Finance minister calls for structural reforms to ensure economic independence from IMF

Federal Minister for Finance and Revenue Muhammad Aurangzeb said on Thursday that fundamental economic reforms were required to ensure that the current IMF programme was indeed going to be the last for Pakistan. He told Voice of America that the approval by the IMF of a $7bn loan package meant it firmly endorsed his assessment that turning the economy into an export-led one required huge structural change.

According to Aurangzeb, all that the government can do is impose reforms to bring currently untaxed sectors like retailers, wholesalers, agriculture and real estate under the tax umbrella. “Although last year’s revenue rose 29%, tax-to-GDP ratio still only stands at a poor 9%. This is not enough to stabilize the economy,” he said.

The minister added the government would end the term “non-filer” and no tax defaulter would be allowed to do any business activity. He said the government has data showing vehicle purchases and international travel, which could better target tax defaulters by the FBR. Aurangzeb said Pakistan’s undocumented economy was around Rs 9 trillion and that number needs documentation.

Businessmen welcomed the deal reached with the IMF with cautionary optimism, as it has simultaneously reduced and added to the uncertainty about future prospects. While the agreement may well reduce some of the uncertainty, new challenges lie ahead for economic recovery. ‘The government needs to achieve a tough target in terms of raising tax revenue and spending on those areas where there has been major under-collecting over the years,’ M. Abdul Aleem, CEO and Secretary General of the Overseas Investors Chamber of Commerce and Industry said.

Other conforming players in the private sector were concerned that the extra expense could fall back on the shoulders of the private sector when the government may not achieve the revenue results as expected within time. Aleem wished that the government will not resort to stopgap for solving crucial problems.

Ehsan A. Malik, CEO Pakistan Business Council, felt that “with the IMF program, there is liquidity and an opportunity to address some systemic economic flaws”. But did he believe the government had shown enough intent to actually deliver the sort of reforms that were necessary? He said the resolve of the government would be put through the straitjacket. Formal sector will take a bigger percentage of the beating but highlighted favorable conditions like remittances have picked up and inflation has begun to fall are already having a salutary impact on the fiscal accounts.

Malik said that the FY16 tax targets will be difficult to attain unless consumer demand recovers, but if not, the FBR would have no option but to squeeze more from high-value taxpayers instead of widening the tax net. He underscored the most critical challenge for the government to carry through the privatization of Pakistan International Airlines (PIA) and resist pressures for easing the tax collection efforts on various sectors.

Malik, in his concern with energy, thought major cost-cutting measures were unlikely and the IMF’s tariff-driven approach may prove not competitive to the interests of local industries and exports.

In the final analysis, while the IMF deal is great news for Pakistan’s foreign exchange reserves, both Aurangzeb and Malik maintained that the short-term targets from the IMF were not sustainable to begin with for a fair and investment-friendly tax regime and could not mitigate the pressing need for fundamental reforms in the energy sector. A positive development has been from the IMF’s side by putting huge efforts into acquiring provincial agreements to tax agriculture.