‘Broad agreement’ reached with IMF to end uncertainty

Budget sized increased by Rs400b to Rs9.9tr

ISLAMABAD:

Pakistan on Tuesday announced a ‘broad agreement’ with the International Monetary Fund (IMF) on the next year’s budget that has seen its size increased to Rs9.9 trillion, as the government agreed to reintroduce tax on people earning up to Rs100,000 and petroleum levy from July 1.

The two sided have decided to gradually impose Rs50 per litre petroleum levy -- the first tranche of Rs10 per litre from July and then Rs5 per litre from August onwards until it reaches the maximum threshold of Rs50 per litre by March 2023.

“We have locked the budget for fiscal year 2022-23 in consultation with the IMF and now the Fund will consult with the State Bank of Pakistan on monetary targets,” Finance Minister Miftah Ismail told a group of journalists. The minister spoke after having a final round of talks with the IMF Mission Chief Nathan Porter.

The size of the budget will go up to Rs9.9 trillion - up by around Rs400 billion against the one unveiled on June 10 by the finance minister. Ismail had unveiled Rs9.5 trillion budget, which was hardly 4% higher than the revised budget of this fiscal year.

The overall primary budget surplus target -- revenues excluding interest expenses -- has remained unchanged at Rs152 billion. The overall budget deficit target also remains the same at Rs3.8 trillion or 4.9% of Gross Domestic Product.

The Federal Board of Revenue’s target has been revised to Rs7.440 trillion as against Rs7 trillion proposed in the budget, requiring 24% growth rate that should not be a problem in a high double-digit inflation.

The government also decided to impose 1% Income Support Levy on people and companies earning Rs150 million a year, 2% on those having income of Rs200 million, 3% additional rate has been proposed for the Rs250 million annual income earners and 4% for Rs300 million annual income.

In the budget, the government had proposed 2% rate for only those earning over Rs300 million a year Rs38 billion additional revenues.

The government had to give in to the IMF’s demand of keeping the annual tax exemption limit unchanged at last year’s level of Rs600,000. In the budget, it had proposed to exempt up to Rs1.2 million annual income from tax.

But Ismail on Tuesday conceded to the IMF demand and agreed to impose 2.5% income tax on those earning from Rs600,000 to Rs1.2 million per annum. It is still half of the rate the people in this income bracket are currently paying.

The tax rates for the upper income slabs will also significantly go up. The IMF will now finalise the net foreign assets, net domestic assets, net international reserves and current account deficit targets with the central bank. The finance ministry hoped to receive the Memorandum for Economic and Financial Policies (MEFP) by Monday.

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Although the broad agreement is short of a staff level pact but it may help soothe markets and end a four-month long period of uncertainty that took a heavy toll on the country’s currency, unleashinig a wave of inflation and eroding the confidence of markets and investors.

The delay had also eroded the political capital of two parties –the Pakistan Tehreek Insaf that failed to conclude the deal despite making repeated attempts – and the PML-N led coalition government that took longer than expected time in reaching the agreement.

A day ago, Finance Minister Miftah Ismail had hoped to seal a deal with the IMF in a day or so, after the government agreed to increase the tax target to Rs7.44 trillion and adjusted some expenses.

The IMF has also conceded some ground and retreated from its earlier demand to impose Rs30 per liter petroleum levy and 10.5% sales tax with effect from July 1st.

It has been agreed between both the sides that the Rs10 per liter petroleum levy will be imposed from July 1st and after that it will be increased by Rs5 per month until it reaches the maximum threshold of Rs50 per liter. The GST will not be imposed immediately on the petroleum products.

The increase in the budget size to Rs9.9 trillion is because of bringing some reality in the budget figures on account of cost of pays and pensions and setting aside nearly Rs200 billion for emergency spending.

The pension budget has been increased to Rs609 billion as opposed to Rs530 billion proposed on June 10th. The cost of running the civilian government has been increased to Rs600 billion -up from Rs550 billion of June 10th.

The IMF has turned down the government’s budget proposal to collect Rs200 billion on account of Gas Infrastructure Development Cess, as the matter is disputed and under litigation.

The seventh review of the programme is pending since March this year after the IMF pulled out of the talks due to the previous government’s decision to give fuel subsidies and announce another tax amnesty scheme. Out of $6 billion, the $3 billion still remains undisbursed. Finance Minister Miftah

Ismail said that he had requested the IMF to increase programme size to $8 billion and tenure to June next year. The electricity tariffs and the gas prices will also go up.

The broad based agreement and a subsequent staff level agreement will be subject to the IMF board approval. But the government will require to present a revised budget in the Parliament and get it approved, including the Finance Bill 2022. The budget has to be passed before the end of month to make it operational from July 1st.

On Tuesday, the Pakistani rupee further shed its value against the dollar and closed at Rs211.52 to a dollar in the inter-bank. There was a dearth of US dollars in the market and the central bank resorted to impose restrictions on opening of letter of credits.

The sources said that the United States government – fthe largest shareholder in the IMF – also played a positive role in convincing the IMF to change its attitude towards Pakistan.

The FBR’s new tax target has been set on an average exchange rate of Rs212 to a dollar. The FBR’s new tax target is Rs7.440 trillion aimed at bridging the gap in the fiscal framework.

The tax target has been upward adjusted by nearly Rs436 billion, as the finance minister expects that the rupee devaluation should give a boost to the tax collection.

The FBR now needs to show an increase of 24% or Rs1.42 trillion in the next fiscal year. Till Tuesday, the FBR pooled Rs5.86 trillion in taxes, bringing Rs6 trillion in the reach.

The custom duties collection target, which had been set at Rs953 billion in the budget, may go up by Rs100 billion. The next year’s custom duties collection target can be around Rs1.05 trillion. Some additional revenue measures will be unveiled to make the new tax target realistic.