IMF team visits Pakistan to kick the tyres on economic reforms

Published: October 28, 2013
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File photo of Prime Minister Nawaz Sharif. PHOTO: AFP

File photo of Prime Minister Nawaz Sharif. PHOTO: AFP

ISLAMABAD: Prime Minister Nawaz Sharif faces the first formal test of his economic policies this week during a visit by the International Monetary Fund (IMF). It won’t be easy.  

Nawaz swept to a landslide victory in May after promising to fix the economy whose growth has averaged 3 percent over the last five years. Voters are hungry for jobs. Power cuts and minimal social services trigger frequent violent protests.

Last month the IMF saved Pakistan from a possible default by agreeing to loan $6.7 billion over three years, but its condition of quarterly reviews means the cash is not guaranteed.

A team led by the IMF’s regional adviser, Jeffrey Franks, is visiting this week to see if Pakistan is trying to meet conditions intended to promote reforms.

The government has begun to tackle fiscal problems, but true success will come only when tax evaders are punished, said one Western diplomat.

“Their willingness to do the painful but necessary things up front suggests they’re more willing to tackle this problem than their predecessors,” said the diplomat, who declined to be identified because of the sensitivity of the topic.

“The next six months is crunch time.”

Eleven out of 12 IMF programs since 1998 have been scrapped or abandoned because Pakistan failed to institute reforms.

“Governments have tried to “game” the IMF, and achieved partial success each time,” two former Fund officials concluded in a recent paper.

This time round, Nawaz promised the IMF to privatize loss-making state industries, reform a faltering energy sector, expand the tiny tax base and cut government borrowing.

Just 0.57 percent of citizens paid income tax last year, contributing to one of the lowest tax-to-GDP ratios in the world, which leaves public services woefully underfunded.

Nawaz also plans to privatise 32 state-run companies, including two huge gas companies, the state oil company, several banks, the national airline and power distribution companies.

During Nawaz’s previous term as prime minister which ended by a coup in 1999, he helped successfully privatise several banks, said Muhammad Jameel, executive vice president at United Bank.

“Now we have a good banking sector that is about 85 percent private,” he said. “The global financial crisis hardly touched us.”

Foreign exchange reserves have dwindled to about $4 billion, or the equivalent of four week’s worth of imports, and several large repayments fall due in the next six months.

Many economists argued that the IMF loan package had aimed to save the country from the consequences of its financial recklessness because the nuclear-armed nation of 180 million was considered too important to fail.

But considerations over Afghanistan also matter. Western allies want to use Pakistan as a route to withdraw equipment from Afghanistan during the Nato drawdown in 2014, and are keen to ensure political stability.

Blackouts and power problems

Daily blackouts have crippled the economy, knocking two percentage points off annual GDP last year.

Nawaz has started to tackle the problem by paying off government debts to energy companies and slashing populist subsidies for power. But the debts are already piling back up.

Potential investors worry that the country’s gas and electricity regulators move at a glacial pace. Some also fear the government may hold a fire sale, with state-owned assets stripped of liabilities and sold cheaply to cronies.

Industrial power customers now pay higher rates but hikes for domestic consumers are being held up by the Supreme Court. Rival political parties have denounced the increases.

“The previous government took little action over the last five years, but this one seems to be trying to come to grips with the problem,” said Jamil Masud, director of energy consultancy Hagler Bailly Pakistan. “It’s unclear yet if they will or not.”

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Reader Comments (15)

  • Anoni
    Oct 28, 2013 - 4:52PM

    Income tax .. Oh yes the richest man in Pakistan Payes just Rs 5000- in income tax. No wonder . Does he get punished?

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  • Asim Ali
    Oct 28, 2013 - 4:57PM

    In this fiercely competitive political decade, I am convinced that the current leadership will not survive the 5 years. With all guns pointing on Pakistan from issues related to economic malaise, terrorism, poverty, intellectual and moral bankruptcy, the current lot of monkeys, do not have the vision, the capacity, the capability and the attitude to lead. They will soon forget the 90s when capital was available, media was not open, and they got away with the loot and plunder. Not this time aroundRecommend

  • Saleem
    Oct 28, 2013 - 5:14PM

    Whole nations is suffering because of bleeding state run industries and poor tax collection. Why this government has not come up with a transparent plan to get rid of state run industries? There is no let up on corruption/collection. Why NAB is not cracking up on corruption which will result in more revenue collection, rather than going in pockets of few.

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  • Indra
    Oct 28, 2013 - 5:26PM

    But do you guys really trust this guy?I mean,

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  • Zif
    Oct 28, 2013 - 5:47PM

    IMF team visits Pakistan to kick the tyres on economic reforms
    Seriously? The only thing that would be kicked around are the poor people of this hapless country.

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  • Jibran
    Oct 28, 2013 - 6:07PM

    Nawaz Sharif cannot fix the economy, nor he is interested in. He has been paying zero taxes. On his first day, he distributes Rs. 500 billion among his buddies. First month, he proposed the Haripur-Islamabad tunnel, only to inflate the prices of real estate owned by his son in law. National assets are on loot sale. His policy is nothing but “lutto te phutto”.

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  • Zen.One
    Oct 28, 2013 - 7:05PM

    I doubt this man has any vision to head start the economy. In the last two tenure he started the dubious yellow cab scheme, In second term billions of public funds were wasted on Apna Ghar schemes, which failed. The foreign exchange dwindled to an alarming 600 million USD.
    Jibran. in the comments section has rightly pointed about the Haripur-Islamabad tunnel fiasco. It re-enforces my belief that this man has “Tunnel Vision”, all hindsight and no foresight.
    Get some good economist in the cabinet; Pakistan has brilliant minds to head start the economy, and get a foreign affairs minister.
    In 2007 during Musharraf Era, Pakistan attracted an FDI of 8 billion USD in one year alone and the dollar was stable at Rs. 60 for five years running. Economic growth(GDP) was 7%-8% during his tenure.

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  • Oct 28, 2013 - 7:11PM

    My people wake-up and see the wider vision of the issue!
    IMF team is not here to help us, it is here to further promulgate policies that will ensure that wealth in accumulated in a few hands.
    This vision-less apathetic government is against the people of Pakistan, be assured that they were selected by foreign agencies to further deprive the country. They came to power ONLY to implement policies which makes Pakistan and its people more dependent to foreign powers.
    These spineless rulers have already hinted that Pakistan will soon have full fledged Value Added Tax, more income tax, more tariffs of power, water, gas etc.
    My people wake-up, when IMF comes they will force these tyrannical rulers to enforce more taxes on us, which will further widen the gap between classes and put severe pressure on the pockets of the fixed income group. Do you all want to give 50% of your salary to the these corrupt officials?
    My labour-class has been driven to organ-sale, in backward areas people are resorting to cannibalism, theft and armed robberies have increased, people are frustrated, rapes are on the rise.
    My people, why can you not relate that crimes are a direct result of an unhappy society?
    Will you continue to close your eyes, and keep your hands shackled from working against these blood-thirsty hounds that were elected?
    My people, what keeps you from rising in a revolution?
    ET do not sensor when I try to give a broader vision to my people. They need to foresee what is happening. It is extremely naive and shortsighted to mark what I say as a ‘conspiracy theory’.

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  • Np
    Oct 28, 2013 - 7:21PM

    All sweet words notwithstanding, the government has been falling short on tax collection month after month and its effort to bring new tax payers in the fold are not going anywhere either. Energy sector reforms are stuck in the courts.despite assurances that the government will shore up reserves the situation has gone in the reverse direction since the government is trying to hold depreciation artificially. It is fine to say that loss making public sectors will be sold but with what has happened in the past and the court’s role in it, you can be sure foreign capital will stay out. So who will buy these organisations? there was agreement to withdraw all SROs but the new finance minister has actually introduced a few SROs. While Pakistanis speak about Bharat and breaking the kashkol, they are unwilling to pay taxes or pay their electricity bills.

    At the very least, the forthcoming tranche will be delayed. Since despite all talks, the action on the ground has been minimal.

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  • np
    Oct 28, 2013 - 7:31PM

    Sorry. I meant to say while Pakistanis talk of ‘ghairat’ NOT Bharat. My autocorrect out of control…

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  • unbelievable
    Oct 28, 2013 - 7:47PM

    Kick the Tyres? IMF is here to remind Sharif that the loan is conditional and he hasn’t made much progress in implementing the promises he made when obtaining the loan. The structure of the IMF loan has it dribbled out over a long period so that when you break your promise (as you have in the past) the loan funding stops.
    .
    The IMF bashers may yet get there chance to see what happens when you default on the IMF debt. The bashers tend to forget that almost ever major construction project in Pakistan has some element of International Aid/Lending and all that will grind to halt. World Bank, Asian Development Bank etc won’t lend to defaulters.

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  • javed Khan
    Oct 28, 2013 - 9:27PM

    I am sure IMF team will also monitor Sales Tax Refunds that are not being paid especially in LTU KarachiRecommend

  • ali ahmed
    Oct 28, 2013 - 10:14PM

    yes he privatise several banks,….MCB was given to his friend Mansha group only for 16 billion where Tawakul group offered 60 billion…case is still pending in court….and want to give PIA to K. Abbasi

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  • nawabeali
    Oct 28, 2013 - 11:18PM

    I used to love Nawaz because of his rightist stand. But now he is taking loan with interest. Thats not what majority of the country stands for.

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  • Nov 28, 2013 - 5:17PM

    Mr .shariff’s another sharafat….

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