IMF further delays Pakistan cash
By Syed Fazl-e-Haider
KARACHI - The International Monetary Fund (IMF) has further delayed a loan to
Pakistan that was expected to be disbursed in the first week of next month.
A meeting of the IMF executive board that was set for May 3 to approve the
fifth tranche of US$1.2 billion intended for Pakistan under a standby
arrangement has been deferred until mid-May because of the insertion of a new
paragraph on the power sector. The meeting was originally scheduled for March
31.
Under the new paragraph inserted in the letter of intent, Islamabad has
extended written guarantees to increase the
power tariff by 6% from the beginning of this month, retrospectively. The
government had been reluctant to increase the tariff by so much due to the
effects it would have on driving up already high inflation.
Inflation as measured by the Consumer Price Index (CPI), which gained 11.29%
during the nine months to the end of March, could climb well beyond 12% for
this financial year if the government increases the electricity tariff before
the budget for the next fiscal year, which starts on July 1.
The World Bank and the Asian Development Bank have helped pressure the
government to bend to the IMF's wishes.
The IMF, which wants the government to increase its revenues, also wants the
government to introduce value-added tax, which again would be unpopular with
the public and politically risky. The government is therefore trying to balance
its considerable need for the next tranche of IMF funds with the danger of a
political and public backlash if it follows the Washington-based institution's
demands.
Last week, Pakistan's Finance Ministry officials, including Finance Adviser
Hafeez Sheikh, were in Washington for the spring meetings of the IMF and the
World Bank, but in the wake of the postponed IMF board meeting, a scheduled
visit of Finance Ministry officials to Washington from April 24 was also
postponed, according to The News.
The officials were supposed to update the IMF on the state of Pakistan's
economy and convince executive board members and IMF management to approve the
$1.2 billion tranche, part of a total package of $11.3 billion first agreed on
in November 2008 to avert a balance of payments crisis in Pakistan and to shore
up reserves.
Critics see the government's agreement to the 6% rise in the electricity tariff
as another blow to already desperately poor masses burdened with electricity
blackouts, high inflation, unemployment and terrorist attacks.
Pakistan has told the IMF that CPI inflation will be 12% against the 9.5%
targeted in the budget for the current fiscal year, according to Business
Recorder. The CPI for March rose 12.91% from a year earlier, largely because of
increases in food and oil prices.
The government, in a Supplementary Memorandum of Economic and Financial
Policies (SMEFP), told the IMF that electricity tariff adjustments and higher
food prices would further push up the annual consumer price inflation.
The present double-digit inflation is already considered too high by local
economists and could substantially drive up the number of people below the
poverty line. Inflationary pressures could also increase in the next two months
due to increasing trends in oil prices.
As the government waits to hear when it will get its hands on the latest
tranche of bailout funds, its budget deficit for this financial year is
expected to reach 5.5% of gross domestic product. That will overshoot the 5.1%
target most recently set with the IMF, which was itself an increase from the
originally agreed 4.9% of GDP.
The worsening deficit is being attributed to low revenue collection,
security-related spending and a shortfall in aid promised by allies.
Domestic debt surged 14% in the first eight months of this financial year to
4.374 trillion rupees (US$52 billion), while the government failed to meet its
commitment to the IMF to limit its budgetary borrowing from the central bank to
1.13 trillion rupees by end of March 2010. The government could not reduce its
borrowing from the central bank due to less than expected revenue collection
and the non-payment of still-delayed fifth IMF tranche.
Meanwhile, the economic outlook is worsening, with the government cutting its
GDP growth target for this financial year to 3% from 3.3% due to power outages.
The IMF wants Islamabad to use VAT to raise its ratio of tax revenue to GDP by
3 to 4%, from the present 9%, one of the lowest in the world.
The transition from general sales tax (GST) to VAT would cost the government an
estimated loss of 50 billion rupees in the first year of enforcement, according
to the Daily Times. Gains would come from ending exemptions to GST, at present
estimated to be worth about 200 billion rupees. Removing such exemptions in one
go would again be politically difficult for the government.
The federal authorities say the net gain would be around 125 billion rupees
following implementation of VAT, with further gains possible due to the more
efficient nature of VAT tax collection
Parliament is opposed to the proposed implementation of the VAT bill in
2010-11, the coming financial year, according to the Business Recorder, and it
could take a further six to 12 months to make necessary arrangements for its
introduction.
The local business community argues that a VAT regime will further add to
inflation.
The government is seeking alternative measures if implementation of VAT grinds
to a halt, to avert the collapse of public resources.
"There would be little choice other than to go for ... tough measures," The
News quoted Federal Board of Revenue chairman Sohail Ahmed as saying. "We would
have to go for alternate taxation in the budget in case the IMF respirator is
removed from the country's economy."
Syed Fazl-e-Haider (www.syedfazlehaider.com ) is a development analyst in
Pakistan. He is the author of many books, including The Economic
Development of Balochistan (2004). He can be contacted at
sfazlehaider05@yahoo.com
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