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Pakistan meets IMF amid struggle to revive growth

Pakistani officials meeting an International Monetary Fund mission this week face a battle in mapping out a strategy for reviving economic growth while keeping fiscal spending in check, analysts said.

world Updated: Jul 07, 2009 17:28 IST
Faisal Aziz

Pakistani officials meeting an International Monetary Fund mission this week face a battle in mapping out a strategy for reviving economic growth while keeping fiscal spending in check, analysts said.

Officials are currently meeting the mission in the Turkish city of Istanbul to discuss Pakistan's performance under its $7.6 billion IMF programme, launched last November to help the country avert a balance of payments crisis.

The programme has got off to a good start, with inflation easing and the central bank's foreign exchange reserves back above $8 billion after falling to $3.3 billion last November, the IMF said in a report in late June.

But the fight against Taliban militants in the northwest, uncertainties created by the slump in global demand and domestic power shortages all add to the challenge of pulling the economy out of what is likely to be an extended phase of sluggish activity, analysts say.

"Pakistan's economy has likely entered an extended phase of low growth, a trend that would require rigorous economic planning and its successful execution to address the entrenched structural weaknesses," said Asif Qureshi, a director at Invisor Securities.

Pakistan is looking to secure the roughly $875 million third tranche of the IMF loan, which was originally meant to be disbursed in June. The IMF board is now set to meet by the end of this month to take a decision on the release of the instalment.

While both officials and analysts expect the money to be released, the talks put the spotlight on the difficulties facing the economy and the government's plans for dealing with them.

Economic growth slid to 2 percent in the 2008/09 fiscal years ended on June 30, tantamount to recession for a country with annual population growth of more than 2 percent and with more than a third of its 170 million people living in poverty.

POWER TARIFFS IN SIGHT
Combating Islamic militancy is likely to cost billions of dollars over the next few years, analysts estimate, and increased dependence on foreign funding will not make the task of jump-starting growth any easier.

"Funding is a big concern, as we are still not sure about the money that should be coming from the Friends of Pakistan," a senior government official said, referring to a group of international donors which met in Tokyo in April.

The 2009/10 budget, unveiled last month, has already factored in 178 billion rupees ($2.18 billion) of aid from that group, and the government is still seeking money from friendly governments and international lenders.

Adding to the troubles, widespread power outages resulting from the country's roughly 3,000 MW power deficit are hurting the textile sector, the country's main exporter.

The government's continuing subsidies for electricity are one of the key sticking points of its talks with the IMF.

The IMF wants the government to increase power tariffs to shore up its balance sheet, but doing so would be politically sensitive as it would add insult to the injury of frequent power cuts for many of the country's residents.

"Given the weak political and security situation of the country and poor governance, both domestic and foreign private sector investment activity is also likely to remain muted," said Invisor's Qureshi.