Pakistan Signs National Fiscal Pact to Meet IMF Requirements

The recent signing of a National Fiscal Pact between the federal and provincial governments marks a significant step towards aligning Pakistan's fiscal policies with the requirements set forth by the International Monetary Fund (IMF). This comprehensive agreement, which encompasses a detailed 19-point agenda, aims to enhance fiscal discipline and foster collaborative governance across various levels of government. The pact is particularly crucial as Pakistan navigates the complexities of its economic landscape, especially in light of the $7 billion Extended Fund Facility (EFF) agreement with the IMF.

Involving the provincial governments of Punjab, Sindh, Khyber Pakhtunkhwa, and Balochistan, the Memorandums of Understanding were signed between June 27 and July 30 of this year. The primary objective of this fiscal compact is to streamline financial management and improve public administration throughout the country. By addressing a range of fiscal responsibilities, from tax reforms to strategic spending adjustments, the pact sets a framework that is expected to drive economic stability and growth.

One of the key features of the pact is the devolution of certain spending responsibilities from the federal government to the provincial governments, in accordance with the 18th Amendment. This shift empowers provinces to directly manage and fund critical sectors such as higher education, health, social protection, and infrastructure development. Furthermore, provinces are encouraged to enhance their internal revenue generation by improving the collection of sales tax on services, property tax, and agricultural income tax.

The agreement outlines several significant reforms related to revenue generation. For instance, provincial governments are required to amend their Agricultural Income Tax (AIT) frameworks to align with the Federal Personal Income and Corporate Income tax regimes by October 2024, with taxation under this new regime set to commence on January 1, 2025. Additionally, a transition from a positive list to a negative list approach for the services GST is planned for FY 2025-26, aimed at effectively combating tax evasion.

On the expenditure side, the pact stipulates that provinces will take full financial responsibility for Public Sector Development Program (PSDP) projects that exclusively benefit their regions. They will also contribute to federally supported initiatives, such as those of the Higher Education Commission (HEC), and are expected to increase their spending on health and education as a share of GDP.

Governance improvements are also a focal point of the agreement. The implementation of the Electronic Pakistan Acquisition and Disposal System (e-PADS) and the adoption of green budget tagging by June 2025 are among the initiatives aimed at enhancing transparency and efficiency. Moreover, the pact emphasizes the importance of digital transformation in government transactions and public record-keeping, which is expected to facilitate access to credit for underserved segments of the population.

The Ministry of Finance has highlighted that this comprehensive approach, once fully implemented, is anticipated to not only meet the IMF's stipulations but also significantly improve the fiscal management and governance landscape of Pakistan. This, in turn, is expected to ensure greater economic resilience and transparency, paving the way for a more stable and prosperous future for the nation.

The National Fiscal Pact represents a pivotal moment for Pakistan as it seeks to strengthen its economic foundations. By fostering collaboration between federal and provincial governments and implementing necessary reforms, the country is taking crucial steps towards achieving fiscal stability and sustainable growth. As these changes unfold, it will be essential for all stakeholders to remain committed to the principles of transparency and accountability, ensuring that the benefits of these reforms are felt by all citizens.