ISLAMABAD: Pakistan plans to seek an extension of an $11 billion International Monetary Fund (IMF) loan programme to win more time to implement the reforms needed to secure the next tranche, a finance ministry official said.
The IMF’s programme, agreed in November 2008, has kept the US ally’s fragile economy afloat, and is increasingly critical for Pakistan as it grapples with a widening fiscal deficit and the devastation of the summer floods. Finance Ministry Secretary Salman Siddiqui said Pakistan will seek a three-month extension of the programme, due to expire on December 30.
The main issue, he said, was Pakistan’s slow implementation of a reformed general sales tax (GST), a key condition for the possible release of the sixth tranche of the IMF programme.
“It’s all linked to how the reformed GST goes; obviously we have a plan (to seek an extension),” said Siddiqui, without elaborating.
Pakistan needs all the financial help it can get, especially after summer floods which inflicted $10 billion in losses. It is waging a costly war against Taliban insurgents and needs to invest heavily in the energy industry to ease frustrations over power cuts.
Pakistan’s political and economic stability is vital for the United States, which sees it as a crucial ally in its war against militancy in the region. In order to secure the remaining tranches, the sixth and seventh, Pakistan has to implement the reforms demanded by the IMF before the programme expires.
Pakistan has already missed several IMF deadlines. Failing to live up to its agreement with the IMF would make it harder for the South Asian country to secure international financial support and affect its sovereign ratings, analysts say. Another official in the Finance Ministry confirmed that Pakistan plans to ask the IMF for an extension. Both officials said a decision on when to submit the request had not been made.
Pakistan is struggling to secure the sixth tranche, which was originally scheduled for release in August but has been delayed due to the GST issue. Pakistan is under intense international pressure to broaden its tax to gross domestic product ratio, currently around 10 percent, one of the lowest in the world.
“What we really want to see is not a system where we keep giving assistance – we want to see a system or a progress where our (US) assistance, coupled with your (Pakistan) reforms leads to a take off,” Cameron Munter, US Ambassador to Pakistan, told a group of reporters in Karachi on Monday. Munter said if the government failed to implement reforms, then it would be a “blow to the confidence of people who want to see Pakistan’s willingness to change.” Any delay in the release of the sixth tranche, around $1.7 billion, would bring pressure on the country’s local currency, which has lost 1.5 percent this year, after losing 6.17 percent in 2009.
Analysts say the government should focus on generating its own resources to create liquidity, which would control high fiscal deficit.
“Pakistan’s problem today, is not external but fiscal. Our fiscal deficit is very high,” said, Topline Securities Chief Executive Mohammad Sohail.
Pakistan’s budget deficit widened to 1.6 percent of GDP in the first quarter ended September 30, which was a warning that Pakistan would likely overshoot full year deficit target of 4.7 percent of GDP, analysts said, forecasting a budget deficit of at least 6.0 percent of GDP.
