The International Monetary Fund (IMF) on Wednesday approved a $7 billion new bailout package for Pakistan after the country promised to overhaul its agriculture income tax, transfer some fiscal responsibilities to provinces, and agreed to limit subsidies.
The Prime Minister’s Office stated that the IMF’s Executive Board approved the 37-month Extended Fund Facility totaling $7 billion, also authorizing the immediate release of the first loan tranche of nearly $1.1 billion. This marks Pakistan’s 25th IMF program since 1958 and the 6th EFF.
According to the Ministry of Finance’s statement to the Senate Standing Committee on Economic Affairs, Pakistan will pay around a 5% interest rate on the IMF loan.
Prime Minister Shehbaz Sharif reiterated that this would be Pakistan’s last IMF program, a statement he similarly made after the approval of the 24th IMF program in 2023. He credited the success of securing the bailout package for Pakistan to Chief of the Army Staff General Asim Munir, Deputy Prime Minister Ishaq Dar, and the finance team. Sharif noted that the federal government cannot complete the 25th program in the nation’s history without the cooperation of all four provinces.
The Sindh government ratified a memorandum of understanding to sign the National Fiscal Pact on July 30th, while the Balochistan government did so on July 26th – after the staff-level agreement between Pakistan and the IMF on July 12th, 2024.
However, the IMF board has approved the program without addressing one of the key issues behind taking such loans – the need to restructure external and domestic debt, which consumed 81% of Pakistan’s tax revenues in the last fiscal year.
This new bailout package for Pakistan aims to achieve macroeconomic stability by consolidating public finances, rebuilding foreign exchange reserves, reducing fiscal risks from state-owned enterprises, and improving the business environment to promote growth led by the private sector.
To qualify for the program, the government has imposed additional taxes between Rs 1.4 trillion and Rs 1.8 trillion, increased electricity prices up to 51%, and committed to greater transparency in managing the Sovereign Wealth Fund.
The government also secured Pakistan’s most expensive loan in history, $600 million, to schedule the IMF board meeting. Core conditions of the IMF program include ensuring fiscal viability in the power sector, privatizing loss-making entities, and enhancing tax revenues.
Unlike previous programs, where provincial budgets were excluded from IMF scrutiny, the new program extends to provincial budgets and revenues. There are nearly a dozen IMF conditions that directly impact the provinces under this program.
The federal and four provincial governments will sign a new National Fiscal Pact, transferring responsibilities for health, education, social safety nets, and road infrastructure projects to provincial governments, in line with the agreement between Pakistan and the IMF.
All four provincial governments must align their agricultural income tax rates with federal personal and corporate income tax rates by amending their laws by October 30. This will raise agricultural income tax rates from 12-15% to 45% by January next year 2025.
The provincial governments have also committed to ending further subsidies on electricity and gas, and they will not establish any new Special Economic Zones or Export Processing Zones. The federal government will similarly refrain from establishing new economic zones and will eliminate tax incentives for existing zones by 2035.
Another condition of the program requires Pakistan to show a primary budget surplus of 4.2% of Gross Domestic Product (GDP) during the three-year period. This surplus is calculated after excluding interest payments, which would significantly reduce non-interest expenditures and add a tax burden equivalent to 3% of GDP on current taxpayers.
Under the IMF program, Pakistan must achieve a primary surplus of 1% of GDP in this fiscal year and approximately 3.2% over the next two years to put the debt-to-GDP ratio on a sustainable, declining path.
In case of a tax shortfall, the government has committed to introducing a mini-budget that will increase tax rates on imports, contractors, professional service providers, and fertilizers. The Federal Board of Revenue (FBR) faces a risk of a Rs 200 billion tax shortfall in the first quarter.
For this fiscal year, Pakistan is obligated to maintain defense and subsidy spending at the previous fiscal year’s levels in proportion to the economy’s size.
Despite the program’s design, it has not fully addressed the issue of debt unsustainability and relies heavily on rolling over maturing external debt during the program period.
Pakistan has also committed not to repay $12.7 billion in debt to Saudi Arabia, China, the UAE, and Kuwait during the program period.
To bridge a $2 billion additional financing gap and secure board approval, the IMF required Pakistan to take the most expensive commercial loan in its history, borrowing from Standard Chartered Bank at an 11% interest rate.
The Asian Development Bank warned that rising political and institutional tensions in Pakistan could hinder the implementation of the reforms committed to the IMF. These reforms are vital to ensuring continued support from external lenders.
