ISLAMABAD: The federal government, in collaboration with provincial administrations, is set to sign a “National Fiscal Pact,” aimed at addressing Pakistan’s external financing gap through the harmonisation of provincial taxes and enhancement of revenue collection.
This landmark agreement will create a unified fiscal framework between the federal government and all the four provinces, focusing on expanding tax revenues from the agriculture sector, growing provincial revenues and realigning federal expenditures.
Federal Finance Minister Muhammad Aurangzeb, speaking at a news briefing on Sunday, confirmed that the National Fiscal Pact would be signed soon. “We will sign the National Fiscal Pact with the provinces, which will help us address the external financing gap,” Aurangzeb stated. He was accompanied by Federal Board of Revenue (FBR) Chairman Rashid Langrial during the announcement.
Tax collection efforts have also intensified. Since last year, the number of tax filers has doubled to 3.2 million, with 723,000 new filers added this year alone. The minister estimated that tax evasion costs the government Rs1.3 trillion annually, and he called for a “war on cash” to reduce the size of the informal economy, which is estimated to be Rs9.3 trillion.
“We see an upside of Rs7 trillion in taxes if we document the economy,” Aurangzeb stated. To this end, the FBR plans to hire 2,000 chartered accountants to strengthen auditing capabilities and combat tax evasion. The minister emphasized that tax collectors will be incentivised to increase revenue collection.
In a major step towards tax reform, the finance minister announced the abolition of non-filer category. The government plans to implement a digital interface and algorithm to detect under-reporting of assets. Aurangzeb revealed that only 14 percent of manufacturers and 25 percent of traders are registered for sales tax. The government will target those evading taxes by blocking utilities, bank transactions and pledging properties.
Efforts to combat smuggling are also being ramped up. Aurangzeb estimated that smuggling costs the government Rs750 billion annually, and the introduction of digital checkpoints at major border crossings is aimed at curbing illicit trade and ensuring tax compliance.
One of the government’s key goals is to increase the tax-to-GDP ratio to double digits, targeting 13 to 14 percent for long-term sustainability. Aurangzeb stressed that Pakistan must shift towards an export-led economy rather than one driven by imports. The government is also continuing its privatisation efforts and reforms in state-owned enterprises (SOEs), aiming to streamline operations and reduce losses.
Aurangzeb, who chairs the committee overseeing SOE reforms, revealed plans to abolish six federal ministries and eliminate 150,000 vacant government positions as part of a broader effort to reduce the size of the federal government.
The finance minister also identified two existential challenges for Pakistan: population growth and climate change. He noted that discussions with the IMF had included the creation of a climate resilience fund and Pakistan plans to participate in the upcoming IMF meeting on October 19.
The IMF advised completing the EFF programme before moving forward on the fund, the minister said. Aurangzeb also highlighted child stunting, affecting nearly 40 percent of Pakistani children, as another key issue the government is addressing with the help of the World Bank.
FBR Chairman Rashid Langrial also spoke during the briefing, revealing that the tax gap has widened to Rs7.1 trillion this year, compared to Rs5.9 trillion last year. He noted that the gap in General Sales Tax (GST) alone amounts to Rs2.3 trillion.
Langrial emphasized that in real terms, tax collection has not increased since 2016, when it stood at Rs3.1 trillion. Adjusting for inflation and growth, the collection remains the same in real terms. “We are working on two fronts: internal FBR reforms and broader tax structural reforms. These are not optional but compulsory,” he said.
The FBR has reconstituted the board of its technology arm, Pakistan Revenue Automation Limited (PRAL), bringing in private sector experts and reducing human intervention in tax collection processes. “This is a defining moment for Pakistan,” he said. “We are creating a strong foundation for macroeconomic stability, driven by a homegrown economic agenda. This is just the beginning. We are laying the groundwork for a sustainable economic future.”
He acknowledged that adjustments would be needed across the government and private sectors to achieve long-term stability.
Aurangzeb also highlighted Pakistan’s improving macroeconomic stability, noting that the country has experienced a stable exchange rate for over a year, along with a significant increase in foreign reserves. The import cover has improved from just two weeks to two months, signaling stronger economic fundamentals. The minister pointed to improved remittances and diversified exports as factors contributing to Pakistan’s shrinking current account and budget deficits.
The finance minister also addressed the issue of inflation, which has dropped from a peak of 38 percent to single digits, with expectations of further decreases. This progress is part of the government’s broader agenda following the completion of nine-month Standby Arrangement (SBA) with the International Monetary Fund (IMF) in the 2023-24 fiscal year.
In July 2024, Pakistan signed a new Standby Arrangement (SLA) with the IMF, which led to the Fund’s board approval of a 37-month Extended Fund Facility (EFF) worth $7 billion, with $1.02 billion already disbursed. Aurangzeb attributed these achievements to a comprehensive programme of macroeconomic stability and structural reforms. However, he cautioned that reforms must continue to ensure that Pakistan does not need another IMF programme in the future.
Aurangzeb emphasized the importance of reducing reliance on the salaried class for taxes. More sectors must be brought under tax. “If we don’t change the DNA of our economy, we will keep coming back to the IMF,” he warned.
The finance minister highlighted the government’s recent success in remitting $2 billion in profits and dividends that had been stuck for 1-2 years, allowing Pakistan to start with a “clean slate” in July 2024. He added that foreign direct investment is on the rise, with major companies such as Aramco, Gunvor and BYD making significant investments in Pakistan.
On the domestic front, the State Bank of Pakistan has cut the discount rate by 450 basis points in response to declining inflation, and the key interbank rate (KIBOR) has also fallen. These developments are expected to boost large-scale manufacturing (LSM). Aurangzeb reiterated that the policy rate and exchange rate remain under the purview of the State Bank, and further rate reductions are likely as the economic situation improves.
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