.
ISLAMABAD:
The negotiations between Pakistan and the International Monetary Fund on the loan tranche of 1 billion The USD remained on Wednesday unsettled due to differences over the viability of this year’s budget, which has been compromised by the poor performance of the tax machinery.
Government officials said the staff agreement with the IMF for the $1 billion tranche USD during the third program review will take more than the planned 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 concerns that the primary budget surplus target for the end-June period may not be met.
Pakistan had committed to show Rs3.15 trillion equivalent of primary budget surplus this fiscal year – the core program condition which is now expected to be missed by a wide margin.
Talks between Pakistan and the IMF began on 26 February and were scheduled to end on 11 March. Led by its mission chief Iva Petrova, the IMF team had arrived in Karachi in February but had to leave on March 2 due to heightened security concerns after the US-Israeli attack on Iran. The remaining talks were held practically from Turkey.
The IMF mission flew back from Istanbul to Washington without reaching a staff-level agreement. But the federal government officials were hopeful that the talks would not extend until May, when the IMF is again expected to visit Pakistan to finalize the 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 Rs 13.5 trillion this financial year, according to the officials. The IMF also had reservations about 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 downwards to Rs13.98 trillion. However, during this round of negotiations, the FBR sought further reduction of the target to just below Rs 13.5 trillion.
Pakistan had also missed the two indicative targets of collecting Rs6.5 trillion in total taxes and Rs366 billion from the retail sector in the July-December period of this fiscal year. 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 FBR employees in the hope that the tax machinery would cope. But even these incentives could not set the tax machinery in motion.
Prime Minister Shehbaz Sharif this week announced energy-saving measures and directed that 50% off government staff would work from home and observe a four-day work week. However, the FBR on Wednesday issued a notification making it mandatory for all its employees to come to the office five days a week. The FBR official said the notification has been issued with the concurrence of the cabinet department.
The IMF also sought visibility on the next fiscal year’s budget and is now expected to send a mission to Pakistan, the sources added. There was a position in the Ministry of Finance that the government should not accept the budget mission. But the global lender did not agree, the sources said.
The sources said the fiscal target for the next financial year was also open as the IMF did not accept the FBR’s base number for this year. The foundation was of the opinion that the tax base would shrink next year due to the one-off recovery of the income through the legal proceedings included in this year’s collection.
The sources said the IMF was also not satisfied with the projections of the dividend income from the state-owned enterprises and the oil tax. Another session with the IMF is expected this week.
The IMF also objected to the government’s decision to break the recently agreed governance and anti-corruption framework. The foundation asked to withdraw the amendments introduced in the Election Commission of Pakistan Act, which the National Assembly approved to exempt parliamentarians from disclosure of assets.
The sources said the IMF also pointed out gaps in the implementation of the SOE 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 civil servants and public servants but who serve as private members on the boards of SOEs.
Head of Mission Iva Petrova noted during these meetings that the government raised a lot of hopes for SOE’s reforms, but no major reform was implemented. The government’s privatization agenda is also delayed, and it informed the IMF that even three better-performing electricity distribution companies cannot be privatized before the 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 IMF’s satisfaction, the sources said.
The IMF did not accept Pakistan’s request to scrap the carbon tax on fuel oil, saying the government had already drawn the money towards that 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 into the price as the FBR did not have the capacity to pay the repayments, the sources said.
The IMF may allow some concessions in the tax on tied power plants by changing peak electricity equivalent gas prices to average prices. But the IMF has yet to communicate the final decision, the sources said.
The sources said there were also problems with the power subsidies. The IMF did not accept the government’s demand to allow Rs990 billion in subsidies for the next fiscal year. It has asked to budget less than Rs 800 billion.
The IMF also did not accept the government’s request for Rs500 billion circular debt relief in the next financial year. It instead asked to limit the flow to around Rs.300 billion, the sources said.
