Pakistan got off track with the International Monetary Fund (IMF) Extended Fund Facility (EFF) of $6 billion in February after securing about $1.5 billion in disbursements.
The government’s decision to delay the further rise in oil prices until June 2020 and the new tax steps to cover for the deficits in the first half of the fiscal year prompted the IMF to place the next tranche on hold.
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Soon after the IMF talks ended, the Covid-19 outbreak changed nearly everything, not only in Pakistan, but also globally. The government had to delay bill collections, inject funds into the power sector to support consumers and provide cash to companies along with tax breaks, all out of the budget to minimise financial and job losses, instead of increasing tariffs and coming up with tax measures.
Dr. Abdul Hafeez Shaikh, the Prime Minister’s adviser on finance, maintained his own tradition of keeping the Fund engaged, just like his earlier stint in the PPP government. Outside of the initiative to tackle the pandemic, he secured around $1.4bn in relief funds. This like the G20 debt relief, has helped other lending agencies come to Pakistan’s aid.
The economic team and the staff of the Fund were in virtual discussions to revive the programme, which had been left behind nearly nine months ago. The outstanding problems remain unchanged: bridging the black-hole power industry that has risen since then and generating more taxes. The key remains a bankable way forward to reform the power and revenue industries within the remaining two and a half years of the PTI term.
The missed benchmarks involving legislation for independence of SBP and Nepra are expected to become ‘prior actions’ for the IMF programme’s revival
An increase in the electricity tariff of over Rs6 per unit is required to meet the traditional IMF demand for the recovery of the full cost of energy supply. For two reasons, this is out of the question at the moment. One to encourage maximum consumption, the government has just offered highly discounted electricity rates to industry and small and medium enterprises. It can not afford to shift the entire burden to domestic and commercial consumers politically, although the brunt may have to be faced by high-consumption consumers.
Second, the government has maintained a supportive stance towards companies and, when they are already struggling, is reluctant to add to their tax burden. When opposition parties are up in arms against the government, it becomes even more difficult politically. Here and there in some public-sector organisations, the government has resorted to reductions. The problem is that the government will soon be in the final part of its five-year constitutional term when deep-rooted structural reforms are usually difficult for any political government to undertake.
In fact, from the end of December to June next year the government now wants to extend the tax exemption and incentive package for the construction industry to take maximum advantage of the prevailing feel-good factor, better large-scale production (LSM), current account surplus, positive primary balance and relatively stable exchange rates and foreign reserves.
In the meantime the missing institutional milestones on the independence regulations of two main regulators, the State Bank of Pakistan (SBP) and the National Electric Power Regulatory Authority (Nepra), are required to become “prior measures” to be officially revived for the Fund scheme.
In recent days, a few public appearances by economic team members after a long pause show a degree of their guarded confidence in an uptick from a bottomed-out economy (4pc GDP contraction), even though it could take years to get back to the stage of 2017-18.
Finance Special Secretary Kamran Ali Afzal acknowledges that the adoption of two main bills relating to Nepra and the SBP would become “prior actions” and that the “restoration of the programme in a formal way” would entail a way forward for power sector reforms and revenue generation.
His understanding was that the two rules have become past acts because Covid-19 did not or could not have impacted them. However, as they were impacted by the pandemic, power sector changes and revenue side items must be re-adjusted and remain core challenges. The truth, however is that the Nepra bill still remains trapped at the level of parliamentary committees, while the SBP legislation still has to cross the finance ministry, splitting the SBP over the’ freedom level.’ To become statute, all bills must eventually be approved by both houses of parliament.
However, Dr Shaikh creates a very positive storey. Last week, he called for “positive news from all four sides on the economic front,” noting that an IMF workers team would arrive in a few weeks’ time.
Nevertheless, Dr. Shaikh maintains that Pakistan had very strong relations with the IMF, for the fundamental reason that the government remained loyal to the policy and that all problems were advancing purely in the manner agreed upon, including improved tax collection, a sharp decrease in government spending and better payment of debts. As a result, he added, the government took advantage of such relaxations that were not part of the initial arrangement in order to provide companies with subsidies for the construction industry and tax rebates to prevent economic recession.
The government hopes that Prime Minister Imran Khan’s overt pledge to the IMF, a departure from previous practises, to strictly abide by the revamped power sector reform programme for its revival over the current administration’s more than 30 remaining months, will make the IMF take a new gamble. The IMF’s textbook models, after all are still evolving in the midst of extraordinary health and economic circumstances.