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Stabilisation measures

Updated December 18, 2018

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THE last few days have seen a flurry of news reports about Pakistan’s ongoing talks with the IMF. In the latest such report, the finance minister has confirmed that a document of economic and financial policies for stabilisation measures has been drawn up and sent to the Fund. This news is welcome.

The confirmation comes only days before the Fund breaks for Christmas and New Year, so it seems like the government has rushed to get its side of the commitments in before that happens, probably to ensure that the request for a programme can be placed before the board in a meeting scheduled in mid-January.

If all goes smoothly, Pakistan could be on its 13th Fund programme in the opening months of 2019, which is nothing to celebrate but that still provides the government a chance to fulfil its promise to make this the country’s last IMF programme.

What is new in this case are the specific performance benchmarks on revenue generation, according to early reports.

Past IMF programmes have stipulated a fiscal deficit ceiling and left it up to the government to decide whether to comply via expenditure cuts or revenue increases.

This time round, it seems the Fund wants to see specific improvements in revenue generation, and if early reports are true, then the government has a steep hill to climb to raise taxes by 2.5pc of GDP over the course of the programme.

There is little doubt that Pakistan needs to elevate its tax-to-GDP ratio, but now that it appears that the government will be bound specifically to this commitment, it bears repeating that the best way to accomplish this is by broadening the tax base and encouraging a culture of compliance, rather than simply squeezing those already within the net.

In the months to come, should the government embark upon the steep climb it has committed to the IMF, there will be temptation to resort to gimmickry to increase the burden on compliant taxpayers. Broadening the tax base is easier said than done, and the three previous governments all met with substantial failure on this front (a few partial successes notwithstanding).

The PTI government has promised that it will succeed where everybody else failed, and tax reform provides the perfect ground upon which to demonstrate its commitment to this promise.

https://www.dawn.com/news/1452123/stabilisation-measures

Published in Dawn, December 18th, 2018