Imran Khan not happy with IMF deal, calls meeting on Monday. Prime Minister Imran Khan on Saturday turned down the draft of a staff-level agreement between the Ministry of Finance and International Monetary Fund (IMF) and summoned officials to brief him on economic affairs and the progress of talks with the Fund.
Under the proposed bailout agreement, Pakistan would have no choice but to concede to the IMF’s demands to hike power tariffs and taxes and withdraw tax concessions and exemptions which are among the conditions that the country has accepted to secure the loan.
During their discussions on Wednesday, the two sides worked out a financing gap of around $11 billion for the next fiscal year, 2019-20. Under the understanding, the government will start withdrawing exemptions offered in various taxes amounting to around Rs350bn in the budget for 2019-20.
The two sides also agreed that Pakistan would increase the costs of electricity and gas for the consumers in the next budget. However, reforms in the tax and energy sectors have been outlined in the list of top priorities. According to sources, the government will have to reduce subsidies and take Rs340bn from consumers in the energy sector only.
It has been agreed that the power sector regulator, the National Electric Power Regulatory Authority (NEPRA), would be made autonomous and the government interference to take popular decisions would be minimised.
Moreover, the State Bank of Pakistan (SBP) would be able to regulate exchange rates independently, and the rate of the US dollar would be set without any pressure from the government. This implies that the government is expected to allow a significant rupee depreciation and a key interest rate hike in 2019.
An official of the Finance Ministry confirmed that the financing gap for the next fiscal year had been projected at $10-$11bn. He added that the demand of the IMF for an increase in the policy rate by 100-200 basis points was also agreed upon. The policy rate is the interest rate announced by the SBP and is seen as a monetary policy instrument to regulate the availability, cost and use of money and credit.
Various measures aimed to build up foreign exchange reserves too have been agreed upon.
The official added that the IMF team pitched the GDP growth and current account deficit (CAD) on the lower side during the negotiations, however, a middle path was agreed upon.
The IMF was earlier stressing that CAD should be in the range of $4-$6bn, said the official. However, it was agreed that the deficit would be $8bn for the next fiscal year under the IMF programme.
The IMF team asked the government to take additional tax measures in the upcoming budget to make massive fiscal adjustments for moving towards surplus primary balance. The budget-making process would start only after the staff-level agreement is finalised.
A major challenge for the government is how to curtail budget deficit which is possible only through curtailing expenditures and enhancing revenues, but the country has a limited space vis-a-vis reducing expenditures.
“The IMF opposes reducing development budget, therefore, it too cannot be curtailed beyond a certain point. Hence the only option was to increase revenues,” the official added.
The budget deficit in the last fiscal year (2017-18) was 6.6 per cent of the GDP and experts have predicted that it would be more than 7 per cent in the current fiscal (2018-19). Former finance minister Dr Hafeez Pasha recently said that budget deficit by June 30 would be around 7.6 per cent of the GDP.
In April, then Finance Minister Asad Umar announced that the government would roll out a new tax amnesty scheme ahead of the budget for individuals to declare their local and foreign assets.
According to the draft of the scheme, a tax rate of 5 per cent will be applied on individuals declaring their undeclared assets by June 30, 2019; 10pc on individuals declaring assets by September 30, 2019; while 20pc tax will be applied on individuals declaring assets by December 31, 2019.
The draft also proposes amnesty for the real estate sector. It proposes 1pc tax on individuals declaring their property by June 30, 2019; 2pc on individuals declaring property by September 30, 2019; and 4pc tax on individuals declaring property by December 31, 2019.
The draft contains a proposal to charge 3pc tax on previously undeclared sales, while the scheme will also apply on benami bank accounts.
The premier will also discuss the upcoming amnesty scheme with officials that is expected to rope in billions in revenue. The government hopes to bring the scheme into effect through a presidential ordinance.