Pakistan’s apex business body has proposed drastic measures to Prime Minister Shehbaz Sharif to contain budget and current account deficits including the rationing of electricity, an increase in individual tax rates and an amnesty for the rich to lure them to put their dollars in the central bank’s coffers.
The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) has also recommended tax-free encashment of cryptocurrencies in Pakistan and converting foreign exchange into Pakistani rupee.
It has also suggested encashment of cryptocurrencies in Pakistan and held as deposits in foreign exchange accounts with the central bank at 5% tax rate and encashment of cryptocurrencies in Pakistan and held as deposits in Roshan Digital Accounts at 10% tax for non-resident Pakistani nationals and dual nationals.
The recommendations have been forwarded to PM Sharif last month aimed at reducing the budget deficit by Rs1.1 trillion through the combination of expenditure rationalisation and increase in taxes and containing the current account deficit by curtailing or banning altogether certain imports.
However, some of these recommendations are contrary to the principles agreed under the International Monetary Fund (IMF) programme such as the tax amnesty scheme or are politically unpopular like increase in individual tax rates and withdrawal of fuel subsidies from July.
The PML-N led coalition government is grappling with serious challenges of potentially a record high budget deficit of Rs5 trillion to Rs5.6 trillion and a current account deficit close to the pre-IMF programme of $19 billion by the end of this fiscal year.
The apex business body has suggested that the PM should request the nation to reduce the use of electricity during peak hours and a scheduled load-shedding for two to four hours per day to help curb pressure on the current account amid the ongoing economic turbulence.
However, the less utilisation of electricity may not provide relief to the consumers and the government, as it will increase the idle capacity payments to power producers.
This will also undermine the economic growth prospects. The country recently faced hours of load-shedding after power plants could not be run due to shortage of fuel.
The FPCCI has proposed to PM Sharif that the government should launch an incentive scheme to channelise dollar holdings from lockers and personal safes into bank accounts.
The government may exempt such deposits from taxes, if these have not been declared earlier in tax returns, which will be held in local accounts for at least one year, according to the proposal.
The tax amnesty scheme is against the IMF programme, which the government may not find feasible as it attempts to revive the stalled bailout package.
Rather than controlling imports through regulatory duties, the FPCCI advocates for a blanket ban on non-essential items amid the current state of economic emergency.
A World Bank study has said that Pakistan’s 80% of imports either comprise raw materials or intermediary goods and their curtailment will have implications for economic growth.
The FPCCI has proposed to cut interest rates from 12.25% to 7% to save interest costs, which will also help to reduce the budget deficit by Rs300 billion.
According to the SBP, government borrowing stood at around 63.6% of the total outstanding loans in March 2022.
It said that higher policy rates erode the fiscal capacity of the government as the cost of debt increases.
The businesspersons’ apex body has backed the IMF demand to increase the income tax rates for individuals.
It said that the current structure of personal income tax in Pakistan was relatively less progressive.
The total number of income tax slabs in Pakistan is 11 as opposed to 5-7 slabs in peer countries.
“It is recommended to reduce income tax slabs from 11 to 5-7 slabs in order to increase the progressivity of income tax. According to the IMF estimates, this would help mobilise additional revenues worth Rs200 billion by the fiscal year 2024.”
The FPCCI has also backed the withdrawal of fuel and power subsidies on a priority basis as these subsidies are fiscally unsustainable.
The artificial fuel price freeze is held off till the budget and PSDP funds be made available till then and then be gradually increased every month.