December 2, 2023
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IMF Wants Pakistan to Reverse Rs. 1.9 Trillion in Agricultural and Power Subsidies

Ali Imran 236 Comments , , , , ,

The International Monetary Fund (IMF) is seriously concerned about Pakistan’s recently announced Rs. 1.91 trillion in agriculture and electricity subsidies, which it plans to reverse through additional tax measures in the next review.

The lender will address such issues during the country’s 9th Review, which will begin soon. “Reverse or compensate for the losses of recently implemented measures (agricultural subsidies, exporter subsidies, and power sector delays”) with new tax measures,” a national daily reported.

Last week, it was revealed that the country’s export-oriented sectors will likely receive electricity at an all-inclusive discounted rate of Rs. 19.99 per unit (estimated Rs. 110 billion), while an earlier Rs. 1.8 trillion concession was announced to assist farmers with free seeds, low-interest loans, and lower electricity and fertiliser prices.

The Ninth Review requires the government to resume necessary consolidation following significant slippages in FY22 in order to meet the primary surplus target of 0.3 percent of GDP in FY23. In this regard, all new FY23 spending plans, including those required to respond to the floods, must be clarified. To meet programme targets, there must also be agreement on offsetting spending cuts, whether through spending restructuring or new tax measures.

“There must be no new electricity subsidies and a commitment not to fiscalize power sector arrears without agreement with the Fund,” sources said.

The seventh and eighth reviews included contingency revenue actions that could be activated if revenue fell below a certain threshold for even one month. According to the sources, in order to strengthen the revenue base and increase tax-to-GDP revenue to at least 11 percent, the government must catch up on the delayed October petroleum development levy correction and stay on track with all committed resolutions to generate revenue equal to one percent of GDP.

To protect social spending, the IMF has asked the government to increase the number of BISP families to 9 million and make changes to the BISP Kafalat programme. The lender has also urged the government to strengthen the energy sector by implementing tariff increases on time (quarterly adjustments and FCAs).

The Fund has also asked the government to seek Cabinet approval for the FY23 Circular Debt Management Plan (CDMP), which is intended to provide a sustainable reduction in circular debt accumulation as agreed with the World Bank (WB), Asian Development Bank (ADB), and IMF.

According to the IMF, real policy rates are significantly negative, and further tightening is required in Pakistan to reduce inflation. The lender also demands that the exchange rate be allowed to fluctuate freely, that forex intervention be limited to agreed-upon limits, and that gross reserve targets be met as planned. This includes the facilitation of approximately $4 billion in committed bilateral creditor support.

It is also expected that the central bank will be required to share AML/CFT inspections of banks in relation to an IMF-agreed structural benchmark for the construction sector.

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