Pakistan clinches IMF bailout deal, agrees to raise tax on farm income

Pakistan IMF bailout: Pakistan and International Monetary Fund on Monday reached a staff level agreement (SLA) for a $7 billion, 37-month loan program with tough measures such as raising tax on farm income, sending country's benchmark share index .KSE to a record high.

deal caps negotiations that started in May after Islamab completed a short-term, $3 billion programme that helped stabilise economy, avert a sovereign debt default, and set challenging revenue targets in its budget to get IMF approval.

benchmark share index has almost doubled since Pakistan signed its last SLA for $3 billion standby arrangement, and is up more than 10 per cent since Pakistan presented its annual budget.

" market has grown used to IMF deal being a highly politicized, news event and IMF asking Pakistan to do more. This time it was a silent agreement between government and IMF staff," said nan Sami Sheikh, assistant vice president of research at Pak Kuwait Investment Company.

new agreement introduced increased tax on agricultural incomes, underscoring need to increase government revenue and reduce recurrent deficit to win lender's approval.

IMF said it h got assurances from Pakistani authorities - provincial and federal - that y would bring taxation on agricultural incomes on par with corporate and or tax rates.

Agricultural income has historically been taxed much lower than or sectors, despite contributing 23 per cent to GDP, employing 35 per cent of labour force, and bringing in an annual income of around 9 trillion Pakistani rupees ($32.37 billion).

Under IMF deal, highest effective tax rate can rise to as much as 45 per cent from current 15 per cent. It will be implemented from 2025, a move that was termed "unprecedented" by brokerage and investment banking firm JS Global.

"se changes could contribute to inflation, particularly in food prices, affecting consumers nationwide," said Ghasharib Shaokat, he of product at Pakistan Agriculture Research, ding that larger farmers will be affected more.

Inflation averaged close to 30 per cent in FY23 and 23.4 per cent in FY24, which ended on June 30.

Policymakers have long wanted to do this, but were unable because Pakistani governments do not want to risk ir popularity among rural voter base, said Vaqar Ahmed of Sustainable Development Policy Institute, a think tank.

"Most of good reforms for fiscal consolidation, unfortunately, have not come as a result of our own political will and have come as a result of external push," he said.

Prime Minister Shehbaz Sharif's government is also based on a weak coalition and faces political pressure of a popular jailed opposition leer, former premier Imran Khan.

But Sharif says his government is committed to tough but unavoidable reforms.

Pakistan has been struggling with boom-and-bust cycles for deces, leing to 22 IMF bailouts since 1958. Currently IMF is fifth-largest debtor, owing $6.28 billion as of July 11, according to lender's data.

latest economic crisis has been most prolonged and has seen highest ever levels of inflation, pushing country to brink of a sovereign default last summer before an IMF bailout.

conditions of programme have become tougher. latest bailout is aimed at cementing stability and inclusive growth in crisis-plagued South Asian country, IMF said.

A source close to negotiations with IMF told Reuters that agriculture income tax was agreed weeks ago, but was deliberately not highlighted by government because of sensitivity of matter.

IMF has said SLA agreement is subject to approval by its executive board and confirmation of necessary financing assurances from Pakistan's development and bilateral partners.

This would include rollovers or disbursements on loans from Pakistan's long-time allies Saudi Arabia, United Arab Emirates and China.