ISLAMABAD
Pakistan has given written assurance to the International Monetary Fund (IMF) to increase the interest rate in a bid to bring inflation rate below eight percent level during upcoming financial year 2014-15.
“The recent spike in both headline and core inflation in March and April is a cause for concern, and the SBP will use monetary policy tools to contain inflation, consistent with bringing it sustainably below 8 percent by the end of FY2014/15. In particular, the central bank will adjust the policy interest rate in a forward-looking fashion to maintain positive real interest rates and in line with desired inflation path”, Pakistan has stated in a Memorandum of Economic and Financial Policies written to IMF.
Meanwhile, the IMF has raised concerns about the recent appreciation of the nominal exchange rate and stressed that a more flexible exchange rate will help SBP to better reach its reserves objectives and boost competitiveness. However, the authorities do not share staff’s view that the exchange rate is somewhat overvalued, and place greater priority on the nominal exchange rate stability.
Pakistan has also informed that it submitted amendments to the SBP Act to the National Assembly (NA), with a view toward having them enacted by end-June 2014 (structural benchmark), although there may be some delays in the parliament.
While appreciating government’s move to broaden the tax base, the IMF noted that more than 8,000 individuals have filed their taxes, as Federal Board of Revenue has issued more than 80,000 income tax notices to individuals with large apparent assets or income who have not filed tax returns. Moreover, the authorities are strengthening the database of potential taxpayers by incorporating additional sources of information-like urban property transactions and vehicle procurement. The authorities issued a tax directory of parliamentarians in February, and of all taxpayers at end-April. They also issued notices to all 45 parliamentarians that have not paid taxes.
The Fund noted that authorities met the indicative target on cash transfers under the Benazir Income Support Program (BISP), reaching 4.4 million beneficiaries. They are also on track to achieve the end-June, 2014 target. In FY2014/15, the authorities will increase cash transfers to the vulnerable through the authorities will increase cash transfers to the vulnerable through the BISP by 25 percent to address poverty and inequality concerns and protect the most vulnerable from the impact of the energy price adjustments, inflation and fiscal consolidation. Coverage of the BISP will also increase by an additional 10 percent in FY2014/15. After the significant payments made by the government to reduce arrears in June 2013 and some accumulation of new arrears thereafter, the preliminary analysis including the generation companies suggested that the stock of arrears stands at around Rs 500 billion by end-March 2014 (about 2 percent of GDP) of which half is the stock of payables in the power sector and the other half is at Power Sector Holding Company Limited (PSHCL) as a debt instrument (the Syndicated Term Credit Finance or STCF). The authorities have identified steps designed to prevent the accumulation of new arrears in the system by the end of the programme, while also dealing with the stock.
The measures include the following components: The stock of arrears at the PSHCL in the STCF facility stood at around Rs 240 billion at end-March 2014. The corresponding accrued debt service continues to add to the payables. The authorities have requested that servicing of the STCF be included in the upcoming Nepra determination, but if this does not occur, they will levy a surcharge to match the servicing costs in the coming years. If fully serviced, the STCF will constitute a debt instrument and not be included as arrears.
Outside the PSHCL, payables in the power sector reached around Rs 270 billion at end-March 2014 of which around Rs 90 billion constitute current payables that are less than 45 days overdue and thus not considered arrears. The remainder comprises: (i) a residual leftover from payables clearance the government undertook last year; (ii) a disputed amount with the Independent Power Producers (IPP); and (iii) Non-recovery and penalties levied on past non-payment from power distribution companies (DISCOs) to generation companies. Before the close of the current fiscal year, the authorities expect to recover around Rs 100 billion receivables in the power sector owed to Discos and to use these resources to reduce the stock of arrears to around Rs 200 billion at the end-June 2014. Continued efforts to recover Disco receivables will help the authorities to service the remaining payables to generation companies.