The International Monetary Fund (IMF) has shared a draft of the Memorandum of Economic and Financial Policies (MEFP) with Pakistani authorities to reach a consensus, a key step toward securing a staff-level agreement under the $7 billion Extended Fund Facility (EFF).
The IMF has indicated a willingness to provide relief for the construction and real estate sectors, though it remains unclear whether these measures will be implemented immediately or incorporated into the 2025-26 budget.
Negotiations between Pakistan and the IMF concluded last Friday without reaching a staff-level agreement, which is necessary for Islamabad to formally request the release of a $1 billion tranche from the Fund’s Executive Board.
According to senior officials, the MEFP draft includes strict conditions aimed at fiscal consolidation. While the Federal Board of Revenue’s (FBR) tax collection target has been revised downward, expenditure reductions have been introduced to ensure the agreed-upon primary surplus for the current fiscal year.
One contentious issue in the discussions was the proposed cross-subsidy mechanism for petroleum levy collection, which would set the levy at Rs70 per liter to create fiscal space for reducing electricity prices. The IMF raised concerns about the feasibility of this approach, questioning its sustainability if global petroleum prices rise, potentially leading to circular debt if the burden is not passed on to consumers.
For revenue collection, the IMF has revised the FBR’s annual tax target from Rs12.97 trillion to Rs12.33 trillion for the current fiscal year. The Fund also expressed concerns about the enforcement of the Federal Excise Duty (FED) on acetate tow, which was drastically increased to Rs44,000 per kg in the 2024-25 budget. The sharp hike led to under-invoicing and smuggling from Iran and Afghanistan, prompting the IMF to instruct the FBR to establish stricter controls to curb these practices.
The FBR had overestimated its revenue projections for the 2024-25 budget, expecting Rs125 billion in revenue from the FED on acetate tow used in the tobacco industry. However, actual collections in the first quarter were significantly lower.
On the expenditure side, the IMF has urged Pakistan to implement spending cuts proportional to revenue shortfalls to meet the targeted primary surplus of Rs2.4 trillion by June 2025.
Additionally, under its Resilience and Sustainability Facility (RSF), the IMF is considering loan facilities of up to $1.2 billion for climate-related projects. However, Pakistan must provide detailed plans demonstrating long-term climate resilience initiatives to qualify for these funds.
