IMF talks begin amid tax challenges

Express Tribune

04-03-2025

In the first half of FY25, the economic slowdown, exchange rate stability, lower-than-expected inflation, and sluggish LSM recovery led to a revenue loss of Rs338 billion. photo: file
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Pakistan has made a strong start in talks with the International Monetary Fund (IMF), and the tax shortfall is expected to be significantly lower than Rs1 trillion due to anticipated large recoveries in court, Finance Minister Muhammad Aurangzeb said on Tuesday.
Aurangzeb stated that the shortfall would be considerably less than Rs1 trillion and that the government would take several steps, including ensuring recoveries from court cases. He spoke to The Express Tribune after the formal opening of Pakistan-IMF negotiations, which will continue until March 14.
However, sources revealed that the global lender had been informed that, due to lower-than-projected autonomous growth, the Federal Board of Revenue (FBR) suffered a loss of approximately Rs450 billion by February. No further shortfall on this account is expected until June.
Additionally, another Rs540 billion in losses are anticipated due to weak responses to policy measures. The government has struggled to break the strong lobby of traders and the real estate sector.
This results in a total revenue shortfall of Rs990 billion, stemming from low economic growth, weak enforcement against traders and real estate, and overestimations of new tax measures introduced in the budget. Despite these setbacks, the IMF was informed that some of these losses would be recovered through court cases related to tax matters. The government set an annual target of Rs12.97 trillion, and after adjusting for these losses, collections are expected to fall below Rs12 trillion, sources said.
The finance minister expressed optimism about the talks, stating that the government expects a positive outcome. He also confirmed that Pakistan would discuss the framework for the next budget with the IMF during the ongoing negotiations to create fiscal space for relief measures.
"We had a good start in talks today, and the Fund also had productive meetings in Karachi on Monday with the Pakistan Banks Association and the Pakistan Business Council," Aurangzeb said.
For the first time, the IMF is holding separate meetings with the State Bank of Pakistan (SBP) and the federal government in different cities, deviating from the previous good practice of conducting all negotiations in one location. Pakistan and the IMF are conducting talks from March 3 to 14 for the first review of the $7 billion package. The discussions will gauge the implementation of agreed conditions for the July-December period of the current fiscal year. A successful review will pave the way for the release of the second loan tranche of over $1 billion.
Following a separate meeting in Karachi with the SBP governor, IMF Mission Chief to Pakistan Nathan Porter opened talks with the finance minister in Islamabad. In his briefing, Porter discussed the FBR, the power sector, and the Pakistan Sovereign Wealth Fund (PSWF). He also acknowledged the introduction of agricultural income tax laws in the provinces.
On Tuesday, the IMF team held multiple rounds of discussions with the FBR regarding tax collection performance during the current fiscal year. The FBR's eight-month revenue shortfall stood at Rs606 billion, which could rise to nearly Rs1 trillion by June if corrective measures are not taken. The IMF was informed that the government aims to recover approximately Rs300 billion from the Rs4 trillion stuck in court cases. An additional Rs100 billion is expected to be generated by lowering taxes on beverages and cigarettes, sources said.
Prime Minister Shehbaz Sharif, during a special open cabinet meeting, stated that the government is working expeditiously to secure court decisions in tax cases involving Rs4 trillion. He highlighted the Rs23 billion recovered in the windfall income tax case, which was ruled in the government's favour by the Sindh High Court last week.
The prime minister directed authorities to recover at least Rs500 billion from the Rs4 trillion stuck in court cases by June. Attorney General for Pakistan Mansoor Awan informed the cabinet that the legal team would closely monitor these cases. Awan further stated that tax cases have been delayed due to outdated legal procedures adopted by the FBR. However, with the prime minister's intervention, these mechanisms have been revised.
Despite this, the government has provided a conservative estimate of Rs300 billion in recoveries to the IMF, FBR officials said.
However, the Supreme Court of Pakistan recently ruled against the government in multiple tax cases, indicating that not all pending cases may be decided in favour of the tax authorities.
In the past, the IMF has been sceptical of the government's claims regarding revenue collection from pending court cases and enforcement measures. The IMF's scepticism has often been validated. It remains unclear whether the IMF will accept the government's claim that Rs300 billion will be recovered this time.
If the IMF does not accept the government's projections, the Ministry of Finance will need to find alternative ways to reduce expenditures. Development spending has already been curtailed and may face further cuts.
According to the FBR's analysis, in the first half of the fiscal year, the economic slowdown, exchange rate stability, lower-than-expected inflation, and sluggish recovery in large-scale manufacturing led to a revenue loss of Rs338 billion. By the end of February, this gap had widened to Rs450 billion, sources said.
The government assured the IMF that the economy is expected to recover from March onward, preventing further revenue losses due to autonomous growth in the March-June 2025 period.
Aurangzeb told The Express Tribune that many policy measures did not yield the expected revenue results.