Pakistan plans budget squeeze to win IMF funding approval

Pakistan plans budget squeeze to win IMF funding approval

© Reuters. FILE PHOTO: A man shops for grocery items in Peshawar, Pakistan June 11, 2021. REUTERS/Fayaz Aziz/File Photo

By Asif Shahzad

ISLAMABAD (Reuters) – Pakistan will end most exemptions on sales tax so that all sectors pay a uniform 17% as part of a package of belt tightening measures aimed at securing approval for a $1 billion tranche of IMF funding, officials said on Friday.

As well as withdrawing sales tax exemptions worth around 300 billion rupees ($1.70 billion) a year, officials said a supplementary budget next week would also cut development spending. The measures will add further pressure on consumers already squeezed by galloping inflation and a sliding currency.

The IMF agreed last month to revive a stalled $6 billion funding programme but demanded further budgetary tightening from Pakistan before the next tranche worth some $1 billion could be approved.

Government finance adviser Shaukat Tarin said the IMF had demanded that the sales tax become an across-the-board sales tax of 17%, which currently is the highest level but only applicable to some goods and services. However, he said the government would be working to provide relief to lower income workers and others hit by the tax.

“The IMF is not saying that you don’t give relief to people, but they’re saying don’t distort the tax ratio,” he told reporters.

Surging food and energy prices have put Prime Minister Imran Khan under increasing pressure over recent months as household bills have caused growing anger among the middle classes, which had provided his government’s main support base.

Pakistan had been in talks with the IMF for several monthsto seek a relaxation in the terms and conditions of a bailout package agreed more than two years ago to shore up its fragile public finances. The completion of the IMF review, pending since earlier thisyear, would make available 750 million in IMF special drawingrights, or around $1 billion, bringing total disbursements sofar to about $3 billion. Pakistan entered the $6 billion, 39-month funding programmewith the IMF in July 2019, but the funding stalled earlier thisyear due to issues over the required reforms.

Pakistan’s economy has been under heavy pressure with a historic decline in the rupee currency, inflation which reached 11.5% in November, a widening current account deficit and dwindling foreign reserves.

The central bank raised its benchmark interest rate by 150 basis points last month to 8.75% to counter inflationary pressures and preserve stability with growth. ($1 = 176.5000 Pakistani rupees)

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