The International Monetary Fund (IMF) is considering reverting back to a three-month review schedule of the $7 billion bailout package after seeing early slippages, but the Pakistani authorities insist that no final decision has so far been taken.
The issue of returning to the quarterly reviews surfaced during an unscheduled visit of the IMF mission that had to rush to Islamabad to keep the programme on track. The finance ministry is also struggling to keep the provinces on the right track, sources said.
According to the sources, a quarterly review would help in constant monitoring of about 40 conditions agreed under the $7 billion deal. However, Pakistani negotiators told the media that there was no final decision on the issue of the biannual and the quarterly reviews.
About six weeks ago, the IMF board had approved the $7 billion deal and released the $1.1 billion upfront. The remaining amount of around $6 billion will be distributed in six equal tranches, subject to the successful completion of half-yearly reviews.
The completion and the approval of the first review was scheduled for March next year but due to multiple challenges on the fiscal, taxation and external financing fronts, the mission arrived before time. The last Extended Fund Facility (EEF) of the 2019-22 deal was also based on the quarterly reviews.
In case of the quarterly reviews, the IMF can ensure strong implementation by keeping a close check on the government, the sources said. The quarterly reviews would also strengthen the hands of the Ministry of Finance to ensure monitoring of the 40 conditions, they added.
IMF Mission took the first round of briefings from various ministries on Monday, while Mission Chief Nathan Porter held opening talks with Finance Minister Muhammad Aurangzeb and State Bank of Pakistan (SBP) Governor Jameel Ahmad on Tuesday.
The IMF’s new Resident Representative to Pakistan Mahir Bicini also attended the opening meeting. The finance minister hosted a luncheon in honour of the outgoing representative Esther Perez. The finance ministry did not issue a press statement after the opening session.
The IMF held different rounds of discussions on the issues of Federal Board of Revenue’s (FBR) performance, reliability of the power sector statistics and performance of the macroeconomic targets. An important round was also held on the status of the implementation of the National Fiscal Pact.
The FBR gave an overview of its performance during the first quarter. The IMF was told that the three-month shortfall of Rs90 billion was because the macroeconomic assumptions went off the mark.
The FBR briefed the IMF that the reasons for missing the monthly targets were related to slow growth in imports, slowing down of inflation rate, while some of the policy measures also did not respond as expected.
The FBR tried to convince the IMF that it had met the Rs10 billion tax collection target for the traders because of higher collection from the non-filer retailers. The non-filer retailers pay the 2.5% withholding tax but stay out of the tax net. However, the IMF’s Rs10 billion target was set against the Tajir Dost scheme, which was missed by 99.99%.
The IMF was told that the FBR would go after non-filer wholesalers in the first phase to make sure that due taxes were collected from them despite availing the bonanza of higher withholding taxes being charged to non-filers.
Finance Minister Aurangzeb has already announced the abolition of the non-filer category.
The FBR also tried to convince the IMF that despite revenue shortfalls, it would still be in a position to achieve the 11.5% tax-to-GDP goal due to shrinking size of the overall economy. However, the absolute collection figure would be far less than Rs12.97 trillion without a mini-budget.
The FBR’s tax target of Rs12.97 trillion had been set on the basis of 15% nominal GDP growth – 3% GDP and 12% inflation. The nominal size is expected to shrink to less than 12%, which would reduce the overall size of the economy against the projections.
The sources said that the IMF did not share its mind whether it had accepted the FBR’s logic or would still press for bringing the mini-budget as promised by the government of Prime Minister Shehbaz Sharif in September.
The IMF asked questions about the low recoveries from the real estate sector despite massively increase in the withholding tax rates on the sale and purchase of plots.
The IMF took a briefing on the National Fiscal Pact and acknowledged the challenges being faced for its smooth implementation. The four provincial governments have not yet approved the agriculture income tax laws to raise the tax rate to 45%. Due to Punjab’s failure, the overall cash surplus target has also not been achieved.
The sources said that there was a possibility that the IMF would provide technical assistance to fully implement the National Fiscal Pact. The pact was aimed at transferring expenditure responsibilities to the provinces in line with the constitutional scheme.
