KARACHI - The federal government is all set to hike further the electricity tariff by June 2009 under its commitment made with the IMF to obtain loan. The federal government and the World Bank would work out the tariff hike within this month that would be implemented in the current financial year. This had been mentioned in the detailed macroeconomic stabilization programme, the Pakistan government had submitted to IMF before the approval of the loan. The IMF has released the details of the "Letter of Intent" (LoI) signed between the IMF and Pakistani government, which explains the policies that Pakistan intends to implement in the context of its request for financial support from the IMF. This document is named as Memorandum on Economic and Financial Policies (MEFP) reviews economic developments and policies during 2007/08-2009/10 and describes underpinning stabilization and structural policies. According to Macroeconomic Stabilization Programme, the government is planning to take additional fiscal measures for the remainder of 2008-09 and for 2009-10 that aimed at achieving fiscal stability to reduce external current account deficits in the current and post IMF financial scenario of FY09-10. The IMF chief was quoted as saying that the government had assured the Fund that electricity tariff differential subsidies would be fully eliminated by end-June 2009. To achieve this objective, the average base tariff will be further increased during 2008/09 according to a schedule to be agreed with the World Bank by end-December 2008 (structural benchmark), and the government will use fuel and other surcharges, as necessary. The implementation of the electricity tariff increases will be followed up in the context of the program reviews. On the revenue side, further steps will be taken during the remainder of the fiscal year to strengthen tax enforcement. Moreover, fuel prices will continue to be adjusted to pass through changes in international prices, said Government of Pakistan MEFP document. As per the details of Pakistan's economic and financial policies for November 2008-June 2010, the government is targeted to decline fiscal deficit (excluding grants) to 4.2 percent of GDP (Rs562b) in 2008/09, from 7.4 percent in 2007/08, said MEFP document This fiscal effort is necessary to help reduce the external current account deficit, move toward a sustainable fiscal position, and eliminate SBP financing of the government. To achieve the 2008-09 deficit target, the government will increase tax revenue by 0.6 percentage points of GDP and reduce non-interest current expenditure by about 11/2 percentage points of GDP, mainly through the elimination of oil subsidies by December 2008 and electricity subsidies by June 2009. At the same time, domestically-financed development spending will be reduced by about 1 percentage point of GDP through better project prioritization. The MEFP also revealed that the government would prepare, by end-March 2009, a plan for eliminating the inter-corporate circular debt within the fiscal deficit target. The plan would clearly identify all elements of circular debt, including (i) the identification of all debts owed and due among the corporations, duly reconciled; (ii) the determination of the validity of the claims; (iii) a schedule by which respective entities will discharge their liabilities to each other; and (iv) a timeframe during which the Federal Adjuster will use his powers to make adjustments, in case of failure, to adhere to the approved schedule. A further reduction in the fiscal deficit to 3.3 percent of GDP is envisaged for 2009/10. "The fiscal effort will be facilitated by the full-year effect of the elimination of energy subsidies by end-2008/09 and declining interest payments, following large bullet payments in the three-year period ending in 2009/10", explained MEFP document. Consistent with the government's objective of substantially increasing tax revenue, a number of tax policy and administration measures are envisaged during the program period. Specifically, an integrated tax administration organization on a functional basis will be established at the FBR (integrating both the income tax and sales tax administration). In addition, audits will be reintroduced as part of a risk-based audit strategy that will be implemented by end-December 2008. A full description of the required reforms, together with an action plan will be provided to the IMF by end-December 2008, following a planned seminar to review tax policy and administration. As part of this process, the government plans to harmonize the income tax and GST laws, including for tax administration purposes, and reduce exemptions for both taxes. To that end, it will submit legislative amendments to parliament by end-June 2009. In addition, the excises on tobacco will be increased in the context of the 2009/10 budget. Following the seminar in December 2008, the government will initiate a process to implement a full VAT with minimal exemptions, to be administered by the FBR. Draft legislation for the VAT is expected to be ready for public debate by end-2009. The first program review will focus on the progress in developing the government's tax reform agenda. The government's fiscal consolidation efforts will continue over the medium term. The government's fiscal framework assumes a further reduction in the fiscal deficit to 2-21/2 percent of GDP by 2012/13. Fiscal consolidation will be supported by a strong tax effort, which will allow for higher spending in infrastructure and the social sectors. Specifically, the government is committed to increasing tax revenue by at least 31/2 percentage points of GDP over the medium term as a result of measures to broaden the GST base, significantly reduce income tax exemptions, and further improve tax enforcement. As far as macroeconomic outlook and policies are concerned, the government's program envisages a significant fiscal consolidation, and the SBP will tighten monetary policy to lower inflation and strengthen the international reserves position. As a result of these policies, the 12-month inflation rate is projected to decline to 20 percent at end-June 2009, even after taking into account the impact of significant increases in administered energy prices. Real GDP growth would slow further to 3-31/2 percent in 2008/09 in response to the tightening of macroeconomic policies and a deceleration of growth in Pakistan's trading partners. The tighter financial policies, higher disbursements from IFIs, lower commodity prices, and restored confidence are expected to contribute to a significant strengthening of the external position in 2008/09. Specifically, the external current account deficit is projected to narrow to $10.6 billion (6.5 percent of GDP) owing mainly to slower aggregate demand growth and lower oil import prices. At the same time, the surplus in the financial account would decline to $6.2 billion, as an increase in disbursements from IFIs (to about $4 billion) would be more than offset by weaker FDI and portfolio flows relative to 2007/08, reflecting in part the impact of the global financial turmoil. The government's medium-term strategy seeks to achieve high sustained growth and significantly reduce poverty, while ensuring external and fiscal sustainability. Following the initial stabilization effort in 2008/09, real GDP growth would increase to 5 percent in 2009/10, and is projected to rise gradually to 61/2-7 percent a year by 2012/13, based on a significant increase in investment and further progress in structural reforms. Average inflation is targeted to decline to 13 percent in 2009/10, and to 5 percent by 2012/13. Prudent demand management policies would contribute to a gradual decline in the external current account deficit to 5.7 percent of GDP in 2009/10, and further to 3.6 percent of GDP by 2012/13. This, along with the expected pickup in capital inflows, would help increase gross international reserves to $14.5 billion (2.6 months of projected imports) by 2012/13, while reducing the external debt to 29 percent of GDP. The external financing gap for 2009/10, which is projected at $3.6 billion, will be covered by disbursements from the IMF and GDR proceeds. External financing gaps will be fully eliminated by the end of the SBA.