ISLAMABAD: Pakistan’s tax-heavy $67.76 billion budget for the new fiscal year comes into effect from today, Monday, which Islamabad hopes will prove key in securing another bailout package from the International Monetary Fund (IMF) to stave off macroeconomic crises.
President Asif Ali Zardari signed the 2024-25 Finance Bill into law on Sunday, after the country’s parliament passed it last week amid an annual inflation projection of up to 13.5 percent for June. The bill comes ahead of further talks with international lenders on a loan of up to $8 billion to prevent a debt default by Pakistan, South Asia’s slowest-growing economy.
The ambitious budget, with a challenging tax revenue target of Rs 13 trillion ($46.66 billion), drew the ire of both government allies and the opposition, who sought relief for the salaried class and the poor. The revenue collection target for FY25 is nearly 40 percent higher than last fiscal year, which has drawn criticism from the business community as well.
“I have already said that we are moving in a positive way,” Finance Minister Muhammad Aurangzeb said on Sunday, talking about the new IMF program during a media interaction in the federal capital. “During July we should reach a good agreement.”
Pakistan began talks on a new loan with IMF officials shortly after ending a $3 billion program that helped the country stave off a sovereign debt default last year. The international lender sent a delegation to Pakistan in May to hold talks with the new government that did not materialize into a staff-level agreement.
Pakistan has sought IMF loans in recent years due to a combination of economic challenges, including significant fiscal and current account deficits, dwindling foreign reserves and rising public debt.
These economic vulnerabilities are exacerbated by external shocks such as fluctuating commodity prices and internal challenges such as political instability and policy inconsistency.
The government has maintained that the country’s economy is improving, but believes that the new aid package is important to ensure a significant financial cushion.
TAX BUDGET
Pakistan’s finance ministry said in a report on Friday that the budget steers the country towards an “era of sustainable and inclusive growth”. It projected annual consumer price inflation for June 2024 between 12.5 percent and 13.5 percent, up from 11.8 percent in May.
The tax target increase consists of a 48 percent increase in direct taxes and a 35 percent increase in indirect taxes over the current year’s revised estimates. Non-tax revenues, including oil taxes, are increasing by 64 percent.
The tax would increase to 18 percent on textile and leather products, as well as mobile phones, in addition to an increase in the tax on capital gains from real estate.
Workers will also receive more direct income taxes. Opposition parties, mainly parliamentarians backed by jailed former prime minister Imran Khan, and top trade bodies rejected the budget, saying it would be highly inflationary and lead to industry shutdowns.
Pakistan’s central bank also warned of possible inflationary effects of the budget, saying limited progress on structural reforms to broaden the tax base meant increased revenue must come from tax increases.
The growth target for the next year is set at 3.6 percent with projected inflation of 12 percent.