KARACHI - The International Monetary Fund (IMF) has approved US$7.6 billion loan for Pakistan as a part of stand-by arrangement facility under exceptional provisions for an amount as much as 5 times Pakistan's annual quota over 23 months or 7 quarters in a bid to stabilise worsening balance of payment position and build-up foreign reserves. This was unveiled by Shaukat Tarin, Advisor to Prime Minister on Finance, while addressing a Press conference held at SBP premises on Saturday. "The agreement has been reached with the IMF for getting Stand-By Fund Facility and Letter of Intend (LOI) between IMF and the government will be signed by next week in order to make this deal written document," Tarin said. Highlighting the details, he said the country would get worth US$4 billion as an amount of first tranche of the loan inflow on immediate basis during the course of current financial year while the rest of the amount will start releasing by next 2-3 years from the IMF. He said that the interest rate on the facility would vary from 3.51 percent to 4.51 percent with some changes as per market conditions. Pakistan will repay the loan over five years starting from 2011, he added. "The Fund did not give us any conditions different than those already committed by us and explained above, he said, adding that IMF team down with our team in Dubai and prepared a detailed quarterly plan based on our own home-grown agenda. The only area where they counselled us was to increase the interest rate to curtail the core inflation, though fundamentally correct, was negotiated. Overall they felt that that by an large all our targets are reasonable, realistic and achievable provided we show discipline and determination". "We are not planning to invest this capital inflow into stock market but to build up our foreign exchange reserves at appropriate level. I assure you that as a part of fulfilling IMF-Funded package, there will be no any cut down in development and defence expenditures," he said. He said keeping in view of downgrading our sovereign ratings and risk of credit default swap triggered by weak balance of payment outlook, there is not suitable time for raising Eurobond and GDRs at international equity market. However, we need to access American and European markets by signing free trade agreements with US. "There is lot of business and investment opportunities in Pakistan and by implementing Reconstruction Opportunity Zones (ROZs) programme, Pakistan and Afghanistan would allow exporting some textiles, clothing and other goods without paying US duties, he added. "We contacted the multilateral agencies and all our friends like Saudi Arabia and China along with other multilateral lending agencies such as Friends of Pakistan, Asian Development Bank and Islamic Development Bank and each one of them was appreciative of our program as well as the predicament that we faced in the form of financing gap. They were all willing to give us a helping hand, but would like us to get the endorsement of our program from the IMF. Moreover, the timing was an issue for us as our foreign exchange reserves were depleting at a regular pace" he said. He said that it was in this background that we approached the IMF, who showed a very positive approach toward us while assessing our program. "This facility will also give confidence not only to the markets and our investors, but also to other IFls and friends. Thus we believe that we can see commencement of a steady stream of inflows now on, thereby eliminating the air of unnecessary in the country," he stated. Analysing the current economic scenario, he said Pakistan is facing challenging economic condition, which is brought about by a combination of global shocks (prices of oil and fuel more than doubling) in action on the part of economic managers during transition to a democratic government and the on-going financial crisis hitting every part of the world. He said the ultimate reflection of what has happened to Pakistan's economy is the massive loss of reserves which have declined from a high of $16.4 billion in October, 2007 to less than $7 billion at present. Other indicators of economic weakening are the slow-down in growth (5.8 percent in 2007/08), rising inflation (25 percent), excessive expansion in monetary assets in recent past (21 percent reserves money growth during 2007/08), rising fiscal deficit (7.4percent of GDP in 2007/08), depreciating exchange rate (21.8percent since March, 08) and massive decline in stock market valuation, which has lost almost half its value. "In the wake of above developments, the country lost the support of some of its development partners as well as the confidence of the market and the rating agencies, which in turn made it impossible for the country to raise resources from the international capital market," he unveiled He stated the loss of reserves is the mirror image of stagnant foreign exchange inflows. This had reached a point where country's balance of payments position was becoming untenable, unless of course immediate resources were made available through our friends. He said the government presented a sound economic programme in the budget 2008-09, which addressed almost all concerns of our development partners. The salient features of the budget are: 1 Fiscal Deficit: In the budget we have targeted fiscal deficit to be brought down from 7.4percent of GDP to 4.3percent of GDP. This target is ambitious but can be achieved with determination. "We have committed zero net borrowing from State Bank, which has made by any government for the first time. Also, it is a measure that has been most appreciated by our development partners, as it poses significant challenges to public financial managers," he added. The State Bank in its monetary policy statement of July 2008 had set a target of 14 percent in broad money (M2) significantly. This will be lower than expected nominal GDP growth this year. About interest rate adjustment to fight core inflation, he said the rising headline inflation (including both food and energy) has now seeped into core inflation (non-food, non-energy), which has risen nearly to 18.3 percent by October 2008. This is most hurting both for people as well as for businesses, as they will begin to lose their competitive advantage. In July 2008, the SSP raised the policy discount rate by 100 bps, but continued pressure on core inflation clearly warranted that more action should be taken to bridle the galloping inflation. It was in this backdrop that SSP raised the policy discount rate by another 200 bps a few days ago. This commitment to fight inflation by targeting positive real interest rate has been an important element of the programme that the central bank is pursuing. The government recognises and supports the monetary tightening stance of the central bank. Talking about exchange rate flexibility, he said Pakistan is supposed to have a flexible exchange rate regime. However, in the period 2004-07, there is a deliberate effort to keep the exchange rate artificially around Rs.60/$. This was made possible by liberal use of privatisation proceeds as well as expensive borrowings from the international' capital markets. Thanks to such resources, imports thrived, exports growth lagged and current account deficit galloped. Now the government has changed this policy and presently the exchange rate is reflecting the real value of Pak rupee vis-a-vis its trading partners, as determined by purchasing power parity by taking into account relative inflation rates among our trading partners. Continued adherence to this policy is our commitment, which is appreciated and supported by our friends. "We have one of the lowest tax/GDP in the region. From less than 9.6percent in 2007/08, we have planned to raise it to over 15 percent over the next 5-7 years. Undoubtedly, this is also lauded, but we need to deliver it to ensure that our fiscal system is sustainable," he said. "Social Safety Net (SSN): We have a sound and adequately funded SSN program with the pioneer effort reflected in the new Benazir Income Support Program (BISP) which is being launched at a cost of Rs.35 billion. Additionally, we will provide another amount of similar size to strengthen other existing SSN programs," he added. Agencies add: The IMF board is expected to meet shortly on $7.6 billion in emergency funding for Pakistan, part of bigger rescue plan to address the country's serious balance of payments problems, the Fund said on Saturday. "This support is part of a broader package that includes financing from other multilateral institutions and regional development banks," IMF Managing Director Dominque Strauss-Kahn said in a statement. The standby lending facility, which is subject to the IMF Executive Board's approval, is part of an economic programme and would last for 23 months, the IMF said.