Country Strategy and Program 2002-2006 - Pakistan

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Executive Summary

I. Development Agenda

A. Key Features of Pakistan

B. Current Political, Macroeconomic, and Social Trends

C. Current Development

D. Development Priorities and Outlook

II. Implementation of the Country Strategy and Program

III. ADB's Strategy

IV. Operational Approach

V. Three-Year Assistance Program

VI. Performance Monitoring and Evaluation

Country Strategy and Program 2002-2006: Pakistan : I. Development Agenda

B. Current Political, Macroeconomic, and Social Trends

1. Political Trends

4. The present Government assumed power after a coup d'etat on 12 October 1999. The chief of the army staff, General Pervez Musharraf assumed the office of Chief Executive of Pakistan. Subsequently in May 2001 General Musharraf concurrently assumed the office of President. The Supreme Court of Pakistan has provided legal cover to the change of Government of 12 October 1999, but ruled that elections to the provincial and national assemblies as well as to the Senate must be completed by 12 October 2002. On 14 August 2001, President Musharraf announced the schedule of actions culminating in national and provincial elections in October 2002.

5. The present Government has initiated a number of reforms to address governance problems and long-standing structural challenges. On the political side, the Devolution Plan announced in March 2000, is a fundamental reform. It aims to replace the existing highly centralized and control-oriented government with a three-tiered local government system that institutes "people-centered, rights and responsibility-based, and service oriented" government structures. The elected local governments took power on 14 August 2001 in over 100 districts in the four provinces (Box 1).

Box 1: Local Government Reforms and Devolution

The Local Government Ordinance promulgated on 14 August 2001 provides for three levels of local government, each with a governing council: (i) district governments (107); (ii) tehsils (about three per district), and union councils (about 20-30 per tehsil), which comprise villages or urban wards. Local elections were held over a six-month period on a nonparty basis, with full adult suffrage. Thirty-three percent of seats are reserved for women at all three levels of local government, and additional seats are reserved for peasants, workers, and minorities. The majority of elected council heads (nazims) and deputy heads (naib nazims) may belong to local influential families, but it is also significant that nearly 50 percent of councilors belong to disadvantaged sections of society, women, peasants, and workers.

Devolution, first from provincial to elected local governments, and then from the federal to provincial level, will bring fundamental changes to how all public services are planned, financed, and managed. The bulk of basic poverty-focused services, for health, education, agriculture, water, and natural resource management has been devolved to district and lower local governments. Provinces, once predominantly responsible for service delivery, will assume new responsibilities to support and supervise the performance of local governments, not as administrative appendages of the provincial bureaucracy, but as independent corporate bodies accountable to the electorate through political leaders.

In addition to elected councils, the Local Government Ordinance 2001 provides a number of institutionalized opportunities for citizens to participate in council affairs. Citizen community boards, and public safety and justice committees will monitor local government activities. Citizen community boards are also empowered to prioritize investments for up to 50 percent of the local development budget for basic infrastructure and services. Public safety commissions at district, provincial, and national levels, introduced by this Government under amendments to the Police Act of 1861, offer new possibilities to depoliticize the police and to increase their accountability to citizens.

6. The 11 September terrorist attacks in the United States (US) have had a great impact on the political and economic situation in Pakistan. President Musharraf's swift declaration of his Government's strong support to the fight against global terrorism was opposed by various religious groups. However, these groups did not receive wide public support, and the danger of political instability was averted. In January 2002, President Musharraf announced a major policy shift committed to ending religious extremism and speeding up social development in Pakistan.

2. Macroeconomic Trends

7. During most of the 1990s, Pakistan faced growing macroeconomic imbalances, declining economic growth, and rising poverty (Appendix 1). The average economic growth rate decelerated from 6.5 percent in the 1980s to 5.4 percent in the first half of the 1990s, and to 3.6 percent in the second half. By 1998, Pakistan was firmly in a debt trap (Box 1), and its economic prospects were extremely poor. The imposition of economic sanctions following the nuclear tests of May 1998 compounded the problem, and Pakistan experienced a full balance of payments crisis in 1998. By this time, Pakistan was firmly in a debt trap (Box 2), and its economic prospects looked extremely poor.

Box 2: Roots of Pakistan's Debt Crisis

The macroeconomic problems faced by Pakistan today are the result of poor economic management and deteriorating governance over the last two decades. In the 1980s, large aid flows, as a consequence of Pakistan's role in the war in Afghanistan against the Soviet Union, allowed the Government to postpone much-needed macroeconomic reforms. During the 1980s the fiscal deficit averaged over 7 percent of gross domestic product (GDP), and current account deficit averaged almost 4 percent. In addition, the nationalized commercial banks and state-owned development finance institutions were used as instruments of patronage to provide cheap credit to favored entrepreneurs and politicians. Tariffs were kept at a high level and exports of agricultural raw materials were heavily taxed, thus ensuring excessive profits for those able to get investment licenses. Inefficient industries flourished; corruption was institutionalized; the financial sector was weakened; and loss-making public enterprises, as well as public debt, expanded.

With the withdrawal of Soviet Union from Afghanistan in the late 1980s, foreign aid flows to Pakistan declined sharply, precipitating the first of several economic crises during this period. Between 1988 and 1998, Pakistan negotiated three programs with the International Monetary Fund, but because of frequent changes of government and lack of political will these were never fully implemented. The fiscal deficit continued to average over 7 percent of GDP, and the average current account deficit increased to almost 5 percent. Public debt expanded rapidly, and debt servicing even more so because of the increasing use of expensive short-term debt to finance the external deficit, and high cost national saving schemes to finance the domestic deficit. The impact of the 1998 economic sanctions, in the aftermath of the nuclear tests, resulted in the collapse of the exchange rate and the beginning of a full-blown economic crisis. In 1998, total debt (both domestic and external) exceeded the GDP, total debt servicing accounted for 67 percent of all Government revenues, and external debt servicing accounted for 55 percent of export earnings, i.e., Pakistan's debt indicators were worse than most heavily indebted poor countries. The situation has improved somewhat since 1998, and in 2001 the ratio of total debt servicing to Government revenues had declined to 57 percent and external debt servicing to exports to 37 percent.

8. Soon after coming into power, the current Government initiated an ambitious reform program to address outstanding macroeconomic, structural, and governance problems. In October 2000, Pakistan began implementing a far-reaching macroeconomic stabilization and restructuring program under an International Monetary Fund (IMF) standby arrangement (SBA). Pakistan successfully completed the standby arrangement, and the final tranche was released in September 2001. By this time, Pakistan's macroeconomic indicators had improved significantly. The fiscal deficit had declined, inflation was low, exports had started to grow, the balance-of-payments deficit had also declined, and foreign exchange reserves were increasing. The Government is also committed to poverty reduction as a central element of its economic policies and a poverty reduction strategy has been prepared.

9. However, tThe events following 11 September 2001 had a major adverse impact on Pakistan's fiscal and external balances and threatened to jeopardize the progress on stabilization and structural reform. To mitigate the adverse impact of these events on the economy, and because of Pakistan's decision to join the fight against global terrorisms, the international community is providing substantial assistance to the country. Following the successful implementation of the SBA, in December 2001 IMF approved a $1.3 billion Poverty Reduction Growth Facility to be implemented during 2002-2004. Also, the lifting of economic sanctions imposed following Pakistan's nuclear tests in May 1998, and increased economic assistance, debt restructuring, and greater access to the G-7¹ markets, and the debt restructuring agreement reached with the Paris Club in December 2001 would make it possible for Pakistan to (i) achieve sustained, high growth in a much shorter period than earlier thought possible, (ii) continue with the reform program, and (iii) increase poverty-related public expenditures to improve its social indicators.

3. Social Trends

10. Until the 1990s, economic growth in Pakistan was much faster than in most other low-income countries. However, Pakistan's social indicators remain among the worst in the worldcompare unfavorably with other countries with similar levels of per capita income (Table 1). The tendency to neglect social sectors because of the national security focus of all governments in Pakistan was reinforced by the social and economic structure of the country. While large landowners dominated the economy and politics of Sindh and Punjab, tribal chiefs enjoyed a similarly dominant position in NWFP and Balochistan. These political elites had little interest in promoting education or literacy in the country.

Table 1: Pakistan and Other Country Groupings: Social Indicators
Indicator	Pakistan	South Asia	Low-Income Countries
Income per Capita (1999)	$470	$440	$410
Real GNP per Capita (PPP$, 1999)	$1,757	$2,030	$1,790
Annual Population Growth Rate (1990/99)	2.5	1.9	2.0
Life Expectancy (Female) (1998)	63	63	61
Maternal Mortality (1999)	400	368	-
Total Fertility Rate (1998)	4.9	3.4	3.1
Under-five Mortality Rate (1998)	120	89	107
Infant Mortality Rate (1998)	91	75	68
Adult Literacy (15+) (1998)
Male	58	65	70
Female	29	41	51
Net Primary School Enrollment Rate (1999)	42	64	66

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G-7 refers to Canada, France, Germany, Italy, Japan, United Kingdom and United States of America.

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A. Key Features of Pakistan