Pakistan may face hurdles in talks with IMF

* IMF mission, country’s economic managers to hold talks from March 1 * Government loses support on economic reforms

By Sajid Chaudhry

ISLAMABAD: Pakistan’s economic managers may find it difficult to face the International Monetary Fund (IMF) mission starting its deliberations from March 1, 2011 in Islamabad — at a time when the Pakistan People’s Party (PPP) government has lost the political support of the three major political parties on economic reforms, official sources informed Saturday.

Country’s political scenario turned bad when the major political party Pakistan Muslim League-Nawaz (PML-N) parted ways with the government just before the arrival of the IMF mission. On the other hand, coalition partners MQM and ANP are also opposing the tax reforms — already agreed with the IMF as performance benchmark.

These talks are part of the bilateral consultation between the Pakistan’s economic managers and Fund mission to judge the economic performance and agreed to hold negotiations for the completion of the fifth review needed for release of $3.6 billion under $11.3 billion Stand-By-Arrangement (SBA).

An IMF mission is scheduled to arrive in Islamabad on February 28 to resume talks from where it concluded in the last meeting — when government and PML (N) had agreed to hold talks on implementation of the 10-point national reforms agenda, proposed by the PML (N). Ten-point agenda’s positive outcome was the assurance that was extended to IMF and failure of talks between the two major political forces has left a meager chance for completion of the fifth review.

Ministry of Finance is expected to place its performance during July-February period of the ongoing fiscal year 2010-11 as well as budgetary numbers till end June before IMF mission and would discuss next year budget as well.

Many economic experts have already hinted that government has nothing to present to the IMF mission as the key performance benchmarks as well as economic performance in the areas such as tax collection, expansion in tax base, approval of tax related legislation including General Sales Tax reforms, Flood Income Tax Surcharge, increase in Special Excise Duty from the parliament has became more difficult compared with recent past due to political developments.

The IMF $11.3 billion Stand-By-Arrangement (SBA) for Pakistan is already facing suspension from May 2010 and fifth review is also facing delay in its completion owing to non-observance of the IMF performance benchmarks.

Official sources informed that passage of key legislative benchmarks agreed with the IMF will not be easy for the Parliament – especially without the support of the PML-N. Four legislations, Finance Amendment Act 2010 for imposition of flood surcharge and Special Excise Duty, State Bank of Pakistan Ordinance 2010 and controversial Reformed General Sales Tax. Failure of approval of 15 percent flood surcharge and 1.5 additional Special Excise Duty would compromise Federal Board of Revenue (FBR) ability to meet the revenue target of Rs 1630 billion and would consequently compound the problem of fiscal deficit and inflation. Oil shocks are also going to have negative impact on the foreign reserves.

PML-N support was critical not only for the approval of legislation from the Parliament to increase revenue to contain the fiscal deficit, especially when coalition partners have abandoned the government on all the benchmarks agreed with the Fund. Escalation of political temperature between Pakistan People’s Party (PPP) and PML-N may compromise expected budget surplus by the provincial government. The fiscal deficit in such a situation will not be containable at the level acceptable to the IMF.

The IMF is said to have made it clear upon the government during the last meeting to come up with economic reforms to qualify for the next tranche of $1.7 billion under the $11.3 billion SBA programme.

According to new fiscal framework, officials claim that a reduction of around Rs 20 billion in current expenditure as well as considerable saving from Benazir Income Support Programme (BISP) and Internally displaced Persons (IDPs) allocation for the current fiscal year. The new fiscal framework proposes imposition of 15% flood surcharge and increase in the Special Excise Duty (SED) rate of 1.5 percent from March 2011 to generate Rs 36 billion in the remaining period of current fiscal year. The proposed measures also envisaged Rs 5 billion from broadening of tax base by taking enforcement measures and another Rs 5 billion through recovery of arrears. The proposed revenue and administrative measures are estimated to give additional revenue measures of Rs 46 billion provided these are implemented from March 1, 2011. An official on condition of anonymity said that dilemma for the economic team is that all the bilateral and multilateral have linked release of budgetary support assistance with the issuance of letter of comfort by the IMF. An official said that the economic managers have tried hard to win over the IMF team during the last meeting that it would take all the possible measures to contain the fiscal deficit below 6 percent. But the IMF wanted tangible measures and not merely assurances for revenue generation and expressed serious concerns over injection of huge amount into bleeding state owned enterprises and losses and theft in power sector. The government has asked the province to give around Rs 100 surplus budget for the current fiscal year from Rs 300 billion being transferred to them under the new National Finance Commission Award (NFC) to contain the fiscal deficit. The development expenditure has already been reduced by Rs 100 billion and may face further slash in case shortfall on revenue side