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

C. Current Development

1. Poverty Situation

11. The declining trend in poverty in Pakistan during the 1970s and 1980s was reversed in the 1990s. The incidence of poverty increased from 26.6 percent in 1992/93 to 32.2 percent in 1998/99; the number of poor increased by over 12 million during this period. Most of the increase in poverty has taken place after 1996/97, coinciding with the onset of the current macroeconomic crisis. In the 1990s, poverty rose more sharply in rural areas, and in 1998/99 the incidence of rural poverty (36.3 percent) was substantially higher than urban poverty (22.6 percent). Over three fourths of the poor live in the rural areas, where the depth and severity of poverty are also greater.

12. Poverty increased in all four provinces during the 1990s. In 1998/99, urban Sindh had the lowest level of poverty (16 percent), while rural NWFP had the highest incidence of poverty (42 percent). Inequality increased in the country, and in each of the four provinces during the 1990s. Inequality also increased in both urban and rural areas, with the income distribution in urban areas being consistently more unequal than in rural areas. Thus in the 1990s, the negative impact on poverty of the slowdown in growth was enhanced by increasing inequality of incomes.

13. The high proportion of transient poverty in rural areas is a key characteristic of poverty in Pakistan. According to one study, on average transitory poor made up 54 percent of the poor in any one year covered by the study.² A number of other characteristics, besides location, characterize the poor. These include the level of education, number of children in a household, age of the household head, quantity of physical assets, degree of reliance on informal sector employment, gender discrimination, and degree of vulnerability to environmental degradation. The environment-poverty nexus manifests itself most particularly in health effects. The degradation of natural resources has also had a devastating impact on the poor, given that they tend to be strongly dependent on exploiting such resources.

2. Pro-Poor Growth

14. The slowdown in economic growth in Pakistan during the 1990s was the key factor in increasing poverty during this period. The labor force is expanding at an annual rate of 2.4 percent, and the average annual gross domestic product (GDP) growth rate of 4.6 percent during the 1990s was insufficient to generate the necessary additional employment.³ In the 1990s, growth declined in all sectors and there was much greater volatility in the growth rate particularly in agriculture. The causes of the slowdown in growth may be divided into two categories, i.e., structural and others. Among the structural causes, the burgeoning debt burden and declining competitiveness of the Pakistan economy in the increasingly skill-based global economy are the most important. While the former was due to economic mismanagement, the latter was because of underinvestment in human development. Increasing debt service requirements resulted in a growing fiscal squeeze, which in turn led to a declining proportion of GDP being spent on development and the social sectors in the 1990s. Falling public investment, together with unsuccessful attempts at macroeconomic stabilization, also adversely affected private investment. The adverse impact of structural factors was reinforced by other problems such as ethnic and sectarian violence, poor state of law and order, and high degree of economic and political uncertainty because of the many changes in government.

3. Social Development

15. Pakistan's performance with regard to social development has been disappointing. In 1993, Pakistan launched the Social Action Program (SAP), with broad-based external support, to address its poor social indicators (Box 3). However, the results at best have been mixed. While health and population indicators showed some improvement, education indicators stagnated. There was some reduction in the gender gap in education, but no progress was made in reducing the urban-rural gap. Because of weak governance and declining public expenditures, the SAP failed to achieve the targeted improvements in the social indicators.

Box 3: Pakistan's Social Action Program Experience

In 1993, the Government of Pakistan, acknowledging the poor social status of its citizens, initiated the Social Action Program (SAP) to improve basic social services-elementary education, primary health care, population welfare, and rural water supply and sanitation. An aid consortium including Asian Development Bank, Department for International Development, the Netherlands Government and the World Bank supported the first phase of the Social Action Plan (1993-1997), and were joined by European Union in the second phase (1997-2002). The first phase mainly aimed to increase sector financing and monitoring and evaluation, while the second phase, based on what was learned in the first phase, placed more emphasis on policy development, governance, and capacity building.

The SAP was successful in terms of putting the social sector on the priority agenda of the federal and provincial governments, building capacity at these levels, and improving planning and evaluation. The SAP helped increase girl's education, and health and family planning services, often in combination with private services. However, because of the growing macroeconomic crisis, public expenditure on education, health, and population after increasing to 2.7 percent of GDP in the mid-1990s, declined to 2.1 percent of GDP in FY2001. The Government and external assistance agencies did not fully anticipate the serious and entrenched neglect of public social services and how difficult it would be to improve implementation and efficiency. Social sector development requires a social transformation and a radical change in the way social services are managed, with full recognition of the roles of communities and the private sector.

16. Education. While adult literacy rates increased slowly to 45 percent in 1998/99, primary school enrolment tended to stagnate during the 1990s. The literacy rate for men, at 58 percent, was twice as high as for women, and was much lower in rural areas (36 percent), compared with urban areas (65 percent). The national gross primary enrollment rate (GER) was 73 percent in 1991 and 71 percent in 1998/99. Although girls' GER has improved somewhat, boys' GER fell from 87 to 80 percent over the same period. While the gender gap lessened, urban-rural disparities increased. By 1998/99 the gap in favor of urban areas had widened to 20 percentage points for boys and 42 for girls. Differences in the GER between income groups were significant, with the GER for the highest quintile being more than twice that for the lowest.

17. Health. In the 1990s, greater progress was made in improving key indicators in the health sector than in education. The infant mortality rate declined by over 25 percent and the proportion of children fully immunized increased by over 30 percent. However, at 49 percent, the immunization rate in 1998/99 was still low, and while the gender gap had declined slightly, the urban-rural disparity widened. The contraceptive prevalence rate improved slightly, and the total fertility rate declined from 6.2 to 4.5 births per woman in 1998/99.

18. Social Protection. The main components of Pakistan's public social protection system are the Zakat,⁴ food support program, Kushal Pakistan Program,⁵ and pensions and medical assistance provided to the small number of workers of registered private establishments. In FY2001 about 2 million beneficiaries received assistance from the Zakat fund, the 1.2 million poorest households received food support, and the Kushal Pakistan Program created employment opportunities for about 0.4 million persons. The total expenditure on social protection schemes in FY2001 was about PRs13 billion, or 0.4 percent of the GDP.

4. Governance

19. By the end of the 1990s, governance had clearly emerged as Pakistan's foremost development concern. Corruption and political instability resulted in waning business confidence, deteriorating economic growth, declining public expenditure on basic entitlements, and serious undermining of state institutions and rule of law. The lack of public confidence in state institutions, including the police and judiciary, eroded their legitimacy and directly contributed to worsening conditions of public security and law and order. The present Government has committed to ongoing reforms to restore the legitimacy and performance of all institutions, political, administrative, judicial, and public security.

20. Governance reforms have been opposed by powerful status quo vested interests; the severe fiscal constraint puts additional restraints on the reform agenda. However, the Government's record of implementing reform commitments made in 1999, in particular providing a legal basis for devolution and police reforms, ensuring the complete separation of judicial and executive powers, and completing the local government elections on schedule, suggests readiness to confront issues that eluded the country since independence.

5. Cross-Cutting Issues

a. Private Sector

21. The 1990s began with the Government reducing controls on private sector development. Investment licensing was abolished, almost all sectors of the economy were opened up for foreign investment, two banks and most of the state-owned enterprises in the manufacturing sector were privatized, and tariff and nontariff trade barriers were reduced. As a result private investment and private sector growth increased. However, in the latter half of the 1990s, political instability, poor law and order conditions, corruption, continuing macroeconomic imbalances, and rising debt servicing burden began to slow down private investment and growth. Following the nuclear tests in May 1998, economic sanctions, freezing of almost $10 billion in private foreign currency accounts by the Government, and the onset of a balance of payments crisis brought the process to a virtual halt. The current Government has implemented several measures to revive private investment and growth, but more needs to be done to achieve the desired success. Reasons for less than expected level of success is the law and order situation which is on the path of improvement. The Government has privatized a number of state owned enterprises but the process of privatization needs to be further accelerated to achieve the desired results.

b. Environment

22. Current environmental problems in Pakistan include land degradation due to erosion, use of agrochemicals, water logging and salinity, depletion of forest and water resources, and pollution associated with industrial and domestic activities. Air and water quality in large cities presents an alarming situation as several critical air pollutants exist in higher levels than the World Health Organization limits, and in many cases, water is not fit for human consumption. Pollution is also playing havoc with the coastal waters of the Indus River and the Arabian Sea, as well as most other rivers and lakes. While adequate control measures exist for production, processing, and import of fertilizers, pesticides, and other chemicals, no legal instruments are available for their disposal, registration or deregistration, or their quality control. Forests, which cover only 4.2 million of the 85 million hectares of the land, are shrinking at one of the highest rates in the world (2.5 to 3.1 percent) per anum, resulting in severely reduced biological diversity. While the basic policy, institutional, and legislative framework covering environmental issues is in place, much needs to be done to develop specific rules and regulations. Enforcement of existing legislation also remains weak, as the institutional and technical capacity needed to deal with infringements of environmental regulations is inadequate.

c. Gender

23. Some progress has been achieved in recognizing gender dimensions when formulating development strategies, but progress in reducing gender inequalities has been slow. Pakistan ranked 127 out of 162 countries in the 1999 gender-related development index and 100 out of 102 countries in the gender empowerment measurement. In the 1980s, the legal status of women was compromised because of the implementation of various discriminatory laws such as the Hudood Ordinance, Law of Evidence, and the Law of Qisas and Diyat, all of which remain in force. Cases of violence against women are widespread. Rural and poor women are generally more vulnerable to gender inequality, patriarchal controls, and violence.

d. Regional Cooperation

24. Given its strategic location and complementarity in resources and markets to its neighbors, Pakistan has substantial potential for cooperation with its neighbors, including the Central Asian republics. In view of the recent developments in Afghanistan, regional cooperation now appears more feasible than at the time of preparing the country strategy and program (CSP) update in July 2001. While the potential for regional cooperation has always been recognized, the state of affairs in Afghanistan precluded their realization. The Government has recently established a unit to handle regional cooperation affairs within the Ministry of Finance.

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A household was deemed to be chronically poor if its mean income was below the poverty line, while a household was transitorily poor if mean income was above the poverty line, but annual income fell below it at least once during the period under consideration (McCullouch and Bauluch, Fellows. IDS Working Paper 97. Institute of Development studies, University of Sussex, United Kingdom).
Average employment elasticity defined as percent change in employment divided by percent change in GDP, is estimated to be 0.4, which means additional jobs created would provide employment to only about 75 percent of the new entrants into the labor force.
Zakat is an obligatory wealth tax under Islamic law. The 1980 Zakat ordinance mandates that 2.5 percent of the value of all declared financial assets is to be automatically deducted at source at the beginning of Ramadan. The system of disbursement of Zakat is overseen by local Zakat committees set up by the Government.
A public works program for local employment generation.
ADB 2001. Country Strategy and Program Update (2002-2004) for Pakistan. Manila.

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B. Current Political, Macroeconomic, and Social Trends

D. Development Priorities and Outlook

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