The International Monetary Fund (IMF) announced a new $7 billion loan agreement with Pakistan to support its struggling economy.
In return, Islamabad agreed to implement additional unpopular reforms, including expanding the country’s persistently low tax base.
The government also committed to ensuring an “underlying general government primary surplus of 1% of GDP,” according to the IMF announcement.
Despite objections from the Ministry of Planning, the Ministry of Finance has decided to limit federal funding for development and recurrent expenditures to meet the IMF’s primary surplus targets, as part of a newly approved $7 billion bailout package.
The Ministry of Finance issued new notifications stating that only 15% of funds for approved development projects will be authorized in the first quarter (July-September) of the current fiscal year. This will be followed by 20% in the second quarter (October-December), 25% in the third quarter (January-March), and 40% in the fourth quarter (April-June).
On the other hand, the recurrent budget for divisions, attached departments, subordinate offices, and other entities will be released at a rate of 20% for the first quarter, 25% each for the second and third quarters, and 30% for the fourth quarter.
The Ministry of Planning protested this decision in writing to the Annual Plan Coordination Committee and National Economic Council last month. Nevertheless, last week, the Ministry of Finance issued fresh instructions to maintain tight control over disbursements, ensuring space for expenditure cuts in May-June if revenue collection falls short.
The budget release process was initially shortened under the PTI government for quicker disbursements, allocating 20% of funds in the first quarter, 30% each in the second and third quarters, and the remaining 20% in the last quarter.
The Ministry of Finance altered the policy last year to meet the IMF’s primary cash surplus target, resulting in a reduction of more than Rs230 billion in development expenditures, lowering the amount to about Rs727 billion by the end of the 2023-24 fiscal year, compared to the budgetary allocation of Rs950 billion.
Pakistan grappling with soaring inflation
Pakistan is grappling with soaring inflation and the government has committed to several reforms, including increasing tax revenue by nearly 40% in the 2024-25 fiscal year, starting July 1.
Finance Minister Muhammad Aurangzeb has vowed to increase taxpayer numbers through measures like blocking mobile phone SIM cards and restricting travel for non-filers. The government also aims to reduce its fiscal deficit by 1.5% to 5.9% in the coming year, as demanded by the IMF. Despite these measures, half of the government’s income in 2024 will go toward servicing its $242 billion foreign debt.