PAKISTAN-IMF PRE-BUDGET TALKS

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)
May 16 - 22, 20
11

The talks are going on between Pakistani officials and the International Monetary Fund (IMF) in Dubai, as the country makes preparations for the next fiscal year budget 2011-13. The talks, which are expected to continue till May 17, are meant to discuss budget targets for the fiscal year 2011/12 and to review economic and policy developments under IMF loan program. The talks are also meant for restoration of suspended $11.3 billion Stand-by Arrangement (SBA) agreed to with IMF in 2008. The country is under pressure to reduce its fiscal deficit even as it copes with more than $10 billion in damage from record flooding in August and the war against Islamist extremists.

IMF postponed talks in Pakistan due to security concerns, while the World Bank also postponed travel to the country, as the killing of Osama bin Laden by US Special Forces on May 2 in the Pakistani city of Abbotabad raised worries about the potential for retaliatory attacks. The IMF review mission was scheduled to visit Islamabad on May 8 for the fifth review of the country's economy, which is a prerequisite for the release of the withheld tranche of $1.7 billion under the suspended bailout programme. Analysts believe that further delay in IMF disbursements would be a setback for the country at a time when the lawmakers in the United States have called for a review of US aid to the country after killing of bin Laden.

The inflation-fueling government's borrowing from banking system posted a phenomenal increase of 81 percent and crossed Rs500 billion mark on April 23, mainly due to shortfall in revenue collection. Consumer Price Index (CPI) inflation recorded at 13.04 percent in April compared to the corresponding month of last year, while registering an increase of 1.62 percent as compared to March. The country has missed even the revised growth target of 2.8 percent as provisional figures suggest it would be 2.4 percent for the current fiscal year, ending on June 30.

The country's gross domestic product (GDP) is projected to remain at 2.39 per cent during fiscal year 2010-11 due to end on June 30, according to the estimates based on provisional information for six to nine months which is projected over the entire year. The provisional growth rate is below the expectations of the IMF, 2.6 per cent less than original government estimates of 4.5 per cent and 0.4 per cent below revised government estimates.

IMF wants Pakistan to reduce its deficit by increasing revenue while cutting wasteful spending. The country's budget deficit for the first nine months of the current fiscal year was 4.5 per cent of gross domestic product. The government aims to keep the budget deficit to less than 5.5 per cent of GDP for the year.

Last May, the IMF halted its program over a lack of progress on reforms, principally on energy and tax. Cash-strapped country direly needs a Letter of Comfort from the IMF to get the suspended budgetary support funding from the World Bank and the Asian Development Bank (ADB). Finance Minister Abdul Hafeez Shaikh disclosed at a recent news conference in Islamabad after his US visit that IMF has agreed to facilitate Pakistan for issuance of Letter of Comfort for obtaining $1 billion budgetary support, $500 million each from World Bank and ADB.

In a recent report, the IMF has included Pakistan among the countries that are registering annual headline inflation of above 10 per cent and warns that monetization of the fiscal deficit is an added concern. The report examines the impact of higher fuel and food prices on the country's economy, noting that the country's import bill was 2.1 per cent of its GDP and the annual cost of subsidies provided to cushion the impact of this price hike was 0.3 per cent of GDP.

The government has reportedly revised budgetary framework with cut in expenditures by Rs120 billion - Rs100 billion cut in public sector development programme and Rs20 billion reduction in non-development budget. This has been done to keep the budget deficit going out of control. Fresh budget deficit ceiling has also been agreed with the IMF authorities to contain it at 5.3 percent of the GDP against the actual budgetary deficit of 4 percent of the GDP.

The government has withdrawn all major GST exemptions, zero rating facility for exports have been maintained but local sales of the five major export-oriented sectors have been taxed. Income tax surcharge has been imposed and rate of special excise duty has been increased from 1 percent to 2.5 percent. The government expects Rs53 billion additional revenues from these measures during the ongoing fiscal year and withdrawal of GST exemptions would help realize Rs90 billion additional revenues in next fiscal year 2011-12. IMF authorities appreciated the government's measures during the talks in Washington last month.

US lawmakers have questioned how it was possible for Osama bin Laden to live near a Pakistani military training academy without the knowledge of the government. Questions have been raised about whether the US might pull back on its bilateral aid to Pakistan, which would make the IMF funding even more critical.

Last month, Shaikh during his visit to Washington reportedly said it was a myth that his country was a major recipient of aid from the US. Shaikh said the Washington had not delivered what it promised under a law passed in 2009 that is meant to provide $7.5 billion in civilian aid to Pakistan over five years. The law authorized aid of $1.5 billion a year, while only $179.5 million had been disbursed to the country by the end of 2010.

In the ongoing talks in Dubai, the two sides are expected to reach an accord on targets for the new budget to cover the fiscal year that starts on July 1. The IMF officials have reportedly been assured by the government that new revenue measures would be introduced in the next year's budget including Reformed General Sales Tax, tax on farm income, services and wealth through a broad-based economic move, both at the federal and provincial levels.