While a staff mission of the International Monetary Fund (IMF) raised more questions over the financing of a relief package announced by the prime minister last month, Pakistan may not be able to draw the next tranche of the $6 billion Extended Fund Facility (EFF) in time.
In a televised address to the nation at the end of February, PM Imran Khan had announced a reduction of Rs10 per litre in petrol/diesel and Rs5 in electricity prices. He further claimed the rates would remain stable until the next federal budget.
It is learnt that the IMF mission and Pakistani authorities remained engaged in discussions on the seventh review of the Fund programme and decided to meet again on Monday. A final round of policy-level talks between Finance Minister Shaukat Tarin and the IMF mission was being scheduled for Tuesday.
Insiders said the IMF team asked more questions about the financing of the prime minister’s relief package. They also expressed concern over the growth prospects in view of a major cut in the Public Sector Development Programme, and wanted precise project details that would be affected by this cut.
The IMF mission also wanted assurances that the social sector would remain untouched by the development cuts, hence demanded more specifics. The authorities had, earlier this week, shared the financing sources with the IMF and had expected a final round of technical engagements on Friday.
An official said the government side insisted the seventh review had to be based on end-December targets, which had been achieved, hence the next tranche of about $955 million should be approved before the spring meetings of the IMF and the World Bank from April 18 to 24.
“They agreed that there was no issue with the end-December data, but pointed out that the memorandum of economic and financial policies has to take into account the future outlook which should be clear about how the fiscal deficit would look like and what would be the strategy to finance it in view of the prevailing uncertain conditions,” an official said, adding that the IMF mission expressed its limitations about taking Pakistan’s case for the next tranche to its executive board by the spring meetings.
Officials claimed the IMF was largely satisfied with the relief announced on power tariff but had concerns over the petroleum prices given its applicability to all the consumers. Equally problematic was the question about the tax amnesty scheme for the industry, as despite the Federal Board of Revenue’s explanations, the IMF staff believed that for all practical purposes the amnesty was prohibited under the continuous structural benchmark of the IMF programme.
Talks were originally targeted to be completed by March 14 but were extended pending resolution of the differences. The talks on the seventh review of the $6bn EFF had started on March 4.
The IMF had been concerned over a ‘one-step-forward-two-step-back’ approach of the government on critical reforms that had serious budget implications going forward. The critical areas are tax amnesty, untargeted subsidy on petroleum products and general subsidy on electricity rates. These are estimated to drive the primary budget account – the gap between revenues and expenditures, minus debt servicing – from a targeted Rs25bn in surplus to about Rs650bn in deficit by end-June 2022 – the conclusion of the current fiscal year.
Pakistan has so far received a little over $3bn out of the $6bn worth of 39-month programme. The Fund had earlier expressed concern over the expansionary policies adopted in the 2021-22 federal budget, which it said had created fiscal imbalances, leading to introduction of a mini budget in December to address these slippages.
The IMF had been opposed to the tax amnesty schemes and had also expressed reservations over a similar scheme for the construction sector two years ago. It had revived the EFF after a suspension of over nine months following hard talks over additional tax measures and increasing petroleum levy and electricity rates.
After initial compliance with the commitments to increase petroleum levy, Prime Minister Imran Khan reversed the progress when he announced Rs10 per litre reduction in petroleum products bringing down the levy to zero, besides a Rs5 per unit cut in electricity rates instead of a schedule of increases agreed to with the IMF to address the circular debt. The 39-month Fund programme is to come to an end in September.