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Photo Source: Dawn

Pakistan Reader# 481, 20 December 2022

Pakistan bids to reduce gaps with the International Monetary Fund over revenue collection



Why the shortfalls in revenue emanate uncertainty over repaying loans to the IMF?

Bhoomika Sesharaj

On 19 December, the Federal Board of Revenue (FBR) placed its revenue estimates before the IMF fund officials and said that despite decreasing imports, the projected budgetary requirement would be achieved in due time. The fund officials measured a shortfall of PKR 422 billion in the fiscal year of 2023 but were rejected by the FBR, who reiterated that there is “no need” for new taxation mechanisms to “fill” the proposed gap. The IMF stressed that new revenue measures are imperative to keep the revenue collection on course to reach the projected tax target of PKR 7.47 trillion by the end of 30 June 2023 and to show a 21.5 per cent growth rate from the previous year’s revenue total. This comes as the FBR showed a collection of PKR 2.688 trillion in July-November, which exceeded the target set by the IMF by just PKR 8 billion.

Ishaq Dar’s attempts to conclude the ninth review
On 20 December, Finance Minister Ishaq Dar visited the FBR to get an overall briefing on the revenue collection performance of the country and expressed hope that the ninth review is concluded by the end of this month. Officials said that the Ministry of Finance shared the collection estimates of the PDL with the IMF after “questions” were raised over its reporting mechanisms and downturns in revenue. They said that the issue would “only be resolved” once both sides “minimise” the gaps in the reporting mechanisms. This comes as the IMF deliberates talks with the government over a rollout of USD 1.18 billion in 2023. 

Why is there a continuous gap in mechanisms between the IMF and Pakistan?
First, FBR’s revenue collection includes varied differences in the collection of petroleum development levies (PDL). Under the PDL in the current fiscal year, the IMF estimated a shortage of PKR 300 billion which was refuted by Pakistan’s finance ministry estimating the shortfall at PKR 50 billion. The estimates were rejected by the IMF and also explained the decline in the consumption of petroleum products in the country by 22 per cent in the fifth month of the financial year. The decline in consumption and the low general sales tax collection of petroleum places the country in a crux, with the petroleum sector producing one of the largest revenue in the country. 

Second, lack of fiscal space for other sectors to roll out revenue. The government’s continued emphasis on subsidies for petrol and diesel and the decision to announce PKR 100 billion in power subsidies to five export-oriented sectors till the end of June 2023 to ramp up export rates to 15-20 per cent in October leaves other industries and sectors in the economy to scour for any fiscal freedom and subsidies, including those of textile, leather, sports and surgical sectors. The exporters in these sectors would face restrained momentum in growth, liquidity issues and further economic slowdown in important export destinations. Pakistan’s economic growth is deterred by structural issues that include untargeted subsidies, misplaced priorities and rolling out money rather than reining in expenditures which explain the imbalance in mechanisms with the IMF.

Third, high tariffs and excessive regulations. In October, Prime Minister Shehbaz Shariff announced a PKR 1.8 trillion relief package for farmers which included fixing a set electricity tariff of PKR 13 per unit, which could potentially cost the government PKR 180 billion in the current fiscal year. Along with staggering levies, businesses in the country are also embroiled in regulatory burdens, outdated policies, and minimal foreign investment which puts revenue collection, adaptability of taxes on potential sectors and the gnawing presence of foreign debt into the forefront of Pakistan’s economic assurances. (Mubarak Zeb Khan, “FBR attempts to convince IMF it can achieve target without new taxes,” Dawn, 20 December 2022, “‘Reforms undertaken for Treasury Single Account’,” The Express Tribune, 20 December 2022, Sarfaraz A Khan, “IMF: back to square one,” The Express Tribune, 19 December 2022)

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