The International Monetary Fund (IMF) has criticised slow progress on taxation and power sector reforms and sought in two days a clear plan from the government about controlling the increasing fiscal deficit.
In the first round of policy discussions, a review mission of the IMF and World Bank headed by Adnan Mazarei held meetings on Monday with Finance Minister Dr Abdul Hafeez Shaikh on tax reforms and the macroeconomic situation and with Minister for Water and Power Raja Pervez Ashraf on power sector reforms.
According to sources, the joint review mission expressed displeasure over slow progress on elimination of power subsidies and urged the government to move quickly towards a ‘subsidy-free regime’.
It expressed concern over ‘half-hearted rationalisation’ of tariff and was particularly unhappy over non-completion of a consumer classification survey, fuel efficiency audits and a plan to eradicate circular debt in the energy sector.
They also expressed concern over a delay in amending the National Electric Power Regulatory Authority (Nepra) Act to empower it to notify tariffs.
It asked why an earlier amendment to the Nepra ordinance which lapsed in July had not been introduced in parliament for authentication.
Raja Pervez said that ending circular debt and subsidies required a 35 per cent tariff hike during the current year which could not be implemented in one go because of political repercussions and economic difficulties of people who were already suffering because of inflationary pressures.
He assured the IMF-WB team that a gradual process of tariff ‘rationalisation’ was in progress with two per cent increase made last month and another two per cent to be notified in two or three days after its clearance by the political leadership.
The monthly adjustments would continue throughout the year, he said.
He said a plan for fuel efficiency audit, consumer classification and loss reduction would be provided before the conclusion of the ongoing talks later this week.
He said the draft of amendments to the Nepra Act had been submitted to parliament and was expected to be approved during the current session.
He said the power sector reforms would be completed in eight months.
The review mission also discussed reduction in line losses, improvement in recovery and related issues and promised maximum cooperation to the government for improving the sector and ending the energy crisis.
At its meeting with the economic team led by Hafeez Shaikh, the mission criticised the government for its slackness in introducing reformed general sales tax, over Rs422 billion commodity sector liabilities, higher than targeted borrowing from the central bank, an unhindered increase in fiscal deficit and its inability to get the approval of parliament on giving more autonomy to the State Bank.
Referring to power sector reforms and resolution of circular debt, members of the mission said the unresolved issues would not enable them to make a favourable presentation to the IMF executive board for the continuation of an adjustment programme and release of the remaining installments of $3.5 billion unless a clear roadmap was available.
The two sides, however, agreed on revised targets for macroeconomic indicators.
They worked out a target of 2.8 per cent rate of economic growth, 14.5 per cent inflation, a surplus current account position and increased revenue realisation at Rs1,690 billion against the budgeted target of Rs1,667 billion.
They agreed that additional measures would have to be taken in the form of flood tax and withdrawal of sales tax exemptions under the RGST.
The crucial point, however, remains how the government will overcome the revenue gap arising out of delayed implementation of the RGST.
Over the next two days, the authorities will share their taxation plan with the lenders.
The sources said a revised fiscal deficit target of 4.7 per cent had been worked out with the IMF on the basis of RGST with effect from Oct 1. The authorities will need to suggest fresh measures to achieve the target.