The distribution of poor population in Pakistan suggests that almost 75 percent of the poor are clustered around the poverty line. The economy moved to a higher growth trajectory in the vicinity of 6–7 percent real GDP growth during FY 2002–07, and resultantly the poverty declined substantially in FY 2004/05. The productive capacity of the economy remained alien to this higher growth and new industrial capacity was hardly added to the economy. The fiscal year 2007/08 was a volatile year for Pakistan’s economy both on domestic and external fronts.


The distribution of poor population in Pakistan suggests that almost 75 percent of the poor are clustered around the poverty line. The economy moved to a higher growth trajectory in the vicinity of 6–7 percent real GDP growth during FY 2002–07, and resultantly the poverty declined substantially in FY 2004/05. The productive capacity of the economy remained alien to this higher growth and new industrial capacity was hardly added to the economy. The fiscal year 2007/08 was a volatile year for Pakistan’s economy both on domestic and external fronts.

Chapter 1 - Introduction: Challenges, opportunities and strategy

1.1 The new Poverty Reduction Strategy Paper (PRSP–II) draws upon lessons learnt from PRSP-I1 and takes into account recent political, economic and social events, both domestic and international, which have adverse impacts for Pakistan. To steer Pakistan back on the path of sustained and broad-based economic growth and to create jobs and reduce poverty, Pakistan requires a prolonged period of macroeconomic stability, financial discipline and consistently transparent policies that place poverty reduction at the centre of the country’s overall economic policies. Linking the economic growth-poverty reduction nexus are the very elements that the new PRSP focuses on, which has been extensively chalked out in the entire document. Meanwhile, this chapter aims primarily to set the stage for the subsequent discussion by presenting a broad overview of the programme and underscores the main points that underpin the Strategy.

1.2 Setting the Stage for the Strategy

1.2.1 Economic Environment: During the five years ending in FY 2006/07, Pakistan’s economy more than doubled in size with an annual GDP growth rate averaging 7 percent. With relative price stability, the debt burden had reduced to one-half, foreign exchange reserves were sufficient to provide import cover for almost six months, stock market was one of the best performing in emerging markets; foreign direct investment touched close to 6 percent of GDP, and Pakistan successfully launched sovereign bonds of maturity ranging from 5-30 years in the international capital market with manifold oversubscription reflecting strong vote of confidence of global investors. However, the last fiscal year, i.e. 2007/08 has caused turmoil for Pakistan’s economy with several political and economic events, both on domestic and external fronts, occurring unexpectedly. The country suffered a series of shocks since the eruption of the judicial crisis in March, 2007. The then government went into policy inaction, delaying important decisions that were needed to face these challenges. Root causes of macroeconomic instability included delay in passing the effect of the oil price hike to the consumers, resulting in a very high budget deficit which was financed by excessive borrowing from the State Bank of Pakistan (SBP). For this reason, monetary growth is projected at close to 19 percent during the first half of the PRSP-II term, further fueling the already high inflation. Domestic political and economic instability has led to GDP growth plummeting from as high as 7.5 percent to barely 5.8 percent in FY 2007/08 and an expected growth of 3.4 percent in the current fiscal year (2008/09).

1.2.2 Three main structural weaknesses can be identified for the current economic difficulty: (i) government spending in excess of revenue (fiscal deficit); (ii) imports in excess of exports (trade deficit); and (iii) inadequate social services to allow the poor and the vulnerable to fully participate in times of economic stability and prosperity and be protected during shocks. More recent reasons for the prevailing macroeconomic instability include domestic law and order situation, an unprecedented global increase in prices of oil, food and other essential commodities, instability in international financial markets and, most importantly, bearing the direct and indirect costs being a frontline state in the ‘War on Terror’. As a result of these issues, Pakistan is currently facing major challenges including growing fiscal and current account deficits; rising inflation; growth deterioration; and depleting foreign exchange reserves.

1.2.3 Pakistan’s Role in the Universal War on Terror: One important aspect that has severely dented development in Pakistan is its role in the ‘War on Terror’. Pakistan has sustained immense socio-economic costs of being a partner in the international counter terrorism campaign. The anti-terrorist campaign, which followed the 9/11 event in the United States in 2001, over-strained Pakistan’s budget as allocations for law enforcement agencies had to be increased significantly which meant erosion of resources for development all over Pakistan, particularly in FATA and nearby NWFP areas in addition to human sufferings and resettlement costs. Several development projects, started earlier in the affected areas are afflicted with delays which would ultimately result in large cost over-runs. Since the start of the anti-terrorism campaign, an overall sense of uncertainty has contributed to capital flight, as well as, slowed down domestic economic activity making foreign investors jittery. It is apprehended that Foreign Direct Investment, which witnessed a steep rise over the past several years may be adversely affected by the on-going anti-terrorism campaign in FATA and other areas of NWFP in addition to an excessive increase in the country’s credit risk, which has made borrowing from the market extremely expensive. Pakistan’s sovereign bonds have alos under-performed owing to similar reasons.

1.2.4 Above all, Pakistan’s participation in the anti-terrorism campaign has led to massive unemployment in the affected regions. Frequent bombings, worsening law and order situation and displacement of the local population have taken a toll on the socio-economic fabric of the country. The costs to the economy, both direct and indirect, have been estimated in Table 1.1. The estimated cost of the ‘War on Terror’ to Pakistan was around Rs 484 billion during FY 2007/08. This cost is projected to increase to Rs 678 billion during FY 2008/09. The government is in the process of devising a strategic policy to overcome the menace of terrorism which has captured the entire country.

Table 1.1:

Cost of ‘War on Terror’ to Pakistan

(Rs billion)

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On account of loss of exports, foreign investment, privatization, industrial output, tax collection, etc.

Source: Finance Division, Government of Pakistan, September, 2008.

1.2.5 Global Food Inflation: Global food crisis has adversely impacted Pakistan in the form of price hike of food items. This includes over 100 percent increase in the price of oil in the international market since April 2007; over 200 percent increase in the price of palm oil; and an increase of 150 percent in wheat prices. A review of price trends of essential items in Pakistan during FY 2007/08, indicates that the major portion of food inflation during this period stemmed from hike in the prices of wheat, flour, rice, edible oil, fruits, vegetables, pulses, poultry and milk, etc. However, prices of other important food items like sugar, potatoes and moong pulse have decreased owing to improved availability of these items in the market.2

1.2.6 Social Protection: Despite all efforts at job creation, training, and so on, there will always be individuals who for one reason or another are unable to benefit from the country’s economic growth. In March, 2008 the Prime Minister laid out a series of future commitments (100 Days’ Agenda) to benefit the poor during the PRSP-II period and beyond. The coming of a new era of democracy in Pakistan has thus immediately resulted in promising opportunities for people belonging to the lower middle class and poor segments of society. Salient initiatives pledged by the government include: increased employment generation with the help of a new Employment Commission planned to facilitate creation of jobs in the public and private sectors and to provide employment to one member of every poor family from 50 percent of the districts in the country, revision of labour laws as per the requirements of the International Labour Organization (ILO) (minimum wage of labourers will be fixed at Rs 6000 per month: see chapter 8), amendments in the Civil Service Regulations (June, 2008), ‘Article 474 B Public’ for eligibility of public servants who become disabled during service to get full benefits of retirement, with ten years service condition being lifted immediately; development at union council level; low cost housing; provision of medical insurance of Rs 15,000 – 20,000 per year to the poor; cases of political prisoners in the country to be reviewed under the National Reconciliation Ordinance (2007) by a Committee headed by the Attorney General of Pakistan; poor people to be provided free national identity cards; and provision of financial assistance/scholarships to widows and children of innocent victims who lost their lives in terrorist attacks. In context with the last commitment, an aid agenda has been issued to all Provincial Governments and Finance Division with the approval of the Prime Minister for implementation. The Government of Sindh in this regard allocated an amount of Rs 50 million in budget estimates for FY 2008/09. The government has also launched the “Benazir Income Support Programme (BISP)” to provide direct cash transfers to the poor, details of which are covered later in the discussion.

1.2.7 The overall vision of PRSP-II is thus to regain macroeconomic stability and Pakistan’s growth of 5-7 percent per annum over the next five years; create adequate employment opportunities; improve income distribution and global economic competitiveness through economic liberalization; deregulation; and transparent privatization. To ensure that macroeconomic difficulties do not further slow down the pace of job creation and hence, ultimately adversely effect poverty reduction, the government has taken and will continue to undertake a series of fiscal, monetary and exchange rate measures to stabilize the economy. In this light, Pakistan has recently reached an agreement with IMF for a US $7.6 billion package with interest rate varying from 3.51 to 4.51 percent spread out over a period of 23 months. For the first time, IMF has accepted Pakistan’s own proposals/programmes which have two main objectives: (i) to restore the confidence of domestic and external investors by addressing macroeconomic imbalances through tightening of fiscal and monetary policies; and (ii) to protect the poor and preserve social stability through a well-targeted and adequately funded social safety nets. In this light, the PRSP-II endeavours not only to address growth per se but pro-poor growth, which is essential for improving the life of the common man. It is in this perspective that PRSP-II emphasizes commodity producing sectors namely, agriculture and manufacturing, alongside services. High employment intensity sectors such as housing & construction; and Small & Medium Enterprises (SMEs) will also receive greater attention, as will skill development and higher education. Tackling the energy crisis to avoid stifling of growth by rapidly adding more power while simultaneously conserving energy will be another top priority. Ensuring the implementation of policies and reform programmes to achieve the desired results as set out in PRSP-II is a critical task. Support from bilateral and multilateral institutions will play an important role in achieving these targets. The Poverty Reduction Strategy covers the three-year PRSP-II period of FY 2008/09–2010/11 but also provides a framework for thinking well beyond this timeframe. It should, therefore, be viewed as an approach to a long-term national economic strategy that has its main focus on reduction of poverty.

1.2 Building up the Strategy

1.3.1 Pakistan’s PRSP is a fully participative process, incorporating the views and suggestions of all stakeholders – parliamentarians, line ministries, development partners, civil society, media and the poor communities. Consultations are an integral element of the PRSP process. PRSP welcomes participation at various stages of the overall process enabling it to become representative of all stakeholder interests increasing the transparency of the formulation process, ultimately, ensuring sustained ownership and successful implementation of the Strategy. The PRSP-II has been compiled incorporating all such feedback. Comprehensive consultations for PRSP-II started towards the end of the year 2005 and have continued till the launch of the Paper in late 2008. This participatory process has included national stakeholder workshops, regular meetings with all partners and informal sharing of the draft for review/feedback. The PRSP-II Draft Summary was launched at the platform of the Pakistan Development Forum, Islamabad in April, 2007. The Draft Summary and the periodic PRSP expenditure reports are available at the Ministry of Finance’s website.3 Details of the entire consultative process are discussed in the next chapter.

1.4 The Strategy for Poverty Reduction

1.4.1 The Strategy consists of the following nine pillars: (i) Macroeconomic Stability and Real Sector Growth; (ii) Protecting the Poor and the Vulnerable; (iii) Increasing Productivity and Value Addition in Agriculture; (iv) Integrated Energy Development Programme; (v) Making Industry Internationally Competitive; (vi) Human Development for the 21st Century; (vii) Removing Infrastructure Bottlenecks through Public Private Partnerships; (viii) Capital and Finance for Development; and (ix) Governance for a Just and Fair System. In addition, the government is putting in place a stringent results-based system to monitor and evaluate the progress of the Poverty Reduction Strategy. Moreover, the government is continuouslly determined to empower women and to reduce gender disparities. This, in addition to environmental sustainability, is a cross-cutting theme and is regarded as an integral part of the programme which is woven throughout the PRSP-II. The following discussion gives a broad overview of the pillars.

1.4.2 Pillar I: Macroeconomic Stability and Real Sector Growth First and foremost, the government’s top priority is regaining macroeconomic stability, which will act as an umbrella over all other government policies. It is on the basis of the macroeconomic framework that assumptions and targets of all policies will be set. The government’s new broad-based programme for economic stabilization has already ensuring adjustment in petroleum prices to reduce burden on the budget; significant cuts in expenditures to curb the rising burden of subsidies; tight monetary policy to fight inflation; and further cuts in development spending, etc. Details are discussed in chapter 4.

1.4.3 Pillar II: Protecting the Poor and the Vulnerable Social safety nets that provide at least minimal safeguard for the poor and the vulnerable which must form an essential element of any poverty reduction strategy. Pakistan has a fairly elaborate network of direct and indirect social protection mechanisms. Direct provisions include employment based guarantees (such as Employees’ Old Age Benefit Institution, Workers’ Welfare Fund and provincial social security benefits), direct transfers (Zakat and Pakistan Bait-ul-Mal) and market based interventions (microfinance). Indirect provisions include the provision of the minimum wage, lifeline tariff on electricity, subsidy on the price of flour and food subsidies through the Utility Stores Corporation of Pakistan. Funding of specific safety net programmes has traditionally been insufficient given programme objectives and target populations. As a result, safety net programmes are fragmented and often duplicative; have limited coverage and are poorly targeted with small benefit levels relative to household income and the poverty gap; payments are infrequent and irregular; administrative arrangements are inadequate; and Monitoring and Evaluation (M&E) capacity is not up to the mark, which negatively impact programme efficiency and quality of service delivery. Consequently, these programmes have limited impact on poverty and vulnerability. In response to these challenges a National Social Protection Strategy (NSPS)4 was drafted in 2007, building upon a detailed sectoral review and upon inputs provided by all relevant actors in the sector, both at the federal and provincial levels. The NSPS aims to develop an integrated and comprehensive protection system, covering the entire population especially the poorest and the most vulnerable. The NSPS comprises a range of programmes and policies such as social insurance and assistance; income transfers to the very poor; support to vulnerable households to manage risks; and investment in human capital and physical assets to strengthen their resilience. With the aim to provide relief to the economically stressed segments of the society in the face of spiraling prices of the essential commodities, the government has launched “Benazir Income Support Programme (BISP)” with an initial allocation of Rs 34 billion to be disbursed amongst the target households. The programme envisages cash grant of Rs 1000 per month to each qualifying household through banks/post offices. The vision of BISP is to ensure the government’s role in amelioratating the conditions of the poorest of the poor by directly accessing them through supplementing their sources of income. Similarly, the Government of Punjab has announced a Punjab Food Support Scheme (PFSS), originally designed to provide food stamps to the poorest households, now converted into a cash grant programme of Rs 1000 per household per month. The scheme covers both, rural and urban areas with total subsidy in the scheme amounting to Rs 21.60 billion (at Rs 1.8 billion per month) for 1.8 million families (at 6 persons per family).

1.4.4 Pillar III: Increasing Productivity and Value Addition in Agriculture Agriculture contributes the largest share in the country’s GDP. Agriculture will receive high priority in the PRSP-II as the bulk of the poor are concentrated in rural areas. Self-reliance in commodities, food security through improved productivity of crops as well as development of livestock and dairy are being supported through: (i) development of new technologies; (ii) more productive use of water through precision land leveling and high efficiency irrigation systems; (iii) promoting production and export of high value crops; (iv) accelerating the move towards high-value activities, such as livestock rearing, dairy production, fisheries, and horticulture; (v) creating necessary infrastructure; and (vi) ensuring availability of agricultural credit.

1.4.5 Pillar IV: Integrated Energy Development Programme Ensuring energy security and energy efficiency will be amongst the government’s top priorities in order to tackle the current energy crisis and enable sufficient supply of energy for domestic as well as commercial use. Rapid urbanization in Pakistan has brought tremendous challenges as cities absorb higher populations. Promoting energy efficiency, fuel diversity and interventions that take climate change into consideration transcend the boundaries of energy policy and have a direct impact on the poor. Policies concerning the development and sustenance of transportation, technology, environment, finance, competition, and investment have an important role to play.5 It must be noted, however, that unless the power sector is put on a financially sound footing, sustainable development of the sector will not happen. Pakistan projects annual growth in energy at 7.2 percent by 2010 and 8.8 percent thereafter, whereas, the demand for power is expected to increase by 8.5 percent for the period 2008-10 and 7.7 percent for the period 2010-15.6 Pakistan’s total energy requirements by 2030 will be 361 MTOE (Million Tons Oil Equivalent) compared with 60.4 MTOE in FY 2006/07.7 The links between sustainable development and energy requires even greater efforts for long term energy security. The government approved the Energy Security Plan (ESP) 2005-15 in February 2005. Salient features of ESP include: increasing exploratory efforts to significantly enhance annual production levels of gas and oil; diversifying the energy mix by expanding the share of coal, nuclear and renewable energy (such as wind and solar); and promoting energy conservation and demand management measures.

1.4.6 Pillar V: Making Industry Internationally Competitive The government realizes the need to improve the general business environment to provide a conducive platform for efficient economic activity. Largely as a result of the inward-looking trade policies that Pakistan followed until the 1990s, the country’s share of world trade remained less than 1 percent. The progressive liberalization of world trade and the country’s shift to a more outward-looking trade strategy has created opportunities for Pakistan to become integrated into the global trading system and to fully exploit its comparative advantages. Pakistan will have to upgrade its technological capacity and increase the focus on skills development. Studies by international agencies have found that policy changes since 2000 have improved the business climate in several respects but many business-unfriendly legacies remain. Key policy related areas will include raising investment levels; attraction of Foreign Direct Investment (FDI); and encouraging private sector involvement in all spheres of the economy coupled with improvement in education and health sectors to create a skilled and healthy labour force. This will ultimately lead to improvements in the business environment through increasing competition, firm level productivity and expansion and diversification of exports.

1.4.7 Pillar VI: Human Development for the 21st Century The overarching philosophy informing the government’s growth strategy is that the country’s productive structure must be responsive to the market, which is the most effective means of ensuring that the country is able to meet fierce international competition to which it will increasingly be exposed. Pakistan must seek to employ its entire labour force, both male and female as income generation from employment constitutes the most effective weapon in tackling poverty. Labour market dynamics reflect that with no major change over the years in the overall labour force participation rate, it has grown rapidly because of large cohorts of new entrants joining the market. The gender gap of more than 50 percentage points in the labour force participation rate in Pakistan is much higher than the average gap of 35 percentage points in South Asia. In this context, it will be important to ensure gender equality in accessing social service and labour markets since neglecting provision of equal access to women would forego the potential contribution of half of its human resources. The demographic transition, commonly referred to as the ‘demographic dividend’, results in a smaller population at young dependent ages and relatively more people in the adult age groups, who comprise the productive labour force. The period of the dividend is not infinite but will come to an end as the working-age population grows older ultimately expanding the number of dependants. Moreover, the dividend will not be repeated. However, the event is a unique opportunity, which can, however, easily turn into a ‘demographic liability’ if appropriate policy measures are not taken to fully utilize the expanding labour force. This will depend crucially upon putting in place market-driven policies (including open trade policies and incentives to generate capital formation and higher savings) that will expand the number of meaningful jobs and increase economic efficiency to produce more and also provide the wherewithal to care for the elderly as the population inevitably ages. The government has, therefore, adopted human resource development as a priority area. In this light, the country’s Poverty Reduction Strategy envisages massive investment in strengthening its human resource base to produce a skilled and competent workforce that can respond to the increasing demands of a steadily growing economy. To achieve these outcomes, the National Education Policy emphasizes the need for educational reforms addressing financing for the sector, which despite increasing, falls short of the requirements. Significant reforms include: strengthening the planning and implementation capacity of the government improved utilization of resources by educational institutions; improving governance for greater accountability of education service providers to the community; capacity building of district and local level institutions; and strengthening the role of communities through school committees. The health strategy has been constructed on the key principles of equity, universal access to essential health care, timeliness, results, accountability, strong leadership and strategic coordination of the overall effort. The Strategy envisages addressing special needs of the vulnerable population, especially women and children particularly in the rural areas of Pakistan. Simultaneously, the programme under the umbrella of Population Policy 2002 is striving hard to achieve universal access to safe family planning methods by 2010. The Policy also aims to achieve population stabilization by 2020 with the aim to reduce population growth rate from 1.9 to 1.3 percent per annum.

1.4.8 Pillar VII: Removing Infrastructure Bottlenecks through Public-Private Partnerships The government’s vision for economic growth and poverty reduction sets ambitious targets, which will require massive investment in quality and affordable infrastructure (roads and highways, dams, energy, transport) to sustain high rates of private sector led growth, enhance economic competitiveness and optimize Pakistan’s locational advantage. This will be a primary objective during the PRSP-II period and beyond. The magnitude of the investment is such that this will only partially be funded from the Budget. The large part of financing will be leveraged through Public Private Partnerships. The government, with the assistance of mainly the World Bank and the Asian Development Bank (ADB), launched a major strategic initiative in 2005 to improve the trade and transport logistics chain along the north-south corridor linking Pakistan’s major ports with its main industrial centres and neighbouring countries. With a disbursement of US $6 billion envisaged over the MTDF period (2005-2010), the major focus areas of the ‘National Trade Corridor Initiative Project’ (NTCIP) include: (i) Ports & Shipping (ii) Trade Facilitation (iii) Highways Modernization (iv) Trucking Modernization (v) Railways Restructuring and Modernization (vi) Energy Logistics; and (vii) Aviation and Air Transport Modernization. The Housing sector is recognized as a hugely productive economic activity. This sector contributes to inter-sectoral linkages which specify development in the construction industry. Huge employment potential in construction and housing industry provides a rationale for the government to establish it as one of the key policy sectors in the PRSP-II. Affordable housing for low-income groups also contributes to poverty alleviation, income redistribution and promotes individual productivity and household savings. The strategy for Housing aspires institutional strengthening in support of the development of a commercially based system of housing finance for land and house purchase; upgrading existing towns and cities with better city planning through improvement of infrastructure; creation of employment opportunities; and affordable housing under a phased programme for the low-income population through community participation and squatter-settlement regulation.

1.4.9 Pillar VIII: Capital and Finance for Development Financial institutions allocate resources to the most efficient utilization ensuing rapid accumulation of physical and human capital and technological progress, which in turn leads to higher economic growth - a prerequisite for poverty alleviation. Financial sector development has helped meet growing financing requirements of productive sectors, while generating consumption demand. Key financial sector strategies include: focus on development finance to serve the underserved markets; introduction of new products while increasing the geographical spread of existing ones; further strengthening of the supervisory regime & strengthening risk management; managing volatility and encouraging greater depth and breadth in equity markets; and expansion of the financial sector through SME financing, Islamic banking and microfinance.

1.4.10 Pillar IX: Governance for a Just and Fair System Governance is the manner in which public institutions and officials acquire and exercise authority to shape public policy and provide public goods and services. It is a critical pillar of Pakistan’s Poverty Reduction Strategy, because it is the poor that especially suffer from lack of security, empowerment, and opportunities. In this connection, devolution reforms were designed to move from a system managed by bureaucracy to a system where decisions are made through a political hierarchy. This has put political representatives incharge of service delivery at local levels. The functioning of local governments has been kept under review and studies indicate that three broad issues must be addressed: (a) resources of local governments are poorly aligned with their responsibilities; (b) power regarding personnel matters remains fragmented; and (c) respective roles of the provincial and local governments in development matters must be further clarified. The efficient working of Provincial Finance Commissions, Local Government Commissions, Offices of the Zila Mohtasib8, Zila Mushawarat9 Committees, Accounts Committees, and Monitoring Committees is an important pre-requisite for strengthening the decentralization process. The Federal Government has also constituted a Committee to examine the Local Government Ordinance in view of the performance of this system. According to the Global Competitiveness Report prepared by the World Economic Forum, 2008, consistent military coups, political instability, corruption, volatile law and order situation, and inadequate infrastructure also have an adverse impact on Pakistan’s business environment. The report also identifies crime and theft, tax and foreign currency regulations, inadequately trained workforce and poor public health as having adverse impacts on the global economic standing of Pakistan. The Poverty Reduction Strategy recognizes the importance of strengthening institutions. To this end, police reforms were introduced to protect the rights of citizens especially of the poor and the vulnerable. The promulgation of Police Order, 2002 was a major step towards transforming police into a professionally competent, politically neutral, non-authoritarian, and publicly accountable organization. In cooperation with international agencies, the government commenced a review of the legal system under the “Access to Justice Programme” in 2002. Taking into consideration the useful findings of this extensive reform project, the objective of legal reforms will continue to include cutting down the caseload of judges, lessening the time spent on deciding each case (particularly in the commercial judicial system), and reducing the costs of accessing justice. Institutions that have received greater government attention over the years with a view to reform include the system of taxation; regulations to facilitate fair and competitive business behaviour; fiscal decentralization for transfer of funds; and transfer procedures with a view to making them simpler and transparent. Further improvement will continue in on-going, as well as, new initiatives. Closely allied is further strengthening of the tax administration, public procurement and public financial management reforms. The implementation of the Medium Term Budgetary Framework is an important development which concentrates on government spending, within the available resources in defined priority areas to achieve national goals and to improve the quality of public spending.

1.5 Monitoring and Evaluation (M&E) of PRSP-II

1.5.1 Success in poverty reduction depends on the availability of resources, effective implementation of the strategy, continuous Monitoring & Evaluation (M&E) of its impact and regular feedback to policymakers for appropriate adjustment in policies. The PRSP M&E framework aims to ensure improved capacity to formulate and implement pro-poor policies, efficient and effective spending aimed at poverty reduction and an integrated system, which will enable precise comparison of past achievements with future objectives. The PRSP constitutes a set of input, intermediate and output indicators in seventeen pro-poor sectors formulated through extensive consultations. These indicators have been refined over the years with continued interaction with all stakeholders. To measure the progress of implementation of the PRSP-II an M&E system has been designed, the purpose of which is to put in place a sustainable system to deliver timely and reliable data against a set of well-defined indicators, which feeds into the policy process and engages national and sub-national levels.

1.5.2 A new project ‘Strengthening Poverty Reduction Strategy Monitoring’, a joint initiative of the Ministry of Finance and UNDP, with a total budget of US $6.487 million covering the period 2008-12 is the right step in this direction. The PRS Monitoring Project has revised the M&E framework identified during the PRSP-I term (2003-06). Being the most current feature of the consultative process, six Technical Working Groups (TWGs) were formed to identify monitorable indicators so as to regularly keep track of the progress of PRSP initiatives well beyond the PRSP-II timeframe. It includes focus group discussions on six key areas of PRSP-II, including health, education, labour/employment, environment/water & sanitation, gender and social safety programmes from August, 2008 onwards to enhance monitorable indicators from the relevant policy-makers.

1.6 Medium Term Expenditure Framework (MTEF) of PRSP-II

1.6.1 Given the significant resources required for its funding, the government will prioritize the Poverty Reduction Strategy through the Medium Term Expenditure Framework (MTEF), which provides the ‘linking framework’ that allows projected expenditures to be driven by policy priorities reflected in the pillars laid out above and disciplined by budget realities. Still a rather recent phenomenon, conceptually the MTEF can be an ideal tool for translating PRSPs into public expenditure programmes within a coherent multi-year macroeconomic and fiscal framework. This expenditure framework will adhere to the Fiscal Responsibility and Debt Limitation Act (FRDLA) 2005 and will list projections in the shape of seventeen medium term budgetary pro-poor expenditures, initiated in PRSP-I (2003) and refined for PRSP-II. These cover: Market access and community services: (i) roads, highways and buildings; (ii) water supply and sanitation; Human development: (iii) education; (iv) health; (v) population planning; (vi) natural calamities, Rural development: (vii) agriculture; (viii) land reclamation; (ix) rural development; (x) rural electrification (People’s Works Programme-II); Safety nets: (xi) subsidies; (xii) social security and welfare including Benazir Income Support Programme; (xiii) food support programme including Pakistan Bait-ul-Mal and Punjab Food Support Scheme; (xiv) Peoples’ Works Programme; (xv) low cost housing; Governance: (xvi) administration of justice; and (xvii) law and order. Non-budgetary PRSP expenditures include: Zakat, Pakistan Bait-ul-Mal, Employees’ Old Age Benefit Initiative (EOBI) and micro-credit disbursement. During FY 2007/08, budgetary expenditure on pro-poor sectors amounted to Rs 573 billion, representing 5.46 percent of the GDP.

1.7 Costing

1.7.1 The costing framework of PRSP-II has largely been based on the Millennium Development Goals (MDGs) Costing Report, resulting from the findings of a study jointly undertaken by Ministry of Finance and UNDP (2007). The MDG costing exercise in Pakistan went through an intensive process of training on costing techniques, which was provided during December 2005. Three social sectors, education, health and water and sanitation were selected to project the cost of achieving the proposed goals. The United Nations MDGs, agreed at the Millennium Summit held in New York in September 2000, are linked to Pakistan’s MTEF, while the key focus of PRSP-II is also intertwined with the achievement of MDGs.

1.8 Pakistan is a rich country in terms of both natural and human resources. However, it is unfortunate that the country continues to find itself as a borderline case in terms of human development as well as economic growth indicators: Over one half of the population is unemployed and a little less than half of it remains illiterate. Clearly, Pakistan has not fully exploited its potential. In the light of this scenario, the PRSP-II will pick up from where PRSP-I left to ensure that clear cut priorities and pro-poor sectoral programmes are in place that will provide the government an appropriate strategic framework to effectively reduce poverty. The PRSP-II attempts to bring related challenges and opportunities together within an integrated and holistic strategy to achieve the vision of a prosperous and poverty free Pakistan.

Chapter 2 - Outcomes of the PRSP-I

2.1 The Poverty Reduction Strategy Paper-I provided a broad policy framework outlining the road map for accelerating economic growth and poverty reduction in Pakistan. The strategy was woven around four pillars, including (i) accelerating economic growth while maintaining macroeconomic stability; (ii) improving governance; (iii) investing in human capital; and (iv) targeting the poor and vulnerable. The Strategy launched a multifaceted attack on poverty that combined macroeconomic stabilization, reduction in debt burden, fundamental structural reforms and improved governance.

2.2 An exhaustive review of the outcomes of the PRSP-I specifically in sectors intrinsically linked with poverty reduction is presented below in order to highlight the economic and social sector policies behind improved outcomes on the one hand and to build the PRSP-II around the lessons learnt from implementation of PRSP-I, on the other.

2.3 The chapter is divided into two parts where first portion presents evidence on improvements in the economic environment of the country during PRSP-I period and the progress made in achieving social sector outcomes. The second part contains lessons distilled from consultations with various stakeholders including line ministries, provincial departments, international development partners, civil society, and incorporates an assessment of the perceptions of common people collected during a series of workshops in the community about issues of social sector service delivery and economic well-being.

Section - I

2.4 Macroeconomic Outcomes

2.4.1 The broad macroeconomic framework formulated under PRSP-I put Pakistan on a high growth trajectory. A comprehensive reforms agenda revamped considerable parts of the financial sector; capital market, reform of the tax administration; fiscal transparency; reforms in the privatization programme; governance reforms particularly with respect to devolution and capacity building; and agricultural reforms mainly with regard to agriculture pricing, movement of commodities and introducing private sector in wheat operations. Most importantly, the Fiscal Responsibility and Debt Limitation Act (FRDLA) 2005 passed unanimously by both houses of the Parliament increased the transparency of fiscal operations and injected firmer discipline into the government’s borrowing and debt strategies.

2.4.2 These reforms led to improved economic indicators, moving real GDP growth from 3.1 percent in FY 2001/02 to 9.0 percent in FY 2004/05 surpassing PRSP targets for the said years and maintaining a striking average growth rate of 7.0 percent over the five years period (2004-07). Table 2.1 shows the performance of key economic indicators against the figures as projected in PRSP-I. The performance remained on track in almost all sectors and exceeded targets for growth in GDP in the Manufacturing and Services sectors; and investment, etc till FY 2006/07. This growth momentum, however, witnessed disturbances in FY 2007/08 due to several reasons including a judicial crisis, productivity shocks, in addition to external factors such as the War on Terror and rising oil, food and other commodity prices. However, the GDP still registered a robust growth of 5.8 percent in FY 2007/08 as against 6.8 percent in the previous year. A point of concern though was the rate of inflation which has remained higher than projected since FY 2004/05.

Table 2.1:

Performance of key economic indicators

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Source: Economic Survey of Pakistan, FY 2007/08, Finance Division, Government of Pakistan.

2.4.3 An overall sustained macroeconomic environment led to improvements in the living standards of the people in Pakistan during the PRSP-I period which shows a steady progress in outcome indicators for sectors like education, health, access to drinking water, housing and labour markets. As a result, the crucial figure of the Poverty Headcount in Pakistan fell from 34.46 percent of the population in FY 2000/01 to 23.9 percent in FY 2004/05. This decline was in marked contrast to the rapid increase during the 1990s until the turn of the century. Table 2.1 elaborates this sharp fall.

2.4.4 The decline occurred in both rural and urban areas of the country. Rural poverty dropped faster than urban (although it still remained proportionately higher) thus narrowing the difference between the two. The Planning Commission’s computation of the poverty line takes into account both food and non-food expenditures, such as health, education, housing, transport, and recreation, amongst others. The results of the Pakistan Social and Living Standards Measurement (PSLM) Survey10 FY 2004/05 show that between FY 2001/02 and FY 2004/05, household and per capita expenditures increased in real terms by 15 and 19 percent respectively. The increase in consumption expenditure by rich households was relatively higher than among the poor but the poorest households (lowest 40 percent) also increased their consumption expenditures significantly.

Table 2.2:

Decline in the poverty headcount FY 2000/01–2004/05


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Source: Planning Commission, Government of Pakistan.

2.5 Social Sector Outcomes

2.5.1 The PSLM Survey enables an in-depth assessment of the performance of the social sectors for the PRSP-I since its inception. Sector wise analysis of outcomes and intermediate variables is presented below. The analysis is limited to the sectors where data for indicators is available without many gaps.

2.5.2 (1) Education Literacy: Between FY 2001/02 and FY 2006/07, overall literacy increased from 45 to 55 percent while missing the target of 59.5 percent set in PRSP-I for the same year. As shown in Figure 2.1, Male literacy increased from 65 percent in FY 2004/05 to 67 percent in FY 2006/07, while the corresponding marginal increase in female literacy was from 40 to 42 percent.

Figure 2.1:
Figure 2.1:

Literacy rate

(FY 2004/05 – FY 2006/07)


Citation: IMF Staff Country Reports 2010, 183; 10.5089/9781455205226.002.A001

Source: Pakistan Social and Living Standards Measurement (PSLM) Survey, various editions, Federal Bureau of Statistics, Government of Pakistan. Female literacy rates vary widely between provinces, ranging from a low of 17 percent in Balochistan to 43 percent in Punjab. Moreover, female literacy rate is only improving steadily in Punjab while witnessing fluctuations in the rest of the country as shown in Table 2.3. This encouraging performance by Punjab can be conveniently attributed to enhanced focus on Girl Education and to overall efforts being made by the provincial government under a comprehensive Education Sector Reform Programme.

Table 2.3:

Adult literacy rate

(aged 15 years and above)


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Source: PSLM Survey, various editions, Federal Bureau of Statistics, Government of Pakistan. Primary, Middle and Secondary Education: The two commonly used indicators for measuring changes in primary and middle schooling are the Gross Enrolment Rate (GER)11 and Net Enrolment Rate (NER).12 The primary-level GER for children 5-9 years old, excluding katchi13 class, according to the PIHS, was 72 percent in FY 2001/02. Sound progress has been made so far in improving both GER and NER and is evident when the comparison is made between 2000-2001 and FY 2006/07 based on PSLM. The PSLM results are encouraging in many aspects. The overall increase in primary school GER is impressive in PRSP period, from 72 percent in FY 2001/02 to 91 percent in FY 2006/07. The second most important indicator for measuring improvements at primary level is NER. The PRSP target was 58 percent for FY 2005/06. A long term target of 100 percent NER by 2015 has been set by the Pakistan MDG Report 2004. Pakistan seems to have made good progress in order to achieve the MDG target as the NER at the primary level (age 5-9) has increased from 42 percent in FY 2001/02 to 56 in FY 2006/07. The PRSP projected target for the middle-level GER of 53 percent in FY 2005/06 was missed by a small margin. The middle-level GER increased from 46 percent in FY 2004/05 to 51 percent in FY 2006/07. The increase for males was 57 percent compared to females at 44 percent. The middle-level NER has remained constant at 18 percent since FY 2004/05. At the matriculation level, the GER was 48 percent in FY 2006/07 registering an increase of 4 percent from FY 2005/06. Provincial disaggregated analysis of GER and NER for Primary and Middle schooling is given in Annex I. Gender Disparities in Education: Gender disparity in education is a major challenge. The disparity increased to 28 percent by FY 1998/99, as literacy among males grew much faster than among females. Since then, however, the gap has begun to shrink, albeit very slowly. The only available data on gender disparity14 is for FY 2004/05 based on PSLM survey. There has also been good progress in closing the gender gap in urban enrolments at primary, middle and secondary levels. The data regarding gender disparities is only available from PSLM FY 2004/05 and shows an overall decline in the gender gap in the GER at the primary level, from 22 percent in FY 2001/02 to 17 percent in FY 2004/05. This decline resulted from the relatively greater increase in the female GER compared to the male GER between FY 2001/02 and FY 2004/05. The gender gap15 in NER at the primary level remained unchanged at the country level between FY 2001/02 and FY 2004/05. The gender gap in GER at the primary level declined during the same period (as discussed above) implying thereby that the number of overage children attending primary school is quite substantial. The gender gap in the NER at the primary level is low in urban areas. However, it remained unchanged between FY 2001/02 and FY 2004/05. Provincial disaggregated analysis of gender gap is given in Annex I. Increasing Role of the Private Sector in Primary Education: The role of the private sector in primary education has increased overtime. Of the total primary level GER of 87 percent in FY 2005/06, the government school GER was 57 percent and private school GER 30 percent. The government school GER increased by 15 percent between FY 2001/02 and FY 2005/06 period while the private school GER increased by 33 percent during this period. It suggested, on the one hand, that new enrolment has taken place in both public and private schools. On the other hand, the relatively higher increase in private school GER suggested some shifting of children from public to private schools. However the PSLM shows that the coverage of the public school system increased to 69 percent in FY 2006/07 compared to 65 percent in FY 2005/06 but witnessed an overall decline from 72 percent in FY 2004/05 to 69 percent in FY 2006/07. In urban areas almost half of the total primary enrolment was currently in private schools. However, in rural areas, private school enrolment, as a share of total primary enrolment, increased from 18 percent in FY 2004/05 to 20 percent in FY 2006/07, suggesting that in rural area, where the majority of the poor live, public schools remain the main source for primary education and thus need special focus regarding improving access and quality. This seems true for all provinces, although in rural Punjab 24 percent of the enrolled children were in private schools.

Table 2.4:

Primary enrolment in government schools as percentage of total primary enrolment

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Source: Pakistan Social and Living Standards Measurment (PSLM) Survey, various editions, Federal Bureau of Statistics, Government of Pakistan. Intermediate Indicators for Education: Education intermediate indicators include functional public schools, basic facilities in public schools, posts filled against sanctioned strength in public schools and percentage of trained teachers in these schools. Regarding the number of functional public schools, their total number declined from 146,316 in FY 2001/02 to 144,558 in FY 2006/07 (Table 2.5). At provincial levels, it is encouraging to see an overall increase of 4 percent in the number of functional schools during the period in Balochistan and similar trends in NWFP as these are the provinces with comparatively lower figures of GER and NER. Data regarding provision of basic facilities and teachers posted against the sanctioned strength is given in Annex I.

Table 2.5:

Number of functional public schools FY 2006-07


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Source: Pakistan Social and Living Standards Measurement (PSLM) Survey, various editions, Federal Bureau of Statistics, Government of Pakistan.

2.5.3 (2) Health The PSLM provides useful information regarding some of ealth sector final outcomes and intermediate indicators on self-reported sickness, use of health services, child immunization coverage, use of Oral Rehydration Salts (ORS) during a diarrhoea episode, pre- and post-natal care and drinking water supply and sanitation. Some of these indicators are discussed in the following sections. Immunization reduces child malnutrition as well as mortality. According to the World Health Organization (WHO) guidelines, a child should receive a BCG16 vaccination to protect against tuberculosis, three doses of DPT17 to protect against diphtheria and tetanus, three doses of polio vaccine, and a measles vaccination. The increase (in full immunization) was particularly impressive in rural areas, from 46 percent in FY 2001/02 to 73 percent in FY 2006/07. Under the ‘record’ method, full immunization rate was low at 50 percent in 2006-07 compared to 76 percent under the ‘recall’ method. However, there had been an improvement in record-based immunization rate, from only 27 percent in FY 2001/02 to 50 percent in FY 2006/07.

Figure 2.2:
Figure 2.2:

Percent of children aged 12-23 months immunized pre and post natal care

Citation: IMF Staff Country Reports 2010, 183; 10.5089/9781455205226.002.A001

Source: Pakistan Social and Living Standards Measurement (PSLM) Survey, various editions, Federal Bureau of Statistics, Government of Pakistan. Quality pre natal care can contribute to the prevention of maternal mortality by detecting and managing potential complications and risk factors, including pre-eclampsia, anemia and sexually transmitted diseases. Pre natal care also provides opportunities for women to learn the danger signs of pregnancy and delivery, to be immunized against tetanus, to learn about infant care, and be treated for existing conditions such as malaria and anemia. High maternal mortality in Pakistan can be reduced through quality prenatal care. The PSLM shows that the proportion of married women who had given birth during the last three years and had attended at least one pre-natal consultation increased from 35 percent in FY 2001/02 to 53 percent in FY 2006/07 (Table 2.6). Punjab had the highest attendance rate and Balochistan the lowest.

Table 2.6:

Pregnant women visiting health facility for pre and post natal consultation


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Source: PSLM FY 2006/07, Government of Pakistan. Compared to pre-natal, the post-natal consultation rate was low i.e. 24 percent in FY 2005/06. However, it improved considerably during the PRSP period, rising from only 9 percent in FY 2001/02 to 24 percent in FY 2006/07 with consultation rates higher in urban than rural areas. Utilization of Health Services: Utilization of health services include information on the use of different types of health services during recent self-reported illnesses, diarrhea episodes among children, and pre and post natal consultations by married women who had given birth during the last three years. The largest proportion (69 percent overall, 74 percent urban areas and 66 percent rural areas) of sick people consulted a private doctor/dispensary/hospital. Around one-fifth of the sick population consulted a public dispensary/hospital in urban as well as rural areas. A very small proportion of the sick population consulted other health providers, such as Rural Health Centre/Basic Health Units, Hakeem18/herbalist and homeopath. However, in the NWFP a relatively larger proportion of sick people consulted a chemist/pharmacy according to the CWIQ-PSLM19.

Table 2.7:

Percentage distribution of health consultations in past two weeks by type of health provider/consulted during FY 2006/07

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Source: PSLM FY 2006/07, FBS, GoP. In case of diarrhea among children, it is encouraging to see a considerable increase in the use of ORS, an effective way of preventing dehydration. The use of ORS increased to 76 percent in FY 2006/07 as compared to 71 percent in FY 2005/06. The increase in use of ORS was greater in rural areas (75 percent in FY 2006/07 as compared to 68 percent in FY 2005/06) than in urban areas (79 percent in the same time period). No gender differential was found. More than two-thirds of children suffering from diarrhea consulted private doctors/hospitals. The use of public dispensaries/hospitals for diarrhea treatment declined between FY 2001/02 and FY 2006/07 to 13 from 59 percent (Table 2.8) and a persistent increase in use of Private dispensaries and hospitals was witnessed during the respective time span. Only a small proportion of respondents reported the use of RHC/BHU, LHW, LHV/Nurse, chemist or hakeem/homeopath/herbalist for diarrhea treatment. This data provides basis for concrete policy actions by the government to increase the service delivery in rural areas and more specifically in geographically poorer areas as prices are higher in private sector and leads to increase in incidence of poverty.

Table 2.8:

Type of practitioner consulted for diarrhea treatment

(percent of cases)

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Source: PSLM FY 2006/07, Government of Pakistan. The proportion of married women who attended at least one pre and post-natal consultation has been reported earlier. The three most commonly consulted sources for pre-natal care were private hospital/clinic, government hospital/clinic and home-trained birth attendants (TBA) (Table 2.9). However, there seems to be either a data reporting problem or a serious concern regarding health services delivery in the public sector. The PIHS data for FY 1998/99 and FY 2001/02 show that around 40 percent of women attended some government facilities such as hospitals, clinic, RHC or BHU for pre-natal consultation. The CWIQ-PSLM shows a decline of 25 percent in FY 2006/07. It is hard to explain this reduction in pre-natal consultation from public hospitals, clinics, and RHCs. As in the case of pre-natal care, the three most commonly cited sources of post-natal care in both rural and urban areas were private hospitals/clinic, government hospitals/clinics, and home TBA.

Table 2.9:

Health facilities used for pre natal consultation


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Source: PSLM FY 2006/07, Government of Pakistan.

2.5.4 (3) Drinking Water and Sanitation Sources of Drinking Water and Sanitation: Access to safe drinking water, an indicator of the PRSP and MDGs, is at the top of the government’s policy agenda. The PRSP-I clean drinking water target was not achieved. The PRSP definition of the sources of safe drinking water includes tap water, hand pumps, and motor pumps inside or outside the house. Hand pumps20 and motor pumps21 together provided 56 percent of households with drinking water in FY 2005/06, which decreased to 51 percent in FY 2006/07, whereas the percentage of households using tap water22 has shown a slight increase. However, this change appears to be mainly a change in convenience since there seems to be a substitution from hand pumps and motor pumps. Moreover, the percentage of households depending on lower water sources i.e. dug from wells, etc. is either increased or slightly decreased. Tap water has increased from 34 percent in FY 2005/06 to 36 percent in FY 2006/07. Sindh has highest value of this indicator at 47 percent followed by NWFP at 44 percent, Balochistan at 37 percent, and Punjab at 29 percent in FY 2006/07. In FY 2000/01, 44 percent of households had access to hand pumps in Pakistan, which declined to 30 percent in FY 2006/07, probably due to tap water availability to households. In FY 2000/01, 17 percent of households had access to motor pumps, which increased to 21 percent in FY 2006/07 (Table 2.10).

Table 2.10:

Main sources of drinking water in Pakistan


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Source: PSLM 2006/07, Pakistan Millennium Development Goals Report 2004 and Accelerating Economic Growth and Reducing Poverty: The Road Ahead, Poverty Reduction Strategy Paper, 2003.Note: Percentage of population with access to piped water, MDG baseline year FY 1990/91: 53 percentPercentage of population with access to clean drinking water, PRSP baseline year FY 2001/02; urban: 95 percent, rural: 80 percent, overall: 86 percentPercentage of population with access to clean drinking water, PRSP target FY 2005/06, urban: 97 percent, rural: 84 percent and overall: 90 percentPercentage of population with access to piped water, MDG target 2015; 93 percent*Sum of tap water, hand pump and motor pump

Totals may not add to 100 because of rounding The overall proportion of households with a flush toilet23 facility increased by 14 percentage points to 58 percent in FY 2006/07 compared to FY 2001/02. The use of flush toilets was 92 percent for the urban households, Punjab with 93 percent – the highest; and Balochistan with 78 percent – the lowest. About 15 percent of households in FY 2006/07 had non-flush toilet and 27 percent do not have any toilet. This varies greatly between urban and rural areas i.e. 4 percent of urban households have no toilet compared to 39 percent of rural households. Proportion of households with a flush toilet in FY 2006/07 in Punjab, Sindh, NWFP and Balochistan stood at 64, 55, 52 and 25 percent, respectively. Rural Punjab had the highest proportion of households reporting no toilet at all i.e. at 44 percent while rural Sindh had the lowest, at 27 percent.

2.5.5 (4) Housing Adequate housing is a key determinant of human welfare. According to the PSLM FY 2004/05 nearly 87 percent households in Pakistan owned a dwelling in the survey year. There were 86 percent households in Pakistan who own a dwelling in FY 2006/07 (87 percent in FY 2005/06), while 7 percent of households had rented dwelling units and about 6.12 percent had rented free houses but a small number of 0.96 percent households were on subsidized housing units. Congestion in housing is another important indicator of poverty. In Pakistan, the PSLM FY 2004/05 indicates that about 24 percent of households had one room while 69 percent had 2-4 rooms. In rural areas, 27 percent of households lived in one room, compared with 20 percent in urban areas. According to the PSLM survey-CWIQ, there were 24.33 percent dwelling units with one room and 69 percent with 2-4 rooms during FY 2006/07. The Survey indicates that 6.62 percent of households had five and more living rooms in their dwelling units. In rural areas the proportion of dwellings with one room (27 percent) were greater than in urban areas (19.5 percent). Electricity has become a necessity of life. In Pakistan in FY 2006/07 there were 86.6 percent households who used electricity for lighting. At the provincial level, NWFP province had the highest proportion of households (91 percent) and Balochistan has the lowest (65 percent) which use electricity for lighting. In urban areas 97 while, in rural areas 81 percent households used electricity for lighting while the remaining households used gas/oil or candle for lighting.

Table 2.11:

Distribution of household by type of housing and electricity use


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Source: PSLM FY 2006/07, Government of Pakistan.

2.5.6 (5) Employment Employed Labour Force: Employment is central to reducing poverty. For monitoring the labour market, the PRSP tracks two indicators: the ‘total employed labour force’ and the ‘unemployment rate.’ Trends in these are discussed as follows:

  • ▪ The LFS computes the labour force by multiplying crude activity rate by total population. The former increased from 29.6 percent in FY 2001/02 to 30.4 percent in FY 2003/04. During this period the total population of the country increased consequently increasing the total labour force from 43 million in FY 2001/02 to 50.30 million in FY 2006/07. Open unemployment in Pakistan decreased from 8 percent in FY 2001/02 to 7.48 percent in FY 2006/07 while this corresponds to the period when overall poverty decreased.

  • ▪ The number of employed persons also increased—from 38.88 million in FY 2001/02 to 47.65 million in FY 2006/07 surpassing the PRSP-I target of 42.03 million in FY 2005/06. This increase affected gender, provinces, in both rural and urban areas. Since the economy was able to create more jobs than the increase in the labour force, the volume of unemployed fell from 3.51 million in FY 2001/02 to 2.65 million during FY 2006/07. Unemployment: Overall unemployment decreased from 8.3 percent in FY 2001/02 to 5.27 percent in FY 2006/07, mainly because of a steep decline in women unemployment from 13 to 9 percent than men i.e. from 6.6 to 5.4 percent evenly across the areas. Age specific rates for teens to early fifties experienced decline again more for women than men. The rates for later fifties and beyond scaled up, however, due to men exclusively. Among males, this decline was nominal—i.e. from 6.7 to 6.6 percent (Figure 2.3)

Figure 2.3:
Figure 2.3:

Percentage of age wise unemployment rate

Citation: IMF Staff Country Reports 2010, 183; 10.5089/9781455205226.002.A001 Changes in the unemployment rates varied between rural and urban areas. The female unemployment rate declined in rural (from 10.9 in FY 2003/04 to 7.7 in FY 2005/06) as well as urban areas (from 19.8 in FY 2003/04 to 15.8 in FY 2005/06). The rate for males fell modestly in rural areas, but in urban areas it increased from 8.4 percent in FY 2003/04 to 6.9 percent in FY 2005/06. This decline could be due to two reasons: females were able to get job opportunities or they withdrew from the labour force mainly because of discouragement. But female participation in the labour force increased considerably between FY 2001/02 to FY 2003/04 in rural areas, and there was a modest decline of 0.6 percentage point in urban areas. It thus appears that female unemployment fell primarily because of an expansion in job opportunities. It has been suggested that microfinance facilities, focusing on women in rural areas, may be a major factor helping to reduce female unemployment rate. Employment in the Informal Sector: In consonance with often-held contention, informal sector accounts for 73 percent of the employment in main jobs outside agriculture sector. In the same vein, percentage of employed (75 percent) in rural areas was higher than that of urban areas (71 percent). As expected, formal sector activities were more concentrated in urban areas (29 percent) as compared to rural areas (25 percent). Male workers were more numerous relatively in urban while females in rural. The profiles of comparative surveys are analogous which indicates structural rigidities. Informal sector’s employment surged from 70 percent in FY 2003/04 to 73 percent in FY 2005/06, across gender and areas.

2.6 Pro-poor Expenditures

2.6.1 Assessing qualitative as well as quantitative aspects of PRSP expenditures is central to the PRSP process; and the government has attached critical importance towards their regular monitoring, analysis and transparency. Since the initiation of I-PRSP in 2001, pro-poor expenditures on 17 sectors have been reported regularly on a quarterly and annual basis. This section gives an overview of the expenditures incurred since FY 2001/02. Table 2.12 presents data on sector-wise PRSP total expenditures in absolute numbers from FY 2001/02 to FY 2007/08.

Table: 2.12

PRSP expenditures

(FY 2002-08)

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Source: Ministry of Finance, Government of Pakistan, 2008.Note: ® Refers to revised figures.

Expenditure for FY 2001/07 relates to Tawana Pakistan Programme

Based on actual expenditure for FY 2006/08.

Consists of Micro-credit, Zakat, EOBI and Pakistan Bait-ul-Mal (excludes Food Support Programme, which is already reported in budgetary expenditure).

2.6.2 Pro-poor budgetary and non-budgetary expenditures gradually increased from Rs 174,949 million in FY 2001/02 to Rs 600,605 million in FY 2007/08, while pro-poor expenditure as a share of GDP increased sharply from 3.8 percent in FY 2001/02 to 5.46 percent in FY 2007/08 as shown in table 2.13.

Table: 2.13

PRSP current & development expenditures

(FY 2002/08)

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Source: Civil Accounts provided by Accountant General’s Office.

Based on actual expenditure

Note 1: GDP (mp) for FY 2006/07 and FY 2007/08 in Rs. Million amounts to 8,723,215 and 10,478,194 respectively.Source for GDP: Economic Adviser’s Wing, Finance Division, 2008

Section - II

2.8 Participatory Process in PRSP Formulation

2.9 The Poverty Reduction Strategy Paper (PRSP) approach is a promising way to design poverty reduction strategies that command broader discussions within a country with numerous governmental and non-governmental organizations, and external development partners through a comprehensive consultative process. The PRSP process recognizes the participation of the poor as a critical element in the formulation of a Poverty Reduction Strategy.

2.10 During the formulation process of the second generation Poverty Reduction Strategy, a comprehensive and widely spread round of consultations at federal and provincial levels, and with communities all over Pakistan was held. The objective of the participatory process was to engage parliamentarians, line ministries and departments, development partners, civil society, and above all the poor communities in policy formulation and to build ownership for the reform programme. The aim of the government was to build Poverty Reduction Strategy Paper (PRSP)-II on the outcomes of PRSP-I and understand expectations of the stakeholders. For this purpose, the consultative process was initiated at two levels: consultations at the district, provincial and national levels; and consultations with the communities all over Pakistan, the lessons drawn from which are compiled in subsequent paras as ‘Voices of the Poor.’

2.11 A comprehensive process of consultations was initiated in 2005 including research studies, seminars, poverty and social impact analysis (PSIA) and workshops to discuss various elements of the evolving PRSP issues like poverty measurement, education, health and population sector intermediate indicators, gender mainstreaming, environment, employment and pro-poor growth policies. In addition, the World Bank and other key development partners including Asian Development Bank, Department for International Development (DFID), INGAD, UNDP, UNFPA, ILO, UNICEF, WHO, JICA, CIDA, USAID, EU, GTZ, NORAD, etc remained actively involved in the PRSP-II process and contributed towards policy design, implementation, and evaluation. DFID helped in carrying out a PSIA in Microfinance sector of Pakistan. The study examined the impact of policy and programmes in the PRSP-I time period and assessed the impact of proposed policy and programmes ex-ante on poverty. As part of the assessment, a Financial Services Survey was also conducted which, investigated the formal and informal financial instruments used by poor households in general, and the impact of microfinance services on beneficiary households in particular. The total number of participants at all consultative workshops are listed in Annex II.

2.12 Federal Level workshops

2.12.1 A series of workshops have been held at national and provincial levels for consultations on the PRSP II which are listed below:

  • ▪ Consultation with Academicians, Researchers and Civil Society (December 12th, 2005)

  • ▪ Consultation on Globalization, Unemployment, Gender, Inequality in income distribution and Environment (May 5th - 6th, 2006)

  • ▪ Consultation on Health, Education and Governance (July 24th – 26th, 2006)

  • ▪ Consultation on MDG Costing at the national level (September 19th, 2006)

  • ▪ Launch of PRSP-II Draft Summary at the Pakistan Development Forum (April 25th – 27th, 2007)

  • ▪ National Workshop on ‘Competitiveness’, ‘Infrastructure’ and ‘Financial Sector Development’ (July 17th, 2007)

  • ▪ Meeting of the Technical Working Group on Health (August 12th, 2008)

  • ▪ Meeting of the Technical Working Group on Education (August 12th, 2008)

  • ▪ Meeting of the Technical Working Group on Labour (August 29th, 2008)

  • ▪ Meeting of the Technical Working Group on Environment/ Clean Drinking Water and Sanitation (September 29th, 2008)

  • ▪ Meeting of the Technical Working Group on Gender (October 10th, 2008)

  • ▪ Meeting of the Technical Working Group on Social Safety Nets (October 15th, 2008)

2.13 Provincial Workshops

2.13.1 Following provincial workshops were arranged in the four provinces with the aim to identify vulnerable areas where incidence of poverty is the highest and to conduct urban and rural poverty comparisons:

  • ▪ Balochistan (July 29th, 2006 – Quetta)

  • ▪ Sindh (31st July, 2006 - Karachi)

  • ▪ Punjab (7th August, 2006 - Lahore)

  • ▪ NWFP (9th August, 2006 - Peshawar)

2.14 Research Studies

2.14.1 Several exclusive studies have been carried out by consultants, covering some of the key areas of the PRSP-II. Keeping in view the crucial linkages between employment generation and poverty reduction, a study on ‘Employment Generation Strategy for PRSP II’ was carried out. The outcomes of this study strongly emphasized the importance of employment as a crucial factor in attaining economic growth in Pakistan and its role in eradicating poverty. The study also provided a detailed analysis of the tremendous scope of various service sectors (trade, transport, non-farming sectors/meat-processing, floriculture, dairy, fisheries, fruits, etc. housing & construction) to employ a large number of people.

2.14.2 Another study on ‘Globalization and its impact on Poverty in Pakistan’ suggests key strategic steps necessary for the country to maximize its growth and poverty reduction, in order to fully benefit from globalization.

2.14.3 The study on ‘Income Inequalities in Pakistan and a Strategy to Reduce Income Inequalities’ undertook an in-depth review of income inequalities in the country. It suggested various measures for a more equitable income distribution for incorporation in the poverty reduction strategy.

2.14.4 A study on ‘Reducing the Gender Gap/Engendering PRSP II’ was also conducted which highlighted the existence of gender disparities in Pakistan and lists certain key areas identified by PRSP for effective integration of women in the economy. ‘Environmental Sustainability’ was another study that developed the crucial linkages between environmental sustainability and poverty reduction.

2.14.5 Input from Ministries

2.15.1 To ensure that every government department relevant to the PRSP is fully engaged in the formulation and implementation of the strategy to reduce poverty, all Line Ministries and departments provided their strategic road maps with regard to related policy parametres envisaged for the next three years. Exclusive brainstorming sessions to discuss the medium term policies were held with Ministries of Education, Health, Food Agriculture & Livestock, Commerce, Population Welfare, Petroleum & Natural Resources, etc.

2.16 Technical Working Groups

2.16.1 An effective Monitoring and Evaluation (M&E) framework is the key to the successful implementation of any strategy. Keeping in view the importance of this critical issue Technical Working Groups (TWGs) on Health, Education and Labour/Employment, Gender, Environment, Water & Sanitation and Social Safety Nets have been constituted under Strengthening Poverty Reduction Monitoring Project. The TWGs consist of sector specialists from diverse backgrounds and includes officials from concerned ministries/departments, experts from international development organizations, civil society and academia. As mentioned above, six meetings of TWGs were held which critically analyzed the monitoring indicators conceived during PRSP-I and developed new indicators for the PRSP-II M&E framework. The TWGs also provided input for finalizing the data sources and baseline for PRSP output and outcome indicators. The suggestions synthesized from these technical meetings have been made part of PRSP-II’s M&E framework.

2.18 Final Round of Consultations for Finalization of Draft PRSP-II

2.18.1 Embodied in the PRSP framework is the expectation that participation by national stakeholders and international development partners in developing and implementing the poverty reduction strategies will create broad-based ownership. Translating these expectations into operational recommendations the PRSP framework advocates participation of the poor in poverty analysis; prioritization of public actions to be addressed in the Strategy; and monitoring the government’s delivery of the commitments made. Recognizing that the participation of various stakeholders in the PRSP process needs to be further bolstered for the strategy to become more effective, a final round of consultations to finalize draft Poverty Reduction Strategy Paper (PRSP)-II was held at three levels in November – December, 2008 including: (a) Consultation with national stakeholders; (b) Consultations with international development partners; and (c) Consultation with Parliamentarians.

2.18.2 National Workshop for Sharing Draft PRSP-II: To further deepen the sense of local ownership of the PRSP process, and to institutionalize participation of national stakeholders including government ministries/departments, academia, civil society, youth and beneficiaries at community level, a workshop for sharing the Draft PRSP-II was held on November 14th, 2008 at the National Library Auditorium, Islamabad. The workshop was conducted with the aim that it is vital for the public officials and representatives of civil society, as well as the public in general, to have a greater voice in making and implementing policies like the PRSP, so that the fruits of prosperity are distributed more equitably. The participants were divided into the following three groups based on various pillars of the draft poverty reduction strategy and their sectoral linkages:

Breakout groups during consultative workshops

article image The participants deliberated on the Draft PRSP-II and analyzed the document from different perspectives. The officials from line ministries, provincial departments, civil society, and academia examined the text in view of their previously contributed input regarding sectoral policies, proposed interventions and targets given for the PRSP-II period. They also verified the data and sources given in the document for effective monitoring and evaluation of the PRSP’s output and outcome indicators. The participants also scrutinized the document with a view to identify missing interventions, errors and omissions. Their recommendations and submissions were carefully recorded and at the end of the day were presented in the plenary session of the workshop.

2.18.3 Consultative Workshop to Share Poverty Reduction Strategy Paper (PRSP-II) with the International Development Partners: The global consensus on the importance of the Millennium Development Goals (MDGs) brings the discussion of poverty reduction strategies to the centre stage of the international development efforts. The development partners play not only a key role in sustained efforts for poverty reduction as outlined in their specific country assistance plans and strategies but also provide guidance in the light of their international experiences in poverty reduction. It is imperative that development strategies and programmes of development partners must reflect the wishes and aspirations of the people to build consensus and ownership. Foregoing in view, a consultative workshop to share the Draft PRSP-II with international development partners was organized on November 19th, 2008 at the Finance Division, Islamabad. This full-day workshop was attended by a large number of representatives from international development community including the World Bank, IMF, ADB, EU, USAID, DFID, UNDP, UNFPA, UNHCR, UNESCO, UNICEF, UNIDO, UN World Food Programme, WHO, JICA, CIDA, SDC, and FAO, etc. Representatives from line ministries and departments were also present. The participants deliberated on the various pillars of PRSP-II and synthesized their comments and suggestions into presentations. These presentations based on recommendations which were then presented in the plenary session of the workshop.

2.18.4 Consultative Workshop to share PRSP-II with the Parliamentarians: Involving the elected representatives of the people in the consultative process of poverty-reduction is not only necessary for sustainability of the process, but parliamentary oversight of the PRSP can ensure long-term ownership of the strategies and generate the support necessary to sustain reforms. Parliament is an institution where the voices and preferences of the public and particularly of the poor can be heard. Parliamentarians’ outreach to their constituencies on issues of PRSP is particularly relevant in this context. Greater parliamentary involvement in the poverty reduction process helps to ensure that a country’s poverty reduction strategy is generated, implemented and evaluated through national institutions with the legitimacy to ensure ownership and sustainability. Parliamentarians also have a significant role to play in influencing the government’s poverty alleviation programmes through the budgetary process. To institutionalize the role of Parliamentarians in formulation of PRSP-II, a consultative Workshop to share the Draft PRSP-II was held on December 4th, 2008 Islamabad. During the workshop, the Parliamentarians stressed the need for legislative oversight of government policies in general and of the budget process in particular to ensure that government is effectively working towards poverty reduction. They unanimously maintained that agriculture is the engine of growth needs to be specially highlighted in the strategy for poverty reduction. In addition, focus on key areas of human development while giving utmost importance to education health and access to clean drinking water for the marginalized. The government’s efforts in providing the poor relief in the form of Benazir Income Support Programme in face of rising inflation were lauded. Parliamentarians overwhelmingly supported government’s efforts to improve governance and institutional development. They were of the view that by instituting accountability and good governance in the administration and management of pro-poor activities and programmes, we can effectively continue the crusade against poverty.

2.19 PRSP-II Communication Strategy

2.19.1 The government firmly believes that the process of designing and updating the PRSP-II remains inclusive so as to ensure that all voices (including those of the poor) are heard. In order to further ensure general public participation and ownership of the Strategy, the PRSP-II has been placed on the Website of Ministry of Finance (

2.19.2 The PRSP Secretariat is working towards developing an all-inclusive communication strategy to ensure ownership through sharing and dissemination of PRSP-II at all levels of society. This would not only ensure accountability, participation and transparency in the implementation process but will also provide food for thought and input for future strategies. Communication interventions would utilize diverse channels in accordance with audience needs including electronic and print media, workshops and seminars, translation of PRSP into national and regional languages, and special supplements in national dailies.

2.20 Voices of the Poor

2.21 This section summarizes results from consultations held with poor communities all over Pakistan on the outcomes of the PRSP-I. It expresses the perspectives of the poor on poverty reduction strategies adopted by Pakistan during the past few years, and their opinions on how far they considered these strategies to have been successful. It thus helps to frame policies for the future.

2.22 In late 2005, the Rural Support Programme Network was asked to organize community consultations for formal feedback on the people’s views about the on-going PRSP24. The consultations with rural poor were intended to ascertain whether they thought PRSP had made any difference in their lives and, if so, through what interventions and by how much.

2.23 During February 2006, 54 dialogues were held in 21 districts, with a total of 1,214 participants. The dialogues were held separately with a total of 646 male and 568 female participants. An effort was made to include as diverse a group of participants as possible, including small farmers, daily wage labourers, employees of public and private sectors, unemployed members of the labour force, Mustahiqs25 of Zakat26, people engaged in small enterprises, students, etc. A summary of these dialogues - highlighting the perceptions of the people on what has worked and what has not, as well as their suggestions on how to improve matters - is presented below.

2.24 Employment: A consensus emerged that the employment situation had improved slightly in the formal sector during the last few years though the change was not substantial. The improvement had resulted particularly from public sector development initiatives especially at the village and Union Council levels. In general, people related access to employment opportunities with education and with having the right contacts. They felt that merit was often not the determining factor. There was a growing trend for women to seek jobs including in non-traditional areas. The jobs mainly sought by women were in the social sectors especially those of lady health workers and school teachers.

2.24.1 High unemployment persisted among young people and lack of technical education cited as a major reason for the difficulty in finding employment. In the construction sector, work opportunities were more easily available than earlier. Salaries as well as daily wage rates of skilled and unskilled labour had risen substantially. However, majority of those consulted believed that the rise in salaries and wages had been offset by increasing prices of daily necessities and consumption goods. Participants in the dialogue emphasized that since the majority of rural population was engaged in farm-related work, a flourishing agriculture and expanding agribusiness were crucial to increasing rural employment opportunities.

2.24.2 The participants recommended that policies and programmes for education and training should take into account current and future employment opportunities. Technical education and vocational skills training could give more people opportunities to contribute. Effective promotion of self-enterprise and SMEs would provide many additional employment opportunities.

2.25 Small Enterprise Development: Participants stressed that SMEs needed assistance in making links with market centers; i.e. they lacked knowledge about market preferences. Overall, it appears that in the view of dialogue participants, little progress had been made in facilitating small enterprise development, particularly in the area of skill development and establishing market linkages.

2.26 Micro-credit: During the last few years, access to micro-credit had considerably improved, but the geographical coverage remained very limited relative to that required by the population and what could potentially be achieved.

2.26.1 Recommendations included the expansion of geographical coverage of micro-credit institutions to cover the entire country in addition to an increase in loan ceilings from micro-credit institutions and for loaning to be tailored to client needs, for instance, repayment schedules should be consonant with the cash flows of their clients’ businesses. Demand for new credit products to cater to client needs, such as, consumption loans was also high such as insurance for agriculture and livestock.

2.27 Agriculture: The entire rural economy is directly or indirectly dependent upon agriculture (including livestock). Most participants in the dialogues believed that there had not been much improvement in this sector during the last few years. The general view was that, despite higher prices for produce, profitability in this sector had not improved as costs of production had increased. Services and facilities for small farmers continued to lack. Agricultural inputs were expensive and in many places were not of good quality or were completely spurious.

2.27.1 The National Programme for Improvement of Watercourses was widely appreciated. Many participants thought that it was productive and would have long lasting benefits. However, the prerequisites asked of small farmers and the procedures to be followed for such schemes such as those relating to disbursement of funds by the government needed to be streamlined while the amount of community contribution needed to be lowered.

2.27.2 The seasonality of the canal system was a major cause of concern. Growing scarcity of water was affecting agricultural production both in rain fed and irrigated areas. Furthermore, many small farmers believed that they did not get their fair share of irrigation water, which they believed was usurped by influential farmers in collusion with the Irrigation Department.

2.27.3 In general, participants were not happy with the extension efforts of the Agriculture Departments. The results of agricultural research, new and innovative techniques, and seed/crop varieties, were not being effectively disseminated among the farming communities. The management of natural resources had improved in districts where area/development programmes had been working; people were more aware about improved farm practices but more efforts were needed. Participants suggested that the government needed to further facilitate farmers in the marketing of produce as well as in storage. The dialogue participants had not experienced any change in tenancy rights. The landless tenants remained at a disadvantage and were prone to exploitation.

2.28 Livestock: Livestock was an important source of income in the rural areas. In most dialogues, participants believed that livestock-related services had not improved markedly during the last 3-4 years. They expressed a need for technical services for improving livestock breeds and for disease prevention and treatment. The majority also felt that few people could actually avail of such services through the Livestock Department. Nevertheless, in parts of the NWFP, participants thought that the services of the Department of Livestock and Dairy Development had indeed improved.

2.28.1 Some of the women participants said that in their areas they had received training in poultry farming through a government department. With the provision of Livestock Extension Workers (LEWs), now livestock medication and vaccination services were available which were previously not available. However, in most villages, veterinary facility and access to qualified veterinary doctors was not available. That gap was filled by quacks. It was suggested that the network of veterinary hospitals/dispensaries be expanded and the presence of qualified staff be ensured. Moreover, since females were actively involved in livestock and poultry keeping, more women veterinarians should be inducted by the Livestock Department. This also strengthened the need for further village-based LEWs.

2.28.2 Awareness about improved practices had risen in districts where area/rural development programmes had been working, in particular and communities were socially organized. Participants stressed that proper marketing facilities for dairy products were largely absent. Participants felt that dairy activities offered a huge potential and should be supported in rural areas by linking small farmers to commercial dairy businesses.

2.29 Governance: The general consensus on the devolved system was that the concept was well-founded but was not being implemented in its true spirit. One of the main reasons why most ordinary rural people appreciated the devolved setup was that it had improved access to government institutions and their services. However, participants complained that in many cases funds were allocated on the basis of allegiance to political parties. Some felt that the elected representatives did not listen to the poor and cooperated with the influential and with their own relatives. Participants complained of a lack of coordination between local elected representatives and government functionaries. Initially there was considerable confusion about role, responsibility, and authority. The participation of women as elected representatives at the local level was so far seen as more symbolic than substantive. However, despite the current limitations, most people were glad that some at least among them had access to power structures that could assist in resolving issues.

2.29.1 The general view was that accessing justice and curtailing corruption in the public sector had not noticeably improved in the last few years. Rural people were especially unhappy with what they had to go through in dealings with the police, revenue and with irrigation departments. Court cases continued to be lengthy and costly. The legal system took years before cases were concluded and judgments implemented.

2.29.2 People felt that most government departments had an uncooperative and occasionally even hostile atmosphere unless they agreed to pay bribes or had a ‘reference.’ Some of the participants did feel that problems in dealing with the police and other government departments had been somewhat eased with the help of elected representatives. However, most participants felt that the efficiency and effectiveness of public servants had not improved significantly during the period under consideration

2.30 Education: Participants generally agreed that during the last few years, access to primary level schooling had improved for both girls and boys. Beyond the primary level, access was often more difficult, especially for girls, the distances involved and because of deficiencies in schools’ infrastructure particularly of boundary walls and toilets. Many schools, both, for boys and girls lacked adequate facilities for providing clean drinking water.

2.30.1 Recruitment of teachers on contract by district governments had helped bridge the shortage of teaching staff. Teacher absenteeism had been checked to a large extent during the last few years. The free education policy of the government had enabled many poor families to enroll their children. The provision of free books, waiver of school fees, and scholarships to girls had significantly improved girls’ enrolment in schools.

2.30.2 In the opinion of most participants, the quality of education had largely remained unchanged. School Management Councils (SMCs) existed but in most cases were dormant and did not play an active role in school management. Government schools often lacked even the minimum requirements of laboratory facilities and other equipment. Technical education centers were located in big towns and Tehsil/District headquarters making access to them especially difficult for girls.

2.30.3 Private sector education was a growing and widespread trend. People preferred private schools. In the view of some participants, government schools only served the poor as those who could afford sent their children to private schools.

2.30.4 It was suggested that there should be a formal system for adult literacy with adequate facilities and properly paid staff. Some participants expressed satisfaction with the current adult literacy programmes initiated by the government (e.g. through National Commission for Human Development) and by NGOs. In none of the dialogues did anyone express knowledge of any specialized education or training facilities for disadvantaged/special children.

2.30.5 It appeared from the dialogues that there had been no improvement in higher education. Access to higher education (beyond matriculation) was especially difficult for people in rural areas as higher education institutions were usually located in towns or cities. This made them more expensive because of travel time and transportation costs.

2.31 Healthcare: In the dialogues there was general agreement that during the last few years there had been very little improvement in healthcare facilities besides some special initiatives. Government hospitals (including at Tehsil/District levels) lacked doctors, paramedic staff, lifesaving drugs, and diagnostic equipment. Since larger specialized hospitals were located in urban areas, the rural population had to travel there to seek secondary-level medical care which entailed a huge cost as well as inconvenience with particular difficulties for women. People were forced to seek private healthcare facilities for better service. Majority of the dialogue participants felt that the needy never got any financial assistance in civil hospitals.

2.31.1 In the rural areas, in general, Basic Health Units (BHUs), Rural Health Centres and Dispensaries were not fully functional and did not provide an acceptable level of service. Participants stressed that life-saving medicines ought to be available free at BHUs. Some participants mentioned the Punjab Chief Minister’s Initiative for Primary Healthcare under which a Public Private Partnership had been initiated for managing BHUs. It was claimed that subsequent to this initiative, primary healthcare facilities had improved during the last three years, doctors and other staff were now present and the supply of required medicines had improved. This could be a model for wider replication.

2.31.2 One of the new initiatives that people thought a definite improvement during the last few years was the Lady Health Workers (LHWs) programme. The LHWs were available where needed in the villages, and they extended timely and effective services. People were generally satisfied with immunization services for children and, in particular, were quite happy with the anti-Polio immunization programme. Participants suggested that free and easily accessible healthcare treatment be given to poor and marginalized families.

2.32 Water Supply and Sanitation: The dialogues revealed that in many locations the situation had improved in this sector. In particular, many district governments had taken steps to resolve water and sanitation issues in villages and towns. However, in remote and isolated villages things had not changed. Even areas where progress had been made in sanitation lacked a proper system for disposing of solid waste. Clean (safe for human health) drinking water was not available for a majority of the rural population. Participants in the dialogues emphasized that there was a tremendous need for more (safe for human health) drinking water schemes.

2.33 Social Safety Nets: Some participants estimated that as much as 25 percent of the community might deserve financial support through safety nets, but perhaps just 15 percent of the deserving got any assistance. Members of the Zakat Committees were nominated by the government. There was a general perception that the selection of the deserving by the Committees is not transparent. Some people said that the members of Zakat Committees usually gave benefits only to their relatives and friends or on the basis of political affiliation or biraderi.27 Participants thought that the process of obtaining social safety net assistance was lengthy and complicated. The majority felt that the Guzara (living) allowance provided through Zakat was insufficient for even subsistence living.

2.33.1 In some dialogues in the NWFP, participants said that in their area Zakat was now more easily available to the deserving, however, the scheme still needed improvement. Majority of the people recommended that the coverage of social safety nets must extend to all those who merit assistance. The amount of Guzara allowance ought to be increased to ensure subsistence. Besides the monthly financial living allowance, social safety nets ought to include skills training, credit for setting up self-owned enterprises, basic healthcare for family members, and support for children’s education. The participants felt that the Zakat fund should be administered in a fair and transparent way and be easily accessible to the deserving. People need to be fully aware about what assistance is available for the deserving and the Mustahiq ought to be able to receive what is due without hurdles and delays.

2.33.2 In general, the dialogues revealed that socially mobilized communities were better able to participate in and to access services and facilities that were available. They were also better able to convey their needs and priorities to decision makers and to implementing agencies. This applied in the economic field, e.g., micro-credit and agriculture; in the social sectors, e.g., school management and oversight; and to social safety nets.

2.34 Satisfaction with Basic Services

2.34.1 The recently conducted CWIQ-PSLM, covering over 70,000 respondents all over the country, substantiates most of the reflections coming out of the dialogues with the poor reported above. The CWIQ-PSLM, for the first time, generated information on the satisfaction from schooling, health facilities, family planning, veterinary hospital, agriculture, and the police. Perception about health and education services based on this data set is discussed here. The survey reported that 59.8 percent of respondents were satisfied with schools in FY 2004/05 (Table 2.14a). The highest level of satisfaction from schooling (67 percent) was found in the NWFP, while the lowest (48 percent) was in Balochistan. The level of satisfaction from schooling was higher in urban areas than in rural. However, only 36 percent of the population was satisfied with basic health units. Satisfaction with the services of basic health units was more or less the same in all provinces, except the NWFP, which recorded a higher level (52 percent). Rural areas expressed greater satisfaction with the services of basic health units than did urban.

Table 2.14(a)

Household satisfaction by facilities and services use


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Source: CWIQ-PSLM FY 2004/05-FY2006/07.

2.34.2 The CWIQ-PSLM FY 2004/05 for the first time assessed a qualitative aspect regarding households and changes in their economic situation during the year preceding the survey. An answer to this question does not, of course, substitute for poverty estimates based on income or consumption data, however, it does provide useful insight. In both rural and urban areas, half the households perceived no change in their economic situation during the year, however, 27 percent of households in urban areas and 23 percent in rural areas reported an improvement in their economic situation compared to the previous year (Table 2.14b). Proportionately more households in the Punjab and the NWFP reported improvement in their well-being than households in Sindh and Balochistan. One-quarter of the rural households reported a worsening of their economic situation in the one-year period suggesting they had not benefited from the high agricultural growth.

Table 2.14(b):

Households’ perception of their economic situation in FY 2004/05 compared with that in FY 2003/04


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Source: PSLM 2004/05

2.34.3 These voices of the poor provide important feedback for fine-tuning the Poverty Reduction Strategy and ensuring its better implementation. From the dialogues, it became evident that the participants’ dissatisfaction was chiefly with inadequacies in implementation and not with the Strategy itself.

Chapter 3 - Poverty diagnostics

3.1 This chapter provides a brief review of the level and the correlates of poverty in Pakistan, which will form an empirical basis for the discussion of the strategy and policy measures to tackle poverty laid out in subsequent chapters. Most of poverty related data in this chapter are drawn from a key poverty monitoring instrument, i.e. a series of the Pakistan Integrated Household Survey (PIHS) and the Pakistan Social and Living Standards Measurement Survey (PSLM). This chapter pays special attention to the PRSP period, i.e. since FY 2001/02 and often compares major poverty statistics between FY 2001/02 and the latest available survey year.28

3.2 Poverty has many dimensions in Pakistan. The poor have not only low incomes but they also lack access to basic needs such as education, health, clean drinking water and proper sanitation. The latter undermines their capabilities, limits their opportunities to secure employment, results in their social exclusion and exposes them to exogenous shocks. The vicious cycle of poverty is accentuated when the governance structures exclude the most vulnerable from the decision making process. These issues are discussed in detail in different chapters of the report; strategies to address them constitute the main pillars of the PRSP-II.

3.3 Poverty Trend

3.3.1 A long-term trend of poverty in Pakistan is shown in Figure 3.1. Poverty, measured in terms of the headcount of the poor (the proportion of the population with consumption below the official poverty line), shows a mixed trend throughout the 1990s until it peaked at 34.5 percent in FY 2001/02.29

Figure 3.1:
Figure 3.1:

Poverty headcount rate in Pakistan FY 1987/88 – FY 2005/06

(percent of population)

Citation: IMF Staff Country Reports 2010, 183; 10.5089/9781455205226.002.A001

Source: Pakistan Economic Surveys, FY 2001/02 & FY 2007/08, Finance Division, Government of Pakistan.

3.3.2 However, it can be seen from Figure 3.1 that there was a large turn-around in the poverty trend in FY 2001/02. Poverty in the country declined by more than 12 percentage points between FY 2001/02 and FY 2005/06 and reached 22.3 percent - its lowest level during the PRSP period.

3.3.3 The overarching objective of the PRSP-II is to reduce poverty. This requires that existing poverty estimates reflected in PRSP-II are realistic and based on surveys. The poverty estimates are worked out at the national level using the PSLM data compiled by the Federal Bureau of Statistics. The latest PSLM data is available only for FY 2005/06. The Planning Commission considers that a Poverty Reduction Strategy based on FY 2004/05 or FY 2005/06 data would underestimate the extent of poverty.

3.3.4 The Planning Commission is of the view that no reliable data exist for estimating poverty in recent years. Significant changes in the growth pattern; and an increase in food and fuel prices have occurred since 2005 adversely affecting the poor. The Planning Commission will undertake a comprehensive estimate of poverty trends over the next three years after it receives the PSLM data for FY 2007/08 from the Federal Bureau of Statistics, which is likely to be available by January/February 2009.

3.3.5 In the meantime, a Panel of Economists set up by the Planning Commission has provided a preliminary estimate of poverty (based on informed judgment) for FY 2008/09 that indicates an ‘addition of 6 percentage points to poverty incidence since FY 2004/05.’

3.3.6 Poverty declined both in rural and urban areas (Table 3.1). Urban poverty declined more than 40 percent between FY 2001/02 and FY 2005/06 from 22.7 percent to 13.1 percent, while rural poverty declined slightly more than 30 percent from 39.3 percent to 27 percent. As a result, the urban poverty is now less than half of the rural poverty in FY 2005/06. However, in terms of percentage point decline, rural areas experienced a larger decline (12.3 percentage points) than urban areas (9.6 percentage points).

Table 3.1:

Decline in the poverty headcount FY 2001/02-2005/06

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Source: Pakistan Economic Survey, FY 2007/08

3.4 Distributional impact of economic growth

3.4.1 The Pakistan economy took off since FY 2003/04 and the GDP growth rate jumped to 7.5 percent and remained high till FY 2006-07. An important question is whether the growth benefitted the poor as well. This section focuses on the distributional impact of the recent upward trajectory of economic growth.

3.4.2 Figure 3.2 shows the distribution of population ranked by household expenditure per adult equivalent for both FY 2001/02 and FY 2005/06. It clearly shows the proportion of poor population has declined and the proportion of middle income class increased. This suggests that the benefits from the recent economic growth have spread widely over different income groups. Also, the concentration of population near the poverty line declined substantially, which indicates that a small shock in income and expenditure likely to have less impact on the poverty headcount rate.

Figure 3.2:
Figure 3.2:

Distribution of consumption expenditure per equivalent adults, 2001/02 and 2005/06

(Rs at 2005/06 prices)

Citation: IMF Staff Country Reports 2010, 183; 10.5089/9781455205226.002.A001

Source: PIHS FY 2001/02 and PSLM FY 2005/06

3.4.3 Table 3.2, which follows the classification of the PRSP, reinforces the observations from Figure 3.2. The proportions of the extreme poor, the ultra poor and the poor all declined substantially since FY 2001/02. On the other hand, the proportion of the rich, including both ‘Quasi non-poor’ and ‘Non-poor’, increased noticeably.

Table 3.2:

Population distribution by household expenditure per adult equivalent


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Source: Economic Survey FY 2007/08, Government of Pakistan.

3.4.4 To see the growth impact by different income groups in more detail, growth incidence curves are shown in Figure 3.3. These curves map the average annual growth rate of per adult equivalent consumption expenditure for each centile over the period FY 2000/01 to FY 2004/05. The figure shows that almost all income groups enjoyed a similar rate of growth in rural areas, while the rich enjoyed a higher growth rate in urban areas. Although there are some variations in growth rates, it is noteworthy that all groups recorded more than 3 percent annual growth rates.

Figure 3.3:
Figure 3.3:

Growth incidence curves between FY 2001/02 and FY 2005/06

Citation: IMF Staff Country Reports 2010, 183; 10.5089/9781455205226.002.A001

Source: PIHS FY 2001/02 and PSLM FY 2005/06

3.5 Poverty profiles

3.5.1 Profiling the poor is often useful to identify where the poor live; who they are; and what they are doing; which are essential in designing poverty alleviation strategies. This section overviews the poverty profiles.

3.5.2 Urban-Rural breakdown The poor are overwhelmingly concentrated in rural areas. As stated above, the poverty headcount rate in rural areas is 27 percent, more than double the size of urban areas. Furthermore, 80 percent of the total poor population lives in rural areas.

Table 3.3:

Urban-Rural breakdown of poverty statistics in FY 2005/06

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Source: PSLM FY 2005/06

3.5.3 Poverty and demographics Poverty is highly correlated with household size. Larger households and households with high dependency ratios are likely to be much poorer than smaller households (Figure 3.4). For example, no household with one member is poor while more than 35 percent of households with 10 or more members are poor.

Figure 3.4:
Figure 3.4:

Household size and poverty rate FY 2005-06

Citation: IMF Staff Country Reports 2010, 183; 10.5089/9781455205226.002.A001

Source: PSLM FY 2005/06, Government of Pakistan.

3.5.4 Agriculture and Poverty Pakistan is an agrarian country where about two-third of the population still lives in rural areas. Not surprisingly, rich households in rural areas were more likely to own agricultural land than poor households in FY 2005/06. The richest 20 percent of rural households were on average more than 3.5 times likely to own agricultural land than the poorest 20 percent of rural households (Figure 3.5). Also, the richest 40 percent of rural households owned agricultural land that was on average about 4 times larger than that owned by the poorest 60 percent.

Figure 3.5:
Figure 3.5:

Agricultural land ownership (in rural areas) by rural consumption quintiles FY 2005/06

Citation: IMF Staff Country Reports 2010, 183; 10.5089/9781455205226.002.A001

Source: PSLM FY 2005/06

3.5.5 Education, Occupation and Poverty Educational attainments and occupations of household heads appear to be highly correlated with poverty incidence of the households. For example, according to PSLM FY 2005/06 data, educational attainment of household heads differs starkly between the rich and the poor. Among the poorest 20 percent of population (or quintile), nearly 70 percent of household heads did not complete class 1; however, among the richest quintile, only around 20 percent of household heads did not complete class 1. On the other hand, almost no heads in the poorest quintile completed class 11 or more, while more than 30 percent of heads in the richest quintile completed class 11 or more. Also, occupational status is clearly different between the rich and the poor. In FY 2005/06, nearly 40 percent of household heads in the poorest quintile held so-called “elementary occupations” while less than 20 percent of heads in the richest quintile held the elementary occupations.

3.5.6 Service delivery and Poverty Access to key community services is strongly associated with a household’s poverty situation. Using the PSLM FY 2004/05, which has rich data on access to key facilities and infrastructure, Figure 3.6 shows the relationship between the distance to some basic community services, such as the nearest primary school, hospital/clinic, family planning facility, or public transport, and poverty. It shows that households closer to the basic community services are in general richer than those isolated from these services.

Figure 3.6:
Figure 3.6:
Figure 3.6:

Poverty rates by minutes to the nearest facility in FY 2004/05

Citation: IMF Staff Country Reports 2010, 183; 10.5089/9781455205226.002.A001

Source: PSLM FY 2004/05

3.5.7 Other important factors Needless to say, other factors are also important. Poor and vulnerable households tend to lack access to jobs, assets, savings, insurance products, institutional credit, and assistance options. Due to this, they are often compelled to resort to desperate measures to cope with chronic stress and shock, often with tragic outcomes. Patterns of multi-generational poverty traps can be identified, whereby poverty incurred by one generation is transferred to subsequent ones, with no apparent hope of escape. A prime example is offered by the effects of the educational attainment of the household head on that of the family—children in families of which the household head is illiterate, tend to be illiterate. Since literacy is correlated with poverty, this tends to perpetuate poverty by transferring it across generations. Another instance is provided by borrowing or the sale of assets, which results in the depletion of already scarce resources. Selling or mortgaging land, house, and productive assets occur with disturbing frequency. Another consequence is economic inefficiency—self-insurance against risk can have high opportunity costs and stifle innovation and investment, as households choose to maintain liquid and low-risk, low-return assets. These factors need to be studied further.


Among the many approaches and definitions in the theoretical literature and adopted by various developing countries, the Planning Commission of Pakistan has used the following definition for estimating the poverty line.

“Calorific requirement approach wherein all those households (or individuals) are classified as poor who do not have income sufficient to allow a consumption pattern consistent with minimum calorie requirements. It is also assumed that the households earning incomes equivalent to poverty line not only have sufficient food to meet the minimum nutrition requirements but also the non-food requirements”.

It is to be noted that the current (FY 2005/06) estimates of poverty status (headcount ratio, poverty gap and squared poverty gap) are updated by Consumer Price Index (CPI) from the revised poverty estimates of FY 2000/01. The methodology of revised poverty estimates of the FY 2000/01 involved the following steps:

I. Constructing Consumption Aggregate

The Aggregate Consumption Function (ACF) is constructed as follows:

  • ▪ Aggregate the various sub-components;

  • ▪ Adjust for cost of living differences; and

  • ▪ Adjust for household composition.

The Sub-components of ACF can be classified into four categories:

  1. Food items;

  2. Non-food items;

  3. Consumer durables; and

  4. Housing.

(i) Food Items

It includes food consumed from all sources and needs data on the total values alongwith the quantity of various food items consumed in the reference period:

  • ▪. Food purchased in market place;

  • ▪ Home produced food;

  • ▪ Food items received from the employer as payment in kind for services rendered; and

  • ▪. Food items received from other household as gift or remittances.

  • ** Tobacco is not a food item

The whole of food consumption is transformed into a uniform reference period:

  • ▪ 1 month = 2.71 * fortnights

  • ▪ 1 year = 12 months

There are some households that report zero quantities consumption but non-zero values of the expenditure on few items. In such cases, prices for the data from other households are constructed and median price paid by other households in the same cluster is used to come up with the quantities.

(ii) Non-Food Items

The non-food items are heterogeneous in nature and hence data on values is available only; quantities data is absent except in case of fuels. Following non-food expenditures have been excluded from the non-food sub-aggregate:

  • ▪. Expenditure on taxes/levies;

  • ▪ Purchases on financial assets, interest payments, and debts; and

  • ▪ Lumpy expenditures such as marriages/funerals.

(iii) Consumer Durables

Appropriate measure of consumption of durable goods is the value of services that the household receives from all the durable goods in its possession over the relevant time period. It is a tedious process and requires a lot of data which is not captured by HIES. Therefore, all durable goods are excluded from ACF except Services and Repair Charges of household effect, etc.

(iv) Housing

It is the most problematic of all sub-aggregations. It includes utilities (electricity, gas, water) and the value of rent paid by the household. The rental value is not always reported, especially in the rural areas. In such cases, implicit or imputed rental value is calculated by using ‘Hedonic Housing Regression.’

For regression purpose, consider all the households that report a payment/benefit from the rent. Regress this variable on some of the household characteristics that can affect the value of rent such as:

  • ▪ Number of rooms, if missing use median number of rooms

  • ▪ Availability of electricity; dummy variable : 1 if yes, 0 if not

  • ▪ Availability of gas; dummy variable : 1 if yes, 0 if not

  • ▪ Availability of telephone; dummy variable : 1 if yes, 0 if not

  • ▪ Availability of water; dummy variable : 1 if yes, 0 if not

  • ▪ Availability of toilet; dummy variable : 1 if yes, 0 if not

  • ▪ Availability of garbage collection; dummy variable : 1 if yes, 0 if not

  • ▪ Location: dummy for strata in the survey: urban, rural, and provinces

Take logarithm of the dependent as well as the independent variables for regression. Parameter estimates from this model are used to calculate rent for the other segment of population.

II. Adult Equivalence Scale

Nutrition based adult equivalent scales which differentiate between households on the basis of sex and age are also used for transforming the number of persons in a household to adult equivalents. The application of nutrition based equivalent scales to any expenditure other than food expenditure is questionable from a methodological point of view. The “revised estimates” are based on a simple equivalent scale that weights 0.8 to individuals younger than 18 years old and 1 for all other individuals. The adult equivalent scale of Planning Commission is based on calorie requirements and therefore, applicable only to food consumption expenditure. Moreover, food expenditure represents only about 50 percent of the total consumption expenditure, therefore, an adult equivalent scale (0.8 for younger than 18 years old and 1 for others) has been used to adjust the total household consumption expenditure.

III. Methodology of Poverty Line Estimation:

Poverty line is estimated from a regression of per adult equivalent monthly consumption expenditure (food and non-food) against estimated daily per adult equivalent calorie intake. This methodology implicitly assumes that those households that reach the minimum requirement of calorie also consume necessary nonfood items, otherwise they would have increased calorie intake. The regression is run for the first three quintiles so that expensive and luxury consumption habits of the rich may not overestimate the poverty line.

Regression Equation Form

The regression equation is as under:



Y = Monthly per adult equivalent consumption expenditure (food and non-food)

X = Daily per adult equivalent calorie intake


Ln Y = (6.112 + (2.019E-4*2350)) = Rs 723.40 (Updated Estimates)

R2 = 0.195

Standard error of the estimate = 0.2112


  • ▪ There exists specifically defined amount of calories that is considered essential. Here, this per adult equivalent minimum calorie requirement (X) is 2350 calories per adult equivalent per month;

  • ▪ In case the minimum calorie requirement is achieved, then implicitly, the nonfood essential items are also achieved;

  • ▪ Same goods basket is consumed in all the provinces.; and

  • ▪ The first three per adult equivalent consumption expenditure quintiles are used in the regression equation estimating the poverty line so that the consumption pattern of the rich does not affect the determination of the poverty line.

IV. Methodology of Poverty Indices Estimation

Poverty indices

Once the decision has been made regarding the choice of poverty line there is then choice of aggregator. This can range from a simple count of individuals below poverty line to more complicated measures which take account of the distribution of income amongst the poor. We use the poverty measures proposed by Foster, Greer, and Thorbeck (1984) that are the headcount ratio (P0), average poverty gap (P1) and the squared poverty gap (P2).

Headcount ratio (P0)

The headcount ratio is defined as the proportion of people below the poverty line. This measure is easy to calculate but it has some disadvantages. It takes no account of the depth of poverty. Someone just below the poverty line has the same weight as the very poorest of the poor. It also fails to obey the principle of transfers i.e. a transfer of income from a poorer person to a rich person does not increase headcount ratio. Indeed, if the recipient of the transfer is just below the poverty line and the transfer raises him just above the poverty line then the transfer will have reduced poverty. This gives rise to the situation where the most effective means of the reducing poverty is to target the comparatively best-off the poor. Despite these drawbacks, the headcount ratio is still perhaps the most widely used poverty measure.



Where z is the value of the poverty line, wi is the per adult equivalent consumption expenditure of the individual i, and N is the total population. For all the indices, when the individual values are summed up they are multiplied by the household size and properly weighted to represent the whole population.

Poverty Gap (P1)

Poverty gap is the product of incidence and average distance between the incomes of the poor and the poverty line. It reflects the average shortfall of the incomes of the poor expressed as a share of the poverty line. Poverty gap does take account of the depth of poverty but it does not take account of the distribution of income amongst the poor.

Poverty gap:


Squared poverty Gap (P2)

The squared poverty gap measure of poverty is sensitive to the distribution among the poor as more weight is given to the poorest below the poverty line. It corresponds to the squared average distance of income of the poor to the poverty line. Hence moving from Po towards P2, more weight is given to the poorest in the population.

Severity of poverty:


V. Updating the Poverty line to FY 2005/06

Following steps were undertaken to update the poverty line and estimate poverty status from the household data contained in the PSLM FY 2005/06 survey:

  • ▪ Total household consumption expenditures in nominal terms in FY 2005/06 prices were reduced to common denominator of a single month.

  • ▪ In arriving at total household consumption expenditure, prices prevailing in 1100 Primary Sampling Units (PSUs) and across the twelve month period (July 2005 to June 2006) were standardized to conform to a consistent consumption welfare concept.

  • ▪ These were divided by household size adjusted for children less than 18 years of age. For example, if there were 5 children under 18, these were treated as 4 adults. This adjustment yielded consumption expenditure per adult equivalent per month.

  • ▪ The poverty line of Rs 878.64 obtained in FY 2004/05 was raised by 7.48 percent CPI inflation during FY 2004/05 and 2005/06 to arrive at the new inflation adjusted line of Rs 944.47 per adult equivalent per month.30

  • ▪ By comparing the per adult equivalent per month expenditure of each sampled individual with the FY 2005/06 poverty line of Rs 944.47, the above indicators on poverty status were calculated.

Chapter 4 – Pillar I: Macroeconomic stability and real sector growth

4.1 The study of global and regional poverty as well as Pakistan’s own experience from the PRSP-I period suggest that a country’s economy must grow rapidly over a prolonged period in order to reduce poverty. At the macro level, economic growth implies greater availability of public resources to improve the quantity and quality of education, health and other services. At the micro level, economic growth creates employment opportunities, increases the incomes of the people, and therefore reduces poverty. Many developing countries have succeeded in boosting economic growth for brief periods, but only those that have sustained high growth over substantial periods (say, two or more decades) have seen a lasting reduction in poverty. East Asian countries such as Korea, Malaysia, China, Taiwan, Singapore, and Hong Kong offer clear examples of the effects of economic growth on poverty alleviation. It is also evident from the experience of these countries that growth does not come automatically—it requires policies. Macroeconomic stability is the key to sustain high economic growth for longer periods. The persistence of high economic growth and not a short sequence of bust and boom that characterized the Pakistan economy over the years is the best hope for poverty alleviation.

4.2 The distribution of poor population in Pakistan suggests that almost 75 percent of the poor are clustered around the poverty line. Thus a slight rise in the mean income pulls many people above the poverty line whereas one crop failure or economic shock may send millions below the poverty line. Pakistan has historically posted higher economic growth too often in its checkered history of sixty years. The volatility in economic growth due to macroeconomic forces is the basis of the asymmetric growth in Pakistan and played an important influence on income distribution. The effects of income growth and the distributive effect associated to structural change were positive on reducing poverty but the evolution of relative prices and wage policies avoided a real income growth of urban and rural low skilled labours. The volatility of the income has proved very costly for the poor. The economy experienced longer spell of slower economic growth only in the 1990s and the poverty level reached as high as 34 percent of the population in 2001.

4.3 The economy moved to a higher growth trajectory in the vicinity of 6-7 percent real GDP growth during FY 2002-07 and resultantly the poverty declined substantially in FY 2004/05. However, the growth strategy relied heavily on external financing and use of sale proceeds from some public sector assets to meet a growing current account deficit. The poor resource mobilization efforts within the country remained hallmark of the economic policy in this period and exacerbated vulnerabilities to external shocks.

4.4 The domestic factor behind higher growth during 2002-07 was a consumer boom on the back of enhanced access to credit. The services sector and production of durables in the manufacturing sector spearheaded the move to higher growth trajectory. The agriculture sector and small and medium industry were largely ignored. These two areas were the best hope for poverty reduction. Financial businesses and telecommunication were the major attractions of foreign investors and these two sectors registered double digit growth feeding into higher growth in the services sector. The minimal potential of job creation and lower level of forward and backward linkages has given rise to a ‘jobless and joyless’ growth.

4.5 The productive capacity of the economy remained alien to this higher growth and new industrial capacity was hardly added to the economy. The agricultural policy was not announced during the last eight years. The input prices of agriculture escalated at a faster pace while output prices remained almost stagnant up to 2006 and it was only in the last two years the output prices witnessed upsurge. Poor water resource management was another area of concern and no serious efforts were made to augment smooth supply of the irrigation water. The agriculture sector faced acute water and input shortages during the last eight years but no conscious effort was being done to bridge demand-supply gap.

4.6 Severe macroeconomic pressure impacted economic activity in Pakistan in FY 2007/08. Beside other factors, Pakistan has had to face significant costs during the last few years being a frontline state in the ‘War on Terror’, thereby neutralizing buoyancy in capital inflows. The law and order situation in certain parts of the country has deteriorated alarmingly. Pakistan, with the rest of the world felt the force of a steep rise in the prices of petroleum and primary products.

4.7 The fiscal year 2007/08 was a volatile year for Pakistan’s economy both on domestic and external fronts. Number of unfavourable and unexpected events occurred during the years, which include: political unrest; law and order situation; supply shock; rising oil; food and other essentials prices; and crisis in the international financial market together with shortcomings in economic management. All these events have adversely affected the key macroeconomic fundamentals of Pakistan. The economy suffered a setback as GDP registered a growth of 5.8 percent against the target of 7.2 percent and a growth rate of 6.8 percent in FY 2006/07. The major sectors, agriculture and manufacturing, performed poorly. Services sector was the saving grace of economic growth in FY2007/08 which primarily stemmed from better than expected performance achieving 8.2 percent as against 7.6 the previous year.

4.8 The FY 2007/08 saw the fragility of the growth model adopted by Pakistan during the last several years. Surging oil, food and commodity prices accompanied by the turmoil in international financial markets and the disturbed domestic political conditions had an adverse impact on Pakistan’s budgetary position. Furthermore, over a year of policy inaction on account of political expediency for addressing the challenges, accentuated the budgetary imbalances. Expenditures greatly exceeded their budgeted amounts, mainly because of subsidies on oil, power, fertilizer, wheat and other foods.

4.9 The mismanagement of wheat operations led to an unanticipated import of 1.7 million tons of wheat at high prices, despite a bumper wheat crop (23.3 million tons) in 2006/07. This imposed a burden of Rs 40 billion on the government as payment for differential between the cheaper price in the domestic market and imported cost. In a similar fashion, the higher cost of furnace oil used in power generation was not allowed to pass through to domestic consumers of electricity. Therefore, against the budgeted subsidy of Rs 52.9 billion the projected power subsidy stood at Rs 113 billion—a slippage of Rs 60 billion.

4.10 The fiscal deficit surpassed the target by 3.4 percentage points of GDP. The combined impact of subsidies to the budget on account of oil and commodity shocks was estimated at nearly 3.6 percent of the GDP. It means the overrun of the fiscal deficit was entirely driven by the subsidies. Belated attempts to obtain savings from reductions in the development expenditures were unsuccessful. The efforts to curb the fiscal deficit within the target were further undermined by the huge overruns in interest payments. In the wake of major disruptions like domestic food and energy shortages and a plummeting exchange rate with high inflation, and exceptionally high macroeconomic imbalances, the required contingency plan was missing.

4.11 With the beginning of the new fiscal year (2008/09), Pakistan economy faced four major challenges: decelerating growth; rising inflation; growing fiscal deficit; and the widening gap in merchandise trade leading to a sharp depletion of foreign exchange reserves and a plummeting exchange rate.

4.12 The high price of food in the global arena threatens to push millions into poverty. Rising food prices have pushed up overall inflation not only in Pakistan, but across the region, particularly during 2007 and mid 2008. This is worrisome, because food price inflation is the most regressive of all taxes, hurting the poor and fixed income groups the most.

4.13 The recent upsurge in inflation is unprecedented in Pakistan and the victim of this hike is the lowest income group where incidence of inflation is the highest among all income groups. Downward adjustments in fuel prices will be neutralized by upward adjustment in energy prices but increase in support price of wheat will also play a role. Inflation has edged up due to massive borrowing from the SBP for budget financing and the government has, therefore, committed itself to restrict SBP financing to zero (on net basis) in order to stabilize inflation.

4.14 Macroeconomic Framework

4.14.1 Macroeconomic imbalances are inimical to longer-term growth and macroeconomic stability. The longer the imbalances persist, the greater the subsequent adjustment will be needed. Macroeconomic stability is, therefore, found to be absolutely vital for improving the investment climate and taking the economy at higher growth path on a sustained basis. The objectives of Pakistan’s stabilization programme are to reduce the ‘twin deficits’ (fiscal and current account) to restore macroeconomic balance, to bring the balance of payment to a viable position, and to build up foreign exchange reserves with a view to strengthening shock absorbing capacity of the economy.

4.14.2 Empirical evidence suggests that macroeconomic instability has generally been associated with poor growth performance and the consequent rise in poverty. The persistence of large fiscal and current account deficits and the attendant rise in public and external debt have been the major source of macroeconomic instability in Pakistan in the 1990s and the last fiscal year (2007/08) proved once again that these imbalances vitiated a stable macroeconomic environment which can not be conducive for investment and growth. Indeed, Pakistan witnessed its investment rate decelerating, economic growth slowing, employment opportunities shrinking, poverty level rising, debt burden reaching alarming proportions, and foreign exchange reserves plummeting in the past as a result of macroeconomic imbalances.

4.14.3 Against this backdrop the government has taken a series of steps to stabilize the economy. The government’s Economic Stabilization Programme includes a combination of stabilization measures and structural reform. The former is aimed at restoring macro-economic balance by bringing the level of demand and its composition in line with the output capacity of the economy and a sustainable external current and fiscal account position. The latter comprises microeconomic and institutional reforms directed at fostering an efficient allocation of resources and removing obstacles to optimize savings and investment. The ultimate objective of the stabilization programme is to harness long-term growth potential of the economy for more inclusive growth.

4.14.4 The macroeconomic stabilization is, unfortunately, likely to slow down economic growth, cause unemployment and push poverty rate up in the short run. Therefore, the central element in the government’s strategy is to protect the poor and vulnerable from the adverse effects of the adjustment by increasing the allocations for social safety nets. In the long run economic stabilization will benefit the vulnerable segments of society. The macroeconomic framework for PRSP-II has been prepared with a view to steering the economy to a higher growth trajectory in a stable macroeconomic environment. Growth, investment, and inflation aspects of the macroeconomic framework are shown in Table.4.1.

Table 4.1

Growth, savings and investment FY 2008-13

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