World Bank Vice President for South Asia Martin Reiser said on Tuesday that corruption-riddled people, landlords and industrialists are resisting reforms in Pakistan, urging Islamabad to immediately decide its future course to emerge from ” one of the worst economic crises. .”
Raiser also warned that the debt restructuring option should only be used in an “extremely cautious” manner as it was not the “silver bullet” that would solve all of Pakistan’s debt-related problems. The World Bank regional president said the Special Investment Facilitation Council (SIFC) cannot replace the underlying problems that hinder foreign investment.
In what he said could sound like an “undiplomatic” speech, Raiser sought to shake the deep-rooted vested interests in Pakistan that have destroyed the country and brought it to a point where 40 percent of its population lives in poverty, but the elites they thrive. “Is this Pakistan’s moment? Will this time be different? I do not know. All I can say is that “blundering through this crisis and maintaining the economic status quo is a dangerous proposition,” he warned. He formally presented the policy notes supported by the World Bank, seeking a change of course to exit the financial crisis.
design: Ibrahim Yahya
Large landowners who cover most of the subsidies benefit from price distortions and pay few taxes on agricultural income. Well-connected industrialists who thrive on the complex array of regulations, protections and exemptions. real estate investors who enjoy low taxes; and many others that lead to corruption and a lack of accountability hindering reforms in Pakistan, Razer said.
The regional president warned that “a failure to achieve growth will exacerbate distributional conflicts and drive the brightest to leave the country.” He said elite capture and political opportunism were the main obstacles to reform, but the growing young population in the cities was also calling for real change.
Asked about the broader ownership of these reforms, Raiser said that “If the reforms are not implemented, it will also affect the World Bank’s programs in Pakistan.”
The World Bank is expected to disburse about $2 billion in loans to Pakistan, which is critical to its survival.
Raiser advised Pakistan to face acute human capital crisis. This “silent” crisis, which rarely makes headlines, affects a large percentage of the population and undermines Pakistan’s potential tomorrow.
Forty percent of children under the age of five suffer from stunted growth and this is a shocking statistic, he added. Nearly 28 million Pakistani children remain out of school—the majority of whom are girls.
Public spending on education and health may need to double to around 5% of GDP to close existing gaps. That would be about the same level as India spends, he said.
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The World Bank Vice President said Pakistan’s chronic fiscal deficits have led to high debt and interest payments that leave few resources for public investment. In the next fiscal year, over 70% of the revenue will be used to service Pakistan’s existing debt.
“Debt restructuring is not a trivial matter and only works when supported by structural reforms and can lead to a significant reduction in nominal debt levels,” the regional president said. He also warned that debt restructuring could also destroy banks and lead to both financial and debt issues. Debt restructuring is an option, but should be exercised in an “extremely cautious” manner.
Raiser also said that the SIFC was not the solution to all the problems hindering foreign investment in Pakistan. “One of the objectives of the SIFC is to bring in foreign investment, which is welcome, but creating a new institution to sign new agreements is not a substitute for the underlying problems that hinder foreign investment,” the regional president said.
He also said that without correcting issues hindering foreign investment, the SIFC may sign one or two agreements, but the focus should be on improving the business environment.
He proposed comprehensive fiscal reforms on both the expenditure and revenue sides. The World Bank has recommended reducing the losses of ailing public enterprises, notably through privatization, cutting regressive and distorting agricultural and energy subsidies, and poorly targeted export support programs, and reducing the current duplication between the federal and provincial governments.
On the revenue side, efforts should focus on broadening the tax base, rather than raising rates further, Raiser said.
He said regressive tax breaks cost Pakistan up to a third of its total revenue every year. The GST system needs to be harmonized across provinces to bring more businesses into the tax net, including the under-taxed retail sector.
Increased taxation of land and property — where the wealthy invest their wealth — could generate additional revenue and incentivize more productive investment, Raiser said.
He said that Pakistan should strive for a more dynamic and open economy as its economy is hampered by distortions and lack of competition. Exports are undermined by frequent exchange rate appreciation and high trade barriers.
The Vice President said the lender has floated a $350 million fiscal support loan for board approval by the end of December after Islamabad fulfilled previous actions and achieved some fiscal sustainability under the IMF program. Reiser said the IMF’s board may also meet in the coming weeks to approve the first revision, but no date was given for the meeting.
World Bank Director Najy Benhassine said the lender was in active contact with all political parties and held consultations on the policy note with MQM, PPP, PML-N and PTI. Benhassine said all political parties have shown commitment to the reform agenda.
Published in The Express Tribune, November 29u2023.
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