IMF tranche in jeopardy?

The United States administration has withdrawn its support for Pakistan to get waiver from the International Monetary Fund (IMF) to seek release of next tranche of $3.4 billion under Stand-By Arrangement (SBA) and conveyed to the Gilani-led government that from now onwards it has to directly deal with the Fund for future alignment.
As far as seeking concessions from IMF is concerned, the US administration gave this clear signal to Islamabad during Pak-US dialogue held in Washington last month and asked the Pakistani team at the talks to satisfy the IMF on all controversial issues linked with the release of fifth tranche of $3.4 billion before the end of the current calendar year.
Sources said the government authorities were visibly perturbed over a dramatic change in US authorities' approach towards Pakistan for persuading key lending agencies like IMF to extend financial support to Islamabad even if it failed to meet the prerequisites for the release of any tranche of $11.3 billion programme under the mutually agreed SBA.
The government strategy to extract concessions through waivers from IMF worked well for the last one-and-half-years and helped it get four instalments amounting to $8 billion, although it had missed key conditionalities linked to the release of instalments particularly in areas such as borrowing from the State Bank of Pakistan (SBP), fiscal deficit, tax and power sector reforms.
The changed US attitude towards Pakistan in relation to the release of the new tranche is a major reason behind IMF's seemingly non-conciliatory approach towards Pakistan this time. The review mission of the Fund currently is in Islamabad to examine what progress this South Asian country government has made to fulfil requirements to qualify for fifth instalment.
Well-placed sources in the federal capital told Business Recorder that the mission is in no mood to hold out the promise of any concession to Pakistan on issues such as imposition of reformed general sales tax (RGST) and power and tax sectors' reforms. On the very first day of policy level talks, IMF team had conveyed to Pakistani official team headed by Finance minister Dr Abdul Hafeez Shaikh that the Fund would not be in a position to take Pakistan's case to the board for approval of fifth tranche if it failed to meet all the pre-requisites starting from RGST to putting an end to circular debt. This situation has put the Pakistani negotiating team in a difficult position as the talks are progressing towards conclusion.
Our staff reporter Zaheer Abbasi from Islamabad adds: Officials circles, however, contradicted the impression that the Fund was no longer sympathetic towards Pakistan economy's woes and had taken a hard approach to conditionalities in relation to release of its fifth tranche. In fact, sources added, the talks with the IMF visiting mission were moving ahead smoothly and hopefully all the issues, including RGST, would be resolved in the next couple of days as IMF delegation had extended its stay by two days and final policy-level talks would continue till Friday.
For example, the sources said, the Fund had taken a lenient view of country's fiscal deficit as it had agreed to allow Pakistan to increase its budget deficit from 4 percent to 4.7 percent for FY 2010-11 to meet the additional expenditure on account of reconstruction in flood-affected areas.
The mission has linked the release of next tranche to introduction of Reformed GST in the Parliament prior to the next meeting of its board, the official circles claimed.
The financial teams also called on Prime Minister Gilani during the day and discussed with him the possibility of taking the issue of RGST to the Council of Common Interests (CCI). The Prime Minister told the mission that the matter had already been taken up at the previous CCI meeting on July 28 and that an informal agreement was reached on the issue. Going to the CCI would unnecessarily lead to create an impression that the whole process was now being restarted. He also told the mission that he wanted his economic team to implement the agreements.
Sources claimed that draft bill on enforcement of RGST would be introduced in the Parliament within a very short span of time. It was also decided that the economic team would immediately brief the parliamentary party of the PPP about the economic situation and talks with the IMF, and subsequently, coalition partners would also be taken into confidence.
A water and power ministry official requesting anonymity said the IMF mission had expressed serious concerns regarding a lack of reforms in power sector and wanted a clear roadmap to eliminate circular debt reaching Rs 151 billion. The government has assured the visiting IMF mission that the size of circular debt would be significantly reduced by passing on tariff of 17.5 percent in the ongoing fiscal year, which would fetch between Rs 45 and 50 billion for the government. And, about Rs 50 billion would be recovered through measures planned for reforms in power sector.
The raise of about 2.2 percent in tariff is expected to be notified on November 7 to be effective from November 1, 2010. The IMF also wanted elimination of "commodity circular debt" which, according to State Bank of Pakistan, has piled up to Rs 422 billion.
According to them, banks have been found reluctant towards commodity financing because of non-clearance of previous loans by the provinces and Utility Stores Corporation (USC). Concomitant increase in mark-up rates because of a tight SBP Monetary Policy has also contributed to expanding the size of loans. The provinces were required to pay back loans prior to next crops.