The IMF on December 27 extended the Standby Loan Agreement with Pakistan to September 30, 2011, easing the heightened pressure on the government to get the Reformed General Sales Tax (RGST) draft law approved from parliament to reform the distorted sales tax regime by the year-end, as per the agreement with the fund.
The 23-month loan arrangement of $7.61 billion was approved on Nov 24, 2008. On August 7, 2009, it was augmented to $10.66 billion and extended to Dec 30, 2010.
Following the completion of the fourth review in May 2010, the IMF approved an immediate disbursement of $1.13 billion, bringing total disbursements under the arrangement to $7.27 billion. The fund also approved re-phasing three remaining disbursements into two, while keeping the total access under the arrangement unchanged.
“The extension will provide time to the Pakistani authorities to complete the reform process of the general sales tax, implement measures to correct the course of fiscal policy, and amend the legislative framework for the financial sector,” the IMF statement issued after the approval of extension said.
As per the agreement with IMF, Pakistan must implement the RGST by removing distortions in its sales tax regime by Dec 31, 2010. But due to strong opposition to the proposed tax, in and outside the parliament and within the administrative ranks, the government has not been able yet to get the draft RGST bill passed from parliament, despite it is pending with the National Assembly’s Standing Committee on Finance for the last several days.
All the opposition parties, besides the coalition partner of the government, Muttahida Qaumi Movement, and chambers of commerce and industries and traders have joined hands to oppose and block the government’s move to impose the tax.
There were uncertainties hovering over the government’s engagement with IMF as to whether the government would be able or not to secure the next tranche of loan under SBA. The extension has provided the government a breather and ease the pressure on it regarding RGST.
But the question arises here is whether the government will be able to carry out the IMF prescribed reforms in its taxation system, including reforming sales tax laws, amending regulations for banking companies and eliminating energy subsidies. If the government could not implement the RGST within the extended period which would be it implications.
Given the strong opposition to the RGST and incumbent government’s performance to sale the idea of RGST to the stakeholders, convincing them that the measure was necessary for recovery of the tattering economy of the country, there are remote chances that the government could implement the reformed GST within the extended period.
There is a dire need that the government should bring its budget deficit to a sustainable level by undertaking harsh measures like enhancing revenue, slashing expenditure, reducing across-the-board subsidies and eliminating the growing deficit of the Public Sector Enterprises (PSEs) for the sake of macroeconomic stability of the economy and the revival of growth on a longer-term basis.
There is a forecast that Pakistan’s fiscal deficit could exceed seven percent of GDP during FY11, which is alarming.
Economists are expressing apprehensions that if the government fails to implement the Reformed General Sales Tax (RGST) and levy agriculture income tax, hyperinflation would grip the country and the authorities would be left with no option but to print currency notes in hundreds of billions.
They said that without major revenue generation measures, the deficit would be out of control, forcing the government to print notes to the tune of around Rs 1 trillion. The country is going to witness an unprecedented budget deficit of over Rs 1.2 trillion during the on-going fiscal year and to meet this deficit government would be required to print Rs1 trillion currency notes against Rs600 billion printed in 2008.
Renowned economist Dr Hafeez Pasha said the country is going to face historic inflation in case the government is unable to take taxation measures to generate additional revenue. People are talking about the inflationary impact of the RGST, but they are unaware that a time will come when government has to print notes worth Rs 1 trillion. The inflation caused by the printing of new notes would be so high that the people would forget about the inflationary impact of the RGST.
Dr Pasha said the deficit is rising day by day and delay in the introduction of new taxation measure would result in extraordinary high inflation. The country would be in grip of hyperinflation, which would be unstoppable. The inflationary impact due to printing of new notes would be much higher than the RGST. Talking about inflation, he hinted that inflation would further increase in coming days unless government would take timely steps to control the situation.
He said economic managers have failed to foresee impact of revenue generation, inflationary impact of RGST, and also were not able to take on board all the stakeholders on the issue. Under the current circumstances, the provinces have to enforce the agricultural income tax and the government should restore wealth tax. The provinces should have taken appropriate steps one year ago and nobody was stopping the federal government from taking measures to generate revenue.
He said the government must show sense of responsibility to avoid printing of notes in coming days. It is unfortunate that the people have not been educated about the actual impact of the RGST. Resultantly, public is unaware of the actual impact.
He said I am very much worried about the constant delay in the implementation of the RGST. It is unfortunate that at first government talked about the RGST implementation in October, which was delayed to December. Now there is a political turmoil on the issue. Even at technical level there is still no unanimity or consensus on all the issues pertaining to RGST.
Referring to a report on the inflationary impact of the RGST, Dr Pasha said the FBR had asked the PIDE to compile a report on the inflationary impact of the RGST, but so far the report has not been completed. There is a lack of clarity on the issue of the RGST and we have not done a good job for taking this reform forward.–By Ali Hussain Chitrali
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