KARACHI, Jan 30: The IMF has agreed in principle to government borrowing from the banking system, awash with liquidity, to make accelerated payments and pre- payments of most expensive external debt and liabilities, knowledgeable sources said.

The massive foreign exchange reserves, around $9.5 billion, have created the capacity to pre-pay expensive external debts but government needs rupee resources to meet its obligations. The IMF is believed to have responded positively to a proposal to accelerate repayments.

Sources said the understanding was reached during the technical session held between Pakistan and IMF officials when a Fund mission visited Islamabad recently.

The borrowing volume in local currency would be worked out on the basis of the size of the retirable debt identified by Ministry of Finance (MoF). Debt Co-ordination Office in MoF headed by Dr Ashfaq Hasan Khan has been asked to work out the details of the most expensive debts.

A knowledgeable source said looking at the foreign exchange reserves alone there is room for retiring debts amounting to at least $3-4 billion or more. But the numbers have to be worked out and the IMF has to be consulted.

Excess liquidity and huge foreign reserves are making it possible to return external debts before scheduled payments and maturity. Officials also feel that forex investments in triple A securities will yield a mere 1-1.5 per cent return while Pakistan will be carrying much costlier loans and it would be advisable to retire most expensive debts.

Four multilateral agencies whose debts would come under scrutiny are the IMF, World Bank, Asian Development Bank and Islamic Development Bank (IDB). The pre-payment of debts is likely to start in a descending order, with those carrying highest interest rate pre-paid first. IDB commercial credit may be retired on a priority basis.

Multilateral debt rose from $10.6 billion in fiscal 1999 to $13.3 in FY 01 mainly due to revaluation while increase during FY 02 was $1 billion. However, one of the positive aspect with respect to multilateral debt was the shift from “hard” to” soft” loans.

About 35 per cent of the World Bank loans are hard loans whereas 65 per cent of the IDA portfolio consists of soft loans. Total obligation to WB as of July 2002 stood at $8.1 billion of which $5.3 billion were soft-term IDA credit.

Asian Development Bank’s terms of credit follow a pattern similar to that of the World Bank. IDB does not provide any cash disbursing loans but finances import of crude oil and fertilizer. The closing stock of IDB debt at end-June 2002 was $183 million. Most of the multilateral debts are, however, on concessional terms..

Off hand, officials have stated that $650 million credit received by Islamabad from the IMF may be liquidated. Yet, independent financial analysts reckon that multi-dimensional advantage, in case of retirement of WB, ADB and IDB credits, would not be available in case of accelerated payment of IMF credit. The Fund provides balance of payment support and the funds are kept with the State Bank. In case of other multilateral donors, the foreign exchange is retained by the central bank and the rupee proceeds are transferred to the government. If government sheds most expensive external debts, it would reduce its external liability, end up finding more fiscal space for development spending and reduce some of the excess liquidity in the inter-bank market.

In its reports on Pakistan, the IMF has also underscored the critical importance of sustaining the reform process to achieve higher growth and of limiting external borrowing to low interest sources.

Perhaps, it is the right time to retire expensive debts when the rupee is getting stronger and the local currency costs of debt servicing are now lower.