Stung by critics, Khan rolls out massive subsidy plan


In a surprise move, Prime Minister Imran Khan announced a massive reduction of Rs 10 per liter in the price of petrol and diesel, and Rs 5 per unit in the price of electricity in his televised address to the nation today. today. Alongside this, there were a host of announcements of further tax cuts, an increase of Rs3000 in the allowance given under the Ehsaas scheme, interest-free loans to small farmers and the mention of another possible amnesty program, with details to be revealed later. Profit learned that this decision had received the consent of the government’s Economic Advisory Council.

The announcement comes weeks after Pakistan won a tough restart of its IMF facility which had been on hold since March 2020. After protracted wrangling that lasted for months, the government had caved to IMF demands to raise prices petrol and diesel by increasing collections of Petroleum Development Tax to Rs 30 per liter by June, and raising electricity tariffs to end the accumulation of circular debt.

With this announcement, those commitments now hang in the balance, casting a cloud over the newly resumed program. “There is no IMF in this country anymore,” Hafeez Pasha told Profit. “The reality is that the fund program is no more.”

The article continues after this announcement

(New Price Notification for Petrol Prices. Petroleum Tax has been reduced to Rs1.81 from Rs17.92 which absorbs the increase in Crude prices in February and also reduced the price of a liter of Rs10)

A member of the Prime Minister’s Economic Advisory Council, who was unable to speak for the award, told Profit that in his view Finance Minister Shaukat Tarin should have obtained prior approval from the IMF before proceeding. to this package. “I would be very surprised if Tarin hadn’t already approved this by the IMF,” he said, adding that he wasn’t sure whether it had been done or not. “But knowing him, I would be really, really surprised if he hadn’t gone through them and gotten their approval.”

Speaking on a TV show later that night, Finance Minister Shaukat Tarin said “we have taken this step after thinking about it”. He said it cannot be financed with debt, nor by adding a spending burden to the government. He revealed that the total cost of the package was between 250 billion and 300 billion rupees.

Talking about the financing plan, he said that some funds may come from the Public Sector Development Program, some funds are in the Ehsaas Fund due to over-budgeting, some from “the flexibility that the IMF had given us in Covid funds”, and some of the funds belonging to “our oil companies” in the form of undisbursed dividends over the past three years which he estimated at 1.3 trillion rupees, most of which was to be used for circular debt reduction, but some will be used to finance this package.

He assured the presenter that the fund’s program would not be disrupted. “Whatever action we take, we get their advice first,” he said. “Their concerns are to maintain fiscal targets, not to get too much debt on our books, we’re not bringing any debt on our books as a result of that.” He also highlighted the excess revenue recovery figure of Rs280bn. “It should be fine,” he assured the presenter.

The petrol and diesel price cuts could cost the government 120 billion rupees by June, he estimates based on a quick calculation. Reducing electricity prices could cost Rs 50 billion, plus Rs 10-15 billion in lost revenue. “The subsidy on small loans” he continues, pointing to another of the measures announced by the Prime Minister, “could cost nearly Rs40bn over two years, then the Rs50bn internship program (annual), the increase in the allowance Ehsaas is still Rs25-30bn”.

Confusion has surrounded the mechanism by which these price reductions will be achieved. In a tweet, Energy Minister Hammad Azhar said the price reductions would first be absorbed by the development levy on fuel, then by direct subsidies.

“Upon the instructions of the PM, fuel cost adjustments that have been incurred in electricity bills (due to rising prices of imported fuels) for the past few months amounting to Rs 4-5/unit will now be absorbed by the government for residential/commercial consumers,” he tweeted shortly after the speech. “Similarly, petrol/diesel prices will be reduced by Rs 10/litre. This will be achieved by reducing the PDL in the short term but through a grant funded in the long term.

However, oil marketers were skeptical of the use of direct subsidies. “About 4-6 months ago they tried something similar,” a senior oil marketing executive told Profit. “And within two weeks they had to reverse everything, but in the meantime a tab was made with the OMCs and the refineries which, to date, has not been settled.”

Besides the mechanism, confusion has also swirled over the impact this will have on the commitments made in the IMF program. In this program, the government had specifically committed to increasing collections through the petroleum development tax as well as electricity tariffs.

“[W]We will increase the PDL by 8 PRs/litre and are committed to increasing the PDL by 4 PRs/litre per month for the remainder of fiscal year 2022 until the maximum of 30 PRs/litre is reached,” says the letter of intent for this facility. IMF staff noted that Pakistan “has just caught up on pending electricity tariff adjustments” and has committed to further hikes in the coming months.

“The services emphasized that the regular implementation of tariff adjustments in accordance with established formulas is essential to lend credibility to the newly independent energy regulator,” notes the services report, referring to the new powers granted to the regulator. of the electricity sector and the tariff setting body, Nepra.

“The EFF is now in danger, clearly,” says Mushtaq Khan, who served as a senior economic adviser to the Governor of the State Bank before setting up his own private macroeconomic consultancy. “With three months of uncertainty over global commodity prices given what is happening in Ukraine, it is far too heavy a fiscal burden,” he adds.

“Getting this across to the IMF is going to be difficult. It makes me wonder what their backup plan is. If this upsets corporate sentiments about the future, it could have repercussions for the stock market, but more importantly, the forex market.

Financial markets have also wondered how the government intends to finance these measures and what this means for the future of the fund program. “There are tough times ahead for investors,” said Fahad Rauf, head of research at Ismail Iqbal Securities. “The move will be negative for all three markets, debt, equities and currencies. Debt market yields are likely to rise immediately,” he says, referring to secondary market yields on government papers, while “some equity investors might see the positive, but the general direction of the economy is not positive. The foreign exchange market is already under pressure, we are on the verge of reaching a record CAD deficit, the Rupee was already under pressure, and that could only make matters worse on that front.

Reducing the price of fuel and electricity will help consumers and industry in the short term. But the impact of its funding burden is likely to hit the exchange rate hard. Everyone Profit spoke to agreed on this point. As such, any disinflationary impact will end up being self-destructive. Everyone also agreed that it was a political decision more than anything, coming from a government under pressure from the rising political temperature in the country.

“It is the purely electoral mode that is approaching,” says Rauf. “The looming no-confidence vote weighs on the minds of prime ministers.”


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