KARACHI - The International Monetary Fund (IMF) has reportedly warned Pakistan of derailing its US$11.3 billion rescue program if the country fails to meet agreed performance criteria. With Finance Minister Abdul Hafeez Sheikh warning that the government will have to seek a new package from the IMF when the present deal expires, the pressure to comply is considerable,
The visiting IMF team, headed by Adnan Mazari, assistant director for Middle East and Central Asia, held extensive meetings at the weekend with Pakistani team led by Finance Minister Abdul Hafeez Sheikh. The IMF mission reportedly told the Pakistani side that the country would have to perform or the fund's executive board would question its own staff over how they
allowed space for Islamabad to breach criteria that were part of the bailout package.
The IMF, which at the weekend expressed concern over uncontrolled expenditure, rising inflation, slow revenue reforms and poor performance of the power sector, tightened the screw at a time when visiting US Secretary of State Hillary Clinton announced more than $500 million in new aid projects for Pakistan.
At risk to Pakistan is the loss of the remaining $2.6 billion in IMF funds to be delivered in two parts under a 2008 rescue package of $7.6 billion that was expanded last August. The IMF is not willing to allow the country to raise the fiscal deficit target of 4% of gross domestic product (GDP) in the fiscal year ending next June, and it has asked the central bank to raise the discount rate by the end of this month to counter inflationary pressures.
Critics say Washington's latest aid to strife-torn Pakistan is a carrot to encourage the government in Islamabad to do more in its war on Islamist extremists, while the Washington-based IMF is waving a stick with a threat to hold back the next $1.2 billion payment due under the Standby Arrangement Program (SBA).
The fund has reportedly portrayed a picture in which Pakistan will not be able to impose value added tax on both goods and services from October 1 or achieve the fiscal deficit target, putting the whole macroeconomic framework at stake.
"The underlined message is quite clear that the IMF's remaining ... $2.6 billion of the Standby Arrangement programme (SBA) will be in danger," The News reported, citing sources privy to the ongoing talks with the IMF on the macroeconomic framework for the current fiscal year.
In contrast, Clinton on Monday announced a string of new projects - including dams, power generation, agricultural development and hospital construction - funded under US legislation passed last year that triples civilian aid for Pakistan to $7.5 billion over the next five years.
Pakistan is failing to reduce its fiscal deficit despite large parts of the country's economy, including rich landlords, not being taxed. The tax-to-GDP ratio is only 10.2%, one of the world's lowest. About 65% of the country's budget goes to debt retirement, defense expenditures and the current expenditures of the government, while almost 60% of the economy is outside the tax net.
The New York Times recently commented: "It is ... a sorry performance for a country that is among the largest recipients of American aid ... Though the [Pakistani] authorities have tried to expand the [tax] net in recent years, taxing profits from the stock market and real estate, entire swaths of the economy, like agriculture, a major moneymaker for the elite, remain untaxed."
The IMF team expressed concern over slippages on fiscal deficit limits for the fourth consecutive quarter and warned the authorities that they would need to work hard to get a waiver on the criteria. The government has so far been unable to meet the fiscal deficit target of 5.1% of GDP, equivalent to 769 billion rupees (US$9 billion), for the fiscal year that ended last month, and may have a deficit of 6.2%, or 900 billion rupees. The 4% target requires financing of 685 billion rupees in the current fiscal year.
"There were issues that lacked clarity on part of government policies and raised uncertainty about the continuation of the [$11.3 billion IMF] programme," Dawn reported, citing comments by a Pakistani official.
The next round of talks in the United States next month will be crucial for the government to persuade the IMF's senior management and board of directors to approve release of the remaining two installments. Local analysts believe that a delay in implementing value-added tax (VAT) after October may disrupt the delivery of IMF funds, which might cause a ripple effect on aid from other multilateral agencies and donors.
Under the $11.3 billion bailout package, the country committed to imposing VAT from July 1, but the government delayed the implementation for three months to try to take all the provinces on board. Critics say this delay was due to political exigency and a failure to convince the country of the need for a VAT regime.
Some analysts are even skeptical that the October 1 deadline will be met because tax rates have not yet been set and the local business community and opposition parties continue to have deep reservations about the new tax regime. The tax could also face practical and administrative hiccups if the government of Sindh continues to insist that it should collect the tax on services in the province.
Though the IMF program will conclude by next June, the government has already indicated that it will seek further support from the fund. Finance Minister Sheikh warned that the country could go bankrupt if the government did not sign a deal with the IMF for another loan. During a budget debate in the senate last month, Sheikh said there was no way out of the economic crisis other than to sign a deal with the IMF.
Pakistan's total debt-to-GDP ratio has crossed 61%, breaching the 60% limit set under the Fiscal Responsibility and Debt Limitation Act. The external debt-to-GDP ratio is now 30%, while the domestic debt-to-GDP ratio is an alarming 31%, according to the State Bank of Pakistan.
Critics say the government depends excessively on foreign aid and loans without having any plan to lead the nation to self-reliance.
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. ----------------- TURKMAN: The Problem is, Pak Establishment is Punjabi and it does not want its own Punjabis to pay any Tax. It wants 'Pakistan Occupied' Provinces, especially Sindh to pay all the Taxes. It does not want Sindh to collect Sales Tax in Sindh either. It wants all the Sales Tax collected in Pakistan for itself like an ancient Medieval Empire. Its not a bit ashamed that it has been collecting 70% of all Taxes from Karachi and her own, Richest Province of Pakistan, Punjab with 56% of Pakistan's population has been paying as little as 12% of the total Taxes for decades because it thinks, Non Punjabis are not Pakistanis and 'Occupied Territories', where Non Punjabis live should be paying all the Taxes. May be it thinks, they are not paying Taxes, they are paying Protection Money (Jiziyah). Who knows? Good thing is, East Pakistanis do not have this trouble since 1972 and they are free of Punjab.
