The IMF team is in Islamabad and staff level discussions are going on. Things don’t look bad on the face of it. Ministry of Finance is confident that all the six binary quantitative targets have been met for 1QFY20 (read “Meeting IMF targets with flying colors”, published on 3rd October, 2019). But the authorities need to ‘do more’ on a few areas, especially in energy where the Fund is reportedly showing concerns on the structural benchmark of circular debt reduction plan.
On the fiscal side, MoF folks feel that there is no need to take any additional measures as the primary fiscal surplus is around Rs200 billion against the deficit target of Rs102 billion. Will this Rs300 billion cushion be enough for MoF to push the Fund for allowing to run pro-growth policies? The buzz in Q block is that a finance bill (mini budget) is in preparation where some tax concessions are to be given to a few sectors. Let’s see how much leverage would the ministry be extended on having a good start of the programme.
The falling economic growth projection is a big concern for the government which came with an agenda to create 5 million new jobs in 5 years. The manufacturing slowdown is more than expected as documentation efforts are temporarily adversely affecting the economic transactions. The earlier slowdown was due to monetary and fiscal tightening, and post-July documentation related tussle between FBR and traders/retailers has exacerbated the situation. The other issue is the poor performance in cotton and other crops where climate change and pests attack are eating the growth potential.
Government is eyeing upon the construction sector where proposals are under consideration on taxation relief in new projects, especially in low cost housing. Rumors are circulating that there will be no question asked on the source of income for investment in construction. There are other elements on easing tax policies to improve the ease of doing business. There are certain taxes which are deemed not efficient with high transaction costs associated- FBR may like to abolish taxes which are irrelevant.
The question is how the IMF team reacts– some fear that IMF may ask for some supplementary tax measures in lieu of concessions, the MoF might ask. Nothing is certain yet as it’s all in the air – wait till the Fund gives the green signal. And if the review goes well, the chances of monetary easing may start earlier than March – market has already priced in a marginal rate cut in Nov-19. Let’s see what MPC decided – the pressure is mounting to cut rates sooner than later.
The main challenge is energy. All the benefits of tightening and painstaking will be wasted if energy woes are not addresses. The Fund has no different opinion as the mission team is showing discomfort on the pace of energy sector reforms. There was a structural benchmark of preparing a comprehensive circular debt reduction plan by Sep-19. The work is still in progress – no agreement is reached with the IMF on it.
The draft needs to be finalized and be approved. The IMF is also concerned on the tariff adjustment. It was a prior action to have quarterly automatic tariff adjustment in the energy sector. Government apparently is fine with quarterly adjustments on fuel charges, but may like to renegotiate on base tariff adjustment on annual basis. The core issue is of capacity payment which is growing and someone has to pay.
Thus the leverage gained on good performance on the fiscal and monetary side targets is probably to be consumed by poor performance on the energy side – and that may leave little room for negotiation on having policies to spur growth. Let’s see how things shape in days to come.
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