The International Monetary Fund (IMF) has urged Pakistan to broaden its tax base by targeting untapped revenue sources, as the country grapples with challenges in expanding its tax collection.

The statement from the IMF came as its mission — led by Nathan Porter — concluded a staff visit to Pakistan from November 12 to 15, during which they reviewed the country’s economic progress.

The IMF mission also met senior officials from federal and provincial governments and the State Bank of Pakistan, as well as representatives from the private sector, the Fund’s statement said.

The Fund said the staff visits are standard practice for countries with semi-annual programme reviews and aim to engage with the authorities and other stakeholders on the country’s economic developments and policies and the status of planned reforms.

Since the visit was not anticipated, there were reports that the global lender’s visit would mean that the federal government would have to roll out a mini-budget; however, reports now suggest that such a move would not occur.

“We had constructive discussions with the authorities on their economic policy and reform efforts to reduce vulnerabilities and lay the basis for stronger and sustainable growth,” Porter said in a statement at the end of the visit.

The official added that the visiting delegation and the Pakistani authorities agreed on the need to continue prudent fiscal and monetary policies and revenue mobilisation from untapped tax bases, while transferring greater social and development responsibilities to provinces.

In addition, he said, structural energy reforms and constructive efforts are critical to restore the sector’s viability.

Porter further stated that Pakistan should take steps to decrease state intervention in the economy and enhance competition, which will help foster the development of a dynamic private sector.

“Strong program[me] implementation can create a more prosperous and more inclusive Pakistan, improving living standards for all Pakistanis.”

The IMF, meanwhile, said it was encouraged by the Pakistani authorities’ reaffirmed commitment to the economic reforms supported by the 2024 Extended Fund Facility (EFF).

The next mission associated with the first EFF review is expected in the first quarter of 2025.

‘Competitive energy sector market’

Dr Khaqan Najeeb, former Advisor to the Ministry of Finance, while commenting on the development, said that the IMF’s visit was an engagement for stock-taking of the first quarter’s quantitative results and ongoing structural benchmarks for reforms.

“The preliminary findings highlight the work needed on the perennial issues of broadening the tax base in 3 areas (agri income tax, retail and real estate) plagued with substantive tax gaps, and the need for devolution of finances to the provinces as envisaged in line with the 18th amendment,” he said.

Dr Khaqan stressed that the energy sector’s restructuring beyond pricing changes remains critical, coupled with a reduced footprint of the state, something which the country has found hard to do.

“The need for a competitive energy sector market has been an ongoing effort for years and has been emphasised by IMF yet again.

“The IMF engagement also highlights the importance of Pakistans’ fiscal consolidation and external buffers for sustaining macro stability,” Khaqan said.

The engagement may help ensure Pakistan authorities stay on course for meeting targets of first review in 1st quarter of 2025, he added.

Pakistan’s foreign exchange reserves have surged to cover two months’ worth of imports after the arrival of the first tranche from the International Monetary Fund’s (IMF) 37-month loan deal under the $7 billion Extended Fund Facility (EFF), Governor State Bank of Pakistan (SBP) Jameel Ahmed said on Wednesday.

In much-needed support for the country’s fiscally-challenged economy, the State Bank of Pakistan (SBP) received the first tranche of $1.03 billion (SDR 760 million) on Monday, September 30, 2024.

Pakistan had been working on implementing conditions deemed “strict” to complete the loan programme agreed to in July, which Prime Minister Shehbaz Sharif time and again hoped would be Pakistan’s last.

The liquid reserves now stand at $10 billion, providing much-needed stability to the country’s foreign exchange position.

“The foreign exchange reserves have stabilised, and we expect further improvements,” Ahmed said speaking at a banking conference.

He highlighted that the recent IMF disbursement has eased pressure on the rupee, ensuring a smooth supply of dollars in the market.

“[Overseas workers’] remittances have increased, and the supply of dollars has improved,” said Ahmed, noting that a decline in inflation has positively impacted monetary policy.

The governor expressed satisfaction over the government’s fiscal situation, which he said had also improved.

“The rate of borrowing from banks has decreased,” he further stated.

Dispelling the impression of a holdup in repayments to commercial banks, Ahmad said the government was not short of funds. “We are making early repayments of bank loans,” the governor said.

Ahmed also briefly outlined the central bank’s strategy to modernise Pakistan’s banking sector, underlining that promoting innovation in banking could spur economic growth.

“We aim to launch fully digital banking by 2025,” he said, noting that the initiative will enhance financial inclusion and accessibility for millions of Pakistanis.

The SBP governor further revealed plans to expand Small and Medium Enterprises (SMEs) financing, with a target to increase the current volume from Rs550 billion to Rs1.1 trillion over the next five years.

This will support small and medium-sized enterprises, key drivers of economic activity in the country.

As the popularity of digital banking continues to grow in Pakistan, Ahmed acknowledged the rising risks of online fraud.

“Banks have been warned to strengthen their cybersecurity measures,” he said, stressing the importance of safeguarding the growing number of users, which currently stands at 12 million for mobile banking and was increasing at an annual growth rate of 70%.

The central bank governor pointed out that branchless banking was already serving 59 million customers, while the use of mobile and internet banking continues to surge, with internet banking growing at 30% annually.

The governor also highlighted the phenomenal success of Raast, Pakistan’s digital payments platform, which has so far processed transactions worth Rs19 trillion since its launch in 2021.

“Daily transactions on Raast now exceed 2.5 million, and the system is being linked with Middle Eastern software to facilitate low-cost remittances for overseas Pakistanis,” Ahmad noted, adding, “This will make it easier and cheaper for expatriates to send money back home.”

Citing the SBP’s ongoing push towards a more modern, digital-driven banking environment, Governor Ahmed said that innovation was the future of banking and a key factor in Pakistan’s economic development.

State Bank of Pakistan (SBP) on Friday received the first tranche of SDR 760 million (equivalent to $1.0269 billion) from the International Monetary Fund (IMF) under the $7 billion Extended Fund Facility (EFF).

The IMF Executive Board approved a 37-month programme on Wednesday.

These inflows will be reflected in SBP liquid reserves to be released on Thursday, September 30, 2024, the central bank said in a statement.

Following the long-awaited approval, the IMF said the new programme would require “sound policies and reforms” to strengthen macroeconomic stability and address structural challenges alongside “continued strong financial support from Pakistan’s development and bilateral partners”.

Pakistan had been working on implementing conditions deemed “strict” to complete the loan programme agreed to in July, which Prime Minister Shehbaz Sharif time and again hoped would be Pakistan’s last.

Though, the country’s economy has stabilised since it came close to defaulting last summer, it is dependent on IMF bailouts and loans from friendly countries to service its huge debt, which swallows up half of its annual revenues.

“There will be transitional pain, but if we are to make it the last programme, then we have to carry out structural reforms,” Finance Minister Muhammad Aurangzeb said.

The IMF said in a statement it would issue an “immediate disbursement” of around $1 billion.

“This past year has seen a very welcome return to economic stability in Pakistan,” IMF Pakistan mission chief Nathan Porter told reporters on Thursday.

“The challenge confronting Pakistan now is to move beyond this renewed sense of stability and towards stronger and sustained growth, with its benefits shared more broadly and evenly across society,” he added.

Speaking on the sidelines of the United Nations General Assembly in New York on Wednesday, Prime Minister Shehbaz Sharif said the deal came through thanks to the “tremendous support” of Saudi Arabia, China and the United Arab Emirates.

“In the final phase (of negotiations), the IMF’s conditions were related to China. The way the Chinese government supported and strengthened us during this time is something I am truly grateful for,” he told reporters shortly before the deal was announced.

Last month, Aurangzeb had said Pakistan was negotiating a $12 billion loan reprofiling from bilateral lenders.

The amount comprised $5 billion from Saudi Arabia, $4 billion from China and $3 billion from the UAE for a three- to five-year period.

Porter said all three countries had “provided significant financing assurances,” beyond these commitments to rolling over the $12 billion in existing loans.

‘Formidable’ vulnerabilities

Kaiser Bengali, a Pakistani economist, said the deal “will help us pay back our immediate debts, but nothing more.”

“The only economic reforms that we are required to implement is more taxes. There is no progress on reducing government expenditures,” he told AFP.

At the end of 2023, Pakistan — long locked in a cycle of overlapping political and economic crises — had amassed a total debt of more than $250 billion, or 74% of GDP, according to the IMF.

About 40% of its debt is owed to external creditors in foreign currencies. Its biggest single foreign creditor is China and Chinese commercial banks, at just under $30 billion, followed by the World Bank at more than $20 billion, according to the report.

Last year the country came to the brink of default as the economy shrivelled amid political chaos following catastrophic 2022 monsoon floods and decades of mismanagement, as well as a global economic downturn.

It was saved by last-minute loans from friendly countries as well as an IMF rescue package.

Islamabad wrangled for months with IMF officials to unlock the latest loan, which came on the condition of reforms including hiking household bills to remedy a permanently crisis-stricken energy sector and raising pitiful tax takings.

In a nation of more than 240 million people where most jobs are in the informal sector, only 5.2 million filed income tax returns in 2022.

The IMF said Pakistan “has taken key steps to restoring economic stability with consistent reforms”. But “despite this progress, Pakistan’s vulnerabilities and structural challenges remain formidable”, it warned.

“A difficult business environment, weak governance, and an outsized role of the state hinder investment, which remains very low compared to peers,” it added.