IMF: entering day 4 unprepared

Govt first proposed cash settlement then book adjustments for circular debt

Shahbaz Rana February 04, 2023
Sources said that the government has apprised the IMF that it may impose a 17% federal excise duty on international tickets of club, business and first-class passengers. photo: file


Pakistan has presented self-contradictory solutions to the International Monetary Fund (IMF) to resolve gas sector circular debt of over Rs1.6 trillion, showing a lack of in-house consensus in a matter that could create hurdles in the coming days.

The disclosure came amid Prime Minister (PM) Shehbaz Sharif’s admission that the IMF was “giving Finance Minister Ishaq Dar and his team a tough time”. In order to satisfy the IMF’s demands, the government is also considering a proposal to increase federal excise duty rates on international air travel and cigarettes as part of the plan to bridge the fiscal gap.

During a session on the government’s plan to settle the gas sector circular debt, the Pakistani authorities first proposed settling over Rs540 billion in circular debt through cash in a single day, sources told The Express Tribune.

Towards the end of the meeting, however, another government representative suddenly said that there was no final decision about addressing the issue through cash. He went on to say that there was also a proposal to address the chronic problem through book adjustments and in multiple transactions.

The contradictory stances taken by different officials in one meeting left the IMF team in the lurch – the team also appeared to be perplexed about the disclosure that the gas sector debt had shot up to over Rs1.6 trillion, the sources maintained.

The statement about non-cash book adjustment was also contrary to the position taken by Finance Minister Ishaq Dar, who had recently backed addressing the circular debt issue through a cash settlement.

The government’s lack of preparedness in such crucial matters suggests that the IMF had good reason to give the country a tough time – especially when it is known to break its promises and comes unprepared to crucial negotiations. Earlier, the IMF had also raised serious objections over the Rs952 billion power sector circular debt plan.

The PM, on Friday, said that the country was facing serious economic challenges and the situation was in front of the entire nation. He said that the economic challenge at this point is unimaginable, adding that the IMF conditions that the country has to meet are “beyond imagination”, yet it is mandatory to fulfil the demands of the financial agency.

The sources also said that the IMF was given a briefing about the status of the circular debt in the gas sector, showing the stock at over Rs1.6 trillion by June last year. The lender was told that the government was working on a plan to settle Rs540 billion through cash payments and dividends.

The cash settlement plan required supplementary grants worth Rs540 billion to be approved by the federal cabinet. The grants will be issued in favour of the Sui Northern Gas Pipelines Limited (SNGPL) and the Sui Southern Gas Company Limited (SSGCL).

SNGPL is to pay Rs90 billion to the Pakistan Petroleum Limited (PPL), Rs172 billion to the Oil and Gas Development Company Limited (OGDCL) and Rs40 billion to the Government Holding Private Limited (GHPL). While SSGCL will pay Rs154 billion to OGDCL and Rs87 billion to the GHPL. These companies will then issue dividends to both the government and their private shareholders. PPL is to issue 75% dividends, OGDCL will issue 85% and GHPL will issue 100% dividends.

PPL, however, will have to arrange Rs30 billion cash and OGDCL is to pay Rs35 billion to its non-controlling shareholders. Being cash rich firms, these companies are understood to have cash, particularly on account of the Benazir Employees Stock Option scheme. OGDCL will also liquidate its Rs23 billion Pakistan Investment Bonds (PIB).

The Ministry of Finance will book the dividends and the supplementary grant will return to the finance ministry.

SSGCL’s gross receivables stand at Rs531 billion, but it will also have to pay Rs561 billion as of last June. Similarly, SNGPL’s receivables are Rs921 billion, while its payables stood at Rs802 billion until June last year.

Some officials in the finance ministry were against the idea of a cash settlement, which they expressed before the IMF team as well. Their concern was that the one-day cash settlement plan could face resistance from the boards that may not issue more than 40% dividends. Similarly, they were concerned that big cash settlements can either cause a spike or plunge in the share prices of these listed companies.

As per the plan, these companies will call board meetings to announce the dividends on the same day and the State Bank of Pakistan will relax its overdraft limits to allow the cash transaction to take place in a single day.

Taxation measures

The sources said that the government has apprised the IMF that it may impose 17% federal excise duty (FED) on international tickets of club, business and first-class passengers. The existing FED rate is Rs50,000 for international passengers. The move is more symbolic than about generating any major revenue. But the government was still reluctant to impose capital gains tax on the stock market.

There was also a proposal to increase the FED rate on cigarettes by 50 paisa per stick. As against the existing rate of Rs6,500 per 1,000 cigarettes, for the printed price of over Rs6,660 per 1,000 sticks, the new rate could be Rs7,000. For the less expensive brands of below Rs6,660 per 1,000 cigarettes, the per 1000 cigarette tax could be Rs2,550.


Published in The Express Tribune, February 4th, 2023.

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