The week in focus
The fate of the remaining two installments of the $11.3b IMF standby loan programme is still uncertain.
The fate of the remaining two installments of the $11.3 billion International Monetary Fund standby loan programme is still uncertain as the government has failed to undertake key power and tax reforms or keep the fiscal deficit within the target.
According to reports, two top International Monetary Fund (IMF) officials are arriving in Pakistan to hold crucial talks with the government and review its restructuring programme before a team of the lending agency comes for a fifth review of the country’s economic performance. Besides government high-ups, IMF officials will also meet this time with other political leaders, particularly the opposition, which forced the government to withdraw the increase in petroleum product prices and refrain from imposing the reformed general sales tax (RGST).
The loan installments totalling $3.4 billion has been on hold since July last year and because of that the standby arrangement, which had to end in December 2010, was extended by the IMF till September this year.
It remains to be seen how the government will convince the IMF of its seriousness about reforming the economy when it has repeatedly failed to impose the RGST - a necessary step to document the economy, check tax evasion and end exemptions - and reduce electricity subsidy by enhancing tariffs every month. It has also failed to limit its borrowing from the central bank to finance the widening fiscal deficit which is feared to rise to around seven per cent of gross domestic product compared to the target of 4.7 per cent.
BMA Capital Assistant Vice President Research Abdul Shakur said the government has to take all political forces on board in a bid to reform the tax and power sectors and have a smooth sailing. “The opposition has got involved in policy-making along with the government and the political forces will play a key role in negotiations with the IMF,” he said.
Shakur did not seem convinced that the government would be able to effectively present its case before the IMF and saw nothing concrete coming out of the talks. “It will be difficult to convince the IMF to release at least one tranche of the loan before the end of the current fiscal year in June.”
He suggested that the government has an option to reach a consensus on major issues with the political parties and prepare a draft agreement. This can be shown to the IMF as a proof of the government’s sincerity to push ahead with reforms and key structural changes in the system to end corruption, improve governance and document the economy.
However, according to another expert, the IMF is going to be very strict this time. In case the loan remains held-up, the government will possibly continue with the short-term and unavoidable option of borrowing from the State Bank or in other words printing of money. This will further fuel inflation, which is already high at above 15 per cent. It will also continue to borrow from commercial banks, swallowing the credit share of the private sector which is badly needed to give a boost to the faltering economy. According to data, the government has borrowed nearly Rs120 billion from the central bank from July 1 to January 15.
In an auction of treasury bills held last week, the central bank, on behalf of the Ministry of Finance, borrowed Rs187 billion from banks and development finance institutions for three months to one year. “How the government will return this money is a big question mark? Obviously, it will repay the money by printing currency,” were the words of an economist.
The writer is incharge Business desk for the Express tribune and can be contacted at ghazanfar.ali@tribune.com.pk.
Published in The Express Tribune, January 31st, 2011.
According to reports, two top International Monetary Fund (IMF) officials are arriving in Pakistan to hold crucial talks with the government and review its restructuring programme before a team of the lending agency comes for a fifth review of the country’s economic performance. Besides government high-ups, IMF officials will also meet this time with other political leaders, particularly the opposition, which forced the government to withdraw the increase in petroleum product prices and refrain from imposing the reformed general sales tax (RGST).
The loan installments totalling $3.4 billion has been on hold since July last year and because of that the standby arrangement, which had to end in December 2010, was extended by the IMF till September this year.
It remains to be seen how the government will convince the IMF of its seriousness about reforming the economy when it has repeatedly failed to impose the RGST - a necessary step to document the economy, check tax evasion and end exemptions - and reduce electricity subsidy by enhancing tariffs every month. It has also failed to limit its borrowing from the central bank to finance the widening fiscal deficit which is feared to rise to around seven per cent of gross domestic product compared to the target of 4.7 per cent.
BMA Capital Assistant Vice President Research Abdul Shakur said the government has to take all political forces on board in a bid to reform the tax and power sectors and have a smooth sailing. “The opposition has got involved in policy-making along with the government and the political forces will play a key role in negotiations with the IMF,” he said.
Shakur did not seem convinced that the government would be able to effectively present its case before the IMF and saw nothing concrete coming out of the talks. “It will be difficult to convince the IMF to release at least one tranche of the loan before the end of the current fiscal year in June.”
He suggested that the government has an option to reach a consensus on major issues with the political parties and prepare a draft agreement. This can be shown to the IMF as a proof of the government’s sincerity to push ahead with reforms and key structural changes in the system to end corruption, improve governance and document the economy.
However, according to another expert, the IMF is going to be very strict this time. In case the loan remains held-up, the government will possibly continue with the short-term and unavoidable option of borrowing from the State Bank or in other words printing of money. This will further fuel inflation, which is already high at above 15 per cent. It will also continue to borrow from commercial banks, swallowing the credit share of the private sector which is badly needed to give a boost to the faltering economy. According to data, the government has borrowed nearly Rs120 billion from the central bank from July 1 to January 15.
In an auction of treasury bills held last week, the central bank, on behalf of the Ministry of Finance, borrowed Rs187 billion from banks and development finance institutions for three months to one year. “How the government will return this money is a big question mark? Obviously, it will repay the money by printing currency,” were the words of an economist.
The writer is incharge Business desk for the Express tribune and can be contacted at ghazanfar.ali@tribune.com.pk.
Published in The Express Tribune, January 31st, 2011.