The IMF and the Government

According to informed sources, the federal government is considering winding up the Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) as one of several policy options. Three facts militate against the likelihood of the government supporting this option. First the original SBA, estimated at 7.6 billion dollars, has already been released and availed by the government as budgetary support.
To assist Pakistan address the increased balance of payment needs, the IMF approved, in August 2009, an augmentation of access by an amount equivalent to 3.2 billion dollars, bringing the total financial support to 11.3 billion dollars equivalent to 700 percent of Pakistan's quota or 6.3 percent of its GDP, a rather disturbing situation.
The period of the end of the SBA was also enhanced from the original 23 months, envisaging the end of SBA by September 2010 to end 2010 - or by a period of around three to four months.
This period enhancement for 3.2 billion dollars was considered appropriate, given that the IMF was augmenting the SBA on the understanding that the government would be able to convert the 5.2 billion dollars aid pledges, made at the Tokyo Friends of Democratic Pakistan meeting held in April 2009, into disbursements enabling it to repay the augmented amount. That has not happened. And therefore, the government's continued reliance on the augmented tranche release.
Second, it must be borne in mind that the 431 million dollars of emergency assistance released to Pakistan recently is not part of the SBA but in response to the devastating floods; and therefore its release in no way indicates that the IMF is content with Pakistan's compliance/performance record with respect to key macroeconomic reforms as identified in the Letters of Intent.
Thus, it comes as no surprise that given the failure of the government to comply with critical IMF conditions, there was no tranche release under the SBA. Third, the LoI submitted by the federal government to the IMF Board for the release of the 431 million dollars emergency assistance reiterated the conditions for the tranche release under the SBA:
"We will continue to cooperate closely with the Fund in the context of our SBA, both to provide support for our reform efforts and help provide a consistent economic and financial framework in the challenging period ahead. Specifically, the existing GST will be transformed through the introduction of a reformed GST capturing the features of a VAT, enabling us to start raising the tax revenues required for sustainable growth.
We also remain committed to reform the electricity sector in order to eliminate the tariff differential subsidies and resolve the circular debt, and to address the quasi-fiscal implications of commodity credit. We will adopt measures to cap the fiscal deficit at 4 percent of GDP before the impact of the flood."
In this context it is relevant to note that the GST transformation seeking to reduce existing exemptions through reform or through the issuance of SROs has been deferred by a month as it remains highly controversial, the circular debt has risen again to 500 million rupees, and given the rise in basis points by 50 recently, which would negatively impact on productivity with its consequent impact on tax collections, it does not appear likely that the tranche release conditions would be met till the end of the year or that the fiscal deficit would be containable at 4 percent of the GDP.
So what are the options in front of the government? If it decides to defer the tax exemptions for the rich and influential, then it must massively slash its expenditure to approximate the revenue. There is no other option. Ideally the government should reduce non-development expenditure, including halving the number of ministers, and raise revenue through reduced corruption as well as tax reforms.