The IMF Article IV Report detailing the contours of Pakistan’s latest Extended Financing Facility (EFF) is finally out, answering many questions. The fiscal equation agreed upon is significantly altered from what was presented in the federal budget in June 2024. The largest blow is expectedly delivered to the Public Sector Development Program (PSDP), which has been slashed from a budgeted Rs1.4 trillion to a more modest Rs983 billion. The 30 percent cut in PSDP was largely expected, as the budgeted PSDP was believed to be built on unrealistic grounds, and the electricity subsidies in 1QFY25 likely further contributed to the revised number.

Those keeping track also had their sights on the treatment of the Petroleum Levy (PL), as the authorities started way off track in relation to the lofty annual collection target. To recall, the government had set the FY25 PL collection target at Rs1.28 trillion—up 26 percent year-on-year.

At well under a dollar per liter, Pakistan’s retail gasoline price is now among the lowest in the region for major oil-importing countries. This is critical because Pakistan has set a rather ambitious revenue target from petroleum consumption for FY25 at a hefty Rs1.29 trillion. This is up 47 percent from last year’s collection of Rs 869 billion.

With one quarter of FY25 gone, the projected revenue loss stands close to Rs40 billion, as estimated PL collection on gasoline and HSD stands at Rs236 billion based on sales of 3.9 billion liters. Petroleum sales have not rebounded since last year, and the government’s reluctance to increase PL on petroleum products to the now maximum allowable ceiling of Rs 70/liter has contributed to the PL collection staying well below the budgeted target.

It was widely anticipated that the IMF would come down hard on the government’s inability to maximize revenues on petroleum sales, as has been the case in the past. However, this does not seem to be the case anymore, as the IMF Report now states the PL annual collection target at a significantly reduced Rs1.06 trillion, down Rs215 billion, or 17 percent, from the budgeted target and only 5 percent higher than the revised FY24 collection of Rs1.01 trillion.

This is where the insistence on not raising the PL early in the fiscal year now makes sense. With the revised target in place, even if consumption remains the same as last year, an average of Rs 65/liter for the year would meet the target. If the PL stays at Rs 60/liter throughout the year, a 10 percent increase in consumption over last year would be sufficient to meet the target. Price setting is tricky business, and the government may well have missed the opportunity to increase the PL earlier when oil prices were lower. That said, there is no real pressure from the IMF to handle petroleum prices in a more stringent manner, a departure from the Fund’s typically strict stance in many previous programs.

The Article IV Report does not mention any timelines regarding maximizing the PL—unlike previous occasions where phased PL increases on gasoline and HSD were part of performance criteria and structural benchmarks. There is also no mention of levying GST on petroleum, which clearly indicates the IMF is fine with Pakistan running one of the lowest pump prices in the region and among the IMF’s current leading borrowers. The overall approach contrasts starkly with the IMF’s oft-stated stance on taxation of petroleum products—which in Pakistan’s case would call for no less than 45 cents per liter. Currently, it stands at no more than 23 cents per liter. Clearly, the IMF seems to have given up on the idea of forcing partner countries to price petroleum products based on the cost of externalities. The idea now appears to be ensuring the bottom line is met—by whatever means.