October 26, 2010 / 11:15 AM / 9 years ago

Q+A-What to expect from IMF's next meeting in Pakistan

KARACHI, Oct 26 (Reuters) - Officials of the International Monetary Fund (IMF) and Pakistan are due to meet on Wednesday in Islamabad to discuss the country’s performance for the release of the sixth tranche of a $11 billion IMF loan.

Policy level discussions will take place on Nov. 1-2, according to official sources.

The last review was completed in May and the review for the release of the sixth tranche has been delayed since August over several issues, such as an increase in power tariffs and the implementation of a reformed general sales tax (RGST).

The meetings are also likely to discuss the revised macro-economic targets after August’s devastating floods caused $9.7 billion in damages as well as any follow-up IMF programme.

Here are some questions and answers:

WHAT DOES THE IMF WANT FROM PAKISTAN?

The IMF wants Pakistan to do four things: introduce an RGST along the lines of a value added tax to increase the tax base; reform the electricity sector to eliminate subsidies; resolve circular debt and address the quasi-fiscal implications of commodity credit.

It would also renew its condition for zero net borrowing by the government from the central bank.

HOW LIKELY IS PAKISTAN TO IMPLEMENT FISCAL REFORMS?

Pakistan said in June that it would replace its general sales tax (GST) by the RGST by Oct. 1, but that deadline has slipped to Dec. 1. A bill is scheduled to be presented to parliament in its next meeting, according to official sources, which would bring it a step closer to actually implementing the RGST. Passage is likely because the federal government finally agreed to allow the provinces to collect taxes on services, one of their key demands.

Pakistan also must raise electricity tariffs to eliminate its current spending of $2 billion annually on power subsidies.

The Ministry of Finance is feeling the urgency to push forward with reforms because in addition to organisations like the IMF, major international donors such as the United States are also calling for reforms.

Pakistan says it expects foreign aid, not including the IMF funds, to make up about 14 percent of its 2010/11 federal budget.

WHAT WAIVERS WILL BE SOUGHT?

Pakistan is likely to seek waivers for the fiscal deficit target for the 2009/10 fiscal year after it swelled to 6.3 percent of GDP, wider than the targeted shortfall agreed with the IMF of 5.1 percent.

The government also failed to meet its target of zero net borrowing from the State Bank of Pakistan for the year ending June 30, owing a provisional 41.93 billion rupees ($488.58 million).

WHAT HAPPENS NEXT?

If the sixth tranche is released, there is one more tranche left before the programme is scheduled to end in November. Pakistan could ask to get both tranches in one go, but analysts said that is unlikely to happen.

Pakistan must start repaying the loan in 2011, but if the last tranche is delayed, the repayment schedule will also be pushed back.

It could also end the current programme with one tranche remaining and choose to enter a new IMF programme.

Finance Minister Abdul Hafeez Shaikh said in May that Pakistan could take out another loan from the IMF to refinance the original $11 billion bailout package.

(Editing by Chris Allbritton)

$1 = 85.82 rupees For more Reuters coverage of Pakistan, see: here E-mail: sahar.ahmed@thomsonreuters.com; Reuters Messaging: sahar.ahmed@thomsonreuters.com; Karachi newsroom: +92-21 3568 5192 If you have a query or comment about this story, send an e-mail to news.feedback.asia@thomsonreuters.com

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