IMF pushes for political consensus on bailout

Mission chief says the programme will not be signed unless all parties endorse it.

ISLAMABAD:

With general elections right around the corner, the International Monetary Fund (IMF) is hesitant about signing a three-year bailout programme with the incumbent government unless it is endorsed by all political parties in the country.

The chief of the IMF mission in Pakistan, Jeffrey Franks, has made it clear that unless opposition parties assure the programme will be implemented, the signing would be postponed till the new government assumes charge, officials who attended the first phase of a policy level dialogue between IMF officials and the finance ministry on Thursday told The Express Tribune.

According to the officials, Franks informed the meeting of his intentions to hold talks with Pakistan’s political leadership in this regard.

IMF is expected to hold meetings with the leadership of Pakistan Muslim League-Nawaz, Pakistan Muslim League-Quaid and the Muttahida Qaumi Movement in particular.

They added that the signing could take place in a couple of months if the parties endorsed the bailout programme.

During Thursday’s talks, the Pakistani side was led by Finance Minister Dr Abdul Hafeez Shaikh. State Bank of Pakistan (SBP) Governor Yaseen Anwar and officials from the Federal Board of Revenue (FBR), ministry of water and power and Economic Affairs Division (EAD) also attended the meeting.

Both sides are negotiating a three-year extended standby arrangement. Fearing a financial crisis in the following months, Pakistan wants to implement the arrangement at the earliest in order to build back foreign currency reserves held by the SBP to a comfortable $15 billion level. The size of the new bailout programme is likely to correspond to the difference between the level of reserves held by SBP at the time of the signing and $15 billion. The reserves currently stand at $8.95 billon.

During the meeting, EAD Secretary Javed Iqbal reportedly told IMF officials that Pakistan was in a comfortable position and could manage all international payments till June this year. According to officials in the meeting, this prompted Franks to remark that this meant the bailout programme was unnecessary.



Officials said the overarching stipulation set forth by the IMF programme for Pakistan would be reducing the budget deficit to 3% of the gross domestic product (GDP) during the programme’s three-year period – the budget deficit is current projected to be around 6% of the GDP.  This will be done by enhancing revenue generation rather than slicing expenditure.

While both sides discussed the possibility of curtailing expenditure, they concluded there was little room available, the officials added. They told The Express Tribune that IMF assured it would not disturb Pakistan’s interest payments – currently the country’s largest spending head. Similarly, IMF also chose to leave Pakistan’s defence spending, realising the issue’s sensitivity.

Instead, IMF has pushed Pakistan to improve tax collection by 1.5% of the total size of its economy during each year of the extended standby arrangement, the officials said. FBR will be bound to raise the tax-to-GDP ratio by 1.5% every year, raising it from existing 9.1% to 13.6% by end of the programme.



According to the officials, if Pakistan and IMF sign the programme in the next few months, the government will have to raise Rs165 billion in additional taxes during the remaining part of the current fiscal year, which ends on June 30.

IMF has asked FBR to increase revenues by 1.2% through policy measures while restricting revenues to be collected under administrative measures to only 0.3% of GDP every year, added the officials. This is contrary to FBR planning, which desires to rely heavily on administrative measures.

Talking to The Express Tribune, Minister of State for Finance Saleem Mandviwalla said Pakistan and IMF will work together to find solutions to problems in the areas of energy and taxation.  The finance ministry spokesperson was unavailable for comment.

Published in The Express Tribune, January 11^th, 2013.