Govt, IMF agree on backup steps in review talks

• Fixed tax on retailers, realtors may be introduced from Jan 1
• Revenue targets aimed through import growth key concern for Fund’s mission
• Technical discussions set to conclude today; policy-level talks begin on Monday

ISLAMABAD: The caretaker government and the International Monetary Fund (IMF) have reached a consensus on backup measures to activate by the year’s end if significant deviations from fiscal and monetary objectives threaten the broader aims of the ongoing $3 billion loan programme.

Informed sources told Dawn that a visiting mission of the IMF and the Pakistani authorities would be concluding technical-level discussions on Friday that involve an exchange of the latest data, not only limited to the end-September quarterly performance, and queries and clarifications on all macroeconomic areas and their forward-looking outcomes.

While formal policy-level talks are expected to begin on Monday, both sides agree on the future course of action, including expanding the scope of taxation on the retail sector and improving the targeting of real estate-based revenue collection in case of any shortfall.

A fixed taxation scheme for retailers could be the first shot in the arm in case of a minor revenue gap, to be followed by real estate, through an ordinance with effect from Jan 1. Further clarity and specifics would emerge in policy discussions next week.

The sources said revenue targets aimed through import growth were the key concern for the IMF mission, as imports so far remain subdued than anticipated at the time of budget 2023-24 and the loan deal’s finalisation in July.

In any case, both retail and real estate sectors would be required to significantly increase their contribution to the revenue stream from their existing share with effect from July 1, 2024.

The sources said the two sides had no big issue on the need for curtailing development spending during the current year both at the federal and provincial levels, but effective taxation on agriculture income remains out of the caretaker government’s agenda given constitutional limitations, although the IMF mission has not given up flagging its importance.

In August, the government shared with the IMF a revised plan for managing the power sector circular debt, besides rebasing annual tariffs and streamlining monthly and quarterly fuel adjustments, including that of the private power utility K-Electric. This meant no fresh flow to the circular debt, which had gone beyond Rs2.5 trillion by the end of September.

“Luckily, no major issue has emerged so far for the power sector this time,” an official said, hoping that policy-level talks with the IMF would remain smooth.

However, the government may have to make proper allocations to solarise tube wells in next year’s budget to further cut down on subsidies.

The policy-level talks next week would also suggest if the IMF had any problem with external financing needs that Pakistani authorities plan to meet through significantly higher foreign direct investment (FDI).

The government aims to attract this investment from friendly nations — particularly in mines and minerals, agriculture, aviation and energy sectors — through the newly created civil-military forum, the Special Investment Facilitation Council (SIFC).

The authorities are expecting such FDI — both through greenfield investment and brownfield through privatisation — to get impetus by January next year, given the advanced stages of negotiations on an umbrella trade treaty with Gulf nations and bilateral agreements.

Also, they anticipate improved market conditions for the international capital market and commercial financing based on the successful completion of the IMF review and the disbursement of the second loan tranche, worth over $710 million, of the current loan programme ending in late March next year.

Officials said the caretaker government has not only met the IMF’s requirement for no more government guarantees but had in fact outperformed by over Rs150bn by retiring some of the guarantees.

Likewise, it has also complied with no more borrowing from the central bank, while the gas sector’s circular debt had been stopped with the latest massive gas price hike notified with effect from Nov 1.

Questions are reported to have been raised on the exchange rate management leading to the rupee’s appreciation, but authorities have insisted that the change had been brought through administrative actions against smuggling and illegal operations and not through intervention.

The government and the IMF already have similar views on containing the development programme both at federal and provincial levels for fiscal tightening to minimise budget deficit and consolidate primary fiscal surplus. They plan to wrap up the review by Nov 16.

Earlier, the authorities had briefed the IMF team about the consultative process with provincial governments for not only slashing the federal funding to provincial projects but also the need to limit the Public Sector Development Programme (PSDP) of the federation and annual development plans (ADPs) of the provinces.

Pakistan has to achieve primary surplus — the difference between total revenues and expenditures except interest payments — at 0.4 per cent of GDP (about Rs400bn) based on Rs600bn cash surpluses to be returned to the federal government by the provinces.

The government has already crossed Rs416bn primary surplus in the first quarter of this fiscal year. The provincial cash surpluses did not materialise in the first quarter as planned, but the trend would reverse going forward.

The major achievement on primary balance had come through a tight squeeze on PSDP and subsidies, as total spending in the first quarter stood at less than Rs41bn against a full-year budget allocation of Rs950bn.

Published in Dawn, November 10th, 2023