The IMF review team, in Islamabad to decide, after a second review, whether Pakistan should be given a third tranche of $1 billion, is having to deal with old problems, but is being told that the damage from floods is to blame for it. There have been shortfalls. There is a need to work out a set of additional measures along with a set of exemptions and waivers, because there have been two major shortfalls. There has been a shortfall in tax collection, with the primary surplus in danger, while Punjab and Sindh have not achieved their cash surplus targets, mainly because of a lack of progress in implementing the agricultural income tax. Another problem is that the circular debt in the power sector will go up by Rs 535 billion instead of falling. This is despite a campaign against line losses and a restructuring of the circular debt which involved the largest-ever loan made by the largest ever consortium of banks.
The IMF and the government are heading towards a mini-budget, for while the IMF is agreeable to taxation measures remaining unchanged, if the CBR does not meet its target in the second quarter of the current fiscal year, it will insist on their bein implemented. Apart from a potentially revolutionary change in the duty-free import scheme for vehicles, whereby current exemptions for gifts and baggage would be ended, there is also the idea of increasing the excise on fertilizer, and the tax on pesticides. That might bring in some revenue, but it would undermine Pakistan as an agricultural country, something that the current floods have shown once again it can ill afford. With flood damage expected in future, IMF revenue demands may make the country lose ac hard-won autarky.
The floods have had a multiple effect. They have led the Finance Ministry to change the GDP growth forecast, on the basis of which revenues are estimated and collection targets set. It is also to be noted that the inflation projection is being changed, which again has an impact on revenue estimates. Perhaps most relevant are the estimates of losses. The IMF itself sees a revenue shortfall of Rs 400 billion. Though the CBR has remained committed to its target of Rs 14.13 trillion, the IMF sees other potential shocks, such as the risk of conflict and commodity price rising internationally.
