IMF conditions for third tranche to put massive financial burden on public

Electricity tariffs are being raised to recover costs.

KARACHI (Dunya News) – As the government begins implementing the International Monetary Fund’s (IMF) four conditions for securing the third tranche of $540 million for Pakistan under the $6 billion Extended Fund Facility (EFF) and removing structural imbalances, the first three months of the year 2020 will put massive financial burden on the general public.

According to the first condition, by the end of January, in order to run private power companies at their full capacity for generating electricity, 25 percent of the annual capacity charges amounting to about Rs40 billion will be charged to the consumers in the bills. The total annual capacity charges are Rs155 billion. Likewise, a 214 percent hike in gas tariff will be imposed, and stern measures will be taken to catch suspicious financial transactions.

Electricity tariffs are being raised to recover costs as IMF data showed that around one-third of the circular debt in 2018-19 was due to distribution companies’ inefficiencies.

National Electric and Power Regulatory Authority and Oil and Gas Regulatory Authority are also needed to be empowered through amendments to existing regulations to avoid delays in the issuance of tariff notifications.

Under the terms agreed for the second tranche of the IMF package, the government is required to apprise the parliament about its income, expenditure and savings by February 28.

Under the third condition, the government is also required to introduce the state bank’s sovereignty bill in the parliament by March 31. The bill will restrict printing of new currency notes for covering the fiscal deficit.

According to the fourth condition, the government will implement the two major provisions of the Financial Action Task Force (FATF) under which banks will strictly monitor the transactions of their customers, and the bank secrecy rules will not be applicable on the implementing agencies.

On Dec 26, the IMF approved the second tranche of $452.4 million while declaring that Pakistan’s reform programme “is on track and has started to bear fruit”.

The Fund, after completing it’s first review of Pakistan under the EFF, noted that "decisive" implementation of government policies had helped preserve economic stability in the country.

The release of the second tranche accounted for the total amount granted by the IMF to $1,440 million.

In a press release, the IMF had noted that the "transition to a market-determined exchange rate has been orderly [and] inflation has started to stabilise, mitigating the impact on the most vulnerable groups of the population."

The IMF had further observed that the "authorities remain committed to expanding the social safety nets, reducing poverty, and narrowing the gender gap."

At the same time, however, the Fund had warned that "risks remain elevated". The press release had quoted IMF’s First Deputy Managing Director and Acting Chair David Lipton as saying: "Strong ownership and steadfast reform implementation are critical to entrench macroeconomic stability and support robust and balanced growth."

"The authorities are committed to sustaining the progress on fiscal adjustment to place debt on a downward path," Lipton had said, adding that: "The planned reforms include strengthening tax revenue mobilisation, including the elimination of tax exemptions and loopholes, and prudent expenditure policies. Preparations for a comprehensive tax policy reform should start early to ensure timely implementation."

"The flexible, market-determined exchange rate remains essential to cushion the economy against external shocks and rebuild reserve buffers," he had suggested.

Lipton had also pointed out that "faster progress [was] needed to improve the AML/CFT framework supported by technical assistance from the IMF and other capacity development providers" in order for Pakistan to be removed from FATF’s grey list.

Pakistan was placed on FATF’s grey list in 2018. In October, 2019, the FATF retained Pakistan on its grey list and gave the country four-months to take stronger measures to combat terror financing and money laundering.