Monitoring Desk
ISLAMABAD: Pakistan is considering imposing a flood levy to shore up dwindling revenues and make up for the losses caused by the devastating floods.
To increase tax collection, the government is considering imposing a flood levy in the current fiscal year, and various proposals are being considered to finalize its exact modalities, an official said. Although the political leadership has agreed to take additional taxation measures in principle, they want to do so that there is no additional burden on the common man in the face of higher inflation and a low growth trajectory.
Flood levy on people in Higher Income brackets
“We’re thinking about charging a Flood Levy to people in higher income brackets who have been making huge profits lately. Although we haven’t finalized the details, the higher functionaries of the government are actively considering it right now, a top government official confirmed.
The government has informed the IMF that funds used for flood relief and rehabilitation during the current fiscal year came from the Public Sector Development Programme (PSDP) and the provincial governments’ Annual Development Plans (ADPs). On the eve of the budget for 2022–2023, the budget deficit target previously set at 4.9 percent of GDP will now be raised using the adjuster, according to a local newspaper.
It is understood that Pakistan informed the IMF that the costs for flood rescue and relief came to Rs 340 billion and asked the lender to grant an adjuster of the same amount by allowing an increase in the budget deficit for the current fiscal year 2022–23.
Disagreements remained over tax collection targets, non-starter energy reforms like raising gas prices, rising circular debt, and expenditure overruns, making it more difficult to come to a staff-level agreement for the conclusion of the 9th review under the $7 billion Extended Fund Facility (EFF).
Because the government maintained the same gas prices, which increased the gas sector’s circular debt, the IMF asked Pakistan to raise the gas tariff.
Despite the government’s plans to improve the gas sector, no progress was seen in the power sector. The monster of circular debt in the power sector grew to Rs 2.4 trillion, and none of the monthly and quarterly reduction targets set by the IMF could be met. The accumulated Circular Debt in the current fiscal year would increase by Rs 200 billion due to the subsidy on tube wells alone.
The Kissan Package and the government’s decision to reduce power and gas tariffs for five export-oriented sectors and the agricultural sector both drew criticism from the IMF.
If the decision to postpone paying electricity bills was made as a subsidy or not, the Ministries of Finance and Power continue to disagree. The payment was delayed, per the Finance Ministry, with the understanding that it would be repaid over the winter. But there is a difference of opinion between the two ministries on interpretation.
In light of import compression and the slowing of the economy, the IMF also determined that the FBR would not be able to reach its projected annual tax collection target of Rs 7.47 trillion and requested a revised projection. The Fund staff also questioned why the nominal growth did not appear in FBR’s collection when it spiked to 25 and 27 percent. The IMF predicted that the tax-to-GDP ratio would decrease in the current fiscal year even if the FBR met its annual target of Rs 7.47 trillion. However, FBR officials argued in front of the IMF that collection was on track and they would be able to hit their goal.
However, because of the litigation, the revenue collection may be delayed. As a result, it’s possible that stuck-up revenues totaling Rs 250 billion will materialize in the upcoming months. The FBR has written requests to the Chief Justice of Pakistan requesting an early resolution of the ongoing court cases involving billions of rupees.
One senior official responded that the negotiations with the IMF were progressing well and that a staff-level agreement would likely be reached soon. According to a representative of the IMF, the discussions surrounding the ninth review have been fruitful.
The macroeconomic outlook following the floods has been revised due to the discussions. The fiscal, monetary, exchange rate and energy policies implemented since the conclusion of the combined seventh and eighth reviews have also been thoroughly examined.
The IMF is eager to continue discussing measures that, given the available funding, maintain fiscal and external sustainability while also providing for the humanitarian and rehabilitation needs resulting from the floods.
IMF
The International Monetary Fund’s executive board reviewed the surcharges it collects on larger loans that are not repaid swiftly from largely middle- and lower-income nations, including Pakistan, on Monday. Still, it did not agree to undertake a formal review.
The fund should not alter its financing mechanism at a time when the global economy is experiencing substantial headwinds, according to the United States, Germany, Switzerland, and other advanced nations. These countries are opposed to the shift.
According to a representative for the IMF, the board addressed possible revisions to the policy during its routine assessment of the precautionary balances held by the international lender. Still, it was unable to come to a decision. The spokeswoman stated that opinions on the surcharge policy generally “continued to differ, particularly on the merits of a temporary waiver of surcharges.”
Argentina, Pakistan, and other countries are pressuring the IMF to eliminate or at least temporarily reduce the surcharges, which the IMF estimates will cost affected borrowers $4 billion from the start of the COVID-19 outbreak through the end of 2022, in addition to interest payments and penalties.
No specifics were given, but the fund stated that it would issue a press release and staff paper in the upcoming days to explain the board’s discussions more thoroughly. No time was specified for a future board meeting.
According to Kevin Gallagher, director of Boston University’s Global Development Policy Center, big shareholders should reconsider their resistance, given the outlook for the world economy. The most pressing time to fix the IMF’s fundamentally faulty business model of taxing those most in need, according to Gallagher, is now.
However, he pointed out that it was noteworthy that the IMF’s shareholders had not flatly rejected a review. The fact that the largest shareholders “didn’t have enough strength to kill the proposal” is one bright spot, he said.
