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Tuesday, May 21, 2024

IMF and Pakistan; Mini Budget and its failure

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Last week Federal Minister of Finance Mr. Ishaq Dar presented the finance bill -also called as Mini Budget – before the National Assembly. According to him, there is a requirement of Rs.170 billion fiscal measures. It is to comply with the conditions of the International Monetary Fund (IMF) to save Pakistan from default. To meet the IMF’s deadline of March 1, the government couldn’t wait for June to implement tax measures worth of Rs115bn.

Increase in GST

Mini Budget suggested to increase the general sales taxes from 17% to 18% on general items. It imposed only 25% on luxury items. Federal Excise Duty (FED) on cigarettes, air tickets, Sugary drinks, cement and advance tax on weddings and seminars have also been increased.

This is why the IMF always comes up with the solutions of accounting rather than pull the economy on track by suggesting structural changes. The IMF always suggests imposing more taxes, increasing fees, and cutting subsidies that usually shift the burden on the public.

International debt

Currently, Pakistan’s economy is shaped around debt-driven growth and consumption. Even the previous economic growth periods in Pakistan were always driven by higher inflows of international debt and aid.

So, the question is why Pakistan is in the IMF’s debt trap. To understand the case of the IMF in Pakistan, one must understand unbalanced equilibrium of import and export of the country.

Imbalance between imports and exports

Imports are far higher than exports. Imports consist of petroleum related products, heavy machineries, automobiles, medicines, food items and electronic items including laptops, computers, and mobile phones.

 In stark contrast, wheat, sugar, cotton, fruit, vegetables, meat, and textile in short mostly agriculture related products are exported from Pakistan. Comparatively exported products have cheaper value than the commodities the country imports.

The IMF has given a deadline of March 1 to Pakistan for implementing all these measures. However, the bulk of tax measures worth Rs115bn was already implemented from Feb 14 through statutory regulatory orders.

The government is in a race against time to implement the tax measures and reach an agreement with the IMF.

Country major imports are petroleum related products which comprises of 27% of the total imports. Since energy generation in Pakistan depends almost 67 percent on crude oil.

Only 37 percent power generation is being done from other sources including solar, wind and nuclear energy. Considering that these are relatively environment friendly sources.

Substitution of oil for energy creation

Simply, reducing the dependency on oil for energy creation would unburden the wrenching economy. The major setback in the journey of transition, to create from other means rather than oil, occurred in the last government regime when 17% GST was imposed on solar panels.

Tax on luxury items

Secondly, apparently importing and consuming luxury items by the public, especially the elite class, is leading the country’s economy towards default. Unfortunately, imposing taxes on luxury items is not making a significant difference. For example, despite the high prices and duty sales of luxury cars have kept behind the sales of ordinary cars in January 2023.

Now your mind must be thinking that the government should opt to ban the luxury commodities. It was also suggested in the Senate Standing Committee on Finance. So, what is keeping the government away from doing so? It is the restrictions imposed by the World Trade Organisation (WTO). Pakistan is one of the signatories of this Treaty.

Eventually, it was a tax regime that was recommended to be revised, restructured, and redesigned by the IMF. Multiple tax amnesty schemes were given by governments in the past to increase the tax base.

Bringing the informal sector into the tax net was also suggested to reduce the underground economy. Moreover, governments got blamed for not imposing tax on agricultural income.

Tax to GDP ratio

However, some economists believe that recommendation to improve the tax-to-GDP ratio is just like putting the cart before the horse. Rather, it is the country’s current investment-to-GDP ratio, i.e., 15%, needs to be increased to 25% to.

Harm caused by Elite class

Pakistan is very unfortunate, since its economic elite is relatively more interested to invest in casino economies like real estate. It is where speculation increases the price of land artificially. Hence, they are able to earn more in a short period of time without any further effort.

The investment in the land market is harmful for the economy. It is not providing jobs to others, not supporting and increasing the productivity of other industries. It is only increasing the wealth of the elite class. Eventually, Pakistan which is a homeland of more than 200 million population has and only around 500 listed companies.

What is the way forward?

Economy of Pakistan only thrives if more public and private investment would be added in the capital market largely in power generation from nuclear, solar and wind energy. However, to reduce imports of other items, a local manufacturing industry should be started. The more productivity and good quality will increase our dependency on locally manufactured goods rather than imported items due to cheap prices.

It requires a National Plan to motivate investors to invest in the productive sectors. Legislation and judicial conduct should be reformed to improve commercial contract enforcement. Moreover, utmost utilization of both private and public land in cities for commerce and housing should be made sure. Since, maximum land use in cities will lead to more economic activities, job creation and revenue generation.

The serious efforts from the political elite, other government stakeholders including military and judiciary, and the economic elite with mutual considerations and cooperation will save Pakistan from such economic devastation.

The dependency on aid or debt from others, large imports and not utilizing savings for further economic activities would remain Pakistan in the same situation where any other mini budget and imposing more taxes would not aid much to save Pakistan from default.

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