Completion of 7th Review: Pakistan-IMF talks to start on 4th

ISLAMABAD: Pakistan and the IMF are scheduled to hold review talks this week whereby both sides will discuss the merits of relief package announced by Prime Minister Imran Khan for reducing the POL and electricity prices amidst a challenging external environment.

The IMF team will kick-start virtual parleys with Pakistani authorities from March 4, 2022, and these talks will continue for two weeks for the completion of the 7th Review under the $6 billion Extended Fund Facility (EFF) program.

When contacted on the relief package announced by PM Imran Khan, IMF’s Resident Chief in Pakistan, Esther Perez Ruiz, said that Pakistani authorities and IMF would discuss during the upcoming 7th review of the EFF the merits of the recently-adopted relief package and other measures to promote macroeconomic stability amidst a challenging external environment.

This scribe also contacted the Ministry of Finance high-ups and got confirmation that the IMF team would hold virtual review talks from March 4, 2022, which would last for a two-week period.

Premier Imran Khan announced reduction in petrol, diesel prices by Rs10 per litre and electricity tariff by Rs5 per unit. It is estimated that the government will dole out Rs360 billion on these two fronts of POL and electricity during the remaining four-month (March-June) period of the current fiscal year.

The government is going to provide a direct subsidy of Rs200 billion on electricity and Rs160 billion on POL prices during the the ongoing The PTI-led government is going to replicate one old program introduced during the Musharraf government and later on during the PPP-led government in 2008 and 2009, which was known as Price Differential Claims (PDCs) for reducing the prices of POL products. However, these claims were largely never reimbursed to Pakistan State Oil (PSO) and its amount was still due after 12 years period. With these measures, it seems that the government has entered into the election mode. It is yet to seen how the IMF will respond to this massive doled out package as apparently it seems total reversal from the Fund-sponsored program. The initial estimates suggested that the the cost of other measures such as the Internship program for almost 150,000 graduates with a monthly stipend of Rs30,000 and doling of interest-free loans under the much-hyped Kamyab Pakistan Program were not included in the cost estimation of the relief package announced by the PM in his televised speech on Monday night.

One member of the high-profile Macro Economic Group, Dr Ashfaque Hassan Khan, told this scribe that the relief package was discussed in detail in the last two months and claimed that it would have neither any negative impact on the budget deficit nor the ongoing IMF program. He said that the relief package was fully financed and savings would be utilized to finance the relief package.

Dr. Ashfaque Hassan Khan said that the IMF provided $1 billion for Covid-19, which would be diverted towards the relief package, second unnecessary development projects related allocation would be provided for execution of the package. Thirdly, he said that the BISP money would be fully utilized and fourthly the FBR’s increased collection of Rs281 billion would be utilized for this package. He said that there were some suggestions to provide targeted subsidy during the Macro Economic Group meeting but he had asked for providing general subsidy by reducing the prices for all because the government did not have the capacity to provide a targeted subsidy.

When contacted, Dr. Khaqan Najeeb, former Director-General Economic Reform Unit, Ministry of Finance, said general subsidies are less welfare enhancing for the vulnerable and that is the reason governments should always promote targeted subsidy regimes. Pakistan has just completed a National Socio-Economic Registry in June 2021 with a door-to-door survey of 33 million households. A good initiative indeed. This should be the right data to use for any future subsidy for better targeting.

Dr. Khaqan emphasized that reduction in fuel and electricity through a general subsidy can have substantive fiscal implications. Electricity consumption in summers (March to June) is the highest during the year. The Rs5 subsidy will be to adjust the fuel price adjustment monthly for the residential and commercial consumers. In a sense, the government has abolished the fuel price adjustment for four months.

Assuming a sale of 40 bn GWh of electricity in four months, this can translate into a subsidy of Rs200 billion. If not paid for, this would be taken as a prior year adjustment in the next year's electricity tariff, thereby increasing it further. He concluded that if a reduction in the price of oil, its consumption could further impact the high 7MFY22 $11.6 bn current account deficit, which the government has been trying to curtail through various measures. In the short run, the government can reduce the Petroleum Development Levy for the Rs10 reduction, however, a funded subsidy from the current budget would have to be created to fund this.