IMF demands sharp revenue hikes

Updated December 16, 2018


The logo of the International Monetary Fund at its headquarters in Washington.—AFP
The logo of the International Monetary Fund at its headquarters in Washington.—AFP

ISLAMABAD: The road to an International Monetary Fund (IMF) bailout is going to be a steep one for the government in the months ahead.

According to a source with direct and detailed knowledge of the matter, the Fund has asked for Rs160 billion worth of new tax measures in the current fiscal year, which ends in June 2019, in order to stabilise the fiscal framework.

The Federal Board of Revenue (FBR) calculates that the 1.1 per cent increase alone means Rs400-500bn additional tax revenue measures. If undertaken, the steps will lift the country’s tax-to-GDP ratio to 13.9pc by end June 2021. The government has set a fiscal deficit target of 5.6pc for 2018-19 whereas the IMF’s projection is slightly below this.

The emphasis on a revenue target is a departure from standard practice for IMF. Previous Fund programmes were built around a fiscal deficit target, and it was left to the government to decide how it was going to be achieved — through some combination of revenue increases and expenditure cuts.

Programme unlikely before February; Rs160bn fresh taxes before June

This time IMF is laying out specific revenue targets for each year of the proposed programme and is asking the government to commit to raising the tax-to-GDP ratio by 0.4pc of GDP by June 2019, followed by 1.1pc in FY20 and 1.2pc in FY21.

In addition to these revenue measures, the Fund has also asked for concomitant increases in provincial revenues, from current 1.1pc of GDP to 1.5pc by end of the programme. This means that provinces will also have to introduce new revenue streams.

According to earlier reports, the tax machinery has already asked the finance ministry to approach the Supreme Court to find a way to restore taxes on prepaid mobile cards. The annual collection from these taxes on prepaid cards alone is around Rs80bn, which can help plug half of the revenue demand for the first year of the programme.

In another proposal, the FBR has proposed to fix sales tax on petroleum products by volume instead of as a percentage of the price, starting from January. According to the board, petroleum products prices in Pakistan are on the lower side as compared to the regional countries. The FBR admits the new price mechanism may lead to oil price increase but justifies it on the plea to raise additional revenue and also to control its consumption.

These two measures, according to the source, could generate around Rs100bn for the government kitty. These, however, still leave the government with Rs60bn gap before June and will necessitate further tax measures.

The government is looking to tax luxury consumption for higher income earners in an effort to meet the IMF’s condition. Moreover, FBR is expecting to raise around Rs30bn alone from sales tax evasion in the next half year of 2018-19. The source suggested that the steep revenue increases demanded by the Fund are the lead reason why the government is having difficulty finalising the IMF programme.

Another source in the Finance Division told Dawn that talks are still continuing with the IMF through video conferencing. “We have suggested to share proposals next week with the Fund before the Christmas and new year holidays.” the finance official said.

“We are expecting to reach an understanding in January.” However, the source said the IMF package will not go to the board until February or March.

The focus of the IMF programme is now only on revenue generation. There is no demand for a cut in expenditures in the ongoing fiscal year, the source added.

The IMF’s resident representative in Pakistan, Teresa Daban Sanchez, when reached for comment did not confirm or deny the numbers, but said a fiscal consolidation is required and that “the policies have to be on the revenue side.”

Published in Dawn, December 16th, 2018