IMF holds back cash to Pakistan
By Syed Fazl-e-Haider
KARACHI - The International Monetary Fund (IMF) has deferred for an indefinite
period disbursement of the fifth, US$1.2 billion, installment of funds to be
paid to Pakistan under their $11.3 billion standby agreement. This came after
the government failed to meet the condition of tabling draft value-added tax
(VAT) legislation in the four provincial assemblies.
Critics say the proposed VAT will increase inflation, erode consumers'
purchasing power and dampen demand. The government has left the issue with
legislators who will adopt, reject or amend the VAT bill. Local business
communities have strongly opposed the imposition of VAT, saying it will harm
every sector of the economy. However, the rupee "will come under
pressure if the IMF money is delayed for more than a month", The News quoted
Sayem Ali, an economist at Standard Chartered Bank, as saying. That would drive
up the cost of imports.
The Washington-based IMF has postponed its scheduled March 31 executive board
meeting, which was to review Pakistan's economy and approve payment of the
fifth tranche.
The legislative bottleneck is the presentation of a draft law on VAT to the
Punjab assembly, according to Dawn. The government has already submitted the
draft law to the National Assembly and to the provincial assemblies of Sindh,
North-West Frontier Province and Balochistan.
The IMF is digging its heels in on the issue after overlooking the country's
failure to meet its budget deficit targets during the previous two reviews. The
fund went along with the government's recommendation to allow the fiscal
deficit target to be increased to 5.1% of gross domestic product (GDP) from the
earlier target of 4.9%. IMF approval is crucial because other donor agencies,
including the Asian Development Bank and the World Bank, take their lead from
the fund.
Pakistan agreed with the IMF in November 2009 to impose VAT from July 1 this
year, according to The News. The new tax would help the government to raise an
additional 150 billion rupees (US$1.9 billion) in revenue. Local traders and
businessmen see inherent flaws in the VAT Act.
"The VAT act is silent on zero-rating of five export sectors, meaning that
zero-rating of these sectors has been withdrawn," the Daily Times quoted Agha
Saiddain, former chairman the Pakistan Tanners Association (PTA), as saying.
Under the VAT Act, zero rating on exports of leather, textiles, carpets, sports
goods and surgical goods will be removed and they will brought into the VAT
scheme. Most of these industries are already in crisis due to various factors,
including unreliable energy supplies.
Critics say the imposition of VAT will immediately drive up inflation. The
central bank forecasts that consumer price index (CPI) inflation for the fiscal
year ending on June 30 will be close to 12%, up from a low of 8.9% in October
2009 after price increases for electricity tariffs, petroleum products and
commodities. In the last fiscal year, the average inflation was 20.5%.
The central bank in its monetary policy statement on Saturday maintained its
discount rate at 12.5% for April and May. "An upward adjustment in the policy
rate at this juncture runs the risk of impeding the still nascent recovery,"
the central bank said in its statement. "A downward adjustment runs the risk of
fueling already high inflation."
The government plans to increase domestic fuel and electricity rates from April
1 after raising gas and electricity tariffs by an average 13.5% on March 1.
The CPI has risen 36.3% since the present coalition government came into power
in 2008, with the prices of wheat flour surging 83% and of sugar 168%,
according to Dawn newspaper. The increase in prices of essential items has
continued despite regular government promises to contain the trend and punish
hoarders and profiteers.
Islamabad has received about $6.4 billion from the IMF from its total rescue
package, agreed as the country faced a crisis in meeting its international debt
obligations. Foreign reserves now stand at around $14 billion, while the
country's external debt and liabilities at the end December 2009 were at an
unprecedented $55.67 billion, or the equivalent of one-third of Pakistan's GDP.
The external debt will increase to $60 billion by next June, according to
official sources.
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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