IMF Shares MEFP Draft with Pakistan, Staff Level Agreement Under $7 Billion EFF Still Pending

The International Monetary Fund (IMF) has shared a draft of the Memorandum of Economic and Financial Policies (MEFP) with Pakistani authorities to build consensus, a step that could pave the way for a staff-level agreement under the $7 billion Extended Fund Facility (EFF). The agreement is crucial for Pakistan to formally request the release of a $1 billion tranche from the IMF’s Executive Board. While the IMF has expressed willingness to provide some relief for the construction and real estate sectors, it remains unclear whether these incentives will be implemented immediately or incorporated into the next fiscal year’s budget for 2025-26. Negotiations between Pakistan and the IMF concluded last Friday without reaching a staff-level agreement, a prerequisite for unlocking the much-needed funds. According to a report by a national daily, the draft MEFP includes stringent conditions aimed at achieving fiscal consolidation. These measures include a downward revision of the Federal Board of Revenue’s (FBR) annual tax collection target and expenditure cuts to ensure the agreed-upon primary surplus for the current fiscal year. One contentious issue during the talks was the cross-subsidy mechanism proposed by Pakistan to collect the maximum petroleum levy of Rs. 70 per liter on petroleum products. The government planned to use the additional revenue to reduce electricity prices. However, the IMF raised concerns about the sustainability of this approach, particularly if international oil prices rise, potentially creating circular debt if the government chooses not to pass the burden onto consumers. Independent economists have also criticized the cross-subsidy plan, calling it a flawed strategy that has historically failed to deliver results. The IMF has revised the FBR’s annual tax collection target from Rs. 12.97 trillion to Rs. 12.33 trillion for the current fiscal year. However, the Fund has raised questions about the enforcement of certain tax measures, particularly the Federal Excise Duty (FED) on acetate tow, which was increased to an unprecedented Rs. 44,000 per kilogram in the 2024-25 budget. This hike, intended to generate revenue from the tobacco industry, has instead led to widespread under-invoicing and smuggling from Iran and Afghanistan. The IMF has now asked the FBR to implement stricter mechanisms to curb these practices. The FBR’s revenue projections for the current fiscal year have also come under scrutiny. While the FED on acetate tow was expected to generate Rs. 125 billion, the FBR collected only a fraction of this amount during the first quarter of the fiscal year. The IMF has urged Pakistan to address these revenue shortfalls and align expenditures accordingly to maintain the targeted primary surplus of Rs. 2.4 trillion by the end of June 2025. On the expenditure side, the IMF has called for proportional cuts to offset the revenue shortfall. This adjustment is necessary to meet fiscal targets and ensure compliance with the EFF program. In addition to fiscal measures, the IMF is considering providing up to $1.2 billion in climate financing under its Resilience and Sustainability Facility (RSF). However, the Fund has requested detailed project plans that demonstrate long-term climate resilience initiatives.