ISLAMABAD: The International Monetary Fund agreed in principle on a $9.6bn economic stabilisation plan for Pakistan during a week-long meeting between the two sides in Dubai, an official from the country's finance ministry said.
"The Pakistan team concluded talks with the IMF on Thursday to get consent for $9.6bn for two years as a standby arrangement," the official, who was part of the government delegation to Dubai, told Dow Jones Newswires.
The first tranche - which would only come after Pakistan has filed a formal request and the IMF has approved the aid - is likely to be for $3bn to $4bn, said the official.
An official from the IMF confirmed the in-principle agreement with Pakistan. The final approval will be given by the Fund's executive board, said the official, without providing details.
Shaukat Tarin, economic adviser to Prime Minister Yousuf Raza Gilani, will take a final decision on the formal request after discussing it with President Asif Ali Zaradari, the government official said.
IMF staff will prepare the Article IV Consultation Review Report and a letter of intent, which will be signed by Tarin as a formal request and agreement on conditions for release of the funds, he said.
Meanwhile, David Hawley, Senior Adviser, External Relations Department of IMF, confirmed talks in Dubai have concluded and said some "key points were still to be formalised."
IMF and Pakistani officials plan to resume discussions on a potential loan in the next few days.
"The stage of talks that took place in Dubai has concluded. Further discussions will take place in the next few days," Hawley said.
Pakistan is urgently seeking funds to help it weather a fast-deteriorating balance of payments situation. It hopes that agreement with the IMF on lending could unlock funds from governments friendly to Pakistan such as the US, the UK and the United Arab Emirates.
Few details about the potential conditions to the loan have emerged, although Tarin recently said the IMF has agreed not to push for an increase in Pakistan's already high interest rates.
Addressing the country's fiscal deficit will also be key. Improving tax collection could be part of that, so could privatisation of government-controlled firms.
Meanwhile, in an interview yesterday Tarin said Pakistan is at war on its western border and no effort should be made to slash down the defence expenditure at this critical juncture.
Citing the example of suspending the work on the construction of the new GHQ in the federal capital, Tarin said they had already taken steps to reduce expenditures keeping in view the difficult economic situation being faced by the country.
"If the armed forces keep their expenditures within the envisaged allocated amount for this fiscal year, it will be a great achievement on their part," he said and added that all the other expenditures would have to be brought down to reduce the fiscal deficit from 7.4% of the GDP to 4.3% on June 30, 2009.
The adviser hinted at raising the discount rate in the near future, as insisted by the IMF, saying the core inflation stood at 17% while the discount rate was 13% at the moment, which could be reviewed to tackle the inflationary pressure in a more effective manner.
He conceded that it would not be an easy task to bring the agriculture income and the services sector under the tax net. "We are not saying that it will be done immediately, but we want to set a course for increasing tax to the GDP ratio from 10% to 15% in the next five to seven years," he added.
However, sources said the government had accepted the IMF demand to cut down development and non-development expenditures by 35-40% and 7-10%, respectively.
On the non-development side, the defence budget is likely to be rationalised without announcing any cut as the panel of economists has recommended cutting down the defence spending by 7% at least during the current fiscal year 2008-09.
There are other non-development expenditures as well that can be reduced such as the government is considering reducing the fuel limit for bureaucrats, continuation of the ban to purchase cars and trying to reduce stationery for office work.
These are all minor steps but it will be a token for other segments to bring simplicity in their lives, added the sources.
"For imposing the agriculture tax, the government will have to move a constitutional amendment in parliament for seeking a nod before imposing this tax," the sources said and added that if the PPP government could devise a mechanism in this regard during its five-year term, it would be an achievement on their part.
"There is a need for upgrading the Index Production Unit (IPU) related to agriculture production," the sources said and added that the imposition of the GST on services also required the consent of the provincial governments before moving towards the desired direction.
"The FBR may slap the Federal Excise Duty (FED) on more services as alternate to the GST on services, which is a subject of the provincial governments," the sources said. - Agencies