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Regions and Countries Country Partnership Strategies Document
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Country Strategy and Program 2004-2006: Pakistan
I. Current Development Trends and IssuesA. Recent Political and Social Developments1. Following elections in October 2002, new governments at the federal and provincial levels were formed in November 2002. The Senate elections were subsequently held in February 2003. The Pakistan Muslim League (Quaid Group) or PML (Q), heads the coalition governments in the center and three of the four provinces, while the Muttahida-Majlis-e-Amal (MMA), a coalition of religious parties, holds office in North-West Frontier Province (NWFP). 2. The Federal Government and the highest political levels in the provincial governments have reaffirmed their continued commitment to the ongoing governance and economic reform program, as well as the policy emphasis on macroeconomic stability, poverty reduction, and growth. However, the elected governments face continuing pressure for populist policies, which may impact the ongoing reforms. Also, negotiations between the Government and the opposition on the Legal Framework Order (LFO)1 are stalled, which is the cause of a degree of political uncertainty in the country. On the positive side, the recent signs of rapprochement with India could have great significance for internal stability, continuity of governance reforms, and private investment. B. Economic Assessment and Outlook3. The economy’s overall performance improved significantly in fiscal year (FY) 2003. The gross domestic product (GDP) growth rate is estimated at 5.1% compared with 3.4% in FY2002 (Appendix 1, Table A1.2). The higher growth was made possible by strong performance in all sectors of the economy: 4.1% growth in agriculture, 5.4% in industry (7.7% in manufacturing), and 5.3% in services. Supported by the sharp fall in interest rates, total investment increased to 15.5% of GDP in FY2003, and the fiscal deficit declined to 4.6% of GDP. For the first 9 months of FY2003, inflation declined to 3.3%; exports and imports increased by 16.6% and 21.9% respectively; and workers’ remittances increased to $3.1 billion from $1.5 billion during the same period in the last fiscal year. As a result, the current account surplus, excluding official transfers, increased to $2.6 billion compared with $1.0 billion during the same period in the last fiscal year. The foreign exchange reserves with the State Bank of Pakistan (SBP), at $9.3 billion on 31 May 2003, have increased to 8 months of imports. 4. The medium-term prospects for the Pakistan economy have improved since the finalization of the country strategy and program (CSP). The reduced economic uncertainty because of Pakistan’s improved macroeconomic fundamentals should boost investment and economic growth. The rate of inflation is expected to remain low. On the external account, both exports and imports are likely to continue to grow strongly, and remittances are expected to sustain their current high levels. Thus, while the trade gap will widen, the current account on the balance of payments is expected to remain in surplus. However, this positive outlook is subject to certain risks that will need to be carefully managed to ensure that the process of economic recovery is not derailed. These include the risk that the Government’s commitment to the reform program may waiver on account of pressure to implement populist measures and postpone unpopular decisions. There is also the risk that weaknesses in implementation capacity may hamper good macroeconomic management and improved service delivery at the local level. Further, global factors, such as a slowdown in the world economy, may also check the favorable economic outlook. C. Implications for Country Strategy and Program5. The focus of the CSP is on supporting poverty reduction in Pakistan through provision of assistance in the key strategic areas of good governance, sustainable pro-poor economic growth, and inclusive social development, with good governance being the primary theme of the strategy. Under good governance, the CSP emphasizes successful implementation of governance reforms, in particular devolution, and legal, judicial, police, and civil service reforms, which are critical to achieving Pakistan’s development objectives. For pro-poor economic growth, interventions in the areas of rural development, employment generation, and infrastructure are emphasized, together with support for sector-level policy reforms. In the area of inclusive social development, the CSP prioritizes assistance for decentralized financing, planning, and delivery of social services, mainstreaming gender issues, and improving social protection mechanisms. Finally, the CSP emphasizes a number of crosscutting themes including subregional cooperation, sustainable environmental management, and the decentralization of Asian Development Bank (ADB) assistance to provincial governments. 6. This strategy continues to be relevant, and is in line with the priorities of the new Government; it will therefore remain unchanged. However, while the federal and provincial governments have assured their commitment to, and continuity in, the ongoing governance and economic reform program, it needs to be recognized that the new political governments would have to develop broad-based support to sustain the reform process. Thus, in terms of implementation of the reforms, there could be some uncertainties. This underscores the critical importance of continued ADB support for governance reforms in general, and devolution in particular, to assist the country in achieving its reform objectives. 7. ADB will support the deepening of the ongoing governance and macroeconomic reforms, through provision of assistance for second generation reforms at the provincial and sector levels. Gender reforms would be an integral part of the governance program and ADB’s strategy would focus on supporting political, administrative, and fiscal initiatives to consolidate these reforms. ADB will continue to support effective relations between the nongovernment organization (NGO) sector and governments in respect of policy advocacy, in the implementation of the new institutional arrangements at the local level that provide for greater citizen involvement in the affairs of government; ADB will also aim to strengthen NGO engagement in the delivery of services. ADB lending to devolved sectors will aim to strengthen devolution, by ensuring that the design of future ADB projects is consistent with the new governance structures under the local government ordinances (LGOs) promulgated in August 2001. Where appropriate, efforts will be made to realign recently approved ADB projects for devolved sectors. Finally, ADB will assist the Government in improving its communication of the reform program, and broadening stakeholder ownership, through organizing a series of workshops on related topics with support from the Asian Development Bank Institute (ADBI). 8. With the expected improvement in growth, ADB will reinforce its emphasis on rural development and employment generation to ensure that the growth is pro-poor. An important addition proposed in ADB’s strategy in this regard is its re-engagement in the water sector through province-focused projects on water conservation, drought mitigation, and rehabilitation of the irrigation infrastructure. ADB’s assistance in this sector will be based on the Water Resources Strategy Study completed in June 2002, and will take into account the need for strengthening institutional capacity. As regards inclusive social development, ADB’s emphasis will remain on improving delivery of social services by supporting both increased public sector allocations made possible by enhanced fiscal space, and improved governance through strengthening devolution, sector administration, and financial management. ______________
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