Govt seeks to cut power subsidies
The board meeting also discussed the southbound movement of the rupee and its future outlook, which SBP governor described as stable, sources told The Express Tribune. Photo: PId
The Monetary and Fiscal Policies Coordination Board on Wednesday agreed to reduce electricity subsidies by Rs170 billion and also discussed the possibility of scaling back grants for subjects that fall in provincial domains.
The board meeting also discussed the southbound movement of the rupee and its future outlook, which the State Bank of Pakistan (SBP) governor described stable, sources told The Express Tribune after the meeting.
The meeting was held the day Pak rupee lost another Rs1.08 value against the US dollar and closed at 166.28 – the lowest level since September 21, 2020. The rupee has depreciated 8.4% since June this year.
The high-representation statutory board met after a long hiatus to dwell upon the emergent issues of growing expenditures, nose-diving rupee against the US dollar and increasing imports that could create external sector challenges.
The board reviewed the recommendation of completely withdrawing electricity subsidies for consumers of 201 to 300 units, the sources said. The proposal was to reduce electricity subsidies from Rs240 billion to Rs120 billion by reducing subsidies from 300 units consumption level to 200 units, they added.
It also took up another proposal of reducing the federal electricity subsidy on agriculture-tube wells from Rs75 billion to around Rs25 billion to Rs30 billion either through reducing motor size up to 15-20 horse power or asking the provinces to share 50% of the cost, they added.
There was a consensus in the meeting that the subsidies for the agriculture tube-wells and domestic consumers have to be rationalised, the sources said. The matter will now be taken up with Prime Minister Imran Khan.
Finance Minister Shaukat Tarin chaired the board, which gets its powers under the State Bank of Pakistan Act of 1956. Other members of the board are adviser to the pm on commerce, deputy chairman planning commission, SBP governor and Dr Asad Zaman.
The central bank governor wanted that the board be abolished through the SBP Amendment Bill. The move for now has been blocked to protect a 27-year-old institutional arrangement to align monetary policies with the country’s economic and fiscal policies.
The coordination board has the mandate to coordinate fiscal, monetary and exchange rate polices and ensure consistency in macroeconomic targets for growth, inflation, fiscal, monetary and external accounts.
The meeting’s agenda was unusual, particularly an item on scaling back non-development expenditures just eight weeks after the implementation of the new budget. This shows that the government was facing heat on the fiscal front after its external sector has also started facing headwinds.
For this fiscal year, the allocations for the non-development expenses is Rs7.52 trillion as against Rs6.4 trillion of the last fiscal year, showing an increase of 18.5%. However, as much as 41% of the non-development expenses or Rs3.1 trillion is on account of interest payments on loans that cannot be cut.
The defence expenditures of Rs1.37 trillion were equal to 18% and sacrosanct.
The allocations for grants and transfers to provinces amounted to Rs1.2 trillion and contribute 16% to total non-development expenses. The subsidies were equal to Rs682 billion and 9% of the non-development budget. The meeting took up proposals under these two major heads to find a fiscal space.
The finance minister “highlighted the possible risks to the economic activities and strategy to counter these risks which were appreciated by the members of the board”, according to the Ministry of Finance statement.
It was recommended to the board that no supplementary grants should be allowed during the current fiscal year except in extreme circumstances.
There was also a recommendation to cut grants in aid to Higher Education Commission, Pakistan Railways and Benazir Income Support Programme. The sources said that the finance minister was of the opinion that the provinces should take their responsibilities under the 7th National Finance Commission award and the 18th amendment in the constitution.
The board turned down a proposal that some national savings schemes – pensioner beneficiaries account, behbood saving certificate may be discontinued. The finance minister did not agree to the proposal that these schemes were critical for livelihoods of these groups.
The sources said that in order to reduce debt servicing cost the meeting also explored the option of reducing cash buffers that the federal government has maintained by taking loans from the banks to avoid exploitation in the hands of the banks. The discussion took place around the point of an optimal level of these buffers, which it had initially maintained at Rs1.2 trillion.
Sources said that the Ministry of Commerce briefed the committee about the trends in imports and exports. The central bank governor was of the opinion that exporters must be asked to perform better in light of the huge fiscal incentives that had been extended to them.
The option of imposing regulatory duties on imports of non-essential items was also discussed and the commerce ministry was asked to work out the modalities, said the sources.
Published in The Express Tribune, August 26th, 2021.
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