Bailout talks with IMF end without a deal

Disagreement remains on hike in power tariff, increase in interest rate, tax collection target

ISLAMABAD: Talks between Pakistan and the International Monetary Fund (IMF) remained inconclusive on Monday as both sides could not bridge the gulf on issues of increase in electricity prices, hike in interest rate and tax collection targets.

The IMF and Pakistan will have to bridge the gap on all thorny issues today (Tuesday), the last day of talks as per original schedule, aimed at reaching a staff-level agreement for the second bailout package in the last five years. here was expectation that Monday’s afternoon session will be the final round of parleys.

“There is still a gap between the positions of the IMF and Pakistan,” said Finance Minister Asad Umar on Monday, after holding talks with the IMF. The minister did not disclose issues that are hindering the conclusion of the parleys, which began nearly two weeks ago.

It had been expected that both sides would announce outcomes of the talks on Tuesday.

The IMF has asked Pakistan to enhance the Federal Board of Revenue’s (FBR) tax collection target by over Rs300 billion to Rs4.7 trillion for this fiscal year, according to the finance ministry sources. Pakistan and the IMF also had difference of opinion on transfer of resources to the provinces under the National Finance Commission (NFC) award. The fund wanted provinces to pick the cost of stipends paid under the Benazir Income Support Programme.

The finance minister said so far there was no change in the IMF’s schedule.

Pakistan had invited the IMF to review the possibility of signing an extended fund facility aimed at bridging $12-billion financing gap, during the current fiscal year. It has adopted two-pronged strategy by reaching out to friendly countries and also knocking the door of the IMF.  The country on Monday received $1 billion from Saudi Arabia out of $3 billion, confirmed the finance minister.

Sources in the ministry said there was still disagreement between the IMF and Pakistan on almost every important issue. They said that the IMF was also demanding full disclosure of China-related debt obligations. The Chinese debt, both public and publically guaranteed, was one of the main sticking points, sources claimed.  The minister said Pakistan believed in transparency and it would not hide anything that is related to the external debt.

According to sources, the IMF was demanding 22% further increase in electricity prices to address the issue of the circular debt. They said the fund was of the view that the countries have successfully managed the circular debt issue by increasing the tariffs.

The finance minister took a position that after increasing Rs1.27 per unit tariffs last month, the government would bridge the remaining gap through improvement in efficiency and recovery of past arrears, they added.

The sources said the IMF has demanded significant increase in the interest rates to contain the inflation, being stoked by the further devaluation of the local currency and increase in electricity and tax rates. The fund also demanded steep devaluation of the currency and adoption of total free float exchange rate regime.

Due to divergent views on the exact increase in the interest rates that currently stand at 8.5%, both sides could also not reach to a number of the budget deficit.

A further increase in the interest rate would also jack up the federal government’s cost of debt servicing that has already soared to Rs1.82 trillion. The rupee devaluation would increase external debt servicing cost.

In the baseline scenario, the IMF has projected that the budget deficit would remain far higher than the upward revised target of 5.1% of GDP for this fiscal year, said the sources. The higher cost of debt servicing would necessitate further increase in tax collection.

The IMF has also insisted setting the FBR’s revenue collection target at Rs4.7 trillion - an increase of over Rs300 billion. This is despite the fact that the FBR is already facing Rs68-billion shortfall in first four months of the fiscal year against the revised target of Rs4.398 trillion.

The international lender demanded Pakistan to change its audit policy and abolish the condition of not auditing a firm for at least three years after the last tax audit, the sources said.

However, Umar expressed reservations against the IMF demand and said that it would discourage companies and individuals, they said.

The sources said the IMF asked the federal government that it should transfer the responsibility of financing the BISP operations to the provinces. But this cannot be done until the provinces agree to the proposal.

The provincial governments have already informed the IMF that they would oppose any structural change in the current NFC award that ensures transfer of 57.5% of the total resources to the provinces. 

Published in The Express Tribune, November 20^th, 2018.

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