Khyber Pakhtunkhwa Finance Minister Taimur Khan Jhagra on Friday conveyed to the Ministry of Finance his administration’s inability to provide a provincial surplus this year, a key requirement previously agreed upon for the revival of the IMF programme.

A provincial surplus is the amount provinces do not spend from the funds transferred to them by the federal government.

The federal government had in July agreed in the Memorandum of Economic and Fiscal Policies signed with the IMF to present an MoU signed by provincial governments to jointly provide around Rs750 billion cash surplus to the centre.

The KP government later became a signatory to the MoU, essentially agreeing to run a surplus, after the federal government assured it would address the province’s concerns.

Those concerns were related to ex-Fata funding and other issues including the transfer of the Federal Sehat Sahulat programme for tribal areas along with its funding to the centre, funds for tribal districts, and regular payment of net hydel profit.

“The MoU targets and conditions will be subject to the full extent of KP budgeted receipts of Rs1.322 trillion being received or generated by the province,” Jhagra had said in a letter to Finance Minister Miftah Ismail at the time.

However, in his letter to Ismail today — just three days before the IMF board is scheduled to meet on Aug 29 (Monday) to approve the disbursement of $1.18 billion to Pakistan under the Extended Fund Facility (EFF) — Jhagra maintained that “it will be next to impossible” for the provincial government to ensure the surplus without the resolution of issues highlighted earlier.

Among the reasons behind KP’s inability to run a surplus, he also pointed out heavy financial losses inflicted to the provincial infrastructure due to rains and floods.

Jhagra reminded the federal minister that KP had signed the MoU “in the greater national interest, however, we have been unable to get time for a meeting with the minister or secretary despite repeated requests”.

He listed four issues in the letter, saying the government should have resolved the budget allocations for ex-Fata which, in the absence of an updated NFC award, were decided at the discretion of the federal government.

He also reminded the government to commit to monthly transfers of net hydel profits as per terms specified in an MoU signed between the federal and provincial governments in 2016.

Jhagra also stressed the need for the revival of the National Finance Commission Award immediately.

He said the federal government must “also commit to immediately engage and resolve other financial issues with the Government of Khyber Pukhtunkhwa”.

“We estimate that the overall impact of not resolving these issues is actually to create a Rs100bn unfunded liability in the Khyber Pakhtunkhwa budget,” he wrote in the letter.

The provincial minister said the situation had become “more challenging due to extreme flooding wreaking havoc in Swat, DI Khan and Tank, while the cost in terms of rescue, relief, rehabilitation and building back is likely to run into the tens of billions”.

Under the current circumstances and without the resolution of the issues highlighted previously, it will be next to impossible for the KP to leave a surplus, he concluded.

Road to the IMF agreement

Pakistan entered the IMF programme in 2019, but only half the funds have been disbursed to date as Islamabad has struggled to keep targets on track.

The last disbursement was in February and the next tranche was to follow a review in March, but the government of ousted prime minister Imran Khan introduced costly fuel price caps, which threw fiscal targets and the programme off track.

The new coalition government has removed the price caps, with petrol and diesel prices going up by as much as 66pc and 92pc in over a month.

On June 21, Pakistan’s authorities and the IMF staff mission reached an understanding on the current fiscal year’s federal budget to revive the stalled loan programme after authorities committed to generating Rs436 billion in more taxes and gradually increasing the petroleum levy to Rs50 per litre.

As a result, the IMF staff in a statement acknowledged that important progress had been made over the federal budget. Based on this, Pakistan provided written commitment from the provinces to provide Rs750bn in cash surplus to the Centre to contain fiscal deficit within 4.9pc of GDP and help generate a Rs152bn primary fiscal surplus.

Moreover, Pakistan is now required to increase the electricity tariff by Rs7.91 per unit besides direct pass-through of monthly fuel cost adjustments in a timely manner to meet IMF demands.

On June 28, Ismail had announced that Pakistan had received the Memorandum of Economic and Fiscal Policies (MEFP) from the IMF for the combined seventh and eighth reviews.

The revised MEFP was based on budgetary measures announced by Ismail in his winding-up speech on the revised budget in the National Assembly, envisaging over Rs1.716 trillion (2.2pc of GDP) of fiscal adjustment, mostly through taxation, including 10pc super tax on 13 industries and personal income tax covering monthly incomes above Rs50,000 per month.

This is on top of a fixed tax regime for sectors like retailers, traders, jewellers, builders, restaurants, automobile and property dealers and so on.

This is the biggest fiscal adjustment in a single year that would help turn about Rs1.6tr primary deficit — the difference between revenues and expenditures excluding interest payments — during the current fiscal year into a Rs152bn surplus next year.