Pakistan refrains from terming its ongoing discussions with the International Monetary Fund (IMF) as “programme negotiations,” preferring to describe them as engagements aimed at further collaboration with the fund.
The finance ministry has not explicitly outlined the nature of this extended engagement, unlike previous instances where it expressed interest in securing the Extended Fund Facility (EFF).
In an official communication, the ministry stated that “the IMF mission, led by Nathan Porter, met with the Finance Minister to initiate discussions on further engagement with the Fund.”
The timing of this visit coincides with unrest in Azad Jammu and Kashmir (AJK), prompting the Prime Minister of Pakistan to approve a Rs23 billion unbudgeted subsidy to mitigate tensions.
Perceptions suggest that this subsidy approval may signal a weakened political resolve, hinting that the coalition government might struggle under widespread public pressure anticipated with the terms of the next bailout package.
Echoing sentiments from the IMF Resident Representative Esther Perez, the language in the finance ministry’s statement mirrors the IMF’s focus on the “next phase of engagement” during discussions with Pakistani authorities.
Sources reveal that Nathan Porter, during initial discussions, highlighted concerns regarding tax revenue shortfalls, federal-provincial tax imbalances, and the political challenges faced by the government.
The outcome of the ongoing IMF mission remains uncertain, with discussions open regarding the duration, instrument, and size of the potential IMF program, with Pakistan expressing interest in a three-year program.
Finance Minister Muhammad Aurangzeb declined to clarify whether the current IMF mission pertains to program negotiations under the Extended Fund Facility.
Additionally, there’s ambiguity regarding whether the IMF mission aims for a shorter-term program or exclusively focuses on a longer-duration program under the EFF, considering the prevailing political and economic circumstances.
In its staff-level report, the IMF flagged high political uncertainty and social tensions, warning that these factors could hinder the execution of economic stabilization policies.
Minister Aurangzeb highlighted improvements in macroeconomic indicators during the Stand-By Arrangement (SBA) and reiterated the government’s commitment to ongoing reforms.
Nathan Porter reiterated concerns about tax collection shortfalls and federal-provincial tax disparities.
Preceding its visit, the IMF submitted a report outlining potential negotiation paths should Pakistan receive a loan.
The IMF has urged Pakistan to broaden the National Tax Council’s terms of reference to encompass tax rate and base harmonization for agricultural income tax and property tax, currently outside federal jurisdiction.
Furthermore, the IMF calls for enhanced provincial tax collection and enforcement of provincial tax laws.
The division of taxing rights between the federal government and provinces complicates tax policy-making and revenue administration, according to the IMF, emphasizing the need for harmonization and administrative reforms.
The IMF’s recommendations include revising the allocation of federal tax revenues in the divisible pool under the National Finance Commission to address distortions and incentivize revenue maximization by provinces.
The decision by the Prime Minister to announce a Rs23 billion subsidy for AJK consumers is viewed as weakening the government’s position in IMF negotiations.
The subsidy, intended to alleviate recent unrest, will support subsidized wheat and electricity in AJK, potentially affecting the ongoing discussions with the IMF.
Following federal approval, AJK announced subsidized wheat prices and reduced electricity tariffs, aimed at easing consumer burdens in the region.
