IMF official outlines Pakistan’s budget priorities

KARACHI: The International Monetary Fund (IMF) said on Saturday that Pakistan’s next budget would focus on broadening the country’s narrow tax base under the third review of its USD7 billion loan program, a move analysts say may mean taxing incomes from agriculture, retail, real estate, information technology (IT) and export sectors.

The Federal Board of Revenue (FBR) collected a provisional Rs11.735 trillion (USD41.9 billion) in taxes during the fiscal year 2024-25, recording a 26 percent increase over the previous year’s collection of Rs9.3 trillion (USD33.2 billion). However, this figure fell short of the annual target of Rs12.3 trillion (USD43.9 billion).

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The international lender said Pakistani authorities were planning to prepare the country’s new fiscal plan for 2026-27 in line with the staff-level agreement (SLA) signed late last month for the third review for Extended Fund Facility. “Their efforts focus on targeting an underlying primary balance of 2 percent of GDP in FY27,” IMF’s resident representative in Pakistan Mahir Binici told Arab News in an interview.

These efforts would be supported by measures to strengthen fiscal discipline and federal, provincial burden-sharing, he said. The government would also be required to expand spending on health, education and social protection schemes in the next fiscal year, starting from July 2026.

Prime Minister Shehbaz Sharif’s government has been working on proposals like cutting on billions of rupees funds the provinces get from the federal divisible pool every year. The provinces, especially Sindh, have expressed reservations on such plans.

The IMF, under its reforms-oriented loan program, requires Pakistan to increase its revenues by withdrawing fuel subsidies and taxing incomes from sectors that remain outside the tax next. “Broadening tax base means bringing in more sectors into the tax net, not necessarily increasing tax rates,” said Adnan Sami Sheikh, vice president of research at Pakistan Kuwait Investment Company Ltd.

Those sectors, the analyst said, may include agriculture, exporters, IT, real estate and retail.

The IMF may require the government to bring “untaxed and under-taxed individuals and sectors into the tax net,” Sheikh said.

Pakistan has around 10 percent tax-to-GDP ratio, which is considered the lowest in the world, according to the analyst. The country, with more than 240 million population is expected to have 15 percent tax-to-GDP ratio.

The government usually presents the new budget in parliament in June as the nation’s financial year starts from July 1. “I am hearing the government will reduce salary tax on upper brackets and maybe super tax in the new budget,” Sheikh said. “This will be a growth focused budget mainly.”

The recently signed SLA with Pakistan is subject to approval by the IMF’s executive board in the coming weeks.

After the approval, Pakistan is expected to receive $1.2 billion tranche from the IMF, about USD1 billion under EFF and USD200 million under a USD1.4 billion Resilience and Sustainability Facility.

The funding will bolster Pakistan’s foreign exchange reserves as the country grapples with mounting external pressures, including elevated global energy prices driven by the Middle East conflict and a USD3.5 billion loan repayment to the United Arab Emirates due this month.

“The next disbursement of USD1.2 billion, subject to IMF Executive Board approval, will provide very important support for Pakistan,” Binici said, when asked to confirm if Islamabad has sought an EFF extension. “At this challenging time, we remain closely engaged with the authorities in supporting their efforts to safeguard hard-won macroeconomic stability and policy credibility and foster sustainable growth.”