In a recent staff report by IMF related to the Rapid Financing Instrument (RFI) to Pakistan, it was revealed that the tax revenue collection target for Pakistan has been revised by Rs. 892 million. The IMF approved $1.38 billion rapid financing support for Pakistan under RFI to deal with economic crisis under the pandemic of Covid-19. However, at the same time, the IMF paused payments under the $6 billion Extended Fund Facility (EFF) due to RFI and lack of fiscal readjustments as required by IMF. To replace IMF’s EFF support, China has stepped into the scene with bilateral loan of $6.3 billion to Pakistan for a period of 12 months.
EFF Program under IMF
The Extended Fund Facility (EFF) by IMF was first availed by Pakistan in 2013. The main aim of this facility is to provide financial cushion to struggling economies to strengthen their macroeconomic and structural policies, reduce account imbalances, take steps for economic growth and thus, create employment opportunities. However, IMF also provides a detailed framework of structural improvements and policies that can help build the economy in long term. For Pakistan, IMF gave several targets for expanding tax bracket, address all circular debts and create balance of payments.
Pakistan fails to meet IMF targets
The IMF in its report observed that Pakistan has failed to achieve most of its targets set by IMF for macroeconomic readjustments under the economic restructuring program. The revenue collection by FBR remains well below its yearly target of Rs. 5.5 trillion. In light of economic stress of prevailing virus, IMF has revised FBR’s tax collection target to 3.9 trillion. The direct tax collection is revised from Rs. 1.9 trillion to Rs. 1.6 trillion while sales tax is reduced from Rs. 1.85 trillion to 1.42 trillion.
Moreover, around Rs. 1.6 trillion revenue was expected from gains in privatization of selected public sector entities that are reporting continuous losses from past decades. Under various circumstances and now due to Covid-19 crisis, the government is unable to privatize public sector entities and therefore, loses an opportunity for gain in revenues. Due to failure to meet these targets, IMF halted payments from the EFF program and focused on relief under RFI instead.
China to Pakistan’s Rescue – Offers $6.3 billion bilateral loan
In order to fill up for fiscal deficit and economic crisis in Pakistan, China offers a bilateral loan facility to Pakistan for $6.3 billion. IMF reiterated that the loan from China will help Pakistan cover up its exposures from the crisis while EFF program will be paused for time being and contract will remain intact. IMF also clarified that RFI is not a replacement for EFF and that the creditor will keep other creditors like China and Saudi Arabia dedicated to the support of countries in need during this time of crisis. The financial support from international bilateral lenders is extremely crucial for Pakistan at this time. China’s support to extend loan facility instead of EFF has brought Pakistan to financial coverage of more than $20 billion loans through IMF, China and G20 relief.
