Pakistan to further increase power tariff in Aug: IMF

Report states country bound to implement FATF action plan in three months as part of $6b loan conditions

Shahbaz Rana July 09, 2019

ISLAMABAD: Pakistan has committed to further increase electricity tariff from next month (August) and is also bound to fully implement the Financial Action Task Force’s (FATF) 27-point action plan in three months as part of the $6 billion programme conditions, reveals an International Monetary Fund (IMF) report.

The staff-level report further disclosed that against the Pakistan Tehreek-e-Insaf (PTI) government’s claim of imposing Rs516 billion taxes, the actual tax measures amounted to a record Rs733.5 billion, which undermined the credibility of the government in the eyes of the legislators and the public.

The report stated that since May 16, 2019 Pakistan had enforced “market-determined” exchange rate regime – a fact that the State Bank of Pakistan was shy to admit.

Hike in power tariff of Rs2.50 per unit on the cards

Under the 39-month $6 billion package, there would also be a permanent ban on giving any new tax amnesty scheme and Pakistan was also bound to implement the value-added tax regime as against the current general sales tax regime.

The IMF has released the staff-level report five days after its Executive Board approved the $6 billion bailout package to help the country meet its international debt obligations. Under the three-year programme, Pakistan would receive $38 billion in loans from all creditors.

The IMF will monitor implementation of conditions through 13 quarterly performance criteria and continuous performance criteria.

One of them is to show net Rs1.071 trillion tax collection by the Federal Board of Revenue (FBR) by the end of September in order to achieve Rs5.503 trillion annual target by June next year.

Prime Minister Imran Khan on Monday elevated Hammad Azhar as the new federal revenue minister after withdrawing the Revenue Division portfolio from Dr Hafeez Shaikh. This has brought new dynamics to power politics where Shaikh is only left with the Economic Affairs Division and the Finance Division.

The effectiveness of Pakistan’s anti-money laundering and combating financing of terrorism regime must be urgently strengthened to support its exit from the FATF list of jurisdictions with serious deficiencies, stated the IMF.

The report showed that the IMF placed a structural benchmark “to implement all measures committed to in an action plan with the FATF by the end of October 2019”.

Power tariff hike

The report noted that the Asia Pacific Group on Money Laundering would discuss Pakistan's mutual evaluation report in August 2019. The authorities will work with technical assistance providers, including the IMF, to complete the action plan and further strengthen the effectiveness of the AML/CFT regime, it added.

Electricity prices

After increasing the electricity prices by 11% from July to recover Rs150 billion in additional revenue from consumers as part of the IMF condition, “a second quarterly adjustment will take place before the end of August”, revealed the report.

Not only that, Pakistan will also notify fiscal year 2019-20 electricity tariff schedule by the end of September 2019 under the IMF condition.

Under yet another IMF condition, the government is bound to submit an amended Nepra Act to parliament by the end of December to ensure full automaticity of the quarterly tariff adjustments and eliminating the gap between the regular annual tariff determination by the regulator and the notification by the government.

External sector

The IMF underlined that Pakistan’s capacity to repay its obligations in a timely manner remained adequate but subject to higher than usual risks. “Risks to Pakistan’s repayment capacity have increased on account of the continued decline in reserves and a delay in the adoption of adjustment policies,” said the global lender.

The fund’s exposure to Pakistan currently stands at nearly $5.9 billion or 55 per cent of the gross official reserves of the country.

The IMF said that Pakistan’s net international reserves were significantly negative at around –$16 billion at the end of May 2019. To remove future drains on its reserves, the SBP agreed to gradually scale back its short swap/forward foreign exchange position to $4 billion by the end of the programme from the current $8 billion.

The SBP would also maintain a positive policy rate in real terms consistent with the SBP’s medium-term inflation objective and the programme’s monetary aggregate targets, said the IMF.

Going forward, “since May 16, 2019, the SBP has allowed the exchange rate to be market determined”. In order to reduce risks to inflation and strengthen confidence, monetary policy had been tightened by 150 bps.

As part of another condition, Pakistan would reduce the SBP financing of it budget from over Rs7.7 trillion. There would be zero borrowing from the SBP for budgetary support.

The SBP Act would be amended to strengthen SBP’s autonomy, governance, and mandate. These amendments would address the recommendations of the upcoming 2019 Safeguards Assessment Report, including in areas such as operational independence and governance, governor’s tenure, and financial autonomy and accountability.

The amendments would ensure price stability as SBP’s primary objective and prohibit any form of direct credit to the government. Amendments to the SBP Act would be submitted to parliament by the end of December 2019 as part of the set of conditions.

Pakistan also committed to eliminating the existing administrative restrictions, which had been imposed to support the balance of payments. These measures included regulatory duties on imported intermediate, consumer and luxury goods as well as import restrictions for balance of payments purposes and multiple currency practices in the form of a requirement to fully pre-fund letters of credit imposed in early 2017; and restrictions on advance payment for imports against letters of credit imposed in July 2018—which “are subject to approval under Article VIII of the IMF's Articles of Agreement”.

Fiscal policies  

The IMF report revealed that the PTI government understated the amount of taxes that it imposed on the people for fiscal year 2019-20. The IMF gave a complete breakup of additional taxes that were estimated at Rs733 billion or 1.7% of the gross domestic product (GDP).

In contrast to this, the government had claimed that it imposed Rs512 billion worth of taxes that were equal to 1.2% of the GDP.

The IMF report showed that against the government’s claim of collecting only Rs51 billion additional from the salaried class, the actual burden would be Rs90 billion. The IMF estimated the impact of the property valuations at Rs44 billion.

An amount of Rs45 billion would be collected from those who were not in the Active Taxpayers List.

The IMF said the fiscal policies aimed at improving the primary balance to 2.6% of the GDP at the end of the programme and bringing the budget deficit to 2.3% of the GDP.

Overtime, Pakistan was “committed to taking steps to transform the GST into a broad-based VAT and making the personal income tax fairer and more progressive by raising the upper end of the tax structure and consider eliminating personal income tax credits and deductions for the higher income brackets”, according to the report.

Pakistan also committed to further strengthen taxation on real estate and on agricultural turnover or income by provinces, ensuring equivalent taxation of all sources of income and eliminating distortionary withholding taxes.

would also align the value of immovable
properties with market rates and specify
conditions under which long-term
lease hold would be considered as the purchase of property, revealed the report.


The IMF said that provinces agreed to deliver surpluses of around 1% of the GDP in FY20, gradually increasing it to 2.7% by the end of the programme by saving additional revenues generated through tax policy and administration reforms.

To support these efforts, the provinces would also increase collection of property and sales taxes, and assume more spending responsibility.

The Fiscal Coordination Committee would meet quarterly to assess progress towards these goals.

Pakistan would also submit in parliament a new state-owned enterprise law by the end of September 2020 aimed at modernising and clearly defining the role of the state as owner, regulator and shareholder of SOEs.

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