Govt’s subsidy plan raises red flags
ISLAMABAD: The chances of finalising the ninth review of the troubled $6.5 billion Extended Fund Facility (EFF) from the International Monetary Fund (IMF) soon got bleak after the global lender on Monday raised questions over the government’s new fuel subsidy scheme.
The development came as the government decided to dole out subsidies worth billions of rupees on petrol as well as Rs73 billion on wheat flour that could potentially lay landmines in the path of the Fund’s programme.
Instead of putting its house in order, the government announced Rs50 per liter subsidy for owners of up to 800cc cars and motorcyclists while Khyber-Pakhtunkhwa and Punjab will give Rs73 billion in wheat flour subsidy cumulatively.
Sources in the finance ministry said that the global lender has inquired about the source of financing of the Prime Minister’s petrol scheme. The IMF also asked about the mechanism in implementing the new subsidy programme, they added.
In her reaction, Esther Perez, the Resident Representative of the IMF, told Daily City News that the Pakistani “authorities did not consult with the IMF staff ahead of announcing their recent fuel subsidy proposal”.
She added that the IMF staff was seeking “greater details on the scheme in terms of its operation, cost, targeting, protections against fraud and abuse, and offsetting measures, and will carefully discuss these elements with the authorities”.
“As a general matter, the IMF sees strengthening support for those eligible for social assistance through the unconditional Kafalat cash transfer scheme (BISP) as the most direct way to help the neediest in Pakistan,” said Esther.
The federal government plans to collect Rs50 per liter extra from car owners of above 800cc category and give it to car owners of below 800cc and motorcyclists.
Prime Minister Shehbaz Sharif has the audacity to waive taxes of the richest commercial banks last month and also withdrew Rs3,000 per month tax on traders in September last year but wants to penalise middle-income group owning 1,000cc cars to fund his political scheme.
The IMF raised queries a day after the Prime Minister’s Office announced to give Rs50 per liter subsidy to the 1.3 million owners of 800cc cars and over 20 million motorcyclists and rickshaw owners.
The move may jeopardise the IMF programme, if the government’s explanation remained short of the Fund’s expectations. The chances of an early IMF deal are already thin due to many political moves made by the government and its inability to raise $6 billion additional loans.
While addressing a news conference on Monday, Minister of State for Petroleum Musadik Malik said that the government will charge Rs100 more for petrol from the affluent so that relief could be provided to the low-income segments in fuel tariff.
The government considers an owner of 1,000cc car “affluent” but it does not have the guts to slap taxes on the richest landlords and retailers.
While talking to Daily City News, Malik said that the owners of above 800cc cars will pay a higher price of Rs50 over and above the normal OGRA-determined petroleum products prices, which will be utilised to reduce the rate for the low-income consumers.
The per liter petrol price is Rs273, which will be increased to Rs323 at the current rates for the car owners of using above 800cc to help the PML-N and its allied parties to win the next general elections.
Due to fears that PTI Chairman Imran Khan will clean sweep, the government is dragging its feet from holding the elections and has now placed its bets on the middle- and upper-middle income groups to lure votes from the lower-middle income groups through such schemes.
In the words of a senior PML-N party leader, the cross-fuel subsidy is a double-edged sword for the government.
The state minister explained that an escrow account will be opened with the National Bank of Pakistan and the dealers claims of subsidised fuel will be settled on a daily basis.
He added that the beneficiaries will be registered against the national identity card numbers who will receive a one-time-password to claim the cheaper fuel.
A motorcyclist will receive a maximum 21 liter per month cheaper fuel with a daily cap of 3 liter while an 800cc car owner will get a maximum 30 liter per month of petrol, said Malik.
The petrol subsidy programme would be implemented within the next six weeks without any provision of subsidies being paid from the budget, said Malik.
Wheat flour subsidy
On the instructions of the Prime Minister, the two provinces have also rolled out a free wheat flour scheme in Khyber-Pakhtunkhwa and Punjab. The sources said that the cumulative cost of the subsidy will be Rs73 billion per month in the two provinces.
An amount of Rs53 billion will be utilised in Punjab and another Rs19 billion will be needed in Khyber-Pakhtunkhwa — a province that is already in the red and cannot afford to give subsidies.
“The Rs73 billion spending might jeopardise the recently agreed fiscal framework with the IMF, which requires Rs559 billion provincial cash surpluses,” said the Finance Ministry sources.
On the basis of the Rs559 billion cash surplus, Rs465 billion or 0.5% primary budget deficit target had been agreed upon with the IMF just last month.
The sources said that K-P had informed the prime minister that it did not have the entire Rs19 billion funds to finance the free wheat flour scheme. The plan is to give free wheat flour to 5.7 million families in the province.
An official of the Punjab Finance Department said that the provincial government will honour its commitment given to the IMF. He said that although the maximum estimated cost is Rs53 billion, it may not go that high. He said currently the provincial government bears about Rs30 billion a month wheat flour subsidy.
Recently, the untargeted subsidy has ended by increasing the released millers prices to the level of support price to end the general subsidy, he added.
The provincial government is paying Rs90 billion annual mark-up on the Rs575 billion debt taken for wheat operations in Punjab, which has become unsustainable. He said that the general wheat subsidy was financially unsustainable and will be removed and target subsidy will continue henceforth
About 15.8 million households will benefit from the free wheat flour scheme.