The IMF team is in Pakistan - final round of negotiations is underway, and it will be a continuous process till IMF-WB spring meetings where the programme is likely to be finalized. Ministry is targeting first tranche in June or July. The question is on the conditionality - there are two broad contours, one is on exchange rate and monetary policy - SBP domain; and other is fiscal, including energy circular debt - MoF domain.
BR Research channel checks confirm that development has taken place on the pricing issues - exchange rate and interest rates, while the fiscal side plans are going to be shared with the IMF in this trip. The good news is that the IMF has significantly relaxed pricing conditions, and now the talks are on the mechanism, not numbers anymore.
For instance, earlier the Fund was asking for specific rates - such as Rs170/USD or 14 percent policy rates. Now the discussions have graduated to fundamentals - the IMF is probably agreeing on 200 bps real interest rates. Seeing that, another 25-50 bps increase in policy rate on Friday is expected, and based on inflation outlook, a reversal in monetary policy cannot be called off in 6-9 months.
On exchange rate, there are talks on making an SBP internal fund - ammunition to defend the currency in the short term. For example, put $500 million aside in SBP for managing exchange rate, and the balance has to be net zero quarterly i.e. the SBP would have the flexibility to use the fund to manage volatility and the amount used has to be rebuilt within the quarter. Meanwhile, SBP may use REER for maintaining the fair value of currency. According to BR calculation, the fair value is somewhere between $145-150/USD – (for details read “Dollar dairy: Don’t go the Dar’s way” and “Currency equilibrium -almost there”).
Thus, the rumours lately circulating about the currency approaching Rs170-180/USD are uncalled for. The number quoted in news reports, based on calculations, for energy price revision was a scenario based analysis where different levels of international oil prices and currency values are used to present respective energy prices increase need. That does not mean that the government is actually using these numbers for gas and electricity prices increase.
The thorny issue in hand is on the fiscal side. The IMF wants the primary deficit to be eliminated. Last year the primary deficit was around 2 percent of GDP, and it may not be much different in ongoing year, the condition would be to bring it to zero in FY20. The MoF is trying to bring the quasi fiscal operations in the equation, as including the energy sector related debt; the fiscal deficit could have reached 8.5-9 percent in FY18.
The government is working on reducing the power sector losses - not much has yielded so far, but MoF wants the condition of lowering of deficit by 2 percentage points including the improvement in the energy sector. This will require further increase in energy prices - both gas and electricity, as merely lowering losses will not cut the deal. The progress so far is not encouraging as circular debt is growing at even higher pace. In short energy prices upward revision is a must.
Apart from energy, the government is required to enhance the tax revenues significantly in FY20. MoF is thinking about lowering the tax exemptions, reversal in individual income tax, and betting on higher economic transactions through tariff rationalization and eliminating the distinction between filer and non-filers. There are no apparent plans to increase GST or bringing any change in corporate income tax.
The tax exemption phasing out is interesting and has potential, but it is not an easy task. The idea is to not let businesses or individuals to park income earned from taxed sectors in untaxed segments - such as sugar companies parking the income from the said business in agriculture. Similarly there is potential to extract taxes from cement, steel and other businesses.
MoF is convincing the Fund to not look at deficits in isolation, the government has a desire to revive growth and churn taxes through higher economic activities. That is why the plan is to eliminate distinction of filers and non-filers in tax collection - mainly in cash withdrawal. The excess amount out of the system in the past 3.5 years due to this tax is over Rs1 trillion – (for details read “Doing away with the transaction tax”). It is not clear whether the relaxation will also be implemented on real estate transactions.
The bad news for salaried class is that the unbelievable lower taxes Miftah offered last year will be reverted to FY18 levels. On expenditure, the development spending will remain low next year as well while not much to gain from so called austerity drive.
That is the story on conditions of the IMF and government plans in offing. The Fund package would be around $6-7 billion with first tranche to be a little higher while the rest will be divided in equal tranches over three years. The government has more interest in IMF’s nod over the amount to be fetched directly as $5-6 billion inflows from WB and IMF in next fiscal year are linked to the IMF letter of comfort.
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