What impact will IMF extension have on economy?

What impact will IMF extension have on economy?

KARACHI - The International Monetary Fund on Monday approved a nine-month extension of Pakistan’s $11 billion loan, which was scheduled to end this year.The standby loan programme had two tranches remaining, but will now run through Sept. 30, 2011, with the two tranches broken up and spread out over that time.

Here are some questions and answers on the nine-month extension. Why did the government ask for a nine-month extentsion? To have time to finish implementing fiscal reforms and exercise fiscal discipline. A reformed general sales tax (RGST)that was supposed to replace the current general sales tax was originally scheduled for implementation in July 2010, but has been delayed several times. Even its latest due date, Jan. 1, now seems unrealistic.

According to a news report, the coalition, led by President Asif Ali Zardari, may push back attempts to implement the RGST until the start of fiscal year 2011/12 on July 1 in order to garner more political support for the tax.
In meantime, to make up the shortfall, the government is also reportedly considering a “Plan B”, which would end the current general sales tax exemptions that have been given to certain sectors such as textiles and fertilisers.
What affect will the extension have on the deficit? It could make it worse. Pakistan expected the last two tranches, worth more than $3 billion, to land by Dec. 31, when the IMF programme was originally scheduled to end.

But the delay in the RGST meant that payments didn’t come in, right when Pakistan is facing a serious cash crunch from damages from August floods and a dropoff in foreign aid.
Now the tranches will be spread out over nine months, to Sept 30, 2011. The problem is that Pakistan’s fiscal year ends on June 30, meaning part of the money originally scheduled for 2010/11 will now fall in 2011/12, creating a shortfall for the current fiscal year and a likelihood the fiscal deficit will overshoot its target.

And that goes to the agreement between Pakistan and the IMF. The two agreed to a budget deficit target of 4.7 percent of gross domestic product (GDP) for fiscal year 2010/11, but analysts now say the fiscal deficit may widen as high as 7 percent after it hit 1.6 percent in the first three months of the fiscal year.
What are the politics surrounding the IMF programme? Complicated and dominated by a fair amount of demagoguery.
The Muttahida Qaumi Movement, the dominant political force in its biggest city of Karachi, said on Monday its two ministers in the federal cabinet would resign, in a move that raises questions about the government’s future.

This month, an Islamic party Jamiat-e-Ulema-e-Islam also decided to quit the coalition. This means the Pakistan People’s Party may be more focused on saving its government than implementing the necessary reforms needed for the release of the sixth tranche.

The IMF’s first concern would be that Pakistan implement the fiscal reforms. A political upheaval would make it harder for any reforms to be passed.

The IMF along with other international donors have expressed concerns on Pakistan’s low tax-to-GDP ratio, which is close to 10 percent and one of the lowest in the world.
The international organisation has made it clear that the country would need to implement fiscal reforms for the release of the next IMF tranche. Political upheaval makes that prospect less likely.—Reuters