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Wednesday, June 20, 2012

Next loan programme: High defence spending to come under spotlight

Pakistan’s defence budget will come under scrutiny in any future arrangement with the International Monetary Fund, as it will be difficult for the IMF to present a case in its board where defence spending is higher than development expenses, says a former IMF official.
Giving a lecture on ‘the IMF and Pakistan, a road to nowhere’, Dr Meekal Ahmed, former senior adviser to IMF executive director, said in Pakistan’s present security environment, the IMF stayed away from suggesting cuts in defence spending (under the previous $11.3 billion programme). The lecture was arranged by Pakistan Institute of Development Economics.
Ahmed’s comments came in the midst of reports that Pakistan and the IMF have been secretly negotiating a new programme as the country’s external financial position has deteriorated significantly. In 11 months of the outgoing fiscal year, the current account deficit – the gap between external receipts and payments – widened to $3.7 billion, $2.3 billion higher than original estimate for the whole year.
Ahmed said in any future programme the IMF will focus on cutting spending, particularly on defence, which must fall as a percentage of total size of economy over time. How the IMF staff will present a programme to their board when defence spending is higher than development spending, he asked.
For the next year, the defence budget has been set at Rs545 billion, which is 2.4% of GDP but actual spending is expected to be Rs913 billion or 3.9% of GDP. Contrary to that, Rs360 billion has been earmarked for development budget.
“No country turns to the Fund when its economy is doing well. We need to reflect on why we are unable to get out of their clutches and stay out like other successful developing countries have done.”
He said programme ownership is a critical ingredient in successful implementation, adding the early end of the last programme was a collective failure and the result of lack of ownership. Failure to impose reformed GST was last nail in the coffin of the IMF programme, he commented.
The 25-month arrangement for $11.3 billion loan ended prematurely in May 2011 as the government failed to push through key reforms.
No fresh funds
Former State Bank of Pakistan governor Shahid Kardar, while presiding over the lecture, said the IMF will not offer fresh funds in the next programme. Rather, it will prefer to roll over outstanding debt and enter into a formal arrangement only after Pakistan takes certain prior steps like application of reformed GST.
Kardar believed that the next programme will be tough and this time Pakistan may not have US support.
Stressing the need for undertaking reforms, Kardar said there was no constituency for reforms in the country. “Bureaucracy will not bother as their salaries have doubled since 2008 despite difficult times. Farmers do not want to pay tax but are receiving subsidy on imported fertiliser and the business community will never like to have reformed GST,” he elaborated.
“We are holding guns to our heads and saying to the world give us money, otherwise, we will blow ourselves,” said Kardar.
To a question about the timing of the next IMF programme, Kardar said a lot will depend on how oil prices move in the international market. Pakistan’s biggest worry should not be the size of current account deficit, but the real issue is financing the deficit, he said.
However, he suspected that the IMF will negotiate the loan programme with an interim government.


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