The government may need to implement revenue measures and a tight fiscal consolidation in the last quarter of the current fiscal year by reducing development spending before receiving the next $1.1 billion from the International Monetary Fund (IMF).
The new fiscal measures, which will come into effect from April 1, may include a three-pronged approach, including tighter controls on the Public Sector Development Program (PSDP), increased revenue collection from the retail and real estate sectors, and activation of emergency measures under the $7 billion Extended Fund Facility (EFF) last year to cover the revenue shortfall in the first half of the year and the following months.
Officials estimate that these measures could help bridge the fiscal deficit of Rs600 billion over the past eight months, but the shortfall could exceed Rs1 trillion by the end of the fiscal year due to business as usual.
An official said there could be some adjustment for lower-than-expected inflation and other trade realities, but strong commitment to reforms now needs to be translated into strong data, not just talk.
According to the official, authorities will have to demonstrate implementation of standards in new sectors, with the Federal Board of Revenue (FBR) promising about Rs250 billion in new revenue from retailers and substantial inflows from real estate as well.
The IMF mission and Pakistani authorities will work out further details to determine to what extent each measure can fill the gap, as they continue discussions until March 14.
The IMF mission held a ‘kick-off meeting’ with the finance ministry team, led by Finance Minister Muhammad Aurangzeb, on Tuesday, even as the mission began sectoral engagements on Monday.
If the talks are concluded successfully, Pakistan is expected to receive the second tranche of over $1 billion from the $7 billion loan program.
The Finance Minister said that Pakistan is in a good position for the first review of the bailout program, he is here, we will have 2 rounds of negotiations, first at the technical and then at the policy level, I think we are in a good position for the review.
The 37-month facility was finalized on the basis of the budget approved by the parliament in July last year, and was formally signed in September 2024. The first tranche of about $1.1 billion was disbursed in advance. All 7 equal tranches are to be paid every 6 months, however, it is necessary to fully comply with the performance criteria, structural benchmarks and index targets.
To meet the IMF-set fiscal targets, the government had already promised emergency revenue measures, which would be triggered if average revenue collection fell by one percent over three months. These measures include higher advance income tax on industrial and commercial imports, a one percent increase in withholding tax on supplies, services and contracts, and a 5 percent increase in federal excise duty on beverages.
Last week, a senior government official involved in the preparations for the IMF review said that there were some technical glitches for some of the deadlines, but after some delays, they were resolved within weeks or a month. In principle, the performance review is based on the first half of the current fiscal year, from July 1 to December 31, 2024, and although some glitches could be seen at that time, all the missing links have now been covered.
The most significant weakness observed so far was the revenue shortfall compared to the program targets, which was compensated by a higher-than-target primary budget surplus and a higher-than-projected revenue-to-GDP ratio due to better collections from non-tax revenues such as central bank profits, petroleum levies, telecom profits, etc.
According to the IMF, a significant portion (about 45 percent) of the fiscal adjustment envisaged by the EFF (about 3 percent of GDP) in the federal budget 2024-25 was ex ante legislation, along with the implementation of a large increase in electricity tariffs as part of the new energy policy.
The remaining structural conditions focused on strengthening the tax system, removing energy bottlenecks, restructuring or privatizing public sector enterprises, strengthening the operational independence of the central bank, enhancing financial sector stability, and protecting the most vulnerable.
Ahead of the IMF mission’s visit, the lender reiterated last week that its program aims to increase Pakistan’s low tax-to-GDP ratio to 3 percent of GDP, while improving the transparency and efficiency of the tax system by broadening the tax base and improving compliance.
The three key areas of focus include increasing direct taxes by bringing retailers, property owners and agricultural income into the tax net; rationalizing personal and corporate income taxes by reducing exemptions in the General Sales Tax (GST) system; smoothing rates; increasing coverage of federal excise duty; and eliminating tariff exemptions to boost customs revenue.
