Business

Talks with IMF end inconclusively

Govt to announce power tariff increase today, other measures in the offing.

Shahbaz Rana March 11, 2011

ISLAMABAD:

Talks between the International Monetary Fund (IMF) and Pakistan remained inconclusive as the Fund was skeptical about the government’s ability to take corrective measures to bring the economy back on track.

However, the economic team insists that during 11 days of talks the government has shown progress and the agreed measures will be announced in the next couple of days.

The IMF mission, led by the assistant director for Middle East and Central Asia, flew to Washington on Saturday morning with empty hands. IMF has suspended its $11.3 billion bailout programme since July last year due to the government’s inability to levy reformed general sales tax and control budget deficit.

During talks with IMF, the government could not get a letter of comfort, a note that acknowledges that the economy is on track which is required for winning budgetary support loans from other international lenders.

The Fund raised questions over the government’s ability to manage debt, called for further reducing borrowing from the State Bank and improving monitoring of banks in the wake of rising non-performing loans. “In order to lay the basis for a higher and broad-based economic growth, tax reforms, reduction of poorly-targeted subsidies and financial sector reforms are needed to improve governance and promote higher savings, investment and growth,” said IMF in a handout.The senior most finance ministry functionary said on Friday that though talks have been concluded, these would continue from Washington, as the government was ready to take agreed measures. He said the government would notify a two per cent increase in power tariffs on Saturday. “IMF’s programme targets will be met, but may not be completely,” said the official.

Another key government functionary, who had managed to get the mission stay extended for three days, said the government would announce revenue measures during the next couple of days.

According to IMF, Pakistan agreed to cut its budget deficit not only for this year, but also promised to apply ‘significant’ cuts in the next financial year. “Significant fiscal consolidation will be needed in 2011-12 in order to reduce inflation and ensure debt sustainability.” It said the lower budget deficit would also help cope with the impact of higher oil prices.

“The mission welcomed recent expenditure restraints and tax policy and enforcement measures being considered by the government to mobilise additional revenue. These measures, if implemented promptly and consistently, will help to improve the budgetary position,” IMF said. It said the government needed to protect pro-poor spending and flood assistance and reconstruction efforts while prioritising expenditures. It urged the federal government to strike an agreement with provinces on their budgetary positions to achieve the deficit target.

The federal government has asked the provinces to generate a surplus of at least Rs120 billion to restrict the budget deficit to 5.3 per cent of the total size of economy.

Sales tax exemption withdrawn

In a related development, the federal government on Friday levied 8.5 per cent sales tax on goods produced and manufactured in federally and provincially administrated tribal areas and sold in regions where sales tax is applicable. However, sales of these goods in Fata and Pata will remain exempted from tax. The Federal Board of Revenue has issued a notification in this regard that will be applicable from March. The notification will not be applicable to sales of cement, sugar, beverages and cigarettes. Mostly, cooking oil and ghee are produced in these areas and supplied to the settled areas of Khyber-Pakhtunkhwa and Punjab.

Published in The Express Tribune, March 12^th, 2011.

COMMENTS (3)

Meekal Ahmed | 13 years ago | Reply It should not surprise that the IMF left "empty-handed". The government has remained stupefied for the past six months. If anything they have regressed taking back TWICE an oil price increase so that the rich can have their oil subsidy. The only measures on the anvil are the flood surcharge (not fair to existing tax-payers) and the increase in the CED (regressive and inflationary). On which items no one seems to know. There is no effort to eliminate the hundreds of special exemptions and concessions that fracture the tax base. The RGST has been kicked down the road to the next budget with no assurance that it will be passed even then. We must thank the gods that our exports are soaring (probably an exogenous price effect) and so are our remittances. There is also reimbursement from the CSF and the IMF money for the floods. I can only assume some K-L money and other donor money is coming in as well. This has resulted in a high level of reserves -- "covering" about five months' of imports. Thus, on the external side, which is always the binding constraint since we can't print dollars, the starting position is quite strong. This gives us some flexibility and lee-way as well as allows us to stare the IMF down. A dangerous game with a growing risk of over-confidence and complacency setting in. "Saab theek hai, Sirjee". Experience should teach us that things can unravel very fast and very suddenly. All its takes is one shock. I see one coming in the surging price of food and oil whose impact has not been felt yet.

John | 13 years ago | Reply To all: Sad to see the inconclusiveness of Talks. What the IMF is saying now is essentially what State Bank of Pakistan was saying in its Monetary Policy Report, Jan '11. You can read it in its website. Heavy government borrowing without proper measures of revenue collection is the essential culprits. Government borrowing in a slump economy to infuse capital to stimulate economy is a standard practice. However in this case PAK Govt borrowing is for government and non Govt expenditure mostly. This leaves little capital for banks to lend to private institutions. There is enough money in circulation but banks do not see deposits from public,partly due to inflation which leaves less disposable income for savings. Contrary to what people think, despite the flood the agricultural sector is performing well with good export. The electricity shortage is blamed for lack of industrial out put to its full capacity. Export earning from industrial output is dismal. The measures recommend by SBP are important steps to make the economy to revive, by any Govt at present. However, unpopular it may sound, objective look at the situation is essential for market confidence for continuing lending. The next two weeks are important to watch how the Govt is implementing its proposed austerity measures. Keep on changing the tariff rates and policy every week to appease varying political factions is not going to help the economy.

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