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Pakistan accepts tough IMF conditions for $6.6 billion bailout package

06 September, 2013

ISLAMABAD: Pakistan has agreed to the conditions of the IMF, including rationalisation of gas tariff and introduction of a new gas levy to generate revenues of Rs124 billion by December end this year for obtaining $6.6 billion under 36-month Extended Fund Facility (EFF).

The government has also given a commitment to the IMF for raising the electricity tariff for domestic consumers by 30 percent from October 1, 2013, in order to implement its plan for phasing out the subsidies but the tariff will not increase for users of up to 200 units.

Under the Memorandum on Economic and Financial Policies (MEFP) agreed by Pakistani authorities with the IMF, the government agreed that the average exchange standing at Rs110 till June end, 2014.

Islamabad will privatise 65 Public Sector Enterprises (PSEs) including 26 percent share of national flag carrier PIA as well as introducing amendments to strengthen legal framework in cases of electricity theft.

To implement structural benchmarks, Pakistan has agreed to develop and approve PSEs reform strategy for 30 firms out of the 65 PSEs approved for privatisation by the Council of Common Interest (CCI) by September end, 2013.

The government will hire a professional audit firm to conduct technical and financial audit of the system to identify the stock and flow of payables at all levels of the energy sector (including Power Sector Holding Company Limited) by November end, 2013, make Central Power Purchasing Agency (CPPA) operational by separating it from the National Transmission and Dispatch Company (NTDC), hire key staff, issue CPPA rules and guidelines, initiate payment and settlement system and enact the amendments to the Pakistan Penal Code 1860 and Code of Criminal Procedures for moving against electricity theft in strict manner.

The government, according to MEFP, will announce gas rationalisation plan and introduce the new gas levy by December end, 2013, under structural benchmark. The current level of unaccounted for gas losses (UFG) is on average 11 percent due to commercial and technical losses.

Under the energy plan, the government has developed a three-year plan for phasing out the Tariff Differential Subsidies (TDS), notifying the tariff determined by Nepra, phasing out immediately the subsidy on industrial consumers and moving to minimum determined tariff on commercial, bulk and AJ&K consumers' electricity consumption through increasing the weighted average notified tariffs by 50 percent; and announcing increase of tariff for domestic consumers by 30 percent from October 1, 2013.

The government is also drafting a new Electricity Act to modernise governance of the sector. The Act will establish investigation systems and a fast-track judicial mechanism to improve enforcement. The government will place the Pakistan Energy Efficiency and Conservation Act before the Parliament.

To reduce circular debt accumulation, period for Nepra's determination of the base tariff will be reduced from eight-10 months to 90 days by the next determination cycle. Specifically, for FY2013, Nepra will issue determined tariff by October end, 2013. The government will notify new determined tariffs within 15 days, and over-time determination and notification of tariffs will be consolidated with Nepra.

The restructuring plan for PIA envisaged stripping the non-viable components of PIA under a separate public sector enterprise PIA2 by December end, 2013. The government, the MEFP states, will service the guaranteed past loans of PIA2, apply a voluntary "handshake" plan for the excess work force and liquidate by June end, 2014.

It noted that Pakistan faces a financing gap of $15 billion through June 2016, almost half of which will be filled by the extended arrangement under the EFF and roughly $3.5 billion will be netted through improvement in balance of payment.

In addition, Pakistan expects additional external financing assurances from the World Bank ($1.5 billion), Asian Development Bank ($1.6 billion), the United Kingdom ($0.5 billion), the United States ($0.4 billion), and others ($1.5 billion).

To address declining reserves and a projected rebound in inflation, the MEFP states that the SBP will adjust monetary and exchange rate policies.Inflation reduction will not be a primary focus of the first year of the program so as to mitigate the impact of the envisaged fiscal contraction, the MEFP made it clear.

In the Letter of Intent (LoI) signed by Finance Minister Ishaq Dar and Governor SBP Yaseen Anwar, which was forwarded to the IMF for making formal request for fresh loans, states that over the past several years, Pakistan has faced considerable challenges that have adversely affected the economy's performance. "These problems have been exacerbated by poor macroeconomic management during the previous government and by long-standing structural problems which have not been addressed," the LoI further states.

Growth will initially remain modest (about 2.5-3 percent) in 2013-14 due to the necessary fiscal consolidation, but will then strengthen around 4.5-5 percent.

Inflation will initially increase, due in part to some weakening of the rupee as reserves are rebuilt. However, monetary policy will likely be tightened in later years to help bring inflation down to the 6-7 percent range by the end of the program period.

Fiscal consolidation will bring the fiscal deficit from the baseline of 8.8 percent of GDP (excluding grants) in FY2012-13 to around 3.5 percent in FY2016-17.

Subsequently, with growth strengthening and private investment rising because of structural reforms, the current account deficit is projected to widen to around two percent of GDP, which will be fully financed by capital inflows. Over the course of the programme, the SBP's foreign exchange reserves will improve to $18 billion equivalent to over three months of imports of goods and services.

Tax administration reforms will gradually deliver further improvements in revenue collectionsThe income tax initiative will be complemented with initiatives to enhance revenue administration for sales, excises and customs, to be developed and launched by December end, 2013 (structural benchmark).

These efforts will be further assisted by increasing the number of risk-based tax audits to 4.2 percent of declarations (from 2.2 percent).The government will finalise a comprehensive plan to separate existing Statutory Regulatory Orders (SROs) either by eliminating those granting exemptions or concessions through SROs by December end, 2013.

The government has already stopped issuing any new tax concessions or exemptions (including customs tariffs) through SROs except by an Act of Parliament, and will also approve by 2015 a legislation to permanently prohibit the practice.

"We will also quantify the remaining tax expenditure and publish a detailed list in the budget in future years. These steps will facilitate gradually moving the GST to a full-fledged integrated modern indirect tax system with few exemptions and to an integrated income tax by 2016-17," said an official.

Provincial governments will play an important role in the fiscal reform process. Under the NFC award, the bulk of the additional revenue generated by the programme will be distributed among provinces, said the sources.

An agreement has been reached at the level of the Council of Common Interest to assure that it is used for deficit reduction or saved, they added. In addition, the government has tightened the balanced-budget requirement on provinces, and provided incentives for them to maintain surpluses (prior action). Before the end of FY 2013-14, negotiations will begin on a new NFC award and the new agreement will adjust the terms of fiscal decentralisation to be consistent with the imperatives of macroeconomic.


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