ISLAMABAD: The International Monetary Fund (IMF) has voiced its dissatisfaction with Pakistan’s budget for the fiscal year 2023-24, highlighting missed opportunities in broadening the tax base and reducing tax expenditures. In addition, the IMF has expressed concerns over the terms of tax amnesty in relation to the fund’s program conditionality.
IMF Calls for Major Changes in the Budget
The Washington-based lender has called for significant changes in the budget, asserting its readiness to work with the government in refining it before its passage from the Parliament. According to the IMF, the draft budget fails to broaden the tax base in a progressive manner and introduces a long list of new tax expenditures that undermine the fairness of the tax system. The fund also emphasizes the detrimental effects of the new tax amnesty and its violation of program conditionality and governance principles. The IMF suggests that measures to address liquidity pressures in the energy sector should be included in the broader budget strategy.
Pakistan’s Financial Challenges and the IMF Program
Pakistan has recently requested China to refinance commercial loans amounting to $1.3 billion within the ongoing month. However, the absence of the revival of the IMF program could lead to a drop in the foreign exchange reserves held by the State Bank of Pakistan to below $3 billion. Pakistan and IMF officials are engaged in last-ditch efforts to revive the Fund-sponsored program under the Extended Fund Facility (EFF), with the next 48 hours being crucial for a breakthrough.
Foreign Exchange Reserves and Repayment Challenges
At present, the central bank holds foreign exchange reserves of $3.9 billion, out of which $1.3 billion has been repaid to Chinese commercial banks. It is expected that Chinese banks might provide refinancing of commercial loans before June 30. However, the repayment of $900 million to multilateral creditors by the end of June poses a challenge. With the rollover and refinancing of $2.3 billion from China, Pakistan’s foreign exchange reserves would still fall below the $3 billion mark.
Managing Repayment Requirements and Political Transition
The repayment requirements from July to November 2023 are estimated to range between $4-6 billion, coinciding with a political transition in the country. This transition will occur after the installation of a caretaker setup around August 12, 2023, as the existing PDM-led government and National Assembly complete their tenure. The management of the bridge financing required during this period remains a concern.
IMF’s Recommendations for Tax Collection and Budgetary Changes
The IMF has advised the government to increase the tax collection target of the Federal Board of Revenue (FBR) to approximately Rs9.8 trillion instead of Rs9.2 trillion. Moreover, the non-tax revenue target of Rs2.9 trillion is deemed unrealistic. Pakistan will need to make significant changes in the budgetary framework to reach a broader agreement on budgetary numbers for the next financial year.
Conclusion
The IMF’s concerns over Pakistan’s budget for the upcoming fiscal year raise important questions about the tax base, tax expenditures, and financial stability. As Pakistan seeks to navigate economic challenges, including repayment obligations and political transitions, cooperation with international partners and the adoption of effective fiscal policies will be critical to sustaining economic growth and stability.
Published in PakWeb, June 15th, 2023.
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