IMF to mount pressure for agriculture tax

[Cheetah786]

WASHINGTON, Nov 16: The International Monetary Fund has asked the government of Pakistan to introduce agriculture tax if it is serious about increasing the country’s revenue, diplomatic sources told Dawn.

The fund’s executive board will meet in Washington on Friday to review an economic programme for Pakistan, which includes a $7.6 billion loan to meet the country’s serious balance of payments difficulties.

Pakistan is expected to start receiving the money from the end of this month. The IMF will deliver $4 billion in 45 days while the rest will be disbursed in 2009.

The fund required Islamabad to undertake a set of prior actions, including a 2 per cent increase in interest rates which was announced last week. This is the highest increase in more than a decade.

But diplomatic sources in Washington told Dawn that the IMF expected Pakistan to do more. One of the key elements of these measures is a proposed tax on agricultural products, which the IMF says has become unavoidable.

During a visit to Washington last month, Prime Minister’s Economic Adviser Shaukat Tarin promised to bring all sectors, including agriculture, under the tax net to strengthen the national economy.

A financial analyst noted that Pakistan had promised levying agriculture tax in the past as well but somehow wriggled out of its promises. “But the fund has now warned Pakistan that there’s no escape from it,” said the analyst. ‘If Pakistanis once again fail to impose agriculture tax, this will be the last IMF programme they will have.”

The fund expects Pakistan to introduce other taxes as well and hopes that Islamabad will soon make new laws to achieve this target. The IMF also expects the government to levy new taxes on real estate appreciation, stock market profits and capital gains.

If the proposals are implemented, the new taxes will become effective next year.

The fund has also suggested a drastic reduction in the government spending and has proposed a performance criterion to increase revenue collection to a certain point.

Pakistan and the IMF are expected to determine the precise amount of the proposed increase later this week.

Opposition parties in Pakistan have already started criticising the government for seeking the fund’s assistance. Even though details of the IMF’s conditions have not yet been published, the critics say the fund always imposes harsh restrictions that impede economic growth.

But IMF officials describe such suspicions as unfounded, saying that the Pakistan aid package will not impede development and will not hurt the poor.

An IMF statement issued in Washington on Saturday said the Pakistan programme had two main objectives: restoring the confidence of domestic and external investors by addressing macroeconomic imbalances through a tightening of fiscal and monetary policies; and protecting the poor and preserving social stability through a well-targeted and adequately funded social safety net.

Some analysts in Washington, however, feel that if public pressure increased, Pakistan may wriggle out of the IMF programme after receiving the first few instalments it needs to meet its balance of payment requirements.

“If this happens, it will badly hurt the country’s image and the fund will not trust Pakistan again,” said an analyst.

The analysts noted that while allies like the United States and Saudi Arabia played a positive role in getting the IMF package for Pakistan, they were still unwilling to provide bilateral assistance to the country. This, the analysts argue, limits Pakistan’s options and may force it to stay with the IMF.

The analysts warned not to expect much from the Friends of Pakistan group which meets in the UAE on Monday.

“The Friends of Pakistan club does not seem to have much cash available,” said a diplomatic source aware of the negotiations between Pakistan and other members of the group. “They may fail to offer any substantial help to Islamabad.”IMF to mount pressure for agriculture tax: Pakistan’s package review on Friday -DAWN - Top Stories; November 17, 2008

 

[Cheetah786]

All subsidies to go; no SBP intervention in foreign exchange market: IMF sets harsh conditions
FIDA HUSSAIN
ISLAMABAD (November 17 2008): Pakistan will have to withdraw subsidies across the board by the end of the current fiscal year and bar the State Bank of Pakistan (SBP) from intervening in the forex market. These are two major conditionalities the International Monetary Fund (IMF) has placed on Pakistan under its rescue package.

The subsidies in power, gas and petroleum products will be eliminated by the end of this fiscal year, sources told Business Recorder. This is one of the two major conditions put by the IMF prior to approval of loans amounting to $ 7.6 billion as rescue package, sources added. This condition would be much harder if it was applied to agricultural inputs as presently the government provides a subsidy of Rs 32 billion on fertilisers.

The government has not made the IMF conditions public so far. But insiders are of the view that some of the conditions are very harsh and the government will have to burden the people, especially the poor, for meeting the Fund's demands.

The IMF is of the view that Pakistan would have to increase the tax-to-GDP ratio to 15 percent by 2013. This issue, according to sources, is also considered to be harsh in the sense that the government would have to increase indirect taxes, instead of direct taxes. The indirect taxes will, again, hit the people. As a result, the ratio of general sales tax may have to be increased.

However, sources did not say whether the tax-to-GDP ratio would be taken to 15 percent by increasing indirect taxes. They were of the view that the government could improve the tax net by bringing more people under direct taxes.

According to sources, the IMF is also keen that banks' profits should be linked with the inflation rate prevalent in the country. Besides these conditions, the IMF has also asked Pakistan to keep getting loans from SBP, within certain limits. They said that IMF wanted Pakistan not to get loans from the SBP till the conclusion of the IMF programme. However, the government successfully told the IMF that SBP credit could be kept within certain limits, and full ban on the facility would be very hard to meet.

Pakistan has also been asked to bring fiscal deficit to 4.3 percent of the GDP within the current fiscal year. Government circles claim tat these conditionalites are not harsh, and most of them have already been included in the current year's budget. In order to slash its deficits, current account and trade will have to be bridged by withdrawing all subsidies, sources said.

 

[fatman17]

Pakistan tax reform dilemma

By Farhan Bokhari in Karachi

Published: November 20 2008

Pakistan was in the spotlight again this week over its need to reform the tax system as the government and potential donors worked on a plan to help the state in the face of a financial crisis. Just 1 per cent of tax is collected in Pakistan.

Economic policymakers led by Shaukat Tarin, the Pakistan prime minister's adviser on finance, said a radical improvement in income tax collection was vital in securing a crucial loan programme under discussion with the International Monetary Fund.

Under the IMF loan, Pakistan is seeking to borrow $7.6bn (€6bn, £5bn) until the last quarter of 2010 to stave off a crisis on forthcoming debt payments. The government's net liquid foreign currency reserves, which are below $3bn, are just enough to pay for about two to three weeks of imports.

Those reserves are likely to fall further without the IMF's approval on the future policy direction of Pakistan's economy, including measures such as tax reform.

Only about 1 per cent of Pakistan's population of more than 165m pay income tax, while the country's tax-to-GDP ratio of about 10 per cent is the lowest in south Asia.

Mr Tarin said his objectives included raising the ratio to at least 15 per cent in the next five years.

"We have to make everyone pay their dues. There should be no sacred cows. Everyone must pay their taxes so that we can overcome large-scale evasion and have more revenue to lower our fiscal deficit," he said.

A key challenge for both Mr Tarin and Asif Ali Zardari, Pakistan's president, will be to persuade landowners to end their immunity from income tax.

Many of these landowners hold powerful positions in federal and provincial parliament and have consistently resisted efforts to be brought under the tax net.

Farm owners argue that tax evasion is not merely confined to land-owning politicians. "Doctors, lawyers, industrialists and business people are all involved in evading taxes. Do you think the other 99 per cent who don't pay income tax are all landowners?" said a member of the parliament in Islamabad.

Other analysts say tax reform will begin to work once the government demonstrates it is equipped to offer basic services to taxpayers in return for their money.

"Many businessmen and other wealthy people can be persuaded to pay their taxes. But, as of now, the main question which people ask is: 'How far has the government progressed to reforming Pakistan in a way that it becomes a good place for a range of business activities?'" said Farooq Hassan, head of the Management Association of Pakistan, a private lobby group.

Copyright The Financial Times Limited 2008