Petroleum levy jumps 45% to Rs1.2tr

IMF projects fiscal performance better than pre-war as provinces post surplus

ISLAMABAD:

The government reported on Tuesday that petroleum levy collection jumped by Rs371 billion, or 45%, during the first nine months of this fiscal year, as the International Monetary Fund (IMF) projects that Pakistan's fiscal performance will be even better than in the pre war period.

The federal government's nine month petroleum levy collection amounted to Rs1.205 trillion, nearly equal to the total collected during the last fiscal year. A petrol consumer is now paying Rs117.5 per litre in levy to fill the government's coffers.

Abnormally high petroleum levy rates, a steep reduction in interest expenses due to a 50% cut in interest rates, and record provincial cash surpluses have placed Pakistan in a comfortable position ahead of the IMF budget talks. The IMF budget mission begins discussions today (Wednesday), but sources said the scope of the mission will go far beyond budget discussions. The mission will review progress on legal amendments to cut the state's footprint in the public sector and liberalise the sugar sector.

The mission will set next fiscal year's revenue and expenditure targets and review progress on amending laws. It will also hold a meeting to discuss the fate of commercial banks after interest based lending ends in 2028, as required by the constitution, according to government sources. The lender will seek a progress report on opening the sugar sector, which remains heavily controlled to the benefit of millers. The budget that the IMF endorses will then be presented to the National Assembly next month for approval.

Discussions will also be held with the provinces to ensure they generate Rs1.64 trillion in cash surpluses in the next fiscal year and deliver nearly Rs1.78 trillion in tax collection, said the sources.

The IMF's latest public disclosure shows that Pakistan's fiscal performance will be even better than the targets set before the war began in June last year. This indicates that the country's finances have not been significantly impacted by the Middle East conflict, as the government recovered both international oil prices and higher taxes on petroleum products.

The government had set an overall budget deficit target of 3.9% of GDP (just over Rs5 trillion) in the last budget. The IMF's report shows the deficit could remain as low as 3.2% of GDP, which is about Rs900 billion better than the budget estimates. This suggests that federal and provincial governments had fiscal space to provide relief instead of charging higher taxes, though the space is largely in the hands of cash rich provinces.

The IMF report shows that the primary budget surplus – net revenues after paying interest costs – may remain at 2.5% of GDP this fiscal year, about Rs50 billion better than the fund's target. However, government officials said the 2.5% figure is an unadjusted primary surplus projection.

Discussions on the 28th constitutional amendment have resumed, including possible changes to articles dealing with resource sharing between the centre and the four provinces.

The finance ministry released details of fiscal operations for the July March period, confirming the IMF's projections. Petroleum levy collection amounted to Rs1.205 trillion during July March, 45% (Rs371 billion) higher than last fiscal year, and only Rs15 billion less than the full year collection of the previous fiscal year.

The overall budget deficit during July March stood at Rs856 billion, or 0.7% of GDP, thanks to higher petroleum levy, lower interest expenses and record provincial cash surpluses. Nine month interest expenses were Rs4.95 trillion – down by Rs1.5 trillion or 23%. Total federal expenses fell by only Rs897 billion (8%) during the period.

The four provincial governments generated a combined cash surplus of Rs1.63 trillion, which was Rs583 billion (55%) higher than last fiscal year. Punjab alone generated half of that surplus – Rs824 billion. On the back of higher provincial surplus and higher petroleum levy collection, the primary budget surplus stood at Rs4.1 trillion, or 3.2% of GDP.

IMF mission agenda

The budget mission will also review implementation of a condition to quantify the cost of subsidies given on foreign remittances. Pakistan has assured the IMF that it is working on a comprehensive assessment of impediments to foreign remittances and their costs, and an action plan will be ready by the end of this month. Under the assurance, after developing the action plan, the central bank and the finance ministry will agree on a mechanism to ensure that claims from remittance subsidy schemes do not exceed budget allocations in any fiscal year.

The IMF will also receive an update on the government's strategy for the financial sector after the constitutional amendment to end the interest based system becomes effective in 2028, said the sources. A high level interagency committee led by the finance ministry is finalising the post 2027 financial sector strategy. The committee has set clear expectations for financial institutions from 2028, and the deadline to submit the strategy for IMF review is June this year.

The budget mission will also review implementation of the circular debt reduction plan and ensure that power subsidies do not exceed Rs890 billion in the next budget, unless the IMF is convinced to raise the cap. The lender will also seek an update on any further electricity price increases due to the Middle East conflict induced price shock. The IMF may approve a gas sector circular debt plan and review proposed gas price increases from July, sources added. Progress on withdrawing general electricity subsidies and shifting to targeted subsidies through the BISP will also be shared with the IMF. The government has submitted a new sugar sector policy aimed at opening the sector to local and foreign competition.