Pakistan has finally reached the pass where the federal budget for the financial year 2024-25 will test the waters: whether or not Pakistan qualifies for the next Extended Fund Facility of the International Monetary Fund (IMF).
Led by Nathan Porter, the IMF mission informed Pakistan that the next bailout package would be considered only when Pakistan presented a budget aligned with the IMF conditions. Further, the aligned budget must secure approval from the parliament, which will also enact necessary laws to sanctify the budget.
To elaborate, this time, the budget, scheduled to be announced on June 7, will not be alone. Instead, a finance bill will accompany it. The bill will offer legal cover to amendments to laws about income tax and sales tax. This will be done to reduce the tax slabs for salaried persons. Further, the bill will make agriculture income permissible for taxation similar to normal income. Moreover, the bill will actuate a system of punishments prescribed for non-filers directly, besides enhancing the cost of their business transactions.
The IMF thinks that, given the unpredictable political environment, the budget’s approval by the parliament will be mandatory. Here lies a catch. Pakistan is inured to introducing the budget piecemeal. The main budget is mild, followed by supplementary harsh budgets. The practice permits consumers to adjust themselves to new budgetary realities surfacing quarterly. This may not be the case anymore. The IMF requires that Pakistan present a consolidated budget quintessentially. If it is done, there is no need for the IMF to send a follow-up mission. Pakistan would automatically enter the 24th bailout package.
The main budget is mild, followed by supplementary harsh budgets.
Currently, Pakistan is trying to seek not only $6 billion for three years but also an additional $2 billion available under climate financing called the Resilience and Sustainability Trust. The extra $2 billion is cajoling Pakistan into coming to terms with the IMF without further ado.
There are two sides to the budget: expenditure and income. During its stay, the IMF mission adumbrated the kind of budget it requires. Regarding the expenditure side of the budget, Pakistan has to curtail expenditures. The mainstay of curtailment would be to undertake structural reforms to reduce losses of state-owned enterprises. Further, reforms must take over the pension sector. Similarly, subsidies must go away.
In the context of state-owned enterprises, Pakistan categorized them as strategic, essential and non-essential. Pakistan wants to retain the first two and let go of the last one. To the IMF mission, out of around 84, Pakistan shared a list of 24 such enterprises which could be shed off as non-essential – to commence the process of privatization. These enterprises would be sold to the private sector. One implication of this step could be that expenditure would be reduced. Another could be that the size of the government would shrink, rendering a substantial part of the bureaucracy without a place to work. The accumulation of the bureaucrats in Islamabad would be difficult. Pakistan Railways, Pakistan Television, and Radio Pakistan are on the way out, after Pakistan International Airlines.
Regarding the income side of the budget, gas and electricity would bear the brunt, through indirect taxes. Tariffs on both are expected to rise by 20 to 30 per cent. This will be to pay the cost of circular debt in the energy sector. Oil would also court taxation. Not only would petroleum products be subjected to 18 per cent GST, but there would also be an introduced carbon tax – to discourage the use of oil (petrol and diesel), which are products of carbon. The carbon tax would make the consumption of oil environment-friendly. Nevertheless, in a country like Pakistan, where people tend to use private transport for locomotion, the price of oil would touch the upper imaginable limits. With the increasing cost of transport, the price of both food items and medicines will scale up manifold.
To enhance income, the government will have to take measures to increase the tax-to-GDP ratio to bring it into double figures (compared to the current 9 per cent). It also means that under-taxed and untaxed areas of the economy such as agriculture, real estate, and retailers will have to be taxed. This is a tricky area because those who form the government mostly belong to these sectors.
The IMF also advised the government to increase non-tax revenue such as revenue collected from penalties, challans, and fees (including token fees). This is where a possibility for social strife may surface: for instance, inflicting hefty traffic challans on drivers for minor traffic violations, imposing stringent penalties on petty offences, and charging colossal fees on passports and other government services.
In the government’s effort to sustain itself financially, the Federal Board of Revenue (FBR) would be under immense pressure of performance – to deliver on the advised targets. Contrary to the past, when the FBR enjoyed the privilege of setting its revenue collection targets, which used to be around a 10 per cent increase per year, and celebrated success by offering monetary benefits to its staff. Now, the targets are set by the IMF, conveyed through the government, and chased by the FBR. This is where frustration sways the FBR. A shortfall in revenue collection is unaffordable and unacceptable.
The FBR has to do two main things: first, it has to trace the forgotten taxpayers who slipped away from the tax net; and second, it has to ensnare new taxpayers to broaden the tax base. Nevertheless, the FBR also has to take anti-smuggling measures. This is where the FBR is naïve. Recently, it has lost the lives of some of its officers. The FBR itself needs reforms which could help it come out of its comfort zone and push the government to meet the targets set by the IMF.
The writer is a former diplomat and freelance columnist.