ISLAMABAD   -   Setting new structural benchmarks for Pakistan, the International Monetary Fund (IMF) has directed the government not to announce any tax amnesty schemes, privatise two DISCOs and introduce revenue generation measures in case of tax collection shortfall.

Pakistan would not grant tax amnesties, and do not issue any new preferential tax treatment (including exemptions, zero rating, tax credits, accelerated depreciation allowances, or special rates). It would seek ex-ante parliamentary approval for any expenditures that are non-budgeted or that exceed the budgetary appropriation. The government would approve a National Fiscal Pact devolving some spending functions to the provinces. The government would share with the IMF staff a report detailing actions to reduce the federal government’s expenditures.

The IMF has issued documents after approving loan programme for Pakistan in last month. Under the structural benchmarks, each province would amend their Agriculture Income Tax legislation and regime to fully align it with the federal personal income tax regime for small farmers and the federal corporate income tax regime for commercial agriculture, so that taxation can commence from January 1, 2025. The government would fully implement compliance risk management measures in Large Taxpayer Units in large markets in Islamabad, Karachi, and Lahore Regional Offices.

The government would introduce a 5 percent FED on fertilizer and pesticide. It would have to amend the Civil Servants Act to ensure that asset declarations of high-level public officials (inclulding assets beneficially owned by them and a member of their family) are digitally filed and publicly accessible (with sufficient protection over private information) through the FBR, with a robust framework for risk-based verification by a single authority. The government would publish the full Governance and Corruption Diagnostic Assessment report. Publicly identify critical governance vulnerabilities.

Under the structural benchmarks, the government would make parliamentary approval of amendments to the bank resolution and deposit insurance legislation, in a manner that preserves the integrity of the draft legal amendments. It would place undercapitalized private banks under resolution unless (i) these banks are fully recapitalized by end-October 2024; or (ii) a legally binding agreement is in place by end-October 2024 towards a merger with other banks or with a new sponsor that would achieve full recapitalization by April 2025. In energy sector, the government would complete all policy actions needed to prepare two DISCOs for privatization and concession transactions. It would eliminate captive power usage in the gas sector.

The government has stated that it recognized that implementation delays or backtracking on crucial policy and structural reforms (particularly on exchange rate policy, tax reforms and the energy sector) would compromise the improving growth outlook, impede the rebuilding of reserves, and jeopardize debt and external sustainability. Fiscal slippages would further increase already excessive pressures on domestic banks to finance the government and endanger the return to macroeconomic stability. Delays to financing from multilateral and bilateral partners would put pressure on reserves and the exchange rate and could cause an adverse shift in market sentiment. External conditions could be strained by an intensification of geopolitical conflicts, resurgent commodity prices, and a further tightening in global financial conditions.

The FY25 budget is a critical initial step in advancing our fiscal consolidation efforts. The budget targets an underlying primary surplus of PRs 1,177 billion (1.0 percent of GDP) was passed on June 28, 2024. For the FY26 budget, we will introduce a 5 percent increase in the FED on fertilizer and a 5 percent FED rate on pesticide (end-June 2025 structural benchmark). Furthermore, to adequately safeguard against potential fiscal risks, the federal government will allocate emergency contingency funds totaling 0.3 percent of GDP, equivalent to PRs 348 billion. Provincial governments agreed to work towards allocating 1 percent of their expenditures for emergency contingencies as well in FY26.

The government has assured for announcing mini budget. If the 3-month rolling average revenue collection fall short of the projected target by 1 percent, in consultation with IMF staff, the government will evaluate the adoption of one or more of the following contingency measures: (i) increase advance income tax on import of machinery by 1 percentage point, expected collection of PRs 2 billion per month; (ii) increase advance income tax on import of raw materials by industrial undertakings by 1 percentage point, expected collection of PRs 3.5 billion per month; (iii) increase advance income tax on import of raw materials by commercial importers by 1 percentage point, expected collection of PRs 1 billion per month; (iv) increase withholding tax on supplies by 1 percentage, expected collection of PRs 1 billion per month; (v) increase withholding tax on services by 1 percentage point, expected collection of PRs 0.5 billion per month; (vi) increase withholding tax on contracts by 1 percentage point, expected collection of PRs 0.5 billion per month; and (vii) increase FED on aerated and sugary drinks by 5 percentage point, expected collection PRs 2.3 billion per month.

The government is moving forward with plans to privatize PIA (and anticipate completion of the transaction by end-August 2024), the Roosevelt Hotel, First Women’s Bank, HBFC, and several DISCOs and GENCOs. We will prioritize the privatization of commercial SOEs, including with the highest priority on profitable commercial SOEs, to reduce the government’s footprint in the commercial space and attract investments that can contribute to Pakistan’s development. We will strive to achieve net zero CD flow for FY25 through a combination of timely tariff increases, targeted subsidies, and cost-reducing reforms. This strategy will be detailed in our FY25 CD Management Plan (CDMP), to be adopted by Cabinet by end-July 2024. Gas sector reforms will focus on price normalization across sectors and captive power elimination. Keeping end-user gas prices in line with costs, including the cost of diverted RLNG is critical to improving the sector’s CD dynamics.

The authorities are committed to ambitious fiscal reforms to broaden the tax base, strengthen fiscal institutions, and durably improve debt sustainability. Despite some improvement in FY24, Pakistan’s public debt remains very high, its tax-to-GDP ratio low compared to peers and its development needs, leaving a narrow path to ongoing debt sustainability. Policies under the EFF aim to support a gradual fiscal consolidation moving to a primary surplus of 2 percent of GDP on the back of a net 3 percent of GDP revenue mobilization effort and base-broadening for a fairer and more efficient tax system. This will be supported by strengthened federal-provincial institutional arrangements for more balanced revenue and spending responsibilities, including incentives to generate greater revenue from broader sources at the provincial level.