Trust deficit cited as cause for delay in staff-level agreement with IMF

A delay in finalizing the staff-level agreement (SLA) for Pakistan’s ongoing Extended Fund Facility (EFF) from the International Monetary Fund (IMF) is largely attributed to a trust deficit between the two sides, Business Recorder reported. 

According to the report, although the IMF has expressed satisfaction with the macroeconomic data shared by Pakistan, the Fund remains focused on ensuring that the upcoming budget for fiscal year 2025-26 aligns with its guidelines. Key issues under review include energy sector reforms, progress on the privatisation plan, and addressing the losses of state-owned enterprises (SOEs).

The virtual talks over the next few days are expected to cover new tax measures for the next fiscal year, further energy reforms, and steps taken towards privatizing state-owned entities. 

While the Finance Ministry and FBR officials expect the staff-level agreement to be signed soon, they noted that the IMF Executive Board’s approval might be delayed until certain prior conditions are met. 

As per the report, this follows a similar pattern to last year’s negotiations, when a staff-level agreement was reached two months after the initial discussions, contingent upon approval from the IMF Board and necessary financing assurances from Pakistan’s development partners.

The IMF is likely to insist on additional revenue-generating measures in the next budget, including the implementation of the Retailers Registration scheme, the removal of exemptions, and wider tax documentation. 

However, discussions also indicated the possibility of reducing the revenue target for the year from Rs12.9 trillion to Rs12.3 trillion. Proposals to cut taxes on beverages, tobacco, and real estate to boost revenues were not accepted by the IMF, which instead focused on the need for stronger measures.

Additionally, the IMF has pressed for significant progress on the privatisation of SOEs, particularly those incurring losses, such as Pakistan International Airlines (PIA) and various power distribution companies. 

The Fund emphasised that these privatisation efforts, alongside broader power sector reforms, would be essential to improving efficiency and alleviating the fiscal burden on Pakistan’s finances.

The IMF has also shared the draft of the Memorandum of Economic and Financial Policies (MEFP) with Pakistani authorities to build consensus, which could lead to a staff-level agreement under the $7 billion Extended Fund Facility.

The Fund has expressed willingness to offer some relief for the construction and real estate sectors, though it remains uncertain whether these incentives will be implemented immediately or included in the 2025-26 budget.