COMMENT: High aid hopes stay unfulfilled —Muhammad Aftab - Monday, November 29, 2010

Source : http://www.dailytimes.com.pk/default.asp?page=2010\11\29\story_29-11-2010_pg3_4

The restrained PDF funding attitude and the partial response of the IFIs to help Pakistan come out of ‘the trough’ created by the floods, and accentuated by the ongoing business slowdown, presents a less-than-happy picture for the Islamabad rulers

Western and Muslim aid donors and international financial institutions (IFIs) have left the Pakistani government’s high aid hopes largely unfulfilled at a time when it needed hard cash — and lots of it — the most urgently. This is the net outcome of the latest round of the Pakistan Development Forum (PDF), a group of 34 western and Muslim countries and international financial institutions that has just ended in Islamabad. It was previously know as the Aid-to-Pakistan Consortium.

Instead of offering a big package of fresh economic aid, the group sent a critical signal regarding the prevalent poor governance, corruption and lack of cohesive business policies. The PDF leaders asked Islamabad to “mobilise its own resources” and stressed that “the wealthy class needs to share the burden of reconstruction and rehabilitation of the flood victims” and “not to expect from foreign taxpayers to meet all the needs”.

Prime Minister Yousaf Raza Gilani, urging larger aid commitments, assured the donors to give Pakistan “more time to carry out structural reforms, including widening the tax base, as it struggles to recover from its worst floods this summer.” Finance Minister Abdul Hafeez Sheikh said, “Pakistan needs all the financial help it can get since the floods inflicted almost $ 10 billion in losses but donors’ mistrust over the transparent use of money has slowed donations.”

Still the good news is that some of the donors did commit fresh aid. Richard Holbrooke, the US Representative for Afghanistan and Pakistan, announced the diversion to recovery and rehabilitation of $ 500 million assistance from the already committed amount of $ 1.5 billion under the Kerry-Lugar Bill for this fiscal. Saudi Arabia committed $ 500 million in concessional loans to rebuild the flood-hit areas and $ 100 million to enhance the export of Pakistani products to Saudi Arabia. The Japanese Vice Minister for Foreign Affairs, M S Makiko Kikuta, announced $ 500 million assistance, including $ 233 million soft loans for the rehabilitation of roads and bridges in Khyber Pakhtunkhwa, and to import farm inputs like fertilisers and seed for distribution among the farmers of the flood-hit areas. It will also include $ 267 million assistance for flood-related works to be carried out by international organisations. Italy will provide 53 million Euros.

However, the PDF promised more funding, if the government succeeds in getting its own act together in the field of improving governance, elimination of corruption and misuse of aid and domestic funds for flood-related and other economic projects, and raised more cash domestically.

What is Pakistan’s response over these concerns? Finance Minister Sheikh assured the PDF that policy reforms would be undertaken in several fields to raise domestic resources not only for rehabilitation and reconstruction of the flood devastated areas, but to make the economy grow at a faster pace. He agreed with the criticism that fiscal policy dominated the monetary policy, which pushed up interest rates and upped the cost of borrowing both for the government and private businesses. This, in turn, is raising the cost of production of private businesses, turning exports costly and uncompetitive.

There are more assurances to placate the donor’s mistrust. “The government is also working hard to eliminate subsidies that are helping the rich at the cost of the poor,” Sheikh said. Monetary injection into Pakistan International Airlines, for instance, he said, “does not benefit the poor. Subsidised power used by the rich for heating swimming pools and rich farmers benefited through commodity procurement by the government.” Sheikh said, “The elimination of subsidies does not mean that we do not care for the poor, but we have to use better ways to identify the poor.”

How do we generate more domestic funds? In order to do so, the government has decided to levy VAT-type Reformed General Sales tax (RGST) on a wide range of goods and services, impose 10 percent flood surcharge on annual incomes of more than Rs 300,000, and a one percent increase in special excise duty on dutiable items. The key objective of introducing these measures is to increase the tax-to-GDP ratio from the present 12 percent, in two years, to 15 percent by 2015. The budget deficit target has been set at 4.7 percent of GDP, in consultation with the IMF. Budget restructuring will provide Rs 361 billion, while government spending has been slashed by Rs 295 billion, following the floods. The new taxes will yield Rs 66 billion.

Alongside the PDF session, the IMF, which is assisting Pakistan through a $ 11.3 billion Standby Arrangement, issued a statement on the present and future prospects of the economy so that the government can formulate policies to do the task. It projects inflation at 14 percent and a real GDP growth of just 2.75 percent in the current FY-2011. The balance of payments is expected to weaken in FY-2011, due in part to the impact of the floods. Imports will rise as food and other basic goods will need to be brought in from abroad. Imports of capital equipment for reconstruction will increase. Textile exports may decline, although the industry escaped flood damage.

But the higher trade deficit will be compensated in part by rising home remittances sent by overseas Pakistanis. But the current account deficit may widen by 0.8 percent of GDP to 2.8 percent. “Given Pakistan’s large flood and development needs, additional donor financing will support the government’s efforts to finance flood relief and reconstruction as well as development and social spending,” the IMF said. It pointed out that prior to the floods, “growth was picking up, but inflation was high and persistent. This summer’s floods have led to sharp deterioration in the economic outlook.”

The restrained PDF funding attitude and the partial response of the IFIs to help Pakistan come out of ‘the trough’ created by the floods, and accentuated by the ongoing business slowdown, presents a less-than-happy picture for the Islamabad rulers. This is particularly so because they are enmeshed and embroiled in numerous domestic problems — ranging from poor image, to inflation, the ongoing energy crunch, the political parties, including their coalition partners, in a perpetual threatening mode to quit and workers and consumers already hitting the streets. This is the current domestic picture.

On the international side, although the PDF has yet to contribute sufficient funding and the IMF’s assessment calls for a greater domestic effort, the task, though difficult, is clearly set for Islamabad. Is the ball not in the government’s court?

The writer is an Islamabad-based journalist and former Director General of APP