International Monetary Fund policies are generally viewed as anti-growth because of their narrow focus on contraction, and stabilisation through excessive taxation and tight expenditure control.

The case of a bailout package of $6.64 billion assistance spread over three years is no different as it scales down the projected economic growth rate to 2.5-3 per cent. This has been accepted by Finance Minister Ishaq Dar for this fiscal year, contrary to the budgeted target of 4.4 per cent set less than three month ago.

The fiscal deficit for last year has also been revised to eight per cent of GDP against 8.8 per cent announced in the federal budget. In the same manner, the finance ministry has also revised target for fiscal deficit to 5.5 per cent of GDP, down from 6.3 per cent envisaged in the federal budget.

The programme also targets the rupee’s real effective exchange rate depreciation by 7.7 per cent during the fiscal year against original estimate of less than five per cent. It also requires the government to stabilise total public debt at 66.6 per cent of GDP this year as it stood at the end of 2012-13 instead of going up to 69.2 per cent earlier estimated by the IMF.

The average inflation over the life of the IMF programme has been estimated in double digits. The net foreign assets have been targeted to increase by 3.9 per cent of GDP from negative 3.4 per cent at the end of 2012-13, while net domestic assets are to be reduced to 12.2 per cent of GDP during this fiscal year against 19.3 per cent at the end of fiscal year 2012-13.

Likewise, gross savings are projected to go up from 13.3 per cent now to 14.3 per cent at the end of current year.

The agreement with the IMF, made public, envisages a series of budgetary measures including revenue expansion and expenditure control during the current year and over three-year life of the programme.

Against fiscal measures of about Rs202 billion introduced in the federal budget, the government has committed to mobilise more than Rs150 billion revenues before the close of current fiscal year including imposition of ‘new gas levy’ worth Rs105 billion or 0.4 per cent of GDP.

Moreover, it also promised to increase electricity tariff by 30-50 per cent this year so that power sector subsidies are completely eliminated by the end of 2015-16 — the terminal year of $6.64 billion extended fund facility.

These commitments along with further reforms in the taxation system to achieve fully integrated and reformed general sales tax, as had been originally envisaged in the value added tax, have enabled the immediate disbursement of first tranche of $547 million. This will help rebuild foreign exchange reserves in excess of $10 billion that recently dipped to about $9.7 billion despite dollar purchases from the banking market.

The disbursement of next tranche, perhaps in December, would, however, depend on achievement of quantitative performance criteria and indicative targets based on actual data for end-September period to be reviewed by the IMF staff in early November.

On the fiscal front, the outcome of taxation measures and power tariff rationalisation would be key benchmarks. On the monetary side, improvement in net foreign assets, foreign exchange reserves and policy discount rate are critical benchmarks.

Initial feedback suggests a slippage of more than Rs16 billion in revenue targets in the first two months of the current fiscal year. There is, however, good opportunity available to the tax machinery to recover this gap in September in view of mandatory filing of income tax returns.

The full impact of power tariff rationalisation is yet to come up given the fact that tariff had been increased in August only for industrial, commercial, agricultural and AJK consumers. A Rs29-billion subsidy announced last week for agricultural tubewells to woo farmers community and rural population ahead of upcoming local body elections, however, pose a serious question mark on the direction to do away with power sector subsidies.

A second round of about 30 per cent increase in domestic power tariff with effect from October 1 would make up the slippages on targets to reduce subsidies. This has to be in the context of re-emergence of circular debt that has already accumulated to Rs90 billion in the first two months and hence a broad direction seems to have been set.

The worrying thing for the government, however, remains the slowing down power sector recoveries that have plummeted to 65 per cent of billed amount compared with an average 87 per cent collection about six months ago despite a drive against electricity theft — perhaps because of conflict of interest arising out of involvement of too many institutions including the National Accountability Bureau, Federal Investigation Agency and the power companies.

A further depreciation in exchange rate, monetary tightening and withdrawal of statutory regulatory orders to do away with tax exemptions would have a direct and immediate impact on cost of production that would be passed on to the consumers and hence an increase in overall inflation.

Risks to the programme also include surging international oil prices and the government policy to subsidise diesel prices that have already started affecting collection through petroleum levy. But this is sufficiently compensated by increased GST collection as prices go up. Higher reliance on textile exports and volatility in international cotton prices and a further economic slow down in trading partner countries, particularly in Europe, could adversely affect exports and scale back of worker’s remittances — to undermine external position.

The performance criteria on which the future disbursement would depend include floor on net international reserves of the SBP at negative $2.5 billion by end-September and ceiling on net domestic assets of the SBP at $2.4 billion and ceiling on net overall budgeted deficit (cumulative excluding grants) at $419 million. Also, ceiling on net stock of net foreign currency swaps at $2.255 billion and on net government borrowing from the SBP (including provincial governments) at $2.7 billion.