Islamabad now needs to come to Karachi: PBC

KARACHI: The Pakistan Business Council (PBC) has expressed concerns over the country’s weak negotiating position with the IMF, emphasizing that without significant reforms, the outcomes of the 24th programme may mirror past failures.

According to a statement issued by the PBC on Saturday, the council believes the current negotiations may do little to shape the loan programme in a more reform-centric and less front-loaded way.

The PBC expressed that the FBR, in its current form, is incapable of broadening the tax base. “We have known it for some time, and the chairperson of the FBR admitted that yesterday,” it said.

The council said that the IMF knows that the only way to help balance the fiscal account is to put further burden on the already taxed sectors, having recognized the inability of the government to walk the talk on cutting the government’s size and reigning in public expenditure, adding that the IMF is also aware of this government’s inclination towards infrastructure projects, and surprisingly, it appears to tolerate that.

Per the PBC, the IMF seems to be primarily focused on the immediate challenge of dealing with Pakistan’s debt vulnerability, which is also the main impetus for the government. “There are some good measures that the IMF has successfully imposed on the federal and provincial governments. Tax on agriculture is the most important.”

“What remains to be seen is whether it can revise the National Finance Award, as simply producing a provincial budget surplus is hardly a motivation for provinces,” it said.

The PBC added that the provinces need to take responsibility for BISP; leaks in energy distribution; and a good share of the PSDP. The IMF also wishes the government to resist new regulatory and tax-based incentives and phase out special economic zones’ incentives.

This would discourage investment in a country with a low investment-to-GDP ratio and now one of the world’s highest tax rates. Refraining from the expansion of generation capacity and guaranteed return projects is a welcome condition, though its continued insistence on timely adjustment in energy tariffs detracts from fundamental reforms of the energy sector, according to the PBC.

On a positive note, the council added, replacing cross-subsidies with targeted BISP support augurs well for industry burdened with regionally uncompetitive energy costs.

The government should now take the heavily burdened formal sector, of which the salaried class is an important component, into confidence by offering a roadmap on how and when their burden will be alleviated through cutting back on public expenditure and broadening the tax net.

The PBC suggested that the authorities should share progress on digitalizing and restructuring the FBR and get rid of sacred cows. If communicated well, most in the formal sector will accept that their sacrifice is worthwhile and temporary.

The PBC noted that ‘Islamabad now needs to come to Karachi’, which means that the government must listen to businesses and consider their concerns, including the levelling of the playing field with the informal sector, adding that it must also acknowledge the role the formal sector plays as unpaid tax collectors on behalf of an ineffective FBR.