Challenges on the fiscal front

The violation by the PTI government of the conditions it had agreed with the IMF added to people’s misery

Challenges on the fiscal front


akistan’s economy is going through a challenging phase after the coalition government led by the Pakistan Democratic Movement (PDM) undertook aggressive macro-economic adjustment measures for “cooling down”. The economy was growing at nearly 6 percent in the fiscal year (FY) 2021-22 with fast deteriorating domestic and external financial position.

However, in the first quarter (Q1) of the current fiscal year (2022-23), the Federal Board of Revenue (FBR) collected Rs 1,635 billion in taxes (this could improve further once final figures are compiled), higher than the assigned target of Rs 1,609 billion and registering an overall growth of “more than 17 percent for the quarter”.

According to the FBR, this “revenue performance” is “reflective of a robust revenue mobilisation strategy,” “despite zero rating of Sales Tax on POL products, import compression and the prevailing situation of floods.”

An FBR press release on September 30, claimed that “performance in overall collection” without 17 percent sales tax on petroleum products (zero-rated) and “41 percent increase in direct taxes” was in line with the policy of the PDM government to tax the affluent. Further, during Q1, the FBR paid refunds to the tune of Rs 84 billion, higher by 35.5 percent as compared to Rs 62 billion in the same quarter of the last year.

It is worth mentioning that the impact of macro-economic adjustments and forced economic slowdown by the incumbent government has started surfacing. Media reports suggest that the collection beyond targets by the FBR is withering away. During the month of October 2022, as per report in an English daily, FBR’s collection at Rs 512 billion showed a growth of just 16 percent, below the targeted 23 percent and falling short of the monthly target of Rs 534 billion by Rs 22 billion.

A detailed disclosure of this underperformance on the part of the FBR and the Ministry of Finance (MoF) is awaited. Since this trend of missing targets by the FBR due to contraction in imports appears likely to persist over the coming months, a mini-budget casing more financial hardships for ordinary citizens is expected. The masses are already squeezed by the government’s fiscal adjustment policies and hyperinflation (26.6 percent in October).

The imprudent tax collection strategy (failure to broaden the tax base and withdraw exemptions) is one of the root causes of our fiscal mess. The tax-to-GDP ratio (especially FBR’s direct tax collection) is on a decline and the fiscal deficit has reached Rs 1,026 billion as per summary of fiscal operations issued by the MoF.

Contrary to the FBR claims, in Q1 of the current fiscal year, out of the total tax collection of Rs 1,634 billion, direct tax was only Rs 683 billion (41 percent) and indirect Rs 951 billion (59 percent). If withholding income tax on imports, contracts, goods and services is extracted being indirect in nature, the contribution of income tax will not be more than 25 percent. It is for the FBR now to present the data on its website to refute this point.

Governments have been failing for years to curtail the budget deficit. This is evident from the yearly figures of fiscal operations on the MoF’s website. After transfer of taxes to the provinces (Rs 880 billion in Q1 of FY 2022-23), net resources (Rs 964 billion) are not enough to meet the two main expenditures, namely, the burgeoning debt-servicing and defence at Rs 954 billion and Rs 312 billion, respectively.

The second formidable challenge for economic managers is to build foreign exchange reserves to maintain the balance of payments and stabilise the rupee. The people were told that the fourth-time finance minister, Muhammad Ishaq Dar, will tackle these issues on priority. However, no “magic” can overcome the fiscal woes and correct the economic direction of the country without structural reforms.

Despite tall claims, no relief has been provided to the overwhelming majority in Pakistan. The people continue to face the severe impact of high inflation due to failed policies of successive governments, especially those of the coalition government led by Pakistan Tehreek-i-Insaf (PTI) and the austerity measures introduced by Miftah Ismail in the name of protecting the country from the risk of potential default.

In several interviews and articles, Ishaq Dar has criticised the amendments made by the PTI in the State Bank Act, 1956, and vowed to reverse those. However, no such action has been taken in that direction. Dar was apparently relying on the International Monetary Fund (IMF) and expecting the release of the next tranche. His visit to Washington to secure concessions, especially in view of the devastating floods, did not produce the desired results. An IMF mission will not visit the country to review the situation until new taxes are imposed and all unfunded subsidies are withdrawn.

There can be no doubt that violation by the PTI government of the conditions it had agreed with the IMF added to the misery of the people. Miftah Ismail told the media that the federal government was losing around Rs 2,500 million daily due to what he called ‘minefields’ laid by the PTI government. As a result, the incumbent government was forced to promise the IMF a monthly increase in petroleum development levy to reach Rs 50 per litre by January 1 for petrol and for diesel on April 1. The levy would remain at Rs 50 per litre for both fuels until the end of the FY 2022-23.

The politically motivated subsidies given by the PTI government had brought the economy to the verge of collapse as both domestic and external financial buffers were exhausting rapidly. The present government had no choice but to withdraw those to create breathing space for the economy. Due to the violation of the agreement, the IMF imposed harsh preconditions for the revival of the programme.

The PDM government has now raised the petroleum levy to Rs 50 per litre. In doing so it has deprived the public of the benefit that they could have received in the last few cycles of petroleum price announcements. At the same time, the decline in the value of the rupee is complicating the situation.

While resuming the Extend Funded Facility (EFF) with the IMF, the current government had also agreed that if the monthly revenue data showed under-performance by the FBR in Q1 vis-à-vis targets fixed for FY 2022-23, it would immediately introduce additional revenue measures: specifically, levy 17 percent sales tax on fuel products. The government has also agreed to streamline sales tax exemptions, raising taxes on sugary drinks and withdrawing unjustified exemptions extended to exporters and/ or increase federal excise duty on Tier I and Tier II cigarettes by at least Rs 2 per stick with immediate effect.

Considering the recent challenges faced by the economy, especially post-floods, the collection targets will be compromised. If the government decides to impose 17 percent sales tax, it will further aggravate the skyrocketing inflation and businesses will be a step closer to closure due to an abnormally high cost of doing business.

Dr Ikramul Haq, an advocate of Supreme Court and writer, is adjunct faculty at Lahore University of Management Sciences (LUMS)

Abdul Rauf Shakoori is a corporate lawyer based in the USA 

Challenges on the fiscal front