The IMF team is in Islamabad to finalize the conditions for the upcoming programme. Apart from an agreement on having a flexible mechanism on exchange management and probably an understanding on interest rates, nothing is final as yet. These two items, have largely been adjusted to the Fund's liking, still there is some room for adjustment.
The elephant in the room is fiscal, and there is no concrete plan presented by the MoF to the IMF. Hence, there is no soft commitment on certain measures with the IMF. The broad contour is to lower the fiscal deficit and the tax revenues are estimated to grow by 1.7 percent of GDP. Administrative measures or technology use argument, at best, can buy MoF 0.3 percent of GDP relaxation.
The gap of 1.4 percent of GDP or around Rs600 billion new taxes has to be filled. That is a big number. The ministry sources are saying that they have a plan and there is a broader agreement with the IMF on it. However, journalists and policymaking circles in Islamabad are of the opinion, that things could go in any direction and nothing is final until it is agreed with the Fund.
The ministry is saying that the GST rate would remain unchanged at 17 percent, while those who have dealt with the IMF, in previous programmes fear that the Fund may not settle for anything less than 1-3 percent increase in GST - one percent increase in GST can fetch around Rs70-80 billion a year. In the first year of PPP government , the GST was increased from 15 to 16 percent, and in first year of Dar, the rate further increased to 17 percent. Will it be 18 percent this time under PTI?
This government is not left with many options in the fiscal exemptions and expenditure to lure IMF for additional revenue generation. In the previous few programmes, governments extracted maximum juice. Another way to put it is that the previous finance czars had used their opportunities to convince the IMF on vague plans.
Now the Fund appears to be in no mood to listen on intangibles. The new finance minster does not subscribe to the political philosophy of Imran, and he could care less on public outcry as a result of tough measures. He probably will take Fund's side to show results.
Some revenues may start coming back after reinstated taxes on telecom consumption. The relief to salary class will likely be reversed. There is ample room in petroleum levy on petrol and diesel and it does not have to be shared with provinces. Plus, the taxation stuck in GIDC can bring some relief. Apart from these, still some exemptions may have room for collection on removal, where IMF can be convinced.
But doing all these will bring inflation home. And the number would be higher if GST is moved up. The oil prices are hovering over $70/barrel. Higher prices, along with higher PL may hurt consumers hard. The other tough measures are in terms of clearing the mess in the energy sector which does not truly reflect in above the line fiscal numbers. Expect significant increase in electricity and gas prices. That is no good for the inflation outlook.
The other inflationary impact could come from currency adjustment. The currency is stable and with expected finalization of the IMF programme, the volatility may remain absent from exchange rate market. But cum July, the designing flexibility in exchange rate market may let the rupee slide further against the USD.
To date, the economy has dealt the currency depreciation as despite around thirty percent adjustment, inflation in yet to cross double digit. With some correction in gas pricing and house rent index, the CPI which stood at 9.4 percent in March, may be revised down by 1-1.2 percentage point.
But the situation could be tough in quarters to come. The economic absorption of currency adjustment on commodity prices, due to relatively low domestic prices to international, prior to currency adjustment, is over now. Any further rupee fall would have higher inflationary consequences.
Days are tough ahead. Next six months are critical for Imran and his government. He has already lost the star batsman, and the weather is still overcast. Forget about scoring runs - like generating employment through better economic growth in FY20.