Govt-IMF staff level agreement next week: Rs170bn mini-budget on the cards

ISLAMABAD: The International Monetary Fund (IMF) has committed virtual negotiations with the Pakistani authorities for striking a staff-level agreement next week.

The Fund has placed prior actions, including the unveiling of a mini-budget for taking additional taxation measures of Rs170 billion such as the imposition of flood levy, windfall profits tax on the banking sector and hiking the GST rate by 1 percent from 17 to 18 percent.

A presidential ordinance is under consideration to fetch additional tax revenues of Rs170 billion in the remaining four and a half month period till June 30.

The imposition of hiking the GST rate by 1 percent will fetch Rs50-55 billion in the remaining period of the current fiscal year.

The other taxation measures include hiking the tax rates on cigarettes, beverages, real estate transactions and expansive vehicles etc.

The IMF also demands implementation of the revised Circular Debt Management Plan (CDMP) by hiking the electricity tariff in the range of Rs8-11 per unit, removing un-targeted subsidies under Zero Rating Industries (ZRI), doing away with the Kissan Package, increasing gas tariff up to 25-30 percent on average and securing confirmation from bilateral, multilateral and other avenues to generate dollar inflows in the range of $12 to $13 billion.

The IMF’s statement issued from Washington DC on Friday stated that an IMF mission led by Nathan Porter visited Islamabad during January 31– February 9 to hold discussions under the ninth review of the authorities’ programme supported by the IMF Extended Fund Facility (EFF) arrangement.

Mr. Porter stated, “The IMF team welcomes the prime minister’s commitment to implement policies needed to safeguard macroeconomic stability and thanks the authorities for the constructive discussions.

“Considerable progress was made during the mission on policy measures to address domestic and external imbalances.

Key priorities include strengthening the fiscal position with permanent revenue measures and reduction in untargeted subsidies, while scaling up social protection to help the most vulnerable and those affected by the floods; allowing the exchange rate to be market determined to gradually eliminate the foreign exchange shortage; and enhancing energy provision by preventing further accumulation of circular debt and ensuring the viability of the energy sector.

The IMF made it clear that the timely and decisive implementation of these policies along with resolute financial support from official partners are critical for Pakistan to successfully regain macroeconomic stability and advance its sustainable development”.

“Virtual discussions will continue in the coming days to finalise the implementation details of these policies,” the IMF statement concluded.

However, the sources said under the fiscal consolidation plan, the government made a commitment with the IMF to slash down expenditures and undertaking additional revenue measures to bring down the primary deficit to the desired levels.

For collection of Rs170 billion in the remaining period of the current fiscal year, the government will have to impose taxes of Rs453 billion having annual impact for making collection of the desired amount.

The FBR’s tax collection will be jacked up proportionally so the annual tax collection target will go up to Rs7,640 billion.

The government also sought Rs472 to Rs500 billion waiver in the flood related expenditures. The Public Sector Development Program (PSDP) was further slashed down while the allocation for BISP was jacked up to Rs400 billion from earlier allocation of Rs360 billion for the current fiscal year.

A senior official of Finance Ministry said the virtual talks would resume from Monday evening at 5.30pm PST. He hoped that the staff level agreement would be signed by the end of the next week.

He said the IMF would secure confirmation from multilateral and bilateral creditors prior to finalising the figures of external financing requirements for the current fiscal year.

Meanwhile, ruling out the possibility of slapping 17 percent GST on POL products, Minister for Finance Ishaq Dar Friday said the government would unveil a mini-budget to fetch Rs170 billion in taxes and halt the flow of circular debt in the power sector in a bid to strike staff level agreement with the IMF.

He said the IMF shared the Memorandum of Economic and Financial Policies (MEFP) with the Pakistani authorities at 9am on Friday and now the virtual parleys would commence from Monday. Addressing a news conference at the Ministry of Finance (Q-Block), Dar alleged that the PTI-led regime breached the IMF agreement that created trust deficit.

The minister said debt servicing escalated from Rs1,750 billion to over Rs5,000 billion during the last five years, arguing that the mismanagement committed by the previous government could be held responsible for the whole mess piled up on the economic front.

To another query about the foreign exchange reserves which had dipped below $3 billion, he said commitments from friendly countries would materialise besides roll-over of recently made payments once the programme with the IMF was finalised.

Additionally, he said the privatisation process of power plants, Haveli Bahadur Shah and Balloki, was on track, as they held meetings in recent days. Dar alleged that the PTI government had created trust deficit by reversing the measures, which were agreed with the IMF when the vote of no-confidence was moved against them.

He said the government had agreed to impose Rs170 billion additional taxes, halt the flow of circular debt in the power sector and reduce the circular debt of gas sector as well as withdraw untargeted subsidies.

Flanked by Minister of State for Finance Dr Aaisha Ghaus Pasha and others, Dar said after reaching an agreement on broad contours of the review, draft Memorandum of Economic and Financial Policies (MEFP) was provided to Pakistan and he would go through it over the weekend ahead of virtual meeting with the Fund on Monday.

The Fund’s mission chief also held a virtual meeting with Prime Minister Shehbaz Sharif through Zoom wherein it was reiterated to implement the agreed reforms.

He said prior actions agreed with the Fund included; (i) fiscal measures of Rs170 billion; (ii) reforms in the energy sector with the main thrust to stop the flow of circular debt; (iii) minimising untargeted subsidies; and (iv) flow of circular debt in the gas sector to be reduced to zero from Rs260-270 billion.

Dar said the fiscal measures would be introduced through an ordinance or a bill in the Parliament. He said the commitment of petroleum levy was almost fulfilled except Rs10 per litre increase in diesel – from Rs40 to Rs50 per liter – and this would be increased in two instalments of Rs5 each from March and April, adding that sales tax on petroleum products was not agreed with the Fund.

The finance minister said the IMF would disburse $1.2 billion once the Fund’s executive board would grant its assent after signing the agreement. Dar said the lifeline consumers would not be burdened through the electricity tariff adjustment.

He said reforms in some sectors were in the interest of the country and added that the power sector was one of them whose recovery was Rs1,800 billion against the generation cost of Rs3,000 billion.

Out of this gap, Rs550 billion was included as subsidy in the budget and the remaining Rs650 billion would have to be parked either in the fiscal deficit or somewhere else, he added.