ISLAMABAD: After the first round of technical talks between the International Monetary Fund (IMF) team and the government concluded on Friday, Prime Minister Shehbaz Sharif observed that the lender was imposing conditions that were ‘beyond our wildest dreams’.
The delegation, headed by Nathan Porter, began make-or-break discussions with the government on the completion of the ninth review on Jan 31.
The four-day talks were held in Islamabad with representatives from more than seven departments present, to identify major fiscal gaps and discuss ways to plug them.
The discussions covered details of expenditures and revenue performance to identify the policy measures — both revenue and non-revenue — that would have to be taken over the next four months of the current fiscal year.
At a meeting of the apex committee over terrorism in Peshawar, PM Shehbaz took the various provincial heads into confidence on the possible impact of these harsh measures on the people of the country.
He said the IMF delegation was giving Finance Minister Ishaq Dar — who was also present on the occasion — a very tough time.
“Our economic challenges at this moment are unimaginable. The conditions we have to fulfil are beyond our imagination,” he further commented.
However, he acknowledged that the country had no choice but to implement the conditions.
Power subsidies in peril
Sources privy to the meetings between the government team and the IMF told Dawn that the Fund’s most unpopular demand entailed the discontinuation of an exemption for lifeline electricity consumers, i.e. those consuming under 300 units. Statistics show that 88 per cent of power consumers in Pakistan fall within this definition.
The increase in power tariffs for this bracket will hit the poorer segments the hardest, but sources said the Fund was not even willing to accept reducing the threshold from 300 to 200 units. This, it is said, will be another widely unpopular decision.
In the Fund’s eyes, the major threat to the economy comes from the poor performance of the power sector, whose circular debt has reached Rs2.9 trillion. Any upward increase in this figure is cause for concern for the Fund and it is expected that in order to address this issue, several measures will have to be taken, which can include the discontinuation of the power subsidy currently being given to export-oriented industries.
Industrialists have already conveyed their concerns over the possible discontinuation of the power subsidy, but sources say that the IMF not only wants the bulk of circular debt eliminated, it is also seeking a way to stop it from piling up again.
Sources said the talks also covered the swift privatisation of loss-making state-owned enterprises, but the finer points are expected to be hammered out in the second round of technical talks.
“All these measures are to show a positive primary balance,” a source said, adding that a cut in the salaries of federal employees was also on the table.
Another of the Fund’s major demands raising the petroleum development levy on diesel to Rs50 from the current Rs40 per litre. This means an increase of Rs10, along with the impact of the depreciation of the rupee, will be reflected in the next review of POL prices, expected on Feb 15.
Negotiations on the quantum of additional tax and non-tax measures are also expected to start from Monday.
“The Fund has not shared the exact quantum of the fiscal gap,” the source said, adding that it was too early to determine the exact amount that will be bridged through new tax and non-tax measures.
At the movement, the Federal Board of Revenue (FBR) is determined to reach the Rs7.70 trillion revenue target, mainly because of record inflation and currency devaluation.
Meanwhile, the FBR is said to have put on hold two ordinances to impose Rs200 billion in new taxes –increasing withholding tax and flood levy on imports, among other measures. The quantum of the revenue requirements now seems much higher than earlier projections, sources said.
The revenue measures to be adopted are also expected to be more than Rs100bn, depending on the size of the fiscal gap. While sources said it was too early to give an exact number, these fresh taxes will bridge the fiscal gap along with non-tax measures like an increase in PDL or any other levy.
The Fund has already identified a shortfall of over Rs300 billion in PDL collection.
Finally, one of the Fund’s most vociferous demands is the restoration of unrestricted imports. Currently, more than 9,000 containers are stranded at the country’s ports as letters of credit are not being opened.
But on the flip side, as of Friday, Pakistan was left with only around $3.10bn in foreign exchange reserves, which can only cover 18 days’ worth of imports, and observers believe the country desperately needs the next IMF tranche to head off a potential default.
This is leading to a Catch-22; the approval of the 9th review of the IMF programme would be a lifeline for Pakistan because it would give the green signal to friendly countries to release loans, but that cannot be done without first taking measures that may, at least initially, make things worse.