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Report No. 25665-PK

PAKISTAN

Public Expenditure Management

Strategic Issues and Reform Agenda VOLUME I

January 28, 2004

Poverty Reduction and Economic Management Sector Unit South Asia Region

Document of the World Bank

CURRENCY EQUIVALENTS Currency Unit = Pakistan Rupee US $1 = PKR 57.8 FISCAL YEAR July 1-June 30 ACRONYMS AND ABBREVIATIONS

ADB ADF AGP AGPR CBR CCAs CFAA CGA CWIQ DFID DPCO DSCs EAD ESR ESW FATA FBS FIP FPSC GOP GST HIPC ICG IDA IMF IPPs I-PRSP IRSA KESC LBOD MDGs Asian Development Bank Asian Development Fund Auditor General of Pakistan Account General Pakistan Revenues Central Board of Revenue Canal Command Areas Country Financial Accountability Assessment Controller General of Accounts Core Welfare Indicator Questionnaire Department for International Development (UK) Debt Policy Coordination Office Defense Savings Certificates Economic Affairs Division (in MOF) Education Sector Reform Economic & Sector Work Federally Administered Tribal Areas Federal Bureau of Statistics Financial Improvement Plan Federal Public Service Commission Government of Pakistan General Sales Tax Highly Indebted Poor Countries Internal Cash Generation International Development Association International Monetary Fund Independent Power Producers Interim Poverty Reduction Strategy Paper Indus River System Authority Karachi Electricity Supply Company Left Bank Outfall Drain Millennium Development Goals MOF MTBF MTIP NDP NEPRA NFC NHA NRB NSS O&M OFWM OGDC PAAS PACs PFC PIHS PIA PIBs PIFRA PR PSDP PTC PV RICs SAP SBP SMCs SOEs SSCs WAPDA Ministry of Finance Medium-Term Budget Framework Medium-Term Investment Plan National Drainage Program National Electric Power Regulatory Authority National Finance Commission National Housing Authority National Reconstruction Bureau National Saving Schemes Operations and Maintenance On Farm Water Management Oil and Gas Development Corporation Pakistan Audit and Accounts Service Public Accounts Committees Provincial Finance Commission Pakistan Integrated Household Survey Pakistan International Airlines Pakistan Investment Bonds Project for Improvement in Fiscal Reporting and Auditing Pakistan Railways Public Sector Development Program Pakistan Telecommunications Corporation Present Value Regular Income Certificates Social Action Program State Bank of Pakistan School Management Committees State Owned Enterprises Special Savings Certificates Water and Power Development Authority

Vice President: Country Director: Sector Director: Sector Manager: Task Managers:

Praful Patel, SARVP John W. Wall, SACPK Sadiq Ahmed, SASPR Ijaz Nabi, SASPR Paul Wade, SASPR; Hanid Mukhtar, SASPR Parvez Hasan, Consultant

TABLE OF CONTENTS

EXECUTIVE SUMMARY ............................................................................................................ i INTRODUCTION...................................................................................................................... xvii CHAPTER 1: EXPLORING THE DIMENSIONS OF THE CRISIS IN PUBLIC EXPENDITURES ........... 1

Introduction ....................................................................................................................................1 Historical Perspective ......................................................................................................................2 Restructuring and Refocusing an Extended Public Sector ................................................................. 11 Key Gaps in Public Goods ............................................................................................................. 13 Health .................................................................................................................................... 13 Education................................................................................................................................ 14 Irrigation ................................................................................................................................ 14 Rural Water Supply ................................................................................................................. 15 Transport................................................................................................................................ 15 Power ..................................................................................................................................... 16 The Strategic Agenda for Public Expenditure Management .............................................................. 16

CHAPTER 2: ENSURING FINANCIAL D ISCIPLINE AND CREATING FISCAL SPACE.................... 18

Introduction .................................................................................................................................. 18 Turn Around in Debt Position......................................................................................................... 18 Baseline Scenario .......................................................................................................................... 23 Slowing the Rate of Borrowing................................................................................................. 24 Increasing Revenues................................................................................................................ 25 Public Enterprise Losses and Other Contingent Liabilities ......................................................... 26 Defense Spending.................................................................................................................... 30 The Cost of Borrowing............................................................................................................. 31 Domestic Debt Costs................................................................................................................ 32 The Cost of External Borrowing ............................................................................................... 34 Structural Reforms and Growth Revival.................................................................................... 36 Alternative Scenarios ..................................................................................................................... 39 Low Case Scenario .................................................................................................................. 40 High Growth Scenario ............................................................................................................. 42 Conclusions .................................................................................................................................. 43

CHAPTER 3: R EORIENTING PUBLIC S ECTOR PRIORITIES ........................................................ 45

Introduction .................................................................................................................................. 45 Funding the Poverty Reduction Strategy.......................................................................................... 46 Remedying the Neglect of Education ............................................................................................. 47 Improving Health and Population Outcomes.................................................................................... 53 Health Sector Reforms ............................................................................................................. 53 The Way Forward.................................................................................................................... 54 Accelerating Water Resource Development..................................................................................... 55 Transforming the Power Sector ...................................................................................................... 61 Conclusion .................................................................................................................................... 64

CHAPTER 4: I MPROVING EFFECTIVENESS OF PUBLIC EXPENDITURES ................................... 66

Introduction ..................................................................................................................................66 Responsiveness to Citizens ............................................................................................................. 66 Reaching the Poor.......................................................................................................................... 66 Improving Budgetary Processes...................................................................................................... 67 Recent Initiatives ..................................................................................................................... 68 Medium-Term Budgetary Framework ....................................................................................... 68 Re-invigorating the Planning Processes........................................................................................... 73 Strengthening Expenditure and Program Monitoring................................................................. 75 Redefining the Role of the State ..................................................................................................... 77 Reducing the Role of the Government in Producing and Providing Private Goods and Services.... 78 Furthering Devolution ............................................................................................................. 82 Federal-Provincial Responsibilities ................................................................................................. 87 Inter-Government Financial Flows.................................................................................................. 87 Improving Governance and Fighting Corruption.............................................................................. 88 Strengthening Financial Accountability ........................................................................................... 91

CHAPTER 5: STRENGTHENING THE CIVIL S ERVICE ................................................................. 94

Key Issues..................................................................................................................................... 94 Structure, not size, is the problem ................................................................................................... 95 Bottom heavy........................................................................................................................... 97 Rigid....................................................................................................................................... 97 Mismatch Between Skills and Rewards........................................................................................... 98 Persistent Patronage..................................................................................................................... 100 A Pragmatic Approach................................................................................................................. 101 Seize the emerging consensus................................................................................................. 101 Managing the Transition .............................................................................................................. 102 Address pay........................................................................................................................... 102 Complete devolution .............................................................................................................. 103

REFERENCES /B IBLIOGRAPHY ..................................................................................................... 106 Annex A: Debt Reduction and Management Strategy Annex B: Medium-Term Framework Annex C: Simulations Based on Dynamic Benefit Incidence of Public Education Expenditures in Pakistan STATISTICAL ANNEXES

TABLES Table 1.1: Non-Interest and Non-Defense Expenditure for Selected Countries......................................1 Table 1.2: Investment as a percentage of GDP....................................................................................3 Table 1.3: Fiscal Indicators as a percentage of GDP............................................................................5 Table 1.4: Consolidated Federal and Provincial Total Expenditure in 1999/00 Prices............................7 Table 1.5: Consolidated Federal and Provincial Total Expenditure.......................................................7 Table 1.6: Planned Privatization of State Enterprises, November 2002-June 2004............................... 12 Table 1.7: Pakistan in Comparison with Regional Countries in Health and Population Outcomes......... 13 Table 1.8: Present Status of Health & Population Outcomes and MDG Targets for Pakistan................ 13 Table 1.9: Public Expenditure on Education for Selected Countries (% of GDP)................................. 14 Table 1.10: Canal Water Diversion .................................................................................................. 14 Table 1.11: Additional Coverage Required for Rural Water Supply (% of population served) ................ 15 Table 2.1: External and Public Debt Burden..................................................................................... 19 Table 2.2: Summary of Key Macroeconomic Variables in Baseline Scenario, 1998/99-2006/07 .......... 23 Table 2.3: Base Case Scenario: Principal Budget Aggregates ............................................................ 23 Table 2.4: Losses of State Owned Enterprises (Rs. Million) .............................................................. 30 Table 2.5: Pakistan: Real Borrowing Cost on Public Debt, FY1996-2002........................................... 32 Table 2.6: Summary of Key Macroeconomic Variables in Low Case, 1999/00-2006/07 ...................... 41 Table 2.7: Pakistan: Low Case Scenario, Principal Budget Aggregates............................................... 42 Table 2.8: Summary of Fiscal Space Alternatives over the Medium Term .......................................... 43 Table 3.1: ESR Targets by Sub-Sector, 2001-2005 ........................................................................... 48 Table 3.2: Water Availability, 1960/61 ­ 1999/00............................................................................. 56 Table 3.3: Electricity Tariffs (WAPDA System), FY96-2003 ........................................................... 64 Table 3.4: Illustrative Allocation of Additional Fiscal Space ............................................................. 65 Table 4.1: Functional Responsibilities of Districts, Tehsils and Union Councils .................................. 84 Table 4.2: Key Governance Indicators in South Asia ........................................................................ 91 Table 5.1: Civilian wage bills in Pakistan (current) by comparison with selected countries.................. 97 Table 5.2: Sanctioned Posts by Province (selected years) .................................................................. 97 Table 5.3: Impact of the January 2002 Pay Reforms.......................................................................... 99 Table 5:4: Proportion of monetary allowances in federal civil service wage bill................................ 102 FIGURES Figure 1.1: Figure 1.2: Figure 1.3: Figure 1.4: Figure 1.5: Figure 1.6: Figure 1.7: Figure 1.8: Figure 1.9: Figure 1.10: Figure 1.11: Figure 1.12: Figure 1.13: Figure 1.14: Figure 1.15: Figure 3:1: Figure 3.2: Trends in Selected Expenditures in 1999/00 Prices ..........................................................6 Trends in Selected Expenditures as a percentage of GDP..................................................6 General Administration Expenditures in 1999/00 Prices...................................................8 Law & Order Expenditures in 1999/00 Prices..................................................................8 Education Expenditures in 1999/00 Prices.......................................................................8 Health and Population Expenditures in 1999/00 Prices.....................................................8 Agriculture Expenditures in 1999/00 Prices.....................................................................8 Irrigation Expenditures in 1999/00 Prices........................................................................8 General Administration Expenditures as % of GDP .........................................................9 Law & Order Expenditures as % of GDP ........................................................................9 Education Expenditures as % of GDP .............................................................................9 Health and Population Expenditures as % of GDP ...........................................................9 Agriculture Expenditures as % of GDP ...........................................................................9 Irrigation Expenditures as % of GDP. .............................................................................9 Spending on Education (Per Facility) ............................................................................ 10 Budgetary Expenditure on Education ............................................................................ 49 Per capita Benefit Incidence of Primary and Secondary Education .................................. 50

Figure 3.3: Distribution of Public Expenditure for Primary and Secondary Education .......................... 50 Figure 3.4: Benefit Incidence of Public Primary Education (Urban vs Rural) ....................................... 50 Figure 3.5: Benefit Incidence of Public Secondary School (Urban vs Rural) ........................................ 50 Figure 3.6: Public Sector Expenditures.............................................................................................. 57 Figure 3.7: Public Sector Expenditures as % of GDP.......................................................................... 57 Figure 3.8: Public Sector Expenditures as % of total PSDP................................................................. 57 Figure 3.9: Depletion of Existing Storage and Planned Augmentation ................................................. 59 Figure 4.1: Decision Tree for Identifying Core Governmental Tasks ................................................... 80 Figure 4.2: The 2-Step Logic of Decentralization ................................................................................ 82 Figure 5.1: The Main Components of Public Sector Employment in Pakistan ...................................... 96 Figure 5.2: Composition of Public Employment.................................................................................. 97 BOXES Box 1.1: Box 2.1: Box 2.2: Box 2.3: Box 2.4: Box 2.5: Box 3.1: Box 4.1: Box 4.2: Box 4.3: Box 4.4: Box 4.5: Box 4.6: Box 4.7: Box 5.1: Box 5.2: Privatization ........................................................................................................................4 Refining the Debt Strategy.................................................................................................. 21 Determinants of the Rate of Public Debt Accumulation ........................................................ 22 Contingent Liabilities ......................................................................................................... 28 Beneficiaries of National Saving Schemes........................................................................... 33 Growth Revival and Poverty Reduction: Private Investment and Public Spending.................. 38 The Rich-Poor Gap and Public Expenditure on Education..................................................... 50 Budgetary and Financial Management Reforms ................................................................... 69 Steps in Preparation of an MTBF........................................................................................ 70 DFID Assistance to Strengthen the Medium-Term Budget Framework.................................. 72 Planning Processes: Sources of Weaknesses......................................................................... 74 Options for Public Financing of Private Delivery of Education.............................................. 79 Public -Private Partnership in Tuberculosis Control............................................................... 81 Corruption in Pakistan ....................................................................................................... 90 Monetary Allowances and in kind Benefits........................................................................ 100 Incomplete Devolution..................................................................................................... 105

ACKNOWLEDGEMENTS

This report was prepared by a core team including Parvez Hasan (Team Leader), Hanid Mukhtar, Paul Wade and Nicholas Manning. Shahid Javed Burki and Mohsin Khan served as Peer Reviewers. The field work for the report was done in three missions during the period October 2002 to February 2003. The basic draft of the report was completed in early May 2003 and shared with the government. Discussions with high-level government officials took place in late August 2003. The draft has been revised in light of the government's comments and has been updated to reflect information available up to middle September 2003, including macroeconomic data provided to the September IMF mission. Volume II on Accelerated Water Development was prepared by Usman Qamar and Walter Garvey. Sector contributions from Tahseen Sayed Khan and Ambar Narayan (Education), Inaam ul Haq (Health), Rashid Aziz (Power), and Navaid Qureshi (Transport) are gratefully acknowledged. The report also benefited from advice given by Tariq Hussain on the civil service, water and education sections of the report. Shanza Khan provided valuable research assistance. Shaheen Malik helped with data problems and prepared the Statistical Annex. Ms. Fritschel contributed to the editing of this report. Thelma Rutledge processed the report and was responsible for its production. During the preparation, the team worked closely with the government authorities. In this regard, the team acknowledges the active and constructive participation from the Planning Commission, Ministry of Finance, especially the Debt Office and the Budget Wing, and the Economic Affairs Division. The Bank team's discussions with the key counterparts, Secretaries Finance, Planning, and Economic Affairs division, Director General Debt Office, and Additional Secretary Budget, at the various stages of the work starting from the concept paper finalization were instrumental in clarifying the main issues and developing the analysis and the conclusions presented in the report. The team also benefited from discussions with the heads of planning and finance departments of the governments of Punjab and Sindh. The team leader made a Power Point presentation in February 2003 on Ensuring Fiscal Discipline and Creating Fiscal Space to the government's economic team, headed by the Federal Finance Minister Mr. Shaukat Aziz and including Dr.Ishrat Hussain (Governor, State Bank of Pakistan), Dr.Shahid Amjad Chaudhry (Deputy Chairman, Planning Commission) Mr. Navid Ahsan (Secretary Finance), Dr. Mutawakkil Kazi (Secretary Planning), Dr. Waqar M. Khan (Secretary Economic Affairs Division), Dr. Ashfaque Hasan Khan (Director General Debt Office), Javed S. Malik (Additional Secretary Budget, Ministry of Finance) and Wajid Rana (Joint Secretary, Ministry of Finance). The Bank team benefited greatly from the discussion of the principal issues involved in creation of additional fiscal space that followed the presentation. The team's work on civil service reforms was very much helped by extended discussion in a brainstorming session on the subject at the Establishment Division Those attending from the government side included Mr. Javed Hasan Ali (Secretary Establishment Division), Mr.Tariq Saeed Haroon (former Secretary Establishment Division), Mr. Tariq Sultan (Principal, Pakistan Administrative Staff College) and Messrs Mueen Afzal and Saeed Qureshi (former Secretary Generals Finance). Finally, the team thanks John Wall, Abid Hasan, Ijaz Nabi, and Sadiq Ahmed for continued support and guidance throughout the course of preparation of this report.

EXECUTIVE SUMMARY

1. Pakistan appears to be at an important economic turning point and there are good prospects of sharply reversing the poor economic and social performance witnessed for more than a decade. The comprehensive and forceful reform agenda, which the government has been pursuing during the last three years, and is reflected in its debt and poverty reduction strategies, has already improved the financial position very considerably and has helped to revive growth. For the first time in many years, there is no threat of a financial crisis hanging over Pakistan's head. Looking ahead, the main challenges now are to increase economic growth from the current annual rate of about 5 percent to close to a sustainable growth rate of 6 percent or higher over the medium term, substantially reduce poverty incidence, and begin to narrow Pakistan's social gap, while maintaining macroeconomic stability. 2. The achievement of Pakistan's economic and social goals would require a strong recovery in private sector investment supported by further improvements in general i vestment climate, deepening n and widening of the financial sector, better incentives for exports and direct foreign private investment to promote both technological change and export orientation. Whereas in the past aggregate investment levels have been constrained by resource availability, in particular low national savings, this has recently changed. Higher worker remittances, the sharp reduction in the government revenue deficit (before grants), higher external grants, lower external interest payments, and the reversal of capital flight have all helped to push the national savings rate to the average of more than 19 percent of GDP in FYs 2002-03, its highest level ever. A part of the improvement--- compared to the national saving rate of 14 percent of GDP during FYs 1999-2000 - is due to transient factors such as reversal of capital flight and exceptionally high level of external grants. Still, provided confidence in the currency can be maintained and the improvement in public savings continues, there is every reason to hope that much of the improvement in national savings rate will prove to be durable. Thus, at least from the point of view of resource availability, the stage is set for sustained and strong increases in the level of investment. The more important issues that are likely to influence future private investment are the investor perceptions about political stability, the new government's commitment to sustained economic reform and its ability to bring about improvements in governance and delivery of public goods and services. Non-economic factors such as the regional security situation and the threat of terrorism will also continue to have a bearing on private investment trends. 3. While private investment must provide the bulk of the growth in investment, it must be accompanied and supported by significant improvement in both the quality and level of public spending to overcome the key gaps in the delivery of public goods, including infrastructure. The low level of human resources development in Pakistan is limiting productivity growth and hindering competitiveness. The possibilities of increasing value added in traditional manufactured exports and developing new service and technology related exports would improve with higher levels of skill development. The high economic costs of port handling, road and rail transport, and electricity are also sources of discouragement to the private sector. 4. Better and more effective delivery of public investment and public services in key areas must, however, contend with the reality, at least in the medium term, of a slow-growing resource envelope for the public sector. Our indicative macroeconomic projections suggest, that even with a moderate but steady growth in government revenues, the level of public spending would not likely increase from its present (and recent) level of around 22 percent of GDP during 2004-7 (compared with 25 percent in the 1980s and the first half of the 1990s), if the necessary further progress towards reduction in public debt burden has also to be ensured. Fortunately, there is considerable scope for both more effective use of public resources and restructuring of public spending.

5. The economic and social reform program has been tackling the various constraints on progress towards a viable and vibrant public sector in a comprehensive and bold fashion for the last four years. There has been notable progress and distinct success in a number of areas, such as reducing macroeconomic imbalances and public debt burden, accelerating the efforts towards privatization, and reorienting public expenditures towards social services and poverty groups. A start has also been made in improving governance and strengthening of institutional capacity, though the reform measures are yet to yie ld concrete results in terms of improvement in delivery of public services. 6. Against the above background, the objective of this report is to assist the government in exploring ways to enhance resource mobilization and to further intensify and strengthen public expenditure policies and management. The report focuses on three aspects of public expenditure management: the institutional reforms that are needed to make more effective use of public spending, economic and fiscal policies that would make possible a steady and significant enlargement of the fiscal space, defined as non-interest, non-defense spending (also excluding public enterprise losses) as a percentage of GDP, and the issues in re-orientation of public expenditure priorities to make optimal use of the fiscal space that could become available. The scope of the work and analyses was shared and discussed with the government counterparts at different stages of the task. Related work to strengthen public expenditure management and service delivery capacity at the provincial and district levels is also underway. 7. The main finding of the report is that the next few years represent a period of great opportunity for Pakistan to accelerate its economic and social development. Efforts to strengthen governance, improve delivery of education and health services, and last but not least, make economic and social policies propoor by making public institutions stronger and the civil service better paid and more accountable will be central to the public sector pla ying its role in increasing growth and reducing poverty. The relaxation of the financial constraints in the public sector can strongly reinforce these efforts. With the maintenance of the momentum of economic and fiscal reforms and effective implementatio n of the priorities outlined in the government's poverty reduction strategy, there could be a sharp increase not only in the level but also the quality of social and economic development spending over the next five years, in sharp contrast to the stagnation in outlays and their declining effectiveness during the last decade. The creation of additional fiscal space, however, would depend critically on further success in raising the level of government revenues, reducing the cost of government borrowing, limiting the public enterprise losses, and continued restraint on defense spending in relative terms. With policy slippages in these areas, the additional fiscal space could virtually disappear, making it difficult to attain and sustain high growth and meet social goals. Even if the fiscal space is created, it could be wasted either because of unproductive expenditures or lack of progress towards more effective use of otherwise high priority spending. The challenge for the new government is to build on the improvements in economic management of the last few years and to avoid mistakes that often led to very ineffective use of public resources in the past. Challenges of Improved Public Sector Management 8. That Pakistan under-performs other countries with simila r per capita incomes in delivery of basic social goods is well known. What is perhaps less commonly realized is that the gaps in public goods delivery have been widening during the last decade especially in relation of delivery of services to the poor. Furthermore, the inadequacy of public investment in key areas is taking a heavy toll in efficiency losses for the economy and hindering private investment. The depth of the crisis in public spending in Pakistan can also be gauged from the fact that consolidated public expenditures (excluding interest and defense) averaged little over 10 percent of GDP in the late 1990s compared to the average of about 15 percent of GDP in the 1980s. Even though non-interest, non-defense spending rose sharply in FYs 200203, Pakistan's spending levels compare unfavorably with other developing countries including South Asian countries

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9. While public development and social spending must recover further from the extremely depressed levels in the last decade and must play a significant part in sustaining high growth and reducing poverty, the biggest economic and social gains must come from improved efficiency in the use of public resources. Improving the effectiveness of spending not only through a better allocation of resources and a more careful choice of priorities but also through better implementation, more efficient delivery of services, plugging of leakages and waste is a key challenge. This requires, above all, restoring the capability and the authority of public institutions especially those concerned with economic and financial management and the delivery of social services. 10. The following will be critical for success in refocusing the public sector and increasing its effectiveness: § Improved governance and more effective delivery of law and order, justice and social services through effective devolution not only from the provinces to the districts but also from the Federal government to the provinces. This would need to be accompanied by suitable financial transfer arrangements and strengthening of the civil service through improved compensation and greater accountability. Creation of fiscal space consistent with further debt burden reduction Using the fiscal space to adequately finance the government's poverty reduction strategy, maintenance of existing public assets and selective important long-term investments especially in water

§ §

Ensuring Financial Discipline and Creating Fiscal Space 11. Creation of adequate fiscal space is a necessary but not sufficient condition for better public sector management. But opening up of the fiscal space, if properly utilized, can certainly increase the room for maneuver for improving governance (through more adequate funding of law and order and better civil service salaries) and re-balancing spending (by increasing allocation for operation and maintenance of infrastructure and more adequate funding of non-salary expenditures in the social sectors.) Pakistan is fortunate that it would not be so deeply constrained financially as in the past decade in its efforts to expand the level of its public spending in economic and social fields. With continued reform on the lines mentioned below, the non-interest, non-defense spending will rise, in the base case scenario, to 14.3 percent of GDP by 2006-07 compared to only 10.9 percent in 2001-02 (and an estimated 12.0 percent in 2002-03) consistent with a significant further reduction in public debt burden. In the low scenario, it increases only to 11.3 percent of GDP by 2006-07 and the debt burden reduction is modest. 12. The major elements that contribute to the increased fiscal space under the base scenario are the reduction in interest payments (2.9 percent of GDP), higher government revenues (1.3 percent of GDP), and reduction in enterprise losses (1.4 percent of GDP. It is noteworthy that significant progress towards raising revenues and reducing interest payments as a percentage of GDP was already made in 2002-03, the first year of the scenario. In the low scenario, the government revenue declines slightly as a percent of GDP over 2002-07, interest payments fall more moderately, and public enterprise losses remain high. The interesting point is that even with higher fiscal deficits (including grants) of 4.3 percent of GDP in 2004-7, compared to the baseline scenario deficit of 3.0 percent of GDP, the fiscal space under the low scenario is only a fraction of what could materialize under the continued reform scenario. 13. A scenario with more fiscal space than in the base case is certainly possible. Achieving this will, however, require three things: (i) even more determined effort to lower the real cost of domestic borrowing, (ii) total elimination of public enterprise losses, and (iii) strong improvements in the effectiveness of government spending and institutional capacity to optimally utilize the additional fiscal space on poverty and growth related spending.

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Reducing costs of Government Borrowing 14. With the recent sharp reversal of the trend towards real depreciation of the rupee, increased flow of concessionary assistance, very favorable terms of Paris Club rescheduling, and the government actions to retire high cost external debt, the real cost of external borrowing has come down sharply. Pakistan's case for continued soft blend of external assistance is strong because of the high level of public external debt and the strength of the reform program. The challenge is to preserve and deepen the reform program to ensure continued flexible assistance from donors at low cost. If the momentum of quick disbursing concessionary assistance can be maintained, and the real exchange rate remains stable, it should be possible to keep the real cost of external borrowing to 1-2 percent per annum in the near future. 15. The real cost of domestic borrowing, however, remains high. The government has taken several strong measures in recent years to address some of the weaknesses of NSS instruments. It eliminated the access of institutional investors to the schemes in early 2000. Recently it took commercial banks out because of abuses of the system. It made, after May 1999, a number of successive reductions in the administratively set interest rates on new issues since and has during the last year or so linked the NSS rates to the market benchmark Pakistan Investment Bonds (PIBs), which have been revived as an important instrument of debt management. Still real long-term rates of return on 10-year certificates for widows and pensioners of 6 percent (assuming inflation rate of 4 percent per year) and on Defense Saving Certificates (DSCs) of 4.5 percent on what are risk free assets are high by international standards; the reductions in nominal interest rates have been largely offset by a drop in the rate of inflation.. Ideally it would be desirable to phase out the use of NSS instruments and rather fund government deficits domestically by selling PIBs. However, phasing out the NSS instruments would meet with substantial public opposition and is not practical partly because the government sees some of the recently launched schemes under NSS as a safety net to pensioners, widows and small savers. But the Government must continue with progress on reforming the NSS while educating the public on the true opportunity cost and problems of the schemes. The successful launch of the PIBs has not only set a market-based long-term benchmark yield but has also helped the government to finance its budgetary requirements with stable long-term debt. In any event, recourse to PIBs should be further enhanced, the on-tap feature of NSS instruments should be eliminated, and the margins over PIB yields should be phased out. Revenue mobilization 16. Pakistan's revenue mobilization has been low, both by international standards and compared with its potential. In FYs 2000 and 2001 total revenue collection was the equivalent of 16.2 percent of GDP; tax revenue was only 13 percent of GDP and had actually stagnated for several years.1 However, revenue collections during the last two years increased sharply to 17.9 percent of GDP in 2002-03 reflecting both the success of tax collection efforts and the revival of the economy. The structure of taxation has, also improved considerably in recent years, and the heavy dependence on foreign trade taxes has been reduced. Still, revenue mobilization falls short of that of many developing countries at comparable income levels in Africa, Asia, and Latin America.2 In light of the weaknesses in the current revenue mobilization system, there is considerable scope for enhancing collection and broadening the income tax base. For instance, while there are only 1 -1.5 million income tax filers, there are 3 million cell phone subscribers, over 10 million electricity consumers, 3-4 million gas consumers and 2-3 million car owners.

1 2

Note that Pakistan has undertaken considerable trade liberalization in recent years with an initial import tariff revenue loss. Countries at comparable income levels with higher revenue/GDP ratios include Bhutan, Botswana, Kenya, Maldives, Namibia, Nicaragua, Sri Lanka, Vietnam, and Zambia. All of these countries had revenue mobilization in excess of 20 percent of GDP, with the exception of Sri Lanka and Zambia.

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17. In our view, it should not be difficult, in light of current efforts, to increase revenue mobilization further to 18.3 percent of GDP by FY07, the assumption in the base case. But the suggested level of revenue mobilization will merely regain the level of the early 1990s. Therefore, to underpin strong public finances and to adequately fund poverty-oriented expenditures, determined efforts are necessary to complete institutional and policy reform especially the fundamental restructuring of CBR in the next few years. In the area of tax policy, reforms should continue to aim at continuing to reduce the number of tax exemptions (for customs duties, income and withholding tax) and make sales taxation more effective. Reforms are also needed for tax on income from financial and land assets. In particular the c urrent practice that allows a single person to hold assets under different names (and more easily evade taxation) should be abolished. On the non-tax revenue side it will be necessary to seek greater cost recovery in higher education, health (subject to considerations about access to basic services for the poor), and water usage for irrigation. Sustained increase in revenue mobilization also requires reversal of the declining trend in provincial tax collection, which is only 0.5 percent of GDP. Tax authority powers of the provincial as well as local governments should be reviewed and incentives for sub-national level resource mobilization need to be strengthened as a part of larger discretionary resource transfers to the provincial and local governments that appear necessary (see para. 45 below). Public enterprise losses 18. Though there has been progress during the last two years in eliminating the operating losses of a number of public enterprises notably Pakistan Railways, PIA, and most state -owned banks, the losses in the power sector are continuing at a high level. The WAPDA and KESC losses in 2002-03 were close to 1 percent of GDP. The continued large losses of public owned power entities is the most troubling element of Pakistan's fiscal position and the only one that has not shown improvement in recent years. While the urgency of need to privatize KESC and parts of WAPDA has grown because of continued losses and inadequate resources for investment as well as the costs to other industries from unreliable power supply, the progress towards privatization is the slowest in the power sector, though WAPDA has moved to create separate corporate power entities. 19. The power sector reforms are fundamental. WAPDA needs to decisively reduce line losses, enforce bill collection, if needed by cutting off non-payers more aggressively, and ensure timely implementation of tariff adjustments determined by NEPRA. The government should help WAPDA in resolving the issue of nonpayment by FATA of its utility bills since this seems to require a political solution. The cost of pursuing noncommercial objectives as imposed by government mandate should be fully financed by explicit grants in the fiscal budget. Fortunately, in the years beyond FY 2004, power sector costs will be favorably influenced by the rising share of hydro- electric generation due to commissioning of Ghazi Baroda project and some reduction in IPP payments. Defense 20. In the 1990s the real spending on defense increased little and as a percentage of GDP, it has declined steadily from the peak of 6.9 percent in the second half of the 1980s. Despite the spurt in spending in 2001-02 due to regional tensions, defense spending remained at 4.7 percent of GDP (4.1 percent excluding defense pensions which are shown separately since 2000-01). 21. The government feels that in current circumstances assuming further reduction in defense spending as a percentage of GDP would not be realistic. While easing of tensions on the Eastern border is very likely, the situation on the Western border as well as combating terrorism in the country will continue to put pressure on the defense expenditures. The report, therefore, assumes that in the base case scenario defense spending (excluding pensions) in FY04, would be as in the federal budget approved by the National Assembly and in coming years would remain at 4 percent of GDP. v

Reorienting public sector priorities 22. Proper use of the considerable fiscal space that can be created under the continued reform scenario will be critical. The financing of the poverty reduction strategy should be the first charge on the additional fiscal resources that are likely to become available. But it should also be possible to increase funding for maintenance and undertake selective new public investment in i frastructure. As the past n experience suggests, the availability of the fiscal space alone is no guarantee that it will be utilized for high priority spending. Indeed the danger is that it could lead to a relaxation of the financial discipline and undertaking of low priority spending. The only way to guard against this danger is for the government to exercise self-discipline and to strictly adhere to well laid out processes and procedures for approval of projects especially large projects. The low scenario will largely mean business as usual and will neither enable reversing much of the decline in the quality of public goods witnessed during the last decade nor ensure sufficient progress towards Millennium Development Goals (MDGs), though governance improvements could still ensure better performance than in the past. Funding the poverty strategy 23. The original indicated funding for poverty reduction (4.2 percent of GDP in 2003-04) in the Interim Poverty Reduction Strategy Paper (I-PRSP) appears to be totally inadequate in relation to ambitious targets especially in education. On the one hand, there is need to set more realistic but still ambitious social targets consistent with MDGs, on the other hand, the financing needs of meeting these targets require more careful assessment. It is also recommended, that priority poverty spending should be defined more broadly to include law and order maintenance, access to justice, and rural electrification. The governance problems resulting from inadequate spending on police and the justice system impact the poor the most. Similarly, it is the poor in the rural areas who most lack access to electricity; of the roughly 40 percent of Pakistani households that do not have electric connections most live in the rural areas and are poor. 24. Using the broader definition of poverty related spending suggested here, the actual priority poverty spending in 2001-02 was about 4.5 percent of GDP. Our very rough estimates suggest that this spending should increase to about 7 percent of GDP by 2006-07. Larger education and health spending would probably take up half of this increase in order to achieve goals set; the rest being accounted for largely by higher allocations for law and order, provision of justice and rural and urban infrastructure including rural electrification. It is encouraging that the recently completed PRSP (December 2003) provides both for a broader definition of poverty spending suggested above and proposes to increase this spending steadily to 6.8 percent of GDP by 2007-08. Remedying the neglect of education 25. The lessons learnt from the experience during the last decade in which expansion of primary education spending resulted in only moderate benefits are already being reflected in approaches to primary education. Less emphasis is put on building new schools and more attention is being given to improvements in quality through hiring of new teachers, greater accountability of teachers, better physical facilities in schools and higher non-salary spending. Human Development Foundation set up by the Government of Pakistan as an autonomous corporation is emphasizing enrollment processes, non-formal education especially for recent dropouts, and innovative approaches to capacity building. But it is not at all clear that programs, new initiatives, institutions and funding commitments are in place on a scale to achieve the key targets in primary education: 35-40 percent growth in primary enrollments over the next five years, narrowing of gender and geographical differences, significant improvements in quality, reduction in drop out rates and expansion of programs of non-formal education.

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26. Four sets of issues relating to the social sector appear especially important. First, devolution of responsibilities for education and health to the local government holds the greatest promises of improved effectiveness of delivery of social services. But as yet there are a large number of unresolved issues in this area. Second, though enrollment levels in Pakistan are among the lowest in the developing world and gender disparities and rural urban gaps are among the widest, there are few incentive programs that have been used around the world to stimulate demand for education and encourage enrollments. Third, the effective public -private sector partnerships that will tap into the strength of the private sector have yet to be developed. The private sector is the most dynamic segment of education. It accounted for over 40 percent of the growth in enrollments in the primary education in the last decade. The average teacher salary in private school is actually lower than in public schools but the quality of teaching appears to be better because of much greater accountability. Last but not least, more detailed and realistic estimates of public funding requirements are needed not only for the primary education but also for the entire education sector. The government plans for reversing the decline in higher education deserve high priority and need to be adequately funded. 27. Clearly increasing public funding alone will not help meet the urgent challenges in the education sector. But higher public spending is a necessary if not sufficient condition for improving educational attainments. Detailed work is necessary to firm up the education funding requirements including for the secondary and higher levels. Our tentative estimates suggest the need of gradually raising public education expenditures from 1.8 percent of GDP in 2001-02 to 2.5 percent in 2006-07. 28. Within the recommended overall increase in education expenditures, a more rational allocation of spending is needed. This includes increasing resources for: non salary recurring expenditures for primary, middle and secondary school improvements, especially textbooks at the primary level; provision of missing facilities in existing infrastructure, especially at the elementary and secondary level; provision of quality services such as teacher training; increasing resources for new infrastructure where there is a need at i.e., middle and secondary level of education; girls' incentive programs; and demand side interventions. 29. The fundamental problems that the government has to resolve to get better outcomes in education are institutional. In the absence of fundamental reform, additional funding by itself will achieve little. Many of these problems, accountability, responsibility, service orientation, and incentives that reward people for doing their job well, are generic to the entire public sector, but they manifest themselves most visibly and with greatest impact in the education sector because of the size and multitude of actors that constitute the system. Accelerating Water Development 30. Because of great neglect of water investments in the recent past, a substantial acceleration in overall public spending in the water sector appears justified. WAPDA and Planning Commission must be commended for their initiatives in reviving water sector investments. There are, however, several problems with the thrust of the present program that require careful consideratio n and review by the Government of Pakistan. Many of the issues involved, the tackling of which can yield a more optimal and balanced expansion of irrigation water related public spending, are discussed at length in Volume II of the Report. These can be summarized as under § § § Need for definition of a clearer vision which integrates long-term agriculture, irrigation water and hydro-electric development Excessive emphasis on extension of irrigation facilities some of whom may prove marginal and all of which will yield economic benefits only after a number of years Inadequate attention to the urgent needs of rehabilitation of existing irrigation assets and onfarm development vii

§ § §

Inadequate attention to the political and technical issues which may stand in the way of an early resolution of a much needed additional storage on Indus The need for harmonization of ambitious water sector plans with overall resource availability and to avoid pre-emption of urgent social investments Balancing institutional development needs with higher water sector investment including Federal- Provincial co-ordination, and greater investment in planning and investigations.

31. A balanced program (including priority activities) covered under the poverty reduction strategy can help initiate the transformation of the water and agriculture sector even in the medium term. The near trebling of the real spending in water over 2002-07 will take up 20-25 percent of the additional fiscal space that is expected to be created under the base scenario and will sharply reverse the declining trend of water sector spending. Needless to say, such large spending carries risks and could waste resources if it is not accompanied by much tighter control on program and project priorities, stronger implementation and institutional arrangements than exist at present. A fundamental strengthening of the sector planning, research and development, project implementation environment, and monitoring mechanisms including much greater inter-provincial and Federal-Provincial coordination is also necessary to facilitate decision making on the more difficult longer-term issues. Transforming the Power Sector 32. While the Government has taken a number of steps to promote private investment in the power sector, the desired goal to ensure the development of the sector without recourse to the GOP budget, except for hydro-electric development and possibly transmission, is no where in sight. The continuing financial distress in KESC, notwithstanding substantial injection of public monies to fund past losses, and international conditions make it highly unlikely that KESC can be privatized in the near future. It also appears somewhat unlikely that the newly corporatized distribution and generation companies under WAPDA will actually be privatized on a timetable to fund power sector investments during 2003-07. 33. Consequently, there is a disconnect between large national power sector requirements and the amounts that can realistically be expected from the development budget and own resources of WAPDA. Whereas the TYPP has notionally allocated Rs.90 billion for WAPDA mainly from external loans, WAPDA's proposed program including Rural Electrification for 2003-07 is Rs.261 billion. So there will be a large additional requirement, after providing for WAPDA's own resources, which will have to be mobilized from the budget and/or borrowing in the market with government guarantee. KESC investment needs will be over and above this. The extra requirement for the power sector investment could wipe out one-third of the fiscal space that is supposed to be available under the baseline scenario. 34. While the system of automatic adjustments in electricity tariffs to reflect costs must be further strengthened and strictly enforced, there may be only limited scope for increasing real, as distinct from nominal, electricity tariffs3 . A detailed sector plan for the power sector for the period 2004-08 needs to be developed on an urgent basis and harmonized with the development of a rolling three-year plan and the MTBF. In the absence of a plan, the power sector could derail government's economic and social priorities. Some of the elements of the power sector review should include the following: § § § § §

3

A realistic but pro-active time table for privatization of corporate entities in the sector Careful review of the present plans of WAPDA especially for generation Reinforced efforts to reduce technical losses including theft Identification of key actions to achieve cost cutting Clear identification of power sector financial requirements under a reform scenario

According to recent World Bank estimates, 10 -15 percent increase in nominal tariffs over the next few years will be inescapable even with aggressive cost reduction and speedy progress towards reduction of theft.

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Effectiveness of Public Spending 35. The effectiveness of public expenditures has several dimensions; strategic approaches to public interventions; soundness, transparency and accountability of budgetary and planning processes; careful screening of projects, speedy and effective implementation of programs and service delivery; and the existence of strong monitoring and evaluation systems. The presence of functioning institutions and a framework of defined distribution of responsibilities at various levels of government are the cross-cutting issues which influence all aspects of effectiveness of public spending. While the mechanics of better and more efficient public service delivery are important, a real test of effective service delivery is whether it meets the expectations of the citizens especially the poor. Pakistan's record in effectiveness of public spending has deteriorated for several reasons. The public sector became overextended, poor governance and declining strength of public i stitutions led to large leakages from expenditures, strict discipline in n choice of new large projects was not observed. Many of these weaknesses are being set right. Privatization is being pursued strongly and public sector role in commercial activities s being dei emphasized. Devolution is being stressed as away to move services closer to the people and to increase accountability of public officials. Fiduciary controls have been strengthened. But in many cases, notably privatization and devolution, reform implementation is far from complete. In other areas, such as improving budgetary and planning processes and strengthening of civil service, a full reform agenda has yet to be developed. Sustained improvements in the management of public expenditures would require not only successful implementation of the measures in hand but also a clear vision of the future changes that are required. Some of the key elements that would shape the effectiveness of public spending are discussed below. Accelerating Privatization 36. Successive recent governments since the early 1990s have already opted for a much more focused role of the state and much greater role for the private sector. A great deal of progress in furthering privatization has been made in the last three years. The need is to speedily complete the privatization plans that are underway and to extend the program in power, transportation, and insurance. Public-Private Partnerships 37. In Pakistan the possibility of inducting the private and non-government sector in service delivery through public -private partnership has not been fully explored. 38. This has become especially important because of the emerging possibility of larger fiscal space but continuing capacity problems within the government. Education and health appear to be the most promising sectors for collaboration partly because national priorities justify a rapid expenditure of public spending on them. Tertiary water management is another area where efficiency of water use can be increased and local resources mobilized if farmer associations can be inducted in the process. Devolution 39. The Government of Pakistan has during the last two years taken a major initiative to devolve powers to local levels of the government especially the district level. The basic idea is to move the responsibilities for service delivery closer to the people and to increase the accountability of the officials. While the devolution program provides the best opportunity in years for improving the structure of governance and improved effectiveness of public services, the system needs considerable fine-tuning and improvement to achieve these objectives. Some of the areas that require early attention of the government are:

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§ § § § §

Extending administrative and fiscal autonomy: Extending facility-level oversight Reducing institutional complexity Improving capacity Improving funding

40. The funding issues are the most urgent and immediate. A significant portion of the fiscal space that is emerging must be made available to the district governments in part through Provincial Finance Commission Awards and partly through incentive mechanisms which would help the local governments to prepare and implement their policies and plans in accordance with the national and provincial priorities, without compr omising the autonomy of the local governments. 41. As the system beds down, it will be important to harness the potential that it offers for strengthening user control over local policy and over the supply of local services. This will require that government take a distinctly pragmatic approach to the development of Citizen Community Boards, amending their structure and their governance arrangements as practical experience is gained. More strategically, devolution may require some adjustments in the new polit ical environment. The provinces might wish to pursue somewhat diverse approaches to the precise pattern and speed of devolution. This should not be discouraged by the Federal government as long as the essential spirit of the devolutionary processes is preserved and there is clarity about the functions of government at various levels. Federal- Provincial Responsibilities 42. There is significant scope for devolving additional functions from the federal to the provincial governments. The simplest way to proceed on this front is to have a serious review of the actual federalprovincial responsibilities in relation to the letter and spirit of devolution especially of those service delivery functions that have been assumed by the Federal Government during the last three decades either because of financial constraints or lack of technical and administrative capacity (actual or perceived) at the provincial level. Devolution of some of the functions presently carried out by the Federal Government would reduce the provincial government concern of becoming redundant in the wake of large devolution to the district governments, will lift the morale of the provincial civil service and would enable the federal government to focus more intently on its key strategic functions. In most of the concurrent list areas, the federal government should remain concerned with providing strategic direction, setting national minimum standards and providing financing to the provinces conditional on their compliance with these standards. 43. Over-centralization of functions is also reflected in the planning process, which still exhibits a strong top-down format. To some extent it is unavoidable because of the central role of foreign assistance. But efforts should be made to eliminate those schemes that are regional in nature from the Federal PSDP. Inter-Government Financial Flows 44. The role of provinces in developing realistic budgetary frameworks and viable poverty reduction strategies can hardly be over-emphasized. We have argued for much greater devolution of responsibility to the provinces in order to underpin and strengthen the devolution to the district level. But even with the present rather ad hoc distribution of responsibilities, it is clear that it is the provincial/ district level spending on education, health, law and order, provision of justice, irrigation, rural and urban water supply, and roads that will account for the bulk of the increase in real public spending in the near future. 45. The share of provincial/ district level public spending is likely to rise from around 26 percent of the total public spending in FY03 to over 33 percent in FY07. In terms of GDP, provincial/ district level

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spending should increase from 5.5 percent to 7.5 percent over the period, if our assumptions about the fiscal space and priorities materialize. This has major implications for allocation of national financial resources. At present, the sub-national governments are facing a severe fiscal squeeze. Whereas the National Finance Commission (NFC) has been seriously considering a significant increase in the share of provinces in the federal divisible poll from the present 37.5%, additional flow of funds would be required to achieve the targets of the PRSP. Clearly, mechanisms will need to be developed to allow a large portion of the fiscal space created at the federal level to be passed down to the sub-national levels. This will require two things: (1) new NFC and PFC arrangements which assign much greater formula -based transfers to the lower levels of governments than at present and (2) putting in place a system of financial incentives and special transfers to the provincial and local governments so that national priorities can be protected consistent with decentralization and devolution. Such transfers can be linked to provincial revenue efforts and demonstration of capacity to effectively utilize resources. Improving the Effectiveness of Planning and Budgetary Procedures 46. The introduction of I/PRSP and MTBF provide important opportunities for moving away from the excessive focus on the development budgets and to a more comprehensive approach to public expenditure management. But several planning and budget process issues will need to be revisited and resolved before the MTBF can become a truly operational document. The relative responsibilities of a range of public sector entities in relation to various elements of a MTBF estimation of resource envelope, costing of sector programs, choice of inter sector priorities, adoption of specific targets etc. need to be looked at afresh and agreed upon because they are in a state of flux. The arrangements for putting together a MTBF will also need to be harmonized with the preparation and implementation of the final PRSP. These entities include the federal and provincial governments, the sector ministries/ departments, Planning Commission/provincial planning departments, and the Ministry of Finance/ provincial finance departments 47. Given that Pakistan is a federation, it is critical for improved budgetary outcomes and enhanced effectiveness of public expenditure that the MTBF process is "rolled out" to all the provinces (and ultimately to all the districts). 48. The introduction of the new processes, i.e. MTBF and PRSP, also provide an important opportunity for strengthening overall planning in Pakistan and improve policy co-ordination among the key economic ministries/departments both at the center and in the provinces and between the federal government and the provinces. This will not, however, happen automatically. The Planning Commission and the planning departments should lead the effort to integrate recurrent and investment expenditures in a coherent medium-term budget framework. The preoccupation of planners with the development budget is hampering the pursuit of balanced strategies and speedy social development. Strengthening Civil Service 49. In Pakistan the strength of public institutions has been greatly eroded over time. Many interrelated factors have contributed to this decline: increasing centralization and non-transparent decision making, lack of accountability, the dilution of the role of merit in selection and promotion of civil servants, undue political interventions in normal functioning of government departments and agencies, declining technical and professional competence of officials, low or declining compensation, and a culture of risk aversion behavior. The broader issues of accountability and over-centralization are now being tackled as a part of the reform process. Some steps have also been taken towards civil service reform.

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50. But clearly fundamental problems with the civil service, low compensation for the higher levels, low level of professional competence due to low investment in training, still excessive weight to seniority, and perverse incentives and risk averse behavior, have not disappeared. The government recognizes this and is examining a number of proposals, to further strengthen merit, to streamline cadres and to increase both opportunities and incentives for greater professional development. These issues have acquired urgency with the implementation of devolution, which requires re-definition of the roles and responsibilities of district, provincial and federal levels of government. 51. This report sets out the need for administrative reform, but argues against an over-ambitious or over-elaborate set of proposals. History suggests that such proposals will generate many opportunities for lengthy reports, but will lead to little sustained progress. Instead, it argues for three steps. First, it suggests that there is an opportunity to move ahead rapidly on the creation of a National Executive Service that would greatly increase incentives both for improved performance and upgrading of skills through learning and education. The two critical ele ments of this reform, on which there is seemingly a substantial consensus, are the much greater emphasis on merit and performance for selection to top grades, including a high bar for promotion beyond grade 18, and opportunities for higher education and learning for civil servants especially early in their careers. Second, it suggests sharp pay increases (and monetization of many of the large in kind benefits) for higher levels of civil servants so that the serious decompression of pay that has been going on for decades can be reversed. Finally, it notes that completing administrative devolution, by transferring budgetary responsibility for salaries to the district governments and by progressively passing appointment, promotion and transfer (APT) authorities to the districts, will address a necessary, if not sufficient, condition for local governments to value professionalism more than patronage. 52. The opening of the fiscal space can provide opportunity for reversing the squeeze in real salaries and de-compressing the compensation differentials and further consolidating monetary allowances and in kind benefits into base pay. However, before a new compensation policy can be formulated the future pension liability must be assessed and actions taken to avoid a crisis in the future. The initiation of work in this regard in the Ministry of Finance is very welcome. 53. Provided future pension liability can be contained and civilian employment growth can be kept down to say 1 percent per annum, there should be room for increasing real salaries significantly over the next five years. The challenge will be to use the fiscal space, on the one hand, for restoring compensation closer to private sector for the higher grades, and on the other to adjust pay scales for groups for instance primary school teachers, policemen, lady health workers who are particularly poorly paid. Flat rate increases, that do not decompress salaries or provide motivation to important occupational groups, will not serve the objectives of the civil service reform. 54. Similarly, expansion of civilian government employment will be necessary but should be extremely selective and driven by identified needs in light of the goals set in the poverty reduction strategy papers at various levels of government. T de-compression in compensation that is being he recommended may be politically difficult but is urgently needed if high-level managerial and professional skills are to be attracted to the public sector. A move towards more adequate compensation should be accompanied by and make possible other reforms such as much greater selectivity in promotion beyond a certain level, strengthening of incentives for learning and skill upgrading, and selective induction of higher level professionals from outside. Fiduciary controls 55. The government has recently embarked on a comprehensive reform program to restructure its financial management system. Although significant steps have been taken in this regard, the government xii

must carry the program forward and involve the subnational governments, public corporations, and autonomous bodies more intently in the reform process. The continuation, expansion, and deepening of the reform program can ensure substantial improvement in the government's financial management system within the next three to five years. The CFAA-Phase-II has outlined (among other things) the following key actions for improving the financial management system. 56. These actions include (1) enhancing the transparency of the budget by disclosing fixed-cost and contingent liabilities and the transparency of the accountability system by publishing annual and quarterly financial reports of all levels of government; (2) developing provincial budget implementation systems along the lines of the federal government's Revised System of Financial Management and Control and making the federal and provincial systems fully operational; (3) establishing a strong internal control mechanism for each level of government; (4) building the capacity of the auditing and accounting establishments and of the PAC; and (5) renewing the government's commitment to implementation of PIFRA. Conclusion 57. With political stability, reduction in regional tensions, improved governance and a continued forceful pursuit of the economic and social reform agenda, Pakistan has good prospects of raising the annual GDP growth to around 6 percent in the next three to four years and possibly higher in later years and sustaining it at a high level, consistent with progress in debt reduction and a more self reliant and equitable pattern of development than in the past. With the decline in the population growth rate expected to continue, sustained per capita GDP growth rates in the later part of this decade of about 4 percent per annum certainly appear feasible . This would represent a dramatic contrast to the average annual per capita increases of little over 1 percent in the latter part of the 1990s and would contribute strongly to poverty alleviation and employment creation. 58. A center- piece of the growth revival must be the recovery in the fixed investment rate from 1314 percent of GDP in recent years to around 17 percent by 2007 led mainly by the private sector. The implied high growth in investment over the next few years would require further efforts to i prove m investment climate both for the domestic and the foreign investors. Better public resource management can assist the growth in private investment in several ways, by improving governance especially law and order and access to justice, by promoting skills development, providing needed infrastructure, and last but not least by strengthening bureaucracy and making public institutions more responsive to citizens. 59. With continued reform, the restructuring of public expenditures away from interest payments and public enterprise losses will create substantial fiscal space for increasing social and development spending. This will provide a unique opportunity to fund Pakistan's poverty reduction strategy and at the same time narrow the gaps in key public goods. Social spending targeted on the poor deserves special priority because poor have seriously lagged behind in access to basic services. It should also be possible to selectively increase infrastructure spending and also fund governance and civil service improvements more adequately. However, without addressing the institutional issues that are at the heart of the effectiveness of public spending, the opportunity afforded by likely creation of fiscal space would be wasted. Some of the elements of public expenditure management that can make possible more effective public spending are: continued focus on accelerating privatization plans, making devolution work at the district level, devolving more responsibilities and finances to the provinces, adoption of medium-term budgetary frameworks at all levels of government, moving away from excessive focus on development spending, developing public -private partnerships in delivery of social services, and last but not least strengthening the civil service by improving i centives, expanding opportunities for learning and more n transparent accountabilities.

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60. Even though there is a clear need for sharp expansion of both private investment and noninterest and non-defense public spending, it is the qualitative aspects of this expansion that will, in the ultimate analysis, assure the productivity improvements vital for growth and poverty reduction. Even with continued reform momentum relative levels of total investment and non-interest and non-defense spending do not fully recover to the level of the early 1990s. Higher growth and more positive social outcomes must come mainly from the expected improvements in the quality and effectiveness of public spending and a private sector that rises to the challenge of diversifying export and industrial structures.

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PUB LIC EXPENDITURE M ANAG EM ENT: S TRATEGI C AGENDA

Challenges & Objectives

A. Reduction in public debt to sustainable levels, i.e. limiting public debt to no more than 400 percent of government revenue by 2006/07. A1. Increase government revenue (to over 18 percent of GDP by 2006/07, and to an average of 17.7 percent of GDP per annum during 2003/07). A2. Reduce financial losses of State Owned Enterprises.

Key Recommendations

§ Contain the overall fiscal deficit (including external grants) to 3 percent of GDP on average during FY04-07. § Accelerate CBR reforms, including a complete reorganization over a three-year period (FYs 04-06) and fundamental changes in human resource management. § Speedily complete the privatization plans that are underway and to develop a realistic but proactive timetable for privatization of WAPDA and KESC. § Reinforce efforts to reduce technical losses in the power sector.

I. Ensuring Financial Discipline and Creating Fiscal Space

A3. Reduce cost of public borrowing.

§ Reduce the margin of NSS instruments over the PIB yield. § End the on-tap feature of NSS instruments.

II. Reorienting Public Sector Priorities

B. Improve social indicators and narrow the gender gap by improving the effectiveness of social spending, and allocating more resources to the sector. § Fund the poverty reduction strategy adequately by raising priority poverty spending by 2% of GDP to about 7% by 2007. § Substantially increase allocation for education and health focusing on both quantitative and qualitative improvements. § Devise incentive programs to stimulate demand for education and encourage enrollments, especially among the poor. § Develop public-private partnership in social sector, especially in remote and underserved areas. § Develop a clear vision, which integrates long-term development of agriculture and power sectors with investments in irrigation sectors. § Develop a water sector investment strategy which strikes appropriate balance between expansion of irrigation facilities and: (i) development of additional water storage facilities; (ii) O&M needs of the system; (iii) investments in the drainage subsectors; and (iv) investment in water saving schemes, e.g. lining of water courses and leveling land under OFWM projects of the provinces. § Implement the institutional plans for raising the effectiveness of spending on irrigation, drainage and water storage.

C. Enhance agricultural productivity through accelerated development of water sector.

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Challenges & Objectives

D. Improve outcomes of public spending at lower unit cost.

Key Recommendations

§ Develop and adopt a rolling Medium-Term Budget Framework (MTBF) at the federal level and in provinces, based on sector strategies and hard budget constraints and integration of development and recurrent expenditures. § Reinvigorating the planning processes by moving away from excessive focus on development spending and integrating planning and monitoring with the preparation of MTBFs.

III. Improving Effectiveness of Public Expenditure

E. Improve governance through further devolution.

§ Complete devolution to district level by extending administrative and fiscal autonomy, improving capacity, and expanding funding. § Undertake devolution from the federal to provincial governments with appropriate funding arrangements. § Establish mechanism, including financial incentives (e.g. matching grants), through which national and provincial priorities could be internalized by the local governments. § Move ahead rapidly on the creation of a National Executive Service that would greatly increase incentives both for improved performance and upgrading of skills through learning and education. § Use the fiscal space, on the one hand, for restoring compensation closer to private sector for the higher grades, and on the other to adjust pay scales for groups, for instance primary school teachers, lady health workers who are particularly poorly paid. § Avoid flat rate increases that do not decompress salaries or provide motivation for important occupational groups should be avoided. § Give the FPSC (and PPSCs) an unambiguous responsibility for oversight of the recruitment process at all grades (even if it is decided that it should not itself undertake direct recruitment for positions below BPS16).

IV. Strengthening the Civil Service

F. Enhance viability and effectiveness of public institutions through civil service reforms.

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INTRODUCTION

1. Pakistan has been grappling with the serious problems of slow growth, heavy debt, social gap and widespread poverty for some time. These problems have their roots in economic and social policy as well as institutional weaknesses. There was extraordinary and persistent reliance on external resources for financing economic development, almost relentless growth in public spending until at least the mid-1980s and the consequent persistent high levels of fiscal deficits leading to unsustainable levels of public debt. Though the reliance on public sector was very heavy, the strength of public sector institutions was eroded over time, reflecting both the growing weaknesses in the civil service and undue political interference in such matters as choice of projects and pricing decisions of public corporations. Even though public spending was large, social sector investments were greatly neglected. Pakistan's social gap is well known. Not only did social indicators not improve in line with the growth in GDP but also the gap between Pakistan and comparable low-income countries has tended to widen (see Figure 1). 2. As the debt burden rose and the financial constraints deepened, the investment rate showed a steady decline reflecting not only political instability but also a lack of confidence in the currency. The impact of reduced investment on the economy was aggravated by poor governance and continued slides in the institutional capacity in the government, which adversely affected the quality of public and private investment as well as the effectiveness of public spending. GDP growth averaged only 3.3 percent per annum in the second half of the 1990s.

Table 1.1: Growth Trends

Indicator (%) Compound growth rate of real GDP Inflation (period average) Annual Average for 1990/91-1994/95 1995/96-1999/00 2000/01-2002/03 4.9 3.3 3.7 11.5 7.9 3.4

1980s 6.5 7.2

Source: World Development Indicators, Economic Survey 2001/02.

3. The Musharraf Government, which assumed power in October 1999, has been giving high priority to revival of economic growth, reduction of poverty, and speedy human development. It has pursued a comprehensive and forceful reform agenda aimed at restoring macroeconomic stability, improving governance, accelerating investments in education and health, improving the climate for private investment, and last but not least making economic and social policies pro-poor. The Government of Pakistan's (GOP) determination to restore financial stability is reflected in its Debt Reduction and Management Strategy adopted in March 2001. 4 The fairly ambitious targets of public and external debt reduction are intended to be made a part of a Fiscal Responsibility Ordinance (approved by the Federal Cabinet) and are to be monitored by a high level Debt Office. The GOP's development agenda and reform program were detailed in the Interim/ Poverty Reduction Strategy Paper (I/PRSP) issued in November 2001. In December 2003, GOP issued the final PRSP, which elaborates and substantially strengthens the poverty reduction strategy. A great deal of success was already achieved in FYs 2001 and 2002 in attaining macroeconomic stability, reviving growth, building up foreign exchange reserves, reversing the decline in public spending and increasing pro-poor expenditures.

4

"Debt Reduction and Management Strategy", Government of Pakistan, Ministry of Finance, March 2001 (see Annex). This strategy was approved by the cabinet following the recommendations of the Debt Reduction and Management Committee Report (hereto referred as the Debt Committee report). The Committee was set up in January 2000 and submitted its report in early 2001.

Figure 1: Trends in Social Indicators

Poverty Headcount fell in Pakistan during the 1980s but stopped falling in the 1990s, leaving 45 million people below the poverty line.

Pakistan Bangladesh India Nepal Sri Lanka

Most social indicators for Pakistan, especially Pakistani women, are much less favorable than other countries in the region.

140 120 100

60

% of Population Under $1 a day

50 40 30 20 10 0 1985-1986 1995-1996 1999-2000

Pakistan Bangladesh India Nepal Sri Lanka

80 60 40 20 0

Primary School Enrollment rate (percent) Proportion of girls in Infant Mortality Rate Maternal Mortality all Primary students (per 1,000) (per 10,000) (percent)

Pakistan's overall spending on education has fallen, while that of comparator countries has risen.

4.5 4.0 3.5

Pakistan Bangladesh India Sri Lanka

Fertility Ratio has begun to fall in Pakistan ­ but it has fallen much faster, earlier in comparator countries and is among the highest in Asia.

8.0 7.0 6.0

Pakistan Bangladesh India Nepal Sri Lanka

Percent of GDP

3.0 2.5 2.0 1.5 1.0 0.5 0.0 1997 1998 1999 2000 2001

Births Per Woman

5.0 4.0 3.0 2.0 1.0 0.0 1960 1970 1980 1990 2000

4. Building on the analysis in the Debt Committee Report, the I/PRSP and the World Bank's recent economic work referred to above, the present report, which is prepared in close collaboration with the government of Pakistan, 5 focuses on the central issues in public expenditure management that will be critical not only for accelerating growth but also for making growth more pro-poor. There can be little doubt that export led growth by the private sector is crucial for Pakistan. But private sector efforts must be strongly supported by improved public sector management. The broader issues of macro-economic imbalances, political instability a poor governance have adversely affected the climate for private nd sector investment especially in the manufacturing sector. However, it is equally true that during the last decade or so deeply constrained public sector spending for social and economic development, continuing

5

The Review Team intends and hopes that the same spirit of cooperation and collaboration between the World Bank and the Government will continue during the dissemination of, and follow-up work to, this report.

xviii

lags in social and human development, poor allocation of resources, and growing inefficiency in the use of capital and delivery of public services have all compounded the trend towards reduction in growth and a stagnation in poverty le vels. A sharp turn around in Pakistan's economic and social performance requires, above all, a strong recovery in private sector investment. However, it all also requires a significant increase in public economic and social development spending, a better management of scarce public resources, and a resolution of the problem of large loss making public enterprises. 5. This is the first in a series of reports dealing with public expenditure management issues planned for 2003-05. It is highly selective in coverage.6 No attempt is made to cover all major sectors or all fiduciary issues in expenditure control and management. In a number of public expenditure areas, the base of knowledge is already good and critical policy actions have already been taken. The approach here is (1) to refine and synthesize the agreed-upon parameters of public expenditure management as they have emerged from the government's development policy agenda and considerable World Bank economic and sector work, and (2) to focus on public expenditure issues of strategy, planning, and implementation that remain either understudied or unresolved.

6

The World Bank has been involved--albeit somewhat unsuccessfully in terms of its impact--in analyzing public expenditure issues in Pakistan. Some recent Public Expenditure Reports include the following: "Pakistan Reforming Punjab's Public Finances and Institutions," August 2001, World Bank; and "Pakistan Public Expenditure Review: Reform Issues and Options," October 1998, World Bank.

xix

CHAPTER 1: EXPLORING THE DIMENSIONS OF THE CRISIS IN P UBLIC EXPENDITURES

Introduction 1.1 This chapter outlines the various dimensions of the crisis i public expenditures in Pakistan: the n low and stagnant revenue base, the high burden of public debt, the great squeeze on public resources available for economic and social spending in the 1990s, the relative neglect of social sectors, and the ineffective use of public spending resulting from both declining capacity of public institutions and governance problems. It traces the historical origins of present-day problems and gives an overview of the key gaps in provision of public goods. Finally, it presents a strategic agenda of public sector management, which is the focus of this report. 1.2 It is well known that Pakistan under-performs other countries with similar per capita incomes in delivery of basic social goods. What is perhaps less commonly realized is that the gaps in public good delivery have been widening during the last decade especially in relation of delivery of services to the poor. Furthermore, the inadequacy of public investment in key areas is taking a heavy toll in efficiency losses for the economy and hindering private investment. While a higher level of social and economic development spending is no guarantee for growth revival and poverty reduction, it is highly unlikely that these will occur without more spending. The depth of the crisis in public spending in Pakistan can also be gauged from the fact that consolidated public expenditures (excluding interest and defense) averaged little over 10 percent of GDP in late 1990s compared to the average of about 15 percent of GDP in the 1980s. 7 Even though non- interest non-defense spending rose sharply in 2001-02 and 2002-03, Pakistan's spending levels still compare unfavorably with other developing countries including South Asian countries (see Table 1.1).

Table 1.1: Non-Interest and Non-Defense Expenditure for Selected Countries

(Percent of GDP)

1990

Argentina Bangladesh Chile Egypt India Indonesia Malaysia Nepal Pakistan Philippines Sri Lanka Thailand Turkey 9.0 15.1 16.2 20.4 21.0 14.7 20.5 n.a. 14.5 11.2 20.9 9.8 12.2

1995

13.2 12.6 17.4 24.3 17.8 12.1 15.9 14.3 11.7 12.9 19.3 13.2 17.3

2000

12.7 11.8 21.1 19.4 19.8 13.0 17.5 13.8 10.3 14.3 15.9 15.5 22.2

Source: Staff estimates, Government Financial Statistics, Economic Survey and World Development Indicators, Selected Issues. Data for India has been obtained for Government Authorities and interest expenditures have been calculated for both the central and the state governments. Note: Data in the 2000 column for Egypt and Malaysia are for the year 1997, while those for Indonesia and Turkey are for the year 1999.

7

This decline is somewhat exaggerated because in the early 1990s, the definition of development spending was revised to exclude spending financed from own resources of public corporations. The latter constitutes about 1-2 percent of GDP.

1.3 Beside inadequate resources devoted towards social and economic development, weak governance led to low efficiency of public expenditure, which contributed significantly to the poor development outcomes. Over time, the role of the government has become increasingly out of touch with reality. Rigid internal structures made it impossible for the government to change its role and organization to meet challenges of running a modern day government. Rather than focusing on increasingly complex tasks of efficient and effective management and regulation of the economy, and providing good governance, the government continued to devote a large part of its efforts and resources to direct provision of private goods and services, an area where it had neither the advantage nor the need to be involved. 1.4 The transition from the government's traditional functions to a modern government was badly hampered by a continuous decline in the quality and authority of the civil service. Falling real income, coupled with the waning authority of the civil servants in running the affairs of the government, made it difficult for the government to attract the best and the brightest into the civil service. The system of recruitment, placement and promotion, which got increasingly distanced from merit, caused further damage to efficiency of civil service. The problem was compounded by a system, which was unable to provide incentives for improving the individual skills, productivity or performance. A sharp decline in resources for training and office and technological support resulted in poor skill development and loss of productivity of the civil service (see Chapter 5). Historical Perspective 1.5 The present inadequate levels of public spendin g on economic and social services as well as other key public services such as law and order and the lag in providing these services are rooted in historical developments in Pakistan. Pakistan's public sector became seriously overextended in the 1970s and 1980s. Several aspects of this overextension should be distinguished. First, at the most basic level the growth in expenditures far outstripped the growth in revenues, thus leading to large fiscal deficit and unsustainable levels of public debt. Second, the growth was especially rapid in nondevelopment expenditures, including defense, and as a result the general government savings turned negative after the 1980s, a pattern that has only slowly begun to change. Third, the state intervention in commercial and industrial activities served as a strong disincentive for the private sector until at least the early 1990s. Many activities in which the private sector could provide an efficient service without draining public resources are in the hands of government departments or public corporations. Fourth, in the process the government's ability, both financial and institutional, to deliver basic public services such as basic health and education was greatly undermined. 1.6 The level, financing, pattern, and effectiveness of public sector expenditures greatly influence the level of economic activity, employment, and the distribution of income in any country. The public sector's role is especially crucial in the early stages of development in developing countries in providing not only strategic direction and macroeconomic stability, but also key social services and infrastructure. In Pakistan the level, pattern, and mode of financing of public expenditures initially influenced development outcomes--that is, growth trends, progress toward poverty reduction, and social progress--to an extraordinary extent at least until the 1980s.

2

1.7 There is a great deal of nostalgia in Pakistan about the relatively high average growth rate of nearly 6 percent per year during the thirty-year period from 1960 to 1990. There is not, however, sufficient memory that the high and sustained growth during this period was made possible largely by the dramatic increases in public investment that started in the 1950s and continued well into the 1980s (see Table 1.2).

1.8 Public investment (including that of public corporations) as a share of GDP rose steadily from the low initial level of 1.6 percent in 1949-50 to the peak of 11.6 percent Source: Economic Survey, State Bank of Pakistan and Hasan (1998). in 1964-65. Following the 1965 war with India, both private and public investment fell drastically. Public investment recovered from the setback in the second half of 1960s and remained on average at the high level of nearly 10 percent of GDP during the 1970s and 1980s. These levels were, however, unsustainable. Public investment showed little real growth in the 1990s and had by 2002-03 come down to 4.5 percent of GDP. 1.9 Although public investment was quite large until the 1980s, not all public investment was well directed. In the 1960s and the first half of the 1970s the government made huge investments in the water sector (including storage) equal to 4-5 percent of GDP. No doubt, these investments, related in part to the Indus Basin Treaty, helped to sustain agricultural output growth and electricity production well into the 1980s. 8 But even in the water sector, large programs of public tube wells proved costly and have remained a drain on the operation and maintenance budgets of the provincial irrigation departments. The investments in water storage and irrigation system expansion have not been matched by adequate maintenance of existing assets or by better water management systems to improve the efficiency of irrigation water use. Moreover, little progress has been made toward solving the major drainage problems in the Indus Basin and building up an institutional infrastructure to guide and implement the plans for use of scarce water resources. 1.10 The major power utilities in the public sector, the Water and Power Development Authority (WAPDA) and Karachi Electricity Supply Company (KESC), have become a major drag on public finances. Indeed, as discussed later, the financial losses of public enterprises in the power sector are at present the principal source of the government's contingency payments. The historical roots of WAPDA's financial problems lie not only in the inefficiencies of its operations and theft of electricity, but also in the government's reluctance in the 1970s and early 1980s to allow timely adjustment of electricity tariffs. Following the sharp rise in the international price of oil in 1973, it took the government nearly a decade to complete the necessary energy price adjustments. Consequently, the demand for electricity remained high while WAPDA's ability to generate funds for investment was badly damaged. This lack of financial capacity in the face of huge load shedding after the mid-1980s led to Pakistan's heavy reliance on independent power producers (IPPs), leading to a new set of problems. 9

Table 1.2: Investment as a Percentage of GDP (%) Public Private Total Gross Fixed Investment Investment Investment 1949-50 1.6 2.5 4.1 1954-55 3.9 3.2 7.1 1959-60 7.3 4.2 11.5 1964-65 11.6 9.2 20.8 1969-70 7.3 7.0 14.3 1970's 10.3 5.6 15.9 1980's 9.2 7.8 17.0 1990's 7.5 9.1 16.6 1999/00 6.0 8.4 14.4 2000/01 5.5 8.4 13.9 2001/02 4.8 8.4 13.1 2002/03 4.5 8.6 13.1

8

According to Hasan (1998: 154), total water and power investments (including the Indus Basin Replacement Works) during the 1960s exceeded US$2.5 billion and accounted for more than 50 percent of total public sector development spending.

9

The costs of power from IPPs are high, especially in the medium term, and are fixed in foreign exchange. In the rush to involve the private sector in power investments, the government did not carefully scrutinize the demand for power or sufficiently take into account the impact of needed increases in real electricity tariffs. Also, the slowdown of the economy was to some extent unexpected, and thus lower electricity demand has necessitated big payments to IPPs for underutilized capacity.

3

1.11 Public sector involvement also extended heavily into industry, banking, state trading, and education in the 1970s. Between 1969-70 and 1976-77 public investment in industry (including the steel mill project) alone increased tenfold in real terms while private industrial investment actually declined by 50 percent. Even though the private investment climate improved in the 1980s, the public sector presence in industry, trade, and banking remained heavy. By and large the public investments in industry, trade, and banks turned out to be uneconomic. Losses in the public enterprises have been a major factor responsible for the push toward privatization and a rethinking of the role of the state in development (see Box 1.1).

Box 1.1: Privatization In 1991 Pakistan launched a broad-based program of privatization with several objectives: reducing the drain on government resources caused by losses of state-owned enterprises, improving the efficiency of resource use, and providing greater incentives and opportunities for private sector investments because the high public debt burden had made public sector resources for development very scarce. Though the urgency of these objectives has grown over time, the actual progress in transferring assets and control to the private sector during the 1990s was slow. Although the sale of shares ( percent of total equity, 12 mostly to foreigners) of Pakistan Telecommunication Corporation Limited (PTCL) when netted more than US$800 million in foreign exchange and provided about 50 percent of privatization receipts, management and control remained in the public sector. Then the government delayed and lost the prime market so that now very little interest or demand exists for telecom. The only significant progress in transferring both ownership and control to the private sector was the sale of two public banks, one power station, and a large number of cement plants. The preparation and pace of privatization has picked up greatly as part of the reform program of the Musharraf government. A major public bank has been sold, and a considerable number of large transactions in banking and finance, oil and gas, and power are ready to be brought to the market in the next twelve months during 2003-04. At the moment, however, a large part of the banking system, as well as almost the entire oil and gas, telecommunications, and power sectors are in the public sector, and as discussed earlier the past and present losses of power and the banking sectors remain a particular source of concern. If current plans to privatize significant parts of the power and banking s ectors are not successfully executed, public corporations will remain a serious drain on public finances. This situation will also limit the role the government can and should play in providing services that the private sector cannot easily provide, such as law and order, justice, basic education and health, infrastructure, irrigation, roads, and urban and rural water supply.

1.12 An important consequence of the heavy emphasis on physical infrastructure development and public sector industry until relatively recently was the low priority accorded to the social sectors. The neglect of education spending, especially in the 1980s, in face of a rapidly growing population, is a root cause of the social lag with which Pakistan is now confronted. The low level of human and skill development is in turn constraining productivity growth. It is also interesting to note that the nationalization of private educational institutions in March 1972, undertaken ostensibly to accelerate educational development, had perverse effects on the growth in basic education and the quality of education. Though primary education was not nationalized, spending on primary education was squeezed because national resources allocated to education did not increase, the management capacity of the government was overextended, and the urban bias in education was intensified by the takeover of all high schools and colleges.10 1.13 Another long-term consequence of public expenditure management during the hig h-growth decades was the steep rise in public debt. The high overall level of public spending, at close to 25 percent of GDP in the 1970s and the 1980s, was unsustainable. As revenue growth lagged, fiscal deficits remained

10

See Hasan (1998: 224-25).

4

large, averaging 7.5 percent of GDP for the period 1980-2000 and showing no strong downward trend. Consequently, public debt grew from 66.3 percent of GDP in 1980 to 93.7 percent in 1990 and to more than 100 percent in FY2001. As a percentage of government revenues, public debt grew from about 400 to 670 percent over the period. This level is extraordinarily high by international standards and also substantially higher than commonly judged sustainable levels (60 percent of GDP and 300 percent of fiscal revenue, respectively). 11 Initially, a large part of the public sector deficit was financed with external borrowing at relatively concessionary terms. Over time, however, the government's reliance on domestic borrowing grew, with the result that domestic debt and borrowing costs became increasingly more important. The problem was compounded by a somewhat premature liberalization of interest rates in early 1989 and moving all government borrowing to market-based instruments when the fiscal deficits remained high. Nominal interest rate payments were the main driving force behind the continued high deficits during the 1990s, as the primary deficit first declined and then disappeared in the late 1990s. But since a large part of the deficits in the first half of the 1990s was financed through money creation, the resulting inflation offset the gains in nominal interest rates. The real interest rate on domestic public debt was actually slightly negative during 1990-96. 12 Paradoxical though it may seem, the liberalization of interest rates did not, in the ultimate analysis, lead to a deepening of the public debt burden. It did, however, lead to much larger fiscal deficits and much higher rates of inflation. 1.14 The high and rising interest payments have made fiscal adjustment difficult. In the past three fiscal years (2001-03) there was an average primary surplus (excluding grants) of 0.8 percent of GDP, in contrast to a primary deficit of nearly 4 percent of GDP in the 1980s. Still the fiscal deficit remained high (see Table 1.3). Realizing the severity of the problem, the government has recently set up a Debt Policy Coordination Office (DPCO) in Ministry of Finance, with the main purpose of establishing an improved debt management system. The DPCO is formalized through the Fiscal Responsibility and Debt Reduction Ordinance (2003), which has been approved by the Federal Cabinet and is likely to be tabled before the Parliament in near future. This Ordinance aims at enforcing and preserving the fiscal discipline through time bound restrictions on revenue deficit and pubic debt.

Table 1.3: Fiscal Indicators as a % of GDP

Total Revenue 16.5 17.9 17.3 16.3 16.3 16.2 16.6 Total Expenditure 23.6 26.3 24.9 23.1 22.5 21.0 22.0 Fiscal Deficit/Surplus -7.1 -8.4 -7.7 -6.8 -6.6 -5.2 -5.2 Interest Expenditure 3.1 4.7 5.4 7.1 7.8 6.8 6.8 Primary Deficit/Surplus -4.1 -3.7 -2.3 0.4 1.2 1.6 1.5

1981-85 1985-90 1990-95 1995-00 1999-00 2000-01 2001-02

Source: Economic Survey, Government Authorities, IMF and Staff estimates. Notes: 1) Fiscal deficit excludes foreign grants 2) Total Revenues do not include surplus of autonomous bodies and grants. 3) IMF total expenditure data has been used from 1999-00 onwards. Statistical Discrepancy has been taken into account to compute fiscal balance. 4) Total Expenditure for 2001/02 excludes one-time expenditures of Rs. 52 billion on KESC recapitalization and CBR bonds. If included, fiscal deficit would be 6.6% and primary surplus 0.1%.

1.15 Overall, public spending adjusted for inflation increased by 19 percent over 1991-2001. All of this increase, however, was accounted for by the rise in interest payments; excluding interest, real

11 12

See the Debt Committee Report, page 12. Debt Committee Report Table 17, page 53.

5

budgetary spending declined slightly. Both defense and non-defense spending (excluding interest) changed little over 1991-2001, though both fell sharply as a percentage of GDP (see Figures 1.1 and 1.2).

Figure 1.1: Trends in Selected Expenditures in 1999/00 Prices

900 800 700 600 500 400 300 200 100 FY81/82 FY82/83 FY83/84 FY84/85 FY85/86 FY86/87 FY87/88 FY88/89 FY89/90 FY90/91 FY91/92 FY92/93 FY93/94 FY94/95 FY95/96 FY96/97 FY97/98 FY98/99 FY99/00 FY00/01 FY01/02

Rs. Billion

Total Expenditure

Total Non-Interest Expenditure

Total Non-Interest Non-Defense Expenditure

Figure 1.2: Trends in Selected Expenditures as a Percentage of GDP 30 25 % 20 15 10 5 FY81/82 FY82/83 FY83/84 FY84/85 FY85/86 FY86/87 FY87/88 FY88/89 FY89/90 FY90/91 FY91/92 FY92/93 FY93/94 FY94/95 FY95/96 FY96/97 FY97/98 FY98/99 FY99/00 FY00/01 FY01/02

Total Expenditure

Total Expenditure excl. Interest

Total Expenditure excl. Interest & Defence

1.16 The burden of stagnant public spending (excluding interest) has fallen especially heavily on development spending. Development spending in real terms dropped 40 percent over 1991-2001, and its share in total public spending dropped from 25 percent to 12.8 percent over the period. 13 During 2001-02 development spending recovered by 34 percent as public resource availability improved thanks to large external grants. Still, public investment by general government (excluding investment by public enterprises) was only over 2 percent of GDP in gross terms.14 If one allows for depreciation of infrastructure like roads, irrigation works, and buildings, the public capital stock has probably grown little in recent years. 1.17 The consequences of growing interest payments, stagnation in revenues, and relatively inflexible defense spending over the past decade are brought out in Tables 1.4 and 1.5, which also show the trends in the level and pattern of major categories of non-interest, non-defense public expenditures. These figures, which include both current expenditures and development spending, give a better idea of the real

13 14

This decline is somewhat exaggerated because of a definitional change in development spending. The Public Sector Development Program, which rose from 2.6 in FY01 to an average of 3.3 percent of GDP in FYs 02-03, includes a lot of current spending covering the new category of pro-poor expenditures.

6

trends in spending and the sectoral shifts than the development spending figures alone. (See Figures 1.31.14).

Table 1.4: Consolidated Federal and Provincial Total Expenditure in 1999/00 Prices

(Rs Million) Total Budgetary Expenditure Interest Defense General Administration Law & order Education Health and Population Agriculture Irrigation Fuel and power Transport and Communication Others 1991/92 645,448 125,287 152,091 38,963 26,091 50,420 15,450 13,244 21,833 38,874 24,951 138,243 1992/93 644,014 145,565 161,554 40,963 25,360 50,365 15,487 11,939 24,529 26,037 35,283 106,933 1993/94 1994/95 625,132 636,203 153,853 138,529 153,763 162,772 40,548 50,958 25,551 28,429 51,673 54,883 16,526 18,714 11,446 11,194 23,458 27,764 30,950 30,480 32,670 25,524 84,694 86,958 1995/96 717,987 173,684 144,225 65,318 27,510 55,944 19,242 10,997 28,441 25,363 22,700 144,562 1996/97 1997/98 654,854 684,455 184,466 213,426 142,443 129,911 54,786 42,002 24,348 25,230 49,820 53,380 16,966 17,390 8,717 8,676 18,247 19,339 21,153 22,775 18,863 19,829 115,046 132,498 1998/99 1999/00 660,132 709,118 219,079 245,078 126,725 150,390 46,606 46,584 25,018 27,624 50,755 54,002 17,519 20,026 8,608 8,520 17,320 17,611 15,226 15,875 21,849 23,912 111,427 99,497 2000/01 703,740 221,781 148,418 55,758 28,790 53,965 18,373 8,528 16,481 18,631 20,316 112,699

Memorandum items: Total Non-Interest Expenditure 520,161 498,450 471,279 497,674 544,303 470,389 471,029 441,052 464,040 481,958 Total Non-interest Non-defense Expenditure 368,069 336,896 317,516 334,902 400,078 327,945 341,117 314,328 313,650 333,540 of which: Development 183,418 140,745 116,915 118,317 124,940 99,990 113,205 103,242 90,681 87,494 Sources: IMF, "Selected Issues and Statistical Appendix" November 9, 2002; Planning Commission and Finance Accounts of the federal and provincial governments. Note: Expenditures for Irrigation, Fuel & Power and Transport & Communication sectors include expenditures financed by the corporations (WAPDA, OGDC, PTCL and NHA) from the budgetary loans of the federal government.

Table 1.5: Consolidated Federal and Provincial Total Expenditure

(Percent of GDP)

Total Budgetary Expenditu re Interest Defense General Administration Law & order Education Health and Population Agriculture Irrigation Fuel and power Transport and Communication Others 1991/92 26.7 5.2 6.3 1.6 1.1 2.1 0.6 0.5 0.9 1.6 1.0 5.7 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 26.2 24.5 23.7 25.5 23.1 23.5 21.9 22.5 5.9 6.0 5.2 6.2 6.5 7.3 7.3 7.8 6.6 6.0 6.1 5.1 5.0 4.5 4.2 4.8 1.7 1.6 1.9 2.3 1.9 1.4 1.5 1.5 1.0 1.0 1.1 1.0 0.9 0.9 0.8 0.9 2.0 2.0 2.0 2.0 1.8 1.8 1.7 1.7 0.6 0.6 0.7 0.7 0.6 0.6 0.6 0.6 0.5 0.4 0.4 0.4 0.3 0.3 0.3 0.3 1.0 0.9 1.0 1.0 0.6 0.7 0.6 0.6 1.1 1.2 1.1 0.9 0.7 0.8 0.5 0.5 1.4 1.3 1.0 0.8 0.7 0.7 0.7 0.8 4.3 3.3 3.2 5.1 4.1 4.6 3.7 3.2 2000/01 21.8 6.9 4.6 1.7 0.9 1.7 0.6 0.3 0.5 0.6 0.6 3.5

memo items: Total Non-Interest Expenditure 21.5 20.2 18.5 18.6 19.4 16.6 16.2 14.6 14.7 14.9 Total Non-interest Non-defense Expenditure 15.2 13.7 12.4 12.5 14.2 11.5 11.7 10.4 10.0 10.3 of which: Development 7.6 5.7 4.6 4.4 4.4 3.5 3.9 3.4 2.9 2.7 Sources: IMF, "Selected Issues and Statistical Appendix" November 9, 2002; Planning Commission and Finance Accounts of the federal and provincial governments. Note: Expenditures for Irrigation, Fuel & Power and Transport & Communication sectors include expenditures financed by the corporations (WAPDA, OGDC, PTCL and NHA) from the budgetary loans of the federal government.

1.18 Though the overall level of non-interest, non-defense spending was essentially stagnant over much of the past decade, the pattern of spending shifted somewhat. Public sector power spending 7

declined as financing from WA PDA's own resources was excluded and more reliance was placed on the IPPs for thermal power generation. In contrast, there was real growth in spending on primary education under the impetus of the Social Action Program. But even in primary and secondary education spending did not increase as a percentage of GDP in the 1990s, and their shares remained at the relatively low levels of 0.8 and 0.5 percent, respectively, in 2000/01. Spending on college, university, and professional education declined by nearly 20 percent in real terms and even more sharply as a percentage of GDP: only 0.3 percent of GDP was being spent on higher education, including colleges, in 2000/01 compared with 0.5 percent in 1990/91.

Figure 1.3: General Administration Expenditures in 1999/00 Prices

70 65 60 55 50 45 40 35 30 25 20

1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01

Figure 1.4: Law & Order Expenditures in 1999/00 Prices

31 29 27 Rs. Billion 25 23 21 19 17 15 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00

1999-00

Rs. Billion

Figure 1.5: Education Expenditures in 1999/00 Prices 60 55 50 45 40 35 30 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 Rs. Billion

22 20 18 16 14 12 10

Figure 1.6: Health and Population Expenditures in 1999/00 Prices

Rs. Billion

1988-89

1989-90

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

Figure 1.7: Agriculture Expenditures in 1999/00 Prices

Figure 1.8: Irrigation Expenditures in 1999/00 Prices

14 13 12 Rs. Billion Rs. Billion 11 10 9 8

31

26

21

16

11 7 6 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 6 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01

Source: Economic Survey 2001/02 and Finance Accounts of the federal and provincial governments.

8

2000-01

2000-01

Figure 1.9: General Administration Expenditures as a % of GDP 2.4 2.2 2.0 1.0 1.8 % % 0.9 0.8 0.7 0.6 1988-89 1.6 1.4 1.2 1.0 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 1.2 1.1

Figure 1.10: Law & Order Expenditures as a % of GDP

1989-90

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00 1999-00 1999-00

Figure 1.11: Education Expenditures as a % of GDP

Figure 1.12: Health and Population Expenditures as a % of GDP

2.2 2.1 2.0 % 1.9 % 1.8 1.7

0.75

0.70

0.65

0.60

0.55 1.6 1.5 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 0.50 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 2000-01 2000-01

Figure 1.13: Agriculture Expenditures as a % of GDP

Figure 1.14: Irrigation Expenditures as a % of GDP

0.60 0.55

1.3 1.1

0.50 0.45 % % 0.40 0.35 0.30 0.25 0.20 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 0.3 0.1 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 0.9 0.7 0.5

Source: Economic Survey 2001/02 and Finance Accounts of the federal and provincial governments.

1.19 Agriculture and irrigation spending went down sharply in real terms, especially in the second half of the 1990s. In 2000-01, agriculture and irrigation spending was 30 percent lower than in 1990-91 and constituted only 0.8 percent of GDP, compared with 1.6 percent a decade earlier. Spending on transport, communication, highways, and buildings dropped by 40 percent or 3 percent of GDP over the period. A large part of spending on the Lahore-Islamabad Motorway was outside the budget as it was financed directly from the supplier's credit. Though the Highway Authority was in no position to service any debt,

9

2000-01

its borrowing was outside the budget and its spending and projects were excluded from normal business processes. Nevertheless, the Motorway-related debt did increase the total public debt. 1.20 Spending on general administration and law and order maintenance fared better in the 1990s than public expenditures on social and economic services. Indeed, the real expenditure on general administration nearly doubled between 1990-91 and 1995-96, far outstripping growth in either GDP or revenues. Clearly, financial discipline was lax in these years and low-priority spending increased. With the financial constraints deepening, the expenditure on general administration was reduced sharply in late 1990s in real terms. This was achieved mainly by delaying the civil service salary adjustments, which were finally made in 2001 and were fully reflected in the 2001-02 budget. The net result was that spending on law and order and general administration grew broadly in line with GDP, and the relative reduction in the non-interest, non-defense spending of nearly 5 percentage points of GDP (from 14.5 percent to 9.5 percent over 1991-2001) fell entirely on economic and social spending. 1.21 The negative impact of the squeeze in social and development spending during the 1990s on growth and poverty reduction was greatly aggravated by declining effectiveness in the use of public resources, both borrowed and domestic. First, many low-priority projects were funded; the most egregious example was the large uneconomic investment in the Lahore- Islamabad Motorway to the neglect of the national, provincial, and rural network. The Saindak copper project and the Tamir-i-Watan program are other examples of misallocated resources. Second, many large and important projects and programs, notably the Left Bank Outfall Drain (LBOD), the National Drainage Program (NDP), the Chashma Right Bank Canal Project, and the Social Action Program, did not have the desired impact because of poor design, poor feasibility, poor coordination, delays in implementation, or leakages in the system.

Figure 1.15: Spending on Education 1/

Ruprees (in thousand) per year

Rupees (in thousand) per year

95 90 85 80 75 70 65 60 55 50

Rupees (in thousand) per year

Primary

290 270 250 230 210 190 170 150

Secondary

7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

Tertiary

19 90 /91 19 92 /93 19 94 /95 19 96 /97 19 98 /99 20 00 /01

19 90 /91 19 92 /93 19 94 /95 19 96 /97

1/

Annual spending per facility.

1.22 The attempt to improve the delivery of social services under the much-heralded Social Action Program was a particular disappointment both because there was no sustained increase in the level of social spending and because poor governance led to tremendous leakage and waste of resources. The problems of governance, related to personnel and resource management, were the critical constraint to achieving the government's development goals. These problems include absenteeism, hiring of staff on grounds other than merit, frequent transfers, and mal distribution of staff to the disadvantage of rural areas. 1.23 In addition, some perennial public expenditure issues were to some extent intensifie d in the 1990s because of stagnant or declining overall levels of economic and social spending. Because the

10

19 98 /99 20 00 /01

19 90 /91 19 92 /93 19 94 /95 19 96 /97 19 98 /99 20 00 /01

development budget cuts were particularly severe, there was inadequate spending in relation to the optimum phasing of projects, and resources were spread thinly, delaying the benefits. 1.24 Notwithstanding the slowdown of development spending, the imbalance between maintenance of existing assets and creation of new ones intensified. As recurrent expenditure budgets stagnated or actually declined, a greater portion of the budget was preempted by establishment costs. The nonsalary expenditures crucial for running education and health facilities and maintaining physical infrastructure were badly squeezed. 1.25 For example, official data show that during the 1990s the real per facility non-development expenditures declined for each level of education, most drastically for the tertiary level. Accounting for the periodic increases in the salaries of government employees during this period, it is possible to infer an even steeper decline in the non-salary component of recurrent expenditures. This decline in quality-related operation and maintenance expenditures has led to a marked deterioration in school infrastructure, and a large number of schools across the country are in a state of disrepair and lack basic amenities. A survey of rural facilities in 2001 showed that only one-third of rural schools had an adequate building, only about half had furniture, less than one-quarter had textbooks, 52 percent had drinking water, 48 percent had toilets, less than one-third had electricity, and only one-sixth had a separate toilet for girls. 1.26 Service delivery and sectoral reforms have also suffered owing to a lack of continuity at key leadership positions. This is especially true for important service delivery departments, like education and health, in the provinces. Lack of control of line departments over appointments and transfers can result in frequent transfers of civil servants. Anecdotal evidence from Sindh suggests that department heads have an average tenure of just over a year­barely enough time to understand the issues of the sector and far too little to develop a policy to tackle these issues. Restructuring and Refocusing an Extended Public Sector 1.27 The preceding discussion brings out two key points. Pakistan's public sector became seriously overextended in the 1970s and 1980s. Until the 1960s the massive expansion of public sector activities did not seriously hinder the development of the private sector. In addition to providing normal public services such as law and order, justice, health, and education, the public sector concentrated on mobilizing large foreign aid and loan resources and expanding investments in physical infrastructure, especially water and power. The state role in industry was confined to a few strategic projects. This situation changed in the 1970s, when very large-scale expansion of public investments in industry and trade actually led to a. sharp decline in private investment in manufacturing. Even though private investment recovered after the late 1970s, the inexorable growth of public expenditures, notably defense, continued in the 1980s: the level of public expenditures as proportion of GDP rose further from 23.5 percent in 1979-80 to a peak of 26.7 percent in 1987-88. The efforts in the 1990s to restructure and refocus the public sector toward its traditional functions--maintaining macroeconomic stability, provision of law and order, basic social services, and essential infrastructure--were not very successful owing to a number of factors, including a lack of strong political will resulting in part from political instability, limited institutional capacity, poor governance, and limited fiscal space. 1.28 The current economic and social reform program attempts to deal with the various constraints on progress toward a viable and vibrant public sector in a comprehensive fashion. Visible progress has been made in a number of areas, such as reducing macroeconomic imbalances and containing the debt burden, accelerating the efforts toward privatization, and reorienting public expenditures toward social services and poverty groups. But in other areas, notably governance and strengthening of institutional capacity, the reform measures have yet to yield concrete improvements in the delivery of public services. Much hinges on the success of the ambitious program of devolution of authority to elected representatives at the district

11

level. The following chapters of this report discuss the various challenges the government faces and some hard choices it will have to make in dealing with difficult issues. Here it is necessary only to highlight four broad areas, which will be critical for success in refocusing the public sector and increasing its effectiveness: § Creation of fiscal space for spending excluding interest, defense and public enterprise losses. § The successful completion of the present privatization program, including early progress especially on the relatively slow-moving power privatization plans. § Improved delivery of social services through devolution and private-public partnerships. § Improved governance and more effective delivery of law and order and justice. 1.29 The creation of fiscal space for public spending in support of growth revival and poverty will be central to the better management of the public sector. As discussed in the next chapter, if broad-based reform efforts continue, prospects are good for expanding real spending in the critical public service areas. 1.30 The preparation and pace of privatization has picked up greatly as a crucial part of the Reform program of the Musharraf Government. A considerable number of large transactions in banking and finance, oil and gas, and power are ready to be brought to the market by the end of FY04 (see Table 1.6). Still at the moment, large part of the banking system, almost the entire oil and gas, telecommunications and power sectors are in the public sector and as discussed earlier the past and present losses in the power sector remain a particular source of concern. 1.31 The political will to narrow Pakistan's social gap appears strong. Nonetheless, the sheer magnitude of the task means that large financial resources and exceptional institutional arrangements will be needed to achieve even such basic and longstanding goals as universal elementary education. 1.32 Finally, improved governance remains a prerequisite not only for reviving private investment, but also for improving the effectiveness of public expenditures, especially in the delivery of services to the poor.

Table 1.6: Planned Privatization of State Enterprises November 2002-June 2004 Sale Proceeds

(Rs Million)

November 2002 ­ June 2003 NBP Shares Lot 2 Pak Saudi Fertilizers (10% Shares) GOP Working Interest in 6 Oil Fields UBL Banl Al-Falah MCB Zares through CDC Pakistan Oil Fields shares through CDC Attock Oil Refinery shares through CDC Mutual Right ­ ICP Lot A Fund Mutual Right ­ ICP Lot B Fund Al-Haroon Building Falaties Hotel Pak Arab Fertilizers July 2003 ­ June 2004 PSO (51% shares) PTCL (26% of GOP shares) OGDCL (5% shares through IPO) NPCC (100% of GOP shares) FESCO (56% of GOP shares) JPC (1% of GOP shares) HBL National Construction Company Limited Lasbella Textile Mills Lyllpur Chemicals Bolan Textile Mills Pak American Fertilizer Republic Motors AC Rohri Others TOTAL

27,873 767 815 540 11,749 620 661 4,699 1,011 175 303 83 450 6,000 93,992 20,300 34,800 4,640 667 2,900 2,030 23,200 100 140 150 140 4,500 45 280 100 121,865

12

Key Gaps in Public Goods 1.33 A brief review of the present position with respect to the social sectors and key physical infrastructure is helpful in explaining the magnitude of the challenge the public sector faces in providing more and better public services. 1.34 It is well known that Pakistan underperforms other countries with similar per capita incomes in delivery of basic social goods. What is perhaps less commonly realized is that the gaps in public goods delivery have been widening durin g the past decade, especially delivery of services to the poor. Furthermore, the inadequacy of public investment in key areas is taking a heavy toll in efficiency losses for the economy. Health 1.35 Pakistan's population of about 140 million is growing by 2.4 percent per year. The high fertility rate of 4.8 children per woman puts an enormous burden on the health of mothers, resulting in a high maternal mortality rate of 200 per 100,000 live births. With 80 percent of women still delivering without assistance from trained personnel, a low contraceptive rate of 28 percent, poor nutritional status, and only 48 percent of tetanus toxoid immunization of pregnant women, one in about three hundred women die in childbirth.

Table 1.7: Pakistan in comparison with Regional Countries 1.36 No change in malnutrition in Health and Population Outcomes levels in children has taken place in Infant Under 5 Annual Total the 1990s: the percentage of Life Mortality Mortality Population Fertility Expectancy children under five who are Country Rate rate Growth rate underweight ranges from 33 to 45 Pakistan 63 85 110 2.4 4.8 61 60 82 1.7 3.1 percent; micronutrient deficiencies Bangladesh 62 62 n.a. 2.9 5.4 of vitamin A and iron persist; and Bhutan India 62 69 87 1.8 3.1 the immunization coverage rate is Nepal 58 73 104 2.4 4.3 only 52 percent, with a large urban- Sri Lanka 73 15 17 1.6 2.1 rural differential and a smaller Source: Pakistan Country Update; World Bank, 2003. gender differential. Moreover, the infant mortality rate of 85 per 1,000 live births is 10 percentage points higher than the average for lowincome countries and 16 percent higher than the average for South Asia (see Table 1.7).

1.37 Public dissatisfaction with the Table 1.8: Present Status of Health & Population Outcomes and MDG Targets for Pakistan government's outpatient health services is reflected in the large numbers of people seeking Millennium Indicators Latest Development the help of private practitioners. Eighty percent of Targets outpatient contacts are with private practitioners. Under Five Mortality Rate 110 47 Government regulation of private practitioners is Infant Mortality Rate 85 40 virtually nonexistent. Poor access to basic services Proportion of fully immunized such as safe water and sanitation, along with poor 50 80 children 12-23 months nutritional status, play a significant role in the Maternal Mortality Ratio 300 120 vicious circle of illness, low productivity, and Proportion of births attended 20 100 poverty. Public expenditures on health are very Source: Pakistan Country Update, World Bank, 2003. low compared with those of other countries in the region and amounted to 0.6 percent of GDP in 2000-01. The low level of resources contributes significantly to the poor quality of health care, as do various inefficiencies in the allocation of resources and waste attributable to weak governance. The performance of the health sector must be improved drastically if Pakistan is to reach the Millennium Development Goals (MDGs) by 2015 (see Table 1.8). 13

Education 1.38 Pakistan's education sector has performed poorly in the past, with enrollment levels among the lowest in the developing world, and gender disparities and rural-urban gaps among the widest. 1.39 Nationwide, net enrollment rates at the primary level in 2000-01 were about 53 percent, masking considerable differences between rural and urban populations (67 percent versus 45 percent) and males and females (57 percent versus 44 percent).15 Although the gender gap narrowed slightly in the 1990s, this improvement was in part due to the decline in male enrollment levels. Quality problems are widespread and often arise from institutional deficiencies such as nonfunctional schools. Were it not for the expansion of private education, the current situation would be much worse. From 1981 to 1998, private school enrollment grew by 937 percent, compared with population growth of 57 percent. 1.40 According to the Higher Education Task Force report, Pakistan's university and college system is in an unreformed state. The country has a population of 18 million in the 17- to 23-year age bracket, of which only 2.6 percent are enrolled in higher education institutions (1996 data), compared with 6.2 percent in India (1990 data) and 12.7 percent in Iran (1994 data). Public universities, which enroll about 85 percent of university students, are not only resource deficient, but also plagued by inefficient governance and politicization. 1.41 Literacy levels, reflecting historical investments in education, are similarly poor (see Table 1.9). In 2000-01 literacy was estimated at 48 percent, with male literacy at 62 percent and female literacy at 34 percent. Although adult literacy rates are similar across South Asian countries today (with the exception of Sri Lanka, where they are considerably higher), Pakistan's lower school enrollment rates imply that it will lag behind its neighbors in improving literacy in the future. Irrigation 1.42 Irrigation and drainage are crucial to Pakistan's agriculture sector, with about 80 percent of arable lands and 90 percent of agricultural output (25 percent of GDP) entirely dependent on irrigation. Despite the country's impressive irrigation infrastructure, overuse, aging, and poor maintenance have resulted in extremely low efficiency of water delivery. Average delivery efficiency is about 35-40 percent from the canal head to the root zone (primarily because of seepage). Other than the Chashma Right Bank Canal, expansion of irrigation in the past fifteen years has been limited to small isolated schemes outside the Indus Basin and increased use of tubewells (see Table 1.10). The improvements made in the irrigation system through investments over the years have been offset by deterioration

15

Table 1.9: Public Expenditure on Education for Selected Countries (% of GDP)

Country Pakistan Bangladesh India Sri Lanka Nepal Average for South Asia Average for low-income countries

Source: Pakistan Country Update, World Bank, 2003.

Expenditure on Education 1.8 2.3 3.7 3.1 2.9 3.1 3.3

Table 1.10: Canal Water Diversion

Year

1949-50 1959-60 1967-68 1975-76 1977-82 1990-91 1991-01 2000-01

Canal Head Diversions MAF

67.0 85.0 95.0 101.0 105.0 109.8 102.6 81.1

Remarks

Just after independence Before Indus Basin Treaty Post Mangla After Tarbela Commissioning Post Tarbela (average) Just before Water Accord Post Accord Average Inflow 99.9 MAF (drought)

Source: Accelerated Development of W ater Resources and Irrigated Agriculture, World Bank, 1993.

The net enrollment rate is from the Pakistan Integrated Household Survey (PIHS). The government states net enrollment as 66 percent. In either case, Pakistan compares poorly with other low-income countries. The rural-urban and male-female differential data pertain to 1998-99.

14

of the system because of inadequate operation and maintenance (O&M budgets fall short of requirements by more than 40 percent, whereas salaries of the overstaffed irrigation department account for more than 50 percent of the total O&M budget) and poor performance of the public institutions handling the irrigation and drainage system. 1.43 Unlike the Indus Basin Irrigation System (IBIS), the drainage network is not continuous and integrated. Low water charges, particularly compared with the productivity of irrigated agriculture, created incentives for farmers to increase water flow through illegal pumping of water, resulting in inequitable distribution of water and inflicting physical damage on the canal system. Inadequate drainage facilities have led to resource degradation, threatening the sustainability of irrigated agriculture. Pakistan's irrigation system, which was designed as run-of-the-river to maximize crop area, has created serious problems of waterlogging and salinity in the command area owing to lack of drainage facilities. Waterlogging problems claim about a third of gross cultivable land, with another 16 percent of cultivable area suffering from salinity. Depending on the degree of waterlogging and salinity, crop yields are reduced by 25-60 percent from their potential levels. Rural Water Supply 1.44 The provinces vary significantly in their current coverage of rural water supply among the provinces (see Table 1.11). Rural water supply coverage is particularly low in the large provinces of Punjab and Sindh. Transport 1.45 Transportation currently accounts for about 10 percent of GDP and 17.3 percent of gross capital formation. Pakistan's transport sector is inefficient and costly and imposes an annual cost of Rs. 180 billion, or 5 percent of GDP, in the following three subsectors alone:

Table 1.11: Additional Coverage Required for Rural Water Supply

(% of population served) Water Supply Water Supply Water Supply Coverage Objective Objective (2000) (2011) (2025) 27 40 75 10 40 75 45 65 75 55 65 75 63 75 75 16 75 75 55 100 100 32 75 75

Province Punjab Sindh NWFP Baluchistan FATA FANA CDA AJK

Source: Water Sector Strategy, Asian Development Bank, 2002.

§ Ports: At Karachi Port inefficiencies and tariff distortions are adding around Rs. 50 billion per year to transport costs (Rs. 12 billion in higher freight rates, Rs. 9 billion in port processing costs, Rs. 18 billion in low containerization, and Rs. 12 billion due to increased inventories). § Roads: Roads cost Rs. 50 billion per year because of the poor network condition (maintenance) and about Rs. 50 billion per year in road accident costs. § Trade and transport facilitation: Trade and transport facilitation costs Rs. 30 billion per year. § In addition, these are potential losses of Pakistan Railways and other transport enterprises. 1.46 The road sector dominates the transport sector, accounting for 90 percent of passenger traffic and 95 percent of freight. The network is comparable in density (0.3 km/square km) to other developing countries in the region. The road network, however, faces severe limitations in the form of poor quality, a serious shortfall in tertiary roads needed for basic access in poor areas, investments in economically unviable megaprojects, a huge unfinished portfolio of investment works that has increased budget rigidities, and one of the worst safety records. 1.47 The road sector has been the main recipient of public sector funding. Total public expenditures on roads are about Rs. 20 billion per year, of which 65 percent are spent on national roads. Road maintenance expenditures have been about 20 percent of the required amounts for the national and provincial networks. In 2001, whereas Rs. 21 billion were spent on roads, assets worth about Rs. 16 billion were lost as a result of deferred maintenance.

15

1.48 The rapid growth of the road sector has in part been at the expense of railways. Currently, Pakistan Railways (PR) accounts for only 5 percent of freight traffic, compared with 73 percent in 195560. Its share of the passenger market has dropped from 42 to 9 percent in the same period. This shift is primarily due to mismanagement and resulting poor service. 1.49 PR is one of the largest public money-losing operations in the country, with recent (1997-2000) annual deficits regularly hitting the Rs. 6-7 billion mark. Since 2000 the new management has succeeded in slowing the loss-making trend. The reduction in the railway deficit is not sustainable, however, in the face of conflicting fare structures, decaying rolling stock and infrastructure, and huge fixed costs coupled with low employee productivity. Power 1.50 Pakistan's power sector faces a number of challenges in contributing more effectively to the country's development. Only about 60 percent of the population, mainly in u rban and periurban areas close to the transmission corridors, currently has access to electricity, whereas the bulk of the rural population relies mainly on traditional fuels and kerosene for meeting its cooking and lighting needs. The Strategic Agenda for Public Expenditure Management 1.51 This report focuses principally on three key dimensions of better public expenditure management in Pakistan. 1.52 First, it is paramount to continue financial discipline and reduce the overall size of the public sector deficit, including the sizable losses of public enterprises. The modest progress made in reducing the government's fiscal deficit during the past few years has been undermined by the persistence of high level of losses of public enterprises, especially WAPDA and KESC. To reduce the unsustainable burden of public debt, the fiscal deficit, which has averaged 5.5 percent of GDP (excluding grants) and 3.4 percent (including grants) during the past three years, must be brought down further. Provision needs to be made for the large and continuing public enterprise losses and unfunded contingent liabilities of the public sector.16 A strong and successful government revenue mobilization effort, which will gradually raise the ratio of revenues from 17 percent of GDP (FY02) to say 20 percent over the next decade, remains central to restoring Pakistan's fiscal health. But as the experience of the past few years shows, the structural weakness in the taxation structure (relatively heavy dependence on trade taxes) and the institutional weaknesses in the tax collection machinery (especially on the income tax side) will continue to dampen revenue growth for some time. Thus it will be prudent to assume, at best, only moderate growth in the ratio of government revenues to GDP over the next five years. 1.53 Even on the assumption of a steady increase in the ratio of government revenue to GDP, the growth in overall public spending in real terms will be modest over the next few years because of the need to reduce the deficit further and to fund public enterprise losses and contingent liabilities. Indeed, in the medium term overall public spending as a proportion of GDP is unlikely to increase from the level of 22 percent witnessed in recent years, even if grant assistance remains at a relatively high level. 1.54 Yet the revival of growth and the reduction in poverty, the goals articulated in the Interim Poverty Reduction Strategy Paper (I/PRSP), will require substantially higher infrastructure investments as well as higher social spending. The dilemma is this. With the relative size of overall public expenditures

16

These figures exclude the one-time expenditures of Rs. 52 billion on KESC recapitalization and Central Board of Revenue bonds in FY 2002. If these are included, the average deficit for the past three years excluding grants is 6.1 percent and including grants is 4.6 percent.

16

remaining stagnant, more adequate support for the government's economic and social goals can be achieved only through a restructuring of expenditures away from interest payments, defense, and nonessential expenditures toward social and development outlays, adequate maintenance of infrastructure, and support for improved governance. What are the possibilities of restructuring public expenditures away from the inflexible burden of defense and interest payments, as well as public enterprise losses? What are the policy and institutional actions that can facilitate a better allocation of public resources within the major economic and social sectors? This then is the second major theme of the analysis in this report. 1.55 While public development and social spending must sharply recover from the extremely depressed levels of the past decade and must play a significant part in reviving growth and reducing poverty, the biggest economic and social gains must come from improved efficiency in the use of public resources. Improving the effectiveness of spending not only through a better allocation of resources and a more careful choice of priorities, but also through better implementation, more efficient de livery of services, and plugging of leakages and waste is the third strategic issue discussed in this report. This goal requires, above all, restoring the capability and the authority of public institutions, especially those concerned with economic and financial management and the delivery of social services. 1.56 Public institutions in Pakistan have suffered a long-term decline because of poor pay for civil service, increasing corruption, and widespread political interference in administrative matters.17 The institutional issues have a special urgency because of the major devolution of responsibilities to the district level. The turnaround in efficiency of education and health spending that is needed now hinges on the success of the new district governments. B the adequacy of planning, budgeting, expenditure ut control, and monitoring and evaluation processes at all levels of government need to be examined in relation to both the distribution of responsibilities among various levels of government and the capability of the civil service to respond and contribute to the desired productivity gains. In looking at the selected sector allocation issues, the analysis focuses more on the institutional strengthening needed to determine priorities and improve implementation and less on the evaluation of specific government plans that, in any case, become quickly out of date. The effectiveness of expenditure analysis gives attention to both the process issues and the institutional capacity problems.

17

"Pakistan: A Framework for Civil Service Reform in Pakistan," December 1998, World Bank; "Pakistan Development Policy Review: A New Dawn?" April 2002, World Bank; and "Pakistan Country Financial Accountability Assessment" (Phase I), World Bank, 2001.

17

CHAPTER 2: ENSURING FINANCIAL DISCIPLINE AND CREATING FISCAL SPACE

Introduction 2.1. This chapter examines the key elements of macroeconomic and fiscal policies that will ensure steady and simultaneous progress toward the goals of debt burden reduction, acceleration in economic growth, and poverty alleviation with the help of a medium-term macroeconomic and fiscal framework that integrates growth, debt reduction, and poverty alleviation goals. 2.2. The focus, however, is on public expenditures in the context of a consolidated medium-term budgetary framework18 and on the critical issue of how to create fiscal space for growth-enhancing and poverty-reducing expenditures while maintaining financial discipline and making progress in reducing public debt burden to sustainable levels 2.3. This focus involves the examination of the scope of expanding social and development spending, while maintaining the current progress on public debt burden reduction (and keeping aggregate spending at about the same level in % of GDP). The illustrative baseline scenario explores the scope for mobilizing more government revenues, cutting public enterprise losses, reducing of interest payments, containing defense spending and mobilizing privatization proceeds. This scenario representing macroeconomic stability and continued structural reforms resulting in productivity improvements is contrasted with a low case in which the structural reform sputters; there is no significant progress in tax revenue mobilization; public enterprise losses and defense spending increases in relative terms; there is little further progress in reducing the fiscal deficit; and consequently there is less external support in the form of grants and concessionary loans. Quite obviously in this low scenario there will be only limited progress towards the goals of debt reduction, revival of growth and poverty alleviation. Turn Around in Debt Position 2.4. The debt problems, which have been a major source of the sharp slowdown in Pakistan's economic growth, and the consequent stagnation in poverty incidence, over the last decade have been brought under control. While the debt burden, especially the public debt burden, is still at an unsustainable level and needs to be brought down steadily, the risk that economic and other shocks will lead to a worsening of the public debt burden in the medium term appears small. 2.5. For nearly two decades, the rising interest payments limited fiscal space and squeezed public spending on development and social sectors. At their peak in 1999-2000, interest payments accounted for nearly half the government revenue. The high interest payments reduced pro-growth public spending directly while indirectly they discouraged private investment because the large government borrowing kept domestic real interest rates high and tended to crowd out the private sector. Private investment also suffered due to the shortages of complimentary infrastructure, limited access to international capital markets, and declining confidence in the domestic currency, which contributed to capital flight.

18

The medium-term budgetary framework being presented here consolidates the budgetary accounts of both federal government and the provinces. The purpose is merely to illustrate the public expenditure level and pattern for the country as a whole and to high light future expenditure options. Since Pakistan is a federation, the operational budgetary frameworks must be prepared separately for the central government and for the provinces of Punjab, Sindh, North West Frontier, and Balochistan. In addition, AJK and the Northern Areas have independent budgets.

2.6. In sharp contrast to the almost inexorable rise in the debt burden in the 1980s and 1990s, there was a significant decline of 21 percent in the present value of public debt from 600 percent to 472 percent of government revenues, between mid 1999 and mid 2003 (Table 2.1). The ratio of interest payments to government revenues dropped to about 30 percent during FY 2003. The drop in the external public debt burden in present value terms and as a proportion of exports of goods and non-factor services has been even more pronounced -- 39 percent between mid 1999 and mid 2003. The dramatic increase in foreign exchange reserves, to $9.5 billion by mid 2003 from $0.9 billion in mid 2000, has transformed the liquidity position. The improvement in debt indicators is attributable to the impact of policy reforms as well as a number of external factors that have resulted in a narrowing of fiscal and external current account deficits (excluding private and public transfers), reduction in cost of government borrowing, sharp rise in private remittances, and increase in concessional and grant external assistance. The very favorable terms of rescheduling of Paris Club debt have also contributed significantly to the reduction in the burden of debt. Still the external debt burden i too high. By the criteria applied under HIPC, the s present value of public and publicly guaranteed external debt in relation to exports of goods and nonfactor services should not exceed 150 percent. In Pakistan, this ratio is currently about 200 percent.

Table 2.1: External and Public Debt Burden

1989/90 1995/96 1998/99 1999/00 2000/01 2001/02 2002/031/

(US$ Billion) Total External Debt (excl. foreign exchange liabilities) Total External Debt (excl. foreign exchange liabilities) as a % of GDP Total External Debt (excl. foreign exchange liabilities) as a % of Foreign Exchange Earnings2/ Total External Debt (incl. foreign exchange liabilities) Total External Debt (incl. foreign exchange liabilities) as a % of GDP Total External Debt (incl. foreign exchange liabilities) as a % of Foreign Exchange Earnings Total Public Debt Total Public Debt as a % of GDP Total Public Debt as a % of Revenues External Public & Publicly Guaranteed Debt Memorandum items: Grant Element Present Value of Total Public Debt as a % of Revenues3/ Present Value of External Public and Publicly Guaranteed Debt as a % of Exports of Goods and Non-Factor Services 3/ 4/

1/ 2/ 3/ 3/

19.4 48.5 234.7 22.0 55.0 266.2

31.0 48.7 330.6 31.3 49.1 333.3

33.5 58.8 341.0 34.7 61.0 353.9

32.4 59.5 324.9 38.1 69.9 381.7

32.2 54.8 327.0 37.2 63.4 377.9

33.5 56.5 287.3 36.6 61.8 314.2

33.4 48.7 287.2 35.5 51.8 305.4

802.1 93.7 505.1 19.1

1,891.0 89.2 510.3 27.9

(Rs. Billion) 3,003.7 3,175.8 102.2 100.9 632.5 619.6

3,707.5 108.3 670.5 29.8

3,633.7 100.1 588.9 31.2

3,689.9 91.8 512.0 31.3

(US$ Billion) 30.2 29.6

599.8 320.1

528.1 248.7

472.3 196.1

Source: "Debt Burden Reduction and Management Strategy", GoP, 2001; Government Authorities; and Staff Estimates.

Data for 2002/03 is provisional. Foreign exchange earnings include goods, services, income, and workers' remittances (World Bank definition as used in the Global Development Finance reports). Estimates assume a 10% grant element in 1998/99, increasing to an expected 20% in 2002/03. Estimates assume a 10% grant element in 1998/99, increasing to an expected 20% in 2002/03.

2.7. The government's basic approach to debt management and reduction is sound. The government attaches high importance to steady reduction in the burden of public debt but has at the same time opted for a ten-year time frame for attaining debt sustainability, defined as 60 percent of GDP, which will not require harsh cuts in the already squeezed levels of public spending. The government recognizes that debt

19

reduction, vital for long-term sustainable growth, cannot be the only economic goal even in the short term and must be balanced with the need to accelerate growth, create jobs, and reduce poverty in the short term. We endorse this target and the basic strategy. As long as the public debt is moving on a favorable downward trajectory, most of the negative effects of high burden of debt on growth and poverty, already noted, can be minimized. 2.8. The Government has approved a Draft Fiscal Sustainability and Debt Limitation Law. It is a good step towards operationalizing the government's debt reduction strategy. It specifies fiscal rules to constrain discretion on fiscal policies and enforce fiscal discipline cons istent with the target of reducing gross public debt to 60 percent of GDP by FY11/12. It limits annual issuance of explicit guarantees to less than 2 percent of GDP, including rolling over existing guarantees and payments of called guarantees. The Draft La w provides for establishing a Debt Policy Coordination Office (DPCO) to serve as a secretariat for the Fiscal Sustainability and Debt Limitation Law. It also creates an enforcement mechanism through public scrutiny by requiring fiscal transparency and open fiscal reporting. Notwithstanding this progress it would be useful to further refine the Debt Strategy with the following improvements: expand the coverage of guarantees subject to the limit in the Draft Law to other explicit and implicit contingent liabilities; apply the reporting requirements to provincial governments as well; and supplement the requirement for a mid-year economic report with a requirement for corrective fiscal measures when there are deviations from mid-year targets. The Government could also increase the overall debt strategy's credibility and its operational relevance with the additional suggested refinements presented in Box 2.1. 2.9. The ten-year goal should be to reduce public debt as a share of revenues to 300 percent (and no higher than 275 percent in present-value terms). For the medium term, a goal of reducing public debt as a share of revenues from the 512 percent in mid 2003 to 400 percent by mid 2007 appears desirable. This step will reduce the public debt burden in terms of GDP to 70-75 percent by the end of FY07, which will be on track to reach the 60 percent goal by FY12. 2.10. What would the target of public debt reduction to 400 percent of government revenues by FY07 mean for the level of fiscal deficits during FYs 2003-07? More important, how can the medium-term economic and fiscal policies ensure achievement of the debt reduction goal consistent with progress in reaching goals of growth acceleration and poverty alleviation? Box 2.2 presents an analytical framework for examining these issues. Broadly speaking, as the analytical framework suggests, three sets of economic policies will be key to the success of the government's strategy of growth revival and debt reduction: § Policies that slow down the future rate of government borrowing by keeping the primary balance positive (normal fiscal balance before interest payments) and reduce public enterprise losses and payments of these and other contingent liabilities. Privatization can help limit public enterprise losses and generate revenues, which reduce the need for new public borrowing. It can also facilitate growth through productivity improvements and new investments. Needless to add, the mobilization of external grants can reduce the overall need for borrowing. Reductions in the overall cost of government borrowing, both domestic and external, through better debt management. Structural economic reforms that promote growth, exports, and government revenues through increases in investment and productivity as well as governance improvements.

§

§

20

Box 2.1: Refining the Debt Strategy The government could increase the credibility and operational relevance of its debt strategy with the following refinements: 1. Because the overall time frame for working out the excessive debt burden is long, Pakistan should define medium-term debt burden goals that can become an integral part of a budgetary framework. 2. Public debt burden goals should be defined in terms of both GDP and government revenues. In a sense revenues are a much better indicator of government's ability to service debt than GDP. In any case it is the public debt-to-revenue ratio that is exceptionally high in Pakistan and needs to be brought down sharply. 3. The government should set explicit medium -term targets for levels of external debt in relation to exports/foreign exchange earnings so that it can achieve the HIPC initiative criterion of reducing the present value of external debt to exports of goods and nonfactor services to 150 percent (from the present level of about 200 percent, assuming a grant element in external debt of about 20 percent). This step will strengthen the case for continued large concessionary assistance and external grants. 4. Related to the previous recommendation, the external borrowing strategy for the next few years needs to be made explicit and linked to the fiscal deficit financing requirements so that a clear domestic borrowing strategy can also emerge. Optimal mobilization of concessionary assistance will greatly alleviate the burden of domestic financing and, combined with financial discipline, could lead to declining real levels of outstanding public domestic debt in the not-too-distant future. 5. The DPCO should give a high priority to developing estimates of the present value of both external and public debt. The calculation of present value for public debt is not common. However, because more than 50 percent of Pakistan's public debt is external and a large part of it is concessionary, present-value calculations assume special importance. Estimates of present value will help Pakistan set more appropriate debt burden reduction goals and better enable it to monitor progress toward them. 6. The government should survey the exposure to exchange-rate and interest-rate risk on its external loan portfolio and, if necessary, restructure its currency composition and possibly use market-based hedging instruments to manage these risks. The currency composition of the external debt should reflect as far as possible the currency composition of external trade and official international reserves. In addition, market-based risk management such as entering into currency swaps and interest-rate swaps at the time of borrowing can hedge against exchange and interest-rate fluctuations at a relatively low cost. Furthermore, the government could minimize the risks of commodity price fluctuations by employing commodity swaps, put options, or commodityindexed loans. 7. Each year the DPCO should reconcile the final fiscal deficit numbers with the public debt stock changes in order to ensure accuracy and transparency.1 In the past, debt growth has been consistently larger than reported fiscal deficits.

1

/ For instance, whereas the cumulative recorded domestic borrowing by the consolidated government to finance fiscal deficits from FY99 to FY02 was Rs. 827 billion, the increase in the government's domestic debt (excluding SBP) in the same period was Rs. 1,054 billion. The difference arises from the government's taking on liabilities of other public sector entities or other operations outside the budget.

21

Box 2.2: Determinants of the Rate of Public Debt Accumulation The analytical framework derives the following conclusions about the evolution of the public debt burden. It shows (equation (2)) that the public debt burden (measured as a percentage of GDP) will decline if: § The borrowing need is lower. The lower the expression in the first bracket (the sum of the primary fiscal deficit and contingent liabilities paid by the government minus the financing from privatization receipts and foreign grants), the lower is the borrowing need and the accumulation of new debt. In particular, when the sum of the primary fiscal deficit and payments of contingent liabilities are lower than privatization receipts and foreign grants, the debt burden (debt/GDP ratio) declines, other things being equal. § Domestic and foreign real interest rates on public debt are lower. § Pakistan's real GDP growth rate is higher. § The Pakistani rupee appreciates in real terms. When the nominal exchange rate measured in local currency units per foreign currency unit appreciates, the local currency value of foreign currency debt and the local currency cost of servicing this debt declines. In the case of nominal depreciation, the exchange losses on the external debt can be substantial, since the local currency value of the whole stock of foreign debt is revalued. If the nominal depreciation goes along with a real depreciation, the rise in the GDP deflator does not fully offset the valuation loss from the nominal depreciation and overall the debt/GDP ratio rises. In a stable real exchange rate environment this last factor in the equation is zero. (Of course, the exchange rate should only appreciate in real terms when this is the long-run equilibrium real exchange rate matched by domestic productivity gains. If not, the loss of competitiveness from an overvalued exchange rate would lead to further accumulation of external debt.) The time path for the evolution of public debt is given by the relationship: Dt+1 = DDOM t+1 + DFOR$t+1 ERt+1 = DDOM t + DFOR$t ERt + (PDt+1 ­ PRIVZNt+1 + CLt+1 - GRANTSt+1 ) + DDOM t (rD + D ) + DFOR$t ERt (rF + F ) + DFOR$t ERt e·rt+1 + DFOR$t ERt e·rt+1 (rF + F)

(1)

where Dt = total public debt at the end of period t, DDOM = domestic public debt, DFOR$ = foreign public debt measured in units of foreign currency, ER = the nominal exchange rate, local currency per unit of foreign currency, PD= primary fiscal deficit PRIVZN= fiscal revenue from privatization, CL= contingent liabilities being assumed by the government, GRANTS = foreign grants, rD = domestic real interest rate, rF : foreign real interest rate, D = domestic inflation rate, F : foreign inflation rate, e·rt = percent change in nominal exchange rate from one period to next (+ shows depreciation), re ·rt = percent change in real exchange rate from one period to next (+ shows depreciation) Dividing throughout by GDPt+1 the following relationship is derived for the change in the debt/GDP ratio (lower case shows all variables in percent of GDP):

ddt = (pdt+1 ­ privznt+1 + clt+1 - grantst+1) - ddomt(g+D)/(1+g+D) - dfort(g+D)/(1+g+D) + ddomt(rD+ D)/(1+g+ D) + dfort(rF+F)/(1+g+ D) + dforte·rt+1/(1+g+D) + dforte·rt+1(rF+ F )/(1+g+D) = (pdt+1 ­ privznt+1 + clt+1 - grantst+1) + ddomt[- g - D + rD+D] /(1+g+ D) + dfort)[- g - D + rF+F + e·rt + e·rt+1(rF+F )] /(1+g+ D) = (pdt+1 ­ privznt+1 + clt+1 - grantst+1) + ddomt(rD ­ g) /(1+g+D) + dfort[(rF­ g) + (F - D + e·rt+1)+ e·rt+1(rF+F )] /(1+g+D) = (pdt+1 ­ privznt+1 + clt+1 - grants t+1) + ddomt(rD ­ g) /(1+g+ D) + dfort[(rF­ g) + e · rt+1(rF+ F ) + re · rt+1 ] /(1+g+ D) (2)

*This result (2) is described in detail in the bullet points above.

22

Baseline Scenario 2.11. The government's reform program stresses all three policy elements mentioned. The question is whether these policies will be implemented in a timely fashion to create fiscal space that will allow the public sector to play its role in pursuit of the goals of growth revival, poverty alleviation, and social development. Tables 2.2 and 2.3 summarize the assumptions and findings of a baseline scenario that explores this question within the context of a medium-term macroeconomic framework that integrates real sector, fiscal accounts, and balance of payments projections. This section provides a brief overview of the key points. A more detailed description and technical material are provided in Annex B.

Table 2.2: Summary of key macroeconomic variables in baseline scenario, 1999/00­2006/07

1999/00 2000/01 Real GDP at market prices Consumer prices (p.a.) Savings and investment Gross national savings Gross fixed capital formation Change in stocks (nongovt) Public finances Revenue (including grants) Grants Revenue Expenditure Interest payments Defense Payment of contingent liabilities Non-interest, non-defense, non-SOE spending Overall balance (including grants) Primary balance (including grants) Gross public debt Gross public debt in % of revenue External sector Current account incl. off. transfers Ext. public and publicly-guar. debt Gross reserves in months of next year imports of goods and services 4.2 3.6 2.6 4.4 Est. Prov. 2001/02 2002/03 2003/04 2.8 2.7 5.8 3.1 5.3 4.0 Proj. 2004/05 2005/06 2006/07 5.5 4.0 5.7 4.0 5.9 4.0

14.1 14.4 1.6

13.6 13.9 1.6

17.4 13.1 1.6

21.3 13.1 2.4

16.7 14.5 2.0

18.0 15.5 1.6

18.3 16.1 1.6

18.5 16.7 1.6

17.3 1.1 16.3 22.8 7.8 4.8 0.5 9.8 -5.5 2.3 100.9 619.6

17.3 1.2 16.2 21.4 6.8 3.8 0.6 10.2 -4.1 2.8 108.3 670.5

19.3 2.3 17.0 23.6 6.8 4.1 1.9 10.9 -4.4 3.8 100.1 588.9

20.8 2.8 17.9 22.3 5.2 4.0 1.2 12.0 -1.6 3.6 91.8 512.0

18.5 1.1 17.3 21.8 4.8 3.6 1.9 11.6 -3.4 1.4 83.3 480.6

19.3 1.7 17.6 22.4 4.6 4.0 1.3 12.6 -3.1 1.5 80.2 456.3

19.6 1.6 18.0 22.4 4.2 4.0 0.8 13.4 -2.8 1.4 74.2 411.40

19.8 1.5 18.3 22.6 3.9 4.0 0.5 14.3 -2.8 1.0 70.9 387.3

-2.0 48.6 3.8

-1.9 55.7 1.7

2.7 52.7 3.7

5.9 45.8 7.0

0.2 38.6 6.3

0.9 35.8 6.0

0.6 32.8 6.2

0.2 30.4 6.2

Table 2.3: Base Case Scenario: Principal Budget Aggregates

Resources Change FY2002 - FY2007 (Percent of GDP) Expenditures Defense expenditure Interest payments Public enterprise losses 1/ Non-interest non-defense non-SOE expenditures o/w Development spending Total expenditures ­ 0.1 ­ 2.9 ­ 1.4 + 3.4 1.5 ­ 1.0

Government revenues + 1.3 External grants ­ 0.8 Fiscal deficits (including grants) ­ 1.5

Total resources

­ 1.0

1/ Public enterprise losses are approximated by subsidies and payment of contingent liabilities.

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2.12. The analysis suggests that to achieve the desired public debt reduction goal by FY07, the government should bring down the overall fiscal deficit (inc luding external grants, provision for public enterprise losses, and other contingency payments) to an average of 3 percent of GDP during FYs 200407, compared with the average of 4.3 percent during FYs 2001 - 02 (see Table 2.2). In light of the strong fiscal performance in FY03 when the fiscal deficit (excluding grants) declined by 2 percent of GDP the fiscal adjustment required over the medium term is not large. But the scenario suggests no room for expanding the overall level of public expenditures, which is projected at 22.3 percent of GDP on average, the same level as in FY03. The projected modest growth in revenues is partly offset by the reduction in external grants (which were at an exceptionally high level in FYs 02 and 03) and partly absorbed by the need to reduce the deficit. 2.13. The projected level of external grants assumed for FYs 2004-07 (1.5 percent of GDP) is lower than in the last two years but somewhat higher than in earlier years. Provided reform efforts continue, there would be a strong case for the donor community to give a high level of budgetary grant support to Pakistan because of its heavy public debt burden and less favorable social indicators.19 But donors will also expect a restructuring of expenditure toward economic and social sectors and generally greater effectiveness in public spending. 2.14. Our projections show that if defense spending can be contained and losses of public enterprises and the interest payments can be brought down, non-interest, non-defense and non-SOE spending will rise to 14.3 percent in FY07, compared with 10.9 percent in FY02 (and an estimated 12.0 percent in FY03; see Table 2.2). The policy issues and options involved in bringing about a shift in public spending toward development and social spending are discussed at some length below. Slowing the Rate of Borrowing 2.15. The first step in slowing down government borrowing is to continue to run significant primary surpluses. This means that government's own resources and not fresh borrowing should cover at least a part of the interest payments. Until relatively recently, Pakistan actually ran large primary deficits, which meant that all of the borrowing costs (and off-budget borrowing) were financed from fresh borrowing. During the past few years Pakistan has made clear progress; the primary surplus (excluding grants) averaged over 1 percent of GDP during 1998/99 ­ 2002/03. Under the Debt Committee projections and the PRGF program with the IMF, the primary surplus was expected to rise to well over 2 percent of GDP by FY 2004. This level no longer appears either realistic or necessary because our projected fiscal path shows sufficient progress toward debt sustainability with a somewhat less restrictive fiscal stance. Pressures for expanding non-interest public spending from the very low level reached in FY00 have grown following the finalization of the I-PRSP, the continued sluggish private sector, and hence slow job creation. 2.16. Nonetheless, the government will need to weigh some choices. Clearly, it will be desirable to maintain a significant primary surplus (including grants) in FYs 2004-07 in order to underpin continued progress toward debt reduction. Yet genuine political and economic pressures for development and social spending are mounting. Further growth in tax revenues as a percentage of GDP, reduction in public enterprise losses, and acceleration of privatization receipts can help to resolve the government's dilemmas and minimize the short-term conflict among key economic and social goals.

19

The external grants projections also reflect the recent announcement by the US government that it will provide support amounting to US$ 3 billion over the next 5 years.

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Increasing Revenues 2.17. Pakistan's revenue mobilization has been low, both by international standards and compared with its potential. In FYs 2000 and 2001 total revenue collection was the equivalent of 16.2 percent of GDP; tax revenue was only 13 percent of GDP and had actually stagnated for several years.20 However, revenue collections during the last two years increased sharply to 17.9 percent of GDP in 2002-03 reflecting both the success of tax collection efforts and the revival of the economy. The structure of taxation has also improved considerably in recent years, and the heavy dependence on foreign trade taxes has been reduced. Still, revenue mobilization falls short of that of many developing countries at comparable income levels in Africa, Asia, and Latin America.21 In light of the weaknesses in the current revenue mobilization system, there is considerable scope for enhancing collection and broadening the income tax base. For instance, while there are only 1 -1.5 million income tax filers, there are 3 million cell phone subscribers, over 10 million electricity consumers, 3-4 million gas consumers and 2-3 million car owners. 2.18. The main factors behind the low revenue mobilization are governance problems in tax administration, a narrow and inflexible tax base, a large informal economy that escapes the tax net, and pervasive smuggling with associated revenue losses. Governance problems have been reflected in widespread collusion (corruption) between taxpayers and tax officials, a situation that leads to tax evasion and lack of tax compliance. These problems stem from the discretionary powers of tax officials, complex tax rules, and weak supervision of staff. 2.19. To address these problems, the government took a number of actions beginning in FY02. (i) In the area of tax administratio n, the government has begun a fundamental restructuring of the Central Board of Revenue (CBR). This restructuring includes a complete reorganization over a three-year period (FYs 02-04) and fundamental changes in human resource management. A Large Taxpayers Unit in Karachi has started operations, and a pilot income tax office for medium-sized taxpayers was recently opened in Lahore. Both units operate with greater functional specialization in tax administration. Universal self-assessment for income tax and audits to reduce contact with tax officials has also been introduced. The Government and the World Bank are preparing a major technical assistance program for tax administration reforms. (ii) Tax policies have also been strengthened: the coverage of the general sales tax has been expanded to include agricultural inputs and now requires compliance of small traders. A new income tax policy came into effect in FY 03 with a number of reform measures (minimal tax exemptions, simplified and more equitable tax rates). The provinces have started collections of the agricultural income tax for high-income farmers that were instituted in 2000. 2.20. In our view, it should not be difficult, in light of current efforts, to increase revenue mobilization further to 18.3 percent of GDP by FY07, the assumption in the base case. But the suggested level of revenue mobilization will merely regain the level of the early 1990s. 2.21. To consolidate recent revenue gains and to underpin future growth of the economy, determined efforts are necessary to accelerate institutional and policy reform, especially the fundamental restructuring of CBR in the next few years. Pervasive smuggling must be addressed resolutely. It is a major cause of loss of revenue and foreign exchange. In the area o tax policy, reforms should aim at continuing to f

20 21

Note that Pakistan has undertaken considerable trade liberalization in recent years with an initial import tariff revenue loss. Countries at comparable income levels with higher revenue/GDP ratios include Bhutan, Botswana, Kenya, Maldives, Namibia, Nicaragua, Sri Lanka, Vietnam, and Zambia. All of these countries had revenue mobilization in excess of 20 percent of GDP, with the exception of Sri Lanka and Zambia.

25

reduce the number of tax exemptions (such as for customs duties and income and withholding tax) and make sales taxation more effective. Reforms are also needed for tax on income from financial and land assets. In particular the current practice that allows a single person to hold assets under different names should be changed, since it weakens tax collection on income from such assets. On the nontax revenue side it will be necessary to seek greater cost recovery in higher education, health (subject to considerations about access to basic services for the very poor), and water usage for irrigation. 2.22. In addition, the government should undertake administrative and governance reforms to ensure better documentatio n of economic transactions, ownership of assets, and sources of income, by, among other things, expanding efforts to ensure auditing of more businesses. Better documentation will enable the government to implement existing tax laws more effectively as well as to broaden the tax base in the future. 2.23. Sustained increase in fiscal revenue mobilization nationwide requires stronger revenue effort not only by the federal government but also by provincial governments. Provincial resource mobilization has dropped steadily in recent years and is currently only 0.5 percent of GDP. Provincial own revenue collection would need to increase in line with the expansion in sub-national spending foreseen in this report (in particular on education, health and certain types of infrastructure) to reach the Government's goals for poverty reduction and to be consistent with the ongoing devolution process. However, provincial (and local) governments only have tax authority over taxes which for the most part are characterized by narrow, inelastic bases and low buoyancy. In addition there has been poor utilization of provincial and local taxes and user charges, reflecting both lack of political will to collect key provincial taxes and deficient revenue administration marred by governance problems. 2.24. Increased provincial revenue mobilization hence requires reforms both in revenue policy and revenue administration. Revenue policy reforms are needed to expand the provincial revenue base. This would require a review of tax authority powers of the provincial as well as local governments. Reforms could possibly include allowing the provinces to share selected federal taxes through levying "add-ons" on the federal taxes with federal collection; determinedly expand and enforce collection of the agricultural income tax; and increase reliance on user charges wherever appropriate and feasible. Furthermore, incentives for sub-national level resource mobilization need to be strengthened as part of larger [discretionary] resource transfers to the provincial and local governments that appear necessary. Such transfers can be linked to provincial revenue efforts and demonstration of capacity to effectively utilize resources. Significant revenue gains could also be realized by strengthening the provincial tax and non tax administrations and plug leakages of revenue; by merging the two revenue collecting departments into one; by better liaising with the federal Central Board of Revenue; through improved automation and computerization in key areas of provincial taxes (e.g., land and property records); and through enhanced training of and incentives for tax officials. Public Enterprise Losses and Other Contingent Liabilities 2.25. There is not a sufficiently widespread appreciation by the public and Pakistani policymakers of the extent to which very large public enterprise losses have contributed directly or indirectly to the buildup of public debt and/or contingent liabilities. According to our estimates, cumulative public enterprise losses and the cost of government guarantees through the end of FY03 amounted to close to Rs. 400 billion, or about 10 percent of GDP22 (see Table 2.4 and Box 2.3). These losses initially remained partly unfunded and took the form of arrears buildup or borrowing from state-owned banks (that cannot be serviced), but the losses must eventually be reflected in the fiscal budget and hence add to public debt.

22

This estimate is based on the data contained in the Debt Committee Report up to FY00 and actual losses of PIA in FY01 and WAPDA and KESC in FYs 01 - 03.

26

In some cases, such as the equity injections by the government into WAPDA and KESC, the losses do not enter the budget directly. Nonetheless, they affect the level of debt by either reducing government receipts or requiring special off-budget government borrowing, such as policy assistance from ADB to facilitate clearance of KESC losses. 2.26. Though Pakistan has made progress during the past three years (FYs 01 - 03) in eliminating the operating losses of a number of public enterprises, notably Pakistan Railways, Pakistan International Airlines, and most state-owned banks, the losses in the power sector continue at a high level. Indeed, WAPDA and KESC losses in FY03 (accrual balance) were close to 1 percent of GDP (Rs 33 billion) whereas total budgetary support to these companies was Rs 73 billion or 1.8 percent of GDP. The FY04 budget foresees budgetary support to WAPDA and KESC of 1.3 percent of GDP. The continued large losses of public -owned power entities is the most troubling element of Pakistan's fiscal position and the only one that has not shown improvement in recent years. 2.27. Many factors account for the continued large losses of WAPDA and KESC: operational inefficiencies, weak bill collection, very high levels of transmission and distribution losses (about 25 percent of units generated or purchased in the case of WAPDA and 40 percent in the case of KESC) due to theft and leakage, inadequate tariff adjustments to increased fuel prices, the relatively high cost of purchases from IPPs, including payments for large unused generation capacity, and the politically mandated practice of subsidizing household and farm consumption at the expense of industry and commerce. Corruption, concerns about law and order, and lack of development funds have also contributed to the decline in KESC's financial performance. In addition, WAPDA's finances have been suffering from the Federally Administered Tribal Area's (FATA) failure to pay utility bills amounting to Rs. 12 billion annually, part of which may be overbilling by WAPDA. The coming on stream of the large Ghazi Baroda Hydel Project (1,450 MW) and the substantial decline in payments to IPPs after FY04 will, however, help to reduce the average generation cost. A pick-up in economic activity by increasing power demand will also reduce the burden of large, relatively fixed payments to IPPs.

27

Box 2.3: Contingent Liabilities

The federal and provincial governments could face serious fiscal costs as a result of their contingent liabilities. These are fiscal obligations contingent on the occurrence of particular events and are not adequately budgeted and accounted for in the fiscal budget. Pakistan has made some progress in recent years on contingent explicit liabilities, at least on monitoring. These liabilities are specific obligations, created by law or contract that the government must settle if particular events occur. They include government guarantees to autonomous bodies, public-sector banks, and the private sector. The government is tracking the issuance and stock of explicit government guarantees, and the Draft Fiscal Sustainability and Debt Limitation Law limits the annual issuance of such guarantees to 2 percent of GDP. Over the past decade, however, annual issuance of such guarantees averaged only 0.6-0.7 percent of GDP. In FY 2002 the impact of contingent explicit liabilities on the budget was Rs. 24.4 billion, or 0.7 percent of GDP, and in FY03 it was Rs. 16.2 billion, or 0.4 percent of GDP. Contingent implicit liabilities have remained substantial . These are moral obligations or burdens that, although not legally binding, are likely to be borne by the government because of public expectations or political pressure. In recent years public enterprises have run substantial operating losses. The impact of contingent implicit liabilities on the federal budget (and on public debt) stemming from public enterprises was Rs. 126.5 billion in F Y02 (3.4 percent of GDP, including a major equity injection to KESC) and Rs. 84.5 billion in FY03 (2.1 percent of GDP). Whereas other public enterprises have improved financially in recent years, the power sector enterprises­WAPDA and KESC­remain major loss makers. In FY03 the drain on the budget from these two enterprises amounted to 1.8 percent of GDP1. Without fundamental reform they will continue to absorb massive fiscal resources. Vigilance is also needed on other contingent liabilities, however, including nonperforming loans of the public-sector banks. Direct implicit liabilities are expected to increase over the medium term. These include the unfunded part of public pension liabilities, which are expected to rise considerably. Pension liabilities must be estimated and made transparent so that proper measures can be taken in time to avoid a pension time bomb. The treatment of interest costs on NSS instruments leads to the buildup of a direct implicit liability to be paid when NSS instruments are redeemed. In the medium term a certain lumpiness in redemption and interest payments is expected, materializing as a sudden large claim on the fiscal budget. The government can limit the impact of contingent and direct implicit liabilities by reducing the potential source of the problem. Privatization and restructuring of the remaining public enterprises to reduce losses could greatly reduce the pressure on the government to assume contingent liabilities. In addition, guarantees must be given much more restrictively, subject to a well-functioning tracking, monitoring, and valuation system.

To put this in perspective, this is the same as the total education budget (also 1.8 percent of GDP) and more than double the total health budget (0.7 percent of GDP).

1

2.28. The impact of the financial problems in the power sector companies extends beyond the fiscal budget. These companies have under invested in power generation capacity for some time, and the country's investment needs in the power sector cannot be met without private sector participation. In addition to the direct consequences for federal and provincial government finances, the power sector problems have a major impact on private sector competitiveness and hence economic growth, exports, and employment (See the forthcoming World Bank study "Investment Climate Assessment in Pakistan"). In fact, the costs associated with the unreliable power supply are one of the manufacturing sector's top competitiveness concerns. 2.29. The government has adopted a strategy to restructure public enterprises to improve their operational efficiency and privatize most of them. In the power sector--the source of the largest contingent liabilities and enterprise losses--the government has started implementing a strategy that aims at improving the efficiency and the financial viability of the enterprises through competition, accountability, and managerial autonomy, while also establishing a multiyear tariff framework and improving the regulatory framework. Efficiency gains will be achieved by unbundling and corporatizing WAPDA's power wing into independent distribution and thermal generation companies as well as a

28

national transmission company. The goal is to privatize the distribution and generation companies and keep the transmission company in government ownership. 2.30. As will be discussed later, although the need to privatize KESC and parts of WAPDA has become more urgent because of continued losses and inadequate resources for investment as well as the costs to other industries, the progress toward privatization is the slowest in the power sector. In part, this slow progress is due to factors beyond the government's control, such as the lack of foreign interest in KESC. 2.31. With regard to the pricing framework, NEPRA has recently followed--albeit with some delay-- the policy of adjusting tariffs for changes in fuel prices to achieve financial viability. On occasion WAPDA has also delayed applying for and implementing tariff increases. 2.32. It is now clear that in FY03 public enterprise losses were higher than in FY02 because of the lack of financial improvement by the power companies and will remain so in FY04. These higher losses compared to previous projections will limit the projected expansion in fiscal space over the next two years. Beyond FY 2004, it should be possible to reduce public enterprise losses through a combination of reforms and structural improvements in the power sector, lower IPP payments and increasing share of low cost hydro- power. In our view, with reasonable strong policy actions, it should be possible to reduce overall public enterprise losses to 0.5 percent of GDP by FY07 from the estimated peak of 1.9 percent of GDP in FY 2004. 2.33. Looking ahead at the remaining reform agenda, WAPDA needs to decisively reduce line losses, enforce bill collection, if necessary by cutting off nonpayers more aggressively, and ensure timely implementation of tariff adjustments determined by NEPRA. The government should help WAPDA in resolving the issue of FATA's nonpayment of its utility bills since this problem seems to require a political solution. The transmission company, remaining in government ownership, is likely to run modest operating losses even at optimum technical/operational efficiency, because of the government's pursuit of noncommercial objectives (for instance, rural electrification, which has a development and social objective). The losses should be minimized and limited to the cost of pursuing noncommercial objectives as imposed by government mandate. Over the medium term the losses should be fully financed by grants from the government to cover the cost of pursuing the social objectives, and the cost should be made explicit in the fiscal budget. 2.34. With privatization, gains in operating efficiency, reduction in theft, and expected lower generation costs because of reduced payments to IPPs, the large Ghazi Barota project coming on-stream and hence an increase in the share of hydro power, it should realistically be possible to reduce the budgetary support to WAPDA and KESC from about Rs. 73 billion, or 1.8 percent of GDP in FY03, to Rs. 13 billion over the medium term (by FY07). The government needs to ensure, however, that other public enterprises such as Pakistan Railways, Pakistan Steel, PIA, and state-owned banks do not fall back into deficit and that guarantees provided by government do not have a net cost to the budget (see Box 2.3). Meeting this goal will require the government to continue privatizing most commercial and industrial public enterprises, to restructure remaining public enterprises and subject them to hard budget constraints, and to restrain tendencies to set prices administratively in the public sector to protect the consumer.

29

Table 2.4: Losses of State Owned Enterprises

(Rs Million) Losses Carry Forward upto 1998/99 Losses During 1999/00 2000/01 2001/02 Cumulative Losses upto 2001/02

KESC WAPDA 1/ Pakistan Steel Mills Pakistan Railways PIA Banks 1/ Others 2/ Total SOEs loss (Debt Report)

24,399 36,400 8,123 25,721 7,046 30,700 60,439 192,828

12,787 8,527 1,403 2,197 5,242 8,000 NA 38,156

16,203 15,086 1,065 727 1,982 0 NA 35,063

17,159 33,128 1,280 -1,819 -2,156 7.900 NA 54,492

70,548 93,141 11,871 26,826 12,114 46,600 60,439 321,539

1/ Carry forward losses are approximated by GOP equity injection into the enterprise and may therefore overstate the accumulated losses of SOEs. 2/ Include: Pakistan National Shipping Corporation (PNSC), Karachi Steel and Engineering Works (KS&EW), Utility Stores Corporation (USC), Heavy Mechanical Complex (HMC), State Engineering Corporation (SEC), Heavy Electrical Complex (HEC), Pakistan Broadcasting Corporation (PBC) and Pakistan Tourism Development Corporation (PTDC). Also included are the losses (of about Rs 50 billion) of Pakistan (TCP), Ghee Corporation of Pakistan (GCP), Cotton Export Corporation (CEC), Rice Export Corporation of Pakistan (RECP) and the Saindak Copper and Gold Mining Unit, which were covered through issuance of government guaranteed bonds (as almost all of these entities have been closed down, this debt is serviced by the federal government). Sources: The figures for carry forward losses of KESC, Pakistan Steel Mills, PIA and Others SOEs are taken from the Government of Pakistan's report A Debt Burden Reduction and Management Strategy, Finance Division, March 2001. Losses of SOEs (other than Banks) during 1999/2000-2001/2002 are taken/compiled from the IMF's report Selected Issues and Statistical Appendix, October 21, 2002.

2.35. According to our estimates, even with continued forceful reform of the public enterprise sector, the losses of public enterprises (mainly power entities) are likely to total Rs.150 billion during FYs 0407, higher than the estimate in the Debt Committee Report (Rs. 100 billion during FYs 2000-04). The Debt Committee also assumed that the enterprise losses and contingent liabilities would be offset by privatization revenues and thus that there would be no government borrowing beyond the normal budget deficit. This assumption appears optimistic; we foresee net privatization revenues to the fiscal budget of only Rs. 54 billion over the four years, FYs 04-07. Even after taking into account privatization revenues, enterprise losses are likely to be a drain on the budget. This projection further underlines the need to vigorously pursue the overlapping agendas of privatization and public enterprise reform. 2.36. With regard to contingent liabilities, the government should assess the full impact on public finances beyond the budget and fiscal debt to include these extra-budgetary items. It should calculate the potential budget cost in expected value terms 23 and make the potential fiscal cost of off-budget items visible beforehand to ensure a proper cost-benefit assessment of government support. It should also limit moral hazard by announcing the limit of its financial support and then sticking to that limit. Defense Spending 2.37. Historically, the high level of defense spending has contributed to the buildup of public debt in two ways. It has preempted public resources for development, and it has been a major factor in the government's inability to cover current expenditures from current revenues. Government savings (defined narrowly as the excess of government revenues over current expenditure) deteriorated from a positive 0.9 percent of GDP in 1980-85 to a negative 3.1 percent of GDP in 1996-99. As the Debt Committee has

23

The financial cost of the event if it occurs weighted by its probability.

30

stressed, there was "a serious upsetting of the balance between defense and development'' after the early 1980s. 24 In the 1990s, however, real spending on defense increased little, and as a percentage of GDP, it declined steadily from the peak of 6.9 percent in the second half of the 1980s to less than 5 percent during 1998-2000. Despite the spurt in spending in FY02 due to regional tensions, defense spending remained at 4.7 percent of GDP (4.0 percent excluding defense pensions, which have been shown separately since FY01). The steady relative reduction in defense spending in recent years has helped to contain the fiscal deficit, reduce the negative government saving (to less than 2 percent of GDP in FY02), and to a degree correct the imbalance between defense and development. 2.38. The government feels that in current circumstances assuming further reduction in defense spending as a percentage of GDP would not be realistic. While easing of tensions on the Eastern border is very likely, the situation on the Western border as well as combating terrorism in the country will continue to put pressure on the defense expenditures The report, therefore, assumes that in the base case scenario defense spending (excluding pensions) in FY04 would be as in the federal budget approved by National Assembly and in coming years would remain at 4 per cent of GDP. To the extent that the effectiveness of defense spending can be improved without compromising national security, the government's policy options will be expanded and the level of defense expenditures will not be entirely hostage to regional geopolitical realities. The Cost of Borrowing 2.39. As the analytical framework in Box 2.2 indicates, the real cost of borrowing is a critical variable in determining the growth of the debt burden. In Pakistan, because the primary balance (including payment of contingent liabilities) has been in surplus for some time, the growth of public debt in recent years has been driven almost entirely by the cost of borrowing. Unfortunately, the real cost of public debt rose to 4.5 percent annually during 1996-99, compared with the historical level and international norm of 2.5 percent. Surprising though it may seem, real borrowing costs during 2000-02 were even higher, at 5.2 percent per year (see Table 2.5). The high real cost of public debt since the mid-1990s reflects a jump in the cost of both external and domestic borrowing. 25 On the domestic side, the sharp deceleration in the rate of inflation from more than 11 percent per year in the mid-1990s to less than 4 percent during the past three years, combined with the locked-in high interest rates on National Saving Schemes (NSS) instruments, kept the real annual cost of domestic debt at 7.4 percent (11.5 percent in nominal terms) during 1999/2000-2001/02. On the external side, the nominal interest rate on external public debt is about 2½-3 percent. The real net depreciation in the value of the rupee over FYs 1999-2001 however, added to the real cost of external debt, raising it to 7.6 percent per year. Including the recent period of real appreciation in FY 2002, the real cost of external borrowing averaged 3.0 during FYs 1999-2002 and was substantially below the 4.7 percent annual figure for 1996-99. 26 2.40. A significant reduction in the cost of public debt must be a part of the strategy to reduce the burden of debt. The objective of policy should be to sharply reduce the overall real cost of public borrowing over the medium term. Unless the cost of public debt is brought d own, there will be limited scope for sharply reducing the share of interest payments in total government spending, at present 30 percent.

24 25

Debt Committee Report, pp. 14-19. The real cost of domestic borrowing is the average nominal interest rate minus the rate of inflation. In estimating the real cost of foreign debt, the capital loss on foreign exchange because of the depreciation of the rupee in relation to the U.S. dollar must be added to the nominal interest payments, and then this nominal cost must be adjusted for the rate of domestic inflation. For details, see Debt Committee Report, pp. 18-19. 26 The estimate reflects the high rate of real depreciation of the rupee during the period.

31

Table 2.5. Pakistan: Real borrowing cost on public debt, FY1996 - FY2002 Real borrowing cost (%) 1/ FY96-99

Domestic public debt

FY00-02 7.4 3.0 5.2

External public debt Weighted average

1/ Compound rates

4.3 4.7 4.5

Domestic Debt Costs 2.41. The most immediate problem is the high real interest rate on domestic debt. The average real interest rate peaked in FY00 at 10.8 percent and declined to 5.6 percent in FY03. In the past, the high level of domestic interest rates reflected the upward pressure placed on the country's narrow financial markets by the considerable borrowing needs of the government. Now that the net government borrowings are projected to be modest (see Table A.2 in Annex B), the government has much greater degrees of freedom in the management of its domestic debt. 2.42. A central problem is the still high cost of borrowing under the National Saving Schemes (NSS), notwithstanding recent rate reductions. Interest rates on the NSS instruments such as the ten-year Defence Savings Certificates (DSCs), the five-year Regular Income Certificates (RICs), and the three-year Special Savings Certificates (SSCs) are fixed administratively. Holders of NSS instruments can redeem them at any time, encashing both the face value of the bond and the accumulated interest earnings. On the initial assumption that NSS serves a population of small, relatively unsophisticated savers (such as widows, orphans, and pensioners), who are unlikely to place their funds with banks or other financial institutions, rates of return on these instruments tended to be generous and tax free. In the 1980s, as budget deficits grew, reliance on NSS instruments increased, and these certificates were made extremely attractive through highly positive tax-free real returns. Naturally this attracted major institutional investors. During the period from late 1996 to mid-1999, compound rates on DSCs of ten years' maturity peaked at 18.04 percent when held to maturity. The yields on all NSS instruments were tax free except that Zakat was payable. Since the interest is paid only on encashment, the large accumulated interest liability is not reflected in the reported stock of NSS debt. This situation implies two things: an understatement of government debt obligations and the prospect that a sizable part of the government's interest bill will continue to be driven by the high-cost certificates issued during 1997-99. 2.43. The government has taken several strong measures in recent years to address some of the weaknesses of NSS instruments. It eliminated the access of institutional investors to the schemes in early 2000. Recently it took commercial banks out because of abuses of the system. It has made a number of successive reductions in the administratively set interest rates on new issues since May 1999 and has linked the NSS rates to the market benchmark Pakistan Investment Bonds (PIBs), which have been revived as an important instrument of debt management. Furthermore, the income from NSS on deposits larger than Rs. 150,000 was made taxable effective July 1, 2001, though this change applies only to new issues. In the most recent rate reduction in July 2003, the rate on DSCs with ten-year maturity was reduced to 8.5 percent per year. The rates on 3- and 5-year instruments remain at 7.7 percent. 2.44. However, two fundamental problems remain. First, despite the actions taken in recent years, NSS is still a source of high-cost borrowing for the government. This is because the sharp drop in the rate of inflation has greatly offset the impact of nominal interest rate reductions for NSS on the real rates. Second, the on-tap nature of the schemes limits the government's options to explore optimal mix of

32

borrowing. Also, the way the NSS instruments are administered makes it difficult for the government to accurately plan the interest payments in the coming budget years. 2.45. Despite the sharp reductions made in nominal rates on NSS instruments during FYs 2000-03 real long-term rates of return on DSCs of 4 ½ percent (assuming an annual inflation rate of 4 percent) and on the recently introduced 10-year certificates for widows and pensioners of 6 percent on what are risk-free assets are still high by international standards. The spread between the yield on PIBs and comparable NSS instruments should be eliminated. This spread is currently 2.9 ­ 4.5 percent in the case of 10-year instruments, 3.5 percent for 5-year instruments and 4.6 percent for 3-year instruments. Also, the rates on SSCs and RICs were not adjusted downward as much as the DSC rates during the past two years, and thus there was internal shift away from DSCs. The continued attractiveness of NSS instruments can be judged from the fact that their share in total domestic debt continues to rise, increasing from 37 to 45 percent from FY01 to FY03. Indeed, over the past two years the expansion in the stock of NSS instruments was more than double the increase in overall public domestic debt.

Box 2.4: Beneficiaries of National Saving Schemes The after-tax return on NSS instruments has persistently been generous compared with market rates, and hence this instrument has been an expensive source of funding of the government deficit. The stated rationale for paying high interest rates on these instruments has been that they serve a population of small, relatively unsophisticated savers (such as widows, orphans, and pensioners), who are unlikely to place their funds with banks or other financial institutions and who have low incomes from other sources. Certainly, a large number of pensioners, from both the government and the private sector, widows, and people belonging to low-income groups depend on profits from these schemes. The bulk of the funds invested in NSS instruments, however, come from a relatively smaller group with a relatively large average holding of NSS instruments. Holdings of this size are not congruent with the mentioned target group; in other words, most of the holdings of NSS instruments are with relatively well-off groups in society, and these groups are the ones that receive the largest share of the indirect income support (subsidy) that the government provides through the NSS. By providing this subsidy through the NSS instruments, the government is diverting scarce public funds from high-priority programs with a much more substantial development impact, such as poverty reduction programs, basic health or education services, or improved infrastructure.

2.46. Ideally it would be desirable to phase out the use of NSS instruments and rather fund government deficits domestically by selling PIBs in sufficiently small holdings to households through the existing network of NSS outlets. However, phasing out the NSS instruments would meet with substantial public opposition. Also, the government feels strongly that it needs to balance its social obligations with economic imperatives. As mentioned above, some of the recently launched schemes act as safety net to pensioners, widows and the small savers. Still, the Government must continue with progress on reforming the NSS while educating the public on the true opportunity cost and problems of the instruments. A key objective s is to provide the public with a safe alternative savings instrument with a good yield. In that regard the Government could make the PIBs more accessible to individuals. The Government is also considering CDNS entering into mutual funds to facilitate developing a secondary market for such assets. 2.47. The successful launch of the PIBs has not only set a market-based long-term benchmark yield, but also helped the government to finance its budgetary requirements with stable long-term debt.27 In any event, the government should make further use of PIBs, end the on-tap feature of the NSS instruments

27

State Bank of Pakistan Annual Report 2001-2002, p. 136.

33

and reduce the margins over PIB yields. The yield curve in Pakistan has become very steep. The spread between the yields of three-month treasury bills and ten-year bonds was 3.9 percent in July 2003 (currently the most recent observation of the ten-year bonds yield). The over reliance on NSS clearly limits the government's options for relying on the cheaper short end of the market. In light of the current low yields on treasury bills (less than 2 percent per year), the government could drive down the average borrowing cost by issuing treasury bills and retiring expensive foreign and­to the extent possible ­ domestic debt. 2.48. The government must do a better job of educating the public on the high cost of NSS and its implications for the national debt problem. It can be made clear that the bulk of public debt interest payments go to well-to-do Pakistanis and that unless these payments can be reduced, the domestic debt problem cannot be solved and poverty programs will suffer. Direct income support programs shown explicitly in the fiscal budget can address the policy objective of providing income support to widows, orphans, and pensioners, if it is to be pursued. 2.49. The discussion here suggests that significant reductions in the real costs of government domestic borrowing will be possible only with a lag. The cost of domestic debt is currently underestimated in the fiscal budget. The true cost is the accrued interest liability. Since the stock of NSS instruments has been rising steadily and the rates were also increasing until 1997, the cash-based figure for interest cost as reported in the fiscal accounts is substantially lower than the accruals. In other words, every year the government has been building up an unfunded liability that will burden the budget in the future over and above the accrual cost. This situation reinforces the need to limit fresh government borrowing and to carry out further fiscal adjustment. 2.50. We also recommend that the DPCO estimate the accrual cost of the interest liability for the NSS instruments with a view to reflecting the true cost in the fiscal accounts. The accrued but not paid interest could be added to debt obligations. The calculations will also improve the estimates of future interest payments likely to be actually paid. The Cost of External Borrowing 2.51. From a fiscal point of view, the total real cost of foreign borrowing is the sum of the nominal interest payments in domestic currency plus the capital loss or gain in the domestic value of external debt stemming from depreciation or appreciation of the currency due to nominal exchange rate changes--all adjusted for the changes in the domestic price level. 28 As already mentioned, the total real cost of foreign borrowing rose during FYs 1996-99 to 4.7 percent annually, reflecting, among other things, substantial capital loss due to real depreciation of the Pakistani rupee in this period. The real depreciation continued during FYs 2000 and 2001 but has been sharply reversed since then because of a remarkable turnaround in the current account balance of payments and improved external resource availability, which is reflected in a strong buildup in foreign exchange reserves. For the period FY 1999-2002 as a whole, the average real cost of external borrowing for the budget came down to 3.9 percent, reflecting real appreciation in the last year and the effect of debt rescheduling. In FY 2002 and the first half of FY 2003, the total real cost of foreign debt was actually a negative 5.7 percent per year. This shift reflects an average annual real appreciation against the U.S. dollar of 7.9 percent and the effect of debt relief. 2.52. What assumptions should be made about public external debt costs in the medium term? How is the exchange rate likely to behave in the near future? What should be Pakistan's external borrowing

28

If there is a real depreciation the valuation element is a capital loss, and if there is a real appreciation the valuation element is a capital gain.

34

strategy, keeping in view the high public debt burden on the one hand and substantial strength in the balance of payments on the other hand? 2.53. It is difficult to predict the course of exchange rate movements, but the sharp real appreciation in FY03 is not something one can expect to continue over the medium and long term. 29 Still, in view of the very strong foreign exchange reserve position, it seems unlikely that the rupee will depreciate in real terms in the near future. More precisely, we assume that the nominal changes in the exchange rate in this (FY04) and subsequent fiscal years will only reflect the differences between the domestic and international rates of inflation. This situation suggests that the real cost of external borrowing can be kept down to about 1 percent per year if the mix of borrowing remains heavily tilted toward concessionary assistance, as it has been in the past few years. 2.54. The case for a continued very soft blend of external assistance is linked to the high level of external indebtedness. As mentioned, despite the sharp slowdown in the growth of public and publicly guaranteed debt and the very favorable terms of Paris Club rescheduling,30 the present value of public and publicly guaranteed external debt to exports is still well above the desirable cutoff suggested for HIPC countries. Pakistan's case for reducing relative dependence on market loans from multilateral banks such as the World Bank and the Asian Development Bank and expanding its access to their concessionary facilities--the International Development Association (IDA) and the Asian Development Fund (ADF)-- remains strong. In fact, the World Bank has increased its IDA exposure in recent years, from US$3.9 billion in June 1999 to US$5.6 billion in June 2003. However, soft financing outstanding through the ADF as of December 2002 remained at the June 1999 level of US$4.2 billion. 2.55. The prospective stability of the real exchange rate and the wide gap that is emerging between the real cost of public domestic debt (projected at about 5 percent per year during 2003-07) and external debt also suggest the desirability of greater reliance on external financing (as opposed to the most expensive domestic debt instruments), provided the mix of external assistance remains heavily concessionary. If external borrowing on appropriate terms can be arranged, it may be feasible to totally eliminate the growth in domestic debt in real terms in a few years and thus lower costs dramatically. 2.56. If the government continues its recent economic policy reforms and maintains a strong track record of implementation, which gives it more credibility in the eyes of its development partners, the country will have considerable opportunities for concessionary assistance and adjustment lending to restructure the present expensive debt. Continued strong reform policies will also facilitate substantial policy and adjustment lending from multilateral institutions. Pakistan's challenge will be to develop strong sector investment and poverty-oriented programs that donors can support through policy-based quick-disbursing assistance, even though balance of payments support may be disappearing as a rationale for adjustment lending. Meeting this challenge would also require the government to increase the general effectiveness of public spending and hence increase the emphasis on sound public debt dynamics. 2.57. Related to the cost of foreign borrowing are the issues of choice of currency denomination and the degree of interest rate variability on foreign debt. At present, the government has only limited information on the currency composition of its external debt and therefore does not manage this risk in any meaningful way. We recommend that the DPCO give priority to improving the information base in this regard and also develop a strategy to reduce the currency and interest rate risks (variability) which could include use of market-based hedging instruments.

29

Between September 2001 and December 2002 the real effective exchange rate appreciated by 4.5 percent and the bilateral U.S. dollar/rupee real exchange rate by 12 percent. 30 See World Bank, Development Policy Review, April 2002, pp. 24-25.

35

Structural Reforms and Growth Revival 2.58. The revival of economic growth is critical not only for alleviating poverty, but also for strengthening the debt-carrying capacity of the economy. The debt burden is determined not only by the absolute level of debt, but also by the size of the economy, the level of government revenues, and exports. But as discussed, the high burden of debt itself contributed to the slowdown in the average annual growth rate of real GDP from more than 6 percent to less than 4 percent over the last four years. The government's strong economic reform program aims at exiting the debt trap by pursuing simultaneous progress on macroeconomic stability and structural reforms. The key elements of structural reform aim at improving governance, the health and efficiency of the financial system, and the climate for private investment. However, the progress made in pursuing the reform agenda has only with a considerable lag helped revive the economy: the average growth rate during FYs 00-02 was only 3.2 percent but picked up to 5.1 percent in FY03. 2.59. Several factors help explain the sluggish growth and the pick-up in growth in FY03. The agricultural growth rate, which averaged more than 4 percent in the 1990s, dropped to 1.6 percent during 1999-2002 mainly as a result of drought but rose to 4.2 percent in FY03. Gross fixed capital formation has continued its downward drift; the rate of fixed investment reached a low point of 13.1 percent of GDP in FY02 and FY03. A number of factors continue to hamper industrial growth including structural problems in industry and exports, continued heavy reliance on cotton textiles, especially cotton yarn, and a lack of diversification to growth areas in international trade in manufactured goods. Decades of low investment in human capital are also taking their toll in terms of slow growth in productivity. In spite of these challenges that still remain, manufacturing and exports experienced rapid growth in FY03. Key factors were better access to the EU and US markets and improved competitiveness of the domestic textile industry. 31 2.60. Some of the structural problems, such as the low levels of education and skills and insufficient diversification of manufactured exports, will take time to resolve. But the remarkable improvement in Pakistan's external resource position in the past three years has fundamentally transformed the prospects of higher investment without an excessive reliance on external flows. How will the strength of the external position translate into accelerated growth? The answer lies in the dramatic turnaround in the national savings rate. During 1996-99 the national savings rate averaged little over 12 percent of GDP as government current expenditures substantially exceeded revenues and capital flight continued because of fears of continued depreciation and mounting public debt. The strong improvement in private remittances, the sharp reduction in the government revenue deficit facilitated in part by external official grants, and the reversal of capital flight pushed the national savings rate to a record high level of more than 21 percent of GDP in FY 2003. If confidence in the currency can be maintained through a further orderly reduction in both public and external debt burdens and an adequate level of foreign exchange reserves, there is every reason to hope that the national savings rate can remain in the 17-18 percent of GDP range. On the fiscal side, achieving further increases in government savings and total elimination of the reliance on foreign grants to finance current expenditures are goals that appear within reach in a couple of years. 2.61. During FYs 2001-03, a significant part of the increase in national savings took the form of addition to foreign reserves---partly involuntary because of the sluggishness of private sector investment. In the future the need for increases in reserves will be relatively modest and thus most of the national savings should be available for gross capital formation. Pakistan can also reasonably hope to supplement its national savings with net foreign capital. The position in FYs 2002 and 2003, when Pakistan has had a

31

Elimination of the incentive for under-invoicing of exports after the disappearance of the premium on exchange rate in the kerb market may also partly explain the strong growth in recorded exports.

36

sizable current account balance of payments surplus both with and without official transfers, cannot be considered the equilibrium. With the further likely improvement in the external debt position, Pakistan can safely run current account balance of payments deficits of 1-2 percent of GDP, financed with a mix of grants, net borrowing, and foreign private investment (see Annex B, Table A.3). Thus, at least from the point of view of resource availability, the stage is set for sustained and strong increases in the level of investment. An increase in the fixed investment rate from the low of 13.1 percent of GDP in FYs 2002 and 2003 to around 17 percent over the next four years need not be constrained by financial availability. While public investment should also increase, more of the increase must come from the private sector (see Box 2.5). 2.62. It is a puzzle why private investment has remained stagnant in the past few years of reforms even though both foreign exchange availability and the liquidity position of the banks have improved greatly. Possible explanations are the real interest rate level (until very recently), perceived uncertainty about the outlook for policy reforms in the run-up to ele ctions in October 2002, and the new political environment. Although funding costs (nominal interest rates) have come down, real lending rates have remained high partly because of very high intermediation costs and lower inflation in the last few years. Acceleration of banking sector reform and further progress on privatization of state-owned banks is clearly indicated. Currently, perceived uncertainty about the continuation of policy reforms in the new political environment may have led investors to continue with a wait-and-see position. Hence, it is important that the government reaffirm its commitment to reforms that improve the investment climate.

37

Box 2.5: Growth Revival and Poverty Reduction: Private Investment and Public Spending The focus of this report is on Public Sector Management issues in Pakis tan. However, the report has underlined at various places the critical importance of reviving private investment. The baseline scenario assumes that 70 percent of the additional investment over 2002-07 would be in the private sector. This assumes that with the continued privatization efforts, investment by public enterprises would grow little. Pakistan: Investment in percent of GDP, baseline scenario 1/ 2001/02 Total investment Public Government Public enterprises Private Public investment in % of total Private investment in % of total Public investment, Rs billion 13.1 4.8 3.5 1.3 8.3 36.6 63.4 174.2 2006/07 16.7 5.7 5.0 0.7 2/ 11.0 34.1 65.9 333.2 Difference 3.6 0.9 1.5 -0.6 2.7 -2.5 2.5

1/ Gross fixed capital formation 2/ Assumes continued privatization of selected public enterprises.

Nevertheless, our projections provide for a substantial growth in development budget as well as non-development spending (excluding interest, defense and SOEs). Development budget is expected to grow from Rs. 126 billion in 2001-2 to Rs. 292 billion in current prices, rising from 3.5 to 5 percent of GDP. The growth in non-development spending would be slower but still this spending would still account for about 60 percent of the fiscal space created for non- interest non ­defense spending. How would this potential expansion of public spending help the revival of growth and poverty reduction? How will this public sector expansion support the critical increase needed in private investment? The institutional, allocation, and governance options that will best ensure positive outcomes from public spending and would provide necessary support for the private sector are discussed at length in Chapters 2 to 5. Only two points should be noted here. First, without substantial increase in capacity at all levels of government and without significant improvements in budgetary and planning processes and fiduciary controls, a large expansion of public spending would not be justified. Secondly, the government spending should strictly avoid substituting for private sector activities. This can be ensured if the privatization efforts continue and determined efforts are made to promote public - private partnerships in the delivery of services especially social services. With the above caveats, there appears to be substantial need of and room for larger public spending especially in human resource development, maintenance of existing infrastructure, and longer term new investments especially in water. The reorientation of public sector priorities to facilitate growth and make the growth more pro-poor are discussed in the next two chapters.

2.63. The government needs to continue its efforts to improve governance and strengthen institutions, including those in the public sector. This entails reforming government institutions and behavior to limit bureaucratic harassment and red tape (especially in the administration of regulations and taxes). Further institutional strengthening and reform is also needed in the financial sector, where the government in recent years has initiated improvements in the regulatory environment and enforced more stringent supervision. More broadly across the economy, the government also needs to more strongly assert the rule of law, including law enforcement, and reduce corruption and crime. It should also improve the provision 38

of public services such as the quality and availability of infrastructure (such as power, water, transport, and telecommunications) and--through improved education--raise the quality of the labor force. Facilitating the availability of trained and skilled manpower could involve reviewing and improving labor laws and policies. The current anti export bias in some industries could be reduced by lowering duties on intermediate products. 2.64. The challenge for the new government is, on the one hand, to maintain the confidence of international financial institutions and private investors, both domestic and foreign, and, on the other hand, to use appropriate incentives, policy guidance, and institutional support to ensure that development resources are well directed. There is a substantial unfinished economic and social agenda, and major problems remain. But for the first time in many years there is no threat of financial crisis hanging over Pakistan's head. 2.65. The government is now aiming to revive economic growth to 6 percent per year in the next three or four years. Achieving this rate will require, above all, a strong recovery in the agricultural growth rate and a sharp expansion of manufactured exports. Some of the policy and institutional elements required for improved performance in agriculture and exports are listed. 2.66. In agriculture there is a need for improved canal irrigation and maintenance; better incentives for water conservation, specifically sharply higher water rates and better management of irrigation systems; reduction in adulteration of seeds, pesticides, and fertilizers through forceful use of regulatory authority; and shifting of economic resources, including scarce water, away from production of sugarcane to other crops through suitable price support adjustments. 2.67. Increased exports can be achieved by undertaking the following measures to improve Pakistan's external competitiveness: raise productivity by building human capital, upgrading labor skills, and hence more easily absorbing new technology; facilitate the availability of trained and skilled manpower by improving labor laws and policies; improve product quality and the reliability of delivery (important contributions would include more reliable power supply and transport systems); reduce the antiexport bias by lowering duties on intermediate products and possibly establishing virtual free-trade zones; attract foreign direct investors for export-oriented production, drawing on their established international marketing channels; focus policy on higher value-added exports rather than volume of exports and the emphasis on cotton yarn; and prepare for the new international regime in garments and textiles trade in 2005. Alternative Scenarios 2.68. To sum up, the room for maneuver in the public sector is increasing. It will be possible to expand public development and social spending at a pace faster than GDP growth, consistent with debt burden reduction, but only if public enterprise losses are reduced, defense spending is contained, government revenues show healthy growth, and donors are willing to provide substantial grants and concessionary loans. In the medium term the revival of well-directed private investment will be critical for reviving growth, revenues, and exports. More rapid increases in social spending and public investment than envisaged in the baseline scenario can certainly be justified on need grounds but will require a much more forceful resolution of public enterprise issues, especially in power, and reduction in domestic borrowing costs than appears likely at the moment. Given the constraints on public spending, the institutional implications of resource allocation and the effectiveness of spending assume special importance. These are discussed in subsequent chapters. The improvements in the effectiveness and targeting of spending will contribute to a higher growth rate but, as discussed later, will be particularly significant for attaining poverty alleviation and social development goals. The performance of social sectors has been poor in the past, as much because of inadequate spending as because of poor governance and de facto poor targeting 39

of service delivery (the benefits of the public services have not accrued to the poor but rather to middle and higher-income groups). 2.69. The government should certainly explore the policy implications of doing better than the cautiously optimistic baseline scenario presented here. But it should be stressed that the base case scenario does assume a continued strong reform effort. If reform falters in just a few areas--revenue mobilization, public enterprise restructuring and privatization, and domestic and external debt management--it will quickly reverse the trend toward a higher growth rate and compound the problem of poverty alleviation. This is illustrated in the low case scenario discussed below. Low Case Scenario 2.70. The low case scenario assumes slippage in maintaining recent proactive and reform-oriented policies, in particular with regard to the fiscal budget, public enterprises, and other structural reforms that have a bearing on the investment climate. The main differences in outcomes over the medium term in this scenario are worsened fiscal balances, less fiscal space, and slower economic growth compared with the baseline scenario (see Table 2.6). A more detailed description is provided in Annex B. The main assumptions are § Fiscal revenue collection gradually declines as a percentage of GDP over the medium term (FYs 2004-07) from the relatively high level in FY 2003. The average revenue/GDP ratio is projected at 16.8 percent of GDP, substantially lower than in the high-growth scenario (average 17.8 percent of GDP). Public enterprise-related costs average 1.6 percent of GDP during FYs 2004-07 as against 1.0 percent in the base scenario. Domestic interest payments average 4.0 percent of GDP during FYs 2004-07 compared to 3.6 percent in the base case. This reflects both that domestic debt is higher in the low case and interest rates decline more slowly. The Government does not manage to contain defense spending as a share of GDP. It rises throughout the projection period, reaching 5 percent of GDP by FY07 and averaging 4.6 percent of GDP, compared with 3.9 percent in the base case.

§ § §

40

Table 2.6: Summary of key macroeconomic variables in low case, 1999/00­2006/07 Est. Prov. Est.

(annual changes in percent)

Proj.

1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 Real GDP at market prices Consumer prices (p.a.)

Savings and investment 4.2

3.6

2.6 4.4

2.8 2.7

5.8 3.1

5.0 4.1

4.9 4.1

4.9 4.2

4.9 4.2

(in percent of G DP)

Gross national savings Gross fixed capital formation Change in stocks (nongovt) Public finances Revenue (including grants) Grants Revenue Expenditure Interest payments Defense SOE-related spending 1/ Non-interest, non-defense, nonSOE spending Overall balance (including grants) Primary balance (including grants) Gross public debt 2/ Gross public debt in % of revenue

External sector

14.1 14.4 1.6 17.3 1.1 16.3 22.8 7.8 4.8 0.5 9.8 -5.5 2.3 100.9 619.6 -2.0 48.6 3.8

13.6 13.9 1.6 17.3 1.2 16.2 21.4 6.8 3.8 0.6

17.4 13.1 1.6 19.3 2.3 17.0 23.6 6.8 4.1 1.9

21.3 13.1 2.4 20.8 2.8 17.9 22.3 5.2 4.0 1.2

15.1 13.7 2.0 18.1 1.0 17.1 22.2 4.8 4.1 2.0

15.3 14.1 1.6 18.3 1.4 16.9 22.4 4.8 4.4 1.8

14.7 14.3 1.6 18.0 1.4 16.7 22.4 4.6 4.7 1.7

14.3 14.4 1.6 17.7 1.3 16.5 22.4 4.5 5.0 1.5

10.2 10.9 -4.1 -4.4 2.8 3.8 108.3 100.1 670.5 588.9 -1.9 55.7 1.7 2.7 52.7 3.7

12.0 11.4 11.5 11.4 11.3 -1.6 -4.1 -4.1 -4.4 -4.6 3.6 0.7 0.7 0.3 -0.1 91.8 83.6 81.5 78.9 77.9 512.0 488.8 482.5 473.0 473.2 5.9 45.8 5.4 -0.4 38.1 4.4 -0.4 35.0 4.4 -1.2 32.5 3.5 1.7 30.4 3.5

Current account incl. off. transfers Ext. public and publicly-guar.debt Gross reserves in months of next year imports of goods and services

1/ Subsidies and payment of contingent liabilities. 2/ Excludes SBP.

2.71. Consequently, the fiscal deficit grows to an average of 4.3 percent of GDP during FYs 2004-07 instead of declining to 3.0 percent as in the base case. The average fiscal space for economic and social spending increases only by 0.6 percent of GDP, compared with 1.9 percent in the base case. 2.72. The policy slippage leads to less strengthening of confidence. Hence, the reduction in interest rates on domestic public debt is slower than in the base case. There is also less foreign financing­both grants and concessional loans--reflecting less confidence by donors and IFIs in the government's commitment to pursue reforms and address the social and public investment needs. Progress on privatizing public enterprises is slower, and the projected sales receipts are lower than in the base case. 2.73. Total public debt is higher and with less concessional terms on average. By FY 2007 public debt as a share of annual fiscal revenue declines only to about 480 percent, whereas in the base case it falls to about 390 percent of revenue. In other words, progress toward reaching public debt sustainability is insufficient in this scenario. 41

2.74. Furthermore, economic growth, job creation, poverty reduction, and improvements in social indicators are slower than in the base case. GDP growth averages 4.9 percent per year during 2004-07 compared with 5.6 percent in the base case. The slower growth reflects lower private investment and lower growth-related public spending on health, education, and infrastructure--both operations and maintenance and new investments--and hence lower productivity of public capital stock and human capital. It also reflects slower improvements in the effectiveness of government spending, governance, and implementation capacity. 2.75. The differences described in the fiscal outcomes between the scenarios are even more accentuated when one looks at the momentum at the end of the projection period. By FY 2007 the fiscal deficit grows to 5.9 percent of GDP (from 4.5 percent in FY 2003) instead of declining to 4.3 percent as in the base case. In spite of the larger deficits, the fiscal space for economic and social spending increases only by 0.4 percent of GDP by FY07 compared to 3.4 percent in the base case. Over the longer term the base case would continue to show improved debt reduction, growth, and social indicators, and the gap between the two cases would continue to widen. The low case would basically show stagnation.

Table 2.7 Pakistan: Low case scenario, Principal Budget Aggregates Change FY2002-FY2007 (Percent of GDP) Resources Government revenues External grants Fiscal deficits (including grants) ­ 0.5 ­ 1.0 + 0.3 Expenditures Defense expenditure Interest payments Public enterprise losses 1/ + 0.9 ­ 2.2 ­ 0.4

Non-interest non-defense spending + 0.4 o/w Development spending -0.7 Total resources -1.3 Total expenditures -1.3 1/ Public enterprise losses are approximated by subsidies and payment of contingent liabilities.

High-Growth Scenario 2.76. A scenario with more rapid economic growth and more fiscal space than in the base case is certainly possible. Achieving this outcome will, however, require three things: First, the government must make a determined effort to lower the real cost of domestic borrowing. Lowering the real interest rate from 6 percent to 4 percent by FY07 will save interest payments equivalent to 1 percent of GDP. Second, it must virtually eliminate public enterprise losses and privatize these enterprises more successfully, especially in the power sector. Third, it must improve the effectiveness of government spending and institutional capacity to better utilize the additional fiscal space on poverty- and growthrelated spending. If marked improvements in institutional capacity do materialize, spending on health and education as well as on infrastructure­both O&M and new investments­should increase. Over the medium and long term, this spending could contribute to higher productivity of the public capital stock and human capital (and improved social indicators), further boosting economic growth. 2.77. In the event, however, that the effectiveness of government spending, governance, and implementation capacity does not materially improve even with higher economic growth and revenue collection, the government should use the additional resources available to repay those debt items with the highest cost attached (currently long-term domestic debt instruments) to at least capture the gains of saving future debt-servicing costs.

42

Conclusions 2.78. Pakistan is at an important economic turning point. The debt problems that have been a major cause of the sharp slowdown in Pakistan's economic growth over the past decade, and the consequent stagnation in poverty reduction, have been brought under control. Although debt, especially public debt, is still at an unsustainable level and needs to be brought down steadily, the risk that economic and other shocks will lead to a worsening of the public debt burden in the medium term appear minimal (see the sensitivity analysis in Annex B). No doubt, there is a substantial unfinished economic and social agenda, and major problems remain. But for the first time in many years, there is no threat of a financial crisis hanging over Pakistan's head. 2.79. Looking ahead, the issue is not so much whether macroeconomic stability can be maintained and orderly reduction in debt burden achieved, but whether public expenditure management and restructuring can play a more positive role in the economy than in the past decade. A financial equilibrium at a level and pattern of public expenditures that does not support provision of essential public goods and does not further social goals will hardly serve Pakistan's long-term interests. 2.80. With continued reform aimed at increased mobilization of government revenues, a sharp reduction in the losses of public enterprises, a reduction in the costs of domestic government borrowing, and defense spending not exceeding 4 percent of GDP for the near future, it should be possible to create substantial fiscal space to further the government's objectives of reviving growth and reducing poverty while continuing to make progress on reducing the debt burden. 2.81. This chapter illustrates essentially two economic and fiscal scenarios and discusses, at some length, the policy issues and options involved in bringing about a shift in public spending toward development and social spending. Table 2.8 presents a summary overview of the main differences between scenarios in the size of the fiscal space available for non-interest, non-defense and non-SOE spending and the elements that contribute to different outcomes.

Table 2.8: Summary of Fiscal Space Alternatives over the medium term

Fiscal space alternatives 1/ Reference: 2001/02 estimate Fiscal space in % of GDP in FY07 Fiscal space in % of GDP - average FY03-FY07 Fiscal space - average annual real growth from FY03 to FY07 Real fiscal space in FY07, in constant FY02 prices, Rs billion 10.9 10.9 395.1 Low case 11.3 11.5 6.3 531.4 Base case 14.3 12.8 11.7 684.0

1/ Fiscal space is defined as spending excl. interest, defense and public enterprise losses. The latter is approximated by the sum of subsidies and payment of contingent liabilities.

2.82. In the baseline scenario real non-interest, non-defense and non-SOE spending expands robustly over the medium term, and this expansion, together with stringent measures to ensure improved effectiveness and targeting of the spending, should enable the government to facilitate economic growth and make a substantial dent in poverty, markedly improve health and education indicators, and hence narrow Pakistan's substantial social and gender gap. Non-interest, non-defense spending under the baseline scenario grows on average by 11.7 percent per year in real terms, be on average 27 percent larger during FYs 2004-07. In the low scenario this growth is only 6.3 percent, and thus there is little room for reversing the relative decline in economic and social spending witnessed in the 1990s. In the baseline

43

scenario non-interest, non-defense and non-SOE spending to 14.3 percent of GDP, compared with only 10.9 percent in FY02, and recovers to levels seen in the 1980s and early 1990s. 2.83. In the low scenario, government revenues decline gradually as a share of GDP over FYs 2004-07, domestic interest payments remain at the FY03 level, public enterprise losses remain high, and defense spending rises steadily relative to GDP. The interesting point is that even with a higher fiscal deficit, compared with the baseline scenario, the fiscal space under the low scenario is only a fraction of what could materialize under the continued reform scenario. 2.84. It is crucial for successful implementation of the baseline scenario that governance improves sharply. This means that government should combat corruption, leakage, and defici nt revenue collection e and control expenditures resolutely and assertively. The benefits will be seen in larger fiscal space to be used for high-priority spending, a reduced debt burden, rising investor confidence, and hence increasing private investment­both domestic and foreign­and growth. In addition, the government is more likely to get a higher share of concessional foreign financing if strong measures to improve governance are part of an overall reform package. 2.85. A firm commitment by the government is needed to stay the course with regard to economic and governance reforms in the face of political opposition, including from vested interests and in particular in the area of public enterprise reform. If the government can obtain the projected gains for another 3-4 years, the fiscal and external dynamics could be entrenched on a path toward sustainability. 2.86. Pakistan's development partners have a crucial role to play in providing sufficient foreign financing in the form of grants or loans on concessional terms. Without such financial assistance in the magnitudes envisaged here, it will be very difficult for the Government of Pakistan to achieve the three central goals (debt burden reduction, acceleration in economic growth, and poverty alleviation) all on its own. Hence, substantial additional foreign financing on concessional terms is an integral part of this reform and development strategy.

44

CHAPTER 3: REORIENTING PUBLIC SECTOR PRIORITIES

Introduction 3.1 The previous chapter outlined the fiscal space that can be created and enhanced by the continuation of reform efforts. This chapter and the next discuss the issues involved in making optimal use of the possibilities of higher economic and social spending. The effectiveness of public expenditures has several dimensions:

§ § § § §

Strategic approaches to public interventions Choice of sectoral and subsectoral priorities Soundness, transparency, and accountability of budgetary and planning processes Careful screening of projects and speedy and effective imple mentation of programs The existence of strong monitoring and evaluation systems

3.2 The presence of functioning institutions and a framework of defined distribution of responsibilities at various levels of government are the cross-cutting issues that influence all aspects of effectiveness of public spending. This situation requires not only the statues, laws, and rules that determine the establishment and functioning of various institutions, but also effective management and leadership so that each institution has the flexibility to perform its statutory duty in collaboration and not in competition with others and to adapt its roles according to changing needs. 3.3 This chapter focuses principally on the intersectoral and subsectoral priorities, though obviously the issues of project choice, budgetary and planning processes, and implementation cannot be entirely separated from sectoral allocations and priorities. 3.4 It is clearly not feasible to undertake a comprehensive sector-wise review of public expenditures in the context of this overview report. The attempt here is to examine, in some detail, a few key sector allocation and implementation issues that will greatly influence the ability of the government to achieve its stated goals. A look at the selected sectors can also illustrate the constraints public spending has faced, the less than optimal way this spending has been used to advance economic and social policy goals, and the institutional weaknesses that have contributed to often disappointing and occasionally adverse consequences of public spending for the economy and the society. Even more important, looking to the future, such an analysis can suggest ways for minimizing the public policy dilemmas (and increasing policy choices) arising from the extremely constrained financial resource position on the one hand and the desperate need on the other hand to step up spending on education, health, infrastructure, and direct poverty alleviation programs. 3.5 In reviewing the government's expenditure priorities and options in allocating the fiscal space, this chapter examines the entire public expenditure in the selected sectors and not just the development spending. The notion of development spending, including as it does the investment expenditures, technical assistance, and some initial recurrent expenditures related to new capital spending, may have outlived its usefulness as a sectoral and national planning tool. Indeed, to some extent, the implied notion that nondevelopment spending is of lower priority has led to an inefficient use of economic resources. It has contributed to inadequate allocations to the social sectors, woefully inadequate allocations for operation and maintenance, and the creation of new physical assets at the cost of the effective use of existing assets. It has also led planners to be preoccupied with the development budget while neglecting sectoral analysis and the impact of so-called non-development spending on the country's economic and social goals. The introduction of I/PRSP and the Medium-Term Budget Framework (MTBF) provide

important opportunities for moving away from the excessive focus on the development budgets and toward a more comprehensive approach to public expenditure management. 3.6 Using this comprehensive sector-wise approach, the discussion here focuses on allocation and implementation issues in three sectors that will greatly influence the ability of the government to achieve its stated goals:

§ § §

Irrigation water Power Education and health

3.7 Public spending on a host of other sectors, such as law and order maintenance and provision of justice, agriculture, roads, population welfare, rural development, and targeted transfers (food support program, Zakat, etc.) no doubt also deserves priority. The government includes many of these (in addition to education and health and a part of irrigation spending) in the list of high-priority spending to be monitored under the I-PRSP. The costing of PRSP-related expenditures and relationships between expenditure inputs and output targets are as yet extremely tentative, but the government has rightly given the protection of I-PRSP spending the highest priority. Issues related to the adequacy of funding of IPRSP cannot be analyzed in a comprehensive fashion in this report because of a lack of costing data. They are touched upon, however, in the next section and discussed at some length in the section on education and health. Since the social sectors account for 60 percent of identified high-priority spending for poverty reduction in the I-PRSP, there is a considerable overlap between the latter and the sectors selected here. In any case, the issues of the coverage and adequacy of high-priority poverty spending must be revisited in the context of the finalization of the PRSP. This spending should have the first claim on the fiscal space that will be created by the continuation of reform policies. Funding the Poverty Reduction Strategy 3.8 The Government of Pakistan is following a multiprong poverty reduction strategy, which is outlined in the I/PRSP and will be further elaborated in the full PRSP now under preparation. The core principles of the strategy include engendering growth, implementing broad-based governance programs, improving social sector outcomes, and reducing vulnerability to shocks. The main macroeconomic targets in the I-PRSP that is, growth rates of GDP, revenue, and inflation--are broadly in line with the baseline scenario presented in Chapter 2. Two questions related to public expenditures are relevant for the implementation of the poverty reduction strategy: § Are the indicated I/PRSP expenditures consistent with the achievement of specified goals especially in the social sectors and with the internationally agreed-upon Millennium Development Goals (MDGs)? § Can the financing needed for the poverty reduction strategy in the medium term be accommodated within the fiscal space likely to be created? 3.9 The high-priority expenditures for poverty reduction identified in the I/PRSP show a relatively modest planned growth, from 3.4 to 4.0 percent of GDP, over the period 2001-04. This allocation appears to be totally inadequate in relation to ambitious targets, especially in education. On the one hand, there is a need to set more realistic but still ambitious social targets consistent with MDGs. On the other hand, the financing needs for meeting these targets require more careful assessment. 3.10 As discussed later in this chapter, achieving goals in education and health will require substantially larger funding than assumed at present. The full PRSP will probably extend the planning

46

horizon to FY 2006 and is expected to provide a fuller costing of social sector goals so that inadequate funding does not frustrate the essential goals of human development, as often happened in the past. 3.11 It is suggested that the high-priority PRSP spending also cover law and order maintenance and provision of justice and rural electrification. The governance problems resulting from inadequate spending on police and the justice system have their greatest impact on the poor. Similarly, it is the poor in the rural areas who most lack access to electricity; of the roughly 40 percent of Pakistani households that do not have electric connections, most live in the rural areas and are poor. Speedy rural electrification must be an important part of increasing access to education and health care, dissemination of new technologies, and general modernization. Rural electrification cannot be undertaken as a commercial proposition and will require special public sector financial support. A system of capital grants to rural communities and electric cooperatives can be developed that gives priority to those who mobilize enough own resources to ensure financial viability after the initial grant. It is worth looking into Bangladesh's experience. Donors will probably show substantial interest in providing grants or low-cost loans to a program whose benefits go overwhelmingly to the poor. The development and expansion of the rural electrification network should not be limited to the Water and Power Development Authority (WAPDA) and should involve the private sector. 3.12 Using the broader definition of poverty-related spending suggested, the actual priority poverty spending in 2001-02 was close to 5 percent of GDP. Our rough estimates suggest that this spending should increase to about 7 percent of GDP by 2006-07. Higher education and health spending would probably take up half of the increase in order to achieve the goals set; the rest would go largely to higher allocations for law and order, provision of justice, and rural and urban infrastructure, including rural electrification. The baseline scenario, which projects that non-interest, non-defense spending could increase from 10.9 to 14.3 percent of GDP over the period 2002-07, can accommodate the rise in highpriority poverty-related spending of the order of magnitude suggested here, provided the political commitment to reorient the public spending toward social goals and better governance remains strong. It is very encouraging that the recently completed PRSP (December 2003) provides both for a broader definition of poverty spending suggested above and proposes to increase this spending steadily to 6.8 percent of GDP by 2007-08. Remedying the Neglect of Education 3.13 Pakistan's I-PRSP recognizes the importance of improving education outcomes. Learning from the experience of the Social Action Program (SAP), the government strategy is to significantly improve the social service delivery system by addressing the underlying governance problems. It will then gradually increase funding as allowed by the impact of improvements in tax administration, stronger economic growth, and assistance from donors. In education, the linchpin of this effort is the federal government's action plan in support of education sector reform (ESR), whose implementation lies with the provincial and district governments. 3.14 Educational attainment and health improvements are among the most valuable benefits of human development and are also--since they constitute vital investment in human capital--important determinants of growth and poverty reduction. Pakistan has seriously neglected investment in human capital and has paid the price for it not only in persistently high growth in population for a long time, but also in the slowing of growth and persistence of poverty. In education, the problems are the very low level of enrollments not only at the primary, but also at the middle, secondary, and higher education levels and the low and declining quality of public education. 3.15 The irony is that an increased emphasis on elementary education and protection of its relative share in public spending in the 1990s did not achieve the desired (primary and middle) results, whereas 47

per-student spending at the secondary and higher education levels declined by as much as 30 and 50 percent respectively in real terms, compounding the crisis of quality. As it moves ahead, Pakistan needs to make a major dent in the social gap at all of levels of education and accompany it with a demonstrable reversal of the trend in declining quality. The approach to remedying the social gap needs to be comprehensive, setting ambitious but attainable targets and backing them up with adequate funding, clear institutional responsibilities, and a system of incentives and workable public participation arrangements including private-public partnerships, citizen boards, and parent-teacher associations. 3.16 The basic strategy embodied in the ESR is sound. It sets explicit targets for each level of education (Table 3.1) expected to be realized by provincial and district governments and aims to achieve these targets through increased funding, improved resource mobilization and utilization, and the introduction of institutional reforms at all levels of education to improve governance. Table 3.1: ESR Targets by Sub-sector, 2001-2005

2001 Actual (%) 49.0 83.0 66.0 47.5 29.5 2.6 2005 Target (%) 61 100 76 55 40 5

Literacy Gross Primary Enrollment Net Primary Enrollment Middle School Enrollment Secondary School Enrollment Higher Education Enrollment

Source: Government of Pakistan, Ministry of Education's Education Sector Reforms document based on provincial Government data. PIHS data has differences.

3.17 As already noted, however, several parameters of ESR, notably the specific targets, funding requirements, and financing mechanisms, need to be revisited. More important, the education sector plans need to be made more operational in the context of finalizing the PRSP, using more recent information on actual enrollment levels and the decision to allow district governments more freedom in choosing expenditure priorities. 3.18 The ESR targets are ambitious and will entail considerable commitments from the government-- for example, gross primary enrollments are targeted to increase by 16 percentage p oints from 2001 to 2005. Taking into account the population growth, meeting this target would require enrollment of roughly an additional 5-6 million children at the primary level. Even this figure understates the problem. There is lack of agreement on the starting level of gross primary enrollments: PIHS data suggest that current primary gross enrollments may be as low as 72 percent compared with a figure of 83 percent from government administrative data (Table 3.1.) Similar discrepancies may exist at other levels of education. 3.19 The ESR had projected a cost of Rs. 100 billion, with roughly 34 percent of the total to be allocated to primary education, 32 over and above the present annual national expenditures on education. IPRSP, on the other hand, assumes a growth in public education spending in line with growth in nominal GDP: the percentage of expenditure on education remaining at 1.8 percent of GDP. Figure 3.1 illustrates the existing difference in projected expenditures between I-PRSP and ESR.

32

The original ESR package was prepared at a cost of Rs. 55.5 billion for the years 2001-04. The duration of this package has been extended to 2001-05 to accommodate the President's Programs, the mainstreaming of Mmadaris, and the setting up of polytechnics at the Tehsil level. Therefore, the cost estimates have increased to Rs. 100 billion. These estimates, however, do not include recurrent expenditures of the ESR program. The districts and provincial/area governments are expected to review and assess their own requirements and adjust the non-development budgets. ESR estimates also do not include the provincial education Annual Development Programs (ADPs).

48

3.20 The bulk of the ESR expenditure at the primary level is allocated to improving and expanding rundown physical infrastructure, with additional support for institutional changes, such as the development of parent-teacher associations. Other features of the overall strategy include teacher training, an adult literacy campaign, mainstreaming of the madarassas, a pilot nutrition program, introduction of a technical stream in secondary schools, reform of examinations, and introduction of a national education assessment program. With the devolution of authority to the district level for the bulk of education spending, the funding flow arrangements for supporting the objectives of ESR are also not clear. 3.21 As already mentioned, the finalization of PRSP during the next few months provides a good opportunity to resolve some of the issues and contradictions noted. 3.22 First of all, the targets for elementary school enrollment need to be reviewed. The 100 percent gross primary enrollment target by 2004 (I-PRSP) or 2005 (ESR) is no longer realistic. On the one hand, firmer information needs to be developed on the present position (at all levels of enrollment), and on the other hand a credible universal education attainment target (say by 2006 or 2007) need to be developed and backed up by a policy package, funding, and institutional arrangements. The ESR middle and secondary school and higher education targets will also need to be moved out in time by a couple of years. Although all education sector goals appear ambitious in terms of the effort required to achieve them, they remain modest by international norms. All countries in South Asia except Pakistan have gross enrollment ratios of 100 percent or higher. The ESR, if successful, will achieve a middle school enrollment rate of 55 percent by 2006 or 2007. In Korea three-fourths of the relevant age group was completing middle school in 1975. Pakistan hopes to raise its secondary enrollment rate to 40 percent over the next four to five years. Malaysia had achieved this rate by 1974. In higher education Pakistan has an enrollment rate (1996) of 2.6 percent. This is one of the lowest proportions in the world--for India the figure is 6.2 percent (1990); for Iran (1994) it is 12.7 percent, and for several East Asian countries this rate exceeds 30 percent. In education Pakistan appears to be at least thirty-five to forty years behind the East Asian countries and ten to fifteen years behind the South Asian countries. Consequently, an acceleration is needed to enhance enrollment levels at all levels of education. This goal will require the government to increase resources allocated to education and to improve the institutional capacity to use the additional resources effectively and efficiently. 3.23 In the very short term, high priority must b given to primary education, including nonformal e education, because without rapid universal education, progress toward increasing literacy levels, now estimated at 45-48 percent, will remain slow. Expanding public expenditure for primary education is also crucial because it is more pro-poor and also helps the rural areas more than the urban areas (see Box 3.1). But high-quality primary (and secondary) education requires parallel development of higher education. It is from this level that the country gets its teachers, scientists, and managers. 3.24 The lessons learnt from the experience of the past decade, in which expansion of elementary education spending resulted in only moderate benefits, are already being reflected in approaches to elementary education. The provincial governments of Sindh and Punjab are no longer giving priority to 49

the opening of new schools. As emphasized in the ESR, attention is being given to improving quality by hiring new teachers, increasing accountability of teachers, improving physical facilities in schools, and raising nonsalary spending. In Punjab special salaries for teachers (and doctors) in rural areas are being considered. The Human Development Foundation set up by the Government of Pakistan as an autonomous corporation is emphasizing enrollment processes, nonformal education, especially for recent dropouts, and innovative approaches to capacity building. The Pakistan Poverty Alleviation Fund has expanded its mandate to include education and social sectors. But it is not at all clear that the programs, new initiatives, institutions, and funding commitments are in place on a scale necessary to achieve the key targets in primary education: 35-40 percent growth in primary enrollments over the next five years, the narrowing of gender and geographical differences, significant improvements in quality, reduction in dropout rates, and expansion of programs of non-formal education.

Box 3.1: The Rich-Poor Gap and Public Expenditure on Education According to Figures 3.2 and 3.3, income groups from the second decile to the fifth decile receive the highest benefits from public expenditure on primary education. In this sense, public expenditure for primary education is pro-poor ­ an effect that is partly attributable to the fact that poor children are more likely to attend public primary schools, as opposed to higher income groups who have a higher private-public enrollment ratio. On the other hand, income groups from the seventh decile to the ninth decile receive the highest benefits from public secondary school education ­ an effect that arises mostly from the fact that poor children are far less likely to enroll in secondary school.

Figure 3.2: Per capita Benefit Incidence of Primary and Secondary Education

250 200 150 100 50 0

Figure 3.3: Distribution of Public Expenditure for Primary and Secondary Education

16 14 12 10 8 6 4 2 0 1 2 3 4 5 6 7 8 9 10

1

2

3

4

5

6

7

8

9

10

%

Per Capita Consumption Expenditue deciles

Primary secondary

Per Capita Conumption Expenditure deciles

Primary Secondary

The Urban-Rural gap and public expenditure on education As Figure 3.4 shows, rural communities, on average, receive more benefits from public primary education than urban communities. It is, however, worth noting that poor urban families receive more benefits from public primary education than urban communities. As for secondary school education, urban communities receive more benefits from public secondary schools than rural communities

Figure 3.4: Benefit Incidence of public primary education (Urban vs Rural)

250 200 150 100 50 0 1 2 3 4 5 6 7 8 9 10

Figure 3.5: Benefit Incidence of Public Secondary School (Urban vs Rural)

250 200 150 100 50 0 1 2 3 4 5 6 7 8 9 10

Per Capita Consumption Expenditure deciles

Urban Rural

Per Capita Consumption Expenditure deciles

Urban Rural

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3.25 In addition to issues related to the devolution process (discussed in detail in Chapter 4), three sets of issues appear especially important. First, enrollment levels in Pakistan are among the lowest in the developing world, and gender disparities and rural-urban gaps 33 are among the widest and point to tremendous unrealized potential and missed opportunities. But there are several incentive programs that have been used around the world to stimulate demand for education and encourage enrollments. Second, the private sector is the most dynamic segment of education. 34 It accounted for more than 40 percent of the growth in primary school enrollment in the past decade. The average teacher salary in a private school is actually lower than in public schools, but the quality of teaching appears to be better because of much greater accountability. Effective public -private sector partnerships that tap into the strength of the private sector have yet to be developed. Last but not least, more detailed and realistic estimates of public funding requirements, not only for primary education but also for the entire education sector, are needed. 3.26 Clearly increasing public funding alone will not meet the urgent challenges in the education sector. But higher public spending is a necessary if not sufficient condition for improving educational attainments. Without additional funding, devolution will not work, needed quality improvements, especially at the primary level, will not materialize, the scope for incentive schemes will be limited, and the needed recovery in higher and secondary education will not take place. This situation will once again frustrate the attempt to achieve the ambitious targets. Detailed work is necessary to firm up the education funding requirements, including for the secondary and higher levels. Our tentative estimates suggest the need to gradually raise public education expenditures from 1.8 percent of GDP in 2001-02 to 2.5 percent in 2006-07. This growth will translate into average spending of 2.2 percent of GDP over the next five years, making possible an increase of about 45 percent in real terms over the 2001-02 level. It will also mean that education spending will take up more than one-third of the fiscal space generated under the baseline scenario. A substantial part of the growth in relative spending will be absorbed by primary and secondary education, though the downward trend in allocations for higher education also needs to be reversed. 3.27 Within the recommended overall increase in education expenditures, a more rational allocation of spending is needed. More rational allocation would include increasing resources for nonsalary recurring expenditures for primary and secondary school improvements; provision of missing facilities in existing infrastructure, especially at the primary and secondary level; provision of quality services such as teacher train ing; increasing resources for new infrastructure where there is a need, that is, at the middle and secondary levels of education; girls' incentive programs; and demand-side interventions.

33

In 1999, for example, female enrollment rate was 23 percent lower than that for males. As in the case of gender, there are significant disparities in educational attainment across regions. Most striking is the urban-rural gap. Unlike the gender gap, the urban-rural gap has widened over the years. In 1991 primary school enrollment in the rural areas was 22 percentage points lower than the urban areas, by 1999 it had increased to 30 percentage points. Furthermore, gender gaps in school enrollments vary substantially across regions and between urban and rural areas. In 1999 the primary schooling enrollment rate was more than 99 percent in urban males of the Punjab but barely 28 percent for rural females of Sindh. The gender gaps in these enrollment rates ranged from less than 3 percent in urban areas of the Punjab to about 34 percent in rural areas of the North West Frontier Province (NWFP).

34

According to a recent Census of Private Schools (2000), Pakistan has as many as 40,000 of such private schools, the result of significant growth in private schooling over the 1990s. The share of the private sector in total national primary school enrollment increased from 14 percent in 1991 to about 28 percent at present. The private share of secondary schooling increased from 8 to 17 percent over the same period. This phenomenon was not limited to the higher-income groups. The private share in primary school enrollment grew from 5 to 10 percent for the lowest-income group, while it grew from 35 to 60 percent for the highestincome group. Research on private schooling, based on data from the aforementioned census, also shows that private schools seem generally to offer better gender outcomes, partly because they are coeducational institutions, and also have been successful in recruiting female teachers.

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3.28 Incentive schemes can be used to promote enrollment in both government and private schools. Voucher schemes, which directly support the students, can help create demand for schooling by meeting some of the direct and indirect costs of attending school. They can introduce school choice and competition between schools (reducing unit costs and improving quality) and can be targeted to subpopulations that are underserved or excluded (such as the poor or girls). Other demand-side enrollment incentives have been widely used around the world and take many forms--free textbooks, uniforms, transport, scholarships (Bangladesh has a very successful female secondary school scholarship program), and in-kind payments to families. Pakistan has some experience with these schemes, such as free textbooks in Balochistan and Sindh and some form of scholarships in almost all provinces. The Food for Schoolgirls program run by the World Food Program provides inducement in the form of a tin of edible oil to each student if she attends school for twenty days in a month. Initial results are encouraging and point to the wide potential that such schemes hold for improving enrollment and retention rates. The government is also financing a food support program (Taiwana Pakistan) that should be evaluated after a year of implementation to assess its impact on enrollment and retention. 3.29 While raising the level of public spending on the social sectors is an important medium-term goal, and two of the four provinces (Sindh and NWFP) have economic reform programs underway that hold promise for more spending for the social sectors, an additional concern is achieving improvements in the efficiency of present-day spending. Getting budget allocations released in a timely fashion to front-line spending agencies, as well as ensuring that allocations are appropriately balanced across salary, nonsalary, and the development budget, is a top priority. Adequate provision and timely release of the nonsalary recurrent budget is critical to smooth operations at the point of service provision. While increased budget allocations are a necessary step, it should also be recalled that in the past actual expenditures have often fallen below planned expenditures--for example, in Punjab actual expenditures have fallen short by as much as a quarter in recent years. Institutional bottlenecks that have disrupted the overall flow of funds in the past are likely to be even more critical with the devolution of service delivery to the districts, and the removal of these bottlenecks is clearly a high-priority area for reform. According to anecdotal information, the flow of funds, especially nonsalary funds, continues to be unpredictable under the district governments. Predictability of funding is crucial, whatever the absolute level of funding. 3.30 As a part of increasing public expenditure on education, the government needs to explore new funding mechanisms to increase enrollment, raise literacy, and improve quality. These mechanisms include the Education Foundations, the Pakistan Poverty Alleviation Fund, the Human Development Commission, and education nongovernmental organizations (NGOs), such as Bunyad, which are active in the nonformal education sector. 3.31 How can public -private partnerships in education be strengthened? One obvious way is to provide vouchers for students, especially girls, where there is no public school nearby (for other possibilities of public financing of private education (see Chapter 4). This seems quite practical because in a number of cases private school fees are not high. 35 Access to educational facilities is an important determinant of school participation. Physical proximity to a school appears to be quite important and is a factor in explaining the gender gap in enrollments, since proximity to girls' schools is far from universal in rural areas. The regressions of school participation 36 show that the presence of a school offering primary education within one kilometer increases the probability that a girl in a rural area will attend school by 15 percent. Existing initiatives, such as private sector use of public facilities in the second shift and concessionary access to public land, should be strengthened. Finally, the government should resist the temptation to strongly regulate the private sector, at least in the next few years when the system desperately needs expansion. To some extent the institutions that will oversee the activities of the private

35 36

See "Poverty Assessment, World Bank, 2002. See Chapter 3, Pakistan: Poverty Assessment, The World Bank, 2002.

52

sector should be the same as those that oversee the activities of the public sector, such as student assessment and examination bodies. 3.32 The fundamental problems that the government must resolve to get better outcomes in education are institutional. In the absence of fundamental reform, additional funding by itself will achieve little. Many of these problems apply to the entire public sector, but they manifest themselves most visibly and with the greatest impact in the education sector because of the size and multitude of actors that constitute the system. Pakistan has more than 150,000 primary and middle schools and more than 450,000 primary and middle school teachers. This size speaks to the need for accountability, responsibility, service orientation, and incentives that reward people for doing their job well. Improving Health and Population Outcomes 3.33 During the last decade, Pakistan has made a noteworthy progress i improving its health and n population indicators. Infant mortality rate declined from more than 100 per 1000 live births in early 1990's to 82 in 2001/02 and the total fertility rate has declined from 6.4 to 4.8 during the same period. Yet because these i provements are from a very low base and a number of problems in the health m services delivery system remain unresolved, therefore there is hardly in room for being complacent. Eighty percent of women are still delivering without assistance from trained personnel; contraceptive prevalence is still very low (28 percent);37 and due to poor nutritional status and low tetanus toxoid immunization coverage of pregnant women (48 percent), about one in every three hundred women die in childbirth. Moreover, even the improved aggregate indicators conceal vast gender and location-wise disparities. Mortality among the girls ages one to four is reported to be 1.7 times higher than in boys in the same age cohort, and the mortality rate for women between the ages of twenty and twenty-nine is about double that of men. All these indicators being significantly worse in the rural areas. Poor governance and low public sector spending on the health sector is the main cause of the persistence of poor health indicators. 3.34 Poor governance, weak health sector management and low levels of public spending are the key factors behind poor health outcomes. During the second half of 1990s, public expenditures on health amounted to only about 0.6% of GDP, among the lowest in the region. The government health services have suffered from insufficient budget allocations to fund current expenses other than staff salaries. These include expenses for drugs, diagnostics (laboratory tests, x -rays), repairs and maintenance of facilities, replacement of equipment, utilities, transportation, in-service training expenses, and health education materials. As a result of its poor quality, public satisfaction with the public health services is low and is reflected in low use of government's heath facilities (about 80 percent of outpatient contacts occur in private facilities, and only slight less for hospitalization). In addition, access to other basic services such as safe water and sanitation is still poor in many areas, which, together with poor nutritional status plays a major part in the vicious circle of illness, low productivity and poverty. Health Sector Reforms 3.35 The government is well aware of the magnitude and depth of the problem and has recently tried to address the broader issues of governance in social sector delivery through major reforms, especially the devolution initiative, while a new agenda for improving health and population outcomes has been defined under the I-PRSP. The I-PRSP contains targets to 2003/04 for child mortality, the number of Lady Health Workers deployed, prevalence of malnutrition among pre-school children, percentage of low-birth-weight babies, contraceptive prevalence rate, and total fertility rate, and it aims to introduce a mechanism to monitor outcomes on a regular basis.

37

This is based on PIHS data, the government estimates are somewhat higher .

53

3.36 Moreover, the Government's new health policy is specifically designed to achieve the mediumterm sectoral goals specified in the I -PRSP. The policy has targeted ten specific areas for reform including, reducing the widespread prevalence of communicable diseases, addressing inadequacies in primary/secondary health care services, correcting male and urban biases, bridging basic nutritional gaps, improved regulation of private health sector, and capacity building for health policy monitoring. The Government's Population policy is designed to achieve population stabilization by 2020 through mainstreaming the concept of Family Welfare in national and development programs, expanding service delivery and improving its quality, fostering public -private partnerships wherever appropriate, promoting health education through advocacy with key influential leaders, training and capacity building of service providers, decentralizing and de-federalizing the family welfare program, and strengthening health sector monitoring and research. The provinces have prepared plans to implement the policy, which are at various stages of development. The Way Forward 3.37 The policy directions envisaged in the I-PRSP and the current health and population policies are by and large appropriate to address the issues faced by the sector. Overall policy objectives are however demanding in terms of local capacity, and there is as yet no clear vision on how to improve implementation of health and population programs to deliver good results on the ground. In addition, there are no definite initiatives or plans and means outlined to improve the quality of health care in both the public and private sectors. The biggest concern however is that I-PRSP's projected financing for health sector seems to be totally out of line with the targets laid down in I-PRSP and the sectoral MDGs. 3.38 To make the public system more efficient and provide better value for money, the government needs to take a series of strategic actions: § The public health services should seek to achieve a sharper focus on service priorities, in terms of both resources and management attention. These priorities need to be developed keeping in view the level and direction of private sector involvement in the sector and the appropriate role of the government. Optimally, the government health services should seek to "crowd in" rather than "crowd out" private health services. Direct provision of public health services should generally be based on equity considerations and on existence of public goods, externalities, information deficiencies, and insurance market failure. Control of disease vectors, protection of water and food safety, and health education, preventive health, women and child health care and rural heath are areas where public sector interventions appear well justified. Establishing better input priorities, for example setting up new facilities on a well-defined criteria and only in underserved areas, improving the balance between doctors and paramedical staff, and focusing new recruitments only to correct skill mix; should increase the efficiency of scarce public resources Building on, and learning from, successful initiatives like LHW, preventive and population programs can help lead to better channeling of public sector efforts and resources. The effectiveness of these programs may be enhanced by a phased devolution of management, implementation and financing of these programs to the district governments. Forging better public -private partnerships to make more effective use of health facilities and skills. In this regard, each provincial government should develop a framework for contracting out packages of services for defined population to NGOs or other private parties individual entrepreneurs or doctors groups. Making devolution to work for achieving the health outcomes (see Chapter 4).

§

§

§

§

§

54

3.39 Most importantly, however, public sector spending in the health sector should increase significantly. At present budgetary allocations for health sector falls well short of what is needed to achieve the PRSP targets and MDGs. Although, private sector spending can help close this gap to some extent, the government's redistributive role requires its increased involvement to ensure access of quality health services to the poorest and the excluded, through direct intervention or financing health initiatives for the targeted groups through the private sector health delivery system. The magnitude of the government's spending effort required to achieve the I-PRSP goals, though not yet fully costed, would be considerably larger than that indicated by the I-PRSP estimates. Rough calculations indicate that adequately financing the high-priority programs (like the LHW, Maternal and Child Health, HIV/AIDS, Malaria and TB Control, Health Education, Populatio n Program, human resource development and capacity building, etc.), along with additional finances for public -private partnership programs, enhancing the non-salary budget, and a normal increase in salary would require, at an average, an additional Rs 10 billion per annum. This would increase sectoral financing from the present 0.6% to an average of 0.8% during 2003-07. Accelerating Water Resource Development 3.40 Agriculture is a major part of Pakistan's economy and one of the key engines of overall economic growth. Agriculture today contributes about 25 percent of GDP, employs nearly 50 percent of the labor force, and is responsible directly or indirectly for 60-70 percent of exports. Within the agriculture sector, crop production (principally wheat, cotton, sugarcane, and rice) accounts for about 59 percent of value added and livestock about 38 percent. Increases in water resources available for irrigation and expansion of irrigated area have played a central role in agriculture growth since the 1960s. Agriculture now uses an estimated 95 percent of available water resources, and irrigated land is responsible for about 80 percent of agricultural production. Total irrigated area in Pakistan is about 46 million acres; nearly 97 percent of this irrigated area is in the Indus Basin. 3.41 As Table 3.2 shows, water availability at farm head doubled over the period 1960-90 but has remained unchanged since then (hopefully the sharp drop in last two extreme drought years will prove temporary). This vast expansion of irrigation water supplies was made possible by the large investment in expansion of the irrigation system and the construction of two major storage sites/hydroelectric projects at Mangla and Tarbela in the 1960s and 1970s under the Indus Basin Treaty, as well as by the exploitation of groundwater resources mainly by private tubewells. In the 1960s total water and power investments in the public sector exceeded US$1.5 billion, accounting for more than 50 percent of total public spending. 38 Half of this amount represented the Indus Basin Replacement works. The long-term investments made in development of water resources in the 1960s and 1970s sustained economic growth well into the 1980s. Yet the long-term vision of the planners of that era,39 in which Pakistan would further integrate water and power development and engage in highly productive agriculture in which water and other inputs are used very efficiently, has not been realized. Increases in water supplies have tended to extend and prolong traditional low-productivity agriculture. Slow growth in productivity in agriculture is due to many factors, including insufficient investment in human development and unequal asset ownership. But the low level of public investment in water including drainage and lack of sufficient progress on institutional arrangements that encourage farmers to pay for water and undertake on-farm development have also acted as major constraints on the development of modern agriculture. Public spending in agriculture and water touched a low of 0.8 percent of GDP in 2000-01. Other than the Chashma Right Bank Canal and the Pehur High Level Canal, expansion of irrigation in the past fifteen years has been limited to small, isolated schemes outside the Indus Basin. More important, the original expectation that a second stage storage on the Indus would be required and built by late 1980s or early 1990s has proved elusive because

38 39

Parvez Hasan, "Pakistan's Economy at the Crossroads- Past Policies and Present Imperatives," 1998. See Water and Power Resources of West Pakistan, a Study in Sector Planning; John Hopkins University Press, 1968.

55

of the political controversy surrounding the Kalabagh Dam and the lack of timely development of alternatives. Table 3.2: Water Availability, 1960/61-1999/00

Year Water Availability at Farm Head MAF Canal Water Groundwater Total 48.4 56.8 61.6 61.4 65.0 61.5 4.2 11.7 27.8 40.9 41.0 41.6 52.5 68.5 89.4 102.3 106.0 103.1 Irrigated Area MA 25.7 30.9 35.1 39.8 41.9 44.0 Acre-ft/ Acre

1960-61 1967-68 1977-78 1985-87 1990-91 1999-2000

2.04 2.22 2.55 2.57 2.53 2.34

3.42 With the rapid increase in population, the competition for water is becoming more intense and disruptive among upper and lower riparian provinces and among the agricultural, industrial, domestic, and environmental sectors. Since 1999 water availability in the system has been inadequate to supply the water allocations agreed-to in the 1991 Water Accord owing to drought and inadequate water availability in the major reservoirs as well as canal capacity. Water shortages on the order of 40-50 percent were experienced during the 2002 rabi and early kharif crop seasons. These shortages created a strong sense of crisis--they mobilized sector authorities to a degree that other persistent problems, such as deteriorating performance of infrastructure, low productivity, or persistent poverty, did not. 3.43 WAPDA was the first of the key sector organizations to prepare and present a plan--a water resources development strategy document called "Vision 2025" (2001) that calls for huge investments in multipurpose storage reservoirs and several new canals to expand irrigation during the period 2000-25. The goal of the plan is to address the problems of water scarcity, the flow of flood water to the sea unutilized, safe disposal of drainage effluent to the sea, tapping of groundwater, and reduction of seepage loses in the country's existing irrigation system. Partly because of the sense of urgency created by drought and the political impasse over the Kalabagh Dam, the government approved Vision 2025 in principle, and its main elements were, by and large, included in the Planning Commission's Ten-Year Perspective Development Plan (TTPP--FY 2001-11). Some projects have actually entered the Public Sector Development Program (PSDP) during the past two years. The cost of federal water projects included in the TTPP during 2003-07 is estimated at Rs. 202 billion, or roughly Rs. 40 billion per year compared with Rs. 9 billion spent in 2001-02. 3.44 Because of great neglect of water investments in the recent past, a substantial acceleration in overall public spending in the water sector appears justified. WAPDA and the Planning Commission must be commended for their initiatives in reviving water sector investments. The thrust of the present program has several problems, however, that require careful consideration and review by the Government of Pakistan. Many of the issues involved, the tackling of which can yield a more optimal and balanced expansion of irrigation water-related public spending, are discussed at length in Volume 2 of this report. These issues can be summarized as follows: § The need for a clearer vision that integrates long-term agriculture, irrigation water, and hydroelectric development § An excessive emphasis on extending irrigation facilities, some of whom may prove marginal and all of which will yield economic benefits only after a number of years § Inadequate attention to the urgent need to rehabilitate existing irrigation a ssets and on-farm development

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§ Inadequate attention to the political and technical issues that may prevent early resolution of much-needed additional storage on Indus § The need to harmonize ambitious water sector plans with overall resource availability and to avoid preemption of urgent social investments § The need to balance institutional development needs, including federal-provincial coordination and greater investment in planning and investigation, with higher water sector investment § The need to identify follow-up work to firm up long-term plans and to seek necessary mobilization of external assistance 3.45 WAPDA's Vision 2025 and the MediumTerm Investment Plan (MTIP) of the Ministry of Water and Power, completed in October 2002, a year after the TYPP, do not clearly relate the role of water development either to future agricultural needs and agricultural potential or to the limits of irrigation water availability. Any long-term plan for agricultural and water development must come to grips with the fact that groundwater development is already nearly at its limit, and surface water resources development will approach its overall limit--through increased storage of flood flows in the Indus River--in the next twenty-five years at the latest. 3.46 Even making the optimistic assumption that two large storage sites on the Indus can be built over the next twenty-five years, the addition to the total water supply in the Indus system would be only about 15 percent, a sharp contrast to the massive additions that were p ossible during 196090. The environmental, political, and economic feasibility of a second storage, however, remains an open question. One of the concerns, now being addressed through environmental studies, is whether there will be sufficient water below Kotri. 40 The worry is that additions to surface water supplies, without adequate drainage and evacuation of salts, will aggravate the problem of salt balance in the Indus Basin. 41 The finalization of a national drainage accord in the near future and adequate investments in a national drainage program will help to mitigate environmental concerns. But the basic fact is that the past pattern of agricultural growth, in which insufficient

Figure 3.6: Public Sector Expenditures

20,000

Water Agriculture Water & Agriculture

Million Rs.

15,000

10,000

5,000

0

1980/811982/831984/851986/871988/891990/911992/931994/951996/971998/992000/012002/03

Figure 3.7: Public Sector Expenditures as % of GDP

3.0 2.5

Percent of GDP

Water Agriculture Water & Agriculture

2.0 1.5 1.0 0.5 0.0 1980/81 1982/83 1984/851986/871988/891990/911992/931994/951996/971998/992000/012002/03

Figure 3.8: Public Sector Expenditures as % of total PSDP

35.0

Percent of total PSDP

30.0 25.0 20.0 15.0 10.0 5.0 0.0

Water Agriculture Water & Agriculture

1980/811982/831984/851986/871988/891990/91 1992/931994/951996/97 1998/992000/01 2002/03

40

The Ministry of Water and Power and the Indus River System Authority (IRSA) are jointly commissioning a study to determine the flow required below the Kotri barrage for ecological/environmental needs and for preventing seawater intrusion.

41

Surface water supplies bring an estimated 33 million tons of salt each year into the irrigated areas of the Indus plain, and a further 28 million tons are added from groundwater from tubewells. Only a small fraction of the total salt is carried out of the basin by the Indus River below Kotri Barrage or the Left Bank Outfall Drain (LBOD) in Sindh.

57

attention was given to water conservation and effectiveness of water use, is not sustainable . 3.47 An optimal water strategy must emphasize all the following elements:

§ Supply expansion: storage expansion (Mangla, Bhasha, and/or Kalabagh), small dams, improvements in diversion capacity and function, improvements in overall system operation § System expansion: external expansion (three canals), internal expansion by remodeling and extension of existing Canal Command Areas (CCAs). § Management: on-farm water management interventions (watercourse lining and land leveling, for example), supply management (rehabilitation and modernization, flood protection, improvements in operations and maintenance versus new investments), improved water allocations and scheduling, improved equity at system and distribution levels, groundwater management, incentives, introduction of new agriculture and irrigation technology, effective access to markets, improved knowledge and information, human resource development and research § Sustainability and environment: waterlogging and salinity, reducing drainable surplus, water quality, safeguarding ecology below the Kotri Barrage § Productivity: cropping patterns, water rights and markets, water pricing § Governance and institutional reform: improved public service and accountability, cost reduction, decentralization, empowerment of users 3.48 The optimal water strategy for Pakistan's integrated Indus Basin System is technically complex. The trade-offs among the set of alternatives and complements (storage, conservation, reservoir scheduling policy, estuary maintenance policy, sSystem expansion) are not simple because of the varying degrees of capital lumpiness, the uncertainty of costs and benefits, and the dependence of benefits and costs on the sequencing of investments. In addition to the technical complexity, the integrated system includes a cascade of upper and lower riparians, which introduces political economy considerations in the choice of the optimal strategy. To address this technical-cum-political complexity, it is essential that provincial governments (lower and upper riparians) as well as intraprovincial stakeholders (system rehabilitation versus system expansion) engage in extensive dialogue to agree on the framework and the rules for sharing the resource and the costs and benefits. This framework may be formalized as water and drainage accords to permit investment choice and sequencing. 3.49 On storage, the decision to raise Mangla Dam appears sound because the increased storage capacity will have a reasonable probability (71 percent) of filling each year. Also, it is the only option available to the government in the next five to seven years. 3.50 The decision to accelerate the feasibility of Basha Dam is also an important step in resolving the political impasse on Kalabagh. Much more work needs to be done, however, during the next year to deal with the political economy and technical questions before Pakistan is ready to propose a large storage project to donors for financial support. Political consensus needs to be built on the sequencing of storage projects, assisted by good economic studies that will throw light on the options available for operation of new reservoirs. The technical choices between water releases for the agriculture sector and electricity generation and the management options for releases in rabi versus early kharif must be debated and settled as a part of the decision to build additional storage. This dialogue will, on the one hand, clarify the economic and political rationales for future storage and, on the other hand, help minimize future conflicts among provinces and in canal commands within provinces.

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Figure 3.9: Depletion of Existing Storage and Planned Augmentation

19.2

Basha Dam (2016) Original Storage Capacity 5. 7

18

15.6

(Tarbela + Mangla + Chashma)

14.8

2.9

13.5 12.8

Capacity (MAF)

12.8 11.9

Mangla Raising (2008)

11.7 10.4

Series1 Series2 Series3

Storage

1976

1980

1984

1988

1992

1996

2000 Years

2004

2008

2012

2016

2020

2024

3.51 The government has initiated a large system expansion program focused on three canals: Greater Thal, Kachhi, and Rainee canals. These canals will enable diversion of 4.6 MAF of water and will cost more than Rs. 90 billion. These projects are driven primarily by the desire of the provinces to utilize their respective shares under the Water Accord, though until more storage is built they will receive perennial supplies for only seventy-five to ninety days during the kharif season. While these projects respond to strong regional interests, the final scale, phasing, and cost coverage of these projects must be reexamined, especially after the feasibility studies of Kachhi and Rainee canals have been completed. The trade-offs among provinces and stakeholders within provinces must be revisited and agreed-on as part of the new drainage and water accords mentioned. The conflicting political economy considerations underlying these choices cannot be minimized, but with the help of technical feasibility studies, consensus should be possible on the broader national interest. 3.52 The following further points need to be taken into consideration before fully committing the funds to the program of canal expansion during 2004-07: § § § Since these canals would receive water for a period of only seventy-five to ninety days in a year (during July to September), the non-availability of water during April-June (the kharif sowing season) would affect cropping patterns and yields. The command areas include depressions, sand dunes, and large areas with low population. Thus water losses would be high, and agricultural development would take place very slowly as colonization and command area development take place. As currently proposed, the projects do not provide funds for the government's share in command area development, and without this development project benefits would remain elusive. But adding these costs, whether they are borne by the government or the farmers, will sharply lower the economic rate of return. Detailed social and environmental assessments should be carried out to determine canal alignments that would explicitly target the poorest areas and small landholders.

§

59

§

The projects would add a substantial burden to already strained operation and maintenance budgets. Full agreement of the provinces that needed requirements will be funded must be obtained before committing large funds to these projects.

3.53 The Ministry of Water and Power is considering a "modular approach" for implementing these projects in a phased manner. This approach may move toward satisfying both the political commitments and the TYPP objectives, as well as providing a highly visible demonstration of the new future of irrigated agriculture in the Indus Basin. Without prejudging the completion of feasibility studies and detailed appraisals, we believe these projects also provide an exceptional opportunity to establish a decentralized and farmer-managed system right from the start. Instead of expanding the existing irrigation departments into the new command areas with their traditional modes of operation, maintenance, and implementation, the government should make concerted efforts to establish Farmers' Organizations (FOs) through a program of social mobilization and capacity building. This step should be followed by the establishment of area water boards. Regardless of their ultimate benefits, the major canals will yield economic benefits only after several years. Short-term benefits will remain elusive. These long-term programs must be strongly supplemented with programs and projects that will yield immediate benefits. 3.54 Various estimates put the potential savings from the current supply at about 4.7 MAF, just under 5 percent of the current average availability of surface water in the Indus Basin. These savings would come primarily from lining watercourses and leveling land under the on-farm water management projects of the provinces. Water conservation and efficiency gains are achievable provided that farmers benefit from the savings--not only because equity would improve and previously unserved farmers would get water, but also because all farmers in the improved canal command would be able to decide how to use the saved water to increase their production and income. A substantially higher allocation for operation and maintenance and fundamental changes in the operation and maintenance regimes are also urgently needed. Current estimates of system rehabilitation (essentially accumulated deferred maintenance) and remodeling costs exceed Rs. 200 billion. 42 Although the ongoing institutional reforms would ultimately address issues of overstaffing and lack of farmer participation, immediate action is needed to stem the deterioration of the irrigation and drainage system. A well-designed program would: § § § § Establish realistic funding requirements through an independent evaluation; Rationalize fund allocation to meet priority needs; Initiate benchmarking and operation and maintenance performance audits: and Rationalize abiana rates and improve assessment and recovery (empowering farmer organizations not only to operate and maintain their canals, but also to collect abiana and retain a sufficient portion of the recovered funds to meet their needs would be a key incentive for increased cost recovery).

3.55 Higher allocations for maintenance of existing assets and speedy on-farm development must be underpinned by reforms in the system of governance. Based on the experience gained so far, a n ew consensus on the way forward within the provinces, and between the provinces and the federal government, is needed that would essentially re-launch the water management program. This new consensus should focus on critical steps to be taken and on piloting and monitoring a variety of approaches within each pilot canal command over a definite time period. Business as usual would prove costly in terms of both forgone benefits of participatory irrigation management and further deterioration of the irrigation system. The lessons learned from the ongoing reform efforts are that these fundamental reforms require champions at the highest level of federal and provincial governments and should not be left to the discretion of the agencies being reformed.

42

PER consultant's estimate.

60

3.56 A balanced program of institutional development, higher investments in water, and appropriate incentives to conserve water and use it more efficiently is well within Pakistan's reach. The substantially larger additional funding for the water sector during 2004-07 can be justified provided the program gives due weight to all key components and strikes a balance among short-term, medium-term, and long-term investment and institutional needs. An indicative program on these lines totaling Rs. 252 billion during 2003-07 is presented in Volume 2. The suggested program provides for ongoing programs (notably Right Bank Outfall Drain II (RBOD2) and National Drainage Program (NDP)), as well as a number of new projects (Greater Thal Canal, Gomal Zam and Mirani Dams, Mangla). It also allows for substantial acceleration of nondevelopment and development budgets of the provinces. It makes provision for the government share of command area development for the new canals, new drainage initiatives including institutional reforms, and on-farm development. 3.57 The balanced program that is being proposed can help initiate the transformation of the water and agriculture sector even in the medium term. The more than doubling of the real spending in water over FYs 2002-07 will take about 25 percent of the additional fiscal space that is expected to be created under the baseline scenario and will sharply reverse the declining trend in water sector spending. The acceleration will be even faster than proposed in the education sector. Needless to say, such large spending carries risks and could waste resources if it is not accompanied by much tighter controls on program and project priorities and stronger implementation and institutional arrangements than exist at present. A fundamental strengthening of the sector's planning, research and development, implementation, and monitoring mechanisms, including much greater interprovincial and federalprovincial coordination, is also necessary to facilitate decision making on the more difficult longer-term issues. Transforming the Power Sector 3.58 On the surface it may appear that the power sector investment program will not have major claims on public resources during 2003-07. The Planning Commission's TYPP suggests an allocation in the Public Sector Development Program for the power sector of only Rs. 90 billion for the next five years, or less than 0.4 percent of GDP--lower than in the recent past. Comfort is drawn from the fact that at present there is surplus power in the country, and with the commissioning of the large Ghazi Baroda hydroelectric project by the end of 2004, there will be a substantial addition to capacity. The coming on stream of the Ghazi Baroda project will no doubt be a milestone in the history of power development in Pakistan. It will substantially improve the hydrothermal balance in electricity generation and help to reduce overall costs. After 2003-04 its completion will provide room for other projects in the power sector: PSDP allocations for Ghazi Baroda for FY 2002-04 alone are estimated at Rs. 37 billion. 3.59 In reality, however, there are many unresolved issues in the power sector, which could both complicate the creation of fiscal space and seriously hamper larger allocations to high-priority sectors. These issues center on the financial weaknesses in the two state-owned power entities, WAPDA and KESC. These weaknesses stem from: § Continued large losses in the power system, reflecting a combination of factors (low level of efficiency, theft of electricity, and inadequate investments in power distribution). § The high cost of power from independent power producers (IPPs). § Increasing consumer resistance and political sensitivity to higher electricity tariffs. § A high level of receivables from public sector consumers. § An implicit large subsidy to consumers in the Federally Administered Tribal Area (FATA). 3.60 More recently, the financial situation of WAPDA and KESC (notably of KESC) has deteriorated, which has further eroded the entities' capacity to finance their investment programs. A number of factors

61

account for this deterioration. Although tariffs have been raised, power purchase and fuel costs also increased substantially, and these increases were not fully passed on to consumers. Targets for reduction in technical and nontechnical losses were not achieved. And the level of receivables--notably from public sector consumers--remained high. 3.61 Recognizing these challenges, the government has established a reform agenda for the power sector driven by the following key objectives: § Mobilize pr ivate resources for the development of the sector, without recourse to the government budget, through the March 1994 Independent Power Producer (IPP) Policy. § Improve the utilities' performance and efficiency through corporatization/commercialization (in preparation for their eventual privatization), enhanced managerial autonomy and accountability, competition, and profit incentives. § Introduce a transparent regulatory framework (particularly in setting electricity tariffs) to provide comfort to potential investors, while enabling the government to maintain certain socially desirable activities such as "lifeline rates" for poor consumers and rural electrification programs. 3.62 Considerable progress was achieved in the mid-1990s in mobilizing private resources, through IPPs, for new generation projects. The Kot Addu power plant was privatized in 1996, through the sale of 36 percent of shares (along with management control) to a strategic investor. The IPP projects, however, were solicited under fixed-price (or fixed-return), long-term contracts, and the government's main focus was on the early commissioning of the projects to overcome the supply shortages being experienced at that time. In the process, too little attention was given to the demand side issues. Moreover, the impact of these investments on the overall financial viability of the sector, including the ability of WAPDA and KESC to pay for power purchases from IPPs, was not adequately analyzed. Although shortfalls in generating capacity have been overcome, there is actually some excess capacity in the system because economic growth has been unexpectedly slow. Consequently, the power sector is facing a financial crisis: KESC does not cover even its operating costs with the existing tariffs, and WAPDA is unable to mobilize adequate funding, through internal cash generation, for its investment program. 43 While WAPDA has met the internal cash generation target in some recent years, it has done so mainly by deferring critical investments, defaulting on debt service obligations to the government, or building up large arrears to fuel and equipment suppliers and contractors. 3.63 Meanwhile, actions have been taken to unbundle WAPDA and to establish the regulatory framework. WAPDA's Power Wing was reorganized into eig ht distribution companies (discos; a ninth disco covering the tribal areas in NWFP was recently established); one transmission and dispatch company (NTDC); and three thermal generation companies (gencos). WAPDA is now responsible solely for developing and managing the hydropower generation facilities. Assets and manpower have been allocated to these entities, and most operational functions (including the management of investment programs) have been delegated. NEPRA has notified its main rules (for tariff setting, license applications, etc). It held hearings on tariff and license applications, which are open to the public, and issued a number of tariff determinations. A formula for passing the impact of changes in fuel costs to consumers, through quarterly tariff adjustments, has been approved and is starting to be implemented. Licenses were issued to all Discos and Gencos by the end of June 2002 and to NTDC by the end of December 2002.

43

The financial performance targets for WAPDA and KESC, which were agreed-to with the government and the entities under ongoing (and past) World Bank and Asian Development Bank projects, included WAPDA's financing of at least 40 percent of its investment program through internal cash generation; the corresponding figure for KESC was 25 percent.

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3.64 Although the government has taken a number of steps to promote private investment in the power sector, the desired goal of ensuring the development of the sector without recourse to the government budget, except for hydroelectric development and possibly transmission, is nowhere in sight. The continuing financial distress in the KESC, notwithstanding a substantial injection of public monies to fund past losses, and international conditions make it highly unlikely that KESC can be privatized in the near future. It also appears somewhat unlikely that the newly corporatized distribution and generating companies under WAPDA will actually be privatized on a timetable to fund power sector investments during 2003-07. 3.65 Consequently, there is a disconnect between large national power sector requirements and the amounts that can realistically be expected from the development budget and own resources of WAPDA. Whereas the TYPP has notionally allocated Rs. 90 billion for WAPDA mainly from external loans, WAPDA's proposed program for 2003-07, including rural electrification, is Rs. 261 billion. So there will be an additional requirement, after providing for WAPDA's own resources, of Rs. 90 billion to be met from the budget and/or borrowing in the market with a government guarantee. KESC investment needs will be over and above this. The extra requirement for the power sector investment could wipe out onethird of the fiscal space that is supposed to be available under the baseline scenario. 3.66 What can be done? What should be done? Although the system of automatic adjustments in electricity tariffs to reflect costs must be further strengthened, there may not be much scope for increasing real as distinct from nominal, electricity tariffs44 . As Table 3.3 shows, the average residential tariff increased by 50 percent over 1996-2002 and is currently about 6 U.S. cents per Kwh. The industry and commercial tariffs have been difficult to increase because they are already high and adversely affect competitiveness. 3.67 Clearly a much more detailed plan for the power sector for the period 2004-08 urgently needs to be developed and harmonized with the development of rolling three-year plans and the MTBF. In the absence of a plan, the power sector could derail the government's economic and social priorities. Some elements of the power sector review should be the following: § § § § § § § A realistic but proactive timetable for privatization of corporate entities in the sector Careful review of the present plans of WAPDA, especially for generation Reinforced efforts to reduce technical losses Solutions for managing load shedding in January when low level of hydroelectric generation will reduce supply Separation of rural electrification from normal WAPDA funding and inclusion of rural electrification as a part of the poverty reduction strategy The formal launching of the new policy for power generation for the private sector Innovative approaches to raise capital for the power sector ahead of privatization

44

According to recent World Bank estimates, 10-15 percent increase in nominal tariffs over the next few years will be inescapable even with aggressive cost reduction and speedy progress towards reduction of theft.

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Table 3.3: Electricity Tariffs (WAPDA System) ­ FY96-2003

(Paisas/kWh)

FY96 Domestic Commercial Industry Bulk supply Agriculture SYSTEM Average 146 534 335 275 161 223.9

FY97 FY98 FY99 117 615 391 355 192 269.6 223 702 444 419 206 319 247 698 417 437 344 348

FY00 243 698 417 437 281 339

FY01 259 704 416 424 258 337

FY02 318 709 419 448 294 372.7

FY03 352 729 442 483 345 405.4

Electricity Tariffs in real terms (WAPDA System) -- FY96-2002 FY96 Domestic Commercial Industry Bulk supply Agriculture SYSTEM Average GDP Deflator (1995-96=100) 146.0 534.0 335.0 275.0 161.0 223.9 100.0 FY97 103.1 542.1 344.7 312.9 169.2 237.7 113.4 FY98 182.6 574.8 363.5 343.1 168.7 261.2 122.1 FY99 191.1 539.9 322.6 338.0 266.1 269.2 129.3 FY00 182.9 525.3 313.8 328.9 211.5 255.1 132.9 FY01 184.5 501.6 296.4 302.1 183.8 240.1 140.4 FY02 216.5 482.7 285.3 305.0 200.2 253.8 146.9

Electricity Tariffs (WAPDA System) -- FY96-2003 (in Usc/kWh) FY96 Domestic Commercial

Industry

FY97 3.00 15.77 10.03 9.10 4.92 6.91 38.994

FY98 5.16 16.25 10.28 9.70 4.77 7.38 43.196

FY99 5.28 14.92 8.91 9.34 7.35 7.44 46.79

FY00 4.69 13.48 8.05 8.44 5.43 6.55 51.771

FY01 4.59 12.48 7.37 7.51 4.57 5.97 56.43

FY02 5.44 12.13 7.17 7.66 5.03 6.38 58.457

FY03 6.02 12.47 7.56 8.26 5.90 6.94 58.457

Bulk supply Agriculture SYSTEM Average Exchange Rate (Rs/US$)

4.35 15.91 9.98 8.19 4.80 6.67 33.568

_____________________________________________________________________________________ Conclusion 3.68 The financing of the poverty reduction strategy should be the first charge on the additional fiscal resources that are likely to become available to the Government of Pakistan. High-priority poverty spending should be defined more broadly to include law and order maintenance, access to justice, and rural electrification. A large part of higher spending under the PRSP would also be on education and health. Without adequate funding (and stronger delivery systems), social sector goals will again be frustrated. There is also a definite need to accelerate spending on water resource development. But the present government program appears lopsided and has not been carefully thought through. A balanced program of increase in storage, system expansion, rehabilitation of existing assets, on-farm development, and concomitant institutional development will yield far better economic and social results. The persisting

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power sector problems remain a threat not only to government finances, but also to an orderly reorientation of public sector priorities. These problems need to be analyzed and resolved with the help of appropriate sector work and policy advice. 3.69 Although there could be several ways in which the additional fiscal space could be allocated, in light of the government's priorities and commitments, Table 3.4 illustrates one such way of allocating additional resources to the high-priority sectors. To meet the government's PRSP targets, substantial portion of the additional fiscal space has been assigned to the poverty reduction sectors and programs, with high-priority given to human development, pro-poor infrastructure and improving the access of the poor to justice. In the illustrative table, this is reflected by increasing the pro-poor expenditure by an additional 2.2 percent of GDP by 2006/07. As for other expenditures, the government's resolve to correct the past neglect of the water resources is reflected by showing substantial increase in the short-, mediumand long-term investments in the irrigation sector. Increases in other infrastructure investments are mainly to improve the efficiency of port operations, railways, road and power sectors. A considerably higher allocation for general administration is mainly to cater for higher salaries and capacity building needs of the civil servants, especially at the district level. Table 3.4: Illustrative Allocation of Additional Fiscal Space

Real Sp ending (Rs. billion) 1/ Percent 2001/02 2006/07 Increase 2001/02 2006/07 Increase Priority poverty related spending Education Health and population planning Law and order Rural electrification Water supply and sanitation Rural development Irrigation Roads, highways and bridges Other 2/ Other non-interest non-defense spending General administration and pensions Large scale water development Railways, ports, national roads and power Other Total

1/ Constant 2001/02 prices. 2/ Social security and social welfare, food subsidies, food support program, natural calamities and other disasters, and land reclamation

(Percent of GDP)

4.8 1.8 0.6 1.0 0.1 0.1 0.3 0.3 0.4 0.4 6.1 2.5 0.1 0.8 2.8 10.9

7.1 2.6 0.9 1.2 0.3 0.2 0.5 0.5 0.5 0.5 7.3 2.8 0.6 1.0 2.9 14.3

2.21 0.73 0.29 0.27 0.15 0.13 0.17 0.22 0.16 0.10 1.21 0.30 0.48 0.27 0.16 3.42

175.5 66.0 20.4 34.5 3.5 2.3 12.3 10.4 12.8 13.2 220.1 89.3 3.6 27.3 99.9 395.5

336.6 121.8 40.6 58.3 11.9 9.1 24.4 24.4 24.4 22.0 347.3 131.8 27.7 48.7 139.2 684.0

91.8 84.4 98.6 68.7 241.1 293.5 97.6 134.6 90.8 66.4 57.8 47.6 665.0 78.4 39.4 72.9

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CHAPTER 4: IMPROVING EFFECTIVENESS OF PUBLIC EXPENDITURES

Introduction 4.1. Delivery of most public services in Pakistan, including education, health, water and sanitation and law and order, is poor after several decades of secular decline. This decline has been only partly the result of inadequate spending on essential public services in the face of a very high rate of population growth. It has also been the consequence of a lack of well-functioning institutions and erosion over time of rules, procedures, and organizational arrangements that ensure the effectiveness of public expenditures. Poor budgetary practices, lack of accountability, inadequate management and organizational capacity, and poor governance have all contributed to poor outcomes. The issues of civil service reform, which are at the heart of institutional strengthening, are discussed in the next chapter. This chapter focuses on budgetary and planning processes, monitoring mechanisms, the incentive structures for implementing government programs and policies, and the recent devolution decisions, which all will have to play an important role in improving the delivery of public services, especially in the social sectors. It outlines the important steps the government has taken to improve the effectiveness of spending and the tasks that remain in implementing the reform agenda. It also pursues the issues of a further redefinition of the role of the state, and public -private partnerships in financing, production, and distribution of a number of public services because the public sector capacity problems cannot be resolved quickly. Responsiveness to Citizens 4.2. Before discussing the mechanics of better and more efficient public service delivery, it is important to stress that the ultimate test of effective service delivery is whether it meets the expectations of citizens, especially the poor. The usual yardstick used by the government to measure the effectiveness of these services is the amount of money spent on these services and on creation of physical assets. Little, if any, attempt has been made to monitor and analyze whether these services are delivered efficiently and whether their provision meets citizens' expectations. In order to determine the level of consumer satisfaction with a number of key public services, the National Reconstruction Bureau (NRB) engaged an international NGO--the Community Information, Empowerment and Transparency (CIET) to undertake a consumer satisfaction survey in all the districts on in the country. The survey attempts to measure the extent to which users are satisfied with these services, aspects of service that were not effective, and groups of people most affected by the deficiency in service. This study also provides a database of information and sets service standards for analysis in future. 4.3. Being a measure only of people's perceptions, the results of the CIET survey need to be interpreted with utmost care. The results, however, do reveal a strong dissatisfaction within the general public with the quantity, and more important the quality, of public services (especially education, health, water supply and sanitation, and roads), which clearly demonstrates the low effectiveness of public expenditure. Reaching the Poor 4.4. Implementing the strategy highlighted in the government's I-PRSP is important for alleviating poverty. It however, needs to be recognized that I-PRSP was prepared against the background of strict fiscal stringency. With more fiscal space likely to be available in future, the poverty reduction strategy can be funded more adequately and the approach to poverty reduction can, as discussed in chapter 3, be broadened. However, there remains the need, within the broad framework of poverty reduction, to design programs specifically targeting the poor.

4.5. The World Bank's Poverty Assessment45 has shown access of the poor to the basic public services is low. For example, net primary enrollment rates are 37 percent for the poor, as compared to 59 percent for the non-poor; the incidence of medical consultation for diarrhea among children is 79 percent for the poor compared to 84 percent for the non-poor; only 15 percent of married women of ages 15 to 49 in the poorest households have ever used contraceptives, compared to 25 percent of those in the richest households; as many as 24 percent of the poor rely on potentially unsafe sources for drinking water, compared to 19 percent of the non-poor; about 52 percent of the poor live in households connected to electricity, compared to 76 percent of non-poor households. 4.6. A determined effort is therefore required to focus these services toward the poor through enhanced outreach and better targeting of these services. It should, however, be kept in view that in Pakistan, supply side bottlenecks are only one side of the problem of limited access of the poor to public services. The opportunity and actual costs, social norms and cultural traits all contribute towards less than full utilization of these services by the poor. But research has also shown that improving the quality of services can effectively offset most of the demand side obstacles. Institutional and governance reforms and adequate allocations for key non-salary expenditure items, like textbooks, class material and medicines would be required to enhance the quality of education and health services. Appropriately designed incentive schemes, like scholarships, edible oil and school lunches (as planned under Taiwana Pakistan Program) can thus help alleviate some of the demand side problems. 4.7. Apart from developing programs in education and health that specifically target the poor, it is also highly desirable that the government aligns the planned large water sector public investments with its poverty reduction strategy. The phasing of these investments should be determined by the extent to which the poor can benefit from these projects. Also, the land development aspect of the Thal, Rainee and Katchi Canals require a strong pro-poor focus. Most of the additional arable land that may become available as a result of these projects should be distributed among the rural poor. Improving Budgetary Processes 4.8. Despite some recent improvements, the budget processes continue to suffer from a number of weaknesses that reduce the efficiency of the budget and therefore the effectiveness of public expenditure. The main weaknesses of the process include (1) lack of strategic focus, and a lack of clear articulation and ownership of sectoral priorities; (2) lack of information on the costs of policies, programs, and services and an intertwining in a single agency of policy advice, regulation, and service delivery; (3) a primary focus on inputs with performance judged largely by how closely spending matched budget appropriations; (4) a short-term horizon for budget decision making that fails to account for longer-term costs and benefits; (5) an artificial and unwarranted separation of development and recurrent budgets, making it impossible to prepare an integrated and coherent strategic budget framework; and (6) few incentives for agencies to save budgetary resources because current year spending is the starting point for the next year's allocations. 4.9. In the past, the budgetary practices suffered also because the planning and programming mechanisms were unable to withstand the political pressures that resulted in a number of economically unviable projects being included into the development program (and budget).. As many of these were large projects they not only pre-empted a sizable portion of available development funds but also imposed an unnecessary burden on the federal or provincial recurrent budgets (see para [4.77] for some examples of these projects). Most of these projects were started by ignoring or short-circuiting the regular approval process, with some projects getting included in the development program without even a proper feasibility study. Removal of key infrastructure sectors (energy, highways, telecommunication, etc.) from

45

Poverty in Pakistan: Vulnerabilities, Social Gaps, and Rural Dynamics, The World Bank, October 2002.

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the purview of the Planning Commission's approval process was one important reason leading to inclusion of these projects into the development program. The decision of the government to restore Planning Commission's authority over project a pproval process for all sectors is a step in the right direction. Fiscal prudence and adherence to the established processes and procedures in approving development projects also need to be ensured. In this context, it is advisable that the government undertake a through review of all large new projects which are presently in the program. In future, no project should be undertaken without proper feasibility and need assessment. 4.10. The problems with the budgetary processes were less apparent in earlier years, when the overall levels of public spending were growing rapidly, planning processes were better integrated with economic decision making, and the governance problems and the weaknesses in the civil service had not yet assumed alarming proportions. During the past decade or so, the weakness of the overall fiscal situation and stagnant or declining economic and social spending exacerbated the structural rigidities in the budget process and compromised the allocative efficiency of expenditure. Arbitrary expenditure cuts undermined program- and agency-level performance, operation and maintenance expenditures were severely under-funded, and development resources were spread too thinly as the overhang of ongoing projects became very large. Recent Initiatives 4.11. Faced with particular weaknesses in the budget processes and general problems of effectiveness of public spending, the government has taken a number of initiatives to improve planning and budgeting, reduce leakage, and target public spending on key services and the poorer groups in the society. It has moved strongly to strengthen fiduciary and accounting controls and improve the working of Public Account Committees (see Box 4.1). It has a set up a Debt Policy Coordination Office to strengthen the macroeconomic work in the Ministry of Finance, integrate debt reduction goals with the medium-term economic framework, and monitor the implementation of the government's Debt Reduction and Management Strategy. It has also initiated work toward a more comprehensive and detailed MediumTerm Budget Framework (MTBF) with the help of technical assistance from the United Kingdom. It has made arrangements for estimating the considerable fiscal contingency obligations with respect to civil and military pensions. Last but not least, the government has adopted a poverty reduction strategy with a clear focus on direct poverty reduction expenditures and initiated the processes of costing of programs and monitoring of both spending and outcomes. Medium-Term Budgetary Framework 4.12. The move toward a comprehensive and detailed MTBF is especially significant because an appropriately designed MTBF can bring the various initiatives for better fiscal planning together and help remove many of the problems in the budgeting and programming process.

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Box 4.1: Budgetary and Financial Management Reforms

In recent years Pakistan has undertaken a series of reforms to improve the effectiveness of public expenditure through improvements in its budget management and financial systems. The main elements of this reform include the following: Devolution: The devolution plan announced by the government aims at strengthening the local governments. By taking the government closer to the stakeholders, this move is a major step to enhance the accountability of public service management, and thereby improve the efficiency of the government. Given the low institutional capacity of the government, however, the reform is not free of risks. The devolution process, if not appropriately handled, may lead to marginalizing the status and role of provincial governments; elite capture of local governments, breaking down of subnational personnel management, and consequently of the service delivery systems. Although with some expected teething problems, to date the reform seems to be working quite adequately. Budgetary reforms: The government has launched an ambitious reform program to address the numerous budgeting problems. The most important action in this regard is the initiation of a Medium-Term Budget Framework (MTBF). In addition, accepting the recommendation of the Debt Committee, the government has established the Debt Policy Coordination Office, which under the Draft Fiscal Responsibility and Debt Limitation Law would be responsible for framing the overall macroeconomic framework, a function related to the MTBF. In order to improve budget implementation, significant financial autonomy and responsibility has been devolved to the line ministries through introduction of a New System of Financial Control and Budgeting (NSFCB), which delegates significant financial powers to the administrative heads of spending agencies. This step has been accompanied by the imposition of hard budget constraints on the line ministries and divisions through expenditure ceilings. At the same time, the spending agencies have also been made responsible for ensuring fiscal and financial discipline, including timely reconciliation of financial data. At the provincial level, the provinces of Sindh and NWFP, under their economic and structural reform programs have ensured better implementation of provincial budgets through timely release of funds and removal of redundant procedural constraints. A better system of monitoring and reporting of budget implementation has been put in place. Moreover, the use of personal ledger accounts (PLAs) has been severely restricted.Fiscal transparency: The government has announced a plan to improve the quantity and quality of fiscal information disseminated to the public to ensure fiscal transparency, and thereby strengthen financial accountability. The government has endorsed a review of fiscal reporting and transparency under the IMF's Code of Good Practices on Fiscal Transparency. Consolidated fiscal accounts of the federal and provincial governments (on the basis of reconciled data) are posted on Finance Ministry's web site on a quarterly basis. The government of Sindh has started to post even its fiscal monitoring report, which analyzes the implementation of the budget and identifies key problem areas of the provincial government, on its web site every quarter. Financial accounting: The government has made significant progress in establishing an integrated financial management system, which can meet internationally accepted standards of completeness, accuracy, reliability, timeliness, and usefulness. The medium-term objective is to accelerate the adoption of the new public chart of accounts and financial reporting requirements prescribed by the president in December 2000, all under a new computerized accounting system supported by the Bank-funded Project for Improvement in Fiscal Reporting and Auditing (PIFRA). The government seeks to establish the public accounting system as a robust platform for transparency in the management of public funds for: (a) economic decision making within the government to promote program efficiency and effectiveness; and (b) provision of auditable financial information to various stakeholders within the country as well as to donors and international financiers. Auditing and legislative oversight. The federal and provincial Public Accounts Committees (PACs) have been made more effective. For the first time in many years, they reviewed the financial transactions of an incumbent government and were also able to significantly reduce the backlog of audit reports. The quality of audits has been improved through systems-based auditing procedures and attention to reporting only on significant matters. And transparency of the PAC process has been enhanced by making PACs' proceedings open to the public. Expenditure monitoring: The evolving PRSP includes a strong program of monitoring, including capacity development to gather and analyze information for impact assessment of public policies and investments. The I-PRSP includes institutional mechanisms for the regular/monitoring and evaluation of poverty reduction expenditures and corresponding outcome indicators at the federal, provincial, and district levels (see 4.28-4.35). These institutional arrangements are presently evolving and will be finalized after the round of consultations with provincial governments is completed. Key outcome indicators have also been suggested, and final benchmarks and targets will be set after consultations with national and provincial statistical agencies, federal line departments, and provincial governments.

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4.13. The rationale for an MTBF is that it provides the "linking framework" that allows expenditures to be "driven by policy priorities and disciplined by budget realities."46 It tries to reduce the disconnect between policy making, planning, and budgeting. MTBF "consists of a top-down resource envelope, a bottom-up estimation of the current and medium-term costs of existing policy and, ultimately, the matching of these costs with available resources...in the context of the annual budget process."47 The "top-down resource envelope" is fundamentally a set of macroeconomic projections that indicate fiscal targets and estimates of revenues and expenditures, including government contingency obligations. To complement the macroeconomic projections, the sectors engage in "bottom-up" reviews that begin by scrutinizing sector policies and activities with an eye toward optimizing inter- and intra-sectoral allocations. The real value added of the MTBF approach comes from integrating the top-down resource envelope with the bottom-up sector programs. (The steps required in preparation of an MTBF are given in Box 4.2.)

Box 4.2: Steps in Preparation of an MTBF A typical MTBF would entail the following steps: ðInitiating a process of rigorous costing and analysis of existing policy commitments, with a view to improving efficiency and developing a firm baseline cost for essential continuing services of government. Maintaining a continuous medium -term view of these elements provides an essential foundation for a full MTBF. ðDeveloping a three-year macroeconomic framework as a starting point for the MTBF. ðUtilizing improved techniques for macroeconomic analysis and revenue forecasting, and publishing the basis and assumptions for medium -term macroeconomic and revenue forecasts. ðEstablishing expenditure review teams with the task of reviewing all of the government's existing commitments (Part A of the budget) through a series of intensive studies of different sectors. The overall objective will be to establish a baseline cost for the continuing essential services of government. Once established, this baseline can be projected forward and published as forward estimates in the MTBF framework. ðDeveloping broad aggregates for revenues and sectoral (and, for important subsectors, subsectoral) expenditure ceilings. ðMaking all ministries and departments responsible for extending their permanent and temporary budget forecasts beyond the budget year by another two years, and separately identifying additional costs over the three-year period t at arise from implementation of government h policies and development projects. ðStrengthening capacity for sectoral and expenditure policy assessments. These assessments should take into account relevant performance information. ðMaking the budget for the following year in a "rolling" format. That is, in the following year's budget, the existing policy estimate for the first outyear will be taken as the baseline estimate for the ministry in negotiating the budget, and similar procedures will be followed each year.

4.14. The MTBF is intended to deliver a number of ambitious outcomes: greater macroeconomic balance; improved inter- and intra-sectoral resource allocation; greater budgetary predictability for line ministries; and more efficient use of public monies. An improved macroeconomic balance, including fiscal discipline, is attained through good estimates of the available resource envelope, which are then used to make budgets that fit squarely in the envelope. MTBFs are expected to improve inter- and intrasectoral resource allocation by effectively prioritizing all expenditures (on the basis of the government's socioeconomic program) and dedicating resources only to the most important ones. Greater budgetary predictability is expected as a result of commitment to more credible sectoral budget ceilings. The MTBF

46 47

World Bank (1998a: 32). The World Bank uses the term Medium-Term Expenditure Framework (MTEF) rather than MTBF. For more on the MTEF concept, see World Bank (1998a), Asian Development Bank (1999), and Dean (1997).

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is also expected to make public expenditures more efficient and effective, essentially by allowin g line ministries greater flexibility in managing their budgets in the context of hard budget constraints and agreed upon policies and programs. 4.15. While the three pillars of an MTBF are clear (projections of the aggregate resource envelope, cost estimates of sector programs, and a political-administrative process that integrates the two), the blueprint for designing and implementing an MTBF must be developed in each country context. 4.16. In Pakistan several planning and budget process issues will need to be revisited and resolved before the MTBF can become a truly operational document. The relative responsibilities of federal and provincial governments, the sector ministries and departments, the Planning Commission and provincial planning departments, and the Ministry of Finance and provincial finance departments in relation to various elements of an MTBF estimation of the resource envelope, the costing of sector programs, the choice of intersectoral priorities, and the adoption of specific targets must be looked at afresh and agreed upon because they are in a state of flux. The arrangements for putting together an MTBF will also need to be harmonized with the preparation and implementation of the final Poverty Reduction Strategy Paper (PRSP). 4.17. Given that Pakistan is a federation, it is critical for improved budgetary outcomes and enhanced effectiveness of public expenditure that MTBF process is "rolled out" to all the provinces (and ultimately to all the districts). Ideally, the national MTBF would be a consolidation of subnational and federal MTBFs. It is essential, therefore, that the process of promoting provincial adoption of MTBF be led by a strong commitment from the center. 4.18. Fortunately, two provincial governments (Sindh and NWFP), under their economic reform programs (supported through World Bank structural adjustment credits), have already made a start toward formulating detailed MTBFs. Although the federal government, with technical assistance from the British Department for International Development (DFID) (see Box 4.3) has embarked upon expanding its MTBF, there is a strong need to base all three MTBFs (and indeed the future MTBFs of Punjab and Balochistan) on a sound institutional footing. 4.19. The introduction of the new MTBF and PRSP processes provides an important opportunity for strengthening overall planning in Pakistan and improving policy coordination among the key economic ministries and departments both at the center and in the provinces and between the federal government and the provinces. This change will not, however, happen automatically. The role of the government needs to be redefined in the light of new approaches. The objectives should be to ground the new processes in not only better estimation of resource availabilities and flows, but also greater knowledge about developments in the real economy, sectoral trends, and realities of project and program implementation. 4.20. The role of provinces in developing realistic budgetary frameworks and viable poverty reduction strategies can hardly be overemphasized. As discussed later, the federal government must devolve greater authority to the provinces with respect to economic and social development and eliminate or limit federal projects and initiatives in a number of sectors, such as education and water, as part of the overall process of moving services closer to the people. This devolution from center to the provinces will give impetus to the major initiative of devolution to the district level. In any case, it is clear that it is the provincial and district-level spending on education, health, law and order, provision of justice, irrigation, rural and urban water supply, and roads that will account for bulk of the increase in public spending in the near future. The institutional arrangements that will integrate financial, policy, project, and sectoral plans at the provincial and district level clearly need to be strengthened. The role of the provincial planning departments should be broader than the present excessive focus on development budgets alone , which are a fraction of provincial spending. At the same time, planning departments will need to work closely with 71

both finance and implementing departments and agencies in costing programs, developing yardsticks of spending, and monitoring of expenditure implementation, impact, and outcomes.

Box 4.3: DFID Assistance to Strengthen the Medium-Term Budget Framework

The British Department for International Development is providing technical assistance (TA) to the government of Pakistan (in the form of international and local experts) to strengthen its attempts to develop a Medium-Term Budget Framework (MTBF). At present the budget framework does not go beyond presenting with the budget documents a three-year macroeconomic forecast, which is updated annually. The TA, which is expected to be spread over thirty months, will initially focus on the health and population sectors but subsequently will be rolled out to cover other key sectors. The Objectives The main objectives of the TA will be to help the government improve the quality, transp arency, and accuracy of Pakistan's medium-term budgeting, provide a firm basis for transmitting policy into effective expenditures, and thereby improve federal expenditure by bringing credibility and stability to budget plans, along with improved estimation of transfers and allocations to subfederal tiers of government. The TA is expected to improve the quality of short- and medium-term budget forecasts, including revenue forecasts and rolling estimates of the costs and liabilities of existing and new policies, drawing on international best practices. Moreover, the TA will help the government develop necessary institutional capacity to prepare, implement, expand, and deepen the MTBF in the future. Institutional Setting In the first year the MTBF will be piloted in the Ministries of Health and Population Welfare. In subsequent years MTBF planning will be rolled out to other line ministries such as education, and transport and irrigation, which require adequate recurrent resources for the operation and maintenance of large physical assets. As such, although the Budget Wing of the Ministry of Finance will be the main counterpart agency for the TA, the process is expected to intimately involve the Expenditure Wing of the Ministry of Finance, the Planning Commission, the Central Board of Revenue (CBR), the Ministry of Health, the Ministry of Population Welfare, and other key federal line ministries The TA Components (a) Strengthening the Resource Framework: The TA will help the Ministry of Finance, the CBR, and the Planning Commission develop sound analytical foundations for the macroeconomic framework, better estimate contingent liabilities, estimate and incorporate quasi-fiscal activities, and strengthen short- and medium-term revenue forecasting. (b) Establishing InterSectoral Policy and Strategy: The TA will help the government undertake better technical work and help establish stronger institutional mechanisms to link technical work with political adjudication of intersectoral policy priorities. (c) Supporting Line Ministries: The TA will help with line ministries (initially focusing on the Ministries of Health and Population Welfare) to: (1) develop sectoral policies and strategies; (2) translate the policies and strategies into programs with well-defined objectives and outputs; (3) develop techniques and procedures to estimate program and project costs; (4) prepare complementary and consistent recurrent budget and development budget proposals in an MTBF format; and (5) prioritize allocations to programs according to resource availability. (d) Securing Improvements in Budget Implementation: The TA will also help the Ministry of Finance, jointly with line ministries, to review budget implementation procedures, specifically the new system of financial control and budgeting, and secure a more efficient flow of funds mechanism.

4.21. At the federal level the Finance Ministry in general, and the Budget Wing, in particular, will take the lead in making the federal MTBF, but much improved coordination would be required between the Ministry of Finance, the Planning Commission, the sectoral ministries, the Central Board of Revenue (CBR), the Economic Affairs Division (EAD), and the Accountant General of Pakistan Revenue (AGPR) for improved formulation and execution of MTBF. The respective roles of the Planning Commission and the Finance Ministry in developing a macroeconomic framework and sectoral plans and targets need clarification. Though some overlap in functions between economic ministries may be unavoidable, and indeed healthy, the overall lack of capacity in all parts of government and systemic problems with the civil service suggest the need for a better delineation of responsibilities and clearer coordination arrangements. 4.22. Preparation of macroeconomic frameworks is a case in point. The Planning Commission has traditionally had a mandate to prepare medium- and long-term development plans and for that purpose 72

also prepares a medium-term economic framework. Over time, however, the operational relevance of these medium-term frameworks declined a fiscal crises forced more ad hoc approaches to resource s estimation in the Ministry of Finance. Recently, the Ministry of Finance has undertaken two initiatives to upgrade its macroeconomic work. First, a macroeconomic framework is to be prepared as a part of the MTBF in the expenditure wing. Second, the newly created Debt Policy Coordination Office (DPCO) has also been charged with the task of preparing a macroeconomic framework under the Draft Fiscal Responsibility and Debt Limitation Law. There is the obvious need for better coordination within the Ministry of Finance on the macroeconomic framework and between the Ministry and the Planning Commission, The latter can bring to bear its expertise in the real economy and the sectors in the preparation of macroeconomic projections. To further this coordination, it is important that at the present juncture, the Ministry of Finance and Planning Commission remain under a unified leadership, preferably under the same Federal Minister. A unified leadership approach to planning and budgeting has been tried in quite a few East Asian countries with considerable success in accelerating economic decision-making. 4.23. Development of an MTBF involves much more than the estimate of the resource envelope. It also involves substantial work on sectoral and subsectoral priorities, costing of programs, monitoring of public spending, and assessment of outcomes. In these and related areas the Planning Commission, working closely with the provincial planning departments, can pla y a major leadership role, quite distinct from its responsibilities for appraisal and approval of large development schemes. Re-invigorating the Planning Processes 4.24. The preparation, monitoring, and evaluation of MTBFs and PRSPs, at both the federal and the provincial level, provide a unique opportunity for invigorating Pakistan's planning processes, which in their heyday in the 1960s were considered a model for developing countries (see Box 4.4). 4.25. During the past two years progress has been made in provid ing the Planning Commission with greater authority in project appraisal, shifting the focus of macroeconomic and sector work away from Five-Year Plans to a ten-year perspective, and setting up rolling Three-Year Plans. Project monitoring has been made systematic and is shared with public, and the poverty work has been substantially strengthened. The recent improvements in the planning processes have been grounded in the general desire of the Musharraf government to give a larger role to technocrats in polic y and decision-making. But clearly the institutional capacity across economic ministries and planning agencies remains extremely weak. There is excessive reliance on outside agencies for analysis. Significant improvements in sectoral planning and macroeconomic and budgetary expenditure frameworks are needed both at the center and in the provinces. 4.26. How can the planning processes both at the center and the provinces be strengthened? First, at the center there must be both a closer collaboration and a clearer division of responsibility between the finance division and the planning division. For instance, the planning division could play a more modest role in preparing a macroeconomic framework but should have the major responsibility for setting the sectoral priorities and development allocations. 4.27. The Planning Commission enjoys two distinct advantages vis-à-vis other ministries: (a) It still has more competent technical staff to deal with all the sectors of the economy and has a long tradition of interaction with line ministries and provincial departments. (b) It is not subject to the day-to-day pressures that tend to preoccupy the Finance Ministry.

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Box 4.4: Planning Processes: Sources of Weaknesses Pakistan's strong economic record of the 1960s was attributable in part to the strength of its planning processes and the unique role of its planning institutions. Contrary to popular perceptions, it was not the existence of Five-Year Plans as such that was the main contributor to the quality and speed of economic policy adjustments and generally sound resource allocation decisions during the 1960s. More important factors were the strong political support to the planning processes, the high level of professionalism and independence of groups of planners both at the center and in the provinces, and the economic policy coordination mechanisms, which, notwithstanding the centrality of the Ministry/Department of Finance, provided a clear role for the planning agencies as well as the sector ministries and departments. Serving as high-powered economic and technical staffs, the Planning Commission and the provincial planning departments were very effective in analyzing key economic development issues, recommending adjustments in policies and programs, and assisting the top leadership and the finance minister in both economic policy coordination and foreign aid mobilization. There is general agreement that the planning processes have greatly weakened over time even though Five Year Plans have formally been in existence throughout most of the past three decades: the Eighth Plan covered the period 1993-98, and the Ninth Plan for 1998-2003, though prepared, was never finalized. Factors responsible for the decline in the effectiveness of both the planning processes and the planning institutions have varied over time but include the following:

§ Reduced political willingness over time to accept the financial and economic discipline of independent

economic and project analysis; in the 1990s large projects in key sectors were taken out of the jurisdiction of the Planning Commission, and only in the past two years have the powers of the Planning Commission to review all large projects have been restored.

§ Excessive focus on preparation of Five-Year Plans and not enough attention to analyzing the causes of

continued failures to achieve planning targets in national savings, exports, and social sectors.

§ Frequent lack of realism of the macroeconomic frameworks prepared by the Planning Commission,

contributing to excessive new commitments on projects and subsequent spreading of development expenditures too thinly and frequent inadequate funding of foreign-aided projects.

§ Insufficient attention to sector plans and the mix between policy requirements and investment needs. § Poor links between resource needs and physical targets. § Lack of balance of effort between planning on the one hand and monitoring and evaluation on the other;

even where monitoring has taken place, it has been excessively concerned with inputs of money rather than achievement of set goals, and impact analyses of development spending have been rare.

§ Last but not least, professional capacity in all agencies concerned with development has become very

weak; little new professional staff has been inducted into the Planning Commission during the past ten or fifteen years.

4.28. The Planning Commission should cede the existing de facto role of overall economic coordination to the Finance Ministry but keep primary responsibility for formulating sectoral policies, plans, and strategies. These sectoral plans need to be developed in collaboration with the line ministries and departments. The Planning Commission (and provincial planning departments) would be responsible for intersectoral priorities in the MTBF for development. This implies that the Planning Commission (and planning departments) should be responsible for determining the allocations at the sector and agency level. For this purpose, while the Public Sector Development Program (PSDP) needs to be formulated within the resource envelope provided by MOF, the recommendations of the Planning Commission on budgetary allocations for individual projects, programs and sectors may be treated as final.

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4.29. The Planning Commission and the planning departments should lead the effort to integrate recurrent and investment expenditures in a coherent MTBF. The preoccupation of planners with the development budget is hampering the pursuit of balanced strategies and speedy social development. To ensure progress, the policies formulated under the major initiative of PRSP need to be consistent with sector-specific policies and total sector allocations. Full integration requires the following: (1) the same strategic objectives should drive the formulation of the recurrent and investment budgets; (2) the budget planning process at the sector level should consider options to achieve these objectives and implications for recurrent or investment expenditures based on a predefined resource envelope for the sector; (3) project selection should be based on a range of economic and non-economic criteria, especially on the defined role of the government within the sector; (4) the best projects to realize the sector programs should be selected on the basis of adequate cost-benefit and cost-efficiency analysis; and (5) monitoring and evaluation of the budget programs should be based on a unified budget classification structure that allows sensible analysis. The full integration of the recurrent and capital budget planning processes is a gradual and long-term process. As a first step, however, there is a need to improve the estimation of the recurrent cost implications of the ongoing investment projects from the line ministries to be reflected in the MTBF sector expenditure proposals. Equally important, organizational arrangements for recurrent and investment planning in the line ministries, the Ministry of Finance, and the Planning Commission need to be realigned to eliminate the present separation. Only in that way will investment projects be an integral part of the MTBF. 4.30. The Planning Commission should develop a rolling program of sector reviews, possibly three to four sectors a year, which will provide depth and credibility to its long-term plans. Such sector reviews could be a vehicle for working with the World Bank, the Asian Development Bank, and other donors on analytical issues 4.31. More concerted efforts to use monitoring and evaluation at the project, sector, and economy level are needed to monitor progress toward key goals and to better understand the constraints hampering economic and social progress. Systems being put in place to monitor PRSP can provide an excellent step in this direction. 4.32. The goals listed cannot, however, be achieved without substantially restoring professional strength. The Planning Commission should opt for a lean but highly skilled staff. For some of the routine functions of project appraisal, it could rely on specially constituted technical panels drawing in part on highly professional experts from outside. Strengthening Expenditure and Program Monitoring 4.33. One key factor behind the declining effectiveness of public expenditure is a dysfunctional expenditure monitoring system. The traditional budgetary monitoring system has focused on ensuring the spending of the budgetary allocations and the procedural correctness of these expenditures. Little, if any, attention is paid to service delivery and client satisfaction. Nevertheless, appropriate systems were put in place within the Ministry of Finance (finance departments at the provincial level), the EAD, and the Planning Commission (planning departments in the provinces) to achieve at least the limited objective of public expenditure monitoring. For example, the Budget Wing of the Ministry of Finance reviews the current and development expenditures on the basis of data received from the Controller General of Accounts (CGA) and project entities on monthly basis. The EAD undertakes a periodic review of donorassisted projects and programs. The Programming Section and the Projects Wing of the Planning Commission undertake monitoring of financial and physical progress of the development projects. Not only was the quality of data used by these monitoring exercises declining steadily overtime, but also the interest of decision makers in using the results of these exercises in their planning and budgetary

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decisions. Partly because of falling demand, but mostly because of the inadequate human and financial resources allocated to it, the quality of monitoring itself has also been going down. 4.34. The Planning Commission has recently revived monitoring of development projects through indepth quarterly reviews of key projects and programs. Although a step in the right direction, this process has yet to factor prominently in inducing the overall economic decision making. 4.35. Meanwhile, the I-PRSP has proposed a more elaborate mechanism to monitor poverty-related expenditures, along with their intermediate indicators and outcomes, vis-à-vis the specific targets set by the government for human development and poverty reduction. When fully functional, the proposed mechanism can provide improved and continuous monitoring of PRSP inputs and outputs, which would help to validate the choices made in the prioritization process and can reveal the reasons for the success or failure of the various interventions chosen. Further, it can offer warning signs to those responsible for the management of the Poverty Reduction Strategy (PRS) when interventions are not having the desired effect or are having undesirable side effects. If undertaken correctly and diligently, the proposed monitoring system can facilitate management decisions about continuation, acceleration, or amendments of various interventions. Moreover, an effective monitoring system of this kind can help develop greater accountability in the use of public resources. 4.36. The proposed mechanism includes following areas to be monitored: § § § § § Budget implementation and public expenditure Policy reforms at a number of different levels (macroeconomic, structural, and sectoral) Public action choices Public services (quality, availability, access, satisfaction) Investment programs

4.37. With technical assistance from DFID and the World Bank, the government has identified indicators at a number of different levels along the "impact chain," starting with inputs and outputs, followed by outcomes and impacts. Special emphasis has been given to identifying the intermediate outputs, which bring into the government strategy elements of accountability, learning and changing actions, and intervention. The system requires monitoring PRSP expenditures on quarterly basis at the federal, provincial, and district level. 48 4.38. Regarding monitoring longer-term outcomes, the I-PRSP presents benchmarks on the present-day status of social indicators and establishes medium-term targets for a variety of indicators, such as infant mortality rates and immunization rates. For these benchmarks and targets to have any meaning, however, they need to be underpinned with a reliable and credible database, as well as backed by the capacity to interpret and analyze the data. While Pakistan has both administrative and survey data sources, but both have their limitations, and in any case show wide differences in the present status of health and education levels. Administrative data are incomplete and unreliable, and household survey data are representative only to the level of the province (not district). There is a considerable lag between data collection and data availability. 4.39. In order to remove these deficiencies, a new survey instrument Core Welfare Indicator Questionnaire (CWIQ) has been developed to monitor changes in key social and poverty in dicators on an annual basis at the national, provincial, and district level. The primary objective is to keep track of the short-term changes in both the intermediate outputs and outcomes. The Pakistan Integrated Household

48

In addition, the MOF has already started reporting on two indicators of intermediate outputs on a quarterly basis.

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Survey (PIHS) remains the key vehicle for providing information on medium-term changes in human and poverty indicators. 4.40. Because PRSP monitoring is a multidimensional task, it is being undertaken by a collaborative effort of a large number of government agencies, including the Ministry of Finance, the Controller General of Accounts and the provincial accountant generals, the line ministries and departments, and the Federal Bureau of Statistics. Given its vast comparative advantage in poverty research and monitoring of public expenditure and projects, the Planning Commission has been assigned a key role in monitoring PRSP outputs and outcomes. It is essential, however, to improve the database and strengthen the analytical capacity of, and cooperation between, the involved agencies to institute an effective monitoring and evaluation system for the government's poverty reduction strategy. Redefining the Role of the State 4.41. Improving the effectiveness of public services and expenditures requires not only mending the institutional framework, but also reviewing the structure and functions of the government. First, the role of the state in the economy must be tailored to its institutional and financial capability and the market economy alternatives available, because in many areas of provision of even public goods and services, the private sector works more efficiently. Second, even in functions that should ideally be in the government's domain, it may be possible to move away from the over-centralization of responsibility at the federal level that has taken place. 4.42. Apart from defense, foreign affairs, and natural resource management, the federal government has a strategic role in economic management that has become and will become highly complex in an integrated world economy. The state at the central level must be responsible for stabilizing the economy, ensuring fiscal discipline, containing inflation, balancing the external accounts, and keeping the debt burden within sustainable limits. It must protect the consumers' and stakeholders' interests by regulating the private sector, facilitate investment, provide a level playing field to economic actors, curtail rentseeking behavior, preserve its autonomy against intrusion by pressure groups, and ensure a competitive environment, vital for survival and growth in a rapidly globalizing world. In addition, it must provide an effective and reliable legal framework and recourse institutions for conflict resolution. It must curtail transaction costs by promoting transparency and integrity and imparting greater predictability to the system. It must also reduce information rentals by facilitating access to policies, plans, and data on economic outcomes and trends. 4.43. Just this strategic agenda is formidable and even the best would be hard put to deliver. Hence, extending its energies and resources to activities and functions which could be well-performed by the private sector and/or sub-national levels of government, the central government undermines not only the development of private sector, but also its own ability to effectively deliver on its strategic agenda. 4.44. According to the 1973 Constitution the federal government is responsible for, key areas like defense, foreign affairs, banking and currency, postal service, transportation (ports, airports, railways), international trade, macroeconomic management and industrial development. The provinces share with the federal government responsibility for population planning, irrigation, curriculum and syllabus planning, and social welfare, and are solely responsible for roads, highways, law enforcement (police) and dispensing of justice, education and health. Under the LGOs 2001, the provincial governments have devolved a large portion of their responsibilities to the local (district, tehsil and union) governments. 4.45. In Pakistan, while the legislative division of powers, as set out by the Constitution and provincial statutes, compares favorably to the assignment based on principals of fiscal federalism, in practice the federal government has expanded itself in areas o shared responsibility (and even in fields which f 77

constitutionally belong to sub-national governments), and have even taken over some of the traditional private sector functions. Reducing the Role of the Government in Producing and Providing Private Goods and Services 4.46. Successive recent governments have already attempted to reduce the role of the state in the economy through privatization of state enterprises and encouraging private sector into areas that had exclusively been reserved for the public sector. Nevertheless, the government's role in the economy still transcends beyond the optimal and its involvement in many sectors is still excessive vis-à-vis the appropriate role defined by economic principals,49 its administrative capacity and fiscal resources. There is significant room for greater private sector involvement in the fields of telecommunications; electricity generation and distribution; gas and oil exploration, production, and distribution; electronic media; banking, finance, and insurance; transportation (including air, sea, and rail traffic), and others. Indeed, the present policy of the government is to retain only the regulatory functions and to gradually vacate all of these areas for the private sector. The government should accelerate the process of privatization to minimize the deterioration in performance and asset-stripping that may occur once the privatization process is started. Lack of an adequate regulatory framework should not be used as an excuse for delaying privatization. Although appropriate regulation of the private sector, especially of the privatized state monopolies, is essential, it should be possible to develop the regulatory capacity of the government concurrently with privatization. 4.47. Efficiency of non privatized organizatio ns can be enhanced by: (1) giving them autonomy over their input and output decisions, thereby increasing their allocative and productive efficiency; (2) protecting them from political interference, to enhance the efficiency of their personnel decisions; (3) subjecting them to a hard budget constraint to ensure that the resources are used efficiently without any waste or leakage; and (4) providing their management and staff a performance-based incentive structure. 4.48. Other than the sectors already cited for reduced public sector involvement, it may be appropriate for the government to reassess the needs and roles of different kinds of public sector entities (such as government departments, attached bodies, autonomous bodies of various types, and commercially oriented public enterprises) with a view to making the overall size of government more consistent with available resources and focused more intensely on the government's strategic agenda. The decision-tree in Figure 4.1 can help in making a quick assessment of whether a particular governmental function should be shed or continued. 4.49. There is also a need to re-examine the role of government as a producer/provider vis-à-vis as a financier and facilitator of services. An area, which has not been fully explored in Pakistan, is the possibility of inducting the private and non-government sector in service delivery through public -private partnership. Despite the emerging possibility of larger fiscal space becoming available, both from financing but more importantly from efficiency point of view it is necessary that the government should actively pursue private sector in all those sectors where it can deliver service more efficiently. In all these areas, the government responsibility may be limited to regulating, and in some cases financing, the delivery of service through private providers, so as achieve its equity and other social objectives. In many cases, it is more efficient for the government responsible to provide only finances to the private sector to provide the service. The financing mechanisms therefore need to be developed that attract the private sector in provision of public services but at the same time are able protect the poor and other vulnerable groups, for being excluded from private delivery system. Box 4.5 provides examples of such financing mechanisms in the case of delivery of education.

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Steps required to decide on what are the core functions of a particular government are highlighted in Figure 4.1.

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Box 4.5: Options for Public Financing of Private Delivery of Education Public funding for private schools: In many countries, such as Canada, Chile, and the Netherlands, the government promotes education by providing finances to the private schools. The recent spread of private schools in the urban and, to a lesser extent, rural areas of Pakistan offers a possibility for the government of better use the private sector to further its objective of a rapid spread of school education. This objective requires providing public financing to the private schools in targeted poor and backward areas and neighborhoods on a per-student basis. As these payments are based on the average cost of education in the public sector, while expenditures per student (for comparable education) are significantly less in the private sector, the private schools have a strong incentive to vie for new students, thereby raising school enrollment in private schools. Public schools under private management: The government may choose to contract one of more qualified nongovernmental organizations (NGOs) to manage a certain number of public schools. An ideal contract would give the managing NGO the right to appoint the head teacher and school staff. The teachers would have qualifications and salaries comparable to those of the contract teachers of public schools. The government would bear the salary cost and provide to the NGO the nonsalary operational cost on the basis of a per-student average of the public schools' cost. Such a mechanism would imply no additional budgetary impact to the government, while the NGO would have every incentive to run the school in a most efficient manner and raise the quality of education to bring in more students. Such an arrangement would be ideal for enhancing the outreach of education to remote or backward areas where it is difficult for the public sector to operate. Giving parents a choice (the voucher system): One option for improving school quality is to give parents a choice through a voucher system. Under this system individual students would be given vouchers funded by public revenues but redeemable in either public or private schools. Schools would have to compete for student patronage, mainly through raising the quality of education. Such a system has been tried with considerable success in many developed countries (such as the United States) as well as developing countries (such as Puerto Rico). All these means of public-private partnership require strong monitoring to protect the interests of the stakeholders. Such monitoring can be established only through the participation of the community.

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Figure 4.1: Decision tree for identifying core governmental tasks

Disaggregate functions · Policy · Co-ordination · Service delivery · Support · Regulation

Review functions that departments and ministries perform.

Is this function required to protect public interest?

Yes

No

Is there a strong demand for the function to continue?

Yes

(i)

Does the function support other governmental priorities?

No Yes

No

Can the Government priorities be achieved through regulation, taxation, transfers to subnational governments, or

No

(ii) Yes

Does national or international law or the Constitution require the function? Can the scale be reduced?

Yes

No

Function still necessary

(iii) Yes

Shed Service

No

Reduce quality or volume

Source: Methodology for Functional Reviews, Paper produced by the Russian Federation Government, World Bank, July 2001.

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4.50. Because of their public goods nature, many health services (preventing and treating infectious diseases, providing safe drinking water, generating and disseminating health information, and preventing non-communicable diseases) will be underprovided if left exclusively to the market forces, as public benefits far exceed private returns. The government has a natural role in providing all these services. Moreover, the government should also get involved in providing a safety net for the poor and for hard-toreach and difficult-to-treat, unprofitable segments of the population. Thus the public sector role in heath care should center on activities such as providing immunization, controlling disease vectors such as mosquitoes and rats, and guaranteeing basic care for the poor and excluded. Beyond these areas, there are ample examples of high-quality health care services being provided and financed efficiently and equitably by both public and private sectors. The government has only to ensure appropria te incentives to the providers, public or private, to guarantee efficiency. A recent attempt to promote public -partnership in health care is in the area of detection and treatment of cases of tuberculosis (see Box 4.6)

Box 4.6: Public-Private Partnership in Tuberculosis Control Pakistan has more than 250,000 new cases of tuberculosis every year, of which only 20 percent are detected. In 1994/95 the World Health Organization recommended a new strategy, "DOTS" (Directly Observed Treatment ­ Short Course) to eradicate TB globally. DOTS is an inexpensive and effective approach, but unfortunately it covers only 10 percent of TB patients in Pakistan. Only 20 percent of Pakistani TB sufferers seek care from the public sector, and about 40 percent go to the private sector, mainly to general practitioners and NGO health units. The remaining 40 percent either do not seek any care or go to other nonprofessional providers. Unfortunately, the nonstandardized TB practice in the private sector leads to very low cure rates. In addition, the infectious nature of the disease leads to increased transmission of the TB germs to others, and inferior-quality treatment creates the risk of multi-drug resistant (MDR) TB. Given the nature of care sought by most TB patients, it is suggested that a public-private partnership would be an ideal approach for treatment of TB. The National TB Program (NTP) is seeking acceptable and feasible mechanisms to ensure closer working between the government and private partners to extend TB care according to national standards. Pooling human and financial resources in the two sector has enormous potential for nationwide TB control. Involvement of private sector providers in implementing DOTS in Pakistan has been recommended in a nationally agreed strategic framework. Consultative processes are ongoing, and there are a few good experiences in some provinces. Successful implementation of the DOTS strategy through collaboration between the Mary Adelaide Leprosy Center (MALC) and the Government of Azad Jammu and Kashmir, under the World Bank-financed Northern Health Project, is one such example. The key components of the public-private partnership project in TB control, to be implemented mainly at the district level, include the following: § Capacity-building of the private and public sectors: Because the majority of TB patients seek care from private practitioners, the NTP aims at training the private doctors, paramedics, and laboratory technicians in standardized good-quality TB treatment. In addition, the private sector will be provided with the latest equipment (microscopes) and chemical reagents to facilitate detection. The public sector, too, will be upgraded: district health offices, supported by provincial authorities, will be equipped to develop and sustain partnerships needed to increase DOTS implementation. § Advocacy: Media messages to promote awareness about health issues will be developed at the federal level. § Research and evaluation: Provincial officials will participate in development, research, and evaluation activities in their respective provinces.

4.51. Similarly, given the importance of agricultural extension in enhancing agricultural productivity, and the virtual collapse of public extension services, there is considerable scope for public financing of private delivery of extension services. In the Pakistani context, such private extension service providers might include unemployed agricultural graduates, agricultural consultants, consultancy firms, progressive farmers, farmers' organizations, cooperatives, nongovernmental organizations, agribusiness companies,

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input dealers, newspapers, private television channels, and private sector banks. The key is to involve all or some of them in the agricultural development process through appropriate incentive mechanisms, including direct financing from the budget. 4.52. The private sector can also be inducted in the road sector through appropriately designed concessions. Information technology is a fast-developing area in Pakistan, having relatively large claims on public funds. According to international experience, the sector requires public involvement in regulation and facilitation more than in development and provision of information technology, which can be well and efficiently performed by the private sector. 4.53. A number of services even in the subnational domain might be better provided by the private sector, including fire protection, refuse collection, street maintenance, traffic management, local transit service, refuse disposal, and electric power. In addition, private sector participation is useful in primary and secondary education, transportation, water supply, sewerage, and health services (see World Bank 1994 for details on such participation). Furthering Devolution 4.54. Perhaps the most important initiative of the government is its comprehensive plan of restructuring the government through devolving the state authority Table 4.1 presents the areas of responsibility of each level of local government. 50 The plan attempts to create fullfledged district and municipal (tehsil) governments having legislative and financial powers, with the main objective of changing the political and administrative culture of the government by taking government closer to the people and therefore getting communities better integrated with the government. This, it is hoped, that the devolution process would improve decision-making and government's accountability, particularly of service providers, to the citizens.

Figure 4.2: The 2-step logic of decentralization

Structural changes: · political · fiscal · administrative Step 1 New accountabilities for senior staff Step 2 Service delivery improvement arrangements: · supply-side · demand-side

4.55. The overall objectives of the current devolution program in Pakistan can be discerned from the various publications of the NRB, the local government ordinances, and their amendments. Some interpretation is required, as the objectives are not set out in any single document. One point is clear from government

50

In addition, city districts may set up district municipal offices for the integrated development and management of the following responsibilities jointly with the Tehsils: (1) water source development and management, storage, treatment plants, and macrodistribution; (2) sewage tertiary and secondary network, treatment plants, and disposal; (3) storm water drainage network and disposal.; (4) flood control protection and rapid response contingency plans; (5) natural disaster and civil defense planning; (6) solid waste management, treatment, and disposal, including landfill cities and recycling plants; (7) industrial and hospital hazardous and toxic waste treatment and disposal; (8) environmental control, including control of air, water, and soil pollution in accordance with federal and provincial laws and standards; (9) master planning, land use, zoning and classification, and reclassification; (10) urban design and urban renewal program; promulgation of building rules and planning standards; (11) parks, forests, playgrounds, and sporting and other recreational facilities; (12) museums, art galleries, libraries, and community and cultural centres; (13) conservation of historical and cultural assets; (14) landscape, monuments, and municipal ornamentation; (15) urban and housing development, including urban improvement and upgrading, and urban renewal and redevelopment, with care being taken to preserve historical and cultural monuments; and (16) regional markets and citywide commercial centres. Moreover, unions can receive functions from districts and Tehsils, provided that they are also given the funds for managing those functions.

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descriptions of devolution: it is intended to improve service delivery and is not an end in itself. Keeping a focus on the intended end product--improvements in service delivery--is crucial, as the literature is clear that decentralization, per se, offers no guarantees of improvement in accountability or service delivery. 51 4.56. Devolution is an attempt to change incentives within the public sector through a pragmatic combination of administrative, fiscal, and political changes. These changes are intended to change how senior staff of subnational governments understand their tasks­that is, changing their perceived accountabilities so that they feel responsible for achieving service delivery improvements. Those service delivery improvements are likely to be variable between districts and across sectors and thus difficult to specify precisely in advance. They are also likely to include both supply-side reforms, improving the quality of health or education services that are produced, and demand-side, strengthening citizens' ability to pressure government for better-quality services. 4.57. The key assumption is not that these service improvement arrangements could not happen within a centralized system. The logic is that making any such arrangement work requires effort and ingenuity on the ground, and changing the accountabilities of senior staff in local government motivates them to install and sustain these arrangements. 4.58. Primary education offers an example of this chain of connections. Passing authority over teacher recruitment and discipline to competent local school management committees can be a step toward better educational service delivery. Establishing local governance arrangements for schools could in principle, however, be undertaken by central government as well as by subnational government. The decentralization argument is that a judicious mix of political and fiscal changes, coupled with some decentralization of hire and fire authority over teachers to local government, will be the trigger that makes nazimeen and senior district officials more concerned with making these arrangements work. 4.59. The same example illustrates why service delivery improvements require better local policy as well as improvements in service quality. Improvements in the quality and attendance of primary school teachers are rather marginal if patronage and elite capture significantly direct public spending toward secondary education for the middle classes, rather than primary education for the poor. 4.60. Initial evidence concerning community oversight at local level is encouraging. Many school management committees seem quite well developed and have had considerable success in reducing the cost of school construction. In Sindh, under the Khairpur Shelterless School Scheme, thirty-three schools have been completed at a third of the cost of a comparable government school, in quicker time, and without compromising on the quality of construction. It seems that the elected officials were crucial for mobilizing the communities and ensuring the effective functioning of these institutions. In addition, some early signs show that the education monitoring committees are having an impact through surprise visits to schools and checks on teacher attendance through direct observation. It is important to build on these early successes and, mindful of the risks of overclaiming, to publici e concrete examples of successes if z some momentum is to be maintained.

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A recent review of the literature found that the empirical evidence that decentralization increases allocative efficiency in public expenditure, accountability, or cost recovery is quite meager. The literature suggests that decentralization can have disadvantages, including failures of policy coordination, "elite capture" of local governments, and overburdening of weak local governments. Overall, it seems that while moving political authority over services and over resources to subnational governments can indeed improve service delivery, positive results are contingent on a large number of other factors, not least ensuring the ability of civil society to exercise discipline over government both through voice and exit as mediated by the electoral arrangements and access to information; preventing monopoly control of information being exercised by community leaders; locating functional responsibilities for public goods at the right levels; limiting the retention of hierarchical authority by national governments (even if this is rarely used); and improving the flow of information from governments to their constituents. (See Azfar, Omar. 2002. "Conditions for Effective Decentralized Governance: A Synthesis of Research Findings" (http://www.inform.umd.edu/IRIS/IRIS/PEG/synthesis_paper.pdf).

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4.61. Although Pakistan has made considerable progress in devolution, there is a considerable distance still to travel. In terms of distribution of state responsibilities among various leve ls of government, it is apparent that the actual assumption of responsibilities at the higher levels has departed substantially from the de jure assignment, with the federal government increasingly encroaching on provincial governments' responsibilities. For example, although education is a subnational responsibility in Pakistan, the federal government has assumed responsibility for formulating national policy, planning, developing curriculum, managing centers of excellence, and financing university education through the Higher Education Commission (formerly through the University Grants Commission).

Table 4.1: Functional Responsibilities of Districts, Tehsils and Union Councils

City District

·Public transportation and mass transit ·Passenger and freight transit terminals ·Traffic planning, engineering and parking ·Industrial estates and technological parks ·Cottage, small and medium sized enterprise promotion ·Investment promotion and protection

District

·District planning ·Schools (boys & girls) ·Girls Schools ·Technical Education ·Colleges (other than professional) ·Special Education. ·Literacy Campaigns & Continuing Education ·Vocational Education ·Public Health ·Basic & Rural Health ·Child & Woman Health ·Population Welfare ·District and Tehsil (HQ) hospitals ·Agriculture (Extension) ·Livestock ·Farm Water Management ·Soil Conservation ·Soil Fertility ·Fisheries ·Forests (local) ·Community Organization and registration ·Labor safety regulation ·Social Welfare ·Sports and Culture ·Cooperatives ·Enterprise and Investment Promotion ·Civil Defense ·Information Technology Development & Promotion Environmental regulation ·Land Revenue & Estate ·Excise and Taxation. ·Spatial Planning and Development ·District Roads and Buildings ·Energy and Transport

Tehsil/Taluka/Town 52

·Spatial plans ·Control over land-use, landsubdivision, land development and zoning by public and private sectors for any purpose ·Prevention of encroachments ·Regulation of sign-boards and advertisements ·Municipal infrastructure and services ·Water supply and control ·Development of water sources ·Sewerage, treatment and disposal ·Storm water drainage ·Sanitation ·Solid waste collection and disposal ·Roads and streets, other than roads falling under the jurisdiction of, and maintained by, the District Government or Government and streets maintained by the Union Administration or Village Council ·Traffic planning, engineering and management (including traffic signalling systems, signs on roads, street markings, parking places, transport stations, stops, stands and terminals) ·Street lighting ·Fire fighting ·Parks, playgrounds, open spaces and arboriculture ·Slaughterhouses ·Sports, cultural, recreational events, fairs and shows ·Regulation of markets and services

Union

·Statistical information for socio-economic surveys ·Consolidation of village and neighborhood development needs ·Union-wide development ·Coordination for removing deficiencies in the delivery of TMA services ·Registration of births, deaths and marriages ·Libraries ·Sports tournaments, fairs, shows and other cultural and recreational activities; ·Cattle fairs and cattle markets ·Public open spaces, public gardens and playgrounds ·Public sources of drinking water, including wells, water pumps, tanks, ponds and other works for the supply of water ·Street lighting, public ways and public places (through mutual agreement with the TMA) ·Facilities for the handicapped, destitute and poor ·Protection against stray animals and animal trespass ·Cattle pounds ·Regulation of grazing areas ·Assistance in disasters and natural calamities, and relief activities (including de-silting of canals)

4.62. Although the devolution program provides the best opportunity in years for improving the structure of governance and the effectiveness of public services, the system needs considerable fine-tuning to achieve these objectives. Some of the areas that require early attention of the government are the following:

52

In urban areas, these responsibilities are undertaken by city districts, not the city towns.

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§ Extending administrative and fiscal autonomy: Local governments do not yet have full control over the staff and finances of devolved departments. For efficient delivery of service, local government should have full autonomy over personnel decisions (hiring, posting, performance monitoring, and rewarding) of facility-level and other related staff. Local governments at all levels will only start taking their responsibilities for workforce management seriously as and when they consider themselves to be fully the employer of their staff. Completing devolution means, first and foremost, transferring budgetary responsibility for salaries to the district governments. Thus salary budgets should be transferred to the districts via account IV. § Extending facility -level oversight: Useful steps have been taken in the development of school management committees, but few significant employer functions have been transferred to the school level yet. Currently SMCs only have very limited funds, resulting from the transfer to the districts of some nonsalary operating budgets, although in a few comparatively richer areas SMCs are raising their own funds as well. The devolution program presents an opportunity to further delegate decision making authority over critical facility-level matters to bodies such as SMCs, which can ensure better oversight over service facilities, perhaps reducing staff absenteeism. Staff absenteeism is not a major issue for private sector schools and health facilities as immediate accountability is ensured. For public facilities, community monitoring provides one avenue to ensure facilities remain functional with their staff present. § Improving political careers. It was hoped that the new system would introduce a new class of politicians who had not previously stood for office and who would permeate the entire political system. Certainly, a large number of women have for the first time participated in the political process. One issue, however, concerns the limited time that citizen activists will have to contribute to a large and growing range of participative bodies, including Citizen community boards, citizen police liaison committees; village, union, district, and tehsil councils; participation in rural support programs and in district development committees for Khushal programs. Since the number of new elected members at various levels is large, allowances paid are very modest--a problem of special concern to many low-income councilors (especially those elected on reserved seats). The travel costs they must incur to attend a council session can be a much as a day's wages. § Reducing institutional complexity : To be motivated to deliver public goods, politicians must be able to effectively claim credit from voters for providing such goods to them. The institutional complexity of the new system suggests that voters might have little knowledge about which tier of local government is responsible for which functions. The high proportion of politicians that are indirectly elected complicates the linkage between voters and their representatives.53 Enhancing awareness and transparency of roles of each level of government is crucial for effective delivery of public services. § Improving capacity: The NRB and local civil society groups have been providing training support to local councilors. To date training has focused on constituency and coalition building, social mobilization, strategic negotiation, legislative oversight processes, and legal rights awareness for elected representatives. Further training could usefully include skills building for new local government politicians in publicizing local achievements. § Raising the efficiency of fiscal management: Only a few provincial taxes, including the property tax, and some user charges have been devolved to the local government. This situation is in distinct contrast to the well-accepted logic that revenue assignments should be closely matched to

53

One third of tehsil and district council members are indirectly elected by the 126,462 union councilors. (The ballot contained 126,462 seats, 21 seats for each of the 6,022 unions. Not all seats were filled, however.)

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revenue needs.54 There are also many local tax administration issues to resolve, such as clarifying the mechanism of returning property tax revenue from the district to tehsils and education and health sector user charges from the province to the district governments. § Improving PFC formulae: The interim Provincial Finance Commission Awards need to be improved to avoid adverse incentives that they might create. For example, according to the Sindh PFC Award, districts will be given an additional allocation matching their baseline collection of certain items. This arrangement, however, may motivate districts to raise taxes regardless of how well they are spent. Districts with wider tax bases and lower efficiency may gain more than those with a narrow base and higher efficiency. The PFCs could be encouraged (or required) to transfer additional resources through mechanisms that convey federal and provincial policy priorities. § Clarifying mechanisms for conveying federal and provincial policy priorities: Provincial micromanagement is enabled by the involvement of provincial and federal governments in personnel management decisions in the districts (and to a lesser extent in the tehsils). It is partly justified because there are few transparent avenues available to the federal government and to provinces to influence local government policy priorities. In order for the devolution initiative to be in complete sync with I-PRSP, mechanisms, national and provincial policies, local priorities, and financial resources must be better integrated. To achieve this, incentive mechanisms need to be instituted to help local governments prepare and implement their polices and plans in accordance with the national and provincial priorities, without compromising the autonomy of local governments. Increasing the tenure of senior district staff: Inter-district transfers of provincial cadre staff are an enormous problem. As long as provincial and federal cadres retain positions in local governments, then some minimum time must be placed on the tenure of these officers. Without this, the temptation to use transfers as a covert policy instrument is too strong. § Improving financial management and fiscal reporting: One approach to reducing the incentive to use development funding for achieving political benefit is to improve the quality of public reporting on the effectiveness of development expenditures. For more effective service delivery, the financial management system should be improved (see CFAA for detailed recommendations). § Reviewing alternative funding mechanisms: Decentralization of services is usually justified on the basis improving the delivery of services that are valued by the community and for which they are willing to pay. In the case of water and sanitation, for example, devolving capital expenditures from the provincial level to the district or tehsil level, accompanied by good intentions to tie them to capacity for operations and maintenance, is unlikely to be sufficient to discipline investment. Without a relationship between the quality and quantity of services delivered on the one hand and the cost of those services on the other, infrastructure will suffer from underinvestment and worsening problems in operations and maintenance. Thus reliance on block grants to finance water is clearly influencing the institutional options that city districts or tehsils are contemplating for delivery of services. § Strengthening the Mushawarat Committees: The weak management links between the districts, tehsils, and union councils do seem to provide some challenges in collaboration. The only coordinating mechanism between districts and tehsils is the Mushawarat Committee. Since each local body can make development decisions independently, without consulting or informing the others, there is potential for considerable waste due to duplication of efforts and development

54

The argument is that governments have few incentives to maximize their effort in raising revenues that they do not spend, and when they spend revenues that they do not raise, they have few incentives for spending them efficiently. See Shah, Anwar. "Fiscal Federalism in Pakistan: Challenges and Opportunities". World Bank. 1996.

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schemes. The Mushawarat Committee can be strengthened to serve as a coordinating body for budgetary decisions. 4.63. As the system beds down, it will be important to harness the potential that it offers for strengthening user control over local policy and over the supply of local services. This will require that government take a distinctly pragmatic approach to the development of citizen community boards, amending their structure and their governance arrangements as practical experience is gained. 4.64. More strategically, devolution will require some adjustments in the new political environment. An active role for the provinces must be found within the new arrangements. One area that the provinces might well be encouraged to pursue is in actively choosing the form of devolution that they encourage. They could choose among several different paths. Early signs are that Sindh is likely to seek to maintain stronger guidance over policies at the local government level, whereas NWFP may feel more comfortable in delegating authority. If this is the case, then the key is clarity and honesty about what approach provinces are taking. Radical devolution might not be the approach chosen by each province. 4.65. Most important, however, local governments need adequate fiscal and human resources to fulfill their duties appropriately and efficiently. Considerable efforts need to go into developing the managerial and technical capacity of the local governments and providing them with adequate facilitating office technology. Nevertheless, without a significant increase in fiscal resources of local and provincial governments, there is little hope for any major improvement in public services through the devolved delivery system. Federal- Provincial Responsibilities 4.66. With the recent devolution, the distribution of responsibilities at lower tiers of the government has been corrected to a large extent. Yet there is significant scope for devolving additional functions from the federal to the provincial governments, which in many ways remains overly centralized. Overcentralization of functions is also reflected in the planning process, which still exhibits a strong top-down format. A large portion of decisions regarding development expenditure are taken by the federal government. A clear example of this is inclusion of a large number of schemes in the PSDP that are regional in nature. 4.67. The simplest way to proceed on this front is to have a serious revie w of the actual responsibilities in relation to spirit of devolution and, encourage the provincial governments to take back as many of those functions that have been assumed by the Federal Government during the last three decades either because of financia l constraints or lack of technical and administrative capacity (actual or perceived) at the provincial level. Devolution of some of the functions presently carried out by the Federal Government would reduce the provincial government concern of becoming redundant in the wake of large devolution to the district governments, will lift the morale of the provincial civil service and would enable the federal government to focus more intently on its key strategic functions. In most of the federal ­ provincial concurrent list areas, the federal government should remain concerned with providing strategic direction, setting national minimum standards and providing financing to the provinces conditional on their compliance with these standards. Inter- Government Financial Flows 4.68. The adequate funding of the devolution initiative is only a part of the important issue of intergovernment financial flows. We have argued above for much greater devolution of responsibility to the provinces in order to underpin and strengthen the devolution to the district level. But even with the present rather ad hoc distribution of responsibilities, it is clear that it is the provincial/ district level 87

spending on education, health, law and order, provision of justice, irrigation, rural and urban water supply, and roads that will account for the bulk of the increase in real public spending in the near future. 4.69. The share of provincial/ district level public spending is likely to rise from around 23 percent of the total public spending in 2002 to over 35 percent in 2007. In terms of GDP, provincial/ district level spending should increase from 5.6 percent to over 8 percent over the period, if our assumptions about the fiscal space and priorities materialize. This has major implications for allocation of national financial resources. At present, the sub-national governments are facing a severe fiscal squeeze. Whereas the National Finance Commission (NFC) has been seriously considering a significant increase in the share of provinces in the federal divisible poll from the present 37.5%, greater flow of funds would be required to achieve the targets of the PRSP. Clearly, mechanisms will need to be developed to allow a large portion of the fiscal space created at the federal level to be passed down to the sub-national levels. This will require two things: (1) new NFC and PFCs arrangements which assign much greater formula -based transfers to the lower levels of governments than at present and (2) putting in place a system of financial incentives and special transfers to the provincial and local governments so that national priorities can be protected consistent with decentralization and devolution. 4.70. Although institutional frameworks under the NFC and PFC exist to devise appropriate revenue sharing formulae, presently there is no such mechanism that can help the federal/provincial governments to induce the local governments to pursue the national/provincial policy objectives. For example, achievement of PRSP targets, require a sharp increase in sub-national spending in high-priority areas like education, health, water supply and sanitation, etc. It is, therefore, imperative to strengthen the administrative and technical capacity and financial management systems at the sub-national levels and develop m echanisms to channel sub-national expenditures towards meeting national objectives (e.g. PRSP targets). One such mechanism could be institutionalizing the conditional grants, whereby the federal government provides additional funds to the sub-national governments conditioned upon them meeting some clearly defined targets. For instance, the federal government can finance full or part cost of an adequately designed scholarship or any other incentive program to promote girls education in the province or district. Care must be exercised to make the grant criteria very transparent to avoid misunderstandings and frictions among the governments. There is a particular need for targeted national programs to generate employment and income among the poor and for promoting specific national agenda in health and education sectors. Improving Governance and Fighting Corruption 4.71. Poor governance and rampant corruption have been responsible for significant wastage of, and leakage from, public resources (see Box 4.8). Table 4.2 provides key indicators of governance for selected South Asian countries. Although based on perceptions rather than real data, these indicators show that Pakistan performs rather poorly in terms of accountability, effectiveness of government, and corruption. All these weaknesses have a strong bearing on the effectiveness of public expenditure. Areas where governance has been a particular problem are personnel and resource management; these include staff absenteeism, hiring of staff on grounds other than merit, frequent transfers, and maldistribution of staff to the disadvantage of rural areas. Closely related to weak governance is the phenomenon of ghost facilities (especially schools and health centers) and staff, which siphoned a significant amount of public resources with no service being delivered. 4.72. One aspect of weak governance in Pakistan has been the widespread political interference in the planning and budgeting process, which has eroded the quality and credibility of the government's expenditure decisions. In Pakistan, the informal role of politicians in the budgeting process went beyond the ideal of establishing the policy agenda for prioritizing the expenditures, making final decisions on

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broad expenditure allocations consistent with these priorities, and monitoring the use of budgetary resources and associated outcomes (such as via the Public Accounts Committees).55 4.73. Senior government officers operate in a political environment, where absence of job security forces them to rely on their p olitical patrons. The 1973 civil service reforms removed constitutional protection given to civil servants against being prosecuted for unintended adverse consequences of their official decisions. Another significant change was the shift of disciplinary proceedings from the Federal Public Service Commission (FPSC) to the Establishment Division, which, although was later retrieved by the Federal Shariat Court, had left a sense of insecurity among the civil service. 4.74. The varied and unstructured responsibilit ies of government officers; complex, out-of-date rules and procedures; and unclear institutional structures create a system that on the one hand gives government officers immense discretionary powers while on the other is extremely opaque and within which it is difficult to determine responsibility and accountability. This situation creates an ideal environment for corruption to flourish. In addition, the financial management and accountability system has broken down (see para 4.80). 4.75. Furthermore, according to anecdotal evidence, politicians frequently interfere in recruitment, transfers, and posting of government employees. More important, they exert pressure, and often with success, to incorporate projects and schemes in the development program that do not merit inclusion on grounds of technical, locational, or economic reasoning. Lahore-Islamabad Motorway, Saindak Mineral Project, and Chashma Nuclear Power Plant are some of the many projects that were undertaken mainly on the insistence of politicians or for political reasons. Similarly, the Peoples' Works Program (PWP) and Tameer-i-Watan (TIW) Programs in the PSDP are standard examples of politically motivated expenditure programs. These programs were included in the PSDP to provide the elected representatives with development resources to undertake projects of their liking. Although justified on the grounds that these programs offer an ideal mode of bringing local preferences into the planning and budgeting process, the schemes undertaken under these programs circumvented the regular screening processes of the government and thwarted the policy framework. 56

55

For a variety of reasons, the Public Accounts Committees (PACs) failed to meet regularly, leading to a large backlog of undiscussed audit reports. As a result, two- to three-year delays between when expenditures are incurred and when the PACs take up the related audit reports for discussion are quite common. 56 For example, the rural water supply schemes initiated by the government departments ask the benefiting community to sign a memorandum of understanding with the department indicating that it will assume responsibility for operating and maintaining the scheme. Rural water supply schemes started under PWP and TIW, however, did not adhere to this sectoral policy, affecting not only the sustainability of these schemes, but also making application of policy on regular schemes that much more difficult.

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Box 4.7: Corruption in Pakistan According to a Transparency International perception survey, Pakistan falls among the bottom few countries in prevalence of corruption. With the establishment of national and regional accountability institutions, however, and the military government's stated objective of reducing corruption from the society, the situation has improved significantly over the past three years. Presently Pakistan scores about the same as India and significantly better than Bangladesh on the corruption perception index. Nevertheless, there is significant room for further improvement. A recent survey by Transparency International gives a stark review of corruption in Pakistan. Based on perceptions and experiences of individuals, the survey attempts to explore the level of corruption in seven main departments of the government. The results of the survey are reproduced below: Education: About 70 percent of respondents who interacted with educational institutions cited the existence of irregular methods of gaining admission. Teachers and members of the management committee were cited as the most involved. The main causes of corruption identified were a lack of accountability and low salaries. Health: Sixty-five percent of all patients visiting a hospital reported irregular admissions, and 96 percent of those who were admitted said they were victims of corruption. Hospital staff were identified as the key facilitators of corruption by 65 percent of the users, and direct extortion was reported in 60 percent of the total cases of corruption. Lack of accountability and monopoly power were quoted as key contributing factors. Electricity: A very high percentage (65 percent) of users with access to electricity reported irregular processes in acquiring it; a much higher percentage reported corruption in regular interaction with the department (96 percent). Meter readers and billing employees were identified as the key facilitators; extortion was reported by 72 percent of the victims. A lack of accountability and low salaries of employees were identified as major contributory factors. Land administration: Only 8 percent of respondents reported interactions with the land administration department. All of those who used the services of the department, however, reported incidences of corruption. Surveyors and revenue officers were identified as the major facilitators. Bribes were directly demanded in 64 percent of cases, and a lack of accountability, discretionary powers, and low salaries were cited as the key causes of corruption. Tax administration: Eight percent of respondents interacted with the tax department during the past year. Corruption was perceived to be rampant, with 99 percent of users reporting corruption. A third of all incidences of bribes were paid to reduce a customer's assessed tax. Tax officers and employees of the department were identified as the major facilitators, and in most cases (61 percent) bribes were extorted. A lack of accountability was identified as the major reason for the prevalence of corruption in the tax department. Police: Nearly a third (32 percent) of all respondents reported using the services of the police during the past year. All of those who interacted with the police reported encountering corruption; one in two victims identified the police officer as the key perpetrator. Extortion was reported by 74 percent of the respondents. A lack of accountability and low salaries were quoted as the major contributory factors. Judiciary: Only 6 percent of respondents reported using the services of the judiciary during the past year; almost half of the users interacted in their capacity as a complainant. Ninety-six percent o users reported encountering f corruption; 44 percent of cases involved bribing court officials. Court officials (41 percent) and judges (24 percent) were identified as key facilitators; in most cases (61 percent), bribes were demanded directly. One-third of the respondents said that a lack of accountability was the main factor contributing to corruption in the judiciary.

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Table 4.2: Key Governance Indicators in South Asia

Polity Score Bangladesh India Nepal Pakistan Sri Lanka 6.00 9.00 6.00 -6.00 5.00 Press Freedom 60.00 42.00 57.00 57.00 74.00 Voice & Accountability -0.20 0.66 -0.06 -1.43 -0.23 Law & Order 2.00 4.00 N/A 3.00 3.00 Government Effectiveness -0.54 -0.17 -1.04 -0.48 -0.44 Graft Corruption -0.64 -0.39 -0.31 -0.79 0.00

Source: Transparency International, Corruption in South Asia, December 2002.

4.76. Recently, the newly elected government has announced it will provide development funds (Rs. 10 million for each member of the national Parliament). Not only are there concerns that this program will follow the same route of PWP and TIW and lead to wasting of public resources, but in view of the devolution program, the argument that this program brings local preferences into the budgeting process is much weaker and may even go against the devolution objectives of the government. Moreover, unlike the past when the deputy commissioner (generally a federal government employee) coordinated all development activities, including PWP and TIW schemes, in the district, the present district coordinating officer (DCO) is a local government employee under the district Nazim­a politician. There are therefore concerns that coordination of the MNA/MPA schemes with other local and provincial development activities may not materialize, leading to duplication and further wastage of development funds. 4.77. Governance is a multidimensional issue, and improvements in all dimensions are required to improve the effectiveness of government. Given the correlation between increase in corruption and the erosion of real income of government employees, an increase in the salary of civil servants would play an important part in reducing corruption from within the government. In the short run, the government should ensure that rules and regulations governing financial transactions are strictly adhered to. Deviations from these rules should be kept to a minimum, with the need for doing so adequately spelled out. The decision to allow such a deviation should rest with the responsible agency and not with the politicians (for instance, the Planning Commission in terms of including development projects in the development program), and the decision should be made only after thorough consultation with all concerned parties. The National Accountability Bureau (NAB) needs to develop a medium-term anticorruption strategy, which should not only significantly improve present methods of combating corruption, but also formulate a more effective and systemic approach toward monitoring and prevention of corrupt practices. For any anticorruption strategy to be effective, it needs to promote the following features in the government's operations and decisions: transparency, accountability, meritocracy, deregulation, standardization, automation, and community and public involvement. Strengthening Financial Accountability 4.78. Although, Pakistan has a reasonably sound accountability system on paper, in fact weak accountability is the factor underlying most, if not all, the problems that impact the effectiveness of public expenditure. The procedures governing financial accountability are neither overly cumbersome (given the circumstances of Pakistan) nor obviously flawed. Nevertheless, accountability has been a serious problem, for the following reasons: a) Parliamentary and executive control of the public purse has been ineffective; audit reports on the annual accounts are heavily qualified; and federal, provincial, and district accounts do not currently meet the expectations of the Constitution and associated laws and regulations.

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Substantially strengthening the effectiveness of the oversight function provided by the public accounts and other parliamentary committees can improve this control. b) The accountability of the executive at present is not sufficiently supported by information that would enable it to become focused on results and outcomes. This improvement in focus can be accomplished by progressively introducing a performance-based management system with incentives that reward outputs and outcomes and hold the secretaries of government departments to account for meeting departmental objectives and performance standards. The responsibilities need to be enforced by strong performance reporting and review functions and internal control responsibilities. c) The separation of audit from accounting functions is still not complete. The Auditor General of Pakistan (AGP) continues to exercise control over staff of Pakistan Audit and Accounts Service (PAAS), which include the accounting staff. This implies that the Controller General of Accounts (CGA) does not have clear administrative authority over his own staff. This problem could be effectively resolved by separating PAAS into an auditing cadre, controlled by AGP, and an accounting cadre, controlled by CGA. d) The devolution process has brought to light the institutional weaknesses in the accounting system. The initiative for a more devolved system of governance for the central, provincial, and local governments and their financial reporting arrangements needs substantial further strengthening in financial accounting, reporting, and auditing and in arrangements for improving public scrutiny. e) The public audit function does not currently meet the standards required by the Constitution and supporting authorities. The audit reports are too narrowly focused and do not contain any information on the efficiency and effectiveness of program or service delivery. The focus is mainly on pointing out irregularities in individual transactions without sufficient attention to significance, and systemic weaknesses, of financial management system. The legislative oversight of accountability system too is weak. The PAC meets too infrequently and lacks the expertise to undertake an effective review of audit reports. Public scrutiny of the government's activities and financi l transactions is seriously impaired because of lack of timeliness and a comprehensiveness of legislative reviews of audit reports and because of poor follow-up to the PAC's recommendations. The auditing function can be strengthened by focusing it in the short term more directly on attest audit and improving internal controls, ensuring its independence by making the Auditor General more independent of the executive; improving the PAC with institutional support; and making the government responsible for following up on the PAC's recommendations. f) Although a penalty system exists for misdemeanors in public service (such as unauthorized expenditures and misuse or theft of resources). A range of sanctions are applicable, including dismissal. The procedures for exercising such sanctions, however, are inordinately cumbersome and lengthy, with the result that they are ineffective.57 There is a need to simplify the penalty procedures. g) While dismissal of staff through regular procedures appears to be virtually unachievable, anecdotal evidence suggests that informal intervention from politicians, at least in some cases,

57

In contrast to the lack of timeliness of such sanctions, staff can be transferred to different departments and different areas of the country at relatively short notice. Transfers are regarded informally within the public service as an effective power of sanction, although this method is not used officially for this purpose. Instead, it increases the scope for breakdowns in accountability by virtue of the power that the authority to transfer bestows.

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can result in swift dismissal (and also in appointments that circumvent procedures), with adverse implications for accountability and morale. h) Procedures for recruitment on merit at the senior level appear to be sound, but promotions depend on Annual Confidential Reports (ACRs), which apparently have failed to establish a sound performance system. A very large proportion of staff is given an "outstanding" rating by managers, irrespective of their performance and in contravention to the ACR guideline. Moreover, the completion of ACRs is not without bias. i) The recent reversal of the previous government's decision to recruit all federal government staff in BPS 11-16 through the FPSC is a step in the wrong direction. The FPSC's purview over this recruitment should be restored, or alternatively a foolproof system should be developed by which this recruitment could be made by the government departments without compromising merit. 4.79. The government has recently embarked on a comprehensive reform program to restructure its financial management system. 58 Although significant steps have been taken in this regard (see Box 4.1), the government must carry the program forward and involve the subnational governments, public corporations, and autonomous bodies more intently in the reform process. The continuation, expansion, and deepening of the reform program can ensure substantial improvement in the government's financial management system within the next three to five years. The CFAA-Phase-II has outlined (among other things) the following key actions for improving the financial management system. 4.80. The immediate actions include (1) enhancing the transparency of the budget by disclosing fixedcost and contingent liabilities and the transparency of the accountability system by publishing annual and quarterly financial reports of all levels of government; (2) developing provincial budget implementation systems along the lines of the federal government's Revised System of Financial Management and Control and making the federal and provincial systems fully operational; (3) establishing a strong internal control mechanism for each level of government; (4) building the capacity of the auditing and accounting establishments and of the PAC; and (5) renewing the government's commitment to implementation of PIFRA. 4.81. The medium-term measures include: (1) developing and operationalizing the MTBF; (2) undertaking civil service reforms; (3) implementing a phased transition from cash to accrual accounting; (4) giving provinces control over their own accounting system by redefining and clarifying the role of CGA and AGs; (5) ensuring a transition to international auditing standards; and (6) making public accountability more viable through formal PAC reviews and training the public and the media on the power and utility of financial information.

58

These reforms are based on issues and recommendations that appeared in the IMF's Accountable Fiscal Management Framework and the World Bank-supported Project for Improvement in Fiscal Reporting and Auditing (PIFRA; and the Country Financial Accountability Assessment (CFAA ) ­ Phase I and II.

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CHAPTER 5: STRENGTHENING THE CIVIL SERVICE

Key Issues 5.1 As discussed in the previous chapters, Pakistan has a unique opportunity to expand and restructure its public sector spending in support of its economic and social goals. But while public expenditure on infrastructure and social development must increase significantly for reviving growth and reducing poverty, this effort could be wasted if public funds are not utilized effectively. In the previous two chapters, we discussed the principal issues, which normally influence the effectiveness of public spending, strategic approaches to public interventions, the role of the various levels of government, sectoral allocations, budgetary, planning and monitoring procedures and fiduciary controls. But all these aspects of design and implementation of public service delivery require functioning institutions including a clear framework of laws and regulations. A competent, honest and independent civil service provides the backbone of these institutions. 5.2 In Pakistan the strength of public institutions has been greatly eroded over time. Many interrelated factors have contributed to this decline including increasing centralization and non-transparent decision making, lack of accountability, low or declining compensation, and the dilution of the role of merit in selection and promotion of civil servants with undue political interventions in normal functioning of government departments and agencies. This has contributed to declining technical and professional competence of officials, and a culture of risk-averse behavior. 5.3 Some steps have been taken to reform the civil service aimed at improving the performance of public servants and reducing corruption. In the interest of merit based recruitment, a more autonomous Federal Public Service Commission (FPSC) was given responsibility for recruitment for all middle level and high level professionals. Promotion panels for higher grades are now chaired by the Chairman FPSC and to ensure quality of high grade staff, acceptance to advanced training programs are now subject to entry examinations. The first phase of pay and pension reforms was implemented in January 2002. All federal civil servants including military were given new pay scales which restored 75 percent of the lost purchasing power after 1994 and also revised pension benefits (lower commutation rates and more actuarially fair commutation factors). The pay reform also reduced the share of monetary allowances from 40 to 27 percent and de-compressed the pay scales. The ratio of the highest to the lowest increased from 1:9.2 to 1:9.9 including all monetary allowances. 5.4 Pakistan shares the symptoms of poor performance and low accountability stemming from an unresponsive bureaucracy with many other low-income countries. Indeed, the problems of compressed pay scales offering few incentives for skilled senior managers to join the public sector, the excess of unskilled lower level employees relative to senior staff, and the extensive patronage and politically motivated appointments and transfers are found in many settings. However, some of Pakistan's administrative reform challenges are distinct - as are the opportunities that are available for addressing them. 5.5 The structural rigidities in the federal and provincial administrations stem from strongly vertically-oriented occupational groups. These groups foster the distinctively deep-seated concern with status. Inter-cadre rivalries significantly determine the shape of federal divisions and attached departments, as structures are created to meet the needs of the various groups and cadres for promotion opportunities ­ rather than on the basis of policy priorities or operational needs.

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5.6 However, government in Pakistan also has some significant advantages. Above all, the public sector is not bloated in the absolute sense of too many employees representing an insupportable fiscal burden. The wage bill is not high in absolute terms, and has been reduced over the last decade as real pay has declined. This is not to say that it has not crowded out other non-salary recurrent expenditure - but this owes more to the reduction in these expenditures than to an increase in employment costs. Also, this is not to offer false comfort - public employment is certainly excessive relative to what the public sector delivers and it is undoubtedly bottom-heavy, with a disproportionate number of employees at the lower levels. The government also finds itself with three 'low-hanging fruit' that can be picked at relatively modest political costs. Specifically, government has: some consensus between the Establishment Division and the NRB on an approach to restructuring; the fiscal space to afford pay reforms; and a well developed, but incomplete devolution agenda. 5.7 This chapter sets out the need for administrative reform, but argues against an over-ambitious or over-elaborate set of proposals. History suggests that such proposals will generate many opportunities for lengthy reports, but will lead to little sustained progress. Instead, it argues for three steps. First, it suggests that there is an opportunity to move ahead rapidly on the creation of a National Executive Service that would greatly increase incentives both for improved performance and upgrading of skills through learning and education. The two critical elements of this reform, on which there is seemingly a substantia l consensus, are the much greater emphasis on merit and performance for selection to top grades, including a high bar beyond grade 18, and opportunities for higher education and learning for civil servants especially early in their careers. Second, it suggests sharp pay increases (and monetization of many of the large in kind benefits59) for higher levels of civil servants so that the serious decompression of pay that has been going on for decades can be reversed. Finally, it notes that completing administrative devolution, by transferring budgetary responsibility for salaries to the district governments and by progressively passing appointment, promotion and transfer (APT) authorities to the districts, will address a necessary, if not sufficient, condition for local governments to value professionalism more than patronage. 5.8 These or similar steps are central to the achievement of both the narrower objective of more efficient use of public resources and the broader objective of "reviving growth and reduci g poverty". In n a very basic sense, civil service strengthening is on the critical path of the reform process. Structure, not size, is the problem 5.9 Government in Pakistan starts from a significant advantage - the public sector is not bloated in the sense of too many employees or excessive fiscal weight. Total public employment is about 3.2 million (Figure 1) and is around 2.3% of the population60. Historically, provincial employment in the provinces has been driven more by political and patronage concerns rather than identified social and

59

In kind benefits, subsidized housing, free cars, telephones, etc are large part of compensation at the highest levels. Such in kind benefits are wasteful because they generally lead to excessive use of facilities provided, free telephones, cars, gasoline, utilities, etc. An equivalent cash compensation will both increase the discretion of civil servants about the pattern of their consumption and reduce wasteful spending.

60

Total Public Employment includes both state-owned enterprise (SOE) employees and General Government. General Government refers to employment in "all government departments offices, organizations and other bodies which are agencies or instruments of the central or local authorities whether accounted for or financed in, ordinary or extraordinary budgets or extrabudgetary funds. They are not solely engaged in administration but also in defense and public order, in the promotion of economic growth and in the provision of education, health, cultural and social services." (International Standard of Industrial Classification of All Economic Activities (ISIC), Series M No. 4, Rev 3- 1990.) By tradition, General Government contains six mutually exclusive categories: Armed Forces; Civilian Central Government; Subnational Government; Health employees; Education employees; and Police. It excludes State-Owned Enterprise (SOE) employees: employees of enterprises that are majority owned by government.

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development priorities. Sanctioned employment in provincial governments grew dramatically in the early to mid 1990s but has since leveled off or reduced slightly. Federal employment is only about 20 percent of general government employment (excluding military) reflecting the federal character of the government. Figure 5.1: The Main Components of Public Sector Employment in Pakistan

Population (000) Labor force as % of pop. Total public emp. as % of pop. General govt emp. as % of pop. 134,790 37.2% 2.3% 2.1%

TOTAL PUBLIC EMPLOYMENT 3,164,900

SOE employees (i) 382,800

General government 2,782,100

Armed Forces (ii) 587,000

Total civilian central government (iii) 429,500

Total subnational government (iv) 1,765,600

Education (v) 10,700 Health (iv) 9,200 Police 106,700 Civilian Central Government excluding education, health, & police 302,900

Education

Health

Police

Subnational Government excluding education, health, & police

Sources: (i) Government of Pakistan, Management Services Wing, Establishment Division, "Annual Statistical Bulletin of Employees of Autonomous/SemiAutonomous Corporations/Bodies under the Federal Government, 2001-2002"; (ii) International Institute for Strategic Studies, The Military Balance 1998/99; data for 1997; (iii) Government of Pakistan, Management Services Wing, Establishment Division. "Annual Statistical Bulletin of Federal Government Employees, 20012002"; and "Annual Statistical Bulletin of Employees of Autonomous/Semi-Autonomous Corporations/Bodies under the Federal Government, 2001-2002"; (iv) Data for 2000 provided by the Ministry of Finance, Government of Pakistan; (v) Government of Pakistan, Planning Commission Report, April 2001; (iv) Data does not include 70,000 community health workers hired on one-year renewable contracts under the "National Program for Family Planning & Primary Health Care."

5.10 Excluding state-owned enterprises, general government employment is some 2.1 percent of population, which - bearing in mind that international comparisons are only indicative because of practical and conceptual problems relating to the accuracy and consistency of all public employment data - compares to an average of some 2.3 percent for other low-income countries in the region. 61 5.11 The wage bill, at Rs 160 billion, is about 4.3 percent of Pakistan's GDP. This is similar to the level of this ratio in India, China, and Bangladesh although higher than Korea and possibly other similar

61

Source: (de Tommaso, Giulio and Amitabha Mukherjee. 2002. "World Bank Administrative & Civil Service Reform Website: Cross-National Data on Government Employment & Wages"; World Bank. (http://www1.worldbank.org/publicsector/civilservice/cross.htm. Access Date: March 24, 2003). Data on public sector employment are notoriously slippery and other sources make the regional average rather higher. SchiavoCampo et al indicate that general civilian government employment (i.e. public sector employment excluding the military as well as state owned enterprises) has accounted for about 2.5% of the population in Asia and the Pacific in recent years (SchiavoCampo, Salvatore and P.S.A. Sundaram (eds). 2001. To Serve and Preserve: Improving Public Administration in a Competitive World. Manila: Asian Development Bank.)

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emergent economies (Table 5.1). It is not high in any absolute sense and it has gone down in the 1990s as real pay declined (notwithstanding recent adjustment). However, the share of establishment costs in total recurrent spending increased during the last decade as overall spending was squeezed. As a result, nonsalary expenditure in the social sectors such as education and health, and O&M spending on irrigation, roads etc. declined. 5.12 The average public sector wage as a multiple of per capita GDP at 2.9 for Pakistan is about the middle of the range between the high level in Korea, Malaysia, and Bangladesh and low level in China, Indonesia, Sri Lanka and the Philippines.

Table: 5.1: Civilian wage bills in Pakistan (current) by comparison with selected countries (recent years)

Bangladesh Philippines

Indonesia

Sri Lanka

Lao PDR

Pakistan

Malaysia

(in percent of total population)

Korea

China

India

Wage bill as % of GDP Average wages as multiple of per capita GDP

3.7 4.1

3.8 1.3

4.2 N.A.

3.0 1.6

2.2 4.6

5.9 2.0

7.7 3.4

4.3 2.9

5.5 2.3

5.1 1.8

Sources: Pakistan wage bill - WB staff files, 2003. All other data - Schiavo-Campo, Salvatore and P.S.A. Sundaram (eds). 2001. To Serve and Preserve: Improving Public Administration in a Competitive World. Manila: Asian Development Bank. (http://www.adb.org/documents/manuals/serve_and_preserve/appendix.pdf), page 797 et seq.

Bottom heavy 5.13 Public sector employment in Pakistan may not be large in this comparative sense but it is certainly excessive in many areas in relation to what it delivers and certainly it became large in the first half of the 1990s in relation to the fiscal resources (see Table 5.2).

Table 5.2: Sanctioned Posts by Province (selected years) 1988/89 1993/94 1996/97 722,916 818,647 880,781 285,042 424,974 445,577 177,106b/ 227,679 254,587 98,942 122,921 127,069 2000a/ 888,796 457,494 n.a. 128,132

Punjab Sindh NWFP Balochistan

Source: World Bank 1998 (FY1989-1997) and District Budget Documents of the Sindh, NWFP and P unjab Governments for 2001/2002 a/ Figures are actual posts as of January 2001. b/ NWFP data for 1988/89 has been estimated

Figure 5.2: Composition of public employment

5.14 Also, public employment is heavily skewed towards lower grades (Figure 5.2), which often typify low productivity levels: about 95 % of the public employment is in grades 1 to 16. For just the Federal level--this share is 97 percent. Rigid 5.15 Rigidities arise because decades of patronage-based employment and inattention to skill mix in the civil service has undermined the work ethic throughout the civil service and has

1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0

grades 17-22 grades 12-16 grades 1-11 NWFP 11,491 13,050 203,138 Baluchistan 7,378 8,309 112,445 Punjab 61,334 124,537 702,925 Sindh 29,807 38,760 376,813 A.J.K. 3,894 6,371 53,197 total federal 24,125 68,912 741,710

Source: WB staff files

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created an entitlement culture, in which status considerations and inter-cadre rivalries far outweigh any concerns about service to the public or to government. Various reforms have attempted to counter what are considered to be the self-serving nature of the bureaucracy. Most radically, the 1973 reforms sought to simplify the grading system, encouraging mobility between different parts of the service and encouraging lateral entry for talented individuals from the private sector. The reforms seem to have had surprisingly little impact on the vertically-oriented occupational groups, and despite these reform efforts, occupational groups remain vertically separated, distinct career streams. 5.16 The structure of federal div isions and attached departments is unnecessarily restricted by the need to ensure that the various occupational groups that have a claim to positions within that division or department are satisfied. Positions are created to satisfy the needs of the various groups and cadres for promotion opportunities ­ rather than on the basis of policy priorities or operational needs. In some cases set proportions of various groups have also to be maintained. 5.17 Recently lateral induction on fixed term contracts have been introduced (MP grades systems). However, it is unclear how many organizations are taking advantage of this flexibility. It appears that the proportion of these positions in the senior management remains low. Generally, the appointments made at senior levels reflect the need to accommodate generalists who tend to be promoted in large numbers because their cadres are larger and thus promotion is faster. At times the career paths define different years of experience for different cadres making promotions slower or faster in them. Also for some of the technical cadres the promotion path narrows down with seniority and ends before reaching the highest levels. For this reason, senior positions tend to exclude staff who have technical backgrounds in specific disciplines. Mismatch Between Skills and Rewards 5.18 Compensation has become increasingly insufficient to attract skilled entrants at the higher levels but may be too generous at lower levels. The average pay masks a serious problem with pay compression. 62 As noted earlier, and as shown in Table 5.3, the present ratio of the highest to the lowest paid (BPS22:BPS1) is about 1:10. In OECD settings, this ratio might be reasonable because of the structure of the labor market. At higher levels, public sector pay in both developing and OECD countries may be compared with skilled private sector positions. However, at lower levels, while in industrial countries the usual comparators for public sector pay are clerical jobs in private companies, this comparison may not be relevant in developing countries where the true employment alternatives of many public sector workers are in the informal sector of the economy.

62

"Compression Ratio" is used here to refer to the ratio of the highest salary to the lowest on the central government's main salary scale. This definition differs from that adopted by the OECD, which measures wage compression in OECD countries as the mean of ninth decile salaries divided by the mean of first decile salaries. The OECD approach ensures that a handful of salaries will not dramatically skew the compression ratio. However, the data quality needed to calculate the OECD compression ratio makes it impractical for extensive cross-country work.

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Table 5.3: Impact of the January 2002 Pay Reforms (monthly pay, Rs)

Before pay reform (1994 - 2001) After pay reform (post Dec. 2001) Base pay a/ Estimated Total Allowances Base pay Estimated Total Allowances allowances as % of total (mean) allowances as % of total grade 1 1,700.00 1,344.15 3,044.15 44% 2,695.00 1,114.00 3,809.00 29% grade 2 1,847.00 1,386.90 3,233.90 43% 2,890.00 1,154.65 4,044.65 29% grade 3 1,970.00 1,428.15 3,398.15 42% 3,105.00 1,192.75 4,297.75 28% grade 4 2,114.00 1,473.25 3,587.25 41% 3,315.00 1,235.05 4,550.05 27% grade 5 2,258.00 1,518.35 3,776.35 40% 3,600.00 1,277.35 4,877.35 26% grade 6 2,389.00 1,560.85 3,949.85 40% 3,810.00 1,317.05 5,127.05 26% grade 7 2,533.00 1,605.95 4,138.95 39% 4,020.00 1,359.35 5,379.35 25% grade 8 2,684.00 1,660.60 4,344.60 38% 4,260.00 1,409.80 5,669.80 25% grade 9 2,866.00 1,721.80 4,587.80 38% 4,585.00 1,466.45 6,051.45 24% grade 10 3,051.00 1,782.90 4,833.90 37% 4,890.00 1,523.70 6,413.70 24% grade 11 3,233.00 1,924.10 5,157.10 37% 5,215.00 1,720.35 6,935.35 25% grade 12 3,520.00 2,024.85 5,544.85 37% 5,670.00 1,813.75 7,483.75 24% grade 13 3,822.00 2,131.90 5,953.90 36% 6,150.00 1,912.40 8,062.40 24% grade 14 4,158.00 2,547.65 6,705.65 38% 6,700.00 2,320.10 9,020.10 26% grade 15 4,491.00 2,863.50 7,354.50 39% 7,260.00 2,627.20 9,887.20 27% grade 16 5,096.00 2,930.40 8,026.40 37% 8,230.00 3,142.95 11,372.95 28% grade 17 6,780.00 3,419.10 10,199.10 34% 10,860.00 3,767.50 14,627.50 26% grade 18 8,013.00 4,452.80 12,465.80 36% 13,985.00 4,716.85 18,701.85 25% grade 19 10,830.00 6,091.50 16,921.50 36% 18,550.00 6,169.00 24,719.00 25% grade 20 12,715.00 10,651.15 23,366.15 46% 21,360.00 10,627.50 31,987.50 33% grade 21 14,550.00 11,614.05 26,164.05 44% 23,795.00 10,900.75 34,695.75 31% grade 22 15,780.00 12,352.75 28,132.75 44% 26,190.00 11,589.75 37,779.75 31% Source: WB staff files a/ These rates show the pay of staff who are 2 increments below the scale maximum BPS

5.19 There is substantial evidence that real compensation for the senior levels has declined over time and the gap between public and private salaries and emoluments has steadily increased. For the highest grade (BPS22), the nominal salary and monetary allowances have increased from Rs. 3,000 per month in the 1950 to Rs.38,000 at present while consumer prices have arisen thirty fold over the period. Undoubtedly, the share of in kind benefits at higher levels has increased but certainly not enough to compensate for the sharp drop in real pay. Real total compensation for the highest civil servants probably decreased over the last half century by at least one-third. 63 In the meanwhile, real incomes in the private sector have at least doubled reflecting the general increase in per capita incomes. Even if one assumes that the gap between the top management positions in the private and the public sector was small initially, it would appear to have grown several fold. The increasing use of MP grades, originally meant for top managerial positions in the public corporations and approximating more closely to private sector pay, to attract managerial and technical skills to government also indicates the problems with the present levels of compensation. Finally, the fact that there has been a historic decline of the pay compression (excluding in kind allowances), estimated at 1:4664 in 1962, al o seems to confirm the hypothesis that pay at the s lowest levels has increased significantly over time while it has declined at the highest levels.65 5.20 This pattern of compensation is undoubtedly contributing to two significant problems. First, relatively generous remuneration at lower levels increases the pressure for patronage-based employment of unskilled staff. Second, below market rates at senior levels are unlikely to be attracting the quality of entrant that is needed at the highest levels of government.

63 64

See Hasan, 1998 (p.359). Table 7.8, "Government That Works: Reforming the Public Sector in Bangladesh" 1996. World Bank. Dhaka. 65 Indeed if one assumes that there has been no real pay decline at the highest levels, the lowest level pay must have increased very sharply to explain.

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Box 5.1: Monetary Allowances and in kind Benefits

Monetary rewards do not tell the full story. Pay must also be seen in the context of the complex array of monetary and in-kind benefits payable to civil servants. Monetary allowances represent a significant proportion of total pay ranging between 29% and 31% for various grades (Table 5.3). This is a reduction from the situation prior to pay reform, when monetary allowances represented between 34% and 44% of total pay by grade.

Table 5. 4: Proportion of monetary allowances in federal civil service wage bill

Rs (million) Annual Base Pay Annual Allowances Total Allowances as % of total Before pay Post Dec. reform 2001 11,728 18,774 7,765 19,493 40% 6,851 25,625 27%

Source: WB staff files Notes: This refers to federal ministries and attached departments it does not include autonomous bodies

Table 5.4 shows that January 2002 pay reforms provided consolidation of monetary allowances within base pay. The table shows the impact of consolidation on the federal civil service wage bill. The impact on the provincial wage bills will have been broadly similar. Even after the January 2002 pay reforms, in kind benefits for BPS-22 (value of accommodation, transport, etc.) were estimated to be much higher than the basic pay. Further, monetization of these allowances and in-kind benefits is highly desirable as has been done in the State bank of Pakistan and is under consideration in the Central Board of Revenue.

Persistent Patronage 5.21 Politically-motivated patronage appointments to the civil service and transfer decisions have had a damaging impact on performance. For this reason, the decision of the Federal Cabinet in early February to recruit grades 11-16 without involving the Federal Public Service Commission sends a disturbing signal. Delegation of lower level recruitment to line departments, per se, is not problematic. Most Public Service Commissions delegate recruitment decision for junior and middle -level to line departments. However, generally they do this while maintaining tight regulatory supervision over the recruitment process.66 Thus while they are not themselves recruiting, they maintain full responsibility for the quality of the recruitment process. 5.22 The recent decision in Pakistan seems to remove responsibility for the process as well as the function from the Commission. Since the original decision was made with the intention of providing some safeguards against identified problems of patronage in a range of more sensitive federal bodies, it begs the question as to why this will not simply recur. However, in addition this will send an unfortunate signal to the provincial Commissions. In NWFP, for example, PSC oversight has been extended down to grade 11 in some corruption-prone departments (mirroring the equivalent reform at the federal level). It is improbable that such arrangements will remain in force given the federal changes. 5.23 In addition to appointments, political pressures are also behind the continuing high level of transfers of senior staff. While data on the rate of transfers of senior staff are not available at the federal level, the problem is clearly chronic at the provincial levels. In Sindh, the average tenure of Secretaries is some 15 months. In NWFP, it is 7.5 months.

66

See Polidano, Charles and Nick Manning. 1996. Redrawing the Lines: Service Commissions and the Delegation of Personnel Management. Managing the Public Service - Strategies for Improvement Series. London: Commonwealth Secretariat.

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5.24 Similar problems pertain at district levels. The Province retains the ability to transfer senior staff in any of the provincial occupational groups (i.e. above grade 16 and thus not transferred in December 2002 to the districts). This is a highly politicized arrangement to influence transfers throughout the district. By the threat of an unpleasant transfer, or the promise of an attractive one, the senior staff member can be put under pressure to accede to a transfer of the junior staff. A Pragmatic Approach 5.25 The track record of incomplete and ultimately ineffective civil service reforms in Pakistan suggests that there is little advantage in devising yet another large and elaborate strategy. This report suggests instead that some momentum towards reform is created by taking advantage of three fortuitous circumstances. The government finds itself in the unusual position of having: some consensus between the Establishment Division and the NRB on some restructuring; the fiscal space to afford pay reforms; and a well developed but incomplete devolution agenda. 5.26 By seizing the low-hanging fruit that these provide, government can set in motion some movement towards a longer-term reform agenda. Other steps can be taken that will achieve short-term efficiency gains and send significant signals at no political cost. For example, on recruitment, the FPSC should be given the unambiguous responsibility for oversight of the recruitment process at all grades, even if the decision stands that it should not itself undertake direct recruitment for positions below BPS16. 5.27 Similarly, since present compensation levels are inadequate at senior levels, use of fixed term consultants with maximum term of say three to four years at near market salaries should be greatly encouraged both for professional and managerial positions. Liberal use of consultants is especially needed to strengthen the federal ministry of finance (including the debt office and the economic adviser's wing), the federal planning commission and the ministry of commerce as well as planning and finance departments of the provincial governments Seize the emerging consensus 5.28 The NRB has proposed the creation of five new broadly-based services:

§ § § § §

The Federal Civil Service The National Executive Service The Provincial Civil Service, including the Provincial Executive Service The District Civil Service The Tehsil Municipal service

5.29 Within the NRB proposal, both the Federal and Provincial Civil Services will continue to be divided into occupational groups below grade 18. The National Executive Service (NES) would, however, be an All Pakistan Service comprising a pool of officers selected on merit from amongst officers of the Federal, Provincial and District Services for critical policy and management positio ns beginning at Grade 19. A maximum of 20 percent of the entrants would be recruited laterally from the private, NGO and academic sectors through a competitive process. The NES posts would total between 1,000 and 1,500 and would encompass all grade 19 to 2 positions in the federal secretariat, heads of 2 important departments in the federal government, and senior positions in provincial and district governments (e.g. Provincial Chief Secretaries, some posts of provincial secretaries and additional secretarie s, and DCOs in District governments).

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5.30

The NRB propose that the NES should have three broad streams of professional specialization: § § § Economic Management Social Sector Management General Management

5.31 The compensation package for NES will be attractive. It is proposed that NES officers (and officers from the proposed parallel Provincial Executive Service) would be required to undergo specialized training in foreign and domestic universities and later in the newly created National School of Public Policy. 5.32 The Establishment Division's proposed reforms are similar. The Establishment Division has also proposed the creation of three streams of professionalized civil servants to some 1,000 policy formulation positions in the Federal Government. These civil servants would be competitively selected and specially trained, and would enter at grade level 19 with up to 20 percent recruited laterally. They would be attractively compensated - the Establishment Division is proposing to double the basic salary plus relevant grade allowances. Establishment Division also proposes three broad professional streams for these senior staff. 5.33 These reform proposals are appropriate and can be a significant contribution towards increasing institutional capacity at the higher levels of government. It is not clear, however, that it is necessary to create a dual structure of compensation. Compensation for grades 19 to 22 should be raised substantially and combined with monetization of most in-kind benefits. Those selected for NES will have a fast track advantage for promotion so there need not be separate pay scales. The key to both proposals is the National Executive Service, with a high bar before grade 19, sufficiently robust to deter any attempt to use seniority as a justification for access, and a system of very broad occupational groups beyond that point. The proposals will encourage improved performance and greater skills development because promotion beyond grade 18 will not be at all automatic. The pursuit of the professionalization objective will be greatly helped by the full development the new National School of Public Policy that has been created with the following functions: § To provide training and research in public policy, law, economics, finance, and management science § To provide consultancy and advisory services for the government § To award degrees in Public Policy, public sector management and related disciplines 5.34 The broad agreement between the NRB and the Establishment Division provides a rare opportunity to move ahead on a pragmatic first step. The National Executive Service is undoubtedly the priority. Over time the need for provincial executive services may emerge. Government should seize the initiative and decide the outlines of the NES quickly. We also suggest that the reform should be comprehensive that is it should create the three agreed occupational groups immediately. Managing the Transition Address pay 5.35 For the reasons noted above, the retrenchment of large numbers of employees is not an overriding priority. Large-scale retrenchment may not, in any case, be politically feasible at this time because of slow job creation in the rest of the economy. However, the government finds itself in a situation when significant pay reform, combined with highly selective future hiring, can be achieved largely through fiscal space and attrition in the low priority civil service groups.

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5.36 There is a prima facie strong case for significantly adjusting upwards the compensation for higher managerial and professional grades, say grades 19 to 22. The numbers involved are small. For instance, Federal employees in the grades 19 to 22 are only about 3,200, less than 1 percent of total Federal employment. The share is somewhat higher in the provinces. But overall these grades account for less than 3 percent of the government wage bill. So financial costs of say a 100 percent real pay increase over the next five years would be only 0.1 percent of GDP. A substantial part of this increase could be financed from natural attrition of lower grade staff focused on areas where employment is excessive and services are no longer needed. Restraints on recruitment coupled with attrition might be easier politically than retrenchment as a method for creating fiscal space, but it is recognized that the de-compression in compensation that is being recommended here is nevertheless politically challenging. It is however urgently needed if high-level managerial and professional skills are to be attracted to the public sector. 5.37 It is much less clear whether there should be a general pay increases at lower levels without looking at job content, skills required, and the comparator salaries in the private sector. The recent moves both at Federal and provincial levels to selectively give large special pay increases (for instance to tax officials and doctors in rural areas) also suggest the advisability of tailoring compensation to the nature of the responsibilities, hardship of posts and reducing the incentives for corruption. There are other cases, primary school teachers, lady health workers, and junior police officials who are extremely poorly paid because their jobs are graded low. Detailed comparator studies of private sector equivalents will, of course, be a necessary to guide future pay reforms for all grades. 5.38 Whether created by attrition and restraints on recruitment or otherwise, the opening of the fiscal space can provide an opportunity for reversing the squeeze in real salaries and de-compressing the compensation differentials and further consolidating monetary allowances and in kind benefits into base pay (See Box 5.1). However, before a new compensation policy can be formulated the future pension liability must be assessed and actions taken to avoid a crisis in the future. The Ministry of Finance has initiated a comprehensive review of reform options for the pension system. Such a review should identify alternatives for controlling pension expenditure and designing and financing the new system, including proposed methods for data collection and for an actuarial valuation of cash flow and liabilities.67 5.39 Provided future pension liability can be contained and civilian employment growth can be kept down to say 1 percent per annum, there should be room for increasing real salaries significantly over the next five years. The challenge will be to use the fiscal space, on the one hand, for restoring compensation closer to private sector for the higher grades, and on the other to adjust pay scales for groups for instance primary school teachers, policemen, and lady health workers who are particularly poorly paid. Flat rate increases, that do not decompress salaries or provide motivational important occupational groups, will not serve the objectives of the civil service reform. Complete devolution 5.40 The unfinished administrative decentralization agenda provides a further opportunity for government to initiate movement on an otherwise intractable issue. Completing devolution means, first and foremost, transferring budgetary responsibility for salaries to the district governments. Thus salary budgets should be transferred to the districts via account IV. In theory, from that time, they can select

67

Further work should include a review of the proposal by a Commissioner of the Securities and Exchange Commission of Pakistan that would move employees of autonomous bodies onto privately managed defined contribution pension schemes. The scheme is a little unclear, without a clear definition of coverage or of the fate of existing (largely defined benefit) schemes. Apparently the proposed law seeks to replace all existing schemes with a mandatory defined contribution scheme to be administered by Pension Administration Companies set up for the purpose. The Pakistan Society of Actuaries has written to the government expressing some concern that the above and other significant issues have not been addressed.

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more of one type of staff or skill and less of another as once the salaries are in account IV, then the interim PFC awards to the districts require a single line item transfer that is up to the districts to allocate with no reserve powers to the provinces to interfere.68 5.41 This is not a sufficient condition for local governments to value professionalism more than patronage, but it is undoubtedly a necessary one. Local governments at all levels will only start taking their responsibilities for workforce management seriously as and when they consider themselves to be fully the employer of their staff. 5.42 Furthering devolution might also assist in reducing the scale and frequency of politicallymotivated transfers. One source of the problem is the willingness of higher levels of government to intervene in the affairs of lower levels. There are many reasonable arguments for maintaining a federal presence at the provincial level, and similarly for maintaining a federal and provincial presence in the districts. However, this provides a point of entry for manipulation and, particularly for the new district governments, leaves them subject to provincial pressures to transfer staff. As feasible, the appointment, promotion and transfer (APT) authorities for staff should be progressively passed to the districts. Currently, staff at grade 17 and above are appointed, promoted and transferred by the provincial governments. APT authorities for grades 17 and 18 can be transferred to the districts within a year, although this will require some clarification of the role of the Provincial Service Commissions or, more logically, by the creation of District Service Commissions. 5.43 In addition, minimum times in post for senior federal, provincial and district staff should be clearly specified with a requirement that public explanations be provided if staff are to be moved before they have completed the minimum. By themselves, however, such specified minimum tenures are unlikely to be sufficient to withstand the considerable political pressures for inappropriately rapid transfers.69 Also, as noted in the discussion of devolution, one pretext for provincial micromanagement in the districts can be removed by providing any increases in provincial-district fiscal transfers in the form of specific purpose grants. This would counter the argument that, since transfers are made on a block grant basis, provinces must resort to various methods to ensure that districts address federal and provincial policy priorities.

68

The SLGO establishes as a "function and power of the Zila council" to "approve the proposals of the District Government for changes in the number of posts of officials and employees of the decentralized offices of District Administration and Taluka Municipal Administration and Town Municipal Administration as part of the budget statement" (Art. 39). A requirement that staff remain in post for at least 3 years is already included in the Government Rules of Business (Rule 35 (ii) Schedule 9). This is not implemented however.

69

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Box 5.2: Incomplete Devolution On August 14, 2001, District, Tehsil and Union Councils were created as administrative entities. These entities inherited a complex array of staff, with complicated and overlapping authority relationships. The consequence of the creation of the districts in August 2001 was a transfer of responsibilities for various functions ­ it was not initially a transfer of the `employer' role from provincial to district governments. The newly created districts found that they had inherited three groups of staff: 1. 2. 3. They found themselves with some staff from federal employment groups (primarily District Management Group (DMG) and the Audits and Accounts Group). In addition, employees who had earlier belonged to the rural district councils were posted to the districts. The bulk of their employees came from provincial employment groups ­ particularly Public Health Engineering, Rural Development, Local Government, and Education. Most provincial groups had some staff in the districts.

The "employer" of the first group remained undoubtedly the federal government. The "employer" of most of the second group became unambiguously the district, although some staff at lower grades were assigned as administrators to the Union Councils (maximum of 3 staff per UC at Grade 9). The employer for the third group is distinctly ambiguous.1 Performance evaluation responsibility for staff was transferred to the district as soon as they were created, by the simple logic that Annual Confidential Reports (ACRs) are initiated at the same level of government as the administrative location of the staff. District officers (DOs) heading each of the functional service categories in district government are to have their ACRs initiated by their respective EDOs, countersigned by the DCO. Below this level, ACRs are initiated by an employee's immediate superior. Career management responsibilities have just been transferred. Legally, all the formerly-provincial staff below grade 16 now have their appointment, promotion and transfer (APT) decisions made through the districts. Senior staff of the districts (Executive District Officers (EDOs) and other staff at above BPS16) will remain subject to the province or the federal government for appointment, promotion and transfer decisions. The ambiguities arise because budgetary responsibility for salaries has not yet been fully transferred. Currently, the staffs of the Public Health Engineering, Rural Development, and Local Government employment groups - as well as other formerly provincial employee groups posted to the districts - are paid by the province through the mechanism of Account I (a provincial account). Under this arrangement, sanction is sought in advance from the province for the release of the funds for their salary payments. Thus, the salaries are effectively paid from the provincial budget. Until district governments consider themselves to be unambiguously the employers of their own staff, then they will have few incentives to manage their workforce effectively.

5.44 If education and health expenditures are to be increased and MDG outcomes achieved (see Chapter 3), there will necessarily be a significant increase in the number of teachers and health care personnel. Clarifying the employment authorities for district governments, and gearing up their capacity for the significant challenges that lay ahead, will be crucial.

105

REFERENCES/BIBLIOGRAPHY

Azfar, O., Kähkönen, S. and Patrick Meagher. 2001. "Conditions for Effective Decentralized Governance: A Synthesis of Research Findings". Center for Institutional Reform and the Informal Sector, University of Maryland. Government of Pakistan. 2001a. A Debt Burden Reduction and Management Strategy. Debt Reduction and Management Committee, Finance Division. March 2001. (Pakistan Debt Report). Government of Pakistan. 2001b. Interim-Poverty Reduction Strategy Paper (I-PRSP). Jointly prepared by the Ministry of Finance and Planning Commission, Islamabad. November 2001. Government of Pakistan. 2001c. Summary of the Ten Year Perspective Development Plan 2001-11 and Three Year Development Program 2001-04. Planning Commission, Islamabad. September 2001. Government of Pakistan. Economic Survey. Various Issues. Halcrow and ARCADIS. 2002. "Pakistan Water Resources Strategy Study". ADB TA 3130 PAK, (Draft Report), June. Hasan, Parvez. 1998. Pakistan's Economy at the Crossroads ­ Past Policies And Present Imperatives. Karachi. Oxford University Press. International Monetary Fund. "Accountable Fiscal Management Framework". Washington, DC. Shah, Anwar. 1996. "Fiscal Federalism in Pakistan: Challenges and Opportunities". World Bank. Washington DC. State Bank of Pakistan. 2002. Annual Report 2001-2002. World Bank. 2002a. Pakistan Development Policy Review: A New Dawn?. Report No. 23916-PAK. South Asia Region. Washington, DC. World Bank. 2002b. Pakistan Poverty Assessment ­ Poverty in Pakistan: Vulnerabilities, Social Gaps, and Rural Dynamics. Report No. 24296-PAK. South Asia Region. Washington, DC. World Bank. 2001a. Reforming Punjab's Public Finances and Institutions. Report No. 20981-PAK. South Asia Region. Washington, DC. World Bank. 2001b. "Methodology for Functional Reviews". Paper produced for the Russian Federation Government. Washington, DC. World Bank. 1998a. Pakistan: A Framework for Civil Service Reform in Pakistan. Report No. 18386PAK. South Asia Region. Washington, DC. World Bank. 1998b. Pakistan Public Expenditure Review: Reform Issues and Options. Report No. 18432PAK. South Asia Region. Washington, DC. World Bank. 1998c. Pakistan ­ Towards A Health Sector Strategy. Report No. 16695-PAK. South Asia Region. Washington, DC.

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World Bank. 1995. Pakistan Poverty Assessment. Report No. 14397-PAK. South Asia Region. Washington, DC. World Bank. 1994. Pakistan ­ Irrigation and Drainage: issues and options. Report No. 11884-PAK. South Asia Region.. Washington, DC. World Bank. 1968. Water and Power Resources of West Pakistan: A Study in Sector Planning. John Hopkins Press.

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Annex A Page 1 of 4

GOVERNMENT OF PAKISTAN FINANCE DIVISION

M ARCH 14, 2001 DEBT REDUCTION AND M ANAGEMENT STRATEGY 1. Pakistan faces grave debt issues, which have been in the making for decades and threaten the economic future of the country. Moreover, the country faces not one but two distinct debt problems: the overall public debt problem and the external debt problem. The external debt problem has greater immediacy because of the concentration of large external debt service payments, amounting to nearly US$ 21 billion over July 2000 ­ June 2004, which cannot be met without exceptional financing from IMF and other multilateral institutions and further debt rescheduling from the Paris Club. 2. Pakistan's total external debt obligations (including debt obligations to residents in foreign exchange) increased from less than US$ 10 billion in June, 1980 to US$ 20 billion in June, 1990 and peaked at US$ 43 billion in May 1998, just before the imposition of economic sanctions forced Pakistan to freeze all individual foreign currency accounts. Even after these large-scale foreign exchange liabilities (totaling approximately US$ 9 billion) were extinguished, external debt and foreign obligations, including those to residents, stood at US$ 37 billion at end-2000, equivalent to nearly 300 percent of foreign exchange earnings (the normal sustainable level is 200 percent). External debt, narrowly defined, stands at US$ 34.5 billion. The nominal value of overall public debt grew from Rs. 155 billion in 1980 to Rs. 800 billion in 1990 and rose to Rs. 3,570 billion at end-2000, raising the burden of public debt from 66 percent of GDP in 1980 to well over 100 percent at present. In terms of a more relevant indicator, public debt is now around 625 percent of government revenues compared to 400 percent in 1980 (whereas the sustainable limit is approximately 350 percent). Pakistan has a higher public debt burden, by a large margin, than any large developing country. Moreover, the above figures do not include any estimate of contingent liabilities of the Federal Government, which comprise guarantees to IPPs and other private and public bodies; and large unfunded losses of public corporations including WADPA, KESC, Pakistan Steel Mill as well as nationalized banks and public financial institutions. 3. Given the absolutely unsustainable level of the country's debt and urgent need to reduce the debt burden, the Chief Executive announced in his public address on December 15, 1999 the establishment of the Committee on Debt Reduction and Management (Debt Committee) headed by Dr. Parvez Hasan, a noted Pakistani Economist and former director of the World Bank. The Debt Committee's task was to analyze (a) factors underlyin g debt growth, (b) impact of high public debt interest payments on Government development and social spending (c) implications of large contingent liabilities of the Government for future debt and fiscal management; and (d) short-term consequences of large gross borrowing requirements for balance of payments management. The Committee was also asked to review the existing framework for debt contracting, recommend medium and long-term goals for the reduction of burden of public as well as external debt and specify institutional arrangements for a debt management system. The Committee has worked for nearly a year. It submitted its interim recommendations to the Minister for Finance in April 2000, and has now finalized its Summary Report. The Chairman of the Committee briefed the Cabinet on November 1, 2000 and February 15, 2001 upon submission of the draft Summary Report. 4. The Committee has analyzed the evolution of debt burden in Pakistan and found that extraordinarily high public debt and very large external debt have stemmed from the following factors: (a) Large and persistent fiscal and current account balance of payments deficits.

Annex A Page 2 of 4

(b) Imprudent use of borrowed resources (such as wasteful government spending, resort to borrowing for non-development needs, undertaking of low economic priority development projects and poor implementation of foreign aided projects) resulting in low productivity of resource use. (c) Weakened debt carrying capacity in terms of stagnation or decline in real government revenues and exports. (d) Rising real cost of government borrowing, both domestic and foreign. 5. The work of the Debt Committee has confirmed that the high and growing debt burden is a fundamental cause of many of Pakistan's problems, including the slowdown of overall economic growth, increase in poverty incidence, the low levels of social welfare indicators, declining investor confidence in the long-term prospects of the country and the recurrent financial crises. The Committee has especially highlighted the close links between high debt burden and slow economic growth. First reduced net external resources are constraining investment. Since reliance on net external flows in the past was totally unsustainable, the Committee has concluded that national savings must finance 90 percent of investment at least for the next decade. Second, large government domestic borrowing is keeping real interest rates high and discouraging private investment. Third, private investment is also being adversely affected by the shortage of complementary infrastructure and inadequate skill development, attributable directly to shortage of fiscal resources. 6. Since the debt problem has arisen because of poor economic decisions, postponed reforms and weak governance over a sustained period, there is no e asy remedy for debt burden reduction. The satisfactory resolution of debt issues will take both time and aggressive policy action. It will also involve painful choices. The Debt Committee recognizes that, desirable though it may be, reduction of debt to a sustainable level cannot be the only economic goal. There is also an urgent need to revive economic growth, which on a trend basis has been only around 4 percent per annum over the last five years. The Committee has therefore stressed that Pakistan needs a comprehensive and integrated economic revival and debt reduction strategy. The twin goals of this strategy should be a notable reduction in the debt burden and a significant increase in the rate of economic growth over the medium term. This implies that in the short-run (that is, for up to two to three years), some difficult tradeoffs between debt reduction and economic growth will be unavoidable. 7. The present Government has already been vigorously pursuing many elements of the strategy recommended by the Debt Committee, notably, reducing fiscal deficits, increasing government revenues, expanding exports, accelerating privatization and strengthening the oil and gas and information technology sectors. It is also attaching high importance to maintaining a program with the IMF, with a view to moving towards a three-year Poverty Reduction and Growth Facility (PRGF), which will provide the basis of exceptional assistance from the World Bank and Asian Development Bank and further rescheduling from the Paris Club till 2004. 8. Nevertheless, the Committee's work has provided many fresh insights concerning the nature of Pakistan's debt problem and the economic challenges Pakistan faces in this decade. These include: i) A focus on productivity enhancement through both structural reforms and improved governance is crucial for reviving economic growth, given financial constraints.

ii) While steady reduction in the fiscal deficit and sharp increase in government revenues are critical, the pattern of fiscal adjustment and effectiveness of public spending will determine whether government investment in human and physical capital can increase significantly and whether the economic and social returns to public borrowing will become significantly

Annex A Page 3 of 4

positive. The balance between development and defense expenditure needs to be restored and the Government must eliminate borrowing for non-development spending, which is lowering national savings and compounding the debt problem. iii) iv) Real costs of domestic and foreign borrowing by the Government have risen to very high levels in recent years and need to be brought down sharply. The huge public debt burden poses as big a threat to Pakistan's long- term financial and economic health as does the large external debt.

9. The Debt Committee is confident that with strong financial discipline, forceful structural reforms and improved governance, economic growth can be revived to a soundly based 5.5 percent per annum by 2003-04. At the same time, with adequate international support, the real external debt burden can be reduced by 30 percent and the need for exceptional assistance from the IMF and Paris Club rescheduling phased out by 2004. If Pakistan can safely navigate the turbulent economic waters during the difficult transition period of the next three or four years, and if major unanticipated exogenous shocks do not occur, it will have laid the basis of high, self-sustaining and equitable economic growth, a combination which it has never achieved in the past. Pakistan's population growth rate is expected to drop gradually from the present level of 2.2 percent to 1.8 percent per annum by 2009-10, reflecting the demographic transition that has commenced. There are thus good prospects of achieving a per capita GDP growth rate of over 4 percent per annum in the second half of this decade ­ higher than in the 1980s and with a much better quality of growth. 10. The Committee has examined the issues involved in debt default and debt reduction. For clearly stated reasons, the Committee believes that default is not a real option. Debt reduction also faces many practical problems. Taking a pragmatic approach, therefore, the Committee has not ruled out seeking softer terms at Paris Club reschedulings. It hopes, however, that Pakistan can resolve its external debt problems while maintaining and improving its creditworthiness. 11. The Government has accepted the broad thrust of the Debt Committee's recommended strategy and has decided on a number of steps to implement its key recommendations. To this end, the following steps are being taken to formalize a Debt Reduction and Management Strategy: i) Public and external debt reduction goals will be made an integral part of the Government's economic revival and poverty alleviation strategy. Specifically, the Government has adopted the goals of reducing external debt burden to 200 percent of foreign exchange earnings by 2005 and reducing public debt burden to 350 percent of government revenues by 2010. These targets will become part of the ten-year macroeconomic framework being prepared by the Planning Commission. The building of gross foreign exchange reserves to a level of US$ 5 billion by mid-2004 will be a part of external financing plans. The attainment of the admittedly ambitious revenue and export growth targets over 2000-2004 (60 percent and 50 percent respectively) will remain a top Government priority. The Government will also aim at eliminating the imbalance between current revenues and current expenditure (that is, borrowing for non-development purposes), which at present is 3.7 percent of GDP, by 2004. Consequently, the overall fiscal deficit will be reduced to 3 percent of GDP by 2004 and further to 2 percent by 2010. To facilitate the above goals, defense spending will be kept constant in real terms, for the next four years.

ii) iii) iv)

v)

Annex A Page 4 of 4

vi)

As the overall fiscal deficit is gradually reduced, the share of interest payments in total expenditure will decline from 33 percent in 2000 to 16.4 percent by 2010. The fiscal revenues thus freed from lower interest payments and defense will be used to sharply increase the share of social and development spending in total expenditures. Bringing down the burden of external debt significantly by 2005 will permit an increase in normal external borrowing thereafter. However, net reliance on external resources will be kept to less than 10 percent of total investment during 2000-10. This compares with net borrowing from external resources of over 20 percent in the 1980s and over 30 percent in the 1990s.

vii)

viii) The Government will make utmost efforts to obtain US$ 6 billion in exceptional assistance from the IMF, World Bank and ADB on soft terms in order both to avoid debt default and reduce the onerous burden of external debt payments. ix) x) During the next four years normal term borrowing from all sources, including IBRD and ADB, will be kept to a minimum. The Government will aim at reducing domestic borrowing costs in real terms to three to four percent per annum, from the average of nearly 9 percent during past two years, by sharply reducing its net domestic borrowing and restructuring its borrowing plans. The Government will be extremely selective in undertaking fresh foreign aided projects in the short to medium term and apply strict criteria of financial and economic viability for screening these projects. Terms and conditions of foreign loans will also be disclosed to the public at large. Borrowing for local currency from international sources will be phased out in the next two years. Thus, development projects requiring mainly rupee funding will rely on indigenous financial resources and local consultants.

xi)

xii)

xiii) The Government will set up a Debt Policy Coordination Office (DPCO) in the Ministry of Finance, which will report to the Cabinet every year on progress in attaining debt reduction goals, provide broad leadership on debt management issues to all parts of government and closely monitor and evaluate contingent fiscal liabilities.

Annex B Page 1 of 20

MEDIUM-TERM FRAMEWORK

Technical Annex 1. This annex provides technical information about the medium-term macroeconomic and fiscal framework in the two scenarios in Chapter 2, and a sensitivity analysis of the base case. 2. The medium-term budgetary framework presented in this report consolidates the budgetary accounts of both Federal Government and the Provinces. The presentation of a consolidated fiscal framework is for illustrative purposes and allows for an assessment of the total fiscal impact on macroeconomic balances and expected progress towards public debt sustainability. The consolidated fiscal space estimates allow for an assessment of the room for increased spending in priority areas by all levels of government with progress towards the government's goals of growth facilitation, poverty reduction, and social development. Drawing on this framework we present findings about the total countrywide resource availability, illustrate the public expenditure level and pattern for the country as a whole and highlight future expenditure options. 3. In order to operationalize the consolidated budgetary framework for use by the central and provincial governments, the authorities would need to break it down into separate real budgetary frameworks for the central government, the provinces of Punjab, Sindh, North West Frontier, and Balochistan, and the areas of AJK and the Northern Areas. This will include making overall and sectorspecific spending projections at the provincial and district level consistent with the consolidated totals we present and the associated necessary transfers from the center to the provincial governments. I. THE B ASELINE SCENARIO

4.

The baseline scenario for macroeconomic policies for the period FY 02/03 - FY 06/07 assumes a continuation of the reform-oriented policies pursued by the GoP in recent years. The gains seen in achieving macroeconomic stabilization and reducing fiscal imbalances are expected to be consolidated and strengthened further. However, it also envisages a concerted approach to reach the goals for poverty reduction and facilitation of economic growth. The macroeconomic framework for the first projection year, FY 02/03, is the same as in the PRGF program agreed with the IMF. II. KEY ASSUMPTIONS FOR THE PROJECTIONS A. § § § § § § Overall macroeconomic framework (Table A.1): Real GDP growth (at market prices) rises from 4.4 percent in FY 01/02 to 5.9 percent of GDP in FY 06/07. Inflation stays at 4.0 percent throughout FY 02/03 to FY 06/07, up from 2.7 percent in FY 01/02 Gross national savings rise from 16.4 percent of GDP in FY 01/02 to17 percent of GDP in FY 06/07, reflecting continuing fiscal consolidation Investment (gross fixed capital formation) rises from 12.3 percent of GDP in FY 01/02 to 16.6 percent of GDP in FY 06/07 with proportionally similar increases in investment by the public and private sectors (the latter inclu des public enterprises in the statistics) The ICORs (Incremental Capital Output Ratios) decline slightly from the FY02 level (3.1) to 3.0 by FY07. The three-year average ICORs decline from 3.5 to 3.1. Constant real effective exchange rate - which in the relatively low inflation environment projected here implies gradual adjustment in the nominal exchange rate in small steps.

Annex B Page 2 of 20

B. 5. § § § §

Fiscal projections (Table A.2): The most critical assumptions for creation of sufficient fiscal space are: Revenue rises from 16.6 percent of GDP in FY 01/02 to 18 percent in FY 06/07. The revenue increase comes entirely from tax collection, in particular tax collection by the CBR (1.4 percent of GDP). Contingent liabilities are contained and sharply reduced, reflecting in particular improvement in operational performance of public enterprises. Payments of contingent liabilities decline from 1.4 percent of GDP in FY 01/02 to 0.3 percent in FY 06/07. Defense spending is constant in real terms at the FY02/03 level. Interest payments decline from 6.6 percent of GDP in FY01/02 to 4.6 percent of GDP in FY06/07. This decline reflects mainly the positive public debt dynamics in the overall - favorable - macroeconomic framework and stagnant domestic public debt in the face of a growing economy. It also reflects slowly declining interest rates on domestic public debt (the weighted average interest cost on domestic debt declines by 0.1 percentage point per annum). The following assumptions apply to the use of the fiscal space: § § § Non-interest non-defense non-contingent liability spending ­ which includes the high priority spending on growth revival, poverty alleviation and social development - rises from 11.1 percent of GDP in FY 01/02 to 14.5 percent in FY 06/07. Social and poverty-related spending rises from 3.6 percent of GDP in FY 01/02 to 5 percent in FY 06/07. Development spending is targeted to increase from 3.4 percent of GDP in FY 01/02 to 4.7 percent in FY 06/07. In this regard it is critical to improve governance (inter alia in procurement), implementation capacity, and expenditure control and monitoring. To the extent that such improvements cannot be achieved in line with the spending plan, actual spending would need to be lower to avoid waste and unnecessarily large public debt Other assumptions: § § § § The government is successful in containing overall expenditure pressures. Total spending declines from 23.4 percent of GDP in FY 01/02 to 22.3 percent in FY 06/07. This requires strong political commitment and improved institutional capacity for effective expenditure control. Foreign grants decline from the high level in FY 01/02 but remain in the range of 1.0 ­ 1.2 percent of GDP (the same as in FY 99/00 ­ 00/01). New foreign loans are mainly on concessional terms. Net privatization receipts to the fiscal budget average 0.3 percent of GDP per year

6.

7.

Annex B Page 3 of 20

Table A.1: Pakistan: Baseline Scenario, 1999/2000 ­ 2006/07

Est.Prov.Est. 1999/00 Proj. 2005/06 2006/07 2000/01 2001/02 2002/03 2003/04 2004/05 (annual changes in percent) Output and prices Real GDP at factor costs Real GDP at market prices Consumer prices (p.a.) 3.9 4.2 3.6 2.2 2.6 4.4 3.4 2.8 2.7 5.1 5.8 3.1 5.3 5.3 4.0 5.5 5.5 4.0 5.7 5.7 4.0 5.9 5.9 4.0

(in percent of GDP) Savings and investment Gross national savings Government Nongovernment Gross capital formation Government Nongovernment 1/ Change in stocks (nongovt) Savings - Investment balance Government Nongovernment (incl.change in stocks) 14.1 -2.5 16.5 16.0 3.0 11.3 1.6 -2.0 -5.5 3.5 13.6 -2.2 15.8 15.5 2.6 11.3 1.6 -1.9 -4.8 2.9 17.4 -0.9 18.3 14.7 3.5 9.6 1.6 2.7 -4.4 7.0 21.3 1.6 19.7 15.5 3.2 9.9 2.4 5.9 -1.6 7.5 16.7 0.1 16.7 16.5 3.5 11.0 2.0 0.2 -3.4 3.6 18.0 0.9 17.1 17.1 4.0 11.5 1.6 0.9 -3.1 4.0 18.3 1.7 16.5 17.7 4.5 11.6 1.6 0.6 -2.8 3.4 18.5 2.2 16.3 18.3 5.0 11.7 1.6 0.2 -2.8 3.0

(in percent of GDP) Public finances Revenue (including grants) Revenue Expenditure Non-interest, non-defense, no-SOE spending Overall balance (including grants) Primary balance (including grants) Gross public debt 2/ Public debt in percent of revenue 17.3 16.3 22.8 9.8 -5.5 2.3 100.9 619.6 17.3 16.2 21.4 10.2 -4.1 2.8 108.3 670.5 19.3 17.0 23.6 10.9 -4.4 3.8 100.1 588.9 20.8 17.9 22.3 12.0 -1.6 3.6 91.8 512.0 18.5 17.3 21.8 11.6 -3.4 1.4 83.4 481.3 19.3 17.6 22.4 12.6 -3.1 1.5 80.3 456.9 19.6 18.0 22.4 13.4 -2.8 1.4 74.3 412.1 19.8 18.3 22.6 14.3 -2.8 1.0 71.0 388.1

(in percent of GDP) External sector Merchandise trade balance Merchandise exports Merchandise imports Current account excl. off. transfers Current account incl. off. transfers -2.3 13.4 15.8 -3.5 -2.0 -2.2 15.2 17.4 -3.3 -1.9 -0.5 15.4 15.9 0.2 2.7 -0.8 15.9 16.7 4.4 5.9 -1.4 15.4 16.8 -0.9 0.2 -1.6 15.4 17.0 -0.7 0.9 -1.7 15.4 17.1 -1.0 0.6 -1.8 15.4 17.2 -1.3 0.2

(in percent of exports of goods and nonfactor services) External public and publicly-guarantd debt 2/ Debt service Gross reserves (in U.S. dollar ml) In months of imports of goods and services Memorandum items: Real effective exch. rate (% change) Real per capita GDP (% change) GDP at market prices (Rs bl) 308.7 46.9 908 3.8 289.4 28.2 1,679 1.7 282.6 34.0 4,330 3.7 229.6 26.4 9,486 7.0 211.3 27.6 9,212 6.3 199.2 22.7 9,569 6.0 184.3 17.0 172.5 15.1

10,679 11,669 6.2 6.2

-0.6 2.0 3,147

-2.6 0.3 3,423

-1.2 0.7 3,629

6.0 3.6 4,018

3.9 3.1 4,400

0.0 3.3 4,828

0.0 3.5 5,307

0.0 3.7 5,845

Source: Data provided by the Pakistani authorities; and World Bank staff 1/ Includes state-owned enterprises. 2/ Excludes SBP.

Annex B Page 4 of 20

Table A.2: Pakistan: Consolidated Government Budget, 2000/01 ­ 2006/07

2000/01 2001/02 2002/03 2003/04 Prov. Act. Proj. 2004/05 Proj. 2005/06 2006/07 Proj. Proj.

Revenue and grants Revenue Tax revenue Federal CBR revenue Petroleum surcharge Gas surcharge Provincial Nontax revenue Grants Expenditure Current expenditure Federal Interest payments Domestic Foreign Defense Running of the civil government Pensions for defense and civil government Subsidies Power Sector Other SOEs Non SOEs Grants Provincial Development expenditure and net lending Public Sector Development Program Net lending Payment of contingent liabilities Statistical discrepancy Budget balance (excluding grants) Budget balance (including grants) Primary balance (including grants) Financing External Domestic Privatization proceeds Memorandum items: Primary balance (excluding grants) Revenue balance (excluding grants) Social and poverty-related expenditure 1/ Spending excl interest, defenses, subsidies, cont. liabilities, % GDP Share of total spending (percent) Nominal GDP (in millions of Pakistani rupees)

17.3 16.2 12.9 12.3 11.5 0.5 0.4 0.6 3.3 1.2 21.7 19.6 14.8 6.8 5.4 1.5 3.8 2.1 0.9 0.6

19.3 17.0 13.0 12.5 11.1 0.81 0.49 0.5 4.0 2.3 24.0 19.0 14.2 6.8 5.1 1.7 4.1 1.6 0.7 0.5

(in percent of GDP) 20.8 18.5 17.9 17.3 13.8 13.6 13.3 13.0 11.5 11.6 1.2 1.0 0.5 0.3 0.5 0.6 4.1 3.7 2.8 1.1 22.3 19.7 14.9 5.2 4.0 1.2 4.0 1.5 0.9 1.2 21.8 17.7 13.0 4.8 3.9 0.9 3.6 1.6 0.9 1.4 0.8 0.5 0.1 0.7 4.7 3.7 3.5 0.2 0.5 0.1 -4.5 -1.6 3.6 1.7 -0.2 1.6 0.3 0.0 -4.5 -3.4 1.4 3.4 1.0 2.1 0.2

19.3 17.6 14.0 13.4 11.9 1.1 0.4 0.6 3.6 1.7 22.4 17.9 12.9 4.6 3.7 0.9 4.0 1.7 0.9 0.9 0.6 0.2 0.1 0.7 5.0 4.1 4.0 -0.1 0.3 0.0 -4.8 -3.1 1.5 3.1 0.1 2.7 0.3

19.6 18.0 14.4 13.7 12.2 1.1 0.4 0.7 3.6 1.6 22.4 17.7 12.3 4.2 3.5 0.7 4.0 1.7 0.9 0.6 0.4 0.1 0.1 0.7 5.3 4.5 4.5 0.0 0.2 0.0 -4.4 -2.8 1.4 2.8 0.6 1.9 0.3

19.8 18.3 14.6 13.9 12.4 1.1 0.4 0.7 3.7 1.5 22.6 17.5 11.8 3.9 3.3 0.6 4.0 1.8 0.9 0.3 0.2 0.0 0.1 0.7 5.7 5.0 5.0 0.0 0.1 0.0 -4.3 -2.8 1.0 2.8 0.4 2.2 0.3

0.5 4.9 2.1 2.6 -0.5

0.6 4.8 3.5 3.5 0.0 1.4

0.6 4.8 2.7 3.2 -0.6

-0.3 -5.2 -4.1 2.5 4.1 2.3 1.7 0.0

-0.4 -6.6 -4.4 2.0 4.4 1.4 2.7 0.2

1.6 -3.5 0.0 10.2 47.4 3,423

0.1 -2.0 4.8 10.9 46.0 3,629

0.7 -1.8 5.1 12.0 53.5 4,018.1

0.2 -0.4 5.4 11.6 52.9 4,400.3

-0.2 -0.4 6.0 12.6 56.2 4,828.0

-0.2 0.3 6.5 13.4 59.9 5,307.4

-0.5 0.8 7.1 14.3 63.3 5,845.3

Source: National authorities; and staff projections and calculations. 1/ Education, health and population planning, Law and Order, Rural electrification, Water supply and sanitation, Rural Development, Irrigation, Roads, highways and bridges, and "Other poverty-related expenditure".

Annex B Page 5 of 20

8. § §

Key results: Reflecting the totality of the above assumptions the primary balance (excluding grants) rises from broadly balance in FY 2001/02 to 0.9 percent of GDP on average in FY03 ­ FY07. The revenue balance (current revenue ­ current spending) marks an even stronger improvement by a full 2.7 percent of GDP over the projection period, from a deficit of 2 percent of GDP in FY 2001/02 to a surplus of 0.7 percent of GDP in FY 06/07. Importantly, this le aves room for financing parts of public investment from savings on current operations which marks an important turnaround from many years of government dissaving. The overall fiscal deficit including grants and payment of contingent liabilities drops from 4.2 percent of GDP in FY 2001/02 to 3.3 percent of GDP in FY 06/07, consolidating the fiscal adjustment achieved so far under the PRGF program with the IMF. This scenario shows a steady improvement in public debt indicators. Annual public debt service in percent of fiscal revenue falls from 55 to 32 % by the end of the projection period. The public debt/GDP ratio drops from 99 to 72 % and the Present Value of the public debt/GDP ratio drops from 80 to about 60 %. The structure of public expenditure changes considerably towards high priority areas. The share on non-interest non-defense non-contingent liability spending in total spending rises from 48 percent in FY02 to 65 percent in FY07. Balance of payments (Table A.3): Key assumptions: § § § § Stable real exchange rate Average annual export volume growth: 6.1 percent. This reflects the exchange rate assumption and continued structural reforms to remove impediments to improvements in productivity and to diversifying into higher-value added exports Average annual import volume growth: 9.5 percent, reflecting the pick-up in economic growth, the expanding government development spending and increasing private sector investmentrelated imports. Private transfers: it is assumed that the surge in workers' remit tances in FY02/03 is temporary and reflects a portfolio reallocation. Hence workers' remittances in FY03/04 are projected to fall back to the FY01/02 level (about $2.4 billion) and then grow slowly in line with international inflation. Official grants are projected to decline from 2.2 percent of GDP in FY 02/03 to 1 percent of GDP in FY 06/07, throughout the period lying considerably below the average for the last three years (1.8 percent of GDP). Continued program financing (on concessional terms) from the World Bank and the AsDB throughout the period whereas the IMF's PRGF financing stops in FY 04/05. Total net foreign financing (disbursement of grants and loans plus rescheduling minus amortization payments) is projected to decline gradually from 4.6 percent of GDP in FY 01/02 to 2.7 percent of GDP in FY 06/07. Actual disbursements of new loans are projected to remain in the 2 ½ - 3 1/3 percent of GDP range seen in recent years reflecting willingness from donors to provide financial assistance for the government's reform program. The projections imply that disbursements grow in foreign currency terms but remain fairly constant in terms of percent of donors' GDP.

§ §

§

C. 9.

§ § §

Annex B Page 6 of 20

Table A.3: Pakistan: Baseline Scenario: Balance of Payments, 2000/01-2006/07

2000/01 2001/02 Proj. 2002/03 Proj. 2003/04 Proj. 2004/05 Proj. 2005/06 Proj. 2006/07

Current account (excluding official transfers) Current account balance (including official transfers) Trade balance Exports f.o.b. Imports f.o.b. Services (net) of which: interest payments Private transfers (net) Official transfers (net) Capital account Public medium- and long-term capital Project and nonproject loans Disbursements Amortization Commercial banks and IDB (net) Other Public sector short -term (net) Private medium- and long-term Private short -term (including errors & omissions)

-1,951 -1,112 -1,268 8,934 -10,202 -3,143 -1,657 2,460 839 -623 -652 -332 1,463 -1,795 -76 -244 -59 343 -256 -1,735 1,735 -1,088 -729 -359 -194 3,017 -525 1,587 0 1,676 279 0 0 279 0

96 1,591 -292 9,140 -9,432 -2,617 -1,579 3,005 1,495 -2,322 -1,613 -983 531 -1,514 -224 -407 -1,064 -80 435 -731 734 -3,082 -2,717 -365 -194 4,007 0 1,210 0 1,314 1,367 698 185 484 117

(in millions of U.S. dollars) 3,029 -651 -602 4,029 190 793 -536 -1,040 -1,306 10,889 11,759 12,663 -11,425 -12,800 -13,969 -2,172 -3,230 -2,977 -1,272 -1,117 -1,053 5,737 3,619 3,682 1,000 841 1,395 -1,529 -1,497 -1,696 723 -2,419 -158 357 -233 221 -19 2,501 -2,501 -5,267 -5,916 649 -418 3,185 0 1,009 100 900 1,090 213 408 469 186 -2,487 -1,590 -1,012 788 -1,800 -33 -545 -564 218 -551 -2,297 -2,297 -11 99 -110 -526 2,842 0 100 100 1,200 1,342 500 400 442 200 -1,426 -1,254 -879 855 -1,734 -16 -359 -117 475 -530 -633 633 -892 -540 -352 -362 1,941 0 100 100 500 1,121 500 400 221 220

-847 570 -1,507 13,648 -15,155 -3,082 -902 3,742 1,417 -676 -832 -501 967 -1,468 -16 -315 -100 670 -415 -106 106 -1,541 -1,309 -232 -135 1,850 0 100 100 500 1,000 600 400 0 250

-1,198 239 -1,762 14,738 -16,500 -3,239 -799 3,803 1,437 -418 -733 -592 1,052 -1,644 -16 -125 -100 744 -329 -179 179 -1,442 -1,194 -248 -111 1,800 0 100 100 500 950 600 350 0 250

Overall balance (before debt relief) Financing Reserve assets (increase -) State Bank of Pakistan (including FE-25s) Deposit money banks Fund repurchases Net exceptional financing Arrears (increase +) Rescheduling of which: Private Sector Involvement Rollover of foreign deposits with banking system Program financing from IFIs World Bank AsDB IMF Privatization receipts Memorandum items: Current account balance (including official transfers) Current account (excluding official transfers) Current account (excluding all transfers) Interest payments/GDP External primary balance (incl. off. transfers)/GDP Official grants/GDP Total foreign financing (net) incl. resched./GDP Trade balance Exports f.o.b. Imports f.o.b. End-period gross official reserves (in weeks of imports of goods and nonfactor services)

(in percent of GDP) -1.9 -3.3 -7.5 -2.8 0.9 1.4 4.0 -2.2 15.2 -17.4 1,679 7.5 2.7 0.2 -4.9 -2.7 5.4 2.5 4.5 -0.5 15.4 -15.9 4,330 15.9 5.9 4.4 -4.0 -1.9 7.7 1.5 2.0 -0.8 15.9 -16.7 -9,486 30.4 0.2 -0.9 -5.6 -1.5 1.7 1.1 1.7 -1.4 15.4 -16.8 9,312 27.5 1.0 -0.7 -5.2 -1.3 2.2 1.7 2.1 -1.6 15.4 -17.0 9,773 26.7 0.6 -1.0 -5.2 -1.0 1.7 1.6 2.3 -1.7 15.4 -17.1 10,989 27.6 0.2 -1.2 -5.2 -0.8 1.1 1.5 2.0 -1.8 15.4 -17.2 12,089 33.2

Sources: State Bank of Pakistan; Ministry of Finance; and World Bank staff estimates.

Annex B Page 7 of 20

10. § §

Results: The trade deficit widens gradually but remains within moderate levels (in all years at less than the FY00/01 level of 2.2 percent of GDP). The current account balance (including official transfers) returns to deficits - albeit modest ­ in FY03/04 after two years of surpluses. The surpluses have been driven by the massive surge in private transfers that in our assessment reflect a portfolio reallocation and hence are not of a longterm nature. The current account balance excluding all transfers (official and private) shows a much less marked improvement in the la st two years and over the medium term, only a slight increase in the deficit is projected. The current account deficits (including official transfers) are in line with the needs of a fast-growing low-income economy and fully sustainable as shown by the rapidly declining external debt burden. External public and publically guaranteed debt declines from 54 percent of GDP in FY01/02 to 36 percent of GDP in FY06/07. Gross official reserves continue to accumulate in nominal terms, reaching US$ 9.9 billion by FY06/07. They level out at about 5.8 months of import cover (of goods and services) over the medium term.

§ §

III. LOW CASE SCENARIO 11. The main alternative scenario assumes less stringent reform actions in particular with regard to the fiscal budget, public enterprises and (other) structural reforms. D. § § § § § § E. 12. § Overall macroeconomic framework (Table A.4): Real GDP growth (at market prices) rises from 4.4 percent in FY 01/02 to 4.9 percent of GDP in FY 06/07. Inflation rises gradually to 4.3 percent over the medium term, up from 2.7 percent in FY 01/02 Gross national savings remain at the pre-FY01/02 level of about 14 percent of GDP compared to the base case reaching 17 percent of GDP by FY 06/07. Investment (gross fixed capital formation) remains at the pre-FY01/02 level of about 14 ½ percent of GDP; substantially lower than the base case reaching16 ½ percent of GDP by FY 06/07. The ICORs (Incremental Capital Output Ratios) are somewhat higher (averaging 3.3) than in the base case (average 3.0) since productivity gains to investments are lower due to lagging structural reforms. Constant real effective exchange rate. Fiscal projections (Table A.5): Main assumptions: Fiscal revenue collection is considerably lower than in the base case: the government proves less effective in tackling challenges in CBR and vested interests. Revenue collection in percent of GDP stagnates at the FY 01/02 level averaging 16.6 percent of GDP over the medium term. By FY 06/07 revenue collection is 1.1 percent of GDP lower than in the base case. In particular, the improvement in CBR revenue collection seen over the last year ceases and CBR revenue stalls slightly below the FY03 level (in percent of GDP). There is less foreign financing ­ of both grants and (concessional) loans, reflecting less confidence by donors in the government's commitment to pursue reforms and address the goals

§

Annex B Page 8 of 20

§ § §

§ § §

for poverty reduction, social development and growth revival through appropriate economic policies. Improvements in effectiveness of government spending, governance and implementation capacity are much slower than in the base case. Total spending levels are only slightly higher than in the base case but the composition is radically different with much higher interest payments, defense spending and payments of contingent liabilities than in the base case and consequently, much less fiscal space. Interest payments are much higher: at 4.6 percent of GDP by FY06/07 they are 0.9 percent of GDP higher than in the base case. This reflects a slower reduction in interest rates on domestic public debt because of less strengthening in domestic confidence, and also the larger fiscal deficits and hence higher borrowing requirements that lead to substantially larger public debt than in the base case. Defense costs grow in line with nominal GDP instead of in line with inflation only in the base case. They remain at 4 percent of GDP, and by FY06/07 defense spending is 1.1 percent of GDP higher than in the base case. The government is less successful in reducing public enterprise losses and other contingent liabilities. Payments of contingent liabilities average 0.9 percent of GDP in FY 02/03 - FY 06/07 compared to 0.4 percent of GDP in the base case. The progress on privatizing public enterprises is slow. Annual average sales receipts are half of those in the base case. Key results:

F.

13. There is substantially less room for non-interest non-defense non-contingent liability spending (stable at 11.9 percent of GDP throughout the medium term) than in the base case (averaging 13.2 percent of GDP and increasing to 14.5 percent by FY07). The structure of spending remains almost unchanged from FY03. The share of non-interest non-defense non-contingent liability spending in total spending declines slightly from 54 to 53 percent. § § § § § Social and poverty-related spending stagnates at 3.8 percent of GDP, below the FY03 level. Development spending is cut over the medium term since most of the fiscal adjustment needed to avoid excessive fiscal deficits takes place in this category. By FY06/07 development spending has fallen to 2.8 percent of GDP; i.e., 1.9 percentage point lower than in the base case. The lower spending on health and education as well as on infrastructure ­ both O&M and new investments (growth-related spending) ­ result in lower productivity of public capital stock and human capital and slower economic growth than in the high case. Social indicators, poverty reduction and productivity of human capital and public infrastructure improve less than in the base case since the effectiveness of government spending improves less and the government finds less room for spending in those areas. Total public debt is higher and with less concessional terms on average (since there is less external debt and more nonconcessional domestic debt); hence, the prospects of reaching fiscal sustainability are considerably worse with much slower improvement in public debt indicators. Annual debt service in percent of fiscal revenue rises from 38 percent in FY03 to 41 percent by FY07 as compared to 32 percent in the base case. The debt/revenue ratio drops from 602 percent in FY02 to 485 percent by FY07 as compared to 396 percent in the base case. Progress is hence slow in the low case on reaching the sustainability threshold of 300 percent.

Annex B Page 9 of 20

Table A.4: Pakistan: Low Case Macroeconomic Framework, 2000/01-2006/07

2000/01 Output and prices Real GDP at factor costs Real GDP at market prices Consumer prices (p.a.) Savings and investment Gross national savings Government Nongovernment Gross capital formation Government Nongovernment 1/ Change in stocks (nongovt) Savings - Investment balance Government Nongovernment (incl.change in stocks) Public finances Revenue (including grants) Revenue Expenditure Non-interest, non-defense, non-SOE spending Overall balance (including grants) Primary balance (including grants) Gross public debt 2/ Public debt in percent of revenue External sector Merchandise trade balance Merchandise exports Merchandise imports Current account excl. official transfers Current account incl. official transfers Est. Prov.Est. Proj. 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 (annual changes in percent) 3.4 5.1 5.0 4.9 2.8 5.8 5.0 4.9 2.7 3.1 4.1 4.1

2.2 2.6 4.4

4.9 4.9 4.2

4.9 4.9 4.2

13.6 -2.2 15.8 15.5 2.6 11.3 1.6 -1.9 -4.8 2.9

17.4 -0.9 18.3 14.7 3.5 9.6 1.6 2.7 -4.4 7.0

21.3 1.6 19.7 15.5 3.2 9.9 2.4 5.9 -1.6 7.5

15.1 -0.8 15.9 15.7 3.3 10.4 2.0 -0.6 -4.1 3.5

15.3 -1.0 16.3 15.7 3.1 11.0 1.6 -0.4 -4.1 3.7

14.7 -1.4 16.2 15.9 2.9 11.4 1.6 -1.2 -4.4 3.2

14.3 -1.8 16.1 16.0 2.8 11.6 1.6 -1.7 -4.6 2.9

17.3 16.2 21.4 10.2 -4.1 2.8 108.3 670.5

19.3 17.0 23.6 10.9 -4.4 3.8 100.1 588.9

(in percent of GDP) 20.8 18.1 18.3 17.9 17.1 16.9 22.3 22.2 22.4 12.0 11.4 11.5 -1.6 -4.1 -4.1 3.6 0.7 0.7 91.8 83.6 81.5 512.0 488.8 482.5 (in percent of GDP) -0.8 -1.4 15.9 15.4 16.7 16.9 4.4 -1.6 5.9 -0.6

18.0 16.7 22.4 11.4 -4.4 0.3 78.9 473.0

17.7 16.5 22.4 11.3 -4.6 -0.1 77.9 473.2

-2.2 15.2 17.4 -3.3 -1.9

-0.5 15.4 15.9 0.2 2.7

-2.0 15.2 17.2 -1.8 -0.4

-2.5 14.9 17.4 -2.5 -1.2

-2.8 14.7 17.5 -2.9 -1.7

(in percent of exports of goods and nonfactor services) External public and publicly-guaranteed debt 2/ Debt service Gross reserves (in millions of U.S. dollars) in months of imports of goods and services Memorandum items: Real effective exchange rate (% change) Real per capita GDP (% change) GDP at market prices (billions of PK rupees) 289.4 28.2 1,679 1.7 282.6 34.0 4,330 3.7 229.6 26.4 9,486 7.0 208.1 27.7 7,920 5.4 196.4 20.0 7,024 4.4 186.7 14.9 6,000 3.5 179.0 10.8 4,979 3.5

-2.6 0.3 3,423

-1.2 0.7 3,629

6.0 3.6 4,018

3.7 2.8 4,392

0.0 2.7 4,796

0.0 2.7 5,242

0.0 2.7 5,730

Source: Data provided by the Pakistani authorities and World Bank staff. 1/ Includes state-owned enterprises. 2/ Excludes SBP.

Annex B Page 10 of 20

Table A.5. Pakistan: Low Case: Consolidated Government Budget, 2000/01-2006/07

2000/01 2001/02 2002/03 2003/04 2004/05 Prov. Act. Proj. Proj. (in percent of GDP) 20.8 18.1 18.3 17.9 17.1 16.9 13.8 13.5 13.4 13.3 12.9 12.8 11.5 11.5 11.4 1.2 1.0 1.0 0.5 0.3 0.3 0.5 0.6 0.6 4.1 3.6 3.5 2.8 1.0 1.4 22.3 19.7 14.9 5.2 4.0 1.2 4.0 1.5 0.9 1.2 22.2 18.3 13.6 4.8 3.9 0.9 4.1 1.6 0.9 1.5 0.9 0.5 0.2 0.7 4.7 3.5 3.3 0.2 0.5 0.1 -4.5 -1.6 3.6 1.7 -0.2 1.6 0.3 0.7 -1.8 12.0 53.5 4,018 0.0 -5.1 -4.1 0.7 3.4 1.0 2.1 0.2 -0.3 -1.2 11.4 51.2 4,392 22.4 18.7 14.0 4.8 3.9 0.8 4.4 1.7 0.9 1.3 0.8 0.4 0.1 0.7 4.7 3.3 3.1 0.2 0.5 0.0 -5.6 -4.1 0.7 4.1 -0.1 4.1 0.1 -0.8 -1.8 11.5 51.1 4,796 2005/06 Proj. 18.0 16.7 13.3 12.7 11.3 1.0 0.3 0.6 3.4 1.4 22.4 18.8 14.2 4.6 4.0 0.7 4.7 1.8 1.0 1.2 0.7 0.4 0.1 0.7 4.7 3.1 2.9 0.2 0.5 0.0 -5.7 -4.4 0.3 4.4 -0.3 4.5 0.1 -1.1 -2.1 11.4 50.9 5,242 2006/07 Proj. 17.7 16.5 13.2 12.6 11.2 1.0 0.3 0.6 3.3 1.3 22.4 18.9 14.3 4.5 4.0 0.5 5.0 1.9 1.0 1.1 0.6 0.3 0.1 0.7 4.6 3.0 2.8 0.2 0.5 0.0 -5.9 -4.6 -0.1 4.6 0.0 4.5 0.1 -1.4 -2.5 11.3 50.5 5,730

Revenue and grants Revenue Tax revenue Federal CBR revenue Petroleum surcharge Gas surcharge Provincial Nontax revenue Grants Expenditure Current expenditure Federal Interest payments Domestic Foreign Defense Running of the civil government Pensions for defense and civil government Subsidies Power sector Other SOEs Non SOEs Grants Provincial Development expenditure and net lending Public Sector Development Program Net lending Payment of contingent liabilities Statistical discrepancy Budget balance (excluding grants) Budget balance (including grants) Primary balance (including grants) Financing External Domestic Privatization proceeds Memorandum items: Primary balance (excluding grants) Revenue balance (excluding grants) Spending excl. interest, defenses, subsidies, cont. liabilities, % GDP Share of total spending (percent) Nominal GDP (in millions of Pakistani rupees)

17.3 16.2 12.9 12.3 11.5 0.5 0.4 0.6 3.3 1.2 21.7 19.6 14.8 6.8 5.4 1.5 3.8 2.1 0.9 0.6

19.3 17.0 13.0 12.5 11.1 0.81 0.49 0.5 4.0 2.3 24.0 19.0 14.2 6.8 5.1 1.7 4.1 1.6 0.7 0.5

0.5 4.9 2.1 2.6 -0.5

0.6 4.8 3.5 3.5 0.0 1.4

0.6 4.8 2.7 3.2 -0.6

-0.3 -5.2 -4.1 2.5 4.1 2.3 1.7 0.0 1.6 -3.5 10.2 47.4 3,423

-0.4 -6.6 -4.4 2.0 4.4 1.4 2.7 0.2 0.1 -2.0 10.9 46.0 3,629

Source: National authorities; and staff projections and calculations.

Annex B Page 11 of 20

G. 14. § § § § §

Balance of payments (Table A.6): Key assumptions: Stable real exchange rate Average annual export volume growth: 4 percent. Slower structural reforms result in slower productivity growth. Hence the competitiveness in export and import competing industries is worse. Average annual import volume growth: 8.3 percent. Private transfers: as in the base case it is projected that workers' remittances in FY03/04 fall back to the FY01/02 level (about $2.4 billion) ­ although slightly lower than in the base case reflecting lower confidence ­ and then growing slowly in line with international inflation. Official grants are projected to decline from 2.4 percent of GDP in FY 02/03 to 0.8 percent of GDP in FY 06/07, throughout the period lying 0.1 ­ 0.3 percent of GDP lower than in the base case, reflecting that donors are less confident about the government's commitment to continued reforms. Lower program financing (adjustment loans on concessional terms) from the World Bank and the AsDB throughout the period (on average 0.5 percent of GDP per year compared to 1.4 percent in the base case) and consequently recourse to larger financing at commercial terms. Results: § § § The trade deficit widens back to the level in FY00 ­ FY01, averaging 2.3 percent of GDP. The current account balance (including official transfers) returns to deficits, reaching 2.3 percent of GDP by FY07 compared to 1.3 percent in the base case. Given the limited financing at concessional terms the increasing current account deficits are partially financed by a drawdown of international reserves. They drop from about US$ 8 billion in March 2003 (about 25 weeks of import cover) to about US$ 4.4 billion (about 13 weeks of import cover) by FY06/07. External debt relative to exports of goods and services declines from 309 percent in FY02 to 240 percent in FY07 but remains still far above the sustainability threshold of 150 percent.

§

15.

§

16. Figures 2.1 and 2.2 present the results of a sensitivity analysis for the public debt burden and the external debt burden, respectively, under the baseline scenario. The robustness of the projected public debt burden (as measured in percent of fiscal revenue) and the external debt burden (measured against exports of goods and nonfactor services) is tested with regard to a wide variety of exogenous shocks and assumptions about the macroeconomic stance over the medium term. 17. The main conclusion from the stress tests on the public debt burden (Figure 2.1 and Table A.7) is that almost none of the shocks identified here lead to a worsening debt burden over the medium term. Most scenarios show sustained reduction in the debt-to-revenue and the debt-to-GDP ratios and remain on a path toward debt sustainability within the 10-year horizon identified in the Fiscal Sustainability and Debt Limitation Ordinance. However, one scenario--reversal of macroeconomic policies and environment to the average of 1992/93 ­1998/99--stands out as unsustainable. In the other cases of severe shocks the debt-to-revenue and debt-to-GDP ratios generally still declines although very slowly. Two sets of stress tests have been run: one where we test the extent of fiscal policy reversal that could make the public debt situation unsustainable and one where we test for shocks to the growth rate of real GDP, the interest rate, and the GDP deflator within a magnitude of 2 standard deviations of the average over the last 10 years.

Annex B Page 12 of 20

Table A.6: Low Case: Pakistan: Balance of Payments, 2001/01-2006/07

2000/01 Current account (excluding official transfers) Current account balance (including official transfers) Trade balance Exports f.o.b. Imports f.o.b. Services (net) Of which: interest payments Private transfers (net) Official transfers (net) Capital account Public medium- and long-term capital Project and nonproject loans Disbursements Amortization 1/ Commercial banks and IDB (net) Other Public sector short -term (net) Private medium- and long-term Private short -term (including errors & omissions) Overall balance (before debt relief) Financing Reserve assets (increase -) Fund repurchases Net exceptional financing Arrears (increase +) Rescheduling 3/ Rollover of foreign deposits with banking system Program financing from IFIs Privatization receipts Memorandum items: Current account (excluding official transfers) Current account (including official transfers) Interest payments/GDP External primary balance (incl. off. transfers)/GDP Total foreign financing (net)/GDP Official grants/GDP Total public- and publicly-guaranteed external debt o/w Public- and publicly -guaranteed external debt excl. SBP Total foreign financing (net) incl.resched./GDP Trade balance Exports f.o.b. Imports f.o.b. End-period gross official reserves (in weeks of imports of goods and nonfactor services) -167 9 -92 2,351 -2,443 -675 -326 600 176 440 272 249 669 -420 16 7 -11 152 27 449 -449 -883 -40 474 -8 211 271 0 0 2001/02 96 1,591 -292 9,140 -9,432 -2,617 -1,579 3,005 1,495 -2,322 -1,613 -983 531 -1,514 -224 -407 -1,064 -80 435 -731 731 -3,082 -194 4,007 0 1,210 1,314 1,367 117 Proj. 2002/03 3,029 4,029 -536 10,889 -11,425 -2,172 -1,272 5,737 1,000 -1,529 -1,497 -1,696 723 -2,419 -158 357 -233 221 -19 2,501 -2,501 -5,267 -418 3,185 0 1,009 900 1,090 186 Proj. Proj. Proj. 2003/04 2004/05 2005/06 (in millions of US Dollars) -1,210 -450 -1,099 11,704 -12,803 -3,230 -1,115 3,119 760 -2,547 -1,650 -1,072 728 -1,800 -33 -545 -564 218 -551 -2,997 2,997 1,392 -526 2,131 0 100 1,200 731 100 -1,487 -351 -1,609 12,364 -13,973 -3,028 -1,050 3,151 1,136 -871 -624 -549 735 1,284 284 -359 -117 400 -530 -1,223 1,223 475 -362 1,110 0 100 500 400 110 -2,159 -1,020 -2,165 12,999 -15,164 -3,172 -891 3,178 1,139 -281 -311 -280 787 -1,068 284 -315 -100 545 -415 -1,300 1,300 711 -135 725 0 100 500 0 125 Proj. 2006/07 -2,747 -1,604 -2,640 13,676 -16,316 -3,337 -782 3,230 1,142 299 159 0 844 -844 284 -125 -100 569 -329 -1,306 1,306 691 -111 725 0 100 500 0 125

0.0 -0.3

2.7 0.2 -2.7 5.4 2.5 58.0 52.7 4.6 -0.5 15.4 -15.9 4,330 15.9

(in percent of GDP) 5.9 -0.6 -0.4 4.4 -1.6 -1.8 -1.9 -1.5 -1.3 7.7 0.9 0.9 1.5 48.9 45.8 2.0 -0.8 15.9 -16.7 9,486 30.3 1.0 40.9 38.1 0.7 -1.4 15.4 -16.9 7,920 23.4 1.4 37.6 35.0 1.3 -2.0 15.2 -17.2 7,024 19.2

-1.2 -2.5 -1.0 -0.1 1.3 34.9 32.5 1.1 -2.5 14.9 -17.4 6,000 15.2

-1.7 -2.9 -0.8 -0.9 1.2 32.7 30.4 1.3 -2.8 14.7 -17.5 4,979 13.7

40.9 38.1 -0.2 4.0 -4.2 1,679 7.5

Sources: State Bank of Pakistan: Ministry of Finance; and World Bank staff estimates. 1/ Assumes early debt retirement of $1 billion in 29003/04, and $500 million each in 2004/05 and 2005/06.

Annex B Page 13 of 20

Figure 2.1: Sensitivity Analysis for Public Debt/Revenues and Grants

650 600 550 500 % 450 400 350 300

Sustainability Target

250 1996/97

1997/98

1998/99

1999/00

2000/01 B E H

2001/02

2002/03

2003/04 C F I

2004/05

2005/06

2006/07

A D G Baseline Projection

A = If interest rate, real GDP growth rate, primary balance and non-debt flows (in percent of GDP) are at average of past 10 years B = If interest rate in 2003/04 and 2004/05 is average plus two standard deviations, others at baseline C = If real GDP growth rate in 2003/04 and 2004/05 is average minus two standard deviations, others at baseline D = If primary balance (in percent of GDP) in 2003/04 and 2004/05 is average minus two standard deviations, others at baseline E = Combination of 2-4 using one standard deviation shocks F = Annual additional contingent liability payments of 5 percent of GDP in 2003/04 and 2004/05, others at baseline G = Same as A, but averages and standard deviations calculated up to 1998/99 only. H = Same as D, but shock extending through 2006/07 I = Same as E, but shocks extending through 2004/05 Baseline Projection = Public debt/revenues and grants

Annex B Page 14 of 20

Figure 2.2: Sensitivity Analysis for External Public Debt in percent of Exports of Goods and Nonfactor Services

400

350

300

%

250

200

150

100 1996/97

1997/98

1998/99

1999/00

2000/01

2001/02

2002/03

2003/04

2004/05

2005/06

2006/07

Baseline Projection

A

B

C

D

E

F

G

Baseline Projection = Ratio External public debt to Exports of goods and NF services A = If interest rate, real GDP growth rate, US$ GDP deflator growth, non-interest current account, and non-debt flows (in percent of GDP) over the medium term are at average of past 10 years B = If interest rate on external debt in 2003/04 and 2004/05 is 10-year average plus two standard deviations, others at baseline C = If real GDP growth rate in 2003/04 and 2004/05 is average minus two standard deviations, others at baseline D = If US$ GDP deflator in 2003/04 is average minus two standard deviations, others at baseline E = If non-interest current account (in percent of GDP) in 2003/04 and 2004/05 is average minus two standard deviations, others at baseline F = Combination of 2-5 using one standard deviation shocks G = 20 percent depreciation in 2003/04 and in 2004/05, others at baseline

Annex B Page 15 of 20

18. In test 1 we look at the impact of a fiscal policy reversal back to the average primary balance (in percent of GDP) over the last 10 years as well as a reversal to a similar macroeconomic environment with the interest rate, real GDP growth rate, and non-debt flows (in percent of GDP) all assumed equal to the 10-year average. (This period includes the last four years with reforms and progress in fiscal consolidation and macroeconomic stabilization.) A policy reversal within this magnitude would not end up in explosive debt dynamics but would rather be characterized by severe stagnation: in the debt burden, economic growth and poverty reduction. The debt burden would decline only very slowly, economic growth would be slow and progress on poverty reduction, social and growth-related spending would be minimal. 19. In the second stress test we check the sensitivity of returning to the policies and macroeconomic framework in the seven years preceding the initiation of reforms, i.e., we use the averages up to 1998/99. The conclusion is clear: such a policy regime is totally unsustainable and with substantially worse debt indicators than in test 1. 20. A third set of shocks (3. ­ 7.) tests the debt burden sensitivity of temporary shocks to the following macroeconomic variables: interest rates (test 3), real GDP growth rate (test 4), primary balance (test 5) and a combination of tests 2. ­ 4 covering a set of macroeconomic variables (test 6)70 but with a smaller shock (using averages plus 1 standard deviation). Test 7 analyzes the impact of subsidies to public enterprises and fiscal payments of contingent liabilities of 5 percent of GDP in addition to the baseline amounts annually in 2003/04 and 2004/05. The general conclusion is that temporary shocks of these magnitudes only slow down the process of debt burden reduction but a sustainable debt position would still be reached by 2011/12. Hence, the baseline scenario is robust to temporary macroeconomic shocks. 21. A fourth set of shocks (8. ­ 9.) tests the debt burden sensitivity of shocks persisting throughout the projection horizon of the same magnitude as above. The general conclusion is that these permanent shocks lead to stagnation or very slow decline in the debt burden even over the whole 10-year horizon and the debt position remains unsustainable. 22. The stress tests on the external debt burden (Figure 2.2 and Table A.8) show that a return to historic macroeconomic performance is unsustainable. This emerges from three tests: Test 1 assumes macroeconomic performance throughout the medium term to be the same as the average over the last 10 years. Test 6 and 7 assume a temporary reversal to historic macroeconomic performance in the first two years of the projection period but with an additional worsening of key macroeconomic variables by 1-2 standard deviations. Such reversals will trigger a worsening of the debt burden measured both in terms of exports of goods and nonfactor services (all three tests) and in terms of GDP (tests 6 and 7). In particular the first test shows clearly an unsustainable path. These three tests once again underline the importance for the Government to maintain the reform momentum, pursue sound macroeconomic policies and avoid reverting to the macroeconomic policies of the 19990s.

70

The shocks are modeled as follows: in the first two years ­ 2003/04 and 2004/05 ­ the projected variables are set equal to their historic averages plus a worsening by two standard deviations. Subsequent years use the baseline scenario data.

Annex B Page 16 of 20

Table A.7: Pakistan: Consolidated Government Debt Sustainability Framework, 2001/02-2006/07

Actual 2002/03 I. Baseline Medium-Term Projections Public debt/revenues and grants Public debt/GDP Change in public debt/GDP Net debt-creating flows/GDP (5+8+11) Overall deficit, excluding gross interest payments/GDP (=primary deficit; - is surplus) Revenue and grants/GDP Noninterest expenditure/GDP Minus non-debt creating financing flows/GDP Privatization Receipts/GDP Other (r-g-(p+gp))/(1+g+p+gp))debt/GDP Adjustment factor: 1+g+p+gp (r-g-(p+gp))debt/GDP r (interest rate) times debt/GDP minus g (real GDP growth rate) times debt/GDP minus (p + gp) (p = GDP deflator, growth rate) times debt/GDP Residual, incl. change in assets and valuation changes on external debt /GDP II. Stress Tests - Public debt in percent of revenues 1. If interest rate, real GDP growth rate, primary balance and non-debt flows (in percent of GDP) are at average of past 10 years 2. Same as 1, but averages and standard deviations calculated up to 1998/99 only. 3. If interest rate in 2003/04 and 2004/05 is average plus two standard deviations, others at baseline 4. If real GDP growth rate in 2003/04 and 2004/05 is average minus two standard deviations, others at baseline 5. If primary balance (in percent of GDP) in 2003/04 and 2004/05 is average minus two standard deviations, others at baseline 6. Combination of 2-4 using one standard deviation shocks 7. Annual additional contingent liability payments of 5 percent of GDP in 2003/04 and 2004/05, others at baseline 8. Same as 4, but shock extending through 2006/07 9. Same as 5, but shocks extending through 2004/05 441.9 91.8 -8.3 -8.3 -3.6 20.8 17.2 -0.3 0.3 0.0 -4.5 1.11 -5.0 5.8 -5.8 -4.9 0.0 451.0 83.3 -8.6 -4.8 -1.4 18.5 17.1 -0.2 0.2 0.0 -3.2 1.10 -3.5 5.2 -4.9 -3.9 -3.7 416.0 80.2 -3.1 -4.6 -1.5 19.3 17.8 -0.3 0.3 0.0 -2.8 1.10 -3.1 5.0 -4.6 -3.5 1.5 377.8 74.2 -6.0 -4.7 -1.4 19.6 18.2 -0.3 0.3 0.0 -3.0 1.10 -3.3 4.6 -4.6 -3.4 -1.3 357.9 70.9 -3.3 -4.3 -1.0 19.8 18.8 -0.3 0.3 0.0 -2.9 1.10 -3.2 4.3 -4.4 -3.1 1.0 Projections 2004/05 2005/06

2003/04

2006/07

512.0 512.0 512.0 512.0 512.0 512.0 512.0 512.0 512.0

504.3 514.7 499.4 503.5 510.4 528.5 509.4 510.4 528.5

501.6 522.0 490.2 500.6 514.5 502.0 512.2 514.5 549.1

477.9 507.7 443.2 452.9 466.0 454.2 463.8 494.7 516.1

472.2 511.3 417.4 426.5 438.9 427.8 436.9 492.5 501.7

Annex B Page 17 of 20

Table A.7: Pakistan: Consolidated Government Debt Sustainability Framework, 2001/02-2006/07 (cont'd)

Actual Projections 2002/03 2003/04 2004/05 2005/06 2006/07 III. Stress Tests - Public debt in percent of GDP 1. If interest rate, real GDP growth rate, primary balance and non-debt flows (in percent of GDP) are at average of past 10 years 2. Same as 1, but averages and standard deviations calculated up to 1998/99 only. 3. If interest rate in 2003/04 and 2004/05 is average plus two standard deviations, others at baseline 4. If real GDP growth rate in 2003/04 and 2004/05 is average minus two standard deviations, others at baseline 4. If GDP deflator growth in 2002 is average minus two standard deviations, others at baseline 5. If primary balance (in percent of GDP) in 2003/04 and 2004/05 is average minus two standard deviations, others at baseline 6. Combination of 2-4 using one standard deviation shocks 7. Annual additional contingent liability payments of 5 percent of GDP in 2003/04 and 2004/05, others at baseline 8. Same as 4, but shock extending through 2006/07 9. Same as 5, but shocks extending through 2006/07

91.8 91.8 91.8 91.8 91.8 91.8 91.8 91.8 91.8 91.8

87.4 89.2 86.5 87.2 83.3 88.4 91.6 88.3 88.4 91.6

88.2 91.7 86.2 88.0 80.2 90.4 88.2 90.0 90.4 96.5

86.2 91.5 79.9 81.7 74.2 84.0 81.9 83.6 89.2 93.0

86.4 93.6 76.4 78.1 70.9 80.4 78.3 80.0 90.2 91.8

Memorandum Items and key macro and external assumptions Nominal GDP at market prices (in Pakistani rupees) Real GDP growth (in percent per year) Consumer price index (change, in percent per year) Exchange rate (Rs per US dollar) 4/ GDP deflator (change, in percent per year) Average interest rate on public debt (in percent) Growth of revenues (deflated by GDP deflator, in percent per year) Growth of noninterest expenditure (deflated by GDP deflator, in percent per year) Primary deficit (percent of GDP, average of past 10 years) Primary deficit (percent of GDP, standard deviation of past 10 years) Non-debt creating financing flows Interest rate (average of past 10 years) Interest rate (standard deviation of past 10 years) Real GDP growth rate (average of past 10 years) Real GDP growth rate (standard deviation of past 10 years) Averages for 1992/93 through 1998/99 Primary deficit (percent of GDP) Non-debt creating financing flows Interest rate Real GDP growth Source: National authorities; and World Bank staff calculations and projections. 1/ Includes State Bank of Pakistan. 4,018 5.8 3.1 57.8 4.6 5.8 13.9 7.8 4,400 5.3 4.0 57.4 4.0 5.7 -6.4 4.5 -0.2 2.0 0.3 7.5 1.0 3.6 1.4 0.8 -0.2 7.4 3.2 4,828 5.5 4.0 60.1 4.0 6.0 10.1 10.1 -0.2 2.0 0.3 7.5 1.0 3.6 1.4 0.8 -0.2 7.4 3.2 5,307 5.7 4.0 59.6 4.0 5.8 7.6 8.1 -0.2 2.0 0.3 7.5 1.0 3.6 1.4 0.8 -0.2 7.4 3.2 5,845 5.9 4.0 62.2 4.0 5.8 6.9 9.0 -0.2 2.0 0.3 7.5 1.0 3.6 1.4 0.8 -0.2 7.4 3.2

Annex B Page 18 of 20

23. However, the external debt sustainability of the baseline scenario is fairly robust to most of the other stress tests. None of the singular shocks identified here (separate tests for temporary shocks to interest rates (Test 2), real GDP growth rate (Test 3), US$ GDP deflator (Test 4), and the non-interest current account balance (Test 5)) leads to a worsening debt burden over the medium term. However, if all these temporary shocks were to come at the same time (Test 6), the combined massive shock to the economy would induce such a sharp, initial rise in the debt burden that it would still be substantially heavier after five years. After the initial peak the debt burden would steadily be reduced, reflecting the underlying strength of the baseline scenario and would be on the path towards sustainability. However, debt sustainability would only be reached beyond the 10-year horizon given the substantial size and comprehensiveness of the in itial shock. An almost identical conclusion applies to the impact on debt sustainability of 20 percent depreciation in each of the first two years (Test 7).

Annex B Page 19 of 20

Table A.8: Pakistan: External Sustainability Framework, 2002/03-2006/07

Actual I. Baseline Medium-Term Projections 1 Ratio External public debt to Exports of goods and Nonfactor services 2 External public sector debt to GDP ratio 3 Change in external public debt debt to GDP ratio 4 Net debt -creating external flows/GDP (5+9+12) 5 6 7 8 9 10 11 12 13 14 15 16 17 Current account deficit, excluding interest payments/GDP Deficit in balance of G&S/GDP Exports of G&S/GDP Imports of G&S/GDP Minus net non-debt creating capital inflows/GDP Net foreign direct investment, equity/GDP Net portfolio investment,equity/GDP (r-g-(+g))/(1+g++g))debt/GDP (14/13) Adjustment factor: 1+g++g (r-g-(+g))debt/GDP (15+16+17) r (interest rate) times debt/GDP minus g (real GDP growth rate) times debt/GDP minus ( + g) ( = US dollar value of GDP deflator, growth rate) times debt/GDP 245.1 48.9 -9.2 -14.7 -7.4 -40.6 19.9 -20.7 -0.9 0.9 0.0 -6.3 1.2 -7.3 1.8 -3.4 -5.7 5.5 227.3 41.5 -7.3 -6.1 -1.5 -39.5 18.3 -21.3 -0.8 0.7 0.1 -3.8 1.1 -4.2 1.4 -2.6 -3.0 -1.3 214.1 38.5 -3.0 -4.7 -2.0 -39.4 18.0 -21.4 -0.8 0.7 0.1 -1.9 1.1 -2.0 1.2 -2.3 -0.9 1.7 198.4 35.3 -3.2 -4.3 -1.5 -39.3 17.8 -21.5 -0.8 0.6 0.2 -2.0 1.1 -2.1 0.9 -2.2 -0.9 1.1 185.8 32.8 -2.6 -3.8 -0.9 -39.2 17.6 -21.6 -0.8 0.6 0.2 -2.0 1.1 -2.2 0.7 -2.1 -0.8 1.2 Projections 2002/03 2003/04 2004/05 2005/06 2006/07

18 Residual, incl. change in gross foreign assets/GDP (3-4) II. Sensitivity Analysis for External Public Debt-to-Exports of Goods and Nonfactor Services Ratio 1. If interest rate, real GDP growth rate, US$ GDP deflator growth, non-interest current account, and non-debt flows (in percent of GDP) are at average of past 10 years 2. If interest rate in 2003/04 and 2004/05 is average plus two standard deviations, others at baseline 3. If real GDP growth rate in 2003/04 and 2004/05 is average minus two standard deviations, others at baseline 4. If US$ GDP deflator in 2003/04 is average minus two standard deviations, others at baseline 5. If non-interest current account (in percent of GDP) in 2003/04 and 2004/05 is average minus one standard deviation, others at baseline 6. Combination of 2-5 using one standard deviation shocks 7. 20 percent depreciat ion in 2003/04 and in 2004/05, others at baseline.

245.1 245.1 245.1 245.1 245.1 245.1 245.1

253.4 236.8 238.3 279.9 255.7 303.2 291.6

259.6 232.4 235.7 265.2 273.6 338.1 337.1

261.2 215.9 219.1 247.4 255.4 317.2 316.3

263.1 202.5 205.5 232.5 240.1 299.0 298.1

Annex B Page 20 of 20

Table A.8: Pakistan: External Sustainability Framework, 2001/02-2006/07 (cont'd)

Actual Projections 2002/03 2003/04 2004/05 2005/06 2006/07

III. Sensitivity Analysis for External Public Debt-to-GDP Ratio 1. If interest rate, real GDP growth rate, US$ GDP deflator growth, non-interest current account, and non-debt flows (in percent of GDP) are at average of past 10 years 2. If interest rate in 2003/04 and 2004/05 is average plus two standard deviations, others at baseline 3. If real GDP growth rate in 2003/04 and 2004/05 is average minus two standard deviations, others at baseline 4. If US$ GDP deflator in 2003/04 is average minus two standard deviations, others at baseline 5. If non-interest current account (in percent of GDP) in 2003/04 and 2004/05 is average minus one standard deviation, others at baseline 6. Combination of 2-5 using one standard deviation shocks 7. 20 percent depreciation in 2003/04 and in 2004/05, others at baseline. Memorandum Items as inputs for stress tests: Key macro and external assumptions Nominal GDP (local currency) Nominal GDP (US dollars) Real GDP growth (in percent per year) Nominal GDP deflator (in US dollars, change in percent per year) External interest rate (percent per year) Growth of exports of G&S (US dollar terms, in percent per year) Growth of imports of G&S (US dollar terms, in percent per year) Current account deficit, excluding interest payments (percent of GDP, average of past 10 years) Current account deficit, excluding interest payments (percent of GDP, standard deviation of past 10 years) Current account deficit, excluding interest payments (% of GDP) + 1 standard deviation Net non-debt creating capital inflows (percent of GDP, average of past 10 years) Interest rate (average of past 10 years) Interest rate (standard deviation of past 10 years) Interest rate (+ 2 standard deviations) Real GDP growth rate (average of past 10 years) Real GDP growth rate (standard deviation of past 10 years) Real GDP growth rate (avg - 2 standard deviations) GDP deflator, US dollar terms (average of past 10 years) GDP deflator, US dollar terms (standard deviation of past 10 years) GDP deflator, US dollar terms (- 2 standard deviations) 4018.1 68.5 5.8 9.3 3.1 23.5 21.6 1.2 3.0 4.2 1.34 5.0 0.8 6.6 3.2 1.3 0.6 -0.6 6.5 -13.7 4400.3 76.4 5.3 5.9 2.8 2.2 14.8 0.0 3.7 3.7 1.33 4.8 1.0 6.8 3.6 1.4 0.8 1.0 6.9 -12.7 4828.0 82.2 5.5 2.0 2.8 6.0 8.2 0.0 3.7 1.3 4.8 1.0 3.6 1.4 1.0 6.9 5307.4 88.7 5.7 2.1 2.4 6.8 8.3 0.0 3.7 1.3 4.8 1.0 3.6 1.4 1.0 6.9 5845.3 96.0 5.9 2.2 2.1 7.1 8.7 0.0 3.7 1.3 4.8 1.0 3.6 1.4 1.0 6.9

48.9 48.9 48.9 48.9 48.9 48.9 48.9

46.3 43.3 43.6 51.2 46.7 55.4 53.3

46.7 41.8 42.4 47.7 49.2 60.8 60.7

46.5 38.5 39.0 44.1 45.5 56.5 56.3

46.4 35.7 36.2 41.0 42.3 52.7 52.6

Annex C Page 1 of 5

SIMULATIONS BASED ON D YNAMIC B ENEFIT INCIDENCE OF PUBLIC EDUCATION EXPENDITURES IN PAKISTAN

I. Static Benefit Incidence Analysis and its Limitation 1. In Pakistan, the social gaps (urban-rural, male -female, and rich-poor) in educational attainment are prominent. According to the Static Benefit Incidence analysis, in order to narrow these gaps, public expenditure for primary education is particularly important, since such expenditure is pro-poor, and especially benefits the rural poor children (see Box 3.1). The Pakistan governments have appropriately allocated more public funds to primary education than other educational sectors, although the total expenditure for primary education has recently stagnated. 2. Although these results are useful, they may be debatable in the following sense. The static benefit incidence measures discussed above are static in that they do not take into account the dynamic effects of spending an additional dollar on the use of public services. In particular, it is not clear whether spending an additional dollar benefits the rural poor even though the static benefit incidence analysis suggests it does. II. The impact of expanding public expenditure for education: Dynamic benefit incidence analysis 3. This section evaluates the incidence of expanding public expenditure for education. The primary objective is to measure the impact of expanding public expenditure for primary education on the gross enrollment rate of the poor, while controlling for expansion in private schooling. To do so, it is appropriate to use the dynamic benefit incidence analysis proposed by Lanjouw and Ravallion (1999) (see Box 1 for a brief description of the methodology). 4. The analysis utilizes the variation among districts in the gross enrollment rate (GER) of different income/consumption groups, to infer the impact of expanding public expenditure on the GER of each of these groups. To do so, one must estimate the marginal odds ratio of enrollment (Lanjouw & Ravallion), which represents the change in the enrollment of a given consumption group when there is an increase in aggregate enrollment. As long as the size of aggregate enrollment is proportional to that of public expenditure ­ an assumption that is not perfect, but most "neutral" under the circumstances ­ one can infer from the marginal odds ratio of enrollment how an increase in public expenditure on education will affect school enrollment of each income group. In addition, in order to obtain the true relationship between expanding public expenditure and enrollment of the different groups, certain heterogeneous characteristics deemed important ­ namely private school availability, literacy rate and rural/urban ­ are controlled for. 5. The first three columns of Table 5 show the estimated marginal odds ratio of primary enrollment for different consumption groups, which can also be interpreted as the estimated impact of 1 percent increase of public expenditure on the GER of different consumption groups (under the above-stated assumption that the size of aggregate enrollment is proportional to that of public expenditure). These results indicate that the lowest three consumption groups receive the largest benefit from public expenditure expansion. 1 percent increase in total public expenditure increase enrollment rate by 0.9 percent for the bottom quintile, 1.1 percent for the second quintile, 0.9 percent for the third quintile and 0.6 percent for the fourth quintile. On the other hand, expanding public expenditure does not have any significant impact on the public primary enrollment rate of the richest group.

Annex C Page 2 of 5

Box 1: A Standard Methodology for Dynamic Benefit Incidence Lanjouw and Ravallion (1999) 71 have proposed a method to calculate the marginal odds ratio of enrollment based on a single cross-sectional survey including data on school enrollment across districts within provinces. The procedure is as follows. First, the average school enrollment rate for each quintile and each district is calculated. Second, an overall average school enrollment rate is computed for each province. To estimate the marginal odds of enrollment by expenditure quintile, one has to regress the quintile-specific enrollment rates across districts on the relevant province's average enrollment rate separately for each quintile. Furthermore, to address the correlation between a quintile-specific enrollment rate and an overall province-specific average rate, the leave-out mean is used as an instrument for the province-specific rate (see L&R, 1999 for details). There are several caveats. First, the size of aggregate enrollment is interpreted as the size of public expenditure if the subsidy rate for educational service is constant not only across provinces and income groups,72 but also between before and after expansion of public expenditure. But this may not be the case. Second, it is assumed that all factors other than province-level average enrollment rate are identical across provinces.73 This assumption might be too strong. To partly address this problem, two province-level variables are included as explanatory variables in all regressions: literacy rate and private school enrollment rate. Province average literacy rate is included because school enrollment is positively correlated with parents' education in Pakistan.74 The effect of private school enrollment rate is included because the impact of expanding public expenditure might fade out as the private sector becomes more accessible. Third, the gender gap and the urban-rural gap in education outcomes for Pakistan suggest there are some structural differences between male and female as well as between the urban and the rural. To address the urban-rural gap, an urban dummy is included as an explanatory variable in all regressions.75 To deal with the gender gaps, the marginal odds ratio of school enrollment rate is regressed separately for each gender in some regressions. 76

6. Although expanding public expenditure increases both male and female enrollment for the poorest and the second poorest income groups, there is a gender difference: the impact of public spending on female enrollment appears to be significantly lower than that of male enrollment (Table 1). 1 percent increase in public expenditure for primary education raises the gender gap in the poorest income group by 0.3 percent, simply by impacting boys' enrollment more than girls'. 7. To some extent, the differential impact of public primary spending on boys and girls may be explained by the fact that parental decisions to send their children to school may be affected by sociocultural factors, over and above the availability of schools (whic h is the factor that is directly affected by public spending), more in the case of girls and for boys. Moreover, the decisions to send girls to school may also depend on the availability of certain facilities in schools, like separate latrines and female teachers, more than it is the case for boys for obvious reasons ­ facilities that may be quite independent of the amount of public spending. For policymakers in Pakistan, this indicates an important issue to address ­ namely, to explore how to enhance the impact of public spending on girls' enrollments. To overcome instances of low incentives to send girl children to school due to sociocultural barriers, targeted scholarships or subsidies can be instituted ­ programs like these have been operational in countries like Bangladesh and Nepal with some success.

71

Lanjouw, P and M. Ravallion (1999), "Benefit Incidence, Public Spending Reforms, and the Timing of Program Capture," The World Bank Economic Review 13: 257-73. 72 Lanjouw and Ravallion (1999) shows that the differences are relatively small 73 Or all factors other than province-level average enrollment rate vary in ways that they are uncorrelated with province-level average enrollment rate. 74 Lanjouw et.al. (2001) also includes the literacy rate of province in the analysis for Indonesia's public expenditure reform. Lanjouw, P., P. Menno, F Saadah, H. Sayed, and R. Sparrow (2001), "Poverty, Education, and Health in Indonesia: Who Benefits from Public Spending?" Policy Research Working Paper 2739, the World Bank: Washington, DC. 75 Furthermore, all province-level variables are computed separately for urban and rural districts within a province in all regressions. 76 In these regressions, all variables are computed separately for each gender as well.

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8. The first three columns of Table 2 report how 1 percent increase in province average private school enrollment rate affects district average public school enrollment rate. It is worth noting that the public primary school enrollment rate for the poorest income group significantly grows by 0.6 percent as the private school enrollment rate grows by 1 percent. On the other hand, the public primary school enrollment rates for the richest and the second ric hest groups decline by 1 percent and 0.3 percent, respectively. Thus for the lower income groups, a larger private sector in primary schooling boosts public school enrollment; whereas, for higher income groups, the effect is the opposite. 9. Finally, after the availability of private schooling and literacy rate has been controlled for, the urban-rural gap does not seem to be significant. 10. Looking at the marginal odds ratio of secondary school enrollment, the third poorest consumption group receives the largest benefit from expanding public expenditure for secondary education. The gender gap of secondary education is larger than that of primary education. For the poorest group, expanding public expenditure for secondary education does not increase female enrollment rate significantly (Table 1). As Table 2 indicates, availability of private schooling does not have any significant impact on public secondary school enrollment.

Table 1. Marginal Odds of Primary and Secondary School Enrollment in Pakistan Public Primary School Public Secondary School Quintile Boys Girls Both Boys Girls Both 1 (poorest) 1.052** 0.773+ 0.925** 0.902** 0.055 0.747* 2 1.097** 1.092** 1.121** 0.848* 0.475* 0.727** 3 0.898+ 0.907 0.912* 1.176** 0.886* 1.295** 4 0.156 0.773 0.597* 0.096 0.486 0.054 5 0.096 0.388 0.145 -0.152 0.676 0.154

Note: The table gives the instrumental variables estimates of the regression coefficients of the quintile-specific primary (and secondary) school enrollment rates across districts on the average rate by province. The leave-out mean enrollment rate is the instrument for the actual mean. The numbers in parentheses are t-ratios. + refers to significant at 10%; * significant at 5%; ** significant at 1%. Source: Authors' calculations based on the 1998-99 PIHS.

Table 2. The effect of province average private school enrollment rate on district average public school enrollment rate Public Primary School Public Secondary School Quintile Boys Girls Both Boys Girls Both 1 (poorest) 0.599+ 0.698 0.613+ 0.530 -0.365 0.535 2 0.410 1.039+ 0.560 0.169 0.715 0.210 3 0.177 11.982 0.238 1.370 0.063 0.986 4 -0.971** -0.167 -0.711* 0.681 -0.779 -0.810 5 -0.366 -0.675 -0.517+ -1.995 -0.689 -1.259

Note: The table gives the instrumental variables estimates of the regression coefficients of the quintile-specific primary (and secondary) school enrollment rates across districts on the average rate by province. The leave-out mean enrollment rate is the instrument for the actual mean. The numbers in parentheses are t -ratios. + refers to significant at 10%; * significant at 5%; ** significant at 1%. Source: Authors' calculations based on the 1998-99 PIHS.

III. Simulations to Relate Targets with Public Expenditures 11. Using the analysis presented above, this section addresses the following question: what are the rough and preliminary estimates of public expenditure required to achieve a target GER (fixed at 80 percent of gross primary enrollment rates) for the bottom two consumption expenditure quintiles by the fiscal year 2007/08? An important assumption underlying this exercise is that the impact of overall public expenditures on education, on the enrollment of different income/consumption groups will

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continue to be the same ­ over time and as public expenditures increase ­ as that revealed by the data of 1998-99 (and estimated in the previous section). 12. Table 3 illustrates the results from this exercise. Using the coefficients from Tables 1 and 2, it is estimated that overall public spendin g on primary education should be at least Rs. 42.2 billion (at 1999/00 prices) to achieve 80 percent of primary GER for the poorest quintile in 2007/08 FY, while Rs. 49.3 billion (at 1999/00 prices) is needed to achieve the same for girls in the poorest quintile in 2007/08 FY. It should be noted that these spending figures will be enough to ensure GERs of 80 percent or above for corresponding groups among higher consumption quintiles. 13. Before examining the numbers in Table 3 in detail, it is worth describing in some detail the restrictive assumptions that underlie these calculations. First, as mentioned in the previous section, the subsidy rate for primary education is assumed to be constant in real term, which implies that public expenditure is proportional to a province level primary enrollment rate. Second, the structure estimated above does not change from 1998/99 (when PIHS data was gathered) to 2007/2008. In other words, the impact of expanding public expenditure (or private enrollment rate) in 2007/08 is assumed to be the same as the number reported in Table 1 (or Table 2). If the estimate of coefficient is not significant, it is treated as zero. Third, the private enrollment rate of a particular quintile is assumed to grow from 1998/99 to 2007/08 at the same rate as between 1990/91 and 1998/99. Under this assumption, the expected private enrollment rate of each quintile in 2007/08 is computed. Fourth, the annual growth rate of school-age population is assumed to be 1.025, which is the average annual growth rate of population between 1991 and 2001. Given these assumptions, this exercise should be considered indicative, which does not take into account structural shifts, like a change in the demand conditions for schooling or a major change in the pattern of private schooling ­ any of which factors can lead to very different scenarios in terms of what the public sector has to achieve. 14. Under these assumptions, Table 3 shows that Pakistan needs to increase the overall public expenditure for primary education by 73 percent in real terms (or Rs. 17.9 billion at 1999/00 prices) by the fiscal year 2007/08, in order to achieve 80 percent of primary school enrollment rate for the poorest quintile. This implies that Pakistan's government will need to spend 0.96 percent of GDP for primary education (assuming an annual growth rate of GDP of 4.5 percent) in 2007/08, while they spent 0.8 percent of GDP for primary education in 1998/99. If the share of primary education in total public expenditure on education is fixed at the current level (47 percent), Pakistan's government will need to increase total education expenditure from 1.68 percent of GDP in 1998/99 to 2 percent of GDP by 2007/08. A similar GER target for the second poorest quintile will necessitate a 39 percent increase in public primary education spending. Combining these two groups ­ i.e., in order to achieve a primary GER of 80 percent for the poorest 40 percent of the population ­ public primary education spending would need to be 55 percent higher in real terms than the current level, amounting to 0.86 percent of GDP in 2007/08. If the share of primary education in total public expenditure on education is fixed at the 1998-99 level, total public expenditure on education has to increase to 1.8 percent of GDP by 2007/08. 15. The gender gap remains serious in these projections too. To achieve the same goal for girls in the poorest income group, Pakistan's governments need to double the overall public expenditure on primary education in 2007/08 ­ amounting to 1.1 percent of real GDP. Achieving the same goal for girls in the bottom 2 quintiles combined ­ the poorest 40 percent of the population ­ will require a spending increase of 85 percent in real terms by 2007/08, which will amount to 1.02 percent of GDP. Thus, if the share of primary education in total education expenditure is fixed at the 1998-99 level, total public expenditure on education has to increase from 1.68 percent of GDP in 1998/99 to 2.1 percent of GDP in 2007/08. 16. Achieving the same targets for boys would require far less. In particular, Pakistan's governments will achieve the goal for boys in the bottom 40 percent of the population by increasing real public

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spending on primary education by only 23 percent, an allocation that will amount to 0.68 percent of the country's GDP, which is less than the current share of primary education in GDP (0.8 percent of GDP).

Table 3. Public Expenditure for Primary Education in 2007/08 to achieve 80 % primary GER for a given quintile Primary education 1998/99b 24.3 (0.80%) 24.3 (0.80%) 24.3 (0.80%) 24.3 (0.80%) 24.3 (0.80%) 24.3 (0.80%) 24.3 (0.80%) Public Expenditure Primary All Education Education 98/99d c 2007/08 42.2 (0.96%) 49.3 (1.12%) 33.8 (0.77%) 40.9 (0.93%) 37.6 (0.86%) 29.8 (0.68%) 45.0 (1.02%) 50.8 (1.68%) 50.8 (1.68%) 50.8 (1.68%) 50.8 (1.68%) 50.8 (1.68%) 50.8 (1.68%) 50.8 (1.68%)

Ratio a All Girls The second poorest All quintile Girls The bottom two quintiles combined All Boys Girls 1.73 2.03 1.39 1.68 1.55 1.23 1.85

All Education 2007/08e 87.9 (2.0%) 103.1 (2.3%) 70.6 (1.6%) 85.3 (1.9%) 78.7 (1.8%) 62.5 (1.4%) 94.0 (2.1%)

The poorest quintile

Note: All public expenditure figures are billion Rs at 1999/00 prices. Parentheses refer to the share of real GDP (at 1999/00 prices) for the corresponding year. a. b. c. d. e. Ratio refers to the ratio of the public expenditure for primary education in 1998/99 FY to that in 2007/08 FY. Public Expenditure for primary education in 1998/99. Public Expenditure for primary education in 2007/08 to achieve 80 % gross enrollment rate for a given group. Public Expenditure for all education in 1998/99. Public Expenditure for all education in 2007/08 to achieve 80 % primary GER for a particular group assuming the share of primary education in total educational expenditure is the same as in 1998-99.

17. This analysis reveals that the real challenge of Pakistan's governments is how to increase primary GER for children (especially girls) of the poorest income group. Achieving such an increase in such a short time is likely to be a tall order for any government, especially given the trends of social spending in Pakistan in recent years evident from graphs presented in the previous section. 18. The analysis done so far to gauge the impact of public spending on education outcomes like enrollment assumes that the current conditions ­ rather, conditions prevailing in 1998-99 ­ will continue to prevail. Given that public spending has been highly inefficient in Pakistan till date, which has stymied improvements in outcomes, it is thus natural that the current projections show that very large ­ and therefore very hard to achieve ­ increases in public expenditure would be needed to reach the targets in outcomes. On the other hand, it can be argued that the same targets can be reached with less increase in the amount of public spending, if the efficiency of public spending were to increase ­ particularly in terms of targeting such spending to the lower income groups.

STATISTICAL ANNEXES

Table 1A: National -- Non-Interest Non-Defense Real Total Expenditure

(In Million of 1999/00 Rupees) 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual 307,402 292,714 288,588 267,779 310,039 319,341 255,284 252,694 251,694 313,702 33,405 38,963 40,963 40,548 50,958 65,318 54,786 42,002 46,606 46,584 21,900 26,091 25,360 25,551 28,429 27,510 24,348 25,230 25,017 27,624 70,738 76,226 76,408 75,139 81,798 83,429 72,767 76,305 74,239 79,508 46,172 50,420 50,365 51,673 54,883 55,944 49,820 53,380 50,755 54,002 19,488 22,104 21,915 22,534 23,824 24,892 23,078 25,910 24,301 26,271 10,699 11,213 11,413 12,164 13,224 14,552 13,164 13,481 13,318 14,669 6,808 6,237 6,938 6,672 6,413 6,867 6,219 6,449 5,916 6,517 3,920 4,141 4,623 3,842 3,501 3,231 3,027 2,933 3,009 2,670 5,257 6,725 5,476 6,459 7,920 6,402 4,332 4,607 4,211 3,875 13,251 14,655 14,371 15,260 17,359 17,745 15,711 16,020 15,971 17,925 10,642 11,817 11,453 12,185 12,305 12,233 11,094 11,872 11,543 13,019 75 71 64 68 69 90 60 67 48 60 617 937 957 806 2,394 2,833 2,413 1,910 2,453 2,520 1,917 1,830 1,897 2,201 2,593 2,589 2,143 2,171 1,927 2,326 777 795 1,116 1,266 1,355 1,498 1,255 1,370 1,548 2,100 10,538 10,356 10,556 6,940 8,201 8,242 5,982 5,535 5,965 5,481 56,774 59,560 49,609 39,906 45,420 47,747 32,910 30,580 30,353 32,023 10,133 13,244 11,939 11,446 11,194 10,997 8,717 8,676 8,608 8,520 15,511 16,627 13,937 10,875 13,946 15,703 11,317 10,436 9,075 8,186 8,456 3,422 1,453 971 2,017 2,275 3,090 760 734 777 1,978 1,971 1,864 1,850 1,977 1,775 2,585 1,330 1,245 1,928 5,074 5,053 6,345 5,032 4,835 5,719 4,188 4,738 4,425 4,757 15,622 19,243 14,071 9,732 11,449 11,278 3,013 4,639 6,266 7,856 39,316 38,817 42,852 38,989 47,217 45,120 29,785 33,151 29,865 30,161 3,096 3,784 3,947 4,239 4,676 4,477 3,882 4,158 3,836 4,484 25,716 22,409 20,602 17,017 21,916 18,896 10,743 12,410 11,819 10,352 2,966 3,637 4,460 4,280 3,894 4,229 2,524 2,702 2,840 2,763 2,506 2,469 2,544 2,104 3,135 4,195 3,284 3,922 2,600 2,813 741 869 739 691 786 753 649 641 580 762 1,107 1,237 1,742 1,931 2,569 3,340 1,729 1,979 1,494 6,031 2,763 3,737 4,571 7,117 9,013 8,706 6,594 7,004 6,434 1,806 434 677 4,250 1,612 1,228 525 381 335 260 1,150 24,847 20,306 14,923 9,662 8,241 14,011 15,564 9,889 15,665 28,912 52,075 23,902 31,520 22,254 40,681 26,027 17,005 26,139 23,344 61,048 8,349 8,852 6,953 15,738 7,236 10,179 8,120 9,398 6,606 7,843 2000/01 2001/02 Actual June Final 309,535 364,516 55,667 63,005 28,790 31,414 75,995 83,694 53,965 60,047 25,453 27,571 15,468 16,118 5,965 7,258 2,807 3,433 4,272 5,666 16,724 17,388 12,012 12,776 72 53 2,322 2,431 2,317 2,129 1,649 1,190 3,657 5,069 36,825 39,619 8,528 9,469 7,541 9,439 1,000 1,829 1,954 2,253 5,561 2,974 12,241 13,656 28,967 29,953 4,540 4,967 10,341 11,608 2,293 2,097 1,740 2,643 869 1,019 2,579 1,244 6,417 6,193 188 183 27,555 26,032 55,374 90,488 363 309

TOTAL EXPENDITURE General Administration Law & order Social services Education Primary Secondary University & College Education Professional & Technical Edu & Teachers Training Others Health General Hospitals & Clinics Mother & Child Other Facilities & Preventive Measures Other Population Other Social Services Economic Services Agriculture Irrigation Fuel and power Industries and mineral resources Transport and Communication Other Economic Services Community services Works (Administration civil) Highways, Roads & Bridges & Building & Struct. Water Supply and Sanitation Public Health Engineering Broadcasting Urban Town Planning & Regulator Services Scientific Research and Survey Other Community Services Subsidies Grants & Investments Unallocable Note: Footnotes on Federal and Provincial Tables. Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Development expenditures of corporations and autonomous bodies financed from federal loans are not included. Source: Federal and Provincial Tables.

Statistical Annex for Volume I

Table 2A: Federal -- Non-Interest Non-Defense Real Total Expenditure

(In Million of 1999/00 Rupees) 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual 155,017 126,740 127,039 122,222 136,235 132,968 105,066 110,219 105,264 138,998 20,358 23,615 23,509 24,983 26,411 26,690 25,076 22,179 22,306 21,861 7,810 9,293 8,649 8,493 10,205 9,594 8,441 8,736 8,371 9,074 17,848 17,120 16,961 15,478 17,524 18,187 14,845 14,375 14,508 15,936 8,218 7,383 7,378 7,013 7,301 7,300 6,565 6,703 6,124 6,882 1,170 796 743 780 912 723 856 794 903 964 1,041 1,145 1,017 1,006 1,065 1,192 1,041 987 947 1,090 3,056 2,820 2,935 2,669 2,600 2,447 2,391 2,550 2,161 2,453 1,153 1,268 1,319 1,191 1,242 1,066 1,006 1,027 986 1,193 1,797 1,354 1,364 1,368 1,481 1,872 1,271 1,346 1,126 1,182 2,239 2,458 2,300 2,683 4,094 4,554 4,030 3,705 3,873 4,196 1,534 1,737 1,562 2,059 1,976 1,715 1,841 1,804 1,596 1,937 2 2 2 2 2 2 1 1 1 2 125 381 414 333 1,808 2,308 1,903 1,385 1,996 1,952 578 338 322 290 308 530 285 515 279 305 777 795 1,116 1,266 1,355 1,498 1,255 1,370 1,548 2,100 6,615 6,485 6,168 4,515 4,775 4,834 2,995 2,596 2,964 2,758 23,382 21,593 18,573 15,962 16,310 17,853 9,727 10,666 10,079 10,299 887 2,978 2,157 2,233 1,545 1,682 1,262 1,040 1,085 958 2,620 2,955 1,598 1,455 2,026 2,414 1,236 1,326 1,174 755 8,344 3,312 1,128 427 1,054 502 196 402 296 189 909 918 853 838 1,027 962 1,912 736 658 565 4,830 4,983 6,148 4,806 4,566 5,677 4,173 4,712 4,401 4,735 5,792 6,448 6,688 6,203 6,090 6,616 948 2,451 2,465 3,096 10,234 9,439 12,833 13,691 16,954 16,641 12,150 13,087 11,712 13,624 1,618 1,901 2,074 2,389 2,329 2,461 2,085 2,239 1,976 2,517 4,023 1,578 1,367 1,478 2,044 1,151 923 985 967 1,259 0 0 0 0 0 0 0 0 0 0 64 72 54 51 135 127 116 104 134 166 741 869 739 691 786 753 649 641 580 762 1,010 1,203 1,718 1,891 2,526 3,301 1,722 1,975 1,491 6,027 2,763 3,737 4,571 7,117 9,013 8,706 6,590 7,000 6,431 1,802 25 79 2,309 74 122 143 65 143 134 1,091 20,796 17,307 12,398 7,813 5,368 10,297 10,787 6,829 9,793 20,372 46,498 19,582 27,306 20,145 36,330 24,092 16,563 24,987 21,994 40,302 8,090 8,790 6,811 15,656 7,133 9,614 7,477 9,360 6,501 7,531 2000/01 2001/02 Actual June Final 133,089 183,507 25,460 31,862 9,514 11,284 13,719 19,086 6,343 10,431 1,006 2,484 1,118 1,304 2,072 3,091 1,090 1,527 1,056 2,025 3,967 3,995 1,884 1,849 1 2 1,750 1,750 331 395 1,649 1,190 1,760 3,471 9,338 7,797 873 1,036 290 1,743 251 158 587 738 5,531 2,927 1,806 1,194 13,295 12,404 2,318 2,266 949 1,159 0 0 132 509 869 1,019 2,553 1,237 6,414 6,189 60 26 19,128 21,265 42,309 79,538 324 271

TOTAL EXPENDITURE General Administration Law & order Social services Education Primary Secondary University & College Education Professional & Technical Edu & Teachers Training Others Health General Hospitals & Clinics Mother & Child Other Facilities & Preventive Measures Other Population Other Social Services 1/ Economic Services Agriculture Irrigation Fuel and power Industries and mineral resources Transport and Communication Other Economic Services 2/ Community services Works (Administration civil) Highways, Roads & Bridges & Building & Struct. Water Supply and Sanitation Public Health Engineering Broadcasting Urban Town Planning & Regulator Services Scientific Research and Survey Other Community Services 3/ Subsidies Grants & Investments Unallocable 1/ Includes Natural Calamities and Religious Affairs. 2/ Includes Land Reclamation, Rural Development, Transport & Communication, and Other Economic Services. 3/ Includes Works Urban and Rural, and Scientific Research. Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Development expenditures of corporations and autonomous bodies financed from federal loans are not included. Source: Government of Pakistan, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 3A: All Provinces -- Non-Interest Non-Defense Real Total Expenditure

(In Million of 1999/00 Rupees) 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual 152,385 165,974 161,549 145,557 173,804 186,373 150,218 142,475 146,430 174,704 13,047 15,348 17,455 15,565 24,546 38,628 29,710 19,823 24,300 24,724 14,090 16,798 16,711 17,058 18,224 17,916 15,907 16,494 16,646 18,550 52,889 59,106 59,448 59,661 64,274 65,242 57,922 61,930 59,731 63,572 37,954 43,038 42,988 44,660 47,582 48,644 43,255 46,676 44,631 47,119 18,318 21,308 21,172 21,755 22,912 24,169 22,222 25,117 23,398 25,306 9,657 10,068 10,396 11,159 12,159 13,360 12,122 12,493 12,371 13,579 3,752 3,418 4,003 4,004 3,813 4,420 3,828 3,899 3,755 4,065 2,767 2,873 3,304 2,651 2,259 2,165 2,021 1,906 2,023 1,477 3,460 5,371 4,112 5,092 6,439 4,530 3,061 3,261 3,085 2,693 11,012 12,197 12,072 12,577 13,266 13,190 11,680 12,315 12,098 13,729 9,108 10,080 9,891 10,126 10,329 10,518 9,254 10,068 9,947 11,082 73 69 62 66 67 89 58 66 47 58 492 556 543 474 586 525 510 524 458 568 1,339 1,492 1,575 1,911 2,284 2,059 1,858 1,656 1,647 2,021 0 0 0 0 0 0 0 0 0 0 3,923 3,871 4,388 2,425 3,427 3,408 2,987 2,939 3,001 2,723 33,392 37,967 31,036 23,944 29,109 29,895 23,183 19,914 20,274 21,724 9,246 10,266 9,782 9,212 9,649 9,315 7,455 7,636 7,523 7,562 12,892 13,672 12,339 9,421 11,920 13,289 10,081 9,111 7,901 7,430 112 110 326 544 963 1,774 2,894 358 438 588 1,069 1,053 1,011 1,012 950 813 673 594 587 1,363 243 70 196 226 269 42 15 26 24 21 9,830 12,795 7,382 3,529 5,359 4,662 2,065 2,189 3,801 4,761 29,082 29,379 30,019 25,298 30,263 28,478 17,634 20,064 18,153 16,537 1,477 1,883 1,872 1,850 2,348 2,016 1,797 1,919 1,861 1,967 21,693 20,831 19,234 15,539 19,872 17,745 9,820 11,425 10,852 9,093 2,966 3,637 4,460 4,280 3,894 4,229 2,524 2,702 2,840 2,763 2,442 2,398 2,490 2,053 3,000 4,068 3,168 3,817 2,466 2,647 0 0 0 0 0 0 0 0 0 0 96 34 23 39 43 39 7 4 3 4 0 0 0 0 0 0 4 4 3 4 409 599 1,940 1,538 1,106 382 316 192 126 59 4,051 2,999 2,525 1,848 2,872 3,714 4,776 3,061 5,872 8,539 5,577 4,320 4,214 2,109 4,351 1,935 442 1,152 1,349 20,746 259 63 142 82 103 565 643 38 105 313 2000/01 2001/02 Actual June Final 176,447 181,009 30,206 31,143 19,276 20,131 62,276 64,608 47,622 49,616 24,447 25,087 14,351 14,814 3,893 4,167 1,716 1,906 3,216 3,642 12,757 13,393 10,128 10,927 71 51 572 681 1,986 1,734 0 0 1,896 1,599 27,487 31,823 7,655 8,433 7,251 7,696 749 1,671 1,368 1,515 29 47 10,435 12,461 15,672 17,549 2,222 2,701 9,392 10,449 2,293 2,097 1,608 2,134 0 0 26 7 4 4 127 157 8,427 4,767 13,065 10,951 39 38

TOTAL EXPENDITURE General Administration Law & order Social services Education Primary Secondary University & College Education Professional & Technical Edu & Teachers Training Others Health General Hospitals & Clinics Mother & Child Other Facilities & Preventive Measures Other Population Other Social Services 1/ Economic Services Agriculture Irrigation Fuel and power Industries and mineral resources Transport and Communication Other Economic Services 2/ Community services Works (Administration civil) Highways, Roads & Bridges & Building & Struct. Water Supply and Sanitation Public Health Engineering Broadcasting Urban Town Planning & Regulator Services Scientific Research and Survey Other Community Services 3/ Subsidies Grants & Investments Unallocable Note: Footnotes on Provincial Tables. Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Provincial Tables.

Statistical Annex for Volume I

Table 4A: Punjab -- Non-Interest Non-Defense Real Total Expenditure

(In Million of 1999/00 Rupees) 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual 78,561 78,934 77,716 65,884 79,919 89,024 74,444 74,085 76,278 90,596 6,487 7,500 8,620 7,729 11,699 19,446 13,888 10,380 13,107 14,175 7,356 7,447 7,804 7,602 7,890 7,909 7,400 7,657 7,746 8,766 28,473 29,621 29,873 29,751 32,386 33,031 29,661 32,561 30,896 32,009 21,087 22,184 22,337 22,847 24,497 25,382 22,547 24,927 23,282 23,451 10,543 11,910 11,353 11,918 13,134 13,833 12,080 14,561 13,260 13,930 5,415 5,385 5,389 5,717 6,045 6,374 5,743 5,715 5,476 5,822 2,085 1,532 2,262 2,164 2,101 2,318 2,106 2,119 2,043 2,240 1,817 1,703 2,101 1,663 1,138 1,160 1,094 994 1,102 427 1,228 1,653 1,232 1,386 2,078 1,699 1,523 1,538 1,401 1,031 5,587 5,791 5,831 5,904 6,309 6,147 5,456 6,127 5,947 7,142 4,814 4,921 5,005 4,987 5,261 5,239 4,701 5,150 5,089 5,660 37 29 30 28 28 50 24 30 24 24 23 22 19 21 25 42 20 28 20 21 713 820 776 868 995 816 712 918 814 1,437 0 0 0 0 0 0 0 0 0 0 1,800 1,646 1,705 1,000 1,580 1,502 1,659 1,508 1,668 1,416 19,154 20,148 15,736 9,834 13,109 14,027 11,164 10,191 10,944 11,861 4,882 4,817 5,109 4,254 4,708 4,520 3,940 4,253 4,352 4,040 6,963 6,678 5,741 4,123 5,088 6,429 5,704 4,430 4,091 4,053 0 0 0 0 0 0 0 0 0 0 434 386 358 320 342 299 310 226 249 1,003 55 0 0 0 0 0 0 0 5 5 6,819 8,267 4,527 1,137 2,972 2,779 1,210 1,282 2,247 2,759 12,838 11,478 12,908 10,456 13,390 12,830 9,794 11,123 9,330 8,480 119 126 128 131 156 137 127 156 140 124 9,904 8,403 9,335 7,767 10,013 8,281 6,215 6,995 6,628 5,684 0 0 0 0 0 0 0 0 0 0 2,438 2,394 2,490 2,053 3,000 4,068 3,168 3,817 2,466 2,647 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4 4 3 4 377 556 955 505 221 344 280 151 92 21 1,281 1,823 999 76 725 1,529 1,756 1,232 3,022 3,500 2,804 902 1,720 386 718 245 353 941 1,232 11,802 168 14 56 51 2 7 428 0 1 4 2000/01 2001/02 Actual June Final 85,406 83,942 14,823 12,852 9,156 9,410 30,846 32,517 23,591 24,857 13,405 14,120 6,242 6,311 2,152 2,277 590 603 1,202 1,546 6,402 6,820 5,671 5,888 28 28 26 47 676 857 0 0 853 840 13,392 13,205 3,978 4,220 3,801 3,971 0 0 977 1,044 11 28 4,624 3,943 6,978 7,891 127 653 5,124 5,023 0 0 1,608 2,134 0 0 21 0 4 4 94 78 3,784 2,278 6,428 5,789 0 0

TOTAL EXPENDITURE General Administration Law & order Social services Education Primary Secondary University & College Education Professional & Technical Edu & Teachers Training Others Health General Hospitals & Clinics Mother & Child Other Facilities & Preventive Measures Other Population Other Social Services 1/ Economic Services Agriculture Irrigation Fuel and power Industries and mineral resources Transport and Communication Other Economic Services 2/ Community services Works (Administration civil) Highways, Roads & Bridges & Building & Struct. Water Supply and Sanitation Public Health Engineering Broadcasting Urban Town Planning & Regulator Services Scientific Research and Survey Other Community Services Subsidies Grants & Investments Unallocable 1/ Includes Natural Calamities and Religious Affairs. 2/ Includes Land Reclamation, Rural Development, Transport & Communication, Other Economic Services & Unallocable. 3/ Includes Works Urban and Rural, and Scientific Research. Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Government of Punjab, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 5A: Sindh -- Non-Interest Non-Defense Real Total Expenditure

(In Million of 1999/00 Rupees) 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual 35,759 41,213 39,201 37,999 48,710 50,634 40,090 34,904 33,772 43,137 3,226 4,088 4,332 3,828 8,428 13,471 11,672 5,311 6,757 5,269 3,647 5,374 4,735 5,743 6,290 6,145 5,183 5,275 5,123 5,717 11,307 14,033 14,078 13,436 15,225 15,311 13,545 14,739 14,037 15,072 8,336 10,295 10,140 10,249 11,848 11,659 10,376 11,220 10,684 11,602 4,088 4,925 5,094 5,487 5,724 5,844 5,357 5,985 5,682 6,149 2,239 2,317 2,535 2,643 2,672 3,222 2,854 2,966 3,087 3,311 915 1,025 1,101 1,041 876 1,216 1,058 1,064 971 1,030 540 713 547 519 628 600 510 468 475 559 554 1,315 863 560 1,948 778 597 738 468 552 2,549 3,193 2,677 2,813 2,888 2,972 2,627 2,912 2,749 3,069 2,096 2,686 2,242 2,417 2,286 2,412 2,161 2,433 2,243 2,494 14 15 4 11 0 0 0 0 0 0 296 357 324 265 384 312 338 327 285 353 143 134 108 120 218 249 128 153 221 222 0 0 0 0 0 0 0 0 0 0 422 545 1,261 374 490 679 542 606 604 401 6,267 6,842 5,991 6,120 7,273 6,487 4,281 4,710 4,060 4,420 1,597 2,205 1,640 1,576 1,553 1,688 1,258 1,187 1,056 1,309 3,143 3,255 2,958 2,777 4,068 3,959 2,370 2,760 2,009 1,911 8 10 10 12 15 14 12 12 12 13 307 280 219 287 349 203 160 167 152 170 185 66 193 223 265 38 12 23 16 13 1,027 1,026 972 1,245 1,023 586 469 561 815 1,004 8,165 8,662 7,295 6,466 7,636 6,983 3,510 4,505 3,598 3,136 440 530 532 526 562 621 522 525 530 600 6,518 6,862 5,344 4,504 5,558 4,953 2,134 3,141 2,235 1,780 1,097 1,218 1,386 1,395 1,430 1,364 839 820 822 748 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 96 31 21 33 43 34 5 4 3 4 0 0 0 0 0 0 0 0 0 0 16 21 13 9 42 10 12 16 7 5 1,284 224 602 758 436 329 1,617 143 25 399 1,772 1,943 2,089 1,617 3,320 1,350 76 184 68 8,815 90 48 79 31 102 558 205 37 105 309 2000/01 2001/02 Actual June Final 49,326 54,663 9,897 12,319 6,198 6,486 15,377 16,779 11,665 13,136 5,468 5,879 3,637 4,097 1,010 1,127 613 795 938 1,238 3,092 3,324 2,521 2,719 0 0 374 455 198 149 0 0 620 319 5,445 7,580 1,384 1,834 1,635 1,960 13 14 137 175 15 15 2,261 3,582 3,207 4,967 607 575 2,169 3,531 421 850 0 0 0 0 5 6 0 0 5 5 2,799 1,372 6,365 5,122 39 37

TOTAL EXPENDITURE General Administration Law & order Social services Education Primary Secondary University & College Education Professional & Technical Edu & Teachers Training Others Health General Hospitals & Clinics Mother & Child Other Facilities & Preventive Measures Other Population Other Social Services 1/ Economic Services Agriculture Irrigation Fuel and power Industries and mineral resources Transport and Communication Other Economic Services 2/ Community services Works (Administration civil) Highways, Roads & Bridges & Building & Struct. Water Supply and Sanitation Public Health Engineering Broadcasting Urban Town Planning & Regulator Services Scientific Research and Survey Other Community Services 3/ Subsidies Grants & Investments Unallocable 1/ Includes Natural Calamities and Religious Affairs. 2/ A substantial amount on the suspense account is included under this head. 3/ Includes land reclamation, stationery & printing and rural development etc Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Government of Sindh, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 6A: NWFP -- Non-Interest Non-Defense Real Total Expenditure

(In Million of 1999/00 Rupees) 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual 24,277 28,282 27,112 24,202 27,337 28,692 23,008 21,195 23,705 25,976 1,990 2,282 2,583 2,337 2,815 3,606 2,743 2,687 2,936 3,007 1,806 2,368 2,305 2,143 2,348 2,261 1,928 2,012 2,116 2,339 0 0 0 0 0 0 0 0 0 0 9,078 10,003 10,541 9,749 10,092 10,478 9,576 9,675 9,644 10,951 5,970 6,869 7,356 7,091 7,248 7,608 7,301 7,227 7,094 8,296 2,663 3,124 3,182 2,844 2,986 3,256 3,709 3,448 3,229 4,030 1,574 1,821 1,872 2,242 2,495 2,708 2,398 2,567 2,531 2,938 420 471 461 448 468 537 415 423 411 466 335 382 417 372 383 296 325 341 335 383 978 1,070 1,423 1,186 917 810 455 449 588 478 1,788 1,999 2,228 2,173 2,300 2,294 1,873 1,974 2,173 2,283 1,469 1,647 1,772 1,762 1,895 1,966 1,550 1,643 1,823 1,938 9 10 10 10 10 12 10 11 11 12 99 87 102 97 96 86 75 82 86 83 211 256 345 305 298 230 237 238 253 250 0 0 0 0 0 0 0 0 0 0 1,320 1,135 957 485 544 577 403 474 377 372 4,361 6,285 4,868 4,462 4,868 5,867 5,015 2,735 3,226 3,598 1,538 1,829 1,649 1,595 1,471 1,517 1,049 996 942 1,011 1,657 1,805 1,610 1,472 1,446 1,551 770 1,121 1,183 1,040 104 100 316 532 948 1,760 2,882 346 426 575 188 205 232 206 118 185 99 112 99 93 3 4 4 4 3 4 3 4 3 4 870 2,342 1,059 654 882 850 211 158 573 877 4,918 5,368 5,671 4,505 5,549 5,013 2,320 2,372 2,908 2,702 380 460 454 444 463 464 401 420 393 422 3,591 3,726 3,586 2,953 3,970 3,056 834 748 1,287 995 941 1,176 1,630 1,108 1,115 1,492 1,084 1,204 1,227 1,280 4 4 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 3 1 1 1 1 0 0 0 7 1,124 502 739 900 1,351 1,127 1,403 1,686 2,825 3,250 6,391 7,221 7,495 7,460 6,896 7,023 6,712 6,693 6,454 7,621 1,001 1,475 405 105 313 341 13 27 50 129 0 0 0 0 0 0 9 0 0 0 2000/01 2001/02 Actual June Final 25,136 26,388 3,233 3,485 2,311 2,410 0 0 10,543 10,067 8,316 8,085 3,964 3,564 3,073 3,247 444 486 397 379 438 410 2,049 1,848 1,061 1,603 11 11 80 79 897 155 0 0 177 134 4,647 7,486 1,021 983 786 895 736 1,657 89 130 3 4 2,011 3,818 2,286 1,783 393 389 850 636 1,043 713 0 0 0 0 0 0 0 0 0 45 1,844 1,117 6,506 5,268 272 39 0 1

TOTAL EXPENDITURE General Administration Law & order Defense Social services Education Primary Secondary University & College Education Professional & Technical Edu & Teachers Training Others Health General Hospitals & Clinics Mother & Child Other Facilities & Preventive Measures Other Population Other Social Services 1/ Economic Services Agriculture Irrigation Fuel and power Industries and mineral resources Transport and Communication Other Economic Services 2/ Community services Works (Administration civil) Highways, Roads & Bridges & Building & Struct. Water Supply and Sanitation Public Health Engineering Broadcasting Urban Town Planning & Regulator Services Scientific Research and Survey Other Community Services Subsidies Interest payments Grants & Investments Unallocable 1/ Includes Natural Calamities and Religious Affairs. 2/ Includes land reclamation, stationery & printing and rural development etc Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Government of NWFP, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 7A: Balochistan -- Non-Interest Non-Defense Real Total Expenditure

(In Million of 1999/00 Rupees) 1990/91 1991/92 1992/93 1993/94 1994/95 1/ 1995/96 1996/97 1997/98 1998/99 1999/00 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual 13,788 17,546 17,521 17,472 17,838 18,023 12,676 12,291 12,675 14,994 1,345 1,478 1,919 1,671 1,604 2,105 1,407 1,445 1,499 2,273 1,281 1,610 1,868 1,570 1,696 1,600 1,396 1,550 1,661 1,728 0 0 0 0 0 0 0 0 0 0 4,031 5,449 4,956 6,725 6,571 6,422 5,140 4,955 5,154 5,540 2,560 3,690 3,155 4,472 3,989 3,994 3,031 3,303 3,572 3,771 1,025 1,349 1,544 1,507 1,068 1,236 1,076 1,123 1,227 1,198 429 545 600 558 947 1,057 1,128 1,246 1,276 1,507 332 390 179 351 368 349 249 293 329 328 75 74 238 97 110 109 92 103 111 107 700 1,332 594 1,960 1,496 1,243 486 537 629 632 1,088 1,214 1,336 1,686 1,769 1,777 1,725 1,302 1,230 1,235 729 826 873 960 887 902 842 842 792 990 13 15 18 17 28 27 24 25 12 23 73 90 98 92 81 85 78 87 66 110 273 282 347 618 773 764 781 347 360 112 0 0 0 0 0 0 0 0 0 0 382 545 465 567 813 650 383 350 352 534 3,610 4,692 4,441 3,528 3,859 3,514 2,723 2,277 2,043 1,845 1,228 1,416 1,384 1,787 1,917 1,590 1,209 1,201 1,172 1,201 1,128 1,933 2,030 1,049 1,319 1,350 1,236 799 618 426 0 0 0 0 0 0 0 0 0 0 140 182 202 200 141 126 104 89 87 96 0 0 0 0 0 0 0 0 0 0 1,113 1,161 825 493 483 448 174 188 165 122 3,161 3,871 4,145 3,871 3,688 3,652 2,010 2,064 2,317 2,219 538 767 759 749 1,167 793 747 818 797 821 1,680 1,840 969 315 331 1,455 637 542 702 635 928 1,243 1,443 1,777 1,349 1,372 601 679 791 735 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3 2 6 0 5 2 0 0 0 0 0 0 0 0 0 0 0 0 0 15 19 972 1,023 842 27 24 25 27 27 362 450 185 115 359 729 0 0 0 1,390 2,700 2,895 3,171 3,141 2,930 2,845 2,792 3,378 2,986 2,875 0 0 0 0 0 0 0 0 0 0 1 1 7 1 0 0 0 0 0 0 2000/01 2001/02 Actual June Final 16,578 16,016 2,253 2,488 1,611 1,824 0 0 5,510 5,245 4,050 3,538 1,610 1,524 1,398 1,159 287 277 116 128 638 449 1,214 1,402 875 717 31 13 92 101 216 572 0 0 247 306 4,003 3,552 1,271 1,396 1,029 870 0 0 164 166 0 0 1,538 1,119 3,201 2,907 1,094 1,083 1,249 1,259 829 534 0 0 0 0 0 1 0 0 28 29 0 0 2,779 3,917 0 0 0 0

TOTAL EXPENDITURE General Administration 2/ Law & order Defense Social services Education Primary Secondary University & College Education Professional & Technical Edu & Teachers Training Others Health General Hospitals & Clinics Mother & Child Health Other Facilities & Preventive Measures Other Population Other Social Services Economic Services Agriculture Irrigation Fuel and power Industries and mineral resources Transport and Communication Other Economic Services Community services Works (Administration civil) Highways, Roads & Bridges & Building & Structures Water Supply and Sanitation Public Health Engineering Broadcasting Urban Town Planning & Regulator Services Scientific Research and Survey Other Community Services Subsidies Interest payments Grants & Investments Unallocable 1/ Break down of Capital Development Expenditures is not available. 2/ For 1988/89 includes Superannuation and Pension amounting to Rs. 1034.6 Mil. Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Government of Balochistan, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 8A: National -- Non-Interest Non-Defense Real Current Expenditure

(In Million of 1999/00 Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final CURRENT EXPENDITURES 254,526 205,018 180,680 202,742 201,075 205,242 196,408 216,769 230,592 208,754 204,524 205,334 265,484 264,970 291,015 General Administration 33,282 34,955 29,283 29,392 35,617 37,542 36,300 48,508 62,787 52,423 40,258 43,065 43,770 53,388 56,596 Law & order 23,020 19,134 19,811 21,648 25,914 25,253 25,504 28,374 27,458 24,324 25,198 25,001 27,578 28,765 29,831 Social services 68,381 56,300 55,367 60,937 66,732 68,780 66,097 70,731 71,566 64,341 66,955 65,324 70,559 69,592 74,787 Education 45,005 37,642 36,950 41,612 46,025 47,314 47,628 51,264 52,517 47,520 50,134 48,262 51,571 51,969 55,003 Primary 18,071 16,249 16,311 18,815 21,898 21,535 22,231 23,481 24,615 22,096 24,164 23,318 25,307 24,822 25,684 Secondary 10,676 9,013 8,922 10,357 10,809 11,248 12,063 12,969 14,341 13,086 13,409 13,267 14,565 15,216 15,799 University & College Education 7,329 5,852 5,680 5,788 5,708 6,625 6,322 5,982 6,516 5,899 5,976 5,611 6,067 5,619 6,459 Professional & Technical Edu & Teachers Training 3,945 3,007 3,020 3,464 3,590 3,948 3,576 3,100 2,979 2,934 2,820 2,694 2,347 2,498 2,756 Others 4,984 3,521 3,017 3,188 4,020 3,958 3,436 5,732 4,066 3,504 3,765 3,372 3,284 3,815 4,305 Health 12,816 10,229 10,639 11,387 12,464 12,617 12,589 13,178 13,503 12,185 12,941 12,726 14,849 14,008 15,175 General Hospitals & Clinics 10,509 8,477 8,835 9,644 10,463 10,663 10,624 11,012 11,312 10,199 10,853 10,718 12,158 11,203 12,426 Mother & Child 74 58 64 60 56 61 57 69 90 60 67 48 60 72 53 Other Facilities & Preventive Measures 626 459 469 450 502 504 413 496 506 579 632 534 644 611 799 Other 1,608 1,235 1,270 1,233 1,442 1,389 1,494 1,601 1,595 1,348 1,389 1,426 1,987 2,122 1,898 Population 7 6 8 7 4 6 7 14 9 32 35 31 33 32 36 Other Social Services 10,552 8,424 7,771 7,931 8,239 8,844 5,873 6,275 5,537 4,604 3,845 4,305 4,106 3,583 4,574 Economic Services 28,572 23,536 22,340 30,055 26,443 25,352 22,280 24,019 26,022 23,491 20,514 19,233 21,688 23,718 24,601 Agriculture 9,082 7,500 7,319 7,686 8,312 8,301 8,241 8,266 8,359 7,265 7,294 7,414 7,684 7,722 8,385 Irrigation 10,268 8,214 7,723 7,260 7,463 7,526 6,341 7,152 8,016 7,207 5,883 5,307 5,312 5,316 5,325 Fuel and power 176 472 463 8,114 3,232 1,000 431 1,293 1,815 2,954 392 455 626 854 1,723 Industries and mineral resources 3,129 2,143 1,567 1,699 1,720 1,668 1,554 1,691 1,659 1,227 1,293 1,167 1,874 1,887 2,154 Transport and Communication 3,677 3,565 3,681 3,332 3,586 4,868 3,641 3,783 4,773 3,515 4,134 3,353 3,792 3,888 1,362 Other Economic Services 2,239 1,643 1,586 1,963 2,130 1,989 2,072 1,834 1,400 1,323 1,518 1,536 2,400 4,050 5,651 Community services 16,069 12,565 13,842 12,013 13,170 15,549 14,031 15,212 14,586 12,109 14,112 13,221 13,887 13,591 14,322 Works (Administration civil) 3,346 2,746 2,983 3,090 3,775 3,938 4,231 4,344 4,472 3,882 4,158 3,836 4,484 4,540 4,545 Highways, Roads & Bridges & Building & Struct. 6,570 5,132 5,702 4,714 5,016 6,285 5,003 5,342 4,563 3,911 4,546 4,290 4,330 4,025 4,444 Water Supply and Sanitation 863 808 776 843 1,054 1,282 1,296 1,146 1,196 896 1,283 1,334 1,321 1,322 1,106 Public Health Engineering 244 190 174 239 225 445 449 549 634 574 735 628 558 465 571 Broadcasting 1,020 731 712 741 869 739 691 786 753 649 641 580 762 869 1,019 Urban Town Planning & Regulator Services 871 694 519 474 394 702 492 539 441 113 506 633 558 443 437 Scientific Research and Survey 2,306 1,791 2,786 1,796 1,695 1,869 1,674 2,260 2,009 1,708 1,911 1,662 1,806 1,743 2,133 Other Community Services 849 472 191 115 141 290 196 246 518 377 332 257 69 185 67 Subsidies 27,413 32,545 22,594 22,044 17,835 13,427 8,618 8,234 13,879 15,555 9,874 15,665 28,912 27,555 26,032 Grants & Investments 54,505 27,461 14,058 29,667 13,289 18,223 11,875 18,470 9,021 12,294 18,216 17,218 51,484 47,515 64,017 Unallocable 7,104 2,527 7,483 8,340 8,845 6,943 15,733 7,235 10,177 7,864 9,396 6,606 7,620 846 829 Note: Footnotes on Federal and Provincial Tables. Source: Federal and Provincial Tables.

Statistical Annex for Volume I

Table 9A: Federal -- Non-Interest Non-Defense Real Current Expenditure

(In Million of 1999/00 Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final CURRENT EXPENDITURES 127,300 108,327 84,061 99,399 87,302 86,482 84,128 86,459 83,255 79,422 85,465 81,250 113,207 108,413 133,322 General Administration 17,577 19,372 16,347 16,761 20,467 20,354 20,941 24,155 24,392 22,882 20,552 19,007 19,409 23,344 25,717 Law & order 8,476 7,623 8,456 7,777 9,276 8,645 8,492 10,205 9,594 8,441 8,731 8,371 9,066 9,514 9,733 Social services 16,891 14,744 12,744 12,534 13,729 14,088 12,409 12,702 12,103 10,482 10,031 9,869 10,487 9,400 11,931 Education 6,626 6,166 5,481 5,257 5,991 6,524 6,036 6,038 5,977 5,639 5,762 5,265 5,829 5,534 6,452 Primary 639 1,082 578 630 741 730 689 836 605 779 765 815 908 947 954 Secondary 1,004 824 840 887 1,003 970 954 1,003 1,075 985 965 922 1,025 1,019 1,136 University & College Education 2,784 2,469 2,251 2,074 2,319 2,646 2,350 2,204 2,143 2,090 2,108 1,889 2,029 1,775 2,419 Professional & Technical Edu & Teachers Training 1,246 943 987 913 1,016 1,210 1,135 1,000 967 946 950 881 1,009 929 997 Others 953 848 826 753 912 968 909 995 1,187 840 973 758 858 866 945 Health 2,191 1,839 1,798 1,622 1,751 1,834 2,093 2,033 2,099 1,922 1,986 1,794 2,003 1,943 2,279 General Hospitals & Clinics 1,718 1,445 1,388 1,248 1,363 1,412 1,701 1,599 1,675 1,540 1,596 1,444 1,598 1,530 1,738 Mother & Child 2 2 2 2 2 2 2 2 2 1 1 1 2 1 2 Other Facilities & Preventive Measures 167 133 142 112 109 131 110 138 112 97 141 111 108 105 227 Other 304 259 267 261 277 290 279 294 311 284 248 237 295 308 312 Population 7 6 8 7 4 6 7 14 9 32 35 31 32 32 36 Other Social Services 8,067 6,734 5,458 5,649 5,983 5,724 4,274 4,617 4,018 2,889 2,249 2,780 2,622 1,891 3,165 Economic Services 6,928 6,357 5,972 13,170 8,643 7,913 6,126 6,160 6,943 5,348 6,008 5,096 5,517 5,617 3,499 Agriculture 869 843 794 797 813 985 1,059 852 879 774 754 730 852 788 899 Irrigation 123 94 94 44 26 78 67 92 92 84 84 64 70 55 69 Fuel and power 151 447 429 8,078 3,198 971 400 357 149 132 133 146 98 154 109 Industries and mineral resources 1,961 1,284 860 856 895 844 826 979 951 626 724 635 553 572 736 Transport and Communication 3,660 3,552 3,662 3,265 3,570 4,855 3,629 3,717 4,755 3,503 4,115 3,330 3,770 3,858 1,317 Other Economic Services 165 136 133 131 140 181 146 163 117 229 199 192 174 190 370 Community services 7,156 5,957 6,328 5,367 5,722 6,519 6,195 7,059 6,562 5,489 6,377 5,843 6,604 6,145 6,856 Works (Administration civil) 1,577 1,425 1,513 1,618 1,901 2,074 2,382 2,329 2,461 2,085 2,239 1,976 2,517 2,318 2,266 Highways, Roads & Bridges & Building & Struct. 681 1,015 729 651 785 921 858 945 675 779 849 758 828 596 871 Water Supply and Sanitation 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Public Health Engineering 54 50 63 64 72 54 51 135 109 103 97 109 132 124 131 Broadcasting 1,020 731 712 741 869 739 691 786 753 649 641 580 762 869 1,019 Urban Town Planning & Regulator Services 849 680 510 471 385 691 466 496 419 108 503 630 554 439 430 Scientific Research and Survey 2,306 1,791 2,786 1,796 1,695 1,869 1,674 2,260 2,009 1,704 1,907 1,659 1,802 1,739 2,129 Other Community Services 671 264 15 25 16 171 73 108 137 62 141 132 10 59 9 Subsidies 14,940 29,680 17,719 18,038 14,916 10,919 6,846 5,368 10,235 10,787 6,816 9,793 20,372 19,128 21,265 Grants & Investments 53,955 26,613 13,613 29,005 12,527 17,060 11,491 17,750 8,715 12,152 17,591 16,770 34,220 34,941 54,049 Unallocable 5,188 1,980 6,972 8,090 8,790 6,810 15,656 7,133 9,614 7,477 9,359 6,501 7,531 324 271 1/ Includes Natural Calamities and Religious Affairs. 2/ Includes Land Reclamation, Rural Development, Transport & Communication, and Other Economic Services. 3/ Includes Works Urban and Rural, and Scientific Research. Source: Government of Pakistan, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 10A: Provincial Aggregate -- Non-Interest Non-Defense Real Current Expenditure

(In Million of 1999/00 Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final CURRENT EXPENDITURES 127,226 96,691 96,619 103,343 113,773 118,760 112,280 130,310 147,337 129,332 119,059 124,084 152,277 156,557 157,693 General Administration 15,705 15,583 12,936 12,631 15,150 17,188 15,359 24,353 38,395 29,541 19,706 24,058 24,361 30,044 30,879 Law & order 14,544 11,510 11,355 13,871 16,638 16,608 17,012 18,170 17,864 15,883 16,467 16,631 18,512 19,251 20,098 Social services 51,490 41,556 42,623 48,402 53,003 54,692 53,687 58,029 59,463 53,859 56,924 55,455 60,072 60,192 62,856 Education 38,379 31,475 31,468 36,355 40,034 40,790 41,592 45,226 46,541 41,881 44,373 42,997 45,742 46,435 48,551 Primary 17,432 15,166 15,734 18,185 21,157 20,805 21,542 22,646 24,010 21,317 23,399 22,503 24,399 23,876 24,730 Secondary 9,672 8,189 8,082 9,470 9,806 10,278 11,109 11,966 13,265 12,102 12,444 12,345 13,540 14,197 14,664 University & College Education 4,545 3,383 3,429 3,713 3,389 3,979 3,972 3,777 4,373 3,809 3,868 3,722 4,038 3,845 4,039 Professional & Technical Edu & Teachers Training 2,700 2,065 2,033 2,551 2,574 2,738 2,441 2,100 2,012 1,989 1,870 1,813 1,339 1,569 1,759 Others 4,031 2,673 2,191 2,435 3,108 2,989 2,528 4,737 2,880 2,664 2,792 2,614 2,426 2,949 3,359 Health 10,625 8,390 8,841 9,765 10,713 10,783 10,496 11,145 11,403 10,263 10,955 10,932 12,846 12,065 12,896 General Hospitals & Clinics 8,791 7,033 7,447 8,395 9,101 9,251 8,923 9,413 9,636 8,659 9,257 9,273 10,560 9,673 10,687 Mother & Child 72 56 62 59 54 58 55 67 88 58 66 47 58 71 51 Other Facilities & Preventive Measures 459 326 328 338 393 373 303 358 394 482 491 423 536 506 572 Other 1,304 975 1,004 973 1,165 1,100 1,215 1,307 1,285 1,064 1,141 1,189 1,691 1,815 1,585 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 2,485 1,691 2,314 2,282 2,256 3,120 1,600 1,658 1,519 1,716 1,596 1,526 1,484 1,692 1,409 Economic Services 21,644 17,180 16,367 16,884 17,801 17,439 16,154 17,859 19,079 18,143 14,506 14,137 16,171 18,100 21,101 Agriculture 8,212 6,657 6,525 6,889 7,499 7,316 7,182 7,414 7,480 6,491 6,540 6,684 6,832 6,935 7,487 Irrigation 10,146 8,120 7,628 7,216 7,437 7,449 6,274 7,060 7,924 7,123 5,800 5,244 5,242 5,261 5,256 Fuel and power 26 25 35 36 35 29 31 936 1,666 2,821 259 309 528 700 1,613 Industries and mineral resources 1,168 858 707 843 824 824 727 713 708 601 568 532 1,321 1,315 1,419 Transport and Communication 17 13 19 67 15 13 13 67 18 12 19 24 21 29 45 Other Economic Services 2,075 1,507 1,453 1,832 1,991 1,808 1,927 1,670 1,283 1,094 1,319 1,345 2,226 3,860 5,281 Community services 8,913 6,608 7,514 6,646 7,448 9,030 7,837 8,153 8,024 6,620 7,735 7,378 7,282 7,447 7,466 Works (Administration civil) 1,769 1,321 1,470 1,472 1,874 1,863 1,849 2,015 2,012 1,797 1,919 1,860 1,967 2,222 2,279 Highways, Roads & Bridges & Building & Struct. 5,889 4,117 4,973 4,063 4,232 5,364 4,145 4,396 3,889 3,132 3,697 3,533 3,502 3,428 3,573 Water Supply and Sanitation 863 808 776 843 1,054 1,282 1,296 1,146 1,196 896 1,283 1,334 1,321 1,322 1,106 Public Health Engineering 190 140 110 175 153 391 398 413 526 471 639 519 427 341 439 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 23 14 9 3 9 11 25 43 22 5 3 3 4 4 7 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 4 4 3 4 4 4 Other Community Services 178 208 176 90 126 119 123 138 380 315 191 125 59 126 58 Subsidies 12,473 2,865 4,875 4,006 2,919 2,509 1,772 2,865 3,644 4,768 3,058 5,872 8,539 8,427 4,767 Grants & Investments 550 848 445 662 762 1,163 384 720 306 142 625 448 17,264 12,575 9,968 Unallocable 1,917 547 512 250 56 133 77 102 563 388 37 105 89 522 558 Note: Footnotes on Provincial Tables. Source: Provincial Tables.

Statistical Annex for Volume I

Table 11A: Punjab -- Non-Interest Non-Defense Real Current Expenditure

(In Million of 1999/00 Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final CURRENT EXPENDITURES 68,974 48,805 49,043 54,768 56,144 59,366 55,344 63,152 73,371 64,314 60,498 63,349 76,338 75,010 73,384 General Administration 7,836 7,105 6,479 6,250 7,429 8,543 7,703 11,671 19,392 13,862 10,364 13,081 13,993 14,818 12,773 Law & order 7,721 5,805 5,418 7,356 7,447 7,804 7,602 7,890 7,909 7,400 7,641 7,738 8,764 9,155 9,410 Social services 27,514 22,351 22,552 27,352 27,455 28,375 28,315 30,494 30,989 28,309 29,594 28,508 30,057 30,153 31,702 Education 20,416 16,939 16,732 20,740 21,104 21,448 22,388 24,068 24,742 22,291 23,396 22,301 23,049 23,340 24,271 Primary 9,853 8,545 8,762 10,543 11,865 11,107 11,836 12,950 13,832 11,981 13,213 12,524 13,617 13,291 13,786 Secondary 5,153 4,353 4,165 5,301 5,195 5,358 5,684 6,027 6,372 5,735 5,709 5,470 5,808 6,172 6,280 University & College Education 2,648 1,945 1,793 2,064 1,528 2,242 2,151 2,086 2,308 2,102 2,105 2,028 2,230 2,126 2,191 Professional & Technical Edu & Teachers Training 1,656 1,295 1,229 1,698 1,527 1,652 1,519 1,078 1,107 1,094 994 963 365 554 602 Others 1,106 802 783 1,135 989 1,090 1,198 1,927 1,123 1,379 1,374 1,316 1,029 1,196 1,412 Health 5,435 4,359 4,421 5,059 5,032 5,415 5,036 5,593 5,466 4,874 5,260 5,282 6,445 6,001 6,653 General Hospitals & Clinics 4,356 3,559 3,609 4,311 4,189 4,608 4,131 4,642 4,600 4,165 4,461 4,496 5,159 5,271 5,727 Mother & Child 38 32 42 37 29 30 28 28 50 24 30 24 24 28 28 Other Facilities & Preventive Measures 35 26 26 23 22 19 21 17 35 20 28 20 21 25 44 Other 1,006 742 744 687 793 757 856 905 781 665 742 742 1,241 676 855 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 1,663 1,052 1,400 1,552 1,319 1,512 891 833 781 1,144 938 925 563 813 778 Economic Services 12,495 9,463 8,692 9,157 8,957 9,145 8,001 8,437 9,710 9,194 7,627 7,251 7,868 7,902 8,591 Agriculture 4,707 3,753 3,556 3,814 3,709 3,885 3,715 3,906 3,881 3,495 3,574 3,867 3,590 3,634 3,835 Irrigation 6,311 4,780 4,373 4,329 4,149 4,292 3,480 3,740 5,033 4,975 3,238 2,783 2,852 2,831 2,857 Fuel and power 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Industries and mineral resources 578 459 302 418 363 354 319 341 297 277 226 236 1,003 977 1,044 Transport and Communication 0 0 6 55 0 0 0 0 0 0 0 5 5 11 28 Other Economic Services 898 472 455 542 735 614 487 450 499 446 589 360 417 449 827 Community services 3,515 2,940 3,575 2,779 2,837 4,003 3,451 3,713 3,720 3,322 3,618 3,411 3,092 3,044 3,392 Works (Administration civil) 170 129 129 119 126 128 131 156 137 127 156 140 124 127 231 Highways, Roads & Bridges & Building & Struct. 3,018 2,488 3,192 2,430 2,474 3,401 2,829 3,058 2,714 2,440 2,669 2,657 2,516 2,479 2,695 Water Supply and Sanitation 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Public Health Engineering 190 140 110 170 149 391 398 413 526 471 639 519 427 341 439 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 4 4 3 4 4 4 Other Community Services 137 183 144 59 87 83 93 85 343 280 151 92 21 93 23 Subsidies 7,865 45 1,628 1,237 1,743 983 0 718 1,458 1,754 1,230 3,022 3,500 3,784 2,278 Grants & Investments 238 617 215 485 269 458 225 230 192 103 424 339 9,061 6,155 5,237 Unallocable 1,790 479 483 152 7 55 47 0 0 371 0 0 4 0 0 1/ Includes Natural Calamities and Religious Affairs. 2/ Includes Land Reclamation, Rural Development, Transport & Communication, and Other Economic Services. 3/ Includes Works Urban and Rural, and Scientific Research. Source: Government of Punjab, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 12A: Sindh -- Non-Interest Non-Defense Real Current Expenditure

(In Million of 1999/00 Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final CURRENT EXPENDITURES 27,661 21,275 22,571 24,410 29,866 29,430 29,032 36,247 40,407 35,913 30,043 30,082 39,460 47,030 49,868 General Administration 4,088 3,008 3,236 3,205 4,065 4,313 3,811 8,395 13,447 11,656 5,298 6,717 5,186 9,868 12,301 Law & order 3,508 2,942 3,129 3,582 5,321 4,723 5,743 6,290 6,143 5,183 5,275 5,123 5,717 6,198 6,486 Social services 11,100 9,273 9,842 10,732 13,514 13,674 12,896 14,619 14,665 13,214 14,280 13,593 14,816 15,104 16,303 Education 8,471 7,210 7,311 8,100 10,072 9,979 10,114 11,647 11,521 10,325 11,150 10,605 11,424 11,521 12,842 Primary 3,959 3,448 3,498 3,966 4,830 5,003 5,419 5,656 5,823 5,336 5,973 5,678 6,049 5,464 5,871 Secondary 2,154 2,039 2,025 2,217 2,290 2,513 2,632 2,645 3,191 2,852 2,937 3,070 3,300 3,592 4,002 University & College Education 1,200 899 904 907 1,001 1,101 1,035 866 1,201 1,055 1,057 968 1,028 994 1,090 Professional & Technical Edu & Teachers Training 574 396 434 490 652 521 494 553 553 497 456 427 502 534 650 Others 583 427 450 520 1,300 841 533 1,928 753 584 727 462 545 937 1,228 Health 2,207 1,766 1,980 2,267 2,926 2,469 2,433 2,507 2,740 2,560 2,770 2,668 2,995 2,982 3,152 General Hospitals & Clinics 1,871 1,483 1,697 1,955 2,530 2,128 2,167 2,142 2,272 2,136 2,362 2,243 2,492 2,496 2,655 Mother & Child 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 265 216 217 227 266 240 174 246 261 311 302 264 323 311 359 Other 71 66 66 85 130 101 92 118 207 113 106 161 180 175 137 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 422 297 552 365 516 1,226 349 465 404 330 360 321 398 601 309 Economic Services 4,890 4,111 4,045 3,995 4,795 4,086 4,279 4,601 3,858 3,132 3,321 3,246 3,727 4,989 6,765 Agriculture 1,312 1,097 1,130 1,156 1,693 1,187 1,311 1,292 1,414 1,044 1,040 945 1,229 1,332 1,590 Irrigation 2,277 2,014 1,906 1,603 1,852 1,727 1,536 2,080 1,664 1,450 1,532 1,329 1,402 1,248 1,420 Fuel and power 9 6 8 8 10 10 12 15 14 12 12 12 13 13 14 Industries and mineral resources 285 180 177 198 203 182 166 128 166 149 162 129 151 119 146 Transport and Communication 13 9 10 9 11 10 9 63 14 8 15 15 13 15 14 Other Economic Services 995 804 815 1,021 1,026 971 1,245 1,023 586 469 561 815 919 2,261 3,581 Community services 1,879 1,596 1,459 1,357 1,580 1,398 1,425 1,372 1,342 1,087 1,514 1,213 1,468 1,403 1,392 Works (Administration civil) 506 441 424 440 530 532 526 562 621 522 525 530 600 607 575 Highways, Roads & Bridges & Building & Struct. 1,073 884 816 689 778 555 486 514 366 304 680 381 531 544 544 Water Supply and Sanitation 259 249 199 210 248 290 383 228 328 246 290 292 329 243 262 Public Health Engineering 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 23 14 9 3 6 9 22 43 17 3 3 3 4 4 6 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 18 8 12 15 19 12 8 25 9 11 16 7 5 5 5 Subsidies 1,807 162 691 1,284 224 602 758 436 329 1,610 143 25 399 2,799 1,372 Grants & Investments 271 120 147 164 320 554 88 370 62 25 174 60 8,074 6,148 4,691 Unallocable 127 68 29 98 48 78 30 101 563 17 37 105 85 521 557 1/ Includes Natural Calamities and Religious Affairs. 2/ Includes Land Reclamation, Rural Development, Fuel and Power, Transport and Communication, & Unallocable. Source: Government of Sindh, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 13A: NWFP -- Non-Interest Non-Defense Real Current Expenditure

(In Million of 1999/00 Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final CURRENT EXPENDITURES 20,436 16,335 16,339 15,673 17,562 18,145 17,482 20,052 21,660 19,404 18,275 20,042 22,930 21,869 21,838 General Administration 2,434 2,040 1,982 1,862 2,225 2,412 2,173 2,684 3,460 2,629 2,614 2,762 2,910 3,118 3,338 Law & order 1,986 1,622 1,626 1,788 2,368 2,303 2,143 2,347 2,252 1,923 2,009 2,116 2,315 2,310 2,410 Social services 9,588 7,149 7,130 7,263 8,328 8,645 8,485 8,940 9,542 8,312 8,768 8,938 10,042 9,871 9,917 Education 7,421 5,510 5,383 5,503 6,339 6,592 6,433 6,825 7,291 6,438 6,775 6,829 7,729 7,771 8,007 Primary 2,615 2,261 2,385 2,652 3,113 3,151 2,780 2,972 3,119 2,924 3,089 3,074 3,536 3,511 3,549 Secondary 1,941 1,439 1,492 1,524 1,775 1,807 2,235 2,347 2,646 2,386 2,552 2,528 2,925 3,034 3,222 University & College Education 559 395 385 409 471 458 435 457 515 402 412 397 453 438 480 Professional & Technical Edu & Teachers Training 439 289 302 288 321 327 331 360 244 306 316 312 365 364 378 Others 1,867 1,127 818 630 658 848 652 689 769 419 405 518 451 423 377 Health 1,926 1,439 1,535 1,586 1,770 1,862 1,903 1,972 2,108 1,795 1,876 2,009 2,192 2,003 1,810 General Hospitals & Clinics 1,664 1,278 1,358 1,400 1,556 1,643 1,665 1,742 1,863 1,516 1,593 1,742 1,919 1,031 1,589 Mother & Child 19 15 8 9 10 10 10 10 12 10 11 11 12 11 11 Other Facilities & Preventive Measures 57 12 12 15 15 16 16 14 13 74 75 72 82 78 68 Other 187 134 157 163 189 194 211 206 221 196 198 184 180 883 143 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 241 200 212 174 219 191 149 143 142 79 117 100 121 97 100 Economic Services 2,637 2,273 2,293 2,377 2,530 2,536 2,292 3,168 3,908 4,269 2,073 2,105 3,004 3,279 3,897 Agriculture 1,225 986 1,018 1,031 1,143 1,147 1,118 1,108 1,111 877 884 826 894 839 846 Irrigation 1,163 1,009 1,041 1,015 1,109 1,102 959 945 940 428 776 832 727 621 647 Fuel and power 17 19 27 28 24 19 19 921 1,653 2,810 247 297 515 687 1,599 Industries and mineral resources 140 111 107 110 124 154 114 109 118 75 92 82 78 61 67 Transport and Communication 4 4 3 3 4 4 4 3 4 3 4 3 4 3 4 Other Economic Services 88 144 96 191 126 110 79 82 83 76 71 64 787 1,068 735 Community services 1,767 1,114 1,253 1,246 1,437 1,359 1,418 1,442 1,320 854 1,098 1,246 1,279 1,174 1,119 Works (Administration civil) 449 365 374 375 451 445 443 461 460 401 420 393 422 393 389 Highways, Roads & Bridges & Building & Struct. 1,015 459 556 501 526 439 514 493 437 182 169 312 321 225 227 Water Supply and Sanitation 302 289 323 365 455 475 460 487 422 271 508 541 530 555 502 Public Health Engineering 0 0 0 4 4 0 0 0 0 0 0 0 0 0 0 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 1 1 1 1 1 1 1 1 1 0 0 0 6 0 0 Subsidies 1,982 2,027 1,972 1,124 502 739 900 1,351 1,127 1,403 1,686 2,825 3,250 1,844 1,117 Grants & Investments 41 110 82 13 173 151 71 120 51 13 27 50 129 272 39 Unallocable 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1/ Includes Natural Calamities and Religious Affairs. 2/ Includes Rural Development, Transport & Communication, Other Economic Services & Unallocable. Source: Government of NWFP, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 14A: Balochistan -- Non-Interest Non-Defense Real Current Expenditure

(In Million of 1999/00 Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final CURRENT EXPENDITURES 10,155 10,276 8,666 8,493 10,200 11,820 10,422 10,859 11,899 9,700 10,243 10,610 13,549 12,649 12,603 General Administration 1,347 3,430 1,238 1,314 1,431 1,919 1,671 1,604 2,096 1,394 1,430 1,498 2,271 2,240 2,467 Law & order 1,330 1,141 1,182 1,145 1,503 1,778 1,524 1,642 1,560 1,377 1,541 1,654 1,716 1,589 1,791 Social services 3,288 2,783 3,098 3,055 3,706 3,998 3,991 3,976 4,268 4,024 4,282 4,415 5,157 5,064 4,934 Education 2,072 1,816 2,043 2,011 2,519 2,771 2,656 2,686 2,987 2,828 3,052 3,262 3,541 3,804 3,431 Primary 1,005 911 1,088 1,025 1,349 1,544 1,507 1,068 1,236 1,076 1,123 1,227 1,198 1,610 1,524 Secondary 423 358 400 429 545 600 558 947 1,057 1,128 1,246 1,276 1,507 1,398 1,159 University & College Education 138 145 347 332 390 179 351 368 349 249 293 329 328 287 277 Professional & Technical Edu & Teachers Training 30 85 68 75 74 238 97 110 109 92 103 111 107 116 128 Others 475 317 140 150 161 210 145 193 235 283 286 318 402 392 342 Health 1,057 826 905 852 985 1,037 1,125 1,073 1,089 1,034 1,049 973 1,214 1,079 1,280 General Hospitals & Clinics 899 712 784 729 826 873 960 887 902 842 842 792 990 875 717 Mother & Child 15 9 12 13 15 18 17 28 27 24 25 12 23 31 13 Other Facilities & Preventive Measures 102 72 72 73 90 98 92 81 85 78 87 66 110 92 101 Other 40 33 37 37 53 48 56 78 75 90 95 103 91 81 450 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 159 141 150 192 202 190 210 217 192 162 180 181 402 182 222 Economic Services 1,621 1,333 1,337 1,354 1,520 1,672 1,582 1,652 1,604 1,548 1,484 1,535 1,572 1,930 1,848 Agriculture 968 820 822 889 954 1,097 1,039 1,108 1,075 1,075 1,043 1,046 1,118 1,129 1,215 Irrigation 395 317 308 270 327 328 300 295 287 270 254 299 261 560 332 Fuel and power 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Industries and mineral resources 165 108 121 117 135 134 128 135 126 101 88 84 89 158 162 Transport and Communication 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Economic Services 94 87 86 79 104 113 116 115 115 102 99 106 104 82 139 Community services 1,751 958 1,226 1,264 1,594 2,270 1,542 1,625 1,641 1,357 1,506 1,508 1,443 1,826 1,563 Works (Administration civil) 644 385 543 538 767 759 749 836 793 747 818 797 821 1,094 1,083 Highways, Roads & Bridges & Building & Struct. 783 287 410 443 454 969 315 331 371 207 179 183 134 179 107 Water Supply and Sanitation 303 270 255 269 352 516 453 431 445 378 484 501 461 524 342 Public Health Engineering 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 0 0 0 0 3 2 3 0 5 2 0 0 0 0 1 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 22 16 19 15 19 24 22 27 27 23 25 26 27 28 29 Subsidies 819 631 584 362 450 185 115 359 729 0 0 0 1,390 0 0 Grants & Investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Unallocable 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1/ For 1988/89 includes Superannuation and Pension amounting to Rs. 1034.6 Mil. 2/ Includes Natural Calamities and Religious Affairs. 3/ Includes Stationary & Printing. 4/ Includes Rural Development. Source: Government of Balochistan, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 15A: National -- Real Development Expenditure

(In Million of 1999/00 Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final DEVELOPMENT EXPENDITURES 151,308 124,069 100,013 104,660 91,639 83,346 71,372 93,270 88,749 46,530 48,169 46,359 48,218 44,565 73,501 General Administration 5,014 4,116 4,248 4,013 3,346 3,422 4,249 2,449 2,532 2,363 1,744 3,540 2,814 2,278 6,409 Law & order 125 700 201 252 176 107 47 55 52 24 33 16 46 25 1,583 Social services 9,927 8,069 10,949 9,801 9,494 7,628 9,042 11,068 11,863 8,426 9,349 8,915 8,949 6,402 8,907 Education 5,067 3,432 6,325 4,560 4,395 3,052 4,045 3,619 3,427 2,300 3,245 2,493 2,430 1,995 5,044 Primary 451 221 1,646 672 206 380 304 342 277 982 1,747 983 963 631 1,887 Secondary 737 465 275 342 404 165 101 255 212 77 71 51 104 253 319 University & College Education 980 688 905 1,020 529 313 350 432 351 320 473 305 450 345 800 Professional & Technical Edu & Teachers Training 434 307 572 456 551 675 266 401 251 92 113 315 322 309 677 Others 2,465 1,751 2,926 2,069 2,706 1,519 3,023 2,189 2,336 828 842 839 591 458 1,362 Health 2,473 2,274 2,062 1,863 2,191 1,755 2,671 4,182 4,242 3,525 3,078 3,245 3,076 2,715 2,213 General Hospitals & Clinics 1,869 1,627 1,138 998 1,353 790 1,561 1,292 921 896 1,019 825 861 809 350 Mother & Child 16 15 13 14 15 4 11 0 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 473 470 383 167 434 453 393 1,898 2,327 1,834 1,278 1,920 1,876 1,712 1,632 Other 115 161 528 684 388 508 707 992 994 796 782 500 339 195 231 Population 744 766 796 770 791 1,110 1,260 1,341 1,489 1,223 1,335 1,517 2,068 1,617 1,154 Other Social Services 1,643 1,597 1,766 2,608 2,117 1,712 1,066 1,927 2,705 1,377 1,690 1,659 1,375 74 496 Economic Services 21,487 22,929 29,185 26,720 33,116 24,256 17,626 21,401 21,725 9,419 10,066 11,120 10,335 13,108 15,019 Agriculture 4,777 3,460 4,899 2,447 4,931 3,639 3,205 2,929 2,638 1,451 1,382 1,194 835 806 1,084 Irrigation 7,607 5,741 7,091 8,251 9,164 6,411 4,534 6,794 7,687 4,110 4,553 3,767 2,874 2,225 4,114 Fuel and power 324 286 308 342 190 454 540 724 460 137 368 279 151 146 106 Industries and mineral resources 403 411 509 279 251 196 296 286 116 1,359 38 78 54 67 99 Transport and Communication 3,331 2,880 1,661 1,742 1,468 1,476 1,391 1,052 946 673 604 1,071 965 1,673 1,611 Other Economic Services 5,045 10,150 14,717 13,659 17,112 12,081 7,660 9,615 9,877 1,690 3,121 4,729 5,456 8,191 8,005 Community services 37,506 28,664 28,780 27,303 25,647 27,303 24,957 32,005 30,533 17,676 19,039 16,644 16,274 15,376 15,631 Works (Administration civil) 0 0 1 6 9 9 8 333 4 0 0 0 0 0 422 Highways, Roads & Bridges & Building & Struct. 28,024 21,393 22,154 21,002 17,393 14,317 12,014 16,575 14,332 6,832 7,864 7,529 6,022 6,317 7,164 Water Supply and Sanitation 2,003 2,019 2,101 2,123 2,583 3,178 2,984 2,748 3,033 1,628 1,419 1,506 1,442 971 991 Public Health Engineering 3,598 2,847 2,161 2,268 2,244 2,099 1,654 2,587 3,561 2,710 3,186 1,972 2,255 1,275 2,072 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 1,688 815 813 633 842 1,039 1,439 2,030 2,899 1,616 1,473 861 5,473 2,136 807 Scientific Research and Survey 1,787 1,307 997 966 2,043 2,702 5,443 6,752 6,697 4,886 5,093 4,772 0 4,675 4,060 Other Community Services 2,739 1,755 1,798 319 536 3,960 1,415 981 7 4 3 3 1,082 2 116 Subsidies 7,616 6,465 3,191 2,803 2,472 1,496 1,043 7 132 9 15 0 0 0 0 Grants & Investments 72,936 56,039 25,195 22,409 10,613 13,296 10,379 22,211 17,006 4,711 7,923 6,126 9,563 7,859 26,472 Unallocable 74 18 78 10 7 10 5 2 2 255 1 0 223 -483 -520 Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Development expenditures of corporations and autonomous bodies financed from federal loans are not included. Source: Federal and Provincial Tables.

Statistical Annex for Volume I

Table 16A: Federal -- Real Development Expenditure

(In Million of 1999/00 Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final DEVELOPMENT EXPENDITURES 98,680 83,487 54,957 55,618 39,437 40,557 38,094 49,777 49,713 25,644 24,753 24,014 25,791 24,676 50,185 General Administration 4,936 3,710 3,983 3,597 3,148 3,155 4,042 2,256 2,299 2,194 1,627 3,298 2,452 2,117 6,145 Law & order 33 23 39 33 17 4 1 0 0 0 5 0 8 0 1,550 Social services 5,263 4,537 6,557 5,314 3,391 2,872 3,069 4,822 6,084 4,363 4,344 4,639 5,450 4,319 7,155 Education 2,857 1,981 4,273 2,961 1,391 853 977 1,263 1,323 926 942 859 1,053 808 3,979 Primary 36 92 1,535 540 55 13 91 76 118 77 29 88 56 60 1,530 Secondary 126 35 67 155 142 46 52 62 117 56 22 24 65 99 168 University & College Education 920 607 855 982 501 289 319 396 304 301 442 272 424 298 671 Professional & Technical Edu & Teachers Training 161 110 220 241 252 110 56 242 99 60 77 105 184 162 530 Others 1,615 1,138 1,596 1,044 443 396 459 487 685 431 373 369 324 190 1,079 Health 842 837 752 616 707 466 591 2,060 2,455 2,108 1,719 2,079 2,193 2,023 1,717 General Hospitals & Clinics 542 562 382 286 374 150 357 376 39 300 208 152 339 354 111 Mother & Child 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 270 220 230 13 272 283 223 1,670 2,196 1,806 1,244 1,885 1,844 1,646 1,523 Other 30 55 140 317 61 32 11 14 220 2 267 42 10 23 83 Population 744 766 796 770 791 1,110 1,260 1,341 1,489 1,223 1,335 1,517 2,068 1,617 1,154 Other Social Services 820 953 736 966 502 443 241 158 816 106 347 184 136 -130 305 Economic Services 7,517 12,390 14,760 10,212 12,951 10,660 9,836 10,150 10,909 4,379 4,658 4,982 4,782 3,721 4,297 Agriculture 768 635 1,598 90 2,164 1,173 1,175 693 803 488 286 354 105 86 137 Irrigation 2,701 1,579 3,200 2,576 2,929 1,520 1,388 1,934 2,323 1,152 1,242 1,110 686 234 1,674 Fuel and power 250 242 283 266 114 156 27 697 353 64 270 150 91 97 49 Industries and mineral resources 164 106 48 53 22 9 11 49 11 1,286 12 24 12 15 3 Transport and Communication 3,127 2,687 1,536 1,566 1,413 1,293 1,178 850 922 669 597 1,071 965 1,673 1,610 Other Economic Services 506 7,142 8,096 5,661 6,308 6,508 6,058 5,927 6,498 719 2,252 2,273 2,921 1,616 825 Community services 7,811 5,628 5,085 4,867 3,716 6,314 7,496 9,894 10,079 6,661 6,710 5,869 7,019 7,151 5,548 Works (Administration civil) 0 0 0 0 0 0 7 0 0 0 0 0 0 0 0 Highways, Roads & Bridges & Building & Struct. 5,272 3,665 3,491 3,372 793 446 620 1,099 476 145 136 209 431 353 288 Water Supply and Sanitation 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Public Health Engineering 0 0 0 0 0 0 0 0 18 13 8 25 34 8 378 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 740 643 604 539 817 1,027 1,425 2,030 2,882 1,615 1,472 861 5,473 2,114 806 Scientific Research and Survey 1,787 1,307 997 966 2,043 2,702 5,443 6,752 6,697 4,886 5,093 4,772 0 4,675 4,060 Other Community Services 12 13 -6 0 63 2,139 1 13 6 3 2 2 1,081 1 16 Subsidies 7,528 6,443 3,173 2,758 2,391 1,480 967 0 62 0 12 0 0 0 0 Grants & Investments 68,969 53,684 23,178 17,494 7,055 10,246 8,654 18,580 15,377 4,411 7,396 5,225 6,082 7,369 25,489 Unallocable 0 0 0 0 0 1 0 0 0 0 1 0 0 0 0 Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Development expenditures of corporations and autonomous bodies financed from federal loans are not included. Source: Government of Pakistan, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 17A: Provincial Aggregate -- Real Development Expenditure

(In Million of 1999/00 Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Budget Actual Actual Actual June Final DEVELOPMENT EXPENDITURES 52,628 40,582 45,056 49,043 52,201 42,788 33,277 43,493 39,035 20,886 23,416 22,346 22,427 19,889 23,316 General Administration 78 405 265 416 198 267 206 193 233 169 117 242 363 162 264 Law & order 92 677 161 219 160 103 46 55 52 24 28 16 38 25 33 Social services 4,664 3,532 4,392 4,487 6,103 4,756 5,974 6,246 5,779 4,063 5,005 4,276 3,500 2,084 1,752 Education 2,210 1,451 2,052 1,599 3,004 2,198 3,068 2,356 2,103 1,374 2,303 1,634 1,377 1,187 1,065 Primary 415 129 111 133 151 367 213 266 159 905 1,718 895 907 571 357 Secondary 611 430 208 187 262 118 49 193 95 21 49 27 39 153 151 University & College Education 60 81 50 39 28 24 31 36 47 20 31 32 26 48 128 Professional & Technical Edu & Teachers Training 273 198 353 216 299 566 210 159 153 32 36 210 138 147 147 Others 851 613 1,330 1,025 2,263 1,123 2,564 1,702 1,650 397 469 470 267 267 282 Health 1,631 1,436 1,309 1,247 1,484 1,289 2,080 2,121 1,787 1,418 1,359 1,166 883 692 497 General Hospitals & Clinics 1,327 1,065 755 712 979 640 1,204 916 882 595 811 673 522 454 239 Mother & Child 16 15 13 14 15 4 11 0 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 204 250 153 154 163 170 170 228 131 28 33 35 32 66 109 Other 85 106 388 367 327 476 696 978 774 794 515 458 330 172 148 Population 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 823 645 1,030 1,641 1,615 1,269 825 1,768 1,889 1,271 1,343 1,475 1,239 204 190 Economic Services 13,970 10,538 14,425 16,508 20,166 13,597 7,790 11,250 10,816 5,040 5,408 6,138 5,554 9,387 10,721 Agriculture 4,009 2,826 3,301 2,357 2,767 2,466 2,030 2,235 1,835 964 1,096 840 730 720 947 Irrigation 4,905 4,162 3,891 5,675 6,235 4,891 3,147 4,860 5,365 2,958 3,311 2,658 2,188 1,991 2,440 Fuel and power 74 44 25 76 76 297 513 27 108 73 99 129 60 49 57 Industries and mineral resources 239 305 462 226 229 187 285 237 105 72 26 55 41 53 96 Transport and Communication 204 193 125 176 55 183 213 202 24 4 8 0 0 0 1 Other Economic Services 4,539 3,008 6,621 7,998 10,804 5,574 1,602 3,688 3,379 970 869 2,456 2,535 6,575 7,180 Community services 29,695 23,036 23,694 22,435 21,931 20,989 17,461 22,111 20,455 11,014 12,328 10,775 9,255 8,225 10,083 Works (Administration civil) 0 0 1 6 9 9 1 333 4 0 0 0 0 0 422 Highways, Roads & Bridges & Building & Struct. 22,751 17,728 18,663 17,630 16,600 13,871 11,394 15,476 13,857 6,688 7,728 7,320 5,591 5,964 6,876 Water Supply and Sanitation 2,003 2,019 2,101 2,123 2,583 3,178 2,984 2,748 3,033 1,628 1,419 1,506 1,442 971 991 Public Health Engineering 3,598 2,847 2,161 2,268 2,244 2,099 1,654 2,587 3,542 2,697 3,179 1,948 2,220 1,267 1,695 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 948 172 209 93 25 12 14 0 17 2 1 0 0 22 0 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 2,726 1,742 1,804 319 473 1,821 1,414 968 1 1 1 1 1 1 100 Subsidies 88 21 18 45 80 16 76 7 70 9 3 0 0 0 0 Grants & Investments 3,967 2,355 2,017 4,915 3,558 3,051 1,725 3,631 1,629 300 527 901 3,482 490 983 Unallocable 74 18 78 10 7 9 5 2 2 255 0 0 223 -483 -520 Note: Footnotes on Provincial Tables. Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Provincial Tables.

Statistical Annex for Volume I

Table 18A: Punjab -- Real Development Expenditure

(In Million of 1999/00 Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final DEVELOPMENT EXPENDITURES 28,195 18,008 21,993 23,794 22,790 18,350 10,540 16,767 15,652 10,130 13,587 12,929 14,258 10,396 10,558 General Administration 9 22 31 237 71 77 26 29 54 27 15 27 182 5 79 Law & order 0 0 0 0 0 0 0 0 0 0 15 8 2 2 0 Social services 1,968 1,429 1,920 1,121 2,166 1,498 1,436 1,892 2,043 1,352 2,967 2,388 1,952 692 814 Education 758 469 1,010 347 1,080 890 459 429 641 256 1,531 980 402 251 586 Primary 25 19 0 0 45 246 82 184 0 99 1,348 735 312 113 334 Secondary 274 143 130 114 190 31 33 18 2 8 6 6 14 70 31 University & College Education 2 0 1 20 4 20 13 15 10 4 14 15 10 26 86 Professional & Technical Edu & Teachers Training 173 99 247 119 176 450 144 61 53 0 0 139 62 36 1 Others 283 208 631 93 664 143 188 151 576 145 163 85 3 6 133 Health 938 698 658 527 759 416 868 717 681 582 866 664 697 401 166 General Hospitals & Clinics 937 690 623 502 732 397 856 619 639 536 690 593 500 400 161 Mother & Child 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 0 0 0 0 0 0 0 8 7 0 0 0 0 1 3 Other 2 8 35 25 27 19 12 90 34 46 176 72 196 0 3 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 272 261 252 247 327 193 109 747 721 514 570 743 853 40 62 Economic Services 8,032 5,043 7,571 9,996 11,191 6,591 1,833 4,671 4,317 1,970 2,564 3,694 3,993 5,489 4,615 Agriculture 2,060 898 904 1,069 1,107 1,224 539 802 639 444 679 486 450 344 384 Irrigation 2,253 1,897 1,502 2,634 2,529 1,449 643 1,348 1,396 729 1,192 1,308 1,201 970 1,114 Fuel and power 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Industries and mineral resources 74 9 196 15 23 4 0 1 2 33 0 12 0 0 0 Transport and Communication 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Economic Services 3,645 2,239 4,969 6,278 7,531 3,913 650 2,521 2,280 764 693 1,887 2,342 4,175 3,116 Community services 15,990 11,179 11,959 10,059 8,641 8,905 7,004 9,678 9,110 6,472 7,505 5,919 5,388 3,934 4,499 Works (Administration civil) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 422 Highways, Roads & Bridges & Building & Struct. 12,006 8,069 9,240 7,475 5,928 5,934 4,938 6,954 5,567 3,775 4,326 3,971 3,168 2,645 2,328 Water Supply and Sanitation 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Public Health Engineering 3,598 2,847 2,161 2,267 2,244 2,099 1,654 2,587 3,542 2,697 3,179 1,948 2,220 1,267 1,695 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 0 0 0 0 0 0 0 0 0 0 0 0 0 21 0 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 386 262 558 317 469 872 412 137 0 0 0 0 0 1 55 Subsidies 88 20 18 45 80 16 76 7 70 2 3 0 0 0 0 Grants & Investments 2,035 299 449 2,318 634 1,262 161 488 52 250 518 893 2,741 273 552 Unallocable 72 16 46 17 7 1 4 1 7 57 0 0 0 0 0 Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Government of Punjab, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 19A: Sindh -- Real Development Expenditure

(In Million of 1999/00 Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final DEVELOPMENT EXPENDITURES 12,283 11,575 9,480 11,349 11,346 9,770 8,968 12,463 10,226 4,177 4,861 3,690 3,677 2,297 4,795 General Administration 10 277 17 21 23 18 17 33 24 15 13 40 83 29 18 Law & order 0 532 4 65 53 12 0 0 2 0 0 0 0 0 0 Social services 706 343 424 575 519 404 540 606 646 331 459 444 256 273 476 Education 491 167 234 236 223 161 135 201 139 52 70 79 178 144 295 Primary 139 61 100 122 95 90 67 68 21 21 11 4 100 5 8 Secondary 126 35 33 22 27 23 10 27 31 1 29 18 11 44 95 University & College Education 30 26 20 8 24 0 6 10 15 4 7 3 2 16 36 Professional & Technical Edu & Teachers Training 66 38 66 50 61 26 25 75 47 13 12 48 57 79 145 Others 131 8 15 34 15 21 26 20 25 13 11 5 8 0 10 Health 177 145 164 282 266 208 380 381 232 67 142 81 75 111 172 General Hospitals & Clinics 63 49 71 140 156 113 251 144 140 25 71 0 2 25 64 Mother & Child 16 15 13 14 15 4 11 0 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 73 73 75 70 91 84 90 137 51 27 25 21 30 63 95 Other 25 8 4 58 4 7 29 100 42 15 46 60 42 23 12 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 37 30 27 57 29 35 25 24 275 212 246 284 3 18 10 Economic Services 2,811 2,343 2,200 2,272 2,047 1,905 1,842 2,672 2,630 1,149 1,389 814 694 456 815 Agriculture 745 513 492 441 512 453 266 261 274 213 147 111 80 51 244 Irrigation 1,742 1,425 1,277 1,540 1,403 1,232 1,241 1,987 2,295 920 1,229 680 509 387 540 Fuel and power 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Industries and mineral resources 120 211 124 109 77 37 121 221 37 12 5 23 19 18 29 Transport and Communication 204 193 125 176 55 183 213 202 24 4 8 0 0 0 1 Other Economic Services 0 1 181 6 0 1 0 0 0 0 0 0 85 0 1 Community services 7,996 6,508 6,121 6,808 7,081 5,896 5,040 6,263 5,641 2,424 2,991 2,385 1,668 1,804 3,575 Works (Administration civil) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Highways, Roads & Bridges & Building & Struct. 5,946 5,300 5,085 5,829 6,084 4,789 4,018 5,044 4,587 1,830 2,461 1,854 1,249 1,625 2,987 Water Supply and Sanitation 1,102 1,037 827 887 970 1,095 1,012 1,202 1,037 593 529 530 419 178 588 Public Health Engineering 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 948 172 209 93 25 12 11 0 17 2 1 0 0 1 0 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 2,332 1,471 1,243 1 2 1 1 17 0 0 0 0 0 0 0 Subsidies 0 0 0 0 0 0 0 0 0 7 0 0 0 0 0 Grants & Investments 758 1,572 678 1,608 1,623 1,535 1,530 2,951 1,287 51 10 8 741 217 431 Unallocable 1 2 31 -8 0 1 1 0 -5 189 0 0 223 -483 -520 Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Government of Sindh, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 20A: NWFP -- Real Development Expenditure

(In Million of 1999/00 Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final DEVELOPMENT EXPENDITURES 8,340 5,767 8,179 8,604 10,720 8,967 6,719 7,284 7,033 3,604 2,920 3,662 3,046 3,267 4,549 General Administration 13 43 206 128 57 171 164 132 146 113 73 174 96 115 146 Law & order 19 18 20 18 0 2 0 1 9 5 3 0 24 1 0 Social services 803 388 923 1,815 1,675 1,896 1,263 1,152 937 1,264 907 705 909 672 150 Education 519 248 255 467 530 764 658 424 316 864 452 265 567 545 78 Primary 16 17 11 11 11 31 64 14 137 785 359 155 495 453 14 Secondary 47 69 45 50 45 65 6 148 62 11 15 3 13 39 25 University & College Education 0 3 29 11 0 4 13 11 23 12 10 14 14 6 6 Professional & Technical Edu & Teachers Training 34 53 40 47 62 90 41 22 53 19 24 23 18 32 1 Others 423 107 131 349 412 575 534 228 41 36 43 69 27 15 33 Health 231 192 159 202 229 366 271 328 186 77 98 164 91 46 37 General Hospitals & Clinics 148 94 62 70 91 129 97 153 103 34 50 81 19 30 14 Mother & Child 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 79 74 77 84 72 86 80 82 73 1 8 14 2 2 11 Other 5 25 19 48 67 151 94 93 9 42 40 69 70 14 12 Population 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 53 -52 509 1,146 916 767 335 401 435 323 357 277 251 81 34 Economic Services 1,545 1,230 2,466 1,983 3,755 2,332 2,170 1,700 1,959 746 663 1,122 594 1,367 3,588 Agriculture 510 620 1,124 508 685 501 478 363 407 172 112 116 116 182 137 Irrigation 374 254 372 642 697 508 513 501 611 342 345 350 313 165 248 Fuel and power 74 44 25 76 76 297 513 27 108 73 99 129 60 49 57 Industries and mineral resources 7 6 112 78 81 77 92 9 66 24 19 17 15 28 63 Transport and Communication 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Economic Services 580 306 833 680 2,216 948 575 799 767 135 87 509 90 944 3,083 Community services 4,787 3,603 3,674 3,672 3,931 4,312 3,088 4,107 3,693 1,466 1,274 1,662 1,423 1,112 665 Works (Administration civil) 0 0 1 6 9 9 1 2 4 0 0 0 0 0 0 Highways, Roads & Bridges & Building & Struct. 4,104 3,170 3,141 3,090 3,200 3,147 2,439 3,477 2,619 653 578 976 673 625 409 Water Supply and Sanitation 683 432 531 576 721 1,156 648 628 1,070 813 696 686 750 488 211 Public Health Engineering 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 1 1 1 0 2 0 0 0 0 0 0 0 0 0 45 Subsidies 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 Grants & Investments 1,173 484 890 988 1,301 254 34 192 289 0 0 0 0 0 0 Unallocable 0 0 0 0 0 0 0 0 0 9 0 0 0 0 0 Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Government of NWFP, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 21A: Balochistan -- Real Development Expenditure

(In Million of 1999/00 Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final DEVELOPMENT EXPENDITURES 3,810 5,232 5,404 5,296 7,346 5,701 7,050 6,979 6,124 2,976 2,048 2,065 1,445 3,929 3,413 General Administration 45 63 12 31 47 0 0 0 9 14 15 1 2 13 21 Law & order 73 127 137 136 107 89 46 53 41 19 9 7 12 22 33 Social services 1,187 1,372 1,125 975 1,743 958 2,734 2,595 2,154 1,115 673 739 383 446 311 Education 441 567 553 549 1,171 384 1,816 1,303 1,008 203 251 310 230 246 106 Primary 235 32 0 0 0 0 0 0 0 0 0 0 0 0 0 Secondary 165 183 0 0 0 0 0 0 0 0 0 0 0 0 0 University & College Education 28 53 0 0 0 0 0 0 0 0 0 0 0 0 0 Professional & Technical Edu & Teachers Training 0 9 0 0 0 0 0 0 0 0 0 0 0 0 0 Others 14 290 553 549 1,171 384 1,816 1,303 1,008 203 251 310 230 246 106 Health 285 401 329 236 230 299 562 695 688 691 252 257 21 135 122 General Hospitals & Clinics 179 232 0 0 0 0 0 0 0 0 0 0 0 0 0 Mother & Child 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 51 103 0 0 0 0 0 0 0 0 0 0 0 0 0 Other 54 65 329 236 230 299 562 695 688 691 252 257 21 135 122 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 461 405 243 190 342 275 356 596 458 221 170 172 132 65 83 Economic Services 1,583 1,923 2,189 2,256 3,172 2,769 1,945 2,207 1,910 1,175 793 509 273 2,073 1,704 Agriculture 695 795 781 340 462 287 748 809 516 134 158 126 83 142 182 Irrigation 536 587 740 859 1,606 1,702 749 1,024 1,062 966 545 319 165 469 538 Fuel and power 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Industries and mineral resources 38 79 30 23 47 68 72 6 0 3 1 3 7 7 4 Transport and Communication 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Economic Services 313 462 637 1,035 1,057 712 377 368 332 72 89 60 18 1,456 980 Community services 921 1,747 1,939 1,897 2,277 1,876 2,329 2,063 2,011 653 558 809 776 1,375 1,345 Works (Administration civil) 0 0 0 0 0 0 0 331 0 0 0 0 0 0 0 Highways, Roads & Bridges & Building & Struct. 696 1,189 1,197 1,237 1,387 0 0 0 1,083 430 363 519 501 1,070 1,152 Water Supply and Sanitation 218 551 743 660 891 927 1,324 918 927 223 195 290 274 305 192 Public Health Engineering 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 0 0 0 0 0 0 3 0 0 0 0 0 0 0 0 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 7 7 1 0 0 948 1,002 815 1 1 0 0 0 0 0 Subsidies 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Grants & Investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Unallocable 1 0 1 1 1 7 1 0 0 0 0 0 0 0 0 Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Government of Balochistan, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 1: National: Total Non-Interest Non-Defense Expenditure

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 Actual Actual Actual Actual Actual Actual Actual Actual Actual TOTAL EXPENDITURE 117,692 123,741 112,352 139,645 145,790 156,234 163,654 215,772 240,855 General Administration 11,106 14,691 13,421 15,175 19,406 22,176 24,781 35,464 49,265 Law & order 6,712 7,458 8,010 9,949 12,995 13,729 15,616 19,785 20,749 Social services 22,709 24,204 26,544 32,134 37,965 41,365 45,922 56,928 62,924 Education 14,521 15,444 17,321 20,974 25,112 27,266 31,580 38,196 42,194 Primary 5,371 6,193 7,188 8,853 11,009 11,864 13,772 16,580 18,774 Secondary 3,310 3,564 3,681 4,860 5,585 6,179 7,434 9,203 10,976 University & College Education 2,409 2,459 2,636 3,093 3,107 3,756 4,078 4,463 5,179 Professional & Technical Edu & Teachers Training 1,270 1,246 1,438 1,781 2,062 2,503 2,348 2,436 2,437 Others 2,160 1,982 2,379 2,388 3,350 2,965 3,948 5,512 4,829 Health 4,434 4,701 5,084 6,019 7,299 7,780 9,326 12,081 13,384 General Hospitals & Clinics 3,590 3,799 3,992 4,834 5,885 6,200 7,447 8,563 9,226 Mother & Child 26 27 31 34 36 35 41 48 68 Other Facilities & Preventive Measures 319 349 341 280 467 518 493 1,666 2,136 Other 500 525 720 871 911 1,027 1,345 1,804 1,953 Population 218 290 322 353 396 604 774 943 1,129 Other Social Services 3,537 3,768 3,817 4,787 5,158 5,715 4,241 5,708 6,217 Economic Services 14,517 17,471 20,623 25,791 29,665 26,857 24,389 31,610 36,012 Agriculture 4,019 4,121 4,890 4,603 6,596 6,464 6,995 7,791 8,294 Irrigation 5,184 5,248 5,930 7,046 8,282 7,545 6,647 9,706 11,844 Fuel and power 145 285 309 3,841 1,704 787 594 1,404 1,716 Industries and mineral resources 1,024 960 831 899 981 1,009 1,130 1,376 1,339 Transport and Communication 2,032 2,423 2,138 2,305 2,517 3,435 3,076 3,365 4,314 Other Economic Services 2,113 4,434 6,525 7,097 9,584 7,617 5,948 7,968 8,506 Community services 15,537 15,503 17,060 17,860 19,334 23,199 23,828 32,861 34,030 Works (Administration civil) 970 1,033 1,194 1,406 1,885 2,137 2,590 3,255 3,376 Highways, Roads & Bridges & Building & Struct. 10,032 9,974 11,150 11,682 11,161 11,153 10,400 15,252 14,252 Water Supply and Sanitation 831 1,063 1,152 1,347 1,811 2,414 2,616 2,710 3,189 Public Health Engineering 1,114 1,142 934 1,139 1,230 1,377 1,286 2,182 3,164 Broadcasting 296 275 285 337 433 400 422 547 568 Urban Town Planning & Regulator Services 742 567 533 503 616 943 1,180 1,788 2,519 Scientific Research and Survey 1,187 1,165 1,514 1,255 1,861 2,475 4,350 6,272 6,566 Other Community Services 1,040 837 796 197 337 2,301 985 854 396 Subsidies 10,158 14,668 10,321 11,287 10,114 8,079 5,905 5,735 10,568 Grants & Investments 36,958 31,397 15,712 23,656 11,905 17,064 13,601 28,312 19,630 Unallocable 2,082 957 3,026 3,793 4,409 3,764 9,618 5,036 7,677 Note: Footnotes on Federal and Provincial Tables. Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Development expenditures of corporations and autonomous bodies financed from federal loans are not included. Source: Federal and Provincial Tables. 1996/97 Actual 218,311 46,851 20,821 62,228 42,604 19,736 11,257 5,319 2,588 3,705 13,435 9,488 51 2,064 1,833 1,073 5,115 28,143 7,454 9,678 2,643 2,211 3,581 2,576 25,471 3,320 9,187 2,158 2,808 555 1,479 5,639 326 13,310 14,542 6,944 1997/98 Actual 232,359 38,622 23,200 70,164 49,084 23,825 12,396 5,930 2,697 4,236 14,731 10,917 61 1,756 1,997 1,260 5,089 28,119 7,977 9,597 699 1,223 4,357 4,266 30,483 3,824 11,411 2,485 3,606 589 1,820 6,440 308 9,094 24,035 8,642 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual June Final 245,007 313,702 327,245 400,785 45,367 46,584 58,851 69,274 24,352 27,624 30,437 34,540 72,267 79,508 80,342 92,021 49,407 54,002 57,052 66,022 23,656 26,271 26,909 30,314 12,964 14,669 16,353 17,722 5,759 6,517 6,306 7,980 2,929 2,670 2,967 3,775 4,099 3,875 4,517 6,230 15,547 17,925 17,681 19,118 11,236 13,019 12,700 14,047 47 60 76 58 2,388 2,520 2,455 2,673 1,875 2,326 2,450 2,340 1,507 2,100 1,744 1,308 5,806 5,481 3,866 5,574 29,546 32,023 38,932 43,562 8,379 8,520 9,016 10,411 8,834 8,186 7,973 10,378 715 777 1,057 2,011 1,212 1,928 2,066 2,477 4,307 4,757 5,879 3,270 6,099 7,856 12,941 15,014 29,071 30,161 30,624 32,933 3,734 4,484 4,800 5,461 11,505 10,352 10,933 12,763 2,765 2,763 2,424 2,306 2,531 2,813 1,839 2,906 565 762 918 1,120 1,454 6,031 2,726 1,368 6,263 1,806 6,784 6,809 254 1,150 199 201 15,249 28,912 29,131 28,623 22,724 61,048 58,542 99,492 6,431 7,843 384 340

Statistical Annex for Volume I

Table 2: Federal: Total Non-Interest Non-Defense Expenditure

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final TOTAL EXPENDITURE 65,534 72,125 55,644 70,420 63,124 68,776 74,697 94,813 100,288 89,849 101,349 102,467 138,998 140,703 201,766 General Administration 6,529 8,679 8,137 9,248 11,762 12,727 15,269 18,381 20,131 21,444 20,394 21,713 21,861 26,917 35,032 Law & order 2,468 2,875 3,400 3,548 4,629 4,682 5,191 7,102 7,236 7,218 8,033 8,148 9,074 10,058 12,406 Defense 47,015 51,053 58,708 62,596 75,907 87,461 93,973 113,281 119,303 132,397 136,164 143,471 150,757 157,900 169,028 Social services 6,425 7,250 7,726 8,108 8,527 9,182 9,459 12,196 13,717 12,695 13,218 14,123 15,936 14,504 20,985 Education 2,750 3,064 3,904 3,733 3,677 3,994 4,286 5,081 5,506 5,614 6,164 5,961 6,882 6,706 11,468 Primary 196 442 846 531 396 402 477 635 546 732 730 879 964 1,064 2,731 Secondary 328 323 363 473 570 550 615 741 899 890 908 922 1,090 1,182 1,434 University & College Education 1,074 1,156 1,243 1,388 1,404 1,589 1,631 1,810 1,846 2,045 2,345 2,104 2,453 2,191 3,398 Professional & Technical Edu & Teachers Training 408 396 483 524 632 714 728 865 804 860 945 960 1,193 1,153 1,679 Others 745 747 969 816 674 738 836 1,031 1,412 1,087 1,237 1,097 1,182 1,117 2,226 Health 880 1,006 1,021 1,017 1,224 1,245 1,640 2,849 3,435 3,446 3,407 3,770 4,196 4,194 4,393 General Hospitals & Clinics 655 755 708 697 865 846 1,258 1,375 1,293 1,574 1,658 1,554 1,937 1,992 2,033 Mother & Child 1 1 1 1 1 1 1 1 1 1 1 1 2 1 2 Other Facilities & Preventive Measures 127 133 149 57 190 224 203 1,258 1,741 1,627 1,274 1,943 1,952 1,850 1,924 Other 97 118 163 262 168 174 177 215 400 244 473 272 305 350 434 Population 218 290 322 353 396 604 774 943 1,129 1,073 1,260 1,507 2,100 1,744 1,308 Other Social Services 1/ 2,577 2,890 2,479 3,005 3,230 3,339 2,759 3,323 3,646 2,561 2,387 2,885 2,758 1,861 3,816 Economic Services 4,189 7,049 8,298 10,622 10,755 10,055 9,755 11,351 13,465 8,318 9,808 9,811 10,299 9,873 8,572 Agriculture 475 556 957 403 1,483 1,168 1,365 1,076 1,269 1,079 956 1,056 958 923 1,139 Irrigation 819 629 1,319 1,190 1,472 865 889 1,410 1,821 1,057 1,219 1,142 755 306 1,917 Fuel and power 116 259 285 3,790 1,649 610 261 734 378 168 370 288 189 265 174 Industries and mineral resources 616 523 364 413 457 462 512 715 725 1,635 677 641 565 620 812 Transport and Communication 1,968 2,346 2,080 2,194 2,482 3,329 2,937 3,178 4,282 3,568 4,333 4,284 4,735 5,848 3,218 Other Economic Services 2/ 195 2,737 3,294 2,631 3,211 3,621 3,791 4,239 4,990 811 2,253 2,399 3,096 1,909 1,313 Community services 4,341 4,356 4,569 4,649 4,701 6,947 8,367 11,799 12,551 10,391 12,034 11,401 13,624 14,056 13,638 Works (Administration civil) 457 536 606 735 947 1,123 1,460 1,621 1,856 1,783 2,059 1,923 2,517 2,451 2,491 Highways, Roads & Bridges & Building & Struct. 1,727 1,760 1,689 1,828 786 740 903 1,422 868 790 905 941 1,259 1,004 1,274 Water Supply and Sanitation 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Public Health Engineering 16 19 25 29 36 29 31 94 96 99 96 130 166 140 559 Broadcasting 296 275 285 337 433 400 422 547 568 555 589 565 762 918 1,120 Urban Town Planning & Regulator Services 461 498 446 459 599 930 1,156 1,758 2,490 1,473 1,816 1,451 6,027 2,699 1,360 Scientific Research and Survey 1,187 1,165 1,514 1,255 1,861 2,475 4,350 6,272 6,566 5,636 6,437 6,260 1,802 6,781 6,805 Other Community Services 3/ 198 104 3 11 39 1,250 45 85 108 56 132 130 1,091 64 28 Subsidies 6,516 13,583 8,363 9,447 8,620 6,712 4,775 3,736 7,766 9,225 6,279 9,533 20,372 20,222 23,381 Grants & Investments 35,648 30,193 14,726 21,123 9,753 14,783 12,312 25,284 18,171 14,164 22,976 21,410 40,302 44,730 87,452 Unallocable 1,504 744 2,791 3,675 4,378 3,687 9,568 4,964 7,251 6,394 8,607 6,328 7,531 343 298 1/ Includes Natural Calamities and Religious Affairs. 2/ Includes Land Reclamation, Rural Development, Transport & Communication, and Other Economic Services. 3/ Includes Works Urban and Rural, and Scientific Research. Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Development expenditures of corporations and autonomous bodies financed from federal loans are not included. Source: Government of Pakistan, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 3: All Provinces Total Non-Interest Non-Defense Expenditure

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 Actual Actual Actual Actual Actual Actual Actual Actual Actual TOTAL EXPENDITURE 52,158 51,616 56,708 69,225 82,666 87,458 88,958 120,959 140,567 General Administration 4,577 6,012 5,284 5,927 7,644 9,449 9,513 17,083 29,134 Law & order 4,245 4,583 4,610 6,401 8,366 9,047 10,425 12,683 13,512 Social services 16,285 16,954 18,819 24,026 29,438 32,183 36,462 44,732 49,207 Education 11,771 12,381 13,417 17,241 21,435 23,272 27,294 33,115 36,688 Primary 5,176 5,751 6,342 8,321 10,613 11,462 13,295 15,946 18,229 Secondary 2,982 3,241 3,318 4,387 5,015 5,628 6,820 8,462 10,077 University & College Education 1,335 1,302 1,393 1,704 1,702 2,167 2,447 2,654 3,334 Professional & Technical Edu & Teachers Training 862 851 955 1,257 1,431 1,789 1,620 1,572 1,633 Others 1,416 1,236 1,410 1,572 2,675 2,226 3,112 4,481 3,417 Health 3,554 3,695 4,063 5,002 6,075 6,535 7,686 9,232 9,949 General Hospitals & Clinics 2,934 3,045 3,283 4,137 5,020 5,355 6,189 7,188 7,933 Mother & Child 25 27 30 33 35 34 40 46 67 Other Facilities & Preventive Measures 192 217 192 223 277 294 290 408 396 Other 403 407 557 608 743 853 1,168 1,590 1,553 Population 0 0 0 0 0 0 0 0 0 Other Social Services 1/ 959 878 1,338 1,782 1,928 2,376 1,482 2,385 2,570 Economic Services 10,328 10,422 12,325 15,169 18,910 16,802 14,634 20,259 22,547 Agriculture 3,544 3,565 3,933 4,200 5,113 5,296 5,630 6,715 7,026 Irrigation 4,365 4,618 4,611 5,856 6,810 6,680 5,758 8,296 10,023 Fuel and power 29 26 24 51 55 176 333 670 1,338 Industries and mineral resources 408 437 468 486 524 547 618 661 613 Transport and Communication 64 77 58 111 35 106 138 187 32 Other Economic Services 2/ 1,918 1,698 3,232 4,466 6,373 3,996 2,157 3,729 3,516 Community services 11,196 11,147 12,492 13,211 14,633 16,252 15,461 21,062 21,479 Works (Administration civil) 513 497 589 671 938 1,014 1,131 1,634 1,520 Highways, Roads & Bridges & Building & Struct. 8,306 8,214 9,461 9,855 10,375 10,413 9,497 13,830 13,384 Water Supply and Sanitation 831 1,063 1,152 1,347 1,811 2,414 2,616 2,710 3,189 Public Health Engineering 1,099 1,123 909 1,109 1,194 1,348 1,255 2,088 3,068 Broadcasting 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 282 70 87 44 17 13 24 30 29 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 Other Community Services 3/ 842 733 792 186 298 1,050 940 770 288 Subsidies 3,643 1,085 1,959 1,840 1,494 1,367 1,130 1,999 2,801 Grants & Investments 1,310 1,204 985 2,533 2,152 2,281 1,289 3,028 1,459 Unallocable 577 212 236 118 31 77 50 72 426 Note: Footnotes on Provincial Tables. Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Provincial Tables. 1996/97 Actual 128,461 25,407 13,603 49,533 36,990 19,004 10,367 3,274 1,728 2,618 9,989 7,914 50 436 1,589 0 2,554 19,825 6,375 8,621 2,475 576 13 1,766 15,080 1,537 8,397 2,158 2,709 0 6 3 270 4,085 378 550 1997/98 Actual 131,010 18,228 15,167 56,946 42,920 23,095 11,488 3,585 1,753 2,999 11,324 9,258 60 482 1,523 0 2,702 18,311 7,021 8,378 329 546 24 2,013 18,449 1,765 10,506 2,485 3,510 0 4 3 176 2,815 1,059 35 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual June Final 142,539 174,704 186,542 199,019 23,654 24,724 31,934 34,242 16,204 18,550 20,379 22,134 58,144 63,572 65,838 71,036 43,446 47,119 50,347 54,553 22,776 25,306 25,846 27,584 12,042 13,579 15,172 16,288 3,655 4,065 4,115 4,582 1,969 1,477 1,814 2,095 3,003 2,693 3,400 4,004 11,777 13,729 13,487 14,725 9,682 11,082 10,707 12,014 46 58 75 56 446 568 605 749 1,603 2,021 2,100 1,906 0 0 0 0 2,921 2,723 2,005 1,758 19,735 21,724 29,060 34,989 7,323 7,562 8,093 9,272 7,691 7,430 7,666 8,462 427 588 792 1,837 571 1,363 1,446 1,666 23 21 31 51 3,700 4,761 11,032 13,701 17,670 16,537 16,569 19,295 1,811 1,967 2,349 2,969 10,564 9,093 9,929 11,489 2,765 2,763 2,424 2,306 2,401 2,647 1,700 2,346 0 0 0 0 3 4 28 8 3 4 4 4 123 59 135 173 5,716 8,539 8,909 5,241 1,314 20,746 13,812 12,040 103 313 41 42

Statistical Annex for Volume I

Table 4: Punjab: Total Non-Interest Non-Defense Expenditure

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final TOTAL EXPENDITURE 28,179 25,122 28,433 35,688 39,314 42,073 40,266 55,620 67,144 63,662 68,123 74,252 90,596 90,293 92,294 General Administration 2,275 2,680 2,606 2,947 3,735 4,667 4,724 8,142 14,667 11,877 9,544 12,759 14,175 15,671 14,130 Law & order 2,239 2,183 2,169 3,342 3,709 4,225 4,646 5,491 5,965 6,328 7,041 7,540 8,766 9,680 10,347 Social services 8,550 8,941 9,795 12,935 14,753 16,172 18,183 22,539 24,913 25,365 29,941 30,075 32,009 32,610 35,752 Education 6,140 6,546 7,101 9,579 11,049 12,093 13,963 17,049 19,144 19,281 22,921 22,663 23,451 24,941 27,330 Primary 2,865 3,220 3,507 4,789 5,932 6,146 7,283 9,140 10,433 10,331 13,389 12,907 13,930 14,172 15,525 Secondary 1,574 1,691 1,719 2,460 2,682 2,917 3,494 4,207 4,807 4,911 5,255 5,331 5,822 6,599 6,939 University & College Education 768 731 718 947 763 1,225 1,322 1,462 1,748 1,801 1,948 1,989 2,240 2,275 2,504 Professional & Technical Edu & Teachers Training 531 524 591 825 848 1,138 1,016 792 875 935 914 1,072 427 624 663 Others 403 380 566 558 823 667 847 1,446 1,281 1,303 1,414 1,364 1,031 1,271 1,699 Health 1,848 1,902 2,033 2,538 2,884 3,157 3,608 4,391 4,636 4,666 5,634 5,789 7,142 6,768 7,498 General Hospitals & Clinics 1,535 1,598 1,694 2,187 2,451 2,709 3,048 3,661 3,952 4,020 4,736 4,954 5,660 5,995 6,474 Mother & Child 11 12 17 17 14 16 17 20 38 20 27 23 24 30 30 Other Facilities & Preventive Measures 10 10 10 11 11 11 13 17 32 17 26 20 21 28 51 Other 292 282 312 324 409 420 530 692 615 609 844 792 1,437 715 943 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 1/ 561 494 661 817 820 923 611 1,100 1,133 1,418 1,387 1,623 1,416 901 924 Economic Services 5,953 5,454 6,509 8,701 10,035 8,519 6,010 9,123 10,579 9,547 9,371 10,654 11,861 14,158 14,519 Agriculture 1,962 1,749 1,785 2,218 2,399 2,766 2,600 3,276 3,409 3,369 3,910 4,237 4,040 4,206 4,639 Irrigation 2,484 2,511 2,352 3,163 3,326 3,108 2,520 3,541 4,849 4,878 4,074 3,983 4,053 4,019 4,366 Fuel and power Industries and mineral resources 189 176 199 197 192 194 195 238 226 265 208 242 1,003 1,033 1,148 Transport and Communication 0 0 2 25 0 0 0 0 0 0 0 5 5 11 31 Other Economic Services 2/ 1,318 1,019 2,171 3,098 4,117 2,451 695 2,068 2,096 1,035 1,178 2,188 2,759 4,889 4,335 Community services 5,657 5,309 6,218 5,832 5,717 6,988 6,390 9,319 9,677 8,375 10,228 9,082 8,480 7,377 8,676 Works (Administration civil) 49 49 52 54 63 69 80 109 103 109 143 136 124 135 717 Highways, Roads & Bridges & Building & Struct. 4,357 3,970 4,976 4,499 4,185 5,054 4,747 6,968 6,246 5,315 6,432 6,452 5,684 5,417 5,523 Water Supply and Sanitation 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Public Health Engineering 1,099 1,123 909 1,107 1,192 1,348 1,255 2,088 3,068 2,709 3,510 2,401 2,647 1,700 2,346 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 0 0 0 0 0 0 0 0 0 0 0 0 0 23 0 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 3 3 3 4 4 4 Other Community Services 152 167 281 171 277 517 309 154 259 240 139 90 21 99 86 Subsidies 2,306 24 659 582 908 541 46 505 1,153 1,502 1,133 2,942 3,500 4,000 2,505 Grants & Investments 659 345 266 1,274 449 931 236 499 184 302 866 1,199 11,802 6,796 6,365 Unallocable 540 186 212 76 7 30 31 1 5 366 0 0 4 0 0 1/ Includes Natural Calamities and Religious Affairs. 2/ Includes Land Reclamation, Rural Development, Transport & Communication, Other Economic Services & Unallocable. 3/ Includes Works Urban and Rural, and Scientific Research. Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Government of Punjab, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 5: Sindh: Total Non-Interest Non-Defense Expenditure

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final TOTAL EXPENDITURES 13,970 14,888 15,810 19,844 25,038 26,586 30,395 40,265 45,198 42,491 42,777 42,998 54,732 62,589 70,705 TOTAL EXPENDITURE 11,584 12,352 12,829 16,244 20,526 21,222 23,223 33,900 38,189 34,283 32,095 32,875 43,137 52,148 60,102 General Administration 1,189 1,235 1,302 1,465 2,036 2,345 2,339 5,865 10,160 9,981 4,883 6,578 5,269 10,463 13,545 Law & order 1,017 1,306 1,254 1,657 2,676 2,563 3,510 4,378 4,635 4,433 4,851 4,987 5,717 6,552 7,132 Social services 3,424 3,616 4,109 5,137 6,989 7,621 8,212 10,596 11,548 11,584 13,553 13,664 15,072 16,257 18,448 Education 2,599 2,774 3,020 3,787 5,128 5,490 6,264 8,246 8,794 8,873 10,317 10,400 11,602 12,332 14,443 Primary 1,188 1,319 1,440 1,857 2,453 2,758 3,353 3,984 4,408 4,581 5,503 5,531 6,149 5,781 6,464 Secondary 661 780 824 1,017 1,154 1,373 1,615 1,859 2,430 2,440 2,727 3,005 3,311 3,845 4,505 University & College Education 357 348 370 416 511 596 636 610 917 905 978 946 1,030 1,067 1,239 Professional & Technical Edu & Teachers Training 186 163 200 245 355 296 317 437 452 436 430 463 559 648 874 Others 207 164 186 252 655 467 342 1,356 587 511 679 455 552 991 1,361 Health 692 718 858 1,158 1,590 1,449 1,719 2,010 2,242 2,246 2,678 2,676 3,069 3,269 3,654 General Hospitals & Clinics 561 576 708 952 1,338 1,213 1,477 1,591 1,819 1,848 2,237 2,183 2,494 2,665 2,990 Mother & Child 5 6 5 6 8 2 6 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 98 109 117 135 178 175 162 267 235 289 301 278 353 395 500 Other 28 28 28 65 67 58 74 152 188 110 140 215 222 209 164 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 1/ 133 123 231 192 271 683 229 341 512 464 558 588 401 655 351 Economic Services 2,233 2,427 2,499 2,847 3,408 3,244 3,741 5,062 4,893 3,661 4,331 3,952 4,420 5,757 8,334 Agriculture 596 605 649 725 1,098 888 963 1,081 1,273 1,076 1,091 1,028 1,309 1,463 2,016 Irrigation 1,166 1,293 1,274 1,428 1,621 1,602 1,697 2,831 2,986 2,027 2,538 1,956 1,911 1,729 2,155 Fuel and power 2 2 3 4 5 5 8 10 10 10 11 11 13 14 16 Industries and mineral resources 117 147 120 140 140 118 175 243 153 137 154 148 170 145 192 Transport and Communication 63 76 54 84 33 104 136 185 29 10 21 15 13 16 16 Other Economic Services 2/ 289 303 399 466 511 526 761 712 442 401 516 794 1,004 2,390 3,938 Community services 2,864 3,047 3,034 3,709 4,314 3,949 3,952 5,314 5,267 3,002 4,143 3,502 3,136 3,390 5,462 Works (Administration civil) 147 166 170 200 264 288 322 391 469 447 483 516 600 642 633 Highways, Roads & Bridges & Building & Struct. 2,035 2,325 2,362 2,961 3,418 2,893 2,752 3,868 3,736 1,825 2,888 2,176 1,780 2,293 3,883 Water Supply and Sanitation 395 484 410 498 607 750 852 995 1,029 717 754 800 748 445 934 Public Health Engineering 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 282 70 87 44 15 11 20 30 26 4 4 3 4 5 7 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 3/ 682 556 503 7 10 7 5 29 7 10 14 7 5 6 6 Subsidies 524 61 276 583 112 326 463 304 248 1,383 132 24 399 2,959 1,509 Grants & Investments 298 636 330 805 968 1,131 989 2,311 1,018 65 169 66 8,815 6,729 5,632 Unallocable 37 26 24 41 24 43 19 71 421 176 34 102 309 41 41 1/ Includes Natural Calamities and Religious Affairs. 2/ A substantial amount on the suspense account is included under this head. 3/ Includes land reclamation, stationery & printing and rural development etc Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Government of Sindh, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 6: NWFP: Total Non-Interest Non-Defense Expenditure

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final TOTAL EXPENDITURE 8,345 8,311 9,814 11,028 14,086 14,678 14,791 19,025 21,641 19,676 19,489 23,075 25,976 26,574 29,013 General Administration 710 783 876 904 1,137 1,398 1,428 1,959 2,720 2,346 2,471 2,858 3,007 3,418 3,831 Law & order 581 617 659 820 1,179 1,248 1,310 1,634 1,705 1,649 1,850 2,060 2,339 2,443 2,650 Defense 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Social services 3,013 2,834 3,223 4,124 4,982 5,707 5,958 7,024 7,903 8,190 8,897 9,388 10,951 11,146 11,068 Education 2,303 2,165 2,257 2,712 3,421 3,982 4,334 5,044 5,738 6,244 6,645 6,905 8,296 8,792 8,890 Primary 763 857 959 1,210 1,556 1,723 1,738 2,078 2,456 3,172 3,170 3,143 4,030 4,191 3,918 Secondary 576 567 615 715 907 1,013 1,370 1,736 2,043 2,051 2,360 2,464 2,938 3,249 3,570 University & College Education 162 149 166 191 235 250 274 326 405 355 389 400 466 469 535 Professional & Technical Edu & Teachers Training 137 128 137 152 190 226 227 266 224 278 313 326 383 419 417 Others 664 464 380 445 533 770 725 638 611 389 412 572 478 463 450 Health 625 614 678 812 996 1,206 1,328 1,601 1,730 1,601 1,815 2,115 2,283 2,167 2,031 General Hospitals & Clinics 525 516 568 667 820 959 1,077 1,319 1,482 1,326 1,511 1,774 1,938 1,122 1,762 Mother & Child 5 6 3 4 5 5 6 7 9 9 10 11 12 12 12 Other Facilities & Preventive Measures 39 32 36 45 43 55 59 67 65 64 75 84 83 85 87 Other 55 60 70 96 127 187 186 208 174 203 219 247 250 948 171 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 1/ 85 55 289 600 565 518 296 378 435 344 436 367 372 188 147 Economic Services 1,213 1,317 1,905 1,981 3,130 2,635 2,727 3,388 4,425 4,289 2,515 3,141 3,598 4,913 8,231 Agriculture 503 604 857 699 911 893 975 1,024 1,144 897 916 917 1,011 1,080 1,081 Irrigation 446 475 566 753 899 871 900 1,006 1,170 659 1,031 1,151 1,040 831 984 Fuel and power 26 24 21 47 50 171 325 660 1,328 2,465 318 415 575 778 1,821 Industries and mineral resources 42 44 87 85 102 125 126 82 139 85 103 96 93 94 143 Transport and Communication 1 1 1 2 2 2 2 2 3 3 3 3 4 3 4 Other Economic Services 2/ 194 169 372 395 1,166 573 400 614 641 180 145 558 877 2,126 4,197 Community services 1,901 1,774 1,972 2,234 2,674 3,070 2,754 3,862 3,781 1,984 2,181 2,831 2,702 2,417 1,961 Works (Administration civil) 130 137 150 173 229 246 271 322 350 343 386 383 422 416 428 Highways, Roads & Bridges & Building & Struct. 1,484 1,365 1,480 1,631 1,856 1,942 1,805 2,763 2,305 714 687 1,253 995 899 699 Water Supply and Sanitation 285 271 342 428 586 883 677 776 1,125 927 1,107 1,195 1,280 1,103 784 Public Health Engineering 0 0 0 2 2 0 0 0 0 0 0 0 0 0 0 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 1 1 1 0 1 0 0 0 1 0 0 0 7 0 50 Subsidies 575 763 789 510 250 400 550 940 850 1,200 1,550 2,750 3,250 1,950 1,228 Interest payments 1,995 2,183 2,595 2,903 3,597 4,057 4,559 4,799 5,297 5,740 6,155 6,282 7,621 6,878 5,792 Grants & Investments 352 223 389 455 735 219 64 218 257 11 25 48 129 287 43 Unallocable 0 0 0 0 0 0 0 0 0 8 0 0 0 0 1 1/ Includes Natural Calamities and Religious Affairs. 2/ Includes land reclamation, stationery & printing and rural development etc Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Government of NWFP, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 7: Balochistan: Total Non-Interest Non-Defense Expenditure

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1/ 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final TOTAL EXPENDITURE 4,050 5,831 5,632 6,264 8,739 9,485 10,678 12,414 13,594 10,840 11,302 12,338 14,994 17,526 17,610 General Administration 2/ 404 1,313 500 611 736 1,039 1,021 1,116 1,588 1,203 1,329 1,459 2,273 2,382 2,736 Law & order 407 477 528 582 802 1,011 960 1,180 1,207 1,194 1,425 1,617 1,728 1,704 2,005 Defense 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Social services 1,298 1,563 1,691 1,831 2,714 2,683 4,110 4,573 4,843 4,395 4,556 5,017 5,540 5,825 5,767 Education 729 896 1,039 1,163 1,838 1,708 2,733 2,776 3,013 2,592 3,037 3,477 3,771 4,282 3,890 Primary 360 355 436 466 672 836 921 743 933 921 1,033 1,195 1,198 1,702 1,676 Secondary 171 203 160 195 271 325 341 659 797 964 1,146 1,242 1,507 1,478 1,275 University & College Education 48 74 139 151 194 97 214 256 263 213 270 320 328 304 305 Professional & Technical Edu & Teachers Training 9 35 27 34 37 129 59 76 82 78 95 108 107 123 141 Others 142 228 278 318 664 322 1,198 1,041 937 416 494 612 632 675 493 Health 389 461 494 494 605 723 1,031 1,231 1,340 1,475 1,197 1,197 1,235 1,283 1,541 General Hospitals & Clinics 313 355 314 331 412 473 586 617 680 720 774 771 990 925 788 Mother & Child Health 4 3 5 6 8 10 10 19 20 21 23 12 23 33 14 Other Facilities & Preventive Measures 45 66 29 33 45 53 56 56 64 67 80 65 110 97 111 Other 27 37 147 124 141 188 377 538 576 668 319 350 112 228 628 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 180 206 157 174 271 252 346 566 490 328 322 343 534 261 336 Economic Services 929 1,224 1,411 1,640 2,337 2,404 2,156 2,686 2,650 2,329 2,094 1,989 1,845 4,232 3,905 Agriculture 482 607 642 558 705 749 1,092 1,334 1,199 1,034 1,104 1,141 1,201 1,344 1,535 Irrigation 270 340 420 513 963 1,099 641 918 1,018 1,057 735 602 426 1,088 957 Fuel and power 0 Industries and mineral resources 59 70 60 64 91 109 122 98 95 89 82 85 96 174 183 Transport and Communication 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Economic Services 118 207 290 506 578 446 301 336 338 149 173 161 122 1,626 1,230 Community services 775 1,017 1,267 1,436 1,928 2,244 2,366 2,567 2,755 1,719 1,898 2,256 2,219 3,384 3,197 Works (Administration civil) 187 145 217 244 382 411 458 812 598 639 752 776 821 1,157 1,191 Highways, Roads & Bridges & Building & Structures 429 555 643 763 917 524 193 230 1,097 545 498 683 635 1,320 1,385 Water Supply and Sanitation 151 309 399 422 619 781 1,086 939 1,035 514 624 770 735 877 587 Public Health Engineering 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 0 0 0 0 1 1 4 0 4 2 0 0 0 0 2 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 8 9 8 7 9 526 625 586 20 21 23 26 27 30 32 Subsidies 237 237 234 164 224 100 70 250 550 0 0 0 1,390 0 0 Interest payments 823 850 987 1,226 1,442 1,717 1,920 2,039 2,146 2,388 3,106 2,907 2,875 2,938 4,306 Grants & Investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Unallocable 0 0 0 0 0 4 0 0 0 0 0 0 0 0 0 1/ Break down of Capital Development Expenditures is not available. 2/ For 1988/89 includes Superannuation and Pension amounting to Rs. 1034.6 Mil. Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Government of Balochistan, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 8: National: Current Non-Interest Non-Defense Expenditure

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final CURRENT EXPENDITURES 73,812 77,089 72,320 92,100 100,148 111,113 120,035 150,860 173,918 178,519 188,066 199,879 265,484 280,130 319,971 General Administration 9,652 13,144 11,721 13,352 17,740 20,324 22,185 33,759 47,355 44,830 37,018 41,921 43,770 56,443 62,228 Law & order 6,676 7,194 7,930 9,834 12,907 13,671 15,587 19,747 20,710 20,801 23,170 24,337 27,578 30,411 32,799 Social services 19,830 21,170 22,162 27,682 33,237 37,236 40,395 49,225 53,977 55,022 61,567 63,589 70,559 73,574 82,228 Education 13,051 14,154 14,790 18,903 22,923 25,614 29,108 35,677 39,610 40,637 46,100 46,980 51,571 54,943 60,475 Primary 5,241 6,110 6,529 8,547 10,907 11,658 13,586 16,342 18,566 18,896 22,219 22,699 25,307 26,242 28,240 Secondary 3,096 3,389 3,571 4,705 5,383 6,090 7,372 9,026 10,816 11,191 12,330 12,915 14,565 16,086 17,372 University & College Education 2,125 2,200 2,273 2,629 2,843 3,587 3,864 4,163 4,914 5,045 5,495 5,462 6,067 5,941 7,101 Professional & Technical Edu & Teachers Training 1,144 1,131 1,209 1,574 1,788 2,137 2,185 2,157 2,247 2,509 2,593 2,622 2,347 2,640 3,030 Others 1,445 1,324 1,208 1,448 2,002 2,143 2,100 3,989 3,067 2,996 3,462 3,282 3,284 4,033 4,733 Health 3,717 3,846 4,258 5,173 6,208 6,830 7,694 9,171 10,184 10,420 11,900 12,388 14,849 14,810 16,685 General Hospitals & Clinics 3,048 3,188 3,536 4,381 5,211 5,773 6,493 7,664 8,531 8,722 9,980 10,433 12,158 11,844 13,662 Mother & Child 21 22 26 27 28 33 35 48 68 51 61 47 60 76 58 Other Facilities & Preventive Measures 181 173 188 204 250 273 253 345 382 495 581 520 644 646 878 Other 466 464 508 560 718 752 913 1,114 1,203 1,153 1,277 1,389 1,987 2,244 2,086 Population 2 2 3 3 2 3 4 10 7 27 32 30 33 34 39 Other Social Services 3,060 3,168 3,111 3,603 4,104 4,788 3,590 4,367 4,176 3,938 3,535 4,191 4,106 3,787 5,029 Economic Services 8,286 8,850 8,942 13,653 13,171 13,725 13,617 16,716 19,627 20,088 18,863 18,722 21,688 25,074 27,048 Agriculture 2,634 2,820 2,930 3,492 4,140 4,494 5,036 5,752 6,304 6,213 6,707 7,217 7,684 8,164 9,220 Irrigation 2,978 3,089 3,091 3,298 3,717 4,074 3,875 4,978 6,046 6,163 5,410 5,166 5,312 5,620 5,855 Fuel and power 51 178 185 3,686 1,610 541 264 900 1,369 2,526 360 443 626 903 1,894 Industries and mineral resources 907 806 627 772 857 903 949 1,177 1,251 1,049 1,189 1,136 1,874 1,995 2,369 Transport and Communication 1,066 1,340 1,473 1,514 1,786 2,636 2,225 2,633 3,600 3,006 3,801 3,264 3,792 4,110 1,498 Other Economic Services 649 618 635 892 1,061 1,077 1,267 1,276 1,056 1,131 1,396 1,496 2,400 4,282 6,213 Community services 4,660 4,725 5,541 5,457 6,560 8,418 8,575 10,587 11,001 10,355 12,977 12,870 13,887 14,369 15,747 Works (Administration civil) 970 1,033 1,194 1,404 1,880 2,132 2,586 3,023 3,373 3,320 3,823 3,734 4,484 4,800 4,997 Highways, Roads & Bridges & Building & Struct. 1,905 1,930 2,282 2,141 2,498 3,402 3,057 3,717 3,442 3,344 4,180 4,176 4,330 4,255 4,886 Water Supply and Sanitation 250 304 311 383 525 694 792 798 902 766 1,180 1,299 1,321 1,398 1,216 Public Health Engineering 71 71 70 108 112 241 275 382 478 491 676 611 558 491 627 Broadcasting 296 275 285 337 433 400 422 547 568 555 589 565 762 918 1,120 Urban Town Planning & Regulator Services 253 261 208 215 196 380 300 375 333 96 466 616 558 469 481 Scientific Research and Survey 669 673 1,115 816 844 1,012 1,023 1,573 1,515 1,461 1,757 1,618 1,806 1,842 2,345 Other Community Services 246 178 76 52 70 157 120 172 390 323 306 250 69 196 74 Subsidies 7,950 12,237 9,044 10,014 8,883 7,269 5,267 5,730 10,468 13,302 9,080 15,249 28,912 29,131 28,623 Grants & Investments 15,806 10,326 5,627 13,477 6,619 9,866 7,258 12,854 6,804 10,514 16,750 16,760 51,484 50,234 70,386 Unallocable 2,060 950 2,995 3,788 4,406 3,759 9,615 5,035 7,676 6,725 8,640 6,430 7,620 894 911 Note: Footnotes on Federal and Provincial Tables. Source: Federal and Provincial Tables.

Statistical Annex for Volume I

Table 9: Federal: Current Non-Interest Non-Defense Expenditure

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final CURRENT EXPENDITURES 36,917 40,732 33,647 45,154 43,482 46,819 51,415 60,171 62,793 67,919 78,588 79,092 113,207 114,616 146,588 General Administration 5,097 7,284 6,543 7,614 10,194 11,019 12,798 16,811 18,397 19,568 18,898 18,502 19,409 24,679 28,276 Law & order 2,458 2,866 3,385 3,533 4,620 4,680 5,190 7,102 7,236 7,218 8,029 8,148 9,066 10,058 10,702 Defense 47,015 51,053 58,708 62,596 75,907 87,461 93,973 113,281 119,303 132,397 136,164 143,471 150,757 157,900 169,028 Social services 4,898 5,544 5,101 5,694 6,838 7,627 7,584 8,840 9,128 8,964 9,224 9,607 10,487 9,938 13,119 Education 1,922 2,319 2,194 2,388 2,984 3,532 3,689 4,202 4,508 4,822 5,298 5,125 5,829 5,851 7,094 Primary 185 407 231 286 369 395 421 582 457 666 703 794 908 1,001 1,049 Secondary 291 310 336 403 500 525 583 698 811 842 888 898 1,025 1,077 1,249 University & College Education 807 928 901 942 1,155 1,432 1,436 1,534 1,616 1,788 1,939 1,838 2,029 1,876 2,660 Professional & Technical Edu & Teachers Training 361 354 395 415 506 655 694 696 729 809 874 857 1,009 982 1,096 Others 276 319 331 342 454 524 555 692 895 718 895 738 858 916 1,039 Health 635 691 720 737 872 993 1,279 1,415 1,583 1,644 1,826 1,746 2,003 2,055 2,505 General Hospitals & Clinics 498 543 555 567 679 764 1,040 1,113 1,264 1,317 1,467 1,406 1,598 1,618 1,911 Mother & Child 1 1 1 1 1 1 1 1 1 1 1 1 2 1 2 Other Facilities & Preventive Measures 48 50 57 51 54 71 67 96 84 83 130 108 108 111 249 Other 88 98 107 118 138 157 171 205 234 243 228 231 295 325 343 Population 2 2 3 3 2 3 4 10 7 27 32 30 32 34 39 Other Social Services 2,339 2,532 2,185 2,566 2,980 3,099 2,612 3,213 3,030 2,470 2,068 2,706 2,622 1,999 3,480 Economic Services 2,009 2,390 2,391 5,983 4,305 4,284 3,744 4,287 5,237 4,573 5,525 4,961 5,517 5,938 3,847 Agriculture 252 317 318 362 405 533 647 593 663 662 693 711 852 833 988 Irrigation 36 35 38 20 13 42 41 64 69 72 77 62 70 59 76 Fuel and power 44 168 172 3,670 1,593 526 244 249 112 113 122 142 98 163 120 Industries and mineral resources 569 483 344 389 446 457 505 681 717 535 666 618 553 605 809 Transport and Communication 1,062 1,336 1,466 1,483 1,778 2,628 2,218 2,587 3,587 2,996 3,784 3,241 3,770 4,079 1,448 Other Economic Services 48 51 53 59 70 98 89 114 89 196 183 187 174 201 406 Community services 2,075 2,240 2,533 2,438 2,850 3,529 3,786 4,913 4,950 4,694 5,864 5,688 6,604 6,496 7,538 Works (Administration civil) 457 536 606 735 947 1,123 1,456 1,621 1,856 1,783 2,059 1,923 2,517 2,451 2,491 Highways, Roads & Bridges & Building & Struct. 198 382 292 296 391 498 524 658 509 666 780 738 828 631 957 Water Supply and Sanitation 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Public Health Engineering 16 19 25 29 36 29 31 94 82 88 89 106 132 131 144 Broadcasting 296 275 285 337 433 400 422 547 568 555 589 565 762 918 1,120 Urban Town Planning & Regulator Services 246 256 204 214 192 374 285 345 316 92 463 613 554 464 473 Scientific Research and Survey 669 673 1,115 816 844 1,012 1,023 1,573 1,515 1,457 1,754 1,615 1,802 1,838 2,341 Other Community Services 194 99 6 11 8 92 45 75 104 53 130 128 10 63 10 Subsidies 4,333 11,160 7,092 8,194 7,429 5,911 4,184 3,736 7,720 9,225 6,268 9,533 20,372 20,222 23,381 Grants & Investments 15,647 10,007 5,449 13,176 6,239 9,236 7,023 12,353 6,573 10,392 16,175 16,324 34,220 36,940 59,427 Unallocable 1,504 744 2,791 3,675 4,378 3,687 9,568 4,964 7,251 6,394 8,606 6,328 7,531 343 298 1/ Includes Natural Calamities and Religious Affairs. 2/ Includes Land Reclamation, Rural Development, Transport & Communication, and Other Economic Services. 3/ Includes Works Urban and Rural, and Scientific Research. Source: Government of Pakistan, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 10: Provincial Aggregate: Current Non-Interest Non-Defense Expenditure

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final CURRENT EXPENDITURES 36,896 36,357 38,673 46,946 56,666 64,294 68,620 90,689 111,126 110,600 109,478 120,787 152,277 165,514 173,383 General Administration 4,554 5,860 5,178 5,738 7,546 9,305 9,387 16,948 28,958 25,263 18,120 23,419 24,361 31,763 33,951 Law & order 4,218 4,328 4,545 6,301 8,287 8,991 10,397 12,645 13,473 13,582 15,142 16,189 18,512 20,353 22,098 Social services 14,932 15,626 17,061 21,988 26,399 29,609 32,811 40,385 44,848 46,059 52,344 53,982 60,072 63,636 69,110 Education 11,130 11,835 12,596 16,515 19,939 22,082 25,419 31,475 35,102 35,815 40,802 41,855 45,742 49,092 53,382 Primary 5,055 5,703 6,298 8,261 10,537 11,263 13,165 15,760 18,109 18,230 21,516 21,905 24,399 25,242 27,191 Secondary 2,805 3,079 3,235 4,302 4,884 5,564 6,789 8,328 10,005 10,349 11,443 12,017 13,540 15,010 16,123 University & College Education 1,318 1,272 1,373 1,687 1,688 2,154 2,428 2,629 3,298 3,257 3,557 3,623 4,038 4,065 4,441 Professional & Technical Edu & Teachers Training 783 776 814 1,159 1,282 1,482 1,492 1,461 1,518 1,701 1,719 1,765 1,339 1,659 1,934 Others 1,169 1,005 877 1,106 1,548 1,618 1,545 3,297 2,172 2,279 2,567 2,545 2,426 3,117 3,693 Health 3,081 3,155 3,539 4,436 5,336 5,837 6,415 7,756 8,601 8,777 10,074 10,642 12,846 12,755 14,179 General Hospitals & Clinics 2,549 2,644 2,981 3,814 4,533 5,009 5,453 6,551 7,268 7,405 8,512 9,027 10,560 10,227 11,751 Mother & Child 21 21 25 27 27 32 34 46 67 50 60 46 58 75 56 Other Facilities & Preventive Measures 133 123 131 154 196 202 185 249 297 412 451 412 536 535 629 Other 378 367 402 442 580 595 742 909 969 910 1,050 1,158 1,691 1,918 1,743 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 721 636 926 1,037 1,124 1,689 978 1,154 1,146 1,467 1,468 1,485 1,484 1,789 1,549 Economic Services 6,277 6,460 6,551 7,670 8,866 9,441 9,873 12,429 14,390 15,515 13,338 13,761 16,171 19,136 23,201 Agriculture 2,382 2,503 2,612 3,130 3,735 3,961 4,389 5,159 5,641 5,551 6,014 6,506 6,832 7,332 8,232 Irrigation 2,942 3,053 3,053 3,278 3,704 4,032 3,834 4,914 5,977 6,091 5,333 5,104 5,242 5,562 5,779 Fuel and power 7 9 14 16 17 15 19 651 1,257 2,413 238 301 528 741 1,774 Industries and mineral resources 339 323 283 383 411 446 444 496 534 514 523 518 1,321 1,390 1,560 Transport and Communication 5 5 8 31 8 7 8 46 14 10 17 23 21 31 50 Other Economic Services 602 566 581 832 991 979 1,178 1,162 968 936 1,213 1,309 2,226 4,081 5,807 Community services 2,585 2,485 3,008 3,019 3,710 4,889 4,789 5,674 6,052 5,661 7,113 7,182 7,282 7,873 8,209 Works (Administration civil) 513 497 588 669 933 1,009 1,130 1,403 1,517 1,537 1,765 1,811 1,967 2,349 2,506 Highways, Roads & Bridges & Building & Struct. 1,708 1,548 1,991 1,846 2,108 2,904 2,533 3,060 2,933 2,678 3,400 3,439 3,502 3,624 3,929 Water Supply and Sanitation 250 304 311 383 525 694 792 798 902 766 1,180 1,299 1,321 1,398 1,216 Public Health Engineering 55 53 44 79 76 212 243 288 396 403 587 505 427 360 483 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 7 5 3 1 4 6 15 30 17 4 3 3 4 4 8 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 3 3 3 4 4 4 Other Community Services 52 78 70 41 63 64 75 96 287 269 176 122 59 133 63 Subsidies 3,617 1,077 1,951 1,820 1,454 1,358 1,083 1,994 2,748 4,077 2,812 5,716 8,539 8,909 5,241 Grants & Investments 160 319 178 301 379 630 235 501 231 122 575 436 17,264 13,294 10,959 Unallocable 556 206 205 113 28 72 47 71 425 331 34 102 89 551 614 Note: Footnotes on Provincial Tables. Source: Provincial Tables.

Statistical Annex for Volume I

Table 11: Punjab: Current Non-Interest Non-Defense Expenditure

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final CURRENT EXPENDITURES 20,003 18,351 19,630 24,879 27,963 32,139 33,824 43,951 55,338 54,999 55,630 61,666 76,338 79,302 80,685 General Administration 2,272 2,672 2,593 2,839 3,700 4,625 4,708 8,122 14,626 11,854 9,530 12,733 13,993 15,665 14,043 Law & order 2,239 2,183 2,169 3,342 3,709 4,225 4,646 5,491 5,965 6,328 7,027 7,532 8,764 9,678 10,347 Social services 7,979 8,404 9,027 12,425 13,674 15,361 17,305 21,222 23,373 24,209 27,213 27,751 30,057 31,878 34,857 Education 5,921 6,369 6,697 9,422 10,511 11,611 13,683 16,750 18,661 19,062 21,513 21,709 23,049 24,675 26,686 Primary 2,857 3,213 3,507 4,789 5,909 6,013 7,234 9,013 10,433 10,246 12,150 12,191 13,617 14,052 15,157 Secondary 1,494 1,637 1,667 2,408 2,588 2,901 3,474 4,194 4,806 4,904 5,250 5,325 5,808 6,525 6,905 University & College Education 768 731 718 938 761 1,214 1,315 1,452 1,741 1,798 1,936 1,974 2,230 2,247 2,409 Professional & Technical Edu & Teachers Training 480 487 492 771 761 894 929 750 835 935 914 937 365 586 662 Others 321 301 313 516 493 590 732 1,341 847 1,179 1,264 1,281 1,029 1,265 1,553 Health 1,576 1,639 1,769 2,298 2,506 2,931 3,078 3,892 4,123 4,168 4,837 5,142 6,445 6,344 7,315 General Hospitals & Clinics 1,263 1,338 1,444 1,959 2,086 2,494 2,525 3,230 3,469 3,562 4,102 4,377 5,159 5,573 6,296 Mother & Child 11 12 17 17 14 16 17 20 38 20 27 23 24 30 30 Other Facilities & Preventive Measures 10 10 10 11 11 11 13 12 27 17 26 20 21 26 49 Other 292 279 298 312 395 410 523 630 589 569 682 722 1,241 715 940 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 482 396 560 705 657 819 544 580 589 979 862 900 563 859 855 Economic Services 3,624 3,558 3,479 4,160 4,461 4,951 4,890 5,872 7,323 7,862 7,013 7,058 7,868 8,355 9,446 Agriculture 1,365 1,411 1,423 1,732 1,848 2,103 2,270 2,718 2,927 2,989 3,286 3,764 3,590 3,842 4,217 Irrigation 1,830 1,798 1,750 1,966 2,067 2,323 2,127 2,603 3,796 4,254 2,977 2,709 2,852 2,993 3,141 Fuel and power Industries and mineral resources 168 172 121 190 181 192 195 237 224 237 208 230 1,003 1,033 1,148 Transport and Communication 0 0 2 25 0 0 0 0 0 0 0 5 5 11 31 Other Economic Services 261 177 182 246 366 333 298 313 377 382 541 350 417 475 909 Community services 1,019 1,106 1,431 1,262 1,413 2,167 2,109 2,584 2,806 2,841 3,327 3,320 3,092 3,218 3,730 Works (Administration civil) 49 49 52 54 63 69 80 109 103 109 143 136 124 135 254 Highways, Roads & Bridges & Building & Struct. 875 935 1,278 1,104 1,232 1,841 1,729 2,128 2,047 2,086 2,454 2,586 2,516 2,621 2,963 Water Supply and Sanitation 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Public Health Engineering 55 53 44 77 74 212 243 288 396 403 587 505 427 360 483 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 3 3 3 4 4 4 Other Community Services 40 69 57 27 43 45 57 59 259 240 138 90 21 98 26 Subsidies 2,281 17 652 562 868 532 0 500 1,100 1,500 1,131 2,942 3,500 4,000 2,505 Grants & Investments 69 232 86 220 134 248 137 160 145 88 390 330 9,061 6,507 5,759 Unallocable 519 180 193 69 4 30 29 0 0 317 0 0 4 0 0 1/ Includes Natural Calamities and Religious Affairs. 2/ Includes Land Reclamation, Rural Development, Transport & Communication, and Other Economic Services. 3/ Includes Works Urban and Rural, and Scientific Research. Source: Government of Punjab, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 12: Sindh: Current Non-Interest Non-Defense Expenditure

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final CURRENT EXPENDITURES 8,022 8,000 9,034 11,089 14,875 15,933 17,743 25,226 30,476 30,712 27,625 29,283 39,460 49,720 54,830 General Administration 1,186 1,131 1,295 1,456 2,025 2,335 2,329 5,842 10,142 9,968 4,872 6,539 5,186 10,433 13,525 Law & order 1,017 1,106 1,252 1,627 2,650 2,557 3,510 4,378 4,633 4,433 4,851 4,987 5,717 6,552 7,132 Social services 3,219 3,487 3,940 4,875 6,731 7,403 7,882 10,174 11,060 11,300 13,131 13,232 14,816 15,968 17,925 Education 2,456 2,711 2,926 3,680 5,016 5,402 6,181 8,106 8,689 8,829 10,253 10,323 11,424 12,180 14,119 Primary 1,148 1,297 1,400 1,802 2,406 2,709 3,312 3,936 4,392 4,563 5,493 5,527 6,049 5,776 6,455 Secondary 625 767 810 1,007 1,141 1,360 1,609 1,841 2,407 2,439 2,701 2,988 3,300 3,798 4,401 University & College Education 348 338 362 412 498 596 633 603 906 902 972 942 1,028 1,050 1,199 Professional & Technical Edu & Teachers Training 167 149 174 223 325 282 302 385 417 425 419 416 502 564 714 Others 169 161 180 236 647 456 326 1,342 568 500 668 450 545 991 1,350 Health 640 664 792 1,030 1,458 1,337 1,487 1,745 2,067 2,189 2,547 2,597 2,995 3,152 3,466 General Hospitals & Clinics 543 558 679 888 1,260 1,152 1,324 1,491 1,714 1,826 2,172 2,183 2,492 2,638 2,919 Mother & Child 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 77 81 87 103 133 130 107 172 197 266 277 257 323 329 395 Other 21 25 26 39 65 55 56 82 156 96 98 156 180 185 151 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 122 112 221 166 257 664 214 324 304 282 331 312 398 636 340 Economic Services 1,418 1,546 1,619 1,815 2,388 2,212 2,615 3,202 2,909 2,678 3,054 3,160 3,727 5,275 7,438 Agriculture 380 413 452 525 843 643 801 899 1,066 893 956 920 1,229 1,409 1,749 Irrigation 660 757 763 728 922 935 938 1,448 1,255 1,240 1,408 1,294 1,402 1,320 1,562 Fuel and power 2 2 3 4 5 5 8 10 10 10 11 11 13 14 16 Industries and mineral resources 83 68 71 90 101 98 102 89 125 127 149 126 151 126 160 Transport and Communication 4 3 4 4 5 5 6 44 11 7 14 15 13 16 15 Other Economic Services 288 302 326 464 511 526 761 712 442 401 516 794 919 2,390 3,937 Community services 545 600 584 617 787 757 871 955 1,012 929 1,392 1,181 1,468 1,483 1,531 Works (Administration civil) 147 166 170 200 264 288 322 391 469 447 483 516 600 642 633 Highways, Roads & Bridges & Building & Struct. 311 332 327 313 387 300 297 358 276 260 625 371 531 575 599 Water Supply and Sanitation 75 94 79 95 123 157 234 159 247 210 267 284 329 257 288 Public Health Engineering 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 7 5 3 1 3 5 14 30 13 3 3 3 4 4 6 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 5 3 5 7 9 6 5 18 7 10 14 7 5 6 5 Subsidies 524 61 276 583 112 326 463 304 248 1,377 132 24 399 2,959 1,509 Grants & Investments 79 45 59 75 159 300 54 257 47 22 160 58 8,074 6,500 5,158 Unallocable 37 25 12 45 24 42 19 71 425 14 34 102 85 551 613 1/ Includes Natural Calamities and Religious Affairs. 2/ Includes Land Reclamation, Rural Development, Fuel and Power, Transport and Communication, & Unallocable. Source: Government of Sindh, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 13: NWFP: Current Non-Interest Non-Defense Expenditure

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final CURRENT EXPENDITURES 5,926 6,142 6,540 7,120 8,747 9,823 10,684 13,955 16,336 16,594 16,804 19,510 22,930 23,120 24,011 General Administration 706 767 793 846 1,108 1,306 1,328 1,868 2,609 2,249 2,403 2,689 2,910 3,297 3,670 Law & order 576 610 651 812 1,179 1,247 1,310 1,633 1,699 1,644 1,847 2,060 2,315 2,442 2,650 Social services 2,780 2,688 2,854 3,299 4,148 4,680 5,186 6,222 7,197 7,108 8,063 8,701 10,042 10,436 10,904 Education 2,152 2,072 2,155 2,500 3,157 3,569 3,932 4,750 5,499 5,505 6,230 6,648 7,729 8,215 8,804 Primary 758 850 955 1,205 1,551 1,706 1,699 2,068 2,352 2,501 2,840 2,992 3,536 3,712 3,902 Secondary 563 541 597 692 884 978 1,366 1,634 1,996 2,041 2,347 2,461 2,925 3,208 3,543 University & College Education 162 148 154 186 235 248 266 318 388 344 379 386 453 463 528 Professional & Technical Edu & Teachers Training 127 109 121 131 160 177 202 251 184 262 291 303 365 385 416 Others 541 424 327 286 328 459 399 479 580 358 373 504 451 447 414 Health 559 541 615 721 881 1,008 1,163 1,372 1,590 1,535 1,725 1,956 2,192 2,118 1,991 General Hospitals & Clinics 483 481 544 636 775 889 1,018 1,212 1,405 1,296 1,465 1,696 1,919 1,090 1,747 Mother & Child 5 6 3 4 5 5 6 7 9 9 10 11 12 12 12 Other Facilities & Preventive Measures 17 5 5 7 8 8 10 9 10 63 69 70 82 83 74 Other 54 50 63 74 94 105 129 143 166 167 182 179 180 933 158 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 70 75 85 79 109 103 91 100 107 68 108 97 121 102 109 Economic Services 765 855 918 1,080 1,260 1,373 1,401 2,205 2,947 3,651 1,906 2,049 3,004 3,467 4,285 Agriculture 355 371 408 468 569 621 683 771 838 750 813 804 894 887 931 Irrigation 337 379 417 461 552 597 586 658 709 366 713 810 727 657 711 Fuel and power 5 7 11 13 12 10 12 641 1,247 2,403 227 289 515 727 1,758 Industries and mineral resources 41 42 43 50 62 83 70 76 89 64 85 80 78 64 73 Transport and Communication 1 1 1 2 2 2 2 2 3 3 3 3 4 3 4 Other Economic Services 26 54 39 87 63 60 48 57 62 65 65 62 787 1,129 808 Community services 513 419 502 566 716 736 867 1,004 996 730 1,009 1,213 1,279 1,241 1,230 Works (Administration civil) 130 137 150 170 225 241 271 321 347 343 386 383 422 416 428 Highways, Roads & Bridges & Building & Struct. 294 173 222 228 262 238 314 343 330 155 156 303 321 238 250 Water Supply and Sanitation 87 109 129 166 227 257 281 339 319 232 468 527 530 587 552 Public Health Engineering 0 0 0 2 2 0 0 0 0 0 0 0 0 0 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 0 0 0 0 0 0 0 0 1 0 0 0 6 0 0 Subsidies 575 762 789 510 250 400 550 940 850 1,200 1,550 2,750 3,250 1,950 1,228 Grants & Investments 12 41 33 6 86 82 44 84 39 11 25 48 129 287 43 Unallocable 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1/ Includes Natural Calamities and Religious Affairs. 2/ Includes Rural Development, Transport & Communication, Other Economic Services & Unallocable. Source: Government of NWFP, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 14: Balochistan: Current Non-Interest Non-Defense Expenditure

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final CURRENT EXPENDITURES 2,945 3,864 3,469 3,858 5,080 6,399 6,369 7,557 8,974 8,295 9,419 10,328 13,549 13,372 13,857 General Administration 391 1,290 496 597 713 1,039 1,021 1,116 1,581 1,192 1,315 1,458 2,271 2,368 2,713 Law & order 386 429 473 520 748 963 932 1,143 1,176 1,178 1,417 1,610 1,716 1,680 1,969 Social services 954 1,046 1,240 1,388 1,846 2,164 2,439 2,767 3,219 3,441 3,937 4,298 5,157 5,354 5,425 Education 601 683 818 914 1,254 1,500 1,623 1,869 2,253 2,418 2,806 3,175 3,541 4,021 3,773 Primary 292 343 436 466 672 836 921 743 933 921 1,033 1,195 1,198 1,702 1,676 Secondary 123 135 160 195 271 325 341 659 797 964 1,146 1,242 1,507 1,478 1,275 University & College Education 40 54 139 151 194 97 214 256 263 213 270 320 328 304 305 Professional & Technical Edu & Teachers Training 9 32 27 34 37 129 59 76 82 78 95 108 107 123 141 Others 138 119 56 68 80 114 88 134 177 242 263 310 402 415 376 Health 306 311 362 387 490 561 687 747 821 885 965 947 1,214 1,141 1,408 General Hospitals & Clinics 261 268 314 331 412 473 586 617 680 720 774 771 990 925 788 Mother & Child 4 3 5 6 8 10 10 19 20 21 23 12 23 33 14 Other Facilities & Preventive Measures 30 27 29 33 45 53 56 56 64 67 80 65 110 97 111 Other 12 12 15 17 26 26 34 54 57 77 87 100 91 86 495 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 46 53 60 87 101 103 128 151 145 139 166 176 402 192 244 Economic Services 470 501 535 615 757 905 967 1,150 1,210 1,324 1,365 1,494 1,572 2,040 2,032 Agriculture 281 308 329 404 475 594 635 771 810 919 959 1,018 1,118 1,194 1,336 Irrigation 114 119 123 123 163 178 183 205 217 231 234 291 261 592 366 Fuel and power 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Industries and mineral resources 48 41 48 53 67 73 78 94 95 86 81 82 89 167 178 Transport and Communication 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Economic Services 27 33 35 36 52 61 71 80 87 88 91 103 104 87 153 Community services 508 360 491 574 794 1,229 942 1,131 1,238 1,161 1,385 1,468 1,443 1,930 1,718 Works (Administration civil) 187 145 217 244 382 411 458 582 598 639 752 776 821 1,157 1,191 Highways, Roads & Bridges & Building & Struct. 227 108 164 201 226 524 193 230 280 177 165 178 134 190 117 Water Supply and Sanitation 88 102 102 122 175 280 277 300 336 324 445 488 461 554 376 Public Health Engineering 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 0 0 0 0 1 1 2 0 4 2 0 0 0 0 2 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 6 6 8 7 9 13 13 19 20 20 23 26 27 30 32 Subsidies 237 237 234 164 224 100 70 250 550 0 0 0 1,390 0 0 Grants & Investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Unallocable 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1/ For 1988/89 includes Superannuation and Pension amounting to Rs. 1034.6 Mil. 2/ Includes Natural Calamities and Religious Affairs. 3/ Includes Stationary & Printing. 4/ Includes Rural Development. Source: Government of Balochistan, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 15: National: Development Expenditures

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final DEVELOPMENT EXPENDITURES 43,879 46,652 40,032 47,544 45,642 45,121 43,619 64,911 66,936 39,791 44,293 45,128 48,218 47,115 80,814 General Administration 1,454 1,547 1,700 1,823 1,666 1,852 2,597 1,705 1,909 2,021 1,603 3,446 2,814 2,409 7,047 Law & order 36 263 80 114 88 58 29 38 39 21 30 15 46 26 1,741 Social services 2,879 3,034 4,382 4,452 4,729 4,130 5,526 7,703 8,947 7,206 8,597 8,678 8,949 6,769 9,793 Education 1,469 1,290 2,532 2,071 2,189 1,652 2,472 2,519 2,585 1,967 2,984 2,427 2,430 2,110 5,546 Primary 131 83 659 305 102 206 186 238 209 840 1,606 957 963 667 2,075 Secondary 214 175 110 155 201 89 62 178 160 66 65 50 104 267 351 University & College Education 284 259 362 464 263 170 214 300 265 274 435 297 450 365 879 Professional & Technical Edu & Teachers Training 126 116 229 207 274 366 163 279 190 79 104 307 322 327 745 Others 715 659 1,171 940 1,348 822 1,848 1,523 1,762 708 774 817 591 484 1,497 Health 717 855 825 846 1,091 950 1,632 2,910 3,200 3,015 2,831 3,159 3,076 2,871 2,434 General Hospitals & Clinics 542 612 455 454 674 428 954 899 695 766 937 803 861 855 385 Mother & Child 5 6 5 6 8 2 6 0 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 137 177 153 76 216 245 240 1,321 1,755 1,568 1,175 1,869 1,876 1,810 1,794 Other 33 61 211 311 193 275 432 690 749 680 719 487 339 206 254 Population 216 288 319 350 394 601 770 933 1,123 1,046 1,228 1,477 2,068 1,710 1,268 Other Social Services 476 601 707 1,185 1,054 927 652 1,341 2,040 1,178 1,554 1,615 1,375 78 545 Economic Services 6,231 8,621 11,682 12,138 16,494 13,132 10,772 14,894 16,386 8,055 9,256 10,824 10,335 13,858 16,513 Agriculture 1,385 1,301 1,961 1,112 2,456 1,970 1,959 2,038 1,990 1,241 1,271 1,162 835 852 1,192 Irrigation 2,206 2,159 2,838 3,748 4,564 3,471 2,771 4,728 5,798 3,515 4,187 3,667 2,874 2,352 4,523 Fuel and power 94 108 123 155 95 246 330 504 347 117 339 272 151 154 117 Industries and mineral resources 117 154 204 127 125 106 181 199 88 1,162 35 76 54 71 109 Transport and Communication 966 1,083 665 791 731 799 850 732 713 575 556 1,043 965 1,769 1,772 Other Economic Services 1,463 3,817 5,891 6,205 8,523 6,540 4,681 6,692 7,450 1,445 2,870 4,604 5,456 8,660 8,801 Community services 10,877 10,778 11,520 12,403 12,774 14,781 15,253 22,274 23,029 15,116 17,507 16,201 16,274 16,255 17,187 Works (Administration civil) 0 0 0 3 5 5 5 231 3 0 0 0 0 0 464 Highways, Roads & Bridges & Building & Struct. 8,127 8,044 8,868 9,541 8,663 7,751 7,343 11,535 10,810 5,843 7,231 7,329 6,022 6,678 7,877 Water Supply and Sanitation 581 759 841 964 1,286 1,721 1,824 1,912 2,288 1,393 1,305 1,466 1,442 1,027 1,089 Public Health Engineering 1,043 1,071 865 1,030 1,118 1,136 1,011 1,800 2,686 2,317 2,930 1,920 2,255 1,348 2,278 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 490 306 325 287 419 563 879 1,413 2,186 1,382 1,354 838 5,473 2,258 887 Scientific Research and Survey 518 491 399 439 1,017 1,463 3,327 4,699 5,051 4,178 4,683 4,645 0 4,942 4,464 Other Community Services 794 660 720 145 267 2,144 865 683 5 3 2 3 1,082 2 127 Subsidies 2,209 2,431 1,277 1,273 1,231 810 637 5 100 7 14 0 0 0 0 Grants & Investments 21,152 21,071 10,085 10,180 5,286 7,198 6,343 15,458 12,826 4,028 7,285 5,963 9,563 8,308 29,106 Unallocable 22 7 31 4 3 6 3 1 1 218 1 0 223 -510 -572 Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Development expenditures of corporations and autonomous bodies financed from federal loans are not included. Source: Federal and Provincial Tables.

Statistical Annex for Volume I

Table 16: Federal: Development Expenditures

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final DEVELOPMENT EXPENDITURES 28,617 31,392 21,997 25,266 19,642 21,957 23,282 34,642 37,495 21,930 22,761 23,376 25,791 26,087 55,178 General Administration 1,432 1,395 1,594 1,634 1,568 1,708 2,471 1,570 1,734 1,876 1,496 3,211 2,452 2,238 6,756 Law & order 10 9 16 15 8 2 1 0 0 0 4 0 8 0 1,705 Social services 1,526 1,706 2,624 2,414 1,689 1,555 1,875 3,356 4,588 3,731 3,994 4,516 5,450 4,566 7,867 Education 829 745 1,710 1,345 693 462 597 879 998 792 866 836 1,053 855 4,375 Primary 10 35 615 245 27 7 56 53 89 66 26 86 56 63 1,682 Secondary 36 13 27 70 71 25 32 43 88 48 20 24 65 105 185 University & College Education 267 228 342 446 249 157 195 275 229 257 406 265 424 315 738 Professional & Technical Edu & Teachers Training 47 41 88 109 125 59 34 169 75 51 71 102 184 171 583 Others 468 428 639 474 220 214 281 339 517 369 343 359 324 201 1,187 Health 244 315 301 280 352 252 361 1,434 1,852 1,803 1,581 2,024 2,193 2,139 1,888 General Hospitals & Clinics 157 211 153 130 186 81 218 262 30 257 191 148 339 375 122 Mother & Child 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 78 83 92 6 135 153 136 1,162 1,656 1,544 1,144 1,835 1,844 1,740 1,674 Other 9 21 56 144 30 17 7 10 166 1 246 41 10 25 91 Population 216 288 319 350 394 601 770 933 1,123 1,046 1,228 1,477 2,068 1,710 1,268 Other Social Services 238 358 294 439 250 240 147 110 616 91 319 179 136 -138 336 Economic Services 2,180 4,659 5,908 4,639 6,450 5,771 6,011 7,064 8,228 3,745 4,283 4,850 4,782 3,934 4,725 Agriculture 223 239 639 41 1,078 635 718 483 605 417 263 345 105 91 151 Irrigation 783 594 1,281 1,170 1,459 823 848 1,346 1,752 985 1,142 1,080 686 248 1,841 Fuel and power 73 91 113 121 57 85 17 485 266 55 248 146 91 103 53 Industries and mineral resources 47 40 19 24 11 5 7 34 8 1,100 11 23 12 15 3 Transport and Communication 907 1,010 615 711 704 700 720 592 695 572 549 1,043 965 1,769 1,770 Other Economic Services 147 2,686 3,241 2,572 3,142 3,523 3,702 4,125 4,901 615 2,070 2,213 2,921 1,709 907 Community services 2,265 2,116 2,036 2,211 1,851 3,418 4,581 6,886 7,602 5,696 6,170 5,713 7,019 7,560 6,101 Works (Administration civil) 0 0 0 0 0 0 4 0 0 0 0 0 0 0 0 Highways, Roads & Bridges & Building & Struct. 1,529 1,378 1,397 1,532 395 242 379 765 359 124 125 204 431 373 317 Water Supply and Sanitation 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Public Health Engineering 0 0 0 0 0 0 0 0 14 11 7 24 34 9 415 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 215 242 242 245 407 556 871 1,413 2,173 1,381 1,353 838 5,473 2,235 886 Scientific Research and Survey 518 491 399 439 1,017 1,463 3,327 4,699 5,051 4,178 4,683 4,645 0 4,942 4,464 Other Community Services 4 5 -3 0 31 1,158 1 9 4 2 2 2 1,081 1 18 Subsidies 2,183 2,423 1,270 1,253 1,191 801 591 0 47 0 11 0 0 0 0 Grants & Investments 20,001 20,186 9,277 7,947 3,514 5,547 5,289 12,931 11,598 3,772 6,801 5,086 6,082 7,790 28,025 Unallocable 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Development expenditures of corporations and autonomous bodies financed from federal loans are not included. Source: Government of Pakistan, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 17: Provincial Aggregate: Development Expenditures

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Budget Actual Actual Actual June Final DEVELOPMENT EXPENDITURES 15,262 15,259 18,034 22,279 26,000 23,164 20,337 30,269 29,441 17,861 21,532 21,752 22,427 21,027 25,636 General Administration 23 152 106 189 98 144 126 135 176 144 107 236 363 171 291 Law & order 27 254 65 99 79 56 28 38 39 21 25 15 38 26 36 Social services 1,353 1,328 1,758 2,038 3,040 2,575 3,651 4,347 4,359 3,474 4,603 4,162 3,500 2,203 1,926 Education 641 545 822 726 1,496 1,190 1,875 1,640 1,586 1,175 2,118 1,591 1,377 1,255 1,171 Primary 120 48 44 60 75 199 130 185 120 774 1,580 871 907 604 393 Secondary 177 162 83 85 131 64 30 134 72 18 45 26 39 162 166 University & College Education 17 30 20 18 14 13 19 25 35 17 28 32 26 51 141 Professional & Technical Edu & Teachers Training 79 74 141 98 149 306 128 110 115 27 33 205 138 156 161 Others 247 231 532 466 1,127 608 1,567 1,185 1,245 339 431 458 267 282 311 Health 473 540 524 566 739 698 1,271 1,476 1,348 1,212 1,250 1,135 883 732 546 General Hospitals & Clinics 385 400 302 324 488 346 736 637 665 509 746 655 522 480 263 Mother & Child 5 6 5 6 8 2 6 0 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 59 94 61 70 81 92 104 158 99 24 31 34 32 70 120 Other 25 40 155 167 163 258 425 680 584 679 474 446 330 181 163 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 239 242 412 746 804 687 504 1,231 1,425 1,087 1,235 1,436 1,239 216 209 Economic Services 4,051 3,963 5,774 7,499 10,044 7,361 4,761 7,830 8,158 4,310 4,973 5,974 5,554 9,924 11,788 Agriculture 1,163 1,062 1,321 1,071 1,378 1,335 1,241 1,556 1,384 824 1,008 817 730 761 1,041 Irrigation 1,423 1,565 1,558 2,578 3,105 2,648 1,923 3,382 4,046 2,530 3,045 2,587 2,188 2,104 2,683 Fuel and power 21 17 10 34 38 161 313 19 81 62 91 126 60 51 63 Industries and mineral resources 69 115 185 103 114 101 174 165 79 62 24 53 41 56 106 Transport and Communication 59 73 50 80 27 99 130 141 18 3 7 0 0 0 1 Other Economic Services 1,316 1,131 2,650 3,633 5,381 3,017 979 2,567 2,549 830 799 2,391 2,535 6,951 7,894 Community services 8,611 8,662 9,484 10,192 10,923 11,363 10,671 15,388 15,427 9,419 11,336 10,488 9,255 8,696 11,086 Works (Administration civil) 0 0 0 3 5 5 1 231 3 0 0 0 0 0 464 Highways, Roads & Bridges & Building & Struct. 6,598 6,666 7,470 8,009 8,268 7,509 6,964 10,770 10,451 5,719 7,106 7,125 5,591 6,305 7,560 Water Supply and Sanitation 581 759 841 964 1,286 1,721 1,824 1,912 2,288 1,393 1,305 1,466 1,442 1,027 1,089 Public Health Engineering 1,043 1,071 865 1,030 1,118 1,136 1,011 1,800 2,672 2,306 2,923 1,896 2,220 1,339 1,863 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 275 65 84 42 12 6 9 0 13 1 1 0 0 23 0 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 791 655 722 145 236 986 864 674 1 1 1 1 1 1 110 Subsidies 25 8 7 20 40 9 46 5 53 7 2 0 0 0 0 Grants & Investments 1,150 886 807 2,233 1,772 1,652 1,054 2,527 1,229 257 485 877 3,482 518 1,081 Unallocable 22 7 31 4 3 5 3 1 1 218 0 0 223 -510 -572 Note: Footnotes on Provincial Tables. Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Provincial Tables.

Statistical Annex for Volume I

Table 18: Punjab: Development Expenditures

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final DEVELOPMENT EXPENDITURES 8,176 6,771 8,803 10,809 11,351 9,934 6,442 11,669 11,805 8,663 12,493 12,585 14,258 10,991 11,609 General Administration 3 8 12 108 35 42 16 20 41 23 14 26 182 6 87 Law & order 0 0 0 0 0 0 0 0 0 0 14 8 2 2 0 Social services 571 537 768 509 1,079 811 878 1,317 1,541 1,156 2,728 2,324 1,952 732 895 Education 220 176 404 157 538 482 281 298 483 219 1,407 954 402 266 644 Primary 7 7 0 0 23 133 50 128 0 85 1,239 716 312 120 368 Secondary 80 54 52 52 95 17 20 13 1 7 5 6 14 74 35 University & College Education 1 0 1 9 2 11 8 10 7 3 13 15 10 28 94 Professional & Technical Edu & Teachers Training 50 37 99 54 88 243 88 42 40 0 0 135 62 38 1 Others 82 78 253 42 331 77 115 105 434 124 150 83 3 6 147 Health 272 263 263 240 378 225 531 499 514 498 797 647 697 424 183 General Hospitals & Clinics 272 260 249 228 365 215 523 431 482 458 634 577 500 422 177 Mother & Child 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 0 0 0 0 0 0 0 5 5 0 0 0 0 1 3 Other 0 3 14 11 14 10 7 62 26 39 162 70 196 0 3 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 79 98 101 112 163 104 67 520 544 440 524 723 853 42 68 Economic Services 2,329 1,896 3,030 4,541 5,574 3,568 1,120 3,251 3,256 1,685 2,358 3,596 3,993 5,803 5,074 Agriculture 597 338 362 486 552 663 330 558 482 380 624 473 450 364 423 Irrigation 653 713 601 1,197 1,260 785 393 938 1,053 624 1,096 1,274 1,201 1,026 1,225 Fuel and power 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Industries and mineral resources 21 3 78 7 12 2 0 1 2 28 0 12 0 0 0 Transport and Communication 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Economic Services 1,057 842 1,989 2,852 3,751 2,118 397 1,755 1,719 653 637 1,837 2,342 4,414 3,426 Community services 4,637 4,203 4,787 4,570 4,304 4,821 4,281 6,735 6,871 5,535 6,901 5,762 5,388 4,159 4,946 Works (Administration civil) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 464 Highways, Roads & Bridges & Building & Struct. 3,482 3,034 3,699 3,395 2,953 3,213 3,018 4,840 4,199 3,228 3,978 3,865 3,168 2,796 2,559 Water Supply and Sanitation 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Public Health Engineering 1,043 1,071 865 1,030 1,118 1,136 1,011 1,800 2,672 2,306 2,923 1,896 2,220 1,339 1,863 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 0 0 0 0 0 0 0 0 0 0 0 0 0 23 0 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 112 99 223 144 233 472 252 95 0 0 0 0 0 1 60 Subsidies 25 8 7 20 40 9 46 5 53 2 2 0 0 0 0 Grants & Investments 590 112 180 1,053 316 683 98 339 39 213 476 869 2,741 289 607 Unallocable 21 6 19 8 3 0 2 1 5 49 0 0 0 0 0 Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Government of Punjab, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 19: Sindh: Development Expenditures

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final DEVELOPMENT EXPENDITURES 3,562 4,352 3,795 5,156 5,651 5,289 5,481 8,674 7,713 3,572 4,470 3,592 3,677 2,428 5,272 General Administration 3 104 7 9 11 10 10 23 18 13 12 39 83 31 20 Law & order 0 200 2 30 26 6 0 0 2 0 0 0 0 0 0 Social services 205 129 170 261 258 218 330 422 487 283 422 432 256 289 523 Education 143 63 94 107 111 87 83 140 105 44 64 77 178 153 324 Primary 40 23 40 55 47 49 41 48 16 18 10 4 100 5 9 Secondary 37 13 13 10 14 12 6 19 23 1 27 17 11 47 104 University & College Education 9 10 8 4 12 0 4 7 11 3 6 3 2 17 40 Professional & Technical Edu & Teachers Training 19 14 26 23 31 14 15 53 35 11 11 47 57 84 160 Others 38 3 6 15 8 12 16 14 19 11 10 5 8 0 11 Health 51 55 66 128 133 113 232 265 175 58 131 79 75 117 189 General Hospitals & Clinics 18 18 28 64 78 61 153 100 105 22 65 0 2 26 71 Mother & Child 5 6 5 6 8 2 6 0 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 21 27 30 32 45 45 55 96 38 23 23 21 30 66 105 Other 7 3 2 26 2 4 18 70 32 13 42 58 42 24 13 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 11 11 11 26 15 19 15 17 208 182 226 276 3 19 11 Economic Services 815 881 880 1,032 1,020 1,032 1,126 1,860 1,983 983 1,277 792 694 482 896 Agriculture 216 193 197 200 255 245 162 182 207 182 135 108 80 54 268 Irrigation 505 536 511 700 699 667 759 1,383 1,731 787 1,130 662 509 409 593 Fuel and power 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Industries and mineral resources 35 79 50 50 38 20 74 154 28 10 5 22 19 19 32 Transport and Communication 59 73 50 80 27 99 130 141 18 3 7 0 0 0 1 Other Economic Services 0 0 73 3 0 1 0 0 0 0 0 0 85 0 1 Community services 2,319 2,447 2,450 3,093 3,527 3,192 3,080 4,359 4,255 2,073 2,751 2,321 1,668 1,907 3,931 Works (Administration civil) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Highways, Roads & Bridges & Building & Struct. 1,724 1,993 2,035 2,648 3,030 2,593 2,455 3,510 3,460 1,565 2,263 1,805 1,249 1,718 3,284 Water Supply and Sanitation 320 390 331 403 483 593 618 837 782 507 487 516 419 188 646 Public Health Engineering 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 275 65 84 42 12 6 7 0 13 1 1 0 0 1 0 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 676 553 498 0 1 0 0 12 0 0 0 0 0 0 0 Subsidies 0 0 0 0 0 0 0 0 0 6 0 0 0 0 0 Grants & Investments 220 591 271 730 808 831 935 2,054 971 43 9 8 741 229 474 Unallocable 0 1 12 -4 0 1 0 0 -4 161 0 0 223 -510 -572 Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Government of Sindh, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 20: NWFP: Development Expenditures

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final DEVELOPMENT EXPENDITURES 2,419 2,168 3,274 3,909 5,339 4,855 4,106 5,070 5,304 3,082 2,685 3,565 3,046 3,454 5,002 General Administration 4 16 83 58 29 93 100 92 110 97 67 169 96 121 161 Law & order 5 7 8 8 0 1 0 1 6 5 3 0 24 1 0 Social services 233 146 369 825 834 1,027 772 802 706 1,081 834 687 909 710 165 Education 151 93 102 212 264 413 402 295 239 738 415 258 567 577 86 Primary 5 6 4 5 5 17 39 10 103 671 330 151 495 479 16 Secondary 14 26 18 23 23 35 4 103 47 10 13 3 13 41 27 University & College Education 0 1 12 5 0 2 8 8 17 11 10 14 14 6 7 Professional & Technical Edu & Teachers Training 10 20 16 21 31 49 25 16 40 16 23 22 18 34 1 Others 123 40 52 159 205 311 326 159 31 31 40 68 27 16 36 Health 67 72 63 92 114 198 165 228 140 66 90 159 91 49 41 General Hospitals & Clinics 43 35 25 32 45 70 59 107 78 29 46 79 19 31 15 Mother & Child 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 23 28 31 38 36 47 49 57 55 1 7 13 2 2 12 Other 1 9 8 22 33 82 57 65 7 36 37 67 70 15 13 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 15 -20 204 521 456 415 205 279 328 277 328 270 251 85 38 Economic Services 448 462 987 901 1,870 1,262 1,326 1,183 1,478 638 609 1,092 594 1,446 3,945 Agriculture 148 233 450 231 341 271 292 253 307 147 103 113 116 193 151 Irrigation 108 95 149 292 347 275 313 349 461 293 317 341 313 174 273 Fuel and power 21 17 10 34 38 161 313 19 81 62 91 126 60 51 63 Industries and mineral resources 2 2 45 35 40 42 56 7 50 21 18 16 15 30 69 Transport and Communication 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Economic Services 168 115 333 309 1,104 513 351 556 579 115 80 495 90 998 3,389 Community services 1,388 1,355 1,471 1,668 1,958 2,334 1,887 2,858 2,785 1,253 1,171 1,618 1,423 1,176 731 Works (Administration civil) 0 0 0 3 5 5 1 1 3 0 0 0 0 0 0 Highways, Roads & Bridges & Building & Struct. 1,190 1,192 1,257 1,404 1,594 1,704 1,490 2,420 1,975 558 532 950 673 661 449 Water Supply and Sanitation 198 162 213 262 359 626 396 437 807 695 640 668 750 516 232 Public Health Engineering 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 0 0 0 0 1 0 0 0 0 0 0 0 0 0 49 Subsidies 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Grants & Investments 340 182 356 449 648 137 21 134 218 0 0 0 0 0 0 Unallocable 0 0 0 0 0 0 0 0 0 8 0 0 0 0 0 Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Government of NWFP, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

Table 21: Balochistan: Development Expenditures

(In Million of Rupees) 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual Actual June Final DEVELOPMENT EXPENDITURES 1,105 1,967 2,163 2,406 3,659 3,086 4,309 4,857 4,619 2,545 1,883 2,010 1,445 4,154 3,753 General Administration 13 24 5 14 23 0 0 0 7 12 14 1 2 13 23 Law & order 21 48 55 62 53 48 28 37 31 16 8 7 12 23 36 Social services 344 516 450 443 868 519 1,671 1,806 1,624 954 619 719 383 472 342 Education 128 213 222 249 583 208 1,110 907 760 174 231 302 230 260 117 Primary 68 12 0 0 0 0 0 0 0 0 0 0 0 0 0 Secondary 48 69 0 0 0 0 0 0 0 0 0 0 0 0 0 University & College Education 8 20 0 0 0 0 0 0 0 0 0 0 0 0 0 Professional & Technical Edu & Teachers Training 0 3 0 0 0 0 0 0 0 0 0 0 0 0 0 Others 4 109 222 249 583 208 1,110 907 760 174 231 302 230 260 117 Health 83 151 132 107 114 162 343 484 519 591 232 250 21 142 134 General Hospitals & Clinics 52 87 0 0 0 0 0 0 0 0 0 0 0 0 0 Mother & Child 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Facilities & Preventive Measures 15 39 0 0 0 0 0 0 0 0 0 0 0 0 0 Other 16 25 132 107 114 162 343 484 519 591 232 250 21 142 134 Population 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Social Services 134 152 97 87 170 149 218 415 345 189 156 167 132 69 92 Economic Services 459 723 876 1,025 1,580 1,499 1,189 1,536 1,441 1,005 729 495 273 2,192 1,873 Agriculture 202 299 313 154 230 156 457 563 389 115 145 123 83 150 200 Irrigation 156 221 296 390 800 921 458 713 801 826 501 311 165 496 591 Fuel and power 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Industries and mineral resources 11 30 12 11 23 37 44 4 0 3 1 3 7 7 5 Transport and Communication 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Economic Services 91 174 255 470 526 385 230 256 251 61 82 58 18 1,539 1,078 Community services 267 657 776 862 1,134 1,015 1,423 1,436 1,517 559 513 788 776 1,454 1,478 Works (Administration civil) 0 0 0 0 0 0 0 230 0 0 0 0 0 0 0 Highways, Roads & Bridges & Building & Struct. 202 447 479 562 691 0 0 0 817 368 334 505 501 1,131 1,267 Water Supply and Sanitation 63 207 297 300 444 502 809 639 699 190 179 282 274 323 211 Public Health Engineering 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Broadcasting 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Urban Town Planning & Regulator Services 0 0 0 0 0 0 2 0 0 0 0 0 0 0 0 Scientific Research and Survey 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other Community Services 2 3 0 0 0 513 612 567 0 0 0 0 0 0 0 Subsidies 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Grants & Investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Unallocable 0 0 0 0 0 4 0 0 0 0 0 0 0 0 0 Note: Capital expenditures of sectors like education, health, etc. are included under the Highways, roads, buildings and structures. Source: Government of Balochistan, Finance Accounts (1987/88 -2000/01); Civil Accounts(2001/02).

Statistical Annex for Volume I

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