A month before an expected inflationary storm due to the International Monetary Fund (IMF)’s proposal to impose an 18% sales tax on almost all products, the federal government on Wednesday projected that the inflation rate may slow down to a two-year low of 14.5% this month.
The acceptance of the IMF’s recommendations would mean that prices of goods, from milk to medicines and petrol, would skyrocket from July 1st, creating a situation that would keep the inflation rate persistently high in the next fiscal year as well.
The IMF’s recommendation suggests that even staple food items like wheat and rice and essential education should also be taxed, but at a single 10% GST rate. In its regular monthly economic outlook, the finance ministry stated that the inflation rate is anticipated to remain within the range of 13.5% to 14.5% for May 2024.
Compared to a month ago, the finance ministry has downward adjusted its inflation forecast for May by 4%. The pace of increase in prices has slowed down due to the higher base effect of May 2023 and stability in the prices of perishable goods, factors that the finance ministry also mentioned in the report.
“The inflation outlook for May 2024 continues on a downward trajectory, attributed to elevated inflation levels last year and improvements in the domestic supply chain of perishable items, staple food like wheat, and reduction in transportation costs,” said the finance ministry.
The monthly economic outlook is the brainchild of the Economic Advisor Wing of the finance ministry. The ministry has also cut the inflation forecast for June to 12.5%-13.5%. However, an ease in the index may prove to be a short-term respite, as the IMF has asked Pakistan to withdraw almost all sales tax exemptions and impose an 18% GST rate.
The government is expected to announce the budget in the second week of June, which, in the words of one Federal Board of Revenue (FBR) official, could be “destructive” this time. In its Tax Diagnostic report, which is the base for the fiscal year 2024-25 budget, the IMF has asked to eliminate the facility of zero sales tax except for export-oriented goods.
This would result in the imposition of sales tax on goods like packaged milk. The IMF has further recommended that the sales tax exemption should only be available for the supply of residential property. It further suggested that all other items mentioned in the 6th schedule related to exempted goods should be taxed at an 18% rate.
The IMF said the withdrawal of sales tax exemptions would also raise the taxation of fuel in line with the average of comparators in the region and emerging economies. The IMF noted that petrol was still cheaper in Pakistan than in India and Bangladesh.
According to another IMF recommendation, Pakistan will have to remove reduced sales tax rates under the eighth schedule and bring goods to the standard rate, except for a small number of essentials such as food staples and vital education and health items to be taxed at a single reduced rate of 10%.
In its monthly report, the finance ministry said that the government’s commitment to curbing inflation through stringent administrative measures paints a promising picture for the inflation outlook. A key pillar in this strategy is the bolstered availability of food items, which is crucial for taming inflationary pressures, it added.
The ministry said that in May 2024, petroleum product prices dropped twice, positively impacting the Consumer Price Index (CPI) for the month. Lower fuel prices reduced transportation costs, contributing to this favourable CPI trend. For the next fiscal year, the IMF has projected the inflation rate at 12.8%, which appears low considering the measures it has asked Pakistan to take in the new budget.
The finance ministry said that the economy has started stabilising but it was conditional on making policy efforts. “Although the signs of a moderate economic recovery are evident, sustaining this positive momentum requires policy efforts and reforms to raise productivity and competitiveness,” according to the finance ministry.
It added that signs of economic stability are becoming more evident. GDP growth is on the recovery path, while inflation continues its steady decline. Fiscal consolidation efforts are apparent from the positive primary balance, and the resilience of the external sector is evident by the positive current account balance. However, large-scale manufacturing (LSM) growth remained subdued.
The LSM sector experienced a slight contraction but has shown improvement compared to the previous year, according to the ministry. The agriculture sector remains the only hope.
The economic performance also reveals that agriculture has been a major contributor to this fiscal year’s economic upswing, attributed to government-led initiatives that enhanced input supply and credit disbursements, said the ministry.
On the external front, the finance ministry said that it is expected that exports and imports along with remittances will continue their trend and the current account will remain stable during the remainder of this fiscal year. However, expenditures have remained under significant pressure due to rising mark-up payments, admitted the finance ministry.
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