ISLAMABAD - Pakistan has assured the International Monetary Fund (IMF) to withdraw the power subsidies in next couple of years by increasing the electricity tariff, as approved in the National Energy Policy with support of the provinces.

In a Letter of Intent (LoI) to IMF, singed by Finance Minister and Governor State Bank of Pakistan, the government has assured to withdraw power subsidies gradually by increasing the tariff. “The first adjustments to commercial, industrial, bulk, and large consumers reduced subsidies by 3/4 percent of GDP on an annualized basis. However, for the first year we will maintain the subsidies for consumers between 0-200 kWh consumption. For the second and third years, we will further reduce subsidies by roughly 0.4 percent of GDP (Rs 105 billion) per year to reach a maximum of 0.3 percent of GDP thereafter”, stated the government in LoI.

The government also assured that to strengthen tax revenues, in addition to the measures approved in the 2013 Finance Bill, the authorities would increase the Gas Infrastructure Development Cess (GIDC) by end-December to raise revenue by 0.4 percent of GDP (Rs 105 billion) on an annualized basis. Similarly, the government assured the Fund to refrain from issuing any new tax concessions or exemptions (including customs tariffs) through SROs, and will approve legislation by end-December 2015 to permanently prohibit the practice.

“We are on track to finalize by end-December 2013 a comprehensive plan analyzing all existing SROs granting tax exemptions or concessions and containing a calendar to eliminate the vast majority of them and convert the remainder into regular legislation. The ultimate objective of this plan would be to achieve an increase in revenues of some 1-11/2 percent of GDP, with all designated SROs eliminated in no more than three years. By end-June 2014, we will issue the necessary orders to eliminate the first batch of SROs - which will be identified in our plan - consistent with our overall fiscal goals (new structural benchmark). We will also quantify the remaining tax expenditures and publish a detailed list in the budget in future years. These steps will facilitate gradually moving the GST to a full-fledged integrated modern indirect tax system with few exemptions along with an integrated income tax by 2016/17”, stated the LoI.

The government has informed that the balance of payments situation was worse than anticipated during the first quarter of FY 2013/14. The exchange rate depreciated by 61/2 percent against the dollar. The exchange rate came under particular market pressure in late September (down around 9 percent) before easing in early October. Gross reserves fell by more than expected, declining from $6 billion at end-June to $4.7 billion by end-September, as weak financial inflows and heavy debt repayments outweighed the first program disbursement.

Amendments to the SBP law, incorporating the recommendations of the recent IMF safeguards assessment, will be enacted to strengthen the autonomy of the SBP, including full operational independence in its pursuit of price stability as its primary objective, complemented with enhanced governance structure including strong internal controls, by end-March 2014 (structural benchmark). Among other things, the amendments will establish an independent, decision-making monetary policy committee to design and implement monetary policy and prohibit any form of new direct lending from the SBP to the government. The SBP will establish a Board committee to centralize and oversee risk management activities across the bank by end-January 2013. The SBP will approve a plan to fully implement International Financial Reporting Standards (IFRS), including reporting financial reserves by currency and maturity by end-March 2014.

“We are implementing the time-bound strategy to tackle price distortions, insufficient collections, costly and poorly targeted subsidies, governance and regulatory deficiencies, and low efficiency in energy supply and distribution with the support of our international partners”, LoI added.

The government will hire financial advisors by end-March 2014 to seek potential strategic private sector participation in the company as it plans to privatize 26 percent of PIA’s shares to strategic investors by end-December 2014 (structural benchmark). In the meantime, PIA will continue leasing more efficient airplanes and rationalizing routes. Regarding, Pakistan Steel Mills, the government said “We have appointed a professional board and will hire financial advisors by end-March 2014 to prepare a comprehensive restructuring plan and seek for potential strategic private sector participation in the company”.

The LoI stated, “An initiative to incorporate 300 thousand new taxpayers into the income tax net was launched in July. More than 30 thousand initial notices have been issued-based on large potential fiscal liabilities and location to ensure the initiative is nationwide and more will follow. We have started issuing second notices which will be followed by a provisional assessment, collection procedures, and penal and prosecution proceedings. By end-March 2014 (new structural benchmark), the Federal Board of Revenue (FBR) will issue 75,000 first notices and will follow up with a second notice to at least 75 percent of those who did not respond satisfactorily to their first notice within 60 days. The FBR will also issue a provisional tax assessment to 75 percent of those who did not respond satisfactorily within 60 days to the second notice”.