Pakistan set for tax hikes in return for massive IMF bailout

Officials and analysts warn the move could cause inflation to escalate as Pakistan plans to impose taxes worth Rs 170 billion

Published - February 14, 2023 07:59 am IST - Islamabad

Pakistan’s Finance Minister Ishaq Dar (R)

Pakistan’s Finance Minister Ishaq Dar (R) | Photo Credit: AFP

Cash-strapped Pakistan will impose new taxes of Rs 170 billion this month in a bid for massive bailout, officials and analysts said on February 13, even as they warned the new taxes could accelerate the country's spiralling inflation.

The dire outlook from economists and political analysts comes after the International Monetary Fund delayed the release of a crucial $1.1 billion portion of a 2019 deal worth $6 billion, on hold since December over Pakistan's failure to meet the terms. The latest round of the talks between Pakistan and the IMF concluded on Friday with the Fund recommending steps including imposing new taxes.

“The imposition of more taxes means tough days are ahead for the majority of the people in Pakistan who are already facing higher food and energy costs, but there is no other way out if Pakistan needs the IMF loans, and Pakistan desperately needs it," said Ehtisham-ul-Haq, a veteran economist.

The stalemate in talks between IMF and Pakistan was seen as a blow to the government of Prime Minister Shahbaz Sharif, who is struggling to avoid a default amid a worsening economic crisis and a surge in militant violence. Pakistan already is struggling with the recovery from record-breaking floods, which killed 1,739 people in summer 2022 and destroyed 2 million homes.

In January, dozens of countries and international institutions at a U.N.-backed conference in Geneva pledged more than $9 billion to help Pakistan recover and rebuild from devastating summer floods, but economists and Pakistani officials say those funds will be given for the projects, and not in cash.

Since then, Pakistani Finance Minister Ishaq Dar has said that his experts were preparing to impose additional taxes and slash subsidies on electricity, gas and more to meet the deal’s terms.

Also Read | Pakistan government approves new tax on electricity to meet IMF conditions

Mr. Haq, the economist, said Pakistan's inflation rate of 26% will jump to 40% after the imposition of new taxes. But, he said in an interview, “life will become more difficult for the common man if Pakistan fails to revive the IMF bailout without any further delay."

Officials say several friendly countries like China, Saudi Arabia and the United Arab Emirates had assured Sharif's government that they will financially help Islamabad — but they too wanted Pakistan to complete the 2019 IMF program.

Imtiaz Gul, a senior Pakistani political analyst, said Mr. Sharif's government is likely to raise taxes on those who are already paying taxes.

“There is a need to broaden the tax base,” he said, but raising taxes “will trigger an increase in the prices of all essential items”.

The government insists that it will impose new taxes in such a way that poor people are not affected. The new taxes will be imposed on those who can afford to pay additional taxes to save the economy, the government said.

Pakistan's foreign exchange reserves have fallen to slightly over $2 billion. That’s enough only to pay for imports for 10 days. Officials say Pakistan's talks with IMF will resume virtually later Monday or Tuesday. Mr. Sharif last week warned that Pakistan would have difficulty complying with the IMF’s conditions.

Mr. Sharif's predecessor, Imran Khan — now the opposition leader since his ouster through April's no-confidence in Parliament — has been warning that Pakistan could face a Sri Lanka-like situation because of the deepening economic crisis. He has publicly warned that Pakistan could be blackmailed by the world community over the country's nuclear program if Pakistan defaults in the near future.

Mr. Khan insists his government was ousted under a U.S. plot, a charge Washington denies.

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