Government has indicated further deterioration of public’s economic conditions by signing off an extremely tough agreement with the International Monetary Fund (IMF) in return for a $3.5 billion loan. According to the agreement, the government requires to further raise electricity and gas prices, mini budget and expenditure cut of Rs534 billion on development spending as part of contingency measures.
On Thursday, the global lender issued the combined report of the 7th and 8th reviews of the bailout package, which includes a Memorandum for Economic and Financial Policies. The document consists of all the commitments made by Finance Minister Miftah Ismail on behalf of the government of Pakistan.
Read more: Pakistan’s economy will remain under pressure: IMF
The document was needed to revive the programme and extend it through June 2023 in order to get a total $3.5 billion loan from the IMF from August 2022 to June 2023.
The government committed to raise gas prices by up to 235 percent by the end of August 2022, the deadline has already passed. Furthermore, the plan calls for closing commercial bank accounts of government departments by the end of December and transferring cash to the SBP.
To ensure the IMFs next tranche, Pakistan had assured the global lender that it would increase gas prices by up to 235% soon.
— Economy of Pakistan (@Pakistanomy) September 3, 2022
The report read, “we are now in the process of implementing more than the prescribed increase in consumer gas prices by end-August 2022.”
Havoc caused by flash floods in Pakistan has resulted in expectation from the Pak-IMF staff-level agreement to undergo a change. However, the IMF is unlikely to grant relief in domains where there is no direct impact on the flood-affected population.
According to the report, Pakistan has assured the IMF that in case the country experiences slower revenue collection or current expenditures start to go beyond targets, the government will move towards the contingency plan. It is pertinent to mention that the contingency plan includes both the imposition of new taxes and the reduction of federal and provincial development expenditures.
“If monthly revenue data show signs of underperforming against the Q1 FY23 and subsequent targets, we will take immediate action to raise additional revenue, as necessary, through: (1) immediately setting the GST on fuel products to a rate sufficient to raise the necessary revenue up to the standard rate of 17 percent; (2) further streamlining GST exemptions including on sugary drinks (PRs 60 billion), and other unwarranted exemptions such as those benefitting exporters; and/or (3) increasing Federal Excise Duty on Tier I and Tier II cigarettes by at least PRs 2/stick with immediate effect to raise at least another PRs 120 billion in revenue,” it read.
Moreover, the government has also stated that it will add another 300,000 people to the income tax base by utilizing data on business withholding tax, identifying, and registering new individuals, and utilizing third-party data.
After raising electricity prices by Rs7 per unit in July and August, the government has promised the IMF that prices will rise by another 91 paisa per unit by the end of September. This increased the tariff, which will be followed by automatic increases in electricity prices due to quarterly tariff adjustments for the July-September period and monthly fuel price adjustments for July to fully recover the shortfall from the first stage’s delayed implementation beyond July 1.
Importantly, the tariffs will be increased at a time when the nation is hit by a 47-years high inflation rate of 27.3 percent and the floods have inundated 118 districts of Pakistan, affecting over 33 million people.
Read more: Broke backs and breaking records: PBS reveals 27.3pc inflation in Aug 22
Regarding gas prices, the IMF was told that the government was going to increase gas prices more than prescribed by the Oil and Gas Regulatory Authority (Ogra). The gas sector circular debt has increased to Rs719 billion by March this year –up from Rs620 billion at end-FY21.
In July the ECC had approved an increase in natural gas prices in the range of 43 percent to 235 percent, but the federal cabinet has not yet endorsed the ECC’s decision.
The government has missed the deadline for increasing gas prices, it says that it intends to raise gas prices to reduce the circular debt flow in the gas sector, resolve some of the debt stock, and strengthen the liquidity of the gas companies while minimizing the impact on smaller users.