By Mehreen Zahra-Malik
ISLAMABAD (Reuters) - Pakistan has shelved plans to privatise its power supply companies and will miss deadlines to sell other loss-making state firms, reneging on promises it made to the IMF in return for a $6.7 billion bailout three years ago.
Two government officials with direct knowledge of the situation said International Monetary Fund (IMF) officials who met Pakistani officials in Dubai this week to review progress on reforms were angered by the backtracking.
But the IMF still agreed on Thursday to release the next $497 million tranche of that loan, leaving a further $1.1 billion left to be released.
Announcing that its team in Dubai had agreed that the tranche should be disbursed, subject to approval by the Fund's executive board, the IMF went on to lament Pakistan's slow progress in some areas.
"While many structural benchmarks have been met, measures pertaining to the energy sector reform and restructuring of loss-making public enterprises are yet to be implemented," the IMF said in a statement.
For all the IMF's frustration over the privatisation delays, the government has pushed ahead on other reforms, Pakistani officials said.
"The energy sector reforms are on track and we have been working consistently," Finance Minister Ishaq Dar told a joint news conference with IMF mission chief Harald Finger when asked about the decision to shelve the privatisation of power supply companies.
Economists say Pakistan can expect the money to keep coming with little more than a reprimand as Western allies, and neighbours Afghanistan and India, fear an economic meltdown would further destabilise the nuclear-armed Muslim nation of 190 million, whose fragile democracy has been crippled by years of power shortages, corruption and militant violence.
Still, a rebuke would send a negative signal to international financial markets about Prime Minister Nawaz Sharif's government.
"It was embarrassing and brutal," a senior Pakistani official present at the meeting in Dubai, told Reuters, describing the IMF's response when Finger was told that the government had decided not to sell nine power distribution companies because of fear of labour unrest.
"It was nothing less than a dressing down. If the IMF still doesn't penalize us, then all I can say is, 'We're very lucky'," the official said.
The other source, a senior finance ministry official who was also in Dubai, confirmed the account. The ministry did not respond to calls seeking comment.
A spokesman for the IMF said earlier the Fund would not comment during a mission review. During the news conference, Finger did not address alleged tensions at the Dubai meeting, though he did acknowledge "complexities" in the process.
The IMF loan helped Pakistan stave off a default in 2013, when dwindling foreign exchange reserves covered less than six weeks of imports. Reserves have since swelled to $20.5 billion in January from $11 billion in mid-2013.
UNION UNREST
The privatisation of 68 state-owned companies, which include loss-making enterprises like Pakistan International Airlines (PIA) and Pakistan Steel Mills, is a crucial part of the IMF deal and was meant to bring the country's finances back on track.
Such enterprises drain about $5 billion every year from state coffers, around an eighth of the government's fiscal revenues last year of about four trillion rupees ($38.2 billion).
The government has made some progress, including raising more than $1 billion by selling its entire stake in Habib Bank Ltd, but has struggled to find buyers for most of the companies and faced stiff opposition from labour unions.
Protesters clashed with security officials on Tuesday over plans to privatise the national airline, leaving two people dead. Most PIA flights were grounded on Wednesday.
The IMF's Finger said the Fund would not give a deadline for the privatisation of PIA, an apparent softening of its earlier insistence on a sell-off by a specific date.
But both Pakistani officials said the IMF had made clear its frustration earlier in the week.
"The IMF is asking the obvious question: 'Why didn't you start negotiations [with unions] earlier? Why wasn't this handled better at the political level?'," the senior government official said.
Officials told the IMF that taking on the power companies' 400,000 unionised employees was fraught with risk, and that instead the government would bring in independent boards of directors to improve management.
Pakistan will also miss a deadline to sell Pakistan Steel Mills by March, the Pakistani officials said.
Problems dealing with the IMF could nudge the government toward other sources of help, like ally China, which plans to invest $46 billion in a China-Pakistan Economic Corridor (CPEC), and is also leading a new Asian Infrastructure Investment Bank.
"If money from the CPEC starts coming in, it allows the government to show that something is happening and that they don't need the IMF," said Akbar Zaidi, a South Asian expert at Columbia University.
(Additional reporting and writing by Tommy Wilkes, Nadia Saleem in DUBIA; Editing by Paritosh Bansal and Simon Cameron-Moore, Robert Birsel)
