Regions and Countries

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p. 8 of 11 BACK | NEXT Executive Summary I. Development Agenda 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

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III. ADB's Strategy

57. The ADB strategy is based on the outcome of consultations with the Government over the past 12 months. The consultative process began with ADB's poverty analysis, four provincial workshops on Pakistan's Poverty Reduction Program, and the High-Level Forum on Poverty Reduction in Islamabad in April 2001. The consultative process was carried forward through an evolving dialogue regarding the Government's interim poverty reduction strategy paper, and the various CSP missions fielded by ADB. ADB's strategy is based on Pakistan's development goals and priorities for poverty reduction as articulated in the Government's Perspective Plan and Poverty Reduction Program, and ADB's long-term strategic framework. It also incorporates ADB's overarching development objective of poverty reduction and lessons learned from past operational experience in Pakistan. The key areas of ADB assistance are defined around the shared strategic priorities of sustainable pro-poor growth, inclusive social development, and good governance. However, under the circumstances, successful implementation of governance reforms, notably in accordance with the Government's commitments to legal, judicial, police, and civil service reforms; and government restructuring consistent with the devolution plan, is central to achieving Pakistan's development and poverty reduction goals. Therefore, good governance is the major focus of the strategy, under which ADB will assist the Government to establish the legal and policy basis for governance reforms; build the capacity of governance institutions with a special focus on province and local government levels; and promote efficient, equitable, and accountable use of available resources. The CSP matrix (Appendix 4) shows the relationship between the Government's key development priorities, drawn from the perspective plan and the IPRSP, the corresponding strategic themes of ADB assistance, and the specific operational instruments in the 2002-2004 program in support of this strategy.

A. Poverty Reduction

58. The first half of the ADB strategy period is likely to be dominated by macroeconomic stabilization and structural adjustment policies. Thus the strategy is conditioned by the fact that although a long-term economic growth rate in excess of 5.5 percent of GDP is required for sustained poverty reduction, this will not likely be achieved during the first half of the CSP period. Pakistan's fiscal constraints also preclude significant increases in pro-poor spending through the development budget. These circumstances make it imperative for the Government and ADB to focus during the CSP period on (i) supporting activities that support structural reforms to lay the basis for more rapid, long-term economic growth; (ii) promoting growth in sectors that are labor-intensive to generate employment opportunities, particularly for those most vulnerable to the economic slowdown; and (iii) improving expenditure management and efficiency in the delivery of basic public services so that, despite resource limitations, a significant improvement in Pakistan's social indicators can be achieved during the CSP period.

1. Sustainable, Pro-Poor Economic Growth

59. Economic growth is critical for poverty reduction, since without a minimum level of growth poverty reduction is almost impossible. In addition there are strong interactions between pro-poor growth, on the one hand, and human development, good governance, and cross-cutting concerns such as private sector development and regional cooperation on the other. Growth creates the fiscal space and the resources for investment in human development, financing governance reforms, attracting private sector investments, etc. Therefore the ADB strategy attaches great importance to reviving growth in Pakistan. However, the strategy is selective, focusing on interventions aimed at addressing critical bottlenecks, or promoting growth in sectors or activities that have maximum poverty reduction impact. Thus under pro-poor growth, ADB's strategy will be to focus on interventions aimed at structural reforms in key sectors, rural development, employment generation, and removal of infrastructure constraints.

60. Structural Reforms. Macroeconomic stability is important for poverty reduction and sustainable, high growth. IMF has taken the lead in supporting macroeconomic policy reforms, while ADB has complemented the reform efforts by supporting restructuring and privatization of loss-making public utilities in the power sector, reform of the trade regime and export finance, and improvement of public debt management capacity. While no further interventions in the power sector are planned, ADB will support the development of indigenous energy sources such as natural gas through deregulation, privatization, and creation of an environment to attract private foreign investment. ADB will continue support to enhance public debt management capacity. To complement this, ADB will assist the provincial governments to improve public resource management, and local governments to enhance their own-source revenue base, and effectively use resources to deliver basic public services to the poor.

61. Rural Development. Seventy-five percent of Pakistan's poor live in rural areas, a large proportion of whom are pushed into poverty because of the volatility of income. ADB will support higher growth and greater stability of income and employment in rural areas by focusing on (i) getting the policy and institutional framework right; (ii) increasing agriculture productivity and diversification by moving to market-based agricultural prices, strengthening research and extension services, and expanding the role of the private sector in storage and agriculture support services; (iii) increasing nonfarm employment opportunities by developing agribusiness for exports and rural SMEs; (iv) promoting rural-urban linkages by improving communications, particularly rural roads; (v) expanding rural economic infrastructure, especially for irrigation, drainage, and water resource conservation and management; (vi) promoting financial intermediation, mobilizing savings, and enhancing access to credit in the rural areas; and (vii) investing in infrastructure in areas where incidence of poverty is high, and where the lack of infrastructure is a critical barrier to development.

62. Employment Generation. SMEs are highly labor intensive and provide employment to the bulk of Pakistan's nonagriculture workforce. SMEs in the manufacturing sector also account for a significant share of manufactured exports. SMEs suffer from lack of access to credit, excessive government regulations, an arbitrary and exploitative tax administration system, a weak technological base, and lack of business support services. Future assistance will be based on a thorough assessment of the obstacles to SME growth, and will support policy and regulatory reforms, as well as development of supporting institutions, infrastructure, adoption of new technology, and enhancing access to credit and business support services.

63. Addressing Infrastructure Constraints. Inadequate infrastructure continues to hamper economic growth. ADB will selectively focus on the energy and transport sectors, but to ensure that sector governance issues are fully addressed it will move away from project loans to sector development project loans with both investment and policy components aimed at addressing issues such as corporate governance, institutional capacity, cost recovery, adequate operation and maintenance, and public-private partnerships.

2. Inclusive Social Development

64. A key factor in Pakistan's poor growth performance in the 1990s was its low level of human development.¹⁸ Over the years, Pakistan has underinvested in the social sectors. However, the experience of the SAP has made it clear that accelerating human development is as much an issue of increasing expenditure on social sectors as of improving the effectiveness of spending through better governance. The result is increasing gaps in social indicators between the rich and the poor, and rural and urban areas. The Government's devolution plan can be instrumental in improving quality and access to education, health, and other public services. ADB strategy aims to assist the Government in making devolution a success. The activities to be supported by ADB include (i) improving provincial public resource management capacity, including participatory strategic planning for better allocative efficiency of human development investments; (ii) establishing decentralized financing, planning, and delivery of selected social services (health and population, and education); (iii) improving quality of primary education by supporting changes in governance structures-institutions and incentives, promoting public-private/civil society partnerships in the context of devolving service responsibilities to local governments; and (iv) improving municipal services in the context of devolving of municipal functions to local governments, with particular focus on services for the poor.

65. Given Pakistan's low gender development index ranking, women's participation in the workforce, government, and judiciary must be proactively promoted. ADB's strategy will be based on the following approach: (i) targeting projects for women, (ii) mainstreaming gender across all projects, and (iii) promoting policy and institutional reforms for awareness and enforcement of women's right's and representation in all aspects of economic and social development. Growth of SMEs and agribusiness being supported by the strategy will also help to expand female employment opportunities. ADB will provide TA to help review laws and government rules and procedures to make them more gender sensitive, to sensitize the government bureaucracy on discrimination faced by women, and build capacity at all levels of government so that gender concerns are considered in all important areas of government from policy formulation, through planning and budgeting, to service delivery.

66. For social development to be truly inclusive it must provide protection to the most vulnerable groups, particularly children and the indigent. ADB is supporting the Government in increasing the effectiveness of the enforcement of child labor laws, and promoting self-monitoring by business. Through its rural development program in Sindh, ADB is addressing the issue of bonded labor in partnership with concerned local governments and NGOs. ADB will also provide TA for social protection, Zakat, and philantrophy to help Pakistan move to a broad-based, effective social protection system.

3. Good Governance

67. Achievement of Pakistan's long-term development and poverty reduction objectives hinges on the success of governance reforms. The primary theme of ADB's strategy is good governance, including management of the development process; public resource and expenditure management; transparency and accountability of economic policies; strengthening of institutions, systems, and capacity; and promotion of local participation and ownership. In this regard a two-pronged approach is envisioned. First, all interventions under the strategy, such as supporting public policy capacity, enforcing female and child rights, promoting public/private partnerships in basic education, the provision of services in rural and urban areas, and revitalizing instruments for social protection, will be designed and implemented to ensure consistency with the overall governance reforms. Second, direct assistance for the Government's governance reform agenda will constitute a significant proportion of ADB assistance to Pakistan during the CSP period. At the center of ADB's support are two programs. The first will address issues relating to provincial and district judicial and police reforms, and the second the need for federal, provincial, and district administrative and institutional reforms arising from the Government's devolution plan.

68. The strategy also supports assistance for improving corporate governance and restructuring state-owned enterprises, particularly in the financial sector. The objective of these interventions is to move these enterprises as quickly as possible into the private sector, to plug the current massive leakage of public resources and promote the emergence of an efficient and dynamic infrastructure and financial support services private sector. Improved performance of the legal system as a result of the ongoing ADB assistance to the judicial and police reform program should also provide an impetus to the private sector and in particular to foreign direct investment and the growth of SMEs.

69. These governance interventions support a range of reforms that have major implications for relations between the state and nonstate sectors. Implementation of governance reforms depends on the creation of a broad-based constituency of support and consensus building among government ministries, civil society, and the private sector. ADB will throughout its assistance activities encourage the creation of these coalitions in civil society and their responsible, coherent dialogue with government, particularly in the context of devolution.

B. Thematic Priorities

70. Decentralization of ADB Assistance. ADB assistance to Pakistan was generally coursed through the federal Government and it's associated departments and agencies. With the Government's adoption of the 2000 Local Government Plan, a rights-based, people-centered devolution of power scheme whereby powers are being devolved to the provincial and local governments, a window of opportunity exists to provide assistance directly to provincial and local governments. This has the potential of greatly enhancing the development impact of ADB assistance and further streamlining portfolio management. The strategy will therefore increasingly provide assistance directly to the provincial and local governments. To achieve this objective, initially ADB will work to get the provincial public resource management framework right and build the necessary institutional capacity. Subsequently, projects will be done directly with the provincial governments. This will permit direct ADB assistance for regions with higher incidence of poverty such as rural Sindh, southern Punjab, and border areas of Balochistan and NWFP.

71. Sustainable Environmental Management. ADB supports the Government's strategy of mainstreaming environmental issues, and incorporating such concerns into all project interventions. Building capacity within the Government to effectively monitor infringements of environmental regulations is crucial, and ADB is supporting initiatives such as the development of the self monitoring and reporting tool for reporting industrial emissions to the environmental protection agencies. With decentralization of administration to the district level under the revised administrative arrangements, environmental management is also being decentralized to the district levels; ADB will support the necessary capacity building measures. Finally, ADB will explore the possibility of using Japan Fund for Poverty Reduction funding to support nature conservation and biodiversity in national parks and other protected areas.

C. Private Sector Development

72. Restoring private sector confidence is the key to reviving growth in the country. Improvement in Pakistan's macroeconomic fundamentals because of the stabilization program, and better governance should go a long way to restoring private sector confidence, increasing investment, and accelerating growth. In addition, ADB's initiatives to develop SMEs, rural finance, and agribusiness will help to deepen and diversify private sector activities. Finally, given the key role of the financial sector in private sector development and in raising the savings rate, and ADB's successful assistance for capital market development,¹⁹ assistance will be provided to complete the unfinished agenda by extending the capital market reforms to (i) develop the bond market and sound contractual saving institutions and instruments, and (ii) restructuring and privatizing of selected state-owned financial institutions.

D. Regional Cooperation

73. ADB's assistance in the near term will support the Government's activities in promoting regional cooperation. Over the medium term and within a subregional cooperation framework, ADB assistance will focus on two sectors. First, transportation networks for roads and railways will be developed to link land-locked Afghanistan and the Central Asian republics to Pakistan and beyond. Within ADB's road sector development strategy, projects programmed for the border provinces of Balochistan and NWFP will develop the regional network. Second, in the energy sector, oil and gas pipelines and power transmission will be developed. While the main investors in these projects are expected to be the private sector, ADB will serve an important and catalytic role in promoting a suitable environment, by supporting feasibility studies, review and reform of regulations, and mitigation of sovereign risk through its guarantee operations.

E. Risks

74. Three main risks could hinder the effective CSP implementation.

1. The 11 September 2001 terrorist attacks in the US have had a multidimensional impact on Pakistan. As a front-line state, its economy has been adversely affected resulting in slower growth and increased internal and external imbalances in FY2001. The international community has responded with additional assistance and other measures to mitigate the impact on the economy. However, the events following 11 September 2001, and the heightened tensions between India and Pakistan have added to the uncertainty. The deeper than expected worldwide recession in the aftermath of the 11 September 2001 attacks will also take its toll on the economy at a time when it can least afford after several years of low growth. Thus implementing reforms with short-term economic cost will be even more difficult. It will be essential for ADB and other assistance agencies to support the Government through enhanced assistance and at the same time help it maintain its focus on the reforms through policy dialogue.

2. Institutional reforms are time consuming, and opposed by those with vested interests who benefit from the existing system. The tenure of the present Government ends in October 2002 and the new government may not pursue the reforms as vigorously. ADB and other external financing agencies can reduce this risk by building devolution and other key reforms into their assistance programs, thus making it difficult for the new government to reverse the reforms. At the same time, ADB will assist the Government to initiate public dialogue on reforms, including with the political parties, to create broad-based ownership for the reform process.

3. Pakistan has generally weak implementation capacity, particularly at lower levels of government. For devolution and judicial, police, and other fundamental reforms to succeed, human resource capability at local levels will be the key. The risk is that without this capacity, the reforms will not be able to yield any early benefits and therefore could be discredited. ADB plans to assist the Government in building local capacity as quickly as possible. ADB is also in discussion with bilateral assistance agencies to expand the resources available for capacity building and for more effective coordination of these efforts.

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