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Pakistan’s tax-heavy budget likely to land IMF bailout, but stoke tensions

The South Asian country has set a challenging tax revenue target of Rs13 trillion for FY25

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Pakistan’s tax-heavy budget likely to land IMF bailout, but stoke tensions
Pakistan’s tax-heavy budget likely to land IMF bailout, but stoke tensions

Islamabad (Reuters): Pakistan’s plan to raise taxes in its 2024-25 budget and boost state revenues will help it win approval from the International Monetary Fund (IMF) for a loan to stave off another economic meltdown, but could fuel public anger, a former finance official, experts and industrialists said.

The South Asian country has set a challenging tax revenue target of Rs13 trillion ($47 billion) for the year starting July 1, a near-40% jump from the current year, and a sharp drop in its fiscal deficit to 5.9% of GDP from 7.4% for the current year.

Pakistan had to reduce its fiscal deficit as part of negotiations with the IMF, with which it is discussing a loan of $6 billion to 8 billion, as it seeks to avert a debt default for an economy growing at the slowest pace in the region.

“The budget is enough to get an IMF programme, as long as … the budget is passed in the way it is presented,” former finance minister Miftah Ismail said. But he said the revenue targets will be challenging, as will the growth target of 3.6%.

“The two cannot happen simultaneously,” said Ismail, who as then-finance minister successfully negotiated the revival of Pakistan’s last Extended Fund Facility (EFF) programme in 2022.

Emerging Market Watch’s Metodi Tzanov believes the budget in its current form should be acceptable to the IMF.

“The government ticked almost all the right boxes to comply with IMF conditions, including withdrawal of tax exemptions, raising corporate tax for exporters, increasing the personal income tax rate, tightening the noose around non-filers, and hiking fuel tax,” he said.

But some said the IMF might baulk if it saw the tax target as unrealistic.

Finance Minister Muhammad Aurangzeb, who presented the budget for the first time, said he expected to seal a Staff-Level Agreement with the IMF in July.

The IMF did not immediately publicly comment on the budget and did not respond to questions sent by Reuters.

The big rise in the tax target is made up of a 48% increase in direct taxes and 35% hike in indirect taxes. Non-tax revenue, including petroleum levies, is seen increasing by a whopping 64%.

Taxes have notably been slapped on previously protected export-oriented sectors such as textiles, which consistently make up over half of Pakistan’s exports, and whose receipts keep a persistently high external account deficit in check.

The representative body for the sector, All Pakistan Textile Mills Association, called for a review of the budget, terming it “extremely regressive” and one that “threatens the collapse of the textile sector and its exports”.

It warned of “dire consequences for employment and external sector stability, as well as for overall economic and political stability and security”.

The Pakistan Business Council (PBC) also called for budgetary measures to be reconsidered.

“The budget prioritises securing another IMF EFF but lacks innovation for domestic economic growth,” said Musadaq Zulqarnain, director at the Pakistan Textile Council and chairman of Interloop, one of Pakistan’s largest textile manufacturers.

The coalition government of Prime Minister Shehbaz Sharif does not have the luxury of a parliamentary majority to help it pass the budget smoothly.

Sticking to the reform measures will require it to resist pushback from key economic sectors as well as a broader public already angry at the prospect of further price rises.

Sharif’s party had to convince its largest ally, the Pakistan Peoples Party (PPP), without whom it does not have a majority, to attend the budget session in parliamentary. PPP said it was not happy with some of the measures.

But analyst Yousaf Nazar, formerly of Citibank, believes the protestations are just political posturing. “(PPP) won’t rock the boat,” he said.

With few options in the short term to support Pakistan’s recent stability, an IMF programme appears crucial.

Increasing the tax base in an economy where proper documentation is often lacking will require considerable time and effort. Pakistan’s undocumented parallel economy is huge and 44% of its nominal GDP does not contribute significantly towards direct tax revenue, according to the Tola Associates, a tax firm.

Traders and agriculturalists in particular, both politically influential, have resisted the government’s push to register themselves and document their sales.

“If the tax base is not going to increase, moving forward, the country’s tax revenues growth can drop further and it might end up as a dead weight loss to the economy,” Tola Associates said in a note.

“The real challenge is that of implementation,” said former central bank chief and Managing Director at Alvarez & Marsal Reza Baqir.

“For example, the budget targets an ambitious increase in the tax-to-GDP ratio. Many previous budgets have similarly targeted ambitious improvements. I would hope that the lessons from why those ambitions were not realised have been reflected in this budget.”

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