Shaukat Tarin is in Washington to lead Pakistani delegation
Pakistan and the International Monetary Fund (IMF) are holding face-to-face policy level talks in Washington DC this week.
Finance Minister Shaukat Tarin has already arrived in Washington to lead the Pakistan delegation. The talks begin on Wednesday, October 13, and will last for three days.
The finance minister will brief the IMF on the economic performance and situation of Pakistan.
If negotiations are successful the IMF will immediately disburse $1 billion.
However, the talks would likely affect common people in the country in three respects.
On Friday, the IMF asked Pakistan to increase electricity tariffs by Rs1.4 per unit to contain the ever-growing circular debt.
The IMF argues that it is necessary to make electricity more expensive because swelling circular debt has been dragging the economy down.
Circular debt occurs when one entity facing problems in its cash inflows holds back payments to its suppliers and creditors. Thus, problems in the cash inflow of one entity cascade down to other segments of the payment chain. In Pakistan, the energy sector has faced this issue for several years.
This has several implications for the economy. For example, the resulting cash flow constraints have added to the operational inefficiencies of companies in the power sector. In some cases, power generation companies are operating below their capacity due to liquidity constraints.
There are reports that the federal government wants to push consumers to use more electricity by reducing the supply of natural gas in winter. An increase in power tarriff can significantly affect consumers’ energy expenses.
The fund has also asked Pakistan to take more steps to increase income tax, sales tax, and regulatory duties collection and urged the Federal Board of Revenue (FBR) to pull up the annual tax collection target from Rs5.8 trillion to Rs6.3 trillion, according to officials who did not wish to be named.
In addition, the IMF has told the government to abolish or significantly reduce all kinds of subsidies, according to officials.
The IMF reportedly believes that the existing pace of FBR’s revenue collection is “unsustainable”, and that additional revenue measures are imperative to achieve fiscal sustainability.
There are two major outstanding issues, ensuring fiscal sustainability and fixing the cash bleeding energy sector.
In the past, the IMF has proposed an increase in the rate of personal income tax by adjusting the higher income brackets, the officials said.
There are different proposals under consideration to adjust the rate of personal income tax to fetch an additional Rs100 billion to Rs150 billion, officials say.
Last month, the State Bank of Pakistan raised the interest rate from 7% to 7.25% after a 15-month gap. Reportedly the finance ministry has decided to take the step in view of the IMF program.
The IMF wants Pakistan to increase the interest rate, terming the current rate insufficient to restrict inflation, and narrow down the current account deficit, officials have told SAMAA Digital.
Higher interest rates make loans expensive. Businesses, which rely on bank financing, stop new projects, the government cuts spending on development projects, and consumers stop using auto finance and home loans and even reduce credit card use. In a nutshell, a higher interest rate shrinks economic activity and slows down job creation.
On the other hand, a lower interest rate encourages people and businesses to borrow more, which in turn increases consumption on the national scale. Since the overall demand is high, it makes the prices of goods rise, thus inflation increases.
There is another motive behind the IMF demand to increase the interest rate. It would also keep the country’s trade deficit in check.
Countries with high trade deficits keep interest rates high so that deficit nations have to offer high rates in order to attract foreign investors that would finance the trade shortfall.