Three-year, $7bn deal finalised with IMF

KARACHI: In a welcome development, the government and the International Monetary Fund (IMF) have finalised a three-year and $7 billion aid package, the Washington-based agency announced on Saturday morning.

The news of the agreement would boost the confidence of local markets, including the Pakistan Stock Exchange. The IMF’s new programme, which needs to be approved by the Fund’s executive board, would allow the country to strengthen “macroeconomic stability and create conditions for stronger, more inclusive, and resilient growth”, said an official statement.

Faced with chronic mismanagement, Pakistan’s economy was until recently on the verge of collapse, following the bad effects of Ukraine war and supply shortages that fuelled inflation. With its foreign currency reserves diminishing last year, Pakistan faced a particularly deep debt crisis and was forced to appeal to the IMF, after which it received its first emergency loan in the summer.

The new rescue package in the form of loans, comes after the administration committed to implementing changes, including a massive push to broaden the country’s tax base. During the fiscal year 2024-25, the government plans to raise approximately $46 billion in taxes, a 40 per cent increase over the previous year.

“The programme aims to capitalise on the hard-won macroeconomic stability achieved over the past year by furthering efforts to strengthen public finances, reduce inflation, rebuild external buffers, and remove economic distortions to spur private sector-led growth,” the IMF statement said, quoting Nathan Porter, the Fund’s mission chief in Pakistan.

“In this regard, the authorities plan to increase tax revenues through measures of 1.5 per cent of GDP in FY25 and 3 per cent of GDP over the programme,” the statement read. Revenue collections will be increased through “simpler and fairer direct and indirect taxation, including by bringing net income from the retail, export, and agriculture sectors properly into the tax system”.

According to the announcement, the federal and provincial governments have signed a ‘National Fiscal Pact’ to rebalance spending activities in accordance with the 18th Constitutional Amendment. The agreement divided responsibility for education funding, health, social protection, and regional public infrastructure investment to provinces.

The provinces have previously agreed to “fully harmonising their Agriculture Income Tax regimes through legislative changes” with the federal and corporate income tax regimes. The shift will take effect on Jan 1, 2025.

Under the agreement the government will also improve the electricity sector’s viability and reduce losses by implementing timely tariff adjustments and reforms, as well as refraining from wasteful development of generation capacity. “The authorities remain committed to undertaking targeted subsidy reforms and replace cross-subsidies to households with direct and targeted BISP support.”

The government will strengthen operations of state-owned enterprises, as well as privatisation, with the most profitable firms given priority, added the statement.