Supplementary LoI submitted to IMF: PL on gasoline, diesel raised as prior action for 6th review

ISLAMABAD: The government has raised the Petroleum Development Levy on gasoline and diesel by Rs 12/liter, as prior action required for the 6th review under the Extended Fund Programme (EFF).

This was revealed in the Supplementary Letter of Intent (LoI) submitted by the government to the International Monetary Fund (IMF).

The documents noted that an updated LoI dated December 17, 2021, was submitted as subsequently corrected, where the authorities informed that all prior actions required for the review were completed.

“We raised the petroleum development levy (PDL) on gasoline and diesel by Rs 8/liter in two equal steps on November 5 and December 1, 2021, and by an additional Rs 4/liter effective from January 1, 2022”, stated the LoI.

The National Assembly adopted a supplementary finance bill on January 13, 2022, which included a GST reform in line with IMF staff agreement. On January 15, 2022, the President signed this into law, with it immediately coming into effect.

Separately, the government presented to the National Assembly on January 21, 2022, a Statement of Contingent Liabilities with all guarantees expected to be issued during the remainder of the current fiscal year.

On January 13, 2022, the National Assembly approved amendments to the State Bank of Pakistan (SBP) Act, aimed at strengthening SBP’s independence, decision-making structure, and mandate. Subsequently, the Senate approved the amendments and the President signed this into law on January 28, 2022.

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The Fund was further informed that the government is publishing key information on COVID-related awarded procurement contracts on the Public Procurement Regulatory Authority’s website.

The Auditor General of Pakistan conducted an ex-post audit of the procurement of COVID-related supplies and social payments made in FY 2020. The full audit report was published on November 19, 2021.

Due to the timing of the Executive Board meeting falling after the end-December 2021 test date, the information on the ceiling on the net foreign currency swaps/forward position of the SBP for end-December 2021 is already available.

Based on this information (position of negative US$4,382 million), was met by the end-December indicative target that was set at the time of the 2nd-5th reviews.

As a result, the authorities confirmed their understanding that this performance criterion will be set for end-March and end-June 2022.

Pakistani authorities further stated that on the same basis, they need to update some of its structural conditionality commitments. On December 16, 2021, the government adopted a cabinet decision for the second step of the energy subsidy reform for residential consumers, thereby completing this structural benchmark (SB) proposed for end-January 2022.

However, Pakistan requested to establish a robust asset declaration system with a focus on high-level public officials (including elected and unelected members of the Federal Cabinet) by the end-March 2022 to permit sufficient time to complete this important SB.

In its LoI submitted to the Fund, the government stated that there are emerging vulnerabilities, with the widening of the current account deficit and elevated inflation due to higher international commodity prices, stronger economic activity, and accelerating government spending.

To address these imbalances, government has taken a series of strong actions, including by raising key policy rates cumulatively by 275 basis points since September to 9.75 percent as of mid-December 2021.

Further, it revised the prudential regulations for consumer financing and imposed a 100 percent cash margin on some additional import items in an effort to moderate import and demand growth and raised the average cash reserve requirement (CRR) to 6 percent.

POL products’ prices remain unchanged

On the fiscal front, the national assembly will adopt a supplementary finance bill (prior action, PA) for completion of the review), which the President will sign into law, to ensure delivery of zero percent of GDP adjusted primary balance based on: (i) adopting an appropriate GST reform and withdrawing the zero-rated GST on some domestic industries; (ii) ensuring that fuel excises will deliver the agreed revenues; and (iii) reversing the preferential tax treatments introduced in the fiscal year 2022 budget. Spending has been lowered to more prudent levels while being mindful to protect social spending.

Moreover, for the first time, the government will lay before the National Assembly all guarantees expected to be issued in the remainder of the fiscal year 2022, which will be treated as a ceiling during this period. These actions are expected to strengthen the external position thereby reducing vulnerabilities and laying the foundation for more durable and robust growth going forward.

The authorities stated that they have reinvigorated its structural reform agenda, to support the EFF program and economic reforms more broadly.

Importantly, amendments of the NEPRA Act were adopted by parliament in June 2021 and the corporate income tax reform was adopted alongside the FY 2022 budget, thereby making permanent the actions taken via temporary presidential ordinances in March 2021 due to the closure of the national assembly.

“Despite the challenges, our quantitative program performance has been strong, with our actions ensuring that all but one end-June 2021 and three continuous performance criteria (PCs) were observed”, the authorities added.

This included the floor on net international reserves (NIR), net general government budgetary borrowing from the State Bank of Pakistan (SBP), net domestic assets (NDA) of the SBP, SBP’s stock of net foreign currency swaps/forward position, and government guarantees.

However, the ceiling on the general government's primary budget deficit was missed. Furthermore, the extension of a 100 percent cash margin requirement on the import of certain goods to an additional 114 items in late September resulted in the breach of the PCs on the non-imposition and non-intensification of exchange restrictions as well as on the non-imposition and non-modification of the Multiple Currency Practice (MCP).

In November the SBP on-lent the SDR allocation to the federal government for budget financing of the vaccine drive breaching the PC on the zero new flow of SBP credit to the government.

An additional two of six indicative targets (ITs) for end-June 2021 were missed: (i) the floor on targeted cash transfers spending (BISP) was missed for technical reasons because PRs 5 billion were spent by another program, the Poverty Alleviation Fund, and not counted towards the definition of this IT; and (ii) the floor on the gross issuance of PIBs, Sukuks, and Eurobonds due to reduced investor appetite for longer-term instruments, bottlenecks in the issuance of Sukuks, and the delayed Eurobond issuance.

Based on the strong steps that were taken and commitments for the period ahead, the government requested (i) waiver of applicability for the end-December 2021 QPCs and (ii) waivers of nonobservance for the missed continuous PCs on the non-imposition and non-intensification of exchange restrictions as well as on the non- imposition and non-modification of the MCP and the continuous PC on zero new flow of SBP credit to the government. Additionally, the government has requested rephasing of access and modification of the review schedule due to delays in completing the review as well as to better align them with its reform agenda.

Copyright Business Recorder, 2022