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Pakistan could be next big IMF customer

* Citigroup calls weak rupee ‘a legacy of flawed economic policies’
* Sees risk of debt default next year

Daily Times Monitor

LAHORE: A recent report by Citigroup suggests Pakistan as the International Monetary Fund’s (IMF) next big customer, according to a Newsweek report.

According to the magazine, the IMF had seemed on track to permanent downsizing earlier this year, because emerging-market growth had left it without a client base of economically poor nations. However, that might soon change.

Default: The magazine quoted a recent report by Citigroup saying Pakistan could be the IMF’s next big customer. According to the magazine, “the bank sees a big risk of sovereign-debt default next year thanks to a weak rupee (a legacy of flawed economic policies) and higher energy prices”.

“The balance-of-payment situation in energy-dependent countries like Pakistan has deteriorated,” Newsweek quoted Citi economist Mushtaq Khan as saying. “Oil has softened, but even if prices stay where they are, Pakistan will run a large deficit,” Khan said.

According to the magazine, Khan noted that Pakistan needed IMF advice more than money. It said proposed loans from Saudi Arabia could stabilise the currency, but other investors “would not bite until they see a plan for structural reform”.

Earlier, an IMF staff assessment of Pakistan’s macroeconomic situation had called it fragile and vulnerable to a crisis.

According to the IMF experts responsible for the assessment, the external current account deficit for 2008-09 will be $14 billion or 7.7 percent of the gross domestic product (GDP). With capital inflows of about $7 billion, the IMF estimated the external financing gap to be around $7 billion.

Real GDP growth is expected to slow further to about 4.5 to 5 percent in 2008-09, while average inflation is projected to increase to 16-17 percent owing in part to the expected pass-through of higher international food and energy prices.

The IMF also recommended that a stronger effort is necessary to broaden the tax base by eliminating some tax exemptions. Interest rates should be allowed to rise as needed in order to lower inflation and ensure that the domestic financing of the deficit is covered entirely by commercial banks and non-bank sources.

The IMF noted that Pakistan has requested an oil facility from Saudi Arabia to defer the payment of oil imports of 110,000 barrels per day, which at current oil prices would amount to $5 billion annually. The terms and conditions of the deferment were on hold till the presidential election.

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