PPP made privy to harsh IMF conditions

IMF demands signing National Fiscal Pact and further electricity price hikes

As the size of the new budget is likely to soar by 30% to a record Rs18.9 trillion due to additional expenditure demands, the PML-N government on Wednesday took its main ally—the PPP—into confidence about the harsh conditions set out by the International Monetary Fund (IMF).

The tax target for the Federal Board of Revenue (FBR) is nearly 40% higher at Rs13 trillion, and the Non-Tax-Revenue target is expected to be a record Rs4.8 trillion due to higher profits by the State Bank of Pakistan and the Petroleum Levy collection.

Among the IMF’s demands for the new programme are signing a National Fiscal Pact to transfer responsibilities to the provinces and a further increase in electricity prices from July, according to sources privy to a meeting that took place on Wednesday.

The PML-N government, for the first time, briefed any parliamentarians about its negotiations with the IMF for the new bailout package and the budget for the fiscal year 2024-25.

The conditions also include approval of the new budget in line with the IMF’s guidelines and prior approval of the parliament for supplementary grants.

National Assembly Speaker Sardar Ayaz Sadiq had asked the government to arrange the briefing for the senior PPP leadership after the party complained about being kept in the dark about the IMF negotiations and the upcoming budget.

Finance Minister Muhammad Aurangzeb joined the meeting from China, while Minister of State for Finance Ali Pervaiz Malik and Finance Secretary Imdad Ullah Bosal gave the briefing.

The speaker arranged the briefing to develop consensus among the allies, and another round will take place soon, said Senator Saleem Mandviwalla, who represented the PPP in the meeting.

It is the first time in many years that the budget proposals have not been shared with the standing committees of the National Assembly and the Senate before their presentation in the parliament. These committees are not yet constituted due to disagreements among the political parties.

Aurangzeb is expected to announce the budget on June 12.

The briefing for the PPP leadership was held days after the Finance Ministry also gave a similar briefing to military authorities. Prime Minister Shehbaz Sharif had also desired that Foreign Minister Ishaq Dar accompany the Finance Ministry team during the briefing to the military. However, Dar skipped the meeting.

Ishaq Dar did not reply to a request for comments.

The PPP was informed that for the next bailout package, the IMF has set at least three prior conditions: approval of the new budget, an increase in electricity prices due to the annual base tariff increase, and a semiannual adjustment in gas prices.

The Finance Ministry officials briefed the PPP that the IMF believed there was a need to sign the National Fiscal Pact—a term equal to the National Finance Commission (NFC), probably coined to avoid any political controversy associated with the NFC.

The meeting was informed that the IMF believed programmes like the Benazir Income Support Programme (BISP) would eventually have to be provincialized.

Senator Sherry Rehman, who also attended the briefing, did not respond to a question regarding the PPP’s viewpoint on any new National Fiscal Pact.

Federal-provincial fiscal relations should be discussed in the Council of Common Interests (CCI) instead of being negotiated with the IMF, said a participant of the meeting on condition of anonymity.

Ministry of Finance spokesman Qamar Abbasi did not reply to questions about whether the ministry had given a briefing to the military a few days ago. The spokesman also did not respond to a question regarding the possible holding of a similar briefing for parliamentarians belonging to the PTI, the main opposition party.

How the budget will look

The PPP was informed that next year’s budget might swell to a new record of Rs18.9 trillion—an increase of Rs4.4 trillion or 30% over this year’s original budget.

The size has further enlarged during the past week after the Ministry of Defense and the Ministry of Planning sought an increase in their allocations to meet next fiscal year’s development and defense needs.

The massive increase in the size of the budget does not reflect the harsh economic ground realities, but the finance ministry’s hands are tied due to the IMF’s insistence on Rs9.7 trillion allocations for interest payments.

Participants were briefed that next year’s interest payments are estimated at a whopping Rs9.7 trillion.

The Rs9.7 trillion interest cost is 33% higher than this year’s original budget.

Another major expense is the defense budget of around Rs2.1 trillion and a special defense package. The grant amount for the next fiscal year has swelled to Rs1.7 trillion, including around Rs450 billion for meeting defense procurement needs.

The Ministry of Finance has now estimated the cost of the Public Sector Development Programme (PSDP) at Rs1.5 trillion, about Rs280 billion more than the indicated budget approved by the Annual Plan Coordination Committee (APCC) last Friday.

The Rs1.5 trillion PSDP will be 60% higher than this year’s original budget. The subsidies are expected to remain over Rs1.3 trillion in the next fiscal year.

Resources

The government informed its ally that the FBR’s tax target is likely to be Rs13 trillion—an increase of Rs3.6 trillion or 38% over this year’s original target.

In response to a question from a participant, the FBR chairman informed the meeting that it was a difficult target to achieve.

He further stated that its realization would depend upon implementing all the conditions of the IMF, including imposing an 18% sales tax on items currently charged at a lower rate under the 8th schedule or nil rates under the 5th and 6th schedules.

The PPP was informed that the government was still trying to convince the IMF to withdraw its conditions to impose an 18% sales tax on medicines, milk, and essential food items. There is also a disagreement on charging all the incomes of salaried and non-salaried individuals at one progressive rate, including income from stock market trading and banks’ dividends.

Participants were informed that the income tax rates on the real estate business by annual tax return filers would be made progressive and linked with transaction values.

The hole

The Rs18.9 trillion budget’s envelope will be funded by taking about Rs9.8 trillion in loans from local and international creditors.

The federal budget deficit is projected to be around Rs9.8 trillion or 7.9% of the gross domestic product. The projected federal deficit is 30% higher than this year’s original estimates.

Sources said that the overall deficit target could be around 6.9% of the GDP or Rs8.6 trillion.

The government expects the provinces to show a cash surplus of Rs1.2 trillion. The primary budget surplus—after excluding interest payments—will be around 1% of the GDP or Rs1.2 trillion.