The caretaker government and the International Monetary Fund (IMF) have come to an agreement on contingency measures to be implemented by the end of the year if significant deviations from fiscal and monetary goals pose a threat to the broader objectives of the ongoing $3 billion loan program.
Reliable sources informed Dawn that technical-level discussions between a visiting IMF mission and Pakistani authorities are set to conclude on Friday. These discussions include the exchange of the latest data beyond the end-September quarterly performance, addressing queries and clarifications on all macroeconomic areas and their forward-looking outcomes.
While formal policy-level talks are scheduled to commence on Monday, both parties have concurred on the future course of action. This includes plans to broaden the scope of taxation on the retail sector and enhance the targeting of real estate-based revenue collection in case of any shortfall. A fixed taxation scheme for retailers might be implemented as an initial response to a minor revenue gap, followed by real estate, potentially through an ordinance effective from Jan 1. Further details are expected to emerge during policy discussions next week.
Sources revealed that the IMF mission is particularly concerned about revenue targets linked to import growth, as imports have remained subdued compared to the expectations set during the budget for 2023-24 and the finalization of the loan deal in July.
Regardless, both the retail and real estate sectors are expected to significantly increase their contributions to the revenue stream from their existing share starting from July 1, 2024.
The sources indicated that there is no significant disagreement between the two sides regarding the need to curtail development spending at the federal and provincial levels for the current year. However, effective taxation on agricultural income remains outside the caretaker government’s agenda due to constitutional limitations, despite the IMF mission underscoring its importance.
In August, the government shared a revised plan with the IMF for managing the power sector circular debt, aiming to rebase annual tariffs and streamline fuel adjustments. Fortunately, there have been no major issues in the power sector so far during these discussions.
The upcoming policy-level talks will also address the IMF’s stance on external financing needs planned by Pakistani authorities through significantly higher foreign direct investment (FDI). The government aims to attract this investment from friendly nations, particularly in mines and minerals, agriculture, aviation, and energy sectors, through the newly created civil-military forum, the Special Investment Facilitation Council (SIFC).
The government expects FDI, both through greenfield investment and brownfield through privatization, to gain momentum by January next year. This anticipation is based on advanced negotiations for an umbrella trade treaty with Gulf nations and bilateral agreements. Additionally, improved market conditions for the international capital market and commercial financing are expected after the successful completion of the IMF review and the disbursement of the second loan tranche, worth over $710 million, by late March next year.
Officials stated that the caretaker government has not only met but exceeded the IMF’s requirement for no more government guarantees by retiring some guarantees, surpassing the target by over Rs150 billion. Similarly, the government has complied with the directive to avoid further borrowing from the central bank, and the circular debt in the gas sector has been curtailed with a significant gas price hike effective from Nov 1.
Questions have been raised about the exchange rate management leading to the rupee’s appreciation, but authorities have clarified that the change resulted from administrative actions against smuggling and illegal operations rather than intervention.
The government and the IMF share similar views on containing the development program at both federal and provincial levels for fiscal tightening to minimize the budget deficit and consolidate a primary fiscal surplus. They aim to conclude the review by Nov 16.
Earlier, authorities briefed the IMF team on the consultative process with provincial governments, involving reductions in federal funding to provincial projects and limitations on the Public Sector Development Programme (PSDP) of the federation and annual development plans (ADPs) of the provinces.
To achieve a primary surplus of 0.4 per cent of GDP (about Rs400 billion), based on Rs600 billion cash surpluses to be returned to the federal government by the provinces, Pakistan has to tighten its fiscal belt. The government has already surpassed Rs416 billion in primary surplus in the first quarter of this fiscal year, primarily achieved through a tight squeeze on PSDP and subsidies, with total spending in the first quarter standing at less than Rs41 billion against a full-year budget allocation of Rs950 billion.