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KARACHI: A delay in implementing a new sales tax in Pakistan after October may disrupt the delivery of vital assistance from the International Monetary Fund (IMF), finance officials and analysts said on Wednesday.
Pakistan was due to implement a value-added tax (VAT) or a reformed general sales tax of 15 per cent by July 1, but the 2010/2011 budget deferred imposition of the tax until Oct. 1 because of a failure to reach consensus among provinces.
Analysts said a delay in the latest billion-dollar tranche of funds from the IMF might cause a ripple effect on aid from other other multilateral agencies and donors.
Failure to introduce the VAT would almost certainly jeopardise Pakistan's access to the remaining $4 billion under the IMF stand-by loan and $300 million under the World Bank, Maria Kuusisto, Asia analyst at the London-based political risk research firm Eurasia Group, wrote in a note.
It could also keep Pakistan from extending the IMF loan beyond December 2010, she wrote.
Failure to impose the tax would be serious business, a Pakistani economist familiar with the situation said.
No money will come from the World Bank or the Asian Development Bank either, and Pakistan will have a serious financing problem for their budget deficit, he told Reuters.
The IMF and Pakistan are having talks and the programme is not in danger, said Asif Bajwa, special secretary at the Ministry of Finance. But the IMF itself is concerned.
The delay in introducing the VAT could delay disbursements under the IMF program. We hope the VAT can be introduced soon so the IMF can move ahead with program reviews and disbursements, IMF country representative Paul Ross told Reuters via email.
The IMF is due to meet in August to review Pakistan's progress against targets for the end of June before approving the next tranche, likely to be $1.1 billion to $1.2 billion.
On the brink of default, Pakistan turned to the IMF in November 2008 for a $10.66 billion loan package to help put its economy back on track. It received the fifth tranche of $1.13 billion last month.
In an effort to meet IMF conditions, the 2010/11 budget raised taxes on sectors like capital gains, increased a sales tax and slashed some food and energy subsidies. Pakistan's tax-to-GDP ratio of around 9.5 per cent is one of the world's lowest.
Cutting the deficit, targeted at 4 per cent of GDP for fiscal year 2010/11, is key but poses a serious inflation risk and could hurt the economy just as it tentatively recovers from its lowest growth rate in decades. Last year's deficit was 5.1 per cent.
The tax collection target is grossly over-ambitious, Ashfaque Hasan Khan, dean of Islamabad's NUST Business School, said when the budget was released earlier this month.
DAWN.COM | Business | Pakistan risks IMF, other aid if tax reform fails
Pakistan was due to implement a value-added tax (VAT) or a reformed general sales tax of 15 per cent by July 1, but the 2010/2011 budget deferred imposition of the tax until Oct. 1 because of a failure to reach consensus among provinces.
Analysts said a delay in the latest billion-dollar tranche of funds from the IMF might cause a ripple effect on aid from other other multilateral agencies and donors.
Failure to introduce the VAT would almost certainly jeopardise Pakistan's access to the remaining $4 billion under the IMF stand-by loan and $300 million under the World Bank, Maria Kuusisto, Asia analyst at the London-based political risk research firm Eurasia Group, wrote in a note.
It could also keep Pakistan from extending the IMF loan beyond December 2010, she wrote.
Failure to impose the tax would be serious business, a Pakistani economist familiar with the situation said.
No money will come from the World Bank or the Asian Development Bank either, and Pakistan will have a serious financing problem for their budget deficit, he told Reuters.
The IMF and Pakistan are having talks and the programme is not in danger, said Asif Bajwa, special secretary at the Ministry of Finance. But the IMF itself is concerned.
The delay in introducing the VAT could delay disbursements under the IMF program. We hope the VAT can be introduced soon so the IMF can move ahead with program reviews and disbursements, IMF country representative Paul Ross told Reuters via email.
The IMF is due to meet in August to review Pakistan's progress against targets for the end of June before approving the next tranche, likely to be $1.1 billion to $1.2 billion.
On the brink of default, Pakistan turned to the IMF in November 2008 for a $10.66 billion loan package to help put its economy back on track. It received the fifth tranche of $1.13 billion last month.
In an effort to meet IMF conditions, the 2010/11 budget raised taxes on sectors like capital gains, increased a sales tax and slashed some food and energy subsidies. Pakistan's tax-to-GDP ratio of around 9.5 per cent is one of the world's lowest.
Cutting the deficit, targeted at 4 per cent of GDP for fiscal year 2010/11, is key but poses a serious inflation risk and could hurt the economy just as it tentatively recovers from its lowest growth rate in decades. Last year's deficit was 5.1 per cent.
The tax collection target is grossly over-ambitious, Ashfaque Hasan Khan, dean of Islamabad's NUST Business School, said when the budget was released earlier this month.
DAWN.COM | Business | Pakistan risks IMF, other aid if tax reform fails
