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The situation with the IMF is getting a little tough. Two main issues are tax revenues and energy related inefficiencies. Latter is a bigger issue where government is finding it hard to come up with a viable solution. Having said that, it seems like there is no imminent threat of program derailment. Environment is conducive as both parties are engaged to find an amicable solution.

IMF staff is asking for a viable plan that can be discussed with its Board; Islamabad is actively searching for it. The worst-case scenario could be a delayed tranche to be clubbed with the next review. One may wonder, what magic wand the government would find by then to resolve the energy puzzle.

It is encouraging that there is a resolve from both sides. It is likely that this tranche might face a delay. This will give allow more time to find a way to reduce energy inefficiencies. IMF understands the tax elasticities and knows that energy prices hike may not result in desired solution at a broader spectrum. But business as usual cannot continue.

This means that budget might come before the next tranche’s board meeting. Fresh taxes can be imposed without the so-called stigma of mini budget. The problem with the non-tax revenues is that IMF has put a cap on SBP profits for computation of primary deficit. It is ironic then that higher than expected SBP profits are the star performers in revenue for current fiscal.

SBP posted Rs427 billion in 1HFY20 as compared to Rs63 billion in the same period last year. Higher profits are attributed to exchange gains (because of currency appreciation in the Jul-Dec) and higher return on SBP stock of government debt. Virtually, all stock of SBP T-bills has been re-profiled into bonds for improving maturity profile. In turn, SBP profits increased.

But not all of it can be used in meeting IMF target of primary deficit. For instance, IMF has placed a ceiling on SBP profits at Rs341 billion for 1HFY20 for primary deficit target. The actual profits transferred were Rs427 billion. The full year ceiling is at Rs604 billion.

On tax revenues, government believes that implementation of measures on taxes will take time to translate into revenues. IMF may want to see a plan on how to meet current and next year’s tax revenue targets. At this point, government is looking for replacement of Shabbar Zaidi as FBR chairman. Tariq Pasha and Mujtaba Memon are probable candidates. Whoever is to come, it is a tough pitch to play.

The bone of contention is energy where government is finding hard to curb the circular debt growth. The other issue is handling the existing stock. Increasing tariff further could be counterproductive as industrial sector is already becoming regionally uncompetitive. Exporters are no longer getting energy at promised rates. Resolving energy woes may prove tougher than addressing challenges on the revenue front.