No Option But IMF
The IMF has thrown the gauntlet and it appears that Pakistan will have to give in. Pakistan is actually at the verge of sovereign default and a rather tough IMF has given the country a clear roadmap on external financing and domestic budgetary steps coupled with substantial energy cost adjustments.
This a big ask that made the Pakistani economic policy makers to waver for a good many months but now it appears that the financial situation has gone past beyond any resolution that may provide some space. The incumbent government was desperate to save some of its political capital that has already been at the rock bottom but it was compelled to concede to the conditionalities of the IMF.
This situation implied taking multiple steps that may further burden the people of the country and may require stringent financial discipline as well bringing about structural changes in the economic process of the country. These steps are taken amidst global credit rating agencies raising apprehensions that a delay in finalising the staff-level agreement with the IMF could increase the country’s external sector risks.
The rating agency Fitch downgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating to CCC-negative from CCC-positive. It is the second time in less than five months that Fitch has lowered Pakistan’s rating, making it virtually impossible to raise debt from the international credit rating agencies.
The prevailing financial crunch, galloping inflation and uncertain future has unnerved the people already under tremendous duress. The task of trimming their already depleted household budgets has spread a sense of doom and even those who were fortunate enough to keep their heads above the water despite bearing unrelenting rises in prices now found it a challenge to counter the after effects of a new wave of searing inflation. The most effected would be the low-income generating households as the oncoming price hikes would pertain to non-discretionary items like food.
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Ominously hanging over is the possibility of further rise in interest rate though aimed at combating inflation yet it will put pressure on domestic demand and add to inflationary spiral. Though the tendency in the country is to blame economic policy makers for the worsening situation in the country but in actual fact the roots of the problem go much deeper.
The fiscal malfeasance prevalent at the higher strata of the power configuration has mostly brought this disaster on. Pakistan clearly has lived beyond its means for years and has become heavily dependent upon spending habits completely incompatible with its financial limitations. The impact of such a callous existence has brought the country to this mess whereby it is now practically impossible to extricate the economy from this dire situation.
To begin with the incumbent dispensation increased the GST from 17% to 18% and also enhanced the federal excise duty (FED) rates on cigarettes to give effect to Rs.115 billion new taxes. Out of Rs.115 billion it is estimated that Rs.55 billion will be collected from 1% increase in the GST in just four and half months and maximum amount of Rs.60 billion will be collected through increase in the FED on cigarettes.
The increase on FED on expensive brands is radical as it will increase the price of a cigarette from Rs.6.5 per cigarette to Rs.16.5 registering an increase of 153% whereas for less expensive brand the increase is from Rs.2.55 to Rs.5.05 that is an increase of 98%. It is however pointed out that the increase in the GST rate is highly inflationary and will affect the poor more than the rich but the government did not have a choice after the IMF refused to entertain measures that can be challenged in the courts.
The government is further restrained by the IMF from levying taxes on bank deposits of the general public and imposing a flood levy on imports.
It is reported that in the session of parliament the government plans to propose increasing FED on international air travel in club, business and first class at 20 % of the gross amount or Rs.50,000 per ticket whichever is higher issued on or after the date of enactment of this bill. It has also proposed to increase the rate of sales tax on imported mobile phones valuing $201 to $500 at 25% of ad valorem. A 10% advance adjustable income tax will be collected from persons on Active Taxpayers List and 20 % for non-ATL of the amount paid for social functions and gatherings.
Moreover, the FED on cement has been increased from Rs.1.50 per kg to Rs.2 per kg. These measures are taken to generate Rs.55 billion more, taking the total size of the mini-budget to Rs.170 billion. Though the officially reported estimates are of Rs.170 billion worth of additional taxes in four months but many sources point out that the net impact of these measures could be Rs.189 billion bringing the annual impact to nearly Rs.570 billion.
Another step taken by the government is to increase up to 113% in the natural gas prices to recover Rs.310 billion from the majority of consumers in six months, putting a minimum of Rs.736 billion additional burden on the citizens in the form of taxes and energy cost. The prices for the domestic consumers had been increased in the range of 8.5% to 113% besides optimising the previous slab benefit.
For the bulk, commercial, power producers, fertiliser plants, cement, exporters, general industry and CNG stations, the gas prices had been increased from 10.4% to 105%. By taking this step the government has passed a massive burden on to the consumers increasing rates of different slabs for consumers in the range 81%, 113% and 105%. This increase also became necessary in order to prevent the gas supplying companies from bankruptcy as they have already sustained Rs.577 billion revenue shortfall since 2013. It is pointed out that the gas sector’s circular debt, which was Rs.299 billion in June 2018, had increased to Rs.1.642 trillion in June 2022.
It must be kept in view that the electricity prices have already been increased by Rs.3.30 to Rs.15.52 per unit to recover Rs.237 billion more till June. Another burden of Rs.189 billion would be passed on in the shape of increase in taxes by June 2023. Cumulatively, these three measures would force the people to cough up an extra Rs.736 billion in just six months. It is noted that the government has conceded to let the rupee float freely in the market as IMF desired resulting in its depreciation to almost Rs.100 to a dollar. It is also reported that the IMF has demanded an upfront big increase in interest rate, which can push the key rate to a new high, aimed at giving a strong signal of economic stabilisation policies and curbing higher inflationary expectations.
It is mentioned that if the IMF’s demand is accepted, this will push the interest rate to the highest level of around 20%, breaking the previous record of 19.5% in October 1996. It is also mentioned that when the current IMF programme began the policy rate stood at 10.75% that is now placed to become double.
The government apprehends that the inflation rate could hit 29% after an increase in electricity prices whereas just a year before it was at 11 per cent. Inflation already has hit a 48-year high of 27.6%.