In a major development, the International Monetary Fund (IMF) reached a Staff-Level Agreement (SLA) with Pakistan for a $7-billion 37-month Extended Fund Facility (EFF) on Friday.
The development comes in response to a request by the Pakistani authorities, for a longer and larger programme, and is subject to approval by the IMF’s Executive Board. A timeline for the board meeting was not issued.
But like all programmes, Pakistan will now be required to follow an economic path curated in concert with the IMF.
Here are some key policy goals outlined in the IMF statement:
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Sustainable public finances: This will be done through gradual fiscal consolidation based on reforms to broaden the tax base and remove exemptions, while increasing resources for critical development and social spending
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Higher taxation in coming three years: Pakistan plans to increase tax revenues through measures of 1.5% of GDP in FY25 and 3% of GDP over the program.
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The FY25 budget targets will see an underlying general government primary surplus of 1% of GDP (2% in headline terms).
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Bring retail, export and agriculture sectors properly into taxation system: revenue collections to be supported by simpler and fairer direct and indirect taxation
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Fairer balance of fiscal effort between the Federal and Provincial governments, which have agreed to rebalance spending activities in line with the 18th Constitutional Amendment through the signature of a National Fiscal Pact
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At the same time, provinces to take steps to increase their own tax-collection efforts, including in sales tax on services and agricultural income tax.
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All provinces are committed to fully harmonising their Agriculture Income Tax regimes through legislative changes with the federal personal and corporate income tax regimes and this will become effective from January 1, 2025.
The IMF also noted that reducing inflation, deepening access to financing, and building strong external buffers are key to development and resilience.
“Monetary policy will continue to be focused on supporting disinflation, which will help protect real incomes, especially for the most vulnerable,” it said.
Whereas, to buffer against shocks and build reserves, the State Bank of Pakistan (SBP) will maintain a flexible exchange rate and continue to improve the functioning of the foreign exchange market and the transparency around FX operations.
On financial stability, IMF said that Pakistani authorities plan to take measures to deepen access to financing, while strengthening financial institutions, addressing any undercapitaliaed banks, and upgrading their crisis management framework.
The IMF called for “restoring energy sector viability and minimizing fiscal risks through the timely adjustment of energy tariffs, decisive cost-reducing reforms, and refraining from further unnecessary expansion of generation capacity”.
“The authorities remain committed to undertaking targeted subsidy reforms and replace cross-subsidies to households with direct and targeted BISP (Benzair Income Support Programme) support.
On promoting private sector and export dynamism, the IMF called for “improving the business environment, creating a level-playing field for all businesses, and removing state distortions. In this regard, the authorities are advancing efforts to improve SOE operations and management as well as privatization (with the highest priority given to the most profitable SOEs) and strengthening transparency and governance around the Pakistan Sovereign Wealth Fund and its operations”.
“They are also phasing out incentives to Special Economic Zones, phasing out agricultural support prices and associated subsidies, and refraining from new regulatory or tax-based incentives, or any guaranteed return that could distort the investment landscape, including for projects channeled through the Special Investment Facilitation Council.
“The authorities have also committed to advance anti-corruption as well as governance and transparency reforms, and gradually liberalise trade policy,” the IMF statement added.
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