EDITORIAL: While specific details of precisely what are the prior conditions that the government has agreed to in the 3 billion dollar Stand-By Arrangement with the International Monetary Fund (IMF) are not known as documents of the staff-level agreement would be uploaded as and when the Fund’s executive board formally approves the arrangement, a prerequisite for the tranche release (assuming that the amount will be released in tranches and not in one go) yet there is a widespread consensus based on previous IMF programmes, including the recently lapsed Extended Fund Facility programme with 2.6 billion dollars remaining undisbursed, that prior conditions must include a raise in utility rates and tax collection from sale of petroleum products.
The objective of the raise in utility rates would be not only to reduce the circular debt of over 2.6 trillion rupees that is negatively impacting on the liquidity available to this critical sector but also reduce the existing outstanding stock of the power sector debt in government guarantees estimated at 73 percent (3460 billion rupees end March 2023 as per budget documents).
The raise in tariffs, the Fund press release notes, would be through ongoing efforts to strengthen the viability of the energy sector (including through a timely FY24 annual rebasing exercise); however, sadly, while there is a general perception that tariffs will be raised, a usual enough measure taken by Pakistani administrations to secure an IMF programme, yet there is no evidence of structural reforms targeted to reduce 579 billion rupees 2023-24 budgeted subsidy for Wapda/Pepco and 315 billion rupee budgeted subsidy to KE though the amended budget referred to an 85 billion rupee reduction in expenditure without citing any specific item.
The hike in rates would no doubt not only contribute to higher inflationary pressures for households already grappling with 38 percent consumer price index for May 2023 but also raise the cost of production that in turn would up the price of all products manufactured for the domestic market as well as make it a challenge for exporters to compete in the international market.
Petroleum subsidy as per the 9 June budget envisaged at 53.6 billion rupees with the bulk of 30 billion rupees to be channeled to domestic consumers through SNGPL. Ironically though, petroleum levy is budgeted to generate the 869 billion rupees for the federal government as it is not a divisible pool tax therefore considered all the more attractive by the federal government.
This large sum, 60 percent more than the revised estimates of last year, coupled with a massive decline in consumption as households continue to struggle to meet the rise in their cost of living, may have necessitated the Finance Bill to allow a rise in the maximum petroleum levy from 50 rupees to 60 rupees per litre.
The tax on petroleum and products is considered a low- hanging fruit as it is easy to collect with the Federal Board of Revenue playing no role in its collection, though the Board insists it does play a supervisory role, yet this is an indirect tax whose incidence on the poor is greater than on the rich.
Besides a higher levy not only raises transport costs but also ups the cost of farm to market transport of perishables and hence its impact on the cost of living index is significant.
With these two decisions taken to secure the IMF package to avert the possibility of the looming default, the coalition government must surely be aware that inflation will be further fuelled.
And while the IMF press release lays the onus of controlling inflation on the State Bank mainly through adjusting the policy rate, yet it is disturbing that the Fund staff remains unaware of the fact that policy rate adjustment merely ups the government’s debt servicing payments given that it is the largest single borrower especially as the rate rises beyond what is economically feasible for the private sector that in turn raises the deficit, again a highly inflationary policy.
There is, therefore, an emergent need for an empirical study that would convince IMF staff that the linkage between the discount rate and inflation is rather tenuous in Pakistan.
The SBA conditions, therefore, do not provide any comfort level to a pledge that controlling inflation will be a priority.
And while SBA is for nine months only, up to end March next year, yet the fact of the matter is that given the country’s indebtedness and reliance on external sources to fund its budget, 23 billion dollars budgeted for this year, there is little doubt that a longer term IMF programme will have to be secured by the end of the SBA. Needess to say, IMF’s eventual support has come with strings attached.
Copyright Business Recorder, 2023
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