EDITORIAL: Tax revenue shortfall is projected at 800 billion rupees as per former Finance Minister Dr Hafeez A. Pasha based on the budgeted increase of 26 percent in tax collections while the current rate of growth is 16.6 percent, a decline in the 750 billion rupees budgeted petroleum levy (at present the levy on petrol is the maximum allowed of 50 rupees per litre while on High Speed Diesel it is 25 rupees per litre) attributed to the decline in consumption as a consequence of a rise in its international price (as well as the eroding rupee-dollar parity) and a 15.5 percent decline in nontax revenue July-September (largely due to zero profits of State Bank of Pakistan).
As soon as monthly data showed signs of underperformance against programme revenue targets Pakistan authorities and the International Monetary Fund (IMF) agreed as per the last successful review documents uploaded in August 2022, to trigger three contingency measures.
First, immediate increase in general sales tax on fuel as a prelude to reaching the standard rate of 17 percent. At present, sales tax on fuel is zero and one would assume that the government would first raise the levy on HSD from the existing 25 rupees per litre to 50 rupees per litre before slapping sales tax on fuel.
Petroleum levy on kerosene is currently at 7.01 rupees per litre and on LDO at 15.39 rupees per litre with the prospect of being raised to the maximum legislated limit of 50 rupees per litre – legislated in the finance bill for the current fiscal year while previously the maximum allowed was 30 rupees per litre. In this context, it is relevant to note that the seventh/eighth review notes that “inflation is expected to continue rising in fiscal year 2023 as the authorities increase petroleum development levy and allow energy tariffs to catch up.”
Second, further streamlining General Sales Tax (GST) exemptions on sugary drinks (60 billion rupees) and other unwarranted exemptions such as those benefiting exporters. The decision of the incumbent finance minister to provide electricity to exporters at 19.99 rupees per unit, which amounts to an unfunded subsidy of 100 billion rupees, has already been termed a regressive measure by Jihad Azour, Director of the Middle East and Central Asia Department dealing with Pakistan.
Reports however indicate that the IMF is unlikely to be satisfied even if funds for this subsidy are generated and as stated by Azour during his 13 October press conference “we are encouraging Pakistan as well as also other countries to move from an untargeted subsidy that is a waste of resources and to dedicate those resources to those who need it. I give you one simple example.
The region spends on social protection 2 percent of GDP and in certain cases what countries are spending on subsidies could be the double of that.” If one adds the element of the massive destruction due to the floods which affected 33 million people, Azour’s plea becomes all the more poignant.
And finally, increasing federal excise duty on tiers I and II cigarettes by at least 2 rupees per stick with immediate effect to raise at least another 120 billion rupees.
Credible reports indicate that the government has asked for a floods adjustor of around 340 billion rupees from the Fund to be subtracted from the projected revenue shortfall before the launch of the contingency measures.
While no one can legitimately argue against an adjustor given the scale of the devastation wrought by the floods yet it is likely that not only would the government’s requested amount be considerably trimmed by the Fund but policy reversals may be required before the Fund would be willing to sit at the negotiating table – reversals that would include lifting administrative and exchange controls that are playing havoc with the country’s desired inflow from remittances, with hundi/hawala system again flourishing due to the difference between the interbank rate and actual rate, and curtail current expenditure which was raised in October not only through the announced subsidy on electricity for exporters but also due to the 1.8 trillion rupees agricultural package.
And finally, the incumbent finance minister has repeatedly attacked his predecessor Miftah Ismail, a long-term PML-N loyalist, for failing to arrange external borrowing. He needs reminding of two facts: (i) pledges were made by friendly countries – for rollovers as well as additional 4.2 billion dollar funding – to the IMF, and delays in the success of the ninth review would delay these inflows; and (ii) the last review documents explicitly state that “the loss of market access in the spring of 2022 also calls for the preparation of contingency plans to deal with possible repayment problems.”
Again unless the incumbent finance minister abandons his resistance to withdrawing his economically flawed policy decisions taken during his two and a half months tenure the Fund is unlikely to declare the ninth review a success, a prerequisite for disbursement of the next tranche followed by disbursements from other multilaterals and bilaterals.
Copyright Business Recorder, 2022
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