Federal Minister for Finance and Revenue, Senator Muhammad Aurangzeb, announced on Tuesday that the government is in the “advanced stages” of securing external financing assurances. These assurances are critical as Pakistan seeks the approval of the International Monetary Fund’s (IMF) Executive Board for a $7 billion loan under the Extended Fund Facility (EFF).
Progress in IMF Negotiations
“Discussions with the IMF are progressing well, and we are in advanced stages of obtaining the necessary assurances regarding our external financing,” Aurangzeb stated during a briefing. He expressed optimism about receiving timely approval from the IMF Executive Board, praising the efforts of provincial governments in meeting IMF requirements.
The Finance Minister reiterated Prime Minister Shehbaz Sharif’s recent declaration that this will be Pakistan’s final IMF programme, highlighting the need for comprehensive structural reforms to ensure the country’s economic stability and independence from future bailouts.
Background on IMF Agreement
In July, Pakistan and IMF staff reached a staff-level agreement on a 37-month EFF arrangement worth approximately $7 billion. This agreement, however, is still pending the IMF Executive Board’s approval, which hinges on Pakistan securing necessary financing assurances from its development and bilateral partners.
The delay in securing these assurances has kept Pakistan off the IMF’s Executive Board schedule. The government is currently negotiating the rollover of $12 billion in loans from key allies, including China, Saudi Arabia, and the United Arab Emirates (UAE). Additionally, Pakistan has sought an extra $1.2 billion loan from Saudi Arabia to address a $2 billion financing gap.
Economic Indicators and Clearing Backlogs
Aurangzeb noted that improved economic indicators have allowed Pakistan to clear all backlogs, including import letters of credit (LCs), contracts, and dividend and profit remittances. He pointed out that inflation has dropped significantly, with the rate falling to 9.6% in August 2024 from 23.7% in the same month the previous year. This decrease in inflation has led to a reduction in the policy rate, which has provided much-needed relief to the industrial sector.
“As the interest rates decline, the economic environment will become more favorable, benefiting all sectors,” Aurangzeb emphasized. He also highlighted the improvement in Pakistan’s credit ratings by international agencies such as Fitch and Moody’s, describing it as “external recognition” that the economy is moving in the right direction.
Tax Collection and Economic Reforms
Addressing the Federal Board of Revenue (FBR) tax targets, Aurangzeb underscored the government’s commitment to increasing tax collection. He pointed out that nearly 43% of economic sectors contribute less than 1% to the tax revenue, calling for a more balanced approach where all segments of society contribute their fair share.
“If we do not broaden our tax base, we will continue seeking external assistance, which is not a sustainable solution,” Aurangzeb warned. He acknowledged that the salaried class and manufacturing industry are already paying taxes disproportionately higher than their GDP contributions. He urged wholesalers, retailers, and distributors to step up their contributions to the national economy, assuring them of the government’s readiness to facilitate and engage with them constructively.
The Finance Minister highlighted the steps taken by the FBR to simplify the tax filing process, stressing the importance of compliance. “Let me be clear: we will not backtrack on these measures,” Aurangzeb asserted. “Nations cannot thrive on charity; we need sustainable revenue generation.”
Challenges in Tax Collection
Despite these measures, the FBR reported a significant shortfall of Rs 98 billion in tax collection during the first two months of the fiscal year 2024-25, with the net collection standing at Rs1,456 billion against the targeted Rs1,554 billion. Aurangzeb acknowledged the challenges but emphasized the government’s resolve not to resort to delaying tactics that could jeopardize fiscal stability.
Commitment to Downsizing Federal Government
Aurangzeb also reiterated the government’s commitment to rightsizing the federal administration. “We are clear in our vision: the size of the federal government will be reduced,” he stated, indicating a strategic shift towards a more streamlined and efficient governance structure.
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