Political crisis in 2017-18 led to widening deficits, delayed adjustments, says World Bank

Updated 28 Jul 2020

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The evaluation report said the decision to split the World Bank’s budget support between two parallel programmes was driven by sensitivity and risks associated with major policy reforms. — AFP/File
The evaluation report said the decision to split the World Bank’s budget support between two parallel programmes was driven by sensitivity and risks associated with major policy reforms. — AFP/File

ISLAMABAD: Procyclical fiscal policies as a result of internal political crisis in Pakistan widened the fiscal deficit in 2017-18, an assessment of two development policy operations in the country by the Independent Evaluation Group of the World Bank showed on Monday.

“In 2017-2018 Pakistan went through another internal political crisis, and procyclical fiscal policies led to a fiscal deficit surge,” it noted.

“The adoption of a new programme with the IMF was delayed for more than two years, until summer 2019, when the Gove­rnment of Pakistan had completed a credible new effort to get the fiscal situation under control,” according to the project performance assessment report on the first and second programmatic fiscally-sustainable and inclusive growth development policy credit.

These consist of a credit in the amount of $400 million for the First Fiscally Sustainable and inclusive Growth (FSIG) Development Policy Credit (DPC), $500m Extended Fund Facility (EFF) of the IMF, with support from other partners.

The project development objective was “to foster private and financial sector development to bolster economic growth; and mobilise revenue while expanding fiscal space to prioritise social needs.”

The objective was matched by two policy areas: reforming trade tariffs, privatising state-owned enterprises, improving business registration, developing the micro-insurance sector, and improving the availability of credit information; the second policy area aimed at improving revenue performance and enhancing the social safety net programme.

in tax and power tariff policies.

In the end, the FSIG programme made important contributions towards a coordinated international effort that led to improved macroeconomic resilience and gradual growth acceleration in 2014-16. The current account and fiscal deficits were reduced, and social safety nets were strengthened, the report adds.

In trade policy, the FSIG-supported actions to advance trade liberalisation and simplify import tariff structure did not bring tangible results. The scale of reduction in average import tariff was below the target whereas the tariff structure remains non-transparent and distortive. The simple average statutory import tariff rate was reduced from 14.4 per cent in 2013 to 12.8pc in 2019, missing the revised programme target of 12pc.

Although the FSIG programme met its privatisation target, the series did not succeed in help government launch a sustainable privatisation programme.

There has been a significant improvement in business registration procedures, reflected in the ‘Doing Business’ indicators, which at least partially could be attributed to the FSIG support through the establishment of a virtual one-stop shop. Pakistan’s overall progress in streamlining business registration was reflected in a significant improvement in the score for the ‘Doing Business’ indicator ‘Starting Business’, from 75.4 (out of 100) in ‘Doing Business’ 2013 to 89.2 in Doing Business 2020.

The FSIG programme contributed to a significant improvement in the country’s revenue performance. The major contribution in this area was associated with a significant reduction in tax exemptions particularly through the legal amendment to permanently eliminate the discretion of the Federal Board of Revenue in issuing special tax exemptions and making proposed exemptions subject to parliamentary approval.

In the first two years of the programme, the total cost of tax exemptions was reduced by more than 0.6pc of the GDP: from 1.9pc in 2013-14 to 1.3pc in 2015-16. However, after reaching its peak of 12.9pc of the GDP in 2017-18, tax collection deteriorated to about 11.6pc in 2018-19 owing to a major reemergence of tax expenditures.

Critical reforms have been stalled owing to opposition from ‘interest groups’, the report further pointed out.

Experience from earlier operations suggests that structural reforms at the federal level in the country must be complemented by a provincial effort to sustain these reforms and maximise their impact. In particular, improvements in the business environment and modernisation of tax administration require significant inter-governmental cooperation, it says.

Published in Dawn, July 28th, 2020