May 25 - 31, 2009

Pakistani authorities concluded talks with the International Monetary Fund (IMF) in Dubai on May 11. The IMF has removed the current revenue target slab of Rs 1.327 trillion for Pakistan and linked it with 10.2 percent of annual GDP growth. While the IMF showed serious reservations over low tax collection, Pakistan attributed low GDP growth as key reason to poor collection. Though IMF agreed for a relaxation of the country's fiscal deficit target for 2009/10 to boost growth but it put stress on no less than 20pc growth in tax collection next year. The critics say that the government received dictations from the IMF for making 2009-10 budget in the Dubai meeting. An IMF-dictated budget for the next fiscal year will further hit the poor in the south Asian country where poverty has already risen to 40 percent.

Islamabad met all the IMF conditions except for tax collection and elimination of subsidy on electricity. The government claims that it has achieved all IMF targets, but what about the targets set by the government in the current fiscal year budget. The country is heading toward another financial crisis in the year 2010-11 due to the government's dependence on IMF's loans". Critics say that the country mortgaged its economic sovereignty and right to make the budget after accepting conditions of the IMF programme under which, 23 months standby arrangement of $7.6 billion bailout package was extended to Islamabad last November. They say that if the government imposes agricultural income tax on farmers, under the IMF pressure, this sector would totally collapse and Pakistan would have to import wheat, cotton, sugar, edible oil from other countries.

Islamabad had requested the IMF to allow an increase in the fiscal deficit target by 1.2 per cent of GDP to 4.5 per cent instead of earlier target of 3.3 per cent for the next fiscal year, according to the media reports. If the IMF allows Islamabad to hike its fiscal deficit by 1.2 per cent of the GDP, it will give fiscal space to the incumbent regime in the range of Rs170 to Rs180 billion for spending more on development projects as well as raising salaries and pensions by around 15 to 20 per cent as adhoc relief for public sector employees.

The country is facing problems in meeting the revenue collection target due to a serious decline in key revenue generating sectors including large-scale manufacturing (LSM). The Federal Board of Revenue (FBR) collected Rs 898.64 billion during the first ten months of the current fiscal year, reflecting an increase of 17.7 per cent from Rs 763.592 billion collected in the same period of last year. The FBR is far behind its tax collection target of Rs1.3 trillion and may hardly collect Rs1,100 billion by the end of fiscal year. The original tax collection target set at the time of budget announcement was Rs 1.25 trillion. The FBR needs to collect over Rs400 billion in remaining two months to meet the current fiscal target of Rs1.3 trillion.

LSM sector growth witnessed a decline of 8 percent during nine months of the current fiscal year 2008-09 as compared to 6 percent rise during the same period of last fiscal year. The decline in production of LSM sector is attributed to energy crisis during last two years, rise in input cost and lower and slow domestic and external demand. Global economic recession is also affecting the growth of export-driven industries including textile with over 60 percent share in the country's exports, which also declined by 8 percent in current fiscal year. Local exporters expect further decline in the growth of LSM sector and the country's exports, as the importers are hesitant in placing orders despite all guarantees due to the country's poor law and order situation.

Due to negative growth in exports, the country's trade deficit crossed $14 billion during the ten months (July-April) of current fiscal year. The trade deficit has been recorded at $14,160,136 million in July-April 2008-09 as compared to $16,836,407 million in the corresponding period of last year, showing a contraction of the deficit by 15.9 percent, according to FBS. Last month, the exports registered a negative growth of 23.92 percent, to $1,362,497 million, as compared to $1,790,809 million in the same month of last year; whereas imports declined by 31.74 percent, to $2,798,369 million against $4,099,870 million in the same month of last year.

The Consumer Price Index (CPI) inflation surged by 22.35 percent during July-April 2008-09 against 10.27 percent in the same period of 2007-08, according to Federal Bureau of Statistics (FBS). During April 2009, food inflation stood at 17.04 percent, whereas prices of non-perishable items surged by 16.22 percent and perishable items by 22.71 percent over April 2008.

Analysts argue that if GDP growth target is set below 6 percent in the next fiscal year budget (2009-10), it will push more people below poverty line. The IMF has further slashed the country's GDP growth rate to 3.5 percent in next fiscal year 2009-10 owing to deepest post-World War II recession. Earlier the IMF authorities had projected the country's real GDP to post a growth of 4 percent. In the current fiscal year budget, the GDP growth target was set at 5.6 percent, which has been lowered to 2.5 percent under IMF demands.

The sharp deterioration in the global economic and financial outlook poses significant risks to exports, remittances and external financing, according to an updated report of South Asia Poverty Reduction and Economic Management Unit (SASEP) by World Bank. The report says that risks to the domestic financial sector may increase, and it seems almost certain that even the downward-revised revenue target will not be met in this fiscal year. GDP growth in Pakistan's export markets is likely to fall sharply in 2009, which would translate into a starker-than projected decline of Pakistan's export growth in the medium-term, put pressure on Pakistan's external balances and complicate growth recovery.

Though the central bank has cut discount rate by 100 basis points to 14 per cent, yet it is still highest in Asia and it is not enough to reduce the bank's lending rate and to stimulate the country's economy. Local analysts believe that high interest rates are the main reason behind the fall in the country's industrial output. They contend that reduction in discount rate by 200 basis points could provide some relief to the ailing industry and trade.

The country's foreign debt and liabilities have risen by $15.01 billion during the last three and a half years from $35.834 billion at the end of June 2005 to $50.85 billion at the end of December 2008. Officials have also indicated their intention to seek another $4.5 billion from the IMF after obtaining $7.6 billion loan package in November. Analysts fear that the additional IMF loan will further enhance the country's debt servicing obligations, thereby squeezing the resources meant for developmental projects.