Pakistan to implement new set of IMF conditions under $6 billion loan program

The International Monetary Fund (IMF) headquarters building is seen in Washington, DC on May 15, 2011. (AFP/FILE)

• Country expects 0.3 percent of GDP in revenue gains in FY 2024 through personal income tax reforms that reduce the tax slabs 
• Under energy subsidy reforms, government will lower threshold for protected consumer slab to 200 units from 300 units 

KARACHI: The Pakistani government will be implementing another set of International Monetary Fund (IMF) conditions as part of the $6 billion loan program, an IMF report has suggested, with financial experts doubting the country’s ability to achieve the growth rate target.
The IMF has asked Pakistan to implement seven conditions, including personal income tax (PIT) reforms, electricity rate hike, cut in the slab for lifeline consumers, phasing out of refinance schemes, and recapitalization of two private banks, before the next performance review that is expected in April this year, according to a report released by the IMF this week along with $1 billion tranche of the revived $6 billion program.
People familiar with the development say the conditions already existed, but the government might have preferred to implement them in a “phased manner” instead of instant enforcement.
“There was no surprise on the conditions among the government quarters in Islamabad. It means these conditions were initially existing and government had requested to implement them in later stages,” Dr. Vaqar Ahmed, joint executive director at the Islamabad-based Sustainable Development Policy Institute (SDPI), told Arab News.
“It was not possible for the government to enforce all the conditions at once, so they have sought time to implement in a phased manner.”
As per the new conditions, the government has agreed to reform personal income tax “to change the existing tax rate structure by reducing the number of rates and income tax brackets (slabs) to simplify the system and increase progressivity,” the IMF report says.
“The authorities are in the process of drafting PIT legislation by end February 2022 to ensure it will be ready to come into effect on July 1, 2022 with the FY2023 budget,” it says, adding it will reduce both the number of rates and income tax brackets, and bring additional taxpayers into the tax net.
The income tax reforms, said to be protecting the low-income households, are estimated to yield 0.3 percent of the gross domestic product (GDP) in revenue gains in Fiscal Year 2024.
Economists say the new measures are likely to burden those who are already paying taxes, but government officials maintain they would target the ones out of the tax net.
“The measures will be burdenizing the existing segment of tax payers, because a majority of those who have filed new tax returns have filed zero income,” Dr. Ahmed said.
Muzzamil Aslam, a spokesman for the Pakistani finance ministry, said the draft for the reforms had yet to be made, however, those out of the tax net would be tapped.
“We have to increase the income tax and those who are out of tax net will be targeted, and for that a formula will be developed, the work on it has not begun yet,” Aslam told Arab News.
Under the energy subsidy reform for residential consumers, the government is planning to lower the threshold for protected consumer slab to 200 units from 300 units per month, and the breakdown of unprotected 301-700 unit slabs into smaller slabs of 100 each as well as an expansion of the definition of lifeline consumers (to include residential consumers with a consumption of 50-100 units per month) by the end of February.
“The problem is that in our country around 70 percent of the connections fall into the lifeline category. Due to this, our recovery ratio declines,” said Aslam, who also speaks for the energy ministry.
“People have more than one connections and that way they remain below the 300-unit threshold, so we have to see the circular debt and recoveries.”
The IMF has also asked the authorities to “unwind” lending to the housing and construction sector, saying: “Banks’ housing lending targets could present risks to financial stability and entail a misallocation of credit.”
Ahmed said rolling back these measures would be a blow to the prime minister’s Naya Pakistan Housing project.
He feared the implementation of the new IMF conditions, including increasing the power tariff, would impact the purchasing power and make it difficult to achieve the growth rate of 4.5 percent set by the central bank.
“I don’t think that the projected growth rate will be achieved with the implementation of these conditions by April, when the next review is due,” the expert said.
But the finance ministry spokesperson insisted the government would achieve 4.8 percent growth rate against the IMF’s projection of 4 percent. 
The IMF report also points to a change of the Pakistani finance minister and presentation of the budget for the current fiscal year by the new finance chief, Shaukat Tarin. 
It “marked a departure from EFF (Extended Fund Facility) objectives and contributed to rapidly increasing macroeconomic vulnerabilities,” it reads.
“The budget delayed key reforms and reversed some key policies, damaging revenue prospects.”