Pakistan adopts painful economic path to secure IMF bailout
The nation of 220 million people is facing a balance of payments crisis, with foreign reserves falling below $10 billion, hardly enough for 45 days of imports, and a widening current account and ballooning fiscal deficits
Summary
- Pakistan faces balance of payments crisis
- Government sharply lowers fiscal deficit target to 4.9% of GDP
- Steps up privatisation drive, raises taxes
- Pakistan seeking bailout from IMF
Pakistan will raise taxes for rich, cut tax leakages and privatise government assets as the cash-strapped nation looks to bring back fiscal rectitude to convince the International Monetary Fund (IMF) to release bailout payments.
The nation of 220 million people is facing a balance of payments crisis, with foreign reserves falling below $10 billion, hardly enough for 45 days of imports, and a widening current account and ballooning fiscal deficits.
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Pakistan Finance Minister Miftah Ismail, announcing the budget for 2022/23 that starts on 1 July, said on Friday it will impose 2% addition tax on individuals with annual income of 30 million rupees.
He said the government would target raising 96 billion rupees from privatisation in 2022/23. In the current fiscal year the government did not raise any funds from privatisation.
Ismail put a ban on government officials from buying new cars for personal and official use to reduce fuel consumption.
"We have started difficult decisions... but it is not the end of taking difficult decisions," Ismail said.
The IMF had asked Pakistan to address its elevated fiscal and current account deficits before releasing a bailout package, as Pakistan had deviated from policies agreed in the last review under the multilateral agency's Extended Fund Facility programme.
It is unclear when the IMF would clear the release of over $900 million under its $6 billion, 39-month programme.
Ismail said the government would prevent tax evasion that would help increase revenue by 20% to 7 trillion rupees ($34.65 billion) in 2022/23 and bring down the deficit.
The government would target a fiscal deficit of 4.9% of gross domestic output for 2022/23, sharply lower from estimated 8.6% in the current year, Ismail said.
"Budget FY23 is an attempt to satisfy IMF on key matters relating to revenue collection, subsidy reductions and attainment of fiscal discipline," said Umair Naseer from Topline Research, a brokerage.
One of the key steps towards meeting the IMF's conditions, the removal of costly fuel subsidies, has already been implemented by the government, with fuel prices being raised by 40%.
Fiscal discipline
The government raised tax rate on banks to 42% from 39%, increased capital gains tax to 15% if assets sold within a year and raised withholding tax to as much as 5%.
Experts said taxation measures could give the government additional revenue of 80 billion rupees in the current year.
"Unlike last year's expansionary budget, that resulted in industry led GDP growth of 5.97% in FY22 and huge increase in imports, this budget is more focused on economic stabilization," Naseer said.
Finance Minister Ismail said the government would aim for economic growth of 5% in 2022/23, down from 5.97% for the current fiscal year that ends on 30 June.
The government set the total expenditure target at 9.5 trillion rupees for 2022/23 from 8.49 trillion rupees. Ismail said he expected inflation to average around 11.5% for 2022/23.
Naseer cautioned global commodity prices will determine outlook on Pakistan macros and the ease with which government will achieve its budgetary targets.
($1 = 202.0000 Pakistani rupees)
