• Rs5 and Rs10 monthly PDL hike in diesel and petrol
• No intervention in exchange rate
• Import reserve cover for 10 weeks
• Phaseout of Ehsas Ration Programme

ISLAMABAD: The government has given an undertaking to the International Monetary Fund (IMF) to raise the petroleum development levy (PDL) to a maximum of Rs50 per litre each on petrol and diesel by January and April, respectively, in 2023.

In its Letter of Intent (LoI) sent to the IMF for formal approval of completion of the 7th and 8th reviews of the $7bn Extended Fund Facility (EFF), Pakistan has also made iron-clad commitments to build foreign exchange reserves to cover at least 10 weeks of imports by end of the current fiscal year from existing 5 weeks and not to use those reserves ever to support the exchange rate.

IMF Country Representatives Esther Perez Ruiz on Wednesday announced that the Fund’s Executive Board meeting for Pakistan’s combined seventh and eighth reviews under the EFF has been scheduled for Aug 29.

The government has also committed federal cabinet’s approval “of an implementation plan of monthly PDL increases of Rs10/litre for petrol and Rs5/litre for diesel on Sept 1, 2022, followed by increases of Rs5 per month for both fuels until the PDL reaches Rs50 in January for petrol and April for diesel” from the current rate of Rs20 per litre PDL on petrol and Rs10 on other three products – high-speed diesel, kerosene and light diesel oil.

Also, the government will phase out Ehsas Ration Riyat Programme during the fiscal year and continue with Sasta Fuel Sasta Diesel (SFSD) for now with clear sunset by June 2023.

However, the regular BISP would be expanded through Ehsas Emergency Cash and unconditional cash transfer programmes to Rs316bn this year to cover nine million families.

Under the LoI, the government would “remain committed to ensuring monetary and financial stability by maintaining a market-determined exchange rate, lowering inflation towards the target, and rebuilding foreign exchange reserves”.

Over the next couple of months, the Ministry of Finance would seek about Rs150bn worth of fresh revenue measures to make up for some reversals in taxation and untargeted increase in expenditures.

The schedule of actions in this direction would be “continued commitment to a market-determined exchange rate and external stability”. The government reported that external conditions had become precarious in recent months, on the back of high uncertainty, a large terms-of-trade shock, and persistently large current account deficits.

Read: Up the IMF creek

The strong demand for foreign exchange from external debt repayments and imports put pressure on the exchange rate, which depreciated by over 33pc between end-December 2021 and end-July, while reserves have fallen to below 1.5 months of imports.

“In this context, we remain committed to the market-determined exchange rate, which has served as an essential buffer protecting economic activity and reserves during this prolonged period of heightened uncertainty, while supporting the smooth function of the market,” said the LoI, adding that State Bank of Pakistan’s (SBP) interventions will remain guided by market conditions and the objective of rebuilding reserve buffers to bring reserves up to a more prudent level of at least 2.2 months of import coverage by end-FY23 notwithstanding the difficult external environment.

“Forex sales will not be used to prevent a rupee depreciation trend driven by fundamentals,” the central bank and the Ministry of Finance have made a firm commitment.

Moreover, the government would upgrade the Debt Management Office (DMO) which will be responsible for designing and implementing debt management strategy in line with World Bank and IMF. The strategy would consolidate fragmented functions of debt recommendations. With the amended Fiscal Responsibility and Debt Limitation Act (2005) management approved in May this year, the Finance Division has assigned the hiring of additional staff commensurate with the responsibilities.

The government is currently in the process of setting up the front office, middle and back offices of the new DMO to be completed by end-November 2022. Migration of relevant functions to DMO from other parts of government agencies has been already been completed in March 2022 and its coordination with other government units, particularly the Economic Affairs Division, was being improved to ensure the accurate compilation and reporting of debt-related statistics.

The government said Pakistan continued to face a challenging economic and political environment as while successfully navigating the Covid-19 pandemic, the war in Ukraine has created uncertainty through higher international commodity prices and adverse external financing conditions. This has already resulted in higher inflation, elevated spreads, and wider current account deficit, while at the same time, the government changed on April 11.

It said the previous government granted a four-month relief package in February (including broad-based subsidies, fuel tax cuts, new tax exemptions and a tax amnesty), but added that the current government “recognise(d) that these actions are not-in and of themselves-conduciveto a sustainable macroeconomic environment and also run against some of Pakistan’s previous commitments under its IMF-supported programme”.

Hence to restore macroeconomic and external sustainability, the government committed and completed five prior actions, including revised budget 2023 approval, MoUs with provinces on provincial targets consistent with Rs750bn cash surplus target in the budget, complete reversal of the February relief package, comprising full elimination of general fuel subsidies and the Rs5/kWh blanket power subsidy in June and introduction of PDL on petrol at Rs10/litre and on diesel at Rs5/litre on July 1, and then doubling it on Aug 1, besides the tightening of monetary policy to 15pc.

Published in Dawn, August 18th, 2022