Debt servicing costs are projected to rise to an alarming level of Rs. 5.2 trillion in the current fiscal year as Pakistan scrambles to bridge its budgeting gaps.
The IMF has given a daunting task to the Government of Pakistan to raise the general sales tax (GST) rate to at least 18 percent in order to raise more taxes, reported Express Tribune.
The lender requested an increase in the standard GST rate on the same day the government released revised macroeconomic projections which showed inflation increasing to 29 percent and economic growth slowing to 1.5 percent.
The government had previously disclosed the details of a $30 billion external financing plan and projected inflows with the lender. However, the IMF did not appear confident in the country’s ability to raise enough cash from capital markets and foreign banks in these difficult times.
The Pakistan side has already exchanged data on the country’s debt profile, foreign inflows, and macroeconomic projections with the IMF this week. Upon discussion, the lender outright demanded raising the GST rate to 18 percent in order to raise additional taxes in the current fiscal year.
The GST was thought to be highly inflationary, with a 1 percent increase pushing up the prices of all goods. No decision yet, but the authorities are expected to present the IMF’s demand to the Prime Minister’s office once the fiscal framework and the gap had been agreed upon.
While the IMF appeared to be pleased with the Federal Board of Revenue’s (FBR) revenue projection plan to meet its Rs. 7.470 trillion target, it also insisted that additional tax and non-tax revenue measures would be required to meet all budgetary targets. Nervous at the impact of such an across-the-board execution, the Pakistani side feared the total cost of debt servicing to reach Rs. 5.2 trillion as a result. To note, the government had budgeted Rs. 3.95 trillion but revised projections were Rs. 1.2 trillion or 31 percent higher.
The Rs. 5.2 trillion would be 54 percent of the budget announced in June last year, and massive spending projections could lead to an IMF demand for more taxes or cuts in other expenses which would create fiscal space despite challenges.
On a separate note, the IMF expressed concern about the inflationary impact of the planned increase in electricity prices to reduce circular debt. According to government projections, further hikes in electricity prices could push inflation to 29 percent.
The IMF was also briefed on debt profiling, and the global lender requested that the authorities investigate the possibility of contracting domestic loans at fixed rates for longer tenors. The Pakistani side responded that it has made plans for $30 billion in gross external loans for this fiscal year, but the lender didn’t buy it.
Pertinently, Pakistan’s economic survival is under threat after its gross official foreign exchange reserves fell to $3 billion as of Thursday. Regardless, the government maintained its opinion that floating Eurobonds would raise $1.5 billion and had included it in the external financing plan. Moreover, the Ministry of Finance saw $6.3 billion materialize in the current fiscal year, a figure that appeared wildly optimistic. The IMF believed that raising $8 billion from capital markets and foreign commercial banks would be difficult for Pakistan.
The IMF cast other doubts over the government’s ability to secure at least $4 billion in debt repayments, excluding rollovers. Pakistan is currently hoping to receive a total of $11 billion from multilateral creditors during the current fiscal year, but this is contingent on the IMF program being revived.
As of now, some lenders have been of great assistance to Pakistan, but prominent lenders like the World Bank are awaiting the IMF before sending more dollars to the cash-strapped South Asian nation.
