Pakistan‘s Revenue Challenges & The path to Fiscal Sustainability: An IMF Assessment
Pakistan’s fiscal landscape remains a complex challenge, marked by revenue shortfalls and a reliance on specific levies. A recent assessment by the International Monetary Fund (IMF) reveals a Rs328 billion revenue gap under current projections for Fiscal Year 2025 (FY25), highlighting persistent issues in tax collection and the critical need for sustained reforms. This analysis delves into the IMF’s findings, outlining the key factors contributing to the shortfall, the projected revenue streams, and the path forward for achieving long-term fiscal stability.
FY25 Revenue Performance: A Detailed Look
the IMF report indicates that tax revenue collection in FY25 fell considerably short of both budgetary expectations and the lender’s initial review targets. A deficit of Rs1.224 trillion compared to the budget and Rs524 billion against the first review target paints a clear picture of the challenges faced. A substantial portion of this shortfall - approximately Rs850 billion – can be attributed to a combination of factors: a faster-than-anticipated deceleration in inflation and lower-than-projected GDP growth.
Specifically, the slowdown in inflation towards the end of FY25 resulted in a Rs157 billion revenue loss relative to the IMF’s first review target.However, the report also points to deeper, systemic issues. Around Rs380 billion of the shortfall stems from ongoing administrative and enforcement weaknesses, especially the protracted resolution of tax court cases which delayed the recovery of substantial revenue. This underscores the need for a more efficient and streamlined judicial process for tax disputes.
Despite these challenges, overall revenues - including non-tax receipts – experienced a notable increase, rising to 15.9% of GDP in FY25 from 12.6% in FY24. This growth was largely driven by increased receipts from the petroleum levy and profits generated by the State Bank of Pakistan.
The Petroleum Levy: A Key, But Potentially Unsustainable, Revenue Source
The IMF anticipates the petroleum levy will continue to be a meaningful contributor to government revenue.Projections indicate a rise from Rs1.02 trillion in FY24 to over Rs2.2 trillion by FY30. The levy is expected to contribute approximately 1.1% of GDP over the medium term, increasing to around 1.2% in the current and next fiscal years before potentially easing. However, reliance on a single revenue source, particularly one subject to global price fluctuations, presents inherent risks to fiscal stability. Diversification of the revenue base remains paramount.
projected Tax Revenue: A Shift Towards Provincial Contributions
The IMF’s projections suggest a relatively stable outlook for federal direct and sales taxes. Direct taxes are expected to remain constant at 5.5% of GDP through FY30, while the sales tax ratio is anticipated to hover around 3.5-3.6% of GDP.
Crucially, the IMF forecasts a significant increase in provincial tax contributions. This is predicated on the triumphant implementation of the agricultural income tax (AIT) and expanded sales taxes on services. The provincial tax-to-GDP ratio is expected to climb from the current 0.9% to 1.3% in FY27, further increasing to 1.6% in FY28 and remaining stable through FY30.
In absolute terms, the four provinces, which collectively collected Rs929 billion in FY25, are projected to increase thier revenue generation to Rs1.22 trillion in the current fiscal year, reaching Rs1.77 trillion in FY27, Rs2.5 trillion in FY28, Rs2.8 trillion in FY29, and exceeding Rs3.1 trillion by FY30.This shift in revenue responsibility is a critical component of the IMF’s recommendations.
The Need for Comprehensive Tax Reforms
The IMF emphasizes that sustained revenue growth requires comprehensive reforms focused on simplifying tax policies and broadening the tax base. These reforms are essential not only for fiscal sustainability but also for creating fiscal space to invest in crucial areas such as climate resilience, social protection, human capital progress, and public investment.
While the Federal Board of Revenue (FBR) saw a 26% year-on-year increase in collections in FY25, reaching 10.3% of GDP – a historically high level – the overall tax revenue still fell short of the target by 0.3% of GDP. This shortfall was largely due to the aforementioned delays in resolving tax court cases (representing 0.4% of GDP) and lower-than-
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