FT : Pakistan Turmoil

Saturday, January 8, 2011

Pakistan’s seasonal gift from the International Monetary Fund, its faithful benefactor, was a welcome one. A nine-month extension to the deadline for compliance with the terms of its latest borrowing programme, totalling about $11bn, was supposed to “provide time to the Pakistani authorities to complete the reform of the general sales tax [and] implement measures to correct the course of fiscal policy”.  The problem is in the IMF’s use of the word “authorities”. Whatever authority the government once had is fast eroding. Tuesday’s murder of Punjab governor Salman Taseer, a key supporter of Asif Ali Zardari, has weakened the president’s Pakistan People’s party just as it has been abandoned by coalition partners, robbing it of a parliamentary majority. Even with added time, the PPP’s chances of delivering on its tax-reform promises to the IMF – requiring renewed consultations with provincial governments and the private sector – seem slim.

The less the government achieves, though, the less keen investors will be to bridge the gap between tax receipts and government spending, which amounted to 1.6 per cent of gross domestic product in the first quarter of the current fiscal year. Hence, Pakistan’s unnervingly wide sovereign credit default swap, midway between Ireland and Greece. The country may not fall into arrears with the IMF imminently: repayments and charges due in the current calendar year are a relatively light $414m, equivalent to seven months of petrol taxes. Still, the ongoing cost of war on Taliban insurgents and flood-related rebuilding leaves little room for manoeuvre.  What’s more, 27 years of IMF borrowing have given Pakistani negotiators a reputation for intransigence rivalled only by the Egyptians and the Vietnamese. At this rate, another letter beginning “Dear Mr Strauss-Kahn” will be winging its way from Islamabad to Washington by September.

Reference : The Financial Times, Jan 7th 2011

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