KARACHI: The International Monetary Fund’s (IMF) board will likely to meet in mid-May to consider the next tranche of Pakistan’s $11.3 billion loan.
The IMF’s board had originally been scheduled to meet at the end of March to approve the next portion of the emergency package, which was first agreed in November 2008.
However, differences over several issues, such as an increase in the power tariff and implementation of a value-added tax (VAT), have delayed approval of the tranche.
Here are some questions and answers about Pakistan’s IMF loan:
What is the background to the IMF loan?
Pakistan turned to the IMF for an emergency package of $7.6 billion in November 2008 to avert a balance of payments crisis and shore up reserves.
The loan was increased to $11.3 billion in July last year and the central bank received a fourth tranche of $1.2 billion on December 28. The fifth tranche, due since the end of March, will be for the same amount.
What are the problems?
A new VAT is one of the main issues of contention. The IMF required Pakistan to submit a VAT law to parliament by the end of last December, and implement it by July 1.
There have been differences between the provincial and the federal governments on the mechanism for collection of VAT, and they have yet to be resolved. The government has introduced the VAT law in parliament, but it has yet to be approved.
While the government has assured the IMF that VAT would be implemented by July 1, most analysts see that as unlikely.
In addition to the differences between the federal and provincial governments, the technical and administrative apparatus for implementing the VAT is not ready.
There seems to be a lot of confusion among the public, as well as officials and analysts on the mechanism and impact of VAT.
The government has yet to finalise the rates for the proposed VAT.
Under the IMF programme, Pakistan is also required to increase the power tariff by April 1, but that deadline has passed.
The government had already raised electricity charges by more than 16 per cent since October, but the IMF is seeking a further hike.
Pakistani officials say they have managed to convince the IMF that the power tariff can only be raised again once the government is able to reduce lengthy power cuts. The increase, whenever it takes place, would be implemented retrospectively from April 1 to meet the IMF condition, they said.
Further waivers sought?
Pakistan is likely to have missed its fiscal deficit target for the third quarter ended on March 31 because of higher expenditure, particularly on security, and is likely to ask for a waiver from the IMF, officials and analysts said.
Pakistan missed its quarterly budget deficit target for the July to September period by three-tenths of one per cent of the GDP.
The IMF Executive Board had approved Pakistan’s request for a waiver on the budget target for the quarter.
The government also did not meet its target of zero net borrowing from the State Bank of Pakistan for the nine months ending on September 30, and is likely to ask for a waiver.
Is the tranche in danger?
Unlikely. While analysts are of the view that the government is coming under increasing pressure from financial institutions, there appears to be some flexibility on the part of the IMF, which understands the important US security ally is in a tight political and fiscal spot. The next tranche will most likely be approved in the upcoming board meeting.
However, there seems to be growing concern among officials and analysts on the fate of later tranches.
While the United States seems to be supporting Pakistan, there seems to be a consensus at the IMF that the implementation of VAT was “absolutely necessary” for future tranches, said a senior Pakistani government official.
There is very little chance that Pakistan will be able to meet the July 1 deadline for VAT to be fully in place, though gradual implementation as soon as possible may strengthen its case for future installments of the loan.
Raising electricity tariffs at a time when there is an acute energy shortage across the country may not be a good political move.
These two major issues, if not resolved quickly, may lead to further troubles with the IMF in future.
Source The News
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