THE unwarranted and illegal war imposed on Iran represents an extraordinary exogenous shock for developing countries. Pakistan is particularly vulnerable on this front. It has an outsized import dependency on a wide range of products, from energy to food, and from industrial raw materials to finished goods. Remittances from non-resident Pakistanis keep not just the external account afloat, but also provide a vital lifeline to 30 to 40 million family members at home. Amplifying Pakistan’s exposure to the conflict in the neighbourhood is the fact that the central node for both trade flows and capital flows that the country so heavily depends on is the Gulf region. Compounding our vulnerability even further is the fact that we have virtually no, or limited, buffers in all critical areas of economic security — energy, foreign exchange reserves, food or fiscal space.

The absence of fiscal buffers is illustrated not just by the high levels of public debt and the large share of interest payments in the budget, on the one hand, but also by the still-narrow and weak tax revenue base. Despite the extraordinary increase in tax collection by FBR over the past four years, most of it has come from the same base — corporate taxpayers, imports, salaried individuals and ordinary Pakistanis paying via regressive indirect taxation.

The recent resort by the government to increasing petroleum levies yet again to plug a gaping shortfall in FBR’s tax collection target aptly demonstrates the unresolved taxation dilemma. Due to its failure to broaden the tax........

© Dawn