The government on Thursday designed a ‘mini-budget’ comprising fiscal adjustments and expenditure cuts worth around Rs600 billion as part of an agreement with the International Monetary Fund (IMF) to cool down the overheated economy.
Analysts are of the view that these measures will aim to reverse the effects of the federal government’s ‘pro-growth budget’ for Fiscal Year 2022 adopted just five months ago.
The measures are being described as the “prior actions” that will make way for the submission of Pakistan’s request to the IMF board for approval towards the middle of January. The board’s approval is required for the release of a $1bn tranche for Pakistan.
Furthermore, the government has replaced Yusuf Khan from the position of finance secretary with the secretary of the Planning Division Hamid Yaqoob Sheikh.
The finalized adjustments include the decision to lower spending under the Public Sector Development Programme by Rs200bn, with Rs50bn coming from reducing the general government expenditure.
Meanwhile, the withdrawal of tax exemptions will earn nearly Rs350bn for the government.
Initially the IMF had wanted tax measures worth Rs700bn, including withdrawal of tax exemptions and revision of tax slabs but an agreement for the current fiscal year was reached for withdrawal of tax exemptions of only Rs350bn. The exemptions on fertilisers, pesticides and food items will remain.
The IMF had further demanded an increase in tax on provident fund and upward revision in salary slabs for tax. However, this proposition has been set aside for now.
A senior official in the finance ministry shared that a bill would eventually be submitted to the National Assembly after vetting. The official added that the vetting is being carried out in the law division, adding that it would later be placed before the cabinet for approval.
Following the cabinet’s approval, the bill would be laid in the parliament.
According to reports, the government has revised upwards the valuation rates in the real estate sector to 90 percent of the market level for the calculation of tax in 40 major cities of the country, including Karachi, Lahore, Peshawar, and Islamabad.
The number of cities on the list was raised from 20 to 40 in order to increase the tax collection from transactions in the real estate sector.
Regarding the head of customs, the government has made the decision to consider imposing a regulatory duty on the import of electric vehicles to lower its import. In order to incentivize the use of electric vehicles in the local market, the government had lowered duty on them in the budget.
Restricting the import of complete built unit (CBU) vehicles of all types by imposing across-the-board regulatory duties has also been proposed.
Along similar lines, the imposition of federal excise duty on vehicles in CKD/SKD conditions is also under discussion, which amounts to over 80pc of the total imports in the automobile sector. The CKD/SKD imports posted a huge increase in the month of November.
The government has also decided that the facility of corporate guarantees against disputed import duties be reversed. Now it will be replaced with a bank guarantee or pay the order.
The PM’s adviser on finance proposed imposing regulatory duties on several non-essential and luxury items. Simultaneously, to discourage the import of non-essential items, it has been agreed that regulatory duty on 525 items is imposed. These items were already subject to a 100pc cash margin, which did not help achieve the desired result of restricting the imports.
Under the cash margin, the importer will deposit 100pc value of import with the bank before processing the case.
As per an official source, the commerce ministry is resisting the imposition of regulatory duties as well as cash margin imploring that it will slow down the economy. However, the finance adviser is in favor of implementing the decision.
The ministry stated that import value is price-driven owing to an increase in global prices. The situation further deteriorated as a result of the highest-ever depreciation of the rupee.
The State Bank of Pakistan (SBP) is pushing for a cash margin proposal instead of managing the free float of the exchange rate, which results in inflation and a high cost of energy in the country.