There is now widespread speculation that Islamabad is keen to seek another bailout from the IMF to support its weakening balance of payments position. Pakistan’s foreign exchange reserves have recently declined significantly. This is despite the release of the Coalition Support Funds (CSF) by the US and record level remittances, which have provided much-needed relief to our deteriorating balance of payments position.
With large international debt payments approaching, it is feared that the balance of payments position will deteriorate to precarious levels in the very near future.
Besides trying to secure IMF support itself, other multilateral lenders like the World Bank and the Asian Development Bank also need the IMF’s endorsement of Pakistan’s economic and fiscal policies before they renew their loan commitments to our government in order to keep our economy afloat.
However, given the lack of compliance to the earlier IMF programme, further lending cannot be secured without accepting harsh fiscal management conditions. With general elections approaching, the IMF is insisting on signing a new bailout programme, endorsed by all political parties in the country, so as to ensure that the incoming government continues to follow its advice.
The overarching stipulation set forth by the IMF programme for Pakistan would be reducing the budget deficit to three per cent of the gross domestic product (GDP) over the next three years, which otherwise is projected to be around six per cent of the GDP. Achieving this sort of fiscal discipline without further slashing public expenditures would be quite difficult.
According to newspaper reports citing anonymous sources, the IMF is trying to push Pakistan to improve tax-collection, hoping to raise it from the current level of around nine per cent of the GDP to over 13.5 per cent by end of the programme.
Trying to raise revenues by taxing citizens with the capacity to pay instead of relying on international borrowing, which is pushing our international debt to insurmountable levels, makes good sense and we should not need entities like the IMF to realise this fact. Moreover, entities like the IMF believe in trying to secure economic growth by providing incentives to big business and the already wealthy, which in turn, shifts the burden of revenue generation and fiscal discipline onto the common man.
The IMF also does not want to disturb Pakistan’s interest payments on outstanding international debts nor does it want to insist on curbing Pakistan’s defence spending so as not to jeopardise the geo-strategic situation in the region. Given that the White House is objecting to certification requirements, which the US Congress has sought to place on disbursements from the CSF, it would not be surprising to see the US exert pressure on the IMF to bail out Pakistan, once again, in order to facilitate its own exit from Afghanistan.
But if history is anything to go by, US support for Pakistan would dry up rather quickly once its own strategic objectives have been fulfilled. While IMF support may help Pakistan defer an economic crisis in the midst of a historic transfer of power from one democratically elected government to another, this support will not help lessen the increasing disparities within the country. In order to achieve the latter goal, our policymakers need to put in place more equitable economic policies, focused on structural economic reforms, and revisie policy priorities aiming to achieve macroeconomic stability from the bottom-up, rather than continuing to rely on top-down advice from international lending agencies.
Published in The Express Tribune, January 15th, 2013.
COMMENTS (23)
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@Observer: "There is no way for Pakistan to continue to eat its huge defense spending cake and still keep the economy on a strong growth path enabling Pakistan to pay back the $60+B external debt, not to mention the growing domestic budget deficit"
Well IMF wil simply insist on a target fiscal deficit number. If the country can increase tax revenues to the point where current expenditures will result in the target fiscal deficit number, IMF will be okay. Ofcourse raising direct tax significantly in short term is not possible. There is no willingness to increase indirect tax through implementation of RGST (which was attempted by PPP and unanimously rejected by all others including its ruling allies). This means expenses have to be reduced. Since debt repayment cannot be touched, the next biggest slice of expense i.e. defence expenses will have to be touched. But IMF would much rather have the country's political leadership take that decision rather than blame IMF for that.
Pakistan seriously needs to accept the IMF regulations, if they are to sustain the economy. Interesting things to note; A. The leaders are worried about the public reaction to IMF measures being introduced, therefore the measures haven't been in order yet. B. Pakistan spends the majority of money earned on debt servicing, rather than paying off the debt.
@Observer: FUNtastic surtax, must be implemented immediately as follows; - hafeez sayeed/ zaid hamid and company- 95% - mullas-85-90%, - all jingoistic web warriors - 80-85% - atheist - 2%, - non muslims- sikh/hindu/christian -0% - - Shia's- better ask them because although they are currently suffering at the hands of sunnis, they will happily support for kashmir cause, same for ahmedis or any muslim.
@Anserali Khan:
"Where will resources come from if even Members of Parliment do not file their tax returns"
One way to raise revenue would be to impose an India specific national defense/ Kashmir support surtax of 10% to 60% on everyone, with the actual percentage tied to level of wealth and income.
Such a surtax while raising significant revenue, will also make people realize that aggressive anti-India geopolitical stance will hit their personal pocketbooks. People will thus know how much their personal financial bite would be to support such external goals. Thus, this surtax could also ultimately have the benefit of finally weaning the Pakistani population from the decades old aggressive geopolitical stance.
The surtax could be broken down into specific areas such as support for Kashmir, nukes, Afghanistan strategic depth etc. besides the anti-India "need".
"The IMF also does not want to disturb Pakistan’s interest payments on outstanding international debts nor does it want to insist on curbing Pakistan’s defence spending so as not to jeopardise the geo-strategic situation in the region."
I am not sure this is a correct statement. There is no way for Pakistan to continue to eat its huge defense spending cake and still keep the economy on a strong growth path enabling Pakistan to pay back the $60+B external debt, not to mention the growing domestic budget deficit. I am sure the IMF knows this.
@meekal a ahmed:
Are you sure all that is needed is a simple majority? I thought the votes were weighted according to how much the donor country gives IMF. This would give the bigger donors such as US and the Western countries more votes.
@gp65 .:
No, he is wrong.
The US as well as others may reject the program -- and it will not be for the first time. Others have in the past rejected the program too. But at the end of the day as long as the tally of votes approving the program exceeds 50%, it goes through. A simply majority is needed to approve a financial arrangement.
Since the minutes of Board meetings are confidential, no one on the outside knows who voted how.
The US has clout if you want to change the Articles of Agreement of the IMF. Then you need an 85% majority and the US can block it with a "no" vote.
@author:
Remittances from growing Pakistani diaspora are hitting new records...over $7 billion received in July-Dec 2012 period.
http://www.riazhaq.com/2013/01/pakistans-year-2012-in-review.html
@meekal a ahmed: I think that @harkol's point was that the reason Pakistan gets the majority is because US supports it. Once that support vanishes it would be difficult for Pakistan to get the majority votes.
This is a continuation of the 2008 default. The can was simply kicked down the road. But like always, the problem have only compounded. But... "This time is different..."
@harkol:
Actually the only reason Pakistan does get the money is that a request for a program (a financial arrangement) only needs a simple majority of votes in the Board.
Indeed, based on my experience, there have been cases where the US, France, Germany and some other nations have REJECTED a Pakistani program as being too soft.
But as long as we get a majority of votes, the program stands approved.
Ali,
As you sow, so shall you reap.
The only thing we do not know is whether it will be a long, painful and agonizing death of the economy or a sudden plunge off a cliff.
@Suheil Siddiqi: "Any limits to taxation?
Any limit for not paying taxes by those who has the earning but evade tax payment. ???
' The power to tax is the power to destroy." Mr. Siddiqui the power of non payment of tax is the power to destroy the economy..
Here are the countries (with above 1% vote share) that may stand behind Pakistan in IMF votes for sure - China (4%), Saudi Arabia (3.93%). Pakistan itself has 0.43% votes.
Some countries that may support Pakistan: Venezuela (1.12%), Mexico (1.2%), Brazil(1.79%)
Which are countries with high vote shares that Pakistan has antagonized time and again (with all its recalcitrant behavior)?
NATO - US (17.69%), UK(4.51%), Germany (6.12%), France(4.51%), Italy (3.31%), Canada (2.67%), Belgium(1.93%), Australia (1.36%), Netherlands(2.17%), Swiss (1.45%), Sweden (1.01%)
Some countries that are not naturally inclined to vote with Pakistan: Japan (6.56%), India (2.44%), Russia (2.5%), South Korea (1.41%)
With such voting pattern the only reason Pakistan gets by at IMF (and other lending agencies) is because USA humors Pakistan right now. The moment it decides to tighten the screws on Pakistan, Pakistan will be another North Korea - Nukes and nothing much else.
Any limits to taxation? How are taxes spent? Interest for all the SBP 'injections' comes from? What are odious debts?
Where will resources come from if even Members of Parliment do not file their tax returns Where is FBR drive to impound 2,00,000 non duty paid cars? Where is FBR when only 18,000 tax payers pay Sales Tax?
IMF should politely say NO more money........First get your house in order and have those who earn money from any source,they should pay taxes then come to IMF
Understand the Globalization of Poverty and the New World Order: http://www.globalresearch.ca/understand-the-globalization-of-poverty-and-the-new-world-order/25371
The IMF Collects Debts on Behalf of the World’s Largest Banks: http://www.globalresearch.ca/the-imf-collects-debts-on-behalf-of-the-world-s-largest-banks/13558
Debt and “Democracy” in Egypt: The IMF’s Deadly Economic Reforms: http://www.globalresearch.ca/debt-and-democracy-in-egypt-the-imf-s-deadly-economic-reforms/25066
One of the biggest problem of Pakistan is dysfunctional FBR. In total 20,000 persons pay more than Rs 5,00,000 in taxes per year.FBR is inefficient and corrupt and in last 6 months FBR has gone from bad to worse. Unless tax collection in Pakistan on ALL incomes increses and is put in place Pakistan is doomed.
So, the deeper than the oceans friend China said he's not carrying cash right now to loan it to you?
China is lying, Pakistan. It has $ Trillion stashed in forex.
Why do the hard part like fixing your economy. Just shutdown the NATO/US supply lines on some pretext. You have done that before. Money will come rolling in.
Junk status of Pakistan's credit rating also confirmed by Moodys' http://www.bloomberg.com/news/2012-07-13/moody-s-cuts-pakistan-credit-rating-deeper-into-junk.html
Pakistan is now technically bankrupt. RIP
IMF is Pakistan's bank, PAK is a shareholder of IMF, and no other share holders of IMF are asking PAK to borrow money from the IMF pool, and it is customary to repay the loan on the terms under which it was borrowed, and PAK made money from its IMF share by lending money to other countries....