ISLAMABAD - The Finance Ministry on Thursday unveiled Pakistan-IMF loan agreement worth $6.68 billion as Islamabad assured the Fund to increase domestic power tariff by 30 percent, imposition of new gas levy and privatisation of 65 public sector enterprises. 

The Executive Board of the International Monetary Fund (IMF) on Wednesday approved a 3-year arrangement under the Extended Fund Facility (EFF) for Pakistan an amount $6.68 billion. The Finance Ministry has released the details of loan agreement. Pakistan has assured IMF to impose new gas levy to generate 0.4 percent of the GDP (around Rs 94 billion) by end December 2013. The government would also increase the domestic power tariff by 30 percent in October 2013 after enhancing tariff for commercial and residential consumers in early August. Later, the government would gradually withdraw the power subsidy in three years except users of 0-200 kWh.

According to the agreement, Pakistan has taken five prior actions before getting approval from IMF’s executive board. The prior actions included, (i) net purchase of $125 million by State Bank of Pakistan in the foreign exchange spot market between July 1 to August 15. (ii) Implement a series of fiscal adjustment measures (those included in the 2013-14 budget) totaling 2 percent of the GDP on an annualised basis.  (iii) Impose a balances budget requirement on provinces and agree with provinces to save additional revenue generated by the programme (IV) issue 10 thousands notices based on large potential fiscal liabilities.

The fifth prior action was, develop and approve a three-year plan by the Government for phasing out Tariff Differential Subsidies (TDS), and implement the first step by: (i) the notification of new tariffs for FY2012/13; (ii) increasing the weighted average tariffs by 50 percent on industrial, commercial, bulk, and AJ&K consumers’ electricity consumption; and (iii) announcing a reduction of the subsidy on second group of consumers (as defined in the TMU) through increasing the weighted average notified tariffs by 30 percent that will be in effect from October 1st, 2013.

Pakistan also agreed for develop and approve PSE reform strategy for thirty firms among the 65 PSEs approved for privatisation by the Council of Common Interest (CCI) by end September 2013. The government would hire a professional audit firm to conduct a technical and financial audit of the system to identify the stock and flow of payables at all levels of the energy sector (including Power Sector Holding Company Limited) by end November 2013. It would Make Central Power Purchasing Agency (CPPA) operational by separating it from the National Transmission and Dispatch Company (NTDC), hire key staff, issue CPPA rules and guidelines, and initiate the payment and settlement system by end December 2013. Enact the amendments to the Pakistan Penal Code 1860 and the Code of Criminal Procedures 1898 by end December 2013 and Privatize 26 percent of PIA’s shares to strategic investors by end June 2014.

Pakistan has assured the Fund to increase tax to GDP by one percent on an annualised basis. Similarly, the budget deficit would be reduced to 3.5 percent of the GDP by 2016-17 from 8.8 percent of the GDP of 2012-13 by widening of tax base with some contribution and improved tax administration. The government also plans to eliminate statutory regulatory orders (SROs) by December 2013.  Meanwhile, Pakistan has agreed with IMF to develop and launch initiatives to enhance revenue administration for sales tax, excises and customs similar to that prepared for income tax by December 2013.

According to the agreement, growth will initially remain modest (about 21/2-3 percent) in 2013/14 due to the necessary fiscal consolidation, but will then strengthen to around 41/2-5 percent in the outer years as structural reforms are implemented and the investment climate improves. Inflation will initially increase, due in part to some weakening of the rupee as reserves are rebuilt. However, monetary policy will likely be tightened in later years to help bring inflation down to the 6-7 percent range by the end of the programme period. Fiscal consolidation will bring the fiscal deficit from the baseline of 8.8 percent of GDP (excluding grants) in FY2012/13 to around 31/2 percent in FY2016/17.

The agreement revealed that restructuring plan includes stripping the nonviable components of PIA under a separate public sector enterprise-PIA2-by end-December 2013. We will service the guaranteed past loans of PIA2, apply a voluntary “handshake” plan for the excess work force and liquidate by end-June 2014. The PIA will retain some liabilities that it can service, streamline workforce and will receive capital injection from the government.

The Privatisation Commission and Cabinet Committee on Restructuring will fast track the decision-making process to approve a new comprehensive restructuring plan for Pakistan Steels Mills by end September 2013. Meanwhile by end-March 2014 the government will develop a comprehensive restructuring plan for Pakistan railways and the railways company will be converted from a government department to a state-owned limited liability.