PM Shehbaz expresses satisfaction. This 37-month programme aims to support govt’s steps to cement macroeconomic stability, says IMF statement. Finance minister says we need to ensure structural reforms.

ISLAMABAD  -   Pakistan has reached a deal for a fresh $7 billion loan with the International Monetary Fund (IMF), the global lender has announced.

In exchange for the37-month loan, which Islamabad badly needs to prop up its sputtering economy, the government pledged to implement more unpopular reforms.

The loan, the 24th from the IMF to Pakistan in more than six decades, is “subject to approval by the IMF’s executive board,” the IMF said in a statement. The deal’s main aim is to back the Pakistani government’s steps to cement macroeconomic stability while putting in place the necessary conditions for resilient growth.

“This includes steps to strengthen fiscal and monetary policy and reforms to broaden the tax base, improve state-owned enterprises’ management, strengthen competition, secure a level playing field for investment, enhance human capital, and scale up social protection through increased generosity,” the statement said.

Prime Minister Muhammad Shehbaz Sharif on Saturday expressed his satisfaction over reaching of Pakistan’s staff-level agreement with the International Monetary Fund (IMF) for a new $7 billion loan programme.

The prime minister said for the country’s economy, they had taken harsh and difficult decisions and owing to these decisions, positive outcome was being achieved in form of economic stability.

“IMF programme proved vital in steering Pakistan out of financial straits,” PM Office Media Wing, in a press release in Urdu language, quoted the prime minister as saying.

The deal came after months of negotiations, and on condition that Pakistan improve its tax collection system. Only 5.2 million people filed income-tax returns in 2022 in a country of some 236 million people.

Under the programme, “we need to ensure structural reforms and bring self-sustainability in areas of public finance, energy, and state-owned institutions,” Finance Minister Muhammad Aurangzeb told reporters on Saturday.

According to the IMF statement,  the program 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 key policy goals of the authorities’ program includes 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.

In this regard, the authorities plan to increase tax revenues through measures of 1½ percent of GDP in FY25 and 3 percent of GDP over the program.

In particular, the recently approved FY25 budget targets an underlying general government primary surplus of 1 percent of GDP (2 percent in headline terms).

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.

At the same time, the FY25 budget provides additional resources to expand social protection by increasing both the generosity and coverage of BISP, education, and health spending,” he added.

“A fairer balance of fiscal effort between the federal and provincial governments, which have agreed to re-balance 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.

At the same time, the provinces will take steps to increase their own tax-collection efforts, including in sales tax on services and agricultural income tax. On the latter, all 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,”the statement added.

According to the statement reducing inflation, deepening access to financing, and building strong external buffers are key to development and resilience. Monetary policy will continue to be focused on supporting disinflation, which will help protect real incomes, especially for the most vulnerable.

 To buffer against shocks and build reserves, 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.

On financial stability, the authorities plan to take measures to deepen access to financing, while strengthening financial institutions, addressing any undercapitalized banks, and upgrading their crisis management framework.

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.

The authorities remain committed to undertaking targeted subsidy reforms and replace cross-subsidies to households with direct and targeted BISP support. Promoting private sector and export dynamism by improving the business environment, creating a level-playing field for all businesses, and removing state distortions.

In this regard, the authorities are advancing efforts to improve SOE operations and management as well as privatization (with the highest priority given to the most profitable SOEs) and strengthening transparency and governance around the Pakistan Sovereign Wealth Fund and its operations.

They are also phasing out incentives to Special Economic Zones, phasing out agricultural support prices and associated subsidies, and 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.

The authorities have also committed to advance anti-corruption as well as governance and transparency reforms, and gradually liberalize trade policy.

IMF team is grateful to the Pakistani authorities, private sector, and development partners for their hospitality during the visit to Islamabad and fruitful discussions, the statement said.

The prime minister thanked the IMF for its support in the difficult times and said that the government was continuing efforts towards strengthening of economy.

He said under IMF programme, steps would be taken for strengthening of the financial and monetary policy besides, broadening of tax net base.

During the previous one year, the country’s foreign reserves had swelled leading to economic stability, he noted. The prime minister also appreciated efforts of Minister for Finance and Revenue Muhammad Aurangzeb, financial team and the provincial chief ministers.  

He also expressed his resolve to stabilize Pakistan and take it to sustainable development, adding that they could achieve success on the day, once they get rid of loans.

The prime minister further underlined the government’s efforts at economic agenda and said these measures were paving ways for putting the country’s economy on strong foundations and for the durable progress and prosperity of the citizens.

The government strictly adhered to the policy reforms and meeting the financial targets and thus supported the low income segments of society, he added.

“We have stabilized the exchange rate for the economic stability and taken steps for sustainable growth,” he said, adding that now onwards, a journey of progress and prosperity would be completed under these reforms.