PAKISTAN-IMF TALKS AFTER FLOODS

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)
Aug 30 - Sep 05, 20
10

It is presently impossible for the flood-hit Pakistan to meet the conditions of the lending programme agreed with the International Monetary Fund (IMF) in 2008. Finance Minister Abdul Hafeez Shaikh, who is currently in Washington, is trying to persuade the IMF to ease the terms of the current $11 billion loan or consider new financing. Pakistani officials believe that it would not be difficult for the country's financial team to convince the IMF on slippage on fiscal side because of the devastating floods.

The MF has so far been reluctant to allow any space to Islamabad for breaching the major performance criteria, as the country could not achieve the key economic targets set by the Fund for the last fiscal year 2009-10 ended on June 30.

Islamabad faced hard choices in Washington, as the Pakistani officials last week held talks with the IMF- either to adjust the current IMF program to factor in fiscal pressures arising from the devastating floods, or to opt for emergency funding provided by the IMF to countries hit by natural disaster.

The talks, which started last week, focused on the future of Pakistan's $11 billion IMF program, which was already off-track before the floods hit. The disaster is set to compound the country's economic woes as the government is forced to deal with more than four million left homeless, along with widespread damage to crops and infrastructure.

"Meeting the IMF performance criteria of the current programme is impossible under the present circumstances," AFP reported a Finance Ministry official as saying. "We are in no position to meet targets on critical areas such as budget deficit, reducing inflation or even economic growth."

Officials from the IMF and Pakistan started discussions on August 23 amid reports that the flood-battered country was asking the fund to ease terms of a nearly 11-billion-dollar loan. The nearly month-long floods have killed 1,500 people and affected up to 20 million nationwide in the country's worst natural disaster, with the threat of disease ever-present in the miserable camps sheltering penniless survivors. There are fears that losses could snowball to 43 billion dollars.

"They (Pakistanis) will have to make hard choices in reallocating government investments toward higher priorities and find ways to mobilise the resources," Reuters reported Masood Ahmed, director of the IMF's Middle East and Central Asia Department, as saying. "One of the key areas in which we can help is to put in place a macro-economic framework that provides some stability and within which resources that are used can be rationally allocated."

IMF had pushed back the review of the country's policies in June, blocking a disbursement under an $11 billion loan approved two years ago, as the country failed to contain spending and fell behind in implementing VAT.

"The IMF stands with Pakistan at this difficult time and will do its part to help the country," Bloomberg reported Masood Ahmad, IMF Director for the Middle East and Central Asia, as saying. "The scale of the tragedy means that the country's budget and macroeconomic prospects, which are being supported by an IMF financed program, will also need to be reviewed."

Pakistani official believe that talks with IMF would help the country to compare initial estimates of losses caused by the countrywide floods with the IMF and share fresh proposals to overcome economic challenges. The government could be able to get a lump sum payment of remaining two installments of the standby arrangement. The implementation of value added tax (VAT) or 'Reformed General Sales Tax' (GST) is an important agenda item in the talks with the IMF. The government is supposed to seek further delay from IMF on implementation of VAT from October 1, which would not be possible due to the current situation in the country.

Islamabad turned to the IMF in November 2008 to avert a balance of payments crisis and has been struggling to meet the conditions of that $10.66 billion emergency loan. The country has so far obtained $8.7 billion from the IMF that forced the political government to take unpopular decisions like further monetary tightening and hike in power tariffs. The central bank recently raised its discount rate by 50 basis points to 13 percent under IMF pressure.

The IMF team in June warned the country of derailing its existing programme if the country fails to meet the agreed performance criteria of the Fund. The government however raises the hopes that the IMF will provide more fiscal space and unconditionally release the cash to the flood-hit country.

The government has slashed GDP growth forecast for the current fiscal year 2010-11 to 2.5 percent, against the earlier target of 4.5 percent due to the large scale devastation brought about by worst floods in the country in decades. The agriculture growth, which was estimated at four percent of GDP for the current fiscal year, could go into negative growth depending upon the reports which suggest submerging of 17 million acres of farmland and heavy losses to main crops including cotton, rice, sugarcane, maize and wheat due to flooding. The government has estimated an economic damage of at least $43 billion caused by the floods. The Finance Minister has reportedly given three week's time to the World Bank and the Asian Development Bank to complete damage and need assessment (DNA) of the floods, which would be subsequently shared with the IMF and the international community for financial assistance and economic support.

The country plans to cut the Public Sector Development Programme (PSDP) 2010-11 by 30 percent due to spending on rehabilitation of the flood-affected people and diversion of 50 percent development funds under PSDP to rebuilding and reconstruction projects to be initiated in flood hit areas. The government had earmarked Rs280 billion under federal PSDP in budget 2010-11 for development projects that would be reduced to below Rs200 billion.

World community recently made pledges of about $320 million in aid to the country's flood victims at a two-day meeting of the United Nations General Assembly in New York. The US pledged $60 million, the U.K $50 million, Germany $32 million, China $7.4 million and the European Union $38.5 million.