Pakistan considers limiting IMF loan package to $10b

Pakistan wants to delay the IMF Executive Board meeting in a bid to gain more time for tax reforms.

ISLAMABAD: Pakistan is considering restricting the $11.3 billion International Monetary Fund bailout programme to less than $10 billion and wants to delay the IMF Executive Board meeting in a bid to gain more time for tax reforms.

Finance ministry sources told The Express Tribune that the government is mulling over taking the meeting of the IMF Executive Board to November instead of end-September or early October. The move is said to have two objectives.

“The primary aim is to deliver on the commitment of tax reforms by buying more time and secondly it will leave no time for the last meeting before the end of $11.3 billion programme in December,” said a key government official on condition of anonymity.

“Pakistan does not want to avail of the last tranche of $1.2 billion due to better position of foreign exchange reserves,” the official added. The IMF loan cannot be used for budgetary support and the money can only be spent on import bills.

Pakistan and the IMF will enter into staff-level talks on August 23 in Washington DC to review the economic performance in the last quarter (April-June) of financial year 2009-10. During the year, the country missed the budget deficit target by a wide margin and ended up with a deficit of Rs909 billion or 6.2 per cent of GDP instead of the target of Rs769 billion or 5.1 per cent. It also could not levy the Value Added Tax (VAT) from July 1.

Pakistan is committed to implementing the reformed GST, which includes withdrawal of tax exemptions on goods and levy of the tax on services, by October. The issue remains unresolved as the Centre and provinces have been unable to sort out differences.

Sindh is not ready to surrender all services to the Centre for collecting the tax, insisting that the levy and collection of the tax on services is a provincial matter.

Finance ministry sources said that as the second deadline of August 11 has been missed and officials were busy in assessing the damages caused by the floods, there was hardly any possibility that the issue could be resolved this week.

Sources said that the government will request the IMF to link tax reforms with its next board meeting. The government will try to sort out differences by October and that will take the board meeting to November.

They added that if the government is able to implement the reformed GST by the end of October, the IMF board will likely approve the next tranche of $1.2 billion in November.

That may be the last tranche taking total loan from the Fund to $9.9 billion, as the country is in a comfortable position due to over $16 billion foreign exchange reserves. It may ask the Fund to end the programme in December without approving the last tranche of $1.2 billion. Pakistan had obtained $11.3 billion IMF bailout package in November 2008 for two years.

Unresolved GST issue

The federal government has again called a secretaries-level meeting of the Centre and provinces on Tuesday on the issue of reformed GST contrary to its commitment that deliberations will now be held between provincial finance ministers or chief ministers.

Sources said during the last technical-level meeting the federal government had committed that it would convene a meeting of the political leadership, as certain issues could not be resolved without give-and-take at the highest level.

A Sindh Finance Department official said that the federal government had agreed in principle to its proposal of collecting tax on four services, namely, financial services, construction, advertisement and franchises and the rest would be with the provincial government. The official said that the understanding just needed a political nod.

The issue of distribution formula for general sales tax on services is still unresolved. Sindh has proposed distribution of the collected amount on the basis of the formula agreed in the seventh National Finance Commission Award. This formula stipulates multiple criteria and under that Punjab will get 50 per cent of the collection, Sindh 44 per cent, Khyber-Pakhtunkhwa 5 per cent and Balochistan one per cent.

Punjab is seeking a population-based distribution formula, which will limit Sindh’s share to less than 25 per cent.

Published in The Express Tribune, August 17^th, 2010.