KARACHI/ISLAMABAD, Dec 3: The government has assured the International Monetary Fund (IMF) that the State Bank of Pakistan will immensely be empowered to change management in banks, restructure them and acquire their ownership.

The IMF on Wednesday released the Letter of Intent (LoI) and Memorandum of Economic and Financial Policies, submitted by the finance ministry, which provides some surprising revelations mainly about the government’s assurances and steps taken preceding the $7.6 billion loan agreement signed last month.

The massive empowerment of the State Bank will be obtained through the Parliament by end-June 2009. “This will strengthen the SBP’s ability to (i) change management in banks; (ii) impose losses on shareholders by writing down their capital; (iii) intervene and take ownership of banks; (iv) appoint administrators to operate banks; and (v) restructure banks,” said the IMF document.

“The legal provisions relating to the operational independence of the SBP will be reviewed. These provisions will be strengthened based on the recommendations of an inter-agency committee that will be established by mid-November 2008, and taking into account technical recommendations from the IMF,” said the document.

State Bank governors were mostly the experts having vast experiences of working with the World Bank or Asian Development Bank.

As per the agreement, the State Bank will get rid of the responsibility of foreign exchange it provides for import of oil and a schedule has been provided. According to the schedule, furnace oil import payment will be phased out by February 1, 2009, diesel and other refined products by August 1, 2009 and crude oil by February 1, 2010.

The government has assured to eliminate any exchange restriction during the 23-month IMF loan programme.

“Specifically, the exchange restriction on advance import payments against letters of credit will be eliminated by end-January 2010, subject to a marked improvement in the balance of payments position,” said the document.

The advance import payments against letters of credit have serious negative impact and were one of the legal paths for the flight of foreign exchange from the country. The SBP imposed restriction on advance import payment due to falling reserves of the SBP.

“No intensification of existing restrictions and no new exchange restrictions or multiple currency practices will be introduced during the programme period,” said the IMF document.

The paper says the real GDP growth would slow further down to 3 to 3.5 per cent in 2008-09 in “response to the tightening of macroeconomic policies and a deceleration of growth in Pakistan’s trading partners.”

It further said following the initial stabilisation efforts in 2008-09, the real GDP growth would increase to 5 per cent in 2009-10, and is projected to rise gradually to 6.5–7 per cent a year by 2012-13, based on a significant increase in investment and further progress in structural reforms.

Average inflation is targeted to decline to 13 per cent in 2009-10, and to 5 per cent by 2012-13 while the 12-month inflation rate is projected to decline to 20 per cent at end-June 2009.

The Benazir Income Support Programme (BISP) has also come under the ambit of IMF.

“The design of the BISP, in particular the targeting of transfers and the delivery mechanism, will be reviewed in the first half of 2009, in consultation with the World Bank,” said the document.

Fiscal deficit/tax reforms

The government will increase tax revenue by 0.6 percentage points of GDP and reduce non-interest current expenditure by about one a half percentage points of GDP, mainly through elimination of oil subsidies by December 2008 and electricity subsidies by June 2009.

The LoI showed to achieve the target of 4.2 per cent of fiscal deficit, domestically-financed development spending will be reduced by about 1 percentage point of GDP through better project prioritisation.

For curtailing inflation, an assurance has been held out to the IMF to increase the discount rate further in the next monetary policy review, scheduled for January.

However, the discount rate will be raised earlier if the actual reserves for end-November and end-December 2008 fall short of the programme monthly floors on the SBP’s net foreign assets.

As per agreement with the IMF, the electricity tariff differential subsidies will be fully eliminated by end-June 2009. To achieve this objective, the average base tariff will be further increased during 2008/09 according to a schedule to be agreed with the World Bank by end-December 2008 (structural benchmark), and the government will use fuel and other surcharges, as necessary. The subsidies on petrol, textile has already been done away with.

Under the conditionalities, an integrated tax administration organisation on a functional basis will be established at the Federal Board of Revenue (integrating both the income tax and sales tax administration).

In addition, audits will be reintroduced as part of a risk-based audit strategy that will be implemented by end-December 2008. A full description of the required reforms, together with an action plan will be provided to the IMF by end-December 2008.

As part of this process, the government plans to harmonise the income tax and GST laws, including for tax administration purposes, and reduce exemptions for both taxes. To that end, it will submit legislative amendments to by end-June 2009.

In addition, the excises on tobacco will be increased in the context of the 2009-10 budget. By end December, the government will initiate a process to implement a full value added tax (VAT) with minimal exemptions, to be administered by the FBR. Draft legislation for the VAT is expected to be ready for public debate by end-2009.

The government will prepare, by end-March 2009, a plan for eliminating the inter-corporate circular debt within the fiscal deficit target. The government is committed to limiting SBP financing of the budget to zero on a cumulative basis during October 1, 2008–June 30, 2009.

The deficit will be met through external resources and the acceleration of the privatisation process, the issuance of treasury bills, and other domestic financing instruments, including Pakistan Investment Bonds, Ijara Sukuk, and National Savings Scheme (NSS) instruments.

The first review of the conditionalities will be held on March 15, 2009 by IMF team before releasing a tranch of SDRs568.54 million, second review on June 15, 2009 for the release of another same amount.