Finance Minister Aurangzeb confident of securing extended IMF programme

Finance Minister Muhammad Aurangzeb on Sunday expressed confidence that Pakistan would secure an extended loan programme with the International Monetary Fund (IMF), adding that agreements with the Fund can contribute to macroeconomic stability.

Addressing a press conference in Islamabad at the end of the fiscal year 2023-24, the finance minister stressed his and Prime Minister Shehbaz Sharif’s hopes that the upcoming IMF programme would be the country’s last. “From my perspective, the prime minister agrees that this will be the last IMF program. This is my hope,” he said.

President Asif Ali Zardari on Sunday gave assent to the government’s tax-heavy Finance Bill 2024 for the new fiscal year.

The government had presented the budget two weeks ago, drawing sharp criticism from opposition parties, especially the PTI, as well as coalition ally PPP.

On Friday, the government extended exemptions in specific sectors while announcing new tax measures in several areas to generate additional revenue in the coming fiscal year to meet the International Monetary Fund’s criteria.

During the NA session, opposition lawmakers, particularly from the PTI, criticised the budget, asserting that it was now an open secret that the document was dictated by the International Monetary Fund (IMF). Leader of the Opposition Omar Ayub Khan had denounced the budget as “economic terrorism against the people”.

Pakistan is in talks with the IMF for a loan of $6 billion to $8bn.

Aurangzeb, in his press conferene today, stressed the importance of macrostability, especially considering Pakistan’s reliance on loans. “If we cannot repatriate an investor’s dividends, it will make asking for additional investment difficult,” he said.

He added that towards the end of May, the State Bank’s backlog of letters of credit and investors’ dividends had nearly been cleared — a step he said was important for investor confidence — adding that addressing the backlog will continue into the coming fiscal year.

The finance minister added that Pakistan has received $1.4 billion in foreign investment, with $1bn from the World Bank for the Dassu hydroelectric project and $400 million from an international financial institution (IFI) to finance the acquisition process for Pakistan Telecommunications Ltd.

Speaking about revenue, he said that Pakistan has a budget of Rs9.4 trillion with an estimated revenue target of Rs9.3tr — a difference he said was “hardly anything”. “This shows a growth in tax revenue by 30 per cent year on year,” he said.

He stated that if macroeconomic indicators remain stable, then “things will run”, but warned that if they change, “microvariables” will “make things difficult”.

Aurangzeb reiterated the three principles underpinning this year’s budget: raising the tax-to-GDP ratio, energy sector reforms and privatising state-owned enterprises. He said that he aims to bring the tax-to-GDP ratio to 13pc within the next three years, reaching that goal by raising it to 10.5pc by the end of this fiscal year.

“Our work, which is the FBR (tax collection), is to close leakages, cleanse corruption and prevent theft,” he said. “We will address this by digitalising FBR from end-to-end and minimising human intervention.

“We bank and pay bills with our phones,” he said. “Instead of going to [FBR] branches you can use an app. There will be problems with digitalisation, but corruption will go down, as will incentives for it.” The minister hinted that if digitalisation is successful at the FBR, it will be implemented in other institutions as well to “ensure compliance and fill the gaps”.

He also mentioned the need to simplify the process of tax collection and tax refunds, using an example of when he worked in the private sector abroad.

“Abroad, salaried classes get their taxes deducted at the source,” Aurangzeb said. “If one buys or sells a car or property, they send those amendments to the tax authorities and they will send a form detailing the final tax. A two to three-day process and that is it.”

He stated that he had approached the Federation of Pakistan Chambers of Commerce and Industry (FPCCI) about ways to simplify the current tax collection mechanism, adding that they presented him with examples of potential forms.

“I am grateful to the FPCCI for sending me the forms,” he said. “This will simplify the process and bring in more filers.”

Aurangzeb emphasised the need to bring retailers into the tax net, referring to a prior attempt by then-finance minister Miftah Ismail in 2022. “When Miftah put that forward it should have been implemented into law,” he said. He said that 42,000 retailers have registered with the Tajir Dost registration drive as of Saturday.

He also said that a condition of the IMF programme was to end tax exemptions on certain sectors of industry. “They are clear that the Rs3.9tr worth of exemptions need to end.” He added that the government has not given new exemptions, but only extended existing ones.

The minister added that the supply side of real estate was being taxed and measures against non-filers “have been taken to punitive levels”. “I said in parliament that I do not understand how we have a category of non-filers […] I am hopeful that we will eradicate this”, he said.

Responding to reporter’s question, he said, “I believe that we need to look at this as a Pakistani programme supported by the IMF. We need them to build confidence in IFIs and ensure investment from our allies. We aim to make sure this is the last programme […] so far it is going on track.”

He added that the government was having virtual discussions towards achieving a staff-level agreement. “There are prior actions, then structural benchmarks,” he explained. “Trust us, we will get this done, maybe in July.”

Anxiety on the ground

Fielding questions from reporters about the impact of the tax-heavy budget on the public, he said, “I understand people are anxious about the additional taxes. I sympathise, but to redress their concerns, we are doing whatever we can in terms of the process.

“I have been on this side of the table for four months, but I’ve been on the salaried side for six years,” he said. “There is absolutely more burden on the salaried class, but I promise when we get the fiscal space, we will extend them relief first.”

“We will bring the exporter community into the tax regime and expand from there. There is a massive delay in revenue which is just not on,” he added. “Resolving leakages and corruption goes into the trillions. If we stop even half of this … it has nothing to do with the IMF, it is all our own doing.”

Asked whether the government considered on-ground realities when drafting the budget, Aurangzeb said, “There is no change in our topline revenue number of Rs12.9tr. Some exemptions were costing us Rs3.9tr, but we have retained some of them, including charitable hospitals, books, stationery, fertiliser and pesticides.

“We acknowledge the on-ground realities,” he said, adding that skill development programs are in the works for women, whom the minister dubbed “the most vulnerable segment of society”.

“We have introduced a skill development and graduation programme for them (women) so they can start becoming productive members of society”, Aurangzeb said. “We have increased minimum wage and utility stores and expect them to keep going up. These measures have been made keeping ground realities in mind.”

Cuts in spending

Regarding spending, Aurangzeb said that the treasury was spending Rs1.15tr on the PSDP, Rs1tr on pensions, and Rs800bn on redundant departments and ministries. “These are big numbers where we are working,” he said, adding that the administration will continue to address overspending in these sectors.

Aurangzeb stated that the government had cut Public Sector Development Programme (PSDP) funding to save money and “encourage a public-private partnership”.

Using Sindh as an example, he said, “Sindh is showing us how to do it. Right now we (the centre) are doing everything on loans […] they have brought in the private sector on their projects as well. This shows economic viability.”

He stated that pensions were initially not a part of the budget, but rather decided upon by the Economic Coordination Committee. “All of you know how much of an unfunded liability there is on the pension side,” he said, addressing reporters.

“We need to find a way to stop the bleeding in terms of new employees entering the civil services and bureaucracy tomorrow,” he said, stressing that the government needs to move forward on this given that it costs the state trillions every year.

Regarding ministries, the finance minister echoed the PM’s stance that redundant ministries need to be devolved or shut down, acknowledging that the process will not be immediate.

“We shut down the PWD (Punjab Works Department) yesterday so that projects could go to the provinces, but we needed to lay the groundwork beforehand and had several meetings.

“Once they are dissolved, we will need to figure out how to manage their assets, ongoing projects and personnel. Announcements are easy but implementation in the right way is really important,” he added.

Responding to a question about the handovers, Aurangzeb said that low-level personnel would be retained, with higher-level personnel being kept on if they demonstrate “competence”. “We have good redundancy packages and will make sure this process is legal. There has to be a proper handover.”

The provinces

During his speech, the minister referred to the National Fiscal Pact and how he has been in discussion with all chief ministers to ensure its implementation, terming it “critical” for the country’s sustainability.

“Right now, we have started talking with provinces about revenue and expenses and how to carry them forward to make the country sustainable,” Aurangzeb said. “We are incentivising the provinces to focus on existing taxes and have requested provinces to take up expenditures for initiatives the federal government is not involved in.”

He added that recommendations have been made for the provinces to take on projects under the PSDP. Regarding the PSDP, he said, “We have earmarked money for those projects that are 80pc complete in the PSDP. We are also only focusing on projects that require a rupee cover.”

“We need to move forward as a sovereign nation,” he said.