Targets, tariffs, & tranches

Mehtab Haider.
March 02, 2020

The government has finally managed to strike a deal with the International Monetary Fund (IMF) but the Fund extended one-month period against its original plan to consider approval of next tranche by early April this year from earlier envisaged schedule to take up this approval in March 2020.

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The government has finally managed to strike a deal with the International Monetary Fund (IMF) but the Fund extended one-month period against its original plan to consider approval of next tranche by early April this year from earlier envisaged schedule to take up this approval in March 2020.

This one month extension indicates the approval of next tranche of $450 million is linked with fulfillment of certain pre-requisites and delivering on the promises will only pave the way for release of third tranche under $6 billion Extended Fund Facility.

A top official, who is privy of recently concluded talks, said there were certain numbers of sensitivities involved in the process of such negotiations so all officials involved in it had taken oath they would not share any information with anyone until the IMF’s board granted approval and released the Memorandum of Financial and Economic Policies by April 10, 2020. Leakage of any information before that could create problems for smooth sailing of an approval from IMF’s Executive Board.

This time around, beyond any doubt, it was a tough task bringing the IMF team around. The Finance Ministry’s team, considered quite weak by many, however, successfully persuaded the fund towards striking a staff-level agreement without having to announce any mini-budget.

The nailed it despite the fact the Federal Board of Revenue (FBR) could not achieve its revised collection target of Rs5.238 trillion. Our team also ensured and there were no additional taxation measures for which the IMF team has pressurised the Pakistani side a lot during recently concluded parleys.

Both Pakistani and IMF officials are completely tightlipped and no one is ready to say anything on the record. However, in the background discussions the officials argued the staff-level agreement did not come easy as it was a daunting task keeping in view the poor performance of tax collection machinery and of cash bleeding energy sector of the country.

Pakistani authorities submitted a revised fiscal plan and agreed to get approval for a new mechanism for hiking power and gas tariffs that helped them strike the staff-level agreement with the IMF.

There was an agreement with the IMF that the Ministry of Power would propose a revised mechanism for determining the tariff to the Council of Common Interest (CCI) for raising average tariff and slowing down the piling up of the circular debt. The summary to this effect will be submitted before the CCI. On gas tariff, the tariff adjustment on July 1 had eliminated the arrears of the gas sector and now the gas tariff would be adjusted on the basis of Oil and Gas Regulatory Authority’s (OGRA) mid-year decision on tariffs.

According to the revised fiscal plan for the current fiscal year submitted before the IMF revealed that the budget deficit was revised downward from 7.5 percent of GDP (gross domestic product) to 6.75 percent for the GDP with the projection to restrict the primary balance at Rs260 billion for the current fiscal year ending on June 30, 2020. The government had committed that the budget deficit would be curtailed at 2.3 percent of GDP in the first half of the current fiscal and now they have projected the overall deficit would be restricted at 6.75 percent of GDP till end June 2020. However, Dr Hafiz A Pasha, renowned economist and former finance minister, said if the government somehow managed to restrict the budget deficit below 8 percent of the GDP, he would celebrate it as an achievement of the incumbent regime.

The FBR’s target submitted by the government before the IMF was kept at Rs 4.8 trillion against the revised target of Rs5.238 trillion. Earlier, on the eve of the budget for 2019-20, the FBR’s target was envisaged at Rs5.555 trillion. The non-tax revenue target was revised upward from Rs894 billion to Rs1.351 trillion as the target on account of State Bank of Pakistan profit was jacked up from Rs406 billion to Rs690 billion. The non-tax revenue target of Petroleum Levy (PL) was proposed to increase from Rs216 billion to Rs300 billion that clearly indicates the government made a commitment with the IMF to keep the petroleum levy on the higher side for pocketing additional Rs84 billion from the voiceless consumers. The petroleum, oil, and lubricant (POL) prices in the international market have tumbled but the full benefits are unlikely to be passed on to the consumers in the coming months of the current fiscal year. However, the target of Gas Infrastructure Development Cess (GIDC) has been slashed down from Rs30 to Rs20 billion for the current fiscal year.

On the expenditures side, the government has slashed its allocated amount for debt servicing on repayment of markup on foreign and domestic loans from Rs2.891 trillion to Rs 2.7 trillion mainly because of appreciation of rupee against dollar and reprofiling of short-term debt. The markup on domestic loan-related payments was projected to decrease from Rs2.532 trillion to Rs2.370 trillion for the current fiscal year. The defence budget was hiked by Rs100 billion from an allocated amount of Rs1.152 trillion to Rs1.252 trillion for the current fiscal year. The amount for subsidies was kept unchanged at Rs271.5 billion for the current fiscal year.

Ironically, the development budget was proposed to be reduced both at the federal and provincial levels. The major cut in the development outlay was proposed at provincial levels as the development allocation was proposed to be cut down from Rs1.081 trillion to Rs880 billion for the current fiscal year. Similarly, the federal Public Sector Development Programme (PSDP) was slashed after excluding federally-funded programmes executed by the Finance Division to the tune of Rs150 billion out of Rs701 billion, the federal PSDP was kept at Rs 540 billion for the current fiscal year.

This all seems overambitious and over optimistic framework agreed with the IMF. It is yet to be seen how the incumbent regime sells these hard targets before the political leadership as the Prime Minister Imran Khan had publicly stated there would be no hike in electricity and gas tariff till budget. So let’s see who wins.


The wirter is a staff member





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