Revenue target for new fiscal year unrealistic: PBC

Revenue target for new fiscal year unrealistic: PBC.

KARACHI (Dunya News) – The Pakistan Business Council (PBC) in recent meetings with the representatives of the International Monetary Fund (IMF) said that the revenue target for new fiscal year is unrealistic with growth projections of 34 percent, meaning either additional Rs 800 billion new taxes will be imposed or to burden existing payers which needs a revisit giving extreme situation at the onset of COVID-19.

A letter issued by the PBC addressing Pakistan Representative of IMF said the council held a zoom session in light of the current COVID-19 crisis and was alarmed by the 34 percent increase which the IMF has projected in tax revenues for FY21, suggesting that an additional Rs 800 Billion would need to be raised in new or higher taxes in the forthcoming budget.

This will throttle an economy which was barely stabilizing prior to the onset of COVID-19, and one that is likely to be battered further before the start of the FY21.

The PBC has previously pointed to the need to reform the Federal Board of Revenue (FBR) prior to setting ambitious tax collection targets. In the absence of FBR’s institutional capacity to broaden the tax base, the risk is high of disproportionate reliance on existing taxpayers to meet unrealistic targets.

The probability of putting further burden on the formal sector increases as political will to pursue SMEs is likely to be weak in the aftermath of the COVID-19 crisis. A sharp 34 percent increase in tax revenues in FY21 is unrealistic. Besides the lack of capacity and absence of political will it is also unlikely to materialize due to a nominal GDP growth which we estimate at 5% to 6%.

“We base this on real GDP change of -1% to 0% and an inflation of 6% in FY21. Even on IMF’s real GDP projection of 2% growth and inflation of 8%, hence nominal growth of 10%, a 34% increase in tax collection is unlikely”, the letter said.

Given the unprecedented depth and width of the COVID-19 crisis and the uncertainty of its duration, a revival in real GDP growth in FY 21 which IMF projects at 2% would suggest the unlikely scenario from a 1.5% decline forecast in FY20.

“We also note that the IMF projects inflation at 8% for next year. Given the demand compression arising from the unemployment, this needs to be reviewed downwards to about 6%. IMF also projects a Policy Rate of 11% for FY21 which again is high relative to where it needs to be soon”, the letter added.

In our discussion we covered the likelihood of lower exports and remittances than forecast by the IMF, hence of a higher current account deficit.

Whilst projections can be debated and we live in uncertain times, our purpose in recording these observations is to convey the concerns of the formal sector in general and PBC members in particular of the need for a more considered IMF Programme, which whilst strengthening the fundamentals, avoids throttling recovery.