Pakistan has turned around a deteriorating macroeconomic situation to a rapidly improving one. In 2004, GDP grew by an estimated 6.4 percent while inflation remained relatively low at 4.6 percent. These macroeconomic achievements have allowed the country to keep on track towards fiscal consolidation while enabling the government to increase spending on health and education. The government has also launched far-reaching structural reforms to privatize public sector enterprises, strengthen public and corporate governance, liberalize external trade, and reform the banking sector. However, despite these favorable developments, formidable challenges remain. Pakistan still lags behind countries with comparable per capita income in most social indicators. Only 46 percent of Pakistan's population is literate, compared to an average of 63 percent of countries with similar income per capita.
IMF-approved government policies, bolstered by generous foreign assistance and renewed access to global markets since late 2001, have generated solid macroeconomic recovery the last two years. The government has made substantial inroads in macroeconomic reform since 2000, although progress on more politically sensitive reforms has slowed. For example, in the third and final year of its $1.3 billion IMF Poverty Reduction and Growth Facility, Islamabad has continued to require waivers for energy sector reforms. While long-term prospects remain uncertain, given Pakistan's low level of development, medium-term prospects for job creation and poverty reduction are the best in nearly a decade. Islamabad has raised development spending from about 2% of GDP in the 1990s to 4% in 2003, a necessary step towards reversing the broad underdevelopment of its social sector. GDP growth is heavily dependent on rain-fed crops, and last year's end to a four-year drought should support moderate agricultural growth for the next few years. Foreign exchange reserves continued to reach new levels in 2003, supported by robust export growth and steady worker remittances.
Poverty remains a serious concern in Pakistan. With a per capita gross national income (GNI) of US$520, poverty rates, which had fallen substantially in the 1980s and early 1990s, started to rise again towards the end of the decade. According to the latest figures (for 2000-2001), as measured by Pakistan's poverty line, 32 percent of the population is poor. More importantly, differences in income per capita across regions have persisted or widened. Poverty varies significantly among rural and urban areas and from province to province, from a low of 23 percent in urban Sindh to 48 percent in rural Sindh.
Pakistan has grown much more than other low-income countries, but has failed to achieve social progress commensurate with its economic growth. The educated and well off urban population lives not so differently from their counterparts in other countries of similar income range. However, the poor and rural inhabitants of Pakistan are being left behind. For example, access to sanitation in Pakistan is 23 percent lower than in other countries with similar income.
There are also significant gender gaps in both literacy and health status of the population. Gender disparities in education remain significant. While the male population completes an average of five years of schooling, the female population in Pakistan completes only two and a half years. The enrollment rate for boys is 82 percent as opposed to 61 percent for girls. Maternal mortality remains high at 450 per 100,000 live births.
Meeting the vision embraced in the Millennium Development Goals by 2015 (including the reduction of infant and child mortality by two thirds and maternal mortality by three quarters and halving the percentage of the population living in poverty) will require renewed efforts in Pakistan. The World Bank's assistance strategy is based on measurable outcomes using the MDGs as the background for its engagement in Pakistan.
The Country Assistance Strategy (CAS), endorsed by the Bank in 2002, was designed to support Pakistan's reform program, which aimed at engendering growth, reforming governance, creating income-generating opportunities, and improving human development.
The CAS was designed to support Pakistan's pursuit of these goals by strengthening macroeconomic stability and government effectiveness, improving the business environment for growth, and improving equity through support for pro-poor and pro-gender policies. The Bank Group's assistance strategy focuses intently on supporting the government's development strategy and is organized around three mutually reinforcing pillars:
Strengthening Macroeconomic Stability and Government Effectiveness: The Bank is supporting the government's efforts to restore fiscal sustainability, reduce internal and external debt, and improve the competitiveness of the economy. At the heart of the Bank's strategy is a focus on reforms to improve government effectiveness at the federal, provincial, and local levels. To this end, the Bank supports furthering transparency and accountability at different state and federal agencies, as well as institutional capacity building to create the political, economic, and institutional setting for entrepreneurship and markets to flourish.
Strengthening and Enabling the Investment Climate: The Bank Group's assistance to strengthen the investment climate in Pakistan includes a combination of analytical work and financial assistance targeted at key sectors. These include support for deregulation, trade liberalization, tariff reduction, privatization, and reform of the banking sector. In addition, the Bank is supporting investment and reform of critical infrastructure, including water, transport, and energy, to reduce the cost of doing business. The World Bank is working in cooperation with the International Finance Corporation (IFC), its private sector-lending arm, to consider the development of new products to better meet the needs of the private sector, such as long-term finance options for infrastructure and expanded access to financial services to underserved small and medium enterprises.
Supporting Pro-poor and Pro-gender Equity Policies: This pillar of the CAS focuses on promoting education and health, supporting pro-poor rural development and community infrastructure, and supporting targeted poverty alleviation programs.
In education, special emphasis is placed on improving the quality of education and giving priority to the poor and disadvantaged, particularly girls and children in rural areas. In health, Bank assistance is supporting the government's priority of strengthening public health programs in immunization, communicable diseases, and maternal and child health. To this end, the Bank provides analytical work, technical assistance, policy dialogue, and lending as appropriate. One example of the World Bank's engagement in the health sector is a project to prevent the spread of HIV/AIDS to vulnerable populations in the country (more info).
The Bank's assistance for rural sector development emphasizes community-driven projects, such as The Poverty Alleviation Fund (PPAF). This project aims to empower rural and urban poor by providing them with access to resources and services, such as micro-credit and grants for community-driven infrastructure and capacity building. The Bank will continue to pilot new approaches to rural development, particularly through projects that develop access to safe water and sanitation (see box) and through micro-credit initiatives to reduce and mitigate risks for Pakistan's poor.
Emphasizing pro-gender equity policies in Pakistan, future Bank assistance highlights expanded access to quality education and health services for women and children. The Bank Group's assistance follows the overall framework of the Education Sector Reform (ESR), which was launched by the Government of Pakistan in 2001. The ESR foresees the adoption of mechanisms, such as school vouchers, and other subsidies to increase girls' enrollment in school. Some other gender-specific projects may include micro-credit and rural employment schemes, as well as water supply and female literacy programs.