Is the 'delay' in Pakistan-IMF agreement a cause for alarm?

Pakistan and the International Monetary Fund (IMF) are likely to reach a staff-level agreement in a few weeks as the international lender requires the government to present clear plans on how it would boost revenue collection, privatize state-owned enterprises, and tackle the over PKR 5 trillion circular debt.

In a report released on Monday, brokerage house Topline Securities pointed out that both Bangladesh and Sri Lanka had recently reached agreements with the IMF but they needed to fulfil some conditions prior.

Bangladesh was able to secure a staff-level agreement for its third review on Dec 18 without any delay. However, the agreement was conditional on some prior actions. Till now, three months since its SLA, Bangladesh hasn't secured the IMF Executive Board's approval yet.

"This could be attributed to high level adjustments required on the fiscal side, in our view, as their tax revenues have fallen after the previous public uprising resulting in change in government."

Separately, Sri Lanka was also able to secure a staff-level agreement timely for its third review on Nov 23. However, it was also contingent on implementation of prior actions and completion of financial financing assurance review and assessing adequate progress with debt restructuring.

Sri Lanka has recently received board approval of its third review on Feb 28, taking almost three months. The prior actions later revealed in detailed report were 2025 Budget, amendments to the VAT Act and Inland Revenue Act, and eliminating all remaining import restrictions.

"It is important to mention that Budget 2025 was kept as a prior action for Sri Lanka despite the fact that Sri Lanka met all its fiscal related quantitative performance criteria i.e. central government tax revenue, and primary balance," Topline noted.

'Prior conditions for Pakistan'

Topline was of the view that it will take a few weeks to reach an agreement as government may share new budgetary measures for FY26 with IMF or present budget in parliament earlier to secure IMF board approval before June-end to bolster foreign exchange reserves and reserves-related IMF targets for June 2025.

Even if SLA is achieved earlier, the board approval may contain some preconditions like passage of Budget FY26.

The virtual discussion over the next few days will revolve around new tax measures in Budget FY26, energy sector reforms, and progress on privatization plan.

The report noted that last year, at the time of signing a new loan program, the IMF team visited Pakistan during May 13-23 and announced end of mission statement without signing the SLA. At that time, the reason cited in statement was also policy discussions to be held virtually including financial support needed from external partners. This SLA for this facility was then achieved on July 12 with a condition that "This agreement is subject to approval by the IMF’s Executive Board and the timely confirmation of necessary financing assurances from Pakistan’s development and bilateral partners."

Then the board approval was obtained on Sept 24, taking another two and half months after SLA, taking total four months from the date of end of mission statement.

The prior actions (possibly the impediments) then revealed were, Budget FY25, notification of annual electricity rebasing, and their gas tariff adjustment.

This time, the government has already taken some measures such as increase in petroleum development levy (PDL) by PKR 10 per liter on petrol and diesel, imposition of additional PKR 791 per mmbtu (23% of existing rate of PKR 3500 per mmbtu) grid levy on captive generation among others.

During eight months of the current fiscal year, the government has already collected PKR 718 billion from PDL, which is 67% of the IMF target of PKR 1.066 trillion and 57% of the government's target of PKR 1.281 trillion for FY25.

"We believe, even with 0% yearly sales growth, the government will achieve annual PDL target (set by IMF) of PKR 1.066 trillion for FY25, while government's own target will be achieved if OMCs sales increases by at least 25% year-on-year for remaining last four months and PDL remains at PKR 70 per liter," Topline said in the report.

Further, it was also shared that the IMF has also agreed to revise down revenue targets of Federal Board of Revenue (FBR) by PKR 620 billion to PKR 12.35 trillion as Pakistan is still meeting tax-to-GDP target of 10.6% with the revised numbers.

Currently, during eight months of the current fiscal year, the tax shortfall is around PKR 601 billion and government expects to cover for any loss above the revised down target of PKR 620 billion through expediting the hearings of pending tax related cases in courts. The government has been mulling hard to recover as much as PKR 400 billion from the court cases.