ISLAMABAD:
Prime Minister Shehbaz Sharif has a meeting scheduled next week with the managing director of the International Monetary Fund (IMF) at a Swiss resort, where he will seek his support for a colossal relief plan aimed at saving remaining industries and individuals from further economic collapse.
Next week’s meeting may remind us of another meeting held about three years ago between Pakistani government leaders and the IMF. In mid-2023, Shehbaz Sharif committed in Paris with Kristalina Georgieva to making the right choices to get the economy back on track and avoid a payment default.
Sharif did save the economy from default, but it caused the highest unemployment and poverty in decades – a result he now wants to reverse in Switzerland.
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 next week. The Finance Ministry said it would not comment on the meeting and the IMF also did not respond to requests for a release.
The new plan was developed in consultation with the Special Investment Facilitation Council, the business community and with input from the Ministry of Finance and Revenue. The tasks include abolishing all tax distortions created in the system since 2013, including a substantial reduction in corporate and personal income tax rates, the sources added.
Last month, a prime minister-led panel led by the private sector had recommended cutting taxes by Rs975 billion to provide some relief to the formal sector. The sources said that after adding other components, the cost of the package could rise from Rs 1.5 trillion to nearly Rs 2 trillion, depending on the final plan that will be shared with the IMF.
Finance Minister Muhammad Aurangzeb and State Secretary Imdad Ullah Bosal will also travel to Davos for the meeting, the sources added.
Unusually, the Finance Secretary travels to the WEF meetings, which take place every year in the hilly station in freezing temperatures.
Usually, technical details are not decided at the leaders’ meeting, and these details are then left to the IMF regional and country offices.
It is unclear how much immediate support the prime minister can secure in a single meeting, and it is expected that the IMF may deliberate on the details of the plan and its viability during next month’s third negotiations under the $7 billion bailout, commented one of the people with knowledge of the development.
Over the past month, Pakistan’s top policymakers have already spoken out about internal resentment within the business community over unfair energy prices and unduly 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 declared that IMF programs were generally anti-growth and that the government would engage with the lender to introduce a pro-growth program.
At the same venue, Finance Minister Muhammad Aurangzeb said some companies were leaving due to rising energy prices and taxes, but he reiterated that there was a need to embark on a “sustainable path”.
A few weeks ago, the national coordinator of the ITFC affirmed that manufacturers were easy prey for the tax machinery. Lt Gen Sarfraz Ahmed stressed the need to abolish super tax, dividend tax, and reduce corporate income tax to 25%.
On Friday, SM Tanveer, a leading textile manufacturer and representative of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI), said all 150 industries built by three generations had closed down and many more were on the verge of shutting down, urging the government to reduce taxes and energy prices to revive the industry.
What could be in the plan?
The sources said that depending on the deliberations, it may be asked to abolish all distortions such as super tax, presumptive income tax on provincial real estate and capital value tax on foreign assets. These distortions raised the effective income tax rate to 60%.
According to an article reported by The Express PK Press Club last month, the government may seek a reduction in corporate income tax from 29% to 25%, the top rate for individuals from 45% to 30%, the salaried class tax to 25%, the abolition of the 10% super tax, the end of the inter-company dividend tax from 15% and the reduction of sales tax from 18% to 15%.
The sources said the estimated impact of the move on annual revenue could be much higher than Rs 1.5 trillion, with a maximum impact of over Rs 600 billion due to the reduction in the standard sales tax rate.
The situation was most serious in the case of the salaried class. According to the FBR, “collection of withholding tax on wages recorded the highest increase of Rs214.2 billion (55% growth) during 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, taxes on employees have been increased by 230%.
The plan is based on the assumption that stalled local and foreign investment would resume, allowing the economy to cover the revenue shortfall. It suggests that in the first year there could be negative revenue growth without compromising the tax-to-GDP ratio, which would be covered in the following year.
This week, World Bank country director Miss Bolormaa told the finance minister that the investment fell short of targets agreed under the $20 billion national partnership framework.
The government could also promise to cut state-owned enterprises’ losses by more than half in three years to reduce spending under the plan, the sources said.
The sources said the Finance Ministry was also seeking relief this time around, after being criticized for giving away too much money in exchange for just $7 billion, spread over three years.
However, the federal government also challenged the IMF program. He has not implemented the National Fiscal Compact in its true letter and spirit. Just last week, it conditionally approved a provincial highway project worth 465 billion rupees. This week, in one day, he approved a health program that falls under provincial jurisdiction.
Provincial governments have also delayed the implementation of agricultural income tax under the pretext of offsetting the impact of the floods. However, the National Accounts Committee reported positive growth in agriculture for the first quarter and, surprisingly, rice production was higher than pre-flood estimates.
GST harmonization between the Center and provinces is another case of failure.
