World Bank sets Pakistan tight deadline
By Syed Fazl-e-Haider
KARACHI - The World Bank has set President Asif Ali Zardari a 48-hour deadline
to force through a 6% increase in electricity tariffs and secure implementation
of value-added tax (VAT) or face the withholding of US$300 million under a
poverty reduction support scheme, according to reports.
The government is "alarmed and clueless" about how to fulfill the conditions by
the May 27 deadline, the PakTribune reported. Analysts say it will be hard for
the government to take the required measures, both deeply unpopular, in such a
short timeframe.
Increasing power charges and imposing VAT are seen by the International
Monetary Fund (IMF) and World Bank as necessary
steps in increasing revenue for the cash-strapped government.
The World Bank has told Pakistani authorities that they will have to show
clear-cut progress on three actions by May 27, after which documents will be
circulated among the World Bank's board of directors on the basis of which it
will consider approval of $300 million under the Poverty Reduction Support
Credit at its scheduled meeting on June 29 in Washington DC, the PakTribune
reported, without citing sources. The third required action is the
establishment of single treasury accounts.
If Pakistan successfully implements the VAT and power tariff conditions, the
approval of $300 million will be made during the World Bank meeting, Dawn
newspaper reported, without citing sources.
A less rigid stance by the World Bank was reported by Pakistan's Daily Mail,
which said the World Bank will continue its assistance program for Pakistan
even if Islamabad fails to implement an integrated VAT from the next fiscal
year, which starts on July 1.
"But Pakistan will have to give credible reasons for the failure," the Daily
Mail report said, quoting an unidentified "top source" at the bank.
The central government at present is at loggerheads with the government of
Sindh province, which wishes to keep control over the collection of VAT on
services. Prime Minister Yousaf Raza Gilani is expected to convene a meeting
this week to resolve the stalemate.
Islamabad has already failed to meet an April 1 IMF deadline for increasing
electricity tariffs, while VAT is a requirement the IMF set when it agreed in
in November 2008 to give Pakistan a US$7.6 billion emergency package to avert a
balance of payments crisis. The amount was raised to $11.3 billion last July.
The World Bank has been assisting Pakistan in preparations to introduce VAT
during the past year, even as business communities across the country have
argued strongly against it. Rules and regulations have been finalized for
implementation of the tax from July 1.
The Pakistani business community wants VAT to be postponed for the next two to
three years so that tax authorities can develop a payment mechanism and remove
anomalies in the proposed VAT regime.
"The government has been urged to amend the proposed VAT law, create awareness
on the subject among prospect taxpayers by holding seminars and using other
effective tools to spread related information and improve confidence of the
taxpayers," The News reported Zakaria Usman, vice president of the Federation
of Pakistan Chambers of Commerce and Industry (FPCCI), as saying. "Every
country in the world, wherever the said tax is collected, designed it in
accordance with the prevailing conditions."
Critics also say that VAT will add to inflationary pressures prices.
Replacement of the existing general sales tax (GST) with VAT would increase the
prices of over 122 categories of items including food by at least 15%, The
Nation reported. About 22 categories in the food group and agriculture,
currently exempt from GST, would be brought under the tax net through VAT, it
said.
Some analysts believe that imposition of VAT could spark widespread tax evasion
as a protest from businesses and a public that has been ill-prepared for the
change.
The general population and industry are already feeling the burden of rising
prices for petroleum products, electricity and gas, which the government has
raised steadily since January, in line with its IMF bailout terms. Inflation
rose to a three-month high of 13.26% in April, as the impact of increased oil
costs pushed up the price of food.
Cutting inflation by raising interest rates is made more difficult by the fact
that these are already among the highest in the world. This week, the central
bank kept its policy discount rate unchanged at 12.5%, where it has held since
it was cut three times in 2009.
Pakistan’s discount rate is the highest among the benchmark interest rates of
53 central banks, according to the Bloomberg. The equivalent rate in
neighboring India is at 5.7%, while Lebanon’s repurchase rate is the
second-highest at 12%.
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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