Tag Archive: International Monetary Fund


Pakistan is on the path of international economic isolation. The serious analysts are in a state of shock with their fingers crossed. They are not ready to believe what is now unfolding before their eyes. A decision taken today in national interest is reversed the next day under pressure, again in the national interest. The ruling party of Pakistan has finally decided to sacrifice economy and the well being of the common man along with it, at the altar of power. The price for staying in power was huge but who cares as long as someone else (read: common man) is paying the price.

The government was relying on imposition of RGST for sailing through the economic problems but all the mainstream political parties have opposed it tooth and nail, for their own reasons which include safeguarding the interests of the elite and putting the government in a difficult situation. Ironically those who opposed this new levy had no alternative strategy except the vague rhetoric of minimizing the institutional corruption in the tax machinery. It seems that the government will work overtime to print notes during the remaining two years. Incidentally, governor of the central bank has already warned against the devastating implications of deficit financing.

Has the government decided to abandon the economic reforms? The instant reaction of US and IMF to reversion of increase in the petroleum prices confirms it.  The government has embarked on the path of economic isolation internationally simply to remain in power. These are short-cut methods and will badly affect the life of common man.

According to Financial Times, Pakistan’s Prime Minister, Yusuf Raza Gilani, announced the deferral of an IMF-backed tax reform on Friday. The reformed general sales tax, which Pakistan has been discussing with the IMF for more than a year, was supposed to be introduced in July last year to boost tax revenues.

“We will not go forward [with the RGST] until consensus is evolved,” said Mr Gilani during a visit to the southern port city of Karachi, where he visited the headquarters of the Muttahida Qaumi Movement.

Mr Gilani reversed a plan to increase oil prices on Thursday to win back the support of MQM, after the party withdrew from the ruling coalition in a move that denied the government parliamentary majority. MQM confirmed on Friday that it would rejoin the coalition.

Analysts warned that the decision to delay the RGST would further intensify concerns over the government’s ability to reform Pakistan’s troubled economy.

“This is a near fatal blow to the reform process,” warned Sakib Sherani, a former adviser to the finance ministry. “The RGST was meant to finally begin documenting the vast informal economy in a country with an alarmingly low tax to GDP ratio.”

Mr Gilani’s decision will only cause more problems with the IMF. Pakistan does not have much to show in the form of successful reforms being undertaken currently. The RGST is a key part of Pakistan’s agreement with the IMF and its postponement could put the $11bn loan package in jeopardy. The IMF said that raising the ratio of government revenue to national income was essential to returning Pakistan’s public finances towards sustainability and the sales tax was an indispensable component in this effort.

Advertisements

According to some reports, telecom minister of India had to resign after Comptroller and Auditor-General (CAG) of India unearthed a telecom scandal costing a minimum of $39 billion to Indian taxpayers.  But those who know India’s black economy are of the view that this could be just a tip of the iceberg. The Indian economy, despite its claims of growth is marred by illegal flow of black money to and from India, mostly stashed in foreign banks. This also means that corruption and illegal transfer of ill-gotten wealth is not the issue of Pakistan alone.

According to Taiwan News, India has lost hundreds of billions of dollars over the past six decades as companies and the rich stashed cash overseas to avoid taxes and hide ill-gotten gains, widening inequality and depriving the poor of crucial resources. The flood of illegal cash has swelled to ever greater heights since the early 1990s, and averaged $16 billion a year from 2002 to 2006, as India’s opening of its economy created more wealth and opportunities to move it across borders, according to the study by Dev Kar, a former International Monetary Fund economist. Kar, now senior economist at Global Financial Integrity, a Washington D.C. group that researches the flow of illicit money, said India’s black money _ at least $462 billion since the late 1940s _ could have paid for its entire infrastructure needs and much else.

The gap between India’s rich elite and the poor who number in the hundreds of millions has widened amid rapid economic growth over the past two decades, adding to social tensions, and the report says the funneling of wealth overseas has contributed to that inequality. Other analysts aren’t taking issue with Kar’s research methods but question whether the blame should be pinned on companies and privately wealthy individuals. They argue the government and corrupt politicians are the main culprits.

Kar used a World Bank model to measure the gap between the nation’s recorded sources of funds, like borrowing and foreign direct investment, and its recorded use of funds, like financing the current account deficit and foreign currency reserves. Illicit outflows are considered to exist when a country’s recorded source of funds exceeds its recorded use of funds. Kar supplemented that by looking at differences between the value of what India says it exports and what other nations say they import from India. This captures practices such as understating the value of export contracts to hide money overseas.

Adjusted for inflation, that all added up to $213 billion missing since 1948, the first full year of India’s independence from British rule. Using the short-term U.S. Treasury bill rate to estimate a conservative investment return, Kar calculated that money would be worth, at minimum, $462 billion today. The figure could be understated by half, Kar said, partly because it doesn’t cover harder to track activities including smuggling and cash transfers outside of the financial system.

Nishith Desai, founder of Nishith Desai Associates, an international tax and corporate law firm based in Mumbai, argues that corrupt officials and government agencies have more to do with illicit money than tax avoidance in the private sector, which he says is more transparent than in the past. As individual tax rates dropped _ from as high as 97.5 percent in the 1970s to about 30 percent today _ the major motivation for tax avoidance evaporated. In its wake however, is a cultural habit of evasion, which is only now beginning to erode, he said.

Desai said officials, who face public scrutiny when they accumulate wealth while on a low government salary, have more motivation to stash illicit money overseas than company executives, and the government, as India’s biggest trader, likely indulges in more manipulation of export and import contracts. Much private-sector corruption is also done under government compulsion, he said. Though economic liberalization ended the so-called License Raj _ during which New Delhi kept tight, lucrative control of business permits _ many opportunities for corruption remain.

Private players pouring into sectors like telecoms and banking still need licenses. This week, the telecom minister resigned over alleged licensing irregularities that may have cost the treasury 1.76 trillion rupees ($39 billion). The government is also the major intermediary in land deals. Desai and others say bribes are common in land sales, which are proliferating as India’s growth spurs the development of mines, factories, buildings and special economic zones.

Regardless of debate about who is most to blame, the report shows the tide of money has been unrelenting even as India makes some efforts to clamp down on the hidden economy. The government has ramped up tax collection efforts and renegotiated its tax treaty with Switzerland to give it greater access to information for investigations of tax fraud. It already has good access to information from Mauritius, a major offshore financial center for rich Indians and companies. Many hope the government’s ambitious plan to give every citizen a unique identity number will also widen the tax net and make evasion harder.

And under pressure from opposition politicians, the Congress Party in recent weeks forced three high-ranking officials including the telecoms minister to step down amid corruption allegations. But critics say such gestures are cosmetic and will do little to stem growing popular frustration at India’s elite.

“Catch some of those high-profile guys, Bollywood fellows and cricket stars and make an example out of them,” Kar said. “If they don’t address this now, they’re going to be stuck with a much bigger problem which will tear at the heart of India. Mark my words. People are losing patience.”

The times are tough and testing, and the life has become difficult for all barring 5% of the elite with perennial sources of ill-gotten wealth. The Government is in a bigger fix than the citizenry. The problems of rising prices and unemployment and the inflation are the real challenges and on top of that there is sometimes motivated, sometimes sincere criticism on the government and everyone, from a man on the street to a celebrated economist, has a package of suggestion to bail the government out of this quagmire.  Some say that the Cabinet should be downsized, some target expenses of PM House. Nobody seems to be offering a solution practical enough which could steer Zardar-Gilani government out of this crisis. It has been reported by The News International that renowned economists are of the view that until the government stops borrowing huge amounts of money from the State Bank, the inflation and interest rates can not be brought under control.

Participating in a discussion, ‘IMF Conditions – Future of Pakistan’s Economy’, organized by the Jang Forum, economics expert Dr Akmal Hussain said that the government had borrowed Rs500 billion from the State Bank, triggering inflation and a simultaneous rise in the interest rates of the commercial banks and depleting the country’s overall economic state. He said that the IMF, while following double standards, was trying to promote economic contraction in Pakistan in this time of recession, rather than promoting economic stimulus, like it had done for the western countries at the time of recession.  This Bretton Woods sister may be gorgeous but she is ruthlessly hypocrite. Akmal Hussain said that there was a dire need of increase in revenue of the country which could not be achieved by limiting public sector development and contraction of the national economy.

The country had lost one third of its infrastructure in the flood disaster and the situation should be exploited as an economic stimulus to invest in public sector and infrastructure building to generate revenues, create employment and deal with the disaster, all at the same time. He said that the budget deficit should be left as a secondary issue as once economic growth was ensured through injection and production of revenue through economic stimulus, the budget deficit would decrease automatically. He said that the European countries, which were going through a budget deficit of nine percent, were making up through economic growth, whereas, Pakistan had only 6.3 percent of budget deficit.
He said that massive amount, around 18 billion dollars, needed for flood affectivities’ rehabilitation could not be reached without international funding. He stressed the need to ensure an effective financial management system, project management and project transparency to build trust of foreign investor and donors, not just in emergent situations but also in routine operations. He proposed a social protection program featuring an Employment Guarantee Scheme on the basis of ‘cash for work’ for which the flood hit areas reconstruction could play as a vital platform.

Pakistan’s President has announced that his government plans to tax the rich to help the poor i.e. flood-hit people. This sincere initiative is a happy development which should be appreciated but will the rich and mighty pay up or will they live up to their reputation of plundering but not paying back. Pakistan’s floods have placed the country at the head of a bumpy road ahead when the country is forced to make tough choices. To start with, Pakistan’s Central Bank has jacked up the interest rate which will have many implications for the flood-hit fragile economy, but the question is: did the new Governor who is an economist of international standing, have any other viable option? Businessweek in its current issue has reported that Pakistan’s deadliest floods ruined crops alone worth 281.6 billion rupees ($3.27 billion), destroying rice, cotton and sugar. And this is one of multiple official versions this time coming from the horse’s mouth, the Agriculture Minister himself. However, the floods have damaged about 10 million tons of crop, which Credit Suisse values at about $1.9 billion.

In this backdrop when Pakistan’s major contributor to the GDP has suffered so badly, the inflation was already out of control and the Bretton Woods sisters had no mercy on the devastated economy and battered populace, this was probably the only thing in his power that a Central Bank governor could do to arrest the inflationary trends. Wall Street Journal has reported that it’s a decision he had to make with incomplete information. Total assessments of the damage to Pakistan’s economy from floods that began in July are still pending….He chose right. The State Bank of Pakistan on Wednesday raised its policy rate by half a percentage point to 13.5%.

The paper says that holding off would have meant a risky delay of action against a worsening inflation problem. Consumer prices in Pakistan have been rising too fast for three years, with gains close to a 12% rate throughout 2010. The floods will amplify the problem, but floods aren’t the only source of a price shock in Pakistan. Islamabad is under pressure from the International Monetary Fund to increase electricity tariffs and raise general sales taxes and import duties—all of which would add fuel to the inflation problem. Not taking these steps could have the country miss out on a $3.2 billion IMF payment due by the end of this year. Pull it all together and economists at Standard Chartered expect inflation to average 15% in the fiscal year that began in July.

Then there’s the fragile state of Pakistan’s economy. Flood damage means Pakistan’s critical agriculture sector will contract 1.7% this fiscal year, the sector’s first decline in a decade, Credit Suisse predicted. It means economic growth could slow to 2.5%, much slower than last year’s 4.1%, and a crawl by Pakistan’s standards. Add to this the infrastructure damage—from power plants to highways—and industrial growth, too, will suffer. The International Labor Organization estimates 5.3 million people will lose their jobs because of the flood. Raising rates, and promising to keep doing so, in such an environment is certainly not going to win Mr. Kardar any friends in the business community. But inflation is the more frightening of Pakistan’s economic challenges. Price stability is far more critical to Pakistan’s long-term growth. Foreign aid and remittances from overseas Pakistanis will ensure money flows into the economy.

It is a strange world where someone’s misery can turn into opportunity for someone else to make quick windfall profits. This is true not only for individual greedy business men but also institutions. In the case of Pakistan, where Government needs to rehabilitate people and reconstruct infrastructure, the only thing needed is money and that too in local currency because almost nothing is to be imported. Any other nation, in such an hour of need, would adopt austerity as a way of life and divert all national and individual savings towards reconstruction and employment generation for those whose livelihood was washed away. Another way is to ask those to cough up who have stashed tons of plundered wealth. They could be given an opportunity to whiten their black money.

However, strange are the ways of the Pakistani Government where the easiest of the way is to ask for external loans and that too very expensive one. At this point in time, debt servicing is 44% of the current expenditure and with additional debts it will rise further and add to the miseries of the people. The only gainers in this calamity are Pakistani businessmen and international lenders like the Bretton Woods sisters and ADB who see a huge business opportunity in investing in reconstruction activities.

Express Tribune, while updating on flood relief activities has reported that the World Bank has increased funding to help Pakistan cope with catastrophic flooding by $100 million, to a total of $1 billion, the bank said in a statement on Thursday. “The World Bank is committed to helping the people of Pakistan during this time of need and has made $1 billion available to finance immediate recovery needs and longer-term reconstruction,” the statement quoted World Bank President Robert Zoellick as telling Pakistani Finance Minister Hafeez Shaikh in Washington.

The same newspaper has also reported that the International Monetary Fund will give Pakistan $450 million emergency loan for flood aid, providing some relief for a government overwhelmed by the disaster. IMF Managing Director Dominique Strauss-Kahn said in Washington on Thursday that the funds would be dispersed in ‘coming weeks’.

Strauss-Kahn said discussions with a delegation led by Finance Minister Abdul Hafeez Shaikh on how to ‘reorganise’ an $11 billion IMF loan program. He said Islamabad remained committed to terms including tax and energy sector reforms. The IMF package had kept afloat and economy that was already fragile before the floods rampaged from the northwest to the south, damaging crops and infrastructure which Prime Minister Yusuf Raza Gilani estimated could hit $43 billion, almost one quarter of last year’s gross domestic product.

Meanwhile demonstrators marched against the new International Monetary Fund (IMF) loan plan in front of the World Bank’s offices in Islamabad.

There was news that Pakistan’s expensively-dressed Prime Minister will donate his wardrobe for the flood-hit people. A very noble gesture indeed; but nobler still will be for the Prime Minister to donate at least half of his Cabinet which will save enormous amounts of money. And this is serious talk as Pakistan is in the eye of a storm which has the potential to destabilize the entire system that we have so far been able to save. It has been estimated that the flooding in Pakistan will inflict serious damage on its economy, posing another challenge for a cash-strapped government struggling to keep a recovery on track amid high inflation and a relentless Islamist insurgency.

Wall Street Journal has reported that Assistance from the International Monetary Fund and Western countries will likely help Pakistan avoid another brush with bankruptcy as it tries to cope with the damage, which by some estimates may reach $43 billion. But the floods will weigh heavily on economic growth this year and leave a long-term mark on the economy.

“The hit on the growth rate is going to be very severe,” said Philip Wyatt, a senior economist at UBS. “We can see a loss of one or two points of economic growth, depending on the damage.” In the fiscal year ended June 30, Pakistan’s economy grew 4.1%. Moody’s Investors Service, which had expected Pakistan’s economic growth to expand to 4.5% this fiscal year, may lower its estimate to 3% to 3.5%, analyst Aninda Mitra said.

The flood began in July and at one point covered one-fifth of the South Asian nation, or land roughly equivalent to the size of Uruguay. It has damaged crops sown over 1.93 million acres, or 776,996 hectares. Cotton output will shrink to 11.76 million bales from the 14 million bales estimated at the start of the season by Pakistan’s food and agriculture ministry. Cotton is an important raw material for the key textile export sector, one of Pakistan’s few sources of export income.

According to the United Nations, the disaster has affected close to 20 million people, killing 1,500 and leaving 1.2 million homes damaged or destroyed. Coping with the social and economic costs of the catastrophe will strain the government’s finances. The budget deficit was already on track to reach 4.5% of gross domestic product before the crisis but now could widen to as much as 6% to 7% of GDP, said Mr. Mitra of Moody’s. That is a grim prospect for a country that had external debt totaling $55.63 billion as of June 30. President Asif Ali Zardari‘s government has been reaching out to other countries for help. A delegation met with IMF officials Monday in Washington. Donors including the U.K. and the European Union have so far pledged almost $500 million in additional help.

Moody’s is unlikely to upgrade Pakistan’s credit rating in coming months due to the devastation from the floods and other challenges, but the country’s current B3 rating “adequately captures the risk” of the likely economic slowdown and is unlikely to be downgraded further, said Mr. Mitra. A B3 rating is just one notch above the C level, which applies to countries in effective sovereign default, and makes it hard for a country to issue bonds in the international market.

The natural disaster is the latest setback for the Pakistan economy, which after several years of strong growth almost ground to a halt in 2008, hurt by budget overruns, a loss in export competitiveness due to high inflation, and an insurgency that continues unabated. On Monday, while emergency workers worked to shore up levees in two southern cities, at least 36 people were killed in three separate bomb attacks across the country, and 12 suspected militants were killed in U.S. drone attacks near the Afghan border.

Concerns about the economic fallout have kept pressure on Pakistan’s financial markets, though the impact has been moderate. The cost of insuring against a default or restructuring of Pakistan’s bonds remains at very elevated levels, but has been relatively steady in recent weeks, a sign that investors anticipate IMF and U.S. support to prevent any fiscal crisis. The spread on Pakistan five-year credit default swaps was quoted at 1,099 basis points Tuesday, roughly on par with those of other high-risk sovereign bond issuers like Venezuela, but well below early-2009 highs of over 2,100 basis points during the global financial crisis.

Pakistan’s benchmark stock index, KSE-100, has fallen 7% so far in August, but is up 4% so far this year, roughly in line with other emerging market indexes. The Pakistan rupee, one of Asia’s weakest currencies in recent years, has fallen in recent days, but has found support above its record low against the dollar of 85.84 rupees hit on Aug. 2, helped by expectations that remittances from overseas Pakistanis, which have averaged around 10% of GDP in recent years, may rise to help families at home cope with the floods.

But analysts expect the rupee to remain under pressure in coming months due to Pakistan’s current account deficit and high inflation rate, which ran at 12.3% in July. The floods are likely to push up food prices and transportation costs for other goods, likely eliminating any chance that inflation might fall below 10% this year, said Mr. Wyatt at UBS.

With about two thousand people dead, millions homeless and deadly diseases spreading, mighty Indus is still furious and this death and destruction is only one side of the story. And its only the beginning.  Deadlier still are events unfolding as are the stories of Government’s incompetence to deal with this situation. The floods are an excellent recipe of disaster for Pakistan as a country, if those rich elite who plundered it do not cough up whole of the looted wealth or at least a fraction of it. Pakistan’s already creaky economy has been pushed to the verge of ruin by the devastating floods of the past month. With foreign aid only now beginning to trickle in, the impoverished country has been forced to take out further loans while pleading for outstanding ones to be restructured.

Already burdened by heavy debt, the country’s economy has suffered a major setback. According to the Independent, funds will have to be poured into reconstruction efforts while many sectors of the economy, especially agriculture, will suffer losses for up to several months, if not years.

So far, the floods have covered a fifth of the country, cost at least 1,600 lives, displaced 4.6 million people, destroyed roads, bridges and schools, damaged power stations and dams, and swamped millions of acres of agricultural land. About 150,000 Pakistanis were forced to move to higher ground yesterday as water from a freshly swollen Indus River submerged dozens more towns and villages in the south. Officials expect the floods to recede across the country in the next few days as the last river torrents empty into the Arabian Sea. Survivors may find little left when they return home. Already, 600,000 people are in relief camps set up in Sindh during the past month. The floods have affected about one-fifth of Pakistan’s territory; at least six million people have been made homeless, and 20 million affected overall.

Some officials estimate that the cost of rebuilding infrastructure could be $15bn, money that Islamabad simply doesn’t have. As of July, Pakistan had a debt of $55.5bn. That figure will jump to $73bn in 2015-16, as debts that were rescheduled after 9/11, in As a result of the tragedy, the budget deficit will grow, inflation will rise, and economic growth will slow – all areas where the fund had wanted to see progress in the opposite direction.

At the same time, Islamabad has secured loans of $1bn from the World Bank and $2bn from the Asian Development Bank to help relief efforts and begin the task to rehabilitation and reconstruction. Government officials say that they were left with no option but to approach the banks as foreign aid has generated only a fraction of what’s needed. The disaster has revealed decades of infrastructural neglect that damns successive governments. However efficiently the current government may have been able to mobilize resources, the state’s capacity was woefully lacking in the first place.

Some 17 million acres of agricultural land have been submerged by the floods, which are still raging in the southern province of Sindh. Key crops including wheat, cotton and rice have been affected. Pakistan’s economy has long suffered problems because of its embarrassingly narrow tax base. Broad sections of the wealthy, including senior politicians, pay little or no tax. But Mr Sheikh said that the crisis could be an opportunity to take tough economic decisions the government has long wanted to. “We could push through a sales tax, introduce a flood surcharge on well-to-do people and get some leeway from the IMF.”