Pakistan’s economic crisis likely to worsen after passing of IMF-dictated budget, rise in fuel prices

The Finance (Supplementary) Bill, 2023, was tabled last week, on February 15, in line with measures required to secure the next IMF loan tranche of USD 1.1 billion

February 23, 2023 by Shriya Singh
Pakistan mini budget IMF
(Photo: via Awami Workers Party/Twitter)

On Monday, February 20, the National Assembly of Pakistan passed an International Monetary Fund (IMF)-dictated finance bill with a majority vote. The new tax measures proposed in the finance bill, also known as the mini budget, target the generation of tax revenues worth PKR 170 billion (USD 650 million) before the end of the fiscal year in July.

Pakistan’s Finance Minister Ishaq Dar had tabled the Finance (Supplementary) Bill, 2023, last week, on February 15. The bill is in line with the measures required to secure the next IMF loan tranche of USD 1.1 billion out of the USD 6.5 billion bailout program.

With its enactment, taxation is set to increase in two ways, Dawn reported: first, by increasing the Federal Excise Duty (FED) on items including tobacco, sugary items, airline tickets, marriage halls, and cement; and, second, by increasing the general sales tax (GST) rate from 17% to 18%. The mini-budget also proposes a GST increase from 17% to 25% on 33 categories of goods that include luxury items—high-end mobile phones, imported food, decoration items, and other goods. 

Earlier this month, negotiations under the ninth review of the IMF’s Extended Fund Facility (EFF) program between the Shehbaz Sharif-led Pakistan government and the IMF delegation failed, as the two sides could not see eye-to-eye on the strict terms demanded by the latter. The delegation reportedly left without a staff-level agreement after 10 days of talks between January 31 and February 9. Subsequently, however, Pakistan’s government agreed to the harsh conditions imposed by the international lending authority. 

Responding to the mini budget and the hike in prices, IMF’s Managing Director Kristalina Georgieva said that the Pakistan government should tax the rich and subsidize the poor “to have a fairer distribution of the pressures by moving subsidies only towards the people who really need it,” as reported by Deutsche Welle (DW).

Meanwhile, the tax hike is being criticized across Pakistan as it will raise the prices of day-to-day items and essential commodities, including food and home appliances. The government also plans to place a 10% withholding tax on places of public gathering like hotels, restaurants, commercial lawns, and community centers, reported Dawn.

Traders associations and unions have highlighted that the new taxes on industrial raw materials and fuel price hikes will severely affect several industries. In Peshawar, a day after the finance minister introduced the bill in both the houses of the parliament, the business community—under the Sarhad Chamber of Commerce and Industry—rejected it, saying that the “the move would escalate the cost of production and lead to a total collapse of the economy.”

Political parties have also condemned the move to impose taxes at a time when the working class is already dealing with high inflation. Speaking to Peoples Dispatch, Ramais Sohail from the Mazdoor Kissan Party (MKP) said, “It seems that due to this budget, at the most basic level people will have less to eat and lesser fuel…While the mainstream parties are only busy with issuing statements, working class parties like MKP have organized protests with trade unions calling on all parliamentarians to reject the IMF-dictated budget.”

Historian and political activist Ammar Ali Jan wrote on Twitter, “Loans were taken by generals, landlords and capitalists. But these loans are being paid back by taxing billions on the poor. No tax was levied on the land mafia but food items were made more expensive. How long will the poor families continue to be sacrificed for the luxury of the rich in Pakistan?”

Pakistan has been experiencing a prolonged and acute economic crisis, made worse by last year’s devastating floods. The value of the Pakistani rupee (PKR) fell by 9.6% in a single day on January 26—to its lowest value in roughly two decades—shortly after market exchange companies removed the cap on Pakistan’s exchange rate and allowed it to free float—an attempt to meet the strict conditions imposed by the IMF on the South Asian nation looking to control its spiraling economy. The rupee reached a record low of 276.58 to a dollar in the interbank market on February 3. Its value has dropped by over 35% in the last 12 months. 

Meanwhile, to manage inflation that hit a record 27.5% in January after averaging around 25% since July 2022, the Central Bank raised the interest rate by 100 basis points to 16% in November 2022.

Aasim Sajjad Akhtar, deputy secretary general of the Awami Workers Party (AWP) and a professor of political economy at the Quaid-e-Azam University, told Peoples Dispatch that “the IMF-dictated budget is the latest development in Pakistan’s long trajectory as it steadily spirals with many fearing a situation of stagflation. The problem is structurally rooted in an elite-ruled government that refuses to tax the rich…The government has only raised indirect taxes nevertheless it will impact the most vulnerable populations…across regions of the country because of the unevenness of development in Pakistani provinces.”

Petrol prices at a record high 

The day after the mini budget was introduced in the parliament, the Finance Ministry announced a record hike in petrol price, which was increased by PKR 22.20 (USD 0.0835) to PKR 272 (USD 1.02) a liter, effective from February 16. Kerosene and diesel prices were also raised. 

Writing on Twitter, Ali Jan said: “It is a pity that petrol can be expensive continuously in Pakistan but neither the rich can be taxed nor the defense budget can be reduced.”

The new hike in petrol price was on top of another hike of PKR 35 (USD 0.13) announced on January 29 by the finance minister, in compliance with the terms dictated by the IMF, which also included a rise in gas and electricity prices.

Pakistan’s mini budget tends to appease the IMF by putting the burden of taxes on the poor and working class citizens of the country.  However Finance Minister Dar has denied that the new taxes will affect the poor and vulnerable sections of the country. The government has announced  plans to raise the budget of the poverty reduction program—also known as the Benazir Income Support Program (BISP)—by PKR 40 billion (USD 152 million) to adjust to rising inflation.

Pakistan’s economic crisis has been worsening for several months and the country is running out of crucial forex reserves, which fell to USD 3 billion, according to figures provided by the State Bank of Pakistan.

The most recent hikes in commodity and petrol prices are a big blow to the purchasing power of the working class.