Pakistan receives draft MEFP: Monetary policy tightening among ‘prior actions’

ISLAMABAD: Pakistan has received a draft of the Memorandum of Economic and Financial Policies (MEFP) from the IMF where the Fund indicated to extend the time-frame of the Fund program but its exact size has not yet been communicated to Islamabad.

The IMF has placed prior actions, including approval of the budget for 2022-23 and the Finance Bill in line with the agreement of the Fund, further tightening of monetary policy in the aftermath of CPI-based inflation and hiking electricity tariff and placement of fuel subsidy mechanism for 20 million poorest segments of the society.

The IMF has clubbed completion of 7th and 8th reviews that will now pave the way for release of two tranches worth $1.9 billion for Pakistan by end July 2022 subject to the approval of the IMF’s Executive Board.

“Early this morning, the Government of Pakistan has received an MEFP from the IMF for the combined 7th and 8th reviews” Minister for Finance Miftah Ismail said in his tweet here on Tuesday.

When contacted by this scribe and inquired about the increased size of the IMF program, the minister replied that the IMF had not yet communicated the increased size of the program. When asked about prior actions placed by the IMF for revival of the IMF program, he replied that there were four to five but he did not remember them exactly.

However, the sources said that the government has decided to provide cheap petrol subsidy to selected 20 million while the BISP beneficiaries will not be provided the additional amount of Rs2,000 given to households. The government has allocated Rs48 billion for this fuel subsidy, which is made part of the BISP allocation in the budget. The total BISP allocation stood at Rs364 billion in the budget for 2022-23. The IMF has also asked for further tightening of monetary policy but its exact determination will be finalized after getting the CPI-based inflation figure on July 1, 2022. The Monetary Policy Committee (MPC) is expected to meet in the first week of July 2022 for considering further tightening of monetary stance, which stood at 13.75 percent at the moment.

Later on, in his address to the Turnaround of Economy organized by the Ministry of Planning, Miftah Ismail said that he would share good news here as the IMF shared MEFP for clubbing the 7th and 8th reviews. He said when communicated to the PM, he had received the reply that “our journey would be moving towards self-reliance.” If Pakistan focuses on inclusive and sustained growth and leaves all other things aside, the country could achieve self-reliance. He said that Japan, Korea and China made progress by achieving higher and sustained growth, then the turnaround could be achieved in 10 years. He said that the coalition government took tough measures without any fear. The economy, he said, was in a difficult situation as the economy witnessed the highest-ever deficits as the budget deficit rose to Rs5,000 billion, the public debt went up by Rs20,000 billion in the last 36 months. The debt servicing stood at Rs1,500 billion in 2017-18, which had now climbed to over Rs4,000 billion.

He said that the tax-to-GDP ratio stood at 8.6 percent for 2021-22; it stood at over 11 percent in 2017-18. “We should not talk about self reliance if we cannot collect taxes,” he made it clear.

He said the government was providing fuel subsidy of Rs120 billion that could result in bankruptcy of the country and it was essential to increase the POL prices. He said that the tax-to-GDP ratio of 8.6 percent was not sufficient to meet the financial requirements of the country. The government imposed the super tax ranging from 4 to 10 percent. It will be a one-time tax. “We are bringing all shopkeepers into the tax net as we have announced fixed scheme for collection of tax through electricity bills,” he said and added that he would bring builders, real estate agents, car dealers and furniture into the tax net in days to come. All rich Pakistanis will have to contribute by paying their share of tax, he maintained.

The minister said that the government would collect 33 percent more through taxes and levies in the next fiscal year compared to the previous year and that was a remarkable achievement. The primary deficit, which stood at Rs1,600 billion for the outgoing fiscal year, would not convert into surplus of Rs152 billion. He said that Pakistan came out of the danger of default but the country would have to stick to the path of financial discipline.