ISLAMABAD: Pledging to completely eliminate subsidies on electricity by August this year, Pakistan has sought at least two waivers from the International Monetary Fund for slippages in important macroeconomic targets in the first nine months of the current fiscal year and requested modifications in future programme milestones.
“We request waivers of non-observance for the end-March quantitative performance criteria on the overall budget deficit (excluding grants) and net government borrowing from the State Bank,” says a letter of intent (LoI) signed by Adviser to the Prime Minister on Finance Dr Abdul Hafeez Shaikh and SBP Governor Syed Ali Raza.
The LoI and 4th Supplementary Memorandum on Economic and Financial Policies (S-MEFP) for 2009-10, available with Dawn, were finalised after one of the most crucial consultations on $11.3 billion Standby Arrangement (SBA) with the visiting IMF delegation.
The IMF’s executive board is expected to meet on May 3 to consider Pakistan’s request for waiver and release of SDR766.7 million ($1.2 billion).
The two sides agreed that reaching agreement on the 2010-11 budget and further progress on the July 1 introduction of VAT would be key issues for the 5th review under the IMF programme.
Pakistan has so far received $6.4 billion under the programme.
The LoI said: “We also request (i) a modification of the end-June 2010 performance criteria for the budget deficit to increase the cumulative end-quarter ceilings by Rs22 billion (0.15 per cent of GDP) in order to allow space for urgent security outlays and avoid undue cuts in other priority spending, and (ii) a modification of the end-June 2010 performance criterion (raising the floor) for net foreign assets of the SBP by $300 million, taking into account our strengthened external position.”
The IMF has been informed that final data for the third quarter (Jan-March 2010) are not yet available. “Preliminary information indicates that we have missed the end-March quantitative performance criterion on the fiscal deficit by 0.4 per cent of GDP on account of lower revenue, higher security-related expenditure and shortfalls in grant disbursements for internally-displaced persons and Tokyo-related multilateral assistance,” the letter said.
The government has also conceded that it has missed the end-March target on net government borrowing from the central bank by 0.2 per cent because of a delay in the disbursement of external financing to the budget. However, the government has pledged to strengthen its liquidity management, including through “use of pre-financing”, to reduce recourse to the central bank overdraft and to ensure that it meets end-quarter targets for net borrowing from the SBP.
Pakistani authorities and the IMF mission have agreed that generally the stabilisation programme is on track, but faces challenges because of slower than planned electricity reforms, delays in disbursements of pledged lenders’ support, revenue shortfalls and military operations, complicating the fiscal management. Inflation has also picked up beyond targets.
The two sides agreed that fiscal deficit for the entire fiscal year would be adjusted to 5.1 per cent of GDP (instead of original 4.9 per cent) and would be met through higher than projected privatisation inflows which would more than compensate for foreign inflows. They conceded for the first time that both tax and non-tax revenues might be lower than targeted.
The government has said that review of the VAT law, including zero-rating and exemptions, will be completed by the finance and revenue committees of parliament by the end of April this year. Federal and provincial VAT acts will be completed by May 15. As a preparatory step towards full implementation of VAT by July 1, regulations will be issued two to three weeks after enactment of the federal VAT act.
The government has also given an undertaking to complete the transition to a single treasury account by June 2010. The government said it was collecting information on commercial bank deposits of federal entities and would have all non-own sources, non-security related cash balances transferred to the federal consolidated fund by the end of June and associated accounts closed.
“We will ensure that these transfers do not affect liquidity of the banking system. We will ensure that a minimum interest rate is received on all federal government deposits,” the S-MEFP said.
The government has assured the IMF that electricity tariff will be increased in stages to ensure that it reached cost recovery in August. For this, discussions with the World Bank and the Asian Development Bank will be completed on framework for dealing with cost pressures and supply shortages in the energy sector before the next programme review in June.
Likewise, the federal adjustor will clear payment arrears (inter-corporate circular debt) of government agencies and departments more efficiently by making at-source deductions from the budget.
Source Dawn News
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