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Pakistan reaches ‘Broad agreement’ with IMF to end uncertainty

Pakistan reaches ‘Broad agreement’ with IMF to end uncertainty

With the government agreeing to reinstate the tax on individuals earning up to Rs100,000 and the petroleum levy as of July 1, Pakistan on Tuesday announced a “broad agreement” with the International Monetary Fund (IMF) on the budget for the following year, which has seen its size increase to Rs9.9 trillion.

The two sides have agreed to progressively implement a Rs50 per litre petroleum charge, with the first instalment starting in July at Rs10 per litre and increasing to Rs5 per litre in August, reaching the maximum level of Rs50 per litre by March 2023.

Finance Minister Miftah Ismail spoke to a group of media, “We have sealed the budget for fiscal year 2022–23 in conjunction with the IMF and the Fund will now consult with the State Bank of Pakistan on monetary targets.” Following a final round of discussions with Nathan Porter, the IMF Mission Chief, the minister stated.

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The budget would be larger than the one the finance minister released on June 10 by about Rs400 billion, bringing the total to Rs9.9 trillion. Ismail presented a budget of Rs. 9.5 trillion, which was only 4% more than the amended budget for current fiscal year.

The overall primary budget surplus goal of Rs152 billion (revenues excluding interest expenses) has not changed. The overall budget deficit target, which is Rs3.8 trillion or 4.9 percent of GDP, is likewise unchanged.

The objective set by the Federal Board of Revenue has been raised from Rs7 trillion to Rs7.440 trillion, a 24 percent growth rate that shouldn’t be an issue given the high double-digit inflation rate.

The government also decided to impose an income support levy of 1% on individuals and businesses with annual incomes of Rs 150 million, 2% on those with incomes of Rs 200 million, 3% on top of that for those with annual incomes of Rs 250 million, and 4% for those with annual incomes of Rs 300 million.

The government had suggested a 2 percent levy in the budget, but it would only apply to people making over Rs300 million a year.

The government was forced to accede to the IMF’s demand to maintain the yearly tax exemption ceiling at Rs 600,000. Up to Rs1.2 million in annual income was recommended to be free from taxation in the budget.

However, Ismail gave in to the IMF’s demand on Tuesday and agreed to levy a 2.5 percent income tax on anyone who earn between Rs600,000 and Rs1.2 million annually. Even yet, the rate is still just half of what persons in this salary range are now paying.

The tax rates for the higher income tax brackets will also increase dramatically. With the central bank, the IMF will now finalise the targets for net foreign assets, net domestic assets, net international reserves, and current account deficit. The Memorandum for Economic and Financial Policies (MEFP) was expected by the finance ministry on Monday.

Although the broad agreement falls short of a staff level pact, it might help calm markets and put an end to a four-month period of uncertainty that had a negative impact on the nation’s currency, caused a wave of inflation, and weakened investor and market confidence.

The Pakistan Tehreek Insaf, which made numerous attempts to achieve an agreement but was unsuccessful, and the coalition government led by the PML-N, which took longer than expected to reach an agreement, both suffered political setbacks as a result of the delay.

After the government agreed to increase the tax target to Rs7.44 trillion and alter some expenses, Finance Minister Miftah Ismail had planned to reach an agreement with the IMF in the next day or so.

Additionally, the IMF has backtracked on its earlier proposal to begin enforcing a Rs. 30 per litre petroleum levy and a 10.5 percent sales tax on July 1st.

Both parties have agreed that the Rs10 per litre petroleum charge will take effect on July 1 and will then grow by Rs5 each month until it reaches the maximum of Rs50 per litre. The petroleum goods will not immediately be subject to the GST.

By making the budget statistics more realistic by accounting for the cost of salaries and pensions and allocating approximately Rs200 billion for emergency spending, the budget’s size increased to Rs9.9 trillion.

Instead of the Rs530 billion that was initially recommended on June 10th, the pension budget has now been boosted to Rs609 billion. From Rs550 billion on June 10th, the cost of maintaining the civilian government has grown to Rs600 billion.

The IMF declined the government’s request for funding to raise Rs 200 billion for the Gas Infrastructure Development Cess since the topic is in dispute and is the subject of litigation.

Since the IMF backed out of the negotiations in March of this year over the previous administration’s decision to offer gasoline subsidies and announce yet another tax amnesty programme, the seventh evaluation of the programme has not been completed. $3 billion of the $6 billion has not yet been spent. Miftah, the finance minister

Ismail said that he had asked the IMF to extend the program’s $8 billion budget and June 2019 start date. Gas prices and electricity rates will also increase.

The IMF board must approve both the broad agreement and any subsequent staff level agreement. However, the administration would need to submit a revised budget to Parliament for approval, along with the Finance Bill 2022. To be effective as of July 1st, the budget must be approved before the end of the month.

The Pakistani rupee lost more ground versus the dollar on Tuesday, reaching an interbank close of Rs211.52. A lack of US dollars on the market forced the central bank to implement restrictions on letter of credit opening.

The sources claimed that the United States government, the IMF’s largest shareholder, also contributed favourably to persuading the organisation to shift its stance on Pakistan.

The new tax goal for the FBR is based on an average exchange rate of Rs212 to $1. To close the fiscal framework’s gap, the FBR has set a new tax target of Rs7.440 trillion.

The finance minister anticipates that the currency devaluation will increase tax collection, hence the objective has been increased by around Rs436 billion.

RELATED: Dollar surge to record record Rs 212 amid delay in IMF Deal

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Sibtain Ali is a Senior Editor Business at Pakistan Lounge and joined in October 2021. Formerly business editor at a renowned International News website

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