WASHINGTON, D.C. — Pakistan and the International Monetary Fund (IMF) have reached a landmark agreement on a three-year, $7 billion aid package, the Washington-based institution announced on Saturday. This deal provides critical relief to Pakistan’s beleaguered economy.
Pending approval by the IMF’s Executive Board, this new program aims to bolster Pakistan’s macroeconomic stability and foster conditions for stronger, more inclusive, and resilient growth. Pakistan’s economy, long plagued by chronic mismanagement, has been further strained by the COVID-19 pandemic, the Ukraine war’s repercussions, supply chain disruptions, and devastating floods in 2022 that affected a third of the country.
With foreign currency reserves dwindling and a looming debt crisis, Pakistan secured its first emergency loan from the IMF in summer 2023. This latest bailout package mandates significant reforms from the Pakistani government, including broadening the country’s tax base.
Despite having over 240 million residents, only 5.2 million people filed income tax returns in 2022. The government aims to increase tax revenue by nearly $46 billion in the 2024-25 fiscal year, marking a 40% rise from the previous year.
“The program seeks to build on the macroeconomic stability achieved over the past year by further strengthening public finances, reducing inflation, rebuilding external buffers, and eliminating economic distortions to encourage private sector-led growth,” the IMF statement quoted Nathan Porter, the Fund’s mission chief to Pakistan.
The authorities plan to raise tax revenues by 1.5% of GDP in FY25 and 3% of GDP over the program’s duration. This will be achieved through simpler and fairer direct and indirect taxation, incorporating net income from retail, export, and agriculture sectors into the tax system.
Additionally, federal and provincial governments have agreed to a ‘National Fiscal Pact’ to rebalance spending activities in line with the 18th Constitutional Amendment. This pact devolves responsibilities for education, health, social protection, and regional public infrastructure investment to the provinces.
The provinces have committed to harmonizing their Agriculture Income Tax regimes with federal and corporate income tax laws, effective January 1, 2025. The government also plans to enhance the power sector’s viability by adjusting tariffs, implementing reforms, and avoiding unnecessary expansion of generation capacity.
Authorities are committed to subsidy reforms, replacing cross-subsidies with direct and targeted support through the Benazir Income Support Programme (BISP).
Efforts will also focus on improving state-owned enterprise operations and management, prioritizing the privatization of the most profitable entities. The government intends to phase out incentives to Special Economic Zones, agricultural support prices, and related subsidies while avoiding new regulatory or tax-based incentives that could distort investment.
FINANCE MINISTRY BACK-LOADS FUND RELEASES DESPITE PLANNING MINISTRY PROTESTS
The Ministry of Finance has mandated stringent control over federal financing for development and recurrent expenditures, despite opposition from the Ministry of Planning. This is to ensure adherence to the IMF’s primary surplus targets.
Fresh notifications from the Ministry of Finance dictate that the Ministry of Planning, Development, and Special Initiatives will authorize only 15% of funds for approved development projects in the first quarter (July-September) of the current fiscal year. This will be followed by 20% in the second quarter (October-December), 25% in the third quarter (January-March), and 40% in the fourth quarter (April-June).
IMF BAILOUT CONDITIONS
Under the $7 billion new bailout package approved on Saturday, the government has committed to ensuring an “underlying general government primary surplus of 1% of GDP (2% in headline terms)”, according to an IMF announcement.
CHANGES TO PSDP DISBURSEMENT
The current PTI government had previously shortened the budget release process to speed up disbursements, allowing half of the total annual allocations to be available to development projects in the first half of the fiscal year. This mechanism entailed 20% disbursements in the first quarter, followed by 30% each in the second and third quarters, and the remaining 20% in the last quarter.
Before this, the practice was to release 40% of development funds in the first six months — 20% each in the first and second quarters — and the remaining 60% in the second half of a fiscal year, at the rate of 30% each quarter.
IMPACT OF BACK-LOADED DISBURSEMENTS
In the planning division, it is generally viewed that back-loaded disbursements negatively impact project implementation, slowing down development schemes in the first part of the year and leading to cost overruns. Consequently, a front-loaded disbursement mechanism was put in place to encourage advance releases to the executing agencies, allowing them to utilize funds appropriately within the required period.
Until a few years ago, the Planning Commission authorized funds for development schemes based on cash plans from the executing agencies. However, the Ministry of Finance often withheld substantial funds on the premise of “ways and means clearance” to slow down disbursements, meet urgent current expenditure needs, or other obligations. This practice contributed to project delays and cost overruns.
CHANGES IN DISBURSEMENT MECHANISM
Due to continuous tensions between the finance and planning ministries, the disbursement mechanism was revised in 2022. The planning division notified that development funds allocated in the budget would be released at a rate of 20% in the first quarter, followed by 30% each in the second and third quarters, and the remaining 20% in the last quarter of each fiscal year.
However, the Ministry of Finance altered the policy last year to ensure the primary cash surplus target committed to the IMF. This led to a cut of more than Rs230 billion in development expenditures, reducing the total to about Rs727 billion by the end of the 2023-24 fiscal year, compared to the budgetary allocation of Rs950 billion.
PLANNING MINISTRY’S PROTESTS
The Ministry of Planning expressed its discontent in writing to the Annual Plan Coordination Committee and National Economic Council early last month over the finance ministry’s decision. Despite these protests, the Ministry of Finance issued new instructions last week, maintaining tight control on disbursements to allow for expenditure cuts in May-June if there are slippages on the revenue collection front.
REVISED RECURRENT BUDGET RELEASE
The recurrent budget for divisions, attached departments, subordinate and other offices, including autonomous bodies, authorities, and commissions, will be released during the current fiscal year at a rate of 20% for the first quarter, 25% each in the second and third quarters, and 30% for the fourth quarter.
