Finance Minister Muhammad Aurangzeb said on Saturday that the new agreement on a $7 billion aid package between Pakistan and the International Monetary Fund (IMF) will help bring macroeconomic stability to the country.
The international lender announced the development late last night, giving much-needed relief to the nation.
The program, which must be approved by the IMF’s executive board, should allow Pakistan to “consolidate macroeconomic stability and create the conditions for stronger, more inclusive and resilient growth,” the statement said.
The latest financial aid to come to Pakistan in the form of loans follows the government’s commitment to reforms, including a major effort to broaden the country’s tax base.
Commenting on the deal today, Aurangzeb said it will help Pakistan achieve macroeconomic stability.
As part of the program, “we must ensure structural reforms and bring self-sufficiency in the areas of public finance, energy and state institutions,” Geo News quoted him as saying.
In the face of chronic mismanagement, Pakistan’s economy is on the brink, facing the Covid-19 pandemic, the fallout from the war in Ukraine and supply woes that have fueled inflation, as well as record floods that will affect a third of the country in 2022. .
With dwindling foreign exchange reserves, Pakistan found itself in a debt crisis and was forced to turn to the IMF for its first emergency loan in the summer of 2023.
IMF statement
An IMF statement today quoted the Fund’s chief of mission in Pakistan, Nathan Proter, as saying the new program “aims to leverage the hard-won macroeconomic stability achieved over the past year by supporting efforts to strengthen public finances, reduce inflation, restore external buffers and remove economic disruption to accelerate private-sector-led growth’.
“In this regard, the authorities plan to increase tax revenues through measures of 1.5 percent of GDP in fiscal year 25 and 3 percent of GDP over the course of the program,” the lender said. The increase in revenue collection will be achieved through “simpler and fairer direct and indirect taxation, including proper introduction of net income from retail, exports and agriculture into the tax system”.
The statement added that the federal and provincial governments have agreed to rebalance spending activities in accordance with the 18th Amendment of the Constitution by signing the “National Fiscal Compact”. Under the agreement, entities such as spending on education, health, social protection and investment in regional public infrastructure will be transferred to the provinces.
The provinces have already committed to “fully harmonizing their agricultural income tax regimes through legislative changes” with federal and corporate income tax regimes. The move will be implemented from January 1, 2025.
The government will also improve the viability of the power sector and minimize its losses through timely adjustment of tariffs, reforms and refraining from further unnecessary expansion of generation capacity.
“The authorities remain committed to targeted subsidy reforms and replacing cross-subsidies to households with direct and targeted BISP support.”
The authorities will improve the operation and management of SOEs as well as privatization, in which the most profitable entities will be prioritized.
The government is also working to “phase out” incentives for special economic zones, agricultural support prices and related subsidies, while refraining from new regulatory or tax incentives or any guaranteed return “that could distort the investment environment. “The authorities are also committed to advancing anti-corruption and governance and transparency reforms and gradually liberalizing trade policy,” the statement concluded.
