Pakistan, IMF yet to reconcile on fiscal framework

ISLAMABAD: Pakistan and the IMF [International Monetary Fund] are yet to reconcile on the fiscal framework as Islamabad is making its last-ditch efforts to convince the Fund staff for moving ahead with ‘manageable fiscal adjustments’ of 1.5 to 2 per cent of gross domestic product (GDP) in the coming budget.

Top official sources confirmed to The News that the economic managers are still in the catch-22 situation, as on the one hand they are required to convince the IMF of a slower pace of fiscal adjustments, and on the other they are facing the daunting task of taking their political leadership into confidence for reducing the cost of losing political capitals through tough measures.

When contacted by IMF’s Resident chief, Esther Perez Ruiz, to seek her comments on Monday, she replied, “The discussions with the Pakistani authorities, aimed at reaching an agreement to enable the conclusion of the pending seventh review under the 2019 Extended Fund Facility (EFF), are ongoing and remain very constructive.

“The IMF appreciates authorities’ efforts toward bringing fuel prices in line with international prices, as part of a wide-ranging set of policies and reforms to repair macroeconomic stability and achieve programme objectives.

“The budget for the next fiscal year is a key policy instrument in this regard. The IMF looks forward to facilitating review progress via continued dialogue and close engagement with Pakistan’s government,” she added.

However, Pakistani authorities especially an FBR team, along with the Ministry of Finance, would be required to convince the IMF’s specialist on the fiscal front that the taxation measures would be able to broaden the tax base as well as jack up the tax collection beyond Rs7.255 trillion and up to Rs7.5 trillion without creating distortions in the tax system.

When a top official of government functionary was contacted for comments, he said that the government was still making efforts to convince the IMF on the pace of adjustments on the fiscal front, which would be unveiled through the upcoming budget as the government wanted to undertake fiscal adjustments in the range of 1.5 to 2 per cent of GDP, equivalent to Rs1.5 trillion to Rs2 trillion maximum in the coming budget through raising country’s revenues and curtailing expenditures. The IMF placed reformed Personal Income Tax (PIT) as a structural benchmark, but the FBR wants to avoid increasing tax rates, especially on lower slabs, and reducing the number of slabs from 12 to 6 in the coming budget.

Although, the federal finance minister publicly refused to jack up PIT rates in the coming budget, insiders say that everything was still open for taking the IMF into confidence before the announcement of the budget within the next few days. The budget for 2022-23 will be announced on June 10, 2022.

The FBR is making efforts to convince the IMF for slapping increased rates on higher-income slabs and it is also under consideration to impose a luxury tax on higher slabs over and above the income tax rate in the coming budget.

However, the FBR is busy identifying income tax exemptions in the coming budget. There are different income tax exemptions that are under consideration to be withdrawn in the budget for 2022-23.

However, it requires the political will of the government whether it can go ahead taking the bold decision to withdraw income tax exemptions such as charitable donations, investment in shares and insurance, investment in health insurance, contribution to an approved pension fund, introduced in Finance Act 2021 for specified industrial undertakings, Clause 57(1) Income of NIT Trust, Clause 66-Comsats, Clause 99A- Profit from sale of immovable property to a REIT, Cl 103 A- inter-corporate dividend, Cl 105B - dividend from a corporate agricultural enterprise, Cl 132C (inserted by Finance Act 2021 with retrospective effect from 2013) on income from bagasse based power projects.

The tax credits for mostly for individuals as income tax exemptions are available to military personnel, judges, president, governors, and ministers on different perks and privileges and it is yet to see whether the government withdraws these income tax exemptions or continue by citing different excuses in the next budget.