Daily Times

The government, led by Prime Minister Shehbaz Sharif, is gearing up for high-stakes discussions with the upcoming International Monetary Fund (IMF) staff mission, aiming to finalize a strategy by this weekend.

One option under consideration is the introduction of a mini-budget, which could include seven proposed tax hikes across various sectors. However, the Federal Board of Revenue (FBR) is advising against raising tax rates, pointing to signs of economic recovery and easing inflation pressures.

Top government sources confirmed that the government plans to solidify its strategy ahead of the IMF mission, which will be led by Nathan Porter. The IMF team is scheduled to visit Islamabad from November 11-15, 2024.

Pakistani authorities have two main options: they could either present a mini-budget or focus on reducing government spending to align with fiscal deficit and primary balance targets.

This situation will test the economic managers’ ability to persuade the government to prioritize expenditure cuts over introducing a mini-budget that could further strain the economy.

The FBR has already faced a revenue shortfall of Rs189 billion in the first four months of the current fiscal year, and this gap is expected to widen to Rs321 billion by the mid-point of the year.

The FBR believes that the government should push the IMF to revise the revenue collection target of Rs12,913 billion, taking into account changes in nominal growth, as well as a slowdown in the Large-Scale Manufacturing (LSM) sector and imports. However, the IMF may not be willing to lower the target.

Pakistan has committed in writing that, in the event of a revenue shortfall, a contingency plan will be enacted to boost tax revenues.

“If revenue collection underperforms, contingency measures will be implemented in consultation with the IMF staff, with a focus on increasing withholding and excise taxes,” government officials stated.

Should the three-month rolling average revenue collection fall short by 1% of the target, Pakistan, in consultation with the IMF, will consider adopting one or more of the following measures:

1. Increase advance income tax on the import of machinery by 1 percentage point, with an expected collection of Rs2 billion per month.
2. Raise advance income tax on the import of raw materials by industrial undertakings by 1 percentage point, with an expected collection of Rs3.5 billion per month.
3. Increase advance income tax on the import of raw materials by commercial importers by 1 percentage point, with an expected collection of Rs1 billion per month.
4. Raise withholding tax on supplies by 1 percentage point, expected to bring in Rs1 billion per month.
5. Increase withholding tax on services by 1 percentage point, expected to generate Rs0.5 billion per month.
6. Increase withholding tax on contracts by 1 percentage point, expected to collect Rs0.5 billion per month.
7. Raise Federal Excise Duty (FED) on aerated and sugary drinks by 5 percentage points, expected to bring in Rs2.3 billion per month.

These contingency measures are being considered as part of Pakistan’s effort to meet its fiscal targets and fulfill commitments made to the IMF.