The International Monetary Fund (IMF) has provided Pakistani authorities with the draft of the Memorandum of Economic and Financial Policies (MEFP), a crucial step in securing a staff-level agreement under the $7 billion Extended Fund Facility (EFF). This draft outlines stringent conditions for fiscal consolidation and the path toward a potential agreement that could unlock a $1 billion tranche from the IMF.
The draft reflects the IMF’s readiness to offer some relief for the construction and real estate sectors, though it remains uncertain whether these incentives will be implemented immediately or included in Pakistan’s 2025-26 budget.
Negotiations between Pakistan and the IMF ended last Friday without finalizing a staff-level agreement, which is necessary before Pakistan can formally request the release of the $1 billion tranche. The MEFP draft includes measures to achieve fiscal consolidation, including a downward revision of the Federal Board of Revenue (FBR) tax collection target and proposed cuts to government spending to maintain a primary surplus.
One contentious proposal involves a cross-subsidy to maximize the petroleum levy on POL (petroleum, oil, and lubricants) products, set at Rs70 per liter. This plan aims to create fiscal space to reduce electricity prices, but it has raised concerns about its viability, especially if international POL prices rise. Economists warn that such subsidies are often ineffective and await the IMF’s response.
Regarding revenue collection, the IMF has revised Pakistan’s tax collection target downward from Rs12.97 trillion to Rs12.33 trillion for the current fiscal year. Additionally, the IMF has questioned the effectiveness of the Federal Excise Duty (FED) hike on acetate tow, which was raised to Rs44,000 per kg in the 2024-25 budget. The high tax rate has led to under-invoicing and smuggling, prompting the IMF to urge the FBR to strengthen enforcement mechanisms.
On the expenditure side, the IMF is pushing for Pakistan to reduce spending in line with the revenue shortfall to achieve the target primary surplus of Rs2.4 trillion by June 2025. In terms of climate finance, the IMF is considering loan facilities of up to $1.2 billion, contingent on detailed project plans to ensure climate resilience in the future.
These discussions highlight the challenges ahead as Pakistan navigates fiscal reforms to secure the IMF’s support and stabilize its economy.
