The government and the IMF have reached an understanding concerning a package of economic and fiscal reforms after talks held in New York during the first week of October. The package, devised by the government, will now be presented to Bhutto’s cabinet for approval, before the measures can be implemented. However no definite date for the disbursement of the next tranche of the stalled standby facility has been set. ‘The disbursement of funds will be entirely dependent on the implementation of the agreed package,’ says an IMF official.
The standby facility, agreed upon after the cancellation of the extended structural adjustment facility (ESAF), has been held up since the June budget for 1996/97. The budget included an increase in sales tax which was so unpopular that the government was forced to amend the tax almost immediately after it was announced. The changes to the budget have resulted in a continuing lack of clarity over government revenues for 1996/97.
The content of the IMF-government agreed package has not been made public. It is likely that it will maintain the budget deficit target of 4 per cent of gross domestic product. Economists say that if it is to achieve this, the government must pass legislation to tax agriculture and that spending cuts could come in the substantial defence budget. The political difficulty for the government in imposing agricultural taxes is the strong representation of land-owners in parliament. Officially, the IMF distances itself from such debate. ‘We are only interested in aggregates,’ says an official.
Whilst trying to win IMF favour the government is facing strong opposition from its own electorate. Strike action and destabilising violence are becoming daily occurrences. The government is charged with deep-rooted corruption and economic mis-management by a united political opposition. The government has also been shaken by the recent murder of Bhutto’s brother, one of her political opponents.
Economically confidence is also low. Foreign reserves stand at about $1,129 million and bankers say that government borrowing is already nearly twice the target for the whole year of Rs 20,000 million ($541.5 million). High inflation is likely to put increasing pressure on exports and strong growth in imports is set to continue. The Karachi Stock Exchange index has lost over 20 per cent since June.
The government says it is hoping to reinstate an ESAF programme. The IMF however says that this is a long way off. ‘The recent talks did not mention the ESAF,’ says the IMF. ‘There is a lot of work to be done on the standby programme first. The most important thing is the restoration of confidence. For that the government must implement the agreed reforms.’