Tax hike essential to break free from IMF bailout cycle: FM

July 08, 2024 (MLN): Finance Minister Muhammad Aurangzeb has warned that the country may need further International Monetary Fund (IMF) bailouts in the future if it fails to substantially increase tax revenue.

Pakistan’s forthcoming IMF bailout “will not be our last” if the government fails to significantly boost tax revenue, he said in the wake of a budget that seeks to reset the country’s ailing economy.  

Speaking to Financial Times, a British newspaper, Muhammad Aurangzeb said he was “relatively confident” of reaching a staff-level agreement with the IMF this month on a loan, which his ministry has previously pegged at between $6 and $8bn.

“But it will not be our last fund program if we don’t bring our tax revenues up,” he told the Financial Times in an interview.

Aurangzeb, a former career banker, was appointed by Prime Minister Shehbaz Sharif in March to steer one of Asia’s most troubled economies, which has been grappling with double-digit inflation, sluggish growth and bare-bones foreign reserves.

Pakistan narrowly avoided default last year with the help of a $3bn IMF emergency loan, which expired in April.

The government announced a tax-heavy budget last month, introducing higher taxes on the salaried class, increased levies, enhanced FED, and revamps of various tax rates.

The goal through this is to achieve a tax revenue target of Rs12.97 trillion, which is around 40.2% higher compared to the revised estimates of Rs9.25tr for the current fiscal year (FY24).

Pakistan’s budget for the upcoming fiscal year reflects the necessity to shrink the fiscal deficit with somewhat harsh taxes spanning across various segments, but this might pave the way for an expanded IMF program.

The tax rises will mostly fall on salaried workers, who comprise a relatively small part of Pakistan’s mostly informal economy, as well as some retail and export businesses, Financial Times reported.

The budget also threatened punitive measures for income tax avoiders, including restrictions on mobile phones, gas and electricity access and the ability to fly abroad. 

Pakistan’s debt has soared since the mid-2000s, as authorities failed to invest a gusher of loans from international bondholders and countries including China and Gulf nations into productive, export-oriented sectors. Instead, the country remains reliant on imports, forcing Islamabad to borrow to pay off existing and accumulating debts, Aurangzeb said.

“We need to create the capacity to repay” loans, Aurangzeb said. “As long as this economy stays import-based, what happens is the moment it heats up , we run out of dollars [and] we have to go back to the lender of last resort.”

Sharif has travelled recently to Saudi Arabia, the United Arab Emirates and China to solicit investments on top of the IMF program, which would be Pakistan’s 24th with the multilateral lender.

“It’s about time we get real,” Aurangzeb said, pointing to Gulf investors’ demands of equity and board seats. “The ball is in our court to provide bankable, investable projects.” 

The finance minister also slammed a reputation for corruption at the Federal Board of Revenue, Pakistan’s tax collection agency. 

“People don’t want to deal with the tax authority because of corruption, because of harassment, because of people asking for speed money, facilitation money,” Aurangzeb said. “That’s not sustainable.” 

“I empathise with the pain people will feel, I was one of the highest taxpayers, at least in the banking sector,” he added. Along with the rest of Sharif’s cabinet, Aurangzeb chose to forgo his government salary as well as forfeiting a Dutch citizenship he gained while working in Amsterdam.

The budget has drawn criticism across the political spectrum, including from the Sharif government’s coalition partners, which it relies on after a disputed election in February. The backlash risks deepening an already volatile political environment that has seen Pakistan cycle through eight finance ministers in the past six years.

“We do not have five years for our programme,” Aurangzeb said. “We have to start showing, start delivering, in the next two to three months.”

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