US watching VAT issue very closely

KARACHI: “We think it’s very important for Pakistan to meet its commitments to the IMF,” says Robin Raphel, American Coordinator for all civilian assistance to Pakistan, in an exclusive interview to Express.

These obligations revolve principally around the Value Added Tax (VAT) legislation and the emphasis comes at a time when the legislation has hit a roadblock. In a wide ranging interview about the nature of American civilian assistance to Pakistan, Ambassador Raphel talked about Pakistan’s energy crisis, the Kerry Lugar bill and the tests that the new relationship America is seeking to build with Pakistan is likely to encounter.

And, of course, VAT. A dispute between Sindh and the federal government has begun casting its shadow over the future viability of the new tax that is the central pillar of Pakistan’s commitments to the IMF. “Sindh has submitted a set of proposals, we are waiting for the response,” says Dr Kaiser Bengali who led the team from the Sindh government in the negotiations. “Our proposals envision Sindh collecting VAT on all services, but in a manner that keeps the value chain intact, to satisfy the finance ministry.”

Caught in the middle of a deep recession, crippling power shortages and growing rift between its commitments to its foreign creditors on the one hand, and the provinces on the other, the new finance minister, Dr Hafeez Sheikh, is now dancing to an increasingly complicated tune. “We have gotten to know him very well over the past four to six weeks,” says Raphel, referring to the newly inducted finance minister’s immediate dash to Washington DC upon assuming his duties.

But she is quick to dispel any mention of difficulties in the civilian relationship that America is trying to build and grow with Pakistan: “The idea that there is some sort of problem with our discussions is simply not true.” But not everyone is as sanguine. “Not only has the deficit been larger than anticipated but the inflow of foreign assistance we were expecting has not come through and this has put extraordinary pressure on domestic borrowing to finance the budget,” says Dr Hafeez Pasha, member of the Revenue Advisory Council and the man widely considered to be an important architect of Pakistan’s reform programme.

“It would be better if the next budget were to be based on a more realistic assessment of foreign assistance,” he says. But Ambassador Raphel strikes a more optimistic note. “Direct support to the Pakistani budget, for targeted programmes that the government of Pakistan and we have agreed on, we will target to disburse about 195 million dollars between now and the end of June,” she says, in a nod towards the financial difficulties of the government in the closing months of the fiscal year.

The fact that this money has taken a long time to be released ought to be understandable, according to the ambassador, who has spent many years of her career in Pakistan, from 1975 onwards. “This whole effort of consultations, which is essential in the early stages before the big money starts to flow is an important part of building our relationship,” she explains. With much of the groundwork for the Kerry Lugar disbursements now in place, “those monies are just now about to become available.”

“A large amount of our assistance is targeted at the FATA areas and KP province,” she says, using an acronym for the newly renamed Khyber Pakhtoonkhwa. “There is not enough clarity on how much of the Kerry Lugar money will be routed through the budget, so we don’t how much of a fiscal impact it will have,” says Dr Hafeez Pasha. The interview will be aired on Express News today at 6.30 PM, and Express 24/7 at 8.30 PM today.

Published in the Express Tribune, May 12th, 2010.