IMF agrees to Pakistan bail out
By Syed Fazl-e-Haider
KARACHI - The International Monetary Fund (IMF) has agreed to sign a fresh loan agreement worth US$5.3 billion with Pakistan to stave off a balance of payments crisis as the country's current account deficit continues to widen and its foreign exchange reserves decline. The deal comes after failure to implement in full an $11.3 billion IMF loan program agreed to in 2008.
Finance Minister Ishaq Dar and the visiting IMF Mission headed by Jeffrey Franks in Islamabad reached a deal last week for a fresh bailout in a bid to rebuild the country's foreign exchange reserves. The Pakistan-IMF talks for a new loan concluded at a time when the country's central bank has around $6 billion left in
reserves, enough to cover less than six weeks of imports.
"We are entering into a fresh program with IMF to not only retire past liabilities but also to bring about structural reforms in the country," AFP reported Dar as telling a press conference in Islamabad last week. "We have successfully agreed over a program that is home-grown and consistent with the new government's policies."
The recently elected government led by Prime Minister Nawaz Sharif, who took over last month, is facing the same situation as witnessed in 2008 when the government of Yousaf Raza Gillani, in its honeymoon period, had to rush for IMF bailout package to avoid default on foreign payments. The country's current account deficit widened to $2 billion in the first 11 months of the last fiscal year, which ended on June 30.
The former government failed to implement key fiscal and tax reforms as demanded by the IMF under the 2008 loan. IMF mission chief Franks however clarified that the institution would not punish the country for the failure of its predecessors.
"It is true that some previous programs have not been completely successful," Associated Press reported Franks as saying. "But the IMF is in the job of helping countries when they have difficult situations and need help, and we're not going to turn a country down because previous governments did not do what they had promised to do."
The $5.3 billion fresh loan, a part of IMF Extended Fund Arrangement, will carry a floating interest rate of 3% and will be payable over a longer period than conventional arrangements to help the country repay the loan. The program is yet to be approved by IMF officials in Washington and it will go to the IMF executive board in early September.
The fresh IMF loan has not come without tough conditions. The international lender wants Pakistan to reach a budget deficit target of 6% of gross domestic product (GDP) as part of its bailout program and to increase its tax-to-GDP ratio to 9.5% in the current fiscal year from 8.9%, one of the lowest in the world. Only 800,000 out of 180 million Pakistanis pay income tax. Those that do pay tax are largely salaried individuals. IMF has demanded the government to send out notices to identified tax evaders before the Washington-based organization starts to release the loan.
Under the deal, Pakistan's Federal Board of Revenue in the first phase will send out notices to 10,000 top tax dodgers this month, according to The Express Tribune. In the second phase, notices will be sent to 15,000 more tax dodgers in August. A total of 100,000 tax evaders will receive notices this fiscal year under the IMF demand.
Dawn in its editorial said,
Although the announcement of the agreement on the loan hides more than it reveals, from whatever has so far been divulged it is clear the people should brace themselves for greater hardship. When Finance Minister Ishaq Dar said a "better tomorrow dawns only when the requisite pains are borne today", he was signaling towards a tougher future for the people in whose name the loans are secured and who must repay these generosities with sacrifices. All the high talk that Mr Dar had indulged in over the last few days was little more than rhetoric to begin with.
Some of the steps demanded by the IMF had already been incorporated in the budget - raising tax revenues (albeit through the old practice of burdening existing taxpayers), liquidation of the power-sector debt, etc. Others, like a hike in borrowing costs and increase in electricity and gas prices, have also been initiated and now the gap will have to be met before September when the Fund holds its meeting to give the final nod.
It further said,
Still Mr Dar is not sure if the Fund will give him the additional $2bn - over and above the amount agreed on so far - he desperately needs to match the foreign exchange outflow. Nor is anyone certain if all the provinces - especially Sindh and KP [Khyber Pakhtunkhwa] where the PML-N's opponents rule - will agree to cut their expenditure to cut fiscal deficit to 6pc from the budgetary target of 6.3pc when the minister takes the agreement to the Council of Common Interest for broader political ownership, which is another condition for the loan. The IMF loan and support from the other lenders will provide only some breathing space for the government. It will have to take measures that hurt if it wants to fix the economy.
The new government of the Pakistan Muslim League - Nawaz (PML-N) faces grave economic challenges, including high food prices, a sliding rupee and crippling power cuts.
Finance Minister Dar, a senior leader of PML-N and also a relative of Prime Minister Sharif, will have to steer the strife-torn country out of the current economic crisis. Dar became the country's finance minister for the first time in November 1998 when he negotiated an IMF rescue package to meet an economic crisis triggered by sanctions over nuclear tests conducted by the country in May 1998.
He had refused to accept a devaluation of local currency and a rise in utility charges or tax rates. His tenure was cut short by a military coup in October 1999 when the then army chief General Pervez Musharraf overthrew the government of the time, also headed by Sharif. He also served as finance minister to rescue the flagging economy in the Gillani government in 2008 but he resigned just after six months due to political differences.
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 firstname.lastname@example.org.
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