Power tariffs to be raised again by 4pc due to commitments to IMF

[Naveed Yaseen]

By Mehtab Haider
ISLAMABAD: Power tariffs for consumers will be raised by four per cent before June 30, 2009, a latest report of the IMF released on Tuesday confirmed.

It further states the Pakistani authorities are also considering levy of carbon tax. Any shortfall in tax revenues of Rs 1,300 billion annual target will be compensated by revenues from the Petroleum Development Levy (PDL), tax administration measures and expenditure control measures.

According to the Letter of Intent, Supplementary Memorandum on Economic and Financial Policies and Addendum to the Technical Memorandum of Understanding of the IMF, under the standby arrangement (SBA) for Pakistan, power tariffs will be raised further to result in a cumulative increase of four per cent by the end of June.

Changes in the fuel cost component of power tariffs (the fuel adjustment surcharge) will continue to be reviewed on a monthly basis and adjusted as needed. The Asian Development Bank is also supporting the power sector reforms jointly with the Government of Pakistan, it further added.

The IMF also says Pakistan’s programme requires additional financing to reduce its risks and enhance growth prospects. As noted, while the programme is financed for 2008/09, financing constraints leave little room for countercyclical policy and there is a need for additional financing to finance social safety expenditure, development spending and enhanced security needs.

The upcoming donor meeting on April 17 is pivotal for mobilising additional financing, supporting our adjustment efforts and reducing risks to the program. According to structural performance criteria, amendments to the banking legislation will be submitted to parliament to enhance effectiveness of the SBP enforcement powers in the area of banking supervision by the end of June 2009.

The government, the IMF document states, will submit draft legislative amendments to parliament to harmonise the income tax and GST laws, including for tax administration purposes, and to reduce exemptions for both taxes by the end of June 2009.

The Federal Board of Revenue is targeting collection of Rs 1,300 billion (10 per cent of revised GDP) in 2008/09, including an additional yield of Rs 65 billion on account of stepped up auditing and enforcement.

“Our budget deficit target for 2008/09 remains unchanged. The shortfall in the tax revenue will be compensated by additional revenue and expenditure measures to achieve an unchanged deficit target of Rs 562 billion (4.3 per cent of revised GDP),” the IMF report says.

Fiscal consolidation will continue in 2009/10; the budget deficit is to be reduced by 0.9 percentage points to 3.4 per cent of the GDP. This consolidation is facilitated by the elimination of fuel and electricity subsidies in 2008/09.

Further, tax policy measures and the ambitious tax administration reform will increase the revenue and assure achievement of the 2009/10 deficit target, while creating fiscal space for strengthening the social safety net.

The government will use non-SBP domestic sources to meet its financing needs. This approach is based on careful advance planning of quarterly budgetary borrowing requirements. Moreover, the finance ministry has taken several measures, in coordination with the SBP, to expand and enhance available financing options for the budget.

The IMF says the deteriorating global economy is posing additional challenges for Pakistan. The world economy has slowed more quickly than envisaged, reducing demand for exports and carrying a risk of declining capital flows. Further, domestic economic activity has weakened.

As a result, both internal and external factors have made the environment for our economic stabilisation program less favourable. There are pressures on the budget, as a result of the slowdown in imports and domestic demand, budget revenues have been lower than projected in the first half of 2008/09 and this trend is expected to continue; however, this was largely offset by revenues from the Petroleum Development Levy (PDL). Disbursement of multilateral programme financing has been slow and projected privatisation receipts for the 2008/09 budget are unlikely to materialise.

The State Bank of Pakistan (SBP) has tightened the monetary stance to reduce inflation and strengthen the external position. Increased confidence and improved terms of trade have helped stabilise the rupee at around Rs 80 per US dollar since mid-Oct 2008 and enabled the SBP to rebuild its gross international reserves to $6.9 billion at end-January, well above the target.

An action plan to strengthen the tax administration was adopted in January and steps to improve revenue collection have already been taken. Most notably, sales tax and income tax administrations were integrated on functional lines at the HQ level to enhance the effectiveness of the tax administration. The full integration at the field level will be completed by end-December 2009.

The government is pursuing a major tax reform agenda. A key step will be the replacement, starting in 2010/11, of the GST with a broad-based VAT. At the same time, the government is exploring options to increase revenue in 2009/10.

The SBP will further improve its monetary policy framework. Market conditions permitting, the SBP remains committed to introduce in July 2009 an explicit corridor for overnight money market rate to enhance market signalling, strengthen the effectiveness of liquidity management, and reduce volatility in short-term market interest rates.

The SBP will continue to pursue a flexible exchange rate policy. The flexible exchange rate policy will be facilitated by phasing out the SBP provision of foreign exchange for oil imports, according to the schedule in the program. As a first step, the SBP has ceased providing foreign exchange for the import of furnace oil as of Feb 1, 2009.

A draft revision of the SBP law has been prepared and it will form the basis for strengthening the operational independence of the central bank. The recently established inter-agency committee, which includes the finance ministry, is expected to propose measures to strengthen the operational independence of the SBP, based on the draft SBP law, by end-April 2009. A new central bank law will be submitted to parliament by December 2009.

A new bankruptcy law is under preparation. It will help in rehabilitation of viable companies and expeditious resolution of other highly indebted companies; thus, paving way for banks to clear their long outstanding loans. A review committee is finalising the draft law which it will submit to the finance ministry by end-July 2009.

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