ISLAMABAD: Serious reservations against the recently-announced package for agriculture sector and subsidy for concessional electricity for export-oriented sectors prompted the International Monetary Fund (IMF) to seek a reversal of both decisions by or compensate through new tax measures (mini-budget), well-informed sources in Finance Division told Business Recorder.
These tough measures will be discussed during talks on the IMF’s Ninth Review scheduled to start soon.
The government recently announced a financial package of Rs 1800 billion for farmers and supply of electricity to five export-oriented sectors at Rs 19.99/ kWh the cost of which has been estimated to be Rs 110 billion.
“Reverse or compensate with new tax measures the losses of recently introduced measures (agricultural subsidies, exporter subsidies and power sector delays),” sources quoted IMF as saying.
The government has also been barred from introducing new tax concessions or exemptions or other preferential tax treatment or any new tax amnesty.
According to sources, under the Ninth Review the government has to resume needed consolidation, after significant slippages in FY 22, to meet the primary surplus target of 0.3 per cent of GDP in FY 23.
In this regard there is a need for clear understanding on all new spending plans for FY 23, including the ones needed to respond to the floods. There is also a need for agreement on compensatory fiscal measures to meet program targets, either through reprioritization of spending or new tax measures.
The Seventh and Eighth review included contingency revenue measures which could be triggered in case of revenue shortfall for even one month.
On fiscal side, the sources said, for strengthening revenue base and bringing the tax-to-GDP revenue to at least 11 percent, the government has to catch up on the delayed October PDL adjustment and stay on track on all committed subsequent increases to generate revenue of one per cent of GDP.
For protection of social spending, IMF has asked the government to expand the number of BISP families to 9 million and undertake a cost of living adjustment to the BISP Kafalat program.
Export-oriented sectors to get power at an all-inclusive rate of Rs19.99 per unit
According to sources, the IMF has further urged the government to strengthen energy sector viability by timely implementation of electricity tariff increases (both quarterly adjustments and monthly FCAs).
The Fund, sources maintained, has also asked the government to seek Cabinet approval of FY 23 Circular Debt Management Plan (CDMP), to guide a sustainable reduction in circular debt accumulation as agreed with the World Bank (WB), Asian Development Bank (ADB) and IMF.
“There must be no introduction of any new subsidies for electricity, and a commitment not to fiscalize power sector arrears, without agreement with the Fund,” the sources added.
On monetary side, the sources said, the IMF maintains that real policy rates are significantly negative (the highest among Middle East and Central Asia (MCD) countries) and further monetary tightening is needed to bring inflation down (policy rate is 15 per cent against headline inflation of 23 per cent and core inflation of 14.5 per cent).
The Fund, sources said, insists that the exchange rate must be allowed to move freely, forex intervention must be limited within agreed targets and gross reserve targets must be built up as planned, including by mobilizing committed bilateral creditor support ($ 4 billion).
The sources said the State Bank of Pakistan would be required to share AML/ CFT inspection of banks in relation to tax amnesty for construction sector (end-September) - a structural benchmark (SB) agreed with IMF but which remains outstanding whereas Cabinet approval of amendments regarding crisis management arrangements is also awaited.
Other commitments like piloting of the e-procurement system (end-August) is outstanding like expanding and/or creating refinance schemes.
The following governance issues are also outstanding: (i) Parliamentary approval of SOE law (SB due end -Sep); (ii) establishment of asset declaration system with focus on high-level officials (SB due end-September); (iii) publication of comprehensive review of anti-corruption institutional framework including the National Accountability Bureau (NAB) (SB- end-Jan 2023) at risk as Task Force has yet not formed; (iv) Cabinet adoption of an SOE ownership policy and amendments to necessary SOE-dedicated acts (end-December); (v) commencement of planning for future climate adoption and donor financing ( PIMA, PEFA); and (vi) fully operationalization of Treasury Single account (TSA III) by end-December.
Copyright Business Recorder, 2022