IMF links tax relief to spending cuts in budget talks with Pakistan

United News of India

23-05-2025

Islamabad, May 23 (UNI) The International Monetary Fund (IMF) has signalled its reluctance in supporting broad tax relief for Pakistan's salaried, property, beverage, or export sectors unless the government matches such measures with spending cuts or meets a higher revenue target.
This position has emerged as the main theme of the ongoing talks in Islamabad, led by IMF Director for the Middle East and Central Asia, Jihad Azour. The delegation is expected to conclude its visit today (Friday), with budget discussions likely to continue virtually according to The News International.
The only clear exception to the IMF's austerity stance is defence spending, which Islamabad plans to increase due to regional security concerns.
On Thursday, Prime Minister Shehbaz Sharif met the IMF team and requested a delay in tax hikes, including raising Federal Excise Duty on fertiliser from 5% to 10% and imposing a 5% tax on pesticides. While the IMF may agree partially, salary and pension increases are expected to be modest amid a stalled rightsizing drive.
'We are clueless about how this number crunching for finalising budgetary estimates will be done,' said one source, as the government prepares to announce the budget on 2 June, reports Dawn.
A top official said the tax strategy 'will set the country's direction for the next few years', with ongoing efforts to persuade the IMF to lower income tax for salaried workers. The Federal Board of Revenue's (FBR) revenue target is projected to exceed PKR 14.1 trillion ($50.5 billion), depending on whether the Finance Division can rein in spending.
To shore up finances, Pakistan plans to raise $1 billion in commercial funding by June 2025, supported by a $500 million guarantee from the Asian Development Bank (ADB). Standard Chartered and Dubai Islamic Bank are expected to deliver a $700 million loan, while three UAE-based banks have been asked to provide $100 million each.
In parliament, the FBR told lawmakers that the IMF would not allow a return to the Final Tax Regime for exporters, having already introduced a Minimum Tax Regime. The Fund also flagged distortions, such as local exporters being taxed while imported goods remain exempt.
Meanwhile, Prime Minister Sharif reiterated his government's commitment to institutional reform and economic recovery. '...Pakistan is now moving from economic stability toward sustainable growth,' he said.
The IMF has pushed for broader reforms, including enforcing agriculture income tax from September 2025, improving retail taxation, and introducing a carbon levy. The government is expected to cut development spending to manage any shortfalls, while legal reforms could unlock PKR 367 billion ($1.3 billion) in disputed tax revenue. A Supreme Court ruling alone could free up PKR 120 billion ($430 million).
Pakistan entered a new IMF programme in early 2024 following a short-term standby arrangement that ended in March 2024. The current extended arrangement aims to stabilise the economy through structural reforms, fiscal consolidation, and improved governance.
The country has faced persistent economic challenges including inflation, dwindling foreign reserves, and fiscal deficits, necessitating continued IMF support to maintain macroeconomic stability.