Pakistan has struggled to meet a key condition set by the International Monetary Fund (IMF) to generate a cash surplus of Rs342 billion from its four provincial governments. The shortfall, primarily attributed to Punjab’s lower-than-expected surplus in the first quarter of the fiscal year, reached Rs182 billion, or 53%, highlighting significant challenges in adhering to the $7 billion IMF agreement.

According to a report in the Express Tribune, Instead of achieving the target, the provinces collectively reported a cash surplus of only Rs160 billion, based on preliminary data from federal government sources.

On a positive note, the provincial governments succeeded in meeting another IMF requirement by collecting Rs213 billion in taxes during the July-September period, surpassing the target of Rs184 billion by Rs29 billion.

As part of the $7 billion Extended Fund Facility (EFF), Pakistan accepted around 40 conditions from the IMF. These include quarterly targets to promote fiscal discipline, reduce debt burdens, and rebalance relations between the center and provinces. The overall goal is to ensure external sector viability through debt rollovers.

For the current fiscal year, the provinces are expected to generate a total cash surplus of Rs1.217 trillion, with the initial quarter target set at Rs342 billion. However, they fell short, primarily due to Punjab’s inability to produce the required surplus, as the provincial government focused on retiring commodity-related commercial debts.

This marks the third major IMF condition that Pakistan has missed. The federal government also failed to meet its target of Rs2.652 trillion for the Federal Board of Revenue (FBR) and collected only around Rs1 million from traders under a new scheme instead of the planned Rs10 billion.

Concerns are mounting regarding the ambitious targets established under the IMF deal, with early results indicating challenges in meeting some of the 40 conditions.

Finance Minister Muhammad Aurangzeb recently stated that Pakistan is aiming for an additional $1 billion climate finance loan from the IMF.

Under the National Fiscal Pact, provincial governments committed to generating the necessary cash surplus and achieving other targets. The success of the $7 billion IMF deal now relies on improved fiscal performance from both federal and provincial levels.

An IMF staff report released this month noted that both federal and provincial governments agreed on the fiscal strategy and required surpluses, aiming for provincial surpluses of around 1% of GDP in fiscal year 2025. It also mentioned the need for provinces to enhance their roles in ensuring government surpluses through better revenue collection and expenditure management.

Sources indicate that the provinces spent Rs1.75 trillion in the first quarter, a significant increase of Rs427 billion (33%) year-on-year. These governments enjoy considerable fiscal flexibility due to increased revenues from the National Finance Commission (NFC) award.

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Of the total expenditures, about Rs1.22 trillion was allocated for current spending, representing a 28% increase compared to the previous year, while development spending reached Rs257 billion, a modest 4% rise.

Provincial revenues totaled Rs1.9 trillion, largely supported by federal transfers of Rs1.6 trillion, which saw a 44% increase compared to last year. Under the NFC award, provinces receive 57.5% of federal tax revenues. Additionally, the federating units independently raised Rs213 billion, marking a 22% increase. The provinces collected Rs122 billion in sales tax on services, a 15% rise, although stamp duty collections slightly decreased to Rs14.6 billion during the first three months of the fiscal year.