FeaturedNationalVOLUME 16 ISSUE # 14

IMF deal: Fear of fresh taxes

Fears of new taxes have risen with the revival of the International Monetary Fund programme for Pakistan. The deal may benefit Pakistan’s economy and help improve fiscal discipline but the common people will have to bear the brunt of the inevitable adjustment, as the government would impose new taxes worth over Rs700 billion. Prices of electricity and fuel are also set to increase, which will add to miseries of people still reeling under bad effects of the pandemic.

Questions are also being asked about accepting “tough conditions” of the IMF at a time when the government claims the economy has been put on the right track, with the foreign exchange reserves improving and the current account going surplus. The conditions will be really tough for millions of people, who have lost jobs or incomes slashed, during the pandemic. Experts say the government could have avoided the new deal with the IMF after a phenomenal rise in remittances, which have surged by 19pc on a year on year basis to $2.3 billion in January and Pakistan hopes to maintain the level in the rest of the current fiscal year.

Pakistan and the IMF have finalised “ambitious policy actions” on expenditure cuts and revenue measures for the revival of the $6 billion programme, which was disrupted by the pandemic in February 2020. A statement issued by the IMF said the two sides had completed second to fifth (March 2020 to March 2021) quarterly reviews — a rare phenomenon given the pandemic — and the fund projected an economic growth rate of 1.5pc for the current financial year against last year’s negative growth rate of 0.4pc. However, the outlook is subject to a high level of uncertainty and downside risks owing to an unfolding second wave of the pandemic. The staff-level agreement is expected to be approved by the IMF executive board before March 31 to enable immediate disbursement of $500m. With the tranche, the total IMF disbursements to Pakistan since the beginning of the extended fund facility in July 2019 would reach $3.362b (including $1.4b of emergency support) which is reasonably higher than $3.006b under the original schedule based on quarterly reviews. With three more quarterly reviews by end-June 2022, the 39-month programme will come to an end on September 1, 2022.

The IMF statement said the two sides “have reached an agreement on a package of measures to complete second to fifth reviews of the authorities’ reform programme supported by the IMF Extended Fund Facility (EFF). The package strikes an appropriate balance between supporting the economy, ensuring debt sustainability, and advancing structural reform. The Pakistani authorities remain committed to ambitious policy actions and structural reforms to strengthen economic resilience, advance sustainable growth, and achieve the EFF’s medium-term objectives.”

The IMF noted the Covid-19 shock required a careful recalibration of the macroeconomic policy mix, the reforms calendar, and the EFF review schedule. “Against this background, the authorities have formulated a package of measures that strikes an appropriate balance between supporting the economy, ensuring debt sustainability and advancing structural reforms.” The fiscal strategy remains anchored by the sustainable primary deficit of FY2021 budget and allows for higher-than-expected Covid-related and social spending to minimise the short-term impact on growth and the most vulnerable. The targets are supported by careful spending management and revenue measures, including reforms of corporate taxation to make it fairer and more transparent, the IMF said, adding that the “power sector’s strategy aims at financial viability, through management improvements, cost reductions, and adjustments in tariffs and subsidies calibrated to attenuate social and sectoral impacts. The authorities are moving steadfastly on a number of other important reforms, including on strengthening regulatory agencies’ legal frameworks (NEPRA and OGRA Acts), consolidating SBP’s autonomy (SBP Act), and improving state-owned enterprises (SOE) management (SOE Law), the IMF said. Besides, they have conducted a triage of SOE, and are moving forward with the audits of contracts awarded for Covid-related spending. The authorities also continue to enhance the effectiveness of their anti-monetary laundering/counter financing of terrorism (AML/CFT) framework and progress in completing their action plan with the Financial Action Task Force.

The IMF said the Covid-19 shock temporarily disrupted Pakistan’s progress under its programme but appreciated that the authorities’ policies and allowing higher than expected Covid-related social spending had been critical in supporting the economy and saving lives and households. It also noted that the policies and reforms implemented by the authorities prior to the Covid-19 shock had started to reduce economic imbalances and set the conditions for improving economic performance. It recognized that most of the targets under the EFF-supported programme were on track to be met” but the pandemic disrupted them. The authorities’ response was enabled largely by the fiscal and monetary policy gains attained in the first nine months of FY2020.

As the IMF appreciated the government for its policies, it had already announced an increase of Rs1.95 per unit (15pc) in electricity tariff for all consumers in the country to generate about Rs200 billion. As a consequence of the new deal, the government would place a bill in the parliament, jointly drafted by the authorities and the IMF on the independence of State Bank of Pakistan, conclude a National Electric Power Regulatory Authority law and complete the process of pruning tax exemptions and distortions to become effective from July 1.

Under the revised agreement, the government will have to make more adjustments. It will have to hike power, gas and fuel prices and impose new taxes, which would overburden the common people. The government lost recent by-polls because of rising prices. It will have to control inflation and improve governance urgently, otherwise, it will face a humiliating defeat in the next election.