IMF holds back cash to Pakistan
By Syed Fazl-e-Haider

KARACHI – The International Monetary Fund (IMF) has deferred for an indefinite period disbursement of the fifth, US$1.2 billion, installment of funds to be paid to Pakistan under their $11.3 billion standby agreement. This came after the government failed to meet the condition of tabling draft value-added tax (VAT) legislation in the four provincial assemblies.

Critics say the proposed VAT will increase inflation, erode consumers’ purchasing power and dampen demand. The government has left the issue with legislators who will adopt, reject or amend the VAT bill. Local business communities have strongly opposed the imposition of VAT, saying it will harm every sector of the economy. However, the rupee “will come under pressure if the IMF money is delayed for more than a month”, The News quoted Sayem Ali, an economist at Standard Chartered Bank, as saying. That would drive up the cost of imports.

The Washington-based IMF has postponed its scheduled March 31 executive board meeting, which was to review Pakistan’s economy and approve payment of the fifth tranche.

The legislative bottleneck is the presentation of a draft law on VAT to the Punjab assembly, according to Dawn. The government has already submitted the draft law to the National Assembly and to the provincial assemblies of Sindh, North-West Frontier Province and Balochistan.

The IMF is digging its heels in on the issue after overlooking the country’s failure to meet its budget deficit targets during the previous two reviews. The fund went along with the government’s recommendation to allow the fiscal deficit target to be increased to 5.1% of gross domestic product (GDP) from the earlier target of 4.9%. IMF approval is crucial because other donor agencies, including the Asian Development Bank and the World Bank, take their lead from the fund.

Pakistan agreed with the IMF in November 2009 to impose VAT from July 1 this year, according to The News. The new tax would help the government to raise an additional 150 billion rupees (US$1.9 billion) in revenue. Local traders and businessmen see inherent flaws in the VAT Act.

“The VAT act is silent on zero-rating of five export sectors, meaning that zero-rating of these sectors has been withdrawn,” the Daily Times quoted Agha Saiddain, former chairman the Pakistan Tanners Association (PTA), as saying.

Under the VAT Act, zero rating on exports of leather, textiles, carpets, sports goods and surgical goods will be removed and they will brought into the VAT scheme. Most of these industries are already in crisis due to various factors, including unreliable energy supplies.

Critics say the imposition of VAT will immediately drive up inflation. The central bank forecasts that consumer price index (CPI) inflation for the fiscal year ending on June 30 will be close to 12%, up from a low of 8.9% in October 2009 after price increases for electricity tariffs, petroleum products and commodities. In the last fiscal year, the average inflation was 20.5%.

The central bank in its monetary policy statement on Saturday maintained its discount rate at 12.5% for April and May. “An upward adjustment in the policy rate at this juncture runs the risk of impeding the still nascent recovery,” the central bank said in its statement. “A downward adjustment runs the risk of fueling already high inflation.”

The government plans to increase domestic fuel and electricity rates from April 1 after raising gas and electricity tariffs by an average 13.5% on March 1.

The CPI has risen 36.3% since the present coalition government came into power in 2008, with the prices of wheat flour surging 83% and of sugar 168%, according to Dawn newspaper. The increase in prices of essential items has continued despite regular government promises to contain the trend and punish hoarders and profiteers.

Islamabad has received about $6.4 billion from the IMF from its total rescue package, agreed as the country faced a crisis in meeting its international debt obligations. Foreign reserves now stand at around $14 billion, while the country’s external debt and liabilities at the end December 2009 were at an unprecedented $55.67 billion, or the equivalent of one-third of Pakistan’s GDP.

The external debt will increase to $60 billion by next June, according to official sources.

Syed Fazl-e-Haider (www.syedfazlehaider.com) is a development analyst in Pakistan. He is the author of many books, including The Economic Development of Balochistan (2004). He can be contacted at sfazlehaider05@yahoo.com.