Key economy numbers out of whack ahead of IMF review

ISLAMABAD: Pakistan’s macroeconomic and fiscal framework agreed with the International Monetary Fund (IMF) has fallen apart, forcing Islamabad to seek revision from the Fund staff on the eve of the first review under the $7 billion Extended Fund Facility (EFF).

The macroeconomic figures have witnessed a major revision, including the real GDP growth and CPI-based inflation, so nominal growth numbers altered during the first quarter (July-September) period, which is now resulting in major tax shortfall of FBR, projected to remain around Rs321 billion for the first half (July-Dec) period, as well as in failing to get the non-tax collection target of Rs100 to Rs200 billion. Both the tax and non-tax shortfall might result in a gap of Rs500 to Rs600 billion on the fiscal front in the first half of the current fiscal year.

It is argued that declining interest rates would result in reducing debt servicing but escalating debt burden owing to increased stocks might not help Islamabad to slash any substantial amount in the shape of debt servicing. In such a scenario, it is expected of the finance ministry to reduce the policy rate by 200 basis points in its upcoming scheduled meeting of the Monetary Policy Committee (MPC) to be held on Nov 4, 2024, bringing it down from 17.5pc to 15.5pc. If the CPI-based inflation continues to recede, then another cut in policy rate is expected in December 2024. Even then, the government would have to slash down its Public Sector Development Programme (PSDP), which was standing at Rs1,100 billion even with revision. On the eve of budget announcement, it was marked at Rs1,250 billion.

Top official sources confirmed to a select group of reporters on Thursday that the macroeconomic framework witnessed a major shift and cited examples that the economic assumptions used for envisaging targets had changed. The CPI-based inflation was targeted at 12.9pc but it fell to 9.2pc in the first quarter (July-Sept) period and even further reduced to 6.7pc for the last month (September 2024).

Imports were projected to grow at 16.9pc but it nosedived to 8pc in the first quarter. The Large-Scale Manufacturing (LSM) growth was envisaged at 3.5pc but it fell and stood at 1.3pc at current levels. The real GDP growth was envisaged at 3.5pc on the eve of budget making but now it was revised downward and projected to stand at 3pc for the current fiscal year. There are projections that the FBR might face a shortfall of Rs230 billion in the second quarter (Oct-Dec) period of the current fiscal year.

The FBR has faced a shortfall of Rs91 billion in achieving the tax collection target of the first quarter (July-Sept) period as the tax authorities could fetch only Rs2,563 billion. The FBR had collected Rs9.299 trillion in the last fiscal year 2023-24 and envisaged to collect Rs12,913 billion for the current fiscal year. There were assumptions that the policy measures in the shape of rising tax rates would yield Rs1,190 billion, enforcement measures Rs320 billion, including Rs50 billion through retailers scheme, materializing revenues from Sindh, and import plus LSM growth was projected to yield Rs2,047 billion.

It was envisaged that the FBR would materialize a revenue growth by 27pc in the current fiscal year to reach its desired tax collection target. With changed macroeconomic numbers, the FBR had to face a shortfall in Sales Tax at the import stage by Rs147 billion. The income tax collection has gone up to Rs1,230 billion against the set target of Rs1,098 billion for the first quarter. The FBR fetched Rs54 billion due to an increase in number of income tax return filers during the current fiscal year. However, the phenomena of NIL/Null filers were still on the higher side and stood at 2.9 million.

The FBR identified 190,000 potential tax dodgers out of which in the first batch the tax authorities sent out notices to 5,000 and more notices would be dispatched in the coming days and weeks. It is expected that 25,000 assessment orders might be issued and around Rs50 to Rs60 billion could be brought into the national kitty.

An ordinance is also under consideration to be promulgated for taking stern enforcement measures against tax dodgers. The FBR may introduce database slabs and powers in this regard will be secured through an expected ordinance.

Dr Khaqan Najeeb, former Adviser of the Ministry of Finance, said the focus of the Extended Fund Facility is on stabilising and containing two critical deficits. The IMF projects a growth increase of 3.2pc in 2024-25. This anticipated growth is premised on a rise in the investment-to-GDP ratio, which is expected to increase from a dismally low 13pc to 13.6pc in FY25. Achieving a rise in investment necessitates a boost in private sector investment and preservation of development spending in the country. An important factor that could adversely impact growth is the possible subdued performance of the agricultural sector in FY 25.

He explained that the IMF also forecasts a significant increase in Pakistan’s tax-to-GDP ratio, projecting an enhancement of nearly 1.8pc of GDP by FY25. This ambitious target entails a daunting 39pc increase in tax collection at a time when nominal growth is estimated at only 12.7pc in FY25. Achieving this goal will require stringent enforcement measures by the Federal Board of Revenue (FBR), as the taxation policy measures outlined in the budget are unlikely to yield such a substantial increase in the tax-to-GDP ratio.

It is important to note that FBR revenues grew by 25pc in the first quarter of FY25, which fell short of the IMF agreement, resulting in a 5pc shortfall from the target. The next nine months of FY25 would thus require a steeper growth in revenues than envisaged earlier, he concluded.