• No major hurdle to completion of first review under $3bn SBA; $710m tranche likely in Dec
• Authorities told to keep ‘critical eye’ on expansion of tax base
• Policy-level negotiations get underway

ISLAMABAD: With policy-level discussions boiling down primarily to external financing gap, the visiting staff mission of the International Monetary Fund (IMF) has started direct communications with key bilateral partners to confirm their committed support to Pakistan, including rollovers and additional flows, during the current fiscal year.

On the first day of policy-level talks, caretaker Finance Minister Dr Shamshad Akhtar and IMF’s mission chief for Pakistan Nathan Porter led their respective sides that held two detailed sessions on Monday. They were joined by respective teams from the State Bank of Pakistan (SBP), planning, power and petroleum divisions, Federal Board of Revenue (FBR) and Special Investment Facilitation Council (SIFC).

In background discussions, officials said there appeared to be no major challenge as far as the successful completion of the first quarterly review was concerned and that about $710 million second tranche of $3 billion Standby Arrangement (SBA) would hopefully be disbursed in the first part of December with the approval of the Fund’s executive board, although there were questions here and there.

However, the mission flagged its concerns about risks to the financing pipeline of about $28bn external needs during the current fiscal year.

Talks may conclude tomorrow

The officials said the mission had an engagement with one of the key friendly countries through its embassy in Islamabad on Mon­day about their promised financing, got a reassurance and would follow suit with others as well on Tuesday before concluding the policy discussion on Nov 15.

The authorities believed that their bilateral financing commitments were intact and so were the pipeline of funds from multilaterals like the World Bank, Islamic Dev­elopment Bank and Asian Dev­elopment Bank, and even the IMF.

However, sources pointed out that about $5bn worth of commercial loans and about $1.5bn of pla­nned international bonds during the current fiscal year could be dou­btful given the global econo­mic conditions and uncertain fin­a­ncial markets. Even if such funds become available, the fina­ncing costs remain challenging.

The officials said the gap could be bridged through about $2bn lower current account deficit than estimated in the SBA while a positive signalling from the IMF and bilateral lenders along with SIFC flows could minimise the gap in the second half of the current fiscal year.

Informed sources said the mission had raised at the policy-level talks matters relating to SIFC-led policies since the authorities anticipate an important part of the foreign inflows through this initiative. Therefore, questions pertained to the treatment of investment inflows and the kind of tax exemptions and their financing impact, but the underlying message pertained to no more distortions in the investment and revenue policies.

They said the IMF mission had also impressed upon the authorities to keep a critical eye on the expansion of tax base and its quality and insisted that while the government and the FBR had robust plans about increasing the number of return filers, a major increase was appearing in the shape of zero-tax return filers.

“The focus should be on increasing taxpayers, rather than return filers, to improve revenue base,” an official summarised the IMF view.

The sources said the Fund had not demanded any new tax or increase in tax rate at this stage, but expanding tax net to retailers through fixed tax scheme, followed by improvement in real estate taxation, remained on agenda going forward.

In this regard, the FBR is reported to have already issued statutory orders on the sidelines of IMF talks under which it could notify any sector or specific area for installation of point of sale (POS) counters and related infrastructure that was currently limited to only tier-1 retailers.

Both sides have agreed on the trigger points for expanded taxation on retail sector and real estate in case of any shortfall, particularly in December, to take effect from Jan 1. The two sides have also discussed improvement in anti-money laundering operations and related legal framework covering trade-based money laundering.

The officials are hopeful about finalisation of memorandum of economic and financial policies before the mission’s departure. The two sides had convergence of views on restricted development spending during the current year, both at federal and provincial levels. The energy sector, including power and petroleum tariff adjustments and streamlining of regular adjustments, had taken care of circular debt flows.

The officials said the caretaker government had not only met the Fund’s requirement for no more government guarantees but had in fact over-performed by over Rs150bn by retiring some of the guarantees.

Published in Dawn, November 14th, 2023