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IMF assured to squeeze difference currency rate between open market and inter-bank

ISLAMABAD (Eshfak Mughal):- Pakistan’s Government has promised with the International Monetary Fund (IMF) to maintain average premium between interbank and open market rate will be no more than 1.25 percent and no supplementary grants to be issued unless the new government forms after up coming general election in the country.

The IMF has issued Letter of Intent which was submitted by the Finance Ministry with the signs of Finance Minister Ishaq Dar and Governor State Bank of Pakistan Jameel Ahmed to secure Stand By Arrangement Loan program worth $3 billion from IMF last week.

According to the letter, the authorities will refrain from formal and informal guidance on the exchange rates of forex reserves intermediaries and, after eliminating existing exchange restrictions and the multiple currency practice, will maintain a framework free of restrictions on payments and transfers for current international transactions and multiple currency practices, and, by allowing no hindrance to the market determination of the exchange rate, ensure that no abnormal premium emerges in between the rate in any of the three FX markets interbank, open, and informal. The average premium between the interbank and open market rate will be no more than 1.25 percent during any consecutive 5 business day period.

Currently, the premium between the both market is more than Rs7. According to the exchange companies, the buying rate was Rs287 and selling Rs290 in open market while green back currency was being traded at Rs283.3 in interbank on 18th July.

The Finance Ministry has assured to take some taxation measures to collect Rs254 billion during the current fiscal yaer to add government revenue. In this regard, the govt has increased maximum petroleum development levy (PDL) to Rs 60 per liter from Rs50 per liter with the following path of increases to reach an average rate over FY24 of Rs 55 per liter. This will add an extra Rs.79 billion.

Increasing revenue from the personal income tax (PIT). We aim to increase the PIT yield by Ps 30 billion by increasing tax rates for business income and wage earners by 2.5 percentage points and merging the top two brackets.

Rationalizing tax exemptions for fertilizer. Instead of an exemption, diammonium phosphate (DAP) fertilizer will be subject to general sales tax (GST) at a rate of 5 percent and a federal excise at a rate of 5 percent. Urea fertilizer will be subject to federal excise duty (FED) at a rate of 5 percent. These measures will increase tax revenues by Rs 34 billion.

Increasing FED on sugary drinks. We are doubling the rate to 20 percent with an expected yield of Rs 8 billion.

Increasing the advance tax on the purchase and sale of immovable property from 2 percent to 3 percent, which we expect to add sustainable revenue of PRs 46 billion.

Collection of an annual tax on second homes and other high-wealth items from non-filers at 1 percent of the value, with an expected revenue yield of PRs 19 billion.

Raising the advance tax from builders and developers based on land size of the project under development, with a revenue yield of PRs 15 billion.

Increasing the additional GST on deliveries to businesses that are not registered for value added tax (VAT) from 3 percent to 4 percent (so at the 18 percent regular rate, unregistered businesses will pay 22 percent GST). We expect Rs 23 billion in additional revenue from this measure.

The govt has also assured to the Washington based lender, it will not approve any supplementary grants for any additional unbudgeted spending over the parliamentary approved level in FY24 at least until the formation of a new government after the elections (except if needed to respond to a severe natural disaster);

It will not launch any new tax amnesties or grant further any new tax exemptions in FY24 including through the budget or Statutory Regulatory Orders without prior National Assembly approval.

The federal govt will sign MoUs with each province on their commitment to achieving an end-FY24 fiscal position consistent with the FY24 general government primary balance goal of Rs 401billion. It also said that the govt will focus on critically urgent energy sector policies, outlined below; and (v) our commitment not to introduce any fuel subsidy, or cross-subsidy scheme, in FY23 and beyond.

The IMF was assured to make efforts to fully operationalize the treasury single account (TSA-2) by end-October 2023.

To enhance transparency in all public procurement and with technical assistance support from the World Bank, the Public Procurement Regulatory Authority (PPRA) launched and piloted the e-Procurement System in early March 2023 with the health and education ministry as well as Punjab province. The govt will fully roll-out the system at the
federal and provincial levels by end-December 2023.

Following the May 2022 regulations on requiring publication of beneficial ownership information for public procurement contracts above PRs 50 million, the PPRA is continuing with awareness-raising activities and enforcement actions to ensure compliance by companies awarded public procurement contracts.

The govt has also give assurance to the Fund to continue to rely on the regular primary T-bill, PIB and Sukuk auctions as the main mechanism for raising new domestic financing; and are committed to refraining from any new financing through direct credit lines, loans, or private placements with domestic financial institutions, including but not limited to local branches of foreign banks. In this regard, the temporary exemption from relevant procurement regulations, obtained from PPRA on February 22, 2023, will be revoked by cabinet by July 30, 2023.

“To focus our scarce budget resources on the most vulnerable, we decided against the execution of the originally budgeted fuel subsidy program (Sasta Fuel Sasta Diesel) that would mainly have benefited the lower- and middle class”, said in the commitment.

“We therefore reaffirm our commitment to return to a market determined exchange rate and, in line with the Foreign Exchange Regulation Act, banks and exchange companies are at liberty to determine exchange rates between Pakistani rupees and foreign currencies free from any formal or informal influence. Specifically, we will refrain from providing guidance or expressing preference to market participants regarding the exchange rate or regulate demand for FX through (either formal or informal) administrative action. Once proper market functioning is restored, we are committed to maintain the average premium between the interbank and open market rate at no more than 1.25 percent and no less than -1.25 percent during any consecutive 5 business day period”, made commitment with IMF.

To enhance transparency and efficiency in the foreign exchange market, we will publish daily the interbank and open market exchange rates, and develop a framework to monitor and publish developments and pricing in the informal market. We will also accelerate work for transitioning to a new trading platform for spot transactions connecting all banks and we expect the system to go live by end-December 2023, the government assured IMF

The State Bank of Pakistan’s (SBP) interventions will remain guided by market conditions and the objectives of

(i) bringing reserves up to a more prudent level of at least US$6.4 billion (1 month of import coverage) by end-December 2023;

(ii) reducing the SBP’s net forward/swap position below US$4 billion, notwithstanding the difficult external environment.

Forex sales will not be used to prevent a trend depreciation of the rupee driven by fundamentals. To safeguard the integrity of the foreign exchange market, any abusive or anti-competitive behavior by market participants will be addressed through enforcement of the relevant regulations and the applicable laws.

To anchor inflation expectations and support the exchange rate, we raised the policy rate to 22 percent on June 26, 2023; and stand ready to consider further action in the next MPC in July and the coming months, until inflation and inflation expectations are on a clear downward path, with the exact pace of future adjustments dependent on inflation data, exchange rate developments, the strength of the external position, and the fiscal-monetary policy mix. To this end, we will aim to ensure that the real policy rate returns to positive territory on a forward-looking basis to signal our commitment to bring inflation within the target band within FY26. In addition to the policy rate increase, we have reduced the interest rate gap between the policy rate and the interest rate on the two major refinancing schemes (EFS and LTFF) to 3 percentage points. To strengthen monetary policy transmission, these rates will continue to be linked to the policy rate and will adjust automatically.

In addition, we are taking decisive action to phase out SBP’s involvement in the refinancing schemes. To this end, and in consultation with the IMF, the MoF and SBP have finalized a plan in consultation with other stakeholders to establish an appropriate Development Finance Institution to support the eventual phasing out of the refinance facilities. Under the plan, which foresees a transition period of no more than 5 years, commercial banks will extend credit to export industries at preferential rates upon receipt of a subsidy, to be provided transparently from the federal budget and to be administered by Ex-Im Bank. Commercial banks will no longer access the dedicated liquidity facility at below market rates from SBP, but instead will obtain liquidity at market rates via SBP’s regular open market operations.

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