Pakistan secures $7 billion EFF deal

Pakistan and the International Monetary Fund have reached a staff level agreement for a $7 billion Extended Fund Facility programme -in a deal that in short-term inflicts heavy burden on the nation but also ends decades-old protections to agriculturists and exporters. 

The global lender announced the three-year 24th programme deal only after Pakistan agreed to bring transparency in the affairs of the Pakistan Sovereign Wealth Fund and stop giving any preferential treatment to the projects laboured by the Special Investment Facilitation Council (SIFC). 

Pakistan’s federal and provincial governments would also sign a new National Fiscal Pact to align their spending in line with the 18th Constitutional amendment. 

“The Pakistani authorities and the IMF team have reached a staff-level agreement on a comprehensive programme endorsed by the federal and provincial governments, that could be supported by a 37-month Extended Fund Arrangement (EFF) of about $7 billion”, according to a statement issued by the IMF from Washington. 

However, the staff-level agreement is subject to approval by the IMF’s Executive Board and the timely confirmation of necessary financing assurances from Pakistan’s development and bilateral partners, it added. 

An IMF team had visited Pakistan from May 10th to 13th but the virtual discussions continued till this week with one of the last few meetings on the fate of the Pakistan Sovereign Wealth Fund and the imposition of up to 45% income tax on agricultural income. 

For the sake of the nation’s 24th programme, the coalition government has imposed heavy new taxes of over Rs1.7 trillion, mainly on the poorer and middle-income groups, and increased electricity prices by Rs7.12 per unit to collect an additional Rs580 billion from residential and commercial consumers. 

Pakistan had sought $8.2 billion loan package but the global lender agreed to nearly $7 billion loan and its disbursements would be spread over 37 months. It is the 24th programme that Pakistan has signed so far, which Prime Minister Shehbaz Sharif has once again promised would be “the last programme”. 

The IMF Mission Chief Nathan Porter said that the new programme aims to support Pakistan’s efforts to cement macroeconomic stability and create conditions for stronger, more inclusive, and resilient growth.

 He said that these measures are aimed at strengthening fiscal and monetary policy and bringing reforms to broaden the tax base, improve State Owned Enterprises (SOE) management, strengthen competition, secure a level playing field for investment, enhance human capital, and scale up social protection through increased generosity and coverage in the Benazir Income Support Program (BISP).

“Continued strong financial support from Pakistan’s development and bilateral partners will be critical for the programme to achieve its objectives”, according to the IMF.

Nathan Porter said that the new programme aims to capitalize 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 Mission Chief further said that key policy goals include sustainable public finances, through a gradual fiscal consolidation based on reforms to broaden the tax base and remove exemptions while increasing resources for critical development and social spending. 

Pakistan plans to increase tax revenues through measures of 1.25% of the GDP in fiscal year 2024-25 and 3% of the GDP over the programme. 

Pakistan will be required to achieve a primary budget surplus of 1% of the GDP or over Rs1.24 trillion in this fiscal year. 

Major conditions 

The IMF said that revenue collections will be supported by simpler and fairer direct and indirect taxation, including by bringing net income from the retail, export, and agriculture sectors properly into the tax system”.

“The provinces will take steps to increase their own tax-collection efforts, including in sales tax on services and agricultural income tax”, said Porter. 

He further added that all the provinces are committed to fully harmonizing their Agriculture Income Tax regimes through legislative changes with the federal personal and corporate income tax regimes and this will become effective from January 1, 2025.

It is for the first time in the nation’s history that a serious effort is being made to bring agriculture income in the tax ambit by charging a rate of up to 45%. The Express Tribune reported this week that the IMF has demanded to impose up to 45% income tax on agriculture. 

In another much-needed step, the IMF got the federal the four provincial governments agreed to “to rebalance spending activities in line with the 18th constitutional amendment through the signature of a National Fiscal Pact that devolves to provincial governments higher spending for education, health, social protection, and regional public infrastructure investment, enabling improved public service provision”.

However, the federal government violated this condition just before the staff-level agreement when it again included provincial nature projects in the federal Public Sector Development Programme and also approved such new schemes in July. 

Porter maintained that monetary policy will continue to be focused on supporting disinflation, which will help protect real incomes, especially for the most vulnerable. 

On Thursday, Finance Minister Muhammad Aurangzeb said that there was “quite a bit room” to bring the interest rates down. The central bank has recently cut the interest rates to 20.5% but it is still far higher than the 12.3% annual inflation rate. 

Nathan Porter said that the State Bank of Pakistan (SBP) “will maintain a flexible exchange rate and continue to improve the functioning of the foreign exchange market and the transparency around FX operations”. 

Energy Sector 

Pakistan has committed that it will timely increase electricity prices and will no longer add capacity to already unutilized power generation capacity.  

Pakistan has committed to “restoring energy sector viability and minimizing fiscal risks through the timely adjustment of energy tariffs, decisive cost-reducing reforms, and refraining from further unnecessary expansion of generation capacity”, said Porter. 

He further said that Pakistan remained committed to undertaking targeted subsidy reforms and replacing cross-subsidies to households with direct and targeted BISP support.

End state-distortions

The government has also committed to transparency in its business deals and end state protections to a few initiatives. 

Porter said that Pakistan will create a level-playing field for all businesses, and remove state distortions. Pakistan will give highest priority to the privatisation of the most profitable SOEs and “strengthening transparency and governance around the Pakistan Sovereign Wealth Fund and its operations”. 

Pakistan will gradually withdraw incentives to Special Economic Zones, phasing out agricultural support prices and associated subsidies, and will be “refraining from new regulatory or tax-based incentives, or any guaranteed return that could distort the investment landscape, including for projects channeled through the Special Investment Facilitation Council”, said Porter. 

Pakistan will advance anti-corruption as well as governance and transparency reforms, and gradually liberalize trade policy, said Porter.