17pc GST on infant milk, computers, laptops, mobile phones: IMF never pressurised govt to undertake expenditure reforms

ISLAMABAD: In order to revive the stalled $6 billion IMF programme, the government has proposed imposition of 17 percent GST on infant milk, computers, laptops, and mobile phones but the Fund never pressurized the government to undertake any expenditure reforms.

Under the existing $6 billion Extended Fund Facility (EFF) for Pakistan, there have been no conditions in the IMF programme, known as the Memorandum of Economic and Financial Policies (MEFP), to undertake any major expenditure reforms despite the fact that the current expenditures ballooned massively, going up by 75 percent in the last four years.

In the fiscal year 2017-18, Pakistan’s current expenditures stood at Rs4.3 trillion, which increased to Rs7.5 trillion during the current fiscal year 2021-22.

In the wake of increasing inflationary pressures, the IMF has placed a condition to withdraw the General Sales Tax (GST) exemptions. The government imposed 17 percent tax on daily use items such as infant milk, laptops, computers, and mobile phones as well as increasing tax on cars and telecom services but there was no demand from the IMF to undertake any expenditure reforms. The question arises why the IMF is not bothered about the wasteful expenditures, economists are questioning.

The total current expenditures in 2017-18 stood at Rs4.3 trillion out of which debt servicing had consumed Rs1.36 trillion. Now the total current expenditures went up to Rs7.5 trillion out of which interest payment was estimated to consume Rs3 trillion, defence services Rs1.37 trillion, pension liabilities Rs480 billion and subsidies Rs682 billion.

The gravity of the ballooned expenditures could be gauged from the fact that the debt servicing witnessed an upsurge by more than 100 percent in the last four years. The debt servicing stood at Rs1.36 trillion in 2017-18, which went up to Rs3.02 trillion in 2021-22. The debt servicing witnessed an increase of approximately Rs1.7 trillion in the absolute term in the last four years.

"The absolute increase in debt servicing of Rs1,700 billion was more than total expenditures occurred on defence as allocation of defense budget stood at Rs1.37 trillion during the current fiscal year 2021-22,” the official data shows.

The government constituted two Pay and Pension Commissions under the leadership of former bureaucrats Abdul Wajid Rana, former Secretary Finance, and Nargis Sethi, former Federal Secretary, but no reforms could be implemented on the pay and pension front.

The monster of pension has been ballooning at a supersonic speed and its liabilities on both federal and provincial levels increased manifold. The federal government allocated Rs480 billion for pension payment and according to the sources, this amount was under-estimated because expenditure on this head might cross Rs500 billion mark at least during the current fiscal year.

When contacted, former Director-General Economic Reform Unit (ERU), Ministry of Finance, Dr. Khaqan Najeeb, expressed his serious concerns on the rising current expenditure and said this rise undermines the stability of public finance and puts pressure on the fiscal deficit.

This leads to a need for raising taxes and the policymakers have to keep pushing indirect taxation, which subsequently hits consumer price increases.

He explained that the current expenditure was merely Rs4,298 trillion in FY2018 and has surged to Rs7,523 billion in FY2022. A seventy-five percent increase in current expenditure is unprecedented. Rising interest payments, burgeoning pensions, increases in subsidies, and grants are mainly responsible for this rise.

He said that Rs7,523 billion also does not depict the complete picture of the accrued liability. The G20 deferral of principle and interest to the tune of $3.7 billion has built up in the last two years but remains unpaid as a deferred liability. The amount due in FY22 is not included in the Rs7,523 billion.

He further explained the country's mark-up liability was merely Rs1,526 billion in FY18 and has shot up to Rs3,060 in FY22. Similarly, the pensions increased from Rs330 to Rs480 billion and subsidies from Rs147 billion to Rs682 billion in this time period.

The rise in four years in just three heads adds up to Rs2,219 billion or $12.5 billion. For context, the defence services of the country would only consume Rs1,360 billion in FY22.

Dr. Khaqan felt pensions reforms, moving to targeted subsidy regime for the poor and completely moving away from subsidizing inefficient industry and fixing state-owned enterprises are essential for fiscal sustainability. He felt a serious research agenda is needed to study the reprofiling of government debt to manage the interest payments.