Pakistan needs to ‘do more’ for double IMF payout

By Khaleeq Kiani
Published in DAWN on June 29, 2022

• Additional prior actions include passage of budget as agreed with IMF, ensuring Rs750bn provincial surplus
• Officials say toughest part of stabilisation exercise already completed

ISLAMABAD: Pakistan will have to take at least two more “prior actions” to secure two combined tranches of about $1.85 billion from the International Monetary Fund (IMF) by the end of July or early August.

Top government sources said these prior actions — which will be in addition to a series of structural benchmarks for the performance review — would be necessary for the Fund’s executive board to approve the merger of the seventh and eighth quarterly reviews of the 39-month, $6bn loan programme that originally began in July 2019.

Finance Minister Miftah Ismail announced on Tuesday that Pakistan had received the Memorandum of Economic and Fiscal Policies (MEFP) from the IMF for the combined seventh and eighth reviews.

Under the MEFP, prior actions include the passage of the federal budget as agreed to with the IMF and presented in the National Assembly on June 24 and present a memorandum of understanding (MoU) duly signed by the provincial governments to jointly provide about Rs750bn cash surplus to the Centre.

The MEFP is based on budgetary measures announced by Mr Ismail in his winding-up speech on the revised budget in the National Assembly last week, envisaging over Rs1.716 trillion (2.2pc of GDP) of fiscal adjustment, mostly through taxation, including 10pc super tax on 13 industries and personal income tax covering monthly incomes above Rs50,000 per month.

This is on top of a fixed tax regime for sectors like retailers, traders, jewellers, builders, restaurants, automobile and property dealers and so on.

This is the biggest fiscal adjustment in a single year that would help turn about Rs1.6tr primary deficit — the difference between revenues and expenditures excluding interest payments — during the current fiscal year into a Rs152bn surplus next year.

The Ministry of Finance projected a Rs800bn (about 1pc of GDP) provincial surplus in the budget to help contain a consolidated budget deficit at 4.9pc of GDP, but three provinces — Sindh, Balochistan and Khyber Pakhtunkhwa — announced deficit budgets or no surplus. This nullified the impact of about Rs125bn surplus announced by Punjab that was too lower than its share.

Therefore, the federal government is now required to share with IMF an MoU with provinces along with the finance bill passed by parliament as prior actions to ensure that budget numbers presented in the fiscal framework would be adhered to.

The two sides would then jointly go through the MEFP over the next couple of days before formal signing by the finance minister and the State Bank governor to enable the fund staff to circulate Pakistan’s case among the executive board members for approval.

In all probability, two tranches of about $918 million each (or $687m Special Drawing Rights, or SDRs) would be made available to Pakistan at once in the last week of July of the first week of August, the officials said.

Fuel prices to go up

Under the structural benchmarks, the government will start imposing the petroleum development levy (PDL) from July 1 at the rate of Rs10 per litre on all products, except Rs5 per litre on high-speed diesel (HSD). The levy would then keep going up at the rate of Rs5 per month to a maximum of Rs50.

As such, the petrol rate is expected to touch about Rs250 per litre on July 1 with an increase of slightly over Rs13 per litre. Based on import parity price that also includes exchange rate loss, petrol price is estimated to be Rs3.3 higher for next fortnight than at present.

The import parity price of HSD has already gone up by almost Rs18 per litre. Therefore, the HSD retail rate would go up by about Rs23 per litre with Rs5 additional PDL — taking its end price to about Rs286.

The ex-depot rates of kerosene and light diesel oil are estimated to be increased by about Rs25 with the addition of Rs10 levy, to take their prices to about Rs237 and Rs233 per litre, respectively.

The electricity rates would be notified to go up by Rs3.50 per unit in July and August each and about Re1 per unit in the September-October billing cycle.

Under the MEFP shared with the government, the 39-month EFF will be extended by one year to September 2023. However, the IMF has not yet committed in the MEFP if it would also increase the size of the programme by $2bn to a total of $8bn, as verbally given an understanding during Dr Miftah’s visit to Washington in the last week of April.

‘Toughest part complete’

Officials said the toughest part of the stabilisation measures had been completed. Finance Minister Ismail said Pakistan was now out of the default threat but would have to tread a responsible taxation and expenditure path to ensure fiscal and monetary targets. Any misstep could reverse the hard-earned gains, he said.

While the government had already introduced Rs1.25tr worth of fiscal adjustment in its original budget presented in the National Assembly on June 10, this was not acceptable to the IMF staff. The government then took additional taxation measures of about Rs466bn on June 24 to reach an understanding with the Fund for a bailout necessary for the balance-of-payments support.

These included a surrender by the government to impose income tax on those earning Rs50,000 to Rs100,000 per month at the rate of 2.5pc and gradually go up for higher earners.

This was one of the moot points where the two sides had been stuck over the past few weeks as the finance minister had repeatedly been claiming to protect this category from income tax but finally gave in when the IMF staff did not budge.

In yet another retreat, the government also agreed to impose 1pc poverty tax on firms earning Rs150m, 2pc on those earning Rs200m, 3pc on over Rs250m and 4pc on Rs300m and above.

In the original budget, the government had set a 2pc poverty tax on Rs300m and above. This was in addition to up to 10pc super tax on 13 big industries.

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