ISLAMABAD: After conceding breach of Pakistan’s financial data integrity, the government has secured approval of the executive board of the International Monetary Fund (IMF) for disbursement of $500 million and revival of the fund programme after a year.
This followed commitments with the board to generate more than Rs700 billion in additional revenues through general sales tax and income tax in the coming budget, increase power tariff by over 34 per cent (about Rs900bn) and withdraw Rs140bn worth of corporate income taxes through promulgation of two ordinances which have not been published at home yet.
“Reaching the FY 2022 fiscal targets rests on the reform of both general sales tax and personal income taxation,” said the IMF board. A government official said budget targets for next year had already been finalised with the IMF.
“Vigorously following through with the updated IFI-supported circular debt management plan and enactment of Nepra amendment act would help restore financial viability through management improvements, cost reductions, regular tariff adjustments and better targeting subsidies,” he added.
Institutional, technical shortcomings giving rise to inaccurate information being addressed, Fund assured
This includes a power tariff increase of Rs1.39pc per unit in June this year followed by Rs2.21 per unit raise in July and another Rs1.76 per unit hike in July 2022, coupled with withdrawal of subsidies for consumers with monthly consumption of 201-300 unit, the official explained.
The executive board “completed today the second through fifth reviews of the Extended Arrangement under the Extended Fund Facility (EFF) for Pakistan,” said an IMF statement, adding that the “decision allows for an immediate disbursement of SDR 350 million ($500m), bringing total purchases for budget support under the arrangement to about $2 billion”.
The Fund said the government’s reporting in Dec 2019 on data relating to sovereign guarantees was inaccurate on the basis of which it had claimed to have met performance criteria for $452m disbursement. This was later noted to be under-reported to an extent of Rs357bn (0.9pc of GDP). “The IMF’s transparency policy requires publication of misreporting related to use of Fund resources, including Executive Board findings in these matters,” the IMF stated.
When contacted, Finance Secretary Kamran Ali Afzal said inaccuracy was “inadvertent, insignificant and contained nothing secret” but obviously fell in the category of “misreporting”. He explained that the data related to guarantees was shared with the IMF in Dec 2019 on a short notice in the night and it could not be accurately calculated. He said the guarantees data was not secret and was available on the State Bank of Pakistan’s website but not with the ministry of finance.
Another official said the guarantees pertaining to two mega power plants contracted and started in 2016 and now in completion stage were missed on the federal government’s consolidated data on sovereign guarantees. The limit for guarantees at the time was Rs1.611 trillion but the authorities reported them at Rs1.555 trillion, thus claiming over-performance of about Rs55bn even though actual guarantees amounted to about Rs1.97tr.
Replying to a question, Mr Afzal said two presidential ordinances relating to amendments to Nepra Act and withdrawal of corporate income tax exemptions had been issued on Monday but could not be published in the gazette due to holidays. Sources said these ordinances and a final bill to amend State Bank of Pakistan Act were transmitted to the IMF board.
The IMF said first review under the arrangement was completed by the Executive Board on December 19, 2019, based upon, inter alia, the reported observance of the quantitative performance criteria (PC) at end-September 2019, including the amount of government guarantees. Upon completion of the first review under the EFF, Pakistan made a purchase equivalent to SDR 328 million (about $452.4m).
“Subsequently, new information that came to the authorities’ attention, and which was shared with Fund staff, has revealed that the data on government guarantees dating back to FY 2016 was reported inaccurately. The revised data indicates a non-observance of the PC on government guarantees at end-September 2019 by a margin of Rs357bn (about 0.9pc of GDP), which resulted in a noncomplying purchase and a breach of obligations under Article VIII, Section 5 of the IMF Articles of Agreement.
The Fund noted that the authorities had taken strong corrective actions to address institutional and technical short-comings that gave rise to the inaccurate information, including mechanism for reconciliation and publication of biannual debt bulletin. The government also gave an undertaking to list all new guarantees expected to be issued in the FY2022 budget.
“In view of the strong and proactive commitment by Pakistan to provide timely and accurate data to the IMF in the future, the Executive Board decided not to require further remedial action in connection with the breach of obligations”, the Fund noted. The board also granted a waiver for the non-observance of the quantitative performance criterion.
The IMF appreciated the authorities for making continued satisfactory progress under the Fund- supported programme, which has been an important policy anchor during an unprecedented period following the Covid-19 pandemic. It also continued to advance the reform agenda in key areas, including on consolidating central bank autonomy, reforming corporate taxation, bolstering management of state-owned enterprises and improving cost recovery and regulation in the power sector.
“Fiscal performance in the first half of FY 2021 was prudent, providing targeted support and maintaining stability. Going forward, further sustained efforts, including broadening the revenue base, carefully managing spending and securing provincial contributions, will help achieve a lasting improvement in public finances and place debt on a downward path,” the IMF observed. It described Pakistan’s current monetary stance as appropriate to support nascent recovery. Entrenching stable and low inflation requires a data-driven approach for future policy rate actions, further supported by strengthening of the State Bank of Pakistan’s autonomy and governance, it said. The market-determined exchange rate remains essential to absorb external shocks and rebuild reserve buffers.
The Fund called for further efforts to remove structural impediments to strengthen economic productivity, confidence and private sector investment. These include measures to bolster governance, transparency and efficiency of the vast SOE sector, boosting business environment and job creation, fostering governance and strengthening effectiveness of anti-corruption institutions. “Also, completing the much-advanced action plan on AML/CFT is essential,” the IMF board concluded.
Published in Dawn, March 26th, 2021