COUNTRY REPORT

Pakistan Afghanistan

3rd quarter 1996

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Summary

Pakistan, Afghanistan 3rd quarter 1996

August 30, 1996

Pakistan Political and economic structures pages 3-4

Outlook: Benazir Bhutto’s government wants to be the first elected govern- ment to complete its term of office. The budget for 1996/97 has galvanised the opposition, but there are problems over what strategy to follow to topple the government. The army is becoming concerned about the economy. Ms Bhutto’s appointment of her husband as investment minister will cause problems. The government’s growth forecast is ambitious, particularly as ind- ustry continues to suffer. The current-account deficit will continue to rise. The government is likely to get an IMF stand-by loan at the World Bank/IMF conference in late September. pages 5-8

The political scene: A new opposition group has been formed. A judicial decision has caused problems for the government and has split the judiciary. The Supreme Court has restored local bodies in Punjab. Imran Khan’s political movement has yet to take shape. There have been family troubles for Ms Bhutto, involving her brother. Ms Bhutto has held a rally in Karachi as violence in the city eases, but bombings in the Punjab have continued. The PPP has done well in provincial elections in Pakistan-controlled Kashmir. A major airforce deal has provoked controversy. There has been little progress towards talks with India. The US ambassador to India has visited Pakistan. There has been progress with the Afghan government. pages 9-16

Economic policy and the economy: The budget for fiscal 1996/97 has increased expenditure by 15.1% and has raised taxes, only to be forced to lower them after widespread protests. GDP growth targets for 1996/97 are ambitious. Inflation has slowed. The IMF deal has been stalled because the budget has not been finalised. An economist for the World Bank has painted a grim picture of the country’s prospects. pages 16-18

Agriculture: The budget has smiled on landowners again. Agriculture output has risen, as has cotton production. Wheat cultivation has improved slightly, but sugar production has done less well. The Agricultural Development Bank has recovered. pages 18-19

Industry: Industry has been divided over the budget concessions. The Textile Mills Association has criticised the government’s export targets. The president has entered into the cotton debate. The cement industry has not been happy about the new taxes in the budget. Investment in industry has grown. pages 20-21

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Energy, and transport and communications: The Kott Adu power-plant deal has been finalised. The Privatisation Commission has said that bids for eight electricity distribution units will be allowed soon. The manufacture of a new power barge has been funded by the USA. The Iranian oil minister has signed two agreements. Partial privatisation of the Pakistan Telecommun- ications Company has stalled. pages 21-23

Banking and finance, and foreign trade and payments: A commission is to be set up to investigate loans. Exports have been growing slowly, but imports have been growing rapidly. Remittances have fallen sharply. pages 23-24

Afghanistan Political and economic structures pages 25-26

Outlook: The interim government will have to work hard to stay together. General Dostam’s position will be crucial to its survival. The Taliban are look- ing weak, but can still pose a threat to the government. The prime minister is expected to move against the Taliban. Relations with Pakistan are likely to improve, which will further isolate the Taliban. The UN is trying to restore its credibility. The local currency will remain very weak. pages 27-30

Review: Gulbuddin Hekmatyar has been appointed prime minister and has formed a new government. Jamiat’s Ahmad Shah Massoud and Mr Hekmatyar have no faith in each other. Mr Hekmatyar has announced Islamic policies. Government moderates have clashed with fundamentalists. Burhanuddin Rabbani has wooed the Nangarhar Shura, but has failed to bring them on board. Fighting has erupted in Nangarhar. The government has turned to General Dostam. The Taliban have continued their opposition against the government, but have improved relations with Iran. Iran has offered economic help. Pakistan has shifted its Afghan policy. pages 30-33

Statistical appendices pages 34-35

Editor: David Bain All queries: Tel: (44.171) 830 1007 Fax: (44.171) 830 1023

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 Pakistan 3

Political structure: Pakistan

Official name: Islamic Republic of Pakistan

Form of state: federated parliamentary system

The executive: the president is head of state, and is elected for a period of five years by a joint sitting of the federal legislature; the incumbent, Farooq Leghari, has pledged to support moves by the PPP government to deprive him of the important discretionary powers he has under the eighth amendment

National legislature: bicameral legislature; lower house, the National Assembly, has 217 directly elected members who serve for five years, of whom ten represent minorities; upper house, the Senate, has 87 members elected for six years with one-third retiring every two years; each of the four provinces elects 19 senators, the remaining 11 are elected from the Federal Capital Territory and the tribal areas

Provincial government: Pakistan has four provinces which enjoy considerable autonomy; each province has a governor, and a Council of Ministers headed by a chief minister elected by a provincial assembly

Last national election: October 6, 1993 (National Assembly)

Next elections due: October 1998 (National Assembly); November 13, 1998 (presidential)

National government: after the election on October 6, 1993, the PPP, backed by a coalition of small parties and independents, formed the national government with Benazir Bhutto as prime minister

Main political organisations: Pakistan People’s Party (PPP); Pakistan Muslim League (Nawaz) (PML (N)); Pakistan Muslim League (Chattha) (PML (C)); Jamaat-i-Islami (JI); Mohajir Quami Movement (MQM); Awami National Party (ANP); Jamiat-e-Ulema-e-Islam (JUI)

Main members of Council of Ministers Prime minister & minister of finance Benazir Bhutto

Key ministers agriculture Yousuf Talpur commerce Ahmad Mukhtar defence Aftab Shaban Mirani education Khursid Ahmad foreign affairs Sardar Asif Ali information Khalid Kharal interior Nasirullah Baber investment Asif Ali Zardari parliamentary affairs Sher Afgan Niazi petroleum Anwer Saifullah population welfare Julius Salik production Mohammad Asgar states & frontier regions Mohammad Afzal Khan water & power Mustafa Khar works Amin Fahim

Governor of the State Bank of Pakistan Mohammad Yaqub

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Economic structure: Pakistan

Latest available figures

Economic indicators 1991 1992 1993 1994 1995a GDP at market pricesb PRs bn 1,020.6 1,211.3 1,341.9 1,564.9 1,835.9 Real GDP growthb % 5.5 7.8 1.9 4.0 4.3 Consumer price inflation % 11.8 9.5 10.0 12.4 12.3 Population m (mid-year) 115.6 119.1 122.6 126.1 129.7 Exports fob $ bn 6.38 6.88 6.76 7.01 7.73 Imports fob $ bn 8.64 9.67 9.31 9.60 11.0 Current account $ bn –1.40 –1.87 –2.94 –3.15 –4.46 Reserves excl gold $ m 527 850 1,197 2,929 1,733c Total external debt $ bn 23.0 24.2 26.2 29.6 32.3 Debt-service ratio % 25.2 27.9 30.1 39.6 36.2 Exchange rate (av) PRs:$ 23.80 25.08 28.11 30.57 31.64c

August 30, 1996 PRs35.5:$1

% of % of Origins of gross domestic product 1994/95 total Components of gross domestic product 1993/94 total Agriculture 25.6 Private consumption 71.9 Manufacturing 17.8 Government consumption 12.1 Wholesale & retail trade 15.9 Fixed investment 17.6 Transport & communications 10.2 Change in stocks 1.4 Public administration & defence 7.7 Exports of goods & services 15.6 Others 22.8 Imports of goods & services –18.8 GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports 1993/94d $ m Principal imports 1993/94d $ m Cotton yarn 1,266 Non-electrical machinery 1,597 Garments & hosiery 1,125 Petroleum & products 1,402 Cotton fabrics 824 Chemicals 862 Raw cotton 792 Transport equipment 832 Rice 243 Edible oils 489 Total incl others 6,803 Total incl others 8,569

Main destinations of exports 1994 % of total Main origins of imports 1994 % of total USA 14.4 USA 9.7 Hong Kong 7.7 Japan 9.3 UK 7.6 Germany 7.8 Germany 7.3 Malaysia 7.4 Japan 7.3 UK 5.3 United Arab Emirates 5.4 China 4.7 a Official and EIU estimates. b Fiscal years ending June 30. c Actual. d Customs basis converted from rupees at average exchange rate for fiscal year.

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Pakistan

Outlook

The government is defiant The coalition government led by the Pakistan People’s Party (PPP) of Benazir Bhutto is still trying to make history by becoming the first administration to complete its term of office. There has never been a smooth transfer of power in the country. The government is just over half way to achieving its goal, as the next general elections are due in October 1998, but its policies are increasing the likelihood of instability. The national budget announced on June 13 has been almost universally unpopular. It has given the opposition an issue to rally around after two and a half years of relative impotence. However, the government has shown, up to now, an ability to weather the political storms and controversies.

The budget is announced— The budget of June 13 imposed some of the heaviest taxes in the country’s history, aiming to raise an additional PRs40.8bn ($1.2bn), principally through extending the General Sales Tax (GST) to all imported and manufactured goods except for sugar, edible oil, petroleum products, unprocessed foodstuffs and agricultural products, and by raising the standard rate from 15% to 18%. The government said it was a time for tough measures to meet its budget targets. The prime minister’s special adviser on finance, V A Jaffrey, said the nation would have to make sacri- fices to achieve a deficit-free budget for the next generation in Pakistan.

—but it is not well But the budget was deeply unpopular. Businessmen reacted strongly against received at home— the government’s attempt to introduce a new sales tax. They opposed the tax, saying it would cause recession as it would adversely affect corporate profits. At first their reaction was widely seen as being fairly standard, as budgets in the past have led to similar protests.

—and prompts a series of Many parts of commerce, industry and manufacturing opted for strikes and the nationwide strikes threat of strikes to try to get concessions. An indefinite transport strike started on July 30, which ended after three days when the government made a number of tax concessions. Many small traders held a two-day strike from August 10. For years Pakistani businessmen have protested about new taxes when budgets have been unveiled, but this time many are predicting a rough road ahead for the Pakistani economy, suggesting that these protests may be more genuine than in the past.

The budget may galvanise The opposition parties were predictably disgusted with the budget. The hardline a jaded opposition— Islamic party, Jamaat-i-Islami, organised a demonstration on June 24 with the aim of marching on the capital, Islamabad. The protest ended in violence, with the army being called out to quell the disturbance. Three protesters were shot dead and more than 50 injured. The incident helped to persuade the opposition as a whole that they finally had an issue with which to try to challenge the

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government. On July 24, 15 parties decided to launch a joint movement to bring down the administration. They called for a campaign of civil disobedience starting on August 25, with a demonstration in the city of Peshawar, the capital of North-West Frontier Province, followed by the other three provincial capitals. Between them, they do not have enough votes to force a vote of no confidence against the government. Their best hope would be to spark large enough public protests to force the president, Farooq Leghari, to use his constitutional powers under the eighth amendment to dismiss the administration.

—but it remains lacklustre But the call has so far failed to strike a chord with the public. Despite the opposition group’s rhetoric, the opposition parties are divided on almost every issue. Further, they are unclear on exactly how they are going to get the government out of office before the next general election.

The army holds meetings The army is keeping a close eye on developments. Highly placed sources say with economic experts senior members of the armed forces have held a number of meetings recently at which they have been given briefings from local economic experts, sum- moned for the purpose, on the state of the economy. The major factor in any government’s survival or demise is the influence of the Pakistani armed forces, which has been involved in every change of power. There has been a new chief-of-staff since January 1996, General Jehanghir Karamat, and he has kept his opinions on the situation to himself. Like his predecessor he maintains he has little interest in politics, but past experience has shown such positions to be highly flexible in the face of instability.

Cabinet expansion brings On July 31 Ms Bhutto made a long-delayed cabinet expansion, the first major in the prime minister’s expansion during her term of office, and made a decision which is in one way husband— a solid response to opposition criticism that her leadership was flagging, but on the other hand a move which will cast doubt on her good judgement. She gave her husband, an MP, Asif Ali Zardari, a cabinet post. Until now he has been the head of the country’s Environment Protection Council.

—and makes him The next day the portfolios were announced and Mr Zardari was chosen to investment minister head a new Ministry for Investment. It is a risky gamble for Ms Bhutto. Her husband has faced years of allegations from many political groups about cor- ruption. In the past he had been jailed for more than a year and a half by the opposition when they were in power on a number of corruption charges. He was subsequently cleared of all wrongdoing, and has denied all the subsequent accusations of corruption, describing them as an opposition smear campaign. Ms Bhutto has already been warned in the past by sources in her party and by elements in the armed forces to limit her husband’s role.

The government’s growth GDP (at factor cost) is officially estimated to have grown by 6.1% in fiscal year forecast is ambitious— 1995/96 (the target was 6.5%), up from 4.7% in 1994/95. The 6.3% growth target set for 1996/97 is not going to be easy to meet. Early indications suggest another good year for cotton output. The secretary for food and agriculture, Zafar Altaf, is quoted as saying that “we are heading towards a situation where the cotton crop (in the current fiscal year) will beat the 11.92m bales record set in fiscal 1991/92, as we expect more than 12m bales this fiscal year”. However,

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cotton output levels, which had fallen in early August, later steadied following an unconfirmed report in the local press that the leaf curl virus had hit 30-40% of the 1996/97 crop in the Multan region of Punjab. (Punjab contributes 8.7m bales to the government’s current estimate of 10.6m bales).

—particularly as industry The government’s prediction of 7.2% manufacturing growth in fiscal 1996/97, continues to suffer— compared with an estimated 4.8% in 1995/96, seems optimistic. Industry is in deep crisis, with a narrow base and little value-added. It needs massive invest- ment, but there is little sign of this materialising. Foreign investment should continue to grow, but only a small proportion of it is being earmarked for industrial ventures. The June budget has not benefited industry and invest- ment sentiment is very weak, despite the improved law and order situation in Karachi. Even if the agricultural sector experiences healthy growth, GDP growth (at factor cost) is not expected to exceed 5.2% in 1996/97.

—against a background of The June budget has set an ambitious target of reducing the budget deficit to high inflation— 4% of GDP by 1996/97. But later tax concessions and the government’s inabil- ity to keep to expenditure targets in the past will almost definitely mean that further deficit financing through printing money is inevitable. This, along with a depreciating local currency, will ensure inflation remains high in calendar 1996 and 1997, averaging 12% in both years.

—and a rising Export growth shows no sign of accelerating rapidly in the next 18 months—but current-account deficit import growth will. During the first 11 months of 1995/96, merchandise exports grew by only 5.8% in dollar terms. Although exports of cotton and its related by-products (excluding synthetic textiles) grew by 15% during the period from July 1995-April 1996, all other major items were down over the same period. The External balances merchandise import bill for July 1995-April 1996 rose by 16.5% (in dollar terms) $ bn to $10.9bn, but the State Bank of Pakistan (the central bank)’s Economic Survey 0 warns that the “present developmental needs may result in excessive import of machinery, chemicals, iron and steel, which may lead to higher imports”. Omi- -2 nously for Pakistan, remittances from overseas workers are falling. Workers remittances—the principal source of foreign exchange earnings after merchan- dise exports—fell by 18.8% during July 1995-March 1996, to $1.1bn. The prin- -4 cipal reason was that remittances from oil-producing countries fell steeply by 24.4% during the period (down 35.8% from Kuwait, and 28.1% from Saudi -6 Arabia) to $833.16m from $1.1bn in 1994/95. Pakistan will not be able to avoid Trade Current account a bigger current-account deficit in calendar 1996 as remittances continue to fall -8 and imports grow at a more rapid rate than exports, and thus the deficit of 1993 94 95 96 97 $4.4bn in 1995 is likely to reach $5.5bn in 1996. Without drastic measures to Source: EIU. slow import growth the deficit could easily reach $6.2bn in 1997.

The government needs an The government says its June budget is aiming to achieve the IMF target of a IMF deal soon fiscal deficit of 4% of GDP, but its failure to reduce the maximum tariff rate from 65% to 55% and to scrap the 10% regulatory duty on imports imposed in October 1995 means it has reneged on commitments it made to the IMF before the approval of the 15-month $600m stand-by loan in late 1995. The IMF has delayed disbursements of two tranches amounting to nearly $200m due in the last fiscal year (1995/96). The stand-by arrangement with the IMF will have to be

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renegotiated, but a planned trip to Islamabad by a delegation from the IMF at the beginning of August to discuss the release of the third tranche of $65.5m was postponed. Now Pakistan will have to wait until the annual World Bank/IMF conference in Washington in late September before any new deal can be brokered.

Forecast summary ($ m unless otherwise indicated) 1994a 1995a 1996b 1997b Real GDP growth (%)c 4.0 4.7 6.1 5.2 of which: agriculture 2.8 4.9 6.7 5.8 manufacturing 5.6 4.4 4.8 6.5 Consumer price inflation (year-end; %) 8.0 10.8 10.4 14.3 Merchandise exports fob 7,005 7,734 8,538 9,386 Merchandise imports fob –9,600 –11,049 –12,372 –13,444 Current-account balance –3,148 –4,465 –5,540 –6,232

a Official and EIU estimates. b EIU forecasts. c Fiscal year ending year stated; at factor cost.

Economic results and forecastsa (PRs bn at constant 1987 prices; % change year on year in brackets; fiscal year ending year stated) 1993b 1994c 1995c 1996d 1997d Private consumption 383.10 398.50 423.78 454.29 481.48 (1.8) (4.0) (6.0) (5.7) (6.5) Public consumption 71.10 70.90 71.40 74.97 73.8 4 (17.7) (–0.3) (0.7) (5.0) (–1.5) Gross fixed investment 96.40 100.90 102.25 103.46 109.29 (5.2) (4.7) (2.7) (4.2) (6.1) Stockbuilding 8.70 9.00 8.50 9.00 8.50 (0.0) (3.4) (1.4) (1.5) (1.3) GDP at market prices 549.50 571.30 595.87 623.28 654.44 (1.95) (3.97) (4.30) (4.60) (5.00) Exports of goods & services 101.20 101.10 100.80 106.84 115.39 (1.4) (0.0) (–0.3) (6.0) (8.0) Imports of goods & services 111.00 109.10 113.90 125.29 134.06 (13.6) (–1.7) (4.4) (10.0) (7.0)

a Fiscal years July-June. b Actual. c Official and EIU estimates. d EIU forecasts.

Gross domestic product Pakistan rupee: real exchange rate (b) % change, year on year 1990=100 6 110

5 100 PRs:$ 4 90 PRs:DM 3 80 2 PRs:¥ Pakistan Asia excl Japan 70 1

0 60 1993 94 95 96(a) 97(a) (a) EIU forecast. (b) Nominal exchange rates adjusted for changes in relative consumer prices. Sources: EIU; IMF, International Financial Statistics. 1990 91 92 93 94 95 96(a) 97(a)

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Review

The political scene

A new opposition The decision on July 24 by 15 opposition parties to group together marks the grouping takes shape— first time that the opposition has collectively called for the removal of the government in more than two and a half years. Besides the main opposition party, Nawaz Sharif’s faction of the Pakistan Muslim League, the PML (N), the group includes parties from the hardline Islamic Jamaat-i-Islami to the left- wing Awami National Party, and the main opposition party in Pakistan’s larg- est city, Karachi, the Mohajir Quami Movement (MQM). A joint declaration by the group after its first meeting described the government as corrupt and inef- ficient and called on the president to dismiss it and replace it with a neutral caretaker administration. The declaration also called for the setting up of an independent commission to investigate charges of corruption.

—and Jamaat-i-Islami The grouping brings Jamaat-i-Islami closer to the PML (N) after a period of seems to be closer to the antagonism. The Jamaat-i-Islami had backed Mr Sharif at the general elections PML (N)— in 1990, and he won. But the two parties developed differences over Islamic issues and Jamaat-i-Islami refused to support him at the 1993 elections. Ele- ments in the PML (N) still blame Jamaat-i-Islami for his defeat. Something of an uneasy rapprochement is under way, but Jamaat-i-Islami still refuses to say whether it will support the PML (N) at future elections.

The grouping, which calls itself the Save Pakistan Movement, has called a campaign of nationwide civil disobedience in August 1996 to try to achieve its aim. It hopes this will be enough to change the government, but it is divided about what other measures to take if street protests do not work. The move- ment is considering whether its members should resign en masse from the country’s elected bodies—a move unprecedented in Pakistan. Jamaat-i-Islami, which supports the idea, is trying to force the debate. Its leader, Qazi Hussain Ahmed, says he has decided to resign from parliament and has sent his resig- nation to the chairman of the Senate.

—but divisions exist over There are divisions in the opposition over the resignation tactic: the PML (N) strategy says it will resign en masse, as a kind of coup de grâce for the government once street protests are under way. There is little chance of an agreement on the issue until the extent of any lasting protest becomes clear. And there is no sign that the opposition call has struck a major chord with the public. The government is confident. Benazir Bhutto says the resignations of opposition party members will only give her coalition a safer majority. On the opposition’s plan to bring her down with a disobedience campaign, she said: “There is no harm in wishful thinking.”

A judicial decision causes A ruling made by Pakistan’s Supreme Court in March is turning out to be a problems for the major source of controversy. The court decided to curtail the power of the government— government to appoint and transfer judges. The prime minister reacted by saying there were elements in the country trying to topple the government by using the judiciary. The government said the court had gone beyond its

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powers, and asked it to think again, applying for a review. But on July 7, with no sign of the court backing down, the government withdrew its appeal for review of the decision on a technicality and now has to accept the judgment. Lawyers for the government had insisted that the Chief Justice of the court, Sajjad Ali Shah, should not be among the judges hearing the case, arguing that his own position depended on the outcome of the case. He rejected this, and the government withdrew its petition. This is the legal end of the road for the government’s efforts to challenge the decision. The Chief Justice rejected the prime minister’s accusation as an attempt to drag the judiciary into politics.

—and splits the judiciary The judiciary is now split between those who think the judgment is a bold move asserting the independence of the courts, and a smaller number of others who think the move is unconstitutional and undemocratic. Judge Shafi Muhammadi of the Federal Shariat Court in Islamabad recently made a num- ber of remarks about the judgment when he was giving a ruling on a bail petition. The details of the comments are not known, as the Supreme Court has banned their publication. But, in an unprecedented move, the Supreme Court summoned the judge to explain what the court describes as unwarranted ad- verse comments about the ruling which it says he made in an insulting man- ner. The Court says it will ask him to explain why action should not be taken against him for contempt of court. The Supreme Court is also facing opposition to its ruling from a number of high court judges whose appointments have been declared invalid by the judgment. Some have refused to step down.

The Supreme Court One example of the poor state of relations came on June 26 when the Supreme restores local bodies in Court decided to restore local bodies in Punjab, which had been dissolved by Punjab— the interim government of the then prime minister, Moeen Qureshi, in 1993. Although that decision had benefited Ms Bhutto because most local bodies were controlled by her main opponents, the PML (N), or the Jamaat-i-Islami, her government delayed holding fresh elections, worried that it would be beaten again. A lengthy legal battle finally made it to the Supreme Court. Its full bench restored the local bodies and ordered their functionaries to be al- lowed to complete their terms, which expire in February 1997.

—only to face open and However, the next day, in defiance of the judgment, the government passed a immediate defiance from bill in the Punjab assembly to repeal the Local Bodies Ordinance, and tens of the government— thousands of local body members were again without a post. The decision is being challenged in the Supreme Court, and it is being asked to initiate con- tempt of court proceedings against the chief minister of Punjab, Arif Nakai, for introducing the bill.

—but the crucial battle is The most potentially destabilising case for the government is waiting in the yet to come wings. It involves the former chief minister of Punjab, Mansour Wattoo, who was removed from office last year by the president. He is challenging his dismissal and wants to be reinstated. The Supreme Court has not allowed him to challenge his dismissal directly and has referred the petition back to the Lahore High Court. If Mansour Wattoo is reinstated it could throw Pakistan’s most politically and economically important province into turmoil. Punjab returns most seats to the National Assembly because of its population, and the

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Bhutto administration is holding control of it by a slim majority. The prime minister went down to Lahore when the case came up and encamped there for several days, ready for the worst. Instead the government received a reprieve. The Chief Justice of the High Court decided to delay the case until after the summer vacations. That means it will not be heard before September at the earliest. Despite the breathing space, the danger for the government has not gone away.

Imran Khan’s political The entry of the former Pakistani cricket captain, Imran Khan, into the polit- movement goes nowhere— ical arena has been a non-event so far, despite widespread sympathy for his aims. The overwhelming reaction has been that while there is nothing wrong with his ambitions, he seems confused and incapable of achieving them. He has said he will contest the next elections, whenever they come, with the aim of becoming prime minister, as the only way of ridding the country of corrup- tion, a nose-diving economy and a “VIP culture”. He hoped that his move- ment, launched in April 1996 and called the Tehrik-i-Insaaf (Movement for Justice) would draw massive support from the public. But there has been no sign of that so far. He has had little chance to put his claim to a real test with nationwide rallies. He undoubtedly commands considerable grass-roots sup- port but it is unclear if an already cynical Pakistani public will accept him as a credible alternative to the two main entrenched political rivals, the Pakistan People’s Party (PPP) and the PML (N). Imran Khan is four years past the peak of his popularity, when he led the cricket team to victory against England in the 1992 World Cup.

—while he is preoccupied While his movement continues to promise a full agenda of policy proposals with legal battles abroad soon, Imran Khan has been preoccupied with libel cases against him in London by his fellow (English) cricketers, Ian Botham and Allan Lamb, which he won. Although closely followed in the Pakistani press, no observers see a political profit to Imran Khan from the victory. Coverage focused purely on his cricket- ing past, an indication of how little Imran Khan is regarded as a realistic threat to the political establishment at the moment. Nevertheless, Ms Bhutto has continued a verbal campaign of attrition against him. She used a speech in Karachi on July 4 to accuse him of corruption, describing him as a spoiled brat who had used public donations to the charity cancer hospital he set up to fund his way into politics. He has denied similar accusations in the past from other politicians in her party.

Corruption issues The ever-present issue of corruption has forced its way to the top of the polit- dominate the political ical agenda again. The opposition believed it had the government on the agenda for a while— defensive in June, when Mr Sharif wrote to the president, urging him to call a referendum to consider whether a judicial commission should be set up to look at corruption allegations against politicians and all other public servants. An opposition resolution calling for the commission was voted down by the gov- erning coalition in parliament the previous week. Few Pakistanis have any faith in the existing government anti-corruption bodies and agencies, which have proved largely ineffective.

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—fuelled by a report from The controversy surfaced following the annual report, at the end of May, by an anti-corruption agency the federal anti-corruption commission, which concluded by saying that cor- ruption in Pakistan is so rampant—and extends so far into the corridors of power—that the commission itself had been crippled in its attempts to find out the truth. The committee said that most countries where corruption is a prob- lem (giving the examples of Japan, South Korea and China) have a sense of shame about it. The head of the anti-corruption committee said the only way to start getting the proof required for prosecution was for there to be a national change of heart. The government, however, says its anti-corruption efforts are adequate and working well.

Allegations about a house On June 9 a UK newspaper, the Sunday Express, published an article alleging purchase— that the prime minister and her husband, Asif Ali Zardari, had bought a $3.75m mansion and 350 acres of land in the English county of Surrey. Ms Bhutto repeatedly denied the report. She said: “I am too busy running the government to go shopping for houses.” The article was brought to the attention of parlia- ment by her main political rival, Mr Sharif.

—make an appearance at When Ms Bhutto entered the parliament chamber for the budget session on the budget session June 13, most of this opposition members rose to their feet and waved copies of the newspaper, specially flown from London, open at the page of the article. The opposition continues to try to make capital out of the allegations. Just after the new session of parliament started at the end of August, Mr Sharif made a long and detailed speech revealing what he said were the records of telephone calls from phones associated with the prime minister and her husband and their friends dialling a certain number in Surrey, England. He listed the sup- posed numbers and the time and duration of the calls. The prime minister’s husband says the alleged purchase of the mansion is a figment of the oppo- sition leader’s imagination.

There are family troubles On July 7 Ms Bhutto and her brother, Murtaza Bhutto, met for the first time in for Ms Bhutto too— six years. They developed differences about the direction of the PPP, founded by their father, Zulfikar Ali Bhutto, in the 1960s. They met for three hours in Islamabad. Murtaza Bhutto said the meeting had been arranged at the request of their mother, Nusrat Bhutto. Ms Bhutto has been fighting pressure from her mother to give her brother a bigger role in the PPP. A few years ago, the two women split over the issue and Ms Bhutto removed her mother from the post of Chair of the party. They are now closer, but the issue has not been resolved, and Murtaza Bhutto leads a small faction of the party accusing his sister of corruption.

—as a reconciliation Murtaza Bhutto said he had made two demands at the talks: for his mother to meeting fails be restored as the Chair of the PPP, and for the removal from it of what he called remnants of the military administration which hanged their father in 1979. Addressing a news conference in the city of Peshawar after the meeting, Murtaza Bhutto said he had been hoping for a reconciliation, but his sister had shown no signs of wanting one, and that the gulf between them had grown. He said she was completely divorced from reality and that she wrongly thought that everything in the country was all right. He said the party faction he led

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should now be considered as separate from the PPP. This is not a big blow for the prime minister, since her brother has little popular support. But her party fears that he could become a rallying point for the opposition.

Ms Bhutto holds rallies in On July 3 and 4 Ms Bhutto held two public rallies in Karachi, the first such Karachi— appearances in front of large crowds there since becoming prime minister. She announced the formation of committees to consider dropping criminal charges against some of the hundreds of suspected activists of the MQM, who have been arrested by the authorities over the last year. She says the govern- ment has finally brought peace to the city. To try to reinforce the point, her second rally of the week was held in Orangi, an area dominated by supporters of the MQM. The last time a senior government official visited the area it was in an armoured car. A few thousand people came to see her—there were no anti-government demonstrations. MQM supporters stayed away.

—where the situation There has been a remarkable turnaround in the situation in Karachi this year, continues to improve with an unprecedented lull in violence since February. In June last year more than 300 people were killed. In June this year it was less than 20. The govern- ment says a big security operation has defeated the MQM—many suspected activists have been killed and hundreds arrested. Ms Bhutto said that as a gesture, the authorities would consider dropping charges against suspected activists not charged with murder. On August 15 the government of Sindh released 51 members of the MQM who it said had been involved in minor crimes. The MQM says the lull in violence is merely a fragile peace, and could be “the calm before the storm”.

Bombings continue in Law and order in Punjab, however, have continued to deteriorate. On June 10 Punjab there were three bomb explosions within 20 minutes of each other near the city of Gujranwala—one in a bus, killing at least four people and injuring more than 12. Another bomb exploded in the waiting area of a railway station in the city of Faislabad on July 8, killing three people and wounding at least 14 others. Earlier this year there were two bomb attacks on buses, including one of the worst attacks in the country’s history, with 40 people killed. Pakistan contin- ued to blame India for most of the attacks. On July 31 Ms Bhutto announced that the authorities had arrested two terrorists who had confessed to two of the major attacks: the bombing of Lahore airport nine days before, in which six people were reported killed and more than 50 injured; and the bombing in April of the cancer hospital set up by Imran Khan in Lahore, in which six people were killed and more than 30 injured. She said that two bombs had been recovered from them, and that the men had admitted working for Indian intelligence. The prime minister also said the two recent bus bombs were carried out by India to divert attention from the elections it was holding in Indian-administered Kashmir.

Ms Bhutto said in a speech on Kashmir on August 13 that the struggle was entering a crucial phase. “Renegades and mercenaries trained and financed by India have been let loose for counter-insurgency to terrorise, intimidate and eliminate the authentic representatives of the Kashmiri people.” She added: “More immediately, the purpose is to facilitate the exercise of state assembly elections.” Critics of the government say it has latched on to the issue of the

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Kashmir elections to provide a convenient explanation for a situation it cannot control, and does not really know the reason for. Ms Bhutto had initially blamed the opposition in Pakistan for the bombing of Imran Khan’s hospital.

The PPP gains in Kashmir A new administration has started work in Pakistani-administered Kashmir dominated by Ms Bhutto’s political party, the PPP, for the first time in over five years. The party and its allies won a landslide victory at assembly elections at the end of June. The return to control for the PPP is sweet revenge, after its last administration was dissolved in 1991, just nine months after being sworn in. The party was only formed in Pakistani-administered Kashmir in 1972 during the time when Ms Bhutto’s father was leading Pakistan. The PPP has never had a full term of office there. Its only previous administration was in 1975, cut short in 1977 when General Zia ul Haq overthrew the national government in an army coup, imposed martial law and later hanged Zulfikar Ali Bhutto for conspiracy to murder. The new officials have acted immediately to try to wipe out part of that legacy. The new prime minister of Pakistani-administered Kashmir, Sultan Mehmood Chaudry, has revoked the holiday which used to be observed on August 17 marking the anniversary of the death of General Zia. Whatever political party is in control, the issues for the administration remain the same, namely the economy and job-creation.

Another major concern is Pakistani-administered Kashmir’s demand for a roy- alty to be paid to the administration from the central government, for a hydro- electric dam in the region, the Mangla dam. The national government stopped paying a royalty in 1972, and officials in Kashmir calculated that the resump- tion of the payment could bring PRs4bn ($110m) annually. The issue of the future of the region is also on the agenda, but there is less urgency for a solution than the national government makes out. The priority for most people is an improvement in their standard of living.

A major air force deal The Pakistan navy is continuing to negotiate the purchase of 32 Mirage aircraft provokes controversy— at the cost of around $4bn. Each plane will cost $90m, with the rest spent on training and spare parts for each aircraft. The deal has split the armed forces by infuriating the army, which wants to cancel the deal, and has also provoked a strong behind-the-scenes tussle in the government. The offices of the prime minister and the defence minister are reported to be strongly against a review of the decision since the defence committee of the cabinet gave the deal the go-ahead in 1993. The implications of the purchase for other deals and for government spending in general are the major cause of concern. Pakistan reportedly wants to go ahead by raising half the money itself, and asking France for a loan for the other half. But it may prove impossible to raise around $2bn from Western banks in the current poor economic climate.

—but other purchases go On July 31 Ukraine announced that Pakistan had purchased 300 T-80 UD main ahead battle tanks costing more than $500m; the first major arms purchase from a member of the former Soviet Union. The tanks are due to be delivered over the next three years, starting with a first consignment early next year. They are fitted with advanced features including the ability to fire at a target while moving. The Pakistan army preferred the Ukranian tank to the Chinese T-85 and the Polish T-72. Pakistani defence sources say the deal includes training

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and maintenance. Meanwhile, the first shipment of arms released by the USA under the Brown Amendment has left the USA and is scheduled to arrive in Karachi later this year.

Little progress towards Hopes of a return to talks with India at foreign secretary level, which broke talks with India down in early 1994, have diminished. Ms Bhutto had made the offer of a return to dialogue in the first place. India’s new prime minister, H D Deve Gowda, replied positively in early June. Then a bizarre waiting game ensued, with Ms Bhutto saying that she was busy with the budget and would reply soon afterwards. India waited patiently, but no reply came, while the Pakistani for- eign office made repeated statements that a letter would be sent in the near future. Then the foreign minister, Aseff Ahmad Ali, surprised everyone with a statement that no reply would be made. He said there was no need to write another letter; the modalities of talks just needed to be worked out, since both sides had already expressed a willingness to meet. Ms Bhutto’s accusations of involvement by India in Punjab’s law and order situation have put paid to any immediate prospects for talks.

So has the Comprehensive Test Ban Treaty (CTBT). Whether to sign the CTBT has been a dilemma for the Pakistani government. Its policy had shown signs of wavering in the face of widespread pressure to sign without India ratifying the treaty. The foreign office at one point started to hedge its bets, appearing to favour the signing of the treaty as long as it did not come into force until all the five nuclear powers and three threshold nuclear states had ratified it. But the prime minister repeated on August 1 that Pakistan would not sign unless India did, in the interests of national security.

The US ambassador to The US ambassador to India, Frank Wisner, visited Pakistan in July and ap- India visits Pakistan pealed for both countries to seize the opportunity for “greatness within their grasp”. Speaking to the Armed Forces Command and staff college in Quetta on July 10 he said that, while acknowledging that America had found common ground with both countries, “the truth is, as our relationships grow in breadth and complexity, the likelihood also grows of divergent opinions surfacing”. He appealed for India and Pakistan to pay particular attention to formalising trade ties and to the bilateral political relationship, especially over Kashmir. He said: “Elections in India pose no threat to Pakistan, to your sovereignty, your prin- ciples, or to your claims on Kashmir. A political process is the single best antidote to the violence that plagues the Valley. It will rejuvenate a weary people and revitalise a moribund economy.”

Embarrassment over the Another part of the Jammu and Kashmir issue appears to have caught the Security Council agenda Pakistani foreign office completely off guard. On August 22 its spokesman, Gul Hanif, said that Pakistan was making urgent efforts to try to prevent the UN Security Council from deleting a permanent item on its agenda relating to Pakistan’s dispute with India over the region of Jammu and Kashmir. He said the issue was among 50 items scheduled to be deleted from the agenda on Septem- ber 15. What has embarrassed Pakistan is that it did not get wind of the decision earlier. Pakistan, he said, regarded the decision to delete the item as incorrect, immoral and frivolous; the main reason for it appeared to be an overcrowded agenda. What is more, the foreign office said a committee of the Security

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Council had taken the decision, without consultation, in a closed meeting. Mr Hanif said the Security Council has agreed to review its decision, and that Pakistan had been told that a UN working group would meet soon to finalise its recommendations. For Pakistan the removal of a permanent item on the issue would be a major blow and embarrassment. Its position is that the people of Jammu and Kashmir should be allowed the right to self-determination accord- ing to UN resolutions passed in the General Assembly. It does not want the UN itself to lose interest so publicly.

There is progress with the Pakistan’s relations with Afghanistan have taken a major step forward for the Afghan government— first time in over a year. On August 10 four senior members of the Afghan government—the interior, foreign, and deputy foreign and deputy commerce ministers—arrived in Islamabad for talks with Pakistani officials led by the prime minister’s adviser on finance and economics, V A Jaffrey. It was only the second official meeting since September 1995, when a mob of Afghan govern- ment supporters burned down Pakistan’s embassy in Kabul. In the first meeting on May 7, 1996, there were only a few hours of discussion focusing on Pakistan’s demand for compensation for the attack.

—as Pakistan says it will This time, Pakistan said it would consider reopening its embassy shortly. The reopen its embassy in foreign secretary, Najumiddin Shaikh, is due to make an official visit to Kabul Kabul to see where a new embassy could be built. Both sides say the main topic at the talks was the supply of food and petroleum to Afghanistan through Pakistan. Officials said Pakistan had agreed to make a goodwill gesture by allowing a delegation from the Afghan government to buy food and fuel from local mar- kets to supply the immediate requirements of the people of Kabul. The new dynamic in the relationship coincides with the first representation in the government of the Hezb-i-Islami leader, Gulbuddin Hekmatyar, who was re- cently made prime minister after switching sides from the opposition.

Economic policy and the economy

The budget increases The draft budget for fiscal year 1996/97 (July-June) projected overall spending at expenditure— PRs500.2bn ($14.4bn), up 15.1% on the budget estimates of PRs434.7bn for 1995/96, with outlays on debt servicing (PRs186.1bn, up from a revised figure of PRs164.5bn last fiscal year) and defence (PRs131.4bn, up from PRs115.2bn last financial year) accounting for 63% of the total. The budget forecast total income at PRs439.3bn, up 8.4% on budget estimates for 1995/96 of PRs405.1bn. Ex- pected revenue from domestic sources, primarily taxes, will rise by 7.2% com- pared with the estimated 1995/96 outturn, to PRs336.4bn. Indirect and direct tax receipts were forecast to rise by 12.2% and 14.8% respectively—an ambitious target, which looks unlikely to be realised. Surcharges are expected to increase by 4.8%. Non-tax revenue has been projected at PRs90.5bn in 1995/96, com- pared with PRs94.3bn in the revised estimates of 1995/96.

—and raises taxes The draft budget set out to raise an additional PRs40.8bn in new taxes, taking initially— domestic taxes to PRs320bn, principally through extending the General Sales Tax (GST)—a crude sort of value-added tax—to all imported and manufactured goods except for sugar, edible oil, petroleum products, unprocessed foodstuffs

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and agricultural produce, and by raising the standard rate from 15% to 18%. The government aims to raise PRs25.8bn from the extension of the sales tax. Tax holidays for industry were abolished; import duties were lowered on cer- tain machinery for textiles and manufacturers, as well as for some primary raw materials for the plastics industry; and many income tax exemptions were eliminated. There was only a small increase in direct taxes—the target is to raise an extra PRs3bn.

—only to be forced to Opposition parties, workers and members of the business community staged lower them after widespread protests against the budget in June. The business sector was espe- widespread protests cially unhappy over the expanded scope of the GST. The government was also criticised for not imposing taxes on large landowners or cutting military ex- penditure. Responding to the fervent criticism, the government reduced some of the proposed taxes and lowered the revenue target. A tax on buses, trucks and oil tankers was reduced, and plans to impose the 18% general sales tax on many industrial products was eased.

Comparative budget positiona (PRs m; fiscal year) 1995-96 1996-97 Budget Revised Budget Income 405,123.0 405,350.9 439,302.2 Internal income 324,526.6 313,737.9 336,400.3 Revenue receipts (net) 265,884.7 260,612.1 280,034.5 Capital receipts (net) 37,141.9 30,473.7 26,120.4 Financing for SAP from privatisation proceeds 12,000.0 12,000.0 14,000.0 Financing by provinces of PSDP 9,500.0 10,652.1 14,045.4 Financing by Sindh & Punjab – – 2,200.0 External resources 80,596.4 91,613.0 102,901.9 Expenditure 434,689.7 440,471.7 500,156.8 Current 338,189.7 353,228.7 395,405.8 Development (PSDP) 96,500.0 87,243.0 104,751.0 Less expected cash build-up – 4,608.3 – Deficit 29,566.7 30,512.5 60,854.6

a Before concessions were made.

Source: Ministry of Finance.

GDP growth targets are as Although GDP (at factor cost) is estimated to have grown by 6.1% in fiscal year ambitious as ever— 1995/96 (the target was 6.5%), up from 4.7% in 1994/95, the growth target of 6.3% for 1996/97 is not going to be easy to meet. The cotton crop will need to be well over the estimated 1995/96 outturn of 9.94m 170-kg bales. While higher prices available to growers over recent months should encourage a further ex- pansion of the area under cultivation, the return of adverse weather or the leaf-curl virus which have devastated previous harvests cannot be ruled out.

—but inflation has slowed Policy-makers will be happy with recent inflation figures. Consumer price inflation was 10.3% year on year in July, compared with 10.8% in May and 11.8% in July 1995. In his budget speech to the National Assembly the finance minister, Makhdoom Shahabuddin, called for a further lowering of the infla- tion rate through “tight control over fiscal deficits and monetary expansion”.

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The budget for the current fiscal year (1996/97) does not look encouraging for inflation.

The IMF deal is stalled— The government says its budget is aiming to meet the IMF target of a fiscal deficit of 4% of GDP, but its failure to reduce the maximum tariff rate from 65% to 55% and to scrap the 10% regulatory duty on imports imposed in October 1995 means it has reneged on commitments it made to the IMF before the approval of the 15-month $600m stand-by loan in late 1995. The IMF has delayed disbursements of two tranches amounting to nearly $200m due in the last fiscal year. The stand-by arrangement with the IMF will have to be renego- tiated. A planned trip to Islamabad by a delegation from the IMF at the begin- ning of August to discuss the release of the third tranche of $65.5m has been postponed.

—because the budget has The key reason is that the budget has not been finalised. The IMF has not been not been finalised impressed by the failure of the government to make progress with major privat- isations, or by its attempts to massage budget figures by retiring enough loans a few days before the conclusion of each quarter to meet the quarter’s borrow- ing requirement, and then re-borrowing the amount within days. The govern- ment retired and re-borrowed an average of PRs30bn ($868m) in each quarter since the end of the second quarter in December 31, 1995. This appears to have jeopardised the chances of obtaining substantial Enhanced Structural Adjust- ment Facility (ESAF) credits from the IMF in the medium term. Bilateral credi- tors are likewise expected to withhold funds.

Agriculture

The budget smiles on The longrunning issue of whether landowners and farmers should pay tax on landowners again their agricultural income has progressed little further. The budget increased the wealth tax by 60%, but it will only raise about PRs20m ($565,000) for the government. This compares with a wealth tax on houses, plots and apartments in urban areas, which is expected to raise over PRs100m. There is a new capital value tax on the purchase of large agricultural land holdings, from which the government is predicting an extra PRs300m. However, landlords who pay little wealth tax will be exempt from the tax. The issue of tax for the agricultural sector is delegated to the provincial governments where little is done in the face of powerful lobbying.

Agriculture output rises— The State Bank of Pakistan (the central bank)’s Economic Survey reports an overall growth of 6.7% in the agricultural sector in 1995/96, up from 5.9% in the previous year. It attributes this to an expansion of 9% in major crops, 4.9% in minor crops, 5.6% in livestock and 8.3% in the fishery sector. The report says the overall growth would have been much higher but for a decline in forestry.

—and estimates for last There are mixed messages on the performance of cotton to date, but it seems to year’s cotton crop are have recovered this year and may be heading for a big crop. The Economic encouraging Survey for 1995/96 estimates it at 10.6m bales, compared with 8.7m bales in 1994/95, up 21.7% because of improved weather and an increase in the area under cultivation to 2.99m ha, from 2.65m ha in 1994/95. Later government

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predictions suggest an even higher crop, in what appear to be government leaks ahead of the publication of official estimates. The secretary for food and agriculture, Zafar Altaf, is quoted as saying that: “We are heading towards a situation where the cotton crop will beat the 11.92m bales record set in 1991/92, as we expect more than 12m bales this fiscal year.” However, cotton output levels, which had slid in early August, later steadied following an un- confirmed report in the local press that the leaf curl virus had hit 30-40% of the 1996/97 crop in the Multan region of Punjab. Punjab contributes 8.7m bales to the government’s current estimate of 10.6m bales.

Rice production is higher— The production of rice in 1995/96 totalled 3.97m tons (of which 1.48m tons was basmati and the rest irri and other varieties), an increase of 15% compared with 3.45m tons in fiscal year 1994/95. The total area under cultivation in 1995/96 is reported to be 2.16m ha.

—and wheat cultivation The Economic Survey said that the country had slightly exceeded the targets for has also improved wheat cultivation set for the year, which were for production of 17.4m tons, slightly— with 8.2m ha under cultivation. In 1995/96 the crop was reported to be 17.57m tons, with 8.37m ha under cultivation, up by 3.3% and 2.4% respectively. Pakistan imported 27.5% less wheat during the period from July 1995-April 1996, but the import bill rose by 10%, owing to the “unprecedented” 51.6% rise in its unit value. The sharp increase in the price on international markets took the import bill up by $39.2m.

—but sugar production The report also says that sugar production was 2.5m tons during 1995/96, does less well down compared with 3m tons last year. Some areas under sugar cultivation were switched to cotton production, leaving a total sugar cultivation area of 960,000 ha compared with 1.09m ha in 1994/95. Four mills had been closed, the report says—leaving a remaining 70 working mills in the country (37 in Punjab, 27 in Sindh, six in North-West Frontier Province).

The Agricultural The chairman of the Agricultural Development Bank of Pakistan (ADBP), Tariq Development Bank Sultan, presented an overview of the bank’s recovery on August 21. He said that recovers during the fiscal year 1995/96 some PRs12.8bn ($360m) has been recovered, compared with PRs9.8bn the previous year. The total credit disbursement dur- ing the last financial year was PRs10.3bn. Recovery had been achieved because only PRs478m of loans had been rescheduled compared with a record resched- uling of PRs4.7bn in the previous financial year. The bank had resumed dis- bursements in March 1996 after, in effect, suspending credit in August 1995 after a cash crisis following years of imprudent lending. Speaking at the meet- ing, Pakistan’s minister of state for finance, Makhdoom Shahabuddin, said the recovery programme of the bank was pleasing compared with what he de- scribed as a “shambles” in the past. He appealed for a change in the culture in the agricultural and rural sector. There was, he said, “no culture of repayment of loans”.

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Industry

Industry is divided over A team from the Federation of Pakistan Chambers of Commerce and Industry budget concessions (FPCCI) met the government shortly after the announcement of the budget in June in an attempt to get concessions. The head of the team, and president of the FPCCI, senator Ilyas Bilour said: “The policies of the present government had shaken the confidence of industrialists and the community had lost confi- dence.” He said the draft budget was, “smuggling oriented”. The Federation described the budget as anti-poor, anti-industry and anti-traders, predicting it would lead to massive unemployment.

The FPCCI gets little from The meeting with government finance officials, on July 18, yielded little for the the government— FPCCI. The Federation withdrew a number of demands, including the lowering of the 18% General Sales Tax (GST) for 28 industries under the fixed-tax re- gime, zero-rated GST for export-related industry, GST concessions on cotton waste, and GST concessions for the poultry feed industry. It did not come away empty-handed, however. A 5% central excise duty on soap and matches was withdrawn, the country’s cottage-industry GST exemption of PRs300,000 was raised to PRs10m, and a 4% turnover tax was brought down to 2%.

—and annoys the business But the meeting infuriated parts of the business community, especially since community the Federation had come away from the meeting claiming that it had got almost everything it wanted. On July 24 a meeting of the Pakistan Exporters Forum, grouping 19 export associations, said they would withhold the pay- ment of sales tax on zero-rated industry, with the possibility of a nationwide strike, to be discussed. It said the FPCCI had failed to convince the government of the gravity of the situation.

The APTMA criticises the The All Pakistan Textile Mills Association (APTMA), an influential lobby, has government’s export warned the government that the allowance of 1.8m bales for export in 1995/96 target— is forcing mills across the country to close. An extraordinary meeting of the association on July 27 in Lahore said the “majority of its member mills” had been closed because of a cotton scarcity, leading to the increased prices of new crop arrivals. Officials say 87 textiles mills had closed up to April 1996, but said many of them had been inoperative for years. Some industry analysts say the APTMA is trying to get a pledge from the government for a ban on the export of cotton until the end of the year.

—and Mr Leghari enters The Pakistani president, Farooq Leghari, has blamed the textiles mill owners for into the cotton debate depriving cotton growers of acceptable prices. Speaking at a conference on cotton and textiles in July organised by the Cotton Export Corporation, he floated the idea of the formation of a body to bring together the different parts of the industry from grower and ginners to traders and exporters, to formulate a consensus. Some other industries have been unhappy at a number of government concessions to the mill owners, including the restructuring and rescheduling of loans.

The cement industry is The cement industry has immediately felt the pinch of the budget. It was hit by not happy about the new a number of measures, particularly the increase in furnace oil prices by 25%, taxes— the raising of the sales tax up to 18% from 15%, and a rise in excise duty from

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25% to 35%. The price of a bag of cement in the local market was PRs145-160 before the budget. Following the imposition of excise duty at 35% and sales tax at 18%, the price is now PRs185-204. There is going to be a knock-on effect in the construction sector. The industry was hoping to export cement by 1998, expecting capacity to rise to 12.7m tons compared with a projected domestic demand of 9.7 tons. Some 20 cement units are operating at the moment, with a capacity of 9.97m tons, and 16 of the units are in the private sector, according to government figures. The government reported that production from July 1995-March 1996 was 6.93m tons, up 12.4% compared with the previous year. There was one piece of good news for domestic producers—the budget raised import duties for cement from 25% to 100%.

—but not all of industry is Some sectors of industry benefited from the budget. Import duty on the ship- unhappy about the budget breaking industry has been reduced from 45% to 10%. Customs duty on iron and other ores has been lowered to 10% from 15%. Import duty on timber has been decreased and has been exempted from regulatory duty. Import duty on paper machinery was reduced from 20% to 10%, and customs duty on paper pulp was reduced from 35% to 10%.

Investment in industry The Economic Survey reports an overall 37.6% increase in industrial investment grows from 1995/96 compared with the previous year, including a 40.3% increase in investment in large-scale public-sector industry, and a 300% increase in invest- ment in small-scale public-sector industry—PRs120m, compared with PRs30m in 1994/95, but well short of the 1993/94 total of PRs173m. The government’s prediction of 7.2% manufacturing growth in 1996/97, compared with an esti- mated 4.8% in 1995/96, seems optimistic. Industry is in deep crisis, with a narrow base and poor value-added. It needs massive investment, but there is little sign of this materialising.

Energy

The Kott Adu deal The privatisation of the 1,600-mw Kott Adu power-plant, the largest thermal is finalised— plant in South Asia, was formalised by the signing of 12 agreements between the Privatisation Commission and National Power on June 28. National Power was the highest bidder, with an offer price of $218m for 26% of the shares and strategic management of the plant. The finalisation of the deal paves the way for the disposal of a similar stake in the 880 mw oil-fired Jamshoro facility near Hyderabad. Its assets are estimated to be worth about PRs15bn. Final bidding is expected to be held in late October.

—but the government is The privatisation of the Kott Adu Plant has led to the sacking of the chairman of not open to criticism the National Electric Power Regulatory Authority, Dr Gulfaraz Ahmad, after he criticised the government’s power policy. In a letter to V A Jaffrey, quoted by the weekly newspaper, the Friday Times, Dr Ahmad said: “Before privatisation, WAPDA’s generation cost at Kot Addu was PRs1.21/kwh. After privatisation we will be buying back power from Kot Addu at more than twice this value.”

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Bidding for electricity The Privatisation Commission says bids for a 26% stake in the Faislabad Area distribution units to Electricity Board (FAEB) will be invited before the end of 1996; this will be the begin soon first of eight distribution companies on offer. The commission wants to con- clude the deal during the first quarter of 1997. It includes the transfer of man- agement control to the private sector. The International Finance Corporation, adviser to the Commission on the sale, has recommended that a consortium of local and foreign investors would be the best buyers. The post-privatisation regulatory framework has not yet been drawn up.

A new power barge gets The US Maritime Administration has approved a $402m credit to Pakistan for funding a 450-mw power barge complex at Port Qasim, Karachi. It is a platform mounted plant which is expected to take 28 months to complete. The power will be sold to Karachi Electric Supply Corporation (KESC). The project expects to increase KESC’s current power supply by 25%, providing electricity for 45,000 households in Karachi.

The Iranian visit focuses The Iranian oil minister, Gholamreza Aghazadeh, arrived in Islamabad on on the pipeline deal— August 19 for a three-day visit and talks with the Pakistani authorities on a 1,600-km gas pipeline deal worth $3.5bn-4bn, that could be hit by US sanc- tions against Tehran. The official government news agency quoted Mr Aghazadeh as saying on arrival that the USA sanctions would not put “time-tested Pakistan-Iran ties in jeopardy. This is a very small political prob- lem which should not become an impediment in Pakistan-Iran relations”.

—and two agreements The talks ended with two deals, one of which was a $1.2bn contract to build a are signed joint oil refinery in Pakistan’s Baluchistan province to process 120,000 b/d of Iranian crude. Tehran Radio reported that 75% of the cost would “be met by international sources and the rest will be paid jointly by the two countries”. The two countries also signed an agreement to conduct a feasibility study for the pipeline. Pakistan and Iran had earlier decided to invite bids in July 1996 for the pipeline project. Australia’s Broken Hill Proprietary Ltd (BHP) has con- firmed that it and several other Western companies had held talks with Iran on the proposed gas export project but that BHP had not made any commitments.

Transport and communications

Partial privatisation of The sale of a 26% stake in the Pakistan Telecommunications Company to an PLC remains stalled overseas operator is still being delayed. Officials say the delay is because of worries that the response from potential buyers could be disappointing as a number of other state-controlled telecommunications companies outside Pakistan are also up for sale. It seems very unlikely that the sale will be finalised this year. But companies are still lining up in interest. On August 20 the Pakistan Air Force’s business and welfare group, Shaheen Foundation, joined a Dutch-Indonesian consortium to launch a possible bid. A Shaheen Foundation statement said it had joined with the Setdco group of Indonesia and Dutch PTT Telecom. The statement added that if successful the consortium would mod- ernise and expand the present communication network in the country through substantial investment.

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 Pakistan 23

Transporters strike— An indefinite national strike was called on July 30 by an umbrella group of transport associations, the Supreme Council of All Pakistan Public Transport Associations, to protest at the provisions in the budget which affected the industry, including: the imposition of capital value tax of 15% on the first registration of a vehicle; a 100% increase in the professional tax; a 400% in- crease in vehicle fitness certificates; 18% sales tax on spare parts; and 3% on lubricants. It lasted three days, causing widespread disruption, bringing the port of Karachi to a virtual standstill with trucks refusing to operate, and causing panic-buying of fuel in many areas.

—and win concessions It ended because an emergency negotiating team from the government gave in to a number of demands. The sales tax stays, but the government withdrew capital value tax on public transport, exempted ten-year-old trucks from taxes, and said it would scrap the increase on vehicle fitness certificates and permit fees.

The railways are in deep The Economic Survey reports that the railways carried 51.5 million passengers trouble during July 1995-March 1996. It also paints a grim picture of the railway’s assets. It says 60% of rails, 55% of sleepers, 60% of diesel locomotives, 50-60% of plant and machinery, and 100% of steam and electric locomotives are over age. Reports cite a recent government inspection Commission looking into Pakistan railways as saying that “malpractice and over-staffing have caused billions of rupees of loss”, and the system was “on the verge of collapse”.

Banking and finance

A commission is to be set The government announced on August 19 the setting up of a commission to up to investigate loans identify bank loan defaulters. The information minister, Khalid Kharal, said that the cabinet had approved the suggestion from the Economic Coordination Committee of the cabinet for a commission to investigate non-performing loans in banks and financial institutions from January 1, 1980, with particular reference to loans above PRs10m ($282,000). The commission will be made up from three retired judges, an economist or banker, and an official from the State Bank of Pakistan. The minister said the commission would prepare a list on a quarterly basis of defaulters, cases of loans extended without proper secu- rities, and loans improperly written off, rescheduled or readjusted. More than PRs109bn is yet to be recovered from the defaulters of loans from banks and financial institutions. While the announcement of the commission has been welcomed there is little confidence that it will be able to make significant progress, and its detailed terms of reference and powers are unclear.

Foreign trade and payments

Exports are still growing There seems little prospect of a meaningful upturn in merchandise exports, slowly— which grew by only 5.8% (in dollar terms) in the first 11 months of fiscal year 1995/96. The State Bank of Pakistan (the central bank)’s Economic Survey esti- mated that merchandise export earnings for 1995/96 would be $9.2bn. For the period July 1995-April 1996, the survey reports earnings from the cotton group,

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 24 Pakistan

excluding synthetic textiles, at $4.19bn, 15% up compared with the same period in 1994/95. However, all other major items quoted were down over the same period; rice (by 1.1% in dollar terms), leather (9.6%), leather manufac- tures (11.1%), fish and fish preparations (15.3%), carpets and carpeting (12.9%), petroleum products (26.4%), synthetic textiles (27.8%) and fruit and vegetables (12%). The major sources of exports remained stable in 1994/95, with the greatest share taken by the USA (16.2%), followed by the UK (7.1%), Germany (7%), Japan (6.7%), Hong Kong (6.6%), Dubai (4%), France (3.3%) and South Korea (3.3%).

—but there are ambitious On July 16 the commerce minister, Ahmed Mukhtar, announced an merchan- plans to increase export dise export target of $10bn for fiscal year 1996/97 (July-June). He said a special growth— team of leading industrialists and exporters is drawing up a report on how to increase exports, which is due to be published soon. He announced measures to try to facilitate trade, including permission for the private sector to export cement rather than go through government channels. A 180-day export fi- nance facility would be provided to cotton-textiles goods, non-textiles items and minerals.

—while imports are The Economic Survey projected the merchandise import bill for 1995/96 to be expanding as rapidly as $10.9bn, but it warns that the “present developmental needs may result in ever excessive import of machinery, chemicals, iron and steel, which may lead to higher imports”. During July 1995-April 1996, it said merchandise imports rose by 16.5% (in dollar terms), up to $9.6bn. The report says the higher bill stemmed primarily from the increased import of machinery (excluding trans- port equipment), petroleum products, chemicals, iron and steel, paper and paper board, milk and milk food, and pulses. It said the import of these seven items had risen by 26.8% during the period, with their share in total exports during the period standing at 58.2%. The official expectation that merchandise imports, which jumped by 17% (in dollar terms) during the 11 months to the end of May 1996, will grow no more than 5.9% in 1996/97 also looks unrealis- tic, as it is based on the hope that the prices of crude oil, petroleum products and edible oil will stabilise. All of them are being required in larger quantities owing to rising consumption and declining domestic production. The report quotes 1994/95 figures for the major sources of imports. They show Japan as the principal source (9.6%) followed by the USA (9.4%), Malaysia (8.8%, up from 5.5% in 1993/94), Germany (6.8%), Kuwait (5.8%), the UK (5.1%), Saudi Arabia (4.9%), and China (4.4%).

Remittances fall sharply The balance-of-payments position had “come under pressure” in 1995/96, re- ports the survey, but improved after the devaluation of the rupee in October 1995. During July 1995-March 1996, private unrequited transfers (net) rose by $24m to $1.79bn. However, workers’ remittances—the principal source of for- eign exchange earnings after merchandise exports—fell by 18.8% during the same period, to $1.1bn. The principal reason was that remittances from oil- producing countries fell steeply by 24.4% during the period (down 35.8% from Kuwait, and 28.1% from Saudi Arabia) to $833.16m from $1.1bn.

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 Afghanistan 25

Political structure: Afghanistan

Official name: Islamic Republic of Afghanistan

Form of government: interim government

The executive: an agreement signed on March 7, 1993, by leaders of eight mujahedeen parties effectively made Gulbuddin Hekmatyar prime minister with substantial executive power. Burhanuddin Rabbani was confirmed as president, in an essentially advisory capacity

National legislature: the agreement stipulated that there should be elections within eight months to a Constituent Assembly responsible for drawing up a constitution paving the way for presidential and parliamentary elections

Last national election: April 1988 (Assembly)

Next national election: yet to be decided

National government: the agreement authorised the prime minister to form a government in consultation with the president

Main political organisations: Hezb-i-Islami; Jamiat-i-Islami; Ittehad-i-Islami; Harakat-i-Inqilab-i-Islami; National Liberation Front; National Islamic Front; Shia Hezb-i-Wahdat

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 26 Afghanistan

Economic structure: Afghanistan

Latest available figures

Economic indicators 1991 1992 1993 1994 1995 GDP at constant 1978/79 pricesa Af bn n/a n/a n/a n/a n/a Real GDP growtha % n/a n/a n/a n/a n/a Consumer price inflation % 56.7 n/a n/a n/a n/a Population m (mid-year) 16.43 19.06 n/a n/a n/a Exports foba $ m 140.4 n/a n/a n/a n/a Imports cifa $ m 411.4 n/a n/a n/a n/a Current account $ m n/a n/a n/a n/a n/a Reserves excl gold $ m 234.9 226.7b n/a n/a n/a Total external debt $ m n/a n/a n/a n/a n/a Exchange rate (av) Af:$c 50.60 50.60 50.60 50.60 50.60

August 30, 1996 Af4,750:$1

Origins of gross domestic product 1989a % of total Components of gross domestic product 1981a % of total Agriculture & forestry 52.6 Private consumption 70.6 Industry 28.5 Government consumption 35.0 Construction 5.8 Gross fixed capital formation/increase in stocks 17.3 Trade 7.9 Exports of goods & services 19.6 Transport & communications 3.5 Imports of goods & services –50.3 Services 1.7 Statistical discrepancy 7.8 GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports 1990a $ m Principal imports 1988a $ m Fruit & nuts 93 Capital goods 293 Carpets 44 Food 150 Wool 10 Textiles 117 Karakul skins 3 Petroleum products 99 Cotton 3 Sugar & vegetable oil 53 Total incl others 235 Tyres 50 Total incl others 900

Main destinations of exports 1990 % of total Main origins of imports 1990 % of total Soviet Union 72.4 Soviet Union 56.3 Germanyd 3.1 Japan 9.4 India 3.1 Singapore 5.6 Belgium-Luxembourg 2.3 India 2.9 UK 1.9 South Korea 2.2 Czechoslovakia 1.2 Germanyd 1.7 a Fiscal years beginning March 21. b End-March. c Official rate. d Includes former East Germany from July.

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 Afghanistan 27

Afghanistan

Outlook

The interim government The future of the marriage of convenience between the Pashtun Hezb-i-Islami of must work hard to stay the prime minister, Gulbuddin Hekmatyar, and the mainly Tajik Jamait-i-Islami together of the president, Burhanuddin Rabbani, is uncertain. Mr Rabbani’s top military commander, Ahmad Shah Massoud, has differences both with Mr Rabbani and Mr Hekmatyar, which could become more serious. Mr Hekmatyar said in July the interim coalition aimed to bring general elections to Afghanistan within 6-12 months. This seems nearly impossible given political differences in the government and continuing confrontation with the opposition, mainly Pashtun, Taliban.

General Dostam’s position General Abdul Rashid Dostam, who controls seven provinces in northern is crucial Afghanistan, signed a ceasefire with the government on August 13 and agreed to open the vital Salang Highway on August 29. If the highway remains open it will allow the government to join trade routes in central Asia and lessen its dependence on food and fuel imports from Pakistan. It will be a huge boost for the coalition and strengthen Mr Hekmatyar’s position. The ceasefire was de facto as there had been no fighting for a year between General Dostam and the government. But at the end of July fierce fighting broke out between General Dostam’s forces and Mr Massoud’s forces in Kohestanat and Sanjerak districts, government-held pockets in General Dostam’s territory. Since the agreement there have been battles between General Dostam’s troops and forces belonging to Mr Massoud and to Anwar Akbari’s Hezb-Wahdat. Foreign ob- servers say the government may be putting pressure on General Dostam to sign a deal and avoid a full-scale war. His popularity in the north rests on peace. General Dostam may take up a post in the government but it is far from certain. The north has been peaceful for some time and is growing economically. General Dostam has even started his own international airline service, Balkh Air, which flies to Iran, Pakistan and the United Arab Emirates. He will be reluctant to lose his autonomy.

A Dostam deal could spell A Dostam/Rabbani alliance would divide Afghanistan equally between the the end of the Taliban— government and the Taliban. General Dostam has good links with Pakistan who may then completely stop support for the Taliban.

—which is in disarray— The Taliban is split; some favour negotiating with Mr Rabbani’s government and others favour fighting it. The group is facing a growing amount of local and tribal rebellion. Fierce fighting in the Taliban-held southern province of Paktia has recently forced the Taliban commander-in-chief to leave his position on Kabul’s outskirts.

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 28 Afghanistan

—but still poses a threat The government announced on August 25 it had lost the strategic Hazb-i-Islami to the government base at Spina Shega in Paktia, adjoining Nangarhar province. Spina Shega, south-east of Kabul, connects by road to the Hezb-controlled Sarobi district, 50 km east of Kabul on the main road to Pakistan. Sarobi controls access to the northern Tagob valley leading to plains where Bagram military airbase is situ- ated. The base, one hour’s drive from Kabul, is the capital’s only functioning airport. The government will need to defend Sarobi to protect the highway to Pakistan and access to Bagram. The government will also need the cooperation of the independent Nangarhar Shura.

Mr Hekmatyar must move Mr Hekmatyar must push the Taliban out of rocket-range of Kabul to guarantee against the Taliban— his position in the government. The agreement with General Dostam, if it develops, will allow him to concentrate on the Taliban. On August 3 the prime minister claimed that Taliban morale was at breaking point and that the militia have adopted defensive positions around Kabul. Later that month, the govern- ment began night movements of troops and heavy weapons in Kabul and the Taliban were said to be moving their troops to Logar province, adjoining Kabul in the south. The Taliban have also intensified rocket attacks on south Kabul. If the government can push the Taliban away from south-west Kabul then strategically there is no suitable base for the militia in south-west Afghanistan until its stronghold in the southern city of Kandahar, 490 km from Kabul.

—although the The government failed in its attack on the Taliban near Kabul in late May-early government failed last June, but the Taliban fared worse. The militia suffered major losses of life when time— it counterattacked. The government gained some territory but lost it again and the front lines remained basically the same with some minor government gains.

—and there will be no The Taliban have controlled the western city of Herat, near the Iranian border, attack on Herat for the past year. The government’s plans to capture Herat are not possible at present, unless there is a spontaneous uprising against the Taliban following the murder of the government’s top commander in the region, Allaudin Khan. Like General Dostam’s deputy, Rasool Pahlawan, Mr Khan was killed by his bodyguard. The murder, on July 4, happened in the Pashtun Zarghoon district east of Herat, where Mr Khan had relocated after the Taliban captured control of Ghor province on May 31. Ghor was planned as the government base from which to attack Herat. Mr Khan was entrenched in Zarghoon and in June carried out a number of successful guerrilla attacks against the Taliban, who claim they ordered his murder.

Relations with Pakistan There have been shifts in the government’s favour and Pakistan does not want are improving— to be left out of Afghanistan’s end-game. Islamabad is aiming for a better relationship with Kabul. Pakistan is soon to reopen its embassy and the deputy foreign secretary, Najmuddin Shaikh, visited Kabul in late August.

—which may isolate the The Afghan government has also invited the Pakistan interior minister, Taliban Nasirullah Babar, to Kabul. He is widely believed to be the founder and control- ler of the Taliban and his visit could hasten its demise. Many observers believe the Taliban is an artificial creation which could disappear as quickly as it appeared if Pakistan finds another vehicle for its influence.

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 Afghanistan 29

Iranian efforts for peace Iran welcomed the new government and at the end of July sent its deputy continue foreign minister, Alauddin Brugerdi, on a short visit to Afghanistan. Iran’s past successes in shuttling between rival Afghan troops is leading Mr Brugerdi to step up his efforts to bring a peace deal between the government and the Taliban. Tehran is hosting a peace conference in October which should be attended by all of Afghanistan’s factions.

The UN is trying to restore The new UN envoy is trying to restore confidence in the UN lost by the its credibility previous envoy, Mehmoud Mestiri, who achieved little during two years in the job. His replacement, Dr Norbert Holl, is more vigorous, has based himself within Afghanistan and is trusted by the Kabul government. He is likely to move the UN political office from Jalalabad to Kabul in the near future. Such a move would give further official status to the coalition and would see other UN offices move to Kabul.

The USA will watch and Washington is said to be taking a greater interest in Afghanistan but there are no wait— signs it will act, especially in a presidential election year. The two visits this year, most recently in August, by a Republican senator, Hank Brown, mean little as he has no influence over the administration’s policy. Mr Brown’s Afghan peace conference from June 25-28 in Washington brought together representatives of Afghan’s rival faction leaders but did not advance the peace process. Mr Hekmatyar and other important government members were not invited to the conference, a snub badly received in Kabul. Mr Hekmatyar was Washing- ton’s golden boy during the Jihad but has long since fallen from favour.

—and may charge Hezb Mr Hekmatyar’s Hezb-i-Islami has for some time been accused of links to inter- with links to national terrorism and of sheltering international terrorists. This accusation has international terrorism not been helped by the arrival in Jalalabad on June 24 of Osman Bin Laden, the denationalised Saudi billionaire, previously living in Sudan. Mr Bin Laden said he timed his arrival to be in the country for Mr Hekmatyar’s swearing-in as prime minister, with whom he has had “friendly relations” since the Jihad. The American Federal Bureau of Investigation announced in late August that Mr Bin Laden is one of the chief suspects if the TWA flight 800, which blew up just before the Atlanta Olympics, is discovered to have been destroyed by a bomb.

Gross domestic product per head (a) Afghani: real exchange rate (b) $ per year 1980=100 440 800 Af:DM Af:$ 420 700

600 400 500 380 400 Af:¥ 360 300

200 340 100

1989 90 91 92 93 94 1980 . 82 . 84 . 86 . 88 . 90 91 (a) Estimates. (b) Nominal exchange rates adjusted for changes in relative consumer prices. Sources: EIU; IMF, International Financial Statistics.

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 30 Afghanistan

The Afghani has The local currency, the Afghani, will continue to decline in value and huge depreciated steeply price increases will also persist. At the beginning of 1996 the exchange rate was Af5,000:$1; by August 22 it was Af24,000:$1. Furthermore, the rate of decline is speeding up—on August 18 the rate was Af20,000:$1. The situation has led some observers to compare Afghanistan with the German Weimar Republic.

Review

The political scene

Mr Hekmatyar comes to Against most expectations the prime minister, Gulbuddin Hekmatyar, came to Kabul— Kabul for the first time in 20 years to take up his premiership. The arrival on June 26 of his 350-vehicle convoy was greeted by a day-long assault on Kabul by the Taliban. Hundreds of rockets and mortars killed at least 61 people and injured hundreds more.

—and forms a new cabinet Nine cabinet ministers were announced on July 4; the remaining posts were left open to attract more parties into the interim coalition government. Until then, ministers holding unassigned positions were given acting minister status. Hezb-i-Islami’s intelligence chief, Washidullah Sabaoon, became defence minis- ter and another top Hezb official, Abdul Hadi Arghandiwal, took on finance. A Jamiat member, Yonous Qanuni, moved from defence to interior and the acting prime minister, Ahmad Shah Ahmadzai, switched to education. Mr Ahmadzai is a deputy to Professor Abdul Sayyaf, head of Ittehad-i-Islami. His party colleague, Qiamuddin Kashaf, became culture and information minister. Aiatullah Mohseni’s Shiite Harakat-i-Islami party was given two cabinet positions: Saeed Ali Jawed became planning minister and Saeed Hussain Anwari social welfare minister. Saeed Hussain Alami Balkhi received the commerce post. He is a mem- ber of the Shiite Hezb-i-Wahdat faction, led by Anwar Akbari. Finally, a sup- porter of Jamiat, Samiullah Najibi, became minister for martyrs and the disabled. There was disagreement over who was to be foreign minister. The president, Burhanuddin Rabbani, favoured the incumbent Najibullah Lafraie, while Ahmad Shah Massoud preferred Mr Lafraie’s deputy, Abdul Rahim Ghafourzai. Mr Lafraie is now minister of state for foreign affairs. The foreign minister’s post has been left open to entice more parties into the government.

Jamiat is divided— Foreign observers say the disagreement between Mr Massoud and Mr Rabbani goes deep. Mr Massoud was not completely informed about negotiations with Mr Hekmatyar and knew of his coming to Kabul only a few days before he arrived. Jamiat is split into two camps—those pro-Rabbani and those pro- Massoud. The Massoud camp wanted Mr Hekmatyar to bring more parties into the coalition before being allowed into Kabul. But the pro-Rabbani camp saw a chance to assert themselves against Mr Massoud and lobbied successfully against imposing conditions. The day after Mr Hekmatyar came into Kabul, Mr Massoud held a secret meeting at his base in Jabul Saral, where he blasted Jamiat government members for disloyalty. Mr Massoud also told Mr Rabbani that he keeps the president in power.

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—and Mr Massoud and The hatred between Mr Massoud and Mr Hekmatyar has existed since they first Mr Hekmatyar have no met. Soon after the prime minister came to Kabul the tension spilled over faith in each other publicly. On July 14 a spokesman for Mr Massoud criticised Mr Hekmatyar’s policies announced four days earlier. The spokesman said they were Hezb policies, not the government’s, and needed approval from the High State Council. The Hekmatyar camp said it did not need approval from the Council. Mr Hekmatyar has been pushing for Mr Massoud to take up a government position so that he can exert some control over him, but Mr Massoud is resist- ing this. Mr Hekmatyar’s forces have been split up and concentrated on the outskirts of Kabul, in Pul-i-Charki to the east and Karga in the west. Some of the estimated 2,000 Hezb troops deployed in Kabul are around front lines such as Rishkor. Mr Massoud’s troops are keeping a close eye on them.

Mr Hekmatyar announces In mid-July Mr Hekmatyar closed Kabul’s cinemas and banned light music on Islamic policies— radio and television. He ordered women to wear Islamic dress and made com- pulsory the saying of prayers five times a day. On July 10, in a broadcast on the government station, Radio Kabul, he said the wish of 1.5 million Afghans who have died in the years of fighting had still not been achieved—“the estab- lishment of a real Islamic system”. Mr Hekmatyar is the most popular and recognisable Pashtun leader in Afghanistan and foreign observers say he will be a challenge to the Taliban.

—which get a mixed Women’s groups held a series of meetings warning the prime minister to tread response from Kabul’s carefully where women’s rights were concerned. Expatriate workers say Kabul’s citizens— residents will accept almost anything to gain peace but their morale dropped to an all-time low when Mr Hekmatyar came to town. He is not trusted because of his previous actions, which claimed up to 45,000 civilian lives and destroyed much of Kabul.

—while government The deputy foreign minister, Mr Ghafourzai, denied on June 15 reports that he moderates clash with had resigned two days earlier, but admitted there were differences in the govern- fundamentalists ment over the role of Islam in the administration. Ittehad-i-Islami demanded on July 11 the removal of all “communists and atheists” from the government. The party’s central committee, chaired by Professor Sayyaf, told its party members, the education and information ministers, to “Islamise” their ministries or re- sign. The committee said it would review its support of the government if it failed to introduce Sharia law. Two months later, on August 20, the government announced its first dismissals of “communists”. It is unclear if this move will affect relations with General Abdul Rashid Dostam, still seen by many as a communist.

Mr Rabbani woos the Mr Rabbani visited the eastern city of Jalalabad on June 28 to hold talks with Nangarhar Shura— the leader of a Hezb faction, Yunis Khalis, the head of Harkat-i-Inquilab-i- Islami, Nabi Mohammadi, and the head of the National Islamic Front of Afghanistan, Pir Gaillani. All three are members of the Nangarhar Shura, an independent body very much in control of the booming Nangarhar province. Mr Khalis is head of the Shura and controls the province governor, Haji Quadeer. Mr Khalis and Mr Mohammadi both have close links to the Taliban, as a number of their former commanders now hold important positions within

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 32 Afghanistan

the militia. Mr Mohammadi was until a year ago a member of the Rabbani government.

—but fails to bring them The key supply route from Pakistan to Kabul passes through Nangarhar and it on board— would have been a big coup for the government if the Shura had joined the coalition. The foreign ministry post was offered to Mr Khalis or to his deputy, but Mr Khalis declined the offer. The Shura rejected joining the coalition and is unlikely to change its mind but talks are continuing. The Shura is not known to have a deal with the Taliban, but Taliban troops have been sighted in Nangarhar and such a deal would be potentially disastrous for the government.

—and fighting erupts in In early August a local commander in the Nangarhar switched loyalties to the Nangarhar Rabbani government and established his own customs post at Torkham, near the Pakistani border. The government was reported to be aiding the rebel commander. The Nangarhar Shura sent a force to Torkham and claim to have regained control.

The government turns to General Dostam refused Mr Hekmatyar’s May 30 invitation to join the govern- General Dostam— ment and said he would talk to Mr Rabbani, but as head of Jamiat, not as president. Mr Rabbani said on June 4 he was ready to share power with General Dostam and the Taliban. From the beginning of July onwards there were low- level contacts between the government and General Dostam’s officials. In early August a high-level government delegation led by Mr Hekmatyar’s brother-in- law, Humayun Jarir, went to General Dostam’s stronghold in Mazar-i-Sharif.

—whose position changes General Dostam’s deputy, Rasool Pahlawan, ruled the north with an iron fist following his deputy’s and was widely feared. Politically, General Dostam was never in trouble but murder militarily he faced competition from Mr Pahlawan who commanded his own loyal troops. Mr Pahlawan vehemently opposed détente with Mr Rabbani’s government and was reported to have threatened to join the Taliban. Mr Pahlawan’s murder by one of his bodyguards in Mazar-i-Sharif on June 24 changed the balance of power. On the one hand it freed General Dostam to make a deal with the government but on the other he was weakened militarily.

The Taliban remains Mr Rabbani called on all other parties on June 4 to join the coalition and put against the government— in demands for ministerial positions. His offer came as a big Taliban meeting got under way in Kandahar. The leader of the Jaba Nijat-i-Milli party, Sibqatuilah Mojaddadi, an important member of the opposition Supreme Coordination Council, joined the talks. The meeting concluded on June 7 with a call for Mr Rabbani’s resignation. Ten days later, the Dutch minister for development cooperation visited Herat and Kabul. Jan Pronk, the most senior Western politician to visit Afghanistan recently, said he “did not see much willingness to negotiate on the side of the Taliban”.

—and Mr Hekmatyar’s On July 1 a delegation from Mr Mohammadi’s Harkat-i-Inquilab-i-Islami party appointment makes no went to Kandahar to persuade the Taliban to enter into peace talks with the difference government, but days later the Taliban rejected such a move. A Taliban jet fighter pilot and his MIG-21 defected to the government on July 16. The pilot said he was the deputy commander of Kandahar air base and had left because

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Pakistan was supporting the Taliban, helping repair and service the planes. He said the Taliban’s small fleet of around ten fighters and fighter-bombers are in a poor state, despite Pakistani help.

The Taliban signs with The Taliban have been worried by reports that the government would launch Wahdat to improve an offensive on Herat in the west by using bases in Iran. Shia Iran has kept a relations with Iran— close watch on the fate of the minority Shias in Afghanistan and the Sunni Taliban sought to show they are not anti-Shia. They signed an agreement on July 14 for peaceful coexistence with Karim Khalili’s wing of the Shiite Hezb-i- Wahdat, based in the central Bamian province. The other branch, led by Anwar Akbari, is in the Rabbani coalition. All routes to Bamian pass through Taliban areas following the Taliban’s capture of Ghor province in May.

—which offers economic Iran is consolidating its political success with economic cooperation. It signed help two deals with the government in June on trade and training. A loan for food and fuel was reported to be worth $500m. Iran has also offered to rebuild Afghanistan’s shattered power network.

Pakistan shifts its Afghan The prime minister of Pakistan, Benazir Bhutto, congratulated Mr Hekmatyar policy on his appointment and sent a personal representative to his swearing-in cere- mony. Some 50 Pakistanis attended the ceremony in the first official contact between the two countries since the sacking of the Pakistani embassy in Kabul last September. The government interior minister, Yonous Qanuni, headed the Afghan delegation to Pakistan on August 10. Both sides agreed not to interfere in each other’s internal affairs. An economic working committee was set up and the governments agreed to prioritise the gas pipeline project with Turkmenistan and the reconstruction of Afghanistan’s roads.

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 34 Statistical appendices

Appendix 1

Quarterly indicators of economic activity in Pakistan and Afghanistan

1994 1995 1996 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr PAKISTAN Exports Monthly av Cotton, lint ’000 tons 4.7 1.0a 0.0 0.0 1.3 9.1 1.6 16.1 31.8b n/a Rice “ 79.3 104.1a 90.3 198.1 126.5 202.5 69.3 128.2 112.6b n/a Industrial production Manufacturing 1980/81=100 282.0 217.4 193.3 243.6 278.8 236.0 n/a n/a n/a n/a Cotton: yarn ’000 tons 110.6 112.7 108.2 115.1 116.5 121.8 109.3 132.3 n/a n/a fabrics m sq metres 25.6 28.1 28.7 27.6 25.5 25.5 24.6 27.1 n/a n/a Prices Consumer prices: 1990=100 143.5 148.4 153.4 159.8 164.4 165.5 172.5 176.5 180.2 183.7c change year on year % 11.8 12.2 12.0 13.4 14.6 11.5 12.5 10.5 9.6 n/a Wholesale: general 1990=100 146 155 158 164 171 173 178 181 185 191c Share prices “ 97 99 98 84 73 65 69 62 66 59c Money End-Qtr M1, seasonally adj: PRs bn 380.6 396.3 410.7 429.0 437.5 470.6 474.7 479.9 502.3 514.4d change year on year % 2.0 13.7 13.0 15.0 15.0 18.7 15.6 11.9 14.8 n/a Foreign trade Qtrly totals Exports fob PRs bn 51.33 59.15 52.90 61.82 59.55 77.99 51.23 63.95 53.17e n/a Imports cif “ 62.84 71.56 65.91 71.43 86.45 97.10 81.96 97.18 65.77e n/a Exchange holdings End-Qtr State Bankf: goldg $ m 590 585 592 592 583 597 592 594 617 601 foreign exchange “ 1,936 2,305 3,128 2,929 2,627 2,741 1,523 1,718 1,579 1,881 Exchange rate Market rate PRs:$ 30.50 30.61 30.65 30.80 30.88 31.01 31.55 34.25 34.52 34.97

1990 1991 1992 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr AFGHANISTAN Prices Monthly av Consumer prices: 1990=100 97.5 93.8 95.4 113.5 126.7 152.1 172.5 175.4 233.6 n/a change year on year % n/a n/a n/a n/a 29.9 62.2 80.8 54.5 84.4 n/a Money End-Qtr M1, seasonally adj: Af bn n/a n/a n/a 346.18 371.48 n/a n/a n/a n/a n/a change year on year % n/a n/a n/a 39.8 34.4 n/a n/a n/a n/a n/a Foreign trade Qtrly totals Exports fob $ m 72.3 50.2 49.2 63.3 47.8 57.6 76.8 60.8 n/a n/a fruit & nuts “ 23.1 23.9 19.3 27.0 16.9 21.7 45.1 n/a n/a n/a Imports cif ” 261.8 171.4 244.5 258.8 205.0 131.5 215.9 184.6 n/a n/a Exchange holdings End-Qtr Bank of Afghanistan: goldg $ m 294 265 277 275 268 261 259 261 254 n/a foreign exchange “ 221 233 240 250 265 231 244 221 214 n/a Exchange rate Market rate Af:$ 50.60 50.60 50.60 50.60 50.60 50.60 50.60 50.60 50.60 50.60h

Note. Annual figures of most of the series shown above will be found in the Country Profile. a Average for April-May. b January only. c April only. d End-April. e Total for January-February. f Excluding assets with Reserve Bank of India. g End-quarter holdings at quarter’s average of London daily price less 25%. h Unchanged to end-2 Qtr 1996.

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996 Statistical appendices 35

Appendix 2

Foreign trade of Pakistan ($ m) Total USA Japan Germany UK Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Imports cif 1993 1994 1993 1994 1993 1994 1993 1994 1993 1994 Foodstuffs 757.6 629.8 239.6 223.0 6.8 5.9 3.2 32.2 1.8 2.9 of which: cereals & preparations 350.1 289.2 236.7 219.3 0.0 0.0 0.0 28.9 0.0 0.1 Textile fibres & waste 202.1 406.9 11.5 51.2 25.8 19.0 7.3 10.7 14.6 23.9 Petroleum & products 1,570.2 1,393.4 37.7 1.4 1.7 1.3 11.4 0.7 2.4 2.0 Animal & vegetable oils & fatsa 601.3 790.9 0.5 90.0 1.3 0.9 0.3 1.7 0.3 0.2 Chemicals 1,564.1 1,462.8 239.7 196.0 94.1 94.4 173.0 161.2 123.1 123.8 of which: elements & compounds 437.4 426.5 31.2 25.9 38.2 41.7 55.7 41.2 32.8 43.6 medicinal & pharmaceutical prods 235.3 243.1 23.8 19.0 11.7 11.0 30.0 31.1 24.5 23.6 fertilisers 258.4 170.9 130.4 109.5 0.0 0.0 0.0 6.5 0.0 0.0 Paper & manufactures 133.2 121.8 3.6 2.7 7.3 5.6 11.4 11.7 6.2 8.9 Textile yarn, cloth & mnfrs 100.5 76.8 4.1 2.5 18.7 14.5 8.8 5.0 2.6 3.1 Iron & steel 350.1 331.4 27.3 28.1 64.6 71.5 56.1 44.6 34.3 20.2 Non-ferrous metals 112.1 102.9 0.2 0.9 3.3 3.0 1.0 6.3 2.6 11.7 Metal manufactures 69.4 97.6 3.9 4.4 8.2 10.4 8.3 4.7 4.4 15.8 Machinery incl electric 2,112.4 1,966.9 143.2 148.9 457.0 255.8 334.1 371.6 156.5 199.7 Transport equipment 1,346.9 568.3 131.8 52.9 757.4 300.6 31.6 16.4 51.6 23.0 Scientific instruments etc 152.2 123.8 17.7 15.4 39.8 24.4 16.3 12.7 12.7 9.1 Total incl others 9,739.7 8,897.0 906.8 869.2 1,515.3 832.7 694.8 700.4 465.6 474.8

Total USA Hong Kong UK Germany Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Exports fob 1993 1994 1993 1994 1993 1994 1993 1994 1993 1994 Food 633.4 696.1 25.0 34.4 6.9 6.2 38.7 36.0 5.4 4.8 of which: fish & preparations 201.9 143.4 15.5 24.3 6.1 5.3 23.4 20.8 2.3 2.4 cereals & preparations 272.8 319.3 3.3 4.6 0.2 0.2 4.2 3.9 0.2 0.4 Cotton raw 237.1 83.1 0.5 0.3 37.4 6.3 6.8 9.6 1.1 3.5 Leather & manufactures 216.4 259.6 15.6 17.4 24.2 23.5 4.8 6.1 27.0 30.7 Textile yarn, cloth & mnfrs 3,506.8 3,984.8 343.3 415.6 289.1 516.6 244.6 256.2 180.9 160.6 of which: cotton manufactures 1,982.3 2,311.9 83.8 99.7 281.3 506.1 73.4 70.2 35.5 31.9 Clothing 1,558.1 1,577.8 484.5 557.5 12.3 9.1 167.3 196.7 285.9 264.4 Footwear 37.8 41.1 0.2 0.2 0.0 0.0 3.4 4.3 7.6 9.3 Scientific instruments etc 109.5 97.8 57.4 45.5 0.3 0.4 6.8 7.1 13.7 13.3 Total incl others 6,841.7 7,341.2 1,004.1 1,158.8 375.6 567.6 507.3 563.2 568.3 541.6 a Imports from Malaysia, January-December 1994, $605.5m.

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996