Pakistan angles for debt relief

By SHIHOKO GOTO, Senior Business Correspondent   |   Oct. 17, 2001 at 5:19 PM
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WASHINGTON, Oct. 17 (UPI) -- Pakistan's strategic importance is only increasing as military strikes against neighboring Afghanistan continue, and the pressure to boost financial assistance to the country, as well as to reduce its existing debts, is intensifying.

"The debt carried by Pakistan is a burden," said the International Monetary Fund's external affairs director Thomas Dawson Wednesday, and suggested that the IMF could move toward providing some financial relief to the country whose support is essential in the global war against terrorism, both by providing another round of funds and by forgiving some amounts of debt.

But Pakistan will need to cut down on the money it owes bilaterally to creditor nations as much as it does to international agencies. According to the Pakistani government, the country has a total of $36 billion in debt, of which $15 billion is from multinational agencies such as the IMF, and $12 billion is bilateral debt. The remaining sum is owed to lenders from the private sector.

Finance minister Shaukat Aziz has said that by reducing at least some of its debt, consumer and business sentiment would improve in the country that is suffering from its geographic proximity to the Taliban regime. He also pointed out that debt relief would enhance Pakistan's balance of payments with a stronger currency and lower inflation.

The country has already been leveraging its more prominent role in the global arena and requesting its creditor nations to write off all or part the money it owes both to international agencies and to individual countries. On Wednesday, for instance, Pakistani leader Gen. Perez Musharaff held a phone meeting with Japanese Prime Minister Junichiro Koizumi to ask for Japan's support to write off at least $5 billion of total bilateral debt Pakistan owes, according to the prime minister's office. Japan has repeatedly said that it would like to help the south Asian country financially as much as it can, especially given the soaring number of Afghan refugees flooding across its borders, but has not yet specified how it would do so.

The IMF, meanwhile, is already discussing a new multi-billion loan package to the Muslim-majority nation to be extended under its poverty reduction and growth facility program, spokesman Dawson said, but he added that Pakistan is unlikely to qualify for the Heavily Indebted Poor Countries program to cut down debt, reserved for the most impoverished of creditor nations which currently are largely in Africa.

Getting access to a PGRF loan is often the first step for countries to qualify for the HIPC debt write-offs down the line, but Dawson suggested that Pakistan could qualify for a fairly generous loan reduction program.

Like the United States, the IMF has been quick to turn around on its stringent policies toward Pakistan following the Sept. 11 terrorist attacks in New York and Washington. A fortnight after the strikes on New York and Washington, the IMF approved disbursing the remaining $135 million of a $596 million stand-by loan approved in November last year -- nearly 12 months before schedule. The institution is usually known for deliberating at length and setting a large number of conditions before extending or renewing any financial assistance, but in the case of Pakistan, it was not only prepared to approve the loan quickly, but it also went so far as to waive one of its lending conditions, namely the implementation of a new income tax law.

Clinching a fresh loan from the IMF would certainly help Pakistan to negotiate with the Paris Club of creditors to reduce or restructure its bilateral debts. The club, which is expected to gather to discuss the Pakistan situation within the next two weeks, is an informal group of creditor countries that meets when a country has trouble paying off debts owed to a member country. The debtor nation then comes before the club to renegotiate its debt terms.

According to some media reports, Pakistan will be angling for $2.5 billion in loans for poverty reduction from the IMF, and it will be seeking more than $5 billion in debt scheduling by the Paris Club.

Meanwhile, the United States has partially lifted sanctions against Pakistan as well as India, which were imposed following their brief but intense race for nuclear testing in 1998. While Gen. Musharraf faces considerable domestic opposition in pledging Pakistan's support to the United States since U.S. forces began airstrikes against Afghanistan's ruling Taliban regime on Oct. 7, U.S. bilateral financial assistance to Pakistan is expected to be resumed soon in return for this support.

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