ISLAMABAD: International Monetary Fund (IMF) has said Pakistan’s tax system used for non-transparent support to privilege sectors like real estate , agriculture, manufacturing and energy as well as, through the proliferation of Special Economic Zones (SEZs).
The Fund, in its Staff Report on $ 7 billion 37- months Extended Finance Facility (EFF) arrangement, has stated that the state’s support of businesses through subsidies, favorable taxation arrangements, protection and governmental price setting has undermined the development of a dynamic and outward oriented economy. Subsidies have taken the form of low-cost financing and other concessions, which although varied across industries, left financing and taxes net of subsidies more favorable than in peer economies and less-favored sectors.
The tax system has been extensively used to provide non-transparent support through exemptions for privileged sectors like real estate, agriculture, manufacturing, and energy, as well as, through the proliferation of Special Economic Zones (SEZs).
The government’s intervention in price setting, including for agricultural commodities, fuel products, power, and gas (biannual), combined with high tariff and non-tariff protection tilted the playing field in favor of selected groups or sectors. Despite all this support, the business sector has failed to become an engine of growth, and the incentives eventually weakened competition and trapped resources in chronically inefficient (including perpetually “infant”) industries.
The authorities recognize that Pakistan needs consistent policy making to improve economic prospects in a durable manner. To this end, key priorities under the EFF include: (i) advancing reforms to raise productivity and competitiveness by creating a more favorable private sector business environment, by removing state-created distortions and ensuring a fair and level playing field with increased competition. This includes streamlined subsidies, an improved FDI regime, deepened bank intermediation, and scaled-up human capital investment ;(ii) reforming SOEs and improving public service provision, through SOE restructuring and privatization, governance and transparency reforms, measures to reduce the cost structure of the energy sector and phasing out the government’s role in price setting.
The Fund hopes that real GDP growth is projected to continue rebounding gradually over FY25–27, supported by a waning fiscal drag, steady implementation of reforms, and progressively improving financial conditions and confidence, reaching 4½ percent over the medium-term. Continued tight monetary and fiscal policies are expected to sustain recent disinflation, with inflation returning to the SBP’s 5–7 percent target range during FY26.
The CAD is projected to remain modest at around 1 percent of GDP over FY25-FY28, as both imports and exports are projected to increase, reflecting a recovery in domestic demand and the benefit of program policies to support a more dynamic private sector. Gross reserves would reach US$22.5 billion by end-FY28 (3.1 months of imports; 72 percent of ARA metric) from US$9.4 billion as of June 2024.
Multilateral disbursements are projected to reach US$14 billion over FY25–28 (including US$7.1 billion from the World Bank and US$5.6 billion from the Asian Development Bank) with key bilateral creditors fully maintaining their exposure through new financing activities. Modest access to new short-term borrowing from commercial banks is anticipated for FY25-FY26, with a gradual return to bond markets assumed for mid-FY27, reflecting a restoration of policy credibility.
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