World Bank Urges Pakistan to Broaden Tax Base: 5 Critical Reforms to Avert a Deepening Economic Crisis

World Bank urges Pakistan to broaden tax base as part of urgent structural reforms needed to stabilize the country’s economy, address deepening water scarcity, and fix long-standing subsidy inefficiencies, according to its latest South Asia Development Update.

The report delivers a stark warning: without decisive action on taxation, water management, and energy pricing, Pakistan faces escalating fiscal pressure, environmental degradation, and social vulnerability — especially in the face of intensifying climate shocks.

Pakistan’s Narrow Tax Base and Revenue Challenges

The World Bank notes that Pakistan continues to rely on a dangerously narrow tax base, with a small proportion of citizens and sectors contributing to national revenues. Despite repeated reform pledges, tax collection remains low compared to regional peers.

According to the report, expanding the tax base — rather than increasing rates on existing taxpayers — is essential for:

• Improving fiscal sustainability
• Reducing dependence on external borrowing
• Creating room for climate and social spending

External resource: World Bank – Pakistan Economic Update

Pollution Taxes and Sustainable Revenue Generation

In a notable shift, the World Bank urges Pakistan to explore revenue generation by discouraging pollution, calling environmental taxation a “dual-benefit policy.”

Such measures could:

• Reduce industrial and urban pollution
• Generate new, predictable revenue streams
• Support climate adaptation funding

The report highlights global examples where carbon pricing and pollution levies have helped governments fund social protection while incentivizing cleaner production.

Water Crisis: Pakistan Among World’s Most Water-Scarce Nations

One of the most alarming findings of the report concerns water security. The World Bank warns that groundwater levels across South Asia are falling rapidly, with Pakistan ranking among the most water-stressed countries globally.

Key drivers include:

• Inefficient flood irrigation systems
• Outdated farming techniques
• Unregulated groundwater extraction

External link: UN Water – Global Water Scarcity

Modern Irrigation Reforms Show Promising Results

Despite grim warnings, the report offers hopeful evidence from Punjab, where modern irrigation reforms have delivered tangible results.

According to the World Bank:

• Water usage dropped by 57 percent
• Crop yields increased by 14 to 31 percent
• Farmers saw improved efficiency and income stability

These pilot projects demonstrate that technology-driven agriculture can play a crucial role in resolving Pakistan’s water crisis while strengthening food security.

Energy Subsidy Reforms and BISP Integration

On energy policy, the World Bank welcomed Pakistan’s recent steps to link electricity and gas subsidies with the Benazir Income Support Programme (BISP).

This reform aims to:

• Prevent subsidy leakage to wealthy consumers
• Protect low-income households
• Improve transparency and targeting

The report describes this move as a critical breakthrough in correcting decades of inefficient energy pricing.

External link: Benazir Income Support Programme

Tackling Circular Debt Through Smarter Subsidies

Pakistan’s energy sector continues to suffer from massive circular debt, driven by under-priced electricity, transmission losses, and poor recovery.

The World Bank recommends:

• Gradually phasing out untargeted fuel subsidies
• Redirecting savings to social protection
• Improving governance of energy utilities

Such measures could significantly reduce fiscal strain while preserving affordability for vulnerable populations.

Climate Risk Facility for Flood-Hit Small Businesses

Recognizing Pakistan’s extreme climate vulnerability, the World Bank also revealed plans to establish a climate risk facility aimed at supporting small and medium enterprises (SMEs) affected by floods.

This facility would:

• Provide rapid financial relief
• Reduce post-disaster business closures
• Strengthen economic resilience in flood-prone regions

External link: World Bank Climate Finance

Policy Implications for Pakistan’s Economic Stability

Taken together, the report underscores that tax reform, water management, subsidy rationalization, and climate resilience are deeply interconnected.

The World Bank urges Pakistan to:

• Broaden the tax base instead of raising rates
• Use environmental taxation strategically
• Scale up modern irrigation nationwide
• Protect the poor through targeted subsidies

Failure to act, the report warns, could intensify debt distress, water shortages, and climate-induced poverty.

Conclusion: Reform or Risk a Deepening Crisis

As the World Bank urges Pakistan to broaden tax base, the message is unmistakable: incremental changes are no longer enough.

With water scarcity worsening, fiscal buffers shrinking, and climate shocks accelerating, Pakistan stands at a critical crossroads. The reforms outlined in the report offer a credible pathway toward stability — but only if implemented decisively and transparently.

The choice is clear: bold reform today or deeper crisis tomorrow.