PBC baffled at IMF’s ambitious revenue target for FY2021

KARACHI: Pakistan Business Council (PBC) has termed the IMF’s revenue projection for the next fiscal year as unrealistic, fearing a further burden on those who are already taxed.

PBC Chief Executive Ehsan Malik said the International Monetary Fund’s (IMF) forecast suggested that additional Rs800 billion would need to be raised through new or increasing taxes in the forthcoming budget.

“This will throttle an economy which was barely stabilising prior to the onset of COVID-19, and one that is likely to be battered further before the start of the FY2021,” Malik said in a letter to IMF’s Resident Representative Teresa Daban Sanchez. Pakistan is implementing IMF-backed reforms under the $6 billion extended fund facility agreed last year.

PBC previously pointed to the need of reforms in the Federal Board of Revenue (FBR) prior to setting ambitious tax collection targets.

“In the absence of FBR’s institutional capacity to broaden the tax base, the risk is high of disproportionate reliance on existing tax payers to meet unrealistic targets,” Malik said. “The probability of putting further burden on the formal sector increases.”

PBC chief said a sharp 34 percent increase in tax revenue in FY2021 is unrealistic and unlikely given the lack of capacity and absence of political due to a nominal GDP growth. The council estimated nominal GDP growth for the next fiscal year at 5 to 6 percent.

“We base this on real GDP change of -1 to 0 percent and an inflation of 6 percent in FY21,” he said. “Even on IMF’s real GDP projection of 2 percent growth and inflation of 8 percent – hence nominal growth of 10 percent – a 34 percent increase in tax collection is unlikely.”

PBC also called for downward revision in inflation target of IMF for FY2021 from 8 percent to about 6 percent. IMF projected a policy rate of 11 percent for FY2021, “which again is high relative to where it needs to be soon”.

“In our discussion we covered the likelihood of lower exports and remittances than forecast by IMF, hence of a higher current account deficit,” Malik said, referring to his online talk with Sanchez.

“Whilst projections can be debated and we live in uncertain times, our purpose in recording these observations is to convey the concerns of the formal sector in general and PBC members in particular of the need for a more considered IMF program, which whilst strengthening the fundamentals, avoids throttling recovery.”

The annual collection for current fiscal year was estimated at Rs3.908 trillion, compared to pre-corona era’s estimate of Rs4.803 trillion. Therefore, the estimated impact of coronavirus on the revenue is around Rs895 billion.

The actual FBR’s collection target for the current fiscal year was set at Rs5.550 trillion, which was first reduced to Rs5.238 trillion. The revenue collection before the lockdown was neither encouraging. The FBR maintained the growth rate of 17 percent up till February but that was not sufficient to reach the revised targets. An estimated collection of Rs845 billion during the last quarter of fiscal year 2019/20 would be around 25 percent less than what was collected in the same quarter of the last fiscal year. The Federal Board of Revenue collected Rs1.126 trillion during the last quarter of 2018/19. The last quarter is always important period for tax authorities as they collect around 35 percent of the total annual collection during this period.