• Rs5 and Rs10 monthly PDL hike on diesel and petrol
• No intervention in the exchange rate
• Import reserve coverage for 10 weeks
• End of Ehsas Ration Program
ISLAMA BAD: The government has made a commitment to the International Monetary Fund (IMF) to raise the Petroleum Development Levy (PDL) to a maximum of Rs 50 per liter each for petrol and diesel by January and April 2023 respectively.
In its Letter of Intent (LoI) submitted to the IMF for formal approval of the completion of the 7th and 8th reviews of the $7 billion Extended Fund Facility (EFF), Pakistan also has ironclad pledges to build foreign exchange reserves to cover given At least 10 weeks imports until the end of the current fiscal year from existing 5 weeks and never to use these reserves to support the exchange rate.
IMF Country Representative Esther Perez Ruiz announced Wednesday that the Fund’s Executive Board meeting for Pakistan’s combined seventh and eighth EFF reviews is scheduled for August 29.
The Government has also pledged the approval of the Federal Cabinet of “an implementation plan for monthly PDL increases of Rs10/litre for petrol and Rs5/litre for diesel on 1 September 2022, followed by increases of Rs5 per month for both fuels until the PDL reaches Rs50 achieved in January for petrol and April for diesel” from the current rate of Rs20 per liter PDL for petrol and Rs10 for other three products – high speed diesel, kerosene and light diesel.
Also, the government will phase out the Ehsas Ration Riyat program during the fiscal year and continue with Sasta Fuel Sasta Diesel (SFSD) for now with clear sunset until June 2023.
However, the regular BISP would be expanded to Rs.316 crore this year through Ehsa’s Emergency Cash and unconditional cash transfer schemes to cover nine million families.
Under the LoI, the government would “remain committed to ensuring monetary and financial stability by maintaining a market-driven exchange rate, reducing inflation towards the target and rebuilding foreign exchange reserves.”
Over the next few months, the Treasury would seek new revenue measures worth about Rs 150 crore to offset some tax inversions and untargeted spending increases.
The plan of action in this direction would be “further commitment to a market-driven exchange rate and external stability”. The government reported that external conditions had turned precarious in recent months amid high uncertainty, a large terms-of-trade shock and persistently high current account deficits.
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Strong demand for foreign exchange from external debt repayments and imports put pressure on the exchange rate, which depreciated by over 33 percent between late December 2021 and late July, while reserves have fallen to under 1.5 months of imports.
“In this regard, we remain committed to the market-driven exchange rate, which has served as an essential buffer to protect economic activity and reserves while supporting the proper functioning of the market during this prolonged period of heightened uncertainty,” the LoI said. He added that State Bank of Pakistan (SBP) interventions continue to be guided by market conditions and the objective of rebuilding reserve buffers in order to increase reserves to a more cautious level of at least 2 by the end of FY23 despite the difficult external environment, 2 months to bring import cover.
“Forex selling will not be used to prevent a fundamentally driven devaluation trend in the rupee,” the central bank and Treasury Department have firmly pledged.
In addition, the government would upgrade the Debt Management Office (DMO), which will be responsible for developing and implementing the debt management strategy in line with the World Bank and IMF. The strategy would consolidate fragmented functions of debt recommendations. With the amended Tax Responsibility and Debt Limitation Act (2005) approved in May this year, the Treasury Department has assigned the hiring of additional staff according to responsibilities.
The government is currently in the process of setting up the front office, middle office and back office of the new DMO, which is due to be completed by the end of November 2022. The migration of relevant functions from other parts of the government agencies to DMO was already completed in March 2022 and its coordination with other government units, especially the economics department, has been enhanced to ensure the accurate production and reporting of debt-related statistics.
The government said Pakistan continues to face a challenging economic and political environment as the war in Ukraine has created uncertainty through higher international commodity prices and unfavorable external financing conditions, despite successfully managing the Covid-19 pandemic. This has already led to higher inflation, widening spreads and a larger current account deficit, all while the government changed on April 11th.
It said the previous government granted a four-month aid package in February (including broad-based subsidies, fuel tax cuts, new tax exemptions and a tax amnesty), but added that the current government “recognises (d) that these measures are not – on and in and of themselves – conducive to a sustainable macroeconomic environment and also run counter to some of Pakistan’s earlier commitments under its IMF-supported programme.
To restore macroeconomic and external sustainability, the government has pledged and completed five previous actions, including the revised budget 2023 approval, memoranda of understanding with the provinces on provincial targets in line with the budget surplus target of Rs 750 billion, the full roll-back of the aid package of February, including the complete elimination of the general fuel subsidy and the flat-rate electricity subsidy of Rs 5/kWh in June and the introduction of PDL for petrol at Rs 10/litre and diesel at Rs 5/litre on 1 July and then doubling on August 1, in addition to tightening monetary policy to 15h.
Published in Dawn, August 18, 2022