• Apprehends rollback of commitments on gas, power subsidies, tax measures and trade tariffs
• Indicates willingness to support Pakistan in coordination with IMF
• Says broader, deeper reforms needed to support fiscal consolidation, increase investment
ISLAMABAD: The World Bank fears that following the upcoming elections, strong and organised vested interests may spur a number of potential reversals on critical policy reforms — committed to multilateral lenders — posing ‘high’ macroeconomic risks to Pakistan.
The possible reversals include the rationalisation of gas and electricity subsidies, lower trade tariffs and better property tax realisation.
“Stakeholder risks are high due to strong and organised vested interests, potentially advocating to reverse critical reforms, particularly trade tariff reforms, increases to property taxation and energy sector reforms,” said the Washington-based lending agency in an assessment of its recently approved $350 million loan under second Resilient Institutions for Sustainable Economy (Rise-II).
The bank, however, expressed willingness to provide further support in tandem with the International Monetary Fund (IMF) under another medium-term loan programme to be signed by the newly elected government, subject to the successful progression of the ongoing reform measures, for even deeper and broader reforms.
“Political and governance risks are high because of the upcoming elections, as associated political pressures may erode fiscal restraint or the commitment to continued implementation of challenging reforms,” it said, adding the priorities and commitment to structural reforms of the future government were also unknown.
“Macroeconomic risks are also high, with reserve cover at end of SBA (stand-by arrangement) projected to be below 1.5 months of imports. Additional external support will thus be needed following completion of the SBA,” it said.
Moreover, additional macroeconomic risks also result from weak public finances, the heavy exposure of the banking sector to government borrowing, and curtailed growth due to shortages of critical imports. On top of that, “institutional capacity for implementation and sustainability risk is high due to the need for provincial-federal coordination and frequent turnover of senior government officials in critical positions,” the bank pointed out.
The bank has shed some light on the “broader and deeper reforms” that the country would have to undertake over the next couple of years once the new political dispensation holds ground following the Feb 8 general elections under the next IMF programme, which is almost a foregone conclusion by now. Caretaker Finance Minister Dr Shamshad Akhtar had also recently confirmed the inevitability of a fresh IMF programme.
“Over the medium term, broader and deeper reforms will be required to support necessary fiscal consolidation, improve confidence, and increase investment,” said the World Bank, which has been working closely not only with the IMF but also with other regional multilaterals like the Manila-based Asian Development Bank (ADB), the Beijing-based Asian Infrastructure Investment Bank (AIIB), and Pakistan’s bilateral partners, including China and the US.
The long list of required reforms include the reduction of protectionist trade policies, elimination of distortive agricultural subsidies, and rationalisation of federal government expenditures over subject areas that are devolved to the provinces. This has been at the centre of discussions nowadays between the federation and its federating units, including limiting the federal funding to development projects and schemes of provincial nature.
The reform menu also pertains to “expanding the tax base by increased taxation of assets, property, and sectors traditionally outside the tax net, particularly agriculture, small retail, and real estate, further reduction in tax exemptions and effective implementation of the treasury single account to reduce government borrowing needs.
Also on the agenda are further push for accelerating energy reforms, both electricity and gas, particularly to reduce costs and losses stemming from distribution and transmission. Measures to cut red tape and ease the business environment along with effective steps for reducing losses of the state-owned enterprise (SOEs), particularly via privatisation and concession to the private sector.
“Without such reforms, private external flows will be limited, and import restriction is expected to be required to preserve foreign exchange reserves amid pent-up demand, weighing on economic activity and imposing long-lasting economic scarring. Foreign investment will remain low and the government will continue to lack access to external commercial borrowing,” the bank warned adding that gross financing needs will remain elevated, leading to the continued accumulation of domestic debt and associated risks to fiscal and debt sustainability.
The World Bank noted that while progress against this reform agenda cannot be guaranteed in the current political context, ongoing World Bank engagements will support continued reform in key areas, including GST and property taxation reform under provincial and federal revenue and public finance investment projects, besides energy reforms under investment project support for improved efficiency of distribution companies (Discos) and ongoing analytical support for electricity and gas tariff reforms.
On the positive side, the World Bank noted that there had been broad support for critical fiscal management and revenue reforms across the political spectrum while the private sector had highlighted the importance of a harmonised tax jurisdiction, a single regulatory entity, and a competitive and stable trade policy.
Published in Dawn, December 25th, 2023
