Two stalled bills: IMF unlikely to be convinced

The government is unlikely to convince the International Monetary Fund (IMF) that it will be able to pass the two money bills stalled in parliament since November 2010, with the PML (N) decision to withdraw its support for the government, sources exclusively told Business Recorder.
"The PML (N) was the only party in parliament that we could have convinced about the necessity for the passage of the two money bills as our coalition partners had already indicated their unwillingness to support them," Finance Ministry sources said.
PML-N support was, therefore, considered critical for the approval of legislation from Parliament to approve revenue generating measures to contain the fiscal deficit, especially when coalition partners had refused to support the government on all benchmarks agreed with the Fund, sources added. Consequently the IMF's $11.3 billion Stand-By-Arrangement (SBA) stalled from May 2010 will most probably continue to be suspended.
The passage of key legislative benchmarks agreed with the IMF is highly unlikely this year. Four legislation's are expected to remain pending, namely the Finance Amendment Act 2010 for imposition of flood surcharge, imposition of an increase in Special Excise Duty, State Bank of Pakistan Ordinance 2010, and implementation of the controversial 'reformed general sales tax' (RGST).
Parliamentary approval of 15 percent flood surcharge and 1.5 percent additional special excise duty is also unlikely and would further compromise Federal Board of Revenue's (FBR) ability to meet the downwardly revised revenue target of Rs 1630 billion and would consequently compound the problem of fiscal deficit and inflation. Oil shocks with prices rising due to the continuing unrest in Libya would also negatively impact the country's foreign exchange reserves.
Additionally, the escalation of political temperature between Pakistan People's Party (PPP) and PML-N may compromise the agreed budget surplus by the provincial government. The fiscal deficit in such a situation will not be containable at a sustainable level.
A high-up of the Ministry of Finance confirmed to Business Recorder that the IMF delegation will arrive in Islamabad on February 28 to resume talks. Finance Ministry would give them budgetary numbers till end-June and would discuss next year's budget as well. "And hope for the best", said one official who sounded sceptical about the likelihood of the Fund agreeing to release the tranche. The IMF is said to have made it clear to the government that it would not approve the release of the second last tranche till it is satisfied that the government has met all the benchmarks.
According to new fiscal framework likely to be presented to the IMF team the government has reduced expenditure by Rs 20 billion in current expenditure as well as realised considerable savings from Benazir Income Support Program (BISP) and internally displaced persons (IDPs) allocation for the current fiscal year.
The new fiscal framework proposes imposition of 15 percent flood surcharge and increase in the special excise duty (SED) rate of 1.5 percent from March 2011 to generate Rs 36 billion during the remaining period of current fiscal year. The proposed measures also envisage Rs 5 billion from broadening of tax base by taking enforcement measures and another Rs 5 billion through recovery of arrears. The proposed revenue and administrative measures are estimated to generate additional revenue of Rs 46 billion, provided these measures are effective from March 1, 2011.
An official said that the dilemma for the economic team is that all bilaterals and multilaterals have linked release of budgetary support assistance with the issuance of letter of comfort by the IMF. An official said that the economic managers tried to win over the IMF team during the last meeting saying that it would take all the possible measures to contain the fiscal deficit below 6 percent. But the IMF insisted on tangible measures, rather than on assurances.
The government has asked the provinces to ensure around Rs 100 surplus budget for the current fiscal year from Rs 300 billion being transferred to them under the new National Finance Commission Award (NFC). Development expenditure has already been reduced by Rs 100 billion and may face a further merciless cut in case the revenue shortfall can not be contained.