An 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 expenditures are curtailing social sector investments, 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 due to inadequate investment in human capital development. According to the IMF, Pakistan faces a social sector financing gap equivalent to 16.1 percent of its GDP, which is required to meet the Sustainable Development Goals (SDGs) by 2030.
Although the fiscal deficit improved with the Extended Fund Facility, public finance remains insufficient to meet UN benchmarks and the required spending on the social sector. The revenue distribution mechanism under the National Finance Commission (NFC) Award is equally important, as provinces rely heavily 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 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. A further reduction in social spending will push more people into intergenerational poverty. Amidst global austerity measures, official development assistance (ODA) witnessed a sharp decline in 2025.
It is therefore increasingly pertinent for the federal and provincial governments, along with civil society, to diversify financing sources 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 pressing need to approach social spending as an investment in future generations. 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 reconceptualize this spending as a high-return investment in future human capital.
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### Policy Instruments and Reforms
There is a need to redesign our financing structures by adopting a results-based approach to financing. Operationalizing this requires multi-layered financing strategies that integrate traditional and non-traditional financing models, as well as international funding aligned with national goals and medium-term budget frameworks.
Incorporating results-based financing in the social sector means recognizing social spending as a 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 solutions.
Secondly, non-alignment of policy goals and a lack of prioritization of the social sector, especially from the lens of children’s constitutional rights, have made fiscal policy reactionary rather than proactive in addressing their needs. A long-term and sustainable financing approach—as the engine of resilience and productivity—has been missing.
A recent positive development is the equity and empowerment mandate of URAAN Pakistan, which aspires for inclusive and equitable education, health, and nutrition for children. However, realizing this vision will require collaboration between all stakeholders to forge long-term development investments alongside immediate emergency responses.
Thirdly, effective utilization of social sector spending is crucial for its sustainability and scalability. In the absence of Provincial Finance Commissions, most development expenditure is directed towards infrastructure instead of social sector development. The NFC award also needs modification to incorporate provincial social spending as a priority.
Fourthly, establishing a linkage between climate adaptation strategies and the social sector is imperative. There is a strong connection between social sector development and climate finance. This can be translated into an integrated approach to identify child-focused climate finance alternatives.
Pakistan can learn from Malawi’s Climate Health Resilience project, a case study for cross-sectoral climate finance projects. Education and health projects can be linked with initiatives 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 are essential.
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### Innovative Financing Models
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 emphasizing alternative financing models. Here are a few examples:
– **Blended Finance** combines public and philanthropic funds with private capital to mobilize investments for sustainable development initiatives, thereby reducing risk and losses to investors. A successful global example in the social sector is the Global Partnership for Education Multiplier Fund.
– **Development Impact Bonds (DIBs), Social Impact Bonds (SIBs), Social Success Notes, and Social Impact Guarantees** are examples of blended finance instruments.
– **Social Impact Bonds** are outcome-based financial instruments whereby private investment is mobilized for the social sector with repayment conditional upon achievement of outcomes. In such arrangements, the public sector, private investors, and service providers jointly implement the programme.
The first Employment Impact Bond is currently being implemented by Punjab Skills Development Fund in collaboration with the private sector, targeting long-term employment outcomes by imparting future-ready skills to youth.
– **Social Success Notes** are outcome-based financial instruments where social enterprises provide funds, with returns tied to achieving outcomes.
– **Social Impact Guarantees** involve the government or other donors providing guarantees to incentivize private investment. For example, Singapore’s Social Impact Guarantee: Enhancing Youth Support Programme has improved education and employment outcomes for youth.
– **Catastrophe Bonds**, an insurance-linked security, can be connected to the climate adaptation agenda of Nationally Determined Contributions (NDCs) to finance disaster response initiatives.
In the long run, public finance cannot be withdrawn from the social sector; instead, it needs to leverage alternative financing instruments as complementary sources, not as substitutes.
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### Debt Swaps and Private Sector Engagement
Given the high debt repayments and servicing surpassing social spending, bilateral debt swaps and **Debt-for-Child Buybacks** represent compelling opportunities. Pakistan has a strong case for renegotiating its bilateral debt in exchange for commitments to replace debt with investments in social and sustainable development.
For example, Egypt reached a debt swap agreement with Germany by committing to allocate resources for welfare programmes. Pakistan can similarly convert its debt into commitments for dedicated spending on child health, education, and wellbeing through Debt-for-Child Buybacks.
The private sector should adopt a long-term, outcome-driven approach to corporate social responsibility (CSR) and philanthropic initiatives aligned 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 vulnerable populations.
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### Additional Recommendations
– The 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 consumption of harmful products.
Recent floods and their impact on children have once again shown that traditional approaches to social spending are no longer adequate. A fundamental paradigm shift is required to reconceptualize social spending as a high-return investment in future human capital.
The sustainability and scalability of social sector investments will ultimately depend on their alignment with local needs and contexts, as well as their integration with national and sustainable development goals.
https://www.thenews.com.pk/tns/detail/1345119-alternative-financing-for-human-capital