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‘Mini-budget’ presages massive hike in tariffs

September 06, 2013
— File photo
— File photo

ISLAMABAD: The government has unfolded sort of a mid-year mini-budget and a three-year plan involving Rs105 billion new ‘gas levy’ a year, a 30-50 per cent gradual increase in electricity rates, privatisation of 30 entities, including the Pakistan International Airlines, rationalisation of trade tariff, withdrawal of tax exemptions and merger and consolidation of weaker banks to comply with the $6.64bn bailout agreement with the International Monetary Fund.

“By end-December 2013, we will implement a new gas levy that will increase tax revenue by 0.4 per cent of FDP on an annualised basis. This package is the first step towards a more efficient and equitable tax system,” committed Finance Minister Ishaq Dar and SBP Governor Yasin Anwar in writing.

As part of a Memorandum of Economic and Financial Policies (MEFP) signed with the IMF, the government also hinted at changing the dynamics of the 7th National Finance Commission Award to “adjust the terms of fiscal decentralisation to be consistent with the imperatives of macroeconomic stability” for which it would begin negotiations before the end of the current financial year.

On top of that, the government said it would do away with tax exemptions and prohibit itself by law to stop issuing statutory regulatory orders to “facilitate gradually moving the GST to a fully-fledged integrated modern indirect tax system with few exemptions and to an integrated income tax by 2016-17” – a rephrasing of the value-added tax (VAT) that was shot down by the PPP government two years ago.

On the basis of a series of budgetary and economic measures introduced in the federal budget and until last week of August as ‘prior actions’, the IMF approved $6.64bn extended fund facility and would transmit the first instalment of $547 million to Pakistan within a couple of days to replenish foreign exchange reserves above $10bn next week, said Finance Minister Ishaq Dar at a news conference.

The disbursement of remaining loan would depend on strict compliance of quantitative performance criteria, indicative targets and structural benchmarks under quarterly reviews and the government “well take any further measures that may become necessary” to meet contingencies.

And contrary to public statements about $12bn financial inflows, the government disclosed in its agreement with the IMF that it required $15bn over the next three years that would be arranged through other lending agencies.

POWER TARIFF: “The government has initiated a plan to phase out electricity subsidies over the life of the programme,” ending in 2015-16, said the MEFP that claimed to have got it approved at the highest level with the support of the provinces “entailing periodic increases in the average tariff, aimed at eliminating the tariff differential subsidy for all consumers except for the very lowest over the next three years” i.e. less than 200 units. To achieve this, a 30pc increase for weighted average tariff for domestic consumers will be notified with effect from October 1, 2013.

In addition, the cost of servicing of the syndicated terms credit finance facility issued to cover some past losses will be incorporated in the notified base tariff by end-December 2013. Over the next two years, the government will generate about 0.4pc of GDP (about Rs120bn) of saving per year through reduction in subsidies to 0.3-0.4pc of GDP at the end of the programme.

“Tariffs for 0.200 kwh (units) will be retained for now, and income support programme will cushion the impact of future tariff increases on the most vulnerable segments of the population.” In year 2 and 3 of the programme, subsidies will be phased out for users above 200 units and reduced for all but the lowest consumers (less than 200 units) range, it added.

From the next year, tariff determined by the National Electric Power Regulatory Authority will become the ultimate tariff with a direct notification issued by Nepra.

Access for the FBR to personal accounts and issuance of 100,000 income tax notices currently in progress will be complemented with initiatives to enhance revenue administration of sales tax, excises and customs to be developed and launched by end-December 2013. The government is committed to bringing down the fiscal deficit from an estimated 7.8pc to 5.5pc of GDP at the end of the current fiscal year.

PRIVATISATION: The government will announce a strategy by the end of this month to privatise 30 units, including PIA, Pakistan Steel and Railways. The PIA will be divided into two companies, park all its liabilities into PIA-2, “apply a voluntary handshake to excess staff” and privatise 26pc strategic stakes by end-June 2014 and continue leasing planes for core-PIA.

MONETARY POLICY: The MEFP conceded that the central bank purchased $125m foreign exchange from banks as prior action of the IMF programme and committed that the “SBP will refrain form further net direct lending to the government, and limit open market liquidity injections to the economy to those consistent with the programme. The inflation reduction will not be a primary focus of the first year so as to mitigate the impact of envisaged fiscal contraction”.

The monetary policy will aim at reducing inflation while continuing to rebuild foreign exchange reserves. Hence the policy will initially be a moderate one, with tightening in the second and third years.

The SBP will allow greater exchange rate flexibility, limiting intervention in the exchange market to the need to build reserves, cushion major shocks and strengthen competitiveness.

Most importantly, “reserve loss exceeding $500m in any 30-day period during the programme will trigger consultation with IMF staff… and no further direct financing of the budget by the SBP, including purchases of government papers and limits on net domestic assets”.

The MEFP confirmed that one public and three private sector banks did not meet the 10pc mandatory capital adequacy ratio. Therefore, the SBP will require completion of recapitalisation of the state-owned bank by end-December 2014.

For private banks, the central bank indicated capital subscription from a private foreign bank for one to fill part of shortfall, capital-raising through issuance of non-cumulative perpetual preferred stock for another and merger or acquisition by a foreign investor for the third bank.