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n analysis of the public expenditure reviews from 2017-22, reveals that child-focused spending by provincial governments is not in line with their budgetary commitments. Public finance constraints due to large debt servicing expenditure are curtailing social sector investment with public spending on education limited to only 2 percent of GDP, on health at 1 percent and on social protection at 1 percent. The future of nearly 40 percent of our population – currently below the age of 18 - is thus at stake on account of inadequate investment in human capital development.
According to the IMF, Pakistan has a social sector financing gap equivalent to 16.1 percent of its GDP, required to meet the SDGs by 2030. Although the fiscal deficit improved with the Extended Fund Facility, public finance remains insufficient to meet the UN benchmarks and required spending on social sector. The revenue distribution mechanism under the National Finance Commission Award is equally important as the provinces rely on federal transfers for social spending.
Besides debt repayments, low-to-moderate GDP growth and limited revenue generation, factors such as covariate shocks including recurring climate disasters and the demographic pressure, are aggravating the fiscal challenge to meet social spending. A consequence of this situation is that about 26 million children are currently out-of-school. Multi-dimensional poverty in the country has surged to 40 percent of the population so that a further reduction in social spending will push the people into intergenerational poverty.
Amidst global austerity measures the official development assistance (ODA) has witnessed a sharp decline in the year 2025. It is therefore ever more pertinent for the federal and provincial governments and the civil society to diversify financing and develop expertise in alternative financing for sustainable social sector investments.
New policy instruments and innovative models need to be adopted to expand the fiscal space. There is a need to approach social spending as an investment in future generation. Traditional approaches to social spending, often perceived as charity or welfare, are no longer adequate to meet the scale of Pakistan’s challenges. A fundamental paradigm shift is required to reconceptualise this spending as a high-return investment in future human capital.
Policy instruments and reforms
There is a need to redesign our financing structures by adopting a results-based approach to financing. Operationalising this requires financing strategies to be multi-layered, integrating traditional and non-traditional financing models as well as international funding with national goals, with medium-term budget framework.
Incorporating results-based financing in the social sector means approaching social spending as high-return investment in future human capital. Such changes in financing structures will pave the way for expanding the fiscal pool with private capital investment through social impact bonds and other instruments, eventually scaling up successful innovative policy solution.
Second, due to non-alignment of policy goals and non-prioritisation of social sector from a lens of children’s constitutional rights, the fiscal policy has been reactionary in terms of their needs. A long-term and sustainable financing approach as the engine of resilience and productivity has been missing. A recent positive development in this regard is the equity and empowerment mandate of URAAN Pakistan which aspires for inclusive and equitable education, health and nutrition of children. However, realising this vision will require collaboration between all stakeholders to forge long-term development investments besides immediate emergency responses.
Third, the effective utilisation of social sector spending is crucial for its sustainability and scalability. In the absence of Provincial Finance Commissions, most of the development expenditure is on infrastructure instead of social sector development. the NFC award, too, needs to be modified to incorporate provincial social spending.
Fourth, there is a need to establish linkage between climate adaptation strategies and social sector. There is a strong connection between social sector and climate finance. This can be translated into an integrated approach to identify child-focus climate finance alternatives. Pakistan can learn from Malawi’s Climate Health Resilience project, as a case study for cross-sectoral climate finance project. Education and health projects can be linked with projects in water, urban resilience, infrastructure and flood recovery sectors. For this purpose capacity transformation, willingness to reform and developing dedicated proposals with this linkage in mind is needed.
Innovative and cost effective financing models that have been successful in other countries can help Pakistan diversify its fiscal resources for social sector investment.
Many experts are now talking about innovative alternative financing models. Here are a few examples:
Blended finance combines public and philanthropic funds with private capital to mobilise investment for sustainable development initiatives, thereby reducing risk and losses to the investor. A successful global example in social sector is the Global Partnership for Education Multiplier Fund. Development impact bonds, social impact bonds, social success notes and Social Impact Guarantees are examples of blended finance instruments.
Social Impact Bonds are an outcome-based financial instrument whereby private investment is mobilised for social sector with repayment conditional upon achievement of the outcomes. In such an arrangement public sector, private investor and service provider jointly implement the programme. The first Employment Impact Bond is being implemented currently byPunjab Skills Development Fund in collaboration with private sector for long-term employment outcomes. It seeks to impart future-ready skills to the youth.
Social Success Notes are an outcome-based financial instrument in which private investment is mobilised for social sector. In this case it is the social enterprises that provide the funds, with returns tied to the achievement of outcomes. Social Impact Guarantees is a model in which the government or other donors provide guarantees to incentivise private investment. The Singapore Social Impact Guarantee: Enhancing Youth Support Programme has helped improve education and employment outcome for the youth.
Catastrophe Bonds, an insurance linked-security, can be linked to the climate adaptation agenda of the Nationally Determined Contributions to finance disaster response initiatives.
In the long run, public finance cannot be withdrawn from the social sector. It needs to leverage the alternative financing instruments as complementary financing sources and not in substitution of it. Given the high debt repayments and servicing surpassing social spending, bilateral debt swaps and Debt-for-Child Buybacks Pakistan has a strong case for renegotiating its bilateral debt in exchange for commitment to replace the debt with investment in social and sustainable development. Egypt has reached a debt swap with Germany by committing to allocate resources for welfare programmes. Through Debt for Child buybacks, Pakistan, too, can convert its debt to commitments for dedicated spending on child health, education and wellbeing.
The private sector should adopt a long-term, outcome-driven approach to corporate social responsibility (CSR) and philanthropic initiatives, aligning them with national development goals. Instead of short-term projects, investments should focus on measurable social impact. A successful example is the Indus Hospital Network, which has demonstrated how sustained, strategic healthcare philanthropy can serve the vulnerable.
Sehat Sahulat Programme should transition from a non-contributory to a contributory model to ensure long-term sustainability and improved quality of healthcare services. Levies on tobacco and soft drinks can generate dedicated revenue for child-focused health and nutrition programmes, while also discouraging the consumption of harmful products
As recent floods and their impact on children have once again shown traditional approaches to social spending, often perceived as charity or welfare, are no longer adequate to meet Pakistan’s challenges. A fundamental paradigm shift is required to reconceptualise this spending as a high-return investment in future human capital.
Sustainability and scalability of the social sector investment will eventually be determined by their alignment to the local needs and context as well as integration with national and sustainable development goals.
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