Pakistan may have to further increase electricity prices and revise down its primary budget surplus of Rs417 billion for the first quarter after the International Monetary Fund (IMF) did not accept the government’s position on fiscal numbers and the circular debt.
The global lender also raised questions over the role, mandate and powers of the Special Investment Facilitation Council (SIFC) during a briefing given by Pakistani authorities on Monday.
It expressed concerns over the expansionary role of the SIFC and the immunity to its decisions from accountability.
In a related development, the government proposed a 40% tax on roughly Rs110 billion in windfall profits earned by banks on foreign exchange transactions during the years 2021 and 2022. The move will generate at least Rs44 billion for the FBR but officials insist that the tax is not being proposed on the IMF’s demand.
Sources said there was no convergence between Pakistan and the IMF on the quantum of increase in electricity prices, ceiling for circular debt for the first quarter and fiscal deficit for the quarter. In order to reach a staff-level agreement by Wednesday, Pakistani authorities were willing to take corrective measures to address the IMF’s concerns.
Sources said that power tariffs would have to be further increased after the IMF declared the earlier average increase of Rs5.75 per unit in July “insufficient” to contain the circular debt at agreed levels. Pakistan had committed to increasing the prices by Rs8 per unit but the actual hike remained below that level.
The matter will now be reported to the IMF’s executive board with a request for waiver.
The IMF did not accept the change in the circular debt goal from the agreed ceiling of Rs155 billion to Rs292 billion in the revised Circular Debt Management Plan.
Pakistan had committed that it would restrict the flow to Rs155 billion during the July-September quarter but subsequently it made changes and relaxed the ceiling to Rs292 billion. The actual increase was Rs227 billion and resultantly the debt jumped to Rs2.537 trillion by the end of September.
The IMF asked Pakistan to add the additional Rs72 billion, from the agreed level of Rs155 billion, to the primary budget for the quarter, said the sources. This will lead to a change in fiscal figures.
Government sources said that the IMF did not accept Pakistan’s claim that it achieved a primary budget surplus of Rs417 billion, or 0.4% of gross domestic product (GDP), during the first quarter. It has now been decided to revise the primary budget figure.
The IMF will reflect a different figure of primary budget in the Memorandum for Economic and Financial Policies (MEFP). The fiscal deficit issue is almost resolved and “we also have a strategy in place to address it”, said Federal Minister for Finance Dr Shamshad Akhtar while talking to The Express Tribune.
She had been requested to comment on the gap between the budget deficit reported by Pakistan and the one being worked out by the IMF.
She said that the IMF had not yet shared its final position on the fiscal numbers. The finance minister added that the FBR’s tax collection target would remain unchanged at Rs9.415 trillion for the current fiscal year. But the FBR would have to perform in line with the targets agreed with the IMF.
Sources said that the IMF had asked the FBR to prepare a backup plan in case its revenue collection decreased. The FBR will submit data to the IMF every month, including details of exchange rate movement as well as imports.
Tax authorities had flagged that the stronger rupee and lower imports could dent the annual target by Rs560 billion. They said that the gap would be filled through improvement in collections at the domestic stage.
Sources said that the IMF had asked for imposing taxes on agricultural inputs, if there was a shortfall in taxes.
Meanwhile, the FBR moved a summary to the cabinet for imposing 40% windfall tax on profits earned by commercial banks by manipulating foreign currency rates, said the sources. Central bank’s working showed that banks earned about Rs110 billion in extra profits.
SIFC on IMF’s radar
Sources said that the IMF got a briefing on the mandate, role and powers of the civil-military body.
The Fund’s concerns were about the vast powers the SIFC had for granting tax exemptions, awarding direct contracts by bypassing the Public Procurement Regulatory Authority process and offering preferential treatment to investors from certain countries.
The IMF’s major concern was the indemnity to SIFC decisions from accountability, which according to the global lender was tantamount to compromising transparency in public decision making, said the sources.
The IMF also raised questions over the long-term role of the SIFC and its need when there were other government departments and agencies working for bringing foreign investment. The Fund was told that the SIFC had been established under extraordinary circumstances to bring foreign investment in times of crisis.
The global lender was assured that the SIFC did not have ambitions to take over functions of other government agencies.