WASHINGTON/ISLAMABAD    -   Rising inflation in Pakistan, ac­celerating to 27.3 per cent in August -- a 47-year high -- can trigger “social protest and in­stability” in the cash-strapped country, the International Mone­tary Fund (IMF) has warned.

The country’s inflation mea­sured by the consumer price in­dex (CPI) accelerated to 27.3 per cent in August this year -- the level last seen in May 1975 -- even as the full impact of un­precedented floods on the pric­es of food items and other com­modities is yet to come.

The adverse impacts of the floods and consequent disrup­tion in food supplies will be vis­ible in the inflation reading for the month of September, which may push the rate far higher than that of August.

“High food and fuel prices could prompt social protest and instability,” the IMF said in an ex­ecutive summary of the seventh and eighth reviews. The IMF Executive Board earlier this week approved the seventh and eighth review of the stalled USD 6 billion Pakistan programme, and the State Bank of Pakistan (SBP) two days later on Wednes­day received the much-need­ed USD 1.16 billion deposit to steer the cash-strapped coun­try’s economy out of the crisis.

The IMF, which has also asked the country to ensure sever­al measures after receiving the loan, released the funds after Pakistan caved to several de­mands of the global lender for fiscal tightening.

The deal required the govern­ment to increase the petroleum levy to 30 per litre on petrol by September 1 and 15 per litre on diesel in three phases.

The government on Wednes­day increased the levy to 37.50 per litre on petrol -- 7.5 per li­tre more than needed under the IMF deal -- to lower taxes on diesel. The report released un­der the Extended Fund Facili­ty (EFF) said that risks to the outlook and programme imple­mentation remained high and tilted to the downside given the very complex domestic and ex­ternal environment.

The spillovers from the war in Ukraine through high food and fuel prices, and tighter global fi­nancial conditions will continue to weigh on Pakistan’s economy, pressuring the exchange rate and external stability, the report added. The report further said that the policy of providing sub­sidies remained a risk, amplified by weak capacity and powerful vested interests, with the timing of elections uncertain given the complex political setting.

According to the report, so­cio-political pressures, apart from the protest risk, are ex­pected to remain high and could also weigh on policy and reform implementation, especially giv­en the tenuous political coali­tion and their slim majority in Parliament

Pakistan has assured the In­ternational Monetary Fund (IMF) for further increasing prices of petroleum products, electricity and gas, announc­ing mini-budget in case of tax collection shortfall and not an­nouncing any tax amnesty scheme without approval of the National Assembly. 

The IMF has released coun­try report of Pakistan days af­ter completing the combined seventh and eighth reviews un­der the Extended Fund Facility (EFF) for Pakistan, allowing the authorities to draw the equiva­lent of SDR 894 million (about US$1.1 billion). 

“We are now in the process of implementing more than the prescribed increase in con­sumer gas prices by end-Au­gust 2022 to contain the circu­lar debt flow, address some of the CD (circular debt) stock, and improve the liquidity of the gas companies, while minimizing the impact on smaller consum­ers,” said the government.

“This will be the first end-user gas price adjustment since Sep­tember 2020. However, we will need more time than envisaged in the amended OGRA Act (40 days) to work out a fair distri­bution of the increase across the various consumer categories,” the government further said. It has also assured the Fund to en­hance petroleum development levy (PDL) to Rs50 per liter on January 1, 2023 for petrol and on April 1, 2023 for diesel. The PDL was increased by Rs10 per liter on petrol and Rs5 per liter on diesel both on July 1 and Au­gust 1, 2022. It has also assured to increase in PDL by Rs10/li­ter for petrol and PRs 5/liter for diesel on September 1, 2022, fol­lowed by increases of PRs5/liter every month for both fuels from October 1 until the PDL level reaches PRs 50/liter on January 1, 2023 for petrol and on April 1, 2023 for diesel. The PDL will then remain at PRs 50/liter for both until the end of FY23, re­sulting in average PDL rates for petrol and diesel of PRs 40/liter and PRs 32/liter for petrol and diesel, respectively, over FY23. Meanwhile, an increase in cus­toms duty and additional cus­toms duty on crude oil from the current 2.5 percent to 5 percent in the budget, with a commit­ment not to reduce this rate be­low 5 percent during FY23.

The country has also commit­ted to bring a mini-budget in case of shortfall in tax collection in current fiscal year. “If month­ly revenue data shows signs of underperforming against the Q1 FY23 and subsequent tar­gets, we will take immediate action to raise additional rev­enue”. The revenue generation measures included immediate­ly setting the GST on fuel prod­ucts to a rate sufficient to raise the necessary revenue up to the standard rate of 17 percent; fur­ther streamlining GST exemp­tions including on sugary drinks (PRs 60 billion), and other un­warranted exemptions such as those benefitting exporters; and increasing Federal Excise Duty on Tier I and Tier II cigarettes by at least PRs 2/stick with imme­diate effect to raise at least an­other PRs 120 billion in revenue.

Pakistan has assured the IMF for not announcing tax amnesty scheme without approval of Na­tional Assembly. “We fully and unequivocally recommit not to launch any future tax amnesties or grant any further tax exemp­tions/concessions through Stat­utory Regulatory Orders (SROs) without prior National Assembly approval”. Work on the harmoni­zation of service sales tax across provincial jurisdictions will con­tinue with World Bank support.

The Fund noted that the gov­ernment is continuously in­creasing power tariff under the agreement. Annual rebasings (ARs) will likely to increase the weighted average power price in October 2022 by only about 10 percent over its end-Decem­ber 2021 level. In two rounds of AR, the government has en­hanced electricity tariff by Rs3.50/kwh each) from July 25 and August 1 and (ii) the remaining AR of Rs0.91/kwh would be effective from Octo­ber 1. The IMF has set eight new structural benchmarks (SBs) for Pakistan. Under SBs, targeted increase of the BISP Kafalat beneficiary base to 9 million families using the NSER, end-June 2023, finalization of the combined annual rebas­ings (AR) for FY22 and FY23 to take effect on October 1, 2022 by end-September 2022, sub­mission to NEPRA of petitions for the (i) FY23-July FPA by end-August; and (ii) FY23-Q1 QTA by end-October which will ensure full recovery of the rev­enue requirement (including lost revenue from the delayed first-stage Annual Rebasing FYs22-23 in July 2022) within FY23Q2 by end-Sep. 2022