Countries and Regions

	Table of Contents
p. 2 of 25 BACK | NEXT I. Country Performance Assessment A. Economic Performance Assessment B. Poverty Assessment C. Assessment of Socio-Environmental Performance D. Governance: Sound Development Management E. Implementation Assessment II. Country Operational Strategy III. Sector Strategies IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Pakistan : I. Country Performance Assessment

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A. Economic Performance Assessment

1. Pakistan's economy is heading towards a slow recovery from the severe downturn of the past two years. In FY1999/00 the economy grew by 4.8 percent. Although this rate remains low compared to the historical trend, it exceeds the 3.1 percent growth achieved in FY1998/99. Improved growth is based mainly on good cotton and food grain harvests. However, because of a large fall in sugar production, large-scale manufacturing production declined by 0.7 percent in FY1999/00 compared to the 3.7 percent growth achieved in the previous year. Tax collection increased by 12.3 percent in FY1999/00 compared to the previous year. However, the fiscal deficit increased slightly from 6.1 percent of GDP in FY1998/99 to 6.4 percent in FY1999/00. Inflation remained low, averaging 3.6 percent FY1999/00, largely due to improved food supplies and slow monetary growth.

2. The fragile balance of payments situation remains a principal area of concern. The trade deficit deteriorated to $1.7 billion, substantially higher than the Government's $800 million target for FY1999/00. Exports expanded by 10.2 percent during this period, while imports increased by 9.3 percent due mainly to a sharp increase in the world oil price. Remittances in FY1999/00 were down by 7.2 percent and foreign direct investment was down by 0.5 percent compared to the previous year. The wider trade gap, coupled with a negative overall resource transfer from donors has exerted pressure on the balance of payments. Foreign exchange reserves was $1.0 billion,as of October 2000. The State Bank of Pakistan has purchased large amounts of dollars in recent months from the open market to fill the foreign exchange gap. Total foreign debt stood at $32.7 billion at the end of FY1999/00².

3. Although Pakistan has managed to emerge from the worst of the crisis during 1998 and 1999, the economy remains weak and the medium-term outlook depends critically on the pace of structural reforms. The emergency measures implemented over the last two years have had adverse impacts, including loss of confidence by creditors due to the rescheduling of foreign debt. The international economic sanctions imposed by the G7 after the atomic tests in May 1998 were lifted partially on January 1999 but investor confidence has remained low: the lingering dispute between the Government and the independent power producers appears to be coming to resolution but it has undermined the confidence of foreign investors. Effective and sustained implementation of the various structural reforms initiated in the past two years will be essential for Pakistan to achieve its long-term development objectives including faster economic growth and poverty reduction. Above all, improving the quality of governance is a precondition for the success of reforms and for a sustainable development program.

4. Since assuming power in October 1999, the new Government has accelerated the pace of economic reforms. A comprehensive structural reform program in line with the economic roadmap announced by the new Government in December 1999 and a broad-based poverty reduction strategy are under preparation. Activities have been initiated to alleviate poverty, including PRs15 billion funding for poverty reduction and establishing a new microcredit bank to improve access to financial services for the poor. The ADB's program has focused specifically on poverty in all sectors.

5. The main focus of the Government's fiscal reforms is to improve revenue performance through broadening the tax base and strengthening tax administration. In the past few months, the Government has introduced the following: (i) on-the-spot assessment scheme in 13 cities to increase tax compliance, registration, and documentation; (ii) periodic adjustments of petroleum prices in line with international price developments and elimination of the subsidy on furnace oil; (iii) increase registration under the goods and services tax (GST) which will be extended to cover the services sector; and (iv) reorganization and downsizing of the Central Board of Revenue of the Ministry of Finance. A number of additional fiscal initiatives including agricultural income tax, a more integrated, client-based, and functional tax administration system and tax amnesty scheme have been taken.

6. In the financial sector, detailed privatization plans have been drafted and disposal of the remaining shares of national commercial banks and other state-owned financial institutions is proceeding. New managers from the private sector have been appointed in all but one of the development financial institutes. A program has also been designed to enhance the minimum capital requirements together with necessary amendments in banking laws for this purpose. In addition, the State Bank of Pakistan will be restructured to focus mainly on its core operations such as monetary policy, banking supervision and foreign exchange management and non-core operations presently undertaken by SBP will be transferred to commercial banks or other financial institutions; a comprehensive three-year computerization program is under implementation. A new insurance law was passed in June 2000 which will increase financial soundness and help further growth in the sector. Under assistance mainly from ADB, the Government has introduced major capital market changes, including establishing a national Clearing and Settlement System, automation of stock exchange transactions and setting up credit rating agencies to strengthen information flows and market efficiency.

7. Privatization, which is urgently required to prevent further losses, has been accelerated recently. Initial measures have included (i) a Privatization Law to enhance transparency, accountability, and efficiency in the privatization process has been prepared; (ii) two national commercial banks and a partially privatized bank will soon be listed on the stock exchange; (iii) bidding for the LPG business of three companies and the meter manufacturing unit of a gas company is to be held by the end of 2000; (iv) in the industrial sector, six units are to be liquidated or sold through the stock market before end-June and it is also planned that a large number of state owned enterprise will be privatized in the next two years. The proposed Energy Sector Restructuring Program and TA loan in 2000 will support privatization in one electric utility (KESC) and restructuring of WAPDA. Under the ADB's CMDPL, the National Investment Trust and Mutual Funds of Investment Corporation of Pakistan are to be privatized by the end of 2000.

8. Government defense expenditures have declined from 6.3 percent of GDP in early 1990s to 4.8 percent in FY1999/00. However, compared to many other countries in the region this figure remains high. Presently, the defense expenditure amounts to $2.47 billion or $17.9 per capita compared with $229 per capita on average worldwide and $38 per person for South Asia³. Defense expenditures further decreased by 7 percent, to 4.6 percent of GDP in FY2000/01 budget. The defense expenditures as percentage of total public expenditure have also showed a declining trend. It declined from the peak of 25.2 percent in FY1993/94 to 21.8 percent in FY1999/00 and further to 19 percent in FY2000/01.

9. As the poor are particularly vulnerable during a structural reform period, special attention needs to be provided to protect the poor and vulnerable groups to mitigate the worst impacts of the current economic crisis. An IMF Stand-by Arrangement of about US$600 million is under negotiation. The successful implementation of the SBA and finalization of major structural reform of loans along with key initial actions is expected to lead to a medium-term financial support under the Poverty Reduction and Growth Facility (PRGF) in the latter part of 2001. In the longer term, structural issues affecting delivery of basic social services and other targeted poverty interventions need to be addressed, including far greater use of nongovernmental organizations (NGOs) and the private sector to improve Pakistan's absorptive capacity and efficiency in the delivery of social and economic services to the rapidly expanding population. The ADB's program includes interventions in all of the areas covered under paras. 4 to 8, specifically in support of macroeconomic stability and rationalization. Appendix 1 provides a summary of country performance indicators.

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