World Bank has criticized Pakistan’s economic development model as it’s facing a severe crisis and has failed to uplift its citizens out of poverty. According to World Bank officials, poverty in the country has surged from 34.2 percent in the fiscal year 2022 to a staggering 39.4 percent or 95 million in the fiscal year, pushing approximately 12.5 million people below the poverty line.
In a press briefing at the launch of a new program aimed at fostering discussions on critical development policy issues in Pakistan, the World Bank introduced “Reforms for a Brighter Future: Time to Decide.” This initiative seeks to engage a wide range of stakeholders in discussions about essential policy shifts needed to guide the economy toward stronger, more climate-resilient, and sustainable growth and development.
“Pakistan has been facing numerous economic hardships including inflation, rising electricity prices, severe climate shocks, and insufficient public resources to finance development and climate adaptation—when the country is among the most vulnerable to climate change impacts. It is also facing a ‘silent’ human capital crisis: abnormally high child stunting rates, low learning outcomes, and high child mortality,” stated World Bank Country Director Najy Benhassine.
Pakistan’s living standards have lagged behind its peers, resulting in a human development crisis, while the looming threat of climate change adds further complexity to the situation.
The World Bank’s report highlighted several concerning trends, including large and growing fiscal deficits, unsustainable debt levels, high government consumption driving inflation, and persistently low revenues due to a narrow tax base and significant tax expenditures.
World Bank has recommended a comprehensive 10-year economic plan. This plan includes measures such as increasing taxes on agriculture and the real sector, transitioning from a regressive to a direct and progressive tax system, reducing tax exemptions for specific sectors, and making the tax structure more targeted to assist the poor and improve the country’s overall economic outlook.
Pakistan can realize significant economic benefits, including 3.4 percent GDP savings through expenditure measures and 2 percent GDP in revenue by cutting tax expenditures and reforming income tax. Moreover, introducing new taxes on land and agriculture could generate an extra 3 percent of GDP in revenue. Addressing trade policy biases could unlock an $88 billion export potential, attract $2.8 billion in FDI, and drive 7-8 percent GDP growth by raising investment to 25 percent of GDP.
Taxation and Revenue
Pakistan’s tax-to-GDP ratio is declining, falling far below its revenue potential, which remains around 22 percent of GDP over the last decade. The World Bank estimates that taxing land, property, and agriculture could generate up to 3% of GDP. However, in the fiscal year 2022, tax collections were only 10.4 percent of GDP, primarily due to rising tax expenditures, increasing from 1.3 percent of GDP in FY16 to 2.7 percent in FY22 at the federal level. World Bank Report has called for
- Increase taxes on agriculture and real sectors.
- Shift from a regressive to a direct and progressive tax system.
- Reduce tax exemptions for specific sectors.
- Implement a broad-based, efficient, progressive, and equitable tax system.
- Enhance transparency and efficiency in government.
- Tax income from agriculture and property.
- Shift away from reliance on the General Sales Tax (GST) to more progressive direct taxes.
- Prioritize investments supporting growth and development.
- Reform or divest state-owned enterprises (SOEs).
- Introduce new taxes on property and agriculture.
- Transition to a dynamic open economy driven by private investment and exports.
- Simplify business regulations and reduce state presence.
- Promote renewable energy and energy efficiency.
- Close corporate tax exemptions.
- Adjust personal income tax brackets.
- Increase excise duties on harmful goods.
- Reduce tax expenditures in various sectors.
- Improve service delivery and social protection systems.
- Prioritize public spending on essential services and infrastructure.
World Bank’s report also underscored the urgency of reforming Pakistan’s economic model to address poverty, spur growth, and enhance resilience to climate change and other challenges.
Despite all the challenges, Benhassine seems hopeful.
“Yes, I’m hopeful that there is a realization that the policy course needs the change”, he added saying that what in common is the realization not only in the political elites but also the business elites, the civil society and all those that count to steer the country in the right direction.
The proposed policy shifts offer a path toward a brighter economic future for the nation. According to the Bank’s estimates, closing the gap in human development indicators with similar-income countries could potentially boost Pakistan’s GDP by a remarkable 32 percent.