IMF programme revival

Reports indicate that Pakistani authorities held a video conference with the International Monetary Fund (IMF) mission led by Ernesto Rigo for the stalled 6 billion dollars Extended Fund Facility programme recently in which the Fund team reportedly insisted on raising power tariffs as well as achieving the budgeted tax revenue target of 4.9 trillion rupees for the current year. This comes as no surprise as the second quarterly staff review was stalled in December 2019/January 2020, because the government was unable to do the agreed time bound power sector reforms, which included a raise in tariffs to achieve full cost recovery, as well as the agreed tax revenue target. By 24 February 2020, just before the onslaught of the pandemic, the IMF website noted that a staff-level agreement was reached with respect to the second review but with the Board date set more than a month ahead it was speculated that prior conditions were to be met before approval for tranche disbursement.

It is relevant to note that without approval of the second tranche, the IMF will not upload details of the second quarterly staff level agreement as and when reached, and hence specific time-bound details of the prior conditions that would have to be accepted by our economic team leaders are not in the public domain at this point in time. Be that as it may, it is not unreasonable to assume that power and tax sectors remain a source of serious concern for the Fund, as they have been for more than the past three decades. Power sector circular debt has risen to around 2.3 trillion rupees (against 1.2 trillion rupees inherited by the Khan administration) and the government has been dragging its feet with respect to raising rates as per the recommendations of the regulator Nepra. The government raised tariffs last week but that was merely for fuel adjustment for the month of July and not for taking account of rising receivables and distribution and transmission losses.

At the same time, the government has been unable to meet the tax targets it agreed with the IMF partly because of the pandemic but mainly because the target agreed was unrealistic considering the projected contraction in the Gross Domestic Product to 1.5 percent last year (pre-Covid 19) due to agreeing to implement severe contractionary monetary and fiscal policies. The Fund contended that the target could be achieved by ensuring that all those who should pay taxes based on their income levels, but who evade or avoid taxes, must be brought into the tax net. Independent economists and senior bureaucrats pointed out at the time that this would take much more than a year to achieve as some proposed draconian measures would simply lead to a further rise in the cash economy; but for reasons that are obvious and have been stated several times, the targets set by the IMF were accepted. However, as anticipated, the targets were not achieved. Reports indicate that the tax revenue target is against under debate with the Fund and the fund is unwilling to reduce it from the budgeted 4.9 trillion rupees.

Today, the government is keen to access the next IMF tranche as that would send the message to bilaterals, multilaterals, commercial banking sector and the debt equity market that Pakistan is embarked on a programme of reform which would determine Pakistan’s future ability to repay loans and meet all its debt equity obligations. The issue with the power and tax sectors is one of appallingly poor sustained governance and any attempt to raise tariffs and taxes at this point in time would imply a further reduction in disposable incomes of households and would compromise the quality of life of the middle and lower middle income earners and push many more into poverty.

It is indeed a very challenging situation and represents a hard choice for a political government but a balance must be struck that does not negatively impact on the projected 2 percent GDP growth for this year, and actually reduces the budgeted expenditure in total terms rather than in highlighting a reduction in expenditure by the Prime Minister’s House or the Presidency, a reduction which is good for optics but which does not appreciably impact on the country’s finances. The challenge that the government faces is further aggravated by the coming together of the main opposition parties under one banner and their announced programme of launching agitation against, what they term as ‘economic mismanagement of the economy’ by the government that has resulted in rising inflation, particularly food inflation.

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