A Boiling Point

The country’s continuing political chaos is casting a shadow on the staff-level talks between the International Monetary Fund (IMF) and the government, which is likely to impact their outcome expected in the first week of April.

According to the sources, the IMF has expressed reservations on the Prime Minister’s relief package and the tax amnesty scheme for the industrial sector. This might delay the release of the next loan tranche, they said.

With no possibility of concluding the staff-level agreement until the fate of the no-confidence move gets settled, Pakistan and the IMF will continue to hold talks for an indefinite period to build consensus on several thorny issues.

Sources in the IMF said the two sides will continue to discuss the recent developments. The Pakistani authorities and the IMF will continue to discuss recent developments and other measures to promote macroeconomic stability, they said.

Both the IMF and the Pakistan authorities confirmed that the talks are in progress but no timeframe has been given for the conclusion of the 7th review owing to the political uncertainty.

So far, the two sides have not been able to develop a consensus on a memorandum of economic and financial policy (MEFP) framework under the IMF programme.

Spokesman for the Ministry of Finance, Muzzamil Aslam, said that the government has achieved the majority of the targets given by the IMF and with the surplus revenue of Rs268 billion, it can easily achieve the annual targets. “The surplus revenue and reduction in expenditures are enough to bear this relief package,” he said.

Regarding the tax amnesty scheme for the industrial sector, he said the government aims to promote industrialisation, which has remained stagnant for a long time, and resultantly this increased unemployment in the country.

Many exporters, especially from the textile sector, kept their money abroad and through this scheme they will have an incentive to bring it back and invest in the expansion of their existing manufacturing units or will set up new industries.

Regarding the status of talks, Muzzamil said the IMF, in principle, is not against this package but it wants targeted subsidies, which are only meant for the poor and the low-income groups.

The IMF has asked the government to develop a mechanism through which relief should only be given to the deserving people. They want a system on all the petrol pumps through which motorcyclists and vehicles used in public transport should get the petrol on subsidised rates, he said. “Now we’re looking for ways and means to find out if this system is implementable or not.”

Senior Economist Ali Salman said that the IMF objections on both issues are justified. “The government to some extent can defend the relief package because the rupee depreciation and the massive hike in the energy prices has badly hit the masses,” he said.

“Because of inflation, the PTI government is facing severe criticism from the opposition and it is losing its popularity. To salvage a reputation, it is deemed necessary (to give relief), but the government should not make it a habit because eventually the common man has to bear the cost of it.”

This is the third amnesty scheme offered by the PTI government, while in its last year, the previous PML-N government had also announced an amnesty scheme.

“Even if we keep the IMF objections aside, I want to know that by introducing these amnesty schemes what signals we are sending to the industries, companies and individuals who are fully paying their taxes. They’re rightly discouraged by these schemes because it encourages tax evasion and money laundering” Salman added.

A senior official in the Ministry of Finance said the scheme did not require waiver because it was not part of the performance criteria, but of the missed structural benchmarks, which are assessed in the context of the overall programme performance.

The major challenge for striking a deal on the memorandum of economic and financial policy was to evolve a consensus on the external front projections in the wake of increasing current account deficit because the IMF’s predictions proved wrong.

The IMF had projected that the current account deficit would be $12.9 billion for the current fiscal year but it had already touched $11.6 billion in the first seven months (July-January) period. If the current account deficit target was revised upward in the range of $18 to $20 billion for the entire fiscal year 2021/22, then the question arises from where the external financing of $5-$7 billion would be bridged to avoid depletion of the foreign exchange reserves.

The rising prices of petroleum products and commodities in the international market multiplied the woes of the economic managers but keeping in view increased vulnerabilities on the economic and political fronts, they did not have much space to manoeuvre through policy prescriptions.

According to the senior official of the Ministry of Finance, the prime minister’s relief package of Rs5/unit on electricity charges and Rs10/litre on fuel prices may  cost in the range of Rs275 to Rs300 billion to the national exchequer.

Pakistan Kuwait Investment Company Head of Research Samiullah Tariq said that the government is giving a subsidy of around Rs23/litre on petroleum products.

“The ex-refinery price of petrol is Rs160/litre and we add transportation cost and the oil marketing companies and dealers margin the actual cost comes around Rs173/litre, whereas it is selling the same at the rate of Rs150/litre.

The amnesty scheme for the industrial sector is unlikely to get any positive response because the State Bank of Pakistan has already offered subsidised markup schemes for the manufacturing sector and received positive response.

“After the amnesty scheme for the real estate sector some trade and industrial associations demanded the same amnesty as well and the government announced it just to appease them,” he said.

For Sami, the IMF will soon realise that this scheme is just a formality and nothing more. The stockbrokers have asked the government to provide tax incentives to encourage investment in the stock market.

Recently, Pakistan Stock Exchange (PSX) Managing Director Farrukh Khan has also criticised the government for extending disproportionately high incentives to the real estate and construction sectors, while dis-incentivising the investments in the capital market. The stock investors only demand a level-playing field at little to no cost to the national exchequer, he said.

“There’s little KYC [know-your-customer] for the national savings and real estate sector. But investors in the stock market have to answer for the wealth of their seven generations,” Khan said.

Moreover, a delegation of the Pakistan Stockbrokers Association (PSBA) has also met Finance Minister Shaukat Tarin and demanded reduction in the capital gains tax of 12.5 per cent, which according to them, is discouraging investments in the capital market.