Pakistan has assured the International Monetary Fund (IMF) for increasing power and gas tariffs and imposing new revenue generation measures from next year (2015) for receiving much-needed $1.1 billion under extended fund facility.
Pakistan has given written assurance to the IMF in Letter of Intent and Memorandum of Economic and Financial Policies dually signed by Finance Minister Ishaq Dar and Governor State Bank of Pakistan Ashraf Mahmmod Wathra.
The IMF's Executive Board on December 17 completed the fourth and fifth reviews of Pakistan's economic performance under a three-year programme supported by an Extended Fund Facility (EFF). Pakistan received $1.1 billion on Monday. However, Pakistan has made many commitments with the Fund for the much needed amount.
Pakistan informed the Fund that it had began implementing electricity price adjustments from October 1, 2014. This adjustment implied an effective increase of 2.5 per cent in electricity tariffs. The government is committed to make further adjustments in January and February to recover the remaining gap to reduce electricity subsidies to 0.7 percent of GDP (Rs 196 billion) for FY 2014/15, and limit the accumulation of circular debt. Due to political difficulties, the targeted 7 percent electricity price increase was not implemented on July 1.
Meanwhile, the government also gave commitment notifying new gas prices by January 2015, which were postponed from August due to the political protests. Furthermore, in the event that GIDC (Gas Infrastructure Development Cess) legal concerns are not resolved by January 2015, the government will put in place specific compensatory measures on the revenue side yielding at least 0.3 percent of GDP (Rs 84 billion).
The government would also maintain in reserve some 0.2 percent of GDP (Rs 56 billion) in extraordinary SBP profits from the privatization of public banks. The government will also continue to restrain expenditures in the first nine months of the fiscal year as a cushion against any revenue shortfall.
"We now expect that GDP growth will reach about 4.3 per cent in FY 2014/15. Though the government retains its goal of achieving a growth of 5.1 per cent, risks to growth are tilted to the downside due to the recent floods. But initial assessments suggest that the macroeconomic impact will be small", Pakistan said in Memorandum of Economic and Financial Policies.
"The envisaged fiscal adjustment in the current year is underpinned by tax revenue measures and further rationalization of energy subsidies. However, the delays in implementing the electricity tariff adjustment and the court order against the Gas Infrastructure Development Cess (GIDC) have created risks to the fiscal outlook. To address these concerns, we have developed a new electricity tariff strategy, and in the event that GIDC legal concerns are not resolved by January 2015 we stand ready to take compensatory measures as agreed, including adjustment on the revenue side, to reach our fiscal targets", the government stated in Memorandum of Economic and Financial Policies.
Regarding broadening of the tax base of the country, the government said, "We already issued 140,000 first notices through end-September 2014, and we are ahead of schedule on our plan for 300,000 notices, out of which 20,000 individuals have so far registered and filed returns". With enhanced revenue collection and a broader tax base, we hope to avoid the need for further increases in GST or income tax rates while achieving our overall deficit targets, it added.
The FBR has identified a list of serious tax offenses. In order to ensure that serious tax crimes are predicate offences to money laundering, we will enact amendments to the relevant tax laws and submit amendments to the AMLA to Parliament by end-December 2014 (structural benchmark is proposed to be rescheduled).
The Fund was informed that stock of arrears at the PHCL (Power Sector Holding Company Limited) in the syndicated term credit finance (STCF) facility stood at around Rs 270 billion at end-September 2014. We have levied a surcharge to service part of the facility, and the tariff adjustments will be sufficient to fully service the remainder of the debt, the government added.
Demonstrations in Islamabad hampered the government's operations in August-September. Security conditions have also remained difficult due to ongoing military operations against the Pakistani Taliban, which have created a large number of internally displaced persons. Recent flooding heightened pressure on the government to relax adjustment policies. Judicial challenges to privatization, tax, and energy tariff measures have also slowed reform momentum. However, the authorities have recommitted to achieving their program targets, and have begun to address policy shortfalls.
Pakistan has also proposed five new structural benchmarks against which to measure progress under the program. The government through draft legislation will permanently prohibit the practice of issuing SROs that grants exemptions and loopholes by end-March 2015. The government will announce a time-bound plan to improve the SBP's interest rate corridor by setting the policy rate between the floor and ceiling rates of the corridor by end-February 2015.
It will improve the internal operations of the SBP by the following measures: (i) the Investment Committee of the SBP Board will begin regular (at least four times per year) oversight and approval of the reserves management strategy and risk practices; and (ii) the authorities will provide confirmation that in line with standard IMF safeguard procedures, the Internal Audit Department will conduct reviews of the program monetary data reported to the IMF, within two months after each test date, for accuracy and compliance with the TMU and share the findings with IMF staff by end-February 2015
Under the fourth new benchmark, the government will reorganize the Debt Policy Coordination Office as a middle office responsible for updating the MTDS and monitoring its implementation, coordinating the credit risk management functions by end-March 2015, conduct a review to reduce the end-March 2015 number of existing processes and forms for paying sales and income taxes.
The Structural Benchmark on central bank independence legislation has been delayed to end-June 2015. The authorities submitted amendments to the SBP Act to the Assembly, but the legislation is still pending in committee.
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