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IMF success masks economic malaise In the jargon of the inner circles of the International Monetary Fund, Pakistan has always been a notorious "single tranche" country: arrange a loan, make some promises, get the first bit of the loan, and then fail to deliver on the promises. No further tranches. Not any more. Or at least that is what Shaukat Aziz, Pakistan's finance minister, could well claim when he presents his annual budget on Monday. For the country looks set for the first time to complete a loan programme with the IMF this autumn. He may well be anxious to note that the country's credibility with its foreign lenders has improved as a consequence of the military government's commitment to economic reforms. Completing the current loan programme would be critical for Pakistan if it is to seek a longer-term debt restructuring arrangement with international financial institutions. Such a deal would be critical to help overcome balance of payments difficulties in the next three years. Economists say that without international help, Pakistan - whose economy reels under the burden of repayments on almost $64bn in combined foreign and domestic debt - could suffer the first default on its debt repayments. It has been a difficult year. Economic growth has fallen to below 3 per cent as a result of a drought which caused a steep fall in farm output. In a country with an annual population growth of about 3 per cent, economists point out that in the past year, the economy has not grown in real terms. Mr Aziz's critics are quick to argue that while the government might have kept the IMF programme intact, it has made little progress in reviving investor confidence or stepping up the pace of reform. One of the most widely cited criticisms is the apparent failure to tackle the many public sector corporations whose combined deficit last year was equivalent to over 2 per cent of GDP. On the investment front, the government has at last resolved a dispute with the Karachi-based Hub power generation company, or Hubco, over the tariff paid by Pakistan's state-owned power transmission company for electricity. But businessmen say that the dispute involving the largest foreign investment in Pakistan in the past two decades continues to worry other prospective investors over the future of long-term investments. Businessmen also lament the delay in beginning to reform Pakistan's notoriously corrupt tax agency known as the Central Board of Revenue (CBR). They note that little progress has been made on the promise by Gen Pervez Musharraf, the military ruler, whose 1999 coup was followed by commitments to begin long overdue reforms. While some sectors of the economy, most notably textiles, have recorded increased output in the past year, there is still little evidence of a wider recovery. Partly helped by a rise in textile exports, Pakistan's international trade deficit fell slightly, but both exports and imports were behind target, reflecting an underlying weakness. The budget week has begun with officials at the CBR confirming that the all-important target for annual tax collections has been lowered to Rs406.5bn ($6.48bn) down from Rs430bn. The fall in revenue has been prompted by a fall in sales at many consumer businesses whose orders have been hit by a fall in farm incomes because of the drought. Businessmen warn that Pakistan's commitments to the IMF only promise to stagnate the economy, especially efforts to reduce the budget deficit. "A fast track approach to increase resources through higher gas and electricity tariffs would only create disincentives for businesses," says a leading industrialist. "Success with the IMF does not necessarily mean successful economic policies." Mr Aziz is sure that if Pakistan can remain afloat in the next two to three years with the backing of international financial institutions, the country would get a chance to recover - and get on with the necessary reforms. |
by Farhan Bokhari