ISLAMABAD: Pakistan and the International Monetary Fund (IMF) failed on Wednesday to reach an agreement on an economic bailout mainly because of the government’s indecision on fuel and electricity subsidies and resultant next year’s budget uncertainties.
Informed sources said that in the absence of a decision on fuel and electricity subsidies, it was unclear how the overall fiscal and external deficits would look like, not only at the end of the current fiscal year but also the next fiscal year.
Therefore, it would be equally uncertain how these deficits would be funded, what kind of revenue measures would be required and what would be the shape of social sector and development allocations. “Our team is returning tonight empty handed,” an official said.
A senior government official said the IMF mission showed relaxation to the extent of allowing the authorities to take a decision within a couple of days to steer clear the situation if they wanted to get back on table.
Fund irked by govt’s indecision on fuel, power subsidies and previous regime’s violation of $6bn programme commitments
“Discussions will continue early next week,” the ministry of finance said in a brief statement. Finance Minister Miftah Ismail and Secretary Hamed Yaqub Shaikh were unavailable for comment.
But in a statement issued at the end of May 18-25 talks in Doha, the IMF did not mince words while reporting violation of the $6bn programme commitments by the previous government in the form of huge fuel subsidies and the inability of the current government to reverse them.
“On the fiscal side, there have been deviations from the policies agreed in the last review, partly reflecting the fuel and power subsidies announced by the authorities in February,” said the IMF statement.
The IMF mission led by Nathan Porter did not take verbal assurances about the government’s economic and fiscal plans and wanted to have a concrete plan backed by upfront government decisions which could become structural benchmarks for performance criteria.
“The [IMF] team emphasised the urgency of concrete policy actions, including in the context of removing fuel and energy subsidies and the FY2023 budget, to achieve programme objectives,” the IMF stated.
Overall, the Fund programme is deep in unchartered waters, said a government official, adding the talks could resume only after the government takes decisive actions at the earliest to have an iron clad programme implementation through the federal budget due on June 10.
The IMF said its team looked forward to continuing its dialogue and close engagement with the government on policies to ensure macroeconomic stability for the benefit all of Pakistan’s citizens.
The Fund said its mission held both in-person and virtual discussions in Doha, Qatar, with the Pakistani authorities during May 18-25 “on policies to secure macroeconomic stability and support sustainable growth in Pakistan” and held “highly constructive discussions with the Pakistani authorities aimed at reaching an agreement on policies and reforms” that would lead to the conclusion of the pending seventh review of the authorities’ reform programme, which is supported by an IMF Extended Fund Facility arrangement.
It said considerable progress was made during the discussions, including on the need to continue to address high inflation and the elevated fiscal and current account deficits, while ensuring adequate protection for the most vulnerable. In this regard, a further increase in policy rate implemented on May 23 was a welcome step, the IMF noted.
On May 18, Finance Minister Miftah Ismail had assured the Fund that the new coalition government would stay in office and take tough decisions, including reduction in fuel subsidies, undertake reforms committed in the original IMF programme and complete structural benchmarks. The minister expects the fiscal deficit could touch Rs6.4 trillion this year and current account deficit could range between $15bn and $19bn.
These steps were considered important to clear the backlog of structural benchmarks. Going forward, the authorities had sought extension in time by one year and increase in the size of the programme by $2bn which was promised to be linked with strategic structural benchmarks that address the root causes rather than delivering on fiscal targets, through privatisation of power companies and other loss-making state-owned entities (SOEs) as a structural benchmark in the revised and upgraded fund programme to $8bn so that circular debt flow could be addressed forever and debt stock dissolved through privatisation proceeds.
The finance minister had also promised to do away with the tariff setting role of the government by giving power tariff in the hands of the National Electric Power Regulatory Authority (Nepra) and limiting the government powers to the extent of taxation on POL (petroleum products) pricing and allowing oil companies to fix retail rates on a daily or weekly basis.
The 39-month Extended Fund Facility — provided to countries facing serious payment imbalances because of structural impediments or slow growth and an inherently weak balance-of-payments position — was to end in September this year, but only three tranches of about $3bn have so far been disbursed as the programme got repeated breakdowns.
Published in Dawn, May 26th, 2022