EDITORIAL: In an exclusive interaction with Business Recorder, the International Monetary Fund (IMF) Resident Representative to Pakistan "welcomed the strong and constructive engagement with the Pakistani authorities." This comment belies the general perception generated after several statements by the Federal Finance Minister Shaukat Tarin, appointed on 16 April 2021, that the government will renegotiate the terms and conditions of the 6 billion dollar Extended Fund Facility (EFF) programme agreed in the second to the fifth reviews, strengthened not only by the 'inconclusive' sixth review announced mid-June 2021, but also by the finance ministry officials expressing their ignorance of any ongoing engagement, leave alone strong engagement, with the IMF, on condition of anonymity.
It would appear that while the IMF office is located in 'Q Block', where the Ministry of Finance is housed as well, yet the government has so far not completed its own homework in terms of providing an alternate action plan focused on eliminating the over 1.5 trillion rupee energy sector circular debt to the World Bank, the lead agency in this poorly performing sector, and has yet to demonstrate that its alternate revenue plan will bear fruit.
This however does not imply that the government is considering disengagement with the Fund as Tarin has stated time and again that his predecessor Dr Hafeez Sheikh had agreed to conditions that are no longer tenable as any further raise in the price of electricity and taxes would not only raise the cost of doing business, thereby stifling growth with its negative repercussions on output and employment but also erode the income of the common man. Reports, however, indicate that the IMF is amenable to a recalibration of the policy matrix based on the unexpected high growth rate of 3.9 percent in 2020-21 against its earlier projection of half that figure.
So what is the action plan of the government today? It claims success in renegotiating with the Independent Power Producers (IPPs), with long-term as opposed to immediate savings envisaged; however, unfortunately, it has backed away from its agreement with about a dozen IPPs subsequent to the launch of an investigation by the National Accountability Bureau while refusing to pay what it agreed to with poorly performing government-owned generation companies citing lack of fiscal space. The circular debt continues to creep upwards and with the ongoing load shedding, it is difficult for the government to reconcile its narrative of excess supply (attributed to the previous administration's flawed emphasis on generation) with its emphasis on capacity payments making electricity very expensive.
Revenue is budgeted to rise by 1.12 trillion rupees in the current year compared to the year before with: (i) 385 billion rupees sourced to inflation of 8.2 percent (a revenue source that could have serious socio-economic implications); (ii) 236 billion rupees to GDP growth of 5.02 percent (a rate dependent on continuing with the post-Covid-19 monetary and fiscal policies that would be concerning to the Fund); (iii) 342 billion rupees from enforcement measures comprising a rise of 100 billion rupees from the budgeted 242 billion rupees due to the amendments in the Finance Bill - a target that is considered even more ambitious by the Federal Board of Revenue officials; and (iv) a rise of 196 billion rupees from sales tax and federal excise tax. In the current month, the first month of the current fiscal year, the government was forced to reduce petroleum levy on high speed diesel from 3.61 to 1.9 rupees per litre (in use by public transport and agriculture) while abolishing it for other petroleum products and reducing the sales tax on these products with a net revenue impact of 10 billion rupees in July. This too would be concerning to the Fund.
Needless to say that all eyes are on the government to not only formulate an energy sector plan designed to eliminate the circular debt and get its approval from the multilaterals but also demonstrate the 'Out of the Box' measures for a substantial increase in tax revenue for success of the next review scheduled for September 2021 in IMF documents.
Copyright Business Recorder, 2021