The International Monetary Fund (IMF) would not release the remaining two tranches of $3.5 billion under the 2008 $11.3 billion Stand-By Arrangement (SBA) during the ongoing financial year 2010-11.
The international lending agency, despite holding “constructive” discussions with Pakistani authorities in Dubai over the past week, remained confined to reiterating its commitment to continue the ongoing dialogue with the resource-constrained country. Instead of making the much-awaited announcement on the transfer of the funds, the IMF staff mission, led by Adnan Mazarei on Tuesday declared that the Fund would keep negotiating with Pakistan.
“The IMF remains committed to the ongoing dialogue with Pakistan and discussions will continue in the weeks ahead and a mission is planned for July 2011,” the IMF staff mission said in a statement issued after the conclusion of talks with a Pakistani delegation led by Finance Minister Abdul Hafeez Shaikh. The IMF approved the government’s strategy for additional revenue generation with and without the implementation of the reformed general sales tax (RGST) from the next fiscal year.
However, the IMF team said the revival of the suspended programme would be decided in July after witnessing the progress on the implementation of the new revenue measures. According to an official source, the IMF stressed for the approval of RGST and the finance bill for the next fiscal year, but agreed to the government’s suggestion that if political opposition within the parliament blocked its passage, then the alternative mode of abolishing exemptions and bringing new areas under the tax net should be pursued.
During the weeklong meetings, the two sides discussed measures that could be taken in the federal budget 2011/12 to narrow down the budget deficit, which is expected to go beyond 6 percent or Rs 1.1 trillion of the GDP during FY11. “Continued efforts are needed to reduce the budget deficit to take the pressure off the monetary policy and create space for more credit to the private sector,” the IMF mission said.
Given the government’s heavy reliance on inflationary bank borrowings, the commercial banks in Pakistan for quite sometime have been reluctant to provide the private sector with credit for generating economic activity, leading to unemployment. The State Bank of Pakistan, also critical of the banks’ risk-averse approach to invest in the heavily-weighted government securities, calculated that the banks’ credit to private sector had dropped to Rs 112.815 billion during July-May 7 from last year’s Rs 130.188 billion.
The IMF mission also asked Islamabad to remain watchful of the soaring government debts, saying debt management needed to be improved. According to SBP data, the government budgetary borrowings from the banking system during July-May 7 had climbed to Rs 624.137 billion, Rs 278.127 billion up from Rs 346 billion of FY10. The IMF also wants Islamabad to reduce its spending over the quasi-fiscal operations, like the procurement of agricultural commodities to reduce inflation, assure fiscal sustainability and protect the so-far “comfortable” external accounts.
The IMF mission said: “Reducing the budget deficit will require higher revenue through tax reform to broaden the tax base, including steps to implement reforms in the general sales tax.” IMF team, a source said, expressed satisfaction on the new revenue measures, especially the elimination of the exempted and zero-rated sectors. Pakistani side assured the Fund that it would continue pursuing the tax and power sector reforms to maintain the fiscal deficit within manageable limit next fiscal year.
The IMF was assured that the fiscal deficit would be retained below the agreed level of 5.5 percent of GDP during the current fiscal year. Another official involved in the talk said Pakistan agreed to end exemptions on the general sales tax, adding that the discussions had went “smooth”. “We plan to remove the existing exemptions,” the source said. The exemptions are mainly on food products, including dairy products.
In March, Pakistan removed sales tax exemptions on items used in agriculture, such as fertilizers and pesticides.