ISLAMABAD:
Prime Minister Shehbaz Sharif has a scheduled meeting with the head of the International Monetary Fund (IMF) next week at a Swiss hill resort, where he will seek her support for a colossal relief package to save remaining industries and individuals from further economic collapse.
Next week’s meeting may remind us of another gathering held some three years ago between the heads of the Pakistani government and the IMF. By mid-2023, Shehbaz Sharif had committed in Paris with Kristalina Georgieva that he would do the right things to bring the economy back on track and avoid default.
Sharif did indeed rescue the economy from default, but this caused the highest unemployment and highest poverty in decades – an outcome he now wants to reverse in Switzerland.
The sources in the prime minister’s office confirmed that the meeting between the prime minister and the managing director of the IMF was scheduled for the coming week. The finance ministry said it would not comment on the meeting, nor did the IMF respond to requests for a version.
The new plan has been developed in consultation with the Special Investment Facilitation Council, the business community and input from the Ministry of Finance and Taxation. The tasks include removing all the tax distortions created in the system since 2013, including a significant reduction in corporate and personal income tax rates, the sources added.
Last month, a prime minister’s panel led by the private sector had recommended cutting taxes by Rs 975 billion. to provide some relief to the formal sector. The sources said that after adding other components, the package cost could jump to Rs1.5 trillion to close to Rs2 trillion, depending on the final plan to be shared with the IMF.
Finance Minister Muhammad Aurangzeb and Secretary Imdad Ullah Bosal are also flying to Davos for the meeting, the sources added.
Unusually, the finance secretary goes to attend the WEF meetings, which take place annually at the hilly resort in freezing temperatures.
Normally, technical matters are not decided at the managers’ meeting, and these details are then left to the IMF’s regional and country offices.
It is not clear how much immediate support the prime minister can get in a single meeting, g and expectations are that the IMF may consider the details of the plan and its viability during next month’s third review talks under the $7 billion bailout, one of the people with knowledge of the development commented.
Over the past month, Pakistan’s top policy makers have already spoken about the internal anger in the business community about the unfair energy prices and the unnecessarily heavy taxes that are driving local and foreign investors out of Pakistan.
This week, Deputy Prime Minister Ishaq Dar gave a first hint when he publicly said the IMF’s programs were generally anti-growth and that the government would engage with the lender to introduce a pro-growth package.
At the same venue, Finance Minister Muhammad Aurangzeb said some companies were leaving due to higher energy prices and taxes, but he reiterated a “sustainable path” forward.
A few weeks ago, the National Coordinator of SIFC said that industrialists were easy prey of the tax machinery. Lt. Gen. Sarfraz Ahmed emphasized the need to abolish super tax, dividend tax and reduce corporate tax to 25%.
On Friday, SM Tanveer, a leading textile miller and representative of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), stated that the 150 industries built by three generations have closed and many more are on the verge of shutting down, urging the government to cut taxes and energy prices to revive the industry.
What could be in the plan?
The sources said that as per the deliberations, all distortions like super tax, estimated income tax on provincial object of immovable property, capital value tax on foreign assets may be asked to be abolished. These distortions have increased the effective income tax rate to 60%.
According to a story reported by The Express Pakinomist last month, the government may seek a reduction in corporate tax from 29% to 25%, the maximum individual rate from 45% to 30%, income tax to 25%, abolition of 10% super tax, abolition of 15% internal dividend tax and reduction of turnover tax from 15% to 15%.
The sources said the estimated annual revenue impact of the move could be well over Rs1.5 trillion, with the maximum impact over Rs600 billion due to reduction in the standard sales tax rate.
The situation was worst for the salaried class. According to the FBR, “the withholding tax collection from salaries recorded the highest increase of Rs 214.2 billion (55% growth) in the last financial year, mainly due to a decrease in the number of income tax slabs and an increase in the corresponding tax rates in each slab”.
Younus Dagha, former finance secretary, said this week that under the IMF program wage-grade taxation has been increased by 230%.
The plan is based on the assumption that the stalled local and foreign investment would start, which would activate the economy to cover revenue shortfalls. This suggests that in the first year there can be negative revenue growth without compromising the tax-to-GDP ratio, which would be covered in the next year.
This week, the World Bank’s country manager, Miss Bolormaa, told the finance minister that investment was falling behind the targets agreed in the $20 billion country partnership framework.
The government may also promise to cut the state-owned companies’ losses by more than half in three years to cut spending as part of the plan, the sources said.
The sources said the Treasury also wanted relief this time after it faced criticism that it gave too much in return for just $7 billion spread over three years.
However, there have also been challenges to the IMF program from the federal government. It did not implement the National Fiscal Compact in true letter and spirit. Last week, it approved a conditional provincial highway project worth Rs 465 billion. This week, it approved within a day a health program that falls within the provincial domain.
The provincial governments have also delayed the implementation of the agricultural income tax under the pretext of offsetting the effects of floods. However, the National Accounts Committee reported positive growth in agriculture for the first quarter, surprisingly rice production turned out to be more than pre-flood estimates.
The GST harmonization between the Center and the provinces is another case of failure.
