IMF challenges amnesty program and untargeted subsidies

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ISLAMABAD: Talks between the government and the International Monetary Fund (IMF) appear to have landed in uncharted waters over a tax amnesty package and fuel and electricity subsidies recently announced by Prime Minister Imran Khan.

A senior government official said Dawn Friday that due to an impasse over key political issues, virtual negotiations between the two sides had been extended until Monday instead of the scheduled conclusion on Friday. Talks on the seventh review of a $6 billion Expanded Financing Facility (EFF) began on March 4.

The official, who participated in the discussions, said the Fund’s mission had expressed deep concern over a “one step forward, two steps back” approach by the government on critical reforms which can have serious budgetary implications.

Another official said Pakistan had performed well against end-December targets, but the outlook based on recent fiscal measures was on a slippery slope.

Expresses concern over government’s ‘one step forward, two steps back’ approach on critical reforms

IMF representative in Islamabad Esther Perez Ruiz did not respond to requests for comment.

Tax amnesty, untargeted subsidies on petroleum products and general subsidies on electricity tariffs are three critical areas that should shift the primary fiscal account – the gap between income and expenditure minus the utility Debt – from a targeted surplus of Rs 25 billion to around Rs 650 billion in deficit by the end of June, the current financial year end.

The IMF mission questioned the introduction of a third tax amnesty scheme introduced by the government despite the recent withdrawal of tax distortions under the sixth review agreement to revive a loan tranche of 1 billion dollars which had been suspended for nine months.

“We also reaffirm our commitment not to grant new tax amnesties … and to avoid the practice of granting new preferential tax treatment or exemptions,” said the written commitment from Finance Minister Shaukat Tarin and Bank Governor of State of Pakistan, Dr. Reza Baqir.

The government team defended the tax amnesty program, saying it was ‘targeted and circumscribed’ to ensure investment in the manufacturing sector to create jobs and increase exports, as the minister described it finances.

However, this did not impress the IMF team given previous commitments, and they expressed their inability to defend such a “deviation from principle”.

The Fund also questioned the reinstatement of untargeted subsidies in the form of a Rs 10 per liter reduction in oil prices despite a commitment to increase the oil tax.

According to sources, the IMF mission said it could have justified the price cut if it was limited to certain low-income and vulnerable groups, but a blanket reduction was completely untargeted and available to everyone, including including the rich.

The government has approved a grant of Rs 20 billion for the first month i.e. March for the payment of price differential claims to oil marketing companies to maintain lower prices.

The initial estimate to maintain oil prices is set at Rs 70 billion for the remaining four months of the current financial year, but remains suspect given the volatility in the global oil market.

Regarding oil prices, the government had pledged to “ensure that the Petroleum Development Tax (PDL) on petrol and diesel is consistent with the new revenue target”.

“As such, we will increase the PDL by Rs8 per liter (prior action in December 2020) and we are committed to increasing the PDL by Rs4 per liter per month for the remainder of the financial year 2022 until the maximum of Rs30 per liter is reached,” the government said.

Instead, the swab has been abolished or is expected to turn negative within a few days.

The IMF also expressed serious concerns over a general subsidy in the form of a Rs 5 per unit reduction in electricity tariffs which had been increased over a period of about 15 months. The government has estimated its financial impact at between 106 and 136 billion rupees. The mission felt that the progress made in 15 months had been wiped out in one fell swoop.

Finance Minister Shaukat Tarin recently announced that the fiscal impact of these measures would be around 250-300 billion rupees depending on international commodity prices.

An official said neither the government had shown any indication to reverse recent expansionary policy moves nor that the fund had shown flexibility.

Pakistan has so far received just over $3 billion of the IMF’s $6 billion loan program, spread over 39 months and due to end in September this year.

Posted in Dawn, March 12, 2022

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