On April 29, 2024, Pakistan successfully concluded a nine-month stand-by arrangement with the International Monetary Fund (IMF). Building on this milestone, the country transitioned to a 37-month Extended Financing Facility (EFF), equivalent to 261.9 percent of Pakistan’s IMF quota, or approximately $7 billion. This program aims to consolidate macroeconomic stability and safeguard the sustainability of the external sector.
Following the approval of the FY25 budget, Pakistan undertook several critical pre-actions mandated by the IMF agreement. These included targeting a primary budget surplus of 1.0% for FY25, notifying annual rebasing of electricity tariffs and instituting bi-annual adjustments in gas tariffs. Implementation of these measures paved the way for approval by the IMF Executive Board in September 2025, releasing the first tranche of $1 billion under the agreement.
Program progress is meticulously monitored using quantitative performance criteria (QPC), indicative targets (IT) and structural benchmarks (SB), as detailed in the Memorandum of Economic and Financial Policies (MEFP). Biannual reviews, supported by ongoing assessments of financial commitments, ensure the program remains adequately funded and on track.
A distinctive element of this agreement is the inclusion of provincial commitments. Provinces are required to consult the IMF, through the Federal Ministry of Finance, before adopting any measure that may impact the objectives of the program.
Pakistan’s first formal review is scheduled for February 2025, with the IMF having already conducted a review mission in October 2024, just one month after the board’s approval. This review will assess performance against the targets set in the MEFP through December 2024 and chart the way forward.
The program identifies seven QPCs to be met by December 2024. The first QPC sets a floor on the SBP’s net international reserves at $12.15 trillion. The SBP reported reserves of $11.71 billion as of December 27, 2024, reflecting a marginal deficit. The second QPC sets a cap on the net domestic assets of the SBP at Rs 15.211 billion and the third on the net stock of currency swaps/forward position of the SBP at -3.250 million. Public data on these two QPCs is insufficient for an assessment.
The fourth QPC of the state’s primary fiscal deficit ceiling – targeting a surplus of Rs 2,877 billion – will likely have been achieved, thanks to the SBP’s robust transfer of Rs 2,500 billion in the first quarter of FY25. The fifth QPC sets a ceiling on the amount of government guarantees at Rs5.200 billion. It is hoped that the authorities have maintained their budgetary discipline and achieved their objective.
The sixth QPC concerns a cumulative floor on targeted cash transfer spending through the Benazir Income Support Program of Rs235 billion by the end of December 2024. It will likely have been achieved, reflecting the expansion of household coverage and increasing disbursements. The latest QPC sets a cumulative floor of 225,000 new tax returns from first-time filers by December 2024. Preliminary reports suggest this target has been met.
The two continued performance criteria – prohibiting new credit flows from the SBP to the state and ensuring the absence of external public payment arrears from the public administration – also appear to have been respected, although the latter deserves careful examination. Initially, the authorities announced debt repayment.
The program also sets eight ITs for December 2024, with available data allowing some of the key ones to be reviewed. Of these, the Federal Board of Revenue’s (FBR) net tax revenue floor of Rs 6,009 billion in 1HFY25 was lower by Rs 386 billion, despite revenue growth of 26.5 per cent. This deficit raises fears of a potential annual deficit close to Rs 1,000 billion. The MEFP provides for additional tax measures if deviations exceed 1.0% of the objective. The 1HFY25 gap stands at 6.4%.
The country has long struggled to integrate the wholesale and retail sectors, which represent 55% of GDP, into the formal tax network. Therefore, the target of a floor on net tax revenue collected by the FBR from retailers under the Tajir Dost scheme – set at Rs 23.4 billion by December 2024 – remains largely unmet. However, compliance with the objective of net accumulation of tax refund arrears, capped at Rs43 billion, provides some assurance.
Provincial performance plays a crucial role in achieving program objectives. One of the ITs requires provincial tax authorities to reach a consolidated floor of Rs376 billion in net tax revenue by December 2024. The IT appears achievable, as it is relatively modest compared to the provinces’ overall revenue potential .
Another bill aims to cap power sector payment arrears, commonly known as circular debt, with an accumulation limit of Rs461 billion. Although falling electricity consumption in Pakistan poses a significant challenge to achieving this target, officials highlighted data through November that reflects promising progress towards achieving this target.
Structural reforms are essential to the success of the program. Pakistani authorities are committed to implementing 22 SBs in the fiscal, governance, social, monetary and financial sectors. Three of these are ongoing commitments: refrain from granting amnesties or preferential tax treatments, obtain ex ante parliamentary approval for any unbudgeted expenditure, and maintain a narrow premium between interbank and bank exchange rates. free market at less than 1.25%. It is encouraging to see that the country appears to have fulfilled these commitments.
The other SBs whose deadline is set for December 2024 deserve particular attention. Among these is the approval of a national fiscal pact aimed at handing certain spending responsibilities to the provinces. The IMF will assess whether the proposed reform has actually been undertaken.
Another key SB required the submission of a comprehensive report to the IMF by September 2024, detailing strategies to reduce the federal government’s footprint. Compliance with this criterion depends on the quality of the report; however, as its contents have not been disclosed, the IMF assessment is expected to be highlighted in the next MEFP.
Provinces were also tasked with amending agricultural income tax legislation to align it with the federal personal income tax framework for small farmers and the agricultural income tax framework. corporate income for commercial agriculture. With the imposition scheduled for January 1, 2025, the amendment deadline was set for October 2024. Unfortunately, only one province met this deadline, resulting in a missed SB.
Other SBs to be completed by December 2024 include instituting non-compliance risk management measures in large taxpayer units, amending the Sovereign Wealth Funds Act and enacting legislative reforms to improve the governance of public companies. The amendment to the law on sovereign wealth funds remains pending.
Pakistan’s journey under the EFF program reflects a mix of successes and setbacks. As the IMF review scheduled for February 2025 approaches, authorities must close the gaps, present a compelling rationale for unmet targets, and propose credible corrective measures. A successful review is essential to ensure continuity of external disbursements, strengthen investor confidence and guide the country towards lasting economic stability.
The writer was part of the team that negotiated the successfully implemented IMF program in 2013-2016. (Former advisor to the Ministry of Finance)
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Originally published in News