IMF Considers Quarterly Reviews for Pakistan’s $7 Billion Bailout, To Overview Agreement Conditions

The International Monetary Fund (IMF) is considering a return to a quarterly review process for Pakistan’s USD 7 billion bailout package, following some initial setbacks. However, Pakistani officials have stated that no final decision has been made yet.

The possibility of quarterly reviews arose during an unplanned visit by the IMF mission, which was expedited to Islamabad to ensure the program remained on track. Sources indicated that the Ministry of Finance is also facing challenges in ensuring that the provinces stay on course, as reported by Express Turbine.

A quarterly review would allow for continuous oversight of the approximately 40 conditions outlined in the USD 7 billion agreement. However, Pakistani negotiators informed The Express Tribune that a final decision has not yet been made regarding whether the reviews will be conducted quarterly or biannually.

Around six weeks ago, the IMF board approved the USD 7 billion agreement and disbursed USD 1.1 billion as an upfront payment. The remaining USD 6 billion will be released in six equal instalments, contingent on the successful completion of biannual reviews.

The first review was originally planned for March next year, but due to challenges in fiscal policy, taxation, and external financing, the IMF mission arrived earlier than expected. The previous Extended Fund Facility (EFF) under the 2019-2022 agreement also followed a quarterly review schedule.

According to sources, quarterly reviews would allow the IMF to closely monitor the government’s performance, ensuring effective implementation. Additionally, these reviews would enable the Ministry of Finance to better oversee the 40 conditions outlined in the agreement.

On Monday, the IMF mission received initial briefings from various ministries, while on Tuesday, Mission Chief Nathan Porter held introductory discussions with Finance Minister Muhammad Aurangzeb and State Bank of Pakistan (SBP) Governor Jameel Ahmad.

The IMF’s newly appointed Resident Representative to Pakistan, Mahir Bicini, also participated in the opening meeting. After the session, the finance minister hosted a luncheon in honour of the outgoing representative, Esther Perez. However, the Ministry of Finance did not release a press statement following the initial meeting.

The IMF conducted several rounds of discussions on various issues, including the performance of the Federal Board of Revenue (FBR), the accuracy of power sector data, and progress in meeting macroeconomic targets. A key discussion also focused on the status of implementing the National Fiscal Pact.

The FBR provided an overview of its performance for the first quarter, informing the IMF that the Rs 90 billion shortfall over three months was due to inaccurate macroeconomic assumptions.

The FBR explained that the failure to meet monthly targets was caused by sluggish import growth, a slowdown in inflation, and some policy measures not yielding the expected results.

The FBR attempted to assure the IMF that it had met the Rs 10 billion tax collection target from traders, largely due to higher contributions from non-filer retailers. While these retailers pay a 2.5 percent withholding tax, they remain outside the broader tax system. However, the IMF’s Rs 10 billion target was based on the Tajir Dost scheme, which was missed by 99.99 per cent. The FBR informed the IMF that, in the next phase, it would focus on non-filer wholesalers to ensure that due taxes are collected from them, despite the benefits they receive from the higher withholding tax rates imposed on non-filers. Finance Minister Aurangzeb has already announced the elimination of the non-filer category.

The FBR also sought to assure the IMF that, despite revenue shortfalls, it would still be able to meet the 11.5 percent tax-to-GDP target due to the shrinking size of the overall economy. However, the total tax collection would fall significantly short of the Rs 12.97 trillion target without the implementation of a mini-budget.

The FBR’s tax target of Rs 12.97 trillion was based on an assumed 15 percent nominal GDP growth, comprising 3 percent real GDP growth and 12 percent inflation. However, nominal GDP is now expected to grow by less than 12 percent, which will result in a smaller overall economy than initially projected.

Sources indicated that the IMF did not reveal whether it had agreed with the FBR’s reasoning or if it would continue to insist on the implementation of a mini-budget, as promised by Prime Minister Shehbaz Sharif’s government in September.

The IMF raised concerns about the low recoveries from the real estate sector, despite significant increases in withholding tax rates on the sale and purchase of plots. It also received a briefing on the National Fiscal Pact and acknowledged the difficulties in ensuring its smooth implementation.

The four provincial governments have yet to approve the agriculture income tax laws, which are meant to raise the tax rate to 45 per cent. Due to delays in Punjab, the overall cash surplus target has not been met. Sources suggested that the IMF might offer technical assistance to help fully implement the National Fiscal Pact, which aims to shift expenditure responsibilities to the provinces in line with the constitutional framework.

(Inputs from ANI)

ALSO READ: US Report Criticizes Israel’s Compliance with Humanitarian Aid Demands in Gaza