Q+A: Will Pakistan's political crisis hurt IMF reforms?

KARACHI Mon Jan 3, 2011 5:05am EST

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KARACHI (Reuters) - Pakistani Prime Minister Yusuf Raza Gilani held talks with opposition leaders on Monday in a bid to head off a possible vote of no confidence after a key partner quit the governing coalition.

Gilani's government lost its parliamentary majority on Sunday after the Muttahida Qaumi Movement (MQM) announced it would go into opposition over government fuel price policies that it said were "unbearable" for Pakistanis.

The pullout, which may lead to a call for an early election, adds to uncertainty over the government's struggle to meet economic policy demands placed on it by the International Monetary Fund in return for an $11 billion loan.

Here are some questions and answers on how the political paralysis may influence Pakistan's efforts to secure all of the financial backing it needs from the IMF.

HOW WILL THE MQM DECISION IMPACT REFORM EFFORTS?

The IMF along with other international donors have expressed concerns about Pakistan's low tax-to-GDP ratio, which at close to 10 percent is one of the lowest in the world. This is the most pressing reform issue.

The government faces fierce opposition from almost all political parties, including the MQM, to its bid to implement a reformed general sales tax (RGST) -- a key condition for the possible release of the sixth tranche of the IMF loan which has been keeping the economy afloat since it was agreed in 2008.

The tax was originally scheduled for implementation in July 2010, but has been delayed several times. The RSGT was presented to parliament in November. Getting a green light will be highly unlikely during the current political storm.

No party has formally demanded a no-confidence vote in parliament on Gilani, but analysts say this is the main worry for the government. The withdrawal of MQM's support has raised the prospect of an early election, and the political upheaval could drag on.

That would make it even harder for the government to tighten fiscal discipline to meet the requirements of the loan programme, which is increasingly critical for Pakistan as it grapples with a widening fiscal deficit and summer flood devastation.

However, the IMF last month granted a nine-month extension of the loan programme, and said the fifth review was expected to be presented to its board before the end of June 2011. This gives the government some more time to convince the political parties to agree to implement the RGST.

WHAT ABOUT OTHER SENSITIVE ISSUES SUCH AS FUEL PRICES?

The MQM said it would go into opposition because of the government's fuel prices policy. The government increased fuel prices by up to 9 percent, effective January 1, following an increase in international oil prices.

The IMF programme required Pakistan to eliminate all fuel subsidies. Now the MQM has put the government in a tight spot by demanding a reversal in the fuel price rise. That would create trouble with the IMF, which has propped up the economy since 2008 with the loan.

WHAT IS THE IMPACT ON THE STOCK MARKET?

Pakistan's stock market is less sensitive to violence than political upheaval.

Foreign investors bought shares worth a net $515 million in 2010 and were a major contributor for the 28 percent rise of the KSE-index last year, partly because their funds are easier to pull out during troubles and are among the cheapest in the region.

Now foreign investors are likely to stay on the sidelines to see how the political crisis plays out. If the government falls, that is likely to drive away foreign investors.

The Karachi Stock Exchange's benchmark 100-share index was down 1.8 percent, or 216.49 points, at 11805.97, on turnover of 72.18 million shares by 0938 GMT.

(Editing by Michael Georgy)

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