IMF: Questions persist on reforms

The IMF team is set to arrive next week for the first biannual review, which is expected to pass—though not without reservations—as all binary conditions are being met. However, concerns loom over tax revenues. The issue isn’t about missing Federal Board of Revenue (FBR) targets but rather the persistent failure to broaden the tax base.

The State Bank of Pakistan (SBP), on the other hand, is performing admirably, comfortably meeting all its targets. This eliminates any pressure on currency adjustments or shifts in monetary policy. The thornier challenge lies in addressing the government’s inability to bridge the gross external financing gap—a problem likely to draw scrutiny during the review.

IMF staff are expected to take a tough stance with the FBR and finance ministry over their lack of progress in expanding the tax net. Despite lofty promises from the finance minister at budget time, there has been negligible movement in bringing retailers, traders, and the real estate sector into the tax fold. Collection from real estate remains abysmally low, and while provincial benchmarks for agricultural income tax legislation have technically been met, the intent to enforce taxation remains conspicuously absent.

These shortcomings are unlikely to trigger revenue contingencies or necessitate a mini-budget. The core issue is fairness. The documented economy—comprising salaried individuals and corporations—is already taxed to the hilt, with rates jacked up exorbitantly. Yet, efforts to widen the tax base remain stagnant. This imbalance is glaringly unfair, and the IMF should call it out for what it is.

The Fund is likely to push for meaningful tax reforms, with discussions centering on strategies to implement them in next year’s budget. The finance ministry is reportedly working on a framework for this, which will be a key topic during negotiations. Additionally, the IMF may express concern over the slow progress in rationalizing trade tariffs, potentially pressuring the government to reduce import tariffs in the upcoming budget.

On the monetary front, the SBP continues to meet all targets comfortably. With inflation plummeting, real interest rates are now positive, leaving the IMF satisfied with the central bank’s performance. The SBP is also considering slowing the pace of monetary easing significantly, and markets widely anticipate a pause in rate cuts this time around. The Fund is likely to appreciate the rational behavior exhibited by both the SBP and financial markets.

In the interbank market, until recently, the SBP had been actively buying foreign exchange, bolstering reserves, and ensuring compliance with Net International Reserves (NIR) and other targets. However, recent weeks have seen mounting pressure, with the currency gradually depreciating and import payments delayed. Reports suggest that surplus banks are being asked to surrender dollars while deficit banks remain under strain—a development noted by treasury offices and possibly known to the Fund. How the IMF reacts remains to be seen, but seasonal inflows expected in the coming months could ease some of these pressures.

The elephant in the room is external financing. While the IMF has been lenient on the gross financing gap under the Biden administration’s tacit support for Pakistan, the shifting political landscape raises questions. With bilateral assistance dwindling and market-based loans proving elusive, how the Trump administration might approach this issue adds another layer of uncertainty.

In sum, while the review is unlikely to derail the program, the IMF’s focus will be on structural reforms—particularly tax broadening—and external financing challenges. Whether Pakistan can navigate these choppy waters depends on its ability to address these longstanding issues decisively.