Pakistan clinches a new deal with IMF

In a most anticipated event, Pakistan authorities have reached Staff Level Agreement (SLA) with International Monetary Fund (IMF) for a new 37 months Extended Funded Facility (EFF) of US$7 billion. This new program aims to strengthen the macroeconomic stability and set the road for resilient and inclusive growth. This agreement will now be followed by board approvals which normally takes couple of weeks after the SLA.

Our note of dissent

We are of the opinion 1) Pakistan already suffers from unsustainable debt servicing and the new agreement would never enable the country to come out of debt circle. Pakistan will keep on borrowing and repaying through the nose, 2) Hike in electricity and gas tariffs will further erode competitiveness of the local manufactures and adversely impact exports, 3) the country does not have infrastructure to workout cost of crops and in turn income of farmers, the proposed 45% rate would be meaningless, 4) the breach of “confidence deficit” will widen further 5) the hatred against “ruling elite” is already on the rise and 6) in case anti-government demonstration start, these could turn violent and create serious law & order situation.

The press release issued by IMF conditions this agreement to timely confirmation of necessary financing assurances from Pakistan’s development and bilateral partners.

Some of the key milestones or reforms that Pakistan has already taken or will take over the course of the program are:

Increase in tax to GDP ratio by 300bps: 

1-      Under this 37-months program, the Government has to enhance tax to GDP ratio by 300bps. Measures to achieve half of this target (150bps) are already taken in FY25 budget by removing various exemptions and broadening the tax base.

2-       Taxing the untaxed and undertaxed: 

Under this program, Government has also changed tax regime of exporters from 1% of turnover full and final regime to normal tax regime, wherein exporters will now be paying tax equal to other corporates at 29% of profit before tax plus applicable super tax. Also, in a bold move, Government has taxed retail sector and plans to introduce tax on agriculture income from January 2025.

3-      National Fiscal Pact to be signed: 

The new national fiscal pact is likely to be signed between provincial and federal government for fair fiscal balance between federal and provincial units. Through this, provincial governments will be required to spend higher on education, health, social protection, and regional public infrastructure investment, enabling improved public service provision. This will result in lower expenditures of federal government in above areas. However, there is no timeline given for such measure.

4-      Monetary Policy: 

On monetary policy stance, IMF has noted, it will continue to focus on supporting disinflation.

5-      Privatization: 

On privatization side, it is noted that, highest priority is given to most profitable State Owned Enterprises (SOEs).

6-      Other Measures: 

Few other important measures are, phasing out of agriculture support prices, phasing out incentives granted to special economic zones, refraining from new regulatory or tax based incentive, or any guaranteed return scheme including those projects which are channeled through Special Investment Facilitation Council (SIFC).

Some of the key measures which Pakistan took before clinching this deal were: 1) increasing the power tariff, 2) increasing the gas rates, 3) approval of budget FY25, and 4) amendment in SOEs law, as per news report. It is believed that some of these measures were taken as part of the prior actions of the new deal.