Pakistan asks IMF to reduce tax collection target

Mini budget of nearly Rs200 billion inevitable


Shahbaz Rana February 03, 2020
PHOTO: REUTERS

ISLAMABAD: Pakistan has requested the International Monetary Fund (IMF) to further reduce tax collection target. However, a mini budget of nearly Rs200 billion will remain inevitable to collect even less than Rs5 trillion in this fiscal year.

In first face-to-face meeting between Pakistan and the IMF for second review talks, the government informed the IMF that it cannot collect more than Rs4.7 trillion while the IMF stressed that the Federal Board of Revenue (FBR) should still aim at Rs5.238 trillion, sources told The Express Tribune.

The IMF asked to immediately go for additional revenue measures, they added.

Pakistan has made the request due to prevailing political instability coupled with tight economic conditions that have adversely affected almost every household, sourced in the Ministry of Finance said.

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Talks between Pakistan and the IMF for the second quarter (October-December) 2019-20 began on Monday. Finance Adviser Dr Abdul Hafeez Shaikh kicked off the review talks with his counterpart Ernest Rigo, the IMF’s Washington-based mission chief. The talks are likely to continue till end of next week.

If talks remain successful and the government also brings in a mini-budget ahead of next board meeting, the IMF may approve third loan tranche of $450 million next month.

The sources said introduction of mini-budget could become a prior action for calling the IMF board meeting, provided both sides agree on new FBR collection target.

All pro-people spending targets were missed again and all numbers related to macroeconomic stabilization, except tax collection and circular debt, were achieved during the second quarter.

Pakistan has met all six performance criteria related to fiscal and monetary sectors and two continuous performance criteria about borrowing. But it has missed four out of five indicative targets.

Pakistan could not meet spending targets related to the Benazir Income Support Programme (BISP), health and education, tax collection and reduction in circular debt. Two structural benchmarks related to the National Electric Power Regulatory Authority (Nepra) could also not be met.

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Achieved targets

The sources said Pakistan over-performed on the target of restricting primary budget deficit to Rs145 billion and instead posted a primary budget surplus of Rs284 billion on back of higher profits from the central bank, one-off telecom license fees and provincial cash surpluses.

The government also met the target of restricting the stock of sovereign guarantees below Rs1.76 trillion and the guarantees remained at around Rs1.6 trillion. Similarly, new borrowings from the central bank remained nil and the government did not accumulate external public payment arrears.

The net international reserves target of negative $16.1 billion, restricting creation of net domestic assets to Rs8.8 trillion and lowering the currency swap exposure to below $8 billion were almost met.

The short-term currency swaps stood at $4.2 billion after the central bank bought nearly $4 billion from the exchange market. The $2.9 billion hot foreign money also helped to achieve the monetary targets, although it came at the expense of suffocating economic growth.

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Missing goalposts

The sources said like the first quarter, the BISP spending target was again missed and actual spending remained at Rs30 billion as against the IMF target of Rs86.4 billion.

The IMF indicative target related to education and health spending was also missed despite the fact that the Fund had already significantly reduced the target after the first review.

As against the downward revised target of Rs569.8 billion in first half, the actual spending by federal and four provincial governments on health and education remained at Rs549 billion.

Similarly, the government also could not meet the circular debt accumulation indicative target of Rs93 billion and it added over Rs100 billion more in the circular debt from July through Dec of this fiscal year.

The FBR met the indicative target of issuing Rs53 billion tax refunds and actual refund payments stood at Rs103 billion. However, the FBR missed the first half reduced tax collection target of Rs2.2 trillion and actual collection remained below Rs2.1 trillion.

The IMF had given Rs5.5 trillion tax collection target to the FBR for this fiscal year, which it cut to Rs5.238 trillion as a result of first review talks.

Mini-budget

The sources said without additional revenue measures the FBR cannot collect more than Rs4.6 trillion to Rs4.7 trillion in this fiscal year. They said the IMF may show some leniency, provided the government also implements the new mini-budget on time.

They said around Rs200 billion additional revenue measures were under consideration.

The federal government has directed the FBR to work out the new budgetary measures on the principles of sustainability of these revenues measures, having some positive impact on economic growth and putting minimum burden on already heavily burdened middle and lower middle classes.

The FBR was also working out whether it can expect some recoveries from broadening of tax base and benami properties cases to offset the impact of the revenue shortfalls.

The sources said Pakistan authorities wanted that the IMF should cut its target to close to Rs4.7 trillion. The possibility was that even if the IMF agrees to further lower the target, it may like to keep the new target to close to Rs5 trillion and the gap will have to be bridged through mini budget.

They said due to prevailing political conditions the government has not yet notified second quarterly increase in power tariffs. The tariffs have to be increased further to raise money for idle capacity payments to independent power producers (IPPs).

However, the government is set to increase gas tariffs to recover additional Rs33 billion from the consumers. The Economic Coordination Committee of the Cabinet is expected to take a decision in this regard today (Tuesday).

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