IMF opens talks on carbon levy, $1.5bn climate finance

ISLAMABAD: The IMF’s technical team on climate finance initiated discussions with Pakistani authorities on Monday, exploring the potential imposition of a carbon levy in the upcoming budget. The talks aim to enhance the existing loan by an additional $1.2 to $1.5 billion.

The IMF’s existing loan of $7 billion under Extended Fund Facility (EFF) might augment the loan from Resilience and Sustainability Facility (RSF) arrangement of $1.2 to $1.5 billion so the total loan amount might jack up to $8.2 to $8.5 billion.

“We have discussed green taxonomy and carbon levy in today’s discussion with the IMF,” top official sources confirmed while talking to The News on Monday. “There is a proposal to incorporate carbon levy along with petroleum levy by jacking up the maximum limit of up to Rs20 per litre and its collection will be utilised for green initiative related development projects,” added the official.

The IMF technical team arrived in Islamabad for holding talks under the RSF with a request from Islamabad to augment the existing loan of $7 billion under EFF up to $8.2bn or $8.5bn. The findings of this technical mission will then firm up on the occasion of the first review under the EFF arrangement as the IMF review mission is scheduled to visit Islamabad by early next month probably from March 4, 2025 for discussing various sectors of the economy for almost 10 to 12 days period after which the Fund staff would take at least 4 to 6 weeks period for presenting its report before the IMF’s executive board provided both sides strike a staff-level agreement in the upcoming review talks.

The government has prepared a Climate-Public Investment Management Strategy (C-PIMA) and conceded in its report shared with the IMF that the financial constraint results in meagre allocation for the Public Sector Development Programme (PSDP).

The low allocation for the PSDP and inclusion of new projects cast a negative impact on economic development. Major challenges in PSDP include: limited fiscal space, yet large number of projects in PSDP; completion of lesser number of ongoing projects; thin allocations resulting in cost and time overrun, coupled with an ever-increasing throw forward; capacity issues including delayed appointment of project directors/ project staff and suboptimal utilisation of resources; difficulty in providing O&M funds (recurring) to maintain the existing assets; and lack of sectoral priorities and criterion for PSDP approval of concept note feasibility studies financially viable or made viable by VGF under PPP private sector commercial nature projects economically and socially viable/desirable rank all viable projects high rank projects included in PSDP.

The low allocation for the Public Sector Development Programme (PSDP), coupled with the inclusion of new projects, has negatively impacted economic development. Key challenges within the PSDP include: limited fiscal space amidst a large number of projects; delays in completing ongoing projects; inadequate allocations leading to cost and time overruns, along with a growing throw-forward; capacity issues such as delayed appointments of project directors and staff, resulting in suboptimal resource utilisation; difficulties in providing recurring O&M (operation and maintenance) funds for existing assets; and the absence of clear sectoral priorities and criteria for PSDP approval.

Furthermore, there is a lack of financial feasibility for some projects, especially those under the Public-Private Partnership (PPP) model, where viability gaps are often addressed through the Viability Gap Fund (VGF). Projects that are economically and socially desirable should be ranked highly for inclusion in the PSDP, ensuring that only the most viable projects move forward.

Sectoral priorities should be aligned with the long-term plan/vision, medium-term plan/five-year plans, the 5Es framework, and annual plans. These priorities must be formulated while considering the existing project portfolio of the respective line ministries.

The Economic Affairs Division (EAD) should provide finalised foreign aid estimates for the fiscal year in which the Public Sector Development Programme (PSDP) is being prepared, along with projections for the following two years, in consultation with all stakeholders.

Additionally, ministries and divisions must ensure that allocations are made in accordance with the annual phasing of ongoing projects while staying within the indicative budget ceiling (IBC).