EDITORIAL: The Federal Board of Revenue (FBR) acknowledged a shortfall of 98 billion rupees during the first two months of the current fiscal year – net collections stood at 1,456 billion rupees while the target was 1,554 billion rupees. This shortfall has sent shockwaves of unease throughout the country – the economists as well as the general public for two reasons.
One, the Board of the International Monetary Fund (IMF) has yet to schedule Pakistan’s Extended Fund Facility programme, a prelude to loan disbursement, on which a staff-level agreement was reached on 12 July 2024 and if past precedence is anything to go by, the delay is almost certainly attributable to the government’s failure to implement “prior” conditions.
Till such a time as the Fund uploads the detailed agreement on its website that always post-dates Board approval, reliance for what constitute these prior conditions rests with government statements or speculation based on our previous history with the Fund.
In this context it is relevant to note that the government publicly acknowledged that it is still engaged in meeting the target of budgeted external assistance from friendly countries (China, Saudi Arabia, and the UAE) with a 2 billion-dollar shortfall as per Governor State Bank of Pakistan in his recent interaction with the parliamentary standing committee on finance; he further contended that the country intends to secure 4 billion dollars from the commercial banking sector abroad – a source of funding that was frozen during the past year due to the high risk factor ratcheting up the interest on offer to the country to an economically unaffordable level. It is yet unclear whether the rates have significantly declined since the recent upgrade by Moody’s and Fitch, though the upgrade keeps the country within the high risk category.
During the past two programme loans – EFF secured on 12 July 2019 and the nine-month Stand-By Arrangement secured on 30 June 2023 – it was made abundantly clear to the authorities that the friendly countries will not agree to roll-overs or additional assistance unless the country is on an active Fund programme.
Second; Pakistan is currently facing a chicken-and-egg conundrum – securing foreign commercial pledges at a high rate of return will raise the budgeted debt servicing costs which, in turn, would increase the budgeted fiscal deficit with negative repercussions on growth.
FBR routinely projects an annual increase in its collections based on the growth rate - a high rate would increase FBR collections and a low growth will decrease collections.
Thus the shortfall may be a reflection of a containment of the 3.6 percent projected growth rate (a projection that was regarded as an overstatement by economists), which may be a factor that led to a shortfall.
However, it is also relevant to note that FBR routinely overstates its capacity to generate taxes from specific sources, which are then revised and adjusted at the end of the year either through domestic or external borrowing (if available) - a trend that has led to a high inflation rate that accounted for 41 percent poverty levels in this country last fiscal year that are comparable to sub-Saharan Africa.
But what is most concerning for the public is the fact that the IMF, during its previous two loans, insisted on meeting the revenue targets agreed with the government at all cost, and failure to achieve them was to be dealt with through what the Fund termed implementation of the agreed contingency measures envisaging additional taxes on existing taxpayers, regarded as low-hanging fruit, or widening the tax net particularly taxing the traders (which appears to be a challenge for this government too as it was with the previous administrations). In other words, the concern today is that this shortfall may well imply additional taxes that may well trigger civil discontent that could become widespread.
It is therefore imperative that the government must begin to implement the tax reforms that it has pledged and the way forward must be to begin to tax the income of the rich landlords today instead of from the January 2025 deadline set by the provincial governments and current expenditure must be slashed today instead of relying on state-owned entities’ sale or their reconstruction as that is not a short-term process.
Copyright Business Recorder, 2024
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