Editorial: Impediments to inclusive growth

EDITORIAL: International Monetary Fund’s (IMF’s) representative to Pakistan Mahor Binici while addressing a panel discussion titled “Financing Sustainable Development in the Emerging World disorder” organised by the Sustainable Development Policy Institute stated that Pakistan needs to increase its tax to Gross Domestic Product ratio to 15 percent to overcome economic and climate change challenges. A Federal Board of Revenue (FBR) report notes that the tax-to-GDP ratio improved to 10.3 percent in 2024-25 driven by a quantum increase in direct taxes after a five-year average of 8.7 percent.

The much quoted proverb — lies, damned lies and statistics is a reference to presenting statistics in a manner most favourable to the compilers — and highlights the necessity of looking at data indicative of a trend, be it favourable or not. The FBR report mentions the five-year tax-to-GDP ratio as being lower than the ratio achieved last fiscal year. Two observations are necessary.

First, the onset of the first wave of Covid-19 in late 2019-20 fiscal year played havoc with output (GDP) and consequently tax collections. Pakistan was subjected to five Covid-19 waves all associated with a significant decline in output with obvious repercussions on tax collections. In 2021-22, GDP grew by nearly 6 percent, on the back of inventories rather than a rise in output.

The IMF first review report on the ongoing programme dated May 2025 notes the following tax-to-GDP ratios: 2019-20 at 10 percent, 2020-21 at 10.3 percent, 2021-22 at 10.4 percent, 2022-23 at 10.5 percent, 2023-24 at 10.6 percent and last fiscal year at 12.6 percent. This data has little synchronicity with the FBR report data. The Finance Division monthly Outlook and Update for July 2025 notes total annual tax collections for 2023-24 at 10.472 trillion rupees against 13.254 trillion rupees in 2024-25 — a rise of over 26 percent.

This rise as per the FBR report is attributable to a quantum increase in direct taxes — from 3,721 billion rupees in the revised (budget) estimates of 2023-24 to 5,826 billion rupees in the revised (budget) estimates of last fiscal year. Two observations on this claim are critical: (i) the withholding tax on purchases payable by the consumers contributed up to 75 to 80 percent of direct taxes collected — a practice that the Auditor General of Pakistan directed the FBR to abandon a few years ago but to no avail; and (ii) the enforcement measures that generated over 300 billion rupees last fiscal year as per the Chairman FBR (budgeted to generate more this year) were on sugar and cement units (with fertilizer factories under consideration this year) that were passed onto the consumers, leading to higher sugar and cement prices in the country. This in turn contributed to a rise in poverty levels domestically.

Higher growth necessarily leads to a higher tax-to-GDP ratio but the question is whether it would raise employment opportunities and reduce the current high poverty levels of nearly 42 percent as calculated by the World Bank? Growth backed by output increase would certainly generate employment and reduce poverty levels but not if growth is on the back of lower inventories or smuggled items.

In this context, it is relevant to note that the major exporters of this country — textiles, surgical/sports goods, carpets, leather — have consistently lamented the rise in their input costs (including high utility charges and a discount rate double that of our regional competitors) with shutdown of local units as well as the exit of many international companies in recent months, which leads one to challenge claims by the FBR.

The impediment to growth, without a shadow of doubt, is due to the severe contractionary policies in practice in an attempt to meet the IMF agreed conditions; however, the economic managers need to present an in-house out of the box alternatives that include a slashing of the current expenditure by at least a trillion rupees that would require a sacrifice from the elite.

True that the country posted a budget surplus of 2.1 trillion rupees in the first quarter of the current year yet this is mainly due to higher non-tax collections, that includes a petroleum levy which burdens the poor more than the rich, and a slashing of the budgeted development outlay to around 40 billion rupees instead of the 150 billion rupees that was to be allocated in the first three months of the current year.

Copyright Business Recorder, 2025