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Pakistan’s finance minister has warned that a future IMF bailout for the country “will not be the last” if the government fails to significantly increase tax revenues, following a proposed budget aimed at reviving the country’s ailing economy.
Foreign Minister Mohammed Aurangzeb said he was “relatively confident” that a staff-level agreement would be reached with the IMF this month on the loan, which his ministry had previously estimated at $6 billion to $8 billion. “But this will not be the last fund program unless we increase tax revenues,” he told the Financial Times in an interview.
Aurangzeb, a former career banker, was appointed by Prime Minister Sharif in March to lead one of Asia’s most troubled economies, plagued by double-digit inflation, slow growth and tiny foreign-exchange reserves. Pakistan narrowly avoided defaulting on its debt last year with the help of a $3 billion emergency loan from the IMF, which comes due in April.
Islamabad last month unveiled a tax-hiking budget aimed at raising revenues and satisfying demands from the IMF, which has long called for improved tax collection along with politically unpopular measures such as cutting energy subsidies.
The budget aims to raise 13 trillion rupees ($46.6 billion) by next July, up about 40 percent from the current fiscal year, to ease a crushing debt burden that has caused 57 percent of government revenue to be eaten up by interest payments.
The tax hikes will mainly affect salaried workers, who make up a relatively small part of Pakistan’s informal economy, as well as some retail and export businesses. The budget also suggests punitive measures against income tax evaders, such as restricting access to mobile phones, gas and electricity, and flying abroad.
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Prior to joining the government, Aurangzeb had a 35-year career in international banking with ABN Amro, Citigroup and most recently JP Morgan, where he led Asia Pacific Corporate Banking in Singapore. He returned to Pakistan in 2018 to take up the role of CEO of Habib Bank, the country’s largest financial institution.
Recently, there have been some signs that the economy is improving, at least in the short term.
Inflation, which hit 38% in May 2023, eased to about 12.6% last month. Central bank reserves fell below $3 billion, less than three weeks’ worth of imports, in February 2023 but now exceed $9 billion. The economy contracted last year but is returning to modest growth.
“The trend is positive and investors are showing confidence in the stock market,” Aurangzeb said, referring to the KSE 100 index, which has been one of Asia’s best-performing so far this year.
Still, he said the government faces significant challenges to put Pakistan on a path of long-term growth and debt sustainability.
Pakistan’s debt has soared since the mid-2000s because authorities did not invest huge amounts of loans from international creditors, China, Gulf countries and others in more productive, export-oriented sectors. Instead, Pakistan is dependent on imports and is being forced to borrow to service existing and accumulating debt, Aurangzeb said.
“We have to create the capacity to repay the loans,” Aurangzeb said. “As long as this economy remains import-based, what will happen is that the moment the economy booms, the dollars will run out. [and] We have to get on our knees and turn to the lender of last resort.”
Sharif recently visited Saudi Arabia, the United Arab Emirates and China to solicit investments on top of the IMF programme. This will be Pakistan’s 24th investment with the IMF.
“It’s time to face reality,” Aurangzeb said, noting that Gulf investors were demanding shares and board seats. “It is our responsibility to provide bankable and investable projects.”
The finance minister also slammed the reputation of corruption at Pakistan’s tax-collection agency, the Federal Board of Revenue.
“People don’t want to deal with the tax authorities because of corruption, harassment and people seeking speed money and facilitation,” Aurangzeb said. “This is not sustainable.”
“I sympathize with the pain of the people. At least in the banking sector, I was one of the high taxpayers,” he added. Like other members of Sharif’s cabinet, Aurangzeb chose to give up drawing a government salary and renounce the Dutch citizenship he had acquired while working in Amsterdam.
The budget has drawn criticism from across the political spectrum, including from Sharif’s coalition partners on whom the government has leaned since disputed elections in February. The backlash threatens to exacerbate an already volatile political environment in Pakistan, which has seen eight finance ministers in the past six years.
“Our plan doesn’t take five years,” Aurangzeb said. “We have to show results and start implementing them in the next two to three months.”
