Mar 9, 2011

With strings attached

Has the Raymond Davis case choked the US aid flow to Pakistan?

By Mehtab Haider

The increasing strain between the US and Pakistan relations over Raymond Davis issue is having an impact on the fragile economic situation of our country. Even earlier, the US had used delaying tactics in releasing funds under the Kerry Lugar Law (KLL) by citing different excuses, thus increasing the problems of the economic managers.

The PPP government is also adding fuel to the fire by demonstrating its indecisiveness on key economic issues. Despite making commitment to provide $1.5 billion under KLL on per annum basis, the US has so far released around $200 to $250 million in the first eight-month (July-Feb) period of the current fiscal year.

The US reimbursed around $732 million under the Coalition Support Fund (CSF) for the services rendered by Pakistan to flush out Taliban and Al-Qaeda supporters from the tribal areas of the Pak-Afghan border against the bills of $3 billion.

After Raymond Davis case, the US has not paid any fresh installment under the CSF and there is a growing concern in Pakistan that Washington would use this money as leverage to convince the PPP government to provide diplomatic immunity to Raymond Davis. The issue of diplomatic immunity is going to be decided by the government and subsequently by the courts.

To come out from the fiscal morass, there is no other solution but to generate domestic resources by broadening the tax base and impose taxes on agriculture income, real estate, and services sectors. This may sound an abrupt conclusion but fearing the international community led by the US is not ready to assist Islamabad without fulfilling its political and strategic agenda, options should be explored. But is that logical to think in these terms at this point in time?

The government had estimated to get Rs186 billion external resources from multilateral and bilateral creditors to finance its budget deficit target of 4 percent of GDP which was equivalent to Rs688 billion for 2010-11. In the post flood situation, the government was forced to jack up the budget deficit target to 4.7 percent of the GDP in the wake of increased resource requirements to compensate the victims of floods.

Now the emerging economic realities show that the government was failing miserably on all fronts, including evolving a consensus on taxation measures, including imposition of Reformed General Sales Tax (RGST), flood surcharge and hike excise duty, reducing expenditures as well as obtaining the desired budgetary support from the World Bank, Asian Development Bank, USA, and others.

Estimates prepared by the finance division show that the government plans to impose 15 percent flood surcharge as against the earlier rate of 10 percent and excise duty to 2.5 percent from the rate of 1 percent from April this year through Presidential Ordinance to generate Rs26 billion in the last three months (April-June) period of 2010-11.

If taken, these taxation measures would help the government to jack up the FBR’s target to Rs1,630 billion from Rs1604 billion and would help curtail the deficit in the range of 5.5 to 6 percent of the GDP. But this desired fiscal deficit target will mainly depend upon the government’s ability to reduce its expenditures as well as generate the required budgetary support from external inflows.

Renowned economist, Dr Ashfaque Hassan Khan, who is Dean NUST Business School tells TNS that “Pakistan requires letter of comfort from the IMF for obtaining budgetary support from other donors as the IMF team analysed debt sustainability of the country to demonstrate that the recipient country’s debt situation was comfortable and there will be no issues for making repayments of their loans.”

Ashfaque also says that the team of the IMF, which visited Pakistan recently, was not meant to undertake review of the economy but to gauge whether Pakistan possessed the capacity to deliver on key economic reforms agenda in the shape of imposing RGST, approving State Bank of Pakistan’s fresh act and doing away with power subsidies and tackling the monster of circular debt. “If nothing has been achieved substantially on key reforms agenda then the IMF staff will not be able to convince its Board of Directors for the release of funds.”

A senior official of the finance division, who does not want to be identified, says the government had committed itself to economic reforms. One way of doing it is by raising the POL prices. This is not an easy decision to take keeping in view its political cost, he says, adding, “We are quite confident that the IMF team would show its confidence as we are going to unveil our macro-economic and fiscal framework by making efforts to restrict budget deficit within the desired limit of less than 5.5 percent of the GDP for end June 2011,” he maintains.

The official data of the finance ministry shows a different picture. It says financial assistance from the international community for budgetary support declined by over 50 percent during July-Dec 2010 compared to the same period in 2009. The government received external inflows to the tune of Rs46.999 billion in July-Dec against Rs110.251 billion in the same period of the previous fiscal, indicating a drop of Rs54 billion. Out of much trumpeted Tokyo pledges of $5.2 billion that was termed as major success by the PPP government, the received inflows amount to a paltry $18 million (Rs1.491 billion) in the first six months of the current fiscal year.

Donors apply three conditions for releasing funds to Pakistan -- imposition of Reformed General Sales Tax (RGST), ending power sector subsidies, and increasing POL prices in months ahead.

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