Pakistan will have to take around Rs40 billion in additional tax measures in the next two weeks, the chief of the International Monetary Fund’s (IMF) mission in the country said on Friday.
His statement came as the government contemplates increasing duties on cigarettes and luxury consumer items to meet the shortfall in revenue collection targets to secure the next $502 million tranche of the $6.2 billion loan programme.
“There is currently a shortfall of about Rs40 billion in [Pakistan’s] tax revenue,” Harald Finger told reporters in Islamabad. “The government will take measures to raise that amount,” he said.
Finger also shared his view on the value of the Pakistani rupee against the US dollar and quashed rumours that the IMF could be used to press Pakistan into accepting curbs on its nuclear programme.
Talking about the new tax measures, Finger said it was up to the Pakistan government to decide what precise measures it will implement to meet the shortfall. He stressed, however, that these measures will have to be put in place in the next two weeks.
“These measures have to be implemented before we go ahead with the next [IMF] board meeting,” Finger said.
The meeting of the IMF board, which has to approve the disbursement of the next loan tranche, is tentatively scheduled for December 15. It will not be called if Pakistan fails to introduce the new tax measures, a senior finance ministry official said.
Pakistan’s request for a board meeting has to be distributed among the IMF board along with a letter of intent and memorandum of economic and financial policies at least 15 days before the meeting, sources familiar with the internal lender’s workings told The Express Tribune.
This has effectively put the government in a tight spot as it will have to make ground to introduce a mini budget just four months after National Assembly approved the budget.
According to finance ministry sources, the government is considering increasing regulatory duties on luxury items and federal excise duties on cigarettes, and imposing certain anti-dumping regulatory duties to meet the IMF condition.
However, the definition used by the Federal Board of Revenue (FBR) for luxury items is interesting. Yogurt, butter, cheese, cereal, pineapple, guava, vermicelli, tomato paste and chocolates are a few of the hundreds of items treated as luxury items. These items were part of the 282 goods on which regulatory duties were raised by five per cent in June last year to meet the IMF condition.
The need for a mini-budget arose after FBR failed to achieve its July-September tax collection target of Rs640 billion. The price for this failure will now be paid by consumers.
Sources said the increase in duties at the import stage will automatically increase sales tax collection, as the sales tax is calculated by including all duties and levies in the price. However, the economists fear this may stoke inflation in the country, which is currently quite stable.
Pakistani rupee ‘overvalued’
Finger also spoke about what IMF thought of the exchange rate for the Pakistani rupee.
“There are no scientific estimates as to what the exchange rate should be but our module shows that the rupee is overvalued by between 5% and 20%,” he said. “If the exchange rate is depreciated by that amount then it will be in line with fundamentals.”
The IMF mission chief clarified, however, that was not suggesting Pakistan should devalue the rupee by that percentage.
Rupee-dollar parity is already under pressure in recent days and stands at Rs105.6 a dollar, shedding about three per cent value in the last few weeks.
To a question, Finger said that “there is absolutely no link between the IMF programme and Pakistan’s nuclear sector,” burying speculations that the United States could use the IMF to pressure Pakistan into rolling back its nuclear programme.
He said the IMF programme was actually helping put in place a gradual phase of fiscal adjustment, which will reduce Pakistan’s financing needs and lower the debt-to-GDP ratio. He said defense expenditures are “a matter of national preference and national decision-making”.
“One of the main goals of the IMF’s programme is in fact to reduce the public debt,” said Dr Tokhir Mirzoev, IMF’s Resident Representative to Pakistan. “Because of IMF’s programme, Pakistan has become financially much stronger than before 2013,” he added.
Published in The Express Tribune, November 7th, 2015.