KARACHI - The foreign exchange reserves of Pakistan are set to hit the level of $12 billion by June 2009. The release of $500m loan from the World Bank and $844 million from the International Monetary Fund would stabilise the foreign exchange reserves of the country. By June 2009 the reserves are expected to rise to $12 billion and $13.50 billion by December this year that would lead to a very positive impact on the economy of the country. This had been mentioned in the analytical report of the Standard Chartered Bank of Pakistan titled Pakistan on the ground, prepared by Sayed Ali, economist of the SCBP. State Bank of Pakistan on Thursday pointed out that the foreign exchange reserves of the country stand at $10.09 billion which do not include the amount provided by the World Bank and the IMF a couple of days back. The release of World Bank and ADB loans, in addition to the second tranche of the IMF loan, will further strengthen the foreign exchange reserves position and this will support the Pakistani currency and the dollar-rupee exchange rate is expected to remain stable, at 80 by June 200, the SCBP report said. Report said that $500m provided by the World Bank will also add to the local currency liquidity if it used to finance new expenditures being undertaken by the government, bringing the benchmark 6-month KIBOR rates down to around 12.2%, from 12.58% on 27 March. In case the loan amount is used to retire the government debt to the central bank, a highly likely scenario, then it will not add to the PKR liquidity. The government needs to retire Rs 100 billion of the central bank debt by end March 2009 to meet the targets agreed under the IMF programme. If this turns out to be the case then we see the benchmark 6 month KIBOR rates remaining unchanged at 12.5% until the next meeting of the central bank at the end of April 2009. On 26 March, the World Bank approved $500mn interest free loan to support the Government of Pakistans programme to maintain economic stability and scale up pro-poor expenditure. The loan carries an annual service fee of 0.75%, a 10 year grace period, and a maturity of 35 years. The credit will be used to support the governments fiscal operations, helping to finance expenditures outlined under the Poverty Reduction Strategy (PRSP II). The release of the WB funds, which had been held up since January 2008 due to the deterioration in the public debt position, is a positive development and follows the successful first review of the IMF programme. The sharp reduction in fiscal and external deficits has improved the public debt position, and has opened the doors for the World Bank and Asian Development Bank (ADB) to start lending to Pakistan again. The World Bank has committed to releasing $2 billion by June 2009, while the ADB has announced a $4.4 billion country assistance programme for 2009-2013. This will be a big boost for the economy, as unlike the IMF standby loan; financing from the World Bank and ADB can be used to increase government spending on key infrastructure projects (power, roads and irrigation), thus boosting economic output. According to government estimates, the incidence of poverty has increased alarmingly to 37.5% in 2008 from 23.9% in 2005, reflecting the loss in purchasing power on account of record high inflation and rising unemployment. The $500m World Bank loan will support the spending outlined in the Governments recently adopted Second Poverty Reduction Strategy Paper (PRSP II). The focus will be on increasing spending on labour-intensive infrastructure projects including roads, highways, low-cost housing and irrigation projects. The government plans to scale up pro-poor spending from Rs 573 billion (5.46% of GDP) in FY08 to Rs 1,850 billion (8.14% of GDP) by FY13 under the PRSP II strategy. The strategy also envisages a significant scaling up of the governments cash transfer programmes, focusing especially on the Benazir Income Support Programme for the poorest households.