Thursday, February 3, 2011

IMF sets terms for headway on $11.3bn loan

IMF sets terms for headway on $11.3bn loan

ISLAMABAD: Welcoming wider political engagements on economic policies, the International Monetary Fund (IMF) has set three pre-conditions for tangible progress on its $11.3 billion standby programme with Pakistan that practically stands suspended since May 2010.

The IMF wants the authorities to move forward with a better macroeconomic framework and sustainable budget deficit, focus on structural items like introduction of reformed general sales tax within the current fiscal year coupled with addressing losses in the energy sector and strengthening central bank role in limiting government borrowing to start with. Mainly because of these issues, according to visiting IMF mission, the fiscal deficit remains very large more likely to be six per cent of GDP or even more than that as against 4.7 per cent agreed to by the two sides after devastating floods.

To overcome this challenge, the IMF has asked Pakistan leadership “to move quickly on both sides of the budget to increase revenues and contain expenditures”.

The government had started on introduction of the broad- based general sales tax or value added tax two years ago and had done a lot of preparations. The IMF believed it was a good tax measure proposed by the government, which should be implemented without further delay.

And given the additional role of the provinces in the aftermath of 18th constitutional amendment, the IMF wants provincial governments to show more fiscal responsibility. In this regard, the IMF delegation would hold a meeting with Chief Minister Punjab Shahbaz Sharif and former finance minister Ishaq Dar on Tuesday to touch the base on their support for the overall economic reforms and provincial finances.

“The efforts that have already started to build a cross-party consensus on fiscal and economic reforms are very positive and we would be happy to support authorities (in that process) and share our analysis with all stakeholders, Masood Ahmed, IMF`s director for Middle East and Central Asia told Dawn in an exclusive discussion.

After daylong interactions with President Asif Ali Zardari, Prime Minister Yousuf Raza Gilani and the government`s economic team led by Finance Minister Dr Hafeez Shaikh, Mr Ahmed said it was not for the first time or something new in Pakistan that IMF was contacting the political parties.

The IMF has appreciated challenging times across the world as well as in Pakistan because of big external shocks like floods that affected revenue and expenditures but has expressed its concern that measures projected on the revenue side `have not borne fruit`.

The IMF is also worried about rising expenditure, particularly subsidies and commodity expenditures that are eating up public finances.

The financing of a large fiscal deficit was leading the government to rely on local banks and the State Bank a move triggering inflation and squeezing both the public and private sector and raising rate of interest, according to the IMF.

Asked about the prospects of disbursement of IMF loan in the near future, the sources said the key to such discussions was not to have economic and fiscal measures in two months or so but for two years and a half from now, which should provide the basis for sustainable public finance and higher growth rates.
“The disbursements would depend on how quickly these measures come about”. Also, the IMF wants that the authorities to take steps for long-term tax measures like RGST to increase tax base supported by temporary taxes like flood tax and better coverage of income tax.

The Fund believed that Pakistan should take steps to increase economic growth rate and contain rising rate of inflation as the two factors were really hurting the common man.

In its initial round of discussions, the political leadership is reported to have shown their willingness to move ahead with economic reforms but the IMF believed the `recognition (for economic reforms) could not be substitute to real action on ground.

Good intentions alone are not enough to meet requirements of the economy and the Fund would like to see budget framework for the next year which should provide sustainable roadmap to reduce fiscal gap and a set of actions to address structural weaknesses.

The IMF mission is reported to have told the authorities that delaying or reversing a trend to pass on oil and electricity prices to consumers was adding to the size of the fiscal deficit. In the process, these subsidies were benefiting only the rich, seen by the IMF as a wasteful use of public money.

The IMF, said these sources, was strongly opposed to an upward revision in fiscal deficit target as the original target was enhanced from 4 per cent to 4.7 per cent of GDP because of additional pressure of floods but there has been no such external shock since then.

The IMF mission would stay in Islamabad until Wednesday to get a clear feedback from Pakistan authorities.

Pakistan seeks IMF’s economic support

Islamabad : Pakistani president and prime minister Tuesday urged the International Monitory Fund (IMF) to continue its economic support for the war ravaged and flood stricken economy of Pakistan.
The IMF team is in Pakistan for talks for a fifth review of Pakistan’s economic performance for provision of an instalment of $1.7 billion under the standby arrangement.

President Asif Ali Zardari while talking to Director, Middle East and Central Asia Department IMF, Masood Ahmed, said that due to war against terror and the worst-ever floods in the history, the country’s economy had to suffer major blows and it needed international assistance by way of creating economic opportunities for the people.

The IMF team will also review progress on its conditions which include a monthly increase in electricity tariffs, reduction in government borrowings from the State Bank of Pakistan and implementation of a 10 per cent income tax surcharge and the reformed general sales tax.

The IMF officials will hold formal talks with Finance Minister Dr Abdul Hafeez Shaikh and political leaders to convince them to stop opposition to the proposed Reformed General Sales Tax (RGST).
The visit of the delegation was originally scheduled for January 25 but the government’s inability to comply with IMF’s terms led to a change of plan. The government delayed decision on the RGST after allies and opposition parties strongly opposed it.

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