The IMF staff and the Pakistani authorities have reached a staff-level agreement on policies to be supported by a Stand-By Arrangement (SBA), a last-minute rescue package for the country facing an acute balance of payments crisis.
A successful deal with the IMF could also help unlock credit from other financiers who are looking for a clean bill of health from the IMF for an ailing $350bn economy. Our supporting allies, Saudi Arabia and the United Arab Emirates, have pledged a combined $3bn that is expected to come in now that the IMF deal has materialized.
Debt rollovers from China, Pakistan’s largest creditor, will be a key to improving the situation. This also includes raising money from the private market. Ensuring the materialization and building of a spending framework for pledges secured earlier this year at an international donor conference will also be crucial.
More than $9bn in climate-related pledges were made to help Pakistan recover from devastating floods in 2022. On the other hand, Pakistan needs $22bn to fund its external payment obligations, including international debt servicing, in the financial year 2024, which started on Saturday, July 1, and ends on June 30, 2024.
Pakistan’s power sector has been specifically mentioned by the IMF, which called for a “timely” rebasing of tariffs to ensure that costs are recovered. The government’s only remedy is to raise the tariff (electricity bills have gone up by 100 percent over the past four years). But it is clearly not working, as circular debt continues to swell.
As mentioned in this writer’s previous articles, two things must be accomplished: reduce transmission and distribution losses and collect nearly 100 percent of the billed amount. In modernizing the crumbling transmission and distribution infrastructure, the government lacks the resources to upgrade the infrastructure on its own.
Therefore, the inclusion of the private sector is imperative, which could be achieved through the privatization of DISCOs. As stated in IMF conditions, Pakistan needs a competitive power sector that is governed by economics, not a convoluted web of regulations, subsidies, and surcharges.
The government must stop “subsidizing” falsification and corrupt practices and limit its role to being a competent regulator.
The resolution of circular debt is necessary, as this will ease supply constraints. The task is testing since it requires the outstanding stock of circular debt to be cleared before plugging any further build-up of circular debt receivables.
Moreover, power subsidies can only be sustained if they are explicitly acknowledged in the fiscal budget; otherwise, the economy will continue to suffer from the indirect cost of these subsidies.
The government, as per the conditions set out by the IMF, is going to introduce new taxes and raise revenue by 215 billion rupees ($750 million) to 9.4 trillion rupees for FY 2023–24. But again, it seems there is no concept of broadening the tax base and progressive taxation, as the IMF instructed.
As per this writer’s views, it will be very difficult to achieve revenue targets of 9.2 trillion rupees by relying only on the industrial sector, and heavily taxing the salaried class without taking serious taxation measures in the areas of agriculture, retail and wholesale trading, and real estate.
The salaried class is already grappling with the harsh realities of rising inflation, increased GST, elevated petroleum levies, and escalating energy costs, and limited employment opportunities. The proposed tax rate hike and alteration of income slabs will significantly reduce their net disposable income, further affecting those who are already struggling to make ends meet.
On the other side, our country’s wholesale and retail sectors have the lowest tax rates. This sector is characterized by high taxation and tax evasion. According to a recent report by Planet Retail, the retail market in Pakistan has crossed $152 billion, which makes the sector the third-largest contributor to the country’s GDP and its second-largest employer.
According to the FBR, the retail market accounts for a whopping 18% of the GDP. Meanwhile, its contribution to the national exchequer is a meagre 3.9%. There is a basic principle: there will be no income tax in our society unless justice is established.
We have to think for ourselves about how fast these indirect taxes are increasing in our country. Second, we need to control our expenditures. How long will our fiscal deficit last for the last 20 years? It has gone to 7%.
We have to see in Argentina that they have imposed a wealth tax for the next two years. We also have to think about how long we will depend on these indirect taxes. There is no rocket science in this thing. This thing could get in the way of a very deliberate and concise approach if there is political consensus.
“At least for the past 25 years, I have been seeing the same conditions the fund asks for, which are prerequisites of sustainable growth.” But again, the same question exists: where are we lacking in terms of our will to do something or any other hidden agenda? We only have hope that things will go in the direction they need to for a prosperous economy.
(The writer is an accountant & economic analyst. Email: [email protected])
Copyright Business Recorder, 2023
The writer is an economic analyst.
Email: [email protected]
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