The 10-day long talks between International Monetary Fund (IMF) and the Ministry of Finance ended inconclusively here on Friday with the Stand By Arrangement (SBA) remaining stalled. The press statement issued by the IMF states that "it remains committed to the ongoing dialogue with the Pakistan authorities and will continue discussions on their reform programme."
However more telling is the fact that the press statement does not contain any quantifiable targets like the budget deficit. Informed sources had revealed earlier to Business Recorder that the Fund had agreed to a 5.3 percent deficit, however, this is not in the press statement further strengthening the view that there was no agreement on the revenue generating measures which would be critical to an agreement on the deficit.
The four measures that were reportedly agreed between the two teams were (i) 6 percent increase in power tariff immediately (in an effort to make good the commitment made to the Fund in November that there would be 2 percent tariff rise every month that remains unfulfilled) and 2 percent rise every month thereafter till the end of the current fiscal year; (ii) imposition of 15 percent flood surcharge; (iii) additional 1.5 per cent Special Excise Duty (SED) from April 1, 2011; and (iv) the implementation of the Reformed General Sales Tax from next fiscal year with all provincial governments on board, as per the Ministry of Finance.
The breakdown in talks between the Fund and the Finance Ministry was attributed to reportedly refusal by the President to entertain the four-revenue generating/subsidy reducing measures. While these measures were extremely challenging politically especially given the evolving political scenario in the country, reports that the President has categorically refused to implement the last day's agreements between the Fund and the economic team have baffled many in the federal capital.
Questions are being raised as to whether the Minister of Finance had informed the President about the crucial talks with the Fund with respect to revenue targets or whether the President did a volte face at the eleventh hour. Business Recorder repeatedly tried to contact the spokesman of President for his comment but did not receive any response from him.
The high ups of the Finance Ministry remained tight lipped to the question whether President did not respond positively to their proposal for revenue generating measures. However, they claimed that the two sides have held productive discussion and talks would continue for another few days even after departure of the visiting IMF mission. In reply to a question, they said that the IMF programme was meant to deliver and with more or less Pakistan had to deliver on the agreed performance benchmark.
The press statement of the IMF said the Fund mission led by Adnan Mazarei visited Islamabad during March 1-11, 2011. "The IMF mission held constructive discussions with government and central bank officials on the recent developments, the outlook for Pakistan's economy for the rest of FY 2010/11 and 2011/12 and on economic policies to restore macroeconomic stability in the context of the improved external current account and international reserves. We also discussed structural reforms to strengthen public finances and the financial sector."
"Discussions on economic stabilisation focused on addressing inflation, containing the budget deficit, reviving growth, and meeting the challenge posed by higher international oil prices. There was agreement on the need to reduce the budget deficit in the current financial year. The mission welcomed the recent expenditure restraint and tax policy and enforcement measures being considered by the government to mobilise additional revenue. These measures, if implemented promptly and consistently, will help to improve the budgetary position. The mission also welcomes the government's efforts to lower recourse to State Bank of Pakistan (SBP) borrowing since late-December."
"Further, expenditure prioritisation needs to protect pro-poor spending and flood assistance and reconstruction efforts. Moreover, a binding agreement will be needed with provinces on their budgetary positions to assure attainment of the deficit target. Given the large domestic borrowing needs, the Ministry of Finance needs to improve debt management. Looking ahead, significant fiscal consolidation will be needed in 2011/12 in order to reduce inflation and ensure debt sustainability. The lower budget deficit would also help manage the impact of higher oil prices on the economy."