Pakistan Reader# 726, 5 March 2024
Dhriti Mukherjee
In Focus
On 4 March, after taking administering oath to the office of the Prime Minister, Shehbaz Sharif in his maiden meeting gave a green signal to begin negotiating a new long-term bailout package with the IMF. Focusing on the country’s economic situation, he recommended strengthening the Special Investment Facilitation Council (SIFC), shutting down enterprises that were making losses, and preparing a roadmap on war footing. The absence of former Finance Minister Ishaq Dar and the presence of the President of Habib Bank Limited, Muhammad Aurengzeb, indicated that Sharif intends to form an economic committee that is not solely based on experience. Sharif was briefed by the Finance Secretary, Imdadullah Bosal, on the fiscal situation, implementation of the IMF’s conditions, and probable demands of the IMF for the new programme the country is seeking. He was also briefed on the shortfall in the FBR tax revenues and the possibility of revenue measures.
On 4 March, The News International reported that the IMF recommended the Federal Board of Revenue (FBR) to include a few dozen products in the standard rate of General Sales Tax (GST) of 18 per cent, to help yield revenues of 1.3 per cent of GDP. Some products listed included unprocessed food, stationery, medicines, and POL products; however, the IMF is yet to see whether this increase in GST through indirect tax could push up inflation. Further, the IMF recommended eliminating all zero ratings under the Fifth Schedule except for exported goods, restricting exemptions under the Sixth Schedule to the supply of residential property, and removing reduced rates under the Eighth Schedule. Other goods under all three Schedules are to be brought to the standard rate of GST. Thus, in all, “the IMF has asked removing all compliance related distortionary tax policy changes which include eliminating the minimum taxes and surtaxes as well as removing the Ninth and Tenth Schedules.” Zero rating items under the Fifth Schedule could include supply to diplomats, components and goods for further manufacture of goods in the Export Processing Zones, and supplies made to exporters under the Duty and Tax Remission Rules, among others. The Sixth Schedule may include products like edible vegetables imported from Afghanistan, rice, wheat and meslin flour, and the Holy Quran, among others. Lastly, the Eight Schedule of sales tax could include natural gas and phosphoric acid.
Commenting on the Moody's rating, a Dawn editorial said: “The rating indicates a higher probability of default and a greater degree of investment risks amid weak debt affordability. It also takes into account Pakistan’s low growth rate and high exposure to extreme weather events, which can increase economic and social costs, with high debt-servicing requirements reducing the fiscal flexibility to undertake key expenditures on infrastructure and social initiatives.”
(Shahbaz Rana, “PM gives nod to IMF talks for long-term bail out,” The Express Tribune, 5 March 2024; Mehtab Haider, “IMF wants govt to impose 18pc GST on POL products, unprocessed food, stationery,” The News International, 4 March 2024; “Unchanged rating,” Dawn, 29 February 2024)
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The News International, 4 March 2024
“The process of development in Pakistan faced its first major challenge early in the third five-year plan. The plan as originally formulated was an attempt to extend the success of the second plan on a broader front. The events of 1965 and their various repercussions on the economy changed these assumptions in a fundamental manner and the basic strategy of the plan had to undergo a drastic revision.”
Mehtab Haider, ‘IMF wants tax burden on non-salaried, salaried class increased’
The News International¸2 March 2024
“The IMF has asked the FBR for reviewing the Second Schedule and Chapter III of the Income Tax Ordinance (ITO) to eliminate preferential treatment to employees in specific sectors, tax credit for investment in shares, deduction for mortgage payments, tax deductions for full time teachers and researchers and maintain the zero rate threshold at the same levels if it is not possible to reduce it.”
Dr Abid Qaiyum Suleri, ‘What economic challenges loom ahead?’
The News International, 1 March 2024
“The FBR's commendable revenue growth, while impressive at twenty-nine percent from July 2023 to January 2024, loses its lustre when accounting for the thirty percent inflation during this period. Broadening the tax net and improving the quality of taxes (shifting from indirect to direct taxes) is a must for revenue growth in real terms. Successive governments in the past failed to tap the true tax potential of sectors such as real estate, retail, and income on agriculture. How the new government will fare on this front needs to be seen.”
Zafar Masud, ‘Fix fiscal account to tame inflation’
Dawn, 10 February 2024
“Pakistan needs recalibration perhaps more than others as it confronts regional conflicts both communal and transnational, along with complex forms of conventional and unconventional inflations — ‘debt-flation’, ‘shrink-flation’, ‘greed-flation’ — which are manifestations of both structural deficits and post-Covid pro-cyclical policies.”
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