Pakistan is scheduled to be meeting with the International Monetary Fund (IMF) on October 4 to discuss issues pertaining to the electricity tariffs and the State Bank of Pakistan (SBP) Amendment Bill 2021.
The SBP Amendment Act 2021 seeks to define the objectives of the institution, enhance its institutional and functional autonomy in order to achieve the objectives and solidify its accountability in attaining its objectives. The proposed amendments are taking into account the ground realities in Pakistan.
The high stake talks between IMF and Pakistan, if successful, will lead to the immediate disbursements of $1 billion each by both the IMF and World Bank as well as another $1.6 billion by the Asian Development Bank over the course of the current fiscal year.
The IMF has appointed a Spanish national, Esther Perez Ruiz as the new head for Pakistan ahead of the talks, replacing the previous country head Teresa Daban who is also a Spanish national and will complete her extended term by November.
Pakistan’s Finance Minister, Shaukat Tarin announced that he will be visiting Washington to hold talks with the senior management at IMF from October 11 to 17 apart from the annual meetings being carried out. A much-needed detailed review of Pakistan’s economic health under Article-IV is also on the agenda.
Vice Chancellor of Pakistan Institute of Development Economics and a former official of the IMF, Dr Nadeem ul Haque said, that despite the changing global scenario, the IMF will accept the government’s program and the review talks will be successful.
Both parties have agreed to hold Article-IV discussions. Previously in 2017, Article-IV review had been heavily focused on Pakistan’s economic and commercial ties with China in addition to gauging the future stability of the economy. Successfully completing Article-IV reviews will be a top priority as it is critical in order to allow for borrowing from foreign capital markets and multilateral lenders in the future. A positive report will expedite the release of the $1 billion loan tranche under the $6 billion program that as per original schedule will expire in September next year.
The 6th review earlier this year had led to differences between the IMF and Pakistan, pertaining to raising electricity prices and levying more taxes. According to our sources, the IMF has already communicated that in order to move forward, Pakistan would have to raise power tariffs. Previously, the IMF Board meeting had been postponed due to Islamabad’s refusal to agree to the harsh conditions.
The two primary issues are the introduction of Rs 150 billion worth of personal income tax and the increase in power prices of Rs4.95 per unit, Tarin explained during a parliamentary committee in June this year. He further clarified that the demands put forward by IMF comprise of the government increasing RS.1.39 price per unit in June and then Rs. 3.56 per unit in July.
Additional Secretary Power, Waseem Mukhtar said that the PTI government had raised the average power tariff by more than 40% which took it from Rs. 4.72 to Rs.16.44 during the span of the last three years. However, the IMF is demanding to further implement the remaining increase in order to make the power sector financially viable.
Mukhtar informed the power committee that an increase of Rs3.34 per unit in base tariff, had been determined by NEPRA, out of which Rs1.95 per unit was passed on to the consumers in February this year but Rs1.39 per unit is still pending.
It is important to note that despite increasing electricity prices in the last three years, the circular debt of the power sector has reached to Rs2.324 trillion as of July 31, 2021. This jump is more than double in comparison to the figures from 2018.
During this fiscal year, Pakistan has budgeted over Rs400 billion or $3.1 billion from the IMF. Only the successful completion of the reviews can lead to the disbursement of these loans.
As for the approval of the SBP Amendment Bill 2021 from the Parliament, at the expense of major criticism, the federal cabinet agreed to give sweeping powers to the central bank for the last tranche of $500 million. This shift in powers allows the SBP to exercise absolute autonomy, and frees it from the responsibility of supporting economic growth and providing budgetary loans to revive the stalled program. Furthermore, the federal government must consult the SBP while passing legislation.
