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Pakistan’s Ambitious Budget Made With an Eye on IMF Deal
Pakistan Foreign Ministry Press Service via Associated Press
South Asia

Pakistan’s Ambitious Budget Made With an Eye on IMF Deal

The main challenge lies in raising taxes in a country that has long failed to widen its tax base.

By Umair Jamal

Pakistan’s newly elected government recently presented its federal budget for 2024-2025, setting an ambitious tax revenue target of $46.66 billion – a nearly 40 percent jump from the past year. This bold move is part of the government’s efforts to strike a new deal with the International Monetary Fund (IMF) to address the country’s mounting debt crisis. Pakistan is reportedly seeking a new IMF bailout of up to $8 billion, which Islamabad claims will be its last if it implements all the envisioned economic reforms.

The budget document promises to bring the public debt-to-GDP ratio under control, a critical concern for Pakistan and its lenders, including the IMF and China.

With external debt reaching $125.7 billion in March 2023 and the debt-to-GDP ratio standing at around 75 percent in 2022, the government seemingly recognizes the urgent need to prioritize fiscal consolidation and improvements in the balance of payments position.

A country’s debt-to-GDP ratio indicates how much its national debt is compared to its GDP. Economies that have a low debt-to-GDP ratio typically have enough revenue collected to repay loans without incurring further debt.

Finance Minister Muhammad Aurangzeb recently emphasized the importance of this opportunity, urging the country not to waste it. “Pakistan has another opportunity to improve itself and embark on the path of economic development. I request everyone not to waste this chance,” he said during his budget presentation speech in the Parliament.

The budget also aims to bring down the fiscal deficit for the new financial year to 5.9 percent of GDP from an upwardly revised estimate of 7.4 percent during the outgoing year. This will be achieved through a combination of measures, including restrictions on dollar-driven imports, keeping bank borrowing rates at record-high levels, and the privatization of some state-owned loss-making enterprises.

Moreover, the upcoming year’s growth target has been set at 3.6 percent, with inflation projected at 12 percent. The government also plans to generate additional revenue by selling its shares in various projects, including mining ventures.

While the promises made in the budget document seem encouraging and point toward a need in Pakistan to contain its debt and raise more funds to increase its revenues, the question remains: Can Pakistan’s new budget deliver on its ambitious targets? The success of this plan will be crucial in securing the much-needed IMF deal and putting the country on a path to economic stability and development.

The challenge for the new Pakistani government in raising taxes is that the country has failed to significantly widen its tax base beyond direct taxes repeatedly in the past. Only 10 million out of a population of over 230 million are registered taxpayers, and just 4.4 million filed annual tax returns with the Federal Board of Revenue (FBR). The FBR’s weak system is often exploited by businesses and individuals to evade taxes, and there is little enforcement outside of major cities.

Moreover, there is little public awareness that tax filing is mandatory, as the state has historically been lax in enforcement. This has reinforced public attitudes that tax evasion is not a serious offense.

Furthermore, the current coalition government may be reluctant to implement drastic reforms that could undermine its political base, even as the country stands on the brink of default. The coalition government led by the Pakistan Muslim League-Nawaz (PML-N) is already facing criticism from its allies. The Pakistan People’s Party (PPP), in particular, has complained that the budget does not take into consideration their concerns. It appears there are differences over how to implement a reform agenda to address the economic crisis.

Stakeholders, including the IMF, will be wary of whether the government is fully committed to implementing tough reforms, as the tax revenue increases are expected to come largely from the middle class, who have already been hit hard by inflation.

Meanwhile, reports suggest that powerful elites may continue to evade taxes, further fueling public discontent. The government’s ambitious budget plans may impress international observers, but the true test will be whether it can overcome these deep-seated challenges to expand the tax net meaningfully.

The government’s budget proposal raises significant concerns about its ability to achieve the ambitious revenue collection targets and address the growing pension liabilities. While the budget includes a substantial increase in government employee salaries and a doubling of the federal development budget, the lack of clear plans to tackle the pension crisis and the uncertainty surrounding the government’s ability to meet the nearly 50 percent growth in direct taxes are worrying.

The finance minister’s expectation that a Staff-Level Agreement with the IMF will be sealed in July is a positive sign. However, the IMF’s lack of response to the budget raises questions about its viability. Although some may consider the IMF’s silence as an approval of the budget, it could also indicate that it does not want to pressure the government publicly on the issue.

What happens next will test the state’s seriousness in implementing meaningful reforms and addressing the country's economic challenges.

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The Authors

Umair Jamal is a correspondent for The Diplomat, based in Lahore, Pakistan.

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