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Business Recorder
23-04-2025
- Business
- Business Recorder
Highest, income groups be taxed at higher effective rates: WB
ISLAMABAD: The World Bank has recommended that highest-income groups be taxed at higher effective rates while income tax regime in Pakistan can be made more progressive by removing exemptions for high income groups and raising the income bracket of the highest tax rate. The bank in its latest report, 'South Asia Development Update, Taxing Times', also noted that industrial output contracted, driven by high input costs, increased taxes, and lower government development spending, and services growth was dampened by spillovers from weak agricultural and industrial activity. Pakistan, ranks among the Emerging Market and Developing Countries (EMDEs) with the widest range of tax rates and the widest range of income thresholds across personal income tax brackets, which makes its income tax regime relatively progressive. Pakistan's poverty rate to stand at 42.4%: World Bank In Pakistan, the government has committed to raising tax revenues by the equivalent of 4–5 percentage points of GDP, reforming the energy sector, and allowing the exchange rate to be flexible, it added. Pakistan provides a guaranteed price for sugarcane production, while subsidizing its consumption of water. Such subsidies that encourage the wasteful use of inputs could be replaced by direct, targeted transfers, with higher transfers for farmers that adopt sustainable land management practices, the report noted. Only Pakistan's tax buoyancy falls in the bottom quartile of EMDEs, suggesting a reliance on taxation of slow-growing economic activities. In all South Asian countries other than Bhutan and Pakistan, greater shares of tax revenues are generated by consumption taxes—such as sales tax, excise taxes, and VAT—and trade taxes than in the average EMDE, with smaller shares derived from income taxes. In Pakistan and Sri Lanka, consumption tax rates were well above the EMDE average in 2024. The report further noted that Pakistan, Sri Lanka, and Bangladesh—the three South Asian countries with the lowest overall revenue-to-GDP ratios—also have much lower tax revenue-to-GDP ratios compared with other EMDEs with similar tax rates in all categories of taxes. Since 2020, Afghanistan, Bangladesh, Pakistan, and Sri Lanka have had sizable shortfalls in direct tax revenue, ranging from 1.4 percentage points of GDP to 2.6 percentage points of GDP, compared with an average shortfall of 0.8 percentage point among all EMDEs. In these four South Asian countries, revenue shortfalls have been nearly evenly split between personal income tax revenues and corporate income tax revenues. Among four countries including Bangladesh, Bhutan, Pakistan and Sri Lanka, with above-average tax revenue shortfalls, the country characteristics account for one quarter of the overall shortfalls in Bangladesh and Bhutan and one-third in Pakistan and Sri Lanka. In particular, widespread informality and lack of financial development account for one-half, one-third, and one-quarter of the shortfall in personal income tax revenues in Bhutan, Pakistan, and Sri Lanka, respectively. A large agriculture sector and lack of financial development together account for one-half of the shortfall in corporate income tax revenues in Bangladesh, Pakistan and Sri Lanka, as well as one-third of the shortfall in consumption tax revenues in Pakistan and Sri Lanka. But even after controlling for these country characteristics, the four countries still have tax gaps that are larger than the EMDE average. The assessment for Pakistan identifies compliance risk management, the timeliness of tax declaration filings, tax dispute resolutions, and tax payments, as well as the monitoring of inaccurate reporting as the main areas needing improvement. In Pakistan, the introduction of electronic VAT filing and computerized risk analysis reduced refund claims by one-half and led to the detection of a significantly larger number of fraudulent claims than had manual assessments. Responsiveness of revenues to changes in tax bases in Bangladesh and India is comparable to that in other emerging market and developing economies (EMDEs); in Nepal responsiveness is in the top quartile of EMDEs, and in Pakistan it is in the bottom quartile. In Bangladesh and India, tax buoyancies are broadly in line with those of other EMDEs, whereas Nepal's tax buoyancy ranks in the top quartile of EMDEs and Pakistan's in the bottom quartile. Below-average tax buoyancies, as in Pakistan, indicate that economic growth is disproportionately generated by under-taxed economic activities. In Pakistan, the agriculture sector accounted for about one -fifth of cumulative growth during 2010–19, compared with less than one-tenth in the average EMDE. In many parts of Pakistan, the agriculture sector faces considerably lower income tax rates than do non-agriculture sectors. A priority for raising tax revenues is therefore to increase taxation of agricultural activity. The report also noted that in Pakistan, the economy continues to recover from a combination of natural disasters, external pressures, and inflation, and is expected grow by 2.7 percent in fiscal year 2024-25 and 3.1 percent in fiscal year 2025-26. In Pakistan, GDP grew by 2.5 percent in fiscal year 2023-24, after a small contraction in fiscal year 2022-23. Robust remittance inflows supported private consumption, but private investment growth continued to be weak, dampened by double-digit real interest rates and political uncertainty. On favorable weather conditions, agricultural growth reached a 19-year high while industrial activity contracted and services growth remained muted. Weak growth has carried over to first half of fiscal year 2024-25. Output increased by an average of 1.5 percent y-o-y in the first half of fiscal year 2024-25, slower than the 2.1 percent expansion in the first half of the previous year. After last year's surge, agriculture posted muted growth in the first half of fiscal year 2024-25 amid drought-like conditions and pest infestations. The government achieved a primary surplus in the first half of fiscal year 2024-25, with fiscal consolidation efforts supported by an IMF program. The current account was in surplus at the end of 2024, helped by higher remittances, stemming from reduced political uncertainty and exchange rate stability, that more than offset the wider trade and primary income deficits. With depreciation pressures on the currency subsiding, a robust agricultural harvest, and administrative prices stabilizing, inflation declined steadily to 0.7 percent in March 2025 from its peak of nearly 40 percent in mid-2023. This allowed the central bank to lower its policy rate by 10 percentage points since June 2024 to 12 percent in January. Copyright Business Recorder, 2025
Al-Ahram Weekly
18-03-2025
- Business
- Al-Ahram Weekly
INTERVIEW - Egypt GDP growth to recover gradually due to remittances, investment uptick: World Bank - Economy
Ahram Online shared its questions with the World Bank team to help us understand the broader picture regarding the latest projections for emerging markets and developing economies, in general, and for the Egyptian economy, in particular. Despite global and regional geopolitical tensions and their severe implications, the Egyptian economy has managed to navigate these challenges. This was proven by the late completion of the fourth review of the Extended Fund Facility (EFF) loan programme. It was also proven through the country's indices and projections in the flagship reports issued by the international financial institutions (IFIs), including the World Bank. The answers here are attributed to the World Bank's spokesperson at its headquarters in Washington DC and Sara Alnashar, the bank's senior economist for economic policy, who is based in Egypt. Ahram Online: What are the key drivers behind maintaining forecasts for economic growth in developing economies? World Bank: Growth in emerging markets and developing economies (EMDEs) is forecast to remain about four percent in 2025-2026, as a projected slowdown in China is offset by an aggregate pickup in other EMDEs. This pickup is anticipated to be broad-based, with growth set to strengthen in nearly 60 percent of EMDEs. Over the next two years, global monetary policy easing, recovery of real incomes, improvement in domestic demand, and gradual expansion of trade and industrial activity are expected to support economic activity in EMDEs. Nevertheless, the pandemic and subsequent shocks have left a lasting mark, with the level of output in EMDEs as a whole expected to remain over five percent below its pre-pandemic trend by 2026. AO: According to the report, the next 25 years are expected to be a tougher slog for developing economies than the last 25. Could you please tell us more about the key reasons? WB: The beginning of the 21st century was pivotal for emerging markets and developing economies (EMDEs). Globally, there was a broad consensus on the benefits of cross-border trade and a strong willingness to establish free trade agreements. Domestically, many EMDEs strengthened their fiscal and monetary policy frameworks and implemented structural reforms to improve the functioning of domestic markets. In that environment, EMDE growth was robust in the first decade of the century, and extreme poverty declined rapidly. The world will look quite different in 2025. A surge in trade tensions and geopolitical fragmentation have drastically altered the global trade landscape in recent years. Climate-related disasters have become more frequent and costly. Debt burdens have climbed. Government debt in EMDEs rose from less than 40 percent in 2010 to 70 percent in 2024 (GDP-weighted averages), the highest level since 1970. Progress on implementing structural reforms has stalled. Investment and productivity growth, key growth drivers, have slowed across EMDEs. The World Bank projects that potential growth in EMDEs — the maximum rate at which they can grow without igniting inflation — will slide to 4.1 percent per year in the 2020s, compared to 5.3 percent in the 2010s and 5.9 percent in the 2000s. AO: The report also pointed to serious headwinds the developing economies are anticipated to face. Would you please expand on this? WB: EMDEs' growth prospects appear insufficient to offset the economic damage caused by several years of successive negative shocks, which have had particularly detrimental outcomes in the most vulnerable countries. Moreover, the outlook is surrounded by substantial uncertainty, and the balance of risks remains tilted to the downside. Growth could be weaker than projected due to potential adverse changes in trade policies and heightened policy uncertainty. A surge in trade-distorting measures, implemented mainly by advanced economies but often disproportionately affecting EMDEs, poses a risk to global trade and economic activity. Beyond specific trade-related policy shifts, a sustained increase in global economic policy uncertainty could dampen growth, particularly in EMDEs. Heightened geopolitical tensions and conflict escalations related to Russia's invasion of Ukraine, events in the Middle East, and instability elsewhere could disrupt global trade and commodity markets, hurting growth. In affected EMDEs, intense conflicts could impede the achievement of a wide range of development goals and result in large and long-term output losses. Other risks include higher inflation, more extreme weather events related to climate change, and weaker growth in major economies. AO: The report expected economic growth to rise in the MENA region in 2024 and 2025. What are the key reasons that support this? WB: In 2024, growth in the MENA region was estimated to have increased to a still subdued 1.8 percent, from 1.7 percent in 2023. Solid non-oil activity in oil exporters, particularly in GCC, supported by resilient labour markets and a recovery in capital flows, mainly contributed to this marginal improvement. In 2025, growth in MENA is expected to strengthen to 3.4 percent, primarily reflecting a gradual increase in oil production in OPEC+ member countries. In addition, with an expected easing of inflationary pressures, activity in oil importers is also projected to increase. The regional outlook for 2025 is highly uncertain amid several downside risks. These risks include the potential re-escalation of conflicts and violence in the region and further extensions of the OPEC+ oil production cuts due to weaker global demand for oil. They also include reduced exports, especially in oil importers, because of a further increase in protectionist measures by main trading partners. AO: The report maintained its projections for Egypt's real GDP growth in the current FY24/25 and expected 4.2 percent in the upcoming FY25/26. What are the key drivers behind these forecasts? WB: Egypt is pursuing macroeconomic stabilization and structural reforms, supported by the IMF's EFF, the World Bank Development Policy Finance (DPF), and the European Union Macro Fiscal Adjustment (MFA) along with development partners' financing. The macroeconomic adjustment since March 2024, steps towards structural reforms, and the injected financing, including the large-scale UAE investment in Ras El-Hekma, immediately positively impacted the country's risk profile. Growth is expected to start a gradual recovery — from 2.4 percent in FY24 to 3.5 percent and 4.2 percent in FY25 and FY26, respectively — driven by favourable base effects, improved private consumption with gradually abating inflation, and ongoing pickup in remittances and investment, especially that financed by the UAE deal. On the sectoral side, the exchange rate adjustment and the easing of import restrictions are also expected to support the pickup in economic activity. AO: In your perception, what are the key policies/actions Egypt needs to navigate the ongoing economic challenges, especially the high level of debt and the shortage of foreign exchange (FX)? WB: Despite the reform efforts, long-standing challenges persist, including Egypt's high government debt and below-potential private sector activity. Sustaining policy measures, making macroeconomic adjustments, and continuing to eliminate distortions in the foreign exchange market are all important drivers of ongoing recovery. For reform efforts to translate into more profound economic transformation, where higher and sustainable growth is associated with more and better job creation, key priorities include pushing ahead with the policy to reorient the state's role towards more efficient public service delivery while enabling private sector activity. This is critical for fiscal and external sustainability, creating a conducive business environment to unlock the private sector's capacity as a competitive force, and addressing human development needs for a healthy, educated, and qualified labour force ready to engage in higher-productivity and export-oriented sectors. It is also important to boost women's opportunities in the labour force and accelerate the green transition for a more sustainable and resilient growth path. AO: What about the WB projections for the country's inflation? And what are its key drivers? WB: Inflation has been broadly declining but remained at 12.8 percent in February 2025. The baseline projections currently indicate a continued gradual decline. This projection is however subject to risks stemming from uncertainties associated with global economic developments (including cross-border trade and international supply chains). Furthermore, potential upward adjustments to some of Egypt's regulated prices (for instance, in the context of streamlining energy subsidies) may only temporarily disrupt the gradual decline in the inflation rate. Sustaining Egypt's ongoing macroeconomic stability (including fiscal consolidation and eliminating foreign exchange market distortions) and structural reforms that enhance competition and boost the economy's productive capacity would bode well for inflation reduction. This would support the gradual decline in interest rates. Follow us on: Facebook Instagram Whatsapp Short link:
