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Background Paper for the IDB Group MCPS Document for Pakistan
Poverty, Inequality and Unemployment in Pakistan
Dr. Ghulam Muhammad ArifJoint Director
Pakistan Institute of Development Economics
Islamabad, Pakistan
and
Dr. Shujaat Farooq
Research Fellow
Pakistan Institute of Development Economics
Islamabad, Pakistan
Dul-Qadah 1432H (October 2011)
This paper is prepared by the authors as a background study forthe IDB Group Member Country Partnership Strategy (MCPS)
Document for Pakistan. The abridged version of this paper hasbeen included in the MCPS document.
The views expressed in this paper are those of the authors and
do not necessarily represent the views of the IslamicDevelopment Bank Group or its Board of Governors or
Executive Directors or its member countries or the Pakistan
Institute of Development Economics (PIDE).
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Contents
Executive Summary vii
1. Introduction 1
2. Data Sources 1
3. Overview of Poverty and Income Inequality Situation during 2000-2010 2
3.1 An Overview of Poverty Situation in Pakistan 2
3.2 Poverty Across the Provinces 4
3.3 Trends in Inequality 53.4 A Comparison of Poverty and Inequality in Pakistan with Selected
Asian Countries7
3.5 Comparison of Inequality 93.6 Status of Achieving Poverty-Related MDG Targets in Pakistan 103.7 Poverty-Inequality Nexus 113.8 Growth-Poverty-Inequality Nexus 12
4. Government Policies/Initiatives for Reducing Poverty and Inequality 14
4.1 Government Past Policies 144.2 Diagnostic Analysis of Binding Constraints to Reducing Poverty and
Inequality16
4.3 Government Medium-Term Policies and Plans 204.4 Main Challenges/Issues/Risks to Medium-Term Outlook 22
4.5 Role of Donors in Poverty and Inequality Reduction Efforts 244.6 Policy Recommendations for Fixing Binding Constraints 27
5. Identification of Focused Areas for MDBs Interventions in Reducing
Poverty and Inequality over the Medium-term
29
5.1 Identification of Vulnerable and Poor Regions 29
5.2 Identification of Vulnerable and Poor Groups 30
5.3 Islamic Microfinance for Poverty Reduction 31
6. Employment Situation in Pakistan 33
6.1 An Overview of Employment Situation in Pakistan 33
6.2 Comparison of Unemployment Rate in Pakistan with Selected AsianCountries
36
6.3 Status of Achieving Employment Related MDGs 396.4 Growth-Employment-Poverty-Inequality Nexus 41
7. Government Policies/Initiatives for Increasing Employment 44
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7.1 Government Past Policies and Programmes 44
7.2 Diagnostic Analysis of Binding Constraints to ReducingUnemployment
46
7.3 Government Medium-Term Policies and Plans Related to
Employment
48
7.4 Main Challenges/Issues//Risks to Medium-Term Outlook RegardingEmployment
49
7.5 Role of Donors in Increasing Employment 50
7.6 Policy Recommendations for Fixing Binding Constraints 52
8. Identification of Focused Areas for MDBs Interventions in Employment
Generation Over the Medium-Term
53
8.1 Possibilities of Poverty Reduction Through SMEs Development byEmployment Creation
53
8.2 Vocational Training 548.3 Islamic Microfinance for Employment Generation 55
References 57
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List of Tables
Table 3.1: Trends in Poverty: Headcount Ratios
Table 3.2: Poverty Incidence Across Provinces
Table 3.3: Gini-Coefficient and Consumption Shares by Quintiles
Table 3.4: Ratio of Highest Quintile to Lowest Quintile
Table 3.5: Rates of Economic Growth and Inflation in Selected Countries
Table 3.6: Headcount Poverty Rates in Selected Asian Countries
Table 3.7: Gini-Coefficient, Inequality in Income or Expenditure in Selected AsianCountries
Table 3.8: Millennium Development Goal Related to Poverty
Table 3.9: Gini-Coefficient by Regions and Overall
Table 4.1: Direct Transfers and Beneficiaries
Table 4.2: Governance Indicators
Table 4.3: Infrastructure by Provinces
Table 4.4: Macroeconomic Targets (PRSP-II)
Table 4.5: Projected PRSP Budgetary Expenditures
Table 4.6: Macroeconomic Indicators
Table 4.7: Proposed PRSP Allocations, MDG Costing Estimates and Resource Gap
Table 4.8: Cost of War on Terror to Pakistan
Table 4.9: Committed and Disbursed Foreign Assistance
Table 4.10: Source and Donor-Wise Disbursements
Table 4.11: Sector-Wise Disbursements of Project Aid
Table 4.12: Pakistans External Debt Servicing
Table 6.1: Labour Force Participation Rates and Unemployment Rates for Adult andYouth
Table 6.2: Share of Employed Labour Force in Various Sectors
Table 6.3: Employment-to-Population Ratio Among Adults and Youth in Pakistan
Table 6.4: Unemployment Rates and Employment-Population Ratio of Selected
Countries
Table 6.5: Ranking of Labour Market Efficiency in Selected Countries
Table 6.6: Demographic Trends and Decent Work Issues in Selected Countries
Table 6.7: MDG Indicator of Women Share in Non-Agriculture Employment
Table 6.8: Vulnerable Employment in Adults and Youth
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Table 6.9: Working Poor Estimates
Table 6.10: Labour Productivity Per Hour Workedby Sector
Table 6.11: Growth, Employment, and Poverty in Pakistan
Table 7.1: Active Borrowers, Active Savers and Active Policy Holders by Peer Group
Table 7.1: Share of Employment in the Informal Sector of the Economy
List of Figures
Figure 3.1: Relationship Between Inequality, Poverty and Growth
Figure 3.2: Real GDP Growth Rates
Figure 6.1: Segmentation of Informal Employment
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Executive Summary
This study has reviewed the poverty and inequality situation in Pakistan. It has examined the
employment situation and explored the growth-employment-poverty-inequality nexus. The
relationship between growth, poverty and inequality is complex in Pakistan. During the high growth
decades (1960s) and low growth decades (1970s), both poverty and inequality moved in opposite
direction. The high economic growth during the 1980s contributed to a sharp decline in poverty, but
accompanied by a mild increase in inequality. The fall in economic growth during the 1990s resulted
in a rise in poverty while inequality decreased modestly. During the first half of the last decade, the
economy witnessed a high growth and poverty declined from 34.5 percent in 2000/01 to 22.3 percent
in 2005/06, while inequality increased sharply. Unemployment rate, despite high growth, did not drop
sharply. Although, after 2006, no official statistics on poverty is available; however, according to
unofficial sources, poverty has gone back to the early 2000s level with rising unemployment.
Poverty in Pakistan is mainly a rural phenomenon. Across the provinces, poverty is highly fluctuated
in rural Sindh and southern Punjab. Historically, Pakistan has not witnessed a secular decline in
poverty; it has fluctuated considerably. During 2000-2006, the country witnessed a sharp decline in
poverty and later, because of both the high inflation and slow economic growth, poverty levels are
likely to have reversed and could be as high in 2010 as was in 2001. The country was on the track to
achieve MDG poverty-related targets up to 2006, however, at present, the ground realities reveal that
it will be unlikely to reduce poverty to 13 percent by 2015.
The labour force participation rates have witnessed an increase of 2.1 percentage points during the last
decade (2001-10). The stable unemployment rates during this period suggest that the labour force
participation grew faster than the new job opportunities. Though the female participation has
gradually increased; however, it is still very low. Both the youth and female are disadvantageous in
the labour market with high unemployment rates and access to modest earning opportunities even
during the high economic growth period (2002-07).
While comparing with five Asian countries: China, India, Malaysia, Indonesia and Thailand; Pakistanhas relatively high fluctuations in growth and inflation during 2000-10 period. One common
characteristic among the selected countries and Pakistan is that the poverty is largely a rural
phenomenon. The five selected countries have witnessed a decline in poverty over the last two
decades, while in Pakistan; it has been fluctuated since 1990. The other selected countries noticed a
decline in poverty in both urban and rural areas; whereas in Pakistan, it declined mainly in urban
areas. Gini-coefficients show that both India and Indonesia witnessed a higher inequality, while it
declined in other countries (China, Malaysia and Thailand) including Pakistan. The share of bottom 10
percent population in total income or consumption has improved in China, Malaysia, Pakistan and
Thailand; whereas it declined for India and Indonesia. Regarding employment, most economies have
employment-to-population ratios in the range of 55 to 75 percent; however this ratio is comparatively
low (52 percent) in Pakistan.The Government of Pakistan has initiated Social Action Program during 1990s, which did not bring
the desired change in social indicators. To counter the rising poverty and unemployment, the
government launched Poverty Reduction Strategy Paper (PRSP) in 2003 by addressing different
aspects of poverty: high economic growth; governance; investing in human capital; and bringing the
poor, vulnerable and backward regions into mainstream of development. PRSP-I (2003-06) remained
successful by achieving its pro-poor targets, while high inflation, poor economic performance and law
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and order situation has counter-cycled the positive effects of PRSP-II (2008-12). Though the
government has some narrowly targeted social safety nets programs; however, the extent of benefits to
the poor from these targeted programs has not been up to the desired level.
The binding constraints to achieve high growth with low levels of poverty, inequality and
unemployment are political instability, poor governance, lower government investment on knowledgeand skills, infrastructural bottlenecks and social and economic exclusion of poor in decision-making.
One important aspect that has severely affected the development is the role of Pakistan in the War on
Terror. Though a number of donors are assisting the government to improve the welfare of the poor;
however, the coverage of these interventions is too limited to meet the challenges. A major proportion
of foreign assistance is going to overcome the budget and current account deficits, as a result, the
government is facing rising public debt especially the external debt and debt services.
To ensure equal distribution of resources, there is a need to include the poor in the development
stream by providing economic, social and political freedom. Agriculture is the key sector of Pakistans
economy and there is a need of intervention in the areas of horticulture and livestock to diversify the
farmers resources. In addition, a special development in terms of physical and social infrastructure is
required to develop the rural non-farm sector. Rural to urban migration could be a way out of poverty
toward the self-help. City is an opportunity for the poor. History has shown that poverty is eliminated
in merchant cities. The ongoing demographic transition in Pakistan should also be viewed for the
policy purpose as it presents the economy with a demographic gift in the form of a surge in the
relative size of the working-age population.
Rather than universally targeted, the narrowly targeted interventions are required especially in the
rural areas of Pakistan. The households who have no land, headed by females or Zakat recipients are
among the poorest of the poor households. The southern districts of Punjab and all rural areas of
Sindh, Baluchistan and KPK are the poorest regions of the country with poor physical infrastructure
and access to education and health services. Much effort from the government side is required to
eliminate the issues related to poor governance including corruption, and nepotism. Stable
macroeconomic system is prerequisite to generate sufficient employment opportunities especially for
the poor. Supportive physical and social infrastructure is necessary to develop better rural-urban
linkages and better integration across the regions.
Micro financing can be helpful in poverty reduction and making the economy self-reliance. There are
1,613 branches of the credit services to the poor and the active borrowers are around two million.
However, their outreach is not adequate as out of more than 45 million poor households, only 2
million have access to it. More importantly, microcredit services generally exclude the poorest of the
poor because they lack assets necessary to have access to these services.
Islamic banking can also make a positive contribution in poverty reduction by fulfilling the
socioeconomic objectives of Islamic society inscribed in the objectives of Shariah. By 2007, six
licensed Islamic banks and 12 conventional banks with more than 330 branches were operatingcompared with one bank with 10 branches in 2003. However, the Islamic banks in Pakistan are not
providing microfinance services. Some non-bank Islamic institutions are providing the micro-credit
services; however, their outreach is very limited in the country. For employment generation in
Pakistan, it is critical to link Islamic microfinance services with the vocational training institutes by
providing their graduates these services. It is suggested to form an Islamic Fund to provide micro-
insurance against unforeseen risks and uncertainties resulting in loss of livelihood.
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Poverty, Inequality and Unemployment in Pakistan
1. Introduction
The concept of inclusive growth demands for widespread expansion of opportunities so that all
segments of the society can benefit from economic expansion (Osmani, 2008). The idea of
inclusive growth has been commonly explained through the employment, poverty and inequality
nexus. Pakistan is an interesting case to study this nexus. As Osmani (2008) has observed, since
1980 Pakistan has experienced three distinct phases regarding the relationship between growth,
poverty and inequality. The high economic growth during the 1980s contributed to a sharp
decline in poverty, but accompanied by a mild increase in inequality. The fall in economic growth
during the 1990s resulted in a rise in poverty while inequality decreased modestly. The high
economic growth during the first half of 2000s (2003-06) was different from the earlier episode;inequality increased sharply with rapid decline in poverty. Unemployment rate, despite high
growth, did not drop sharply.
By focusing on the last decade (2000-2010), this study has first reviewed the poverty and
inequality situation in Pakistan, and then it has examined the employment situation to explore the
growth-employment-poverty-inequality nexus. During this period, the Government of Pakistan
has developed Poverty Reduction Strategy Paper (PRSP) and the Medium-Term Development
Framework. In these policy documents, high sustained economic growth is considered necessary
condition for poverty reduction. However, in view of the possibility that benefits of growth do not
transfer equally to all segments of the society, the poverty reduction strategy has given
importance to transfer income programmes including Zakat, microfinance and more recently
Benazir Income Support Programme (BISP). This study has reviewed these policies in particular
to see the possible role of Islamic microfinance in employment generation and poverty reduction.
2. Data Sources
This is a review study, which has drawn the data related to growth, poverty, inequality and
employment from secondary sources. For poverty and inequality, the study has primarily relied
on the estimates based on the income and expenditure household surveys. 1The last such survey,
known as the Pakistan Socio-economic Living Standard Measurement Survey (PSLM), was
carried out in 2007/08. However, its poverty related data could not be made public. Thus, the
latest available data for poverty and inequality is for the 2005-06 period. However, because of
both the high inflation and slow economic growth since 2008, several sources have attempted to
estimate poverty for the more recent years 2008 and 2009. Poverty data from these sources have
1Pakistan has a long history of conducting Household Income Expenditure Surveys (HIES), started in 1963. Thesesurveys were renamed as Pakistan Integrated Household Survey (PIHS) in the mid-1990s. The latest series of suchsurveys is known as the Pakistan Socio-economic Living Standard Measurement Survey (PSLM). However, incomeand expenditure module of all these surveys remained same, thus providing data for consistent poverty series.
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also been included in the analysis. However, for these recent years data are not available for rural
and urban areas separately.
This study has used the poverty estimates based on the official poverty line methodology. It is
worth noting that in 2003, the Planning Commission announced the official poverty line based on
the threshold level of 2,350 calories per adult per day plus a minimum expenditure required for
non-food needs. A number of developing countries follow the consumption and calories intakes
where the poverty line ranges between 1,970 and 2,350 calories.2
Poverty estimates based on the official poverty line are available for the 2000-06 period. Recent
estimates of poverty for 2008 and 2009, as noted earlier, are not strictly comparable with the
earlier estimates. Data on income distribution is also available only for the 2000-06 period. This
study has used the Gini-coefficients as the measure of inequality, based on the consumption
expenditure data.
Regarding the employment analysis, Labour Force Surveys (LFS) are the main data source,
available for the 2000-09 period. For employment (unemployment as well), the LFS uses the one-
week reference concept. Unpaid family helpers are also part of the labour force. For country-wise
comparison, this report has relied on information as given in the World Development Report,
UNDP, and SAARC reports. The poverty data in these reports are based on the $1.25 a day
concept which is altogether different from the official poverty line methodology.
3. Overview of Poverty and Income Inequality Situation during 2000-2010
3.1. An Overview of Poverty Situation in Pakistan
For the situation analysis of poverty and inequality, this study has focused on the 2000-10 period.
However, the decade of 1990s has also included in the analysis to put the current poverty and
inequality trends in a longer perspective. Data presented in Table 3.1 show that the 1990s haswitnessed a gradual increase in poverty levels, from 26.8 percent in 1992/93 to 30.6 percent in
1998-99. This rise in poverty was because of a six percentage points increase in rural poverty
while urban poverty declined during this period. The rising trends in overall poverty continued
until 2000/01 period, but this time the increase was both in rural as well as urban areas. In
addition to fall in economic growth, several factors are responsible for the rise in poverty in the
1990s including political uncertainty, economic instability, and persistence of wide fiscal and
current account deficits. The inflows of foreign remittances, which are believed to be one of the
major factors for reducing poverty during the 1980s, also declined markedly during the 1990s.
Bad weather conditions and severe droughts lowered the agriculture growth, and led to an
increase in rural poverty. Urban population was to some extent successful in protecting its well-
being level during the 1990s.
Table 3.1 shows a sharp decline in poverty during the first half of the last decade, from 34.5
percent in 2000/01 to 22.3 percent in 2005/06 - a decline of more than 12 percentage points in
2 Bangladesh has 2,112 per capita; China 2,150; Indonesia 2,100; Philippine 2,000; Sri Lanka 2,250 per adultequivalent, and Thailand 1,970 (GoP, 2006).
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only five years3.The percentage of population living below the poverty line in rural areas has
declined from 39.3 percent in 2000/01 to 27 percent in 2005/06 while the corresponding decline
in urban areas was from 22.7 percent to 13.1 percent, suggesting that sharp decline in rural areas
could not narrow the rural-urban gap; rural poverty in 2005/06 was more than double the urban
poverty.
Poverty estimates may vary considerably when a different methodology is applied. For instance,
the data presented in Table 3.1 is based on the official poverty line methodology that uses the
Consumer Price Index (CPI) for price adjustment. Using CPI for price adjustment, World Bank
(2006a) shows a smaller decline in poverty from 34.4 percent in 2000/01 to 29.2 percent in
2004/05 at the national level and from 39.1 percent to 34 percent for rural households. The fall in
overall poverty levels was only 5 percentage points between 2001 and 2005 according to the
World Bank estimates.
One of the main reasons of poverty reduction during 2000-06 was the high economic growth
recorded by most sectors. In addition to high growth, other factors that are likely to have
contributed to poverty reduction include the increased public spending especially on education,
health and infrastructure (rural electrification, roads, and irrigation improvements). Overall pro-
poor expenditures increased from 3.8 percent of GDP in 2001/02 to 4.8 percent in 2004/05 (GoP,
2005). The inflow of foreign remittances has mounted over $19 billion during 2001/02 and
2005/06 period, being an average of 4.1 percent of GDP. The contribution of remittances in
economic growth and poverty reduction in developing countries including Pakistan is well
documented (Iqbal and Sattar, 2005; Arif, 2009). The economy also found a large fiscal space
after 9/11, when much of Pakistans debt was written either off or rescheduled, allowing debt
repayments to be used on development projects.
3 It is important to note that the official poverty estimates for 2000/01 period have been revised upward from 32.1
percent to 34.5 percent, because of some flaws in earlier estimates (GoP, 2006).
Table 3.1. Pakistan: Trends in Poverty: Headcount Ratios
Urban Rural Overall
1992-93 24.6 28.3 26.8
1996-97 22.6 33.1 29.8
1998-99 20.9 34.7 30.6
2000-01 22.7 39.3 34.5
2004-05 14.9 28.1 23.9
2005-06 13.1 27.0 22.3
2007-08 - - 29.9a
2008-09 - - 33.8b
2008-09 - - 36.1b
2008-09 - - 30-35c
Source: Economic Survey, Government of Pakistan, 2008-09.
a: Interim Report (October 2008), Economic Stabilization with a Human Face, Panel of Economists
constituted by the Planning Commission, Government of Pakistan.b: Task Force on Food Security (World Bank) cited in Economic Survey 2008-09 (p.197).c: Independent Estimates cited in Economic Survey 2008-09 (p.197).
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After 2006, no official statistics on poverty are available. The last HIES or PSLM was carried out
in 2007/08, but poverty estimates have not been made public. The economy of Pakistan has been
facing severe challenges since 2007/08 with a declining rate of economic growth, double-digit
inflation particularly the food inflation, power shortage, soaring oil prices and poor law and order
situation. The war on terror has also resulted to divert public expenditure from development tosecurity. The present socio-economic situation is likely to have adversely affected the efforts for
poverty reduction. The government sources consider that poverty is likely to have increased from
22.3 percent in 2005/06 to 30-35 percent in 2008/09 (GoP, 2008). In 2008, the Planning
Commissions constituted Panel of Economists has reported in its Interim Report that poverty
may have increased by 6 percentage points from 23.9 percent in 2004/05 to 29.9 percent in
2008/09.4Similarly, the Task Force on Food Security (World Bank) estimated that poverty head
count ratio is likely to have increased from 29.2 percent in 2004/05 to 33.8 percent in 2007/08
and 36.1 percent in 2008/09 when about 62 million people were below the poverty line (GoP,
2008).
In 2008, the Report of a UN Inter Agency Assessment Mission found that food security inPakistan in 2007/08 had significantly worsened because of food price hike. The total number of
households falling into this category was estimated to be seven million households or about 45
million people in 2008. Based on the information, poverty level in 2009 appears to be in the range
of 3035 percent. Poverty estimates for 2010 period are not available, but there is no real change
in economic situation. Rather the severe flood in 2010 has pushed many non-poor households
into poverty and numerous poor households are likely to have been pushed into an extreme
poverty condition. It has disproportionately affected the poorest regions of Pakistan, southern
Punjab and rural Sindh where deprivation levels are high and the infrastructure is poor. The
majority of the population in these regions is highly dependent on crop income with less
diversification in their sources of incomes (Arif et al., 2010). Thus, it is likely that the recent rise
in poverty, as started in 2008, has continued to 2010.
Historically Pakistan has not witnessed a secular decline in poverty. Rather, the poverty levels
have fluctuated considerably. This has also been the case for the last decade when first the
country witnessed a decline in poverty between 2000 and 2006 period. Later, because of both the
high inflation and slow economic growth, poverty levels are likely to have reversed and the
poverty headcount ratio in 2010 could be as high as in 2001.
3.2. Poverty Across the Provinces
Although, the Household Income Expenditure Surveys are claimed to be representative at the
province level, the official agencies have generally avoided the estimation of poverty at the
province level probably because of political reasons. The poor provinces or regions may demand
more resources to arrest poverty in their regions. Moreover, explanation of large variations in
poverty levels across provinces over a short period remains a challenge. The province-level
poverty estimates from independent sources are available until the 2004/05 period and are
reported in Table 3.2, which shows that poverty declined in all four provinces between 2000/01
4Economic Stabilization with a Human Face, October 2008.
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and 2004/05. However, there is a great deal of variation across the provinces in terms of
percentage decline. Rural Sindh has shown a huge reduction in poverty, from 48.3 percent in
2000/01 to 28.9 percent in 2004/05, a decline of about 20 percentage points. This substantial
decline in poverty in rural Sindh reversed the ranking across provinces. Sindh rural was the
poorest region in 2000/01, which is turned out to be the least poor region across the country in2004/05. World Bank (2004) attributes the highest volatility for Sindh to the severe drought in
2000/01 and exceptionally high agriculture growth in 2004/05. However, Anwar (2006) links this
variation in rural Sindh over a short period with the data problems at the province level. The
decline in rural poverty in Punjab was marginal, while in other two provinces, KPK and
Baluchistan, it was quite small. In urban Sindh, poverty declined from 20.7 percent in 2000/01 to
13.8 percent in 2004/05. Urban poverty also declined in other provinces but the rate of decline
was lower than the decline in Sindh (Table 3.2).
It appears from the province level estimates that the national level decline in poverty between the
2000/01 and 2004/05 period was primarily due to substantial decline in Sindh and Baluchistan
provinces. It is important to note that the highest and persistent levels of poverty are registered for
KPK. Based on the official methodology, Cheema (2005) has estimated province-wise poverty
levels for the 1992/932000/01 period and found the cyclical nature of poverty in Sindh than in
other provinces. It also suggests vulnerability of rural Sindh population.
3.3 Trends in Inequality
Two measures are commonly used to examine levels and trends in inequality: Gini-coefficient
and income or consumption share by quintiles e.g. the bottom 20 percent. Table 3.3 shows the
Gini-coefficients and consumption quintiles for the 2000/2006 period based on three nationally
representative household survey datasets (PIHS, HIES and PSLM). The inequality data after the
Table 3.2: Poverty Incidence Across the Provinces, 1998/99, 2000/01 and 2004/05
Province
Overall Urban areas Rural areas
1998/99 2000/01 2004/05 1998/99 2000/01 2004/05 1998/99 2000/01 2004/05
World Bank (2006)
Punjab 29.8 30.7 29.5 23.7 23.0 21.2 32.2 33.8 33.4
Sindh 26.2 37.5 22.4 15.3 20.7 13.8 34.5 48.3 28.9
NWFP 40.8 42.3 39.3 26.1 30.0 26.1 43.3 44.4 41.9
Baluchistan 22.1 37.2 32.9 25.2 27.4 21.5 21.6 39.3 35.8
Anwar (2006)
Punjab 31.6 32.2 29.7 24.2 23.2 20.6 34.6 35.8 33.9
Sindh 26.0 35.3 22.4 15.6 20.1 14.3 34.0 45.0 28.4
NWFP 41.3 41.3 38.9 27.1 29.0 26.5 43.7 43.4 41.4
Baluchistan 21.6 35.5 33.1 22.9 26.2 22.4 21.3 37.5 35.9
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2005/06 period are not available. The Gini values show an overall increase in consumptioninequality between 2000/01 and 2004/05 while during the next period of 2004/05-2005/06 the
Gini coefficients did not change. This pattern has been witnessed in urban as well as rural areas.
The last row of Table 3.3 also reveals a similar trend where the ratio of richest group (quintile 5)
to the poorest group (quintile 1) shows a rising gap during the 2000/01-2005/06 period. However,
the gap between the rich and poor increased in urban areas, while it declined in the rural areas.
Overall, it appears from the inequality information that during the period when poverty declined
Table 3.3: Pakistan: Gini-Coefficient and Consumption Shares by Quintiles
PIHS 2000/01 HIES 2004/05 PSLM 2005/06
Urban Rural Overall Urban Rural Overall Urban Rural Overall
Gini-coefficient 0.32 0.24 0.28 0.34 0.25 0.30 0.35 0.25 0.30
Consumption Share by Quintiles
Quintile 1 5.3 12.8 10.1 4.8 12.6 9.5 4.5 13.5 9.6
Quintile 2 8.1 16.9 13.7 7.6 17.1 13.2 8.2 16.8 13.1
Quintile 3 12.1 19.5 16.8 11.6 19.7 16.4 11.1 20.1 16.2
Quintile 4 19.4 22.4 21.3 18.3 23 21.4 17.8 23 20.8
Quintile 5 55.1 28.4 38 57.7 27.6 39.4 58.4 26.6 40.3
Ratio of Highestto Lowest
10.4 2.22 3.76 12.02 2.19 4.15 12.98 1.97 4.2
Source: Economic Survey, Government of Pakistan, 2007-08
Table 3.4: Pakistan: Ratio of Highest Quintile to Lowest Quintile
Selected Indicators
PIHS 2000/01 PSLM 2004/05 Overall
%
change
indisparity
Urban Rural Overall Urban Rural Overall
1 Literacy (Age 10 & above) 2.08 2.17 2.41 1.69 1.76 1.95 -0.19
2 Adult Literacy (Age 15 & above) 2.11 2.23 2.52 1.89 1.93 2.22 -0.12
3 Gross Enrollment Rates
Primary Level 1.77 1.98 2 1.55 1.52 1.65 -0.17
Middle Level 2.84 3.47 3.6 2.28 2.91 3.04 -0.16
Matric Level 3.96 6.36 5.8 2.5 5.33 4.33 -0.25
4 Net Enrolment Rates
Primary Level 2.15 2.04 2.25 1.62 1.56 1.73 -0.23
Middle Level 4.4 3.67 4.57 2.35 3.56 3.27 -0.28
Matric Level 6 8.5 7.67 2.5 6.67 5 -0.35
5Immunization (Children 12-23months)
1.58 1.53 1.76 1.25 1.19 1.25 -0.29
6 Women using Pre-natal Care 2.36 2.44 2.95 1.87 1.73 2 -0.32
7 Women Receiving Post-natal care 4 3.75 4.2 3.05 2.18 3.42 -0.19
Source: Economic Survey, Government of Pakistan, 2007/08
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overall as well as in rural and urban areas the gap between rich and poor widened. It indicates that
the benefits of growth during the high growth period (2000-06) were relatively higher for the rich
than for the poor.
Inequality has many dimensions i.e. inequality in educational opportunities, inequality in health
and other amenities of life. Table 3.4 shows a comparative picture on seven social indicators of
bottom 20 percent population to top 20 percent population at the national as well as regional level
for the 2000-05 period. Unlike the Gini-coefficient and consumption quintiles, the non-income
inequality in terms of access to various social services has been improved faster for the poor
(bottom 20 percent) in urban as well as rural areas during 2000/01 and 2004/05. As shown by the
last column, the gap between rich and poor has been narrowed appreciable at the national level in
the net enrollment rate in matriculation level, use of pre-natal care by women and child
immunization rate. However, overall the Pakistani society is marked by high both income (or
consumption) inequality and non-income inequality.
3.4 A Comparison of Poverty and Inequality in Pakistan with Selected Asian Countries
The past 20 years have seen substantial progress in many aspects of human development in East
and Southeast Asian countries. There has been progress not only in improving health and
education indicators and raising income, but also in expanding peoples power to select leaders,
influence public decisions and sharing knowledge. However, these years have also seen
increasing inequalityboth within and across countries. Countries with less human development
tend to have greater inequality in more dimensionsand thus larger losses in human
development (HDR, 2010).
For comparison of poverty and inequality, in addition to Pakistan, five Asian countries have been
selected: China, India, Malaysia, Indonesia and Thailand. To give the comparison a proper
context, data on GDP growth and inflation are also presented in Table 3.5. All the selected
Table 3.5: Rates of Economic Growth and Inflation in Selected Asian Countries, 2001-2009
2001 2002 2003 2004 2005 2006 2007 2008 2009
Real GDP Growth (%)
India 5.2 3.8 8.4 8.3 9.3 9.4 9.6 5.1 7.7
China 8.3 9.1 10 10.1 11.3 12.7 14.2 9.6 9.1
Indonesia 3.6 4.5 4.8 5 5.7 5.5 6.3 6 4.5
Malaysia 0.5 5.4 5.8 6.8 5.3 5.8 6.5 4.7 -1.7
Pakistan 2 2 4.8 7.4 7.7 6.2 5.7 1.6 3.6
Thailand 2.2 5.3 7.1 6.3 4.6 5.1 4.9 2.5 -2.2
Inflation (%) (Based on Consumer Price Index)
India 3.7 4.4 3.8 3.8 4.2 5.8 6.4 8.4 10.9
China 0.7 -0.8 1.2 3.9 1.8 1.5 4.8 5.9 -0.7
Indonesia 11.5 11.9 6.6 6.2 10.5 13.1 6.3 10.1 6.4
Malaysia 1.4 1.8 1.0 1.5 3.0 3.6 2.0 5.4 0.6
Pakistan 3.1 3.3 2.9 7.4 9.1 7.9 7.6 20.3 13.6
Thailand 1.6 0.7 1.8 2.8 4.5 4.6 2.2 5.5 -0.8
Source: World Development Indicator, 2011
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countries have witnessed a fast economic growth in terms of real GDP during the last decade;
however, there are relatively larger swings in Pakistan GDP growth than the other countries
except Thailand. The last four years have been challenging for all the economies across the world
in terms of global financial crises, and hike in food and oil prices. However, India, China and
Indonesia have maintained a moderate growth in all recent years. The second important indicatorshows high inflation in Pakistan, India and Indonesia, especially after the mid-2000s. In Pakistan
inflation hovered at more than 20 percent in 2008/09 and it is still in double digit. The other three
economies (China, Malaysia and Thailand) have experienced relatively low inflation rates.
With regard to poverty, a direct comparison of Pakistan with the selected Asian countries (China,
India, Malaysia, Indonesia and Thailand) is not easy as the official poverty methodologies of all
these countries are not consistent to each other. The estimates of poverty are highly sensitive to
the choice of poverty line, its underlying methodology, the threshold level of calorific
requirements, the determinants of the scale of household, spatial and regional prices or
consumption patterns. There is no recent statistics available over these countries; however, the
Economic and Social Survey of Asia and Pacific (ESCAP), 2010 has provided the statistics ofpoverty and inequality for all the selected countries including Pakistan except Malaysia.5 For
Malaysia, the data from Economic Planning Unit are used. As shown in Table 3.6, all the selected
five Asian countries (China, India, Malaysia, Indonesia and Thailand) and Pakistan have made
significant progress in reducing their headcount poverty rates. The median average poverty rates
in the all six countries declined from 47.5 percent in 1990 to 18.7 percent in the mid-2000s. The
decline in poverty rate was sharpest in China, Indonesia, Malaysia and Thailand (Table 3.6). The
official statistics of these countries also have revealed the similar trends of poverty during the
current decade. For example, both China and India have succeeded to reduce their headcount
poverty rates in both urban and rural areas since 1980s.6A similar trend can be seen in Malaysia
where around half of the countrys households were living below the national poverty line up to
5According to ESCAP, a poor is defined as individuals consuming less than $1.25 (adjusted by PPP) per day.6For China, see National Bureau of Statistics, China, September, 2004. For India, see SAARC Report, 2007/08.
Table 3.6: Headcount Poverty Rates in Selected Asian Countries, 1990-2005
Country Period Initial Final
China (rural) 1990-2005 74.1 26.1
China (Urban) 1990-2005 23.4 1.7
India (rural) 1990-2005 55.6 43.8
India (urban) 1990-2005 47.5 36.2
Indonesia (rural) 1990-2005 70.5 24.0
Indonesia (urban) 1990-2005 62 18.7
Malaysia* 1990-2007 17.1 3.6
Malaysia (Urban)* 1990-2007 7.5 2.0
Malaysia (Rural)* 1990-2007 21.8 7.1
Pakistan 1990-2005 64.7 22.6
Thailand 1990-2005 17.2 0.4
Average (median) 47.5 18.7
Source: UN Economic and Social Survey of Asia and Pacific (ESCAP), 2010*Source: Economic Planning Unit, Malaysia
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1970. In the following three and a half decades, rapid economic growth and structural changes
have transformed Malaysia into a prosperous, urban, and industrialized economy. By the end of
the century, Malaysias poverty rate had fallen below 10 percent and in 2007 to less than 5 per
cent (UNDP, 2008).7Indonesias poverty fell significantly during 197696. In 1998, the poverty
incidence shot up due to the 1997 Asian financial crisis. The poverty incidence increased from16.7 percent in 2005 to about 17.8 percent in 2006 due to the surge in rice prices (World Bank,
2006b). The incidence resumed a downward trend when the rice prices subsidized and the safety
nets were put in place. In 2008, the poverty incidence was counted as 15.4 percent, which is still
far from the ambitious target of 8.2 percent set for 2009 in Indonesia's Mid-Term National
Development Plan 20042009 (Heriawan, 2008).
One common characteristic among the selected countries and Pakistan is that the poverty is
largely a rural phenomenon. Urban poverty is almost non-existence in China and Malaysia. For
India, Indonesia and Pakistan, higher rural poverty persists but relatively with less gap than the
former twos. However, no uni-directional movement of headcount ratio has been observed in
Pakistan while comparing it with the other selected countries. The five selected countries havewitnessed a decline in poverty over last two decades, while in Pakistan, poverty based on the
official line has been fluctuated since 1990. The other selected countries noticed a decline in
poverty in both urban and rural areas; whereas in Pakistan, it declined mainly in urban areas, the
rural poverty remained at the high level.
3.5 Comparison of Inequality
All selected Asian countries have enjoyed respectable growth during the last quarter century;
however, inequality remains an issue. Table 3.7 shows the Gini-coefficient and the ratio of the
consumption or income share of the top 10 percent to the bottom 10 percent of the population
among the selected six East and South Asian countries. Gini-coefficients show that both India and
Indonesia witnessed a higher inequality, while it declined in other countries (China, Malaysia andThailand) including Pakistan. There is more reduction in the value of Gini-coefficient in Malaysia
as compared to the other countries. Across the region, there is higher inequality in rural areas of
China, while India and Indonesia have more inequality in urban areas. As discussed earlier,
Pakistan also has more inequality in its urban areas. The ESCAP report (2010) shows that
inequality rose in both rural and urban areas of China, India and Indonesia.
The ratio of the bottom 10 percent to top 10 percent also indicates the presence of inequality in all
the selected countries. Since the household surveys differ in method and type of data collection
across the countries, the cross-country comparisons should be made with caution. A cross-
comparison in Table 3.7 shows that during the selected period (initial and final), the share of
bottom 10 percent population in total income or consumption has improved in China, Malaysia,
Pakistan and Thailand; whereas it declined for India and Indonesia. In India, the overall
inequality appears to be static since the mid-1980s; both poverty and inequality declined in urban
and rural areas during the pre-reform period (1983-94). After the post reform period (1993-2005),
the country has had a faster growth; however, this faster growth could not be translated into faster
7UNDP, 2008, Malaysia, Measuring Poverty and Inequality.
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reduction in poverty, suggesting that the overall distribution has worsened at the lower tail
(Osmani, 2008). There is rising disparity across the households and regions in terms of
consumption, income, asset holding as well. The social hierarchy system (Hindu Varna system) is
the root cause of this social and economic inequality (Hirashima, 2009).
3.6 Status of Achieving Poverty-Related MDG Targets in Pakistan
The Government of Pakistan has endorsed the Millennium Development Goals (MDGs) and has
set the target of halving poverty from its 1990/91 level of 26.1 percent to 13 percent by 2015.
This commitment of government has been fully reflected in its MTDF (2005-10), PRSP-II (2009-
10) and Vision 2030. MTDF and PRSP targets have been aligned with the MDGs. The poverty
related goal has been measured in Pakistan by three indicators: reduction in headcount ratio,
reduction in the proportion of underweight children of age 5 and reduction in the proportion of
population below minimum level of dietary energy consumption (Table 3.8).
Table 3.7: Gini-Coefficient, Inequality in Income or Expenditure in Selected Countries
Indicators
China India Indonesia Malaysia Pakistan Thailand
2001-07 1999-07 2002-07 1997-07 1998-07 2000-07
Initial PeriodPoorest 10% 1.8 3.9 3.6 1.7 3.7 2.5
Richest 10% 33.1 27.4 28.5 38.4 28.3 33.8
Ratio of Richest 18.4a 7b 7.8b 22.1a 7.6b 13.4b
Gini Index (overall) 44.7 32.5 34.3 49.2 33 43.2
Final Period
Poorest 10% 2.4 3.6 3 2.6 3.9 2.6
Richest 10% 31.4 31.1 32.3 28.5 26.5 33.7
Ratio of Richest 13.2b 8.6b 10.8 b 11 a 6.7b 13.1b
Gini Index (overall) 41.5 36.8 39.4 37.9 31.2 42.5
a. income shares by percentiles of population, ranked by per capita income.b .expenditure shares by percentiles of population, ranked by per capita expenditure.Note:The value of Human Development Index (HDI) have been calculated from life expectancy at birth, meanyears of schooling, expected years of schooling, gross national income (GNI) per capita Source: Human Development Reports, various editions, UNDP.
Table 3.8 : Pakistan: Millennium Development Goal related to Poverty
Indicators 1990/91 2005/06
MTDF
Target
2009/10
MDG
Target2015
Current Status
(2008-09)
Proportion of population below thecaloric based food plus non-food
poverty line
26.1 23.3 21 13Lag (Worsened
since 2006)
Prevalence of underweight childrenunder 5 years of age
40 38 28
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The country was on the track to achieve MDG poverty related targets up to 2006 when a sharp
reduction in poverty was witnessed during the 2000-2006 period in both rural and urban areas.
However, at present, the ground realities and official estimates reveal that it is difficult to achieve
the goals of PRSP and MTDF by 2010 and MDGs targets by 2015. First, in 1990/91, the base
year for the MDGs, the incidence of poverty was 26 percent, which, because of low growthepisodes, increased to 34.5 percent in 2000/01. The sharp increase in poverty of about 9
percentage points occurred between 1996/97 and 2000/01 period. The reduction in poverty by
more than 11 percentage points between the 2000/01 and 2005/06 period has only offset the
earlier rise in poverty.
Second, though no recent poverty numbers are available, as discussed earlier, the economy has
lost its growth momentum since 2008 and poverty is likely to have increased. Furthermore, the
most recent catastrophic floods led to huge financial and life losses by affecting about 20 million
population directly and much larger number of population indirectly.
The MDG 1 also deals with the prevalence of underweight children and the population below the
minimum dietary energy consumption levels. Both these indicators are also linked to the overallpoverty situation. Pakistan is also lagging in these indicators (Table 3.8); therefore, it is most
likely that the MTDF and MDG target for the Goal 1 (reduction in hunger and poverty) will not
be met. High sustained economic growth is required for achieving the target of reduction in
poverty, according to the MDG Report 2010 (GoP, 2010).
3.7 Poverty-Inequality Nexus
All the East and Southeast Asian economies have succeeded in reducing poverty, but inequality
remains an issue in all these countries except Malaysia. A similar paradoxical situation is present
in Pakistan where it is hard to find out a relationship between poverty and inequality. During the
first half of last decade (2000-2005), both the consumption and income inequality moved in a
direction opposite to changes in overall poverty inequality increased when poverty declinedduring the 2000-2005 period. Gini-coefficient shows a rise in inequality in both urban and rural
areas, while the headcount ratio shows a decline in poverty in both urban and rural areas.
However, the consumption share of top 20 percent and bottom 20 percent population, which
measure the gap between rich and poor, shows that overall inequality increased primarily due to
its rise in urban areas while it declined in rural areas. It indicates an uneven growth in
consumption by quintile. In other words, consumption increased faster for top 20 percent of the
population (richest) as compared to the growth rate of bottom 20 percent (poorest).
A similar situation was found during the 1990s, when overall consumption inequality increased
between 1992/93 and 1998/99(FBS, 2001; World Bank, 2002 and Anwar, 2005). During this
period, the urban inequality rose while the poverty in urban areas remained almost the same; therural inequality declined while poverty rose in rural areas. Between 1998/99 and 2001/02, the
inequality has a negative association with poverty as poverty rose in this period in both urban and
rural areas, while inequality declined in terms of Gini-coefficient and the ratio of top 20 percent
to bottom 20 percent (Table 3.9).
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3.8 Growth-Poverty-Inequality Nexus
The rise in inequality weakens the poverty reduction effect of economic growth. Income
inequality and poverty affect each other directly and indirectly through their link with economic
growth.8As shown in Figure 3.1, some of these links can be explored separately, but often ones
influence causes an indirect effect on the other. For instance, inequality can indirectly influencepoverty as inequality affects growth and growth in turn influences poverty. Small changes in
income distribution can have a large effect on poverty (Jamal, 2006). The cross-country studies
have shown that stable inequality within country over time is not sufficient to make a significant
difference in poverty reduction (Deininger and Squire, 1998). Moreover, greater initial income
inequality reduces future growth even after controlling for initial levels of GDP and human
capital (Bridsall, et al. 1995). Thus, low inequality can benefit the poor in two ways: by
increasing overall growth and average incomes and by letting them more share in that growth
(Knowles, 2001).
The relationship between growth, poverty and inequality is complex and multi-dimensional, and
this complexity holds in Pakistan as well as other developing countries of the region. The recent
and past trends of growth, poverty and inequality in Pakistan show that the average growth rate
during the 1960s was 6.8 percent per annum (Figure 3.2); however, both poverty and income
disparities rose during this period as this growth was mainly due to easy access to foreign aid,
8Knowledge about the links between non-income inequality and poverty remains very limited. The studies that do existgenerally focus on the effect of non-income inequality on income rather than other dimensions of poverty and suggestthat income inequality also acts as a proxy for asset inequality.
Table 3.9. Pakistan: Gini-Coefficient by Regions and Overall, 1992/93 - 2005/06
Year FBS (2001) World Bank (2002) Anwar (2005)
Overall
1992-93 0.2680 0.276 0.3937
1993-94 0.2709 0.276 0.3864
1998-99 0.3019 0.296 0.4187
2001-02* 0.2752 - 0.4129
2005-06* 0.3018 - -
Rural areas
1992-93 0.2389 0.252 0.3668
1993-94 0.2345 0.246 0.3647
1998-99 0.2521 0.251 0.3796
2001-02* 0.2367 - 0.3762
2005-06* 0.2462 - -
Urban areas
1992-93 0.3170 0.316 0.39701993-94 0.3070 0.302 0.3685
1998-99 0.3596 0.353 0.4510
2001-02* 0.3227 - 0.4615
2005-06* 0.3490 - -
*Based on Economic Survey of Pakistan
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Figure 3.1: Relationship between Inequality, Poverty and Growth
Source:Naschold (2002).
exchange rate was kept overvalued and this growth promoted industrial rent-seeking elite only.
The decade of 1970s witnessed a sharp decline in economic growth, recoded as only 4.8 percent
per annum; however, urban poverty and inequality declined during this period. Again, the high
growth performance was observed during the 1980s (6.5 percent on average). Although, growth
in the agriculture sector remained sluggish (around 3.6 percent), the industrial sector posted a
healthy average annual growth of more than 8 percent. The services sector also grew strongly in
the 1980s, led by ownership of dwellings, transportation, storage and communication and
wholesale and retail trade. The inflow of foreign remittances increased sharply during the 1980s
(GoP, 2009). Both the rural and urban poverty declined from 30.6 percent in 1980 (25.9 percent
in urban and 32.5 percent in rural areas) to 22.1 percent in 1988 (18.6 percent in urban and 24.6
percent in rural areas). However, inequality did not decrease rather it witnessed a mild increase.
The growth performance of Pakistan during the 1990s was not encouraging; rather it is shown as
the lost decade. Beside political instability, many other factors contributed in the low economic
performance, including deteriorating law and order, economic sanctions in the wake of nuclear
testing, persistent drought conditions, and infrastructure bottlenecks such as inadequate power
supply with frequent power outages in the industrial areas, and lack of public facilities at optimal
levels (Haq et al., 2007). The persistence of large fiscal and current account deficits and the
Inequality
Poverty Growth
a b
c
6.8
4.8 6.5
4.6
6.2
3
0
2
4
6
8
1960s 1970s 1980s 1990s 2001-06 2007-10
Figure 3.2: Pakistan: Real GDP Growth, 1960-2010
(%, average)
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associated buildup of public and external debt emerged as the major source of macroeconomic
imbalances during the 1990s (Din, 2007). As discussed earlier, that both poverty and inequality
increased during 1990/91 and 1998/99 period, while inequality moved to opposite direction of
poverty during 1998-2001 when poverty rose and inequality declined.
During the first six years of 2000s when the Government of Pakistan launched its PRSP
programme, the growth performance was impressive, about 6.2 percent per annum on average,
matching the growth of 1980s. Fiscal deficit was reduced and debt ratios witnessed an
improvement with stable exchange rate and rising foreign reserves. As discussed earlier, the
poverty declined by 12 percentage points in five years (2000/01 and 2005/06). However, Pakistan
could not succeed in reducing inequality during the fast growth periods when poverty reduced
sharply. It suggests that growth may take much longer period to trickle down to the poorest of the
poor.
4. Government Policies/Initiatives for Reducing Poverty and Inequality
4.1 Government Past Policies
Pakistan has a long history of poverty reduction policies including the Social Action Program of
the 1990s, which did not bring about the desired change in social indicators. The government
took a serious view of the rise in poverty during the 1990s, and launched the Interim Poverty
Reduction Strategy Paper (IPRSP) in November 2001 focusing attention on the primary objective
of reducing poverty and restoring economic stability. The full PRSP that was launched in
December 2003 for three years outlined a well-structured strategy for poverty reduction, with four
pillars addressing different aspects of poverty: high economic growth; governance and
consolidating devolution; investing in human capital; and bringing the poor, vulnerable and
backward regions into mainstream of development, and to make marked progress in reducing
existing inequalities. To ensure the availability of resources, the government was under obligationto protect PRSP expenditures at around 4 percent of the GDP.
For the revival of economic growth, the PRSP-I (2003-06) identified five major areas, namely,
agriculture, small and medium enterprises (SMEs), housing and construction, information
technology and telecommunication and exports. It is well established that poverty is highly
conditioned by the governance factors. To improve the governance, several steps were initiated in
the PRSP-I including the devolution of power to the grass roots level and decentralization of
administrative and financial authority. The PRSP-1 also focused on education, health, nutrition,
population programs, water supply and sanitation, employment and gender related reforms. To
transfer income to the poor, several targeted programmes including Zakat, Bait-ul-Mal and
microcredit were also part of the PRSP-I.The PRSP-I envisages that all these measures will help revive economic growth and will reduce
poverty in the medium-term. Results point to the right direction. The reforms led to improved
economic indicators, moving real GDP growth from 3.1 percent in 2001/02 to 9.0 percent in
2004/05 surpassing PRSP targets for the said years and maintaining a striking average growth rate
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of 7.0 percent over the four years period (2003/04 2006/07). As reported earlier, poverty
reduced sharply during the PRSP-I period.
After the completion of PRSP-I, PRSP-II was launched for the period of 2008-12.The Strategy is
built upon nine pillars: (i) Macroeconomic Stability and Real Sector Growth; (ii) Protecting the
Poor and the Vulnerable; (iii) Increasing Productivity and Value Addition in Agriculture; (iv)
Integrated Energy Development Programme; (v) Making Industry Internationally Competitive;
(vi) Human Development for the 21stCentury; (vii) Removing Infrastructure Bottlenecks through
Public Private Partnerships; (viii) Capital and Finance for Development; and (ix) Governance for
a Just and Fair System.
Targeting the poor and vulnerable, which has been integral component of both PRSP-I and PRSP-
II, includes some narrowly targeted interventions of the government to transfer benefits directly
to the poor. However, the extent of benefits to the poor from targeted programs has always been
in some doubt. Few programs have been reviewed here. The amounts transferred under these
programmes and their beneficiaries are given in Table 4.1.
Benazir I ncome Support Programme (BI SP)
With a view to cushion the sharp rise in oil and food prices, the BISP was launched in 2008 to
provide cash assistance to the identified vulnerable and enabling them to exit the vicious cycle of
poverty in the shape of the cash grant of Rs. 1,000 per month. This strategy also includesimparting training to one member of each vulnerable family to sustain it. This programme has
aimed to cover almost 15 percent of the total population or 40 percent of the poor (GoP, 2010).
Punjab Food Support Scheme (PFSS)
Like BISP, PFSS was initiated by the Government of Punjab in 2008 to provide food stamps for
the poorest households with a cash grant of Rs. 1,000 per month per household. This programme
Table 4.1: Pakistan: Direct Transfers and Beneficiaries
Social Protection2008/09 2009/10
Expenditures
(Rs. million)
Beneficiaries
(000)
Expenditures
(Rs. million)
Beneficiaries
(000)
Budgetary Transfers
BISP 15,800 1,760 32,000 2,290
PBM (all Programmes) 3,432 1,159 2,261 2,110
Punjab Sasti Roti 1,900 - 8,000 -
Non-Budgetary Transfers
Zakat (all Programmes) 2,877 1,085 2,874 1,289
EOBI 5,787 290 6,442 310
WWF 2,087 63 2,432 70
Microfinance 28,6691,939,050
(loans)33,775
1,966,457(loans)
Total(excluding microfinance)
31,880 4,357 54,010 6,070
Source: PRSP, Annual Progress Report, 2010, Finance Division
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account and fiscal deficits, the following are the major barriers for sustained growth and poverty
and inequality reduction.
4.2.1. Law & Order and Governance
The rising militancy during the last few years has adversely affected every Pakistani by creatingan overall uncertainly which led to capital flight, lower investment, and decline in FDI. It has also
limited the government capacity to spend on pro-poor expenditures due to a massive spending on
anti-terrorism campaign during the last four years. The institutional dimensions of governance
uncover a negative and significant association between rule of law and poverty (Haq et al., 2007).
At present, the state of governance in Pakistan is a serious impediment in the way of growth and
poverty reduction efforts. Global Competitiveness Index (GCI) is a comprehensive measure of a
nations competitiveness based on 12 indicators: Pakistans overall ranking deteriorated in last
few years; it was 91 out of 125 countries in 2004/05 and it went up to 123 out of 139 countries in
2010/11. As shown in Table 4.2, the problematic factors for doing business in Pakistan are
corruption, government instability/coups, policy instability, inflation, inefficient government
bureaucracy, and crime and theft. However, Pakistan has significantly improved in judicialindependence. Corruption has been adversely influencing the economic activities and resource
management. The latest transparency survey (2009) assigns Pakistan a score of 2.4 out of 10 and
ranks it 139thout of 180 countries.
4.2.2. Education, Technology and Health
At the macro level, the share of high technology intensity product in Pakistan is small. As per
Global Competitiveness Report 2010/11, Pakistan ranks 76 th on the innovation index out of 139
countries, reflecting a poor level of innovation. Pakistan is hardly spending its 2 percent of GDP
on education (World Economic Forum, 2010).
At the micro level, the incidences of poverty are highly linked with the literacy and educational
attainment of household heads. In the Pakistan Poverty Assessment (PPA), education was found
to be the most significant factor distinguishing the poor from the non-poor. These educational
differences also explain the poverty gaps between the rural and urban areas, consistent with the
idea that literacy is likely to have higher returns in urban areas (Jafri, 1999 and World Bank
Table 4.2: Pakistan: Governance Indicators, 2010
Indicators Index
Judicial independence 74/139
Irregular payments and bribes 117/139
Property rights 107/139
Favoritism in decisions of government officials 87/139
Business cost of terrorism 138/139
Organized crime 127/139
Source: Global Competitiveness Report: 2010-11
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2002). Education and skill levels are directly related to employment. The poor usually have low
levels of skill and can only find employment in low-paid jobs.
Health has commonly been related to the incidences of poverty and change in poverty status
(Hussain, 2003). Unfortunately, the Government of Pakistan has not been successful in allocating
sufficient resources for the health sector, as it is stagnant on only 0.6 percent of GDP. Most of the
poor households suffer from ill health and are forced to bear the high cost of medical treatment.
Illness is often a catalyst in pushing households deeper into poverty and, thus, ill health and
poverty are linked in a vicious cycle.
4.2.3. Landlessness, Farm Assets and Tenure Patterns
The ownership of land is highly unequal in Pakistan, which is one of the major barriers to poverty
and inequality reduction in rural areas. Less than half of all rural households own any agricultural
land, while the top 2.5 percent of households account for over 40 percent of all land owned
(Gazdar 2004; World Bank 2002). Within the rural areas, Malik (2005) found relatively higher
land inequality in poor districts located in the cotton-wheat belts of southern Punjab and Sindh.
Land is often sold to cover urgent consumption needs, marriage expenditure, and health
expenditure. This depletion of productive assets has an adverse impact on the poor in terms of
their future stream of income, and reduces their probability of escaping poverty (Hussain, 2003).
Gazdar (2004) also observed the unequal distribution of farm asset ownership (other than of land)
among cultivating households. Even though the incidence of sharecropping has declined over
time, there are still many rural households that cultivate land as share-tenants and poverty is
higher among them (Anwar, et. al. 2005; SPDC 2004; and World Bank, 2002).
4.2.4. Power Structures in Rural Areas
The civil and military bureaucracy, political and religious forces, landed rural elites, and caste,
biraderi (clan), and ethnicity are among the most important pillars of the prevailing powerstructure in Pakistan (Hooper and Hamid, 2003). The highest and persistent levels of poverty
occur in those rural areas of Pakistan which are traditionally considered feudal, such as rural
Sindh, southern Punjab, and the tribal areas of Khyber Pakthunkhawa (KPK) and Balochistan. In
rural areas, landed elites have a decisive influence not only on the social and economic life of
residents, but also on local, as well as central and provincial decision-making power. Size of
landholding is regarded as directly proportionate to power, and the landed elites in Pakistan enjoy
more power than its Indian counterpart. The dependency of the poor on local power structures
takes a variety of forms. Distortions in the input and output markets functioning against the poor
tend to generate poverty in rural areas (Hussain, 2003). Tenants as well as small farmers who
cultivate their own land, generally have to pay relatively high prices for inputs while receiving
relatively low prices for outputs as compared to large farmers. At the same time, the lack of
access to formal credit markets often forces poor tenants to borrow from their landlord. This
generates a form of bonded labor and tenants are sometime obliged to work on their landlords
farm at less than market wage rates or even without wages (Arif, 2004; and Hussain, 2003).
Landlords may also exert control over watercourses, which influences their relationship with their
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tenants because it provides the former with absolute control over cultivation (Hooper and Hamid,
2003).
4.2.5. Doing Business in Pakistan
The World Bank report of Doing Business 2011 shows that doing business in Pakistan is quitedifficult, the rank of Pakistan for ease of doing business is 83 out of 183 (World Bank, 2011).9
The cost of starting business is significantly above those observed in South East and East Asian
countries with a rank of 85thout of 183 countries. Similarly, in case of Enforcing Contract cost
is also very high in Pakistan. It also ranked lower in terms of registering property in 2011. Getting
credit has also become more difficult in Pakistan; if the government does not introduce reforms
particularly in employing worker, paying taxes, and enforcing contract, thenit would not
attract investment, which is necessary for high growth and poverty reduction.
4.2.6. Poor Infrastructure
Qayyum et al. (2007) consider that quality of infrastructure in Pakistan is not a binding constraint
as indicated by Global Competitiveness report 2006/07 that is 3.4 and is equivalent to that ofChina (a high growth performer), and is better than that of Indonesia and India.10However, the
recent Pakistan score declined to 2.8 as compared to India with 3.5, Indonesia with 3.6 and China
with 4.4.
4.2.7. Regional Inequality in Public Provision and Infrastructure
Public provision of social services plays important role in the capabilities development and leads
to decline in income poverty. Similarly, social overhead capital is a necessary input in the
structure of production and poverty reduction (Hirschman, 1958). If inequality between provinces
and districts rises above a certain threshold, it can trigger a violent conflict which, in turn, can
lead to decades of reduced growth and rising poverty (World Bank, 2006c).
As shown in Table 4.3, there is higher inequality across the provinces in terms of physical and
social infrastructure. The Punjab province has better ranking, while the two provinces, KPK and
Baluchistan are poor by all infrastructure indicators. Even within Punjab and Sindh, the rural
9There are 183 countries included in Doing Business Report (2011), and if best rank in doing business is one and worstrank is 183th. So 83thshows that Pakistan lies in the middle of the world in doing business.10General Infrastructure (1= underdeveloped, 7=as extensive and efficient as the worlds best) Score for other countries:
Indonesia (2.5), India (3.3), China (3.4), Thailand (5.0), Korea (5.1), Taiwan (5.4), Malaysia (5.7), and Hong Kong(6.4).
Table 4.3: Pakistan: Infrastructure by Provinces
Province
Physical Infrastructure Soft Infrastructure
Distance to
Metal road
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Sindh and southern Punjab have poor level of access to physical and social infrastructure as
compared to the northern and central Punjab. These infrastructural differences across the regions
explain the poverty and inequality differences as the regions with poor level of infrastructure have
comparatively less social and economic integration in terms of diversified resources, human
capital, and access to jobs in armed forces (Arif et al., 2011). The recent flood has also affectedthe poorest regions of Pakistan, southern Punjab and rural Sindh and has pushed many non-poor
households into poor category and many poor stuck into long-term poverty (Arif et al., 2010).
4.2.8. Limitations in Social Protection and Social Safety Net Programmes
The Government of Pakistan has been allocating a fair amount for social safety net programmes.
All these programmes directly intervene to transfer resources to the marginalized segment of the
society so that they can stand on their own two feet and become economically self-sufficient.
However, the efficient utilization of these funds by targeting the poor and vulnerable is a debated
topic in Pakistan. Moreover, the transfer programmes are not sufficient to meet the demand of the
poor.
4.3. Government Medium-Term Policies and Plans
The Medium-Term Development Framework (2005-10) and PRSP-II (+2008-11) have given the
medium-term policies and plans in the light of long-term development framework of Vision 2030.
Both the MTDF and PRSP advance the agenda for pro-poor economic growth by allocating
adequate resources for sustainable human development where the targets have been aligned in the
line of MDGs. To fulfill this commitment, the government has settled the issue of distribution of
resources among the provinces by freeing the resources toward provinces in 2010. It will enable
the provinces to meet their obligations by raising spending on both social and economic sectors
and creating opportunities for the deprived and vulnerable peoples.
A summary of the macroeconomic targets is given in Table 4.4. The economy is projected to
grow between 7.2 percent and 7.5 percent by 2010/11, supported by strong growth in agriculture,
Table 4.4: Pakistan: Macroeconomic Indicators/ Targets (PRSP-II)
Macroeconomic Indicators (Base case Scenario)
Items 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11
Real GDP Growth (%) 6.6 7 7.2 7.1 7.3 7.5
Agriculture 2.5 4.5 4.4 4.5 4.3 4.4
Manufacturing 8.6 10.5 11.2 11.8 11.7 12.1
Inflation (CPI based) 7.9 6.5 5.5 5 5 5
Investment (% of GDP) 20 20.5 21 21.7 22.2 22.8
National Saving (% of GDP) 15.6 16.1 17 17.9 18.6 19.4
Trend in Public Finance
Fiscal Deficit (Rs. billion) -45.6 36.5 80 140.5 209.4 -
Public Debt ( % of GDP) 56 50.6 46.4 43.3 40.1 -
Trend in Balance of Payments
Worker Remittances (S million) 4,600 5,500 6,200 6,400 6,700 6,950
Current Account ( % of GDP) -4.4 -4.4 -4 -3.8 -3.6 -3.4
External Debt ( % of GDP 28.9 27 25.5 24.3 23.1 21.9
Export Growth (%) 13.8 10 12 13 14 15
Import Growth (%) 31.4 11 10 10.5 11 11
Source: Poverty Reduction Strategy Paper-II, 2008-12
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manufacturing and services sectors. In order to achieve these growth targets, the overall projected
investment is 21 percent to 22.8 percent of the GDP. National saving is targeted as 17 percent to
19.4 percent of GDP for the same period and current account deficit is in the range of 3.4 percent
to 4 percent of GDP. Fiscal development is considered the key element of obtaining the stability.
The overall budget deficit is targeted to be reduced from current level of 4.2 percent of GDP to3.3 percent of GDP by 2010/11. On the external side, the projected trade gap is in the range of $9-
11 billion and current account deficit in the range of $ 6-7 billion.
The PRSP has a rolling strategy, which identifies the required resources in according to national
objectives and in the context of fast changing global economic developments. Table 4.5 shows
the projected government expenditure on 17 budgetary pro-poor sectors under 5 broad headings
for 2010/11 2012/13 period. According to the Fiscal Responsibility and Debt Limitation Act
(FRDLA), 2005, the social and poverty related expenditures are not to be reduced below 4.5
Table 4.5: Pakistan: Projected PRSP Budgetary Expenditures (2010/11 - 2012/13)
2010/11
2011/12
2012/13
Expenditure Rs million % of GDP Rs million % of GDP Rs million % of GDPDevelopment 347,649 2.20 436,049 2.46 554,165 2.78
Current 701,039 4.43 859,482 4.85 1,060,813 5.33
Total 1,048,688 6.62 1,295,531 7.31 1,614,978 8.12
Market Access and Community Services
Roads, Highways &Bridges
75,426 0.48 97,003 0.55 125,341 0.63
Water Supply &Sanitation
13,407 0.08 16,492 0.09 20,384 0.10
Human Development
Education 348,782 2.20 471,338 2.66 639,956 3.22
Health 88,244 0.56 126,563 0.71 182,378 0.92
Population Planning 5,087 0.03 5,746 0.03 6,521 0.03
Rural Development
Agriculture 132,360 0.84 161,343 0.91 197,599 0.99Land Reclamation 3,869 0.02 4,759 0.03 5,882 0.03
Rural Development 13,356 0.08 15,982 0.09 19,215 0.10
Rural Electrification(People Works
19,096 0.12 22,423 0.13 26,4540.13
Safety Nets
Subsidies 178,343 1.13 178,343 1.01 178,343 0.90
Social Security &Welfare
93,197 0.59 104,225 0.59 117,106 0.59
Benazir IncomeSupport Programme
59,654 0.38 66,713 0.38 74,9570.38
Others* 33,542 0.21 37,512 0.21 42,148 0.21
Governance
Administration of
Justice7,930 0.05 9,312 0.05 10,986 0.06
Law & Order (Current& Development)
41,116 0.26 39,084 0.22 37,327 0.19
Total PRSP 1,048,688 6.62 1,295,531 7.31 1,614,978 8.12
*This includes (i) Labour Welfare Measures; (ii) Social Welfare Measures; (iii) Welfare of Pakistanis Abroad;(iv) Population Welfare Measures; (v) Others (Distribution of Winter clothes); (vi) BISP; (vii) PPAF; and (viii)Pakistan Bait-ul-Mal (other than Food Support).
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and current account deficit are also rising. Another misfortune is the stagnant development
expenditures which, on average, are low (3.5 percent of GDP) during the current decade
compared to the 1980s and 1990s. After launching the MTDF and PRSP-II, the proportion of
development expenditure, by and large, declined, meanwhile the current expenditure rose.
The UNDP and Ministry of Finance have prepared a joint report for the Millennium
Development Goals (MDGs) Costing in (2007)11for three social sectors education, health
and water and sanitation to achieve the MDGs.12 The gaps for each activity have been
reported for the entire country. As shown in Table 4.7, the allocation of resources under
PRSP is not sufficient to meet the MDG targets. The government is already facing the
financial constraints as the PRSP data show that relatively fewer amounts have been spent
than the projected.
The government is facing severe issues of revenue generation and is highly dependent on
borrowing from the central bank and from external resources including the IMF. The intense
borrowing from the central bank may force a reversal in current tight monetary policy stance
of the central bank with adverse implications for inflation, particularly the food inflation,
which has eroded the purchasing power of poor. Similarly, the government has to remove a
number of subsidies under the IMF Standby Agreement (SBA) at the wrong time.
The external financial flows also exhibit instability by worsening the trade balances due to
weak export base with higher imports. Pakistan's exports are dominated by textiles and
clothing and the rising input costs in recent years has eroded Pakistan's competitiveness.
Global competitive pressure is posing major challenges for developing countries, for which
our main exporting sectors such as textiles and clothing are not fully prepared. The rising
international oil prices have also threatened the balance of payments position with
depreciation in exchange rate. A comprehensive approach is required to improve export
competitiveness.
One important aspect that has severely affected the development is the role of Pakistan in the
Waron Terror. It has sustained immense socio-economic costs by diverting resources from
11Estimating the Cost to achieve MDGs in Pakistan UNDP & Finance Division, Islamabad (2007).12The initial costing parameters were determined through a consultative process during December 2005 to August2006. However, assumptions, including the financial prices, made over two years remain valid. Expenditure incurred in2007/08 has been updated with current GDP at market cost as a result of which future projections have been readjusted.
Table 4.7: Pakistan: Proposed PRSP Allocations, MDG Costing Estimates and Resource Gap
(2009-11)
SectorPRSP Allocations
(Rs million)
MDG Costing Estimates
(Rs million)
Resource Gap
(Rs million)
Education 804,950 880,261 -75,311
Health 194,295 305,759 -111,464
Water supply &sanitation 33,484 172,268 -138,784
Total 1,032,729 1,358,288 -325,559
Source: Estimating the Cost to achieve MDGs in Pakistan, UNDP & Finance Division, Islamabad (2007)& PRSP Secretariat, Finance Division, Government of Pakistan.
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public development to law enforcement. Besides massive human losses resettlement
suffering; it has contributed to capital flight, and limited the FDI and other investment
opportunities particularly in FATA and KPK. The estimated cost of the War on Terror to
Pakistan was around Rs. 678 billion in 2008/09 which has led to massive unemployment
especially in the affected regions (Table 4.8).
4.5. Role of Donors in Poverty and Inequality Reduction Efforts
As discussed earlier, Pakistan has witnessed healthy economic growth during the periods when
foreign inflows were higher i.e. 1960s, 1980s and during the first decade of current century.
During the last 6 years, Pakistan has faced two biggest disasters of the world in terms of the
population affected, areas, human losses and infrastructure losses: earthquake in 2005 and floods
in July-August 2010. In both the disasters, the foreign donors including international community,
international institutions and NGOs actively participated in affected areas by financially and
materially. With the assistance of local community and government, these donors developed
several clusters in various fields i.e. agriculture under FAO, camp coordination/management,
protection, emergency shelter under UNHCR, community restoration under UNDP, educationunder UNICEF/Save the children, health under WHO, food, information management, logistic
under WFP and nutrition water, sanitation and hygienic under UNICEF. Some donors
participated only in the emergency relief; however, several are still performing to restore the
livelihood of these poor including: on-farm livelihoods, shelter, community restoration,
education, health, restoration of infrastructure and public utilities.
According to the Constitution of Pakistan, the government is responsible to improve the standard
of living of its people. However, the magnitude of available resources is too limited to achieve the
national and MDG targets. At present, the government is catching the foreign assistance to
overcome the saving-investment gap, balance of payment constraints and to overcome the
structural weakness of the economy i.e. poor skills, shortage of capital, power crisis and poverty
(GoP, 2009).
As detailed in Section 3, the government of Pakistan has launched a comprehensive strategy, the
PRSP and MTDF to reduce poverty and inequality by targeting the poor especially in rural areas.
The central voyage of PRSP is based on investing on those activities and programs, which
directly and indirectly benefit the poor population. Therefore, a number of donors including
World Bank, Asian Development Bank, Department for International Development (DFID),
Table 4.8: Cost of War on Terror to Pakistan (Rs. billion)
2004/05 2005/06 2006/07 2007/08 2008/09
Direct Cost 67.1 78.1 82.5 108.5 114.0
Indirect Cost* 192.0 222.7 278.4 375.8 563.8
Total 259.1 300.8 360.9 484.4 677.8
* On account of loss of exports, foreign investment, privatization, industrial output, tax collection, etc.Source: Finance Division, Government of Pakistan, September, 2008.
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INGAD, UNDP, UNFPA, ILO, UNICEF, WHO, JICA, CIDA, USAID, EU, GTZ, NORAD are
actively the part of PRSP in policy designing, implementation, and evaluation (GoP, 2003).
Several donors are chairing and co-chairing various sectors to improve the welfare of the poor i.e.
Water and Sanitation Sector Donor Coordination Group (WSDCG) co-chaired by DFID and
UNICEF.
As shown in Table 4.9, the commitments of foreign economic assistance (excluding Bonds and
IMF) amounted to $39,786 million from 1999-00 to 2009-10. Grants were 21 percent and loans
were 79 percent of the total commitments. Over this period, the bilateral commitments consituted
about 38 percent of the total commitments with the highest commitments were from USA, China,
Japan, Saudi Arabia and UK, while the rest 62 percent were multilateral commitments with
highest commitments were from AsDB, World Bank and, and the Islamic Development Bank
(IDB). The non-project aid commitment was about $20,812 million, which mainly has been
stretched from IDB, IDPs and Tokyo Pledges for Afghan Refugees Relief Assistance,
Commodity Aid, Food Aid, Programme Loans/Budgetary Support, and Short-Term Credits. The
rest project aid includes commitments for the Earthquake Rehabilitation & Reconstruction. Thedisbursements of foreign economic assistance, excluding Bonds and IMF, amounted to $31,368
million with 20 percent share of grants and 80 percent share of loans during the corresponding
period (GoP, 2009a).
4.5.1. Donor-Wise Disbursements
Table 4.10 shows that during the last two years, July 2008 to June 2010 period, the total disbursedamount from multilateral sources was higher than the bilateral sources with 70 percent share of
multilateral and 30 percent share of bilateral sources, respectively. Out of the total bilateral
amount, 43.7 were grants and the rest 53.6 percent were loans. In the bilateral group, major
disbursements were from China ($782.1 million), USA ($614 million), Saudi Arabia ($479.2
million), UK ($286 million) and Japan ($214.5 million). Multilateral agencies disbursing over
$100 million were ADB, IDA, World Bank and IDB.
Table 4.9. Pakistan: Committed and Disbursed Foreign Assistance ($ million)
Commitments of Foreign Assistance Disbursement of Foreign Aid
Year Grant Loan Total Grant Loan Total
1999-00 371.8 1,008.5 1,380.3 292 1,458 1,750
2000-01 247.7 1,388.7 1,636.4 203 1,882 2,085
2001-02 922.3 2,677.7 3,599.9 1,002 1,753 2,755
2002-03 441.3 1,352.6 1,794.0 401 1,520 1,921
2003-04 405 2,070.0 2,475.0 335 1,046 1,381
2004-05 945.7 2,282.2 3,227.9 506 2,216 2,722
2005-06 1,426.7 3,079.8 4,506.5 1,068 2,291 3,359
2006-07 635.3 3,648.4 4,283.7 681 2,700 3,381
2007-08 576.1 3,174.9 3,751.0 574 3,085 3,659
2008-09 609.9 5,778.3 6,388.1 575 4,113 4,688
2009-10 1,606.4 5,137.0 6,743.5 648 3,019 3,667
Total 8,188.2 31,598.0 39,786.3 6,285 25,083 31,368
Source: EAD, Year Book (2009)
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4.5.2. Sector-Wise Disbursements of Project aid
During the past two years, the sectoral-wise project aid shows that an amount of $2,056 million
was disbursed in 15 different sectors with grants amounting to $465.3 million and loans
amounting to $1,591 million (Table 4.11). Sectors claiming more than $50 million were power,
Table 4.11. Pakistan: SectorWise Disbursements of Project Aid during 2008-10 ($ million)
Sector Grant Loan Total
Power 3.3 498.37 501.57
Transport & Communication 26.7 524.97 551.57
Rural Development & Poverty Reduction 21.31 159.38 180.69
Governance, Research & Statistics 127.93 91.01 218.94
Health & Nutrition 42.06 69.39 111.45
Water 52.69 83.19
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