Pakistan considers higher taxes to meet IMF demands
Parliament to decide on indirect duties, as central bank role also under scrutiny
Pakistani Prime Minister Imran Khan needs to make a difficult decision over a fiscal bill submitted in the National Assembly.
ISLAMABAD — Pakistan’s government is facing a tough choice: prevent economic default or public outcry that could topple it from power.
The government on Thursday submitted a bill to the National Assembly — a supplementary finance bill that will give Islamabad the right to impose indirect taxes of 360 billion Pakistani rupees ($2 billion).
The government is reluctant to have to raise taxes but it needs to do so as a prerequisite to get approval for a $1 billion loan at a Jan. 12 board meeting of the International Monetary Fund.
Islamabad was also expected to submit another bill under IMF pressure, called the State Bank of Pakistan amendment. The bill, if passed, will give the central bank more autonomy and allow it to reject government borrowing. The government has not given any hints as to whether this bill will be shelved or submitted later.
Ahmed Naeem Salik, a research fellow at the Institute of Strategic Studies Islamabad, said the second bill will give the central bank complete freedom from government involvement for the first time.
There had been worries that the indirect taxes could lead to higher prices, which might trigger protests. This comes after the ruling party, Pakistan Tehreek-e-Insaf led by Prime Minister Imran Khan, recently suffered huge setbacks in local mayoral and district elections, as Pakistanis punished the party for inflation.
Experts are also of the view that the current government, which is surviving on a thin majority in the National Assembly, could lose the support of its coalition members if the bills were passed, and the government could collapse.
“Parliamentarians of PTI and its allied parties might not show up to vote for the aforementioned bills because elections are just 20 months away and no politician wants to be seen as a supporter of a bill which increases inflation,” Salik said.
But if the government cannot pass the finance bill, it will not get the next tranche of $1 billion from the $6 billion, three-year IMF extended fund facility.
Uzair Younas, director of the Pakistan Initiative at the Atlantic Council, a Washington-based think tank, said: “Without the IMF’s seal of approval, Pakistan will struggle to meet its external financing needs, and neither the Chinese nor the Saudis will step up to fill the hole,” he said, adding that the rupee “will face increased pressure, investor confidence will collapse and a dramatic increase in economic uncertainty will unleash unimaginable pain on millions of households.”
The precarious situation of Pakistan’s economy can be gauged from the fact that it borrowed $4.6 billion in the past five months for financing its budget deficit and building its foreign exchange reserves. Failure to secure a deal with the IMF would mean it could not borrow from global lending institutions anymore.
“The government has to navigate the uproar with great difficulty, and the best-case outcome is that it convinces citizens that there is light at the end of the tunnel,” Younas added.
Other experts believe that the IMF is asking for fiscal discipline and that Pakistan needs to do this for the sustainability of its economy.
“These are difficult reforms, and unfortunately needed due to lack of fiscal discipline in the past,” said Vaqar Ahmed, joint executive director of the Sustainable Development Policy Institute, an Islamabad-based think tank. “Even if the IMF doesn’t ask Pakistan to reform energy, tax, public-sector enterprises… we still need to do for ourselves.”
NOTE: This article was originally published on NIKKEI ASIA