Discussions between the visiting IMF mission and Pakistan government representatives last week were unusual in the sense that there were several rounds of unscheduled talks over contentious issues, especially the unmet fiscal targets, slow pace of structural reforms and agriculture income tax.

Among other things, the visiting IMF team, led by mission chief Nathan Porter, focused on Pakistan’s desire to increase its loan programme size and discussed climate financing, under which Pakistan has applied for an additional loan of $1.2bn. It may be added here that the Fund has already extended cheaper climate financing to 20 nations most impacted by climate disasters to build resilience through adaptation. The IMF mission also extended the date until February 2025 for Pakistan to make up for revenue shortfalls that stood at Rs190bn in the first four months (July to October) of the current fiscal year.

It was also decided that the formal review talks on biannual targets would be arranged by the end of February or early March to determine whether Pakistan qualified for the disbursement of a $1bn tranche, subject to compliance with structural benchmarks. On the other hand, smaller provinces contested the IMF’s desire to discontinue wheat support price or subsidised issue price, insisting that it could create a food security problem, particularly in underdeveloped markets like Khyber Pakhtunkhwa and Balochistan.

It is for the first time that provinces are now directly part of the talks with the IMF under a loan programme. The general impression from the provinces to the visiting mission was that while the legislation for agriculture income tax was being made, it would be a Herculean task to actually implement it given the capacity constraints and the weaknesses in the land record. The FBR has not been able to ensure compliance with income tax returns in 77 years in the urban centres. As such it would be more difficult for farmers, most of them illiterate, to file their income tax for agriculture incomes. Even Punjab, which has passed the agriculture income tax legislation, has kept the tax rates outside the law with a premise that these would be issued separately through a schedule or rules. As it is, Pakistan’s agricultural tax revenue currently stands under Rs10bn, against a potential yield of Rs230bn. Authorities have committed to introducing mechanisms by January 2025 to ensure agricultural tax collection, targeting Rs1 trillion in revenue in a couple of years.

According to media reports, the International Monetary Fund has urged the government to take steps “to decrease state intervention in the economy and enhance competition” while emphasising the importance of structural energy reforms terming it “critical to restore the sector’s viability”. To quote the IMF mission chief, “We had constructive discussions with the authorities on their economic policy and reform efforts to reduce vulnerabilities and lay the basis for stronger and sustainable growth. We agreed with the need to continue prudent fiscal and monetary policies, revenue mobilisation from untapped tax bases while transferring greater social and development responsibilities to provinces. In addition, structural energy reforms and constructive efforts are critical to restore the sector’s viability, and Pakistan should take steps to decrease state intervention in the economy and enhance competition, which will help foster the development of a dynamic private sector.”

The IMF mission chief emphasised that strong programme implementation can create a more prosperous and more inclusive Pakistan, improving living standards for all Pakistanis. He welcomed the government’s commitment to the economic reforms supported by the 2024 Extended Fund Facility (EFF)  and asked for meeting the benchmarks and conditionalities for the EFF.

The IMF team was particularly concerned about the need to implement tax targets and the National Fiscal Pact. The lender stressed the importance of accelerating tax revenue collection to meet the tax target of Rs12,970 billion for the ongoing financial year. The IMF team also urged for the collection of taxes on agricultural income starting January 2025. Moreover, the IMF has recommended Pakistan strengthen its capacity at the Finance Division to lead and coordinate macro-fiscal forecasts to support budget preparation, increasing forecast cycles and synchronising them with the budget. The Fund has also asked Pakistan to initiate legal changes, required to limit the discretionary powers granted to the federal government over the use of supplementary grants, while maintaining some flexibility in budget execution.

It may be added here that IMF staff visits are standard practice for countries with semi-annual programme reviews with the aim to engage with the authorities and other stakeholders on the country’s economic developments and policies and the status of planned reforms. In the case of Pakistan such reviews take on added importance because of the serious structural flaws which have impeded the pace of progress and overburdened the country with unsustainable debt levels. It is to be hoped that the authorities in Pakistan will follow the advice of the IMF team so that the next tranche of EFF loan is not unduly delayed.