IMF just gave Pakistan a lifeline. But its conditions can bite

After months of painful negotiations, the International Monetary Fund (IMF) agreed this week to bail out Pakistan’s economy with a $7 billion loan.

Islamabad has depended on the IMF and concessional financing from close allies to pay off its debt of Rs77. 66 trillion or $271.2 billion.

Finance Minister Muhammad Aurangzeb told local media on Thursday that the IMF loan has come with conditions that will force the country to bear “transitional pain”.

The IMF attaches strict austerity measures to its loan programmes that include conditions for a government to cut subsidies and welfare spending.

“This deal will help us pay back our immediate debts, but nothing more than that,” says Pakistani economist Kaiser Bengali, who stepped down from several government committees earlier this month.

Islamabad would have to bring in reforms to collect more taxes, he says.

Successive governments have struggled to bring more people under the tax net.

Mind the tax gap

Dr Sobia Khurram, a professor at Lahore’s University of Punjab, tellsTRT World that less than 2 percent of Pakistan’s population currently pays income tax.

“The main income of any government is majorly through raising revenues. If we don’t tax people or businesses, how would the government raise revenues for its expenditures?”

While there are not many untaxed sectors, Khurram says, they are given exemptions or concessions to boost exports.

Widening the tax net would mean bringing in more people and businesses under the tax net, a painful and politically challenging proposition.

“Widening the tax net means including retailers, wholesalers, agriculture, transportation, all kinds of SMEs and light manufacturers…anyone who is not being taxed right now who should be taxed,” says Ammar H. Khan, an economic commentator.

But while bringing people under the tax net is one thing, making them pay the tax is another, says Sharmila Faruqui, a lawmaker from the southern Sindh province.

While 3 million traders joined the tax net under a government scheme, most of them filed nil returns - basically showing that they didn’t have any taxable income.

“Now the issue is that 68 percent of the total number of tax returns submitted in 2023 were nil,” Faruqui tells TRT World.

So what would happen if the untaxed sectors start paying up?

Punjab University’s Khurram says widening the tax net means that tax collection will not only increase but it will also become more equitable.

“Currently our taxes are collected through filers who are mainly salaried class with taxes withheld at source only,” she says.

In Pakistan, one of the thorniest issues has been the taxation of the agriculture sector, especially the large landholders.

But Faruqui, who belongs to the Pakistan People’s Party that derives support from farmers, says the agriculture sector is not prospering as it was in the past.

“We have no water. The agricultural inputs, including fertilisers, have become very expensive.”

Until key reforms are brought in, Pakistan will continue to rely on the IMF for bailouts.

The recent deal marks the 24th IMF payout Pakistan has received since 1958.