Four new structural benchmarks set

The Intern-ational Monetary Fund (IMF) has set four new structural benchmarks including avoiding the practice of issuing new preferential tax treatments or exemptions and presentation of the federal government mid-year budget review report to the National Assembly by end-February.

This has been noted in the "First Review under the Extended Arrangement under the Extended Fund Facility and Request for Modification of Performance Criteria" released, here on Monday.

The report stated, "The following new structural benchmarks are being proposed: (i) avoid the practice of issuing new preferential tax treatments or exemptions (continuous); (ii) Q2 FY 2020 tariff notification for capacity payments (end-January 2020); (iii) presentation of the federal government mid-year budget review report to the National Assembly in line with the PFM Act (end-February 2020); (iv) improve towards a substantial level the effectiveness in addressing terrorism financing, consistent with FATF Immediate Outcomes 9 and 10 (end-March 2020).

Pakistan has missed five indicative targets (ITs) for end-September agreed with the IMF under the $6 billion EFF arrangements.

The IT on targeted cash transfers spending was missed but is expected to be corrected by end-December. The indicative targets on net accumulation of tax refund arrears and power sector arrears were also missed, but with the newly proposed ITs they are on track to be met by end-December.

Spending on health and education came in short of the target as, at the time the target was set, only very preliminary estimates of fiscal year 2019 expenditures on health and education were available, especially at the provincial level. Since the actual outturns turned out to be significantly lower, the IT on health and education has been revised accordingly to reflect the authorities' spending capacity.

Nonetheless, the revised IT still envisages an increase in health and education spending as percent of GDP against FY 2019. Net tax revenues collected by the Federal Board of Revenue (FBR) was also missed due to lower than expected customs receipts that have been negatively affected by the faster-than-expected external adjustment.

Most structural benchmarks (SBs) have been implemented, albeit with delays. The licences for the track-and-trace system for excises on cigarettes were issued in October (end-September 2019 SB), while the finalization of BISP's banking contracts and launching the financial inclusion strategy for women were implemented according to the agreed timeline (end-October 2019 SB).

In November, the circular debt reduction plan was completed (end-September 2019 SB) in line with staff and other IFI recommendations.

Further, the electricity tariff adjustments as determined by the regulator was notified on September 30, although the Q1 FY 2020 tariff adjustment, critical to stem the accumulation of new arrears, only took place on November 29 (completing the end-September 2019 SB; prior action for completion of the first review).

The continuous SB on the commitment to not grant further tax amnesties was also observed. However, while there has been progress on measures to strengthen the effectiveness of the AML/CFT framework (end-October 2019 SB), this has not been completed.

One prior action was set on the notification of Q1 FY 2020 electricity tariff adjustment for capacity payments, critical to stem the flow of power sector arrears.

The following end-December performance criteria (PC) are proposed to be modified: (i) government guarantees to accommodate the issuance of guarantees in the power sector, in line with the adopted circular debt reduction plan and to support investment in the energy sector; (ii) net international reserves and net domestic assets of SBP to lock-in some of the over performance achieved by end-September; and (iii) general government primary budget deficit to reflect the better-than expected end-September outturn.

The following end-December ITs are proposed to be modified: (i) budgetary health and education spending to more accurately reflect spending plans by the provinces; (ii) net tax collection by the FBR to recognise the faster-than-expected external adjustment negatively impacting customs revenue; (iii) net accumulation of tax refund arrears to capture the authorities plans to reflect the end-June stock of tax refund arrears; and (iv) power sector payment arrears to reflect the end-September outturn.

March PCs and ITs for March, June, and September are proposed in line with updated quarterly projections. An additional adjustor for the general government primary budget deficit is proposed on SBP profit transfers to the budget to ensure a rules-based approach. The definition governing the PC on the stock of government guarantees is proposed to be modified to measure the stock of issued or executed government guarantees to broaden coverage.

The end-October 2019 SB for the adoption of measures to strengthen the effectiveness of the AML/CFT framework is proposed to be reset for end-June 2020 to allow more time to advance reforms.

The end-December 2019 SB for the submission of amendments to the SBP Act is proposed to be reset for end-March 2020 to allow more time for the technical preparation and consultative process.

The end-December SB for the submission of amendments to the NEPRA Act to parliament has been modified to reinstate the power of the government to levy surcharges over and above the system's revenue requirements under the NEPRA Act.