Govt Mulls Spending Cuts and Tax Hikes Amid Rs600B Deficit

The government is considering additional fiscal measures, such as spending cuts and stricter revenue enforcement, to tackle a Rs600 billion budget deficit ahead of securing the next $1.1 billion disbursement from the International Monetary Fund (IMF).

According to reports, officials suggest that from April 1, these measures could include tighter restrictions on Public Sector Development Programme (PSDP) spending, targeted taxation on under-taxed sectors like retail and real estate, and activating contingency fiscal mechanisms under the $7 billion Extended Fund Facility (EFF).

The IMF delegation in Islamabad is currently reviewing Pakistan’s economic performance from July to December 2024 to determine eligibility for the second loan tranche. Negotiations between the IMF and Pakistani authorities, set to conclude by March 14, will finalize specific fiscal adjustments to close the deficit. Officials warn that without intervention, the shortfall could exceed Rs1 trillion by year-end.

The Federal Board of Revenue (FBR) has pledged to raise Rs250 billion by broadening the tax net for retailers and real estate transactions. Meanwhile, contingency tax measures, already approved by the IMF, could be triggered if revenue targets fall short. These include:

• Higher advance income tax on industrial and commercial imports
• A 1% increase in withholding tax on supplies and services
• A 5% hike in Federal Excise Duty (FED) on sugary and aerated beverages

Finance Minister Muhammad Aurangzeb remains optimistic about Pakistan’s compliance with IMF conditions, stating that ongoing reforms and policy adjustments will help meet fiscal goals. However, the government is also under mounting pressure to implement deep structural reforms, such as overhauling the tax system, restructuring the energy sector, and privatizing state-owned enterprises.

The IMF has emphasized its program aims to increase Pakistan’s tax-to-GDP ratio by 3%