IMF authorises $7 billion for Pakistan’s EFF program
- In Reports
- 04:53 PM, Sep 26, 2024
- Myind Staff
The Prime Minister's Office announced that the International Monetary Fund (IMF) has approved a 37-month Extended Fund Facility for Pakistan, amounting to $7 billion. They also approved the immediate release of the first loan instalment, which is just under $1.1 billion. This marks Pakistan's 25th IMF program since 1958 and its sixth Extended Fund Facility. The statement from the Ministry of Finance to the Senate Standing Committee on Economic Affairs states that Pakistan will pay approximately 5% interest on the IMF loan. Following the approval of the 24th IMF program in 2023, Prime Minister Shehbaz Sharif reaffirmed on Wednesday that this will be Pakistan's last IMF program.
Shehbaz credited the finance team, General Asim Munir, the Chief of Army Staff, and Deputy Prime Minister Ishaq Dar for the new IMF bailout package. He pointed out that the federal government cannot complete the 25th program in the history of the country without the assistance of all four provinces.
Interestingly, following the staff-level agreement between Pakistan and the IMF on July 12, the governments of Sindh and Balochistan ratified memoranda of understanding for the purpose of signing the National Fiscal Pact on July 30 and July 26, respectively. The main reason for taking a loan is the need to restructure the external and domestic debt, which accounted for 81% of Pakistan's tax revenue in the most recent fiscal year. Interestingly, the IMF board approved the program without addressing this issue.
With the help of the new bailout package, macroeconomic stability is to be attained through strengthening foreign exchange reserves, streamlining public finances, lowering the fiscal risk associated with state-owned businesses, and enhancing industry conditions to support private sector growth. The government raised electricity prices by up to 51%, imposed additional taxes ranging from Rs1.4 trillion to Rs1.8 trillion, and pledged to increase transparency in the Sovereign Wealth Fund's operations to be eligible for the program.
In addition, the government accepted the most costly loan in Pakistani history—$600 million—in exchange for an IMF board meeting date. Increasing tax revenues, selling off loss-making companies, and ensuring the fiscal viability of the power sector are some of the fundamental requirements of the IMF program. The new program also covers the provincial budgets and their revenues, unlike in the past when the provincial budgets were not under the IMF's jurisdiction. Under the new program, the provinces are directly impacted by almost a dozen IMF conditions.
As per the terms set forth by Pakistan and the IMF, the federal and four province governments will sign a new National Fiscal Pact by next Tuesday to assign the provincial governments' responsibilities for road infrastructure projects, health, education, and social safety nets. By October 30, all four provincial governments would have amended their laws to bring their rates of agriculture income tax into compliance with the federal personal and corporate income tax rates. Consequently, starting in January of the following year, the agricultural income tax rate would rise from 12–15% to 45%.
No additional gas or electricity subsidies would be provided by any provincial government, and no new export processing zones or special economic zones would be created. By 2035, the federal government would be prohibited from creating any new economic zones and would have to terminate the tax benefits of any current zones. There was also a requirement that Pakistan demonstrate a primary budget surplus of 4.2% of GDP over the course of the three-year program.
If interest payments are subtracted, the primary budget surplus is computed. An additional 3% of GDP in taxes would be imposed on current taxpayers in the event of a 4.2% GDP deficit, greatly decreasing non-interest expenses. To keep the debt-to-GDP ratio on a sustainable downward trajectory, the IMF program requires a primary surplus of 1% of GDP to be demonstrated in this fiscal year and roughly 3.2% over the following two years.
The government has promised to present a mini-budget in the event of a tax shortfall, which would raise taxes on fertiliser, contractors, imports, and professional service providers. For the first quarter, the Federal Board of Revenue of Pakistan (FBR) could potentially face a tax deficit of more than Rs 200 billion. Pakistan will be required to maintain defence and subsidy spending for this fiscal year at the same level as the previous fiscal year, taking into account the size of the economy.
The program's design, which revolves around the tactic of rolling over the maturing external debt during the program period, has not entirely addressed the problem of debt unsustainability. Pakistan has pledged that it will not pay back the $12.7 billion debt owed to Kuwait, Saudi Arabia, China, and the United Arab Emirates during the duration of the program.
Pakistan has pledged that, for the duration of the program, it will not pay back its $12.7 billion debt to Kuwait, Saudi Arabia, China, and the United Arab Emirates. Pakistan was compelled by the IMF to close a $2 billion financing shortfall before being eligible for board approval. To close the financing gap, Pakistan was forced to accept the most costly commercial loan in its history, with an interest rate of 11%, from Standard Chartered Bank.
The Asian Development Bank issued a warning on Wednesday, stating that it might be challenging to carry out the reforms that Pakistan has promised to submit to the IMF due to the escalating institutional and political tensions. It claimed that in order for Pakistan to continue receiving loans from foreign lenders, these reforms were essential.
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