Monday, November 17, 2008

IMF Sets Harsh Conditions

Found this article on Business Recorder. Quoted directly from source.
All subsidies to go; no SBP intervention in foreign exchange market: IMF sets harsh conditions


ISLAMABAD (November 17 2008): Pakistan will have to withdraw subsidies across the board by the end of the current fiscal year and bar the State Bank of Pakistan (SBP) from intervening in the forex market. These are two major conditionalities the International Monetary Fund (IMF) has placed on Pakistan under its rescue package.

The subsidies in power, gas and petroleum products will be eliminated by the end of this fiscal year, sources told Business Recorder. This is one of the two major conditions put by the IMF prior to approval of loans amounting to $ 7.6 billion as rescue package, sources added. This condition would be much harder if it was applied to agricultural inputs as presently the government provides a subsidy of Rs 32 billion on fertilisers.

The government has not made the IMF conditions public so far. But insiders are of the view that some of the conditions are very harsh and the government will have to burden the people, especially the poor, for meeting the Fund's demands.

The IMF is of the view that Pakistan would have to increase the tax-to-GDP ratio to 15 percent by 2013. This issue, according to sources, is also considered to be harsh in the sense that the government would have to increase indirect taxes, instead of direct taxes. The indirect taxes will, again, hit the people. As a result, the ratio of general sales tax may have to be increased.

However, sources did not say whether the tax-to-GDP ratio would be taken to 15 percent by increasing indirect taxes. They were of the view that the government could improve the tax net by bringing more people under direct taxes.

According to sources, the IMF is also keen that banks' profits should be linked with the inflation rate prevalent in the country. Besides these conditions, the IMF has also asked Pakistan to keep getting loans from SBP, within certain limits. They said that IMF wanted Pakistan not to get loans from the SBP till the conclusion of the IMF programme. However, the government successfully told the IMF that SBP credit could be kept within certain limits, and full ban on the facility would be very hard to meet.

Pakistan has also been asked to bring fiscal deficit to 4.3 percent of the GDP within the current fiscal year. Government circles claim tat these conditionalites are not harsh, and most of them have already been included in the current year's budget. In order to slash its deficits, current account and trade will have to be bridged by withdrawing all subsidies, sources said.

Copyright Business Recorder, 2008
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