IMF Highlights Pakistan's Tax Shortfall and Foreign Loan Delays as Major Concerns for USD 7 Billion Loan Implementation

The International Monetary Fund (IMF) has raised concerns about Pakistan's tax revenue shortfall and delays in securing foreign loans, which are affecting the implementation of a USD 7 billion loan package. During a five-day mission, IMF officials discussed these issues with Pakistani authorities. The IMF also highlighted problems with Punjab's new agriculture income tax law, which does not fully align with federal legislation and deviates from the National Fiscal Pact.

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Tax and Loan Challenges

A source revealed that the IMF identified two main issues: the Federal Board of Revenue's (FBR) underperformance and delays in finalising loans to cover a USD 2.5 billion gap. The IMF urged Pakistan to seek deferred oil payments from Riyadh and request Beijing to reschedule debt. Additionally, the IMF expressed concerns over delays in privatising power distribution companies (DISCOs) and insisted on amending the Pakistan Sovereign Wealth Fund Act by December.

The IMF also stressed the need to amend the gas sector's definition of circular debt and ensure its monthly reporting. Currently, both the power and petroleum divisions do not regularly report these figures. Furthermore, flaws were found in implementing the National Fiscal Pact, which aims to align income tax rates and transfer some expenditure responsibilities to provinces.

Provincial Tax Legislation

The IMF requested that provincial property and agriculture income tax regimes align with FBR standards through legislation. Although Punjab passed the Agriculture Income Tax Amendment Act of 2024, it did not meet the target of raising agriculture income tax rates to 45%. Punjab Information Minister Azma Bukhari denied any breach of the pact, stating, "It's not in any breach. Even the IMF has read the amendments and is fine with them."

In addition to Punjab, Sindh also violated the National Fiscal Pact by not showing serious intent to implement it during meetings with the IMF. Meanwhile, Pakistan's finance ministry withdrew an October 31 report claiming Punjab ran a budget deficit of Rs 160 billion, missing a cash surplus target of Rs 342 billion.

IMF's Recommendations

The IMF called on Pakistan to reduce state intervention in the economy and enhance competition, emphasising urgent energy sector reforms. Nathan Porter, the IMF’s mission chief, stated that reducing state intervention would foster a dynamic private sector. "Strong program implementation can create a more prosperous and more inclusive Pakistan," he added.

The statement also highlighted constructive discussions on economic policy and reform efforts aimed at reducing vulnerabilities and promoting sustainable growth. The IMF reiterated the importance of prudent fiscal and monetary policies focusing on revenue mobilisation from untapped tax bases while transferring greater social responsibilities to provinces.

Pakistani authorities claimed that the IMF had not yet given its final verdict on bridging revenue shortfalls and would send their recommendations after consulting with headquarters in Washington. The next IMF mission related to the first review of the 2024 Extended Fund Facility (EFF) is expected in early 2025.