The World Bank’s Board of Executive Directors is scheduled to meet next month to consider the approval of the ‘Second Resilient Institutions for Sustainable Economy project’ for Pakistan worth $350 million.
The program’s development objectives are enhancing the policy and institutional framework to improve fiscal management, and improving the regulatory framework to foster growth and competitiveness.
The operation aims to enhance the policy and institutional framework to improve fiscal management by (i) improving fiscal policy coordination (ii) enhancing debt transparency and management; (iii) broadening the tax base and reducing distortions in tax policy (iv) improving the financial viability of the power sector through the resolution of the circular debt; and (v) addressing unsustainable power subsidies.
This operation also supports reforms to improve the regulatory framework to foster growth and competitiveness by (i) harmonizing the General Sales Tax (GST) (ii) improving financial sector transparency and deepening; (iii) increasing the use of digital payments; and (iv) reducing the anti-export bias of the National Tariff Policy.
The proposed RISE-II operation will support institutional and policy reforms contributing to the recovery in economic growth and sustainability. The proposed operation will be supported by an International Development Association (IDA) credit of $200 million and an IDA Shorter Maturity Loan of $150 million. Reforms supported by the operation are organized under two pillars (i) enhancing the policy and institutional framework to improve fiscal management and (ii) improving the regulatory framework to foster growth and competitiveness.
The operation will help Pakistan meet large external financing needs in the wake of a series of external and domestic shocks, with supported reforms contributing towards a broader required adjustment. Supported reforms are aligned with WB’s strategic priorities in Pakistan and the government’s reform program.
The RISE Development Policy Operations (DPOs) was envisaged as a series of three operations; this second operation comes with a 24-month delay following the completion of Prior Actions (PAs) and the establishment of a sustainable macroeconomic framework.
The first RISE DPO, RISE-I, was approved by the WB Board in June 2020 and supported an ambitious government reform program amid the global COVID-19 crisis. Pakistan achieved significant progress against reforms, while macroeconomic policy settings supported a rapid recovery from the COVID-19 crisis through to mid-2021.
Delays in reigning in accommodative fiscal and monetary policies from mid-2021 led to the erosion of buffers, while the pace of program implementation slowed considerably. The government sought WB support under a revived RISE program and completed critical outstanding PAs, including the flagship GST harmonization reform.
A new IMF-SBA was approved by the IMF Board on July 12, 2023, and the government undertook important stabilization measures, including maintaining the alignment between the interbank and open market exchange rates, a tighter monetary stance, and implementing the FY24 budget targeting a primary fiscal surplus. The government reached a Staff Level Agreement with the IMF on the first review of the SBA on November 15, 2023.
Most policy and institutional reforms supported by this operation are expected to have neutral poverty and social effects. PAs on fiscal policy coordination (PA1), debt management (PA2), property valuation (PA3), the power sector circular debt and electricity subsidies (PA4 and PA5), financial sector transparency and digital payments (PA7 and PA8) are not expected to have any significant poverty and social effects. Harmonization of the GST (PA6) is expected to improve poverty reduction. GST harmonization is expected to reduce the cost of GST compliance, increase the efficiency of GST administration, close many of the existing GST loopholes, and eliminate double GST taxation.
In the medium term, these improvements to the business environment could foster economic growth, increase labor demand and further poverty reduction, and increase GST collections with which to finance critical pro-poor public services.
The reduction in the level of import duties (PA9) is likely to reduce poverty because it potentially lowers consumer prices and increases the real purchasing power of households. Lower customs duties will reduce prices paid by households in the short term and are likely to support export-led growth in the medium term, thereby contributing to economic growth, job creation, and poverty reduction.
A reduction of duties is not only expected to lower the prices of imported goods but also that of domestically produced goods, due to increased competition and lower input prices. Consequently, poverty and inequality are expected to decrease. Policy and institutional reforms under this operation are not expected to have any significant negative effects on women and children; PA8 on digital payments is expected to have positive effects on women lacking access to financial services.
Reforms under PA8 support the regulatory framework and infrastructure for digital payments, which in the medium term facilitates the launch of a modern, cost-effective, interoperable, and secure instant payment system.
These digital payment systems are expected to promote access to finance for women by increasing the number of branchless banking accounts for women, who are currently less mobile in the public sphere and who only have limited access to financial services through traditional brick-and-mortar retail banks.
The reform is expected to improve access to digital payments for the 9 million women receiving transfers under the Benazir Income Support Programme, while enabling opportunities to reach a significantly larger number of women with digital financial services, including accounts, savings, and credit products.
The overall risk rating for the proposed operation is High. Despite high risks, the operation will contribute to stabilization efforts, together with other partners, and support reforms to help achieve the required fiscal adjustment in the medium term. Nonetheless, there are exceptional downside risks. Political and governance risks are high due to continued political uncertainty that could lead to reduced ownership to sustain reform efforts.
These risks are mitigated to some extent by the strong commitment of the caretaker government to the IMF-SBA, as reflected in the Staff Level Agreement reached on November 15, 2023, for its first review. Also, elections are now officially set for February 8, 2024, reducing political uncertainty.
Macroeconomic risks are also high with reserve cover at the end of SBA projected to be below 1.5 months of imports. Additional external support will thus be needed following the completion of the SBA.
The project documents revealed poverty reduction has slowed in recent years amid shocks, critica