INTERVIEW-IMF to meet in mid-May on Pakistan

Thu Apr 29, 2010 5:34pm EDT

* IMF board to meet in mid-May

* IMF concerned over inflation

* Electricity crisis is stifling economy (Adds details, more quotes, background)

By Sue Pleming

WASHINGTON, April 29 (Reuters) - The International Monetary Fund's board will meet in mid-May to approve the next installment of Pakistan's $11.3 billion loan but Islamabad must do more to tackle rising inflation and overcome power shortages that stifle the economy, the IMF said on Thursday.

Pakistani finance officials were in Washington last weekend ironing out problems before the IMF board meeting, which has been postponed several times partly due to delays by Pakistan over imposing a value added tax and raising power tariffs.

"We reached understandings on things enough for us to be able to go to the board in mid-May," said Adnan Mazarei, the Washington-based IMF mission chief for Pakistan.

"We recommend to move forward," he said, referring to the fifth payment of the loan, which amounts to about $1.15 billion.

Pakistan turned to the IMF for an emergency package of $7.6 billion in November 2008 to avert a balance of payments crisis and shore up reserves. The loan was increased to $11.3 billion in July last year. Pakistan's budget has also been strained by the cost of battling Taliban insurgents.

Mazarei said Pakistan remained "vulnerable" and he was concerned over the electricity crisis as well as a recent increase in inflation from about 9 percent at the end of last year to 12.9 percent at the end of last month.

"What is keeping me up is the electricity sector problems, the pick-up in inflation and its impact on the poor and the daily difficulties in budget management," he said.

"There are calls every day on new spending from the budget, the revenue performance is not very good and the Pakistani authorities need to make better efforts to make sure budget execution is smooth and that the budget financing is in place," he added.

CONFIDENT ON VAT

Mazarei said the government had made promises on the VAT issue, indicating it would take steps to iron out differences between the provinces and to ensure the new tax would be rolled out on July 1, a deadline analysts are skeptical about. The VAT rates have not yet been set.

"They (Pakistan's government) realize the historical opportunities and that the revenues are much needed. They also realize that this step is required for continued donor support," Mazarei said.

"Donors are very supportive to provide Pakistan with assistance for a period of time until Pakistan's public finances are put on a sustainable footing," he said, adding that there were no plans to augment the loan.

He also praised Pakistan's recent efforts to improve tax collection, with revenues collected by the Federal Board of Revenues increasing by 14 percent over the past nine months.

"Monetary policy on the part of the central bank has been generally appropriate. What is needed is a more appropriate fiscal policy which would then draw less on credit and also less crowding out of the private sector," he added.

Interest rates had been high in part because of the government's large borrowing needs and as a result banks were more willing to lend to the government at high rates rather than to the private sector.

THE OCTOPUS EFFECT

Pakistan is battling a chronic power shortage, with rolling blackouts countrywide, and is also struggling to keep its budget deficit at the levels required under IMF reforms. Under the IMF program, the deadline for another rise in electricity tariffs was April 1, but Pakistan failed to meet that.

Mazarei said Pakistan had agreed to measures to increase its electricity supply, which would eventually lead to an end in subsidies. He said Islamabad also promised steps to eliminate so-called circular debt.

This debt creates a chain reaction. Distributors cannot pay power producers, who in turn cannot pay fuel suppliers, resulting in even greater electricity cuts and putting more strain on the economy and industry.

"The problems in the electricity sector are like an octopus, with each of the legs stifling one aspect of the Pakistani economy. One leg stifles growth and one leg affects government finances and one is affecting the banking sector."

Seeking to ease IMF concerns, Prime Minister Yusuf Raza Gilani announced last week the government would pay off 116 billion rupees ($1.38 billion) of the circular debt. (Editing by David Alexander and Vicki Allen)