Pakistan commits to addressing missed IMF targets before February review

ISLAMABAD: Pakistan has assured the International Monetary Fund (IMF) that it will address its recent shortcomings before the first biannual review scheduled for February, while remaining committed to future targets to ensure the smooth and successful execution of its 37-month, $7 billion program.

The country has yet to meet three key targets, as highlighted in a recent briefing to the National Assembly’s Standing Committee on Finance. These targets relate to revenue collection, debt maturity, and provincial legislation for additional taxes within their jurisdictions, such as agricultural income tax, real estate, and sales tax harmonization.

The unmet targets have raised concerns among IMF staff and government officials, prompting the federal government to engage in consultations with provincial authorities to recover losses, despite lackluster responses from some provinces. The government has emphasized the need to maintain the trust and credibility it has regained over the past 14 months to pave the way for inclusive and sustainable growth, as stated by a minister.

Secretary of Finance, Imdadullah Bosal, informed the parliamentary panel that Pakistan missed the targets set for first-quarter revenue, increasing the average time to maturity for domestic debt, and provincial legislation, with deadlines of the end of September for the first two and the end of October for the latter.

The federal government argues that some spending responsibilities should be devolved to the provinces, in accordance with the 18th constitutional amendment. These responsibilities include additional contributions for higher education, health, social protection, and regional public infrastructure investment. However, these transitions are taking longer than expected and facing resistance.

Both the IMF and the federal government anticipate that the provinces will enhance their own tax-collection efforts in areas such as sales tax on services, property tax, and agricultural income tax. To this end, provinces must amend their Agricultural Income Tax regimes to align fully with federal personal income and corporate income tax structures by the end of October, in preparation for taxing agricultural income under this new framework starting January 1, 2025.

Furthermore, provinces are expected to move from a positive list to a negative list approach for services GST to reduce tax evasion, effective at the beginning of FY26. The goal is to collectively increase revenues from corporate tax in agriculture and GST on services while expanding provincial efforts in tax collection.

They will also work towards developing and implementing a unified approach to property taxation and make necessary administrative reforms to close the tax compliance gap, including for GST. The National Tax Council will broaden its terms of reference to encompass the design of relevant tax measures, including property tax, along with the required legal and administrative changes for implementation.

On the expenditure side, provinces are expected to contribute additional funds to support federal initiatives with the Higher Education Commission (HEC). Both federal and provincial governments should gradually increase spending on health and education programs as a percentage of GDP.