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Govt shares revised budget framework with IMF

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ISLAMABAD:

Despite the worst flood in the country‘s history and hundreds of billions of rupees in unbudgeted subsidies, Pakistan has initially projected only Rs990 billion fiscal slippages in this financial year, hardly showing a negative impact of Rs55 billion on its revenues.

Sources told The Express Tribune that Pakistan has shared the revised budget framework with the International Monetary Fund (IMF) amid the global lender’s apprehensions about the reliability of these figures.

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The disagreement over the impact of the floods on the fiscal framework remains a key hurdle in the next visit by the IMF Mission to Pakistan for negotiations for the release of a $1.2 billion loan tranche.

The sources said that the discussions would take place on these numbers with the IMF and the government was open to revise the figures based on the input by the global lender.

They said the government had projected only Rs990 billion fiscal slippages — of which Rs850 billion was only on account of higher debt servicing cost.

The overall budget deficit that the National Assembly had approved at Rs3.8 trillion was now projected at nearly Rs4.8 trillion, they added.

Despite the country witnessing the worst floods in its history, the coalition government has been signing off billions of rupees of unbudgeted cheques for exporters and farmers.

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It also waived off Rs40 billion in revenue in favour of traders.

However, it has not shown any major slippage on account of non-interest expenses and tax revenues, turning the figures unrealistic.

The Federal Board of Revenue’s (FBR) collection projection has been kept unchanged.

The sources said almost the entire shock of Rs990 billion had been shown on the expenditures, with hardly Rs55 billion negative impact on the petroleum levy target.

Neither the finance ministry, nor the IMF resident representative responded to the requests for comments.

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However, a government functionary said, off the record, that in the present circumstances the government would still have a primary budget surplus.

The primary budget surplus is calculated after excluding the interest payments.

There is a view that the government has overstated the interest expenses to Rs4.8 trillion up from Rs3.95 trillion approved in the budget.

The government has gone ahead with this move as the IMF does not trail the interest expense under its $6.5 billion programme.

The cushion availed on account of higher than the targeted interest expenses can be utilised to meet some other expenditures, said the sources.

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However, the senior government functionary said that the interest expenses were bound to rise because of the 15% policy rate.

The sources said the government had told the IMF that there would be a primary budget surplus of Rs14 billion or 0.02% of the GDP as against the budgeted figure of Rs153 billion.

However, this assessment is contrary to the World Bank report that showed Pakistan’s primary deficit at 3% of the GDP.

The sources said the government had projected the total expenditures, inclusive of the provinces, at Rs15.1 trillion — up by Rs934 billion.

They added that the current expenses were shown at Rs9.7 trillion — up by Rs1.1 trillion.

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However, the interest expenses are projected to be increased from Rs3.95 trillion to Rs4.8 trillion — an excess spending of 21.5%.

The subsidies are the second component where the government has estimated a slippage of Rs240 billion — up from Rs664 billion to Rs906 billion — an excess of 36%.

Out of this Rs240 billion, Rs195 billion would be taken out of the annual provision for emergencies, said the sources.

The pension is the third current expenditure head where the annual cost has been projected to increase by Rs25 billion to Rs634 billion.

The federal development expenditures have been slashed by Rs175 billion to Rs469 billion, according to the sources.

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The reset of the expenses have been kept unchanged.

The major assumptions are made in the revenue collection, where the FBR’s target has been kept unchanged at Rs7.47 trillion despite the board informing the finance ministry that the half-year target could be missed by a margin of Rs150 billion.

The petroleum levy collection is projected at Rs855 billion despite a mere Rs47 billion collection during the first three months of the current fiscal year.

The government is hopeful that it will collect at least Rs400 billion petroleum levy on account of petrol alone in the remainder period of the current fiscal year at the current rates.

The State Bank profit is projected at Rs371 billion — Rs71 billion higher than budgeted estimates.

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The rest of the revenue estimates have been kept unchanged.

The federal budget deficit widened by 43% to over Rs1 trillion in the first quarter of the current fiscal year as the rise in expenditure more than doubled the pace of gross revenues because of the uncontrolled spending on debt servicing.





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Privatisation fails to meet objectives

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ISLAMABAD:

The success of Pakistan’s privatisation programme has remained limited to only generating $11 billion in sale proceeds, as the country could not achieve the post-privatisation objectives of improving efficiency and competition, says a new independent study.

The findings come amid the International Monetary Fund’s (IMF) push for approval of the State-Owned Enterprises (SOEs) Bill to improve efficiency and management of public sector firms. The finance ministry has requested the holding of a joint session of parliament to approve the law, after the bill was rejected by the Senate.

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In a study titled “Public Sector Enterprises (PSEs) in Post-Privatisation: Evidence from Pakistan”, authors Naseem Faraz and Dr Ghulam Samad concluded that the key objectives of the privatisation programme had remained unfulfilled. The study has been published in the Journal of Applied Economics.

“Our main finding is that the performance of firms has improved in the post-privatisation period but (it is) statistically insignificant,” said the authors. Privatisation has been carried out with the motive of reducing the fiscal burden and increasing the efficiency of the inefficient PSEs. Since 1991, the sale of PSEs has raised revenues of Rs649 billion, or $11 billion.

The $11 billion has been worked out by applying the exchange rate of the year when a privatisation transaction took place.

Pakistan is one of the developing countries where privatisation of a large number of PSEs has taken place, but the post-privatisation effect is yet to be analysed. Second, rather than focusing on one or a few sectors, the study considers all the privatised PSEs.

The study showed that the performance of a few firms improved in the post-privatisation period but it largely remained negative.

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“In particular, the privatised PSEs in energy, cement and chemical sectors do not show positive gains in the post-privatisation period. However, the telecom and textile sectors have experienced a positive change in the performance of the privatised PSEs.” “Similarly, the results also showed that the efficiency of firms did not increase significantly.”

The authors said that according to their assessment through the Key Informant Interviews, the malfunctioning of regulatory environment led to the market failure that eventually resulted in market exploitation.

Regulations and regulators are captured by the market, bureaucrats, judiciary and politicians. An effective regulatory environment does not exist to force the privatised entities to have higher efficiency and develop a competitive environment.

Government intervention in the regulatory sphere is dominant. Every regulatory authority has a board member from the government. This practice is clearly not aligned with the privatisation regulations.

The government intervention (secretary sitting as a board member) creates conflict of interest by having ownership and management together.

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The privatised banking and energy companies have failed to bring in the benefits of sell-off, according to the study. The process of privatisation and rewards distribution favoured mainly the buyers, while the government faced risk and cost.

According to the authors, the privatised companies earned a higher average rate of return on assets compared to their fully government-owned counterparts, as measured by the total net profits-to-sales ratio.

The higher returns on assets suggest a favourable effect of privatisation. On the contrary, the profitability or productivity measure (net profits-to-sales ratio) was relatively higher for the privatised firms but it was statistically insignificant compared to the period when the firms were fully government owned.

“The privatised firms experience a mild increase in productivity compared to their pre-privatisation period. This difference in performance is not statistically significant.”

Privatisation also did not enhance the efficiency of the privatised firms in terms of increase in sales. It suggested that the efficiency improvement was merely coming through the reduction in cost of production.

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The study identified weak regulators as a reason for the failure to achieve the privatisation objectives.

“Unfortunately, the regulator Pakistan Telecommunication Authority (PTA) did not influence PTCL and other related entities to work in a regulated market environment.”

The role of the PTA is limited to overseeing the determination of market prices. PTCL’s privatisation was not a fair deal. It lost $800 million and also did not improve the market in terms of competition.

“The government sold 26% shares to Etisalat and also transferred the management, which is against the rule, which requires 51% shares,” emphasised the authors.

The government had agreed that Etisalat would pay $2.6 billion by making upfront payment of $1.4 billion and the remaining $1.2 billion in nine installments of $33 million each. For the deal, the government received only $1.8 billion and the remaining $800 million was never paid.

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“The monopoly of the telecom sector persisted despite the privatisation and drove away billions of dollars.”

The privatisation of KESC, now KE, also did not achieve the objectives. Though the main reason of the privatisation was to get rid of the loss-making enterprise, unfortunately the government is paying more after privatisation, according to the study.

Published in The Express Tribune, November 24th, 2022.

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Tractor maker faces legal action over fraud

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KARACHI:

The Federal Tax Ombudsman (FTO) has ordered legal action against a tractor manufacturing company as the Federal Board of Revenue (FBR) reported a fraud of more than Rs10 billion.

According to FBR sources, the tractor company has allegedly committed a fraud of over Rs10 billion under the previous government’s initiative to provide tractors at a lower cost to the farmers.

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As part of the subsidy scheme, the government gave billions of rupees to the deserving and underprivileged farmers for the purchase of tractors.

Sources said that the tractor manufacturer had claimed sales tax refunds on fake documents and flying invoices. The FBR then referred the case to the FTO.

They added that the FBR recommended the application of the Benami Transactions Act while taking legal action against the tractor manufacturer.

“The respondent company misused pay orders of the complainant by issuing bogus and fake sales tax invoices to other persons for obtaining fraudulent adjustment and refund,” a notification of the FTO office read.

The FBR has initiated legal proceedings against the owners and dealers of the tractor manufacturing company for the recovery of money obtained through fraudulent means.

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The Directorate General of Intelligence and Investigation, Inland Revenue has been tasked with investigating the fraud and tax evasion case.

Published in The Express Tribune, November 24th, 2022.

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G7 looking at Russian oil price cap of $65-70

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BRUSSELS:

The Group of Seven nations (G7) are looking at a price cap on Russian sea-borne oil in the range of $65-70 per barrel, a European Union (EU) diplomat said on Wednesday.

Views in the EU are split, with some pushing for a much lower price cap and other arguing for a higher one. The G7, including the United States, as well as the whole of the EU and Australia, are slated to implement the price cap on sea-borne exports of Russian oil on December 5.

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“The G7 apparently is looking at a $65-70 per barrel bandwidth,” the EU diplomat said.

“Poland, Lithuania and Estonia consider this too high because they want the price set at the cost of production, while Cyprus, Greece and Malta find it too low, because of the risk of more deflagging of their vessels, which might mean the G7 has found a good middle-ground,” the diplomat said.

Some 70%-85% of Russia’s crude exports are carried by tankers rather than pipelines.

The idea of the price cap is to prohibit shipping, insurance and re-insurance companies from handling cargos of Russian crude around the globe, unless it is sold for no more than the maximum price set by the G7 and its allies.

Because the world’s key shipping and insurance firms are based in G7 countries, the price cap would make it very difficult for Moscow to sell its oil – its biggest export item accounting for some 10% of world supply – for a higher price.

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At the same time, because production costs are estimated at around $20 per barrel, the cap would still make it profitable for Russia to sell its oil and in this way prevent a supply shortage on the global market.

Brent crude front-month future oil prices initially fell to $86.54 from $87.30 on the news.

Published in The Express Tribune, November 24th, 2022.

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