World Bank approves $700mn loan for Pakistan tax reforms

The World Bank has approved $700 million in new financing for Pakistan to support tax reforms, improve budget transparency and strengthen governance, despite limited progress under earlier lending programmes.

The loan, approved by the World Bank’s Board of Executive Directors, is part of the Pakistan Public Resources for Inclusive Development initiative, a multi-year and multi-programme effort aimed at supporting macroeconomic stability and public service delivery.

According to World Bank documents, $600 million of the financing will go to the federal government to reduce reliance on trade taxes, establish more predictable and evidence-based tax policy, and expand the revenue base through lower tax expenditures and higher direct tax collections. 

The remaining funds will support reforms including rationalisation of energy subsidies, digitisation of payments and procurement, improved budget transparency, and stronger statistical systems with better data sharing between federal and provincial authorities.

The new loan follows a previously approved $470 million World Bank programme to raise revenues, which the lender itself assessed as only “moderately satisfactory.” Despite years of reform efforts and significant public spending, Pakistan’s tax-to-GDP ratio remained at 10.3% in the last fiscal year, and tax authorities have warned of a large revenue shortfall in the current year.

World Bank officials said the new financing will also help increase spending on basic health and education, improve infrastructure standards in schools and primary healthcare facilities, and strengthen data systems to track progress on human development and economic indicators. The programme aligns with Pakistan’s commitments under the International Monetary Fund’s Extended Fund Facility and the National Fiscal Pact, under which the World Bank plans to provide up to $1.4 billion in total financing.

As part of the reforms, the government has created a new tax policy unit within the finance ministry to develop a medium-term tax framework, though it has retained the tax policy wing within the Federal Board of Revenue, raising questions about institutional leadership. The government has also pledged to review pension and subsidy spending to improve efficiency, even as some pension reforms were recently reversed.

World Bank officials said strengthening Pakistan’s fiscal foundations is critical to restoring economic stability and public trust, noting that the country spends less on health and education than regional peers and faces persistent deficits due to weaknesses in the tax system. Critics, however, point out that repeated lending has yet to deliver meaningful and lasting improvements in Pakistan’s fiscal management.