Pakistan confident on IMF loan as doubts linger

04/05/2010 | Chris Wright

Pakistani officials believe the country has met all the requirements for the IMF to release a vital, delayed final tranche of its $11.3 billion emergency loan programme

Pakistani officials believe the country has met all the requirements for the IMF to release a vital, delayed final tranche of its $11.3 billion emergency loan programme.

The tranche, of $1.2 billion, was due to be released in March, but was withheld while talks continued on policy issues including power tariffs and a new VAT law.

But Sibtain Fazal Halim, Secretary for the Economic Affairs Division in Pakistan’s Ministry of Economic Affairs and Statistics, told Emerging Markets yesterday: “We are confident we have met all conditionalities. We are hopeful the next IMF tranche will be released soon.”

His comments came in the wake of a statement last month by the IMF that “more needs to be done” to stem financial losses in the power sector which are a drain on public finances and “pose a threat to macro-economic stability.” The IMF also warned that “the introduction of a broad-based value-added tax in July 2010 is essential” for stabilizing Pakistan’s stricken economy.

The lender is likely to discuss the issue in the middle of this month before making a decision. It will focus on Pakistan’s progress towards a VAT law, which should be in force by July 1 to meet the formal terms of the loan.

Laws under consideration by the federal parliament and four regional legislatures will replace the current sales tax on goods and services with VAT. “We hope to have them declare in time,” before July 1, Halim said.

Since the laws will still be under discussion when the IMF meets, it will have to base its decision about releasing funds on the level of commitment to change that it perceives.

Authorities have insisted that the laws will go through. Abdul Hafeez Shaikh, principal adviser on finance to the prime minister and de-facto finance minister, told Emerging Markets in an interview last month: “Our president and prime minister have already committed themselves to VAT from the new fiscal year [i.e. from July 1].”

But western economists in Islamabad have told Emerging Markets that the IMF is concerned that Pakistan’s tax collection agency could not get ready to collect new taxes in time.

Another issue the IMF must consider is power tariff increases. These have risen by 12% in the last year, and a further 6% hike, backdated to take effect from April 1, is due for approval. Such decisions are deeply unpopular with citizens who face constant problems with power brownouts.

“It shall be done: maybe before we leave Tashkent, maybe this month,” Halim said.

Getting the final tranche of the IMF programme is vital for Pakistan. A failure to receive it would rock already shellshocked investor confidence, while a successful disbursement would help stabilize the economy and improve sentiment.

The VAT itself would help the country’s funding base enormously, Halim said. “Our tax to GDP ratio is a little under 10%. Our aim is to push it up to 15%.”

Foreign direct investment fell 46% to $1.9 billion in the nine months to March 31, but portfolio flows have started to look slightly more positive: the National Bank of Pakistan said last month that $200 million had flowed into local stocks from overseas this year. Halim blamed the drop in FDI on the global financial crisis and the security situation, but said interest was increasing and “foreign investment will definitely increase.”

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