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The IMF review mission is expected to arrive by the end of February to conduct the first semi-annual review of the ongoing programme.

While the programme remains largely on track, several key challenges persist, particularly in taxation, fiscal policy, and broader economic reforms.

This review will be critical in determining Pakistan’s ability to navigate economic pressures while maintaining IMF-mandated fiscal discipline.

One of the most pressing concerns remains the government’s inability to broaden the tax base, a key requirement of the IMF.

Currently, the tax burden disproportionately falls on the same formal sectors, undermining equity and inclusivity in the tax system. Despite commitments to expand taxation to agriculture, retail, and real estate, progress has been limited.

Agriculture continues to enjoy substantial exemptions, while retailers and real estate investors largely remain outside the tax net.

To address this issue, legislative reforms must introduce progressive taxation measures targeting untapped sectors. This could involve revising agricultural income tax laws, enforcing stricter compliance among retailers, and rationalizing property transaction taxes to boost revenue collection.

However, in response to sluggish market activity, the government is considering lowering tax rates on real estate transactions. The move is aimed at reviving the sector, which has seen abysmally low trade volumes nationwide, dragging down the construction industry.

A task force meeting is scheduled today to discuss this proposal, but it is unlikely to receive approval from the IMF mission. The Fund remains focused on maintaining revenue stability and avoiding measures that undermine fiscal discipline.

Reducing property transaction taxes may temporarily stimulate demand but risks eroding long-term revenue streams. Instead, the government should explore alternative incentives, such as subsidies for affordable housing projects or infrastructure investments, to rejuvenate the sector without compromising fiscal targets.

The Federal Board of Revenue (FBR) has also fallen short of meeting its tax collection targets, raising concerns about fiscal sustainability.

According to recent data, revenues are approximately 15% below the IMF’s indicative benchmark, necessitating the activation of contingency measures outlined in the programme documents. To complete the review process, the government will likely need to seek a waiver from the IMF’s Executive Board.

To mitigate this shortfall, the government should accelerate digitalization efforts to enhance tax compliance and reduce leakages. Expanding the use of e-filing systems and leveraging big data analytics can help identify underreported incomes and improve overall efficiency. But taxation challenges are only one piece of the puzzle.

The stance of the United States, which holds significant influence over the IMF board, will play a pivotal role in shaping the outcome of the review. Historically, the US has played a key role in influencing IMF programmes in Pakistan.

While the previous administration provided robust support during challenging economic times, uncertainty looms over whether this level of backing will continue under the current leadership.

During the last review cycle, the Biden administration strongly advocated for leniency, allowing Pakistan to secure necessary waivers despite delays in implementing certain conditions. However, under the new administration, geopolitical priorities may shift, potentially affecting the degree of support extended to Pakistan.

Beyond geopolitical considerations, another critical issue on the table is the slow progress of negotiations regarding older independent power producers (IPPs). These discussions have yielded minimal results, failing to address pressing concerns like circular debt and balance-of-payment pressures.

While payments to older IPPs are less concerning, the buildup of circular debt stems primarily from excessive capacity payments to newer IPPs. Furthermore, the Fund is unlikely to endorse the government’s proposal to cut taxes on electricity, signaling a potential impasse in negotiations.

To resolve this deadlock, the government should renegotiate power purchase agreements (PPAs) with both old and new IPPs to align tariffs more closely with market realities.

Additionally, phasing out subsidies and introducing time-of-use pricing mechanisms could promote energy conservation and ease financial strain on utilities. Despite these fiscal challenges, the performance of the central bank remains largely in line with IMF expectations.

Interbank liquidity remains stable, and the State Bank of Pakistan (SBP) has effectively managed foreign exchange reserves while servicing external debt obligations. Although concerns persist among banking treasuries about rising import costs, the IMF is unlikely to advocate for currency depreciation in the near term.

For example, SBP’s recent interventions in the interbank market have helped maintain adequate liquidity levels, ensuring smooth operations in the financial sector. Looking ahead, there may still be room for a 1-2% interest rate cut later this year, contingent upon inflation trends and economic growth prospects.

While the IMF staff appears content with the current monetary policy, given the positive real interest rates based on 12-month forward-looking inflation, there may still be room for further easing. However, the IMF’s primary focus remains on enhancing fiscal viability and expanding the tax base—a challenge that will intensify during next year’s budget negotiations.

To ensure sustained progress, the government must adopt proactive measures to address structural weaknesses, foster inclusive growth, and build resilience against external shocks. By prioritizing reforms in taxation, energy, and fiscal management, Pakistan can position itself favorably for continued IMF support and long-term economic stability.

Copyright Business Recorder, 2025

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Ali Khizar

Ali Khizar is the Director of Research at Business Recorder. His Twitter handle is @AliKhizar

Comments

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KU Feb 03, 2025 05:10pm
If you read, A Farewell to Alms by Gregory Clark, it becomes very clear that Pak's socio-economic progress is a result of rogue governance/corrupt culture, n truly explains our poverty/bankruptcy.
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