Monday June 24, 2024

Pakistan authorities told: Bailout deal to come after approval of IMF-dictated budget

This arrangement could pave the way for kick-starting formal parleys and signing a staff-level agreement

By Mehtab Haider
May 23, 2024
International Monetary Fund (IMF) building in Washington DC. — AFP/File
International Monetary Fund (IMF) building in Washington DC. — AFP/File

ISLAMABAD: The visiting IMF team has conveyed to the authorities that the next bailout package under the Extended Fund Facility (EFF) would only be considered after presenting an aligned upcoming budget and securing its approval from parliament.

This arrangement could pave the way for kick-starting formal parleys and signing a staff-level agreement for clinching the fresh bailout package with the possibility to augment it through climate finance in the range of $6 to $8 billion. On account of timelines, it seems possible only in July 2024.

“In the budget 2024-25, the government will have to demonstrate its ability to raise the FBR revenue, throw primary surplus through curtailing expenditures and undertaking structural reforms to restrict the losses of State-Owned Enterprises (SOEs). The government will have to hike electricity and gas tariffs in coming July and August 2024 to strike a deal with the IMF,” top official sources confirmed to The News on Wednesday.

The Ministry of Finance had arranged a dinner in the honor of visiting IMF team led by Nathan Porter Tuesday night in Islamabad where the ongoing talks were expected to be concluded.

Now the upcoming budget for 2024-25 will become a test case for the incumbent regime to demonstrate its ability that they could deliver on the IMF’s stringent conditions.

The visiting IMF team had secured relevant data of all major economic fronts and informed the relevant authorities what kind of budget the Fund staff would like to see in 2024-25.

The IMF’s prescription is crystal clear that the government will have to devise a roadmap for increasing tax-to-GDP ratio which might further decline to 9 percent of GDP for the current fiscal year.

The FBR has been struggling to collect Rs 9.415 trillion but independent tax experts are predicting that they might face a shortfall in achieving the desired target. If FBR collects Rs9 trillion in the outgoing fiscal year, the IMF will ask it for increasing the collection up to over Rs12 trillion in the next budget. So the FBR will have to add up Rs3 trillion in the next budget in the presence of nominal growth rate of 16 percent.

The non-tax revenue target will also go up substantially, so a carbon levy is also under consideration in the next budget.

On the expenditure front, the government will have to rationalize expenditures of SOEs, pensions and subsidies in totality in order to slash down the current expenditures. On development side, the federal government will abandon the provincial nature projects from the next fiscal year.

On tariff rationalization, the IMF has asked for raising the power tariff by jacking up base line, fuel price adjustment and quarterly tariff adjustments. The tariff of gas will also be increased.

On solar net metering, the government has decided to hire a Chinese consultant and others to study it independently because net metering system was causing harm to DISCOs’ grids and multiplying problems for transmission and distribution system coupled with increasing the fiscal woes of cash-bleeding power sector.

There are estimates that solar panels might generate 6,000 megawatts electricity and the consumption drops significantly in winter season, so what will happen if there was no user of generated power in the next winter season. So, the power sector has entered into a real mess and has diminished the power of policy makers to maneuver in a complex and difficult situation.

A top official told this correspondent that they wished the visiting IMF team avoided front loading of the next IMF package in order to protect the social fabric of society as the country had experienced the highest-ever inflationary pressures in a persistent manner in the last few years.