Govt bound to hike gas prices, fuel GST under IMF deal

The government has committed more utility price shocks under a straightjacket implementation plan with the International Monetary Fund (IMF) involving an over 53 per cent increase in gas rates, the revival of general sales tax on petroleum products and withdrawal of more subsidies.

The IMF released a deta­iled 112-page country report on Friday on the completion of the seventh and eighth reviews of the extended fund facility (EFF), under which Pakistan has also committed to ensure electronically filed tax and asset details of grade 17 to 22 officers and members of the cabinet and the parliament and make them available to “authorised entities” — not to the public — besides globally acceptable comprehensive review of the anti-corruption institutional framework, particularly the National Accountability Bureau (NAB).

The authorities have also given an undertaking to privatise four state-owned entities (SOEs) — a bank, a development finance institution and two LNG-based power plants — this year, besides immediately setting up a central monitoring unit in the finance ministry to control the financial management of other SOEs to improve their performance.

The government has also promised that as it had cleared the tariff backlog, would not tamper with the power tariff determinations to be given by the power regulator Nepra, and timely allow uninterrupted implementation of all revisions in annual base tariff, quarterly adjustments and fuel price adjustments.

On top of this, the government would stagger capacity payments to power producers, either through renegotiated power-purchase agreements or lengthening the debt repayment duration to contain rising circular debt, which stood at Rs2.253 trillion by the end of June even after Rs564bn budgetary payments.

The IMF found the provincial cash surplus commitments of Rs750bn and petroleum development levy (PDL) target of Rs855bn as potential risks given the political atmosphere, particularly ahead of an election year, and secured a contingency plan from the government to make up for slippages.

The Fund also pointed out the violation of more than a dozen structural benchmarks, performance criteria and indicative targets of the programme, mostly on the part of the previous government, and gave tacit approval to phasing out exchange controls and import curbs at the earliest but insisted on tighter monetary and fiscal policies albeit with full return to a market-based exchange rate.

Read: A pyrrhic victory

The government has given a commitment to the IMF to recover about Rs786bn from gas consumers during the current year — about Rs120bn higher than 45pc increase in gas rates determined by the Oil and Gas Regulatory Authority (Ogra) for June to generate an estimated revenue of Rs666bn.

As a result, the gas tariff would be higher by 53pc to scale down the gas sector circular debt that the government put at Rs1.230tr as end-March.

Based on the receipt of Ogra’s determination, “we are now in the process of implementing more than the prescribed increase in consumer gas prices”, reads the undertaking given by Finance Minister Miftah Ismail to the IMF who promised a mechanism for regular updates of the end-user gas price, while also rationalising gas subsidies and implementing the structural pricing changes through the weighted average cost of gas.

The IMF report said the government had committed to priority measures, such as establishing an asset declaration system with a focus on high-level public officials, including federal cabinet members (end-March SB, reset to end-September), and publication of a comprehensive review of the anti-corruption institutional framework — NAB — by a task force with the participation of independent experts with international experience and civil society organisations (new end-January 2023 SB).

Under this target, to advance transparency, accountability, and integrity in the public sector, “we will issue regulations to establish an electronic asset declaration system that is comprehensive (i.e. covering assets beneficially owned or located abroad, including those of spouses, children and benamidars), centrally held with the Federal Board of Revenue, covering federal civil servants of Basic Pay Scale (BPS) 17 to 22, accessible to entities authorised by law (including banks for the limited purposes of conducting customer due diligence as required for the provision of banking services), and effectively verified”, it said.

Moreover, a task force, to be established by the law ministry and undertaken in consultation with the finance ministry, with participation and inputs from reputable independent experts with international experience and civil society organisations, will complete and publish a comprehensive review of the institutional framework of anti-corruption institutions to enhance their independence and effectiveness in investigating and prosecuting corruption cases, with proposals for legislative amendments as appropriate (new end-January 2023 SB).

Moreover, the government would strengthen financial institutions and other reporting institutions in improving their capacities to identify politically exposed persons (PEPs) and apply enhanced due diligence measures.

The IMF said the approved budget and the initial implementation of PDL increases and power tariff adjustment provided a strong signal of the authorities’ determination to implement commitments as agreed.

Yet, the fiscal risks to the programme were considerable, including from the government’s ability to raise the projected revenue from a number of novel taxes and staggered PDL implementation (with 90pc revenue generated in the last three quarters), the provincial commitment to deliver the historically high surpluses agreed, and the significant containment of current spending relative to GDP in a pre-election year.

In view of these risks, the government has committed to triggering contingency measures at the earliest signs of fiscal programme underperformance.

As soon as monthly data show signs of underperformance against programme revenue targets (for example, if data for an early month within a quarter suggest risks to quarterly performance), the government has committed to activating contingency measures as needed, including immediately increasing GST on fuel as a prelude to reaching the standard 17pc rate, further streamlining GST exemptions including on sugary drinks and other unwarranted exemptions, such as those benefiting exporters including those in financing facilities and energy prices.

The report said authorities were working with the World Bank on a “subsidy rationalisation for tube wells for large agricultural users and promised to submit a concrete reform proposal to the cabinet by November this year. The government has also committed to pursuing other reforms by increasing private participation in power distribution companies (Discos) to improve their governance and efficiency.

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