Pakistan's unsavoury relationship with the IMF

The ongoing Stand-By Arrangement (SBA) with the IMF has seen many ups and downs, with frequent grant of waivers whenever Pakistan failed to meet the prescribed conditionalities. The latest hurdle in continuing with the programme is the deadline of December 31, 2010 for the imposition of the Reformed General Sales Tax (RGST) due to the resistance of the Parliament to enact the enabling legislation.
According to a news item in the Business Recorder on 20th December, the government has now formally submitted its request to the IMF to extend the SBA - a dollar 11.3 billion bailout package - for three months i.e. up to March 31, 2011. A very interesting revelation was made by an official of the Finance Ministry that the request for an extension to secure the two remaining instalments of dollar 3.4 billion, and dollar 11.3 billion SBA was actually made in the second week of December, knowing fully well that the deadline of December 31 was certainly going to be missed to introduce the RGST - a condition linked by the Fund for releasing the remaining dollar 3.4 billion to Pakistan.
However, submission of the formal request was intentionally delayed to keep up the pressure to impose such a tax, within and outside the parliament. Reportedly, Pakistani authorities are confident that the IMF will accept their request to extend the deadline till March 31, 2011, in order to enable them to convince the members of Parliament about the desirability of imposing the RGST.
Contrary to expectations of the government, the extension in deadline by the IMF, even if granted, may not resolve the problem of resistance to the imposition of the RGST. Earlier, Pakistani authorities had given a firm commitment to impose such a tax in the first half of the current fiscal year but failed to fulfil their obligation and their experience in the next three months may not be any different in the absence of any change in the ground realities. In fact, resistance to the RGST has grown rapidly in the recent past, both within and outside the parliament, due to the negative propaganda and the uncooperative attitude of the political parties. A perception has been created that such a tax is regressive, would be highly inflationary and is being imposed on the behest of foreign elements. In desperation, the government is now reported to be looking for other alternatives. According to certain sources, the fiscal authorities are working on 'Plan B' that envisages the withdrawal of sales tax exemptions and zero-rating of goods in major sectors through a cabinet decision in case their efforts to have parliamentary backing for RGST end in a deadlock. Some sources have also disclosed that instead of introducing an entirely new law, the FBR had the legal authority to continue with the existing VAT regime and levy FED in VAT mode to increase documentation by amending the Sales Tax Act, 1990. On the political front, President Zardari has requested the PML-N chief Nawaz Sharif for his co-operation for getting the controversial RGST approved from the National Assembly, while his government will address some other important issues, including the promulgation of a new accountability bill.
In our view, there is an urgent need at this stage to avoid political brinkmanship and develop a proper consensus on certain vital issues, fundamental to the health of the economy. It needs to be understood that the country has to learn to live within its own means, whether such an advice is dictated by the IMF or is accepted through self-analysis/education. Undoubtedly, public finances of the country, measured from every angle, are in a deplorable shape and the RGST is probably the best available tool to stop leakages, and widen the tax net to collect more revenues to meet the growing expenditures. The criticism from certain circles that agricultural income taxes, checking of corruption or reduction of certain expenditures could more than compensate for the imposition of RGST may be valid but no harm will be done if all these measures could be implemented simultaneously to give a much needed boost to the revenue side of the budget and reduce the outstanding stock of debt.
The only care that needs to be taken in the process is that the poor and those living at a subsistence level are not unduly hurt. This is probably the only way to keep the inflation down, provide more credit to the private sector in order to generate a higher growth rate, increase employment, reduce the interest rates and resolve other endemic problems of the economy. Both the government and opposition parties need to develop a consensus on the matter for the larger interests of the country. Another contentious issue is the unnecessary bashing of the IMF by all and sundry, including the political parties, for dictating its terms, without realising that it provides advice and untied resources when the economy of the country is usually in shambles and other sources of financing the current account deficit are not readily available. Of course, certain adjustment measures are prescribed to rehabilitate the economy but these, in any case, had to be followed by the authorities themselves to stabilise the economy and keep it solvent. The only way to avoid or say good-bye to the IMF is to keep the country's economy in good order by undertaking self-correcting, appropriate policies so that there is no need to look for outside resources.