BACK TO IMF
SHAMIM AHMED RIZVI
Nov 03 - 09, 2008
Pakistan would have to knock the door of the International Fund to help Pakistan with a bailout package as it has not been able to ensure required financial assistance from other sources including friends of Pakistan and other donor agencies.
"Pakistan cannot wait any longer" said Shaukat Tarin, Adviser to Prime Minister on Finance which addressing a press conference jointly with foreign ministers in Islamabad last week after their visit to China. The country could get required financial assistance of about 9 to 10 billion US dollars.
The economic managers of the country are running from pillar to post to get external financial assistance to bridge the widening current account deficit to avoid default and bankruptcy. Their initiatives include request to Saudi Arabia for an oil facility, negotiation with International Financial Institutions, formation of a Friends of Pakistan group and an appeal to Iran for the supply of oil on deferred payment basis.
Lately China has also been approached for providing financial support. The efforts to keep the country solvent in the face of heavy pressures, of course, need to be commended.
While the decisions of the IFIs like the World Bank and others investors are heavily influenced by the seal of approval stamped on the policies of the country by the IMF, friendly countries and other donors have their own problems either due to declining oil prices in the international market or crises in the world financial markets resulting in a slow down in their own economics.
The country needs a huge inflow of resources as a short term measure to get out of the highly difficult situation and draw a roadmap for the years ahead. The one and probably the only source which could be of real help at this critical juncture in mobilizing the needed resources and devising appropriate policies is the IMF.
So in less than eight years Pakistan is again standing at the door step of IMF with a big begging bowel. According to a leading Pakistani economist, Dr. Qaiser Bengli, Pakistan has no choice but to go to IMF, however, he says after going into the IMF the government may or may not opt for the financial assistance, as the IMF stamp would open the doors of the other donors, which are reluctant to give loan to the sinking economy.
He makes former Prime Minister Shaukat Aziz responsible for the current economic crisis. "He let the trade deficit to widen." He says Shaukat Aziz kept financing the trade deficit through capital inflows, which in the longer run was not sustainable. He should have curtailed the imports of luxury items and some raw material.
Other experts say the economic bubble was busted because it was filled by the growth in the services sector. Manufacturing and Agriculture sectors, which historically remained the strength of Pak economy, were badly ignored during the past years. Pakistan's dollars pipeline is shortly going to dry up, as the central bank cannot support the import bill for more than six weeks. Last time Pakistan got emergency aid from the IMF in 2000 for nine months but finally took shelter under the IMF's three-year Poverty Reduction and Growth Facility Programme. The then top economic manager, former Prime Minister Shaukat Aziz returned two last trenches of the Programme and proudly announced to break the begging bowl. The PRGF facility was obtained at nominal interest rate but had a cap on borrowing.
This time Pakistan has decided to use Stand-By Arrangement, which comparatively have higher interest rate than the earlier Programme but no limit on borrowing, as Pakistan's requirements are much more than that of late 1990s, Pakistan is in dire need of US $9 billion in the short-term. It is eying on getting US $ 4 to 5 billion from the IMF and remaining amount from the other multilateral lenders. The expecting 15 million US $ from the Asian Development Bank, US$1.4 from the World Bank, 500 million US $ from the Islamic Development Bank and about US$ 1 billion (600 million Sterling Pond) from Britain's Department for International Development.
The multilateral aid is linked with a Letter of Comfort from the IMF. Islamabad is trying to sell its economic stabilization package to the funds, which if agreed would pave way for letter of comfort to the IFIs. Affirmative report from the Fund would not only send positive signals to the market but also avoid default on Sukuk bond of 500 million US $ due in February 2009.
Credible sources in the Finance Ministry reveal that during the annual WB-IMF meetings, both the bilateral and multilateral donors refused to extend loans to Pakistan and asked the authorities to "come through the 'IMF". In addition to LOC, the international donor agencies would also seek sound guarantees from Pakistan Peoples Party-led coalition government to follow their programme. Pakistan has been pursuing the World Bank since March 2008 to extend at east US$ 500 Budgetary Support Programme loan. The Washington-based donor agency refused to give the money and asked Islamabad to first restore macroeconomic stability.
The World Bank sources say though Pakistan has embarked on consolidating fiscal deficit by eliminating subsidies on oil and electricity, what is the guarantee that the government would not reverse the whole process.
People who are closely monitoring the whole episode say -US $9-10 billion are required in short-term and in the medium term while the country needs are assessed over US$1 5 billion. Recently appointed Advisor to Prime Minister on Finance and Revenue, Shaukat Tarin says, "getting money from bilateral and multilateral donors is not an issue, what is important is that under what circumstance we get the money". The Abu Dhabi discussions are based on Economic Stabilization Package. The government has offered a lot under the programme, which is also desired by the donors. The Finance Ministry has prepared a policy matrix for the multilateral donors.
The official documents reveal that the government will commit with the IMF that it would keep the budget deficit at 4.3 percent of Gross Domestic Product. For that it will trim expenditures including the development spending. The government had announced Rs. 550 billion Public Sector Development Programme in fiscal policy 2009. Now it is all set to slash it more than Rs 100 billion. It has already in principle decided to cut the PSDP by Rs. 102 billion and the Programme will once again be reviewed with the Fund.
Huge subsidies, which widened the budget deficit to Rs. 777.2 billion or 7.4 percent of GDP during the last fiscal year 2008 is again a hot topic for discussion. Prime Minister Syed Yousuf Raza Gilani had already stated that the government was compelled to do away all subsides on demand of the WB and IMF. The authorities under an understanding with the donors have decided to phase out fuel subsidies by December 2008.
Owing to sharp decline in crude oil prices in the international market the government had already accomplished the task. The IMF would ensure that the fuel subsidies remain at zero level. Electricity subsidies will be abolished before June 2009, says the official document. The government plans to remove the subsidy by giving two doses of 31 percent each to the masses. However, the people have come on streets after the first dose.
On revenue side, the IMF would like to see more taxes and withdrawal of exemptions given to some important sectors of the economy. The IMF would emphatically seek levy of Capital Gain Tax on stock market and real estate. The other major sector is the agriculture. The fund would persuade Islamabad to net this area. In its Macroeconomic Assessment Letter, which issued to the Asian Development Bank on August 28, 2008, for release of US $ 500 million loan to Islamabad, the IMF states, to curtail budget deficit, Pakistan needs to broaden the tax base by "eliminating some tax exemptions". In medium-term the IMF believes that tax revenue should be increased by at least 3-4 percentage points of Gross Domestic Product. It wants to broaden the base of general sales tax (a regressive way of taxation) to services, taxing commercial agriculture under the income tax, eliminating other tax exemptions and significantly strengthening tax enforcement.
On Monetary side, it termed 13 percent interest rate "insufficient", the IMF had recommended an "increase in interest rate to stem reserve losses and eliminate central bank financing of the government. Interest rates should be allowed to rise as needed to lower inflation and ensure that the domestic financing of the (budget) deficit is covered entirely by commercial banks and non-bank sources".