FeaturedNationalVOLUME 17 ISSUE # 42

IMF package: Harsh relief?

The revival of the International Monetary Fund (IMF) package was necessary to avert default. There is no doubt about it. However, one feels the international lender has set harsh conditions and the government accepted them, which would hurt people badly, especially at a time when the country is facing the worst floods of its history.

Under the agreement, the government will have to increase oil prices, even though their international rates are coming down. The power tariff will also gradually increase under the deal. The past PTI government had capped oil and electricity prices after a no-confidence motion was tabled against former Prime Minister Imran Khan. He would have hiked their rates if he had been in power until now. This capping of the prices forced the IMF to set even harsher conditions for the new government and it had to accept them because it had no other option to save the country from default. The PTI government was also criticized by the opposition, which is now in the government, for accepting “tough” conditions of the IMF. It had accused the PTI government of forfeiting the country’s sovereignty to the IMF and even threatened to abandon the programme and reverse all decisions taken under it after coming to power. However, the roles have been reversed now. The PTI attempted to derail talks with the IMF, without caring for its consequences for the country. The government had done the same when it was in the opposition.

Prices of food, essentials, electricity and oil have already skyrocketed in the country and the government has clarified that it is not possible to provide immediate relief to people. Instead, their prices are set to increase after the government has promised to realize Rs750 billion as the petroleum levy for the current year and increase power tariffs. Under the agreement, Pakistan will impose additional petroleum levy in a phase-wise manner until it reaches Rs50/litre by January 2023. It means there is no prospect of any relief for the common people in the next five months.

According to media reports, Pakistan has assured the IMF that in case the revenue collection slows down or the current expenditures start exceeding the targets, the government will announce a contingency plan, under which new taxes would be imposed and development expenditures by the federal and provincial governments would be curtailed. It is clear that the government may not be able to achieve the tax collection target in the current flood situation and new taxes seem imminent. The finance minister has assured the IMF that if the collection slows down, Pakistan will “immediately set the GST on fuel products to a rate sufficient to raise the necessary revenue up to the standard rate of 17pc”.

The government has already slapped over Rs1 trillion in taxes, including Rs608 billion being imposed through the FBR. It has also assured the IMF that it is ready to cut public sector development expenses by the federal and the provincial governments. As part of the strategy, the finance ministry will slow down the releases to the ministries to make sure that the PSDP is cut by at least Rs150 billion to Rs577 billion. Besides, Rs384 billion savings will be ensured from lower-priority projects in the provincial PSDP budgets. However, the ground reality is different from the government’s undertaking as provinces need more funds after the floods.

The government has also assured the IMF that as a matter of principle, energy subsidies will be contained to Rs570 billion, of which PRs 225 billion would be for the tariff differential subsidy arising from the power tariff adjustment path. The government has ended the previous slab benefit for electricity consumers, which significantly increased its price in August. After increasing the power tariff by Rs7 per unit in July and August, the government has committed to the IMF that it will further increase the prices by 91 paisa per unit by the end of September. It will follow automatic increases in electricity prices on account of quarterly tariff adjustments for the July-September period and monthly fuel price adjustment for July. The government will also withdraw the electricity subsidy being provided to agriculture tube-wells. A plan to withdraw the subsidy for tube-wells for large agricultural users will be submitted to the federal cabinet by November 2022.

The government also aims to increase gas prices to contain the gas sector circular debt flow, address some of the debt stock, and improve the liquidity of gas companies. The IMF was informed that the government was going to increase gas prices more than prescribed by the Oil and Gas Regulatory Authority (OGRA). The gas sector circular debt has increased to Rs719 billion by March this year –up from Rs620 billion at end-FY21. The government said it would be the first end-user gas price adjustment since September 2020.

In the footnote of the report, the government stated that as per the OGRA determination, the prescribed average end-user gas price will go up some 45pc to Rs928 per MMBTU. “This will generate about Rs666 billion for the gas companies in fiscal year 2023,” the report said. The Rs666 billion additional revenues would require up to a 235pc increase in gas prices. In July, the ECC had approved an increase in natural gas prices in the range of 43pc to 235pc but the federal cabinet has not yet endorsed the decision.

It is strange that the IMF has identified major internal and external risks to Pakistan’s economy without taking into account the recent floods, which have deprived millions of people of their livelihoods and destroyed crops over millions of acres of land. The situation not only threatens the food security situation in Pakistan but will also adversely affect its revenue collection and economy. One feels the government could have earned a better deal for its people, who have been hit hard by devastating floods after barely recovering from the pandemic.