EDITORIAL: A staff-level agreement (SLA) on the second review was announced on 14 October 2025 by the International Monetary Fund (IMF) on its website — one week after the mission left the country on 8 October 2024. This has raised speculation as to what changed during seven days, given that no new fiscal or monetary policy decision was taken that would account for a “prior” condition being met.
Some argue that the delay perhaps was due to a change in the mission leader that may have required giving a briefing to and seeking subsequent approval from the head of the department, Jihad Azour, who met with the Finance Minister on the sidelines of the annual IMF/World Bank annual meeting; others maintain that it may have been at the request of the authorities motivated to give the perception that the deal was reached due to successful negotiations by the two economic team leaders — finance minister and the Governor State Bank of Pakistan.
Whatever the reason for the delay there is one major point of departure between the press release issued by the mission on its departure dated 8 October and the one dated 14 October: advancing fiscal structural reforms has been added to fiscal consolidation — an addition that envisaged not only an increase in revenue (the Federal Board of Revenue has already acknowledged 198 billion-rupee shortfall from the target in the first quarter) to broadening burden-sharing between federal and provincial authorities.
In this context, it is relevant to note that Pakistan’s tax structure in the budget retains its reliance on indirect taxes (up to 75 to 80 percent whose incidence on the poor is greater than on the rich) and even the revenue generated from enforcement measures relates to sales tax on sugar and other manufacturers, which is a regressive tax passed onto the consumers.
The Fund’s concern no doubt is attributable to: (i) provincial budgets reliance on federal transfers remains high — Punjab at 76 percent, Sindh at 61 percent (due to its collections under sales tax on services), Khyber Pakhtunkhwa at 79 percent and Balochistan at 78 percent; (ii) provincial surplus was budgeted at a high of 1464 billion rupees — Punjab budgeted a surplus of 740 billion rupees against its share of 629.6 billion rupees, Sindh budgeted a negative 36 billion rupees, KPK budgeted 157 billion rupees surplus lower than its federal budgeted share of 170.6 billion rupees and Balochistan budgeted a surplus of 37 billion rupees against the target of 110.6 billion rupees).
Punjab’s budgeted projection is expected to be severely compromised in the aftermath of the devastating floods, given that the provincial government is allocating funds from its own resources; and (iii) the condition to legislate (early this calendar year) and implement the levy of agricultural income tax in the budget 2025-26 effective from 1 January this year was budgeted by all four provinces at a very nominal rate with a revenue base much lower than expected.
The SLA also stipulates restoring viability of the energy sector and while it acknowledges efforts to prevent accumulation of circular debt but adds in the same sentence the need for timely tariff adjustments to ensure full-cost recovery in the event that the discount rate rises, which the Fund insists must be “appropriately tight and data dependent” — an oblique reference to the 1.25 trillion rupees borrowed from commercial banks may require — and “maintaining a progressive tariff structure.”
The Fund’s obsession with privatisation, a sentiment echoed by successive economic team leaders, is immature at the present moment, given the present fragile state of the economy (reflected by the public sector continuing to crowd out private sector credit with negative 170 billion rupees private sector credit flow for 1 July 2025 to 12 September 2025) and heavy reliance on borrowing both domestically and externally to shore up foreign exchange reserves. The Fund’s exhortation to improve business environment to support private sector development based on its existing severely contractionary fiscal and monetary policies is a contradiction in terms.
The 14 October press release notes important progress in strengthening policy design with the newly established tax policy office, leading to medium term reforms. Additionally, setting up of a new dedicated office has rarely yielded positive results, hence one will have to wait to see the actual success of these Fund-sponsored measures.
The Fund continues to promote age-old capitalist principles; notably, the scaling back of footprints of the state in the economy, reducing government intervention while promoting internationally competitive agricultural sector that meets food security needs boosting international trade, and implementation of a national tariff policy. These measures are available on paper though their implementation remains very weak. However, the efficacy of these policies has come under severe stress with massive changes in global geopolitics.
Copyright Business Recorder, 2025
Comments
Comments are closed for this article.