A Pakistani delegation led by finance minister Abdul Hafeez Shaikh is in Washington to assess the economic impact of the floods and to discuss ways in which the IMF could help in the recovery. Islamabad is reported to have requested the fund to relax the conditions of the loan to give it some fiscal space to fight the economic consequences of the floods and to immediately release the stalled loan instalment to offset pressure on the rupee. The ongoing talks, officials and analysts say, are also important for another IMF credit facility, which Pakistan desperately needs to avert pressure on its foreign exchange stocks and currency because of huge reduction in foreign investment and painfully slow disbursement of bilateral assistance pledged at the Tokyo conference in April last year. Pakistan aimed to ensure fiscal austerity, stay within fiscal targets and reform public sector corporations to set the stage for economic growth, he said. Analysts believe that the fund’s help as well as the decision of the World Bank and the Asian Development Bank to redirect their nearly $3 billion assistance for reconstruction of flood-affected areas will only provide a short-term respite for the economy. “It will ease pressure on the rupee, cover the expected expansion in trade gap, boost the investor confidence and reduce the government’s borrowing needs for budgetary support in the near term. But the government will need to obtain another IMF facility to put the economy back on the road of sustainable growth,” said Sayem. More importantly, he said, the government will have to implement tax reforms to increase its revenues. “It must cut its wasteful expenditure, including subsidies (of almost Rs200 billion) to public sector organisations (like Pakistan Railways, PIA and Pakistan Steel Mill) and improve its tax revenues by imposing wealth tax – which generates almost 3-4 per cent of their gross domestic product (GDP) in the developed economies – on finances, savings, property, etc of the wealthy people for sustainable economic growth,” he insisted.

The latest information provided by the State Bank showed that the banking spread has sharply increased to 7.6 per cent in July, which was 16-month high. Higher banking spread means banks get more while depositors get less return on their deposits. The State Bank has increased the discount rate by 0.5 per cent to 13 per cent which suddenly increased the return on banks’ investments. Banks have been making heavy investments on government papers on which the return also increased after enhancement of policy interest rate. Banking industry has been showing strong performance in the country despite severe global financial crisis. Further, the banks are no more dependent on borrowing by the corporate sector or overall private sector. The government has practically replaced the private sector and borrowed record money from the commercial banks last year giving them risk free easy income. In the fiscal 2009-10, the five big banks earned over 90 per cent of entire banking profits. The half year results (Jan-July-2010) also shows that these five big banks earned over 80 per cent of the banking profits.

The official said the government had allocated about Rs280 billion for repayment of foreign loans and interest during the current year, including a payment of about Rs102 billion to the IMF in two phases. The estimates comprised Rs77 billion for servicing of foreign debts, Rs175 billion repayment of loans and Rs27 billion of short-term credits.The government has assured the IMF that despite delays in increasing electricity tariff because of the flood situation, the agreed increase of about 25 per cent would be passed on to consumers during the year.

Despite poor economic scenario, banks kept improving their profits during the first half of this calendar year as they earned a net profit of Rs35.5 billion. The private sector did not play a key role for banks’ profits; it was the banks’ investment mostly in government papers which yielded profit for them.

In this regard, the KESC has moved two petitions, which would come up for hearing on Sept 2 amid stiff resistance from consumers and other stakeholders. Sources said the KESC sought a 19 paisas per unit increase on account of its rising operation and management (O&M) expenses while an increase of 11 paisas per unit was sought on the pretext of an increase in fuel cost.