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Donors halt Pakistan cash
Multilateral donors including the World Bank, Asian Development Bank (ADB) & Islamic Development Bank (IDB) have reportedly halted budgetary support to Pakistan, asking the government to provide a Letter of Comfort (LoC) to be issued by the International Monetary Fund (IMF) prior to disbursement.
Local analysts believe any delay in disbursement from donors will be another setback for the cash-strapped government, which is borrowing 2 billion rupees (US$23.4 million) per day from the central bank to run its affairs.
After stepping back from reforms urged on the government by the IMF and linked to loans from the fund, the country's fiscal deficit has continued to deepen. Finance Minister Abdul Hafeez Shaikh recently disclosed that the deficit could cross 8% of gross domestic product (GDP), against the original target of 4% set for the current fiscal year 2010-11, which will end on June 30.
The IMF, the country's economic lifeline, is losing patience with Pakistan People's Party (PPP)-led coalition government, which lacks the political resolve to take measures such as imposing a new sales tax to ease the fiscal deficit. Local analysts argue that the widening fiscal deficit is unmanageable, as fiscal expansion funded by borrowed money, including government borrowings from the central bank, will continue to fuel inflation.
The IMF has been strictly monitoring the country's performance indicators under a stand-by arrangement (SBA) the country signed with the fund in November 2008 for a US$11.3 billion loan package. Multilateral lenders and the Friends of Democratic Pakistan (FoDP), a group of donor countries, carefully evaluate the performance indicators prior to taking any decisions with respect to disbursement of their pledges.
"The IMF SBA facility is almost suspended and therefore multilateral donors want a LoC extended by the IMF for loan disbursement under budgetary support," Business Recorder reported, citing sources close to Shaikh.
Pakistan received a total of $365 million in bilateral and multilateral assistance during the first four months of the current fiscal year, which runs from July 1. Last month, the IMF accepted the country's request for a nine-month extension of the SBA to September 30, while the government continued to delay implementing one key reform - the introduction of the Reformed General Sales Tax (RGST).
"There is a danger that the fiscal deficit may be higher than 8% of GDP in the absence of a coherent and coordinated economic policy," Dawn reported Shaikh as saying. "This is very alarming ... If business as usual continues and politicians do not help the government in taking big, difficult decisions, the fiscal deficit could reach 8%, but we will not let this happen."
Inflation as measured by the consumer price index rose to 15.68% in December 2010, the highest for 12 months, according to the Federal Bureau of Statistics. Food inflation rose to 20.4% in December, with the cost of perishable food items going up by 43.5% and non-perishable items by 17%.
A recent study by the Pakistan Institute of Development Economics highlighted high inflation, the high budget deficit and low economic growth as problems facing the economy. The increasing tendency of government borrowing from the State Bank of Pakistan (SBP) to finance the deficit and proposed implementation of the RGST are feeding the public expectations about future prices. The study indicates high inflation, high unemployment and stagnant growth during the current financial year.
The country's economic managers have warned that if subsidies are allowed during the second half of the current fiscal year, they would put an unbearable burden on the economy, leaving no option but to increase borrowing from the market at higher interest rates. The result will be a further rise in inflation.
The government this month bowed to political pressure and reversed a fuel price increase, putting a further burden on the economy as oil prices rise towards US$100 a barrel.
"The country is facing threats of an economic collapse due to non-implementation of economic reforms agreed with the international financial institutions, especially with the IMF," according to Business Recorder. The government is taking about 2 billion rupees in loans from the State Bank of Pakistan every day to run its affairs, and the budget deficit has exceeded 500 billion rupees, but the government is not taking any remedial measures, it said.
The PPP-led coalition government is sandwiched between the United States-backed IMF, pressing for implementation of economic reforms - and other political parties warning the government against taking unpopular decisions under the IMF's diktat. The country has prepared a revised economic plan that is expected to be acceptable to political parties and bring the IMF standby arrangement back on track.
The government plans include a 50% rise in development spending, scaling down its revenue target by more than 5% and granting two weekly holidays for the entire public sector to narrow the fiscal deficit.
A five-member committee recently constituted by Prime Minister Yusuf Raza Gilani intends to hold meetings with the heads of all political parties to develop a consensus on economic decisions.
"The government has decided that subsidies on the power tariff, oil prices and others will be withdrawn," Daily Times reported, citing official sources.
The country's Oil and Gas Regulatory Authority expects a 12% increase in prices of petroleum products during February due to rising global oil prices.
In December, as global oil prices rose, the government kept oil prices unchanged due to fear of widespread street protests, resulting in a revenue loss of 2 billion rupees. In January, oil prices were raised but the government withdrew its decision after a week due to intense political pressure.
Critics say that political expediency often takes precedence over wise economics in key sectors like agriculture, which contributes about one-fifth of country's $17 billion GDP and is almost entirely exempt from taxation due to political reasons, with a strong presence in parliament of feudal land lords and industrialists.
The current inflationary pressures in the agriculture sector can be traced to a government decision in 2008 to sharply raise the price it pays farmers for wheat to encourage them to grow more.
Asia Times Online :: South Asia news, business and economy from India and Pakistan
Multilateral donors including the World Bank, Asian Development Bank (ADB) & Islamic Development Bank (IDB) have reportedly halted budgetary support to Pakistan, asking the government to provide a Letter of Comfort (LoC) to be issued by the International Monetary Fund (IMF) prior to disbursement.
Local analysts believe any delay in disbursement from donors will be another setback for the cash-strapped government, which is borrowing 2 billion rupees (US$23.4 million) per day from the central bank to run its affairs.
After stepping back from reforms urged on the government by the IMF and linked to loans from the fund, the country's fiscal deficit has continued to deepen. Finance Minister Abdul Hafeez Shaikh recently disclosed that the deficit could cross 8% of gross domestic product (GDP), against the original target of 4% set for the current fiscal year 2010-11, which will end on June 30.
The IMF, the country's economic lifeline, is losing patience with Pakistan People's Party (PPP)-led coalition government, which lacks the political resolve to take measures such as imposing a new sales tax to ease the fiscal deficit. Local analysts argue that the widening fiscal deficit is unmanageable, as fiscal expansion funded by borrowed money, including government borrowings from the central bank, will continue to fuel inflation.
The IMF has been strictly monitoring the country's performance indicators under a stand-by arrangement (SBA) the country signed with the fund in November 2008 for a US$11.3 billion loan package. Multilateral lenders and the Friends of Democratic Pakistan (FoDP), a group of donor countries, carefully evaluate the performance indicators prior to taking any decisions with respect to disbursement of their pledges.
"The IMF SBA facility is almost suspended and therefore multilateral donors want a LoC extended by the IMF for loan disbursement under budgetary support," Business Recorder reported, citing sources close to Shaikh.
Pakistan received a total of $365 million in bilateral and multilateral assistance during the first four months of the current fiscal year, which runs from July 1. Last month, the IMF accepted the country's request for a nine-month extension of the SBA to September 30, while the government continued to delay implementing one key reform - the introduction of the Reformed General Sales Tax (RGST).
"There is a danger that the fiscal deficit may be higher than 8% of GDP in the absence of a coherent and coordinated economic policy," Dawn reported Shaikh as saying. "This is very alarming ... If business as usual continues and politicians do not help the government in taking big, difficult decisions, the fiscal deficit could reach 8%, but we will not let this happen."
Inflation as measured by the consumer price index rose to 15.68% in December 2010, the highest for 12 months, according to the Federal Bureau of Statistics. Food inflation rose to 20.4% in December, with the cost of perishable food items going up by 43.5% and non-perishable items by 17%.
A recent study by the Pakistan Institute of Development Economics highlighted high inflation, the high budget deficit and low economic growth as problems facing the economy. The increasing tendency of government borrowing from the State Bank of Pakistan (SBP) to finance the deficit and proposed implementation of the RGST are feeding the public expectations about future prices. The study indicates high inflation, high unemployment and stagnant growth during the current financial year.
The country's economic managers have warned that if subsidies are allowed during the second half of the current fiscal year, they would put an unbearable burden on the economy, leaving no option but to increase borrowing from the market at higher interest rates. The result will be a further rise in inflation.
The government this month bowed to political pressure and reversed a fuel price increase, putting a further burden on the economy as oil prices rise towards US$100 a barrel.
"The country is facing threats of an economic collapse due to non-implementation of economic reforms agreed with the international financial institutions, especially with the IMF," according to Business Recorder. The government is taking about 2 billion rupees in loans from the State Bank of Pakistan every day to run its affairs, and the budget deficit has exceeded 500 billion rupees, but the government is not taking any remedial measures, it said.
The PPP-led coalition government is sandwiched between the United States-backed IMF, pressing for implementation of economic reforms - and other political parties warning the government against taking unpopular decisions under the IMF's diktat. The country has prepared a revised economic plan that is expected to be acceptable to political parties and bring the IMF standby arrangement back on track.
The government plans include a 50% rise in development spending, scaling down its revenue target by more than 5% and granting two weekly holidays for the entire public sector to narrow the fiscal deficit.
A five-member committee recently constituted by Prime Minister Yusuf Raza Gilani intends to hold meetings with the heads of all political parties to develop a consensus on economic decisions.
"The government has decided that subsidies on the power tariff, oil prices and others will be withdrawn," Daily Times reported, citing official sources.
The country's Oil and Gas Regulatory Authority expects a 12% increase in prices of petroleum products during February due to rising global oil prices.
In December, as global oil prices rose, the government kept oil prices unchanged due to fear of widespread street protests, resulting in a revenue loss of 2 billion rupees. In January, oil prices were raised but the government withdrew its decision after a week due to intense political pressure.
Critics say that political expediency often takes precedence over wise economics in key sectors like agriculture, which contributes about one-fifth of country's $17 billion GDP and is almost entirely exempt from taxation due to political reasons, with a strong presence in parliament of feudal land lords and industrialists.
The current inflationary pressures in the agriculture sector can be traced to a government decision in 2008 to sharply raise the price it pays farmers for wheat to encourage them to grow more.
Asia Times Online :: South Asia news, business and economy from India and Pakistan
