World Bank exposes vested interests

ISLAMABAD: The World Bank Vice President for South Asia, Martin Raiser, said that people riding on corruption, landlords, and industrialists were resisting reforms in Pakistan, urging Islamabad to immediately decide its future course to come out of “one of the worst economic crises.”

Raiser also cautioned that the debt restructuring option should be used only in an “extremely careful” manner, as it was not the “silver bullet” that would solve all the debt-related problems of Pakistan. The regional World Bank president said that the Special Investment Facilitation Council (SIFC) cannot be a substitute for the underlying problems hindering foreign investment.

In what he called might be sounding an “undiplomatic” speech, Raiser tried to shake the deep-rooted vested interests in Pakistan who were pulling the country down and have brought it to a point where 40% of its population lives in poverty but the elites are thriving. “Is this Pakistan’s moment? Will this time be different? I don’t know. All I can say is that “muddling through this crisis and maintaining the economic status quo is a risky proposition,” he cautioned. He formally launched the WB-supported policy notes seeking a change of course to come out of the economic crisis.

Large landowners who capture the bulk of subsidies, benefit from price distortions and pay little taxes on agricultural income; well-connected industrialists who thrive in the complex thicket of regulations, protections, and exemptions; real estate investors who enjoy low taxation; and many others who ride on corruption and lack of accountability are hampering reforms in Pakistan, said Raiser.

The regional president warned that “a failure to achieve growth would aggravate distributional conflicts and lead the brightest to leave the country.” He said that elite capture and political opportunism were the major impediments to reform but the growing young population in the cities was also asking for real change.

To a question about the broader ownership of these reforms, Raiser said that “If the reforms are not happening, it would also have implications for the WB programmes in Pakistan.”

The World Bank is expected to disburse around $2 billion in loans to Pakistan, which is critical for staying afloat.

Raiser advised that Pakistan address its acute human capital crisis. This “silent” crisis, which rarely makes the headlines, affects a large proportion of the population and undermines the potential of Pakistan tomorrow.

Forty percent of children under the age of five suffer from stunted growth, and this is a shocking statistic, he added; close to 28 million Pakistani children remain out of school—the majority of whom are girls.

Public spending on education and health may need to be doubled to around 5% of GDP to close the existing gaps. That would be around the same level India spends, he said.

The World Bank VP said that Pakistan’s chronic fiscal deficits have led to high debt, and interest payments that leave few resources for public investment. Next fiscal year, over 70% of revenue will be used to service Pakistan’s existing debt.

“Debt restructuring is not a silver bullet and it works only when it is supported with structural reforms and can lead to a significant reduction in nominal debt levels,” said the regional president. He further cautioned that debt restructuring can also bust banks and lead to both financial and debt issues. Debt restructuring is an option but it should be exercised in an “extremely careful” manner.

Raiser also said that the SIFC was not the solution to all the problems that were hampering foreign investment in Pakistan. “One of the objectives of the SIFC is to bring foreign investment, which is welcoming, but creating a new institution to sign new deals is not the substitute for underlying problems hindering foreign investment,” said the regional president.

He further said that without fixing issues hampering foreign investment, the SIFC can sign one or two deals but the focus has to be on improving the business environment.

He suggested comprehensive fiscal reforms on both the spending and revenue side. The WB has proposed reducing losses of ailing public enterprises, especially via privatisation, cutting regressive and distortionary subsidies in agricultural subsidies and energy, and poorly targeted export support schemes and reducing the current duplication between the federal and provincial governments.

On the revenue side, efforts should focus on expanding the tax base, rather than further raising rates, said Raiser.

He said that regressive tax exemptions cost Pakistan up to a third of its total revenue every year. The GST system needs to be harmonised across all provinces to bring more firms into the tax net, including in the under-taxed retail sector.

Increased taxation of land and property– where the rich invest their wealth – could bring additional revenues and incentivise more productive investments, said Raiser.

He said that Pakistan must strive for a more dynamic and open economy, as its economy is hampered by distortions and the lack of competition. Exports are undermined by the frequent overvaluation of the exchange rate and high trade barriers.

The VP said that the lender has circulated a $350 million budget support loan for the board’s approval by end of December after Islamabad met the prior actions and achieved some fiscal sustainability under the IMF programme. Raiser said that the IMF board may also meet in the next few weeks to approve the first review but no date was given for the meeting.

World Bank, Country Director, Najy Benhassine, said that the lender was in active contact with all the political parties and held consultations on the policy note with the MQM, the PPP, the PML-N, and the PTI. Benhassine said that all the political parties have shown commitment to the reforms agenda.

Source: The Express Tribune, November 29^th, 2023.