Economic performance dampens foreign inflows

KARACHI – Pakistan’s failure to implement economic reforms, proposed by multilateral lenders like International Monetary Fund (IMF), has now started to reflect on foreign inflows to the floods and terrorism-stricken country.
Whereas the IMF has already denied Islamabad its two tranches under the Stand-By Arrangement (SBA), other international donors like the World Bank, Islamic Development Bank and Asian Development Bank (ADB) have linked their budgetary support to the funds-stripped Pakistan with a Letter of Comfort (LoC) issued by the IMF.
Pakistan might find it hard to get the required LoC from IMF that, apparently, is unhappy with the PPP-led coalition government in Islamabad for its failure to implement economic reforms agenda – primarily aimed at widening the country’s tax base and cutting expenditures by introducing reformed General Sales Tax (GST) and eliminating power subsidies.
A failure to convince its political allies on the imposition of reformed GST forced the reconciliation-driven coalition government to seek a nine-month extension from the Fund in the SBA till September 30 this year. However, current poor flow of disbursements to Pakistan indicates that donors’ condition for an IMF-backed LoC has started unfolding its unpalatable repercussions on Pakistan.
According to the State Bank of Pakistan, foreign disbursements, during the first seven months of the current fiscal year, have dropped phenomenally by 61.16 percent. During the same period last year, Pakistan receipts of these disbursements, long and short-term project and programme loans from foreign funding agencies, amounted to $2.660 billion, the SBP data shows.
The floods-riddled country received zero commercial and IDB loans during July-January 2010-11 for undertaking short-term development projects and programmes.
The IDB had lent $322 million to Pakistan during the last corresponding period. As for long-term loans, the multilateral donors kept their funding as low as $1.033 billion during the period under review.
Long-term disbursements to Pakistan squeezed by over $1.3 billion, or 55.8 percent, compared to $2.338 billion in the last fiscal year. According to the State Bank, the country’s receipts under project and programme loans, in the current year, stand at a meager $ 409 million and $ 624 million, respectively, against $565 million and $1.773 billion in July-January 2009-2010.
This depicts an alarming slump in foreign long-term loans of 28 and 67 percent or $156 million and $1.149 billion in value terms. The present politically-embattled government had to slash its development budget during the current fiscal primarily due to non-materialisation of pledges made by its friends abroad, including Friends of Democratic Pakistan (FoDP).
Out of the total $ 5.3 billion Tokyo pledges, the 26-nation FoDP is said to have released only a friction, over a billion or 25 percent, of the pledged amount to Pakistan. Analysts see no respite in the prevailing gloomy situation and cite a negative global perception about Pakistan as a sole reason for lower foreign inflows.
“The internal threat of terrorism has combined with Pakistan’s global reputation as a country of bad governance to keep investors and donors away,” viewed Asfar Bin Shahid. Illustrating the reformed GST issue, the analyst said that foreign lenders and donors had developed the perception that “government functionaries (in Pakistan) say one thing and do the other.”
Shahid stated that incidents of governmental mis-commitments like PTCL real estate issue had brought the country’s credibility to disrepute in the eyes of investors. The analyst maintained that Pakistan might not get the Letter of Comfort from the Fund. “Specially now when its backers in Washington are displeased with it” over the Raymond Davis issue, he opined.