ISLAMABAD: Pakistan’s current economic development model is no longer reducing poverty and provides few benefits to most citizens, as poverty increased from 34.2 percent in the fiscal year 2022 to 39.4 percent in the fiscal year –pushing 12.5 million people below the poverty line.
This was stated by the World Bank officials while briefing the media at the launch of a new programme to foster debate on the critical development policy issues facing Pakistan. “Reforms for a Brighter Future: Time to Decide” —intended to engage in discussions with a broad range of stakeholders on what fundamental policy shifts are most needed to durably steer the economy towards stronger, more climate-resilient, and sustainable growth and development.
Living standards have fallen behind peers as the country faces a human development crisis, while climate change represents a major new threat.
Najy Benhassine, country director for the World Bank in Pakistan recommended a 10-year economic plan proposing several measures including increasing taxes on agriculture and real sectors, changing in tax system from regressive to direct and progressive as well as slashing tax exemptions for certain sectors making it more targeted for poor to turn around the country.
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The bank report noted that large and growing fiscal deficits driving debt to unsustainable levels. High government consumption driving inflation and current account deficits. Spending dominated by interest payments, transfers, subsidies, and salary costs – overall regressive while contributing little to growth. Persistently low revenues, driven by a narrow base and large tax expenditures.
The bank recommended prioritising investments that support growth and development financed by a broad-based, efficient, and equitable tax system.
Reducing subsidy spending, realigning federal spending with constitutional mandates, divesting or reforming SOEs, reducing tax expenditures, introducing new excises on harmful products, introducing new taxes on property and agriculture as the country can generate 3.4 percent of GDP in savings from expenditure measures, two percent of GDP in revenues from closing tax expenditures, new excises, and reforms to income tax, three percent of GDP in revenues from new taxes on land and agriculture.
The bank further stated that Pakistan has a heavily regulated, protected, stagnant, and unproductive economy with a large state presence with an overvalued exchange rate, protectionist trade policies, a difficult business regulatory environment, large state presence in the economy, limited access to finance/crowding out and low female labour force participation.
A dynamic open economy driven by private investment and exports with maintaining a flexible, market-based exchange rate, reducing fiscal deficits to increase the availability of credit to the private sector, pursuing business regulatory simplification through coordinated federal and provincial processes, reducing the presence of the state in the economy; eliminating the anti-export bias of trade policy through major tariff reform, Pakistan has $88 billion export potential, $2.8 billion FDI potential, and 7-8 percent GDP growth by raising investment to 25 percent of GDP.
Policies intended to stimulate staple production and stabilize prices, have proven extremely costly, locked smallholder farmers into low-value farming system; encouraged resource-intensive and environmentally damaging production; and weakened innovation.
Around $4.9 billion in savings just from reducing subsidy support to agriculture in Sindh and Punjab. Further, the country can achieve 13 percent reduction in energy costs from renewable generation, $2 billion in savings from energy efficiency and $13 billion in avoided imports.
Pakistan’s tax-to-GDP ratio has been declining, with revenues well short of what the economy can generate. Pakistan’s tax capacity (the overall capacity of the country to generate revenues) has remained largely unchanged at a little over 22 per cent of GDP over the past decade.
The bank estimated up to two percent from taxes on land and property and up to one percent of GDP from taxes on agriculture.
The tax collected in FY22 was only 10.4 percent of GDP. This decline in tax-to-GDP is associated with rising tax expenditures, which at the federal level, rose from 1.3 percent of GDP in FY16 to 2.7 percent of GDP in FY22.
The bank recommends tax reforms which include; close corporate tax exemptions. Revenues equivalent to around 0.1 percent of GDP could be generated by closing regressive corporate tax exemptions that impose large fiscal costs while bringing few economic benefits.
Specifically, this could include exemptions for power generation projects, which amounted to Rs37 billion in FY21 and exemptions for real estate investments, which amounted to Rs26 billion.
Close personal income tax loopholes and adjust tax brackets. Closing avoidance loopholes— through harmonizing the tax schedule between salaried and non-salaried individuals and by reducing the number of tax brackets—could raise 0.1 percent of GDP in additional revenue.
The tax-free allowance could be lowered to include more salaried individuals in the tax net, and the threshold for the top marginal tax bracket could be lowerer.
Increase excise duties on socially harmful goods. Excise duties on cigarettes could be applied with a uniform rate for all brands and an automatic inflation adjustment. This, in combination with strengthened enforcement to close the collection gap through the effective roll-out of a digitized stamp system, could raise up to 0.4 percent of GDP in additional revenue.
Additional excises could be considered in future on other goods that are associated with environmental damage or negative health outcomes. Reduce tax expenditures in the energy sector and for COVID-19 response.
Tax exemptions and concessions resulted in tax expenditures of 2.7 percent of GDP in FY21. The government should wind back exemptions and other concessionary rates in the petroleum sector (Rs280 billion); close exemptions on machinery imports to power generation and transmission (Rs100 billion); and close costly exemptions introduced during the Covid-19 pandemic in the pharmaceuticals and energy sectors and for specific food items (PKR 40 billion on imports and Rs100 billion on local supplies).
Close exemptions for basic household items. Removing exemptions for food items including oil, pulses, animal, fruit, and dairy, could save Rs100 billion in revenues. Current concessionary rates on fertiliser impose fiscal costs of Rs90 billion.
The bank proposed fundamental policy shifts that are needed to move away from the current low-growth, anti-development status quo: (i) from underfunded, inefficient, and fragmented service delivery and social protection systems towards coordinated, efficient, and adequately financed service delivery, targeting the most vulnerable—in particular to reduce abnormally high child stunting rates and to increase learning outcomes for all children, especially for girls, (ii) from wasteful and rigid public expenditures benefiting a few, towards tightly prioritized spending on public services, infrastructure, and investments in climate adaptation, benefiting populations most in need, (iii) from a narrow, distortive, and inequitable tax system towards one that is broad-based, efficient, progressive, and equitable—generating sufficient revenues to significantly increase public investment in human development, infrastructure, and climate adaptation, (iv) from a protected, stagnant, and unproductive economy with a large state presence towards a dynamic open economy driven by private investment and exports, (v) from agriculture sector policies that lock farmers into a low-value, low-productivity farming towards a more market-driven, productive agricultural system, including value chains that are resilient to climate change impacts and water scarcity, (vi) from energy sector policies that drive high energy costs, environmental harms, and unsustainable accumulation of debt, towards efficient, sustainable, and resilient generation and distribution, based on accurate price signals, increased competition and private participation, and a cleaner energy mix, (vii) from a public sector that is inefficient, often ineffective, and vulnerable to capture by vested interests towards accountable, efficient, and transparent government, including at the local level.
“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,” said Benhassine.
“Yes, I’m hopeful that there is a realization that the policy course needs the change”, he said, adding that what in common is the realization that across the political spectrum, across not only the political elites but also the business elites, the civil society and all those that count to steer the country in the right direction.
Copyright Business Recorder, 2023
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