The World Bank is expressing concern over the potential impact of vested interests on critical policy reforms in Pakistan following the upcoming elections. The Bank identifies possible reversals in policies such as gas and electricity subsidies, trade tariffs, and property tax realisation. It emphasizes that strong and organised vested interests may advocate for these reversals, posing high macroeconomic risks to Pakistan.
The Bank is willing to provide further support in collaboration with the International Monetary Fund (IMF) under a medium-term loan program, contingent on the successful progression of ongoing reform measures.
The upcoming elections introduce political and governance risks, with potential pressures that may erode fiscal restraint or the commitment to challenging reforms.
Additionally, macroeconomic risks are considered high, given the projected reserve cover at the end of the stand-by arrangement. The World Bank indicates that additional external support will be needed after the completion of the stand-by arrangement.
The Bank suggests that broader and deeper reforms will be necessary over the medium term to support fiscal consolidation, improve confidence, and enhance investment. This reform agenda includes reducing protectionist trade policies, eliminating agricultural subsidies, rationalising federal government expenditures, and expanding the tax base.
Furthermore, the Bank highlights the importance of accelerating energy reforms, reducing red tape, improving the business environment, and addressing the losses of state-owned enterprises through privatisation and concessions.
Without such reforms, the Bank warns that private external flows may be limited, import restrictions may be required to preserve foreign exchange reserves, and economic activity could be negatively impacted. Foreign investment may remain low, and the government could face challenges in accessing external commercial borrowing.
The Bank recognizes the need for progress against this reform agenda, acknowledging the political context’s challenges. Ongoing World Bank engagements are expected to support reform efforts in key areas, including GST and property taxation reform, energy reforms, and analytical support for tariff reforms in the electricity and gas sectors.
On a positive note, the Bank acknowledges broad support for fiscal management and revenue reforms across the political spectrum in Pakistan. The private sector has also emphasized the importance of harmonised tax jurisdiction, a single regulatory entity, and a competitive and stable trade policy.