It's a question of commitment-on defence expenditure and taxation. Pakistani prime minister Nawaz Sharif may still defend his government against criticism for its failure to revive the country's battered economy, but senior officials in his finance ministry concede that the message has penetrated the top echelons of power. That is the reason for Sharif not being able to keep his earlier commitment made to the public that he will not compromise with the International Monetary Fund (imf).
Charges for fuel, power, gas and phones-apart from the prices of basic commodities-have gone up due to an increase in taxes. And now Sharif is faced with the biggest challenge. The imf has made it clear that the government has to make a firm commitment, prior to the release of funds, that it will levy a 15 per cent general sales tax (gst) up to the retail level. With traders being Sharif's main constituency, their alliance with the opposition on this issue can create serious problems for him. As the government is trying to persuade the traders not to go on strike, the imf seems firm that unless there is a commitment from the very top, no money will be released.
A senior imf official quoted by a local daily said: "We need a firm political commitment and the will to back up what they sign. Even if they sign the Letter of Intent and then dilly-dally in enforcing the gst, it would not do."
The hitherto loyal business community is distancing itself from the government. "Our demand is clear: that the gst should be reduced to 5 per cent. I think it is a reasonable demand," says Fazlur Rahman Ditto, president of the Federation of Pakistani Chambers of Commerce and Industry. But if Sharif succumbs to this pressure, he won't get the money he desperately needs to keep the economy rolling for another six months to a year.
The other commitment made by the government is to reduce defence expenditure. The imf has only asked the government to reduce its fiscal deficit by cutting down non-development expenditure. But it knows there's no other way Pakistan can cut expenditure without slashing defence spending. After debt repayments, defence is the biggest chunk of the Pakistan budget. In the current budget, it is 21 per cent or Pakistani Rs 142 billion of the total expenditure. "The imf has made it clear that development expenditure can only be reduced up to a certain limit as it will affect the social development programmes of the government. The other non-development expenditure, including grants by the government, is only 15 per cent of the budget. Then, you cannot reduce the debt-servicing budget. So, from where are you going to cut the expenditure except defence?" asks an economist.
No matter what Sharif may do, if he wants the imf's money, he has to meet their demands. "No matter what the political repercussions, this time the progress and implementation on the imf programme will be closely monitored. And if anything falls short of target, Pakistan's programme will be in serious problems," says a senior finance ministry official. So would be the country's prime minister.