As expected, the recently announced budget by the government is causing problems in unlocking IMF funding to bail out the economy. Experts had already indicated that this might be the case. Time is of the essence here, with the June 30 deadline looming, which is when the current Extended Fund Facility programme expires. While Pakistan will inevitably have to seek out a new loan facility after this, if this deadline is passed, we will be unable to receive the remaining $2.2 billion of the current programme.
Of particular concern is the government’s proposal to launch an amnesty scheme to increase remittances and foreign exchange inflow. The government is looking to waive any requests for source of income information for remittances under $100,000. This one-time inflow might bump up remittances for a short period, but ultimately this will only harm the economy due to untracked wealth entering and leaving the country. Amnesty schemes have been used by successive governments to try and allow for a momentary boost to economic activity, only for this to have disastrous consequences laters. A restructuring of the financial system and tracking wealth can perhaps be a better solution to getting more taxable wealth into the formal economy.
Beyond this, another sticking point remains the tax net and the government’s attempts to broaden it. Without any monumental changes to property and wealth tax, any angling of restructuring of the income tax system will not be enough to achieve the lofty tax collection targets in place. We continue to rely on the sales tax as a means of collecting a large chunk of revenue and with heavy inflation and devaluation of the rupee, this is having an even greater impact than before on lower-income households.
The IMF’s comments on the budget are not unexpected or surprising. The amnesty scheme was always going to be a hard sell, and repeated attempts by the government to get the last tranches of the funding unlocked have more or less failed in past few months. There is a need for restructuring the economy, but it is clear that the current government does not see that as a priority in election year. The finance ministry will now have to provide answers on how it plans on avoiding a default in the months to come.