Pakistan has managed to comply with three out of five major fiscal conditions set by the International Monetary Fund for the release of the next $1 billion loan tranche, largely supported by elevated interest rates and robust petroleum levy collections. However, the country has failed to make progress on broadening the tax base, with the Federal Board of Revenue emerging as the weakest link in meeting IMF-mandated revenue targets, according to official fiscal data.
The Ministry of Finance’s fiscal operations summary for July to December of the current fiscal year, released on Friday, shows that the government achieved the overall primary budget surplus, secured a provincial cash surplus, and met the provincial tax revenue target. At the same time, it missed two critical IMF benchmarks related to increasing total FBR tax collection and generating additional income tax from retailers, Associations of Persons, and corporate entities.
Despite multiple revisions to revenue targets, the FBR failed to meet even the downward-adjusted collection goal of Rs6.49 trillion during the first half of the fiscal year. The shortfall of Rs330 billion against the IMF benchmark has raised concerns within both government and multilateral circles. Income tax collection from the retail sector was particularly weak, with the FBR unable to generate the targeted Rs366 billion despite policy adjustments and enforcement efforts.
Several initiatives introduced under FBR Chairman Rashid Langrial have either been delayed or faced resistance from influential pressure groups, limiting their impact. The failure of the Tajir Dost Scheme further undermined efforts to bring retailers into the formal tax net, highlighting long-standing structural challenges in documenting large segments of the economy.
In an effort to improve outcomes, the government and the IMF agreed to redefine the target base from individual retailers to the broader retail sector. Under this revised framework, income tax collected from entities such as power distribution companies and telecommunication firms was also counted as retail sector taxation. Even with this adjustment, revenue performance remained well below expectations, underscoring the depth of the tax compliance issue.
Finance Minister Muhammad Aurangzeb acknowledged last week that expanding the tax base has proven difficult under current conditions. Meanwhile, the FBR chairman reportedly sought an in-camera briefing to disclose the names of individuals and groups he believes are obstructing enforcement actions, reflecting the political and institutional constraints facing tax reforms.
The fiscal summary indicates that Pakistan’s compliance with IMF targets during the first half of the year relied heavily on non-tax revenue sources. Profits transferred by the State Bank of Pakistan and petroleum levy collections played a central role in meeting surplus targets. High interest rates boosted central bank earnings, allowing the federal government to book an estimated Rs2.42 trillion in annual SBP profits within the first six months.
As a result, against a primary surplus target of Rs3.2 trillion, the federal government reported a surplus of Rs4.1 trillion, equivalent to 3.2 percent of gross domestic product. Petroleum levy collections also surged, with Rs823 billion generated from petrol and diesel consumption across income groups, including users of motorcycles, small cars, tractors, and rickshaws.
However, the central bank has cautioned that achieving the full-year primary surplus target will remain challenging. While higher interest rates support government cash flows through increased SBP profits, any future reduction in rates could compress this revenue stream.
Provincial governments outperformed expectations during the first half, collectively generating a cash surplus of Rs1.18 trillion compared to the target of Rs752 billion. They also collected Rs569 billion in revenue, exceeding the Rs488 billion benchmark, reflecting the fiscal flexibility provinces enjoy under the National Finance Commission award.
Between July and December, provincial governments spent approximately Rs3.5 trillion, including Rs950 billion in development expenditure. Total provincial revenue reached Rs4.7 trillion, with Rs3.6 trillion coming from their share in federal taxes. Punjab recorded a surplus of Rs609 billion, Sindh Rs353 billion, Khyber-Pakhtunkhwa Rs175 billion, and Balochistan Rs42 billion. Each province also reported statistical discrepancies, largely linked to changes in commercial bank deposits.
Pakistan has committed to nearly 50 conditions under the $7 billion IMF programme, including a requirement for provinces to generate a combined cash surplus of Rs1.5 trillion during the current fiscal year. Multiple fiscal benchmarks remain in place ahead of the third review talks related to the fourth $1 billion loan tranche.
On the expenditure side, the federal government spent Rs7.1 trillion in the first half of the fiscal year, with current expenditures accounting for Rs6.8 trillion. Interest payments totalled Rs3.6 trillion, lower than last year due to reduced rates. Defence spending stood at Rs1.04 trillion, civil government operations cost Rs380 billion, pension payments rose to Rs504 billion, and Rs71 billion in statistical discrepancies were recorded. After distributing the provincial share, the federal government’s net income stood at Rs6.4 trillion, largely driven by central bank profits and petroleum levy collections.
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