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Document of The World Bank
FOR OFFICIAL USE ONLY
Report No. 38517-PK
INTERNATIONAL DEVELOPMENT ASSOCIATION
PROGRAM DOCUMENT
FOR A
PROPOSED CREDIT
IN THE AMOUNT OF SDR 86 MILLION (US$130 MILLION EQUIVALENT)
TO
THE ISLAMIC REPUBLIC OF PAKISTAN
FOR A
SECOND NORTH WEST FRONTIER PROVINCE DEVELOPMENT POLICY CREDIT
May 8,2007
Human Development Sector South Asia Region
This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not be otherwise disclosed without Wor ld Bank Authorization.
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AAA CAS COA DFID DPC ED0 GDP GoNWFP H M I S HFW NAM N F C N W F P PDL PFAA PIFRA PPSC PRSP PSD PSLMS SAC
PAKISTAN - GOVERNMENT FISCAL YEAR July 1 - June 30
CURRENCY EQUIVALENTS (Exchange Rate Effective as o f April 1,2007)
U S $ l =PKRs 60.7
ABBREVIATIONS AND ACRONYMS
Analytical and Advisory Services Country Assistance Strategy Chart o f Accounts Department for International Development Development Policy Credit Education District Officers Gross Domestic Product Government o f Nor th West Frontier Province Health Management Information System Human Resource Management N e w Accounting Model National Finance Commission Nor th West Frontier Province Petrol, Diesel and Lubricants Provincial Financial Accountability Assessment Project to Improve Financial Reporting and Accountability Provincial Public Service Commission Poverty Reduction Strategy Paper Private Sector Development Palustan Social and Living Standards Measurement Survey Structural Adjustment Credit
Vice President: P r a h l Patel, SARVP Country Director: Yusupha Crookes, SACPK
Sector Director: Julian Schweitzer, SASHD Sector Manager: Mansoora Rashid, SASHD
Harsha Aturupane, SASHD Task Team Leader: Co-Task Team Leader: Naveed Naqvi, SASHD
FOR OFFICIAL USE ONLY
PAKISTAN SECOND NWFP DEVELOPMENT POLICY CREDIT
TABLE OF CONTENTS
CREDIT AND PROGRAM SUMMARY
I . INTRODUCTION AND OVERVIEW ........................................................ 1
I1 . NATIONAL PAKISTAN CONTEXT .......................................................... 3 RECENT PROGRESS IN HUMAN DEVELOPMENT AND POVERTY REDUCTION ........................................................................................ 3 RECENT ECONOMIC DEVELOPMENTS. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ......................................................................... 5
I11 . THE CONTEXT OF THE NORTH-WEST FRONTIER PROVINCE ................. 9 RECENT PROGRESS AND CHALLENGES IN HUMAN DEVELOPMENT AND POVERTY REDUCTION .......................................................................... 9 RECENT ECONOMIC DEVELOPMENTS. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ........................................................................ 14
I V . THE NORTH-WEST FRONTIER PROVINCE POLICY REFORM PROGRAM ......................................................................................... 20
V . BANK SUPPORT TO THE GOVERNMENT'S PROGRAM ........................... 30 LINK TO CAS ....................................................................................... 30 COLLABORATION WITH THE IMF AND OTHER DONORS ........................... 30 RELATIONSHIP TO OTHER BANK OPERATIONS ....................................... 31 LESSONS LEARNED ............................................................................. 31 ANALYTICAL UNDERPINNINGS ............................................................ 31
V I . THE PROPOSED NORTH-WEST FRONTIER PROVINCE SECOND DEVELOPMENT POLICY CREDIT ......................................................... 33 DESCRIPTION OF THE OPERATION ......................................................... 33
VI1 . OPERATION IMPLEMENTATION ......................................................... 39 POVERTY AND SOCIAL IMPACT ............................................................ 39 IMPLEMENTATION. MONITORING AND EVALUATION .............................. 40 FIDUCIARY ASPECTS ........................................................................... 41 DISBURSEMENTS AND FIDUCIARY ASSURANCE ..................................... 43 ENVIRONMENTAL ASPECTS ................................................................. 44 RISKS AND RISK MITIGATION ............................................................... 45
This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties . I t s contents may not be otherwise disclosed without Wor ld Bank authorization .
TABLES
Table 1 : Ne t Primary Enrollment Rates by Gender And Area, Pakistan and Provinces.. ........ ..3 Table 2: Immunization Rates, Prenatal and Postnatal Consultation Rates by Province .......... .4 Table 3 : Pakistan Selected Economic Indicators 2004/05-2009/10.. ............................... ..6 Table 4: Cognitive Achievement Scores in Primary Mathematics and Urdu 2005.. ............ ..11 Table 5: NWFP Medium-Term Fiscal Framework, 2005/06/-2009/10.. ........................... 15 Table 6: NWFP Medium-Term Fiscal Framework, 2005/06-2009/10
(percent o f provincial GDPO) 1/. .............................................................. 28 Table 7: Analytical Underpinnings o f the Proposed NWFP DPC 2.. ............................. .32 Table 8: Key Performance and Monitoring Indicators.. ............................................ ..39 Table 9: Risk Assessment and Mitigation Measures.. ................................................ 45
FIGURES
Figure 1 : Consolidated Fiscal Deficit. ................................................................... .7
BOXES
Box 1 : Box 2:
Box 3:
Box 4:
Progress on key Prior Actions o f DPC 1.. ................................................... 19 Conditionality for the Second North-West Frontier Province Development Policy Credit.. ................................................................ .36 North-West Frontier Province Third Development Policy Credit: Summary o f Proposed Triggers for DPC 3.. ............................................. .37 Good Practice Principles on Conditionality.. ............................................. .38
ANNEXES
Annex 1 : Letter o f Government Development Policy Annex 2: Policy Matrix Annex 3 : Fund Relations Note Annex 4: Statement o f Loans and Credits Annex 5: Pakistan - Status o f Bank Group Operations Annex 6: Fiscal Framework o f the North-West Frontier Province Annex 7: Fiduciary Aspects o f the Program Annex 8: Environmental Aspects Annex 9: Debt Sustainability Note Annex 10: Pakistan at a glance
MAP: IBRD#35511
The Task Team
The North-West Frontier Province Second Development Policy Credit was prepared by an IDA team consisting o f Harsha Aturupane (Senior Economist, SASHD and TTL), Naveed Hassan Naqvi (Education Economist, SASHD and Co-TTL), Ismaila Ceesay (Senior Finance Specialist, SARFM), Inaam Haq (Senior Health Specialist, SASHD), Venita Kau l (Senior Education Specialist, SASHD), Isfandyar Khan (Private Sector Development Specialist, SASFP), Tahseen Sayed Khan (Lead Education Specialist, SASHD), Benjamin Loevinsohn (Lead Health Specialist, SASHD), Shaheen Malik, (Research Analyst, SASPR), Hanid Mukhtar (Senior Economist, SASPR), Ameer Hussain Naqvi (Senior Education Specialist, Consultant), Uzma Sadaf (Procurement Specialist, SARPS) , Furqan Saleem (Finance Specialist, SARFM), Ernest0 Sanchez-Triana (Senior Environmental Specialist, SASES), Corinne Siaens (Economist, SASHD), Oleksiy Sluchynskyy ( Social Protection Economist, SASHD), Kalanidhi Subbarao (Lead Economist, consultant) and Paul Wade (Senior Economist, SASPR). Peer reviewers were Darius Mans (Director, WBIRC), and Robert Prouty (Lead Education Specialist, HDNED).
SECOND Borrower
CREDIT AND PROGRAM SUMMARY ISLAMIC REPUBLIC OF PAKISTAN
THE NORTH-WEST FRONTIER PROVINCE
Implementing Agency Amount Terms Description
Benefits
EVELOPMENT POLICY CREDIT (NWFP DPC 2) Islamic Republic o f Pakistan Government o f the North-West Frontier Province SDR 86 mi l l ion (US$ 130 mi l l ion equivalent) Standard IDA terms: 35 year maturity, with 10 year grace period The proposed North-West Frontier Province second Development Policy Credit i s the middle operation o f a series o f three development policy credits designed to assist the NWFP pol icy reform program. The objectives o f the program are to improve human development, promote economic growth and reduce poverty. The reform program i s based on four mutually supportive and internally consistent pillars.
Accelerating human development to: (a) improve access, equity, quality and governance o f the education system, (b) increase the utilization and quality o f care, and strengthen stewardship functions in the health sector, and (c) reduce the risk and vulnerability to the human capital o f the poor through a sound social protection system. Improving Jiscal stability and public expenditure management, to improve: (a) macroeconomic stability, (b) fiscal sustainability o f the reforms, and (c) better planning and monitoring o f public expenditures. Strengthening governance to improve: (a) public financial management and accountability, (b) transparency and accountability in public procurement, and (c) obtain reliable and timely human resource data for planning, budget preparation and control o f establishment expenditure, and to monitor compliance with legal and policy stipulations. Promoting economic growth through private sector development to: (a) institutionalize the public private dialogue, (b) reorient role o f state f rom operator to facilitator, and (c) improve private participation in economic activities.
Faster progress towards the achievement of PRSP objectives by accelerating human development reforms, decreasing risk and vulnerability o f the poor, and promoting growth in one o f the poorest provinces o f Pakistan. The sector wide focus, within human development, on education and health enables the government to address the full range o f challenges facing each sector. The Bank support is integrated around a mutually consistent, multi-sectoral reform agenda that supports the government's comprehensive reform program which emphasizes the interconnectedness o f human development, fiscal strengthening, governance and economic growth. Donor harmonization i s facilitated through the dialogue between the government, the Bank and other development partners, to coordinate a l l external assistance under the NWFP's medium-term policy reform program. Increased ownership and commitment by the government, as
There are six important benefits to the operation.
Risks
Operation ID Number
Bank support i s targeted to the overall reform program developed by the NWFP. Stimulation of economic growth through private sector investment by reducing transactions costs to market entry and facilitating commercial operations. Higher growth will create greater fiscal space for the government, help reduce poverty, and create employment opportunities for educated young people in the future
The NWFP DPC2 has six principal r isks: Any weakening o f the macroeconomic framework, due to inflation and external trade deficits, could pose a risk to this or any other budget support operation. As with a l l budget support credits, the government may not allocate adequate resources to priority sectors in which case the human development reform agenda, the sheet-anchor o f this operation, may be jeopardized. District governments are expected to play an important part in the execution o f the reform agenda. Lack o f harmony and alignment o f policy objectives between the district governments and the provincial government may hurt the implementation o f reforms. There i s a risk that the procurement reforms across the province will lag behind the reforms in financial management. Capacity constraints both at the district level and at the provincial level might delay implementation o f reforms. Finally, unforeseen and unpredictable natural covariate shocks and disasters may hold up the entire policy reform program.
PO9747 1
IDA PROGRAM DOCUMENT FOR A PROPOSED DEVELOPMENT POLICY CREDIT
TO THE ISLAMIC REPUBLIC OF PAKISTAN FOR A SECOND
PROVINCE (NWFP DPC 2) DEVELOPMENT POLICY CREDIT TO THE NORTH-WEST FRONTIER
I. INTRODUCTION AND OVERVIEW
1. Human development levels in Pakistan reflect long-term under-investment in the social sectors: and the North-West Frontier Province (NWFP) suffers from human development indicators that are below the national average for Pakistan. Broad based improvement in human development outcomes i s essential to sustain the recent increase in economic growth and public investment experienced in Pakistan and the NWFP, and to ensure that vulnerable groups benefit from, and contribute to, expanding opportunities. The Government o f the NWFP, recognizing this challenge, has launched a medium term reform program from 2005/06-2007/8. The overarching objectives o f this reform program are to accelerate human development, promote economic growth and reduce poverty.
2. The proposed North-West Frontier Province second Development Policy Credit (NWFP DPC 2) for US$130 million i s the middle operation of a series o f three development policy credits designed to assist the NWFP policy reform program. The current NWFP program builds on the experience o f previous reforms, f rom 2000/01 onwards, that were supported by the Wor ld Bank through two structural adjustment credits (SACs) in 2002 and 2004, and the f i rs t development pol icy credit (DPC 1) in 2006. The two SACs emphasized fiscal, expenditure management and growth reforms, while DPC 1 was a transition operation between the expenditure and growth focused SACs and a future series o f operations that will emphasize human development. The DPC series recognizes that for sustained human development improvement i t i s critically important for the budget process and governance structures to make adequate resources available, and that these resources are spent prudently. Further, economic growth i s vital because it creates better paying employment opportunities for healthy and educated workers, and thus constitutes a key incentive for public and private investment in human development. Also, strong economic growth helps generate revenues for sustained increase in human development expenditure. Recognizing this inter-connectedness, DPC 1 helped deepen the fiscal and growth accelerating components o f the overall reform program. DPC2 a clear strategic focus on accelerating human development, but also continues to support the fiscal, governance and growth components o f the program.
3. The NWFP DPC 2 assists the NWFP government to broaden and deepen human development reforms, while also sustaining and building upon the momentum of reforms in fiscal and public expenditure management, governance and growth. The operation supports the government’s comprehensive reform program that emphasizes the interconnectedness o f human development, fiscal strengthening, governance and economic growth. DPC 2 i s organized according to four pillars: (a) accelerating human development; (b) improving fiscal stability and public expenditure management; (c) strengthening governance; and (d) promoting economic growth through private sector development. Under the f irst pillar, the scope o f the human development reform program has been substantially expanded to address challenges related to coverage, quality and service delivery. In education, where previous reforms focused mainly on increasing access to primary education, the scope has been broadened to cover secondary education as well. The education reform program has also been deepened to address key issues related to: (i) education quality, such as teacher development and the sk i l l s and competencies o f school heads; and (ii) education governance, such as institutional strengthening o f the Ministry o f Education, empowerment o f local school communities, and the development o f a sound
1
monitoring and evaluation system. Whi le in DPC 2 the deepest reforms are in education, in health the reform program has been broadened beyond primary health to include access to secondary and tertiary level health care. The health reform program has also been deepened to improve the quality o f health services; and to strengthen governance and stewardship functions. The human development program has also been strengthened through the preparation o f a social protection strategy for the province, with a key focus on reducing the adverse impacts o f r i s k and vulnerability on the poor. Under the second pillar, the fiscal sustainability o f the reform program has been improved by consolidating expenditures within the medium-term budget framework, and promoting own revenue generation. Under the third pillar, the governance framework has been strengthened through the establishment o f a new accounting model down to the district level, and through actions to bring procurement practices to international standards. Under the fourth pillar, the climate to promote economic growth through private sector development has been improved, especially through actions that lower administrative barriers and reduce the transactions costs o f commencing and expanding economic activities in the province.
4. The NWFP has demonstrated capability to successfully implement wide ranging policy reforms in the past. The NWFP implemented a broad policy reform program f rom 2001- 2005, containing reforms in several areas: fiscal, public financial management and accountability, human development, governance and c iv i l service, and private sector development and growth. The reform program focused on creating a sound fiscal framework for private sector led economic growth. The program was largely successhl. The debt service burden declined from 1.8 percent o f provincial GDP (PGDP) in 2000/01 to 0.9 percent in 2004/05. The fiscal deficit fell to under 1 percent o f PGDP. The composition o f public spending improved, with substantial increases in development spending and the share o f the budget allocated to priority sectors such as education and health. The NWFP economy grew at about 4.5 percent per year during the period 2000-2005, which was in line with the growth o f the national Pakistan economy o f 4.7 percent per year. Positive progress was also made o n improving human development levels. Policies to provide fi-ee public education and textbooks to school children were adopted. Following these reforms, the gross female primary enrolment ratio increased from 55 percent in 2001/02 to 65 percent in 2004/05, while the gross male primary enrolment ratio rose from 77 percent to 80 percent over the same period. In health, policies were instituted to increase the health budget and expand primary health care provision. After the reforms were implemented, during 2001/02 to 2004/5, the immunization rate for children aged 12-23 months rose from 57 percent to 76 percent, the immunization coverage o f pregnant women increased from 34 percent to 45 percent, and the detection o f TB rose from 20 percent to 58 percent.
5. The proposed NWFP DPC 2 i s fully consistent with, and follows the principles o f engagement set out in, the FY06-09 Country Assistance Strategy (CAS). T h e CAS, approved by the Board in June 2006, proposes to increase lending with a focus on areas o f the Pakistan government's program that are critically important to promote economic growth and poverty reduction, including human development. The proposed DPC2 i s based on the abil ity o f the NWFP to meet the strategic engagement principles set out in the CAS: (i) " client pull " through evidence o f committed champions o f reform, and demonstrated ability and willingness to implement required reforms; (ii) " strategic selectivity " that seeks to replicate or scale up approaches that have already been effective; (iii) greater focus on performance, guided by the CAS results framework and associated integration o f monitoring and evaluation into the design; and (iv) the use o f a programmatic approach to ensure sustained, flexible and predictable support to reforms over the medium-term.
6. Accelerating human development and promoting economic growth in the North- West Frontier Province will generate substantial benefits to the population of Pakistan's poorest province. The NWFP i s the third largest province in Palustan. Human development and
2
income levels in the NWFP are below the national average, with particularly sharp gender, socio- economic and regional disparities. Sound and effective policies to improve human development outcomes and raise household incomes will generate substantial economic and social benefits to the people o f the NWFP. The focus on promoting gender, socio-economic and regional equity will particularly benefit the poorer and more disadvantaged households and social groups, allowing them to invest in human capital and participate more effectively in, and contribute to, economic growth. Bank support i s organized around a mutually consistent, multi-sectoral reform agenda that seeks to exploit synergy between policies to improve human development, sustain fiscal stability, strengthen governance and promote economic growth.
NWFP
Sindh Balochistan
Punjab
11. NATIONAL PAKISTAN CONTEXT
57 20 38 64 26 45 57 36 47 65 44 55 60 31 46 68 41 56 53 15 36 52 19 37
RECENT PROGRESS ON HUMAN DEVELOPMENT AND POVERTY REDUCTION
7. The recent upsurge in economic growth in Pakistan has been accompanied by improvement in human development and a reduction in poverty, but considerable challenges remain. Preliminary analysis o f the most recent Pakistan Social and Living Standards Measurement (PSLM) Survey 2004-05 shows that between 2000-01 and 2004-05 the country enjoyed significant improvements in social indicators. Primary school enrollments, literacy, immunization coverage and pre-and-post natal consultations improved (see Table 1 and Table 2).
Despite this progress, Pakistan’s social gap i s evident f i o m numerous education and health indicators in comparison to other similarly situated countries. Compared to other countries o f South Asia, Pakistan lags behind in school enrollments, adult literacy, and child survival rates. There are also significant rural-urban disparities. By far the most significant feature o f Pakistan’s social gap i s the divergence between the r i ch and poor in human development indicators.’ For example, while primary gross enrollment rates among the top three deciles are around 90 percent, for households in the bottom three deciles it i s less than 50 percent.
8. Various poverty studies show a reduction in poverty ranging between about 10.6 and 5.2 percentage points during the period 2000-01 and 2004-05. There has also been a reduction in the severity and depth o f poverty, as wel l as in the head count o f poverty, both in rural and urban
This paragraph draws partly from World Bank (2002): Poverty in Pakistan: Vulnerabilities, Social Gaps and Rural Dynamics. Poverty Reduction and Economic Management Sector Unit, South Asia Region.
3
Sources: PSLM report, February 2006, and World Bank, NWFP Economic Report, 2005.
areas. The progress in poverty reduction notwithstanding, a third o f Pakistan’s rural population cannot meet basic needs. Moreover, vulnerability i s a key feature o f poverty and a significant proportion o f the population i s highly vulnerable to poverty. Recent analysis2 o f poverty and vulnerability in Pakistan has shown that while about 33 percent o f the population i s chronically poor andor vulnerable to chronic poverty, an additional 35 percent o f the population i s transitorily (temporarily) poor or vulnerable to transitory poverty. Households vulnerable to chronic and transient poverty include those with high dependency ratios, illiterate or poorly educated household heads, households with unskilled labor, and share croppers and those engaged in subsistence agriculture. Children o f poor households are particularly vulnerable.
Recent Policy Initiatives bv the Government o f Pakistan to Improve Human Development and Reduce Poverty
9. A number o f policy initiatives have been launched by the Federal Government to further improve human development and reduce poverty and vulnerability. Pakistan’s Poverty Reduction Strategy Paper (PRSP) was finalized in 2003 which la id down the future directions o f reforms and programs. The PRSP indicators and targets are aligned with the MDGs and focus o n achievement o f universal primary enrollment, reducing gender disparities, reducing child mortality, reducing maternal mortality, combating communicable diseases, and eradicating poverty. PRSP I1 i s being finalized and it seeks to further deepen the strategic direction for attaining these stated goals and targets. Investments in human capital remain a core agenda of PRSP II’, which sees the provinces and districts as playing the pivotal role in service delivery.
10. In the education sector, a series o f initiatives and reforms have been recently taken by the Federal Ministry o f Education (MoE). These have implications for education policies and programs in the provinces. K e y initiatives at the federal level include: (a) update o f the 1998 National Education Policy, which i s near completion4; (b) completion o f revision and reform o f the national curriculum; (c) approval o f a National Textbook Policy to establish a competitive system for development, printing and publishing o f textbooks; (d) completion o f two rounds o f student testing under National Education Assessment System (NEAS) for Grade IV and o f a pi lot assessment for grade VIII; and (e) completion o f the National Education Census (NEC) which
See De l Ninno, Vecchi and Hussain (2006) Poverty, Risk and Vulnerability in Pakistan. Draft PRSP I1 Summary “Ensuring a Demographic Dividend: Unleashing Human Potential in a Globalized World” was presented at the Pakistan Development Forum in April 2007. A White Paper has been placed on the MoE website to solicit comments and views from stakeholders.
3
4
includes data on al l education institutions (public, private, madrassahs, and polytechnics) f rom pre-primary to university levels.’ As a part o f fostering inter-provincial coordination, the M o E also holds regular consultations with provincial education officials on ongoing reforms, policies and programs.
1 1. The Federal Ministry of Health (MOW has initiated policy measures and programs which are likely to positively influence the NWFP health program. The main national health policy initiatives include: (a) broad based consultation to review the existing National Health Policy and draft a new health policy; and (b) the approval o f a strategic framework for nutrition, maternal and neo-natal health, and an integrated disease surveillance system. The revised national disease surveillance system, once established, will provide timely information for disease prevention and control. The MOH has also commissioned an assessment o f vertical programs to identify options for further decentralization o f national health programs. The recent announcement o f the President’s initiative on Primary Health Care (PHC), which envisages using rural support programs and NGOs to manage first level care facilities and preventive programs in rural areas, will influence the delivery o f PHC in NWFP in line with the President’s initiative.
12. The major earthquake which hit Pakistan in October 2005 was a large shock that affected thousands of households to which the Government responded with short term social protection measures. According to the jo in t ADB-Wor ld Bank Needs Assessment, approximately 73,000 people died and more than 70,000 have been severely injured or disabled. Many also lost their livelihoods. The government and donors responded to the earthquake with pledges o f comprehensive assistance for rel ief and rehabilitation. In addition to deliveries o f in- kind emergency assistance (food, blankets, tents and roofing sheets), the financial assistance to the affected households comprises: a) housing support; (b) payments for death and injury; (c). l ivelihood support; and (d) social welfare services for disabled groups.
13. A new poverty targeted conditional cash transfer i s being launched by Bait-ul-Mal, a federal safety net program meant to help the poor and destitute. Bait-ul-Mal runs a number o f programs, the most important being the Food Support Program (FSP) which pays an annual cash transfer o f Rs.3,000 to about 1.45 mi l l ion beneficiaries. FSP i s complemented by a new Chi ld Support Program (CSP). CSP i s a conditional cash transfer for education targeted to existing beneficiaries o f the Food Support Program and technically supported by the Wor ld Bank. CSP provides an additional benefit (over and above the FSP benefit), to FSP beneficiaries provided their children o f school-going age regularly attend school. Families with n o children o f school going age or whose children do not attend school continue to receive the regular FSP benefits and therefore do not lose out as a result o f this new program. CSP commenced as a pi lot in five districts during 2006, including Kohistan in NWFP. An impact evaluation i s planned.
RECENT ECONOMIC DEVELOPMENTS, MACROECONOMIC OUTLOOK, AND DEBT SUSTAINABILITY
14. Since the beginning of the new millennium, Pakistan’s economy has staged a remarkable turnaround, laying the ground for sustained growth and poverty reduction. The 1990s were a period o f slow growth, and progress in reducing poverty and improving social indicators stagnated. Successive governments initiated reforms, but with only modest results as reforms faltered midway due to rising polit ical pressures and constrained external financing. Beginning in 2000, the Government initiated a more wide-ranging and ambitious reform program that was articulated in the Government’s 2003 Poverty Reduction Strategy Paper, “Accelerating
The data shows a healthy increase in enrollments at 33 million, out o f which 12 mill ion are enrolled in private institutions. Overall, gender gap i s reducing with male share o f enrollment at 57 percent and female share at 43 percent.
5
Growth and Reducing Poverty, The Road Ahead.” These reforms, along with debt restructuring, and increased remittances and concessionary aid flows, resulted in a dramatic turnaround o f the economy. In contrast to several previous IMF programs, both the 2000 Stand-by Arrangement (SBA) and the 2001 three-year arrangement under the Poverty Reduction and Growth Facil ity (PRGF) were successfully completed. Recent years have witnessed considerable improvement in the performance o f the industrial and services sector, leading to a significant acceleration in
2004/0S
Table 3: Pakistan: Selected Economic Indicators 2004/05-2009/10
200906 2006/07 I 2007/08 I 2008/09 I 2009/10 Projections
National Income and Prices GDP (at factor costs of 1999100) Agriculture Manufacturing Other Sectors
Inflation Savings and Investment Investment Fixed Capital Formation
Private Public
National Savings Public Finance Total Revenue Total Expenditure
Current Expenditure a/ Development Expenditure & Net Lending
Consolidated Government Fiscal Balance Net of Earthquake Impact
Total Debt Domestic Debt Foreign Debt
Balance of Payments
Exports (% change, current US) Imports (% change, current US) Current Account Balance (% of GDP)
Foreign Exchange Reserves (US million)
Memo Items Earthquake Spending (Rs billion) (% of GDP)
13
(in months of next year’s Imports of GNFS)
7.0 4.5
10.5 6.8
7.5 I1
(percent of 20.3 18.8 13.9 5.0
15.7
7.2 4.4
11.2 6.9
5.5
GDP) 20.8 19.3 14.2 5.2
16.6
8.6 6.7
12.6 8.1
9.3
18.1 16.5 12.1 4.4
16.5
13.7 17.0 13.9 3.1
-3.3
61.4 33.1 28.3
15.9 37.6 -1.6
9,791 3.6
... ...
GDP at current market prices (Rs Billion)
information.
6,581
6.6 2.5 8.6 7.6
7.9
20.0 18.4 13.6 4.8
15.6
13.9 18.1 14.0 4.2
-4.2 -3.4
56.0 27.1 28.9
13.8 31.4 -4.4
10,760 3.6
65.8 0.9
7,713 were madc
(percent 13.1 17.3 12.7 4.6
-4.2 -3.6
50.1 23.1 27.0
11 8.0 11.0 -4.6
1 1,794 3.6
50.0 0.6
8,893 y the World Bai
;DP) 13.5 17.4 12.7 4.8
-4.0 -3.6
46.0 20.5 25.5
12.0 10.0 -4.2
13,625 3.8
40.0 0.4
10,084 staff on thl
7.1 4.5
11.8 6.5
5.0
21.5 20.0 14.7 5.3
17.6
13.8 17.5 12.6 4.9
-3.7 -3.5
42.9 18.6 24.3
13.0 10.5 -4.0
15,133 3.8
22.0 0.2
11,375
7.3 4.3
11.7 6.7
5.0
22.0 20.5 15.1 5.4
18.4
14.2 17.7 12.6 5.1
-3.5 -3.4
39.7 16.6 23.1
14.0 11.0 -3.8
16,977 3.7
13.0 0.1
12,854 iasis of latest available
/1 The CPI inflation and export growth numbers for 2006107-2009110 have been adjusted by the WB staff from the GoP macroframework according to the actual numbers available for the period July to February 2006/07.
economic growth, to 7.5 percent in 2003104 and 8.6 percent in 2004105. In 2005106, Pakistan’s economy withstood serious adverse shocks emanating f rom i t s worst ever earthquake, a sharp increase in o i l prices, and less favorable weather conditions, and registered continued strong growth o f 6.6 percent.6
For more details on macroeconomic situation and prospects see the program document o f Second Poverty 6
Reduction Support Credit, March 2007.
6
15. The acceleration in economic growth since 2001/02 has led to higher household incomes and lower poverty. In 2005/06, the per capita income increased to $847, up from $742 a year earlier (an increase of 14 percent in nominal dollars). More importantly however, a l l segments o f the population, in both urban and rural areas, have gained from income growth. Poverty declined significantly, and Pakistan’s social indicators have started to show some improvements .’ 16. The government’s prudent expenditure and debt management strategies have resulted in sustained fiscal improvement, despite limited progress in improving revenue collections and reducing power sector losses. Due primarily to increased savings on the interest bill, the overall fiscal deficit (excluding grants) declined f rom 5.4 percent o f GDP in 1999/00 to
-2.0
-2.5
-3.0 3 -3.5 0 L -4.0
e -4.5 8 b -5.0 P
-5.5
-6.0
-6.5
-
Figure 1: Consolidated Fiscal Deficit I .................................................................................
................................................................................
......... .................................................................
................................................................................. 3: ............................
............................
2001102 2002103 2003104 2004105 2005106 2006107
about 3.3 percent in 2004/05. Earthquake related expenditures contributed to a higher deficit o f 4.2 percent o f GDP in 2005/06.* Net o f earth-quake effect the fiscal deficit was 3.3% o f GDP, implying that a significant part of earthquake impact was absorbed within the budget (See Figure 1). Rapid economic growth, availability o f grants and concessionary finance, debt cancellation and fiscal consolidation have enabled Palustan to reduce i t s debt burden sharply. The government pol icy o f using privatization proceeds towards retirement o f debt also contributed to lessening o f debt burden. Total government debt fell f rom about 80 percent o f GDP in 2001/02 to 56 percent in 2005/06. Moreover, despite the rapid fiscal adjustment, social and poverty-related expenditures continued to increase sharply and over a four year period (2001/02-2005/06) were raised by 1.8 percentage points o f GDP, or by over 12 percent p.a. in real per capita terms, although they remain l o w in comparison with other countries at similar levels o f per capita income. The Government promulgated the Fiscal Responsibility and Debt Limitation Act in June 2005, under which i t has committed i t s e l f to specific targets o f fiscal adjustment and debt reduction.
17. Rapid economic growth and an expansionary monetary policy contributed to strong aggregate demand. This caused an upsurge in inflation, which increased to to 9.3% in 2004/05, but then fel l to 7.9% in 2005/06 as authorities took measures to tighten money supply. Despite continued healthy growth in exports during the past two years, the external situation deteriorated, as imports growth exceeded exports by a considerable margin. As the trade gap widened, the current account has gone from a surplus to a deficit, which in 2005/06 i s estimated to have
According to the CPI-based price index overall poverty declined from 34.4% to 23.9%. In urban areas, poverty declined from 22.7% to 14.9% and in rural areas, from 39.3% to 28.1%. According to survey- based prices, overall poverty declined from 33.3% to 28.3%. In urban areas, the poverty declined from 22.0% to 18.4%, and in rural areas, from 37.9% to 32.9%. The CPI-based price index suffers from being collected only in urban areas, therby leaving out rural areas where poverty i s the greatest. The survey- based price data suffers from being very limited, collecting only food and transport prices, which may be unrepresentative o f the items on which rural households actually expend.
In 2005106, the earthquake-related expenditure amounted to 0.9% of GDP.
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8
7
reached 4.4 percent o f GDP, despite sizeable increases in workers’ remittances. Worsening current account balance was financed mainly through non-debt inflows as continued strong foreign investors’ interest led to a substantial increase in FDI.
Macroeconomic Outlook and Debt Sustainability
18. Prospects for continued rapid growth are good, provided that political and macroeconomic stability are maintained. The government i s aiming to increase growth to 7-8 percent over the long run. For this, it plans to continue to implement reforms to reduce the cost o f doing business in Pakistan, attract investment through the privatization program, and reduce infrastructure and human development shortfalls. The SBP and the Government have expressed their commitment to control inflationary pressures and the growing external imbalances, and are expected to take actions to counter them.
19. Since early 2005, there has been a gradual tightening o f the money supply. Interest rates have increased;’ reserve and liquidity requirements ratios have been raised (by more than 2 percentage points in the current fiscal year); and the discount rate has been increased (by 50 basis points to 9.5. These, coupled with relative stabilization o f o i l prices in the international markets and crossing the hump o f some lumpy imports, led to a marked slow down in imports during the f i rs t 7 months o f 2006/07.’0 The import growth i s projected at 11% for 2006/07. This , however, did not result in any significant improvement in current account balance as exports too decelerated. Pakistani rupee has appreciated by around 12 percent in real terns over the past 18 months, which aided the strong growth in imports (and may have dampened exports), but has also stifled the growth in exports. Nonetheless, the sudden and sharp deceleration in exports f rom the beginning o f this fiscal year may in part be to structural factors that have eroded international competitiveness. Owing to higher non-debt inflows, the foreign exchange reserves increased, albeit only marginally. On the basis o f these developments, it i s projected that while the current account deficit will remain high during the next three years, increased capital flows will cause a gradual build-up o f foreign exchange reserves, which are projected at 3.6 months o f imports in 2006/07 and rising to 3.8 months for the next three years.
20. Tighter monetary pol icy also led to some easing o f inflationary pressures. Consumer price inflation declined somewhat f rom a peak o f 11.5 percent in April 2005 to 9 percent in July 2005 and 8.1% in January 2007. On the basis o f a sharp deceleration in monthly inflation in January, end-year inflation i s projected to decline to 7.5%.
21. Tax revenue collection during the f i rs t ha l f o f 2006/07 was 27% higher than the corresponding period in the previous year, in spite o f the sharp deceleration in import-related taxes. Direct taxes were higher by 66%, reflecting the increased profitability o f the corporate sector, in particular banking, energy and telecommunications, as wel l as better tax compliance due to the tax administration reforms within the Central Board o f Revenues (CBR). The fiscal deficit is, therefore, projected to decline gradually f rom 4.2% o f GDP in 2005/06 to 3.5% by 2009/10. These relatively l o w levels o f fiscal deficit will contribute to further improvements in Pakistan debt indicators. Debt sustainability analysis has been carried out by the IMF and by the Wor ld Bank, and indicates that the government’s debt reduction path (which i s prescribed in the Fiscal Responsibility and Debt Limitation Law) i s consistent with a sustainable debt outlook. As discussed in paragraph, following the conclusion o f the Poverty Reduction and Growth Facil ity (PRGF) in 2004, Pakistan i s n o w on a standard Article IV surveillance schedule. IMF post- program Monitoring was deemed unnecessary by the IMF’s Board. An IMF Article IV
Treasury Bill rates increased from 1.7% in 2003/04 to over 8% in the current year. lo The growth in imports decelerated from 31% in 2005106 to 12% during the f i r s t seven months o f 2006/07.
8
consultation mission took place in August 2006, and a Staff Report was discussed by the IMF Board.
111. THE CONTEXT OF THE NORTH-WEST FRONTIER PROVINCE
RECENT PROGRESS AND CHALLENGES IN HUMAN DEVELOPMENT AND POVERTY REDUCTION
Achievements and Progress
22. The NWFP has made good progress in implementing human development reforms in recent years. During the period f rom 2002 onwards the NWFP introduced a range o f policy reforms to expand primary school attendance, especially among girls, and to improve access to primary health care. In education, these policies included providing tuit ion free education and free textbooks to primary school children (subsequently expanded up to secondary school); expanding essential primary school facilities, such as classrooms, sanitation and boundary walls for security; and increasing the number o f teachers. In health, the key policies were focused on widening access to important preventive services, such as Tuberculosis (TB) Dai ly Observation Therapy Sessions (DOTS), Maternal and Chi ld Health (MCH) services, and Family Planning.
23. The education and health budgets were increased substantially from 2002 onwards to support the education and health reform programs. The education budget rose by over 150 percent in nominal terms, f rom 9 b i l l ion rupees in 200 1/2 to 23 b i l l ion rupees in 2005/6, while the health budget rose by more than 100 percent in nominal terms, f rom 2.5 b i l l ion rupees to 5.1 b i l l ion rupees over the same period".
24. The combination of policy reforms and higher investment has enabled the NWFP to raise human development outcomes considerably in recent years, especially among girls and women. In education, according to household survey data, the net female primary enrolment ratio increased from 33 percent in 2001/2 to 40 percent in 2004/5, while the net male primary enrolment ratio rose from 48 percent to 53 percent over the same period. In health, the immunization rate for children aged 12-23 months increased from 57 percent in 2001/2 to 76 percent in 2004/5, the coverage o f Lady Health Workers for MCH and FP services expanded from 50 percent to 60 percent, and the ante-natal coverage o f pregnant women by health professionals increased from 34 percent to 39 percent, during the same period. Economic growth also helped reduce poverty, f rom 43 percent to 41 percent o f the population.
Future Policy Challenges and Development Needs
25. Despite progress in recent years, the low initial conditions of human development in the NWFP mean that substantial challenges remain. According to the latest P S L M 2004-05, education, health and poverty indicators for the NWFP continue below the Pakistan average. The NWFP net primary enrolment rates o f 40 percent for girls and 53 percent for boys are both below the Pakistan averages o f 48 percent (girls) and 56 percent (boys), respectively (Table 1). The NWFP female literacy rate o f 26 percent i s also considerably below the national average o f 40 percent. In health, the pre-natal consultation rate for women i s 39 percent, below the national average o f 50 percent; while the post-natal consultation rate for women i s 21 percent, less than the Pakistan average o f 23 percent (Table 2). Similarly, poverty rates, though reduced, remain much higher than the country as a whole. These challenges are related. Addressing poverty and
l1 Whi le reliable province specific inflation data do not exist for Pakistan, national inflation figures during t h i s period suggest that in real terms the education budget rose about 110 percent and the health budget about 70 percent during 2001/2-200516.
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vulnerability allows households to invest in human capital; improvements in health and nutrition contribute to improvements in learning outcomes; and investment in education helps reduce long term poverty. The key issues facing the education, health and social protection sectors in improving human development outcomes are listed in the sections below.
Education Sector Challenges and Issues
26. Gross enrollment in primary education i s relatively high for boys, much lower for girls, and reveals considerable disparities in coverage of education by gender, economic class and region in the NWFP. According to the most recent Education Management Information System (EMIS) 2005-06 datal2, the gross enrolment in primary education (age group 5-9 years) i s 98 percent among boys, whereas it i s only 66 percent for girls. Regional disparities are also significant. Gross primary enrolment rates for girls range fkom 105 percent in Abbotabad to 29 per cent in Shangla. Clearly a substantial proportion o f children in the NWFP, especially girls, are not yet attending school at primary level. Children generally, and girls particularly, belonging to poor families face a higher risk o f not being enrolled, and once enrolled, a greater probability o f dropping out even when a school i s available The highest dropout rate in primary education i s concentrated at the transition point f rom Kutchi to Grade 1 (about 30 percent).
27. There i s low enrolment, and high regional and gender disparities, in participation rates in middle school and above. There i s a steep decline in participation rates in middle school and further up the education system. Total net enrolment according to household survey data, for example, declines fkom 47 percent in primary education to just 16 percent in middle school, and a mere 7 percent in higher secondary education. There are also high gender and regional disparities in middle school and above. For instance, the net middle school enrolment rate for boys i s 21 percent, while for girls i t i s only 11 percent. Further, middle school female enrolment rates in some districts are extraordinarily low, just 3 percent in Shangla and 1 percent in Kohistan. At the higher secondary education level, the net male enrolment rate i s only 9 percent, while the net female enrolment rate i s a mere 5 percent.
28. Expanding equitable access to primary and post-primary education i s a key development need. The focus o f education expansion in the past was o n primary schooling. Whi le this focus has to continue, the education sector reform program now also needs to be broadened to take into account access to education at post-primary level. The l o w enrolment in middle school and above, especially o f girls, constrains the private and public sector labor markets. For instance, there i s a shortage o f educated women for professions such as teaching, nursing and medicine. In addition, the pool o f educated labor to take up managerial and administrative positions within the province i s tightly constrained. The NWFP needs to increase enrolment in middle school and above, to increase the stock o f human capital and be competitive in the national and international labor markets in the future, as wel l as to s ta f f education and health institutions that need female professional and technical workers. The need i s particularly acute in regions with very l o w female post-primary enrolment, such as seven districts where female middle school enrolment i s under 12 percent.
29. Improving the quality o f education i s a critical reform challenge. The quality o f education in the NWFP, as shown by indicators such as cognitive achievement, i s low. Among
~~
l2 The information in paragraph 22 i s based on EMIS data, as we have more recent EMID information (200Y06) than household survey data (2004/5). Typically, EMIS data report higher figures than household survey data, so that the actual problem may be even more acute, on the basis o f the household survey data, than revealed in administrative information.
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the four main provinces o f Pakistan, the NWFP shows the lowest learning outcomes in Urdu and the second lowest outcomes in mathematics at the primary education level 13[see Table 41. The
Pakistan 42 1 369 N W F P Punjab Sindh Balochistan
NWFP experiences several constraints in the provision o f good quality education. These include: (a) a shortage o f teachers, especially at middle school and above; (b) poor deployment o f teachers to remote areas; (c) the absence o f a strong professional qualification and development framework for teachers; (d) insufficient management and leadership development o f school heads; (e) the absence o f a good system o f technical support for schools; (0 inadequate teaching- learning material; and (g) poor physical learning environments, especially in remote regions.
415 327 430 3 82 402 3 67 443 403
30. The education sector faces a set o f key challenges in ensuring good governance. The key governance issue i s that the relationship between stakeholders f rom local communities, especially parents, and schools remains weak. Other countries, including Bangladesh, India, Nepal and Sri Lanka in the region, are actively promoting the involvement o f local school communities, particularly parents, to play a role in improving school administration and increasing resources for school development. Parent Teacher Associations (PTAs) have been formed in the NWFP and the budget for instructional materials and repairs, and for consumables, has been allocated to PTAs. The role o f PTA’s needs to be strengthened to administer selected activities funded through the development budget, such as minor construction in schools.
3 1. The private education sector has experienced increasing enrolment in recent years, but would benefit from a more enabling policy environment. Policy measures to stimulate further private investment in education are important, especially as the education system expands beyond the primary level. The Elementary Education Foundation and the College Education Foundation have the mandate to promote private investment in education, but require strengthening to play an active and effective role. The Elementary Education Foundation currently devotes a large proportion o f i t s resources and time to providing adult education, and to implementing a program for community schools. This Foundation needs to focus more actively o n i t s mandate to improve private sector involvement in education, and to serve as an apex institution to finance the provision o f education through the private sector. The role o f the College Education Foundation, too, needs to be directed to active promotion o f private sector participation in College education.
Health Sector Challenges and Issues
32. The health outcomes in NWFP appear to be improving. The IMR for NWFP in 2000/01 was reported to be the lowest for Pakistan at 56 per 1000 births (national average o f 85 per 1000 l ive births). The TFR however, declined at a slower pace than nationally, f rom 5.5 in the early nineties to 5.1 in 2000, quite a bit above the national figure o f 4.5 undfur behind other
l3 Note that, as enrolment rates rise and children with weaker home learning environments attend school, the average performance o n cognitive achievement tests normally decline. As the NWFP has higher primary school enrolment rates than Sindh and Balochistan, one reason for the lower average cognitive test scores may be the presence o f school children f r o m less favorable home backgrounds in the NWFP.
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parts of South Asia. Estimates o f maternal mortality are not available but improvements are l ikely to be modest despite declining fertility. With the launch o f the NWFP reform program supported by the SACS and DPC 1, several achievements have emerged with a higher health budget, including increasing immunization coverage and antenatal care attendance, improved access to MCH and FP, and increased coverage o f TB DOTS services. l4
33. Despite the above improvements, the health sector continues to face significant challenges in terms of coverage and access to primary health services. Maternal health i s a major challenge, with proportions o f births attended by skilled personnel very l o w at 28 percent pre-natal consultations and post-natal consultation, at 39 percent and 2 1 percent respectively are wel l below the Pakistan average o f 50 percent and 23 percent respectively. Contraceptive prevalence at 30 percent i s also below the Pakistan average o f 32 percent and significantly lower than has been accomplished in India and Bangladesh. In addition one in three children under five are moderately or severely malnourished as judged by weight for age (37 percent). Whi le this i s lower than the national average o f 41 percent i t i s s t i l l high by global standards.
34. The NWFP PHC facilities are underutilized, with most facilities seeing less than 20 patients per day. Further, this number has remained stagnant since 2000. Several factors constrain the coverage, access and utilization o f public health care facilities. These include uneven development o f health systems among the various districts; the poor location o f public health facilities and a shortage o f wel l qualified and trained health personnel in remote areas. Ineffective functioning o f the system i s due to weak management, inadequate s t a f f motivation, and l i t t l e emphasis on measurement o f results. Management at the district level i s l imited by lack o f strategic orientation and few management ski l ls . Staff i s unaccountable, barely supervised, and with litt le or n o incentive for performance
35. The quality of health care in secondary care health institutions varies across the province due to weak management and lacks autonomy to function efficiently. The quality o f health care in secondary health institutions varies and anecdotal evidence suggests it i s poor. Although multiple factors contribute to poor quality o f care, weak management i s one o f the critical factors. NWFP granted managerial and financial autonomy to four tertiary hospitals with an aim to improve quality o f care and generating additional financial resources. There i s some evidence that autonomy has resulted in increased utilization o f services, but control over human resource management, financing and internal governance are insufficiently delegated, delaying decision making and management. The secondary care District and Tehsil hospitals are also managed by inadequately trained manpower and lack adequate administrative and financial powers to function efficiently. These factors outlined lead to considerable variation in the quality o f both primary and hospital care, with adverse effects on the utilization o f health services.
36. The information on the quality of health care i s uneven, and requires substantial improvement. A major constraint to the improvement o f the quality i s the absence o f independent and reliable information o n the quality o f care across the province. Having such information would be usefu l as a baseline and would help in the design and monitoring o f health care quality improvement measures. In particular, information i s required o n quality o f care indicators such as the quality o f the patient-provider interaction, patient satisfaction, knowledge o f staff, availability o f staff, drugs, equipment, and specific services. This type o f information i s needed especially for primary health centers and District and Tehsil hospitals.
37. following:
The health sector also faces several key stewardship related issues. These include the
l4 The PSLSM data indicate significant improvements in health outputs such as immunization coverage and use o f antenatal care, although f i r ther analysis o f the data i s required.
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a.
b.
C.
d.
Absence of an adequately enabling environment to facilitate high quality private sector and NGO participation in the delivery of health services. In particular, the Health Foundation, which has the mandate o f private-public partnerships in the delivery o f health services, has engaged in financing and supporting activities such as provision o f scholarships to medical graduates which are l ikely to contribute insignificantly health sector goals and objectives. There i s need to revitalize the Health Foundation by re-examining i t s role, mandate, scope o f work, financing and enhancing i t s autonomy in order to create an environment for private or NGO participation in the health service provision.
Lack o f regulatory mechanisms: The health sector in NWFP operates without a legislative or regulatory framework to ensure provision o f quality health care. In addition, the existing health related laws are poorly enforced. With uneven quality o f care and a growing private sector outside the policy framework o f the Government, the lack o f a regulatory framework i s a key constraint in ensuring good quality o f care and protecting consumer rights. The NWFP has constituted a Health Regulatory Authority (HRA) to regulate the private sector, however, the HRA lacks a clear strategic direction and a practical approach regulation;
Strengthening monitoring and evaluation i s a priority area for the future development of the health sector. The evolving health program contains innovative elements, such as the contracting out the management o f health care centers and institutions to NGO’s and the private sector. In addition, an increasing focus i s being placed on results and outcomes in the design o f health policy. In order to support this higher level o f policy formulation and wider range o f management systems, there needs to be close monitoring o f performance over time and evaluation o f the innovations being tried out. Moreover, existing data sources, such as administrative and survey based health information, reveal weaknesses and inconsistencies, so that third-party verifications to provide external validity checks, and to improve the quality o f data over time, are important. The absence o f an independent monitoring and evaluation cell in the Department o f Health, staffed with adequately qualified and trained officials, i s also a key constraint to the improvement o f monitoring and evaluation in the health sector.
Inadequate financing: Health sector expenditures, as part o f the NWFP reforms, have been increasing in line with the MTBF; and allocations for development expenditure have increased significantly. However, both recurrent and development expenditures have fallen short o f allocations, and health expenditure continues to be biased towards hospitals, rather than on cost effective interventions and PHC. In addition, an institutional mechanism to track expenditures at the provincial level i s absent, and limits evidence based decision making.
Poverty Reduction and Social Protection
38. The recently released PSLM data show that in comparison with national poverty reduction, the progress in poverty reduction in the NWFP Region has been rather modest. N o t only i s the poverty incidence among provinces highest in the NWFP, but also the rate o f reduction in poverty has been slower than for the country as a whole. This makes the poverty challenge quite daunting. In this context, two important sources o f vulnerability are: high seasonal unemployment in rural areas, and pervasive health r i s k s that result in high maternal and infant mortality. Currently the social protection programs are inadequate to cushion either o f the two vulnerabilities. The NWFP needs to improve the targeting and implementation o f existing programs, and evaluate the ongoing pilots in social protection for coverage and effectiveness.
39. The NWFP relies heavily on federal funding for key social protection programs, with relatively little funding from the province at present. The provincial Department o f
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Social Welfare and Women Development has seen i t s allocation tripling over the last year but the budget i s s t i l l small compared to what i s being spent by federally funded programs such as Zakat or Bait-ul-Mal. Other provincial institutions delivering social programs include the Departments o f Health, School and Literacy, and Industry and Labor. In addition to those programs, a number o f NGOs provide a variety o f services.
40. The main federally funded programs are Zakat and Bait-ul-Mal. The provincial government i s running programs such as welfare homes for beggars, orphans and children at risk, and distributes a modest financial assistance to the disabled. The major funding for social protection programs though comes f rom the federal budget under Zakat and Bait-ul-Mal. The Gujara allowance (a small grant o f Rs.670 per month to identified destitute households) i s the only major poverty-alleviating program under Zakat and accounts for 60 percent o f Zakat budget. A substantial proportion (26%) o f Zakat funding supports education, the rest o f the budget being spent on medical and other welfare allowances. Zakat resources have been decreasing over the last years and sustainability o f the program i s questionable. The other federal safety net provider i s Bait-ul-Mal. This institution i s implementing several programs including the Food Support Program-FSP and the Individual Financial Assistance for medical, education and general assistance. Bait-ul-Mal also runs centers for rehabilitation o f chi ld laborers (1 8 current operating in the Region; 11 more are planned), and Vocational Centers for women (29 centers currently operating, 9 more are planned). The budget has been increasing over the last years, mainly because o f an increase in the cash transfer program (the FSP).
41. Overall, the NWFP currently runs a patchwork o f programs, funded both federally and provincially. Programs need better targeting and coordination to ensure that the fiscal resources allocated by the government are utilized optimally. The programs also need to be strategically designed, especially to ensure that the poor are better able to participate and benefit f rom human capital investments and economic growth.
RECENT ECONOMIC DEVELOPMENTS, MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY
Political and Economic DeveloDments
42. Growth in the province was slightly slower than in the rest of the country in 2005/6, mainly due to the 2005 earthquake, but reforms in provincial finances have helped in creating fiscal space and maintaining a sustainable fiscal position. During the last six years (i.e., since reforms started) the NWFP economy has grown at a slightly slower pace (4.5 percent p.a. on average) than that o f Pakistan (4.7 percent).” In FY05/06 the province was hit by a devastating earthquake which in addition to a very large number o f casualties, homeless and injured, also caused extensive damage to other public infrastructure and to private property. The loss in employment and output in the affected districts i s estimated to be about 25 percent and the overall impact on provincial GDP (PGDP) in 2005/06 about 3.6 percent. Real GDP growth in 2005/06 i s estimated at about 3.8 percent, and i s projected to bounce back to 6.3 percent in 2006/07.
43. The budget expenditure figures for FY05/06 show that the overall fiscal deficit (1.7 percent o f GDP) was in line with the Budget approved by the Provincial Assembly (1.6 percent o f GDP). Both total current spending and development spending were contained below the budget allocation (in sum 7% or Rs 3.7 b i l l ion below). The key reason for slightly overshooting the deficit (by Rs 0.6 billion) was that federal grants were considerably lower than
l5 The PGDP estimates are unofficial and prepared by the World Bank for the NWFP Economic Report (2005). There are no oficial provincial GDP estimates in Pakistan.
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expected (by more than Rs. 4 billion). Previous concerns about a possible considerable overrun on development spending in light o f a 22 percent supplementary budget request were allayed as the final outturn was 5 percent (Rs 1 billion) below budget. The ADP throw forward ratio (that indicates the efficiency in executing the existing project portfolio) continued to show improvement and declined to 2.8.16
Source: Government o f NWFP Fiscal tables and Bank staf f projections. l i Government Finance Statistics
44. Own provincial revenue collection grew by 9 percent, but fell marginally short of the budget target (by Rs 0.1 billion). Revenue collection was hampered in the earthquake- affected districts since part o f the assigned responsibilities o f the revenue agencies was to provide relief efforts in the aftermath o f natural calamities. In spite o f this, provincial tax collection showed robust growth (at 28 percent) f rom the previous year. Abstracting f rom the (relatively minor) revenue loss stemming from the earthquake the increased spending stemming from rel ief and reconstruction efforts was fully offset by additional grants f rom the federal government. However, non-tax revenue collection stagnated, reflecting a decline in full user charges. The province continues to need advice on revenue policy and administration.
45. The overall outlook for FY06/07 shows a fiscal strengthening beyond that planned in the Budget approved by the Provincial Assembly and points to a fully sustainable path. The overall fiscal deficit i s projected to decline from 1.2 percent o f GDP in FY05/06 to 0.6 percent o f GDP (Rs 5.2 billion) this year (Table 6), as against a projected deficit o f 0.7 percent o f GDP in the original Budget”. Financing o f the deficit i s on l o w cost terms through the IDA credit and also reflecting effective containment o f borrowing o n commercial terms the future debt
This ratio (2.8) indicates that if a l l ADP spending at the current level were directed towards existing 16
projects it would take 2.8 years to complete a l l o f them. l7 On the format o f the international standard, Government Finance Statistics, referred to in the fiscal tables as “Budget, Wor ld Bank adj.”.
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service burden i s contained.18 The main drivers for the overall fiscal improvement are substantial increases in federal tax assignment (NFC award)lg and federal grants and transfers, reflecting the realignment o f federal-provincial resource distribution that took effect this year. Going beyond the budgeted increase, overall transfers f rom the federal government to the province are now projected to be Rs 5 bi l l ion higher than Budget. Own revenue collection i s projected to grow in line with provincial GDP in the current and the coming fiscal year.20 This should be fully feasible in light o f ongoing and coming measures in revenue pol icy and administration. Total spending (current and development) i s expected to come in slightly below budget. In the case o f development spending the main reason for the slight under-expenditure i s inflated projections for Foreign Project Assistance in the Budget.
46. The expenditure program has a relatively wel l balanced composition between current and development spending although there i s a need to raise the spending o n maintenance and repairs o f public assets in coming years. The wage bill has been contained at sound levels. The growth in the c iv i l service has been kept in check with a demonstrated track record over the last 3-4 years whereas the rate o f general wage increases for provincial staff follows the federal government’s decisions. Sectoral budget allocations reflect the increasing emphasis on human development with enhanced budgets for education and health. These budgets fully cover the cost requirements o f implementing agreed reforms. Within development spending priority i s being given to completing ongoing projects while limiting the number o f new projects - al l with a focus on further reducing the ADP throw forward ratio which i s far below those o f the rest o f the country.
47. As a result o f the government’s pol icy o f retiring prematurely the most expensive debt since the start o f Bank-supported DPOs in 2002 while strictly limiting the assumption o n new debt and only on concessionary terms, the debt service burden has decreased markedly in these years. Further premature retirement o f expensive debt depends on agreement with the creditor - the federal government. However, the provincial government has made a Cabinet decision to continue with i t s policy o f early debt retirement. It has presented a schedule for planned retirement o f loans from the federal government but made i t conditional on receiving the additional hydel profit disbursements f i o m WAF’DA or the federal government following Arbitration o n net hydel profits. The plan outlines retirement o f identified CDLs over the next 3 years amounting to Rs 3.4 bil l ion.
48. A provincial debt sustainability analysis has been camed out by the Bank. Given that the bulk o f future debt service payments are already predetermined (fixed interest rates and amortization schedules) one can with a high degree o f certainty project the ranges o f debt service burden over the medium and long term in different scenarios. The debt sustainability analysis shows that the fiscal outlook i s robust and can maintain debt sustainability in the face o f a wide range o f shocks. The positive debt dynamics mark a turnaround from the substantial debt overhang the province was burdened with at the turn o f the century following a decade o f large deficits, and they reflect the success o f the province’s fiscal consolidation and restructuring in this period as wel l as i t s strategy o f early retirement o f the most expensive debt.
Provincial government borrowing from the market i s effectively contained since the provinces need a proval from the federal government to borrow, which as part o f i t s po l icy it i s not giving. “The system o f revenue transfers to the provinces through the National Finance Commission Award i s enshrined in the Constitution and their amounts determined according to a transparent formula (set down by law) based o n objective, verifiable data, currently covering the period up to 201011 1. This gives a relatively strong assurance o f the magnitude o f NFC transfers for the coming four years. 2o O w n provincial revenue constitutes only 8 percent o f total revenues and grants, reflecting the lack o f a buoyant tax base under the provincial purview whereas the buoyant tax revenue items are under the federal government’s purview.
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49. Public investment in human development increased in 2006/7. The education budget has risen to 20.8 bi l l ion rupees, about 20 percent higher than the previous year. The increased education expenditure covers the cost o f the education reform program for 2006/7, including the DPC 2 pr ior actions such as the stipends for girls attending middle and secondary schools in seven districts, the allocation o f development funds for PTA’s to engage in minor construction work in schools, and the establishment o f an education sector reform unit in the Department o f Education. K e y DPC 2 milestones, such as the appointment o f 4,000 new primary school teachers, the phased reduction o f missing facilities and the allocation o f incentives for female teachers in backward areas are also contained in the education budget. The health budget for 2006/7 has risen to about 6.5 b i l l ion rupees, which i s an increase o f around 23 percent over the previous year. This budget increase will cover the health sector reform program, including the creation o f 500 new posts for nurses, and a special allowance for female medical officers, gynecologists and lady health workers in remote areas. The two DPC 2 pr ior actions for the health sector, primary health care centers in five districts awarded for management by NGO’s, and the baseline studies o f quality o f care assessments o f primary health care centers, are also adequately covered in the health budget.
50. Whi le the bulk o f the increased recurrent current spending goes to wages and salaries, the allocation for Operations and Maintenance i s inadequate. Similarly, the ongoing rapid expansion in development spending would require enhanced monitoring and inspection o f projects with associated increases in the Monitoring and Evaluation budget and the number o f qualified staff. The strengthened Monitoring and Evaluation would over time lead to substantial savings in the form o f reduced leakage and together with adequate Operations and Maintenance lead to better quality o f public infrastructure and other government-owned physical assets. The NWFP and the Bank have agreed that f rom FY08 the government will commence increasing the Operations and Maintenance budget in real terms.
5 1. With regard to the objective o f fiscal transparency the presentation in the 2006/07 budget continues a few inadequate practices. These include over-estimating foreign project assistance from donors, the wage expenditure by allocating for a l l sanctioned posts (rather than for those which are l ikely to be filled) and o f interest payments by including some items that should be classified as financing items.
Recent Progress and Challenges in Governance Reform
52. The NWFP government recognizes that addressing governance weaknesses i s critically important to promote human development and improve fiscal management. The governance program contains reforms in public financial management, procurement and c iv i l service reform and administrative devolution. In public financial management, the key reform o f establishing an integrated, automated budgeting and accounting system to connect provincial and district offices with real time information has been completed. Further, for the second year running, the 24 district governments o f NWFP have al l prepared their respective budgets on the basis o f the new chart o f accounts under the N e w Accounting Model principles. The province- wide budgets are now available on uni form IMF GFS-compliant charts o f accounts, facilitating the generation o f aggregated and consolidated fiscal data for the province. Monthly reconciliation account levels in the NWFP are the highest among a l l provinces, with accounts reconciliation for receipts, expenditures, suspense and inter-governmental accounts scoring 96- 100 percent.
53. The NWFP i s also the leading province in terms of improvements to public procurement reform and legislation. The key reforms o f recent years include the enactment o f a Procurement L a w and notification o f rules for procurement o f goods, works and services, and the notification o f the standard bidding documents o f the Pakistan Engineering Council as the
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recommended documents for the province. Moving forward, the governance reform program will focus mainly on strengthening the financial management and procurement reforms, and carrying forward the human resource management database.
Future Policy Challenges and Development Needs
Financial Management
54. Developing the operational I T connectivity and productivity for District Finance and District Accounts Office sites, using uniform chart o f accounts under the New Accounting Model, i s the main future policy challenge. This IT connectivity o f the N e w Accounting Model will strengthen the timeliness, accuracy and efficiency o f financial management within the province. In addition, i t will facilitate maintaining monthly reconciliation levels o f provincial accounts at over 95 percent, eventually leading to 100 percent, and timely completion o f the provincial and district audits each year. The province also needs to train Public Accounts Committee members, and to staff the Internal Audit Units with trained and qualified personnel. Over time, the Budget Execution needs to be monitored and reported, for provincial and district governments, to increase efficiency and transparency o f public expenditure management.
Procurement
55. The key policy challenge i s to align the procurement rules closely with best practice. In this context, the NWFP needs to examine the rules (and possibly the law) governing procurement, and make suitable amendments. In addition, the province needs to replace the system o f Composite Schedule o f Rates (CSR) by Current Market Rates (CMR), to facilitate competition and efficiency. Also, the various codes, departmental rules and regulations need to be reviewed, and their application synchronized within the stipulations o f the procurement rules. This would include the review o f standard bidding documents, and recommendations for the adoption o f various standard documents for small and large assignments. The legal and institutional improvement o f the procurement system needs to be complemented by human resource development and capacity building o f procurement staff and government agencies. Such development would involve providing regular procurement training for government officials. In addition, a home for future procurement reforms needs to be established, with a mandate and capacity for procurement research, database management and updating o f procurement guidelines. Moreover, a mechanism to redress complaints needs to be set up. And, as the procurement system i s developed, awareness and training in the reformed system will be needed.
Civil Service Reforms and Administrative Devolution
56. The Human Resource Management (HRM) database needs to be operational to provide timely and accurate information for decision making. Cost control through limited and strategic recruitment i s important. In particular, expansion o f the c iv i l service should be mainly confined to priority areas, such as education and health. The Provincial Public Service Commission (PPSC) needs to carefully monitor and regulate the staff recruitment and management at the provincial and local levels, as mandated. In addition, the province needs to use contract employment strategically to attract necessary sk i l l s f rom the labor market at competitive rates. The HRM database i s necessary to provide the information required to manage c iv i l service staffing effectively and productively.
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Recent Progress and Challenges in Promoting Growth Through Private Sector Develop men t
' Pillar 11: Fiscal and Expenditure Reforms. The Government has kept al l reforms described in the D P C l fiscal triggers, and in most cases has carried implementation further. The fiscal budgets for FY06 and FY06 show continued implementation o f a sound fiscal policy that ensures fiscal sustainability for the province. The Government has managed to contain the establishment cost in terms o f GDP also in these last two years. The revenue measures in the trigger for DPCl are now established policy and ongoing practice. Bonus payments to excise and taxation staff continue to be linked to revenue collection performance, and a number o f Tax Facilitation Centers with support from private sector for collection o f selected taxes are in operation, and new ones are coming on stream. Government has also, in spite o f steady pressures for the
57. The NWFP recognizes the importance of private sector led development to promote economic growth. The province has made strong progress in private sector development in recent years, contributing to better economic growth. Public-private dialogue has been institutionalized through the establishment o f an Investment Facilitation Council, headed by the Chief Minister, and an Investment Facilitation Committee to address specific issues. The reorientation o f the role o f the state f rom investor to facilitator has been strengthened by the participation o f private sector management in 7 o f the 17 industrial estates. Private sector representation has also increased in the mining committees. In addition, private participation in infrastructure has widened, with 7 o f the 10 small hydel projects leased to the private sector.
Future Policy Challenges and Development Needs
58. A key need for future private sector development i s a unified investment facilitation center, coordinated by the private sector and corresponding government agencies, to reduce the financial and transactions costs for private sector investment. This investment facilitation center will substantially reduce the cost o f doing business in the NWFP, and contribute to long- term improvement o f the investment climate. The NWFP has substantial economic potential, based o n potentially profitable services such as minerals and mining, tourism, hydro-power generation, construction, transport and waste management. Currently, more than any other sector growth in the mining sector i s hampered by the absence o f a strong regulator. The establishment o f a mines magistrate to help regulate the minerals and mining sector i s a key medium-term reform that could help pro-poor growth in the mineral r i ch NWFP.
59. specific areas o f D P C l are given in Box 1 below.
The f irst operation in the series, DPC1, focused broadly on al l pillars. Progress o n the
Box 1: Progress on key Prior Actions of DPCl The Government has sustained the reforms o f the D P C l triggers under al l four pillars.
Pillar I: Accelerating Human Development by Improving Delivery of Education and Health Services. The government continues to provide free textbooks to al l primary school students, and girls up to grade 10. Textbooks were distributed before the start o f school year in September 2006, and the government i s on target to distribute free textbooks prior to the next school year in September 2007. PTAs are functional in al l primary schools, and continue to receive recurrent budget funds, which w i l l be doubled to Rs.7,000 per classroom for FY08. In addition PTAs o f almost 50 percent o f al l middle and secondary schools have been made functional. The implementation o f health reforms supported under DPC I continue to make satisfactory progress. The TB DOTS program i s fully functional across al l districts in NWFP through public health facilities and joint programs are being implemented with private and non state sector. The Government has also taken steps to enhance the implementation HIV/AIDS services for vulnerable population sub-groups. Provision o f HIV/AIDS services to IDUs, ja i l inmates and other high risks has been initiated. The IDU program i s providing services to about 1600 IDUs while the services are now available in two large jails in NWFP. Steps taken by the NWFP has also addressed procedural bottlenecks facilitating NGO partners to focus on service delivery.
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proliferation o f A D P projects, kept improving the effectiveness o f public investment spending with steady reduction in the throw-forward ratio o f development projects.
Pillar 111: Governance Reforms. The provincial budget continues to be presented since 2004-05 under the format based on the N e w Chart o f Accounts. Progress has been made in undertaking procurement pol icy reforms, and the government has recently agreed specific areas for re form with the Bank. The government i s working steadily on removing inconsistencies in the designation o f the appointing authority for different levels o f officers and staff o f the departments devolved to the districts The provincial cabinet has constituted a sub-committee to submit recommendation son the creation o f a district cadre f rom BPS 1- 15, as we l l as ensuring that provincial secretaries are kept in their posts for at least 20 months. In addition, the HRM database has been created and operationalized. The HRM database o n the payro l l o f AG N W F P i s updated o n a monthly basis, o n receipt o f relevant information.
Pillar IV: Accelerating Economic Growth and Promoting Private Sector Development. The Industrial Estate Management Committees headed by the private sector have been established in a l l Industrial Estates at Peshawar, Gaddon, Hattar , Nowshera, SI1 Peshawar, SI1 Mardan, and SI1 Abbotbabad. Finally, the government has also proceeded to divest shares in the Bank o f Khyber, and government holding i s restricted to 5 1%. 25% o f shares have been offered to the general public.
IV. THE NORTH-WEST FRONTIER PROVINCE POLICY REFORM PROGRAM
60. The central goal o f the NWFP Reform Program i s to improve living standards through policies that accelerate human development, improve fiscal stability, strengthen governance and promote growth. The strategy document summarizing the Government’s program, Provincial Reform Program 11, 2005/06 - 2007/08 (PRP 11), was issued in M a y 2006. The Provincial Development Strategy consists o f four pillars:
Accelerating human development to reduce poverty and raise the quality and standard o f l i fe o f the people. Improvement in the coverage and quality o f education, health and social protection services, i s critical for sustained and inclusive economic growth.
Improving fiscal stability and public expenditure management to strengthen and sustain investment to support the medium-term reform program. The l o w level o f human development in the province will require sustained public investment over many years, and the government needs to manage i t s fiscal resources prudently to ensure that i t s reform program i s financially sustainable.
0 Strengthening governance by improving accountability, especially in financial management and procurement.
0 Promoting private sector development to raise incomes and reduce poverty, and to increase employment opportunities in productive and sustainable economic activities within the province.
The scope and contents o f the NWFP reform program, under each pillar, i s described below.
Pillar One: Accelerating Human Development
61. The government o f NWFP has developed a clear vision to both broaden and deepen human development reform under the PRP I1 2005/6-2007/8, concentrating o n the following three key themes: (i) further improving access, coverage and utilization o f human development services; (ii) improving the quality o f services; and (iii) undertaking management reform and strengthening governance, including promoting public-private partnerships, increasing public
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investment and developing a sound monitoring and evaluation system. The specific sectoral reforms for the education, health and social protection sectors are presented below. Financing for HD sectors are enhanced within the medium-term development framework, and the level and composition o f education, health and social protection budgets are aligned with sectoral priorities.
Broadening and Deepening Education Sector Reforms
Increasing Access and Coverage o f Education
62. Increasing enrolment in primary education, and improving the transition to middle and higher levels of education, i s a key component of the education reform program. In order to raise enrolment in the school and college system, the government i s adopting strategies on both the demand and supply sides o f the education system. The participation o f girls, especially f rom poor regions, i s a priority focus o f the reforms to expand participation in the education system.
63. The demand for education will be stimulated through a variety of policy initiatives. The incentive o f providing tuition free education in public schools will continue. In addition, school children f rom grades 1-10 will continue to receive free textbooks, partly as an incentive to attend school and partly to improve learning levels21. The NWFP i s also introducing a major new policy initiative to promote girls enrolment in middle schools. The policy i s to provide al l girls attending school in grades 6-10 with a stipend, to stimulate female enrolment beyond the primary level. Initially, in 2006/7 during the preparation o f DPC 2, the stipend will be introduced in seven districts where female middle school enrolment i s lower than 12 percent. In subsequent years, depending on the impact o f the program, it will be further developed and expanded to other districts. The main objective o f increasing female enrolment in middle and secondary schools in districts with large gender disparities i s to produce a pool o f educated women for the future. Based on the results o f pilots further demand side instruments to assist children from poor households to attend school will be explored, as fiscal and administrative capacity allows.
64. Supply side policies to expand the education system will complement the demand side measures. The primary school network has been expanding over time, although about 30 percent o f primary schools s t i l l lack basic facilities. The NWFP will continue the policy o f providing a primary school in each village, with adequate facilities such as water, sanitation and boundary walls for security. The government has also recruited about 4,000 primary teachers, to move towards the target primary school student-teacher ratio o f 40:l. Consistency between the education sector reform plans o f district and provincial governments are being expressed in terms o f partnership agreements (Tops). Under DPC 2 the TOPS cover increased budget allocations for education f rom the District governments, the reduction o f missing school facilities, and increased enrolments in primary schools f rom 2007/8 onwards, in at least 50 percent o f districts22. Over time, the TOPS will be expanded to cover al l districts. Attention will also be paid to reducing the 30 percent drop out at the Katchi (pre-school) level, including a phased program o f quality improvement for Katchi education in primary schools.
65. In the medium term the government will expand middle and secondary schools by five percent annually. Female middle and secondary schools will receive priority in the reduction o f missing facilities. Over time, the middle and secondary teacher stock for the middle
The delivery o f textbooks was successfully administered, with virtually al l students receiving textbooks on time, according to a study done in 200516. 22 The allocation o f provincial funds to the districts w i l l take the TOPS into account, providing a fiscal incentive for districts to formulate plans that are consistent with provincial norms for the location o f schools and the reduction o f missing facilities.
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and secondary school levels will also be increased, in a phased manner.23 The focus o f expansion o f middle and secondary schools will be to reduce gender and regional disparities in participation in post-primary education. Over the long term college education will also be expanded, both by stimulating private investment and strategically scaling up public provision. The main purpose o f expanding college education will be to increase the stock o f well-educated women to take up positions in professional jobs such as medical practice and health services, secondary and college teaching, and public administration, and to increase the employability o f college graduates o f both sexes in the private and NGO sectors.
Imurovinn the Oualitv o f Education
66. The central objective of the education reform program i s to improve the quality o f education. Policies to improve education quality will focus o n three core areas: (a) strengthening teacher development; (b) improving the competencies and sk i l l s o f school heads; and (c) developing a system o f class room testing.
67. Strengthening teacher development i s critical to quality improvement. As part o f the reform program supported by DPC 2, the NWFP notif ied a teacher development framework to set standards and norms for the teacher system. These standards and norms will form the foundation for teacher development over the medium and long-term, and cover: (a) competency levels that have to be attained, during pre-service teacher education, for appointment as a teacher; (b) professional development o f teachers in service, especially through on-site school based support, but also through induction training and off-site support; (c) payment systems linked to the achievement o f professional standards; and (d) career progression l inked to professional development. In the medium term this framework, which will also be part o f an education sector plan, will be implemented and institutionalized in phases. Initially, priority will be awarded to upgrading the quality o f the weaker schools through on site teacher support, and to addressing teacher absenteeism through incentives, including allowances and secure travel arrangements for female teachers. Also, efforts will be made to recruit middle and secondary school teachers f rom within the district itself, where feasible, as teacher absenteeism i s lower among local teachers.
68. Improving the management and leadership competencies and ski l ls of school heads i s a key reform to increase education quality. Several policy measures will be supported under the DPC 3 cycle. First, the government will create designated positions o f head teachers for primary schools, so that a clear cadre o f primary school heads will be established. Second, standards will be set to build the management and leadership sk i l l s o f school heads at a l l levels, through a regular and recurring cycle o f professional development. Third, the relationship between the academic services o f teachers and schools heads, and the education management and administrative services o f education officials, will be clearly specified. This will include the transition paths between services, promotion prospects within and across services, and relevant professional development opportunities.
69. A system of class room assessment to stimulate student learning and obtain feedback on student performance i s important to improve education quality. This i s a reform for which support will commence in the DPC 3 cycle. This reform initiative involves building the capacities o f teachers, school heads and education administrators to: (a) implement class room testing; (b) disseminate test information to parents and students, and within the school; (c) feed
23 A problem faced by the province in appointing teachers to middle and secondary schools is a shortage o f adequately educated women in the adult population who can teach in girls schools, especially in remote rural districts. This i s a country wide problem, and it may take a generation to address the issue successfully.
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test information back into school management, professional development o f teachers and classroom practice; (d) institute discussions o f test information between parents, students and teachers; (e) undertake remedial teaching where problem areas are identified; and ( f ) arrange feedback from schools up the chain o f education policy malung to the district and provincial levels. This i s a complex but important program which will be implemented in stages, with the capacity building work commencing in 200718.
Strengthening Governance and Service Deliverv in the Education System
70. Strengthening education governance i s a vital component of the education reform program. Several policy initiatives have been designed to improve governance and service delivery. A key pol icy measure that i s being supported under DPC 2 i s the establishment o f an education sector reform unit (ESRU) in the Department o f Education to act as the apex body to lead the reform program forward. The mandate o f the ESRU will be pol icy development, planning, coordination, and monitoring and evaluation. In this context the ESRU will lead the preparation, monitoring and annual updating o f the education sector development plan. In addition, the ESRU will p lay a key role in the preparation o f plans for the NWFP annual development programs (capital budget) each year, including integrating donor financing within the sector plan.
71. The role o f Parent Teacher Associations (PTA’s) will be expanded to improve school-community links. PTA’s have been given budgetary authority, under the reform program supported by DPC 2, over school development budgets. This will enable PTAs to be involved in school infrastructure improvement, l ike construction o f classrooms, boundary walls and latrines, and the purchase o f furniture and equipment. I t i s expected that this will improve the cost effectiveness, timeliness and quality o f school related construction activities through local stakeholder participation and supervision. The capacity o f PTA’s will also be built up over time to use the expanded budgetary authority, with emphasis o n maintaining financial records and bank accounts, formulating expenditure plans and records, conducting school development meetings, and mobil izing parents to promote school attendance among children.
72. Increasing private sector participation in education, especially at the secondary and college levels, i s an important education development strategy in the NWFP. The government i s exploring options to re-structure and strengthen the Elementary Education Foundation and the Frontier Education Foundation to develop private-public partnerships in education. Options for re-structuring are the widening o f the Boards o f these Foundation to increase private sector representation, and the provision o f a budget exclusively to stimulate private-public partnerships at the school and college levels. Alternatives under consideration to strengthen private-public partnerships in schools are based o n options such as: (a) a one time capital grant to assist with the cost o f expanding and upgrading private schools which meet accreditation criteria; (b) a one time capital grant to support the establishment o f private schools, again subject to accreditation criteria; and (c) meeting part o f the recurrent costs o f private schools, such as teacher salaries, according to agreed norms. The contours o f this reform will be clarified during the DPC 3 cycle, and will form a key element o f long-term Bank support to the NWFP education program.
73. The education reform program places great emphasis on monitoring, evaluation and studies of education performance. Several steps are being taken to strengthen monitoring and evaluation. First, the Education Management Information System (EMIS) has been placed under the ESRU, and i t s coverage and quality o f information will be improved over time to support the information needs o f the education sector plan. Second, external accountability checks will be introduced, as part o f the reform program supported by DPC3, through third party validation (TPV) studies. These studies will provide independent monitoring data and evaluation
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information for key reforms, such as teacher attendance, the functioning o f PTAs and the delivery o f textbooks. The information f rom TPV’s will also enable the accuracy o f administration information, such as the EMIS, to be checked and improved over time. Other studies will also be conducted, normally with the assistance o f external agencies such as universities and research institutes, as and when required. In addition, information o n cognitive achievement f rom the N E A S will be incorporated into the data base o f the ESRU, and utilized for policy formulation in a variety o f areas, including resource allocation and teacher development.
74. A policy review of the college system will be carried out to help the province prepare a suitable development strategy for the college sub-sector. T h i s study, which will be part o f the DPC 3 cycle, will cover topics such as: (a) measures to improve quality and labor market relevance o f the college system; (b) phased expansion o f enrolment in college education; (c) options for financing expansion and quality improvement; and (d) improving the environment for private sector participation in college education. The findings o f this review will feed into the development o f the college sector in the next wave o f policy reforms in the NWFP.
Broadening and Deepening Health Sector Reforms
75. The NWFP, aware o f the challenges facing the health sector, has been working to deepen health reforms, including progressively increasing financing for the sector within the medium-term development framework. Improving quality, equity, and utilization o f services in PHC and secondary care hospitals i s a key component o f the health reform program. In order to improve quality and utilization, the government will focus on management innovations to improve effectiveness o f the system. The NWFP will also continue to coordinate with the federal government to implement the national nutrit ion strategy in the province in a phased approach. The health reform program will support: (a) testing innovative approaches to strengthening the management and organization o f health services; (b) increasing managerial autonomy and accountability in the public sector; and (c) significantly strengthening the stewardship function o f government, particularly monitoring and evaluation.
Strengthening Primary Health Care
76. The NWFP will undertake three organizational innovations to strengthen district level management of primary health care in nine under-performing districts. The innovations, which will be assisted through DPC 2, include: (a) supporting five district governments to contract NGOs to manage a l l the PHC facilities with responsibility for delivering a package o f PHC services - the contract will provide considerable management autonomy and flexibility, wel l defined objectives and indicators o f success, and adequate financing at least equivalent to previous year’s budget; (b) increasing the autonomy o f EDOs (Health) with enhanced administrative and financial powers to effectively manage two districts; and (c) providing performance based incentives along with administrative and financial autonomy for district managers and staff in two districts. These innovations will be rigorously evaluated.
77. Establishing a mechanism to measure quality of health care. Assessments to measure quality o f health care are rare in Pakistan and NWFP. As part o f the reforms supported through DPC2 an assessment o f quality o f care in PHC’s will be implemented to obtain baseline information. The assessments will be used to a) develop standards o f health care; b) set out the measurable objectives o f PHC and hospital reform, and c) devise mechanism to regularly monitor improvements in the quality o f health care.
Strengthening Secondary Health Care
78. To improve quality, equity and utilization of services in secondary care hospitals the DOH will undertake assessments o f the experience o f hospital autonomy in the NWFP. Based on
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the findings o f the assessment, which are part o f the reforms supported by DPC 2, a strategy will be developed to improve hospital governance, management and autonomy. This strategy will be taken forward in DPC 3 with about three districts implementing models o f management autonomy in their district/Tehsil headquarter hospitals to improve human resource management, governance, and financing. The innovations, if successful, will be scaled up to other districts.
Improving Governance and Service Delivery in the Health System
79. The stewardship functions of the government are being strengthened through: (a) enhancing monitoring and evaluation by establishing an independent monitoring and evaluation (M&E) unit at the provincial level; (b) strengthening partnerships with the private and NGO sectors through revitalizing the NWFP Health Foundation (NWFPHF); and (c) strengthening regulation o f the private sector by supporting the Health Regulatory Authority (HRA)
0 Enhancing monitoring and evaluation functions The health reform program i s being implemented in a devolved set up and needs regular assessment o f performance for informed decision making. GONWFP places a lo t o f emphasis on strengthening monitoring and evaluation and performance assessment. Several steps will be taken to strengthen monitoring and evaluation functions at the provincial/district level. The Department will establish an independent monitoring and evaluation unit at the provincial level. The unit would assess sector performance, inform health policy, feedback to decision makers and enhance accountability by disseminating results to a l l stakeholders provide. The unit will be adequately staffed by skilled manpower to analyze H M I S and household data; undertake spot checks to improve quality o f H M I S data; contract out and supervise third party assessments and other studies; enhance utilization o f data by managers and decision makers and disseminate results to the public and other stakeholders.
0 Strengthening partnerships with the private and NGO sector. The reform o f the NWFP Health Foundation i s a key pol icy measure to strengthen public-private partnerships in the health sector. The foundation will be restructured by redefining i t s role, mandate, scope o f work, financing, enhancing i t s autonomy and means to measure i t s performance. In the medium-term the Foundation will finance the private and NGO sector to improve provision o f TB DOTS and childmaternal health care services.
0 Strengthening regulation of the private sector T o improve quality o f care in the private sector, DPC2 will help develop and implement a regulatory framework for regulation o f the health sector. The Health Regulatory Authority (HRA) will be supported through provision o f adequate financing and skilled staff to accomplish i t s mandate effectively. HRA will outline a wel l defined strategy, that addresses i ts: (i) long term vision and objectives; (ii) identifying priorities; and (iii) legislative and regulatory framework and means to implement it.
Initiating Social Protection Reforms
80. Social protection has only been recently added to its reform program by the NWFP provincial government, and needs further policy development. As such, strategic thinking i s needed on what the critical r isks faced by poor households are, how well-targeted current programs are, what are the gaps, and how to design a set o f fiscally sustainable and wel l administered and targeted social protection programs. The NWFP government recently undertook a situation analysis o f social protection in the province, collecting information (including financial information) on al l SP programs and initiatives in the NWFP. Based o n the situation
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analysis the Department o f Social Welfare has commenced the development o f a social protection action plan to help poor people meet basic needs and alleviate poverty, as wel l as to enable the poor to exit poverty through human capital accumulation and access to better jobs arising f rom growth.
81. The establishment of a Social Protection Reform Unit (SPRU) in the Department of Social Welfare to plan and develop social protection activities, with a particular focus on the reduction of risk and vulnerability, i s an important policy initiative of the government. The SPRU will also undertake monitoring and evaluation o f social protection programs in the province, and the implementation o f Federal programs such as Zakat and Bait-ul-Mal. The establishment o f the SP Reform Unit will be a key component o f the reform program that will be supported by DPC 3.
Pillar Two: Improving Fiscal Stability and Public Expenditure Management
82. The medium-term fiscal reform strategy i s being closely integrated with the government’s strategy for human development and inclusive growth. T o improve delivery o f social services, increased expenditures and sector-specific measures in education, health, and water and sanitation, are being complemented with corresponding measures in fiscal decentralization, to give service providers (local governments) additional resources.
83. The high-investmendhigh-growth strategy envisaged in the medium-term reform program will have important development rewards but it will also require additional fiscal resources for its implementation. The 2006 amendment in the 1997 NFC (National Finance Commission) Award covering FY07 - FY 1 1 devotes an increasingly higher share o f the divisible revenue pool to the provinces.
84. The provincial budget received a substantial increase in federal revenue transfers in 2006/7 f rom the amended NFC Award: but the net effect o n NWFP’s finances i s more l imi ted as the direct cost impact o n the provincial budget stemming f rom the federal government’s general pay increase i s o f comparable magnitude.24 Under the new arrangement, N W F P got an increase o f about Rs.6 b i l l ion (12.7 percent) in FY07 compared to the terms o f the original 1997 NFC Award. The estimated addition to the wage bill i s about Rs.4 billion, leaving a net impact o f 0.2 % o f PGDP.
85. The NWFP government plans to strengthen own finances and i s committed to a full implementation o f the fiscal reform program that started in 2001. Increasing own resource mobilization i s a major challenge given the existing federal - provincial assignment o f tax instruments that leaves NWFP with a l imited tax base.*’ With focused efforts on tax policy and tax administration reform there i s some potential to generate higher own revenues over the medium term from revenue sources such as the Motor Vehicle Tax (MVT), Stamp Duty, Professional Tax, Urban Immovable Property Tax, Agricultural Income Tax and taxing services. However, the growth strategy also requires increased resource transfers or tax assignment f rom the federal government as wel l as increased external development assistance.
86. To strengthen own revenue mobilization, the government will address issues in tax administration to make i t more effective, and strengthen collection o f broad based taxes and user charges. Besides improving tax administration through improved incentives, training and
24 The 2006 amendment i s l ike ly to be continued until such time that the NFC announces a new Award. 25 Federal laws also exempt 7 out o f 24 districts in the province from paying taxes to the provincial government.
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computerization o f tax records:6 the provincial government plans to focus more intensely on relatively broad-based provincial taxes. Collection o f MVT, which i s below potential, i s being streamlined through a more automated collection system. T o improve the structure and revenue potential o f the urban property tax, the provincial government has completed a survey o f urban properties. K e y measures for rationalizing and improving the yield o f user charges include: improving the water rate formula with the aim o f making it self-financing and a review o f higher education fees and user charges for tertiary health services, with adequate safety nets for the poor. Because o f these measures, the provincially collected revenue i s projected to increase at an average rate o f 15 ?4 percent p.a. from FY06 to FY10. With federal tax assignment and transfers expected to grow as projected in the current N F C arrangement overall provincial revenue i s projected to increase by 15.7 percent per year, 3 percentage points faster than nominal GDP.
87. The government plans to continue to create fiscal space by following i t s strategic debt management pol icy to save interest payments through better debt management (in particular by retiring loans f rom the federal government at high interest rates). Since agreement has recently been reached with the federal government o n early debt retirement, the provincial government aims at retiring some debt prematurely this year and to continue this policy in coming years.
88. Accelerating growth and facilitating access to service delivery will require not only increasing the overall level o f public expenditures, but also improving the composition and effectiveness of these expenditures, with relatively more emphasis on investment and operations and maintenance, less on consumption, and better management of investment projects. In i t s medium-term budget framework (FY07 - FY 10) the government plans to contain overall current expenditure in terms o f provincial GDP with a reduction f rom 6.9 percent in FY06 to about 6 percent in FYlO (see Table S), while significantly enhancing spending o n high-priority sectors such as education and health. An increasing share o f the budget will go to Maintenance and Repairs to maintain the value o f public capital stock. Resumption o f early retirement o f expensive federal debt will continue to lower interest payments. Regarding public investment, the government has raised the level o f development (ADP) spending from 2 percent o f PGDP in FY04 - FY05 to an expected 3 percent o f PGDP this year (FY07) while continuing to reduce the A D P throw-forward ratio considerably. The government will keep development spending at the FY07 level over the medium term. I t will invest more in priority areas that include education, health, roads, irrigation networks, and water supply and sanitation while containing the “throw- forward” o f the Annual Development Program at i t s current level in real terms. Reforms will also aim at raising the effectiveness of public investment spending through improved selection o f projects, avoiding post-approval escalation o f costs, and improved monitoring and supervision.
89. The fiscal framework also envisages measures to fully meet future liabilities and making the budget process more effective and transparent. I t will continue to build up the Pension Fund, the General Provident Fund and the Frontier Highway Authority Funds. Drawing o n the newly established Human Resource database for the c iv i l service it will explore pension r e f o m options by projecting pension liabilities under different reform scenarios. The government will also continue to improve budget preparation through phased roll-out o f performance budgeting to other districts. At the start o f FY07 pilot performance budgets were in place for selected areas of four districts, making NWFP the leading province in the country in this area. The performance budgets’ targets and monitoring arrangements will be harmonized with the districts’ Terms o f Partnership in education and health service provision. T o improve budget
26 Other tax administration measures include: a clearly defmed and streamlined role o f the Board o f Revenue (BoR) and the Excise and Taxation (E&T) Department; modernizing the mode o f application o f laws and administration o f agricultural and land-based taxes; and improving coordination between the B o R and E&T Departments. The GoNWFP i s undertaking a new study to improve revenue administration in the key revenue collecting Departments.
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execution, in the coming fiscal year a system be launched to enable timely reporting o f the consolidated fiscal deficit (province and districts) and other key fiscal aggregates on a quarterly basis. It will attain accurate and timely information on the fiscal accounts o f district governments and TMAs o n a monthly basis, and disseminate it to provincial departments and to the public.
Table 6: NWFP Medium-Term Fiscal Framework, 2005/06 - 2009/10 (percent of provincial GDP) 1/
FY06 June Final
7.7 4.9
0.7
Total Revenues and Grants 11
(NFC) and GST
Revenues
Federal Tax Assignment
Provincially Collected
Income on oil, gas and hydel
Total Expenditures 11 Current Expenditures Dev. Expenditures Contingency Expenditures Fiscal Balance Primary Fiscal Balance (incl. earthquake effects) Revenue balance
1/ NWFP GDP at current market prices
2/ Government Finance Statistics
FY07 FY07 FY07 FY08 Budget Budget Proj. Proj.
WB 3/07 21 format
8.8 8.6 8.6 8.4 5.2 5.2 5.2 5.2
0.7 0.7 0.7 0.7
FY06 Budget 2005106
8.4 4.8
0.7
1.2
9.7 6.9 2.9
-1.3 -0.2
1.3 1,057,O
733,782
FY06 Budget
WB format
8.1 4.8
0.7
0.9
9.1 6.9 2.2
-0.9 -0.2
1 .o
733,782
1 .o
8.9 6.2 2.7
-1.2 -0.4
1.2
9.7 6.5 3.2
-0.8 -0.1
0.9
8.9 6.1 2.8
-0.3 0.4
0.9
9.2 6.2 3.0
-0.6 0.0
0.9
9.2 6.1 3.0 0.2
-0.8 -0.3
1.0 I 1.8 I 1.9 I 1.9 I 2.0
FY09 Proj.
21
8.4 5.4
0.7
0.8
9.0 5.9 2.9 0.2
-0.6 -0.1
2.2
FYlO Proj.
21
8.5 5.5
0.7
0.8
9.0 5.8 2.8 0.3
-0.5 -0.1
2.4 1,191,2
41 mat .
Source: Government of NWFP Fiscal tables and Bank staf f projections.
90. By continuing fiscal decentralization reforms the Government will enable local governments to function more effectively and hence improve the delivery o f social services.” As a key step towards further fiscal decentralization the government has devolved the payment of district s ta f f salaries through (district) Account IV with effect f rom July 2006. T h i s should provide proper incentives to districts for efficiency gains in staffing. In addition, it also intends to increase the share o f district development budgets executed through (district) Account I V which also will need capacity building for district staff. The government has also made headway in formulating a transparent formula/system o f incentive grants to Districts for good performance in service delivery, and has initiated work on designing conditional grants. In this mechanism development funds could be transferred to the district governments (through Account IV) as part o f performance agreements between the provincial and district governments. Also, over the medium term the Provincial Finance Commission should be made permanent to institutionalize fiscal decentralization and review fiscal performance o f the districts o n an ongoing basis.
91. The combined effect o f the provincial government’s fiscal policies and reforms over the medium term are summarized in i t s medium-term budget projections. The broad outcomes include: (i) the provincially collected revenue will grow considerably faster than nominal provincial GDP; (ii) the provincial current expenditure will remain at about 6 perent o f GDP, slightly below the 2006/07 level, throughout the medium term; (iii) the level o f provincial development expenditure will be consolidated at about 3 percent o f PGDP; (iv) the fiscal deficit will decline f rom 1.2 percent o f PGDP in 2005/06 to 0.6 percent in 2006/07 and will on average remain at this level over the medium term; (v) the stock o f public debt will decline as a percent o f PGDP; and (vi) interest payments will continue to decline gradually in terms o f PGDP and reach relatively l o w levels o f debt service burden (9% o f current expenditure) by 2009/10.
*’ This also requires progress in administrative and functional devolution (see pi l lar IV).
28
Pillar Three: Strengthening Governance
92. Weak governance has been an important development challenge, and the focus on human development in the future will require continued improvements in: (i) public financial management, (ii) procurement; and (iii) carrying the devolution process forward; the latter with the goal o f improving the administration o f multi-tiered government (province/district/tehsil) and making local governments more accountable for improved service delivery. The main thrust o f governance reforms are as follows.
Public Financial Management
93. The government will continue to implement i t s medium-term strategy for public financial management reforms as outlined in the P F A A action plan. These reforms aim, inter alia, at improving the reliability and accuracy of financial data, institutionalizing the internal audit function and improving accountability and legislative oversight. The outcome o f the joint-donor PEM re-assessment, currently in progress, will further in form o n the renewed areas o f reform that the province will include as part o f i t s overall reform agenda.
Procurement Reforms
94. While the province has made substantial progress in procurement reforms, including promulgating a new Procurement Law, and rules, further work i s needed to effectively implement the regulatory framework. . The government i s refining phase 3 o f i t s Procurement Reform Act ion Plan to align procurement rules to best practice over the medium term. Among other things, this includes specifying the needed amendments in the procurement rules, putting in place a system for posting and updating market prices for use in cost estimates, and providing procurement training.
Modernization of the civil service and administration of multi-tiered government
95. The HRM database will need to continue and be fully operational and be integrated with PIFRA. It should be in regular use, with reliable and timely data provided for HFW planning and monitoring o f establishment levels, appointments, promotions and transfers at provincial, district and tehsil levels. I t can also be used, for instance, to monitor at provincial and district levels the success o f policies to recruit and retain female teachers at girls’ schools and health workers at basic health units in disadvantaged districts. In i t ia l ly the HRM database will focus mainly on priority sectors, such as education and health, but will then be extended to cover al l sectors over the long-term.
Pillar Four: Promoting Economic Growth Through Private Sector Development
96. With the overarching goal o f reducing poverty in the province the NWFP government’s medium-term strategy also sets out to increase employment opportunities through accelerated, inclusive growth. The government, supported by the Bank’s analytical work and the ground work in recent years, has developed an overall strategy for economic growth that was presented at the NWFP development forum in M a y 2006.
97. The private sector in the NWFP has always had a l o w base and efforts under the program are meant to accelerate growth by using private sector development as a key vehicle. The Bank’s support i s multi-pronged, with the emphasis being on reshaping the role o f the Government as a facilitator for the Private Sector and not a provider. The focus has been on involving the private sector in key decision bodies that impact the productive value o f the sector.
29
98. The next phase o f the growth strategy aims to (i) strengthen the private sector by promoting demand-responsiveness o f public sector agencies; (ii) improve the functioning o f industrial estates; and (iii) supporting an enabling environment to spur growth in important sectors. The key policy measure for 2006/7 i s the establishment of a one-window investor facilitation center coordinated by the private sector and the corresponding line agencies. This one-window investor facilitation center became operational in the last quarter o f 2006, and about 150 potential investors have already utilized i t s services.
99. The government will implement a subsequent phase o f i t s growth acceleration strategy by 2007. The key reform will be setting up and starting operations o f a Mines Magistrate to strengthen enforcement o f mining property rights and address labor concerns, to facilitate the development o f the important minerals and mining sector. Legal recognition o f mines wil l be extended throughout NWFP and the provincial policy extended to mines in PATA. In addition, the NWFP will merge the SDA and Small Industries Development Board (SIDB), transfer management control o f the Bank o f Khyber to the private sector, develop an enabling framework for private provision o f power and initiate preparation o f a decentralized PPI law that defines the role o f a l l relevant units (rather than establishing a central unit). I t will also develop an enabling framework for private provision o f municipal services, and seek to restructure the technical and vocational training system consistent with principles o f being private sector led and responsive to labor market demands.
V. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM
LINK TO CAS
100. The DPC 2 i s fully consistent with the FY06-09 Country Assistance Strategy (CAS) that was approved by the Board in June 2006, and i s the main vehicle for the delivery of IDA support to the province. The CAS, which plans IDA availability o f US$785 mi l l ion per year to Pakistan, has three inter-related and mutually reinforcing pillars l inked to the strategic pillars o f the PRSP: (I) sustaining growth and improving competitiveness; (11) improving government effectiveness and service delivery; and (111) improving lives and protecting the vulnerable. The NWFP DPC 2 supports al l three pillars o f the CAS in the NWFP. Pillar 1 o f DPC2, accelerating human development, impacts positively on al l three CAS pillars. Pillar 2 o f the DPC2, improved fiscal stability and better public expenditure management, i s a pre-requisite for accomplishing the CAS pil lar o f sustaining economic growth. Pil lar 3 o f DPC2 i s aimed to promote and strengthen governance, which i s critical for attaining CAS pillars 2 and 3. Finally the fourth pil lar o f DPC2, promoting growth and private sector development, i s perfectly consistent with Pillar 1 o f the CAS. Bank engagement in N W F P through the DPC series i s guided by the strategic principles o f the CAS: (a) client pull; (b) scaling up / replicating approaches that have already proved to be effective; (c) focusing o n outcomes; and (d) using programmatic approaches to provide flexible and predictable support t o promising medium-term reforms.
COLLABORATION WITH THE IMF AND OTHER DONORS
101. The Bank and the International Monetary Fund (IMF), continue to work closely and hold regular consultations on Pakistan macroeconomic issues. Pakistan i s now on a yearly Article IV Consultations cycle and the latest IMF Article IV consultation mission was undertaken in January 2007. The IMF successfully completed the final review o f the o f the PRGF in December 2004 and the Government o f Pakistan did not request a successor IMF program.
102. The Bank i s collaborating actively with development partners at the federal and provincial levels, including through the Poverty Reduction Support Credits at the national level,
30
and provision o f technical assistance for analytical and strategic work l inked with the provincial reform program. Other development partners are complimenting the Banks work in the NWFP, especially in education, health and social protection. The E C i s supporting the education sector in close alignment with the Bank DPC series. DFID i s working closely with the Bank to support the NWFP provincial reform program, with a special focus on the social protection reforms and on the health sector. GTZ i s providing technical assistance for the education and health sectors, aligned with the reform program supported by other development partners. NORAD has a program to support education activities, mainly the establishment o f local circle offices for school administration; madrassah mainstreaming; and upgrading o f teacher training institutes. The NWFP i s also receiving assistance from USAID, UNFPA and UNICEF to strengthen the district level maternal and neonatal health services in selected districts. All donor assistance i s aligned with the provincial reform program. The ADB i s considering preparing a an operation aimed at supporting the growth pil lar o f the NWFP reform program, with emphasis o n urban management.
RELATIONSHIP TO OTHER BANK OPERATIONS
103. The proposed DPC 2 i s closely linked to a number of ongoing and planned development policy and investment operations in the country. It complements the ongoing Education sector DPCs in Punjab and wel l as the planned DPC series in Sindh, and strongly promotes Pakistan's PRSP objectives. The reforms supported by the N W F P DPC 2 also complement those at the Federal level assisted by the PRSCs. Learning Assessment reforms at the provincial level will build o n the achievements o f the National Education Assessment System (NEAS) project. In addition the NWFP DPC 2 also incorporates lessons learned on encouraging private-public partnerships in education in Balochistan during the preparation o f the Baluchistan Education support Project (BESP). Finally, the Public Financial Management reforms supported by the N W F P DPC 2 complement those being implemented under the platform o f the Project for Improvement o f Financial Reporting and Auditing (PIFRA), to improve the overall fiduciary environment and enhance the accountability process in the use o f public education resources.
LESSONS LEARNED
104. The DPC 2 builds upon lessons learned from previous policy based lending operations in the NWFP and elsewhere, and Bank experience of national and sub-national policy reform programs. The key lessons include:
Strong political commitment and leadership are essential for a successful pol icy reform program to improve human development and reduce poverty. A close partnership between the NWFP government, the Bank and other development partners i s required, at both the political and technical levels, to develop and implement deep and lasting policy reforms. Technically rigorous monitoring, evaluation and research studies are required to assess progress, measure results and outcomes, and guide the development o f future policy reforms. Analytical and advisory activities that increase the knowledge base and advance the policy agenda play an important role in the deepening and broadening o f the reform program. Strategic selection and sequencing o f reforms i s important to ensure deep and lasting impact on human development.
ANALYTICAL UNDERPINNINGS
105. The analytical foundations o f the proposed N W F P DPC 2 are given in Table 7 below.
31
Table 7: Analytical Reports N W F P Economic Report, December 2005
Country Gender Assessment
Country Report on Risk and Vulnerabil ity
malytical Underpinnings of the Proposed NWFE Recommendations Education 1. The Government should set feasible but ambitious education goals as an integral part o f a provincial development strategy
2. Reforms should meet three k e y challenges: (a) enhance overall school attendance closing (i) gender gap, (ii) rural-urban gap, and (iii) rich- poor gap in attainments.
3. Reforms should also a im to reduce the cost o f schooling, the distance to schools, teacher supply and school quality, and take in to account cultural factors and parents’ concerns.
4. Reforms should also a i m at raising the demand for girls’ schooling (both at primary and secondary levels) by instituting demand side interventions.
5. Make adequate budgetary provisions to launch and sustain the above reforms
Health 6. Adopt new and innovative approaches to improve the delivery o f publicly-financed preventive, promotive and curative services, addressing in particular basic problems o f weak management, inadequate staff motivation and litt le attention to measuring results.
7. Promote public-private partnership and consider contracting-in management o f primary health care facilities:
Growth 9. Sustain rapid economic growth, driven by the private sector, by creating a business-friendly public pol icy environment by the government disengaging f r o m various economic activities and creating a space for the private sector. 1. Implement innovative schemes targeting rural girls including stipends and income transfers l inked to school attendance and retention. 1. Pi lot innovative schemes linking income transfers to outcomes in health and education (conditional cash transfer programs)
2. Conduct a stock-taking exercise o f current safety net programs and their effectiveness in relation to r i sks faced by poor households and develop province-specific social protection
)PC 2 Links to DPC-2 Actions
Pil lar One: Accelerating human development
Pi l lar One: Accelerating human development
Pi l lar One: Accelerating human development
Pil lar One: Accelerating human development
Pi l lar Two: Improving fiscal stability and public expenditure management;
Pi l lar One: Accelerating human development
Pil lar One: Accelerating human development
Pi l lar Four: Promoting economic growth and private sector development
Pi l lar One: Accelerating human development Pi l lar One: Accelerating human development
Pi l lar One: Accelerating human development
32
Devolution in Pakistan Report 2004
Pakistan Public Expenditure Management Report 2004
NWFP Public Financial Accountability Assessment Report 2004
Note: The above table i s no t exha1
strategic frameworks.
1. Increase fiscal autonomy and judicious use o f conditional transfers to achieve overarching policy goals
1. Increase the level and quality o f public expenditures on education
2. Develop incentive programs to stimulate demand for education among the poor.
1. Improving the accounting, internal controls, financial reporting, auditing, and legislative oversight.
ve and manv recommendations are rmeated in reoorts. In some
Pillar Two: Improving fiscal stability and public expenditure management; and Pillar Three: Strengthening governance Pillar One: Accelerating human development
Pillar One: Accelerating human development Pillar Three: Strengthening Governance
:as, such as social protection and college education, the proposed DPC series 6 1 1 help establish the anaiytical foundation for future reform.
VI. THE PROPOSED NORTH-WEST FRONTIER PROVINCE SECOND DEVELOPMENT POLICY CREDIT
DESCRIPTION OF THE OPERATION
106. The proposed NWFP DPC 2 i s the second in a sequence of three annual Development Policy Credits that assist the NW"P government to implement the medium- term development program to accelerate human development, improve fiscal stability and public expenditure management, strengthen governance, and promote economic growth through private sector development. The DPC 2 will provide a single tranche disbursement o f US$130 mi l l ion (IDA) to the Government o f Pakistan, with the rupee equivalent being on-lent to the Government o f the NWFP. DPC2 has a strategic focus on improving outcomes in the human development sectors: education, health and social protection. In addition, DPC2 cames forward reforms to ensure sound fiscal management, strengthen governance in the key fiduciary areas o f procurement and financial management, and promote private sector led economic growth. These reforms, while important policy objectives in themselves, will also help create fiscal space for sustainable investment in human development over the long-term. Whi le DPC2 supports the overall N W F P reform program, a set o f key pr ior actions were identified by the government and agreed with the Bank as the critical reforms to be completed during the preparation o f the operation. The status o f these prior actions are described below.
33
Pillar One. Accelerating Human Development.
Education
107. Prior Action One: Stipends for girls enrolled in grade-4-1 0 to be introduced from FY07 in districts where girls’ middle and secondary enrollment rates are below 12 percent. The stipend policy to promote middle and secondary school attendance among girls was approved by Cabinet, and the FY07 budget allocated 30 mi l l ion rupees for this program. The Postal Department was designated to channel the stipend payments to girls who have achieved at least 80 percent school attendance. The payments for girls for the period July 1 to December 3 1, 2006 (the f irst six months o f the school year) has been released through the Postal Department, directly to the girls homes. Status: the pr ior action i s complete. Source: NWFP government records.
108. Prior Action Two: A Framework for Teacher Development notified. The Framework for Teacher Development (TDF) has been notif ied by the Department o f Education. T h i s comprehensive TDF covers several areas related to teacher development, such as: (a) managerial provisions for teacher recruitment; (b) a performance appraisal and promotion system; (c) incentives l inked to performance and training; (d) monitoring and supervision; (e) teacher education, training and capacity building; ( f ) and a time frame for implementation. Status: The pr ior action has been completed. Source: NWFP government records.
109. Prior Action Three: Partnership agreements for the education sector reform program will have been signed between the provincial and at least 50 percent of district governments. Partnership agreements with twelve districts (50 percent o f the districts) have been signed. These agreements contain district specific baselines and targets for increasing enrolment, reducing missing facilities and the implementation o f the stipend program. The government allocated 100 mi l l ion rupees to be distributed, according to the Provincial Finance Commission formula, among the districts that signed the agreements. T h i s prior action i s completed. Source: N W F P government records.
110. Prior Action Four: The revised guidelines for increased budgetary authority for Parent Teacher Associations (PTAs) to use development budgets issued and capacity building activities outlined. The policy to empower PTAs to spend development budget up to a maximum o f two hundred thousand rupees has been approved by the Chief Minister. The Department o f Education has also notif ied guidelines for capacity building activities for PTAs in the use o f both recurrent and development budgets. Status: the prior action i s completed. Source: N W F P government records.
111. Prior Action Five: Education Sector Reform Unit (ESRU) in the Department of Education with monitoring and planning functions notified and budgeted. The ESRU has been notif ied and budgetary provision made available. The ESRU will be the planning and monitoring unit, manage the Education Management Information System (EMIS), and undertake pol icy analysis for the Department o f Education. The Director o f the Unit has already been appointed. Status: the prior action has been completed. Source: NWFP government records.
Health
112. Prior Action Six: Partnership agreements signed with the District Governments for implementation of management innovations (contracting with NGO). This action supports the testing o f three managerial and organizational innovations in nine intervention districts using a controlled, before and after, evaluation. Detailed program outlines have been specified for the three innovations. The Department o f Health, the District Governments and the selected NGO
34
have signed the agreements to manage primary health care in the five districts.28 Status: the prior action has been completed. Source: NWFP government records.
113. Prior Action Seven: Contract out baseline studies of quality of care assessments in PHC facilities of all districts. The Department o f Health has completed a l l the implementation steps o n this activity, including: (a) the development o f TORS; (b) drafting the quality o f care framework and standards o f care, based on stakeholder consultations; and (c) contracting the study. The quality o f care assessment study has been contracted with an international consultancy firm.” Status: the prior action has been completed. Source: NWFP government records.
Pillar Two: Improving Fiscal Stability and Public Expenditure Management
114. Prior Action Eight: The FY07fiscal budget to be in line with MTBF and devolution principles. The overall outlook for FY06l07 has shown a fiscal strengthening beyond that planned in the MTBF and approved by the Provincial Assembly. The overall fiscal deficit i s projected to decline f rom 1.7 percent o f GDP in FY05/06 to 0.9 percent o f GDP (5.7 b i l l ion rupees) in FY06/07 (compared to 1.2 percent o f GDP in the original Budget estimate). The 2006/7 education and health budgets for have been increased in line with the MTBF. The salary budgets have been transferred to the districts, consistent with the pol icy o f fiscal devolution. Status: the prior action has been completed. Source: NWFP government records.
Pillar Three: Strengthening Governance
Financial Management
115. Prior Action Nine: Achieve operational I T connectivity and productivity for 20 District Finance and District Accounts Office sites using uniform chart of accounts under the New Accounting Model. The operational IT connectivity for a l l 24 District Accounts Offices (DAOs) in NWFP has been achieved using the S A P R 3 system for transaction processing o f payments and receipts. The NWFP has become the f i rs t province in Palustan to implement a reliable and comprehensive financial information system, generated through the state o f the art S A P system. Status: the prior action has been completed. Source: NWFP government records.
Procurement
116. Prior Action Ten: Implement Phase 3 of Procurement Action Plan to align procurement rules with international standards. The NWFP government has selected a consulting firm to assist in implementing this reform, including identification o f the changes in the rules (and possibly the law), review o f procurement documents, development o f a complaints redressal system, and recommendations for an institutional arrangement with responsibility and ownership for the procurement re foms. Under a separate consultancy the system o f composite schedule o f rates i s being replaced by current market rates. Status: the pr ior action has been completed. Source: N W F P government records.
Pillar Four: Promoting Economic Growth through Private Sector Development
1 17. Prior Action Eleven: Ensure that the one-window investment facilitation center coordinated by the private sector and the corresponding line agencies is operational; Le., has been staffed and has started serving potential investors. The one-window investment facilitation
28 The five districts are Karak, Kohat, Mardan, Peshawar, and Swabi. 29 It should be observed that the N W F P is the f i r s t province to initiate a comprehensive quality o f care assessment in Pakistan covering a l l the districts within the province.
35
center was established in October 2006. The purpose o f the investment facilitation center i s to: (a) maintain and provide information o n Provincial and Federal Industrial Policy; (b) assist investors through the one window facility in the provision o f basic services and entrepreneurs in access to finance; (c) provide information o n various policies and procedures regarding customs, taxation, labor laws, legislative fkamework etc.; (d) maintain and update a data base with respect to a l l procedures that the private sector has to comply with and assist in compliance; and (e) conduct seminars and conferences to attract investors to promote growth in the province. The Director and six staff members have been appointed, and activities to assist potential investors through the provision o f information and advice o n industrial policies and procedures, and the organization o f conferences and seminars to promote investment, have commenced. Status: the pr ior action has been completed. Source: NWFP government records.
1 18. below.
The prior actions for DPC2, conditions for Board presentation, are summarized in B o x 2
Box 2: Conditionality for the Second North-West Frontier Province Development Policy Credi t The government has agreed upon and implemented the following prior actions before the presentation o f the credit to the Executive Board:
Accelerating Human Development Education Sector
0 Stipends for girls enrolled in grades 6-10 introduced from FY07 in 7 districts where girls’ middle and secondary enrolment rates are below 12 percent. Partnership agreements for the education sector reform program signed between the provincial and at least 50 percent o f district governments. A policy framework for the professional development o f teachers notified. The revised guidelines for authority for PTAs to use development budgets issued and capacity building activities outlined. An Education Sector Reform Unit with planning and monitoring functions within the Department o f Education notified and budgeted.
Partnership agreements signed with at least five district governments for implementation o f management innovations (contracting wi th NGO). Contract out baseline studies o f quality o f care assessments in PHC facilities at district level.
Improving Fiscal Stability and Public Expenditure Management The FY07 fiscal budget to be in l ine wi th MTBF and devolution principles.
Strengthening Governance Achieve operational IT connectivity and productivity for at least 20 District Finance and District Accounts Office sites using uniform chart o f accounts under the New Accounting Model. Implement Phase 3 o f Procurement Action Plan to bring procurement practices to international standard.
Ensure that the one-window investment facilitation center coordinated by the private sector and the corresponding l ine agencies i s operational.
Health Sector
0
Promoting Economic Growth through Private Sector Development
119. The DPC 2 operation i s expected to be followed by DPC 3 in FY08. Recognizing that human development, governance and growth reforms require sustained investment over several years, further fo l low up operations are l ikely beyond FY08. The subsequent DPC 3, and fol low on human development focused operations, will be based on clear progress towards pol icy goals and outcomes. These operations will continue accelerating the human development reform program, while also sustaining the fiscal, governance and growth reforms. The proposed triggers for DPC 3 are shown in Box 3 below.
36
Box 3: North-West Frontier Province Third Development Policy Credit: Summary of Proposed Triggers for DPC 3 As part o f the programmatic series o f credits, the government has agreed o n the fol lowing actions as key indicators for moving to the next operation in the series:
Accelerating Human Development Education
Program for management innovations to strengthen hospital performance developed and
Policy to provide special incentives for female teachers in disadvantaged districts approved. A system o f regular and comprehensive class r o o m assessments in primary schools notified. Commence a system o f annual Third Party Validations by conducting studies o f teacher attendance and textbook delivery to schools, and o f the stipends for girls program. A framework for the professional development o f school heads in primary schools notified.
Health
implemented in at least three districts. Conduct annual analysis o f health system performance by district and disseminate findings to the public, through print media and the department website.
Social protection reform unit, with planning, monitoring and evaluation functions, staffed and operational in the Department o f Social Welfare.
Improving Fiscal StabiliQ and Public Expenditure Management The FY08 budget to be in line with the MTBF and devolution principles. K e y budgetary indicators will be the overall deficit adjusted for operational shortfall, growth in own revenue collection, the revenue deficit, the level and detailed composition o f education and health sector budgets.
Social Protection
Strengthening Governance Financial Management
Budget Execution Statements Generated f r o m S A P R/3 available for a l l Provincial and District Governments o f NWFP according to Function, Sub-Function and Detailed Heads, and posted to the website o f the Department o f Finance and the Accountant General within three weeks o f the end o f each calendar month.
Implement Phase 4 o f Procurement Act ion Plan to implement the revised procurement rules/practices in alignment with the best practice. This includes noti fying amendments in the procurement rules (and l a w if necessary) eliminating discriminatory stipulations and aligning it to the best practice, adopting amended Standard Bidding Documents for goods, works and services, and ensuring their implementation.
Confer powers upon magistrates to try cases under applicable mining statutes.
Procurement
Promoting Economic Growth through Private Sector Development
120. The proposed operation, including i t s prior actions, have been prepared within the framework o f the good practice principles for pol icy based operations. The Good Practice Principles on Conditionality are presented in Box 4 overleaf.
121. The proposed operation has the potential to yield several complementary benefits.
a. The NWFP DPC 2 will provide resources to support the NWFP’s new medium-term reform program, with a particular emphasis on improving human development outcomes. Human development levels in Pakistan lag below most other developing countries at comparable levels o f per capita income, and the NWFP performs below the national average in human development. Gender, economic and regional disparities in human development are also sharp in the NWFP. The operation, by assisting the province to increase human development levels, especially among girls and women, poor households, and in under-developed districts, will generate substantial benefits in terms o f improved gender, economic and regional equity.
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Box 4. Good Practice Principles on Conditionality
Principle 1: Reinforce Ownership The proposed development policy credit supports the reform program o f the NWFP Government, which i s closely aligned to the Medium Term Budget Framework. The operation has widespread ownership among key stakeholders at all levels o f government and political leadership, and has been designed on the basis of consultations with primary stakeholders (local communities) and involvement of district governments. A track record of high level ownership and commitment to reforms has been demonstrated throughout the period of the two previous SACs and DPC1, and i s continuing. Bank assistance to the Government program takes into consideration the political economy of reform, as reflected in the sequencing of reforms, such as the phased entrance of district governments into terms o f partnership agreements with the provincial government in the education sector, the gradual sharing of health care management with NGOs, and the relaxation o f administrative barriers to private sector development through the one-window investment facilitation center.
The operation i s based on a strong platform of analytical work, such as the NWFP Economic Report, NWFP Public Financial Accountability Assessment, Pakistan Public Expenditure Review, Country Gender Assessment, Country Report on Risk and Vulnerability and Devolution in Pakistan. The four pillars of the reform program, and the contents of each pillar, have been derived from the findings and recommendations of these reports. Going forward, the Bank i s working closely with the Government to strengthen the knowledge base on the province. Current analytical work includes establishing baseline measures of cognitive achievement in primary and secondary education, setting baseline indicators of the quality of care in health institutions and a stock taking of social protection interventions in the province. Further analytical work i s planned to support the future series of reforms, including studies to promote private-public partnerships in education and to develop the college system, third-party evaluations o f key reforms in education and health, and studies of public finances and the sources of economic growth.
Principle 2: Agree up front with the government and other financial partners on a coordinated accountability framework The Policy Matrix o f Reforms, which i s based on the NWFP Government’s overall reform program, constitutes the framework for all assistance by development partners. Within this government framework, a variety o f donors are assisting the education sector (EC, GTZ, Norway), the health sector (DFID and GTZ), social protection (DFID) and governance reforms (EC, DFID). The performance framework i s derived from the Government Program, and the Government i s establishing mechanisms to coordinate donor support to achieve these performance targets.
Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances T h e DPC supports the NWFP’s overall reform program. The preceding SACs and DPCl established the foundation for sound fiscal management and economic growth in the province. DPC2 builds on this foundation to focus strategically on accelerating human development, while also carrying forward reforms to further promote fiscal prudence, strengthen governance and stimulate economic growth. These are linked to Pakistan’s overall human development and growth reforms.
Principle 4: Choose only actions critical for achieving results as conditions for disbursement The program framework reflects the scope and content of the Government’s reform program. The eleven key prior actions for DPC2 were identified, in consultation with the Government, as the most critical actions across the four pillars of the reform program. The eleven triggers for DPC3 were selected, in discussion with the Government, as the key actions needed to accelerate the momentum of the next round o f the reform program.
Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support The program i s regularly reviewed by the Task Team through formal missions, through continuous dialogue with policy makers and administrators, and through field visits. The Government has established a review mechanism, under a higher level Steering Committee chaired by the Chief Secretary, to monitor the progress of the program. T h i s review process i s strengthened by periodic third party monitoring studies and impact evaluation. These arrangements have enabled close collaboration between the Government and Bank to monitor the program, address problems and issues promptly, and fine tune the program to strengthen its implementation.
b. Within human development, the reform program will cover the full education, health and social safety net programs, whereas in the past only sub-sets o f each sector, such as primary education or primary health care, were included. The sector wide focus o f DPC 2 o n education and health enables the government to address the full range o f challenges facing each sector by focusing on both demand and supply side policies, and exploiting economies o f scale and scope in the implementation o f development strategies for each sector.
C. DPC 2 enables the Bank to integrate support around a mutually consistent, multi- sectoral reform agenda, and exploit synergy between policies to improve human
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development, sustain fiscal stability, strengthen governance and promote economic growth. Hence, in addition to the strategic focus o n human development, the NWFP’s overall development program will be assisted through this operation.
Ind i ca to r Baseline observation a t the commencement o f the DPC series
d. DPC 2 will facilitate the dialogue between the government, the Bank and other development partners to coordinate all external assistance under the NWFP’s medium-term policy reform program. A future DPC 3 will offer a further vehicle for donors to harmonize their financial support to the government.
Target by end of DPC 3 (end o f FY09)
e. The design of DPC 2 increases ownership and commitment within the government, as Bank support i s targeted to the overall reform program developed by the NWF’P. This also increases coordination o f reform policies within government, as the development plans o f each sector i s agreed with the Ministries o f Finance, and Planning and Development, and included within the overall government budget.
f. The proposed operation will also assist the province to stimulate private sector investment by reducing transactions costs to market entry and facilitating commercial operations. Higher private sector investment can increase growth and reduce poverty, and create employment opportunities for educated young people in the future.
122. The key perfonnance indicators and monitoring information are closely aligned with the IDA14 results measurement indicators, and are presented in Table 8 below.
Transition rate m government sc
Sources: NWFP Department o f Education, Annual Statistical Report o f Schools in NWFP (2004/5 and 2005/6). Pakistan Social and Living Standard Measurement Survey (PSLSMS) 2004105 (preliminary estimates). Department o f Health, NWFP. NWFP Department o f Finance: Revenue and Expenditure Information.
MI. OPERATION IMPLEMENTATION
POVERTY AND SOCIAL IMPACT
123. I n NWFP, one o f Pakistan’s poorest provinces, poverty i s strongly associated with lack of access to critical education and health services. Where such services are available,
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lack o f household demand for such services has been a key deterrent for poor children, especially girls, taking advantage o f available schools and advancing their own education. The DPC 2 i s designed to address these concerns, and by doing so, it supports the Government’s PRSP objectives. The basic underlying motivation behind the proposed reforms in human development are to ensure that: (a) the access to human development services in education, health and social protection are equitable across income groups, gender and rural-urban location; and (b) both market and state failures are addressed through systemic reforms in education, health and social protection. By correcting deficiencies in service delivery in rural areas and by relaxing demand side constraints o f poor families, the operation will significantly advance the main PRSP objectives o f ensuring that the benefits o f growth are widely shared and that opportunities for human capital accumulation are enjoyed by a l l socio-economic groups.
124. Concerted efforts to improve human development outcomes are important not only to improve equity but also as an integral part o f Pakistan’s growth objective. By integrating social protection interventions into the health and education programs, DPC series will address at once both poverty and vulnerability along side advancing the medium term goal o f preparing a well-educated and healthier workforce to meet the challenge o f promoting broad-based and widely shared economic growth. Some o f the pilots being implemented will provide lessons for future mainstreaming and/or for malung suitable adjustments in the design o f interventions. Moreover, the whole set o f reforms being supported by DPC series are such that significant social externalities (such as secondary school education o f girls leading to lower infant and lower maternal mortality) will result, thus raising the overall productivity and returns to public investments. T o the extent the operation promotes public-private partnerships in advancing human development, even private investments could be channeled to create social externalities.
125. The NWFP Reform Program has been developed and i s being implemented through a process of extensive consultation with stakeholders and beneficiaries, including district and local government officials, the private sector, NGOs, and local communities. The operation i s strengthening relationships between the government, the private sector and c iv i l society. The education reform program also empowers local school communities, such as parent- teacher associations, to contribute to the management o f government schools, including uti l izing development and recurrent budgets. The health reform program empowers NGOs to manage health facilities. The role o f the private sector in economic activities i s also strengthened in the reform program, including private-public partnerships in infrastructure provision, and space for the private sector to be represented in government authorities, such as the one-window investor facilitation center.
IMPLEMENTATION, MONITORING AND EVALUATION
Implementation
126. The reforms are being implemented by the Department o f Finance, Department o f Planning and National Development, and the various sector departments, including the Departments o f Schools and Literacy, Health and Social Welfare. A Reform Support Unit (RSU) in the Department o f Finance assists the coordination o f the reform program. The key departments and the R S U al l have considerable experience o f implementing pol icy reforms, and o f Bank operations to support such reforms, due to the experience o f earlier reform programs that were supported through the IDA financed SAC 1 (2002), SAC 2 (2004) and DPC 1 (2006). The R S U wil l be further strengthened, through the recruitment o f senior and experienced staff, and capacity building o f the existing office, to coordinate the future series o f DPC’s, commencing with DPC 3.
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127. The overall monitoring and oversight o f the reform program i s the responsibility the provincial government. However, district governments play a role in the implementation o f the program in decentralized sectors, including education and health. The terms o f partnership agreement between the provincial and district governments in education, and for management innovations in health, will clearly specify the roles and responsibilities o f the two tiers o f government, eventually strengthen capacity o f the district governments to deliver these key services at the district level.
Monitoring and Evaluation
128. The NWFP reform program contains a strong emphasis on monitoring and evaluation. The monitoring and evaluation o f the program will be under the oversight o f the Department o f Finance, including the Reform Support Unit (RSU). In addition, within the key sectors, health and education, the existing Health Sector Reform Support Unit and the Education Sector Reform Support Unit that i s to be established as part o f the reforms will play major roles in monitoring the program. The Health Management Information System (HMIS) and the Education Management Information System (EMIS) wil l provide administrative data and management information for the key human development sectors.
129. Several measures are being supported as part of the reform program to improve monitoring and evaluation. These include: (a) strengthening the information base on human development through the improvement o f education and health information management systems in the Departments o f Schools and Literacy, Higher Education and Health; (b) capacity building o f the Departments o f Schools and Literacy, Higher Education and Health to collect, process and utilize policy relevant information for planning, management and monitoring purposes; (c) contracting out third party validations o f data to external parties, including research agencies and consulting f irms; and (d) reliable, timely and comprehensive decision-oriented financial and fiscal information generated across the province and posted o n the government website.
130. Surveys and censuses carried out by the Federal Government, such as the biannual CWIQ surveys, triannual Multiple Indicator Cluster Surveys and triannual Pakistan Integrated Household Surveys, add to the information base on the NWFP. These surveys and censuses can be used for analysis and monitoring o f time trends o f key outcomes, including poverty rates, school enrolment, and mortality and morbidity rates. In education, the Federal government i s undertaking a census o f schools, including private schools, which can feed into the NWFP education management information system (EMIS). There i s also the national assessment o f learning outcomes that wil l provide evidence o f cognitive achievement levels in the province. The MOH has also commissioned an in-depth assessment o f vertical programs to identify options for further decentralization o f vertical national programs.
FIDUCIARY ASPECTS
Financial Management Reforms
131. The NWF'P i s the most advanced province in Pakistan in terms of financial management reforms. The financial accountability environment in the province, as concluded by the Provincial PFAA (April 2005), provides adequate safeguards for reliance on government financial management systems. This i s reinforced by the progress o f actions implemented since the IMF Safeguards Assessment (2001) o f the State Bank o f Pakistan, and also by the conclusions o f the draft report presented at the government/joint-donor partners' workshop in January 2007 on the PEFA diagnostics and the OECD-DAC Baseline Procurement Assessment carried out for the province, and planned for finalization during FY 2007. The draft PEFA PFM PMF report
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highlighted the overall improvement in PFM in the province, with high rating scores in budget comprehensiveness, budget classifications and orderliness, participation in the annual budget process; predictability o f expenditure commitment flows; effectiveness o f payroll controls; recording and management o f cash balances, debt, and guarantees. Whi le improvements remain to be accomplished in several areas, the strong commitment o f the province to initiate a renewed strategy demonstrates that reform implementation i s o n course.
132. The key thrust of the financial management reform program in NWF’P rests on the pace and comprehensiveness of implementation of the Bank-financed country-wide public financial management project, PIFRA. Several critical performance improvements demonstrate the commitment o f the NWFP, including: (a) improving the reliability and accuracy o f the financial information, o n a uniform basis, through the adoption o f a new chart o f accounts for provincial and district governments’ budgets and accounts, resulting in the highest levels o f reconciliation o f accounts amongst al l provinces; (b) being the f i rs t province to achieve 100 per cent IT connectivity in F M I S implementation covering the provincial and a l l district governments, enabling the production o f meaningful and comprehensive fiscal and financial information on a timely basis; (c) improving the reporting lag for provincial government c iv i l accounts to 14 days from 15-21 days, and building o n the strategy to improve timeliness to not more than 10 days after each month-end; and (d) maintaining the pro-activity o f the provincial and district external audit infrastructure in completing the audit o n a timely basis.
133. Mov ing forward, the financial management reform program will include the entrenchment o f transparency and disclosure requirements pertaining to the budget execution status o f a l l provincial and district governments by ensuring that the financial and fiscal status reports, in detailed formats, are posted to the website and made readily available; internal audit functions are wel l established and are functioning and addressing systemic issues in the overall management and control o f public resources; and the annual draft accounts are indeed produced o n timely basis (within three months o f the end o f the fiscal year) and equally audited o n timely basis using international standards o f auditing.
134. Foreign Exchange Control Environment: An IMF Safeguards Assessment o f the State Bank o f Pakistan (SBP) was conducted in 2001. It highlighted significant vulnerabilities at the SBP particularly as relating to i t s financial statements and disclosure policies which fel l short o f acceptable Central Bank standards. However, since a program o f reform has been agreed with the IMF and i s being implemented, the r isks associated with foreign exchange management control have been mitigated. The State Bank o f Pakistan has transitioned to producing financial statements which accord with international accounting standards and formats. An independent review o f the SBP’s internal audit function, as recommended by the Safeguards Assessment, has since been completed and recommendations implemented. The SBP has also established a formal process o f reconciling data reported to the Fund as wel l as implemented guidelines to prohibit operations that pledge or encumber reserves, or place restrictions on, or otherwise impair the availability o f foreign exchange reserves outside an authorized framework. Equally, the SBP’s Ac t has been accordingly amended to strengthen and guarantee i t s independence and autonomy in the management o f reserves as required under the Safeguards Assessment.
Procurement Reforms
135. The NWFP i s the leading province in terms o f governance reform encompassing improvements to the public procurement legislative and regulatory framework. The NWFP passed the Procurement Ordinance in 2002 as the f irst government (federal and provincial) in the country. Rules for procurement o f consulting services were notified in November 2002, and ru les for procurement o f goods, works and (non-consultancy) services were notif ied in December 2003. The Ordinance was adopted by the parliament as the Procurement L a w for goods, works and
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services in 2003. In February 2006 NWFP prepared a road map to revise the procurement rules and review the procurement l aw to eliminate al l aspects limiting transparency and equal opportunity and align these documents with international best practice. Upon request o f the NWFP, the Bank arranged for a grant to facilitate to bring about these amendments. The grant for Strengthening o f Procurement Regulatory Framework was signed on August 10, 2006 and over the next three years, it aims at the following achievements:
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136.
aligning the procurement rules closer to international best practice, and suggesting amendments in the law; replacing the system o f Composite Schedule o f Rates (CSR) by Current Market Rates (CMR); review the various codes, departmental rules and regulations to synchronize their application in context o f the stipulations o f the (amended) procurement rules; implement an effective mechanism to redress complaints with respect to procurement; identify a home for procurement reforms for further research, database management and revisions; and implement awareness o f and training for the reformed system.
The Finance Department i s the executing agency for this grant. As the phase o f the procurement reform supported through DPC2, the government has defined the areas which require improvements in the rules, the standard bidding documents and in the law if required, especially to introduce a system o f market rates for preparing contract budgets. In the next phase, to be supported through DPC3 the NWFP will bring procurement practices to best practice. This will include notifying amendments in the procurement rules eliminating discriminatory stipulations and aligning it to the best practice, implementing revised rules, adopting amended Standard Bidding Documents for goods, works and services, and ensuring their implementation. These reforms will be supported by comprehensive procurement training at various levels, and the setting up o f a provincial procurement institutional arrangement to act as a focal point for procurement activities.
Conclusions on the Fiduciary Environment
137. With the implementation o f the reform measures in the financial management and procurement areas already on course in the province, and arising f rom the mitigated r isks associated with the manner in which the SBP manages the country’s foreign exchange reserves as highlighted in the IMF Safeguards Assessment, the overall fiduciary r i s k o f the program i s rated ‘modest ’. DISBURSEMENTS AND FIDUCIARY ASSURANCE
138. On-Lending Terms: The Islamic Republic o f Pakistan, represented by the Federal Ministry o f Finance would be the Borrower. The Loan would be on-lent by the Federal Government to the Government o f NWFP o n terms and conditions as shall be agreed between the two governments.
139. Funds flow arrangements: The Government o f Pakistan shall identify a Foreign Exchange Account with the State Bank o f Pakistan (SBP) and which forms part o f the country’s official foreign exchange reserves, into which the proceeds o f the Credit will be disbursed on a single tranche basis upon Credit effectiveness. The Rupees equivalent o f the funds in the Account will, within two working days, be transferred into the Consolidated Fund o f the Government o f NWFP (Account No. 1 - Non-Food) held with the SBP which i s used to finance budget expenditures.
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140. Disbursements f rom the Consolidated Account No. 1 (Non-food) by the Government o f NWFP shall not be tied to any specific purchases and n o special procurement requirement shall be needed. The proceeds o f the Credit shall, however, not be applied to finance expenditures in the negative l i s t as defined in the Schedule o f the Financing Agreement. If any portion o f the Credit i s used to finance ineligible expenditures as so defined in the Schedule o f the Financing Agreement, IDA shall require the Government to promptly, upon notice f rom IDA, refund an amount equal to the amount o f the said payment to IDA. Amounts refknded to IDA upon such request shall be cancelled f rom the Credit.
141. Assurance Requirements: For this credit, n o special fiduciary arrangements, in the form o f an audit, are required; particularly in the light o f the manner in which SBP manages the country’s foreign exchange reserves. However, within 45 days o f disbursement o f the Credit by IDA, the Finance Secretary o f N W F P shall provide a written confirmation to IDA certifying the receipt o f the Rupees equivalent o f the Credit into the Consolidated Fund Account o f the Government o f NWFP, the number o f the account, the date o f the receipt, and the exchange rate applied to translate the Credit currency into Rupees.
ENVIRONMENTAL, ASPECTS
142. The policies supported by the proposed operation are environmentally benign, and do not entail significant negative effects on the environment, forests, or other natural resources. The DPC’s focus o n assisting the NWFP government to broaden and deepen human development reforms while providing continued support to strengthen governance i s expected to have positive environmental effects. Poverty reductions as a result o f improvements in human capital are anticipated to reduce current over-dependence on “depletable” natural resources (e.g., biomass for fuelwood). Also, fiscal reforms include recommendations to increase resources allocated to environmental agencies. Finally, supported governance reforms encompassing the environmental agencies are expected to enhance their capacity to enforce environmental regulations. Reforms aimed at accelerating economic growth through private sector development might induce potential positive and negative environmental effects. Given the structure o f the Province’s industry, it i s anticipated that stimulation o f private sector activity will entail mainly broad based growth o f light industries, with a modest environmental footprint and l o w pollution intensity.
143. According to the Bank’s Strategic Country Environmental Assessment (SCEA) Pakistan has an adequate environmental framework for environmental management. The Pakistan Environmental Protection Act o f 1997 (PEPA) guides environmental management in the region. NWFP EPA has established three offices in the region with the a im o f complying with PEPA provisions, including the agency’s approval for the execution o f large public and private projects. In addition, the Province has introduced the Sarhad Provincial Conservation Strategy (SPCS), which aims to promote conservation and sustainable development. Unmatched elsewhere in Pakistan, three NWFP districts have incorporated the SPCS into their development agenda.
144. The Bank i s undertaking an institutions-based Strategic Environmental Assessment aimed at analyzing the borrower’s systems to address the potential environmental effects of the program, with special emphasis on private sector development. The assessment has been designed to identify and address existing institutional gaps that may hinder the government’s capacity to anticipate and respond to potential adverse environmental impacts. The assessment will provide recommendations to strengthen the capacity to manage efficiently and effectively the licensing system, as wel l as to monitor and enforce compliance with environmental norms and conditions set as part o f the licensing process.
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R I S K S AND R I S K MITIGATION
145. The reform program and proposed operation face several key risks. Table 11 below provides a description o f these risks, and mitigation measures. The Bank team assesses the overall risks as moderate, and propose that the previous commitment and performance o f the NWFP government, as wel l as the strong potential benefits o f the DPC series, justify the processing o f the DPC 2 operation.
Table 9. R R i s k s Macroeconomic management. There is a moderate risk related to macroeconomic management. Although the pol icy stance o f the government has remained appropriate, inf lat ion and the external trade deficit indicate significant excess liquidity in the economy, and calls for resolute actions to contain money supply and improve export competitiveness. -1. A budget support operation such as DPC 2 r u n s the r isk that adequate resources may not be allocated to priori ty sectors, such as education and health, to support the broadening and deepening o f the human development re form program.
Political. The N W F P i s currently engaged in the process o f decentralization, and several tiers o f government, at the provincial level and local level, are involved. There is a risk that the implementation o f the reform program at these various levels may not b e adequately aligned. This is especially a risk for the social sectors, where local governments play, an important role in service delivery.
Fiduciarv. NWFP i s implementing province-wide, and o n a fast track basis, the P IFRA project which serves as the key thrust o f the financial management and accountability platform in the country. There i s an attendant risk o f information overload amidst weak
k Assessment and Mitigation Measi Mitigation Measures Government i s committed to take necessary steps to ensure macroeconomic stability. The State Bank o f Pakistan has already taken the necessary steps to tighten money supply.
The provision o f adequate budgets for key sectors, including education and health, and alignment o f these budgets within the overall medium- term budget framework o f the government, constitute a key up- front po l icy action for the sequence o f DPCs. This helps to ensure that adequate pol icy attention i s pa id to the budgets o f priori ty sectors to implement the key reforms o f the program. The N W F P has developed terms o f partnership agreement, between the provincial government and districts governments, in the education sector, to ensure alignment between the two tiers o f government. Such a model has been successfully implemented for education in the Punjab, and the N W F P has adapting t h i s model to make it suitable for the NWFP. In the health sector, too, terms o f partnership agreements have been signed between the Provincial and Distr ict tiers o f government to implement management innovations. The introduction o f the district functionality, as we l l as the training o f budget preparation, accounting, and auditing personnel o n a l l facets o f the new paradigm under the P IFRA project, will negate instances o f under-capacity and information overload. Also, with
es. Risks After Mitgation M
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human resource capacity in the province. In addition, the r isk o f achieving a slower rate o f implementation o f the procurement reforms across the province i s present. Implementation caDacity. The wide- ranging reform program may overload the implementation capacity o f the provincial and district governments.
External shocks. Exogenous shocks, such as natural disasters and developments in the global economy, are dif f icult to anticipate, but are inevitable r isks.
Overall risk rating
the IDF grant recently approved for the NWFP to support i t s procurement re form agenda, the requisite impetus to fasten reforms in the area o f public procurement wi l l be generated. The reforms have been carefully sequenced to minimize the risk o f overloading the technical and administrative capacity o f the government. The operation also supports capacity building in key sectors, including education and health, as an integral part o f the reform program. Further, other development partners have promised significant technical assistance to increase the capacity o f the government. The NWFP government has recent experience o f handling natural disasters, after the earthquake which damaged the province in October 2005. This includes bo th the provision o f emergency relief, and long-term reconstruction and rehabilitation. The NWFP can draw o n t h i s relief, and reconstruction and rehabilitation experience, if any natural disasters occur during the future implementation o f the reform momam.
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ANNEX 1 Letter of Government Development Policy
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ANNEX 3: FUND RELATIONS NOTE
IMF Executive Board Concludes 2006 Article I V Consultation with Pakistan
Public Information Notice (PIN) No. 06/139 December 7,2006
Public Information Notices (PINS) form part o f the IMF's efforts to promote transparency o f the IMF's views and analysis o f economic developments and policies. With the consent o f the country (or countries) concerned, PINs are issued after Executive Board discussions o f Article IV consultations with member countries, o f i t s surveillance o f developments at the regional level, o f post-program monitoring, and o f ex post assessments o f member countries with longer-term program engagements. PINs are also issued after Executive Board discussions o f general pol icy matters, unless otherwise decided by the Executive Board in a particular case. The Staff Report for the 2006 Article IV Consultation with Pakistan i s also available.
1. concluded the Article IV consultation with Pakistan3'.
On November 22, 2006, the Executive Board o f the International Monetary Fund (IMF)
Background
2. Pakistan's recent economic performance has been impressive. Growth has accelerated, improvements in public spending and wide-ranging structural reforms have reduced the debt burden and increased efficiency, and pro-poor policies have helped lower poverty rates. The devastating earthquake o f October 2005 lef t a heavy to l l in terms o f human lives and physical and social infrastructure, but had relatively minor effects on macroeconomic indicators (except for an increase in government spending) owing mainly to the small share o f the affected areas in the overall economy.
3. Economic developments during the fiscal year ending in June 2006 were favorable, with buoyant real GDP growth and inflation declining to 7.6 percent. The external current account deficit, however, increased to US$5 b i l l ion (3.9 percent o f GDP), from US$1.5 b i l l ion (1.4 percent o f GDP) a year earlier. Record-high net capital f lows (mainly f rom foreign direct investment-including privatization) more than covered the larger deficit and allowed for a build up o f nearly US$1 b i l l ion in official international reserves. The interbank market exchange rate was broadly unchanged from end-June 2005.
4. The fiscal deficit exceeded the original budget target for 2005/06 owing to earthquake- related spending. Excluding the latter, revenues and expenditures rose by roughly the same amounts compared to the outturn in the previous fiscal year. The government debt-to-GDP ratio fe l l to 56 percent by the end o f June, below the 60 percent ceiling stipulated in the 2005 Fiscal Responsibility Law. The budget for 2006/07 targets a deficit o f 4.2 percent o f GDP (excluding grants), unchanged from the estimated outturn for 2005/06.
30 Under Article IV o f the IMF's Articles o f Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion b y the Executive Board. At the conclusion o f the discussion, the Managing Director, as Chairman o f the Board, summarizes the views o f Executive Directors, and this summary is transmitted to the country's authorities.
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5. The growth o f broad money and bank credit to the private sector decelerated in 2005/06, but private sector credit continued to expand at a relatively strong pace. Bank lending rates became increasingly positive in real terms as inflation declined; the real return on bank deposits remained negative. The State Bank o f Pakistan's (SBP) claims o n the government rose by more than total government borrowing from the banking system, as the SBP absorbed treasury bills that commercial banks did not ro l l over upon redemption. In July 2006, the SBP tightened monetary conditions by raising reserve and liquidity requirements on bank deposits and the discount rate.
6. Foreign investors' interest in Pakistan increased significantly in 2005/06. Foreign direct investment inflows, excluding privatization, rose by 70 percent, and foreign demand for Palustani bonds was strong. Government divestiture f rom electricity and telecommunications entities generated large foreign exchange inflows and revitalized the privatization process.
7. Progress o n structural reforms, other than privatization, was mixed. Reforms to broaden the income tax base and streamline rates continued, and the legal framework for investor protection was strengthened. However, implementation o f the schedule o f higher regional electricity tariffs, a key step for continued reform o f the power sector, remains pending, and progress on trade liberalization slowed.
Executive Board Assessment
8. Executive Directors commended Pakistan's impressive macroeconomic performance since 200 1. They welcomed in particular the acceleration in output growth, the steady decline in debt ratios, and the fall in poverty rates. Directors noted that Pakistan's strong track record on the macroeconomic and structural reform fronts had made the country increasingly attractive to foreign investors, as shown by the record-high inflows o f foreign direct investment (FDI) during 2005/06 and the favorable terms obtained on recent sovereign bond placements in the international capital markets.
9. Directors noted that during 2005/06 the Pakistani economy had withstood wel l the impact o f large negative shocks, including the tragic earthquake o f October 2005, a sharp rise in international o i l prices, and unfavorable weather conditions. Although these shocks had limited the scope for fiscal maneuver, growth had remained buoyant, inflation had declined slightly and the import coverage o f reserves had remained stable.
10. Directors nonetheless noted the r isks to the outlook, including the continued strength o f domestic demand, and i t s adverse effects o n the trade and current account deficits as wel l as on the pace o f disinflation during 2005/06. They noted also the authorities' v iew that macroeconomic imbalances would decline without the need for further changes in the stance o f policies envisaged for the current fiscal year, and welcomed the government's commitment to tighten monetary policy, i f warranted. However, most Directors felt that macroeconomic policies during 2006/07 should be more effectively geared at reducing domestic demand and strengthening the balance o f payments position. To this effect, many considered that a further tightening o f monetary policy (including by allowing higher cutof f rates at treasury bill auctions) should not be delayed to help strengthen the external position and allow the government to meet i t s inflation target. Most Directors considered that to be effective, monetary policy should be supported by exchange rate flexibil i ty and a fiscal policy that keeps this year's budget deficit (excluding grants and earthquake-related expenditures) at least at the level o f 2005/06.
2
1 1. Directors stressed that, beyond 2006/07, Pakistan's macroeconomic policies should aim at ensuring that the external current account deficit-to-GDP ratio remains on a declining path with a steady build up o f reserves. In this regard, they encouraged the authorities to adopt a policy stance that maintains real interest rates at positive levels accompanied by a close monitoring o f credit growth, and a fiscal consolidation program that lowers the overall fiscal deficit to a sustainable level over the medium term.
12. Directors viewed the favorable prospects for sizable FDI inf lows as important for future gains in productivity and investment, but also as presenting challenges for macroeconomic policy in the years ahead. They highlighted that continued reliance on FDI inflows o f uncertain size and timing would require a large degree o f f lexibil i ty in economic policymaking. In this connection, Directors stressed the need to improve the government's capacity to generate timely policy responses to shortfalls o f external financing arising f rom negative balance o f payments shocks. Directors were o f the v iew that those shocks should generally require monetary policy and exchange rate responses, but also envisaged a role for fiscal tightening in cases where the shocks are large, or more permanent in nature. Directors cautioned that the option o f resorting to the use o f international reserves to cover shortfalls o f external financing (especially those stemming from delays in FDI-related flows) ought to be used sparingly.
13. Directors viewed structural reforms conducive to higher saving and investment, an improved business climate, and well-targeted poverty-related spending as critical for sustaining growth and poverty reduction over the medium term. They encouraged the authorities to quickly complete the reform o f the regulatory and tar i f f framework for the power sector, and step up efforts to broaden the tax base and further curtail tax exemptions. Directors also saw scope for improving the government's debt management strategy, including by increasing the issuance o f long-term marketable securities and reducing i ts reliance on treasury bills and the National Savings Schemes (NSS) to finance the fiscal deficit. Directors welcomed the initiatives underway to modernize the NSS and reform the system o f broker-financing o f stock trading, but noted that these should be followed quickly with measures that enable the integration o f the NSS with local financial markets.
14. Directors welcomed the authorities' commitment to maintaining a liberal trade regime and their determination to contribute to the success o f the Doha round o f trade talks. They called on the authorities to resist pressures to reinstate ad-hoc tar i f f and nontariff measures and broaden export subsidy schemes.
15. Directors encouraged the authorities to further improve the quality and timeliness o f data, including by reporting fiscal data on an economic classification. They also urged the authorities to expedite the process o f subscribing to the Special Data Dissemination Standard.
3
Annex 4: Statement o f Loans and Credits ~~ ~~ ~~
Original Amount in US$ Millions Difference between
expected and actual
disbursements
Project FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. ID Rev’d
PO94086 2006 Balochistan Education 0.00 22.00 0.00 0.00 0.00 20.19 -1.97 0.00
PO76872 2006 PO99110 2006 PO83929 2006
PO97402 2006
PO88994 2005
PO77306 2005
PO10556 2004 PO82621 2004
PO83370 2004
PO82977 2004
PO78997 2004
PO71454 2003
PO74797 2003
PO74856 2003
PO77288 2003
PO35823 2001
PO71092 2001
PO94086 2006
Support Project PIFRA I1 Pakistan Earthquake ERC Punjab Municipal Services Improvement Second Partnership for Polio Eradication Taunsa Barrage Emergency Rehab. & Modem Tax Administration Reform Project HIGHWAYS REHAB NWFP Community Infrastructure I1 ( CIP2) PK Public Sect Capacity Building Project Second Poverty Alleviation Fund Project Sindh On-Farm Water Management Project AJK Community Infrastructure & Services Banking Sector Technical Assistance HIViAIDS Prevention Project National Education Assessment System GEF-Protected Areas Management Project
MANAGEMENT PROJECT Balochistan Education
NWFP ON-FARM WATER
0.00 0.00 50.00
0.00
123.00
24.40
215.00 0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
84.00 400.00
46.70
78.50
150.00 37.10
55.00
338.00
61.14
50.00
26.50
37.11
3.63
3 1.35
22.00
0.00 0.00 0.00
0.00
0.00
0.00
0.00 0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00 0.00 0.00
0.00
0.00
0.00
0.00 0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
10.08
0.00
0.00
0.00 0.00 0.00
0.00
0.00
0.00
0.00 0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
3.47
0.00
64.54 87.22 46.38
1.19
57.42
92.05
247.00 29.59
33.99
66.61
23.02
38.50
11.66
22.00
2.96
6.85
7.29
20.19
-0.14 -29.44 1.70
0.00
24.51
44.33
7.59 4.77
9.08
-61.84
6.34
3.73
6.75
10.00
1.55
3.16
-2.62
-1.97
0.00 0.00 0.00
0.00
0.00
0.00
-9.03 0.00
0.00
0.00
0.00
0.00
0.00
8.27
0.00
0.00
0.00
-7.34 Support Project Total: 412.40 1421.03 0.00 23.08 3.47 858.44 27.50 -8.10
1
STATEMENT OF IFC’s Held and Disbursed Portfolio
In Millions o f U S Dollars
Committed Disbursed
IFC IFC
FY Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. Approval
2005 ABAMCOFUND 0.00 3.46 0.00 0.00 0.00 3.46 0.00 1995 1996 1995 1991 1993 1997 200 1 2006 2004 2003 1991 2006 2001 1990 1992 2004
1996 2006 2003 1995 2002 2004
2006 2005 2006 1983 2002 1965 1987 1991 1994 1995 2005 2006 2001 2004 2007 2006 1996
AES La1 Pir AES Pak Gen Abamco Mgmt BRRIM Crescent Bahuman Crescent Bahuman Crescent Bahuman Dewan Petroleum Dewan SME Dewan Salman Engro Chemical Engro Chemical Eni Pakistan FIIB FIIB First UDL GTFP Metropolita Gul Ahmed Habib Bank Li ... K C T Kohinoor Micro Bank NBFI Credit Orix Finance Orix Leasing PICT PICT PPL PPL Packages Packages Packages Packages Packages Packages Paktel2005 Sarah Textiles TRG Pakistan TRG Pakistan Tameer Bank Uch Power
12.42 9.20 0.00 0.00 0.00 0.00 2.72
15.00 0.00
25.00 0.00 0.00
12.00 0.00 0.00 7.00 2.54 8.10 0.00 6.46 6.25 0.00 6.50 5.00
17.00 6.00 8.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
25.00 35.00
1.12 0.00 0.00 0.00
29.60
9.50 9.50 0.29 0.23 0.3 1 0.20 0.00
12.00 0.98 0.00 1.95 0.64 0.00 0.27 0.40 0.00 0.00 4.10 0.00 0.00 6.30 2.43 0.00 0.00 0.00 0.00 0.00 1.33 5.63 0.05 0.02 0.02 0.01 0.26 5.43 0.00 0.00 4.16 2.50 1.01 0.00
0.00 0.00 0.00 0.00 0.00 0.00 2.50 0.00 0.00 5.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
50.00 1.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.00 5.37 0.00 0.00 0.00 0.00 1.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.22 0.00 0.00 2.03 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
12.42 9.20 0.00 0.00 0.00 0.00 2.72 0.00 0.00
25.00 0.00 0.00
12.00 0.00 0.00 0.00 2.08 8.10 0.00 6.46 6.25 0.00 6.50 0.00
17.00 6.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.12 0.00 0.00 0.00
9.50 9.50 0.29 0.23 0.3 1 0.20 0.00 0.00 0.00 0.00 1.95 0.64 0.00 0.27 0.40 0.00 0.00 4.10 0.00 0.00 6.30 2.43 0.00 0.00 0.00 0.00 0.00 1.33 5.63 0.05 0.02 0.02 0.01 0.26 1.47 0.00 0.00 4.16 2.50 1.01
0.00 0.00 0.00 0.00 0.00 0.00 2.40 0.00 0.00 4.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0 0
5.31 0 0 0 0
1.5 0 0 0 0 0 0 0 0 0 0
5.22 0 0
2.03 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 19.68 0.00
Total portfolio 239.91 72.98 59.00 14.12 134.53 56.04 7.90 14.12
2
Approvals Pending Commitment
FY Approval
2004 2006 2004 2006 2006 2006 2006 2006 2006
Company Loan
CSIBL IHFL I1 Dewan SME JSPE Fund Habib Bank Paktel2005 Orix SME OLP Tameer Bank Dewan Petroleum
35.00 5.00 2.00 0.00 0.00 0.00
17.00 3.70 0.00
Equity
. 0.00 0.00 0.00
20.00 50.00 0.00 0.00 0.00 0.00
Quasi
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Partic.
0.00 0.00 0.00 0.00 0.00
30.00 0.00 0.00
25.00
0.00 55.00 Total pending commitment 62.70 70.00
3
2
3 m
8 In
8 0 N
VI
VI
" W
6 m
6 8 0 0 N r 4
VI E
3 vi VI
VI VI
VI . 2 e z
P
3
x c .e
P P u 8 8 - v) 0 .e
a
* e,
a ._ e P
L L 5
x
8 E W
c)
-0 0
t
$ 1 ; e 0 d N
t
t rD B s 0 5 0 d N
-
f f : $1 $1 5
I
-T
ANNEX 7
FIDUCIARY ASPECTS OF THE PROGRAM
Financial Management Reforms
1. The Pakistan C F A A (December 2003) concluded that there existed substantial opportunities for consolidating current reforms throughout Pakistan and for introducing additional reforms to further strengthen public financial accountability. In January 2004, a Provincial Public Financial Accountability Assessment (PFAA) was concluded for NWFP with a v iew to identifying the specific financial accountability issues in the province o f NWFP and designing reform actions to be taken to reverse the weaknesses, exploit the opportunities and capitalize o n the strengths inherent in the financial accountability environment in the province. The assessment captured and isolated the province-specific accountability shortcomings and helped to design a reform agenda that has enabled the province to focus on implementing the required actions which together are currently contributing to the enhancement o f the accountability regime at this sub- national level o f government. The PFAA report has signaled the clear will and determination o f the NWFP government to embrace reforms and this i s evidenced by the scale and variety o f actions taken since then to improve the financial management regime in the province.
2. At the request o f the NWFP, key development partners (WB, ADB, EC, DFID) jo in t ly carried out a PEFA PFM PMF31 Assessment as wel l as an OECD-DAC Procurement Performance Measurement Assessment o f the Province, building up on the PFAA o f January 2004 and the reforms already implemented so far. The draft report was prepared in December 2006 and a stakeholders’ workshop held in Peshawar in January 2007. The report highlighted a heightened overall improvement in P F M in the province as denoted by the high rating scores achieved in the areas o f budget comprehensiveness, and in particular, budget classifications and orderliness and participation in the annual budget process; predictability o f expenditure commitment flows; effectiveness o f payroll controls; recording and management o f cash balances, debt, and guarantees. While significant improvements remain to be accomplished towards achieving better ratings in a number o f areas, the commitment o f the province to initiate a renewed strategy provides a positive signal that the trajectory o f reform implementation i s on course.
3. The key thrust o f the financial management reform program in N W F P rests on the pace and comprehensiveness o f implementation o f the Bank-financed country-wide public financial management project, PIFRA. Critical performance improvements demonstrative o f the level o f reform commitment o f the Government o f NWFP include: (a) improving the reliability and accuracy o f the financial information in the province, and on a uni form basis, through adoption o f the new chart o f accounts for provincial and district governments’ budgets and accounts and achieving the highest levels o f reconciliation o f accounts amongst al l other provinces; (b) being the f irst province to achieve 100 per cent IT connectivity in F M I S implementation covering the provincial and a l l district governments by December 2006, and thus creating the environment to providing meaningful and more comprehensive fiscal and financial information on a timely basis; (c) improving the reporting lag for provincial government c i v i l accounts to 14 days f rom 15-21 days, and building o n the strategy to improve timeliness to not more than 10 days after each month-end; (d) maintaining the pro-activity o f the provincial and district external audit infrastructure in completing the audit on a timely basis, although the finalization o f audit
‘PEFA PFM PMF: Public Expenditure and Financial Accountability Public Financial Management Performance Measurement Framework approved in June 2005
certification remains a challenge to be addressed with the gradual introduction o f the new and good practice audit methodology.
4. A key dimension o f the required public financial management performance to allow for the operation to proceed i s the agreed prior action o f ensuring the achievement o f operational IT connectivity and productivity o f at least 20 District Finance and District Accounts Office sites using u n i f o m chart o f accounts under the government’s adopted new, IMF GFS-compliant, chart o f Accounts prescribed under the N e w Accounting Model. This pr ior action, as highlighted in the preceding paragraph has been fully satisfactorily met since a l l 24 District Accounts as wel l as District Finance Offices have n o w been connected under an IFMIS basis for on-line budget preparation, processing, execution, and financial reporting. The achievement o f this critical prior action further buttressed the reform consciousness and commitment o f the government o f NWFP as being the first amongst provincial governments in Pakistan that can claim the full state o f readiness to produce reliable, timely, accurate, comprehensive and meaningful financial and fiscal information, on real time basis, for informed decision making. At the same time, the province has become the first, amongst al l four provinces, to assure the timely preparation o f reliable financial statements, consistent with good international practice (International Public Sector Accounting Standards), and submit these for timely external audit using the new audit methodologies prescribed under the Financial Audit Manual.
5. Going forward, other key triggers, reform milestones and benchmarks include the entrenchment o f transparency and disclosure requirements pertaining to budget execution status o f a l l provincial and district governments by ensuring that the financial and fiscal status reports, in detailed formats, are posted to the website and made readily available; internal audit functions are wel l established and are functioning and addressing systemic issues in the overall management and control o f public resources; and the annual draft accounts are indeed produced o n timely basis (within three months o f the end o f the fiscal year) and equally audited o n timely basis using international standards o f auditing.
6. Notwithstanding the identified areas requiring further reform, NWFP i s acknowledged as the most advanced province in Pakistan in terms o f financial management reforms. The financial accountability environment in the province, as concluded by the Provincial P F A A (April 2005), provides adequate safeguards for reliance on government financial management systems. This i s reinforced by the progress o f actions implemented since the IMF Safeguards Assessment (2001) o f the State Bank o f Pakistan, and also by the conclusions o f the recently held government/joint-donor partners’ workshop o n the PEFA diagnostics and OECD-DAC Baseline Procurement Assessment carried out for the province and planned for finalization during FY 2007.
7. Foreign Exchange Control Environment: (An IMF Safeguards Assessment o f the State Bank o f Pakistan (SBP) was conducted in 2001. It highlighted vulnerabilities at the SBP particularly as relating to i t s financial statements and disclosure policies which fell short o f acceptable Central Bank standards. However, since a program o f r e f o m was agreed with the IMF and i s being implemented, the r isks associated with foreign exchange management control have been mitigated. The State Bank o f Pakistan has transitioned to producing financial statements which accord with international accounting standards and formats. An independent review o f the SBP’s internal audit function, as recommended by the Safeguards Assessment, has since been completed and recommendations implemented. The SBP has also established a formal process o f reconciling data reported to the Fund as wel l as implemented guidelines to prohibit operations that pledge or encumber reserves, or place restrictions on, or otherwise impair the availability o f foreign exchange reserves outside an authorized framework, equally, the SBP’s Act has been
2
accordingly amended to strengthen and guarantee i t s independence and autonomy in the management o f reserves as required under the Safeguards Assessment.
Procurement Reforms
8. Pakistan’s Nor th West Frontier Province i s the leading province in terms o f economic and fiscal reform, including governance reform which encompasses improvements to the public procurement legislative and regulatory framework. I t s SAC-supported Provincial Reform Program (PRP) contained a series o f actions aimed at implementing procurement reforms in phases.
9. Marking the end o f the f i r s t phase, NWFP passed the Procurement Ordinance in 2002 as the f i rs t government (federal and provincial) in the country. Rules for procurement o f consulting services were notif ied in November 2002, and rules for procurement o f goods, works and (non- consultancy) services were notif ied in December 2003. The Ordinance was adopted by the parliament as the Procurement L a w for goods, works and services in 2003, as the main achievement in phase 2. Through a notification by the department o f Planning, the Standard Bidding Documents o f Pakistan Engineering Council were recommended for use. However, while being a major step forwards, the L a w and the rules do not completely adhere to the international best practice in procurement.
10. The rules were designed and adopted by the officials o f the Finance Department, without significant external assistance. Inevitably, therefore, these rules contain a l l the aspects o f the existing procurement procedures without bringing in any changes to align the procedures with the modem public procurement practices.
1 1. In February 2006 NWFP prepared a road map to revise the procurement rules and review the procurement law to eliminate al l aspects limiting transparency and equal opportunity and align these documents with international best practice. Upon request o f the NWFP, the Bank arranged for a grant to facilitate to bring about these amendments. The grant for Strengthening o f Procurement Regulatory Framework was signed on August 10, 2006 and over the next three years, i t aims at the following achievements:
aligning the procurement rules closer to international best practice, and suggesting amendments in the law; replacing the system o f Composite Schedule o f Rates (CSR) by Current Market Rates (CMR); review the various codes, departmental rules and regulations to synchronize their application in context o f the stipulations o f the (amended) procurement rules. T h i s also includes introduction o f various standard bidding documents and identifying means to adopt the standard Pakistan Engineering Council (PEC) bidding and contract documents; introduce sustainable procurement training for government officials; implement an effective mechanism to redress complaints with respect to procurement; identify a home for procurement reforms for further research, database management and revisions; and implement awareness o f and training for the reformed system.
The Finance Department i s the executing agency for this grant, and having this assistance to carry out procurement reform, further work i s needed to actually make the L a w effective and ensure i t s implementation. As phase 3 o f the procurement reform, the government committed to
f i rs t define the areas which require improvements in the rules, the standard bidding documents and probably in the law and introduce a system o f market rates for preparing contract budgets, as a near term action. In the mid term the identified amendments shall be brought about, and implementation shall be focused on.
13. As a next step the NWFP will implement Phase 4 o f Procurement Act ion Plan to bring procurement practices to international standard. This includes notifying amendments in the procurement l aw eliminating discriminatory stipulations and aligning it to the best international practice, implementing revised rules, adopting amended Standard Bidding Documents for goods, works and services, and ensuring their implementation. These reforms shall be supported by comprehensive procurement training at various levels and setting up o f a provincial procurement institutional arrangement to act as a focal point.
Conclusions on the Fiduciary Environment
14. With the implementation o f the reform measures in the financial management and procurement areas already o n course in the province, and arising f rom the mitigated r i sks associated with the manner in which the SBP manages the country’s foreign exchange reerves as highlighted in the IMF Safeguards Assessment, the overall fiduciary risk o f the program i s rated ‘modest ’. DISBURSEMENTS AND FIDUCIARY ASSURANCE
15. On-Lending Terms: The Islamic Republic o f Pakistan, represented by the Federal Ministry o f Finance would be the Borrower. The Loan would be on-lent by the Federal Government to the Government o f NWFP o n terms and conditions as shall be agreed between the two governments.
16. Funds flow arrangements: The Government o f Pakistan shall identify a Foreign Exchange Account with the State Bank o f Pakistan (SBP) and which forms part o f the country’s official foreign exchange reserves, into which the proceeds o f the Credit will be disbursed o n a single tranche basis upon Credit effectiveness. The Rupees equivalent o f the funds in the Account will, within two working days, be transferred into the Consolidated Fund o f the Government o f N W F P (Account No. 1 - Non-Food) held with the SBP which i s used to finance budget expenditures.
17. Disbursements from the Consolidated Account No.1 (Non-food) by the Government o f NWFP shall not be tied to any specific purchases and n o special procurement requirement shall be needed. The proceeds o f the Credit shall, however, not be applied to finance expenditures in the negative l i s t as defined in the Schedule o f the Financing Agreement. If any portion o f the Credit i s used to finance ineligible expenditures as so defined in the Schedule o f the Financing Agreement, IDA shall require the Government to promptly, upon notice f rom IDA, refund an amount equal to the amount o f the said payment to IDA. Amounts refunded to IDA upon such request shall be cancelled f rom the Credit.
18. Assurance Requirements: Within 45 days o f disbursement o f the Credit by IDA, the Finance Secretary o f NWFP shall provide a written confirmation to IDA certifying the receipt o f the Rupees equivalent o f the Credit into the Consolidated Fund Account o f the Government o f NWFP, the number o f the account, the date o f the receipt, and the exchange rate applied to translate the Credit currency into Rupees.
4
ANNEX 8
ENVIRONMENTAL ASPECTS
1. The country’s policies in education, health, social protection, fiscal stability and public expenditure management, and governance, supported by the proposed loan do not entail significant negative effects on Pakistan’s environment, forests, or other natural resources. The policies will not result in any significant commitment o f such resources. Although some minor negative effects are possible, the net balance o f a l l effects i s l ikely to be either positive or benign. For example, increased primary health care service delivery can impact the environment through three channels: (i) scale effects, (ii) composition effects, and (iii) changes in techniqueshechnology. Scale effects, meaning overall increases o f infrastructure associated with health care and wastes generated in the provision o f primary health care services, should not be significant. Composition effects refer to the growth or decline o f more versus less-polluting health centers. These effects are not l ikely to significantly affect the environment since the loan supports mainly relatively non-polluting health centers. Finally, changes in techniques refer to more efficient (and hence less polluting) technologies or processes that are introduced through improved primary health care services. Whi le these changes are impossible to quantify, the adoption o f such technologies i s expected to have positive environmental effects.
2. The Bank’s Strategic Country Environmental Assessment (SCEA) provides a broad overview of Pakistan’s environmental policies and institutions. The SCEA concludes that the legislative framework for environmental management i s largely in place and the country has made progress in establishing regulatory institutions for environmental management. However, implementation o f policies has evidenced substantial variations across the country, mainly due to the binding constraints o f insufficient resources and inadequate compliance incentives. Recognizing these problems, the Medium Term Development Framework 2005-20 10, which was adopted in mid-2005, recommends a significant increase in the budget allocated for environmental management to support implementation o f the legislative framework.
3. Simultaneously, Pakistan has adopted environmental safeguards aimed at offsetting and minimizing potential environmental risks associated with the North West Frontier Province Development Policy Credit. The Pakistan legal framework contains provisions to strengthen enforcement o f environmental regulations. Additionally, there i s a high level o f environmental awareness in the Province, evidenced by the government’s decision to respond to environmental pressures by introducing the Sarhad Provincial Conservation Strategy (SPCS), which aims to promote conservation and sustainable development. Unmatched elsewhere in Pakistan, three districts in NWFP have integrated the SPCS into their development agenda. Furthermore, environmental management within the province i s guided by the Pakistan Environmental Protection A c t 1997, which requires EPA approval for the execution o f large public and private projects. N W F P EPA has three zonal offices in the province and has established an Environment Impact Assessment (EM) training center in Peshawar.
4. Although the Bank-supported policies aimed at accelerating human development, improving fiscal stability and public expenditure management, and strengthening governance, are expected to have only minor negative environmental effects, Pakistan recognizes the importance of proper environmental policies and proactive government monitoring within an adequate environmental regulatory framework. T o address such concerns, Pakistan has adopted a National Environmental Policy (NEP), aimed at promoting sustainable development. As part o f Pakistan’s NEP, the government i s interested in
1
strengthening i t s country environmental systems, particularly for effectively identifying and addressing environmental problems and priorities and taking into account the concerns o f multiple stakeholders (including the most vulnerable groups). Pakistan’s NEP also embodies processes to monitor and evaluate progress to overcome the identified environmental priority problems.
5. The DPL’s focus on assisting the NWFP government to broaden and deepen human development reforms while providing continued support to strengthen governance i s expected to have positive environmental effects. Improvements in human capital are aimed at reducing poverty, and are consequently anticipated to reduce the current over-dependence on “depletable” natural resources (e.g., biomass for fuelwood). Fiscal reforms are consistent with the Medium Term Development Framework 2005-20 10, as they include recommendations to increase resources allocated to environmental agencies. Finally, to the extent that governance reforms encompass the environmental agencies, the DPL i s expected to enhance the authority’s capacity to enforce environmental regulations.
6. Reforms aimed at accelerating economic growth through private sector development might induce potential positive and negative environmental effects. While it i s impossible to quantify these impacts, these reforms might eventually y ie ld net environmental benefits. Private sector activity i s to be stimulated by lowering administrative barriers and the transactions costs o f investment. Given the structure o f the Province’s industry, i t i s anticipated that the bulk o f industrial development will entail broad based growth o f light industries, with a modest environmental footprint and l o w pollution intensity.
7. The Bank i s undertaking a sectoral environmental analysis aimed at assessing the borrower’s systems for reducing potential negative environmental effects linked with private sector development, particularly in the mining and infrastructure sectors. As a follow-up to the SCEA, the Bank has initiated an institutions-based strategic environmental assessment o f the policy reforms associated with the Nor th West Frontier Province Development Policy Credit. The assessment has been designed to identify and address existing institutional gaps that may hinder the government’s capacity to anticipate and respond to potential adverse environmental impacts. The assessment will provide recommendations to strengthen the capacity to manage efficiently and effectively the licensing system, as wel l as to monitor and enforce compliance with environmental norms and conditions set as part the licensing process. Such recommendations will include specific proposals to consolidate the authority’s capacity to assess the potential adverse impacts o f resource-intensive businesses dealing with use o f natural resources and involved in generation o f pollution and wastes. The timely completion o f the assessment will ensure the incorporation o f environmental considerations in the design and implementation o f Bank-supported policies.
2
ANNEX 9
DEBT SUSTAINABILITY NOTE
This note analyzes the evolution over the next 15 years o f debt stock and debt service indicators for a baseline (reform scenario with agreed medium-term fiscal framework). I t also analyzes the sensitivity o f the debt stock and debt service indicators to a range o f exogenous shocks and in several pol icy slippage scenarios.
The note concludes that if N W F P continues recent years’ fiscal reforms, it will ensure a robust and sustainable fiscal and debt outlook over the medium and long term. The province has undertaken considerable fiscal adjustment over the last 5 years and invested substantially in debt restructuring, including by substituting expensive domestic loans with low-cost budget support f rom the Bank. These efforts have now enabled the province to move onto a fully sustainable debt path with an increasingly lighter debt service burden (for instance, interest payments measured in terms o f % o f revenue and grants). The debt stock and debt service burden remain sustainable in the face o f substantial shocks. However, the fact that persevering, substantial fiscal slippage (as seen in several alternative scenarios) could bring the province back o n an unsustainable path underlines the importance o f the government staying close to i t s medium-term fiscal framework.
The current debt situation
The province i s currently not in a debt-stressed situation (table 1). The interest burden in terms o f % o f revenue and grants has decreased substantially over the last 5 years and i s now - at 10% - wel l below commonly accepted thresholds for debt ~ustainabil ity~’.
Table 1. NWFP: Indicators of public debt
Total public debt stock, % o f PGDP Domestic debt stock, % o f PGDP Foreign debt stock, % o f PGDP
Share o f total public debt, % Domestic debt Foreign debt
Interest payments, % o f revenue and grants Domestic debt Foreign debt
Share o f interest payments, % Domestic debt Foreign debt
2005106
12.4 5.2 7.2
42.2 57.8
10.1 9.3 0.7
92.8 7.2
32 For instance, in India the central Ministry o f Finance, classifies states with interest/revenue&grants ratios larger than 20 % as “debt stressed”.
1
The vast majority o f interest payments, almost 93%, i s o n domestic debt and only 7% o n foreign debt. The l o w share o f the latter reflects in particular very l o w average nominal interest rates on foreign debt (all concessional foreign aid); over the last 8 years it has been about 1 percent in U S dollar terms (and hence the real interest rate o n foreign debt has been between -1% and -2% in US$ terms).
Institutional context: Provinces in Pakistan are not authorized to borrow from the market without specific approval f rom the federal government; hence any deficit financing (beyond drawing down cash reserves or using temporary overdraft facility with the State Bank o f Pakistan) will need the federal Ministry o f Finance’s approval. The approval to borrow has in most cases been given to borrow from the federal government (at relatively high interest rates) or f rom foreign donors.
Analytical framework for debt and debt service projections: the analysis builds on the standard debt sustainability template for subnational governments but with some additional features: In the case o f the NWFP, the debt service schedule for each individual, existing government loan i s predetermined, including with fixed interest rates, for the rest o f the lifetime o f a loan (up to 20 years ahead). This data i s incorporated in the projections. Hence the only element o f projection uncertainty for the debt service on existing loans i s with regard to the nominal exchange rate risk.
The analytical framework o n the debt dynamics in the standard debt sustainability template assumes in any given future year the same real interest rate for both o ld (existing loans as o f FY07) and new loans. This i s improved in the modified framework used for this debt sustainability assessment which splits debt stocks and their debt service in four categories: existing portfolio o f domestic loans, existing portfolio o f foreign loans, new foreign loans (at lower real interest rates than new domestic loans), and new domestic loans (residual since they have the highest cost o f financing). The debt service sensitivity to future changes in interest rates can therefore be pointed out more accurately since the debt dynamics module captures exactly that as opposed to an average interest rate covering also o ld loans with fixed interest rates.
The analysis
The debt sustainability assessment i s based on analysis o f a set o f scenarios covering the period FY07 - FY23 (2006/07 - 2022123) and sensitivity testing o f the baseline (reform) scenario for exogenous shocks.
The following scenarios are analyzed:
1. 2. 3. 4.
5.
Baseline scenario with continued reforms and DPC financing over the medium term Baseline scenario with continued reforms but only DPC financing in FY07 (DPC2) Combined fiscal and other economic policy r i sks - over a 10-year period Combined fiscal pol icy r isks over 10 years but partially offset by cutting capital expenditures Higher fiscal deficits and n o new DPCs beyond DPC2.
K e y assumptions underlying the scenarios are presented in B o x 1.
2
Box 1. Kev assumDtions for the scenarios
1. Baseline scenario with continued reforms and DPC financing over the medium term The real interest rate o n foreign debt used for projections i s equal to the average real interest rates over the last 9 years (in US$ terms), and similarly for the real interest o n domestic debt. RIR o n foreign debt: -1% (in U S $ terms; debt service projections and debt stock figures are also adjusted for an annual depreciation o f the nominal Pak RsiUS$ exchange rate o f 2 -2 % percent t o maintain purchasing power parity). RIR o n domestic debt: 5.9 % per annum. DPCs f r o m the Bank (on IDA terms) are assumed for FY08 - FY10, after wh ich budget support drops by half. Provincial real GDP growth i s projected to average 6.7 % over the coming 5 years which lags the country’s growth rate slightly (using the off icial macroeconomic projections o f GoP for th is period). Inf lat ion i s the same as reflected in the off icial medium-term macroeconomic projections o f GoP. The primary deficit that averages 0.3 percent o f PGDP in FY06 - FY07, i s projected at 0.28 % o f GDP in FY08,0.1% in FY09 and 0.06% in FYlO (as in the government’s medium-term budget framework for FY08-FY lo). It remains at 0.06% each year thereafter.
2. Baseline scenario without DPC financing over the medium term. Relative to the baseline scenario the only change in assumptions is n o M e r DPCs beyond DPC2; hence a much higher share o f deficit financing comes f r o m domestic loans at a higher cost. Combined fiscal (and other economic) policy risks - over a 10-year period. A worsening o f the primary balance compared to baseline o f 2 % o f GDP each year until FY17. Real GDP growth i s 1 percentage point lower than the baseline in the f i s t 5 years, thereafter the gap in the growth rates narrows and i s closed after 5 more years. Combined economic policy risks over 10 years but partially offset by reducing capital expenditures. Scenario 3 but slower growth in total spending since capital expenditure i s 1 % o f GDP lower each year until FY17. Real GDP growth i s 0.25 percent lower than in scen.3. Increased fiscal deficit and no new DPCs. A permanent worsening o f the primary balance
3.
4.
5.
Results f r o m the baseline scenario
In the baseline scenario the combination o f continued fiscal prudence and the ongoing (positive) debt dynamics leads to a steady improvement in key debt indicators (Charts l a and lb). The debt service burden - measured as interest payments in % o f revenues and grants33 - declines from 7 percent in FY07 to about 4 % percent by FY17 and remains at that level over the rest o f the projection period. The debt stock / PGDP ratio declines f rom 12 percent in FY07 to 10 percent by FY17 and to 9 percent by FY23. The steady reduction in the debt service burden leaves sufficient fiscal space for expanding PRSP spending, including increasing development spending.
The fact that the ongoing debt dynamics are positive or in other words at this phase contribute to a virtuous cycle, reflects that the average real interest rates are lower than the expected real GDP growth. This again i s a result o f the government having overcome the previous heavy burden o f a debt overhang (from the 1990s) by repaying over the last 4 years large parts o f i t s most expensive domestic debt, partially by substituting for concessional IDA funds.
The projections o f the debt service can be made with a high degree o f certainty since the current debt stock have predetermined debt service schedules (with fixed interest rates). Hence only the
This note uses th i s variable as the central indicator for assessing debt sustainability since it (implicit ly) measures h o w much o f fiscal resources are available for other spending items after nondiscretionary interest payments. The debt/PGDP ratio does not give as strong predictive power about the fiscal burden o f the debt as the interest paymentshevenues and grants ratio when the debt stock consists o f debt instruments with highly different debt servicing terms. The latter i s the case o f NWFP.
33
debt service o n new loans and the foreign exchange component o f existing loans are subject to projection uncertainty.
Impact o f IDA budget support- comparing baseline scenario with and without the DPCs
The impact o n the evolution in key debt indicators i s seen directly in Charts l a and lb. In chart l a the gap between the two graphs shows the savings in interest payments as share o f revenue and grants as a result o f getting l o w cost IDA budget support. Over the medium-to long term the annual savings are about 1 ?4 percent o f revenue and grants. In chart l b the cumulative effect o f these savings i s shown as the gap between the two graphs, both showing declining debt stock in terms o f GDP but in the scenario without new DPCs stabilizing at 1% % o f GDP higher than in the baseline with new DPCs.
Chart l a Chart l b I I
; 2.0 0 E - - 55 1.0
11.0 n
6.01 I , , , , , , 1 , , , , , I I ,
~ -Baseline - reforms and DPCs +Baseline - reforms, no new DPC
Sensitivity analysis - shocks
The sensitivity o f the baseline scenario - the government's medium-tern reform scenario - i s analyzed with regard to the following shocks: 1. Interest rate r i s k 2 standard deviations increase in the real interest rate for both new domestic
loans and new foreign loans (in US$ terms) compared to the baseline (increase by 2.9 percentage points and 1.9 percentage points, respectively).
2. Exchange rate risk: 30 percent nominal depreciation in the Pak RupeeAJS$ rate in FY08, then same annual depreciation as in baseline.
3. Negative real GDP shock: 1 standard deviation (2.8 percentage points) decrease in the rate o f growth in real GDP compared to the baseline, starting in FY08 for 3 years.
4. Increasing the c iv i l service wage bill by 12% in terms o f share o f PGDP in FY08. Wage bill increases by 0.5% o f GDP and remains at the new level.
5. Contingent l iabil i ty r i s k the FY08 budget i s hit by the realization o f contingent liabilities, necessitating fiscal payments equivalent t o 5% o f PGDP.
4
Chart 2a. Shocks
-Wage bill increase, 1/2 YO of GDP - Contingent liabilities, 5 YO of GDP .- Lower real GDP growth, 1 std.dev - 30 % depreciation in Rp/US$ rate
10.0
9 .o
t 5 ;:: 6.0
C '- 5.0 [ 4.0
- 3.0
- Baseline -Wage increase
- Interest rate increase, 2 std.dev - Contingent liabilities, 5 YO of GDP Lower real GDP growth, 1 std.dev - 30 YO depreciation in Rp/US$ rate
Chart2b.
18.0 I
16.0
14.0
12.0
10.0 -I
These are al l substantial shocks (in several cases with confidence intervals o f 95 %' for a normal probability distribution). As seen in charts 2a and 2b the baseline scenario i s robust to a l l f ive shocks. In n o case i s the sustainability o f the debt service burden threatened by the shock and the interest burden remains below 8 percent over the long term, only marginally up from the FY07 level o f 7%. Only in the case o f contingent liabilities hitting the budget to the value o f 5 % o f
5
GDP does the interest burden spike init ially to 10% before it gradually declines and converges back to i t s long-term level o f 7 $4 percent after 10 years. Interestingly, the 30% nominal depreciation o f the Pakistani rupee versus the U S dollar does not affect the debt service burden much neither since interest payments on foreign debt only constitutes 7 percent o f total interest payments (table 1). However, and importantly, the widening gap between the baseline scenario trajectory for interest payments in % o f revenues and the trajectories for the shocks does mean that substantial revenue resources would be pre-empted for debt service and could not be used for high-priority areas such as PRSP spending.
Having established that the baseline scenario i s robust t o a wide range o f shocks and preserves debt sustainability, what would the impact o n debt sustainability be o f scenarios o f fiscal slippage?
Impact of fiscal policy slippage
Chart 3 demonstrates the fiscal constraints within which the provincial government would need to maneuver in order to maintain fiscal sustainability. Scenario 5 (primary deficit 1.5 percentage points o f GDP (2 standard deviations) higher than in the baseline over the whole (16-year) projection period and n o new DPCs) i s the most severe case o f deep and prolonged fiscal slippage. In this scenario both the debt service burden and the debt stock in % o f PGDP keep growing throughout the projection period and do not stabilize, reaching high and unsustainable levels over the longer term. Such a scenario i s highly unlikely for two reasons: first, it would imply that the federal government would accommodate such large deficits and finance them, in other words also have a quite expansionary fiscal stance - throughout 16 years. Second, it assumes that n o fiscal adjustment will take place year after year in a continuing worsening fiscal outlook.
Also scenario 3 - a long-term worsening o f the primary balance compared to baseline o f 2 % o f GDP for 10 years - shows steadily increasing debt service burden and debt stock ratios but these indicators stabilize at higher levels. Interest payments stabilize at about 17 percent o f revenues and grants, up from 7 percent in FY07. T h i s would imply an unsustainable squeeze o n other, high priority areas o f public spending, including human development spending. Again, this scenario would be unlikely for the reasons described for scenario 5 (above).
6
Chart 3a. Alternative scenarios
25.0
20 .o
15.0
10.0
5 .O
-A- Baseline - Combined policy risks, 10 years - Combd pol.risks, offset cap spdg - Increased prim.def, no new DPCs I
Chart 3b. Alternative scenarios i i 36.0 I
31 .O
26.0
21 .o
16.0
11 .o
- Baseline - Combined policy risks, 10 years ~
-+ Combd pol.risks, offset cap spdg - Increased prim.def, no new DPCs i
7
Scenario 4 assumes some fiscal adjustment to curb the rising fiscal deficits - in the form o f cutting public investment spending by 1 % o f GDP annually until FY 17compared to scenario 3. These investment cuts result in lower PGDP growth in addition to effects such as limiting the supply o f new facilities for public services. This scenario enables the province to stabilize i t s interest burden in terms o f revenue and grants at about 11 percent - albeit much above the baseline scenario i t i s markedly lower than the two severe fiscal slippage scenarios and within reasonable limits consistent with fiscal sustainability. Whi le this scenario shows a muddling through and technically preserves debt sustainability, i t i s not sustainable f rom the point o f v iew o f economic growth and public service provision.
In sum, the conclusion from the scenarios analyzed here i s that the government’s objectives o f achieving higher rates o f shared economic growth while also ensuring adequate PRSP spending and improving access to public services, in particular basic social services, can best be met by staying close to the agreed medium-term fiscal framework and along similar fiscal parameters for the longer term.
8
ANNEX 10
Household final consumption expenditure 79.2 72.9 78.0 81.4 General gogt final consumption expenditure 12.8 12.6 7.7 7.6
Pakistan at a glance 4/4/07
- 1 0 1
-GCF e G D P
POVERTY and SOCIAL Pakistan
2006 Population, mid-year (millions) GNI per capita (Atlas method, US) GNI (Atlas method, US$ billions)
Average annual growth, 2000.06
Population (%) Labor force (%)
Most recent estimate (latest year available, 2000-06) Poverty (% of population below national povedy line) Urban population (% of total population) Life expectancy at birth (year@ Infant mortality (per 7,OOOlive births) Child malnutrition (% of children under 5) Access to an improved water source (% ofpopulation) Literacy (% ofpopulation age 75+) Gross primary enrollment (% ofschool-age population)
Male Female
KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1986
GDP (US billions) 31.9
11.9
Gross national savingdGDP 19.7
Current account balanceIGDP -2.4
Total debVGDP 46.9 Total debt servicelexports 25.0 Present mlue of debffGDP Present mlue of debffewrts
(average annual growth)
Gross capital formation/GDP 18.8 Exports of goods and servicedGDP Gross domestic savings/GDP 8.0
Interest paymentsIGDP 1.8
1966-96 1996-06
GDP 5.0 4.2 GDP per capita 2.4 1.7 Exports of goods and services 8.0 8.3
159.0 770
122.1
2.4 3.8
35 65 80 38 91 47 82 95 69
1996
63.3 19.0 16.9 14.5 16.2
-7.3 1.9
47.1 28.3
2005
7.3 4.7 9.6
South Asia
1,470 684
1,005
1.7 2.1
29 63 66 45 84 60
110 116 105
2005
110.9 18.1 15.5 14.3 20.6
-0.8 0.7
30.4 10.9 25.4
125.9
2006
6.2 4.1
12.9
LOW. income
2,353 580
1,364
1.9 2.3
31 59 80 39 75 62
104 110 99
2006
128.9 20.0 15.5 11.1 17.3
-3.7
2006-10
6.7 4.5
17.0
Development diamond'
Life expectancy T
Gross primary
capita enrollment
1
Access to improved water source
-Pakistan - Low-income group
Economic ratios.
Trade
Capital formation
Domestic savings
Indebtedness
-Pakistan - Low-income group
STRUCTURE of the ECONOMY
I% of GDPI I lg8' 1996 2005 2o06 IGrowth of capltal and GDP (%)
27.6 25.5 22.2 20.5 1 1 5 T I 23.4 24.2 26.5 26.7 16.3 16.0 17.8 16.3 49.0 50.4 51.3 52.9
1966-g6 1996-06 2005
Agriculture 4.3 2.5 6.7 Industry 5.8 5.5 11.4
Manufacturing 5.2 6.8 12.6 Services 5.1 4.8 8.0
Household final consumption expenditure 4.7 4.4 13.1 General godt final consumption expenditure 3.0 0.5 1.7 Gross capital formation 4.3 1.6 9.3 9.9 -Exports -Imports imports of goods and services 4.3 3.3 40.5 23.9
Note: 2006 data are preliminaryestimates. Group data are to 2005.
*The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will
(average annual growth)
be incomplete. 6
1
Total debt outs&nriin~ and rirsbursed IBRD IDA
Totat debt service IBRD IDA
188s
3 3
17 5 -0 9 -8 f
1 B 6
2,945 513 342
2.055 6.002
2,039
f B S
3,796 7,230
-3,434
-650 3,302
-772
1 200 -428
1.638 16 I
lgS6
74,951 m5
1560
1.626 88 26
31 5 368 55
1 Ob 3
75s 249 50
199 63
I36
t $as
10 8 8 4
18 a -2 8 -7 8
19%
8,311 507 5oJ
4,989 12,035
1,539 2,010
I19 113 I05
I 9gS
9.977 15,227 -5 250
-1.953 2.610
4,563
4,163 431
2.83% 33 5
$896
26,829 3,007 3 480
3 287 436,
63
200 2,125
556 922 285
553 65 I 255 386 234 15%
2005
9 3 8 7
I 4 1 4 3 -3 4
2005
14 482 123 933
8 288 18,966
7116 4 534
124 131 94
2005
17801 25 808 -7 807
-2,386 9 34d
-849
239 610
11,516 59 4
2005
33.675 2 238 6 865
2.443 404 I67
61 I 590 933
2 I83 45:
1,550 845 427 419 i 45 274
2006
7 8 20 3
14 5 0 4
- 4 2
200fl
I 6 764 I24
2 011 6 881
23,967 783
I28 142 90
200%
20,256
12,844
-2,676 10 707
-4,813
5 $343 -1 130
33,098
12 468 59 B
2008 Comp~s~tion of 2005 debt (US$ mill f
GilgitChitral
Mardan
PeshawarKahat
Rawalpindi
Bannu
Mianwali Khushab
Jhelum
Sargodha
GujratSialkot
Gujranwala
Bhakkar
JhanaLahore
KasurFaisalabad
Sahiwal
MultanD.G.Khan
Bahawalpur
Bahawalnagar
Rahimyar Khan
RohriSukkur
Larkana
Dokri
Nawabshah
Hyderabad
Thatta BadinKarachi
Bela
Gwadar
Panjgur
Kalat
Khuzdar
Quetta
Sibi
D.I.Khan
ISLAMABAD JAMMUand KASHMIR
N.W.F.P.
B A L O C H I S T A N
P U N J A B
S I N D H
Jhel
um
R.
R.
Ravi
Sutlej
R.
Indus
R.
Nar
aC
anal
Nal
R.
Mouths ofthe Indus
Zhob R.
A R A B I A N S E A
IndusR.
Kuna
r
R.
ApproximateLine of Control
TAJ IK ISTAN
C H I N A
AFGHANISTAN
I S L A M I C R E P .
O F I R A N
I N D I A
70° 75°
35°
30°
75°
25°
70°65°60°
25°
30°
35°
60° 65°
30°
35°
75°
35°
30°
25°
75°70°65°
25°
70°65°
N.W.F.P.
BALOCHISTAN
SINDH
PUNJAB
••
•••
••
•••
•
•
••••
••
• •••• •• ••• • • • • • • ••
Approx. Line of ControlJAMMU
AND KASHMIR
Arabian Sea
TAJIKISTANCHINA
I N D I A
A F G H A N I S T A N
ISLAMIC REP . OF
IRAN
TURKMENISTAN
UZBEK.
PAKISTANPAKISTAN
TAJIK.
PAKISTAN
Islamabad
0 100 200 300 KILOMETERS
0 50 100 150 200 MILES
MA
Y 2007
IBRD 35511
PAKISTANSECOND PROPOSED
DEVELOPMENT POLICY CREDITNORTH WEST FRONTIER PROVINCE
PROJECT PROVINCE
SELECTED CITIES
NATIONAL CAPITAL
MAIN ROADS
RAILROADS
RIVERS
PROVINCE BOUNDARIES
INTERNATIONAL BOUNDARIES
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shownon this map do not imply, on the part of The World Bank Group, anyjudgment on the legal status of any territory, or any endorsement oracceptance of such boundaries.
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