Revenue collection and IMF restraints

ByAsrar Raouf

Former Civil Servent


December 3, 2022

Revenue collection and IMF restraints

Asrar Raouf describes the current revenue position

The financial crunch Revenue collection and IMF restraints faced by the country is worsening by the day as the foreign exchange reserves are dipping fast amidst inordinate delay in release of $1.8 billion IMF tranche. The resumption of 9th review of Pakistan-IMF programme review has been postponed owing to the impediments in calculation of the estimates of the flood damages and funds required for rehabilitation and reconstruction efforts. Moreover, the Fund is not very receptive to the urging of Pakistani financial managers that they need more fiscal space to adjust to the widespread devastation caused by the flooding and the Fund’s perspective is that the underlying conditions causing recurring budgetary deficit have not much to do with the climate-induced calamity as it pertains to structural imbalances within the financial makeup of Pakistani governance system and unless that is rectified and reformed, it would be self-defeating to keep on sinking more funds into Pakistan’s economy.

By the looks of it, however, Pakistani revenue authorities are doing their utmost to increase revenue collection and so far they have become successful in doing so. It certainly is not an exercise in isolation as all associated with the Federal Board of Revenue are putting in hard work to meet the revenue targets set before them and currently it is reported that they have successfully exceeded the target set for the period by Rs.8 billion by collecting Rs.2.688 trillion in the first five months of the current fiscal year. This is certainly a performance worth lauding as the revenue collection has posted a growth of 15.3 per cent against Rs.2.330 trillion collected in the same period last year.

It is all the more healthy as just last month the collection fell short by 17 per cent off the target. Moreover, compared with Rs.480 billion in the same month last year, the revenue collection posted a year-on-year growth of 11.5 per cent. Nevertheless, it is pointed out that the growth in collection during July-November period is much below what the government had committed to the International Monetary Fund to achieve the annual collection target. The healthy growth in tax revenues underscores the resolve of the government and the FBR to make Pakistan financially viable and get out of its current economic woes. It is also under pressure from the IMF to increase its revenue earnings that are considered to be amongst one of the lowest globally despite the alternate economy showing signs of prosperity.

In this context, the revenue collection trend during the first five months of the financial year augurs well for the achievement of assigned revenue targets for the current financial year. It is important to take into positive account the endeavours of all field formations and officers for their untiring efforts and commitment to optimise revenue collection in difficult times where sales tax collection on imports is showing negative growth. Achievement of targets was made possible due to extraordinary steps taken in the areas of recoveries, monitoring and day-to-day vigilance.

It must also be pointed out that only in the area of Income Tax arrears, the FBR collected Rs.24.17 billion during the five-month period against Rs.11.69 billion collected last year. During the month, Rs.8.98 billion were collected against Rs.6.65 billion collected last year. This trend is required to be maintained as it is the abject need of the day and the country heavily depends upon it. In addition, the FBR refunded Rs.135 billion during the period mentioned herein compared to Rs.124 billion paid last year, reflecting an increase of 8.87 per cent. This is reflective of FBR’s resolve to fast-track refunds to prevent liquidity shortages in the industry.

The collection of direct tax registered an increase of 43 per cent while the customs collection remained short of the target due to a depression in imports. A major dip was noticed in the collection of duty and taxes at the import stage mainly due to a fall in imports of non-essential items. The State Bank of Pakistan is approving letters of credit with a delay of four to six weeks. The customs duty collection remained short of the target by at least Rs.10 billion in November. A major drop was also witnessed in a few major revenue spinners like automobiles—CBU and CKD and other machinery due to the import compression policy of the government. The collection at the import stage contributes almost 50 per cent in the total revenue collection of FBR.

On the other hand, Pakistani finance managers have initially projected only Rs.990 billion fiscal slippages in this financial year that do not adequately reveal the quantum of negativity of Rs.55 billion on its revenues. Such estimate casts dark shadows over the reliability of figures provided by Pakistani finance managers and have added to the apprehensions of the IMF that already harbours many misgivings in this respect. This situation has exacerbated in wake of the fact that many international agencies are also carrying out relief works in Pakistan after the floods and the UN Secretary General spearheaded such efforts who was also instrumental in supporting the case for financial relief to Pakistan owing to its vulnerability to climate exigencies though the country is not directly responsible for them.

The current position is that there is substantial disagreement between Pakistan and IMF over the impact of the floods on the fiscal framework and such misgivings are reported to be causing difficulties in resolving the issue related to the release of the next financial tranche. The lack of understanding is so profound that the IMF is reported to be deliberately delaying the proposed visit of its team to Pakistan to sort out matters. There are concerns evinced by the IMF that the overall budget deficit that the National Assembly had approved at Rs.3.8 trillion was now projected at nearly Rs.4.8 trillion and despite the country witnessing the worst floods in its history, the coalition government has been signing off billions of rupees of unbudgeted cheques for exporters and farmers and it has waived off Rs.40 billion in revenue in favour of traders. However, it has not shown any major slippage on account of non-interest expenses and tax revenues, turning the figures unrealistic.

While Pakistan would be seeking a few waivers on slippages from the fund programme because of floods, the fund staff had been examining the government’s position on flood-related expenditure on budget and related financing flows from multilateral and bilateral lenders and donors. Fund sources also suggest that two sides were remotely engaged over policies to reprioritise and better target support toward humanitarian and rehabilitation needs, while also accelerating reform efforts to preserve macroeconomic and fiscal sustainability, including with continuing financial support from multilateral and bilateral partners.

The delay caused in settling matters with IMF is badly hurting the prospects of Pakistani economy that is under tremendous duress. Both sides are obviously trying their best to sort out the differences but they are quite wide and apparently unbridgeable as the coalition government desperately needs fiscal space to gain badly needed political advantage whereas the IMF is unwilling to concede on the structural perimeters of its reform agenda. In the current scenario it has become quite difficult to align the divergent points of policy. TW


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