Govt likely to hike taxes in budget amid IMF loan pressure

June 12, 2024 (MLN): Pakistan’s government is set to unveil its budget Wednesday, with Finance Minister Muhammad Aurangzeb likely under pressure to hike taxes and boost revenue in order to bolster the chances of clinching a new International Monetary Fund loan, as Bloomberg reported.

Aurangzeb will present the country’s first post-election budget and his first since being appointed to the position in March.

The budget plan will outline targets for tax revenue growth, possible tax changes and the fiscal deficit.

The government already approved an economic growth target of 3.6% for the fiscal year starting July 1 compared with 2.4% a year ago.

“There are no sacred cows,” said Aurangzeb in press conference on Tuesday. “Everyone will have to contribute in this economy because schools or universities or hospitals can run with philanthropy but countries can only run through taxes.”

Prime Minister Shehbaz Sharif’s government, which came to power in a disputed election in February, are in discussions with the IMF for a minimum three-year bailout program.

The government was on the brink of a default last summer and the economy is still struggling to gain traction, forcing the government to seek more funds.

Chances of a new IMF loan have helped to lift investor sentiment, with the country’s stock market and bonds among the world’s best performers in the past year.

To meet IMF loan conditions, Pakistan will likely have to maintain fiscal discipline and achieve a primary surplus to make its debt sustainable, said Ankur Shukla, an economist at Bloomberg Economics.

The IMF program is critical for the country to help meet its debt payments of about $24 billion in the next fiscal year.

The budget will likely give a hint into the policy decisions agreed with the IMF, which approves the fiscal plan line by line.

About half of the total debt payments are loans from China, Saudi Arabia and the United Arab Emirates, countries that are expected to extend the loan terms for another year once they reach maturity, according to central bank Governor Jameel Ahmad.

The finance minister has pledged to raise the tax ratio to 15% of gross domestic product from below 10% currently, levels which the IMF has said is unsustainable.

The government is targeting to raise revenue by an ambitious 38% to Rs13 trillion in the budget, according to a report by newspaper Dawn.

Higher revenue means the government will be under pressure to hike taxes.

That fueled the benchmark KSE-100 Index to drop in six of the last seven sessions, with speculation of a possible increase in capital gains tax on equities and an increase in income taxes.

“Every budget transmission becomes a witch hunt for more taxes,” said Nadeem Ul Haque, vice chancellor of the Pakistan Institute of Development Economics and a former economist with the IMF.

“Frequent policy changes only make businessmen uncertain, create hurdles for enlarging a formal economy, and force the capital to flee.”

The government has also proposed an increase by 29.4% to $4.4bn in government development spending on mega-projects.

The government was only able to spend about 40% of the amount allocated for the current year.

Pakistan has the highest inflation rate in Asia, although it’s moderated recently, and the exchange rate has been relatively stable after a tumultuous year.

Political conditions continue to weigh on sentiment though, with opposition leader Imran Khan challenging the results of February’s national elections as well as his convictions on multiple counts.

High inflation had seen economic pessimism rise to a record high this year in Pakistan where almost half the population finding it hard to get by on their present income.

About 40% of the nation lives below poverty.

The upcoming budget aims to protect the middle and lower income segments, State Finance Minister Ali Pervaiz Malik told Geo TV this week.

“We must decide which segment to protect, which to document, and where to implement taxation measures,” said Malik. “Each section of society should contribute fairly according to its share.”

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