IMF comes down hard on Pakistan’s budget proposals

The International Monetary Fund (IMF) has expressed its dissatisfaction with the budget proposals announced by Finance Minister Ishaq Dar for fiscal year 2023-24, calling them a missed opportunity to broaden the tax base while criticising the new amnesty scheme that “creates a damaging precedent”.

“The draft FY24 Budget misses an opportunity to broaden the tax base in a more progressive way,” Esther Perez Ruiz, the IMF Resident Representative for Pakistan, told Business Recorder via message on Thursday.

“The long list of new tax expenditures reduces further the fairness of the tax system and undercuts the resources needed for greater support for vulnerable (Benazir Income Support Programme) BISP recipients and development spending,” she added.

Perez Ruiz said the IMF remains engaged to discuss policies to maintain stability, and “it stands ready to work with the government in refining this budget ahead of its passage”.

Her statement comes as the IMF programme remains scheduled to end on June 30, a day before the new budget measures come into force with the start of the new fiscal year in Pakistan.

New ‘tax amnesty’

The IMF also came down hard on new taxation proposal that seeks to enhance the limit in sub-section (4) of section 111 of the Income Tax Ordinance 2001 to rupee equivalent of US$100,000.

“Enhancement of monetary limit of foreign remittance remitted from outside Pakistan from five million rupees to rupee equivalent of USD 100,000 for the purpose of section 111(4) which places bar on asking nature and source of unexplained income/assets,” it says in the ‘Salient Features’ section of the Budget 2023-24 (Income tax Ordinance 2001).

Perez Ruiz said the amnesty runs against the IMF programme’s conditionality.

“The new tax amnesty runs against program’s conditionality and governance agenda and creates a damaging precedent.”

The IMF official also said measures to address the energy sector’s liquidity pressures could be included alongside the broader budget strategy.

The remarks from the Washington-based lender come at a time when policymakers in Pakistan are scrambling to secure dollar inflows. Reserves held by the central bank have fallen below $4 billion, and look set to decrease further, while the IMF programme remains stalled at the ninth review since November last year.

Talks of debt restructuring are picking pace, and Finance Minister Dar has moved to pacify markets several times, repeating the government’s stance of meeting all obligations in a timely manner.

Just a day ago, Moody’s Investors Service warned that Pakistan is at an increased risk of a failure to restart its bailout programme with the IMF, pushing the country closer to a sovereign default.

“There are increasing risks that Pakistan may be unable to complete the IMF programme that expires at the end of June,” Grace Lim, a sovereign analyst with the ratings company in Singapore, was quoted as saying by Bloomberg on Wednesday.

“Without an IMF programme, Pakistan could default, given its very weak reserves.”

Background

Pakistan had to satisfy the IMF on three counts, which included restoring the proper functioning of the foreign exchange market, pass a FY24 budget consistent with programme objectives, and secure firm and credible financing commitments to close the $6-billion financing gap ahead of the Board meeting.

Pakistan did not feature on the IMF Executive Board calendar as of Thursday morning.

Perez Ruiz had earlier already stated that there was only time for one last IMF board review before the scheduled end of the $6.5-billion Extended Fund Facility (EFF).

In August 2022, the IMF Board completed the combined seventh and eighth reviews of the Extended Arrangement under the EFF, taking total disbursement for budget support to about $3.9 billion. The EFF had originally been approved in July 2019.