PRR Loan Fails to Improve Pakistan’s Tax System: Report

ISLAMABAD: Despite disbursing 80 percent of the Pakistan Raised Revenue (PRR) loan from the World Bank’s $400 million fund, the Federal Board of Revenue (FBR) has failed to address long-standing problems in Pakistan’s tax system and machinery. has been

This was the conclusion of a joint report by the Friedrich Naumann Foundation and PRIME, an economic think tank, titled “The World Bank’s PRR Loan: Did it Help Increase Tax Revenue and the Efficiency of the Tax Machinery? A Prospective Analysis, Friday was started.

The report authored by economist Shahid Mehmood has highlighted significant shortcomings in achieving the loan targets.

The report states that multilateral donors have provided 16 foreign loans and technical assistance packages to reform Pakistan’s tax system.

However, when contacted, an FBR official argued that the report wrongly included funds allocated to provinces as part of FBR financing. The official clarified that the FBR itself has received only three foreign loans.

On the occasion of the release of the report, renowned World Bank economist Tobias Akhtar Haque emphasized the urgent need to bring all types of income into the tax net at both the federal and provincial levels.

He said that Pakistan’s economy was on the brink of default 18 months ago but now it has entered the phase of stabilization. However, bridging the revenue gap is still important.

“In the short term, emergency measures are necessary, but the country will eventually have to broaden its tax base. Pakistan needs to consider moving towards a flat income tax system,” Haq added.

Responding to questions about policy loans to bridge the external financing gap, Haq highlighted that provinces also received foreign loans, stressing the need to assess their real benefits. On digitization of FBR, he said that efforts are on to develop sophisticated data centers and analytics to broaden the tax base. However, he admitted that the tax-to-GDP ratio is unsatisfactory. Haq also stressed the importance of balancing revenue collection with essential expenditures in a country where 80% of children experience learning poverty, and 40% experience stunting.

The report warns that the PRR loan risks repeating the failures of previous initiatives such as the World Bank’s Tax Administration Reform Project (TARP). Despite partial improvements, fundamental problems persist due to institutional learning and lack of consideration of ground realities.

The main objective of the loan was to sustainably increase tax revenue by broadening the tax base and simplifying compliance. The first component outlined four goals: creating a simple and transparent system, ensuring taxpayers’ responsibilities, facilitating compliance, and promoting institutional development. However, none of these goals have been fully achieved.

“With 80 percent of the loan already used, major improvements with the remaining funds seem highly unlikely,” the report said. The underlying problems, such as lack of institutional development, stagnant tax-to-GDP ratio, declining number of filers, and ineffective efforts to bring retailers and non-compliant groups into the tax net, remain unresolved.

The report also criticized the use of technology under the second loan component, which aims to equip the FBR with modern IT systems and tools. It quotes Robert Solow’s famous 1987 observation, “You can see the computer age everywhere but in productivity statistics,” to highlight the minimal impact of technology on improving FBR performance.

The report concludes that an outdated bureaucratic structure, political pressure, and strong inefficiencies are hampering the FBR’s performance, making technical upgrades insufficient to achieve meaningful reforms.