Over taxed, over burdened

Compliance with the latest IMF conditions will pose further challenges for the people

Over taxed, over burdened


he International Monetary Fund (IMF) is holding negotiations with the government of Pakistan over the ninth review of its $7 billion loan programme. The Fund has spelled out certain conditions for Pakistan to get the next tranche of this loan and address the immediate economic crisis. The conditions, if met, will have both direct and indirect negative impacts on the common people.

The IMF has asked Pakistan to remove energy and fuel subsidies and move to a market-based exchange rate. Besides, it has asked the country to increase its general sales tax rate to a minimum of 18 percent from 17 percent at present, to raise more taxes.

The IMF has also determined that Pakistan faces a primary deficit of 0.9 percent of the gross domestic product (GDP) equivalent to Rs 800 to Rs 850 billion per year mainly because of less revenue than expenditures. To plug this gap, Pakistan will have to increase its taxes, widen the tax base and remove some of the exemptions.

There are reports that the government and the IMF might agree to abolish the reduced electricity tariff for the export-oriented sector and link it to export proceeds. The argument here is that the textile sector is selling 40 percent of its production in the domestic market, so that a subsidy on power and gas tariff on the entire production is not justified.

Pakistan has less than $3 billion in foreign reserves, hardly enough to finance three weeks of imports. It needs to conclude the deal with the IMF to keep its economy going. The ever-increasing circular debt in the energy sector – in both power and gas sector – is also a matter of concern for the Fund. It is also negotiating a circular debt management plan

How compliance with these conditions will impact the common man needs to be analysed.

Economist Asad Sayeed says the impact will be primarily in terms of inflation. “There will be some impact on unemployment but that will be limited to the formal sector. The most hard-hitting inflationary impact will be on the wage workers. They are roughly a third of the employed labour force, according to the Labour Force Survey. They will be impacted by inflation in food and fuel prices as well as energy prices as wages will not keep up with inflation.”

Sayeed says the middle and upper middle-class segments will also see the real value of their savings/ assets depreciate by at least one third. He says those who are self-employed (roughly a third of the workforce) will also suffer but less so, as they will be able to pass on at least a part of their costs to consumers of their goods or services.

According to Sayeed, regionally, the worst hit areas will be north and central Punjab and parts of the Peshawar valley in Khyber Pakhtunkhwa and Karachi as the highest share of wage employees are there and they are the biggest consumers of fuel (through vehicle ownership or public transport) and energy.

A large part of the population in Sindh, other than the big cities, most of South Punjab and Balochistan will be least affected because they are already very poor, he says. “People in these regions do not consume much electricity or gas, work largely in agriculture sector and a smaller proportion of them have wage employment. Food price inflation will hit them but since their nutrition levels are already low, the relative impact on them will be less.”

Economist Kaiser Bengali says new taxes will make life tough for people. He says there is no capacity among the masses to bear this burden. “People are already over-taxed and the new taxes will make businesses non-viable. Many will shut down.” He says as industries shut down due to heavy taxation there will be unemployment on a large scale. The worst affected will be the daily wage earners because they will have no earning at all. At the same time this source of tax (the closing industry) will vanish.

He says he has heard rumours that the government has plans to tax bank deposits. If so, he says, this is not a prudent decision. “If this happens, people will withdraw cash from banks and the banking system will collapse. Nobody wants their bank deposits to come under the watch and control of tax authorities.”

Journalist Khurram Hussain forsees inflation and unemployment in the aftermath of the IMF review. He says price adjustments and more taxes will push the prices upwards and make life tough for the common man. This, he says, will also affect businesses, which will shrink or close down, resulting in more unemployment. He adds that the government has already raised gas prices and increase in electricity tariff is also likely.

The writer is a staff reporter. He can be reached at shahzada.irfan@gmail.com

Over taxed, over burdened