Pakistan has successfully resolved its ongoing issues with the International Monetary Fund (IMF), clearing the way to unlock a crucial $7 billion loan. This development comes as a significant relief for the country, which has been grappling with severe economic challenges, including dwindling foreign exchange reserves, rising inflation, and a widening fiscal deficit.
The $7 billion loan is part of the broader $6.5 billion Extended Fund Facility (EFF) program agreed upon in 2019. Earlier, Pakistan faced delays in receiving the funds due to disagreements over fiscal policies, including concerns regarding subsidy reforms, revenue generation, and controlling inflation. However, following months of negotiations, Pakistan has addressed key concerns raised by the IMF, allowing the stalled funds to be disbursed.
Key Economic Reforms Implemented
In recent months, Pakistan has introduced several measures to meet the IMF’s stringent conditions. These include:
- Energy Subsidy Reforms: The government has cut back on energy subsidies, which were seen as a significant burden on the fiscal budget. Instead of blanket subsidies, targeted support is being provided to low-income households, which aligns with the IMF’s request to reduce fiscal imbalances while protecting the most vulnerable.
- Taxation Reforms: To boost revenue, Pakistan has implemented new tax measures, including broadening the tax base and increasing levies on sectors that were previously under-taxed. These measures aim to improve revenue collection and reduce reliance on external borrowing.
- Monetary Policy Tightening: The central bank has taken steps to control inflation by raising interest rates. Additionally, the government has allowed the Pakistani rupee to float more freely, reducing the pressure on foreign exchange reserves and making the currency more market-driven.
- Fiscal Discipline: Pakistan has committed to reducing its fiscal deficit by curbing non-essential expenditures and improving budgetary controls. This includes limiting government borrowing from the central bank and improving governance within state-owned enterprises.
The Importance of the Loan
The unlocking of the $7 billion loan is a critical step for Pakistan, as it not only provides immediate financial relief but also restores investor confidence in the country’s economic management. Pakistan’s foreign reserves had been hovering at precariously low levels, raising concerns about its ability to meet external debt obligations and import essential goods.
With the IMF’s support, Pakistan can now stabilize its economy by addressing short-term liquidity needs and avoiding a potential balance of payments crisis. Moreover, the disbursement of IMF funds is expected to unlock further financing from other international lenders, including the World Bank and the Asian Development Bank, providing additional economic buffers.
Broader Economic Implications
While unlocking the IMF loan is a positive development, Pakistan’s economy still faces numerous structural challenges. High inflation, especially in food and fuel prices, continues to strain households. The government will need to balance economic reforms with social welfare programs to mitigate the impact on lower-income groups.
Moreover, Pakistan will need to maintain fiscal discipline to ensure long-term sustainability. Continuous reform of key sectors such as energy, agriculture, and manufacturing is essential to enhancing productivity and reducing reliance on external assistance.
The Path Forward
Pakistan’s ability to secure the IMF loan underscores its commitment to fiscal and economic reforms. However, the journey toward sustainable economic recovery will require consistent implementation of these reforms, coupled with efforts to foster inclusive growth.
The IMF, while disbursing the loan, has emphasized the need for Pakistan to focus on long-term structural reforms, including enhancing governance, improving tax compliance, and addressing the chronic energy crisis. This will be essential not only for economic stability but also for ensuring Pakistan’s resilience in the face of future global shocks.
For now, Pakistan’s successful resolution of IMF issues marks a positive turn in its economic trajectory, providing a much-needed breather as the country navigates its complex economic landscape.
Pakistan Resolves IMF Issues, Set to Tighten Tax Regulations on Existing Filers
ISLAMABAD:
On Thursday, Pakistan announced that it had amicably resolved all outstanding issues with the International Monetary Fund (IMF), paving the way for the approval of a $7 billion loan expected this month. At the same time, the government is preparing to impose stricter tax regulations on existing taxpayers after backing down from a confrontation with traders.
The government has drafted amendments that would deny income tax filers the right to purchase assets if the value of their declared cash balances and income falls short of the cost of the new assets. This step follows an analysis by the new chairman of the Federal Board of Revenue (FBR), who examined data from the nearly six million income tax return filers for the 2024 tax year. The analysis revealed that only around 45,000 Pakistanis declared an annual income of over Rs10 million.
“Thank God, all issues have been amicably resolved with the IMF, and this month the IMF board will finalize these matters,” Finance Minister Muhammad Aurangzeb announced on Thursday. His statement ends months of uncertainty surrounding the $7 billion Extended Fund Facility, which had been pending approval from the IMF board for two months.
In Washington, IMF spokesperson Julie Kozack confirmed that the board is scheduled to meet on September 25 to consider the loan package, which would cover a three-year term. Pakistan had taken longer than anticipated to secure the rollover of $16 billion in cash deposits and commercial loans and to arrange an additional $2 billion in commercial financing.
The approval of the 37-month IMF deal will mark the beginning of a challenging economic period, but its implementation is expected to bring much-needed stability.
Stricter Tax Measures for Compliant Filers
According to sources, the government is drafting new legislation aimed at boosting tax collection, which has fallen short of the targets agreed upon with the IMF. Authorities believe that a majority of the nearly six million tax filers, primarily business individuals, associations of persons (AOPs), and companies, have under-reported their assets and income in their annual filings with the FBR. As a result, the government has decided to target these existing taxpayers to increase revenue.
A significant issue contributing to Pakistan’s narrow tax base is the government’s decision to charge higher tax rates on asset purchases by non-filers. Despite this, the government has not yet abolished the non-filer category, which encourages individuals to remain outside the tax net.
The proposed amendments to the Income Tax Ordinance would focus on existing tax filers. The government plans to either introduce the changes via an ordinance or present a bill in the National Assembly. Under these proposals, even filers and taxpayers whose declared assets do not justify the purchase of high-value properties, such as homes, plots, or cars, would be denied the right to buy them. Filers would also face restrictions on withdrawing cash from their bank accounts if their aggregate withdrawals are less than the amounts declared in their tax returns. The FBR intends to enforce these measures starting from October 1.
Furthermore, government sources indicate that the FBR will grant government departments and commercial banks access to taxpayer data to prevent those with under-reported assets from purchasing new properties.
Ongoing Challenges for Businesses and Taxpayers
These new tax measures come just days after the government conceded to retailers, exempting them from the requirement to disclose their bank accounts and asset details. Meanwhile, many industrialists are moving their businesses overseas, and individuals are seeking ways to avoid the heavy taxation that has burdened salaried employees and business owners. Salaried individuals pay up to 39% of their gross income in taxes, while business owners face rates of up to 50% of their net income.
Despite the narrow tax base and the heavy burden already placed on taxpayers, the government is pushing forward with proposals to increase tax collection. The FBR is also considering barring non-filers from investing in mutual funds and the stock market, and potentially from purchasing property, though implementing such measures may prove difficult given pressure from powerful interest groups.
The FBR plans to issue notices to existing tax filers, detailing their incomes, assets, and tax liabilities in an effort to compel more accurate reporting and higher payments.
Focus on Civil Servants
In the first phase of its tax reforms, the government will focus on civil servants. The FBR is set to pre-populate the income tax returns of nearly two million federal, provincial, and state-owned enterprise employees to encourage them to pay their dues.
The FBR also intends to target the 3.7 million business individuals who are already filers but are believed to be underreporting their incomes. Of these filers, 2.4 million did not pay income tax last year. Only 20,000 filers declared incomes above Rs10 million, while another 921,000 reported incomes below this threshold.
In the salaried class, about 630,000 individuals fell below the Rs600,000 tax-exemption threshold. However, only 15,000 salaried filers declared incomes of Rs10 million or more, contributing Rs93 billion in taxes, while 1.3 million middle- to upper-middle-income earners paid Rs157 billion in taxes.
The FBR also plans to target businesses. Out of 80,000 registered companies, fewer than 6,000 reported incomes above Rs10 million, contributing Rs940 billion in taxes, or 99% of the total corporate tax revenue. Another 47,000 companies filed nil returns, and 26,000 declared incomes below Rs10 million.
Similarly, less than 5,000 of the nearly 100,000 associations of persons declared incomes above Rs10 million, contributing Rs150 billion in taxes, while 60,000 declared nil incomes.
These measures reflect the FBR’s growing focus on tightening the tax net around existing filers and addressing the country’s fiscal challenges.
