By Ali Imran
ISLAMABAD: Pakistan’s current economic model was not working, World Bank Country Director Najy Benhassine has said, underlining that the country needs to overhaul its economy and focus on generating alternative electricity instead of through expensive.
The remarks by Benhassine came in an article, published in the latest UNDP publication. In his article, he portrayed a dismal picture of the economy, saying that the country lagged behind its peers, while the reduction in poverty had started reversing.
He regretted that the benefits of growth had been limited to the elite. There had been a growing perception that policy change was necessary and defects in agriculture and energy sectors should be removed, he said. However, he warned that past experience showed that reforms were blocked. Benhassine emphasised that Pakistan had an opportunity to have a bright future. For that he added government spending also needed reforms. He suggested that a free economy and growth would improve the living standard.
Earlier, 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.
