Govt mulls seeking relaxation in FY27 budget framework from IMF

• Govt aims relaxation in targets related to primary balance.
• Might request IMF to allow higher fiscal deficit target in next budget.
• Will cut super tax for manufacturing sector subject to IMF's not.

ISLAMABAD: In a move aimed at spurring sluggish economic activities, the government is mulling various options to convince the International Monetary Fund (IMF) to secure relaxations on different macroeconomic and fiscal frameworks for the next budget 2026-27, The News reported on Wednesday.

This thinking among policymakers has surfaced in the context of increasing criticism over the IMF's Extended Fund Facility (EFF) that suffocated growth by increasing the tax burden and hike in electricity and gas tariffs.

With the lenient conditions of the IMF, the government wants the revival of economic growth, attracting investment, reducing unemployment and poverty, cutting power tariffs, offering tax incentives and creating room for a reduction in the policy rate.

The government plans possible relaxation in targets related to the primary balance and provincial budget surpluses in the next fiscal year 2026-27.

The government might request the IMF to allow a relatively higher fiscal deficit target in the upcoming budget to create fiscal space for growth-oriented measures.

After completing two years in office, the government has now started moving seriously towards allowing the economy to grow during the third year of its tenure, to achieve economic growth of 5 to 6%.

Prime Minister Shehbaz Sharif has instructed the Ministry of Finance and the Federal Board of Revenue to fully cooperate with the business community to help attract domestic and foreign investment.

Four key proposals have been discussed, with the government's foremost priority being export-led growth. The prime minister has also expressed concern over the trade deficit recorded during the July to December period of the current fiscal year.

The second major proposal focuses on boosting investment by exploring all possible opportunities. The Special Investment Facilitation Council has been tasked with taking concrete measures to increase investment.

Another proposal under consideration is a further reduction in power tariffs to provide industry with a competitive edge in international markets. The government is also seeking fiscal space to offer tax incentives.

According to the draft of the industrial policy, a decision has been made to reduce super tax for the manufacturing sector, but it will be implemented subject to the approval of the IMF. Under the new industrial policy, the government has decided to lower the super tax rate for manufacturing.

Under the proposed reforms, the super tax rate for the manufacturing sector will be gradually reduced to 5% over four years, while the tax will be abolished in the fifth year if a primary surplus is achieved.

Approval of the industrial policy from the IMF is still pending.

It has also been proposed to increase the minimum income threshold for the manufacturing sector, subject to a super tax from Rs200 million to Rs500 million.

Similarly, the threshold for imposing a 10% super tax is proposed to be raised from Rs500 million to Rs1.5 billion, while the super tax rate will be halved over the next four years.

Another proposal under consideration is to leverage the decline in inflation to cut the policy rate, making credit more accessible for the private sector.

The government also wants banks to be given specific lending targets to improve private sector credit flows, especially to the SME sector.