IMF Proposes New Tax Collection Targets for Pakistan’s Next Budget

Pakistan had big hopes in 2020 after several achievements indicated easier pathways of the South Eastern economy towards further growth and stability. The country showed signs of economic stabilisation, transition to a market-based exchange rate system, significant reduction in the current account deficit, a primary balance surplus, higher tax and non-tax revenue collection and increased social spending. But, like most other countries, it will not be able to achieve the targets set for the 2020 financial year due to the fallout of the novel coronavirus outbreak which hit almost every country around the globe.

 


The IMF stressed that Pakistan’s short-term macroeconomic outlook has drastically deteriorated amid the COVID-19 pandemic, underscoring new urgent external financing needs in FY2020.


 

While some nations may be in better positions than others in terms of their ability to recover from the pandemic, Pakistan may have to struggle for before the pre-pandemic state is restored. This would necessarily require all efforts to integrate and consider all internal and external factors. In this regard, the International Monetary Fund (IMF) has reportedly proposed Pakistani Rupee (PKR) of 5,100 billion revenue target in the next budget for fiscal 2020-21, compared to the previously set target of PKR 4,800 billion. The IMF’s figure includes PKR 575 billion of revenues collected from additional tax measures.

 

 

Particularly, the Fund proposed enforcement of administrative measures for tax integration and harmonisation along with the elimination of unnecessary exemptions and bringing new sectors into the tax net. During a meeting to discuss these measures and others with the Pakistani Minister for Economic Affairs, Khusro Bakhtyar, the IMF’s Resident Representative in Pakistan, Teresa Sanchez said last week “IMF would continue to cooperate with Pakistan for sustainable economic growth in future.” She also mentioned that the severity of the shock and the uncertainty about the outlook make it difficult to recalibrate the existing USD 6 billion extended fund facility (EFF).

The Government of Pakistan and the IMF are working together to make ensure that the EFF, which was approved last year and is expected to last for three years, remains on track to meet its objectives. In addition, the IMF approved USD 1.4 billion of rapid financing to meet the country’s urgent balance of payment needs and free up its resources to spend on countervailing measures for the pandemic. However, the Fund has yet to complete the second review of its EFF bailout package that would entail the release of the third loan tranche.

 


Although achieving the revenue targets proposed by the IMF seems impossible, given the state of its economy under the pandemic, Pakistan may not have other viable alternatives.  


 

In a report that was published recently, the IMF said “Growth is expected to contract sharply by -1.5 percent in the financial year 2020, as the economy is buffeted by demand and supply shocks. Exports and remittances are expected to decline sharply, which together with a temporary loss of market access create an urgent balance of payments need.” It also highlighted that “public finances are expected to come under significant pressure from the sudden increase in health- and mitigation-related expenditures as well as the decline in tax revenues.”

Tribune reported sources as saying “The IMF loan programme will not be resumed until the budget targets are set as per IMF conditions,” adding that “the Fund demands that the budget deficit be fixed at 0.4% of GDP while PKR 2,700 billion be allocated for interest and debt repayment.” It further reported that the PKR 5,100 billion revenue target requires a 30% growth which may not be possible given the current turbulent conditions caused by the COVID-19 pandemic. It would be more difficult to achieve as the government has been considering the tax rates and schemes to support the outbreak-affected affected industries.