Tag: Fiscal Sustainability

  • UN survey forecasts modest growth for Pakistan’s GDP amid inflation projections

    UN survey forecasts modest growth for Pakistan’s GDP amid inflation projections

    Pakistan is projected to experience a real GDP growth rate of 2 per cent in 2024, with a slight increase to 2.3 per cent expected in 2025, according to a United Nations economic survey.

    The survey, titled ‘Economic and Social Survey of Asia and the Pacific 2024: Boosting Affordable and Longer-term Financing for Governments,’ released on Thursday, also forecasts a decrease in the inflation rate from 26 per cent to 12.2 per cent in the same period.

    The report highlights the challenges faced by Pakistan’s economy in 2023, citing political unrest and a significant flood that disrupted agricultural production.

    To address fiscal pressures, Pakistan, along with Sri Lanka, sought external assistance from the International Monetary Fund (IMF), with additional support from bilateral partners such as China, Saudi Arabia, and the United Arab Emirates.

    Both countries are implementing fiscal adjustments, including debt restructuring in Sri Lanka and subsidy removal in Pakistan’s power sector.

    Despite moderate tax gaps in Bangladesh, Pakistan, and Sri Lanka, the report suggests that improving tax policies and administration alone may not suffice to bridge development financing gaps, emphasising the need for broader improvements in socioeconomic development and public governance.

    The macroeconomic conditions in the developing Asia-Pacific region remain challenging, with a disparity in economic growth among different economies.

    While some larger economies experienced a rebound in economic growth, others saw only moderate growth in 2023. Pakistan’s GDP growth rate for the second quarter of fiscal year 2023–24 stood at a modest 1 per cent, below earlier projections ranging from 2–3 per cent.

  • World Bank proposes tax reforms with 3% GDP growth projection for Pakistan

    World Bank proposes tax reforms with 3% GDP growth projection for Pakistan

    The World Bank has advised Pakistan to implement taxes on the agricultural and real estate sectors and merge the income thresholds for salaried and non-salaried individuals to create a progressive Personal Income Tax (PIT) system.

    If agriculture income and property taxes are effectively enforced, they could contribute 3 per cent of the GDP annually, totaling over Rs3 trillion. The World Bank is awaiting approval for a $350 million allocation for Pakistan under RISE-II, with the meeting date yet to be confirmed.

    Currently, the annual income threshold for salaried individuals is Rs600,000, and for non-salaried income, it stands at Rs400,000, both exempt from taxes.

    The World Bank emphasises the urgency of Pakistan’s fiscal situation and the need to generate revenue and reduce expenditures, recommending taxing the wealthy while protecting the poor.

    The World Bank proposes simplifying the income tax structure by aligning it for both salaried and non-salaried individuals, ensuring progressivity without suggesting a reduction in the current nominal threshold.

    They acknowledge the importance of considering inflation and labour market changes in recent data when reforming the income tax structure.

    The focus of the recommended tax reforms should fall on higher income brackets and include a comprehensive tax package and expenditure reforms to address unsustainable fiscal deficits.

    These reforms involve cutting down on subsidy expenditures, eliminating regressive tax exemptions, and increasing the taxation of high-income earners, particularly in agriculture, property, and retail sectors, to enhance the progressivity of the tax system.

    Regarding a question about lowering the current exemption threshold for salaried workers earning below Rs50,000 monthly, the World Bank’s lead economist clarified that the bank does not recommend a reduction in the current nominal threshold.

    Instead, the emphasis is on streamlining the income tax structure for both salaried and non-salaried individuals to ensure progressivity while protecting the poor during the reform process.

  • Pakistan’s economy to recover, but challenges remain: World Bank

    Pakistan’s economy to recover, but challenges remain: World Bank

    Pakistan’s economic outlook, as per the World Bank’s ‘Pakistan Development Update,’ is challenging. The report projects a gradual recovery in real GDP growth, expecting it to reach 1.7 per cent in FY24 and 2.4 per cent in FY25. However, it warns that this recovery is contingent on implementing IMF measures, securing external financing, and maintaining fiscal discipline.

    The report highlights the dire poverty situation in Pakistan, with an estimated 39.4 per cent of the population living below the Lower-Middle Income Country poverty threshold in FY23, compared to 34.2 per cent in FY22. Factors contributing to this include economic slowdown, floods in 2022, import restrictions, political uncertainty, rising global commodity prices, and reduced investor confidence.

    The fiscal deficit remains a concern. While some easing of import restrictions may widen the current account deficit, a weaker currency and higher domestic energy prices could sustain inflation. The report emphasizes the importance of comprehensive fiscal reforms, including reducing tax exemptions, broadening the tax base, improving public expenditure quality, reforming the energy sector, and managing public debt more effectively.

    The World Bank stresses that addressing these challenges is crucial for long-term recovery and recommends strengthening institutions and systems to achieve fiscal and debt sustainability. The report echoes concerns about external shocks, political instability, and debt servicing challenges, underlining the need for prudent economic management and reforms.

    The Asian Development Bank (ADB) predicts a modest GDP growth recovery to 1.9 per cent in FY24, following a contraction of 0.3 per cent in FY23, with persistent price pressures. Overall, Pakistan faces a complex economic landscape that demands immediate attention to fiscal reform, poverty alleviation, and resilience to external shocks.