Rs 340bn flood expenditures: Pakistan asking IMF to allow budget deficit increase

ISLAMABAD: Informing the IMF that the expenditures on flood rescue and relief amounted to Rs 340 billion, Pakistan has requested the lender to grant an adjuster of the same amount by allowing an increase in the budget deficit for the current fiscal year 2022-23, it is learnt. 

To jack up the tax collection target, the government is considering slapping a Flood Levy in the current fiscal year and different proposals are under consideration for finalizing its exact modalities. Although the political leadership has agreed in principle to take additional taxation measures but they want to adopt them in such a way there is no extra burden on the common man amid higher inflation and low growth trajectory. “We are considering imposing Flood Levy on those higher income brackets who are earning lofty profits in recent years. We have not yet firmed up modalities but it’s actively under consideration at the moment within the higher functionaries of the government,” one top official of the government confirmed while talking to The News here on Tuesday.

The government has informed the IMF of the flood expenditures including BISP and those utilized on relief and rehabilitation during the current fiscal year including the Public Sector Development Programme (PSDP) and Annual Development Plans (ADPs) of the provincial governments. Now the adjuster will be used to hike the budget deficit target envisaged at 4.9 percent of GDP on eve of the budget for 2022-23.

Pakistan and the IMF continued ongoing talks virtually but differences still persisted over tax collection targets, and non-starter energy reforms including hiking of gas tariff, rising circular debt, and expenditure overrun, making consensus harder to strike on a staff-level agreement for completion of the 9th review under $7 billion Extended Fund Facility (EFF).

The IMF had asked Pakistan for hiking the gas tariff because the government kept the gas prices unchanged which resulted in increasing the circular debt of the gas sector.

Although the government made plans for improving the gas sector no progress was witnessed in the power sector. The monster of circular debt in the power sector went up to Rs 2.4 trillion and all targets agreed with the IMF for reducing it on a monthly and quarterly basis could not be achieved. The subsidy on tube wells alone would cause an increase of Rs 200 billion in the accumulated Circular Debt in the ongoing financial year.

The IMF also raised objections over Kissan Package as well as the government’s decision to grant power and gas tariff reduction for five export-oriented sectors and the agriculture sector.

The decision regarding deferred payment of electricity bills continues to be another bone of contentions among the Ministry of Finance and Ministry of Power if the move was meant for subsidy. The Finance Ministry argues that it was deferred payment with the understanding that the payment would be recovered during the winter. But there is a difference of opinion on interpretation between the two ministries.

The IMF has also assessed that the FBR would not be able to collect its annual envisaged tax collection target of Rs 7.47 trillion so it asked for a revised projection in the wake of import compression and slowing down of the economy. The Fund staff also inquired when the nominal growth jumped to in the range of 25 to 27 percent why it did not reflect in FBR’s collection. The IMF has projected that even if the FBR achieved its annual target of Rs 7.47 trillion, the tax-to-GDP ratio would decline in the current fiscal year. But the FBR high-ups argued before the IMF that the FBR’s collection was on track and they would be able to achieve the desired target. However, the revenue collection might be staggered in the wake of litigations whereby the stuck-up revenues to the tune of Rs 250 billion might be materialized in coming months because currently, the courts granted stay orders. The FBR has sent out written requests to the Chief Justice of Pakistan for early disposal of the pending cases before the courts where billions of rupees were involved.

When contacted one top official said that the talks positively continued with the IMF and both sides would be able to strike staff level agreement soon. An IMF official said that Discussions to date in the context of the 9th review have been productive.

Discussions have enabled a revision to the macroeconomic outlook post floods as well as an in-depth evaluation of fiscal, monetary, exchange rate, and energy policies adopted since the completion of the combined seventh and eight reviews.

The IMF looks forward to continue the dialogue over policies that adequately address the humanitarian and rehabilitation needs from the floods while also preserving fiscal and external sustainability given available financing.

News Desk adds: The International Monetary Fund’s executive board on Monday discussed the surcharges it collects from mostly middle- and lower-income countries, including Pakistan on larger loans that are not repaid quickly, but failed to agree to launch a formal review.

Argentina, Pakistan and others are pushing the IMF to drop - or at least temporarily waive - the surcharges, which the IMF estimates will cost affected borrowers $4 billion on top of interest payments and fees from the start of the COVID-19 pandemic through the end of 2022.

The United States, Germany, Switzerland and other advanced economies oppose a change, arguing that the fund should not change its financing model at a time when the global economy is facing significant headwinds.

An IMF spokesperson said the board discussed potential changes to the policy during its regular review of the global lender’s precautionary balances, but failed to reach consensus on reviewing the policy. “Overall, views on changes to the surcharge policy continued to diverge, including on the merits of a temporary waiver of surcharges,” the spokesperson said.

No details were provided, but the fund said it would publish a staff paper and a press release in the coming days that would provide a fuller account of the board’s deliberations. No date was set for any further board discussion.

Kevin Gallagher, who heads the Global Development Policy Center at Boston University, said big shareholders should rethink their opposition, given the global economic outlook. “This is the most urgent time to address a fundamentally flawed business model where the IMF is generating revenues by taxing those most in need,” Gallagher said.

But it was notable, he said, that the IMF’s shareholders had not outrightly rejected a review. “One silver lining is that the biggest shareholders ... didn’t have enough strength to kill the proposal,” he said.