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

Pakistan IMF bailout: Pakistan and the 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 the country's benchmark share index .KSE to a record high.The deal caps negotiations that started in May after Islamabad completed a short-term, $3 billion programme that helped stabilise the economy, avert a sovereign debt default, and set challenging revenue targets in its budget to get IMF approval.The benchmark share index has almost doubled since Pakistan signed its last SLA for the $3 billion standby arrangement, and is up more than 10 per cent since Pakistan presented its annual budget."The market has grown used to the IMF deal being a highly politicized, news event and the IMF asking Pakistan to do more. This time it was a silent agreement between the government and the IMF staff," said Adnan Sami Sheikh, assistant vice president of research at Pak Kuwait Investment Company.The new agreement introduced increased tax on agricultural incomes, underscoring the need to increase government revenue and reduce recurrent deficit to win the lender's approval.The IMF said it had got assurances from Pakistani authorities - provincial and federal - that they would bring taxation on agricultural incomes on par with corporate and other tax rates.Agricultural income has historically been taxed much lower than other sectors, despite contributing 23 per cent to the GDP, employing 35 per cent of the labour force, and bringing in an annual income of around 9 trillion Pakistani rupees ($32.37 billion).Under the IMF deal, the highest effective tax rate can rise to as much as 45 per cent from the current 15 per cent. It will be implemented from 2025, a move that was termed "unprecedented" by brokerage and investment banking firm JS Global."These changes could contribute to inflation, particularly in food prices, affecting consumers nationwide," said Ghasharib Shaokat, head of product at Pakistan Agriculture Research, adding 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 their popularity among the rural voter base, said Vaqar Ahmed of the Sustainable Development Policy Institute, a think tank."Most of the 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 leader, 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 decades, leading to 22 IMF bailouts since 1958. Currently the IMF is fifth-largest debtor, owing $6.28 billion as of July 11, according to the lender's data.The latest economic crisis has been the most prolonged and has seen the highest ever levels of inflation, pushing the country to the brink of a sovereign default last summer before an IMF bailout.The conditions of the programme have become tougher. The latest bailout is aimed at cementing stability and inclusive growth in the crisis-plagued South Asian country, the IMF said.A source close to negotiations with the IMF told Reuters that the agriculture income tax was agreed weeks ago, but was deliberately not highlighted by the government because of the sensitivity of the matter.The IMF has said the SLA agreement is subject to approval by its executive board and the 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, the United Arab Emirates and China.

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

The new agreement introduced increased tax on agricultural incomes, underscoring the need to increase government revenue and reduce recurrent deficit.

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