The cost of servicing debt might skyrocket to a staggering Rs5.2 trillion.
The IMF requires Pakistan to increase its value-added tax rate to 18%.
ISLAMABAD:
The International Monetary Fund (IMF) requested Pakistan on Thursday to earn additional revenue by raising the general sales tax rate to at least 18%, as the country’s estimated debt servicing costs were projected to rise alarmingly to Rs5.2 trillion in the current fiscal year.
The day after the government released its updated macroeconomic estimates, which showed an acceleration of inflation to 29% and a stalling of economic growth to 1.5%, the global lender demanded a hike in the basic GST rate.
Increased unemployment and poverty in the nation would result from higher inflation and slower economic growth.
The administration disclosed the specifics of the predicted inflows and the $30 billion in external funding obligations one day earlier. However, sources told The Express Tribune that the IMF did not seem confident in the nation’s ability to raise nearly $8 billion from capital markets and foreign commercial banks in these difficult circumstances.
According to the sources, on the second and third days of the negotiations, the administration exchanged information regarding the debt profile of the nation, foreign investment, and macroeconomic projections.
They continued by saying that the IMF had urged that the government take into account raising the GST rate by 1% to 18% in order to collect more revenue for the current fiscal year. A 1% increase in the GST was thought to result in a significant inflationary impact on all pricing of goods.
A representative of the finance ministry clarified that no decision had yet been made and that after the fiscal framework and the gap had been agreed upon, the government would present the IMF’s request to the prime minister.
According to a different government official, the IMF appeared pleased with the FBR’s plan to predict revenues in order to hit the Rs7.470 trillion yearly objective. However, he continued, “the IMF stated that more tax and non-tax revenue measures would have to be employed to reach the overall budgetary targets.”
The low tax-to-GDP ratio of the FBR, which was now anticipated to be roughly 8.4% at the inflated size of the economy, was a problem, though. According to the sources, the ratio was 9.6% of GDP on the previously anticipated old size of Rs78 trillion, which the IMF did not support. But overall, the IMF was pleased with the technical advice provided by the FBR.
According to the sources, the IMF was informed that the entire cost of debt payment may reach an astounding Rs5.2 trillion in the current fiscal year 2022–23. The updated expectations were Rs1.2 trillion, or 31%, more than the budget estimates, which were Rs3.950 trillion according to the government’s budget.
The Rs5.2 trillion would be equivalent to 54% of the budget released in June of last year, and the sources warned that enormous spending predictions would prompt the IMF to call for higher taxes or a reduction in other spending in order to free up some fiscal space.
During the months of July through December of the current fiscal year, the government had already spent Rs2.57 trillion on debt servicing. The central bank raised interest rates to 17% last month, which might not help control inflation but will undoubtedly cause the budget to haemorrhage even more.
According to the sources, the IMF expressed concerns about the projected rise in electricity rates’ potential to cause inflation and reduce circular debt.
According to the sources, the government had predicted that an increase in electricity prices may cause inflation to reach 29%.
It was unclear if the government had taken the effects of increased taxes into account when forecasting inflation.
The Pakistan Bureau of Statistics said on Wednesday that in January, inflation reached a level of 27.6%, the highest in 48 years. The people who were having trouble making ends meet would suffer more from the index’s likely acceleration. To avoid default, the government was forced to abide by the IMF’s stipulations.
The IMF was advised that the economic growth rate may slow down to 1.5% to 2% due to floods, strict monetary policy, rising inflation, and an unfavourable global environment, a pace that was even slower than the population growth rate and would increase unemployment in Pakistan.
According to the sources, the agricultural sector would experience a decline, the industrial sector would exhibit nominal growth, while the services sector was predicted to rise by about 3%.
The administration has finally realised that the additional jobs in the current fiscal year may not be more than 500,000, as opposed to earlier forecasts of roughly 1.5 million new jobs.
Some estimates place the number of new workers entering the labour force each year at at two million, and the low rate of increased employment suggested that Pakistan’s unemployment rate would be higher.
According to the sources, the IMF was also informed about the debt profiling and requested that the authorities look into the prospect of securing local loans with stable rates and longer terms.
The sources said that although the government insisted it had made preparations for the $30 billion in gross external borrowing for this fiscal year, the IMF had some major concerns.
The country’s gross official foreign exchange reserves fell to $3.1 billion, putting its economic survival in jeopardy.
The administration had included floating Eurobonds in the external funding strategy because it continued to anticipate it would raise $1.5 billion by doing so.
In contrast to the almost $7 billion in foreign commercial loans that were projected, the Ministry of Finance still anticipated $6.3 billion in the current fiscal year, which likewise seemed extremely optimistic.
According to the IMF, it would be challenging to raise $8 billion from international commercial banks and the capital markets given the current situation.
The government’s ability to secure at least $4 billion for impending debt obligations, excluding rollovers, was also questioned.
During the current fiscal year, it aimed to earn a total of $11 billion from the multilateral creditors, but whether that goal would be realised would depend on whether the IMF programme would resume.
Up until this point, Pakistan had received significant assistance from the Asian Development Bank, but the World Bank was looking to the IMF.
