Govt reluctant to accept IMF demands as rupee depreciation hits imports

The government has been advised to take swift decisions to revive the IMF programme, as the world’s leading lender is pushing for tough conditions that include increasing indirect taxes as well as the gas and electricity tariffs.

At the same time, the depreciating rupee is triggering fears over the country’s economic health, particularly its ability to pay the import bill for essential items in the coming weeks, which may cause shortage of essential items.

Citing political considerations as the primary hurdle in preventing the government from making these decisions, sources say frustration is mounting among policymakers because they have spelled out strategy, attached cost and its implication in case of non-implementation on IMF’s prescriptions as adjustments cost will further go up with every passing day.

Slapping additional taxes of Rs300 to Rs400 billion mainly through hiking indirect taxes and withholding taxes’ rates, charging the full cost of electricity from consumers by increasing the per unit price up to Rs7.50 and hiking  the gas tariff by 50 percent to 60 percent are the measures which the IMF has demanded.

However, the incumbent government wants a guarantee that they will continue to stay in power in the coming months because there are apprehensions that they might be shown the door after taking tough decisions.

As far as the IMF is concerned, it is pointing to the lackluster approach of the authorities concerning not initiating the reform process including those that relate to structural initiatives with the mounting circular debt in the energy sector.

The IMF is also not happy with the FBR tax collection target of Rs7,470 billion after reduced imports compression and not achieving the Rs855 billion amount through the petroleum development levy (PDL). It means imposing additional taxes of Rs400 billion through a mini budget.

On the other hand, the government is contemplating options to impose a 60 percent to 70 percent windfall tax on the profit earned by banks through alleged manipulation of the exchange rate.

The IMF also asked the government to consider the imposition of GST on POL products but the government seemed reluctant to move ahead.

However, an official source said there were still hopes that the government might secure $700 million refinance of commercial loans from China, a $2 billion additional deposit from Saudi Arabia, $1 billion from UAE, and the possibility of $1 billion commercial loan from Dubai-based banks.

In reality, the foreign exchange reserves held by the SBP hovered around $4 billion after repayment of $300 million to China as the SBP had reported that it stood at $4.3 billion as of January 6.

Downward movement of rupee

Currency experts said the rupee had been falling “despite being managed by the State Bank of Pakistan (SBP)”. On Tuesday, it closed at Rs228.66 against the US dollar.

Amid a shortage of dollars, the gap between its rates in the interbank and open markets has significantly widened, drastically hurting the economy and diverting remittances from the legal banking channel to the grey market.

Bankers believe that the country would soon notice the shortage of petroleum products along with basic essential items like food items.

Experts say there have been no significant inflows since June when China provided $2.5 billion. We are watching the outflows despite low imports and $2bn inflows of remittances per month on average.

Some experts also hinted that the shortage of dollars could cause rationing of petrol and diesel in the next two to three months, ultimately hitting the trade and industry and even the agricultural sector, which needs diesel during the harvesting season.

“The dollar is the key for Pakistan. We are all watching and waiting for the resumption of talks with IMF while waiting for Chinese help in the form of debt rollover,” a senior banker said.

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