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The Pakistani government has made written commitments to the International Monetary Fund (IMF) to limit the powers of the Special Investment Facilitation Council (SIFC) and the Sovereign Wealth Fund. These measures are part of broader reforms to ensure greater accountability and transparency. Additionally, Pakistan has agreed to phase out all Special Economic Zones (SEZs) by 2035.
Limiting SIFC and Sovereign Wealth Fund Powers
In its agreement with the IMF, Pakistan promised to regulate the operations of the SIFC and the Sovereign Wealth Fund to avoid distorting the investment landscape. The SIFC, established to boost economic growth and facilitate foreign investment, will now operate under stricter governance rules. This includes preventing the council from offering tax incentives or other benefits that could undermine market competition.
Finance Minister Muhammad Aurangzeb signed the written commitments, ensuring that these bodies will adopt best practices in transparency and accountability. The government has also committed to aligning the Sovereign Wealth Fund with international standards, including establishing transparent appointment processes and ensuring competitive neutrality.
Phasing Out Special Economic Zones by 2035
Another major commitment is the phasing out of all SEZs by 2035. These zones were initially designed to attract foreign investment by offering various incentives. However, the IMF has emphasized the need to eliminate such incentives over time, citing concerns about their long-term sustainability and the distortion they create in the investment landscape.
This commitment is expected to impact the implementation of the second phase of the China-Pakistan Economic Corridor (CPEC), which relies on SEZs for development.
Mini-Budget and Tax Reforms
The IMF agreement also outlines that a mini-budget will be introduced if Pakistan’s revenue targets fall short by more than 1% of the agreed goal. The Federal Board of Revenue (FBR) already missed its first-quarter target by Rs90 billion. The shortfall will trigger additional tax measures, including higher taxes on professional services, imports of machinery and raw materials, and excise duties on beverages.
Pakistan will raise advance income taxes on machinery and raw materials by 1%, generate additional revenue through increased withholding taxes on services and contracts, and impose a 5% excise duty on sugary beverages.
Provincial Reforms and Agricultural Taxation
Pakistan has also agreed to harmonize provincial agricultural income tax laws with federal income tax regimes by the end of October 2024. The government expects this move to take effect by January 2025, aiming to improve tax collection and align agricultural taxation with other sectors.
Provincial governments will also phase out price-setting for agricultural commodities by 2026, limiting government intervention in markets and allowing private sector participation to flourish.
Public Sector Governance and Transparency
Reforms also include amending the Civil Servants Act by 2025 to mandate public access to the asset declarations of high-ranking officials and their families. The government will implement annual inflation adjustments to cash transfer programs by 2025 and enforce a revised legal framework for undercapitalized banks.
Moreover, by 2025, the government plans to prepare two power distribution companies for privatization and has already raised gas tariffs for in-house power generation.
Strengthening the Sovereign Wealth Fund
The government plans to amend the Sovereign Wealth Fund Act by the end of 2024 to ensure it aligns with international standards. The reforms will ensure that the SOEs under the SWF’s ownership govern themselves according to the SOE Act and follow transparent procurement processes.
The SWF will directly transfer all revenues from its operations to the government and will prohibit the use of its assets as collateral for public borrowing. These measures aim to enhance fiscal discipline and ensure the proper functioning of state-owned enterprises.
