Fifth review under SBA rescheduled

ISLAMABAD: The fifth review of Pakistan's performance as set out in the technical memorandum of understanding under the Stand By Arrangement (SBA) has been further postponed, according to Staff Report on International Monetary Fund's (IMF) website. The review was originally scheduled for 15th August 2010 but was later delayed till end September/November due to devastating floods in Pakistan.

The fund staff met with Pakistani officials for the fifth review during September end and early November, however, the government's failure to comply with the critical conditions of the SBA led to rescheduling of the review. This was the first time during the ongoing SBA when the government of Pakistan failed to convince the IMF to release a scheduled tranche with partial compliance of critical conditions.

According to the Staff Report, it is expected that the fifth review may take place in early 2011 with a view to presenting to the IMF Board a request for the completion of the fifth review before end June 2011. The sixth review originally scheduled for 15th November 2010 has been delayed till 15th August 2011.

The rescheduling of the review indicates that the government has committed to comply with the remaining critical conditions by next year. These were noted in the Letter of Intent submitted by the government to the IMF Board which led to the rephrasing/rescheduling of the review.

The LoI is as follows: The government of Pakistan assured the IMF that the provincial part of the legislative package for the Reformed General Sales Tax (RGST) on services will be submitted to the provincial assemblies shortly, as the federal part of the package has been submitted to the National Assembly.

The government claimed progress in devising a plan to ensure financial viability of the electricity sector, which - together with the package of other measures - will enable the authorities to achieve the budget deficit target of 4.7 percent of GDP, revised from the original target of 4.0 percent of GDP to accommodate additional flood-related spending.

The Government and State Bank of Pakistan believed that extending the arrangement to September 30, 2011 will support confidence and help restore macroeconomic stability at a time when our economy is still recovering from the recent devastating floods. The government remained committed to implementing a fund-supported program, and will continue to consult with the fund in accordance with the relevant Fund policies.

The Staff Report of the IMF notes that the structural benchmark on implementing a value-added tax on July 1, 2010 and the end-June 2010 performance criteria on general budget deficit and government borrowing from the central bank were missed. Subsequently, the economic conditions deteriorated markedly as a result of the floods, requiring significant amendments to the 2010/11 budget. Corrective actions needed to complete the fifth review could thus not be implemented before the expiry of the SBA.

Discussions between the authorities and the Fund staff on the ways and prior actions to complete the fifth review are ongoing. Among the main issues, the change of tax reform from the implementation of a value added tax to a reform of the existing general sales tax (GST) has required significant modifications to the proposed legislative framework and renewed consultations with provincial governments, the private sector, and other stakeholders. Draft legislation to reform the GST on goods (the federal part) was introduced in the National Assembly in November 2010 and is to be complemented by the legislation to cover GST on services (the provincial part). The authorities and staff are discussing the measures needed to achieve the authorities' revised 2010/11 budget deficit target of 4.7 percent of GDP, while accommodating flood-related assistance. These discussions also cover energy sector reform, which is needed to increase electricity output, curtail the inter-enterprise debt of the electricity sector (circular debt) and contain untargeted electricity subsidies, the report said.

A nine-month extension will provide the authorities with time for completing the GST reform, implementing a set of measures to correct the course of fiscal policy, and amending the legislative framework for the financial sector. It would also allow time to establish a track record of performance. Full implementation of a reformed GST involving a broader base, reduced exemptions, and input crediting, both at the federal and provincial levels, parliamentary passage of the amendments to the State Bank Act and the Banking Companies' Ordinance, agreement on measures to achieve the revised fiscal deficit target, including a realistic envelope for energy subsidies in 2010/11 based on a plan that is yet to be endorsed by the Asian Development Bank and World Bank staffs, and third-quarter fiscal performance that is consistent with achieving the full-year target are among the actions that will be critical for the completion of the fifth review, it said.

The IMF Staff expects to conduct discussions for the fifth review in early 2011 with a view to presenting to the Board a request for the completion of the fifth review before end-June 2011, at which time, staff will also propose a set of performance criteria for end-June 2011 and structural benchmarks that would form the basis for the sixth and final review under the SBA.

The IMF staff supported the authorities' request for an extension of the arrangement until September 30, 2011, IMF staff report added. On November 24, 2008, the IMF's Executive Board approved a 23-month Stand-by Arrangement (SBA) for Pakistan that was augmented on August 7, 2009 and extended through December 30, 2010.

The government had requested further extension of nine months, to implement the policy measures envisaged under reform programme, and to allow sufficient time to complete the remaining fifth and sixth reviews under the SBA. A successful fifth and sixth review would lead to the release of two remaining IMF tranches estimated at 1,149.815 million Special Drawing Rights (SDRs) each.