New taxes to shrink Pakistan's economy by 0.3% in 2HFY25

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By MG News | January 07, 2025 at 01:39 PM GMT+05:00

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January 07, 2025 (MLN): Pakistan’s economy could face an output contraction of 0.3% in the second half of the fiscal year 2025 due to the implementation of new taxes totaling Rs900 billion. 

This is based on tax multipliers for emerging and low-income countries, which typically range between 0 and 0.4 over four quarters, as Bloomberg reported.

Pakistan's output could be reduced by as much as Rs360bn over four quarters. 

On the other hand, suspension of the International Monetary Fund (IMF) program which would also stop dollar inflows from friendly countries could hurt growth more.

An episode in 2H fiscal 2023, when IMF loans due got delayed, suggests so.

At the time, default risk shot up. The rupee dropped by around 20% on average during 2H fiscal 2023 from 1H, and average consumer prices soared by 15%. Real GDP in 2H fell by 0.8% from 1H.

Pakistan still needs IMF loans and inflows from other creditors to stay solvent over the medium term.

The IMF estimates that the country's external financial needs, which comprise current account deficit and debt payments, average around $22bn a year through fiscal 2028.

FX reserves now stand at around $11.7bn.

Bloomberg forecast Pakistan's nominal GDP would grow by 10% in the current fiscal year.

This should lead to an 11% growth in revenues, according to a regression between nominal GDP and tax collections.

New tax measures of around 1.5% of GDP were introduced in the fiscal 2025 budget that was presented in June 2024.

Therefore, according to Bloomberg the tax collections, this fiscal year should sum up to Rs12 trillion.

This is lower by around Rs867bn from the IMF's target.

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