Pakistan fears poverty surge

By M H Ahssan & Ruhena Fatima

Concern is growing in Pakistan that levels of poverty may worsen if the country gets additional support from the International Monetary Fund (IMF) in addition to a US$7.6 billion deal agreed late last year. A better source of cash, they say, would be the United States in return for Pakistan's contribution to the "war on terror".

The poverty rate has jumped to 37.5% from 23.9% during the past three years. More than 64 million people, out of a 160-million population, were living below the poverty line in 2008, as against 35.5 million people in 2005, according to the Planning Commission of Pakistan.

Pakistan is seeking an additional $4.5 billion loan after agreeing to the $7.6 billion standby loan last November as it grappled with a 30-year high inflation rate and fast-depleting foreign exchange reserves.

Strict IMF conditions have forced the government to ignore social-sector spending and more people are being pushed below the poverty line. A reduction in the fiscal deficit, higher interest rates and a cut in the country's development program have been dictated by the IMF, leading to further increases in unemployment and poverty levels. Local experts fear that tough IMF conditions will drag the country further into a vicious circle of poverty while increasing debt-servicing liabilities.

The government forecasts that the economy, South Asia's second-biggest, will grow at its slowest in seven years after raising interest rates as part of the IMF conditions. The fund late last year released $3.1 billion as the first installment to save Pakistan from defaulting on external payments. Pakistani and IMF officials are now holding talks, due to last until February 26, in Dubai in the United Arab Emirates as part of a review for disbursing the second installment of $775 million under the 23-month program.

"Pakistan is [also] to ask for an additional loan of $4.5 billion from the IMF to patch up an economy wilting under a widening trade deficit," the private Geo TV channel reported, citing a Finance Ministry official. Pakistan may seek that amount from the IMF as the country's fight against terrorists is hurting the economy, Shaukat Tarin, the finance adviser to the prime minister, said on February 15, according to Bloomberg.

While there is little question that Pakistan needs help in meeting its financial obligations, critics question whether the IMF terms and payback conditions do not make the US a more desirable source of support, given the partnership the two countries profess in the "war on terror" on Pakistan's eastern border with Afghanistan.

"Before asking for more loans, the government needs to say how it will pay it back?" Business Recorder quoted Muzzammil Aslam, an economist at KASB Securities in Karachi, as saying. "The government should seek aid from the US, and not a loan from the IMF, as compensation for fighting terrorists. It is time to consolidate the economy and adjust policies for pro-investment activities. The IMF loan can only be used for balance of payments and building foreign reserves. The government needs to cut interest rates to boost businesses."

Islamabad is facing a 45 billion rupee (US$564 million) shortfall in revenue in the first seven months of the current fiscal year, which runs to the end of June, after cutting the budget deficit 27.24% during the first half of the fiscal year to 259 billion rupees compared with a year earlier.

The fiscal deficit is targeted to decline to 4.2% of GDP this fiscal year from 7.4% in 2007-08. In the first six months, the deficit was held back to 1.9% of GDP against a 2% target.

"To meet the IMF's 4.2% fiscal deficit condition, a major cut was made to the development budget," according to a report published in Business Recorder. The report, citing a Planning Commission document, said achieving IMF conditions ultimately would lead to ignoring social sector spending.

The government spent only 19% of the federal Public Social Development Program (PSDP) total allocation of 371 billion rupees, during the six months through December, the lowest since 2005. This PSDP has already been cut by 100 billion rupees.

Pakistani authorities finalizing the next budget outlay will keep in view the IMF's terms and conditions, according to a report in The News.

These terms include a commitment to increase the ratio of tax to gross domestic product. The Federal Board of Revenue submitted to the IMF an action plan for the tax reforms late last year. If the plan is approved, the government will have to choose between increasing the tax base by incorporating the agriculture sector, real estate and stock markets under the tax net or pile up new taxes on existing taxpayers.

Taking the latter route would risk public unrest and political agitation.

Local industrialists, meanwhile, are unhappy over the central bank's decision to keep interest rates at 15%, a level well above rates in the developed world. Critics say the government agreed with the IMF to raise the discount rate by 350 basis points in two phases, with an increase of 200 basis points (or two percentage points) made effective before last year's $7.6 billion deal was approved by the IMF board. An increase of 150 basis points would be dependent on the behavior of relevant indicators this fiscal year.

Industrialists are already struggling from the global slowdown, with textile exports falling 1.79% during the first six months of the current fiscal year. It now looks unlikely that the export target of over $22 billion for the full 12 months will be met.

"The financial crisis in the US and Europe [Pakistan's most important textile markets] has a spiral impact and Pakistani textile products are no exception to this global issue," the Daily Times reported Federal Textile Commissioner Mohammad Idris as saying.

Exports are being hit despite a more than 30% deprecation of the rupee, what has increased import costs and removed the potential benefits of a 70% decline in the price of oil in the international market. The country’s oil import bill increased by 45% to $5.48 billion during the first five months of the current fiscal year, from $3.8 billion over the same months the previous year, according to the Federal Board of Revenue.

The oil import bill did decline in November, but only on the back of a steep dip in demand from the slowing economy.

The government has given a commitment to the IMF to reduce domestically financed development spending by about 1% of GDP through better prioritization of projects. The government wants a total adjustment of 100 billion rupees by slashing the Public Sector Development Programme, according to Business Recorder.

The Planning Commission of Pakistan has sent a summary of its rationalization proposals to Prime Minister Yousaf Raza Gillani. In the next phase, projects that require foreign lending will be cut in the face of government difficulties in obtaining loans from international donors, the report said, citing commission sources.

The cuts will come amid forecasts of an average 2% growth in Pakistan's economy by June, with expansion now dependent on the performance of agriculture after the manufacturing sector shrunk 6.5% in the six months through December.

The IMF has forecast real GDP growth of 3.5% in the year through June, down from an average of 6.8% in the past five years and the slowest pace in seven years.