Pakistan’s 2024 budget a missed opportunity: IMF

Says proposed budget misses opportunity to broaden tax base

ISLAMABAD':

The International Monetary Fund (IMF) on Wednesday said that the proposed budget missed the opportunity to broaden the tax base, terming the new tax amnesty scheme a “damaging precedent”.

In a first official reaction to the expansionary Rs14.5 trillion budget, Esther Perez Ruiz, the resident representative of the IMF, said that the amnesty scheme is also against the good “governance agenda” and against the $6.5 billion programme objective.

The statement highlights the serious differences that persist between Pakistan and the IMF, which now may not be bridged in the remaining 15 days.

“The draft FY24 Budget misses an opportunity to broaden the tax base in a more progressive way, and the long list of new tax expenditures reduces further the fairness of the tax system,” Esther stated.

She added that the new tax expenditures also undercut the resources needed for greater support for the vulnerable Benazir Income Support Programme (BISP) recipients and also development spending.

The IMF gave the statement five days after the presentation of the new budget in the National Assembly by Finance Minister Ishaq Dar, which also carried an income-whitening scheme.

“The new tax amnesty runs against the programme’s conditionality and governance agenda and creates a damaging precedent,” Esther stated, echoing the views expressed by many Pakistanis.

Under the IMF programme, Pakistan cannot give any type of tax amnesty scheme and the Pakistan Democratic Movement government had also agreed to this condition but is now violating it.

The government has proposed an amendment in Section 111 (4) that increased the question-free remittance limit from “five million rupees” to “rupees equivalent of one hundred thousand United States dollars”. At the current exchange rate, about Rs30 million can be whitened without disclosing the source of income.

The IMF also suggested inclusion of more measures to address the energy sector’s liquidity pressures alongside the broader budget strategy.

The resident representative said that the IMF staff remains engaged to discuss policies to maintain stability. “The IMF team stands ready to work with the government in refining this Budget ahead of its passage,” Esther said.

Her statement indicates that the IMF would not endorse the budget in its present form and the chances for completion of the 9th review of the programme have almost diminished.

Only two weeks are left until the expiry of the IMF extended programme and still $2.6 billion remain undisturbed due to delay in meeting the conditions agreed with the IMF, first by the PTI government and now by the coalition government.

The total size of the programme is $6.5 billion and $3.9 billion has already been disbursed. The PDM remained successful in drawing only one tranche of $1.2 billion of the remaining four tranches.

The programme had begun in July 2019 with the objectives of “reducing economic vulnerabilities and generate sustainable and balanced growth focusing on: a decisive fiscal consolidation to reduce public debt and build resilience while expanding social spending; a flexible, market-determined exchange rate to restore competitiveness and rebuild official reserves; to eliminate quasi-fiscal losses in the energy sector; and to strengthen institutions and enhance transparency”.

But all these objectives remained unfulfilled and Pakistan is facing strong headwinds with high risks of default.

There has also been confusion about the government’s future economic roadmap in case the IMF programme ends without revival. Finance Minister Ishaq Dar said that there was ‘Plan B’ but Minister of State for Finance Dr Aisha Pasha claimed that there was no such thing.

On Saturday, Dar said the country was also planning to get an external bilateral debt restructuring. But SBP Governor Jameel Ahmad on Monday said there were no intentions for debt restructuring at present, whether it pertained to external or domestic.

The government sources told The Express Tribune that the IMF also gave its feedback on the tax relief measures during a technical session held with the Federal Board of Revenue (FBR) on Wednesday. The technical round took place in a follow up to a meeting between Dar and IMF Mission Chief Nathan Porter a day earlier.

On the basis of discussion at the level of the minister and the mission chief, the technical-level discussions would take place in the areas of spending, resource mobilization, and power sector, the minister of state said.

The IMF officials discussed the Finance Bill of 2023.

When the fund raised questions over the $100,000 income-whitening amnesty scheme, the FBR tried to defend it by arguing that the money would be sent by the expatriates, sources said.

The IMF also sought explanation from the FBR about a record Rs2.24 trillion tax exemptions given in the outgoing fiscal year. However, the FBR was of the view that these exemptions pertained to the previous fiscal year and are only reflected in this fiscal year’s Economic Survey of Pakistan.

As a matter of principle, the IMF has objected to the tax exemptions that the government has introduced in the budget, the sources added.

They said that the IMF officials were of the view that these exemptions have never helped and benefit only certain groups.

The sources said the FBR was of the view that the cost of these exemptions was not very high. But the IMF did not accept this stance on the ground that if the cost is low then how these can benefit the overall economy in a major way, they added.

“We will try to convince the IMF but we want some breathing space to propel the economic growth,” Dr Aisha said.

The government has announced tax relief measures for nearly a dozen sectors in addition to extending the already under implementation blanket tax exemption for erstwhile Federally Administered Tribal Areas (Fata) and the Real Estate Investment Trusts (REIT).

The withholding taxes for overseas Pakistanis have been abolished on the purchase of immovable property while the tax liability of young entrepreneurs has been cut as part of the voter-induced measure.

The IMF also inquired about the cost of erstwhile Fata tax exemption status. The exemption is expiring on June 30 but the government has proposed to extend it further for one year.

FBR Chairman Asim Ahmad on Friday said that the cost of the new tax exemptions was Rs23 billion.

In the budget, the government has also relaxed the registration conditions for the retailers, offered reduction in tax liabilities of the builders and proposed sweeping tax breaks for agriculture information technology.

The IMF has particularly expressed concerns on the tax side, Aisha said, adding that the global lender always gives importance to the power sector and both sides will discuss in detail the power sector issues.

Dar had unveiled a Rs14.5 trillion budget with a record budget deficit of Rs7.6 trillion, which many dumped as unrealistic and populist.

The IMF is keen to review the primary budget surplus position and the assumptions used for it, Dr Aisha maintained, adding that the Power Division will also have a detailed meeting.

“We want stability but at the same time we want to boost the economy while remaining within the programme,” the state minister noted.

She added that the issues of interest and exchange rates would be discussed between the IMF and the State Bank of Pakistan.

Meanwhile, the Moody's Investors Service on Wednesday said Pakistan is feared to fail on reviving the IMF's stalled loan programme worth $6.5 billion by the time it officially expires in two weeks on June 30.