IMF, not govt, responsible for stalled lending?

ISLAMABAD: The Ministry of Finance (MoF) has claimed that delay in IMF Review Mission was on the part of the International Monetary Fund (IMF) as the government had been requesting them to send the mission since October 2022.

Briefing the Federal Cabinet on February 14, 2023, Finance Division apprised the cabinet that in July 2019, Government of Pakistan entered into a 3-year Extended Fund Facility (EFF) arrangement with the IMF amounting to $ 6 billion (SDR 4,268million).

Pakistan has completed eight IMF reviews so far and cumulatively received $ 3.9 billon. While completing the combined 7th and 8th Reviews on 29th August, 2022, the Government and the IMF agreed to extend the EFF program till June 2023 with size of the program increased to approximately $ 6.5 billion, (SDR 4,988 million).

The 9th IMF Review was scheduled with an attached disbursement of US 1.1 billion for November, 2022, but this was delayed due to certain reasons. The Finance Division, FBR and SBP remained continuously engaged with the IMF team and provided them all the required information on a regular basis. Finally, the IMF mission visited Pakistan for the 9th Review from January 31 to February 9, 2023.

During the visit, the relevant stakeholders including Finance Division, FBR, SBP, BISP, Power and Petroleum Divisions held detailed technical-level discussions with the IMF team. Impact and implications of the devastating floods on the country were duly highlighted by the Pakistani team.

Issues relating to power and gas sectors were also part of the negotiations. Avenues for additional revenues (both tax and non-tax) were also discussed.

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At the conclusion of the Mission, the IMF agreed to revise the target of primary deficit for FY-23 to 0.5 per cent of GDP (Rs .465 billion from Rs. + 153 billion). However, this was linked with measures for generating additional revenue, necessary rationalization in expenditures, doing away with non- targeted subsidies, as well as, enhanced social sector spending.

Spending on relief and rehabilitation of flood affectees was also incorporated while arriving at the revised deficit figures.

A comparison of budget estimates and projected revised estimates for FY 2022-23 as per the briefing were as follows: (i) Total federal revenue, budget estimates, Rs 9,404 billion, projected revised estimates, Rs 9,471 billion out of which FBR budget estimates were Rs 7,470 billion whereas projected revised estimates would be Rs 7,640 billion. Budget estimates of non-tax revenues were Rs 1,935 billion whereas projected revised estimates would be Rs1,831 billion, of which projected revised estimate of PDL will be Rs680 billion from Rs 855 billion of budget estimates. The total projected revised estimate of net federal revenue would be Rs5,001 billion from budget estimate of Rs 5,032 billion.

The total projected revised estimates of federal expenditure will be Rs 11,225 billion from budget estimate of Rs 9,579 billion.

The projected revised estimate of interest would be Rs 5,200 billion from budget estimate of Rs 3,590 billion and revised estimate of subsidies would be Rs 1,177 billion from Rs699 billion of budget estimates.

The projected revised estimates for grants would be Rs 1,207 billion against budget estimate of Rs 1,174 billion, of which BISP allocation would be Rs 400 billion from budgeted Rs 360 billion and others Rs 3641 billion from 3756 billion of budget estimates.

Foregoing in view, approval of the Cabinet was solicited for the projected changes in budget estimates for FY 2022-23 with the direction to the relevant Divisions to initiate cases for approval of Supplementary Grants.

Briefing the Cabinet on prior actions required for successful completion of 9th Review, the Secretary Finance Division highlighted the following: (i) Supplementary Budget: Tax measures to generate RS. 170 billion; (ii) increase in BISP Budget, i.e., increase in allocation from Rs. 360 billion to Rs. 400 billion after inflation adjusted cash transfers for Kafalat Program; (iii) increase in Petroleum Development Levy (implementation of the already agreed outstanding PDL, Rs.5/litre on diesel from March 01, 2023, and another Rs.5/litre on Diesel from April 01, 2023); (iv) external financing (assurances from the friendly countries to the IMF).

The Cabinet was also briefed about prior actions, i.e., power sector (recoup the deferred June and July 2022 FCAs starting from March 1, 2023) implement a surcharge of Rs. 3.39/kwh (to Rs 3.82/kwh) from March 1, 2023 whereas recently announced subsidies on Zero-Rated Industry (ZRI) and agriculture subsidy packages will expire on March 01, 2023.

Gas Sector: Notification of a gas price hike as determined by OGRA issued in January 2023 along an updated tariff slab system by February19, 2023.

During discussion, it was highlighted that the initial demand of IMF was for imposing additional taxes to the tune of Rs. 875 billion, which after tough negotiations was revised down and mutually agreed at Rs.170 billion. The IMF was also sensitized on the impact of the conditionalities on the poor, to which they agreed and accordingly enhancement in social spending by Rs. 40 billon were made part of the proposal to protect the marginalized. It was also agreed to update end-user gas prices and change the structural end-user gas tariff (approved by the ECC on Feb 13, 2023).

On a query by certain members with regards to reasons for delay in IMF Review, it was explained that the delay was on part of the IMF and the government had been requesting them to send the mission since October, 2022.

The members though concerned at the inflationary burden that the additional taxes would place on the common man, were in consensus that the government had no choice but to return to the IMF program. It was observed that other international lenders, including the friendly countries, were also expecting Pakistan’s agreement with the IMF which would unlock the rollover of old loans and extension of new ones.

Certain members asked Finance Division to provide them with a simple brief, in layman’s language, so that position of the government could be effectively defended; the Finance Division assured that the same would be furnished.

A member underlined the years of mismanagement and neglect that had led to country’s economic morass adding that it was; therefore, time for introspection and taking painful policy decisions or else the country would never be free of its cycle of crises. Members endorsed the viewpoint that structural reforms should also be initiated to get the fundamentals right even at the cost of eroding political capital. In this regard, the need for tax reforms was underscored so that dependence on indirect taxes, which hurt the poor more, could be reduced and the tax net widened instead of milking the existing taxpayers and ignoring the wealthy elites.

The issue of underperforming and bloated SOEs, which drain millions from the treasury every month needed to be addressed and the challenges swamping the energy sector required urgent attention. It was highlighted that the problem of current account deficit would continue to persist unless exports were enhanced but in the face of a contracting economy and de-industrialization, it would be difficult to achieve such enhancement. The matter of economic contraction; therefore, warranted a review besides embarking on other measures, such as diversification of export products and markets. The members recommended that to formulate a robust and sustainable economic plan, the Economic Advisory Council may be activated.

There was consensus in the Cabinet that government should effectively cut expenditure by adopting tough austerity measures in view of the economic pains of the common man. It was assured that recommendations of the Austerity Committee, which were expected to be finalized shortly, would be implemented in letter and spirit. Attention was also drawn towards the impediments in implementation of the recently approved Energy Conservation Plan, and the members emphasized that its strict enforcement must be ensured.

Copyright Business Recorder, 2023