KARACHI: The State Bank of Pakistan (SBP) has issued a strong recommendation to the government, advocating for policies that prioritize broadening the tax base while simultaneously easing the tax burden on salaried individuals and other formally documented segments of the economy.
In its report on the state of Pakistan’s economy for the first half (H1) of the fiscal year 2024-25, the central bank emphasized the critical need for a more equitable distribution of the tax burden. The SBP argues that such a redistribution is essential for fostering sustainable economic growth.
Tax collection falls short despite favorable conditions
The SBP report noted an improvement in tax collection by the Federal Board of Revenue (FBR) during H1-FY25. However, it highlighted that collections still missed their set targets. This shortfall occurred despite relatively positive economic indicators, including declining interest rates, moderating inflation, and a stable exchange rate. In response to the fiscal pressures, the government reportedly tightened non-interest expenditures, leading to notable reductions in development spending and subsidies in an effort to achieve fiscal consolidation goals.
The central bank cautioned that without fundamental structural reforms aimed at expanding the tax net, the fiscal burden will continue to fall disproportionately on the same groups: salaried employees, corporations, and other compliant taxpayers. The SBP warned that sustaining a heavy tax load on these documented sectors risks dampening both consumer and investment confidence, thereby hindering the country’s broader development prospects.
Furthermore, the SBP called for a re-evaluation of the current significant reliance on indirect taxes. The report points out that indirect taxes tend to be regressive in nature, potentially worsening income inequality. The bank warned that in the absence of comprehensive tax reforms, the ongoing fiscal pressures could increasingly necessitate cuts in development expenditure, ultimately undermining the economy’s long-term growth potential.
Addressing productivity challenges
The SBP report also drew attention to Pakistan’s persistent productivity challenges. It identified low and declining productivity as a major constraint on the economy’s competitiveness. The central bank highlighted that Pakistan lags behind many peer nations in terms of GDP per worker, a trend it described as worrying and one that has contributed to recurring balance of payments crises and cyclical economic instability.
In its concluding remarks, the SBP urged policymakers to look beyond temporary solutions such as tax amnesties, excessive subsidies, and growth strategies heavily reliant on foreign debt. Instead, the bank stressed that the focus must shift towards addressing the deep-rooted structural issues that burden the economy and impede productivity growth for sustainable and stable development.
