Pakistan was “well positioned” for the first review of its $7 billion International Monetary Fund bailout programme, the finance minister told Reuters, as talks with the global lender began on Tuesday.
Islamabad secured the $7 billion Extended Fund Facility last summer to help claw its way out of an economic crisis, with an immediate disbursement of about $1 billion. The review, if cleared and approved by the lender’s board, could unlock another tranche of funding for cash-strapped Pakistan ahead of its annual budget which is usually presented in June.
The programme has played a key role in stabilising Pakistan’s economy and the government has said the country is on course for a long-term recovery. “They are here. We will have two rounds of talks, first technical and then policy level,” Finance Minister Muhammad Aurangzeb said. “I think we are well positioned,” for the review, he said.
Meanwhile, the Federal Board of Revenue (FBR) is facing a gigantic task for avoiding mini-budget through agreed contingency measures. Instead of taking any additional revenue measures, the FBR high-ups are making all out efforts to convince the IMF that there are certain sectors where the tax rates are on higher sides and if the rates are adjusted downward, the revenue collection might go up. They cited examples that property’s transaction taxes are required to be lowered, as well as excise duty on cigarettes, which should also be reduced.
According to official sources, there are two options; the first is to utilise the fiscal space achieved through reduction in debt servicing bill to the tune of Rs1.3 trillion to bridge the FBR’s revenue shortfall during the current fiscal year to achieve the agreed fiscal deficit and primary balance targets for the current fiscal year. The second option is to reduce a certain portion of available fiscal space for erasing some portion of the Circular Debt (CD) of the energy as well as slashing the power tariff. The Ministry of Power is also working on its plan to utilise surcharges for settling the stocks of CD, but overall tariff reduction plan will be implemented only with the approval of IMF, said the official.
FBR has faced revenue shortfall of Rs604 billion in the first eight months of the current fiscal year and it is projecting that it would be able to maximise the revenue collection in the remaining four months (March to June) period of FY2025. The IMF has not yet shared its projected revenue shortfall but indicated that the overall shortfall of the FBR might range around Rs1,000 to Rs12,00 billion till end June 2025. “This is the point of contention between the two sides,” said some sources, and added that two sessions were held between the two sides on the FBR’s revenue performance and policy measures, but nothing was yet firmed up.
Under the contingency revenue measures, the IMF and Pakistan had agreed on the occasion of finalizing the EFF loan that if there would be a shortfall of three month rolling average revenue collection of the projected target by 1 percent, the IMF staff in consultation with Pakistan will evaluate the adoption of one or more of the seven tax measures to generate Rs11.3 billion monthly by increasing advance income tax on machinery imports by 1% (Rs2bn/month). (2) Increase advance income tax on raw materials for industrial undertakings by 1% (Rs 3.5bn/month). (3) Increase advance income tax on raw materials for commercial importers by 1% (Rs1bn/month. (4) Increase withholding tax on supplies by 1% (Rs1bn/month). (5). Increase withholding tax on services by 1% (Rs0.5bn/month). (6) Increase withholding tax on contracts by 1% (Rs0.5B/month). (7) Increase FED on sugary drinks by 5% (Rs2.3bn/month).
