Tax hike, SBP bill IMF’s preconditions

Tarin says these steps will lead to approval of $1b tranche, but time frame unclear

ISLAMABAD:

The introduction of Finance Bill in the National Assembly to increase taxes and approval of the State Bank of Pakistan (SBP) Amendment Bill are pre-conditions for the revival of International Monetary Fund (IMF) loan programme, Finance Adviser Shaukat Tarin said on Tuesday.

As part of the IMF programme, Pakistan is also required to show a balanced budget, excluding the payment of interest on public debt.

Tarin said that the IMF board would approve a $1 billion loan tranche once all the prior actions were taken but he did not give any new deadline to meet these conditions.

The finance adviser spoke with the press after distribution of corporate awards by the Pakistan Centre for Philanthropy.

It was for the first time that Tarin gave complete clarity about prior actions that Pakistan was required to take for the normalisation of relations with the IMF, as the loan programme had remained off track since June this year.

The IMF has asked for three prior actions on the fiscal side and “we have already met one by increasing electricity prices last month,” said Tarin.

He revealed that no further increase in electricity prices was required in the current calendar year.

The introduction of Finance Bill and the approval of SBP Amendment Bill were part of the IMF’s prior actions, said the finance adviser.

Responding to a question about whether the government would introduce a presidential ordinance to impose new taxes, Tarin said that the IMF did not recognise the ordinance as a source of legislation.

The Express Tribune had reported last month that the delay in unveiling a mini-budget and approval of the SBP Amendment Bill 2021 was hampering the completion of IMF talks, which began on October 4.

Tarin said that compared to April 2021, he had regained significant ground by persuading the IMF to soften its conditions. He added that IMF talks were at a delicate stage, requiring cooperation from all sides.

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Sources said that on an annualised basis, roughly Rs400 billion worth of new tax measures would be taken, largely by withdrawing sales tax exemptions. However, its impact on the remaining period of current fiscal year would be lower.

They said that the timing to introduce the Finance Bill in the National Assembly would depend on the understanding that was due to be reached between the IMF and the Ministry of Finance. Both the Federal Board of Revenue (FBR) and the IMF have agreed on the set of tax measures.

The completion of the review will pave the way for the release of next loan tranche of $1 billion in addition to the $1.6 billion injection by the World Bank and Asian Development Bank.

Replying to a question about the primary deficit target, Tarin said that there would be zero primary deficit in the current fiscal year. Primary balance is calculated by excluding the cost of debt servicing.

To another question about whether the government could achieve primary balance in the current fiscal year, the finance adviser hoped that the government would achieve it on the back of exceptionally good tax collection by the FBR.

Tarin said that there would also be a reduction in the Public Sector Development Programme (PSDP) but hoped that in the case of better fiscal performance, the development spending could be increased towards the end of the current fiscal year.

The Express Tribune had reported last month that Pakistan agreed to slash the PSDP budget by Rs200 billion to Rs700 billion to meet the primary budget deficit condition of the IMF.

Tarin said that the government also made adjustments to the Circular Debt Management Plan, which would help reduce the circular debt by Rs400 billion in the current fiscal year.

He said that he had instructed public sector companies to pay dividends and the government’s dividend share should be adjusted against the circular debt payment.

He added that the creation of Treasury Single Account was also a condition of the IMF programme but it was not a prior action.

Under phase-II of the Treasury Single Account, the government is required to close all commercial bank accounts maintained by public sector enterprises and the armed forces.

When asked whether the increase in interest rate was also a condition of the IMF, the finance adviser said that the issues of exchange rate and monetary policy were dealt with by the central bank and he would not comment on it.

The IMF and Pakistan have taken significant time to bridge differences over the draft of SBP Amendment Bill.

Read more Tarin rules out 'further' relief on fuel prices

Last week, the finance ministry gave the final read to its position vis-à-vis the SBP Amendment Bill while keeping in mind the discussions that took place with the IMF a day earlier, the constitutional requirements, and the prevailing legal framework, they added.

In the name of autonomy of the central bank, the government had earlier agreed to give absolute autonomy to the SBP with no checks and balances – a mistake that it was now trying to rectify.

Pakistan and the IMF staff were earlier targeting December 17 as the board meeting date but the delay in completing the prior actions has made the date challenging.

December 22, 2021 and January 14, 2022 were also considered as alternative dates for the board meeting, subject to the implementation of all prior actions.

Last month, the finance adviser had said that the government was still reeling from the conditions met to receive the previous loan tranche of $500 million from the IMF.

To qualify for the $500 million tranche that the IMF disbursed in April this year, Pakistan had accepted five prior actions. They included imposition of income tax to the tune of Rs140 billion, submission of the controversial SBP Amendment Bill in parliament and changes to the National Electric Power Regulatory Authority (Nepra) Act to automatically increase electricity prices.

The other two conditions were Rs1.95-per-unit increase in electricity prices and the approval of Circular Debt Management Plan, envisaging a further tariff increase of Rs5.65 per unit.

 

Published in The Express Tribune, November 17^th, 2021.

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