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Roving Periscope: With the IMF rejecting the plea, Pakistan inches closer to default

Roving Periscope: With the IMF rejecting the plea, Pakistan inches closer to default

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Virendra Pandit


New Delhi: With the International Monetary Fund (IMF) rejecting Pakistan’s revised Circular Debt Management Plan (CDMP) as “unrealistic,” the nearly bankrupt South Asian country has inched closer to default, a la Sri Lanka last year.

The global financial institution, in Islamabad to throw a lifeline to a drowning economy, had asked Islamabad to increase the electricity tariff in the range of Pakistani rupees (PKR) 11 to 12.50 per unit to restrict the additional subsidy at PKR 335 billion for the current fiscal year, the media reported on Thursday.

The electricity sector in Pakistan is so crippled that most cities and industries are now suffering from a 12-hour power cut every day.

The IMF, currently on a mission to somehow bail out Pakistan, has been holding talks with Islamabad to complete the pending ninth review under the USD 7 billion Extended Fund Facility (EFF). 

Circular debt occurs when an entity facing problems with its cash inflows does not make payments to its suppliers and creditors.

The IMF had called the revised CDMP “unrealistic” as it was based on certain ‘wrong’ assumptions. Now, Pakistan will have to make changes in its policy prescription to restrict the losses of the power sector, one of the key conditions of the IMF bailout attempts.

The revised CDMP proposed an increase in the circular debt to the tune of PKR 952 billion for the current fiscal year against an earlier projection of PKR 1,526 billion.

Pakistan’s revised CDMP, shared with the IMF on Wednesday, showed the government needed an additional subsidy of PKR 675 billion despite increasing the power tariff in the range of PKR 7 per unit through quarterly tariff adjustment in the first two quarters of 2023 and PKR 1.64 for the third quarter from June to August.

“The IMF opposed the revised CDMP and asked the government to raise the tariff in the range of PKR 11 to PKR 12.50 per unit so that the requirement of additional subsidy could be reduced to half from its existing levels of PKR 675 billion for the current fiscal year,” the reports said.

Also, the IMF questioned how the Pakistan government calculated its additional subsidy requirement of PKR 675 billion. It envisages restricting losses of DISCOs to 16.27 percent on average during the current fiscal year.

According to the report, the government envisaged the target to recover Fuel Price Adjustment (FPA) charges deferred last summer to fetch PKR 20 billion against estimates of PKR 65 billion made last summer.

The IMF wanted tax increases and subsidy reductions, but Prime Minister Shehbaz Sharif refused, fearing a severe public backlash ahead of the upcoming elections in October 2023. But Islamabad started yielding to pressure in recent days as the threat of national insolvency grows and no friendly nations are willing to offer less painful bailouts.

Former Prime Minister Imran Khan’s government’s attempted multibillion-dollar credit agreement with the IMF in 2019 had also failed.



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