ISLAMABAD: The delay in reaching a staff level agreement under the International Monetary Fund’s ongoing Extended Fund Facility (EFF) may be due to the prevailing trust deficit.
This was the crux of background discussions with Finance Ministry and the Federal Board of Revenue officials who told Business Recorder that the Fund was not overtly concerned with the shared macroeconomic data however the mission wanted to ensure that the budget 2025-26 will be in line with its guidelines including energy sector reforms, progress on privatization plan as well as state owned entities (SOEs) losses.
The virtual discussion over the next few days will revolve around new tax measures in the budget for next fiscal year, energy sector reforms, and progress on privatization plan.
First review: IMF sounds optimistic on SLA prospects
Officials said that signing of SLA is expected forthwith, but the IMF Executive Board approval may be delayed till prior conditions are met. This procedure is in line with what the Fund did last year: in May 2024, at the time of signing the new EFF program, IMF team visited Pakistan for two weeks - May 13-23, 2024 and announced an end of mission statement without signing the SLA, saying policy discussions would be held virtually. The SLA was reached on July 12, 2024 (nearly two months later) with the condition that “this agreement is subject to approval by the IMF’s Executive Board and the timely confirmation of necessary financing assurances from Pakistan’s development and bilateral partners”.
The Board approval was granted on September 24, 2024, taking around 4 months from the date of end of mission statement. The prior actions reported were, budget fiscal year 2025, notification of annual electricity rebasing, and gas tariff adjustment.
The FBR sources informed BR that the IMF may insist on additional revenue-generating measures in next year’s budget including implementation of the Retailers Registration scheme (traders and real estate), removal of exemptions, and widening of the tax net through stricter documentation of the economy.
The FBR has collected Rs7,346 billion during the first eight months (July-February) 2024-25 against the target of Rs7,947 billion, reflecting a massive shortfall of Rs601 billion and projected a shortfall of over Rs600 billion during the current fiscal year.
During discussions with the IMF, the FBR officials claimed that they informed the mission that they are making serious efforts to meet the annual target with special focus on enforcement, income tax/sales tax audit and settlement of pending revenue cases in courts involving Rs2.7 trillion.
However, both sides reportedly discussed the possibility of slashing the target from Rs 12.9 trillion to Rs 12.3 trillion though it is unclear whether this would trigger the agreed contingency plan would envisage a set of indirect taxes with an annual revenue impact of Rs216 billion.
The FBR also claimed that it proposed a reduction in tax rates on beverages, tobacco and real estate sector to increase volumes and transactions in these sectors to generate additional revenue of over 100 billion during April-June (2024-25). However, the IMF reportedly did not agree with these proposals.
The IMF urged the government to take concrete steps on the privatization of SOEs, especially loss-making entities like Pakistan International Airlines (PIA) and certain power distribution companies.
The privatization process will be crucial for improving efficiency and reducing the burden on public finances. The government may need to commit to power sector reforms, including reducing circular debt, rationalizing electricity and gas tariffs, and improving governance in distribution companies (DISCOs).
Copyright Business Recorder, 2025
Comments