The IMF agrees to enhanced safety nets for the poor no sales tax increase, but shows little flexibility on electricity and gas sector circular debts and untargeted subsidies.
By Muhammad Ali
ISLAMABAD: While the marathon talks between Pakistan and the International Monetary Fund (IMF) here remained inconclusive, the good news is that the two sides now see eye to eye on all but a few points.
To resolve the remaining differences, the talks will recommence through online meetings as of Monday, Finance Minister Ishaq Dar confirmed at a presser Friday, and said the government needs to impose new taxes to the tune of PKR 170 billion (and not PKR 500 or PKR 600 as variously rumoured) to balance the current fiscal’s budget.
The field mission delivered the draft Memorandum of Economic and Financial Policies (MEFP) to the Pakistani authorities to mark the end of their visit.
This is the 9th review of the USD 6.5 billion Extended Fund Facility (EFF) signed up by former Prime Minister Imran Khan in 2019. He, however, scuttled the deal before his unceremonious exit from office, which took former Finance Minister Miftah Ismail considerable exertion to get back on track last year.
But the program went off the rails almost as soon as Ismail passed the baton to Dar, who arrived emphasising his vision of a higher valued rupee and the need to protect the vulnerable. Originally due in November 2022, the 9th review of the EFF has since faced delays, finally commencing on January 31, 2023.
The International Monetary Fund (IMF) field mission, headed by mission chief Nathan Porter, spent ten days in threadbare discussions with Pakistani authorities, but sought more time to strike a staff-level agreement on the last day of talks on Thursday.
Senior Finance Division officials confirm the two sides still have differences of opinion over a few points.
The Finance Minister voiced his optimism that financing commitments from Pakistan’s bilateral lenders will be fulfilled, and his resolve to manage the country’s economy and exports.
Returning to the forex situation, Dar said a couple of debts payments made recently will be rolled over will soon revert. He particularly mentioned a USD 1 billion repayment expected to be reversed soon.
Dar exulted that the IMF team has accepted Pakistan’s demand not to impose sales tax, and clarified that restructuring of the National Accountability Bureau (NAB) was never on the agenda.
Dar lamented that the former prime minister used to rant on his every foreign visit how Pakistan is debt trapped and how everybody in the country is corrupt. He was askance who could invest in Pakistan after these claims.
He reiterated the government’s position that there is trust deficit between Pakistan and the IMF because of the conduct of the previous government.
The two sides have agreed on several prior actions for the completion of the review, including cutting gas and electricity sector losses, although Dar still believes it is difficult to pass the whole of the subsidy to consumers.
At his Friday presser, Dar confirmed Pakistan is committed to completely eliminating the gas sector circular debt, and lamented that the cost of electricity to the exchequer is PKR 3000 billion but only yields PKR 1800 billion in revenue.
The Finance Minister announced a roadmap for the expansion of the petroleum development levy (PDL) on diesel fuel by PKR 5 each on March 1 and March 5, and said an agreement has been achieved to increase the allocation for the Benazir Income Support Program (BISP) over the current fiscal by PKR 40 billion to PKR 400 billion.
Pakistan has until Monday to review the MEFP drafted by the IMF review mission, the parley recommences through online meetings. The Minister said there are several measures proposed that need to be discussed.
“We have to stop bleeding of the economy”, said Dar, as he lamented the country’s economy has gone from bad to worse over the last three years, and reiterated his determination to successfully conclude the program. Pakistan has only ever completed one IMF program successfully, which was on Dar watch.
He, however, is still not sure if the measure will be taken through the parliament as a Finance Bill or be approved as a Presidential Ordinance.
The IMF mission has already issued an end-of-mission press releases from Washington DC, confirming the two sides will continue virtual discussions in the coming days “to finalise the implementation details” of the policies Pakistan needs for economic stabilisation.
The statement said: “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.”
According to the fund statement, key program priorities include strengthening Pakistan’s 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 is another key priority, which the mission believes will gradually eliminate the foreign exchange shortage.
Finally, there is the need for preventing further accumulation of circular debt and ensuring the viability of the energy sector, which the mission hopes will result in improved energy security.
“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”, the statement said.
“Virtual discussions will continue in the coming days to finalize the implementation details of these policies.”
When the review concludes successfully, Pakistan hopes to receive a USD 1.2 billion tranche of funding from the IMF – subject to the executive board’s approval.
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