ISLAMABAD: The Extended Fund Facility (EFF) programme entails high fiscal risks due to the government’s ability to raise the projected revenue from a number of novel taxes and staggered Petroleum Development Levy (PDL) implementation, provincial commitment to create budget surplus and containing current expenditure in a pre-election year, says the International Monetary Fund (IMF).

The provincial Khyber Pakhtunkhwa government has already informed the Finance Minister of its inability to create budget surplus due to floods in the province and other provinces are also unlikely to create budget surplus due to massive floods.

The Fund in its latest report “seventh and eighth reviews under the extended arrangement under the extended fund facility, requests for waivers of non-observance of performance criteria, and for extension, augmentation, and re-phasing of access,” stated that the budget strategy requires timely and decisive implementation of programme commitments but also generally entails very high risks.

The approved budget and the first steps in PDL and power tariff adjustment provide a strong signal of the authorities’ determination to implement commitments as agreed. Nonetheless, the fiscal risks to the program are considerable, including from the government’s ability to raise the projected revenue from a number of novel taxes and staggered PDL implementation (with 90 percent 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.

The government has committed to IMF to trigger contingency measures at the earliest signs of fiscal programme underperformance including: (i) immediate increase in GST on fuel, as a prelude to reaching the standard rate of 17 percent; (ii) further streamlining of GST exemptions including on sugary drinks (Rs 60 billion) and other unwarranted exemptions such as those benefiting exporters; and/ or (iii) increasing Federal Excise Duty on Tier I and Tier II cigarettes by at least Rs 2/ stick with immediate effect to raise at least another Rs 120 billion in revenue.

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As soon as monthly data show signs of underperformance against program revenue targets (e.g., if data for an early month within a quarter suggest risks to quarterly performance), the government has committed to activate contingency measures.

The government has also committed to limiting spending to 16.9 percent of GDP, with an additional 0.2 percent of spending to clear IPP arrears, and a contingency reserve of 0.25 percent of GDP has been budgeted to hedge against potential shocks. This accommodates salary and pension increases of 15 and 5 percent, already granted by the government. It also safeguards development spending to the fiscal year 2022 levels (as a share of GDP).

Following the removal of the price differential claim (post-tax fuel subsidy), the government has committed to fully passing through international oil price changes to consumers. In addition, once fuel taxation is returned to its reference level, the government plans to introduce an automatic pricing mechanism.

The provinces have committed, through MoUs they have signed with the federal government in late-July 2022, to deliver their individual commitment to an aggregate provincial surplus of Rs 750 billion. In this regard, quarterly data on fiscal outcomes from provinces will be shared with Staff to monitor implementation of provincial commitments and any likely impact on the Federal budget.

The report further noted that risks to the outlook and program implementation remain high and tilted to the downside given the very complex domestic and external environment. Spillovers from the war in Ukraine through high food and fuel prices, and tighter global financial conditions will continue to weigh on Pakistan’s economy, pressuring the exchange rate and external stability. Policy slippages remain a risk, as evident in fiscal year 2022, amplified by weak capacity and powerful vested interests, with the timing of elections uncertain given the complex political setting.

Socio-political pressures are expected to remain high and could also weigh on policy and reform implementation, especially given the tenuous political coalition and their slim majority in Parliament. Furthermore, high food and fuel prices could prompt social protest and instability.

All this could affect policy decisions and undermine the program’s fiscal adjustment strategy, jeopardizing macro-financial and external stability and debt sustainability. Moreover, elevated near-term domestic financing needs may overstretch the financial sector’s absorption capacity and cause market disruption.

Copyright Business Recorder, 2022


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