Pakistan’s imports have declined to the tune of $6 billion so far, and with this new realities are emerging on the economic front of Pakistan. The country will likely readjust policies over short to medium-term. With the changing security environment in the aftermath of the killing of Iranian general in Baghdad, international oil prices might escalate, posing another threat to the import-dependent countries like Pakistan. Economic volatility will thus increase further.
However, in which direction the incumbent government’s policy makers take Pakistan, is yet to be seen. The economic team has to decide about the course of adjustment through loosening of the fiscal policy or monetary policy, or a combination of both to kick-start the sluggish economy. It possesses a month and a half to make its choice before the International Monetary Fund (IMF) team arrives in the capital in February 2020 to discuss the new economic realities and to finalise the course of correction.
Many economists who know the ins and outs of the country’s economy concede that readjustment in policies was around the corner. They suggest adopting well thought out policies. The government seems ready for adjustment in fiscal policies so a mini-budget is on the cards by the end of February 2020 following IMF consultations.
With the IMF’s consent, Pakistan revised down the Federal Board of Revenue (FBR) collection target to Rs5.238 trillion from Rs5.5 trillion. It also agreed under the new structural benchmark condition to take “additional measures” before presenting the budget review in parliament by end-February 2020.
This clearly indicates that a mini-budget is on the cards if the need arises to make adjustments on the fiscal front. On the other side, the non-tax revenue target has also been jacked up by 0.8 percent of GDP to compensate the shortfall on the tax collection front, and to keep the budget deficit, especially primary deficit, within the desired limits.
“On the basis of the review’s findings, we will implement ‘additional measures’ as needed to ensure that FY 2020 annual targets are observed,” the Memorandum of Economic and Financial Policies (MEFP) duly signed by Adviser to the PM on Finance Dr Abdul Hafeez Shaikh and SBP Governor Dr Reza Baqir stated under the IMF’s $6 billion Extended Fund Facility (EFF).
Pakistani authorities made a commitment to present the budget review to Parliament by end-February 2020 to guide implementation of the FY 2020 budget, containing budget and actual comparisons of revenue, expenditure, and financing through the first half of FY20, as well as an assessment of the budget estimates for the entire budget year.
“On the basis of the review’s findings, we will implement ‘additional measures’ as needed to ensure that FY 2020 annual targets are observed,” the MEFP stated which was released through IMF’s review report.
Although, the IMF has lowered down projection of its inflationary pressures from average 13 percent to 11.8 percent for the current fiscal year, it would be still kept in double digit. So the possibility of any drastic change in monetary stance seems minimal because the SBP through monetary policy was taking into account as overall headline inflation instead of core inflation. The food and energy push inflation will continue keeping pressures on overall inflationary pressures in the current fiscal year.
The IMF’s review report and MEFP document signed by Pakistani authorities stated that there would be quarterly notification of adjustment of power tariff. “Until the process of adjusting quarterly tariffs becomes fully automatic, we will continue to timely notify tariffs on a quarterly basis,” it said.
The government is committed with the multilateral creditors to amend NEPRA Act after which the determined tariff by the regulator would stand notified automatically, but until this mechanism would be in place, the authorities were committed to notify quarterly adjustment of tariff.
“In this regard, on November 29, we announced the increase in tariffs for capacity payments by around 2 percent, effective for Q1 FY 2020 (prior action) and we will adjust Q FY 2020 tariffs for capacity payments by end-January 2020 (new SB),” the IMF document states.
Recovery of net hydel profits stock of arrears: The tariff update of January 2020 will incorporate the recovery from consumers of half the outstanding stock of remaining net hydel profits arrears, equivalent to Rs73 billion.
Eliminating delays in tariff adjustments and reintroducing the government’s power to introduce tariff surcharges: To this end, we are preparing amendments to the NEPRA Act focusing on giving the regulator the power to determine and notify quarterly tariffs; ensuring timely submissions of quarterly and annual petitions by the DISCOs; eliminating the gap between the regular annual tariff determination and notification by the government; and reinstating the power of the government to levy surcharges over and above the system’s revenue requirements under the Nepra Act.
Ensuring timely disbursement of power sector-related subsidies: We will aim to streamline and facilitate the disbursement of sector-related subsidies and, to this end, by end-November 2019 the Ministry of Energy will streamline the required auditing procedures to ensure the timely disbursement of subsidies.
Performance-based management of DISCOs: To improve efficiencies and collections the government will sign performance-based contracts with all DISCOs by end-January 2020.
The contracts will contain KPIs for improvements in collection, reductions in losses, and meeting the regulatory timelines for petitions submissions, with mechanisms to reward good performance and/or compensate for shortfalls. DISCOs will submit quarterly performance reports to NEPRA and will publish on NEPRA’s website.
“We will introduce new surcharges as needed to ensure that the circular debt reduction targets under the plan are met,” the document read.
On gas sector, the IMF report states that reforms in the gas sector were advancing as planned. Key achievements included timely update of tariffs.
The tariff adjustment on July 1 eliminated the flow of gas sector arrears. Going forward, Pakistan would adjust tariffs on OGRA’s midyear decision on tariffs.
The writer is a staff member