Conditions for $350m loan: WB assured GST on goods, services will be harmonised, property valuation rates jacked up

ISLAMABAD: Pakistan has accepted demands of the World Bank (WB) for harmonizing general sales tax (GST) on goods and services and jacking up valuation rates of properties to obtain approval of a $350 million programme loan.

To keep property assessment ratios at no less than 85 percent of market value, the Provincial Boards of Revenue have adopted the Federal Board of Revenue (FBR) valuation tables as their district collectorate valuation tables in at least 21 districts of the country.

The government also agreed with the WB to convert all bearer prize bonds of Rs15,000 denomination and above into registered instruments.

Top official sources confirmed to The News on Wednesday that the Asian Infrastructure Investment Bank (AIIB) was going to approve co-financing of $250 million so Pakistan will secure $600 million from both the WB and AIIB. On poverty figures, the WB has assessed that poverty reduction has slowed down in recent years amid shocks, critical structural constraints, and periodic macroeconomic crises. The lower-middle income poverty rate in 2023 is estimated at 39.4 percent ($3.65/day 2017 PPP), only slightly below the poverty rate of 40 percent in 2018. There are almost 3 million more Pakistanis living below the poverty line than in 2018. Little progress has been achieved in closing gaps in poverty between urban and rural areas, while women and girls continue to face widespread exclusion from access to services and opportunities.

To help reduce the stock of power sector circular debt in FY23, (a) the Finance Division has: (i) transferred Rs335 billion to contain the circular debt flow increase; (ii) absorbed PKR35 billion of Power Holding Private Limited debt into the public debt stock in FY23; and (b) the FBR has agreed to refund the Central Power Purchasing Agency Guarantee approximately PKR6 billion for overcharged GST.

According to the WB, risks to the operation are very high. 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. The priorities and commitment to structural reforms of the future government are also unknown. Macro-economic risks are also high with reserve cover at end of SBA projected to be below 1.5 months of imports.

Additional external support will thus be needed following completion of the SBA. Additional macro-economic risks result from weak public finances, the heavy exposure of the banking sector to government borrowing, and curtailed growth due to shortages of critical imports. Technical design risks are substantial due to the complexity of the reform programme. 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. Stakeholder risks are high due to strong and organized vested interests potentially advocating to reverse critical reforms, particularly trade tariff reforms, increases to property taxation and energy sector reforms.

Over the medium term, broader and deeper reforms will be required to support necessary fiscal consolidation, improve confidence, and increase investment. Required reforms include: (i) reduction of protectionist trade policies; (ii) elimination of distortive agricultural subsidies; (iii) rationalization of federal government expenditures over subject areas that are devolved to the provinces; (iv) expanding the tax base by increased taxation of assets, property, and sectors traditionally out of the tax net, particularly agriculture, small retail, and real estate; (v) tax exemptions should also be further reduced; and (vi) the treasury single account should be implemented to reduce government borrowing needs; (vii) measures to reduce state-owned enterprise losses, particularly via privatization and/or concession to private sector; (viii) accelerating energy reforms—both electricity and gas, particularly to reduce costs and losses stemming from distribution and transmission; and (ix) measures to cut red tape and ease the business environment.

Without such reforms, private external flows will be limited and import restrictions 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. Gross financing needs will remain elevated, leading to the continued accumulation of domestic debt and associated risks to fiscal and debt sustainability.

While progress against this reform agenda cannot be guaranteed in the current political context, ongoing WB engagements will support continued reform in key areas, including: (i) GST and property taxation reform under provincial and federal revenue and public finance investment projects; (ii) energy reforms, under investment project support for improved efficiency of distribution companies (DISCOs) and ongoing analytical support for electricity and gas tariff reforms; and (iii) trade and business environment reforms through technical assistance to the Ministry of Commerce, the Board of Investment and other institutions.

Ongoing reforms to fiscal and debt management will be supported by the FY24 Performance and Policy Actions (PPAs), and ongoing technical assistance and project engagements at the federal and provincial government levels. Overall, at least seven ongoing IPF or Programmes for results projects support the further implementation of RISE-II reform areas.

The WB’s Board of Executive Directors approved on Tuesday $350 million in financing for the ‘Second Resilient Institutions for Sustainable Economy (RISE-II)’ Operation, which aims to strengthen fiscal management and promote competitiveness for sustained and inclusive economic growth. “Pakistan needs urgent fiscal and structural reforms to restore macro-economic balance and lay the foundations for sustainable growth,” says Najy Benhassine, World Bank Country Director for Pakistan. “RISE-II completes a first phase of tax, energy and business climate reforms geared to raising additional revenues, improve the targeting of expenditures and stimulate competition and investment.”

The operation contributes to better fiscal management by improving fiscal policy coordination, enhancing debt transparency and management, strengthening the taxation of property, and improving the financial viability of the power sector. The operation also aims to foster growth and competitiveness by reducing the cost of tax compliance, improving financial sector transparency, encouraging the use of digital payments, and promoting exports by lowering import tariffs. “Based on the foundations laid through RISE-II and parallel support by other IFIs, Pakistan has the opportunity to tackle long-standing structural distortions in its economy after the upcoming general elections. Failing to use this opportunity would risk plunging the country back into stop and go economic cycles,” says Derek H. C. Chen, Task Team Leader of the operation.