Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 47480-PK

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A PROPOSED

SOCIAL SAFETY NET DEVELOPMENT POLICY CREDIT

IN THE AMOUNT OF SDR 133.8 MILLION

(US$200 MILLION EQUIVALENT)

TO

THE ISLAMIC REPUBLIC OF PAKISTAN

M a y 5,2009

Human Development Unit South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not otherwise be disclosed without World Bank authorization.

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PAKISTAN - Government Fiscal Year July 1 - June 30

ADB BISP CAS CCT CNIC CoA CPI CSP DFID DG DPC EOBI ESSI FA FBR FDI FSP GDP GNP GoP GST HIES IBRD IDA IF C ILO IMF JSAN LDP MD MDGs MNA MOE MOF M O H

Currency Equivalents (Exchange Rate Effective as o f April 28,2009)

US$1 .OO = PKRs. 80.5

Weights and Measures Metric System

ABBREVIATION AND ACRONYMS

Asian Development Bank Benazir Income Support Program Country Assistance Strategy Conditional Cash Transfer Computerized National Identity Cards Chart o f Accounts Consumer Price Index Child Support Program Department for International Development (UK) Director General Development Policy Credit Employees Old Age Benefits Employees’ Social Security Institutions Financing Agreement Federal Board o f Revenue Foreign Direct Investment Food Support Program Gross Domestic Product Gross National Product Government o f Pakistan General Sales Tax Household Income and Expenditure Survey International Bank for Reconstruction and Development International Development Association International Finance Corporation International Labor Organization International Monetary Fund Joint Staff Advisory Note Letter o f Development Policy Managing Director Millennium Development Goals Member o f National Assembly Ministry o f Education Ministry o f Finance Ministry o f Health

i

MoSWSE MTEF M & E NADRA NEP NGO N L T A NSPS NWFP P B M PDL PEFA PER PEPFM PFM PFMAA PFSS PHRD PIFRA PPRA PRGF P M L PMT PO POL PPAF PPP PRES0 PRSP PSLM PSNS RSP SBA SBP SCEA S S N DPC UNDP V A T WWF

Vice President: Country Director:

Sector Director: Sector Manager:

Task T e a m Leaders:

FOR OFFICIAL USE ONLY

Isabel M. Guerrero Yusupha B. Crookes Michal Rutkowski Mansoora Rashid Cem Mete, Iftikhar Malik, and Andrea Vermehren

ABBREVIATION AND ACRONYMS

Ministry o f Social Welfare and Special Education Medium-Term Expenditure Framework Monitoring and Evaluation National Database and Registration Authority National Environmental Policy Non-Govemental Organization Non-Lending Technical Assistance National Social Protection Strategy North-West Frontier Province Pakistan Bait-ul-Mal Petroleum Development Levy Public Expenditure and Financial Accountability Public Expenditure Review Public Expenditure, Procurement and Financial Management Public Financial Management Public Financial Management and Accountability Assessments Punjab Food Support Scheme Japan Policy and Human Resources Development Trust Fund Project for Improvement to Financial Reporting and Auditing Public Procurement Regulatory Authority Poverty Reduction and Growth Facility Pakistan Muslim League Proxy Means Test Partner Organizations (POs) Petroleum, O i l and Lubricants Pakistan Poverty Alleviation Fund Pakistan’s People’s Party Poverty Reduction and Economic Support Operation Poverty Reduction Strategy Paper Pakistan Social & Living Standards Measurement Survey Pakistan Safety N e t Survey Rural Support Programs Stand-B y-Arrangements State Bank o f Pakistan Strategic Country Environmental Analysis Social Safety Ne t Development Policy Credit United Nations Development Program Value-Added Taxation Workers Welfare Funds

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

THE ISLAMIC REPUBLIC OF PAKISTAN A PROPOSED SOCIAL SAFETY NET DEVELOPMENT POLICY CREDIT

CONTENTS

ABBREVIATION AND ACRONYMS .......................................................................................................... i

CREDIT AND PROGRAM SUMMARY ...................................................................................................... iv

I . INTRODUCTION ............................................................................................................................. 1

I1 . COUNTRY CONTEXT .................................................................................................................... 3 RECENT POLITICAL AND ECONOMIC DEVELOPMENTS ................................ 3 POVERTY AND VULNERABILITY ........................................................................ 18 SAFETY NETS: OVERVIEW AND CHALLENGES ............................................... 19

A . B . C .

I11 . THE GOVERNMENT’S SOCIAL SAFETY NET REFORM PROGRAM ................................ 22

IV . WORLD BANK GROUP STRATEGY AND THE PROPOSED SSN DPC ............................... 25 LINK TO THE COUNTRY ASSISTANCE STRATEGY ......................................... 25 COORDINATION WITH THE IMF AND OTHER DEVELOPMENT PARTNERS ................................................................................................................. 26 RELATIONSHIP TO OTHER BANK OPERATIONS .............................................. 27 LESSONS LEARNED FROM PRIOR OPERATIONS .............................................. 27 ANALYTICAL UNDERPINNINGS .......................................................................... 28

A . B .

C . D . E .

V . THE PROPOSED SOCIAL SAFETY NET DEVELOPMENT POLICY CREDIT ................... 30 OPERATION DESCRIPTION .................................................................................... 30 POLICY AREAS ......................................................................................................... 34

A . B .

V I . OPERATION IMPLEMENTATION .............................................................................................. 44 A . POVERTY AND SOCIAL IMPACTS ....................................................................... 44 B . ENVIRONMENTAL ASPECTS ................................................................................. 46 C . IMPLEMENTATION, MONITORING AND EVALUATION ................................. 47 D . FIDUCIARY ASPECTS ............................................. ...................................... 48 E . DISBURSEMENT AND AUDIT ............................... .......................... 51 F . R ISKS AND RISK MITIGATION ............................................................................. 51

ANNEX 1: Letter of Development Policy Credit .......................................................................................... 54 ANNEX 2: DPC Policy Matrix ....................................................................................................................... 60 ANNEX 3: International Monetary Fund Relations Note ........................................................................... 64 ANNEX 4 . The Poverty Scorecard Instrument and M&E Arrangements ................................................. 69 ANNEX 5: Pakistan At-A-Glance .................................................................................................................. 80

The Pakistan Social Safety Nets Development Policy Credit was prepared by an IDA team consisting o f Cem Mete. Senior Economist. SASHD; Iftikhar Malik. Senior Social Protection Specialist SASHD; Andrea Vermehren. Senior Social Protection Specialist SASHD; Xiaohui Hou. Economist SASHD; Aylin 1sik.Dikmelik. Economist SASHD; Naveed Hassan Naqvi. Senior Education Economist; SASHD; Julie-Anne Graitge. Program Assistant. SASHD; Rubina Quamber. Program Assistant. SASHD; Gertrude Cooper. (Program Assistant. SASHD; Satu Kristiina Kahkonen. Lead Economist. SASEP; Hanid Mukhtar. Senior Economist. SASEP; Javaid Afzal. Environmental Specialist. SASDI; Asif Ah. Senior Procurement Specialist. SARPS; Ismaila Ceesay. Lead Financial Management Specialist. SARFM; Saaeda Sabah Rashid. Financial Management Specialist. SARFM; Shahzad Sharjeel. Senior External Affairs Officer. SAREX; Maniza Naqvi. Senior Social Protection Specialist. ECSHD; Martin Serrano. Counsel. LEGES; Jorge Luis Alva- Luperdi. Consultant. LEGES; Sohail Abbasi. Salma Jafar and Amjad Zafar Khan. consultants. SASHD . The team would like to acknowledge contributions o f Carolina Sanchez-Paramo (PRMPR) and Tara Vishwanath (MNSPR) . The Peer Reviewers were Jehan Arulpragasam. Cornelia Tesliuc and Carlo Del Ninno .

iii

CREDIT AND PROGRAM SUMMARY

THE ISLAMIC REPUBLIC OF PAKISTAN SOCIAL SAFETY NET DEVELOPMENT POLICY CREDIT

Borrower Implementing Agency Financing Data

Operation Type

Main Policy Areas

Government o f Pakistan Benazir Income Support Program, Cabinet Div is ion IDA Credit Terms: standard IDA terms: 35-year maturity with a 10-year grace period

Amount: SDR 133.8 mi l l ion (US$200 mi l l ion equivalent).

This operation will be a two-tranche Development Policy Credit. The f irst tranche o f SDR 100.3 mi l l ion (US$l50 mi l l ion equivalent) would be disbursed upon achievement o f progress on the prior actions as wel l as appropriateness o f macro-economic policy framework. The second tranche o f SDR 33.5 mi l l ion (US$50 mi l l ion equivalent) would be disbursed upon successful completion o f the actions to be taken by the government as provided in the pol icy matrix. The proposed Social Safety Nets Development Policy Credit (SSN DPC) supports: (i) Improving the targeting eflciency of the safety nets programs by establishing a national targeting system through appointing separate agencies for data collection and eligibil i ty determination and adopting sound policy on transitioning from the old to the new targeting system. (ii) Establishing an institutional fiamework for safety nets program implementation through the development o f legal, institutional, administrative institutions for the safety net system, including the establishment o f an independent safety net agency to provide a uniform platform to implement rationalized safety net programs; the development o f administrative policy guidelines for program implementation; the rationalization o f overlapping safety net programs to improve fiscal and administrative efficiency; and the development o f graduation and exit strategies to facilitate households’ movement out o f poverty. (iii) Enhancing fiscal sustainability and strengthening the fiduciary environment through ensuring adequate budget allocation for benefit payment and program administration consistent with the overall macro-economic framework; and by developing a reliable and transparent payment system, through appointing a separate payment agency governed by strong fiduciary and social accountability controls on benefit payments.

iv

Key 2010 Outcome Indicators

Program Development Objective(s) and Contribution to CAS

Risks and Risk Mitigation

Increase in the share o f beneficiaries enrolled in the Benazir Income Support Program (BISP) using the new targeting mechanism from 0 to at least 30 percent o f total beneficiaries.

Increase in the share o f total benefit expenditures reaching the poorest 40 percent o f the population f rom 46 percent to at least 55 percent.

Increase in program applicants receiving a response on whether they qualify for the program within 3 months f rom scorecard form submission, f rom 0 to at least 50 percent o f total applicants. Increase in benefit payments audited f rom 0 percent to at least 50 percent o f total payments under the new payment system and improvement in reconciliation time lag f rom the present indefinite period to 2 months.

Increase in percentage o f participating (poverty-scorecard) districts in which beneficiary l is ts are available, f rom 0 to at least 30 percent. The program development objective i s the establishment o f an appropriate policy framework for an efficient national safety net system.

The proposed DPC support falls under pil lar 111 o f the CAS: supporting the poor and vulnerable. The CAS recognizes that the existing social assistance programs cover a very small fraction o f the poor, provide negligible benefits, and suffer f rom ineffective targeting, weak administration, and a lack o f monitoring and evaluation. T o this end, the CAS notes that the Bank’s support wil l include support for safety nets that will (i) help the chronic poor cope with poverty, and where possible; (ii) help the poor escape poverty, e.g., v ia conditional cash transfers; and (iii) help families and households cope with seasonal shocks.

The proposed DPC i s fully consistent with the PRSP 2, which identifies assisting the poor and the vulnerable as a key objective o f Government’s poverty reduction strategy. The proposed DPC i s also consistent with the National Social Protection Strategy that supports the development o f an effective and financially sustainable safety net system to promote the re-distributive goals o f society.

The risks to the proposed Pakistan Safety Nets DPC are substantial. Several risks attend the proposed Social Safety N e t DPC operation:

Political risks: Attaining a sharp reduction in the fiscal and current account deficits will require polit ical leadership and cohesion. The scale and speed o f the required economic pol icy response to the macroeconomic imbalances to improve economic growth and poverty reduction prospects in the long run could intensify social tensions in part o f the population. The sustainability o f the program could also be undermined by possible differences among Pakistan’s main polit ical parties o n other issues, including constitutional reforms and the security

V

situation. The development o f a well- governed and targeted safety net could help mitigate the economic and social impact o f necessary structural reforms on the poorest segments o f the population, promoting social peace. The BISP has been established as an autonomous agency under presidential Ordinance IX o f 2009. The Pakistan Constitution provides for a sunset clause for al l Ordinances. Ordinance I X o f 2009 will eventually require the Parliament's adoption to remain in force. The chances o f the Ordinance being repealed are deemed slim. Nevertheless, the association o f the safety net program with the current government could lead to i t s disbanding under a new and different government in the future. In addition, the involvement o f parliamentarians in the init ial beneficiary selection could also pose a major risk to i t s governance, and pose a reputational risk for the Bank. The development o f effective institutions and strong monitoring and evaluation systems that can provide information on program performance and gain the confidence o f the public could mitigate this risk. The consensus across the political spectrum o n the need for a safety net program wil l also ensure continuity o f the program (though the name or institutional home may change).

Economic risks: On the external side, a renewed rise in international energy and commodity prices, a reduction in foreign remittances especially f rom the countries o f the Middle East, and a further deterioration in the world economy and international financial markets could weaken the export sector, reduce household transfers, lower capital inflows, limit economic growth and reduce flexibil i ty for policy reforms. Owing to these reasons, the external imbalances may continue to widen despite the short-term measures taken. On the internal side, the inability o f Government to restore fiscal and external balance as agreed could reduce business and consumer confidence. This could cause a fundamental shift in market expectations and a loss o f confidence at home and abroad, leading to a sudden reversal o f financial assets held in Pakistan's stock and bond markets. This could generate a vicious cycle between weakening financial markets, stalling economic activity, and a worsening fiscal position. The IMF Stand-By Arrangement will mitigate these risks by committing the authorities to fiscal and current account deficit targets.

Implementation risks: A successful implementation o f the reforms will be critical for an effective safety net system. Among the risk factors that would influence reform implementation performance are (i) the l o w administrative capacity o f BISP, which i s a newly established organization; (ii) continued enrollments to BISP under the old system; (iii) over- ambitious and unrealistic ro l l out o f the safety net system, which would have negative implications on the quality o f program . -

implementation- (iv) inadequate financing o f the- program that

vi

I

could result in insufficient coverage o f the poor; (v) delays in

Operation ID Number

funds release to safety net programs arising f rom the current fiscal crunch and the need to reprioritize public spending; (vi) fraud and corruption that could undermine the ability o f the program to deliver benefits to the poor in circumstances o f weak internal controls; and (vii) transition to a new targeting system, which may lead to dissatisfaction f rom beneficiaries o f the old system who no longer qualify for the benefit. The mitigating factors are (i) Bank supported technical assistance to build capacity for the implementation o f the reform program; (ii) ro l l out o f the new targeting system with a strong M&E component to demonstrate i t s effectiveness; (iii) the use o f a pi lot enrollment phase to fine tune and adjust program parameters prior to a national ro l l out; (iv) Government’s strong commitment to establishing and implementing a modern safety net system as evidenced by i t s adoption o f an objective national targeting system; (v) the establishment o f separate agencies for data collection, eligibil i ty determination and benefit payments; (vi) the institution o f special purpose independent financial and performance audits o f the BISP program by the Auditor General o f Pakistan as wel l as regular operational audits by third parties; and (vii) the institution o f an appeals mechanism and process evaluations o f the targeting process during the test phase.

P115638

vii

INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A PROPOSED SOCIAL SAFETY NET DEVELOPMENT POLICY CREDIT TO

THE ISLAMIC REPUBLIC OF PAKISTAN

I. INTRODUCTION

1. This Program Document presents the proposed Social Safety Ne t Development Policy Credit (SSN DPC) in the amount o f US$200 mi l l ion to the Islamic Republic o f Pakistan to support the Government o f Pakistan’s Safety N e t Reform Program. The broad objective o f the safety net reform program i s to support inclusive growth through the development and implementation o f a fiscally sustainable, efficiently targeted, and well-administered national safety net system in Pakistan. The safety net system will provide the chronic and transient poor with both basic income support and access to opportunities for graduating out o f poverty. Specifically, the credit will support the establishment o f an appropriate policy framework for an efficient national safety net system, including the development o f sound institutions for the effective implementation o f the Benazir Income Support Program, the Government’s new national safety net program. This objective i s consistent with the goals o f the Pakistan’s Second Poverty Reduction Strategy Paper (PRSP-11) and the National Social Protection Strategy o f Pakistan (NSPS).

2. Pakistan’s economy grew rapidly during 2003 to 2007 but i t s growth has been compromised by both internal and external shocks. Average economic growth between 2003 and 2007 was 7.3 percent, but growth declined to 5.8 percent in 2007/08 and the growth target for 2008/09 i s only 2.5 percent. The fiscal deficit also increased in 2007/08, and i s estimated to be at 7.4 percent o f GDP. The economic slowdown i s in part due to external events including price increases in international o i l and food commodities, reduced demand for Pakistan’ exports due to a stagnant global economic environment and the reduction in the supply o f credit as a result o f the deterioration in international credit markets. During the same period, internal political uncertainties also had a negative impact on growth by reducing investor confidence, which in turn resulted in capital outflow, rising macroeconomic imbalances and reduced creditworthiness rating by international agencies.

3. While economic growth had reduced the incidence o f poverty in the country, recent economic shocks have likely reversed this trend. Irrespective o f the methodology deployed, economic growth reduced poverty between 2001/02 and 2005/06. The official poverty estimates suggest that the national poverty rate fell by more than 11 percentage points in these four years. However, despite these declines in poverty, nearly a quarter o f Pakistan’s population remains poor. Aside from l o w levels o f income, Pakistani households are also subject to income shocks- both aggregate, e.g., the recent global food, fuel and financial crisis and natural disasters and idiosyncratic, e.g., health and unemployment-can impose significant costs on households, particularly for the poor. As a result, the poor often have to reduce their food intake (both quality and quantity), increase labor supply, sometimes by withdrawing their children out o f school.’ Thus, income shocks can have negative impacts on welfare, particularly for the poor, and also perpetuate inter-generational poverty.

4. Existing publicly financed social protection programs in Pakistan are limited in adequacy, targeting efficiency, and abil ity to respond to shocks. Until the introduction o f the Benazir

World Bank (2007) Social Protection in Pakistan: Managing Household Risks and Vulnerability 1

1

Income Support Program, Pakistan’s safety net system comprised o f two cash transfer programs, namely, Zakat and the Food Support Program administered by the Bait-ul Maal, covering approximately 3.2 mi l l ion households in 2006/07.2 Both programs are weakly targeted to the poor: only 46 percent o f total expenditures o f Bait-ul-Mal (and 43 percent o f total Zakat expenditures) reached the poorest 40 percent o f the p ~ p u l a t i o n . ~ Pakistan also implements social security programs for the formal sector workers (largely non-poor), comprising about 10 percent o f the labor force, to mitigate risks o f income loss in o ld age, disability and survivorship. Social protection expenditures remained about 3-4 percent o f pro-poor PRSP spending between 2004/05 and 2006/07, before sharply increasing to 13.4 percent in 2007/08. However, this recent increase in spending reflects an increase in social security expenditures and a significant increase in food subsidies, both l ikely targeted to the non-poor. Given that a large share o f total social protection expenditures comprise social security spending (75 percent in 2007/08); and the sizeable leakage o f safety net benefits to the non-poor, a significant share o f social protection spending (excluding food subsidies) in Pakistan l ikely accrues to the non-poor.

5. During the second hal f o f 2008, the Government o f Pakistan launched the BISP as i t s main national social safety net program. The short-term objective o f the program i s to cushion the adverse impact o f food, fuel and financial crises on the poor, but i t s broader objective i s to meet the re-distributive goals o f the country by providing a minimum income support package to the chronic poor and those who are highly vulnerable to future shocks. The program wil l provide cash transfers o f Rs. 1000 [$12] per month to the eligible families and i s expected to cover 3.4 mi l l ion families in 2008/2009.4 The 2008/09 budget allocation o f Rs. 34 bi l l ion doubles the federal Government’s social safety nets spending from 0.3 percent in 2003/04 to 0.6 percent o f GDP.’ The Government intends to increase the coverage o f the safety net program, with safety net spending expected to reach approximately 0.9 percent o f GDP in 2009/10 and the BISP serving as the national safety net platform for the country.

6. The Social Safety Ne t Reform Program, which this proposed credit would support, i s based on three complementary pillars. The first pil lar aims to improve targeting efficiency of the safety net programs by establishing a national targeting system through the appointment o f separate agencies for data collection and eligibility determination and adopting sound policy on transitioning from the old to the new targeting system. The objective o f the second pillar i s t o establish an institutional framework for program implementation through the development o f legal, institutional, administrative institutions for the safety net system, including the establishment o f an independent safety net agency to provide a uniform platform to implement rationalized safety net programs, the development o f administrative policy guidelines for program implementation; the rationalization o f overlapping safety net programs to improve fiscal and administrative efficiency; and the development o f graduation and exit strategies to facilitate households’ movement out o f poverty. The objective o f the third pillar i s to enhance fiscal sustainability and strengthening the fiduciary environment through ensuring adequate budget allocation for benefit payment and program administration consistent with the macro-economic framework; and developing a reliable and transparent payment system, through the appointment

* Both PBM and Zakat also administer various other programs, such as social welfare rehabilitation, selected health sector programs, rehabilitation centers for children and vocational training centers.

World Bank (2007), ibid. This level o f coverage i s approximately equal to about 25 percent o f the population-around the 2005106 national

poverty headcount rate-according to the most recent estimates. In addition, the province o f Punjab i s allocating about 0.2 percent o f GDP to i ts income supporticash transfer program

in 2008109. A higher level o f spending does not translate into more coverage for the poor if safety nets programs are poorly targeted.

2

o f a separate payment agency governed by strong fiduciary and social accountability controls on benefit payments.

7. The Government i s committed to developing a modern social safety net system as the first step in developing a viable social protection program for the country. The Government’s strong commitment to the safety net reform agenda i s evident f rom the rapid introduction of the BISP to address chronic poverty and to protect the poor f rom the adverse impacts o f the recent global economic crisis. The Government’s commitment i s also evident in the formal adoption of a poverty score card (or Proxy Means Test) as an objective instrument to identify safety net beneficiaries-a f i r s t in the South Asia regions6 Consistent with international best practice, and again for the first time in South Asia, the Government i s developing a targeting system with separated agencies to conduct the enrollment process and determine program eligibility and i s starting to institute reforms to develop a transparent and timely payment system. The Government has also included monitoring and evaluation o f the program to inform pol icy as an important element o f the reform agenda. More recently, the Government has shown commitment to the new targeting system by requesting the main eligibility determination agency to no longer accept forms under the old targeting system. The Prime Minister has also publicly requested households to comply with the teams carrying out the door-to-door scorecard census for the new targeting system.

8. An effective social safety net program can promote human capital development and contribute to inclusive economic growth in Pakistan. First, poor and vulnerable households will receive some relief to cope with adverse income effects o f the recent crisis. The program wil l also provide basic income support to the chronic poor, consistent with the Government’s re- distributive goals. Second, Pakistan will have an established safety net system that can be scaled- up in response to future adverse economic or agro-climatic shocks. Third, in the long term the program can promote access to graduation strategies such as micro-finance, skill development programs, or basic health and education services that can help households accumulate human capital and eventually contribute to economic growth. The institution o f an effective safety net system also allows policy makers to undertake much needed structural reform measures (e.g., reduction o f subsidies) while protecting the poor and promoting dynamic efficiency.

11. COUNTRY CONTEXT

A. RECENT POLITICAL AND ECONOMIC DEVELOPMENTS

1. Recent Political Developments

9. Pakistan has undergone rapid political changes in the past year and a half. On November 3, 2007, President Pervez Musharraf, acting as the Chief o f Army, imposed a state o f emergency and suspended the Constitution. At the end o f November 2007, Mr. Musharraf relinquished the Army Chief post and took oath as a civil ian President for another five-year term. Soon thereafter the emergency was lifted, and Parliamentary elections announced. However, the elections had to be postponed, as the former Prime Minister Benazir Bhutto was assassinated at the end o f December 2007.

Annex 4 provides detailed information about the poverty scorecard instrument.

3

10. The Parliamentary elections held in February 2008 were widely considered to be free and fair. The main opposition parties won the elections by a wide margin, and a new coalition government comprising the former Prime Minister Benazir Bhutto’s Pakistan’s People’s Party (PPP), led by Mr. Asif Zardari, and the Pakistan Muslim League (N), led by former Prime Minister Mohammad Nawaz Sharif was formed, with Mr. Yousaf Raza Gi l lani as the Prime Minister. In August 2008, Mr. Pervez Musharraf resigned as the President o f Pakistan. In September 2008, Mr. Asif Zardari was elected President.

rising household incomes, with

11. economic and security environment. The security situation in the country remains unstable.

Pakistan i s a frontline state in the war on terror, which has adversely impacted i t s

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/01

-5% ~

2. Economic Developments through 2006/07

12. Pakistan’s development record was strong for part o f this decade. The economy grew at 7.3 percent on average per year during 2003/04 through 2006/07, driven by solid performances in the services and industrial sectors (see Figure 1). The manufacturing sector grew fast during the earlier part o f the period, but slowed down considerably later in the period due to capacity and infrastructural constraints. At the same time, the services sector, catering primarily to the domestic demand, grew steadily throughout the period. The factors that contributed to growth included a benign external environment availability o f external financing, political and macroeconomic stability. K e y measures include renegotiation o f external debt with Paris Club creditors, pre-payment o f extensive debt, greater reliance on concessional borrowing for new

Figure 1: Trends in Economic Growth

~ 20%

I

13. However, this growth was in part explained by heavy reliance o n external financing and on expansionary fiscal stance, whi le revenues and savings remained stagnant. A surge o f capital inflows from abroad allowed the government to finance rising fiscal deficits at a l o w cost. The consolidated fiscal deficit increased from 2.3 percent in 2003/04 to 4.3 percent o f GDP in 2006/07, while domestic tax collection remained weak.

14. The effect o f expansionary fiscal policy was compounded by loose monetary policy, which together led to a sharp increase in the domestic demand from 2002/03 onwards. While until 2003/04, economic growth had been sustained by external demand, it became consumption- driven thereafter until 2006/07 (Figure 2). Strong growth in money supply contributed to the acceleration o f inflation f rom 3.5 percent in 2001/02 to 7.8 percent in 2006/07. Pakistan’s savers

4

continued to receive l o w returns, below the rate o f inflation. L o w returns on bank deposits discouraged private savings and fuelled asset-price bubbles as households sought higher returns by buying shares and property.

15. With domestic demand outpacing domestic output, the current account deficit reversed from a

percent in 2002103 to a deficit o f 4.8 percent o f GDP in 2006107, financed through ample capital inflows. The reliance on external financing

surplus o f 4.7

Figure 2: Contribution to GDP Growth

-6% 2000101 2001/02 2002103 2003104 2004105 2 0 0 5 / 0 6 2006107 I

left the economy vulnerable to external shocks and, despite the clear signs o f overheating, Pakistan concluded 2006107 with no visible signs o f adjustment.

3. Economic Developments in 2007/08

16. In 2007108, the sharp rise in international o i l and food (specifically wheat) prices, in combination with policy inaction and internal political turmoil, led to rapidly expanding macroeconomic imbalances in Pakistan. Both fiscal and current account balances widened significantly. In the absence o f adequate remedial policy measures to address the imbalances-in particular not passing on the international price increases to domestic consumers-the economy begun to adjust through a slowdown in growth and rising inflation.

17. Spending overruns led to a sharp increase in the 2007108 fiscal deficit to 7.4 percent o f GDP, compared to the budget target o f 4.0 percent o f GDP (see Table 1). Expenditures exceeded the budget target by about 2.9 percent o f GDP, while revenues fel l short o f the target by about 0.6 percent o f GDP.

18. About 80 percent o f the fiscal deficit increase was driven by international o i l and commodity price increases. The sharp increase in the budget deficit was mostly caused by the overrun o f 2.7 percent o f GDP in budgetary subsidies (from the budget target o f 1.1 percent o f GDP to 3.8 percent o f GDP) owing to the rise in international commodity and o i l prices (see Table 2).7 From 2006107 to 2007/08, the domestic price o f Pakistani o i l imports increased by about 60 percent on average. Yet, in an attempt to protect households and businesses from domestic price adjustments, Government kept domestic petroleum prices unchanged until March 2008. This resulted in overruns o f 1.4 percent o f GDP in the petroleum, oil, and lubricants (POL) subsidy, and o f 0.6 percent o f GDP in the electricity subsidy. Furthermore, the r ise in

Fiscal data covers public enterprises only to the extent o f subsidies and government guarantees provided 7

to them and WAPDA borrowing.

5

international wheat and fertilizer prices led to an overrun o f 0.5 percent o f GDP in expenditure on wheat and fertilizer subsidy.

19. Beyond the rise in government subsidies, an overrun in interest payments by 0.9 percent o f GDP due to an underestimation o f interest liabilities in the budget contributed to the increase in the budget deficit. The rise in the budget deficit would have been even higher without the 1.2 percent o f GDP under-run in development spending.

20. In parallel, increased import bills and strong aggregate demand contributed to a widening o f the current

Table 1: Consolidated Federal and Provincial Fiscal Accounts, 2006/07-2007/08

Total Revenue (excl. grants) Tax Revenue Non-tax Revenue

Total Expenditure Current

Of which : Interest Federal Subsidies Defense Other Current Expenditure

Development Expenditure

Budget deficit (excl. grants)

Financing External Domestic

Non-bank Bank

Memo item: GDP (Rs in Billion)

(Percenl 200

Budget 13.3 10.3 3.0

17.5 12.8 2.7 1.0 2.8 6.2 4.7

-4.2

4.2 4.2 4.2 4.2 4.2

L 8 808

’GDP)

Actual 14.9 10.2 4.7

19.2 15.8 4.2 1.2 2.9 7.5 4.9

-4.3

4.3 2.3 2.0 0.9 1.2

8,707

)7 20a Budget

14.9 11.0 3.9

18.8 13.7 3.8 1.1 2.8 6.0 5.2

-4.0

4.0 2.0 2.0 1.7 0.3

9,9 70

08 Actual

14.3 10.4 3.9

21.7 17.7 4.7 3.8 2.7 6.6 4.0

-7.4

7.4 1.4 6.0 1 .o 5.0

L 10 478

account deficit in 2007/08. Pakistan’s current account deficit reached 8.4 percent o f GDP in 2007/08, compared to 4.8 percent in 2006/07. Over 50 percent o f this increase (1.9 percent o f GDP) was on account o f a 38 percent increase in the import price o f petroleum per barrel. The trade deficit increased by about 58 percent year-on-year to 9.1 percent o f GDP, mainly owing to sharp increases in the import bill. The import bi l l rose by about 31 percent, far higher than the targeted growth o f 6.5-7.0 percent for 2007/08. The o i l import bill jumped by about 56 percent, and the food import bill rose by about 46 percent on account o f a sharp increase in the wheat import bill. Pakistan’s gross national saving declined f rom 18.1 percent o f GDP in 2006/07 to 13.2 percent o f GDP in 2007/08. Gross capital formation declined more moderately, dropping from 22.9 percent o f GDP to 21.6 percent o f GDP.

21. Pakistan’s foreign reserves declined rapidly due to the large current account deficit, a reduction in net capital inflows, and inadequate adjustment o f the exchange rate. Whi le FDI flows remained relatively robust at US$5.1 bi l l ion (albeit lower than in 2006/07) and remittances increased to US$6.5 billion, portfolio investments declined as investor confidence plummeted. Also, donor inflows significantly dropped as the macroeconomic framework went o f f track, and the privatization process came to a halt in 2007/08. Furthermore, given the large spread on Pakistan sovereign bonds, borrowing from international capital markets was not an option. As a result, foreign reserves were drawn down to pay for imports. By endJune 2008, the State Bank o f Pakistan (SBP) foreign exchange reserves dropped to US$8.6 billion, a fall o f about US$5.7 bi l l ion since October 2007. An additional US$950 m i l l i on was drawn from the now-depleted sinking fund. The decline in international liquidity i s reflected in the sharp decrease o f the ratio o f SBP reserves to broad money during the second hal f o f 2007/08 (see Figure 3).

6

22. Even though the deterioration in the terms-of-trade put increasing pressure on the exchange rate, the Rupee-Dollar exchange rate remained broadly unchanged around Rs/US$61 until December 2007. During the second hal f o f 2007108 SBP allowed some exchange rate

Figure 3: Net Reserves to Broad Money (YO)

35

30

25

2 20

15

10

5

0

2

Mar-03 Dec-03 Sep-04 Jun-05 Mar-06 Dec-06 Sep-07 Jun-08 Mar-09

Source : State Bank o f Pakistan.

flexibility and the exchange rate depreciated by 13 percent to reach Rs/US$68.4 by the end o f the fiscal year.

23. Faced with lower external financing and privatization receipts, Government resorted to direct borrowing from SBP for budget deficit financing. During 2007108, government borrowing from SBP amounted to Rs. 689 billion, increasing the total stock o f government debt owed to SBP to Rs. 1.1 t r i l l ion at end June 2008.

24. The rise in government borrowing kept the growth o f reserve money over 20 percent and fueled inflation (see Figure 4). The average CPI for 2007/08 was 12 percent, with year-on-year CPI at

Figure 4: Money Supply, Credit, and Real Interest Rate

I 2 5 I 1

08 . 08 I 09

I I ' T -10

-7 - - Series1 - Series2 - - - - Series3

-1 5 Note The real interest rate i s the bfference tetueen nominal interest rate on the 6-month T-bill and CF'I inflation

21.5 percent at end June 2008. SBP responded to the rise in inflation by increasing the pol icy discount rate by a total o f 200 bp by end-June 2008, but real interest rates remained negative by a large margin.

25. In response to the widening imbalances and supply side shocks, real GDP growth declined from 6.8 percent in 2006/07 to 5.8 percent in 2007108. In agriculture, floods and pest

7

attacks depressed rice and cotton production, while industrial production and services were constrained by acute power and gas shortages.

26. Pakistan’s risk rating worsened as the economic situation deteriorated. Both Standard & Poor’s and Moody’s downgraded Pakistan’s sovereign debt ratings in M a y 2008 (from B+ to B and from B1 to B2, respectively) owing to the sharp erosion in the fiscal position and the inadequate policy response to the worsening macroeconomic situation.

4. Towards Stabilization

27. Recognizing the need to correct the macroeconomic imbalances, Government embarked on a concerted effort to stabilize the economy starting with the 2008/09 budget. The budget, among other things, envisaged sizeable fiscal consolidation through power and fuel subsidy cuts and increased revenue effort. However, by November 2008 it was apparent that the budget measures were inadequate to contain the economic slide, aggravated by the global financial crisis, and to restore the investor confidence. The foreign exchange reserves o f SBP had dropped to US$3.3 bi l l ion (about three weeks o f imports) by mid-October 2008, the nominal exchange rate had depreciated to Rs/US$84, Government had borrowed additional Rs. 356 b i l l ion f rom SBP during July-November 2008, the average CPI had risen to about 25 percent and core inflation to 18.9 percent at end-November 2008, and the EMBI Global Bond spread o f Pakistani sovereign bonds had climbed above 2,000 bp. In response to these developments, Moody’s had further downgraded i ts ratings outlook for Pakistan sovereign bonds from stable to negative in September 2008 and the rating f rom B 2 to B3 in October 2008. Similarly, Standard & Poor’s had downgraded Pakistan’s rating further f rom B to CCC+ in early October 2008 and to CCC in early November 2008.

28. T o avoid a balance o f payments crisis and default on foreign debt payments, the authorities developed a home-grown stabilization program, which was supported by the IMF through a 23-month SBA in November 2008. The program includes a medium-term macroeconomic framework, which envisages fiscal and monetary tightening to bring down inflation and reduce the external current account deficit to sustainable levels. The 2008/09 program framework supported by SBA builds on the 2008/09 budget, modified to account for higher inflation projections and greater exchange rate adjustment than envisaged at the time o f the budget. The framework was revised during the f irst program review in February 2009 to take into account the impact o f significantly deteriorated global economy, resulting lower exports, foreign inflows and growth prospects in the short and medium term, as wel l as the change in the terms o f trade through lower international o i l and food prices. Table 3 summarizes the revised framework, and compares it with the init ial November 2008/09 program framework for 2008/09.

29. The revised framework i s built around the following economic parameters for 2008/09:

Real GDP growth of 2.5 percent: the target was lowered from 3.4 percent owing to sharper than anticipated economic slowdown;

The fiscal deficit (excluding grants) of 4.3 percent of GDP: the in i t ia l fiscal deficit target remained unchanged in nominal Rupee terms, but owing to the moderated GDP growth projection, the target as a share o f GDP increased from 4.2 to 4.3 percent;

The current account deficit of 5.9 percent of GDP: the init ial target o f 6.5 percent o f GDP was revised downwards due to a larger than anticipated decline in imports; and

8

Annual average consumer price inflation at 20percent: the annual inflation target was adjusted downwards from 23 percent, as a result o f falling food and energy prices and lower economic activity.

Table 2: Medium-Term Macroeconomic Framework Initial Revised

Actual Program Program Projections 2006/07 2007/08 2008109 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14

(Annual changes; in percent) butput and prices Leal GDP at factor cost :onsumer prices (period average) 'akistani Iupees per U.S. dollar (period average) aving and Investment iross national saving iross capital formation /I 'ublic finances .evenue and grants .evenue Tax revenue

Non-tax revenue Grants

:xpenditure (including statistical discrepancy) 12 Current expenditure

of which : Federal Board o f Revenue

Interest Other federal Provincial

o f which: one-off-outlays Development expenditure

Net lending tatistical discrepancy lverall balance hderlving (excludinn grants and one-off-outlays) xcluding grants icluding grants inancing External

Domestic otal government debt xternal government debt omestic government debt Ionetarv sector et foreign assets et domestic assets road money rivate credit ix-month treasury bil l rate (period average; in %)

xternal sector lerchandise exports. U.S. dollars (growth rate; in %) lerchandise imports. U.S. dollars (growth rate: in %) urrent account including official current transfers (as % o f GDP) ross official reserves (in millions o f U.S. dollars) 13 I months o f next year's imports o f goods and services [emorandum Items: ea1 effective exchange rate (annual average: Dercentaee chanee)

o f f which; privatization receipts

6.8 7.8 1.3

18.1 22.9

15.2 14.8 10.9 9.7 3.9 0.3

20.6 15.8 4.2 6.9 4.6 4.9 0.5 -0.1 -1.4

-3.9 -4.3 -4.0

4.0 2.0 0.6 2.0

54.1 24.2 29.9

8.1 11.3 19.3 17.2 8.8

4.4 8.0 -4.8

14.302 3.8

0.5 :a1 per capita GDP (percentage chanee) 14 5 1

5.8 12.0

13.2 21.6

14.6 14.3 10.4 9.6 3.9 0.3

21.8 17.7 4.7 8.9 4.2 4.0 0.2 -0.3 0.1

-7.3 -7.4 -7.1

7.1 1.2 0.0 6.0 57.4 26.2 31.2

-7.8 23.2 15.3 16.4 9.6

16.5 31.2 -8.4

8.591 2.7

-0.8 4.1

10,478

3.4 23.0

13.5 20.0

15.1 14.9 11.0 10.2 3.9 0.2

19.0 16.0 4.6 7.6 3.9 3.0 0.2 0.0 0.1

-4.0 -4.2 -4.0

4.0 2.5 1.1 1.6

54.6 26.9 27.7

-4.9 15.7 10.8 25.2 12.7

12.0 1 . 1

-6.5 8,591 2.1

1 '.6 13.384

2.5 4.0 5.0 20.0 6.0 5.5

fhpercent of GDP) 14.2 20.1

15.4 15.2 11.3 10.0 3.9 0.2

19.3 16.1 4.8 7.3 4.0 3.2 0.2 0.0 0.2

-4.1 -4.3 -4.2

4.2 1.4 0.0 2.8

56.9 27.8 29. I

15.6 19.9

16.0 15.8 12.0 10.6 3.8 0.2

19.2 15.2 4.7 6.3 4.2 4.0 0.1 0.0 0.0

-3.3 -3.4 -3.2

3.2 1 .o 0.2 2.2 55.3 26.2 29.1

17.3 21.6

16.8 16 4 12.8 11.5 3.7 0.4

19.4 14.2 3.5 6.4 4.3 5.2 0.0 0.0 0.0

-3.0 -3.0 -2.6

2.6 1.5 0.2 1 . 1

54.1 26.2 27.9

(Annual changes; in percent)

11.8 12.1 . . 8.4 10.6 .. 8.3 14.2 ,.

-3.4 -1.4 ,,

-5.5 1.5 6.2 -14.5 -5.5 6.8 -5.9 -4.3 -4.3

9.091 10,591 11,091 3.0 3.3 3.2

0 9 2.4 3.4 12,970 14,298 15,838

6.0 5.5

18.6 23.0

17.4 17.0 13.5 12.3 3.5 0.4

19.7 14.1 3.1 6.6 4.4 5.7 0.0 0.0 0.0

-2.7 -2.7 -2.3

2.3 2.1 0.4 0.2 52.1 26.2 25.8

8.0 7.0 -4.3

11,891 3.2

4 A 5.4 22,572

. .

DP at market prices (in billions o f Pakistani rupees) 8.723 ~ , - -

Expenditure on social assistance in 2008/09 is budgeted at 0.Spercent of GDP. Theprogram wil l target an additional 0.3-0.Spercent of GDP. Excluding gold. foreign deposits of commercial banb held with the State Bank ofPakistan. The Realper capita GDP foryears FYI], FY12, FY13, andFYl4, thepopulation growth rate is assumed to be 1.6%p.a.

Iurces: Government of Pakisian for rhe hisioricalyears, andIMFpro,edions.

. . I 7 712

6.5 5.5

19.7 23.9

17.7 17.3 13.9 12.7 3.4 0.4

19.6 14.0 2.8 6.7 4.5 5.6 0.0 0.0 0.0

-2.3 -2.3 -1.9

1.9 1.9 0.1 0.0 49.9 26.3 23.6

8.0 7.6 -4.2

11,891 3.0

4.9 19,901

7.0 6.0

21.5 25.2

17.9 17.5 14.3 13.1 3.3 0.4

19.7 13.8 2.5 6.9 4.5 5.9 0.0 0.0 0.0

-2.1 -2.1 -1.7

1.8 1.8 0.1 0.0

47.4 26.0 21 4

8.5 6.8 -3.7

12,891 3.0

30. The fiscal deficit reduction i s to be achieved by a combination o f expenditure cuts and revenue increases, with the burden o f adjustment falling primarily on expenditures, Overall revenues (excluding grants) are to be increased from 14.3 percent o f GDP in 2007/08 to 15.2

9

percent o f GDP in 2008/09 through a rise in tax revenues. Further, the reduction in the fiscal deficit relies on a consolidation o f overall expenditures by about 2.5 percent o f GDP to 19.3 percent o f GDP. About ha l f o f the reduction i s to come from current spending-primarily f rom cuts in fuel and power subsidies-and the other ha l f f rom rationalization in development spending, whi le ensuring productive social and infrastructure spending i s protected.

3 1. On the external side, the 2008/09 revised program framework projects a rapid decline in import growth (14.5 percent contraction) due to decreases in international commodity and o i l prices and the slowdown in economic activity. The decline in imports i s expected to outweigh the projected 5.5 percent contraction in exports, leading to a strong improvement in the trade balance. Both gross national savings and gross capital formation are predicted to further decline, with capital formation decreasing with the economic downturn.

32. The 2008/09 program assumes that Government’s net borrowing from SBP wil l be zero on a quarterly basis from November 1, 2008 onwards, and Government will rely increasingly on non-bank borrowing and external financing. This, in addition to a sharp decline in aggregate demand during the second hal f o f 2008/09, i s expected to bring down average annual inflation to the program target.

33. At the first quarterly review o f SBA in February 2009, the stabilization program remained on track.8 The rapid decline in international commodity and o i l prices since August 2008 has reduced the risks, facilitated improvement in the external position and the achievement o f targets. Table 4 highlights the developments in select recent economic indicators by month during 2008/09.

34. Fiscal consolidation was on track at end December 2008 (see Table 5). The end March 2009 actual fiscal data wi l l be available only in early M a y 2009. The estimated ha l f a year fiscal deficit (excluding grants) was 1.9 percent o f GDP against the target o f 2.0 percent o f GDP set in November 2008. Savings on non-essential development spending and a reduction in power and fuel subsidies, facilitated by rapidly declining international o i l prices, helped the fiscal deficit stay within the target, despite o f weak revenue performance.

The second review o f SBA will be carried out in early May 2009. 8

10

Table 3: Selected Recent Economic Indicators

Intemanond Commodity Prices Crudc Oil, Dubai (md-pmad) Sbbl li what. us (nwriyc) S/mt I t

Cumnt Account Ddicit % of GDP ojwhich Trado o f Goods % o f GDP Trado of Senrcos %ofGDP Workers' Renuttmnces % o f GDP

No! Capital Flour 4 a f G D P 2 ojwhich Fomgn Direct Imcranolt %of GDP Potiiolio In,sshlmt Yo aE GDP

Net PonEoiia Imesment (cnd-peenod) EMBI Global Bond Spread (end-penod) Foreign Exchange Rescncs (end-pnod) Exchange h i e (cnd-pmod) RsR

Consumer Price Index %. YOY gra\\th CPI food Yo, YaY growth CPI non-food wid non-mmg> %. YOY 5aa.th

s mn bps

$ mn

6-mmth T-bill ('Yo old-pcnod)

Rescne mone) Broad mone)

-1 4 - 3 9 -4 8

-4 I -65 -6 8 -3 0 - 3 4 -29 3.8 3 6 3 8

1.0 4 9 7 4

1 4 2 7 3 6 0 6 0 7 2 3

6200 9640 3,288C 229 251 214

5 9 7 6 0 2 606

9 3 7 9 7 8 125 6 9 1 0 3 7 2 7 8 5 9

7 9 8 4 8 9

9,805 10,765 13.345

176 I l l 2 2 0 9 192 149 1 9 3

91 I 869 928 I55 6 135.1 - 5 8 6 -8s 4 -680 1606

___1

w m 90 3

- 343 8

8 4

-9 I

3 8

4 9

3 1

-3 n

n o

41 n

n 625

12 n

687

68 4

176 8 4

I 1 5

= 22 3 15 4

583 8 688 7 -134 I

-

Jul Aug Scp Oet No- Dee Jan Feb Mar

1232 11113 g o o 594 4 7 1 3 7 1 4 3 2 4 4 6 4 7 0 32x2 329.0 2960 2370 2269 22nn 239.0 2250 231 n

- 0 6 - 0 9 -08 - 1 3 -05 -03 -02 n i - 0 1

- o x -09 -1 o .IO - 0 4 - 0 7 - 0 5 - 0 2 -04 -u3 -04 -n I -0.3 -O 2 -0 2 -n I .o 2 -0 I 0 4 0 4 0 4 0 3 0 4 0 4 0 4 0 4 0 5

-03 n 4 0 2 n 4 0 2 0 6 n 5 -02 n 4

n z 0 3 0 2 n i 0 2 0 4 n i n i 0 2 0.1 n o o o o n n o 0.0 U I 0 3 (10

-133 -218 -2.35 -2% -278 .308 -408 -503 -542 782 1,040 1,6nn 2,005 2,132 2,112 2,046 1,914 i.700

6,968 5.760 4,866 3.379 6,001 6,619 6,793 6,687 7,146 715 762 784 8 1 7 789 7 9 1 790 799 8 0 5

243 2 5 3 23.9 25 n 2 4 7 23 3 2 0 5 21 i 19 I 338 3 1 1 299 3 1 7 3 0 4 2 7 9 2 1 6 229 197 147 164 173 183 189 188 189 189 1 8 5

115 115 1 2 7 1 2 7 140 140 1 4 0 1 3 0 1 1 8

19.3 213 261) 1 6 2 107 Ill 1 1 5 7 2 8 4 138 1 3 4 1 2 6 1 1 7 120 i n 1 9 7 9 9 8 6

Ju& - Apni 18. 2009 263 8 103 3 137 2

3 5. During July-December 2008, recurrent and development expenditures were below their targets by 5 and 18 percent, respectively. On the recurrent side, the bulk o f savings accrued from federal subsidies. Expenditure on federal subsidies (at 0.9 percent o f GDP) was only 36 percent o f the budgeted amount, as expenditure on fuel and food subsidies fe l l substantially short o f the (pro-rated) budget targets. The authorities started passing on the international fuel price increases to consumers in March 2008, with the aim to eliminate fuel subsidies by end December 2008. The parity with international fuel prices was reached already in mid-October 2008, helped by rapidly declining international o i l prices. The authorities are also committed to eliminate the power sector subsidies by end June 2009. To achieve that, they increased electricity tariffs on average by 9 percent in February 2008 and 18 percent in November 2008. In parallel, stringent expenditure controls measures adopted by the federal government and the impact o f polit ical transition in the provinces contributed to smaller than targeted development spending.

Jul-hlur -

-4 7

-5 8 -I 8 3 5

2 0

1 9 0 6

23 n 27 8 17 9

36. However, inter-corporate debt in the energy sector increased sharply f rom Rs. 51 b i l l ion in mid-October 2008 to about Rs. 147 bi l l ion at end January 2009. Whi le there are several reasons for the debt, including delayed payments to energy companies, this highlights the continued need for fiscal adjustment.

11

Table 4: Consolidated Federal and Provincial Fiscal Accounts, 2008/09

Revenue (excluding grants) Tax revenue

Federal FBR revenue Oi l and gas surcharges and other

Provincial Nontax revenue

Federal Provincial

Expenditure

Federal Interest Other

Provincial Development expenditure and net lending

Public Sector Development Program

Current expenditure

Federal Provincial

Net lending Statistical discrepancy Overall Deficit (excluding grants) Financing External Domestic

Bank Nonbank Privatization receipts

Memo item: Nominal GDP

Budget 14.6 10.8 10.3 10.0 0.4 0.5 3.8 3.0 0.8

19.2 15.7 11.6 4.2 7.4 4.1 3.5 3.5 2.3 1.2 0.0 0.0

-4.6 4.6 1.8 2.8 0.8 2.0 0.0

12,556

(Perc JuIY-DI

Program Target

6.5 4.7 4.5 4.3 0.2 0.2 1.8 1.4 0.3 8.4 7.4 5.7 2.3 3.4 1.7 1 .o 1 .o 0.6 0.4 0.0 0.1

-2.0 2.0 0.4 1.5 1.1 0.4 0.0

13,384

ember

Actual 6.2 4.6 4.4 4.1 0.3 0.2 1.6 1.5 0.2 7.9 7.0 5.2 2.2 3.0 1.8 0.9 0.9 0.5 0.4 0.0 0.2

-1.9 1.9 0.3 1.6 1.4 0.2 0.0

13,384

t of GDP) Ful

Initial Program Target

14.9 11.0 10.5 10.2 0.4 0.4 3.9 3.2 0.7

19.0 16.0 12.2 4.6 7.6 3.9 3.0 3.0 1.8 1.1 0.0 0.1

-4.2 4.2 2.6 1.6 0.7 0.9

0 13,384

tear

Revised Program Target

15.2 11.3 10.9 10.0 0.9 0.4 3.9 3.3 0.6

19.4 16.4 12.4 4.8 7.6 4.0 3.0 2.9 1.8 1.2 0.0 0.2

-4.3 4.3

1.69 2.7 1.5 1.2

0 12,970

37. Revenue collection has been fall ing short o f targets. During July-December 2008, national revenue collection reached Rs. 834 billion, which was 0.3 percent o f GDP below the init ial program target o f 6.5 percent o f GDP. The relatively weak performance was due to lower tax collection o f the Federal Board o f Revenue (FBR), as the sharp economic slowdown reduced the buoyancy o f Pakistan’s two main tax bases o f manufacturing and imports. In response, the FBR revenue target was revised downwards from Rs. 1,360 bi l l ion to Rs 1,300 b i l l ion during the February 2009 program review. In addition, Government decided to compensate the shortfall in FBR revenues through higher petroleum development levy (PDL) collection. The PDL collection reached Rs. 29 bi l l ion during the first ha l f o f 2008/09, exceeding by over 100 percent the fiscal year target o f Rs. 14 bil l ion. Instead o f passing on the international price decreases to consumers, Government has maintained a premium above the import parity levels to cover part o f the tax revenue shortfall. However, since December 2008 tax revenues have continued markedly underperforming, and even the downward revised tax revenue target i s unlikely to be met. From July 2008 to March 2009, FBR tax revenues reached Rs. 810 billion, an increase o f only 19 percent year-on-year compared to the downward revised program target o f 29 percent.

38. The external imbalances have been narrowing on the back o f a lower o i l import bill (see Table 4). The monthly current account deficit dropped sharply f rom the peak o f 1.3 percent of GDP in October 2008 to 0.1 percent o f GDP in March 2009, bringing the July 2008-March 2009

12

current account deficit to about 4.7 percent of GDP (US$7.6 billion). Imports are projected to decline further as Pakistan reaps the benefits from lower international o i l prices.

39. While net capital inflows during July 2008 Figure 5: SBP Foreign Exchange Reserves (End Period)

18’ooo t to March 2009 almost halved from US$6.2 billion in 2007/08 to US$3.2 billion in 2008/09, foreign exchange reserves o f SBP rose to about US$7.1 billion by end- March 2009 (see Figure 5). The rise in SBP

15,000 4 I

9 12,000

3 9,000

6 ,000

3,000 4 I Mar- Jun- Sep- Dee- Mar- Jun- Sep- Dee- Mar - Jun- Sep- Dee- Mar-

06 06 06 06 07 07 07 07 08 0 8 0 8 0 8 0 9

reserves by end March Source : State Bank of Pakistan.

2009 reflects the release o f US$3.9 billion total

9 disbursement so far under SBA, in addition to other disbursements from development partners , interbank purchases from SBP and borrowing from foreign commercial creditors. Improvements in the current account and the reserve position have helped to stabilize the nominal exchange rate at about Rs/US$SO (Figure 6).

40. Over the last few months, Government has met i t s financing needs mainly

Figure 6: Interbank and Open-market Exchange Rate (Rs/US$)

I 9 0 1 I 85

80

15

70

65

60

I 55 J I Mar- Jun- S e p - D e c - Mar- Jun- S e p - D e e - M a r - Jun- S e p - D e c . Mar-

0 6 06 06 06 0 7 0 7 0 7 0 7 0 8 0 8 0 8 0 8 0 9

-Interbank -Open-market Source: State Bank o f Pakistan.

through non-bank borrowing. The T-bill market has responded well to changes in the policy discount rate. The policy discount rate was increased by 200 bp to 15 percent in mid-November 2008, but reduced by 100 bp at end-April 2009. The increase in T-bill placements since mid- November 2008 has enabled Government to reduce the level o f net borrowing from SBP by end December 2008 to below the ceiling stipulated.

41. Improved aggregated demand management and lower commodity and o i l prices have begun to reduce inflation. The monthly year-on-year CPI declined to 19.1 percent in March 2009, and food inflation to 19.7 percent (see Figure 7). However, core inflation (nonfood, non- energy CPI) remained high, and reached 18.5 percent.

On March 26, the World Bank Board approved US$SOO million Poverty Redudion and Economic Support Operation (PESO)

13

42. Standard & Poor’s upgraded Pakistan’s long- te rm foreign currency credit rating back to CCC+ in December 2008. The EMBI Global Bond spread o f Pakistan sovereign bonds has declined below 1,600 bp by mid-April 2009 from above 2,000 bp in early January 2009, suggesting rebuilding o f investor confidence in the economy.

Figure 7: Inflation

42 -, 3 6

3 0 -

0 1 Mar44 Sep04 f i r 4 5 SepOS M a r 4 6 Sep06 f i r - 0 7 SepO7 Mar48 SepO8 Mar-09

- CPI - WPI - - Non-fwd, Nonail CPI

h’oti Non-faad.non-olCP1 8 sakukled b y e x h d n g food and enerevleml fmm CPlnPaton Sower CPLiWlsndNan-faod,non-oICPlImmFcderalBweauofSla~ufrr,Pekslsn

43. Despite favorable trends in the agricultural sector, domestic production and sales declined during the first ha l f o f 2008/09 compared to the previous year, due to power shortages, increased input costs, lower domestic demand, decreased private sector credit growth, and worsened prospects for exports. In particular, the growth o f the large-scale manufacturing sector during the f irst seven months o f 2008/09 turned negative 5.4 percent. Owing to these trends, the real GDP growth target for 2008/09 has been reduced to 2.5 percent.

5. Medium-Term Outlook

44. Given global economic crisis, the medium-term outlook presents significant downside risks. The external environment i s expected to deteriorate further, with global growth turning negative and a gradual recovery starting only 20 10.

45. Pakistan’s real GDP growth i s projected to remain l o w in 2008/09 and 2009/10, and increase gradually f rom 2.5 percent in 2008/09 to 6.5 percent by 2012/13, although longer-term projections are particularly uncertain in view o f the volatile global economic environment. Aided by increasing public investment-among other things in infrastructure, power, and transport- gross capital formation i s projected to rise and contribute to growth recovery and facilitate private sector activity. In parallel, gradually increasing private sector credit growth i s projected to help economic activity. Agriculture i s showing good growth prospects, while manufacturing and services are expected to recover only gradually as the domestic aggregate demand picks up and the availability o f power improves as a result o f investments in power generation. With the global recovery, exports are also projected to improve gradually and reduce Pakistan’s external vulnerability over time. Further analysis o f Pakistan’s growth prospects and possible sources o f growth i s currently being carried out by the Bank.

46. Over the medium term, Government’s revised macroeconomic framework targets projects a decline in the fiscal deficit (excluding grants) f rom 4.3 percent o f GDP in 2008/09 to 2.3 percent o f GDP in 2012/13. The cornerstone o f this outlook i s a significant increase in FBR tax revenues which are projected to rise by 3.1 percentage points o f GDP to 12.7 percent o f GDP by 2012/13. Excluding grants, overall revenues are to rise f rom 14.3 percent o f GDP in 2007/08 to 17.3 percent o f GDP in 2012/13.

14

47. T o meet the ambitious revenue targets, the authorities plan to implement bold and comprehensive tax policy and administration reforms. This will include quick and decisive implementation o f value-added taxation (VAT) o f goods and services, elimination o f tax exemptions and zero-ratings, and revamping o f the tax administration. The work on the new VAT law has started, with the aim to get it ready for implementation in the 2010/11 budget. This wil l be the key measure to expand the tax base and revenues, since currently services, which account for about 60 percent o f GDP, currently remain outside the tax net. In the meantime, as part o f the 2009/10 budget, Government expects to adopt significant legal changes to the current General Sales Tax (GST), moving it closer to VAT by minimizing exemptions and zero-ratings, and thereby broadening tax base and revenues. In parallel, steps are taken to strengthen tax enforcement and audits o f taxpayers. This includes measures to control stop fi lers, short filers, and detect under-reporting v ia cross-checking. Significant untapped revenue potential-such as property and property transfer taxes, motor vehicle tax, agricultural income tax-remains also at the provincial level, which would warrant attention.

48. Owing to this sizeable revenue effort, total expenditures are projected to slowly c l imb back to about 20 percent o f GDP in 2012/13. In line with current projections o f l o w o i l and commodity prices, and following the elimination o f power and fuel subsidies and maturing o f the remainder o f high interest-yielding Defense Savings Certificates, current expenditures wil l decline as a share o f GDP and make space for a steady increase in development spending from 3.2 percent o f GDP in 2008/09 to 5.6 percent o f GDP in 2012/13.

49. Lowering inflation remains a challenge. Headline inflation i s projected to decrease from 20 percent in 2008/09 to 5.5 percent in 2012/13. The economic downturn is, however, l ikely to put stress on banks’ financial positions and close monitoring wil l be warranted.

50. The external current account deficit i s projected to decline to about 4.2 percent o f GDP by 2012/13. Foreign exchange reserves are expected to build-up from US$9.1 b i l l ion by end- June 2009 to about US$11.9 bi l l ion by end-June 2012/13. The sharp decline in international commodity prices, reduced private sector credit growth, and the economic recession are expected to curtail import growth in 2008/09 and 2009/10. Exports are projected to start recovering f rom 2009/10 onwards with gradual global recovery and imports f rom 2010/11 onwards, but the growth o f both remains moderate during the medium term. Remittances are projected to grow over the medium term. FDI, after a drop in 2008/09, i s projected to start gradually recovering in 2009/10 with the re-launch o f the privatization process, and portfolio flows are predicted to turn positive only f rom 2010/11 onwards.

5 1. In the medium term, increased productivity and export competitiveness are necessary to generate growth and reduce external vulnerability. To this aim, structural reforms to strengthen the investment climate and competitive environment are required. These will include measures to ease firm entry and exit, reduce barriers to competition and trade, and enhance the labor market flexibility. In addition, efforts to improve the financial sustainability and efficiency o f the power sector will be essential to attract investment in new power generation.

52. Protecting the poor and vulnerable i s essential during the stabilization process. Recognizing this, the federal Government and the Punjab province increased spending on social safety nets by total o f 0.5 percent o f GDP in 2008/09. Further spending increases are projected in 2009/10. The federal Government launched the Benazir Income Support Program in the fal l 2008, with the objective to provide cash grants to the poorest families in Pakistan. In parallel, the province o f Punjab established i t s own income support program to protect the poor and vulnerable o f Punjab.

15

53. In conclusion, despite a highly uncertain external environment, Pakistan i s now in a better position to attain the projected medium-term recovery path. Over the last few months, the stabilization efforts together with a decline in international commodity prices have succeeded in reducing external imbalances, rebuilding foreign exchange reserves, narrowing fiscal overruns and lowering inflation. However, the sharp deterioration in the global economic and financial outlook poses significant risks to exports, remittances and external financing, notwithstanding the fiscal stimulus packages prepared in a number o f countries. Even though projections in these areas as well as forecasts about the speed o f real economy recovery were significantly moderated during the f i r s t program review in February 2009, they may s t i l l turn out to be optimistic. This highlights the need for a rigorous implementation o f reforms, while protecting core development spending, in particular social spending, to ease the adjustment for the poor and vulnerable people. During the Pakistan donor conference held in Tokyo in April 2009, donors pledged about US$5.2 bi l l ion in additional financing, but actual disbursements are l ikely to be lower. There i s a risk that the sharper than anticipated economic downturn will lead to social tension as business activity slows down and f i r m s shed labor. Also, the risks to the domestic financial sector may increase. To mitigate this latter risk, SBP has adopted a problem bank management and contingency plan for dealing with problem banks, and measures to improve banking resolution and banking supervision are being implemented.

54. The medium-term revenue projections are ambitious and there i s a risk that they wil l not be met. However, the authorities want to retain the stretch targets in order to maintain the pressure for reform. Recognizing the need to substantially raise the tax to GDP ratio, they are keen to seize the opportunity for bold tax reforms, and are committed to take compensatory action in case revenues fal l short o f targets. This will include cutting o f expenditures, but in an orderly manner ensuring productive social and infrastructure spending i s protected.

55. Stringent implementation o f the economic program wil l be critical to success, and timely responses o f fiscal and monetary authorities to emerging risks wil l be essential to ensure it remains on track. In the current economic environment, any medium-term projections are uncertain and regular adjustments are necessary in response to changed circumstances. The quarterly monitoring o f the IMF and the Bank’s proposed programmatic operation will mitigate these risks through continued policy dialogue with the authorities on a proper adjustment path.

6. Governance

56. Pakistan exhibits problems in many dimensions o f governance. The delivery o f public services i s adversely affected by leakages, difficulties with bureaucratic structure and quality, and opaque decision-making. Government recognizes that corruption constitutes a threat to Pakistan’s development agenda, undermining revenue collection and service delivery, and eroding Government’s credibility. Public pressure to tackle corruption under the democratic government i s increasing.

57. The authorities have made progress in public sector accounting and auditing reforms, and in improving regulatory structure for public procurement. The accounting and audit functions have been separated and the Office o f the Controller General o f Accounts established. Government has made significant progress in transitioning to the international public sector accounting standards using a computerized integrated financial management information system. The timeliness and reliability o f financial reports o f Government have improved. A new Chart o f Accounts for budgeting, accounting, and financial reporting, which i s consistent with international standards, has been rolled out across federal, provincial, and district governments. The overall quality and reliability o f Government financial statements has also improved, and

16

unidentified expenditures reduced. There i s a significant reduction in “pay-bill” processing time as computerization has minimized manual processing and human discretion, and financial reports are disclosed. Expenditure irregularity has been reduced with monthly budget execution reports generated electronically and made available to spending agencies for budget monitoring and with pre-audit activities. Internal management practices, while s t i l l weak and a source o f corruption, are being strengthened. Some progress has also been made in public procurement. In 2003, the Public Procurement Regulatory Authority was set up to provide efficiency and transparency in public procurement. In 2004, public procurement rules consistent with good practice were prepared and notified. However, several challenges remain to be addressed, including an effective appeals process and monitoring and evaluation system (see paragraphs 124 and 167-1 74). Since enhancing accountability, transparency, and reducing opportunities for corruption are core elements o f improved governance, these and other related actions will need to be strengthened and deepened as part o f ongoing reforms.

5 8. Government has strengthened key regulatory institutions, deregulated, and proceeded with privatization to reduce opportunities for corruption. In 2007, an Anti-Money Laundering bill was promulgated that allows the authorities to seize property derived from or invested in money-laundering and impose penalties, and a National Commission for Government Reform presented in 2008 a proposal for c i v i l service reform and restructuring o f government processes.

7. Status of IMF Activities in Pakistan

59. The IMF-supported Poverty Reduction and Growth Facil ity (PRGF) was concluded in December 2004, and the Government o f Pakistan did not request a successor IMF program. Between 2005 and October 2008 Pakistan was on a standard Article IV surveillance schedule. The Article I V consultations concluded in December 2007 highlighted the widening current account deficit as the economy’s main vulnerability. The IMF carried out i t s bi-annual Staff Visit in M a y 2008, and concluded that a major fiscal adjustment effort accompanied by a substantial tightening o f monetary policy (including the elimination o f central bank financing o f government) and further exchange rate depreciation would be needed to contain inflation whi le reducing the large current account deficit. At the request o f the Pakistani authorities, an IMF technical mission visited Islamabad during September 2008 to provide technical input to quantifying the economic stabilization package being developed by the authorities and preparing an updated medium-term macroeconomic fi-amework.

60. In light o f the rapidly deteriorating balance o f payments position and substantial financing needs, the authorities entered into an IMF-supported 23-month SBA in late November 2008. The program supports the macroeconomic stabilization program in 2008/09 and 2009/10 to reduce inflation and the external current account deficit to more sustainable levels. The pace o f adjustment aims to balance the need to address the macroeconomic imbalances with protecting social stability. The medium-term macroeconomic framework presented earlier i s supported by the SBA. The f irst review o f SBA was carried out in February 2009, and the program i s on track.

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B. POVERTY AND WLNERABILITY

61. Recent years o f relatively high levels o f economic growth led to a decline in poverty in Pakistan. Although poverty increased over the 1998-99 to 2000-01 period this trend was reversed in subsequent

Irrespective o f the methodology deployed, poverty dropped significantly between 2001102 and 2005106, from

years (Figure 8).

i

Figure 8. Poverty headcount rate in Pakistan, 1987/88-2005/06 (percent of population)

40 , I

35

30

25

20

15

10

5

0

15

10

5

0 1987-88 1990-91 1992-93 1993-94 1996-97 1998-99 2001-02 2004-05 2005-06

Source Pakistan Economic Surveys, various yean.

34.5 percent o f the population to 22.3 percent o f the population, equivalent to over 17 mi l l ion people moving out o f poverty. Even the more conservative estimate suggests that the national poverty rate fe l l by close to six percentage points." The effect o f growth o n poverty reduction between 2001/02 and 2004/05 was dampened by increasing inequality over the same period. Though lower than in many regions o f the world, the Gini coefficient increased from 0.283 to 0.303 over the period 2000-05.

62. Aside from l o w levels o f income, Pakistani households remain vulnerable to income shocks, both economic crisis such as the recent global food, fuel and financial crises; and natural disasters such as earthquakes and droughts, and from idiosyncratic shocks such as health and, unemployment. These shocks have the potential to reverse recent gains in poverty reduction. A recent simulation o f the welfare impact o f the fuel price found that poverty rates may have increased between 2.3 and 3.6 percent, depending o n the growth assumption used." Earlier studies have also documented the negative impact o f shocks o n household welfare. The clustering o f a large share o f the population around the poverty line means that small changes in income can translate into large changes in poverty. For example, between 1998-99 and 2001-02, the drought in Sindh caused a sizable movement o f the population in the middle part o f the consumption distribution to i t s lower end. The Pakistan social protection report12 also provides some insights into the specific shocks that affect households and household risk-coping strategies.

lo Poverty estimates depend on how the poverty lines are updated. The official poverty rates are estimated based on poverty lines updated with CPI-based inflation rates. According to the official estimates, the overall poverty declined by more than 12 percentage points, from 34.5 to 22.3 percent between 2001/02 and 2005/06. Poverty in urban areas declined from 22.7 to 13.1 percent and in rural areas from 39.3 to 27 percent. If a survey based price index (SBPI) i s used to update the poverty line since 2001-02, the overall poverty declined by a l i t t l e less than 6 percentage points, from 34.5 to 28.8 percent over the same period. Both CPI and SBPI have pros and cons. CPI i s constructed with price data from major cities only; thereby i t might not properly reflect inflation in rural areas where poverty i s the greatest. By contrast, the survey-based price index collect price data in both urban and rural areas, but, it suffers from the limited coverage o f items-covering only food and transport prices, which may be unrepresentative o f the items households purchase.

'' World Bank (2007), ibid. These results presented in the report are from a representative sample o f safety net recipients/applicants collected in 2005, and are therefore not nationally representative. The sample i s predominantly poor. Over half o f the sampled households (54 percent) are ultra poor (those with consumption below the food poverty line), about a quarter (23 percent) are poor (between the food and national poverty lines), while the remaining were non-poor.

Vishwanath et. a1 (2009).

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The report found that nearly two-thirds o f safety net applicants and recipients (about 80 percent of whom were poor) surveyed suffered from one or more major shocks in three years before the survey, comprising both idiosyncratic (health, unemployment) and aggregate shocks (economic and natural disasters). Whi le income shocks imposed major costs on al l affected households, the poor were the hardest hit (cost o f the shock as a share o f annual household consumption for the poor was twice that for non-poor households). Nearly 33 percent o f these households lowered their food intake, 10 percent put a child to work, and 8 percent pulled a chi ld out o f school in response to the shock. While these households also received private assistance, i t s concentration in time and geographic space made it diff icult to use for smoothing consumption against aggregate shocks. These results are consistent with findings on risk-coping strategies f rom other countries in the region, and reveal that income shocks can both impoverish households at the time o f the shock and, by adversely impacting human development, can also perpetuate poverty across generations.

63. establish the latest poverty trends.

The release o f the 2007/08 PSLM, expected in mid 2009, will provide an opportunity to

C. SAFETY NETS: OVERVIEW AND CHALLENGES

Overview of Social Protection in Pakistan

64. Pakistan’s social protection system comprises safety nets, social security and employment promotion and protection. The country’s safety net system includes three main federal cash transfer programs: Zakat, the Food Support Program (FSP) and the recently established (2008) Benazir Income Support program (BISP). Other small, scattered programs provide social welfare and care services to persons with disabilities, chi ld laborers, and others. Although Pakistan has earlier implemented public workdworkfare programs, no large workfare program i s currently in place. To address aggregate economic (price) shocks, till recently, Pakistan implemented a wheat subsidy program. Although no permanent program i s in place to help individuals cope with aggregate disasters, Pakistan has used a combination o f cash transfers, housing and social care service programs to help those affected, for example, by the 2005 earthquake. The country also implements several employment promotion programs, e.g., micro credit programs and sk i l l s and training. Employment protection institutions (e.g., labor laws) cover workers in the formal sector. Pakistan’s social security system offers pension benefits to formal sector workers (old age, survivor and disability). Public sector workers are provided c iv i l service pensions, whi le private sector workers have access to pensions from the Employees O l d Age Benefits (EOBI) as well as also provincially-based pension and non-pension programs such as the Workers Welfare Fund (WWF) and the Employees’ Social Security Institutions (ESSI).

65. During the last four years, the overall social protection expenditures have fluctuated as a share of total PRSP/pro-poor expenditures. Specifically, expenditures pertaining to social protection (food subsidies, Bait-ul-Mal, Tawana school meals, social security, and low-cost housing) remained between 3 -4 percent o f total PRSP spending between 2004/05 till 2006/07 but then sharply increased to 13.4 percent o f total PRSP spending in 2007/08 (Table 6). This increase in social protection expenditures i s largely due to the increased spending on food subsidies and social security, both o f which are l ikely not wel l targeted to the poor. The share o f food subsidies in PRSP “pro-poor” social protection (SP) spending has increased from 5 1 percent in 2004/05

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Sectors

Social Security

Low cost housing

FSP

Expenditures (Rs. million)

2004105 2005106 2006107 2007108 2,030 7,575 4,513 18,942

318 305 299 597

2,703 3,081 3,458 4,370

Tawana

to 68.4 percent in 2007/08. In comparison, the expenditures on the Food Support Program steadily decreased from 25.8 percent o f SP-PRSP expenditures in 2004/05 to 5.4 percent in 2007/08. Since 75 percent o f Pakistan’s social protection spending (excluding food subsidies) i s devoted to social security spending (likely received mainly by the non-poor), these expenditures largely accrue to the non-poor.

78 I 20 I 1,420

66. Until the introduction o f the BISP in 2008 (see description in section V), the two main cash transfer programs in Pakistan were Zakat and the Food Support Program (FSP) o f Pakistan Bait-ul-Mal (PBM). Although similar in terms o f their overall objective and target population, these programs have different histories and are operated and funded in substantially different ways. Zakat i s managed by the Ministry o f Religious Affairs and implemented by local committees with financing from individual contributions. In contrast, the FSP i s administered by the Ministry o f Social Welfare and Special Education (MoSWSE), through PBM, and i s funded through public resources.

Challenges for Safety Net DeliveryI3

Food Subsidies

67. Expenditures: Prior to the institution o f the new safety net program, expenditures on safety net programs were low relative to neighboring countries and declining over time in Pak i~ tan . ’~ Safety net spending on the two main safety net programs (Zakat and Bait-ul-Mal) declined sharply, from 0.4 percent o f GDP in 1991/92 to less than half o f this level, or 0.14 percent o f GDP in 2004/05. Contributions to Zakat have declined significantly (from 0.3 percent o f GDP in the 1980s to 0.08 percent in 2002/03, and 0.04 percent in 2006/07) as more people have opted out from paying contributions by either withdrawing funds before the day that Zakat i s levied or by filing a declaration o f exemption, leading to concomitant declines in expenditures on Zakat programs. Fiscal allocations for Bait-ul-Mal have increased in recent years, from 0.02 percent in 2002/03 to roughly o f 0.04 GDP in 2006/07, but not enough to compensate for the decline in Zakat expenditures. In 2006/07, the P B M Food Support Program and “regular” Zakat programs together covered 3.2 mill ion households corresponding to about 13 percent of

5,359 I 6,021 1 5,455 I 54,872

l3 This section i s based on World Bank (2007), ibid. The report defines households whose consumption falls below the

p4 Safety net spending (most recent estimates; as a share o f GDP) i s approximately 0.6 percent in Bangladesh, over 2 percent in India. The level o f social safety nets expenditures i s not an indicator o f program efficiency in targeting the poor, however.

overty line as poor, while the ultra poor are households whose consumption falls below the food poverty line.

Total PRSP Expenditures

Social Protection / Total PRSP Expenditures (%)

20

327,683 390,970 445,414 600,605

3.2 4.3 3.1 13.4

population in a country where poverty estimates range from 22.3 percent t o 28.8 percent depending on which price index i s used to take into account i n f l a t i ~ n . ’ ~

68. Benefit adequacy and timing: Zakat guzara transfers represent 14 percent o f average recipient household income whi le PBM’s Food Support benefits are equivalent t o 11 percent o f household income among the ultra-poor, and to 8 and 5 percent among the poor and the non-poor respectively. In comparison, conditional cash transfer programs in Mexico and Nicaragua provide benefits that amount to 2 1 percent o f average household consumption. Furthermore, the stipulated amounts are often not received by households. For example, the average Zakat guzara cash transfer beneficiary during the 12 months before the survey was equivalent to 5-6 monthly installments, rather than the stipulated 12, and payments occurred in 6-8 months intervals. Given the small size o f program benefits and non-poor targeting in Pakistan, poverty and inequality decline only slightly in response to transfers.

69. Benefit payment: Benefit delivery systems are weak with negative impact on program efficiency. Major issues with Zakat and PBM’s service concern the long response time for payment activation after program registration, the costs associated with cashing program benefits and the irregularity and lumpiness o f benefit payments. Whi le 20 percent o f a l l applicants received their first payment within a month o f application, 50 percent had to wai t 1-6 months and 8 percent had waited more than a year. One in ten households had diff iculty getting their funds. Beneficiaries on average made 1.6 visits to the payment center to obtain funds; one in twenty had to go three times or more. Moreover, one in ten beneficiaries declared to have paid a bribe to get their benefit at some point, with bribes averaging 10 percent o f the transfer. Finally, beneficiaries complain about small, lumpy, and infrequent installments. Even so, a l l said and done, program beneficiaries found the transfers useful in providing some poverty relief.

70. Benefit Incidence: Although both Zakat and Bait-&Mal display elements o f pro-poor targeting, they could s t i l l perform better. The current fiscal allocation to cash transfer programs could be more efficient in covering the poor if program expenditures were better targeted. A sizeable share o f benefits reaches the non-poor while many o f the rejected applicants are poor. Nearly 46 percent o f total benefit expenditures o f Bait-&Mal reach the poorest 40 percent o f the population, while 43 percent o f total Zakat expenditures reach the same population group. This performance could be improved. For example, 80 percent o f expenditures on conditional cash transfers reach the bottom 40 percent o f the population in Honduras; and 62 percent o f total expenditures reach this group in Mexico.

7 1. Governance: Weak governance and lack o f transparent eligibil i ty conditions reduce targeting effectiveness. The main reasons for poor targeting include (i) the lack o f an objective targeting instrument: Both Zakat and Bait-ul-Mal target the ‘deserving needy’ and poor, but no objective targeting tool i s used; (ii) the lack o f an operational definition o f poverty or targeting mechanism that leaves eligibil i ty decisions in the hands o f the chairmen and members o f the local Zakat committees or o f local authorities in the case o f Bait-ul-Mal; and (iii) systematic

’’ The PBM Food Support Program delivered cash transfers to 1.46 million households in 2006/2007. When all PBM programs are considered (FSP, individual financial assistance, national centers for rehabilitation o f child labor, vocational training centers and institutional rehabilitation) then the total number o f beneficiary households i s estimated to be 1.7 million in 2006/2007. Similarly, “regular’ Zakat programs (guzara allowance, educational stipends, stipends for students o f Deeni Madaris, health care, social welfare rehabilitation and marriage assistance to unmarried women) covered 1.7 million households but this number increases to 2.5 million when other zakat programs are considered (eid grant, leprosy patients, emergency re l i e f operations, national level health institutions, national level Deeni Madaris, technical educational stipends and permanent rehabilitation scheme). For more information, see PRSP I1 and the PRSP Annual Progress Report 2007/08.

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differences in program access and eligibility, which favor the non-poor-programs tend to be located in better-off localities and benefits to increase with household income.

72. Graduationmxit: Currently, safety net program recipients are not l inked to income earning opportunities or access to education and health services. Globally, there i s a trend for cash transfer programs to include incentives to help children in beneficiary households acquire human capital and avoid inter-generational poverty. These conditional cash transfers have successfully increased enrollment, improved health outcomes and reduced chi ld labor. Pakistan i s also piloting and evaluating similar programs: (i) provincial stipend programs, including the Punjab Secondary School Stipend Program targeted to girls; (ii) Bait-ul-Mal’s Chi ld Support Program, a pi lot conditional cash transfer program targeted to the poorest households; and (iii) a cash transfer program that targets improvement o f health status (TB) alone. Microfinance programs also provide opportunities to the poor to exit poverty. Even though Pakistan had the lowest penetration o f microfinance in South Asia with less than 2 percent o f poor households covered (vs. over 60 percent o f the poor in Bangladesh and Sri Lanka) in early 2000s, micro- credit disbursements have increased consistently f rom Rs. 1 bi l l ion in FY02 to Rs. 9.9 bi l l ion in FY07. During the same period, the number o f beneficiaries increased f rom 100 thousand in FY02 to 906 thousand in FY07.

73. Coping with Shocks: Safety net programs also are not able to expand to cope with shocks. The recent earthquake exposed the gap in the ability o f the government to cope with natural disasters. Since no safety net structure existed that could be rolled out quickly, interventions had to be designed from scratch. The final relief package combined short-term income support (cash support) with long-term aid for reconstruction (housing). Community- based rehabilitation services housed in four resource and information centers for persons with disabilities in the earthquake-affected areas are planned to complement this program. Pakistan has also implemented workfare programs to build infrastructure and offer temporary employment to the poor, but n o major program currently exists. Past programs include workfare for Afghan refugees and the Khushal Pakistan Program, though their overall impact on poverty reduction i s not known. Currently, n o public works program exists to target the poor through l o w wages or conditions on public works contracts to employ local labor.

111. THE GOVERNMENT’S SOCIAL SAFETY NET REFORM PROGRAM

74. Pakistan’s Social Protection Reform Program, including i ts safety net reform program, i s outlined in three key policy documents: the Poverty Reduction Strategy Papers (PRSP I, 2003 and PRSP 11, 2009); and the National Social Protection Strategy (NSPS, 2007). These documents are the outcome o f a comprehensive consultative process that involved key stakeholders f rom federal, provincial and local governments, c iv i l society organizations, the private sector and development partners. They provide a consistent policy framework to develop the country’s social protection system with a particular emphasis on consolidating and improving the effectiveness o f the country’s safety net programs, moving from disparate safety net schemes to a modern national safety net system. The proposed Social Safety Ne t DPC i s fully aligned with these strategies.

75. The PRSP I : A strategy for poverty alleviation and economic development was articulated by the previous Government in i t s Poverty Reduction Strategy Paper (PRSP-I) o f December 2003 entitled “Accelerating Economic Growth and Reducing Poverty: the Road Ahead. ” PRSP-I focused on second generation reforms to: (i) achieve and sustain a high growth rate with macroeconomic stability, and translate this high growth into reduced poverty; (ii) improve governance and consolidate devolution, as a means o f delivering both development

22

results and ensuring social and economic justice; (iii) invest in human capital, with emphasis on effective delivery o f basic social services; and (iv) target the poor and vulnerable, and bring the marginalized sections o f the population and backward regions into the mainstream o f development. An important component o f the fourth pil lar was the modernization o f the safety net system. The strategy was fully aligned with the Mi l lennium Development Goals (MDGs) and focused on raising incomes, achieving universal primary enrollment, reducing gender disparities, lowering chi ld and maternal mortality, combating communicable diseases, and eradicating poverty. The strategy was implemented and, as mentioned earlier, the economy grew rapidly, poverty incidence declined, and many human development indicators improved during the PRSP- I period.

PRSP-11 Pilladchapter Macroeconomic Stability and Real Sector

76. The PRSP 11: The current administration recently finalized the second PRSP (PRSP-11). The new strategy i s also fully aligned with MDGs. I t focuses on regaining the macroeconomic stability and structural reforms required to support the recovery o f strong and sustainable growth. The strategy envisions an economy with competitive enterprises, productive employment opportunities, transparent governance and low poverty. The PRSP I1 outlines the priorities o f the present government with particular emphasis on social safety nets. Pillar I1 o f the PRSP “Protecting the Poor and the Vulnerable” outlines an assistance framework for the poor and the vulnerable as a key objective o f Government’s poverty reduction strategy. It recognizes that due to the rapid escalation o f food prices in FY2007/08, a significant part o f the population may have been pushed below the poverty line. In view o f recent economic shocks, it sees a particular urgency to expand existing programs and to institute new measures to protect the disadvantaged population. The stated policy objective o f the new programs i s to reach the poorest and the most vulnerable segments o f the society. The menu o f the proposed programs ranges from direct cash transfers to employment programs. The amount projected to be spent o n these programs in FY2008/09 i s more than Rs. 148.6 bi l l ion (about 1.1 percent o f GDP and 3.74 percent o f total budgetary expenditures for the current FY) - more than double o f the previous year’s allocation. The PRSP I1 suggests that as the country systems for delivering safety net programs improves and more fiscal space becomes available, the programs could be further expanded.

Safety Net Reform Area Improved efficiency o f safety net spending

Growth Protecting the Poor and Vulnerable Monitoring and Evaluation o f PRSP-I1

Better targeted social safety nets Monitor ing and Evaluation o f the safety net

I I Drogram I

77. Pakistan’s National Social Protection Strategy (NSPS) was developed and approved by Cabinet in 2007, consistent with the provisions o f PRSP, and i s presently under revision to reflect the new federal and provincial initiatives (for example, the Punjab Food Support Scheme) ensuring their coordination, as well as the new institutional arrangements for program delivery and monitoring.

78. The Goals o f the NSPS are: (i) to support chronically poor households and protect them against destitution, food insecurity, exploitation, and social exclusion; (ii) to protect poor and vulnerable households f rom the impacts o f adverse shocks to their consumption and well-being that, if not mitigated, would push non-poor households into poverty, and poor households into deeper poverty; and (iii) to promote investment in human and physical assets, including health,

23

nutrition, and education, by poor households to ensure their resilience in the medium run, interrupting the intergenerational cycle o f poverty.

79. The NSPS recognizes that even though there are a number o f programs in Pakistan which tackle poverty and vulnerability directly or indirectly, but due to the lack o f a holistic strategy, these individual programs remain ad hoc fragmented and duplicative. The strategy concludes that in order to fulfill their mandate, existing safety nets programs wil l need to strengthen their implementation and targeting to ensure that they efficiently reach the intended beneficiaries. In the absence o f monitoring, evaluation and accountability mechanisms to assess the performance o f the existing programs, program designs are rarely improved. Finally, the NSPS observes that the total government spending on social protection i s both very l o w and inadequate for meeting current needs, given the large number o f poor and vulnerable people in the country and in comparison to international benchmarks.

80. Given this overall context o f social protection programs, the NSPS identifies priority areas for action and outlines a broad reform agenda aimed at improving targeting, coverage, implementation, and monitoring o f the safety net programs. The NSPS’s priority actions to achieve the main short-term objective o f protecting the poorest families are: (i) ensuring good performance o f existing programs and effecting a transition to better and more comprehensive systems; (ii) introducing new means testing and development o f databases through some pilots across chosen rural and urban areas; (iii) scaling up successful pilots across the country fo l lowing assessment and generation o f lessons learned; (iv) extending the current level o f benefits t o the target population o f the poorest o f the poor; (v) introducing pi lot Conditional Cash Transfer (CCT) programs; and (vi) scaling up successful pilots to the whole target population. The NSPS identifies public works programs, social protection measures for the informal sector and social security as other potential interventions that deserve consideration, in addition to the two key pillars that the SSN DPC supports: cash transfers and conditional cash transfers targeted to the poor households.

81. The Bank has supported the development o f the National Social Protection Strategy, through i t s technical support for safety net systems in Pakistan over the past several years. This engagement included the completion o f the Pakistan Social Protection Report entitled “Social Protection in Pakistan: Managing Household Risks and Vulnerability” which (i) evaluated risks and vulnerability facing households; (ii) evaluated the existing social protection programs; and (iii) provided recommendations on improvement in their efficiency. The Bank also provided technical assistance to formulate a National Social Protection Strategy; provided technical assistance to improve the targeting and administration o f existing social assistance programs, including the development o f a poverty scorecard based on a Proxy Means Test (PMT) formula; conducted policy dialogue with provincial governments on social protection policy and programs; supported social care services for the disabled; and provided technical assistance to support the design and implementation o f a pi lot Conditional Cash Transfer Program, the Chi ld Support Program (CSP).

82. The introduction o f BISP as the Government’s main national cash-transfer program i s consistent with the National Social Protection Strategy’s objective o f creating a national safety net program to provide minimum income support to the chronic and transient poor; that could also serve as a common platform for other safety net programs. As noted above, the BISP was rolled out in fal l o f 2008 with the objective o f covering 3.4 mi l l ion families in 2008/09 with a benefit o f Rs. 1000 [$12] per month, increasing program expenditure on safety net f rom 0.3 to 0.6 percent o f GDP. The main vehicle for targeting o f the program was through the distribution o f forms to parliamentarians who, in turn, encouraged their constituents to apply for benefit. By late

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April 2009, over 3.185 million forms have been received out of which 5 1.18% have been found eligible and roughly 1.7 million families have been paid. The approximate amount disbursed i s US$147.83 million. However, recognizing the need for a more objective and transparent targeting method, the Government adopted a poverty scorecard for improving the targeting performance o f the program. The Government i s now in the process o f reforming the program to transform it into a modern well-administered and -targeted safety net system.

IV. WORLD BANK GROUP STRATEGY AND THE PROPOSED SSN DPC

A. LINK TO THE COUNTRY ASSISTANCE STRATEGY

83. The FY06-09 Country Assistance Strategy was discussed by the Board in April 2006. The strategy was designed to assist the Government of Pakistan to consolidate the economic turnaround that began in 2000 and to lay the foundation for increased competitiveness and sustained growth and poverty reduction. The CAS was organized around three inter-linked and mutually reinforcing pillars corresponding to the strategic priorities o f the PRSP: (i) sustaining growth and improving competitiveness; (ii) improving government effectiveness and service delivery; and (iii) improving lives and protecting the vulnerable. The period covered by the CAS comes to an end on June 30, 2009. Preparation o f the new CAS (FY10-14) i s underway and management plans to discuss the new CAS with the Board during the latter half o f the year. The proposed Social Safety Net DPC i s consistent with the CAS, although timing and type o f instrument has been adjusted in line with the requirements o f the evolving context.

84. The program o f support in the CAS endorsed by the Board envisioned a flexible lending program o f up to $6.5 billion over the four year period (approximately US$3.1 billion IDA and US$3.4 billion IBRD). Within this envelope an immediate priority was to assist in addressing the impact of the October 2005 earthquake. In addition, the CAS targeted expanded lending in infrastructure (primarily energy, water, and transport) and human development. Cross-cutting reforms, both at the national and provincial level were to remain a key focus and a substantial share o f IDA lending was expected to take the form o f PRSCs and provincial development policy credits.

85. Since the CAS was discussed the Bank program has evolved to meet the requirements o f a changing strategic context. Lending for earthquake reconstruction, education and infrastructure was delivered largely as planned during the first two years of the CAS. Thereafter Bank support slowed as the political transition introduced a degree o f policy uncertainty and as the macroeconomic situation deteriorated. Front-loading o f IDA utilization and limitation on IBRD access due to creditworthiness concerns combined to shift lending toward the first two years o f the CAS and reduce aggregate financing. Overall lending under the CAS period i s projected to reach a total o f $4.9 billion, about 25 percent below the upper bound for lending set in the CAS. IDA lending will exceed the CAS target as a result o f the higher than anticipated IDA available under IDA 15. rSRD lending will fall short o f the volume foreseen in the CAS.

86. The past two years have been a time o f change, uncertainty, and economic crisis for Pakistan. The ruling coalition that came to power through parliamentary elections in February 2008 split in August. In September, Asif Zardari assumed the presidency following the resignation o f Pervez Musharraf. Meanwhile, in 2007/08, the sharp rise in international prices o f o i l and food combined with policy inaction and internal political turmoil, led to rapidly expanding macroeconomic imbalances in Pakistan. Under these circumstances, the focus o f the Bank’s dialogue was increasingly on improving macroeconomic management, averting a balance o f

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payments crisis and restoring stability while seeking to mitigate the impact o f adjustment on the poor. Planned policy based operations were delayed during this period while the Bank focused on enhancing programs in education and social services and strengthening i t s dialogue on infrastructure, particularly energy.

87. After a period o f inaction, Pakistan started to take decisive steps to stabilize the economy following election o f the current Government. The Government entered into a Stand-By Arrangement with the IMF in November 2008, and has been able to sustain diff icult reforms so the program remains on track. The Government also finalized i t s second PRSP which was discussed by the Board on March 26, 2009. The strategy focuses on regaining macroeconomic stability and structural reforms required to support the recovery o f strong and sustainable growth and will serve as an anchor for the next CAS. The strategy also emphasizes the importance o f protecting the poor and sets as a goal the establishment o f an efficient, well-targeted nationwide social protection program. The proposed Social Safety Nets DPC i s fully aligned with the new strategy.

88. N o w that the macroeconomic situation has improved the Bank has quickly resumed preparation o f policy-based lending, the f irst o f which was the Pakistan Poverty Reduction and Economic Support Operation (PRESO) approved by the Board o f Executive Directors on March 27, 2009. Other donors have mobilized additional resources for Pakistan, notably with the international community pledging more than $5 bi l l ion to Pakistan at the Donors Conference in Tokyo, Japan on April 17, 2009. These resources will be utilized over the next two years primarily to expand social protection and enhance human development spending.

89. Including PRESO, the Bank wil l provide up to $800 mil l ion in development policy operations in FY09, including this proposed Social Safety N e t DPC and a proposed $100 mi l l ion Higher Education DPC. Policy based lending, including PRESO, i s a critical element o f Government’s financing plan embedded in the IMF Stand By Arrangement. We wil l also present a Safety Ne t TA loan to support program implementation as wel l as two provincial education investment operations and a project to support livelihoods and basic service delivery in the poorest regions o f the country.

90. The proposed Social Safety Net DPC i s fully aligned with the CAS while also taking into account emerging needs and opportunities. Specifically the operation builds on the social protection pol icy directions outlined in the CAS while assisting the government to scale up social protection in order to mitigate the impact o f an unforeseen macroeconomic adjustment program as well as dramatic changes in the global economic environment. As outlined more fully in the CAS, Pakistan’s PRSP recognized that existing safety net systems suffer from a variety o f shortcomings including inadequate spending, weak administration, targeting, and delivery mechanisms, lack o f coordination between agencies, and poor monitoring and evaluation. The CAS strategy was centered on helping the government to develop a comprehensive social protection strategy to guide policy reform over the medium and long term. The CAS lending program was to support reforms through the PRSCs, a standalone Social Protection operation, and social protection components in provincial DPCs and emergency operations. However, Government’s decision to launch the BISP presented a significant opportunity to accelerate safety net reforms whi le dramatically scaling up safety net spending for the poor.

B. COORDINATION WITH THE IMF AND OTHER DEVELOPMENT PARTNERS

91. Coordination with IMF: Bank and Fund staff collaboration in Pakistan continues to be effective with consultations on macroeconomic issues and technical assistance. The Bank and

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IMF teams have coordinated closely both the SBA and PRESO-supported reform programs. The MEFP indicates that an expanded and effective social safety net constitutes an integral part o f the authorities’ program. The Bank has continued participating in the IMF missions as an observer.

92. Coordination with other development partners: The Bank i s collaborating with DFID on select reforms supported by the SSN DPC and TA operations. A DFID-financed trust fund has generously supported the analytical work and technical assistance that i s underpinning a number o f supported reform measures in social protection. DFID i s providing bridge financing for technical assistance to implement the measures supported under the SSN DPC until the proposed Social Safety N e t Technical Assistance loan becomes effective. The specific activities covered under this DFID trust fund are (i)) the ro l l out o f the poverty scorecard; (ii) the development o f a communication strategy; (iii) improvement o f the management capacity o f BISP; and (iv) analytical work and data collection for M&E.

C. RELATIONSHIP TO OTHER BANK OPERATIONS

93. The proposed SSN DPC i s closely linked to several ongoing and planned Bank operations. This operation follows from the PRESO, implementing a broader social safety nets reform program. PRESO supported the adoption o f the poverty scorecard as the new targeting instrument for BISP and preparation o f a plan for i t s ro l l out. This operation supports the development o f institutional systems to support the implementation o f the safety net program, which includes support for the implementation o f the targeting method through identifying institutions for enrollment, eligibil i ty determination and payment processing; as wel l as rationalization o f safety net programs.

94. A Social Safety N e t Technical Assistance (SSN TA) project i s being prepared in parallel with the proposed SSN DPC, both for Board approval in the fourth quarter o f FY08/09. The SSN TA project i s designed to build institutional capacity and systems to implement and sustain the reforms supported under the SSN DPC. Specifically, over a four year period, the proposed SSN TA project would provide support to (i) establish the national targeting system, (ii) strengthen safety net program operation, (iii) enhance program management, implementation, accountability and evaluation, and (iv) advance the analytical underpinnings o f the social protection agenda, facilitate the dialogue for the National Social Protection strategy and support better monitoring and evaluation o f selected safety net programs.

95. The current DFID Trust Fund would provide bridge financing till the Safety N e t TA operation i s effective. Finally, the reforms supported by the proposed SSN DPC are complementary to the PPAF 3’s livelihood protection and livelihood improvement components, in particular, the activities that involve the provision o f microcredit and training to facilitate exit/graduation f rom poverty.

D. LESSONS LEARNED FROM PRIOR OPERATIONS

96. Country Assistance Evaluation: In 2005, IEG conducted an evaluation o f Bank assistance to Pakistan during 1994-2003, The report rated the effectiveness o f Bank’s assistance mixed, with the overall outcomes o f Bank’s assistance program rated as moderately unsatisfactory. Bank support for macroeconomic management and growth was rated as moderately satisfactory, whi le the Bank’s assistance was found to be unsatisfactory in poverty reduction, social sector development, governance, agriculture, natural resource management, f ixed infrastructure, revenue mobilization, and expenditure management. The key recommendations o f the evaluation were: (i) the Bank should continue i t s strong support o f

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analytical work, while translating analysis into implementable actions, taking into account political economy constraints; (ii) Bank interventions should have a greater focus on building sustainable institutional capacity; (iii) projects should be more focused and scaled to fit the capacity o f implementing agencies; and (iv) the Bank should invest additional effort into improving donor relations.

Analytical Reports

Poverty Assessment, 2002, The World Bank.

97. Lessons from other operations: K e y lessons from ongoing sector DPC operations in the country, the prior experience with provincial adjustment programs, the long-standing experience o f sector investment projects in Pakistan, and broader Bank-wide experience with development policy operations are:

Recommendationshtesults Links to DPC Actions

The previous poverty Pillar One: Improving the assessment on Pakistan was completed in the fa l l 2002. The

targeting efficiency o f safety nets programs.

Strong polit ical commitment and ownership are critical for successful steering o f a sector reform program and for addressing governance constraints to effective service delivery. A reform program that combines sector reforms with cross-cutting fiscal and fiduciary reforms i s more l ikely to y ie ld results and to be sustained. I t also contributes to increased ownership o f sector reforms beyond the line department. Uppont actions combining governance reforms with reforms that visibly and quickly improve outcomes increases credibility and acceptability of reforms. This can lay the foundation for the more complex institutional reforms that come with considerable challenges and resistance from vested interests. The success of sector reforms is dependent on collection and dissemination of credible data and information. Establishment o f baselines at the onset, followed by intense monitoring and verification i s essential to provide credibility for the reforms, to monitor progress and to support the necessary analysis for design. Weak capacity to plan, manage and implement reforms requires careful sequencing of reforms combined with appropriate capacity building efforts. Capacity for the implementation o f policy reform i s often weak and calls for focused capacity building efforts to be built into the program. I t also calls for a reform agenda that i s implementable, and developed in line with existing capacity. Programmatic, policy-based lending provides the flexibility needed to support reforms while managing risks. Multi tranche DPCs help support a complex reform agenda while providing a mechanism to adjust to the pace o f reforms. Social protection policy reforms supported through a development policy credit have more impact if accompanied by a capacity building technical assistance credit. Given that reforms take t ime to implement, continuity o f support to SP reforms i s important. Analytical support including just-in-time demand-driven notes adds considerable value. The development o f a strong analytical base that allows a full understanding o f sector specific issues and identifies policy reform areas help develop ownership and capacity for reforms.

E. ANALYTICAL UNDERPINNINGS

98. The analytical foundations o f the proposed Social Safety Net Development Policy Credit are outlined by Table 8 below.

work is Ongoing On the next 1 Pillar Two: Establishing an one, which wil l diagnose the

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Analytical Reports

Pakistan CFAA, 2003, PEPFM 2008 Draft, and Federal PEFA PFM, 2009 Draft

Pakistan Public Expenditure Management Report, 2004, The World Bank.

Pakistan Country Gender Assessment: Bridging the Gender Gap: Opportunities and Challenges, 2005, The World Bank.

Social Protection in Pakistan: Managing Household Risks and Vulnerability, 2007, The World Bank.

For Protection and Promotion: The Design and Implementation of Effective Safety Nets, 2008, The World Bank.

RecommendationdResuIts

incidence and characteristics o f the poor, essential for improving the design o f an effective safety net.

Predictability o f funds flow to spending agencies and the need to strengthen internal control processes in expenditure management. The Government should be more involved in providing a safety net for the poor, giving priority to targeted transfers.

For the effective delivery o f education and health services, it i s critical to have intensive information campaigns to reach women who have never been to school. Reform and strengthen the coverage, adequacy and targeting performance o f basic income cash support. Explore combining cash transfer programs with graduation mechanisms; improve human capital outcomes via conditional cash transfer programs. Improve administrative arrangements for the delivery o f social protection benefits, consolidate programs and phase out untargeted programs. Improve fiscal sustainability and financial management o f cash transfers.

Public spending on safety nets in Pakistan i s very small compared to other countries, at less than 0.9 o f GDP.

administered cash transfer programs can also provide temporary re l i e f to those who

Well-targeted and -

Links to DPC Actions

institutional framework for safety nets program implementation.

Pillar Three: Enhancing fiscal sustainability and strengthening the fiduciary environment.

Pillar Three: Enhancing fiscal sustainability and strengthening the fiduciary environment.

Pillar One: Improving the targeting efficiency o f safety nets programs.

Pillar Three: Enhancing fiscal sustainability and strengthening the fiduciary environment.

Pillar Two: Establishing an institutional framework for safety nets program implementation.

Pillar One: Improving the targeting efficiency o f safety nets programs.

Pillar Two: Establishing an institutional framework for safety nets program implementation.

Pillar Three: Enhancing fiscal sustainability and strengthening the fiduciary environment.

Pillar One: Improving the targeting efficiency o f safety nets programs.

Pillar Three: Enhancing fiscal sustainability and strengthening the fiduciary environment.

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Analytical Reports

Child Support Program Rapid Assessment Report, 2009, The World Bank.

Child Support Program Baseline Survey Report, 2009, The World Bank.

Poverty and Social Impact Assessment: 2009, The World Bank

Recommendations/ResuIts

have suffered losses o f assets and income due to economic or natural crisis.

0 A well-maintained information management system needs to be in place to correctly record all necessary beneficiary information.

0 A well-structured communication campaign i s needed to ensure adequate reach and coverage o f the program especially in remote areas.

The fuel price and power tariff adjustments may have distributional impacts. Assessments o f (i) direct impacts o f fue l price increases on poverty; (ii) incidence o f power subsidies; and (iii) the impact of food price increases on poverty have been carried out. Well targeted safety nets can mitigate these impacts.

Links to DPC Actions

Pillar One: Improving the targeting efficiency o f safety nets programs.

Pillar Two: Establishing an institutional framework for safety nets program implementation.

Pillar One: Improving the targeting efficiency o f safety nets programs.

Pillar Two: Establishing an institutional framework for safety nets program implementation.

Pillar Three: Enhancing fiscal sustainability and strengthening the fiduciary environment.

Iote: The above table i s not exhaustive and many recommendations are repeated in various reports.

V. THE PROPOSED SOCIAL SAFETY NET DEVELOPMENT POLICY CREDIT

A. OPERATION DESCRIPTION

99. Objective: The broad objective o f the safety net reform program i s t o support inclusive growth through the development and implementation o f a fiscally sustainable, efficiently targeted, and well-administered national safety net system in Pakistan. The safety net system wil l provide the chronic and transient poor with both basic income support and access to opportunities for graduating out o f poverty.16 Specifically, the proposed credit wil l support the establishment o f an appropriate policy framework for an efficient safety net system, including the development o f sound institutions for the effective implementation o f the Benazir Income Support Program, the Government’s new national safety net program. This objective i s consistent with the goals o f the Pakistan’s Second Poverty Reduction Strategy Paper (PRSP-11) and the National Social Protection Strategy o f Pakistan. The proposed tranching i s well suited to Pakistan’s current situation and needs, since it provides the Government with predictability o f IDA’S support to social safety nets until the new CAS i s available and serves to mitigate some risks associated with the program.

l6 This objective i s fully consistent with the recommendations of the 2007 World Bank report titled “Social Protection in Pakistan: Managing Household Risks and Vulnerability”.

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100. The Safety Net Reform Areas: During the second ha l f o f 2008, the Government of Pakistan launched the BISP as i t s main national social safety net program.” The program provides cash transfers o f Rs. 1000 [$12] per month to the eligible families and i s expected to cover 3.4 mi l l ion families in 2008/2009.’8 The 2008/09 budget allocation o f the Rs. 34 billion, doubles the federal Government’s social safety nets spending from 0.3 percent in 2003/04 to 0.6 percent o f GDP.” The GoP intends to expand the budget for the BISP in the coming fiscal year 2009/10 to cover around 5 mil l ion families with the ultimate goal over the medium term to expand coverage to 7 mil l ion families to al l provinces o f the country, Azad Jamnu and Kashmir (AJK) and Northern Areas. In line with the National Social Protection Strategy, the short-term objective o f BISP i s t o cushion the adverse impact o f the food, fuel and financial crises on the poor, but i t s broader objective i s to establish a safety net platform for the chronic poor and those affected by future shocks as a f i rst step towards a more comprehensive social protection system. In particular, the Government’s vision i s to gradually implement poverty-exidgraduation programs (such as conditional cash transfer programs) to enable desired education, health and employment outcomes for the poor. As the BISP program expands under the new targeting mechanism, the Government intends to shift resources from untargeted or poorly targeted programs (such as wheat subsidies), which would aid the fiscal sustainability o f the targeted safety nets programs in the long term.

101. The introduction o f the Benazir Income Support Program i s evidence o f the strong commitment o f the Government to develop a modern safety net system with strong institutional underpinnings. The adoption by the Government o f an objective national targeting method based on a poverty scorecard for this program, a f i rst in the South Asia region, to replace the parliamentarian based targeting process i s another evidence o f this commitment to developing an effective safety net system (Annex 4 provides detailed information on this Proxy Means Test). Most recently, the Government has informed the eligibil i ty determination agency to no longer process the old targeting forms. T o facilitate the transition to the new system, the Prime Minister has made a public announcement through media asking the households to participate in the new poverty score card data collection process. As targeting improves under the BISP, it wil l be possible to support a social policy platform that can potentially align other human development and poverty-focused programs to achieve the goal o f establishing accountable and sustainable systems in the country.

102. However, the adoption o f an objective targeting method i s only the first step towards the development o f an effective safety net system. In addition to this measure, the key policy reforms that need to be taken to improve the functioning o f the safety net include, inter alia, (a) the development o f a targeting system that i s transparent and serves to identify the eligible poor; (b) the establishment o f a legal, policy, and institutional framework to ensure sound management, governance, monitoring, and administration o f the program, including exit policies to help the poor and vulnerable graduate f rom safety net programs; and (c) the expansion o f coverage and

” Similarly, provincial governments are engaged in the formulation o f new social protection programs. For example, the Government o f Punjab has announced the Punjab Food Support Scheme (PFSS) originally designed as providing food stamps for the poorest households, but later converted to a cash transfer program o f RslOOO per household per month. The allocation for PFSS in the current year provincial budget was Rs. 21.60 billion to cover 1.8 million families. According to PFSS design and agreement with the federal government, it wi l l ensure that PFSS beneficiaries do not overlap with the BISP. Hence, PFSP wil l target an additional 1.8 mill ion beneficiaries on the top o f around 1.7 million likely to be covered under the BISP in Punjab. I* This level o f coverage i s approximately equal to about 25 percent o f the population-around the 2005106 national poverty headcount rateaccording to the most recent estimates. l 9 In addition, the province o f Punjab i s allocating about 0.2 percent o f GDP to its income supportlcash transfer program in 2008109. A higher level o f spending does not translate into more coverage for the poor if safety nets programs are poorly targeted.

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provision o f adequate benefit amount, within a framework that ensures fiscal sustainability; and benefit payments to the poor are delivered on time and with adequate governance and control mechanisms in place.

103. Table 9 summarizes the pillars, the reform areas and the actions proposed to be covered under each. The specific reforms to be supported in each area will be detailed in the Government o f Pakistan’s Letter of Development Policy (Annexl) and the Safety Net Development Policy Framework (Annex 2).

Table 9: Pillar Objectives

Pillar I: Improve the targeting efficiency o f safety nets programs.

Pillar 11: Establish an effective institutional framework for program implementation.

Pillar 111: Enhance fiscal sustainability and strengthen the fiduciary environment

immary of the Propose Reform Areas

1. National targeting system established

2.1. Institutional arrangements for safety net administration developed.

2.2. Exit and graduation strategies developed.

3.1. Safety net expenditures adequate and sustainable.

3.2. Control and accountability o f BISP payments improved.

Safety Net Reform Program Medium Term Objectives

0 Developing and initiating the data collection system.

0 Developing the eligibil i ty determination system

0 Developing and implementing the monitoring mechanism for targeting.

0 Developing a legal framework for safety nets.

0 Adopting institutional arrangements for program implementation.

0 Init iating the rationalization o f safety nets Drorrrams.

0 Providing incentives to invest in human capital accumulation.

Allocating sufficient funds for safety nets program implementation.

Agreeing and implementing benefit delivery mechanisms. Developing and implementing control and accountability systems for benefit payments. Developing and adopting a strategy for monitoring program performance.

104. In the medium term, program outcomes such as the inclusion and exclusion errors o f the program, benefit incidence o f safety net spending (percent o f safety net expenditures targeted to the poor), and adequacy o f benefit (benefit as a share o f total consumption) could be measured to evaluate program performance. The long-term outcomes o f the Government’s safety net reform program would include the poverty impact o f program (percent poverty incidence reduced among beneficiaries) and, where conditional cash transfer programs or other graduation strategies are included, outcome indicators such as the impact o f the program o n children’s school enrollments and nutritional and health outcomes would be an appropriate metric o f program performance.

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105. Proposed SSN DPC Prior Actions: SSN DPC supports the Government’s safety nets reform agenda. In addition, the general requirement o f a satisfactory medium-term macroeconomic framework for al l Bank’s budget support operations applies. The S S N DPC i s proposed to have in total the following seven prior actions for the first tranche (US$150) million) and two triggers for the second tranche (US$50 million), which follow the good practice principles (see Box 2):

First Tranche Prior Actions

Pillar I: Improving the targeting efficiency of safety nets programs

1. A national targeting system established to implement the poverty scorecard method, through contracting of separate agencies for scorecard data collection and eligibility determination.

2. Policy decision on improving BISP targeting mechanism and transition o f BISP enrollees under the parliamentarian-based system taken by the BISP Board, removing existing beneficiaries from the program if they do not complete the scorecard targeting form or qualify under the new targeting system.

Pillar 11: Establishing an institutional framework for safety nets program implementation

3. BISP established as an autonomous statuary safety net authority to implement safety net programs through adoption o f a legal ordinance with (i) clear financial and administrative autonomy; and (ii) distinction in roles o f the Board, the Chairperson and the Secretary for the oversight and management o f program implementation.

4. Administrative policy guidelines for effective BISP program implementation adopted by BISP, as approved by i t s board.

5 . Policy decision to remove overlapping mandates o f BISP and PBM in delivering unconditional cash transfer programs taken by the Prime Minister.

6. Child Support Program (a conditional cash transfer [CCT] pilot) expanded, using a poverty- score-card based targeting method.

Pillar III: Enhancing fiscal sustainability and strengthening the fiduciary environment

7. Independent payment agency appointed, and policy guidelines and procedures for ensuring timely delivery o f payments agreed.

Second Tranche Triggers

Pillar I : Improving the targeting efficiency of safety nets programs

1. Poverty scorecard data collection completed in selected pilot districts.

2. The BISP has (i) implemented the policy decision to remove beneficiaries of the parliamentarian based system who do not complete the scorecard form or qualify under the poverty-scorecard based system; (ii) adopted a transition policy including but not limited to grievance mechanisms, definition of cut-off score for eligibility, plan for national rol l out and communications strategy.

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106. single tranche operation are expected to lead to the fo l lowing outcomes in 20 10:

Expected outcomes of the SSN DPC: The measures and reforms supported by this

Increase in the share o f beneficiaries enrolled in the BISP program using the new targeting mechanism from 0 to at least 30 percent o f total beneficiaries. Increase in the share o f total benefit expenditures reaching the poorest 40 percent o f the population f rom 46 percent to at least 55 percent. Increase in program applicants receiving a response on whether they qualify for the program within 3 months f rom scorecard form submission, f rom 0 to at least 50 percent o f total applicants. Increase in benefit payments audited f rom 0 percent to at least 50 percent o f total payments under the new payment system and improvement in reconciliation t ime lag f rom the present indefinite period to 2 months. Increase in percentage o f participating (poverty-scorecard) districts in which beneficiary l is ts are publicly available, f rom 0 to at least 30 percent.

Box 2. Good Practice Principles for Conditionality Principle 1 : Reinforce Ownershit, The proposed operation supports the Government’s reform program, which i s aligned with the National Social Protection Strategy and the PRSP2. I t has wide ownership among key stakeholders at all levels o f government and political leadership. Bank support to the Government program takes into consideration the political economy o f reform, as reflected in the sequencing o f reforms (e.g., implementation o f the poverty score card based targeting gradually, through implementation in 10 districts to start with). Given the wide scope o f the reform program, there are some areas that require analytical work. The Bank has worked closely with the Government to prepare a comprehensive review o f the social safety nets, the results were published as the Social Safety Nets Report, which in turn provided inputs into the National Social Protection Strategy. More analytic work i s planned under the TA support that the Bank i s providing, in collaboration with DFID. Principle 2: Agree up front with the government and other financial partners on a coordinated accountability framework The Policy Matrix o f Reforms, based on Government’s overall program, provides the framework for coordinating support o f all development partners. Specifically, support from the DFID i s already being provided through Bank executed Trust Funds. The ADB i s also planning to support the process through the proposed “Accelerating Economic Transformation Program”. The results framework i s derived from the Government Program, and i t would continue to coordinate donor support around the same set o f results. Principle 3: Customize the accountability framework and modalities of Bank support to country circumtances The DPC series have in the past benefited from Bank’s overall fiduciary work at the country level. The related actions supported by the proposed DPC are consistent with Pakistan’s overall fiduciary reforms. Principle 4: Choose only actions critical for achieving results as conditions for disbursement The program framework i s ambitious as the Government’s reform program i s fast-moving. The criticality o f the seven prior actions for meeting Program Objectives i s explained below. The prior actions are derived from the Government’s reform program and are required for meeting the program outcomes. Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support Apart from formal missions, the program i s reviewed by the Task Team through continuous dialogue with policy makers (department level, finance and planning, and senior administrative and political leadership), and through field visits. Regular reviews wil l be conducted both by the Government and by the Bank, based on the framework o f outcome indicators listed by the Policy Matrix.

B. POLICY AREAS 107. The Social Safety Ne t Reform Program, which this credit seeks to support, i s based on three complementary pillars. The f irst pil lar aims to improve targeting eflciency of the safety nets programs by establishing a national targeting system through appointing separate agencies for data collection and eligibil i ty determination; and adopting a sound pol icy on transitioning

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f rom the o ld to the new targeting system. The second pil lar aims to establish an effective institutional j-amework for safety nets program implementation through the development o f legal, institutional, administrative institutions for the safety net system including the establishment o f an independent safety net agency to provide a uniform platform to implement rationalized safety net programs, the development o f administrative policy guidelines for program implementation; the rationalization o f overlapping safety net programs to improve fiscal and administrative efficiency, and the development o f graduation and exit strategies to facilitate households' movement out o f poverty. The third pil lar aims to enhance fiscal sustainability and strengthen the fiduciary environment through ensuring adequate budget allocation for benefit payment and program administration consistent with the overall macro-economic framework and by developing a reliable and transparent payment system, with a separate payment agency governed by strong fiduciary and social accountability controls on benefit payments.

108. The fol lowing sections describe in further detail the actions proposed to be supported by the SSN DPC that have as their objective developing the institutional structures to ensure effective implementation o f the BISP.

Pillar I: Improving the targeting efficiency of safety net programs

Establishing a national targeting system

109. Key Issues: The targeting performance o f the BISP has been a major concern. Given the need to rapidly r o l l out the program, the beneficiaries o f BISP were init ially identified by Parliamentarians (Members o f the National Assembly and Senators). By early March 2009, over 2 mi l l ion such forms have been received by BISP for processing o f payments. Out o f these, roughly 1 m i l l i on applications have been identified as eligible under the init ial selection criteria.

1 10. The recent adoption o f an objective targeting instrument-the poverty scorecard*'-has been the critical first step to ensure the benefits reach the poor and vulnerable. The poverty scorecard i s a synthesized form o f proxy means test (PMT)-a targeting tool that i s used in many countries to identify the poor for provision o f social assistance. The poverty scorecard or P M T includes a l imi ted number o f indicators that correlate wel l with poverty along with a simple scoring system to help identify the program beneficiaries. The proposed scorecard-based targeting wil l be an improvement over the previous system in a number o f ways: (i) a transparent and fair enrollment process that allows al l to apply for it; (ii) objective and transparent criteria for determining the eligibility; (iii) adoption o f verification tools to reduce exclusion and inclusion errors,

11 1, To finalize the design o f the nationwide scorecard ro l l out, the BISP has launched a test phase o f the scorecard ro l l out in at 16 selected districts; in a l l o f the provinces and in Azad Jammu and Kashmir and Northern Areas. This exercise will enable the BISP to finalize the design for the nationwide ro l l out by learning from the f ie ld including logistics and monitoring requirements. The Government proposes to use a census approach for collecting scorecard information, which requires that each household in the covered area wil l be visited door-to-door and requested to fill out the forms. For the national implementation, the targeting center approach

The poverty scorecard i s a Proxy Means Test that includes a limited number o f indicators that correlate well with poverty along with a simple scoring system to help identify the program beneficiaries. The proposed scorecard-based targeting wil l be an improvement over the previous system in a number o f ways: (i) a transparent and fair enrollment process that allows all to apply for it; (ii) transparent criteria for determining eligibility; (iii) adoption o f verification tools to reduce exclusion and inclusion errors.

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i s also likely to be employed, which requires families to approach the center and fill out the forms themselves. This process wil l require training o f those both approaching households and filling out the forms in the targeting centers. An effective public information campaign wil l be a key element for both phases to inform the potential beneficiaries locally about the objectives and implementation o f the program. In order to closely monitor the implementation o f the test phase and quickly learn f rom this valuable experience, BISP wil l use a series o f control instruments to evaluate data collection experience. Based on the test phase results, including evaluations, BISP wil l initiate the transition o f beneficiaries to the new targeting system.

112. efficiency o f the BISP (prior actions are bolded).

The SSN DPC will support the following reform actions t o improve the targeting

0 A national targeting system established to implement the poverty scorecard method, through contracting of separate agencies for scorecard data collection and eligibility determination. The Government will establish a targeting system that separates the enrollment o f beneficiaries f rom the determination o f their eligibil i ty for the BISP to improve administrative efficiency. Specifically, the Government will select a separate agency/ agencies for national data collection for the poverty score card. This selection will be based on the performance o f several agencies that wil l implement data collection during the test or p i lot phase. These agencies, or partner organizations (POs), include the Pakistan Poverty Alleviation Fund (PPAF), the Rural Support Program Network (RSPN) and the Population Census Organization (PCO). The rationale for selecting these partner organizations i s to capitalize on their outreach and ability to galvanize the community to apply for the program by completing the scorecard applications during the targeting process. The Government will also establish clear criteria for evaluating their performance o f each organization regarding efficiency, maintaining confidentiality o f household information, quality o f trainings and o f information campaigns, and the methodology o f approaching culturally and geographically diverse populations. After the test phase, BISP wil l engage in similar partnerships with these and if needed other organizations that have the capacity and capability o f managing the scorecard data collection process (e.g., in urban areas). The targeting system wil l also include the appointment o f a separate institution for the processing o f the poverty scorecard data for eligibility determination, including the provision o f CNICs to eligible families in a coordinated manner. The agencies for poverty score card data collection will be required to transfer the scorecard information to this entity who wil l then undertake the data entry, processing, validation, o f the l i s t for determining their eligibility to the program. Based on the eligibility thresholds, this entity will determine and transfer the final l i s t o f eligible beneficiaries to a separate payment agency for delivery o f benefit to eligible households. Eventually, the BISP, as the main safety net agency, wil l also provide data to the entity for eligibil i ty determination f rom other organizations l ike PBM, PFSS and Zakat to minimize duplication o f benefit. Since BISP intends to make payments to families, it wil l work with the relevant entity to include provisions for CNICs to be provided in a fast track mode to eligible beneficiaries.

0 Policy decision on improving BISP targeting mechanism and transition o f BISP enrollees under the parliamentarian-based system taken by the BISP Board, removing existing beneficiaries from the program if they do not complete the scorecard targeting form or qualify under the new targeting system. Given that the Government i s committed to rol l ing out the scorecard-based targeting system at the earliest, under the proposed reform, it has had to make a policy decision on status o f beneficiaries in the old targeting system post the poverty scorecard ro l l out. Specifically, the Government has decided that if the

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beneficiaries o f the old system do not apply or qualify under the new targeting system, their benefits wil l be discontinued.

Poverty scorecard data collection completed in selected pilot districts.’l T o implement the new targeting system, the Government wil l collect poverty-scorecard data in select districts in Pakistan during a test phase through the three partner agencies noted above. There are 16 districts where the test phase poverty scorecard data wil l be collected, covering about 17 mi l l ion individuals. The data will be collected using a census method, with survey teams obtaining information f rom each fami ly residing in the pi lot districts, which will then be used to determine their eligibil i ty for BISP benefits.

The BISP has (i) implemented the policy decision to remove beneficiaries of the parliamentarian based system who do not complete the scorecard form or qualify under the poverty-scorecard based system; and (ii) adopted a transition policy including but not limited to grievance mechanisms, definition of cut-off score for eligibility, plan for national roll out and communications strategy.22 Once data has been collected from the test districts, it will be processed by the eligibil i ty determination agency to determine whether or not a fami ly qualifies under the new targeting system. Those families in the district who were previously receiving benefit but did not apply or do not qualify under the new targeting system wil l have their benefits discontinued. To implement this decision, the eligibil i ty determination agency will inform the payment agency to discontinue benefits o f these particular beneficiaries. In order to ensure smooth transition to the new poverty-scorecard based targeting system, a comprehensive policy will need to be adopted and implemented by the Government, including but not limited to grievance mechanisms, definition o f cut-off score for eligibility, plan for national ro l l out and communications strategy. This transition policy will be informed by among others, the results o f a rapid-assessment survey that will provide information inter alia, on the overlap between the parliamentarian based targeting and the poverty-scorecard based targeting.

Effective mechanisms to ensure the quality of data collection for the test phase of poverty scorecard based targeting process adopted. In order to closely monitor the implementation o f the test phase and quickly learn f rom this experience, BISP’s monitoring policy for poverty scorecard data collection will be based on using a series o f control instruments to evaluate the performance o f this process. First, according to this policy, Partner Organizations will be required to establish a cascade system for the supervision o f the data collection as outlined in the targeting guidelines. Second, a process evaluation for the test phase wil l provide insights into the adherence o f data collection institutions to the established processes. Third, BISP will receive timely information f rom third party random spot checks on the quality o f the data collection by the Partner Organizations. The results f rom these spot checks wil l be communicated to BISP management and the Partner Organizations to ensure learning and midcourse correction if necessary. The spot checks will also suggest a threshold level for errors on the basis o f which the area can be re-surveyed for improving the quality o f data. This policy wil l be critical for helping to ensure that exclusion and inclusion errors under the new system are reduced.

113. Medium-Term Milestones: Over the medium term, the Government will finalize the institutional policy arrangements for enrolling beneficiaries for the nationwide ro l l test phase results, taking into account their performance. Based on this institutional

out based on arrangement,

*’ This i s the first (of two) triggers o f the second tranche 22 This i s the second (of two) triggers for the second tranche.

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the score card enrollment would be rolled-out nationwide (at least 80 percent o f districts in the country). In the medium term, the spot checks for monitoring the quality o f scorecard ro l l out and ensure mid-course correction will need to be taken; and appeals emanating f rom the scorecard-based selection wil l have to be addressed to minimize inclusion and exclusion errors. Policy decisions regarding the long-term enrollment process wil l also be critical: the key decisions include whether to make enrollments open or closed; and whether to collect information v ia a census approach or a targeting-center approach.

114. Expected Results: A well-targeted safety net system wil l ensure that the eligible households benefit f rom safety net programs, and will improve the efficiency o f public benefit expenditures on safety net programs. The policy supporting an institutional framework o f independent agencies for collecting data, determining eligibility, and for payment will improve the governance o f the system. Grievance procedures, once in place, can also minimize targeting errors, increasing the efficiency o f public expenditures. A well-established targeting system can then be extended to other cash transfer and pro-poor programs, further improving the efficiency o f public expenditures on the poor.

Pillar 11: Establishing the Institutional framework for Safety Net Implementation

Developing Institutional Arrangements for Safety Nets Administration

115. Key Issues: BISP was originally established to be headed by a National Program Coordinator under the Ministry o f Finance. A National Steering Committee headed by the Minister for Finance was also established at the same time. Later in 2008, the Program was transferred to the Cabinet Div is ion and a Special Secretary was appointed along with a National Program Coordinator. Moreover, the Special Secretary was declared as the Principal Accounting Officer with a l l administrative and financial powers as given in the Rules o f Business o f Pakistan for Federal Secretary, in charge o f a Division. The Special Secretary was later replaced by a Managing Director enjoying the same powers as o f a Federal Secretary.23 Thus, BISP remains a temporary institutional arrangement compromising i t s governance and administrative efficiency, and a more formal institutional arrangement for the agency i s required to minimize polit ical interference and ensure sound governance and effective program implementation. Such an arrangement would also allow fragmented safety net programs to be consolidated and rationalized under one platform and through one agency, resulting in more consistent safety net policy formulation and improvements in targeting and administrative efficiency o f safety net spending.

116. As i t s legal base i s formalized, a critical role for the implementing agency wil l be to develop the administrative policy, structures, and procedures to successfully implement the program. The main administrative policies and processes will include the targeting process, payment procedures, monitoring and information systems, evaluation strategies and programs. The agency will need to implement a monitoring policy that wi l l focus on improving monitoring information to evaluate program performance in order to inform and fine-tune program design and effectiveness. Public outreach and public information wil l also be important for communicating program information to eligible groups and reducing exclusion errors. Administrative policies and procedures would also include attention to staffing, both recruitment and training o f BISP professionals.

23 After the promulgation o f the BISP Ordinance the Managing Director tit le wil l be replaced by the t i t le o f Secretary

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1 17. The rationalization and consolidation o f the safety net programs wil l improve their effectiveness overtime. Currently, as noted above, Pakistan has two other cash transfer programs that are nationally implemented. T o avoid duplication and develop a common social protection policy platform under the BISP, specific measures to ensure coordination between the two programs, including their level o f benefit, coverage, targeting, and outreach wil l need to be considered. Finally, in an even broader context, the NSPS will need to be revisited, both in terms o f i t s design and implementation, given the initiation and need for coordination o f the new safety net programs both at the federal and provincial level, and i t s potential role as a platform for other safety net programs.

118. The SSN DPC will support the following reform actions for improving the institutional framework o f the BISP for effective administration o f the safety net system; for rationalizing the existing safety net; and for reducing benefit dependency (prior actions are bolded):

0 BISP established as an autonomous statutory safety net authority to implement safety net programs through adoption of a legal ordinance with (i) clear financial and administrative autonomy; and (ii) distinction in roles of the Board, the Chairperson and the Secretary for the oversight and management o f program implementation. The Government o f Pakistan has decided to transform BISP from a temporary agency into a more permanent structure by submitting a law for i t s creation to Cabinet and later to Parliament. Under the law, BISP would become an autonomous statutory authority with financial and administrative autonomy that would be responsible for the design and implementation o f the main safety net program, and would provide a unified platform for implementing other safety net programs currently operating in the country. T o ensure strong governance o f the program, the law would also define the composition and roles and responsibilities for the BISP Board and BISP management. The main provisions would ensure that the Board would have overall oversight o f the program, would set the pol icy directions and review program performance on a regular basis, while the Management o f the BISP would have the responsibility o f operating the program: ensuring that the program i s administered in a transparent and well-governed manner, hiring and firing o f staff, etc.

Administrative policy guidelines for effective BISP program implementation adopted by BISP, as approved by its board. The successful administration o f the BISP requires the adoption o f transparent and accountable administrative policy guidelines for the effective, coordinated, and efficient delivery o f income support to eligible beneficiaries. These guidelines to be contained in the program Operational Manual wil l include detailed operational and implementation provisions for the roles and responsibilities o f a l l implementation partners (BISP, MOF, Planning Commission, Pakistan Post, Partner Organisations for enrolment and for eligibil i ty determination, provincial and local governments, beneficiary households, etc.). They also include the guidelines for targeting, enrolment, payments, organisational structure, and monitoring and evaluation arrangement, as wel l as fiduciary rules governing the program. Specifically, effective administration o f the BISP program wil l also require policy guidelines for the development o f a comprehensive Monitoring and Evaluation system. This system would include an integrated Management Information System (MIS) with core functions managed by BISP and satellite systems managed by the data processing agency and the payment agency. In addition, a set o f evaluations (process evaluation, impact evaluation (qualitative and quantitative) and beneficiary assessments) wil l be carried out periodically t o ensure effective feedback to policy makers and to facilitate further improvements in the program. Furthermore, spot check reports as wel l as audit reports will provide valuable inputs for effective monitoring o f

0

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program implementation. T o administer programs, BISP wil l also require well-qualified staff. BISP i s in the process o f filling key positions at the central offices to implement the test phase o f the program. For the nationwide rollout, BISP wi l l also fill the necessary positions at the provincial and district levels. These policy guidelines will be critical for the implementation o f the program and will be codified in a program implementation.

The update of the National Social Protection StrategV (NSPS) initiated to include program rationalization and establish the institutional pamework for enhanced coordination and delivery of social protection programs. Although the general framework provided in the NSPS i s entirely consistent with the social safety net reforms that are being introduced by the new government, the Government wil l revise the strategy document to adequately reflect the latest policy developments and institutional arrangements. In particular, the updated NSPS wil l include program rationalization and will establish the institutional framework for enhanced coordination and delivery o f social protection programs. For this purpose, under the proposed reform, the Government i s expected to not i fy a Committee under the Planning Commission to steer the revision o f the NSPS through a consultative process. The committee wil l have specific responsibilities and stipulated time frame for completion o f the review. Consultations at the federal as we l l as provincial level will be undertaken to ensure coordination o f safety net reform initiatives, and the revised NSPS wil l be placed before the Federal Cabinet for adoption. The revised NSPS wil l thus adequately reflect the new government’s vision and priorities in social protection and the reforms in particular to be undertaken to establish systems. I t will also outline the institutional framework for monitoring and implementation o f the NSPS with social safety nets as one o f the priority areas for action.

Policy decision to remove overlapping mandates of BISP and PBM in delivering unconditional cash transfer programs taken by the Prime Minister. The Government intends to make BISP the central safety net program o f the country and to this effect; a law i s being adopted to define i t s mandate as wel l as parameters for governance. However, given that the Pakistan Bait-ul M a l (PBM) i s also a federal safety net agency and i s implementing a large unconditional cash transfer program, i.e., Food Support Program (FSP); a policy decision i s required to clarify i t s future role with delivery o f the FSP being similar t o BISP. This policy will require P B M to discontinue the FSP in order to remove the duplication. However, the P B M wil l continue to implement the CSP (CCT) pi lot until i t s successful completion and evaluation.

Developing Exit and Graduation Strategies

119. Key Issues: A key issue in program design and implementation i s t o ensure that the program does not induce benefit dependency; but rather facilitates the graduation o f beneficiaries f rom poverty status. Thus it i s critical that benefit levels are established to ensure work disincentives are minimized. In Pakistan the benefit amount corresponds to 16 percent o f average monthly male adult earnings, and i s therefore unlikely to create disincentives for work. I t i s also important to link beneficiaries with income earning opportunities such as ski l ls and training programs or micro-credit opportunities. Incentives can also be included in the program to reduce the inter-generational poverty among program beneficiaries, through, for example, conditional cash transfers. These programs provide poor households with incentives to send their children to school and to avail health and nutrition services. The Government plans to initiate analytic work o n potential exivgraduation strategies during the updating o f the National Social Protection Strategy, and planned projects such as the PPAF 3 will focus on ski l ls training and micro-credit programs to promote exit o f adults from the safety net system. The Government also plans to

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expand the pilot o f the CCT pi lot being undertaken by the Bait-ul Maa l to reduce inter- generational poverty.

120. The SSN DPC wil l support the following action to promote long-term poverty reduction:

0 Child Support Program (a conditional cash transfer [CCT] pilot) expanded; using a poverty score card based targeting method. The CSP has already been implemented in three districts on a pi lot basis by PBM, in order to promote the investment in human capital for poverty reduction by increasing attendance and reducing dropout rates in primary schools in the targeted districts. The CSP provides additional cash incentives, as a top-up benefit, for PBM’s FSP program beneficiaries with children between f ive and twelve years old. A rapid assessment o f this pi lot program has been carried out, among other things indicating the need to increase the CSP payment amount and to better coordinate with the Provincial Education Departments during the implementation o f the program. The Government i s expected to expand the CSP to further districts, in a manner that incorporates lessons-learned from the f i r s t phase implementation into the program design. The expanded pi lot program wil l also uti l ize the poverty-scorecard information to increase the targeting performance o f the CSP.

121. Medium-Term Milestones: In the medium term, the government i s expected to consolidate select federal safety net programs under the safety net authority adopted by the federal cabinet, as reflected in i t s revised National Social Protection Strategy. To be effective in implementing programs, the agency would need to be staffed with qualified professionals at the federal, provincial and divisional levels in accordance with the Organizational Structure outlined in the BISP Operational Manual. As monitoring and evaluation results become available, a wide dissemination o f these will ensure a broad-based debate about the effectiveness o f BISP in providing basic income support to the poor. Finally, BISP would be modified to ensure that program beneficiaries are able to access selected human development services (e.g. heal thht r i t ion, education, training) and selected/existing activation programs (e.g., skill development, income generation, employment, cash for work) t o promote exit f rom poverty. In particular, the results f rom the C C T pi lot wil l be used to assess how BISP and P B M can coordinate their programs to ensure better human development outcomes among the poor.

122. Expected Results: As a result o f strong administrative policies and procedures, BISP wil l be able to deliver benefits to the eligible poor. A strong evaluation focus will help the program to showcase i t s positive results and identify areas for improvement in order to increase i t s performance. The efficiency o f public expenditures on safety nets will be increased if safety net programs are rationalized and managed through a single agency. Finally, the introduction o f graduation strategies into the program should help the current poor and their children escape poverty.

Pillar 111. Enhancing Fiscal Sustainability and Strengthening the Fiduciary Environment

Adequacy and Sustainability of Safety Net Expenditures

123. As noted above, despite economic growth, social protection (including safety net) expenditures have been declining in recent years. T o support the ro l l out o f the program, in addition to ensuring that public expenditures on safety nets are wel l targeted, it will be important to provide sustained financing for the safety net program that i s also consistent with the medium- t e r m macro-economic framework. The SSN DPC wil l support the fo l lowing action to promote the fiscal sustainability o f the safety net programs.

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124. BISP budget allocation for FY08/09 is consistent with medium term macroeconomic j-amework and adequate to pay the agreed benefit amount to at least 3.4 million families. In 2008109, the Government increased safety net spending considerably f rom 0.3 to 0.6 percent o f GDP. The increase in spending in 2008109 mainly reflects the institution o f the new national safety net program (BISP), which i s ultimately intended to cover the bottom 25 percent o f the population. The init ial budget allocation for the safety nets programs i s indicative o f the Government’s commitment to protect the poor and the vulnerable. In the medium term, a well- targeted social assistance program would allow policy makers to reduce budget allocation to other poorly targeted schemes (such as the price subsidies for wheat products) that are meant to assist the poor families.

Improving the Control and Accountability of BISP Payments

125. Key Issues: Consistent with best practice, the Government wil l appoint an agency for delivering payments that i s separate and independent f rom the agencies that enroll beneficiaries and determine their eligibility. Specifically, the policy o f the Government i s to deliver benefits t o eligible beneficiaries (female representatives o f the family) through postal money orders. However, there are currently no policies or procedures for evaluating or improving the effectiveness o f the payment system-that is, whether payment reach beneficiary households, full or in part, on time or later than stipulated, and whether there i s any pressure on the post office staff to divert payments intended for beneficiaries or any side payments or required by the poor households to avail their benefits. This information wil l be required to strengthen the payment system.

126. transparent, timely and delivered with adequate control and accountability:

The SSN DPC will promote the following actions to ensure that benefit payments are

Independent payment agency appointed, policy guidelines and procedures for ensuring timely delivery of payments agreed. Under the proposed reform, the Pakistan Post will be appointed as an independent agency to pay benefit to eligible beneficiaries. The agreement wil l require the periodic provision o f eligible l i s t o f beneficiaries by the selected eligibil i ty determination agency to Pakistan Post. According to the Government policy, the Pakistan post will be required to print money orders and deliver the money at the door steps to the beneficiaries after verifying their CNICs. Pakistan Post wil l also maintain a record o f the delivery o f payments and will periodically submit it to BISP in a specified format. This data will then be uploaded in the MIS, with the record o f each transaction serving as the financial management, reporting and reconciliation mechanism and wil l allow regular tracking o f payments. Based on PPRA 2004, procurement guidelines for BISP developed and approved by the BISP Board. To address a weak regulatory framework governing public procurement, a Public Procurement Regulatory Authority (PPRA) was created in 2002, PPRA rules are based on international best practice and are followed by Sindh and Balochistan. Punjab i s in the process o f implementing a procurement reform strategy, and technical assistance i s being provided to NWFP on amendment o f i t s existing procurement law and making it consistent with international best practice. The management o f BISP also recognizes the importance o f establishing the appropriate procurement procedures in accordance with the federal Public Procurement Regulatory Authority (PPRA) Ordinance 2004. Independent operational audit arrangements for BISP adopted. The independent operational audit arrangements wil l provide a systematic assessment o f the efficiency and effectiveness o f BISP by focusing on structure, controls, procedures and processes. Under the proposed reform, BISP wil l put in place organizational arrangements for instituting operational audits,

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including their functional relationship with the Secretary, being the Principal Accounting Officer, as wel l as with the Board, with the latter being responsible for policy and implementation oversight. The operational audits will include audits o f the payment system, from the time the post office receives the l i s t to the time when benefit i s supposed to be received by the eligible beneficiary. This exercise wil l help identify the constraints to benefit delivery as wel l as requisite measures for improving i t s effectiveness such as the posting o f beneficiary l i s t s in the village, community verification, etc. In order to ensure that the correct beneficiaries o f the BISP safety nets get the benefits in a timely manner and operational funds are appropriately utilized, the operational audits will also look into the efficacy o f and transparency in the financial management system within BISP. This will involve an analysis o f the entire payment process from generation o f the beneficiary l i s t to the receipt o f cash by the eligible beneficiary. The operational audit reports wi l l provide specific recommendations to enhance control and accountability mechanisms in BISP’s overall operations thereby enabling BISP not only to meet the program objectives in a transparent manner but also to avert any financial risks.

127. Medium-Term Milestones: T o provide sustained financing for the program and expand i ts coverage, the Government proposes to increase spending on BISP to nearly 1 percent o f GDP in 2009/10. In the medium term, fiscal sustainability wil l be ensured if budgets to the safety net programs are adequate, with the number o f families chosen through corresponding cut-off scores (determined in part by making use o f the firstho11 out phase implementation experience o f the poverty scorecard) to ensure program consistency with the overall macro-economic framework. To ensure benefit payments are made efficiently, both accurately and on time, the FM system wil l be fully functional, FM audit reports regularly available and observations fully settled. The reconciliation process o f payments wil l be functional in accordance with the administrative policy guidelines; the procurement procedures will be fully implemented; and the third party ex-post review o f sample procurements will have been completed. Over time, however, BISP management wi l l evaluate and adopt, if feasible, alternative payment options using modem technology (e.g., smartcards). Social accountability systems wil l also be in place and will a l low the assessment o f payment processes, which would include, inter alia, the publication o f beneficiary l i s t s at the appropriate sites, systematic oversight by local stakeholders, and a mechanism for complaints and confidential allegations. Finally, grievance system for payments wil l be in place to ensure that beneficiaries are able to obtain their full benefits in a timely fashion.

128. Expected Results: The implementation o f these policies will help ensure adequate and sustainable financing o f the safety net system that will increase the coverage o f the poor. The reforms wil l also ensure that benefit delivery has sufficient in-built control and accountability mechanisms to provide timely delivery o f stipulated benefits to the eligible poor.

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VI. OPERATION IMPLEMENTATION

A. POVERTY AND SOCIAL IMPACTS

129. The proposed operation i s expected to help the poor cope with both chronic and transient poverty. The operation supports the development o f a well-targeted cash transfer program (Le., BISP), which will cover a significant portion o f the poor population nationwide. The provision o f income support to the poor should help provide for the basic needs o f the poorest populations. The establishment o f a national targeting system based on objective and transparent criteria, supported by strong and transparent institutional structures for collecting enrollment data, determining eligibility, benefit payment, and for addressing grievances, with a strong emphasis on monitoring and evaluation, has the objective o f ensuring that benefits reach the poor, with minimum inclusion and exclusion errors.

130. The new targeting system relies on the use o f a poverty score card, which i s developed as a Proxy Means Testing (PMT) method using Pakistan Living Standard Measurement Survey (PSLM) data. This targeting tool consists o f a l imited number o f simple indicators that correlate wel l with poverty (as measured by a household consumption aggregate) along with an intuitive scoring system that helps identify program eligibility (see Annex 4 for detailed information on the poverty scorecard instrument). Under this system, if the poorest 25 percent o f the population i s set as the target group, about 52 percent o f the poor would be excluded while 37 percent o f beneficiaries would be non-poor. However, a more detailed analysis reveals that many o f these non-poor beneficiaries would be families that are vulnerable to becoming poor because approximately 85 percent o f these beneficiaries come from the third, fourth, fifth and sixth deciles o f household expenditure distribution (with per adult equivalent less than Rs. 1,436, around 150 percent o f the official poverty line).

13 1. There i s a tradeoff between the breadth and depth o f the coverage. The current benefit amount i s Rs. 1000 per month per family, and it would take Rs. 63.4 bi l l ion to cover about 18.7 percent o f the population, provided al l the program budget i s allocated to the benefits. However, if the monthly payment i s reduced from Rs. 1000 to Rs. 750, it would take the same amount o f budget (Rs. 63.4 billion) to set the cutof f score at the poverty line (score o f 17) and cover about 24 percent o f population, again provided a l l the budget i s allocated to the benefits. However, the increase in the coverage i s at the cost o f the reduction in benefit, which will have impact on poverty alleviation. At this time, with benefit amount set at Rs. 1000 per month per family, the BISP i s expected to reduce poverty headcount rate by 6.4 percentage points if a cutof f point that leads to a coverage rate o f 16.6 percent o f the population i s selected.24

132. Basic income support to the poor i s also expected to have a positive impact on human development outcomes. First, the provision o f income support through an effective safety net wi l l help ease household budget constraints, allowing an increase o f food consumption for both adults and children. Given that the cash transfer will be provided to the female head o f the eligible families, the cash i s more l ikely to be spent to increase nutritional intake for children. Second, with income support it i s expected that beneficiary families are l ikely to rely less on child labor and at the same t ime have more resources to be spent on children’s schooling. Evidence from Pakistan suggests that many poor families do not send their children to school because o f

These statistics are based on simulations which use a poverty rate of 2 1.9 percent (as suggested by the PSLM 2005/06 data), and utilize the inclusion and exclusion errors of the poverty-score-card based targeting approach. Thus these estimates do not reflect the poverty reduction impact o f the parliamentarian based selection approach.

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l imited facilities but also because o f lack o f resources. Third, the operation will support linking program beneficiaries with current income opportunities such as skill training activities, micro- finance and other programs, but also support the development o f conditional cash transfer schemes that provide incentives to poor households to send their children to school (and in the future nutritional and health services) thereby breaking the inter-generational cycle o f poverty. Evidence from Lat in America indicates that well-designed and -administered conditional cash transfer programs reduce poverty but also have positive impact on school enrollment, a critical ingredient for improving welfare o f the future generation.

133. This operation wil l also promote gender equity. The cash transfers supported by this operation are provided to the female head o f the eligible families, which i s expected to increase women’s autonomy and their perception o f self and social status within family, as suggested by the international evidence f rom other cash transfer programs or conditional cash transfer programs. The empowerment o f women in turn may have some positive impacts on the children’s human capital. There i s some international evidence that cash transfers when received by women had a large impact on the anthropometric status (weight for height and height for age) o f girls; this was not the case when men received the allowances, suggesting that the efficiency o f public transfer programs may depend o n the gender o f the recipient.25 Though more evidence i s needed to support the hypothesis that female heads are more l ikely to spend more resources on girls in Pakistan, it i s reasonable to hypothesize that girls’ overall welfare, nutrition, and educational opportunities wi l l improve as a result o f the program. There i s also a risk that in some o f the traditional tribal areas, communities may object to women receiving the benefit. However, at this time, this issue has not emerged as a significant obstacle for program implementation other than in few isolated areas where there may be a need to undertake additional measures to ensure that the program benefits reach the poorest and most vulnerable families.

134. The provision o f Computerized National Identity Cards (CNICs) to recipients o f benefits under this program wil l also benefit the poor including women. This provision o f the CNICs wil l indirectly facilitate access to various services such as opening o f Bank accounts, etc. The government has already launched a campaign o f providing free o f charge CNICs through NADRA’s offices as wel l as the mobile teams. In this context, there i s an accelerated campaign in the poverty scorecard test phase districts preceding the poverty- scorecard data collection so that maximum number o f families, especially the poor, will be able to provide complete information to the survey teams. Since women are less l ikely to have C N I C cards compared to men, it i s pertinent to note that as o f April 2009, the accelerated distribution o f C N I C cards has benefited women disproportionately: there i s a phenomenal increase in women’s enrolment with 100,000 women receiving new CNICs per week.

135. This operation will help protect the poor against both chronic poverty and transient poverty. Pakistan has experienced a series o f adverse aggregate income shocks, such as a drought and earthquake and recently, the global economic crisis. The unfolding global financial crisis wi l l reduce aggregate demand and will inevitably affect - albeit with a lag - employment and wages. Recent evidence from Pakistan and elsewhere in South Asia suggests that the poor are often the hardest hit by a crisis. Given limited physical assets and human capital, the poor are more l ikely to fo l low behavioral strategies to cope with income shocks. These include pulling their children out o f school, or reducing the quality and quantity o f food consumed, or borrowing from usurious money lenders-all o f which forces them deeper into poverty. Informal risk sharing arrangements often cannot reduce poverty, especially when shocks affect communities as

25 For Protection and Promotion: The Design and Implementation o f Effective Safety Nets. World Bank, 2008.

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a whole. Global evidence suggests that countries with effective safety net systems can better protect those adversely impacted by shocks. In countries without a well-administered safety net, governments use inefficient policies such as expanded untargeted subsidy programs that are both distortionary and often do not reach the poor. The BISP program, supported by this operation, has the potential t o mitigate negative economic impacts o f the financial crisis by providing well- targeted basic income support to the poorest households. A recent Poverty and Social Impact Analysis (PRES0 Annex) indicated that while the recent food and fuel crisis households could have increased poverty between 2 and 3 percent, depending on whether growth did not occur or the economy grew at 6 percent, a safety net system could be much more effective than subsidies for protecting the poor, assuming it was wel l targeted.

B. ENVIRONMENTAL ASPECTS

136. The reforms and policies supported by the proposed loan to strengthen Pakistan’s social safety nets are not l ikely to have any significant negative effects o n Pakistan’s environment, forests, or other natural resources.

137. The Strategic Country Environmental Analysis (SCEA) prepared by the Bank indicated that environmental degradation costs Pakistan at least 6 percent o f GDP, or approximately Rs. 365 bi l l ion per year. Roughly 80 percent o f these costs stem from increased mortality and morbidity associated with indoor and outdoor air pollution and waterborne diseases. Infant chi ld mortality rates, for instance, are the highest in South Asia and the prevalence o f childhood diarrhea and acute respiratory infections are the second highest. More specifically, Pakistan’s under-five mortality rate o f 97 per 1,000 l ive births as we l l as i t s infant mortality rate o f 78 per 1,000 l ive births are higher than those o f both India (76 and 57) and Bangladesh (69 and 52), respectively.

138. By 2008, excluding the impact o f malnutrition,26 roughly one third o f al l child mortality in Pakistan (or approximately 132,000 children per year) i s caused by environmentally related factors (35 percent o f which originate f rom acute lower respiratory illnesses and 64 percent due to diarrhea).27 When malnutrition i s taken into account in the calculations, mortality f rom environmental factors increased to 187,000 children per year (47 percent o f a l l chi ld mortality). Annual costs o f the environmental health burden not accounting for malnutrition are in the order o f 2.9 percent o f GDP, and when malnutrition effects are included, annual costs increase to 4.1 percent o f GDP. Moreover, when the longer-term effects o f malnutrition (partly attributed to environment-related infections) on education and income are considered,28estimated annual costs may be as high as 8.8 percent o f GDP.

139. Realizing the costs and the potential long-term ramifications o f environmental degradation, the Government o f Pakistan (GoP) i s giving top priority to the environment. The GoP, through i t s Ministry o f Environment (MOE), has requested assistance from the Bank in the development o f an environmental management program that enables a reduction in environmental degradation and i t s economic consequences, with the aim o f underpinning the country’s

26 Malnutrition and child mortality are strongly interlinked. Malnourished children are particularly vulnerable to environmentally-related diseases and therefore at higher risk o f death. Conversely, children that contract environmentally-caused infections have a high likelihood o f becoming malnourished, regardless o f their socio- economic level, although lower income children with limited access to treatment are at higher risk. 27 Comparable fractions o f environmentally caused children mortality were found when analyzing the situation in Ghana. ’* Chronic malnutrition causes impairment o f cognitive development, resulting in poor school performance and ultimately a loss o f lifetime earnings.

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sustainable economic growth. In this sense, the Bank i s carrying out analytical work and preparing a technical assistance loan to support Pakistan’s National Environmental Policy (NEP) to enable environmental interventions aimed at ameliorating the social consequences o f environmental degradation.

C. IMPLEMENTATION, MONITORING AND EVALUATION

140. Implementation: The BISP i s currently implemented by the Cabinet Div is ion and a Special Secretary was appointed along with a National Program Coordinator. Moreover, the Special Secretary was declared as the Principal Accounting Officer with al l administrative and financial powers as given in the Rules o f Business o f Pakistan for Federal Secretary, in charge o f a Division. The Special Secretary was later replaced by a Managing Director with the same powers as o f a Federal Secretary. The BISP i s governed by a Board (national Steering Committee) headed by the Chairperson.

141. At the federal level, a Managing Director (MD) and a Director General (DG) Administration have been appointed. Moreover, f ive Regional Directors for a l l the provinces including AJWNA, Director Admin, Director IT, Director Finance & Accounts, Director Internal Audit and a Deputy Director, Media, along with some support staff have been appointed. However, some administrative setup at the federal level, namely DG Operations, DG Finance & Accounts, M&E Officer, Director Media and some support staff are yet to be placed. At the provincial level, a DG will head each province including A J W N A (a total o f 5 DGs). Provincial DGs shall be assisted by 28 Divisional Directors, who shall be further assisted by 125 Supervisors. So far, a l l the f ive Regional DG positions have been filled, whereas the remaining staff has to be appointed. The Management Board for BISP was established under the Cabinet Div is ion v ia Notif ication No . F. 1/5/2008-Admn-II dated September 27th 2008.

142. The Management Board that will oversee the overall implementation o f BISP comprises the Ministerhiinister o f State - Chair; MNA - Vice Chair; 3 MNAs, the Deputy Chairman, Planning Commission, Member, Advisor Finance, Member; and the MD BISP - MembedSecretary. BISP wil l implement the program through partnerships with the Pakistan Poverty Alleviation Fund; the Rural Support Program Network and Population Census Organization for data collection; the National Database and Registration Authority (NADRA) for database design and management; MIS; verification o f eligible beneficiaries selected through the Targeting Process, and generation o f payment l ists. The BISP has also signed an agreement with Pakistan Post, for paying beneficiaries through the postal system, which has a very wide outreach.

143. Monitoring and Evaluation: The program i s designed to include a robust monitoring and evaluation system (see Annex 4 for a detailed description). The program wil l be monitored by an effective management information system that allows BISP to access information on applicants and beneficiaries, generate payment lists, handle grievance redressal, and reconcile the payments. Moreover, the M I S wil l also enable BISP to share information with partner agencies, perform regular cross-checks, and update the information contained in the database on a regular basis within a secure environment that guarantees the integrity o f the information underpinning the system. The evaluation strategy o f BISP aims to assess the impacts o f the cash transfers on the socioeconomic conditions o f the beneficiary families focusing on food and non-food household consumption. Given that the cash transfer i s given to the female head o f the beneficiary families, the evaluation also aims to assess the impact o f BISP on women’s perceived and actual social status. In addition, the proposed evaluation aims to assess the targeting process, including the poverty scorecard performance and the effectiveness o f targeting centers, and door-

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to-door approach. Three phases o f evaluation are proposed: First, the process evaluation o f the test phase wil l emphasize evaluating the quality and the effectiveness o f the poverty scorecard as wel l as the operational processes for al l stakeholders (including beneficiaries and non- beneficiaries). Second, the initialhest-phase impact evaluation will further inform the baseline (and follow-up) questionnaires for the nationwide impact evaluation o f the program. Finally, for the ro l l out o f the BISP program, a full- fledged impact evaluation would be carried out that would benefit from the gradual ro l l out at the national level. The impact evaluation study wil l assess the targeting performance o f the program and how cash transfers affect food expenditure, overall household consumption patterns as wel l as women’s social status. The evaluation would include a baseline survey (between targeting and payment) and at least two fol low up surveys to build a panel dataset on the same households to assess the impact o f the program in the medium term. The follow-up survey wil l be conducted once or, if possible, twice a year in order to capture the seasonality effects on consumption, but the frequency o f the follow-up surveys i s contingent on the availability o f the financial resources. The results f rom the monitoring and evaluation o f the program wil l help inform policy makers about program performance and assist in fine- tuning the safety net system to ensure that it meets i t s stated objectives o f protecting the poorest populations.

144. Consultation and participation: The policies and programs supported by the proposed credit are based on the National Social Protection Strategy, which was developed v ia stakeholder participation and consultation. Consultations with district governments are a key aspect o f the init ial design o f the reforms, and these are ensuring greater ownership and input into the reforms. Greater participation o f communities ensuring transparent benefit delivery as part o f the social accounting mechanisms will be an important facet o f program monitoring.

145. The reform program sets out qualitative and quantitative benchmarks and targets. The Bank team wil l monitor and fol low up on progress, carry out regular consultations with the executing federal ministries, and assess implementation o f policy measures. The fol low up and monitoring will be done in the context o f SSN DPC missions and progress will be documented in aide-memoires.

Bank’s Monitoring Arrangements:

D. FIDUCIARY ASPECTS

146. Public Financial Management System: The Pakistan Country Financial Accountability Assessment (CFAA) o f December 2003 highlighted improvements in expenditure reporting and monitoring, and stated that budget support operations disbursed and managed through Government’s financial management systems have satisfactory outcomes. However, it also underscored the need for building institutional and human resource capacity to support the transition to full reliance on government systems, controls, and financial reporting. I t revealed weaknesses in data reliability, particularly at the sub-national level. In accounting and financial reporting, challenges that remain to be addressed are: (i) the creation o f internal audit units in departments to improve internal controls; and (ii) finalization o f the Controller General o f Accounts’ (CGA) control over organization, staffing, and training arrangements with clearly defined roles and responsibilities for staff reporting

147. Public Financial Management and Accountability Assessments (PFMAA) for the provinces o f Balochistan, Punjab, and N W F P were completed in M a y 2007, and identified deficiencies in internal audit and controls, and budget credibility. These assessments were based

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on the PEFA,29 PFM,30 and Performance Measurement Framework, which were used to rate the existing PFM arrangements against international best practice. Reform strategies are being formulated to bridge these gaps. A federal-level PFMAA, using the same PEFA framework, i s in progress. A stakeholders’ workshop was recently held and the draft report i s being revised to incorporate comments received.

148. In addition, a PEPFM3’ review was also carried out. The review concluded, inter alia, that expenditure effectiveness would be fostered by a concerted review and revision o f government business processes to eliminate redundant procedures in expenditure commitment and payments, particularly for the development budget.

149. Government has taken action to enhance accountability and effectiveness o f public expenditures. For better accounting and financial reporting, the Project for Improvement to Financial Reporting and Auditing (PIFRA) has supported a new accounting model, which has introduced an IMF GFS-compliant Chart o f Accounts (CoA) for general government. As o f 2007/08 the federal, provincial, and district governments have prepared their budgets based on the new CoA. An automated budget compilation, accounting, and financial/fiscal reporting system i s being implemented country-wide. The financial management systems o f the federal government, NWF, Sindh, and Punjab provinces, including the district accounts and finance offices, have been fully automated. Implementation in Balochistan i s currently in progress, and completion o f the automation process i s expected during 2009/10. The next step also being taken i s to complete system connectivity to all 140 line departments to support the monitoring o f budget execution on a real t ime basis.

150. Timeliness o f end-year financial reporting has improved at the federal level and in all provinces and districts owing to the introduction o f the automated budget management system. Within 12 to 15 days o f the end o f each month, c iv i l accounts are prepared and presented to the Ministry o f Finance. The reliability o f these reports has also improved with material reductions in un-reconcilable differences and the elimination o f suspense accounts. Reconciliation levels, except in Balochistan, which i s yet to achieve full computerization, have improved to about 97 and 98 percent for receipts and expenditures, respectively, and 99 percent for suspense and inter- governmental accounts. Year-end financial statements have been prepared o n the IPSAS32 basis by the federal government and al l provinces. District governments are also transitioning to this form o f reporting as part o f Government’s international financial reporting regime. Pakistan i s moving ahead wel l in compliance with international standards and the timeliness and readiness o f annual financial statements for audit have improved to an average o f six months after the end o f the fiscal year compared to more than 15 months prior to 2007/08.

15 1. T o enhance the effectiveness o f external audit, a risk-based audit methodology, compliant with international standards on auditing, has been rolled out. I t was applied to federal government accounts in 2005/06 and to the financial statements o f provinces and some districts in 2006/07. The 2007/08 financial statements o f federal, the four provinces and 115 districts have already been certified by the Auditor General. I t i s for the f i rst t ime that this certification has been done within 9 o f the end o f the fiscal year, compared to 18 to 24 months in prior years. Introduction o f an Audit Management Information System i s also underway to enhance the efficiency, effectiveness, and control o f audit processes.

29 Public Expenditure and Financial Accountability 30 Public Financial Management 3 ’ Public Expenditure, Procurement and Financial Management ’’ International Public sector Accounting Standards

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152. Legislative oversight across the federal and provincial governments has been mixed, largely due to the absence o f functioning Public Accounts Committees (PACs) in some provinces, weak capacity o f P A C members in financial scrutiny, and the non-functioning o f the Z i la Accounts Committees at the district level. There i s a large backlog o f un-reviewed audit reports and audited accounts due to recurring interruption o f the legislative oversight function and the hitherto poor quality o f audit reports. With the new government since after the last elections, strong PACs have emerged at Federal, Punjab, N W F P and Sindh that are working systematically to reinforcing accountability o f the executives through regular reviews o f audit reports and audited accounts. Institutionalization o f the oversight function in district governments, however, remains a key challenge in the medium term to ensure enhanced accountability at the sub- provincial level.

153. Procurement: The 2000 Pakistan Country Procurement Assessment Review (CPAR) highlighted a weak regulatory framework governing public procurement, and called for institutional and procedural reforms. The CPAR revealed that Pakistan does not have a coherent law that establishes standards and an effective legal system that protects against collusion and corruption in the award o f government contracts. The CPAR recommended the establishment o f a new and modern procurement rules conforming to international best practice.

154. A Public Procurement Regulatory Authority (PPRA) was created in 2002 with powers to formulate public procurement legislation applicable to federal government line departments, state-owned enterprises, and semi-autonomous organizations. N e w public procurement rules were notified in 2004, and they depart f rom the old system in two important ways: they require posting o f a l l bid notices on the PPRA’s website, and prohibit post-bid negotiations. Mov ing forward, the development o f monitoring and reporting mechanisms, and the creation o f an autonomous second-tier appeals procedure to handle complaints in a timely and transparent manner wil l be critical for effective implementation o f PPRA rules. PPRA rules are widely recognized as the rules to fo l low for procurement, and Sindh and Balochistan have adopted the rules to apply to a l l procurements o f the provincial and district governments. Punjab i s in the process o f implementing a procurement reform strategy, and technical assistance i s being provided to NWFP on amendment o f i t s existing procurement law and making it consistent with international best practice.

155. Safeguards Assessment of the Central Bank: An IMF Safeguards Assessment o f the State Bank o f Pakistan was conducted in 200 1. It highlighted significant vulnerabilities, in particular, relating to SBP financial statements and disclosure policies that fe l l short o f acceptable central bank standards. However, since 200 1 the risks associated with foreign exchange management control have been mitigated. SBP i s currently producing financial statements consistent with international accounting standards and formats. An independent review o f SBP’s internal audit function has been completed and the recommendations implemented. SBP has also established a process o f reconciling data reported to the IMF, and implemented guidelines to prohibit operations that pledge or encumber reserves, or place restrictions on, or otherwise impair the availability of, foreign exchange reserves outside the authorized framework. Also, the SBP A c t has been accordingly amended to strengthen i t s independence and autonomy in the management o f reserves.

156. Overall Fiduciary Environment: The proposed operation i s related to the social protection sector and particularly BISP, which i s newly established and considered high risk with respect to financial management. Having due regard to the Government’s commitment to overall P F M reforms exemplified by actions already taken at the federal, provincial and district level as wel l as the risks associated with the sector, the overall fiduciary risk associated with the proposed

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operation i s ‘substantial’. Significant progress has been made in public financial management reforms. In public procurement, several challenges remain to be addressed, including the establishment o f an independent second-tier appeals process and an effective monitoring and evaluation system. Enhancing accountability, transparency, and reducing opportunities for corruption are core elements of improved governance and reduced fiduciary risks.

E. DISBURSEMENT AND AUDIT

157. Borrower and Credit Agreement: The proposed Credit would be made to the Islamic Republic of Pakistan, represented by the Federal Ministry o f Finance. The IDA credit proceeds, amounting to the equivalent o f US$200 million, would be transferred to the Federal Government in accordance with the terms o f the Financing Agreement (FA).

158. Funds Flow Arrangement: The Government o f Pakistan will identify a Foreign Exchange Account with SBP, which forms part o f the country’s official foreign exchange reserves, into which the proceeds o f the Credit will be disbursed in two tranches. The f i rst tranche will be disbursed upon project effectiveness, and the second tranche upon fulfilment o f the triggers as described in Schedule 1, Section I T , C o f the Financing Agreement. The Rupees equivalent o f the funds in the Account will, within two working days, be transferred into the Consolidated Fund of the Government of Pakistan (Account No. 1-Non-Food) held with SBP, which i s used to finance budgetary expenditures.

159. Disbursements: Disbursements from the Consolidated Fund for activities to be financed under the program by the Government of Pakistan will not be linked to any specific purchases, and no special procurement requirement shall be needed. The proceeds o f the Credit shall, however, not be applied to finance expenditures in the excluded expenditures as defined in Appendix 1 o f the FA. If any portion o f the Credit i s used to finance ineligible expenditures as so defined in the FA, IDA will require the Government to promptly, upon notice from IDA, refund the amount equal to the amount of the said payment to the IDA. Amounts refunded to IDA upon such request will be cancelled from the credit.

160. Accounting and Assurance Requirements for the Credit: SBP, on behalf o f Government, will continue to maintain an appropriate accounting system in accordance with generally accepted accounting principles. For this Credit, since no special fiduciary arrangements are required, no additional assurance requirements in the form o f a formal audit will apply, in the light of the fiduciary environment as established with the management of foreign exchange reserves by SBP. However, within 45 days of disbursement o f the Credit by IDA, the Finance Secretary, Ministry o f Finance, will provide a written confirmation to IDA certifying the receipt of the Rupees equivalent of the Credit into the Consolidated Fund Account of the Government o f Pakistan, the date o f receipt, and the exchange rate applied to translate the Credit currency into Rupees.

F. R I S K S AND RISK MITIGATION

161. economic and implementation risks for the operation are outlined below:

The risks to the proposed Pakistan Safety Nets DPC are substantial. The political,

162. Political risks: Attaining a sharp reduction in the fiscal and current account deficits will require political leadership and cohesion. The scale and speed of the required economic policy response to the macroeconomic imbalances to improve economic growth and poverty reduction

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prospects in the long run could intensify social tensions in part o f the population. The sustainability o f the program could also be undermined by possible differences among Pakistan’s main political parties on other issues, including constitutional reforms and the security situation. The development o f a well- governed and targeted safety net could help mitigate the economic and social impact o f necessary structural reforms on the poorest segments o f the population, promoting social peace. The BISP has been established as an autonomous agency under presidential Ordinance IX o f 2009. The Pakistan Constitution provides for a sunset clause for al l Ordinances. Ordinance IX o f 2009 will eventually require the Parliament’s adoption to remain in force. Nevertheless, the association o f the safety net program with the current government could lead to i t s disbanding under a new and different government in the future. In addition, the involvement o f parliamentarians in the init ial beneficiary selection could also pose a major risk to i t s governance, and pose a reputational risk for the Bank. The development o f effective institutions and strong monitoring and evaluation systems that can provide information o n program performance and gain the confidence o f the public could mitigate this risk. The consensus across the political spectrum on the need for a safety net program wil l also ensure continuity o f the program (though the name or institutional home may change).

The chances o f the Ordinance being repealed are deemed slim.

163. O n the external side, a renewed rise in international energy and commodity prices, a reduction in foreign remittances especially f rom the countries o f the Middle East, and a further deterioration in the world economy and international financial markets could weaken the export sector, reduce household transfers, lower capital inflows, limit economic growth and reduce flexibility for policy reforms. Owing to these reasons, the external imbalances may continue to widen despite the short-term measures taken. On the internal side, the inability o f Government to restore fiscal and external balance as agreed could reduce business and consumer confidence. This could cause a fundamental shift in market expectations and a loss o f confidence at home and abroad, leading to a sudden reversal o f financial assets held in Pakistan’s stock and bond markets. This could generate a vicious cycle between weakening financial markets, stalling economic activity, and a worsening fiscal position. The IMF Stand-By Arrangement wi l l mitigate these risks by committing the authorities to fiscal and current account deficit targets.

Economic risks:

164. Implementation risks: A successful implementation o f the reforms wil l be critical for an effective safety net system. Among the risk factors that would influence reform implementation performance are (i) the low administrative capacity o f BISP, which i s a newly established organization; (ii) continued enrollments to BISP under the old system; (iii) over-ambitious and unrealistic ro l l out o f the safety net system, which would have negative implications on the quality o f program implementation; (iv) inadequate financing o f the program that could result in insufficient coverage o f the poor; (v) delays in funds release to safety net programs arising f rom the current fiscal crunch and the need to reprioritize public spending; (vi) fraud and corruption that could undermine the abil ity o f the program to deliver benefits to the poor in circumstances o f weak internal controls; and (vii) transition to a new targeting system, which may lead to dissatisfaction f rom beneficiaries o f the o ld system who no longer qualify for the benefit. The mitigating factors are (i) Bank supported technical assistance to build capacity for the implementation o f the reform program; (ii) ro l l out o f the new targeting system with a strong M&E component to demonstrate i t s effectiveness; (iii) the use o f a pi lot enrollment phase to fine tune and adjust program parameters prior to a national ro l l out; (iv) Government’s strong commitment to establishing and implementing a modern safety net system as evidenced by i t s adoption o f an objective national targeting system; (v) the establishment o f separate agencies for data collection, eligibil i ty determination and benefit payments; (vi) the institution o f special

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purpose independent financial and performance audits of the BISP program by the Auditor General o f Pakistan as well as regular operational audits by third parties; and (vii) the institution of an appeals mechanism and process evaluations o f the targeting process during the test phase.

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ANNEX 1: Letter o f Development Policy Credit Social Safety N e t Development Policy Credit

SECRETARY FINANCE

Government of Pakistan

(FINANCE DIVISION) Ministry of Finance

***

D,O. N ~ . 3 (53) EF-C.IY 2008

Islamabad. the ., .. , , . . . ?,?d.?!?Y~.?!!??

Pakistan Social Safety Net DPC Letter o f Development Policy

Dear Mr. Zoellick,

1. (Government) for the Pakistan Social Safety Net Development Policy Credit (SSN DPC), o f USD 200 million to support inclusive economic growth in Pakistan through establishing a national social safety net system that i s fiscally sustainable and provides the chronic and transient poor with basic income support and access to opportunities for graduating from poverty. This letter o f Development Policy sets out the Government’s key social safety nets policy actions that are consistent with the National Social Protection Strategy (NSPS, 2007) and the Poverty Reduction Strategy Papers (PRSP I, 2003 and PRSP 11, 2009), to be supported by the SSN DPC for 2009/10.

2. Pakistan faced both external and internal shocks in the past year. External shocks include the sharp rise in international oi l and food commodity prices and the slowdown in the global economy, while internal shocks include the rapid rise i n macro-economic imbalances and the increasing political turmoil. These shocks have dampened growth prospects and are likely to reverse recent gains in poverty reduction, imposing hardship on the poorest and most vulnerable households. Pakistan’s ability to help the poor cope with these shocks is limited because the country’s safety net programs suffer from several weaknesses including infer alia, limited outreach, weak administration, low financing, and inadequate benefits. Poor governance and accountability mechanisms and the absence o f an effective and transparent targeting mechanism have also impeded the quality and efficiency o f benefit delivery.

3. Recognizing the need to provide immediate support to p o w families, and the fragmentation and ineffectiveness o f existing safety net programs, the Government launched thc Benazir Income Support Program (BISP) in 2008 as Pakistan’s main social safety net system. The short term objective o f the program i s to cushion the adverse impact o f the food, fuel, and financial crises on the poor, but its broader objective i s to meet the re-distributive goals o f the country by providing a minimum income support package to the chronic poor and those who are highly vulnerable to future shocks. The program wi l l provide cash transfers o f Rs.lOOO [%12] per month to the eligible families and is expected to cover 3.4 million families i n 2008/2009.’ Further expansion o f coverage and funding i s planned for FY2009/10 and 2010/11.

4. The Government i s committed to develop a modern social safety net system, as the first step in developing a viable social protection program for the country. Our strong commitment to the safety net reform agenda i s evident from the rapid introduction o f the Benazir Income Support Program (BISP) to address chronic poverty and to protect the poor from the adverse impacts o f the recent global economic crisis. Our commitments to the safety net reform agenda is evident from the increase in safety net spending

I am writing to request, on behalf o f the Government o f the Islamic Republic o f Pakistan

’ This level of coverage is approximately equal to about 25 percent of the population-around the 2005106 national poverty headcount rate-according to the most recent estimates.

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from 0.3 to 0.6 percent o f GDP. We expect to further iiicrease spending to nearly 0.9 percent o f GDP in the coming year. The formal adoption o f the poverty scorecard as an objective instrument to identify safety net beneficiaries shows our Government’s commitment to ensure that increased safety net expenditures transparently and effectively reach the poor.

5 . I t is now important to transform the BISP into a modern well administered and targeted social safety net system. In meeting this objective, we aim to achieve the following overall outcomes by the end o f 2010: (i) increase in the share o f beneficiaries enrolled in the BISP program using the new targeting mechanism from 0 to at least 30 percent oftotal beneficiaries; (ii) increase in program applicants receiving a response 011 whether they qualify for the program within 3 months from scorecard form submission, from 0 to at least 50 percent o f total applicants; (iii) increase in benefit payments audited from 0 percent to at least 50 percent of total payments, under the new payment system and improvement in reconciliation time lag from the present indefinite period to 2 months; and (iv) Increase in percentage o f participating (poverty-scorecard) districts in which beneficiary lists are publicly available, from 0 to at least 30 percent.

6. Our reform plans to reach these outcomes are reflected in the following three main pillars: (I) improving the targeting efficiency o f the safety net programs; (11) establishing an effective institutional framework for safety nets program implementation; and (111) enhancing fiscal sustainability and strengthening the fiduciary environment. These reform areas are outlined in the following paragraphs.

I.

As noted above, as a first step in developing a viable social protection program for the country we have adopted the poverty scorecard as our national targeting instrument. To implement the poverty scorecard, we have established a national iargeting sysiem IO implement the poverry scorecard method, through coniracting of separate agencies for scorecard data colleciion and eligibility determination. To ensure sound governance, the targeting system wil l separate the enrollment o f beneficiaries from the determination o f their eligibility for the BISP. To this end, we wi l l select a separate agency/ agencies for national data collection for the poverty score card. This selection wi l l be based on clear selection criteria, provided in the targeting manual o f BISP. The rationale for selecting partner organizations i s to capitalize on their outreach and ability to galvanize the community to apply for the program. We have also selected a separate institution for the processing o f the poverty scorecard data for eligibility determination once it has been collected, including the provision o f CNICs to eligible families in a coordinated manner. The agencies for poverty score card data collection wil l be required to transfer the scorecard information to this entity who wi l l then undertake the data entry, processing, validation, o f the l is t for determining their eligibility to the program. Based on the eligibility thresholds, this entity wi l l determine and transfer the final l ist of eligible beneficiaries to a separate payment agency for delivery o f benefit to eligible households. To prepare for the nationwide rollout o f above processes, ihe BISP shall complete /he collection ofpoverry scorecard information in ai least eigh! (8) disiricts und transmit such injormaiion to the data processing agency.

Given that the Government i s committed to rolling out the poverty scorecard based targeting system at the earliest, a policy decision for beneficiaries in the old targeting system wi l l need to be taken. We huve therefore taken a policy decision on ihe iransition of BISP enrollees under [he parliamentarian based system to the new system. Specifically, our decision is to discontinue benefits of the existing beneficiaries of the old system f l they do not complete the scorecard form or qual ib under the new targeting system. This decision wil l be implemenied as the poverry scorecard iargering system is sequentially rolled out in various districts. To address the social costs of the transition, based on the results o f the test phase, we

2

Improv ing the Targeting Efficiency of Safety Net Programs

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wil l adopt a policy for transitioning BISP enroleesfr.om parliamentarian based selection system to poverty scorecard based system. This policy will provide, interalia, the grievance redressal mechanisms, definition of cut-off oint for eligibili&j and communications strategy.

9. In order to closely monitor the implementation o f the test phase o f the targeting process, we have udopred efective mechanisms to ensure the qualiry of data collection for the test phase of poverty scorecard based targeting process. First, Partner Organizations wil l be required to establish a cascade system for the supervision o f the data collection as outlined in the targeting guidelines. Second, a process evaluation for the test phase wil l provide insights into the adherence o f data collection institutions to the established processes. Third, BISP wil l receive timely information from third party random spot checks on the quality o f the data collection by the Partner Organizations. The results from these spot checks wil l be communicated to BISP management and the Partner Organizations to ensure learning and mid-course correction if necessary. The spot checks wil l also suggest a threshold level for errors on the basis o f which the area can be re-surveyed for improving the quality o f data. This policy wil l be critical for helping to ensure that exclusion and inclusion errors under the new system are reduced.

I O . Over the medium term, we wil l finalize the institutional policy arrangements for enrolling beneficiaries for the nationwide rollout based on test phase results, taking into account their performance. Based on this institutional arrangement, the score card enrollment wil l be rolled-out nationwide (at least 80% o f districts in the country). In the medium term, the spot checks for monitoring the quality o f scorecard roll out and ensure mid-course correction wil l be taken; and appeals emanating from the scorecard based selection wil l be addressed to minimize inclusion and exclusion errors. Policy decisions regarding the long term enrollment process wil l also be taken, including whether to make enrollments open or closed; and whether to collect information via a census approach or a targeting center approach.

11. Establishing the Institutional framework for Safety Net Implementation

I I. BISP was originally established to be headed by a National Program Coordinator under the Ministry o f Finance. A National Steering Committee headed by the Minister for Finance was also established at the same time. Later in 2008, the Program was transferred to the Cabinet Division and a Special Secretary was appointed along with a National Program Coordinator. Moreover, the Special Secretary was declared as the Principal Accounting Officer with all administrative and financial powers as given in the Rules o f Business o f Pakistan for Federal Secretary, in charge o f a Division. Special Secretary was later replaced by the Managing Director enjoying the same powers as o f a Federal Secretary. Thus, BISP remains a temporary institutional arrangement compromising its governance and administrative efficiency, and a more formal institutional arrangement for, the agency i s required to minimize political interference and ensure sound governance and effective program implementation. Such an arrangement would also allow fragmented safety net prograins to be consolidated and rationalized under one platform and through one agency, resulting in more consistent safety net policy formulation and improvements in targeting and administrative efficiency o f safety net spending. Recognizing the need for a more formal institutional arrangement, we have estublished BISP as an autononious stalutory safety net author@ to implement sajety nets programs by promulgating a legal ordinance with: (i) clear financial and admintrtrative uutononiy; and l i i ) distinction in roles ofthe Bourd, the Chairperson und the Secretary for the oversight and niariugenient ofprogram implenientation

12. The successful administration o f the BISP requires transparent and accountable administrative policy guidelines for the effective, coordinated, and efficient delivery o f income support to eligible beneficiaries. We have adopted administrative policy guidelines for effective BISP program

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implenientaiion. These guidelines contained in the program Operational Manual includes detailed operational and implementation provisions for the roles and responsibilities o f all implementation partners (BISP, MOF, Planning Commission, Pakistan Post, Partner Organisations for enrolment and for eligibility determination, provincial and local governments, beneficiary households.) as well as modalities for implementation, As the program rolls out, the Manual wi l l be further elaborated on key processes such as targeting, enrolment, payments, organisational structure, staffing, and monitoring and evaluation arrangement, as well as fiduciary rules governing the program. .

13. Pakistan’s National Social Protection Strategy (NSPS) was prepared through a consultative process under the leadership of the Planning Commission and approved by the cabinet in 2007. Even though the general framework provided in the NSPS is consistent with the social safety net reforms currently being introduced by the new government, i t is important to revise the strategy document to reflect the latest policy developments and institutional arrangements. We have initiaied ihe updaie of the Naiional Social Proieciion Strategy (NSPS) to include program raiionalizaiion and esfabhhed the insiiiutionalfiamework for enhanced coordination and delivery of social proiection progranis.

14. The government intends to make BlSP the central safety net program o f the country. However, given that the Pakistan Bait-ul Mal (PBM) i s also a federal safety net agency that administers a similar cash transfer program, a policy decision was required to clarify its future role especially regarding the administration o f its unconditional cash transfer program i.e. Food Support Program (FSP) vis-a-vis BISP. We have adopted a policy io remove overlapping niandatev of BISP and PBM in delivering uncondiiional cash iramfer programs. The policy wi l l require PBM to discontinue the FSP in order to remove i ts duplication with BISP. However, the PBM will continue to implement the CSP (CCT) pilot until its successful completion and evaluation.

15. We believe that a key issue in program design and implementation is to ensure that the safety net program does not induce benefit dependency; but rather facilitates the graduation o f beneficiaries from poverty status. As the first step in this process, and in an effort to reduce inter-generational poverty, we have expanded the Child Suppori Program (a CCT pilot), using ihe poveriy score curd based iargeiing nwthocl. A rapid assessment o f this pilot program in 3 districts indicated, inter alia, the need to increase the CSP payment amount and to improve better coordinate with Provincial Education Departments during the implementation o f the program. The targeting inethod used in the pilot wi l l also change to the new poverty card based targeting instrument. The evaluation o f this program wil l inform its feasibility for scaling up to the national level under the BISP.

16. In the medium term, we wil l consolidate select federal safety net programs under the safety net authority adopted by federal cabinet, in a manner that is consistent with the revised National Social Protection Strategy. ‘To be effective in implementing programs the agency wi l l be staffed with qualified professionals at the federal, provincial and divisional levels in accordance with the Organizational Struclure outlined in the BlSP Operational Manual. As monitoring and evaluation results become available, a wide dissemination o f these wil l ensure a broad based debate about the effectiveness o f the BISP in providing basic income support to the poor. Finally, the BlSP wil l be modified to ensure that program beneficiaries are able to access selected human development services (e.6. health/nutrition. education, training) and selectedkxisting activation programs (e.g. skill development. income generation, employment, cash for work) to promote exit from poverty. I n particular the results from the CCT pilot wi l l be used to assess how the BISP and PBM can coordinate their programs to ensure better human development outcomes among the poor.

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111. Enhancing Fiscal Sustainability and Strengthening the Fiduciary Environment

17. Compared to other countries in the region, the social safety net spending in Pakistan was quite low and declining in recent years, To ensure that we are able to provide adequate and financially sustainable benefit to households, the BISP budget allocation for FY08/09 is consistent with medium term macroeconomic framework and udeyuate to p q the agreed benefit amount to at least 3.4 mi1lionjunilie.r. This wi l l increase our safety net spending from 0.3 to 0.6 percent o f GDP.

18. Aside from providing adequate resources for the program, we believe it is vital to ensure that benefit expenditures reach eligible groups transparently and in a timely manner. As a first step in this process, we have appointed an independent payment agency (Pakistan Post) and agreedpolicy guidelines for ensuring timely delivery of payments. The agreement with this agency includes the periodic provision o f eligible list o f beneficiaries by the selected eligibility determination agency to Pakistan Post. According to the Government policy, the Pakistan post wi l l be required to print money orders and deliver the money at the door steps to the beneficiaries after verifying their CNICs. Pakistan Post wi l l also maintain a record o f the delivery of payments and wi l l periodically subinit it to BlSP in a specified format. This data wi l l then be uploaded in the MIS, with the record o f each transaction wi l l serve as the financial management, reporting and reconciliation mechanism and wi l l allow regular tracking o f payments.

19. In order to establish the appropriate procurement procedures in accordance with the federal Public Procurement Regulatory Authority (PPRA) Ordinance 2004, the BISP has approved a procurement procedures manual, which i s consistent with international best practice. These procedures wil l help the BISP for transparent procurement o f goods and services.

20. Finally. in addition to appointing an independent payment agency, we wi l l take further measures to ensure that benefit payments reach the poor in a transparent manner and operational funds are appropriately utilized. To meet this objective, we have adopted independent operational audit arrangement,r for BISP. This wi l l include placement o f organizational arrangements for instituting operational audits, including their functional relationship with the Management Board as well as the Secretary being the Principal Accounting Officer. The operational audits wi l l include audits o f the payment system, from the time the post office receives the list to the time when benefit is supposed to be received by the eligible beneficiary. This exercise wil l help to identify the constraints to benefit delivery as well as requisite measures for improving its effectiveness, such as the posting o f beneficiary lists in the village, coinmunity verification, etc. In order to ensure that the correct beneficiaries o f the BlSP safety nets get the benefits in a timely manner and operational funds are appropriately utilized. the operational audits wi l l also look into the efficacy o f and transparency in the financial management system. The findings wi l l enable BlSP not only to meet the program objectives in a transparent manner but also to avert any financial risks. The above organizational arrangement wi l l also assume the internal audit function to look into, among others, the entire payment process from generation o f the beneficiary list to the receipt o f cash by the eligible beneficiary. This wil l help to identi@ constraints in benetit delivery and monitoring mechanisms and recommend solutions. The internal audit wi l l serve as a management tool to enhance control and accountability mechanisms in BlSP’s overall operations.

21. To provide sustained financiiig Tor the program and expand i ts coverage, we are planning to increase spending on BlSP to nearly 1 percent of GDP in 2009110. In the medium term, fiscal sustainability wi l l be ensured if budgets to the safety net programs are adequate, with the number o f families chosen through corresponding cut-off scores (determined in part by making use o f the firsUroll- out phase implementation experience o f the poverty scorecard) to ensure program consistency with the

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overall macro-economic framework. To ensure benefit payments are made efficiently, both accurately and on time, the FM system wi l l be fully functional and FM audit reports regularly available and observations fully settled. The reconciliation process o f payments wi l l be functional in accordance with the administrative policy guidelines; the procurement procedures wi l l be fully implemented; and the third party ex-post review o f sample procurements wil l have been completed. Over time, however, B[SP management wi l l evaluate and adopt, if feasible, alternative payment options using modern technology (e.g. smartcards). Social accountability systems wil l also be in place and wi l l allow the assessment o f payment processes, which would include, interalia, the publication o f beneficiary l is ts at the appropriate sites, systematic oversight by local stakeholders, and a mechanism for complaints and confidential allegations. Finally, grievance system for payments wi l l be in place to ensure that beneficiaries are able to obtain their ful l benefits in a timely fashioii.

22. In conclusion, I would like to reiterate the commitment o f the Government to the country’s safety net reforms as mentioned above, and 1 trust that this request for World Bank support for implementation o f safety net reforms wi l l receive your favorable consideration.

Mr. Robert Zoellick President The International Development Association 1818 H Street, N.W. Washington DC 20433

6

59

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ANNEX 3: International Monetary Fund Relations Note Social Safety N e t Development Policy Credit

INTERNATIONAL MONETARY FUND

Pakistan-Assessment Letter for the World Bank

March 2,2009

T h i s note provides the IMF s t a f f s assessment o f Pakistan’s macroeconomic developments and prospects as background for the Poverty Reduction and Econonlic Support Operation policy loan being considered by the Executive Board o f the World Bank on March 26. The assessment i s based on t h e findings o f the February 2009 IMF mission to Islamabad and Dubai that conducted the discussions with the Pakistani authorities on the First Review under t h e Stand-By Arrangement (SBA) and the 2009 Article I V Consultation.

Recent Developments and Performance under the SBA Program

Economic developments in Pakistan since the SBA was approved on November 24,2008 have been favorable.

T h e exchange rate has been broadly stable, with the State Bank o f Pakistan (SBP) intervening on the buying side o f the interbank foreign exchange market. As a result, t he international reserves position has strengthened signlficantly (gross reserves amounted to $6.7 billion on February 23).

There was a strong positive response from t h e T-bill market to the 200-basis points increase in the central bank discount rate in mid-November, allowing the government to ret i re some o f its debt to the SBP. T-bill auctions through end-February have been consistently oversubscribed, with wide participation o f banks, and interest rates on T-bills came down from 14 percent (weighted average) in mid-January to 12.98 percent at the most recent session (February 25).

There has also been a gradual reflow o f deposits into the banking system.

Headline inflation declined markedly to 20.5 percent in January, due to lower food and energy prices, but year-on-year core inflation remains high at 19 percent, despite a decline in t h e month-on-month core inflation rate.

In mid-December, the authorities removed the stock market price floor which had been in place for 3% months. Subsequently, stock prices dropped sharply, but t h e decline moderated in early January. Since then, the market has fluctuated in l ine with economic prospects and developments in international equity markets.

All the quantitative performance criteria through end-December 2008 were observed.

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Through December, the budget registered a revenue shortfall that was compensated by expenditure restraint.

Despite the improved confidence, credit and broad money growth have been slower than expected. Specifically, private sector credit growth, at 13 percent on an annual basis, has been lower owing to both lower demand from corporates and an increase in lenders’ risk aversion.

Structural conditionality has generally been observed, although there i s scope for improvement in some areas.

A contingency plan for handling problem private banks has been prepared.

A committee to review t h e operational autonomy ofthe SBP has been established.

A tax administration reform plan has been prepared which comprises key reforms, such as the integration o f the income tax and sales tax departments and the replacement of the current general sales tax with a broad-based VAT. The authorities have requested technical assistance from the Fund to help with the design o f the VAT law, t h e revisions in the income tax legislation, and the possible introduction o f a carbon tax.

Electricity tariffs have been reviewed (with the World Bank) and it has been agreed that a 4 percent increase, to be implemented between February and June, would suffice to reach the cost recovery level, given t h e recent substantial drop in the price o f furnace oil.

T h e SBP has stopped the direct provision o f foreign exchange for furnace oi l on February 1,2009, as agreed under the program.

Progress has also been made toward the end-March 2009 benchmarks under the program.

The fiscal program includes additional spending on the social safety net

In late January, the authorities and the World Bank agreed on reforming t h e Benazir Income Support Program and introduce a scorecard for t h e identification o f poor households.

The authorities have accelerated t h e preparation of a plan to deal with the circular debt issue (inter-corporate debt in the energy sector).

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3

Outlook

Since the SBA program was agreed in October, the world economic outlook has deteriorated significantly. Th is deterioration i s likely to af fect Pakistan’s economy through several channels:

Domestic activity i s likely to be weaker than originally envisaged in the program. Large-scale manufacturing output has dropped, and there has been a signi f icant decline in exports. Preliminary projections for agricultural output in 2008/09 show that increases in rice and cotton crops, and the prospects o f a large wheat crop, would offset a decline in sugar cane production.

Lower activity i s having an adverse impact on fiscal revenue.

Falling food and energy prices and the lower economic activity should continue to exert downward pressure on headline inflation. Under conservative assumptions, year-on-year headline inflation would decline to 10 percent by end-2008/09 (compared with 20 percent in the program), and to 6% percent by end-2009110.

The external current account has also improved, but the outlook i s fragile owing to the recent decline in exports. T h e projected outcome for the external current account through end-2008109 i s slightly better than envisaged in the program because a marked decline in imports i s expected to outweigh the weaker export performance. T h e financial account surplus is now expected to be somewhat lower than originally projected, due mainly to lower than envisaged inflows o f private capital. The overall external balance for 2008109 i s now projected to be better than programmed by about $500 million. T h i s outlook, however, is subject to significant downside risks, especially if t h e drop in exports continues and remittances decline.

K e y Challenges and Policy Issues

As noted above, t h e downturn in the world economy poses signi f icant downside risks to economic activity and the external position. T h e authorities recognize that, given financing constraints, the scope for countercyclical policies i s limited and that consolidating economic and financial stability remains the principal challenge faced by the authorities. The f iscal program and the monetary policy stance remain the key policy tools to consolidate stability.

T h e fiscal outlook for t h e remainder o f 2008/09 i s likely to be affected by shortfalls in revenue and foreign budget financing. The authorities remain committed to the program target o f a deficit o f Rs. 562 billion, equivalent to 4.3 percent ofthe revised GDP for 2008109. The tax revenue shortfall i s expected to be partly offset by higher collections from t h e Petroleum Development Levy, as well as stepped-up auditing, and the authorities are committed to restraining expenditures, as needed, to achieve

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the budget deficit target. External budget financing in 2008/09 i s now projected to he lower than expected, mainly reflecting a shortfall in external privatization proceeds.

Pakistan needs additional external resources in order to create fiscal space for higher development and social spending. A donor conference, tentatively scheduled for March’April2009, wi l l provide an opportunity to seek additional external assistance.

T h e cumulative 500-basis points discount rate hike in 2008 has resulted in tighter monetary conditions. As inflation remains elevated, it i s premature at t h i s stage to reduce interest rates, but rates may be lowered later in the year, provided that inflation continues to decline and the government avoids SBP financing o f the budget.

The exchange rate should remain flexible, with market intervention largely aimed at meeting the international reserves targets.

Pakistan’s banks have weathered t h e cr is is well so far, but there are increasing r i s k s from t h e deteriorating economic outlook. Non-performing loans have risen to 9.1 percent in December 2008, from 7.7 percent in June. Stress tests by the FSAP update mission and by the authorities show that the a deterioration in credit quality i s the main risk. Accordingly, t h e authorities need to continue to monitor developments in the banking system very closely.

Medium-term outlook

A significant increase in revenues as a share o f GDP remains the cornerstone o f the medium-tern framework, but t h e economic downturn has led to a revision o f the medium-term path for fiscal and external adjustment. Growth is projected to recover gradually to 4.0 percent next year and 7.0 percent by 2013114. Headline inflation i s expected to decline rapidly to 6% percent by 2009/10. The external current account deficit i s envisaged to narrow to 4% percent o f GDP in 2009/10 and to decline further to more sustainable levels by 2013114. A significant increase in the revenue-to-GDP ratio wi l l create fiscal space for higher public investment and sustainable growth. However, the room for increasing the public investment-to-GDP ratio may be more limited than previously assessed, as there i s a need to ensure that the outlook allows for an adequate increase in outlays on poverty reduction.

Status o f IMF Relations

As noted, a SDR 5.169 billion ($7.6 billion) SBA was approved on November 24, 2008. T h e s t a f f has just completed the discussions on the First Review o f t h e SBA and the 2009 Article I V Consultation, which are scheduled to be considered by the IMF Executive Board in late-March 2009.

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Table 1. PWsttn: Selected Economc Indicators. 2005/06-2009/10 I/ (~apuiat ion 160 9 mnmn (2oovo81)

(Pe~cep~te GDP USS1 042 (2007106)l IPaveRy rale 23 9 percent (2Oc4Ps511

2005106 2008107 2007108 2008109 2009110 Pro0 Pro) Pro0 Pro,

7 0 4 8 B O 3 1

1 5 5 0 0

1 5 5 1 7 7

3 6 14 1

13 2

-3 6 d3 -0 6 53 3 25 2 26 0

$ 8 8

6 8 5 6 3 4 2 5 S O 4 0 4 5 4 5 1 6 I 2 0 2 3 0 2 0 0 1 3 0 8 0 1 0 215 2 0 0 1 0 0 6 0 6 5 1 3

(In pemnt oIGDPI

1 8 1 132 1 3 5 1 4 2 1 5 6 1 5 6

1 5 2 1 4 6 1 5 1 1 5 4 1 6 1 1 6 0 1 9 2 2 1 1 1 9 1 196 ‘92 1 9 2 - 4 0 - 1 1 - 4 0 - 4 2 - 3 1 - 3 2 - 4 3 7 4 - 4 2 d 3 . 3 3 - 3 4 0 2 - 2 5 0 6 0 6 1 6 1 5

5 4 1 5 1 4 5 4 6 5 6 8 5 2 4 5 5 3 2 4 2 2 6 2 2 6 9 2 7 8 2 7 1 2 6 2 2 9 9 3 1 2 2 1 7 2 9 1 2 5 4 2 9 1

5 4 8 1 - I 8 d 9 3 4 1 6 - 1 4 1 3 9 113 2 3 2 1 5 1 1 1 8 1 4 3 1 2 1 1 9 3 1 9 3 1 5 3 1 0 6 6 4 1 5 9 1 0 6 2 1 7 1 1 2 1 6 4 2 5 2 8 3 1 9 6 1 4 2

6 2 8 8 9 6 127

164 4 4 1 6 5 1 2 0 - 5 5 1 1 0 1 5 1 6 2 8 0 312 1 1 -145 5 7 - 5 5 - 2 2 d 8 -84 - 6 5 - 5 8 - 5 7 4 3

(In pelcent ot exports 0190045 m a SBWICBI. m e s s oitrm~re mcarea i

1173 1M6 1697 1600 1862 1542 1 6 9 0 1 4 2 1 6 6 152 1 6 9 2 3 1 1 5 4 2 0 2

2 8 5 0 2 4 2 4 3 2 2 4

12,006 I 4 302 8.591 8.591 9091 11.291 10591 4 5 3 6 2 7 2 1 3 0 2 6 3 3

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ANNEX 4. The Poverty Scorecard Instrument and M&E arrangement^^^ Social Safety Net Development Policy Credit

I. Poverty Scorecard System and i t s Rationale

1. A poverty scorecard i s a targeting tool that includes a l imited number o f simple indicators that correlate wel l with poverty along with an intuitive scoring system that helps identify program eligibility. The poverty scorecard for Pakistan’s social safety nets programs i s marked by two main characteristics: a “Proxy Means Testing” approach to improve targeting performance and ease o f i m p l e r n e n t a t i ~ n . ~ ~

2. Adoption of the “Proxy Means Testing ’’ approach to ensure targeting performance: The poverty scorecard for the BISP follows the “Proxy Means Testing” method in ensuring good targeting performance. A challenge in designing a scorecard i s to make the resulting scores accurately reflect the attributes o f households or families that a program aims to address, e.g., poverty. The “Proxy Means Testing” method determines program eligibil i ty based o n a predictor o f household income or welfare that i s created from a set o f typical proxies o f household welfare, l ike household demographics, housing conditions, and ownership o f durable assets. The assumption behind this methodology i s that collecting direct measures o f household welfare l ike income i s vulnerable to misreporting whereas measuring consumption i s very painstaking and costly. Instead, the proxy means testing method relies o n the proxies o f household welfare that can be easily collected and verified.

3. The “Proxy Means Testing” method not only produces a good predictor o f household welfare but also provides various statistical assessments o f the targeting performance o f the welfare predictor. Any targeting mechanism, including a proxy means test, necessarily involves some targeting errors which lead to the exclusion o f some in the target group and the inclusion of some who are not in the target group. I t i s important for program providers to assess ex ante the extent o f such mis-targeting, and to select the proxies o f household welfare that minimize targeting errors. The “Proxy Means Testing” method i s a valuable tool because it provides a detailed ex ante assessment o f program coverage and targeting performance. The poverty scorecard for Pakistan, developed by uti l izing various rounds o f existing household surveys, i s n o exception. I t ensures checks and balances that the data affords to minimize targeting errors ex ante, especially exclusion o f the poorest 20 percent o f the population.

4. Ease of implementation: The poverty scorecard form contains only twelve questions, most o f which require a simple yesho answer, or the selection o f one answer f rom a set o f simple choices, which not only makes it easy to train program implementers to accurately collect the requisite data, but also make it relatively cheap to do so. In addition, the poverty scorecard only includes information that i s easily verifiable and this makes it much easier t o address complaints or carry out audits. Households are identified as eligible for a program if their scores are below a cutof f score set by the program provider. The simplicity and verif iabil i ty o f the scorecard approach minimizes the implementation costs and improves the quality o f data collection.

33 For more details about this poverty scorecard instrument, see “Poverty Scorecard for Pakistan: A Recommended Approachfor Targeting the Poor”, Manuscript, World Bank, Jan 18, 2009. 34 See Grosh and Baker (1995) for more details on the Proxy Means Testing approach. Grosh, M., and J. Baker.1995. “Proxy Means Tests for Targeting Social Programs: Simulations and Speculation.” LSMS Working Paper No. 118, World Bank, Washington, D.C.

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11. Developing a Scorecard for Pakistan

5. This section describes how the poverty scorecard for Pakistan was developed based on the proxy means testing method. I t required the following steps: (i) selection o f a proper dataset, (ii) selection o f an indicator for household welfare, (iii) selection o f a group o f poverty correlates, (iv) selection o f a regression model, and (v) conversion o f regression coefficients to a simple scoring system.

Data Sets

6. The data used for this exercise i s the Pakistan Living Standard Measurement Survey (PSLM), conducted by the Federal Bureau o f Statistics in 2005-06. This i s a multi-topic household survey, with modules on consumption, income, employment, health, education, and living conditions. The P S L M 2005-06 covered around 15,000 households drawn from four major provinces o f Pakistan and was designed to be representative at the national and provincial levels. For several reasons, the P S L M 2005-06 appears to be wel l suited to the purpose o f developing a scorecard following the Proxy Means Testing approach. First, it has r ich and detailed information on household and individual characteristics that are correlates of poverty. Second, the P S L M 2005-06 data are representative at the national level, which enables one to estimate key program statistics l ike program coverage, program leakage, and budgetary needs. Third, this dataset i s used for estimating the official poverty headcount rates o f 2005-06 making it easy to check what percentage o f the poor defined in the official estimation wil l be identified by the poverty scorecard.

Selecting an indicator for household welfare

7 . Household consumption expenditure (monthly) per adult equivalent i s chosen as the welfare measure. The same measure i s used for producing the off ic ia l poverty estimates in Pakistan; therefore, it i s easy to identify the poor. Household expenditure includes a l l expenditures on non-durables, the imputed value o f non-durables received as gifts or produced in the household, while it excludes expenditures on durable goods and assets.

8. In the economic development literature, consumption expenditure i s generally considered a more accurate measure o f welfare than income for several reasons (see Deaton 1997). First, because consumption expenditures tend to be less variable than income over seasons, it i s more likely to indicate the household’s “true” economic status (as a result o f households with sporadic incomes smoothing their consumption patterns over time). Second, in practice, consumption i s generally measured with far greater accuracy than income in a household survey. For example, households’ sources o f income may include home-based production, o w n farms and businesses. Calculating the f low o f net incomes from these sources turn out to be a big problem since the f low o f costs and returns f rom these activities are often inaccurately reported by households.

Choice of Poverty Predictors

9. Selection o f variables to predict welfare as measured by per capita consumption should take into account two separate criteria: correlation between the welfare measure (consumption) and the predictor, which wil l determine accuracy o f the prediction, and veriJiabiZity o f the predictor, which will determine the accuracy o f information used to impute welfare. The types o f predictors used for this exercise, discussed below, were arrived at after judging a l l possible predictors on the basis o f these two criteria.35

35 The l i s t o f all variables i s available in Table A-1 in Annex.

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10. Household and individual characteristics, such as the number o f members and dependents, and the age, education and occupation o f the household head, as wel l as the education o f children, not only strongly correlate with consumption levels they are relatively easy to verify and are less l ikely to be misreported.

1 1. Ownership o f durable goods and housing characteristics: These variables are verifiable by inspection. However they can be misrepresented if a household removes the goods from i t s home during an expected visit by the social worker, which i s easier to do with small or mobile items than with larger items such as stoves or refrigerators. The general presumption in the literature i s that people are more willing to misreport ownership o f such items as opposed to household characteristics. Nevertheless, these variables tend to have high predictive power for welfare, and therefore including them should reduce mis-targeting substantially.

12. Ownership o f productive assets, especially land holding, livestock and farm equipment i s critical to proxy the welfare status o f rural households. Verif iabil i ty o f these variables i s reasonably high. For example, even for a variable l ike land ownership, which may not be measured perfectly, one can reasonably expect that program officers belonging to the community would be able to deter misreporting using local knowledge.

Selection o f a regression model

13. Whi le each variable listed above i s already a good poverty predictor, a combination o f them can be an even more powerful predictor o f poverty. However, combining them i s not a simple task and combining variables in an arbitrary way can produce a worse predictor o f poverty. For example, some welfare programs simply count the number o f poverty predictors satisfied by a household and use that as a score to identify whether the household i s poor or not. There i s no guarantee that the resulting score i s a better predictor o f poverty than a single variable is.

14. In the Proxy Means Testing approach, the OLS regression method i s used to find a good combination o f variables in predicting poverty. The OLS method regresses the consumption variable (household expenditure per adult equivalent in the case o f Pakistan) on various sets o f variables listed above. Predicted values from a regression model are by construction better proxies o f poverty than any single variable included in the regression model. The main task here i s to find a regression model f rom many possible combinations o f variables based on a set o f criteria.

Conversion o f the regression coefficients to scores

15. Once the preferred regression model i s determined, the predicted value i s a good proxy for household expenditure per adult equivalent. However, the predicted value i s not necessarily intuitive and easily processed for implementation. To simplify the calculation o f scores, the predicted values were normalized so that al l scores are integers ranging between 0 and 100. To minimize the risk o f reversing the ranking, this normalization was made by first revising regression coefficients o f a l l variables proportionally and then rounding them.

111. Final Proxy Means Testing Formula (PMTF) and a Poverty Scorecard

16. Using the latest Pakistan Social Living and Measurement Standard Survey (PSLM 2005- 06) data, a final model was chosen from the regression analysis, which has the relatively high R-

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square but low exclusion and inclusion errors. Annex 4-Table 1 indicates the regression results o f the final model. Consistent with the standard literature on poverty diagnostics, the predictors include the number o f dependents, the educational attainment o f household head, children’s enrollment status, and housing conditions and asset ownership etc. The scorecard i s prepared by converting regression coefficients in the final model to certain points so that predicted values o f household expenditure take integers between 0 and 100. Annex 4- Table2 shows the final coverage page and the scorecard questionnaires.

70 1 62.3

17. Figure 1 provides the coverage rate o f the chosen poverty scorecard by expenditure deciles. At a coverage rate o f 25%, the excluded among the poor are far more l ikely to belong to the upper deciles o f expenditure while over 60 percent o f the poorest 10 percent o f population are selected.

I

IV. Choice o f the cut-off scores

18. The choice o f the cutoff score i s a critical policy decision o f program providers. The cutoff needs to be determined by taking into account program budgets, implementation costs, grievance redress policies, and targeting performance.

19. To determine the appropriate cutof f score for BISP given a budget constraint, program coverage and budgetary needs in terms o f “families” are estimated for each score. Annex 4 -Table 3 summarizes

Figure 1: Program Coverage (%) by expenditure deciles

60 -

50 -

40 -

30 -

20 -

10 -

0 ,

41 .9

30.6

22.1

13.2

6.6 9.1

the results. All calculations are based Source: The World Bank staff estimation using PSLM 2005-06 data

on estimated population as o f 2008- 09. The estimated number o f families per household i s derived using the P S L M 2005-06 data.36 Additionally, it i s assumed that the benefit amount per fami ly i s Rs. 1,000 per month.

20. I f the cutof f score o f 14 were chosen, 13.3 percent o f a l l families in Pakistan would be selected as beneficiaries and the budgetary needs would be Rs. 56.8 bil l ion. This cutof f o f 14 i s roughly consistent with GoP’s current intention to cover 5 mi l l ion families in the coming fiscal year. On the other hand, if the cutof f were raised to 17, program coverage would include 19.8 percent o f families and the estimated budgetary needs would be Rs. 84.6 billion. The cutof f score o f 17 comes closest to covering 25 percent o f the population which i s the national poverty headcount rate (according to most recent estimate^)^^.

According to PSLM 2005-06 data, there are on average around 1.47 families in a household. The number o f families in a household i s approximated by the number o f ever married women (including widows or divorced) in a household. With the population estimate o f 2008-09 (164 million) and the average household size o f 6.8, the total numbers o f households and families in 2008-09 are estimated to be 24.1 million and 35.6 million, respectively. This means the proposed budget allocation can cover 16 percent o f families.

The current scoring system from 1-100 does not easily allow for meeting exact goals like for example targeting 5 million families. The closest cut o f f score i s 14 with coverage of 4.73 million families. However, this scoring system can be easily adjusted to accommodate a more precise coverage o f five million families, if that were the target number o f beneficiaries for BISP.

36

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V. Monitoring and Evaluation

2 1. The poverty-scorecard based targeting mechanism will be monitored and evaluated through (i) an integrated Management Information System; (ii) financial management and auditing arrangements; (iii) procurement arrangements; (iv) appeals and complaint mechanisms; (v) social accountability mechanisms; (vi) the role and use o f impact and other forms of evaluation. Since these monitoring mechanisms are described in detail by the proposed Social Safety Nets Technical Assistance Project Appraisal Document, this section wil l only outline the impact evaluation arrangements.

22. The impact evaluation wil l focus on displaying the effects o f the cash transfers on the socioeconomic conditions o f the beneficiary families such as food and non-food consumption, and potentially on a number o f human development indicators such as school enrollment and attendance, health outcomes, and chi ld labor. Given that the cash transfer i s provided to the female head o f the beneficiary families, the evaluation wil l also assess the impact o f BISP on women’s perceived and actual social status. In addition, the targeting performance o f the poverty- scorecard will be re-assessed.

23. The evaluation i s structured in two phases: the first phase focuses on evaluation of the test phase, mainly on the implementation process, scorecard effectiveness and the spot checks. The second phase focuses on the impact evaluation o f BISP through a combination o f quantitative and qualitative instruments.

Phase I: Evaluation o f the Test Phase

Process Evaluation of the targeting test phase

24. The process assessment has three main objectives: (i) to evaluate the consistency o f activities o f the poverty scorecard test phase with what has been specified in the targeting manual; (ii) to evaluate the efficiency and transparency o f the payment process, and (iii) to evaluate whether the data entry, data quality verification, data formatting and report generation in accordance with the targeting guidelines. The main methods for this evaluation include direct observation, individual interviews with key stakeholders, and focus group interviews.

Assessment of the scorecard effectiveness

25. The poverty scorecard i s developed using the most recent household survey data (PSLM 2005-06), which unavoidably bears statistical errors. The main purpose o f this evaluation component i s to assess the effectiveness o f the scorecard by comparing the relative score distribution versus the actual consumption distribution. That is, for a sample o f households, both the scorecard data and actual consumption data are to be collected. The relative score distribution against the national representative scorecard distribution i s to be compared with the relative consumption distribution against the national representative consumption distribution.

26. There are a couple o f data sources that will be used for this assessment. The first i s the up-coming P S L M 2007-2008 data, which contain both scorecard and consumption information in a national representative sample (the sample size i s about 16,000 households); the second i s a rapid assessment o f the overlap between the existing BISP beneficiaries and the poverty scorecard-based beneficiaries (the sample size i s about 2,500 households); and the third i s a follow-up study planned to assess the impact o f the food crisis and financial crisis on households (sample size i s about 4,000), which also contains the scorecard and the full consumption information.

73

Spot Checks

27. The “spot-checks” (or “operational” audits) are at the init ial stages o f program implementation mainly used to evaluate whether the data collected o n the poverty scorecard i s accurate. This objective wil l be achieved by re-visiting a sample o f randomly selected families and re-collecting the same information that has been collected in the poverty scorecard and comparing it with respect to results provided by Partner Organizations and NADRA. If difference exists, causes are to be investigated and the data collection in the problematic villages/Union Councils (UCs) i s to be repeated.

Qualitative Survey to Identify the Potential Areas of Focus for the Cash Transfer Impact Evaluation

28. This activity i s designed to collect qualitative information on how the families are planning to use the additional income provided by BISP and how the additional income can potentially alter households’ behaviors in order to better understand the outcomes o f the BISP. These areas include (increased) consumption on some items, (increased) savings, (increased) investment in productive assets, preferences to send children to school or work, women’s social status, labor participation, and others. The collected qualitative information would be used to develop the questionnaires for the program impact evaluation.

Phase 11: Imuact Evaluation of BISP

29. For the BISP program, a full-fledged impact evaluation would be carried out, benefiting from the gradual ro l l out at the national level. The impact evaluation study will assess how cash transfers affect food expenditure, education and nutrition outcomes, chi ld labor supply as well as women’s social status. The evaluation would include a baseline survey (between targeting and payment) and at least two fol low up surveys to build a panel dataset on the same households to assess the impact o f the program in the medium and long term. The follow-up survey should be carried out ideally twice a year in order to capture the seasonality effects o n consumption but the frequency o f the follow-up surveys i s contingent on the availability o f the financial resources and institutional capacity.

30. Decisions are yet to be made by the government whether the national rollout could be a randomized process. If the rollout i s to be a randomized process, it should be at the U C level and this randomization will guide the national rollout - the UCs in the treatment group should be rolled out first, followed up with UCs in the control group. In both treatment and control groups, a random sample f rom beneficiary families and non-beneficiary families that are right above the cut-off score will be selected. If the rollout i s constrained by various factors and can not be a randomization process, matching technique has to be used to identify a control group in the later- enrolled UCddistricts which are as similar as possible to the selected beneficiary families in the earlier-enrolled UC/districts. Alternatively, the impact evaluation has to rely o n the regression discontinuity design: comparing beneficiaries’ right below the cut-off point and non-beneficiaries right above the cut-off point.

31. Thus the f irst and preferred option i s to use a randomized experiment with treatment group being enrolled first and control group being enrolled later. The assumption i s that families in the treatment group and control group are similar in both observed characteristics and unobserved characteristics. Direct comparison o f the outcome indicators between the treatment and control groups renders the average program treatment effect. The second option i s to use a Regression Discontinuity (RD) technique. Targeting by proxy means test generates exogenous thresholds that discriminate between eligible and non-eligible households. Identification in the

74

RD settings stems from the assumption that the un-observables o f those who were barely excluded from the program are similar t o those o f individuals who were barely accepted. Comparing a sample o f individuals within a very small range around the cutof f score is analogous to conducting a randomized experiment at the cut-off score (quasi-experimental design). The regression discontinuity methodology identifies the treatment effect locally, i.e., identification stems from the discontinuity around the exogenous cut-off point, thus might have limited implications o n the overall program effects. The third option i s to use a matching technique to match beneficiary families enrolled later and beneficiaries enrolled earlier if randomization becomes unfeasible. Various matching techniques are available, such as non-parametric matching and propensity score matching. A key assumption for the matching technique i s that if families are similar based on a vector of observed characteristics, families are l ike ly to be similar in unobserved characteristics.

75

Annex 4: Table 1. The Final Regression Model

Not ail children between 5 and 16 years old in the

76

n

(d d c 0

E .e

.e + 2 3

i? a, > 0 a Pi a,

.. d

1 Form# I 2. Full Name of the household head

I I I I l l l l l l l l l l l l l l l l l ~ l ~ l l l I I 3. CNlC number of Household head -1 4 Stgflature of the Enumerator:

1.

n ' U

3 . D

u i

x I:

3 2 - 1

0

0 0

c

0 0

G

t E I a, a -

C 3

1

a, 5

I [I

rU m

t c

Annex 4: Table 3. Program coverage, budgetary needs and targeting performance as respect to cutoff scores

Source: The World Bank Staff estimation based on PSLM 2005-06

79

ANNEX 5: Pakistan At-A-Glance Social Safety Net Development Policy Credit

Pakistan a t a dance 9/24/08

Key Development Indicators

PJ7)

Population. mi&year (millions) Surface area (Aousandsq. km) Populationgrowth (%) Urban populaton (% oftotal popllation)

GNI (Atlasmethod. US$ billions) GNI percapita (Atlasmethod. US$) GNI percapih (PPP, interna(onal$)

GDP growth (%) GDP per capita gmwth (%)

(mort r w e n t &mate, 2000-2007)

Poverty headmuntratioat $1.25a day(PPP, %) Poverty headmuntratio at S2.00a day(PPP. %) Life expedanq at bilm (yean) Infant mortality (per1,OOO live births) Child malnubition (% of children under 5)

Adult literaq. male (% of ages 15 and oldel) Adultliteraq. female (% ofages 15 and older) Gross primary enrollment, male (% of age group) Gross primary enrollment.fema1e (% of age group)

Access to an improwd wdter sourca (% of population) Access to impmvedsanitason facilities (% of population)

Pakistan

162.4 798 2.1 36

141.0 870

2,570

6.4 4.2

65 78 31

64 35 94 73

90 58

south Low Asia inwme

1,520 1.296 5,140 21,646

1.4 2.1 29 32

1,339 749 880 578

2,537 1,500

8.5 6.5 6.9 4.3

40 74 64 57 62 85 41 29

70 72 46 50

111 100 104 89

87 68 33 39

Net Aid F l o w

(US% m71ions) Net ODA and omcial aid Top 3 donors (in 2006):

United Stabs Japan United Kingdom

Aid (% of GNI) Aid percapita ( U S )

Long-Term Economic Trends

Consumer plices (annual % change) GDP implicit deflator (annual %change)

Exchanp rate (annualaverage. locdl per U S ) T e n s of trade index(20W = 100)

Population. mid-year (millions) GDP (US0 millions)

Agnculhrre lndusby

ManubcbJring SeMWS

Household lnal consumption ewenditure General gov't final wnsumption expenditure Gross capital formalon

Expo* of goodsand sewices Imports of goodsand services Gross savings

1980

1.181

42 112 44

4 6 14

9 1

9 9

82 7 23,690

29 5 24 9 15 9 45 6

83 1 10 0 18 5

12 5 24 1 24 1

1990 2000

1,127 692

167 88 194 280 54 24

2.7 0.9 10 5

10.6 4.8 6.5 24.9

21.4 51.8 103 1 w

108.0 138.1 40,010 73,905

(% of GDP) 26.0 25.9 252 23.3 17.4 14.7 48.8 50.7

73.8 75.4 15.1 8.6 18.9 17.2

15.5 13.4 23.4 14.7 22.3 20.1

2007 '

2,147

478 225 203

1.7 14

7.7 7.8

60.6 112

162.4 143,597

19.6 26.8 19.5 53.7

75.0 10.4 23.0

13.9 22.2 23.9

Age distribution, 2007

Female

I l5 lo percant O lo l5

Under4 mottalky rate (per 1,000) llrr

I IGrowth of GDP and GDP per capita (%)

GDP per capita I I +GDP -

198C-90 1990-2000 2000-07 (avemgeannualgmMh %) 2.7 2.5 2.3 6.3 3.8 5.8

4 0 4 4 2 8 7 7 4 1 7 9 8 1 3 8 107 6 8 4 4 6 5

4 3 4 9 5 1 10 3 0 7 9 5 5 8 1 8 6 5

1 7 100 8 4 2 1 2 5 9 9

Note: Figures in italics are for years other Aan hose speuled. 2007 data are preliminary. .. indicutes data are not available. a. Aid dam are for 2006.

Development Economics. Development Data Group (DECDG)

80

Pakistan

I I

Balance of Payments and Trade

( U S millions) Total merchandise exports (fob) Total merchandise imports (00 Net trade in goods and services

Wwkers' remittances and compensation of employees (receipts)

Current account balance as a % of GDP

Reserves. including goid

Central Government Finance

(% of GDP) Current revenue (including grants)

Current expenditure

Overail surpluddeficit

Highest marginal tax rate (%)

Tax revenue

Individual Corporate

External Debt and Resource Flows

(US$ millions) Total debt Outstanding and disbursed Total debt service Debt relief (HIPC, MDRI)

Total debt (% of GDP) Total debt service (% of exports)

Foreign direct investment (net influus) Portfolio equity (net inflows)

2000 2007

8,191 17,011 10,309 30,540 -2.275 -15,021

1,075 5,998

-217 -8,037 -0.3 -5.6

2,149 15,801

13.7 14.9 10.6 11.1 14.3 11.9

-2.3 -0.1

35 35 .. 37

32.781 35,909 2.854 2,282 - - 44.4 28.3 26.7 9.2

308 4,273 35 1,152

I lComporltlon of total external debt, 2006

Shat"m r lBRD 2143 Shat"m r lBRD 2143

ommum- kI.rni, 7,574 USS millions

Private Sector Development 2000 2008

Time required to start a business (days) - 24 Cost to start a business (% of GNi per capita) - 12.6 Time required to register property (days) - 50

Ranked as a major constraint to business 2000 2007 (% of managers surveyed who agreed)

A ~ S S to/wst of financing 47.5 Tax administration 46.0

Stock market capitalization (% of GDP) 8.9 48.9 Bank capital to asset ratio (%) 4.9 8.8

IGovernance indicators, 2000 and 2007

Vace and accountability

Polibcal 6tabHity

Technology and Infrastructure 2000 2007

Paved roads (% of total) Fixed line and mobile phone

High technology exports subscribers (per 1,000 people)

(% of manufactured exports)

560 64.7

2 52

0 4 1.4

Environment

Agriwltural land (% of land area) 35 35

Nationally protected areas (% of land area) .. 9.5 Forest area (% of land area) 2.7 2.5

Freshwater resources per capita (cu. meters) .. 336 Freshwater withdrawal (% of internal r e s o u ~ ~ s )

C02 emissions per capita (mt)

GDP per unit of energy use

323.3

0.77 0.83

(2005 PPP $ per kg of oil equivalent) 4.2 4.5

Energy use per capita (kg of oil equivalent) 463 490

(US$ millions)

IBRD Total debt outstanding and disbursed 3,093

159 Disbunements Principal repayments 227 Interest payments 182

IDA Total debt outstanding and disbursed 3.828 Disbursements 141 Total debt service 93

iFC (fiscal year) Total disbursed and outstanding pattolio

Disbursements for IFC own acwunt Portfolio sales. prepayments and

repayments for IFC own account

718 455

2

52

of which IFC own account

MlGA Gross exposure 111 New guarantees 0

2 088 175 284 114

9,075 1,001

197

219 214 69

55

82 38

Note: Figures in italics are for years other than those specified. 2007 data are preiiminaty .. indicates data are not available. -indicates observation if not applicable.

Development Economics, Development Data Group (DECDG).

9/24/08

81

Millennium Development Goals Pakistan

With selected targets to achieve between 1990 and 2015 (esbmate dosesf to date shown, +/- 2 )ears)

Goal 1: halve t h e rates for ex t reme poverty a n d malnu t r l t lon I990 1995 2000 2007 Poverty heactount ratn at $1 25 a day (PPP, % of population) Poverty heactount rat0 at national poverty line (% of population) Share of income or consumption tothe pocrest qunlile (%) Prevalence of malnutrtion (56 ofchildren under 5)

28 6 32 6 8 1 9 9 8 7 9 1

39 0 31 3

Goal 2: ensure that chldren areable t o c o m p v Primary school enrollment (net, X ) 33 57 66 Primary completion rate (% ofrelevant age grorp) Secondary sd-1001 enrolment (gross, 56) Youth literacy rate (% ofpeople ages 15-24)

62 25 30

55 65

Goal 3: eliminate pnder disparity In educatlonand empower women Retio of girls to boys in prmary and scondary educaton (56) Women employed n the nonegreukural sedor (% of nonagrmkural employment) Proportwn of seats held by women n natwnal parliament (%)

78 10

10 2 21 7 8 7

Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 130 118 108 97 Infant mortality rate (per 1,000 live births) Measles immunization (propotiwn of one-yea olds immunued, %)

100 93 85 78 50 47 56 80

Goal 5: reduce maternal mortal i i by three-fourths Maternal mortality rado (modeled esSmate, per 100,000 live bdhs) 320 Births attended by 3illed heath staff (% of total) 19 18 23 31 Contraceptie prevabnce (U ofwomen ages 15-49 15 18 28

Goal 6: halt and begin to reverse the spread of HNlAlDS and other major diseases Prevalence ofHN (% of popubtion ages 1549)

Tuberculosis cases detecled under DOTS (%) 1 3 50

0.1 Incidence of tuberculosis (per 100,wO people) 181 181 181 181

Goal 7: halve the proportionof people withod sustdnabk access to basic needs Access to an improved water source (% of popubtion) 86 87 88 90 Access to improved sanitation facilities (% of popubtion) 33 40 48 58

Nationally proteded areas (% oftolal land area) C02 emissions (metre tons per capita) 0.6 0.7 0.8 0.8 GDP per unit of energy use(mnstant 2005 PPP $ per IQ of oil equivalent) 4.2 4.2 4.2 4.5

Forest area (56 oftotal land area) 3.3 2.7 2.5 9.5

Telephone mainlines (per 100 people) Mobile phonesubscrbers (per 100 pecple) Internet users (per 100 peolje) Personal computers (per 1M) people)

iducation indicators (%)

w 1

-0-Primarl net enrollment ratio

+Ratio of g i b to boys in pnmary 6 secondaly education

leasles immuniration (% of l - p a r olds)

loo 1

il Pakistan 0 South Asia

0.0 0.0 0.2 48.6 0.0 0.0 0.2 10.8 0.1 0.4 0.4

OFued + mbile subscriben internet users

Note: Figures in italics are for yearsother than thosespecified. .. indicates data are not amilable

Development Economics, Devebpment Data Group (DECDG).

9/24/08

82

AFGHANISTANAFGHANISTAN

CHINACHINA

To To MandiMandi

30˚N30˚N

25˚N25˚N

65˚E65˚E 70˚E70˚E 75˚E75˚E

K2K2(Mt. Godwin-(Mt. Godwin-

Austen) Austen) (8,611 m)(8,611 m)

FED. CAPITAL FED. CAPITAL TERRITORY TERRITORY

ISLAMABADISLAMABAD

Karakoram Range

Th

ar D

e s e r t

Hindu K

ush

Central Makran Rang

e

Indu

s

Ravi

Sutlej

Chenab

Jhelum

Zhob

Indus

Mas

hkai

Indus

B A L O C H I S T A NB A L O C H I S T A N

S I N D HS I N D H

P U N J A BP U N J A B

NORTHERNNORTHERNAREASAREAS

QuettaQuetta

LahoreLahore

PeshawarPeshawar

MuzaffarabadMuzaffarabad

ISLAMABADISLAMABAD

SrinagarSrinagarKargilKargil

HyderabadHyderabad

FaisalabadFaisalabad

RawalpindiRawalpindi

SaiduSaidu

ChitralChitral

D.I. KhanD.I. Khan

GujratGujrat

KahatKahat

BannuBannu

GujranwalaGujranwala

D.G. KhanD.G. Khan MultanMultan

SahlwalSahlwal

BahawalpurBahawalpurNok KundiNok Kundi

ChamanChaman

SurabSurab

ZhobZhob

BadinBadinThattaThatta

PanjgurPanjgur

RanipurRanipur

TurbatTurbat

MoroMoro

BelaBela

GwadarGwadar

ApproximateApproximateLine of ControlLine of ControlN . W. F. P.N . W. F. P.

JammuJammuand Kashmirand Kashmir

B A L O C H I S T A N

S I N D H

P U N J A B

N . W. F. P.

FED. CAPITAL TERRITORY

ISLAMABAD

SrinagarKargil

Hyderabad

Faisalabad

Rawalpindi

Saidu

Chitral

D.I. Khan

Gujrat

Kahat

Bannu

Gujranwala

D.G. Khan Multan

Sahlwal

BahawalpurNok Kundi

Chaman

Surab

Zhob

BadinThatta

Panjgur

Ranipur

Turbat

Pasni

Moro

Bela

Gwadar

ApproximateLine of Control

Karachi

Quetta

Lahore

Peshawar

Muzaffarabad

ISLAMABAD

AFGHANISTAN

INDIAISLAMICREPUBLIC

OFIRAN

CHINATAJIKISTAN

Jammuand Kashmir

Indu

s

Ravi

Sutlej

Chenab

Jhelum

Zhob

Indus

Mas

hkai

Indus

A r a b i a n S e aRann of Kutch

To Kandahar

To Kerman

To Kerman

To Khash

To Jodhpur

To Mandi

To Kabul

To LudhianaTo

Bhatinda

Karakoram Range

Th

ar D

e s e r t

Hindu K

ush

Central Makran Rang

e K2

(Mt. Godwin-Austen)

(8,611 m)

35˚N

30˚N

25˚N

30˚N

25˚N

65˚E 70˚E 75˚E

65˚E 70˚E 75˚E

PAKISTAN

0 50 100 150

0 50 100 150 Miles

200 Kilometers

IBRD 36758

FEBRUARY 2009

PAKISTANSOCIAL SAFETY NETS DEVELOPMENT POLICY CREDIT

SELECTED CITIES AND TOWNS

PROVINCE CAPITALS

NATIONAL CAPITAL

RIVERS

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endo r s emen t o r a c c e p t a n c e o f s u c h boundaries.

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES