FeaturedNationalVOLUME 18 ISSUE # 35

IMF bailout raises concerns of increased tax burden and hardships

There is a consensus among independent economists that the $3 billion IMF bailout programme, while providing short-term relief to the government, would impose greater difficulties on the lives of ordinary Pakistanis by increasing the tax burden and poverty levels in the country.

According to analysts, the implementation of tax reforms under the IMF loan programme can place an additional burden on the people. The increase in taxes and reduction in exemptions directly impact individuals, households, and businesses. Certain segments of society, particularly the middle and lower-income groups, may bear this burden disproportionately.

Pakistan was on the verge of defaulting on its international obligations, but that danger has been averted. However, it is evident that the new standby arrangement is not a panacea for our economic woes and offers no relief to the people. It will further compound the issue of servicing the debt, raise the cost of doing business, and increase hardships for the majority of Pakistanis. The burden of indirect taxes, rising energy prices, mounting inflation, and exorbitant discount rates would further harm the economy.

The IMF’s conditionalities, including a return to a market-determined exchange rate and a tight monetary policy, would fuel price increases across the board. Distressed consumers have no reason to welcome the Stand-By Arrangement (SBA) offered by the IMF. All indications point to more troubles ahead for ordinary Pakistani families. Certain tax measures, such as increased indirect taxes or the removal of exemptions, can have a regressive impact, disproportionately affecting low-income households. This may lead to increased inequality and place a heavier burden on those who are already economically vulnerable. Higher taxes can contribute to inflationary pressures as businesses pass on the increased costs to consumers, further straining their purchasing power and potentially impacting their standard of living.

Government leaders have assured the public of protecting households from the consequences of the IMF’s conditionalities, but these promises sound empty as steps have already been taken to raise taxes and levies in fulfillment of IMF conditions. On June 24, Finance Minister Ishaq Dar announced Rs240bn in tax measures, implemented spending cuts, lifted import restrictions, and withdrew the proposed tax amnesty.

Instead of expanding the tax base by including untaxed and undertaxed sectors like real estate, retail, and agriculture, the government opted for the easier route of raising rates for the salaried classes whose taxes are deducted at the source. Post-IMF deal, the authorities have significantly increased electricity tariffs by Rs4.96 per unit, which is perhaps the highest in the world. On the other hand, higher income tax will further squeeze the middle class.

Prime Minister Shehbaz Sharif and Finance Minister Ishaq Dar, in discussions with journalists, acknowledged that inflation may not ease as quickly as desired but insisted that improvements in the trust level of bilateral and multilateral development partners, along with increased business confidence, will eventually lead to an upward trajectory in the economy, benefiting the people. However, this brings little comfort to the masses who have experienced heavy indirect tax burdens in the past and currently. Disproportionate increases in utility tariffs will impact both the common people and the industry and commerce sectors.

The IMF has expressed concerns to the government regarding revenue measures, spending projections, import restrictions, and the tax amnesty scheme. The IMF’s website recently stated: “Steadfast policy implementation is key for Pakistan to overcome its current challenges, including greater fiscal discipline, a market-determined exchange rate, and further progress on reforms, particularly in the energy sector.”

The message from the Fund is clear. Unless the government urgently implements structural reforms, the economy will remain in a precarious state, necessitating repeated visits to the IMF for bailouts. Among other things, the tax net should be expanded to include wholesalers, retailers, and the undocumented real estate sector. It is also imperative to find a way to ensure the agriculture sector pays taxes commensurate with its contribution to the economy. However, our political structure is predominantly feudal, making this task seemingly impossible. Additionally, fundamental reforms are urgently needed to reduce energy distribution losses and theft, which are the primary causes of high electricity tariffs.

Pakistan’s economy has grappled with fiscal imbalances, a widening current account deficit, and a low tax-to-GDP ratio for decades. To make the most of the IMF loan program, the government must swiftly address macroeconomic imbalances and promote sustainable growth through structural adjustments and policy reforms.

The implementation of the IMF bailout programme in Pakistan has raised concerns among economists regarding the increased tax burden and hardships faced by ordinary citizens. While the programme provides short-term relief to the government, its conditionalities, including tax reforms, can disproportionately affect low-income households. The reliance on indirect taxes, rising energy prices, mounting inflation, and regressive tax measures contribute to the challenges faced by the economy. Urgent structural reforms are necessary to address these issues, broaden the tax net, and promote sustainable growth. Without such reforms, Pakistan risks recurring visits to the IMF for future bailouts.