World Bank asks parties, policymakers to evolve consensus on economic reforms

ISLAMABAD: Amid the political transition around the corner, the World Bank (WB) has asked Pakistan’s political parties and policymakers to evolve a broader consensus on the economic reform agenda by focusing on five major areas to fix the ailing economy.

“The broad-based policy shift is required for striking consensus on minimum reform agenda instead of just labelling it as a Charter of Economy. There was a lot of stop-and-go as well as policy reversals in the past so there is a need for a broader economic reforms agenda with full implementation mechanism,” WB’s Country Director Najy Benhassine stated on the occasion of the launch of a new programme titled “Reforms for a Brighter Future: Time to Decide’ here at WB Office on Friday.

The WB has come up with a prescription of identifying five major areas and recommended bringing the real estate and agriculture income into the tax net in order to jack up the tax-to-GDP ratio by 3 percentage points over the short term.

Over the long term, the WB suggests that tax collection could be doubled from the existing 9.6 per cent of GDP to around 22 per cent. The FBR fetched a collection of over Rs7.2 trillion in the last budget so the WB had projected the country’s potential to increase tax revenues up to more than Rs14-15 trillion on a per annum basis. “It requires the country’s reliance on direct taxation and removing tax exemptions which are being enjoyed by the wealthy and reducing the reliance on General Sales Tax (GST),” the WB’s lead economist Tobias Akhtar Haque said.

It disclosed that the prevalence of poverty has gone up by 5 percentage points increasing from 34.2 per cent to 39.4 per cent, falling 12.5 million people into cruel clutches of poverty. The unemployment rate has doubled and it went up from 6.3 per cent to 12.2 per cent in accordance with the latest estimation done by the WB.

WB County Director Najy Benhassine said that the country saw a lot of stop-and-go and reversal in policy implementations so the political transition coincided with the need to bring the economic reform agenda on the table for evolving consensus. When asked about the requirements of the Charter of Economy, he replied that there was a requirement for an economic reform agenda so broad lines could be drawn without labelling it with the Charter of Economy. Pakistan could raise its GDP growth up to 7-8pc by jacking up investment to 25 per cent of GDP, the WB stated.

The WB identifies that Pakistan followed the boom and bust growth model and there is a potential that the country could increase 32 per cent GDP in five years by closing human capital gaps with peer countries. It requires developing and implementing a national strategy for coordinated action to address stunting, progressively increasing budgetary allocations to health, education, and social protection, as fiscal space becomes available, strengthening support to family planning, increasing the number of schools and quality of teaching, enhancing the efficiency of social protection spending.

The WB says that to move from a narrow, distortive, and inequitable tax system towards a system that is broad-based, efficient and equitable, Pakistan must (i) reduce or eliminate costly and often regressive duty and sales tax exemptions, (ii) increase excise on socially harmful goods including tobacco; (iii) expand the base for personal income tax by simplifying the structure, merging the schedules for salaried and non-salaried workers and lowering the tax-free thresholds; iv) increase or implement progressive taxation on property, retail and agriculture income particularly at provincial levels; and (v) introduce new environmental taxes and user charge including on carbon emissions or other pollutants.

The WB recommends a policy shift for human development as child stunting has become a major issue and Pakistan must develop a national strategy for coordinated efforts to address child stunting. For building a competitive and outward-oriented private sector, the WB has asked to maintain a market-based exchange rate aligned with fundamentals. To a query, the WB official said that there was a need to open up imports as delays were being used as a tool to impose import restrictions. The external financing gap will be shared in the upcoming report but import restrictions in the shape of delays might hurt the prospects of GDP growth.

To another question about the approval of the RISE-II programme loan, the WB’s country director said that it was in the advanced stage but did not share any exact timeframe for getting approval from the Board for the release of the loan amount.

The WB has launched a new programme to foster debate on the critical development policy issues facing Pakistan. ‘Reforms for a Brighter Future: Time to Decide’ is intended to engage in discussions with a broad range of stakeholders on what fundamental policy shifts are most needed to durably steer the economy towards stronger, more climate-resilient, and sustainable growth and development. This consultation programme includes the publication, today, of a series of draft Discussion Notes. These will be progressively enriched by feedback received from a broad range of stakeholders.

The notes, which draw on international experience as well as a large body of evidence on Pakistan, propose fundamental policy shifts that are needed to move away from the current low-growth, anti-development status quo: 1) From underfunded, inefficient, and fragmented service delivery and social protection systems towards coordinated, efficient, and adequately financed service delivery, targeting the most vulnerable — in particular to reduce abnormally high child stunting rates and to increase learning outcomes for all children, especially for girls.

2) From wasteful and rigid public expenditures benefiting a few, towards tightly prioritised spending on public services, infrastructure, and investments in climate adaptation, benefiting populations most in need. From a narrow, distortive, and inequitable tax system towards one that is broad-based, efficient, progressive, and equitable — generating sufficient revenues to significantly increase public investment in human development, infrastructure, and climate adaptation.

3) From a protected, stagnant, and unproductive economy with a large state presence towards a dynamic open economy driven by private investment and exports.

4) From agriculture sector policies that lock farmers into low-value, low-productivity farming towards a more market-driven, productive agricultural system, including value chains that are resilient to climate change impacts and water scarcity. By reducing the agri subsidy in Punjab and Sindh, the country could save up to $4.9 billion through saving from subsidy support.

5) From energy sector policies that drive high energy costs, environmental harms, and unsustainable accumulation of debt, towards efficient, sustainable, and resilient generation and distribution, based on accurate price signals, increased competition and private participation, and a cleaner energy mix.

Energy sector policy settings that drive high energy costs, environmental harms, and unsustainable accumulation of debt. The energy price subsidies are regressive and impose fiscal costs. The high costs of generation arise from the current energy mix and high returns to producers while high distribution losses arise from DISCO inefficiency and mismanagement.

From a public sector that is inefficient, often ineffective, and vulnerable to capture by vested interests towards accountable, efficient, and transparent government, including at the local level.

“Pakistan has been facing numerous economic hardships including inflation, rising electricity prices, severe climate shocks, and insufficient public resources to finance development and climate adaptation—when the country is among the most vulnerable to climate change impacts. It is also facing a ‘silent’ human capital crisis: abnormally high child stunting rates, low learning outcomes, and high child mortality,” said the WB country director in Pakistan.