## 1. The Government of Pakistan completed its second full Poverty Reduction

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---

### Background and purpose
- The Government of Pakistan completed PRSP-II in December 2008.
- A new democratically elected government took office in March 2008 and finalized the draft strategy inherited from the previous administration.
- This Joint Staff Advisory Note (JSAN) provides the advice of the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA) for strengthening PRSP-II and its implementation.

### Key context and outcomes of PRSP-I
- Builds on PRSP-I (adopted December 2003) and is shaped by recent political and economic developments.
- Outcomes and macro facts:
  - Education and health outcomes and access to drinking water showed steady progress.
  - Economy grew at about 7 percent a year on average during 2003/04–2006/07.
  - Poverty headcount decreased from 34.5 percent in 2001/02 to 22.3 percent in 2005/06.
- 2007/08 shocks and policy environment:
  - Sharp rise in international commodity prices combined with policy inaction and internal political turmoil led to rapidly growing macroeconomic imbalances.
  - Economic activity slowed and inflation rose sharply, hindering poverty reduction and intensifying balance of payments pressures.

### Objectives and strategic focus of PRSP-II
- Core objectives:
  - Regain macroeconomic stability.
  - Recover growth momentum to 5–7 percent a year while protecting the poor and vulnerable.
- Strategy elements:
  - Prolonged macroeconomic stability, financial discipline, and sound policies to steer broad-based growth, create jobs, and reduce poverty.
  - Emphasis on economic liberalization, deregulation, transparent privatization, and improving income distribution and competitiveness.
  - Greater emphasis than PRSP-I on agriculture, manufacturing, and services.
  - Strengthening the social safety net.
  - Consistency with the Millennium Development Goals (MDG).
- Structure:
  - Nine pillars ranging from macroeconomic stability and real sector growth to social protection and governance.
  - Empowering women and reducing gender disparities as a cross-cutting theme.
- Staff advice:
  - Identification of core priorities would be helpful given resource and implementation constraints.

### Strengthening links between PRSP-II and domestic processes

A. Consultation process
- Consultations timeline and stakeholders:
  - Consultations started towards the end of 2005 and continued until launch.
  - In 2005–06: federal and provincial workshops; consultations with communities, parliamentarians, and civil society; commissioned research studies and poverty and social impact assessments; technical working groups.
  - A draft Summary circulated at the Pakistan Development Forum in April 2007 for feedback.
  - Final consultations with government, civil society, parliamentarians, and development partners were conducted in November–December 2008.
- Delay factors:
  - Parliamentary elections initially scheduled for fall 2007 but held in February 2008 delayed completion.

B. Coordination with provincial strategies and MTDF
- Federal nature and coordination gaps:
  - PRSP-II is a federal strategy that references provincial initiatives but is not systematically coordinated with provincial strategies and plans.
  - Recommendation: PRSP-II should reflect and build on provincial development strategies to eliminate overlap, ensure complementarity, share key priorities, and exploit synergies.
- Medium-Term Development Framework (MTDF) linkage:
  - Planning Commission launched a five-year MTDF for 2005–10 outlining the federal Public Sector Development Program (PSDP).
  - MTDF was neither coordinated with PRSP-I nor properly linked to the budget.
  - Opportunity: PRSP-II covers up to 2010/11 and MTDF expires in 2010; authorities could merge the two into a single national development strategy linked to the medium-term macroeconomic framework and the annual budget in 2010/11.

### Strengthening PRSP-II and enhancing its implementation

A. Poverty diagnostics
- Strengths:
  - Good summary of trends and spatial patterns of poverty using the official methodology from PRSP-I, official poverty line, and household surveys by the Federal Bureau of Statistics.
  - Confirms significant poverty reduction since 2001/02 and provides historical perspective back to 1987/88.
  - Notes limitations of the 2005/06 poverty estimates for assessing impact of recent crises.
  - Provides rich profiles linking poverty status to socio-economic indicators and household demographics.
  - Identifies key correlates of poverty: educational attainment of household head, agricultural landholding, and household size.
  - Links poverty to access to facilities (hospitals, schools) and highlights need to improve access while accounting for service quality.
- Gaps and recommended additional studies:
  - Lack of empirical evidence on the poverty impact of expanded access to finance; staffs recommend a detailed analysis.
  - Limited analysis of gender issues in relation to poverty despite gender mainstreaming being cross-cutting; gender breakdowns exist but their links with poverty are not discussed.
  - Need for analysis of the impact of social safety nets on the poor and vulnerable.

B. Macroeconomic framework
- Historical assessment:
  - PRSP-II provides a broad overview of macro trends since early 2000.
  - Notes pickup in average real GDP growth to about 7 percent a year during 2002/03–2006/07, partly explained by heavy reliance on external financing and an expansionary fiscal stance, low tax revenue, and stagnant national savings.
  - This model increased vulnerability to external shocks in 2007/08.
  - Government did not pass higher energy and food prices through to consumers and producers, increasing the budget deficit which was mainly financed by the State Bank of Pakistan (SBP).
  - Increasing import bill and buoyant domestic demand widened the current account deficit to 8.4 percent of GDP at a time of declining capital inflows, reducing international reserves to less than one month of imports by end-October 2008.
  - Real interest rates were increasingly negative amid buoyant domestic demand, contributing to CPI inflation rising to 25 percent in October 2008 (compared with 9.3 percent in October 2007) and sharply widening external imbalances.
- Alignment with Fund program:
  - Short-term macro framework is consistent with objectives of the Fund-supported Stand-By Arrangement (SBA).
  - Strategy targets significant reduction in inflation and external imbalances through tighter macroeconomic policies to lay foundations for sustainable low-inflation growth.
- Fiscal adjustment and social protection trade-offs:
  - Key fiscal target: reduce fiscal deficit from 7.4 percent of GDP in 2007/08 to 4.2 percent in 2008/09 and 3.3 percent in 2009/10.
  - Adjustment through significant reduction in energy and food subsidies, better prioritization of development spending, and revenue measures.
  - Given subsidy cuts and high inflation, social protection expenditure is envisaged to increase to 0.9 percent of GDP in 2008/09 from 0.3 percent in 2007/08.
  - Government finalizing preparatory work on scaling up social safety net spending.
  - Staffs recommend directing additional funds to existing programs (e.g., Bait-ul-Mal) or complementary income-generation programs such as skills development.
- Monetary and exchange rate policy:
  - Need to strengthen analysis of monetary and exchange rate policy issues.
  - Emphasis: maintaining a tight monetary policy is critical to protect international reserves, ensure targeted placement of treasury bills with commercial banks, and reduce inflation.
  - Importance of improving liquidity management framework and strengthening SBP independence should be reflected.
  - Strategy emphasizes exchange rate flexibility; could also mention SBA commitment to remove restrictions on current transactions and phase out SBP allocation of foreign exchange to oil importers.
- Medium-term feasibility and risks:
  - Feasibility depends on effective implementation of medium-term reform measures: tax policy and administration reforms, improved development expenditure management, financial sector reforms, and competitiveness improvements.
  - Weaknesses in public debt management highlighted; government committed to strengthen it and PRSP-II should cover this with a clearly articulated medium-term debt strategy.
  - Targets:
    - increase real GDP growth to 7 percent a year by 2012/13 from projected 3.4 percent in 2008/09;
    - gradual reduction in current account deficit to 3½ percent of GDP;
    - raise gross official reserves to $14.5 billion (2.6 months of imports).
  - Risks not fully analyzed:
    - prolonged slowdown in trading partner growth;
    - lower remittances from GCC countries;
    - lower FDI;
    - delayed resumption of portfolio inflows.
  - Recent decline in oil import prices is a positive development reducing the current account deficit.
  - Strategy could indicate areas where additional donor financing should be allocated.

C. Sectoral policies
- Competitiveness framework:
  - Identifies macroeconomic stability, infrastructure, human resources, strong institutions as key building blocks; firm-level productivity as key outcome.
  - Policy commitments: trade competitiveness forum; open product markets; removal of trade-related bottlenecks; labor law reform; continuation of privatization; elimination of barriers to entry, exit and domestic trade.
  - Limits government interventions to public goods: quality systems, knowledge flows, export promotion, and safety nets.
- SME and sectoral emphasis cautions:
  - Concern that PRSP-II places too much emphasis on steering policies toward specific product groups and firms of specific size (notably SMEs).
  - 95 percent of firms in Pakistan are SMEs; proposed targeted SME framework (finance, business regulation, land allocation, industrial programs, direct grants, SME Act) should be carefully designed for cost-effectiveness.
  - Staffs recommend revisiting plans to avoid distortions from promoting specific product groups and to ensure a level playing field.
  - Policy actions to strengthen: land markets, creditor rights enforcement, improved judiciary, and strengthened competition policy.
- Education:
  - PRSP-II covers access, governance and quality of education and takes into account provincial interventions.
  - Education expenditures increased steadily during 2002/03–2006/07; retaining this trend is important.
- Health:
  - Programmatic priorities: maternal and neonatal health, family planning, nutrition, control of communicable diseases (TB, HIV-AIDS, hepatitis, malaria).
  - Focus on strengthening supply of services and planned demand-side interventions.
  - Organizational reforms: expand People’s Primary Health Initiative, improve hospital management and governance, strengthen Ministry of Health stewardship, pilot health community financing schemes.
  - Need to carefully estimate costs of enhanced/new interventions.
  - Recommendation: strengthen monitoring framework with indicators disaggregated by expenditure quintiles and by districts/regions; define criteria for evaluating health financing pilots.
  - Staffs recommend regular health facility surveys as part of monitoring.
- Social protection and safety nets:
  - Detailed articulation of social protection welcomed; National Social Protection Strategy completed in 2007.
  - Government doubled safety net budget by launching Benazir Income Support Program (BISP), partly in response to high food inflation in 2008.
  - Government committed to further increasing BISP budget and recognizes need to improve BISP targeting.
  - Staff recommendations moving forward:
    - (i) Improve BISP targeting.
    - (ii) Streamline programs with similar objectives.
    - (iii) Create income-generation opportunities to help beneficiaries graduate from social assistance.
  - Immediate priority: implement an improved targeting system for BISP to cover 7 million families in 2009/10.
  - Staffs welcome adoption of an objective, transparent poverty scorecard to gradually replace existing targeting system.
  - Institutional capacity at all tiers of government must be created and strengthened to realize this.
  - Streamline federal programs (e.g., Bait-Ul-Maal) and provincial programs (e.g., Punjab Food Support Program) serving similar objectives.
  - Medium-term priorities:
    - (a) Move from universal subsidies (such as wheat) to targeted ones.
    - (b) Ensure programs such as education stipends align with targeting base created through the poverty scorecard.
    - (c) Build a robust program that helps the poor graduate from safety net to income generation.

*Source: Joint Staff Advisory Note of the IMF and IDA on PRSP-II (December 2008).*

### 23. The proposed way forward to increase energy generation and strengthen

### Energy generation and infrastructure: main findings
- Enhancing energy generation and efficiency is urgent given Pakistan’s current energy crisis.
- Availability of affordable infrastructure (dams, roads, highways, and other transport) is essential for promoting private sector activity and competitiveness.
- The strategy emphasizes the role of Public-Private Partnerships (PPPs) to address large investment needs.
- The strategy identifies limited access to rural roads as an issue affecting a large part of the population and suggests federal government consultation with provincial and local governments to address this.

### Public-Private Partnerships (PPPs): requirements and cautions
- PPPs can:
  - contribute to creating fiscal space;
  - improve the quality and scope of service delivery;
  - provide better value for money.
- Realizing PPP benefits hinges on:
  - developing a legal and regulatory framework; and
  - building institutions capable of managing fiscal risks associated with PPPs.
- Regulatory framework and institutions need to be put in place and should be given priority.
- PPPs should be subjected to value for money analysis based on a public sector comparator.
- PPPs should not be used to bypass budgetary spending controls (i.e., to move public investment off budget).
- The PPP-policy framework should give the Ministry of Finance a strong role in approving PPP projects because of its mandate to formulate fiscal policy and evaluate the possible budgetary implications of PPPs.
- PPPs in the transport sector could have been given more emphasis; the list of roads to be undertaken under PPPs in the strategy’s annex should guide PRSP-II implementation.

### Governance: assessment and recommended emphasis
- PRSP-II recognizes the importance of good governance for development and poverty reduction but proposes a limited reform agenda.
- Lacks analysis of successes and failures on governance during PRSP-I to define priorities (for example, decentralization implementation experience).
- Proposes desirability of reforms in:
  - public financial management;
  - civil service reform;
  - tax administration;
  - judicial and public procurement reform.
- Gaps: for public procurement and judicial and civil service reform, little detail is provided on proposals and implementation paths.
- Staff recommendations:
  - focus on strengthening governance elements of the strategy;
  - substantially strengthen public expenditure management at all levels to enable better budget execution, monitoring and evaluation;
  - introduce systematic and credible commitment control systems; and
  - improve fiscal reporting.
- Ongoing efforts (including strengthening the government’s cash management) could be highlighted in the report.
- Staff recommend PRSP-II specify an action plan with detailed timetable to guide efforts in this area.

### Costing, budget, financing and targets: current projections and concerns
- Implementation will be prioritized through the medium-term expenditure framework (MTEF), updated annually in the budget process.
- Sectoral expenditures need to be embedded in the MTEF, consistent with the medium-term macroeconomic framework.
- PRSP-II includes costing only for three sectors—education, health, water and sanitation—and, within these sectors, only for the Millennium Development Goal (MDG)-related expenditures.
- The strategy provides detailed year-by-year comparisons of projected PRSP expenditures and MDG costing estimates linked to explicit quantitative MDG targets for education, health and water and sanitation, and stresses limitations of the costing exercise due to strong assumptions and large standard errors.
- Key numeric projections and gaps:
  - PRSP-related expenditures on education, health and water and sanitation are projected to increase from 2.9 percent of GDP in 2007/08 to 3.2 percent of GDP in 2010/11.
  - Pakistan plans to spend on these sectors less than what the MDG costing estimates would call for during the PRSP-II period.
  - Uncertainty whether the MDG costing estimates derived in 2005/06 are still accurate for the PRSP-II period.
  - In 2006/07 the net primary enrolment rate in Pakistan was only 56 percent against the MDG target of 100 percent by 2015.
- Staff advice:
  - clarify whether and how the resource gap will be bridged during 2008/09–2010/11;
  - bring the MDG and poverty reduction agenda in line with the available fiscal envelope given Pakistan’s deteriorated fiscal and economic outlook;
  - if targets are not adjusted, any resource gap would need to be filled by mobilizing additional donor and private resources;
  - given that the public sector must be the main provider in rural areas and for poor households in education, staff urge measures to increase the efficiency of public spending and to revisit allocation across sectors to re-allocate spending to priority areas.

### Indicators and monitoring: progress and remaining needs
- Progress in data collection since PRSP-I:
  - implementation of multi-rounds of the Pakistan Social-economic Living Standard Measurement (PSLM) survey, launched in 2004/05 and fielded annually since then;
  - PSLM survey data will help monitor PRSP-I and PRSP-II outcomes at national, provincial, and district levels;
  - implementation of other surveys, such as the Pakistan Demographic Survey (PDS), has made the M&E system more comprehensive.
- PRSP-II identifies weaknesses in the existing M&E system and proposes reform measures:
  - improve data compilation in the Management Information System (MIS);
  - create poverty related indicators at the district level;
  - enhance the quality and timeliness of data.
- Need to clarify mechanisms through which M&E findings will provide timely feedback into the policy process.
- The new Statistical Law:
  - will be key for implementing the M&E system and institutional arrangements;
  - proposes a new statistical agency, the Pakistan Bureau of Statistics (PBS), integrating several existing agencies (Federal Bureau of Statistics, Agriculture Census Organization, Population Census Organization, and the Technical Wing).
- Strategy could have better explained how autonomy will be strengthened and how the law will establish governance processes and an organizational plan for senior management.
- Once the Statistical Law is approved, PRSP Secretariat should hold close consultations with the new agency on M&E institutional arrangements.
- Urgent need to strengthen technical capacity for poverty measurement and review institutional arrangements:
  - the Center for Research on Poverty Reduction and Income Distribution (CRPRID) has been given responsibility to estimate official poverty headcount rates, but delivery has been slow at times (poverty estimates for 2005/06 were published only in 2008);
  - recent erosion of analytical capacity in CRPRID is a concern.
- Staff recommendation: review the institutional framework for poverty measurement and rebuild an effective and reliable poverty monitoring instrument.

### Conclusions and issues for discussion: priority actions and risks
- Main priority areas for strengthening the strategy and its implementation (staffs’ view):
  - (i) develop a detailed tax policy and tax administration reform action plan to ensure that the ambitious revenue mobilization targets are met;
  - (ii) conduct further work on costing the proposed programs and measures, including on health, and, if necessary, revise the targets in light of the fiscal constraints;
  - (iii) implement the envisaged social safety net reform agenda, while streamlining social protection programs with similar objectives;
  - (iv) further develop the reform agenda on governance and public financial management, including on public debt management;
  - (v) establish the appropriate legal framework for PPPs and develop institutional capacity to manage the financial risks associated with PPP financed infrastructure investment;
  - (vi) lessen the emphasis on directed programs at SMEs and focus efforts on strengthening the overall investment climate; and
  - (vii) strengthen the technical capacity for poverty measurement and analysis.
- Implementation risks that need to be managed:
  - (i) a further deterioration in the world economy and international financial markets, which could complicate stabilization efforts by weakening Pakistan’s export prospects, lowering capital inflows, limiting economic growth and reducing flexibility for economic reforms;
  - (ii) a deterioration in the security situation, which could shift the government’s focus away from economic matters; and
  - (iii) delays in the implementation of reforms because of institutional capacity constraints.
- Questions posed for discussion:
  - Do the Executive Directors concur with the priority action identified by the staffs?
  - Do they agree with the recommendations made by the staffs?

*Source: Excerpt from the provided IMF staff report content.*

### 1. The Government of Pakistan completed its second full Poverty Reduction

### _cr10182 - 1. The Government of Pakistan completed its second full Poverty Reduction

### Background and purpose
- The Government of Pakistan completed PRSP-II in December 2008.
- A new democratically elected government took office in March 2008 and finalized the draft strategy inherited from the previous administration.
- This Joint Staff Advisory Note (JSAN) provides the advice of the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA) for strengthening PRSP-II and its implementation.

### Key context and outcomes of PRSP-I
- PRSP-II builds on PRSP-I (adopted December 2003) and is shaped by recent political and economic developments.
- PRSP-I outcomes and macro facts:
  - Education and health outcomes and access to drinking water showed steady progress.
  - Economy grew at about 7 percent a year on average during 2003/04–2006/07.
  - Poverty headcount decreased from 34.5 percent in 2001/02 to 22.3 percent in 2005/06.
- 2007/08 shocks and policy environment:
  - Sharp rise in international commodity prices combined with policy inaction and internal political turmoil led to rapidly growing macroeconomic imbalances.
  - Economic activity slowed and inflation rose sharply, hindering poverty reduction and intensifying balance of payments pressures.

### Objectives and strategic focus of PRSP-II
- Core objectives:
  - Regain macroeconomic stability.
  - Recover growth momentum to 5–7 percent a year while protecting the poor and vulnerable.
- Strategy elements:
  - Prolonged macroeconomic stability, financial discipline, and sound policies to steer broad-based growth, create jobs, and reduce poverty.
  - Emphasis on economic liberalization, deregulation, transparent privatization, and improving income distribution and competitiveness.
  - Greater emphasis than PRSP-I on agriculture, manufacturing, and services.
  - Strengthening the social safety net.
  - Consistency with the Millennium Development Goals (MDG).
- Structure:
  - Nine pillars ranging from macroeconomic stability and real sector growth to social protection and governance.
  - Empowering women and reducing gender disparities as a cross-cutting theme.
- Staff advice:
  - Identification of core priorities would be helpful given resource and implementation constraints.

### Strengthening links between PRSP-II and domestic processes

A. Consultation process
- Consultations timeline and stakeholders:
  - Consultations started towards the end of 2005 and continued until launch.
  - In 2005–06: federal and provincial workshops; consultations with communities, parliamentarians, and civil society; commissioned research studies and poverty and social impact assessments; technical working groups.
  - A draft Summary circulated at the Pakistan Development Forum in April 2007 for feedback.
  - Final consultations with government, civil society, parliamentarians, and development partners were conducted in November–December 2008.
- Delay factors:
  - Parliamentary elections initially scheduled for fall 2007 but held in February 2008 delayed completion.

B. Coordination with provincial strategies and MTDF
- Federal nature and coordination gaps:
  - PRSP-II is a federal strategy that references provincial initiatives but is not systematically coordinated with provincial strategies and plans.
  - Recommendation: PRSP-II should reflect and build on provincial development strategies to eliminate overlap, ensure complementarity, share key priorities, and exploit synergies.
- Medium-Term Development Framework (MTDF) linkage:
  - Planning Commission launched a five-year MTDF for 2005–10 outlining the federal Public Sector Development Program (PSDP).
  - MTDF was neither coordinated with PRSP-I nor properly linked to the budget.
  - Opportunity: PRSP-II covers up to 2010/11 and MTDF expires in 2010; authorities could merge the two into a single national development strategy linked to the medium-term macroeconomic framework and the annual budget in 2010/11.

### Strengthening PRSP-II and enhancing its implementation

A. Poverty diagnostics
- Strengths:
  - Good summary of trends and spatial patterns of poverty using the official methodology from PRSP-I, official poverty line, and household surveys by the Federal Bureau of Statistics.
  - Confirms significant poverty reduction since 2001/02 and provides historical perspective back to 1987/88.
  - Notes limitations of the 2005/06 poverty estimates for assessing impact of recent crises.
  - Provides rich profiles linking poverty status to socio-economic indicators and household demographics.
  - Identifies key correlates of poverty: educational attainment of household head, agricultural landholding, and household size.
  - Links poverty to access to facilities (hospitals, schools) and highlights need to improve access while accounting for service quality.
- Gaps and recommended additional studies:
  - Lack of empirical evidence on the poverty impact of expanded access to finance; staffs recommend a detailed analysis.
  - Limited analysis of gender issues in relation to poverty despite gender mainstreaming being cross-cutting; gender breakdowns exist but their links with poverty are not discussed.
  - Need for analysis of the impact of social safety nets on the poor and vulnerable.

B. Macroeconomic framework
- Historical assessment:
  - PRSP-II provides a broad overview of macro trends since early 2000.
  - Notes pickup in average real GDP growth to about 7 percent a year during 2002/03–2006/07, partly explained by heavy reliance on external financing and an expansionary fiscal stance, low tax revenue, and stagnant national savings.
  - This model increased vulnerability to external shocks in 2007/08.
  - Government did not pass higher energy and food prices through to consumers and producers, increasing the budget deficit which was mainly financed by the State Bank of Pakistan (SBP).
  - Increasing import bill and buoyant domestic demand widened the current account deficit to 8.4 percent of GDP at a time of declining capital inflows, reducing international reserves to less than one month of imports by end-October 2008.
  - Real interest rates were increasingly negative amid buoyant domestic demand, contributing to CPI inflation rising to 25 percent in October 2008 (compared with 9.3 percent in October 2007) and sharply widening external imbalances.
- Alignment with Fund program:
  - Short-term macro framework is consistent with objectives of the Fund-supported Stand-By Arrangement (SBA).
  - Strategy targets significant reduction in inflation and external imbalances through tighter macroeconomic policies to lay foundations for sustainable low-inflation growth.
- Fiscal adjustment and social protection trade-offs:
  - Key fiscal target: reduce fiscal deficit from 7.4 percent of GDP in 2007/08 to 4.2 percent in 2008/09 and 3.3 percent in 2009/10.
  - Adjustment through significant reduction in energy and food subsidies, better prioritization of development spending, and revenue measures.
  - Given subsidy cuts and high inflation, social protection expenditure is envisaged to increase to 0.9 percent of GDP in 2008/09 from 0.3 percent in 2007/08.
  - Government finalizing preparatory work on scaling up social safety net spending.
  - Staffs recommend directing additional funds to existing programs (e.g., Bait-ul-Mal) or complementary income-generation programs such as skills development.
- Monetary and exchange rate policy:
  - Need to strengthen analysis of monetary and exchange rate policy issues.
  - Emphasis: maintaining a tight monetary policy is critical to protect international reserves, ensure targeted placement of treasury bills with commercial banks, and reduce inflation.
  - Importance of improving liquidity management framework and strengthening SBP independence should be reflected.
  - Strategy emphasizes exchange rate flexibility; could also mention SBA commitment to remove restrictions on current transactions and phase out SBP allocation of foreign exchange to oil importers.
- Medium-term feasibility and risks:
  - Feasibility depends on effective implementation of medium-term reform measures: tax policy and administration reforms, improved development expenditure management, financial sector reforms, and competitiveness improvements.
  - Weaknesses in public debt management highlighted; government committed to strengthen it and PRSP-II should cover this with a clearly articulated medium-term debt strategy.
  - Targets: increase real GDP growth to 7 percent a year by 2012/13 from projected 3.4 percent in 2008/09; gradual reduction in current account deficit to 3½ percent of GDP; raise gross official reserves to $14.5 billion (2.6 months of imports).
  - Risks not fully analyzed: prolonged slowdown in trading partner growth, lower remittances from GCC countries, lower FDI, delayed resumption of portfolio inflows—these are key downside risks.
  - Recent decline in oil import prices is a positive development reducing the current account deficit.
  - Strategy could indicate areas where additional donor financing should be allocated.

C. Sectoral policies
- Competitiveness framework:
  - PRSP-II identifies macroeconomic stability, infrastructure, human resources, strong institutions as key building blocks; firm-level productivity as key outcome.
  - Policy commitments: trade competitiveness forum; open product markets; removal of trade-related bottlenecks; labor law reform; continuation of privatization; elimination of barriers to entry, exit and domestic trade.
  - Limits government interventions to public goods: quality systems, knowledge flows, export promotion, and safety nets.
- SME and sectoral emphasis cautions:
  - Concern that PRSP-II places too much emphasis on steering policies toward specific product groups and firms of specific size (notably SMEs).
  - 95 percent of firms in Pakistan are SMEs; proposed targeted SME framework (finance, business regulation, land allocation, industrial programs, direct grants, SME Act) should be carefully designed for cost-effectiveness.
  - Staffs recommend revisiting plans to avoid distortions from promoting specific product groups and to ensure a level playing field.
  - Policy actions to strengthen: land markets, creditor rights enforcement, improved judiciary, and strengthened competition policy.
- Education:
  - PRSP-II covers access, governance and quality of education and takes into account provincial interventions.
  - Education expenditures increased steadily during 2002/03–2006/07; retaining this trend is important.
- Health:
  - Programmatic priorities appropriate: maternal and neonatal health, family planning, nutrition, control of communicable diseases (TB, HIV-AIDS, hepatitis, malaria).
  - Focus on strengthening supply of services and planned demand-side interventions.
  - Organizational reforms: expand People’s Primary Health Initiative, improve hospital management and governance, strengthen Ministry of Health stewardship, pilot health community financing schemes.
  - Need to carefully estimate costs of enhanced/new interventions.
  - Recommendation: strengthen monitoring framework with indicators disaggregated by expenditure quintiles and by districts/regions; define criteria for evaluating health financing pilots.
  - Staffs recommend regular health facility surveys as part of monitoring.
- Social protection and safety nets:
  - Detailed articulation of social protection welcomed; National Social Protection Strategy completed in 2007.
  - Government doubled safety net budget by launching Benazir Income Support Program (BISP), partly in response to high food inflation in 2008.
  - Government committed to further increasing BISP budget and recognizes need to improve BISP targeting.
  - Staff recommendations moving forward:
    - (i) Improve BISP targeting.
    - (ii) Streamline programs with similar objectives.
    - (iii) Create income-generation opportunities to help beneficiaries graduate from social assistance.
  - Immediate priority: implement an improved targeting system for BISP to cover 7 million families in 2009/10.
  - Staffs welcome adoption of an objective, transparent poverty scorecard to gradually replace existing targeting system.
  - Institutional capacity at all tiers of government must be created and strengthened to realize this.
  - Streamline federal programs (e.g., Bait-Ul-Maal) and provincial programs (e.g., Punjab Food Support Program) serving similar objectives.
  - Medium-term priorities:
    - (a) Move from universal subsidies (such as wheat) to targeted ones.
    - (b) Ensure programs such as education stipends align with targeting base created through the poverty scorecard.
    - (c) Build a robust program that helps the poor graduate from safety net to income generation.

*Source: Joint Staff Advisory Note of the IMF and IDA on PRSP-II (December 2008).*

### 23. The proposed way forward to increase energy generation and strengthen

### 23. The proposed way forward to increase energy generation and strengthen

### Energy generation and infrastructure: main findings
- Enhancing energy generation and efficiency is urgent given Pakistan’s current energy crisis.
- Availability of affordable infrastructure (dams, roads, highways, and other transport) is essential for promoting private sector activity and competitiveness.
- The strategy emphasizes the role of Public-Private Partnerships (PPPs) to address large investment needs.
- The strategy identifies limited access to rural roads as an issue affecting a large part of the population and suggests federal government consultation with provincial and local governments to address this.

### Public-Private Partnerships (PPPs): requirements and cautions
- PPPs can:
  - contribute to creating fiscal space;
  - improve the quality and scope of service delivery;
  - provide better value for money.
- Realizing PPP benefits hinges on:
  - developing a legal and regulatory framework; and
  - building institutions capable of managing fiscal risks associated with PPPs.
- Regulatory framework and institutions need to be put in place and should be given priority.
- PPPs should be subjected to value for money analysis based on a public sector comparator.
- PPPs should not be used to bypass budgetary spending controls (i.e., to move public investment off budget).
- The PPP-policy framework should give the Ministry of Finance a strong role in approving PPP projects because of its mandate to formulate fiscal policy and evaluate the possible budgetary implications of PPPs.
- PPPs in the transport sector could have been given more emphasis; the list of roads to be undertaken under PPPs in the strategy’s annex should guide PRSP-II implementation.

### Governance: assessment and recommended emphasis
- PRSP-II recognizes the importance of good governance for development and poverty reduction but proposes a limited reform agenda.
- The strategy lacks analysis of successes and failures on governance during PRSP-I to define priorities (for example, decentralization implementation experience).
- The strategy explains the desirability of reforms in:
  - public financial management;
  - civil service reform;
  - tax administration;
  - judicial and public procurement reform.
- Gaps: for public procurement and judicial and civil service reform, little detail is provided on proposals and implementation paths.
- Staff recommendations:
  - focus on strengthening governance elements of the strategy;
  - substantially strengthen public expenditure management at all levels to enable better budget execution, monitoring and evaluation;
  - introduce systematic and credible commitment control systems; and
  - improve fiscal reporting.
- Ongoing efforts (including strengthening the government’s cash management) could be highlighted in the report.
- Staff recommend PRSP-II specify an action plan with detailed timetable to guide efforts in this area.

### Costing, budget, financing and targets: current projections and concerns
- PRSP-II implementation will be prioritized through the medium-term expenditure framework (MTEF), updated annually in the budget process.
- Sectoral expenditures need to be embedded in the MTEF, consistent with the medium-term macroeconomic framework.
- PRSP-II includes costing only for three sectors—education, health, water and sanitation—and, within these sectors, only for the Millennium Development Goal (MDG)-related expenditures.
- The strategy provides detailed year-by-year comparisons of projected PRSP expenditures and MDG costing estimates linked to explicit quantitative MDG targets for education, health and water and sanitation, and stresses limitations of the costing exercise due to strong assumptions and large standard errors.
- Key numeric projections and gaps:
  - PRSP-related expenditures on education, health and water and sanitation are projected to increase from 2.9 percent of GDP in 2007/08 to 3.2 percent of GDP in 2010/11.
  - Pakistan plans to spend on these sectors less than what the MDG costing estimates would call for during the PRSP-II period.
  - Uncertainty whether the MDG costing estimates derived in 2005/06 are still accurate for the PRSP-II period.
  - In 2006/07 the net primary enrolment rate in Pakistan was only 56 percent against the MDG target of 100 percent by 2015.
- Staff advice:
  - clarify whether and how the resource gap will be bridged during 2008/09–2010/11;
  - bring the MDG and poverty reduction agenda in line with the available fiscal envelope given Pakistan’s deteriorated fiscal and economic outlook;
  - if targets are not adjusted, any resource gap would need to be filled by mobilizing additional donor and private resources;
  - given that the public sector must be the main provider in rural areas and for poor households in education, staff urge measures to increase the efficiency of public spending and to revisit allocation across sectors to re-allocate spending to priority areas.

### Indicators and monitoring: progress and remaining needs
- Significant progress in data collection since PRSP-I:
  - implementation of multi-rounds of the Pakistan Social-economic Living Standard Measurement (PSLM) survey, launched in 2004/05 and fielded annually since then;
  - PSLM survey data will help monitor PRSP-I and PRSP-II outcomes at national, provincial, and district levels;
  - implementation of other surveys, such as the Pakistan Demographic Survey (PDS), has made the M&E system more comprehensive.
- PRSP-II identifies weaknesses in the existing M&E system and proposes reform measures:
  - improve data compilation in the Management Information System (MIS);
  - create poverty related indicators at the district level;
  - enhance the quality and timeliness of data.
- Need to clarify mechanisms through which M&E findings will provide timely feedback into the policy process.
- The new Statistical Law:
  - will be key for implementing the M&E system and institutional arrangements;
  - proposes a new statistical agency, the Pakistan Bureau of Statistics (PBS), integrating several existing agencies (Federal Bureau of Statistics, Agriculture Census Organization, Population Census Organization, and the Technical Wing).
- Strategy could have better explained how autonomy will be strengthened and how the law will establish governance processes and an organizational plan for senior management.
- Once the Statistical Law is approved, PRSP Secretariat should hold close consultations with the new agency on M&E institutional arrangements.
- Urgent need to strengthen technical capacity for poverty measurement and review institutional arrangements:
  - the Center for Research on Poverty Reduction and Income Distribution (CRPRID) has been given responsibility to estimate official poverty headcount rates, but delivery has been slow at times (poverty estimates for 2005/06 were published only in 2008);
  - recent erosion of analytical capacity in CRPRID is a concern.
- Staff recommendation: review the institutional framework for poverty measurement and rebuild an effective and reliable poverty monitoring instrument.

### Conclusions and issues for discussion: priority actions and risks
- Main priority areas for strengthening the strategy and its implementation (staffs’ view):
  (i) develop a detailed tax policy and tax administration reform action plan to ensure that the ambitious revenue mobilization targets are met;
  (ii) conduct further work on costing the proposed programs and measures, including on health, and, if necessary, revise the targets in light of the fiscal constraints;
  (iii) implement the envisaged social safety net reform agenda, while streamlining social protection programs with similar objectives;
  (iv) further develop the reform agenda on governance and public financial management, including on public debt management;
  (v) establish the appropriate legal framework for PPPs and develop institutional capacity to manage the financial risks associated with PPP financed infrastructure investment;
  (vi) lessen the emphasis on directed programs at SMEs and focus efforts on strengthening the overall investment climate; and
  (vii) strengthen the technical capacity for poverty measurement and analysis.
- Implementation risks that need to be managed:
  (i) a further deterioration in the world economy and international financial markets, which could complicate stabilization efforts by weakening Pakistan’s export prospects, lowering capital inflows, limiting economic growth and reducing flexibility for economic reforms;
  (ii) a deterioration in the security situation, which could shift the government’s focus away from economic matters; and
  (iii) delays in the implementation of reforms because of institutional capacity constraints.
- Questions posed for discussion:
  - Do the Executive Directors concur with the priority action identified by the staffs?
  - Do they agree with the recommendations made by the staffs?

*Source: Excerpt from the provided IMF staff report content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10182.pdf_