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Pakistan’s forthcoming IMF bailout “will not be our last” if the government fails to significantly boost tax revenue, the country’s finance minister has warned in the wake of a budget that seeks to reset the country’s ailing economy.
Muhammad Aurangzeb said he was “relatively confident” of reaching a staff-level agreement with the IMF this month on a loan, which his ministry has previously pegged at between $6 and $8bn. “But it will not be our last fund programme if we don’t bring our tax revenues up,” he told the Financial Times in an interview.
Aurangzeb, a former career banker, was appointed by Prime Minister Shehbaz Sharif in March to steer one of Asia’s most troubled economies, which has been grappling with double-digit inflation, sluggish growth and bare-bones foreign reserves. Pakistan narrowly avoided default last year with the help of a $3bn IMF emergency loan, which expired in April.
He announced a tax-heavy budget last month aimed at shoring up public revenue and satisfying the IMF, which has long demanded Islamabad improve tax collection among other politically unpopular measures such as cutting energy subsidies.
The budget aims to raise Rs13tn ($46.6bn) by next July, a roughly 40 per cent increase from the current financial year, to bring down a ruinous debt burden that has caused 57 per cent of government revenue to be swallowed by interest payments.
The tax rises will mostly fall on salaried workers, who comprise a relatively small part of Pakistan’s mostly informal economy, as well as some retail and export businesses. The budget also threatened punitive measures for income tax avoiders, including restrictions on mobile phones, gas and electricity access and the ability to fly abroad.
Before joining the government, Aurangzeb had a 35-year career in international banking, including at ABN Amro, Citigroup and most recently JPMorgan, where he led the Asia-Pacific corporate bank in Singapore. He returned to Pakistan in 2018 to take over as chief executive of Habib Bank, the country’s largest lender.
There are some recent signs that the economy is turning a corner, at least in the short-term.
Inflation, which reached as high as 38 per cent in May 2023, has eased to about 12.6 per cent last month. Central bank reserves — which dipped in February 2023 below $3bn, less than three weeks’ worth of imports — are now above $9bn. The economy contracted last year, but has returned to modest growth.
“The direction of travel is positive, and investors are showing confidence in the stock market,” said Aurangzeb, referring to the KSE100 index, which is one of Asia’s best-performing year to date.
Still, the government faces a considerable challenge in putting Pakistan on the path for longer-term growth and debt sustainability, he said.
Pakistan’s debt has soared since the mid-2000s, as authorities failed to invest a gusher of loans from international bondholders and countries including China and Gulf nations into productive, export-oriented sectors. Instead, the country remains reliant on imports, forcing Islamabad to borrow to pay off existing and accumulating debts, Aurangzeb said.
“We need to create the capacity to repay” loans, Aurangzeb said. “As long as this economy stays import-based, what happens is the moment it heats up . . . we run out of dollars [and] we have to go back to the lender of last resort on our knees.”
Sharif has travelled recently to Saudi Arabia, the United Arab Emirates and China to solicit investments on top of the IMF programme, which would be Pakistan’s 24th with the multilateral lender.
“It’s about time we get real,” Aurangzeb said, pointing to Gulf investors’ demands of equity and board seats. “The ball is in our court to provide bankable, investable projects.”
The finance minister also slammed a reputation for corruption at the Federal Board of Revenue, Pakistan’s tax collection agency.
“People don’t want to deal with the tax authority because of corruption, because of harassment, because of people asking for speed money, facilitation money,” Aurangzeb said. “That’s not sustainable.”
“I empathise with the pain people will feel, I was one of the highest taxpayers, at least in the banking sector,” he added. Along with the rest of Sharif’s cabinet, Aurangzeb chose to forgo his government salary as well as forfeiting a Dutch citizenship he gained while working in Amsterdam.
The budget has drawn criticism across the political spectrum, including from the Sharif government’s coalition partners, which it relies on after a disputed election in February. The backlash risks deepening an already volatile political environment that has seen Pakistan cycle through eight finance ministers in the past six years.
“We do not have five years for our programme,” Aurangzeb said. “We have to start showing, start delivering, in the next two to three months.”