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Pakistan's Economic Crisis Deepens as Multilateral Donors Withhold Aid

Strategic Insights

— 1 min read

Pakistan's economic situation is facing a crisis as multilateral donors, including the World Bank, the Asian Development Bank, and the Islamic Development Bank, have halted their budgetary aid to the country. The donors have expressed their concerns over the government's failure to implement economic reforms, including the introduction of a reformed sales tax, and have asked for a Letter of Comfort (LoC) from the International Monetary Fund (IMF) prior to disbursement. The IMF, which has been Pakistan's economic lifeline, is losing patience with the Pakistan People's Party-led coalition government, which lacks the political resolve to take unpopular decisions.

Key Takeaways:

  • The IMF's Stand-By Arrangement (SBA) facility is almost suspended, and multilateral donors are seeking an extension of the Letter of Comfort (LoC) from the IMF for loan disbursement under budgetary support.
  • The Pakistan government has sought a nine-month extension in the SBA till September 30, 2011, due to the delay in implementing the Reformed General Sales Tax (RGST) and the additional time required to restore macroeconomic stability in the aftermath of the 2010 devastating floods.
  • Finance Ministry officials have informed an ADB delegation that 95 percent work on the RGST has been completed, but the remaining 5 percent, consisting of critical support in parliament, remains the major impediment to the RGST implementation.
  • The government is planning to launch additional tax measures for flood-affected people and is looking for inflow of funds.
  • The IMF has been strictly monitoring Pakistan's performance indicators under the SBA signed in November 2008 for a $11.3 billion loan package.
  • Multilateral lenders and the Friends of Democratic Pakistan (FoDP) are carefully evaluating these indicators prior to taking decisions on disbursement of their pledges.
  • Pakistan faces challenges due to slow progress in flow of foreign investment, flood problems, and poor performance of the manufacturing sector.

Statistics:

  • The IMF's SBA facility is almost suspended.
  • 95 percent of work on the RGST has been completed, but 5 percent remains incomplete.
  • The Pakistan government has sought a nine-month extension in the SBA till September 30, 2011.
  • The IMF has provided a $11.3 billion loan package to Pakistan under the SBA signed in November 2008.
  • Multilateral donors, including the World Bank, the ADB, and the IDB, have halted their budgetary aid to Pakistan.

Sources:

  • ANI (Asian News International), Feb 01, 2011
  • Business Recorder
  • IMF, Stand-By Arrangement (SBA) signed in November 2008
  • Friends of Democratic Pakistan (FoDP)

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