Concerns of the World Bank

An article titled “Economic Turnaround Moment?” has recently been published in the newspaper, Dawn. It has been written by Martin Raiser, World Bank Vice President for South Asia, and by Najy Benhassine, Country Director for World Bank, Pakistan. The article highlights that Pakistan is now facing one of its worst crises. This is attributed to poor policy choices and a series of negative shocks, including the 2022 catastrophic floods, which have led to lower growth and brought the country close to a default.

Clearly, this perspective on Pakistan is in the context of the performance of the major South Asian economies like India and Bangladesh. However, it may come as a surprise that the World Bank’s own database, the World Development Indicators (WDI), indicates a lower incidence of poverty in Pakistan. This is measured by the international poverty line of $3.65 per capita per day at 2017 PPP. According to the latest data in the WDI, the level of poverty is 39.8% in Pakistan. It is significantly higher in Bangladesh at 42.3% and even more in India at 46.5%.

Further, the level of income inequality measured by the Gini coefficient, according to the WDI, is also significantly higher in India and Bangladesh than in Pakistan. Therefore, while Pakistan may have had less rapid economic growth, it has apparently been successful in achieving more inclusive growth.

The article on Economic Turnaround Moment?; has five parts relating respectively to the human capital crisis, generation of more fiscal space, striving for a more dynamic and open economy, transformation of the agricultural sector and addressing energy sector inefficiencies.

There is no doubt that Pakistan has fallen sharply in the level of human development. According to the global Human Development Report of 2021-22 of the United Nations Development Program, Pakistan’s ranking in the Human Development Index has slipped from the 154 to the 161st position, due more to very poor education indicators. It is now down to the low level of human development from the medium level earlier.

There is need for study of the better performance of Bangladesh in the education indicators. This is despite the fact that, according to the WDI, both Pakistan and Bangladesh had the same level of government expenditure on education in 2022 of 1.97% of the GDP. It will be very useful if the World Bank could identify the reasons for more efficient public spending on education in Bangladesh, so that Pakistan can learn from this experience.

The section of the article on generation of fiscal space is of substantial importance as it will help improve service delivery and human capital development. The assessment of the article is that bold fiscal reforms could potentially generate up to 12% of the GDP. This is substantially more than the fiscal gap identified before, ranging from 4 to 6% of the GDP, by researchers in Pakistan.

These reforms, according to the article, include, first, abolition of expensive tax exemptions and reduction in compliance costs, which could generate about 3% of the GDP. Second, another 3% of the GDP could be mobilized by development of local and provincial taxes on property, agriculture, and the retail sector. Third, rationalization of expenditures between the federal and provincial governments can lead to savings of up to 3% of the GDP.

Surely, the Bank has been focusing on these fiscal reforms in Pakistan over the last many years. There is a major on-going tax reform project of the World Bank with the FBR on Resilient Institutions for Sustainable Economy (RISE). Today, the World Bank is the second largest lender to Pakistan after China. The outstanding loan of Pakistan with the Bank was $18.2 billion as of end-December 2022.

There have many programme and project loans disbursed by the World Bank over the years in Pakistan. Therefore, the relatively poor performance of the country can also reflect the role of the World Bank as a major development partner of Pakistan.

There was need to highlight in the article why the process of tax reforms has been pre-empted and frustrated by the elite capture of economic policies in Pakistan for such a long time. Will this stranglehold be withdrawn now, and the elite exhibit a degree of enlightenment never seen before? There is a compelling need for progressive tax reforms today to enable greater relief for the poor.

The lower income quintiles have been hit disproportionately by deterioration in economic conditions, especially after COVID-19 pandemic and the disastrous floods.

Turning to the third point in the article on the need for Pakistan to strive for a more dynamic and open economy, some facts may again first be highlighted. According to the WTO publication, World Tariff Profiles, Pakistan has lower import tariffs than other South Asian countries and is in that sense a more open economy.

The position, according to the WTO publication, is that the average MFN tariff of Pakistan is 8.7%. It is lower than the average of 14.1% in Bangladesh and 11.4% in India. Also, Pakistan has devalued its currency much more.

There is need for the World Bank to appreciate that one of the key reasons for faster export growth in Bangladesh and India is the presence of wide-ranging export incentive schemes. For example, 43 types of products in Bangladesh are eligible for an export cash inventive scheme ranging from 1% to 20%. Similarly, India operates a duty credit scrip scheme on net foreign exchange obtained.

Pakistan has been compelled to withdraw major export promotion measures like concessionary export refinancing, lower energy tariffs and zero-rating of domestic sales tax under the IMF programmes. This has placed Pakistan in a competitive disadvantage.

Finally, there is a need to make a plea to the World Bank for continued support at this critical time. Initial indications from 2023-24 are that the Bank has reduced its support to Pakistan. According to the Federal Ministry of Economic Affairs, the total commitment of IBRD and IDA funding for 2023-24 is $2329 million. During the first five months the amount received is $490 million, equivalent to only 21% of the committed funding. However, it is likely that there has been a large disbursement by the Bank in December as the SBP reserves have jumped up in the last two weeks.

The article ends on a positive note. The authors state that if Pakistan implements the identified fundamental reforms in coming years, then it can achieve upper middle-income status by its centennial in 2047. Confidence is expressed in the human capacity and implementation capability in the country. The World Bank must be thanked for its vote of confidence and for all the support that it has provided to Pakistan over the years. We hope and pray that 2024 will mark an economic turnaround for Pakistan.

Copyright Business Recorder, 2024