Failure to meet criteria: relations with IMF will be restricted to Article 4

The International Monetary Fund (IMF) and Pakistan relations will be restricted to Article 4 from next month onwards as the latter has not been able to meet the criteria agreed under the Stand-By-Arrangement and decided not to take fresh loan for repayment of instalments, sources in the Finance Ministry said.
Sources said the government has failed to meet the agreed fiscal deficit target of 5.3 per cent for 2010-11 and undertake reforms in power sector as well as implement Reformed General Sales Tax (RGST). They said the IMF also considers that Pakistan should not waste energy on revival of SBA and economic managers of the country believe that they are comfortably placed on the external side for repayment of first instalment of $1.2 billion to the Fund due from February 2012 and does not need to take a new loan for this purpose. The IMF mission is expected to visit Pakistan under Article 4 for review of Pakistan''s economy.
They said that Pakistan would remain engaged with the IMF if any negative shock compels the country to make a request to the Fund for fresh loan after June 2012. The thinking in the economic team is that things are manageable till June 2012 because of projected growth of 5 per cent in exports and 2 per cent current account deficit for the current fiscal year and dismissed the impression that decision to come out of the IMF programme was politically motivated to avoid strict fiscal conditions and take difficult economic decisions because of upcoming general elections.
They admitted that the decision would have repercussions on the World Bank and Asian Development Bank loans and budgetary support in the current fiscal year, but said Pakistan faced similar situation during the last fiscal year as well. The way forward, they said is to pursue tight fiscal policy and protect the stabilisation path and recovery ensuring that macroeconomic stability achieved so far is not damaged in coming months.
They said power sector and fiscal side would be major challenges for the economic managers and may pose threat to the economic stabilisation. The government plans to bring in private sector to the power sector and pursue the difficult policy of openness in the country through tariff liberalisation. The problem of circular debt is grave and complicated and various measures have to be taken simultaneously, as reforms in parts would not be helpful to minimise its impact on the economy. The circular debt could reach Rs 250 to Rs 300 billion if management, regulatory and non-recovery issues were not tackled on fast track basis. At least 10 to 12 per cent tariff increase would have to be made along with reforms in the current fiscal year, they added.