akistan is facing a balance of payment crisis. Despite some improvement in its foreign exchange reserves (~$9 billion) it is still vulnerable to market shocks as these reserves cover only about two months of its (controlled) imports.

This is the reason it requested the International Monetary Fund for a long-term financing programme. The IMF is the lender of last resort, meaning that when all financing options are exhausted it steps in to save a country from default on sovereign guarantees. Before agreeing to help a government, it sends its staff to the country desiring a loan programme and after examining the financial position of that country, recommends action it considers necessary for a return to solvency.

The IMF staff has been negotiating terms with the government for a long-term financing programme since approving the last tranche of its $3 billion programme that ended in June. It outlined the steps that the government must take this year to qualify for the loan.

The conditions outlined by the IMF were the harshest ever that Pakistan has been asked to comply with. However, the economic conditions in the country were also the worst ever. The government agreed therefore to incorporate all the taxation and regulatory measures in the 2024-25 budget that has since been approved by the parliament.

That done, the government is facing stiff resistance from various segments of the population and many businesses. There is however no escape for Pakistan from the measures announced in the budget if it wants to ensure that the IMF board approves the staff level agreement.

In its latest assessment, Moody’s rating agency has stressed that Pakistan’s external position remains fragile, with high external financing requirements over the next three to five years. Moody also warns that the country is vulnerable to policy slippages. Weak governance and high social tensions can erode the government’s ability to advance reforms and jeopardise the programme.

Pacifying various stakeholders on the new taxation measures is going to be an uphill task for the government, which is in no position to back out of approved taxes, while it awaits final approval of the IMF programme by its board.

The government has issued a Letter Of Intent, committing itself to abide by the conditions agreed with the IMF. It has owned the policies that it intends to implement in the context of its request for financial support from the IMF. The Memoranda of Economic and Financial Policies were prepared by the government of Pakistan.

This letter of intent points to new funding opportunities from various international funding agencies like the World Bank, the Asian Development Bank and some friendly countries. The Moody’s says that approval of the programme will improve Pakistan’s funding prospects.

Pakistan’s economic condition is precarious. Painful steps will have to be taken to ensure sustained reforms. The common man has always borne the burden of reforms and taxation measures that various governments have imposed from time to time. It is worth noting that the low-end consumers slapped with higher sales tax have not been as vocal since the budget as those from the exempted sectors of the economy who have been asked to pay regulation taxes.

The government itself is responsible for this situation. Instead of defending the approved budget, many on the treasury benches sided with those demanding tax withdrawals. The government opened a Pandora’s Box when it agreed to reduce the petroleum levy by Rs 10 per liter, granting a three-month relief to the lifeline consumers.

This encouraged others impacted by higher taxes to seek relief. Now the cement producers are demanding withdrawal of additional excise duty, the sugar mills and the cement manufacturers are protesting higher sales tax and acting as withholding agents for retailers. The dairy sector is up in arms against the imposition of sales tax on processed dairy products. The flour mills have deferred their strike for ten days after receiving an assurance from the government to come up with an amicable solution to their demands. The paper merchants are furious about the imposition of sales tax on books and stationery. In short, many sectors are hoping [and pressing] for some relief.

The income tax on exporters is in line with the global norms. Globally, the exports are zero-rated [as in Pakistan] but the exporters pay taxes on the profits earned. Here, the exporters are protesting the decision to include their profits in the income tax regime. They are also protesting high energy tariffs.

There is no influential voice against the unjust increase in income tax rates on salaried people. Many protesting segments are sure that they will get some relief. Most have no idea as to how the government will then balance its income and spending. The projected collection is already short of scheduled expenses and most experts expect a shortfall in projected revenues from the budgeted revenue measures.

All this has created uncertainty in the market. The consumers are keeping their purchases to a minimum, wondering if this result in a lowering of prices which were raised the day the budget came into force. The retailers have raised the prices of articles purchased at pre-budget levels. The manufacturers have raised their prices in accordance with announced budget measures. The impact of higher cost [and taxes] has been passed on to the consumers.

A brief interaction with some multinational dairy company representatives revealed that so far there has been no dip in the sales of packaged milk, fifteen days after implementation of tax measures. One executive, however, said the impact would be visible after a month or so.

TNS learnt that there was no resistance from consumers although the retailers in most cases were not comfortable as under the current law they have to pay withholding tax on their purchases. There are numerous items that retailers cannot afford to remove from their shelves. Sooner or later, they will have to comply with the rules.

Moody’s has painted a bleak picture of the economy. It says that there is no escape from the IMF programme. It also says that if the democratic setup fails to implement it, a technocrat setup will likely be installed for an indefinite period for its implementation.

The writer is a senior economic reporter