IMF programme to be wrapped in tough conditions

ISLAMABAD: Pakistan will have to erase borrowings from the State Bank of Pakistan (SBP) from the existing level of Rs3.8 trillion to zero, hiking electricity tariff up to 30 percent and placing Integrated Value Added Tax (VAT) for bringing both goods and services under uniform tax collection agency for striking the staff level agreement with the IMF.

The upcoming IMF bailout package will be folded into the toughest conditions, but the PTI led government is claiming that the Fund mission will agree for “gradual adjustments”. Many insiders believe that it could only be wish of the government and Islamabad would have to take decisive measures to overcome the imbalances on macroeconomic front.

In order to bring down borrowing of government from the SBP to zero, the federal government will have to make commitment to bring down borrowings on quarterly basis and the reliance will be shifted on commercial banks.

The adoption of this mechanism will result into hiking the discount rates as the SBP had raised policy rates by 450 basis points going up from 6.75 percent to 10.25 percent. Official sources said the IMF programme will have a condition to achieve primary balance of budget into surplus, which is currency witnessing huge deficit.

The primary budget deficit excluding interest payment has been estimated at negative 2.2 percent of the GDP on the basis of last fiscal year data. The IMF wants to convert this deficit into surplus so the PTI-led government will have to make fiscal adjustment of 1.1 percent of GDP each in next two years period to convert primary deficit into surplus as the Fund programme did in case of Egypt for providing $12 billion package.

For achieving fiscal consolidation under the condition of primary balance of budget into surplus, the government is left with no other option but to massively decrease grants and subsidies as well as development programme. Although, the Public Sector Development Programme (PSDP) was massively cut down now the focus could be shifted towards abolishing vertical programmes such as population welfare and others in totality from the domain of the federal government to provinces. The funding for Benazir Income Support Programme (BISP) would be protected in order to ensure safety nets for vulnerable segments of the society that might face the severe hit in the wake of adjustment programme under the IMF conditions. The BISP programme might be shifted on cost sharing basis of 50:50 percent by the federal and provincial governments. The Higher Education Commission (HEC) could also be shifted under jurisdiction of the provinces in line with the spirit of 18th constitutional amendment.

On revenue collection side, the VAT could be one among the major conditions whereby the existing General Sales Tax (GST) would be replaced. Currently, the GST on goods is the domain of the federal government while GST on services falls into jurisdiction of provinces. It is the welcome move of Minister for Finance Asad Umar to take provinces on the board for finalising fiscal issues with the IMF.

On hiking electricity tariff, the officials said the government would have to take different measures for tackling the ongoing cash bleeding of the power sector under which the hike in tariff in accordance with Nepra’s determination would be only one aspect as the experts of World Bank and Asian Development Bank estimated the requirement of hiking tariff in the range of 25 to 30 percent. It all aimed to bring efficiency in power sector as the IMF wants to bring flow of circular debt at zero. The overall circular debt including flow and stocks stood at Rs1,643 billion out of which the government approved launching of Islamic Sukuk bond for generating Rs200 billion in shape of debt from the banks in order to remove the liquidity crunch being faced by the whole power sector. The government is all set to launch this Islamic bond in domestic market within next few days.

An official of the Finance Division, when contacted, said it’s premature to discuss IMF programme conditions at this stage as all these issues would be deliberated when the IMF mission would be visiting Islamabad probably within the ongoing financial year to finalise the details of the programme.