IMF and World Bank urge Pakistan to do away with subsidies

ISLAMABAD — Pakistan's new elected government has regretted to accept the joint proposal of the World Bank and the IMF to withdraw oil subsidy in the next budget. Official sources said that the Prime Minister Syed Yousuf Raza Gilani believed that the nation cannot withstand the "shock" of eliminating subsidies on oil, wheat and fertilizer at this stage.
The prime minister stated at a high-level meeting held yesterday on budgetary matters that the process of withdrawing subsidies can only be gradual and when the government succeeds in mobilising new resources by overhauling the weak taxation system.
New resources were required to provide "certain respite" to the poor and the lower middle-income groups in the society, the prime minister said. The visiting IMF director for South Asia and Middle East Mohsin Khan and the World Bank Vice-President for South Asia Pruful Patal had proposed to the new government to "immediately do away with all subsidies" on oil, wheat and fertilizer etc. to arrest the fast declining economic situation in the country.
Sources said that the prime minister was told that Indonesia and Sri Lanka have removed subsidies recently and that Pakistan should also swallow the "hard pill" in order to achieve the much needed macroeconomic discipline in the country. "Off course macroeconomic fundamentals need to be set right but it does not mean that we should further burden our people by removing various subsidies," a source said who attended the meeting. He said that the meeting agreed to "restrict further bleeding" in the economy by re-prioritising every thing so as to achieve economic stability.
"The situation is extremely challenging as the budget making process has been constrained due to lack of funds", the source said. He said balancing act will have to be maintained in the new budget to collect resources including from the international donor agencies and to offer some relief package to the people. It will also have increase in the salaries of the government employees. Sources said that the meeting decided to restrict Public Sector Development Programme (PSDP) in the vicinity of about Rs400-425 billion during 2008-09. In fact, they said, there will be over 10 per cent reduction in the funds being allocated for the new PSDP compared to existing development programme of 2007-08.
A senior government official when approached said that the situation was pretty difficult but not "unmanageable" and the prime minister was informed that there was no need to be panicky as the government would not accept undue demands of the donor agencies particularly with respect to eliminating subsidies. He said that the meeting decided to achieve 6.5 per cent GDP growth rate and bring down the fiscal deficit from 9.5 per cent to sustainable limit of around 5-6 per cent by further reforming the country's spineless taxation system. Responding to a question, the official said that IMF has a very "conservative view" of achieving financial discipline by doing away with all subsidies.
"We cannot accept Fund's proposal as its role is now that of a advisory body but we have to take into account WB advice which is our regular donor," he said adding that Bank's will be convinced that Pakistan at this stage cannot afford to remove all subsidies and that it may take some time to start implementing their proposal, the official said.
According to an official handout about the meeting, the prime minister said that providing tangible and concrete relief with specific financial allocations to the people especially those in the lowest income groups should be the topmost priority of his government in the forthcoming budget. le explaining government's priorities for the forthcoming budget, the he directed all the concerned officials involved in the budget making to incorporate objectives which could provide relief to the lowest income groups, boost agriculture and manufacturing growth, help in overcoming energy and water shortages, developing human resource and avoiding wastage of tax payers' money.
The prime minister said that providing relief to the poorest of the poor who are facing back breaking hardship due to high food inflation and shortage of power and other essential goods is the real objective of the elected government. He said that the government is committed to making a sizable allocation in the budget for direct income support to the poorest and vulnerable groups.
Gilani said that government will soon start rural employment generating projects to generate employment for at least 100 days per family especially in the poor and backward districts. He said that skills development programmes for both rural and urban areas will also be initiated so that employability and productivity can be increased. He said that social protection measures including health care and nutrition support for children especially girls, will also be put in place besides allocating resources for provision of safe drinking water.
The prime minister said that government will also provide relief to government employees to compensate for rising inflation especially the low paid employees.
He directed that budget should also incorporate both fiscal and development support measures to boost growth in agriculture and manufacturing sectors which would include increasing incentives to enhance profitability, output and productivity in agriculture by suitable adjustment in subsidies and timely support prices.
This he said would boost agriculture production, improve income of farming community and eliminate the possibility of food shortage in the country.
He said that fiscal and development support for manufacturing in terms of tax incentives, encouraging industrial clusters, support for technology transfer and facilitation of import of power generating small units are some of the areas to be given priority in the budget.