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ISLAMABAD:
Negotiations between Pakistan and the International Monetary Fund for the $1 billion loan tranche remained inconclusive on Wednesday due to differences over the viability of this year’s budget, which has been undermined by the poor performance of the tax system.
Government officials said reaching IMF staff-level agreement for the $1 billion tranche under the program’s third review would take longer than expected, which ended Wednesday.
They said that although Pakistan had met all the quantitative performance criteria for the period July-December 2025, the IMF had serious concerns that the primary fiscal surplus target for the end-June period could not be achieved.
Pakistan had pledged to post a primary budget surplus equal to Rs 3.15 trillion this financial year – the basic condition of the program which is now expected to be largely missed.
Negotiations between Pakistan and the IMF began on February 26 and were scheduled to end on March 11. Led by its head of mission Iva Petrova, the IMF team arrived in Karachi in February but had to leave abruptly on March 2 due to heightened security concerns following the US-Israeli attack on Iran. The remaining talks took place virtually from Turkey.
The IMF mission returned from Istanbul to Washington without reaching an agreement at staff level. However, federal government officials hoped that the negotiations would not extend into May, when the IMF is expected to visit Pakistan again to finalize the budget for the next fiscal year.
The real problem was the performance of the Federal Board of Revenue and the IMF was not convinced that the tax machinery could even collect Rs 13.5 trillion this fiscal, officials said. The IMF also had reservations about some other fiscal projections, the sources added.
The government had set a fiscal target of Rs 14.13 trillion for the FBR, which the IMF revised downward in the second review to Rs 13.98 trillion. However, during this round of negotiations, FBR sought to further reduce the target to just under Rs 13.5 trillion.
Pakistan also failed to achieve the two indicative targets of collecting Rs 6.5 trillion in total and Rs 366 billion from the retail sector during the July-December period of this financial year. The FBR remains the weakest link in the government’s fiscal stability plan.
The government had given 1,000 new cars and up to four additional monthly salaries to FBR employees every month in the hope that the tax mechanism would work. However, even these incentives have failed to boost the tax system.
Prime Minister Shehbaz Sharif this week announced energy-saving measures and ordered a 50% discount for government staff to work from home and observe a four-day work week. However, the FBR on Wednesday issued a notification requiring all its staff to come to the office five days a week. The FBR official said the notification was issued with the approval of the Cabinet Division.
The IMF was also seeking visibility on the next fiscal year’s budget and is now expected to send a mission to Pakistan, the sources added. Within the Ministry of Finance, the view was that the government should not accept the budgetary mission. But the global lender disagreed, the sources said.
The sources said the fiscal target for the next fiscal year was also open as the IMF had not accepted the FBR base figure for this year. The fund was of the view that the tax base would decline next year due to one-time revenue recovery through court cases that are part of this year’s collection.
The sources said the IMF was also not satisfied with projections for dividend income from state-owned enterprises and the oil tax. Another session with the IMF is expected this week.
The IMF also opposed the government’s decision to violate the recently agreed governance and anti-corruption framework. The Fund has demanded the withdrawal of amendments introduced in the Election Commission of Pakistan Act, which the National Assembly approved to exempt parliamentarians from disclosure of their assets.
The sources said the IMF also highlighted shortcomings in the implementation of SOE reforms and questioned why government officials are appointed to the boards of SOEs as private members. The government may now have to remove all those candidates who are civil servants and civil servants but sit as private members on the boards of public companies.
Head of Mission Iva Petrova observed during these meetings that the government had raised many hopes for reforms to state-owned enterprises, but no major reforms had been undertaken. The government’s privatization program is also delayed and it has informed the IMF that even three most successful electricity distribution companies cannot be privatized before autumn this year.
The government met most of the structural criteria but fell short of the condition of amending the sovereign wealth fund law to the satisfaction of the IMF, the sources said.
The IMF has not accepted Pakistan’s demand to remove the carbon tax on fuel oil, saying the government had already collected the money on this criterion.
The IMF also did not agree to Pakistan’s request to allow zero sales tax on oil refineries. Instead, he asked the government to incorporate the tax into the price, as the FBR did not have the capacity to pay the refunds, the sources said.
The IMF could grant certain concessions in terms of captive levy on power plants by changing the peak tariffs of gas equivalent to electricity to average tariffs. However, the IMF has not yet communicated the final decision, the sources said.
The sources said there were also issues regarding energy subsidies. The IMF has not accepted the government’s request to authorize a subsidy of Rs 990 billion for the next financial year. He asked for a budget of less than Rs800 billion.
The IMF also did not accept the government’s demand to add Rs 500 billion to the circular debt in the next financial year. He instead asked to limit the flow to around Rs300 billion, the sources said.
