Islamabad swallows bitter IMF pills
Pakistan has agreed to take Rs800 billion measures through a combination of cut in expenditures and slapping about Rs500 billion in taxes, including Rs20 per litre fuel tax, to revive the stalled $6 billion International Monetary Fund (IMF) programme.
“The tax collection target of the Federal Board of Revenue (FBR) has been increased to Rs6.1 trillion – an addition of roughly Rs300 billion – and the government will also have to get the State Bank of Pakistan amendment bill approved from parliament,” Finance Adviser Shaukat Tarin said on Monday.
While revealing what the government will have to do in less than two months, Tarin did not hide details of what sounded like very harsh IMF conditions which, if implemented in letter and spirit, would not only consume significant political capital but also unleash another wave of inflation.
“Price stability, exchange rate of the rupee and the level of the interest rate will be the responsibility of the central bank in which the government will have no role,” Tarin told reporters, while sharing details of what had been agreed with the IMF in the name of the SBP autonomy.
“There will also be another increase in power tariff in the next few months, currently estimated to be increased by about 50 paisa per unit but its exact quantum will be determined at the level of circular debt,” said Energy Minister Hammad Azhar, while speaking at the news conference.
Since February, the government has already increased the base tariff by Rs3.63 per unit in two phases.
Tarin and Hammad spoke to the media hours after an announcement by the IMF about the measures that Pakistan would have to take to secure approval of the $1 billion loan tranche. Tarin said once all the conditions were met, the IMF board would meet in January to approve the sixth review of the economy.
“The Pakistani authorities and IMF staff have reached a staff-level agreement on policies and reforms needed to complete the 6th review under the EFF,” according to a statement issued by the IMF from Washington on Monday morning.
Read: Tax hike, SBP bill IMF’s preconditions
The IMF statement suggested that Pakistan was still only halfway through to securing the $1 billion loan, as the IMF’s Executive Board approval had been formally linked with the implementation of the pre-conditions.
“The prior actions for the IMF board meeting will include introduction of the supplementary finance bill in the National Assembly, increase in the petroleum development levy by Rs4 every month so that it reached the maximum rate of Rs30, approval of the SBP Amendment Bill and the audit of Covid-19 expenditures and sharing details about the beneficial ownership of coronavirus vaccines,” said Tarin.
Earlier, the government had decided to keep the Coivd-19 expenditures audit report confidential in violation of the IMF agreement. As a result of the IMF conditions, Tarin admitted, “difficulties of the lower income groups will increase marginally but targeted subsidies will be given”.
Tarin explained that roughly Rs350 billion general sales tax (GST) exemptions would be withdrawn, the Public Sector Development Programme would be cut by Rs200 billion or 22% and the “contingency grants” will also be reduced by Rs50 billion.
“The contingency grants are largely meant to meet the military’s hardware needs,” according to the Finance Ministry sources.
Tarin added that the petroleum development revised target was now Rs356 billion – down from Rs610 billion that the government had set in the budget. Only two weeks ago, the per-litre petroleum levy rate was nearly Rs6, which the government had already increased to nearly Rs10 per litre.
Pakistan will have to ensure a primary budget surplus after paying the cost of debt servicing as against the budget target of Rs376 billion deficit, requiring strict fiscal discipline that would have severe implications for the economy.
A finance ministry official said that the net additional Rs20 per litre petroleum levy would generate roughly Rs275 billion in the remainder of this fiscal year.
The cumulative fiscal impact of the prior actions is around Rs800 billion, which includes Rs250 billion cut in spending and Rs550 billion taxation measures during the remainder period of the current fiscal year. The Rs800 billion is equal to 1.5% of the gross domestic product (GDP), making it one of the steepest adjustments in the midst of recovery.
Responding to a question whether the IMF board would approve Pakistan’s loan request on January 12, Tarin said that the executive board’s approval was likely to come in January 2022. Earlier, the government was targeting the December 17 date, which it had missed due to a delay in reaching an agreement over the needed policy actions.
Read more IMF attitude influenced by US: Pasha
The details shared by both the IMF and Tarin suggested that the IMF did not budge much from its stiff position. Tarin said that the talks with the IMF resumed from where they had been left in March. He claimed that the IMF demanded Rs700 billion additional taxes but we agreed to only Rs350 billion.
“In March, when we had taken $500 million from the IMF, we had promised to reduce or end tax exemptions worth Rs700 billion, increase electricity tariff by around Rs4.95 per unit and pass the legislation on the SBP,” he added.
That, Tarin said, led to lengthy negotiations, as the IMF pointed out that “we have already taken $500 million and the conditions had been approved by the Fund’s Executive Board”.
Tarin said that the IMF asked Pakistan not to distort the sales tax regime and charge the goods at a standard 17% rate. “We have still managed to protect exemptions on a few goods like agriculture, food and fertiliser,” he added.
However, the government had already taken roughly Rs300 billion measures in the budget. Thus, there was no major concession by the IMF.
Tarin said that the government would ensure that the legislation pertaining to the SBP autonomy was passed. The monetary policy, price stability and exchange rate would be the responsibility of the SBP, said Tarin, saying he supported the autonomy.
“Let them [the SBP] determine the exchange rate,” said Tarin.
The IMF also did not accept Pakistan’s demand to retain the Monetary and Fiscal Policy Coordination Board. But Tarin said that there would be a liaison between the finance minister and the SBP governor.
He added that the SBP governor and the board of directors would be appointed by the federal government and after that there was no harm in giving autonomy to the central bank.
However, deputy governors would be appointed on the recommendation of the SBP and the federal government would have no role in determining the salary of the SBP governor, deputy governors and they would also not be required to take leave for foreign visits, Tarin added.
Unlike the previous proposal, it had been agreed that the National Accountability Bureau (NAB) law would also be applicable on the SBP, as it was applicable on the prime minister, said Tarin.
Also read IMF programme to enhance tax collection
Tarin further stated the financial institution had stressed the need for improvement in Pakistan’s medium- and long-term policies, adding that the IMF representatives had, however, “accepted that we are on the right track”.
“While the IMF acknowledged the growth of our external account, the fund said that there was still pressure on it,” said Tarin. He further stated that the need for more transparency in the governance of state-owned enterprises and reforms for public finance was also highlighted in meetings with the IMF.
Hammad Azhar said that the deal with the IMF would not affect the seasonal energy package for this winter and industrial energy tariff, under which incremental electricity was being supplied for Rs12.96 per unit.
In its handout, the IMF said that the external pressures had started to “emerge” and inflation “remains high” – the two weakest points that would now require tough actions on the part of Pakistan.
The IMF has projected the economic growth to reach, or exceed, 4% in the current fiscal year and 4.5% in the next fiscal year.
An IMF mission led by Ernesto Ramirez Rigo held virtual discussions from October 4 to November 18, 2021, in the context of the 2021 Article IV consultations and the sixth review of the programme, stated the IMF.