THURSDAY JANUARY 27: IMF's 'letter of comfort' sought: donors halt budgetary support

ISLAMABAD: Multilateral donors including World Bank, Asian Development Bank (ADB) and Islamic Development Bank (IDB) have reportedly halted budgetary support to Pakistan and requested the government to provide the Letter of Comfort (LoC) to be issued by the International Monetary Fund (IMF) prior to disbursement.
The government had sought a nine-month extension in the Stand-By Arrangement (SBA) - till September 30, 2011 - due to delay in the implementation of Reformed General Sales Tax (RGST) and additional time required to restore macroeconomic stability in the aftermath of the devastating summer floods. IMF had accepted the government's request.
"IMF SBA facility is almost suspended and therefore multilateral donors want LoC extended by IMF for loan disbursement under budgetary support," sources close to Finance Minister Abdul Hafeez Sheikh told Business Recorder. The government has received disbursement of $11.2 million on account of programme loans/budgetary support against projected $1,015.8 million loan disbursements during the first four months of the current fiscal year (July-October 2010).
Pakistan received a total of $365 million bilateral and multilateral assistance during the period under review which includes project lending as well. The government has also revised budget estimates downwards premised on expectations of lower disbursement of pledged assistance - from $4443.7 million to $4336.3 million.
Sources maintained that Finance Ministry officials informed an ADB delegation led by its Deputy Director General Central West Asia Department recently that 95 percent work on RGST had been completed. It is unclear whether the mission was aware that the remaining 5 percent, consisting of critical support in parliament, remained the major impediment to the implementation of RGST.
"Government is also planning to launch additional tax measures for flood affected people," Finance Ministry officials said adding, "we are looking for inflow of funds." Officials maintain that the Pakistani economy is facing challenges due to slow progress in flow of foreign investment, flood problems and poor performance of the manufacturing sector.
"Flow of foreign investment has been slowed down from 4.5 to 2.5 percent and manufacturing sector is not performing well," officials said. However exports are picking up and imports are low. The IMF is strictly monitoring Pakistan's performance indicators under SBA, and many FoDP countries are carefully evaluating these indicators prior to taking any decisions with respect to disbursement of their pledges. "As there has been poor cash inflow of disbursement from FoDP, the obvious conclusion is that Pakistan has not yet come out of the woods as far as its economic performance is concerned," argue analysts.