Pakistan records 122% increase in donors’ loans

KARACHI, Pakistan – Donors are lending to Pakistan again.

Pakistan saw a 122% increase in the disbursement of loans by international donors for development projects in the past six months of the 2009-10 cycle.

In the July-to-December period of fiscal year 2010 [FY10], Pakistan received US$1.75 billion from donors for development projects, compared to US$716m in the same period of FY09.

“In FY10, the donors, especially the World Bank [WB] and the Asian Development Bank [ADB], expedited the disbursement of loans to Pakistan to augment development and economic activity and to help the government fight the recession,” Finance Minister Shaukat Tarin told Central Asia Online by phone from Islamabad.

“The WB and ADB have given a major chunk of loans, a little over US$1 billion, for health, education, irrigation, roads and energy sector projects”, he said.

Enhanced lending, disbursement of credit by the International Monetary Fund [IMF], approval of US$7.5 billion in US aid, and promises of further Japanese assistance have put the economy on a path to recovery and revived investor confidence, he said.

Foreign investors who deserted the Pakistani stock market in 2008 as the global crisis struck have returned to invest US $271m in the past six months, he said. In the same period a year ago, the stock market registered an outflow of US $178m.

The return of many foreign investors to the stock market will encourage others to expand their footprint in Pakistan, he said.

The indicators have been generally positive in recent months, Tarin said. The country's exports grew 25 percent in December 2009, compared to one year ago, because of global and domestic economic recovery, he said. Furthermore, the government has trimmed the country's account deficit from an imposing US$7.85 billion in July-December FY09 to US$1.75 billion one year later, he said.

He also cited "impressive" growth in the foreign exchange sent home by Pakistanis living overseas and in foreign exchange reserves.

All these factors could improve chances for a modest recovery and economic growth this year, he added.

They come after domestic and global economic crises savaged the market and dampened the investment climate.

In 2008, Pakistan contended with record trade and budget deficits. It had a combined trade and budget deficit of US$58 billion in FY07 and FY08.

In November 2008, the country's foreign exchange reserves fell to about US$600m, barely enough to pay for two weeks of imports. Thirteen months earlier, the reserves had hit a record US$16.4 billion.

The breathtaking erosion of the country's financial position caused a panic-driven capital outflow and a plunge in the value of the rupee.

Foreign donors stepped in to shore up the country as it tottered economically. In November 2008, the government secured a US$7.6 billion three-year bailout package from the IMF. The world body boosted that to US$11 billion in 2009. It also released US$3.1 billion that November to eliminate the threat of a default by Pakistan.

In 2009, the US announced US$7.5 billion in further assistance for Pakistan over five years under the Kerry-Lugar bill. The Friends of Democratic Pakistan [FODP] also promised to extend US$5.6 billion in support over three years, a guarantee that did much to restore confidence in the country's prospects for recovery.

But one former official says that the government needs to reform domestically, too, rather than merely seek increased foreign aid. “The government should reduce the cost of doing business, secure release of funds pledged by the Friends of Democratic Pakistan [FODP] and overcome the energy crisis to achieve [its] target of over 3% economic growth in FY10,” Dr Salman Shah, former finance minister, told Central Asia Online from Lahore.

In his view, the prevailing tight monetary policy, very high interest rates of 15-25% for corporate and individual borrowers, worsening shortages of electricity and gas, and a decline in tax revenues could impede economic growth.

Shah also suggested that the government end its intervention in the market to bring down inflation in food prices and ensure a free-market economy. Bank and economic body officials are starting to see some light ahead. For FY10, the State Bank of Pakistan, the IMF and multilateral donors like the WB and the ADB have predicted about 3% economic growth, compared to the previous year’s 2% growth.

Analysts say that if the country can combat terrorism and the energy crisis, economic growth can increase beyond 5% annually.