ISLAMABAD: The regional head of the International Monetary Fund (IMF) has arrived in Islamabad and is expected to seek guarantees from the political leadership on crucial taxation issues and power sector reforms, a finance ministry official said.
His trip, which will last three days, comes in the wake of the scrapping of Value Added Tax and a delay in energy sector reforms.
“The visit of IMF Director for Central Asia and Middle East Department Masood Ahmed will set the stage for upcoming talks between the IMF and Pakistan for the release of $1.8 billion sixth loan tranche,” said a senior official of the finance ministry.
Though dates for the negotiations have not been finalised, it is widely expected that the parleys will be held in August in some foreign country. Pakistan has so far obtained $7.6 billion under the $11.3 billion relief programme.
During his stay, Ahmed, a Pakistani origin senior official, will hold talks with Prime Minister Yousuf Raza Gilani. However, his meeting with President Zardari could not be confirmed till late in the evening.
He would also have a breakfast meeting with Finance Minister Dr Abdul Hafeez Sheikh on Tuesday in a local five-star hotel, where the minister permanently resides.
In spite of being the most important condition of the IMF programme, Pakistan has put off VAT, instead Sheikh has given a political slogan of reforming the existing sales tax instead of replacing it with VAT.
The official said though the idea of reforming the sales tax has an American backing, it may not go down well with the Fund as the IMF is of the view that only VAT can assure a long-term flow of revenues.
“The fear is that the government may not withdraw all the tax exemptions granted on political grounds while overhauling the GST,” said the official.
The IMF had asked Pakistan to levy an integrated VAT, but the plan faced stiff opposition from the business community, backed by the PML-N, from the provinces and even the FBR.
VAT was designed to increase the tax-to-GDP ratio by at least five per cent over the next five years. Pakistan has the second lowest tax-to-GDP ratio of around nine per cent in the region.
Other major areas of concern for the IMF are the swelling inter-corporate debt and a delay in the increase in power tariffs aimed at bridging the gap between the cost of generation and sale.
The official said the inter-corporate debt has started increasing again. The government has already parked Rs301 billion of circular debt in a holding company and is paying over Rs40 billion interest on that.
On top of this, over Rs130 billion has again been blocked in the system, as provincial governments were not paying their dues to the Pakistan Electric Power Company. They had promised to pay the debt in the energy summit held in Islamabad in May.
The official said the only workable solution is that the federal government should start adjusting automatically the power dues while paying the provincial revenue share. He said the idea of appointing a federal adjudicator also did not work as the two provincial governments got stay orders from court against the decision of deducting the amount.
The government also did not increase power tariff by six per cent from April 1, fearing a public backlash. It was bound to do so under an agreement with the World Bank and the Asian Development Bank, guaranteed by the IMF. However, a three-month delay will cost the consumers a further one per cent on account of arrears.
The IMF official will also ask the government to bring its house in order, as excessive borrowing from the central bank to finance the budget deficit is not only sidelining the private sector but is also pushing up inflation.
Published in The Express Tribune, June 22nd, 2010.
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