ISLAMABAD: The government may have to withdraw energy subsidies to big export industries, besides cutting non-salary, non-essential civil and security costs as part of harsh reforms required to obtain the International Monetary Fund’s consent for an economic bailout that ensures soft landing for the poor and vulnerable.
Senior government officials said IMF mission chief for Pakistan Nathan Porter had already arrived in Islamabad to start a technical discussion with authorities on Tuesday (today), which would continue till Friday (Feb 3).
The second phase of policy negotiations would continue till Feb 9 to finalise a memorandum of economic and financial policies (MEFP).
The government’s maximum effort with the IMF will be to secure an arrangement that entails burden of massive fiscal adjustment on the principle of ability to pay amid an already hard-pressed majority population, an official said, adding this would mean all segments of society, including the middle class, civil administration, armed forces and judiciary, would have to sacrifice the kind of lifestyle that is no more sustainable.
Hence impact on the rich and well-to-do people would be proportionate to their purse, both in terms of an increase in energy tariff and an additional tax burden.
The officials conceded that about 30 per cent population was already below poverty line and being looked after through various social sector support programmes, while another 22-25pc is the most vulnerable to the inflationary spiral and hence would have to be insulated from further shocks. This will require a compassionate and empathetic view of the IMF mission.
Therefore, the authorities would have to announce strong policy measures and start their upfront implementation. These would envisage a road map along with steps to address a circular debt of over Rs2.5 trillion in the power sector, expenditure cuts and tax measures to bridge a Rs2-2.5tr fiscal hole depending on how the two sides build consensus while taking into account the necessary flood-related expenditures.
The thrust of reforms would be on permanent issues and trim fats almost everywhere and in every institution and their representatives would have to contribute.
This could also involve a significant reduction in the size of the cabinet to show political commitment, surrender of more than one plot at government expense, withdrawal of all untargeted and unbudgeted subsidies, particularly Rs120bn in energy subsidy to exporters announced four months ago without budget allocation.
The authorities have already surrendered the exchange rate cap, allowing more than Rs40 per dollar depreciation in less than a week, and increased the policy rate by one per cent to 17pc to enable the IMF to field its staff mission for completion of talks on 9th quarterly review pending for almost four months.
The government had on Jan 19 formally conveyed to the IMF its willingness to accept all the four major conditions and requested for the mission to visit Islamabad for talks on $3bn part of the programme to avert a sovereign default.
The IMF has already made it clear that its mission “will focus on policies to restore domestic and external sustainability, including to strengthen the fiscal position with durable and high quality measures while supporting the vulnerable and those affected by the floods; restore the viability of the power sector and reverse the continued accumulation of circular debt; and reestablish the proper functioning of the FX market, allowing the exchange rate to clear the FX shortage”.
Pakistan requires about $8-9bn during the remaining five months of the current fiscal year to meet international obligations and currently the reserves held by the central bank are slightly over $3bn.
That means the two sides would to find a way to finance over Rs803bn worth of financing gap in the power sector with an average tariff increase of about Rs7.50 per unit, hike in petroleum levy on all products to Rs50 from existing Rs40, fresh additional revenue measures in the range of Rs500-700bn through a mini-budget.
The increase in gas prices was not part of the IMF’s previous benchmarks, but over Rs1.6tr circular debt in the sector risks the gas companies and is a looming burden on the already runaway fiscal deficit, and hence would become part of the talks.
This had been reinforced by the IMF which made it clear that “stronger policy efforts and reforms are critical to reduce the current elevated uncertainty that weighs on the outlook, strengthen Pakistan’s resilience, and obtain financing support from official partners and the markets that is vital for Pakistan’s sustainable development”.
Friendly countries had been holding back their promised additional support — about $2bn from Saudi Arabia, $1bn from the UAE and about $2bn from China — on top of recent rollovers, mainly because of an impasse between the finance ministry and the IMF.
Published in Dawn, January 31st, 2023
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