PM in a quandary on how to sweeten bitter IMF pill

ISLAMABAD:

Prime Minister Shehbaz Sharif on Wednesday withheld his final approval of a set of measures that Pakistan had to take to unlock the much-needed International Monetary Fund (IMF) programme, directing authorities concerned to slightly sweeten the bitter pills of an increase in energy prices and taxes.

The prime minister chaired a virtual meeting from Lahore. He also directed for finding ways to ensure that there was less political fallout and also the people might be less burdened, one of the participants of the high-profile meeting told The Express Tribune.

Almost four-hour long meeting ended inconclusive amid frustration with the Washington-based IMF and the World Bank. Another round will be held to take these matters to the logical end, as the duo of the WB and the IMF had also taken a firm stance over Pakistan.

The overwhelming majority of the participants, which included cabinet members and key bureaucrats, were of the view that the only remaining option was the IMF and certain measures would have to be taken, according to sources.

However, there was disagreement over the quantum of these measures, particularly the volume of increase in taxes, and percentage of raise in gas and electricity tariff. There was also in principle understanding in the meeting that Pakistan would have to let the rupee reach closer to the open market rate, the sources said.

However, the prime minister’s concern was that these measures would further erode his political capital and burden the people, according to the sources. The discussions headed towards a point where the government might finally take a decision that the IMF was the only option, a senior government functionary said.

The current economic crisis is not of the making of the present government but it has to deal with it and that must be appreciated, another participant of the meeting added, while indicating that a decision was expected within this week.

Pakistan’s economic situation has turned grave with now only $4.4 billion in hands. The fresh details showed that Pakistan was also in breach of the IMF’s limit to restrict the forward swaps by the central bank to $4 billion by end of December, highly placed sources told The Express Tribune.

As against the condition to cap the foreign currency swaps to $4 billion, the number was fluctuating between $5.2 billion to $5.5 billion and it would not be easy to retire the excess amount with very limited reserves in hand, a top government functionary admitted.

The major concerns by the IMF and the World Bank were the severe import restrictions, currency controls and increasing exposure to the short-term loans by the central bank that had exposed the commercial banks to many risks, said the sources.

If the situation was not resolved, it could be run on the banks and the banks would not have sufficient dollars to pay the private depositors, the sources added.

The external loans have dried up, as the net external financing during the first half of the current fiscal year was negative by around Rs300 billion, a finance ministry source revealed.

The World Bank and the IMF has reached to a conclusion that Pakistan could not be offered new loans without first ensuring sustained policies for macroeconomic stability. The Express Tribune had already reported that the World Bank had refused to give two policy loans of $1.1 billion during the current fiscal year.

Some of the participants of the meeting were of the view that the current huge gap in the interbank and the open market exchange rates could not be sustained for a longer period. They added that the decision to go to the IMF would help stop dollarisation of the economy and minimise the gap between both the rates.

However, a strong rupee was close to the heart of the finance minister and it was not immediately clear whether the rupee-dollar parity would still be market-based, as demanded by the IMF.

The sources said that there was a clear view in the meeting that the gas prices would have to be increased with effect from this month. But the Oil and Gas Regulatory Authority’s (Ogra) recommendation to force the average 74% increase from July 2022 might not be accepted.

Pakistan has committed to the IMF that there would be zero increase in the circular debt during the current fiscal year. During the first four months of the fiscal year, there were already about Rs500 billion deviations.

It was discussed in the meeting that the IMF might be requested to pass some of the impact to the consumers and allow the rest of the circular debt to be added in the stock.

Any future excesses from the month of January would be passed on to the consumers, according to the sources. If the IMF did not allow any adjustment then around Rs7.50 per unit tariff would have to be increased, they added.

The meeting also discussed roughly Rs170 billion to Rs200 billion mini-budget, including a proposal to start increasing the sales tax on petroleum products. According to an assessment, if the mini-budget was enforced from February and 17% GST was imposed, at least Rs270 billion could still be raised by the FBR.

The sources said that 1% increase in GST would fetch in Rs16 billion.

The prime minister had instructed that the finance ministry and the Power Division should prepare a new plan where all the measures could be staggered over a period. But this would require the endorsement of the IMF, which was not forthcoming until the government showed seriousness in taking concrete steps.

However, some of the meeting participants were of the view that the IMF should give relaxation in the light of the devastatation caused by the floods and both the World Bank and the IMF should not exploit Pakistan’s weak economic conditions.