ISLAMABAD:
The International Monetary Fund (IMF) departed Washington on Saturday without finalizing discussions with Pakistan, stating that talks will resume in the coming days to reach an agreement on the upcoming fiscal year’s budget. This signals ongoing differences between the two parties.
Nathan Porter, the outgoing IMF Mission Chief to Pakistan, said in a statement following a 10-day negotiation period that discussions focused on ways to increase revenue—through better compliance and broadening the tax base—and prioritizing government spending.
Originally scheduled to visit Pakistan from May 13 to 23, the IMF team began the first round of talks remotely from Turkey due to India-Pakistan tensions. Face-to-face meetings in Islamabad started on May 19 but extended beyond the planned timeframe without concluding.
The mission reviewed recent economic developments, the implementation of the current IMF program, and Pakistan’s budget strategy for fiscal year 2026.
Government sources indicated there was broad agreement on the primary fiscal goal of achieving a budget surplus next year, but differences remain, particularly regarding how to achieve that target.
Porter confirmed the authorities’ commitment to fiscal consolidation while protecting social and priority spending, aiming for a primary surplus of 1.6% of GDP in FY2026. At the projected economy size, this surplus would amount to approximately Rs2.1 trillion, slightly less than the Finance Ministry’s earlier estimate.
The IMF will prepare a report based on this mission’s preliminary findings for management review, which may then be presented to the IMF Executive Board for discussion and decision.
According to sources, no consensus has been reached yet on next year’s tax targets, certain revenue measures, or relief provisions for specific sectors. These outcomes depend on the planned expenditures in the three main budget areas.
Disagreements persist regarding tax relief for the salaried class, the real estate sector, and the taxation of pensions.
Last week, Prime Minister Shehbaz Sharif described the proposed relief for salaried taxpayers by the Federal Board of Revenue (FBR) as insufficient and urged tax authorities to offer greater concessions. Officials from the FBR and finance ministry have said the exact extent of relief is still undecided.
IMF reportedly requested Pakistan to propose alternative ways to provide relief to the salaried class. The Fund suggested levying taxes on high-income pensioners and using that revenue to support salaried workers.
However, Pakistan’s government views the IMF’s condition—to link relief for salaried individuals with new taxes that reverse previous budget inequities—as unjustified. The salaried class has already paid Rs437 billion in income tax, compared to under Rs4 million collected from traders.
The IMF’s calls to broaden the tax base appear superficial, given its inaction regarding government failures to collect due taxes from retailers.
Taxing high-earning pensioners is seen by the government as politically sensitive and difficult.
The government remains inclined to offer relief to the real estate sector, particularly by lowering transaction taxes—an approach not aligned with IMF policy. Last month, FBR Chairman Rashid Langrial confirmed the IMF’s agreement to abolish federal excise duty on this sector.
Porter stated that IMF discussions with Pakistan authorities were constructive, covering budget proposals, economic policies, and reform agendas under the 2024 Extended Fund Facility (EFF) and the 2025 Resilience and Sustainability Facility (RSF).
Talks also addressed ongoing energy sector reforms aimed at improving financial sustainability and reducing costs, along with structural reforms intended to promote sustainable growth and a more competitive business environment.
Sources revealed the IMF did not approve the Power Division’s request to allocate nearly 1% of GDP for power subsidies, consenting instead to Rs1.04 trillion.
The government has delayed the budget presentation to June 10, more than a week past the original June 2 date, due to unresolved issues.
Porter highlighted Pakistan’s focus on maintaining sound macroeconomic policies and building financial buffers. “Maintaining a tight and data-driven monetary policy remains a priority to keep inflation within the central bank’s medium-term target of 5-7%,” he said.
He reiterated that rebuilding foreign exchange reserves, preserving a fully functioning foreign exchange market, and allowing greater exchange rate flexibility are crucial to strengthen resilience against external shocks.
Despite the IMF program, Pakistan is currently unable to secure significant foreign loans due to its low credit rating.
Porter concluded that the IMF team will stay engaged and continue close dialogue with Pakistani authorities. The next mission, linked to reviews of the EFF and RSF, is expected in the latter half of 2025.
