IMF’s SLA

On 15 May International Monetary Fund (IMF) uploaded the Staff Level Agreement (SLA) on the third review of the Extended Fund Facility (EFF) and the second review of the Resilience and Sustainability Facility (RSF) with the very first para of the Executive Summary inexplicably minimising the impact of the ongoing Middle East conflict by referring to it as “contained.”

In the age-old modus operandi of a bureaucracy covering its bases, be it national or international, the Fund staff preceded the word “contained” with the following caveats: “the impact of the war in the Middle East clouds Pakistan’s near-term outlook and there is great uncertainty about how developments will unfold. Under the baseline scenario, the war is expected to put upward pressure on inflation and weigh on growth and the balance of payments, but the overall impact is expected to be contained.” So what prompted the IMF team to reach this conclusion given the ongoing severe global oil, minerals, and fertilizer supply disruptions due to the conflict – a conclusion that provided the rationale for harsh upfront conditions quite unlike the Fund’s approach during the onset of COVID-19? And what is the anti-poor benchmark that the government has agreed to with the IMF?

Data shared by government entities, notably the Pakistan Bureau of Statistics (PBS), with the Fund staff is the reason behind the conclusion that the impact of the conflict is “contained” – data that the Fund termed had “important shortcomings” in the ongoing 7 billion-dollar EFF loan approval documents (October 2024). These shortcomings were “in the source data available for sectors accounting for around a third of GDP, while there are issues with the granularity and reliability of the Government Finance Statistics (GFS). The authorities are prioritizing addressing these weaknesses, supported by Fund Technical Assistance (TA) on the GFS and a new Producer Price Index (PPI).” The TAs completion date was 30 June 2026 however as per the PBS it has been delayed till October this year after the Fund suggested changes in the methodology to make the PPI-based data more credible and authentic.

Earlier this month there were reports that the Fund had noted that the GFS compiled by the Finance Division remained subject to shortcomings that undermine transparency, including a persistent statistical discrepancy between above and below the lone measures of the fiscal deficit. This discrepancy as per the consolidated federal and provincial fiscal operations data released by the Finance Division reached a high of negative 444,554 million rupees July-March 2026 against plus 205,691 million rupees in the comparable period of the year before.

In spite of these rather damning projections the Fund in the third EFF review and second RSF review documents estimated a growth rate for the current year at 3.5 (0.6 percent lower than budgeted) – a rate that the World Bank has projected at 3 percent while independent economists maintaining that the rate may be as low as 2.7 percent that may be further compromised due to the ongoing Middle East conflict.

What is hitting the consumers particularly hard today is the authorities pledge to the Fund to align domestic fuel prices with international prices as a prior action (implementation leading to the recent tranche release) with the rationale that “subsidies seeking to prevent domestic fuel price adjustment have proven distortionary and fiscally unsustainable, any fiscal policy response to high fuel prices should be targeted, limited, temporary, and budget neutral.”

The report further notes that “fiscal space is being created by extending the domestic debt maturity period, which is now four years instead of the earlier 2.7 years at the start of the programme,” and while there are exhortations to the administration to slash expenditure yet in the current year’s budget there was no time-bound condition or structural benchmark that specifically called for capping any of the current expenditure items. This allowed the government to follow the same strategy as in the previous twenty-three programmes, which is to deliberately overstate the development outlay, a major source of GDP growth in Pakistan, and slash it as and when the fiscal space becomes extremely narrow. July-April 2026 a mere 47 percent of the budgeted Public Sector development Programme was disbursed.

The IMF has been focusing on poverty alleviation through Benazir Income Support Programme (BISP) to mitigate the negative impact of its severely contractionary fiscal and monetary policy conditions as well as its insistence to meet full cost recovery, which has implied passing on the cost of sectoral inefficiencies onto the consumers.

The Fund argues that “strengthening social protection and human capital investment is critical to create sustained gains in poverty reduction, employment, productivity, and long-term GDP growth.

Pakistan’s poverty headcount rate increased to 25.3 percent in FY24, up from 18.3 percent in FY22, exacerbated by overlapping crises (COVID-19, floods, economic instability and inflation).” There is absolutely no understanding by the Fund staff that the private sector remains in the throes of a recession with wages frozen since the pandemic that, in turn, account for rising unemployment which consist of mainly those who are not serviced under the BISP programme. Additionally, the poverty figure cited should be amended, given the Fund’s concerns over low outlay on health and education, and therefore the calorific value measure should be preferred that calculates poverty in Pakistan at a high of 44 percent.

And finally, the heavy reliance on indirect taxes needs to be phased out. Sales tax is an indirect tax whose incidence on the poor is greater than on the rich and in this instance the Fund notes disturbingly in the third review that: “The GST C-efficiency ratio (measures how effectively a country collects its Goods and Services Tax by comparing actual revenue collected against the theoretical revenue that would be generated if the standard GST rate were applied universally to all consumer spending without any exemptions or collection losses) has declined from 27.4 percent to 22.8 percent over the past ten years.

Pakistan’s 18 percent standard GST rate is not low by regional standards; however, barely one-quarter of the theoretical base is taxed. A broad set of basic goods remains exempt or concessionally taxed, historical zero-rating in export sectors has narrowed the base, and post-devolution fragmentation of GST on services has added compliance and administrative complexity through four separate provincial regimes.” Or, in other words, this, if realized, would contract wages further.

The Fund in the recently released documents envisages tax revenue mobilization through (i) eliminating sales tax expenditures, which would raise inflation, (ii) improving compliance, that may lead to capital flight forever a concern in this part of the world, and (iii) increasing provincial revenues with the understanding that the agricultural income tax would be applied at the same rate as other income sources – an objective that has so far remained unmet for political reasons.

The design flaws in the IMF programme have therefore not been corrected continue and additionally would hope for a revisit of some words used in the documents, particularly the use of the word “generosity” in the context of raising allocations for BISP as taxpayers’ money used for the poor and vulnerable is the state’s responsibility.

Copyright Business Recorder, 2026