NO END TO IMF LOAN PROGRAM AT THE YEAREND

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)
Dec 27, 2010 - Jan 2, 20
11

It appears that Pakistan will remain in the trap of International Monetary Fund (IMF) in the next year, as the government has no intention to quit the loan program of the Washington-based Fund.

The government has already requested to IMF for nine-month extension in its $11.3 billion bailout package under standby arrangement (SBA) in order to secure two remaining installments of $3.4 billion. The IMF's SBA programme is due to officially expire on December 31.

The government sought the extension after missing several deadlines on implementing a reformed general sales tax (RGST), which was originally scheduled for July and is a key condition to getting the sixth tranche. Some analysts believe that the government will prefer to get the sixth tranche worth $1.7 billion from the IMF and then the existing SBA program will be scrapped without getting the last tranche and negotiation will be started for getting fresh loan from the Fund.

The country has so far received $7.7 billion from IMF and disbursement of $3.4 billion has been held back due to the non-observance of performance benchmarks from the last nine months. The IMF bailed out Pakistan with an $11.3 billion loan in November 2008 after the country's foreign-exchange reserves shrank 75 per cent to $3.5 billion.

The SBA was aimed at restoring financial stability through a tightening of fiscal and monetary policies to bring down inflation and strengthen foreign currency reserves and raising budgetary revenues through comprehensive tax reforms. Local analysts however believe that the country's entry into an IMF program caused a significant economic slowdown, as irrationally high interest rates and tight monetary policy of the central bank under IMFs diktat has held back economic growth.

Critics say that the country's monetary policy has been under heavy burden of borrowed $11.3 billion from IMF and policy-makers are bound to consider reservations shown by the IMF at different occasions.

IMF forecasts the country's economy will grow 2.75 per cent in 2010-11, 4 per cent in 2011-12, and 5 per cent in 2012-13. The government needs all the financial support it can get to recover from summer floods that inflicted nearly $10 billion in damages.

Analysts warn that the government would have to take recourse to large-scale borrowings from the international lenders next year, as the country has to pay back nearly $3 billion to IMF alone from 2012.

The government could not meet the five performance benchmarks including enforcement of RGST on goods and services by the federal and provincial governments, operationalising of Single Treasury Account at federal level, limiting central bank borrowing, formal approval of the State Bank of Pakistan Act 2010, and enforcement of power tariff rationalization plan seeking increase in power tariff and elimination of all power subsidies by the end of current fiscal year.

Pakistani authorities are confident that IMF will extend SBA for three months to help it get through parliamentary process to make law for imposing RGST.

The IMF and other donors require Pakistan to broaden its tax to GDP ratio, which at about 10 per cent is one of the lowest in the world. Implementation of RGST has become a big challenge for present government, as it is facing stern opposition from the business community opposition parties and even from its coalition partners. Critics say that RGST will further fuel the already high inflation in the country.

Inflation in the country is expected to accelerate to 13.5 per cent in the current fiscal year 2010-11 as massive summer floods push up prices for food and other staples, the IMF said in its country report. Prior to the disaster, the IMF had projected average inflation for the current fiscal year 2010-11 at 11.5 per cent, slightly below the 11.7 per cent seen last year.

Critics say that the recent hike in interest rate to 14 per cent will act as an upshot to inflation and prices of consumer goods will multiply owing to increased cost of manufacturing and doing business.

The approval of the much-criticized RGST bill by the National Assembly will be the crucial stage, as the Standing Committee on Finance has started its deliberations. The delay in implementation of the RGST would compound the problem on fiscal side, as revenue target of Rs1655 billion would be an uphill task to achieve in case of failure to implement the tax from January 1. An amount of Rs70 billion was estimated after implementation of the RGST from July 1.

Failure to raise enough revenue has forced the country to cut its development spending by almost half to meet fiscal deficit target. Though the country announced in October a fiscal deficit of 4.7 per cent of GDP, agreed with the IMF for fiscal year 2010-11, yet the fiscal deficit for the first three months of the current fiscal year was 1.6 per cent of gross domestic product (GDP), compared with a fiscal deficit of 1.5 per cent in the same period last year. Analysts forecast a budget deficit of at least 6 per cent of GDP, as they believe that widening fiscal deficit in the first quarter warns that the country would likely overshoot the deficit target by the end of the fiscal year in June.

The country's economic managers may find it difficult to convince the IMF mission to further delay the introduction of RGST. The authorities at the Ministry of Finance strongly feel that further delay in the introduction of RGST would give a wrong signal to the country's major lenders like IMF, World Bank and Asian Development Bank as well as bilateral donors like United States and other developed countries.

Poverty level has risen due to persistent high inflation and deterioration of the security environment drying up foreign inflows and constraining economic activity in the country

A few months ago, the government had discussed the option to quit IMF program. Pakistani business community had welcomed the government's approach to study future economic plans without IMF directions contending that dependence on conditional loans was not in the interest of the country and following IMF lines was a big mistake, which should not be repeated.

Pakistan had terminated an IMF programme prematurely in 2004 during former Prime Minister Shaukat Aziz's tenure on a positive note after successful completion of programme's conditionalities and had given up its right to draw last tranche of the programme. That was the only IMF programme, out of seven arrangements, Pakistan had successfully completed and started repayments ahead of time.