Consortium for Development

Dr. Ijaz Nabi, Chairman

Dr. Naved Hamid, Treasurer
Dr. Farooq Naseer, General Secretary

Policy Research

Reclaiming Prosperity in Khyber-Pakhtunkhwa - A Medium Term Strategy for

Inclusive Growth
This Policy Brief is based on the report Reclaiming Prosperity in Khyber Pakhtunkhwa, prepared under the IGC Pakistan
Program management: Ijaz Nabi (Country Director), Naved Hamid (Resident Director) and Ali Cheema (Lead Academic). The
coordinators for the report were Yasir Khan (IGC) and Bilal Siddiqi (Stanford). The authors are: Anjum Nasim (IDEAS,
Revenue Mobilization), Osama Siddique (LUMS, Rule of Law), Turab Hussain and Usman Khan (LUMS, Transport, Industry,
Construction and Regional Trade), Sarah Saeed (Skills Development), Munir Ahmed (Energy and Mining), Arif Nadeem
(Agriculture and Livestock), Ahsan Rana (LUMS, Agriculture and Livestock), Hina Shaikh (IGC, Education and Health),
Rashid Amjad (Lahore School of Economics, Remittances), GM Arif (PIDE, Remittances), and Reza Ali Development
Consultants (Urbanization). Sarah Khan (Columbia) edited the report and Khalid Ikram peer reviewed it. Shaheen Malik
estimated the provincial accounts.

requires that the growth strategy remove the

causes of poor Millennium Development Goal
(MDG) outcomes.
The starting point of the growth strategy is to set
a realistically ambitious medium term economic
growth target. The benchmark for this will be the
federal governments projected national growth
target of 7.5%1. This target is to be achieved in
the medium term, to match the increase in the
size of the labor force. It will require a near
doubling of total investment from 14% of GDP
in 2013 to 26% in 2020. Much of this is expected
to be private investment, projected to rise from
8.7% of GDP in 2013 to 19% in 2020.

Figure 1. Trends in Per Capita GDP, Pakistan and
Khyber-Pakhtunkhwa

40000

Growth Challenges
In the ten years up to 2011-12, KPs economy
has grown at an annual rate of 4.2%, which is
slightly lower than the national growth rate of
4.6% for the same period. (Figure 1.) This
growth has been too slow to absorb the
provinces growing labor force and to have any
substantial impact on living standards.
KPs economic growth thus needs to be stronger
and inclusive, generating the required jobs
needed to raise living standards and reduce
poverty and vulnerability. Importantly, inclusion

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The citizens of Khyber Pakhtunkhwa (KP)

continue to suffer a series of external shocks that
have, over an extended period of time,
significantly eroded living standards. However,
recent developments in domestic and regional
politics suggest that KP is on the cusp of
reclaiming prosperity and a promising future.
Withdrawal of NATO troops and political
transition in Afghanistan present an opportunity
to stabilize Afghanistan, which could in return,
open up substantial regional trade and
investment opportunities for Pakistan. Moreover,
the current government, put in place following
the May 2013 elections, has come in with a
strong mandate to strengthen the provinces
economic and social foundation. Hence, KPs
Economic Growth Strategy is a key instrument
for fulfilling the elected governments mandate
to improve citizens living standards and creating
opportunities for a prosperous future.

Presented in the Vision 2025 document

 Consortium for Development

Policy Research

Emerging Growth Drivers

While KP has suffered from several growth
inhibiters, some important growth drivers have
also emerged which, if properly harnessed, can
propel the economy to a much higher growth
trajectory. These include:
Urbanization
KP has seen periods of rapid growth in its urban
population. High population densities along
major road corridors have led to the development
of urban clusters. While 83% of the provinces
population is classified as rural, over 2/3rds lives
within a travel time of one hour from a city, and
90% lives within two hours. This has
implications for the provision of government
services and promotion of public and private
infrastructure investments to develop the
agglomerations, as hubs of economic activity
and employment generation.
Regional Trade and Connectivity
KP has long enjoyed the advantage of being
located at the apex of Pakistans North-South
economic corridor, linking Pakistans economy,
through the port of Karachi, to Afghanistan and
beyond to Central Asia and China. Two
developments are likely to have far reaching
consequences for regional trade and its
implications for KPs economy. One is the
impending withdrawal of NATO troops from
Afghanistan and the other is greater trade
liberalization with India and the likely impact of
that on transit trade through Peshawar and other
trading posts along the Afghan border. KPs
ability to reap the transformational benefits from
international trade opportunities will depend on
progress in three broad areas: (i) peace along its
borders, (ii) trade facilitation through border
ware-housing facilities, customs clearance and
road and rail networks and (iii) improved
competitiveness of priority growth sectors.
Remittances
In 2012-13, every fourth Pakistani who went
abroad through the Bureau of Emigration &

Dr. Ijaz Nabi, Chairman

Dr. Naved Hamid, Treasurer
Dr. Farooq Naseer, General Secretary

Overseas Employment or Protector of Emigrants,

came from KP. This has had a large impact on
KP economy. Sustaining this will require
upgrading the skills of KP workers. While, the
skill composition of other Asian workers in the
Gulf, such as Indians and Sri Lankans, has
changed due to a shift in demand, the
composition of Pakistani and KP workers has not
witnessed a shift towards higher skills. In light of
the expected growth trends and structural
changes in the Gulf Cooperation Council (GCC)
countries, KP needs to: (i) gear up to the current
and accelerated shift into higher paid jobs in
services, including the fast growing tourist sector
where large expansions are planned, and (ii) take
advantage of major planned events such as the
Dubai World Expo Trade Fair in 2020 and the
soccer World Cup in 2022, which will provide
more opportunities for higher skilled workers.
Increased Federal Fiscal Transfer
Provincial autonomy for managing provincial
level economy has increased considerably
following the 18th amendment to the Constitution
in 2010. The devolved mandate is supported by
the 7th National Finance Commission (NFC)
Award, which has allocated greater financial
resources to the provinces. This has raised KPs
share in federal revenue, from about 7% of
provincial GDP to 8.7% in 2009-10 and 11.3%
in 2010-11. Federal transfers, proposed revenue
measures and savings from spending efficiency
will all contribute to expansion of the fiscal
space, that will allow the KPs government to
sharply increase both current and development
spending in priority areas discussed below.

Priority Growth Sectors

Manufacturing and Construction
The recent performance of KPs manufacturing
which contributes to 17% of provincial GDP, has
been mixed. Restoring manufacturing with a
focus on cement, marble and granite finishing,
pharmaceuticals and furniture and woodworking
should be high priority in KPs growth strategy.
Provision of steady energy supply and skills

 Consortium for Development

Dr. Ijaz Nabi, Chairman

Dr. Naved Hamid, Treasurer
Dr. Farooq Naseer, General Secretary

Policy Research

enhancement of the labor force is essential to

achieve this. Without a strong manufacturing
base, KP is unlikely to reap the full benefits of
the emerging regional opportunities.
Construction (4% of KPs GDP) is another
policy priority area. After agriculture, it is the
largest employer of labor. Growth in the
construction industry is largely correlated to
growth in retail trade, which is a significant
employer of low skilled workers. Retail trade has
seen rapid expansion in the wake of
consumption-led
growth
facilitated
by
remittances and slow-down in manufacturing. A
modern, organized KP based construction sector
would build on KPs comparative advantage in
materials and could be the backbone of the
construction industry in the country and beyond
in the region.
Agriculture and Livestock
Agriculture (contributing to 14% of KPs GDP)
provides direct and indirect livelihood to a
majority of the rural population. However,
despite the centrality of the sector, overall
performance has remained poor. Farmers in the
province are locked in low value crop
production, such as wheat, due to lack of
institutional support, fear of food shortage and
inadequately developed markets. The decrease in
land use intensity over the years and lack of
expansion in irrigation (despite KPs many
rivers) are contributing to the poor performance
of agriculture. The horticulture sub-sector, on the
other hand, has seen some progress in
developing high quality fruit farms in recent
years, but the success remains localized to a few
areas. Measures needed to improve agriculture
performance include (i) diversifying into high
value crops, (ii) developing horticulture
specialization, (iii) managing irrigation, (iv)
promoting certified seed nurseries and (v)
strengthening agriculture research.

and climate for livestock, herd size is small and

yields remain low. KP government must invest
in rangeland management, disease surveillance
and prevention, develop a fodder policy and
deregulate livestock markets. The private sector
should be encouraged to invest in the various
stages of livestock value chain including semen
production,
livestock
medicines
and
slaughterhouses.
Mining2
KP has vast reserves of minerals and gemstones.
Hence, the mining sector has the potential to
become a key driver of economic growth and has
in fact witnessed strong growth during the last
few years, contributing 3% value addition to the
provincial GDP in 2012. Despite stellar
performance in recent years, the sector suffers
from a number of challenges. The most
significant of which is the use of outdated
technology that results in high wastage of
minerals. Challenges are further exacerbated due
to the lack of a comprehensive mining
development framework (though work is
underway on it). The regulatory regime in place
for mining operations also has a number of
loopholes. KP will benefit from a comprehensive
mineral development framework that reviews
mineral rights awarding procedures, creates a
dispute resolution system, regulates the use of
explosives, upgrades technology and rationalizes
leasehold size.
Tourism3
Tourism in KP employs thousands of small and
medium enterprises, covering locations with
widespread poverty. According to estimates
almost 8.8 million domestic tourists visit KP
every year. This forms 19% of the total national
domestic tourist traffic. Due to its geography, KP
has a competitive edge over other provinces in
tourism. Yet the tourism sector faces significant

2

Livestock for meat and milk products is raised by

millions of small and landless families in KP and
contributes to 30% of the agriculture GDP.
Despite KP being blessed with an ideal terrain

The discussion draws on Assessing Baluchistan and KP

Minerals Policy Framework, draft report, USAID FIRMS
Project
3
The discussion draws on, Tourism Policy for KhyberPakhtunkhwa, draft report, USAID FIRMS project,
October 2013

 Consortium for Development

Dr. Ijaz Nabi, Chairman

Dr. Naved Hamid, Treasurer
Dr. Farooq Naseer, General Secretary

Policy Research

challenges such as poor law and order,

dilapidated infrastructure and lack of an effective
marketing strategy. This means that tourists are
either discouraged by the absence of facilities or
remain unaware of the potential sites to visit.
Thus, key objectives of a proposed tourism
policy are to establish KP as a preferred tourist
destination nationally with an aim to increase
tourist traffic by 10% annually over the next 5
years. With this, there is also a need to focus on
setting quality standards, image building and
infrastructure development.
Figure 2. Average Annual Growth 2000-2012
Mining & quarrying
Dwelling ownership
Community, social & personal
Manufacturing
ConstrucMon
Finance, real estate etc.
Wholesale & related trade

Agriculture, shing & forestry

0%

All
sector

Transport & storage

Electricity, gas & water

10%

20%

30%

Investment Climate
Investment climate spans a range of factors that
determine a destinations attractiveness for
investors.
The
key
determinants
of
competitiveness in KP are discussed below.
Cost of Doing Business
The World Banks survey on the cost of doing
business conducted in 2010 finds that Peshawar
ranks 8th in overall ease of doing business, well
behind the best performing Faisalabad. It is
therefore, critical, to improve this ranking to make
Peshawar an attractive destination for business.
Energy
Energy shortages remain a major impediment to
attracting investment. Critical sources of
inefficiency in the power sector are the large
losses that occur in transmission and distribution.
The provincial government has to engage
effectively with the federal government to address

the shortages arising from national constraints. At

the same time, KP must exploit its considerable
power generation potential by either setting up
prospective power generation stations itself or
through PPPs. Within thermal power, the
government can focus on power generation
through coal or bio fuel. For hydel power
generation, small projects may be initiated in
different parts of KP instead of large power
generation units, which require large investments
and more security measures.
Transport
The geographical location of KP, landlocked and
being furthest from the seaport, makes the role of
transport (that contributes to 13% of KPs GDP)
critical in its economic progress. Road
connectivity plays a critical role in the formation
of industrial clusters, which in turn results in
agglomeration economies, attracting more
businesses. Linking economically backward
areas to economic hubs within and outside KP
will provide access to employment, education
and healthcare for the relatively low-income
districts. Road and rail connectivity will be
critical for KP to realize the benefits of regional
trade.
Rule of Law
KP and FATA have both been challenged by the
specter of worsening conflict during the past
decade. In addition, the province also faces
challenges of growing litigation and weak
contract and regulatory enforcement, which
become important pre-conditions for slow growth
and low employment creation in the province.
Therefore, rule of law and governance reforms
need to be a central pillar of KPs Growth
Strategy. There is an urgent need to institute a
Police and Prosecution Reform Committee, which
can frame a modern sentencing law and work in
coordination with the Local Government
Department to propose a framework for
strengthening linkages between the formal justice
system, the local government system and informal
dispute resolution mechanisms. There is also a
need to invest in a forensic science laboratory in
KP along with the establishment of a Command

 Consortium for Development

Dr. Ijaz Nabi, Chairman

Dr. Naved Hamid, Treasurer
Dr. Farooq Naseer, General Secretary

Policy Research

and Control System (with first responder

capacity) and Crime Scene Units in the capital
city.
E-governance4
E-governance initiatives can play a key role in
bridging the information gap for citizens. There
is a need to restructure the provincial
Information Department for better management
of modern communication tools leading to more
effective governance. Moreover, establishing an
ICT-based Complaint Redressal System for KP
is also imperative. Automating government
systems such as procurement processes, public
college admissions, crime investigation, land
records, and birth certificates will further help
improve efficiency.

Inclusion
Healthy, educated and better skilled workers are
the most critical interventions for inclusive
growth.
Health and Education
A sound health and education sector is key to
ensuring that KP meets its MDG targets and has
a productive labor force to sustain long-term
growth. In the health sector, problems of low
immunization coverage, stagnant infant and
maternal mortality rates as well as low quality of
curative healthcare, need to be addressed. In
education, significant gaps persist between
access and outcomes across regions, gender and
income with low learning outcomes. Measures to
overcome these challenges include:

Scaling up the existing models of PublicPrivate Partnerships in the education sector

Use of ICTs in monitoring of health and
education facilities
Implementing Conditional Cash Transfer
programs to enhance access to education and
health services

4
This discussion is based on Khyber Pakhtunkhwa growth
chapter as reflected in the federal governments Vision
2025 paper.

Restructuring vaccination programs

Expanding the engagement on Basic Health
Units
Launching
special
programs
for
identification, training and development of
female teachers
Targeting female education and maternal
health
Upgrading existing primary schools to
middle level to improve transition rates
Supporting high quality and low cost private
schools

Skills Development
KP is passing through a demographic transition
that is creating a youth bulge. Realizing the
dividends of the demographic transition will
require addressing critical challenges related to
human capital development and the labor
market. It will require building skills sets that
enable citizens to increased benefit from the
provinces tradition of migration. This will be
fundamental in restoring livelihoods and
generating employment in the province, in the
conflict zones and in FATA. Furthermore, an
important challenge in KP is to enable a
transition away from low-end vulnerable
employment that accounts for 3/4ths of non-farm
jobs in the province. There is also massive
underinvestment in skills provision by the public
and private sectors. Thus the Growth Strategy
supports the KP governments target of
increasing
recurrent
and
development
expenditures for the sector by 50% over the next
three years. For this to be effective, the increase
in budget has to be accompanied by the
formulation of a provincial Skills Policy.

Fiscal Space
The improvement in fiscal space following the
2010 constitutional amendment (and the
supporting NFC award) and agreement on hydel
profit needs to be consolidated with specific
measures to improve public expenditure
management and tax revenue collection.

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Expenditure Management5
In terms of efficiency, large pay and pension
raises in the last two fiscal years have consumed
significant public expenditure, which has
compromised spending on operation and
maintenance, with adverse consequences for
asset maintenance. Furthermore expenditure
management has not fostered linkages of inputs
to outputs. Artificial bifurcation of current and
development expenditure budgets has increased
compartmentalization of budget formulation,
undermining efficiencies of a more integrated
budget making. Measures to address these
include (i) developing a well-designed debtmanagement
strategy,
(ii)
introducing
professional pension fund management, (iii)
establishing a balance between development and
current expenditures and (iv) strengthening
project design of new schemes.
Revenue Mobilization
The high growth targets set by the KP growth
strategy have implications for the provinces
revenue mobilization. Assuming that KP sets the
same growth and investment targets as the federal
governments national targets6, it is estimated that
KPs total expenditure will rise from PKR 327
billion in 2014 to PKR 389 billion in 2015 and
PKR 826 billion in 2020, even with conservative
projections of current expenditure relative to its
growth in the recent past. A substantial revenue
effort by the government of KP will hence be
required to increase the provincial tax-toProvincial GDP ratio by 0.1% per year from
FY2014/15 till FY2019/20.7 Since KPs share in
provincial tax revenue in FY2013/14 was 5.8%,

This discussion draws on, World Bank (2013), Pakistan
- Khyber Pakhtunkhwa: Public Expenditure Review.
Washington, DC.
6
Federal governments Vision 2025 sets average GDP
growth at 4.3% in 2013-15 and 6.79% in 2015-20.
7
The assumptions underlying these tax simulations are in
line with the federal governments medium term budgetary
framework but conservative compared with the
recommendation in Pakistan: Finding the Path to JobEnhancing Growth, World Bank Report No. 75521-PK ,
Washington D.C. 2013.
5

Dr. Ijaz Nabi, Chairman

Dr. Naved Hamid, Treasurer
Dr. Farooq Naseer, General Secretary

we assume that this percentage will remain

unchanged in the forecast period.
The major sources of tax revenue for KP in 2014
were: (1) land revenue (Rs1300 million), (2)
GST on services (Rs8000 million), (3) motor and
vehicle tax (Rs1075 million), (4) stamp duty
(Rs670 million) and (5) electricity duty (Rs507
million). However, each of these sources of
revenue has to be made more buoyant, requiring
far reaching policy and institutional reform.