Pakistan will seek release of two IMF tracnhes in one go

ISLAMABAD. Aug 25: Pakistan’s economic managers are not sure that they would be able to convince the International Monetary Fund (IMF) authorities for release of two remaining installments of $2.6 billion in one go during ongoing fifth review at Washington, official sources informed here on Wednesday.

There are chances that IMF authorities might agree for release of single tranche to Pakistan owing it’s difficulties owing to damages caused by the devastating floods across the country, the sources added.

Pakistan’s economic team would try its level best to convince the IMF authorities for the release of remaining two installments in one go at the end of fifth review of Pakistan’s economic performance. However, there are less chances of release of two installments by the IMF authorities and single tranche of $1.3 billion might be agreed at the end of review, explained the sources.

In Fall 2008, the Pakistani authorities embarked on a stabilization program, supported by US$7.6 billion under a 23-month SBA. This exceptionally high level of financial support was necessary given the country’s sizeable external imbalances and the risk of large capital outflows. In August 2009, the IMF extended the program to 25 months and raised its support to US$11.3 billion to help address increased risks and financing needs.

At the conclusion of fourth review under Stand-By Arrangement for Pakistan the IMF had approved $1.13 billion Disbursement on May 14, 2010. The Executive Board of the International Monetary Fund (IMF) had completed the fourth review of Pakistan’s economic performance under a program supported by a Stand-By Arrangement (SBA). The completion of the review had enabled the immediate disbursement of an amount equivalent to SDR 766.7 million (about US$1.13 billion), bringing total disbursements under the arrangement to an amount equivalent to SDR 4.94 billion (about US$ 7.27 billion). The Board had also approved rephasing three remaining disbursements into two, while keeping the total access under the arrangement unchanged.

Pakistan has sought three waivers from the International Monetary Fund (IMF) for missing three performance criteria with a clear decision that it would not seek more loans for flood-related rehabilitation and reconstruction needs.

Also, the government has decided to freeze federal and provincial public sector development programmes (PSDPs) at last year’s position to create fiscal space to cover the requirements of the current crisis. The government’s initial estimates now suggest that the current year’s economic growth rate would fall to about 2.6 per cent against a budgetary target of 4.5 per cent because of the negative impact of floods on agriculture and industry and partly on services sector.

Pakistan had missed the fiscal deficit target agreed with the IMF both at the conclusion of the last financial year and also for next year because of the floods. Also, the government has not been able to eradicate subsidy on electricity by July 1, 2010, as committed to the international lending agencies while zero borrowing limit from the State Bank of Pakistan has been breached by Rs40 billion.

These are three areas where the government has asked the IMF to give waiver from performance criteria, following the Fund’s initial appreciation of Pakistan’s fiscal difficulties arising out of the devastating floods. Pakistan has also requested the IMF to release at once two remaining tranches of $2.6 billion from the $11.3 billion to create the fiscal space. The authorities anticipate that the IMF may agree to release only $1.3 billion immediately after the ongoing talks.

Senior government officials said Pakistan would plead for grants from multilateral and the international community to cope with rehabilitation and reconstruction challenges and in no case would pile up more foreign loans for reconstruction. They said the government had also decided not to seek rescheduling of foreign loans, not even moratorium on mark-up repayments, at least at this stage.

They said the IMF would be given a concrete assurance that it would not step back from the planned introduction of reformed general sales tax on all goods and services with effect from October 1, although a mechanism for collection of GST on services was yet to be worked out with the provinces. Most probably, the Sindh government would be allowed, if it still insisted, to collect GST on telecommunications and four other services and retain tax collection responsibility at the federal level for the current year.

Likewise, the provincial governments have been told in very clear terms that they would have to create a fiscal surplus of Rs180 billion during the current year through re-appropriation of their development schemes towards flood rehabilitation. Another Rs50 to 70 billion would be made available by the federal government to pump in about Rs250 billion into the reconstruction effort. As a result, the provinces have been asked to curtail their development programmes from budgetary announcements of Rs425 billion (all provinces) to about Rs245 billion utilization achieved last year.

The federal government also plans to restrict its development programme at last year’s level of Rs275 billion and create a surplus of Rs50 billion for the flood-related rehabilitation. The officials said the provinces had made a commitment to the federal government at the time of budget announcement to restrict their development budgets at Rs373 billion, but later violated the commitment by allocating Rs425 billion for PSDP. They said three provinces – Punjab, Khyber Pakhtunkhwa and Balochistan – stood by their commitment but Sindh allocated Rs50 billion more than the agreed amount.