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ISLAMABAD:
Negotiations between Pakistan and the International Monetary Fund for the $1 billion loan tranche were inconclusive on Wednesday due to differences over the viability of this year’s budget, which has been compromised by the poor performance of the tax machinery.
Government officials said the staff-level agreement with the IMF for the $1 billion tranche under the third review of the program will take longer than anticipated, which ended Wednesday.
They said that although Pakistan met all quantitative performance criteria for the July-December 2025 period, the IMF had strong fears that the primary budget surplus target could not be achieved by the end of the June period.
Pakistan had committed to showing a primary budget surplus equivalent to Rs 3.15 trillion in this fiscal year, the core condition of the program that is now expected to be missed by a wide margin.
Talks between Pakistan and the IMF began on February 26 and were scheduled to end on March 11. Led by its chief 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 after the United States and Israel attacked Iran. The rest of the talks were held virtually from Turkiya.
The IMF mission returned from Istanbul to Washington without reaching an agreement at the staff level. However, federal government officials were hopeful that negotiations would not drag on until May, when the IMF is expected to visit Pakistan again to finalize the next fiscal year’s budget.
The real problem was the performance of the Federal Board of Revenue and the IMF was not satisfied that the tax machinery could even collect Rs 13.5 trillion in this fiscal year, according to officials. The IMF also had reservations about some other fiscal projections, the sources added.
The government had assigned a fiscal target of Rs 14.13 trillion to the FBR, which the IMF during the second review revised downwards to Rs 13.98 trillion. However, during this round of negotiations, FBR sought a further reduction of the target to just under Rs 13.5 trillion.
Pakistan had also not met the two indicative targets of collecting Rs 6.5 trillion in total taxes and Rs 366 billion from the retail sector during the July-December period of this fiscal 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 every month to FBR employees in the hope that the tax machinery would work. However, not even these incentives could energize the tax machinery.
Prime Minister Shehbaz Sharif this week announced energy conservation measures and indicated that 50% of government staff would work from home and observe a four-day work week. However, the FBR on Wednesday issued a notification mandating all its staff to come to the office five days a week. The FBR official said the notification was issued with the consent of the Cabinet Division.
The IMF was also seeking visibility over the next fiscal year’s budget and is now expected to send a mission to Pakistan, the sources added. There was an opinion in the Ministry of Finance that the government should not accept the budget mission. But the global lender did not agree, the sources said.
Sources said the fiscal target for the next fiscal year was also open as the IMF did not accept this year’s FBR base figure. The fund considered that the tax base will be reduced next year due to the one-time recovery of income through judicial processes that are part of this year’s collection.
Sources said the IMF was also not satisfied with projections of dividend income from state-owned companies and the oil tax. Another session with the IMF is expected this week.
The IMF also objected to the government’s decision to violate the recently agreed governance and anti-corruption framework. The Fund called for withdrawing amendments made to the Election Commission of Pakistan Act, which the National Assembly passed to exempt parliamentarians from asset disclosure.
Sources said the IMF also pointed out gaps in the implementation of state-owned enterprise reforms and questioned why government officials are appointed to the boards of directors of state-owned enterprises as private members. The government may now have to withdraw all nominees who are civil and public officials but serve as private members on the boards of directors of state-owned companies.
The head of the mission, Iva Petrova, observed during these meetings that the government raised many hopes for reforms of state-owned enterprises, but no major reforms were carried out. The government’s privatization agenda is also behind schedule and it has informed the IMF that not even three best-performing power distribution companies will be able to be privatized before the fall of this year.
The government met most structural benchmarks but did not meet the condition of amending the Sovereign Fund Law to the IMF’s satisfaction, the sources said.
The IMF did not accept Pakistan’s request to abolish the carbon tax on furnace oil, saying the government had already withdrawn the money based on this benchmark.
The IMF also did not accept Pakistan’s request to allow zero sales tax on oil refineries. Instead, it asked the government to include the tax in the price as the FBR did not have the capacity to pay the refunds, sources said.
The IMF may allow some concessions on the tax on captive power plants by changing the peak electricity equivalent gas rates to average rates. However, the IMF has not yet communicated the final decision, the sources said.
Sources said there were also problems with energy subsidies. The IMF did not accept the government’s demand to allow a subsidy of Rs 990 billion for the next fiscal year. It has asked to budget less than 800 billion rupees.
The IMF also did not accept the government’s request to add Rs 500 billion to the circular debt in the next fiscal year. Instead, he called for restricting the flow to around 300 billion rupees, the sources said.
