Foreign aid utilisation

• Foreign aid should be employed more in avenues that enhance exports

The discussion in Pakistan is mostly about ‘getting’ foreign aid, especially with regard to build up of country’s foreign exchange reserves, and less about ‘managing’ foreign aid for its better utilisation.

It is the Ministry of Economic Affairs and Statistics, and within it the Economic Affairs Division (EAD) that is mainly responsible for negotiating all development assistance — financial and technical (latter mainly for capacity building of the public sector) — from both bilateral or individual countries, and multilateral development partners; where in the case of latter, resources are pooled by a number of countries to institutions like International Monetary Fund, World Bank, and Asian Development, among others.

At the same time, development projects are envisaged and implemented in the public sector by the Ministry of Planning and Development (MoPD) at the federal level, and its connected Planning and Development Departments at the provincial level. This they do in collaboration with other ministries/departments depending on the relatedness of a particular project. Here, among the development projects are those with either a component of foreign aid financing or are completely foreign aid based, and in all such projects basically while the EAD negotiates the project with development partner(s), all the project related technical preparatory work is done before hand between the development partner(s), MoPD, and related ministries/ departments.

At the same time, the main modality of foreign aid is mostly in the shape of project financing, whereby development partners provide aid for a particular project, related with one or more economic and political economic spheres. On the other hand, not much is aid is planned in the mode of programme lending, where instead of individual projects, the scope of funding is enlarged to see the whole programme of development within any one sector of the economy.

Below are discussed important areas of focus for the current government to improve the performance of foreign lending:

1. Foreign aid should be more directed towards projects that include a) technology transfer, and b) capacity building of labour to utilise the technology transferred, so that local labour’s skill levels could be raised. For example, a much practiced approach, especially during the early years of Musharraf era when a lot of foreign aid flowed in, funding into microfinance for people to get loans, without giving them the knowledge and enabling environment to invest in projects that are economically viable and diversify economy, and more importantly that give higher returns on investment.

The capacity of MoPD over the years has been below par when it comes to monitoring development projects, and this needs to be rectified

Thomas Piketty, in his famous book, ‘Capital in the Twenty-First Century’ indicates that one of the main reasons behind ever increasing gap between rich and poor was the ability of the rich to invest in high-earning financial markets and products — at the back of asymmetric information and high initial level of investment pre-requisite — while the others invested in traditional instruments in low yielding saving certificates, bank deposits or narrow equities markets. This means that the initial foreign aid funding in the form of microfinance lending, in not planned in a way that allows borrowers the opportunity to firstly earn much from the low-value adding projects that are obtained for, and secondly the financial markets are just not available for people with small earnings from these projects, so there is no scope to earn a kind of amount that could be reinvested. Hence, the poor remain vulnerable. Just look at the poverty numbers hovering around that one-third mark most of the times, even when there was so much foreign aid received under poverty alleviation for so many years.

2. Development aid is scattered all over the place, with issues of funding overlapping by donors at the back of lack of donor coordination and harmonization. EAD has simply not been able to rally this effort in a way that this could happen. I remember even in 2006, when I was in EAD there was talk of these issues. What else was discussed was to explore possibility to align development partners in a way that issues could be targeted on a sector-level through approaching the modality in this regard of programme funding; rather than uncoordinated project funding whereby there was duplicity of funding and effort in some areas, and lack of virtually any inroads in other areas of development needs.

Development Assistance Database (DAD) has been working — being used as a platform by all development partners to keep updated about their work and finances involved — but needs more focus and development to both create better user-friendly awareness, and for overall better planning towards efficient aid utilisation and in a coordinated and harmonised way; especially in programme mode, and identifying and working towards creating projects that allow earning greater returns on income initially earned from, for example, a micro-finance based project.

3. EAD has not properly publicised its database management system that keeps track of all aid inflows and debt repayments. This needs to be attended to by EAD, so that related data could easily be accessed by researchers and overall public in general. In fact, there should be an effort to make clear as to the differences and similarities between this database management system, and DAD. In fact, EAD should be more inclusive in its policy formulation endeavour; advertising and welcoming more outside researchers into its policy think tanks.
4. There should an Independent Evaluation Unit created by the government, which should be totally independent of the government control. This Unit should take an independent view of all the issues mentioned above, and overall reports on the performance of government in foreign aid utilization, and suggests best practices including with regard to better coordination between all development partners.
5. The capacity of MoPD over the years has been below par when it comes to monitoring development projects, and this needs to be rectified if the government wishes to improve the entire project cycle and development spending results. At the same time, the government should harmonize the effort of MoPD and its provincial branches, including doing away with needless authorities and implementation units. The institutional setup of MoPD should advise laws and procedures that remove unnecessary division of work over numerous authorities, and should also simplify hierarchical structures. One case in focus could be all those companies in Punjab for example, registered to do work that basically is the direct responsibility of MoPD, provincial planning and development departments, and other line ministries/departments. Another could be all those Project Monitoring and Implementation Units (PMIUs) in for example health and education sectors. A big drain on tax-payer’s money and an inefficient use of foreign lending that these companies and units have continued to consume over many years, and therefore should be rolled back.
6. Foreign aid should be employed more in avenues that enhance exports and attract foreign investment. It is only through this way that Pakistan could move on a path out of aid-dependency.
7. The CPEC project involves huge foreign aid lending, and requires special focus by EAD and MoPD. The current weaknesses in the system as highlighted above are highly likely going to be the weak links in making the best use of an opportunity that could radically change the development status of the economy. This opportunity should be a good attraction to overall revamp the issues in foreign aid utilisation in Pakistan.