Stabilising the economy

June 19, 2022

Subsidies on petroleum products removed ahead of talks with the IMF

Stabilising the economy


he coalition government led by Prime Minister Shahbaz Sharif has abolished all subsidies on fuel to pave the way for an agreement with the International Monetary Fund (IMF).

The government is making last-ditch efforts to persuade the IMF to strike a staff-level agreement. More tough measures may be on the cards including a Rs 7.92 per unit raise in the electric power tariff. This will cost consumers an additional Rs 225 billion. Gas prices too will be rationalised and a mechanism devised to collect petroleum levy as well as GST on petroleum products.

When Finance Minister Miftah Ismail unveiled the budget the revenues appeared overprojected and expenditures under-stated. However, the IMF is unlikely to agree to the tax breaks for the salaried class. On the eve of the completion of the sixth review, personal income tax (PIT) reforms were made a part of the structural benchmark, making it mandatory for the FBR to prepare a PIT reforms draft by the end of February 2022 and implement it in the 2022-23 budget.

The government made a commitment to the IMF in early February 2022 that the PIT draft legislation will be ready by end of February 2022 and will come into effect from July 1.

Aiming at simplifying the system, increasing progressivity, and supporting labor formalisation, it will: (i) reduce both the number of rates and income tax brackets; (ii) reduce tax credits and allowances (except those for the disabled and senior citizens, and Zakat receipts); (iii) introduce special tax procedures for very small taxpayers; and (iv) bring additional taxpayers into the tax net. Low-income households will be protected as the reform preserves the current PIT threshold (almost three times income per capita). These PIT reforms will yield an estimated 0.3 percent of the GDP in revenue gains in FY 2024.

The FBR proposed Rs 47 billion incentives for salaried class in the budget which is totally unacceptable to the IMF. The non-observance of structural benchmark requires a waiver by the INF. Now the IMF has made it clear that the reduction in tax rates for salaried class will not be accepted.

This time, stabilisation under the prescriptions of the IMF, will have different connotations for the poor and middle-income earners in Pakistan. Earlier, under all IMF programmes. Pakistan had faced inflation been on the low side due to laxity of policies and the IMF prescriptions were meant to tighted fiscal and monetary policies to slow the economic growth. This time, the cooling of the economy will have to be achieved with the CPI-based inflation at 13.8 percent and SPI climbing to 20 percent on a year-on-year basis. The inflation is bound to go up further despite the fact that the government envisaged restricting the inflation to 11.5 percent in the next fiscal year.

Independent economists like Dr Hafiz A Pasha have predicted that the CPI-based inflation might touch 25 percent in the next fiscal year on account of the rising fuel and energy prices. More conservative estimates suggest that inflation will be hovering over 20 percent.

Although some tinkering with official pricing data is under way, one should hope that the government will focus on its policy actions instead of making efforts to tinker with the data because that will result in official statistics losing all credibility.

What needs to be done to protect the vulnerable population and middle income earners? Targetted subsidies are needed for the urban lower middle class. The challenge is to come up with a foolproof design and accurate identification of deserving people so that only the deserving people draw the benefits.

The writer is senior staff reporter,The News International, Islamabad.

Stabilising the economy