Today the IMF issued a statement addressing key questions regarding its $7.6 billion financing package to Pakistan provided under a 23-month Stand-By Arrangement which was announced last week.

The IMF attributed Pakistan’s financial decline mainly to “[a]dverse security developments, large exogenous price shocks (oil and food), and global financial turmoil.” Under the IMF Stand-By Arrangement, Pakistan will use the financing to restore “macroeconomic stability and confidence in the economy through a significant tightening of macroeconomic policies” and to ensure “social stability and adequate support for the poor.” The loan is conditioned on Pakistan meeting several “quarterly quantitative” targets and commitments. Some key targets that are outlined under the Arrangement concentrate on “government borrowing from the State Bank of Pakistan, the budget deficit, international reserves and net domestic assets of the State Bank of Pakistan, contracting or guaranteeing of non-congressional loans by the public sector, and external arrears.” Specific commitments include improvements in the area of banking and tax legislation, electricity subsidies, inter-corporate debt, and a reduction of “foreign exchange market intervention by the State Bank of Pakistan.”

Many have pointed out that the basic framework of the IMF’s aid package to Pakistan promotes the adoption of fiscally conservative policies, which runs directly counter to the consensus that was reached at the G-20 summit “that fiscal stimulus was necessary to help countries deal with the financial crisis.” The IMF noted however, that Pakistan’s economic situation was different than most G-20 countries that “have stronger fiscal positions and where fiscal stimulus is needed to deal with recessionary pressures,” and stated that Pakistan, by contrast, faced “severe balance of payment pressures stemming in part from loose financial policies.”