Pakistan’s ongoing talks with the International Monetary Fund (IMF) have reportedly hit a snag on the issue of the third tax amnesty the politically embattled prime minister has announced for the wealthy and the Rs246 billion energy price subsidy his government has given to reduce the burden of elevated price inflation on people. Even though finance minister Shaukat Tarin and others had hoped and stated that the government had discussed the amnesty and energy price relief with the lender of last resort, the reports suggest that negotiations on the seventh review of the $6bn funding programme have now been extended for one day to Monday (today) because of disagreement on the matter. The review was originally scheduled to conclude on Friday.
A report quoting anonymous official sources says the virtual meeting between Mr Tarin and IMF team head Nathan Poter, also could not take place, indicating that both sides were struggling to come closer to a position where some understanding at the top level might be achieved.
Prime Minister Imran Khan has deviated from the programme for the second time in less than one year. His government had ditched the programme, originally signed over 32 months back to avert the deep currency crisis it faced, shortly after it was renegotiated in March 2020 after a year of suspension due to the Covid outbreak. The government was of the view that the harsh IMF conditions were stopping it from pursuing growth through pro-cyclical fiscal policies and providing relief to the inflation-stricken population.
The finance minister had at that time claimed that he would convert the multilateral lender to his side and get its conditions relaxed later on by improving the economy. Nonetheless, the reemergence of the balance of payments weaknesses on the back of relentless pursuit of rapid growth again forced it to reach out to the lender after a few months and agree to much harsher conditions that included an increase in energy prices, withdrawal of tax exemptions, grant of absolute powers to the State Bank of Pakistan and on and on. The resumption of the programme had paved the way for the release of $1bn early last month to help it shore up its depleting foreign exchange reserves.
The IMF is of the view that the government could have justified the energy price cut if it was limited to certain lower-income and vulnerable groups, but a blanket reduction was totally untargeted and available to all, including the rich
The failure to convince the IMF on tax amnesty and energy price relief package is likely to jeopardise another tranche of $1bn. So far Islamabad has received $3bn under the programme while the remaining amount is to be disbursed before the end of the 39-month programme in September subject to successful completion of three remaining reviews.
Ever since the opposition political parties had announced to bring a no-confidence motion against him the prime minister has gone into an election campaign mode, addressing public gatherings across the country to explain the reasons behind the higher inflation and the combined opposition’s motives behind its current drive against him.
The opposition had submitted the motion with the National Assembly last week and the Speaker is required to call session by March 22 and hold the vote on the resolution by 29. The energy price relief, which froze the petrol, diesel and electricity prices for four months to the end of June was also part of the government’s strategy to blunt the opposition’s move against him. The opposition says Imran Khan has lost public support and grossly mismanaged the economy. He has responded by warning the opposition of dire consequences if they failed to vote him out of power.
Mr Tarin had recently said that the IMF should not have problems with the relief package as Pakistan was neither increasing its fiscal deficit nor taking any loans to provide relief to the people. He said the government was able to announce subsidies on the back of improved revenue collection. Although the central bank in its latest monetary policy statement also assumes that the relief package will not add to the fiscal deficit due to other offsetting savings, the fear is that the government will largely breach its commitment of showing Rs25bn primary budget surplus.
Instead, it is believed that the government could run a primary budget deficit of over 1pc of GDP or Rs665bn even at the revised base of the economy. The finance minister had also admitted that the government could run a primary budget deficit of 0.5pc of GDP against the targeted surplus.
A report last week said that the federal budget deficit is now projected over Rs4.3 trillion for the ongoing fiscal year, roughly Rs318bn higher than the target despite the measures taken in the finance supplementary bill passed last month to meet a prior action for the resumption of the IMF funding. Tax amnesty, untargeted subsidy on petroleum products and general subsidy on electricity rates are three critical areas that are estimated to drive the primary budget account — the gap between revenues and expenditures minus debt servicing.
Anonymous officials quoted in a report in this paper say the Fund had expressed grave concern over a “one step forward, two steps back” approach of the PTI government on critical reforms that can have serious budget implications.
The IMF is of the view that the government could have justified the energy price cut if it was limited to certain lower-income and vulnerable groups, but a blanket reduction was totally untargeted and was available to all, including the rich. Besides the relief package, the IMF has also questioned the introduction of a third tax amnesty scheme by the government despite the government’s defence that the scheme was “targeted and ring-fenced” to ensure investment in the manufacturing sector for creating jobs and growing exports.
In politics, the failure to deal with rising inflation can be fatal for a government. But sacrificing prudent economic policy for political gains can have a longer-term impact on the economy and the people in whose name such expediency is resorted to for protecting the self-interests of the ruling party. That’s what we are watching right now.
Published in Dawn, The Business and Finance Weekly, March 14th, 2022