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Business Recorder
28-07-2025
- Business
- Business Recorder
Discount rate as a policy tool
Economic stability has been achieved, and the country will not be deterred from implementing the reform agenda agreed with the International Monetary Fund (IMF) – a claim that has repeatedly been pledged by the country's cabinet members. The pros and cons of economic stability are stark in Pakistan: pros include strengthening foreign exchange reserves, rising remittances, plummeting inflation and halving of the discount rate in one year (21 percent in June 2024 to 11 percent in June 2025). The cons negate these gains with (i) reserves entirely debt based as roll-overs are estimated at 16 billion dollars while reserves on 11 July 2025 reached a high of 14.525 billion dollars – a high achieved by the State Bank of Pakistan reportedly picking up 8 billion dollars from the open market that led to a severe dollar supply shortage in the open market leading to a fall in the rupee value in spite of the current account surplus; (ii) the rise in remittance inflows leading to the current account surplus is are not expected to end the boom bust trade cycle — 'economic volatility has only increased over time, with a tight correlation between Pakistan's boom-bust economic outcomes and its economic policies' was noted by the IMF in its September 2024 documents; (iii) declining inflation which has been unable to arrest the rise in poverty levels (44.2 percent at present as per the World Bank), and (iv) reduction in the discount rate that has been unable to lift the large scale manufacturing sector out of its negativity (with the latest data placing it at negative 1.52 percent). This leads one to carefully review IMF's first review documents dated May 2025 where it argues that external and domestic risks may 'quickly eviscerate Pakistan's hard won economic stability.' The key question raised in nearly all twenty-three previous IMF programmes is: did the Pakistan team propose in-house out of the box suggestions to the IMF team and which, if any of their suggestions, were entertained? A quick glance at the Memorandum of Economic and Financial Policies (MEFP) dated 2024 shows no deviation from past conditions, except that they are harsher and more upfront for the reason specified in Fund documents notably that Pakistan's implementation of agreed reforms has been poor – an opinion supported by the fact that the country either left the previous programmes mid-way or if any was completed (2016 three year loan) the government of the day quickly reversed all reforms necessitating another loan within the year of its completion. Notwithstanding the foot-dragging by Pakistan authorities to implement politically challenging reforms, there is flawed policy advice given by the Fund staff premised on economic linkages that maybe relevant in several countries but not in Pakistan. A long time Fund condition for Pakistan has been to link the discount rate to inflation – a linkage that is tenuous in Pakistan as the government remains the major borrower in the domestic market and any decline in the discount rate is seen as a means to reduce mark-up on loans secured to finance budgeted expenditure. The government budgeted bank borrowing (treasury bills, Pakistan investment Binds, sukuk) at 5.142 trillion rupees in 2024-25 while total credit to the private sector was only 676.6 billion rupees – a mere 13 percent of government borrowing. So much for claims that private sector led growth is the policy thrust. A State Bank of Pakistan Working Paper Series dated December 2022 titled 'Time Frequency Analysis Determinants of Inflation rate' in Pakistan identified short, medium, and long term determinants of inflation as follows: (i) short term (4 to 8 months) policy rate, exchange rate, government borrowing and import growth; (ii) medium term (9 to 64 months) global commodity prices (specially petroleum whose impact on the public is exacerbated by the hefty petroleum levy as well as the carbon levy that was a condition to procure 1.4 billion dollar resilience loan from the IMF) and broad money supply; and (iii) Long term (above 64 months) government borrowing which continues to rise with the focus on extending the amortisation period rather than reducing the amount), global commodity prices and money supply. The short term one may assume began soon after the 8 February 2024 elections and ended in November 2024 with three major observations that challenge the linkage between the discount rate and inflation: (i) the discount rate declined by a mere 150 basis points on 10 June 2024 (from 22 percent to 20.5 percent) even though it was claimed inflation declined by 8.1 percent (from 20.7 percent in March 2024 to 12.6 percent in June); reports suggest that the Fund may have opposed a further cut in the discount rate as it is clearly stipulated in the Fund's loan documents dated September 2024 that 'there are important shortcomings' in the source data available for sectors accounting for a whopping one-third of GDP and a Technical assistance will be provided that would address these weaknesses in Government Finance Statistics and Producer Price Index; (ii) IMF condition that the interbank open market rupee-dollar parity must not be in excess of plus/minus 1.25 percent during five consecutive business period. However, the dollar scarcity has been addressed by the stakeholders through implementing law enforcement measures; and (iii) imports were restrained during this period via administrative measures while domestic government borrowing continued – up to 53.46 trillion rupees by March 2025 (no further update is available). Medium term is underway and is more dependent on global commodity prices as well as the rupee-dollar parity. Long term has not yet arrived, but one may assume that government borrowing will continue to rise, though the economic team leaders have budgeted a decline in debt servicing due to the expectation that the discount rate will decline — an expectation that would entail convincing the Fund team that the real rate has declined – an assessment that may not be forthcoming till the end of the Fund TA on addressing data shortcomings (scheduled end in June 2026). There is a need for existing researchers employed in the SBP as well as those in the federal government to not only provide accurate data to the leadership on a regular basis but also to ensure that they provide an updated analytical treatise on the outcome of reforms proposed by the Fund and those out of the box in-house measures that would achieve better results because they are premised on unique conditions prevalent in this country. To date the government has focused on reducing subsidies, passing the onus of utilities reforms onto the end users through higher tariffs, raising revenue through indirect taxes and ceasing procurement and price setting of staple food items – measures likely to exacerbate the poverty levels, which together with unemployment at a high of 22 percent bodes ill for the general public and strengthens the risk associated with 'political economy considerations and pressures from vested interests that could delay or weaken the reform momentum and put at risk the still brittle stability.' Copyright Business Recorder, 2025
Express Tribune
19-05-2025
- Business
- Express Tribune
'IMF conditions part of reforms'
Pakistan said on Monday that 11 new structural benchmarks by the International Monetary Fund (IMF) were not new conditions but a "continuation" and "natural next step" of the $7 billion programme to roll out the agreed reforms agenda. It said that some of these benchmarks, including a requirement to submit a plan for the smooth transition to an interest-free economy and debt servicing surcharge, had to be included due to developments that took place after the finalisation of the Memorandum for Economic and Financial Policies (MEFP) with the IMF in September last year. In a detailed statement on the rationale behind adding "new structural benchmarks" by the IMF, the Ministry of Finance said these were advancing or continuing actions under the broad policy goals set at the outset of the programme. The ministry said that actions already completed were moving to the next phase, while others were updated or reiterated to ensure that policy goals under the programme were met. On the IMF condition to publish a new Post-2027 Financial Sector Strategy, the ministry said that, "This benchmark was set in light of the 26th constitutional amendment passed in October 2024. Since the amendment took place after MEFP approval, the action could not be included in the September 2024 MEFP." It added that the action aligned the reform process with the country's constitutional priorities. In return for the Jamiat Ulema-e-Islam's support for the 26th Constitutional amendment, the government had included an article in the Constitution to abolish the interest-based economic system. The IMF staff report stated that clarity on the structure and rules of the financial system post-2027 would allow market participants to prepare and ensure financial stability during the transition. The Fund said Pakistan's strategy should clearly identify and prepare for the implications of removing 'riba' (interest) from the economy by January 2028, following the constitutional amendment. The decision would significantly impact the structure of the financial sector, stability, banking supervision, and monetary policy implementation. The global lender said that publishing this financial plan and providing guidance would help align expectations of market participants, investors, and regulators, allow time for preparation, and mitigate any cliff effect (proposed new SB, end-June 2026). The IMF report further stated that the government should develop a strategic action plan to support capital market development to address the sovereign-bank nexus, and improve access to private sector financing. In response to the IMF's concerns, the Fund included the government's position in last week's report. "We recognise that clarity on financial sector reform objectives helps build trust in institutions and policies, and thus the Ministry of Finance will lead a government effort which, in collaboration with the State Bank of Pakistan (SBP), will prepare a plan outlining the government's post-2027 financial sector strategy, outlining the institutional and regulatory environment from 2028 onwards and providing clear expectations for financial institutions (new end-June 2026 SB), with work starting by end-October 2025," reads the report. The ministry said that the structural benchmark to approve the fiscal year 2026 budget in consultation with the IMF was not a new condition. It was a continuation of ongoing fiscal consolidation targets, including the primary surplus target of 1.7% of GDP for fiscal year 2026. It added that steps related to agricultural income taxation, including legal amendments and implementation from July 1, 2025, were detailed in the September 2024 MEFP. These were not new, but scheduled follow-up actions. The ministry said the increase in Benazir Income Support Programme (BISP)transfer under the Kafalat Programme predated the current Extended Fund Facility (EFF). It was part of the 2023 programme and continued under the current programme, hence not a new conditionality. On the new IMF benchmark about Governance Diagnostic Assessment, the ministry said the commitment to publish governance reform recommendations stemmed from the September 2024 MEFP and the publication was a natural next step. The structural benchmark to adopt legislation making the captive power levy permanent operationalised an agreed reform in the September 2024 MEFP to disincentivise captive power, with the objective of phasing it out. The ministry said benchmarks about electricity tariff and gas price adjustments related to annual electricity rebasing and biannual gas tariff adjustment, which were part of the strategy to contain circular debt. These were continuous benchmarks reiterated for the next fiscal year. The ministry added that the new benchmark about the Debt Service Surcharge Cap Removal resulted from the government's plan to convert up to 80% of Central Power Purchasing Agency (CPPA) arrears into debt. As this plan was proposed after the September 2024 MEFP, the benchmark was added during the current review. On the Special Zones Incentives phase-out plan, the ministry said that eliminating incentives for Special Technology Zones (STZs) by 2035 extended earlier commitments for Special Economic Zones (SEZs) and Export Processing Zones (EPZs). It broadened the scope to all zones to ensure a level playing field for investment. It said the condition about used car import policy was part of lifting quantitative restrictions on commercial importation of used motor vehicles. Restrictions would initially be lifted for vehicles less than five years old, subject to meeting minimum environmental and safety standards. This, too, was a next step under the September 2024 MEFP. The ministry said removing trade restrictions was part of Pakistan's commitment to integrate with world trade by reducing non-tariff barriers and avoiding prolonged trade-distortive measures. "The EFF programme is designed to support gradual, medium-term reforms to achieve the government's policy goals. As each review builds upon the previous one, benchmarks reflect logical progression of existing commitments," it added.
Express Tribune
23-03-2025
- Business
- Express Tribune
IMF proposes Rs15tr tax revenue target
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 The International Monetary Fund (IMF) has proposed setting a tax revenue target of over Rs15 trillion in the federal budget for the upcoming fiscal year 2024-25. However, the finalization of this target will take place following detailed discussions in ongoing virtual negotiations between the government and the IMF official which are expected to conclude soon. According to sources in the Ministry of Finance, the IMF is likely to introduce new conditions in the Memorandum of Economic and Financial Policies (MEFP) as part of the staff-level agreement for the release of the next $1 billion tranche to Pakistan. However, in response to a request from the Federal Board of Revenue (FBR), the IMF has agreed in principle to grant partial relief by reducing the withholding tax rate on property purchases by 2% starting in April 2025. The withholding tax rate for property sellers, however, will remain unchanged. The sources said Pakistan and the IMF are engaged in virtual negotiations, during which further stringent conditions for the $1 billion tranche may be imposed and new financial targets may also be set for Pakistan. The government is expected to face financial structural benchmarks in the new fiscal year including new revenue collection targets to increase tax income. These targets are likely to be finalized through ongoing virtual discussions. The IMF and Pakistani officials have also discussed measures to curb tax evasion. The proposed tax revenue target for the next budget exceeds Rs15 trillion, with discussions underway to raise the tax-to-GDP ratio to 13%. The government aims to collect Rs2.745 trillion in non-tax revenue in the upcoming fiscal year. Economic growth is projected to exceed 4% in the next fiscal year, according to ministry sources. During the recent virtual meeting, the IMF agreed to lower the federal excise duty rate on property buyers, though the tax on sellers will remain unchanged. At FBR's request, the IMF has agreed to reduce the tax collection target for March 2025 by Rs60 billion. Regarding property taxation, the FBR had requested a reduction in withholding tax rates for both buyers and sellers under Sections 236C and 236K. However, the IMF has only agreed to lower the tax rate for buyers by 2% under Section 236K. Moreover, the IMF has approved the collection of Rs1.257 trillion from banks to address the issue of circular debt in the power sector.
Express Tribune
22-03-2025
- Business
- Express Tribune
IMF approves tax cut on property purchases in Pakistan
Listen to article The International Monetary Fund (IMF) has agreed in principle to a partial reduction in the withholding tax rate on property purchases, following a request from the Federal Board of Revenue (FBR). The new rate, which will be reduced by two percent, is set to come into effect in April 2025. However, the withholding tax rate imposed on property sellers will remain unchanged. According to sources, a recent virtual meeting between Pakistani officials and the IMF concluded with an agreement to lower the federal excise duty rate for property buyers. However, the tax on property sellers will still be collected at the existing rate. In addition, the IMF has also agreed to a reduction of Rs60 billion in the tax revenue target for March 2025, as requested by the FBR. The sources indicated that this development would pave the way for consensus on the Memorandum of Economic and Financial Policies (MEFP) and a staff-level agreement, which is expected to be finalized next week. Regarding the tax reduction on property transactions, FBR had previously requested the IMF to lower withholding tax rates for both buyers and sellers under Sections 236C and 236. However, the IMF has only agreed to reduce the tax rate for buyers under Section 236 by two percent. Additionally, the IMF has permitted the government to raise PKR 1,257 billion from banks to address the circular debt issue in the electricity sector.
Express Tribune
21-03-2025
- Business
- Express Tribune
FinMin Aurangzeb optimistic about IMF deal breakthrough
Listen to article Finance Minister Muhammad Aurangzeb has expressed optimism about the ongoing negotiations with the International Monetary Fund (IMF), stating that talks are in their final stages and there are no significant obstacles remaining. Speaking to the media on Friday, the minister confirmed that Pakistan is on track to meet the IMF's economic targets and reassured that the discussions will soon conclude positively. Aurangzeb emphasised Pakistan's commitment to fiscal discipline, highlighting the government's adherence to the financial framework agreed upon with the IMF. The talks are focused on securing the next tranche of funding, which is crucial for Pakistan's economic recovery. The IMF Mission Chief to Pakistan, Nathan Porter, also confirmed last week that significant progress had been made toward reaching a Staff-Level Agreement (SLA) regarding the first review of Pakistan's $7 billion loan programme. The success of these talks will pave the way for Pakistan to receive about $1 billion as part of the second instalment of the loan. Additionally, Aurangzeb addressed climate change challenges, stressing the urgent need for structured climate financing to combat environmental risks. He acknowledged the increasing threats posed by climate change, including the rapid melting of glaciers and economic disruptions caused by environmental changes, particularly in Lahore. The finance minister also highlighted international pledges for flood rehabilitation, although the country has struggled to fully utilise these resources due to implementation challenges. Earlier on Thursday, the central bank governor, Jameel Ahmad, said that there was no hurdle from the State Bank of Pakistan (SBP)'s side in reaching a staff-level agreement with the International Monetary Fund (IMF), and any outstanding issues might be related to the federal government. While talking to the media after a meeting of the Public Accounts Committee (PAC), the governor hoped that the staff-level agreement would be reached very soon with the IMF. However, he did not provide a firm date for the deal, which has been overdue since March 14. The PAC meeting also revealed that the federal government was about to give "emperor-like powers" to Federal Finance Minister Muhammad Aurangzeb to approve up to five special honoraria for employees and officers of various government departments. "There is no issue pending with us, and any outstanding issue might be on the part of the federal government," said Jameel Ahmad while responding to a question about the timing of the staff-level agreement with the IMF. The governor did not specify any particular issue but stated that finalising matters with ministries and divisions takes time. Pakistan and the IMF held talks from March 3 to 14, but both sides could not reach a staff-level agreement due to delays in finalising the Memorandum of Economic and Financial Policies (MEFP). After the mission returned to Washington, the Ministry of Finance held at least two virtual sessions with the IMF in the presence of other stakeholders. The IMF and Pakistan are in the process of finalising the MEFP in the areas of trade and taxes, along with fiscal and circular debt numbers. The federal authorities remain hopeful that the agreement will be reached soon. According to the IMF Board's schedule, the first programme review and the end-December 2024 performance and continued criteria must be completed by March 15.
