Economy

Pak taxpayers to feel the pinch as IMF deal prompts belt-tightening steps

Updated : August 20, 2019 01:16 PM IST

Details of the IMF deal reveal that the Fund aims to ‘correct structural imbalances’ through heavy taxation.

The IMF programme requires Pakistan to almost double its foreign exchange reserves.

After months of negotiations, the International Monetary Fund (IMF) approved a $6 billion bailout package for Islamabad in July, to ‘return sustainable growth’ and ‘improve the standards of living’ in Pakistan.

The deal — which is the 13th bailout package for the country — will see Pakistan receive an annual $2 billion over a period of 39 months, with a quarterly review of the progress made by Islamabad with regards to the economic reforms promised in the agreement.

Heavy taxation

Details of the IMF deal revealed that the Fund aims to ‘correct structural imbalances’ through heavy taxation so that Islamabad can gradually repay its external debt, and significantly enhance the foreign exchange reserves.

The IMF programme requires Pakistan to almost double its foreign exchange reserves, from the current $6.824 billion to $11.187 billion next year. This would mean Pakistan’s net reserves growing from negative $17.7 billion to negative $10.8 billion by next year, with total foreign exchange reserves projected to increase from the current 1.4 months of imports to 2.2 months next year.

The IMF deal also demands that Islamabad clear $37.359 billion in external debt over the next 39 months, out of which $14.682 billion is owed to China.

As a result, the agreement with the IMF means that Pakistan has to significantly enhance its tax volumes, which was reflected in the financial budget announced for the new fiscal year.

Additional taxes worth PKR 1.56 trillion have been levied by the government increasing the tax collection target for the Federal Board of Revenue (FBR) to PKR 5.5 trillion from PKR 3.94 trillion last year. Another PKR 1.5 trillion hike would be enforced in next year’s budget, and a further PKR 1.31 trillion the year after next if the collection targets are met as expected.

The taxation hike has seen the price of power and petroleum products precipitously rise over the past few months. Last month, the price of petrol was increased to a six-year high of PKR 112.68 per litre, along with a 55 paisa per unit increase in electricity prices. As part of the IMF deal, a further hike in electricity prices is expected by the end of August.

Additionally, the devaluation of the Pakistani rupee, as part of the IMF condition requiring the local currency’s value to be ‘market-determined’, saw the inflation rate reach a five-year high at 9.4 percent in April. The rupee itself has lost almost half its value against the US dollar since December 2017.

Growing resentment

While IMF mission chief for Pakistan Ernesto Ramirez-Rigo said in a press conference on July 8 that Islamabad is expected to increase collection by increasing the tax base, the growing inflation and the hiking prices of energy and power have had widespread repercussions for the masses and the business community.

All Pakistan Anjuman-e-Tajran — a trader’s association — has called a nationwide strike from July 13 against the budget hikes in sales tax. Strikes against the growing taxes have also been called by the textile processing mills association.

“Textile processing orders have been stopped after the imposition of the new taxes. Thousands in the textile industry will lose their jobs if textile processing mills are closed. The sales tax and the 20 percent tax on non-registered buyers should be reviewed,” said All Pakistan Textile Processing Mills Association President Muhammad Ashraf.

A further increase in the taxes for non-filers of tax returns has been implemented by the government across the board. Officials maintain this is designed to encourage more people to come under the tax net, as reflected in the budget for the new fiscal year.

“The budget was completely in line with the demands of the IMF, and the taxation hike was a precondition for the bailout agreement. Now with the IMF agreement, Pakistan can get further loans from the World Bank and the Asian Development Bank and issue bonds globally as well. However, if the new government had finalised the terms when it came to power in August last year, the rupee wouldn’t have devalued as much,” said economist and chairman of Research Institute of Islamic Banking Shahid Hasan Siddiqui.

Meanwhile, the opposition parties not only accuse the government of incompetence in dealing with the economy, but they also claim that the ruling party Pakistan Tehrik-e-Insaf (PTI) has virtually handed over the country to the IMF.

“The IMF has its own office in Pakistan now. The State Bank Governor [Reza Baqir] is the IMF’s guy, [Financial Advisor to the PM] Abdul Hafeez Shaikh also represents the IMF. So, all actions from increasing taxes to raising prices, everything has been done as per IMF’s orders. And the ‘sustainable growth’ envisioned as part of the bailout package is nowhere to be seen. Even the Finance Ministry itself sees a 2.3 percent growth rate with 13 percent inflation – which will be a disaster for the country,” said Pakistan Muslim League-Nawaz leader Mohammad Zubair Umar, former Chairman of Privatisation Commission and ex-Governor Sindh.

However, Adviser to Prime Minister on Commerce Abdul Razak Dawood said that the fact that Pakistan still has to go to the IMF is owing to the fact that previous governments haven’t implemented the reforms suggested by the previous deals with the Fund.

“This time around, however, we plan to implement the reforms properly. Because if we don’t do that, we’ll have to go to the IMF again after a few years. The biggest concern right now is the current account deficit, the fiscal deficit and the trade gap. As things stand, the trade gap and the current account deficit are improving, and we plan to further bridge the gaps. We are [headed] in the right direction,” he said.

KK Shahid is an Islamabad-based freelance writer and a member of 101Reporters.com, a pan-India network of grassroots reporters.

Pak taxpayers to feel the pinch as IMF deal prompts belt-tightening steps

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