Docmen,L Ul The World Bank Group Public Disclosure Authorized
Renort No. 24399-PAK
MEMORANDUM OF THE PRESIDENT
OF TU Public Disclosure Authorized INTERNATlONAL BANK FOR RECONSTR-IUCTION AND0 DEVELOPMENT
AND THE
INTERNATIONAL DEVELOPMENT ASSOCIATION
AND THE
INTERNATIONAL FINANCE CORPORATION Public Disclosure Authorized
EXECUTIVE DIRECTORS
ONA
COUNTRY ASSISTANCE STRATEGY
FOR
TH. TTLAMHC REPIRL(TT OF PAICJqTAN
J un A'4, 2002 Public Disclosure Authorized The last Country Assistance Strategyfor Pakistan (R95-213/i) was discussed on December 19, 1995 and a ProgressReport (R2001-0076) was discussed on June 12, 2001
CURRENCY AND EQUIVALENTS
Currency Unit = Pakistan Rupee US$1 = PKR 60.50 (March 2001 Floating Inter Bank Rate)
FISCAL YEAR
July 1 - June 30
ABBREVIATIONS AND ACRONYMS
AAA Analytical and Advisory Activities MDG Millennium Development Goals ADBP Agricultural Development Bank of Pakistan MIGA Multilateral Investment Guarantee Agency AsDB Asian Development Bank NAB National Accountability Bureau AG Auditor General NBP National Bank of Pakistan AIDS Acquired Immunodeficiency Syndrome NCBs Nationalized Commercial Banks AJK Azad Jammu Kashmir NCSW National Commission for the Status of Women BMP Bait-ul-mal NDP National Drainage Program CAO ^-un..; Assis* 0-.c ED. Th'tse Na fiona! ID-.--~; P>A-,.D-c Au'.or;. CBR Central Board of Revenue NEAS National Education Assessment System CFAA Country Financial Accountability Assessment NHA National Highway Authority CGA Comptroller General of Accounts NGOs Non-Govemmental Organizations CIP Community Infrastructure Project NRB National Reconstruction Bureau CPAR Country Procurement Assessment Review NWFP North West Frontier Province DLC Distance Learning Center OFWM On-Farm Water Management DEC Development Economics & Chief Economist OGDC Oil & Gas Development Corporation D Fsh Deve-lop.m._ r..t F;.n^nce LntttosPACs- Publii A--utsCm... -...... te DISCOs Distribution Corpanies PHC Primary Health Care DPR Development Policy Review PHIRD Policy and Hunan Resource Dev. Fund ESR Education Sector Reform PIFRA improvement to Financial Reporting and EU European Union Auditing Project FESCO Faisalabad Electric Supply Company PPAF Pakistan Poverty Alleviation Fund FMCs Fiscal Monitoring Committees PPF Project Preparation Facility FSDIP Financial Sector Deepening and PPL Pakistan Petroleum Limited Lw.. mi_Aa't;on P.o,-ect .... PPRwM MWv-.^.dcine cnv V...... GBHP Ghazi Barotha Hydropower Project PRGF Poverty Reduction and Growth Facility GDLN Global Development Learning Network PRSC Poverty Reduction Support Credit GDP Gross Domestic Product PBRSP Poverty Reduction Strategy Paper HBL Habib Bank Limited PTCL Pakistan Telecommunication Limited HIPC Highly Indebted Poor Countries RDPR Rural Development Policy Review HIV Human Immunodeficiency Virus SAC Structural Adjustment Credit HUBCO The Hub Power Company SAL Structural Adjustment Loan 1B" hit.mato^nal Ban.k for,rR onstutioh,n, arid S.AP Social ,Action P---_m Development SBP State Bank of Pakistan ICT Information, Communication and Technology SDR Special Drawing Rights IDA Intemational Development Association SME Small and Medium Einterprise IFC Intemational Finance Corporation SMEDA Small and Medium Enterprise Dev. Ag,ency IMF Intemational Monetary Fund SRO Statutory Rule Order IPPs Independent Power Producers TABS Technical Assistance for the Banking Sector I-PRSP Interim Poverty Reduction Strategy Paper UBL United Bank Limited JSA o -- CS..af A t tl.CEF Y-;..... A.... -4.-.A.. suA..... JSDF Japan Social Development Fund UNDP United Nation Development Progmnmu e KESC Karachi Electric Supply Company USAID United States Agency for Intemationai Dev. LHW Lady Health Workers WAPDA Water and Power Development Authoiity LIL Learning Innovation Loan WBI World Bank Institute LPG Liquified Petroleum Gas WHO World Health Organization
Ine FYorWDldank Vice President Mieko Nishinizu, SARVP Countrv Director John W. Wall, SACPK Task Manager Zoubida Allaoua, SACPK The InternationalFinance Corporation Vice President Assaad Jabre, CIO VP Country Director Mary Ellen Iskenderian, CSADR Tsick MnrcPigr…~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-- NeiWAlreoyn -, rSASr_ T AItLE OFU CONN I *NI S
EXECUTIVE SUMMARY .. 1......
T I.i~ DOLrTI.A SOm ^i AL A MDI ECONOMy'C C OT.A TUPTULEN iiDJ'lE' A nE 1 A. JL%J,~LIIItVK1,9A k3'.JIL.-iJl, tiLIAiJ ARIIK £ 4DL5 .....
A. From Crisis to Growth . B. Development Challenges . C. Recent Economic Developments ...... 5
II. PAKISTAN'S POVERTY REDUCTION STRATEGY .6
A. 1Ppctnrinor Rii.2ninhIp. nine 'Rnnid (Trnwth6 A~~~~~~~~~~~~~~-r. Rs.. ^.utnal .d.. pi.o ...... B. Restoring the Integrity and Accountability of State Institutions ...... 9
Ci~L~I.Ui5 AccelraU.111 LJTV1ur UL^...... e.-.t11 m. THE BANK G-ROUP'S ASSISTANCE STIATEGY OVER FY03-05 ...... i4
A. Overview of Bank Group Strategy ...... 14 B. Inputs to Strategy Formulation ...... 15 C. Strategic Engagement Principles ...... 17 D. Program Priorities ...... 21
IV. WORLD BANK PORTFOLIO AND ASSISTANCE PROGRAM ...... 27
A. IBRD/IDA Portfolio Management ...... 27 B. VDonor Coornumauon ...... 29 C. FY03-05 Lending Program and hnplementation Challenges ...... 30 D. Non Lending Services ...... 34 E. Monitoring & Evaluation ...... 35
V. IFC PORTFOLIO AND PROGRAM ...... 35
VI. MIGA PORTFOLIO AND PROGRAM ...... 35
VII. OPERATIONAL DECENTRALIZATION ...... 36
VIH. RISKS MANAGEMENT ...... 36 BoxEs
Box 1 Who Are the Poor? ...... 2 Box~UA L 2 LandL,G.T -AJ Co wxx%p &inFlU)aA .-.Touodu.i;i; 1-A.-.... fl4-4+ ...... IVL.,3L, Box 3 The Lady Health Worker Program: Documented Success - Impressive Potential ...... 13 Box 4 Consultations for tLhe CAS ...... I/
TABLES
Table 1 Social and Economic Indicators ...... 2 Table 2 Pakistan-Macroeconomic Indicators 1998/99-2003/04 ...... 5 Table 3 NAB Performance 2001-2002 11...... Table 4 Debt Service Ratios ...... 31 'r.ll. 4 T pA;nAiwr p1-"i4enro - 1ZVI)A2J"2 T0J.- .e 5 v a. n8 . ., .t o . . 31...... 3 Table 6 Triggers for Bank Assistance Over FY03-05 ...... 32 't1_ - x - _kT- T . r__1__ -_. A A A r__ _T... 1 T17 1 A I L ie I.-,,' o ui vNUu-ilUuu1g i4i- anu tUI JAl ruiu r I..I.iui-r IV UJ...... 3J.
ANNEXES
Annex IT lonsultations with Pakistan Citi7.enq Annex II Pakistan Private Sector Strategy A ~~--_1 1_ _1 - ' '! - I-- 1 - Annex m1 Bank rarmnirsmps wiiin Bilaterai anu iviutuiterai Agencies Annex IV Millennium Development Goals (MDGs), Targets and Selected Output Indicators for Pakistan Annex V Pakistan Countrv Program Matrix (FY03-05) Annex B1 Pakistan at a glance
,A nex~ B2~ Selec.ted 1nd:caitnra of Barkil Portfolio Perfe1 noi,.. ~ ardM?aAav r.age..e.n. Annex B3 Bank Group Program Summary for Pakistan (IDA, IFC, MIGA) A___ TNA -,. hT-- 1 ~ A1iIi1 BX4 SuiuuIW4y Uo 4null-IC1VULU iSL vices Annex B5 Pakistan Social Indicators Annex B6 Key Economic indicators Annex B7 Key Exposure Indicators Annex B8 Status of Bank Group Operations and Statement of IFC's Held and Disbursed Portfolio EXECUTIVE SUMMARY
From Crisis to Growth-Pakistan's Poverty Reduction Strategy
1. Palistan has started the new millennium with more hope. Starting from a position of extreme vulnerability at the end of the i990s-a financiai crisis, domestic tensions, and external isolation-it has achieved a remarkable turnaround. A major factor behind this turnaround is strong leadership in the country with internal cohesion and a clear sense of direction. The latter is manifested in the interim- Poverty Reduction Strategy (I-PRSP) anchored in a comprehensive reform program for poverty reducing growth, human development, and governance improvement. The government is engaged in fundamental political, institutional, economic, social and gender transformation for Pakistan's transition to a modern Islamic state.
2. The government implemented a far reaching devolution program which led to locally elected officials with the legitimacy and mandate to improve public service delivery. Women were given more voice than in the past (33 percent of the total local governments seats were reserved for them and the number of reserved seats was tripled in the future national and provincial assemblies). Despite severe shocks-the worst drought in decades-GDP at factor cost grew by 2.7 percent in 2000/01; inflation is low and reserves have reached US$3.5 billion on March 31, 2002, one third of imnorts, their hiehest level in a decade. The government formulated a credible education and health reform strategy. It started alon a nro-poor public works program to ease the impacts of the eononmicC hncks and the drought.
3. Pakistan however- Rtill faceq formidahle challenoes (nolitinal, atfitidina1i and nnliyvl tn fuillv develop human capital, improve the investment climate, and increase productivity growth to bring the economy to the 5-6 perce.nt annual growth rate ach.ipeved irn earlier decades, or even higher, to significantly reduce poverty.
4. The policy reforrm record of the military government which took over on October 12, 1999, has .4"ually , -revehope~ UIQ.zUL;.es develo ...... ertQ;lrga.be-;ously Ma . lld ...... sLLDW UL01 p;.hLas been reconfirmed in the recent Interim Poverty Reduction Strategy. The full PRSP is expected to be comnpleted a's;' UI. O'oJUbLerVi. 20 ec UI02 s JoWirL .aLUI Asssbs1lmnL on Ui,e I-rSPar was uisussed by the Boards of the Bank and the 1MF on December 4, and 6, 2001, respectively).
Bank Group Strategy
5. The main goal of the Bank Group's Assistance Strategy is to support these fundamental reforms for a transition to a modern islamic state t'nrough a program of analytical services, institutionai capacity building, and demand-pull lending. The triggers underpinning the Bank Group's assistance strategy will be based on measurable outcomes wnich have the MDGs as a frame of reference in alignment with corporate priorities and global public goods.
6. The Bank Group CAS has been shaped by: (i) the lessons learned from the implementation of the past Bank Group CAS in Pakistan, including IFC's and MIGA's experiences as investors and advisors; (ii) the results of the 2000 Client Survey; and (iii) the concerns of Pakistani women and men expressed during the extensive consultations held by the Bank Group all through 2000.
Strategic Engagement Principles
7. The Bank Group's support will be guided by three strategic engagement principles: (i) Strong "client pull" to reform and selectivity; (ii) A programmatic approach focused on transfer of knowledge and canacitv building first: and resources second. in a flexible nursuit of key development outcomes: and (iii) Partnerships and Outreach.
8. Selectivity. The Bank Group's strategic priorities will be subdivided into three categories: (i) Dee.p engaeTmnnt; (ii) Low enganement: aind (iii) Mnnitnrinor LFC.'s investment±q and mmlrtnart will also depend on progress in establishing a competitive market framework.
Business Areas for Deep Engagement. While cooperating with other donors, the Bank Group -il1 +.I-^ fhe laoAn rnrt to:
>ynlIA.L ^*1 ~Q O~ a" f-lJ-1.- > econ"omric managenment an.d finan.cial gov,emans^ce, incl.uding 'echnical an.d financial assis+nce to the State Bank of Pakistan (SBP), the Comptroller General of Accounts (CGA), the
Z UULLUL [U.4%1 a _LV kAJ*,Ir ' OL&jM LIl Ul1i IU IXIIl Ui U1 '.UU41 IDVUJU UL A%iV SUUi, U1r. civil service,
> investment climate, including support to reform the governance and regulatory environment for power, gas, oil, financial sector, pricing and tariffs reforms, and privatization
___, -_'-__I __ _ __- __ __ r '...... I prov-mcial anu Uitrict govcrnmcns reiorms, mcluamg eaucanon, nealtu, water management and rural development, district services, and community infrastructure. The level of support at this stage of the Bank Group engagement wiii include both non-lending and lending services as required.
* Business Areasfor Low Engagement. The Bank Group will keep a low level of engagement in areas where the client has been "reform-shy" such as for urban development and transport or where there have been reversals of reforms or slow progress. The Bank Group will focus on analytical services and leveraging the resources of WBI to play an advocacy role to encourage reforns.
* Business Areas With No-Lending Services. These are areas where the Bank would monitor developments such as on areas where the IMF has comparative advantage (macroeconomic stabilization); areas where the reforms are on-going (sometimes with other donors suDDort) or need only IFC or MIGA's engagement (capital markets, SMEs); and areas where the commitment to reform is verv low. Areas of business from which the Bank has disengaged completely will also figure in this category. This includes financing physical investments in railwavys telecom and nnrtt, oil and g_s, public indiist:riep lnarWe lrml cprvij-pe' a.nA tn,,.rsmn where the private sector can invest with the support of IFC and MIGA as required. No lending
90 Pp~,Ymmnm,,hi Annrn ~h Pal,-;afa"'S UDDIDD n.+16 - ambitious reform program covering political, institutional, economic, and social areas, including gender equiL;. T.hesL f-.. s .U1 ; hI1-e-lLLy long tei LUin ascU acfUIVWlVUdgeU uy ULU gOUVViUlMML UaU caIn therefore be more effectively supported by multi-year programs-both at the national, provincial, and district level-hence the need for a progralmaiuc approach ior iie BankiGroup's assistance strategy. The system wide reforms being envisaged for example for the tax administration (CBR), the institutions in charge of financial management (the Comptroller Generai of Accounts, the Auditor General's Office), the civil service, also require a programmatic approach.
10. ProgrammaticInstruments. The instruments used under this CAS follow directly from the strategy. The Bank will use (i) policy based fast disbursing lending to pursue the economic management Pakistan Countrv Assistance Stratepv iii
and governance agenda at both the federal and provincial levels and the sectoral reform agenda (finance, power); (ii) programmatic sector and investment lending to support the implementation of the reforms to improve the economic and social infrastructure and delivery systems for education and health, and community infrastructure services (including water management) at all levels of governments; and (iii) analvtical work and other non-lending serviceS to monitor develonments in the areas of low en,eagement and encourage reforms. The Bank Group will use its non-lending services to build a coherent strategy for nanrift biuildinc,r fill the lnuopa'p gaps in key arpea of rpfnrim s t helpT the =rnwnt artitu1latp its reform strategies and strengthen its implementation strategy.
11. Partnerships and Outreach. The Bank has been instrumental-as it pursued the Comprehensive
LJVVr.IVp1lV;L ItUIVWUiILF1j4,I1oltir-I pulIlUir,g aloUgi UUd,Uob LU UUIlU buLL115VL pa UIVLbIUP i *UjJSUpLl Uo the government's reform program and its I-PRSP. The Bank Group will continue under this CAS its ciose collaboraton with the ivr, the AsDB, ana UN agencies (basea on eacn msmtunon-s comparatve advantage). Facilitating partnerships and donor coordination by the Bank will assume an even greater role over the CAS period now that sanctions have been lifted and many bilaterai donors are reviewing their assistance strategy to Pakistan with a view of scaling it up. An important complement to partnership is the Bank Group's overall outreach. The Bank has increased its interactions with the different levels of governments, the Pakistan media, civil society, and business community to establish partnerships based on a shared vision for Pakistan's development.
Bank Group Program Priorities
12. The Bank Group's program priorities will be focused on the reforms to (i) strengthen macroeconomic stability and government effectiveness; (ii) improve the business environment for growth; and (iii) improve equity through support for pro-poor and pro-gender equity policies.
Strengthening the Basis for Macroeconomic Stability and Government Effectiveness
13. Macroeconomic Stability. The Bank will support in partnership with the IME the macro- economic stabilization program agenda to restore fiscal sustainability, reduce internal and external debt, and improve the competitiveness of the economy through supportive trade, monetary, and exchange rate policies. The Bank Group's key contributions will be in improving public expenditure management and supporting reforms of tax administration, safe and sound banling, efficient public utilities, and structural fiscal and governance reforms. In particular, the Bank will continue to carrv out the annual reviews of the Government's Public Sector Development Program at the federal level and will complete a National Public Pxnenditure Review in FY03.
14. Governance Reform. Tmnroving government effectiveness at federal, provincial, and dstrinct levels, will remain at the heart of the Bank's assistance strategy. Specifically, over the past years the TRtanl- lsne hadt a ciornifionnit inrnroram of wnn"vtial wnrlr inrolliIinr flip niril cprwrir-p rpftrm c6p rn mt*rr Financial Accountability Assessment (CFAA), and the Country Procurement Assessment (CPAR)
-Fre ts, vVflUch haws bee. inflfl.Ob tot t.he policy dialope ;, this ama. Ami..eBwikk will s-UpFort m.UtLIh future (i) furthering transparency and accountability through Freedom of Information, effective
IUML.LIUMUIi,furlc.^;o-4rn Ukof U1l,sheUblic I UUILV AcclsCrmtes-'.. JUUIiL0 l~~tUUIUU n-uIe U Ui'., UbL4Uk1Uhi0ILVlesaU_ L,, '.11of - iilas.,r, 1OLU1S ULiOULULIU1IU1r,si.-.o.a bssfr_Utt1IZ LUf the agency mandated to fight corruption-the National Accountability Bureau; (ii) the extension of the modernization of ute government's accounting and auditing functions to district governments through a second PIFRA project which is currently under preparation; (iii) the implementation of the first stage of the Central Board of Revenue functional re-organization and the fundamentai cultural change within the tax administration; (iv) the development and implementation of medium-term fiscal frameworks at the PakistanCountry AssWstance Strateev
federal and provincial levels to improve accountability; (v) the implementation of the CPAR's recommendations, including the establishment of a Public Procurement Authority and the promulgation of a Procu rement Ordinance to foster conimetition and transDarency through a uniform set of procurement rules at the federal level and across provinces and public agencies; (vi) policy advice and financial assisftance to imp!lement the necessary deremulation and otber policv reforms to reduce the incentives for corruption and improve the investment climate; (vii) the completion of the corporate governance reforms in the financial sector; and tviii 1! svice reform through analytical work and advisory services for the continued implementation of the systems for better performance evaluation, merit-based promotions, and Uairning programs, as well as the imrrplementation of the reforms. of the pay an.d pension systems.
1J. T,e Ba1,. "s support, to govemarice reir.. wil! also include supp-rt for the des;,-- of in-depth Lid I1e 'armK UJJJ LlP Vl 1Aw.L f .fn,fn,, .,.... . governance and corruption diagnostic surveys and institutional capacity building for oversight and monitoring. Thiis will be done through training :i uthe areas of public expenditure and financial accountability, media development, and the interaction between parliament and the Auditor General, including support to strengthening legislative oversight once parliament is reinstated.
Strengthening the Enabling investment Cidmate
16. Tne Bank Group's support to strengthening the investment climat'e -will include a combination of analytical work and financial assistance targeted to reforms in key sectors. The Bank Group will continue to encourage the federal and provincial governments to pursue the trade liberaiization and modernization of industrial, business and labor regulations that are already under way. To build the knowledge base to underpin the policy dialogue on private sector development, the Bank Group pians to carry out a significant program of analytical work. In addition to a Development Policy Review (completed in FY02) which provides the Bank's assessment of the adequacy of the current development policy agenda, including for rural development, to achieve rapid growth and poverty reduction; the Bank will complete in FY03 an Investment Climate and Economic Performance Study. The latter aims to relate key aspects of the investment climate (basic economic infrastructure, and regulatory and governance frameworks) with the performance and productivity of private manufacturing firms, small and large. An analysis of the trade regime will also be undertaken in FY03. In addition to the governance reforms which have a direct bearing on the investment climate, the Bank Group will also continue to support financially the reforms of the governance and regulatory environment for power, gas, oil, financial sector, pricing and tariffs reforms, and privatization, as well as support to provincial and district governurients reforms to iimprove the quality of basic infrastructure and social services.
!7. WC will suRport the development of new nroducts to better meet the needs of the private sector (e.g., long-term finance for infrastructure), and expand access to financial services to new clients (e.g., the bankable poor through micro-finance or leasing institlutinns), and to the under-serve4 small and medium enterprises sector.
Supporting Pro-Poor and Pro-Gender-Equity Policies
18. The Bank Group will support the I-PRSP's core objective to empower people by creating greater opportuait-es for increasing real incomnes by irnpov,ing ac.ess to eAduc,ation and hnealth e, ic especially for girls, and to safety nets programs. The Bank's support to these three areaLs-promoting education and healtih, supportirg pro-poor rural developrrent and cormmunity ifastucture, as well as supporting targeted poverty alleviation programs reflect their importance as well as the Bank's comparative advantage. 19. -durSa1on for Al- The World Bank CGirmun's -SSiqtqnnestrate,v will he driven hv sunnort to the implementation of the Education Sector Reform (ESR) Strategy. The Bank support will focus on those intetrentions ins tiepAed,ucation, secton thkat mi'lA lpln the anal nf a,,pipiVincr inivrstval pnrim>-; PeilPtienn with particular focus on improving the quality of education provided, and giving priority to the poor and A__A .,__+__AJ -9s-U _A-A _ U .1 A _ _. 1 ^ AfT_ - j.1 _ ^;_^; tAf1~ v O C& % I UlOGUVGlLa~llbU JiFu L&1"1O Y17 II 1I'U LIUZl'1 I U.kl LUJ. .ULGL, U.l 5 IUI1 41 . lk will be crucial to the fight against child labor. Accordingly the Bank will focus on: (i) sector adjustment fIUlii,ig LU 5UP-UIL ULV 1'NLIUUai1l Ed-MuatUio Sec'.or1XU[lll SalLVgy, (ii) iUppoUIL LU UI', P44ML1Ui14 EdUU;L1U1 Assessment System through a L1L; (iii) a program of analytical work to underpin the policy dialogue during the implementation of thie ESR; and (iv) province-based support to implementing the ESR within the fiscal and economic reforms of Sindh and NWFP to start with. The support could also include advice and technicai assistance to reform higher education.
20. The Bank Group assistance to health sector reforms, will support the government s priority of strengthening the public health programs-immunization, communicable diseases such as malaria, TB, HIYV/AIDS; and maternal and child health and family planning. To this effect, the Bank will use multiple instruments, including analytical work, technical assistance, policy dialogue, and adjustment and investment lending as appropriate. IFC will seek opportunities to invest in private education and healthcare providers.
21. Supporting the rural sector through community-based infrastructure projects (particularly for water supply and sanitation services) and the spread of micro-credit have been part of the Bank Group's strategy to reduce and mitigate risks for Pakistan's poor. The Bank will continue, under this CAS, to pilot new approaches, and also help scale up those which have proven effective such as the Community Infrastructure and Services Proiect (CIP) and the Pakistan Poverty Alleviation Fund (PPAF). The NGO- implemented program of building social and physical capital and extending micro-credit schemes under the PPAF is a very successful scheme which will be scaled up during the coming CAS. The on-going PPAF has already provided loans to over 60,000 borrowers, over two thirds of which are women. A nocial rick aqqeqnment is also planned for FY03 which will also help undernin the Rank Grun'ps integration of social protection in the Bank's future operations.
22. Pro-Gender-Equity Policies. The Bank Group plans to intensify its efforts to mainstream gernder. The m.ost effectfive policy througmh which to nirrmrov.e crp.dPr equiistos to irnrrve access to and quality of education and health, particularly to women and children, girls especially. In this context, the
MR LIMu "Cum %.oJ'VUpJ Will asi LU'..' 5 oJv'.AJ.L4,e.1L 11;.. p1Le.1.Ur.t I co;npone..U11 of u11hL1&L.oJnX U JLI UVJOLLU115 incentives-through vouchers system, food for school, and other targeted subsidies-to increase girls enrollment. nere tare iany oierA c&iuiuides for gender-specifc prograns inrough which the Dank Group's support can improve gender equity and help reduce poverty. These are water supply schemes at household level, femaie literacy programs, extensive micro-credit systems, and rurai empioyment schemes.
23. A significant program of analytical work is also planned to show the opportunities that gender- responsive policies create for enhanced growth and poverty reduction. The Bank, the government, and the other donors, including UNDP and DFID, have been working together to strengthen the govenment's analytic capacity on gender sensitive policies. The Bank has a Poverty Assessment underway, with a survey geared to capturing gender issues with a view of informing public policy regarding the formulation of a gender strategy. A Country Gender Assessment is planned for FY04, which would provide the knowledge base for future Bank's policy dialogue and operational interventions. vi fl.1.ot r Cu.,A*,ta.... S'.,ate,..
IAorld Blank Pnr*fnl;.o anA d4is*anj' Programi
24. Th.e quality of the Pakistan portfolio has improvzpA P1nc!rPrnbly, althnough. prnblenismc affecting two major projects remain, which loom large now that the "lean portfolio" strategy has taken hold. By early FY03,V2 wiu. she clos of ^ADDI and resolution of issues relat+edto tho - 4,e- s large -njt- (KTP, 1L V-?, VUL U til' 1% VlOUJ% .J LJCL A.~ O.1 *t0JAJ1t5 *0A%,- LtaA Llf%, LVw. I' IF ' v -.- -W5 k-flJ -%b GBHP), the "commitments at risk" are expected to fall to a single digit.
25. Lending Scenarios and Triggers. An SDR 1.0 billion (equivalent to US$400 million per year) LIJJtituA allca_olilULUkLIUI1 'rasIJdb be-,MULL bVLe LVIfor- UIV, baseLmV---- V4bcas---- M1U--- .0LJX%. I.'t billionUlIIVIL kUII(euvae..Vd41VaI11L toLU US60TTillion%LJ1J.PUUU jijijujLLi a-er yvaij for the high case over FY03-05. The Bank will resume IBRD lending under the high case starting from FY04. Tnree iending scenarios (low, base, and high case) combining in base and high case policy based lending and investment lending are outlined for FY03-05. The lending scenarios will be guided by two sets of triggers; (i) entry and exit triggers linked to provincial reforms; and (ii) global triggers linked to each of the three pillars of the assistance strategy, macroeconomic stability and govemrance, enabling environment for private investment, and human development.
26. JFC and MIGA. Future investment will depend on further progress mi key policy reforms to open up opportunities for private investment. lFC's ability to do new business is constrained by its ability to provide competitive financing. IFC's equity and foreign currency loans are unattractive because of the high country risk premium. IFC is therefore exploring providing local currency financing by means of partial credit guarantees. MIGA's portfolio is diverse, covering 7 investments in the financial, infrastructure, and manufacturing sectors. Over the last two years, foreign investors in general have adopted a wait-and-see attitude toward Palistan, which is reflected in the small number of projects that MIGA has underwritten.
27. Non-Lendinz Services will be used to support the PRSP process, strengthen governance reforms at both the federal and provincial levels, and support capacity building and knowledge sharing. To recapitulate. over the period FYOO-02. the Bank Group would have completed a CPAR, a CFAA, a National Public Expenditure Review (PER), a Development Policy Review (DPR), a Poverty Assessment. a Provincial Finances Renort. A Puniab PER- and a number of other important policy notes. Over FY03-05, the Bank Group non-lending services will include a Financial Sector Assessment (FY03), a (FAATT FY03), a National Pu blic Expenditure Review (FY04), Provincial Economwic R12ports (FY03- 05), and a Gender Assessment Review (FY04). Other analytical work in FY03 will include a policy note to launch the policy dialorne ..-Ath the ,1liv It gova,er,e. af.er October 2002, an nvestm-ent Climate Review, an Oil and Gas and Power Sectors Report, a Rural Development Policy Review (FY04), and a 'Yvac KceOUCC lViLanarC'11CIRL MUUy k1 A4V)FJ. .Ie M14L.yMLl,41 WULF. Will unIUdIpiII UiV. BarisK G-rIUUp s support to capacity building and will be reinforced by a series of learning and knowledge dissemination progarns to be delivered by wBi, in collaboration witn Pakistani hiinKnks and academic institutions.
2. Risk Management. Pakistan's economy iaces serious cnallenges and major risks emanating from a variety of internal and external sources. The main risks associated with this CAS are:
29. There is unavoidable uncertainty about the sustained implementation of the reform agenda outlined in the I-PRSP post October 2002, particularly in the face of domestic oppositionL from vested interest, possible future opposition to the modernizing policies introduced by this government; in particular the reform of the elementary education system, including the attempt to regulate: the Madaris (religious schools), and the pro-gender equity policies. The government has rightly decided not to complete the full PRSP until after the new government is in office to ensure that it endorses it. Hence, continuity and change issues will be discussed in a CAS Progress Report after the full PRSP is completed Pakstan Country Asszisance Si,1ategy vii
to Aeteprmi,ip x%i1itwp.r tf.e rain M%ippt-pes of the CASA rvp,aio, raliA lit aAAititvn trhin,pre hv,xp 1ee.n designed to help the Bank Group manage this political uncertainty.
30. Technical and institutional capacity constraints especially for the reforms that involve .P~on+n nf L 0 "Clial ^_s A;+-;-+ 1-f.,1> Vk- ;-- rA ;_+- 44-1 -,- -. 44 ^s-A U 5 VYtaiuiixa,to at *t' jJ± y I a.n UtOU.Lftt *9V*0, Ula i.IAIJJ V9LU flt%,kna." nal *momn IV. VOLLtV, Wl Uflk access to increased concessional financing may pose a risk of implementation or complacency. To rmianage U'le IIIIPiIpuLuLelt4 risk ul BDar ki4iu UUIr. UUIliu[ ar WaULItiuLUg CU1VI WIUI. 'uUl1 goVvenlicIlt to build capacity. The complacency risk is mitigated by the sound, if daunting, debt reduction strategy wnich has been under implementation for the past three years to rapidly restore creditwortniness and reduce over-reliance on International Financial Institutions' financing.
31. There are also several other risks to the achievement of the poverty reduction outcomes. The low tax/GDP ratio may prove difficult to raise significantly over the next three years. Lower growth caused by the impact on exports of a longer than expected global slowdown or protracted military operations in Afghanistan, or weather related shocks to agricultural output. These shocks could be, in part, weathered by the floating exchange rate regime but would have also to be met through a combination of additional adjustment measures and external financing-none of which can be taken for granted. If concurrent with timid debt relief, exogenous shocks would also delay the return to external sustainability, which is a key condition to achieving Pakistan's growth and poverty reduction objectives.
32. The portfolio risks are manageable in this CAS period. Credit worthiness indicators are moving in the right direction (though the preferred creditor ratio will continue to increase as debt rescheduling decreases the share of bilateral debt in total debt). To manage this risk, however, IBRD lending is planned only under the high case and starting in FY04 when the uncertainty regarding continuitv of reform would have been resolved. Given on-going repayments, this leads to negative net IBRD lending.
33. The Bank Group support program is self-adjusting to mitigate the risk of reform derailment. Substantial lending will continue only as long as Pakistan continues its excellent imnlementation performance of the past two years. Adjustment lending is subject to Pakistan being "on track" in imlplentning the. pnvPertv reduition and economir management sttegy, including those under the PRGF.
34. The Pakistan CAS has been prepared during a period of renewed prospects for a recovery leading to sustaained growti. and i-mproved gover.ance. At t.L s-. +rea t ia a pe;rod of inceased uncertainty-arising from the impact of the war in Afghanistan, domestic tensions with the hard-line
L.Ua.LUCLLlL4A&01ofiundanist .VUFO - tls;ons+_ousL%.LI 1u 1o-9+U 4 UTndAz,"Y1Lf.I, M CLfL.L-- A +U-ULMI shdue0%.1a..uuiA4V__U_A. 11LULLIIII to-U de._cUW ilL4I. w."l.WLIu naioa1iaLtiUilai a.UUU provincial elections in October 2002-which as discussed above may increase the risks facing the I ,IpleLII.iLULIU11 UiI Uofu.Ie a UMUC,n UeLgy. 1'iULWIUZiLu H1Hg U1ebI risks, uii govmiiienL rermams engageu in fundamental reforms for Pakistan's transition to a modem Islamic State.
PAKISTAN COUNTRY ASSISTANCE STRATEGY
I. POLITICAL, SOCIAL AND ECONOMIC CONTEXT-A TURBULENT DECADE
A. From Crisis to Growth
1. Pakistan entered the new millennium with more hope. Starting from a position of extreme vulnerability at the end of the 1990s-a financial crisis, domestic tensions, and external isolation-it has achieved a remarkable turnaround. A maior factor behind this turnaround is strong leadershin in the country with internal cohesion and a clear sense of direction. The latter is manifested in the Interim Pnvprtv- Rediirtinn------qtnitPcv- (I-PR.RP)------/ rn.,hnrktd----.- in s ^r.nmnrPhPncivP- - rPfnrm nrnomm ---fnr nnvPrtvr- - rPeld.incy growth, human development, and governance improvement. The government is engaged in fundamental politia!, mncls'u.leanol nana,ecor.omic soial andAgndr tar.scfor....;on for Pakis'ar.'s t,ar.sit.;n '.o a r,A.ode Islamic state.
2. The current government implemented a far reaching devolution program which led to locally A1 A+ A 2 A . 1-- s+U+U- , <_ _ Pn A.A_A_A l _ A A U1%,LGiJ VlaWLUI ULLH 1 r1LUL Ri1aLy1u1ullIaL IV. 111k1VVvv FUUVIL" vL4VL9% U11IV916. TV UJI.11A WAlIW VL.II more voice than in the past (33 percent of the total local governments seats were reserved for them and tne nlumber of reserved seats was tripled in 'the futuLe national an.d provuicial assemb.blies). Despite se-vere shocks-including the worst drought in decades-GDP at factor cost grew by 2.7 percent in 2000/01; inflation remained low at 4.4 percent, and reserves have reached US$3.5 billion on March 31, 2002, one third of imports, their highest level in a decade. The government formulated a credible education and health reform strategy. It started also a pro-poor public works program to ease the impacts of the economic shock and the drought.
3. Pakistan, however, still faces formidable challenges (political, attitudinal, and policy) to fully develop human capital, improve the investment climate, and increase productivity growth to bring the economy to the 5-6 percent annual growth rate achieved in earlier decades, or even higher, to significantly reduce poverty.
B. Development Challenges
4. Pakistan's past track record as a reformer has been erratic. Over the previous decade, Pakistan had failed to complete on schedule any of the nine programs supported by Fund arrangements. Progress was made in some areas, particularly on trade liberalization and banking sector reform; and reversal of reforms has been rare. Successive governments started off well with ambitious home grown reform programs but failed to carry through sustained reform. This undermined investors' confidence and prevented lasting improvements in the fiscal and external positions, as well as human development.
5. Pakistan became more inward looking in the 1990s at a time when competing Asian economies were aggressively integrating into the global economy (see Annex II). A large share of Pakistan's private sector was content with onerating behind hi h nrotective harriers and snecial tax privileges-rent- seeking behavior often referred to as the Statutory Rule Order (SRO) culture-or "tailor made n:1,pgps"_.w.hi(h h,_v.ep inwv.-ntisd it frnm rpaning the hp,pfitc nf inti-matingr intso wnt%A iarn-lptv Tb%v situation created an increasingly unfavorable investment climate which has constrained Pakistan's 4 -,+I, -nt_...;l.l b . -,A,.na . a a+-n- t exports, VX, ar. -raA-"-., growth ;a.4. - ;...-fA-ial sector. 2 Paiusian kCounliy A51sMuflncu S ruicgy
6. AC a res.lt average9 fnnlfal aw,,th ur,,iw nT,9rpA ar,i4pArptA o the 1 o9on A follingo fay ratio -to 15-16 percent of GDP resulting from a narrow tax base, poor governance, and weak collection and emuri mcerne n lHULU goUVeMCHhI1 abilityU to pro-viUC c-riiUic social services anu U irdstrucwure. ine fiscal deficit remained well above 6 percent of GDP throughout most of the 1990s, causing a continuous increase in pUIlic sector Table 1. Social and Economic Indicators indebtedness 1990-97 1998 2001 I-PiSP Low which when 20D4 Income combied with abuse of the HedPcudrimt PnvPrtLvTx () 28.2 32.6* banking sector Illiteracy rate, adult female (% of females 15+) 75.6 71.1 67.7 .. 47.2
kept real interest n1it yte,9u1te(% ^5 of ) .. A 4 2.0 39.2 .. 28.5 rates high (now at Illiteracy rate, adult total (% of people 15+) 60.4 56.0 52.9 40.0 37.8 10 percent). Life expecancy atbittotlyes) 60.1 61.7 63.9 64.4 59. Limited budgetary Mortality rate, infant (per 1,000 live births)* 103.7 90.0 85.0 77.0 77.3 space for Growth Rates development GDP at market prices 4.1 2.5 3.4 5.5 5.1 expenditure and GtDP at factor costs 4.6 3.5 2.7 5.5 inefficiency-if Per capita GDP at market prices 1.6 0.1 0.9 3.7 1.3 not outncLht norruptiouvig * The head count index is for 98/99. Infant mortality rate for 2001 is from Paldstan Iteproductive corruption-mn Health & Family Planning Survey.
~..)( £Ar jJa1, U. ITVI1 U L'V.Vr.VPIUIIUIIL IUUII..4LU01 £ZV 10 . management resulted in poor a.0at... (see T 0 1). mnal front, .eu.L and uncompetitive foreign exchange regime discouraged export diversification and resulted in unsustainable L,Li~11 AA4JL1LUV1II.,1W..AAS AAAIA&A- LAWT -I_._ IJAiV4L investment inflows and the recourse to snort-term debt and foreign currency Iu uuw U= deposits only delayed an external debt | _ 0 loyE= crisis, which was eventually triggfere mo0T e iIhih 4 1 by economic sanctions following oim Pakistan's nuclear test in 1998. Ihus, edl' S =n ofii the economy grew increasingly "con vulnerable, balance of paymnents crises io ,hy h oet o~ recurred, leaving Paldstan with debt indicators higher than those of the an d HIPC group of countries (see Pakistan ~~*~ ~ tn,-.~ Development Policy Review, April 3, l ! r t 2002. Report No.23916-PAK). 1
7. There are also significant poor, Is gender gaps in both literacy and health | _ E _ _ Ei status in Pakistan which are _ compounded by outright discrimination l against women (due to institutinnal anid - IuyP 9 attitudinal factors) in access to ia _ ieducation, hponltlk P.im1lnvmen* aint other productive assets, and justice. 1 .aesgaps ,rse+r.t a stark n.-re o. gender inequity. Pakistan CountryAssistance Strategy 3
0. rLiiVi rapidgU rLUWU1 ULLr.11. UL-e L.UO U18lL 1'.U to10LLLU IrUULcL,ion iII JUV-IL.y, loJWIWer C,LU volatile growth in the 1990s has led to stagnation of poverty measured in consumption terms. Differences across -- -- i~~~~~,,I- V1TL1. . 11 1AI fluAlfl -J Inno nfl regions .-and provincebs persisted or -wiUerieU. VYIUlIC UrbOU pO-vety LeIl VOLW-efn 19Y9-91 aiun 1998-79 (from 28 percent to 24 percent), rural poverty stayed at 36 percent (see Box 1). This shows a weak link between rural growth and reduction of rurai poverty due in part to a skewed land distribution and iow agricultural productivity (see Box 2). This is d of particular concern since more than two- iA thirds of Pakistan's population live in rural areas. j s jo f A Turbulent Political and Social History
9. Pakistan's turbulent politicalI and social history has also contributed to limit its l airna od h ~~ growth potential. This in turn has capital. First, the country's wrenching social |__ 'E change since its independence, vast influx of l _ n 1 t refugees, and its increasing internal schisms onn (result of a difficult economic situation l exacerbated by the impact of Afghanistan's DIili~I fL1 ~ii iiJ ~9 conflict) have contributed to social fragmentation. Discord between its diverse e'thnir grniinq sectariain and ethnic schi~ms - iesS~ and the continued political dominanice of large laindoners (Box. 2) haue all contibuted to deteriorating law 'and order a&uu% A.p w. Alv. ~L A IR5 backward both socially and economically.
10. Another factor which may have UUIIUIUUtWU LU LIIC, bUU1A1 V.U FUIILIVll1 LULLIUIiIL UkJ LVAAA[iL yrjIb lb UIW, rLUWU18 FUWVI 1 L IUIILUIIL IVIAUal lb (Muslim religion-based seminaries). The radicalization of some of these institutions started with their politicization during the ;980s. with active support from, tne Zia regime (;977-;988), Madaris with extremist administrations were established along the Pakistan-Afghan border. The objective was to form a cadre of religiously motivated "Mujahideen to fight in Afghanistan and provide political support to Zia's regime. Madaris degrees were made equivalent to degrees obtained from formal universities. This facilitated recruitment of Madaris students into the civil service, leading to the state's accommodation of activities encouraging religious intolerance and sectarian divides.
11. The contribution of these "Mujahideen" to the Afghan victory, poverty, falling standards of public education, and weak governance, account for much of the success of the Madaris in the 1990s. Since they provided free boarding and lodging, they became popular with the parents of poor children and a steady stream of Afghans fleeing the factional fighting in Afghanistan. Marginalized, the graduates from the non-mainstreamed Madaris (those which did not include the formal education curricula) with no career-oriented education, resorted to violence to influence the country's policies. Successive governments did little to restrain them or bring them into the' mainstream education system. It is estimated that 15-20 percent of the Madaris are involved in military related teachings and training. 4 Pakistan Country Assistance Strategy
1L2. ScondJlU', UIV con.6ILUIUJIrI '.V.IUII LIl UV,e ,IU-egI, sL'iVVe PdaJULkis oUL iaUi .sOVUUI' ces ( uIg Ul-euc from over 6 percent in the 1980s, defense spending still absorbs 4.7 percent of GDP') and reduce opportunities for closer regional integration. wnile over tie meuium-term Pakistan s gro-wth potential may be enhanced by Afghanistan's reconstruction plan, in the short-run, the war in Afghanistan, and its spillovers to Paidstan, and tensions aiong the border with India, are adding to the political turmoii and raising the risk of doing business in Pakistan.
13. Third, Pakistan's poor and deteriorating governance has accentuated the political and social turmoil. Since 1990 four democratically elected governments have been dismissed, three of them on corruption charges. The frequent changes of government over the 1990s and the ensuing unpredictability of the policy stance undermined business confidence. At the core of the governance problem is the abuse of the state's institutions, widespread corruption, and disregard for the separation of powers and respect for the rule of law.
Service Delivery in Crisis
14. Pakistan is a federation of 4 provinces-Punjab, North West Frontier Province (NWFP), Balochistan, and Sindh-seven tribal areas (excluding five tribal areas adjoining settled areas called as Frontier regions); and the Northern Areas. Pakistan's 1973 constitution grants major responsibility to the provinces for regulat6rv oversight, provision of infrastructure (including irrigation and agricultural extension services) and social services. The provinces account for 80 percent of total government snendinp on health. education. and irrigation In contrast- and contrarv to exnerience with other fedemlil countries, tax authority is concentrated at the federal level. The federal govemment revenue transfers aGnint fnr ns much s R4 npernit of nrnvinciil rPcnhircsP wuepaviiln. thle arcnintnhiilitu of ywnft,Uicl governments to taxpayers, as expenditure and revenue decisions are made at two different levels of
1,. Ac a csuhl* arnd lIkAe +*16 cs a n,holewnr,nl Paclsfan's prov-,nes have beer. facin..g -a c.rsis o public finances, public service delivery, and public institutions and governance. The provinces suffer
oIIL laIrg eLU WzL.-*LoL-s "kdiIc4iIUeIr.:... Ulofspe.UULrd...g ar.d SI vic UeILV iVL.-LaLIVCP needs)IU il UuI funding, delivery, and quality of social services (education, health, rural water supply and sanitation). Similar pro-vincial infras-tucLure deficits (roads, irrination and drainage, and municipai serices) increase the cost of doing business and impose a heavy burden on the economy and the general public. Vital irrigation water services are unreliable and controlied by antiquated, non-transparent and unresponsive departments. The multiplicity of provincial regulatory agencies harass the private sector and discourage entrepreneurship and economic activity. The police is widely perceived as ineffective and corrupt, while the judicial services are subject to long delays and are also seen as sometimes corrupt and out of reach of the average citizen, let alone the poor.
16. There is a tremendous opportunity for the provinces to turn around the performance of their public sector. The following factors are conducive to reform.
* There is a reforming government at the federal level, which has put at the heart of its poverty reduction strategy a program of reforms to foster growth and reduce poverty.
* The provinces-particularly Sindh and NWFP-have already initiated a number of promising reforms to restore good governance, improve their public finances and public service delivery. Pakivtan rnuntry A.vsistanrn,e Strnteov 5
* Pakistan's devolution Dlan reDresents a major oDDortunitv to reverse decades of over- centralization of public sector management by creating more accountable elected local governments. which wnould he reqnnin-ble for thre nroviqinn of Iocal public services.
17- The nplicv reform reenrd nf the militarv government which tnok nver nn Octnber 12. 1999 ha.- gradually led to renewed optimism that these development challenges can be seriously tackled. This nntiniminm hnabhpn rp-.nnfirn,pd i th,e rern,-ntlv vliblich,pA T.n,t,pm Pnveprh 14PAi-utieni .tmte , (T-WPQP There are also signs of an economic revival.
C. Recent Economic Developments
18. Prior to September 11, 2001, Pakistan was already reforming for nearly two years and showing s011s of ar. eo ric r J e.; 2'000/01, A-spite a severe WoUU t, toLaL C-.JD PLL ftLat LSJI UOL &VW by 2.7 percent while CPI inflation remained low at 4.4 percent, notwithstanding large increases in fuel and eleC'uicity prieU adU ta b1signif1iL uvptUr.;ioUnu uo Urv nupee. tIueUUgu ue prUguLtIUs Uwx cUllectionl targets were not achieved, the Central Bureau of Revenue (CBR) tax ratio increased by 0.4 percentage points of GDP. The budget deficit was contained at 5.3 percent of GDP compared with 6.5 percent the previous year (Table 2). Low inflation and successful reserves accumulation-US$3.5 billion by March 3i, 2002, the highest level in a decade-refiected responsive monetary management supported by the introduction of a floating exchange rate regime. The tightening of anti-money laundering measures in US, Europe, and the Gulf countries has also triggered a large repatriation of holdings abroad by Pakistani residents through the official banking channel since end-September.
Table 2: Paldtn: Macroeconomic Indicaton, 199899 -2003/04
EtI ratel Projections 1998/99 i9991001 2000/01 2001/02 2002/03 2003104 Output and Pries (annual changes In peent) I _ Real GDP at fictor coast 4.2 3 91 2.71? 33 A4? 5 2 Consumner Prices 5.7 3.6 4.4 3.0 3.9 4.0 Savins and Investment (Dereent of GDP! Gross National Savings 11.9 13.5 12.8 15.4 15.4 15.8 Government -3.0 -3.6 1.81 0.2 0.8 1.4 Non-Government 15.0 17.2 1461 15.2 14.6 14.3 Gross Capital Formation 15.6 15 6 14.7 15.2 16.6 17.5 C-vvwt 3.7 321 I 37IA '6914 Non-Government 11.9 24 120 118 130 13.6 Publc Finances (nereent of GDP) Budgetary Revenue 16.2 16.51 15.71 16.9 17.3 17.3 Budgetary Expenditure 22.2 23.0 21.0 22.7 21.5 20.6 Budgetary Balance -6.0 -6.5 -5.31 -5.7 -4.2 -3.3 Primary Balance 1.3 1.1 1.5 1.2 2.1 2.4 NetPbicDebt -93.6 9! I009 94.42 90.5 83.6 Interest Payments 7.3 7.6 68 7.0 6.3 5.7 External Sector ( nereent of GDP) Merchandise Exports 12.8 13.31 15.01 14.9 15.4 15.8 Merchandise Imports 16.4 15.6 17.1 16.4 16.9 17.1 Current Account Balance excluding official transfers -4.6 -361 -3.3 -2.3 -2.7 -2.1 Current Account Balance including official transfers -3.6 -2.1 -1.9 0.2 -1.2 -1.7 Totalv E- tb+De f-wt of c9wt cz r 32S. ! 1 0I0 a 05 29-0 Total Debt Service (percent ofcurrent receipts) 41.7 38.9 3251 33.9 30.4 26.8
Gross Ro.. ine (nLtS milli.nn i 7'f n onR n I ldtl A 770o7n U. fA AC 19.~ The .-ex, e;,irno. tlkreatf4idA n pr" pt.ni, abouft sci-ri.tu risre Aum tn the wuv rin Afah2innist2n1 tensions with India, together with the global economic slowdown, have worsened prospects for growth, export0- zr. A Vnf.ws T.k.e -- +-..alfI.a g gap fr_ fisca --a 200A1 /A2 4--As by- 1-tlatTUS$1 eXuiLauu JJi LLiJiUWO. 11L.ALILUi. iUiliLUl 5 aJ L%P X1lovc 3YLu i JII'J~. uvMlu uoL.J U) xvU billion (or 1.7 percent of GDP) after the September 11 shock. 20. On September 26, 2001, the IMF's Board agreed that performance under the program supported by_ nT~" A-I --'I '_ . .J T'b- A - 'LT ...- 1... l- 1%% in i - ---.... _J Uya aLJSDR 45 mniUllon auUIU-y tUrLArgeIIVIs (app.-veU Uon -4UVn111UVI 2, 20.VV) stablish,1V a guuu *Uack record of macroeconomic policy and structural reform implementation. This laid the ground for a three- year support program under the Poverty Reduction and Growin Facility (PRGF), approved in November 2001. The first review of the PRGF program was successfully completed in end-March 2002. 21. The international community's response post September 11 helped reduce the financing gap. The US provided direct budgetary support of US$600 miilion to protect spending on heaith, education, and anti-poverty programs and cover some of the cost due to the increased number of Afghan refugees. Other donors (Japan, UK, EU, Canada and European countries) also contributed. The external financing package which is supported by the IMF (PRGF-US$1.25 billion over FY02-04) includes UJS$3.3 billion in debt relief from the Paris Club over the next three years. However, despite these favorable developments, the external and domestic public debt are both quite large and hence there are still concerns over the fragility of the external position and future growth prospects. The September 11 shock has also increased the longer term risks to the balance of payment position by making more uncertain an early resumption of long-term private capital inflows as well as increased access to international capital markets. II. PAKISTAN'S POVERTY REDUCTION STRATEGY 22. Soon after the military coup, the new government issued a seven-point agenda to revive the economy, root out endemic corruption, depoliticize state institutions, devolve power to the grass-root level, and imDrove checks and balances and democratic processes in society. In December 1999. following broad national consultations, the government announced its development strategy which focused on: (i) strengthening governance and the integritv of the civil service; (ii) creatihng opponrtnities through accelerating growth of agriculture, small and medium scale industries, informaticin technology, anA nil and one qertnre; aid (iii) rdwuiino rinuprtv thlrniioh reui.ual nf mrrw.th a-nd rP.^.nr,,tivng puiblic expenditure towards human development and poverty reduction. This reforn agenda is now the b-kbfo,.ej prof.hsuove .me... .+rmPv,;.teu..o.S,ae.. Silj.ifiLJ%c^nt p.-Fessl%OLas bee.- .-.- e already in implementing this reform program particularly on macro economic stabilization,, deregulation, govei-iirance and UeVUfiUon. full.uLn Mr is Apvepc'u to bucom-pleted anLr October Luul when the newly elected government takes office (A Joint Staff Assessment (JSA) on the I-PRSP was discussed by tne Boards of tne Bank and tne iME on December 4, and 6, 200i, respectively). A referendum was held on April 30, 2002 in which President Musharraf sought voters confidence for a five-year presidential mandate, arguing that this is the only way to ensure sustaina'bility of the on-going reforms. National and Provincial elections are to be held between October 1-11 with the transfer of power andl formation of federal and provincial governments to take place shortly after. A. Restoring Sustainable and Rapid Growth 23. The govemment recognizes that the incidence of poverty and the vulnerability of the poor will not be reduced without sustained, broad based economic growth. This growth can only be generated and sustained by the private sector. For this to happen, a reasonable investment climate is required with a policy framework that provides ample room for private firms, small and large, to invest and create jobs in agriculture, industry, and services. The government's main preoccupation has therefore been to improve Pa>staCor..A-WisarceS,aer7 govemnrmet effectiveness in creating the political, economic, and insititutinnal setiing for .markets and entrepreneurship to flourish. In particular, it focused on ensuring macroeconomic stability, good nn'crnrnarp.. I,ot p.tn5 otadeqsteA .rop; r4-;-,+. zr.d-bcA , of cnt,+ra-+_ -. +l,n, a fme.a.r-, -If bLsV kiiiS' iji p ,i.t,,. sajSAi Ji.q- - i-F "LIU9.am L UU.L VUI,LLQat.tI- itu I C u lma WVLZf L regulations underpinned by a functioning legal system and curtailment of corruption. 24. Strengthening Macroeconomic Stability. The path of fiscal consolidation envisaged in the I- PUXRS3P is ajppIupIia.ely 411UIUIV0us LU U:.LVd.se Udor.sicU saVUrpb to f1[inar rIIW 1iV-UflU1L aInU cU-Ui unfavorable public debt dynamics. This is essential as the I-PRSP is appropriately cautious on prospects iur2.- tnigner I--t pri-vae sa-vmgs. I incn - T-ri-Pi "LT9.(ITO rigntly stresses that" these fiscal iargets. . hinge upon the realization of the government's projected revenue increase. Implementation of CBR reform, and measures to broaden tne tax base, including bringing agricuitural income in the tax net, and eliminate tax exemptions, are therefore crucial. The strategy also seeks to re-orient expenditures towards the social sectors by reducing the costs of domestic debt, public enterprises, and defense spending (see graphs below). A4ustmnut under the I-PRSP poargm 1 [anging C onpwideeofEqnditure In I-PRSP ,V 1 14 I: -- ~ ~ ~ ~ ~ 401 - ~~~~~4 i 60A 4050 - 0.iz13 3; ~ . 30 Impro-vln1the .I 4O cme _DvlorPaiB +Fsa 13di _Ddeeepnhu(wolpns) reducevthe cost ofdopmening businessOn, aid t"" pr opU'more- piputUztp-Pi servce Oew Po-poor /.J improvIncu ODInV5rN3 9iimRIe. In alUmuon TO MaCrOeCOnomic StaDiuity ana governance improvemenit, reforms in this area focused on reducing the level of protection through de-regulation, trade liberalization, tariffs reduction and rationalization, and policy reforms to raise productivity and reduce the cost of doing business through privatization or more efficient public services. 26. In power, the vision is to build a competitive electric power system consisting of autonomous, financially viable, and efficiently operated entities governed by an independent regulatory authority. Commercialization leading to privatization forms the cornerstone of the government's power sector reforms, which requires credible pricing and regulatory frameworks to improve efficiency and attract private investment. 27. Despite the Government's commitment to this vision, progress in implementing it has been painfully slow. The four year old National Electric Power Regulatory Authority (NEPRA) has not been able to play its regulatory role effectively because of lack of capacity and weaknesses in the regulatory framework regarding tariff setting policy. It has not been able to find a balance between the interests of consumers and producers. Improvements in the operational performances of the Water and Power Development Authority (WAPDA) and the Karachi Electricity Supply Corporation (KESC) also have lagged. In fact, the government recognizes that the large losses of KESC may endanger some of its fiscal achievements and poses therefore an important risk for macroeconomic balances. Adjustments in tariffs have been largely inadequate to finance the viability of nower sunnliers. 28. Natural Gas. The natural gas sector has significant potenttsl fnr growth, foreign exchYi-ange savings (estimated to be about US$500 million a year), efficiency gains as well as environmental 8 Pakistan Country Assistance Strateev benefits. Its development has been stifled, however, by insufficient investment in exploration and production, inadequate infrastructure, administered prices, heavy taxation and disproportionate cross- subsidies. The government strategy is to establish a credible, market-based mricing frameworlk across the production, transmission and distribution chain. The govermment also intends to privatize Pakistan Petrnleuim T.imited (PPT.) the largest nroducer of gas and two Transmission and Distribution utilities. 29. The cnmerstone of this reform is the imnlementation of a new gas tariff nolicy. For gas production, well-head gas prices will now be linked to intemational crude prices. The price of gas a-1piableI-tPP pT i;ll hbe aidjuslteA mdAiiallu t.r:ce a ye2ar. gimilarlv rPtail tnriffe uill als be .diiiQtpdi biannually with a view to eliminating subsidies for households (except for a lifeline block targeted to the po,--). A rajuior setback hIa beer. +-h G .--v,r. ts dAcision '.-l4-r.. to ramLarn ab.o..E. lofl. tariffs for the existing units in the fertilizer industry. 30. Petroleum and Minerals. Implementation of reforms has continued at a rapid pace and extended tOthe pVUUirolI UUij.dUV,- r sco.VeLaU. rUnUWUiglo 11UVLaL1LZL1U11io iUI14l.o V oil aur LPG'..J, u1e evuuo.u of the three government-owned LPG plants has been privatized. Markets have been further deregulated; oil marketing companies and large consumers are now free to import all products. Petroleum products prices are set on a fortnightly basis consistent with import parity levels. Pakistan is the first country in South Asia to adopt automatic adjustment formuiae for petroleum prices. Subsidies to the refineries are now budgeted. Environmental standards have been strengthened but continue to suffer from poor enforcement. Unleaded gasoline is now available across most of the country. There is, however, a need to enhance competition throughout the distribution chain. Pakistan has considerable mineral resources which, if properly developed, could contribute to job creation, economic growth, and poverty reduction. The federal government has formulated a new Mineral Development Policy which is now helping shape activities in Provinces. The Sindh Coal Authority has been established and is now preparing a developmental and promotional action plan. 31. Infrastructure. The government has developed a National Transport Policy to improve the quality of services and reduce their costs. It has refocused its priorities. For roads, there is a welcome shift at the national level towards operations and maintenance, cost recovery (mobilizing additional revenues through tolls earmarked for road maintenance), completion of existing projects, and scaling back nreviouslv large projects. Provincial governments (notably Sindh and NWFP) are starting to replicate some of these reforms. Last year's major effort to turnaround the railways department has continued hbt the railways remain the largest nuhlic sectnr loss makinsg enternrkse Privati7atinn of the railways or significant private sector participation is not an option in the National Transport :Policy. The imple.m.entat.ion of t+h.e gradual out to n'nnract.iv.fi.,otesectotr of Pactati' two port .,f s beer stalled. 32 'TI,0e A,,nelnrA---t of 44,., IfTf..nns C',, .... or.sc n.An .Tecn,&.mnl , -T) scl: or is oane o the priorities in the I-PRSP because of its role in building competitive markets, facilitating private sector UrvelopULU eUr, anu 11le cn11U1U.ULU1r, LU rowuLI. rA natioInal ICT Plicy -wa arLuiuuiLiIVu iU AnUrut 2000, setting in motion a program to increase access to information infrastructure and use ICT across sectors to improve public service elivery. iimplemenitaion o0 uis poiicy m 200 I resulted in the growtn of service providers. The government recognizes, however, that growth in the sector will come from introducing competition in ail market segments. Since Pakistan Telecommunication Limited's (PTCL) monopoly over fixed line services expires at the end of 2002, the government is preparing for liberalization by licensing operators in basic, long distance, and internationai service provision. 33. FinancialSector Reforms have been accelerated. The government believes that the best way to insulate the banking sector from political interference is to privatize all Nationalized Commercial Banks (NCBs) and consolidate (restructure, merge, or liquidate) the Development Finance Corporations. PakistanCountry Assistance Strategy 9 Accordingly, tne strategy incluues ine privauzauon o0 two INCBs kriaDio B5anK Li1mted iiBL), and United Bank Limnited (UBL)) within the tenure of the current government and preparing a third bank National Bank of Paidstan (N.BP) for privatization. 34. Tne tnree large nationalized commercial baniks are being restructured to reduce tneir costs and make them more attractive for privatization. More than 8,000 staff have opted for voluntary retirement and 650 branches have been closed, mostly in urban areas. The National Finance Development Corporation-the largest state-owned non-bank financial institution-has been merged with the National Bank of Pakistan. The government has divested 6 percent of its shares in Muslim Commercial Bank, and is committed to sell off the remaining 9 percent. For Allied Bank Limited, the Privatization Commission has already advertised for a block sale of Government's 49 percent shareholding. The strengthening of prudential regulations continues. 35. The government is working on removing the uncertainty arising from the implication of the application of the Shariah code to all financial transactions which has held potential investors at bay. The government considers that Islamic banling should be viewed as an opportunity to diversify the supply of financial products and deepen financial intermediation. The 'government is therefore seeking Supreme Court approval for a dual approach where traditional and Islamic finance institutions would coexist. The first Islamic bank (with 90 percent investment from a consortium which includes the Islamic Development Bank and 10 percent from Societe Generale) has iust been established. Te State Bank of Pakistan (SBP) intends also to rely on other countries' experiences of such a dual approach to t1e,velnn its cpircityv t remilate and mn-nitor TIdamifr flinanncp nroditnc nn nnqpr_tnrs. 36. Rural Develnrnment and N.atur-al ResnLre Management. T.he I-pRRp rightl!y ,high,lights th,e key role that agricultural growth must play in poverty reduction. The government has made significant 7,rnarress iin, imiwr.u1vin the imtpnftiupc rpmnrrn foir ag-ih-c,al 4 A-.4-- +-4e .- A pc regimes have been substantially liberalized to the point that very few distortions remain. The govemr.uner.trecogrzshenee51. V 4 1U~11L11 11*.40to fo -n0prd"gacs *.o_lP. 11144.,.-kes(a,,c-Ad. 11.ar, Lvu14U ir-,P-v- .JJ.1u14AJJ,1aUU_ L ___.__ 1 v,0g3_ LU 1 11u 1..Lq, kia1411U W1u UILJ 411U lILIJA UVVU1r their functioning. And stresses that the most important reform for accelerating rural growth is the imrIovement in uje nianagelment ofuna. uilUlreso-5rces, particularly watcr. Gi-ven tnc on-going drough-t, the I-PRSP focuses on expanding water storage, by building new dams. There is, however, a welcome emphiatsis on a realistic pricing of water and better recovery of user cnarges, and improved water conservation and management-particularly to address saline soils and water logging in the Indus Basin irrigation system-to protect the long-term sustainability of agriculture in Paicstan. The strategy gives increased emphasis also to investment in on-farm water management (OFWM), recognizing the cost- effectiveness of this participatory approach at community level relative to other alternatives. A water management strategy that analyzes access, distribution, and pricing is therefore crucially needed. B. Restoring the Integrity and Accountability of State Institutions 37. Improving Government Effectiveness has been and remains the hallmark of this government's reform program. The far reaching set of reforms to improve governance are all at an advanced stage of implementation. These include: (i) reforrns of some of the country's fundamental institutions of economic and financial management: the Central Bank of Pakistan (SBP), the Central Board of Revenue (CBR), the Auditor General and Controller General of Accounts, the police, the judicial system, and the civil service; (ii) improved public financial management, accountability, and increased transparency and information on government activities to facilitate public oversight; (iii) devolution; (iv) an anti- corruption drive; and (v) privatization and deregulation to reduce incentives for rent-seeking behavior. lo PakistanCountry Assistance Strategy 38. After detailed analytical work, including widespread consultations, a strategy for the fundamental reform of the Central Board of Revenue (CBR) was approved by the Cabinel: in October 2001. The strategy was translated into an action plan using the recommendations of the Task Force for the Reform of the Central Board of Revenue. A new CBR management has assumed the leadership for its implementation. 39. To improve public financial management and accountability, the government has implemented fundamental structural reforms to strengthen the audit and accounting functions. It has lpromulgated ordinances establishing the autonomy, powers, and respective responsibilities of the Auditor General and the Office of the Controller General of Accounts. Ad-hoc Public Accounts Committees (PACs) have been set up at both the Federal and Provincial levels to clear the backlog of Audit Reports not yet reviewed, and take appropriate follow-up action. For the first time in more than a decade, the Federal Public Accounts Committee is reviewing the accounts of a government in office. The proceedings of the Federal PAC have been onened to the media and it is exnected that the nractice will be extended to thle Provincial PACs. The government is establishing a National Procurement Authority to lead the process of change in this 40. The Comntroller Gen_ir of Acenu1nts (CGTA) has formilated a strateyv to improve financial management. In the short-term, the focus is on improving the existing system through training of district lp'inl officl.s mi.A im irrvincr the p-nergpvp nf rpnnnciliatnon nf ac,-nirnta Tin tlip minA;ii,rn ta.rm lIat"ai,e public chart of accounts and financial reporting requirements,.announced by the President in December <1)ArkAA S%,1 -11 Up -- A -+A_A A._4-- -A_ T A A__ A_+ ; s t_A_A Uvvv, LviLI UVW 11iUVL GVVW.,'JULULLia v0t1A1. 5 03 *L1sw r.J V- illJliLt la1vvv U1 vU extending the modernization of its accounting and auditing functions to the district governments and below. As part of this proraLm, dUrig tLle next two yers, Pakistanl will: (i) imp-rove its ex-penditure management through the implementation of a medium-term budget framework; and (ii) publish the government's quarterly fiiscai accounts to enaDie pubiic monitoring of budget implementation. in addition, Fiscal Monitoring Committees (FMCs) have been set up at the Federal and Provincial levels to monitor the preparation of reconciled and accurate accounts. Civil service reforms now include an entry and exit strategy, training, consolidation of functions, simpler procedures, and a phased program of pay and pension reforms. 41. The Government's far. reaching Access to Justice Reform Program focuses on police and judiciary reforms. The government is keen on creating an environment that respects the rule of law, protects property, and offers its citizens, particularly the poor, access to an independent and professional justice and police. 42. Devolution. The government expects that the devolution of power to local governments will play a major role in putting in place an institutional framework that would make the public sector more accountable to the users and more efficient at delivering basic social services-basic education, primary health care, rural water and sanitation, policing, justice, and other forms of community infrastructure. Local government elections were completed as scheduled in August 2001. Building the administrative capacity to govern and providing the financial resources to deliver these services are, howvever, yet to come. Fiscal devolution to allow local Boverments to fulfill the service deliverv asRionments ic hampered by the general scarcity of funds at all levels of government. The effective working of district level govermentls and tlw heibliniin of the requisite institutional c-apacity are likelyltobe len.gthIy and challenging processes. PakistanCountry Assistance Strategy 11 43. Atier tle s-uccessiul prosecution oi a large numoer ksee iaoie 3) o0 nign gUvernLnene U11cials, politicians, senior military officers and major tax and loan defaulters which brought in about US$1.5 billion to the treasury, the National Accountability Bureau (NAB), wnich has been mandated to investigate and prosecute cases of Tahle 3: NAB Perfornmane 2001-2002 corruption, is worling on mstitutionalizing its anti-corruption strategy to prevent Investigation Prosecution corruption through improved governance. Authorized 1060 Cases Filed in Courts 397 Completed 312 Cases Decided 198 44. Finally the govermnent has On-going 668 Convicted 169 completed and issued key environmental Closed 80 Acquitted 23 impact assessment regulation. It delegated CasesWi Progress 6 monitoring and enforcement responsibility to provincial environmental agencies. It has made progress in the preparation of a modern resettlement policy. These initiatives will need to be supported by adequate recurrent budgets, further strengthening of human resources and information system capacity, and a clear system of accountability for implementation and enforcement. C. Accelerating Human Development 45. The government has now put in place a credible strategv to make progress towards achieving the MDGs for education and health. Federal budget allocations for education and health programs were almost doubled this fiscal year using the fiscal snace created by external sunnort after Sentember 11. A system to track expenditures on education and health is also being developed. There is now a strong lesadershipa fir the e'dacsation se-~tor at hoth the Federsi sand sa!! fouir inv.intisal e~disat:n ,m, inie W1hile education is a provincial subject, the Federal Education Minister has been successful in building a 1 pnortnpralv.p ,mtl. 11na! ion sm. n ortr.cu ating fnvn.s .ni-tarear atacrnes to it+npnt Ahoni The partnership has been sealed with Memoranda of Understandings linking resource transfer to tu. li LAP,1IV111JUUV"V11L.3 Lu u1L 0UCL&,y LU IILLjJL%JVV, UUL,V4L%4u 1 UUIuIiussss U11%,1UUVqu1V IUIUWl1r-. kl) oLL overall framework-Education Sector Reform (ESR), launched in 2001-laying down the foundation for ute Education For All agenda; (ii) a major Scnooi Rehabilitation Program; (iii) a Teacner Training Program; (iv) Learning Centers at the District Level which aim at universalizing access to primary education, with a special focus on giris (covering the entire eiementary stage of education for ages 6-14); (v) Public/Private Partnerships; providing public funding for low cost private education through the Education Foundations (the government has also taken the lead in restructuring the National Education Foundation providing it with greater autonomy under the Societies Act); and (v) a National Education Assessment System (NEAS) to measure outcomes by enabling stakeholders in the elementary education system to understand how well the elementary education system in Palistan is performing and to design targeted interventions to improve the system to achieve desired learning outcomes. In addition, the ESR encompasses new innovative programs in examination reform, video textbook libraries, a comprehensive literacy program, early childhood education and an "adopt a school" program. The Federal Minister is now in charge of donor coordination and is looking for assistance with the implementation of these various components, including experience with school feeding programs and use of vouchers. 47. The Islamabad Capital Territory has been used to test ideas and encourage reforms by piloting a number of the initiatives included in the ESR. These include the recruitment of teachers on school specific contracts, introducing training programs for head teachers and learning centers to improve teachers' academic knowledge- ungrading entrv qualificatinns for teachers and intrnducning a teacher- focused code of ethics to address chronic teacher absenteeism. Federal transfers are also being used to 12 Pakistan Country Assistance Strategy encourage reform. in this context, federai fundimg nas been ngniiy reiocuseu on rexwEilULIrng UIW existing infrastructure-with funding targeted to rehabilitating those schools which are in worst conditions. Federal funding is also being put where it is expected to have catalytic impact on performance. The budget for the NEAS has been doubled and is linked to outcomes. A Human Development Task Force is also working on a program to build district capacities for service delivery through pilot initiatives referred to as "incubators". The latter are expected to serve as role models for district staff and below to better deliver social services. A Human Development Commission has also been set up to coordinate initiatives to further public private partnerships. 48. In parallel with the federal government's ESR initiative, provincial governments are also beginning to put in place measures that address some of the most fundamental problems of the system, such as calling teachers to account throuigh a re-certification process, linking pay with performance (through monitoring attendance), hiring new teachers on school specific contracts, and exploring ways to use under utilized school buildings. Each province has started to seriously monitor teacher attendance. To improve facilities, the focus is on maintenance rather than new investment. Education departments unreidertaking iventories of unused schools and investiaating ontions for their utilization, inter-alia, through "contracting out" to the private sector. 49. Learning from the experience of the Social Action Program (SAP), the Government's priority is +wk-iF^vre- to .4 tesocialhp deplivPru svytem nf its seiver anvprnance nrnhlems first then nddress the funding issue expecting that assistance from donors and the on-going reform program (through its impact on growth) would geerAate the necessary resources to fund adequAtely the. sfuiol spto-nrs Siu-pe,cfill experiences which have relieved the funding constraint are being scaled up or replicated. The Sindh ClUG4LL1L IJUVVVI1ULIULt IIUU"JL a Sc.ihol" proiuaii LIas UbeI. V.jLI3 s V0IUis acI.JL 5 co 1 t adoL funds to finance textbooks, schools uniforms, and other supplies as well as maintenance of buildings, and is being replicatea mindiferent parts of0 the country. 50. Tne goveunment's meuiunm term- health strategy under the I-PRSP is rightly cu;uunntauing on prevention and control programs, especially in the area of reproductive health, child health, nutrient deficiencies and communicable diseases. Programs include adoption of updated strategies against TB5 and malaria, introduction of Hepatitis B vaccination and plans of response to HIV/AIDS. The IPRSP includes targets for 2003/04 for reducing child mortality, increasing the number of Lady Hiealth Workers (See Box 3), reducing the prevalence of malnutrition among pre-school children, and increasing contraceptive prevalence rate, among others. 51. Strengthening public-private sector partnerships features strongly in the Health Policy reform as well as making more effective use of existing facilities and skills. It is proposed, for exampile, that every medical college in the public and private sector be required to adopt at least one district hospital or primary health facility in addition to the teaching hospital affiliated to it. Reforms of the regulatory environment are also being considered. 52. A start has been made already to improve personnel management. In the health sector, NWFP and Punjab are increasingly resorting to contract employment in an effort to reduce absenteeism and fill vacancies in remote rural areas. The provinces have also started to strengthen management for the deliverv of social services at district level. To this effect, they have redeployed staff from the provincial to district level. Of the four provinces, NWFP is by far the most advanced in decentralizing staff from the center to the distrinct level facilities where they are most needed- C53. Pak-istan hnq rntifled qeve-n of tlhe 110 core labor ennverntinris A mainr effort is on Lyoing to address with support from ELO and the Bank child labor issues (see Annex Ml). It has also been granted m0rn f-orableh treatme~nt wrnder thli Em-riean UTnion-' r-4P in vipuw of its pffnrkc tn P~nmihft dnirio production and trafficking. The government has also strengthened its track record regarding its L,LIIUIIV,11L LU 5Vf&"MCT Uc.jn.&y. *~, lLA11LT 'JAlt Ut=UZi--.A( .*~fl 4l. S* &* .l* 5 emipowered, the 1eaveihWnk rnfa'Dcmtd 4 after it took ove a-1- :' i1 ote 1til L'Tli'f I,.4 -'l*' point agenda to repeai me j..-Federal.Go laws that are thzb~nih4I9V4..Fuianed1almo--t' ennly~m' Qver en.sourcesiiitj,.p Wm uii&I I- -,.~~~~~~~~44?Lt .-. ~ ~ ~ _. ,' ... .',, V` A National Commission ~~ina(slPn sies-uAezr be~iiia 36W2: w eaii ff~'h%rn -aiaefi~-f..aeci68 educati'a'ra-:' cpdn.tdar' i'vtrn .3. for the Status of Women "hontiiof ftil'd-.iiie,laining'Wihd, 1 4 mon1hsoffinsrv-i,e'wiIia 4 Bic?'a LHW j;61v es1 (NCSW) was established - iS 2 per:~fsrSOi.abR mo?Ctj" adi e•4 ib.li for ~b l!.',I00&populat-ion i.P.Thrrlowlibollil to review the existing laws 60,000 LHWs adtoss the councry, micludrgi about- 13,000, village' bas01,fluil~iy welar - ~ ~ ~~~~~~ i6by.the1fhistryof Pop'ulaio6n &'Welfnire andb'bave~-I with a view to I opgny-en recommending reformns to 4 -_ ' i and p~~~~~~~~~dcatesada reduce gener ningrou,vauadn- 4 -, Ih discrimination and ~SlgnilICant inP~aC1 On, I11ortanL a1SPeCCSlM r!N:, anC- Mzmly planning. A-iQswI8jrm ,1oieod .surv Sgib~,d;ibosd; villagtsl'%iLhJ-L"Nso lb iief{bcer -acc'es.to.iai p3romote Render equity. 4f- lrl "'Thp nnlv P Pve-nti,Wi .&inji;r~ gr.n k;I rCin,4imn'nnn u,h"Tp al%hAV.pnfl? 1 After extensive ,bt4 s efor'deltVe,i P,sr~e~, .. ~K''* *, '~ 1~!' consultations with ~AI~''~ constitutional lawyers and I] FJ 3C"U~. ,, exnertq- a nrominent NGO0 -ll,"latrs' M' , the Foundation, has' K~~ ;u UUTN ru It. a ini i.L511r 1f 4. -c I Muslim Lawsz tomk ioodm o 1i666rotbi'~iinhIS td'd9.iltgby011rtraOndhat worker'2 153 These include theFaiyF usnoonpon(R ~ I*'" Ladws U rH eaa.eerLytghdVa, , Nikahnama form (marriage NuimSui"'f'cbilIdrien'l'it di ihea:i+'Q-.r %1 - 5 licence');, Farmily CoUurts tdarea,3?r * 4 Act; Dissolution of XIN cide.1 5mnh Iu~nnzdV ~ ~ Yr Muslim Manriages Act; .iiojnJa 3CEIIeLvV;ogram, nas. utmiicia flDl3ma JocusCa on1 ns10 nll itiraitilgic .vision'adndpc4bI- ledei"sbip.' V s -to, superviio lY,_ and Child Marriage a rnnae s'i hj1i adJ%nar Restraint Act. Ihe pha~hxouiprnghejr - Zrl. goverrnment hs already N '~~¶' declared that all "honor **. 5 ~ S * -control-aieasiert'iMis lt Imuchro- I rnj druat services klig"(see Annex I, Box k~Lc of:conu-~i6~t deIa &fA Itu seL', 4) will be treated as 'VlcU'yohea-lth 9fafflikve a1i6ffiTd ith-p ' murders. L ,,.. .. 1.hM..I. Mr. , ;cornt conerigaboui 6 54. TheCommission rew H nti'~~ 5hofr.; the -LHWf is focusing on. lat " coeo t-'' recommending the repeal ' ' ' " dioatrkonunn,()prvli 8 of one of the most '~I1 eLoc L11 ucao ru discriminatory laws h I4- nh . tV~"i'i\' t..t~i"4.~' Hudood Ordinances 4 . . 'rill'.. .- ' 4 (which cover rane,~ ~~* -:I~ ~ '.Il :'iJ;i$ i. c;'~i adultery and prostitution) I 14 Pakistan Country Assistance Strategy and offenses related to Qazf (false accusation relating to women chastity). under the nudood ordinances, the testimony of adult Muslim males is the only admissible evidence and this has created many instances of egregious arbitrariness and discrimination against women. Besides the Hudood ordinances, other discriminatory laws include the Qanoon-e-Shahadat (law of evidence), Qisas (covers retribution) and Diyat (covers blood money). 55. Beyond changes in the laws, the government is also seeking to improve women's voice and access to resources by increasing their political representation and reducing their vulnerability to rule of law violations. A third of local council seats have been reserved for women (resulting in a total of 36,007 women elected across all four provinces). On January 17, 2002, the governmenlt announced a tripling in the number of seats reserved for women under the future National Assembly from 20 to 60. Women's rePresentation in the future provincial assemblies will also be increased. This is a clear break from the past. The government is receiving a significant level of technical assistance from bilateral donors and UN agencies to implement the reform agenda for gender eouitv in Palistan. 56. A number of targeted interventions, such as Pakistan Bait-ul-mal (BPM). the Pa!kistan Povertv Alleviation Fund (PPAF), the Zakat Foundation, are used also to provide assistance to poor women and children These incltde the Fond I.Runnnrt Prooranm direct financial and medical assistance, and educational stipends. The government has also established the Khushali Bank (micro credit bank) to ix,omen's access to wrol iiptiuve assets. 57. Mo-e gne rallxy, th.e T-PRSP artm e t.he need for a com.preheasnve soc pro'ecton stategy to address both poverty and vulnerability. The government seeks to reduce the vulnerability of the poor by expar.ding vuugeted :ic.e.un tr,sfer J al°lm s LL. p.-oLd:.nL Va U". access LU assets Uli gUh UHl.roVedL access to credit, housing, and distribution of government-owned land. The govermnent has also embaur'vu on1 a1 1reIlulll VI Ue sAiLU1 safeLy net p-rogram41s uy FVngRgu1in1g u1 e iMistitutionLs in charrge 01 their implementation and monitoring, increasing transfers, and extending the targeting to reach a further 1.5 miilion benenfciaries. For example, the government's Knusnal Pakistan Program, as iaid out in the i- PRSP, attempts to improve targeting by incorporating active community participation. As district governments start functioning under the devolution program, the government expects Khushal Pakistan to gain further importance and local ownership (See the Poverty Assessment and the DPR). m. THE BANK GRoup's ASSISTANCE STRATEGY OVER FY03-05 A. Overview of Bank Group Strategy 58. The government of Pakistan is engaged in fundamental reform for a historical transition of the country to modernity. These reforms cover a broad spectrum-politics, institutions, economic, gender, and social. They provide a clear break with the past, especially regarding gender equity. The main goal of the Bank Group's Assistance Strategy is to support these fundamental reforms for a transition to a modern Islamic State through a program of analytical services, institutional capacity building, and demand driven lending. The triggers underpinning the operationalization of the Bank Group's assistance strategy will be based on measurable outcomes which have the MDGs as a frame of reference in alignment with corporate priorities and global public goods. PaFdkitan Coun.try Assistance Str-ate, 15 MILLENNIUM DEVELOPMENT GOALS I Poverty Reduteon N (The Overarching Objective) Pakdstan's I-PRSP Strategy: Growth with Equlty (Government Effeene Business CUimate N ( Pro-Poor Growth ) • Macr Stability Politincanv 8l/acrorStabilit Edu on Reiorrn l *Fiscal Reform Regimen for: * Health Reform * Governance Reform * Power, Oil & Gas, ICT *Rural Development tw-vuL'VUJUUUII * Financial Services a Gender Equity * Infrastructure Services *Social Protection i' World Bank Group Strategic Prindples Client "Pull" and Selectivity Programmatic Approach Partnerships and Outreach l B. Inputs to Strategy Formulation 59. The Bank Group CAS will also be shaped by: (i) the lessons learnt from the implementation of the past Bank Group CAS in Paiistan, including iFC`s and MIGA;s experiences as investors and advisors; (ii) the results of the 2000 Client Survey; and (iii) the concerns of Pakistani women and men expressed during the extensive consultations held by the Bank Group all through 2000 (see Annex I). There was no Country Assistance Evaluation by the Operations Evaluation Department. 60. Lessons from the On-Going Bank Group Country Assistance Strategy. Experience with implementation of the on-going CAS has been positive and has taught a number of lessons. * The Bank's shift in emphasis towards knowledge transfer (to underpin policy advice) and capacity building has paid off. > Significant policy reforms took place in a number of areas without financial assistance. This was particularly successful in energy and transport, where no sector specific lending took 16 Pakistan CountryAssistance Strategy place over the past 10 years, yet the dialogue continued and reforms have progressed. And financial sector reforms were deepened well before any financial assistance accrued. The large and eff-ective pro-poor public works program is another important example of a positive outcome arising out of the dialogue with the Government. > The partnership between the Bank Group and the Government of Pakistan has been strengthened. The latter camne to see the Bank Group as a committed development partner and not solely a lending institution. This was true both at the federal as well as provincial levels where the Bank became a more engaged partner in encouraging provinces to reform and support their efforts through analytical services and policy dialogue. * The substantial progress in macroeconomic management at the federal level and weaker policy and implementation performance at the provincial and sector levels (fiscal, power, agriculture, irrigation, infrastructure, including water and sanitation, and human development) led the Bank to refocus its assistance on the provincial reforms and on the cross-cutting governance imorovement issues-accountabilitv (nublic sector financial management. transnarencv)- compliance (taxation, civil service reform, strengihening central bank's supervision and regulation capacitv), and q rnnnrt to A5evnliitinn (mrn-VinniI refnrmc aind dietritt ra,nt-it hi,ilAinc) to improve the investment climate and service delivery. For the future, Bank support for reforms need to giuev mnre atte.ntionv n implementation capacity. Wek gverac a--ld h-ig incidenc- Uoty1L"- private sector, leading to market distortions which undermined IFC's support: to building a COMIP VelVe VUUi rIII. iUi pLLVa4L seorLUL UCVVVIUjJLIIU-L. -I 'UH5 en-ViLVUmUeiJZL, 1I1lUIaialIy attractive investments often have low economic value added, further limiting opportunities for LE- s catalytic role for private invesunent in Pakistan. * Tne message from tne experience of the Social Action Program (SAP) is to focus Bank's support on helping the government improve the governance structures (systematically not topically) that underpin service delivery and help achieve results in the MDGs areas of health and education. The message from the implementation of the National Drainage Program is that fundamental institutional reforms require high level political commitment and "champions" to lead them. Sindh is showing the way in this respect and reforms are progressing well. 61. Client Survey Results. The lessons from the client survey echo those from the implementation of the CAS. They stress the need to (i) sharpen the Banks Group's assistance priorities; (ii) increase the poverty focus across the spectrum of Bank Group's activities; (iii) increase the effectiveness of the Bank's assistance through more consultation and participation of stakeholders; (iv) pay more attention to implementation capacity in the country; (v) be flexible in adjusting to changing country circumstances: and (vi) strengthen capacity of local training and research institutes. Clients view interactions with Bank Group Staff as important and very useful and stressed the need for Bank Staff to increase their outreach and interactions with clients and civil society. 62. Consultalons and Their Imnact on Stratewv Formulation. A series of very extensive consultations were organized both on lessons learnt frdm past Bank Group Assistance and on priorities for this CAS. The Rank (Trnirn Cn,intrv tenm (nvPr 20 staff in nl1ahnrntinin with wBT snent a total of five weeks, one week in a district in each of the four provinces, and one week between the federal and ,wrin.cial capitala lietpingto onupr 5l0fl Aart-irininto rAvnum &om anbroad rnge nf hbc.rrn1inds (eeP Bloy 4 & Annex I). These consultations gave participants the opportunity to learn more about the Bank C.L oups' mAssion ALLA L6L1111% JO '-Oe Our, UWAt!flO fut. P Ip.pnIs V' %IS.ed this oppSr.Jflty (for' many it was the first time) to discuss directly with Bank Group staff their country's development ciiaiLvii-ges, zutcu conceillb, andu hopes Ior 'Ule LuLure. A orr.all riOvup vf p.0totestes irIMVU -.o Uie &LILL- globalization movement boycotted the consultations in Karachi and Lahore. Most participants remained; however, for the whole duration of the one day workshop and while tIey -were also criical of a numnber of the Bank Group's activities in Pakistan, they were more constructive in offering advice and suggestions. T-ney stressed the need to continue this diaiogue with civii society on the BanKi Groups' assistance strategy to Pakistan on a more c 7 -. I periodic basis. I ,t . :flf,Bo' 4., Conosultzaons,f,or te (iA-r'. ~~ ~ ~~ ~ .h.i;;-~ ~ 7 i,r. ,b t1 -. r i , is.o 63. The consultations helped increase the lEL ee-rit,rocunci-,-lextensivc9clnsu ltoes-thr iUi Bank Group's awareness of the impact of its __ is rIc-tev., b snr ; assistance in Pakistan and ground the main .- i-_i i pillars of its future strategy in the reality of |11WHAM-WA 'a MOMrw pF6-yiq7ql-o Q past implementation record. For example, the RMrionne db- iifd1iH"PM ' citin inbry consultations showed how high on eveTyone's Olr,s r , ;Mo agenda is the issue of quality and reliability of |sXaa Vo[-exnenslve'cn.mn water and education delivery services to both Inc udeRApepttz 7 ; otI the wealthy and the poor (see Annex 1). The ddi -e e heield, consultations with the Drivate setor|olllrn-h20,,izersttepvt~ highlighted the importance of "getting the l*toy. onIt'v gnvernment off the back of businesses" by g ,, n,4oP%$-, reducing the burden of taxes and regulations, start h_____ 21(1tinA fl,wnnnrhinitia- that thi-.ir 2I-lnini'ctr2ntininq. hgi~.nkrtP?r-lva main offers for corruption. In contrast to the hist or, e of lobbyin.g gSovernmen.t for intersventionsv" to A" > ____*P; favor specific industries or companies, the -tcn ove-arc.ludW,g ui.enne was uiat WiLaL the pJriV4L | _ u2 u sector most needed from government was to be l a .. .W1'NPOVic LI I41 L - - C. Strategic ngagement Prln o'. Inc Bank Group's suppor Dwile be I U' um* .U UU U guided by the following three strategic j engagement principies: (i) Strong "ciient pu ero to reform and selectivity; (ii) a programmatic 5 c u _e essE approach tocused on transter ot knowlecge and so t or eransaiD ;:Eo4:I capacity building first; and resources second, go ae _ _ n i do'p in a flexible pursuit of key development ! -in. . ;I outcomes; and (iii) Partnerships and Outreach. 18 Pakistan Country Assistance Strategy Client "Pul" and Selectivity 65. Underiying botn the seiection of The Bank Groups strategic priorities and their implementation is the principle of "strong client pull" for reform and selectivity. Part of the strategic objective behind the "demand pull"' approach is to aim for capacity building through lending and non-lending support and to learn together with the client. There is a need to focus, not just on what is important, but also on areas with strong client commitment to carry out the necessary reforms. Bank Group financial support is useful only among these. For example, the Bank's assistance strategy has already been reoriented to focus first on those provinces-Sindh and NWFP-which have embarked on a comprehensive fiscal and economic reform program and have sought Bank's assistance. Subsequently the Bank's dialogue will also focus on those newly established district level governments which would be committed to reform. IFC's investments and support will also depend on progress in establishing a competitive market framework. For example, the extent of IFC's involvement in the gas sector depends on government's action on regulatory and price reforms and privatization. 66. Using this principle, the Bank Group's strategic priorities will be subdivided into three categories: (i) Deep engagement; (ii) Low engagement; and (iii) Monitoring (see graph below). 67. Business Areas for Deep Engagement. The Bank Group will engage fully with its full set of services in areas where the government has shown the strongest conmitment to reform and has demonstrated such comnmitment through measurable actions already taken. While cooperatng with other donnrq the Bank (G'roou will take the lead on support tn en.nnnmic management and financial grnance, including technical and financial assistance to the State Bank of Pakistan (SBP), the C!omptroller General of Accouents (G.A), the Auditonr (nera1's Office (AG) support for the reforr. of th.e Cerl Board of Revenue, the civil service, investment climate (including support to reform the governance and regunaton.T Owneshi power, gas, oil, financial Ownership Instruments sector, p-....cA.O andL-.ft A reforms, and privatization), -1 - - A .---. Reformed * inanna-nuhlir provinciai anu UiSLlCtr crnnfle governments reforms, * Guarantees education, health, water management and rural ReforCing _ s Reforming '1 1~~~- A A A *development, district services, _ U AA and community infrastructure. The level of support at this -l stage of the Bank Group Reform-shy *LIL engagement will include both '"why"AAA non-lending and lending * services as required. 68. Business Areas for Low Low Enzarement. The Bank Low CAS Relevance ffigh Group will keep a low level of engagement in areas where the client has shown so far a relatively low degree of reform resadinese ciulh as for urban development and transport or where there have been reversals of reforms or slow progress. The Bank GIrmop will focsii on ananlvyticl qrvinpe and leve.raging the resouirces of BI to play an advocacy role to encourage reforms. Pn/rivdan (nunfrv AVViVtOnneP StrntPov 19 69. Business Areas With No-Lending Services. These are areas where the Bank would monitor developments such as on areas where the IMF has comparative advantage (macroeconomic stabilization), areas where the reforms are on-going (sometimes with other donors sunport) or need only IFC or M[GA's engagement (capital markets, SMEs), and areas where the commitment to reform is very low. Arte2 nfhimiginPQe frim which the lRnnlc ha disenagepd cornplettelv will alqn fimire in this categrorv This include financing physical investments in railways, telecom and ports, oil and gas, public industries, aon4.iJlhi1 s. Zavcs And t riv ,,,lhrpur,n t.h4.e ,a , fstor -. pmn, iwu.yp'at ixnith ti c,nr"ni-t nf TFlw snd AAiA &... - - .01H ... , -- V e _ - s w. LthU.- _,, _ as required. No lending will take place at this level of engagement. ProgrammaticApproach 70. Pakistan's I-PRSP sets out the process underlying a sweeping and ambitious reform program cov zll r.g U jAJILI%.01,o UA0&ItULIWInlU, econor,^.., socialO-.d m-eas, ir,cuir..g gener. equity.II..ese *.Ms re. are inherently long term in nature as acknowledged by the government and can therefore be more 1L__ _U.1- -.L A .- , _ 1_ _3-… C eLIeC1ivly su-ppUorU. Uy n,1u-;ru-yoU1 aIU8141UVUUtULUIV na.LoU11r1, pFUVUhiAaI, aUnU UdLUc level-,hence the need for a programmatic approach for the Bank Group's assistance strategy. The system wide reforms being envisaged for example for the tax administration (CBR), Tne institutions in charge of financial management (the Comptroller General of Accounts, the Auditor General's Office), the civil service, also require a progranmmatic approach. 71. Programmatic Instruments. Tne instruments used under this GAS follow directly from the strategy. The Bank will use (i) policy based fast disbursing lending to pursue the governance and sectoral reform agenda (finance, power); (ii) programmatic sector and investment lending to support the implementation of the reforms to improve the economic (TA to the Central Bank, CBR, CGA, and AG) and social infrastructure and delivery systems for education and health, and community infrastructure services (including water management) at all levels of governments; and (iii) analytical work and other non-lending services to monitor developments in the areas of low engagement and encourage reforms. The Bank Group will use its non-lending services (AAA, TA, and advisory services) to build a coherent strategy. for capacity building, fill the knowledge gaps in key areas of reforms to help the government articulate its reform strategies and strengthen its implementation strategy (see Table 7). 72. The core program of fiscal and governance reforms at both the provincial and district levels is an area for which the Bank's programming approach is best suited; reforms take several years to yield results. and sutport needs to be flexible and consistent to withstand the uncertainties inherent in such an endeavor. Moving forward with reforms will also require assurance of a reasonable degree of financial sunnort over the medium-tern. The Bank's nlanned use of a series of one tranche adiustment credits to the federal and provincial governments will provide a predictable and performance-based support to enahle hnth the refhrmincr nrnvince tore t.nre their filnrcinl en,lniiiihrilim while ,rndeirtnring the diffirult and politically controversial reforms. The approach will also help the Bank manage risks by pacing its acaaat+nna -,i;lI +tim Ahh.1rA nnrj'prnp,it'c al 6tl,- fo rsue rnfnorrn n.dinfl.e to - a,nc-- of "u,,a+t in '4m-" support. 73. A programmatic approach is also effective in community-based rural development projects which ;-.-.ov -_ctorI po1c6c.-e as vvell as - 1high Aegre of -xe-e.ainz-.d Aio:.gA-44--l. - programmatic investment lending approach whereby individual projects are tailored to the particular cUI1.U s'fulcesU1 and .ed Ub of a UVUrvgC VI U15LriLVL allvW IUnMUg adIU 1VtUUUI7iiig loLUaKe plac, wmici iiC projects are implemented. With the devolution of social service delivery and rural infrastructure services to the newly formed district governmenTs (97 in totai), me iBank wiii aiso seek to support building the capacity of local governments for effective planning, management, and implementation of related policies and district services programs. This support will initially be extended through a combination of 20 Pakistan Country Assisiance Strategy anL,aly -JA1 Uliw.-Aand hn.ec.f,..icl aaos,s.*-e f+,U-LO5 .1 LTlLsO *,Jf +a-..to t sfer1Q ov ledge -Ult- expe.;se as needed. Bank support may eventually be expanded to include outcome-based programmatic i,nvesuL.,1L ler,dir,g '. assisOL LIn Uuilng -dUUL,aL.iUn aru, zIeaul U;. L1Lu IdlivU.;y ayamwau. I U' J4ayw4iia Government-funded PHRD grant technical assistance will continue to be a very useful instrument in building local govermnent capacity to implemelnt refuiris. Partnership-sand Outreach 74. Tne Bank has been instrumental-as it pursued tne Comprehensive Development Framework approach-in pulling along donors to build stronger partnerships in support of the govermient's reform program and its I-PKSP. The Bank supported the government from its first days drawing on its expertise to help it formulate its comprehensive reform program. The Bank Group will continue under this CAS to base its financial assistance on a sector-wide programtmatic approach. In this context, and using the selectivity principle, the Bank Group will seek better donor coordination in the areas of Blank Group's deep engagement. The Bank is leading the effort to mobilize technical expertise and financial assistance to modernize the Central Board of Revenue; leveraging the support of the IMF and DFII) in the process. In the financial sector area, the Bank will continue to support the banling sector governance reforms (and privatization with IFC's support) while AsDB is focusing on supporting capital market development, the restructuring of the Agricultural Development Bank of Pakistan (ADBP), micro-credit, ane SMEs development. IFC will complement the Bank's work on baikin8 sector reforms and AsDB's on SMEs. In education, the Bank will lead the effort to support the sector-wide reforms (through the Education Sector Reform) and suDport pilot initiatives such as the nlanned LTT to the Natinnal Fihuation Assessment System (NEAS). AsDB and USAID will support basic education and health thkrough project lending. Tn healtlh, the Bankwil1 cnntiniue tn crnnernt-.P with the relevant TJN agncGies, inliuding aWH, UNAIDS, UNICEF, and UNFPA on a range of common concerns such as HIV/AIDS. The Bank will also mnin-taini a co-nt.uous dialogule on healkth m vs ri. the .A aT oAr.d o+... l141.w+.l a.d ilat.l - -- - -A --- tU.lt' --l -Wlt.UC A Culi ulIAL%,La, donors active in the sector (EU, DFID, the Japanese Government, and prospectively USAID). APauer;hip aiunIMM.OMFU4- TAI4++k-1111th IV TT;. UN U±~JaUMAY£T faul 41 ;,it LW ItsIJ%UUOfc-- LUCWL-re tor IVPas aULaI WIEal11U_~YWULWi19 for- A-1o..;on, ,5;iIU.Lgende equ:.1,vI4uLLY, V.dUIU I4vuIlbo_ld are also important. UNDP is leading the support to the implementation of the devolution. Increasingly Ule Bank Lb work1ig WitU NGs and otuhler mrem1lbers of civil society in designing and implementing its projects (See Annex mIfor more details). 75. Partnerships are also central to IFC's work, since it is always a minority investor. IFC will continue to work closely with domestic and international investors in Key industries such as gas and the financial sector to facilitate new investment. EFC will also work closely with domestic financial institutions to help mobilize long-term domestic financing, e.g. through partial guarantees of bank loans or bonds. IFC and MIGA's activities will aim to crowd in private investment. The approach is through investing in, and guaranteeing investments in, projects which have a strong catalytic impact in mobilizing additional private investment, or which are pioneering new opportunities for private investment, or which support new mechanisms for raising finance. 76. Outreach. An irnportant complement to partnership is the Bank Group's overall outreach. Accordingly, the Bank has increased its interactions with the different levels of governments, the Pakistan media, civil society, and business community to establish partnerships based on a shared vision for Pakistan's development. In this regard, the Bank Group's intensified its efforts to build the local media's capacity to better understand and accurately report on important socio-econornic issues and govemance. The Bank routinely conducts training programs for business and economic renorters usually through the WBI and in collaboration with local universities. In keeping with the Bank's goal of sharing knowledge, increasingy transparencv- and enhancing accoiLntabilitv_ the Bank GfrOni has launchrned a web site dealing specifically with its operations in Palistan but providing worldwide best practices and links Pakistan Country Assistance Strategy 21 to irC and vu'Umiis wcesites. ine Bank Groups outreach will expand Luruier once Farakstn develops its Distance Learning Center (DLC) as part of the Global Development Learning Network (GDLN), a global network of interactive classrooms with full muitimedia connectivity to other centers of inowledge around the world. Joining the GDLN will greatly increase the Bank Group's outreach in Pakistan by bringing WBkl learning and capacity building activities to larger numbers of government officiais, private sector representatives, members of civil society, and other stakeholders. In addition, and in response to the feedback received during the CAS consultations (see Annex 1), a special effort will be made to extend the Bank Group's outreach through more periodic dialogue with stakeholders. This will be done through wider dissemination of the Bank Group's reports and disclosure of project documents (especially in local languages), greater engagement with civil society organizations and opinion makers. The Bank will continue also its highly effective consultative process in the preparation of specific projects. D. Program Priorities 77. The Bank Group's program priorities will be focused on the reforms to (i) strengthen macroeconomic stability and government effectiveness; (ii) improve the business environment for growth; and (iii) improve equity through support for pro-poor and pro-gender equity policies. Strengthening the Basis for Macroeconomic Stability and Government Effectiveness 78. Macroeconomic Stability. The Bank will support in partnership with the IMF the macro- economic stabilization program agenda to restore fiscal sustainability, reduce internal and external debt, and improve the competitiveness of the economy through supportive trade, monetary, and exchange rate nolicies. The Bank Groun's key contributions will be in inmroving public exnenditure management and supporting reforms of tax administration, safe and sound banlking, efficient public utilities, and structural fiscal and governanGe refhrme. Tn particular, the Bank wvill Gnntinue to carrv out the anniul revi-ws of the Government's Public Sector Development Program at the federal level and will carry out a National = SCV,li Aaedtjf.flftfl .*teRe ASi.,Vto be. tonA ltj t.ed ... *i 03). 70 Cnn...mns,. D a snw T.nmn,rin nnran,nrm+ o# fi.te ofa;Aa ..rntinAl nnA A. Ox+nla 701. VealJ" T--.- t 5;V S *t S..S.-,-.fOO -- O. AS.LAS., jJ*AJ Vf l , and t.ll.c, 5 levels, will remain at the heart of the Bank's assistance strategy. The ongoing Project to Improve I-LUajl,4ial AXp1-7ULig arlu r%UuXlzrl g, Ia.tTLA) I4lU uiilauivU U%l OJWVq-ilUllek1L Lt UdeVeUlJ a INew rkV%A.Vu1LLU1rg Model which consists of revised forms, principles and methods of accounting and financial reporting mee'ting the requirements of an Integra'ted Financial Management System in Pakistan. Tne PiFRA project also provides for introduction of a double entry computerized General Ledger system for all governent financial transactions in a pnased manner. Specifically, over, *_*9, , *me*X_srr~~.. GAb- 1 - penoa,. the.. BankA. wlll.. ' support: * Furthering transparency and accountability through Freedom of Informnation, effective functioning of the Public Accounts Commnittees, and the establishment of a lasting institutional basis for the National Accountability Bureau; * The completion of the second part of the Pakistan Country Financial Accountability Assessment (CFAA). The first part which was shared with the government reviewed four aspects of financial accountability: (i) budgetary processes; (ii) accounting, financial reporting and internal control systems; (iii) auditing; and (iv) legislative and public oversight. The second part of the CFAA which is expected to be completed in FY03 would cover (i) financial accountability under devolution; (ii) review of internal control practices within Government; (iii) accountability framework to support transparency under future governments; (iv) financial accountability of public enterprises/autonomous bodies and quasi-fiscal management; and (v) extending the 22 Pakistan CountryAssistance Strategy analysis to duie pnivate sectoor fiinancial iiiuagement anU MAcoUnUUMELalyaI1e-work. E,ased u uie findings and recommendations of the final CFAA, an action plan for strengthening financial accountability in Pakistan would be agreed witn tne governnent. * The impiementation of the FiYO i CPAR recommendations, including the establishment of a . Public Procurement Authority and the promulgation of a Procurement Ordinance to foster competition and transparency through a uniform set of procurement rules at the federal level and across provinces and public agencies; * The extension of the modernization of the government's accounting and auditing functions to district governments through a second PIFRA project which is currently under preparation; * The implementation of the first stage of CBR functional re-organization and support the fundamental cultural change within the tax administration, through a PPF at first; * The development and implementation of medium-term fiscal frameworks at the federal and provincial levels to improve accountability; * Policy advice and financial assistance to implement the necessary deregulation and other policy reforms to reduce the incentives for corruntion and improve the investment climate; * The completion of the corporate governance reforr in the financial sectOr- nid Civl! seric:e reform throughm a.al.,fi-calhl .- *r"a aA - sri- fr, +U.e c.-44-A implementation of the systems for better performance evaluation, merit-based promotions, and uaiun;ng prograrns, as well zs the, unpFle.-..e.-.ta.^;onUof1% IT1011e s VA.o..f LVepay _ULd 1XnIoLL1 S-jStGIlS. U8. A .' B-. l s suppo..t 5'og IeIr.&r.ce . II orr L-e lsUI'.clude hdeig.%.IA0 ofriIUI I1-dIeptLI rVVViii4.laeV and corruption diagnostic surveys which will include: (i) establishing a benchmark for the quality of governance; (ii) prLovidiLng inLp-uts LU a UtioLeIIW1uu govenlance. adu ani-corruption action plan; (iii) promoting coalition building and long-term partnership among key segments of government and civil society; and (iv) buildiung local capacity to monitor and assess government performance. Tne Bank will also support institutional capacity building for oversight and monitoring through training in the areas of public expenditure and financiai accountabiiity, media development, and the interaction between parliament and the Auditor General, including support to strengthening legislative oversight once parliament is reinstated. 81. Devolution. Initially, the Bank will continue to use analytical work, technical assistance, and policy dialogue as more appropriate instruments to support the implementation of the devolution strategy, particularly the strengthening of district level capacity to manage public service delivery. Since a number of Pakistan's development partners are supporting also the implementation of the government's devolution program, the Bank will focus on areas where it has a comparative advantage, in financial management, planning and budgeting, and social service delivery. Specifically, the Bank will focus on the implementation of the recommendations of the part I of the CFAA. The latter reviewed provincial financial accountability issues, including the Local Government financial accountabilitv framework. This was possible because the fundamental financial rules goveming federal and provincial governments described in the Constitution are similar. and nrovinces mostly follow the federal government budgetarv rules, since financial accountability institutions are centralized. The federal government's Controller Grenera of Account'q office attaGhed to the Federal Miniftry of Finance, is respc sible for th.e preparation of the Civil Appropriation Accounts of all Governments, from the federal to the district level. Pakivtan Cnuntrv AsAvitangnp Stratpo-v 23 The Pakistan Auditor General's office is responsible for all audits except for those of the smallest tiers of local Governments, which are audited by the Local Fund Board. The Bank has already made a start in sunnorting the devolution aLgenda in the area of financial management through its dialogue on provincial reforms. The support to Sindh's fiscal and structural reform program includes (i) improving public accounkt through imprnved reonrnilintintn (ii) etrencthoniinog n,pnr,ntnhilit-v thrnigh seti.:na lin of ni effective Public Accounts Committee; (iii) improving budget implementation; and (iv) preparing a mr.edim. term..fin-aricial r.agemrn.e.n.tm. ref...rm.. -.. a 82. .rnt ,h.;l .'*e .inenti en"nd P-er- a 1'bM..., flBb,- p neeAd to r-1ild-A 4i' knowledge base on private sector development issues given the changes since the last private sector assessm.en-t~~O~ii~11L1.17.7- ftn 1 MC. J11Trl ^dAA.44-OCUUII,14UI 4.-LUo a11r UUIIVIiaItrla FA1V4K,v'. bgI.~LVL--- t%bb11V1JHUasesle-t------jo.l,l J1VFaU1VU by1reeUy 'Ulu, LU'...t" 4U_rId the Bank, in FY02, and an SME policy note describing the key features of SMEs and their constraints kemerigmg Hrum U uLLSiesS s-urvey ConUUULCU M iVr 1), wne nanik Group plans to carry out a signincant program of analytical work over the next two years to underpin its advisory services in this area. These include: (i) A Development Policy Review (completed in rF u) which provides the Bank's assessment of the adequacy of the current development policy agenda to achieve rapid growth and poverty reduction; and (ii) an Investment Climate and Economic Performance Study (to be completed in FY03). The latter aims to relate key aspects of the investment climate (basic economic infrastructure, and regulatory and governance frameworks) with the performance and productivity of private manufacturing firms, small and large. To build domestic capacity for this analytical and monitoring work in the future, the study is being carried out jointly with SMEDA-the Small and Medium Enterprises Development Agency. An analysis of the trade regime will also be undertaken in FY04. 83. The Bank will also continue to encourage the federal and provincial governments to pursue the trade liberalization and modernization of industrial, business and labor regulations that are already under way. In addition, the Bank Group has advocated the strengthening of the anti-trust authority. At the federal level, the Bank will support the newly established deregulation committee. The latter will help with the implementation of the deregulation agenda with soecial focus on SMEs. At the provincial level, the Bank's dialogue and proposed assistance to Sindh and NWFP will also focus on reforms which fall within the provinces' purview (such as labor and industrial regulations) to improve the investment climate. On SMEs development, given the selectivity principle, the Bank's contribution will be on knowledge, dissemination- and possible technical assistnnce given that the AsDB is taking the lead w:ith the preparation of a SME project. This project will support the first generation of reforms already identified in the Bank's ar.al,tical work on the SMws. WC wil cor.tinie to play a lead.ng, role i supporting the development of private financial institutions serving SMEs. 84. IFC and MIGA will seek opportunities to mobilize additional private investment in infrastructure ~nf ~e+n;~ 1.4n W-~~k. A-+-..+ I,. -_+_+ UnT .4.. .., .n faceo.e of subsva.n-al. polit.cal riskn.VW.,11, wLAuch ha.s beer.v* a detet LU f1ve, lt.1fL TV iLJUI U1.h1GAU%,L.UV, the Bank Group will give strategic priority to the development of the naturalgas sector. The Bank will cont.inue LU IfoUb iLt assistance11on al-ytiCal workn whichU hUa LuleuipJnIVU muchn 01 L--h regiiatory, pricing, and policy reforms undertaken in the gas and petroleum sectors over the past two years. An Oil and Gas Seclor Review Will be completed m r Y u3 to assess progress anda iaentiy rurtner opportunes for growth, IFC and MIGA will aim to mobilize additional private investment through loans and guarantees. 85. in petroleum, the Bank Group will continue to support the government's reform guided by the important program of analytical work carried out over the past two years. Over the next three years the focus will be on supporting the implementation of the deregulatory reforms to strengthen competition in 24 Pakistan Count7y Assistance Strategy 'uhe sec'.or, .- Ad assit;ln vv -uSepr-^;.^;o of +Uhe ";l &nd I-- Developlull ] ion To .- A&n UliO.vAI "LIU CaOOaILru. W'Y It L41%, JJLLY OL*ZaAVl* VA Ut'. P* atm .JLUO t"o~VV .f-.ytdL~L fULjFlJ. -Ln~n .t m Pakistan State Oil Ltd expected to take place by March 2003. Regarding mining, the Bank is well posiLiUUVU LU [respUoU LU WIILL puII iUILI bouVIUMUUUI c ar,dLU piOfvliUX 8UVVLU1IUtZL kSUCh as UIO LrVeVIL demand from the Sindh Government), for assistance regarding reform of the legal/regulatory and fiscal frameworks and development of institutional capacity to iaciliiate and promote environmentaly and socially responsible private sector mining development both for coal and for non-fuel minerals. 86. The Bank Group will continue its deep engagement in the power sector reforms. The power sector reforms wiil continue to be supported through policy dialogue and adjustment lending which, by strengthening macroeconomic stability and reducing exposure risk, is expected to improve the investment climate for private investment. In addition, the Bank Group will support through programmatic investment lending the privatization of the distribution companies. In particular, IFC will aim to mobilize private investment for the power sector, particularly for the privatized distribution companies. IFC will also continue to act as adviser to the government on the privatization of Faisalabad Electric Supply Company (FESCO). 87. In line with the selectivity principle, the Bank Group support for transport, over the CAS, will be limited to analytical and advisory services, given the lack of strong pull from the government, the importance of private sector participation in the sector, and the extent of involvement of other donors in the road sector. Accordingly, project lending will be limited to supporting the National Highway Authority's (NHA) reforms, especially financial management, through the National Highway Rehabilitation Proiect-currentlv under nrenaration but delaved for manv vears due to NHA'q erratic commitment to reform-provided the NHA's new management shows strong commitment to reform with 1 r.easrale a.oons taken uprvfront. Fi.na"cial support to policy reafnrre ir, 1oftirniay a.A transport operations will be considered for Sindh and NWFP within their provincial fiscal and economic re-fr__ prograrns. 00. LLiLC.'.. LIIIjUVtU %-LUIMcLAVLjiLs esseit, LI L rL1l.lfroWUA, .. cudI...gUUi U14LIll Uof, Al JIUuAuy, andU fo Ule poor to benefit from technological change, the Bank Group will continue its dialogue with the goUvermriien onU an adequaie poulicy rUIU-rgulaiory iralnuwurt inUroduce competition against the incumbent and attract private,investment. In FY02, MIGA supported a software development project in Karachi from Japanese investors. in addition, a telecom project was approved by tne Board on April 30, 2002. IFC and MIGA will seek opportunities to support the growth of the IT industry. 89. The Bank Group will continue its support to financial sector development, another major component of the on-going CAS. In particular, over the CAS period, Bank Group support will continue to focus on deepening banking sector governance reforms, support to bank privatization and to strengthening the regulatory and supervisory capacity of the State Bank of Pakistan. This last outcome is supported through a Technical Assistance for the Banling Sector (TABS) Project. The proposed TABS is a follow-on to the ongoing Financial Sector Deepening and Intermediation Project (FSDIP). It will support (i) the completion of the State Bank of Pakistan's restructuring program aimed at modernizing the central bank and strengthening its capacity to regulate and supervise the banking sector; (ii) staff development to re-align personnel management policies with international best practices; (iii) the strengthening of the country's payment systems and credit information services for better disclosure standards to all stakeholders; and (iv) strengthening the capacity of regulators and enforcers to control money laundering and financial fraud. 90. EFC will support the emergence of strong private commercial banks and Non-Bank Financial Institutions through selective investmentq- IFC wAll also piinnnrt the develonment of new producte to better meet the needs of the private sector (e.g., long-term finance for infrastructure), and expand access Pakistan Country Assistance Strategy 25 to financial services to new clients (e.g., the bankable poor through micro-finance or leasing institutions), and to the under-served small and medium enterprises sector. 91. Creating the Conditions for Accelerated, Sustainable Rural Growth. Agricultural trade and pricing regimes have been substantially liberalized to the point that few distortions remain at the macroeconomic level. However, a significant agenda of second generation reforms remain to address the unequal opportunity and capacity to access assets and markets-land, water, financial intermediation, technology and output markets. The Bank will therefore focus its assistance over the next three years on: (i) monitoring developments on agricultural policies to improve further the investment climate in agriculture; (ii) filling the knowledge gap on the policies and institutional and regulatory frameworks governing the functioning of rural markets as well as o.portunities for off-farm employment; (iii) seeking opportunities to improve access to financial services with IFC's support; and (iii) supporting govemnment's Strategy to improve water managemernt and irrirastionn Arenrdincrlv * A Ruiral Develonpm.ent POlicY Review (RDPR) irl16be preparedin, Y4 which would assess the adequacy of policies to accelerate rural growth; this would include inter alia an analysis of land 4 anrA c-eAd -,r.-o4- .- A tim ,A.an',4.nmn s -- n e-.r-e. =-A Sector o,. on W -, -will be 141 irlr. .o J fl,1 r'L ~JL3eLUl 1X-.JUL L on11 VY amImaviXuI %,VIvIcular5MIUMUtl WElMMAUliJ~~ l IU ULLUiJLlLdU Group's assistance for sustainable water and natural resource management and implementation o0 an iteg-rated iuresry- mranagement and vuwatershned uevelopmeni. In aWuiuoon, toe i1aik will support strengthening the capacity of local environmental and natural resource management agencies in the areas of information systems, drougnt preparedness and management, and monitoring and enforcement. * The Bank will continue its support for policy reforms and institutional capacity building for imgation and drainage under a restructured NDP. The provincial governments will be eventually responsible for sector policy and regulatory oversight only. * EFC will support the development of private micro-finance institutions to extend their geographical reach in rural as well as urban areas. Supporting Pro-Poor and Pro-Gender-Equity Policies 92. Promoting Education and Health for All. The Bank Group will support the I-PRSP's core objective to empower people by creating greater opportunities for increasing real incomes by improving access to education and health services, especially for girls, and to safety nets programs. The Bank's support to these three areas-promoting education and health, supporting pro-poor rural development and community infrastructure, as well as supporting targeted poverty alleviation programs (PPAF, CIP), reflect their importance as well as the Bank's comparative advantage. 93. Education Reforms. The World Bank Group's assistance strategy will be driven by support to the implementation of the Education Sector Reform (ESR) Strategy. The Bank support will focus on those interventions in the education sector that would help the groal of achieving universal nrimarv education, with particular focus on improving the quality of education provided, and giving priority to the poor and disa.idvantaged, particularly goirs and children in nral areaS. Tin pariculGar, increasincg children enrollment will be crucial to the fight against child labor. Accordingly the Bank will focus on: (i) sector- .rnjto-*Adjustm..+. I-A.din - rnn-b. to-t. supporOt.- JtFW. t.+h.e*A.-- -aioaf'Jf~l- -Stfl VuA.-44-.J.0.ltl SectoDr-JltJ L%L liiI CPveforULL 0tV&j,. /ttO;A(ikLIJ s-,-ortOUJJjUL L LUto the National Education Assessment System through a LIL; (iii) a program of analytical work to underpin Ulf, policy Uialogue Uulllr Ul.e ilellllll4LUVl VI UofuLe rS;l anU iLV) pLUVIlAX-IJUNU sLLuppOri to 26K PA.-ictan rntn,ft., Avritan,p Nfratpov implementing the ESR within the fiscal and economic reforms of Sindh and NWFP to start with. Future support will take the form of outcome-based programmatic support for district delivery of both education ntid he2!th qerviceq The siinnnrt couild alsn inclu-de advice and tec'h-nical aqsistance to reform hiaher education along the lines of the Bank Group's global and Pakistani specific analytical work. IFC will cePPr nrnnmtiniti pc tn invPQt iin ?nrivntP Plltfllntin ,nviuPrd 9A. 'The Bonnlr Group assistin.ce on keanth saetor rpfrm, u,ll C.a!unrot 1-h. gof.M.rly t'a prw orty of strengthening the public health programs-iimmunization, communicable diseases such as malaria, TB, Ill TXn/AMv .'nas.J, an%A *UflArLt. -,d.+..a-.d ; I*U anti.-... Al. l Ut.Ini &-.d;IA iit.AILipl-n:,n.- .Ui% .AuuiLyT FI.ULXIii.A&, .%- ULLOU;.O _ffe~ +U_.n'LU.L Bar-1J.it WRIt~~-..-. 11 tACt'SiULjf- - mu.14-1le instruments, including analytical work, technical assistance, policy dialogue, and adjustment and 11VesUIL1L ilHiuHIg as pUpiUJ[pII,t. C... Will sVee UoJpUpLU LILes Lo uIIVesL uIs piVULV IIV4IUI1[LVr proY-UVId. 95. oru-XUUr rurw&1nJru3&ruivS"r unudcrvicey uand .ouci" XrutecugIn. .uppunLiUi 'uicudee Lilig of the rural asset base through rural community-based infrastructure projects (particularly for water supply and sanitation services) and tie spread of micro-credit nave been part of the Bank Group's strategy to reduce and mitigate risks for Pakistan's poor. The Bank's efforts to support key investments in rural infrastructure and support services are designed not only to promote more rapid and sustained rural growth but also to directly attack rural poverty and support social protection. Since the 1998 CAS progress report, the Bank has integrated social protection in its operational work through its support to improving the delivery of basic infrastructure and access to micro-credit through conmmunity-driven projects such as the NWFP Community Infrastructure and Services Project (CIP) and the Pakistan Poverty Alleviation Fund (PPAF). The NGO-implemented infrastructure and micro-credit schemes under the PPAF is a very successful scheme which will be scaled up during the coming CAS. The on- going PPAF has already provided loans to over 60,000 borrowers, over two thirds of which are women. Building on the experience of these community-based approaches, the Bank is currently preparing a Commnunity Infrastructure and Services Project (CIP). The Bank will continue, under this CAS, to pilot new approaches, and also help scale up those which have proven effective such as the CIP and the PPAF. A programmatic approach is key. This enables the government and the Bank to tailor projects to the particular circumstances and needs of individual provinces and districts, leaming and adjusting as they gon and scaling up as successes are identified. A sncial risk assessment is also planned for PY3O whi-ch will also help underpin the Bank Group's integration of social protection in the Bank's future operations. 96. Pro-Gender-Equity Policies. Since Gender equity is an issue of development effectiveness, the Bank Group plans to intersify its e.fforts tn maniinstream. gernder inte com.ing CAS e m..ost effective policy through which to improve gender equity is better access to and quality of education and health, Ut'UJl 13 tUJ wor..e.. etALLt t'iiuiti-., b.0 especially. Uu thisIV-onAt, LLt' BLk JIVUjJ "illWAu assist .UIe govermment implement the component of the ESR focused on boosting incentives- through vouchers system, food for school, and other targeted subsidies-to increase gieis enrollment. Sindh has already moved in this direction with its successful food program (providing edible oil for girls who attend schools) which has increased giris enrollment. Women's empowerment is a prominent component of the Bank-supported education, health, CIP and PPAF. 97. A significant program of analytical work is also planned over the CAS period to show the opportunities that gender-responsive policies create for enhanced growth and poverty reduction. The Bank, the govenment, and the other donors, including UNDP and DFID, have been working together to strengthen the government's analytic capacity on gender sensitive policies. The Banl: has a poverty assessment underway, with a survey geared to capturing gender issues with a view of informing public policy regarding the formulation of a gender strategy. A country gender assessment is planned for FY04, which would provide the knowledge base for future Bank's policy dialogue and operational interventions. Pakistan Country Assistance Strategv 27 98. A rural access and mobility pilot initiative-currently under preparation with JSDF support-is expected to recommend ways of improving rural women's access to markets and social services. Support to rural development strategies at the federal and provincial levels will hi2hlight the need to ensure property rights for women. The Japanese Govenmment's funded JSDF program will continue to be used for niloting innovative social nrograms designed and imnlemented by beneficiaries with high potential for improving the living conditions of the poorest and most vulnerable groups. IV. WORLD BANK PORTFOLIO AND ASSISTANCE PROGRAM A. IBRDIEDA PortfoI;o Management 99. Portfolio Management Strategy. The quality of the Palistan portfolio has improved considerbahly, althnloglh wrnhblae.s af'f't'ingc t.w.on mna>r ,n,pprt,ip rpmair (epp inana 1C)A. Tn FVOR .inith A1 projects, it was ranked among the 25 worst performers Bank-wide with more than 50 percent of projects and Cconlt"atrisk". Si.ceulele then, has zAll z ticc4nge Mw...A1lla. nc,-e the size and the quality of the portfolio as well as the Bank's approach and strategy for portfolio ,,riarage.,lsinL.. 100. BegL)L.L1 111Ul li' F 1 70, u1e iuall, LU .eu1LWIUI ULF I.e.4ll anUU plUVUlLLaLl gVoVlUJ1ulit0, UllU0.Ge an aggressive portfolio improvement strategy. The traditional project-based approach was supplemented by a more systemic vision of portfolio management based on outcomes, ownership, and good governance. Quarterly portfolio reviews with the Federal Finance Minister and periodic- provincial portfolio reviews are now the norm. Building on this portfolio strategy, two Portfolio improvement Plans were developed in FY99 and FY00. The number of projects in the Pakistan portfolio declined from 41 in FY98 to 16 as of May 3, 2002, with outstanding commitments of US$1.5 billion (net of cancellation). The decline in the number of projects was the result of two actions: (i) a 'no-extension' policy outside of "force majeure"; leading to closure of 32 projects; (ii) few new entrants to the portfolio in FY00 and FYOI, relative to closings, as a result of enhanced selectivity and "quality at entry" criteria. This trend has already been reversed starting from FY01 due to this government's strong track record in reform implementation. 101. The Bank is now engaged with the clients on key thematic issues affecting portfolio performance. In this regard, the Bank has initiated thematic portfolio reviews-on impactloutcome indicators and on social and environmental risk management-with senior policy makers as part of a strategy to mainstream these development challenges within the Government's own monitoring and evaluation framework. A workshop was held in March 2002 with key government staff to disseminate best practice on "outcomes" measurement. Portfolio performance has been turned around to some extent also with the heln of field-based sunervision teams working closely with the government and reducing response time. Projects are now managed with increased participation of communities and beneficiaries. Thew Bank has alson trenothened its safemnirAQ oversicrht hv strenathpiina financial mrnnagpment andi internal controls and providing training to clients on Bank procurement guidelines. The Bank will continue to aggressively pursue its objective of a lean and clien.t driven portfolio the1,r CAS 1no. Rencomii7ziny thot "gonnA nalithy sat ent-y" anA frstrong dient nximernlin are v,-v otnrc 1k1,inA sve~~~.*- s _o-1-- ,>L.. ._, zv "**vsb _ _ UfOSl X-v * … 1mm ~-wov_ portfolio performance, the Bank weeded out from the portfolio all operations which were not driven by a sutrg Full vor4AAwhrW11.l4pFYle.ltlal 1111act'Utcorr.JL e -. claly UdefrLVUe. As a IrUsLt, Ulu Bank's "work-in-progress" has been reduced from over 30 projects in the pipeline to 12 projects in the C'UIrlenIt lenldling pipelinle WithllslighLly over US$2 m-illion "0wo-rk-,in-progress"budget. 28 Pakistan Countrv Assistance tratev 103. Using the lessons learnt from project implementation and taking into account the emerging client needs led to the restructuring in FY01 of two major high risk projects, namely the Second Social Action Program (SAPP2) and the National Drainage Program (NDP). The scope of the SAP was substantially narrowed in light of government's changed human development strategy under the new devolution system. The Rank has recnmmendned diwnsi7ina the NDP tn alion it hetter with the newjv Federal andi Provincial governments priorities. 104. Portfolio Performance. As a result of the above measures, portfolio performance improved; the re-.n.be of '9prn eto at rtcV' ixrent 41,.uM frno 52V) -pe,,t i PVOQ to 6 per_e.pit i PV'l iola "commitments at risk" decreased from 54 percent in FY98 to 21 percent in FYOI (see Annex B2). 1LASJW~V~I,Vt1-1-er theseL110. rL-4-n IGU W~I%e-e LU'.L%UerLodedA LAIm_ UL%+U-e LLI.3Lr-+s ..LGIL1lf ofVI± ILL.I A 02Vd', becauseuL.aa ofr,I +Lt-eeuu,% IaLr5%;larg FJIvu"IdUp.-oblellpr FJAvJ%,.Lw SAPP2, NDP and Ghazi Barotha Hydropower Project (GBHP)-which account for 60 percent of the ___- _:__- __ r:_sv: c ArTM% v__ _ i _s_t__ _ _:.s ______.. __sv remaining purIu11u. vv Lnn antrrF nMb UVii Hi prUUIvIn plUJV;;L slaUb ur UnL pUaL 'LWO Yab, Lnt remaining two (NDP, GBHP) have been downgraded to unsatisfactory performance in the last few montns. As a result, "commitments at risk!' have increased again from 20 percent in F1'uii to 60 percent at end-December 2001. The specific factors behind the unsatisfactory ratings for these three projects and actions taken to address them are: * The restructured SAPP2 is now being implemented satisfactorily but will be closed early in June 2002 with a U rating. The U rating for DO will not be removed because the time span since restructuring is too short. The SAP2's restructured component accounts for about 15 percent of total credit, the remaining balance has been fully disbursed. Efforts over the next few months will be directed at ensuring satisfactory implementation of the restructured component. * Regarding NDP, the restructuring recommended by the FYO mid-term review--reducing the implementation to only one canal command in each province-has not yet been implemented. Sindh has accepted the recommendation to focus on one canal command which has led to improvement in the implementation of the project in that province. But since the institutional reforms underpinning the project are not widely shared by all government departments, and there are comnlex inter nrovincial iSqSUeS the other nrorinreq are waitinor fnr the recommendations of a Government's commission which has been set up to examine options to reach a consiensus among all the 4akeholderts on the scop~e of reatviicturng. The c:oim..ission .has just completed its work but it will take time for the main stakeholders to reach consensus. * Regarding the GBHP, major disputes on claims emerged during FY01 between WAPDA and the mnain con-UCtor, a consolumU1n IVU uy ulv Iianw I.aIWHIy MLuprVVgiiU. iLne dUspULt UdvlIoped into a crisis following the contractor's evacuation of the site after the start of the Afghan war. The dispute nas since Deen resolved. As soon as tne agreed upon financiai settlement is honored and the contractor resumes work, implementation progress is likely to pick up and ratings are expected to De upgraded. * By early FY03, with the closure of SAPP2 and resolution of issues related to the other two large projects (NDP, GBHP), the "commitments at risk" are expected to fall to a single digit. 105. Outcomesfrom the last CAS. The last CAS was discussed by the Board in December 1995 and the CAS Progress Report was reviewed in June 12, 2001. The volume of IBRD and IDA commitments was linked to the strength of Pakistan's reform program, maintenance of macroeconomic stability, and to progress in social sectors. In addition the level of IBRD's commitments was linked to irnprovements in the country's creditworthiness. In early 1997, policy reforns had been slowed and Pakistan was in the low base case. In fact, after lending US$420 million from DBRD in FY96; there was no EBRD lending in FYV7. Lending from IDA also fell dtring those vears- averaging only US$80 mnillion ner year. With the implementation of a comprehensive package of macroeconomic stabilization and structural reforms, in FV98, PaL,St&n, r,nnv,A i nto th.e High. Bae. raep sernpmrin TIn YVQR IBRRT nrovvided IUS250 million for the Banking Sector Adjustment Loan, and IDA provided a total of US$558 million (including for the Social Action P ogrn.- .-- a .AUTf.4 -10 TL"#lA1.a .-11 -Jra t *tD'J UO. 1 A. TIn FYV9O ar.A A-- - -4...efr. io,,ny. .anrpqo, r. a r..r.n.ber of l,key irea,-ti.iarlu ILIV. JUL 1 LX11 W L JAflfl, VT11 tjL111 JJlf A*J_A~llLtl 1 * 1 L 1fJ - o -- a) in power, banking, and govemance, Pakistan remained in the High Base Case lending scenario. A - 1- rnrflXTn Tmn"T% TT041CA 11.... -.. AAAZ..-.....l 1,... -UZI. TmA Auccrdingly III r 1 77, IDJn1J jLJUViUV US$O.D350 IUIILUIt foI a S0UUU.LUr1 SVUJUs.U1W11L lar1 wil. e WA provided US$90 million for a Poverty Alleviation Fund. Sustained implementation of the comprehensive reform program as envisaged in the 1999 CAS Progress Report was expected to lay the basis for lenlding at High Case levels during FY00. That never happened. Reform implementation slowed down over FYOO, with a worsening of the investment climate as the Nawaz Sharif govemment engaged in a very damaging dispute with Independent Power Producers, NGOs, and corruption became rampant. As a result, the Bank stopped lending over FY00 and focused on non-lending services. 107. The positive developments in Pakistan in FY01 provided the basis tor a stronger operational engagement by the Bank Group in FY01. Accordingly over FY01, the program of assistance included a Structural Adjustment Credit for US$350 million and investment credits focused on supporting reforms to improve the investment climate and the delivery of basic services. These included a Trade and Transport Facilitation Project for US$3 million, a US$21.35 million project to support water resource management in North West Frontier province, and a GEF. A Banking Sector Restructuring and Privatization Project (US$300 million) was approved in October 2001. The assistance over FY01 and the first half of FY02 was supported by IDA as outlined in the CAS Progress Report discussed by the Board on June 12, 2001. B. Donor Coordination 108. The Bank Group will continue to play its role of bridging partnerships between the Government of Pakistan and the donor community. Over the past two years, the Bank Group has increased its focus on donor coordination and continued to play an important role in intermediating information on the aovernment's reform program and implementation record to donors. It has also encouraged the govermment to communicate with its domestic public opinion makers, and other major stakeholders about t.he Ma.in, nhipJptiu-eCof the fi1nd_.mPntn1 ref.fnrms heing irnpmlepentpd mnd th5 tmk-c rrnord todate to hn.ild consensus around the reforms. 109. The government is therefore taking the lead on donor coordination. A donors meeting was held in Tlaniabad in March 1_*eflk fr dnAt r.eet.. a ee A rat information about Pakistan's reform program and its implementation record and seek the support of the U017101 'UVUUIIIUrLLY LVI 1LO M.IL1U~UM IIJSISI4II.IUUU "lilr U1, .1 GL.1DL411 LJUV,VSAJJk1SA,1t E-ULU4AII LI Islamabad was to allow the entire Federal Cabinet, provincial ministers, heads of key public agencies- tne "change leaders!!-and businessmen-wno were invited to attend and speak a tihe Forumi-o participate. The location was also to enable development partners to learn about Pakistan's Economic Revival Program, in the local grass-roots context and see for themselves that the government is truly in the "driver's seat" and that its program represents a "real break" from the past. 110. Learning from this positive experience, the government invited its partners to a Human Development Forum which was held in Islamabad in January 2002 to elicit donors feedback on the government's human development strategy and seek donors support and stronger engagement in the implementation of the strategy. Building upon these positive experiences, the provincial governments of 30 PakistanCountry Assisirance Strategy Sri dii anU n4wrr are aiso seeIng 'o Wilgage 'UULe- doo0 - comimUl'niUyUU 1 In e I UI1JrL11rLLtaLW11I VI Uof U provincial reform programs and poverty reduction strategies. A Sindh Development Forum was held in February, 2002; another one is being planned for NwrP. Tne second Pacistan De-velopment Forum (PDF) was held in Paris on April 29-30, 2002. High level representation from 14 bilateral donors and 18 international agencies attended the Forum. For the first time NGOs (inciuding 'Transparency International) were also invited to attend the forum which was also open to the press both in Paris and Paiistan. This was followed on May 2, 2002 by a Private Sector hnvestors' Forum and a discussion on the Government's I-PRSP. Both events were attended by a large number of CEOs representing international and Pakistani businesses, academics and members of influential think tanks. 111. Facilitating partnerships and donor coordination will assume an even greater role over the CAS period now that sanctions have been lifted and many bilateral donors are reviewing their assistance strategy to Pakistan with a view of scaling it up. The Bank will continue to facilitate the annual donors meetings as well as provincial and special topic forums on Pakistan's development. The Bank will also continue to support other donors initiatives to organize thematic donors meeting. C. FY03-05 Lending Program and Implementation Chalenges 112. Despite the implementation of very tight macroeconomic policies, that have already led to compression of imports and falling current account deficits, Pakistan's external capital requirements remain large. Current balance of payments projections indicate that through 2003/05 Pakistan will need over US$5.7 billion (US$1 billion for 2001/02 alone) to finance the reforms under the I-PRSP. 113. Creditworthiness. Pakistan remains a heavily indebted country despite the recent Paris Club rescheduling. Pakistan's total external public and publicly guaranteed debt stood at US$31.4 billion, or 53 percent of GDP at the end of June 2001, and is exnected to rise to UTS$317 hillinn (45-8 percent of GDP) by June 2005. Debt service as a share of foreign earnings is estimated to fall as a result of the debt rp-'es1.Aelina frnm. 29 pr'epnt in 20f01 tn lindAr 22 tperprpnt in 2005. Th. preser.t valiiu nf lnng- twvm public and publicly guaranteed external debt to exports fell by 30 percentage points to around 230 pe-.-cet i.n fisca 20.2, -r.d*v1 realch aU lev-l close too 210 per-cer.t ;.in A . fill. abUov t, 4-ndiati. Vt level of sustainable debt (150 percent) for HIPC countries. The debt service to IBRD as ratio of exports Uf gooUs iUU DLticeVM,V aL 37.J Fec.L,V.11 inJ201LUt Ls UbelW UIVs pVLrc.Lt11L gU1uridel.V L.WUL1L,UUUV ul DIU.J lending and is projected to fall significantly to 2.6 percent by 2005. The preferred creditor ratio (debt serviceCt preferre creditors as a raMiUo Uo W'ta p-ublc debt servUAce)b5.3 percent in 20Ui/02-iS weii above that recommended by IBRD exposure guidelines (see Table 4). This is the result of recent bilaterai debt reductions and past initiai non-multilaterai iending to Paiastan. At this level, Pakistan is only marginally creditworthy for IBRD and the government has refrained from borrowing on IBRD terms for FYOO-01 and is not expected to borrow at those terms in FY03. 114. Given the strength of the Government's I-PRSP, its implementation record ito date, poor prospects for higher private capital flows particularly given the current regional tensions, the large financing requirements, and high indebtedness and poverty incidence, the Government oi Palcistan has requested an increased access to 1DA13 allocation to finance the comprehensive federal amd provincial reform program. The Bank's level of financial assistance over the next three years is a key element of this CAS. PnIdictan rOunt vAssistance S1rategy 31 Table 4: Debt Service Ratios 2000/01 2001/02 2002/03 2003/04 2004/05 External Debt/FE Receipts 273.8 255.7 240.4 225.9 210.4 DS/FE Receipts 29.4 29.4 26.0 23.4 21.7 LDXJSLJW.oLLaJpJUU1b LcD:.0 . 1i.J 11.1 11. 1.2 IBRD DS/exports of G&S 3.5 3.1 2.9 2.7 2.6 Share of IBRD oortfolio 2.5 2.3 2.1 1.9 1.7 Preferred Creditor Ratio 45.8 45.3 51.3 54.9 53.4 115. IDA AUlocaton. Given these considerations, and the likelihood of an increase in demand for Bank's assistance from the provinces, an SDR 1.0 billion (equivalent to US$400 million per year) IDA allocation has been set for the base case and SDR 1.4 billion (eauivalent to US$600 million a vear) for the high case over FY03-05. The Bank will resume IBRD lending only under the high case and starting from FY04. 116. Lending Scenarios. Three lending scenarios cormbininag policy based le.ndinrg and inv.ectm.ent lending are envisioned for FY03-05 (see Table 5). Following the completion of the full PRSP, a CAS Progress Report -All be prepare,A -4,1, ll outline any . ui44-+ar to thAe ass,stonce nron, and +the triggers that are considered necessary to fully align the Bank's program with the PRSP. Table 5: Illustrative Lending Scenarios - FY03-05 (US$ '000) FY03 FY04 FY05 IDA Investment 200 200 200 Total l~~~~~~~~~~~~~~~~200 200 200 mA Adjustment 150 200 200 Investment 250 200 200 TOtl 400 400 400 !SA Adjustment 350 300 300 Investment 250 300 300 Sub Total 600 600 600 IBRD Adjustment 0 300 300 Investment 0 0 0 a U *UL1 V .3uU 3 00 Total 600 900 900 i i7. Lending Triggers for Bank Assistance. hne lending scenarios will be guided by two sets of triggers; (i) entry and exit triggers linked to provincial reforms; and (ii) global triggers linked to each of the three pillars of the assistance strategy, macroeconomic stability and governance, enabling environment for private investment, and human development (see Table 6). In addition, the SACH and following adjustment operations, include detailed short-and-medium-term triggers for each of the three pillars of the assistance strategy, macroeconomic stability and governance, enabling environment for private investment, and human development. 118. These tg;cero oh.ould be inter-preted as indiatin,g the key areas of depn reforms: (i) macrn stability; (ii) governance; (iii) enabling enviromnent for private investment; (iv) human development; and (v) portfolio mana-germent. Within.those, the bullet are inAdicators t+ht t-jl be used t caAoae rroe in each of these five areas. These indicators are not intended to represent prior actions. The implemenitationl of so,-Le o'ffiv,se refLS c-an On be don re L-.Le in each of the above five areas will be needed for the high case. Failure to show progress iin any of the five areas above will move Pakistan to ihe low case. Table 6: Triggers for Bank Assistance Over FY03-5| Low Cas I Base Case mHiguase Off-track * On track-as demonstrated, for example, by * On track-as demonstrated, for example, by meeting all the fulfillment of the PRGF fiscal and PRGF performance indicators and benchmarks in * OM-tracK . I ne functionai reorganization of CBR nas * CBR will have completed its humnan resourced audii, been completed. implemented its reconmnendation; new recruitment, * A Tnrg,e TanYPave Init will have heen performance assessment, training, and promotion policies established in Karachi established * A new performance-based pay-scale for CBR wifl have Deen approvea oy government Rightsizing o0 CBR personnel based on skills needed will have started * CBR performnnce i dir_tni,r shared wih the puhlir *^ n | regular basis Financial ,Man2aament * Off-track | * PACs current in their review of past audits * Federal and provincial governments have agreed to a I* PACs : - ...... I time-bound programn to assign public accounting and e PACsin cu-_nt mi- - audim atresy responsibilities among the federal, provincial, new government and district governments. A new human resource policy * Regular and Accurate Audits far the feder_and,wnvincialACpOUntinoandA,,di * National Procurement Ordinance cadre defined promulgated * Extension of PIFRA reforms to Districts to strengthen fiduciary framework * Satisfactory Implementation of National Procurement Ordinance Civil Service Reform * Off-tsck * Merit recruitment * Implement civil service training plan * Initiation of pay &pensions reform | Follow-through on Pay & Pensions Reforns Improvement in professionaVACS ratio * Satisfactory | * Improved Performance of the Regulators (oil, | * Deregulation Comnmittee will have amended laws to gas, power) and anti-bust bodies. reduce unnecessary regulations in the arnas of. (i) labor * Approval of telecommunications legislation; (ii) health, industrial, and environmental iiberaiization policy regulations; an.d SOsRrii) * Bring to point of sale * Competition Law Ordinance Issued to replace the I I N bib,. .BL . IMonopolyand Restrictive Trade Practices Act of 1978 |N|*KECBsabb L * MOST to complete operating license documents for new * KESC ICT entrants l*- wWv . | * No new tax, duty exemptions, or special privileges for income tax, custom duties, or GST. No new regulatory I I I~~~~~~~~~~~~~~~~~~~~~~l.edubes. hca out oftirni;-..hn,,n r.neglc*ws ;,Thmnpv dutivs * Bring to sale 2 Discos, PSO, OGDC, PPL, PTCL, National Bank I ______l ______| * Fertilizer Policy without gas subsidy for new investme t Pakistan Country Assistance Strategy 33 Table 6: Triggers for Bank Assistance Over FY03-05 Low Case Base Case Elgb Case * Satisfactory * Budget allocations for human development * Promulgation of Provincial Finance Awards (per and pro-poor expenditures increased to 4.4 province) regulating transfer of resources from the percent of GDP provinces to the districts The consolidated budget allocations of the * Share of human development and pro-poor expenditures federal, provincial, and district govemment in the consolidated federal, provincial, and district budgets for education have increased to 2.0 governments budgebt increased in fiscal vear 2002/2003 percent of GDP to at least 4.6 percent of GDP and for fiscal year 2003/04 * The imnplementation of the National Health to at least 4.8 percent of GDP Policy has been strengthened through the * Education, health, and population expenditures in launching of the enhanced Expanded consolidated federal, provincial, and district governments Immunization Program for children; the budgets increased in FY03 and FY04 in line with strengthening of the Lady Health Workers recommendatons from Public Expenditure Reviews and Program through the hiring of new workers, full costing of reforms under the PRSP the expansion of uitheTubC luai5 conuo1flo * The coverage of the Expanded Program of hITnunization proVgram; and the formulaion of a naional for children will have increased by at least 5 percent from strategic HIV/AIDS prevention prograi 50 nercent in FY02 to 55 peent in FY03 Proposals for implementation of the * The government will have hired 10,000 new Lady Health Expanded Progam of Immunization for Workers (LHW) for a total of 78,000 workers to achieve children approved by federal and provinciai the target of 100,00 LHW reaching 100 million women govemments and children by 2005 I Iic * egove-IisiiiwWill ia-ve LtillIIuni rpUIollluililiul of the expanded HIV/AIDS prevention program. r* Programs of capacity buildine with a focus on budgeting and financial management will have been implemented * Continued monitoring of human development outcome I indicatorsl * Comntitment at risk * Commitment at risk under 25% * Commitment at risk equal or under 15% over 30% * Disbursement ratio equal or over 15% * Disbursement ratio over 18% Duisbursementratio |_less tban 15%_l___l 119. Entry and Exit Triggers for Bank Assistance to Provinces. Pakistan's provinces face a fiscal crisis-itself the resuit of poor governance and economic management-which has crippled their ability to deliver on their mandate. Since a significant volume of the Bank's lending program is linked to structural reforms to improve the provinces' fiscal performance and strengthen their capacity to deliver basic services, the Bank's lending program will take place only under the high case scenario and will be regulated by the following entry criteria. * There is a reforming government at the provincial level with committed "reform champions" at the top and capable reform leaders within the administration. * The provinces would have already initiated a number of reforms to restore good governance and improve their public finances and public service delivery. This includes: O Fiscal discipline translated into reduced short-term borrowing for deficit financing O Improved Performance of Financial Management Commlittees and PACs. O Initiation of civil service reform including pay & pensions adjustment, rightsizing by eliminating positions as per skills requirements at the pDrovincial and in autonomous and semi-autonomous bodies. Paiustan ountiry Assi-sance Strate 35 E. Monitoring and Evaluation 122. For the programmatic approach to succeed, the Bank needs to significantly enhance its capacity to monitor intermediate targets and final outcomes-be they policy reforms ai the national, provincial, district level, or of individual projects-and to incorporate the lessons learnt in future work. The Bank is also working with the government on developing poverty and social monitoring systems to track changes in key intermediate and outcome indicators, including access to public services as well as income and non-income dimensions of poverty. This includes: (i) monitoring spending (disaggregated by economic classification such as salary vs. non-salary) in important sub-sectors such as primary education, health and safety net programs; (ii) adopting a national poverty line and updating it; (iii) selecting priority indicators for monitoring poverty outcomes and related intermediate targets, incorporating gender concerns; and (iv) building technical capacity, particularly in the provinces and districts, for effective monitoring. 123. The success of the Government's poverty reduction strategy as well as the effectiveness of Bank Group support for that strategy can be judged ultimately by Pakistan's progress towards achieving the Millennium Development Goals (MDGs). The Bank plans to suDport the Federal government to better monitor these and related key development outcomes (see Annex IV). V. IFC PORTFOLIO AND PROGRAM 124. Over the past three years IFC has focused on restructuring its existing portfolio, while helping clients to restructure and strennthen their comnanies. It is nearin8 conmnletion of the reqtructuhrin of investments in three cement and two textile companies. As a result, Pakistan now ranks as IFC's 9h largeszt enxrntre. dnwn from Ath in !Q9 TIC's disbhursed own acounmft portfolio is cu rrPntly US442.4 million in 48 companies including US$76 million in equity. The B Loan portfolio is currently US$229 rriv,l.on i,nI1 1 pnnm ties.o T biggthie e posIe isa i t3 sctor: 366pocer npc.t of the A moan portfolo *Afl*SSSU fl.*~~A*~J. 5aU- . --S T * Q'.J..t -l * * W- ...... ft is in five IPP projects. All five IPPs are operational and four are current (Uch is currently being reasut^ut-c.-Lu-vd.4 i~~J. IUa. UUILJl LU UV LLVW UL&OLLV,0 LO %AJ1VUIOUQLJU U)' ILW UUIIL3 LU JP1UV1UU LoUII1JJ.LILIYV IUiIl1~ IFC's equity and foreign currency loans are unattractive because of the high country risk premium. IFC is iieref-urc expioruig provuidmig local currency financing by means of parial creudit guarantees. LAO. iI r I VI, JC l,ha oUIUULLeU a US$a3 HiULULL tA loan in upprL01o.fl. iiie B -GS DeCvCIopment project, and will invest in two microfinance institutions. EFC sees good prospects for further investments in gaS and mining, where clients value Lrk's poliiical risk mitigation. irC is also pursuing opporunities to invest in financial services, manufacturing (especially garments and textiles), telecoms, health and education, ri and SMEs through partial guarantees. New investment is expected to be in the range of US$150-250 million over the next three years which will keep IFC's exposure near existing levels. VI. MIGA PORTFOLIO AND PROGRAM 127. As of March 31, 2002, MIGA has a gross exposure of US$92.3 million in Pakistan representing 1.9 percent of the Agency's portfolio. The portfolio is diverse, covering 7 investments in the financial, infrastrucwre, and manufacturing sectors. 36 Pakistan Country Assistance Strategy ViH. IOPERATIONAL DECENT (ALIZATION 128. Tne South Asia Region initiated a umndamenial shift in organization, culture and work processes in July 1997 with the single objective of strengthening client effectiveness. The unique character of the nations of South Asia created the opportunity for more strategic choices in where work was conducted: in the country itself, in Washington, or in another location in the region. To that end, the Bank's South Asia operations have been significantly decentralized to the field already. A powerful global team was formed, co-located between Washington and the field, teaming global knowledge in Washington, and proximity to the social, cultural, and political business context of development work in the field. 129. The management support structure in South Asia, including for Palistan, consists of Country Directors (CD) in country offices and Sector Directors (SDs) in Washington, working as ai global team. SDs remain in Washington to work closely with network families and sector boards. For Pakistan, experience has shown that having the Country Director (CD) in the Islamabad Office has huge benefits. Some of the Sector Managers who complement the managerial role of Sector Directors will also be located in country offices further strengthening technical capacity in these offices. Task leadership is based on competencies, business needs and skills (not location). There has been a large increase in field- based leadership, for AAA as well as lending tasks including supervision. Recruitment strategv for sector staff located in Country Offices, within the context of sector strategies, is to hire the best and brightest South Asians (some living abroad and willing to return home) For Pakistan, the implementation of the shift to province and district-based CAS over the forthcoming three years will nene'citnte q hicgher deoree nf nnoratininldenentrmli7ntinn ann n cornsequent renewal nf sLills 130 S(AR has no core service init in Washington Tin October 2000, the RegionalRMancage.mePnt Team agreed a "hub" concept for regional services could strengthen client service and mitigate against the World Bank tanking responsibility forwork that should be done by t-he bA, wh-,ile r,ai.-,;,,,ir.g fiduciary control. Subsequently regional procurement and information management hubs were estblished_I.3 LaUlO %JU ;uii Tnda4. toW p,r-ovidLJVL%& Oi -,4-cVV...L toLU all Co,n, ..'kLlOfies:,WILAA.0 Lill UIIL;.-eg.on, LIL-6U1k, nwllJA.iUrn'--Ilu... 3 g rd.kL;niu,P s'-n lubJL'u1g*s.' in consolidation of some procurement and information management functions from both Washington and other Country Offices. Fancial Manageet and Reso-urces Mvanagement functions are being strengthened in Country Offices. There are Human Resources Officers in the three larger countries, Paidstan, india, and Bangiadesn. Legal has just established a "nub" in india which wiii cover aii countries in the region. External Relations has been asked to consider ways to move work to Country Oftices. 131. Feedback from governments is positive, the Bank Group is better understood, and responsiveness and product cycle-time have improved. Quantifiable improvements are being seen in the quality of portfolio, economic and sector work, and supervision. VIII. RISK MANAGEMENT 132. Palistan's economy faces serious challenges and major risks emanating from a variety of internal and external sources. The main risks associated with this CAS are highlighted below. 133. With national elections scheduled to take place by October 2002 (as mandated by Palistan's Supreme Court), there is unavoidable uncertainty about the sustained implementaton of the reform agenda outlined in the I-PRSP post October 2002. Lack of continuity would threaten many of the benefits expected from the program. Pakistan Country Assistance Strateev 37 134. The government has rightly decided not to complete the full PRSP until after the new government is in office to ensure that it endorses it. While it is expected that the new govermnent would endorse the strategy to reduce poverty in Pakistan as outlined in the I-PRSP, there is inevitably some uncertainty regarding what economic policies the new government would focus on and what their impact on private investment will be. The best risk mitigation against reversal is the benefits the Dost 1999 reforms have on the people of Pakistan. The reforms to increase transparency and accountability within the government the Central Board of Revenue reformsr the human develonment strateov, the devolutinon with elected officials now taking charge of public service delivery and accountable to the voters, are hnibnd to lhnvt mrnior bepnefito whinh the npnnle of Pakigtn,i .wolld inot likp to f^regon 1pnn.p n,intmluitu and change issues will be discussed in a CAS Progress Report after the full PRSP is completed to determi.ne , f,.1hhrth. main ob,ecti;ves of th.e rAC reai'n. -,.1iA TIn AAdd4,4., Ugi, b. des-A--. ed. ..-. e __J_C _ _ _. _._~~Lt _Ut._ C *WC* _ . %t..fl4J* 4 C M U~ilt'f5. -V f (see table 6) to help the Bank Group manage this political uncertainty. 135. Another political risk is the opposition to the modernizing policies introduced by this guvwiiu-..e.t; in particul'ar, the r-eform. of th.e elementary ed-ucation systeml, incl-udinlg thle atemlpt to regulate the Madaris (religious schools), and the pro-gender equity policies. Following the September 11 e-vents, tuhe government hasUeen more aggressi-ve in its communications surategy, stressing the need to develop Pakistan into a modern Islamic state and stressing the important benefits Palistan stands to gain from integrating into the worid economy. 'Wnile the govemment is trying to manage this risk and there is strong support for the President's stand against intolerance, the risks posed by these militant groups cannot be underestimated. 136. A risk of complacency may lessen the compulsion to improve the investment climate now that international reserves are rising and seem likely to continue to rise due to the increasing capture of workers' remittances by the banking system. The Paris Club debt restructuring and exceptional financing by IDA and other donors may add to the complacency. This risk is mitigated by the sound debt reduction strategy which has been under implementation for the past three years to rapidly restore creditworthiness and reduce over-reliance on International Financial Institutions' financing. 137. There are also.implementation risks stemming from the technical and institutional capacity constraints especially for the reforms that involve governments at the provincial and district levels. To manage this risk, the Bank and other donors are working together with the government to build capacity. 138. Domestic public finance risk to poverty reduction outcomes. The low tax/GDP ratio may prove difficult to raise significantly in the next three years. All levels of government are under-funded for their basic assignments, with the lower tier the most under-funded when accounting for its responsibilities for basic service delivery. 139. A foreign concessional risk to poverty reduction outcomes. The September 11 shock has increased the risks to the balance of navment position by maiking more lnertin an early resuimpntion of long-term private capital inflows as well as access to intemational capital markets. Inadequate extemal fiu,ni,tinc, Wull indermine the mnnroeronounnmin firm.euwork as it relies on ein.i4 icant excepntinnal fina"c,inc 140. Finally, ogenos shocks may require ad-ustm--e.nt in fiscal an.d exter..-al policies beyond ,what is being envisaged. In particular, growth may tum out to be less than anticipated in the current ri roga. Tnwxer ,wt* coulAdk. be-.aA by +-i on exportsof a longe; +U-- expected global slowdown or protracted military operations in Afghanistan, or weather related shocks to arp1iCultUl,_I1 ouitp ut IL - A-LoAs 1A L_ - _A '.^s-___1 ---- I - L __<- _ L_ __._ - 1_-t at;i'..u.iuiai uuLpuL. sIIio 0Ifl1'.1D .,uUIu U,, In Pala, WVaulul U uy ui Lluu4ulg vAnuig raw rcgimuc UUL would have also to be met through a combination of additional adjustment measures and extemal financing-none of wicn can De raKen ior granied. if concurreni with excessively timid debt reiief, exogenous chocks would also delay the return to external sustainabilityv which is a keyr cnndition to achieving Pakistan's growth and poverty reduction objectives. 141. The Bank Group support program is self-adjusting to mitigate the risk of reform derailment. Substantial lending will raOntinule only as long as Pakistan continiues its imTplemtation per.fo.rmnn-ce of the past two years. 142. The portfolio risks are manageable in this CAS period. Credit worthiness indicators are moving ir. th-e r;h.i -,of-. c .A, .wll cor.';nue '.o i;.-.cease as -debt - - A s the share of bilateral debt in total debt). To manage this risk, however, 1BRD lending is planned only uden utLL high case and sIu Lr i .0t J wihiei LHI L.c aILY MgM4ILu vulgcon ui.; ofLyUL XlI -LiWUUiU uave been resolved. Given on-going repayments, this leads to negative net IBRD lending. Jiimes D. Woiiensonn President By: Shengman Zhang Peter Woicke Washington, D.C. Page I of 13 ANNEX I: CONSULTATIONS WITH PAKISTAN CITIZENS 1. A series of very extensive consultations were organized both on lessons leamt from past Bank Group"AsSitrnnnp nAniin"r:or.tin for t.h;c rCAS The Bon-, contry team. (ovr 20I staff) i.n collaboration with four NGOS (see attached program) and WBI spent a total of four weeks, one week in a district in each r-nxrmMince, and -r.ohr,veekin +1-0 feAdral, ar.d capitals,-p.ol listernng to over 5000 participants drawn from a broad range of background. Consulting the People of Pakistan 2. No vibrant society speaks with a single voice, and Pakistan-among other things-is a vibrant society. Dunrng extensive consultations that the Bank conducted in 0LUUand 200 i in preparation for the CAS, Pakistanis at all levels predictably spoke with feeling about a wide range of concerns, hopes and fears. Extensive though the Bank's consultations were in time and area covered, they do not constitute a scientific survey of public opinion in Pakistan. Their intent, instead, was to enable Bank Group staff to hear directly from people, particuiarly those the Bank Giroup staff do not frequently meet in the ordinary course of business-judges and police, students, joumalists, tribal leaders, religious scholars, and women and men locked up in jails. Nevertheless, in the hundreds of discussions that Bank Group staff held in impoverished villages and bustling cities, four themes clearly dominated. They were: * A hunger for education, especially basic education for girls; * A thirst for water, particularly for clean, accessible drinking water; * A yeaming for justice, for the maintenance of law and order to curb violence, corruption and abuse of political influence; and * A criticism of the World Bank's and IMF's pDolicies and Dractices. particularlv for their Derceived collaboration with corrupt, anti-poor governments. 3. Not every group raised all these points. Many rural Palistanis also highlighted the importance of access to oualitv healthcare and the infrastructural deficiencies in roads and puhlic transpnrt as well as power and water supply. Some small town entrepreneurs stressed the importance of access to credit along with transparency in tAxation and regulation. Notahly, however, wliile some ordiznary citize.ns could not see the direct link between the improvement in their lives and the government's tax reform, devolution, aint ndiVAt7IAtt1: nrnorams they nnnethele-s saw a e1nQP link hbetween. th. govprnmPr nts' sroia! and infrastructure sectors reforms and their improved access to education, health, water, sanitation and means of tanspoJrtation. At the ssroots, the prospect of devolu-ion was greeted as often as not with skepticism shading into a cynical expectation that devolution will continue to enshrine the existing nnlitinnl p%nwer eri(tlure. Tin mnrp th2n. non.e ingtnn.o Ap,dml1jXn:n -,v taoggcnasA n nar inr; it.iHn- voatl than the government's own initiative. Deficient Governance - Rural participants blame it on the government while Urban participants Blame A '1 ir A4-n.~ -f +1,- ne-4.+n4-.n. ..-- A,.,.o -A;s .. 0 A-- a -4r1...~ ITe fin.ng. of &nsl4n,&heproduce u.tu1ap -+uLauof ie aV ailure 01 uvLiii.iice :.n almost every area of daily life in Pakistan. 5. Few of the Pakistanis who engaged in the consultative exercise used the word "governance" in speailng of their lives and problems. Th tellrale is a specialied oneUtat ,has riot passed into ordinaly speech in Pakistan or elsewhere. The umbrella concept of top-to-bottom inefficiency and outright corruption-in the delivery of social services, infrastructure and tne preservation of the ruie of iaw- does, however, go far to explain most of the disparate failings of development cited by citizens. Pnbiv.ta. Con,,,,h-u Avvivtnn' sIrnhtpov Annex I Page 2 of 13 6. Those include schools with neither fumirhis-ngs nor qualified teachers, clinics without medicines or skilled staff, villages without water or sanitation, unpaved and untended rural roads, inaccessible veterin,ary services, unreliable public transport, backlogged conurtrooms, hbrie-tahing tax and utility inspectors, extortionist highway police and civil servants indifferent to all but political cronyism. The Pakistanis who aired their grievances to Bank representatiVes were most articulate about situations they knew first-hand. Collectively, though, they painted a portrait of a non-functioning system that impedes developr.n_t an.d ,rv%uprh rdiirftin and gerpine.rat dee dsJicillSiinlmpl-nt 7. Pakisn women and men living in rural porhy, rrely blarn.ed their plight on the World Panic They blamed their governments. They saw their problems as local ones, signs of wider, systemic failures, but bically challenges that should noi y have been- or can be met by the A--- offi.r _ oe or another government agency. Without significant exception, they listed education as an urgent need and a sorlly egLccted oniie. IMLa.y saiu in Piauar. simple language: "if our leaders d.d .ot steal cas much ',Ve would not be leaving in these filthy conditions with animals and people using the same pond"; with pregnant womer, oyLfln the way tohospitalsu ard With chs.'rr.r; dyi,,g of dia,,hea because thedocto in the village health clinic has not showed up for months ". For many of these rural poor, both elected and gover[iiMen1t offiCials only kr,ow h0ersel-Ves'1Uhow to help ar.dA forgLe the. poor; m.a -c e devolution, indicating they saw it all before, and did not expect much unless the elected district officials are firom liicir own vuilage. 8. in the workshops in tne provincial capitais-'Lahore, Karacni, Pesnawar, and Quetta-many of the urban elite and representatives of the middle class blamed the Bank and IMF policies for "hurting Pakistan and creatingpoverty." Tne Bank, urged one speaker, shouid "write off Pakistan's debt and withdraw." "Facilitate but do not promote a western dominated policy agenda in the country ", recommended another participant in Peshawar. Bank policies shiould change, said another, -from dictatorial to friendly." Echoing an appeal to "please leave us alone," a third claimed to speak for Pakistan's citizens when he said "This nation is fed up with the IMF and world bank agenda". Some thought 80 percent of Bank loans are in technical assistance payments to foreign firms and consultants. Very few understood that Paiistan was a blend country eligible for both 1BKD and IDA terms, most quoted interest rates they thought the Bank charged that were far in excess of those actually charged and almost none knew the IDA terms. Such criticism came in large measure from educated, articulate, urban professionals. The perception among urban elites of the Bank as an accomplice in official sins of omission and commission adds another challenge to the Bank's work in Pakistan. Surprisingly these criticisms and anger were not echoed in the federal capital, Islamabad where the Bank office is situated. 9. Other participants from this same gathering of urban professionals, instead praised the Bank's assistance strategy to Pakistan and argued for increased assistance on concessional terms. Some said the Bank should "give priority to educationfor women, technical education andfamily planning and health." Repeatedly, the participants in the district-level consultations urged the Bank to connect more closely to community-based and non-governmental organizations. A Peshawar participant, for instance, counseled the Bank to work with "formally organized" groups of the poor who "can best identify wlat will take them out of poverty." In Peshawar, Karachi, and D.G Khan district, some speakers citod "religious groups" as deserving "direct" Bank support and encouragement. "The best building in any village and the cleanest," asserted a participant, "is the mosque, because the community manages it." Others in Kohat (NWFP) praised the Bank's support using as example the Community Infrastructure and Services Project (CTh-being imnlemented in some villages there with community participation-where there was visible impact of Bank's support in improved rural roads and rural water supply and sanitation schemes. 10. A number of those consulted pressed the case for more attention to women's groups at all social levels both as soLirces of advice and as "delivery mechanisms" for Ba nk-supported progrms. The failure Pakistan Country Assitance Strategy Annex I Page 3 of 13 to "recognize women as partners in development in Pakistan," in the view of a Karachi participant, "is a major source of siow development." Recommended solutions: ire More ferMale teachers-less tan two percent of all teachers in some 200 villages are female-and make a special push to bring "literacy programs to adolescent girls, the primary group affected by maternai mortality." A parallel concern that some political activists (but few others) raised was continued population growth in Pakistan. An "illiterate population," said a discussant in Lahore, "does not practice tamily planning because large families provide them with safety." Female illiteracy, she added, "is the most important reason for low levels of contraceptive use, poor family health status, and empowerment. 11. The consultations with politicians representing the major parties in Islamabad, Karachi, Lahore, Peshawar, and Quetta, uniformly featured criticism of the Bank,, some mild, some harsh. Somewhat more charitably, many of the political i representatives of the major parties, | l ' tended to acknowledge Palistan's , :l shortcomings in various areas as ii __E, primarily the work of Pakistanis IIs vjthhfrhr thecityoi-Shikrr4,, lo themselves. While some stuck to the dli e hoEofntheB h abeVafl;.araLunder | party line and praised their parties abis l 96neloiherl.boS a-re achievements while deriding other en;rol tsn r lhoogroo.concrte WIdw h a. parties' policies, many still blamed rce ilet -bIo n d-ien Baki smafl the Bank for supporting past n.neWsd acher sonndutV. takih9 ail: fi-e governments, imposing ill-conceived It c aie sbrion or policies and project design, or not Dm It pI hwd n l l speaking strongly enough against the a n sw're u r etBeen A4Oa 50 mismanagement of their past iAV-F hi u i r intn ini isn ihe . governments. Many asked the Bank neighbor oo ' to share in the blame when discussingLy~t~ ~~ past government failures. | TJ a77 flsJW -I eemTSon rastAih areasun cnnsodl billouTroom.bnck 12. Religious scholars and uim misine i;h he viIlage renresentatives of reliLious narties 1111TrA n i'1M r-Iris-hrhemyh who attended the consultations M " hetop icso5;uVeiv A stressed that they were for education. i n h,q NCT Or.n-ni=; including of girls but only in XStuden s u on ug te agsZo tx ooks1 mtdesks vegrreorit-ed sqchonn While the menonzing 2ando traheir Jammat-I-Islami representatives edeable ;b9hty.in 1 acepntetd that girls could atte1nd mixed a 60 o1 schools for the elementary cycle but ss p es ;;Wr.oo As, needed to attend proper girls schookn 3lOuzcomiareaKi nforrsaitthngchos echn thereafter, representatives of the more the ot_1 . L t conse artivp "arhr_ Tnm TTlema-e-IB i be MA ohe,o, tis,vlaitr:idituoniand Islam (JU)-were more opposed to i cutayo onraianrressIsttree mnqixed schools in generaI and w,.,,ed iU1~oIn iaeR J hajdt the Bank against pushing mnixed sc.hols T.e weeie ada nt.h chisoe 5 e g|Pl __' ;; opposed to all forms of social LUliaLLIUiI aJ.u VV&ndIIIw&..L& unat q wiligtWILI II LLaU all ut.e 1'q.3JC-Os whic,h we.-L, th'ei V1%,ew- through their social mobilization to impose a western way of life and inciting rural women to adopt 4LLILUUdes %orUarLY LU 1IslamIc UaUiLIUIID. Pakistan Country Assistance Strategy Annex I Page 4 of 13 Hungering for Education 13. Mehrab Khan is an extraordinary 19-year-old from an ordinary Sindh village-Nim Sharif about two hours outside Shikarpur. What makes him extraordinary is his determination to get a college degree, a goal that involves commuting by bus three hours a day to a college in Rotadero and that requires his father to devote half of the household's meager income (Rs. 30 a day) to Mehrab's expenses. 14. Sixteen-year-old Rubina Khoso is even 1 X -; - more extraordinary. Where Mehrab is one of 8-10 | 'L boys from Nim Sharif seeking a B.Sc. degree, Rubina and her sister, Amina, are the only two girls . MI from their Shikarpur village, Qadir Bux Khosa, ever I to go to college. Her family's income is some three , 5 ' times that of Mehrab's, and her bus commute is only = | half as long, but as a woman she fears to make it I alone. As a result, one or two days a week -with no companion to shield her from harassment-she i _ ' .- .. .. -. I does not make the journey at all. 15. Rubina, child of an enlightened and well to- .. do familvy hones to follow the examnle of hber sister, I now taking a masters degree in economics. Mehrab, whose father operates a wheat-milling machine andti a has three other sons in school, does not know where iML he will fin.d uwork onc-e he gets his dp&r,-m Tnn S Ok young to teach in the village school, he sees himself as too eA--ctedA 'o beconne a mason or SUht;l+- o - professions that are needed in the village-or a | weiueur- or autwmreCh i`C., 16. He will, at any rate, have an advance education. His sisters will have none. Nim Sharif has no scnooi set aside just for giris, and Menrab's5 *E Y i 9- conservative parents would not consider sending ,r * - their daugnters to any other idnd of institution. In their village and others like it, in any case, girls not only have no place for education but little time for it. Once they are married, usually between the ages of 13 and 15, they are committed to work days- cooking, cleaning, washing clothes, making dung cakes, collecting firewood, preparing animal fodder and working either in the fields or at embroidery-that last 14-16 hours. As soon as they are old enough to attend school, girls follow similar, grueling schedules. In some places, families need their school-age daughters as babysitters for younger children while their mothers walk long distances carrying water for the household. At least, Nim Sharif villagers have accessible water supplies. 17. In the arid stretches of the NFWP, the women of Toolanj Jadeed-a settlement of 500 households-say they spend an average 25 hours a week fetching water from wells a kilometer or more from the village center. In the summer, they must trek to a deeper well three kilometers awav. In the same season, their neighbors in Dohk Alwara must walk to the Indus River for water, taking ten hours a week to provide a household necessity. PakistanCountry Assistance Strategy Annex i Page 5 of 13 18. Still, even the 70 or so men of the Toolanj Jadeed Community Organization who talked with Bank visitors in October 2000 recognized the need io educate mneir daugnters. Ine village nas no schoul for girls, and parents are reluctant to send their daughters to an all-girls school more than two kilometers away for many of the same reasons tnat keep Rubina Ksnoso irom taking unescorted bus trips. I nose anxieties and the need for women's hands in household work also result in girls dropping out of the village' s five primary schools for boys after the third or fourtn class. -No giris attend tne one secondary school, and efforts to obtain at least one school just for girls have tailed. A buildmg for them that was put up ll IS some ten years ago on shamilati land (donated land) was I _rht d never occupied because title was not properly I l n o transferred. Parents, however, continue to seek l educational opportunities for their daughters. They had 3wYIi_seoirm fi written the provincial education department about the eer village's deprivation. Some had even written to the 1 iria_a n f Xh E ,-d secretary of education. None have received a response. I s | _1a'E1 Another Option - Islamic Education ers 1w 19. The school in Allah Bux Khoso is one of 120 i public schools open in the Shikarpur district. Ninety- I -- three others are closed because no teachers can be recruited to work at them. Responding to that shortage | s and to rligou convictions, many families send their sons to Islamic schools, known as madaris. Pakistan had | 3,000 such schools in 1978. It has more than 15,000_ institutions for which the curriculum was designed by a _ Mogul emperor three centuries ago. Their student body I _ is estimated to be close to a million. A number of h | participants indicated that lack of access to public a s _ 1 w b_ L education and inability to pay for private schooling lead d parents to send their children to Madaris. Many said that i ain _an a M while they want their children to know about Islam, they o did not want them to become Islamic scholars. They only want them to be educated (see Box 3). Water - Too Scarce and Too Unhealthy 20. Water availability and its quality have a direct bearing on educational and health outcomes, particularl,y in riural Pakeistn. Watching thte yovnger children while adldit womten fptlh water iS a common duty that keeps girls, especially, out of school. Water-borne diseases keep school attendance erratic and is amain contributor to the high infant Iinortahtr rate. Andl at anofthr rpmovep inaidequate water supplies that limit agricultural production even in fertile soil also keep the children of farming faum ilies .from. schools sin.^ce they are t,oo irpa.4ntt hue..lA i^.corn, to be~ spoare for f1i. ,classrtoom.. 21 To one degree or another, the scarcity and low qualit, of -,ater are serious dev-elopmet issues ir every district that Bank staff visited in the course of the consultations. The Dera Ghazi Khan district of D_;._U is ar. exnaw+., exar.ple, n.ot just becausof- a .r=;eoc=lnn d.-o.,,-A A z. elder tA,+. D- U.IiJau..a .a. ...,.e aupL,*ll tO .Lfl-I &tL -%Mtl8Lll-lf SLL-,tff fS- Itf1. "LUU*fAIAflww- fL Tribal Area put the situation: "we are still living in the Stone Age." People and animals in the village of uatchLed huts dUrIUI u1ie sa1La% rL&I V1V"waLte, UUL LU. LULUUII. iias MUCIe rIuuiy caLle, a,..U LforceU .iiaii VI Roongan's people to mnigrate. Among those who remain, women and girls spend 5-8 hours a day carrying waLer. MoIUUCSL UU'.Uys LU I .ICULU WHULUI Uof nLuldl 111he .fIl[lUII a aadU bIUU.IIUs 511711 illl Ukils 0on neadriby Pakistan CountryAssistance Strategy Annex I Page 6 of 13 hill torrents would produce a reliable water supply, but the villagers have only their own unskilled labor to invest in such projects. Children bring their own brackish water in bottles to school since the school has no running water and no toilets. Of the five diseases that claimed the lives of 30 Roongan children in 2000, three are water-bome: diarrhea, typhoid and cholera. 22. Far to the north in the NWFP village of Toolanj Jadeed, water is as high a priority as in Punjab and Baluchistan, but its provision by the Public Health and Environment Department (PHED) has been marked by so many false starts that the local inhabitants have lost faith in the government's promises. In the 1980s, PHED did pipe water from mountain springs to small tanks in the village. Without a system to pump the water onward from the tanks, however, the enterprise failed within a month. According to a PHED representative, an agreement with ten members of the community in 1995/96 had established the conditions for digging a tubewell some distance from the village and piping water from it to Toolanj. None of the 70-odd village men who met with Bank staff recalled any such agreement. They did recall that a well had been dug but had failed to produce water. 23. A second well was being tested at the time of the October 2000 Bank visit and, if it proved productive. water was to be piped to Toolani at a monthly charge of Rs. 50 per household. The village men said they would be willing to pay that bill but would only believe the reality of piped water when and if it started to flow. Meanwhile their women and girls (before they reach the age of purdah) tramp to shallower dug wells once or more a day, wasting time and strength and risking accidents each time they haul heavy buckets up and over the large logs that cross the mouths of the wells. InAfrstrurture - Roads and Power 24. Mainte-nance and general investment nrohlems are not confined to water supply. They mark the state of Pakistan's roads and its delivery of electricity, not least for irrigation pumps, as well. In villages and some cities, residents were q,uick to point out sueh deficiencies and their cost. The 12215 residents of the Shikarpur District village of Allah Bux Khoso, mostly landless farmers, have to make their way along tw.o eilometers of unpaved road and across a nA1rrOw and nrmbling concrete bridcre to get to nublic transport on a paved roadway. If the unpaved road, not repaired since it was built in 1996, were in decent shape, said sno,. nf the ul:!uiger', the nost of grettina their rine and whes t to mnrket w ould he cuit in half The dirt track connecting the NFWP village of Dohk Alwara to the main Kohat-Pindi road is seven kilom.eters long, a ri.bbon of .mudin the rainu seant arnd anm obstarle course at any tirn.e fnT the v ullAge.rs who need regular access to Kohat, 40 kilometers away, for health services and access to district adminristrati.on but mus3t now depen.d on tractors or th.eir legs to get them. th.e first sixth. of th.e way. 25. Siilr Lu-^rlspoIL-'tionI -yVUr.oblen-n IVW, po'ULoleU hiI.LWdYb '-eV U"le oneV be.wee.-. S0LAWuM aiu-. Sukkur in Sindh province-are barriers transporters cite to the growth of private bus service between cities and outlying villages and on the congested streets of ShiiKarpur itseif. in Punjab, where the bridge on the Multan-Karachi highway is so ill-maintained that traffic must creep across it. The impact of poor infrastructure is direct and heavy on the poor and on the prospects for rural development. Pakistanis in the Dera Ghazi Khan district, Punjab, for instance, tied the sorry state of the roads and, in consequence, of public transport to high rates of teacher absenteeism, particularly among women teaching at the primary school level, low rates of school enrollment generally and distressing rates of death in emergency cases when transport is too slow or unavailable. 26. Shortages of electricity are another impediment to poverty reduction. Again, in Allah Bux Khoso, of two transformers supplied by WAPDA, only one functions. The other has burned out, but villagers have been unable to get the agency to send a repair crew. In Dohk Alwara, lack of electricity forces villagers to use hand pumps-at a. construction cost of about Rs. 25,000 each-to move water from £ unwsst.AG^u.y Ass 5.atusa. ,. I Page 7 of 13 ponds to homes. In the summer, however, the ponds dry up and, as noted above, the village women must hike four kilometers t.o '. TA.. Co wat Healh Cae - coneIsIsonrg 2I. i LULe d. .ectL c UU11 bUVLWUL,II e ULpable W4ate1 a,iu good .Uiiaiui is nU sc,-VL LU rLual I aisU'wU. They understand that many of their illnesses and deaths, in particular, those of their children are conseque,-,ces of'I. dInking ULLULr. WaLte, IL IUL VI Uof dLAUaIIIjcJdIyIg ILaK Uo sUILULI UIIU UaIldurirge iII their communities. What many understand less well is why is the government so indifferent to their plighiL! VYiiy are UULdUlo WIU UU nUL [VpoUt LU WU-K Mrinunc villagc nca; n ceniers knDnu) or rciuse tO Uteal them even when they are there? Why do these people remain unpunished were repeatedly asked questions. inc trnial areas arc tne worst 'i Dy lacK o0 imrastructure anu neaith care. A female doctor, wife of a powerful landlord and former politician, assigned to the tribal area of Dera Ghazi Khan, acKnowledged that sne rarely visit the nealth ciinc sne was assignea to, inalcatng That ner salary aoes not cover for the price of gasoline for her to use her car and travel to the tribal health clinic. Still she admitted she continues to draw her salary despite not reporting to work. Her husband found it nornai that she should draw her salary while not reporting to work. He went on a tirade against World Bank's policies and foreign interference-he found it preferable to discussing his and his wife's accountability. 28. In the Shikarpur District village of Nim Sharif, for instance, women listed a hospital-along with a school and drainage-as their top priority. The village has no trained birth attendant or public medical facility. The nearest hospital is an hour away, too far for one expectant mother in September 2000. She and her unborn baby died en route. For the 1200 residents of.another ShikarDur village-Allah Bux Khoso-the nearest health facility is an hour away on foot. A self-styled 'hakim' (quack), however, lives in Allah Bux Khoso. 29. Tn the Ralaichitnn villaire of Chih Kalmniti N2gore, in rnntmf,t a diqnpn'cpr hirth attpnAinnt nind two support staff run a basic health unit (BHU) that serves local inhabitants and those in neighboring vihages. A nilmher nf rpQitpntQ agreedtt l2tthe (w,uvrdnr A:sr:t .hA m,uelA prorh ss i, rrrI,nAiT. health care and stimulating population planning. At the same time, they noted that the shortage of qualified medical rpersonn.1l Pxtene,ti firnm the abepncpeofn tli.nt foeratee htospital1 e-ui-.ernt in G-,ad,ar to the distance-30 minutes by car-from Chib Kalmati Nagore to the nearest doctor. The villagers do not have C&-S£. *S.e sick have to be caU,&L5Ie L M.her Uon. UCd,% VIko a Udor1-e or1VUn a li.er, ardU Ul JUoUI.-.ey lasts for hours. 30. In Toolanj Jadeed, a doctor is supposed to be on duty at the BHU that serves two neighboring villagesO. Resid-.ts1 saiu, LEV;ITVVe1, ULatLhe. dUob notL c.eui L a%UrIIyCeCIe 'I.ugh, when he uucs -visii iruin Peshawar, he signs register entries indicating that he had been present for all the days he was absent. vV .UIVUL1111L, UIV' .-II.Ii-cILIUJlbn isLVsfe uy LWU para-nedUIcal persUnlcI. A LUuy ricaln W orker assigned to the village stayed only a few months. No midwife lives there, and no medicines are delivered. To get themt _ anu_ -3 thcir.t-' _¢ salaries,_ _ BUwTsT stafirr nhave to-._. _go to- Kohat,- -- - paymg-- ' iorI the" mpI . themselves..s I 31. Tne most noticeabie shortage in the heaith care field is that of medically trained women, a vital element in delivering everything from immunizations to neonatal advice to other women. The reason that there are too few midwives or Lady Health Workers or women doctors, however, does not lie in the health field. It originates in the failure to educate girls, to give them the skills to take charge of their own lives and help save the lives of others. Without that empowerment, many of the women with whom Bank staff spoke mentioned health problems only in passing. The root of their greatest problems, they appeared to indicate, lies elsewhere. Pakistan Country Assistance Strategy Annex I Page 8 of 13 Arm of the Law . . ' - - The Crippled 'Box4- -Aven omen Box4: Avenng Dishonor, Vicuiri-ingi oien 32. Whether in rural or urban Pakistan, -- ' the weakness-even absence-of law I s: .- i rurai distrilcs arou.nd S hiSarur, iinj, ,dru - enforcement summons protest from those who the provincial border in Baluchistan, tribal traditions have long.| see themselves as denied elementary justice. allowed wTonged huands to avenge-u.ty by killingbot the Among the victims are Sindh villagers in Nim w"ay-iad wifeandherparner. $upposedlyamsof passionor: Sharif (Shikarpur District) who complain of -UUL,r U. JIa.I4.y IOl. MIV IA - toe.:p - and of the ransom they - 7anyplieeswherecustomalawandsocietalatilidesfavorthe- frequent cattle theft - Z. usj1.1. ,J TT.nt -in..4. 4r c, 6~i must often pay to recover their livestock. alVUilUIUfliaU. IJUIt! lwui3l S o I Since the police do not respond to such registetid Karo-Kani casesin 1999 10 oft in Shikarpur incidents, the herders have stopped reporting d i s suvn a e plac UUUicLlIu mill XIJ., them. Instead, their wives said, they have 'however, areJoiuing forces to raise awareness of ind thc penty- bought rifles to protect their livestock and for, ir-ari iunlng,' a signiucant i auloao pow themselves. And women are put in jail to structures d valuesystems: -I being killed by relatives ° ".e!"ently protect them from -;a recent prictice, Karo-vKai plays out fi"uentla safe house for * . . ! . l - -. when there is no government - -et,ta mrd.er. Pal-,rt.n charges br-oah. It-e womenmin the area. .wotnn. w,hose husband rnay"atually- be; eelking a, cbot.firee, ArIPfnran.+ +-xrro, nn b P r4.onlv.. h- * ,inQnn@ I 33. Not all the aggrieved, however, are 5 payments from the alleged adulterer.Ai6th6er cases, poor peasants. Members of the Bus Owners hhiti a,zition iJqthe real reison hehmF.te:acsadh. IW Association in Shikarpur feel doubly somneonewants soieldy else's land'andffe latterIdoes pot want victimized by police misconduct. On one I to sell the former kills a wormai from his sid'e §Ld acc'ises the'. hand, untrained policemen levy heavy fines on reluctant seller of havm ha an al ithi the re on° - their vehicles without due cause. IThe accused runs away feaing1br ihslifieleavingbis property- ,behind for gra. '': .,0 :: 34. Orne young police sunerintendent, ei f g ; ; : . - respected in the city the Bank staff visited for some cases ajirga tditional tribf)nnIn his honesty and his impnact since he took over, bythe tribal chief (sardar)takes'h case andttris to resole#theA judges that 95 percent of police officials he Idispute byimosin fnes and ke taccuisedomenuner oversees are corrupt. Misdeeds range from -.its,pr9tePddn°iitiiajudgementis passed. - -- bribe-taking at high levels to the 47 officers , I fo.dU 1 to be hprnin aAAdite, T . ;. he ractice of Karo,-1;ad, perTsists. The law it-now- murder Between- th law. and ts enf6rcemet he says, is so crippled that beyond *' * . . , calls'. . B ersen wh encstill ives extori :t r. do nttle to prevenrt or pnimic c ti .- ,. crime. ; l -. '' I. 35. A parallel situation-including low-level bribery-has brought the courts into disrepute. In the KO,.at Dsu;cto,n'TVm DLte .. iCad of bhebar association befie'Ves. td-A main. obstacle is a shotange ofijudges so severe that each judge has a docket with 70 cases pending at any one time. The judges of the district, whi'le agreefirg *IhLLIi r,-arl w---were '.oo1 L.cited poor police work as a morr p.-ble...m;... ci.m.ial cases along with the inability of the police or courts to provide protection to witnesses. They also cited language boiamers. Tle 11973 constion requaireVu that couL proceeuirgs ble condductid :...Urdu ior Pashtun, the languages most widely understood, but to this date, court proceedings are still in English which few if any poor understand. In Shikarpur, several judges and their aides were suspended in 2000 on charges of stealing evidence (heroin) to sale. The Bar Association president listed illiteracy and the distance that litigants have to travel as an impediment to justice, a concern voiced in Kobat as well. 36. The breakdown of law enforcement and the judicial system in many parts of Pakistan has severe consequences for the entire society, not least for small private entrepreneurs left unprotected against the Pakistan Country Assistance Strategy Annex 1 Page 9 of 13 depredations of what is known as the "inspector raj." Its members are the legion of petty officials with the authority to license businesses, read utility meters, inspect premises for heaitm and iabor regulations violations, impose highway tolls and assess taxes. Many small busiriessmen told Bank staff one story of harassment after another. A WAPDA officiai, for instance, bumed one businessman's electricity meter after being denied a bribe and then charged the trader with tampering with the apparatus. According to members of the group, an "army of people" 15 strong typically descend on them to conduct the tax assessment, usually sending an emissary ahead to intimidate and extort a bribe. 37. The assessors include income tax, excise, police, public health, labor, WAPDA and telephone officials. In addition, in some areas, army members have joined the gang of inspectors and bribe-takers. I I Le 9 O i t One participant in the CAS consultation told of an |Il army wife who bought merchandise from him and _ I1gemanaoM IMUMIRI sought to exchange it after using it. His refusal g1 eamed him arrest and the closing of his shop for W9 il I W Ii three days. But in D.G Khan, the army monitoring O a g t e unit there was praised for curbing corruption on Eli W X 4 I government poverty schemes since they werei m . I l charge of overseeing their implementation. i N 3 S. . a 38. Official lawlessness breeds civilian | _r_ scofflaws. The small businessmen indicated they 1 N would circumvent any attempt to document their income for tax purposes. They recommended l _e returning the country to the self-assessment system |_ of taxation that they said worked two decades ago 1 and had the merit of making bribery unnecessary. | Without a stable relationship between government 1 and business, shaped by mutual respect for law, they iini said they would not expand their investments even into promising opportunities. One trader-the man whose meter was burned-said he was thinking of joining relatives in the United States. Many others, he suggested, were ready to fnllnw suit. 39. With them and their energy and their capital would go one of Pakistan.'s prime hopes for development and for the sustained creation ofjobs capable of reducing poverty. 40. But there is potential for a more vibrant private sector in all the districts visited. Many hi.cinpeC!er.pf arlmn.wlprdapri that .whilp mnr. n to hp ain.np tn reiruce h,.rass.ope.t they.r saw a r.et improvement in the investment climate over the past two years. This was more visible in Karachi and Lahore but also in Gvradar district. The coastal strip on t+h-e',-a Al sea holdAs a I.hug un-ped +.a1 for both fisheries and tourism. According to various statistics, the area is capable of producing at least ~Jvv*UJ7000 ,.or,e fishAfloAt th&uilOil itIL A-esSfl%' ~1--1Jcu- t -. ontI.. a..Of! WUUOlunnaua! basiJU.fl.msafviid. "AjO.IU 001 VtOItt.U LVYU FJAUtdt00UfLr,} ws.. aLIt packaging plants (one foreign owned off-shore). There is potential for more we were told and the current owners A +U- +rA - -AA; -A A1-A+A 1-AA _1- r_------, A_ _ ; _ _ ---A_A 1- _1 _A_ r_ _ ---A A -- 0 L t4t. vwv pit.t.toon.." p.ut * FOa.f lAvl t.Gpat.JLJy t.ajmjaOIUI. u CLL% aiauv FItaLo jul iuau auiU port developments but reliable power supply was a serious constraint to this private sector development pLter.tial. Pakistan Country Assistance Strategy Annex 1 Page 10 of 13 Pakistan CAS Consultations 2001 - Itinerary and Program District Kohat, NWFP, consultation facUitated by the National Rural Support Program (PRSP) NGO October 21" - * Meeting with Mr. Mueen Afzal, Secretary General, Finance, and Economic Affairs ISLAMA BAD DepartmentStaff, Ministry of Finance, Govt. of Pakistan. October 23rd - 27' * Meeting with Divisional & DistrictAdministration KOHAT- NWFP * Combined meeting with districtofficials (Education, Health, Agriculture, Irrigation, Forestry, WAPDA, C&Wand others). * Meeting with major NGOs working in the Kohat District. * Meeting with -members ofchamber of commerce. October 24"- * Walk through and meet with government officials in the Divisional Complex Konat. * Walk through District Courts. * Meeting with iawyers. * Visit to the Center supported by the Poverty Alleviation Program. * Visit to Police Stadion and meeting with Police officials * Meeting with Revenue Departmentstaff * MUeeting w--ith Judges. VILLAGE groups, farmer groups, tehsildars, putwaris, extension workers, dispensaries, local health workers. * "'al 'thr- .hill - * Visit schools, rural health centers. October 26h * Meeting with district line departments officials. VILLAG.F DIJOKV October 2 7h * Meeting with Ulemas (Relizious scholars). * Briefing on the Tribal System by the DistrictAdministrator. * Meeting with Tribal areas journalists. * Meeting with Tribal elders. District Shikarpur, Sindh, consultation facilitated by the Strengthening Participatory Organization (SPO) NGO October 3 0fh * Briefing by Stren thening Participatory Organization (SPO) on Program. * Meeting with Divisional & DistrictAdministration October31 * Meeting with District Officials. * Walk-about and meet people in District Courts. * Meeting with Lawyers in the Bar Room. * Visit to JudicialLock-up. * Meeting with Police Officials. * Meeting with local NGOs. Panlrimnnrounnr, 4vijvtnnr.P R.trnt.P Annpr I Page 11 of 13 November I' * Visit to Village Nim Sharifand Village DarhiJhakhri (Tehsil Gorhi Yasin) * Meeting with communitiesu community organizatinym women grounx._farmer grouns. * Meetings with government officials of sub-districtlevel line departments, including tehsildars. putwaris, extension workers. dispensaries! local health workers. * Walk through village. * Visit schools, rural health centers. * Meeting with religiousscholars November 2"d * Visit Tehsildar office in Tehsil Lakhi. * Spend the day in Village Qasim Goth (Tehsil Lakhi) November 31d * Meeting with TransportAssociation. * Meeting with traders, Bazaar Association. * Meeting with Growers Association . DistrictD. G. Khan, Punjab, consultationfacilitated by the NationalRural Support Program (NRSP) February12'h O Meeting with FederalGovernment Officials (FinanceMinistry, PlanningCommission). * Briefing by National Rural Support Program (NRSP) on the team's program in the surroundingvillages in D. G. Khan. February13' * Meeting with Divisional & DistrictAdministration. * Walk through District Courts. * Meeting with district officials ILine Departments. * Meeting with Teachers, Doctors and Paramedics. * Meeting with local NGOs. February 14" * Briefing and Visit to IRUDP/PAPSchemes. * Travel to Roongen - Tribal areaof D. G. Khan & meeting with the tribals. * Meeting with community. FebruaryIS" * Meeting with Police Officials. * Visit to Local Prison. * Spend a day in the villages - One Jrom a rain-Jedarea, Onefrom canal irrigatedarea. * Meeting with Chamber of Commerce and Industry and Traders. * Meeting with the Army Monitoring Team. Februaryio6" * Meeting witn locally elected representatives. * Meeting with Journalists. * Visit to audrassauand meeting with religious leaders. * Meeting with Growers Association. * ,U,eeing with Clerk-' Associtullon. * CulturalEvent hosted by the DivisionalAdministration . Pakistan Country Assistance Strategy Annex i Page 12 of 13 District Gwadar, Balochistan, consultation facilitated by the National Rural Support Program (NVRSP) February2 (/h * Briefing by NRSP. February21i' * Meeting with Divisionai& DistrictAdministration. * Meeting with JudicialMagistrate and Lawyers. * Visit to Qazi Court. * Visit JudicialLock-up. * Visit Police Station, Police Lock-up and meeting with Super-intendantof Police (SP). * Meeting with Community Activists/NGOs. February22""d * Meeting with Villagers of Village Chib Kalmati. Meeting witn rFefmue Gruup, HU andU Shoo/VMeeViRngs witn Villgers.. * Visit to Akra Dam. Inctainerg wtith rr,'Mome, Ilfishe,,uar Uri" ,liforgylursera tin Surbandar Village. * Meeting with elected Nazims, Naib Nazims and Councilors. • eein with- j7sh.-* - De-w*tst Qmdv 4---v * Visit male andfemale groups in Gazarwan Ward, meetings with Villagers. February24h * Visit School, Hospital, Power House and Salt Making Plant. * Visit Snn nf Sea Prno-essinag Plnt. * Meeting with Fishermen, ABC Fishery ProcessingPlant. February25' Visit PovertyAlleviation ProgramProjects . * Visit Women HandicraftsCenter. Pakiswan CAX. Consunltainni- with th PrivnleSvRortAr May 15- 23, 2001 Cn"onvend hip Mr Corporation,and Banks) SMAn,.h 1 ' * iC'nne,ZitntinnV With tho Pri.vt,t, .Sp,'tnp in kIC7,n,'hi fF-i- T.-Of- Pnzti,.tri Corporations, and Banks) Federal and Provincial Levels Consultations rgJjn,1qa 2,0i W"I and Regional Staff managed the discussion with the support of NGOs May 15t * CAS Workshop in Islamabadfacilitatedby the National Rural Support Arogram 7NVRVP) facilitatpd May 16'b * Meeting with representatives of main noliticalnarties. May 17 th * CAS Workshop in Karachifacilitated by NGO Resource Center - Agha Khan Foundation (NGORC-AKF) * Meeting with representativesof main politicalparties Page 13 of 13 May 19th * CAS Workshop in Quettafacilitated by the NGO Taraquee. * .AAaot'r. ,un,;t ranroonnstni,,oc of nenin nnhlrnS.cl nartiot May 2l" * CAS Workshop in Peshawarfacilitated by SarhadRural Sunpport norporation (S'RSr) * Meeting with representativesof main politicalparties. May 22nd * CAS Workshop in Lahore. * Meeting, with representatives of main politicalDarties. Pvak]r7Stnn C'un,,,,r, A ,sVh.tAnnr Vh-tont,,} A.".XF7 1! Page I of 23 ANNEX II: PAKISTAN PRIVATE SECTOR STRATEGY 1. The 1990s were a decade of lost -ortunities for PakIistan From in,e, deAnceAprP tn t eO1ne I Pakistan outperformed the rest of South Asia. Then in the 1990s progress ground to a halt. Poverty remained shck at hj-1, levels, econo-rc .ov,,t sloo,ed, institutions fanctinedi badly, a a seou macroeconomic crisis erupted. 2. What went wrong? To explain some of the trends of the last decade, this annex probes aspects of the investment climate, viewed broadly to include the macroeconomic enviromnent, political stability, incentive regime, and infrastructure and regulatory framework. 3. FLA keyf l~y A,LDUAIJreso IMLfor Ulk,+1 jJ%UVIpoor recordLL4,VJUX ofII +u-1UIC~ 1-.~7U190o was..wao +u-U1W r'VC4I11IIL4Loer.etsfilr a ICULUIC IAmc lli1UlLVEJ11.u+r a favorable investment climate for dynamic, competitive, and sustainable private sector growth. The effects UI L11V UUaI VI10LLaUUL0 VI a l1110rUUL1,U HIC01LIM M,L11 aL~UiLlu aii MaiUCI4ULM LqrU14LVIY I1d1a.1W1MO. VIUL infrastructure were exacerbated by an unstable and risky macroeconomic environment. But these failings hadU VLL aroUIIU.UL years. VYHiaL WasrIIW Wdas UIq- way U1L aUnM .Ulwl.LlUlg, UULIUbiVU UdeI'eULLUI1 HI 'uie govemance of public institutions weakened economic management and created an increasingly -IUrfVolabeUiVIVejUllerLt cU111 . J3?ZLWVCn I990 iuanU L2VV, ULIe counuty had eignt udifrernt guvcrprments, each averaging 16 months in office. Four democratically elected governments altemated with interim regimes. 4. This deteriorating governance aggravated the inadequacies and opacity of the incentive regime and regulatory framework. It encouraged rent-seeking by the private sector and discouragecl productivity growth and international competitiveness. While other developing countries were increasingly integrating into the global economy, their private sectors becoming more outward looking and less dependent on government protection, Pakistan's private sector became increasingly inward-looking and dependent on government interventions. Its weakening performance set the stage for the macroeconomic crisis of the second-half of the 1990s. 5. The current government of Pakistan is determined to turn the situation around. Its r ecent Interim Poverty Reduction Strategy Paper (l-PRSP) sets out a sweeping program of political, economic, and institutional reforms that aim to establish the foundations of an open, modern, and prosperous nation through revived broad-based growth. The Worid Bank Group's private sector strategy tor Pakistan is based on support for this program, particularly efforts to improve the investment climate by restoring private sector confidence in the economy. 'T'hree areas will receive special attention: the government's macroeconomic stabilization program; a growth-oriented structural reform agenda that encourages productivity growth and more efficient resource allocation; and timely implementation of key structural reforms of the incentive regime and the regulatory framework in infrastructure. P~as.Lvta 's PWvsate Sector: Ufrtfi^ul,w.lled ,Poterd.ay 6. A clear consensus in Pakistan has emerged that private sector led growth is essential in order to provide better economic opportunities and to reduce poverty faster. The shift in emphasis has been characterized by the public sector's withdrawal from production activities through privatization, and by the substantial advancement of the public sector's role as facilitator and regulator (Table 1). Pakistan Country Assistance Strategy Annex ii Page 2 of 23 It is only in key areas of infrastructure Table 1: Units Privatdzed 1991 - 2001 services - power, oii, natural gas, _ transport, telecommunications, and banking- that the public sector stili -Auramebile dominates. With several landmark Automobile 7 _1k privatization transactions in baning, Bndg 8.2 power, oil and gas underway, this is Cement Producfion expected to change by the end of this year ChemicaU Fertilizer 14 1.8 (Table 2). Ener 5 10.7 7. Agriculture, the largest sector of Ghee Production 19 0.6 the economv- contributes 25 nercent of D-. Di n 15 GDP and employs more than half the labor Telecom 2 30.6 force. As the pnrirnarv sinnier nf raw I I .1 material (cotton) for the main industry othrs |20 1.2 (tpytilp-rl it Pnrne rrinnt nf tht- r,niintrv's- 20 1.2 (f.-xeles, it-1-- --.- st of-- --- r n,hy S Ih,eTotal 108 61.2 foreign exchange (from cotton and its I 1 dArivativsc) CronutAl hasc rnainiu e.nm c,A..... r A--^.^. D from adoption of modem inputs, cont"hireA uAth1 oxpnaioein of irrgahed water supplies. However, this strategy has Table 2: Privatizatlon Program - Upcoming Transactions on better management of existing levels of anldng &Finance reore AanAO ^s^p -A+ -s.1-.A;_^ -1.-A-, P.. .. . _ ...... , - .. - - uLVLjJUMO, unirc tSanK UmireO (UBL) marcni Apli 2Uf access to land and credit. Agricultural trade Allied Bank Limited (ABL) 11Qtr. 2002 a.riU JLI,U,, I L.-gires beeIIh ave... i nuUb1aHLl"ljy Bank Al Falah .. i Qtr. 2002 liberalized, but policy reforms are needed Habib Bank Limited (HBL) - first tranche 11Qtr. 202 .LU11i1r1Vp, v UIo UlWliar,e-W11U, oflaLUUt aur Muslim Commercial Bank (MCB) 11Qtr. 2002 water resources. Since the issues are Habib Bank Limited (HBL) - second tranche I Qtr. 2003 largely bVULV1-bpuLaifi, Ulu agii.UILulU Ilndustry & Real Estate I sector is not discussed further in this annex. National Investment Trust (NiT) March 2002 8. Manufacturing, which employs Pak Saudi Fertilizer Limited March 2002 about 11 percent of labor force, has I Faletti's Hotel HQtr. 2002 stagnated, remaining at around 16 to 17 | Investment Corporation of Pakistan (ICP) | 1Qtr. 2002 percent of GDP since the 1970s. The latest liol & Gas l Census of Manufacturing Industries (CMI, Working interest in 9 oil & gas fields April 2002 1995-96) counted 4,474 private | Attock Refinery Limited (ARL) Il Qtr. 2002 manufacturing entities and 42 public sector Pakistan Oilfields Linmited (POL) 11Qtr. 2002 entities, which together employ under 1 I Oil & Gas Develovment Corporation Limited (OGDCL) III Otr. 2002 I percent of the 4.06 million people in the Pakistan State Oil (PSO) III Qtr. 2002 manufacturing and mining sector. Textiles I Pakistan Petmleum L_imited (PPL.) - I 0tr 2003 I and clothing are the largest industries, Sui NortherasPipelinesLimited(SNGPL) IQtr.2w3 accountinLm for 79 nercent of Pakistan's I 4z-tuh-t .-,Co,.r -- ,,n T.rueA (SSCrCLT ! 2n 1 merchandise exports (in 1999), employing |Power l over 40 nercent of the sector's lahor force I D ,,...,, _ AX .A,. wl I and contributing nearly 29 percent to Karachi Electric Supply Corporation (KESC; September 2002 mainufacturing valiie added in 1995/96 Faisa;ali Eiecic"---;'Corporation (FESCO) IV . The food industry (including edible oils, L IGecol(Janshoro) IQtr.2003 grrAin milling, sugar, beveragesclelenom and l tobacco) is the second largest. Iron and Pakistan Telecom Corporation Limited (PTCL) Il Qtr. 2002 J S,tPPI PbPtira"~le lplnprinal PnhiTu'iPrt ___ automtvee, andpharmaeuticalinequipr Puivatization' Cent, r automotive, and p-harmaceutical industries Source: Privatization Conunission Annual Report 2001. Pakistan Country Assistance Strategy Annex 11 Page 3 of 23 make up the rest of the sector. During the 1990s, most private investment went to capital-intensive industries. The share of the "Big Four" capital-intensive industries--sugar, textiles (cotton yarn and gray cloth), cement, and fertilizer-rose from 28 percent of total value-added in large-scale manufacturing to more than 40 percent. Dualistic Industrial Structure 9. Large-scale activities dominates manufacturing output (70 percent of value-added) while small and medium-size enterprises (SMEs) provide the bulk of employment. The most important areas of activity for the SME sector are grain milling (16 percent), cotton weaving (13 percent), wood and furniture (10 percent), metal products (7 percent), and other textiles (6 percent). The five largest industries account for half of the SME sector, and cotton weaving and other textiles are their chief exports. Although SMEs produce a quarter of manufacturing exports, most are low value-added products that rely on traditional technologies. IV. 1 fl vCI1...... 90flfE per ciLtL oI i1T1Ism s in Pakistan are SMEs, most of which Chart 1: Sectoral Disribution of Non-Agricultural Labor In in- I,_ - Pakistn operate in tne imormai sector. According to the latest Small Household Mvanufacturnng inaustries Survey (SHMI, 1996), there are some 400,000 Others Construction small-scale manufacturing units, Whozesaiel 12% 600,000 services units, and one million Retail/Hotels___2R% 'dil/Hot s Manufing retailers in the country. Together they __ ___ 19% contribute about 11 percent to GDP and - employ roughly 80 percent of the nonagricultural labor force. Most such .... ~~~~~~ ~ ~ ~~~~Soclal/Stoiraae/ finrms are engaged in nonagricultural, Personal Comrm low-productivity service activities Service 10% (household services, small-scale trade 29% and retail activities) that depend in large measure on demand from other sectors in the formal economy (Chart 1). 11. Until the 1990s the government discouraged private sector involvement in most infrastructure services, from power, oil, and natural gas to transport and telecommunications. And even during the 1990s, despite considerable private investment in thermal power generation and natural gas, weaknesses in the regulatory framework kept the public sector the dominant supplier in all key areas of infrastructure services (Table 2). 12. Pakistan faces an enormous challenge in meeting its energy needs. Costs in largely state-owned MeAtsMl,r,ses ahe 1ighL auld iLnfrastucture isbrossly iriadequate. Tne power sector is largely government controlled. The state-owned Water and Power Development Authority (WAPDA) and Karachi Electric Supply CorpoULtion (kESC) together control almost the wnole electric distribution and transmission market. WAPDA also accounts for 65 percent of generation; 21 independent power producers account ior me rest. 13. State control also characterizes oil and gas. Both of the largest natural gas Droducers. accounting for more than 80 percent of total production, and the country's two gas transmission and distribution companies are state owned, as are extensive assets that include refineries, transport and retail facilities= The performance of public sector entities has been steadily declining, largely because of the rigidities of public sector management and weak implementation of structural reforms. Demand for nil and gas has PakistanCountry Assistance Strategy Annex II Page 4 of 23 increased significantly in recent years, mainly from the independent power producers (Box 1). A mounting consensus holds that substituting natural gas for fuel oil would bring considerable mnacroeconomic gains, improved performance by power plants, and lower power tariffs. I A i-1- 1.i . I,4. rakistan 's miing puienusi iss c large. Although it could contribute as much as 3 percent of GDrP under iZL i i Pei U IId b"cptril conservative assumptions, mining r ! i . e ...... A . ~ t a nn _ae 3o noDw.ef ner .Betwe 9lM9-5d presently contrioutes bareiy V.4 percent. 7 e The industry is dominated by federal and provinciai development 7 t E corporations, with little foreign t e investment. 15. Excent in road transnort t services, government agencies also ISe lY ~ a5Li r dominate the transpoTt sector (Trailwavs, airlines, port). Inefficiencies and high costs have seriously handicapped Pakistan's economic growth and export onmpnetitiveness. Acncrding to World Bank estima-tes, some 6 percent of GDP is lost because of inadequacies in the transport system. Despite partial divesture (12 percent of shares) of Pakistan Telecom (PTCL) in thp. parly 1QQnc the anvPrnfmpntretin a minnnnoly PTT 'c evxclusiavty n a1 1 tieftion-l and domestic fixed line telephony services expires on December 31, 2002. Four mobile cellular companies - including a subsidiary of PT,T - are now- rpmrit4i,g in the c P s PTCL privatization are under process and it is expected that the transaction will be brought to the point of sale b%y Ti,ne 2002. DisappofntingEconomic Growth 16. Slo,-,in --- growth, poor export. -er...^e,-.dA rl; ;- -S were tfetures F--- -F... ~ ~ ~ L*OiU ULII iUAV%, LUMILIO %A LIMt, J%aL%OUL the deteriorating performance of Pakistan's economy during the 1990s, a lost decade in the fight against povert^;..Y .XTo-S-t only'JAA ditfU fAheLAflt ir.idnc" AU~AtIt,LV,t o-A--MAif jJ.VtdLY-- 4-.^ X.IIIaLII un'1aileUL&L&ILaLILrVU I-r;.airUJt,LW%,-,I1 19/91L.77V/.71nnnwe CILU-A I1770177, nd 199899 UUL -u more people were actually living in poverty in 1998/99 than 10 years earlier. 17. GDP growth decelerated considerably Table 3: Growth Performanee in the Plitan Eeononmv during the decade, falling to 2.6 percent in 2000/01 after __ averaging 5 percent over the | t 61 previous four decades GDP growth rate (Table 3). According to (%FC, constant rupees) 6.1 4.9 4.0 3.9 IAgriculture 4.1 4.2 4.8 6.1 recent analysis (Arby, SBP, Manufacturing 8.2 4.8 3.2 1.4 2001), the slowdown relates Large 8.2 4.7 2.4 -0.2 to the decline in the trend 6.6 8.4 |65 |53 ASmaed GDP growth rate, starting as early as the mid-1980s. Total investment . . 7 15 l combined with the Fixed 16.8 18.0 15.2 14.0 recessionary Phase of a I Public I 9.1 I 8.6 I 6.4 5.8 business cycle that began in Private 7.8 9.4 8.8 8.2 the early 1990s. Most of I TO nnPr I I the deceleration came from | (%,Cvonstant uSs) | 8.7 8.0 | -3.8' 10... 1 the halving of a- 1995 to 1999; b: in nominal terms; c: July-April Source: Pakistan Economic Survey 2000-2001, World Bank. manufacturing's growth rate to 3.7 nercent during the 1990s from 8.2 percent in Pakistan Country Assisance aSiraIegy AInUJX II Page 5 of 23 the 1980s, and to a lesser extent from the weak performance of the service industry (Table 3). In contrast, agUIGultlue pe-ormIRued beUerl UU1l1rg LtIh 177V0, I1ip1ui LU sustLaIn UYve1LL groVWL1 bUcUsV ol it large contribution to GDP and employment. 18. Within manufacturing, the decline in growth was uneven. It was more pronounced in large-scale manufacturing, with a larger share in manufacturing value added, than in small and medium-size enterprises (see Table 3), though there is some uncertainty in those figures since the quality of economic information on small firms is poor. Among large firms, the decline was also more pronounced for export- oriented industries than for domestic- oriented industries, which have a much Chart 2: Growth InIndustries larger share of manufacturing value flndex of physical output) added (Chart 2)= Domestic oriented Dramatic Fall in Exports Reflects 15% M onented Failureto Share in GlobalProduction 10% 19. After growing rapidly during 0% the 19?0s and 1980s (7.1 percent or /5% , more a year), export eamings (in real US dollars) fel1.9 percetayear between 1992 and 1999, lagging behind low- .- A t,lUs tfl.Jethfl-- arAt.d t.fle JV11 Asiz0A. - .. on ( -.JI. 3A). jJUUIpoor exporU por.-..c reflects Pakistan's rising reliance on a few products (textiles and clothing accounted for 79 percent of .. ec.hands exports ;i.n 19 up1 111 ar. alreauy L1I V p.-cr.t Lil 1970) W,1,ose VAjIJLL LULL V, v-b stagnated (Chart 3B) and whose export prospects are dim relative to the exports from other, more success P- Asi, cour. iesr(Tale 4). Chart 3: Pakistan Export Performance A B Evae% cdrCvod S.nerve in ,.n.l.r, 4 @t16H,e.v 4070 I n I _"r~ ~ ~ w_w __'----. A._-. _ ro.wai *iniwwLui rna WUlw 7 100) (1995= 100) 79 ______140 ______.6DD_ I12D -W&MIdde 2 1 1 D _ 1100 10 9_ 1_- 40 1970 1975 1980 1986 199 1996 1970 1975 1980 1985 1990 1995 Pakistan Country Assistance Strategy Annex 11 Page 6 of23 Table 4: Export Prospects, Pakistan and Competitors Pakistan 1.6 Synthetc weaves (14 percent), Linens (I1 percent), Cotton fibers (8 percent), Leather cloth (5 percent), Cotton garments (5 percent) |China 39 Toys (8 percent), Footwear (6 percent), Machinery Parts (3 percent), Handbags (3 percent), Outwear knit (2 percent) India 2.6 Di9nonds (97 percent) Cotton yamn (4 percent), Shell fish (3 percent) Precious jewelry (2.5 percnd)a2cotton6I gaaod Cot1 (p 2 tton Sri Lanka 3.0 Outer garnients (9 percent), Outwear knit (6 percent), Tea (5 percent), Blouses (5 percent), I ~...IConon ga1iiWeL (4.5 perIerit) a. The index reflects the influence of global demnand growth, assuming no change in the country's competitive position. The higher the index, the higher the export market prospects. Countries with an index greater than unity have above average export mfarket prospects. Source: World Bank. 20. Pakistan's deteriorating export performance seems to reflect an inability Chart 4: Trade Openness - Pakistan Loses Ground to integrate into the global economy and 50 participate in global production sharing a 40 _ (specializing in different stages of the | J I I production chain), as many of its we 30 competitors across Asia are doing. While 20 competing Asian economnies were _ increasingly integrating with the global 10o economy, Pakistan's trade openness n. , , . declined both in absolute terms and 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 relative to other Asian economies'(Chart 4). 4). ~~~~~~~~~~~16_wPakistanaPChina 0DImndia -*Indonesia -4-Sri Lanka| 21. This retreat - particularly dramatic in the textile and clothing industry-contrasts sharply with trends in Bangladesh, China, India, and Sri Lanka, where textile and clothing exports performed significantly better than in Pahistan. 'T'hese competitors capitalized on their comparative advantage m labor-intensive clothing production by establishing zero-tariff schemes for imports of needed raw materials such as cotton and blended yarns and fabrics. China's intra-industry trade index in textiles, for example, increased from 34 percent to 54 percent during the last decade, enabling China to develop its clothing industry and become the world's largest clothing exporter (Table 5). Table 5: Global Production Sharing In Pakistan and Other Asian Economies (Intra-Industry Trade Index, 1990 and 1999) | Algoods 9.6 86 29.0 30.3 14.2 31.0 34.4 440.2 16.6 20.2 7.4 6.7 All fnanufactures 7.5 6.6 30.3 2S.9 i 7. 3.7 3.5 452 16. 20.6 7.4 7.3 Textiles 11.6 6.7 34.0 53.8 54.7 46.5 21.6 17.9 7.6 23.2 17.9 15.6 Clothing 1.2 1.2 63.2 10.2 63.4 2.9 44.3 2.2 67.1 6.0 2.2 10.2 Chemicals 4.2 4.7 41.4 65.1 28.9 65.1 39.4 |57.5 | 14.1 15.7 20.0 21.2 Machinery and transport 2.6 5.8 49.6 53.7 7.6 53.7 24.3 40.1 9.6 19.8 1.8 5.2 Other manufactures 14.2 15.9 247 26.4 195 26.4 54 61 4n.8R 4A ! 72 64d Note: The intra-industry trade index ranges between 0 and 100. The higher ratios indicate that gains from specialization in different products are being exploited and that the participating country is increasing its integration into the global economy. Source: World Bank. PAnric.tnn rn,intr, Aeaic#nn A.Vfrt.o A"n,or TI Page 7 of 23 22. Had Pakistan encouraged global production sharing in the textile industry by easing imports of ra- materials, itStextile and clothing expwts ixrould probably both have pi4n,.nieA sigr.antii, hettAr Global integration would have enabled these industries to import the raw materials they needed to diverAs,fiy L.e; nx,--rl -i-A.-cq n to ex*kn ninnAnna .+h-Anlf .-.nlr -.7 1-_.AA_A .-A dy.cA,nn (volume or price) market prospects, and take better advantage of the global relocation of the textile and cl-oUL.-~1UILFUAA a ;.ndustrUL %Ay U U-+alLaL lJtLULtLAocc.-Ae A-runAUUI 1LA +.eJ, 1.'i.'I1%1990ns. ILIt wouldATV ULUA alsoGIa. 1WQ%U-a,V %enabled-t4WUIL.U A-pos UI00% IIIULSUindusu;es LLMI' +-lU OULLWD1-44ws +1UIlk impact of the poor domestic cotton crops of the 1990s, inoculating their export potential against the FallingInvestments d,.. 23.~~~~~~~~~~31LrnIVU- LIUVILL felaIVII aLOa 4 hr Vne",l.oVWI~UJ JLJI D IUtLLVLrIUUL UIV, I77WO9~i,II90,ra%.l.il. Vog.utu. ana all-k6rewillIUI 11 V 11~JJ.IIL 2000/01. The rapid decline in investment by government and public enterprises accounted for most of the drop I,1..ILL1S A).AN veu..wU- - by I.e p1-V---A-- sec or L 4a IIUU177Us,-UI followed by a igp-.t, s.. i3VH spike and then a sharp drop after the 1998 sanctions and ensuing macroeconomic crisis. Averaging less *U1i I percer.tL I GJDr, Uo[ei51direLc ULIVebUlICILL krul) iexnIImCU smalUl PMiswri u'iirOUgioUi iii9 I0YYUS, with the exception of 1995-97. Between 1996 and 2001 (years for which. disaggregated data are available) must rEL was airected to domestic-orented and mgmy caplital-mtensive mdustries, notabiy power generation, oil and gas, and chemicals (fertilizer, synthetic fibers), but surprisingly little to export- onented industries such as textiles (Chart 6). investment inmanufacturing has fallen steadily since 1993/94, especially for large manufacturers (Chart 5 B). PDIEb I =. tmb_I@ U'JIIIUBUE 9____-__ll IWUUU oIJ_ A B Gross Capital Formation 1 Gross Capital Fonnaton In Ianufacturing (%o GDP) (as %of GDP) LU ~~~~~~~~~ ~4% 18% 16% -I~ ~ ~ ~ ~~fl ~3%4 - 14% *Gowmment 12% Publi 2 10% goPdIaete1 8% * LSM *SME ______Ni -J - 24. Another change in nrivate investment Chart 6: DIstribution of FDI (1996-2001) patterns in the 1990s was the increased reliance on Agmbusirew external finance. Until about 1996, donmentfi re;es banks were reducing their exposure to the private nicaCt sectnr, encolurgino the nrivate sectnr tn hnrrnwu abroad (Chart 8 shows that the flow of private Gas .Ytpmrnal APIht i n'rparld at the t.ime uhlien ,wI'inst sector claims as a percentage of bank assets were fa1Bi&.g)PQidi, AAm.d..1p ;n..t atti .-r4lt,Vr t4x... rnar alc1s foreign interest rates also expanded arbitrage TrarogStme abrou.n.. eSt uie,eBankr .ofPlt fa.. c.litate o wtswmWon abroad. The State Bank of Pakistan facilitated CoiUdnf Pakistan Country Assistance Strateev Annex 11 Page 8 of 23 external commercial borrowing by private Chart 7A: Which Private Sectors Gained or Lost In investors through a Foreign Exchange Risk Access to Domestic Bank Lending? (1985-2000) Insurance Scheme, at least until 1995, NAgrculture making such arbitrage opDortunities E 40%- EMining extremely attractive. 3 Manufacung g; 30% '>'' i iOConstrudUon *u uinies 8 20% _Commerce Poliies hehind the Incentive Regime of the P 1990s andDeteriorating Governance 1 I n0/, 25. An unfriendly business climate X °' helps to explain the declining economic -10% 7 performance and stagnating poverty of the 20 _ _ _ _ _| 1990s. Yet the incentive regime (the trade a and investment regimes, industrial policies, tax administration and regulations) of the 1990s did not look very different from that of the 1980s. If anything, it should have been better. The government had initiated a series of structural reforms in the 1990s, notably reform of the financial sector, government withdrawal from manufacturing, and external trade reforms. 26 . The 11". -C.-ImtrelAf degree Chart 7B;Which Private Manufacturing Industry .. '.' .S Gained or Lost In Access to Domestic Bank political istability, however, undermined Lending? (1985.2000) ti, 6se aA-nceg0 i' a *pidm deteArinrat.ion in the governance of public institutions and Textie 1....~~~ de;pcsT1.~-sr s ries ofr s.t.o.t-lv-A - 25% EC ______a_ _ governments, each with its own priorities 20% i mCement arLu vesteu UL.t'at'OL, e U policyrtd II uMhuniuy instability and the opacity of an incentive 15% _ _ and labor-intensive industries, discouraged X [UUUVLIVILYproduclivi Biding _ 200 27. Until 1997, an inward-looking trade co | _Ml -200 S regime made extensive 'use of directed t 50% * *-_ __ 1__-4_ incentives, principally end-user based tarif ; ; *600 $ exemptions or concessions (known as A . ' .- oon a. Statutory Rules Orders-SROs). The regime _,s provided high nominal protection and, through cascading tariffs and exemptions, even higher effective protection to import- Pakistan Countryv Assistance Stratevv Annex II Page 9 of 23 substituting and capital-intensive industries (fertilizer, cement, synthetic fibers, motor vehicles) while discriminating heavily against exports by raising the cost of inputs and raw materials. Exports were hurt further by dysfunctional duty drawback schemes managed by the Central Board of Revenue. The bias against exnort-oriented industries helps explain Pakistan's noor exnort nerformance during the 1990s. 28. Policy shifts in 1997 began a move toward world prices. In April-May 1997, the maximum tariff was lowered from 65 percent to 45 percent and the number of slabs from 11 to 5. By January 2003, the number of tariff exemptions and concessions (SROs) is to be reduced; the maximum tariff is to be cut to 25 percent; and slabs are to drop to three. 29. Although these changes look significant (chart 9) they do not tell the fihll stnry. While the number of SROs has been cut, they still account for a 30 percent of the difference between potential duty collections (had all imports paid the fill statu_torv du ty) and actual collections. Mnost of t!ne rem.minig exemptions are in the manufacturing scptor, nrT+irilnllrv in mlitnmnnhiIq- sector, particularly in automobie-Chart 9: Changes In distribution of Statutory Rates assembly (imports of parts and 1995196 to 2000101 onmn,pbtpehd ulhiiGpeS Arn,i Adscif,t the overall move toward lower and fewer 4 1 a U20000 tariffe cvimifirant thAin,h fu 351 =-=^- --0.^^-.~-, o'^- *1s" 3 a 1995196 domestic industries continued to 25-1 1 bt.n.n,fit arom.n ,hAA.W..ff -F.-SA.cd.iS0n. U 25 * . These exceptions are consistent with c 201 | _ l obsenedA groww, rates for_ = 0 d_ I manufacturing for 2000/01, which 5 sossw high grOwth for ismport- _ substituting industries such as auto ° lo assemUly (23 jpe1,-1e,t) anUd kV.LU11LZ Tariff Slabs (y oDu 65+ (8.5 percent), but slow growth in the expoit-olienLted Llex-iles iIUUsUty (2.7 percent). 30. All this means that by 2002 the private sector is likely to be increasingly exposed to international competition, but the anti-export bias and nontransparent trade regime remains. The tariff reductions and rapid devaluation of the currency since 2000 are probably behind the improvements in export performance in recent years. But the trade regime and prospective reforms need to be assessed carefullv for their effectiveness in correcting the anti-export bias and in improving the terms of trade to encourage faster growth and a greater export orientation. International experience suggests that low, uniform tariffs would do much to spur a more efficient allocation of resources in the economy, eliminating the anti- export bias and encouraging competitiveness and nroductivity growth. Industrial Poieies Have Discouraged Productvity Growth and Contributed to Decing Openness 31. Since the early 1990s. the govemment has gradually withdrawn from direct involvement in manufacturing. It continues, however, to attempt to pick winners through its industrial policies despite increasing evidence that these policies discouirage nrodiuctiivity grnwth and restruinfiring i.n significadnt manufacturing industries. 32. industrial policies are also likely to have played a key role in the decreasing openness of the economy during the 1990s (see Chart 2) and the bias in resource allocation away from export-oriented and labor-intensive small and medium-size enterprises and toward domestic market-oriented and capital- intensive industries (see Charts 6 and 7). Constraints on private investment tightened during the 1990s, initially in domestic financing and later in extemal financing (see Chart 8) as reserves and macroeconomic imbalances mounted. In this increasingly restrictive setting, the government's industrial policy assumed greater importance by lowering perceived risks for private investors (by raising retums both over and under the table). As Box 2 illustrates, this intensified the bias of private investment toward Pakistan Gountrv Assistance Strategv Annex 11 Page 10 of 23 inward-looking and capital-intensive industries where government can more easily "protect" returns on canital than it can for exnort-oriented industries. B6ox 2: How Seetoi2l Policies Encourmged :6od,0pr ,D'i0 rerLu4aer. LUC I;989 er 1LUK= PUUl Pi ViJVIUVU vL awThu Oy ie Suab,'U.ena^ 4IW" OX J^U to the domestic fetimlizer ifdustiy. The subsidy, jahile prempting'$R',2 billion wR iof invesmiems in urea prodcti,on ii t .1990s, also encouraaed'su6h aross ine.ciency in ,prouction t'ati on avera_e'factories operate at-least-25 below internatiqnal-.benclitarkc: Al6ng .with sirrila w;ste` in distribution due to the absence of product sharfig,g the subndylsot uted productity growth in ag e ome ,Opeaifulturepaapplidly faineir was 'asted-and byd iven tiscal.jtsource'tfmn, proven growthe-e"ncing, public expenditures in-educaqoi4n, ingaton andcdl;age,,ecinoIogy I developmenf and disseminatio-n, r,-ur infrastruture. " -' The n,ew, fertilizer, poiicy announced in August 2001, althou`b' an mprovement over the 1989 policy, still seiVds the, 'wrong signals to investo-rs by -d,,scouraging productivity gaiis. And by °petuatng' noatnsparent subsidies and 'diiect1 Flup?71WUtUIU;I7Vvyllu 1UUL*U1wS.UW11&b kIULunitu ui v~bumLUb. Lium FUCVUll.) subM 11db 11l14ki14VLVJL.UU1Wt. 4YJA4L1VU lklU~bU1 later section).Athe,po ipy'rafins the'diiuS(feedstock-fueI) gas pricing regime,,btings 4inestic feedstoclgas price iiine9i f ,Middle East price leveis.`phases out the feedstock subsidy by 2606 forold 'fertilizer plant and by 2008 (contract ns)¶foij ',ew plants, introduces a new feedstock suheidy (10 percent of The Middle 1s parity price) fof futplants with a 0year; loc,kin price featre, dedicaies an existing gas field for use'fy,ft eiaffirms the ` of ' Textle: and c ohng'Grodwh;in'ite*ele and clotiing.e*portii rose about 13 percent a year (in,US dollar s betweeni 1990 1995_14nd thcfell to -2 percent'inl995 before'risiing-slightlyto 3 .ercent in. 1999. The industry's' deteriora,| -,.,ino,nftherniare cornlple,te dependence ocottoand hea-vy reliance r onel low,valnue-addedh'dtn pro,ducts-with'limited m oadcttwr ,d ''T,hehighOe,ctiv,p;ritition ofte cottn-textile an'd s;nfibetic fibe indl ies-urt tae export competitiveness of the 'c,,otg industrr, eQrntegl'ngit to:r'ely on a narrow and iowqiaiy7nge ofyarend cipmand:lieavily protecied sy)meticnti mrs Iproducedi loCaUYi.P 2The -tektile; induWy b,enCefited f£rom cheapy' tcottol through - e' cottn 'exp'ort tax and export restrict,;ris -: 'ev,ent i,alVi,tia durlgnthe ,Qlq.g _ id_frm, nrfeetil agesritnto:b, r1ii'M ^redit,nrdoth nednI-iaiwin^en !i^Hib'imnor tariffs (2545 perctorbas oniports of semi-manufactured textile inuts:coupl'ed,witlvysfurIcdinal irmrport.ury and'sales > tax,reibate stc;'lE avediscouraged diversification and been a majorjobstacle to imioved export performance by the clothing .industry These policieahave prevented the clothirg aid textile indtst frorh-ttg a tge of global productioti sharing (se *TablevS) : 4 a , r , 5°' '' 9 - < ~ 1r D; m S~rgr.e zlgizt tif,xclutiverig;for, gt nl;torwcn o ptiid ra (de-zoning) in 1987, coupled~ [withhighr ves p1 ge intm in the industry. Mvore than 40 percent of the 67.j .mlls operating in -iA',/uvv enaterec toe,mKt¶y sner is,. Yete emema susysiersu irom poor tecniicai, iinanciai, ant ,etconomic perform*ance, ivith? roductivity'grou., 'ither atthe'field or riull' level4lagging behind other major sugar producing. ciUntri&q CChar( tO)r De-vojngpniMat.ias enco4:d new and 1,rer sugar mills to coninete with existino mills and divert cane frnj theni has camied a-cost inlilling capacity utlhzatlQn, large capital JnvestTmqntk'highunit costs of production. and low and. -declIiiin" (relative to the voil4Jcane and sigar yield'(hart 0)., The abserce of'oning discourages nills from investing in out-t: grower fields with'ligher aneeand sucrose.yields since' they r,6,'nonger askured of sharing,in the beneSits-of.bti-gher. 'y=productivity leves m theYte1dXor factoryi Pe-zpning is the mainrason, for the poor,ptrodu,ctvity phrane otth.s se` fltfh.;+Cos>rfl54+ QIAU IfI;SAt .L W s13Q. SM --V. *%'1 t$I LA. .*7 **:, . .' ' 'also suffers'fromi the eff cts of r'nisguided poli'cy.n irif protecti6on for at- ed Pakistan . anicci i(raSovuL-)sii iuripvucu uwe5vewpmvm of UUWflbUa5m ,eeecn&mudua s. Jsrlvi icc~mees auu,t aLn'uru u0 UIC c6untry's steeld demXd bid .at prices sonii5' p'-rcent higher tha international p -ices.High tariffs penalize e:xporters of-, enint; ihose oroducts are uncomome:itive in the interational markeL FLuaucialPolicies and InstitutionsAre Still Weak 33. Until 1997, the banking system was dominated by public institutions and suffered from inadequate prudential regulaotin and sunervi:sion and a .weak legral and judicial envirnnmernt Rv the mid- 1990s, public sector banks were in severe distress, a consequence of poor governance in the banking system and deteriorng ,govemnane in the incentivee repaime nf the real sector. Developumen-nt finance institutions accumulated non-performing loans ranging from 30 to 70 percent of their portfolios and accown.ffin.hg fonrbw t 0Rru-_-rwn.t nf th.e band' lnar. nf the 1rnlri'n e'ictprm. The onnrnialit, of ha"Vmcv Pakistan Country Assistance Strategy Annex ii Page 11 of 23 assets was especially acute in the fertilizer and sugar sectors; non-performing loans totaled 89 percent of advances to th'e fertiuizer industry and 60 percent to the sugar industry. 34. The government introduced reforms in 1997 to strengthen governance and financial discipline in the banking sector. The reforms upgraded prudential regulation and strengthened the auth,ority of the central bank to supervise banks and enforce regulations, imDroved legal and judicial processes for enforcing financial contracts and facilitating foreclosures, and initiated corporate governance reforms in the nationalized commercial banks. Chart 10: Productivity Indicators in the Sugar Industry -. i I .. .. I. B S V~ ~~.h'*,l L u1--f.A.'il9,Th.,fs,,'k. A.i,E,, - - _-+-n - Iedn ' ra- ;I - -1_ I-- 1- i-A+ Source: LMC. 35. While details of the reforms are described in the Country Assistance Strategy (GAS), two points *r.- l.--.-.. *n r ... r.... ow *o lI..,. Fi FpLJ.... "Il LlllU a uiIV.JI l11.J.IlllZ. Ud,iaL_ and in restructuring banks, non-performing loans and intermediation costs are still high enough to keep l~AihlRR 1 LLA&A1551 55 L, m L~a L 1l%L A &LAIUb a.LuU L%JUJLO%,VUUI4r H1 vpillV-U11L. 36. The second is that weaknesses in the legal and judicial system impede corporate restructuring and asset restructuring by the financial system. The stronger than normal links between s-olvency and performance in the corporate and financial sectors in Paldstan because of the heavy concentration and co- mingling of political and economic powers make it especially critical that corporate restructuring accompany bank restructuring. Future growth depends as much on restructurine induistries where overcapacity or low productivity is rampant (such as cement, textiles, and chemicals) as on new investmnents. And future growth requires a financial system that facilitates the reallocation of resources from low to high efficiency sectors or fims. Thus the long-term success of financial sector reforms, including bank privatization, hinges on strengthening the legoal and judicial framework to facilitate the exit of fi-rms and the foreclosure or restructuring of distressed assets by financial institutions. While some progzress has been made (in bankruptcy law. for example). much more remains to be done. Pakistan Country Assistance Strategy Annex II Page 12 of 23 In vestment Regime Still Not Business Friendly 37. During the 1990s, the government tried to make the investment regime more attractive to foreigners, especially in certain sectors of the economy. It established the Board of Investment as a "one- stop shop" to facilitate and coordinate the needs of foreign (and domestic) investors. Notably, the new investment policy announced in 1997 lifted the requirement that foreign imnvestrs get government approval for projects. It also eliminated foreign exchange restrictions; allowed remittances of salaries, profits, and dividends without restriction or innrova! of the Stqte Bank; remnoved ill cnntrnlv on the transfer of technology; and eliminated ceilings on the amount of royalties or technical fees a technology hu,ver may navy 38. Yet the latest Foreign Investment Advisory Service study (FIAS 1999) found that, "Pakistan is an inefficient investment location, with the country becoming less attractive relative to other investment locations in the Region." Moreover, "whilst appropriate on paper, [the current foreign investment regime] is simply not implemented at the ground level." The study noted that the investment policy was subject to both inconsistent interpretation and arbitrary changes. FDI was encouraged through directed incentives such as user-based import tariff concessions or exemptions (on raw material and other inputs), high tariff protection on output, exemptions from income and sales taxes, exclusive licenses or franchises, and other special treatment. Implementation of these measures failed to create a transparent and level playing field for investors, instead encouraging rent-seeking at the expense of intemational competitiveness and productivity growth. Chart11: Wo,lddSuine,s Survey1999 39. T c off ''-11.0 (%firms ranking obstacles as moderate to major) and predictability, uncertainty over the 90 _asEaaNI _ ~~~~~~-;- - pler-14 . er.t.oar.dD.r n 1UUap~1*14UtOAUUIOJfl "I14AW 51 Fv1YpUUl y LaunfAm gSout Asia ...... _ statements, and lack of accountability 80 GIUL Ua1LL JG1IIh.3 iLtdll4lll oVLvuO '- problems. Events of the late 1990s- 60 UiLCIIstU,axrLa policalU1 bsain.;lUU1s, t 50 military coup, a balance of payments crisis, foreign ex'unage resnrictions, 4n and the independent power producers 30 debacle (Box 1) furtner undermined 20 already low investor confidence in 10 Palu'stan. i.nus substanu"at N imipediments, uncertainty, and risks Policy Instability Financing Taxes & Infrastucture InflationlPnce continue to face foreign investors, regulations instablity imposing high transaction costs for I investing and doing business in a-t Pakistan. Policy lnstabiIity, fla1x= - = Administration, and Regulation Raise the Cost of DoingBusiness l_ g w5dest & d t 40. In the 1999 World Bank Mwean . World Business Environment Survey a (Chart 11) and CAS discussions with dO s private sector in 2001 (Box 3), firms ds n _ identified policy instability as the_ leading constraint on the operation and growth of private sector actii;ty (91 prcen.t of f...1s consid.ed it a moderate or mejor obstacle to business), followed by difficult access to financing (83 percent of firms), tax administration and regullation (20 npecrt of .- ), nn a . bril atractive in PakistanCountry Assistance Strategy Annex ii Page 13 of 23 Palcistan than elsewhere in all its aspects. Policy instability and difficult access to financing (especially high interest rates and highn collaterai requirements) stand out as particularly damaging to the business climate (Chart 11). The policy instability reflects the unfolding macroeconomic crisis of the late 1990s, policy slippages or reversals of successive governments througnout the i990s, and the deteriorating governance in public institutions and economic management that created a lack of transparency and predictability in government policies. While tax administration is a criticai constraint for the entire private sector, regulation is more of a binding constraint for small and medium-size-enterprises (Box 3). 1This perception is also reinforced by the results of a recent SME survey carried out in Paidstan in which more than 80 percent of the respondents cited regulations.as a major barrier in their smooth functioning (Charts 12 A&B). 41. Taxatdon and tax administratian. After policy uncertaintv and financing. firms rank taxes and regulations as the biggest constraint to business in Palistan (Table 6 and Charts 12 A&B). Across the 1nnrnI-lnrce firmT and smati mmnqlf2chlirtnr firms and errviceq-thev cite high taxes as the chief tax and regulatory constraint, a verdict consistent with the overall regional rankings in Chart 11. Chart 12: Taxation & Regulatory Constraints for SMEs In Pakistan A B - . -- - . .. ~~~~~~~~~Govnrmment,intennsity nlF Problems Reguiation ana utner uovL Keiatea issues F80 60 s8 706 401- | I >4 20co1 30 20 1 1 ______~~~~~~~~~2 01 _ I _M - e0 i e. -o Note: Mulbple responses were allowed; total may exceed 100 l Note: Multple responses were allowed; total may exceed 100 Source: SME Policy NoAt, Worid Bank, June 2001. 42. Tax administration is the second biggest regulatory constraint, especially for large firms. Smaller firmn are mnre likely to underrenort income. Some 80 percent of firms eittimnate that "typical" firmnc avoid some portion of taxes by underreporting income, with 22 percent reporting less than 50 percent of their inr.onmr the hiohe-t nnrtinn in the Soith Asia reoinn The nriv2t§ tectnr is hianhlv crititl nofthe Crntrnl Board of Revenue, which they consider to be corrupt and inefficient, with too much discretion. Pakistan Country Assistance Strategy Annex II Page 14 of23 Table 6: Taxation and Regulatory Constraints by Size and Sector in Pakistan, 1999 (percentage of finns ranking obstacle as moderate or major) m,tj~~~~~~~~~~~~~~~~~_7 IHigh taxes 86 74 75 77 79 79 Tax regulations 75 65 90 72 76 74 Customs regulations 72 65 71 67 74 69 Business regulations 64 58 70 64 63 63 Labor regulations 57 53 60 54 60 56 Environmental regulations 62 44 44 49 56 50 Foreign investment 46 48 45 40 53 46 iFiretsafety regulations 43 46 33 42 46 43 Source: World Business Environment Survey, 1999. 43. Recognizing these problems, the government set up a Task Force on the Reform of Tax Administration. The radical reforms it recommended in an April 2001 report, endorsed in the 2001 budget, focus on reducing the number of taxes at federal and provincial levels as well as tax rates and penalties. The program also calls for simplification of assessment and collection procedures, reform of labor levies, greater efficiency in dispute resolution, broadening of the tax base, and honesty and efficiency in administration. AA. T1.A uuoliness coniJfnur-y welcor.ed we A UJfLIIU*d1+L.I1O Uo Ul LEM AXL,LWL11 A aOa APorc Uk andits subsequent endorsement at the highest level. The recent establishment of a tax reform wing under a new l- A_-1 D- - D A. -U 4 . --- A_ -gfU -_ - Ai - 4F+- _ _ -4 _A.~ ._ Ir- 4- _+ AAA '..l.ual V vauD1ULW U 4laliJlJl, %1IuIur, vYIul FtjF9iui a 1LsLUIULIL-LA-IIIA 111FLLMWiLMilaLIVI OUCLLI,Y IUXI LLIS reform program, is another move in the right direction. Timely implementation of proposed reforms will UV Lsey LU I vLvr1 FIvprivLat sAeLVI coLnUU,de -. 45. Regulation. Regulatory constraints include lack of predictability of laws and regulations related to customs, business, labor,.environment, and foreign investment, among others (see Table 6). The World Bank Business Environment Survey of 1995 had already identified the constraints caused by Pakistan's poor business climate (Private Sector Assessment 1996). Recent survey work suggests that conditions have worsened. Most regulatory roadblocks place a bigger burden on small firms than large ones, encouraging them to remain in the informal sector (see Table 6 and Charts 12 A&B). Because trade regulations protect many domestic producers, it is not surprising that few firms consider the trade regime to be especially burdensome. '40. wnat many ousinesses object to in ihc reguiatory framework is tne uncertainty: regulations are unpredictable, changing without advance notice or consultation, and interpretations are inconsistent. On average businesses report being informed in advance about changes in policies that affect them "seldom" or "sometimes," with 45 percent of enterprises reporting that they are "never" or "seldom" informed in advance. More than a third (37 percent) of the firms in the Pakistani sampie agreed to some extent that information on laws and regulations is not easy to obtain. 47. To improve the regulatory environment for businesses, the government recently established a Committee for Reforms in Regulatory, Legal and Policv Environment. Building on the govemment's ongoing regulatory reforms, the committee is mapping out a comprehensive program of regulatory reform includina the imnlementation stens needed to lower Costq of doing husiness and enhancing international competitiveness of industry in Pakistan. Because of the many sectors involved and the links between the center and the provinces in regulatorv affairs. coherent and effective reform will require significnnt coordination among a wide range of government departments and ministries. And it will require strong commitment ove.r time- Pakistan CountryAssistance Strategy Annex II P'age 15 of 23 w'ear Reguixiory Frxmlework ALojrsrcr 48. Infrastructure services also suffer from a weak regulatory framework that hurts the investment climate by inhibiting private investment in infrastructure, undermines the competitiveness of the economy, and exacerbates macroeconomic vulnerabilities. Since the mid-1990s, the government has pursued policies aimed at attracting private sector investment in infrastructure. However, progress has been impeded by the risks stemming from a weak and unstable regulatory framework for the efficient provision of infrastructure services. 49. Altnough Pakistan was one of the first developing countries to open its power sector to private investment in the mid-1990s and thereby eliminate much of the generation capacity shortage, its mishandiing of the independent power producers crisis of i997 snattered private sector confidence, particularly for foreign investors (see Box 1). Despite the new capacity, reliability and efficiency remain poor, the sector's financial position has deteriorated, and only a little more than half the population (about 55 percent) has access to electricity. 50. To reinvigorate the power sector reform program, the government, in a new policy statement in 199R8 reiterated its commitment to the establishment within 5-10 years of a comnetitive nnwer syste_m_ made up of autonomous, financially viable, and largely privately owned generation, transmission, and distribution entities. An indenendent remilatnrv agoencv (NFPRA) would oversee the sector. The firet phase of the program, now under implementation, focuses on the financial restructuring and nomnrafi7ntin1n of WAPT)A sand ICRF5C WAPDA ' new man2agerPent hnc tAren etPfle to innmrnvup ite efficiency and financial performance through a focus on loss reduction, improved billing and collections, nAn,redprpe of WAPTA 's finnnninl diffin,ltiP FPnar WFNCs aftpr cPvUr,-l v arc nf tr%Annf t ii,A-r t utility's operational and financial performance, the government has opted for fast-track privatization, with the help of t.he Asian DeVelopr.me.nt Bankl. 51. Even with these measures, many regulatory implementation issues remain. Tariff standards and rules are vague, and clear policy guidelines from the government on future competitive market structure are lacking. Private investors are unlikely to respond unless further progress is made on creating an enabling regulatory environment in the sector by strengthening the independence of the regulatory agency (NEPRA), reducing regulatory risks by moving toward formula-based and multiyear tariff setting mechanisms, and establishing a legal framework for safeguarding foreign investments. 52.. TiA .ece. years, I AisUx a already we.ak exi'.,1 balUa.ces wo.j illI patU. beas UIVe govermment was unable to interest the private sector in investing in naturalgas production wvhen demand JVLfor l ;..-..oreuiqVJi LU UJ1L'-oila.-.d ml'J-oil pr.ceF'JIIjJ1U, vv.eri;.g.ebllVV'L.4Lv, 'r,1aU11. I ul UI WIfor- 1115JLu vlU-r..pv.e al.saUIIVO11UL UULUUII-U,dobld LIVULI4oil .$1.Jbllior,I .JCm UIIIIUIL _ Lil,n 1999 to just under $3 billion in 2000, bringing home the macroeconomic importance of developing the cou,Uy's oU^11estL1c na11l4al gas ,-esources *I reduce -V-ulVrUa14V11ILy LU eALeH17lI b[IUUU. Unmvtainty about government policies has perpetuated the dominance of state enterprises in production, transmission, and UdiLUUiULIon at UIe coUsL Uo UIV bVsetULr' duVIUpIILenL. 53. While gas exploration was encouraged by promises of remunerative well-head Drices under the 1994 petroleum policy, production never materialized because the policy was not implemented. A weak regulatory framework and contract disputes discouraged further investments by the private sector. The main regulatory issues are low and administered prices at the retail level, involving heavy subsidies to fertilizer and households; low and administered well-head prices for existing state-owned nroducers- inability of new producers to enter into long-term contractual relationships with consumers because of the administered gas allocation system. Additionally, pricing arrangements for the state-owned tranmisssion and distribution companies discourage efficiency and cost savings and are inconsistent with the gas pricing regime. The institutional environment is also defective; the Ministrv of Petroleun and Natul Resources plays the conflicting roles of policymaker, regulator, and market participant. 54. The government has taken steps to redress some of these inadequacies, appointing experienced staff, for example, to the management and boards of state-owned companies. A new gas pricing framework adopted in March 2001 uses international oil prices in setting well-head prices; phases in Pakistan Country Assistance Strategy Annex ii Page 16 of 23 adjustments in consumer prices that reflect cost of service; phases out subsidies over a three-year period, except for existing fertilizer contractuai obligantons and for a lifeline rate for nousenolds; and establishes a Gas Regulatory Authority. The new fertilizer policy, however, is inconsistent with the new gas pricing framework in many respects. T-he latter continues a dual (feedstock and fuei) gas pricing regime thai sets domestic feedstock gas prices at parity wit-h Middle East prices (around $0.77/mmbtu) when Pakistan's opportunity cost of gas is considerably higher (around $1.76/mmbtu) and introduces a new feedstock subsidy for future plants with a 10-year price lock-in feature. 55. The inefficient transportsystem is another drag on Pakistan's competitiveness. The World Bank esti.martes th.at trAnznnrt weaknesses canse annual nmn etitiveneqs-based losses of some Rs.220 billion, or 6 percent of GDP. Similarly, inefficient public sector utilities impose a heavy fiscal burden on the economy tat a tim.e when more public investments in infinrstucture and human develonment (health. education) are badly needed. 56. The current government is addressing some of the key transport problems. The National Highway Authority, rather than focusing on constructing new roads, is emphasizing completing ongoing projects, upgrading existing corridors, and mobilizing resources for maintenance through tolls. The new management of Pakistan Railways cut losses in 2000 some 25 percent over the previous year by reducing excess staff, rehabilitating assets, and shedding non-core operations. The freight business has huge potential and could interest private sector investors if the right framework were in place, but Pakistan Railways is reluctant to give up its freight business, which cross-subsidizes its passenger services. Although Pakistan Railways had once indicated a willingness to consider letting private freight operators run their own trains in exchange for a track access fee, the government's draft National Transport Policy (March 2001) contains no mention of private- sector participation in any form. Furthermore, implementation has stalled on a government decision to gradually phase in private operating concessions at all ports. In aviation, the sale of shares of Pakistan International Airlines to strategic investors has been proposed, but substantial pre-privatization technical and financial restructuring would be needed to attract private sector interest. 57. Pakistan's rich and extensive mineral resources (zinc, copper, gold, iron ore, coal, marble, among OuterS) couid, unuer consevaiuve ass-bumlIpLiuls, puoeliuallHy coruibutetInUIual 101eilv111 VAni4i qu. ofmIV $1.7 billion, or 3 percent of GDP and tax revenues to central and local governments of $200 million a year. Development of mineral resources would also act a powerful en^.gLIne of growtu for SMEs and local community development in largely remote regions of the country, such as Balochistan. Today, however, mineraI exploitation contributes barely 0.4 percent of GDP despi e go-verrnment's in erest in developing the sector. 58. The mining industry is dominated by the public sector through federal and regional development corporations, with little foreign investor involvement. There is little or no modem exploration, and what little development has occurred has been restricted to simple technologies and has been poorly planned and managed, especially the environmental and social imnacts. The main reasons for the missed opportunities are the uncertainty created by the inadequacies of mining concession rules, which fail to meet international standards; lack of supporting infrastructure (such as railway freight); and perceptions of political and security risk associated with the geographic location of the bulk of mineral resources Ra1nchistan) 59. The federal government recently issued its National Minerals Policy, which approaches intemational standards and provides a basis for improving the business environment. It has also created an export processing zone arrangement for export-oriented mineral development (for example, Saindak prospect). These recent developments are steps in the right direction, but they remain untested. And more remains to be done to bring the mining regulatory structure up to international standards and make it attractive to foreign investors. Modemization of the regulatory framework rests largely with provincial governments but will also require further actions by the federal government (such as in foreign exchange and trade regulations) to provide the right incentives to private investors and to provincial governments to modemize. Pakistan Country Assistance Strategy Annex 11 Page 17 of23 Growth Has Been Unsustainable 60. The pattern of growth that unfolded during the 1990s proved so unsustainable that ushered in a maceroeconom.ic crisis lat'e in th,k deip,Anp iUlnmilnatin.g in the balance of payme^nt cnriki nf 1998. Ultimately, although quantitative analysis remains to be done, it appears that productivity growth fell A-r can^4.nllh,A .- ^.. +t.h 1 00A, n^1o,-n thntn+1,. nf mniv+th ,incmatiaiinnhlp Ac thp rnrpu,niic Air.liceinin tuanflntnt.annj J11 5s .nn. -.. sI--- -_ k- --- -.- …___._.. illustrates, the deteriorating business climate of the 1990s failed to provide the appropriate incentives to pri vate -L-- orr toap..lic u.n.i..o it, p rs. p.o1-ductivity 5 1,J-tf1.k 61. Macroeconomic stabilization is the first priority for reducing poverty and improving the business climate since it will reduce policy instability, the leading deterrent to business confidence. The stabilization program (fiscal adjustment, flexible exchange rate regime, and tight monetary policies) together with high indebtedness and limited extemal financing leave the central government with very little maneuvering room for encouraging private sector-led growth. In particular, the stabilization program imposes strict limits on the capacity to increase public (and private) investment in the economy. 62L.. zbprcially u11Udi uighL mac4role1onorl.l. conLst%r1a , .^a+LL0 palivaLe 0%,"1-MlU groWU1^ a pVeLL.YVLld reduction hinge on higher productivity growth and more efficient allocation of investment amd resources LlrlLUgIl U S bUULLLUGIuI4I1wU MlVIlb . 1l Wit.fl iiL i uhpl1UV-llU U1e lULV1LIVcr.t M11i . VVII GallU l.UALLdir. regulatory risks in the provision of infrastructure. Summary 63. To sum up, the diagnostic section elucidates that it is the govemment's failure to maintain a U1vU1-aUie Uir.vestr.er IUclinateI in 'U1 iecowuity Uiat hats consurailledi uL-UU owXu^L oi a d1ynanCL', %JJLIIFVLILIVV adIU sustainable private sector in the 1990s. To turn around the declining trend of investment and exports, the P.11 - 1 … .P- . - - - ..St~ L ii …- -- following key a of1reaui u erinl iuorPrIVabu nLo. bI1Ue auudresdu. * An inadequate incentive regime resulting from a combination of unfinished trade Policy reforms, continuing reliance on sectoral industrial policies, an unfriendly investment regime, poor tax administration, excessive regulatory burden, and a recurring pattem of policy instability. * Risky and weak regulatory framework in infrastructure, particularly, in the key growth- supporting sectors of gas, mining, power and telecom. * Weak financial nnlicies and institutions that discouragei svailahilitv nf finRnning for nrivt.te investment. * Risky macroeconomic environment. 64 Th.e crrent goverm ent of Pakls* is A tn isernern, the ir.ep+mstr. c1ira+e,t. country. While the vision for private sector-led development is well-articulated, the country is still in the process of 1.-10flhiatI.ning a Os.Lteg; to 1LAflfA the vision. 1g.311 thrft 0W.'v.3 ofthe key in1vesl,.,e.t cI;I.-LuLa issues are beginning to be tackled are apparent. The Government's Evolving PrivateSector Strategy 65. In its recent Interim Poverty Reduction Strategy Paper (I-PRSP) - a document that reflects the strctteg; papers prepared by-+he C_rt-! oet.m.tsrc c.r199zdth eo. rpe.e.e since then - the government sets out a sweeping and ambitious program of political, economic, and 1li.LLUutiiail ref sLzir.edIIo atL estabi10L1. SAIr iULUi aUfU1JA ofl Gr. o59per., r.UodeLrr, andU jp.-ospLe-us socieLy. LIt seeks to revive broad-based economic growth and eliminate poverty and social inequities through three &uy sutaterip ilU1u1LIVVb. a Piu;laglI wU IIIIJIUVV bIUliU2i.UIliUlULUUlIlLy GlIU rUVVllUlllUIL ViLUCLVullbS, a reform agenda in key sectors to foster broad-based growth; and a social and human developrnent agenda. 66. Getting the macroeconomic fundamentals right and improving government effectiveness through governance refonns and devolution are the government's first priorities. Fiscal consolidation is F,a.^tar -orysta.e.ate^Are Page 18 of 23 considered vital for curbing unfavorable public debt dynamics and boosting national savings in order to finanrce higher prirate in-vestent. Fiscal targets hinge o realizi.g the gover;_n__-t's p.roj +^A increases-a key weakness in past fiscal adjustment efforts. Implementation of the Central Board of U-.A M_t Pvve-J V -UPJ A eformsI.LJUWX IlDO ar.d3t fl*0mreasures 0, J bradr.+e------,A "I~ txbaseW . JO., flua.. el..I.LkIIIIat0 a..x..p^osi-... fL -Lnsfll L.~ rWil.Tflf11. A1 government's strategy also envisages rationalization of public expenditures to enable increased public U1VUIf'.iI..:nvesu.,.-44- 11in-+' 'u" "IM.0ALJ19 i,C&IU.IJJ .helth CUI%Aard-Aca^;n %J~Ll~k er JJA%JLII.y -. o;+. area0.LL OU01such 110 as UIALOLALUOU:.n-w-un."e L&L.U. 67. "Sustained pro-poor economic growth, based on robust private sector activity and enhanced investment, are the main elements of Pakistan's [I-PRSP]. Therefore, the essence of Pakistan's poverty reduction strategy is to maintain an environment conducive to trade and investment, including foreign investment" (I-PRSP, p. 23). Promoting private sector-led growth in agriculture, services, and export- oriented manufacturing will therefore be critical for accelerating growth and poverty reduction and reducing Pakistan's vulnerability to internal and external shocks. 00. 1 pap[;L aclLUVW1 Ugt;D Ul1.L U JULLWHI0Ul groWU [l1nb [ut Uc;tn UU UU iVW Lu V1IIp UIyll IWL generation and has neglected external markets, productivity growth, and international competitiveness. It atributes tne siow pace and ina-pprupriave ptLwrn 01 growmn to tne long neglect of te agriculitural sector and misguided policies in manufacturing, as well as an inadequate macroeconomic environment, insufficient investments in 'numan capital, and weak infrastructure. Accordingly, recognizing the need to spur greater export orientation and more labor-intensive growth, it envisions complementing trade and financial sector reiorms with reforms in Keys sectors nlKe agriculwre, maustry, mirasuructure, and information technology. 69. To revive private sector growth, sectoral committees will be constituted with all key stakeholders to develop recommendations for the textile, chemical, engineering goods, automobile, and edible oil sectors. In manufactured exports, the prime concern is to encourage the production of value-added nroducts in Pakistan's textile exports, mainly garments. As these are labor intensive, they also have high potential for employment generation. Within manufacturing, SMEs have been earmarked as holding the greatest notential for generating emnlovment and creating an exnort base in the countrv. The focus is on programs for developing managerial, technical, and informational support for SMEs. 70. in trade, the government intends to reduce maximum tariffs to 25 percent by 2003 and the number of tariff slabs to three, to rationalize duty drawback and export-financing schemes for exporters, and to comply with the WTO trade regime and standards. 71. Recognizng the. rave inefficiencies in tratnnnrt infra.vtru,-turo (rqilwn,vq roads, nin wv6atinn' and its role as a catalyst in economic growth, the government is reorienting infrastructure priorities. In the enDrau sectnr inihttv.eq have focus-ed nn de-reeiilatiinn lihprali7ntinn nriVati7Atinin , iadorrter use of indigenous resources and on a shift from thermal and fumace oil to hydroelectric, gas, and coal. Attno.tin fhrpion invep.tment nid enteri.no intn new alliainpc wu*ith inter,niotinr2 nilo i nedgas cor. pnnipe are important goals. The oil and gas sector has earned priority because of its potential role in reducing macroecononnic nivl-nerability by providing a depe.ndble domestic source of emrgy to replace flte hii"gh foreign exchange cost of imported oil. A new investment policy for offshore oil and gas exploration was - u- JTor- on.-aml1 on"A t0- -nu,.nrnnntlono tn nl-;r_t fnrni m m .,+'I,1fl *.. .-1 A - - - -- V- F -W . f . tJSM-lV0.0IJRfl0.1 IMfl f...v -l. - .. v ., 6 *-t -. us k 'o -&lAWItI downstream sectors. Marble and gem industries will be encouraged near the point of deposit, to add ,VzClue +- c-,er,ttc, l -o -- AA-Azdeprod..cts. 72. Although the I-PRSP provides an impressive vision for private sector development (PSD), the document falls short of clarifying a PSD strategy that translates this vision into a comprehensive and cohesive road-map ahead. 73. The Bank has tried to assist the government in the process of formulating its private sector 0UaLC.y. Lhe pi,-cess of WVLLLUAr1 WiLUL UII. r1JVVL,UI0.1IL LI1 dveIop:,JUin Uhe: LPDgidIUa OIJ 1h4a bUser.gUhe.-U in the past eighteen months. PakistanCountry Assistance Strategy Annex LI Page 19 of 23 The World Bank Group's Private Sector Assistance Strategy 74. The World Bank Group (WBG) private sector strategy aims to support the Government of Pakistan (GOP) in encouraging dynamic private sector-led growth that can reduce poverty more effectively, while reducing macroeconomic vulnerabilities, and fostering productivity growth and efficient resource allocation. Based on WBG's diagnostic work, this would be achieved by supporting the government in pursuing the following outcomes: * Establishing a more neutral incentive regime that significantly reduces the appareni bias against exports, labor-intensive industries and SMEs, and productivity growth in key industries; key elements of this outcome include: furtner trade liberaiization; policy adjustments to facilitate the reallocation of resources from less to more efficient industries and firms, and restructuring of large scale manufacturing industries. * creating an investrnent friendly regrime that is attractive to fnreign and tinTnestic investnrs; key elements include: transparent trade policy formulation, deregulation, tax administration reform nind nnlicyv tnhilitv * Strengthening the financial sector to mobilize resources for private investment; lkey elements include: commercial bank privatization, development of capital markets, and expansion of commercial microfinance. 75. While the outcomes being sought are clear, the Bank still needs to come to an agreement with the 4 gov,Zernmene-tt on a shared pnmnr. .,,ehixre PSD agen-da. Alon'whs,A.lr.aA, +LiTinthelasI. eigh'.eer- +l 'whe+of-- working with the government, through continued dialogue and analytical work, has been enhanced. This process haWs inclueAd. * Analytical inputs: The Bank has provided inputs to policy-making through sectoral notes on fertilizer and cement industries, an Investment Climate note by World Bank's Chief Economist, and an SME Policy note based on a country-wide survey; IFC has provided advice on financial market development, including reviews of insurance and housing finance. * Capacity building: Given that thre government has been responsive to analytical inputs and dialogue, the Bank has followed on its support through capacity building efforts. Amongst other things, this has included: (i) an iTJF grant to push forward the dereguiation agenda through the recently established Committee for Reforns in Regulatory and Legal Policy Environment; (ii) an LDF grant to support the government's championing of tax administration reforms through the establishment of a Task Force on Tax Administration Reforms in 2000. Based on the recommendations of the Task Force, a program of reform was approved in November 2001 by the President; the Bank is providing a Project Preparation Facility (PPF) to implement amd prepare a project for restructuring of tax administration, along the lines recommended by the Task Force; and (iii) in response to a government request, a three-day WTO training workshop was organized by the WBG, in joint sponsorship with the Ministry of Commerce. Aside from disseminating information regarding WTO, its requirements and implications, it helped to build capacity within the government. *tS.&0& 6 Ra,;s.r.a&,varene A.,I.Bea1 as LLUb . wo~r.k. tAo assist010 L11 5V..V -&1tU1LL ;r. %t.A.AULLLUULU1 jJIIoILY reforms areas -- the on-going Investment Climate Study (ICS) to help identify the key bottlenecks ;.1 ;.vestnm. A v,1 .. ate ;n Pakis. OL, io an1 exa..ple of one suchIL U1LI.4a.LLv-. I 11B- iNUsI LULUU'L4UI.gdl this study in joint collaboration with the Small and Medium Enterprise Development Authority 01VIL,DrXJ DU asO Lt he'Ip UUIIU ctap4aLc.y WiUILiI UI, LUU,UUy LU U1UVILa&V ULiU Labk Ur a regUlr ubass. * Desk-based review services: In response to government's reauest, the Bank has prcvided timely desk-based review of its new Competition Law which may soon replace the antiquated Monopolies and Restrictive Trade Practices Ordinance. 1970. Recently, an informal review was also provided for the proposed PharmaceuticalPolicy. In both cases, the Bank was able to draw on exnertise within the networks. Pakistan Country Assistance Strategy Annex II Page 20 nf 23 76. To provide continuing support to COP for its evolvi.ng PS1 .strategyq the World Bank Cironun will focus on four key areas, selected on the basis of WBG's diagnostic and their impact on growth and poverty reduction, and of the Group's comparative advantage: * Supporting economy-wide policy and institutional reforms that improve the overall incentive regime and investment climate, and cataly ing private investment in response to these improvements; * Supporting the establishment of regulatory frameworks in the key growth-supporting sectors of gas, mining, power and telecom, and catalyzing private investments under these new frameworks; * Building the knowledge base on constraints to private sector development; and * Supporting the further development of thefinancial sector to improve availability of financing for private investment. 77. In alignment to the outcomes being sought, support by the WBG will be provided in the form of following instruments: * Policy dialogue and adjustment lending to suDDort the imDlementation of macroeconomic and sectoral reforms aimed at improving the investtnent climate and overall incentive regime; * Advisory work to support institutionai and reguiatory reform, inciuding privatization; * Analytical work to improve understanding of constraints to Drivate investment and Droductivitv growth, and identify institutional, policy and regulatory frameworks which will encourage private investment and productivity growth; * Equity and loan investments and guarantees to mobilize private investment in reformed sectors 78. The World Bank will take the lead in analytical and advisory work, drawing on the perspectives of IFC and MIGA, and in supporting GOP reforms. IFC will invest equity and loan finance, and make partial credit guarantees; MIGA will offer political risk insurance through its guarantee program. The matrix below summarizes the Private Sector Strategy and World Bank Group interventions in support of them. [| I World Bank IFC MIGA IPolicy Analysis & Dialogue& Economy- ______I Adi. | TA Investment Advisory G'tees v>wuuvuu,y- sexAaVaSory Adj wide Mir. |.|lll Tr_ Id &_, Mg. I .N- I growth Power &... sectors Tplpi'nrnc Financial Banks l 1 | * | * __l _ l | sector I NBFIs I I Improving the Investment Climate 79. Tne Worid Bank will support economy-wide policy and regulatory reforms through balance of payment operations and technical assistance in areas such as tax administration by the Central Board of Revenue and deregulation of industriai, business, and labor regulations. Tnis dovetails with the World Bank's program of support for strengthening government effectiveness. Strengthening public institutions Pakistan Country Assistance Strategy Annex II Page 21 of 23 like the CBR both imDroves the accountabilitv and efficiencv of the Dublic sector and improves the investment climate for the public sector. 80. Consistent with the Bank's earlier diagnostic, priority will be given to elements of the trade regime that discourage export orientation and participation in global production sharing, productivity growth, and international competitiveness. Actions would include timely implementation of scheduled tariff reforms, the phasing out of regulatory duties that still provide protection well beyond the maximum tariff rates, the elimination of SROs that distort resource allocation or undermine business conficlence, and reforms of the tax administration to eliminate the shortfalls of general sales tax refunds and duty drawbacks to exporters. External trade reforms would need to be complemented by selected economy- wide (e.g., labor, business) or sector-specific regulatory reforms to relieve constraints that are holding back private investment (domestic and foreign) and productivity growth. 81. The Bank will continue to encourage the federal and provincial governments to pursue the trade liberalization and modernization of industrial, business and labor regulations that are already under way. A Committee for Reforms in Regulatory and Legal Policy Environment was recently established (January 2002) to review commercial and labor regulations with a view to eliminate those that constrain competition and/or impose unnecessary compliance costs. A World Bank team has started to support the Committee and will work with the government in identifying policy measures in these areas that could be supported by adjustment lending. 82. At the provincial level, the Bank's iialogue and proposea assistance to Sminh ana INWIw', which sought Bank's assistance, will also focus on reforms that fall within the provinces' purview (such as labor and industrial regulations) to improve the investment climate. Key Growth Sectors 0.3. I11U, VVUILU BzJd.aN JIUUJJ Will Ub IVIeleV- i LlllVls Vf 4LUUd UIVZi.Lr,sUiLctal poll.cy aLdU regulatory issues, and promoting private investment. Priority will go to sectors with significant impact on ecoiiuiiu,. grWiLL zUa 41%d al. oJf llL i.e. gas, mi.Unin, povwezv l sec.O. 1 4 QA T-o prrity wll on tn nat3al gase whl,ich of'fmrc t.he largest -npnoQl fnr rpAi.r.g n.croecnnorn, vulnerabilities, attracting FDI, restoring private sector confidence, and encouraging efficient substitution of dom,.esti;c resowces for inm.ports. Cornnsise-ent .t thA atue. PnVe uivcsnn thqe nhienti,.oeIll h; tirnAl,, . _d - .... '.....-.'..,-I.-- 'J-- _..-- ie and consistent implementation of regulatory reforms to create an environment for accelerated developme-nt of gas reserves The str-tegy will be to surppnrt implementatiion of the planned p.rogram. of retail and producer price adjustments, including bringing feedstock gas prices to the fertilizer industry in line with prrices to th.e rest of the indulstrial sec-tor and rerflctin-g any fertilizer sibsidiy in the budgert. The strategy includes privatization of PPL, restructuring of transmission and distribution companies, and liberalizatinn of transmissinn under a common carrier reaime. Thess reforms wrill be supponted hy the gradual dismantling of the administered gas allocation system and implementation of a new regulatory reoim- for tranqmiqqinn that nermits both contractino between larve nartieq anti the intrndiitiiinn nf new tariffs. The World Bank would concentrate on advice and financial support to expedite introduction of an appronriatei fully onerating regulatorv cframework. LFC would consider financing annronriate business opportunities to increase the country's gas reserves by supporting early development of newly discovered fields and imnrovement of the gas transmission infrastructure. 85. In Detroleum, the Bank Group will continue to supDort the government's reform guided by the important program of analytical work carried out in FY01. Over the next three years the focus will be on advancing the implementation of the deregulatory reforms to strengthen competition in the sector and assisting with the privatization of the Oil and Gas Development Corporation Ltd and Pakistan State Oil Ltd expected to take place by March 2003. Pakistan Country Assistance Strategy Annex 11 Page 22 of 23 86. The World Bank Group will accord greater priority than in the past to development of the mining sector, because of its potential importance in improving macroeconomic stability through external and fiscal accounts and broadening access to growth and employment opportunities geographically and socially. While the expected benefits will materialize beyond the planning horizon of this CAS, the immediate objective of the 'Worid Bank Group will be to support establishment of a modern reguiatory environment for mining that enhances Pakistan's competitive position in attracting private investment and encourages environmental and social sustainability. Ine strategy will focus on supporting the federal and provincial governments in their elaboration and implementation of a modern regulatory framework and improving their capacity to mranage the instability of govern-ent revenues associated wi't extractive industries. The Bank will respond to client "pull" from both central and provincial govemments (such as ULe LUUMIL UVI1I 1U frULUIII , IV S IUII GJUVVII1UIIdh I1L), fUo asilbante ill rfolurring uhe luegiiuLi.egugiiawy aiIU fisl frameworks and developing institutional capacity to facilitate and promote environmentally and socially rUeso s 11VUMl ,nj 111%,it.j%AVl LILf,, U LVVVito tP.tILUUU1 lUL5Udi1 iUU'lUlR lul ilUil.dib.OUL,-tIt Q87. 'T.he B -1 rbG _ .. ,II c.;nu-wi!! Atsdeep erggr-en . h pwrscor h oe sector reforms will continue to be supported through policy dialogue and adjustment lending which, by .trength - n- r----r- atoilih, an.d rsA,,nmg expo ncdr i expected '.o ;rr.p:o.r..hLr e .teim.t...r..ent climate for private investment, particularly for the privatization of the distribution companies. In aAAitinni thfB Rin. (rrnim will imn nnt fm nnp,allw tlfrn--,rh n,onrinnn-otw in.rta- t 1-Ainn ih- ---i -~~G. s -p rt*^ _arr ..... J Vb-- r- 6- --*-6 privatization of the distribution companies. In particular, IFC will aim to mobilize private investment for the power set'tnr particularly for the privati7fA Arih:ulinn cmor.par.ies. LTC will also continue to act as adviser to the government on the privatization of Faisalabad Electric Supply Company (FESCO). 88. Since improved connectivity is essential for growth, including that of the IT industry, and for the poor to benefit from technological change, the Bank CGroun will continue its dialogue with the government on an adequate regulatory framework to attract private investment. In FY02, MIGA supported a software development project in Karachi by Jananese investors and is looking at a telecom project in FY03. IFC and MIGA will seek opportunities to support the growth of the 1T industry. Building the Knowledge Base 89. In order to underpin this assistance strategy and the policy dialogue, the World Bank Group will need to build its knowledge base about the main impediments to an improved investment climate. While the broad impediments have been identified --trade and investment regime, industrial policies, tax administration, business and labor regulations-- the precise microeconomic distortions of the investment climate and incentive regime and their relative impact on productivity growth, resource allocation, and private investment need to be identified and quantified more precisely. For example, more needs to be known about the impact of the current and prospective (2003) trade regime on private sector incentives in order to judge the effectiveness of trade reforms in encouraging stronger and more export-oriented growth. 90. In documenting these domestic constraints, priority will be given to industries with the potential to contribute significantly to macroeconomic stability, growth and employment. The textiles and clothing industry is an obvious candidate. With close to 80 percent of merchandise export earnings, the industry approaches the imminent phase-out of the Multi-Fiber Arrangement in need of crucial domestic reforms that can put it back in competition after a decade of losing ground (see Table 3). Another candidate might be the sugar industry. Current sugar policies that fuel the huge sugar cycles that destabilize manufacturing and agricuitural growth also retard productivity growth in the mills and on the farm and discourage more efficient use of scarce water resources. 91. In addition to an informal private sector assessment jointly prepared by the IFC and the World Bank in FYr , and an SM1E Policy ivote describing tne key features of Sivus ana their constraints (emerging from a business survey also conducted in FY01), the program of analytical work includes: (i) a Pakistan Country Assistance Strategy Annex 11 Page 23 of 23 Development Policy Review (to be completed in FY02) which will provide thie Bank's assessmnent of the adequacy of the current development policy agenda to achieve rapid growth and poverty reduction; (ii) a 'Trade Policy note (to be completed in FY04); (iii) an tiuiI Administrative Barriers Reform study to be conducted by FIAS; and (iv) an Investment Climate and Economic Performance Study (to be completed in FY03). 1Tne latter aims to relate key aspects of the investment climate tbasic economic inuastructure, and regulatory and governance frameworks) with the performance and productivity of private manufacturing firms, small and large. To build domestic capacity for tius analyticai and monimring work in the future, the study is being carried out jointly with SMEDA. Reforming the Banking and FinancialSystem 92. In response to the financial crisis of 1996, implementation of the government's banking and J.JahcLial- -t-r.I st- ae~5 sfd Ut eaWl..est 1997 and is well ad-vm-.ed. Thtt-me is '--o--d a5r,L .4tt between the government and the Bank on the vision for Palistan's financial system - a market-oriented, ,.redonA nar+.tly -ratel,y on.eA bank1- an.d.in-inal sysftw. f+lit -orftes,.d a raenilnfnr,-+rnn- framework, is supported by an effective legal and judicial system, mobilizes the capital needed to finance rsniA n-nr-fa e.nnnr nrnn,fl, snA .nfu'o oaa fn ...iol Cannnaa ho, fh- nnn- ('nnan,ntlar fls. Bank Group and ADB have been actively supporting implementation of the strategy with adjustment lending, restructuring and pi-ivatzation operations, technical assistance to strengthen t'he fir.ncial infrastructure, including the payments system, credit information and anti-money laundlering, and eyxpnding the micro-finance te-rtnor Mudh progress has been mAde in srengthening pnrdential regulations and supervision for banks and the capital market, and this needs to be extended.. Priorities inchlde adherincg to the nrivatimation schedule far the NCR- closinty mnst of the TlFT.- imnrnvino the legal and judicial system for financial contract dispute resolution, and achieving full market integration by nhasing out snecial credit programs and closinLg tax and regulatory arbitrage onnortunitieq 93. IFC will supDort the emergence of strong Drivate commercial banks and Non-Bank Financial Institutions through selective investments. The IFC will also support the development of new financial products to better meet the needs of the private sector (e.g.. long-term fmance for infrastructure, access to finance in agriculture/agribusiness, guarantees for SME finance). Such products should also expand access to financial services to new clients (e.g. the bankable poor through micro-finance institutions or leasing institutions) and to under-served SM[Es. Pakistan CountryAssistance Strategy Annex IIn P age I °S I ANNEX m: BANK PARTNERSHIPS WITH BILATERAL AND MULTILATERAL AGENCIES Gender | The Interagency Gender and Development Group, comprising all major donors, is supporting vanous activities to nromote gender eciuitv in Pakistan. The Bankl the govermment and maior bilaterals and multilaterals, including all UN agencies, are also working together to strengthen the govermment's analytic capacity on gender sensitive policies. Specific projects include: "Women's Political Participation and Gender Sensitive Strategy", a UNDP- Gender Equality Umbrella Project; "Family Protection" and "Gender Equality Project" by DFID; and "Gender Reform" TA grant by AsDB. Power rower Reforms are supported by the Bank and other donors, particuiarly AsDB and iapan. ixne Reforms Ghazi Barotha Hydropower project is one such example which is supported by a number of do_nor ;-ncA;-ing D-1,B^AsB n T.TB!C , IDB,T B!B.T A!o-2er is0- te sl_ii among various donors, with the Bank supporting WAPDA restructuring while AsDB taking on KESC reforms. Oil and Gas The Bank, CIDA and AsDB are supporting policy reforms through TA and Grant funds. [Provincial The Bank is supporting the economic reform programs of the Sindh and NWFP provinces while Reforms AsDB is assisting Punjab on publc resource management. Devolution A number of development partners are supporting the Government's devolution program. I-ee |UNDP is leading the effort while the Bank is focusing on areas where it has a comparative I..J_+_1_:__ -- .A _ A -:1A_ Av._. A- TsrIk - - adv=wautge sUacuG aIs,UGUII ~~~~~I--:--A asGr l u IQGuu OLP.,QU OVI VIVU%.si UVU-y. flu r- 5auL r already been provided to the National Reconstruction Bureau. Child Labor The Govermment of Pakistan has initiated over the past decade a mnajor campaign to meet the challenge of child labor, including enactment of key legislation prohibiting child labor in hazardous occupations and bonded labor, joining the ILO Program for Elimination of Child Labor (IPEC). The Bank is collaborating with ILO in building partnerships with the private sector and NGOs in tackling the child labor issues. Poverty Iiie ksank, along with other major donors, particuLarly AsDB and DFu-I is supporting key aspects Reduction of the government's Poverty Reduction Strategy (PRS). A Workshop was recently organized ^rriw~ ~ ~z 6spp.DDzd U on develop:1,u 111CICa+.or to ITMeu E11pe,1..11,11ce VI soc"ia services delivery within the PRSP framework. [Rural Water I The Water and Sanitation Program (WSP) is supported by 15 bilateral and multilateral donors, 1 SuoPpl I including the Bank. [sAgricultureand { The Bank and other major donors, including AsDB and JBIC, have pooled resources to support] Irrigation policy reforms and investments in irrigation and drainage under the Government's National Drainage Program. The Bank and the Dutch government are supporting community irrigation programs in Balocistan. Th e Bank is also working witn tne w wI on forestry and bio-diversity. 1JUl15 WIa 1il~ BnDUI ille InnuGLmLuun w.ui uuI UUIeldU, incuduing DrFLD, L'.IVV, has proviueu bUppO LU |Development | provincial education and health projects. Future support by the Bank will take the form of nrtgranmaticII umnport for dictriet deliverv nf hnth pAnn^tinn anti henlth qervi.ec - Health I To combat HIV/AIDS. TB, we have collaborated with UNAIDS, UN Drug Control Program at 1 -the policy and planning level. Pakistan Countrv Assistance Strateeg Annex IV Page I of 4 ANNEX IV: MILLENNIUM DEVELOPMENT GOALS (MDGs), TARGETS AND SELECT OUTPUT INDICATORS FOR PAKISTAN 1. This note summarizes the long term indicators consistent with the MDGs for Pakistan, the baseline data issues, and the output indicators selected as part of the monitoring and evaluation exercise for Pakistan's PRSP. The I-PRSP for Pakistan provides an elaborate M&E framework, outlining the various issues surrounding the choice of indicators and the related sources of data and measurement (see I-PRSP document, Annex 1, final version Dec 4t" 2001). This note will also describe the progress made so far on these technical issues as well as on the process of reaching a consensus on these and the institutional accountabilities for this exercise. Tracking Progresstowards Millennium Development Goals 2. Table 1 below summarizes the Millennium Development Goals (MDGs), and the long term indicators that will be tracked at the national level, along with the sources for these indicators. The long- term indicators proposed to measure progress towards the MDGs are readily available from existing databases. A few outstanding issues however remain, w'hich require timely resolution. > fle challenge, however, is to reconcile the baselines in instances (e.g. gross enroliment rates) where more than one source of information exist. The PRSP Implementation Committee under the PRSP Secretariat (Ministry of Finance), in consultation with the relevant ministries and the Federal Bureau of Statistics, would need to identify the source to be used for baseline and tracking of sucn indicators. in tne interim, we have recommended the Pakistan, integrated Household Survey (PIHS 1998-99) as the preferred source, since it is a representative household survey t'hat is regularly fielca. iLms wiii aiso ensure ithat capacity-building can be focused on the agency currently accountable for the PIHS. > Pakistan does not have a national poverty line. The choice of a poverty line has been the source Us IIIUtII UeUUMV UVVI Ul; yVNI15. 114IaUMU prugrt;b wWrUUb Uf 1VILJ.lvlb IllrXb5llaltb tt uia Iun l a national poverty line that can be consistently updated over time to measure progress in reducing povlL,y. rA reglional WVLAZ1LUji spJUIiouirU uy UIIV vYvOIIU Basl& 1 Jd.e1Lup1V1s'I41 -wiu Institute of Development Economics has helped in building consensus which should result in the I Lic. ,o1 oi ar. ofJ1c1l jvrL.LVM-FG y l;Lne. Ti, L PRSP.J1I1FjJlemIeat CLorUL,,r,,iteLULL lb er,co.U4igedU tU piay a facilitating role in expediting this decision. > The indicators would also need to be disaggregated at the provincial level. Setting baselines for p,-o,VLL.1al ulr.dicatr, W;.a are c Iste.-.tW WIUI ULWOL. Uo UIV. una.IVIal iul-.dators, 10 0U4d48igL1LW&aLU since the data sources for the most part can be disaggregated at the provincial level. However, tag -sb Ar-n.c-,;i! -.- A to bke worked out wi+.k. p-ovincial. gOv....MCnAts .. sli process is currently being initiated by the PRSP Secretariat. Ultimately these targets are endogenous to --.plem.en--aio. of __. eol ;v plar. De_,ou_.;o ot.e itc e,e rdblo scr.. underway, for which the fiscal framework is yet to be full implemented. Therefore the exercise of Settidn"g redible targets for indivi:dual provinAc c or.! e when the devolution process has been completed. In the interim, it would be best to focus on the national levels and arrive at a vrAcnliifinin fnr thnp int.tinnsal. inAinntnrc ir. Pa1r;etan. 'The PIHS closely follows the model of the Living Standards Measurement Surveys that are fielded regularly in a number of developing countries. PakistanCounty Assistance Strategy Annex IV Page 2 of4 3. Given the issues raised above, particularly the ones outlined in the first two bullets, the targets should be seen as indicative. Moreover, for some indintnrc thtar mnnitnr2hle (smuh ns the nnes in Table 2), targets are not meaningful. Tracking progress towards MDGs, which comprise of internationally set goals, will be challenginga where the firt.t step will he to a how realistic suich goals, are in the specific context of Pakistan. The Bank is facilitating this process in Palcistan, using SIMSIP (a simulation software nackage develoned by the Bank) to assess how realistic these targets are. in conjunction with the exercise of costing the targets. The regional workshop made a beginning in this direction. by conducting training sessions for representatives for all countries in the reffion. including those from Pakistan. Poverty Monitoring and Tracking of Output Indicators 4. In order to measure progress towards the MDGs, it will be necessary to track some output indicators that change over short spans of time, are leading indicators for the goals, and provide feedback to policymakers about the results of policy initiatives on the ground. Such indicators should be monitored regularly - annually or semi-annually - so that the findings can inform policymakers on a continuous basis. Table 2 provides a list of such output indicators for Pakistan. This list has evolved from the monitoring framework provided by the I-PRSP, further refined at the workshop held by the PRSP Secretariat to bring about consensus among provincial and district authorities on the selection of indicators. Implementation of this monitoring mechanisms will require finalization of the set of indicators, setting up mechanisms to collect the information, and building capacity for rapid analysis of the data gathered. 5. The process outlined above entails the following steps in the context of Pakistan: > Evaluation of existing monitoring systems, like the management information systems for education and health (NEMIS and HMIS), identifying bottlenecks and possible' areas of improvement. This is likely to be completed by May 1, 2002 with the help of DFID consultants. > Creating a database to measure the selected output indicators; this involves identifying new data sources, as well as developing a survey-based tool that is easy to administer, implement, and covers a large sample that is representative at the district level. Most importantly, the analysis of the data must be completed with a quick turnaround time, to have maximum impact onl policy formulation. > In the context of Pakistan, given the criticality of improving service delivery, the survey tool should collect information at the facility level, as well as the household level. This, when triangulated with the expenditure tracking exercise (which is part of the proposed monitoring frameworkt), will provide a quick and effective diagnostic of progress in education, health and targeting efficiency of the major poverty programs. 6. We expect the full implementation of this monitoring exercise to be completed by the end of this calendar year. A critical outstanding issue is to clarify the institutional arrangements and accountability for implementing the monitoring exercise. Ongoing dialogue is expected to expedite this process. In the context of Pakistan, institutional accountability and the roles and responsibilities of CIPRID and PRSP Secretariat would need to be specified. 34 Pakistan Country Assistance Strategy o nflrhLUFUCWICHL oL lU A^LIU1-bYWil1aic tachiV ar.dU 1L%.aldUh WVJLAA-1 cor.acts, c1AUV.G V. absenteeism; and implementation of performance-based remuneration and teacher training programs. 120. Correspondingly, Bank iending to the provinces will be g-uided uy tlhe follow-ing exit crIteria: * Reappearance of substantial short-term borrowing to finance tie budget deficit. * Expansion of public sector contingent liabilities (through off-budget financing of public enterprises and other entities). * Deterioration or reversal of reforms to improve social service and governance improvements. D. Non Lending Services 121. The Bank Group non-lending services will include the completion of a Poverty Assessment Report (FY02), a Development Policy Review (FY02), a Financial Sector Assessment (FY03), CFAA (FY03), a National Public Expenditure Review (FY03), Provincial Economic Reports (FY03-05), and a Gender Assessment Review (FY04). Other important analytical work in FY03 will include a policy note to launch the policy dialogue with the new government after October 2002, an Investment Climate Review, an Oil and Gas Sector Report, a Rural Development Policy Review (FY03), and a Water Resource Management study (FY04). Support to the implementation of the PRSP will also be part of the Bank Group's non lending services (see Table 7). The analytical work will underpin the B3ank Group's support to caDacity building and will be reinforced by a series of leaming and knowledge dissemination programs to be delivered by WBI, in collaboration with Pakistani think taiks and academic iinstitutions. Table 7: Components of Non-Lending Tasks and AAA for Pakistan, FY01-FYO5 Current CAS Ne-t CAS l r yol xvTV r lUO r IV-# X rru e _5 CPARIP I DPR IPER ||Poveiy Assessment Punjab PER Poverty Assessment CFAAI DPR CFAAI CPAPII Provincial Finance Review Environmental Inv. Climate Review Poverty Monitoring Private Sector Assessment 1DF Paper e--rsectorAsessmnent * tPovetyMonitoring Poverty Monitoring Rural Development FSAP Policy Review .l A r.i.. ______Social Risk Assessment Ptmjab PER I JSA Provincial Economic 1Provincial Economic Provinicial Economic | SnE c Reform NWFPEcoReform _ Policy Note for New GOP WWater Resource Mgmt Policy Review CAS Progress Report CAS 1CAS Progress Report CAS CAS lrre Report POlicY Nnt. On SME I Support for I-PRSP I Sunnort for PRSP D Sup.ort for PRSP I Supnnrt for PRSP |Deveopment Forum Papers | Development Forums | Development Forums | DevelopmentForums [Devdlpment Forums Pakistan Country Assistance Strategy Annex IV Page 3 of 4 Table 1: Tracking Progress Towards MDGs MDGs Long Term Indicators Baseline (1998-99)' Medium-Tlerm Targets (20) r(Outcome) Economic Well-being:Econonuc wei-beilig:> Pverty > gap Pvcr^.Ay C0rato, hcco ...... t> 32.6%. > _age_etbe d-eternuAnmd reducing the proporfion of > Poverty gap ratio > 7.0 poor livinR in extreme > Gini index of consumption > 30.6 poverty by at least half by > Percentage of rural population with > 61.4% 2015 no ownership of agricultural land Social development & Empowerment of Women I Universal primary > Gross primary enrollment > 71% > 80% education by 2015 > Net primary enrollment > Literacy rate (i 5 and above) > 05% (urban; 66.5%, rural: 45.2%) > 42.5% (urban: 63%. rural: > 59% 34%) Reduce gender disparity in > Difference in primary enrollments i 13.6 % (net enroliment); > i 2% gap (Gross primary education by 2005 (net and gross) between girls and 18% (gross enrollment) enrollments:- Male: 87%, boyvs Ifemale: 750/6) > Differences in literacy rates between > 30.8% (male: 58%, > 21 % (Male: 70%, female: males and females female: 27.2%) 49%) Increase participation of > Proportion of seats held by women 11> Available after national -,;,omen winpoi I _in nnationa!a n,rir-nmp,t I e1ections in October, 2002 decision-making Reduce infant and child > Infant mortality rate > 90 per 1000 live births > 65 per 1000 live births (below age5) mortality (127 in 1991) > Tobe determined Ira.tes by 132 Of 1el90-9 1 > U-der=5 child mAort_lihy.t-le > !!6per!000!ieb mfis rate, by 2015 > Immunization rate (% of children > 49% > 62% 12-23 months old that are fully immunized) [Reduce maternalmortality I > Bhsattende 1.> d 19, > 25% by 4between 1990 and personnel (doctor/nurse/ Lady 2015 Health Visitor) |> Percentage of pregnant women > 31% > 500% using prenatal care Provide access to > Contraceptive prevalence rate > 28% (PRHFPS); 19.5% > 39°/, [reproductive health services I through primary health care system for all individuals of [appropriate ages by 2015 ni-n.rovements in Other > Population with access to safe > To be filled Indicators drinking water > Total fertility rate > Life expectancy at birth > 4.5; 4.8 (t'RHr-Sj) I 4.1 > % of TB cure rate > To be filled I_> Unknown _ 2 Data source for all long-term indicators, unless otherwise specified, are from PIHS (1998-99). Other sources are: Pakistan Renroductive Health and Family Planning Survey (PRHFPS) 2000-01. PakistanCountry Assistance Strategy Annex IV Page 4 of 4 Table 2: Output Indicators for Poverty Monitoring (measured annually) 1Access > Utilization Rates disaggregated by BHU/RHC and by curative and preventive care: Source: HINUS > | % of population covered by LHWs ; Source: LHW/MlS Quality IIk % of FLCF (BHUs/RHCs) that were out of stock of 5 essential drugs, Leading indicators to monitor or contraceptives for period of more than one month each in a given Ihealth out.com.n,es I yeaL; Sourc;e: X3UVJS I > % of FLCF (BHUs/RHCs) with doctors and/or female paramedic present; Souree: Pronosed Annnual FaciIty Su.rvey >x Number of female health providers trained in midwifery; Source:Ministry/Departments of Health | % of children aged 12-23 months fully immunized against DPT-3 Source: Annual Surveys conducted by independent agencies under the GAVI initiative t Number of functional schools: facilities with physical infrastructure - at least a b- 8 , .oet,Q . VVate Source: NEMIS Percentage of teachers with in-service training Source: Proposed Annual Facility Survey; NEMIS Leading indicators to monitor Quality of schooling education outcomes > Availability of textbooks, blackboard and chalk, student-teacher ratio; Source: NEMIS > Teacher absenteeism: teacher present or not at the time of survey; "U-UrI rIopuseu iuUuiarn uieiltySurvyy | |______Proposed Annual Household Survey J Social Protection/Safety Net Programs ) ' Employment generated througn public works programs under Knushal Pakistan Program; Source: Proposed Annual Household Survey Leadig idicatorsLeading~~indiator~ to ~~ monitormonitor^ie > Number of borrowers andof7Z size of credity.yp under fassnc PPAF and Khushaliru anti-poverty programs Bank Drograms; Source: Proposed Annual Household Survey > Number and composition of small infrastructure projects and training supported by microcredit > Number of beneficiaries by province (rural/urban) of the Food Support | ______|I Program; Source: PakistanBait-ul-Maal l Pakistan Gguntry Assist,ance Strategv Annex V Page I of 6 ANNEX V- 'AKISTAN COUNTRY PROGRAM MAT]RIX (FY03-05) external and savings to finance nev * ReducEd Fiscal DefIcitiGDP *SC FO-5 rvne iclsaiiaii dornestic pijblic investment aniJ curb . Sustainable CUrTent acountnt * Provincial space restored despitiegotP uinavestcnt * deficits Adjustment s Improved Public debt are both quite unfavhrable pubcc debt defcits forms Creits sector management large andrhne uodynaniics. This hinge * Continued tight management (FIY03-05) there are still upon the of external borrowing concerns over the implementationi of CBR o* DPR (FY05) fragility of the reform, and measures * Sound finandal position of Pove external position to broaden the tax WAPDA Assessment andl future growth base, including (IY05) prospects. The agricultural income, and September 11 eliminate tax * PFublic Expenditure shock has also exemptions. The Review (FY03) increased the risks strategly also seeks to * Annual Public to the balance of re-orient expenditures Investment payment position by towards the scdal Reviews (FY03-15) maldng more sectonr by reducing the * Trade Policy uncertain an early costs of domeitic debt, Review (FY03) resuimption of long- public enterprises, and temn private capital defense spendling inkows as vwell as Increased aiccess to intemational capital maikets m--I I IU ih, Hm. * At the core of the * Improvement in * The Comptroller * Ad-ho Public Accounls * Country Financial * Improved public * Statistical capacity buildin!g poor governance govemment effectiveness General of Accounts Committees (PA%Cs)have Accountability & sector, accounting, * Accounting and auditing, problem inl'akistan at federal, provincial, anid (CGA) has forrnulated deared at both the Federal and Assessment auditing, and lecgal Isthe leadership's distict levels an Action Plan to Provincial levels the backlog of (CFAA 11,FY03) reporting capacity abuse of state * Transparent budgetary improve financial Audit Reports not yet reviewed, * PIFRA 11i(FY04) * Improved public instpreadons, Proces management and take approprate follow-up sectoruinanial coesrrutoeand Independlent audliting o Reforms of somne of thie action (Y0)sctorufinanialfacPR codrupgion, and * Impenent ino countres fundamental * Furthering transparency and * Improved disr,sgard for the Irnprovement inoverall institutions of economic accountability through procurement separation (A quality of financial and financial Freedorn of Information, powiers and respect management thru the management: the effective functioning of the for the rule of law ATBF _ ___I_ _ _- ______.__ I -- . Paklstan County Assistance Strategy Annex V Page 2 of 6 Central Bank of Public Accounts Committees, Pakistan (,'BP), thie agreement lo and Central Board of actions on the outcomes of Revenue (GBR), ttie the second phase of the Auditor General and CFAA, and the establishment Controller iGeneral of of alasting institutional basis Accounts, the police, for the Naticinal Accountability thet judicial system, Bureau andJthe civil service; (ii) improved public * Proceedings of the FPovincial financial management, PACs opened to the media. accountability, and Promulgatior of a Procurement increased ~~Ordiniance National transparencyinreaispaedcn and establishedProcurement Authority informationi onesaihd govemmerit activities * Better perfonmance evaluation, to facilitate public merit-based promotions, and * Oveirsight; (iii) training programs, as well as devolution; I(iv) an anti- the irnplementation of the oorrupton drive; and (v) refonns of thie pay and pension privatization and systelms -dereguiationi to redLice incentives for rent- seeking behiavior """" 1"""" "" l,|,S,iX, W"" "S" lN"3"~ 0~ i * Heavy burden oatax Low tax and regulation * National Aaountability * Lower compliance costs * Trade Policy note * Improvement in * Incentives framework administration aid compliance costs Bureau, Central Board repoited inbusiness * Invesbnent Climnate investment cCimate, * Legal, judidal and regulation, and Increased value added of Revenue reform lo environment surveys study including regulatory institutional frameworks related coupton fromi ompetlive adminisin and * Lower levels of effecive * Natonal and eosts of doing * Financial sector and rUnstable, distorted indusfrioesc eupiion cvsts protecUon provincial-level businesslmprrovemen capital rnarkets iidustial policies l Increased exprts c * Higher FDI adjustnent lending t inbanking sector * Anti-export policy o f * Deregulabon Task * Higher exports suppoitng relevant coreDrate bias domInceasticavailability of Forc to review and ihreprsspolicyingrelevant covrpoate, tiias domesbc financdng for simplify regulations * Higher private investment p .g * limited availability of privatie investmnent * IFC investments modeemization of the financing from weak Increased employment* * Phase out distortionary * Increase inoutput and and MIGA central bank's core financial scor aincreased e dnploymet policies inautos, employment inSMEs guarantees for funcions of iprice and financiaa sector and vialue added frorn chemicals, edible ois, * Sound financial position of exportuoriented banking syslem * SME sector SMEs textile, sugar, fertilizer VWAPDA &KESC manufacturing and stab lity particularly Greater pnvale provision and cement sectors contributing to servics isadvarntaged by of infrastructure * Introduce lower, rriacrostability * aP* Banidng sector the above I formula-based and reforms, induding Pakistan Country Assistance Strategy Annex V Page 3 of 6 High regulatory and * Development ol extractive multi-year tariffs setting * WAIPDA coiporadation * 1A to SBP reduced costs, policy nsks; for Industries * Strengthen banking completed * IFC investments in reduced NPLs, pdvate investment regulation, pmidential * Effective reg)ulation thru private commercial improved capital inextractive standards, supervisioni NEIPRA banks and NBFIs adequacy, & industries and * Commercial bank * KESC Privatized Blank Group rsheets infrastructure financial and support for SME set operational fnancing * Privatization of restructuring and banks, power &gas puiva6zaion . * Analytical work cn utilities, and telecom Capited market infrstructure and Expanded acoess to development industries, micro-credit * Support development of regulatory and * Support to PRSP microtinance, SME pricing frameworks finance * PSAS privatization * Strengthen regulatory advisory mandates frameworks fer fDr FESC:O infrastnucture and * IlFCIMIGA support extracfive industries for private * Allow private entry to infrastructure telecoms services * F'olicy acdvioe on markets and privatze power sector PTCL reform * Complete WAPDA's * IFC investments corporatizafion and MIGA * Privatize FESCO and guarantees in KESC eotractuve * Privatize PPL, SSGC, industries SNGC * Skewed larid * Higher Rural Growth * Policy dialogue * Update knoWtedge on rural * Fural DF'R (FY03) * Full implementation * The Water and Sanitation dislibuton and low * improved efficiency of * Support to development * WaterSector of institutonal and Program (WSP) is agricultural insttutions inirrigation and decentralization * Land and Water Rights Study Fleport (FY04) physical rehabilitaon suippoted by 15 bilateral produdfivitv drai;nage, Str awDevolutioni and Delivery of Provind"al On- reform in1 major and multilateral donors - ~~~~~~~~~~~~~command ~ ~~~~~~~~~~~~~~~~~~~~~~~~canalo A(ricultunaf policies, rural * Weak link between * Improved and expandecl * Water Resource Rural Services Farm Water (Nara Canal) c*rdit irrigation aid rural growthi and irrigationi and dr-ainage Managemnent Strategy Management reductton of rural InfrastructureManagement';trategy . Fojects (Sindh, * Improved lancl and draingage pvreutio atrrl Ifatutr NWFP) StrengthenedReuevunrbly water mnarkets commurilty/armer * NDP supervision * Reducoedvulnerabtlity _ _organizations - _r__ _ _t o_ Pakistan Country Assistance Strategy Annex V Page 4 qf 6 * Education service , Improved access to, * Support for the * Impimentation of Education * National Eduation * Implementation of * Project assistance(USAID delivery system in quality of, and equity in Education Sector Reform Strategy Assessment Education Reform AsDB) crisis primary education, mDving Reform (ESR) at * Strengtheneti and expanded (FY03, NEAS lI-L) Straegy * Low enrollment, towards the MIDG goal of federal and provincial key public health programs, * Adjustment Credit * Improved poor actilevements, universal primary levels induding Lacly Health Workers, for Education govemance insocial poor quclity of enrollment by 2015 . Advisory services and TB-Dots, EPII, polio Sector Reform service delivery education , Closing of the gender gap technical assistance for eradication, malaria, HIV/AIDS, (FY03405) * Developmerit of a * Very poor inprimary and secondary the ireforms of higher and family * Analytcal work on reliable monitoring governance education by 2005 education planning/reproductive health ESR and system for HID * Support to * Improved govemanae insodal montcring of outcomes decentralization service delivery MDGs * Sucissful strategy * Development of a reliable * Support to implementation of monitoring system for HD Provncial Reforms district based delivery outcomes (Sindh, NWFP, of education services * Successful irnplementation of FY034)5) district based delivery of health * Support to SACs and education services * Support to PRSP (FYO3.05) - * Support for district delivery of educalion and health services (FY03 .05) * Law public a Reduce mortality and * Impiroving govemance * Increase inthe %of births Ongoing * HIV/AIDS Prevenion * ADB: Wbmen's Health spending and poor nmordity with a focus on and the efficiency of attended by itained provider; * Social Acdon Project effectve by Project, Reproductve value for money women and children public expenditure to 25% by 2C03 04 Program Project II, Q2 of FY03 Heaflth Projectd lechnical because of Reduxe fertililly through devolution to * Increase inthe %of fully Northem Healih * Lessons of SAPP II assistance for health governance and C'ount Outcos n the local govemiments and immunized dhildren to 85% by Education Project adequately drawn in sector neform in NWFP mnanagemnent ome the other measure 2003 04 AAA/policy the ICR * JICA: program to eradicate weaknesses l-PRSP, to be- achievied by daotenoadttns 2003-04 indude: to reduce * Developing effective * Increase inthe coverage of dialogue * HNF' components in neonatal tetanus. * Weak capacity in the IMIR to 65/1000, to disbict healh systems prenatal caret to 50% by 2003- Flanned adjustment * GAVI: assistance to the the public sector for reduce child mortality to * Focusing on basic care 04 * HIV/AIDS operations aire immunization program policy formulation, 17/1000, to reduce the especially * Increase intie %of population Prevention Project; effective in * WHO and other UN programming, TFR lo 4.1 children per conmmunicable disease with acxss to LHWs to 90g National and supporting major agencies: various technical iimplementation, woman, The l-PRSP also conrol, chili care and by 2003-04. Provindal-level reforms and assistatoe programs and M&E ses targets interrns of reproductive health multisectoral initiatives inline wAit * Poor quality of imprved coverage of * Developing in le CPR to 39% by ausent the vernent * DFID ad other bilateral private Ihealth care water and sanitation, oartshi ;with th_e I _ _ __ _ operations with strategies and soughit av Pakistan Countr Assistance,StrategV Annex V Page 5 ofJ6 services and education, and partnerships with the Increase inpublic expenditure! health aind outcomes. for polio eradicaton onsumer abuse consurnplion poverty prvate sector both to on health and nutitiori as a educatkon Important factors improve the efficiency percentage of GDP components policy * EU cofinancing of SAPPI ou tside the health of govemment-financed dialogue; Public; and free-standinc technical sector indlude health expenditure and * Increase inthe share of non- Expenditure assistance program. poverty lick of to improve the quality of salary expenditures intotal Review (all education pnivate health care government health expenditure sectors) especially of services e Increase inthe share of women, * Improving the government suabsidy inhealth environmental regulatory framework. services accruing to the poor fadcors, and many * Creatng ma;s [Note: a baseline has to be households lacking awareness inpublic established first] access to safe hat ati water and sanitation * Bridging nutrition gaps inreproductive-age womien and young children * Promoting greater gender equity * Capacity building at the Federal level and low,er levels * Very poor rural * Improved infrastructure * Policy dialogute * Rural asset base deepened * Supporl to PRSP lo Strengthened * Ftural infrastructuLre, water infrastructure and quality, efficiency, and (Transport; through rural community-based * Sub-national governance and and sanitation, riral micro scdal service growth Urban/Nater) infrastructure projects and Adjustment improved delivery of credit deilivery systems * Community driven * AAA (Peshawar CDS; spread of micro-credit. Progranns (Sindh; basic infrastricture * High vulnerability of development of local Distridc level needs and NWFP, FY03-05) selices at the local rural poor to service provision capadty assessmenl * AJK Community level idiosyncratic shocks study) Infrastructure , Rehabilitated * Impleiment Trade andl (FY03) highways, improved Transport Fadlitation * Highways NHA fnancial program Rehabilitation management * Support to Project (FY03) decentralization * Suppol to Locail strategy Gov. Servioes ______(FY04-U5) _ ___ _ PaAistan Country Assistance Strategy Annex V Pa,ge 6 ojr6 * Sgnificarit gender * National Resellement * Indigenous peoples * Changes in LUs to promote * Suppori to PRSP National * DFID: Women's Political gaps inboth literary Plan Policy policy gaps gendeir equity thru Saial Risk Reseltement Plan F'arlcipalon and Gender aid healt1h status * National Gender Policl * Oialogue on gender * Resolution of outstanding Assessment Policy , 'ensitive Stategly, a InStuional and * Support to Resettlement cases (FY03) mr National Gender UNDP-Gender Equality attitudinal deetaizto Country, Program Poliqf Ulmbrella Project; Family discrimination detra tin Risk Management Resollution of E .qualion anded against women strategy (FY03-05) outstanding Equality Proect * Country Gender Reseltlement cases * AsDB: Gender Reform TA Assessment (CGA, girant FY04) Pakistan Countpy Assistance Strategy Annex Bl Page I of 2 Pakistan at a giance S15/02 POVERTY and SOCiAL South Low- Pakistan Asia Income Developrmnt diamond' 2000 Population, mid-year (millions) 138.1 1,355 2,459 Life expectancy GNI per capita (Atlas me0tWd US$) 440 460 420 GNI (Atlas method, US$ billions) 61.0 617 1,030 T Average annual growth, 199440 1 Population i(f) 2.4 1.9 1.9 /I\ Labor force (%) 3.0 2.4 2.4 GNI Gross per 7 Nj prImary Most recent estimate (iatest year availabie, 1199440) capita X /' enrollment Poverty (%of population below national poverty line) 33 .. .. N I Urban Dopulation /%of total oDoulation) 37 28 32 Ufe expectancy at birth (years) 63 63 59 l Infant mortality (per 1,000 live births) 90 74 77 Child malnutrlton 1%of children under 5 38 47 .. Access to improved water sou rce Access to an Improved water source (%of population) 88 87 76 Illiteracy (%of population age 15+) 54 45 38 Gross rlmary enrollment 96 of school-age population) 69 100 96 Palsten Male 77 110 102 | Low4ncome group Female 60 90 86 L- KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1980 1990 1999 2000 Eeonomic ratios- GDP (US$ billions) 23.7 40.0 58.6 61.6 Gross domestic investmenVGDP 18.5 18.9 15.6 15.6 Trade Exports of goods and services/GDP 12.5 15.5 15.1 15.5 Gross domestic savings/GDP 6.9 11.1 10.6 12.1 Gmss nabonal savings/GDP 13.7 14.2 11.0 12.0 1 Current account balance/GDP -4.8 -4.7 -4.6 -3.6 Domestic |r//mn Interest payments/GDP 1.0 1.3 1.6 1.4 savings Investment Total debtUGDP 41.9 51.6 57.8 52.2 Total debt service/exports 18.3 23.3 29.4 26.7 Present value of debtGDP .. .. 42.5 T Present value of debt/exports .. .. 249.0 I Incebte ness 19840 199040 1999 2000 200044 (average annual growth) I GDP 6.3 3.7 3.7 4.4 4. -Pakisian GDP per capita 3.5 1.2 1.2 1.9 1.9 - Low-Income grouup Exports of goods and services 8.4 1.7 -2.9 16.0 0.5 _ STRUCTURE of the ECONOMY (96of GDP) 1980 1990 1999 2000 G owtholnvestnent and GDP (9) Aqriculture 29.5 26.0 27.0 26.3 ' T Industry 24.9 25.2 23.7 22.8 Manufacturing 15.9 17A 15.5 15.1 o Services 45.6 48.8 49.2 50.9 4 9 sos03 - -OD Private consumption 83.1 73.8 79.0 76.9 .1no V General govemment consumpton 10.0 15.1 10.4 11.0 - GDI 0 -GDPP imports of goods and services 24.1 23.4 20.0 119.11 195040 1 90-00 1999 20001 Growth or (average annual growth) r exports ana import Agriculture 4.3 4.4 1.9 6.1 20 1 industry 7.3 3.9 4.9 -i 1 Al. / I Manufacturing 7.7 3.5 4.1 1.4 Services 6.8 4.4 50 4.8 0 Private consumption 4.3 4.9 7.5 0.9 Inv General govemment consumption 10.3 0.7 -6.9 7.0 .20 Gross domestic investment 5.8 1.8 -9.2 4.1 |Expors 0 -Imports Imports of goods and services 2.1 2.5 -5.4 -2.3 The diamonds show four key Indicators in the country (in bold) compared with its Income-group average. If data are missing, the diamond will be incomplete. Note: 2000 data are preliminary estimates. The debt figures in this table are from the WB debt reporting system and may differ from those in Annex B7 because they cover calendar years rather than Pakistan's fiscal years (July 1- June 30). Pakistan Country Assistance Strategy Annex Bl Page2 of 2 Pakistan PRICES and GOVERNMENT FINANCE 1980 1990 1999 2000 Inflation (%j Domestic wicesI (°h change) 'S Consumer prices , . . 5.7 3.6 ic Implicit GDP deflator 9.1 8 5 5.9 3.7 s Government finance (%of GDP, Includes current grants) Current revenue .. 18.0 15.2 1d.8 I 5 B s997 Oa oo Current budget balance -1.0 43.0 -3.5 -GDP de8ator --- CPI Overall surplus/deflcit .. -6.6 -6.0 -6.3 TRADE 1980 1990 1999 2000 F-tanr nd !po tev ls S$' l.' (USS millions) Total exports (fob) 2,365 4,927 7,528 8,191 15.0o0 Cotton 443 2 73 Rice 239 533 540 Manufactures 1,371 2,489 6,993 7,579 Total Imports (cifl) 7,411 9,613 9,602 ,qll I r l ,u ,nll Fuel and energy 1.163 1,477 2.793 Capitalgoods . 1,788 2,921 2,705 | o -'i Export price lndex (1995=100) .. 102 87 84 9^ 95 90 97 98 99 00 Import pdwe Index (1995=100) . . 87 93 oExports 0 imports Termrs of trade (?9-9S=?00) .. .. 100 91 BALANCE of PAYMENTS ______ (US$ millions) 11= w9.0 1909 200. Current account balance to GDP(%) Exports of goods and services 2,958 6,217 8,842 9,575 0 , 1I , 1,, ,1, , import of goods and --s 5,709 9,351 11,737 11762 t 17 I1 I1 Resource balan;e -2,751 -3,134 -2,895 -2,187 *2*jj Net income -281 -966 -1,808 -2,018 ___ Net current transfers 1,895 2,210 2,005 1,997 |4I I U 1 Current account balance -1,137 -1,890 -2,698 -2,208 | FInancIng Items (net) 1,890 3,952 2,000 | Changes In net reserves .. 0 -1,254 208 Enema:, Reserves Including gold (USS millions) .. 1.311 2,228 1,606 Converslon rate (DEC, locaW/US$) 9.9 21.4 50.1 51.7 EXTERNAL DEBT and RESOURCE FLOWS 1980 1990 1999 2000 (US$ millions) p..miion d iuwo^iebtCuSSmlii. j Tota debt outstandIng and disbursed 9,931 20,663 33,886 32,182 0 e IBIRD 330 1,816 3,315 3,093 G.1,519,,A | iDA 821 2,106 3,905 3,8Z82 Total debt service 870 1,926 2,940 2,850 | F:3,94\B: 3,828 lRRD -58 199 434 408 IDA 9 34 86 93 ComposiUon of net resource flows Q 1,529 Officlal grants 268 538 573 926 Officlal creditors 544 913 876 452 Private creditors 167 -63 -477 -381 E:11,659 Foreign direct investment 68 200 472 471 D:6,6C0 Portfolio equity 0 87 28 74 Wond Rnnk progrnma Commitments 185 972 808 0 A -IBRD E-tsiates I Disbursments 90 494 628 301 B- A DD-tlirm tiaterai F.-PFate P-n-n-- -navymeniss 29 Q9 283 291 C-IMF n -AhAJ.- Net flows 61 402 345 10 1 Interest payments 39 141 237 210 Net transfeea 9922 1 in -2ni Development Economics 5/15/02 Note: 2000 date are preliminary estimates. The debt figures in this table are from the WB debt reportng system and may differ from those in Annex B7 because they cover calendar vears rather than Pakistans flscal years (Juiy 1 -June 30). Pakistan County Assistance Strategy Annex B2 -,-oP-I,of ! Selected Indicators* of Bank Portfolio Performance and Management As of 05/03/2002 Indicator 1999 2000 2001 2002 PortfoloAssessment 1NUmber o01'PojuW 'vade[ 1iuVl au0wU0U- U 23 10 L6 10 Average Implementation Period (years) b 4.3 4 3.9 4 PercentofP.-oblemr ....o-jec-b..w by-3a, c 113 18.8 1Q.8 Percent of ProblemProjects by Amount a, c 33.8 19.6 20.6 41 DMTDWOT++a4S;nea 2;1 vNlo A I12 12Q2 w) Percent of Projects at Risk by Amount a, d 33.8 19.6 20.6 60.5 Dihbursem_nt aio(%)e 18.2 221 30.9 AA.3 PortfolUo Management U..,rrv..uuUn Yu= kVLiyowuu, I I I I0 0b Supervision Resources (total US$'000) 3,507 3,384 2,041 (est.) 1,306 AA- ._ .....,,.sv-"^s >;nlT'cnnnlflI...... - s^ vlFa3 1lnv- 1o1w 02 { tist.)o 59JCA MerageSc upex-vWision (TISVJbJe projectSJ.) I A4I1 Memorandum Item Since FY 80 Last Five FYs Proi Eval b y OED by Number 121 29 Proj Eval by OED by Amt (US$ millions) 8072.8 2894.7 % of OED Proiects Rated U or HU by Number 24 24.1 % of OED Projects Rated U or HU by Amt 31.3 28.9 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bankes country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or inplementation progress (IP). d. As defined under the Portfolio Improvement Progran. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. f. Includes quarterly and biannual portfolio reviews with federal and provincial governrnnets. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes al active proiects as wel as projects which exited during the fiscal year. PaastanCoawty Asstuance Strategy Annex B3 Page I of2 Pairirtan - PrnivoeId TR ,fflDAABase-Case TL.nding Pronram (As of May 15, 2002)- __ Proc NStrategei Implementation Fiscui ProJect Name US$(M) Rewar RlsAs Year Project IDA (HIM/) a. (HIMZL) e 2002 b/ Drought Emergency Recovery Assessment c/ 130 M H b/ BSRPP 300 H M AJK Comnuniity Infrastructure Services Project 20 H M TA for Banldng Sector 27 M L SAC II 500 H H Sindh SAC 100 H H Result 947 2Mnn3 !L-g6na, D. inn M M HIV/AIDS Prevention Project 20 H H Natinnal Eduastinn Asse5ment I.R. S5vrtem H H Education Reform SAC 150 H M Tax Admnin. Reform 100 H H Eco Reform TA 25 H H Result 400 2004 PiFKA 11 100 H H, Sindh On Farm Water Management 50 L M Local Government Support 50 H H SAC II 200 H H AC.I 400 2005 Local Government Support 100 H H Water Sector Management 100' H M SAC IV 200 H H Result 400 a/ Indicates whether Strategic Rewards and Implementaton Risks are expected to be High (H), Moderate (M), or Low (L). b/ Operation already approved In FY02. cd $130 mdlilon of Drought Emergency Recovery Assessment Is a reallocation of existing commitments under SAPP-II and NDP. An=e B3 NVg 2 of 7 Paldstan - Proposed JJJRDA-I'A High-Case Lending Program (As of May 15, 2002) Fiscal ProjectName USU(M) Rcw_rds Rlsks Year Project IBRD IDA (HIMIL) a/ (Hl V/ 2002 b/ Drought Emergency Recovery Assessment c/ 130 M H b/ BSRPP 300 H iM AJK Community Infistructure Services Project 20 H M TA for Banling Sector 27 M L SAC i Soo H H Sindh SAC 100 H H ReesMu 947 2003 NWFP PSAC 90 H H Highways Rehabilitation 100 M M HIV/AIDS Prevention Project 20 H H INWAUrWJ rUU~ULI ~ILul--- .-y Le-.. H. . I LMI Education Reform SAC 150 H H Tax Admnin. Reform 100 M M Provincial Adjustment Credits (Sindh, NWFP) 110 H H Eco Reform TA 25 Result 600 'I00A nTUD A nI HA ,V~~~~fl rAn anti ~~~~~~~~~~~~~~iTnyU rIT Sindh On Farm Water Management 50 L M Provincial Adiustment Credits II 250 H H SAC III 300 50 H H Local Government Support 150 H H Result 300 600 2005 Lo-cl C-ove,nmt Sott 100 H M PEFRAIII 100 Water Sector Management 100 H H Provincial Adjustment Credits III 250 H H SAC IV 300 50 H H Result 300 600 Overail Result 600 2 747 a/i ndicates wl,et,Uer StdWdirtagc RewadIus and implmentUon Rtisks are ezedV tD Itbe High (Hj, Moderait (M), or Low (L). b/ Operations already approved In FY02. c/ $130 million of Drought Emergency Recovery Assessment is a reallocaton of existing commitments under SAPP-11 and NDP. Pakistan Country Assistance Strategy AnnexB3 Page 3 of 3 Pakistan - IFC and MIGA Program, FY 1999-2002 1999 2000 2001 2002 IFC approvals (US$m) 83.00 55.10 52.10 24.04 Sector (%) FINANCE & INSURANCE 60 100 NONMETALLIC MINERAL 40 OIL, GAS AND MINING 77 TrDVVT1TrD ADDADT:T R.TV 112 Total 0 100 100 100 Investment instrument(%) Loans 77 Ezqui; I °° Quasi-Equity Other 100 23 Total 0 100 100 100 ,vYLGjr- mitees kLJS) 14711 14. I 5 4 96.76I 8 Pakistan Country Assistance Stratgy Anner B4 Page I of I Paldstan - Summary of Nonlending Services As of May 3, 2002 cofwp..... J..L,,. e NV Cowl _5_e00(fAl A, ...c _ 1 Recent completdons Punjab Public Expenditure Review 2001 190 B, G, P K Policv Nnte onMB 2001 87 B, G, P K NoteforPakistanPev. Forum 2001 12 B,G,P K Financial Accountability Assessment 2001 110 B, G, P. K Oii and Gas Sector Poiicy Advice B 2001 120 B, G, P K CAS Progrss Report 2001 43 B, G, P K TA for Energy Sector Dialogue &Policy Advice 2001 181 B, G K TA for Provincial Health 2001 90 B, 0 K TA for mmunization and HlV/AIDs 2001 219 B, G K TA fo, Pri;,a _iat 200! 333 B, a K TA for Financial Setor Monitoring 2001 115 B, G K TA for Subnational Economic Reforn 2002 206 B, G K Joint StaffAssssnient - IPRSP 2002 43 B, G, P K Development Policy Review 2002 188 B, 0, P K Private Sector Stratesv 2002 92 B. G. P K Underway Environment Strategy 2002 124 B, G, P K Transport Sector Strategy 2002 122 B, G, P K Poverty Assessment 2002 582 B, G, P K Country Assistance Strategy 2002 150 B, G, P K Planned investment Climate 2003 I1w B, 0, P K Provincial Economic Reforn 2003 100 B, G, P K Policy Note to New Government 2003 100 B, G K JSA -PRSP 2003 100 B, G, P K CFAA 11 2003 100 B, G, P K CPl An 2n' Inn B, G-,p Oil & Gas Sector Review 2003 150 B, G K Financial Sector Assessment 2003 150 B, G, P K CAS Progress Report 2003 100 B, G, P K Public Expenditure Review 2003 150 B, G, P K R_r1l Devolnnn,ent PolicV Revi-w 2003 130 B; C, P K Power Sector Review 2003 100 B, 0, P K Sindh Rural Development Policy Review 2003 100 B, G, P K Sociai Riisc Assessment 2003 i10 B, G, P K a/ Government (G), Bank (B), public dissenmnination (P) b/ Knowledge generation (K) Pakistan Country Assistance Strategy Annex B5 Page I of I Pakistan Social Indicators Latest single year Same reglon/lncome group South Low- 11970f75 1 15 1994A00 Asia income POPULATION Total populatbon, mid-year (millions) 71.0 94.8 138.1 1,354.7 2.458.7 Growth rate (%annual average forperlod) 3.2 2.7 2.4 1.9 1.9 Urban populatIon (%of population) 26.4 29.8 37.0 28.4 31.9 T,otal;i*e,u;Ly rate (bi;t,Vhs perf woiari) 7.0 6.5 4.8 3.4 3.7 POVERTY, (76 of popuiaUoriJ National headcount Index .. .. 32.6 Urban headcount index .. .. Rural headcount Index .. .. INCOME GNI per capita (US$) 150 330 440 460 420 Consumer price index (1995=100) 20 42 146 136 142 Food pnti, Indnx (1PS5100) .. 39 134 INCOME/CONSUMPTION DISTRIBUTION Gini index - 3112 Lowest quinUile (%of hncome or consumption) 8.0 .. 9.5 Hlghest quinUle (%dncomeof or consumption) 41.8 .. 41.1 SOCIAL INDICATORS Public expenditure Heaui (m,6or GDP .. .. 0.9 0.9 1.2 Educaton (X of GNI) 2.2 2.9 2.7 3.1 3.3 Social security and welfare (%of GDP) 0.3 0.9 Gross primary school enrollment rate (56 of age group) TIob; .. .. 69 100 96 Male .. .. 7 110 102 Female .. .. 60 90 86 Access to an Improved water source (%of population) Totai .. 38 88 87 76 Urban .. 77 96 92 88 Rural .. 22 84 85 70 ImmunIzaton rats (%under 12 months) Measls .. 38 8i 63 64 DPT .. 77 80 75 70 Child malnutrition (%under 5 years) .. 22 38 47 Lfe expectancy at birth (years) ;1I 52 57 63 63 59 Male 52 57 62 62 58 Female 52 58 64 63 60 Mortality Infant (per thousand live births) 134 122 90 74 n7 Undar 5 (per tousand libirths) 183 161 i26 99 ii6 Aduft (18-59) Male (per 1,000 population) 339 283 188 223 288 Female (per 1,000 population) 381 291 153 212 258 Matemal (per 100,000 live births) .. .. 340 Births attended by-skled health sL)ff. 9 .. .. 9 CAS Annex B5. This table was produced from the CMU LDB system. 02/1302 Note: 0 or 0.0 means zero or less than hatf the unit shown. Net enrollment ratios exceeding 100 Indicate discrepancies between the estimates of school-age population and reported enrollment data. Pakistan County Assistance Strategy Annex B6 Page I of 2 Pakistan - Key Economic Indicators Actual Estimate Projected Indicator 1999 2000 2001 2002 2003 2004 2005 National accounts (as % of GDP) Gross domestic productL i00.0 i00.0 i00.0 i00.0 i00.0 i00.0 i00.0 Agriculture 27.0 26.3 25.2 25.1 25.3 25.1 24.9 indusuy 2. 22.8 23.5 23. 23.8 24.0 24.4 Services 49.2 50.9 51.3 51.2 50.9 50.9 50.7 Total Consumption 89.4 87.9 89.0 87.8 86.5 85.5 84.9 Gross domestic investment 15.6 15.6 14.7 15.2 16.2 16.8 17.0 GoVC-ove.n,.r.t ir.vest-2ent 3.7 3.2 2.7 3.4 3.6 3.9 4.0 Private investnent 1/ 11.9 12.4 12.0 11.8 12.6 12.9 13.0 Exports (GNFS)b 15.1 15.5 17.2 17.3 17.4 18.3 18.5 Imports (GNFS) 20.0 19.1 21.0 20.2 20.5 21.3 21.1 Grossdomesticsavings 10.6 12.1 11.0 12.2 13.5 14.5 15.1 Gross national savingsC 11.0 12.0 13.3 15.8 17.0 18.3 18.8 Memorandum items Gross domestic product 58615 61623 59605 59783 63038 64368 '69198 (US$ million at current prices) GNP per capita (US$, Atlas method) 470 440 410 400 410 410 430 Real annual growth rates (%, calculated from 1981 prices) Gross domestic product at market prices 3.7 4.4 3.4 3.4 5.2 5.5 5.5 G2fss Dor.estic3.0 L.corne3.1 3.03.8 6.1 5S 5.S Real annual per capita growth rates (%, calculated from 1981 prices) in Ln .An flfl in3 q.A q GrsUbb UUUWDoLIL proUUcL aL WllU s .2 :.9 0.9 0.7 2.7I 3.0 3.0 Total consumption 3.1 -0.9 2.0 0.3 2.6 2.5 2.9 Private consumption 4.9 -1.5 2.5 0.1 2.9 3.0 2.6 Balance of Payments (US$ milHons) R.n,rt-c(NFRb RR42 9575 10269 10336 10991 11776 127R8 Merchandise FOB 7528 8191 8926 8914 9588 10351 11230 Imports(GNFS)b 11737 11762 12492 12104 12951 13690 14631 Merchandise FOB 9613 9602 10171 9780 10496 11187 12032 Resource balance -2895 -2187 -2223 -1768 -1960 -1914 -1848 1,v c u rULer L tr-ausfeMr 2005 3. 1771 997 2 4t7 245 9 29 L3493 Current account balance -2698 -2208 -1946 -1365 -1659 -1375 -1261 Nu - r__:_---: m_. diec in 47 47 t* 3z- - ^e A.. 1'cLpnvaw OiLULgislUi[vLUI W1Ulu 'ILA 'tI v-3vU 'tOv JOi JUU Long-term loans (net) 591 -1452 -655 -611 -123 686 1276 Official 876 452 -480 251 155 81 -824 Private -285 -1904 -175 -862 -278 605 2100 Other capital (net. inl. erors &ommissions) 2889 2981 2967 2597 2812 1362 200 Change in reservesd -1254 208 -688 -822 -1431 -1173 -714 Memorandum items Resource balance (% of GDP) -4.9 -3.5 -3.7 -3.0 -3.1 -3.0 -2.7 Real annual growth rates ( YR81 prices) Merchandise exports (FOB) -6.6 13.9 6.8 -4.1 0.9 3.7 4.1 Manufactures -5.0 11.2 6.1 -11.0 -3.6 0.9 1.6 Merchandise imports (CIF) 0.8 -6.5 -12.1 -6.2 9.3 5.4 6.1 (Continued) Pakistan Country Assistance Strategy Annex B6 Page 2 of 2 Pakistan - Key Economic Indicators (Continued) Estimate Projected Indicator 1999 2000 2001 2002 2003 2004 2005 Public finance (as % of GDP at market prices) Current revenues 16.2 16.6 15.7 17.0 17.2 17.3 17.9 Current expenditures 19.2 20.1 18.9 19.1 17.8 16.6 16.4 Current account surplus (+) or deficit (-) -3.0 -3.5 -3.2 -2.1 -0.6 0.7 1.5 Capital expenditure 3.0 2.8 2.2 3.6 3.6 4.0 4.2 Foreign financing 5.0 2.2 32 2.4 2.3 1.6 0.5 Monetarv indicators M2/GDP 43.6 44.0 44.0 45.1 45.0 44.7 44.4 Growth of M2 (%) 6.2 9.4 9.0 9.1 9.1 9.0 9.0 Private sector credit growth 187.2 19.8 107.3 28.4 15.0 46.6 68.8 total credit growth (%) Price indices( YR81 =100) Merchandise export price index 97.5 94.3 91.9 95.7 102.0 106.3 110.8 Merchandise import price index 91.5 97.3 108.2 111.0 109.0 110.2 111.7 Merchandise terms of trade index 106.6 96.8 84.9 86.3 93.6 96.4 99.2 aI LJLF%LIVG IAafahI~L4ktJoWlA.tjJ IU. I IJ.* I IV. JO.I U.j IvJn.W 1V9¾ Consumer price index (%change) 5.7 3.6 4.4 3.0 3.9 4.0 4.0 GDP deflator (% change) 5.9 3.7 5.5 2.9 4.0 4.0 4.0 a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Consolidated central govermnent. f "LCU" denotes "local currency units." An increase in US$/ICU denotes depreciation. Pakistan Countiy Assistance Strategy Annex B7 Page 1 of 1 Paldstan - Key Exposure Indicators Actual Estimate Projected Indicator 1999 2000 2001 2002 2003 2004 2005 Total debt outstanding and disbursed (TDO) (US$m)a 29318 29757 31398 31099 31400 31523 31697 Net disbursements (US$m)a 511 439 1641 -299 301 123 174 Total debt service (TDS) 3726 3771 3369 3580 3400 32615 3200 OUS$MY Debt and debt service indicators (%) TDO/XGSb 267.2 278.8 273.8 255.7 - 240.4 225.9 210.4 TDO/GDP 50.0 48.3 52.7 52.0 49.8 49.0 45.8 TDS/XGS 34.0 35.3 29.4 29.4 26.0 23.4 21.2 TDDTr A (;00/L IBRDDS/publicDS 10.9 11.2 11.8 10.5 11.1 11.7 12.2 Preferred creditorDS/pubiic 45.7 39.1 45.8 45.3 51.3 54.9 53.4 DS (%). IBRD DS/XGS 3.7 4.0 3.5 3.1 2.9 2.7 2.6 IBRD TDO (US$m)d 3438 3332 3043 2861 2654 24083 2132 Share of IBRD portfolio (%) 2.9 2.7 2.5 2.3 2.1 1.9 1.7 TDA TDO (IJS$m) d 373 4123 404 480R9 5232 i1RA 589Q7 Loans 396 347 0 0 Equityand quasi-equity /e 110 108 0 2 Guarantee, Standby & Risk Management 95 22 MIGA MIGA guarantees (US$m) 147 143 97 81 a. Uiri'UUde pUULbc andU pjUb'c:y MicUtLLu-u udeb, -u5s oU Vivir Ur;UiW.:, auiu neL shoi- term capital. b. "XGS' denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments. ~~~~~~g .- ES t I h n n .R~~~~~~~~~ fl ~~~~IEa "Zq q 'S 15~~~~~~~~~~~~~~~~~~~~~~~~~~~1 sa i 0 Ex EE X00E |~~8Ii~~~~~~~~~~~~~~~~~~~~~~~ 0s3c 0^ 0 0 0" 000nsce"snxo & l ,Il}xsl Xs }lElsill2|!SI; ' 0 Xl|Xgl;g209eo' ,P"-.IanC,.,tr,y Assistan.ce Str.aegy Annex B8 Paistan Page 2 of 3 STAIEMENT OF IFC's Held and Disbursed Portfolio As of March, 2002 iFG nata Wamhniioa (Amounts !n US DoI!!a ,AilN.. IFC Held IFC Disbursed- FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1995 Abamcb Mgmt n.00 0.29 0.00 0 00 0.00 0.29 0.00 0.00 1995 AES Lal Pir 30.82 9.50 0.00 0.00 30.82 9.50 0.00 0.00 1996 AES Pak Gen 15.58 9.50 0.00 26.83 15.58 9.50 0.00 26.83 1996 Atlas Inv Bank 2.81 0.00 0.00 0.00 2.81 0.00 0.00 0.00 1994 Atlas Lease 2.40 0.36 0.00 0.00 2.40 0.36 0.00 0.00 Io DIBRR!L 0.00 0.24 0.00 0.00 0.00 0.24 0.00 0.00 1991/94/95 BRRIM 0.00 0.76 15.00 0.00 0.00 0.76 15.00 0.00 1995 BSJS Fund 0.00 0.50 0.00 0.00 0.00 0.50 0.00 0.00 1993 CDCPL 0.00 0.16 0.00 0o00 n=n 0 16 0 000 0.00 1993/97/01 Crescent Greenwd 5.71 5.10 0.00 2.50 5.61 5.10 0.00 2.50 196 CIresc-,: 'Bank 6.75 0.00 0.00 0.00 6.75 0.00 0.00 0.00 1994/95/96/00 D.G. Khan 10.82 5.49 0.00 30.61 10.82 5.49 0.00 30.61 1998 Engro Asahi 6.86 0.00 0.00 0.00 6.86 0.00 0.00 0.00 1991/95/97 Engro Chemical 5 14 3. 0 0 00 3 75 5.14 3I90!O 0.0 3 75 1996 EngroVopak 7.13 0.00 0.00 2.97 7.13 0.00 0.00 2.97 i 993/94 Fauji Cement 22.40 5.00 0.00 0.00 22.40 5.00 0.00 0.00 1990/92/96 FIIB 1.54 1.50 0.00 0.00 1.54 1.50 0.00 0.00 1995 First Crescent 0.00 0.00 5.00 0.00 0.00 0.00 5.00 0.00 1994/9R First Leasina 1.25 1.69 0.00 0.00 1.25 1.89 0.00 0.00 1995 First UDL 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.00 1996 Gul Ahmed 18.90 4.10 0.00 20.61 18.90 4.10 0.00 20.61 1988 Hala Spinning 3.27 0.00 0.00 0.00 3.27 0.00 0.00 0.00 1991/95 IHFL 1.30 0.87 0.00 0.00 1.30 0.87 0.00 0.00 U.JS 1.11 0U0. 0.00 0.00 1 11 0.00 0.00 1995 Kohinoor 16.25 6.30 0.00 18.30 16.25 6.30 0.00 18.30 1994/95/97/00 Maple Leaf 27.19 5.72 0.00 31.25 27.19 5.72 0.00 31.25 1993/01 Muslim Comm Ba, 1.41 0.00 0.00 0.00 1.41 0.00 0n00 0n00 1984194 NDLC 2.81 1.25 0.00 0.00 2.81 1.25 0.00 0.00 1994/96 Or IFlnance 0.00 0.58 0.00 0.00 0.00 0.58 0.00 0.00 1994/98 Orix Leasing 2.81 1.25 0.00 0.00 2.81 1.25 0.00 0.00 1965/80/82/87/91/ Packages 2.25 3.46 0.00 0.00 2.25 3.46 0.00 0.00 94/95 1994 PACRA 0.00 0.10 0.00 0.00 0.00 0.10 0.00 0.00 1993 Pakistan Service 1.25 3.00 0.00 0.00 1.25 3.00 0.00 0.00 1995 Pakistan Unit Tr 0.00 1.48 0.00 0.00 0.00 1.48 0.00 0.00 1994 PI&CL 1.25 0.00 0.00 0.00 1.25 0.00 0.00 U.00 1991/94/95 PILCO 2.50 1.04 0.00 0.00 2.50 1.04 0.00 0.00 i8i84i94i95 PPL -0.00 1.56 0.00 0.00 0.00 1.56 0.00 0.00 1991 Prudential 0.00 0.40 0.00 0.00 0.00 0.40 0.00 0.00 Note: Values do not reflect offbalne sheet items vuch as guarntee and risk tmnagement products. Last Data Update: March 31. 2002 Run Date: May 06, 2002 Page:-of 2 Pakictan Cnuntru uAtsvan.-P Strateav Annpr RR Pakistan Page3 of 3 STATEMENT OF IFC's Held and Disbursed Portfolio As of March, 2002 IFC Data Warehouse (Amounts In US Dollar Millions) IFC Held IFC Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1194 Reoenf Knitwear A.oo 0.00n .00 2.80 6.00 O.00 000 2 Rn 1995 Rupafab 3.67 0.00 0.00 0.00 3.67 0.00 0.00 0.00 1993196/01 Sarah Textiles 1.28 0.00 0.00 0.00 1.28 0.00 0.00 0.00 1996 Uch Power 38.05 0.00 0.00 71.24 33.09 0.00 0.00 56.20 Total Portfolio: 249.40 76.22 30.00 210.86 244.34 76.22 30.00 195.83 j Approvals Pending Commitment i FY ADDroval Project Name Loan Equity Quasi Partic 2001 Lasmo Pakistan 40.00 0.00 0.00 0.00 2002 Microbank 0.00 1.64 0.00 0.00 Total Pending: 40.00 1n.64 0.00 .nn Note: Values do not reflec off-bale sheet item msudh as aantee and risk managoent pxducts. Last DatUpdate: March 31.2002 Run Date: May 06, 2002 PaRe:2 of 2 Svo :edAl iV%d 66'ZC4 : oN ljode I