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Country Strategy and Program 2002-2006: Pakistan
Executive SummaryDuring the 1990s, Pakistan was faced with growing macroeconomic imbalances, declining economic growth, and rising poverty. 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. However, the present Government, which came into power in October 1999, moved forcefully ahead in implementing reforms across a broad front. By the end of fiscal year 2001, Pakistan's macroeconomic indicators had improved significantly. The fiscal deficit had declined, inflation was low, the balance-of-payments deficit was reduced, and exports and foreign exchange reserves were increasing. The events following 11 September had a major adverse impact on Pakistan's fiscal and external balances that threatened to jeopardize the progress made in stabilization and structural reform. However, the successful completion of the standby arrangement (SBA) and the agreement on the Poverty Reduction and Growth Facility with the International Monetary Fund, the lifting of economic sanctions and resumption of bilateral assistance, greater access to G-7 markets and the debt restructuring agreement reached with the Paris Club in December 2001 would make it possible for Pakistan to achieve sustained, high growth in a much shorter period than earlier thought possible. While the recent progress of reforms has been encouraging, much needs to be done to bring Pakistan's social indicators on par with other countries with similar levels of per capita income. The inadequacy of social development is compounded by the fact that 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, and the number of poor increased by over 12 million during this period. Over three fourths of the poor live in rural areas, where the depth and severity of poverty are also greater. The high proportion of transient poverty in rural areas is one of the characteristics of poverty in the country. A number of other features characterize the poor, including lower level of education, greater number of children in a household, greater age of the household head, negligible quantity of physical assets, greater degree of reliance on informal sector employment, gender inequality, and greater degree of vulnerability to environmental degradation. The Government's vision and development goals are articulated in the Ten Year Perspective Development Plan 2001-11, and Poverty Reduction Program. The key objectives of the Perspective Plan are to (i) accelerate gross domestic product growth, reduce unemployment, and eliminate poverty; (ii) contain public borrowing, and encourage private sector and private savings; (iii) improve economic competitiveness; (iv) build human capital base; and (iv) institutionalize social capital conducive to sustainable development. The Government's poverty reduction target is to reduce absolute poverty from 30 percent in 2001 to 15 percent by 2011 through 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 by developing appropriate social safety nets. The Government's development agenda provides a good balance between growth and social development. Acknowledging the disparity in Pakistan's historically high growth rates and low level of social indicators, the 1995 country operational strategy identified human resource development and economic growth as its primary and secondary objectives. The interim 1999 country operational framework was formulated to take into account the changed economic and political conditions following the nuclear tests. It sought to address the challenges of weak governance, weak absorptive capacity resulting in inadequate implementation of government policy, and high external debt. Past experience suggests that successful implementation of (i) governance reforms that are in accordance with government's commitments to legal, judicial, police, and civil service reforms; and (ii) government restructuring consistent with the devolution plan, is central to achieving Pakistan's development and poverty reduction goals. Furthermore, a review of the operations of the Asian Development Bank (ADB) in Pakistan shows that generally program loans that promote and support Government reforms have performed satisfactorily, whereas the project and sector loans have performed less, well largely because of governance problems relating to relations between different levels of government, management and institutional capacity at the sector level, and participation and ownership at the local level. The country strategy and program (CSP) is based on the outcome of ADB consultations with the Government over the past 12 months, and 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, with good governance as the major focus. With regard to sustainable, pro-poor growth, ADB will support structural reforms in key sectors like energy, in addition to higher growth and greater stability of income and employment in rural areas. The focus will be on developing the agriculture sector, as well as increasing nonfarm employment opportunities by developing agribusiness among other measures. ADB will also focus on the development of small and medium enterprises (SMEs) to encourage employment generation. In addition, ADB will selectively focus on infrastructure development in the energy and transport sectors. With regard to inclusive social development, ADB will focus on supporting the Government's devolution plan, which aims to improve service delivery of social infrastructure at the grassroots level. The activities to be supported by ADB include establishing decentralized financing, planning and delivery of selected social services (health and population, and education), improving quality of primary education by supporting changes in governance, and improving municipal services in the context of devolution with a particular focus on services for the poor. With regard to good governance, ADB is supporting two core governance programs. The first focuses on reforms to the provincial and district judiciary and police, while the second focuses on administrative and political reforms required to implement the Government's commitment to decentralization. In addition, all interventions under the strategy, such as support for public policy capacity, enforcement of female and child rights, promotion of public-private partnerships in basic education, provision of services in urban and rural areas, and revitalizing instruments for social protection, will be designed and implemented to ensure consistency with the overall government reforms. ADB plans to promote private sector development by supporting initiatives for development of SMEs, rural finance, and agribusiness; and assisting in capital market development, and restructuring and privatizing selected state-owned financial institutions. ADB will continue to support sustainable environmental management by continuing to build government capacity, including at the district level, to effectively monitor and enforce environmental regulations. ADB will support nature conservation and biodiversity protection initiatives in national parks and protected areas. In addition, ADB will promote regional cooperation by supporting the Government in developing a subregional cooperation framework, and assisting in the development of transportation networks that link landlocked Afghanistan and the Central Asian republics to Pakistan and beyond. ADB will work with governments in the region to support the development of regional energy sector infrastructure like oil and gas pipelines and power transmission systems. The proposed Pakistan lending program for 2003-2005 is estimated at $2,400 million, or an average of about $800 million per annum. The estimated average per annum breakdown between Asian Development Fund and ordinary capital resources is $250 million and $550 million, respectively. Actual Asian Development Fund allocations will be based on the outcome of the yearly performance-based allocation exercise. Core poverty and poverty intervention projects constitute 54 percent of the total lending program. The country program will focus on seven sectors: (i) agriculture and rural development, (ii) energy (the gas subsector and renewable energy development), (iii) transport (strengthening intersectoral linkages and market access), (iv) finance (including microfinance), (v) health and education, (vi) water supply and sanitation in both urban and rural areas, and (vii) governance. While ADB has provided assistance to 28 subsectors in Pakistan, it has withdrawn from certain subsectors and is currently assisting in 15 subsectors. The CSP proposes a more focused approach on 10 subsectors for ADB assistance. Under the Government's poverty reduction strategy an elaborate framework for tracking pro-poor public expenditure and poverty monitoring has been established to which all the major donors have agreed. The monitoring system has three components including expenditure tracking, output mapping, and outcome monitoring, all of which are relevant to track progress in achieving the International Development Goals. ADB has selected an appropriate subset of performance indicators for the CSP from the targets agreed to by the Government in the Interim Poverty Reduction Strategy Program. These are developed within the framework of the overall poverty reduction strategy, and include targets and goals for the economy, poverty reduction, education and gender equality, health sector, reproductive health, environment, social protection, and poverty-related budgetary expenditures.
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