WITH its onerous burden on salaried employees and those already taxed disproportionately while leaving out the mighty untouchables or substantially reducing government expenditure, the federal budget is hyped as an essential step to secure the 24th IMF programme. Granted, we need this programme to retain our fragile solvency and avoid debt restructuring. But is the 24th programme likely to be the final programme and achieve the much-required reforms? Is the sacrificial offering to the IMF worth the pain it will cause? I think not.

Pakistan has had 23 IMF programmes to date. For the 24th programme to be the last, it would need to be drastically different from the earlier ones. However, so far, there is nothing to suggest this. Previous programmes were front-loaded with targets that could not lead to sustainable change and were set oblivious of how they would be met.

A prime example is tax targets without consideration of FBR’s capacity or the government’s political will. Hence, they were met through easy options. Tax the weak, ie, the salaried, and extract more from those already in the tax net. The 2024-25 budget repeats this formula through revenue-extractive measures based on deepening rather than broadening the tax base. It is, therefore, an attempt to appease the IMF, which lacks trust in the government’s capacity or willingness to undertake painful reforms. Such knee-jerk, short-term, tactical measures are not good for Pakistan, even if they are acceptable to the IMF.

The next IMF programme will not be the last.

Pakistan needs exports and foreign direct investment to help manage its external account. Instead of a comprehensive review of all the factors undermining Pakistan’s export competitiveness, the budget makes the lives of exporters difficult by exposing them to the vagaries of FBR’s notices and harassment that they were spared under the Final Tax Regime. FBR’s restructuring and digitisation designed to stem this harassment are held out as hope, but realistically, that will take a few years, if ever, to materialise.

Existing foreign investors would be put off by the threat of disallowance of their advertising expenses. New local and foreign investors will not be forthcoming due to an unpredictable fiscal policy and tax rates that are higher than those of alternative jurisdictions. Additional taxes on the more experienced talent, which the formal sector employs, will likely lead to more people leaving the country or looking for non-taxed alternatives, ie, the informal sector. Capital flight from Pakistan will continue due to higher income tax and capital value tax.

The imposition of 18 per cent GST on packed dairy will not only create an unlevel playing field versus open and often adulterated milk, it will also lead to inflation. Steel, tea, and edible oil sectors will continue to suffer from the misuse of the concessions, now renewed for ex-Fata and Pata. The levy of advance tax on retailers will only apply to supplies by the formal sector, while smugglers and the informal sector will capitalise by eating into their share. It is also likely that this burden will be passed on to the consumer as retailers force manufacturers to cover the tax through high prices. The government put an additional burden on the telecom sector by forcing it to act as unpaid tax collectors, raising the cost of connectivity, vital for a digital economy.

None of the major recommendations to reduce the heavy burden of taxes on the formal sector and promote scale and competitiveness were considered in the budget. These included phasing out supertax, withdrawing double taxation of inter-corporate dividends, and restoring the letter and spirit of group taxation as enacted in the Finance Act 2007-08.

In short, the bud­get is inequitable, unfair, and unreasonable. It lacks vision and is not aligned with the need to balance the external and fiscal accounts or to kickstart investment and employment. Instead, it will thwart the growth of the private sector.

As a result, the government is unlikely to meet its tax targets. That would then trigger an even more extractive mini budget. Inflation is unlikely to recede at the expected rate, nor will the policy rate decline to levels previously hoped for. The Ponzi scheme of printing currency and directing bank lending to feed the government’s uncontrolled appetite will subsist. A valuable opportunity to set the tone for an IMF programme to achieve sustainable change appears to have been lost. The 24th programme is unlikely to be the last. At best, it will provide temporary solvency. At worst, it will fail to address deep and fundamental economic defects.

The writer is CEO of the Pakistan Business Council.

Published in Dawn, July 6th, 2024