The World Bank has sounded a dire warning which policy and decision makers in Pakistan should not ignore. A WB’s spokesman recently said that Pakistan is facing serious economic and human development challenges and it is at a point where major policy shifts are required to save the economy from total collapse.

According to him, poverty in Pakistan increased within one year from 34.2% to 39.4% with 12.5 million more people falling below the poverty line of $3.65 per day income level. Pakistan’s economic model has miserably failed to reduce poverty and its living standards have fallen behind neighbouring countries. About 100 million Pakistanis now live in abject poverty.

The World Bank has also cited reasons for Pakistan’s slippage in the economic race. A major factor is that Pakistan’s average real per capita growth rate was just 1.7pc between 2000 and 2020 — less than half the average per capita growth rate (4pc) for South Asian countries over the period and well below the average of peer countries with similar economic structures. As a result, Pakistan’s per capita incomes have fallen far behind other countries.

Among the many remedial measures suggested by the WB for Pakistan to come out of the crisis, one is an overhaul of the taxation system to bring agriculture and real estate into the tax net and cut wasteful expenditures. The lender has identified low human development, unsustainable fiscal situation, over-regulated private sector, agriculture and energy sectors as the priority areas for reforms in the coming days.

The proposed measures are designed to increase the tax-to-GDP ratio by 5% through withdrawal of tax exemptions and increasing the burden of taxes on the real estate and the agriculture sectors. It has also been suggested to cut current expenditures by about 2.7% of GDP which will put the economy on the path of sustainable growth.

In the opinion of the World Bank, Pakistan has the capacity to collect taxes equal to 22% of the GDP but its current ratio is only 10.2% – showing a gap of more than half. This can be achieved by reducing untargeted exemptions and increasing taxes on land and property to collect another 2% of GDP in revenues and generate another 1% of the GDP from the agriculture sector.

The WB has also recommended withdrawing income tax exemption available to the power generation projects and to the real estate investment trusts. It also wants withdrawal of tax exemptions on machinery import for power generation and transmission, and withdrawal of exemptions for pharmaceutical and energy sectors as well as food items – oil, pulses, animal, fruit and dairy. It is estimated that withdrawal of existing exemptions will generate enough funds to pay the salaries of 35,000 teachers.

Another suggestion is to reduce the numbers of tax slabs and bring down the income threshold for high salaried individuals. The WB has proposed to lower the income tax free slab for the agriculture sector from the existing 12.5 acres and through proper categorisation of land aimed at generating taxes equal to 1% of the GDP. The farmers with land of less than 12.5 acres do not pay any tax, while those who own up to 25 acres pay just Rs100 per acre. The ones owning from 26 to 50 acres land pay only Rs250 per tax and the rate for above 50 acres is mere Rs300 per acre.

Another set of WB recommendations relates to a cut in government expenditure. The lender has proposed reducing energy and commodity subsidies and imposing temporary austerity measures in the short-term for saving about 1% of the GDP. For the medium-term, the WB has proposed reducing federal development and current expenditures on provincial nature projects, cutting spending on loss making entities, and improving quality of development spending to save about Rs1.4 trillion. The cumulative impact of these short- to medium-term savings is estimated at 2.7% of the GDP.

Heavy government reliance on bank borrowing at high interest rates for deficit financing is one of the key factors behind high inflation. The situation needs to be corrected by reducing the government footprint in public sector entities that account for over 45pc of GDP, most of them loss-making and needing public money to stay afloat.

At present Pakistan is facing numerous economic hardships including inflation, rising electricity prices, severe climate shocks, and insufficient public resources to finance development and climate adaptation. It is time to shift gears and make the right decisions. Countries with higher sustainable economic growth like India, Indonesia and Vietnam made the right decisions at the time of crisis and were able to overcome similar challenges.  We also need to do the same.

Existing policies are heavily tilted in favour of strong vested interests, including those of military, political and business leaders. There is an urgent need to move from wasteful and rigid public expenditures benefiting the elite classes towards carefully prioritised spending on public services and infrastructure benefiting the sections of populations living below or near the poverty line.