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Pak to slash defence budget substantially for IMF help

world Updated: Oct 24, 2008 13:27 IST

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Cash-strapped Pakistan will have to slash its defence budget by a substantial 30 per cent over next four years if it agrees to the International Monetary Fund's conditions for a bailout package now being discussed.

Facing severe debt-repayment problems and massive imbalance in its foreign exchange reserves, Islamabad hopes to get USD 9.6 billion from the IMF over the next three years at a mark-up rate of 16.7 per cent a year, a media report in Islamabad said.

But it pictured "extremely tough conditions", Pakistan would have to meet to get this financial bailout, The News daily reported quoting a document containing IMF's conditions.

The document states that if Pakistan accepts the IMF funding, it will have to gradually slash the defence budget by 30 per cent between 2009 and 2013 and reduce the number of jobs entailing pension in government and semi-government departments from 350,000 to 120,000.

The document further states that six IMF and two World Bank directors will monitor the preparation of the federal budget by the finance ministry and could change proposals which Pakistan government will be obliged to comply with.

Shaukat Tarin, adviser to the Prime Minister on finance, has said that Pakistan will approach the IMF for aid to overcome its financial crisis by mid-November, if it is unable to secure assistance from multilateral donors like the World Bank and friendly countries.

Pakistan will also have to furnish to the IMF details of all loans it has availed of under bilateral and multilateral arrangements 48 hours before signing the agreement for the funding, which will not be rescheduled, the document said.

"The IMF will propose taxation structure under package of reforms in the Federal Board of Revenue and Rs 50 billion increase in the current target of revenue under the head of general sales tax," the document said.

"Imposition of agriculture tax will be made mandatory at the rate of seven per cent on wheat production and 3.5 per cent on other crops," it added.

Pakistan requires financial aid worth USD three to five billion within a month to cover its fiscal gap. As a first step, it will seek aid from multilateral donors like the World Bank, ADB, Islamic Development Bank and Britain's DFID.

The second option available to the country is seeking aid from friendly countries, including members of the Friends of Pakistan group, which is scheduled to meet in the UAE in the first week of November.

If aid is not forthcoming from these quarters, Pakistan will make formal request for assistance to IMF, Tarin said.

The document listing the IMF's conditions further stated that the Federal Board of Revenue will have to submit a quarterly report to the Islamabad office of IMF for monitoring of revenue collection through direct and indirect taxes.

It said that the IMF representative will be part of the FBR's administrative structure and offices of the IMF will be set up in all the headquarters of Pakistan's four provinces to monitor the general sales tax collection.

"The Pakistan government will have to provide details of loans it got from all other lenders, including China, 48 hours before signing the funding agreement with the IMF and 25 per cent of government assets pledged as securities for such loans will be the property of the IMF," the document said.

The IMF's intervention in affairs of the State Bank of Pakistan and provision of details of foreign exchange reserves and flow of foreign exchange through commercial banks are other strict conditions entailed by the IMF funding.