Document of

The World Bank

FOR OFFICIAL USE ONLY
Report No. 86373-PK



INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A PROPOSED DEVELOPMENT POLICY CREDIT

IN THE AMOUNT OF US$400 MILLION

TO THE

ISLAMIC REPUBLIC OF PAKISTAN
FOR A

FIRST FISCALLY SUSTAINABLE AND INCLUSIVE GROWTH
DEVELOPMENT POLICY CREDIT

April 3, 2014



Poverty Reduction and Economic Management
South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official
duties. Its contents may not otherwise be disclosed without World Bank authorization.
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GOVERNMENT OF PAKISTAN FISCAL YEAR
J uly 1J une 30

CURRENCY EQUIVALENTS
(Exchange Rate Effective as of February 28, 2014)
Currency Unit: Pakistani Rupees
US$1.00 =PRs 104.90

ABBREVIATIONS AND ACRONYMS
ADB Asian Development Bank
AML Anti-Money Laundering
BISP Benazir Income Support Program
BOI Board of Investment
BOP Balance of Payments
CCI Council of Common Interest
CCOP Cabinet Committee on Privatization
CCT Conditional Cash Transfer
CIB Credit Information Bureau
CFT Counter-Terrorist Financing
DFID Department for International
Development (UK)
DPC Development Policy Credit
EFF Extended Financing Facility
EOBI Employees Old-Age Benefits Institution
FATF Financial Actions Task Force
FDI Foreign Direct Investment
FSIG

Fiscally Sustainable and Inclusive
Growth
FBR Federal Board of Revenue
GDP Gross Domestic Product
GCC Gulf Cooperation Countries
GOP Government of Pakistan
GST General Sales Tax
IBRD International Bank for Reconstruction
and Development
IDA International Development Association
IEG Independent Evaluation Group
IMF International Monetary Fund
ITAMS Integrated Tax Audit Mgment. System
J ICA J apan International Cooperation Agency
LLP Limited Liability Partnership
MFN Most Favored Nation
MOC Ministry of Commerce
MoF Ministry of Finance
MOU Memorandum of Understanding
MTB Market Treasury Bill
NFC National Finance Commission
NISP National Income Support Program
NPL Non-Performing Loan
NSS National Savings Scheme
NTN National Tax Number
OSS One Stop Shop
PC Privatization Commission
PEFA Public Expenditure and Financial
Accountability
PIA Pakistan International Airlines
PIB Pakistan Investment Bond
PFM Public Financial Management
PML-N Pakistan Muslim League-Nawaz
PPG Public & Private Guarantee
PSE Public Sector Enterprise
SBP State Bank of Pakistan
SECP Securities and Exchange Commission of
Pakistan
SEZ Special Economic Zone
SME Small and Medium Enterprise
SOE State Owned Enterprise
SRO Statutory Regulatory Order
WTO World Trade Organization

Vice President: Philippe H. Le Hourou
Country Director: Rachid Benmessaoud
Sector Directors: Ernesto May and Sujata Nitin Lamba
Sector Managers: Vinaya Swaroop and Henry K Bagazonzya
Task Team Leaders: J ose Lpez-Clix and Mehnaz Safavian
THE ISLAMIC REPUBLIC OF PAKISTAN
A PROGRAMMATIC DEVELOPMENT POLICY SERIES FOR A
FIRST FISCALLY SUSTAINABLE AND INCLUSIVE GROWTH
DEVELOPMENT POLICY CREDIT

1.INTRODUCTION AND COUNTRY CONTEXT .................................................................................... 1
2.MACROECONOMIC POLICY FRAMEWORK ..................................................................................... 3
2.1. Recent Economic Developments ....................................................................................................... 3
2.2. Macroeconomic Outlook .................................................................................................................... 5
3. THE GOVERNMENTS REFORM PROGRAM .................................................................................. 11
4. THE PROPOSED OPERATION ............................................................................................................ 12
4.1. Link to Governments Program and Operation Description ............................................................ 12
4.2. Prior Actions, Results and Analytical Underpinnings ..................................................................... 13
4.3. Link to Country Assistance Strategy and Other Bank Operations ................................................... 21
4.4. Consultations and Collaboration with Development Partners ......................................................... 22
5. OTHER DESIGN AND APPRAISAL ISSUES ..................................................................................... 23
5.1. Poverty and Social Impact ............................................................................................................... 23
5.2. Environmental Aspects .................................................................................................................... 25
5.3. Public Fnancial Management, Disbursement and Auditing ............................................................. 25
6. SUMMARY OF RISKS ......................................................................................................................... 27
Annex 1.Policy and Results Matrix ............................................................................................................ 29
Annex 2. Letter of Development Policy ..................................................................................................... 30
Annex 3. Bank-Fund Relations Note .......................................................................................................... 37
Annex 4. PSIA: Why Protecting BISP Is So Important for the Poor? ........................................................ 38
Annex 5. Privatization in Pakistan .............................................................................................................. 41
Annex 6. Tariff Simplification and SROs Trade Distortions ...................................................................... 43
Annex 7. Plan for Establishing and Virtual One-Stop Shop Registration in Pakistan ................................ 47
Annex 8. Doing Business Indicators for Pakistan ....................................................................................... 49
Annex 9. Financial Inclusion in Pakistan .................................................................................................... 50
Annex 10. Creation of Fiscal Space Through Revenue Mobilization......................................................... 53
Annex 11. Pakistan: Debt Sustainability Analysis ...................................................................................... 55
Annex 12. Public Financial Management and Procurement ....................................................................... 59
Annex 13. Analytical and Advisory Activities: Major Findings and Recommendations .......................... 61
Annex 14. Country at a Glance ................................................................................................................... 63


LIST OF TABLES:
Table 1. Key Macroeconomic indicators Pakistan FY09/10 to FY17/18 ..................................................... 6
Table 2. Key Fiscal Indicators Pakistan FY10/11 to FY 17/18 .................................................................... 7
Table 2.1. Total Expenditure Functional Classification ................................................................................ 8
Table 3. Pakistan BOP Financing Requirements and Sources FY11/12 to FY 15/16 .................................. 9
Table 4. Fiscal Impact Under FSIGs and Power DPCs-supported Actions in FY13/14 ............................. 20
Table 5. FSIG-I Prior Actions and Analytical Underpinnings .................................................................... 21
Table A4. 1. Budget Execution Performance of BISP, 2008-13 ................................................................ 39
Table A4. 2. Funds Requests and Releases for BISP, FY2012-13 ............................................................. 39
Table A6. 1. Tariff Rates ............................................................................................................................ 44
Table A6. 2. Statutory Duty Rates, FY2002/03 to FY2012/13 ................................................................... 45
Table A6. 3. Statistics of Statutory Duty Rates, FY2002/03 to FY2012/13 ............................................... 45
Table A6. 4. Number of Tariff Lines by Type of Goods and Statutory (MFN) Rate, FY2012/13 ............. 46
Table A6. 5. Major General and Sector Specific SROs (Rs. Billion) ......................................................... 46
Table A7. 1. Preliminary Timeline of Proposed Implementation Plan ....................................................... 48

LIST OF FIGURES:
Figure 1. Pakistan Debt Sustainability Analysis FY08/09 to FY17/18 ...................................................... 10
Figure A4. 1. Targeting Performance of Federal Social Programs in Pakistan (%) ................................... 38
Figure A8. 1. South Asia Doing Business Rankings .................................................................................. 49
Figure A8. 2. Pakistan Ranking Across Doing Business ............................................................................ 49
Figure A10. 1. Sequencing of Follow-up Actions in Registering Potential Taxpayers .............................. 54
Figure A11. 1. Pakistan Evolution of Public Debt ...................................................................................... 55
Figure A11. 2. Structure of Domestic Debt 1999/2000-2010/13 ................................................................ 55
Figure A11. 3. Share of MTBs Holdings by Investor ................................................................................. 55
Figure A11. 4. Currency Composition of PPG External Debt (including IMF) at End J une 2013 ............. 56
Figure A11. 5. Public Debt Sustainability Analysis ................................................................................... 57
Figure A11. 6. External Debt Sustainability Analysis ................................................................................ 57
Figure A12. 1. PEFA Assessment Scores for South Asia ........................................................................... 59

LIST OF BOXES
Box 1. Key Economic Priorities of the Governments Program ............................................................... 11







The Credit was prepared by an International Development Association team consisting of Jose R. Lopez-Calix (Lead Country
Economist and Task Team Leader, SASEP); Mehnaz Safavian (Senior Economist and Task Team Leader, SASFP);Vinaya Swaroop
(Sector Manager, SASEP), Anthony Cholst (Country Program Coordinator, SARCE); Daria Taglioni (Senior Trade Economist,
(PRMTR); Paul Welton (Senior Financial Management Specialist, SARFM);Hanid Mukhtar (Senior Economist, SASEP);Yasuhiko
Matsuda (Senior Public Sector Specialist, SASSP);Sarwat Aftab (Senior Private Sector Development Specialist, SASFP);David L.
Newhouse (Senior Economist, SASEP);Muhammad Waheed (Economist, SASEP); Guillermo Arenas (Consultant, PRMTR);Saadia
Refaqat (Economist, SASEP);Kiran Afzal (Economist, SASFP), Rehan Hyder (Senior Procurement Specialist, SARPS);Sunita
Kikeri/Person (Senior Private Sector Specialist, SAFPD), Aijaz Ahmad (Senior Private Sector Specialist, SASFP), ,IrumTouqeer
(Analyst, SASGP); Sarmad Sheikh (Research Analyst, SASFP); Mehwish Ashraf (Research Analyst, SASEP); ShabnamNaz (Program
Assistant, SASEP); Muhammad Shafiq (Program Assistant, SASEP) and Ehteshamul-Haq(Program Assistant, SAFPD). The team is
particularly grateful to Pablo Saavedra (OPSPQ), Satu Kahkonen (ECSP2), Zeljko Bogetic (ECSP2), Manuela Ferro (LCRVP), Peter
Mousley (MNSF1) and J ohn Goddard (ESF2) who provided priceless comments and guidance.
iv
CREDIT AND PROGRAM SUMMARY: PAKISTAN
FIRST FISCALLY SUSTAINABLE AND INCLUSIVE GROWTH
DEVELOPMENT POLICY CREDIT

Borrower Islamic Republic of Pakistan
Implementing Agency Ministry of Finance (MoF)
Financing Data International Development Association Credit Amount
US$400 million
Operation Type Programmatic (1
st
of 2), single-tranche
Main Policy Areas

Private sector development, fiscal management, trade policy
and social protection
Program
Development
Objectives



This is the first in a proposed series of two development policy
credits to Pakistan supporting Pakistans fiscally sustainable
and inclusive growth enhancing reforms. The proposed DPC
operation is central to the Banks engagement in the country in
the areas of improved economic governance and human
development and inclusion as described in the 2010-2013
Country Partnership Strategy (CPS, and in the 2011 CPS
Progress Note.

The programmatic Development Policy Credit (DPC) is
structured around two development objectives (i) increased
private and financial sector development and (ii) expanded
social protection and revenue mobilization. The program
development objective is also supported by a parallel DPC in
the power sector.
Key Outcome
Indicators



To measure results, the following outcome indicators will be
used:
1. By J une 2016, at least five entities privatized through
strategic or equity sale from a baseline of no privatization
transactions.
2. By J une 2016, consumers will have 100% access to their
credit information.
3. By 2016, the simple average statutory Customs tariff rate is
at or lower than 10%, and no special (concessionary)
Statutory Regulatory Orders (SROs) granting tax
exemptions are issued.
4. By J une 2016, the number of unconditional cash transfer
(UCT) beneficiaries reaches at least 5.5 million.
5. By J une 2016, the overall tax collection is at least 11.5 %
of GDP.
Overall Risk Rating High
Operation ID P147557

1
INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A
PROPOSED CREDIT TO THE ISLAMIC REPUBLIC OF PAKISTAN
1. INTRODUCTION AND COUNTRY CONTEXT
1. This memorandum describes the first Fiscally Sustainable and Inclusive Growth
(FSIG-I) single-tranche reform loan for US$400 million equivalent to the Islamic Republic
of Pakistan. From the Banks perspective, the proposed loan will be the first of a new
programmatic series of loans. The FSIG series has two broad objectives: fostering private and
financial sector development to bolster economic growth, and mobilizing revenue while
preserving priority use of fiscal space. In this way, the operation contributes to the governments
strategy for accelerating economic growth, ensuring fiscal consolidation, increasing investment,
and enhancing the openness of the economy to domestic and external competition. A
programmatic approach is proposed to carry on reform momentum and strengthen reform
incentives during times in which political incentives for reforms are typically high due to
election results. Moreover, lessons from other similar operations in Pakistan favor a carefully
sequenced and continuous reform approach.
2. Pakistan faces a serious economic situation. Unprecedented floods in 2010 and 2011,
coupled with continuing security issues, stalling economic reform, falling investment and
external financial inflows, increased devolution of responsibilities to the provinces, and fiscal
disarray preceding elections in May 2013 posed critical challenges that have severely affected
two major macroeconomic imbalances: by the end of the 2012/13 international reserves were
below 1.5 months of imports, and the fiscal deficit (excluding grants) reached 8 percent of gross
domestic product (GDP), a very high level for the third year in row. As a result of weak
fundamentals, the economy also featured borderline stagflation: modest growth coupled with,
until recently, double-digit inflation. As soon as it took office in mid-J une 2013, the new
Government had to articulate an ambitious emergency response so as to prevent a balance-of-
payments crisis, correct fiscal imbalances and put the economy on the road to stabilization and
rapid recovery.
3. The first peaceful transition from one democratically elected government to another
in Pakistani history has given the incoming administration a solid reform mandate. On May
11, 2013, 86.2 million registered Pakistanisshedding fears of attackcast their vote, with the
highest voter turnout in the countrys 66-year existence. The results favored the Pakistan Muslim
LeagueNawaz (PML-N) with a majority of seats. PML-N formed a stable government of the
center with support from independent candidates and smaller parties. At the provincial level
PML-N retained its mandate to govern Punjab. Two opposition parties won mandates as well:
Pakistan Tehreek-e-Insaf emerged as the largest party in Khyber Pakhtunkhwa provincial
assembly, while the Pakistan Peoples Party, despite losing heavily at the national level,
managed to stay the largest political force in Sindh provincial constituent assembly.
4. Barely installed in power, the new government entered into successful negotiations
of an Extended Fund Facility (EFF) with the International Monetary Fund (IMF).Approved
on September 4
th
, 2013, the Governments program goes beyond merely rebuilding the reserve
position and fiscal consolidation. It also contains a growth-oriented agenda in the areas identified
as the major constraints to growthenergy reform, as well as growth, investment, and
competitiveness. The overall Bank contribution in IDA budget support to the program is a
2
commitment of at least US$1.5 billion over three years, provided the economic program remains
on track and the government meets the Development Policy Credit (DPC) conditions. Given the
very low level of reserves, the Bank cannot provide lending under International Bank for
Reconstruction and Development (IBRD) conditions until creditworthiness (including the level
of reserves and debt) recover required levels.
5. Pakistan has important strategic endowments for growth and jobs. A lower middle-
income country at the crossroads of South Asia, Central Asia, China, and the Middle East, it is
thus the fulcrum of a regional market with a vast population, large and diverse resources, and
untapped potential for trade. Pakistans population is about 180 million and gross national
income per capita is estimated at US$1,260 in 2013.Agriculture retains a keythough
decreasingrole in the economy, with a GDP share of around 22 percent (versus 23 percent for
industry and 55 percent for services). Urbanization has been the fastest in South Asia. More
rapid and inclusive growth can benefit from and give employment to the increasing proportion of
Pakistans working-age population, which requires adequate services and quality jobs,
particularly among the rapidly rising share of nonfarm female workers in the labor force.
6. Growth is essential for reducing poverty and improving shared prosperity. Cross-
country studies show economic growth as the main determinant of poverty reduction and
improving shared prosperity in recent decades and Pakistan is no exception. Despite falling and
increasingly volatile per capita growth, poverty declined over the last decade, and Pakistans
poverty rate broadly followed the per capita growth trend. The share of the population below the
national poverty line fell from 34.7 percent in 2001/02 to an estimated 13.6 percent in
2010/2011. For its part, real per capita consumption of the bottom 40 percent of the population
a measure of shared prosperityalso exceeded that of the top 60 percent in the same period. In
addition, Bank analysis shows that growth has been broadly inclusive, with the national Gini
coefficient falling from 0.34 to 0.29 between 1998/99 and 2010/11. In this regard, social safety
netslike the Benazir Income Support Program (BISP)have had a unique redistributive
impact on the poor and vulnerable and have become especially important when growth has
become more volatile (Annex 4). BISP has achieved high efficiency, with about 73.5 percent of
the program budget reaching the poor.
7. At the request of the authorities, the FSIG-DPC series is designed to support Pakistans
fiscally sustainable growth strategy. To this end, it supports enabling the environment for private
investment and creating fiscal space. It addresses selected areas like privatization of SOEs, and
investment climate reforms around business registration, financial inclusion, and trade
competitiveness; as well as strengthening revenue mobilization and protecting priority public
spending, . The ambitious reform program is strongly supported by the government, key
stakeholders, and donors. Most reforms in Pakistan are contested by vested political interests and it is
often difficult for the reform-minded parts of any government to attain their goals. As with other
reformsand to varying degreesthe reform program supported by this operation is likely to face
resistance. However, by complying with the prior actions of the first operation in this series, the
government expects to create a momentum that will help to sustain the reform program. Donors have
been involved in preparing this operation since its inception and have taken part in review processes.
3
2. MACROECONOMIC POLICY FRAMEWORK
2.1. Recent Economic Developments
8. Pakistans economy is at a turning point. Pakistan had not fully recovered from the
slowdown in economic growth since the global and twin balance-of-payments crises of 2008/09
when the country was hit by a mix of large fiscal deficits, accommodative monetary policy and
financial outflows; thus leaving it with few buffers to absorb shocks and little fiscal space to
foster investment. As a result, real economic growth has averaged 3 percent over the last five
years, which is about half the rate of the 1960s. Bank estimates also point to increased GDP
volatility in past years, accompanied by slowing gains in poverty reduction, job creation and
social indicators. Emerging growth constraints are shortage of electricity supply, falling
productivity growth, poor business climate, a difficult security situation and poor
macroeconomic management. Business climate rankings have also worsened. Out of 189
countries, Pakistans Doing Business indicators with lowest scores are: getting electricity (171),
paying taxes (162), enforcing contracts (155), registering property (135), issuing construction
permits (109) and starting a business (98). Pakistan's ratings on the World Economic Forum
(WEF) Global Competitiveness Index are also poor. To change the growth trajectory, the new
authorities adopted an ambitious growth enhancing package, supported by the EFF and the two
proposed DPC series. The authorities approved a substantial increase in, and protection of, the
amount of targeted transfers to the poorest with aims to compensate for the effects of fiscal
consolidation and rationalize social spending. The DPC described here addresses the electric
power sector, and the Fiscally Sustainable and Inclusive Growth DPC series is aimed at reforms
to state owned enterprises, (SOEs), trade policy, business climate and financial inclusion.
9. Economic activity is gradually improving. Preliminary data for FY13/14 show growth
picking up mainly driven by services and manufacturing. They grew 5.7 and 5.2 percent,
respectively, in the first quarter of FY13/14, supported by some decline in electricity shortages
and unscheduled load-shedding. Over the past year, the growth in services has remained stable
due to the offset of the slowdown in telecoms and transport with an improved performance by
wholesale and retail trade, and by finance and insurance. There has been strong large-scale
manufacturing performance, including of agro-based industries, enhanced capacity in iron and
steel, some improvement in construction, and better external demand for cotton yarn and fabrics.
Agriculture grew at a modest 2.5 percent in the first quarter of this year and continues to show
significant variation in its contribution to growth owing to changing weather conditions, little use
of new technologies, and few seed varieties. On the demand side, growth continues to be driven
by private consumption, strongly supported by workers remittances. Private investment is low
and declining: its share of GDP dropped to 10.3 percent in FY12/13 from 14.5 percent in
FY06/07. Much of this stems from a shortage of private sector bank credit, whose growth was
nil in FY12/13 owing to depressed demand, large excess capacity in manufacturing linked to
persistent energy shortages, and to scarce supply due to massive placement of government paper
with commercial banks. In FY13/14, credit to the private sector has started to rebound and
posted year-on-year nominal growth of 5.6 percent. Public investmentconstrained by lack of
fiscal spacewas also low at 3 percent of GDP in FY12/13 and remains contained this year due
to fiscal constraints.
10. A significant correction of a loose fiscal stance is taking place to ensure sustainability.
Pakistan is on track to meet a fiscal deficit target of 5.8 percent of GDP in FY13/14. This is
4
remarkable as the country has had large fiscal deficits exceeding the budget target over the last
six years, with a widening gap stemming from recurrent revenue shortfalls, and expenditure
overruns mainly due to unbudgeted power subsidies. These problems stood out sharply in
FY12/13: Federal Board of Revenue (FBR) revenue was about 1.9 percent of GDP below target
due to low collection of the general sales tax (GST) and income taxes. Energy-related subsidies
reached 1 percent of GDP in FY12/13, and circular debt continued to accumulate due to below
cost recovery tariff rates, and delays in tariff determination and fuel cost adjustments. The
government cleared 1.5 percent of GDP of this circular debt in J une 2013 and an additional 0.6
percent of GDP in J uly 2014.
11. Public debt remains high as large fiscal deficits have been financed mainly through
domestic borrowing, crowding out private sector credit. As external financing available to
the government has become scarce, the government has had to borrow increasing amounts from
the banking system to finance the budget. This has left very little commercial bank credit
available for private investment, directly hurting recovery prospects. In addition, because T-bills
are the preferred instrument, there are in high rollover/refinancing risks and high interest
payments for the government equivalent to 4.3 percent of GDP. Since FY11/12, public debt has
been above the 60 percent limit mandated by the Fiscal Responsibility and Debt Limitation Act
of 2005.
12. The external position is extremely fragile. The current account deficit was small at around
one percent of GDP by end-FY12/13 and remains so. In contrast, net official foreign exchange
reserves declined to the equivalent of 1.5 months of imports at the end of J une 2013 (and to 0.8
month of imports by the end of December 2013). The overall balance of payments is under
severe stress due to weak financial inflows coupled with high debt repayments, especially to the
IMF. Net foreign direct investment (FDI) was a modest 0.5 percent of GDP in FY12/13 and is
muted in the present fiscal year. In response, monetary and exchange rate policies have moved
from being accommodative to a tightening stance on monetary policy as needed to assure reserve
accumulation and price stability. Last year, strong intervention by the State Bank of Pakistan
(SBP) kept the Pakistan Rupee to U.S. Dollar exchange rate stable. As a result, the rupee
suffered only a mild depreciation of 4.5 percent in FY12/13 and of 6 percent against the dollar
since end-J une. Since the second quarter of this year SBP has started to purchase dollars on the
spot market, turning decisively toward rebuilding the external position. The relative stability of
the rupee in nominal terms left the real effective exchange rate roughly unchanged during the
past year. On a longer view, and following the steep correction the real effective exchange rate
had in the aftermath of the 2007 - 2008 crisis, the rupee remains overvalued by some 3-6 percent.
13. Inflation has been in double digits over the last four years, but more recently returned
to single digits. The average headline rate declined to 7.4 percent in FY12/13, down from 17.0
percent in FY08/09. In FY13/14, headline inflation has been in single digits supported by the fall
in food prices and core inflation. Some favorable supply and demand factors explain its recent
decline: good weather has helped improve food supply; and nonfood and non-energy core
inflation - a proxy measure of underlying inflationary expectations - declined from 11.5 percent
in J une of FY11/12 to 7.8 percent in J une of FY12/13. Consistent with the recent tightening of
monetary policy to address balance of payment concerns and support the deflationary move, SBP
increased the policy rate by 50 basis points in September and November 2013.
14. The financial sector appears reasonably provisioned, but vulnerable to further
slowdown in the economy and overexposed to government securities. Banking profitability
5
has been broadly positive over the last few years but slipped in an environment of monetary
policy easing last year. The past years decline in interest rates reduced returns of banks
placements in government securities and, coupled with lower loan volumes, curtailed banks
profitability, which was further dampened by higher provisioning charges in J anuary to J une
2013. In broad terms, the sectors liquidity and solvency positions remain strong, backed by
sluggish growth in advances and a sizable concentration of the asset portfolio in government
securities which carry low risk weightings. As banks risk appetite remains cautious for private
sector credit amid weak but stabilizing credit quality, nonperforming loans (NPLs) slightly
declined to around 15 percent of the overall loan portfolio in J une 2013 and to 14.3 percent in
December 2013. NPLs in small and medium enterprises (SMEs) are still high at 36.9 percent of
total loans, followed by those in agriculture (18.5 percent) and the consumer sector (15.6
percent). The largest share of credit to the private sector is the corporate sector (64.6 percent)
where NPLs are 15.8 percent, mainly concentrated in textile firms.
15. Pakistans Emerging Markets Bonds Index Plus (EMBI+) risk spread has declined
significantly since the arrival of the new administration. The spread had been affected by
continuous political instability, security concerns, and the lackluster performance of the fiscal and
external sectors over the past two years. Market confidence in the Governments program is
bearing fruit as the EMBI+spread has almost halved from 1,011 basis points in March 2013 to
around 560 basis points in February 2014. According to Caa1 (Moodys) Pakistan's foreign- and
local-currency bonds are high risk. The Government intends to return to the international markets
with the placement of a US$500 million Eurobond in April 2014.
2.2. Macroeconomic Outlook
16. The economic cornerstone is the bold economic program of measures anchored on
Pakistans EFF and the proposed DPCs. The medium term macroeconomic framework
FY13/14-FY17/18 projects gradual growth recovery-cum-low inflation, supported by fiscal
consolidation and rebuilding of the external position. The program tackles the key identified
growth constraints: power load-shedding, cumbersome business environment, low access to
finance and macro risks embedded in past stagflations. Under a baseline scenario, higher growth
rates are expected to be reached gradually and inflation is expected to remain low and declining.
17. On the supply side, growth will be driven by the services and large-scale manufacturing
sectors, which have benefitted from decreased power load-shedding and improved business
climate. On the demand side growth drivers will be a mix of consumption recovery, partly
supported by remittances, with strengthened private investment and renewed export
dynamism and, to a lesser extent, increases in public investment. Fiscal consolidation is
expected to reduce borrowing needs and create some fiscal space for public investment while
reducing public debt. Scheduled banks liquidity is in turn expected to increase, helped by
reduced crowding out, falling NPLs and increased provisioning, which is now above 70 percent.
Relatively stable or declining international commodity prices, are also expected to help reduce
inflationary pressures. Ongoing recalibration of policy toward monetary tightening, but in a
context of falling inflation rates, should help rebuild reserves. Aided by a gradually improving
security situation, structural reforms are expected to spearhead productivity growth, lower
country risk, attract foreign and domestic investment linked to the sale or restructuring of state-
owned enterprises and foster competition in the banking, telecom and commercial service
sectors. Strong remittances and recovery of private sector credit are also projected to support
6
consumption. In sum, successful fiscal consolidation and gradual rebuilding of the external
position, supported by satisfactory implementation of the EFF, are expected to ensure
complementary donor external financing and enable the business environment to stimulate
financial inflows. The Baseline macro projections are shown in Table 1 and explained below.
Table 1. Key Macroeconomic indicators Pakistan FY09/10 to FY17/18

FY09
/10
FY10
/11
FY11
/12
FY12
/13
FY13
/14
FY14
/15
FY15
/16
FY16
/17
FY17
/18
Actual Projections
Real economy (Percentage change; unless otherwise indicated)
Nominal GDP at market prices (in bn. of
rupees) 14,867 18,285 20,091 22,909 26,139 29,485 33,171 37,217 41,795
Real GDP growth (at factor cost) 2.6 3.7 4.4 3.6 3.6 4.0 4.4 4.7 5.0
Contributions:
Agriculture 0.1 0.4 0.7 0.7
Industry 0.7 1.0 0.6 0.7
Services 1.8 2.2 3.1 2.1
Per Capita GDP (current US$) 6/ 1,025 1,214 1,257 ..
Unemployment rate 1/ 5.6 6.0 6.0 6.0 6.0 6.0 5.9
Consumer prices (period average) 10.1 13.7 11.0 7.4 10.0 9.2 8.4 7.3 7.0
Consumer prices (eop) 11.8 13.3 11.3 5.9
Fiscal sector (In percent of GDP; unless otherwise indicated)
Expenditures 20.2 18.9 21.5 21.0 19.9 19.9 19.6 19.8 19.8
Revenue 14.3 12.3 12.8 13.0 14.1 14.5 15.1 15.4 15.4
Overall balance (excl. grants) -5.9 -6.5 -8.8 -8.0 -5.8 -5.4 -4.5 -4.4 -4.4
Total public debt 61.3 59.4 63.7 63.0 64.2 63.5 62.1 59.5 58.0
Foreign currency public debt 2/ 30.0 26.5 25.7 21.4 23.1 22.7 22.0 20.0 18.0
Domestic currency public debt 31.3 32.9 38.0 41.6 41.1 40.8 40.0 39.5 40.0
Monetary Sector (Percentage change; unless otherwise indicated)
Broad Money 12.5 15.9 14.1 15.9
Credit to non-government 3.9 4.0 7.5 -0.6
Interest (key policy interest rate) 12.5 14.0 12.0 9.0
Balance of payments (In percent of GDP; unless otherwise indicated)
Current account balance (incl. transfers) -2.2 0.1 -2.1 -1.0 -1.0 -0.8 -1.0 -1.4 -1.6
Exports of goods & services 14.0 14.6 13.2 13.3 14.9 15.0 15.0 14.8 14.5
Imports of goods & services 21.5 20.4 21.6 20.1 22.5 23.1 23.3 23.3 23.3
Capital and financial account 3.0 1.1 0.6 0.3 2.4 2.4 1.5 1.6 1.5
Foreign direct investment, net 1.2 0.7 0.3 0.5 0.6 1.2 0.9 1.3 1.5
Gross official reserves (in US$ million,
eop) 3/ 13,112 15,662 10,852 6,047 8,427 13,142 16,641 17,562 17,419
Gross official reserves (in months of
imports of G&S) 4/ 3.6 3.9 2.7 1.4 1.8 2.6 3.0 2.9 2.8
Total external debt 5/ 34.7 31.0 29.1 25.3 26.5 26.4 25.7 23.6 21.6
Rupees per U.S. dollar (period average) 83.9 85.5 89.2 96.8
Memo:
Nominal GDP at market prices (in US$
billion) 177.4 213.9 225.1 236.6

GDP, PPP (current international $) 6/ 442.8 464.1 491.1 ..
1/ National estimates. Estimated for FY12/13 as published in the Economic Survey of Pakistan 2012/13. Staff assumptions for projection years.
2/ Includes mediumand long termPPG debt as well as short-termexternal debt and IMF debt (budget and balance of payments support).
3/ SBP Gross Reserves exclude Cash Reserve Requirement, gold and foreign currency deposits of commercial banks held with SBP.
4/ Total external debt is inclusive of mediumand long termPPG debt as well as short-termexternal debt, IMF and private debt. 5/ Source; WDI.
Growth and inflation. GDP growth is expected to be 3.6-4 percent in the current fiscal
year and it should pick up from 4 to 5 percent from FY14/15 onwards. Inflation is expected to
decline as a result of stabilization. This will result from the Government tackling its key growth
constraints addressed by the reform agenda supported by both Bank DPCs: and tackles with
macroeconomic instability (mainly addressed by the EFF). At the sector level, the economic
expansion will be supported by services and recovery of the large-scale manufacturing sectors,
fostered by less load-shedding and better private sector credit conditions ensuing from fiscal
consolidation and hence lower borrowing requirements. On the demand side, consumption will
be supported by resilient remittances that are expected to show positive, albeit declining growth
7
rates. Manufacturing exports of goods and services are expected to grow at 6 to 7 percent, their
past decade average. Better external demand growth is expected due to GSP plus enhanced trade
preferences for 75 new major export products entering in the European market, U.S. recovery
and opening of new markets in South and East Asia and trade normalization with India. Services
are projected to expand with telecom, fostered by new 3G/4G services, power and transport
services. Official figures place inflation in single digits by end-fiscal 2014, despite some
pressures related to hikes in administered prices such as oil, electricity and gas that might bring
about a 10 percent end-year rate. As fiscal consolidation and monetary tightening proceed,
average inflation is expected to approach its medium-term target of 7 percent.
Fiscal accounts. The fiscal deficit excluding grants is projected to decline from 5.8
percent of GDP in FY13/14 to about 4.4 percent of GDP by FY17/18. Provinces are expected to
generate small fiscal surpluses. About half of the fiscal consolidation effort is expected to come
from revenue increases and the other half from reducing untargeted power subsidies and
recurrent spending. Recurrent expenditure cuts and gradual reduction of power subsidies would
lead recurrent expenditures to decline from 16.0 percent of GDP in FY12/13 to 14.2 percent in
FY17/18. The tax strategy should support an increase of at least three percentage points of GDP
in tax revenue over this period, from 9.6 to 12.6 percent of GDP. About two thirds of such efforts
are expected to come from the federal level and one-third from provinces. Part of such fiscal
space generated would allow development spending and protect social safety net. BISP outlays
will increase to around 5.6 percent of GDP by FY17/18, significantly higher than the 3.7 percent
average during the last three years. Public debt to GDP ratios are expected to increase to 64.2
percent of GDP in FY13/14, but to decrease to below 60 percent of GDP by FY16/17, as
projected fiscal consolidation will require smaller amounts of financing (Tables 2 and 2.1).
Table 2. Key Fiscal Indicators Pakistan FY10/11 to FY 17/18
FY10
/11
FY11
/12
FY12
/13
FY13
/14
FY14
/15
FY15
/16
FY16
/17
FY17
/18
Billion PKR Actual Projections
Revenue and grants 12.6 13.1 13.3 14.3 14.7 15.3 15.5 15.5
Total Revenue 12.3 12.8 13.0 14.1 14.5 15.1 15.4 15.4
Tax revenue 9.3 10.2 9.6 10.3 11.2 12.0 12.5 12.6
Taxes on goods and services 4.2 4.7 4.2
Direct Taxes 3.3 3.6 3.2
Taxes on international trade 1.0 1.1 1.0
Other taxes 0.8 0.8 1.1
Nontax revenue 3.0 2.6 3.4 3.8 3.3 3.1 2.9 2.8
Grants 0.3 0.3 0.3 0.2 0.2 0.2 0.1 0.1
Expenditure 18.7 21.2 21.0 19.9 19.9 19.6 19.8 19.8
Current expenditure 15.9 17.5 16.0 15.5 15.2 14.4 14.3 14.2
Interest payments 3.8 4.4 4.3 4.7 5.1 4.5 4.3 3.9
Superannuation allowances & pension 0.6 0.7 0.8
Transfers (other than provinces) 1.3 1.1 1.0
Others 5.7 4.5 5.1 5.7 4.9 4.6 4.5 4.8
Provincial 4.4 6.8 4.8 5.2 5.2 5.4 5.6 5.5
Development expenditure & net lending 2.8 3.7 5.0 4.4 4.7 5.2 5.5 5.6
Statistical discrepancy 0.2 0.3 0.1 0.0 0.0 0.0 0.0 0.0
Overall balance (excluding grants) -6.5 -8.8 -8.0 -5.8 -5.4 -4.5 -4.4 -4.4
Overall balance (including grants) -6.2 -8.5 -7.7 -5.6 -5.2 -4.3 -4.3 -4.3
Financing 6.5 8.8 8.0
External 0.6 0.6 0.0
Of which : privatization receipts 0.0 0.0 0.0
Domestic 5.9 8.1 8.0
Memo:
Primary balance (excluding grants) -2.5 -4.0 -3.6 -1.1 -0.3 0.0 -0.1 -0.5
Primary balance (including grants) -2.2 -3.7 -3.3 -1.0 -0.1 0.2 0.0 -0.4
Source: World Bank Staff estimates
8
Table 2.1. Total Expenditure Functional Classification
(In percent of GDP; unless otherwise indicated)

2011/12*
Actual
Federal Punjab Sindh KP Balochistan
General services 11.1 0.5 0.3 0.2 0.1
Defense 2.5 0.0 0.0 0.0 0.0
Public order and safety 0.4 0.4 0.2 0.1 0.1
Economic affairs 0.7 0.4 0.3 0.2 0.2
Health 0.1 0.3 0.2 0.1 0.0
Education 0.3 0.8 0.4 0.3 0.1
Community services 0.0 0.4 0.1 0.1 0.1
Social protection 0.0 0.0 0.2 0.0 0.0
Others 1/ -0.6 0.0 0.0 0.0 0.0
Source: World Bank Staff calculations and estimates.
* Does not include net lending.
1/ This category pertains to other social services in case of provincial governments. For federal government, this category is a balancing entry to reach at
the Ministry of Finance published aggregate number on development expenditure using the Accountant General Pakistan Revenues disaggregated data
(on account of data discrepancy).
Revenue mobilization. The baseline assumes a marked improvement in FBR
performance, allowing tax revenues to rise from 9.6 percent of GDP in FY12/13 to 12.6 percent
by FY15/16, and consolidated total revenue and grants from 13.3 percent of GDP in FY12/13 to
15.7 percent of GDP by FY15/16. In general increased revenue mobilization will be aided by tax
buoyancy resulting from a revival of economic growth, a pickup in imports as well as the
authorities own efforts to revamp and reform tax policy and tax administration. Thanks to its tax
reform strategy, Government has a menu of tax policy priorities aimed to broaden the tax net and
reduce the tax gap by strengthened compliance focused on five areas: (i) minimization of tax
expenditure (including those which are SRO-related); (ii) upward revision of sales and general
excise tax rates; (iii) upward revision of capital gains tax on securities and immovable property;
(iv) revision of threshold taxes for sales tax registration; and (v) identification of new sectors for
expanding the net of domestic taxes. The impact for FY13/14 is projected to be positive at about
0.7 to 0.8 percent of GDP, and next year estimated fiscal impact is expected to be again at least
0.7 percent of GDP. Of this, removal of SRO supported tax exemptions estimated at 0.35 to 0.4
percent of GDP has already been identified. This also assumes a mild decrease of nontax
revenues, which over the forecast period are projected to fall from 3.8 percent of GDP in
FY13/14 to 2.8 percent of GDP, mainly because of reduced US Coalition Support Funds offset
by small increases on SOE profits resulting from their expected reform and privatization.
External accounts. The current account deficit is projected to average a modest 1.2
percent of GDP between FY13/14 and FY17-18, with a positive trend in tandem with expected
gradual growth recovery that will require additional imports (including oil). Export recovery,
strong dynamism of remittancesdespite some negative spillovers expected from expatriate
workers returning from Gulf Cooperation Council (GCC) countries and imports initially favored
by low international oil prices will support the current account balance. Higher financial inflows
attracted by lower country risk, privatizations, new cooperation and trade relations with
neighbors and the opening of special economic zones, especially attractive to China and J apanese
investors, and multilateral flows will support the financial account. Official foreign exchange
reserves are expected to build from US$6.0 billion by the end of FY12/13 to about US$16.6
billion by the end of FY15/16, equivalent to 3 months of imports. This will be the outcome of a
significant effort to close the financing gap in the initial years. Balance of payments (BOP)
financing requirements are shown in Table 3.
9
Table 3. Pakistan BOP Financing Requirements and Sources FY11/12 to FY 15/16
Actual Projections
In million US Dollars FY11/12 FY12/13 FY13/14 FY14/15 FY15/16
Financing requirements 8,028 7,983 8,350 5,809 5,021

Current account deficit 4,658 2,530 2,311 1,988 2,717
Maturing short-termdebt 100 391 147 100 100
Amortization of medium- and long-termdebt 3,270 5,062 5,892 3,721 2,203
To IMF 1,155 2,540 3,089 1,272 57
To other official creditors 1,477 1,881 2,203 1,849 1,941
To private creditors 638 641 600 600 205

Financing sources 8,031 7,983 8,350 5,809 5,021

FDI and portfolio investments (net) 600 1,273 2,250 3,724 2,690
Capital grants 180 241 202 165 235
Other net capital and financial inflows -370 -793 -200 400 -200
Short termdebt disbursements 0 256 300 300 250
Long termdebt disbursements 3,191 2,454 8,230 5,936 5,444
FromIMF 0 0 2,207 2,207 2,207
Fromother official creditors 2,633 2,089 5,336 2,912 2,756
Fromdomestic private creditors 558 365 687 817 481
Change in reserves (decrease =+) 4,430 4,556 -2,433 -4,715 -3,399
Source: World Bank Staff calculations and estimates
Financing gap. Gross financing requirements from the balance of payments are expected
to decrease significantly once the bulge of the IMF amortization in FY13/14 and, to a lesser
extent, FY14/15 passes. They are projected to decrease from US$7,983 million in FY13/14 to
US$5,021 by FY15/16. In closing the financing gap, the role played by front-loaded multilateral
financing during the early stages of the EFF program is expected to decline, partly offset by a
back-loaded increase in FDI attracted by privatization and private sector participation. In the
critical initial year of FY3/14, the main projected sources of official financing are: Saudi Arabia
(US$1.5 billion), the Coalition Support Fund (US$1 billion), Bahrein (US$0.5 billion); IMF
(US$2.2 billion), World Bank (US$1 billion), Asian Development Bank (ADB) and J apan
International Cooperation Agency (J ICA)(US$500 million each) and DFID (US$100 million).
Pakistan Telecommunication Company Ltd. Privatization (US$800 million), and sales of third-
generation telecoms licenses (US$1 billion) and placement of Eurobonds (US$0.5-1 billion) are
also expected to contribute to the early rebuilding of the foreign reserves position. Given the
difficult security conditions only slow increases in Foreign Direct Investment (FDI) flows are
projected from 0.5 percent of GDP in FY12/13 until they reach the average level of 1.2-1.3
percent of GDP of the 2000-2009 period. This projection accounts for a privatization program
that can despite facing some early successes, may face some implementation delays and a
gradual return of investors appetite for investing in Pakistan only when key structural reforms
get sustained momentum.
Public Debt. Pakistans public debt to GDP ratios are projected to peak in FY13/14 and
then decline. Fiscal consolidation coupled with enhanced debt management and revenue from
privatization proceeds will help reduce public debt levels. Public debt is projected to fall from
64.2 percent of GDP in FY13/14 to around 58 percent by FY17/18. Stress tests of a debt
sustainability analysis show that the debt path is highly sensitive to exchange rate depreciation
shocks and, to a lesser extent, the materialization of a contingent liability from power circular
debt or SOEs losses which might put the level of public debt above threshold of 60 percent of
GDP. Debt sustainability analysis is shown in Figure 1 and discussed further in Annex 11.

10

Figure 1. Pakistan Debt Sustainability Analysis FY08/09 to FY17/18

18. The macroeconomic framework is appropriate for the proposed DPC operation.
Economic activity is showing clear signs of pick-up, inflation is declining, and fiscal imbalances
are narrowing. Moreover, on the external front, imbalances are at a point of inflexion, the
current account remains modest and foreign exchange reserves have started to rebuild.
19. Downside risks to the macroeconomic outlook are high. Pakistan remains vulnerable to
internal and external shocks that could derail the entire program. First, the country is exposed to
natural disasters that might require significant fiscal resources. Second, the economy is
vulnerable to terms-of-trade shocks, especially for oil. A US$10 increase per barrel in oil price
raises the import bill by about US$600 million. Third, remittances growth might fall faster if
tougher migration policies in labor-recipient countries such as Saudi Arabia, the United Arab
Emirates, and other GCC countries stop or reduce migration. Fourth, the consolidation of the
global economic recovery could take longer than projected, due to the impact of US Federal
Reserve tapering or new unfavorable events in European or major emerging economies. Fifth,
expected FDI might not materialize as expected, especially if the domestic or regional conflict in
neighboring countries continues or even gets worse. Last, but not least, the IMF program might
run off-track because, for example, lower revenues are collected at the federal and/or provincial
levels or both; or power subsidies are reduced more slowly than projected due to political
opposition; or no or slow progress on State Owned Enterprises (SOEs) privatization. If any of this
happens, the mitigation response would depend on the nature of the shock, once it materializes.
The summary results of a worst case scenario are included in Annex 11 and, compared with the
baseline, they can be summarized as: lower growth, return to double digit inflation, larger fiscal
deficits, and higher external current account deficits. While the reserve position would show
initial improvements, these would reverse in later years. In a similar vein, public debt ratios
would barely show marginal decreases.

External Debt Composition, 2012/13
USD
(mn)
Share of
total debt
% of
GDP
Monetary authoriities 4,981 8% 2.1%
General Government 45,194 76% 19.1%
Banks 1,554 3% 0.7%
Other sectors 8,050 13% 3.4%
Of which intercompany lending 2,829 5% 1.2%
Total External debt 59,779 100% 25.3%
Long term 56,256 94% 23.8%
Short term 3,523 6% 1.5%
Sources: Pakistan authorities
50
55
60
65
70
75
80
2
0
0
8
/
0
9
2
0
0
9
/
1
0
2
0
1
0
/
1
1
2
0
1
1
/
1
2
2
0
1
2
/
1
3
2
0
1
3
/
1
4
2
0
1
4
/
1
5
2
0
1
5
/
1
6
2
0
1
6
/
1
7
2
0
1
7
/
1
8
Actual 0 0 0 0Projections0 0 0 0
I
n

p
e
r
c
e
n
t
o
f

G
D
P
Public Debt SustainabilityAnalysis
Contingent
liabilities1/
Combined2/
ERdepreciation
3/
Baseline4/
Source: WorldBank staffestimates
Notes: 1/ Onetime10percentof GDP increaseinother debt creatingflowsin2014/15
2/ Combinationofthreeshocks: i. Real GDP growthisat baselineminusone-quarter standard
deviation,ii. Primary balanceisat baselineminusone-quarterstandarddeviation, iii. Real interest
rateisat baselineplusone-quarter standarddeviation
3/ Onetime30percentreal depreciationin2014/15
4/ Countryteamprojections
10
20
30
40
2
0
0
8
/
0
9
2
0
0
9
/
1
0
2
0
1
0
/
1
1
2
0
1
1
/
1
2
2
0
1
2
/
1
3
2
0
1
3
/
1
4
2
0
1
4
/
1
5
2
0
1
5
/
1
6
2
0
1
6
/
1
7
2
0
1
7
/
1
8
Actual 0 0 0 0Projections0 0 0 0
I
n

p
e
r
c
e
n
t

o
f

G
D
P
External Debt Sustainability Analysis
Currentaccount 1/
Combined2/
ERdepreciation3/
Baseline4/
Source: WorldBank staffestimates
Notes: 1/ Non-interestcurrentaccountisat baselineminusone-half10-yearhistorical standard
deviations
2/ Combinationofthreeshocks: i. Non-interestcurrentaccountisat baselineminusone-quarter
standarddeviation,ii. Real GDP growthisat baselineminusone-quarter standarddeviation, iii.
Nominal interestrateisat baselineplusone-quarterstandarddeviation
3/ Onetime30percentreal depreciationin2014/15
4/ Countryteamprojections
11
2.3. Relations with the IMF
20. This FSIG-I operation is prepared in close coordination with the IMF-EFF. This has
required an extraordinary amount of bilateral technical dialogue, coordination of views, and joint
missions between both institutions and officials. The EFF mainly focuses on the short-term
stabilization program and on selected structural reforms in tax administration, SOE reform, and
power sector reform. The Banks DPCs bring depth and complementarity to key structural efforts
over the medium term in those areas as well; while introducing new measures in tax
administration, trade competitiveness, the business climate, and access to finance. The Bank also
has parallel technical assistance work identifying institutional capacity and providing assistance
to areas where it has proper technical and financing expertise, such as tax policy and
administration, trade, private participation in basic infrastructure, and social safety nets. Finally,
close collaboration with the IMF is ongoing in (a) power sector reform through the Banks
preparation of a DPC on power; (b) financial sector reform, including joint efforts to prepare a
Financial Sector Assessment Program; and (c) debt management through joint missions and
preparation of a Medium-Term Debt Strategy.
3. THE GOVERNMENTS REFORM PROGRAM
21. Upon taking office, the Sharif government introduced a comprehensive reform
program. Under this program, the government is committed to adopt strong stabilization
measures to eliminate the countrys critical macroeconomic imbalances and initiate major
growth-oriented structural reforms needed for a more efficient economy (Box 1).The government
also issued a new energy policy last August.
Box 1. Key Economic Priorities of the Governments Program
The government envisages stabilizing the economy, bringing inflation down to the 67 percent range, and achieving growth
rate targets of 67 percent by 2017/18 or earlier. To do this, it has set the following major goals:

Stabilization
Moving to fiscal consolidation. Reducing the fiscal deficit from8.0 percent of GDP in 2012/13 to 3.5-4 percent in 2016/17 by
increasing revenues over 1 percent of GDP annually; eliminating tax exemptions; imposing austerity in expenditure
management based on reductions in ministries nonwage current expenditures; protecting the priority safety net (BISP); and
carrying on active public debt management.
Rebuilding the external position and tightening monetary policy. Scaling back monetary accommodation of fiscal deficits and
setting up policy rates to keep positive real interest rates; strengthening the central banks independence; and protecting the
external position by repurchasing reserves to cushion against major shocks.
Growth-enhancing reforms
Comprehensive power sector reform. Reducing power subsidies; restructuring boards of power distribution and generation
companies; making new investments; strengthening the power sector regulator; and expanding alternative sources of energy.
Reforming SOEs. Privatizing or restructuringthe latter requiring professional chief executives and board members with a
corporate structure in line with Public Sector Companies (Corporate Governance)Rules 2013.
Improving trade competitiveness. Simplifying tariffs to return to the 2003 tariff framework, with four slabs and 025 percent
rates, and phasing out trade-distortive statutory regulatory orders (SROs) on some 4,000 products.
Normalizing trade relations with India. Extending most-favored nation status to it; shifting to the sensitive list under the
South Asian Free Trade Area regime to facilitate regional trade; and taking full advantage of trade preferences available from
the European Union.
Enhancing the investment climate. Establishing a virtual and physical OSS for registering limited liability companies; and
strengthening of the Board of Investment in facilitating implementation of investment-friendly special economic zones.
Expanding access to finance. Deepening the SBPs Financial Inclusion Programto enhance access of SMEs to financial
services through regulatory reforms, product innovation, financial literacy, and consumer protection.
12
4. THE PROPOSED OPERATION
4.1. Link to Governments Program and Operation Description
22. The proposed FSIG-I single-tranche credit, under a two-phase framework, will
support key reforms of the growth-enhancing components of the governments program
described above. In particular, it will address the following: privatization of SOEs, improving
the investment climate, mobilizing revenue and protecting priority social expenditure. Measures
are encapsulated in four core areas of actions: (a) reforming state-owned enterprises with private
sector participation; (b) promoting access to finance and business registration; (c) expanding
social protection; and (d) mobilizing revenue. Most measures are in fact interrelated. For
instance, SOE privatization and the creation of fiscal space will contribute to fiscal consolidation
and smooth the social costs of adjustment both in this operation and in a parallel power sector
operation. As the growth elasticity of Pakistans poverty rate is among the highest in the world,
by the expected impact on growth acceleration, the operation is also expected to contribute to
poverty reduction and shared prosperity.
23. The first phase of the program addresses critical institutional and regulatory
changes required to have a solid jumpstart of reforms. The second phase of the program
consolidates and deepens reforms required to reach the major outcomes of the reform process.
However, the first credit is mostly based on self-standing policy measures implemented by the
government before Board presentation.
24. Pakistan is considered as a low-performing country at implementing policy-oriented
operations. Therefore, past operations provide valuable country-specific lessons for designing
this DPC series that have been closely followed in its preparation.
The 2011 Country Partnership Strategy Progress Report notes that deep reform progress
supported by development policy lending should be aware of the slow pace of structural
reform and the permanent risk of an earlier than anticipated closing of the IMF program.
Evidence from past reform programs in Pakistan, undertaken by both the Bank and ADB,
suggests that multi-sector operations fail. A recommendation from an IEG Project
Performance Assessment Report on four structural adjustment loans in Pakistan dated
December 19, 2005 states three lessons: (i) "Complex or politically difficult sector reforms
are best supported through dedicated sector operations. A multi-sector operation can play
only a secondary or facilitating role when dealing with ... deep-rooted reluctance to reform
(as in power)..."; (ii) power sector reform programs require sustained intervention over the
long term but must be designed with flexibility to allow assessment of progress and
adaptation as the reform evolves, including leaving open the option to change indicative
triggers or bring other instruments into play; and (iii) precise definitions of actions and
when they are considered complete are needed to avoid delays or failures to achieve
objectives, and these cannot always be described in the policy matrix alone. ADB's
equivalent of IEG, which had a series of program loans which completed in about 2008 or
2009 drew much the same conclusion: "ADB must pursue structural reforms through
sector-specific initiatives using a programmatic approach. Reforms in various sectors
should not be lumped together into one large program."
The Tax Administration Reform Project indicates that given the policy, legal, and
institutional complexities involved in mobilizing revenue, an investment operation alone
13
strictly focusing on improving tax administration is unlikely to increase the tax ratio on a
sustained basis. Hence, tax administration reform should be complemented by upfront
adopted tax-policy measures.
The last 2007/08Poverty Reduction and Economic Support Operation underscores the
importance of (a) aligning the program with the relevant levels of government, that is
federal or provincial; (b) avoiding dispersion and being selective on the most critical areas
of reform; (c) addressing capacity issues with timely technical assistance; (d) undertaking
robust and comprehensive prior analytical work; (e) being aware that institutional reforms
take time and need multiyear support; and (f) having flexibility to respond to new
developments.
4.2. Prior Actions, Results and Analytical Underpinnings
Fostering Private and Financial Sector Development
Under Action 1.1 of DPC-I, The Privatization Commission has launched the Privatization
Program, including (a) taking to market one strategic sale of an SOE, including calling for
expressions of interest from prospective investors; and(b) issuing requests for proposals and
calling for expressions of interest in connection with the procurement of financial advisors to
advise on: (i) another SOE strategic sale, and (ii) the offering of equity in three SOEs in
domestic and international capital markets.

Under Action 2.1 of DPC-II, one SOE strategic sale and one capital market SOE
privatization transaction will have been completed.
25. The current Government is keen on reviving the Pakistans privatization program
that had been stalled for over eight years (Annex 5). Pakistans SOEs are a heavy burden on
already strained fiscal resources, deliver poor services, and create market distortionsall of
which hold back economic growth and suppress private investment by providing poor services
and crowding the private sector out of major markets. Pakistan still has more than 100 SOEs
operating in a wide range of economic sectors, many of which have weak managerial and
corporate governance and cost-ineffective service delivery, and rely on considerable direct
subsidies (to cover financial losses or to pay for operational costs) and contingent liabilities
(guarantees) to sustain their operations. The new government is taking urgent steps to generate
revenues from the privatization of suitable SOEs. On October, 2013, the Cabinet Committee on
Privatization (CCOP) approved a list of 31 priority projects to be implemented in a phased
manner. These projects were selected from the list of 65 SOEs approved by the Council of
Common Interest (CCI) for privatization. On December 18, 2013, the government appointed a
full-time professional (from the private corporate sector) Chairman of the Privatization
Commission and constituted a new Privatization Commission (PC) Board on December 26,
2013, consisting of leading private sector professionals. The PC Board has already selected a
priority list of at least 10 SOEs, from the approved list of 31 SOEs, in the oil and gas, banking
and insurance, and power sectors for block sales, and primary or secondary public offerings. It
also approved an implementation roadmap for these 10 SOEs including: key objectives,
identification of appropriate privatization modalities, sequencing prioritization, broad
timeframes, and stakeholder communication. The expected support of financial advisors will
14
allow PC to offer minority shares in two or three companies in domestic or international markets
and one strategic sale subject to investor interest and global market conditions.
26. Results: The prior action and indicative trigger will help restart the privatization
process in Pakistan, with the completion of the first 2 equity and strategy sales. And as the
privatization process gains momentum, it will indirectly achieve an increased private sector
investment, improved performance at service delivery by SOEs, reduced fiscal losses and by the
same token, improved public sector resource allocation.
Under Action 1.2 of DPC-I: The MoF has submitted the Credit Bureaus Bill, 2014 to the
National Assembly for approval.
Under Action 2.2 of DPC-II: National Assembly will have approved the Credit Bureau Act.
27. Credit information is a key component of a strong business environment and a key
indicator in the Doing Business report. Among the most productive reforms to promote
financial inclusion are those which reduce the underlying risks by strengthening creditors rights
through reforms in credit information and in secured transactions. Credit bureaus are essential
parts of the financial infrastructure that facilitate access to formal finance, and when well
designed with the proper legal framework, they reduce information asymmetries, increase access
to credit for small firms, lower interest rates, improve borrower discipline, and support bank
supervision and credit risk monitoring. The State Bank of Pakistan established the electronic-
Credit Information Bureau (e-CIB) system with mandatory membership for all banks and
financial institutions, which are either regulated by SBP or the Securities and Exchange
Commission of Pakistan (SECP) (43 nonbank financial companies, 38 banks, 9 development
financial institutions, and 7 microfinance banks). Access to information from this database is
restricted to members. Public and private credit bureaus provide credit information on only 7
percent and 2 percent, respectively, of the population. Significant gaps are that borrowers and
third parties do not have access to their own credit information, positive information is not
included in public bureau credit reports, and credit histories do not include information from
nonfinancial institutions. Furthermore, there is no direct legislation governing credit information.
The government recognizes the need for reforms in credit information.
28. Results. This action will fundamentally change the way the credit information
system functions in Pakistan by making it fully transparent. Following extensive
consultations in its preparation, the new Act consolidates the regulatory framework under the
State Bank of Pakistan (including credit rating agencies), includes critical consumer protections
which have been missing, and increases the scope of information available to consumers, while
expanding the coverage and quality of their credit information.
Under Action 1.3 of DPC-I, the Securities and Exchange Commission of Pakistan has
approved the Securities and Exchange Commission (Micro-insurance) Rules, 2014.
29. Opening insurance markets is critical for an inclusive growth agenda. It lowers risks
for enterprises, households, and individuals. International experience has shown that insurance
can play an important role in helping the poor manage their risks by protecting the assets and
incomes of low-income households when financial losses occur. The market for micro-insurance
in Pakistan remains severely underdeveloped due to the lack of awareness about the potential
15
benefits of micro-insurance among micro-entrepreneurs, small and landless farmers, women, and
low-income households, and due to the lack of effective mechanisms and targeted products to
provide micro-insurance services and address the existing or potential demand. Moreover, most
of the activities in this sector remain broadly unsupervised due to the inexistence of a specific
regulatory framework. The SECP has finalized draft rules for micro-insurance that were
published in J une 2013 in the official gazette of Pakistan for seeking public comments. The rules
were waiting to be finalized and officially communicated. In Pakistan, where insurance
penetration is just 2-5 per cent of the population, and there is the potential to increase the number
of micro-insurance holders from 5 million to 30 million, it is anticipated that this initiative will
help in creating a transparent and enabling environment thereby increasing the insurance density
and affordable outreach to low-income people.
30. Results. These rules will open up the insurance market in Pakistan by introducing
insurance products that benefit lower income households and small farmers.
Under Action 2.4 of DPC-II, SECP, FBR and Employees Old Age Benefit Institution
(EOBI) will have established (a) a virtual One-Stop-Shop (OSS) for business registration and
(b) a physical OSS in one province, and developed a plan for introduction of the concept of
limited liability partnerships (LLPs).
31. One of the most important elements for doing business is business registration.
When an entrepreneur wants to start a business in Pakistan, the business has first to be registered
with many different public agencies and the person behind the business has to be aware of the
range of different reporting obligations that may apply. This process is cumbersome and a
deterrent for starting a business. Indeed, a new business is often not registered with all the
required agencies, and in many cases the business does not register at all, and therefore
unregistered businesses expand the already large informal sector, with negative consequences for
business activity and tax collection. Businesses themselves may be hurt, as on average informal
businesses grow more slowly and stay smaller than those in the formal sector. Under DPC-I,
solid steps have been taken. FBR, EOBI and SECP launched the establishment of OSS by
finalizing the design of the integrated business registration software and, to do this they signed a
memorandum of understanding (MOU). The MOU defined roles, responsibilities, actions, costs,
and timeframe to initially establish a virtual OSS for limited liability companies; established the
Project Management Committee; finalized the technical requirements for hardware and software
development; and finalized the blueprint for the design of the virtual (and physical) OSS.
32. Results. This action will reduce the number of steps and days to register a business
from 10 and 21 to at least 8 and 18 respectively.
Under Action 2.3 of DPC-II, MoF will have obtained approval by Parliament of a budget
2014/15 including the application of 6 statutory tariff slabs under the tariff simplification
program and the Plan to achieve 4 slabs in 3-years, within a range of 0 to 25% for all tariff
lines, with very few exceptions and tariff peaks allowed just to address sensitive goods or
special sectors will be finalized.
33. A poor investment climate has also negatively affected by a complex tariff regime
that reduces trade competitiveness. Tariff simplification would stimulate growth by boosting
exports and increasing Pakistans ability to compete globally, at the same time increasing
16
consumer welfare. A decade ago Pakistan was among the most open economies worldwide, with
four statutory tariff rates in the range of 525 percent, and few exceptions (Annex 6). However,
the tariff structure of imports seems to have started growing more complex after 2004, with the
introduction of new statutory duty rates, the use of statutory regulatory orders (SROs) and
additional duties. The number of standard statutory rates doubled from only four (5, 10, 15, and
25 percent) in 2002/03 to eight (0, 5, 10, 15, 20, 25, 30, and 35 percent) in 2012/13. As a result,
the performance of Pakistanis export growth has deteriorated since 2004, reflecting an
increasing complexity of the tariff regime and the use of SRO exemptions. Firm level export data
clearly show that the ability of firms to innovate and select high growth products is greatly
diminished. Tariff dispersion also increased from 67 percent to 81 percent over the last decade.
Tariffs reform should aim to reduce the average rate, while preserving selected tariff peaks
mainly of sensitive tariff lines, namely alcoholic beverages and auto industry products, whose
elimination seems politically more difficult in the near term, but feasible in the medium term.
The reduction in the average duty rate, which should be applied with priority to capital and
intermediate goods, will result in increased competitiveness for Pakistani producers, stemming
from cheaper access to imported inputs and machinery unavailable in Pakistan. The
simplification of the tariff regime to fewer slabs will enhance transparency, and cut the
administrative, menu and information costs associated with the current complexity of the tariff
structure. As an initial step, the Federal Government already approved a Tariff Rationalization
Plan to reduce, and make effective following approval of budget 2014-15, the number of slabs in
statutory (MFN) Customs tariff rates from 8 to 6, in the range of 0 to 25 percent, for all tariffs
lines currently below 50%, with a very limited number of exceptions for sensitive goods and
special sectors.
34. Results. The simple average statutory tariff rate will be reduced to below 10% by
June 2016, from its present average of 14.4 % in June 2013.
35. Other measures to create a more enabling investment climate. Competitiveness is
instrumental to growth, and Pakistan needs to address it in a broader way, through productivity-
enhancement measures, particularly around the business environment which can create
incentives to increase private sector investment. Whereas some key areas affecting the business
environmentregistering contracts and dealing with construction permitshave been
transferred to provincial governments, there are still important initiatives to be done at the
federal level (see below).
Business environment Special Economic Zones. The creation of Special Economic
Zones (SEZ) in Pakistan has been advanced through the recently approved SEZ bill of
2012. While the law should catalyze the creation of industrial clusters, increasing
productivity and competitiveness, implementation has stalled due to lack of clarification
for private investors and capacity constraints at the Board of Investment (BOI) to process
the applications received to date. The BOI, after consultations with the provincial
governments and concerned SEZ authorities, is charged with framing the rules and
regulations necessary for implementation of this act. BOI Committee already approved
the first SEZ application. In this case, it was submitted by the Sindh provincial authorities
on Khairpur and approved it following clarification of tax benefits under the SEZ
regulatory framework for developers and provincial authorities. By mid-this year, BOI
Committee intends to approve at least two SEZ applications.
17
Access to finance AML/CFT. Pakistan has taken substantial steps towards improving
its Anti Money Laundering (AML/CFT) regime, including by issuing a Statutory
Regulatory Order that addresses the definition of terrorism and an Anti-Terrorism
Amendment Ordinance to establish procedures for the identification and freezing of
terrorist assets. The Financial Actions Task Force (FATF) has commended Pakistan for
the issuance of the AML/CFT Ordinance, which came into force on 12 October 2013 and
allows Pakistan to begin implementing its UNSCR 1373 obligations immediately.
However, the FATF had concerns regarding the temporary character of this ordinance,
which needs to be converted into permanent legislation through the parliamentary
process, and urged Pakistani authorities to take the necessary steps for swift ratification
of the ordinance by its legislature. The Ministry of Interior already submitted the
ratification of the AML/CFT amendment to Parliament and National Assembly approved
it. The amendment responds to FATF requirements towards ensuring Pakistan is fully
compliant, and is a substantial progress towards ensuring Pakistans country rating
reflects these achievements to date.
Several trade and transit-related actions have put the country on a course towards
enhanced regional competitiveness. The GOP has set the stage for increasing the
number of goods that can be imported through its main land border with India at Wagah
and at Karachi port. It has granted India (the main country with which Pakistan maintains
significant trade barriers) full non-discriminatory access to its market over 3 years, which
will allow a significantly expanded list of items to be imported from India via Wagah and
Karachi, and extended Wagah border hours of operation from the current 8 hours to at
least 12 hours per day, 7 days a week (with a schedule to extend to 24/7). Through
tangible progress in implementing the Afghanistan-Pakistan Trade and Transit
Agreement, Pakistan has also allowed goods from India destined for Afghanistan to also
enter through Wagah, which up until now could only enter Pakistan through Karachi;
thereby increasing transit volume and collected fees, reducing transportation costs and
enhancing consumer welfare in Afghanistan, an important action for both countries'
growth and stability. Additional regional measures include the signing of power purchase
agreements with Tajikistan and Kyrgyz Republic (and a transmission services agreement
with Afghanistan) which will allow Pakistan's National Power Transmission Corporation
to import 1000 MW of summer-time electricity supply; and adoption of a Pakistan-India
framework under which the electricity transmission systems of the two countries can be
connected within the next 12-18 months, with Pakistan's private sector importing at least
200 MW of competitively priced electricity from India.
Expanding Social Protection and Revenue Mobilization
Under Action 1.4 of DPC-I, the Ministry of Finance has strengthened the pro-poor
orientation of the BISP through: (a) raising the basic benefit under BISP to PKRs.1,200 per
family per month; (b) issuing a notification guaranteeing timely and full quarterly budget
releases to BISP; and (c) obtaining the endorsement of the Chief Secretaries of the Provinces
of memoranda of understanding between BISP and the Provinces to extend conditional cash
transfers (CCTs) for primary education to at least twenty (20) districts.
18
Under Action 2.5 of DPC-II, MoF will have (a) obtained approval by Parliament of a
budget 2014/15 increasing BISP allocation to at least PRs. 80 billion increase the benefit
amount in line with inflation; start activities to expand CCTs for primary education in no less
than 25 districts with a benefit of Rs.250 per month per child attending school; and seek an
agreement with provinces on a cost-sharing arrangement for CCTs included in budget
2014/15.
36. Protecting the safety net by expanding social protection. The government is
committed itself to minimize the potential negative impact of fiscal adjustment and structural
reforms on the poor and vulnerable. The rigorous fiscal adjustment requires protecting those
programs with demonstrated effectiveness in benefiting the poor while curtailing less productive
expenditures. For example, the planned reduction of the untargeted power subsidies, could
disproportionately affect the poorest. Although these subsidies are not particularly well targeted
for the poor, their significant reduction could increases the prices of consumption goods in
general. To mitigate these risks, the Benazir Income Support Program (BISP) is the countrys
primary pro-poor federal expenditure program.
37. The Governments move to increase the cash benefit amount, within a constrained
fiscal space, is a step in the right direction in enhancing the BISP basic cash transfers
impact on poverty. Furthermore, the Government is considering ways to index the cash
transfers amount so as to protect it from possible erosion from inflation. Budget releases to BISP
tended to be insufficient in amount and were characterized by lack of predictability in timing.
This forced BISP to ration benefit payments, which resulted in a sizable portion of the eligible
beneficiaries not receiving the full annual benefit amount they were entitled to. For the current
fiscal year, the Government has taken cognizance of this problem and has improved the budget
releases. For the first two quarters of the FY2013-14, the Finance Division released the full
quarterly amount (PRs. 18.75 billion) and allowed BISP to make full payments to all eligible
beneficiaries. However, in both quarters, releases arrived late. To prevent recurrence of these
problems, the Finance Division has decreed a special procedure committing to release exactly
one quarter of the annual appropriation by the 15
th
of the middle month of each quarter. BISP
will also expand modern, debit-based technology-based payment methods. Finally, BISP has
successfully piloted a co-responsibility cash transfer (CCT) scheme in 5 districts and will expand
it to additional 15 districts throughout the nation. Management of the schools systems is a
provincial responsibility assigned in the Constitution and therefore the verification of the CCT
co-responsibility requires collaboration by the provincial education departments. In this regard,
the Government has obtained an explicit high-level endorsement of the Memorandum of
Understanding (MOUs) by the chief secretary in each province and BISP plans to further expand
the coverage of CCT to more districts.
38. Results. The number of unconditional cash transfer beneficiaries who received full
benefits is at least 5.5 million in June 2016.In addition, 25 districts will pilot CCTs for
education, thus opening the door for mainstreaming such mechanisms nationwide.
Under Actions 1.5-18 of DPC-I, the Ministry of Finance has approved the FBR Strategy
Paper containing a comprehensive tax reform strategy; and consistent with it, the Federal
Board of Revenue has refrained, since July 1, 2013, from issuing statutory regulatory orders
granting special tax exemptions. The Federal Board of Revenue, as part of the implementation
19
of the FBR Strategy Paper, has: (i) issued at least seventy thousand (70,000) notices to
potential tax evaders to register and file tax payments; and (ii) undertaken provisional tax
assessments of at least eight thousand (8,000) individuals. The Federal Board of Revenue, as
part of the implementation of the FBR Strategy Paper, has: (i) launched an information
technology-based Taxpayers Audit Monitoring System; (ii) undertaken ballot-based audits of
at least five (5) percent of total tax returns filed for tax year 2012; and (iii) completed at least
twenty-five (25) percent of such audits. The Federal Board of Revenue, as part of the
implementation of the FBR Strategy Paper, has: (i) published the Parliamentarians Tax
Directory; and (ii) issued national tax numbers to all members of the Senate, the National
Assembly, and the Provincial Assemblies, and disclosed their respective tax payments.

Under Actions 2.6-2.9 of DPC-II, MoF will have obtained Parliamentary approval of a
budget 2014/15 including (i) a tax expenditure annex; (ii) a set of tax exemptions and SROs
eliminated, and additional tax measures for a total revenue impact equivalent to no less than
0.7% of GDP; (iii) a policy statement prohibiting FBR from issuing any special exemptions,
other than those approved by the Federal Government, and committing the Federal
Government to place all its SROs issued or planned in any given financial year before the
National Assembly for ratification or withdrawal; and of (b). amendments of the corresponding
tax laws to permanently eliminate the discretion of the Federal Board of Revenue to issue
special tax exemptions, making an proposed tax exemption subject to overall parliamentary
approval as part of the annual budget low or/and the corresponding tax legislation. FBR will
have issued 120,000 notices to identified potential tax evaders to register and file tax payment,
and taken administrative and/or legal actions on at least 25 % of the potential taxpayers who
received notices by 31 March 2014, but failed to respond to them. (c) FBR will have selected at
least 7.5 % of large taxpayers (filed for tax year 2013) through ballot- or risk-based audits,
and initiated audits for at least one-quarter of those selected cases. And (d) Federal
Government will have provided support to provinces initiative to increase revenue either by
expanding the scope of services taxed by the General Sales Tax (GST) or modifying other
provincial taxes; so as to increase by no less than 20% the budget 2014/15 allocations to non-
salary education and health spending.
39. Creating fiscal space with revenue mobilization. The creation of fiscal space, through
mobilizing revenue preferably without raising tax rates and while protecting priority budget for
social programs benefitting the poor, is the single most important precondition for achieving
sustainable growth with equity (Annex 10). Insufficient fiscal space stems from poor revenue
collection at one end and inflexibility of government expenditure at the other. Low revenue
mobilization limits the governments options to stabilize the economy against undesirable
expenditure controls that ultimately constrain it from making necessary pro-growth public
investments. Moreover, additional fiscal resources should not be wasted but prioritized to protect
vulnerable segments of the population from the fallout of stabilization and structural reforms that
the government intends to undertake to put the economy on a higher growth trajectory. Creation
of fiscal space relies mostly on the governments strong fiscal consolidation effort, which would
bring down the fiscal deficit from 8 percent of GDP in 2012/13 to about 4 percent by 2015/16.
As cutting priority expenditure is undesirable from a growth perspective, achieving this goal
hinges critically on fresh revenue mobilization, mainly by widening the tax base: broadly, the
tax-to-GDP ratio should increase by about 0.75 percent of GDP a year over the next three years.
20
40. There are well-known inherent structural weaknesses in the tax system. These
include: (a) inefficient tax administration (no clear vision, high key staff rotation, poor
management, weak human resources, lack of adequate information technology support systems,
excessive scope for staff discretion and for rent seeking); (b) a narrow tax base (of 39.4 million
employed persons, fewer than 10 percent are registered and active taxpayers are further eroded
by numerous and generous exemptions and concessions); (c) skewed tax structure (68 percent of
tax revenue is from indirect taxes); (d) a complex and nontransparent tax system that favors
exemptions (tax expenditure is estimated at around 2 percent of GDP), corruption, and tax
evasion (low compensation of tax officials, high informal sector of the economy by international
standards); and (e) low revenue collection efforts by the provinces. In response, the revenue
mobilization component of the DPC focuses on expanding the tax base and on strengthening
registration, tax enforcement, and compliance.
Table 4. Fiscal Impact Under FSIGs and Power DPCs-supported Actions in FY13/14
Estimate in
% GDP
I. POWER TARIFFS 1.2
Tariff adjustment (FY13/14) 0.8
Tariff adjustment (FY14/15 ) 0.4
II. TAX POLICY 1.5
Eliminate exemptions and SROs (income, GST and Customs) 0.4
Other FY14/15 tax policy measures to broaden tax base 0.3
Customs tariff simplification to 6 slabs -0.1
GST scope expansion by provinces 0.2
Others (FBR & IMF-supported tax policy measures in FY13/14) 0.7
III. TAX ADMINISTRATION 0.2
Customs administration 0.1
Expanding Income Tax base (100,000 notices to potential taxpayers Plan) 0.1
Ballot-based audit 0.1
Other (SEZ, One-time Investment Incentive Package) -0.1.
IV. SOCIAL COMPENSATION MEASURES -0.5
Increase BISP allocation* -0.3
Increased non-wage education and health provincial budgets -0.2

ESTIMATED NET FISCAL SPACE FROM FISCAL REFORMS 2.4

Memo: Nominal GDP FY13/14 (Source: IMF, in bn.Rs); Estimates: FBR, IMF, WB.
25,417
41. Results. The overall net fiscal space created by the DPCs series during FY13/14 and
FY14/15 is projected to be 2.4 percent of GDP (Table 5). Tax measures contained in the tax
strategy for the first two years of Government will raise revenue by 1.5 percent of GDP. This
includes an increase of 0.2 percent of GDP from provinces essentially based in the expansion of
the scope of GST taxed services and other tax adjustments. Tax policy measures adopted under
the IMF program during budget FY13/14 are equivalent to about 0.7 percent of GDP. The startup
of the tariff simplification process to six slabs inside 0-25 percent tariff bracket will generate
infra marginal losses. There is also a modest gain associated to tax administration measures
adopted by FBR in Customs or in income or sales taxes, and this is due to the fact that tax
administration and collection by FBR has markedly improved over the past year. The power
tariff adjustment (supported by a parallel DPC) will reduce subsidies by about 1.2 percent of
GDP. For their part, social compensation (and budgetary protection measures) represents a fiscal
cost of about 0.5 percent of GDP; where the biggest share is the increased allocation given to
BISP at the federal level (0.3 percent of GDP) and the increase to non-wage expenditure in
21
education and health at the provincial level (0.2 percent of GDP). This table does not include
space originating from expenditure adjustment measures adopted under the IMF program (other
than reduction of power subsidies) as well as from privatization proceeds.
Table 5. FSIG-I Prior Actions and Analytical Underpinnings
Areas of prior actions Analytical underpinnings
Pillar 1. Expanding opportunities and incentives for trade
competitiveness, business creation, and access to finance
Privatization of SOEs PML-N Manifesto SOE Reform: Time for Serious Corporate
GovernanceWorld Bank Policy Paper Series on Pakistan;
Reforming SOEsPakistan Policy Notes; SOE Reforms Technical
AssistanceFindings and Recommendation, Governments
Strategy on Privatization of 31 SOEs.
Trade competitiveness Governments program in letter of intention to the IMF.
Reinvigorating the Agenda for Open TradePakistan Policy
Notes. Finding the Path to Job Enhancing GrowthCEM Report.
Business climate: OSS PML-N Manifesto Doing Business in Pakistan 201013; Doing
Business Follow-up Reform Memos 2012; Enhancing the Business
environmentPakistan Policy Notes. A Blueprint for Business
Registration Reform through a One-Stop Shop 2013.
Credit infrastructure Doing Business 2012; Pakistan FSAP Update; SBP Microfinance
Strategic Framework 201115; Asian Development Bank (ADB)
Strengthening Secured Transactions in Pakistan Report. Finding the
Path to Job Enhancing GrowthCEM Report.
Micro insurance SECP studies.
AML/CFT 2013 Report of Regional Review Group (RRG) of Financial Action
Task Force (FATF), Government of Pakistans AML Strategy.
Pillar 2. Creating the fiscal space for more productive investments by the public and private sectors
BISPsafety net Governments program in letter of intention to the IMF.
Consolidating Social ProtectionPakistan Policy Notes. Several
BISP and World Bank reports on BISP loan.
Fiscal space PML-N Manifesto. Finding the Path to Job Enhancing Growth
CEM Report. Mobilizing RevenuePakistan Policy Notes.
Promoting Efficient Service Delivery with DecentralizationPolicy
Note.
4.3. Link to Country Assistance Strategy and Other Bank Operations
42. This DPC series underpins two objectives of the current and future Country Partnership
Strategies. In the current CPS (Report No.53553-PK), it underpins primarily Pillar 1 (Improving
Economic Governance) and Pillar 2 (Improving Human Development and Inclusion). And in the
future CPS (Report No.84645-PK scheduled for Board presentation on May 1
st
2014), it
underpins Pillar 2 (Private Sector Development), and to a lesser extent Pillar 3 (Inclusion). The
DPC is designed to have a strong impact on economic growth through a renewed focus on
private sector development by linking to SOE privatization, improved business environment,
access to finance and trade competitivenessthree well-identified constraints to Pakistans
growth. In addition, through its creation of fiscal space, the DPC would make room for
additional public investment; improved public sector efficiency through a more accountable and
competent tax administration; and enhanced transparency of tax exemptions, concessions, and
SRO regimes. The DPC proposes to support inclusion through an expanded scope of the safety
net through unconditional and conditional cash transfers, and increased social spending on
education and health.
22
43. Other Bank operations complementing FSIG-I. Another budget support operation in
power is being prepared in parallel to this operation. Identified as another major constraint to
growth, there are several synergies via common policy goals on the creation of fiscal space
ensuing from the reduction of tariff subsidies, the restructuring or eventual privatization of power
distribution companies and power generation companies, as well as via the use of fiscal space to
strengthen the safety net so as to compensate the poorest against loss of purchasing power due to
increased power tariffs. Similarly, the technical assistance provided under the Project Preparation
Facility of the Revenue Mobilization Disbursement-Linked Indicator deals with complementary
efforts on tax policy and administration reform, and addresses the creation of fiscal space.
4.4. Consultations and Collaboration with Development Partners
44. Consultations with stakeholders have taken place in stages. The first stage provided
an extraordinary opportunity for informed dialogue, and was based on the dissemination of the
Banks Policy Notes, the Country Economic Memorandum and the findings of a rich set of other
analytical underpinnings (Annex13). It made an account on diagnostics about major challenges
and opportunities, and on how to involve the Banks support in the agenda of growth, poverty
reduction, and prosperity. The second round were dedicated consultation sessions for the new
Country Partnership Strategy held in several parts of the country, which provided insights into
the perception of various stakeholders on the Banks work in Pakistan, and the key areas of
intervention. The third round, this time centered on the DPC, took place among selected donors
directly or indirectly related to the fiscal space and business climateIMF, DFID, ADB, United
States Agency for International Development, European Union and J ICA. This dialogue centered
on reform major initiatives on taxation, privatization, business environment and power.
45. Coordination with the IMF. Bank and IMF staff collaboration on Pakistan continues to
be effective with permanent consultations on macroeconomic, tax administration, debt
management, power, financial, SOE, trade, social, and decentralization issues. The Bank and
IMF teams have coordinated closely on both the EFF and DPC-supported reform program. The
Bank continues to take active part in IMF Article IV and Review missions (Annex 3).
46. Coordination with other development partners. The Department for International
Development (DFID) is planning to provide parallel financing to the DPC series, and its
representatives have participated in discussions primarily focusing on tax policy and
administration, the BISP safety net, and the OSS. Additionally, DFID will support the
implementation of FSIG through a Trust Fund designed to support the implementation of key
priorities through technical assistance in the areas of privatization and SOE reform, business
registration, access to financial services and fiscal consolidation and reform. ADB and the U.S.
Agency for International Development have also shown interest in providing parallel technical
assistance, and perhaps lending to SOE reform. Finally, the Bank keeps working closely with
ADB on the power sector reform operation that complements this DPC series.
47. Solid coordination providing timely TA is critical. The proposed Economic Reform
Technical Assistance (TA) project, supported by DFID, will strengthen government's capacity to
implement its economic reform agenda. Together with the IFC, this will be achieved by funding
priority technical assistance that will provide government with the executive capacity required to
implement its reform agenda. The implementation of government's economic reforms will in turn
stabilize the economy, enhance investment, expand the role of the private sector in the economy
23
and put the country on the path of higher economic growth. On one hand, the TA facility will
focus on building capacity and strengthening institutions, such as the Ministries of Finance,
Water and Power, Fuel and Natural Resources, Federal Board of Revenue, and the Privatization
Commission, among others. On the other hand, the facility will also focus on strengthening
provincial finances by supporting the provincial governments' efforts to improve the capacity
and efficiency of revenue mobilizing boards, authorities, and departments and by strengthening
provincial expenditure, financial and debt management systems. The technical assistance
provided to the government is organized so as to cater to each of the six reform priorities of the
government, particularly for activities that may be required for deepening, broadening and
implementing future reforms. TF activities cover technical assistance in support of i) Power
Sector Reforms; ii) Investment Climate Reforms; iii) Tax Reforms; iv) Trade Reforms; v) Debt
Management Institutional Reforms; and vi) Expenditure and Financial Management Reforms.
5. OTHER DESIGN AND APPRAISAL ISSUES
5.1. Poverty and Social Impact
48. The DPC series supports sustained poverty reduction and shared prosperity in at
least three ways. First, by facilitating a sustained recovery of high growth-cum low-inflation
over the medium term, the proposed measures would address the low-growth, high-inflation
economic environment of past five years that has affected the income of the poor and lower
middle class (the bottom two quintiles). Second, the DPC series would support measures that can
be expected to enhance Pakistans investment climate, competitiveness and, through SOE
reform, service delivery. This would in turn increase growth and facilitate quality employment
creation, as well as improve living standards. Third, given the combined impact of short-lasting
rapid growth episodes with the increased volatility in GDP per capita, the DPC will strengthen
policies that help households cope with risk due not only to shocks and natural disasters, but to
illness, poor crop yields and job losses, such as the cash transfer from BISP and micro insurance.
49. The poverty and social impacts (PSIAs) of policy measures supported by the DPC
series are expected to be mainly positive or, at worst, mildly negative. Most policy measures
will improve the standards of living directly by creating employment and enhancing
consumption, or indirectly derived from improved price stability and sustainability of public
finances; but tax or power tariff increases will also temporarily increase prices, and thus reduce
income and consumption of the poor in real terms. There are four main areas where prior actions
of these operations would have a significant impact on poverty and social conditions: taxation,
power subsidies, BISP, and Customs tariff rationalization.
Taxation. Pakistans overall tax system progressivity should increase under FSIG-related
actions. Taxes account for 67 percent of total expenditures throughout the per capita
expenditure distribution. The four main sources of tax revenue are General Sales Tax
(GST), the individual income tax, the corporate income tax, and excise taxes, which
combined account for nearly 80 percent of total federal tax receipts. GST (as well as
Customs dutiesbelow) is slightly more progressive than excise taxes, largely because
of the federal excise tax on tobacco, which is consumed more heavily by poor
households. The corporate income tax, which accounts for nearly a quarter of federal
revenues, is particularly progressive because it mainly falls on capital. But progressivity
gets blurred when tax exemptions enacted by laws or SROs are considered. A long, and
24
possibly too extensive, list of basic food and medicines exemptions makes the GST more
progressive because poor people spend a larger share of their budget on them. However,
many GST and Customs tariff exemptions fall on goods mostly consumed by wealthier
households, such as education, intermediate and luxury expenditures. Under FSIG, the
tax system should become more progressive as the Government intends to remove tax
exemptions on selected food and nonfood items that are consumed by wealthier
households. Overall, FSIG reforms are expected to have a positive impact on taxation
incidence.
Power subsidies. Pakistans power subsidies high regressivity should diminish under the
DPC series (and particularly under the parallel power DPC operation). Studies show very
weak correlation between the poorest households and households whose electricity
consumption is on or below the lifeline. Same studies also point to the high regressivity
of the electricity subsidy and hence suggest the need for its reduction and reallocation to
more productive use and design of an alternative targeting mechanism. The bottom two
quintiles (the poor and lower middle class) only receive 27 percent, while the top two
quintiles receive about 55 percent. Reforms that gradually reduce untargeted subsidies
with better targeted subsidies and well-targeted social spending can make an important
contribution to further reducing poverty. Raising power tariffs, as requested under the
IMF program, has a short term negative impact on prices; but actions under the parallel
DPC operation on power, will make the electricity subsidy slightly more progressive.
And in addition, in the medium term, BISP poverty scorecard might be adjusted to
include electricity consumption as one of the key parameters in the design of an
alternative subsidy mechanism to the lifeline. But the preliminary survey-based field
work required to do this would require at least one year. If BISP succeeds in doing this,
it will become a cutting-edge global practice. Introducing this mechanism should be part
of the technical assistance of the power DPC and, if successful in design, eventually
consider the formulation of a dedicated action in later stages of the power DPC. Overall,
power sector reforms are expected not to lead to a more progressive subsidy mechanism.
BISP is efficiently pro-poor. To compensate the poor and the vulnerable against power
tariff (and GST tax rate hikes under the IMF program), BISP transfers cash to poor
households, mostly in rural areas, and beneficiaries are selected using a proxy means test.
About 40 percent of the transfers are received by the bottom quintile of households, and
60 percent by the bottom 40 percent. However, supported by the actions of this DPC,
BISP targeting will considerably improve for three reasons: first, 15 percent of eligible
beneficiaries do not receive debit cards because of the lack of banking infrastructure in
the areas in which they live; second, an estimated 2.5 million households, or roughly half
of current beneficiaries, have been identified as poor but have not registered for the
program, mainly because of the lack of a national identification card; and third, the
introduction of CCTs will target poor children to attend schools, thus raising enrollment
rates among the poorest. Overall, BISP reforms are expected to have a positive social
impact and an improved pro-poor targeting.
Customs tariff simplification and SROs phasing down should also improve the
progressivity of taxation and favor trade and growth. Customs tariffs are, in statutory rates,
progressive, and their proposed simplification will facilitate reduction in overall trade
protection. But when adjusted by SROs, high and escalating tariffsparticularly in
25
agricultureharm the poor by affecting its productivity and creating an anti-export bias.
High tariffs also reduce demand for imports, which distorts production decisions, and favor
vested industries. SROs are mainly targeted at specific firms rather than applied uniformly,
and primarily at inputs exclusively for certain firms. Measures proposed by the DPC series
should eliminate such perverse firm privileges, improve competitiveness and increase
consumer welfare. Overall, Customs tariff reforms are expected to have a positive impact
on consumption and on reducing poverty.
5.2. Environmental Aspects
50. Pakistan has adequate legislative cover, policy guidelines, and institutional
mechanisms in place for managing the environment. The Pakistan Environmental Protection
Council, headed by the prime minister, is responsible for overall guidance on national
environmental programs and policies. After devolution in 2010, provinces have been empowered
to legislate and formulate policies. At the federal level, the Climate Change Division of the
Cabinet Secretariat is responsible for environmental protection. The institutional arrangements
for environmental management are quite elaborate at the provincial level, though implementation
remains the key challenge across most of the country. In any case, this operation is likely not to
cause any significant effect on Pakistans environment, forests, and other natural resources, and
there are systems in place for reducing any eventual such adverse effect and rather enhance
eventually positive effects as described in paragraph of OP 8.60.
51. The last Strategic Country Environmental Assessment was carried out in 2006. It
estimated the cost of environmental degradation at 6 percent of GDP, with both indoor and
outdoor air quality and lack of adequate water and sanitation facilities among the major
contributors. Through another Bank work with the Ministry of Industries, an analytical
underpinning for enhancing Pakistans industrial competitiveness is provided by taking into
account the strong linkages among business competitiveness, harnessing the power of
agglomerations and spatial transformation, environmental concerns, and the sustainable use of
natural resources. It is desirable that the counterpart unit for the DPC at the MoF co-opts a
member from the Climate Change Division to provide technical advice on the potential
environmental effects of the proposed reforms. This is important particularly for components
referring to SOE reform, trade, and the business environment, so as to identify and forestall any
potential undesirable negative effects on the environment and help to support sustainable
development.
5.3. Public Financial Management, Disbursement and Auditing
52. Pakistan has a fairly well-developed infrastructure for public financial management
(PFM). And according to the Pakistan Federal Government Public Expenditure and Financial
Accountability (PEFA) Update (2012), the trajectory of change is positive with PEFA scores
comparing favorably with other countries in the South Asia region. The overall fiduciary risk
associated with the proposed operation is substantial (Annex 12). This assessment is made
with due regard to the governments commitment to overall PFM reform exemplified by actions
already taken at the federal and provincial levels, as well as the weakness in the PFM cycle
identified in PEFA and other analytical reports.
26
53. Borrower and Credit agreement. The proposed Credit would be made to the Islamic
Republic of Pakistan, represented by the Economic Affairs Division of the MoF. The Credit
proceeds would be transferred to the government in accordance with the terms of the Financing
Agreement.
54. Funds flow arrangement. The Government will identify a foreign exchange account
with SBP, which forms part of the countrys official foreign exchange reserves, into which the
proceeds of the Credit will be disbursed. The proceeds will be released in one tranche following
approval and official communication by IDA of Credit effectiveness. The completion of the
prior actions and the maintenance of a satisfactory macroeconomic framework are sufficient to
release the funds. The Pakistan Rupee equivalent of the funds in the account will, within two
working days, be transferred into the consolidated fund of the government Account No. 1-Non-
Food, held with SBP, which is used to finance budgetary expenditures.
55. Disbursements. Disbursements from the Consolidated Fund for activities to be financed
under the program by the Government will not be linked to any specific purchases, and no
special procurement requirement shall be needed. The proceeds of the Credit shall, however, not
be applied to finance expenditures in the excluded expenditures as defined in the Financing
Agreement. If any portion of the Credit is used to finance ineligible expenditures as defined in
the Financing Agreement, IDA will require the Government promptly upon notice from IDA, to
refund the amount equal to the amount of the said payment to the IDA. Amount refunded to IDA
upon such request will be cancelled from the Credit.
56. Accounting and Assurance requirement for the Credit. SBP, on behalf of the
Government, will continue to maintain an appropriate accounting system in accordance with
generally accepted accounting principles. For this Credit, because no special fiduciary
arrangements are required, no additional assurance requirement in the form of a formal audit will
apply. However, within 45 days of disbursement of the IDA Credit, the Finance Secretary of
MoF, will provide a written confirmation to IDA certifying the receipt of Pakistan rupee
equivalent of the Credit into the consolidated funds account of the Government, the date of
receipt, and exchange rate to translate the credit currency into Pakistan Rupees.
5.4 Monitoring and evaluation
57. The MoF would be responsible for overall oversight and implementation of the
DPC. A team designated at FBR/MoF would be the main technical agency for the actions related
to create fiscal space/SOE reform. Both MoF and FBR, as the lead implementing agencies, have
extensive experience and are fully versant with World Bank policies and procedures through
investment-lending and policy operations. Finally, depending on the final actions agreed to, other
specialized agencies may be involved in implementing the operation.
58. A results framework has been developed for the operation (see Annex 1). Monitoring
for the operation would benefit from the Governments own monitoring and evaluation
mechanisms. Timely achievement of targets would be assessed from hard data and documents
made promptly available, drawing on the regular supervision function of national accounting,
fiscal, and household survey data and, if required, specialized surveys on access to finance.
27
59. The World Bank would play a supporting and monitoring role, reviewing progress
and making needed adjustments. The World Bank FSIG-I team would use the preparation of
the series as an opportunity to monitor overall progress toward the expected outcomes of the
second operation of the DPC series. The World Bank team will focus on the impact outcomes of
the program and identify the adjustments needed as the series evolves, particularly for the
subsequent selection of triggers and prior actions, to take into account the latest country
developments, stakeholder support, and feasible options for realizing the intended goals. Future
reviews will be based largely on the monitoring indicators and goals of the program. At the same
time, the overall status of the national government program of reforms will be monitored to
determine whether country conditions and the specific policy measures have been met.
6. SUMMARY OF RISKS
60. The overall risk rating level of the program development objective of this operation
is high.
Political economy risks. The government has obtained a sufficiently comfortable majority
in the lower chamber of Parliament which would allow it to support legal, institutional,
and regulatory reforms. However, political opposition in the senate- the other chamber of
Parliament - could emerge among those who will be affected by any reduction in tax
benefits or the phasing out of tax exemptions and SROs, which could undermine the
political coalition in power, and threaten to stop reform. This risk is being mitigated
through the acceleration of tax reforms accompanied by identifying the winners and
losers up front, which should reduce the scope for rent seeking. Another risk is that the
reform process could take longer than anticipated due to legal injunctions or civil
objections, as the decision makers enter the next political cycle, where the reforms
themselves may become the target of the next political campaign. The design of the DPC
also mitigates this risk by balancing key institutional with minimum legislative actions,
by a systematic work with media and other stakeholders so as to track and inform public
opinion on the benefits of reform, and by setting their implementation pace in line with
both perceived potential political-economy constraints and the limits of institutional
capacity. If all goes well, DPC II could also be processed in early FY 2014/15 which
would give enough time for it to become effective while momentum for reform is strong.
Economic risks. On the domestic front, macroeconomic risks have risen further under the
past governments slow progress on reforms. A possible balance-of-payments crisis, and
the unavoidable recessionary bias and social unrest related to adjustment measures
needed to prevent (or correct) it, may complicate the prompt recovery of macroeconomic
stability in the next few years. If this materializes, it could delay the implementation of
structural reform and slow economic growth in the next few years. The IMFs EFF
program and dialogue with World Bank and other donors are intended to mitigate this
risk. Beyond these, the DPC objectives and actions are geared to address some of these
risks. The tax reforms aim to increase fiscal revenues. SOE reform should reduce fiscal
losses and improve service delivery. On the external front, however, larger than expected
negative shocks (e.g. a fall in remittances, or a mild recovery of FDI inflows, or a drop in
external demand for Pakistani exports) could undermine the results of the operation.
28
Implementation risks. The reform program supported by the proposed operation may face
headwinds due to staff turnover, counterpart capacity constraints, and weak policy
coordination, a set of common and frequent problems. These risks are mitigated in three
ways. First, it addresses potential coordination failure by using an appointed economic
reform unit as the coordinating body at the MoF. Second, the DPC reforms are intended
to mitigate overall implementation risks by providing extensive, timely and highly
qualified technical assistance required to advancing reforms at all levels of government
concerned. TA is made available upfront from the design stage, especially at the
Privatization Commission, FBR and the monitoring unit. In this regard, a TF co-
sponsored by DFID is being set up to finance these technical needs.
Fiduciary risks. These are substantial despite good progress in most phases of budget
operations. This assessment is made with due regard to the governments commitment to
overall PFM reform exemplified by actions already taken at the federal and provincial
levels, as well as the weaknesses in the PFM cycle identified in PEFA and other
analytical reports. Areas of concern refer to the internal control system, where in
particular no progress has been made on internal audit in recent years. To mitigate these
risks, the DPC relies on the self-reinforcing actions committed to under the ongoing
Project for Improving Financial Reporting and Auditing Project Roadmap. Such program
deals heavily on timely implementation of PFM measures addressing accounting, internal
and external audits, procurement, and budget transparency.
Social and environmental risks. The operation is expected to have significant positive
impacts on social livelihoods, but not on the environment. Most of the former are related to
the expansion of the benefits of the unconditional cash transfers and development of the
CCTs that will favor increased childrens school enrollment. The actions supported by this
operation have been designed to specifically include provisions to improve the scope of the
social safety net and alleviates stress produced by reforms. Hence the DPC serves the
additional objective of making structural reforms more inclusive and sustainable.
61. Notwithstanding these risks, the benefits of this operation to Pakistans development
process far outweigh the costs. This operation helps the government catalyze and consolidate
much needed reforms during the reform window opened up by the political transition and a
stable government. The reforms supported by this operation are designed to have a tangible,
positive impact on fiscal and economic development; ultimately these reforms will contribute to
the overall development of the country and will benefit the people of Pakistan.

29
ANNEX 1.POLICY AND RESULTS MATRIX
Prior Actions Under DPC I Indicative Triggers for DPC II Results
FOSTERING PRIVATE AND FINANCIAL SECTOR DEVELOPMENT
Action 1.1: The Privatization Commission has launched the
Privatization Program, including: (a) taking to market one strategic
sale of an SOE, including calling for expressions of interest from
prospective investors; and (b) issuing requests for proposals and
calling for expressions of interest in connection with the
procurement of financial advisors to advise on (i) another SOE
strategic sale, and (ii) the offering of equity in three SOEs in
domestic and international capital markets.
Action 2.1: One SOE strategic sale and one capital market SOE privatization
transaction have been completed.

Results indicator: At least five entities
privatized through strategic or equity
sale by J une 2016.
Baseline: No privatization transactions
took place in last 6 fiscal years.
Action 1.2: The Ministry of Finance has submitted the Credit
Bureaus Bill, 2014 to the National Assembly for approval.

Action 1.3: The Securities and Exchange Commission of
Pakistan has approved the Securities and Exchange Commission
(Micro-insurance) Rules, 2014.
Action 2.2: National Assembly has approved the Credit Bureau Act.
Action 2.3: MoF has obtained approval by Parliament of a budget 2014/15 including
the application of 6 statutory tariff slabs under the tariff simplification program; and the
Plan to achieve 4 slabs in 3-years, within a range of 0 to 25% for all tariff lines, with
very few exceptions and tariff peaks allowed just to address sensitive goods or special
sectors has been finalized. Action 2.4: SECP, FBR and EOBI have established a virtual
One-Stop-Shop (OSS) for business registration and a physical OSS in one province,
and develop a plan for introduction of the concept of limited liability partnerships
(LLPs).
Results indicator: 100% access to
credit information by J une 2016.
Baseline: No consumer has access to its
own credit information in J une 2013.
Results indicator: Simple average
statutory tariff rate is at or lower than
10% in J une 2015.
Baseline: Simple average statutory tariff
rate is 14.4 % in J une 2013.
EXPANDING SOCIAL PROTECTION AND MOBILIZING REVENUE
Action 1.4:The Ministry of Finance has strengthened the pro-
poor orientation of the BISP through: (a) raising the basic benefit
under BISP to PKRs.1,200 per family per month; (b) issuing a
notification guaranteeing timely and full quarterly budget releases
to BISP; and (c) obtaining the endorsement of the Chief
Secretaries of the Provinces of memoranda of understanding
between BISP and the Provinces to extend conditional cash
transfers for primary education to at least twenty (20) districts.
Action 2.5: MoF has obtained approval by Parliament of a budget 2014/15
increasing BISP allocation to at least PRs. 80 billion; increase the benefit amount in
line with inflation; start activities to expand CCTs for primary education in no less than
25 districts with a benefit of Rs.250 per month per child attending school; and seek an
agreement with provinces on a cost-sharing arrangement for CCTs included in budget
2014/15.
Results indicator: Number of UCT
beneficiaries who received full benefits
is at least 5.5 million in J une 2016.
Baseline: Number of unconditional cash
transfers (UCT) beneficiaries who
received full benefits is at 4.4 million in
2012/13.
Action 1.5:(a) The Ministry of Finance has approved the
Federal Board of Revenue (FBR) Strategy Paper containing a
comprehensive tax reform strategy; and consistent with it (b) FBR
has refrained, since J uly 1, 2013, from issuing statutory regulatory
orders granting special tax exemptions.
Action 1.6: The Federal Board of Revenue, as part of the
implementation of the FBR Strategy Paper, has: (a) issued at least
seventy thousand (70,000) notices to potential tax evaders to
register and file tax payments; and (b) undertaken provisional tax
assessments of at least eight thousand (8,000) individuals.
Action 1.7:The Federal Board of Revenue, as part of the
implementation of the FBR Strategy Paper, has: (a) launched an
information technology-based Taxpayers Audit Monitoring
System; (b) undertaken ballot-based audits of at least five (5)
percent of total tax returns filed for tax year 2012; and (c)
completed at least twenty-five (25) percent of such audits.
Action 1.8: The Federal Board of Revenue, as part of the
implementation of the FBR Strategy Paper, has: (a) published the
Parliamentarians Tax Directory; and (b) issued national tax
numbers to all members of the Senate, the National Assembly, and
the Provincial Assemblies, and disclosed their tax payments.
Action 2.6: The MoF has obtained Parliamentary approval of (a) a budget 2014/15
including (i) a tax expenditure annex; (ii) a set of tax exemptions and SROs eliminated,
and additional tax measures for a total revenue impact equivalent to at least 0.7% of
GDP; (ii) a policy statement prohibiting FBR from issuing any special exemptions,
other than those approved by the Federal Government, and committing the Federal
Government to place all its SROs issued or planned in any given financial year before
the National Assembly for ratification or withdrawal; and of (b) amendments of the
corresponding tax laws to permanently eliminate the discretion of the Federal Board of
revenue to issue special tax exemptions, making any proposed tax exemption subject to
overall parliamentary approval as part of the annual budget law or/and the
corresponding tax legislation.
Action 2.7: FBR has issued 120,000 notices to identified potential tax evaders to
register and file tax payment, and takes administrative and/or legal actions on at least
25 % of the potential taxpayers who received notices by 31 March 2014, but failed to
respond to them.
Action 2.8:FBR has selected at least 7.5 % of large taxpayers (filed for tax year
2013) through ballot- or risk-based audits, and initiate audits for at least one-quarter of
those selected cases.
Action 2.9:Federal Government will provide support to provinces initiative to
increase revenue either by expanding the scope of services taxed by the General Sales
Tax (GST) or modifying other provincial taxes so as to increase by no less than 20%
the budget 2014/15 allocations to non-salary education and health spending.
Results indicator: Overall tax
collection is at least 11.5% of GDP by
end-2015/16 and no special exemptions
issued.
Baseline: Overall tax collection is at
9.6% of GDP by end-2012/13.
30
ANNEX 2. LETTER OF DEVELOPMENT POLICY


:)
(r;l
g
Senator Mohammad lshaq Dar
Minister for Finance, Revenue,
Economic Affairs, Statistics and
Privatization
SUBJECT: LETTER OF DEVELOPMENT POLICY
Dear President Kim,
No.414-FM/2014
ISLAMABAD
March 27, 2014
The Government of the Islamic Republic of l'akistan (Government) is pursuing a
comprehensive program of economic and social reforms. These refonns are essential to
rei nvigorate the economy, address vulnerabilities and spur inclusive growth.
On behalf of our Government, I am writing to request approval of a Pakistan's
Fiscally Sustainable and Inclusive Growth (FSIG-1) reform credit for USS400 million. The
credit wi ll provide needed external linancing and signal our detennination to implement sound
reforn1s. This Letter of Development Policy sets out the Government's key economic policy
actions to be supported by the first operation in the series (FSIG-1) over 2013/ 14, as well as our
planned reforn1 path through 2014/ 15. which. I expect to be supported by a second operation
(FSIG-11), tentative cut-off date for which is September 30, 2014.
The main objectives of the FSIG series are to steer l'akistan back on the path of
sustaiaed and broad-based economic gro"1b, create jobs and protect the poor. This
requires macroeconomic stability, fiscal discipli ne and business-friendly policies that foster
private investment and economic growth. The main program development objective is to
support refonns which are most critical for increasing investment and improving incl usive
growth. We have prepared this operation in close collaboration with the World Bank Group.
Our Vision
Let me articulate the basic tenets of our vision for Pakistan during the present
administration. First. we want to build an economy that is not dependent on others except
though trade and investment. based on competitive advantage and market considerations. And
this can only be obtained with rapid and sustained growth. Second. the private sector has to be
the lynchpin of economic activities. which explains the strong accent we give to it in the Bank
supported operation. Third. the only areas where government's presence in economic affairs can
be justified arc where investments are too large for private sector to undertake and/or markets are
unlikely to functi on. Fourth, all segments of the population must share the burden of revenue
mobilization. The distorti ve and inequitable culture of exemptions and concessions must end,
and provinces should also be encouraged to participate in this effort. Fifth, government must
31


limit itself withi n the broader limits imposed by available resources. i.e. respect fiscal discipline.
And sixth, we have to protect the poor and vul nerable segments of our population with an
accesstblc and reliable social safety nel. which explains the priority given in this operat ion to the
Benazir Income Support Program. The requested operati on - FSIG-1 - fits squarely with all
components of our vision.
Economic Context
Tbe economy of Pakistan is showing strong signs of recovery. The Government
inherited severe macroeconomic imbalances and vulnerabilities. Economic gro\\1h averaged 3
percent in the last live years. well below potential and about half its average in past decades;
inflation averaged around 11.8 percent for the last live year. State Bank of l'akistan's (SBP)
international reserves were around 1.5 months of imports for FY 2013: more than Rs500 billion
of accumulated circular debt was crippling the power sector; average fiscal deficit in the last 5
years was 7 percent of GOP. and public debt had crossed the 60 percent of GOP advised by
Pakistani legislation i.e. Fiscal Responsibility and Debt Limitation Act. 2005.1n terms of clause
3(4) of this Act. the Government informed the National Assembly about this departure, reasons
thereof and future measures to return to the principles of sound fi scal and debt management.
Longstanding constraints have prevented Pakistan from reaching its growtb
potential. Average growth has fallen due in part to the difficult regional and domestic security
situation which has discouraged investment. This decline is also driven by periodic bouts of
macroeconomic instability and long-standing structural impediments to growth. We are
committed to tackling the problems of the energy sector. which we estimate have lowered output
by up to 2 percentage points per year; reform and/or privatize public sector enterprises: carry on
key initiatives to improve investment climate; increase access to finance, simplify and li beralize
international trade regime. and create fiscal space for productive investments and expanded
protection to the most vulnerable.
However, there are visible signs of improvement in recent economic conditions.
During the first half of the present fiscal year. growth appears to be picking up and is expected to
reach above 4 percent for FY 2013-14: inflation is now in single digits; the fiscal outtum has
been solid; and the external current account deficit remains modest. And even if the position of
international reserves remains low. it has made a turning point and has been decisively
improving si nce end-December. Despite these encouraging signs, external and domestic risks
remain high and further efforts arc needed to consolidate those gains and get the economic and
social conditions back on a solid track.
Broad and sustained high economic growth in Pakistan is inextricably linked to the
strength of incentives, institutions and policies that spur private sector investmenl. The
Government recognizes that Pakistan's investment climate has considerable room for
improvement. Investment climate has been further eroded by an adverse security situation and
energy shortages. Our Govcnunent is fully confident that Pakistan can attain a higher growth
path if there arc improvements across the board in all these dimensions. In parallel. the country
must ensure n stable macroeconomic environment. Our target is to increase private sector
investment to about 20 percent ofGDI' by 2017/18 from about 14. 2 percent ofGDI' in 2012113
supported by a comprehensive agenda that includes actions described below. The Govenunent
has already committed to a 36-month extended arrangement under the Extended Fund Facility
(EFF) with the IMF and also expects other donors support in carrying this process forward.
Main actions supported by the FSIG series are described below.
32



Fostering Private and Financial Sector Development
The Government is keen on reviving and revitalizing Pakistan's privati1Jition
program that had been more or less stalled for the past eight years. We arc committed
towards refonning State-Owned Enterprises (SOEs) by focusing on mi nimizing poor
perfonnance at service delivery, improving public sector resource allocation, and attracting
private sector participation. The Cabinet Committee on Privatization (CCOP), in its meeting held
in October 201 3. approved a list of 31 priority SOE-projects to be implemented in a phased
manner. These projects were selected from the list of 65 SOEs approved by the Council of
Common Interests (CCI) for privatization. The Government initiated the implementation of the
privati zation program in December of 2013 by appointing a full-time professional (from the
private corporate sector) Chainnan of the Privatization Commission and constituting a new
Privatization Commission (PC) Board. consisting of leading private sector professionals.
The Privatization Commission(PC) has already launched the privatization process.
It has done so by taking to market one strategic sale of an SOE, including calling for expressions
of interest from prospective investors; and issuing requests for proposals and calling for
expressions of interest in connection with the procurement of financial advisors to advise on:
another SOE strategic sale. and the ofTering of equity in three SOEs in domestic and international
capital markets (prior action). Going forward the Commission will ensure that at least one SOE
strategic sale and one capital market privatization transaction arc completed (indicative trigger).
In addition, the Ministry of Finance (MoF) will publish an annual report on SOEs investment
tracking and perfonnance, including their financial liabilities and operational targets for 2014115.
Expanded access to finance and to credit information and strengthened creditors'
rights are critical for investment recovery. Financial inclusion is all about providing access to
potential creditors and respecting their rights. In Pakistan there are gaps and restrictions in place
which precl ude the effective use of credit infonnation to enhance access to finance, or to ensure
consumers have adequate protections, redress. and access to information, which ultimately
reduces coverage of potential borrowers. Among these gaps, borrowers and third parties do not
have access to their own credit infonnation. positive infonnation is not included in public bureau
credit reports, and credit histories do not include information from non-financial institutions. To
rectify this, the Government has submitted to Parliament a credit information bureau law, so-
called ''Credit Bureaus Act" (prior action) designed to put in place a number of features and
address a number of gaps which will increase the depth of available credit information while
providing consumers with effective protection over their personal data. Going forward, we
expect the Act to be approved by the National Assembly (indicative rrigger). We wi II also
continue to strengthen our regime for creditors' rights through a review and submission of a new
law on secured transactions. The State Bank of Pakistan (SBP) wi ll also develop a national
financial inclusion strategy, which focuses on reaching the poor and underserved clients, and has
a strong emphasis on bringing women into the financial sector.
There is an urgent need for the development of new financial products to help
consumers, producers, and farmers manage and mitigate risks from shocks und
catastrophic events. In Pakistan, where insurance penetration is just 2-5 per cent of total
population. there is the potential to increase the number of micro-insurance holders from 5
million to 30 million. To spur insurance penetration and increased availability lor insurance
products for the poor. the Securities and Exchange Commission of Pakistan (SECP) prepared
rules for micro-insurance whi ch were published in June 2013 in the official gazette of t>akistan
for seeking public comments. and now they have been approved and notified (prior action). It is
anticipated that this initiative will help in creating a transparent and enabling environment
thereby increasing the insurance density and affordable outreach to low-income people.
3
33


Pakistan has also taken substantial steps towards improving its Anti Money
Laundering (AMUCIT) regime. It has done so by issuing an Amendment Ordinance to
establish procedures for the identification and freezing of money laundered assets. The FATF
commended Pakistan for the issuance of the AMUCFT ordinance. which came into force on 12
October 2013 and allows Pakistan to begin implementing its U CR 1.373 obligations
immediately. Additionall y. to address concerns regarding the temporary character of this
ordinance, the ordinance is being converted into a regular legislation through the parliamentary
process. The law has been approved by the National Assembly. Going forward. we will continue
to strengthen our AMUCFT framework through the drafting and consultation process around the
Mutual Legal Assistance l ~ 1 w
Ease of business entry is one of the most important nspects of entrepreneurship in
competitive markets and of doing business. In the previous two years, the Securities and
Exchange Commission of Pakistan (SECP) had developed and rolled out an electronic platform
for the company registration system, which had led to a significant reduction in time taken to
register a business in corporate form. Yet, as per World Bank's Doing Business Report 2014,
21 days and I 0 procedures needed to register a business in l>akistan with the concerned
authorities can still act as a deterrent to business ent ry. That is why the Government has been
working to develop a One-Stop-Shop for business registration. creating a shared platform for
registration between the SECP. the FBR. and the EOBI. to reduce the time for registration of
businesses. These three key agencies have launched the new OSS through the finalization of the
functional specifications and architectural design of the integrated business registration sofiware.
Going forward, we intend to launch this virtual OS platform immediately following its final
approval, and set up a commensurate physical OSS in one province. SECP is also working on
developing a plan lor introduction of the concept of limited liability partnerships (LLPs).
(indicalive !rigger). LLI's arc being aimed to foster growth in the services sector and lead to
enhanced business registration in the country. Professional accounting bodies and service
providers have been supporting the dc,elopmcnt of this framework, which would combine the
advantages of both a partnership finn and a company, while mitigating their drawbacks. Overall.
we expect to reduce the number of days to register a business by 3. which will facilitate doing
business in the country and will likely increase Pakistans ranking on the Business Registration
Doing Business Indicator.
Foreign investment can also be spurred by the creation of Special Economic Zones
(SEZs). This is why the creation of Special Economic Zones (SEZ) in Pakistan has been
advanced through the recently approved SEZ bill of 2012. The framework lor SEZs will help
catalyze creation of industrial clusters, increasing producti vity and competitiveness. The
Government has now embarked on a path towards implementation of the law. Aficr clarifying to
private investors the fiscal benefits allowed to developers. it reviewed and approved the first
provincial SEZ application received to date. The Government is committed to accelerate
implementation and approve at least two provincial SEZ applications. while providing additional
guidelines and criteria for attracting further applications.
Trade policy reforms would stimulate growth and competition and increase
consumer welfare. The Government is committed to achieving a simple statutory (Most
Favored Nation--MFN) rates regime of 4 slabs by end 20 1611 7; thus ending discriminatory
statutory regulatory orders (SROs) that establish special concessionary Customs tariff rates; and
improving trade relations with our commercial partners and deliver a level playing field and a
much needed boost on trade-related gro\\1h and investment. As an ini tial step in tariff
simplification. the Government has already approved a Plan for reducing the number of tariff
slabs from 8 to 6 withi n a rdllge of 0 to 25% for all tariff lines. with very few exceptions and
34




tariff peaks allowed just to address sens1t1ve goods or special sectors. The Government is
committed to make such reduction effective next July 1st once the budget 2014115 is approved
by parliament; and the Plan for achieving 4 slabs in 3-years will be finalized end May (indicative
trigger). Improving trade relations with our commercial partners involves taking full advantage
of trade preferences available from the EU where we have autonomous trade preferences in 75
items--EU has extended GSP plus benefits (zero percent duty) from January I, 2014 on
Pakistan' s exports--and consolidating our trade relations with the regional trading partners.
Mobilizing Revenue and Protecting Priority Social Expenditure
Sustainable high economic growth for Pakistan requi res fiscal consolidation. Fiscal
consolidation is the only possible way to open future fiscal space. reduce borrowing needs from
the banking sector and. by the same token, increase credit to the private sector. Our target is to
bring the fiscal deficit to around 4 percent ofGDP by 2016/17. And as consolidation takes place,
created fiscal space should be allocated to priori ty public investment and targeted social
spending to protect the poorest and most vulnerable.
Mobilizing revenue is a crucial objective. There is full realization within our
government that weak revenue mobilization is one of the main factors constraining Pakistan' s
economic development as it reduces Government's stabilization options to expenditure
compression. Pakistan's tax collection, at below 10 percent ofGDP. is highly inadequate to raise
public savings and investme nt to levels which arc consistent with our desired higher growth
trajectory. Infrastructure gaps, especially massive power load-shedding and low level of human
development in Pakistan- where education and health budgets arc well below those assigned by
other emerging countries with similar levels of income per-capita to Pakistan-are clear
evidence of the low level of public resources. Expanding the resource envelope, therefore, is the
key element ofGovenuncnt's stabilization and economic recovery program.
The Government is commilled to reach a respecta ble l ax to COP rat io of 15 percent
by 2017/18 through domestic resource mobilization. Growth in Federal Board of Revenue
(FBR) tax collection during the first eight months of FYI4 has been quite robust (above 17
percent). Going forward. the bulk of the growth in revenue shall also come from FBR revenues
and. to a lesser extent. provincial taxes. We are working on several pillars: broadening the tax
base; rationalizing the concessionary regime and eliminating privileges: reducing the tax gap:
and improving tax collection management and behavioral change as part of
comprehensive tax administration reforn1s. We are encouraged by initial tax policy measures
adopted in the budget 2013/ 14 that are providing promising results. FBR tax collection appears
closely approaching its revised target well beyond eight-month results; which gives us
confidence that the tax target s will be met for the first time in many years. In addition to that,
and supported by FSIG-1. several key measures were adopted: MoF approved a comprehensive
tax reform strategy prepared by FBR, and consistent with it. several tax measures have been
completed includi ng: FBR refrai ning from issuing any special SROs that would provide
concessionary exemptions: FBR issuing 75.000 notices till date to identified potential tax
evaders to register and file tax payments and undertaking provisional/tax asses ments of at least
8.000 individuals: FBR launching an IT-based Audit Management System and undertook
ballot-based audits of at least S percent of total returns (filed lor tax year 2012} and
completing above 25 percent of them; and FBR publishing a ational Tax Directory and issuing
National Numbers (NTNs) to all members of Senate of Pakistan and National and
Provincial Assemblies (prior actions).
35



The next budget 2014115 will be instrumental to accelerate the revenue mobilization
agenda decisively. Going forward. Government expects to obtain Parliamentary approval of a
budget 2014115 including a tax expenditure annex; and a set of tax exemptions and SROs
eliminated, and additional t ~ measures for a total revenue impact equivalent to no less than
0. 7% of GOP. As the Government is committed to approving legislation to permanently prohibit
discriminatory special SROs that establish tax exemptions (including Customs tarifTs) and
concessions, it intends to enact a bill to be submitted to the National Assembly by mid-2015
introducing amendments of the corresponding tax laws to permanently eliminate the discretion of
the Federal Board of revenue to issue special tax exemptions, making any proposed tax
exemption subject to overall parliamentary approval as part of the annual budget law or/and the
corresponding tax legislation (indicative trigger). As a related step. the budget 2014115 will
already contain a policy statement prohibiting FBR from issuing any special exemptions, other
than those approved by the Federal Government, and committing the Federal Government to
place all its SROs issued or planned in any given financial year before the National Assembly for
ratification or approval. In addition, amendments will be obtained of the corresponding t ~ laws
to permanently eliminate the discretion of FBR to issue special t ~ exemptions (indicatile
trigger).Furthermore. FBR will issue 120.000 notices to identified potential tax evaders to
register and fi le tax payment. and take administrative and/or legal actions on at least 25% of the
potential taxpayers who received notices by 31 March 2014. but failed to respond to them
(indicatie trigger). FBR will also select at least 7.5 % of large taxpayers (filed for tax year
2013) through ballot- or ri sk-based audits. and initiate audits for at least one-quarter of those
selected cases (indicative trigger). Finally. Federal Government will encourage provinces'
initiative to increase revenue either by expanding the scope of services taxed by the General
Sales Tax (GST) or modifying other provincial taxes so as to increase by no less than 20% their
budget 2014/ 15 allocations to non-salary education and health spending (indicative trigger).
Effective allocation to protect key social protection is a priority of the Goernment.
The Government is committed to expand the safety net supported by cash transfers. The ri gorous
fiscal adj ustment requires very tight management of discretionary spending by the Federal
Government. and yet the Government recognizes the importance of protecting programs with
demonstrated effectiveness in benefiting the poor while curtailing less productive expenditures.
For example, the planned reduction of the untargeted power subsidies could disproportionately
afTect the extreme poor. Despite its success as the main safety net program. BISP still requires
additional improvements to enhance its effectiveness in expanding and reaching its beneficiaries.
Furthermore, in collaboration with provincial authorities. BISP has also begun to introduce Co-
responsibility Cash Transfers (CCn linked to primary education so as to address one of the
sources ofintergenerationaltransmission of poverty.
The Government is prioritizing three sets of actions to expand the safety net. These
are: (a) increasing the benefit amount to adjust it to inOation: (b) removing administrative
constraint that in the past led to insufficient benefit payments to eligible beneficiaries; and (c)
expanding the CCT scheme to promote better educational performance among poor children.
Hence. the basic benefit of the !liSP Program was raised to Rs. l.200 per family per month this
fiscal year. MoF issued a notification guaranteeing timely and full quarterly budget releases to
BISP and obtained provincial Chief Secretaries' endorsement of MOUs signed by !liSP with
provinces to expand CCTs for primary education in no less than 20 districts (prior actions).
Goi ng forward, next year 2014/ 15 budget will increase BISP allocation to utleast Rs.80 billion;
increase the benefit amount in line with inOation: expand CCTs for primary education in no less
than 25 districts with a benefit of Rs.250 per month per child attending school; and will seck an
agreement with provinces on a cost-sharing arrangement for CCTs. (indicatiw triggers)
6
36

Concluding Remarks
The Government is finnly convinced that the comprehensive reforn1 agenda outlined
abo\'e while ambitious, is what Pakistan requires to improve its social, economic and financial
conditions. The Government is determined to fight attempts to roll back policy measures or
attempts to delay the implementation of further stages of the program. The Government will
continue to promote national dialogue on the reforn1s, and forge political consensus to see the
required legislation approved and to execute the program successfully. The Government expects
to mitigate the possible adverse impact of its policy actions with increased and be11er targeted
social spending. and increased effectiveness in basic public service delivery.
Mr. President --our country is going through a tough economic period. The good news is
that our Government is composed of people that recognize the need to address key refonn issues
that would put our country back on the path of shared prosperity. We are commi11ed to refonns
and would like the continued support of the World Bank Group in assisting us in this process
through the much needed knowledge sharing and financial support.
Kind regards,
Mr. Jim Yong Kim.
President,
International Bank for Reconstruction and Development
1818 H Street. N.W.,
Washington DC. 20433
J.i.,M
37
ANNEX 3. BANK-FUND RELATIONS NOTE

Press Release No. 14/123

March 24, 2014
The Executive Board of the International Monetary Fund (IMF) today completed the second
review of Pakistans economic performance under a three-year program supported by an
arrangement under the Extended Fund Facility (EFF). The completion of the review enables an
immediate disbursement of an amount equivalent to SDR 360 million (about US$555.6 million).
The 36-month extended arrangement under the EFF in the amount of SDR 4.393 billion (about
US$6.78 billion, or 425 percent of Pakistans quota at the IMF) was approved by the Executive
Board on September 4, 2013 (See Press Release No. 13/322).
In completing the second review, the Executive Board also approved the authorities request for
waivers of non-observance of the end-December 2013 performance criteria on net swap/forward
position and government borrowing from the State Bank of Pakistan (SBP) based on corrective
actions taken by the authorities.
Following the Executive Boards discussion on Pakistan, Mr. David Lipton, First Deputy
Managing Director and Acting Chair, said:
The Pakistani authorities have made commendable progress in stabilizing the economy and
launching important structural reforms. However, economic conditions remain challenging, and
more needs to be done to reduce vulnerabilities.
Fiscal consolidation is on track, but additional efforts to broaden the revenue base and improve
tax administration are needed to sustain the adjustment. Recent steps to increase the equity and
transparency in taxation are in the right direction. However, the December 2013 investment
incentive package runs against these steps. Slippages on targeted cash transfers should be
avoided to protect the most vulnerable segments of the population. It will also be important to
strengthen public debt management.
Monetary policy should increasingly focus on containing inflationary pressures and every effort
should be made to reduce the stock of government borrowing from the State Bank of Pakistan in
line with program targets. Efforts to build up foreign reserves should continue, including through
greater exchange rate flexibility and a higher policy through greater exchange rate flexibility and
a higher policy rate. Agreed legislation to enhance central bank independence should be
presented for parliamentary approval without undue delay.
Tackling financial sector risks is an important policy priority. In particular, capital shortfalls at
some banks and high nonperforming loans need to be addressed promptly. Additional steps to
deepen the government debt market would also strengthen financial stability.
Progress on structural reforms is welcome but more remains to be done. The rationalization of
gas prices should move beyond the gas levy; regulation of the energy sector needs to be
strengthened; privatization of public sector enterprises should move forward; and bolder actions
are needed to improve trade policies and the business climate.

Public Affairs Media Relations
38
ANNEX 4. PSIA: WHY PROTECTING BISP IS SO IMPORTANT FOR THE POOR?
The government has committed itself to minimize potential negative impact of fiscal adjustment on
the poor and the vulnerable. The primary and most appropriate federal vehicle for protecting the poor
and the vulnerable is the basic Cash Transfers (CT) administered by the National Income Support
Programme (NISP), more commonly known as BISP. Launched in 2008 with the initial coverage of 1.76
million families, the BISP-CT expanded rapidly to reach 4.8 million beneficiary families by J une 2013.
Correspondingly the budget allocated to the program also increased from the initial PKR. 34 billion in
FY08-09 to PKR. 70 billion in FY12-13 (later revised to PKR. 58 billion). During the expansion, BISP
also underwent important qualitative improvements, most notably in its approach to targeting but also in
benefit payments. With an improved targeting backed up by a comprehensive Management Information
System (MIS) and validation by the National ID database, around 75 percent of the cash benefits accrue
to the bottom two quintiles. Leakage to the rich was reduced to a negligible level (A4.1).
BISPs innovation also includes its modern, technology-based methods of benefit payments. BISP
introduced new, modern methods of payment using mobile phones, smart cards (to be presented to tellers
of contracted banking outlets or other payment agents in exchange for cash grants) and debit cards (to be
used at ATMs) and began phasing out payments through the Pakistan Post. As of the end of J une 2013,
3.4 million out of the total 4.8 million families were receiving payments through BISP-issued debit cards,
and another 300,000 or so were getting paid through either the mobile banking or the smart card method.
BISP is continuing to phase out the payments through the Pakistan Post to the remaining 1 million.
Figure A4. 1. Targeting Performance of Federal Social Programs in Pakistan (%)

Going forward, the federal government has increased the budget to PRs. 75 billion in FY13-14.
With the increased budget BISP aims to reach 5 million families by the end of the fiscal year while
increasing the individual benefit amount from PRs. 1,000 per month to PRs. 1,200 per month. For FY14-
15 the targeted budget amount will increase to at least PKR. 80 billion with the individual benefit being
indexed to annual inflation. Although both the past trend and the future plans to expand the reach of the
cash transfer programs are encouraging, a particular concern that requires the Governments attention
relates to the extent to which the allocated budget has been released and executed. Table A4.2 below
shows how the actual execution of the BISP budgets has tended to fall short of the original budget
allocations. Even when BISP managed to execute most of the revised budget as in 2010-11 and 2011-12,
for example, the actual amounts spent on the cash grants for the BISP beneficiaries tended to be even
39
lower. Part of this is a necessary administrative cost of running the BISP and all its programs, which has
hovered around PRK. 4-5 billion per year. But another part is displacement of the budget for the basic
CT scheme by other BISP initiatives. In 2010-11, this was a result of a necessary response to the flood
emergency, for which BISP allocated around PRK 4.7 billion. In 2011-12, a micro-credit scheme
(Waseela-e-Haq) and a group life insurance scheme (Waseela-e-Sehet), which together received around
PRK 4 billion originally allocated to BISP.
Table A4. 1. Budget Execution Performance of BISP, 2008-13
(In billions of Pakistani Rupees)

BISP past low budget execution reflects incomplete (and often delayed) payments of benefits to the
beneficiaries. In FY12-13, BISP registered a total of 4.8 million beneficiaries by the end of FY12-13 and
yet it was only able to pay full benefits (i.e., PKR. 1000/month for 12 months) to only about 1.5 million
of them. One of the reasons was BISPs own decision to convert payments though the Pakistan Post,
which had demonstrated problems of accountability, into a modern reliable and expedient debit cards,
which resulted in temporary suspension of payments to as many as 1.2 million beneficiaries. But another
reason is the insufficiency of budget releases by the MoF. Table A4.2 shows the amounts requested by
BISP and released by Finance and the dates.
1
It displays a pattern of unpredictable releases both in terms
of the amount (vis--vis the amount requested) and the timing. Irregular and incomplete benefit payments
compromise the beneficiaries ability to count on the cash transfers as an important source of social
protection and could in the long run undermine the programs credibility among them. Therefore, timely
and regular releases of the BISP budget and correspondingly timely disbursement by BISPis critical to
make sure that all eligible beneficiary families (expected to reach 5 million or more by the end of
FY13/14) will receive the full annual benefit amount (PKR. 14,400).
2
The MoF could consider a new
procedure of automatic quarterly releases of the BISP budget for the basic Cash Transfers based on the
latest enrollment data.
Table A4. 2. Funds Requests and Releases for BISP, FY2012-13


1
Released amounts in Table A4.3 and actual expenditure amounts by BISP in table A4.2 show discrepancies
because they correspond to different accounting concepts.
2
Because of the time lag between incorporation of the new beneficiaries in the program and processing of their
payments, the payments for those who are incorporated in the 4
th
quarter cannot be processed within the financial
year. In a sound payment process, these should be the only source of payment carryover into next financial year.
40
BISP is pursuing its own plan to continue increasing the coverage of its basic Cash Transfer
Program. However, enrollment alone would not be sufficient to provide these poor and vulnerable
families with a minimum level of social protection if the benefit payments are irregular and/or
incomplete. By pursuing measures to ensure timely and complete releases and disbursements of funding,
BISP will be able to enhance its cash transfers value as a predictable source of financial assistance for the
poor and thereby reduce their vulnerability.
Need to roll out the Conditional Cash Transfers (CCT). Although the basic Cash Transfer scheme has
played an important role in alleviating effects of income poverty among the targeted poor, the
Government is aware that it alone does not address structural causes of poverty or its inter-generational
transmission. One such feature of poverty is the low level of schooling among the children of NISP
beneficiaries. More than 70% of the children of the targeted families are out of school (compared to the
national average of about 34%) and the Government wishes to play a stronger role in facilitating the
poors exit from poverty by offering incentives for human capital accumulation through school
attendance.
The strategy chosen to pursue this objective is a CCT scheme. A pilot CCT scheme by the Pakistan
Bait-ul-Mal (PBM) a federal welfare program established in 1992 to provide support to the destitute
such as widows, orphans, the elderly and the disabled demonstrated that despite imperfect design (e.g.,
weak targeting, very low benefit amount) and a number of implementation problems (e.g., limited
coordination with education authorities, delays in payments) the pilot scheme produced significant
impacts on improving school enrollments among the beneficiaries. Building on this positive experience
under the PBM and following the international best practices, BISP in partnership with the provincial
governments piloted a CCT program to encourage enrollment and attendance of primary school-aged
children of existing beneficiaries of the base cash transfer program. The CCT program provides the
family with a monthly top-up benefit of PRs. 200 per child to the three youngest children between the
ages of 5-12. The children must maintain at least 70% school attendance every quarter to qualify for the
cash transfers.
After successful execution of this pilot in 5 districts, the BISP plans to extend the schemes coverage
to 15 more districts in all provinces and regions during FY13-14 and then to at least 50 districts in
FY14-15. The evidence from other countries successfully implementing similar programs suggests that
cooperation and effective partnership of the provincial governments is critical to achieve sustainability
and outcomes of the CCT program. Active participation and commitment by the provincial governments
is particularly critical in Pakistan where primary (and secondary) education has long been a devolved
provincial responsibility. Most of the provinces have declared education emergency and signaled
universal enrollment as an immediate priority. These declared policy objectives could benefit from the
federal demand-side intervention targeted to the poor to achieve the education outcomes amongst the
poorest. The provincial governments could play critical roles in timely completing and sharing
information on verification of compliance (i.e., school attendance) by the beneficiaries; and increasing the
supply of education services where these are lacking. Five out of the six provinces/regions have already
signed a Memorandum of Understanding (MOU) with the federal government to collaborate in CCT
implementation but their performance, especially in compliance verification, left room for improvements.
Therefore, renewing federal-provincial agreements on joint CCT implementation would be a high priority
for the programs success, especially given the planned expansion of its reach and coverage. A possible
means to formalize effective federal-provincial partnership in CCT implementation would be a formal
approval by the Council of Common Interest (CCI). With the expansion of a well-designed CCT scheme,
BISP is expected to augment the provinces own efforts to increase schooling among the children of the
poor and vulnerable. The target is to raise the enrollment rate from the current 30 percent among this
segment of the population to at least 50 percent, but this target cannot be achieved unless there is strong
commitment from provinces; commitment which is at nascent stage.

41
ANNEX 5. PRIVATIZATION IN PAKISTAN
Denationalization started in Pakistan during the 1980s. Legislative cover to the privatization
program was provided through the Privatization Commission Ordinance promulgated in in 2000. Around
167 transactions have been completed. The proceeds from privatization total Rs. 476 bn. including
Telecom privatization (Rs.187 bn.), capital market offerings (Rs.133 bn.), Energy privatizations (Rs.52
bn.), Banking privatizations (Rs.41 bn.) and Chemical/ Fertilizer privatization (Rs.42 bn.).
The Privatization Commission Ordinance defines privatization as: . a transaction by virtue of
which any property, right, interest, concession or management thereof is transferred to any person (entity)
from the Federal Government or any enterprise owned or controlled, wholly or partially, directly or
indirectly, by the Federal Government. Whereas the objectives of privatization listed in the Ordinance
include: enhancing the role of private sector; curtailing losses of SOEs and transforming them into
profitable enterprises with the help of the private sector; improving efficiency and performance of SOEs,
and producing and offering better quality products and services at affordable prices.
The Ordinance created a Privatization Commission (PC). It is a corporate body governed and
administered currently by a 14 member Board with a professional from the private sector (with the status
of Minster of State) as its Chairman. The Board is independent, autonomous and has majority of its
members from the private sector as well. Its key functions include: i) recommending privatization
program and guidelines to the Cabinet; ii) planning, managing, implementing and controlling the
privatization program approved by the Cabinet; iii) taking operational decisions on matters pertaining to
privatization, restructuring, deregulation and regulatory issues, including, proposing regulatory
framework and the establishment and strengthening of regulatory authorities, and advising the Federal
Government in selection and appointment of the head and members of a regulatory authority, and iv)
advising measures to the Federal Government for improvement of public sector units till their
privatization. The privatization process, varies depending on the nature of the asset being privatized such
as the proportion of shares being offered for privatization or whether a transfer of management is
involved. The Commission can carry out privatization, through a variety of modes including: (a) sale of
assets and business; (b) sale of shares through public auction or tender; (c) public offering of shares
through a stock exchange; (d) management or employee buyouts by management or employees of a state
owned enterprise; (e) lease, management or concession contracts, etc.
A typical Privatization Transaction involves the following key steps:
1. Policy level approval of Council of Common Interest (CCI) for an entity/sector to be considered for
privatization- compulsory after the 18
th
Amendment.
2. Identification of an entity and approval of the PC Board and Cabinet Committee on Privatization
(CCOP).
3. Hiring of a Financial Advisor (FA) or Valuator.
4. Due diligence by FA and Privatization Commission.
5. Finalization of transaction structure.
6. Restructuring and regulatory reforms, if needed.
7-9: Invitation of Expressions of Interest, submission of statement of qualifications and prequalification
of firms.
10-12: Due diligence by potential buyers, sharing of Bid Documents/Instructions with pre-qualified
bidders and Pre-bid conference.
13. Approval of valuation (reference price) by CCOP.
1416: Bidding process (media invited to observe bidding), Approval of bidding results by PC Board and
CCOP, Issuance of Letter of Intent to successful bidder.
17-18: Finalization of sale agreement between PC and the Buyer, and Handing over of the entity.
42
The privatization process has been more or less dormant since 2006. This has been a result of a
number of external constraints, including slower-than expected economic growth, the challenging
security and law and order situation, as well as legal challenges / to the privatization process The new
Government as part of its policy for restructuring and reforming the economy has committed to swiftly
take action to restructure and reform fiscally burdensome SOEs
3
. As part of the reform strategy, the
CCOP approved a priority list of 31 transactions / SOEs,( out of the CCI approved list of 65 transactions
/SOEs), to be taken up for processing
4
on October 3, 2013. The list includes power generation companies,
power distribution companies, energy (exploration and distribution) companies, banks etc. PC further
shortlisted around 10 SOEs as the first batch of transactions. Their Implementation Roadmap was
approved by the Privatization Commission Board when it was reconstituted in December 2013. These
projects will follow alternative modalities:
a. Strategic Partnership / Sale: Expected to be considered where it is vital to bring in an experienced
and qualified private sector party to introduce good governance and use its expertise to introduce new and
better technologies, and practices to make the firm more efficient, effective and competitive
b. Capital Market Offerings: Expected to be considered where the objective is to spread ownership,
raise capital and/or develop/provide opportunities in capital markets. Private ownership and scrutiny
usually leads to overall good governance. To be undertaken as:
Initial Public Offering (IPO), after converting to a public limited company, SOEs not being offered
for strategic sale or that have never been offered in the capital markets before (with the help of
underwriters/ book runners).
Secondary Offering for previously listed SOEs to private sector institutional investors and other
subscribers to be considered as quick and easy offerings to raise immediate Government revenues
(their benchmark market prices are available and their financial information and records is available).
PC is confident that out of the top ten prioritized projects, it would be able to take at least five
projects to market in the next 10 - 12 months. Prioritizing the sequencing would be to be based on:
a. Selecting the low hanging fruits or SOEs that are most ready (in terms of prior work done, presence
of a good enabling environment and market interest SOEs for secondary public offering), and most
likely to be successful first, so as to rebuild market and stakeholder confidence.
b. Prioritizing SOEs for early privatization that can generate quick revenues needed to be ploughed back
into SOEs for some sort of restructuring with financial implications, prior to privatization (again, for
instance selecting SOEs for secondary public offering).
c. Prioritizing projects that if privatized would have the highest fiscal impact (reducing
subsidies/liabilities and potential at generating tax revenues) (e.g. utility or transport SOEs).
Key challenges going forward include:
a. Getting the Implementation Roadmap for the first 10 projects right
b. Removal of legal impediments including clarification and resolutions of issues emanating from the
Supreme Court observations in decisions on Pakistan Steel Mills and Lakhra Power Plant
privatizations.
c. Changing the current negative public perception about privatization.
d. Capacity (re)building and staffing of the PC.
e. Selecting, prioritizing and sequencing the most saleable transactions first aiming for early success.
f. Successfully handling employee/ labor issues in SOEs such as Pakistan International Airlines (PIA).
g. Obtaining consensus on the privatization program with the opposition political parties.
h. Improvement in the overall enabling environment for investments and private sector participation.

3
Accumulated loses of all SOEs average Rs. 500 Billion a year.
4
PC had a list of 30 SOEs among 65 earlier approved by CCI, but CCOP added Lakhra Power Plant later. Last month, Supreme
Court of Pakistan nullified the Lakhra Power Plant's 20 year lease to Associated Group after finding faults in the lease agreement.

43
ANNEX 6. TARIFF SIMPLIFICATION AND SROS TRADE DISTORTIONS
Pakistan was a global benchmark country in FY2002/03, and some improvements compared to that
tariff structure have been achieved in the last decade. There has been an overall push to lower tariffs
by moving some tariff lines to lower slabs and by the introduction of a zero tariff rate in FY 2007/08. As
a result, the un-weighted average statutory tariff rate was reduced from 17.4% to 14.4% between FY
2002/03 and FY 2012/13 (Table A6.3). Additionally, in FY 2012/13, 40.2% of tariff lines (2,799
products) paid 5% duty rate or lower compared with only 16.3% of tariff lines (977 products) in 2002/03.
5

Nevertheless, the overall tariff structure of Pakistans imports became extremely complex after
2004, with an uncontrolled mix of new statutory duty rates, the use of regulatory and additional
duties, and the multiplication of statutory regulatory orders (SROs). Table A6.1 compares the
number of tariff lines applying to a specific statutory duty rate between 2002/03 and 2012/13. The
number of standard statutory rates (so called Most Favored Nation MFN) doubled from only 4 slabs (5%,
10%, 15% and 25%) in FY 2002/03 to 8 slabs (0, 5%, 10%, 15%, 20%, 25%, 30% and 35%) in FY
2012/13 (Table A6.4).
6
The increasing complexity of the tariff structure is better quantified through a
coefficient of variation, a measure of tariff dispersion: it increased from 67% to 81% over the last decade.
Regulatory and additional duties introduce more complexity and reduce the transparency of the
tariff schedule. Regulatory and additional duties, levied in excess of the statutory duty and ranging from
5 to 50 percent, are set by two SROs: SRO 482(I)/2009 which covers 64 tariff lines in several sectors
(including agricultural products, ceramic/tile products, autos, guns, among others); and SRO 693(I)/2006
which affect 140 tariff lines that are basically components and sub-components for auto
makers/assemblers. Because regulatory and additional duties are applied on top of the statutory duty, they
increase the effectively paid customs duty for some products and de facto create three additional standard
slabs in Pakistan: 45% for most products under SRO 482(I)/2009, and 50% and 60% for most products
under SRO 693(I)/2006. Additionally, since regulatory and additional duties are not part of the tariff
schedule they make the system less transparent.
Two sets of actions are necessary to improve the competitiveness of Pakistans producers. First, an
overall benchmarking tariff simplification halving the number of tariff slabs, with priority given to
reducing tariffs on capital and intermediate goods. Second, the elimination or drastic reduction of seven
major customs related SROs which discriminate across importers and suffocate firm dynamism, in
particular of small and medium business. In addition, an additional step that might be required is the
elimination of regulatory and additional duties, which increase the duty levied on imports well above the
MFN rate. . Two complementary reform scenarios are next.
a)Tariff simplification reform should aim at lowering the number of standard duty slabs to four in
order to reduce tariff dispersion while reducing the average statutory duty rate from 14.4% in FY
2012/13 to 10% by FY 2016/17.The reduction in the average duty rate will result in cheaper access to
imported inputs and machinery unavailable in Pakistan which would likely contribute to enhance the
competitiveness of domestic producers of manufactured goods. The simplification of the tariff regime to
fewer slabs enhances transparency, and cuts the administrative, menu and information costs associated
with the current complexity of the tariff structure. Finally, these measures constitute a move towards the
desirable ultimate policy target of establishing low, very few, uniform tariff rates. For enhancing the
beneficial effect on Pakistani producers, particular and early attention should be placed on reducing the
average tariff rate on capital and intermediate goods. It is suggested to lower by 2014/15 the average tariff
rate on capital goods to 10 percent and the average tariff rate on intermediate goods to 5 percent.

5
The statutory duty is zero for 6.3% of the tariff lines (440 products) in FY 2012/13.
6
We define tariff rates which apply to 20 or more tariff lines as standard tariff slabs; and tariff peaks as those tariff rates that
apply to less than 20 tariff lines. Tariff lines refer to a Harmonized System (HS) 8 digit product code. No SRO rates are included.
44
b) Complementary SROs reform should remove distortions and anti-competitive practices. Any
tariff reform scenario should include their elimination or rationalization. SROs proliferated since 2006
when local content requirements had to be removed to align Pakistans trade policy with WTO
commitments but evolved into a scheme discriminating across importers. At such time, SROs aimed at
maintaining a certain degree of temporal protection of the domestic market. Instead, SROs favor firms
with higher lobbying power and have the effect of discriminating across importers. Gathering information
on the exact incidence and pervasiveness of SROs is particularly challenging, as even though published
by notification in the official Gazette, they are not included in the tariff schedule, representing a major
element of opacity in the trade regime. The majority of SROs reduces or exempts import duties on inputs,
raw materials, components, and machinery to be used by firms as part of a manufacturing process and not
sold in the domestic market. The duty exemptions cover a wide range of imported products, including
industrial components, chemical and pharmaceutical products, auto parts and some agricultural
commodities. Duty exemptions are only granted to selected industries or firms that fulfill certain
requirements which result in anti-competitive effects for businesses in Pakistan and a highly
discriminatory business environment. The seven major customs related SROs -- SROs 565(I)2006,
567(I)2006, 678(I)2004, 575(I)2006, 655(I)2006, 656(I)2006, 450(I)2001, and 809(I)2009--affected 25%
of imports and generated revenue losses of Rs. 100 billion (42% of collected customs duties) in FY 2012-
13 (Table A6.5). Additionally, almost 80% of all the customs duty exemptions in Pakistan, i.e. the
difference between the potential duty revenue based on statutory rates and actually collected revenue, is
due to 7 SROs; the rest accounts for Preferential Trade Agreements (PTAs).
Table A6. 1. Tariff Rates

Besides discriminating among importers some SROs introduce another layer of complexity and
uncertainty by attaching conditions to tariff exemptions and involving other agencies in the
granting of such exemptions. Under SRO 565, 655, and 656, the quantity of products to be imported
under the tariff exemptions is limited to those products that may effectively be used in the manufacturing
process. To that end, SROs rely on the approval of the tariff exemption by the Engineering Development
Board (EDB), who is to assess the products and quantities needed by the importer/manufacturer. SRO 565
establishes that eligible firms are to submit a request containing a declaration of input/output ratios,
which describes the products and quantities of imports needed for one year of production. The request is
to be analyzed by the Collector of Sales and Federal Excise body, which may approve the request for the
desired products and quantities or, after allowing for a reasonable quantity, refer to the Engineering
Development Board for a final determination. Conversely, SRO 655 and 656 do not describe the
procedure, but rather set out that the input output ratios of items to be manufactured and total annual
requirement of raw materials, sub-components, sub-assemblies and components shall be defined and
determined by EDB, presumably after a request of the company.
In principle, none of SROs appears openly inconsistent with World Trade Organization (WTO)
agreements. WTO Members are free to modify their custom tariff as long they do not exceed the bound
tariff rate. Reductions in tariffs are therefore measures that tend not to raise any concern. They could be
45
considered subsidies under the WTO framework, but that does not imply that they are inconsistent with
WTO disciplines. There is no provision under the WTO pertaining specifically to reductions in tariffs.
However, these measures may be applied in a manner that falls short of the WTO provisions. Besides,
the import quota mechanism envisaged by the four SROs has three main flaws: (i) firms with stronger
lobbying power - larger firms - will get more generous quotas; (ii) such system is a disincentive to
product and process innovation (given that is based on coefficients of production based on a determined
and established production function); and (ii) the mechanism creates scope for corruption and is relatively
inefficient (firms can challenge the assigned quota and engage in discussions with EDB and IOCO to
negotiate more generous quotas).
Table A6. 2. Statutory Duty Rates, FY2002/03 to FY2012/13
Rate 2002/03 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13
0 0 0 0 0 400 413 413 423 424 440
3 0 0 2 0 0 0 0 0 0 0
5 977 1,503 2,462 2,657 2,346 2,338 2,339 2,323 2,346 2,359
6.5 0 0 14 0 0 0 0 0 0 0
7 0 0 56 0 0 0 0 0 0 0
10 1,707 1,448 874 873 874 872 873 871 882 954
14 0 0 150 0 0 0 0 0 0 0
15 0 0 194 405 483 464 466 470 477 487
20 874 908 814 917 928 874 875 874 907 890
25 2,380 2,148 1,555 1,422 1,351 1,089 1,090 1,093 1,104 1,113
30 13 13 12 37 26 76 76 76 78 368
35 0 88 85 373 383 548 552 555 557 267
40 1 0 0 0 0 0 0 0 0 0
45 2 2 2 0 0 0 0 0 0 0
50 0 6 8 20 13 13 13 13 13 13
55 1 1 0 0 6 6 6 6 6 6
60 12 19 20 5 10 9 9 9 9 9
65 0 0 4 4 0 0 0 13 13 13
70 0 8 0 0 0 13 13 0 0 0
75 2 0 7 13 4 4 4 4 4 4
80 0 4 0 0 13 0 0 0 0 0
90 7 13 13 29 29 16 16 16 16 16
100 17 23 16 0 0 13 13 13 13 13
105 0 0 0 0 0 0 0 0 0 0
120 0 0 0 0 0 0 0 0 0 0
125 2 0 0 0 0 0 0 0 0 0
150 1 2 0 0 0 0 0 0 0 0
200 6 2 0 0 0 0 0 0 0 0
225 0 0 0 0 0 0 0 0 0 0
250 0 0 0 0 0 0 0 0 0 0
Total tariff lines 6,002 6,188 6,288 6,755 6,866 6,748 6,758 6,759 6,849 6,952
Tariff slabs 15 16 18 12 14 15 15 15 15 15
Standard tariff slabs /b 4 6 9 9 9 8 8 8 8 8
Tariff peaks /c 11 10 9 3 5 7 7 7 7 7
Tariff dispersion 67.2% 70.8% 76.4% 75.3% 80.7% 83.0% 83.0% 82.3% 82.3% 81.3%
Source: WTO for FY 2002/03-FY 2011/12 and FBR for FY 2012/13, World Bank staff computations
Note: a/ This refers to unweighted average customs duty. b/We define as standard tariff slabs, tariff rates which apply to 20 or more tariff lines. c/ we define as tariff
peaks, tariff rates that apply to less than 20 tariff lines.

Table A6. 3. Statistics of Statutory Duty Rates, FY2002/03 to FY2012/13

mean sd minimum maximum CV
FY 1999/00 25.2 17.3 0 250 0.69
FY 2000/01 24.9 18 0 250 0.72
FY 2001/02 20.4 16 5 250 0.78
FY 2002/03 17.4 11.7 5 200 0.67
FY 2004/05 16.8 11.9 5 200 0.71
FY 2005/06 14.4 11 3 100 0.76
FY 2006/07 15 11.3 5 90 0.75
FY 2007/08 14.5 11.7 0 90 0.81
FY 2008/09 14.7 12.2 0 100 0.83
FY 2009/10 14.7 12.2 0 100 0.83
FY 2010/11 14.7 12.1 0 100 0.82
FY 2011/12 14.7 12.1 0 100 0.82
FY 2012/13 14.4 11.7 0 100 0.81
Source: WTO for FY 2002/03-FY 2011/12 and FBR for FY 2012/13, Bank staff computations
Mean refers to the un-weighted average tariff rate.
46

Table A6. 4. Number of Tariff Lines by Type of Goods and Statutory (MFN) Rate, FY2012/13
MFN Tariff Rate
0 5 10 15 20 25 30 35 50 55 60 65 75 90 100 Grand Total
Capital goods
59 749 111 60 131 50 40 173 4 4 13

1,394
Consumer goods
47 261 231 94 387 731 267 64 8 6 5 4 14 13 2,132
Intermediate goods
169 1,077 416 302 336 231 3 21 1 2

2,558
Raw materials
160 244 192 31 23 53 58 2

763
#N/A
5 28 4

13 48 7

105
Grand Total
440 2,359 954 487 890 1,113 368 267 13 6 9 13 4 16 13 6,952

Table A6. 5. Major General and Sector Specific SROs (Rs. Billion)
General and Sector Specific SROs
Import
value
Loss of
customs
duty due to
exemptions
Immediately
Budget
FY
2014-15
To be
decided
by
committee
SRO 567(I)/2006
474 28 0.01 1.9 26
Non-survey based (raw materials, components, etc.)

SRO 565(I)/2006
121 11 0.04 3.5 7
Survey-based (raw materials, components, etc.)

SRO 575(I)/2006
222 18 0.01 5.7 12
Machinery and equipment (general)

SRO 809(I)/2009
33 2 0 2 0
Machinery and equipment (textile)

SRO 678(I)2004
88 7
Oil and gas (Exploration and production)

SRO 655(I)/2006
65 12
Auto sector (vendors)

SRO 656(I)2006
63 22
Auto sector (OEMs)

Total
1,066 100 0.1 13.1 45.8


47
ANNEX 7. PLAN FOR ESTABLISHING AND VIRTUAL ONE-STOP SHOP
REGISTRATION IN PAKISTAN
Registering a business in Pakistan is a lengthy and cumbersome process. When an entrepreneur wants
to start a business in Pakistan, the business has to be first registered with many different public agencies
and the person behind the business has to be aware of the range of different reporting obligations that may
apply. At present this process takes 21 days, is cumbersome, and acts as a deterrent for emerging
entrepreneurs in Pakistan. To the extent costly and cumbersome business start-up process and problems in
dealing with tax (income and sales) registration deters firms to enter into the formal sector, the proposed
one-stop shop solution for business entry should positively contribute to the formalization agenda.
The proposed physical and virtual one-stop shop (OSS) solutions both for the Limited Liability
Companies (LLCs) and non LLCs aim to build a fully integrated and streamlined registration
system. In this way, business will be able to obtain its necessary registration from the relevant registration
authority (i.e., the Registrars of Firms for partnership) and the FBR from the OSS rather than visiting
each of these different authorities separately and providing similar set of information again and again.
This in turn is expected to reduce the transaction costs of doing business and thus may encourage more
businesses to formalize. From the government perspective, the OSS system should also improve the data
quality and integrity about registered businesses and would potentially increase the tax base by reducing
the gap between the number of registered businesses with the registration authority and the FBR.
Given the diversity of the underlying causes and typology of informal firms, the OSS will also
address informality through a multi-pronged approach. Registration of LLCs at the Federal will just
be the first step in a longer process of incentivizing firms to participate in the regulated economy. Many
of the constraints and administrative barriers to firm entry and operation lie under the auspices of the
provincial governments. Therefore, a comprehensive strategy to reform business entry and operation
regulations, such as registration for non-LLCs, obtaining construction permits, and registering property
will also need to be addressed, as well as incentive programs to bring small firms into the informal sector,
which have shown to be effective in other country contexts as well.
A detailed overview of the steps needed to develop the virtual OSS for companies is given below.

1. SECP, FBR, and EOBI enter into a MoU which encompasses the following:
a. Defines the roles, responsibilities, actions, costs and timeframe to establish a virtual OSS for
LLCs.
b. Establishes a Project Management Committee to steer and oversee the implementation
process.
c. Finalizes the requirements for hardware deployment, software development and IT consulting
needed for implementation.
2. After completion of all pre-implementation steps under the MoU, SECP, FBR, and EOBI enter into a
formal agreement to implement the OSS, which covers administrative mechanisms, including the
following:
a. Ownership of the technical solution of the OSS including the database.
b. Agreement on which information elements are common information in the OSS and the
ownership of each of these elements. Agree on the standards that will be used for the data
elements, as well as the formats for how data is entered and stored in the OSS.
c. Agree on the mapping of each data element between the OSS and the SECP, FBR and EOBI.
d. Revise and streamline existing business processes to facilitate the OSS. The goal must be to
remove unnecessary steps and simplify the remaining steps, making sure that the OSS is the
hub for business registration and no additional obligations are introduced.
e. Agree on the technologies, such as tools and formats, for the exchange of data.
48
f. Agree on how to provide customer support for the virtual OSS, i.e. who has the responsibility,
which are the channels and what are the timings for customer support. Online guidance for use
of the OSS must be available 24/7, and possible to download.
3. Verify that current legislation does not need to be changed in order to implement a virtual OSS for
LLCs.
4. According to the responsibilities set in the agreement, the technical platform and solution for the
virtual OSS for LLCs has to be created, which includes the following steps:
a. Create database, application, web services, etc.
b. Implement common forms and common information.
c. Include registration of new LLCs, changing of data on existing LLCs and deregistration of
LLCs.
d. Analyze and adapt the systems of the SECP, FBR and EOBI in order to be able to use data
made available by the OSS.
e. Develop a solution regarding digital signature, authorization and authentication for the OSS
5. The parties must make a plan for awareness building with both businesses and public authorities. The
essence of the message should be the benefits from reforming business registration and introducing
the OSS in Pakistan.
6. According to the responsibilities set in the agreement, the training of staff that shall provide customer
support for the virtual OSS must be planned and carried through. The staff must be trained in the
procedures of business registration, how to use the OSS and how the OSS provides information to
several public authorities.
Table A7. 1. Preliminary Timeline of Proposed Implementation Plan
Task Description
Months
1 2 3 4 5 6
1. Consultation on MoU with implementing agencies
2. Signing of MoU
3. Notification of Project Management Committee
4. Project kickoff & Data Ownership Acceptance
5.
Finalization of technical requirements & selection of HW
vendor and Software Development Partner



6. Procurement of Hardware
7. Software Development
8. Procurement of Bandwidth & Connectivity
9. Hardware and Bandwidth implementation & Testing
10. Application testing and acceptance
11. Training of Systems Managers
12. Final Signoff



49
ANNEX 8. DOING BUSINESS INDICATORS FOR PAKISTAN

For developing countries like Pakistan, where small and medium-size enterprises make up a large share of
the economy, the quality of the business environment is a critical policy area for governments to drive
economic growth, create jobs, and encourage private sector competition. Pakistan is ranked 107 out of
185 economies on the overall ease of doing business rankings, down from 76 out of 181 economies in
2008.
Within the region, Pakistan ranks better
than most South Asian economies, with
the exception of Sri Lanka and Maldives.
However, in the past five years,
Pakistans ranking has gone down by 21
places, which is the highest deterioration
among South Asian economies since
2008.
Within different areas of business
regulation, it is relatively cumbersome,
expensive and time-consuming for
entrepreneurs to get electricity
connections and pay taxes. Pakistan
currently ranks 171
st
and 162
nd
on the getting electricity and paying taxes indicators respectively, while
the median rankings for South Asia are comparatively much better at 115
th
and 106
th
respectively.
Over the past five years, Pakistan has failed to keep up with business regulatory reforms across the world.
As a result, rankings have slipped across all Doing Business indicators with the exception of Trading
Across Borders. For example, Pakistan ranked 59
th
in the Starting a Business indicator in 2008 but now
ranks 98
th
in 2013, with only minor improvements in the procedures, time and costs to start a business. In
comparison, many countries around the world have rapidly implemented business registration reforms in
the form of one-stop-shops and streamlining of procedures to encourage entrepreneurship and to bring
informal businesses into the formal economy. There is considerable potential for Pakistan to move
forward with ongoing reforms (e.g. one-stop-shop business registration). World Bank Group is working
with the federal and provincial level to removing impediments to business entry and exit, paying taxes
and other reforms that will help to improve Pakistans competitiveness performance. Several investment
climate reform activities construction permits and business inspections are being prepared for selected
cities. This is expected to significantly reduce administrative processes, documentation and timeframe for
compliance with regulatory requirements. Similarly, BOI will be provided an Indicator Based Reform
Advisory in areas measured by a broad set of actionable investment climate indicators.













Source: Doing Business 2013 and Doing Business 2008. World Bank. Washington
Source: Doing Business 2013 and Doing Business 2008. World Bank. Washington,
171
162
155
126
105
98
85
78
70
32
115
106
146
135
109
95
133
116
77
66
PakistanDoingBusinessRank
SouthAsiaMedianRank
H
i
g
h
e
s
t

R
a
n
k

=
1
L
o
w
e
s
t

R
a
n
k

1
8
5
Getting
Electricity
Paying
Taxes
Enforcing
Contracts
Registering
Property
Startinga
Business
Trading
Across
Borders
Resolving
Insolvency
Getting
Credit
Protecting
Investors
Construction
Permits


Figure A8. 1. South Asia Doing Business Rankings
Figure A8. 2. Pakistan Ranking Across Doing Business
50
ANNEX 9. FINANCIAL INCLUSION IN PAKISTAN
Pakistans banking sector continues to be relatively robust and stable, despite difficult macro-
economic situation, devastating floods in 2010 and 2011, law and order and power shortage issues.
Overall, the banking system has consistently remained profitable, with the most recent profit before tax
increasing 22% year-on-year, while both return on assets and return on equity remained at satisfactory
levels with 2.2% and 23.4% respectively. Banking system liquidity has been improving, and solvency
has been strong with the overall capital adequacy ratio of 16%, well above the regulatory requirement of
10%. Banking supervision is relatively strong and independent, and is largely compliant with the Basle
Core Principles. Overall, stress tests show that the banking sector remains reasonably resilient to
extensive shocks and after-shock capital adequacy of the system remains above the minimum
requirement. While overall the banking sector has been robust and resilient in recent years, there remain
some vulnerabilities and gaps--notably in the areas of credit quality, deposit insurance, and oversight of
financial conglomerates. In addition, there is a need to address lack of access to financial services for
most of the Pakistani population. Less than 14% of the population has access to any financial service,
microfinance reaches less than 3% of the population, and less than 7% of SMEs use formal finance for
working capital or investments. Although availability of financial products and services has become
gradually more widespread, access to finance continues to be limited, especially on the credit front.
Overall credit growth has been declining and rising NPL ratios have reinforced banks risk-aversion
towards the private sector. Additionally, the microfinance sector in Pakistan is amongst the most
progressive and innovative globally, but outreach to the poor and underserved remains static, with less
than 3% of the population having access to microfinance products or services. There are even more
serious issues facing women borrowers, including discriminatory lending policies and practices.
One of the most productive actions to enhance financial intermediation for the private sector could
focus on reducing underlying risks by strengthening creditors rights through regulatory reforms
in Secured Transactions and Credit Information. In addition, a special focus on SMEs and on women
is needed if the financial sector is to deepen and broaden access to a range of financial services for these
key constituencies. While all stakeholders are working towards the same goal of bring a more inclusive,
innovative, and sustainable financial sector, which also reaches the poor, the underserved, and SMEs,
there is room for a more cohesive and coordinated approach. Towards this end, a Financial Inclusion
Strategy could bring about a more comprehensive approach, which could maximize the potential
complementarities of all stakeholders, increase and leverage efficiencies and relative comparative
advantages of all players, and provide a roadmap for donors, the private sector, and regulators in
continuing to support and nurture the financial inclusion agenda.
Giving consumers access to their own credit information is one of the key input measures of Doing
Business Getting Credit indicators. And is a critical component in the legal and regulatory framework
governing the collection, distribution, use, and contestability of consumer credit information. Currently,
no consumer in Pakistan can review, dispute, verify their own credit report, which is a fundamental block
to both access to financial services as well as basic consumer financial protections. Public and private
credit bureaus in Pakistan provide credit information on only 7 and 2 percent of the population
respectively. Changes in their governing regulations could have important effects on bringing more
potential borrowers into the formal financial system. Credit bureaus and credit registries are essential
parts of the financial infrastructure that facilitates access to formal finance, and when well designed with
the proper legal framework, they reduce information asymmetries, increase access to credit for small
firms, lower interest rates, improve borrower discipline and support bank supervision and credit risk
monitoring.
SBP established the electronic-CIB (e-CIB) system with mandatory membership for all banks and
financial institutions, but there are many gaps and restrictions in place. These preclude the effective
51
use of credit information to enhance access to finance, or to ensure consumers have adequate protections,
redress, and access to information, and which ultimately reduce coverage of potential borrowers. Among
these gaps, borrowers and third parties do not have access their own credit information, positive
information is not included in public bureau credit reports, credit histories do not include information
from non-financial institutions, and regulation of private bureaus is fragmented and limited. Furthermore,
there is currently no legislation governing credit information. As a result, the SBP has drafted a CIB Law
in 2010, Credit Bureau Act. By providing access to credit information, this action introduces
transparency in credit approvals and aims to reduce discriminatory lending practices. At the same time,
this action provides clarity on the regulatory environment for private credit bureaus, consolidates and
strengthens the role of the supervisory authority, and allows for the provision of both positive as well as
negative information, and information collected from non-banks, such as utility companies. In the
medium term, this law is expected to increase coverage and enhance the quality of credit information
available, while in the short term it will change the Doing Business rating for Getting Credit indicator in
Pakistan. Finally, this action is supplemented by the government's efforts to compile a database of credit
information of microfinance borrowers (mf-cib) and the State Bank of Pakistan's ongoing work on
secured transactions.
Relative to the use of real property, the use of movable property as collateral is not widespread in
Pakistan. The underutilization of movables as collateral has economic impacts, particularly for
agricultural producers, women, and SMEs. Agricultural producers, women entrepreneurs, and SMEs
rarely have sufficient land or access to guarantors, which limits their access and increases the cost of
credit. These factors particularly restrict the growth of SMEs in Pakistan, where the bulk of SMEs are
engaged in trade and services (51% and 35%, respectively), and have most of their assets in inventories
and receivables or other forms of movable assets.
A modern secured transactions framework in Pakistan would facilitate the use of movable property
as collateral. As opposed to solely relying on immovable property, it would increase access to
commercial sources of finance, and decrease costs of finance. The current secured transactions system is
limited by the time, cost, and uncertainty in (i) establishing claim to the property to secure payment of
credit, while allowing the debtor to retain possession of the collateral; (ii) prioritizing claims; (iii)
publicizing the ranking of the priority; and (iv) taking possession of the collateral for sale to satisfy the
claim. In response to the need for reform of the secured transactions system in Pakistan, SBP has drafted
the Secured Transactions Act of 2013, which represents a positive development in the improvement of
the secured transactions framework in Pakistan. The most positive aspects of the law are the extension of
the possibilities to create fixed and floating charges over all kinds of movable assets to individuals and to
entities other than companies, and a broad definition of movable assets. In addition, the design of the
regime is based on the general principle of perfection by registration, an organized system of registration,
and the swift enforcement of secured credit.
International experience has shown that insurance can play an important role in helping the poor
manage their risks by protecting the assets and incomes of low-income households when financial
losses occur. The market for micro-insurance in Pakistan remains severely underdeveloped due to the
lack of awareness about the potential benefits of micro-insurance among micro-entrepreneurs, small and
landless farmers, women, and low-income households, and due to the lack of effective mechanisms and
targeted products to provide micro-insurance services and address the existing or potential demand.
Moreover, most of the activities in this sector remain broadly unsupervised due to the inexistence of a
specific regulatory framework. The SECP has finalized draft rules for micro-insurance which were
published in J une 2013 in the official gazette of Pakistan for seeking public comments. The rules are
waiting to be finalized and notified. In Pakistan, where insurance premiums represent just 0.5-0.1 per
cent of GDP, and there is the potential to increase the number of micro-insurance holders from 5 million
52
to 30 million, it is anticipated that this initiative will help in creating a transparent and enabling
environment thereby increasing the insurance density and affordable outreach to low-income people.
Pakistan has taken substantial steps towards improving its Anti Money Laundering (AML/CFT)
regime, including by issuing a Statutory Regulatory Order that addresses the definition of terrorism and
an Anti-Terrorism Amendment Ordinance to establish procedures for the identification and freezing of
terrorist assets. The FATF has commended Pakistan for the issuance of the Anti-Terrorism Amendment
Ordinance, which came into force on 12 October 2013 and allows Pakistan to begin implementing its
United Nations Security Council Resolution 1373 obligations immediately. However, the FATF has
concerns regarding the temporary character of this ordinance, which will need to be converted into
permanent legislation through the parliamentary process, and has urged Pakistani authorities to take the
necessary steps for swift ratification of the ordinance by its legislature.
53
ANNEX 10. CREATION OF FISCAL SPACE THROUGH REVENUE MOBILIZATION
Since the early 1990s, successive governments have tried to reform Pakistans tax system. However,
implementing these reforms had not been easy and the tax-to-GDP ratio has remained low at below 10
percent of GDP, of which revenue collected by the Federal Board of Revenue (FBR) amounts to only 8.5
percent of GD
7
. This relatively low tax ratio stems from a variety of structural issues including: (i) certain
constitutional provisions which introduce inequity and dichotomy in taxation of certain incomes (e.g.
agriculture); (ii) inefficient tax administration (poor management, weak human resources, lack of
adequate IT supporting systems, excessive scope for discretion and rent seeking behavior; (iii) a narrow
tax base (of 39.4 million employed persons, less than 10 percent of whom are registered and active
taxpayers further eroded by numerous and generous exemptions and concessions; (iv) skewed tax
structure (68% of tax revenue is from indirect taxes); (v) a complex and non-transparent tax system; (vi)
corruption and tax evasion (low compensation of tax officials, large informal sector); and (vii) a non-
supportive political economy environment (strong vested interest groups). Perhaps the three most
important areas for reform are: the reduction of tax exemptions, the massive registration of new
taxpayers, and the achievement of effective tax audits.
It is critical that the government adopts a tax reform strategy which is more align with the needs of
the government and ground realities. Due to some fundamental changes in the countrys fiscal
landscapeincluding the Seventh National Finance Commission Award and the 18
th
Amendment
existing FY02 FBR strategy on tax policy and administration has become obsolete. The Sharif
administration has committed to raise the overall tax ratio to 14 percent of GDP. The tax authorities have
agreed on the need for a new tax reform strategy.
Reducing exemptions is central to the core tax agenda. The tax base is eroded by a large number of tax
exemptions and tax concessions granted to various sectors, sub-sectors and economic activities. Tax
Authorities estimate that exemptions from, and concessions on payment of income tax, sales tax and
custom duties deprive the government of revenue amounting to a range between 1.9 - 2.5 percent of GDP,
with each type of tax contributing almost equally to this estimate. While a number of exemptions relate
to bilateral (e.g. IPPs) or Free Trade Agreements of the government; a sizeable number of exemptions and
concessions are outcomes of ad hoc policy decisions. In order to enhance transparency of tax
expenditures, the tax authorities have agreed to publish the tax expenditure report. To reduce the fiscal
cost of tax exemptions, the authorities have prepared a plan to eliminate the SROs and tax exemptions
over a period of three years. This plan will be put into implementation from the 2014/14 budget.
Increasing the number of registered taxpayers is also essential to broaden the tax base. An
extremely small number of population, (less than 1 percent), mainly wage earners, are registered as
taxpayers. The reasons for this woefully small number of registered taxpayers are many; but lack of
taxpayer information available to the tax authorities is the most important among these reasons. FBR has
made efforts to increase the number of registered taxpayers through the use of external (third-party)
information on: (i) acquisition of real estate; (ii) purchase of luxury cars; (iii) expenditure on children
education; (iv) expenses on foreign travel; etc. to identify potential taxpayers, i.e. individuals whose
living standard does not justify them to be outside the tax net. FBR plans to issue 100,000 notices to such
individuals in each of the next three years, with an attempt to register many of them as taxpayers. Follow-
up actions (see Figure A10.1) include: (i) establishing an institutional mechanism to oversee the potential
taxpayer response and chart the future course of action for FBR; and (ii) sending legal notices to at least
10 percent of individuals who would either not respond to the tax notices or would provide an
unsatisfactory responses. Increased number of taxpayers will also reduce the informal economy.

7
The tax/GDP ratio ranges between 30 to 50 per cent for developed countries, and an average of 18%, for developing countries.
54
Figure A10. 1. Sequencing of Follow-up Actions in Registering Potential Taxpayers

Instituting an effective tax audit system is critical for tax compliance: A more efficient tax audit
system will reduce tax avoidance and enhance government revenue. Tax enforcement remains among the
weakest areas of tax administration. And this is an essential gap as most of the federal taxes encourage
self-assessment by taxpayers. However, the number and quality of tax audits conducted by FBR
authorities remains insufficient to encourage correct assessment by a large number of taxpayers, thus
encouraging and facilitating tax avoidance. In an attempt to overcome this deficiency, in 2011/12, FBR
developed a well-known central system which adopted universally accepted parameters for identifying the
most risky (in terms of improper assessment of tax liability) taxpayers for the purpose of tax audits. A
little more than 11,000 cases were selected for tax audits. However, the risk-based audit system ran into
some legal challenges as superior courts called them discriminatory against some taxpayers. In response,
Authorities have amended the tax laws to avoid future court rulings against the system, which they are
now applying to 2012/13 tax returns. In 2013/14, FBR launched an Integrated Tax Audit Management
System (ITAMS) that will allow it to monitor daily compliance with audit performance benchmarks. It
has also opted for a computer-based random ballot selection of (of at least 5 percent or over 41,000)cases
for tax audits. Overall, FBR plans to complete at least 8,000 audits during the year. For 2014/15, the
authorities intend to revert back to risk-based audits. For this, they have not only amended the tax laws to
avoid future court rulings against the system, but as also decided to increase the number of audits to 7.5
percent of tax returns filed for the tax year 2014.
Enhanced transparency of taxpayer information, especially of rich and powerful, can help in
improving the tax culture in the country. Pakistan tax collection is adversely impacted by a culture of
weak tax compliance, tax avoidance and tax evasion. One reason for this non-supportive tax culture is the
perception within the public that countrys tax system supports and abets the affluent and powerful
segments of the population. In order to dispel this impression, the FBR published a tax directory of all
taxpayers who have filed tax returns for the tax year 2013.
FirstNoticeIssued
NoResponse
SecondNoticeIssued(afterxx
weeks)
Noresponse
Thirdnoticeissuedor
preliminaryassessmentmade
ontaxliability(afteryy weeks)
Noresponse
Preliminaryassessmentmade
ontaxliabilityorlegalnotice
issued(afteryy weeks)
Noresponse
Legalnoticeissuedorlegal
proceedingstarted(afteryy
weeks)
PotentialTaxpayerresponded
Iflegibletaxpayer Taxpayer
registered,tax
assessed/collectionreceived
PotentialTaxpayerresponded
Iflegibletaxpayer taxpayer
registered,tax
assessed/collectionreceived
PotentialTaxpayerresponded
Iflegibletaxpayer taxpayer
registered,tax
assessed/collectionreceived.
55
0%
20%
40%
60%
80%
100%
FY00 FY02 FY04 FY06 FY08 FY10 FY12
Treasury Bills National Saving Schemes Bonds
Source: State Bank of Pakistan
ANNEX 11. PAKISTAN: DEBT SUSTAINABILITY ANALYSIS
Overall Trend. The downward trend of the public
debt-to-GDP ratio reverted in the last two years.
Public debt-to-GDP ratio breached the bar of 60
percent limit specified by the Fiscal Responsibility
and Debt Limitation Act 2005 in the last two Fiscal
Years (Figure A11.1).
The main reason is the doubling of the amount
of domestic debt issued. Domestic debt increased
from Rs. 4.7 trillion at end-J une 2010 to Rs. 9.5
trillion by end-J une 2013. Increasing reliance on
domestic financing and declining financing from external sources is explained by the large fiscal deficits
and their monetary financing.
Domestic debt creation has become increasingly skewed towards short-term instruments. Domestic
debt consists of Market Treasury Bills (MTBs), borrowing from the SBP, and retail debt market
instruments such as National Saving Schemes (NSS). At end-J une 2013, almost 60 percent of domestic
debt was issued in short-term instruments,
namely, 3-, 6-, and 12- months MTBs (see
Figure A11.2); followed by PIBs (22.8 percent)
and retail debt instruments (22.4 percent).

Borrowing from the SBP through Market
Related Treasury Bills has also substantially
increased. The SBP Amendment Act 2012
(Section 9c) stipulates that net borrowing from
the SBP has to be brought to nil on a quarterly
basis. However, this limit has been repeatedly
breached in the past. Borrowing from the central
bank at end-June 2013 stood at Rs. 2.3 trillion
compared to Rs. 1.3 trillion at end-J une 2010.
Scheduled Banks remain the prime lenders to
the government. The banking sector, despite
their asset-liability mismatch balance sheet
structures, dominated the government securities
market (see Figure A11.3) while the
participation of non-banks is still abysmally low.
Growing budgetary needs led banks prefer such
option. As a result, credit to the private sector
was crowded out: its amount became almost
negligible. Given recently accelerated placement
of MTBs, refinancing risk has increased. The
redemption profile on domestic debt has become
highly frontloaded. By end-J une 2013, its
average time to maturity was 1.8 years which is
high. This risk is further compounded by the put
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
FY01 FY03 FY05 FY07 FY09 FY11 FY13
P
e
r
c
e
n
t
a
g
e

o
f

G
D
P
R
s

t
r
i
l
l
i
o
n
Domestic
External
0%
20%
40%
60%
80%
100%
Q
1
-
F
Y
1
1
Q
2
-
F
Y
1
1
Q
3
-
F
Y
1
1
Q
4
-
F
Y
1
1
Q
1
-
F
Y
1
2
Q
2
-
F
Y
1
2
Q
3
-
F
Y
1
2
Q
4
-
F
Y
1
2
Q
1
-
F
Y
1
3
Q
2
-
F
Y
1
3
Q
3
-
F
Y
1
3
Q
4
-
F
Y
1
3
Scheduled Banks Non-Banks/Corporates
Source: State Bank of Pakistan



Figure A11. 1. Pakistan Evolution of Public Debt
Figure A11. 2. Structure of Domestic Debt 1999/2000-
2010/13
Figure A11. 3. Share of MTBs Holdings by Investor
56
44%
23%
26%
7%
USD EUR J PY Other
Source: Economic Affairs Division, Government of
option embedded NSS instruments which give investors the right of early redemption.
As a result, external debt has become about one fifth of total public debt. Multilateral institutions
accounted for nearly half of the external public and
publicly guaranteed (PPG) debt with the main
two creditors being the Asian Development Bank
and the World Bank (capturing 21 percent and 18
percent of total external debt). Bilateral held
almost one third of total external debt. Within
bilateral creditors, Paris Club countries accounted
for almost 23 percent of total external debt.
Currency composition of PPG external debt is
diversified. The main exposure of exchange risk to
foreign currencies comes from USD denominated
loans (see Figure A11.4). External debt US dollars-
denominated represents 44 percent of total external
debt. This is followed by J apanese Yen (26
percent) and euros (23 percent).Exposure to
exchange rate risk is high but declining. The
amount of foreign loans maturing in 2013/14
(including repayments to IMF) is equal to almost
68.5 percent of foreign exchange reserves. Hence, a depreciation of the Rupee would affect both the stock
of the government debt as well as the debt servicing flows.
Debt Sustainability Analysis. Under our baseline scenario, Pakistans public debt-to-GDP ratios are
projected to decline over the medium term. With a targeted consolidated fiscal deficit (excluding grants)
of 4.4 percent of GDP by 2017/18, public debt is projected to fall from 64.2 percent of GDP in 2013/14 to
58 percent by 2017/18 (see Table 1). However, even though gross financing needs are also expected to
decline from 33 percent of GDP in 2013/14 to 28 percent in 2017/18, these remain high, thus posing
significant refinancing (or rollover) risk. These should be monitored, especially with regards to maturing
short term domestic debt. Early fiscal consolidation reflecting adjustment measures deemed politically
feasibleincluding subsidy reduction and tax policy and administration actionsand strong economic
growth are expected to support the decline in public debt ratios.



2011 2012 2013 2014 2015 2016 2017 2018
Public sector debt 1/ 59.4 63.7 63.0 64.2 63.5 62.1 59.5 58.0
o/w foreign-currency denominated 2/ 26.5 25.7 21.4 23.1 22.7 22.0 20.0 18.0
Key Macroeconomic and Fiscal Assumptions
Real GDP growth (in percent) 3.7 4.4 3.6 3.6 4.0 4.4 4.7 5.0
Inflation rate (in percent, period average) 13.7 11.0 7.4 10.0 9.2 8.4 7.3 7.0
Primary deficit /3 2.5 4.0 3.6 1.1 0.3 0.0 0.1 0.5
Source: World Bank staff estimates
3/ Excluding grants.
2/ This includes mediumand long termPPG debt as well as short-termexternal debt. This also includes IMF debt (both budget support
and balance of payments support), Foreign currency bonds as well as Central bank deposits.
Table 1: Base case debt projections
(In percent of GDP, unless otherwise indicated)
Actual Projections
1/ General government gross debt
Figure A11. 4. Currency Composition of PPG External Debt
(including IMF) at End June 2013
57
Stress tests show that public debt is particularly sensitive to an exchange rate depreciation shock.
Stress tests show that the most important deterioration of public debt levels vis--vis the base case
scenario would take place in a scenario of a one-time 30 percent depreciation shock, followed by a
contingent liabilities shock, and a combined shock (see Figure A11.5). In the case of the most extreme
shock, a 30 percent one-time depreciation, the public debt ratio would increase to 68.6 percent of GDP by
end-2018; 11 percentage points of GDP above the baseline. Another scenario with significantly worse
outcomes than the baseline is a one-time contingent liabilities shock, equivalent to 10 percent of GDP,
which would lead to an
increase in the debt stock to
67.1 percent by end-2018, 9
percentage points of GDP
above the baseline.

Public debt dynamics will
remain a source of fiscal
vulnerability. Despite the
gradual decline in public debt
ratios, total interest payments
will continue to absorb a large
share of fiscal revenues
(including grants), averaging
close to 30 percent of total
revenues. The public debt-to-
revenue ratio during the
projection period is projected to average around 409 percent, well above other countries in the region.

However, external debt sustainability risk is projected to remain low under the baseline scenario.
External debt-to-GDP is projected to decline gradually over the medium term to 22 percent of GDP under
the baseline scenario, owing to persistent inflationary pressures in the short term, sustained economic
growth, and large IMF
repurchases due in the medium
term. External debt is robust to
most shocks and is expected to
follow a declining path under
most standardized-shock
scenarios (see Figure A11. 6).
Most extreme shock appear to
be sharp exchange rate
depreciation which increases
the external debt to GDP ratio
to 32 percent of GDP by end-
J une 2018, which is 11 percent
of GDP higher than the base
case. Non-interest current
account shock raises the
external debt by 5 percent of
GDP relative to the baseline.
Shocks to the economic growth rate, the external interest rate, and the combined shock, make only small
differences with respect to the baseline scenario.
50
55
60
65
70
75
80
2
0
0
8
/
0
9
2
0
0
9
/
1
0
2
0
1
0
/
1
1
2
0
1
1
/
1
2
2
0
1
2
/
1
3
2
0
1
3
/
1
4
2
0
1
4
/
1
5
2
0
1
5
/
1
6
2
0
1
6
/
1
7
2
0
1
7
/
1
8
Actual Projections
I
n

p
e
r
c
e
n
t

o
f

G
D
P
Contingent
liabilities 1/
Combined 2/
ER depreciation 3/
Baseline 4/
Source: World Bank staff estimates
Notes: 1/ One time 10 percent of GDP increase in other debt creating flows in 2014/15
2/ Combination of three shocks: i. Real GDP growth is at baseline minus one-quarter standard deviation,
ii. Primary balance is at baseline minus one-quarter standard deviation, iii. Real interest rate is at baseline
plus one-quarter standard deviation
3/ One time 30 percent real depreciation in 2014/15
10
20
30
40
2
0
0
8
/
0
9
2
0
0
9
/
1
0
2
0
1
0
/
1
1
2
0
1
1
/
1
2
2
0
1
2
/
1
3
2
0
1
3
/
1
4
2
0
1
4
/
1
5
2
0
1
5
/
1
6
2
0
1
6
/
1
7
2
0
1
7
/
1
8
Actual Projections
I
n

p
e
r
c
e
n
t

o
f

G
D
P
Current account 1/
Combined 2/
ER depreciation 3/
Baseline 4/
Source: World Bank staff estimates
Notes: 1/ Non-interest current account is at baseline minus one-half 10-year historical standard
deviations
2/ Combination of three shocks: i. Non-interest current account is at baseline minus one-quarter
standard deviation, ii. Real GDP growth is at baseline minus one-quarter standard deviation, iii.
Nominal interest rate is at baselineplus one-quarter standard deviation
Figure A11. 5. Public Debt Sustainability Analysis
Figure A11. 6. External Debt Sustainability Analysis
58
The Effects of an Eventual Worst Case Scenario. An alternative scenario would assume slowdown in
reforms efforts especially after 2015/16 due to political economy challenges mostly followed by an early
start of the political cycle previous to the election process. Under this scenario, the IMF program would
derail, reforms would slowdown, fiscal consolidation would lose steam, investors confidence would
falter, and all this would result in lower GDP growth and higher inflation.
Key Economic Indicator:

Inflation after falling till 2015/16 will return to double digit in 2017/18. Given the assumption that
Pakistan will enter an election cycle in 2016/17 means that political considerations would kick in
higher public sector expenditures due to higher subsidies, fuel consumption and thus inflation
2015/16 onwards. In addition, relatively weak external position would also exert inflationary
pressures through exchange rate depreciation pass through in prices of imported goods and services.
Fiscal consolidation would stop. With lower revenues and higher expenditure, Government would
struggle to bring this deficit below 5 percent in medium term.
The external current account would register relatively larger deficit post 2014/15. Higher
exchange rate volatility emanating from relatively weaker macroeconomic position and the slowdown
in reforms, post 2014/15, would dampen export dynamism. Fuelled consumption would support
higher imports and a higher current account deficit. Resulting import coverage (months of reserves
sufficient to cover next years imports of goods and services) would decrease from 2.4 in 2015/16 to
1.1 months in 2017/18 mostly due to the financing of a higher current account deficit.

2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18
Output and Prices
Real GDP at factor cost 2.6 3.7 4.4 3.6 3.6 4.0 4.0 4.0 4.3
Consumer Prices (period average) 10.1 13.7 11.0 7.4 10.0 9.2 8.5 10.0 11.0
Balance of Payments
Current Account Balance(as % of GDP) (2.2) 0.1 (2.1) (1.0) (1.0) (1.1) (1.5) (2.2) (2.5)
Exports of goods & services 14.0 14.6 13.2 13.3 14.9 14.7 14.5 14.3 14.0
Imports of goods & services 21.5 20.4 21.6 20.5 22.5 23.1 23.3 23.6 23.3
Remittances 5.0 5.2 5.9 5.9 6.4 6.6 6.6 6.4 6.1
Gross official reserves (in months of imports of G&S) 1/ 3.6 3.9 2.7 1.4 1.8 2.3 2.4 1.8 1.1
Public Finance
Revenues and Grants 14.3 12.6 13.1 13.3 14.3 14.0 13.9 14.2 13.2
Expenditures 20.2 18.7 21.2 21.0 19.9 19.3 19.2 19.8 18.7
of which: Current 16.7 15.9 17.5 16.0 15.5 15.1 15.1 15.6 14.3
Overall Fiscal Balance2/ (6.2) (6.5) (8.8) (8.0) (5.8) (5.5) (5.5) (5.7) (5.6)
Total Public Debt (incl. obligation to IMF) 61.3 59.4 63.7 63.0 64.2 63.6 63.1 60.7 58.8
Memorandum:
GDP at Market price(in billion Pakistan Rupees) 14,876 18,825 20,091 22,909 26,139 29,485 33,154 37,880 43,641
Notes:
1/ Excludinggold and foreign currencu deposits of commercial banks held with theStateBank of Pakistan.
2/ Excludinggrants.
Source:International Monetary Fund and WB staff
Projections
59
ANNEX 12. PUBLIC FINANCIAL MANAGEMENT AND PROCUREMENT

Pakistan has a fairly well-developed infrastructure for public financial management (PFM). At the
policy level, Parliament has a key role in authorizing revenues, expenditures, and debts. The MOF plays a
pivotal role in budget preparation and expenditure control. Line ministries, departments, and agencies
have well-defined roles in implementing budgets and rendering accounts. The Controller General of
Accounts prepares annual financial statements. PFM benefits from a comprehensive financial information
system, which is now the core fiscal and financial management system of government. The government
has established a sound legal framework for coordinating fiscal and debt management policies and for
improving fiscal transparency through the Fiscal Responsibility and Debt Limitation Act of 2005. The
Public Expenditure and Financial Accountability (PEFA) 2012 scores compare very favorably with other
countries in the South Asia region (Figure A12.1).
SBP is now producing financial statements consistent with international accounting standards and
formats. The financial statements of SBP for the financial year ended 30 J une 2012 were audited by Ernst
& Young Ford Rhodes Sidat Hyder and KPMG Taseer Hadi & Co. The auditors gave an unqualified
opinion on the statements concluding that the statements gave a true and fair view of the financial
position, financial performance, and cash flows. An IMF Safeguards Assessment of the SBP was issued
on March 27 2009 and an update report was also produced on March 3 2010. Both these reports have also
been reviewed by the World Bank.
Figure A12. 1. PEFA Assessment Scores for South Asia
Note: South Asia countries include Afghanistan (2008), Bangladesh (2006), Nepal (2008), Bhutan and India (2010), and Maldives (2009).
Information in budget documents is comprehensive and budget documents are available to the
general public. The improvement in the Open Budget Survey score for 2012 from 38 to 58 reflects this.
Implementation of the Integrated Financial Management Information System is based on the Government
Finance Statistics-compliant chart of accounts at all levels of government has facilitated budget tracking
down to the third tier and preparation of timely reliable financial reports. The System facilitates
submission of annual financial statements for audit within two months of the close of the financial year
and monthly financial reports are finalized within 1015 days after the close of the month. Audit reports
are presented to the legislature within eight months of the close of the financial year.
Despite progress in many areas of PFM, the latest federal and subnational PEFA reports show
some areas of concern. The internal control system is largely based on rules and regulations issued by
the MOF, which are quite elaborate. However, instances of noncompliance with rules and regulations
have been reported by the Auditor General of Pakistan. It is therefore of particular concern that no
progress has been made on internal audit in recent years. The internal audit function is assigned as a
0
1
2
3
4
5
P
I

1
P
I

2
P
I

3
P
I

4
P
I

5
P
I

6
P
I

7
P
I

8
P
I

9
P
I

1
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P
I

1
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1
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1
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1
4
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1
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1
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2
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2
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2
2
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2
3
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2
4
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2
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P
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d

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Federal SouthAsia
60
responsibility of chief finance and accounting officers, but has not yet been developed as an
administrative operating function. Progress in legislative oversight has also been mixed across federal and
provincial governments, largely due to the absence of functioning public accounts committees in some
provinces. The scrutiny of audit reports by the most recent federal committee, however, was extensive
and succeeded in addressing a large backlog of audit reports to be reviewed.
Improving PFM capacity at provincial and lower tiers has emerged as a key challenge. The capacity
to plan, manage, implement and account for results of policies and programs is critical for achieving
development objectives. With the 18th Amendment to the Constitution (April 2010), the majority of
service deliveryrelated functions have devolved to the provinces. The government realizes the need to
strengthen its PFM systems by addressing the capacity of provincial institutions, processes, and
individuals to use resources well. This is supported by findings of recent subnational PEFA assessments
that have highlighted the scope for improving capacity to manage provincial finances. Weaknesses are
somewhat mitigated by the consolidation of current PFM reforms which include nationwide automation
of budgeting, accounting, and financial reporting; modernization of auditing practices; and adoption of
medium-term budgetary frameworks.
Procurement
A strong public procurement system enhances the efficiency of budgetary expenditure. Typically for
a developing country 15-20 percent of annual GDP is related to procurement contracts. Pakistan should be
no exception. n Pakistan, procurement is a devolved subject. The Public Procurement Regulatory
Authority (PPRA) at the federal and provincial levels is mandated to regulate procurement function and
act as respective custodians of the regulatory frameworks. PPRAs are functional at the federal level, in
Sindh and in the Punjab; with laws enacted, rules notified. In Khyber Pakhtunkhwa, however, the PPRA
is at a nascent stage, law has been enacted and rules are yet to be notified. Balochistan enacted
procurement regulations in 2009 but are yet to implement it in earnest. Recently the National Procurement
Strategy has been developed which highlights the need of harmonization amongst the various PPRAs,
specifically towards having harmonized standard bidding documents; capacity building of PPRAs;
monitoring through M&E system; procurement professionalization and e-procurement. A major
development in monitoring is the effort to align the Auditor Generals office and procurement regulators
to conduct procurement performance audits. The Bank is supporting the PPRAs in developing the e-
procurement strategy, as well as preparing a training strategy for procurement staff. The Sindh and Punjab
PPRAs are also working towards developing their M&E systems. . Federal and provincial regulations are
also a good support in enhancing transparency and thus accountability of public expenditures.
While the good aspects of the regulatory regime that assures competitiveness may be diluted by
gaps in implementation, there are certain SROs or Import Policy Orders (IPOs) or legal
interpretations which overlap with the procurement function. Government has been engaged in a
discussion with development partners on SRO 827(I)/2001 and SRO 809/I/86 that limit competition by
making local participation in goods procurements compulsory. The review may cover SROs/directives
and any other instructions having such implications, in order to facilitate equal opportunity and adequate
support to local industry. A study is also deemed beneficial to review the overlapping jurisdiction of the
various accountability and other institutions on procurement function, specifically in view of the 18
th

amendment, which may imply double/uneven taxation to bidders incorporated in different provinces. On
privatization, governing regulations are: (i) Privatization Commission (Hiring of Financial Advisors)
Regulations, 2007; and (ii) Privatization Commission (Hiring of Valuators) Regulations, 2001 amended
in 2007. These regulations are framed under Section 41 of PC Ordinance 2000. In a letter to Transparency
International in 2009 PC clarified the jurisdiction of Public Procurement Rules 2004 (PPR-2004). As the
privatization process is about selling rather than acquiring assets it is not a considered as a
procurement activity as defined by Section 2 (l) of Public Procurement Regulatory Authority Ordinance,
2002.
61
ANNEX 13. ANALYTICAL AND ADVISORY ACTIVITIES: MAJOR FINDINGS AND RECOMMENDATIONS
DPC Focus Areas AAA work Key Recommendations
Growth Enhancing
framework
Finding the Path to Job-Enhancing Growth - Country
Economic Memorandum (FY13) considers reformchoices for
Pakistan (piecemeal or comprehensive), for its transformational
agenda leading to job-enhancing growth.
Pakistan needs to create more productive jobswith jobs defined to include all wage work and self-employment, formal or informalfor a reliable route to
move away frompoverty, crime, and civil conflict. Rapid growth and more and better jobs should be pursued in tandemfor sustainability. In this regard, the
report suggests a menu of reforms with political economy analysis.
A bold agenda is the only way to achieve the economys potential, and to reach high, sustained and inclusive rates of growth.
Stabilization itself is a necessary but not sufficient condition for growth acceleration. Instead the country must address its main constraints to growth: power
shortages, low savings and investments, business governance constraints and low openness.
Expanding Social
Protection and
Mobilizing Revenue
Policy note: Mobilizing Revenue (2013) reviews key
shortcomings in Pakistans revenue mobilization systemand
provides directions for its revitalization.

Proposed reforms include eliminating exemptions and zero rates, adjusting income tax rates, simplifying tariffs, expanding user-friendly electronic
registration and filing, zero-tolerance policy for noncompliance and evasion, and overhauling the technical capacity and accountability of the administration,
especially in information technology systems, auditing, and enforcement. The provincial level policy reforms include broadening the tax base/improving
collections (fromGST on services, motor vehicle tax, and property tax), incentivizing tax collection, and enhancing the capacity of tax administration.
Policy note: Promoting Efficient Service Delivery with
Decentralization (2013) identifies key reasons for the failure of
decentralization in Pakistan, and suggests policy reforms for
positive impact on social outcomes.
There is a role for local governments in municipal and other local services, while devolving other key provincial services likehealth and education to
autonomous provincial authorities. For the financial sustainability of devolved functions there is need for improved revenue efforts by the federal and
provincial governments and maintenance of fiscal discipline by the provinces.
Policy note: Improving Financial Management (2013)outlines
Pakistans challenges in Public financial management and
suggests options for meeting them.
A second generation of reforms is to be introduced that focuses on decentralizing budget management (preparation and implementation to the line
departments), strengthening cash management through business process reengineering, and augmenting the capacity of procurement regulatory authorities.
Khyber Pakhtunkhwa, Public Expenditure Review report
(2012) analyzes overall budgetary, fiscal and financial
management systemfor improving delivery of social services
and quality of life.
Other than increasing its tax revenues, the province needs to analyze sustainability of current expenditure and its relevance to service delivery, improve
human resource for development activities, avoid thin-spreading of funds over large number of projects, and enforce budget constraints favoring project
completion. Linking expenditure and learning outcomes, and removing demand side barriers for greater access to social services are important.
Punjab Social Sector Public Expenditure Review report
(2013)provides strengths and weaknesses of provincial
governments expenditure and financial management.
The efficiency and effectiveness of social spending require substantial improvements. The government needs to make additional efforts to remove the
lingering limitations fromthe fiscal and financial management systems, as well as effectively and innovatively tacklethe sectoral impediments with support
fromprivate sector investment.
Education and gender sectors:
Policy note: Expanding Access to Quality Education (2013)
reviews main reasons for disparities between provinces on
access to quality education and low outcomes.
The main contributing factors include poor teacher quality and accountability, inadequate and inefficient funding, and weak management and governance.
Post-18th Amendment, the provinces are responsible for management and financing of education, but Federal government also needs to set national
standards and monitor their achievements to address disparities in access to quality education between provinces.
Pakistan Gender Policy Notes (FY13) makes suggestions to
mainstreamgender into education sector at provincial level.
Greater investment is to be made in education, particularly for girls in rural areas. There is need for province specific research and analysis and thus the role
of academia, CSOs, and national machineries for women.
Health sector:
Cost-effectiveness and financial consequences of new vaccine
introduction in Pakistan (FY12)

While the investment in vaccine (pneumococcal (PCV-10), rotavirus (Rota-Teq), and Homophiles influenza type B (Hib)) would be worthwhile froman
economic perspective, introducing all threevaccines in Pakistan will present financial challenges unless overall health spending increases. Careful
consideration needs to be given to long-termfinancing after GAVI support ends.
Expanded program on immunization in Pakistan:
recommendations for improving performance (FY12).
Increasing focus on supervision, monitoring and evaluation, (ii) performance-based incentives, (iii) partnerships with the private sector, (iv) expediting polio
eradication initiatives, (v) improved management, (vi) targeted capacity development, (vii) targeting age group for immunization, (viii) a human resource
strategy and implementation plan, and (x) improving planning at the local level.
Protecting Pakistans Poor Against Health Shocks in Disasters
(FY13) assess the impact of 2010-floods on health status and
access
Provincial Health Emergency Preparedness and Response Unit has been constituted to adopt a policy of preparedness for different disasters and their health
consequences by effectively managing the risks and impact of natural and complex catastrophes affecting humans.
Social protection:
Policy note: Consolidating Social Protection (2013) considers
providing appropriate, adequate and predictable benefits to the
poor, through a sound and financially viable system.
BISP can be further improved through partnership arrangement between federal and provincial governments for social protection (SP) service delivery;
establishing a national SP framework that is coherent between federal and provincial authorities; harmonized systemfor design and delivery of above
framework; and financing for SP based on affordability and efficiency principles. Enabling effective p ost-disaster early recovery cash transfers as part of
disaster response action plan is also needed.
Social Safety Nets in Pakistan: Protecting and Empowering the
Poor and Vulnerable (FY12) provides an assessment of
Pakistans recent social safety net programs and suggests a
road-map /recommendations for improvement.
The household poverty survey database can be used to target other human development or employment services programs. Further modernization of the
sector would require: (i) using available resources effectively (establishing central bodies with responsibility for SP in provincial governments,
implementing graduation programs, integrating the disaster response mechanisms and safety net institutions); (ii) responding to household-level crises
(households insurance against the negative effects of catastrophic illness); and (iii) instituting regular monitoring mechanisms and improving program
design over time.
Impact Evaluation of SSN Programs (FY14, ongoing): Short
TermImpacts of the BISP Unconditional Cash Transfer .
The main findings of the report are: (i) thelow benefit level and irregular payments of the BISP cash transfer are diluting the programimpact on
beneficiaries consumption; (ii) the programhas positive impact on women empowerment, and (iii) the impact evaluation did not find evidence that BISP
would produce dependency or work disincentive effects.
62
DPC Focus Areas AAA work Key Recommendations
Labor Supply and Vulnerability in Pakistan (FY14, ongoing)
aims to informBank lending in designs of poverty exit /
graduation projects that utilize BISP poverty scorecard
database.
Improve the information/data base for analyzing these important development challenges, through fielding an Employment and Skills Survey. Limited
capacity building will be carried out as part of this work, through (i) close collaboration with a local survey firmin the design and implementation of the
employment and skills survey, including the training of master-trainers who would be tasked to train the interview teams; and (ii) commissioning papers to
local researchers.

Reinvigorating State
Owned Enterprises
Reform
SOE Reforms Technical Assistance (FY14, ongoing) is for
helping develop and implement a strategic framework for SOE
reforms.
The legal framework and institutional mechanisms for investment tracking and performance management of state-owned enterprises (SOEs) are weak.
Corporate governance needs to be strengthened within SOEs by (i) making the board nomination process structured and transparent, (ii) improving board
accountability, and (iii) developing performance contracts and indicators.
Reforming SOEs Pakistan Policy Notes (FY13) a menu of
policy choices for theGovernment.
Emphasizing the urgency of SOE reforms (including commercializing SOEs), main recommendations are to curtail fiscal costs, professionalize the role of
the government as owner, and improve corporate governance and accountability in state enterprises.
SOE Reform: Time for Serious Corporate Governance (FY12)
corporate governanceis at the top of the 'constraints to
economic growth
Improve the efficiency and effectiveness of SOEs, which includebasic governance reforms, revamped commercialization processes and enhanced market
regulations. The paper also provided perspectives on international experiences with SOE reforms combined with some suggestions on how the Government
can move forward.
Improving
Investment Climate
Promote Access to
Policy note: Reinvigorating the Agenda for Open Trade (2013)
measures to improve Pakistans trade performance for growth
and jobs creation.
To improve its trade competitiveness and its place in international markets, Pakistan needs to simplify tariffs and trade regulations (to reduce the anti-export
bias); accelerate deep preferential trade agreements to encouragetrade creation; fully normalize trade relations with India to benefit fromgrowth there; and
address logistical weaknesses to reduce trade costs.
Doing Business in Pakistan (FY11) provides analysis of seven
DB indicators in 13 districts across the country.
It would help generate Doing Business (DB) reformagenda at the provincial and Federal levels, as it provides a monitoring and evaluation framework to
measure progress in the implementation of such reforms. The report highlights potential good practice on investment climate reformwithin Pakistan which
can be adopted by other jurisdictions.
Doing Business Follow-up Reform Memos (FY12). District-specific reformmemos were prepared and disseminated for Gujranwala, Sialkot and Rawalpindi covering three DB indicators: starting a business,
construction permits, and trading across borders.
A Blueprint for Business Registration Reform through a One-
Stop-Shop (FY13 ongoing). Steps for OSS business registration
implementation.
Implement integration of business registration processes through a virtual one-stop-shop (OSS) mechanism, by consolidating and streamlining key processes
of SECP, FBR and EOBI for corporates in the first stage, and later setting up a physical OSS in one district before scaling it up and rolling it across Pakistan.
Pakistan FSAP Update Diagnoses vulnerabilities and analyzed development priorities in the financial sector (banking sector, securities/capital markets, and financial inclusion
related issues), while supporting a coordinated dialogue with national authorities, and enhanced effective collaboration between the Bank and the Fund.
Consumer Protection & Financial Literacy Diagnostic
Assessment (FY13, ongoing) on consumer protection and
financial literacy
Assessment of the legal, regulatory and institutional frameworks for financial consumer protection compared to international best practice benchmarks,
covering the banking, insurance, microfinance, and securities sectors. The Micro Insurance Rules recently drafted by SECP include a Code on Consumer
Protection.
Are Pakistan's Women Entrepreneurs Being Served by the
Microfinance Sector? Report (FY13)
The report focused on products, services, policies, and other elements of the business model of microfinance in Pakistan that affect both demand for and
access to microfinance by women borrowers, some of whomfall into the narrower category of entrepreneurs. The report documents consumer protection
issues (giving loans to male household members despite women being a better potential customer with high return rate), and highlights a very low proportion
of female entrepreneurs as microfinance clients.
NLTA - A New Generation of Women Entrepreneurs in
Pakistan (FY14-FY15) is to help selected women entrepreneurs
grow their businesses in measurable and replicable manner.
Pilot intervention on an entrepreneurial microcosmfor a selected group of businesswomen operating micro and small firms in Pakistan.
This pilot programwill incorporate a packaged approach including: mentoring and networking support, access to more appropriate financial services, and
building and enhancing relevant business skills.
Trade Finance Knowledge Product (FY14) identifies
constraints and opportunities to expand access to trade finance
for the private sector.
Domestic and international trade finance mechanisms to (ii) identify whether there arepotential opportunities to expand access to trade finance; and (iii)
provide an informed assessment of whether undertaking the necessary reforms and investments would likely have a measurable impact for exporters,
potential exporters, suppliers to exporters, and/or specific industries.

63
ANNEX 14. COUNTRY AT A GLANCE

..
Pakistan at a glance
lOWM
middle
Paii: 6Bn A.U ncornt
"' po 12J
Popu B:b n. m r (m IliOn&)
l m)
PopuB: b n qoWin ( '!O)
lXIB'I oop.&: b n r.-o :tolillpopulill b n)
G' OlllOI'Ii)
G' perC30D (AIBf.rnPIIY:I<I.l.S$)
GN per capo (PPP l'l!emauonals )
G::l? 9'QWIII
G::l? pet capu
POVUJIIHOOOU"I: a:Jo atSllia<la'J{l"PP
Povecyne.aooor.n a:Jo atS2DOaaay(PPP '!;.')
t.r.e al !111!11
ntlnl lllOnilftj{PM \000 DltOIIt'U;)
CNicl 'l'lalT.Jtrt:Jon r.-o c:11eoren M 5)
A<ll l ceraey. male ('Oo' tSano oiCier)
A<ll l tSan<loiOet)
GIJ" pcmar1 entelln n .mate ('oo ageqoup)
GJJ6$pRnaryentellnerc e:nale
ACCI!'$$10 an "'uce (".o' popua(lon)
ACCI!'$$10 (%o: popJiaUon}
llet AI <I FIOW6 e ao
{US$ r.lll!Ons)
'loel O:JA o :!lcbl aiO \131

Vl l e<ISQIII!r. l2
VII eo Ktlg:lom u
.'a pan 112
AICI(%o' G.' 'l) 6
Alelpercapn (...SS) tS
Long-Te rm Economic Tr end6
COnr.U'IIer prar.
G::l? tnpllet <le:lilO r Cllange) 91
ecr.ange az (anrualneage.Jocal petUS$) 9.9
TetmfiO' ;Qde l'IOeX{2000 tle)
Popub: o aoo
G::l? (USS m11J0n> 23690
Ag:ICUltn 295
'M<li6HJ 29
. , r!U!aclurt"lg
5.9
l$6
aJCOn&IZIIp:Jon l!llj)en<ll:'.le 831
Ge'leralgovt 0 0
GIJ6$Caplall:l rna :Jon
Ellj)0/'$0 ' 9000$ XI fil!'rv1CI!'6
'mpoRiio gooo;, urvlee6 21

n UliC6aeorytanot lll!'t:"lil'IIIY:Ifil!'6peel:le<l
All <!ala ae or 2010
::leVeiOI"\en: !:OO!lO'IIIC$ ;:)!VeJop"'le"\1 :)a ;a GIJUP
1792 2.507
70D 5131 10712
t7 \3 t$
37 3\ 39
22t .9 2.3!$ Htl
1.260 V22 \879
3030 3.53l 3.913
tO 36 t O
23 23 2$
21 31 271
60 67 56.3
66 66 66
69 l 1 l6
31 J2 2
69 73 ao
tO 62
tll 111 m
83 109 tll
91 90 tf1
H 39 l 1
D $0 20 00 2012
\ 1!7 703 3013
6 7 sa \197
$ l 2t 299
9 2ao 208
2.7 tO \6
tl 5 v
07 36 1\0
29 56
2U 5\7
m m S6
nn 1l38 1792
l() 010 73.952 22t 8ao
f"OfGOP)
260 25.9 2ll
252 23.3 220
Vt l7 ll l
l88 536
73 8 75 li2.S
5 1 16
11.9 11.2 l.9
6.5 13 \2.3
23 l7 20.3
\2.8
1'10 t o;u are nota vallal! I!
..
21'-' 11
.cge <l m touton. 2012
IJa'<: ( )

-
........
,..,..
.,.. .. ,

o o
==
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n

Glow In o r GOP and GOP per capl ta {%j





D I 0-$0 D$0-2000 2000- 12
jil\w.lQ!
33 26 ta
63 38 51
t O
' '
3.
71 l1 72
81 38 89
68
' '
56
3 l.9 l5
03 07 89
sa t8 53
8. t7 71
21 25 7.&
64

6alanu o r Pa ymtnh ancl Trallt
(USS r.tlJ'oiiS)
Totalmercmnmoe l!l;)Or.s oD)
Totalmer<NIXII&e tnDORS
\ el uaoe n goo r.erv10er.
Qlrl!! '1iaoco(J"lltla a nee
ar. a %o G:>;>
l!ml!n:euno
co o e11pl0yeu feeelOir.)
Cent nt l GovtrMtt nt Fl na net
,Sol GOP)
a.nen: (nelJO

Qlnenl txpt"lltJe
-Jgl!L!maJgnal taXBIII!
l'ldllt:ILBI
COrpo13!e
Ext ernal DtDt a ncl Rno urc Ftow'
(USS mll'()flS}
TOlal oelll OJ I:&tancln9 a"1d 0 15e0
Total oeot r.e 11 10e
:>eDt I! ttl .;>C. II:;
Total oeot r,.o G::l?)
Total OPOI r.eu 10e ('.0 expo e&)
h:Ows)
Polt'oiiD eQ.J i y (net '"'0 '115)
composition ortoU. txttrnal lltDt 2012
P rtvat t Stct o r Dtvt iOpmtnt
nne eClJireoto 6lanat.ool'le-.f. (oaJ&)
COf>: r.:auoor.mr.r-o G.\ oercapb)
nne eo;lreo to propuy (oayr.)
!J.:ot-eor.
roo mil.1 age 15 r.Jtve tf!J W'10
na
na
Sloc:t
6;L,k capl alto ai$ell3!l0
2000 20 12
8S1 2696
9EQ2 l 0l61
-2.;275 -la.957
tS tl
IH
tl 2
61
11901
tta
10.2
17.S
-a a
20
35
U6 275
268 108
2000
2000
t 7.S
t !I.O
20 12
21
9.9
50
20 12
S l
00
Mte "IJ.ft'o t'lu:t r. are 'pecneo
notavabl)li! - 5 not
,
Pakistan
O:a:
Conti>
... ; ._.. ,., ....
Ttchnolomano lnl nt, tr uch itt
Paveo roacs (%ototal)
91ceo ea:'lOmo!)llepnone
tlOpeople)
D!rexpou

EnvlroMt t nt
Ag:ICUi unJ lnl b'lll am)
Fo a a'lll a til' a)
Te aren (eo aro)
fresi?Rierre-..o 16oes percapt a (cu. meo: er&)
r mll'A'li1HWI!l31Dal na.f)ICmetm )
002 (mt)
G:>P perJnao
s pertgoo 1 ec.N3le'1i)
W)IICI 6 1111 Gro up port!OI O
(USS lriJl'ollS)
l!'O
TOBICI$
:>IWJrr.em

r:cem.tpl)metllr.
:>A
Total<leot

Toa 1e1eu r.etvlet

T Ola 10 5b'.ne<l i1.10 OIA6li1.1Citlg polt'o lb
ol 'll!lt:'l
OISII..rr.t'11e'ltr. or r cownaoco(J"lt
Po CJI 10
ll!pJ' f rnnr. or "C own OICCOUrl:
UGA
GIOU rxpo,crt

2000
560
2
Ol
3:5
2.7
101

07l
2000
31)93
159
227
182
20 11
72.2
6S
3l
21
1),1
312
003
so
20 11
\610
61
60
16
31128 10n2
1t 1 aao
93 271
718 716
C5S 67C
2 Ot
$2 2$
111 9$
0 9$
65


Millennium Development Goals
VWh se le ded targets to achieve l>etwee n 199 0 and 20 15
f!S:l'!lil!l! CIOsesllo csa:esfiO vn t'- 2
Goa t I: naiVe tilt ratu ror extrtmt povtrty a110 munutntton
POV!I'!J lleac!OOII'll raiiO at$125aOZJ ?PP %0 po p:lbiiOII)
POVfftJ lltac!OOI.r11 raiiO ill llliiiOnalpoVUf ltl t (%0 pojJJiiiDII)
Sl'lill!! oll'loomeorconwmpciOn 10 tllepoore1 <JJIIII!!
Prevat nceo :manJtriD n("io
Goa l 2: nur tna t cnl ort n are aD It to complete pnmary .cnoollng
PrtnarJ "'>
PrtnarJ rewa:n agegoup)
StcOilOarJ
Yo>AnKetacJ r,. o:peopl!ager.
Goals: eli minate g. notr PI nt y In eoucallon a not mpowtr womt n
RalD ol 10 CO)'fotl prtnar, ano &eOOIIOiii'J
women e:11 plOy eo n nonll!jOCUlural oe<:IO r{%011'0 'l.lg!CUCJI'l.l
Pro poniOn o oeali nell) oy wo tl natD ("
Goal 4: rtouce unou-s mortality tiJ two-tnuo
:'lder-6 mona 1 rze (per \000)
artmona J I'Zt{Ptr \OOODieOIIt'lr.)
MeasleUnmltll!:a:lon no 01111-' JUro IIUnmuniZeCI %)
GoalS: reouct matemal morta l t y Dr thr .. -rourtl\5
M;uerna lmorta!ly 1300 perm ooo DltOt;lt5)
Slnlti at:enoeo OJ Q .. o nea111 r.a r,.o:total)
Con:racrptlrt pl!!vali!':lce r,.owomenageo
&1
300
21
,g
a
10
IllS
06
so
l90

15
Goal' : llalt a no Dtgln to rtVtrU tilt 5,prta0 Of H IV/AIDS I no otntr major CI IUUU
Preval!nceol-tV ag5 !i-49) 0 1
tlctoenceotlberc:uiOn (per mooopeopl!!) 231
T -'letCJIOr. r. call!
Goal 7: naiVe tile proportion o r peoplt wltnout u.tatnatllt acceu to tlulc nno
Accus 10 an mproveowa err.ouce pojJJiaUon) as
Accer.s 10 mprov eo wnla:IOn acuter. po lXI a ton) 27
Forer.taear,.o la1oall!a) 3--l
Ttre&Htal proteaeo areu(%o lJ:'lOall!a) 0 1
C02emliSDno fn t<OC IOI':i percJpla) 0 6
G:>P perun& o t:ltflr Uit {OOI'IOQn: 200 5PPP $ pertgoole<Miilel'l) ( ,2
Goa l a: Otvtlop a gtoO&I partlltr5nlp lor oevtlopment
TeJell"llne mmttes tJer moeoplt)
Mo l)lle pno {Per 1l0 peo pl!)
'tU'Itl Uitl'i (pfl' OOpeopl!)
-.our.e,'loiCI' wtru com
Eoucaton In Olea lor' (%1

aoa., " a...c: rl
e LCIOD"I
Mta5lt5 lmmu nu:aion (%o111ur
01051
' T.! :ca:
oeveDpmentEcooomler.. OtveiOpm r11 Dill a Group (:)EOOG}
o.a
0.0
0.0
Pakistan
Pa ll61an
IUS 2000 2011
181 20 I 2t!l
22.3
1:10 8J 00
3'2 3fJ 3M
.ss n
fi1
35
5.5 71
79
9 13 15
21 23
fl6 112 as
97 aa 71
H 59 8)
uo 330 21)!)
15 23 '3
13 25 17
01 0 1 01
231 231 231
87 aa 91
32 37 ' 7
30 2.7 2.1
1) 1 0 1 1.)1
07 07 00
'2 u 50
t7 2 1 3.2
00 02 6\6
00 fJ 90
1\0
ICT lnelca_," IP 100 ptoplt l
TQ
1 0
! -!
o
--
: c

:= :::. ::-:
o : , c -.blc ... ,..
a .... . ....
2Jtn.t
AFGHANI STAN
CHI NA
To
Mandi
30N
25N
65E 70E 75E
K2
(Mt. Godwin-
Austen)
(8,611 m)
B A L O C H I S T A N
S I ND H
P U N J A B
NORTHERN
AREAS
Quetta
Lahore
Peshawar
Muzaffarabad
ISLAMABAD
Srinagar
Kargil
Hyderabad
Faisalabad
Rawalpindi
Saidu
Chitral
D.I. Khan
Gujrat
Kahat
Bannu
Gujranwala
D.G. Khan
Multan
Sahlwal
Bahawalpur
Nok Kundi
Chaman
Surab
Zhob
Badin
Thatta
Panjgur
Ranipur
Turbat
Moro
Bela
Gwadar
Approximate
Line of Control
KHYBER
PAKHTUNKHWA
Jammu
and Kashmir
B A L O C H I S T A N
S I ND H
P U N J A B
KHYBER
PAKHTUNKHWA
FED. CAPITAL
TERRITORY
ISLAMABAD
FED. CAPITAL
TERRITORY
ISLAMABAD
Srinagar
Kargil
Hyderabad
Faisalabad
Rawalpindi
Saidu
Chitral
D.I. Khan
Gujrat
Kahat
Bannu
Gujranwala
D.G. Khan
Multan
Sahlwal
Bahawalpur
Nok Kundi
Chaman
Surab
Zhob
Badin
Thatta
Panjgur
Ranipur
Turbat
Pasni
Moro
Bela
Gwadar
Approximate
Line of Control
Karachi
Quetta
Lahore
Peshawar
Muzaffarabad
ISLAMABAD
AFGHANI STAN
I NDI A
ISLAMIC
REPUBLIC
OF
IRAN
CHI NA
TAJIKISTAN
Jammu
and Kashmir
I
n
d
u
s

R
a
v
i
S
u
tle
j
C
h
e
n
a
b

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h
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lu
m

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b

In
d
us
M
a
s
h
k
a
i

I
n
d
u
s

Ar a b i a n S e a
Rann of Kutch
To
Kandahar
To
Kerman
To
Kerman
To
Khash
To
Jodhpur
To
Mandi
To
Kabul
To
Ludhiana
To
Bhatinda
K
a
r
a
k
o
r
a
m

R
a
n
g
e

T
h
a
r


D
e
s
e
r
t

H
i
n
d
u

K
u
s
h

Centra
l M
a
k
r
a
n

R
a
n
g
e

K2
(Mt. Godwin-
Austen)
(8,611 m)
35N
30N
25N
30N
25N
65E 70E 75E
65E 70E 75E
PAKISTAN
0 50 100 150
0 50 100 150 Miles
200 Kilometers
IBRD 33460R
NOVEMBER 2010
PAKI STAN
SELECTED CITIES AND TOWNS
PROVINCE CAPITALS
NATIONAL CAPITAL
RIVERS
This map was produced by
the Map Design Unit of The
World Bank. The boundaries,
colors, denominations and
any other information shown
on this map do not imply, on
the part of The World Bank
Group, any judgment on the
legal status of any territory,
or any endor s ement or
a c c e p t a n c e o f s u c h
boundaries.
MAIN ROADS
RAILROADS
PROVINCE BOUNDARIES
INTERNATIONAL BOUNDARIES