Pakistan has been compelled to downgrade its earlier 4.5 percent growth estimates to 3.5 percent to 3.6 percent. According to the World Bank's recent report, titled 'Country Partnership Strategy FY2010-2013', in the presence of IMF program, Pakistan may have attained GDP growth rate of 4.5 percent in the current fiscal year (2011-12), which has been revised downward to 3.5-3.6 percent, by IMF and the Ministry of Finance.
The report adds that if Pakistan is to have the resources to invest in human development and infrastructure, and if it is to build resilience to future shocks and guard against costly and disruptive growth reversals, then raising the ratio of tax-to-GDP (currently only 10.2 percent of GDP) is absolutely essential. Also, reforming the power sector and ensuring sustainable expansion of supplies is absolutely essential if industrial and service activity is to be increased and productivity raised. The report says that Pakistan's medium-term outlook hinges on a significant increase in tax revenues: by 2-3 percentage points of GDP by 2012/13.
'Country Partnership Strategy FY 2010-2013', states that the security situation in Pakistan is precarious, having deteriorated over the past four years, and imposes a large cost to society. The Government and donors recognise that the crisis has deep historical roots as well as links to the ongoing conflict in Afghanistan. The Federally Administered Tribal Areas, that is a focus of ongoing military operations, has long been administered under a colonial-era legal and governance framework based on tribal structures that leave it outside of the regular constitutional framework. A patronage tradition has grown and fuelled grievances that have been exploited by insurgent forces. Inadequate justice and rule of law, critical components of the provision of public goods, are seen as integral dimensions of the crisis in FATA and KP. The ascendancy of militancy in Swat, for example, was directly linked to perceived degradation in the responsiveness of the justice system.
The report points out that the external debt-to-exports ratio rose to 220 percent in 2008/09, and is projected to peak at 273 percent in 2011/12 and start thereafter gradually declining. However, debt sustainability analysis suggests that external debt service remains manageable, although there are potential risks to this assessment from sources such as lower than projected growth and foreign direct investment (FDI), and higher than projected current account deficit, interest rates and exchange rate depreciation.
The report says that a range of survey evidence confirms Pakistan's governance challenges. The world-wide 'Governance Indicators' suggest that Pakistan is at, or below, the 25th percentile on key dimensions of 15 governance indicators, and significantly below the South Asia averages, with the exception of regulatory quality. A recent Investment Climate Survey indicated that governance constraints are critical to the overall business environment. Despite improvements in the business-governance interface, firms' perception of corruption and crime have worsened; between 2002 and 2007, the percent of firms citing corruption as a major constraint to doing business rose from 40 to 57 percent. Overall, almost half of all Pakistani firms reported at least one incident of bribery.
The report says that the priority lending program in Pakistan amounts to an estimated $3.7 billion (IBRD/IDA) through FY12, equivalent to about 60 percent of a total potential lending envelope of up to $6.0 billion during the 4-year CPS period (FY10-13). International Finance Corporation (IFC) intends to invest between $1.3 and $1.5 billion, provided that the economic and security situations do not deteriorate significantly, and will continue with its robust program of Advisory activities. The Bank on behalf of development partners will administer complementary grant financing of at least $100 million for the MDTF for the Northwest Border Region. This amount may increase, depending on developments in the region and results achieved.
After a delay of over two years, the federal and provincial governments agreed on a new (seventh) National Finance Commission (NFC) Award on December 30, 2009, which provided for significant changes in inter-governmental revenue sharing from July 1, 2010 onwards. The new award raised the share of provinces in the divisible pool of federally collected taxes from 46.25 percent to 56 percent. However, the new revenue sharing arrangement will be sustainable only if substantially increased revenue is mobilised and/or if it is accompanied by a transfer of expenditure responsibility from the federal to provincial governments.
While the economy is stabilising, continued improvement in the macroeconomic situation will remain a challenge. Global trade is projected to remain depressed, and unemployment high, for years in a large part of the world. The report says that Pakistan's tax collection has failed to improve since the late 1990s, and is among the lowest in the world.
The tax-to-GDP ratio recovered to 10.9 percent in 2006/07, but, due to the economic crisis, dropped to 10.2 percent in 2008/09. Problems in tax collection are related to administrative limitations and weaknesses in tax policy that have been unduly responsive to the needs of vested interests. Tax evasion is rampant, and there is a vast network of special treatments and exemptions backed up by powerful vested interests.
Availability of electricity is currently considered to be the main constraint to economic activity. The sector faces a large gap between supply and demand, leading to widespread load shedding and forcing many firms to invest in captive supply. One in every six firms identifies power as a major, or severe, obstacle to business, while only 65 percent of households have access to electricity.
Enhancing domestic revenue mobilisation will be an urgent priority during the CPS period. To address chronic under-funding of key services and avoid episodic crises, tax revenue needs to be substantially increased. Otherwise, targeted improvements in social indicators and physical infrastructure will remain unaffordable.
The report says that the access to finance is a major constraint, impeding private sector development in Pakistan. Recent data indicate that Pakistan's microfinance penetration is among the lowest in Asia at 1 percent, while 93 percent of SMEs lack access to finance.
Despite increasing allocations for the health sector under PRSP-I, Pakistan's health financing strategy remains inconsistent. Pakistan still spends only 0.6 percent of its GDP on health sector besides spending on areas that do not facilitate progress towards MDGs. In health, the government is committed to doubling health expenditures from 0.5 percent of GDP in 2003 to 1 percent of GDP by 2013 as envisaged in the Fiscal Responsibility and Debt Limitation Act (FRDLA), 2005, which provides an indication of the minimum level of public funds to be allocated to the health sector.
The economic recovery now underway, has opened up the prospect for resumption of International Bank for Reconstruction and Development (IBRD) (WB) lending to Pakistan and the CPS envisages IBRD lending of up to $2.0 billion over the CPS period. The priority lending program targets IBRD lending of $1.075 billion over FY 10-12. Lending amounts for FY11-FY13 are indicative and dependent on IBRD's overall lending capacity. Priorities for IBRD lending are power, water, ports. IBRD guarantees would also be used to support private investment in the energy sector.
The report says that Pakistan's extensive irrigation system, one of the largest in the world, is under stress as a result of growing demand, deteriorating infrastructure and poor governance. The World Bank strategy reflected a conclusion that weak performance of the Pakistan irrigation and drainage sector reflects major underlying institutional weaknesses.