The World Bank has called on Pakistan's political parties and policymakers to agree on an economic reform program in preparation for general elections scheduled for the last week of January, amid a stifling financial crisis as a result of continued high inflation and declining foreign exchange reserves.

The World Bank also highlighted 5 key areas for reviving Pakistan's struggling economy. This came at a press conference by the World Bank Country Director Naji Ben Hussein at the World Bank office last Friday on the occasion of the launch of a new program of economic reforms, entitled "Reforms for a Brighter Future: Time for Decision."

"A broad political transition is required to reach consensus on a minimum reform agenda rather than just describing it as an economic pact," Hussain said at the news conference.

"There has been a lot of pause, as well as policy implications in the past, so a broader economic reform agenda with a full implementation mechanism is needed," he said.

Declining economy

According to World Bank data, Pakistan's tax collection capacity is 22 percent of GDP, but tax collection for fiscal year 2022 was only 10.5 percent.

According to the Bank's estimates, the proposed efforts could help increase revenues from 10.5 percent to 13 percent of GDP in the short term, and 15 percent to 18 percent of GDP in the medium term.

According to World Bank chief economist Tobias Akhtar Haq, Pakistan should rely on direct taxes, remove tax breaks enjoyed by the wealthy and reduce reliance on general sales tax.

The report revealed that the poverty prevalence rate increased by 5 percentage points from 34.2% to 39.4%, resulting in an additional 12.5 million people falling below the poverty line. The unemployment rate doubled and rose from 6.3% to 12.2%, according to the latest World Bank estimates.

Economist Shahbaz Rana said, "If we say that almost 95 million Pakistanis are living in poverty, that's true, which is a very large number."

Rana says in an interview with Al Jazeera Net that the recent economic crisis in Pakistan caused an increase in millions of poor people, due to low growth, high inflation and low jobs.

Rana adds that the tax-to-GDP collection ratio is only 10 percent, which is low and Pakistan needs to increase it, and this can only be done by taxing exempt areas and sectors.

He added that the agricultural sector is one of the least tax-collected, accounting for 1% of total taxes in Pakistan, while the contribution of the agricultural sector to Pakistan's overall economy is up to one-fifth.

According to Pakistan's constitution, taxing the agricultural sector is the responsibility of provincial governments, which may require constitutional amendments, he said. He added that tax collections for the real estate sector are also low.

Rana suggests that the agriculture and real estate sectors should be taxed, as well as increased export and import taxes, which would raise the contribution of taxes to GDP to 13% in the short term.

Rana believes that the World Bank's recommendations do not mean the immediate imposition of these taxes, but rather proposals for the new government that will be elected in the next elections.

The World Bank report noted that Pakistan could raise its GDP growth from 7% to 8% by increasing investment to 25% of GDP.

Queues at a petrol station in Pakistan (Reuters)

The need for repairs

Economist Khaliq Kiani said in an article in the Pakistani newspaper "Dawn" that the World Bank's statements are a warning to Pakistan before the upcoming general elections, to make early choices consistent with the policies of development partners and international lenders.

"Pakistan must decide whether to inaction under elite control and political decisions driven by the strong vested interests of military, political and business leaders or change course for the better," Kiani said.

According to the World Bank document, with regard to the real estate and land sector, important potential sources of income remain untapped. The document also identified several problems related to the real estate sector, including:

  • Low tax rates: This makes investing in real estate more profitable compared to manufacturing or tradable services, thereby distorting capital allocation and reducing growth potential.
  • Low effective tax rates for immovable property tax, distorting land and housing markets.
  • Significant differences in actual tax rates between rental properties and owner-occupied properties distort housing and rental markets.
  • Insufficient progression in land taxes benefits owners of high-value properties at the expense of equity.

In the agricultural sector, the World Bank says agricultural income tax revenues are very weak despite the fact that the sector accounts for about 22.5 percent of GDP, in part because 90 percent of farmers are exempt from agricultural income tax.

Pakistan's foreign exchange reserves continue to decline, weighing on the economy (Getty Images)

The Bank also noted that the complexity and overlap of Pakistan's tax system hampers revenue collection efforts and makes it more difficult for individuals and businesses.

The Bank has identified 5 key areas that could help revive Pakistan's economy:

  • Closing regressive tax breaks for companies that impose significant financial costs while generating little economic benefits, helping to generate revenues equivalent to about 0.1% of GDP.
  • Close personal income tax loopholes and modify tax brackets. This could increase additional revenues by 0.1% of GDP.
  • Increase tariffs on harmful goods, such as cigarettes and all tobacco products at a uniform rate for all brands and adjust automatic inflation, helping to generate 0.4% of GDP in the form of additional revenue.
  • Reducing tax expenditures in the energy sector and responding to the Corona pandemic. For example, the World Bank document notes that tax exemptions and privileges resulted in tax expenditures of 2.7 percent of GDP in fiscal year 2021.
  • Remove exemptions for foodstuffs including oil, legumes, animals, fruits and dairy products, saving 100 billion rupees ($348 million) in revenue.
  • The Asian Development Bank said in its report released a week ago that Pakistan's commitment to the economic adjustment program until April 2024 will be critical to restoring macroeconomic stability and gradually recovering the country's growth.

    According to the Asian Development Outlook for September, Pakistan's GDP growth is expected to pick up by 1.9 percent in the current fiscal year (July 1, 2023 to June 30, 2024) from 0.3 percent in the previous fiscal year, indicating that prices remain high.