ISLAMABAD: The International Monetary Fund (IMF) is not convinced with the government’s justifications for a recently announced amnesty scheme and has doubts over the financial impact and financing sources of the prime minister’s relief package on electricity and petroleum prices.
As a result, the Fund’s mission and the government authorities are unlikely to conclude the ongoing seventh review of the $6 billion Extended Fund Facility (EFF) shortly and may lead to the disbursement of about $1.9bn worth of two tranches close to the federal budget due in June, depending on the outcome of a no-confidence motion against the prime minister.
Informed sources told Dawn that during the final round of policy-level talks with Finance Minister Shaukat Tarin, the IMF staff mission raised more questions on the estimated impact of relief measures announced by the government and their financing guarantees.
The mission was completely dissatisfied with the arguments advanced in favour of the money-whitening scheme for the industrial sector.
Ongoing seventh review of $6bn loan programme unlikely to conclude anytime soon
“You had written and signed a memorandum of economic and financial policies (MEFP) that there would be no more amnesty scheme,” a source said, paraphrasing the IMF side as telling the Pakistani team led by the finance minister.
The Fund is critical of the third tax amnesty scheme introduced by the government despite a recent withdrawal of tax distortions by removing GST exemptions as part of the mini-budget agreed under the sixth review, which led to the revival of the EFF after a nine-month suspension and then disbursement of over a $1bn instalment.
“We also reaffirm our commitment to not granting further tax amnesties (continuous structural benchmark) and avoiding the practice of issuing new preferential tax treatments or exemptions,” said the written undertaking given by Finance Minister Tarin and State Bank Governor Dr Reza Baqir.
The sources said the IMF mission had worked out their own numbers on the financial impact that was quite higher than estimates and data provided by the government authorities. The Fund’s mission is reported to have privately met some stakeholders in the energy sector, including refineries and oil companies, and had gathered a different set of data.
Mr Tarin said on Sunday that the IMF had sought agreements with the provinces for sharing the financial burden of the relief package and project details, which would be shared on Monday and then he would wind up policy-level discussions on Tuesday.
The minister did not respond to calls for comments. The IMF side also avoids direct comment.
The Pakistani side insisted that all end-December 2021 targets needed for the seventh review had been met and there was no reason for the review to be kept incomplete. However, the IMF team appeared to be evasive on concluding the review before the political dust settled sometime next week on the completion the no-confidence motion against Mr Khan, the sources said.
The time would then be very close to the IMF-World Bank spring meetings starting April 18, during which time a board meeting with the Pakistani side could not be arranged.
By the first week of June, the time for the eighth review would become due and therefore both reviews involving $950 million each could be merged and major policy actions could be pushed through the next year’s budget.
The sources said the authorities were also not that hard-pressed after the rollover of $4.24bn loans by Chinese banks that were due for payment on March 23 ($2bn) and March 25 ($2.24bn). The rollover coupled with a reduction in the current account deficit last month, expected operationalisation of Saudi oil facility next week and lower oil prices could sustain the reserves position in the short term amid political uncertainty.
Besides questions over the financing of the prime minister’s relief package, the IMF mission also has concerns over the growth prospects in view of a major cut in the Public Sector Development Programme (PSDP). It wanted to know precise project details that would be affected by the PSDP cut and wanted expenditure control should not affect social sector spending.
Talks were originally targeted to be completed by March 14 but were extended as differences remained.
The talks on the seventh review of the $6bn Extended Fund Facility started on March 4. The Fund had been concerned over the “one step forward, two steps back” approach of the government on critical reforms having serious budget implications going forward.
There are three critical areas, including tax amnesty, untargeted subsidy on petroleum products and general subsidy on electricity rates. These are estimated to drive the primary budget account — the gap between revenues and expenditures minus debt servicing — from a targeted Rs25bn in surplus to about Rs650bn in deficit by end-June, when the current fiscal year ends.
Pakistan has so far received little over $3bn out of $6bn worth of 39-month IMF programme. The Fund earlier expressed concern over expansionary policies adopted in the 2021-22 federal budget, which it said had created fiscal imbalances, leading to the introduction of mini-budget in December to address these slippages.
After initial compliance with the commitments to increase the petroleum levy, Prime Minister Khan reversed the progress when he announced a Rs10 per litre reduction in petroleum products, bringing down the levy to zero, besides a cut in electricity rates by Rs5 per unit instead of scheduled increases agreed with the IMF to address the circular debt.
The 39-month IMF programme is scheduled to end in September.
Published in Dawn, March 24th, 2022