Pakistan and IMF Inch Closer to Strike Deal Over Bailout Revival

In a major breakthrough, Pakistan on Tuesday reached an agreement with the International Monetary Fund (IMF) on the budget for the upcoming fiscal year 2022-23. The breakthrough was reached after Pakistan agreed to a number of stern conditions including the gradual increase in petroleum levy up to Rs. 50 per liter.

The discussions progressed swiftly late on Tuesday during a meeting between the IMF staff mission and the Pakistani authorities, led by Finance Minister Miftah Ismail.

“Discussions between the IMF staff and the authorities on policies to strengthen macroeconomic stability in the coming year continue, and important progress has been made over the FY23 budget,” the IMF Resident Representative in Pakistan, Esther Perez Ruiz said in a statement.

In addition to imposing the petroleum levy, the government has also agreed on a number of other demands of the international lender. The Federal Board of Revenue’s tax target has been revised upwards from Rs. 7 trillion proposed in the budget.

On the petroleum prices, Rs 50 will be increased to cut subsidy but gradually in addition to Rs 6-12 lac earner will face an income tax of Rs 2.5%. In the first time Rs 10 per liter and later Rs 5 per liter will be enhanced.

It is pertinent to mention here that IMF had asked Pakistan to bring changes to the new income tax slabs for the salaried class under budget FY23. Income Tax exemption on annual income up to Rs 1.2 million is withdrawn, this exemption was announced in new budget.

Annual income of Rs 150 million to Rs 300 million will be paying 1-4% of income support levy. The tax rates for the upper income slabs will also significantly go up. Those who earn Rs 6-12 lac annually will pay 2.5% income tax.

The size of the budget is enhanced from Rs 9500 billion to Rs 9900 billion. FBR annual tax target is enhanced from Rs 7004 to Rs 7442 billion.

The IMF will now finalise the net foreign assets, net domestic assets, net international reserves and current account deficit targets with the central bank. The finance ministry hoped to receive the Memorandum for Economic and Financial Policies (MEFP) by Monday.

Although the broad agreement is short of a staff level pact but it may help soothe markets and end a four-month long period of uncertainty that took a heavy toll on the country’s currency, unleashinig a wave of inflation and eroding the confidence of markets and investors.

The resetting of the budget size would be on account of cost of pays and pensions and setting aside nearly Rs200 billion for emergency spending.

The pension budget has been increased to Rs609 billion as opposed to Rs530 billion proposed on June 10th. The cost of running the civilian government has been increased to Rs600 billion -up from Rs550 billion of June 10th.

The IMF has turned down the government’s budget proposal to collect Rs200 billion on account of Gas Infrastructure Development Cess, as the matter is disputed and under litigation.

The broad based agreement and a subsequent staff level agreement will be subject to the IMF board approval. But the government will require to present a revised budget in the Parliament and get it approved, including the Finance Bill 2022. The budget has to be passed before the end of month to make it operational from July 1st.

The Pakistani Rupee (PKR) hit a new all-time low against the US Dollar (USD) and closed at Rs. 211.48 on Tuesday. Since the arrival of the new government on 11 April, the greenback is up by Rs. 29.13 against the PKR.

The precarious condition of the country’s foreign reserves also forced the central bank to issue a statement to deny rumours implying that the reserves held by the State Bank of Pakistan (SBP have dried up.

On June 10, the foreign currency reserves held by the SBP were recorded at $8.985 billion, down $241 million. The central bank reserves are currently at their lowest level since November 22, 2019.