World Bank’s RISE-II: Pakistan told it can lose funding if prior actions not completed

World Bank (WB) has warned the government that Pakistan will lose a part of FY 23 funds from International Development Association (IDA) for not completing Prior Actions (PAs) under second Resilient Institutions for Sustainable Economy (RISE-II).

The Bank conveyed this message to Finance Minister Miftah Ismail in a letter dated subsequent to his recent meeting with the Bank’s Vice President South Asia Region, Hartwig Schafer which was also attended by Aisha Ghaus Pasha, State Minister for Finance and Revenue, and Dr. Murtaza Syed acting State Bank of Pakistan Governor, Secretary Power, and Chairman of the Federal Board of Revenue, and representative from the Economic Affairs Division.

The World Bank team discussed the progress on the proposed budget support operations, which include the second Resilient Institutions for Sustainable Economy (RISE-II) and the Program for Affordable Energy (PACE).

“There are five prior actions (PAs) pending for RISE -II, three of which, if not achieved by May 31, 2022, will result in Pakistan losing a part of its FY23 IDA allocation,” warned the Bank’s Vice President, in his letter written prior to leaving Pakistan.

The first prior action was that the Finance Division will issue revised Rules of Business/ Notification following the amendments to the Fiscal Responsibility and Debt limitation Act (FRDLA), 2005 to: (i) provide legal mandate to the Macro-Fiscal Policy Unit; and (ii) provide for automatic safeguards in case of breach of ceilings as per the FRDLA and the Provincial Finance Departments to notify regulations for the implementation of the Fiscal Responsibility Laws enacted by provincial assemblies that are consistent with the Federal FRDLA amendments.

This prior action is not completed as the PA stipulates that the Finance Department is to issue revised Rules/ notification after the passage of the FRDLA.

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The second prior action was that the Finance Division will notify the transfer of responsibility for the choice and pricing of retail debt instrument from budget wing (through the Central Directorate of National Savings) to Debt Management Office (DMO) and issue detailed rules for the DMO. This is also not completed. The revised rules/ notification for the DMO can be issued only after the passage of the FRDLA amendments.

The third prior action was that the Provincial Boards of Revenue will issue notifications adopting the FBR valuation tables as their District Collectorate valuation tables to keep property assessment rations at 85 per cent of market value.

This PA is partially completed as Punjab has opposed adoption of the FBR valuation tables because the Punjab BoR maintains that their own tables are more accurate. Balochistan argues that higher valuation will lead to lower compliance and lower revenue collection.

The fourth prior action was to absorb Rs 73 billion of Power Holding Pakistan Limited (PHPL) debts into public debt stock in FY 21 and refund Central Power Purchasing Agency-Guaranteed (CPPA-G)/ Discos Rs 240 billion for overcharged GST. This PA is also partially completed as Finance Division issued a notification confirming the absorption of Rs 73 billion of PHPL however this is at risk because of the current fiscal situation, with the FBR unlikely to be able to provide any refund.

Prior action five required the Finance Division and Provincial Finance Departments to issue implementing regulations following the approval of common General Sales Tax law passed by the Federal and Provincial Assemblies to generate a harmonized GST for goods and services across the country.

Meetings of the National Tax Council (NTC) were held to harmonize definition of goods and services, place of supply rules, principles of taxation and rate harmonization. A broad agreement on the definitions of goods and services was reached in September 2021.

However, the agreement could have been undone at the most recent NTC Executive Committee but no decision has been taken on the remaining issue required for harmonization.

This PA is neither completed nor any date has been set for the next NTC meeting. World Bank says that progress has not been satisfactory and PA is at risk.

According to the World Bank most of the Prior Actions related to power sector (PACE-II) are delayed except approval of National Electricity Plan (NEP) which has been shared with donors. Final draft is expected to be completed in May 2022 for CCoE approval in June 2022.

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