ISLAMABAD:
The International Monetary Fund (IMF) on Saturday announced a staff-level agreement with Pakistan for the release of a $1.2 billion loan, but linked the executive board meeting to approve the tranche with Islamabad’s ability to raise Rs 322 billion from court cases.
After finding the Federal Board of Revenue’s performance to be below average, the Washington-based global lender imposed “pre-action” whose successful implementation will pave the way for the executive board meeting, Pakistani authorities said.
The IMF reached the agreement at the staff level only after seeking assurances that the government would strictly adhere to pre-war fiscal targets, while the central bank would raise interest rates if inflation exceeds the target range and allow exchange rate flexibility to absorb external shocks arising from the conflict.
Under the above action, the FBR would collect additional tax revenue arising from the recent court rulings in the cases previously disputed and in which the courts have issued rulings by the end of February, according to government officials.
They said that both the IMF and Pakistan agreed that an amount of Rs 322 billion would be collected from court rulings, mainly in super tax cases. The FBR not only collects the principal amount but also claims late fees of up to 25%.
The government has already collected most of the disputed taxes and was confident the required amount would be generated before Pakistan’s case was referred to the board for approval. Pakistan is hopeful that after complying with the above measures, the board can meet in early May to approve the next tranche of the loan.
Upon approval, Pakistan will gain access to around $1 billion under the SAF and $210 million under the RSF, bringing total disbursements under the two agreements to approximately $4.5 billion.
The FBR has missed the first eight months of the original fiscal target of this fiscal year by a margin of Rs 640 billion. He has attributed the deficit to decreased revenue in the energy, oil and gas sectors.
The FBR stated in these meetings that during the first half of the fiscal year, around half of the shortfall was offset by higher collection of provincial petroleum tax and cash surpluses, lower-than-expected cost of flood responses and loan repayments of state-owned enterprises arising from settlement of power sector circular debt.
Amid growing tax disputes and the FBR’s struggle to address these issues, Prime Minister Shehbaz Sharif has constituted a task force to improve the legal affairs of the FBR, according to a notification.
The task force will revamp and strengthen the FBR’s revenue litigation framework at all levels, including initial adjudication by the tax department, commissioner, collector appeals, appellate courts, Revenue and Customs, High Courts, Supreme Court and Federal Constitutional Court.
The Task Force will be chaired by Mr. Shad Mohammad and includes eminent Constitutional Lawyer and Prosecutor Hafiz Ahsaan Ahmad Khokhar, Advocate of the Supreme Court, underlining the seriousness of the government initiative.
Members are required to undertake a comprehensive assessment of existing legal wings, covering workload management, human and logistical resources and overall operational capacity. The review will focus on identifying structural weaknesses, procedural obstacles and systemic inefficiencies that contribute to protracted litigation and delays in the resolution of tax and customs disputes.
A key component of the review will be the Litigation Management System (LMS), which has faced challenges in its integration with appeal courts and high courts.
The Task Force is expected to recommend reforms that ensure a more effective, data-driven, and institutionally coordinated approach to litigation.
The IMF is now also focusing on weaknesses in the FBR’s internal governance, indicating concerns that the government’s efforts to strengthen the tax machinery have not yet produced fully effective results.
The war in the Middle East will affect Pakistan
“The conflict in the Middle East, however, casts a cloud over the outlook, as volatile energy prices and tighter global financial conditions risk putting upward pressure on inflation and weighing on growth and the current account,” the IMF said.
In contrast, Pakistan’s Finance Ministry has projected that inflation would rise only marginally by 0.3%, remain within target, economic growth would remain around 4% and the current account deficit would remain within $2 billion despite global oil price shocks.
Iva Petrova, IMF mission chief, said Pakistan’s authorities “remain committed to pursuing sound and prudent macroeconomic policies to preserve recent gains in macrofinancial stabilization, while deepening structural reforms to accelerate growth and strengthen social protection to mitigate the impact of volatile energy prices.”
The Fund’s assessment contrasts with projections from Pakistan, which has said the war would have no major economic implications.
No relaxation in objectives
The IMF did not ease the pre-war primary budget surplus target of 1.6% of GDP, even though the State Bank of Pakistan earlier indicated that the target could be difficult to achieve due to the FBR’s weak tax collection performance. The Fund also maintained strict fiscal targets for the next financial year.
Petrova said the authorities remained committed to ensuring a sustainable fiscal position and reducing the still high public debt burden in the medium term.
“Efforts are underway to achieve the primary budget surplus of 1.6% of GDP by FY26 and target an underlying primary balance of 2% of GDP in FY27, supported by measures to broaden the tax base and strengthen spending discipline,” he said.
He also highlighted efforts to improve cost-sharing between the federal and provincial governments, as Islamabad has asked provinces to share the burden of fuel subsidies, which had already increased to Rs 125 billion on April 3.
“Efforts are being made to improve the sharing of the fiscal burden between federal and provincial governments and strengthen public financial management,” Petrova said.
The IMF stressed that strong implementation of fiscal reforms remains critical to achieving the program’s objectives.
Petrova said the State Bank of Pakistan remains committed to keeping inflation within its target range and is willing to raise interest rates if price pressures intensify, including due to the pass-through effects of global food and fuel price volatility. Pakistan has set an inflation target of 7.5%, which the Finance Ministry believes remains achievable despite fuel price shocks.
The IMF said exchange rate flexibility should continue to serve as the main buffer against the effects of the Middle East conflict, while ensuring banks can finance imports and external payments amid potential balance of payments pressures. The Fund reiterated that Pakistan must achieve viability of the energy sector and avoid a recurrence of circular debt.
“It is essential that sustainability is maintained through timely tariff adjustments that ensure cost recovery,” Petrova said, adding that energy price subsidies should be avoided due to their high fiscal cost and distortive effects.
The IMF also highlighted structural reforms, saying progress on state-owned enterprise reforms and the privatization agenda remains critical to reducing the state’s economic footprint and improving service delivery.
Authorities are also strengthening institutional capacity and intensifying anti-corruption efforts to promote inclusive growth and ensure a level playing field for businesses and investors.
