IMF calls for Rs163b in spending cuts amid revenue shortfall

IMF calls for Rs163b in spending cuts amid revenue shortfall

The International Monetary Fund (IMF) on Friday asked Pakistan to cut spending in the range of Rs163 billion to Rs183 billion immediately, as it is not ready to compromise on its goal of achieving a primary budget surplus this year despite a significant revenue shortfall.

The development comes amid the government’s decision to appoint Ali Pervez Malik, Member of the National Assembly, as Minister of State for Finance and Revenue. Ali Malik belongs to a political family and is considered an unorthodox lawmaker.

Sources told The Express Tribune that during the first day of interaction, the IMF reiterated its old demand that there would be no compromise on the core objective of having a primary budget surplus of 0.4% of Gross Domestic Product or Rs401 billion.

The issue came up for discussion on the first day of program deliberations after the Federal Board of Revenue (FBR) informed the global lender that it faces a revenue shortfall of Rs163 billion to Rs183 billion for the current fiscal year ending in June, sources said.

A day earlier, the IMF team quietly landed in Pakistan – five days ahead of the date given by Finance Minister Muhammad Aurangzeb in his press conference attended by two other federal ministers.

The FBR assured the IMF that it will try to recover Rs20 billion to Rs25 billion through administrative action under Statutory Regulatory Order 350. The SRO aims to curb false or improper sales tax refunds, and the FBR has recovered Rs2 billion from one company.

The FBR informed the IMF that its direct tax collection exceeded the target with a growth rate of over 40%. Despite the compression in imports, customs duties also increased at a rate of 13%. However, the challenge arises from the Rs215 billion stuck in the court case.
Pakistan had earlier assured the IMF that the court would decide on this matter by April-May. However, the court proceedings took longer, and now the authorities have assured the lenders that a decision may be announced from June.
The apex court has also issued guidelines to high courts to dispose of taxation-related cases in a timely manner.

The petitioners have challenged the government’s move to impose super tax, tax on real estate, and tax on windfall profits made by commercial banks. These measures were taken as part of the last budget. Of the Rs415 billion of additional tax measures that the PDM government had taken in the previous budget, almost half of it is now stuck in court.

The source said that the IMF asked Pakistan that to cover the shortfall in revenue, there is a need to reduce expenditure by the same amount.

The government is already running tight and has very limited fiscal space to make room for spending cuts. The only window readily available is to reduce development expenses.

In its final staff-level report on the Preparedness Arrangement, the IMF said on Friday that in order to strengthen economic stability, strict adherence to FY2024 targets and further adjustments beyond FY24, while protecting development needs and social safety nets, are essential to reduce external and domestic pressures as well as ensuring fiscal sustainability.

It further stated that Pakistan remains committed to achieving a FY24 general government primary surplus of at least Rs401 billion or 0.4% of GDP, which requires sustained efforts.

The staff-level report underlined that the annual FBR revenue target remains unchanged at Rs9.415 trillion, but there is a risk of shortfall in April and May 2024 due to holidays that will see closure of ports and burden revenue collection.

The report states that agreed contingency measures will be adopted in the event of insufficient collection.

The report said that efforts to collect additional revenue from retailers have been delayed, and challenges persist in the tobacco sector where, despite the mandatory implementation of track and trace systems, smuggling and clandestine production continue despite efforts to curb informal production and imports.

FBR is facing another challenge in the form of constant pressure from the government to recover its stuck revenue. The government has started punishing the chief commissioner for the actions of lawyers seeking adjournment in tax cases.

As a result, lawyers have started leaving FBR cases.

One of the senior FBR lawyers representing the board in the Supreme Court and high courts on Thursday refused to plead the FBR case related to the Karachi Medium Tax Office due to continued pressure.

“Due to my busy schedule before the Supreme Court of Pakistan, I am not in a position to attend FBR cases simultaneously in the High Court and the Supreme Court. I was repeatedly called by your subordinate office that I am not allowed to take adjournment for any reason as the Prime Minister of Pakistan has suspended a Chief Commissioner because the FBR counsel sought adjournment,” the lawyer wrote to the FBR.

He further stated that in such a stressful situation, his High Court pending cases, except for a few specially assigned ones, should be handed over to some other lawyers as time clashes in attending to High Court and Supreme Court cases were unavoidable.

The FBR has already missed the 10-month tax collection target by a margin of Rs52 billion. It could raise Rs7.362 trillion against the target of Rs7.414 trillion. The collection was Rs15 billion short of the FBR’s own expectations – a shortfall the administration attributed to the slow-moving policy adopted by officials against the prime minister’s move to remove compromised and incompetent officials.

The FBR missed its monthly target of Rs57 billion as it could raise only Rs650 billion in April.

To cover the revenue shortfall and widen the tax base, the FBR on Friday also reached an understanding with telecom companies. The FBR Chairman held a meeting with the Pakistan Telecommunication Authority (PTA) and telecom operators across Pakistan to ensure effective implementation of Income Tax General Order No 1, issued under Section 114B of the Income Tax Ordinance 2001.

Telecom operators have agreed to start the manual blocking process in small batches until their systems are fully equipped to automate it, according to a statement issued by the FBR. It added the first batch of 5000 non-filers has been notified to telecom operators today for compliance on SIM blocking.

The FBR has issued orders to block the SIM cards of half a million non-filers.

Telecom operators have also started sending messages to non-filers about SIM blocking for informational purposes.

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