ISLAMABAD: The Asian Infrastructure Investment Bank (AIIB) and the World Bank will co-finance Pakistan’s second Resilient Institutions for Sustainable Economy (Rise-II) programme with a $600 million loan, aiming to enhance the policy and institutional framework to improve fiscal management and regulatory conditions that support growth and competitiveness.

According to the cost and financing plan, AIIB will provide $250m for Rise-II, while the World Bank will contribute $350m through the International Development Association (IDA).

The objectives of the second programme are to strengthen Pakistan’s macroeconomic management, fostering sustained and inclusive growth by mitigating the socioeconomic effects of the Covid-19 pandemic and other shocks.

This proposed operation will provide external financing to help the government implement critical policy reforms, accelerating economic recovery and laying the foundations for sustainable growth.

Programme aimed at strengthening Pakistan’s macroeconomic management for inclusive growth

Specifically, Rise-II addresses key institutional and policy constraints for effective fiscal management and private sector investments, aiming to induce economic growth and reduce poverty by improving the policy and institutional framework for fiscal management and enhancing the regulatory framework for growth and competitiveness, project document says.

Reforms supported by the programmatic series are relevant to current economic challenges and have already yielded positive results, such as strengthening institutions for fiscal and debt management, broadening the tax base, eliminating trade barriers, and rationalising power sector subsidies, according to the document.

Rise-II is proposed to be supported under AIIB’s Covid-19 Crisis Recovery Facility and co-financed with the World Bank as a Development Policy Financing (DPF) under the World Bank’s DPF Policy to further key institutional and policy reforms.

In 2020, AIIB and the World Bank co-financed Rise-I, the first programme in the series, to assist the Pakistani government in improving macroeconomic management and business competitiveness in the medium term.

The first phase of Rise focused on reforms that will enhance macro-economic stability and fiscal management by improving fiscal policy coordination; enhancing debt management and debt transparency; broadening tax base and reducing distortions in tax policy; reducing the stock of circular debt in the power sector; and addressing unsustainable and inequitable power subsidies.

Measures under second phase of Rise will improve the regulatory framework to foster growth and competitiveness by: harmonisation of the general sales tax; financial sector transparency and deepening; increasing the use of digital payments; and reducing anti-export bias of the National Tariff Policy.

The loan will be a development policy financing that requires the World Bank to assess whether the specific policies supported by a development policy loan are likely to have significant social and poverty-related consequences or significant effects on the country’s environment, forests and other natural resources.

Most of the policy reforms supported by this operation are expected to have positive environmental effects by increasing budget allocations for environmental management and contributing directly to climate change mitigation and adaptation.

However, one of the prior actions could lead to adverse environmental effects in the long term, as tariff reforms will increase export opportunities for small and medium enterprises (SMEs), resulting in higher SME production, leading to more industrial pollution, worsening air and water quality, contaminating soils, and illegal industrial urban sprawl.

Overall, Pakistan has adequate legislation, policy guidelines, and institutional mechanisms in place for managing environment and natural resources, the document says.

Published in Dawn, October 15th, 2023