Dec 01 - 07, 2008

Analysts see tough times ahead for Pakistan after temporary relief from the International Monetary Fund (IMF), which would give its loan in installments in almost two years to the government dictating its harsh conditions. Last month, cash-strapped Pakistan had reached an agreement with the IMF for a total loan of $7.6 billion to meet the severe balance of payments problem and strengthen the exchange rate. The executive board of the IMF in its meeting on November 24 approved a $7.6 billion rescue package for Pakistan. The country will have to pay an interest of 3.15 per cent to 4.15 per cent on the 23-month loan programme under which money will be disbursed in six quarterly installments. The meeting approved the first installment of $3.2 billion, which was disbursed to Pakistan within 48 hours.

Pakistan has been reluctant to swallow the bitter pill of an IMF loan, but the country's rapidly depleting foreign-exchange reserves and its failure to obtain timely cash support from friendly states including United States, China and Saudi Arabia ultimately forced the government to use the most unpopular option-the IMF. The Fund has reportedly demanded the government of curtailing non development expenditures, minimizing fiscal deficit, tax increases, increasing discount rate, bringing down rate of inflation, and withdrawal of all subsidies.

During the two-year IMF program, the government would have to increase the tax-to-GDP ratio to 15 percent. It would have to increase indirect taxes that will hit the people, as the ratio of general sales tax may have to be increased.

Analysts believe that it would be much harder if tax was applied to agricultural inputs as presently the government provides a subsidy of Rs 32 billion on fertilizers. During 1990s, the democratic governments had failed to meet the Fund's condition for levying agriculture tax. Some analysts believe that the country's entry into an IMF program will cause a significant economic slowdown and the government would face a major challenge in managing a slowing economy as it would have to cut expenditure to reduce the budget deficit.

It is generally believed that the government will have to burden the people, especially the poor, for meeting the IMF's demands. The government is under severe criticism by the opposition parties and some analysts for accepting IMF harsh conditions. Opposition parties lashed out at the government that has miserably failed to secure financial assistance from avenues other than IMF. Some analysts believe that it is not romance but economic realities, which determine relations with other countries and international financial institutions. Presently, rapidly depleting foreign currency reserves, sliding rupee, alarming numbers of current account and fiscal deficits, soaring inflation and slumping financial markets are the hard economic realities being faced by the country.

The government has gone to the IMF loan programme on its own terms and conditions after the consent of Cabinet, according to Prime Minister Yousuf Raza Gilani. He recently said this was unprecedented in the history of the country as none of the government in the past sought approval from the Cabinet before going to the IMF programme. "The governments of late Muhammad Khan Junejo, Mian Nawaz Sharif and late Benazir Bhutto all worked under the shadow of the IMF, but never sought Cabinet approval", he said.

Since 2004, when Pakistan ended its last IMF program, this is the first such deal that has been finalized with the IMF. The country is being pressurized by the Washington-based Fund to do more after the country has been forced to raise interest rates by 2 per cent and withdraw subsidy on gas. The analysts believe that the IMF is following the same Washington agenda under which Islamabad was ever asked to do more in countering terrorism during last five years despite the country had paid heavy human and economic costs for being on frontline position in US-led war on terror. Pakistan's economy has paid heavy costs both directly and indirectly for its frontline role in war on terror during past seven years. As a result of being a partner in the international counter terrorism campaign, Pakistan is currently facing major challenges including growing fiscal and current account deficits; rising inflation; growth deterioration; and depleting foreign exchange reserves, according to the draft of Poverty Reduction Strategy Paper (PRSP) - II of the finance ministry issued last month. Statistics released by the finance ministry showed that the expected direct cost due to war on terror would reach Rs114.03 billion in the year 2008-09 from Rs108.527 billion last year while the indirect cost would edge up to Rs563.760 during the year under review against Rs484.367 billion last year.

The currency dealers hope that emergency loan would help the rupee stabilize, at least in short-term, after a sharp depreciation this year as a balance of payments crisis developed. The loan agreement with the IMF has so far had no impact on the country's stock markets. Trading dried up weeks ago because of a floor authorities placed under the benchmark Karachi Stock Exchange (KSE) 100-share index on August 27 to protect a market that has dropped 35 percent this year.

Some analysts criticize the government for unnecessarily delaying negotiations with the IMF, as if beggars could be choosers, no one would choose to take begging bowl to the Fund. The country's trade deficit rose to $7.522 billion in July-October period of current fiscal year, showing an increase of 33 percent, over $5.642 billion for the same period of last year. Inflation rose to 25 per cent in October, nearing a three-decade high, against 9.31 per cent in the same month last year. During July-October 2008-09, the country's oil bills rose to $4.924 billion compared to $2.551 billion of last year which is 93 per cent higher. The food bill of the four months rose to $1.577 billion compared to $890 million, which is again 77 per cent higher, during the corresponding period of last year. The four-month data shows that the country is still paying the highest amount for import of oil and food. The imbalances are rising despite steep fall of oil and food prices in the world market which forced the government to spend over $12 billion alone to import petroleum products during the last fiscal ended on June 30.