IMF to put down tough terms for Pakistan

[Ulhas Joglekar]

2 December 1999
IMF to put down tough terms for Pakistan
KARACHI: The arrival of an IMF mission this week shows the West has not
linked aid with a return of democracy in Pakistan, but analysts said on
Wednesday Islamabad would still have to agree to tough economic conditions
for renewed funding.
Inaction by Pakistan on the key IMF demands that it broaden its tax-base and
boost domestic fuel prices had already caused the international organisation
to put on hold a $1.56 billion loan programme before the military took over
the country on October 12.
Analysts said those items will be back on the table along with the
government's new economic policy, expected on December 15, when an IMF team
arrives later this week for talks. "The rescheduling arrangement with the
Paris Club will fall through the cracks and they cannot risk that by not
accepting the conditions," said Jehanzeb Naseer, research head at Jardine
Fleming Pakistan.
Pakistan had rescheduled $3.3 billion, out of a total $32 billion in foreign
debt, through the Paris Club of official creditors with the IMF acting as a
facilitator. After the military coup, the US, European Union and major IMF
board members called on the new regime to quickly restore democracy and
threatened economic sanctions.
Arshad Arif, research head at First Capital ABN AMRO Equities, said the
change in the IMF stance was driven by the US. "Firstly, the fund seems to
be cautiously positive on the direction the new government is taking, and
secondly the US is also softening its stance towards the new military
regime," he said.
But the analysts said the IMF would still push hard for Pakistan to improve
and broaden its tax-base. Pakistan has set an ambitious tax revenue target
of 356 billion rupees ($7 billion) for the year to June after collecting 307
billion of a targeted 354 in 1998/99.
Economists have said revenues would fall short again if an IMF demand for a
general sales tax (GST) was not met. "The litmus test will be the GST," one
investment banker said. Delays in introducing the tax and a failure to
implement other measures like higher petroleum prices had already caused the
IMF to hold back from releasing a $280 million tranche expected in June.
Successive governments, including the ousted one of Nawaz Sharif, have been
reluctant to impose the tax for fear of alienating the public and upsetting
the powerful small business lobby. The military government was embarrassed
last week when a strong traders' group said after talks with Finance
Minister Shaukat Aziz that it would not collect the GST.
But Jardine's Naseer said the military government was in a position to push
through the tax if it wanted as it did not need to worry about voting blocs
and was free of other considerations.
Analysts said raising domestic fuel prices would also be unpopular,
especially as the government did not drop them in the last several years
when world oil prices plunged. Now that international prices have risen to
their highest levels in nine years, they said it was unlikely the government
would be able to collect a projected target of 48 billion rupees from taxes
on domestic fuel prices.
For reprint rights: Times Syndication Service
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Bennett, Coleman & Co. Ltd. 1999.