Increasing domestic revenues key to stronger fiscal buffers: WB

Stepping up domestic revenue mobilisation could help the South Asia region strengthen fragile fiscal positions and increase resilience against future shocks, said the World Bank (WB) in its twice-yearly regional outlook.

The latest South Asia Development Update, Taxing Times, projects regional growth to slow to 5.8 per cent in 2025 -- 0.4 percentage points below October projections -- before ticking up to 6.1 per cent in 2026.  This outlook is subject to heightened risks, including from a highly uncertain global landscape, combined with domestic vulnerabilities including constrained fiscal space, according to a media release.

It said amid increasing uncertainty in the global economy, South Asia’s growth prospects have weakened, with projections downgraded in most countries in the region.

“Multiple shocks over the past decade have left South Asian countries with limited buffers to withstand an increasingly challenging global environment,” said Martin Raiser, WB vice president for South Asia.

“The region needs targeted reforms to strengthen economic resilience and unlock faster growth and job creation. Now is the time to open to trade, modernise agricultural sectors, and boost private sector dynamism,” he added.

A key component of strengthening economic resilience will be domestic revenue mobilisation. Although tax rates in South Asia are often above the average in developing economies, most tax revenues are lower.

On average during 2019-23, government revenues in South Asia totalled 18 per cent of GDP-below the 24 per cent of GDP average for other developing economies.

Revenue shortfalls are particularly pronounced for consumption taxes but are also sizable for corporate and personal income taxes.

Tax revenues in South Asia are estimated to be 1 to seven percentage points of GDP below their potential, based on existing tax rates.

Some of this shortfall is explained by the widespread informality and large agricultural sectors in the region. However, even after taking this into account, sizable tax gaps remain, highlighting the need for improved tax policy and administration.

“Low revenues are at the root of South Asia’s fiscal fragility and could threaten macroeconomic stability, especially in times of elevated uncertainty,” said Franziska Ohnsorge, WB chief economist for South Asia.

“South Asian tax rates are relatively high, but collection is weak, leaving those who pay taxes with high burdens and governments with insufficient funds to improve basic services,” she added.

The report recommends a range of policies to improve tax revenues by eliminating loopholes, streamlining tax codes, tightening enforcement, and facilitating tax compliance.

This includes paring back tax exemptions, simplifying and unifying the tax regime to reduce incentives to operate in the informal sector, and using digital technology to identify taxpayers and facilitate collection.

The report notes the potential of adopting pollution pricing, which could help address the high levels of air and water pollution while raising government revenues.

Highlighting the country outlooks, it said in Bangladesh, growth is expected to slow in FY24/25 to 3.3 per cent amid political uncertainty and persistent financial challenges, and the growth rebound in FY25/26 has been downgraded to 4.9 per cent.

In India, growth is expected to slow from 6.5 per cent in FY24/25 to 6.3 per cent as in FY25/26 as the benefits to private investment from monetary easing and regulatory streamlining are expected to be offset by global economic weakness and policy uncertainty.

In Pakistan, the economy continues to recover from a combination of natural disasters, external pressures, and inflation and is expected to grow by 2.7 per cent in FY24/25 and 3.1 per cent in FY25/26.

The regional outlook said in Bangladesh, real GDP growth moderated to 4.2 per cent in FY23/24 from 5.8 per cent in FY22/23, primarily driven by a sharp decline in exports.

It said supply chain disruptions, combined with currency depreciation and rising domestic energy prices, added to inflation pressures in 2024.

The current account balance has improved as a result of rising exports and strong remittance inflows, which have increasingly been chanelled through the formal financial system as the kerb market premium has narrowed.

As a result of persistent inflationary pressures, Bangladesh’s central bank has continued tightening monetary policy when other countries have been lowering policy rates.

After several years of large swings in growth caused by the pandemic and the post-pandemic recovery, three countries in the region—Bhutan, India and Nepal—are now growing at rates broadly consistent with their 2010-19 averages.

The other five countries—Afghanistan, Bangladesh, Maldives, Pakistan, and Sri Lanka—are recovering from, or in the midst of, economic stress or political uncertainty.

Inflation is expected to remain stable and near official targets in most South Asian countries, assuming continued stability in commodity prices and exchange rates.

Inflation is expected to moderate in countries where it is currently unusually high (Bangladesh) or low (Sri Lanka) as the impact of temporary factors such as tax rate changes or currency depreciations fades.

In Bangladesh, real GDP is expected to gradually rise in the medium term, however, driven by critical reforms.