The World Bank has proposed $200 million in financing to help Khyber Pakhtunkhwa (KP) strengthen its revenue collection system, improve public services and manage its finances more effectively. The initiative aims to nearly double the province’s own-source tax revenue in real terms, increasing it from Rs64 billion to Rs122 billion by June 2031.

The proposed initiative, titled the Pakistan Public Resources for Inclusive Development Multiphase Programmatic Approach for KP, carries a total estimated cost of $650 million. Of this amount, $200 million would come from the World Bank, while the provincial government would contribute the remaining $450 million.

According to the programmed document, the initiative is expected to cover FY2027 to FY2032, with approval scheduled for October 29, 2026.

Expanding KP’s Tax Base

A major objective of the proposed programmed is to reduce KP’s reliance on financial transfers from the federal government by increasing revenue generated within the province.

The province’s own tax receipts currently account for a relatively small and declining portion of its expenditure. At the same time, growing salary and pension obligations, inflation and additional spending requirements in the merged districts have placed considerable pressure on public finances.

To address these challenges, the proposed reforms will focus on expanding the tax base, simplifying tax procedures and improving the efficiency of revenue collection. Digital systems are also planned for the KP Revenue Authority, the Excise, Taxation and Narcotics Control Department, and the Board of Revenue.

The World Bank has identified weaknesses in property taxation, agricultural income taxation and the taxation of certain services as areas requiring attention. Fragmented administrative arrangements and limited information sharing between government departments have also restricted the province’s ability to collect revenue effectively.

Improving Healthcare and Education

Alongside tax reforms, the programmed seeks to improve how public funds are allocated and spent, particularly in the health and education sectors.

The proposed measures include better budgeting, more efficient procurement procedures and stronger financial management systems. These changes are intended to ensure that government resources are used more effectively and that essential services reach the people who need them.

By June 2031, the initiative aims to bring 60% of primary schools that currently fail to meet minimum functional standards into compliance.

It also seeks to introduce electronic verification and payment systems for 60% of contractual payments. In addition, the programmed targets a 15% reduction in procurement cycle times in healthcare and primary education.

If implemented effectively, these measures could improve transparency, reduce administrative delays and help public institutions deliver services more efficiently.

Addressing Major Social Challenges

The proposed reforms come at a time when KP continues to face significant challenges related to poverty, education and public health.

According to the World Bank figures cited in the programmed document, 35.3% of the province’s population lived below the national poverty line in FY2025. Approximately 40% of children under the age of five were affected by stunting, highlighting persistent nutritional and healthcare concerns.

Education indicators also remain troubling. Around 36% of school-age children were out of school, while only 58% of children were fully immunized.

These figures underline the importance of strengthening public institutions and directing government spending towards essential services. Although higher tax revenue alone will not resolve these problems, improved fiscal management could provide the provincial government with greater capacity to finance development priorities.

A New Digital Hub for Better Planning

Another important component of the initiative is the establishment of a KP Development Data Hub.

The proposed platform would help consolidate economic information, connect administrative records and improve access to reliable government data. Better information could enable policymakers to identify service delivery gaps, monitor public spending and make decisions based on evidence rather than incomplete records.

Digital reforms, however, will need to be accompanied by appropriate safeguards. The World Bank has classified the programmer’s environmental and social risks as moderate, identifying concerns that include digital exclusion, data privacy and the potential distributional effects of agricultural income tax reforms.

Ensuring that digital services remain accessible and that tax changes are implemented fairly will therefore be important aspects of the programmed.

Financing Structure and Implementation Timeline

The proposed $200 million World Bank contribution would consist of a $100 million International Development Association (IDA) credit and a further $100 million IDA loan. The provincial government would provide an estimated $450 million towards the overall programmed cost.

The initiative is expected to run from FY2027 through FY2032, while the central tax revenue target is set for June 2031. World Bank approval is scheduled for October 29, 2026, meaning the financing remains proposed as of October 12, 2026.

The programmer’s effectiveness will ultimately depend on the implementation of its planned reforms, the strength of institutional coordination and the provincial government’s ability to maintain consistent progress towards its targets.

Conclusion

The World Bank’s proposed financing represents a significant opportunity for Khyber Pakhtunkhwa to strengthen its fiscal position and improve the delivery of essential public services.

Raising own-source tax revenue from Rs64 billion to Rs122 billion in real terms would give the province greater capacity to finance its priorities and reduce its dependence on federal transfers. At the same time, improvements in education, healthcare, procurement and digital governance could help ensure that public resources are used more productively.

However, achieving these objectives will require more than changes to tax administration. Transparent implementation, effective oversight, fair taxation and a clear focus on public service outcomes will be essential to turning the proposed investment into lasting benefits for the people of KP.

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According to the World Bank’s October 2026 economic outlook for the Middle East, North Africa, Afghanistan and Pakistan region, Pakistan’s economic growth is expected to improve to 3.7% in FY2025-26, compared with an estimated 3.2% in FY2024-25.

The forecast is significant because it comes at a time when the wider region is facing one of its most serious energy shocks in years.

Hormuz Disruption Creates a Global Energy Shock

The conflict that began in the Persian Gulf on February 28, 2026, has severely disrupted shipping through the Strait of Hormuz, one of the world’s most important energy routes.

A substantial share of global oil and liquefied natural gas shipments normally passes through the narrow waterway. The disruption sharply reduced tanker traffic and contributed to a major decline in regional oil production.

Oil prices responded quickly. Brent crude climbed above $100 per barrel in March, before easing toward approximately $70 in June as tensions temporarily moderated. Prices later moved higher again as the conflict intensified.

The World Bank expects energy prices to remain elevated for the remainder of 2026, creating challenges for countries that depend heavily on imported fuel.

Pakistan Feels the Impact Through Higher Costs

Pakistan does not have the same exposure as major Gulf oil and gas exporters because it is primarily affected through the cost of imported energy rather than a loss of domestic hydrocarbon production.

Nevertheless, the consequences are being felt across the economy.

Fuel prices have increased substantially since the beginning of the conflict. Gasoline prices have risen by 40% or more, while diesel prices have increased by over 40%.

Higher fuel costs can quickly spread through the economy because transportation, agriculture, manufacturing and logistics all depend heavily on petroleum products.

The increase in freight and insurance costs has added another layer of pressure, making imported goods more expensive and potentially widening Pakistan’s external financing requirements.

Inflation Remains a Major Concern

Economic growth may be holding up, but inflation remains one of Pakistan’s biggest challenges.

The World Bank estimates that inflation climbed to around 11% by the middle of the year, as higher energy and transportation costs began feeding into domestic prices.

For households, rising fuel prices can have effects far beyond the petrol station. Transportation becomes more expensive, food distribution costs increase and businesses face higher operating expenses. These costs can eventually be passed on to consumers.

The government has responded with targeted measures aimed at supporting fuel consumers and the agricultural sector. However, policymakers must balance assistance to households with the need to avoid putting excessive pressure on public finances.

Services and Manufacturing Support Growth

Despite these difficulties, several parts of Pakistan’s economy have remained relatively strong.

The services sector continues to provide an important foundation for economic activity, while manufacturing has shown resilience despite higher production and import costs. Livestock production has also contributed to economic stability.

This domestic strength is helping offset some of the negative effects of the external energy shock.

The World Bank’s forecast therefore suggests that Pakistan’s economy is not immune to the crisis, but its underlying domestic activity is strong enough to keep growth moving forward.

Pakistan Performs Better Than Regional Oil Exporters

Pakistan’s projected growth stands in sharp contrast to the outlook for several energy-producing economies in the region.

The World Bank expects the broader MENAAP economy to contract by 2.1% in 2026. GCC economies are projected to shrink by 4.3%, while developing oil exporters could experience a contraction of around 5.4%.

The difference is largely explained by the nature of the current energy shock.

During previous oil-price crises, higher crude prices often benefited oil-producing countries by increasing their export revenues. This time, however, the major problem is not simply the price of oil. It is the ability to physically produce and transport it.

With shipping through the Strait of Hormuz disrupted, some oil and gas exporters are unable to take full advantage of higher international prices because their export volumes have been reduced.

Global Economy Has So Far Absorbed the Shock

Despite the scale of the disruption, the impact on global economic growth has so far been relatively limited.

Several factors have helped cushion the supply shock, including existing oil inventories, alternative transportation routes, additional production from other sources and weaker energy demand in parts of East Asia.

As a result, the World Bank has reduced its forecast for global growth in 2026 by only 0.1 percentage point, from 2.6% to 2.5%.

However, this relatively limited impact should not be interpreted as a guarantee that the crisis will remain contained.

Risks Could Increase if the Conflict Continues

The biggest concern for Pakistan and other energy-importing countries is the possibility of a prolonged disruption.

The World Bank’s baseline scenario assumes that conflict-related disruptions will begin easing from early 2027. If the conflict continues for longer or becomes more intense, energy prices could remain elevated for an extended period.

For Pakistan, that could mean higher import costs, greater inflationary pressure and increased strain on external balances.

A prolonged crisis could also affect investment, consumer spending and industrial production if businesses and households face persistently higher energy and transportation costs.

A Resilient Economy Facing a Difficult Test

Pakistan’s projected 3.7% growth is an encouraging sign at a time when much of the surrounding region is under severe economic pressure.

The country has so far managed to maintain domestic economic activity despite higher fuel, freight and commodity costs. Services, manufacturing and livestock are providing important support, while targeted government measures are helping cushion some of the impact on households and producers.

But the road ahead remains uncertain.

Pakistan’s resilience will ultimately depend on how long the Hormuz disruption lasts, where international oil prices settle and how effectively the government can control inflation without placing excessive pressure on public finances.

For now, the World Bank’s assessment offers a cautiously optimistic message: Pakistan is absorbing the regional energy shock, and its economy continues to grow—but rising fuel prices and inflation remain significant threats to that momentum.

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