Sunday June 26, 2022

Miftah Ismail hopeful of IMF accord ‘in a day or two’

Miftah said that the stalled International Monetary Fund’s (IMF) Extended Fund Facility (EFF) would be revived within a day or two

By Erum Zaidi & Mehtab Haider & News Desk
June 21, 2022
Finance Minister Miftah Ismail. Photo: The News/File
Finance Minister Miftah Ismail. Photo: The News/File

ISLAMABAD: Federal Revenue and Finance Minister Miftah Ismail said Monday that the stalled International Monetary Fund’s (IMF) Extended Fund Facility (EFF) would be revived within a day or two.

“I am very hopeful that the IMF programme will be revived,” the finance minister said while speaking to journalists. The finance minister told the journalists that the government aimed at taxing the wealthy and providing relief to the poor through the budget for the fiscal year 2022-23.

“IMF has no relation with the increase in salaries. Also, the tax exemption to the people earning below 1.2 million [annually] would remain in place,” the finance minister said. Annually, he said, around 15kg of gold is brought legally while 80 ton is smuggled into of the country. He said there was a plan to reduce import duty on gold.

Miftah, talking about the proposed taxes on property in the Senate Standing Committee on Finance, said that once construction begins on an empty plot, it would be exempted from taxes.

“Lay one brick on the empty land and the taxes will be lifted. But we will not impose a tax on anyone who has not acquired the possession of a plot or has not received the permission to start construction on it,” he said.

The finance minister said if a person has been granted permission to start construction on a piece of land and they still do not begin building something on it, then they will have to pay the tax.

In the coalition government’s first budget, the finance minister proposed a 15% capital gains tax on immovable property for a one-year holding period, which will be reduced by 2.5% for every additional year.

Moreover, he has also proposed advance tax on filers to be increased to 2% from the previous 1% on the purchase of property and non-filers 5%. Meanwhile, top economic managers Monday briefed Prime Minister Shehbaz Sharif on ‘tough conditions’ attached to the IMF programme and got his direction to revive it at the earliest.

After getting a nod from Prime Minister Shehbaz Sharif Monday evening, the economic team would now extend guarantees to the IMF staff that the country would be implementing the fund-sponsored programme without any breach or deviation from the agreed conditions. The ongoing $6 billion programme under Extended Fund Facility (EFF) had been stalled since March 2022.

“We will now pursue the IMF staff to revive the programme and ask them to finalise negotiations at the earliest. We are hoping that there will be a requirement for one more meeting/interaction with the IMF for reaching a staff-level agreement,” a top official confided to The News, here Monday.

However, official sources said that the government would have to take more tough decisions on slabs of Personal Income Tax (PIT) and the most difficult one would be related to jacking up tax rates from the taxable ceiling from Rs1.2 million to Rs 2.4 million where the bulk of salary earners existed.

There are only 12,000 salaried people who earn Rs1 million per month in the whole country. The base of the tax net is so skewed and narrow-based that there is no other solution but to broaden the base by bringing all sectors into the tax net irrespective of any protection.

The IMF has found some flaws in the budget for 2022-23 and asked the government to rectify. For instance, the government envisaged FBR’s tax collection target of Rs7,004 billion for the next budget against the desired collection of Rs6,000 billion for the outgoing fiscal, requiring growth of 16.67 percent in the next fiscal. The nominal growth has been envisaged at 16.5 percent and indicates that the government sees no increase in tax to the GDP ratio in the next budget.

There is another problem in the budget where the government envisaged a target to fetch Rs750 billion through petroleum levy in the next fiscal year. From July 1, 2022, the government will have to slap PL of Rs50 per liter on POL products to collect the desired amount of Rs750 billion.

However, the government showed its intent to impose Rs5 per liter petroleum levy so it will be able to collect just Rs5 billion on a monthly basis. It will also be highly inflationary if the government will impose a petroleum levy so it needs to be rationalised.

When contacted, a high official of the Finance Ministry said that it would be challenging undoubtedly, however, there were limited sources of revenue. “We will review the situation once we make up through compensatory sources,” he said.

Subsidies on power sector and provision of cheap petrol are another issue between the IMF and the Pakistani side. The cost of power generation has alarmingly gone up as it stood at Rs13.15/kWh in May 2022, which was 28.4 percent higher on a month-on-month basis and 130.7 percent higher year on a year basis.

In the first 11 months of FY 2022, the power generation rate stood at Rs8.76/kWh which was 82.2 percent higher year on a year basis in the same period of the last fiscal.

That shows a build-up in inflationary pressures when the Sensitive Price Index (SPI) touched 28 percent last week and it was a level never seen in any week since 2008. This building up of inflationary pressures has not yet passed on the effects of the recent depreciation of the exchange rate and partial effects of the hike in POL prices. The full-fledged impact of the POL price hike, raise in electricity tariff by Rs7.92 per unit, and gas prices of 45 percent will come into play in the next fiscal year so there are predictions of on average inflation touching 20 to 25 percent to further erode purchasing power of low and middle-income groups in months ahead.

The rupee, meanwhile, continued to nosedive against the dollar in both the currency markets Monday, as Pakistan and the International Monetary Fund have not been able to reach near a staff-level agreement for the resumption of the bailout, adding worries to the falling foreign exchange reserves and the battered currency.

The rupee dipped to another record low, falling past 213 against the dollar in the open market. It was trading at 213.50 versus the greenback, according to the rates quoted by the Exchange Companies Association of Pakistan. The local unit weakened by 1.50 rupees.

In the interbank market, the rupee breached the 209 level, hitting a new low against the dollar. It closed at 209.96 per dollar, down 0.58 percent from the previous close of 208.75. It traded as low as 2012 in intraday trading.

Traders said the local unit extended losses and made record lows for six consecutive sessions due to prevailing uncertainty about the revival of the IMF programme.

“The market is concerned about the IMF bailout package. According to media reports, the government had not yet received the first draft of the memorandum of economic and financial policies (MEP) from the IMF, showing certain issues remained unsettled with the Fund regarding the measures unveiled in the fiscal year 2022/23 budget,” said a forex trader.

“If the agreement has not been reached with the IMF, how can the government pass the federal budget from the National Assembly by the end of this month? This hampers investors’ confidence in the economy and the domestic currency,” he added.

The central bank's forex reserves are under $9 billion. The reserves held by the SBP declined 2.6 percent to $8.98 billion as of June 10 that are enough to cover 1.32 months of imports.

“The reserve situation is tight. The SBP does not have a cushion to inject dollars into the market. Having said that, the Finance Minister has said that the IMF agreement will be signed in a day or two, which would quickly change things around,” said Fahad Rauf, the head of research at Ismail Iqbal Securities.