KARACHI: A welter of new revenue measures could become necessary this fiscal year, according to the International Monetary Fund (IMF) Article IV report released earlier in the week.

The IMF projects a shortfall equal to 1.5 per cent of GDP just to meet the revenue target set by the government. The amount is around Rs480 billion if GDP is taken to be Rs32 trillion.

“The 2017-18 budget is subject to significant risks,” the Fund says before pointing out the massive gap between its revenue projections and those of the government. It recommends additional revenue measures like “reducing tax expenditures (estimated at 1.3pc of GDP in 2016-17), gradually raising petroleum taxes, further strengthening the system of withholding taxes for non-filers, and improving provincial tax collection in agriculture, property and services.”

Budget is subject to significant risks, says IMF

The last suggestion is unlikely to materialise, or help bridge the federal government revenue collection gap. The burden is, therefore, likely to fall on those taxpayers that are already within the net, with greater resort to withholding taxes.

In administrative measures, the Fund recommends “improving the FBR’s access to third-party information, enhancing tax audits, building a centralised electronic fiscal cadastre, and reducing the stock of outstanding tax refund claims”.

Each of these measures can run into strong opposition, presenting the government with an unpleasant menu of options at a time when its strength is already sapped in fending off a powerful political storm.

On top of the gap in revenue projections, the Fund also projects expenditure overruns of around 0.5pc of GDP, equal to Rs184bn. Scant suggestions are offered about how to control this, other than a detailed pointer towards the National Finance Commission (NFC) award, which the report touches gingerly due to strong political implications.

Other than that, the report points towards “containing the wage bill growth” and power-sector subsidies as areas where expenditures can be curtailed, as well as “prioritisation of development spending”, ostensibly as a precaution to identify those projects whose funding can be cut in the event expenditures fail to stay on course.

The government’s revenue projections are already facing a challenge as 2016-17 ended with a massive revenue shortfall of 0.7pc of GDP as per Fund projections, equal to Rs 224bn. This happened despite a downward revision of the revenue target. Final figures for 2016-17 revenues and expenditures have not yet been released.

For next year, the government has already budgeted Rs53bn worth of new sales tax and federal excise duties, limiting its room to squeeze more out of these heads midcourse. Given the political circumstances, as well as the approach of an election, the government is likely to be faced with the necessity of raising revenues through fuel prices and power bills, both of which are highly inflationary.

The only other option left would be to follow in the footsteps of its predecessors and borrow massively, either from banks or the State Bank, both of which again carry damaging consequences for government priorities in other areas. The former can constrain growth at a time when taking expansion to 6pc is a big boast for the government, while the latter is again inflationary and violates laws and commitments given to foreign creditors.

Adding to the difficult balancing act that lies ahead, the report also points out that “a higher-than-budgeted deficit would exert additional pressures on the current account and reserves”. Reserves have already entered a downward glide path as annual remittances declined for the first time in over a decade this year, while the trade deficit grew by 32pc this year.

The current account deficit more than doubled in the same year. Revised figures released last week showed it had already crossed 3pc of GDP in the first 11 months of the fiscal year. Final data for the full year is yet to be released