Pakistan, already struggling to increase its tax intake before the pandemic, will face additional hurdles, said Moody’s Investor Services (Moody’s) in its latest report.
Moody’s in its report, ‘Emerging Markets Recovering revenue post coronavirus crisis will be crucial but challenging,’ said that subdued global recovery will shift focus to broadening tax bases, which will be challenging.
The Emerging Markets (EM) fiscal revenue will remain below pre-crisis levels amid a slow and halting global economic 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 is weak, it added.
The coronavirus crisis will lead to long-lasting revenue losses for emerging market (EM) sovereigns.
The ability of EM governments to implement and enforce effective revenue-raising measures in response will be an important credit driver over the next few years because of their sizeable spending pressures, and the subdued recovery in the global economy, Moody’s expect.
As a result, the EM governments will, with the support of development finance institutions, 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.
Sovereigns with a pre-existing and established focus on raising taxes from low levels like Costa Rica (B2 negative), or past episodes of effective tax policy changes like Georgia (Ba2 stable) and Montenegro (B1 stable), will likely fare better.
Sovereigns already struggling to increase their tax intake before the pandemic, like Tanzania (B2 stable) and Ethiopia (B2 negative), Sri Lanka (Caa1 stable), Pakistan (B3 stable) and Bangladesh (Ba3 stable) will face additional hurdles.
For instance, Pakistan and Bangladesh have both implemented tax reforms in recent years, with the support of the IMF in the case of Pakistan.
Since its passage in July 2019, Bangladesh’s VAT law has faced implementation challenges related to revisions to the tax rate structure and technological implementation.
The authorities’ weak policy effectiveness, especially for taxes (as illustrated by their low ranking in the World Bank Doing Business’ component on paying taxes), combined with the weak economic backdrop means that revenue collection will remain challenging.
Sovereigns with a pre-existing 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. Sovereigns already struggling to increase their tax intake before the pandemic, like Tanzania and Ethiopia, Sri Lanka, Pakistan and Bangladesh will face additional hurdles, it added.