ISLAMABAD: Pakistan has formally submitted to the Inter­national Monetary Fund (IMF) its Memorandum of Economic and Financial Policies (MEFP) envisaging macroeconomic stabilisation graduating into growth strategy over the next three years.

“Yes, we have given it (MEFP) to the IMF,” confirmed Finance Minister Asad Umar when approached. “It’s under discussion” he told Dawn and declined to go into further details saying “they (IMF) may have something to add and come back to us”.

Sources said the government under the MEFP plans a fiscal adjustment of about 2.5per cent of GDP in three years — almost the same as the last Fund programme ending September 2016 — to bring down fiscal deficit to about 4pc at the end of 36-month programme. This time, however, the programme implementation would be front-loaded compared to relatively balanced implementation schedule of the last programme. “Most of the pain would be immediate this time in the form of revenue measures and energy pricing,” an official said.

Officials say the Fund has never proposed specific tax measures

In absolute terms, the adjustment would entail more than Rs1 trillion of additional fiscal space with a combination of increased revenues and reduced expenditures. Under the plan, the government will have to gradually reduce current addition of Rs30bn per month in the energy sector circular debt and bring it to zero within first two years of the programme besides addressing the bleeding of other public sector entities (PSEs). This will be followed by a long route to address the old debt stock of the PSEs.

On top of that, the government is also committing a series of taxation measures to increase revenues while the IMF wants new areas, like agriculture, real estate and others, to be brought under effective tax net to address the chronic problem of low tax to GDP ratio.

The sources said an IMF mission was expected to return to Islamabad after Christmas holidays for finalising the bailout package so that it could be taken up with the Fund executive board for approval. The mission had left Islamabad on November 20, leaving the talks inconclusive as Pakistan authorities were still unprepared to finalise the adjustment sequencing including circular debt capping plan, creation of Sarmaya Pakistan holding company to address structural reforms relating to PSEs.

In background discussions, officials said the IMF never proposed specific tax measures being reported in the media like increase in GST, income tax, etc., and highlighted broader issue of reducing budget deficit to about 3.5pc of GDP in three years, arguing that Pakistan’s tax to GDP ratio was the lowest among the peers and even lower than Bangladesh despite reasonable untapped potential and its existing tax system was regressive with minimal contribution from direct taxes.

The officials said IMF’s Resident Representative Teresa Daban Sanchez may remain in electronic contact with the government authorities and the IMF high-ups even during upcoming holidays even though the fund teams working on MEFP would not be available.

They said the two sides were in agreement that while tightening the fiscal and monetary policies, expenditure as percentage of GDP should be increased for social safety nets to ensure poor people remain unhurt as the tough fiscal adjustment comes into place.

The official said the authorities have been explained that they would have to navigate through changed geo-political circumstances for which they would have to produce bankable fiscal and monetary plans that could be advocated by the IMF mission and the teams on merit before the executive board for approval.

The authorities have been trying to gain time to see if the IMF’s insistence on upfront implementation of fiscal and monetary adjustment plans could be minimised through alternative financing plans but that was no more an option, the sources said, adding that they had to finally submit the MEFP to the Fund last week.

The sources said the Fund was tough this time on independent monetary policy but because of capacity constraints the monetary policy graduation to complete inflation targeting would be completed by 2020 in view of a major brain drain in recent years.

Difficulties have also stemmed from poor performance of the Federal Board of Revenue in the first five months of the current financial year that witnessed more than Rs110bn shortfall in revenue collection against the target. This necessitates not only steps to recuperate the lost ground in almost half of the year but also add on to that to meet tough targets being negotiated with the IMF.

This will be on top of an earlier adjustment of almost 2.1pc (about Rs800bn) introduced by the PTI government in September supplementary budget followed by about Rs120bn and Rs225bn additional adjustment in gas and electricity rates, respectively, together making almost 0.9pc of GDP.

Another round of energy price increase has to follow soon, beginning in January to ensure 100pc recovery of gas and electricity costs from consumers to reduce burden on the budget.

Published in Dawn, December 17th, 2018