Relief Package: Funding the main challenge

March 02, 2022 (MLN): Taking streets by surprise, PM Imran Khan on Monday announced a Rs250-300bn relief package, aiming to provide relief to the masses for the next four months, until the announcement of Federal Budget FY23.

In the eyes of experts, the move is aimed at gaining political mileage as the rising inflation has dampened the sentiments of masses and opposition parties are contemplating a no confidence motion against the PM.

Although the details are yet to materialize, overall, the package is a mixed bag. On one hand, it will support industries and IT sector as the PM announced several incentives including tax exemptions. In addition, the most vulnerable segment of the society will also be benefited from the package through expanding Ehsaas program.

While on the other hand, the reduction in energy prices at a time when international commodity prices are raging will put a significant pressure on both fiscal and external side. There is no denying that the measure will have a short-term disinflationary impact, however in the long-run any drop in energy prices would spur deficit buildup that would eventually lead to higher prices.

If we assume the oil prices remain same and that pricing pressures are not passed on to the consumers, this will also start affecting OMCs by creating liquidity concerns.

On the funding side, given the fiscal position of the government, ‘how the government would finance this outlay’ remains a key question. The financing tools as per Finance Ministry will include; cut in PSDP, excess tax collection on the back of higher imports, unused COVID-19 funds carried forward from last year, and dividends payouts of SOEs.

Though the details to raise funds through dividends from SOEs are not yet clear, it is worth mentioning that without clearing SOEs overdue receivables, it is not possible for the government to raise financing from SOEs as it will raise cash flow concerns.

Currently, the receivables of OGDC and PPL stood at Rs407bn and Rs319bn respectively. So, the move will be positive for both E&Ps if the government opts for the complete settlement of these receivables.

There is no doubt that the passing aforementioned legislations would be politically challenging for the government amid a stressed macroeconomic environment, however, it will be interesting to see how the economic fundamentals react to these adjustments in the coming months.

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