To lose one parent may be regarded as a misfortune, to lose both looks like carelessness.” Well, Pakistan has now lost its third State Bank governor in three years and it looks like nothing but incompetence on the part of the government. Shahid Kardar confirmed in an interview that he had handed in his resignation but said he would only explain his reasons once the resignation has been accepted. His predecessor, Salim Raza, had officially quit for personal reasons but reportedly he was extremely unhappy with the government’s attempts to curtail the central bank’s independence. Mr Kardar, it is believed, does not want to agree to printing more money to meet the government’s demand for increased expenditures and to meet financial obligations (one report suggests that part of this may have to do with extending the allocation for the Benazir Income Support Programme).
Mr Kardar’s stance is correct for reasons related both to finance and governance. Inflation is well above double digits and printing more money will only exacerbate matters. Rather than meeting its debt obligations by raising revenue, the government has preferred to just print more currency. A state bank governor who refuses to exercise that option could force the government to improve its tax collection and eliminate untargeted subsidies.
IMF has been steadfast on its stance and succeeded pressing Pakistan to meet its conditions for levying tax on the agriculture sector, enhance energy price and ensure implementation of GST.
The government had set October 1, 2010 as the new deadline to overhaul the sales tax regime after failing to implement Value Added Tax on July 1, 2010. “IMF had also indicated the conditions for release of last tranche of $1.85 billion bailout package for Pakistan would be tougher,” Shakeel Ahmad member Karachi Chamber of Commerce and Industry said.
Ahmad added that the IMF would likely put a proposal before Pakistan that surplus cash crops would be kept under the IMF supervision. “This will be done in case Pakistan fails to follow the dictation of IMF for levying different types of taxes and increase cost of utilities,” he explained, Pakistan will start paying $8 billion loan by 2012 and the process will continue till the next three years.
The IMF had delayed the three meetings on the request of the Pakistani government as officials wanted to present final figures instead of relying on provisional statistics.
He said due to the continuous energy price hike, IMF agreed for releasing funds otherwise donor would stop releasing remaining loan amount besides it was determined to start audit of the loans accounts.
He said the Pakistani side would likely request for another loan of $4 billion on a short-term basis in order to repay interest amount on loans.
“The rulers, at the behest of the IMF, reviewed the domestic economy on many occasions by levying taxes—and in case of failure—the IMF would impose tougher conditions for the release of loans,” Ahmad maintained. He expressed surprised that Pakistani team, “headed by Federal Finance Minister Abdul Hafeez Shaikh is without governor of the SBP.”
The IMF has sought amendments to the State Bank of Pakistan Act in order to provide the central bank with operational independence.
By November 2009, in 52 years after independence the country was indebted under foreign loans to the tune of Rs 3,000 billion. The IMF wants Pakistan to raise tax revenue from the present 10 percent of gross domestic product (GDP) to 15 percent by 2013, which could spell trouble for country’s economy.
The country’s foreign debt now stood at Rs 6,200 billion and in only two years 2008-09 alone, they have swelled to Rs 9,500 billion. The talks for the sixth review would be quite delicate as the government had not only breached the budget deficit target and central bank borrowing ceilings but was also unable to demonstrate any concrete development on the reformed General Sales Tax (GST) system aimed at abolishing all tax exemptions extended on political grounds.
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