IMF DRIPS FOR PAK ECONOMY
by B.Raman
The Executive Board of the International Monetary Fund (IMF) approved on
November 29,2000, a Stand-By credit of US $ 596 million for Pakistan
until end-September 2001 to support the Government's economic program
for 2000-01. Out of this, Pakistan got US$192 million immediately.
Mr. Horst Köhler, IMF Managing
Director, said: "The Pakistani authorities have put in place an
economic adjustment and reform program, for which financial support
under a Stand-By Arrangement has been approved by the Fund's Executive
Board. The program aims to move Pakistan on to a high and sustainable
growth path by strengthening the balance of payments position,
rebuilding official reserves, and reducing public sector indebtedness.
To support these objectives, the Government has strengthened
macroeconomic policies and has developed a wide-ranging structural
reform agenda that emphasizes revenue mobilization, improving investor
confidence, poverty alleviation, and good governance. "
The credit would be subject to the
following conditionalities:
* A reduction in the overall
budget deficit in 2000/01 to 5.2 percent of GDP, from 6.4 percent in
1999/2000, with further consolidation over the medium term. This is to
be achieved through increased tax collections with a widening of the
tax base, improved tax administration and strict expenditure controls.
Since there is significant uncertainty surrounding the short-term
impact of revenue measures on the budgetary position, the authorities
should stand ready to take additional measures if revenues fall short
of expectations.
* Increased spending by close
to one-third on poverty reduction and decrease in less productive
spending. .
* An increase in gross
official reserves from US $ 1.114 billion presently to US$1.74 billion
at end-June 2001, equivalent to 7.3 weeks of imports of goods and
services, to be achieved through a flexible exchange rate policy,
monetary tightening, fiscal adjustment, substantial exceptional
financing, increased exports and sharply reduced private sector
capital outflows brought about by a restoration of investor
confidence.
* Pakistan would get the
accounts of all its income and expenditure scrutinized periodically
and closely by the IMF staff over the next 10 months.
* Adequate expenditure control
mechanisms would be put in place to ensure that the defence budget
remains within the agreed limit and does not exceed the allocations as
had happened in 1999-2000, when it increased by Rs. seven billion
beyond the approved allocation.
* Enactment of an anti-dumping
law by December-end.
In sanctioning the credit, the IMF
took note of the following reforms already initiated by the Pakistani
military regime:
* The sales tax net is being
widened through the extension of the General Sales Tax (GST) to
services and to agricultural inputs.
* Taxation of agricultural
incomes has been enhanced with the introduction of a two-tier tax from
this fiscal year, comprising a fixed land-based tax as well as an
income tax on large farmers.
* A fundamental overhaul of
the income tax system is underway, and a new income tax law aiming at
establishing a simple income tax based on genuine self-assessment with
minimal exemptions and a less distorting rate structure is to be
promulgated with the 2001/02 budget.
* Efforts are being made to
reduce GST, customs duty, and income tax exemptions.
* The financial and
organizational restructuring of public enterprise reform is proceeding
with a view to reducing enterprises' burden on the budget and
preparing them for eventual privatization.
* The medium-term trade
liberalization program is built around a pre-announced series of
further cuts in the maximum tariff rate and in the number of tariff
slabs.
* Improvement in the working of the
banks.
The IMF said that in addition to the
IMF's stand-by credit, Pakistan's reform program would be supported by
financing from the Asian Development Bank, the World Bank, bilateral
official creditors, and the private sector. The Paris Club has agreed to
consider, in January 2001, rescheduling Pakistan's outstanding arrears
and upcoming debt obligations to Paris Club creditors.
The IMF credit, which amounted to an
endorsement of the economic reforms initiated by the military regime,
was crucial for Pakistan to prevent a default on the repayment of part
of its external debts, which fall due shortly. Its total external debt
is estimated at $32.7 Billion. The release of the future tranches by the
IMF would depend on Pakistan meeting agreed targets. The next IMF review
is due in February.
A spokesman of the State Bank of
Pakistan (SBP) told pressmen subsequently that it had received the first
IMF tranche of $192 million, bringing its foreign exchange reserves to
US $1.336 billion. The Paris club meeting, due in January, would discuss
rescheduling of debts amounting to US $2.2 billion.
In a note to the IMF Executive Board
on November 4 requesting for the credit,, Pakistan admitted that during
the current year alone the Government would add about $3 billion to the
country's short-term private sector debt, including two loans of $145
million for public sector enterprises for 300 days, $413 million from
the Islamic Development Bank, besides a $50 million loan for two years
and another $80 million for a six-month roll-over from the same bank, a
roll-over of $500 million from the Bank of China as well as $250 million
of roll-over from Kuwait and $150 million of roll-over from the UAE. The
note estimated that Pakistan would need $4 billion of exceptional
financing under the new Fund arrangement if it were not to default on
its external debt.
The note projected the state of the
economy as at the end of October, 2000, as follows:
* Favorable performance of the
agricultural sector boosted real GDP growth to an estimated 4.8 per
cent in 1999/2000, compared with 3.1 per cent during 1998/99.
Agricultural output expanded by 7 per cent, with bumper cotton and
wheat harvests more than offsetting a decline in sugarcane output.
* The bumper cotton crop gave
a welcome boost to the textile industry after three years of
lackluster activity in this vital sector.
* However, industrial activity
was dampened by a collapse in sugar production. As a result,
large-scale manufacturing output growth contracted by 0.8 per cent,
compared with an increase of 3.7 per cent during the previous year.
* Notwithstanding increases in
domestic petroleum products prices, the average rate of consumer price
inflation eased further to 3.6 percent, from 5.7 per cent in 1998/99.
Food price inflation was even lower, aided by the decline in
international non-oil commodity prices and the buoyant domestic output
of food crops.
* With the favorable supply
conditions in the agricultural sector and the recovery in the textile
sector, Pakistan's external current account deficit narrowed from 3.8
per cent of GDP in 1998/99 to 1.6 per cent of GDP in 1999/2000 despite
the sharp rise in world oil prices.
* Exports grew by 8.5 percent
in U.S. dollar terms, as more favorable external demand conditions and
the boost in textile production helped maintain buoyant export
performance despite a decline in export unit values. The overall
import bill was flat in 1999/2000, with the US$1.2 billion increase in
oil imports caused by higher international petroleum prices offset by
lower food, defense, and project aid-related imports.
* Kerb market purchases of
foreign exchange by the State Bank of Pakistan (SBP) increased.
* The capital account of the
balance of payments turned sharply negative, however, driven mainly by
a reversal in public medium- and long-term capital flows. As a result,
gross official reserves declined from US$1.7 billion (equivalent to
7.4 weeks of imports of goods and non-factor services) to US$0.9
billion (3.7 weeks of imports).
* The exchange rate of the
rupee was held stable against the U.S. dollar through the year in an
effort to maintain investor confidence amidst the uncertain outlook
for external financing. In real effective terms, the rupee remained
roughly stable on average in 1999/2000 in relation to the previous
year.
* The consolidated Government
budget deficit widened to 6.5 per cent of GDP in 1999/2000, from 6.1
per cent of GDP in 1998/99, adversely affected by the delayed
adjustments in domestic petroleum prices, an increase in the
Government's interest bill, an overrun in defense expenditure, the
settlement of accumulated tax refunds, and additional provincial
transfers to municipalities in lieu of abolished local taxes. Interest
payments rose by 0.4 per cent of GDP, while petroleum surcharge
revenue fell by 1 per cent of GDP.
* These effects on the fiscal
balance were partly offset by increased tax receipts of the Central
Board of Revenue (CBR) by 0.2 per cent of GDP; higher nontax revenue
(0.4 per cent of GDP); and lower development expenditure and net
lending (0.4 per cent of GDP).
* While a lapse in expenditure
control mechanisms prevented the envisaged cut in defense spending
from materializing, defense expenditure nevertheless declined by 0.2
percentage points in relation to GDP.
Within a week of the IMF approval of
the stand-by credit, the military regime had to face three embarrassing
developments:
* Latest revenue returns of the
Central Board of Revenue (CBR) showed a slump in revenue receipts in
July-November, during which the CBR collected only Rs136 billion
against a target of Rs150 billion projected to the IMF.
* The statement of expected
growth in foreign exchange reserves by June 2001 had provided for a
flow of US $ 80 million from the US towards part reimbursement of the
amount paid by Pakistan for a fresh lot of F-16s, which were not
supplied due to the invoking of the Pressler Amendment. The military
regime is reported to have been surprised by the fact that instead of
paying this amount in cash, the US Administration has adjusted it
against past wheat supplies. Apparently, no proper home work was done
in preparing the notes for the IMF because while agreeing to refund
the amount when Mr.Nawaz Sharif was the Prime Minister, the Clinton
Administration had clearly said that the reimbursement would be half
in cash and half in wheat. At that time, the wheat harvest was poor
and Pakistan had to import wheat from the US and Australia to meet the
shortages.
* There have been allegations
that the Government had concealed from the IMF negotiating team its
plans for the purchase of 60 F-7MGs for the Pakistan Air Force from
China during the current financial year, for which part payment would
have to be made by Pakistan before June 2001 and part would be
deferred payment by utilising a supplier's credit offered by China.
This is not the first time that
Pakistan has had to seek a stand-by credit for balance of payments
support from the IMF. It had done so in the past too during the Prime
Ministerships of Mrs.Benazir Bhutto and Mr.Nawaz Sharif. The IMF had to
suspend the implementation of the programme half-way through either for
political (e.g Chagai nuclear tests, the Kargil invasion etc) or for
economic (post-facto discovery by the IMF that the data supplied to it
by Islamabad had been fudged or that material facts had been concealed
from its negotiating teams) reasons.
In the present instance, Gen.Pervez
Musharraf, the self-styled Chief Executive, and Mr.Shaukat Aziz, the
Finance Minister, have given the impression of total transparency and
have claimed that nothing but accurate data were given to the IMF and
that there was no cover-up of inconvenient data. If the allegations of a
cover-up from the IMF about the allocation for the purchase of F-7MGs
are correct, it would appear that this was not so.
A study of the documents released by
the IMF explaining the background to the approval would show that the
military regime probably did not bring to the notice of the IMF the
continuing pessimism about Pakistan's economic prospects for 2000-2001
reflected in the SBP's annual report for 1999-2000 submitted to the
Government on November 6. The report cautioned the military regime as
follows:
* The GDP is likely to grow
during 2000-01 by 4.5 per cent only as against 4.8 per cent during
1999-2000. "This is so because the impressive growth attained by
the agricultural sector in 1999-2000 is unlikely to repeat itself as
the base has already risen significantly."
* The consumer inflation fell
to 3.6 per cent in 1999-2000--the lowest in three decades--- mainly
due to the improved availability of agricultural and food products.
But, inflation is likely to go up this year due to higher oil prices
coupled with increased domestic interest rates and a sharp
depreciation in the rupee value (by about 14 per cent since June,
2000).
The SBP also admitted that it was able
to meet Pakistan's external obligations during 1999-2000 mainly through
the purchase of US dollars amounting to $ 1.6 billion---roughly US $ 140
million per month-- in the open market. This has reportedly come down to
US $ 30 million per month since June, 2000, after foreign Governments
started enquiring as to how so much US currency was available in the
open market during a period of net outflow of money. It is strongly
suspected that all this is the heroin money earned by narcotics
smugglers, who, it is said, inject every year at least about US $ two
billion into the illegitimate economy and then have it laundered through
the SBP purchases to meet its urgent needs.
Another worrisome development not
reflected in the Pakistan Government's note to the IMF is the extent of
the steep drop in the flow of Foreign Direct Investments (FDI) and
remittances from overseas Pakistanis. Neither the Finance Ministry nor
the SBP publishes these figures, but "The Nation" of October
31 reported that the FDI flows, which reached a high of US $ 1.1 billion
under Mrs.Benazir Bhutto in 1995-96, declined to $ 682 million in
1996-97, $ 601 million in 1997-98, $ 376 million in 1998-99 and $ 361
million in 1999-2000. During the first quarter of this year, it amounted
to $ 35 million only and, at this rate, is likely to be around $ 140
million for the whole year.
Pakistani economic analysts have drawn
attention to the dramatic drop in FDI flows after the Chagai nuclear
tests, which was further accentuated after the military regime seized
power in October, 1999, and stepped up its jehadi rhetoric. They have
drawn attention to the fact that India's Pokhran-II nuclear tests have
not had any marked impact on investment flows into India.
From this, they have concluded that
the action of the military officers and the Mullahs in stepping up the
jehadi rhetoric and in painting a scary "nuclear flashpoint"
scenario, in order to make the UN and the Western powers intervene on
the Kashmir issue, has caused nervousness amongst potential investors
and kept them away from Pakistan.
Writing in the weekly "Friday
Times" (September 15-21,2000), Mr. Khalid Ahmed says that no
Pakistani official has the courage to tell Gen. Musharraf that the jehad
atmosphere in Pakistan is driving away not only potential new investors,
but also many of those, including Pakistani entrepreneurs, who had
invested in Pakistan in the past. Citing Mr.Najimuddin Sheikh, former
Foreign Secretary, he points out that India seems to be attracting even
more FDIs after Pokhran-II than before and asks why investors are
frightened of coming to Pakistan.
He quotes Mr.Sheikh as saying as
follows on Pakistani entrepreneurs fleeing the country since
Gen.Musharraf seized power: " Pakistanis are leaving Pakistan in
droves. Many of them are paying US $ 150,000 per person to get the
business visa, which allows them to stay in the USA, the UK, and Canada.
The (foreign) investors are not investing, but why is the Pakistani man
trying to leave the country? Newspapers have reported that since October
1999, approximately 120,000 people have gone to the West on visas and
many among them will try not to come back. Lahore's passport office has
revealed that it issues 800 passports every day. The US Embassy in
Islamabad has announced that it gives a thousand visas a day to
Pakistanis bound for the US. Other Western Embassies have a similar
rush. All of them have toughened their visa regulations to stem the
rising tide of people, who no longer want to stay in Pakistan."
Mr.Khalid Ahmed also says that the
perception among foreign investors of a strengthening of the position of
the Mullahs under the Musharraf regime is also adding to their
nervousness. He quotes Mr.Sheikh as saying as follows: " Equally
important, they (the foreign investors) have been deterred by what
appears to be a struggle for the soul of the nation between the
followers of the Quaid's (Jinnah's) vision of a progressive and
religiously tolerant Pakistan and those advocating the adoption of a
system of Government based on the Shariah, which no investor would find
palatable. The latter school of thought, it seems, holds sway in the
economic field and is on its way to establishing a similar dominance in
other spheres of life."
The extent to which Gen. Musharraf is
anxious to keep on the right side of the Islamic fundamentalist forces
and to prevent any opposition from them to his seeking IMF assistance
would be evident from the fact that the Finance Ministry's note of
November 4 to the IMF makes a specific reference to the regime's plans
for the Islamisation of the economy. It says: "The Government is in
the process of making the necessary preparations to implement the
Supreme Court's December 1999 decision requiring the transformation of
Pakistan's financial system to conform with Islamic financial
principles. In this connection, a Commission on the Transformation of
the Financial System has been established to formulate a transformation
plan and suggest amendments in contracts and operations of financial
institutions. Once the transformation is completed, all new domestic
borrowing will be in accordance with Islamic financial principles; new
instruments and institutions, as well as a legal framework, will need to
be put in place for this purpose. All international debt obligations
will continue to be serviced."
Initially, the military regime was
hoping to get a sum of US $ 3.5 billion from the IMF under the Poverty
Reduction and Growth Facility, which is repayable over a longer period
with less interest. But, ultimately, it could get only a stand-by credit
of US $ 596 million for balance of payments support. Pakistan is still
paying back to the IMF installments of credits received in the past and
interest thereon. In 1999-2000, while it received no assistance from the
IMF, it paid back US $ 329 million, in part settlement of past dues.
A similar amount is due to the IMF
this year. If one deducts US $ 300 million towards this, the amount left
would be about US $ 296 million, which would be too small to enable
Pakistan to meet its external obligations. The significance of the IMF
approval lies not in the amount, but in the fact that it now clears the
way for Pakistan to receive credit from other institutions such as the
Asian Development Bank and to negotiate with foreign banks the
re-scheduling of its debts for a further period of possibly two years.
Purely on economic merits, the IMF
should not have sanctioned this credit because one of the IMF's past
conditionalities, namely satisfactory conclusion of a new power tariff
agreement with Hubco, has not yet been met by Islamabad. The fact that
the IMF has sanctioned this credit despite this would underline the
anxiety of the US and other Western countries not to let the Pakistani
economy collapse, but to do no more than to keep it on drips.
In 1998, when the US and other
countries imposed sanctions against Pakistan after Chagai, Saudi Arabia
came to its rescue with a generous deferred payment facility for oil
imports for two years. The extension of this facility for another two
years is presently under negotiations between the two countries.
During the negotiations, Saudi Arabia
reportedly pressed that as a quid pro quo the military regime should
pardon Mr.Nawaz Sharif and let him go into exile along with his family.
The fact that Gen.Musharraf had to pocket his pride and agree to this is
indicative of the still serious state of the economy.
(10-12-00)
(The writer is Additional Secretary
(retd), Cabinet Secretariat, Govt. of India, and, presently, Director,
Institute for Topical Studies, Chennai. E-mail: corde@vsnl.com)
