Islamabad: The people of Pakistan should brace for more taxes as carbon levy is on the cards following a fresh deal of USD 1.3 billion with the International Monetary Fund (IMF) to tackle climate change, officials said.
Under the Staff-Level Agreement (SLA) with the fund Wednesday, the lender also agreed to release the second tranche of about USD 1 billion under the already agreed USD 7 billion loan.
“The IMF team has reached a SLA with the Pakistani authorities on the first review of the 37-month Extended Arrangement under the Extended Fund Facility (EFF), and on a new 28-month arrangement under the IMF’s Resilience and Sustainability Facility (RSF) with total access over the 28 months of around USD 1.3 billion,” the Fund said in a statement.
With the latest RSF arrangement, the combined volume of IMF loan rises to about USD 8.3 billion and approval by the IMF’s Executive Board, the country would have immediate access to about USD 2 billion, which would help to shore up its balance of payment.
But the largesse by the lender comes with a price age for the already tax-burdened masses, as the government agreed to introduce a new carbon levy, increase water pricing, and open up the automobile sector to global trade, reported Dawn.
The only silver lining for the common people is the expected reduction in the power rate, but that is not free either, as the fund allowed the government to divert the already introduced petroleum levy to reduce power tariffs.
Senior officials privy to the SLA entailing the Memorandum of Economic & Financial Policies (MEFP) told the paper that about Rs 7 per unit reduction in average electricity rates would be announced by the prime minister in a few days, but with effect from April 1, 2025.
Other major steps — carbon levy, water pricing and automobile protectionism — would be gradual, with implementation starting from July 1, 2025. The overall fiscal consolidation will continue in the upcoming budget through a reduction in energy subsidies and tight development spending.
Officials said the government had requested a reduction in the GST rate on electricity to bring down costs. The IMF did not allow any more distortions in the GST system but allowed the use of a higher petroleum levy to compensate for power tariffs.
A Rs 10 per litre increase in the petroleum levy was estimated to provide a roughly Rs 1.80 per unit cushion. The combined impact of savings from all power purchase agreements and pending quarterly tariff adjustments would mean about Rs7 per unit reduction in the overall rate, to be announced by the prime minister on a date of his choice.
Officials said the government has committed to introducing a carbon levy on all hydrocarbons, including petroleum products and coal, starting with Rs 3-5 per litre or equivalent. This will gradually increase. The revenue will be spent on specific climate-related expenses.
Average trade tariffs (such as customs duties) for the automobile sector would also be reduced from about 10.5 pc to 6 pc from now on to FY 2030. Both the IMF and the authorities agreed that the auto sector had enjoyed too much protection for far too long, and this should end.
The cabinet approvals for these two measures would be shared with the IMF and then introduced through the finance bill 2025-26 for implementation with effect from July 1, 2025. Water pricing would also be approved in consultations with the provinces and be dealt with separately, sources said.
The IMF appreciated the significant progress made by Pakistan over the past 18 months in restoring macroeconomic stability and rebuilding confidence despite a challenging global environment.
While economic growth remains moderate, inflation has declined to its lowest level since 2015, financial conditions have improved, sovereign spreads have narrowed significantly, and external balances are stronger.
The authorities are on track to achieve an FY25 underlying primary surplus of at least 1pc of GDP and are committed to sustaining consolidation in the FY26 budget. While refraining from increasing current spending beyond that budget, the government would further reduce energy subsidies and prioritise development spending.
The government would continue to enhance revenue mobilisation, spending efficiency and transparency, and broaden the tax base. Agriculture Income Tax (AIT) regimes in the provinces for implementation with effect from July 1, 2025, and greater fiscal devolution in FY26 would be ensured.
Pakistan also committed to maintaining an appropriate tight monetary policy based on data to ensure inflation remained anchored within the State Bank of Pakistan’s (SBP) medium-term target range of 5–7pc and also to preserve “a fully functioning foreign exchange market to support exchange rate flexibility while rebuilding FX reserve buffers”.
Under the RSF, the government will strengthen public investment processes across all levels of government to prioritise projects that enhance disaster resilience; improve the efficiency of scarce water resource usage; enhance intergovernmental coordination on disaster financing; improve information architecture and disclosure of financial and corporate climate-related risks; and promote green mobility to mitigate significant pollution and adverse health impacts, reported Dawn.
