KARACHI: Pakistan will face additional hurdles in increasing its tax revenue due to the coronavirus crisis, Moody’s Investors Service said in a report issued on Monday.
The remarks were made as part of an assessment of how emerging market (EM) sovereigns will suffer long-lasting revenue losses due to the coronavirus crisis, with governments’ ability to implement and enforce effective revenue-raising measures set to be a key credit driver over the coming years.
According to Moody’s, on average, EM governments will lose revenue worth 2.1 percentage points of GDP in 2020, above the 1.0 pp loss in Advanced Economies (AEs).
Sovereigns already struggling to increase their tax intake before the pandemic, like Pakistan, Tanzania, Ethiopia, Sri Lanka, and Bangladesh, will face additional hurdles.
Sovereigns with a preexisting and established focus on raising taxes from low levels like Costa Rica, or past episodes of effective tax policy changes like Georgia and Montenegro, will likely fare better.
Almost all EMs will record budget deficits this year and face constraints in cutting spending amid the pandemic, amplifying the importance of revenue generation. EM fiscal revenue will stay below pre-crisis levels amid a slow and halting global recovery.
“The crisis will also complicate the continuation of reforms aimed to broaden the tax base in countries that have been relatively successful in raising tax intake historically but where tax-to-GDP remains very low and policy effectiveness weak. For instance, Pakistan
and Bangladesh have both implemented tax reforms in recent years, with the support of the IMF in the case of Pakistan,” noted the report.
“The coronavirus crisis has underlined the importance of revenue generation for emerging market governments,” said Lucie Villa, a Moody’s Vice President – Senior Credit Officer and the report’s author. “For EMs, any fall in revenue is particularly important for creditworthiness because their government spending needs – social, infrastructure and debt financing – are often more urgent than for advanced economies and they have a generally narrower revenue base.”
With the support of development finance institutions, EM governments will look to implement or
resume tax-raising measures. However, only a few governments have successfully raised revenue much faster than GDP growth over the last 10 years.
