ISLAMABAD, April 25: With a promise by the US that $1.8 billion will be disbursed to Pakistan by June 30, the country will have to make upfront budgetary adjustments of more than Rs700bn (almost 3.5 per cent of GDP) during the next two years as part of a $5bn Extended Fund Facility (EFF) ‘agreed in principle’ with the International Monetary Fund.

The next fiscal year should see an upfront budgetary adjustment of Rs400bn while the year 2014-2015 over Rs300bn.

The fresh adjustment is anticipated to involve revenue measures and reform gains worth Rs550bn (both at federal and provincial levels) and over Rs220bn on power subsidies reduction through tariff rationalisation and attract over $7bn flows from the lending agencies in return.

A senior government official told Dawn that overall response from bilateral and multilateral lenders had been very encouraging during recent engagements, indicating international community’s general support to Pakistan’s smooth political transition process and willingness to work with the new democratic set-up that has to facilitate withdrawal of coalition forces from Afghanistan.

But Pakistan will have to show seriousness that it is politically geared to take deep-rooted structural reforms as required under the IMF’s EFF programme when the new democratic government takes over after the May 11 elections. This will have to be articulated in the draft budget documents currently in the process of finalisation in consultation with major political parties.

The fresh fiscal adjustment will be in the form of about 1pc of GDP (about Rs220bn) expenditure control on account of power sector restructuring through rationalisation of tariff, reduction of losses and improvement in governance.

Sources said the existing difference between applicable electricity tariff and the tariff approved by the National Electric Power Regulatory Authority (Nepra) stood at Rs3.08 per unit, entailing a Rs350bn subsidy from the budget.

However, the recent tariff determination by Nepra had increased the per unit difference by almost Rs6 per unit, envisaging an increase in the financing gap to Rs550bn. Therefore, the average electricity tariff will be increased upfront substantially for upper echelon of consumers to reduce the gap by about Rs200-230bn at the start of the next fiscal year.

Another 2.5pc of GDP (almost Rs550bn) adjustment will come from the revenue side, including Rs350bn (1.5pc of GDP) worth of new taxes.

Provincial taxes will also be improved by increasing provincial income tax, property tax, motor vehicle tax and agricultural income tax and expanding general sales tax on services that was considered to be far below the potential.

The new IMF facility of $5bn or above will be dovetailed with about $2bn additional funding from development agencies like the World Bank, the Asian Development Bank, USAID and UK’s Department for International Development to meet huge investment requirement in the power sector. Therefore, overall lending programme from the multilateral lenders has been estimated at $7bn.

This is necessary to support the government’s efforts to reduce subsidies with increased social protection programmes so as to contain the negative impact on poor sections arising out of proposed higher electricity rates and at the same time move to a high-growth path, the official explained.

It was in this background, the official said, that while reconciliation of Islamabad’s outstanding dues on account of Coalition Support Fund (CSF) would continue as an ongoing process between Pakistan’s military and the US administration, the latter agreed to disburse about $1.8bn during the current fiscal year. The amount would help the government conclude its fiscal accounts on a relatively positive note, he added.

Pakistan is reported to have filed claims of around $3bn on account of services and logistic support to the US-led coalition forces. The US authorities suspect that bills worth $1bn were ‘cooked up’ or lacked documentary evidence. The two sides, however, appreciated that it would be a great support to Islamabad, facing huge fiscal deficits and declining foreign exchange reserves, if undisputed amounts were cleared within next two months.

The current financial year is estimated to have 6.9pc to 7.3pc of fiscal deficit, says caretaker prime minister’s adviser on finance Dr Shahid Amjad Chaudhry.

Independent economists, however, suspected the deficit could be contained below 8pc of GDP this year and hence would largely depend on US support in the absence budgetary items like privatisation proceeds of the PTCL, auction of third-generation telecom licences and international bonds coupled with over Rs300bn shortfalls in tax revenues and higher power subsidies.Khaleeq Kiani