Emerging Markets, May 2010

Pakistan believes it has met all the conditions required for the IMF to release a vital, delayed final tranche of its $11.3 billion emergency loan programme.

The tranche, worth US$1.2 billion, was originally due to be released at the end of March but was withheld over issues including power tariffs and a new VAT law. But Sibtain Fazal Halim, Secretary for the Economic Affairs Division in Pakistan’s Ministry of Economic Affairs and Statistics, told Emerging Markets yesterday: “We are confident we have met all conditionalities and we are hopeful the next IMF tranche will be released soon.”

The IMF is likely to discuss the issue in the middle of this month before making a decision. One of the main areas it will focus on is progress towards a VAT law, which Pakistan must have in force by July 1 to meet the formal terms of the loan. Pakistan has a sales tax on goods and services and has laws under consideration by the federal parliament and four regional legislatures to replace the tax with a VAT. “We hope to have them declare in time,” before July 1, Mr Halim said. Since these laws clearly will not be passed before the IMF meets to discuss the loan, the question will be whether it sees significant commitment to the new law to justify releasing the funds.

It will also consider power tariff increases. Pakistan has already increased power tariffs by 12% in the last year – not a popular decision when Pakistan’s citizens face constant problems with power brownouts – but had been required to impose a further 6% hike by April 1. “It shall be done: maybe before we leave Tashkent, maybe in this month, but it will be effective from the first of April. That’s what the plan is,” Mr Halim said.

Getting the final tranche is vital for Pakistan, and not just because of the money. A failure to receive it would rock already shellshocked investor confidence. A successful disbursement would help sentiment, while the VAT itself would help the country’s funding base enormously. “Our tax to GDP ratio is a little under 10%,” said Mr Halim. “Our aim is to push it up to 15% and if we can do that, we won’t need any assistance.”

Foreign direct investment fell 46% to $1.9 billion in the nine months to March 31, but portfolio flows have started to look slightly more positive: National Bank of Pakistan said in April that $200 million had flowed into local stocks from overseas since the start of the year. Mr Halim blamed the drop in FDI on the global financial crisis and the security situation, but said interest was increasing and “I can tell you with confidence that the foreign investment from overseas will definitely increase.”

He said he believed foreign brokers like Credit Suisse, Citi and JP Morgan, who have all pulled out of on-the-ground presences in Pakistan, could “absolutely” be coaxed back. “These foreign investors did not leave by choice. They left by sheer force of circumstances emanating from the terrorist threat” rather than lack of profitability or a poor business environment. With an improvement in security, he said he believed they would return.

Mr Halim defended his government’s achievements in the two years since it was elected to power, saying that foreign exchange reserves have been restored to pre-crisis levels, inflation has almost halved in a year (albeit to a still-high 13%) and economic indicators have improved. “I would not say it is a complete reversal but an appreciable reversal in negative trends,” he said.

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