IMF announces $450m in emergency assistance

If approval is given by IMF's executive board, the money is likely to be disbursed this month.

ISLAMABAD: The International Monetary Fund (IMF) on Thursday announced an additional $450 million in emergency assistance for Pakistan to help the country deal with the aftermath of the floods. However, the international financial institutions hooked the release of the next $1.7 billion tranche by delaying the fifth review of the country’s economy.

The emergency funding would be provided under the Fund’s policy of ‘Emergency Natural Disaster Assistance’. Nonetheless, confirmation of the aid is subject to approval of the IMF’s executive board.

If approval is given, the money is likely to be disbursed this month. The emergency assistance is on top of $11.3 billion ongoing bailout programme.

The emergency assistance will be in shape of budgetary support. In normal circumstances, the Fund’s money can only be used to clear imports bills.

A senior official of the finance ministry said the emergency assistance would be available for three years and Pakistan will pay up to four per cent interest on the loan.

The floods have affected one-fifth of the country, rendering more than seven million homeless.

Meanwhile, sources from Washington told The Express Tribune that the IMF has postponed the fifth review of the economy till November or December, which has also delayed the release of the second last tranche of $1.7 billion under the ongoing bailout programme being offered to Pakistan. According to the sources, Pakistan’s likely failure to implement the Value Added Tax (VAT), a 15 per cent levy on all goods and services except food and health, even on the revised date of October 1 has led to postponement of the fifth review of the economy.

The fifth review of Pakistan’s economy was originally scheduled for May 31 but due to Pakistan’s inability to implement the VAT from July 1 and likely failure to honour the subsequent commitment to implement it from October 1 in shape of the reformed General Sales Tax had led the IMF to reschedule the economic review to August 15.

Pakistan could not implement the tax reforms due to Sindh’s insistence on collecting tax on services and influential political lobbies’ resistance to withdraw tax exemptions on goods.

The Fund will wait for the reformed GST to be implemented before calling the executive board meeting regarding approval for giving out the $1.7 billion installment.

The decision would also affect the sixth and seventh review schedules. Originally, the sixth review was planned for August 31, which would pave the way for release of last tranche under the $11.3 billion programme. Now, the sixth review is not possible before December, the last month of the IMF programme.

It has been learnt that the Pakistani government is now considering two options, one to end the programme on fifth review restricting the loan to $10 billion and the other, seeking a three-month extension in the programme.  Sources said the final decision would depend upon Pakistan’s intention to get another IMF programme.

Sources also said that the government has reassured the IMF in Washington that it is ready to implement the reformed GST and increase electricity prices by at least 16 per cent to phase out subsidy.

During the last two years Pakistan has increased power tariffs by 67 per cent.

Sources added that the authorities had also promised the IMF that they would levy a flood surcharge, but chances of this materialising are bleak. “Despite a tainted past, Pakistan again made a lot of promises and the IMF is once again ready to be fooled”, sources added.

The government was contemplating levying a 10 per cent surcharge on the taxable income of all groups and a tax of the same percentage on all imports in order to generate Rs140 billion for rehabilitation of the flood affected areas during the first year.

Nonetheless, there are strong chances that the government would prefer to slash the public sector development programme by half to meet expenses. For this year, the government has allocated Rs280 billion for federal development spending.

The most ambitious promise was to keep the budget deficit at four per cent of the Gross Domestic Product or Rs685 billion, said the sources. They added that in the given circumstances, restricting the gap between the income and the expenditure to Rs 685 billion was highly implausible.

Published in The Express Tribune, September 3^rd, 2010.