After a gap of almost four years, the World Bank has decided to restore Pakistan’s budgetary support and may approve a $500mn loan to bring improvement in fiscal management and harmonise sales tax across the country.
The bank’s board of directors may approve a development policy credit – the Resilient Institutions for Sustainable Economy (RISE) programme – by March next year, according to the Ministry of Finance and the World Bank documents.
It will be the first budgetary support loan that the Washington-based lender will approve in four years. Last time it had approved a loan in February 2016.
The Asian Development Bank and the World Bank had suspended Pakistan’s budgetary support in 2017 after its macroeconomic conditions started to deteriorate.
The ADB has already restored Pakistan’s budgetary support over two months ago. The bank had differences on the exchange rate regime and then linked the budgetary support with the devaluation of the currency.
Another requirement for qualifying the World Bank budgetary support loan is that the country must have foreign exchange reserves to cover at least two-and-a-half months of import bill.
Pakistan still does not meet the criterion but since it has already signed the IMF programme, the World Bank is likely to relax this condition. During the week ending November 15, 2019, the SBP’s reserves increased by $45mn to $8.44bn, according to the central bank.
The $8.44bn reserves are inclusive of foreign investors’ investments of nearly $450mn in the government’s debt securities, which is a highly risky venture for Pakistan. The Ministry of Finance took significant time in finalising the policy matrix of the RISE loan package, which has pushed its approval to the third quarter of this fiscal year.
The World Bank stated that the $500mn upcoming loan will be aimed at enhancing the policy and institutional framework to improve fiscal management and improving the regulatory framework to foster growth and competitiveness.
Historically, the projects’ loans remained more effective than the policy loans, as successive governments have failed to fully implement the reforms after the disbursements of policy loans.
Pakistan also plans to launch sovereign bonds but the process may take more than the desired time, according to the sources in the Ministry of Finance. Earlier, the finance ministry had a plan to launch the bonds either by end of October or mid of November.
The IMF executive board is also expected to take up Pakistan’s request for approval of the second loan tranche of $450mn next month under the $6bn loan package.
Pakistan is once again in a macroeconomic crisis that repeats every four to five years, according to the World Bank.
It said that short periods of relatively fast growth are followed by severe deceleration. The main factors that cause the crises are the incomplete implementation of structural reforms, inappropriate policy responses to macroeconomic imbalances, and a federal structure that exacerbates challenges of co-ordination of institutions and harmonisation of policies nationwide.
After an overall low economic growth period during 2008-13, Pakistan witnessed decent growth rate during past five years. However, the country is again passing through a low economic growth phase due to structural weaknesses that remained unaddressed during past five years.
The World Bank said the proposed $500mn was the first in a programmatic series of three operations focused on enhancing the policy and institutional framework to improve fiscal management, and regulatory framework to foster growth and competitiveness.
The proposed series will be complementary to the two-year development policy series Securing Human Investments to Foster Transformation (SHIFT).
The World Bank said that the new budgetary support will help the government’s efforts maintain macroeconomic stability while putting in place the foundations for sustainable growth.
The reforms in the first pillar will support fiscal management by establishing effective institutions and co-ordination mechanisms between federating units for a consolidated fiscal framework and improve debt transparency and management.
The programme loan also targets broadening the tax base by resolving inconsistencies in tax policy, dealing with contingent liabilities from state owned enterprises (SOEs), and lowering electricity generation costs and eliminating arrears in the energy sector.
The World Bank also plans to give policy loan for supporting competitiveness and growth by improving the business environment and simplifying business regulations, harmonising the sales tax across the country, enhancing the transparency and depth of the financial sector and supporting the digital economy.
The World Bank stated that private investment was severely constrained due to the way the general sales tax was administered across the country, an opaque and overregulated business environment, a shallow financial sector, and significant anti-export bias of the national tariff policy.
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