Woes facing the economy

ByAsrar Raouf

Former Civil Servent


October 22, 2022

Woes facing the economy

Ansar Raouf comments on the ups and downs of the country’s economy

While the news that the IMF is prepared to extend as much support to Pakistan as possible keeping in view the current massive flooding and Woes facing the economy the country suffered came as a much-needed breather for the much beleaguered financial policymakers but still the economic challenges they face are huge in their content. IMF confirmed that it has accelerated some of its disbursement recently to the exogenous shocks and the shock of an increase in the price of food and commodity.

It added that it is waiting for the assessment of damages the World Bank and UNDP are conducting in order to see the repercussions on public finance and the impact of the Woes facing the economy and on society. It mentioned that based on this assessment the IMF will reconsider many options in the context of the already limited fiscal space that exists. This indeed is an encouraging prospect as Pakistan was badly smothered by the grip of the IMF and the sadistic former government gleefully agreed with the conditions imposed by the international lender of the last resort.

It was mentioned that the region spends two percent of its GDP on social protection and in certain cases what countries are spending on subsidies could be double that, therefore, it is very important to use this moment where challenges are mounting particularly where an increase in prices is hurting and to reallocate the resources for those who need it most. In this context, the IMF emphasized that this is something that it is not part of the IMF conditionalities as this is part of what is needed in order to provide the right protection for those who need it at a time when inflation is very high.

IMF Support

Elaborating on the point it was stated that since the outbreak of the Covid crisis, the IMF has supported both the Middle East and North Africa (MENA) and Caucasus and Central Asia (CCA), plus Afghanistan and Pakistan, with $21.3 billion in financing and, in addition, in 2021, it provided, through the SDR allocation, additional boost to reserves by $49 billion.

The efforts to expand the tax base are also continuing and in this connection, it was reported that the FBR has rejected the National Database Registration Authority’s (NADRA) claim for expanding the narrowed tax base through its prepared tax profiles of potential tax dodgers arguing that such profiles could not be converted into taxability.

NADRA shared 3,500 tax profiles of potential tax dodgers with the FBR to find out possibilities for expanding the tax base a couple of months back. However, after scrutinizing the data, the FBR found that such profiles could not be converted into taxability under any circumstances whatsoever. Earlier, NADRA claimed that its data could make wonders whereby the FBR failed to expand the tax base. The income tax law at that time incorporated changes for paving the way for data sharing for expanding the narrowed tax base.

Moreover, now when the FBR high-ups were contacted for seeking their version, they asserted that they have analyzed NADRA’s tax profiles in detail and found that such profiles could not be converted into taxability. FBR elaborated that there was an urgent need for purchasing software for assigning its field formation to utilize the data. Whereby proper track down should be kept in place to verify whether respective chief commissioners in their jurisdictions utilized the data to expand the narrowed tax base.

FBR Is Facing Challenges

And FBR in its study found that the tax gap of Rs.3,000 billion existed due to policy issues and faulty enforcement. There is a tax gap of Rs.3,000 billion out of which Rs1,800 billion is a policy gap, as it occurs mainly because of tax exemptions/incentives provided by the FBR woes facing the economy to different sectors. There is a remaining compliance gap of Rs.1,200 billion. Under the Finance Act 2022, the FBR and the NADRA have empowered the exchange of information for expanding the tax base.

Apparently, there is no scarcity of data and information but the FBR is facing challenges to convert this information into taxability. The problem arises as to how to convert the information into taxability under the existing law of Pakistan. It is only true that people are earning lofty incomes, but they never come into the tax net.

Under the IMF agreement, Pakistan authorities had committed that they would expand the tax base by bringing 300,000 persons with data on the withholding tax of businesses, third-party data, and physical surveys to book new individuals. The IMF in its last review report said that the FBR will bring the service sector, notably retailers, into the tax net by making better use of data.

On the other hand, Pakistan’s oil and eatables imports grew 9.06 percent to $7.58 billion in the first quarter of the current fiscal year from $6.95 billion a year ago. In contrast, textile and clothing exports could only rise by 3.68 percent year-on-year to $4.58 billion due to slow demand and the high cost of local production because of expensive energy. The government has recently announced to offer of subsidy on energy for the export sector.

Import Of Oil

The oil import bill increased by over 5.94 percent to $4.86 billion in July-September from $4.59 billion over the corresponding months of last year with further breakup showing that the import of petroleum products went up by 9.79 percent in value. Crude oil imports rose by 7.98 percent in value during the period under review while liquefied natural gas declined by 5.35 percent. Liquefied petroleum gas imports jumped by 10.69 percent in value in FY23.

The food import bill rose by over 15.21 percent to $2.72 billion in the three months under review from $2.36 billion a year ago to bridge the local production gap. Within the food group, the major contribution came from wheat, sugar, edible oil, spices, tea, and pulses.

Pakistan imported 856,813 tons of wheat in the first quarter of this year to bridge the shortage in local production. The import value of the wheat stood at $408.65 million during the months under review. Palm oil imports rose 27.45 percent to $1.13 billion between July and September this year against $891.15 million in the corresponding period last year.

 Machinery Import Bill

Contrary to this, the machinery import bill declined by 37.89 percent to $1.76 billion in 1QFY23 against $2.84 billion in the same period last year. The major contribution to the decline came from the import of almost all sectors, including mobile phones and textile machinery. However, the electrical machinery posted growth during the period under review. The transport group also posted a negative growth of 45.17 percent to $605.63 million in the first quarter of this year.

Textile and clothing exports grew by just 3.68 percent year-on-year in July-September. High energy cost was one of the reasons for the slowdown in textile exports. Ready-made garments exports jumped 5.85 percent in value and 39.31 percent in quantity in July-September, while the exports of knitwear edged up 15.40 percent in value and 64.56 percent in quantity.

Bedwear exports dipped by 2.93 percent in value and 20.01 percent in quantity. Towel exports declined by 1.67 percent in value and 18.22 percent in quantity but exports of cotton cloth rose by 4.21 percent in value and a decline of 22.67 percent in quantity. The Weekender


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