The government has announced details of an economic reform package based on promoting growth through wide-ranging tax cuts. Finance Minister Sartaj Aziz had indicated that the government would move in this direction after talks with the IMF ended in the effective suspension of the current standby agreement. Aziz said that the targets of the standby agreement could not be met and that the IMF had agreed to negotiations on a new agreement later in the year.
The new package was announced by Aziz in a speech to the National Assembly on 28 March. The maximum import tariff is to be cut to 45 per cent from the existing 65 per cent; general sales tax is to be reduced to 12.5 per cent from 18 per cent; and personal income tax rates are to come down to five-20 per cent from 10-35 per cent.
Aziz said that the reduction in tariff levels will improve profitability in export-oriented sectors and stimulate industrial production. Any shortfall in government revenue is to be compensated for by the introduction of a minimum import tariff of 10 per cent, the minister said. A new retail sales tax of 3 per cent is also likely to be introduced. Food and medicine are expected to be exempt, but details have not yet been finalised.
The tax cuts have been welcomed by Karachi Stock Exchange president Arif Habib, who said that they will boost corporate profits. However, some observers say that the changes may lead to higher inflation and fiscal and balance of payments deficits. Aziz said that the reforms would form the basis of negotiations with the IMF for an extended structural adjustment facility. Under the recent standby facility the government was to cut its budget deficit to 4 per cent of gross domestic product (GDP) - a target unlikely to be reached, local observers say.
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