An International Monetary Fund (IMF) team conducted an unscheduled visit to Pakistan last week to assess the country’s progress on the terms of its $7 billion bailout package. The surprise visit, coming less than two months after the loan’s approval, has raised questions about the future of the bailout program. IMF staff are expected to present their findings to the Washington-based executive board for review.

What prompted the IMF’s unexpected visit to Pakistan?

Several officials, speaking to Nikkei Asia on condition of anonymity, highlighted key factors prompting the visit. These included a $685 million shortfall in the government’s tax collection target for the first quarter of the current fiscal year and a $2.5 billion deficit in the external financing required under the bailout terms. Compounding these issues was the failed sale of Pakistan International Airlines (PIA), a key component of the IMF-recommended privatisation drive.

While routine IMF program review visits are standard, the timing of this visit—just seven weeks after board approval—has raised concerns. “This suggests significant difficulties in implementing the program,” said Naafey Sardar, an economics professor at St. Olaf College in the United States, speaking to Nikkei Asia.

Ikram ul Haq, a lawyer specializing in economic and tax policy, added, “The reality is that the government’s promises to the IMF have not been fulfilled.”

What were the key issues discussed?

The IMF raised the issue of the tax gap and urged action to ensure that Pakistan meets its annual tax collection target of $46 billion.

Islamabad was also asked to engage with Saudi Arabia and China, the largest investor, to bridge the external financing gap. Promised energy sector reforms and the repayment of billions of dollars of debt owed to mostly Chinese-backed power plants in Pakistan were also discussed.

Another issue was for the IMF to press provincial governments for more funds, such as the Benazir Income Support Programme, which provides a $2.1 billion annual cash transfer for poverty alleviation, currently paid for by the central government.

How does agricultural income tax fit into this picture?

As part of the loan agreement, Pakistan’s provinces missed an end-October deadline to harmonize their agricultural income tax laws with the federal income tax.

The IMF had previously said that Pakistan’s loan agreement would be in jeopardy if agricultural income remained largely untaxed. During the meetings, provincial government officials told the IMF that they would face significant difficulties in implementing a higher tax.

Economist Aqdas Afzal said such a move would face significant opposition from big landowners, who are disproportionately represented in the federal and provincial assemblies.

“Given the weak mandate of the current government, a higher agricultural income tax is unlikely as it could trigger major social and political unrest,” he added.

What assurances has the government given to the IMF?

Pakistan has assured the IMF that it will increase the provincial agricultural income tax rate by up to 45 percent. It has also pledged to meet annual tax collection targets and to continue reforms in the energy sector and state-owned enterprises.

“This is an ongoing dialogue process and there have been discussions [with the IMF] on energy and SOE reforms, the privatization agenda and public finance,” Pakistan’s Finance and Revenue Minister Muhammad Aurangzeb told local media.

Haq, a tax expert, said the government’s primary focus would be on meeting the six-month revenue collection target set by Pakistan’s Federal Board of Revenue, a government agency that regulates and collects taxes.

What are the challenges ahead for Pakistan’s loan agreement?

Meeting tough tax targets and implementing structural reforms are major hurdles for the government to overcome.

The IMF has previously cancelled other loan programmes when conditions were not met. Payments to Pakistan could be suspended or stopped altogether, which would be a serious blow to a country struggling with a sputtering economy.

The IMF is pressing for cuts in government spending.

“Structural reforms are being resisted by vested interests, making efforts to meet IMF conditions even more difficult,” Haq said.

As Asia prepares for potential instability ahead of Donald Trump’s potential return to the White House, Australia, Japan, and the United States are taking significant steps to strengthen their strategic partnerships.

Before Trump’s anticipated inauguration in January, U.S. Defense Secretary Lloyd Austin is working to reinforce Washington’s network of like-minded allies cultivated during President Joe Biden’s administration to counter China’s growing influence in the Indo-Pacific region. Under Biden, the United States has deepened defense ties with regional players such as Japan, South Korea, and the Philippines to address China’s expansionist strategies.

Austin’s first stop on this mission was Australia, where he joined his Australian and Japanese counterparts to announce that Japanese soldiers would now participate in an annual rotation alongside U.S. Marines in Darwin.

“Recognizing the critical role of the trilateral partnership in maintaining regional stability, we are committed to trilateral policy coordination and consultation on regional security challenges and contingencies,” the three nations’ defense ministers stated in a joint announcement on Sunday, emphasizing concerns over China’s growing regional presence.

In their statement, the ministers highlighted their “grave concern” over “destabilizing actions” in the East and South China Seas, specifically referencing “dangerous behavior” by the Chinese military toward Philippine vessels and other maritime actors. They also underscored the importance of maintaining “peace and stability” in the Taiwan Strait as a key regional priority.

It has been a while that the regional countries have expressed their deep concern over the rise of terrorism activities in Afghanistan and had repeatedly asked the Taliban rulers to stop turning the country into a hub for extremist groups.

The Taliban had always assured the neighbors and the world community that there are no terrorist groups in Afghanistan and the Taliban will not let any groups use Afghan soil against any countries in the region. Indeed, terrorism emanating from Afghanistan will be a driver of insecurity in the region and further afield and the threat coming from Islamic State (IS) and al-Qaeda terrorist network still exists.

In August, the UN Security Council committee had reported that extremist groups with thousands of fighters endanger the security of Afghanistan’s neighbors and pose a growing threat globally.

The report identified IS-K, the Afghanistan branch of IS, as the most serious threat in the Central and South Asia region, adding that the group was “projecting terror beyond Afghanistan”.

Chinese envoy expressed concern over the presence of over 20 terrorist groups in Afghanistan

China’s special envoy for Afghanistan, Yue Xiaoyong, had expressed concern over the presence of over 20 terrorist groups in Afghanistan. He said that these groups are posing security threats to China and the countries around the region. “Many countries share concerns about the security risks posed by terrorism in Afghanistan,” Mr. Yue said in an interview with the Beijing International Dialogue Center. However, Mr. Yue said that before the US intervention in Afghanistan in 2001, there were less terrorist groups compared to today.

“When the United States and NATO initially intervened, there were only one or two terrorist groups in the country. Now, after 20 years of occupation, there are more than 20,” he lamented. He also went on saying that China does not seek influence or control in Afghanistan, and emphasized over formation of a moderate and inclusive government. He also said that Afghanistan should “become for all parties to cooperate rather than becoming a geopolitical arena (competition)”.

He furthered that over the past three years, China has provided Afghanistan with 470 million yuan (approximately $64 million) in humanitarian aid and is negotiating an additional 1 million yuan in assistance with the Taliban.

Yue reassured China’s support for a stable and developed Afghanistan

Yue said that China is supporting Afghanistan in its path toward peace and stability, but said that this achievement could not be achieved sans an inclusive and moderate government.

“China supports achieving lasting peace, sustainable stability, and reconstruction in Afghanistan,” Yue said, adding that this includes “building a national political framework, forming a moderate and inclusive government, continuing humanitarian and developmental aid, enhancing security—especially cybersecurity—and working together for shared development.”

He also made it clear that China has no intention to interfere into internal affairs of Afghanistan, but said that there is need to address Afghanistan’s most pressing challenges, including humanitarian crisis, food shortages, refugee displacement, and terrorism.

Yue has traveled to Pakistan on Monday to discuss regional issues and bilateral ties concerning Afghanistan.  Pakistan’s Ministry of Foreign Affairs in a statment said that during his visit, Mr. Yue held “comprehensive discussions” with Amina Baloch, Pakistan’s deputy foreign minister, and Ahmad Naseem Waraich, the deputy foreign minister for Afghanistan and West Asia.