'Pakistan Public Expenditure Management; Strategic Issues and Reform Agenda', released on Wednesday by World Bank has estimated that 10-15 percent increase in nominal power tariffs over the next few years is inescapable even with aggressive cost reduction and speedy progress towards reduction of theft. It is a 330 pages two-volume elaborate dissertation on Pakistan economy.
Lauding government's four years' progress, it says that with political stability, reduction in regional tensions, improved governance and a continued forceful pursuit of the economic and social reform agenda, Pakistan has good prospects of raising the annual GDP growth to around 6 percent in the next three to four years and possibly higher in later years and sustaining it at a high level, consistent with progress in debt reduction and a more self-reliant and equitable pattern of development than in the past.
The reforms necessary for the country are the strengthening civil service, improving the effectiveness of planning and budgetary procedures, speed up inter-government financial flows, address federal-provincial responsibilities, develop public-private partnerships and accelerating privatisation, effectiveness of public spending, transforming the power sector, accelerating water development, remedying the neglect of education, funding the poverty strategy and reorienting public sector priorities.
Moreover, there is a need to end raise in defence spending, reduce public enterprise losses, enhance revenue mobilisation, reduce costs of government borrowing, ensure financial discipline and creating fiscal space, meet challenges of improved public sector management, ensuring financial discipline and creating fiscal space.
With the decline in the population growth rate expected to continue, sustained per capita GDP growth rates in the later part of this decade of about 4 percent per annum certainly appear feasible. This would represent a dramatic contrast to the average annual per capita increases of little over 1 percent in the later part of the 1990s and would contribute strongly to poverty alleviation and employment creation.
The creation of additional fiscal space depends on raising the government revenues, cutting government borrowing cost, limiting the public enterprise losses, and maintaining restraint on defence spending. With policy slippages in these areas, the additional fiscal space could virtually disappear, making it difficult to attain and sustain high growth and meet social goals. Any created fiscal space could go waste either because of unproductive uses or no progress in effectively using high priority spending.
The real cost of domestic borrowing remains high. Pakistan's revenue mobilisation has been low, both by international standards and compared with its potential.
To enhance revenue mobilisation and to adequately fund poverty spending, determined efforts are necessary to fundamentally restructure CBR in the next few years. In reforming tax policy, number of tax exemptions be reduced (for customs duties, income and withholding tax) and sales tax be made more effective.
The continued large losses of public owned power entities is the most troubling element of Pakistan's fiscal position and the only one that has not shown improvement in recent years. While the urgency of need to privatise KESC and parts of Wapda has grown because of continued losses and inadequate resources for investment as well as the costs to other industries from unreliable power supply, the progress towards privatisation is the slowest in the power sector, though Wapda has moved to create separate corporate power entities.
The government feels that in current circumstances assuming further reduction in defence spending as a percentage of GDP would not be realistic. While easing of tensions on the Eastern border is very likely, the situation on the Western border as well as combating terrorism in the country will continue to put pressure on the defence expenditures.
The original indicated funding for poverty reduction (4.2 percent of GDP in 2003-04) in the Interim Poverty Reduction Strategy Paper (I-PRSP) appears to be totally inadequate in relation to ambitious targets especially in education. On the one hand, there is need to set more realistic but still ambitious social targets consistent with MDGs, on the other hand, the financing needs of meeting these targets require more careful assessment.
The governance problems resulting from inadequate spending on police and the justice system impact the poor the most. Similarly, it is the poor in the rural areas who most lack access to electricity; of the roughly 40 percent of Pakistani households that do not have electric connections most live in the rural areas and are poor.
Detailed work is necessary to firm up the education funding requirements including for the secondary and higher levels. Our tentative estimates suggest the need of gradually raising public education expenditures from 1.8 percent of GDP in 2001-02 to 2.5 percent in 2006-07. Within the recommended overall increase in education expenditures, a more rational allocation of spending is needed.
According to recent World Bank estimates, 10-15 percent increase in nominal tariffs over the next few years will be inescapable even with aggressive cost reduction and speedy progress towards reduction of theft.
Consequently, there is a disconnection between large national power sector requirements and the amounts that can realistically be expected from the development budget and own resources of Wapda. Whereas the TYPP has notionally allocated Rs 90 billion for Wapda mainly from external loans, Wapda's proposed program including Rural Electrification for 2003-07 is Rs 261 billion. So there will be a large additional requirement, after providing for Wapda's own resources, which will have to be mobilised from the budget and/or borrowing in the market with government guarantee.
A detailed sector plan for the power sector for the period 2004-08 needs to be developed on an urgent basis and harmonised with the development of a rolling three-year plan and the MTBF.
But clearly fundamental problems with the civil service, low compensation for the higher levels, low level of professional competence due to low investment in training, still excessive weight to seniority, and perverse incentives and risk averse behaviour, have not disappeared.