• Pakistan-IMF to start virtual talks today.
• Staff-level agreement with IMF expected this week.
• Islamabad facing difficulties in securing external finances.

ISLAMABAD: The federal cabinet on Sunday approved a plan to increase the power tariff and end subsidies ahead of virtual talks with the International Monetary Fund (IMF) starting today on the Memorandum of Economic and Financial Policies (MEFP).

The cabinet also okayed a revised circular debt management plan through circulation in this regard, The News reported Monday.

A team of the Washington-based lender concluded policy-level talks last week but the two sides could not strike a deal due to differences over fiscal measures that needed to be taken before the staff-level agreement. 

According to the plan okayed by the cabinet yesterday, to be presented to the IMF, the government will jack up power prices by Rs7.91 per unit in four quarterly adjustments — February-March 2023, March-May 2023, June-August and September-November.

Under the plan, the government will charge Rs3.21 per unit from now onwards, Rs0.69 from March-May and increase it again by Rs1.64 per unit from June onwards to August of 2023. From September-November, the government will hike the power tariff by Rs1.98 per unit.

The consumer base tariff will be increased from Rs15.28 per unit in June 2022 to Rs23.39 per unit till June 2023.

The government also approved to end electricity subsidy of Rs65 billion given to exporters, with effect from March 2023.

The government will be able to get Rs51 billion from the withdrawal of subsidy on electricity for exporters while Rs14 billion will be collected by ending the subsidy on electricity under the Kissan Package from March 2023. For the export sector, the Rs12.13 per unit subsidy on electricity will be taken back.

About Rs250 billion will also be recovered from electricity consumers by June 2023. Under the plan, a surcharge of Rs3.39 per unit will be levied, sources said, according to the publication.

Rs73 billion will be obtained from the increase in quarterly adjustments till June. In the quarterly adjustment, electricity will become more expensive by up to Rs4.46 this month, the sources said.

Virtual meeting

Meanwhile, the IMF has shared its menu on the table with the Pakistani authorities but gaps still exist in finalising the exact taxation measures, increase in base tariff for electricity and securing confirmation on gross external financing.

The menu, suggested in the MEFP, has remained under discussion in the last two days among the policymakers in Islamabad.

The Pakistani side will talk to the IMF side through a virtual meeting today to finalise specific taxation measures, resolving the lingering controversy over power base tariff and incorporating gross external financing requirements and Net International Reserves (NIR) target for the end of June 2023.

It is not yet known how much time both sides will take to resolve these lingering issues.

“The IMF shared its menu and virtual discussions will kick-start Monday evening to finalise details on relevant important fronts. Once all gaps are filled, then the staff level agreement will be struck,” top official sources confirmed while talking to The News on Sunday.

Now everything is on the menu table and open to discussion for finalising measures. The question here is what the authorities had done in the last 10 days of talks with the IMF review mission when it stayed here. It seems nothing could be concluded.

Flood levy was a priority of the government but the IMF was opposing all those measures which were on-off. The IMF insists upon “permanent revenue measures”, including the raising of GST from 17 to 18%, slapping GST on POL products, and jacking up petroleum levy on energy.

Tax Laws Amendment Ordinance 2023 is expected to be promulgated within this week probably from February 15, in order to fetch an additional tax of Rs170 billion in the remaining four and a half months period of the current fiscal year.

The increase in 1% GST rate from 17 to 18% will fetch Rs60 to Rs65 billion, raising withholding tax on banking transactions to Rs45 billion, hiking Federal Excise Duty (FED) on sugary drinks (it’s still under consideration), hiking FED on locally manufactured and imported vehicles and increasing FED on cigarettes, etc.

Some proposals triggered a heated debate between the two sides. At one stage, a special assistant to the prime minister had to play a role to pacify the sentimental environment, as one participant from the Pakistani side argued before the IMF mission last week that why the Fund mission was asking for all kinds of regressive taxations measures amid rising inflationary pressures.

In the power sector, the IMF wants a hike in the base tariff, as the government approved a revised CDMP for bringing down the baseline scenario to reduce the piling up of debt.

The revised CDMP did not mention anything on increase in base tariff, as the Pakistani authorities argued that they had done it last August 2022.

However, the IMF does not agree to it and asks for an increase in base tariff by Rs4.06 per unit. On gross external financing and the NIR target, a senior official of the State Bank of Pakistan told The News that the NIR target for the end of June 2023 was yet to be agreed upon with the IMF.

External financing

Meanwhile, official sources told the newspaper that the most complex issue being confronted by the economic managers was ensuring to secure external financing needs so that the foreign exchange reserves should be built up from their existing level of $2.9 billion by June 30, 2023.

During the last IMF review done in August/September 2022, the foreign exchange reserves held by the SBP were fixed at $16.2 billion for the end of June 2023.

However, it seemed impossible to jack it up to such a level. This is the most sticking point, as Pakistan is anxiously waiting for the pledges to be materialised by the Kingdom of Saudi Arabia, the UAE, Qatar, and China.

These countries say they will support Pakistan if Islamabad is under the IMF programme while the Fund says that it will only enter into a program once these countries assure assistance to Pakistan.

It is not known how this issue will be resolved in the coming few days and weeks.