The government has decided to impose additional taxes to the tune of Rs30 billion as it struggles to arrange Rs100bn emergency funding to avoid international default on oil and gas payments and keep the staff-level agreement with the International Monetary Fund (IMF) intact.
The decision was taken at a special meeting of the Economic Coordination Committee (ECC) of the cabinet presided over by Finance Minister Miftah Ismail on Sunday.
The meeting was informed that the budgetary commitment with the IMF for Rs153bn primary budget surplus could not be met without additional taxation.
The ECC also decided to examine reducing the price adjustments on a weekly or 10-day basis from existing fortnightly pricing to minimise price uncertainties.
The ECC “directed Finance Division and Federal Board of Revenue to submit proposal for generation of Rs30 billion through taxes within a week”, said an announcement after the meeting.
It also approved a supplementary budget grant of Rs30bn for immediate payment to state-run Pakistan State Oil (PSO) facing international payment obligations of about Rs270bn till August 28.
“For the smooth continuity of oil and gas national supply chain and avoid PSO from being default on international payments, the ECC decided to clear the outstanding payments accumulated during the period of pervious government,” the announcement said. It also directed the Power Division to make immediate payments of the current outstanding amount of Rs20bn within 24 hours and another Rs12.8bn by August 4 (Thursday).
Sources in the Petroleum Division said PSO’s receivables had touched Rs608bn on July 28, including Rs340bn from Sui Northern Gas Pipelines Limited (SNGPL) alone. A major contributing factor was the LNG supply that added a cash shortfall of Rs213bn since July 1, 2021. SNGPL, on its part, had been constrained by delayed payments by the Central Power Purchasing Agency (CPPA) whose receivables jumped to Rs113bn from Rs43bn since January 1, 2022. CPPA had another Rs182bn direct payables to PSO on account of fuel supplies, including Rs16bn accumulated since July 1, 2022.
The petroleum secretary pleaded that PSO had been raising SOS calls to avoid international default as delay in payments by respective entities had exhausted its liquidity. As a result, the company has not been able to deposit Rs81bn to the government’s local currency (NIDA) account for onward transmission to Kuwait Petroleum Cooperation (KPC) which is contractual obligation.
Moreover, PSO had not been able to deposit Rs16bn to the government against an integrated term finance certificate (ITFC) facility, which has been deferred to avoid PSO’s international contractual obligations.
The meeting was told that there has been a decline in sale of high speed diesel (HSD) and petrol by 28pc and 32pc, respectively, that had an impact of Rs69bn on collections, while about 17.8pc devaluation of rupee against dollar in July had resulted in increased cost of procurement of these products by Rs63bn. It was reported that PSO had foreign exchange loss of about Rs85bn over the years and Rs55bn of it was still outstanding.
The meeting was told that despite these challenges PSO had met its contractual international payments in July, 2022 but “this will not be possible in August” which will result in disruption of the supply chain.
PSO has to make an international payment of Rs267bn in the first fortnight of August 2022. The collections during the first fortnight of August were expected at Rs157bn, leaving a net deficit of Rs100bn.
While the petroleum division made a pitch for total Rs133bn payments, the finance ministry explained that there was “no budgetary allocation in current fiscal year” for this account; therefore, financial support has to be arranged through a supplementary grant. Even then, considering fiscal constraints and understanding with the IMF, the supplementary grant so provided will result in outflow beyond the numbers agreed with the IMF.
Therefore, against a demand for Rs54bn, Rs30bn supplementary grant was approved which would be booked as expenditure and then matching taxes would have to be generated to compensate for the revenue loss to “achieve primary balance agreed with the IMF”.
In addition, the government would separately direct the National Bank of Pakistan (NBP) and other banks to extend credit limits to PSO and SNGPL on emergency basis to meet remaining Rs45bn funding.
The ECC also directed Petroleum Division to work out in consultation with OGRA other options of setting up petroleum product prices within a week. The ECC directed Petroleum Division for submission of proposal within a week to regulate the prices of Kerosene Oil and Light Diesel Oil after consultation with relevant stakeholders.