Dictating terms: IMF links next loan tranche with 4% power tariff hike

Fourth round of negotiations to continue now via video conference.

Shahbaz Rana August 19, 2014


The first signs of the deepening political crisis affecting Pakistan appeared on the foreign front on Monday, as International Monetary Fund (IMF) tied the approval of the next loan tranche with a 4% power tariff increase.

In order to secure the next loan tranche of over $550 million, Pakistan will now have to announce a 4% increase in power tariffs with effect from September 1st, according to officials privy to the talks held between Pakistan and the IMF in Dubai.

Though the proposed increase appears to be marginal in comparison with the hike in power tariff imposed last year sources within the government’s inner circle believe that Pakistan Tahreek-e-Insaf (PTI) may use it for settling political scores and make it difficult for the government to implement the necessary decision.

According to sources, the timing of the ongoing sit-ins by PTI and Pakistan Awami Tehreek (PAT) has made it difficult for the government to implement the marginal increase of less than 50 paisa per unit in power tariffs.

They revealed that IMF was suspicious that the government may delay the implementation until the political dust settles down in Pakistan. Originally, the decision had to be implemented from July this year.

Interestingly, due to difference over the timing of the increase in tariffs, Pakistan and the IMF could not conclude the ongoing fourth round of talks that held from August 6 to 18 in Dubai.

Discussions will be continuing in the coming days via video conference from Washington D.C with the aim of securing a timely completion of the fourth review, according to a handout issued by the IMF on Monday.

According to the officials, the Washington based lender wanted the increase to be implemented from July – a demand that was rejected by Pakistan.

Subsequently, IMF staff, led by Jeffery Franks, conveyed to Finance Minister Ishaq Dar that the Executive Board will only call a meeting when the government would announce its decision to increase power tariffs.

After increase in power tariffs, the IMF staff would present its report to the Fund’s Executive Board. Upon approval of the report, the international lender will disburse the fifth loan tranche of over $550 million.

The officials said that if the government increases the power tariffs, the IMF Board may meet next month to consider the request to approve the next tranche.

“The IMF has extended the fourth round till Friday and during this time we will reach out on an agreement on the remaining issues”, said Dar while talking to The Express Tribune.

Without disclosing the outstanding issues, Dar said policy talks usually take four to five days and he was unable to spend a full week in Dubai due to his domestic political engagements.

Under the $6.7 billion financial bailout package, the IMF had set a pre-condition for finalising the determination and notification of electricity tariffs for fiscal year 2013-14 before end June.

IMF views

“The IMF is encouraged by the overall progress made in pushing ahead with policies to strengthen macroeconomic stability and reviving investment and growth”, according to a handout issued by the IMF.

It added economic indicators were generally improving, with growth continuing to gain momentum, inflation on a downward trajectory, and credit to the private sector rebounding sharply. The IMF said economic growth is expected to rise by 4.3% in the current fiscal compared to a provisional estimate of 4.1% in the last fiscal year.

Published in The Express Tribune, August 19th, 2014.

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