The final agreement will come after the completion of a few more prior actions, involving more pain for the masses.
By Staff Reporter
ISLAMABAD: Pakistani authorities are expecting the International Monetary Fund (IMF) to share a draft Memorandum of Financial and Economic Policies (MEFP) in the next 24 hours, paving the way for a staff level agreement within this week.
If everything goes well, Pakistan and the Fund will sign the staff level agreement by the end of June or in early July. The IMF Executive Board will then consider the revival of its stalled Extended Fund Facility (EFF) program within next 3 to 6 weeks.
The revival of the program will win Pakistan a USD 1 billion tranche of funding, a welcome dose of liquidity for the country’s cash-strapped economy.
Before that, however, Islamabad will have to take certain prior actions, including further tightening of policy rate. The government will decide the exact quantum of the adjustment after the release, on July 1, of Consumer Price Index (CPI) based inflation data for June 2022.
In view of the rising Sensitive Price Index (SPI), CPI based inflation is expected to definitely cross the 15 percent mark and probably touch 16 percent.
The IMF favours a tightening of monetary policy by 200 to 250 basis points. Pakistani authorities are trying to convince the IMF for a less drastic tightening in the range of 150 basis points. The next monetary policy is expected to be announced in the first week of July 2022.
The second prior action required of Pakistan concerns energy tariff hikes. The government will have to hike tariff for both electricity and gas in July 2022. The Economic Coordination Committee (ECC) has already approved a three-step hike of power tariff, totalling to PKR 7.92 per unit.
The government had allocated PKR 225 billion for next budget 2022-23 for payment of Price Differential Claims (PDCs) but the IMF assessed that these allocated funds would not be sufficient to fulfil PDCs claims.
The government will also start to roll out a federal petroleum levy as of July 1, 2022. Although the ceiling for the levy is PKR 50 per litre, it will be charged at PKR 10 per litre in the first phase, starting July 1, 2022. The GST on POL products will be kept at zero.
Collecting petroleum levy on POL products instead of GST is a deliberate strategy of the government. Under the NFC Award, the collection of levy will not become part of Federal Divisible Pool (FDP). The revenue generated can thus be utilised by the Centre.
Charging GST instead would require the revenue to be distributed among the Centre and provinces under the resource distribution formula of NFC award.
Pakistan has also requested the IMF to jack up the size of the EFF from USD 6 to USD 8 billion and extend its culmination from September 2022 to June 2023. What the IMF decides on this request remains to be seen.
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