In talks with a visiting IMF mission, the Pakistani authorities seem amenable to PKR 200 billion in additional revenues measures plus PKR 100 billion in development spending cuts.
By Muhammad Ali
ISLAMABAD: Pakistan is set to see the already high inflation to soar further as the authorities’ parley with the International Monetary Fund (IMF) staff enters a new phase as of Tuesday.
The inflationary impact of the fiscal adjustments required to stay on-budget for the rest of the current fiscal year will likely take headline inflation beyond the 30 percent mark by the end of June 2023, top official sources confirmed to IP here on Monday night.
An IMF field mission is in Pakistan for the 9th review of a multibillion-dollar Extended Fund Facility (EFF) that has kept the country afloat in the face of an imminent default on its external obligations.
The two sides have concluded technical level talks and are set to commence policy level dialogue as of today, scheduled to finish by February 9.
The Independent Pakistan can report that Islamabad made a request to the IMF for moving forward by holding a meeting with Minister for Finance Ishaq Dar on Tuesday (today) to finish review within the stipulated timeframe.
Already suffering from chronic macroeconomic distortions, Pakistan’s economy took a severe beating from last monsoon’s cataclysmic floods. The deluge that had a third of the country under water at one point wrought vast damage on the agriculture sector, disrupting food supplies.
This has sent food inflation into the stratosphere. The fallout of the war in Ukraine and the recent free-floating of the rupee added additional burden the on the common citizen.
But if the Pakistani side was expecting any leniency from the Fund in view of the above, they were mistaken. The visiting IMF mission has conveyed to Pakistani authorities they would have to undertake massive fiscal and monetary adjustments in order to achieve economic stabilisation.
Under the IMF’s diagnosis, the government will have to hike the GST rate by 1 percent increase from the standard rate of 17 to 18 percent through a minibudget. The IMF is asking taxation measures to the tune of PKR 200 billion in additional revenues over the rest of the current fiscal year.
The government is left with no other options but to increase both electricity and gas tariff in order to erase the monster of the circular debt.
If the two sides fail to strike a consensus on a staff-level agreement by February 9, the timeframe of ongoing parleys might be considered to extend. But Pakistani authorities are optimistic that the review talks would conclude on time.
The government has finalised its different options including increasing power tariff up to PKR 10 per unit in staggered manner and hiking the gas tariff as well in the current fiscal year.
The government is asking the IMF for protecting power consumers up to 300 units from any upcoming raise in tariff. The government also wants to protect the Kissan package but it might become difficult owing to the fiscal squeeze.
On the expenditure side, there are signs the government is considering to further slash the Public Sector Development Program (PSDP) for the current fiscal year from PKR 452 billion to PKR 352 billion.
Initially the government had envisaged PSDP of PKR 727 billion for the current fiscal year but so far the utilisation of funds has remained dismally low at PKR 151 billion till January 2023.
A monetary tightening is also on cards so the policy rate might further go up by 1.5 to 2 percent.
All in all, it seems the country’s economy is being put on a path to stagflation with GDP growth projections ranging between 1.5 percent and 2 percent and inflation on track to cross 30 percent.
Whether or not this bitter pill cures the country’s deep macroeconomic distortions remains to be seen. However, it will certainly cost millions of jobs and send millions more Pakistani below the poverty line.
Copyright © 2021 Independent Pakistan | All rights reserved
