Asrar Raouf describes the mounting financial situation
Asrar Raouf describes the mounting financial situation
The Pakistani finances are dicey political dispensation realizes fully-well that it has not inherited a bed of roses but has taken on a very tough challenge. It is widely acknowledged that the Pakistani economy has tanked owing to the highly erratic policies followed by the former government. Pakistani economy is in grip of multiple and intractable issues that required persistent and patient handling. For the time being the new financial managers appear to be in a quandary and do not have a clue about where to begin from as matters are really complicated. The main issue remains negotiating financial arrangements with the IMF as the 7th review of the running programme is long overdue. The level of difficulties in respect is that IMF has set out five major conditions for the revival of $6 billion bailout package, including reversal of fuel subsidies and withdrawal of the tax amnesty scheme.
The new finance boss Miftah Ismail is an old hand and is a well-respected economist but the problems are certainly overwhelming. He has now gone to Washington to parley with the IMF and would take up IMF conditions such as increase in electricity tariffs, imposition of new taxes and ensuring fiscal savings aimed at bringing down the projected primary budget deficit of Rs.1.3 trillion to the earlier agreed limit of Rs.25 billion surplus. As can be seen that this is a fairly tall order and may be very cumbersome to tackle as fiscal space available with Pakistan has considerably lessened and temporary measures cannot do the needful.
In this context, Miftah Ismail has formally requested an interview with IMF Managing Director Christalina Georgieva with a view to seek maximum possible concessions against the commitments given by the former PTI government. The IMF programme remains stalled due to the previous government’s back-pedaling on implementation of the condition it had agreed with the Fund in addition to fixing the fuel prices at their level on 1 March 2022. The conditions have been set out for the next loan tranche of around $960 million under the 7th review of the programme. At the moment three programme reviews are pending and their completion will pave the way for the release of a total $3 billion remaining three tranches before the programme is completed in September 2022. It was reported that the revised estimates suggested that the country would need to pay Rs.192 billion more in fuel subsidies for the May-June period, bringing the total subsidies to Rs.293 billion since 1 March and it appears that it would be very difficult to make IMF agree on these concessions.
It is reported that the new finance team is wiling not only the subsidies to be withdrawn but the government also may go to the extent of restoring petroleum levy and sales tax on the sales of the petroleum products. It also appears that the new government has no qualms about withdrawing the tax amnesty scheme that the previous government had announced and it is also willing to reduce the Public Sector Development Programme (PSDP) to the tune of Rs.600 billion. At the face of it the new finance managers proclaim that the government would not endorse those conditions that could disrupt economic activities and expect that the IMF would not push hard to immediately increase the electricity prices and an effort would be made to delay this action too.
The Pakistani finances are dicey new financial team is also seeking financial help from China and expects that the country would get $4.3 billion breathing space from China in the shape of earlier disbursement of $2.3 billion commercial loan and rollover of $2 billion SAFE deposits. The top priority for the new team is to sustain the foreign exchange reserves at the current levels and also arrange $4 billion more to pay for the current account deficit. They are of the view that exchange market was very thin and there was a need for remaining vigilant about any attempts to manipulate the rupee value and this uncertainty has resulted in high volatility in currency market.
In the Pakistani finances are dicey revenue front the FBR has utilised short-term measures in an attempt to show less revenue shortfall, bringing into question its performance that is largely dependent on higher imports. In addition, the FBR also could not deliver on the previous government’s single largest initiative to integrate the 500,000 retail machines with the tax system and collect additional Rs.50 billion in revenue. It was reported that till March it could integrate less than 4,500 businesses that paid additional revenue of about Rs.2.5 billion. FBR registered less than 3,900 retailers who integrated about 8,600 machines with the FBR system during the current fiscal year. The reconciled figures showed that the tax collection in March remained Rs.35 billion short of the monthly target and was still Rs.6 billion less than what the FBR had claimed. It was the first time that the reconciled tax collection remained less than the provisionally released figures, giving credence to the reports that the FBR deliberately fudged the figures.
On the other hand, the taxpayers are crying hoarse against undue tax demand notices that the FBR is sending to them without following the due process. As a result, the tax amount stuck up in litigation has suddenly doubled to Rs.3.6 trillion. For the current fiscal year, the last government had set tax target at Rs.5.829, which was increased to Rs.6.1 trillion in January this year after the Rs.360 billion mini-budget was introduced. In the current scenario the FBR now needs to collect Rs.575 billion per month to hit the benchmark that is virtually a steep rise to climb. It is already recognised that the trend of the first half of the month points out that achieving this month’s target of Rs.485 billion has also become difficult. Quite worryingly the IRS that was required to collect Rs.5.2 trillion out of the revised annual target is now trying to shift the onus of responsibility partially towards the Customs but Customs authorities refused to accept the proposed Rs.970bn target and declared sticking to its Rs.917 billion target.
As is widely Pakistani finances are dicey known the FBR’s tax collection is largely driven by imports that contributed 52% in total collection and during the first nine months of the fiscal year, the sales tax collection at the domestic stage decreased by 8.9% despite double-digit inflation in the country. More worryingly the POS initiative of the FBR appears to be failing as instead of opening 500,000 point of sales (POS) machines and fetch additional Rs.50 billion in the current fiscal year the FBR could integrate hardly 4,500 more businesses that installed about 10,000 more machines. The collection from these retailers amounted to Rs.16 billion registering an increase of only Rs.2.5 billion in nine months.