Sheikh fails to move IMF with funds
plea By Syed Fazl-e-Haider
KARACHI, Pakistan - Finance Minister Abdul
Hafeez Sheikh returned home empty handed from
Washington this week, unable to convince the
International Monetary Fund (IMF) to release the
next tranche of an US$11.3 billion loan package
initially agreed in 2008.
The IMF has
expressed concern over Pakistan's rising
inflation, a widening fiscal deficit and energy
subsidies. Islamabad had earlier indicated that it
might seek another loan arrangement of about $3.2
billion to meet its financial obligations and to
repay earlier debts. The country has only two
months to implement at least some of the reforms
the IMF recommended to qualify for the sixth
installment and to secure a
new loan package.
The failure of the
Pakistani delegation is a setback for the
cash-strapped government, which is likely to
ratchet up a 256 billion rupee (US$3 billion)
deficit this year, weighed down by rising oil
prices.
"This was not a good trip for the
Pakistani delegation," Dawn reported a diplomatic
source as saying. "There are no indications that
the delegation was able to convince the IMF to
release the next tranche. And until the sixth
tranche is released, it is highly unlikely that
the IMF will hold any negotiations on a future
arrangement."
The finance minister met the
IMF mission chief for Pakistan, Adnan Mazaeri, and
discussed progress towards completion of the $11.3
billion program ahead of a fifth review of the
government's performance for release of the two
remaining tranches, worth a combined $ 3.3
billion.
In a two-and-half hour session,
Sheikh explained various long-term objectives of
the government, which the IMF has criticized for
failing to introduce tax and other reforms tied to
the 2008 loan agreement. Such reforms as there
have been, including changes to the energy sector,
have been late and limited in scope. The
government's inability to implement reforms led to
the suspension of the IMF loan program.
"Mr Sheikh dumped the entire
responsibility for the inability to carry out the
tax, energy, and withdrawal of all subsidies
reforms onto parliament, calling it the most
serious obstacle to such reforms," Daily Times
commented. "This is not an untypical technocratic
argument by a finance minister steeped in the
culture and approach of the IFIs [international
financial institutions]. The fact of the matter is
that Pakistan is suffering from the fallout of the
still precarious global recession, the devastation
caused by last year's floods, the malign effects
of terrorism, and mismanagement by our brilliant
technocrats."
Islamabad negotiated a
bailout package with the IMF in November 2008,
with a pledge to implement reforms suggested by
the fund. The $11.3 billion emergency loan package
helped the country avert a balance of payments
crisis and shore up reserves.
Sheikh
recently indicated that the government may seek
another IMF programme as a short-term effort to
fill the gap between its income and expenses.
About 45% of the country’s tax revenue is
being absorbed by interest payments on foreign
debt, which has reached $58 billion. The foreign
debt has cost more than $1 billion in interest
payments during the first nine months of current
fiscal year, similar to the $1.07 billion paid in
the same period a year earlier. Those payments
will surge next year when the country starts
repaying the IMF loan.
Pakistan has
revised its fiscal deficit target for the year
ending June 30 to 5.5% from 4% because of higher
food and energy costs, escalating subsidies and
reducing tax revenue. The country’s economic
growth is forecast to fall to 2.5% in the 12
months to June 30 from 4.5% in the previous fiscal
year.
Meanwhile the country is best by
rising prices, with average inflation in the nine
months through March climbing to 14.2% over the
same period last year. The Asian Development Bank
predicts that annual inflation could go up to 16%
this fiscal year.
Slow progress on
reforming the energy sector was been a key factor
leading to the IMF's suspension of its loan
package. The government in September had gave an
assurance that it would increase the power tariff
by 2.2% each month in the eight months to June to
achieve its target of a 17.6% increase by end of
this fiscal year, but has failed to follow through
on this, fearing the inflationary impact of any
increases.
Of particular concern is
inter-corporate circular debt problem that has
debilitated the production capacity of power
generation companies and refineries. The
government in 2009 borrowed 157 billion rupees
from the banks to pay off circular debt and is now
paying an annual 40 billion rupees in interest on
the loans.
Syed
Fazl-e-Haider
(http://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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