PAKISTAN: Economy falls short of targets, UAE offers $500 million

13 December 1996

The State Bank of Pakistan's annual report covering fiscal year 1995/96 has confirmed that targets for growth, inflation, current account and budget deficit were all missed. However, whilst analysts agree that failing to meet targets undermines the economic credibility of the country they also say that the figures show that Pakistan is not heading for an immediate economic crisis. An improved outlook is also derived from fresh news of additional help from foreign donors.

Growth in the economy has been put at 6.1 per cent - short of the 6.5 per cent target - but substantially up from 4.4 per cent during the previous year. Foreign investment grew substantially during the year, by more than 29 per cent compared with 1994/95, and the majority of the investment was direct and long-term. However, economists express concern over the budget deficit, which rose as a percentage of gross domestic product (GDP) compared with the previous year, and over high current account and trade deficits.

The government's foreign currency situation is improving, however, and is expected to continue to do so with improved relations with the IMF and a surprise loan offer from the UAE. Foreign currency reserves rose to $1,344 million in November, equivalent to more than five weeks of exports. The IMF has already indicated its readiness to restart the stalled standby facility. On 3 December, the fund's resident representative in Islamabad announced that an increase in the value of the facility is also being considered. The UAE has also offered the government a loan of $500 million. Details of the loan have not yet been announced but UAE officials said that it will carry an interest rate significantly below market rates. The government is also looking to raise up to $300 million on the Japanese market.

An improvement in Pakistan's foreign currency situation is likely to provide a moderate boost in confidence, analysts say. Economic targets for this year are tough but government plans to cut spending, reduce corruption and reform the state financial sector will be welcomed, they say.

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