IMF sets three structural benchmarks

The Interna-tional Monetary Fund (IMF) has set three structural benchmarks for Pakistan including draft legislation against "benami" transactions by end-January 2016 to improve tax compliance and enforcement, tackle losses, raise payment compliance and improve energy efficiency and service delivery in the sector. The IMF staff level report on eighth review under the Extended Arrangement and Request for waivers of non-observance of performance criteria stated that the (i) authority would prepare and submit to the National Assembly a draft legislation against "benami" transactions by end-January 2016 to improve tax compliance and enforcement.
(ii) Further performance would be enforced through setting quarterly loss-reduction, collection, and recovery targets consistent with arrears reduction plan for each DISCO by October 15, 2015 while (iii) the bidding process would be completed for shares of FESCO by end-June 2016 to privatise electricity distribution companies in line with arrears reduction plan.
The report further states that two end-June 2015 quantitative Performance Criteria (PCs) and three indicative targets (ITs) were missed, but deviations were either minor or temporary, corrective actions have been taken as needed, and the authorities remain on track to meet the end-September 2015 programme targets. Specifically, while the program's monetary PCs were met, the PCs on the fiscal deficit and government borrowing from the central bank were missed (linked to higher-than-programmed spending by some provinces along with a shortfall in federal revenue), and the IT on federal tax revenues was missed (reflecting legal challenges to some of the tax measures and the negative impact of lower global commodity prices). In both cases, the authorities are taking corrective measures.
The IT on social cash transfers was missed by a small margin, but the targeted number of beneficiary households was achieved, making the deviation minor. The IT on power sector arrears was also missed, but this is expected to be temporary, reflecting a delay in the implementation of some elements of the arrears reduction plan. The end-September structural benchmark (SB) on improving the central bank's interest corridor and the end-November SB to enact the Credit Bureau Bill were met ahead of time.
The report states that key domestic downside risks include slippages in policy implementation, ongoing legal challenges to power surcharges, and the still challenging political and security conditions, which could affect economic activity and undermine fiscal consolidation. External vulnerabilities include a protracted period of slower growth in key advanced and emerging market economies (including possibly a sharp slowdown in China), which could weaken exports and hurt remittances (including from GCC countries). A persistent US dollar appreciation, for example in the context of recent global exchange rate movements, with limited variation in the rupee's exchange rate, could further erode export competitiveness. Increased volatility in oil prices could affect efforts to reform energy subsidies. Conversely, fast implementation of CPEC projects and an improvement in the security situation could boost investment and growth, and removal of international trade and financial sanctions against Iran could have a positive medium-term impact on energy supply to Pakistan.
The authorities increased the weighted average gas prices by around 14 percent in August 2015. The price notification recuperates part of the losses in the sector incurred from delayed notification and eliminates the potential future fiscal impact. Staff urged the authorities to continue with pricing reforms for better allocation of gas and prevent potential fiscal costs. Liquefied Natural Gas (LNG) imports reached 200 mmcfd and the authorities are fully passing through the cost of imported LNG to the end-user purchase price. More than two-thirds of the conversion of existing domestic gas concessions to higher producer prices has been finalised with the remaining eligible ones to be completed by end September 2015. The authorities are also planning to award contracts for an additional 10-15 exploration fields by end-December 2015 to increase supply.
The report states that swift implementation of the plan to reduce the accumulation of arrears remains important to improve the functioning of the power sector. The authorities are implementing the agreed power surcharges, including to service the debt in the power holding company (Rs 335 billion at end-June 2015), and are allocating 0.1 percent of GDP from fiscal year 2015-16 budget to reduce part of the circular debt.