Govt expected to enact strict fiscal reforms to secure IMF loan tranche

Islamabad may have to strictly follow a contractionary fiscal policy to appease the International Monetary Fund’s (IMF) delegation that is currently visiting Pakistan. As per reports, lawmakers and authorities alike are considering cutting back on government expenditures during the last quarter of fiscal year (FY) 2024-25 in an attempt to meet targets set by the international lender.

The stakes are high for cash-strapped Pakistan as the delegation will decide if Islamabad’s efforts warrant the disbursement of the next tranche of the Extended Fund Facility (EFF) program. If authorities can convince the IMF of its efforts, the international creditor may release a loan amount of $1.1 billion to Pakistan, which is vital for the recovery of the economy.

According to credible reports, Islamabad is planning to enact additional fiscal measures to boost revenue collection levels. These measures include a possible slashing of the Public Sector Development Program’s (PSDP) budget and boosting taxation revenues from real estate and retail sectors.

Reports claim that the federal government may also attempt to cover revenue shortfalls experienced in the first half of FY 2024-25 by enacting special emergency measures - which were agreed upon under the previous EFF program meeting.

Authorities have revealed the existence of a revenue gap which, in almost three-quarters of the current FY, has swelled to a staggering 600 billion rupees. While the government plans to plug this gap by boosting revenue, it may fall short as experts have already labelled the targets as ‘ambitious’ from their inception.

However, Islamabad needs to mobilize resources to plug the aforementioned gap, as reports claim that if left unattended, the shortfall may grow to a whopping one trillion rupees by the end of the fourth quarter of FY 2024-25.

As per reports, IMF officials expect Islamabad’s efforts to yield results at this stage of the loan program, which is realistically only possible by strictly following the road map the officials have laid out. However, many believe that revenue targets could be missed by even larger margins in the coming periods.

This is because the State Bank of Pakistan’s (SBP) exceptional profit levels augmented the country’s budget in the first half of FY 2024-25. The SBP has to dedicate a portion of its profits to the federal government. Moreover, petroleum levies have allowed the government to augment its income to meet targets.

While levies on petroleum are a stable source of income for the federal government, the same cannot be said for SBP profits – as interest rates have declined by 1000 basis points over the past seven months.