WASHINGTON, D.C./ISLAMABAD (The Thursday Times) — Building on the economic stability achieved under the 2023 Stand-by Arrangement (SBA), the International Monetary Fund (IMF) staff and Pakistani authorities have reached a staff-level agreement on a 37-month Extended Fund Facility (EFF) arrangement amounting to approximately US$7 billion. This agreement awaits approval from the IMF’s Executive Board.
The new program is designed to support the authorities’ efforts in cementing macroeconomic stability and fostering conditions for a stronger, more inclusive, and resilient growth. Key objectives include enhancing fiscal and monetary policy, broadening the tax base, improving the management of State-Owned Enterprises (SOEs), strengthening competition, ensuring a level playing field for investment, enhancing human capital, and expanding social protection, particularly through increased generosity and coverage in the Benazir Income Support Program (BISP).
Responding to a request from the Pakistani authorities, an IMF team led by Nathan Porter, IMF’s Mission Chief to Pakistan, conducted discussions from May 13-23, 2024, in Islamabad and virtually thereafter regarding IMF support for the authorities’ medium-term policy and reform plans. Concluding these discussions, Mr. Porter issued a statement highlighting the staff-level agreement on a comprehensive program endorsed by both federal and provincial governments. The program, backed by a 37-month Extended Fund Facility arrangement equivalent to SDR 5,320 million (about US$7 billion), is subject to IMF Executive Board approval and the timely confirmation of necessary financing assurances from Pakistan’s development and bilateral partners.
The program aims to build on the hard-won macroeconomic stability achieved over the past year by further strengthening public finances, reducing inflation, rebuilding external buffers, and eliminating economic distortions to promote private sector-led growth. The authorities’ program outlines several key policy goals.
Firstly, sustainable public finances are to be achieved through gradual fiscal consolidation, reforms to broaden the tax base, and the removal of exemptions, thereby increasing resources for critical development and social spending. The authorities plan to boost tax revenues by 1.5 percent of GDP in FY25 and 3 percent of GDP over the program. The recently approved FY25 budget targets an underlying general government primary surplus of 1 percent of GDP (2 percent in headline terms). Revenue collection will be supported by fairer direct and indirect taxation, including bringing net income from the retail, export, and agriculture sectors into the tax system. Simultaneously, the FY25 budget allocates additional resources to expand social protection, increasing the generosity and coverage of BISP, education, and health spending.
Secondly, a fairer fiscal balance between federal and provincial governments is to be achieved. Both levels of government have agreed to rebalance spending activities in line with the 18th constitutional amendment through a National Fiscal Pact, which devolves higher spending responsibilities to provincial governments for education, health, social protection, and regional public infrastructure investment. The provinces are also committed to enhancing their tax-collection efforts, particularly in sales tax on services and agricultural income tax. Effective from January 1, 2025, provincial Agricultural Income Tax regimes will be fully harmonised with federal personal and corporate income tax regimes through legislative changes.
Thirdly, reducing inflation, improving access to financing, and building strong external buffers are crucial for development and resilience. Monetary policy will focus on supporting disinflation to protect real incomes, especially for the most vulnerable. The State Bank of Pakistan (SBP) will maintain a flexible exchange rate and enhance the functioning and transparency of the foreign exchange market to build reserves and buffer against shocks. Measures to deepen access to financing, strengthen financial institutions, address undercapitalised banks, and upgrade the crisis management framework will be implemented to ensure financial stability.
Fourthly, restoring energy sector viability and minimising fiscal risks will involve timely adjustments of energy tariffs, cost-reducing reforms, and refraining from unnecessary expansion of generation capacity. Targeted subsidy reforms will replace cross-subsidies with direct BISP support to households.
Lastly, promoting private sector and export dynamism will be achieved by improving the business environment, creating a level playing field for all businesses, and removing state distortions. Efforts to enhance SOE operations and management, prioritise profitable SOEs for privatisation, and strengthen transparency and governance around the Pakistan Sovereign Wealth Fund will be advanced. The authorities will phase out incentives to Special Economic Zones, agricultural support prices, associated subsidies, and refrain from new regulatory or tax-based incentives that could distort the investment landscape, including for projects through the Special Investment Facilitation Council. Additionally, anti-corruption, governance, and transparency reforms will be pursued, along with gradual trade policy liberalisation.
The IMF team expressed gratitude to the Pakistani authorities, private sector, and development partners for their hospitality during the visit to Islamabad and the fruitful discussions that took place.
