Budget delayed as IMF talks remain inconclusive

Discussions between Islamabad and the International Monetary Fund (IMF) have remained inconclusive, causing the federal government to delay the announcement of the budget till June 10. The IMF will reportedly continue to engage with relevant authorities over the fiscal year (FY) 2025-26’s budget in the coming days.

The series of Pak-IMF high-level policy talks began on May 19 in Islamabad, and according to reports, both sides failed to reach an agreement on the budget by the end of the mission.

However, the IMF’s Pakistan mission chief, Nathan Porter, described the discussions to be “constructive”. Moreover, he asserted that IMF will remain locked in talks with Pakistani authorities until an agreement is reached for the nation’s federal budget for the upcoming FY.   

He also revealed that the talking points included avenues to boost government revenue and to “prioritise expenditure”. The federal government could attempt to expand the tax net while simultaneously increasing compliance with tax laws.

Reports indicate that a multitude of businesses do not comply with laws surrounding taxation. This problem is especially pronounced in the cigarette manufacturing sector, where the government loses out on a staggering Rs300 billion in revenue because of tax evasion. 

According to Nathan Porter, the discussions also went over “budget proposals and broader economic policy, and reform agenda”. Reports reveal that the aforementioned reforms are to be funded by the 2025 Resilience and Sustainability Facility (RSF) package along with other economic goals falling under funding provided by the 2024 $7 billion Extended Fund Facility (EFF) program. 

Reports cite Porter describing Islamabad’s commitment to aim for a surplus amounting to 1.6 percent of the Gross Domestic Product (GDP) for FY 2025-26. To achieve this, the federal government will have to prioritise government expenditures and ensure an increase in revenue to consolidate its fiscal position.

In a separate development, Minister for Power Sardar Awais Ahmad Khan Leghari received a delegation from the World Bank earlier this week to discuss reforms that are currently in progress. These reforms were in line with those recommended by the IMF, as Islamabad intends to substitute broad subsidies with those that offered support to a targeted segment, which could help with fiscal consolidation. 

Porter outlined the importance of Pakistan’s inflation rate remaining within a band of five to seven percent in the medium term. The State Bank of Pakistan (SBP) is responsible for targeting the optimal inflation rate in the economy and, as such, has been recommended to ensure that its policies are “data-dependent”.

Porter also highlighted the importance of allowing the exchange rate to fluctuate as it will allow Pakistan to grow resilient to “external shocks”. Currently, the rupee is subject to a managed float regime which allows for the SBP to intervene to insure that the rupee does not face significant depreciation. However, this puts pressure on the SBP’s reserves.