World Bank likely to approve additional IDA credit to PRR

ISLAMABAD: The World Bank (WB) is likely to approve an additional International Development Association (IDA) credit in the equivalent amount of $70 million to Pakistan Raises Revenue (PRR) to provide additional investment financing to the Federal Board of Revenue (FBR), in support of its new Transformation Plan.

Official documents revealed the tax system raises little revenue, generates economic distortions, and imposes a high burden on the poor largely due to the revenue system.

Recent analysis shows that Pakistan’s fiscal policies have a more pronounced impact on increasing poverty and a less significant effect on reducing inequality than average for lower-middle-income countries.

World Bank official, FBR chief discuss FBR transformation plan

The additional financing (AF) incorporates a Level 2 Restructuring to introduce new activities and change some activities under the existing investment financing component. It also updates the results framework to reflect revised outputs linked with the investment financing component, and extends the project end date to June 30, 2027. With this AF, the total project amount will increase to $470 million.

Project outcomes contribute directly to Outcome 5 of the CPF – More Public Resources for Inclusive Development. By increasing FBR collections to 10 per cent of GDP in fiscal year 2027, the project aligns with CPF outcome indicator 5.1, which aims to raise the tax-to-GDP ratio to 15 per cent by 2035.

Enhanced revenue collection will enable Pakistan to increase spending on essential services over time, meeting fiscal financing needs without generating excessive fiscal imbalances in the future.

Beyond the CPF’s outcomes and targets, the project also indirectly contributes to World Bank Group (WBG) Scorecard indicators related to improved access to services, better debt sustainability, and increased private investment.

PRR is an Investment Project Financing (IPF) with an original allocation of $400 million, with a results-based component and an investment financing component.

The results-based component ($320 million or Component 1) disburses against documented execution of eligible expenditures under the Eligible Expenditure Programs and the achievement of the Disbursement Linked Indicator (DLI) targets.

These DLIs are linked with four objective areas: (i) simple and transparent tax system; (ii) effective control of taxpayers’ obligation; (iii) facilitation of compliance; and (iv) institutional development for efficiency and accountability.

The investment financing component (original allocation of $80 million, Component 2) mainly focuses on investment in the FBR’s information and communications technology (ICT) systems, including ICT equipment, software and business process improvement, cargo weighing, contact-less scanning, and laboratory equipment for customs inspections (goods). It also finances consulting and non-consulting services for software development, technical assistance (TA), and training. AF activities will be conducted within the geographical scope of the existing Project.

The proposed restructuring responds to the request of the Government of Pakistan to scale up Project activities under Component 2 to meet the FBR’s emerging priorities, and to extend the duration of the Project.

The proposed Level 2 restructuring supports: (i) AF of $70 million for new activities under the investment financing component; (ii) extension in the duration of the Project by 24 months (until June 30, 2027); and (iii) an update of the results framework to reflect revised outputs linked with the investment financing component (change of previously approved activities), as well as align with the extended Project duration until June 30, 2027. With this AF, the total Project amount will increase to $470million.

The additional proposed activities will support the implementation of the FBR’s recently adopted Transformation Plan, which is part of a broader economic reform agenda, aligned with a new IMF EFF program. This program builds on previous federal tax administration reform efforts and encompasses an ambitious range of additional measures towards FBR digitisation, enhanced enforcement, new anti-smuggling measures, institutional strengthening, and human resource reforms.

The government has requested the support of international development partners in implementing the new program, including through advisory support, TA, and financing for ICT-related requirements.

The areas for support are also linked with the FBR’s strategic plans for the Inland Revenue Service (IRS) and Pakistan Customs Service (PCS), focusing on improving effective compliance, strengthening tax administration, building institutional capacity, enhancing customs, fiscal controls, and enforcement, and modernizing infrastructure and technology.

The AF through the PRR Project will allow for the mobilisation of required support in alignment with the government’s timelines. Preliminary estimates suggest costs of around $200 million for implementation of the Transformation Plan. Several development partners have been approached to finance components of the Plan, alongside new budgetary allocations.

The Asian Development Bank (ADB) has committed to providing support for programme implementation through a dedicated new project expected to be approved in mid-fiscal year 2026.

In coordination with development partners, and at the request of the FBR, the World Bank is proposing to mobilise AF for the PRR Project to support the initial stages of the Transformation Plan, allowing rapid progress with implementation and achievement of associated improvements in revenue performance.

The AF under PRR will allow more efficient implementation of activities to support the Plan, using existing Project implementation structures, capacities, and partnership modalities.

Weak revenue performance (tax-to-GDP of just 10.5 per cent in fiscal year 2024, with 8.6 per cent of GDP from FBR collections) has driven recurrent fiscal deficits, debt accumulation, and periods of macroeconomic instability. The lack of fiscal resources undermines service delivery, contributing to Pakistan’s major human capital gaps.

A complex tax system, heavy exemptions (4 per cent of GDP in fiscal year 2024), and weak compliance and enforcement capacity lead to a narrow revenue base (there are about 13.4 million registered income taxpayers and 0.396 million registered sales taxpayers) and heavy reliance on direct taxation (more than 50 per cent of FBR revenue) and withholding and advanced taxes.

Copyright Business Recorder, 2025