IMF agrees to release installment

ISLAMABAD: The International Monetary Fund (IMF) has agreed to release the next instalment of $1.2 billion of the Standby Arrangement Programme. The decision followed assurances over the implementation of reformed General Sales Tax (GST) from October 1.

However, a final decision on the release of the loan tranche will be taken later by the IMF Board.

The Fund has also agreed to relax some of the economic targets previously set for fiscal 2010-11, according to a senior member of the Pakistani delegation. This includes a further reduction in the tax collection target from Rs1,604 billion earlier proposed by the Federal Board of Revenue, according to sources.

The IMF delegation expressed reservations about the expected failure to achieve the economic targets for the July-September quarter set during the last meeting between the two sides.

The failure to implement reformed GST, eliminate subsidies on electricity and limit government borrowing from the central bank were the issues raised by the IMF during the discussions.

The IMF added that the next instalment shall be contingent upon the fulfilment of economic targets agreed upon during the meeting.

In response, the Pakistani delegation explained that the delay in the implementation of reformed GST was due to the failure of negotiations between Islamabad and the provinces regarding the collection and distribution of GST on services.

However, they informed the IMF that reconciliation between the provinces and the federal government was likely soon.

The Pakistani delegation also provided a schedule for the elimination of subsidies on electricity and outlined a plan of action to meet the shortage of electricity and other economic challenges, sources said.

The IMF was apprised that economic targets will be revised downwards after estimates of flood losses are made available. They outlined the damages caused by massive flooding to the infrastructure and economy and offered a conservative estimate of $5 billion in losses. The delegation predicted that the agriculture sector will suffer the most in the aftermath of the floods and hence GDP growth will be stunted. The balance of payments will worsen as the trade deficit widens following increased imports of foodstuff and agricultural inputs.

As a result, the IMF has agreed to relax the conditions for the next instalment, but subsequently stressed the realisation of reformed GST schedule from October 1.

According to sources, the delegation will also attempt to obtain additional emergency funding of around $2 to $3 billion for the reconstruction of areas affected by the floods.

Published in The Express Tribune, August 27th, 2010.