IMF Posts MEFP Draft to Pakistan, $7 Billion EFF Deal Still in Limbo
The International Monetary Fund (IMF) has posted a draft of the Memorandum of Economic and Financial Policies (MEFP) to Pakistani authorities to establish consensus on the $7 billion Extended Fund Facility (EFF). The move is significant for Pakistan to formally seek a $1 billion disbursement from the IMF‘s Executive Board.
While the IMF is keen to provide some respite to Pakistan’s real estate and construction sectors, it remains to be seen whether the incentives will become operational immediately or find a place in the next budget of the fiscal year 2025-26.
Pakistan-IMF negotiations ended last Friday without concluding the staff-level agreement, which would release the much-needed funds.
Based on reports, the draft MEFP contains stringent conditions aimed at fiscal consolidation. They include lowering the Federal Board of Revenue’s (FBR) annual tax collection target and trimming expenditures in order to keep the agreed primary surplus for the ongoing fiscal year intact.
One of the areas that resulted in issues during the negotiations was Pakistan’s offer of a cross-subsidy mechanism to extract a petroleum levy of Rs. 70 per liter. The government intended to utilize this income to reduce electricity prices. However, the IMF questioned the sustainability of this proposal, particularly if international oil prices increase. This might generate circular debt if the government does not impose the burden on consumers. The plan has also been condemned by independent economists, who observed that such approaches have previously collapsed.
The IMF adjusted the FBR’s tax collection target for the year, from Rs. 12.97 trillion to Rs. 12.33 trillion. The IMF questioned the implementation of some tax measures, particularly the enhancement of the Federal Excise Duty (FED) on acetate tow, which resulted in smuggling and under-reporting. The IMF has requested the FBR to take harsher measures against these setbacks.
The FBR’s revenue estimates have also been questioned. Although the FED on acetate tow was to yield Rs. 125 billion, the actual revenue collected was significantly lower in the first quarter. The IMF has asked Pakistan to fill these gaps and align expenditures to achieve fiscal targets.
On the spending side, the IMF has sought reductions to meet the revenue gap. The changes are necessary to remain on course with the EFF program.
In addition, the IMF is in the process of considering to provide up to $1.2 billion in climate funding under its Resilience and Sustainability Facility (RSF). Yet, the IMF has called for refined project plans so that the funds will finance long-term climate resilience projects.
