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Pakistan's hopes rest on IMF and WB loans, but analysts see a bleak future

The severely deflated Pakistani economy has shown signs of improvement following the sanction of $ 1.5 billion loan by the Islamic Development Bank in Jeddah.

The position is likely to get a further fillip if the International Monetary Fund eases certain restrictions imposed on Pakistan in the aftermath of its nuclear tests in May.

However, some analysts said Pakistan's is a desperate bid to raise cash reserves, which is why it has agreed to a $ 1.5 billion crisis package from the IDB at such crippling interest rates. It will do little to ease the country's economic crisis, they said.

Pakistan, scrambling to raise money from global donor agencies, on Thursday signed an agreement with a consortium of Islamic and middle eastern banks to create a 'Pakistan Fund' to help the troubled south Asian nation cover its Balance of Payments deficit and foreign debt obligations.

A five-member IMF team is in New Delhi to initiate dialogue with Islamabad for a fresh loan package to improve the BoP position.

The team will review the economic situation and is expected to announce its decision within a week.

Pakistan's stock markets picked up steadily and the dollar rate has also declined by at least three to four rupees over one week.

The nation of 130 million people, already struggling with a $ 32 billion foreign debt and an acute shortage of foreign currency, has been pushed to the brink of economic collapse by international sanctions. World leaders cut off Pakistan after it conducted a series of nuclear tests in May.

On Friday, Pakistan is opening talks with a joint IMF-World Bank team on a broader economic relief package, which could include stalling foreign debt payments until loans can be restructured. Pakistan signing a treaty banning nuclear weapons testing is seen as a key condition of new loans.

''The IDB has pledged $ 200 million to the Pakistan Fund,'' a statement by Pakistan finance ministry said.

Saqib Sherani, an analyst at ABN Amro Bank said Islamic and middle eastern banks would probably wait for the outcome of Pakistan's talks with the IMF and the World Bank before committing any more money.

''They will wait for the fog to clear in the next two weeks. If Pakistan went in for a moratorium (on the repayment of current debt), commercial banks will face difficulty to finance the country,'' he said.

Pakistan will pay more than 10 per cent interest for the Pakistan Fund loans, adding to its already unmanageable debt burden.

Salman Ali, chief analyst of the Indosuez WI Carr brokerage, said the packages carry an annual interest of five per cent over London Interbank Offered Rate, which is now 5.5 per cent for US dollars.

Chief analyst of Taurus Securities Abid Naqvi said the IDB package has not provided the immediate cash Pakistan needs to avoid default on its foreign debt payments this month. Pakistan is due to re-pay about $ 750 million this month, but has just $ 700 million in foreign currency reserves.

''Pakistan will have to invoke a grace period on the payments of external debt as any fresh inflows will take time to come,'' he said.

Naqvi said Pakistan needs the IMF package. Any deal is likely to include tough conditions, such as increasing taxes and revenues, while cutting government spending.

UNI