Key Takeaways:
– Pakistan aims to secure a $6 billion IMF bailout this month.
– Government plans to raise tax-to-GDP ratio from 9% to 13%.
– Budget targets Rs13 trillion in revenue by next July.
– High taxes on salaried workers and businesses may stir public discontent.
Optimism in IMF Negotiations
Finance Minister Muhammad Aurangzeb announced on Thursday that Pakistan is close to finalizing a deal with the International Monetary Fund (IMF) this month. He expressed confidence in the positive progress of talks between Islamabad and the global lender for a new bailout program.
Addressing the IMF’s Requirements
The government is striving to meet the IMF’s demands by incorporating necessary measures into its annual budget. The aim is to secure a bailout exceeding $6 billion. Aurangzeb emphasized the need to increase the tax-to-GDP ratio from the current 9% to 13%, as no country can sustain itself with such a low ratio. The government presented a Rs18.877 trillion budget for the fiscal year 2024-25, aiming to shore up public revenue and satisfy the IMF’s repeated calls for improved tax collection.
Raising Revenue and Expanding the Tax Net
The budget aims to generate Rs13 trillion by next July, a 40% increase from the current year, to reduce the debt burden. The increase in taxes primarily affects salaried workers, who are a small part of Pakistan’s mostly informal economy, and certain retail and export businesses. The budget also includes punitive measures for tax evaders, such as restrictions on mobile phones, gas, electricity, and travel abroad. Aurangzeb highlighted the need to bring all sectors into the tax net and ensure everyone becomes a tax filer, as per Prime Minister Shehbaz Sharif’s directives.
Reducing Government Spending
Aurangzeb noted the significant share of government expenses devoted to loan and interest repayments. He announced that five federal ministries would be abolished by July 30, following Prime Minister Shehbaz Sharif’s budget presentation. Additionally, efforts are being made to reduce human interference in the Federal Board of Revenue (FBR) system and increase public trust in the institution.
Economic Indicators and Currency Stability
The finance minister reported positive economic indicators in the last fiscal year, with foreign exchange reserves remaining above $9 billion and a gradual decline in the inflation rate. He attributed the destabilization of the Pakistani currency in 2023 to delays in the IMF program.
Military Pension Reforms
Aurangzeb announced upcoming changes to the military’s service structure, including the introduction of a contributory pension system for the armed forces. The new pension scheme for military servicemen will be effective from July 1, 2025, following similar changes for civil servicemen starting July 1, 2024.
Public Response to High Taxes
While the budget aims to win IMF approval, analysts warn that high taxes on an already struggling economy could lead to public discontent. Pakistan has set a tax revenue target of Rs13 trillion for the fiscal year starting July 1, aiming for a sharp reduction in its fiscal deficit from 7.4% to 5.9% of GDP.
