WB says private investment only way to growth

Ranking countries on ease of doing business would take account of the prevailing economic situation from next year. This was stated by the World Bank Country Director for Pakistan Illango Patchamuthu, after he was asked by this newspaper as to how the WB could reconcile Pakistan's considerable improvements in ranking on ease of doing business while business productivity had declined significantly.

Pakistan jumped 28 places to a global ranking of 108 in 2019 on ease of doing business index against 136 in 2018 while large scale manufacturing declined by 3.37 percent productivity in 2018-19 and continues to decline to date.

Patchamuthu further stated that ease of doing businesses is composed of components that capture incremental improvements annually and it is based on de-regulation carried out by the government and private sector perceptions. Ease of doing business indicators are more reflective and representative of Small and Medium Enterprise (SMEs) sector "and we have to wait for next year's ranking to take account of the economic slowdown.

The slowdown is not necessarily because of any regulatory aspect but due to stabilization designed to consolidate other components of the economy. Overall the economy is performing at a very low level," the WB official added.

Patchamuthu along with other World Bank staff was talking to a select group of media persons.

He added that Pakistan is facing the challenge of lack of political consensus on the economic reforms agenda.

World Bank staff stated that the framework for harmonization of general sales tax (GST) among federation and provinces is being prepared and would be placed before the Council of Common Interest (CCI) to make the system easy for the private business to comply with.

Talking about the $400 million Pakistan Raises Revenue (PRR) project, WB officials said that it is critical to implement harmonization of GST among the federating units and the federation. "Conversation is currently taking place and eventually the framework would be placed before the CCI. Currently, constitutionally sales tax on services is with provinces and federal government deals with sales tax on goods," World Bank officials stated.

The WB is proposing a single law which decides about the single principle of taxation, supply rules and rate. So the wholesale tax base on services and goods should be harmonized in principle and practically which would facilitate compliance of private businesses. "At present private businesses are filing 60 sales tax returns working across the country," said a WB official.

He added that harmonization of tax system would benefit the country, by reducing informality in the tax system and getting more people into the tax system while double taxation would be avoided.

The WB official said that in terms of paying taxes as a component of ease of doing business Pakistan was one of the worst performers. "On the compliance side one will have 12 sales tax returns filing rather than 60 after the implementation of PKR and which could further be reduced.. There is a huge compliance gap of around 80 percent on goods and services sales taxes. Around 13 percent is collected and 87 percent remains as potential. The government can double its tax collection by simplifying the laws and improving compliance," the official added.

The Bank has proposed the formation of a national tax committee or council for tax matters with an organized mechanism where provinces and the federation should sit together and hammer out their differences. The World Bank official added that "we are proposing to convert FBR into a function based and technology savvy organization from a territorial organization; taxpayers and tax collectors interaction should be minimized."

One proposal of the PRR is GST harmonization. Currently, Pakistan has 5 markets (four provinces plus the federal government) where 13 tax authorities are operating with no data sharing with each other, said WB officials, adding that they are cognizant of the constitutional challenges and have met all the stakeholders but insisted that the country needs to be allowed a single market and not five different markets with different rules. PRR is about tax administration reforms and the idea is to reform FBR into a modern organization which is mostly reliant on IT. At this time 70 percent of direct taxes are collected through WHT mechanism, but no third party audit can look into it, said the WB officials.

Patchamuthu said that the government collects revenue which is used for capital and current expenditures and for development. The country spends around 3 percent of the GDP on health and education sector while comparable countries spend closer to 7 percent. To bridge this gap the government needs to spend on human capital development and either the government opts not to provide these services and let the people suffer or go for concessional borrowing from international financial institutions.

The WB Country Director further said that the tax to GDP ratio must be at least 15 percent, considered the base level for a government to be able to run its affairs in a sustainable manner. Unfortunately, Pakistan's tax number is hovering around 11-13 percent and the government is envisaging taking it to 17 percent as a medium term goals. This requires focus on revenue reforms in the country.

The only way to increase growth in Pakistan is to increase private investment and increase revenue collection so the government is able to spend on social sectors, the World bank Country Director emphasized. However, this is a fundamental challenge and requires structural interventions. The economic structure is not sustainable and it cannot grow at a fast pace, the WB official added.

WB and ADB financing terms are very attractive and very concessional compared to Pakistan borrowing from open market. International Development Association (IDA) is providing loans at around 1 percent with longer maturity period, the official further contended.

IDA goes on a three-year cycle and starting July next year Pakistan will get around $4 billion and one billion dollars from International Bank for Reconstruction and Development (IBRD), so the WB would disburse around $2 billion per annum, Patchamuthu added.

Replying to a question, Illango said that WB financing for power sector is in three categories, "first, we finance cheaper power generation capacity, i.e. Tarbela 4 and 5 Dasu 1 and 2, solar and wind power projects. Second we finance transmission and distribution and third budget support operation."

"We are looking at some prior actions related to energy sector and one is reducing the cost of energy supply to renewable energy policy and competitive auction and bidding so Pakistan can benefit from the open market," said the Country Director, adding that the Bank supports the circular debt strategy that the government has agreed with the IMF and has been approved by the ECC.

He said that under the plan the government is committed to reducing the circular debt flow as well as addressing the stock. The circular debt comes from inefficient operation of DISCOs and tariff increases that were stayed by the previous administration, so there was a wide gap in what is collected and what was paid out. There is atomicity in IMF programme for quarterly adjustment of tariffs to get to a level where cost recovery is achieved. And Pakistan is dependent on imported expensive fuel coupled with the old legacy of IPPs which were contracted at a very high rate. WB is looking at addressing all these three issues, Patchamuthu said.

Replying to another question, he said that up to 300 units are being consumed by 75 percent of consumers. This requires better targeting, he said adding that, subsidy for 'up to 200 units we can see but from 200 to 300 units per month we simply do not see and feel that this requires more work. Targeting does not happen very easily."

The WB official said that the stabilization programme is designed to slow down the economy to reduce imports and reduce the twin deficits and it is doing just that. "We can question the quality of adjustment on the fiscal side. It is fine at this stage but Pakistan has had a stabilization programme every five years in the past and doing a good job on stabilization would always reduce the deficit by compressing economic activity but then Pakistan is very bad in undertaking structural reforms which leads to a balance of payment crisis every two to three years," the World Bank officials contended.

Patchamuthu further said that PSDP effectiveness rests with policies and regulatory environment and even in the public sector if the government takes a long time to get a project approved then no breakthrough is happening. And for any private investment to come, investment climate and ease of doing business needs to be improved continually, and the right reforms must be in place.

He further said that "disbursement for projects has been slower than projected due to procedural bottlenecks and not filling essential staff positions or filling positions not with the right people. At any given time around $3 billion of World Bank portfolio or 1/3 of the portfolio is always stuck. Last year the World Bank disbursed $600 million and this year we are hoping to disburse $600 to $800 million but concerted efforts are needed to improve implementation of development projects otherwise project outcome would suffer."

The Country Director added that monitoring of PC-1 and 2 and manual procurement system is also critical to smooth project implementation.