$2.5b gap focus of IMF visit

Mission to discuss challenges in securing critical loans to repay existing debts

ISLAMABAD:

The materialisation of new foreign loans to fill nearly $2.5 billion in external financing gap for this fiscal year will be a primary focus during next week's unscheduled performance review discussions by the International Monetary Fund (IMF).

The IMF will assess Pakistan's external financing needs during these discussions, as some planned loans have not yet been secured, according to government sources. Led by Nathan Porter, the IMF Mission Chief, the talks will formally begin on Tuesday, with an opening session also planned with Finance Minister Muhammad Aurangzeb. The mission's arrival in Pakistan is unscheduled, as the first formal review for the release of the second $1.1 billion tranche is slated for March 2025.

Pakistan faces delays in obtaining loans from bilateral creditors, complicating efforts to bridge its external financing gap. The Washington-based global lender previously estimated a total $5 billion external financing gap for the 2024-2027 period, of which $2.5 billion is estimated for this fiscal year. However, Pakistani authorities claim that the gap will be smaller than projected five months ago, due to improved performance of the external sector.

Pakistan's exports and foreign remittances have been performing better, reducing pressure on the external account. Nevertheless, loans are still needed to repay existing debts, primarily owed to Western financial institutions.

At the time of the $7 billion package, Pakistan had anticipated raising $3.2 billion against the $2.5 billion in debt needs. This included a $1.2 billion Saudi oil facility.

Five months into the fiscal year, no agreement has been reached on the Saudi oil facility, sources indicate. Each month of delay reduces the available funds by $100 million within the fiscal year. Pakistani authorities remain hopeful of persuading Riyadh to extend the facility. Finance Ministry Spokesperson Qumar Abbasi did not respond to inquiries about the $1.2 billion Saudi oil facility's status.

Pakistan is also pursuing a $1 billion loan from Dubai Islamic Bank. Additionally, Pakistan has requested China to reschedule $3.4 billion in debt extended by China's Export-Import (Exim) Bank. Of this, roughly $750 million is due in the current fiscal year; the rescheduling is factored into the external financing calculations, sources said.

Due to its weakened financial position and certain implicit restrictions under the IMF agreement, Pakistan lacks the flexibility to repay Chinese debt.

Out of the total $6.5 billion Chinese commercial debt, about $3.9 billion is due this fiscal year. The government has managed to roll over a $200 million debt that matured in September, but the next $1 billion is due in March 2025, with no progress on securing another rollover, according to sources. The government's $3.2 billion plan also included Pakistan's most expensive loan in history—a $600 million facility from Standard Chartered Bank. However, following an article in The Express Tribune, the finance minister indicated that this facility would not be utilised, and the IMF distanced itself from this loan arrangement.

The IMF's unexpected visit comes just six weeks after the loan's approval and four months before the planned review, to assess performance on July-September targets and progress in the second quarter from October-December 2024.

Official figures indicate a tax collection shortfall of Rs190 billion over the past four months, with the Federal Board of Revenue (FBR) collecting Rs3.440 trillion against a target of Rs3.632 trillion, despite record-high taxes this year.

Sources say the IMF intends to scrutinise Pakistan's macroeconomic framework projections closely. Last week, Pakistani authorities reported that at least three underlying assumptions for the nearly Rs13 trillion tax collection target had fallen short, impacting revenue.

The government also missed its target by 99.99% in collecting Rs10 billion in taxes from traders under the Tajir Dost Scheme. However, the finance minister claimed on Friday that Rs10 billion had been collected from traders.

Any tax collection from the up to 2.5% withholding tax on non-registered traders is not part of the IMF's Rs10 billion target, according to the technical Memorandum of Economic and Financial Policies signed by the finance minister and the central bank governor. Additionally, provincial governments missed the end-October deadline to legislate an increase in agriculture tax rates to 45%, amid significant challenges due to limited cooperation between federal and provincial governments in enforcing IMF conditions.

The National Fiscal Pact, signed by the finance ministers of the four provinces and Muhammad Aurangzeb, deviated from the initial discussions with the IMF during the $7 billion package approval. Spending on social protection, primarily the Benazir Income Support Programme, has been excluded from the pact. Additionally, the transfer of federal-funded, provincially-focused projects and downsizing government structures depend on endorsements from the National Economic Council.