Regions and Countries

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p. 6 of 11 BACK | NEXT 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

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D. Development Priorities and Outlook

1. Pakistan's Objectives and Priorities

25. The Government's vision and development goals are articulated in the Ten-Year Perspective Development Plan 2001/11 (the Perspective Plan), and its poverty reduction strategy. The key objectives of the Ten-Year Perspective Plan are to (i) accelerate GDP growth, reduce unemployment, and eliminate poverty; (ii) contain public borrowing and encourage private sector and private savings; (iii) improve economic competitiveness; (iv) build the human capital base; and (iv) institutionalize social capital conducive to sustainable development. In pursuit of these key development objectives and priorities, the Government has set itself the following targets of the International Development Goals.

26. Poverty Reduction Targets. The Government's poverty reduction target is to reduce absolute poverty from 30 percent in 2001 to 15 percent in 2011. The perspective plan envisages a four-pronged attack on poverty centering on empowering the poor and providing them with increased economic opportunities, greater access to physical and social assets, and improved access to welfare and support developing appropriate social safety nets. These in turn require revival of economic growth, and getting the Pakistan economy back on a sustainable, high growth path.

27. Reviving Growth and Creating Employment. The strategy is to revive economic activity in the medium term, and accelerate it over the long term. The growth rate is projected to increase to 5.2 percent by FY2004 and 6.3 percent by FY2011. In the medium term, the four sectors identified to lead the revival of growth include agriculture, small and medium enterprises (SMEs), information technology, and energy (gas and coal). The Government's target is to create 11.3 million jobs during the Perspective Plan period by promoting growth in labor intensive sectors and activities such as agriculture and SMEs, as well as supporting rapid expansion of microcredit through a range of institutions and initiatives.

28. Human Development. Government recognizes the need to improve the country's social indicators. However, the need to achieve macroeconomic stabilization by reducing the fiscal deficit, preclude the possibility of significantly increasing public expenditures on education, health and other social sectors in the medium term. Therefore, the strategy under the Interim Poverty Reduction Strategy Paper (IPRSP) is to more effectively utilize available resources through governance reforms, improved institutional mechanisms; and increased focus on the disadvantaged, weaker sections of society and rural areas.

29. Governance Reforms. An extensive structural and governance reform agenda is an integral part of the IPRSP and the Perspective Plan. The key problems that the reform agenda proposes to address include (i) poor fiscal performance, including management of external and domestic debt; (ii) problems associated with the persistent social exclusion of the poor, women, and minorities from access to basic services; (iii) the chronic failure of past efforts to address accountability, corruption, and poor public sector performance; (iv) ineffective and inefficient intergovernment relations between federal and provincial levels, and marginalization of local governments; and (v) loss of trust by the common citizenry in public institutions, especially in the administration of justice and the police. The Government's governance reform agenda covers three key areas: (i) improving the public financial management system, public accounting and auditing functions, civil service, and tax administration; (ii) enhancing effectiveness of delivery of basic public services through a comprehensive devolution plan; providing access to justice, and reducing vulnerability of poor through legal, judicial, and police reforms; and (iii) tackling corruption by reducing incentives for it through privatization, deregulation, tariff reduction, and tax system reforms; and establishing an effective anticorruption agency as a deterrent.

30. Sustainable Environmental Management. The national conservation strategy was completed in 1992 and identifies 14 core management areas for action. The strategy was followed by the more comprehensive National Environmental Action Plan approved in February 2001, which narrows the Government's policy focus on the environment to four core programs: clean air, clean water, waste management, and ecosystem management. Programs and projects relevant to all four core areas are currently being prepared for implementation. In 1997, the Environmental Protection Act was promulgated, providing a comprehensive framework for preservation of the environment and giving extensive powers of enforcement of environmental regulations to the environmental protection agencies.

2. Public Finance and Investment

31. Pakistan is burdened with excessive debt, the servicing of which is crowding out investment and stagnating growth, which in turn is limiting its capacity to service the debt and reduce the debt burden. Pakistan has adopted a strategy of debt reduction and management focused on reducing the fiscal deficit, increasing exports, promoting foreign investment, following a market-based exchange rate policy, and relying as far as possible on concessional assistance to meet the external financing gap. The Government expects to raise the average investment rate from 14.7 percent of GDP in FY2001 to 20.6 percent in FY2011, and the national savings rate from 12.7 percent of GDP in FY2001 to 20 percent in FY2011. A substantial portion of the improvement in the savings rate will come from increased Government savings. The improved fiscal performance will also help to reduce internal debt from 46.5 percent of GDP in FY2001 to 27.1 percent in FY2011.

32. In the medium term, the Government proposes to undertake a significant resource mobilization effort and exercise control over recurrent expenditure to reduce the fiscal deficit from 5.3 percent of GDP in FY2001 to 3.3 percent in FY2004. At the same time, poverty focused budgetary expenditure will be increased from 3.4 percent of GDP to 4.2 percent, and development expenditure (excluding poverty related expenditures) from 2.0 percent of GDP to 2.5 percent. During this period, national savings will increase from 12.8 percent of GDP in FY2001 to 15 percent in FY2004, with higher Government savings contributing 63 percent of the increase. While these measures will help Pakistan to move to a sustainable macroeconomic balance, the country will still need substantial external assistance to fill the investment-savings gap, and to help build up its foreign exchange reserves to the minimum level required to reduce its vulnerability to speculation and exchange rate instability (Box 4). The average current account deficit for next three years (FY2002 to FY2004) is estimated at 2.4 percent of GDP, and the annual external financing requirements during this period (including for reserves) at about $2.5 billion.

3. Role of External Assistance

33. Over the past three decades, external assistance has played a central role in the economic development of Pakistan. Since the mid-1990s the trend in official development assistance has been mixed (Appendix 2). Annual commitments declined from $2.6 billion in FY1996 to $1.7 billion in the following year. They rose to $2.2 billion in FY1999 and were estimated at 1.6 billion for FY2001. Disbursements followed a similar mixed trend (Appendix 2, Table A2.3) and were 2.9 percent of GDP and 20 percent of the total investment in that year. The decline in both commitments and disbursements was particularly sharp following the nuclear tests in May 1998, when economic sanctions were imposed and most new bilateral assistance was stopped. Prior to sanctions, Japan was the largest provider of bilateral assistance followed by the US. Four external assistance sources, ADB, Japan, US, the World Bank, accounted for 68 percent of the loan commitments during 1996-2001, and ADB with 23 percent of the total was the largest source. Details on the operations of external aid agencies are provided in Appendix 2.

4. ADB's Assessment of the Development Agenda

34. The Government's development agenda provides a good balance between growth and social development. It is also realistic in recognizing that in the medium term macroeconomic stabilization must be the priority, and during this period progress in poverty reduction and social development must depend largely on more effective use of existing resources. It therefore rightly focuses on promoting growth in labor intensive sectors and activities for employment generation, and on structural and governance reforms to improve efficiency and effectiveness of the public and private sectors. However, the problems facing Pakistan are enormous and will require concerted government effort in the medium term.

35. Poverty Reduction Targets. To mitigate the impacts of rising poverty, the Government has evolved a program of economic growth, human development, and governance reforms. While the targets are seemingly ambitious, particularly for the medium term, the focus and direction of the Government's reform program are essentially correct.

36. Sustainable Economic Growth and Employment Generation. The target annual growth rates of 5.2 percent in FY2004 and 6.3 percent in FY2011 are not ambitious compared with the growth rate achieved historically by Pakistan (e.g., 6.5 percent in the 1980s). However, the target represents a significant increase in comparison with the average annual growth rate of 3.4 percent during the last five years. Improvements in the growth rate require both critical fiscal reforms and a substantial improvement in private sector confidence. Reduction in the fiscal deficit, increase in foreign exchange reserves, and successful implementation of the Poverty Reduction Growth Facility and debt restructuring agreement with the Paris Club should help restore private sector confidence over the medium term. If over the next year or so the ambitious structural and governance reform agenda set out in the IPRSP is successfully implemented, the law and order situation improves, and power is smoothly transferred to an elected government in October 2002, the prospects for achieving the medium-term growth target will be positive.

37. Human Development. Given the need to utilize available resources more effectively to improve social indicators in the medium term, the Government is relying heavily on the devolution program to make a difference by promoting competition, ownership, and accountability in the delivery of public services; and by involving people more actively in community issues through village councils and citizen community boards. However, international experience has shown that devolution takes time to have an impact. Also, technical and institutional capacity at the district and local levels is extremely weak, and unless a major capacity building initiative is implemented quickly to address this problem, the expected improvements will not be forthcoming.

38. Improving Governance. The Government's ambitious governance reform agenda (para. 29) is at the core of its strategy for reviving growth, reducing poverty, and accelerating social development. In some areas, such as devolution, public expenditure management, anticorruption, and the independence of the Central Bank, appreciable progress has been made. In others, such as tax administration, the justice system, the police, and the civil service, the process is at a relatively early stage. However, for the success of the proposed development agenda to succeed, the need to consolidate the reforms in the first category is critical as is accelerating the process in the second.

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