IMF review: Deadlock on execution timeline remains a hurdle

ISLAMABAD: The deadlock on the timeline of implementing the qualitative and quantitative conditions contained in the Memorandum of Economic and Financial Policies (MEFP) remains a hurdle in the successful completion of the 6th review under the $6 billion Extended Fund Facility (EFF).

This was revealed by a senior official in the Ministry of Finance while talking to Business Recorder on condition of anonymity. The 6th review under the EFF is expected to conclude soon, he added, but at the cost of contractionary policies which may lower GDP growth projections while raising inflation estimates still further.

The government has accepted two major demands of the Fund - withdrawal of sales tax exemptions and zero rating as well as reducing rates to the tune of Rs 395 billion and raising base power tariff by Rs 1.39 per unit in October, which was to be implemented from 1 June 2021 as per the second to fifth IMF review agreement.

Independent economists argue that the budget for the current year is based on the agreement reached between the IMF and the Pakistan authorities in February 2021 during the second to fifth review talks based on 2 percent growth rate but with the actual growth rate of 3.94 percent calculated for the year IMF targets have most likely changed which may be an additional stumbling block in the sixth review talks.

"Pakistan and IMF have almost developed a consensus on major issues including raise in power tariff and revenue target and the review completion is expected anytime in the current week", said the official, adding that the two have yet to reach an agreement on timeline for implementation of some of the actions.

One of the festering issues in the successful completion of the sixth review relates to presenting amendments to the State Bank of Pakistan (SBP) Act to parliament, however, the government rightly claims that as this requires a constitutional amendment it simply does not have the requisite two-third majority in parliament to ensure its passage.

Sources further revealed that the Fund is insisting on equality in taxes and withdrawal of tax exemptions, especially on agriculture sector however the government points to agriculture being a provincial subject and reiterated that its thin majority in parliament as not being conducive to the passage of any constitutional amendment.

Officials stated that the agreement is most likely to be reached in the current week, but on such conditions which may result in negatively affecting the GDP growth and in a further inflationary spike.

The SBP is also expected to raise the policy rate in line with the Fund's insistence on a contractionary monetary policy which would negatively impact on productivity.

Copyright Business Recorder, 2021