ISLAMABAD – The International Monetary Fund (IMF) on Tuesday shared the draft of the Memorandum of Economic and Financial Policies (MEFP) with the government of Pakistan to reach an agreement, which could pave the way for a staff-level agreement under the $7 billion Extended Fund Facility (EFF).
The IMF expressed willingness to provide some relief to the construction and real estate sectors, but it is unclear whether the incentives/reliefs will be provided immediately or included in the upcoming budget for the fiscal year 2025-26.
The negotiations between Pakistan and the IMF ended last Friday but a staff-level agreement could not be reached. The agreement is necessary for Pakistan to formally request the release of a $1 billion tranche from the IMF’s Executive Board.
The IMF shared the draft of the MEFP, which includes strict conditions to ensure fiscal discipline. The IMF is satisfied with the legislation on agricultural income tax and has demanded the early privatization of PIA and electricity distribution companies.
On one hand, the Federal Board of Revenue (FBR) reduced the tax collection target, while on the other hand, cuts in expenditures have been included to achieve the primary surplus agreed upon with the IMF staff for the current fiscal year.
A proposal was made to impose a 70 rupee levy per liter on petroleum products to generate maximum revenue, with the intention to use this amount to reduce electricity prices. However, this became another point of disagreement between Pakistan and the IMF.
The IMF raised the question of how the government would handle circular debt if global petroleum prices were to rise, without passing the burden onto the public.
Many economists have stated that such cross-subsidies have not been successful in the past, and they are awaiting the IMF’s response.
Islamabad has presented a six-year plan to eliminate the 2.4 trillion rupees of circular debt in the energy sector.
With IMF approval, the indebted government has received financial relief, as this new loan will not be reflected in public debt.
According to officials, Pakistan will impose a debt servicing surcharge (DSS) of 3 rupees per unit on electricity bills to repay this new loan, which is expected to generate over 300 billion rupees annually.
The officials requested anonymity as the negotiations were private.
Minister for Power Awais Ahmad Khan Leghari said they had not received a decision yet but he hoped that the IMF had approved borrowing from banks.
Leghari stated that he hoped the IMF had approved borrowing from the banks since the demand made by Pakistan did not violate any principles, nor would it impact the debt-to-GDP ratio or any other parameters.
He clarified that there would be no change in the Debt Service Surcharge (DSS), and once the final deal with the banks is concluded, it would continue as part of the term sheet.
He confirmed that the DSS would remain below 3 rupees per unit.
