Even if it is understated, the State Bank of Pakistan’s monetary policy statement for the next two months is a damning indictment of the Nawaz Sharif government’s fiscal policies.

The central bank considers the government’s heavy dependence on indirect taxation and non-tax revenue to bridge its fiscal deficit as unsustainable going forward.

Therefore, the SBP believes that the deficit will breach the budgetary target of 6.3 per cent of GDP for the present year, even though the government has managed to keep it within the target level in the first quarter to September.

The government is targeting total federal tax revenue of Rs2.475 trillion, up 27 per cent from last year’s estimates. The target includes direct taxes of Rs975 billion — most of which are collected in indirect mode — and indirect taxes of Rs1.62 trillion. The non-tax revenues are estimated at Rs822 billion.

Government claims aside, few believe in the capacity of the Federal Board of Revenue (FBR) to collect the targeted amount, or even reach close to it, because of several tax exemptions given to powerful lobbies. Also, its emphasis on indirect taxes or on direct taxes implemented in indirect mode has reinforced skepticism about the FBR’s ability to meet the target.

The International Monetary Fund (IMF) has already cut its tax revenue estimates by Rs130 billion to Rs2.35 trillion, and made it mandatory for Islamabad to withdraw the tax exemptions given through statutory regulatory orders (SROs) before the end of the second quarter of this fiscal to December.

The collection of Rs481 billion in direct and indirect taxes in the first quarter was significantly higher than last year, but fell short by a hefty Rs39 billion of the target for the period.

Meanwhile, the government has withdrawn several measures that it had introduced in the budget with a view to documenting the economy to broaden the tax base and increase revenue. Most of these measures relate to the trading community, which forms the core constituency of the ruling PML-N, particularly in Punjab.

The central bank’s veiled criticism of the government’s fiscal policies follows the IMF staff’s first review of the Fund’s $6.6 billion loan, in which it praised the fiscal consolidation effort of the government.

“Fiscal consolidation remains a key component of the government’s economic reforms programme. The IMF mission was encouraged by the government’s efforts to enhance tax revenues, which slightly exceeded the programme’s target level,” said the IMF statement on the conclusion of its staff mission to Pakistan.

The statement shows that the Fund is more concerned about the targets rather than the means the policymakers chose to implement the IMF programme conditions.

But the SBP wants the government to implement tough and politically unpopular tax reforms for sustainable reduction in the fiscal deficit, which shot up to eight per cent in the last fiscal year.

“Carrying out reforms, particularly those related to fiscal consolidation, is critical for the economy. For instance, expanding the base of direct taxes and rationalising their rates is the key to sustainable expansion of revenue collection.

“These are superior to all indirect taxes, which are regressive in nature and require much broader documentation of the economy. While the fiscal authorities have already progressed in this regard by increasing the GST rate (from 16 to 17 per cent), bringing the informal sector in the tax net is an arduous task. Consequently, it is difficult to bring down the fiscal deficit significantly,” the SBP policy statement insisted.

It must be noted that the government, which won a definite mandate in the May elections, stopped short of taxing the wealthy in its first budget, which it had prepared days after coming into power.

Finance Minister Ishaq Dar and FBR officials have repeatedly expressed their ‘commitment’ to expanding the tax base to bring the untaxed or under-taxed sectors like agriculture, retail and property into the net, but little has been done so far.

Even the FBR’s ‘campaign’ to issue notices to potential taxpayers to force people to file their income tax returns has flopped. Less than one per cent of the population files tax returns, with the country’s tax-to-GDP ratio standing at slightly above nine per cent —one of the lowest in the world.

The government’s inability to implement tax reforms and collect enough taxes to meet its expenditure has resulted in a whopping increase of over Rs1.1 trillion in total public debt in the first quarter.

Domestic debt is up by Rs634 billion, and the government’s deficit borrowing from the SBP has exceeded Rs750 billion, spawning inflation, which was recorded above nine per cent last month, compared with less than six per cent in June.

Federal and provincial development spending was cut significantly in the first three months of the year to keep down the consolidated fiscal deficit within the IMF programme’s target level.

The SBP is also not happy with the government for its dependence on ‘one-off’ non-tax revenue as a tool for cutting its deficit, and considers this strategy as unreliable. It said in the policy statement that the “decline in the estimated fiscal deficit for the present fiscal year, compared with eight per cent last year, owes much to the realisation of non-tax revenues like the coalition support fund (CSF).”

The first CSF installment of $322 million was received last month and the remaining amount is expected over the next several months.

“The realisation of the other proceeds is also critical to maintaining the deficit within the estimated level,” continued the SBP statement.

The fact is that these non-tax proceeds are one-off receipts, and, therefore, cannot be relied upon in the long term, the SBP argued.

Hence, it believes that a more permanent solution lies in tax reforms. Will the government and its finance management team listen to the advice of the central bank? It remains to be seen.