Talks between the government and the International Monetary Fund (IMF) appear to have landed in uncharted waters over a tax amnesty scheme and subsidies on petrol and electricity recently announced by Prime Minister Imran Khan.
A senior government official said on Friday that in view of a stalemate on key policy issues, virtual negotiations between the two sides had been extended to Monday instead of the scheduled conclusion on Friday. The talks on the seventh review of a $6 billion Extended Fund Facility (EFF) started on March 4.
The official, who had been involved in the discussions, said the Fund’s mission had expressed grave concern over a “one step forward, two steps back” approach of the government on critical reforms that can have serious budget implications.
Another official said Pakistan had performed well on end-December targets, but the outlook based on recent budgetary measures were on a slippery slope.
IMF country representative in Islamabad Esther Perez Ruiz did not respond to requests for comment.
Tax amnesty, untargeted subsidy on petroleum products and general subsidy on electricity rates are three critical areas that are estimated to drive the primary budget account — the gap between revenues and expenditures minus debt servicing — from a targeted Rs25 billion in surplus to about Rs650 billion in deficit by the of June, when the current fiscal year ends.
The IMF mission questioned the introduction of a third tax amnesty scheme introduced by the government despite the recent withdrawal of tax distortions as part of the agreement on the sixth review to revive a $1 billion loan tranche that had been suspended for nine months.
“We also reaffirm our commitment to not granting further tax amnesties … and avoiding the practice of issuing new preferential tax treatments or exemptions,” said the written undertaking given by Finance Minister Shaukat Tarin and State Bank of Pakistan Governor Dr Reza Baqir.
The government team defended the tax amnesty scheme, saying it was “targeted and ring-fenced” to ensure investment in the manufacturing sector for creating jobs and growing exports as described by the finance minister.
This, however, did not impress the IMF team given the prior commitments, and it expressed its inability to defend such a “principle deviation”.
The Fund also questioned the restoration of untargeted subsidies in the shape of a Rs10 per litre reduction in petroleum prices despite a commitment for increasing the petroleum levy.
According to sources, the IMF mission said it could have justified the price cut if it was limited to a certain lower-income and vulnerable groups, but a blanket reduction was totally untargeted and was available to all, including the rich.
The government has approved a Rs20 billion subsidy for the first month, i.e. March, for the payment of price differential claims to oil marketing companies to maintain lower prices.
The initial estimate to maintain petroleum prices is put at Rs70 billion for the four remaining months of the ongoing fiscal year but it remains suspicious given a volatile global oil market.
On oil prices, the government had given a commitment to “ensuring the petroleum development levy (PDL) on gasoline and diesel is consistent with the new revenue target”.
“As such, we will raise by Rs8 per litre the PDL (prior action in December 2020) and we commit to raising the PDL by Rs4 per litre per month for the remainder of FY2022 until the maximum of Rs30 per litre is achieved,” the government said.
Instead, the levy has either been abolished or set to turn negative in a few days.
The IMF also expressed serious concern over a general subsidy in the shape of Rs5 per unit cut in the electricity rates that had been raised over a period of about 15 months. The government has estimated its financial impact at Rs106 to Rs136 billion. The mission believed that progress achieved in 15 months had been undone with a single stroke.
Finance Minister Shaukat Tarin recently announced that the fiscal impact of these measures would be around Rs250-300 billion depending on international commodity prices.
An official said neither the government showed any indication to reverse recent expansionary policy measures nor the fund showed any flexibility.
Pakistan has so far received little over $3 billion out of the $6 billion IMF loan programme, spread over 39 months and scheduled to an end in September this year.