Pakistan gets latest IMF tranche
By Syed Fazl-e-Haider
KARACHI, Pakistan - The International Monetary Fund (IMF) released a US$1.13
billion loan to Pakistan at the weekend after the latest review of the
country's economic performance under an $11.3 billion stand-by arrangement
(SBA) to help the South Asian country meets its overseas debt obligations.
The IMF also granted the country waivers for overruns on the overall budget
deficit and net borrowing limits from the central bank for the period ended
March, 2010. The fund also agreed to combine the remaining three disbursements
into two.
Government Finance Adviser Abdul Hafeez Sheikh has indicated that Islamabad may
apply for a second IMF loan program due to a shortage of resources caused by
low tax collection, delays in aid
from donors, and the cost of debt servicing. At the same time, he made clear
his opposition to the cost of calling on IMF assistance.
"We may need a follow-up program but in the long run we have to get rid of the
IMF because it's expensive” said he told a news conference last week.
Critics say Pakistan's foreign exchange reserves will continue to erode as the
country lacks a strategy to deal with the ever-increasing cost of debt
servicing. This reached $3.57 billion during the first nine months (July-March)
the current fiscal year, against $3.55 billion for the entire previous fiscal
year, and may exceed $5 billion by June 30, according to the central bank.
Pakistan will receive the fifth tranche of $1.13 billion from the IMF on
Tuesday, according to the State Bank of Pakistan. The IMF agreed to increase
the end-June 2010 budget ceiling by 0.15% of gross domestic product (GDP) to
allow space for urgent security outlays and to avoid spending cuts. The floor
for net foreign assets of the central bank was raised by $300 million. The
fresh disbursement will increase the country's foreign exchange reserves, which
stand at $15.357 billion, of which the central bank holds $11.552 billion.
Release of the IMF loan will help to restore the confidence of the World Bank
and Asian Development Bank (ADB), as both lending agencies require Pakistan to
get a "Letter of Comfort" from IMF for obtaining any new loan.
The loan was due by the end of March, but it was delayed due to disagreements
between the fund and the government over the introduction of a value-added tax
(VAT) and the raising of power tariffs. Under the IMF program, the country
failed to meet an April 1 deadline for a 6% increase in electricity tariffs.
Pakistani officials have assured the IMF of their commitment to proceed with
legal and administrative steps to ensure that the VAT is introduced by July 1.
Pakistan's economic conditions have improved even though the country faces
"adverse security developments and a rapidly changing political environment",
IMF deputy managing director Murilo Portugal said in a statement released from
Washington last week. The IMF said the country's economy remained highly
vulnerable, and listed worry spots ranging from persistent inflation to
security-related spending pressures.
"Real GDP growth has begun to pick up and the external position has
strengthened. Preparations for important and politically difficult tax reforms
have moved forward, and there has been steady progress in financial sector
reform," he said. The economy is forecast by the finance ministry to expand by
3.4% in the fiscal year ending on June 30 after growing 2% in the last
financial year, the slowest pace in eight years.
With the release of the latest loan installment, the country has drawn about
$7.27 billion from the IMF. Islamabad turned to the fund in November 2008 for a
$7.6 billion rescue package, as the country grappled with a 30-year high
inflation rate and fast depleting reserves that were barely enough to cover
nine weeks of import bills. The loan was increased to $11.3 billion in July
last year and the central bank received a fourth tranche of $1.2 billion on
December 28.
While industries battle chronic power shortages, with rolling blackouts
countrywide, inflation is again rising, hitting 13.2% year-on-year in April,
compared with 9% towards the end of last year. The country's trade deficit
increased to $12.24 billion in the first 10 months of this fiscal year, with
$15.88 billion of exports against $28.12 billion of imports, according to the
Federal Bureau of Statistics (FBS).
Pakistan continues to suffer violence from al-Qaeda and Taliban militants, with
at least 3,200 killed in acts of terrorism since July 2007. The United States
released $656 million to the country from its Coalition Support Fund (CSF) for
some costs incurred last year, with $188 million transferred on April 30 and
another $468 million this month.
Security-related spending, low revenue collection and a shortfall in aid
promised by donors last year in Tokyo have been the main reasons for the
country's growing budget deficit, which may overshoot its target of 5.1% of
gross domestic product (GDP), as agreed with the IMF.
The implementation of VAT to replace a general sales tax (GST) by July 1 is one
of the main concerns of the IMF. The fund wants the country to use VAT to raise
its tax-to-gross domestic product (GDP) ratio by between 3 and 4%, as its
current tax-to-GDP ratio of about 9% is one of the lowest in the world. Though
Islamabad has indicated that VAT will be rolled out on July 1, analysts are
skeptical about its impact because they say the government has not done enough
to make taxpayers aware of what it entails.
There are also unresolved differences between the provincial and federal
governments over the mechanism for the collection of the tax. The federal
government still appears in serious trouble in fulfilling its promise with the
IMF to pass the draft VAT bill by May 31. Some analysts believe that taxpayers,
since they have no idea how VAT would work, could resort to agitation and may
even close down markets. Critics say imposition of VAT could spark widespread
tax evasion.
The provincial Sindh government has said the federal government's effort to
impose VAT in its existing integrated shape would be a violation of
constitution and that VAT on goods is the jurisdiction of the federal
government while VAT on services as well as its collection is the right of the
provinces.
The Ministry of Finance contends that there is no option other than to impose
VAT on both goods and services under the IMF's Standby Arrangement (SBA)
program if Islamabad wants to complete the existing fund program.
The government plans to increase the number of taxpayers from 1.9 million to
2.4 million after the implementation of VAT from July 1. The non-implementation
of VAT from that date has reportedly been identified by the government as the
biggest risk for the revenue policy for the next fiscal year, as the county may
face a serious revenue shortfall if the tax base is not broadened.
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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