The eighth review by the IMF has been concluded. With two waivers; the government has come home with a clean report card. The question is that, what are the pre-agreed terms for the next review? There are no issues on the external front with all the quantitative conditionality met comfortably; sailing is smooth with foreign exchange reserves close to $19 billion.
The major economic problem is missing growth. However, that is not the fund’s concern. The IMF has its eye on fiscal slippages. So far, FBR has persistently failed to meet revenue targets. When FBR misses its targets, the fiscal deficit is impacted disproportionately. The provincial share in the divisible pool is compromised and in return, the provinces do not provide requisite surpluses.
The slippage in FBR revenue adversely affected two of IMF’s quantitative targets for June-end; government budgetary borrowing from the central bank and overall fiscal deficit limits. It also questions the prior agreements with provincial finance secretaries that had mandated increased provincial surpluses consistent with the Programme. How can it be done when the provinces do not get the promised amount from divisible pool?
So it all boils down to the FBR. The institution has limited capacity to enhance revenue through direct taxation measures. This is evident from the fact that only 0.3 percent of the population pays income tax and less than 15 percent of total tax revenues are collect directly, by FBR’s own efforts. The lion’s share of FBR’s revenues emanates from WHT and GST.
The overall taxation system is regressive and anti-growth. But the Fund is not unconcerned besides the top line; irrespective of the quality. That is why Dar has continued with the old school PML-N style of imposing WHT to increase revenues. Back in 1990s, the Nawaz government introduced a number of measures of WHT and presumptive tax regime. The idea was to tax those who don’t pay and are not audited. The taxes were either full or final (presumptive tax) or WHT which are treated by many as final without filing returns.
The first step Dar did in this regime is to raise GST by one percent. The rest of the efforts are on WHT. But the difference this time around is to charge higher rates on those who don’t file. That is a smart strategy; but the risk is that if businesses still refrain from filing returns, they may pass on the added tax burden to consumers.
The hot issue is on the WHT of 0.6 percent on all the banking transactions for non-filers which has for the time being, been negotiated down to 0.3 percent. The trader community has lobbied to do away with the tax altogether. Though the Finance Minister has not budged, the IMF may be perturbed if the government is forced to retract the tax. There are rumours that the tax will go. If that happens, Dar will need alternatives for FBR to make up its collection tally.
Focus on targeting non-filers should continue. FBR should use databases available but also improve its own audit capabilities and fair practices, across the board. Juicing the existing tax base of honest tax payers through higher taxes, must stop. Steps such as retrospective FED on stock brokers, for past four years, and minimum tax of eight percent on services providers; are counterproductive.
In FY15, the budget target of FBR revenue was Rs2810 billion. It was first revised down to Rs2691 billion by the IMF, and then by government, to Rs2610 billion. In contrast, the collection stood at just Rs2580 billion. The tax collection growth target of 24 percent must be backed up with a cogent strategy to meet it.
After all, what is the point of a target that is never met? Sources reveal that Dar has informed the Fund that CNIC has replaced NTN; with effect from July 2015. This is a welcome step and will make the system more connected and transparent.
Apart from taxation issues and fiscal slippages, the IMF may be unhappy over the privatization timelines. To compensate all that, Dar will be further pushed to increase gas tariffs and electricity rates. The steps taken on implementation of GIDC are not only contradictory to the law of the land; but also hurting the export-oriented sector.
Textile exports are stagnant for four years and instead of giving them fiscal incentive to compensate on disadvantage of currency appreciation; their cost has been increased through higher electricity and gas rates.
However, these are also not concerns for the IMF; as loss of employment and growth potential will not affect the Balance of Payment. The Fund will feel secure, as long as foreign exchange reserves are building up.
So the focus is on the sustainability of foreign exchange reserves. Post FY17, debt repayments will commence and the commodity price-cycle may approach a reversal. That could spell crisis and Dar is cognizant of it. Hence the attempt to bargain the remaining reviews on bi-annual basis, instead of quarterly, with the IMF. Though the success of the Finance Minister on that front will become apparent in time; his primary challenge is driving growth and a tax system that can rid the economy of the need for external support, through IMF.

Comments

Comments are closed.