Reprieve: IMF extends bailout programme for nine months

Approval provides Pakistan with another opportunity to implement the reformed General Sales Tax.

ISLAMABAD: The International Monetary Fund on Monday approved Pakistan’s request for a nine-month extension in the suspended $11.3 billion bailout programme, providing it with another opportunity to implement the reformed General Sales Tax, official sources said.

Last week, Pakistan had requested the IMF to extend the bailout programme which was secured in November 2008 for a period of 25 months to avoid defaults on international payments. The extension will allow the country a chance to deliver on  three unmet conditions.

Since none of the IMF executive board members sought a regular board meeting, they paved the way for automatic approval of the extension due to the technicality of a time-lapse. The IMF had circulated Islamabad’s request among the board members.

Until May 2010 Pakistan availed five loan tranches worth $7.7 billion. Most of the proceeds were meant to support international trade. But a part of it was given for budgetary support after Friends of Democratic Pakistan failed to provide assistance to the country for meeting the budgetary expenses. In April 2009, the FoDP pledged to give $5.7 billion to Pakistan in order to compensate losses on account of the war on terrorism. However, as against a commitment of $2.5 billion during 2009-10 the donors delivered less than $1 billion.

Sources said that an IMF team will arrive in Islamabad by the end of January. Both the parties will negotiate on the three undelivered conditions, zero borrowing from the central bank for budget financing, power sector reforms and the most controversial GST implementation. All the international donors have linked their loans with the implementation of the GST. The World Bank and the Asian Development Bank have already withheld their programme loans.

The IMF suspended the bailout programme in May 2010 after Pakistan failed to deliver on the promise of levying value-added tax (later renamed the reformed General Sales Tax) from July 1st. With that the Fund has withheld $3.6 billion from the two last loan tranches.

Prime Minister Yousaf Raza Gilani had pledged to re-launch efforts to convince the opposing forces to support the reformed GST plan. The PML-N and MQM are threatening mass protests on the issue. The government also decided to restructure the loss-making public sector enterprises and cut some of its expenditures.

Sources said the authorities are also considering minimising borrowing from the central bank by borrowing from commercial banks. Central bank borrowing is considered inflationary in nature, making the tight monetary policy virtually ineffective. The government has so far borrowed over Rs 318 billion from the State Bank for budget financing.

On power sector reforms, the authorities are also considering plans to fast track the reform process. However, the sources said that the water and power minister was dragging his feet on the issue of appointment of a new board of directors for power distribution and generation companies.

Published in The Express Tribune, December 28^th, 2010.