Third IMF tranche hangs in the balance

ISLAMABAD: The fate of the $850 million third IMF tranche hangs in the balance following ‘inconclusive’ talks between a Pakistani delegation and Fund’s officials.

‘The International Monetary Fund has linked the release of the third tranche with the performance of the economy and fulfilling of the remaining conditions in the first quarter (July-September) of 2009-10,’ a source told Dawn.

Islamabad has failed to meet the commitments made in the $7.6 billion standby arrangement. It received the first tranche of $3.1 billion in November last year and the second of $840 million in March 2009.

The IMF officials will carry out next review of the country’s economy in September and that would determine the fate of the third tranche.

The third tranche was expected to be released by the end of June or in early July.

The IMF is reviewing Pakistan’s March-June economic indicators and measures taken in the budget 2009-10 ahead of giving a go-ahead for the release of the tranche.

A 23-member delegation led by Adviser to the Prime Minister on Finance Shaukat Tarin recently held week-long talks with IMF officials in Istanbul.

According to the source, the delegation accepted further harsh conditions.

Initially, the IMF and World Bank officials were convinced about 17.7 per cent increase in power tariff but later accepted to a 31 per cent raise, the source said.

The talks on the issue would start in Islamabad on Monday,’ the source said, adding that Pakistan was left with no option but to approach the US for some relief.

The IMF rejected long-hours of loadshedding as a reason for not increasing power tariff and advised the team to improve management to avoid public criticism. The Fund also asked the government to clear the Rs60 billion circular debt by the end of July.

‘The payment of circular debt itself will improve power generation,’ the source quoted the IMF officials. The commitments must be honoured, the delegation was bluntly told.

The source said the Fund had also proposed over a 20 per cent increase in the price of diesel as part of resource mobilisation. It also raised objections over the changes made recently in the tax administration reforms and asked for two mainstreams in the taxation system -- Customs and Inland Revenue.

The Pakistan team committed to the IMF that a notification establishing the two streams of taxation would be issued in early August and would be implemented from September.

Before the departure of the Pakistan team for Istanbul, the government had made amendments in the tax administration reform project (TARP) to address the concerns of the customs group which was opposing the establishment of the Inland Revenue for the merging of sales tax into income tax.

The government established the Inland Revenue but the customs group challenged the decision in the Islamabad High Court which gave an interim order to maintain the status quo.

A source in the finance ministry told Dawn that the IMF had also raised objections over revenue realisation and expenditure targets. ‘The revenue targets are overstated and expenditures understated,’ the IMF said.

According to the IMF estimates, the budget deficit would not be around 4.9 per cent but would rise to 5.5 per cent to 6 per cent because of the measures taken in the budget, including appointments of over 90 federal ministers and advisers.

The source said that to save the IMF programme, the Pakistan team contacted the president’s secretariat for issuing an ordinance to protect the Rs122 billion collection, otherwise the budget deficit would rise by another one percentage point.

An example of lack of coordination among members of the Pakistan team was on the issue of Value Added Tax (VAT).

An independent economist Hafiz Pasha, who accompanied the delegation, informed the IMF that it would not be possible to implement VAT from next fiscal year because of a possible resistance from the provinces. But, the finance secretary assured the Fund that there would be no problem in introducing the VAT. link....