WB wants NFC Award, 18th Amend reviewed

ISLAMABAD: With expectations of holding the next general elections on time and sharing the economic reform agenda with the upcoming government, the World Bank asks Pakistan to implement combined revenue measures for doubling the tax collection and expenditure cut by 10 percent including the freezing of wages.

These are some of the highlights of the press conference addressed by the visiting WB’s Regional Vice President for South Asia Martin Raiser while launching a series of policy notes for fixing economic ills facing Pakistan here on Tuesday. The policy notes for specific areas were launched in collaboration with PIDE and would be shared with the upcoming government coming into power after the next general elections.

The WB asks for a review of the National Finance Commission (NFC) Award and 18th Constitutional Amendments. The WB has asked Pakistan to reduce tax slabs for salaried and non-salaried classes. In an objectionable recommendation, the WB recommends removing tax exemptions for basic household items such as removing exemptions for food items including oil, pulses, animal, fruit, and dairy, which could save Rs 100 billion in revenues.

On expenditure cut, the WB asks for imposing temporary austerity measures, while protecting maintenance expenditures. The temporary imposition of stringent review requirements over staff and operational costs, as well as development spending, can generate immediate cost savings. The government could consider setting a recurrent expenditure reduction target of 10 percent and implementing a government-wide hiring freeze, wage freezes for the mid to upper echelons, and conservative salary increases (if any) for the lower echelons. These should be complemented by other measures, such as halting vehicle purchases and limiting allowances for representation, meetings, travel and petrol usage for all staff.

Concurrently, the government could conduct a review of PSDP development expenditure and cancel all projects that have not undergone proper project preparation, selection and prioritization and delay previously vetted projects that are unlikely to bring significant benefits to the poor. Such a consolidation of development expenditure could target a 20 percent reduction in near-term development spending.

However, the WB has rightly pointed out that the current concessionary rates on fertilizer impose fiscal costs of Rs 90 billion. It can be a justified recommendation mainly because the subsidies were enjoyed by fertilizer plants instead of being fully passed on to the farmers. On the expenditure side, the WB asks for implementing the Treasury Single Account (TSA) total federal government deposits at commercial banks amounted to Rs 2,020 billion. By proper accounting and use of these idle cash balances, the amount of required sovereign borrowing can be reduced, generating interest cost savings of up to Rs 424 billion annually.

“Pakistan could generate 9 percent of GDP revenues if all recommended measures are implemented. The country will have to undertake reforms on both sides generating revenues and spending efficiently on priority areas. The country will have to achieve a growth rate of 5 to 6 percent on a sustained basis for a decade. The austerity is usually a failed method if there is no sustained GDP growth.”

With regard to NFC and the 18th Constitutional Amendment, the WB said the federating units should be provided with access to resources commensurate with their service delivery responsibilities and expenditure needs. The current system of federal transfers and assignment of tax responsibilities (GST on goods, and personal and corporate income taxation with the federal government; GST on services, property tax, and agricultural tax with the provinces) does not achieve this objective. The mismatch between available financing and formal service delivery responsibilities leads to de facto overlaps in service provision, undermining accountability and weakening incentives for efficiency in spending and revenue mobilization.

The WB said that Pakistan’s fiscal system is uniquely regressive and cited findings from the Pakistan Commitment to Equity (CEQ) Assessment fiscal incidence analysis which demonstrate that households (except those in the very poorest decile) are net payers in the fiscal system, which means that they pay more in cash terms in taxes than they receive in either subsidy or direct transfer benefits.

The CEQ Assessment also revealed that in cash terms and relative to pre-tax incomes, the poorest 10 percent of the population in Pakistan pays a greater share of income in taxes than the richest 10 percent. That poor households in Pakistan can expect a larger total tax burden (relative to pre-tax incomes) than rich households is unique among the set of countries that have undertaken a CEQ Assessment and points to the deleterious social and welfare impact of Pakistan’s current domestic revenue mobilization efforts.

The WB asks for realigning federal recurrent and development spending with constitutional mandates. Despite the 18th amendment, the federal government maintains recurrent spending on areas that have been devolved to the provinces. Overlaps between federal and provincial recurrent spending should be eliminated from the federal budget to improve accountability, reduce duplication and waste, and realize fiscal savings. To another query about SIFC, he said that it was a good move but Pakistan would have to improve the overall investment climate to attract foreign direct investment on a sustained basis. The biggest asset for Pakistan, he said, was its human capital. The stunting of kids has become a major constraint for the future growth prospects of the country.

“This is a critical moment for Pakistan as you are facing one of the worst economic crises of the country’s history” the WB’s Vice President for South Asia Martin Raiser said. The WB is convinced there is a feasible path to get out of this crisis. With elections coming at the Federal and Provincial levels, it is indeed time to decide on the country’s path forward.

“Now it is second to the bottom in per capita incomes and has education and health outcomes comparable to much poorer countries in sub-Saharan Africa” he added. The WB’s Country Director Najy Benhussine said that total disbursement could go up to $2 billion if the government implemented the projects in true letter and spirit during the current fiscal year.