Sigh of relief as IMF okays tranche release

Express Tribune

27-03-2025

The International Monetary Fund on Wednesday announced a new programme worth $1.3 billion -- 26th in line—and also concluded a staff level deal for the release of $1 billion second loan tranche of the ongoing bailout package after Pakistan committed to table a fiscally tight new budget in the National Assembly.
The deals were announced after both sides made some adjustments in the 25th Extended Fund Facility (EFF), including lowering tax target by Rs640 billion, setting a new deadline to trim the Pakistan Sovereign Wealth Fund and open the economy to foreign companies.
Pakistan will also impose carbon levy as part of the conditions of the new $1.3 billion programme with effect from July this year and increase water usage charges from next year as part of the conditions for the new Resilience and Sustainability Facility (RSF).
Islamabad also reluctantly agreed to commence a study for phasing out the existing Special Economic Zones (SEZs) by 2035. AT Kearney –an American consulting firm –has been engaged to complete the study by June this year.
The IMF's executive board will approve the EFF's second tranche of $1 billion and the $1.3 billion RSF new facility either by the end of April or early May, according to Pakistani authorities. However, the fund will release only $1 billion while the $1.3 billion will be given over a period of 28 months and subject to implementing about 13 conditions, including carbon levy.
The IMF team has reached a staff-level agreement with the Pakistani authorities on the first review of the 37-month Extended Arrangement under the EFF, and on a new 28-month arrangement under the IMF's Resilience and Sustainability Facility (RSF) with total access over the 28 months of around $1.3 billion, said Nathan Porter, the IMF Mission Chief to Pakistan, on Wednesday.
He said that the staff-level agreement is subject to approval of the IMF's Executive Board. Upon approval, Pakistan will have access to about $1 billion under the $7 billion EFF, bringing total disbursements under the program to about $2 billion.
The announcement came 12 days after the IMF team, led by Nathan Porter, left Islamabad on March 14 without reaching a staff level agreement. Both sides subsequently continued discussions through video links that culminated on a deal on Wednesday.
Where Pakistan conceded ground to the IMF, the global lender also made some adjustments in its previous policies, mainly lowering the tax target by Rs640 billion –a mistake that has been rectified after nine months but it put undue pressure on the taxpayers, particularly salaried persons.
While speaking to his cabinet, Prime Minister Shehbaz Sharif said that the IMF agreed to reduce the tax target to Rs12.33 trillion –down from Rs12.97 trillion. There is a reduction of Rs640 billion against the annual target.
The Express Tribune was the first media outlet that had reported soon after the last budget that either the tax target will be cut or a mini-budget will have to be introduced, as the annual target was highly unrealistic.
The FBR has already sustained Rs605 billion shortfalls, which is expected to significantly widen further when March officially ends on this Friday.
Nathan Porter outlined the policy priorities that Pakistan will have to implement during the upcoming months. He said that Pakistan would continue fiscal consolidation to reduce public debt while creating space for social and development spending and reducing crowding out of private investment.
"The authorities are on track to achieve an underlying primary surplus of at least 1% of GDP and committed to sustaining consolidation in the fiscal year 2026 budget", said Porter. The statement suggests that the government will not have any room for giving stimulus for economic growth without putting additional tax burden.
The IMF will again engage Pakistan in May to approve the next year's budget before it is formally presented to the National Assembly, said the government authorities.
Porter said that the government will also refrain from increasing current spending beyond that budgeted, indicating that no supplementary grants can be issued.
Pakistan is also committed to preserve the generosity of the Benazir Income Support Programme (BISP) unconditional cash transfer programme and aim to create savings on energy subsidies and prioritise development spending, he added.
"Over the past 18 months, Pakistan has made significant progress in restoring macroeconomic stability and rebuilding confidence despite a challenging global environment," said Porter.
While economic growth remains moderate, inflation has declined to its lowest level since 2015, financial conditions have improved, sovereign spreads have narrowed significantly, and external balances are stronger.
Porter said that there were still risks to Pakistan's economy. "Downside risks also remain elevated. Potential macroeconomic policy slippages—driven by pressures to ease policies—along with geopolitical shocks to commodity prices, tightening global financial conditions, or rising protectionism could undermine the hard-won macroeconomic stability," said the Mission Chief.
He said that climate-related risks continue to pose a significant challenge for Pakistan, creating a need to build resilience including through adaptation measures.
The IMF underscored that it was critical for Pakistan to stay the course and entrench the progress achieved over the past one and a half years, building resilience by further strengthening public finances, ensuring price stability, rebuilding external buffers and eliminating distortions in support of stronger, inclusive and sustained private sector-led growth.
The IMF appreciated amendments in the Agriculture Income Tax (AIT) regimes by all the provinces, calling it "an important step towards greater tax equity and expanding the tax base. But it said that the "effective implementation is crucial to the AIT's success and greater fiscal devolution in the next fiscal year.
The IMF once again advised Pakistan to continue on the path of maintaining appropriately tight monetary policy. Recognizing that the full impact of recent rate cuts is still to be felt, the authorities will continue with an appropriately tight and data-dependent monetary policy to ensure inflation remains anchored within the State Bank of Pakistan's (SBP) medium-term target range of 5–7%, said Porter.
He said that Pakistani authorities were also fully committed to preserving a fully functioning foreign exchange market to support exchange rate flexibility while rebuilding FX reserve buffers.
The rupee has again started gradually depreciating; now ranging to Rs282 to a dollar. The IMF praised timely implementation of electricity and gas tariff adjustments, which it said has helped reduce the stock and flow of the sector's circular debt, and both should remain a priority.
Porter said that the integration of captive power plants into the electricity grid was important. The IMF forced Pakistan to impose Rs791 per unit levy on these plants. However, Islamabad High Court on Wednesday gave a stay order against the levy.
Porter also underlined privatizing inefficient generation companies, which the government had excluded from the first two phases of privatisation.
Porter once again highlighted the issue of the governance structure of the Pakistan Sovereign Wealth Fund, asking Pakistan "adopting appropriate governance mechanisms and safeguards for the Pakistan Sovereign Wealth Fund".
The government was supposed to amend the wealth fund law by December last year. It has now managed to win an extension in the deadline to amend the law in return for accepting the IMF's demand to make drastic changes in the existing governance structure.
He said that Pakistan would also further strengthen institutional capacity to fight corruption and significantly reduce trade barriers to support inclusive growth and a level playing field for business and investment.
RSF facility
Pakistan and the IMF reached the staff level agreement for the $1.3 billion 26th programme. Porter said that the new programme will scale up climate reform efforts to reduce vulnerabilities to natural disaster risks and to build climate resilience.
It is the new facility, which marks a departure from the government's claim that the 25th programme will be the last programme.
In return for the loan, Pakistan has committed to strengthen public investment processes across all levels of government to prioritize projects that enhance disaster resilience, said Porter.
The government will also improve the efficiency of scarce water resource usage, including through better pricing mechanisms, he added.
It will enhance intergovernmental coordination on disaster financing; improve information architecture and disclosure of financial and corporate climate-related risks; and promoting green mobility to mitigate significant pollution and adverse health impacts, said the IMF.