Editorial
The International Monetary Fund’s (IMF) staff-level agreement for Pakistan’s 37-month, $7 billion Extended Fund Facility (EFF) set a number of time-bound targets, with the first quarterly review due in March 2025. If successful, the review would unlock an additional $760 million in disbursements. However, there is growing concern within Pakistan about the country’s ability to meet key fiscal benchmarks, with speculation mounting regarding which conditions have been unmet, prompting the IMF’s mission to visit Pakistan. This mission will likely focus on establishing new time-bound conditions or enforcing contingency measures to address any shortfalls.
A report from sources has revealed that the IMF mission recently met with Pakistan’s Federal Board of Revenue (FBR) to discuss a projected shortfall of 230 billion rupees in tax revenue by the end of December 2024. The shortfall is partly attributed to the failure of the Tajir Dost Scheme, which was launched with high expectations in March 2024 but has faced significant resistance from traders, a predictable outcome given the political and historical context. Although FBR officials have downplayed the scheme’s potential, the original revenue projections ranged between 400 and 500 billion rupees, creating a stark contrast to the current expectations. As a result, this shortfall has become a key issue for the IMF mission, as it will have implications for Pakistan’s fiscal health.
In response to the revenue shortfall, one potential solution could be for the government to reconsider its planned 20-25% salary increase for public sector employees. This increase, which is to be funded by taxpayers, impacts 7% of the workforce while the remaining 93% continues to suffer from stagnant wages and rising inflation. A deferral of this pay rise could help mitigate some of the fiscal pressures, providing the government with more flexibility to address the shortfall. However, like previous administrations, the current government has instead opted to cut development expenditure—a critical driver of economic growth and GDP expansion—despite ongoing stagnation in private sector output.
The government’s projection for a 3.5% GDP growth has already been downgraded by donor agencies to 3%, and the Monetary Policy Committee (MPC) revised this figure further down to a range of 2.5-3.5% in early November.
Domestic economists have raised concerns that the government’s optimistic growth targets are more a result of external pressure than realistic economic assessments. Lower growth means lower tax collections, which compounds the difficulty of meeting fiscal targets. Furthermore, high interest rates, despite a recent reduction to 15%, continue to stifle private sector activity, with the IMF report noting that the interconnectedness of the fiscal, monetary, and banking sectors means that any disruption in one area could have broad negative effects on the economy.
Another key issue identified by the IMF is the rising cost of administered prices, particularly for electricity and petroleum products, as part of the Fund’s conditions. These increases are further raising input costs for businesses, acting as a major deterrent to private sector growth. The growing burden of indirect taxes, which disproportionately affect the poor, is another area of concern. The IMF has specifically noted that the government’s ability to meet tax targets will depend on whether it can avoid the political fallout of these unpopular measures.
In this context, Economists have consistently argued that Pakistan needs to adopt a more realistic approach when agreeing to tax targets with the IMF. The report suggests that the IMF’s introduction of contingency tax measures in case of failure to meet targets reflects the uncertainty surrounding Pakistan’s fiscal position. It also emphasizes the need for the government to reduce its reliance on politically challenging policies, such as increases in administered prices and the regressive nature of indirect taxes. To achieve sustainable economic growth, Pakistan will need to prioritize the welfare of the broader population and secure voluntary sacrifices from the elite, particularly in the short term, as part of a broader strategy to build economic resilience.
