IMF approves $7 billion EFF programme for Pakistan

PM Shehbaz reiterates that this will be country's last IMF programme

ISLAMABAD:

The International Monetary Fund on Wednesday approved a $7 billion new bailout package after Pakistan promised to overhaul its agriculture income tax, transfer some fiscal responsibilities to provinces and agreed to limit subsidies.

The Prime Minister’s Office said that the Executive Board of the IMF approved the 37-month Extended Fund Facility totalling $7 billion. It also authorised the immediate release of the first loan tranche of less than $1.1 billion. It is the 25th IMF programme that Pakistan has obtained since 1958 and the 6th EFF.

Pakistan will pay around 5% interest rate on the IMF loan, according to the Ministry of Finance statement given to the Senate Standing Committee on Economic Affairs.

Prime Minister Shehbaz Sharif on Wednesday reiterated that this will be Pakistan’s last IMF programme; a statement he also gave after the approval of the 24th IMF programme in 2023.

Shehbaz gave credit for the new IMF bailout package to Deputy Prime Minister Ishaq Dar, Chief of the Army Staff General Asim Munir and the finance team. He noted that without the cooperation of all four provinces, the federal government cannot complete the 25th programme of the nation’s history.

Interestingly, the government of Sindh ratified a memorandum of understanding for signing the National Fiscal Pact on July 30th, and the government of Balochistan did it on July 26th - after the staff-level agreement between Pakistan and the IMF on July 12th.

The IMF board has approved the programme without addressing one of the root causes of taking these loans –the need for restructuring of the external and domestic debt that consumed 81% of Pakistan’s tax revenues in the last fiscal year.

The new bailout package targets achieving macroeconomic stability by consolidating public finances, rebuilding the foreign exchange reserves, reducing fiscal risks from state-owned enterprises, and improving the business environment to encourage growth led by the private sector.

To qualify for the programme, the government imposed from Rs1.4 trillion to Rs1.8 trillion in additional taxes, increased electricity prices up to 51% and committed to bring transparency in the affairs of the Sovereign Wealth Fund.

The government also took Pakistan’s history’s most expensive loan of $600 million to win a board meeting date from the IMF. The power sector fiscal viability, privatisation of loss-making entities and enhancing tax revenues are part of the core conditions of the IMF programme.

Unlike in the past, when the provincial budgets were out of the purview of the IMF, the new programme is also expanded to the provincial budgets and their revenues. There are nearly one dozen IMF conditions that directly impact the provinces under the new programme.

The federal and four provincial governments will sign a new National Fiscal Pact by next Tuesday to transfer the responsibilities of health, education, social safety net and road infrastructure projects to the provincial governments, according to the conditions agreed between Pakistan and the IMF.

All the four provincial governments would align their agriculture income tax rates to the federal personal and corporate income tax rates by amending their laws by October 30. As a result, the agricultural income tax rate would increase from 12-15% to 45% in January of next year.

All the provincial governments would not give any further subsidies on electricity and gas and these governments would not establish any new Special Economic Zones or Export Processing Zone. The federal government would not be entitled to have any new economic zones and would end the tax incentives of the existing zones by 2035.

According to another condition, Pakistan would show a primary budget surplus of 4.2% of the Gross Domestic Product during the three-year programme period.

The primary budget surplus is calculated after excluding interest payments. A 4.2% GDP deficit would significantly squeeze non-interest expenses and put an additional tax burden equal to 3% of the GDP on the existing taxpayers.

Under the IMF programme, a primary surplus equal to 1% of GDP will have to be shown in this fiscal year and about 3.2% over the next two years to put the debt-to-GDP ratio on a sustainable declining path.

In case of tax shortfall, the government has committed to bringing a mini-budget that would result in increasing tax rates on imports, contractors, professional service providers and on fertilizer. The FBR is facing the risk of over Rs200 billion tax shortfall for the first quarter.

For this fiscal year, Pakistan will be bound to keep the spending on defence and subsidies at the previous fiscal year’s level in terms of the size of the economy.

However, the design of the programme has not completely addressed the issue of debt unsustainability and is built around the strategy of rolling over the maturing external debt during the programme period.

Pakistan has committed that it would not repay the $12.7 billion debt to Saudi Arabia, China, the United Arab Emirates and Kuwait during the programme period.

The IMF forced Pakistan to first bridge a $2 billion additional financing gap for qualifying the board approval. Pakistan had to take the most expensive commercial loan in its history at 11% interest rate from the Standard Chartered Bank to meet the financing gap.

The Asian Development Bank warned on Wednesday that the rising political and institutional tensions may make it difficult to implement the reforms that Pakistan has committed to deliver to the IMF. It said that these reforms were crucial to make sure that the external lenders keep lending to Pakistan.