FRESH LOANS FOR RETIRING OLD ONES

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)
Mar 14 - 20, 20
11

Present government is actually following a policy of seeking fresh loans for retiring old loans, while the country's debt servicing obligations have squeezed the resources meant for developmental projects, particularly in social sector. The government plans to seek a fresh loan program from February next year from the International Monetary Fund (IMF).

The Pakistani officials and the visiting IMF mission reportedly discussed the possibility of adjustment of the sixth and final tranche of about $1.7 billion against repayment of the first installment of new IMF loan. Introduction of the controversial reformed general sales tax (RGST) and provincial taxes on agricultural income and real estate from July 1 will be the pre-condition for the fresh loan from the Washington-based Fund.

The country already relies on an $11.3 billion bailout package agreed to with IMF that has propped up its faltering economy since 2008. What the country actually needs at this stage from the IMF is a letter of comfort (LoC), which will open a window for Islamabad to obtain loans from the World Bank and the Asian Development Bank (ADB) for financing its burgeoning fiscal deficit. After stepping back from the reforms proposed by IMF, the country is facing a fiscal emergency, as the government is heavily borrowing from the central bank to run its affairs, while the central bank is printing more notes to provide the government about Rs2 billion per day.

Suspension of IMF programme has also suspended lending of the ADB and the World Bank to Pakistan. The achievement of monthly fiscal targets will enable the Islamabad to get a letter of comfort from the IMF to ensure budgetary support from other lenders-World Bank, ADB, Islamic Development Bank-which have been holding back about $500 million each because of suspension of the IMF programme since May last year.

The country-which faces lack of funds due to a 'suspended' IMF program and 'stalled' aid from the US-is currently battling for the release of next tranche worth $1.7 billion of the IMF loan program. Last week, the IMF team initiated policy level talks with the government in Islamabad.

The government for issuance of the LoC will have to present a comprehensive roadmap with clear signals to implement it.

Pakistan's total debt and liabilities for the first time in the history touched the Rs10 trillion-mark, as the government violated almost all the limits on borrowing imposed in the Fiscal Responsibility and Debt Limitation Act. Critics say that the government has no plan to lead the nation to self-reliance, as more loans from the IMF will further increase the country's debt burden, which has already crossed the legal limit of 60 per cent of the total size of the economy.

The country's total debt and liabilities touched the Rs10 trillion-mark in September last year, as the government borrowed over Rs5 trillion from domestic sources and approximately the same amount from international lenders. The government borrowed Rs271 billion from the IMF for balance of payments support and incurred an exchange loss of Rs200 billion on the external debt portfolio because of the rupee depreciation against the US dollar. The country has to spend almost Rs900 billion this year on debt servicing, which is five times more than the revised federal development budget.

Relations between Washington and Islamabad have been strained since police arrested Raymond Davis, who has confessed to killing two Pakistanis in self-defense on a busy street in Lahore on January 27. Revelations that Davis was a CIA contractor have heaped pressure on President Asif Ali Zardari's fragile government and further heightened public mistrust of US actions inside Pakistan.

Analysts identify the lack of funds a major cause of pressure on the economy, which could take a hit due to the country's growing diplomatic tension with the Washington over the detention of Davis.

Federal Finance Minister, Dr. Abdul Hafeez Shaikh urged the visiting Marc Grossman, the new US special Envoy for Pakistan and Afghanistan for a timely provision of coalition support funds (CSF) to the country, which has so far received only $630 million out of $1.4 billion allocated this year. The security related expenditures increased from Rs177 billion in 2009-10 to Rs800 billion in 2010-11.

The visiting Grossman reportedly told the Prime Minister Yousuf Raza Gilani that the stalled aid for Pakistan will be provided very soon, while he also appealed to Gilani to release Davis. Gilani, however, repeated his stance on the Davis issue saying the decision regarding Davis' immunity will be made by the court.

Washington insists Davis is protected by diplomatic immunity and should be released but the Pakistani government is fearful of a backlash from the people, already wary of the US and enraged by the shooting of two citizens dead by the US official.

Washington postponed the high-level dialogue with Pakistan on war in Afghanistan scheduled for February 23-24, as a diplomatic crisis between the two countries deepens over the ongoing detention of Davis. The U.S. has also threatened to cut off aid to the country, the beneficiary of $7.5 billion of aid and $2 billion in military aid.

The country was forced to turn to the IMF for a loan package of $7.6 billion that was agreed in November 2008, as the country was facing a serious balance of payments crisis and 75 per cent of its forex reserves had shrunk. The IMF increased the loan to $11.3 billion in July 2009.

The country's debt servicing increased by 43 per cent in the last five years to $3.112 billion in 2009-10, which was $2.162 billion in 2005-06. The total external debt increased from $37.24 billion in June 2006 to $55.62 billion in June 2010, showing an increase of 49 per cent. After making a payment of $6.03 billion during the last three years, the country is still under the burden of $53.7 billion foreign debt.

Critics say that present government still excessively depends on foreign aid and loans to run the country without having any plan to lead the nation to the goal of self-reliance. The country's 65 per cent of the budget goes to debt retirement, defense expenditures and the current expenditures of the government and almost 60 per cent of the economy is out of the tax net.