ISLAMABAD, April 22: Bureaucratic harassment, problems of law and order, unreliable and expensive electricity and inadequate infrastructure have discouraged investment in Pakistan, says a latest report of the World Bank.

“There is also a risk that the mid-level bureaucracy will sabotage implementation of key reforms,” feared “Pakistan Development Policy Review” of the World Bank.

The report said that Pakistan’s difficult relations with India have been a longstanding source for weakness, and an intensification and prolongation of the current standoff could derail the attempt to control the fiscal deficit, and hurt the investment climate.

The risk that appears to be uppermost in the minds of the private sector, the report said, was that the continuity of policy might be broken after the October 2002 elections for the national and provincial assemblies. Another risk is that the breathing space secured by the Paris Club agreement and exceptional financing from the IFIs might tempt the authorities into postponing the difficult reforms to which they have so commendably committed themselves.

But the World Bank believes that, GoP’s reform agenda embodies a courageous attempt to redress the problems of the past and create a foundation for sustained growth, with reasons (notably the determination to adders the social and gender gaps) to hope that this will be more pro-poor than in the past.

“However, credibility is essential if investment is to rise again, and credibility is attained neither instantaneously nor permanently. The government will need to stay the course, maintain a proper balance between increasing development spending and exiting debt trap, and restoring democracy while trying to avoid the corruption and populism that marred its reputation in the past. so long as Pakistan’s policy-makers pursue that agenda, there is well-founded hope for a better future for its people,” the report added.

The reforms in the past were partial, while corruption and weak institutions did not provide a solid foundation for a market economy. The present government, which took office in October 1999, the report said, had sought to build upon the efforts of its predecessors by launching a comprehensive programme that sought to achieve sustained pro-poor growth by attacking the inter-linked problems of slow growth, the social gap and the heavy debt burden. The policy review describes and evaluates GoP’s policies in the six critical areas that form the core of this agenda: governance, investing in people, macroeconomic sustainability, the financial sector, the investment climate for the private sector, and agriculture and irrigation.

Governance reforms are aimed at addressing four major issues: devolution, civil service reform, reduction of corruption and improvement of financial management, and institution of more realistic and open budget processes. Police and judicial reforms have also been initiated, but are less advanced. The first phase of the devolution initiative was completed on August 14, 2001, with elections held for the sub-provincial union, tehsil and district councils. If the next difficult step from political to fiscal decentralization can be made, and the requisite implementation and monitoring capacity developed, the system has the potential to deliver better local services while opening up political participation to a much wider number of citizens.

So far, civil service reforms have been focused at the federal level, which, even though a small proportion of total public employment, sets the tone for the provinces.

The National Accountability Bureau (NAB) established by the President in 1999 appears to have made a significant impact on the problem of “grand” corruption, but there is some evidence that the general public is not yet convinced of progress, particularly with regard to low-level corruption. Accountability within government has been improved significantly, especially the quality of the federal budget presentation. Planned reforms to the Central Board of Revenue, widely regarded as the most corrupt governmental institution, show considerable promise, with the assessment and collection functions being split and made anonymous.

Interest on public debt, together with defence spending, consumes 70 per cent of total revenues, thus squeezing out development expenditure, including social spending. The debt-to- GDP ratio has risen almost uninterruptedly for the past two decades. The challenge is to move public debt dynamistics to a downward trajectory, thereby improving the investment climate and lowering domestic interest rates, while adhering to the social spending levels. This will demand increased tax revenue, limitation of defence expenditure, reduction of the losses of state enterprises, and containment of contingent liabilities.

The financial sector is dominated by the banking system, where state-owned institutions play a big role, nationalized commercial banks (NCBs) account for some 50 per cent of banking system deposits. Development finance institutions (DFIs) were important suppliers of long-term credit in the past. Non-performing loans are a serious problem, and accounted for 20 per cent of the outstanding advances of NCBs and 60 per cent of those DFIs and socialized banks at the end of 2001. That plus limited competition plus high explicit and implicit taxes on intermediation have resulted in exceptionally high interest rate spreads. The challenge is to clan up the balance sheets of the NCBs and create condition for a modern and efficient banking system, as well as to develop a vibrant capital market.

Agriculture is critical to poverty reduction, because about 80 per cent of the poor live in rural areas. Even though agricultural growth has exceeded the average for low and middle income countries in the 1990s, there is considerable unexploited potential, policy priorities to accelerate agricultural growth centre on markets, technology and water.

Of these, the most progress has been made in liberalizing markets, although there is still scope for further liberalization. Water availability is rapidly becoming a problem not just because of the current drought, but also because of sedimentation of existing dams, aquifer depletion, and growing demand; it will demand a range of responses, including a shift of the cropping pattern to less thirsty crops.

Growing salinity, waterlogging, and untreated waste water demand completion of a national drainage system together with better O&M for the irrigation system, but progress on both construction for the drainage system and devaluation of responsibility from the provincial irrigation departments to local user groups is lagging. Without a renewed commitment to these reforms at the highest level, water and associated drainage issues will become the binding constraint on agricultural growth.