Loan programme: IMF not impressed by Islamabad’s promises

IMF asks for more action before it can issue ‘letter of comfort’.

ISLAMABAD:

The International Monetary Fund on Monday seemed reluctant to endorse the government’s view that Pakistan’s economy was on track, heightening Islamabad’s financial woes since reticence on the part of the IMF is likely to keep away other donors.

A finance ministry official told The Express Tribune that during first day of policy level talks between the IMF and Pakistan, the Fund was not inclined in issuing a Letter of Comfort – a policy statement endorsing the view that the country’s economic fundamentals were on right track. If the Fund issues the LOC, it will open a window for Islamabad to obtain loans from the World Bank and the Asian Development Bank (ADB) for financing the budget deficit.

After completing the technical level talks, the IMF initiated policy level talks on Monday. The finance ministry official said that the chairman of the Federal Board of Revenue (FBR) will submit a framework to implement revenue measures today (Tuesday), some of them before end March and a few in April. The authorities will also submit a power sector financing plan. The outcome of this meeting would determine the roadmap towards the end of the current fiscal year, on June 30. Pakistan is contemplating levying more taxes to generate up to Rs38 billion in the remaining period of the current financial year.

“Due to rising debt vulnerability the IMF is not willing to issue the LOC at least until May,” said an official in the finance ministry.

Pakistan’s total debt as percentage of the total size of the economy has crossed the legal limit of 60 per cent. The Fiscal Responsibility of Debt Limitation Act binds the government to restrict the debt below 60 per cent of GDP and reduce it by 2.5 per cent of GDP every year.

A former finance ministry official who is closely attached to the Fund said the aim of the IMF mission was to only engage Islamabad. For issuance of the LOC, the government will have to present a comprehensive roadmap with clear signals to implement it – a factor that was still missing, he added.

The visiting IMF team has refused to allow further concessions for the revival of its suspended $11.3 billion Standby Arrangement Program. The Fund has clearly told Pakistan that for last two years Islamabad only promised but now, without practical steps, the IMF will neither restore the programme nor will it issue the LOC.

If Pakistan manages to deliver on the promised roadmap that talks about levying new taxes, IMF may agree to hold talks for fifth review of Pakistan economy in May.

Due to the IMF programme’s suspension, the ADB and the World Bank have suspended lending to Pakistan.

The lack of an IMF LOC will have far-reaching impact on Pakistan’s economy as the government scrambles for alternatives.

In an attempt to finance its expenses, the government will rely on banking and non-banking domestic borrowing, which will crowd out private sector credit.

There is also a fear of higher inflation as the government may simply print more money to pay its bills, depreciating the value of the rupee and increasing interest rates. The higher cost of borrowing is expected to further hamper the economy’s fragile recovery.

Published in The Express Tribune, March 8^th, 2011.