EDITORIAL: Approval of the sixth mandatory review scheduled for 4 June 2021 was removed from the agenda of the International Monetary Fund (IMF) Board meeting, a prerequisite for the release of the tranche under the 6 billion dollar Extended Fund Facility (EFF), indicative of inconclusive ongoing discussions between the Government and the Fund. The operative word is 'inconclusive' as opposed to 'suspension' as the Fund in all probability wants to assess the efficacy of the alternative policy decisions suggested by the Shaukat Tarin-led Ministry of Finance, in marked contrast to the agreement reached with the Dr Hafeez Sheikh-led Finance Ministry, for the first three months of next fiscal year. The Fund may decide to club sixth and seventh review, as it did the second to the fifth review stalled due to the onslaught of Covid-19; however, the actual amount of disbursement may not equal the sum of the sixth and seventh reviews given that in March 2021 the Fund disbursed 500 million dollars as opposed to a little more than a billion dollars that were scheduled to be disbursed by the fifth review noted in the July 2019 EFF documents.
The sixth review had a disbursement tag of 750 million Special Drawing Rights (SDRs) and the seventh review of another 491 million SDRs - or a total of 1241 million SDRs equivalent to 1842 million US dollars at the rate of 1.48472. It is unlikely that the Fund would disburse this amount in one go and it is likely that the remaining two tranches - scheduled in March 2022 and September 2022 - may disburse more than what was stipulated in the March 2021 documents; or the EFF maybe extended beyond September 2022 which would bring the end of the programme closer to the September 2023 elections and no government is likely to support an ongoing programme in the final year of its tenure.
It is important to note that Shaukat Tarin will have to show tax collections in the first three months (July-September), which is going to be extremely ambitious requiring full cooperation of the Federal Board of Revenue (FBR) to generate an additional one trillion rupees next year or a minimum rise of 220 billion rupees in the first quarter of 2021-22. This could be a challenge given that: (i) taxes on internet projected to generate 100 billion rupees have been withdrawn; (ii) difficulties associated with the proposal to tax electricity bills in excess of 25,000 rupees per month at 7.5 percent on only those not on an active list of filers many of whom do not have the connection in their names, including those renting property, while previously this rate was applicable if the bill exceeded 75,000 rupees per month but on all - filers and non-filers alike; (iii) 38 billion rupees from crude oil sales tax is not likely to be realized as crude is used by the local refineries who produce taxable products; and (iv) imposing a tax on items under Schedule 3 which are not suitable for this mode of taxation. These challenges have morphed into many expressing concern that this maybe an attempt to sabotage Tarin's policy thrust.
The alternative reforms in the power sector, alternative to raising tariffs, has so far not been approved by the World Bank, the lead agency in this regard. It is not yet clear whether the discussion has progressed into submitting a detailed reform plan to eliminate the circular debt within a specified time period. This is particularly worrisome as the budget 2021-22 documents highlight the risk associated with power sector losses, notably continuation of flow of energy sector losses and non-payment of arrears and liabilities that would impact on the fiscal forecasts - a risk which "may impact government's fiscal position if such arrears and liabilities are required to be paid through the budgetary process."
It is therefore relevant to note that the country is not out of the woods and in the event that the budgeted targets are not met the Fund may suspend the EFF which would compel the government to rely on borrowing (commercial and equity debt through issuance of Sukuk/Eurobonds) at very high rates of return with a short amortization period, raising the annual debt servicing payments that in turn would fuel the budget deficit. Tarin needs the full support of the FBR and other agencies and some of his budgetary proposals must be proactively supported, specifically redefining smuggling to include retail in the Customs Act and anyone not declaring one account or more as defaulter.
Copyright Business Recorder, 2021
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