At the end of the International Mo netary Fund (IMF) mission (24 September to 8 October 2025) a press release was issued noting “significant progress” and the pledge to “continue discussions with a view to settling any outstanding issues” on the second review of the 37-month extended arrangement under the Extended Fund Facility (EFF) and the first review of the 28-month arrangement under the Resilience and Sustainability Fund (RSF).
The staff level agreement (SLA) which would have triggered the 1.2 billion-dollar disbursement under the two programmes was left pending. This generated speculation both within and outside the country that the government would have to meet some challenging prior conditions before the SLA was announced. One week later, on 14 October, the IMF announced an SLA.
With no major policy (fiscal or monetary) changes announced between 8 and 14 October, it is critical to ascertain what was noted in 8 October press release but not in the 14 October press release and what was added on to the 14 October press release.
The only deletion from the October 14 press release, which was included in the 8 October press release, was the word “transparency” though improvement in governance was included in both. Some analysts argue that this may be indicative of the Fund’s desire to extend its support to the flood victims by prioritizing the first disbursement of 200 million dollars under RSF in the aftermath of the massive 2025 floods – a rationale that implies that the third review of the EFF may present more of a challenge for the authorities. Others are baffled, as the Fund could have easily delinked the SLA on the EFF and the RSF.
Be that as it may, there is a common emphasis in both the 8 and 14 October press releases on sustaining fiscal consolidation – the usual Fund lingo to pressurise the debtor nation to focus on total revenue collections. The Federal Board of Revenue (FBR) revealed that in the first quarter of the current fiscal year (July-September) the shortfall from the target agreed with the IMF (which if past precedence is anything to go by was overstated) was 198 billion rupees and if the shortfall continues at this rate the most optimistic projection by the end of the year is a shortfall of 400 billion rupees.
Sadly, the IMF’s thrust in terms of tax reforms has remained on total collections even though the voluminous previous SLA documents on nearly all the twenty-three previous programmes are replete with exhortations to undertake structural reforms and shift the heavy existing reliance from indirect taxes, whose incidence on the poor is greater than on the rich, to direct ability to pay taxes. The current budget continues to rely from between 75 and 80 percent on indirect taxes.
Indirect taxes are sourced to consumption that include recent claims of higher collections under enforcement measures which focused on sales tax collections, a regressive tax, on sugar, cement and under consideration at present on fertilizer manufacturing hubs. In addition, the Fund has yet to take note of FBR’s practice of crediting withholding taxes imposed in the sales tax mode under direct taxes – even after the Auditor General of Pakistan pointed it out a few years ago. This inequitable taxation structure accounts for rising poverty levels in Pakistan, estimated at 44.7 percent as per the last measure by the World Bank more than year ago.
The government is likely to deal with the tax shortfall as in previous programmes by either slashing public sector development (PSDP) spending or take the unpopular decision to raise existing taxes and/or widen the tax net. In the first quarter of the current year only 40.45 billion rupees were disbursed for PSDP against authorisation of 156 billion rupees which, as in previous years, will have negative repercussions on growth (as notwithstanding claims of a commitment to private sector led growth the government’s PSDP remains the main engine of growth, reflected by the routine large debt incurred by the government from commercial banks that crowds out private sector credit).
Raising taxes or widening the ambit of existing taxes (contained in the contingency measures agreed with the Fund under the EFF) may be fraught with socio-political implications, especially at present in the aftermath of floods which has affected 7 million people as per the 14 October press release.
The 8 October press release however does not refer to what is prominent in the 14 October press release: advancing fiscal structural reforms with a focus on broadening burden sharing between federal and provincial government. Challenges to the implementation of broadening burden sharing between the federal and provincial governments are threefold: (i) the federal government budgeted 1464 billion-rupee provincial surplus in the current year with the four provinces budgeting only 874.6 billion surplus (Sindh budgeted negative 37 billion rupees and the Punjab government budgeted 790 billion rupees which is unlikely to be met as the provincial government is releasing significant funds for flood relief victims); (ii) the actual budgeted total farm levy collection by all four provinces is too little in terms of revenue generation than was reportedly envisaged by the Fund; and (iii) reliance on federal transfers in the provincial budgets remained high - Punjab at 76 percent, Sindh at 61 percent (due to collections under sales tax on services), Khyber Pakhtunkhwa at 79 percent and Balochistan at 78 percent.
The 14 October press release exhorts the government to deliver structural reforms aimed at boosting productivity (compromised due to the severely contractionary monetary and fiscal policies being implemented under the Fund programme), strengthening governance (to reiterate no mention of transparency), improving business environment to support private sector development (compromised due to high tariffs and higher utility rates relative to competing countries — a direct outcome of Fund conditions), advancing state owned enterprise agenda, and a long-term stated priority by nearly all administrations that remains compromised due to the routine non-merit seniority-based appointments and where appointments are merit based there has been a plethora of conflict of interest decisions but with no transparency/penalty a trend that continues to this day.
To conclude, one would have hoped that the flaws in the Fund programme design had been ironed out through reducing the outlay on expenditure by at least 2 trillion rupees, including revisiting the power sector’s tariff differential subsidy (to provide time to implement structural changes), and loosening the contractionary fiscal and monetary policies to ensure a growth rate that could oil the wheels of industry and generate employment thereby reducing the high poverty levels.
Copyright Business Recorder, 2025
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