ISLAMABAD, Oct 22: Pakistan’s high debt, low growth and high real interest rate payments of eight per cent are a volatile mix that could lead to explosive debt increases in near future, warns the World Bank.

A World Bank’s draft report, “Poverty in Pakistan, vulnerabilities, gaps and rural dynamics”, obtained by Dawn, believes that Pakistan’s fiscal crisis has captured most of the attention of economic policymakers. In the 1980s and early 1990s, the emerging debt and growth crisis was disguised by substantial external flows.

These flows from international lenders and remittances, dropped off long ago: official remittances from migrant workers declined from over 10 per cent of GDP at their peak in 1983 to 2.3 per cent by 1996, creating the crisis atmosphere now surrounding the national debt. However, the newly emergent crisis atmosphere surrounding debt is matched by the chronic, but more silent crisis of the growing social gap.

The government is said to have strongly objected to the draft report as being bias and controversial and has asked the World Bank authorities to rectify it.

The report further stated that the argument is not that fiscal objectives should be compromised in order to address Pakistan’s social gap. Rather it is that by attacking the governance problems that are at the root of this gap, Pakistan would work also to spur economic growth that will mitigate the fiscal crisis. “In the past, governance problems have precipitated a vicious circle in Pakistan: a focus on fiscal policies that de-emphasized social spending; were implemented with excessive leakage and insufficient attention to efficiency and equity; and eventually gave rise to serious fiscal and social gaps. A different strategy, focused on governance reforms, can create a virtuous circle in which growth is accelerated and resources are freed for spending, helping to effectively close both the social and fiscal gaps,” it added.

Governance problems, the 179-page draft report said, were the main reason that deficit-funded public investments of the 1980s failed to yield long term growth dividends. If these dividends, had been realized, the debt incurred would now constitute a small fraction of GDP and debt service payments would today be much less onerous.

For example, if $58 billion in development assistance provided to Pakistan between 1960 and 1999, had been invested during this time to yield to moderate real return of 6 per cent, it would have grown into assets equal to $239 billion in 1998, many times Pakistan’s current external debt. Instead, this debt now stands at 92 per cent of GDP and is in and of itself a constraint on growth.

Governance reforms, the draft report said, that are specifically directed at improving the implementation of social spending should close the social gap, by increasing the amount of real resources allocated to meeting needs “on the grounds”.

In addition, by closing the social gap, the country should indirectly incur growth payoffs that would increase resources available for debt reduction.

One set of estimates looking at the effect of education on growth, controlling for other factors, finds that a 10-percentage point increase in secondary school enrolment is associated with a 0.5-percentage point increase in yearly per capita growth.

Social spending is embedded in the fabric of government and society in Pakistan, however, so successful governance reforms will have to be comprehensive and broad in their scope.

The report pointed out that reforms that reduce waste and leakage in all areas of fiscal policy, especially in development, and that deepen the rule of law, also have direct effects on the efficiency of spending — relaxing the fiscal constraints that exacerbates the social gap — but also increase growth, expanding the size of the pie available for debt reduction.