‘New loan package is multi-year, multi-programme initiative to support macroeconomic stability, service delivery’
The World Bank. Photo: file
ISLAMABAD:
After a struggling $470 million loan package aimed at increasing taxes, the World Bank has approved another $700 million loan to bring fairness to the tax system and improve budget transparency giving funds to areas that require improvement in governance structure rather than foreign lending.
The World Bank’s Board of Executive Directors approved $700 million in financing for the Pakistan Public Resources for Inclusive Development, according to an announcement by the World Bank’s office in Pakistan. The new loan package is a multi-year, multi-programme initiative to support macroeconomic stability and service delivery, it added.
Details showed that the World Bank has again provided a $700 million loan, or about Rs200 billion, for purposes that do not require any foreign lending. Of this amount, $600 million has been given to the federal government and will be used to reduce reliance on distortive trade taxes and establish predictable and evidence-based tax policy, according to the loan documents.
These papers showed that the loan will also be used to expand the revenue base through reduced tax expenditures and increased revenues from direct taxes.
The foreign loan will also be used for rationalisation of energy subsidies, increased budget transparency, digitisation of payments and procurement, strengthening overall statistical performance, and improving the flow of data between federal and provincial bureaus of statistics, according to these documents.
It is the second loan that the World Bank has approved for areas where its previous lending has failed to bring any notable improvement. The World Bank had also approved a $470 million loan under the Pakistan Raises Revenue programme, and the lender itself described progress on achieving the development objectives as “moderately satisfactory”.
The federal government has also spent billions of rupees to improve the tax system. However, the tax-to-GDP ratio stood at 10.3% in the last fiscal year, and the chairman of the Federal Board of Revenue (FBR) has informed the prime minister that his machinery may miss the target by over Rs560 billion in the first half of this fiscal year.
World Bank documents stated that the new package will be used to increase the tax-to-GDP ratio, boost spending on basic health and education, increase the number of schools meeting standards for basic infrastructure, teaching resources and teacher qualifications, increase the number of primary healthcare facilities meeting basic infrastructure standards, and improve data to track progress against human development and economic indicators.
The official statement noted that the multi-year package is intended to support ongoing fiscal reforms aligned with the International Monetary Fund (IMF)’s Extended Fund Facility programme and the National Fiscal Pact. Under the programme, the World Bank will provide up to $1.4 billion in total financing. Of this amount, $600 million has been approved for federal programmes and $100 million specifically for the Sindh provincial programme.
Under Phase One of the new package, the proposed operation will support federal fiscal reforms under the National Fiscal Pact.
The government has established a new tax policy unit within the Finance Division, which it said will lay the foundation for a thorough review of tax policy and the development of a medium-term rolling tax policy framework, supporting reductions in tax expenditures, improved policy predictability, a higher number of compliant taxpayers, and increased overall revenues.
However, despite setting up the tax policy unit in the Finance Division, the government has also retained the policy wing of the FBR, indicating that tax policy would still be led by the FBR rather than the finance ministry.
The government has also committed to improving efficiency in public expenditure and aligning spending with policy priorities. It will review pension and subsidy expenditures.
But two days before approval of the new World Bank loan, the finance ministry restored multiple pensions of retired government servants, reversing what it had earlier described as a reform.
“Pakistan’s path to inclusive, sustainable growth requires mobilising more domestic resources and ensuring they are used efficiently and transparently to deliver results for people,” said Bolormaa Amgaabazar, World Bank country director for Pakistan.
She added that through the new lending programme, the World Bank is working with the federal and Sindh governments to deliver tangible impacts, including more predictable funding for schools and clinics, fairer tax systems, and stronger data for decision-making, while safeguarding priority social and climate investments and strengthening public trust.
Strengthening Pakistan’s fiscal foundations is essential to restoring macroeconomic stability, delivering results and strengthening institutions, said Tobias Akhtar Haque, Lead Country Economist for the World Bank in Pakistan.
The World Bank management built a solid case for the board to approve the $700 million package, noting that Pakistan spends less on health and education than regional peers and has rigid public spending dominated by interest payments, transfers and subsidies.
It said Pakistan’s fiscal challenges reflect broader weaknesses in the tax system, where weak revenue performance has driven recurrent fiscal deficits, debt accumulation and periods of macroeconomic instability.
However, the World Bank did not mention its own shortcomings, as it continues to pump millions of dollars into Pakistan’s fiscal management without achieving the desired results.
