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US not to block new IMF loans to Pakistan

The United States has given the green light to the International Monetary Fund to resume negotiations with Pakistan to help avert financial disaster even though the Americans have imposed economic sanctions on the country to protest its nuclear testing.

Senior State Department and treasury officials said last evening that the United States would abstain or vote against any new IMF loans that emerged from these negotiations as US sanctions laws require.

But the officials, speaking on conditions of anonymity, said they believed the loans would be approved by other industrialised democracies on the IMF board, provided Pakistan agreed to substantial economic reforms.

They said the US decision not to block any new IMF loans was made by high-level officials after consultations with interested members of Congress, who expressed ''no significant opposition''.

Earlier, State Department spokesman James P Rubin said, ''We have not softened or somehow waived the sanctions.''

He said the intent of the sanctions laws was never to punish Pakistan or its people or precipitate an economic collapse.''

Pakistan's currency reserves have fallen to $ 600 million, intensifying doubts about its ability to service its $ 42 billion in external debt.

Rubin said it was critical that the IMF be allowed to resume negotiations on reinstating Pakistan's IMF programme, the minimum necessary to forestall a collapse of confidence in Pakistan's economy but unlikely by itself to prevent default.

To turn things around, Rubin said, Pakistan must commit to serious economic reforms and the United States and its G-7 partners will do all that is needed to see these reforms are implemented.

One of the officials who briefed reporters later said an IMF rescue package for Pakistan would be in the interests of India, which would not want to have an economically unstable neighbour.

Pakistan conducted its first nuclear sanctions on May 28 that prompted western economic sanctions, including measures such as withholding of multilateral assistance from the IMF, the World Bank and the Asian Development Bank.

The officials said the United States would continue to oppose any loans from the two development banks to Pakistan.

The IMF had a three-year $ 1.6 billion loan programme with Pakistan that the IMF would now have to renegotiate, the officials said. A $ 26 million installment was supposed to be paid at the end of June when a meeting of the fund was scheduled and then did not take place.

Paul Chabrier, the IMF's director for the Middle East, returned from a trip to Pakistan on July 12 and discussed the country's economic situation with the IMF directors who represent the main industrialised democracies.

Rubin said Pakistan's serious economic problems, a legacy of severe and lengthy mismanagement, had been exacerbated by sanctions. A default could result in severe hardship for Pakistani people, leading to political instability and turmoil, he added.

The state department official said, ''It was not our intention that sanctions should punish Pakistan's citizens or precipitate an economic collapse. We need to respond in a prudent manner and this can best be done through international institutions designed to deal with such problems.''

He said it was critical that the IMF be allowed to resume negotiations on reinstating Pakistan's IMF programme. "We are re-examining, with our G-7 colleagues, the multilateral approach to the IMF with respect to Pakistan. Resumed IMF involvement is the minimum necessary to forestal a collapse of confidence in Pakistan's economy, but it is unlikely, by itself, to prevent default,'' he added.

In reply to another question, Rubin said, ''We have not softened or somehow waived the sanctions. We are abstaining and making use of the flexibility that the law currently allows. We are not being softer on Pakistan than India. On the contrary, the overall effect of sanctions is harder on Pakistan, and in addition, India neither seeks nor receives support from the IMF.''

He said both India and Pakistan would continue to feel the impact of US sanctions. Pakistan would continue to be denied much-needed spares for its US-origin military equipment, for instance, and both India and Pakistan would continue to be denied desperately needed financing and insurance for investment.

''We still retain significant leverage, but we are trying to deal with one of the fundamental problems right now, which is the state of the Pakistani economy,'' he added.

UNI