The International Monetary Fund announced Friday that it will release $1.13 billion aid package for Pakistan despite country’s failure to meet conditions specified in loan agreement.

Pakistan had requested for a waiver for its inability to meet quarterly budget deficit target and net government borrowing limits from the State Bank of Pakistan.

Murilo Portugal, IMF’s deputy managing director and acting chairman said, “preparations for important and politically difficult tax reforms have moved forward, and there has been steady progress in financial sector reform”.

IMF has approved total of $10.66 billion loan for Pakistan and with the release of $1.13 billion it has disbursed $7.27 billion so far. IMF has also accepted Pakistan’s request to merge the remaining three payment instalments into two. The IMF said Pakistan has missed two conditions because of the delay in getting pledged aid from other nations.

Portugal said, “Pakistan’s vulnerabilities remain high, due to persistent inflation, security-related spending pressures, energy-sector problems and shortfalls in revenue collection and external financing”.

United States is exerting pressure on Pakistan to send troops to North Waziristan to fight Taliban who claimed responsibility for the recent failed bombing attempt in New York. The IMF announced its readiness to adjust Pakistan’s budget deficit and borrowing targets to let Pakistan manage necessary funding for such priority programs as security.

Portugal said, “these challenges highlight the importance of pursuing a credible fiscal consolidation, maintaining a flexible exchange rate and a cautious stance to monetary policy, and improving governance”.

IMF accepted Pakistan’s request to increase the end-June 2010 budget ceiling by 0.15 percent of gross domestic product, and the floor for net foreign assets of the State Bank of Pakistan was raised by $300 million.

Noting a 17 percent increase in remittances, State Bank of Pakistan Wednesday said that Non-Resident Pakistanis have send home nearly $5.7 billion between July 2009 to February 2010. During the same period in previous fiscal year, Pakistanis living abroad had sent $4.9 billion.

For economies like Pakistan, funds repatriated by non-residents to family and friends back home, provide the most tangible link between migration and development. But September 11attacks, it has become increasingly difficult for Pakistanis to get work visas which had resulted in negative growth of remittances.

Analysts believe that latest increase is due to strict regulation of foreign exchange market. Majority of the informal money transfer and forex firms have changed their business practice or disappeared.

Analysts point out that since remittances are unilateral transfers they do not create liabilities. And they usually come with advice—from migrants who have seen better—on how to best use them. Thus, remittances are not simply money, but value-added money.

NRPs sent $588.78 million in February 2009 compared to $641.32 of February 2010, reports Dollars Magazine. The inflow of remittances in July-February, 2010 period from UAE, USA, Saudi Arabia, GCC countries (including Bahrain, Kuwait, Qatar and Oman), UK and EU countries amounted to $1,317.17 million, $1,173.37 million, $1,148.86 million, $826.93 million, $596.26 million and $171.41 million respectively as compared to $1,035.55 million, $1,156.51 million, $962.30 million, $783.39 million, $344.08 million and $150.05 million respectively in the July-February, 2008-09 period.

Remittances received from Norway, Switzerland, Australia, Canada, Japan and other countries during the first eight months of the current fiscal year amounted to $550.65 million as against $486.34 million in the same period last year. The monthly average remittances for the July-February 2010 period comes out to $723.36 million as compared to $614.83 million during the same period of last fiscal year, registering an increase of 17.65 percent.

During February 2010 remittances from Saudi Arabia, UAE, USA, GCC countries (including Bahrain, Kuwait, Qatar and Oman), UK and EU countries amounted to $149.45 million, $136.88 million, $111.48 million, $89.21 million, $45.91 million and $13.48 million respectively as compared to $123.64 million, $166.62 million, $127.48 million, $93.09 million, $54.12 million and $18.31 million in February 2009. Remittances received from Norway, Switzerland, Australia, Canada, Japan and other countries during February 2010 amounted to $41.13 million compared with $58.04 million in the same month of last year.

The true size, including unrecorded formal and informal flows, is believed to be significantly larger. Remittances total at least three times official development assistance and are the largest source of external financing.

As of yesterday State Bank of Pakistan will not sell foreign exchange to banks for financing the crude oil imports. SBP had given banks a full working week to get prepared for securing funding from the international market.

The present measure has been adopted in the wake of Pakistan rupee losing 53 paisa or 0.6 per cent of its value within 4 days against the dollar as banks began to buy US dollars in advance. Bankers anticipate a further decline in the rupee value as they start financing crude oil imports. Crude imports stood at $4 billion or more than 40 per cent of the overall petroleum imports of $9.5 billion in FY09.

Pakistani bankers estimate this year’s crude imports around $3.5 billion if the global prices remain range-bound and local refineries’ output that declined eight per cent in July-November 2009 does not rebound quickly.(In July-October 2009 crude imports fell to a billion dollars from two billion dollars in a year-ago period due to reduced refineries’ production and lower international prices )

The banks in Pakistan need some $300 million per month to finance crude oil imports.  The rupee depreciated a bit immediately after last announcement and  it may lose some more value in next few weeks unless there are big inflows of foreign exchange.

After the talks between Pakistan and the IMF mission held in Dubai last month, the government is expecting $1.2 billion after the approval by the IMF board scheduled to meet on December 21-22.

But IMF’s Director of External Relations Department Caroline Atkinson has said discussions with Pakistan were in progress, implying that the Dubai talks were not final and that the release of the fourth trance of the $7.6 standby credit might be delayed.

If Pakistan does not get the fourth trance this month a steeper decline in the rupee value of rupees in anticipated in the last weeks of December.

Pakistani bankers also concerned that the year-end servicing of both sovereign and corporate foreign debts would keep the rupee under pressure.

Foreign debt servicing in October-December 2009 was estimated well above a billion dollars, the major share of which was paid in December. In July-September Pakistan spent $1.2 billion on foreign debt servicing despite a roll-over of $450 million.

In July 2008, the State Bank had decided to provide foreign exchange to banks for financing import of crude oil and petroleum products to keep the exchange rates stable amidst inconsistency  triggered by international financial crisis and recession. But it stopped providing foreign exchange for financing of import of furnace oil from February 2009 and for that of petroleum products from July.

Now it has stopped selling foreign exchange for crude oil as well—reportedly to meet one of the conditions of the IMF standby loan—thus restoring the pre-July 2008 arrangements wherein banks were responsible for arranging foreign exchange to finance imports of both crude oil and all petroleum products.

Between February 2009 and 10 December 2009, when banks started financing of furnace oil imports on their own, the rupee has lost 6.8 per cent of its value against the US unit. A senior State Bank official remarked. “This should remove fears that the shifting of financing of crude oil imports to banks would lead to a big depreciation in the rupee value,” He  also added  “The rupee might lose a bit but we neither foresee a major decline in its value nor a serious inconsistency in exchange rates.”

Bankers also dispel the possibility of a speculative attack on the rupee value saying the State Bank is yet to allow forward selling of foreign exchange to importers and thus the question of manipulating exchange rates does not arise. But they say the central bank may allow it sometime next year as the IMF is believed to have raised this issue during talks with SBP authorities.