IMF's double-edged rescue for Pakistan
By Syed Fazl-e-Haider
QUETTA, Pakistan - The decision of the International Monetary Fund's executive
board on Monday to approve a US$7.6 billion credit to Pakistan to stave off a
balance of payments crisis reduces for the time being the prospect of Islamabad
defaulting on its foreign debts.
In the IMF's first rescue in Asia since the beginning of the current global
financial crisis, Pakistan will get between $3.5 billion and $4 billion as a
first tranche, which is likely to be transferred to the country's central
bank's account in the US Federal Reserve in New York. Cash-strapped Pakistan
will have the money by Thursday, as the disbursement takes 48 to 72 hours.
Analysts believe that the rapid disbursement has the support of
the US government, which wants to help Pakistan arrest its economic
deterioration as soon as possible. Its precarious financial situation has
caused widespread alarm due to Pakistan's role as a key ally in the US-led "war
on terror" and its position as the Islamic world's only nuclear power.
Local analysts are, however afraid of the harsh conditions linked to the IMF
loan and believe these conditions could convert the financial mess into a
political crisis.
The credit will "support the country's economic stabilization program", the IMF
said in a brief statement. The country's foreign exchange reserves shrunk just
short of $100 million to $6.64 billion during the week ended November 15.
Reserves held by the central bank declined in the week by $37.1 million to
$3.459 billion.
The IMF cash may help the nation overcome a "crisis of confidence"' and improve
its debt rating, Bloomberg reported, citing Asian Development Bank managing
director Rajat Nag.
A rescue plan "could have the advantage of presenting an opportunity to force
countries like Pakistan to come to grips with entrenched structural distortions
in its economy", Dawn newspaper reported, citing a joint article from
Washington's Middle East Institute by Wendy Chamberlin, the former US
ambassador to Islamabad and former IMF economist Zubair Iqbal.
The Pakistani rupee ended firmer on Monday on expectation of the IMF giving the
go-ahead for the stand-by arrangement, according to local currency dealers.
The rupee rose 1.3% last week to 79.29 per US dollar, touching 79.15 on
November 19, the highest since October 10, after strengthening from a record
low of 83.55 on October 17, according to Bloomberg. The rupee plunged in
October as the balance of payments deficit in the three months from July 1
widened to $3.95 billion from $2.27 billion a year earlier.
Even so, the loan will not extend long-term help to the currency market, as one
IMF condition is that the aid cash will not be used in the currency market,
according to the local currency dealers. The rupee would only stabilize in the
long term when there is an improvement in inflation and the current account
deficit, according to the analysts.
The government is being strongly criticized for succumbing to IMF
conditionalities even before the release of the bailout funds. Before approval
of the loan, the IMF had called for measures including withdrawal of a wide
range of subsidies by the end of the fiscal year ending next July 1, barring
the central bank’s intervention in the foreign exchange market, and imposition
of an agriculture tax.
Pakistan had to go to the IMF for the unpopular stand-by agreement to avert an
economic meltdown because the government suffered a "trust deficit" which did
not allow it to use other options with success, the Dawn reported, quoting a
Finance Ministry official. Local businessmen and industrialists have strongly
opposed the recent rise in the central bank's discount rate, the highest
increase in more than a decade and one seen as being linked to the IMF deal.
Pakistan’s industrial landscape may soon be marked with dead and sick units and
there will be massive unemployment because of the devastating impact on
businesses of the higher cost of bank loans arising from the interest rate
increase, according to Anjum Nisar, the president of Karachi Chamber of
Commerce and Industry.
The IMF conditions have not yet been made public, but local media reports have
suggested the terms may be almost impossible to implement in Pakistan.
"If Pakistan accepted the IMF funding, it would have to reduce the defense
budget by 30% between 2009 and 2013 and would reduce the number of posts
entailing pensions in the government and semi-government departments from
350,000 to 120,000," The News claimed last month.
According to the report, the loan terms would include the fund's intervention
in central bank affairs, provision to the IMF of details of foreign exchange
reserves, remittances and flow of foreign exchange through commercial banks,
the imposition of a 7% tax on wheat production and a 3.5% levy on other crops,
and IMF monitoring of preparations of the federal budget.
"The Pakistan government will have to provide details of loans it got from all
other lenders, including China, 48 hours before signing the funding agreement
with the IMF, and 25% of the government assets pledged as securities for such
loans will be the property of the IMF," the report said.
Subsidies for power, gas and petroleum products will be eliminated by next
July, according to the Business Recorder. This condition will be particularly
tough if it is applied to agricultural inputs, as at present the government
provides a subsidy of 32 billion rupee on fertilizers. The government will have
to burden the people, especially the poor, to meet the IMF demands, the
Business Recorder said.
Among other terms believed to be included in the IMF deal is an increase to 15%
in the ratio of tax to gross domestic product. The government would have to
increase indirect taxes, instead of direct taxes, which would hit the general
public as the ratio of general sales tax may have to be increased, the Business
Recorder report said.
Parliamentarians on both government and opposition sides have said they will
strongly resist any move to tax agriculture, saying every farmer will come out
on the streets against such a move after high diesel and other input costs have
already made it hard to survive. The legislators claim an IMF deal is
tantamount to making the country hostage to the global market.
Democratic governments in the 1990s failed to meet demands under an earlier IMF
deal to levy an agriculture tax. "If Pakistanis once again fail to impose an
agriculture tax, this will be the last IMF program they will have," Dawn
reported one analyst as saying.
Low-income workers and the unemployed are already battling soaring prices, with
year-on-year inflation according to the sensitive price index (SPI) hitting
29.02% during the week ended November 20.
Other data for the economy are as grim or grimmer. The current account deficit
widened 98.5% to $5.943 billion in the July-October period compared with a year
earlier, according to the central bank. The oil bill during the period jumped
93% year on year to $4.92 billion and the food bill surged 77% to $1.58
billion.
The imbalances are rising despite the recent steep fall in global prices of oil
and food.
"No one could deny the fact that the conditions linked to the IMF package may
be terribly harsh, but the fund's team monitoring disbursements will have a
strict check on 'royal spending linked to the lavish living of a few at the
top'," Dawn reported, citing a local analyst Hasnain Asghar Ali.
Another analyst, Ashraf Zakaria, said: "Although the IMF credit line has
allayed fears of a possible default on foreign debt repayments, its fallout on
the economy amid further increases in the discount rate and taxes could well
prove a double-edged weapon. both for the financial and the corporate sector."
Syed Fazl-e-Haideem sfazlehaider05@yahoo.com, is a Quetta-based
development analyst in Pakistan. He is the author of six books, including The
Economic Development of Balochistan, published in May 2004.
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