ISLAMABAD: The International Monetary Fund (IMF) has stressed the need for raising tax-to-GDP ratio drastically to allow for the much needed social and investment expenditures while lowering the deficit. According to IMF Programme note, Pakistani authorities are grappling with several key challenges like ensuring medium-term fiscal sustainability, rebuilding external buffers and maintaining price stability over time, implementing structural reforms to achieve inclusive growth and protect the most vulnerable.
The fund is of the firm opinion that macroeconomic imbalances and longstanding structural impediments to growth have prevented optimal realisation of Pakistan’s potential. Problems in the energy sector, security concerns, and a difficult investment climate have combined to undermine economic performance in the past decade.
As a result, the IMF note read, GDP growth has only averaged 3 percent over the past few years, well below what is needed to provide jobs for the rising labour force and reduce poverty. With the population still increasing rapidly, per capita income growth has lagged behind many emerging economies. The fiscal deficit has widened, driven by weak tax collection, energy sector subsidies, and increased provincial government spending. Domestic deficit financing has crowded out private sector borrowing and has contributed to inflation. Private sector credit has become negative in real terms, while monetary aggregates continue to be driven mainly by the government’s financing needs. The external position has weakened significantly, and central bank reserves have declined to critical levels, maintained in the report.
It further says that while the reduction in the headline deficit from 8.8 percent of GDP in 2012-13 to 5.5 percent of GDP in 2013-14 is an important achievement, further efforts will be needed in subsequent years to secure medium-term fiscal sustainability. In particular, the tax-to-GDP ratio must be raised significantly to create a cushion for needed social and investment expenditures while lowering the deficit.
In the short term, the central bank must stabilise and rebuild its foreign exchange reserves, making use of fund disbursements, financial support from other donors, foreign exchange intervention, and exchange rate flexibility. Once reserve cushions begin to be restored, the central bank should increasingly focus on maintaining low and stable inflation.
The IMF note states that the authorities’ energy policy was geared to addressing the longstanding problems in the sector, which constitute the most critical constraint on growth and have generated large fiscal costs. Reforms in the trade regime, restructuring or privatising public sector enterprises, and measures to improve the business climate, should also boost medium-term growth prospects. Throughout the program it is a top priority of the government to protect the poor from direct and indirect impacts of fiscal consolidation and price adjustments by means of targeted income support.
