Bailout programme: IMF likely to release $550 million tranche
Despite failing to undertake any structural reforms, govt likely to come away with funding
Despite failing to undertake any structural reforms, govt likely to come away with funding. STOCK PHOTO
ISLAMABAD:
Pakistan and the International Monetary Fund (IMF) have broadly reached an agreement in their ongoing talks for the release of the next loan tranche of $550 million, but differences persist over finding a permanent solution to the energy sector’s circular debt problem, which has mounted to Rs310 billion.
The policy level dialogue, the sixth such review of Pakistan’s economy by the IMF, began early this week in Dubai and is scheduled to end on Thursday, according to government officials participating in the negotiations with the Washington-based lender. They added, however, no agreement on the issue of addressing the circular debt problem has yet been reached with the IMF and is the subject to further deliberations.
Finance Minister Ishaq Dar and outgoing IMF Mission Chief to Islamabad Jeffrey Franks are likely to announce the outcome of talks in Dubai on Thursday (today).
At the heart of the disagreement between Islamabad and the IMF is the latter’s desire to add a condition to its $6.6 billion bailout of the Pakistani economy that would force the government to honour its commitments to come up with a more permanent solution to the circular debt problem.
In the fifth review of Pakistan’s economy, held in Dubai two months ago, Pakistan had assured the IMF that it had worked out a plan to address the circular debt issue. The plan included recovering receivables in the power sector, improving efficiency and collections, and using fiscal resources. However, chronic infighting between the finance ministry and the water and power ministry, coupled with a weak governance structure at the state-owned power companies, resulted in a lack of coordination and the government’s failure to implement the plan.
The finance ministry argues that they should not be required to miss their deficit targets by paying the water and power ministry for the costs of theft and grid inefficiencies beyond what they have already built into the tariff structure. In her testimony before the National Assembly Finance Committee, Azra Mujtaba, the acting finance secretary, said that the ministry would only pay electricity subsidies that account for the differential between the cost of power generation and the price charged to consumers. The finance ministry refuses to include a higher cost of line losses in its cost basis for electricity.
This refusal to pay for the cost of theft is what has resulted in circular debt mounting once again to Rs310 billion, just 18 months after the government paid off Rs480 billion in circular debt in June 2013. According to officials familiar with the finance ministry’s negotiations with the IMF, the lender is not satisfied with the government’s monitoring system to prevent power theft, which was designed with the help of the World Bank (WB) and the Asian Development Bank (ADB). The officials said that the IMF wants Pakistan to exhibit quarterly decreases in the levels of circular debt and improve bill recovery. The WB has imposed a ceiling on the levels of circular debt and if the government fails to stay within that limit, the WB and the ADB will stop financing projects in the energy sector.
The government’s strategy for dealing with circular debt has been to raise tariffs, which reduce the amount it has to spend on subsidies, but do nothing to control theft, which accounts for the consistent rise in circular debt.
The IMF also wants to prevent the rise of circular debt on the natural gas side of the energy supply chain and has asked the government to increase gas tariffs to at least the levels of the cost of production of new fields and has asked Islamabad to implement that change before the next IMF board meeting.
Aside from the energy sector, the government also missed the revenue collection target it set for itself for the first half of the fiscal year and has yet to hire a financial advisor to privatise Pakistan Steel Mills. Islamabad did, however, meet the target for net foreign reserves, the limits on government borrowing from the State Bank of Pakistan, the budget deficit and reducing the amount already borrowed from the SBP.
However, it appears that the government achieved these targets through some creative methods. The foreign reserve target was met by the State Bank delaying the purchase of $1 billion from the currency markets for oil payments, which in turn helped precipitate a major petrol shortage in most parts of Pakistan in January, said the officials. They added that while the government met its budget deficit target for the first half of fiscal 2015, it is likely to miss the full-year target of 4.9% of the total size of the economy. Despite those misses, however, the IMF staff is expected to request its Executive Board to approve the seventh loan tranche amounting to $550 million.
Published in The Express Tribune, February 5th, 2015.
Pakistan and the International Monetary Fund (IMF) have broadly reached an agreement in their ongoing talks for the release of the next loan tranche of $550 million, but differences persist over finding a permanent solution to the energy sector’s circular debt problem, which has mounted to Rs310 billion.
The policy level dialogue, the sixth such review of Pakistan’s economy by the IMF, began early this week in Dubai and is scheduled to end on Thursday, according to government officials participating in the negotiations with the Washington-based lender. They added, however, no agreement on the issue of addressing the circular debt problem has yet been reached with the IMF and is the subject to further deliberations.
Finance Minister Ishaq Dar and outgoing IMF Mission Chief to Islamabad Jeffrey Franks are likely to announce the outcome of talks in Dubai on Thursday (today).
At the heart of the disagreement between Islamabad and the IMF is the latter’s desire to add a condition to its $6.6 billion bailout of the Pakistani economy that would force the government to honour its commitments to come up with a more permanent solution to the circular debt problem.
In the fifth review of Pakistan’s economy, held in Dubai two months ago, Pakistan had assured the IMF that it had worked out a plan to address the circular debt issue. The plan included recovering receivables in the power sector, improving efficiency and collections, and using fiscal resources. However, chronic infighting between the finance ministry and the water and power ministry, coupled with a weak governance structure at the state-owned power companies, resulted in a lack of coordination and the government’s failure to implement the plan.
The finance ministry argues that they should not be required to miss their deficit targets by paying the water and power ministry for the costs of theft and grid inefficiencies beyond what they have already built into the tariff structure. In her testimony before the National Assembly Finance Committee, Azra Mujtaba, the acting finance secretary, said that the ministry would only pay electricity subsidies that account for the differential between the cost of power generation and the price charged to consumers. The finance ministry refuses to include a higher cost of line losses in its cost basis for electricity.
This refusal to pay for the cost of theft is what has resulted in circular debt mounting once again to Rs310 billion, just 18 months after the government paid off Rs480 billion in circular debt in June 2013. According to officials familiar with the finance ministry’s negotiations with the IMF, the lender is not satisfied with the government’s monitoring system to prevent power theft, which was designed with the help of the World Bank (WB) and the Asian Development Bank (ADB). The officials said that the IMF wants Pakistan to exhibit quarterly decreases in the levels of circular debt and improve bill recovery. The WB has imposed a ceiling on the levels of circular debt and if the government fails to stay within that limit, the WB and the ADB will stop financing projects in the energy sector.
The government’s strategy for dealing with circular debt has been to raise tariffs, which reduce the amount it has to spend on subsidies, but do nothing to control theft, which accounts for the consistent rise in circular debt.
The IMF also wants to prevent the rise of circular debt on the natural gas side of the energy supply chain and has asked the government to increase gas tariffs to at least the levels of the cost of production of new fields and has asked Islamabad to implement that change before the next IMF board meeting.
Aside from the energy sector, the government also missed the revenue collection target it set for itself for the first half of the fiscal year and has yet to hire a financial advisor to privatise Pakistan Steel Mills. Islamabad did, however, meet the target for net foreign reserves, the limits on government borrowing from the State Bank of Pakistan, the budget deficit and reducing the amount already borrowed from the SBP.
However, it appears that the government achieved these targets through some creative methods. The foreign reserve target was met by the State Bank delaying the purchase of $1 billion from the currency markets for oil payments, which in turn helped precipitate a major petrol shortage in most parts of Pakistan in January, said the officials. They added that while the government met its budget deficit target for the first half of fiscal 2015, it is likely to miss the full-year target of 4.9% of the total size of the economy. Despite those misses, however, the IMF staff is expected to request its Executive Board to approve the seventh loan tranche amounting to $550 million.
Published in The Express Tribune, February 5th, 2015.