In a major development, the ruling Tehreek-e-Insaaf (PTI) acceded to the condition set by the International Monetary Fund (IMF) to impose income tax on monthly pensions in the next budget.
The PTI government under the leadership of Prime Minister Imran Khan, who had earlier eschewed the idea of borrowing from IMF, had signed onto another IMF Extended Fund Arrangement (EFF) for about USD 6bn.
What has Pakistan’s experience with the IMF looked like? Why do we keep going back and who precisely is being ‘bailed out’? Let’s take an in-depth review of the effects of IMF deals on country’s 2021 budget.
Pakistan and the IMF: a brief history
Though Pakistan began its borrowing history with the IMF under Ayub Khan, its first Structural Adjustment Package was accepted by Ziaul Haq in 1982.
Since then, various governments have accepted 12 conditional loan packages from the Fund, all of which have sung quite similar policy tunes: privatisation of state assets, liberalisation of the terms of trade, indirect taxation, subsidy cuts and an almost singular focus on reducing budget deficits.
Socioeconomic casualties at the hands of the IMF conditions have included social sector spending (most notably, health and education), employment and accessibility to essential items like oil and electricity. Under PTI government, the International Monetary Fund granted the country a $6 billion Extended Fund Facility (EFF).
Taxes on Pensioners?
The government has acceded to the condition set by the International Monetary Fund (IMF) to impose income tax on monthly pensions in the next budget.
The IMF proposal is likely to impose a tax of 7.5% on all pensioners as the government’s consultations with the IMF and the World Bank over the federal budget for the next financial year enters the final phase. The federal government pays Rs250 billion annually to pensioners.
The proposed plan also includes taxing the profits of the Federal Government General Provident Fund, sources said, adding that levying the 7.5 percent tax would generate a revenue of Rs18 billion.
The IMF conditions 2021
In March this year, the government had secured a $500 million tranche from the IMF on successful completion of third, fourth and fifth reviews of the loan facility, taking the total amount received from the Fund to $1.94 billion.
However, the latest $500 million tranche was only released after the government had agreed to 1) generate Rs700 billion worth of additional GST and income tax in the coming budget; 2) raise Rs900 billion by making a 34%, or Rs5.36 per unit, raise in the power tariff; and 3) withdraw about 36 tax exemptions and streamline other corporate tax exemptions with an Rs140 billion financial impact.
In addition, the government also allowed greater autonomy to the SBP over price control by adopting exchange rate and monetary policy without the government’s interventions.
Will IMF terms be met?
The budget for the 2021-22 fiscal year is just a week away, and authorities feel that they need more space to make a balanced budget — but could not do so while fulfilling IMF’s conditions.
Last year, the national economy contracted 0.4 percent and Pakistan’s consumer price inflation climbed to 11.1pc in April, the highest in 11 months. The government has revised growth projections for fiscal 2020-21 to 3pc, but the IMF has predicted a much lower 1.5pc growth.
