World Bank approves $350m package
Board members deem 10% tax-to-GDP ratio insufficient to meet growing expenditure
Shahbaz RanaJanuary 1, 2024
The World Bank greenlit a $350 million package for Pakistan’s budget financing, highlighting the need for fiscal and structural reforms. This move comes amid
concerns raised by the World Bank’s board members over Pakistan’s low tax
collection relative to the size of its economy.
The World Bank’s Board of Executive Directors unanimously approved the $350 million financing
for the Second Resilient Institutions for Sustainable Economy (RISE-II) operation, according to
a press statement issued on Wednesday. The approval for the $350 million comes after a two-year
delay, attributed to weak economic fundamentals, the absence of an International Monetary Fund
(IMF) umbrella, and uncertainty over upcoming elections. The Washington based lender moved
forward with the case for board approval only after obtaining clarity on these aspects.
World Bank Country Director for Pakistan, Najy Benhassine, stressed the urgency of fiscal and
structural reforms to restore macroeconomic balance and establish the foundations for sustainable growth. He noted that RISE-II completes a first phase of tax, energy, and business climate
reforms aimed at generating additional revenues, improving expenditure targeting, and
stimulating competition and investment.
Although Pakistan met all nine prior conditions for securing the budget financing loan, the
lender moved forward only after the completion of the first review of the $3 billion IMF
programme and the announcement of the February 8th election date.
The board members raised concerns about Pakistan’s approximately 10% tax-to-GDP ratio, which
they deemed insufficient to meet growing expenditure needs and contributing to higher public
debt. This ratio is significantly lower compared to regional countries, with India boasting an
18% tax-to-GDP ratio.
The World Bank has approved loans to improve fiscal management, regulatory frameworks
fostering growth and competitiveness, debt transparency and management enhancement, and broadening the tax base while reducing distortions in tax policy.
Programme loan documents indicate that the $350 million lending was approved “with a
24-month delay following the completion of prior actions and establishment of a sustainable macroeconomic framework.”
The World Bank documents state that delays in reining in accommodative fiscal and monetary
policies from mid-2021 led to the erosion of buffers, while programme implementation slowed considerably.
The government sought the World Bank’s support under a revived RISE programme and
completed critical outstanding PAs, including the flagship general sales tax harmonisation
reforms. However, there are still hurdles to filing one single sales tax return instead of five at
federal and provincial levels.
To qualify for the lending, Pakistan implemented steps for effective fiscal management,
improvements in debt management, withdrawal of energy subsidies, and enhanced revenue
collection from property taxation.
The World Bank underlined that external financing realisation from international financial
institutions, bilateral partners, and structural reforms supported by the $350 million RISE-II
loan and $3 billion IMF package are critical for macroeconomic policy adequacy. But it added that continued macro adequacy is contingent on the successful completion of the ongoing IMF
programme.
“Based on the foundations laid through RISE II and parallel support by other International
Financial Institutions, Pakistan has the opportunity to tackle long-standing structural distortions
in its economy after the upcoming general elections,” said Derek Chen, Task Team Leader of the
WB operation. Failing to use this opportunity would risk plunging the country back into stop
and go economic cycles, he warned.
The programme document stated that, in recent years, poverty reduction efforts have slowed
amid shocks, critical structural constraints, and periodic macroeconomic crises. The lower-middle income poverty rate in 2023 is estimated at 39.4% at $3.65 per day income yardstick, only
slightly below the poverty rate of 40% in 2018. There are almost three million more Pakistanis
living below the poverty line than in 2018. Little progress has been made in closing gaps in
poverty between urban and rural areas, while women and girls continue to face widespread
exclusion from access to services and opportunities, it added. Despite some recovery, economic
growth is expected to remain below potential over the medium term. The World Bank has
projected a 1.7% economic growth rate for this fiscal year and a negative real per capita income.
This Article was originally Published in The Express Tribune, on December 21st, 2023.