Pakistan's tax shortfall, delay in materialising foreign loans major concerns in implementation of $7 billion loan: IMF

Islamabad: The IMF has flagged Pakistan's tax shortfall and a delay in materialising foreign loans, among other issues, as challenges in implementing the $7 billion loan package.

At the end of the International Monetary Fund (IMF) mission, which for five days held in-depth meetings with Pakistan officials about the implementation of conditions linked with the loan, the global lender also expressed concerns about Punjab's new agriculture income tax law which is still not fully aligned with the federal legislation and deviated from the National Fiscal Pact, The Express Tribune reported.

A source said the IMF mission flagged two major concerns on Friday: the Federal Board of Revenue (FBR) 's underperformance and a delay in finalising the loans to fill the $2.5 billion gap.

The global lender again asked Pakistan to contact Riyadh to secure oil on deferred payments and request Beijing to reschedule debt.

In addition, the IMF had concerns about the delay in the privatisation of the power distribution companies (DISCOs) and stuck to its condition of amending the Pakistan Sovereign Wealth Fund Act by the end of December.

The IMF emphasised amending the gas sector's definition of circular debt and ensuring its monthly reporting. Both the power and the petroleum divisions do not regularly report these numbers.

The IMF also found flaws in the implementation of the National Fiscal Pact signed by all five provincial finance ministers to align the income tax rates and transfer some expenditure responsibilities to the provinces.

The sources said the IMF asked the property tax and agriculture income tax regime by provinces to be brought in line with the FBR through legislation.

Although the Punjab Assembly passed the Agriculture Income Tax Amendment Act of 2024, it fell below the desired target of raising the agriculture income tax rates to 45 per cent.

Punjab Information Minister Azma Bukhari denied any breach of the pact and said the newly amended provincial law addressed the needs of the National Fiscal Pact.

"It's not in any breach. Even the IMF has read the amendments and is fine with them." "If there is any breach then the IMF would have said that during the last two days' meetings," the information minister said.

In addition to Punjab, the Sindh government also violated the National Fiscal Pact as it did not show any serious intention to implement it during meetings with the IMF, sources said.

In yet another major development, the finance ministry on Friday withdrew its October 31 report saying the Punjab government ran a budget deficit of Rs 160 billion, missing the overall cash surplus target of Rs 342 billion.

The Pakistani authorities however claimed the IMF had not yet given its final verdict on the issue of bridging revenue shortfalls and would send the "asks" after consultations with its headquarters in Washington.

Meanwhile, the IMF called on Pakistan to reduce state intervention in the economy and strengthen competition, while also stressing the need for urgent energy sector reforms.

The IMF’s mission chief, Nathan Porter issued a statement at the conclusion of an unscheduled IMF mission visit to Islamabad from November 12 to 15.

"Pakistan should take steps to decrease state intervention in the economy and enhance competition, which will help foster the development of a dynamic private sector," according to the statement.

"Strong program implementation can create a more prosperous and more inclusive Pakistan, improving living standards for all Pakistanis." The statement added that the IMF team had constructive discussions with the authorities on the economic policy and reform efforts to reduce vulnerabilities and lay the basis for stronger and sustainable growth.

It also reiterated the need for Pakistan to continue with prudent fiscal and monetary policies, focusing on revenue mobilisation from untapped tax bases. He stressed that these efforts should go hand-in-hand with transferring greater social and development responsibilities to the provinces.

“We are encouraged by the authorities’ reaffirmed commitment to the economic reforms supported by the 2024 Extended Fund Facility (EFF),” it stated, adding that the next IMF mission associated with the first EFF review is expected in the first quarter of 2025.