Pakistan's inability to generate revenues key issue: IMF

ISLAMABAD: International Monetary Fund (IMF) Resident Chief in Pakistan Mahir Binici Thursday said that key macroeconomic challenges facing Pakistan’s economy were debt burden owing to inability to generate revenues up to the potential.

“There is a higher burden of taxation on the formal sector,” he said while addressing a conference on “Retail Reimagined: Innovate, Collaborate & Thrive”, organised by the Pakistan Retail Business Council (PRBC).

He said that the larger fiscal burden arose mainly because there are certain sectors which are not contributing to the national exchequer. These key macroeconomic challenges resulted into macroeconomic challenges, he added.

Earlier, Minister for Finance and Revenues Muhammad Aurangzeb said that the share of the retail sector in the country’s GDP stood at 19 percent but their contribution into tax was just hovering at one percent. He said that there was an element of formal versus informal sectors even in retail, tobacco and beverages where the formal ones were subsidising the free riders. This kind of free rides are unsustainable.

“The salaried, manufacturing and to some extent services sectors have been facing disproportionate burden for paying more taxes but this cannot go on. The proportion of salaried class burden has gone up and I knew it because I paid out Income Tax last September as a salaried person. It is not sustainable. Now agriculture, retail/ wholesale and real estate will have to step up to travel on this trajectory,” the finance minister said while addressing the inaugural session of the conference. He said that enforcement would be done in a big way against informal sectors and those un-documented sectors contributing nothing to the national exchequer.

He said the government had been engaging with the retail sector, requesting them to formalise their businesses and pay their due share of taxes. For national interest “we cannot afford to have people taking a free ride anymore,” and documentation was key to achieving this goal.

Later, while speaking to the media, he announced that artificial intelligence would be utilised to increase tax collection. The finance czar added that there is Rs9.4 trillion rupees in cash circulation, which needed to be brought into the formal economy, acknowledged that this could not be done overnight; however, the government was determined to move in the right direction.

The economy, the minister added, has taken a significant turn for the better, with macroeconomic stability firmly in place as currency has stabilised, foreign exchange reserves have increased and inflation has receded with the policy rate decreasing significantly leading Kibor to recede from 23 percent to around 11 percent.

These positive developments have not gone unnoticed as foreign investors are once again taking notice of Pakistan’s economic potential. Institutional flows are returning to the country, with investments pouring in on both the debt and equity sides.

He further said Pakistan was actively engaged with international rating agencies, with a clear goal in sight to upgrade its credit rating to the “Single B” category.

The minister said structural reforms in taxation, energy, state-owned enterprises (SOEs), and public finance were underway. A major overhaul of the taxation system is underway, with a focus on end-to-end digitisation to promote transparency, reduce leakage and combat corruption.

The introduction of faceless Customs has already shown promising results, with 80 percent of imports being cleared within 18-19 hours, down from 118 hours. This streamlined process has eliminated the facilitation money culture, fostering a more efficient and trustworthy tax authority.

To achieve fiscal discipline, the government has initiated a right-sizing exercise and implemented pension reforms, with new civil bureaucracy recruits now on a defined contribution system.

Aurangzeb revealed that the IMF team would arrive in Pakistan on February 24 to hold discussions on a climate resilience fund. He said Pakistan was expecting $1 to $1.5 billion in climate funding from the IMF. The second IMF mission would visit Pakistan in March for six-monthly review under the under $7 billion Extended Fund Facility (EFF), the finance czar said, adding that all matters related to the global lender were fine.

The finance minister said the current account posted a $420 million deficit in January 2025, up 4 percent from $404 million in the same month last year. However, he highlighted that the current account maintained a surplus of $682 million in the first seven months of FY25, a sharp turnaround from the $1.801 billion deficit in the same period last year.

After registering surpluses in the last few months, Pakistan’s current account posted a deficit of $420 million in January 2025, a significant increase of 4 percent when compared with the deficit of $404 million in the same month of the previous year, data released on Tuesday by the State Bank of Pakistan (SBP) showed.

Earlier, addressing the conference, Chainstore Association of Pakistan (CAP) Chairman Asfandyar Farrukh said that there were huge disparities as 10 percent of the formal retail sector was in the tax net while 90 percent belonged to the informal retail sector. It is becoming difficult to run the formal retail sector, he added. He argued that the formal sector was making a tax contribution of about 25 percent of its turnover while the informal sector was paying nothing, so this mechanism was making customers to buy from those who were paying no taxes.

State Bank of Pakistan Deputy Governor Saleem Ullah said that the digital payment system would be fully implemented over the next five years.

FBR’s Member Legal Mir Badshah Wazir said that the Point of Sale (POS) integration was underway as it kickstarted in 2019 when there were only 78 Tier-1 retailers linked with the POS. Now there are 12,249 Tier-1 retailers connected with the POS whereby 660 million receipts were generated with FBR linked POS in the last fiscal year. Till Feb 2025, the number of POS generated receipts stood at 444 million and it was hoped that the number might touch 900 million or one billion receipts.

He said that the Tajir Dost Scheme (TDS) could not yield the desired results but the FBR took policy measures and there was a big jump in receiving an increased number of returns from the retail sector. He said that the FBR received six million income tax returns but there was a substantial number who filed nil returns to avoid increased rate of withholding tax deductions.

FBR’s Member Inland Revenue Operation Hamid Ateeq Sarwar said that the tax for tier-1 retailers was fixed on the lower side in 2018 but due to the IMF condition the concessionary tax regime was withdrawn. He said that the FBR could offer lower tax rates for the formal retail sector if no input adjustment was claimed but it could be done only with the consent of the IMF.