FeaturedNationalVOLUME 18 ISSUE # 45

Pakistan’s fiscal dilemma calls for urgent tax reform

Pakistan is grappling with a dire economic situation, marked by an unsustainable fiscal deficit, surging inflation, and an ever-increasing burden of debt.

The International Monetary Fund (IMF) has repeatedly urged the country to reform its tax system, emphasizing the need to collect taxes from the affluent. However, Pakistan’s leaders have been hesitant to take decisive action, constrained by IMF agreements and a lack of political will. In this context, the nation faces the risk of further decline on the global stage and a potential disaster if urgent measures are not taken.

IMF Managing Director Kristalina Georgieva’s call to Pakistanis to collect taxes from the wealthy highlights the glaring issues within the nation’s unequal tax system. This system stands as the primary source of a multitude of economic challenges, including an unsustainable fiscal deficit, soaring inflation, a low rate of investment, and a fragile balance-of-payments situation.

This is not the first instance where the IMF chief has urged Pakistan to impose taxes on the affluent to bolster its tax revenues. Back in February, she emphasized that, for Pakistan to function as a viable nation, it is imperative for high-income individuals to contribute taxes, while subsidies should be directed solely to the underprivileged. Unfortunately, the previous ruling coalition, akin to its predecessors, disregarded her counsel. The June budget failed to address the fundamental issue of the nation’s dwindling tax revenues, as it strategically avoided bringing undertaxed and untaxed sectors like real estate, agriculture, and retail into the tax net, fearing potential political backlash.

Instead, the government chose to increase the tax burden on “captive taxpayers” – salaried individuals and the organized corporate sector – to meet the revenue targets set by the IMF for a new bailout programme. The tax measures introduced in the budget, such as the differentiation between tax filers and non-filers, run counter to the broader objective of formalizing the economy and discourage tax compliance, perpetuating risks to the long-term sustainability of the country’s economic framework.

With one of the world’s lowest tax-to-GDP ratios at 8.6%, Pakistan has consistently faced a fiscal deficit of over 7% in recent years, primarily due to the reluctance of its leaders to expand the tax base. It is no surprise that the country now finds itself ensnared in a debt trap, perpetually seeking diminishing financial assistance from international lenders to meet its obligations and provide some relief to its impoverished citizens.

It is high time for Pakistan’s policymakers to heed Ms. Georgieva’s persistent calls for comprehensive income taxation, regardless of its source, to transform the nation into a functioning entity. All of the people’s woes – inflation, unemployment, rising expenses, and escalating education costs – will continue to worsen in the foreseeable future and beyond. Even if the current IMF programme is successfully completed, it will necessitate further sacrifices from the public, and a subsequent programme with similar or even more stringent conditions will become an urgent requirement.

Presently, Pakistan finds itself buried under a mountain of debt, with its populace trapped in a vicious cycle of indebtedness. Even if we hypothetically anticipate a turnaround in the coming years, we will still have to grapple with exacerbated poverty rates, dismal literacy levels, and worsening nutrition indicators, to name just a few of the challenges ahead.

Regrettably, the government currently lacks the fiscal flexibility needed to address the pressing socioeconomic crises at hand. It appears unlikely to gain this flexibility anytime soon, primarily due to the rigid agreements in place with the IMF. Given the current circumstances, the government is unable to reduce taxes or expand subsidies.

However, there is an opportunity to heed the advice of the IMF chief, who recently engaged with the caretaker prime minister on the sidelines of the UN General Assembly. The government could take decisive action to bring major tax evaders into the formal tax system. Achieving this, though, requires a level of determination and influence that both the democratic and military ruling elite have historically struggled to muster.

Nonetheless, a state that cannot shield its citizens from the vicious cycle of debt risks seeing its global standing decline. Pakistan already faces no shortage of critics eager to label it a failing state, and recent developments provide them with ample ammunition.

The immediate priority should be to generate sufficient revenue to return to the IMF and negotiate more favorable terms. This, once again, necessitates the taxation of powerful interest groups and shadowy entities that have remained beyond the reach of the law in this Islamic republic.

Looking ahead, if these groups continue to enjoy unfair and unlawful protection, law-abiding citizens who pay taxes will slip further down the social hierarchy. This could lead to a demographic catastrophe while the country strains to secure additional bailout loans from international organizations and friendly nations. History is replete with lessons on the consequences when a household debt cycle inflates into an unsustainable bubble and subsequently bursts, causing people to channel their helplessness into anger directed at the state itself. We came perilously close to such a scenario when the shock of skyrocketing electricity bills in August drove people to take to the streets. Therefore, any necessary actions must be taken swiftly.

To navigate the current fiscal crisis and regain financial stability, Pakistan must prioritize comprehensive tax reform. This includes bringing major tax evaders into the formal tax net, regardless of their influence or special interests. Failing to do so not only perpetuates economic inequality but also endangers the well-being of ordinary citizens who bear the brunt of the nation’s financial woes. Swift action is imperative to avert a looming disaster and restore Pakistan’s economic standing on the world stage.

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