Pakistan had committed to show Rs3.15 trillion equal primary budget surplus in this fiscal year
ISLAMABAD:
Negotiations between Pakistan and the International Monetary Fund for the $1 billion loan tranche remained inconclusive on Wednesday due to differences over the viability of this year’s budget, which has been compromised by poor performance of the tax machinery.
Government officials said that the staff level agreement with the IMF for the $1 billion tranche under the third programme review will take more than the scheduled time, which ended on Wednesday.
They said that although Pakistan met all the quantitative performance criteria for the July-December 2025 period, the IMF had strong apprehensions that the primary budget surplus target for the end June period cannot be achieved.
Pakistan had committed to show Rs3.15 trillion equal primary budget surplus in this fiscal year — the core programme condition that is now projected to be missed by a wide margin.
Pakistan-IMF talks began on February 26th and were scheduled to finish on March 11th. Headed by its Mission Chief Iva Petrova, the IMF team had arrived in Karachi in February but had to leave abruptly on March 2nd due to heightened security concerns after US-Israel attacked Iran. The remaining talks were held virtually from Turkiya.
The IMF mission was flying back from Istanbul to Washington without reaching a staff level agreement. However, the federal government officials were hopeful that the negotiations would not prolong until May when the IMF is again expected to visit Pakistan to finalize next fiscal year’s budget.
The real issue was the performance of the Federal Board of Revenue and the IMF was not satisfied that the tax machinery can even collect Rs13.5 trillion in this fiscal year, according to the officials. The IMF had also reservations over some other fiscal projections, the sources added.
The government had given Rs14.13 trillion tax target to the FBR, which the IMF during the second review revised downward to Rs13.98 trillion. However, during this round of negotiations FBR sought further reduction in the target to a little under Rs13.5 trillion.
Pakistan had also missed the two indicative targets of collecting Rs6.5 trillion total taxes and Rs366 billion from the retail sector during the July-December period of this fiscal year. The FBR remains the weakest link in the government’s fiscal stability plan.
The government had given 1,000 new cars and up to four extra monthly salaries every month to the FBR employees in the hope that the tax machinery would perform. However, even these incentives could not energize the tax machinery.
Prime Minister Shehbaz Sharif this week announced energy conservation measures and instructed that 50% off the government staff would work from home and would observe four-day working week. However, the FBR on Wednesday issued a notification, making it binding for all its staff to come to the office for five-day a week. The FBR official said that the notification has been issued with the concurrence of the Cabinet Division.
The IMF was also seeking visibility on the next fiscal year’s budget and is now expected to send a mission to Pakistan, the sources added. There was a view within the ministry of finance that the government should not accept the budget mission. But the global lender did not agree, said the sources.
The sources said that the tax target for the next fiscal year was also open, as the IMF did not accept the FBR’s this year’s base number. The fund was of the view that the tax base would shrink next year due to one-off recovery of the revenues through the court cases that are part of this year’s collection.
The sources said that the IMF was also not satisfied with the projections of the dividend incomes from the state-owned enterprises and the petroleum levy. Another session with the IMF is expected this week.
The IMF also objected to the government’s decision of breaching the recently agreed governance and anti-corruption framework. The Fund asked to withdraw the amendments introduced in the Election Commission of Pakistan Act, which the National Assembly approved to exempt parliamentarians from the disclosure of assets.
The sources said that the IMF also pointed out gaps in the implementation of the SOEs reforms and questioned why the government officials are appointed on the SOEs boards as private members. The government may now have to withdraw all such nominees who are the civil and public servants but are serving as private members on the SOEs boards.
Mission Chief Iva Petrova observed during these meetings that the government raised a lot of hopes for the SOEs reforms but no major reform was undertaken. The government’s privatisation agenda is also delayed and it informed the IMF that even three better performing power distribution companies cannot be privatized before fall of this year.
The government met most of the structural benchmarks but missed the condition of amending the Sovereign Wealth Fund Act to the satisfaction of the IMF, said the sources.
The IMF did not accept Pakistan’s request for abolishing the carbon levy on furnace oil, saying the government had already drawn the money against this benchmark.
The IMF also did not accept Pakistan’s request to allow zero sales tax on the oil refineries. It instead asked the government to build the tax in the price, as the FBR did not have the capacity to pay the refunds, said the sources.
The IMF may allow some concession in the captive power plants levy by changing peak electricity equivalent gas rates to average rates. However, the IMF has not yet communicated the final decision, said the sources.
The sources said that there were also issues about the power subsidies. The IMF did not accept the government’s demand to allow Rs990 billion subsidy for the next fiscal year. It has asked to budget less than Rs800 billion.
The IMF also did not accept the government’s request for Rs500 billion circular debt additions in the next fiscal year. It instead asked to restrict the flow to around Rs300 billion, said the sources.
