The International Monetary Fund (IMF) has estimated Rs 101 billion lower than envisaged in revenue subsequent to a shortfall of Rs 63.5 billion (1/4 percent of GDP) in tax revenue and Rs 38.1 billion (about 0.15 percent of GDP) non-tax revenue. This was disclosed by the IMF in Staff Report finalised after the conclusion of third review under the Extended Fund Facility (EFF) for Pakistan.
According to the report, the authorities have taken some steps to strengthen tax administration to improve the underperformance; staff expects that tax revenues will be about 1/4 percent of GDP lower than envisaged. Moreover, revenues from 3G licenses were also lower than projected, which reduced non-tax revenues by about 0.15 percent of GDP.
To address these shortfalls, the authorities are expected to continue to contain current spending to deliver savings of about 0.15 percent of GDP mainly in non-energy subsidies and untargeted grants. The lower tax revenues entail lower transfers to the provinces, which will have to reduce provincial current and capital spending to comply with agreed targets and generate additional savings. Provincial underspending which has been the norm in recent years could fully cover the remaining fiscal shortfall to meet the year-end deficit target while providing room to avoid further reductions in the federal capital spending, maintained in the report.
The authorities envisage further fiscal consolidation in line with programme objectives for fiscal year 2014-15. The authorities' budget proposal implies lowering the deficit to 4.8 percent of GDP (prior action). The consolidation is underpinned by tax policies that aim mainly to increase the tax base, including the initial steps to eliminate concessions granted through SROs and a further hike in the Gas Infrastructure Development Cess (GIDC) of around 0.2 percent of GDP. While tax revenue measures, at about 0.8 percent of GDP, remain in line with the effort envisaged under the programme, the lower revenue base (due to the underperformance in fiscal year 2013-14) will produce a lower tax-to-GDP ratio than envisaged in the programme. Nonetheless, the remainder of 3G license receipts and a new 4G auction will compensate for this shortfall, the report maintained.
The auction of 3G telecoms licenses were launched on April 2014. The auction raised $1.1 billion, of which $516 million, ie, about half was received in foreign currency in this quarter. The remainder will be paid by firms in the next financial year.
The report further states that the authorities are committed to additional permanent tax measures in fiscal year 2015-16 to further raise the tax-to-GDP ratio. On the expenditure side, the budget envisages that current spending will remain contained - including by further reducing electricity subsidies in order to provide space for a stronger increase in capital spending and for a further significant increase in targeted support for the poorest under the Benazir Income Support Programme (BISP). To help assure programme targets can be met, the authorities have identified several contingent measures (both on revenues and expenditures) that can be implemented if the expected fiscal adjustment begins to fall short of the objective.
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