IMF Imposes New Conditions Following Punjab’s “Fiscally Reckless” Electricity Subsidy

The International Monetary Fund (IMF) has imposed several new conditions on Pakistan’s provincial governments concerning energy subsidies and budget management. This move follows Punjab’s controversial decision to provide Rs45 to Rs90 billion in electricity subsidies over two months, which the IMF has labeled as “fiscally reckless.”

Government sources revealed that the IMF has mandated the Punjab government to end the temporary Rs14 per unit electricity subsidy by September 30th. Additionally, the IMF has prohibited all provincial governments from introducing any new energy subsidies during the 37-month Extended Fund Facility (EEF) program.

Impact on Future Provincial Plans and Subsidies

These new IMF conditions cast doubt over Punjab’s plan to allocate Rs700 billion for providing solar panels to consumers with up to 500 monthly consumption units. A key condition now requires that “the provinces agree that they will not introduce any subsidy for electricity or gas.” This condition contradicts previous claims that provincial governments could give subsidies, and it also challenges Prime Minister Shehbaz Sharif’s earlier encouragement for other provinces to follow Punjab’s lead.

Rising Energy Prices and Subsidy Challenges

Due to factors such as bad governance, high line losses, higher taxes, and costly energy deals, electricity prices in Pakistan have surged to between Rs64 to Rs76 per unit for residential and commercial consumers. Despite these escalating costs, both federal and Punjab provincial governments opted for a temporary two-month subsidy plan instead of finding a sustainable solution.

The Punjab government approved a Rs14 per unit subsidy for consumers using between 201 and 500 units in August and September. The estimated cost of this subsidy ranges from Rs45 billion to Rs90 billion, depending on various statements from provincial leaders.

Tighter Fiscal Controls and New Conditions for Provinces

The IMF has introduced another condition that prohibits provincial governments from implementing any policies that could undermine the commitments made under the $7 billion IMF program. This restriction significantly limits the fiscal autonomy of the four provincial governments, requiring them to adhere strictly to the terms agreed upon with the IMF.

Provincial governments are also expected to sign a National Fiscal Pact by the end of September, assuming responsibility for some of the expenditures currently covered by the federal government. Additionally, the provinces must enhance their collection of agriculture income tax, property tax, and sales tax on services.

A third critical condition mandates that provincial governments consult with the Finance Ministry before making any changes to measures that could affect the structural benchmarks and key actions agreed upon with the IMF.

Struggle for IMF Program Approval

Pakistan’s new IMF program, which is yet to receive approval from the IMF board, encompasses five budgets and policies from five different governments. The Finance Ministry is currently seeking a date for the IMF Executive Board meeting to secure the $7 billion package. The meeting, initially set for August 30th, was postponed due to Islamabad’s failure to secure the rollover of $12 billion in loans and arrange $2 billion in new financing.

The Finance Ministry continues to reach out to foreign commercial banks, aiming to secure $800 million in new financing to meet IMF requirements.

Provincial Revenue Challenges and Overestimated Budgets

The IMF has also been closely monitoring provincial budgets and recently reviewed their figures. It observed that the revenue projections for Punjab and Sindh were overly optimistic, potentially complicating efforts to generate the necessary cash surpluses. The federal government relies on a provincial cash surplus of over Rs1.24 trillion to meet a core IMF condition for a primary budget surplus.

However, the Federal Board of Revenue’s (FBR) failure to meet its two-month revenue target by Rs98 billion has jeopardized the ability of provinces to generate these surpluses.

Federal Government’s Plans Under Scrutiny

The IMF’s concerns extend beyond the Punjab government. The federal government’s decision to allocate Rs2.8 trillion to reduce electricity prices by up to Rs6 per unit has also drawn criticism. Pakistan recently presented a plan to the IMF to achieve this reduction, based on assumptions of receiving Rs1.4 trillion from the four federating units and raising additional commercial loans. However, this plan has yet to receive IMF approval.

The IMF’s heightened scrutiny of provincial budgets and subsidies presents a significant challenge for Pakistan as it navigates the complexities of its new program and seeks to stabilize its economy.