IMF review is not done. There are broad agreements on the fiscal and energy side. The IMF is not flexible—the Finance team at home must agree on all the steps along with the assurances from the PM to bridge the mistrust. The only issue left is to arrange additional gross financing needs to the tune of $7-8 billion to shore up the SBP foreign reserve to $10 billion by June. Clarity on the issue is missing, such as whether the solid commitments (or full guarantees) must be arranged before the Staff Level Agreement (SLA) or after.
The mistrust between the Fund and the authorities has grown disproportionately in the past few months. This all started on May 21 when Hafeez Sheikh was replaced by Tarin and later events around the VONC only complicated matters. Over the last few months, things have gone from bad to worse and now the IMF is mentioning the support of the PM in the press release. That is not usual.
On taxation, the IMF has asked for permanent revenue measures. The government wanted to have a one-off tax on bank deposits and additional duty on imports. IMF is not allowing such measures. The government perhaps will have to increase GST to 18 percent and introduce some additional penal taxes on cigarettes and sugary drinks. There is likely to be a tax on cash withdrawals from banks which is regressive in nature and IMF was not in support of it; but it’s Dar’s favorite tax.
The government must also slash the untargeted and unfunded subsidies. The regional competitive tariffs to exporting industries is coming to an end. There would be no subsidy on energy provisioning for agriculture tube wells. The Kissan package which was recently announced by the PM has to be withdrawn.
The circular debt overflow from the targeted number was at Rs850 billion and the government is budgeting Rs350 billion as subsidy while the remaining has to be passedon to the consumers. Thus, the power tariffs have to increase at an average of Rs7.5 per unit as against the earlier IMF demand of Rs10. The subsidy protection for below 300 units is likely to remain intact. Government is somehow able to convince the IMF to continue with it. Around 60 percent of domestic consumption is below 300 units by 88 percent of consumers. They may continue to pay lower bills.
On the gas side, the prices must increase by 70-80 percent. There would not be much change in the petroleum taxes beyond previously agreed petroleum levy limits with no sales tax.
The imports restrictions and the backlog of imports and payments must be done away with completely by June end and the exchange rate will be market based to manage the demand. There are inflationary consequences of these steps which may result in inflation to move up to 30 percent in the next few months and to counter that, the monetary policy must adjust upwards by another 2-3 percent from the current policy rate of 17 percent.
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