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FT: The IMF in Pakistan
Thursday September 2 1999
PAKISTAN: IMF medicine may not work
Farhan Bokhari reports on concerns about very low
economic
confidence, faltering reform and political
uncertainty
The IMF's seal of approval
for Pakistan,
expected to be granted in a
letter of
intent in the next few days,
is the latest
in a series of international
rescue
measures to resurrect the
country's
battered economic
confidence.
The letter would precede a
decision by
the Fund's executive board
later this
month which should recommend
disbursement of a $280m
tranche from a
$1.56bn loan agreed last
year.
But many analysts are sceptical an IMF-led rescue
can translate into
an economic recovery. Ishaq Dar, finance minister,
who predicts an
upturn in the months ahead, is faced with critics
arguing the IMF
medicine is just not enough to revive economic
growth, narrow the
international trade deficit or increase equity and
direct investment.
Mr Dar has recently announced fresh incentives for
exporters and
successfully concluded debt restructuring with
western lenders. But
even before he announced his annual trade policy
for this financial
year (July-June), critics were quick to argue that
the government's
economic targets were just too ambitious.
In one sign that added to the scepticism,
Pakistan's international
trade deficit of more than $200m in July was twice
that in the same
month a year ago. Critics also say that the target
of $800m for this
year's trade deficit may already be beyond reach.
The gap between Mr Dar's expectations and
independent assessments
is largely the consequence of battered confidence,
faltering reforms
and, above all, political uncertainty in the
fallout from almost two
months of fighting between Pakistani and Indian
troops along the
disputed border in Kashmir.
Critics say the IMF's next tranche would not
necessarily mean smooth
sailing for Pakistan in its relations with the
Fund. Many reforms urged
by the Fund, including the recent imposition of a
15 per cent general
sales tax (GST) on imported and processed food, gas
and petroleum,
have yet to show that they can yield more in tax
revenues. The
revenue collection system still suffers from
widespread corruption and
inefficiency.
The opposition hopes to build on traders'
unhappiness with the sales
tax in mustering support for a protest strike on
Saturday.
The IMF's loan is vital to hold together subsequent
agreements such
as a $3.3bn debt restructuring agreed with the
Paris Club of lenders
and a $512m trade facility rescheduled with foreign
banks.
The trade agreement has set a target of $9bn for
exports, an 18 per
cent rise over last year. Imports are projected to
rise approximately 5
per cent to $9.8bn, while the projection for the
trade deficit of $800m
is almost half of last year's deficit of $1.57bn.
Additionally, Mr Dar
hopes overall economic growth will recover sharply,
rising twice as
fast as the 3.1 per cent increase in gross domestic
product last year,
which barely kept up with the country's annual
population growth rate.
"The government has done everything possible. We
have provided
the conducive environment," says Mr Dar, while
appealing to
businessmen to support new investments.
He expects a strong recovery in the agriculture
sector to yield large
surpluses of exportable crops such as cotton and
rice, a recovery in
large-scale manufacturing and a worldwide economic
recovery to lift
Pakistani exports.
The trade policy has included ambitious measures
such as removing
import duties on polyester staple fibre to benefit
domestic textile
manufacturers. Other incentives include a 1 per
cent income tax on
consultancy and engineering services which earn
foreign exchange,
and a reduction to 0.5 per cent in the 1 per cent
tax on exports of
rice, fish, precious and semi-precious stones.
"Exports and new investments are the key to your
economic outlook.
Without a recovery in those two, the economy is
unlikely to move,"
says Salman Shah, a respected economist and former
chairman of
the privatisation commission. "Confidence has been
badly battered
and there is a continuing fallout."
Sceptics warn that the outlook for foreign
investment may not be
different from last year. Then, foreign direct
investment of $296m fell
from $436m the year before, while portfolio
investment of just $4.7m
was substantially below the $203.8m of a year
earlier.
The reasons for the pessimism, above all, include
the fallout from
Pakistan's controversial treatment of foreign
investors in the 19 private
power projects agreed five years ago.
The government has only relented in the past few
months from its
claims of corruption in those projects, under
pressure from the World
Bank. But businessmen say that new agreements on
future tariffs for
all of the power projects have yet to be concluded.
Businessmen also say that the decision to freeze
almost $11bn
deposited in onshore bank accounts last year, to
prevent a run on
banks, has damaged confidence. The uncertainty has
also harmed
domestic confidence.
In addition to economic factors, Pakistan's recent
clash with India
over Kashmir has thrown in doubt its relations with
the IMF. US and
Pakistani officials denied reports last month that
the Clinton
administration had considered blocking the next IMF
tranche if
Pakistan refused to withdraw fighters from Indian
controlled areas.
However, bankers in Karachi say that the mere
suggestion of the
linkage between IMF lending and its use to promote
strategic
objectives is likely to have a detrimental effect
on the country's
image. "During future crises investors would keep
an eye out for a link
between strategic goals and IMF funds," says one.
Copyright The Financial Times Limited 1999. "FT" and "Financial
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