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January 12, 2013

IMF links bailout package with reforms agenda

 
January 12, 2013

ISLAMABAD: The International Monetary Fund (IMF) is linking its next bailout package of approximately $5billion for Pakistan’s ailing economy with the cooperation of major political parties in implementing a reform agenda beyond the upcoming elections.
This agenda will entail the removal of tax exemptions, the broadening of the tax base, the reduction of losses borne by public sector enterprises and the raising of energy prices.
The visiting IMF team, led by Jeffrey Franks, is holding negotiations with the Pakistani team for evolving strategies to avert a balance of payments crisis.
“After making heavy repayments to the tune of five billion dollars in the remaining few months of the current fiscal and in the coming financial year, there is no solution but to seek a fresh IMF programme after June 2013,” said former finance minister and renowned economist Dr Hafeez A Pasha on Friday. “However, a lot depends on timing – when Islamabad chooses to place a formal request with the IMF.” Significantly, Finance Division officials were not available for comment.
Meanwhile, despite the inflow of $688 million under the Coalition Support Fund head last month, the depletion of foreign exchange reserves continues unabated. And with the deposits of individuals having increased by $1 billion in the last one year, the pace of dollarisation looks poised to increase.
Insiders privy to the ongoing talks between Pakistan and the IMF team say the next bailout package will be extended under an extended Stand-by Arrangement Program, provided the above-mentioned conditions are met.
“With the full backing of the US, the IMF may agree to extend the new bailout package in the next few months,” said official sources. “However, we will have to demonstrate the willingness of major political parties to implement measures after the general elections and ensure the immediate removal of tax exemptions.”
The sources said that the pressure on the exchange

rate has led to a slowdown in remittances as well as the influx of export proceeds besides accelerated pressure for imports clearance. “Within a month, a full blown crisis could erupt,” they said.
Meanwhile, the IMF is also demanding that the FBR raise the tax-to-GDP ratio by 1.5 percent of GDP – from nine percent to 10.5 percent of GDP – in one go through policy action. This increase is expected to net the government some Rs 360 billion.
However, FBR authorities are trouncing this demand as unrealistic and have been telling the IMF that they can only increase revenue by a maximum of 0.7 percent of GDP, even if the Parliament approves the tax amnesty scheme.
In the event that the bill gets delayed, FBR officials have been arguing, the only other way to increase revenue would be for political parties to support the revenue body in its task to exert pressure on tax evaders.
Significantly, the FBR is also said to have told the IMF that RGST and Value Added Tax (VAT) cannot be introduced on an immediate basis. However, the revenue body claims to be working on coming up with Statutory Regulatory Orders to remove tax exemptions.