ISLAMABAD: The International Monetary Fund (IMF) has imposed a series of stringent new conditions on Pakistan in response to Punjab’s “fiscally reckless” decision to grant Rs45 to Rs90 billion in electricity subsidies over two months. Government sources revealed on Monday that the global lender has demanded an immediate halt to these subsidies and set forth additional restrictions that could have far-reaching implications for provincial budgets.
Punjab’s recent move to offer a Rs14 per unit electricity subsidy has drawn sharp criticism from the IMF, which has stipulated that no provincial government may introduce new subsidies during the 37-month Extended Fund Facility (EFF) program. The IMF has given a deadline of September 30th to end the temporary subsidy, further complicating Punjab’s plan to allocate Rs700 billion for providing solar panels to consumers with up to 500 units of monthly electricity consumption.
“The provinces have agreed not to introduce any subsidies for electricity or gas,” stated one of the new conditions introduced by the IMF. This contradicts earlier assertions that provincial governments had the autonomy to grant such subsidies, raising questions about the stance of Prime Minister Shehbaz Sharif, who had encouraged other provinces to follow Punjab’s lead.
The IMF’s concerns are rooted in ongoing issues such as poor governance, high line losses, excessive taxes, and the shifting of subsidy burdens onto consumers using over 300 units monthly. These factors have driven electricity prices to an unsustainable range of Rs64 to Rs76 per unit for residential and commercial users. Rather than addressing these systemic issues, both the federal and Punjab governments opted for a short-term subsidy plan, further straining fiscal resources.
Punjab’s decision to approve the Rs14 per unit subsidy for electricity bills in August and September, benefiting consumers using between 201 to 500 units, has sparked controversy. While the provincial finance minister estimated the subsidy cost at Rs90 billion, Punjab Chief Minister claimed it would be Rs45 billion—a figure now under IMF scrutiny.
Moreover, the IMF has introduced another condition that binds all provincial governments from adopting any policy or action that could undermine or contradict commitments under the $7 billion EFF program. This move significantly curtails the fiscal autonomy of provincial governments, which had previously committed to signing a National Fiscal Pact by the end of September to take on some expenditures currently borne by the federal government.
Provinces have also agreed to improve their collection of agricultural income tax, property tax, and sales tax on services. The IMF’s new condition, which prohibits any action that might undermine these commitments, effectively prevents unilateral decisions by provincial authorities, according to sources.
In a third critical condition, the IMF now requires provincial governments to consult with the Finance Ministry before implementing any measures that could affect or undermine the structural benchmarks and key actions agreed upon with the IMF. This tightens control over fiscal policies at the provincial level, reflecting the IMF’s intensified focus on provincial budgets and policies under the new program.
Pakistan’s new IMF program, which is yet to receive approval from the IMF board, encompasses five budgets and policies of five different governments—a stark contrast to previous agreements that placed less emphasis on provincial policies. The Finance Ministry is urgently seeking a date for the IMF Executive Board meeting to secure approval for the $7 billion program. The delay in approval, initially expected on August 30th, is due to Islamabad’s failure to secure the rollover of $12 billion in loans and arrange $2 billion in new financing.
As the federal government struggles to meet its financial commitments, it has turned to foreign commercial banks for $800 million in new financing. Meanwhile, the IMF has expressed concerns over the revenue estimates provided by Punjab and Sindh, describing them as overly optimistic and potentially problematic in achieving the required cash surpluses.
The federal government relies on a projected Rs1.24 trillion provincial cash surplus to meet the IMF’s core condition of a primary budget surplus. However, the Federal Board of Revenue’s (FBR) failure to meet its two-month revenue target by Rs98 billion, despite collecting advances, jeopardizes the provinces’ ability to generate the necessary surpluses.
Compounding the issue, the federal government’s plan to spend Rs2.8 trillion to reduce electricity prices by up to Rs6 per unit has also raised concerns with the IMF. The plan, which hinges on the assumption of receiving Rs1.4 trillion from the provinces and raising additional commercial loans, has yet to gain the IMF’s approval, leaving the government in a precarious position as it seeks to stabilize the economy.