Pakistan to share details of federal budget with IMF board

Tariq Butt

Pakistan will share the details of the federal budget with the International Monetary Fund (IMF) board, which is scheduled to meet on July 3, after its passage in the National Assembly.

The final budget measures along with a report on compliance with all prior actions will be key elements in the board’s decision to grant Pakistan’s request for accession to a $6 billion bailout facility. The final, approved version of the budget is expected to be transmitted to the IMF by Monday, an official said.

“Completion of all prior actions has paved the way for the board meeting on third of July. Sharing of budget approved by the parliament was one of the prior actions,” said the official.

He said the budget approval was the final thing for Pakistan to deliver before the IMF meeting. “The latest exchange rate, SBP policy rate, electricity and gas rates and budget approval were the key prior actions.”

Other officials said the Memorandum of Economic and Financial Policies (MEFP) had already been transmitted to the IMF in line with the staff level agreement reached on May 12. Pakistan will remain committed throughout the 39-month programme period to what the State Bank calls a “market determined exchange rate”.

However, if at any stage the central bank comes across reasonable evidence to suggest artificial exchange rate manipulation by outside factors, it will be free to intervene, a senior official said.

Also, the State Bank of Pakistan (SBP) will maintain the current gap between its policy rate and the rate of inflation all along. At no time, and in any circumstances the difference between policy rate and inflation would not be allowed to fall below 1.5pc. That would mean the policy rate will stay 1.5% higher than inflation even in extreme circumstances. At present, the core inflation stands at about 7.2%, general rate of inflation measured by consumer price index at 9.1% and policy rate at 12.25pc. State Bank sources tell Dawn that usual practice is to look at projected inflation rather than today’s inflation rate when deciding the policy rate. As per budget documents, projected inflation all through next fiscal year can be as high as 13pc.

Officials said the revenue target of Rs5.550 trillion announced in the budget was not as sacrosanct this time as it used to be under previous programmes as long as the Federal Board of Revenue clearly demonstrates with its genuine efforts and actions that tax base was actually expanding, tax exemptions declining and new taxpayers coming in. “The tax target could be relaxed.”

They said the increase in energy prices - both natural gas (about 25pc) and electricity (about 12%) - have been approved by the relevant forums and would become legally effective on July 1. Going forward, the government will remain committed to make further tariff adjustments as and when it falls short of meeting its recovery targets.

Pakistan reached a staff level agreement with the IMF on May 12 under which authorities announced over Rs1.4trillion worth of revenue adjustments through federal budget 2019-20. The IMF announced at the time that the “forthcoming budget for FY2019-20 is a first critical step in the authorities’ fiscal strategy” that will aim for a primary deficit of 0.6pc of GDP supported by tax policy revenue mobilization measures to eliminate exemptions, curtail special treatments and improve tax administration. The primary deficit is what the current fund program is focused on, it measures the difference between taxes and expenditures after taking out debt service payments.

The International Monetary Fund has voiced opposition to the idea of extending the deadline for the tax amnesty scheme, saying doing so could hurt Pakistan’s case at its board meeting scheduled to take up Islamabad’s request for a $6 billion bailout package on July 3. “The IMF is not in favour of tax amnesties,” IMF’s country representative to Pakistan Teresa Daban Sanchez said.

Commenting on Prime Minister Imran Khan’s indication to extend the amnesty scheme and come up with a plan, she said cross country experience shows that tax amnesties have usually huge costs, such as undermining taxpayers’ morale and sense of fairness, that more than offset potential short-term gains.

She thought that the extension will certainly not help Pakistan at the IMF board meeting because it is inconsistent with the whole package.

Pakistan is set to enter its 13th IMF programme days after the board meeting, which will decide whether or not to approve the staff level agreement that has already been signed between the government and the IMF mission. “I hope they are not going to do it,” Sanchez said, talking of the possibility of an extension in the amnesty scheme. “It’s not going to work.” The amnesty scheme was discussed during the staff level negotiations, she said, “and even though we were not happy about it at the time, we said ok, because we saw it as a targeted attempt to facilitate the implementation of the Benami law”.