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Pakistan’s economic growth hamstrung by low tax collection, says report

ISLAMABAD: Despite recent optimism surrounding Pakistan’s economy, the country is facing an “existential crisis” stemming from its woeful tax collection rates and inability to finance itself, a report said Wednesday.

Pakistan’s economy grew at 4.24 percent during the 2014-2015 fiscal year with per capita income rising a significant 9.25 percent, markers that come as investor confidence in the long-underperfoming South Asian giant have also increased.

But according to the report by non-profit organisation Raftar, funded by Britain’s Department for International Development (DFID), Pakistan’s economy continues to rely heavily on “commercial loans, concessionary donor loans and aid”.

The country’s tax-to-GDP ratio of 9.4 percent is among the lowest in the world, leading to a public debt of 17 trillion rupees ($163 billion). This an almost three-fold increase since 2008 for the $232 billion economy, with 44 percent of tax revenue going toward interest payments.

The report blamed the lack of a “tax culture” on non-revenue sources of funds the country has historically enjoyed in the form of foreign aid and loans.

It said 68 percent of tax revenue was being generated through indirect taxes on fuel, food and electricity, which unfairly penalizes the poor.

 

The lack of revenue collection also negatively affects infrastructure development including power generation, with the country facing a massive shortfall of up to 4000 MW in the summer that shaves about $15 billion off the country’s GDP.

Pakistan is currently in a $6.6 billion loan programme with the International Monetary Fund, which was granted on condition that Islamabad carried out extensive economic reforms, particularly in the energy and taxation sectors.

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