IMF PRESSES PAKISTAN ON PERFORMANCE CRITERIA

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)

Oct 4 - 10, 2010

International Monetary Fund (IMF) has delayed the disbursement of $2.6 billion under the $11.3 billion standby arrangement (SBA) to Pakistan and imposed new conditionalities related to energy sector reforms. The international lender has asked the country to abolish Pakistan Electric Power Company (Pepco) and privatise two power distribution companies. The IMF meeting, which ended in the first week of September, demanded to put an end to power line losses by December and demanded to raise the power tariffs twice by June of the current fiscal year 2010-11.

The Fund has already made it clear that further talks with the country on macroeconomic review could be held only after the government introduced value-added tax (VAT) or reformed general sales tax (GST) from October 1. The IMF authorities have informed the Pakistani officials that the program would continue only after key measures agreed under the programme are adhered to.

Analysts believe that the sixth tranche of $1.7 billion has been delayed as the country would have to implement the VAT, eliminate electricity tariffs, curtail its expenditure and bring down its fiscal deficit to be eligible for the tranche.

IMF has come up with new conditions of reforms in energy sector bound for the sixth and seventh tranches of SBA.

The Fund also demanded to abolish Pepco and put an end to the discounted power supply to the employees of Wapda (water and power development authority) and other distribution companies.

It was also demanded of Pakistan that two distribution companies should be privatised by the end of current fiscal year. After the required reforms, the remaining deficit in energy sector should be made up with twice-raised power tariffs.

IMF is not ready to grant the country any waiver on its performance criteria and any further financing from the Fund will be tough to get without action on reforms. A 17-member Pakistani delegation stayed in Washington for more than 10 days for talks with the IMF on a belated macroeconomic review. The IMF's review, which was due in June this year, should have been followed by the release of a $1.3 billion tranche in July. Completion of the fifth review by IMF in Washington was expected to allow the Fund to release $1.7 billion to the country. Analysts believe that delay in disbursement from the IMF has added to financial woes of the calamity-hit country where worst floods in history have caused huge monetary losses.

The IMF has reportedly set four preconditions for the release of two remaining tranches of $2.6 billion to the country. The IMF executive board has informed Islamabad that it would not consider the country's request for more funds unless it made tangible progress on power sector reforms, gave more autonomy to central bank and resolved the emergence of a fresh circular debt arising out of commodity operations.

IMF commenced talks on August 23 with a delegation led by Pakistan's Finance Minister Abdul Hafeez Shaikh on re-organising the terms of an $11 billion IMF loan programme. The two-week long Pakistan-IMF talks focused on the future of the country's IMF program, which was already off-track before the floods hit. A deteriorating economy forced the South Asian country to seek the IMF loan in 2008 to avoid defaulting on its overseas debt. That loan was augmented in 2009 and extended through the end of this year.

The Fund however agreed to give the country $450 million in emergency flood aid, which could be secured by Islamabad through a simple letter, instead of spending a lot of time, energy and resources in Washington. The flood aid is not related to Pakistan's economic progress, as it is not part of the existing $11 billion IMF package

Last year's fiscal deficit was 6.3 per cent of Gross Domestic Product (GDP). It was much higher than 5.2 per cent (or Rs680 billion) deficit of the preceding year. Analysts contend that full impact of the floods would emerge within next two months which would make it clear how much would be the fiscal deficit and how much government would borrow to continue functioning with the least available liquidity.

The full impact of the floods is yet to come and that would further shrink revenue inflow and result in a sharp increase in government borrowing. During the last fiscal year, the government made record borrowing from commercial banks as it was bound to remain within the limit while borrowing from the central bank under an agreement with the IMF.

The Fund however insisted that the country should implement tax and energy sector reforms within the current fiscal year if it wants to continue IMF loan arrangement, which is due to complete in December. The government has reportedly assured the IMF that despite delays in increasing electricity tariff because of the flood situation, the agreed increase of about 25 per cent would be passed on to consumers during the year.

The country's current account deficit during July-August of the current fiscal year reached $944 million against $635 million during the corresponding period of last year, according to the central bank. The deficit was 48.6 per cent higher than two months of the previous year, setting a reverse trend, unlike the trend witnessed during the fiscal year 2009-10.

The business community has expressed its dismay over the outcome of the country's talks with IMF and demanded of the government to categorically express its inability to pay the debts in such a condition and all or partial loans should be written off. This is not the time to further burden the nation with another loan as Pakistan is not in a position to pay off huge loans, which have already piled up due to history's biggest natural catastrophe that has not only displaced over 25 million people but incurred monetary losses to the tune of billions of dollars.

Global Competitiveness Index (GCI) has placed Pakistan in 2010-2011 at 123rd in the world as compared to 101 in the last fiscal year's GCI (out of 133).

Corruption and inflation are the top problematic factors for doing business in Pakistan, says Global Competitiveness Report 2010-11, prepared by World Economic Forum (WEF).The report said among the factors that create problems for doing business in Pakistan included policy instability, inflation, inefficient government bureaucracy, crime and theft, access to financing, tax rates, inadequate supply of infrastructure, inadequately educated workforce, tax regulations, foreign currency regulations, poor public health, restrictive labour regulations.