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Is IMF catching Pakistan in a debt trap?

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Khalid Mustafa

Pakistan’s public debt has alarmingly swelled to whopping figure of Rs9 trillion meaning thereby that every person and even a child who is yet to be born will come to this world with a gift from the incumbent regime of debt of Rs54,000.

The incumbent regime has virtually failed to improve its economic landscape as it could neither succeed in enhancing the tax base for revenue nor curtail its expenditure owing to which budget deficit is not being controlled.

The domestic debt stood at Rs3275 billion till June 2008 that swelled by Rs586 billion to Rs38,616 billion by June 2009. Now the domestic loan has increased by Rs792 billion to Rs4653 billion from June 2009 up to June 2010. In last two years, the debt increased by Rs1378 billion pulling up the public debt to over Rs9.2 trillion. Pakistan’s debt to GDP ratio has increased to 61 percent from 55 percent.

Apart from the huge debt, in the outgoing fiscal, the budget deficit stayed at 6.2 percent against the revised target of 5.2 percent which was originally at 4.9 percent.

So much so the government has failed to implement VAT from July 1, 2010 and it also seems that the government will not be able to implement the reformed GST from October 1, 2010 if the rifts between the centre and provinces on GST collection on services are kept in view.

The incumbent regime also ostensibly lacks the will even to withdraw the exemptions from 5 powerful sectors of economy.

However, it seems more odd and suspicious as to why IMF, and World Bank which are considered to be economic arms of US State department, so lenient to accommodate the country like Pakistan that has totally failed to fulfil any condition of $11.3 billion loan. The three main condition of the loan include

1) implementation the VAT from July 1;

2) reducing the budget deficit to 5.1 percent and

3) No borrowing from State Bank of Pakistan.

The leniency of the IMF towards Pakistan also seems very intriguing and it can easily be gauged that it continues to extend the loan to the country which is not performing in terms of implementation of reforms to increase the tax to GDP ratio and rationalize its expenditures just to drown the country into huge debt so that it could not stand on its feet.

If kept in view the current public debt of the country and its debt carrying capacity, then there exists a huge gap.

IMF does know very well that Pakistan’s debt carrying capacity is fast deteriorating even then it is extending the loan. So much so it has indicated that it would extend another loan when the current loan of $11.3 is over.

This means that IMF is all set to suck Pakistan into vicious circle of huge debt trap. The negotiations for next loan will be starting from November and that loan will be used to retire the existing loan of $11.3 billion.

Keeping in view the worst performance with regard to fulfilling the terms of $11.3 billion loan, IMF should have suspended the remaining tranches of the loan, but it did not happen just because of the US intervention. This shows that IMF and World Bank have become the political arms of the State Department. Piling of debts of the country that has no debt carrying capacity seems a great conspiracy to make Pakistan toothless in the future and dependent more on US.

Pakistan’s political leadership should come forward and help implement VAT that will help document the undocumented economy of the country. VAT will also increase the tax to GDP ratio by 15 percent till 2015. Apart from, good governance and rationalization of expenditure should be introduced on war footing. The leadership should also put their heads to save Rs250 to Rs300 billion per annum which is used to make some loss making Public Sector Entities functional.

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