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FY-2024-25 budget: PM Shehbaz-led govt may resort to heavy taxation due to tough IMF conditions

KARACHI: The government of Prime Minister Shehbaz Sharif in Pakistan is set to propose its first budget this week since its inauguration in March, amid some “tough” conditions by the International Monetary Fund (IMF), which local economists reckon would result in “heavy” taxation and inflation.

The country’s Finance Ministry and the IMF are locked in last-minute talks ahead of the budget for the fiscal year 2024-25 as Islamabad is in a fix over some “tough” demands by the loaning agency, a ministry official told Anadolu wishing not to be named as he was not allowed to speak on the record.

IMF’s key demands, he said, include an increase in the tax revenue target, withdrawal of subsidies, taxes on the agriculture sector, increase in levy and taxes on power, gas and oil sectors, and privatization of sick government organizations and units, and improving administration.

The country’s last fiscal year’s tax target was nearly Rs9.4 trillion (roughly $33.38 billion), whereas the IMF reportedly wants to increase it up to Rs11 trillion ($39.06 billion) for the upcoming fiscal year.

Pakistan’s tax revenue was reported at $25.99 billion by March 2024 as tax authorities are confident they will meet the assigned target. According to the Federal Board of Revenue, the overall revenue growth remained 31% during the first 11 months of the current fiscal year compared to the same period last year.

“The government is already working on several reforms to put the economy on track. However, some of the (IMF) demands, mainly regarding tax revenue target, are very hard considering the current economic conditions,” the official said.

“We are negotiating with the IMF officials on these terms, and hopefully we will be able to convince them,” he maintained.

Islamabad, which received $1.1 billion, the last tranche of a $3 billion IMF bailout package in May, is negotiating for a “long and larger” loan program to the tune of $7 to $8 billion.

In a related development, the State Bank of Pakistan Monday reduced the interest rate from 22% to 20.5%, a move that came a week after inflation slowed to a 30-month low of 11.8% in May.

It was welcomed and termed “positive for the business environment” by the business community.

The all-time high 22% rate was fixed in June last year.

– ‘Between rock and hard place‘

State Minister for Finance Ali Pervez Malik did not respond to Anadolu’s request for a comment on the IMF’s reported demands.

Ashfaque Hasan Khan, an Islamabad-based economist, reckons that the IMF demands have caught Pakistan between a “rock and a hard place.”

“Since Pakistan is seeking another loan program from the IMF, it’s difficult for it to reject the loaning agency’s tough conditions,” Khan, who served as an economic adviser to the Finance Ministry from 1988 to 2009, told Anadolu.

Commenting on the IMF’s reported demand for a $1.6 trillion increase in the tax revenue target for the upcoming fiscal year, Khan dubbed it as “hard to achieve given the current depressed economic environment.”

“Adding more burden to taxpayers, particularly the country’s already weakening industry, means a rise in cost productions, which will ultimately encourage imports rather than exports,” Khan warned.

Sharing a similar view, Khaqan Najeeb, an economist and former adviser to the Finance Ministry, said if Pakistani authorities fail to convince the IMF of its main focus on increasing the country’s tax-to-GDP ratio, then it will be a “heavy taxation budget, as well as will delay (new) agreement with the IMF.”

“Pakistani authorities feel (that) putting more burden on already taxed areas like manufacturing, personal income tax, sales tax may not be viable. So, hopefully, the authorities are able to convince the IMF of reliance on direct taxation proposals to avoid the incidence of taxation on the already taxed areas,” he told Anadolu.

The IMF’s main focus is on an increase in Pakistan’s federal tax-to-GDP ratio from 10% to 13% in the coming years.

Najeeb further said that Islamabad needs to broaden the existing tax base, remove tax concessions, increase the tax net, ensure compliance, and improve administration in the next IMF extended fund facility, which is the “right way” forward.

“We should also try to bring the agriculture and retail sector into the tax net,” he added.

– Total surrender to IMF will be ‘disastrous’

Khan said that Pakistan is treading a “tough” economic terrain despite a few positive signs in recent months, including a significant reduction in the current account deficit, which is just 202 million dollars compared to 3,920 million dollars last year.

Though Pakistan has secured this through “choking” its economy and slowing down the growth rate, “under the given circumstances, it’s a good policy,” he maintained.

He further said that Pakistan needs to negotiate with the IMF “carefully” considering its current economic situation.

“But a total surrender to them (IMF conditions) will have a negative fallout not only on the country’s economy but the overall political landscape,” he opined.

Pakistan is currently the fourth biggest debtor to the IMF with a total outstanding debt of $7.72 billion, following Argentina, Egypt, and Ukraine.

Khan, who also served as the country’s Special Secretary of Finance from 2006 to 2007, supported the idea of taxing agricultural income but not the agricultural “input.”

“The IMF’s demand for taxing agricultural income is justified but taxing the agricultural input, like fertilizers, pesticides, and other related stuff will be bad economics,” he went on to argue.

Currently, he added, 88% of Pakistani farmers fall in the category of “small farmers”, owning just up to 12 acres of agricultural land.

“Taxing agricultural input means directly hitting the brute majority of small farmers, which will result in a skyrocketing increase in production costs and subsequently lead to food inflation and insecurity,” he maintained.

It’s hard for a political government to afford such conditions, he added.

The agriculture sector contributes 22.9% to the country’s GDP and 37.4% to employment generation.

“(The) IMF is not here to strengthen ours or any other country’s economy. Rather, its loans are meant for increasing its debtors’ dependence on it,” Khan said.

“It’s possible with some difficulties and the help of friendly countries to say goodbye to the IMF. What we need to do is to tighten our belt and ensure financial discipline,” he contended.

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