$7bn EFF staff level agreement: IMF shares MEFP draft with govt for consensus

ISLAMABAD: The IMF has shared the draft of Memorandum of Economic and Financial Policies (MEFP) with the Pakistani authorities for evolving consensus which might pave the way for striking a staff level agreement under $7 billion Extended Fund Facility (EFF).

The Fund has shown its readiness for provision of some relief for the construction/real estate sector but it is not yet clear whether these incentives/relief will be made a part on immediate basis or incorporated in the next budget for 2025-26.

Pakistan and the IMF team had concluded parleys last week on Friday without striking a staff level agreement which is a prerequisite for forwarding Islamabad’s formal request for release of $1 billion tranche under the EFF before the Fund’s Executive Board.

“The IMF has shared the draft of the MEFP incorporating stringent conditions for achieving fiscal consolidation, as on the one side, the FBR’s tax collection target was revised downward, while on the other hand the expenditure cut was also incorporated for achieving a primary surplus agreed team had concluded parleys last week on Friday without striking a staff level agreement which is a prerequisite for forwarding Islamabad’s formal request for release of $1 billion tranche under the EFF before the Fund’s Executive Board.

“The IMF has shared the draft of the MEFP incorporating stringent conditions for achieving fiscal consolidation, as on the one side, the FBR’s tax collection target was revised downward, while on the other hand the expenditure cut was also incorporated for achieving a primary surplus agreed with the Fund staff for the current fiscal year,” top official sources confirmed while talking to The News.

The cross subsidy for collecting maximum petroleum levy on POL products was proposed at Rs70 per liter for creating fiscal space and utilising it to reduce the electricity prices which proved another bone of contention between Pakistan and the IMF. There are some questions raised by the IMF including what would happen if the POL prices started surging in the international market so it might create circular debt if the government preferred not to pass the burden on to consumers. Many independent economists say this kind of cross subsidy always proved a non-starter and keep their fingers crossed and were awaiting the response of the IMF.

On the FBR’s revenue collection, the IMF has revised downward the annual tax collection target from Rs12.97 trillion to Rs12.33 trillion for the current fiscal year.

The IMF also raised questions on the effective enforcement of hiking Federal Excise Duty (FED) on acetate tow which was jacked up to unprecedented level of Rs44,000 per kg in the last budget for 2024-25.

There was a proposal to slap Rs4000 per kg advance tax on acetate tow but the FBR jacked it up to Rs44,000 per kg which resulted into under-invoicing and smuggling from Iran and Afghanistan.

Now the IMF has asked the FBR to devise a stringent mechanism for discouraging under invoicing and smuggling.

The FBR had made wrong revenue projections in the last budget for 2024-25. With the imposition of Federal Excise Duty (FED) on acetate tow at rate of Rs44,000 for tobacco industry, the IMF has estimated that it will yield revenues of Rs125 billion during the current fiscal year. However, the FBR could fetch only millions of rupees during the first quarter of the current fiscal year.

On the expenditure side, the IMF has asked Pakistan to cut down expenditures in proportion to the revenue shortfall so that the government could display the desired primary surplus of Rs2.4 trillion till end June 2025. On climate finance under RSF, the IMF is all set to consider loan facilities up to $1.2 billion but sought project details ensuring climate resilience initiatives in months and years to come.