EDITORIAL: Minister of Finance Muhammad Aurangzeb while speaking to a foreign news agency categorically stated that the International Monetary Fund (IMF) programme remains on track and as per previously agreed schedule, consultations on the budget for 2025-26 will commence from 14 (today) till 23 May.
The ongoing Extended Fund Facility (EFF) programme envisages a range of time-bound actions/structural benchmarks that include: (i) discontinuing government interventions and purchases of agricultural commodities by State-Owned Entities or provincial food departments that should be done solely for purposes of a narrowly defined national food security, and not as quasi-fiscal social policies, including to boost farmers’ income or provide untargeted subsidies for staples; (ii) subsidies have taken the form of low-cost financing and other concessions, which although varied across industries, left financing and taxes net of subsidies more favourable than in peer economies and less-favoured sectors.
The tax system has been extensively used to provide non-transparent support through exemptions for privileged sectors like real estate, agriculture, manufacturing, and energy, as well as, through the proliferation of Special Economic Zones (SEZs) with the agreement to phase out these subsidies and SEZs and taxing the income of the rich landlords from 1 July 2025 effective 1 January 2025; and (iii) the government’s intervention in price setting, including fuel products, power, and gas (biannual), combined with high tariff and non-tariff protection, tilted the playing field in favour of selected groups or sectors. Despite all this support, the business sector has failed to become an engine of growth, and the incentives eventually weakened competition and trapped resources in chronically inefficient (including perpetually “infant”) industries.
While the focus of the Fund team is to end the elite capture in the agriculture and industrial sectors yet what is ignored is the fact that the cost of these reforms has so far been paid by the general public through higher utility charges (to meet the objective of full cost recovery), the reliance on indirect taxes, currently at 70 to 75 percent of all taxes collected, whose incidence on the poor is greater than on the rich, the higher tax rates on the salaried people, who were already paying the major portion of direct taxes, and last but not least, the rise in reliance on easy to collect petroleum levy, which again is an indirect tax. While the Fund staff has emphasised the need to increase the Benazir Income Support programme (BISP) yet it approved a mere 3 percent of total current expenditure outlay on this item even though the poverty levels in this country were a high of 42.4 percent as per the World Bank and a tad higher at 44 percent as per independent economists.
The Fund is proposing that the government streamlines subsidies (power sector/food essentials through Utility Stores) through the BISP programme, which has scientifically identified beneficiaries. However, this transition is a slow process and one would hope that the Fund reviews its design flaws and begins to insist on: (i) pension reforms specifically initiating employee contribution from the 7 percent of the total workforce whose income and subsequent pension are paid at the taxpayers’ expense; (ii) seek a massive reduction in current expenditure, to the tune of 2 trillion rupees from what was budgeted for the current year, which must include a freeze on salaries, reduction of the work force and minimising operational expenses; (iii) providing realistic figures for non-tax revenue as this is not part of the divisible pool which overstates the State Bank of Pakistan profits and leads to upping the petroleum levy as and when there is a tax shortfall. It is relevant to note that during the first 10 months of the current year the tax shortfall has been 833 billion rupees from what was budgeted; (iv) a more realistic Public Sector Development Programme, which is routinely slashed at the end of the fiscal year to meet the budget deficit targets; and (v) direct instead of indirect taxes must form the bulk of the total revenue collected.
Based on the government’s continuing policy to delay structural reforms and instead pass on the buck to the general public the Fund, therefore, would be well advised to seek design changes that would mitigate the burden from the public and shift it towards the elite — be they in government or in private sector.
Copyright Business Recorder, 2025