IMF STOPS RELEASE OF TRANCHE

TARIQ AHMED SAEEDI
(feedback@pgeconomist.com)

Jan 3 - 9, 2011

International Monetary Fund (IMF) has stopped the remaining more than three billion dollar tranche of Stand-by arrangement (SBA) programme on the ground of delay in imposition of reformed general sales tax (RGST) besides failure of the government to show fiscal discipline in a given time. Since the budget deficit is not contracting, the government keeps relying on domestic borrowing to meet its expenditures. As a result, inflation is on upward trend and so does the interest rate that is a preferable tool of the central bank to tame runaway inflation.

While IMF is not ready to forgo its condition of RGST levy, public pressure against the new tax on the government of Pakistan is not seen to be easing out. Now the government is in dilemma. If it does not get the RGST bill passed from the parliament, release of remaining loan seems to be near to impossible. On the contrary, it is not strong enough politically to go against the popular will of political parties including its coalition partner apparently hell-bent on frustrating RGST plan. Even if it is successful in getting federal part of RGST law passed, it would be provincial prerogative to implement provincial part of the tax and unanimity in this case is not guaranteed. There is a divide in authority of collecting tax on goods and services between federation and federating units. Bringing uniformity in tax nationwide is really a difficult task.

Perhaps, therefore government of Pakistan has sought extension in SBA programme through September 30, 2011 to implement policy measures outlined by the Washington-based lender under reform program. "The nine-month extension will support confidence and help restore macroeconomic stability," Pakistan's senior officials stated in a letter to the fund on December 17, 2010. The reform program wants the government to control domestic borrowing and circular debts in energy sector, and implement RGST. Pakistan's authorities are determined to maintain budget deficit at 4.7 per cent of the gross domestic product (GDP) and for this to happen it needs extra time.

Critics say the government is not controlling non-development expenditures and living with profligacy at the cost of society threatened by impending danger of extreme poverty. Buying power of people is weakening as the prices of consumer products are increasing with each passing day. The country is reduced to a low-income country and only good governance and making public sector enterprises efficient can ensure sustainable economic growth and elevate the country to middle-income level, according to analysts.

Pakistan Steel Mill, Pakistan Railways, Pakistan International Airlines, and few other public sector enterprises are eating billions of rupees of national exchequers to keep themselves operational. Sceptics are also worried over the fate of 11 billion rupees recently approved by the federal cabinet to upgrade railway lines. If this enormous fund is misused, they see further devastation as well as unrealised dream of Pakistan becoming trade corridor to the landlocked central Asian states. The civilian government continues to feed these lose-making giants to prevent unemployment that may be a subsequent effect of stoppage of bailout packages to inefficient public sector enterprises. But, the cost of it is being borne through minting money instead of cutting funds to the ministries and above all reining in corruption, which is being ignored deliberately. Not once, many times analysts have pointed out measures that can be effective to generate revenue for the government. One such measure is plugging the leakages in tax collection. Hundred of billion of rupees taxes are siphoned off from the tax machinery because of lack of transparency and tax laws exploited to the benefits of tax evaders by the tax lawyers. A parliamentary leader of a political party has claimed that he can generate a thousand billion rupees taxes without imposing regressive taxes on public. The government should pay heed to such suggestions and use the services for the economic benefits.

At present, the government is resorting to public-unfriendly measures to get out of the economic crisis. It is pushing up prices of petroleum products despite the known fact that how much inflationary this move would be. A slight increase in prices of petroleum products unleash price storm across the board.

Domestic borrowing is swelling. This overreliance on public debts is also major cause of inflation, according to SBP Governor. He said alone in three year (June 2007 to October 2010), inflation was increased 66 per cent, which was actually 100 per cent more than the cumulative rise during June 2003 to June 2007. Government borrowing has unusually surpassed the limit prescribed in SBP Act. This excessive borrowing affected the private credit off-take. Reportedly, Governor SBP said during the aforementioned three-year credit to private sector grew only 24 per cent. Lending to public sector enterprises increased 305 per cent during June 2007 and Oct 2010, he added. IMF has projected 14 per cent average inflation for the current fiscal year (2010/11). The forecast was based on the Fund's consideration of massive impact of the floods on Pakistan's economy.

To control inflation, SBP is keeping the monetary policy tight and pushing up interest rate, which is asphyxiating private sector suffering already from energy crisis and disturbed law and order situation. The central bank increased the discount rate to 14 per cent that is highest in the region and makes bank credit for the private sector nonviable when added with additional mark-ups upon reaching to debtor. The lending rate increases the principle amount by over 100 per cent. Bank funds that can play a major role in alleviating poverty and creating income sources when distributed on small scale are rather more costly. High interest rate is constricting the penetration of micro financing to cash-strapped entrepreneurs.