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Pakistan adopts painful economic path to secure IMF bailout

| Updated: June 14, 2022 17:58:12


A shopkeeper uses a calculator while selling spices and grocery items along a shop in Karachi, Pakistan Jun 11, 2021. Reuters A shopkeeper uses a calculator while selling spices and grocery items along a shop in Karachi, Pakistan Jun 11, 2021. Reuters

Pakistan will raise taxes for rich, cut tax leakages and privatise government assets as the cash-strapped nation looks to bring back fiscal rectitude to convince the International Monetary Fund (IMF) to release bailout payments, Reuters reports.

The nation of 220 million people is facing a balance of payments crisis, with foreign reserves falling below $10 billion, hardly enough for 45 days of imports, and a widening current account and ballooning fiscal deficits.

Pakistan Finance Minister Miftah Ismail, announcing the budget for 2022/23 that starts on July 1, said on Friday it will impose 2 per cent addition tax on individuals with annual income of 30 million rupees.

He said the government would target raising 96 billion rupees from privatisation in 2022/23. In the current fiscal year the government did not raise any funds from privatisation.

Ismail put a ban on government officials from buying new cars for personal and official use to reduce fuel consumption.

"We have started difficult decisions... but it is not the end of taking difficult decisions," Ismail said.

The IMF had asked Pakistan to address its elevated fiscal and current account deficits before releasing a bailout package, as Pakistan had deviated from policies agreed in the last review under the multilateral agency's Extended Fund Facility programme.

It is unclear when the IMF would clear the release of over $900 million under its $6 billion, 39-month programme.

Ismail said the government would prevent tax evasion that would help increase revenue by 20 per cent to 7 trillion rupees ($34.65 billion) in 2022/23 and bring down the deficit.

The government would target a fiscal deficit of 4.9 per cent of gross domestic output for 2022/23, sharply lower from estimated 8.6 per cent in the current year, Ismail said.

"Budget FY23 is an attempt to satisfy IMF on key matters relating to revenue collection, subsidy reductions and attainment of fiscal discipline," said Umair Naseer from Topline Research, a brokerage.

One of the key steps towards meeting the IMF's conditions, the removal of costly fuel subsidies, has already been implemented by the government, with fuel prices being raised by 40 per cent.

FISCAL DISCIPLINE

The government raised tax rate on banks to 42 per cent from 39 per cent, increased capital gains tax to 15 per cent if assets sold within a year and raised withholding tax to as much as 5 per cent.

Experts said taxation measures could give the government additional revenue of 80 billion rupees in the current year.

"Unlike last year’s expansionary budget, that resulted in industry led GDP growth of 5.97 per cent in FY22 and huge increase in imports, this budget is more focused on economic stabilisation," Naseer said.

Finance Minister Ismail said the government would aim for economic growth of 5 per cent in 2022/23, down from 5.97 per cent for the current fiscal year that ends on Jun 30.

The government set the total expenditure target at 9.5 trillion rupees for 2022/23 from 8.49 trillion rupees. Ismail said he expected inflation to average around 11.5 per cent for 2022/23.

Naseer cautioned global commodity prices will determine outlook on Pakistan macros and the ease with which government will achieve its budgetary targets.

 

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