IMF wants agriculture and services sectors in tax net

[Aarwaa]

IMF wants agriculture and services sectors in tax net

* Says Pakistan’s main challenge is to maintain high economic growth, lower inflation and reduce external current account deficit

By Sajid Chaudhry

ISLAMABAD: The International Monetary Fund (IMF) has called for broadening the tax base, including thorough taxation of the agricultural and services sectors and reducing tax exemptions.

It cautioned Pakistan that continued vigilance was required to reduce vulnerabilities and maintain investors’ confidence after recent political uncertainties and developments in the global credit markets.

The IMF executive board’s Public Information Notice (PIN) held that inflation remains relatively high, the external current account deficit has widened and Pakistan’s external financing needs remain large. The PIN is an overall review of the country’s economic policy issued recently at the conclusion of the 2007 Article IV consultation with Pakistan.

High growth: The IMF directors considered Pakistan’s main challenge to be the maintenance of high growth while lowering inflation and reducing the external current account deficit to a more sustainable level.

“This will require continued tight fiscal and monetary policies,” the board maintained. In this regard, the directors encouraged the Pakistani authorities to strengthen fiscal programme for 2007/08 to complement monetary tightening, particularly by reducing energy subsidies and capital spending.

The directors supported the use of public-private partnerships in infrastructure development, but cautioned that any contingent liabilities should be fully identified and incorporated in the budget.

The directors agreed that the real effective exchange rate was broadly in line with Pakistan’s economic fundamentals. The IMF board encouraged Pakistan to vigorously implement structural reforms in order to sustain growth and reduce poverty. They underscored the need to modernise the energy sector’s regulatory and tariff framework and revive the privatisation process.

The directors welcomed the recent enactment of regulations governing legislation to combat money laundering and terrorism financing. They underscored the need to obtain parliamentary approval of such legislation, make the Financial Monitoring Unit fully operational and clarify related reporting and accountability issues.

The directors welcomed the tightening of monetary stance since mid-2007. They regretted the re-emergence of central bank financing of the budget, and stressed the need to adjust the interest rates in treasury bill auctions as needed in order to ensure that the government’s 2007-2008 domestic borrowing requirement was fully met through the commercial banks or non-bank institutions.

Many directors of the board called for greater flexibility in exchange rate to enhance effectiveness of monetary policy and better absorbing of external shocks, while some directors felt that exchange rate stability was important at this juncture to maintain investor confidence.

Looking beyond 2007-08, the directors stressed that further fiscal consolidation would be required to reduce inflation and external current account deficit while lessening pressures on real interest rates. In this regard, they noted the low tax revenue to GDP ratio, and recommended to press ahead with reforms to increase revenue so that the fiscal deficit could be reduced while boosting spending on infrastructure and poverty alleviation.