.1 to 3.5 percent, with some changes as per market conditions, which would be repaid during the fiscal years 2012 to 2016."
However, he made it clear that this fund would not be used for any non-development expenditures and stock markets, saying that the loan would be utilised for maintaining the declining foreign reserves, besides overcoming its balance of payments crisis. He said that the IMF financing facility would give confidence not only to the markets and the investors but also to other IFIs and friends.
Tarin said: "We believe that now we can see commencement of a steady stream of inflows, thereby eliminating the air of uncertainty in the country." He said that IMF's new program is different from the previous programs, and it is the first time in the history that Pakistan has got IMF loan on its home ground plan, "and it did not give us any conditions different from those already committed by us and explained above".
"The IMF has imposed a condition of zero borrowing from the central bank from October 1 to June 30, and government has already has decided it," he said. He said: "Earlier, Pakistan had contacted the multilateral agencies and all our friends, and each one of them was appreciative of our program as well as the predicament that we faced in the form of financing gap. They were all willing to give us a helping hand, but would like us to get the endorsement of our program from the IMF."
He said that the only area where IFM counselled us was to increase the interest rate to curtail the core inflation. "Though fundamentally correct, it was negotiated." The advisor said: "We have already raised the policy rate by 200 basis points to curb the inflationary pressure on the economy, which also opens new avenues of financing for the government, with increase in T-bills and saving rates." He added that timing "was an issue for us as our foreign exchange reserves were depleting" at a regular pace.
"The IMF showed a very positive approach toward us, while assessing our program and, in the process, they also offered us to access their 'Stand-By Facility' under exceptional provisions for an amount as much as 5 times of our quota, which meant a fast track processing of request," Tarin said.
He expressed hope that the IMF facility would also give confidence to markets, investors and other IFIs and friends, saying that the government believes that it can see commencement of a steady stream of inflows from now on. Overall, the Fund has felt that Pakistan's all targets are reasonable, realistic and achievable with the help of discipline and determination, he added.
Giving details on economic background, he said that Pakistan is faced with economic challenges, which have been brought about by a combination of global economic shocks and massive loss of the country's reserves dwindled from a high of 16.4 billion dollars in October, 2007 to less than 7 billion dollars at present.
Other indicators of economic weakening are the slowdown in growth, rising inflation, rising fiscal deficit, depreciating exchange rate and massive decline in stock market valuation, which has lost almost half its value, he said.
The country's reserves had reached a point where the balance of payments position was becoming untenable, unless of course immediate resources were made available through friends. Therefore, Pakistan approached IMF for assistance, he said.
He said that the government presented a sound economic program in the 2008-09 Budget, which addressed almost all concerns of development partners. "In the federal budget we already have address fiscal deficit, zero net borrowing from State Bank, monetary growth, interest rate adjustment to fight core inflation, exchange rate flexibility, raise in tax-to-GDP ratio and social safety net," he added.