Revenue targets

EDITORIAL: Pakistan has been on an International Monetary Fund (IMF) programme since 2019 — a programme that was suspended twice — once during the Covid-19 global crisis (2020) and again from October 2022 to June 2023 due to the then Finance Minister Ishaq Dar violating agreed conditions.

The expensive lesson learned by the Pakistani authorities at the expense of the hapless public was that the IMF was unwilling to phase out the harsh upfront conditions or allow waivers in the quarterly reviews given our history of either not implementing politically challenging conditions or reversing IMF mandated reforms as and when a programme was completed.

What was a particularly expensive lesson learned by the elite stakeholders was that friendly countries (China, Saudi Arabia and the United Arab Emirates) whose 16 billion-dollar worth of rollovers were critical to shore up the country’s reserves as well as the external rupee value, required the country to be on a rigidly monitored IMF programme before they were willing to extend the rollovers for another year.

It is therefore little wonder that the subsequent two programmes — 3 billion dollar nine-month long Stand-By Arrangement in July 2023 to cover the period of the caretakers and the 36-month 7 billion dollar Extended Fund Facility programme subsequent to the February elections. But there have been design flaws that one would hope would be dealt with appropriately in the budget 2025-26 by the Fund as well as by the Pakistani authorities, particularly with reference to pending tax and energy sector reforms.

The tax reforms to date have focused on raising the tax revenue by an unrealistic 40 percent on average, and it is no wonder that in the first 10 months of the current fiscal year a shortfall of 833 billion rupees has been acknowledged by the Federal Board of Revenue (FBR) and this in spite of the fact that the Board relied on low-hanging fruit notably raising the tax on existing taxpayers and on levying withholding tax in the sales tax mode, an indirect tax whose incidence on the poor is more than on the rich.

One would hope that in next year’s budget the focus would be on making the tax structure fairer, more equitable and less anomalous, which would require implementation of the tax on the income of rich landlords legislated by all the provincial assemblies to be implemented from 1 July effective 1 January 2025 though, disturbingly, the mechanism to assess the income of the landlords has not been dealt with.

In addition, government sources have reported that the traders will be taxed from the next fiscal year, a pledge made yet again to the Fund, however several previous administrations, including the incumbent in 2024, attempted to tax this sector but failed due to their formidable street power.

Energy sector reforms are pending however reports suggest that the Fund has agreed to borrowing from banks, already too exposed to the energy sector, to reduce the over 2.3 trillion-rupees circular debt with the interest to be payable by the consumers. Two observations are in order.

First, in 2013 the Dar-led Finance Minister browbeat the banks to lend for this purpose and to-date the loan itself remains unpaid though the interest on the debt is being borne by the consumers. And second, this was proposed by Muhammad Ali during the Caretaker setup last year but was rejected by the Fund as not feasible. Reports suggest that the banks have now been convinced to lend to the power sector at lower rates, which is why the Fund has finally agreed to this proposal.

There is no doubt that tariffs on electricity have come down based on the savings expected subsequent to the renegotiation of contracts with Independent Power Producers; however, not only are these projections into the future but so far there have been no progress in rescheduling the China Pakistan Economic Corridor (CPEC) power projects and one would have to wait and see if these savings are realised or frittered away due to the: (i) inability to undertake other reforms notably improving governance in the sector, which includes the heavy distribution/transmission losses; (ii) inability to take appropriate measures with respect to net metering rates; and (iii) failure to end the half a trillion rupee annual budgeted tariff differential subsidy, scheduled for fiscal year 2026-27 as it is a politically sensitive subject.

It is important to note that so far reforms, like in previous IMF programmes, centre on passing on the buck to the consumers. One would, therefore, hope that the costs of the tax and energy sector reforms begin to be absorbed by the elite, and this would be possible if the current expenditure is massively reduced rather than relying on higher tax collections and borrowings.

Copyright Business Recorder, 2025