Pakistan likely to hike taxes before crucial IMF loan
Islamabad: Pakistan’s government is set to unveil its budget this week, with Finance Minister Muhammad Aurangzeb likely under pressure to hike taxes and boost revenue in order to bolster the chances of clinching a new International Monetary Fund (IMF) loan.

Aurangzeb will present the country’s first post-election budget and his first since being appointed to the position in March.

The budget plan will outline targets for tax revenue growth, possible tax changes and the fiscal deficit.

The government already approved an economic growth target of 3.6% for the financial year starting July 1 compared with 2.4% a year ago.

“There are no sacred cows,” said Aurangzeb in a press conference on Tuesday.

“Everyone will have to contribute to this economy because schools or universities or hospitals can run with philanthropy but countries can only run through taxes.”

Prime Minister Shehbaz Sharif’s government, which came to power in a disputed election in February, is in discussions with the IMF for a minimum three-year bailout programme.

The government was on the brink of a default last summer and the economy is still struggling to gain traction, forcing the government to seek more funds.

Chances of a new IMF loan have helped to lift investor sentiment, with the country’s stock market and bonds among the world’s best performers in the past year.

To meet IMF loan conditions, Pakistan will likely have to maintain fiscal discipline and achieve a primary surplus to make its debt sustainable, said Ankur Shukla, an economist at Bloomberg Economics.

The IMF programme is critical for the country to help meet its debt payments of about US$24bil in the next fiscal year. The budget will likely give a hint into the policy decisions agreed with the IMF, which approves the fiscal plan line by line.

About half of the total debt payments are loans from China, Saudi Arabia and the United Arab Emirates, countries that are expected to extend the loan terms for another year once they reach maturity, according to central bank governor Jameel Ahmad.

The finance minister has pledged to raise the tax ratio to 15% of gross domestic product from below 10% currently, levels which the IMF has said is unsustainable.

The government is targeting to raise revenue by an ambitious 38% to 13 trillion rupees in the budget, according to a report by newspaper Dawn.

Higher revenue means the government will be under pressure to hike taxes. That fuelled the benchmark KSE-100 Index to drop in six of the last seven sessions, with speculation of a possible increase in capital gains tax on equities and an increase in income taxes.

“Every budget transmission becomes a witch hunt for more taxes,” said Nadeem Ul Haque, vice-chancellor of the Pakistan Institute of Development Economics and a former economist with the IMF.

“Frequent policy changes only make businessmen uncertain, create hurdles for enlarging a formal economy and force capital to flee.”

The government has also proposed an increase by 29.4% to US$4.4bil in government development spending on mega-projects. The government was only able to spend about 40% of the amount allocated for the current year.

Pakistan has the highest inflation rate in Asia, although it’s moderated recently, and the exchange rate has been relatively stable after a tumultuous year. — Bloomberg
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Pakistan’s government is set to unveil its budget this week, with Finance Minister Muhammad Aurangzeb likely under pressure to hike taxes and boost revenue in order to bolster the chances of clinching a new International Monetary Fund (IMF) loan.