Pakistan and the International Monetary Fund (IMF) are scheduled to recommence talks pertaining to the resumption of a $6 billion program which was fell off track previously, in the coming week. The government officials and IMF will try to reach an agreement on the issue of increasing the electricity prices.
The five-day round will begin from Oct 4 with the IMF team joining virtually from Doha, Qatar. According to sources, Finance Minister Shaukat Tarin is trying to have a face-to-face meeting towards the end of talks in Washington, but the IMF officials have proposed virtual meetings for October 13 till 15.
As per the sources, the finance ministry has shown an inclination towards accepting the demands put forth by IMF because the four-month deadlock in the talks was causing a lot of difficulties for the government which is relying heavily on foreign loans.
The minister held a meeting with the resident representative Teresa Daban two weeks earlier as a sign of the government’s willingness to cooperate with the financial body. However, the real challenge will come when the policy-level talks address the issues of increasing electricity prices, the central bank’s autonomy, and the reduction in the circular debt.
According to sources, IMF’s local staff has also shown willingness to show some leniency to the government for the resumption of the program provided that the institute is also provided some face saving.
In July 2019, Pakistan and the IMF had signed an agreement regarding the $6 billion but the deal had derailed at the beginning of 2020, resumed briefly in March of 2021 but went off track again in June.
One of the most important questions which will be determined in the next two weeks is if Pakistan wants to exit from the IMF program in September 2022 as was originally decided or does it need an extension to receive the remaining $4 billion loan.
At the moment the government seems to want the IMF to advance the disbursement calendar and increase the size of the loan tranches. So far Pakistan has budgeted more than Rs400 billion or $3.1 billion from the financial institution within the current fiscal year and its payment is only possible with the completion of the remaining reviews.
Sources say that there has been some back paddling on the state-owned enterprises law from Pakistan, which is creating confusion in the IMF circles.
IMF clearly conveyed that Pakistan would have to raise its power tariffs, as the staff had already assured the management and the IMF board and could not budge from its position.
In June this year, Tarin addressed a parliamentary committee and said that there were two outstanding issues of introducing Rs150 billion worth of personal income tax and Rs4.95 per unit increase in electricity prices. He said the IMF had demanded that Pakistan should raise the price by Rs1.39 per unit in June followed by an increase of Rs3.56 per unit in July.
According to the energy ministry, the government has already increased the average power tariff by over 40% or Rs4.72 per unit to Rs16.44 in the last three years. Tarin said on Friday that the government would put forth a number of alternative proposals before the IMF in order to avoid the reliance on increased tariff only.
Despite the hike in power prices, the last three years have seen a surge of more than double the amount in the circular debt from the power sector which has reached Rs2.324 trillion as of July 31, 2021.
An increase of 373% in the current account deficit during July-August this year in comparison to the same period last year is another point of concern while evaluating Pakistan’s gross financing needs.
Another demand by the IMF is the tightening of the fiscal and monetary policies in order to reverse the increase in public debt and external sector stability.
The finance minister had earlier wanted to achieve a growth rate of more than 6% however, the government wants to avoid the situation from 2017-18 this time and is considering a sustainable economic growth rate instead.
