ABC of IMF-Pakistan Agreement Sans Trade & Logistics
IMF Country Report No. 24/310 of October 2024 – Article IV Consultation and Request for an Extended Arrangement under Extended Fund Facility
External Financing Support
Pursuant to economic stability achieved under the 2023 Stand-by Arrangement (SBA) the International Monetary Fund (IMF) and Pakistan finalized an agreement on a 37-month Extended Fund Facility Arrangement (EFF) of about US $7 billion. External financing support was extended by Pakistan’s bilateral and multilateral partners, particularly the Kingdom of Saudi Arabia, People’s Republic of China and United Arab Emirates .
Overview of IMF-Pakistan Agreement
Key priorities under the EFF supported program include (i) rebuilding policy making credibility and entrenching macroeconomic sustainability through consistent implementation of sound macro policies and a broadening of the tax base (ii) advancing reforms to strengthen competition, raise productivity and competitiveness (iii) reforming SOEs and improving public service provision and energy sector viability (iv) building climate resilience. Strong and consistent policy implementation under the SBA including the first primary surplus in twenty years (0.9 % of GDP) led to a near doubling of foreign currency reserves accompanied by current account deficit reduction to US $ 665 million in FY 24 (compared to US $ 3.3 billion in FY23. The IMF understands that the tax system has been extensively used to provide non-transparent support through exemptions for privileged sectors like real estate, agriculture, manufacturing and energy, as well as through proliferation of Special Economic Zones (SEZs) and seeks to gradually phase out the existing incentives subject to contractual obligations. With an export basket strongly biased towards agriculture and textiles the country has struggled to reallocate resources towards more technologically complex products. Concerning the establishment of a Sovereign Wealth Fund and the creation of the Special Investment Facilitation Council (SIFC) the need was highlighted to ensure a level playing field with regard to the investment environment and avoid a watering down in governance standards.
Tax Measures
Strengthening general government tax revenues to 12.3 % of GDP is to be achieved through taxation measures worth over PKR 1,723 billion or 1.4 % of GDP. Personal and corporate income tax (PIT and CIT) measures are expected to generate PRs 357 billion by bringing exporters into the regular tax regime, streamlining PIT for salary (SI) and non-salary individuals (NSI), reducing taxation slabs to five and raising the maximum rate for NSI to 45 %. On the sales tax side measures include transforming the sales tax regime by moving most exempt and zero-rated products to the standard rate and ending preferential Export Facilitation Scheme for locally purchased inputs and introducing Federal Excise Duty (FED) on property sales and sugar lubricants. Other tax measures are enhancing withholding taxes and direct taxation by raising the withholding tax for non-filers under advance tax collection and increasing taxes on property transactions with progressive rates. Capping the exemption granted by a Commissioner to 80 % of the corresponding withholding income tax of the total value , withdrawing exemptions and concessionary rates for the import of fresh and dry fruits (except apples) from Afghanistan , reevaluating the property valuation tables to align them with market rates, including retailers in the tax net through the Tajir Doost scheme, not to use “supplementary grants” via executive fiat except in cases of severe natural disasters with any expenditure exceeding the budget appropriation . Provincial tax reforms will include the full alignment of their Agriculture Income Tax (AIT) regimes with the federal personal and corporate income taxes by October 2024 (end-October SB) with implementation from January 1, 2025 and collection in July 2025 and transforming the General Sales Tax (GST) into a broad-based Value added tax (VAT) .
Concessionary Tax Regimes
Removal of tax concessions and exemptions to reduce tax expenditures is another important component of revenue mobilization as in previous Fund programs despite a continuous benchmark being in place not to introduce any new exemptions and concessions existing ones continued to exist. However, starting with the Finance Act FY 25 the authorities have abolished exemptions and tax concessions (yielding about 0.37 % of GDP). The GST on services regime is being moved from a positive list to a negative list. It is planned to consolidate which will be grounded in an increase in the tax-to-GDP ratio. The annual budget for FY25 envisages the tax-to-GDP increasing by ~ 2 percentage points of GDP, to 12.3 of GDP, rising further to 13.4 of GDP by the end of the program. The commitment is evident from the measures taken in historically difficult and politically challenging areas, including bringing the retailers in the tax net, reduction in slabs for Personal Income Tax (PIT), expansion of coverage of FED while enhancing its rate and removal of several tax concessions and exemptions. During the program period, it has been agreed that the agriculture income tax rates will be harmonised with the PIT and Urban Immovable Property Tax will also be restructured in consultation with the Fund.
Tax Administrative Measures
Strengthening tax administration to address the current 3.5 % of GDP compliance gap predominantly concentrated in retail (1.1 % of GDP), transport (0.7 % of GDP) and real estate (0.2 % of GDP). Other tax administrative measures involve implementation of the compliance improvement plan (CIP) to expand the tax net through targeting of professionals and small businesses. Performance will be monitored via a QPC setting a floor on tax returns from new filers identified through the CIP and extending the Tajir Doost scheme to an additional 36 cities. Further implementing digital invoicing, enhancing the track-and-trace system, establishing a Tax Policy Office under the Minister to improve tax policy analysis thereby allowing the Federal Board of Revenue (FBR) to focus on revenue .
National Fiscal Pact and Transparency
The provinces have been tasked to deliver surpluses of around 1 % of GDP in FY 2025 as the federal government and the provinces have agreed to enter a National Fiscal Pact (end-September 2024 SB) that will devolve specific federal spending responsibilities to provinces in line with the 18th constitutional amendment . The National Fiscal Pact is designed to re- balance the federation and the federating units’ relationship which has been agreed by the provinces in principle, under which taxes will be harmonized across jurisdictions to improve collections while protecting the social sector spending. Federal and provincial governments are to refrain from announcing the support prices for raw commodities and limiting the procurement programs to the extend of food security purposes.
Development and Transparency
There will be an annual limit on the total size of new projects entering the PSDP portfolio . Ensuring of highest level of spending transparency by leveraging digitalization namely e-Pakistan Acquisition and Disposal System which can contribute to effective use of resources and prevent misuse and corruption through roll-out the e-PADs to all federal and provincial agencies. In this backdrop authorities concerned are to continue publishing of beneficial ownership information of winning suppliers and conduct an external audit in the next fiscal year accordingly. Pakistan exited the FATF grey list in 2022 and continues to make good progress in making the institutional frameworks more robust. In 2023 Pakistan established the National AML/CFT Authority which is now driving the National AML/CFT .
Vulnerable Sectors
Merits of the National Saving Scheme (NSS) should be comprehensively assessed considering its externalities on the financial sector and its operational costs. The FY25 budget allocates PRs 599 billion (0.5 % of GDP) to Benazir Income Support Program (BISP) a 27 % increase above the budgeted and executed level in FY24. There is a pressing need to reverse the decline of health and education spending outside of BISP as Pakistan’s most vulnerable segments are currently protected from excessive electricity and gas tariff increases via the tariff structure (cross-subsidies with protection of vulnerable households) moving to direct cash transfers via BISP in the medium term.
Foreign Currency Reserves
Gross foreign exchange reserves to be maintained at least 3 months of imports, supported by disbursement of multilateral and bilateral loans and FX purchases. Should outflow pressures return, the SBP is committed to allowing the exchange rate to adjust flexibly and not intervene against a trend depreciation de jure exchange rate arrangement which is classified as floating while the de facto exchange rate arrangement is classified as crawl-like.
Governance & SOEs
Improving SOE Governance continues to be one of the important pillars of the reform agenda. On the advice of the Fund and with the technical assistance of ADB Pakistan formulated a SOE Policy, promulgated the SOE Act in 2023 and established a Central Monitoring Unit at the Ministry of Finance and the process of aligning the statutes of different SOEs with the SOE Act is underway. Four such statutes have already been amended and several other statutes including of Sovereign Wealth Fund are expected to be harmonized in FY25.
Energy Sectors Structural inefficiencies and Subsidies
Structural inefficiencies in the generation, transmission, distribution and payment recovery of electricity and gas and the importance of cost-side reforms are to be addressed in the next phase of reforms in consultation with the Fund, World Bank and Asian Development Bank (ADB). Phasing out of the incentives coupled with the decision to grant no such incentives in the future will help reduce the associated fiscal costs and create a level playing field and a more predictable business environment. The energy subsidies have been contained at 1 % of the GDP in the annual budget for FY25 by adjusting tariffs and introducing cost-side reforms.
Inflation
Owing to an appropriately tight monetary stance and fiscal prudence, inflation has come down to single digits (9.6 % in August 2024) from its peak of 38 % in May 2023, Forex (FX) reserves have doubled to about five weeks of import and the rupee remained generally stable. On the fiscal side, responsible fiscal management helped post a primary surplus of 0.9 % of GDP in FY24 and the FY 25 budget aims at achieving the headline primary surplus of 2.0 % of the GDP.
Monitoring by IMF and Data Sharing
To effectively monitor the program performance the authorities will provide all the needed data to the IMF in line with Article VIII, Section 5 of the IMF Articles of Agreement as deemed necessary. Performance under the program is to be monitored from data supplied to the IMF by the SBP, Ministry of Finance, FBR, Pakistan Bureau of Statistics, Ministry of Energy (Power and Petroleum Divisions) and other agencies as outlined in annexed Tables of the Agreement . Irrespective of the requirements outlined in any Table the authorities will report on an ongoing/continuous basis any non-observance of continuous PC in the annexed tables of ESF on daily/weekly/forthnighlty/monthly /quarterly basis.
Authored by Nadir Mumtaz
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