The talks have been suspended so that the economic managers could seek President Zardari’s intervention in taking difficult economic decisions.—Reuters photo

ISLAMABAD: The crucial talks between the government and twin missions of the International Monetary Fund and World Bank remained suspended for a day on Tuesday and then put off for another two days to seek top level political intervention in difficult economic decisions.

Informed sources told Dawn that the two sides were originally scheduled to conclude on Tuesday, or latest by Wednesday, their negotiations on macroeconomic framework and on a strategy for economic stabilisation and containing the rising fiscal deficit.

Officials said the talks did not take place on Tuesday because President Asif Ali Zardari had called to Karachi the economic team, including Finance Minister Dr Abdul Hafeez Shaikh and Finance Secretary Salman Siddique.

But the sources said the talks were planned well ahead of time and were seldom left in the middle.

They said the economic managers wanted to brief the president on the country’s precarious fiscal position and seek his intervention in taking difficult decisions following a tough stance adopted by international lenders.

They are also reported to have sought the president’s influence in persuading the Sindh government to give up its hard line on collection of sales tax on five smaller services which had practically stalled the introduction of reformed general sales tax.

As a result, the talks were expected to resume on Wednesday on the basis of feedback from Karachi and to continue until Friday.

The sources said the government had put on hold a notification for increasing electricity tariff by two per cent for a few days to let the political pressure arising out of a nine per cent increase in petroleum prices subside, although the lenders had been assured of meeting the commitment on tariff hike with effect from Nov 1.

Notwithstanding a delayed notification, the higher power rates could be recovered from consumers with retrospective effect from Nov 1 through a delayed billing cycle, the officials said.

They said the media hype against the petroleum price describing it as ‘petrol bomb’ had not gone down well with the government. It now wanted to avoid, or at least delay, a similar description of power tariff hike as ‘an electric shock’.

But the real concern for policymakers was containing the rising fiscal deficit in view of much higher than budgeted security expenditures, lower than targeted revenue collection in the first quarter and delay in the implementation of major taxation measures like RGST.

The sources said that the security-related expenditure in the first quarter of the current fiscal year had exceeded its budgetary estimates by more than 18 per cent.

But still the United States wanted Pakistan to launch military operation in North Waziristan without releasing more than $2.5 billion in ‘overdue arrears’ out of the Coalition Support Fund or easing out funds under the Kerry-Lugar-Berman Act.

They, however, said the additional financial commitment by the United States could partially offset short-term deficits for a year or so, but a long-term solution was seen in the introduction of wide-ranging taxation measures to improve tax-to-GDP ratio, which had declined from 9.1 per cent in 2008-09 to nine per cent in 2009-10.

It was in this background that not only the lending agencies but also the US president asked Pakistan to expand its tax base and improve transparency mechanism.

The sources said that the economic team had also sought support of the president and the prime minister for introduction of additional income tax ranging between five and 10 per cent to bridge the financing gap for flood-related reconstruction requirements.

AUTONOMY FOR SBP
According to the sources, the government forwarded to parliament a bill to amend the State Bank act granting more autonomy to the central bank, but some restrictions on bank borrowings envisaged in the amendment were technically difficult to be adhered to.

For example, the proposed law put intra-day limits on the government’s borrowing from the central bank and the IMF wanted to return over Rs1,300 billion debt stock to the SBP and then meet intra-day restrictions.

The authorities believed this was an uphill task in the given circumstances.

The government has already been criticised by lending agencies for its inability to meet borrowing limits not only during the last fiscal year but also during the first quarter of the current year.

Containing fiscal deficit to 4.7 per cent, removing energy sector subsidies and more independence to the SBP continue to be crucial points of discussions with the IMF and World Bank.

But some political quarters within the government believed pressure was being exerted on the present government to take most of the tough economic and political decisions to discredit the PPP and then provide a stable economy to its successors.

Therefore, they suggested that the government should take only those decisions which it could politically absorb and pass on some of the difficulties to coming governments.

The lending agencies are critical of the government for its slackness in introduction of the reformed GST, over Rs422 billion worth of commodity sector liabilities, higher than targeted borrowings from the central bank, unhindered increase in fiscal deficit and its inability to get the approval of parliament on granting more autonomy to the State Bank.

The lending agencies wanted to hear from the authorities on key economic decisions over the next two days before they submit a report to the IMF’s executive board to consider disbursement to Pakistan of the remaining $3.5 billion of the $11.3 billion standby arrangement.