Agriculture’s turn

The IMF’s unanticipated drop-in to Pakistan from November 12 to 15 did not end with the mini-budget many had feared. However, the Fund has called on Pakistan to widen its tax base by focusing on untapped revenue sources, as the country struggles to boost its tax collection efforts. These struggles are illustrated by the FBR’s Rs189 billion shortfall over the first four months of the ongoing fiscal year, with government authorities reportedly assuring the IMF that the shortfall would be made up in the coming months. Aside from tax-collection struggles, the IMF also raised concerns about the country’s $2.6 billion external financing gap. The visiting delegation and Pakistani authorities also agreed on the need to continue prudent fiscal and monetary policies and revenue mobilisation from untapped tax bases, while transferring greater social and development responsibilities to provinces. According to experts, agriculture, retail and real estate are the three big gaps when it comes to tax collection in Pakistan. The government is showing signs of bringing at least one of these areas into the revenue net, assuring the visiting IMF mission that the agricultural income tax (AIT) would be enforced from January 2025. All provinces have reportedly agreed to go ahead with the approval of legislation on agriculture income tax from their respective provincial assemblies, with Punjab taking the lead by approving the AIT law.

While the Khyber Pakhtunkhwa government is also reportedly ready to introduce an AIT bill in its assembly, Sindh may prove to be a trickier customer. The PPP already opposed the AIT bill in the Punjab Assembly. It is worth noting that Pakistan is already late when it comes to taxing agricultural incomes, which it was supposed to start doing by the end of October 2024 based on an agreement with the IMF. As things stand, a mere Rs8 billion is being collected from agricultural taxes, against a potential collection of Rs2.3 trillion. One can only hope that enhanced efforts at collection in this crucial sector do not end up with higher costs being passed down to customers in the form of hike prices. Higher prices have also been the most notable consequence of efforts to get the energy sector’s finances in order thus far. With energy prices already at unbearable levels, the people will have little appetite for a similar development when it comes to food prices. Food inflation has already been a struggle for ordinary Pakistanis over the past few years and a large-scale public outcry might jeopardise government attempts at necessary reforms.

While the IMF has yet to issue an official statement on its urgent visit to Pakistan, it appears that the country has somehow managed to avoid any immediate and drastic ‘course correction’. That being said, the visit and the struggles to expand revenue collection highlight both how tough the current IMF programme will be for this government and that it will likely take a long-term process of monitoring and adjustments before the economy can stand on its own feet. As things stand, the path towards tax hikes and tighter fiscal budgets appears to be the only option for Pakistan in order to keep its economy afloat. And as painful as the necessary reforms may be, shirking or delaying them, as previous governments have done, will only increase the pain for both ordinary people, businesses and the state alike. One simply cannot have a state that spends more than it collects or an economy incapable of attracting the investment and other inflows it needs to pay for its imports.