ISLAMABAD, Sept 25: The World Bank has said that a large amount of Pakistan’s budget is devoted to military spending, which is very high by international standards.

In its recently-prepared report “Poverty in Pakistan, vulnerabilities, social gaps, and rural dynamics,” the bank said: “High levels of military spending absorb a significant part of public resources. Even following the substantial reductions in defence spending as share of GDP, 29 per cent of the Pakistan’s budget still remains devoted to military expenditures — a very high share by international standards.”

The report gave fresh details of poverty and weak social indicators in the country. It called for spending adequate resources on social development with a view to improving what it termed very poor social indicators in Pakistan.

In addition, the report prepared for “official use only” said the cost of servicing past borrowing had assumed a growing share of the budget — nearly half in 2000. From 1987 to 1999, the non-interest component of the government budget fell from 22 per cent of the GDP to 15 per cent. Indeed, devising fiscal remedies and securing new financing to enable the government to service its external and domestic debt and to cover its projected deficit have preoccupied recent governments in Pakistan.

Other types of “discretionary” spending, such as public investment, have fared much less badly in the competition for resources. Throughout the 1980s, social spending — comprising largely recurrent spending on items such as teachers salaries, textbooks and medicines — hovered around 2.5 per cent of the GDP, while development spending — largely for public investment or infrastructure such as roads, irrigation and buildings — consumed around seven per cent of the GDP. This relationship was briefly reversed from 1989-1992 when social spending rose to four per cent of the GDP and development spending dropped to around five per cent.

The report said the relative insulation of social spending from downward pressures during this period was largely due to an infusion of $2 billion in external assistance from 1993-98, in support of the Social Action Programme (SAP). Absent this, spending on social services in Pakistan would have declined further. Even with the additional funds, however, the country’s per capita allocation of $2 for health and $8 for education is clearly insufficient and less than the amount envisioned when the SAP was conceived.

Moreover, even after development expenditures had fallen substantially relating to social service expenditure in the 1990, cross-country comparison indicated that social spending still bore the brunt of fiscal adjustments to high interest payments.

The relative lack of attention to social spending in Pakistan has had particular adverse consequences for the poor, since social services tend to benefit the poor disproportionately. For instance, in case of Pakistan, a rough benefit-incidence analysis of public expenditure on education reveals that spending on primary education, in particular, is strong pro-poor. This is however, not the case for spending on secondary and tertiary education, primarily because of the low participation of the poor at such levels.

The report regrets that there is a serious problem of governance in Pakistan. “As the case of Punjab illustrates, mismanagement and implementation failures have exacerbated the ill-effects of scarce allocation for social programmes in Pakistan”. This was also the case for Social Action Programme that was launched in mid 1990’s with the help of donors to improve education and health outcomes in Pakistan. Resources that were allocated to social spending over the past decade were largely used inefficiently, and failed to have a significant impact on a dollar per dollar basis.

“Pakistan in fact exhibits persistent problems in most dimensions of governance that are relevant for sound public spending,” the report said and added that there were leakages, difficulties with bureaucratic structure and quality, weaknesses in the rule of law, and opacity in government decision-making.

It said that efforts to reform the Pakistani economy had also been undermined by related governance issues. Pakistan’s liberalisation efforts in the 1990s were sometimes called into question particularly with regard to their poverty impact.

Although successive governments in the late 1980s and early 1990s introduced extensive measures to liberalise trade in order to encourage export-led growth, implementation of these measures revealed a continued anti-export bias.

Successive rounds of tariff reforms reduced the maximum tariff rate from 225 per cent in 1988 to 45 per cent by 1997 and qualitative restrictions were lifted on 332 of 400 items.

However, the tariff structure continued to be characterized by substantial differences among tax rates. This resulted in large and unpredictable de-facto differences in protection across commercial sectors and activities. For example, imports of plant and machinery competing with the domestic engineering industry were charged a rate of 35 per cent, as compared to the 10 per cent tariff on non-competing capital goods.

“The complexity and non-transparency of tariff regime was further exacerbated by ad hoc exemptions and concessions, which allowed considerable scope for discretion and corruption in custom administration,” the report said.

Accordingly, though the government implemented broad reforms to considerable acclaims, implementation of these reforms undermined their effectiveness — and governance undermined their implementation. “As a consequence, exports rose from approximately 10 per cent of GDP in 1985 to approximately 15 per cent of GDP in 1996, but stagnated and even declined slightly during the remainder of the 1990s,” it added.