Revised budget

Published June 26, 2023

BUDGET 2023-24 that was passed by parliament yesterday after the introduction of large fiscal-tightening measures to sweeten it for the IMF might resuscitate the bailout deal with the Fund, stalled since last November.

As Finance Minister Ishaq Dar said in his closing budget speech, the IMF’s concerns regarding the original budgeted deficit of 6.5pc of GDP have been largely addressed through the imposition of additional taxes of Rs215bn and spending cuts of Rs85bn.

In its comments on the original budget unveiled in May, the IMF had said that it “misses the opportunity to broaden the tax base in a more progressive way”. The lender had also objected to certain other budgetary measures like the ‘no-questions-asked scheme’ to attract new dollar inflows from Pakistanis abroad.

Unfortunately, the details of the new fiscal adjustments show that the government has wasted yet another opportunity to broaden the tax base despite meeting the IMF condition.

It has imposed a total of Rs438bn — taxes of Rs223bn were introduced in the original draft — and there is no major effort to bring undertaxed sectors, such as retail, agriculture and real estate, into the net. No reform of the SOEs has been planned either.

Although the government has increased the withholding tax on property transactions in the hope of netting Rs35bn, the measure is unlikely to produce the targeted revenue without drastic documentation of the sector. Much of the burden of the additional taxes will be borne by the organised corporate sector and salaried classes.

Mr Dar’s speech indicated that agreement on the new adjustments had been reached between the two sides after three days of hard negotiations. That means that one of the three concerns of the lender has been met before it restarts the funding.

How much progress has been made on the other two demands regarding the removal of controls on the exchange rate to keep the rupee from going into free fall, and the gap between the two sides on the IMF’s external financing gap estimates for the outgoing fiscal year?

The government has already moved towards restoring the proper functioning of its foreign exchange market, and it is anticipated that the Fund will relax its condition on external financing gap projections.

Since the ‘thaw’ in ties between the lender and Islamabad has come only after Prime Minister Shehbaz Sharif’s repeated interactions with IMF managing director Kristalina Georgieva, including their recent Paris meeting, both sides seem to be softening their positions.

Though just a few days are left before the rescue facility expires on June 30, there is still enough time to seal the deal. This is crucial if Pakistan is to avoid the looming sovereign default; without the deal, the country could exhaust its forex reserves in the next few months.

Published in Dawn, June 26th, 2023

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