A meeting between officials from Pakistan and the International Monetary Fund (IMF) is to be held on Wednesday (today) in Islamabad to discuss the country’s performance for the release of the sixth tranche worth $11 billion.
According to official sources, discussions regarding policy making would take place on November 1 and November 2. The review for release of the sixth tranche had been delayed since August due to issues including an increase in power tariffs and the implementation of a reformed general sales tax (RGST).
It is plausible that the meetings would discuss the revised macro-economic targets after August’s devastating floods which caused damages worth $9.7 billion. The IMF wants Pakistan to introduce an RGST along the lines of a value added tax to increase the tax base. In addition, the IMF demands the electricity sector to eliminate subsidies.
Pakistan decided in June that it would replace its general sales tax (GST) with RGST by October 1, but that deadline had slipped to December 1. A bill was scheduled to be presented to the parliament in its next meeting, according to official sources, which would bring implementation of the RGST a step closer.
Passage was likely as the federal government finally agreed to allow the provinces to collect taxes on services which was one of the key demands of the IMF. Pakistan also must raise electricity tariffs to eliminate its current spending worth $2 billion annually on power subsidies.
The Ministry of Finance is feeling the urgency to push forward with reforms as in addition to organisations like the IMF, major international donors such as the United States are also calling for reforms. Pakistan expects foreign aid, excluding the IMF funds, to make up about 14 percent of its federal budget for 2010-11.
Pakistan may look for waivers for the fiscal deficit target in 2009-10 after it swelled to 6.3 percent of GDP, which is wider than the targeted shortfall of 5.1 percent as agreed with the IMF. The government also failed to meet its target of zero net borrowing from the State Bank of Pakistan for the year ending June 30, owing to a provisional 41.93 billion rupees ($488.58 million).
If the sixth tranche is released, one more tranche would be left before the program is reaches an end in November. Pakistan might ask for both tranches in one go, but analysts felt that it was unlikely. Pakistan must start repaying the loan in 2011, but if the last tranche is delayed, the repayment schedule will also be pushed back.