 "Pakistan’s $7 billion IMF deal has run into trouble. Here’s what happens next")
The International Monetary Fund’s Pakistan deal does not seem to be going well.
The chief of the Pakistan mission of the IMF, which had agreed to a $7 billion funding agreement for the Pakistan in September, on Tuesday opened unscheduled talks with the country.
The unscheduled visit of the IMF mission and talks beginning with meeting the country’s finance team are too early for first review of the IMF’s Extended Fund Facility (EFF), which is due in the first quarter of 2025.
The chiefs of Pakistan’s central bank and federal board of revenue also attended the meeting besides other officials from both the sides, the statement said.
The ministry and the IMF have not officially released details of the visit.
But what do we know about the issue? And what happens next?
Let’s take a closer look:
What do we know?
According to Express Tribune, the IMF is considering changing its review schedule for the $7 billion bailout package to every three months.
This is because the IMF is concerned about Pakistan going off track when it comes to delivering on its promises.
As per The Times of India, the meeting was set to occur in March 2025.
However, due to challenges in fiscal policy, taxation, and external financing, the IMF mission arrived earlier than expected.
Impact Shorts
More ShortsThe previous Extended Fund Facility (EFF) under the 2019-2022 agreement also followed a quarterly review schedule.
As per Business Standard, the IMF had given Pakistan $1.1 billion upfront.
The rest of the money, around 6 billion, was set to be dispersed in six tranches pending the completion of half-yearly reviews.
Subject to the successful completion of half-yearly reviews, the remaining amount of around $6 billion will be distributed in six equal tranches.
The International Monetary Fund’s Pakistan mission chief Nathan Porter met Finance Minister Muhammad Aurangzeb and State Bank of Pakistan (SBP) Governor Jameel Ahmad, as per Business Standard.
The IMF’s new Resident Representative to Pakistan Mahir Bicini was also present, as per The Tribune,
The sources said the main agenda of the visit was to take a stock of the country’s fiscal deficit, which included a nearly 190 billion rupees ($685 million) shortfall in the revenue collection in first quarter of the current fiscal year.
They said external financing gap of $2.5 billion which the South Asian nation needs for the current fiscal year, which runs to June 30, 2025, will also be discussed by the mission.
On the first day of meetings on Monday, the IMF raised questions about the power sector, focused on plans to manage the solarisation challenge and the surplus imported gas, The Express Tribune newspaper reported, quoting sources.
The meeting was attended by Pakistan’s Minister for Power Awais Laghari, Minister of State for Finance Ali Pervaiz Malik, the secretaries of Finance, Power, and Petroleum, and the chairman of the Federal Board of Revenue.
During the meeting, the IMF also raised the issue of reducing electricity demand due to an increasing trend of installing rooftop solar panels as an alternative to highly expensive electricity.
However, the global lender did not get a satisfactory reply to its questions on solar use and urged the energy ministry to take the lead on the matter.
The IMF also asked about the impact of the Punjab government’s policy to incentivise solar use, which is contrary to the federal government’s policies.
The issue of about 1000 mmcfd (million standard cubic feet per day) surplus imported gas and Pakistan’s commitment to disconnect the gas connection to the in-house power generation plans of the industries also came up for discussions, said the sources.
Under a condition by the IMF, Pakistan is required to disconnect the gas for the in-house power generation plants of the industries by January 2025. There is a strong resentment within the industry about its adverse impact on the cost of doing business.
Pakistan proposed that industries may be allowed to run on imported gas on a full-cost recovery basis. Currently, the government charges about Rs 2,950 per MMBtu (Metric Million British Thermal Unit) for the use of imported gas in captive power plants, which is about Rs 700 less than the market price.
The IMF conducted several rounds of discussions on various issues, including the performance of the Federal Board of Revenue (FBR), the accuracy of power sector data, and progress in meeting macroeconomic targets. A key discussion also focused on the status of implementing the National Fiscal Pact.
The FBR provided an overview of its performance for the first quarter, informing the IMF that the Rs 90 billion shortfall over three months was due to inaccurate macroeconomic assumptions. The FBR explained that the failure to meet monthly targets was caused by sluggish import growth, a slowdown in inflation, and some policy measures not yielding the expected results.
The FBR attempted to assure the IMF that it had met the Rs 10 billion tax collection target from traders, largely due to higher contributions from non-filer retailers. While these retailers pay a 2.5 per cent withholding tax, they remain outside the broader tax system. However, the IMF’s Rs 10 billion target was based on the Tajir Dost scheme, which was missed by 99.99 per cent. The FBR informed the IMF that, in the next phase, it would focus on non-filer wholesalers to ensure that due taxes are collected from them, despite the benefits they receive from the higher withholding tax rates imposed on non-filers. Finance Minister Aurangzeb has already announced the elimination of the non-filer category.
The FBR also sought to assure the IMF that, despite revenue shortfalls, it would still be able to meet the 11.5 per cent tax-to-GDP target due to the shrinking size of the overall economy. However, the total tax collection would fall significantly short of the Rs 12.97 trillion target without the implementation of a mini-budget.
The FBR’s tax target of Rs 12.97 trillion was based on an assumed 15 per cent nominal GDP growth, comprising 3 per cent real GDP growth and 12 per cent inflation. However, nominal GDP is now expected to grow by less than 12 per cent, which will result in a smaller overall economy than initially projected.
Sources indicated that the IMF did not reveal whether it had agreed with the FBR’s reasoning or if it would continue to insist on the implementation of a mini-budget, as promised by Prime Minister Shehbaz Sharif’s government in September.
The IMF raised concerns about the low recoveries from the real estate sector, despite significant increases in withholding tax rates on the sale and purchase of plots. It also received a briefing on the National Fiscal Pact and acknowledged the difficulties in ensuring its smooth implementation.
The four provincial governments have yet to approve the agriculture income tax laws, which are meant to raise the tax rate to 45 per cent. Due to delays in Punjab, the overall cash surplus target has not been met. Sources suggested that the IMF might offer technical assistance to help fully implement the National Fiscal Pact, which aims to shift expenditure responsibilities to the provinces in line with the constitutional framework.
After the session, the finance minister hosted a luncheon in honour of the outgoing representative, Esther Perez. However, the Ministry of Finance did not release a press statement following the initial meeting.
What happens next?
The Express Tribune quoted Pakistani officials as saying that no decision has been taken by IMF yet.
Sources indicated that the Ministry of Finance is also facing challenges in ensuring that the provinces stay on course, as reported by Express Tribune.
A quarterly review would allow for continuous oversight of the approximately 40 conditions outlined in the $ 7 billion agreement.
Dawn reported that the mission will remain until November 15 “to discuss recent developments and programme performance to date”, according to informed sources.
“This mission is not part of the first review under the extended fund facility (EFF), which will be no earlier than the first quarter of 2025,” they said.
The assessment by the IMF is important for the success of the loan and the economic recovery of Pakistan, which narrowly avoided a default last year with the timely help of the lender.
Islamabad had been working on implementing conditions that Sharif had previously called “strict” from the IMF to complete the 37-month loan programme agreed to in July, which the country hopes will be its last.
The IMF said the new program will require “sound policies and reforms” to strengthen macroeconomic stability and address structural challenges alongside “continued strong financial support from Pakistan’s development and bilateral partners.”
The government had also vowed to increase its tax intake, in line with IMF requirements, despite protests in recent months by retailers and some opposition parties over the new tax scheme and high electricity rates.
Pakistan has been struggling with boom-and-bust economic cycles for decades, leading to 22 IMF bailouts since 1958. Currently the country is the IMF’s fifth-largest debtor, owing the Fund $6.28 billion as of July 11, according to the lender’s data.
A failed attempt by Pakistan to sell its national airline , a major setback to plans to privatise all loss-making state-owned enterprises, will also be discussed along with power and gas sectors losses, they said.
At a staff level agreement in July, Islamabad had given sureties to arrange for external financing through bilateral and multilateral funding lenders, on top of roll overs of loans from friendly countries including China, Saudi Arabia and the United Arab Emirates.
The latest economic crisis has been the most prolonged and has seen Pakistan facing its highest-ever inflation, pushing the country to the brink of a sovereign default last summer before an IMF bailout.
Inflation has since eased and credit ratings agency Moody’s has upgraded Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to ‘Caa2’ from ‘Caa3’, citing improving macroeconomic conditions and moderately better government liquidity and external positions.
With inputs from agencies
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