Frequently Asked Questions on Pakistan
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IMF arrangement and summary
- On September 25, the Executive Board of the International Monetary Fund (IMF) concluded the 2024 Article IV consultation with Pakistan and approved a 37-month Extended Arrangement under the Extended Fund Facility (EFF) for Pakistan in the amount of SDR 5,320 million (or around US$7 billion).
- The 2024 Extended Fund Facility (EFF) aims to improve the livelihoods and prospects of the Pakistani people and restore Pakistan’s external viability.
Program pillars
- The program is built around 4 key pillars:
- Reinforcing the authorities' policy credibility and entrenching economic stability through sound monetary and fiscal policies and by fostering a favorable environment for private sector-led growth.
- Strengthening public finances through higher quality public spending, enhancing the provision of critical public services, and strengthening revenue collection from currently undertaxed areas.
- Preserving the cost of living with appropriate monetary policies that will help to limit inflation, while exchange rate flexibility will be used to support the rebuilding of foreign reserves.
- Implementation of structural reforms to foster stronger, inclusive growth by safeguarding the viability of the energy sector, strengthening social safety nets and governance and anti-corruption efforts, reforming state-owned enterprises, and deregulating product markets; the program recognizes the importance of addressing environmental challenges as an integral part of its agenda.
Social protection, human capital, and vulnerable populations
- Program support for the Pakistani people and the most vulnerable includes:
- Strengthening social safety nets and increasing investment in human capital such as training, education, and other social development opportunities.
- Allowing the Benazir Income Support Program (BISP) to increase by 27% to 0.5% of GDP in FY25, enabling higher unconditional cash transfers to the poorest households.
- Expanding coverage by enrolling remaining eligible households into BISP.
- Enhancing education, health, and nutrition conditional cash transfer programs in collaboration with the World Bank.
- Rebuilding health and education spending at the federal and provincial levels and increasing allocations to partially restore previous levels of human capital investment.
Fiscal strategy, revenue mobilization, and tax reform
- Goal: raise Pakistan's tax-to-GDP ratio by 3 percent of GDP while improving fairness and efficiency.
- Key elements to broaden the tax base:
- (i) Increase direct taxes by bringing previously untaxed sectors—such as retailers, property owners, and agricultural income—into the tax net and rationalizing personal and corporate income taxes.
- (ii) Reduce exemptions and harmonize rates in the general sales tax (GST) system to streamline indirect taxation.
- (iii) Expand the coverage and rates of the Federal Excise Duty (FED).
- (iv) Rationalize tariffs by eliminating exemptions and concessions to increase customs revenue.
- Compliance and administration measures:
- Enhance revenue administration through better information sharing and digitalization.
- Provincial support for a number of these reforms is identified as critical.
Structural reforms and competitiveness
- Main reforms focus on improving competitiveness and private sector conditions to raise productivity, employment, and incomes:
- Reform state-owned enterprises through restructuring and privatization to enhance efficiency and reduce fiscal burdens.
- Remove state-induced distortions including the setting of prices for goods and services, correct trade policy distortions, increase competition, and eliminate concessions that have hindered growth.
- Reform the energy sector and streamline subsidies.
- Improve the foreign direct investment regime and deepen financial intermediation to attract investment.
- Scale up human capital investment and strengthen governance and transparency.
Federal-provincial fiscal relations and National Fiscal Pact
- The program formalizes provincial involvement through a National Fiscal Pact (NFP), enhancing federal-provincial fiscal relations and facilitating devolution in line with the 18th amendment to the Constitution of Pakistan.
- The NFP includes a novel revenue mobilization strategy that aims at taxing previously undertaxed sectors such as agriculture and property, as well as retailers at the federal level, and integrating exporters into the regular tax regime.
Debt sustainability and risks
- Pakistan's debt is assessed as sustainable despite its high level, provided that the authorities implement sound policies and reforms that strengthen the economy and foster sustained growth.
- Important policy imperatives:
- Increase revenue fairly and efficiently given the low tax-to-GDP ratio.
- Enhance tax compliance and shift taxation towards direct, progressive taxes on undertaxed sectors such as retailers, property, and agriculture.
- Improve the quality of public spending and better manage substantial gross financing needs through improved debt management and extended maturities.
- Risks to sustainability:
- The path to debt sustainability is narrow and could be undermined by policy slippages, particularly failure to implement necessary revenue measures, or by reduced external financing.
- Such challenges could exert pressure on the exchange rate and crowd out the private sector, potentially weakening growth.
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