Pakistan has given written assurance to the International Monetary Fund (IMF) to enhance the prices of electricity and gas, reducing power subsidies, broadening of tax base and privatisation of Public Sector Entities.

“The government has started applying a new FY2014/15 electricity tariff, with a more comprehensive view of production and distribution costs. These steps could reduce on-budget subsidies by another 0.1 percent of GDP and thus help address the revenue shortfall. In addition, it should begin to reverse the accumulation of circular debt by closing the gap between electricity tariffs and the cost-recovery level,” stated Memorandum of Economic and Financial Policies dually signed by Finance Minister and Governor State Bank of Pakistan along with Letter of Intent written to IMF.

The payables in the power sector, which climbed to Rs 298 billion at end-December 2014, of which around Rs 80 billion constitute current payables.

Pakistan also assured that notification of new gas prices was postponed for a second time and is now planned for July 2015. However, the Fund expressed concerns about this delay and urged the authorities to reconsider unification of determination and notification with the regulator - Oil and Gas Regulatory Authority (OGRA). The government remains committed to full pass-through of the cost of imported LNG to the end-user purchase price (including Compressed Natural Gas) as it comes online.

The government also agreed with the IMF to privatise eight public sector entities by the end of year 2015. The entities included Habib Bank Limited (HBL), Heavy Electrical Complex (HEC), National Power Construction Corp. (NPCC), Faisalabad Electric Supply Company (FESCO), Convention Center, Northern Power Generation Company Limited (NPGCL), Islamabad Electric Supply Company (IESCO) and Lahore Electric Supply Company (LESCO).

To permanently prohibit the issuance of SROs to grant tax concessions or exemptions, the government had assured the Fund to draft the necessary legislation, which is expected to enact by end-December 2015. Regarding broadening of tax base, the government had informed that FBR issued more than its target of 150,000 first notices to non-taxpayers by end-December 2014. Furthermore, the FBR will merge the National Tax Number (NTN) system covering 3.6 million individuals with the Computerised National Identity Card (CNIC) database that covers about 150 million people by end September 2015 (new structural benchmark).

The government had also informed the IMF that budget deficit target would be kept at four percent of the GDP in the budget for next fiscal year 2015-16. The deficit would be reduced by broadening the tax base and eliminating tax concessions, exemptions and loopholes, while making further progress in removing untargeted subsidies.

Looking forward to the new round of National Finance Commission (NFC) negotiations, the federal government will seek an agreement to balance devolution of revenue and expenditure responsibilities in a way that is consistent with the objective of macroeconomic stability and long-term sustainability of inter-governmental fiscal relations. The new NFC negotiations are scheduled to begin in the coming months, and IMF and World Bank technical advice will be provided to help inform the discussions. Among other recommendations, staff has encouraged the modernisation of agricultural taxation, within the existing constitutional framework.

The documents revealed that Pakistan admitted that GDP growth target of 5.1 percent would not be achieved, as it is projected to grow by some 4.3 percent in FY2014/15, driven mainly by the agriculture and construction sectors. Inflation is expected to hover around 5 percent in FY2014/15 (about 3 percent lower than previously forecast) as energy prices ease and inflation expectations are anchored by prudent monetary policy. The current account deficit is expected to remain around 1.2 percent of GDP in FY2014/15, due to declining oil prices and strong remittance.

However, export growth will under-perform due to real exchange rate appreciation and declining cotton prices. This will partly offset the positive impact of lower oil prices.

The government admitted that revenue collection at the federal level was below the indicative target, partly due to continued legal challenges against the Gas Infrastructure Development Cess (GIDC) as well as lower tax receipts from the fall in oil prices. We have submitted amendments to the SBP Act to the National Assembly (NA), but the legislation is still in the relevant parliamentary committee. The amendments will strengthen the autonomy of the SBP, including full operational independence in the pursuit of price stability as the SBP’s primary objective, the government added.

To achieve the deficit target, the government said, we have restrained expenditures and introduced additional revenue measures at the federal level, including (i) raising the General Sales Tax (GST) rate on petroleum products (excluding furnace oil) from 17 to 27 percent in two stages; (ii) levying regulatory duties on steel products; (iii) introducing a regulatory duty on mobile phones; (iv) levying a regulatory duty on furnace oil; (v) increasing the withholding tax on non-filer contracts, services, and commercial importers; (vi) levying a regulatory duty on luxury items; (vii) levying regulatory duty on metal scrap; and (viii) reduce electricity subsidies by 0.1 percent of GDP. Together, these steps are expected to raise 0.35 percent of GDP.

Security conditions remain difficult due to ongoing military operations against the Taliban and the fallout from the recent attack on a school in Peshawar. While political pressures have eased somewhat, as sit-ins organised by different opposition groups during the summer of 2014 have ended, sensitivities remain in implementing some structural reforms, particularly in energy tariff adjustments, central bank independence, and greater exchange rate flexibility. In indirect Senate elections held in late February for one half of the chamber, the government’s PML-N party picked up additional seats but fell short of its objective of a majority. This will likely complicate approval of government’s legislative reform agenda. Judicial challenges to privatisation and tax measures are also constraining progress.