No package until fuel, power subsidies revoked: IMF

ISLAMABAD: Pakistan and IMF talks have failed to strike a staff-level agreement mainly because of the government’s inability to withdraw fuel and electricity subsidies.

Now a deadlock persists between the two sides whereby the IMF has linked the revival of stalled $6 billion Extended Fund Facility (EFF) programme to the removal of unfunded fuel and power subsidies as well as presenting the next budget for 2022-23 in line with the fund programme objectives.

It clearly indicates that the IMF programme will only be revived once the government hikes the POL and electricity prices. The government will have to present and approve the next budget for 2022-23 in line with the fund agreement.

These unfunded subsidies were provided by the PTI regime and now the Shehbaz government is finding it hard to reverse them. The IMF and Pakistan authorities will continue the talks. “The talks will continue” was the brief response from Pakistani negotiators in Doha who also stated that the IMF had placed a pre-requisite to withdraw fuel subsidies.

According to a statement issued by the IMF after review talks Wednesday night from Washington, an International Monetary Fund (IMF) mission led by Nathan Porter held both in-person and virtual discussions in Doha, Qatar, with the Pakistani authorities during May 18-25 on policies to secure macroeconomic stability and support sustainable growth in Pakistan. At the conclusion of the mission, Porter issued the following statement: “The mission has held highly constructive discussions with the Pakistani authorities aimed at reaching an agreement on policies and reforms that would lead to the conclusion of the pending seventh review of the authorities’ reform programme, which is supported by an IMF Extended Fund Facility arrangement. Considerable progress was made during the mission, including on the need to continue to address high inflation and elevated fiscal and current account deficits, while ensuring adequate protection for the most vulnerable. In this regard, increase in policy rates was a welcome step. On the fiscal side, there have been deviations from the policies agreed in the last review, partly reflecting the fuel and power subsidies announced by the authorities in February. The team emphasised the urgency of concrete policy actions, including in the context of removing fuel and energy subsidies and the FY2023 budget, to achieve programme objectives.

“The IMF team looks forward to continuing its dialogue and close engagement with Pakistan’s government on policies to ensure macroeconomic stability for the benefit of all of Pakistan’s citizens,” the IMF statement concluded.

When contacted, the IMF’s Resident Chief in Pakistan said: “The discussions held in Doha during May 18-25 are part of the IMF’s continuous engagement with Pakistan’s government on policies to ensure macroeconomic stability. Please be on the lookout for a press release over the next few hours.”

Soon after completion of the sixth review and release of $1 billion from the IMF, the PTI government had announced unfunded subsidies in February and then had talks with the IMF for completion of the seventh review. The IMF had raised objections and termed fuel subsidies as “unfunded” despite tall claims made by the previous finance minister that they had made provision of funding to provide relief package. When the PTI led regime was ousted through a no-confidence move, newly-placed Finance Minister Miftah Ismail had publicly conceded that there was no provision for financing fuel subsidies. He also visited Washington for attending the annual meeting of IMF/World Bank in April and on the sidelines of the meeting, Pakistani delegation had made a request to revive the stalled $6 billion programme and jack up the size of EFF programme by adding $2 billion and increase it up to $8 billion till June 2023. The existing IMF programme is going to be completed in September 2022.

The IMF had agreed to dispatch its review mission in second half of May 2022 but had linked it to withdrawal of fuel subsidies. The Shehbaz government could not muster up the required courage to abolish fuel subsidies and made efforts to convince the IMF on striking a staff-level agreement but failed to convince the fund staff.

One senior Pakistani official told this scribe that the IMF and Pakistani side would continue talks early next week for gauging the progress on elimination of fuel subsidies that could pave way for completion of the seventh review and release of a $1 billion tranche under the EFF programme.

Finance Ministry’s former adviser Dr Khaqan Najeeb said that it is unfortunate that IMF’s seventh review has been inconclusive. This impacts our access to other creditors and friendly countries. The success of an IMF-backed programme hinged on the team’s preparation and the arguments they could present during the review. Especially on the needed adjustments on the fiscal side as that was kind of a precondition to put the programme back on the track. Without that concluding the talks was unlikely.

He emphasised that completing the review required better targeting of the petroleum and energy subsidies to reduce quasi and fiscal impact. It seems that the gap with the IMF in this area could not be narrowed. It was also hoped the FBR had prepared a good legislation on reform of the personal income tax, which was due by February 2022. Some form of agreement on the steps for implementation of PIT and other measures in the Budget 2023 were needed.

It is hoped that some progress has been made, as it entails a rise in taxes of certain categories due to a reduction in both the number of rates and income tax brackets and reduction tax credits and allowances. A consensus with the IMF is time-bound, as being in the IMF programme requires finalisation of the contours of the Budget 2023 with the fund before presentation in June.

He clarified that monetary tightening of 1.50% in policy rate has been a helpful move to close the gap with the IMF on the monetary side. This hike was necessary with 13.4 percent headline inflation in April being a two-year high. Inflation momentum was also seen to be high at 1.6 percent month on month. With a hike of 150bps in the interest rate at 13.75%, Pakistan’s real interest rate turns marginally positive from being negative in previous months.

He concluded that IMF’s completion of the seventh review would have removed uncertainty at a time when external financing needs have swelled to nearly $32 billion for FY22 and FX reserves are eroding, the rupee is losing value and the country’s default risk as measured by five-year credit-default swaps is at the highest since 2013. However, with the steps required to be taken by the authorities, it is likely to take some time to move forward with securing the IMF support required to create economic stability. In the meantime, smart policymakers know that they should take requisite steps to calm markets.