Tuesday, July 30, 2013

Actions ahead of EFF - IMF Loan

Pakistan has to take a number of prior actions before qualifying for $5.3 billion International Monetary Fund (IMF) package under Extended Fund Facility (EFF). According to this newspaper on 27th July, 2013, the Federal Government is required to reach an understanding with the provinces on budget surplus, issue notices to 10,000 potential taxpayers and increase electricity tariff to eliminate power sector subsidies at least one week before September 4 IMF board meeting for the consideration of request for the new loan. One more condition might be that the State Bank of Pakistan should raise the discount rate by 150 basis points in its next monetary policy announcement because the Fund's assessment was that inflation could be in double-digit figure during the current year. It seems that the government is already moving in that direction. The issuance of notices to the potential taxpayers would begin from 15th August, 2013 to bring them into tax net before the IMF board meeting. Power sector reforms in the energy policy are likely to be announced by the end of the current month after approval from the Council of Common Interests (CCI).

The condition of reaching an understanding with the provinces about the budget surplus could also be met before the deadline if Sindh and KP governments are properly persuaded to cooperate with the Federal Government for a national cause. This was essential because after the 7th National Finance Commission Award, tilt of resources had been shifted from the centre to the provinces and the role of provincial governments had become very critical in fiscal management.

It is easy to find out why the IMF authorities are insisting on prior actions before taking the country's case for EFF to the Executive Board. This was due to the poor credibility of the country in fulfilling the agreed conditionalities in the past. On a number of occasions in the past, Pakistan failed to meet stipulated conditions on one pretext or the other after the disbursement of a tranche and then waivers were sought to continue with the programme. In international circles, Pakistan also came to be known as one-tranche country due to its inability to continue with various programmes after only a few months. At one time, even figures were doctored to show that a certain conditionality was met. This time the Fund staff did not want to take any chances. The implementation of certain prior actions will also make it easier for the Fund staff to strongly advocate Pakistan's case before the Board. In fact, the head of the IMF mission had already indicated at a press briefing in Islamabad that a staff level agreement with the authorities on the key elements of an economic reforms programme had been reached subject to timely completion of prior actions to be taken by the government. The details of the prior actions now revealed, indicate the urgency to manage the public finances of the country properly and bring down the level of budget deficit to a manageable level. The condition of undertaking serious efforts to broaden the tax base, eliminate subsidies to power sector and persuading the provinces to have surplus budgets before the case was put to the Board, seem to be directed to achieve this objective. It would be no surprise if prior conditions were also attached to successive tranches of the EFF when they are due for disbursement. Hopefully, the present government seems to have done its homework properly to ensure that various conditionalities attached to the EFF are tolerable to the vast majority of population and the programme is not derailed in between so that credibility of the country is improved overtime. The intention of the government to place the programme before the parliament is of course a step in the right direction to take various parties on board for developing a consensus on the matter and ensuring the continuity of the programme.

Copyright Business Recorder, 2013

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