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The World Bank FILE CUPYFOR OFFICIAL USE ONLY
Report No. P-3314-PAK
REPORT AND RECOMMENDATION
OF THE PRESIDENT
OF THE
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
AND THE
INTERNATIONAL DEVELOPMENT ASSOCIATION
TO THE EXECUTIVE DIRECTORS
ON A
PROPOSED LOAN AND CREDIT
TO THE
ISLAMIC REPUBLIC OF PAKISTAN
FOR A
STRUCTURAL ADJUSTMENT PROGRAM
May 11, 1982
This duement ha a rteicted dsbution gnd may be used by redipieiits dby in the pOiffnabMe oftheir ofidal dits. Its coatents may not otherwise be deiscloed without Wedd whbk *a6mmIlon.
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CURRENCY EQUIVALENTS
Effective January 8, 1982
Effective January 8, 1982, the exchange rate for thePakistan Rupee is to be managed with reference to a weighted basket ofcurrencies. At the end of April, currency equivalents were:
Rs 11.70 = US$1.00Rs 1.00 = US$0.09
February 16, 1973 to January 7, 1982
Rs 9.90 = US$1.00Rs 1.00 = US$0.10
FISCAL YEAR
July 1 - June 30
GLOSSARY
APC - Agricultural Prices CommissionEFF - Extended Fund Facilitymcf - One thousand cubic feetOGDG - Oil and Gas Development CorporationPPF - Project Preparation FacilitySAL - Structural Adjustment LendingSCARP - Salinity Control and Reclamation ProjectWAPDA - Water and Power Development Authority
FOR OFFICIAL USE ONLYPAKISTAN
STRUCTURAL ADJUSTMENT LOAN AND CREDIT
Table of Contents
Page No.
Loan and Credit Summary .......... . . .. . ..................... .*.................... i
PART I - THE ECONOMY ..................... ....... 1
A. General Background ............ . .... ...... * * * * . 1
B. Economic Development to the Mid-1970s ...................... 2C. Economic Reforms and Performance Since 1977 ...... ........ 3D. Long-Term Balance of Payments Prospects .... *................ 8
PART II - STRUCTURAL ISSUES AND THE GOVERNMENT'S REFORMPROGRAM .............. ...... o................................... 10
A. The Extended Fund Facility (EFF) Program .............. 12B. The Proposed SAL Program ..* ..... .............. . ................ 14
I. Development Planning ........ . ....... . ............... . 14II. The Agriculture and Water Sectors .................... 19III. The Energy Sector ............ .. .,.............. . ... 24
IV. Industry ............... ...... .. 29Matrix Presentation of the Structural Reform Program ....... 32
PART III - THE STRUCTURAL ADJUSTMENT LOAN AND CREDIT ....... o .... 37
PART IV - OTHER BANK GROUP OPERATIONS IN PAKISTAN . ...... 42
PART V - LEGAL INSTRUMENTS AND AUTHORITY ............ 44
PART VI - RECOMMENDATION ............. .. ....... . 44
ANNEXES
I. Social and Economic Data.. 45II. Status of Bank Group Operations . ............ 50
III. Supplementary Project Data Sheet so.................... 59IV. GOP Statement of Development Policies ..................... 61V. Use of Fund Resources ......... ..... . 82
M4AP
This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
PAKISTAN
STRUCTURAL ADJUSTMENT LOAN AND CREDIT
Loan and Credit Summary
Borrower: Islamic Republic of Pakistan.
Amount: Loan: US$60 million (includingcapitalized front end fee).
Credit: SDR 71.9 million(US$80 million equivalent).
Terms: Loan: repayment in 20 years, including 5 yearsof grace, at 11.6% interest p.a.
Credit: standard terms.
Loan/Credit Description: The Loan and Credit would support the implement-ation of the Government's structural adjustmentprogram as outlined in the statement of develop-ment policy in the attached letter from theGovernment to the Bank. The program consistsof a number of significant improvementsin the areas of development planning,agricultural/water sector policies, energysector policies and industrial sector policies.
The program has been designed through extendedanalysis and discussion of key economic issuesbetween the Government and Bank staff andcomplements the economic reform program whichis being pursued in the context of an ExtendedFund Facility from the IMF.
The Loan and Credit would finance high-priorityimports by both public and private sectors.Counterpart funds would be used for developmentexpenditures by the Federal Government. TheGovernment has requested technical assistance tosupport the implementation of the adjustmentprogram: a separate credit for this purpose isbeing proposed. The main risk relates to possiblepolitical events either inside Pakistan or in theregion which may impede the inplementation of theprogram.
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Estimated Disbursements: The Loan and Credit would be disbursed in twotranches: US$90 million (comprising $51 millionequivalent from the Credit and $39 million fromthe Loan) would be available for disbursement oneffectiveness and US$50 million (comprising $29million equivalent from the Credit and $21million from the Loan) after a review of theprogress of implementation in October/November1982. Disbursements are expected to be completedby September 1983.
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENTINTERNATIONAL DEVELOPMENT ASSOCIATION
REPORT AND RECOMMENDATION OF THE PRESIDENT TO THEEXECUTIVE DIRECTORS ON A PROPOSED STRUCTURAL ADJUSTMENTLOAN AND CREDIT TO THE ISLAMIC REPUBLIC OF PAKISTAN
1. I submit the following report and recommendation on a proposed Struc-tural Adjustment Loan of $60 million (including capitalized front end fee)and Credit of SDR 71.9 ($80 million equivalent) to the Islamic Republic ofPakistan. The Loan would have a term of 20 years, including five years'grace, with interest at 11.6% p.a.; the IDA Credit would be on standard IDAterms.
PART I - THE ECONOMY
2. A report entitled "Pakistan: Economic Developments and Prospects"(Report No. 3802-PAK), dated April 14, 1982, was circulated to the ExecutiveDirectors on April 16, 1982.
A. General Background
3. Pakistan has experienced an uneven pattern of development over thepast 20 years. Rapid economic growth during the 1960s was followed by aperiod of poor performance in the early and mid-1970s. Having inherited anextremely difficult economic as well as political situation in 1977, theGovernment of Pakistan (GOP) has moved firmly and effectively to re-establisheconomic stability and generate appreciable growth (averaging over 6% fromFY77 to FY81). The Government's recovery programs have been based on afoundation of firm financial management and on a wide range of price adjust-ments which have begun to correct the distortions in the Pakistan economy.The reforms already adopted and the further measures proposed made it pos-sible for GOP to reach agreement with the IMF in November 1980 on a substan-tial Extended Fund Facility (EFF) program (SDR 1,268 million over threeyears).
4. Following a further rapid increase in migrant workers' remittances(now over $2 billion per year) and the negotiation of the EFF, the balance ofpayments position has become more manageable. This has provided an oppor-tunity for GOP policymakers to move beyond a pre-occupation with short-termstabilization problems and to focus increasingly on longer-term issues. GOPis aware that, in the absence of further wide-ranging measures to strengthenproductivity and trade performance, its 6-6.5% p.a. target for economicgrowth would need to be revised downwards because of balance of paymentsconstraints. Some recent developments, such as the slowdown in the worldeconomy and the depressed world market prices for Pakistan's principal
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exports (cotton and rice), have underlined the tenuous nature of Pakistan'sexternal balance.
5. Against this background, there has been a continuation of the steadyprocess of rationalization and improvement of Pakistan's economic policyframework. During the past 18-24 months this process has been assisted andaccelerated by the dialogue between GOP and Bank staff on structural policyissues, leading to a close understanding on the reform measures needed toavert a serious balance of payments problem in the second half of the 1980s.The Government's reform program is focused on the rebuilding of an effectiveplanning system; concrete steps to implement a well-conceived NationalAgricultural Policy; policy reforms to accelerate the development of Pakis-tan's oil and gas potential; and rationalization of the industrial structure.
6. The Government's reform program which would be supported by theproposed structural adjustment lending (SAL), and its links with the EFFprogram agreed with the IMF, are described in Part II: a summary of theGovernment's medium-term objectives, steps already taken and the furtheractions to be implemented is presented in Table 5 (pages 32-36). A copy of aletter from the Government to the Bank outlining GOP's structural adjustmentpolicies is at Annex IV. The background to the choice of issues addressedunder the proposed SAL is provided by a brief review of past developments andbalance of payments prospects in the following paragraphs.
B. Economic Development to the Mid-1970s
7. Sectoral policies and the allocation of investments during the 1960swere effectively guided through a series of five-year plans. A significantpart of public investments was devoted to building up the infrastructuralbase for agricultural growth by the construction of major irrigation works inthe Indus Basin, including the Mangla and Tarbela dams. In industry, publicsector involvement was small and emphasis was placed on the private sector.However, the incentives and protection which were provided to the privatesector led to a bias towards import replacement and a concentration ofeconomic power held by a small number of bankers and industrialists.
8. A series of major political disruptions took place from 1969 leadingup to the separation of Bangladesh at the end of 1971. The new Governmentwhich came to power in Pakistan in 1971 reversed many of the policies of the1960s. Most large industries, domestic banks and life insurance companieswere nationalized, with adverse effects on private investment and confidence.Difficulty was experienced in absorbing these nationalized enterprises intothe public sector, leading to a general decline in industrial sector produc-tivity. At the same time, the Government embarked on massive, long-gestationpublic investments in industry (notably the Pakistan Steel Mill) and by 1977public sector investment accounted for three quarters of total industrialinvestment. The system of five-year plans was discontinued. From themid-1970s, public investments were allocated through annual development plans
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which did not provide a framework for programming the future phasing ofdevelopment expenditures.
9. In several respects, government policies in the early part of the1970s were biased towards the improvement of welfare for urban wage earners.Substantial wage increases took place as well as over-staffing of the newlyacquired public sector enterprises, while consumer interests were protectedby a combination of price controls and subsidies. The agricultural sectorbore some of the burden of these policies. Output prices for domesticallyconsumed agricultural products were restrained to benefit consumers, whileprices for exportable products, such as rice and cotton, were kept well belowborder prices in order to generate revenues to finance increased investmentsand subsidies.
10. In addition to large-scale investments in public sector industry andthe associated needs for infrastructure, there were continuing large outlayson the major Indus Basin irrigation projects which had been commenced in the1960s. However, these investments were not accompanied by adequate effortsto utilize the irrigation water provided by these projects, to maintainexisting facilities, or to develop support services and other instrumentsaimed at achieving sustained improvement in agricultural yields. The Govern-ment became committed to a policy of increasing subsidization of agriculturalinputs as the principal means of promoting agricultural productivity.
11. During the mid-1970s, following the first round of petroleum priceincreases, there was extensive reliance on significantly increased externalborrowing, largely from OPEC sources, as well as excessive domestic borrow-ing, in order to maintain the pace of public investment. This relaxation offiscal discipline led to an upsurge in domestic inflation and a depletion offoreign exchange reserves.
C. Economic Reforms and Performance Since 1977
12. The Government which came to power in 1977 embarked on a program ofreforms aimed at achieving financial stability, the revival of economicgrowth and private sector confidence. Although a number of serious problemsremain, considerable progress has been made towards these objectives, despitethe 1979 oil crisis and political events in Afghanistan which necessitatedsubstantial outlays for refugee support and defense.
13. Fiscal policies: The Government has restored financial disciplineand the fiscal situation has improved considerably since FY80. The budgetsfor FY80 and FY81 both included substantial tax measures. In addition, therewere major increases in the domestic prices of wheat, sugar, fertilizers,petroleum products, railway fares and water charges, which reduced budgetarysubsidies and the deficits of public sector operations. Despite theunplanned expenditures following events in Afghanistan and cost overruns onthe Pakistan Steel Mill and Tarbela Dam, tight spending restraints were
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maintained. As a result, the domestic bank financed budget deficit wasreduced from 4.4% of GDP in FY79 to 1% by FY81.
14. Development planning: The preparation of a Fifth Five-Year Plan forFY79-83 marked a resumption of development planning after a lapse of severalyears. The Plan aimed to reorient agricultural policy away from a relianceon subsidies towards programs to improve efficiency in the use of inputs, inorder to increase yields without an excessive burden on public resources; todevelop domestic energy resources; and to improve basic social services.These shifts in priorities were to be achieved within an overall 10% p.a.real increase in public sector investments, based on an assumed real growthlof GDP of 7.5% p.a. and a real increase in national savings of over 12% p.a.over the Plan period.
15. These assumptions have proved to be optimistic. Although performancein certain areas (such as agricultural production and exports) were as highas or higher than expected and the rate of growth of GDP averaged over 6%p.a. between FY78 and FY81 (compared to 3.5% during the earlier part of the1970s), national savings and external assistance fell well short of expecta-tions. The proportion of development expenditures financed by net foreignresources fell from over 70% in FY75 to 37% by FY77 and continued to declineto less than 25% by FY81. In addition, major cost overruns were experiencedon ongoing projects and the cost of the fertilizer subsidy escalated muchfaster than originally estimated. The shortage of resources, combined withthe need to limit overall budgetary deficits, necessitated a cutback inplanned investments and prevented the planned reallocation of public develop-ment expenditures. Faced with these severe constraints, GOP resolved toprepare a Three-Year Public Sector Development Program to cover the periodFY82-84 in order to make progress towards implementing the shifts in expendi-tures originally envisaged under the Fifth Five-Year Plan (see alsoparagraphs 38 to 46 below).
16. Agriculture and water sector policies: A major government study ofthe development of irrigated agriculture in the Indus Basin was completed in1979; the study was assisted by UNDP with the Bank as executing agency.Three principal recommendations of this study have been adopted by GOP as thecore of a new agricultural development strategy announced in February 1980,namely that there should be:
(a) a progressive adjustment of prices of key agriculturalinputs and outputs to reflect real resource costs,thereby phasing out input subsidies while providingappropriate incentives for increased production;
(b) a gradual transfer of certain operations fron the publicto the private sector, notably the distribution ofagricultural inputs and the exploitation of freshgroundwater; and
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(c) a reorientation of expenditures to optimize the use of
existing facilities, as against further investment inmajor new irrigation works.
17. In line with this revised strategy, subsidies on pesticides have beeneliminated in the two major provinces (Punjab and Sind) and fertilizer sub-
sidies were reduced by raising fertilizer prices by 50% in February 1980. In
connection with the Fertilizer Imports Credit (Credit No. 1066-PAK datedOctober 17, 1980), GOP has undertaken to eliminate fertilizer subsidies by
mid-1985. Irrigation water charges have been increased by 75% over the past
four years. Crop procurement/support prices have been adjusted on severaloccasions to maintain incentives for production and an Agricultural Prices
Commission has been established to provide a systematic basis for the con-tinuing implementation of appropriate pricing policies. The process of
reorienting development expenditures in the agriculture and water sectors was
commenced in the FY81 Annual Development Program and has been carried for-
ward, with increased momentum, in the FY82-84 Public Sector DevelopmentProgram.
18. Industrial policies: The earlier policies of extensive nationaliza-tions, tight restrictions on the private sector and rapid expansion of the
public sector have been reversed. A variety of measures have been taken to
revive private activity. Most agricultural processing and some industrial
units were denationalized in 1977-78 and constitutional safeguards have beenintroduced against further arbitrary government acquisition. The areas open
to private investment have been considerably widened and a wide range ofincentives have been provided, including tax holidays, excise and import duty
concessions, easier access to imported raw materials, concessionary credit,
income tax provisions and direct cash rebates. Investment sanctioning proce-dures have been progressively streamlined. These measures have led to a
steady recovery of private sector confidence as evidenced by the substantialincrease in investment proposals, approvals and commencements in the past
three years; private investment increased by 14% p.a. in real terms betweenFY79 and FY81.
19. Government policy towards public sector industry has been to complete
ongoing projects and to improve the performance of existing publicenterprises. A gradual decentralization of decision-making and delegation of
management responsibility to individual public enterprises have taken place.The centralized Board of Industrial Management has been abolished and boards
of directors, in some cases with private representatives, have been estab-lished for each enterprise. Managers of enterprises have been given
increased autonomy to adjust prices in order to improve profitability. By
FY80, there was a marked improvement in public sector performance: produc-
tion increased by 32% in real terms and overall net profits before tax roseto Rs 590 million compared to only Rs 20 million in FY79.
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20. Energy sector policies: As an oil importing country (nearly 90% ofpetroleum requirements are met from imports), Pakistan has been seriouslyaffected by the sharp increases in world petroleum prices in 1973/74 andagain in 1979/80; the import bill for POL products increased from $150 mil-lion in FY74 to $400 million in FY77 and to over US$1,500 million in FY81,equivalent to nearly 50% of the f.o.b. value of exports. GOP has passed onthe impact of higher world prices for petroleum to consumers in order torestrain demand. In addition, it has sought to accelerate the explorationfor new oil and gas resources in Pakistan; joint venture agreements have beensigned with a number of private oil companies for concessions in previouslyunexplored areas. The Government has also sought to reduce dependence on oilimports by developing hydro-electric generating capacity and substitutingother fuels such as natural gas. Pakistan is one of the few developingcountries with an extensive gas distribution network based on domestic sup-plies, and natural gas accounts for almost 40% of commercial energy use. A35% increase in gas consumption between 1977 and 1980 helped reduce thedemand for oil imports. However, by 1980 serious shortages of gas hademerged and it became evident that revised gas pricing and investmentpolicies were required in addition to measures to increase domestic oilproduction from known fields, which had stagnated at around 10,000 bpd.
21. Overall performance: Although major problems remain, the economicreform program implemented by GOP since 1977, together with favorable weatherconditions, has already resulted in a marked improvement in the economy.Agricultural production has increased substantially and value added inagriculture rose by an average of 4.2% p.a. between FY77 and FY81, in con-trast to the earlier sluggish growth averaging 2.1% p.a. from FY72 to FY77.The recovery in industrial activity and investment by the private sector, theimprovements in the performance of public sector manufacturing enterprisesand the completion of some public sector projects contributed to an average8.0% p.a. growth in value added in industry over the same period. Conse-quently, GDP grew by over 6% p.a. over four successive years to FY81, whileexports increased at an average rate of 13% p.a. in constant prices and 27%p.a. in value terms.
22. Monetary growth, which had reached 23-25% annually in the mid-1970s,was reduced to below 15% p.a. by FY81. The Government's effective demandmanagement, combined with good harvests, held inflation to around 10% p.a.during FY79 and FY80 and around 12-13% in FY81 despite external pressures andsubstantial price increases in some key consumer items as part of GOP'sefforts to rationalize prices. While public consumption has been restrained,private consumption was boosted by a rapid increase in remittances fromPakistanis working in the Middle East, so that total consumption increased at6.4% p.a. from FY77 to FY81, with gross national savings rising from 11% to13% of GNP.
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23. Exports have grown slightly faster than imports over recent yearsdespite the impact on imports of higher petroleum prices, which have con-tributed to a more than 25% reduction in Pakistan's terms of trade since1978. However, since the value of imports was more than double the value ofexports in FY77, the trade deficit has continued to widen as shown in Table 1below. The substantial increase in workers' remittances from the Middle Easthas helped to limit the pressure on the balance of payments, so that thecurrent account deficit has been held approximately constant in nominal termsand has declined from 6.8% to 3.3% of GNP between FY77 and FY81.
Table 1: CURRENT ACCOUNT BALANCE, 1973/74-1982/83
(million US$)
1973/74 1976/77 1979/80 1980/81/a 1981/82/b 1982/83/c
Exports (f.o.b.) 1,020 1,132 2,341 2,798 2,796 3,400Imports (f.o.b.) -1,493 -2,418 -4,857 -5,563 -5,851 -6,630Balance of trade -473 -1,286 -2,516 -2,765 -3,055 -3,230
Workers' remittances 151 578 1,748 2,097 2,155 2,370Other (net) -226 -344 -371 -323 -489 -622
Current account balance -548 -1,052 -1,140 -991 -1,389 -1,482
Current account balance -6.2 -6.8 -4.5 3.3 4.1 3.6as % of GNP
/a Provisional.7T Government estimates.Th Government and staff projections.
Source: Ministry of Finance, Planning and Economic Affairs; staff projections for 1982/83.
24. The financing of these balance of payments deficits has continued tocause difficulties. A serious crisis was avoided in 1979 only by temporary,severe restrictions on imports and special emergency assistance from someOPEC countries, as well as substantial short-term commercial borrowing.However, in response to further improvements in Pakistan's economic manage-ment and changed geopolitical situation since the invasion of Afghanistan,
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external assistance has increased since FY80; in addition, an 18-month res-cheduling of debt service due on official concessional loans from bilateralmembers of the Pakistan Consortium was agreed in January 1981. Most impor-tantly, GOP agreed with the IMF on a three-year Extended Fund Facilityprogram which is to provide SDR 1,268 million (over $1.4 billion) over threeyears from November 1980; the contents of this program are discussed in PartII below. Consequently, the short-term balance of payments situationimproved substantially by FY81.
25. The balance of payments outlook for FY82 and FY83 is somewhat lessfavorable, partly as a result of international economic conditions. Worldmarkets for rice, raw cotton and cotton products are depressed, so that thevolume and average price of these exports are expected to decline. Despitecontinued growth of other export items, the value of total exports for FY82is expected to show little change from FY81. In addition, there has been arelatively small increase in workers' remittances compared to earlier years.Although imports are expected to decline in real terms (rising by only 5% invalue) due to the elimination of wheat and sugar imports, the reduction offertilizer imports and stable petroleum prices, the current account deficitfor FY82 is expected to widen to about US$1,400 million. GOP has respondedto these difficult conditions by ending the fixed link of the Pakistan Rupeewith the recently appreciating US dollar; from January 1982 to the end ofApril 1982 the exchange rate depreciated by 17% against the US dollar. Inthe anticipation of some recovery in the world economy, a revival of exportperformance is projected for FY83 and, provided net inflows of assistance donot fall below expectations, the balance of payments situation should remainmanageable at least up to FY84, though foreign exchange reserves may fallslightly to a little over the equivalent of one month of imports of goods andservices. However, longer-term projections indicate that serious balance ofpayments difficulties could re-emerge after that time unless major structuralchanges in the economy are brought about.
D. Long-Term Balance of Payments Prospects
26. The need for further coordinated policy reforms in broad areas of theeconomy, aimed at a long-term strengthening of the balance of payments, isunderlined by an analysis of balance of payments prospects during theremainder of this decade.l/ In order to achieve a modest 3% improvement inincomes per head, GOP must seek to maintain a 6% p.a. rate of growth of GDP
1/ This section of the report is based on staff projections which arepresented (together with a full description of underlying assumptions)in "Pakistan: Economic Developments and Prospects" (Report No.3802-PAK), Chapter V. These projections are broadly consistent with theGovernment's medium-term macro-economic objectives (see paragraph 30) andhave been discussed in detail with GOP officials.
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through the 1980s.1/ Bank staff projections indicate that such growth willplace severe strain on the balance of payments from 1984 onwards and willonly be possible if it is based on strong efforts to promote savings andexports and to limit imports through the promotion of efficient importreplacement, as well as further increases in commitments of external assis-tance and a continued growth of workers' remittances. The Government agreeswith this assessment and the multi-sectoral program of reforms to support itsrequest for structural adjustment lending is designed to strengthen thelong-term balance of payments situation.
27. The long-term projections indicate that, in addition to improving thesavings rate from 13% to 16% of GNP, a sustained growth of exports in theorder of 7-8% p.a. will be required throughout the 1980s while limiting thegrowth of imports to around 6% p.a. (i.e., in line with the target growthrate of GDP). Export growth of this order would be lower than experienced inrecent years, but would be significantly higher than the 4.5% p.a. averageachieved over the whole of the past decade; it would require continuingimprovements in agricultural yields in order to permit growing exports ofcotton and rice, a possible commencement of wheat exports, as well as furthergrowth of manufactured exports competitive at international prices.Restraining the growth of imports would require improving self-sufficiency inagriculture with increased emphasis on the domestic production of edible oil,together with efficient import replacement in key industries such as fer-tilizers and a substantial acceleration of domestic oil and gas production.If these objectives can be attained, and workers' remittances continue toincrease by at least 10% p.a. (in nominal terms), it would be possible toachieve a progressive reduction of the current account deficit from around 4%of GNP expected over the next two years to below 3% by the latter part of thedecade.
28. The financing of these deficits is, nevertheless, likely to poseserious problems since the absolute size of the current account deficit islikely to rise to, and remain in the order of, $2 billion per year. Unlessnet inflows of official assistance increase steadily in real terms - whichcannot be safely assumed in present circumstances - a considerable proportionof Pakistan's capital requirements will need to be financed from commercial
1/ The Government attaches high priority to the reduction of the current 3%p.a. growth of population and has adopted a new strategy for addressingthis problem which seeks to overcome the shortcomings encountered by pastefforts at family planning. The revised Population Welfare Plan,approved by the Cabinet in November 1980, is based on a multi-sectorapproach which recognizes that a reduction in fertility rates requiresfundamental changes in attitudes as well as improved delivery of serv-ices. GOP has sought the Bank's assistance in implementing this Plan anda Population Welfare Project is being appraised.
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sources. Commercial borrowing is expected to be needed in increasing amountsfrom FY84 onwards, rising gradually to provide up to 50% of gross capitalinflows, or over $1 billion per year. Staff projections indicate that,provided sound policies are followed to strengthen the balance of payments,such increasing amounts of borrowing on commercial terms could be undertakenwhile keeping the ratio of debt service to the exports of goods and services(including factor services) below 20% throughout the 1980s. However, givenPakistan's presently very limited access to international capital markets, itwill not be easy to obtain such large amounts of finance. Over the past twoyears Pakistan has been able to obtain substantial short-term borrowings ongradually improved terms, but it still faces the task of establishing credit-
worthiness for longer-term borrowing from private capital markets. In thissituation, the vigorous pursuit of further structural reform of the economywill not only help to keep the external financial requirements of sustainedgrowth to manageable proportions but will also serve to inprove Pakistan'sability to obtain the necessary finance on acceptable terms.
PART II - STRUCTURAL ISSUES AND THE GOVERNMENT'SREFORM PROGRAM
29. Following the re-establishment of economic stability and a markedimprovement in performance, GOP has moved purposefully towards implementingstructural reforms designed to turn the recent recovery into a period ofsustained growth through the 1980s. Over the past 18-24 months, there hasbeen an intensive and fruitful dialogue between GOP officials and Bank aswell as IMF staff on necessary reform measures to support access to the IMF'sExtended Fund Facility and the proposed first phase of a program of struc-tural adjustment lending. Bank staff participated in draxiing up the sectoralpolicy measures of the EFF program; the SAL program is designed to reinforceand build on those initiatives.
30. The Government's medium-term economic objectives are to improveproductivity, domestic resource mobilization and growth together with thepromotion of exports, efficient import substitution and liberalized access toimports. The macro-economic targets for the Sixth Five-Year Plan period(FY84-88) have been tentatively set as follows:
(a) GDP is to grow at 6.5% p.a. with growth rates of 5% p.a. and 10%p.a. set for agriculture and manufacturing, respectively;
(b) Gross national savings are to be increased from the current 13%to 16% of GNP by means of additional taxation measures, reduc-tions in subsidies and internal profit generation by publicenterprises through the pursuit of flexible pricing policies;
- (c) An increase in the share of investment to GNP from the present16% is to be promoted to the maximum extent consistent with
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improvements in savings and trade performance. The proportionof private to total investment is to be increased from aroundone third to 50%;
(d) Domestic credit expansion is to be kept in line with the nominalgrowth of GNP in order to help to reduce and keep the inflationrate around or below 10% p.a.;
(e) Fiscal deficits financed from the domestic monetary system areto be kept around 2%; and
(f) The current account deficit or the balance of payments is to begradually reduced from around 4% to 2.5% of GNP by FY88.
31. The proposed SAL program reflects the Government's recognition of theneed for an integrated package of reforms covering several important sectorsin order to help achieve these economic objectives. The program would followup and carry forward a number of critical actions already initiated by GOP inthe fields of development planning, agriculture and water, energy andindustry. In some cases, these actions would be supported by studies andother activities to be financed by a proposed IDA Technical AssistanceProject; documents for this Credit are being circulated separately to theExecutive Directors for their consideration. The principal aspects of theSAL program are as follows:
(a) As noted in Part I above, GOP has drawn up a revised Three-YearPublic Sector Development Program for FY82-84 to achieve aredirection in the pattern of public investments. This programrepresents a major first step in the reorientation of governmentexpenditures. The FY82-84 program is to be "rolled over" tocover FY83-85 to continue this process and will be followed bythe preparation and implementation of the Sixth Five-Year Plan(FY84-88);
(b) Further steps will be taken towards the implementation of GOP'srevised National Agricultural Policy by (i) adjusting agricul-tural input and output prices to provide appropriate productionincentives while reducing subsidies, guided by recommendationsfrom the newly established Agricultural Prices Commission;(ii) the rehabilitation and improved operation and maintenanceof the existing irrigation system, financed to an increasingextent through user charges; (iii) the preparation of newhigh-priority projects and programs in line with the new policydirections; and (iv) a progressive diversification of agricul-ture;
(c) GOP will implement recently adopted major reforms to its energypolicies, particularly in the oil and gas sectors. Producer and
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consumer gas pricing policies have been revised; the publicsector Oil and Gas Development Corporation is being reorganizedalong more commercial lines; and a better balance is beingsought between the respective roles of the public and privatesectors in developing Pakistan's hydrocarbon potential. Along-term energy plan is to be drawn up in order to integratethe development of all potential energy sources over a 10-yearplanning horizon; and
(d) In addition to continuing import liberalization under the EFFprogram and other ongoing measures to revitalize industry, withparticular emphasis on private sector involvement, GOP willimplement a program of policy analysis and preliminary actionsto rationalize industrial incentives and initiate a systematicperformance evaluation and incentive system for public rnanufac-turing industries. This is designed to lead up to a comprehen-sive program of industrial reforms which could be supported by asecond round of structural adjustment lending to Pakistan.
32. Since the EFF and the proposed SAL programs complement and reinforceeach other, a detailed description of the SAL program is preceded below by abrief outline of the salient features of the program agreed with the IMF.
A. The Extended Fund Facility (EFF) Program
33. The EFF program sets out the agreed macro-economic framework for theGovernment's overall reform efforts for the three years from November 1980 toNovember 1983. The program's objectives include a 5-6% p.a. real growth inGDP, an increase in investment from 16.5% to 17.3% of GNP and an increase inthe savings ratio from 12% to 14% of GNP, while limiting domestic inflationto an average rate of 10% p.a. and the balance of payments current accountdeficit to about 4.0% of GNP during the last two years of the program.
34. A continuation of GOP's stabilization policies to bring about areduction in the size of budgetary deficits and the rate of growth of themoney supply forms the demand side of the EFF program. To attain theseobjectives, the program calls for continued expenditure restraint, includingan undertaking to reduce subsidies in real terms, and improved revenue per-formance to limit government recourse to domestic bank financing. To assistin restraining price increases to an average of 10% p.a., the average rate ofgrowth of domestic liquidity is to be limited to 14-15% p.a., slightly belowthe projected increase in nominal GDP. To reserve adequate credit forprivate financing within these overall ceilings, fiscal deficits and domesticborrowing by public enterprises are to be curtailed; net bank credit toGovernment (for both budgetary and commodity operations) is to be held to anaverage of about 2% of GDP for FY81-83. GOP has adhered closely to thesetargets. The first year of the program has been completed, objectives forthe second year have been agreed and detailed targets for the third year will
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be finalized during 1982. As indicated in paragraph 30 above, GOP'slonger-term economic targets to FY88 are broadly consistent with, and inseveral cases are more ambitious than, the parameters which have been agreedfor the 1980-83 period.
35. The EFF program supports a phased program of import liberalization toreform Pakistan's restrictive import policy under which all items notexplicitly on a free list or tied list (i.e., tied to purchases from specificsources) are implicitly banned. By the end of the program, the number ofbanned items are to be sharply reduced, bans replaced by tariffs whereappropriate, and the transition from a "positive list" (permitted imports) toa "negative list" (prohibited imports) completed. Temporary quantitativeceilings on importable items, imposed during the period of acute foreignexchange shortage in 1979, were all lifted by December 1980. At the sametime, virtually all previously prohibited basic raw materials were added tothe list of permitted items and a number of commodities (including cement),previously only importable by the public sector, were pernitted to beimported by the private sector. In July 1981, 212 previously banned itemswere added to the free list, 36 items were transferred from the tied list tothe free list and more items on the free list permitted for import by theprivate sector. The liberalization process will be continued so that thepresent proportion of industry protected by bans or restrictions(approximately two thirds) will be reduced by at least 40% by the end of theprogram period.
36. Until the end of 1981, the exchange rate of the Pakistan rupee hadbeen fixed since 1973 at Rs 9.9/US$1. As noted in paragraph 25 above, fol-lowing indications that exports had been adversely affected by the relativestrength of the US$ over the previous 18 months, the rupee was delinked fromthe UJS$ in January 1982. Its value is now being fixed daily by the StateBank of Pakistan with reference to a basket of currencies of Pakistan's majortrading partners. Under these new arrangements, the Pakistan authoritiesintend to manage the exchange rate in a flexible manner to help maintainexport competitiveness in world markets. The exchange rate adjustments up tothe end of April 1982 represented an 11% devaluation against a basket ofcurrencies of major trading partners. In order to stimulate exports, GOP hasalso progressively extended the range of standard rebates of import andexcise duties on imported inputs; provided for rebates of income taxes onprofits from exports; and reduced minimum pricing and other restrictions onexport transactions. An Export Processing Zone is being developed outsideKarachi.
37. The EFF program also includes a number of sectoral reform measuresincluding undertakings to reform pricing and other incentives. These wereincluded in the program after close consultation with the Bank and are con-sistent with the further reforms to be pursued under the proposed SALprogram; they are discussed under appropriate sector headings (see also thetabular presentation of the Government's reform program on pages 32-36).
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B. The Proposed SAL Program
I. Development Planning
38. Since 1977, GOP has placed high priority on reviving and strengthen-ing the planning system. However, in its efforts to restore forward plan-ning, the Government has faced serious difficulties owing to unanticipatedshortfalls in available resources, the absorption of resources to completelarge, long-gestation projects, and the reduced capacity of the planningagency due to the loss of key personnel. As already noted, such shortfallsin resources, coupled with the need to maintain fiscal balance, led to adecline in public real investment during the first two years of the FifthPlan (FY79-83) and prevented the intended shift of resources towardhigh-priority projects in agriculture, water, energy and the social sectors.Since that time, increased aid commitments, debt relief and the EFF arrange-ments, coupled with improved public savings, have increased the availabilityof resources and provided a basis for a reassessment of the public sectordevelopment program over the medium-term. GOP has responded positively tothis opportunity and, following discussions with Fund and Bank staff, arevised Public Sector Development Program was drawn up for FY82 to FY84 toreorient public expenditures in the direction intended in the Fifth Plan.
39. The revised Three-Year Program is set within the macro-economicframework of the EFF program and is consistent with a cautious estimate ofdomestic and foreign resources available to finance public sector developmentexpenditures. The expected growth of development expenditures under theFederal and Provincial Annual Development Programs for those years and theproposed financing plan are shown in Table 2.
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Table 2: THREE-YEAR PUBLIC SECTOR DEVELOPMENT PROGRAM FY82-84
PROVINCIAL SHARES AND OVERALL FINANCING PLAN
(Rs billion)
FY81 FY82 FY83 FY84
(provisional) (budget (projection)estimates)
A. Development Expenditures
Federal Government 20.3 23.1 25.4 26.3
Provincial Governments 4.6 5.8 6.9 8.4
Total annual development programs 25.0 28.9 32.4 34.7
B. Financing Plan
Domestic sources 19.3 20.7 24.8 26.9
Contributions from current budgets 12.0 14.0 16.0 18.3
Federal Govt. (7.5) (10.3) (11.7) (13.5)
Provincial Govts. (2.5) (1.2) (1.1) (1.1)
Autonomous bodies (2.0) (2.6) (3.1) (3.7)
Domestic non-bank sources 4.9 1.2 3.0 2.3
Domestic bank borrowing 2.3 5.4 5.8 6.4
External sources (net) 5.7 8.2 7.6 7.8
Gross disbursements 9.3 14.2 12.0 12.5
Amortization 3.6 6.1 4.5 4.8
C. External sources (net)/totaldevelopment expenditure (23%) (28%) (23%) (22%)
Source: Ministry of Finance, Planning and Economic Affairs.
40. Total development expenditures over the three years are projected to
increase at 9.4% p.a., thus remaining approximately constant in real terms.
After a large increase in foreign inflows in FY82 following increased aid
commitments in 1980 and 1981, foreign inflows available for financing
development expenditures are assumed to decline, so that the proportion of
total development expenditure financed by net foreign inflows would decline
once again to below 25% in contrast to the much higher proportions financed
by external assistance during much of the 1970s. Recurrent expenditures and
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government revenues are assumed to grow approximately in line with GDP, sothat the current budget surplus expands in real terms to finance a graduallygreater share of the total development program. As a consequence, governmentborrowing from the banking system is expected to remain below 2% of GDP. Theincrease in revenue which is assumed to result from additional measuresappears to be manageable over the three-year period while the assumptionsregarding foreign economic assistance may prove to be conservative. Thus,projected expenditures appear to be adequately covered by a realisticestimate of prospective available resources.
41. Although the total Public Sector Development Program is expected toremain constant in real terms over the next three years, a major shift inallocations towards the agriculture, water, energy and social sectors is tobe accomplished through the planned decline in expenditures on the fertilizersubsidy and on public sector industry which are to decline sharply in nominalterms and as a share of total expenditures; this major, structural shift inpriorities is clearly illustrated in Table 3. Because a substantial part ofthe development program in agriculture and in the social sectors is a provin-cial responsibility, provincial expenditures are to be expanded much morerapidly than federal and their share in total development expenditures is togrow from 18% to 24% between FY81 and FY84.
Table 3: SECTORAL SHARES IN NATIONAL DEVELOPMENT PROGRAM/a
(percentages)
FY81 FY84
Agriculture (including rural development) 7.3 10.5Subsidy on fertilizer 9.2 2.9Water 11.8 13.7Energy (including power and fuels) 20.7 27.8Industry (including minerals) 15.6 4.9Physical planning and housing 6.9 7.9Transport, communications and mass media 18.7 20.7Education (including manpower) 5.0 6.1Health (including population planning) 4.1 4.8Other sectors 0.7 0.7
Total 100.0 100.0
/a The national program is the total of the federal and fourprovincial programs.
Source: Ministry of Finance, Planning and Economic Affairs.
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42. The direction of investments in the agriculture and water sectors are
in line with the 1980 National Agricultural Policy Statement and form an
important part of GOP's policies to improve productivity in the vital
agricultural sector. These investments are described in more detail in
paragraphs 51 to 56 below.
43. Consistent with the Government's objective of reducing the role of
the public sector in manufacturing, development expenditures on industry are
expected to fall from Rs 4 billion to Rs 1.4 billion or from 15.3% to 4.1% of
total allocations during FY81-84. About 80% of the allocation to industry
will be for the Pakistan Steel Mill expected to be completed in FY84. Most
of the remaining expenditures are for the completion of other ongoing
projects, mainly in cement, metal works and chemicals. Upon completion of
the ongoing projects, public enterprises will be expected to meet their
investment requirements through self-financing or through foreign and domes-
tic borrowing.
44. In response to the rapid rise in international energy prices, GOP is
planning for major increases in expenditures on the development of domestic
energy resources. Expenditures on the power and fuel sectors are to increase
at an average rate of 23% p.a. and 14% p.a., respectively, over the
three-year period. Of the total allocation of Rs 16 billion for the power
sector, Rs 6 billion is for generation, Rs 7 billion for transmission and Rs
3 billion for additional distribution facilities in order to achieve balanced
power development. A rural electrification program to provide electricity to
nearly 4,000 additional villages will also provide infrastructure for private
tubewell development. The allocation to the fuel sector includes further
exploration and development work by the Oil and Gas Development Corporation
(OGDC), improvements in the gas transmission network, and the Government's
participation in joint ventures with private petroleum companies. The
revised development program in oil, gas and power forms part of a broader set
of energy sector initiatives described in paragraphs 64 to 78 below.
45. The share of expenditures on transport and communications is to
increase slightly from 18% to 20% of total annual development expenditures
over the three-year period. Emphasis is to be placed on the completion of
ongoing schemes (the most important of which is Phase I of Port Qasim) by
FY84 and the rehabilitation and capacity improvements of existing road and
rail networks. Investment in telephones and telegraph is intended to augment
capacity to cope with an anticipated 14% annual growth in traffic.
46. While GOP's immediate attention has been focused on the productive
sectors, the FY82-84 program also marks a shift in resources towards the
social sectors which have been seriously neglected in the past. The educa-
tion program emphasizes the primary and secondary levels and vocational
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training. The health program continues to accord high priority to the con-
struction of rural health facilities and training of paramedical personnel.Higher allocations are also included to support an intensified populationplanning effort.
47. GOP is following up the FY82-84 Public Sector Development Program bythe preparation of a similar program for FY83-85. This program, which will
be extended to cover major public enterprise investments financed outside thebudget, will provide a further opportunity to reorient investments toward thepriority sectors. The FY83-85 program will be reviewed with Bank staff in
October/November 1982. These three-year public sector development programsare designed to provide an effective linkage between the longer-term perspec-
tives of Pakistan's Five-Year Plans and the financing decisions reflected in
the annual development programs which are approved as part of the budgetcycle. Through a process of timely review, GOP intends to ensure that the
implementation of public sector development projects remains closely in line
with the objectives of longer-term plans, while keeping total outlays in linewith available resources and shorter-term economic stabilization policies.
48. A Sixth Five-Year Plan, covering FY84 to FY88 and retaining the basicobjectives of the agreed structural reform program, is currently being
prepared. The Sixth Plan will provide a longer-term perspective for develop-
ment, specifying macro-economic targets (set out in paragraph 30 above),identifying supporting sectoral policies, and outlining strategies andinvestment programs for the key sectors. For the first two years of theSixth Plan, the phasing of public investment expenditures will be consistentwith the FY83-85 Three-Year Development Program. A mid-Plan review will beconducted at the end of FY85 to assess progress toward targets, evaluate
available resources and adjust expenditures as necessary for the remainder ofthe period. In this way, GOP will retain the flexibility to adjust to suchfactors as fluctuations in international commodity prices, migrant remittan-
ces and the availability of external assistance, while avoiding the majordisruptions which marked the implementation of the Fifth Five-Year Plan.
49. The revival of development planning in Pakistan has been accompaniedby the revitalization and strengthening of the Government's planningcapability. A highly regarded and experienced economist has recently been
appointed to the previously vacant, key position of Deputy Chairman of thePlanning Commission, with the Finance Minister taking up the position of
Chairman. More high-level staff are expected to be appointed shortly and
various forms of technical assistance are being sought. In addition, GOP hastaken steps to safeguard planned priorities by requiring the active involve-ment of the Planning Commission at all stages of the project selection
process. The project selection and approval process, which was reviewed bythe Bank during the preparation of the proposed SAL, is designed to ensurethat all projects included in the program are evaluated to check their con-sistency with government priorities and objectives and meet appropriate tests
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of economic efficiency. Finally, the central monitoring of project implemen-
tation is also being strengthened by an expansion in the number and
capability of the project monitoring staff of the planning organization.
II. The Agriculture and Water Sectors
50. As outlined in Part I, GOP has revised its agriculture and water
sector policies following in-depth studies and dialogue with Bank staff.
The Government's medium-term action program is directed toward the rapid
implementation of the 1980 National Agricultural Policy through: (a) the
reorientation of public expenditure programs in the agriculture and water
sectors, particularly towards the more efficient use and maintenance of
existing facilities; (b) continued adjustments of prices and other charges to
reduce subsidies and to provide incentives for increasing the productivity of
land and other key inputs; and (c) a progressive diversification of agricul-
ture.
51. Reorientation of public expenditures: Past investments in the
agriculture and water sectors have created a substantial infrastructure,
giving Pakistan the potential to manage its water supplies to meet crop
requirements and to increase crop yields substantially. Carefully targeted
expenditures are now required to exploit this potential by improving the
efficiency of the irrigation system.
52. It has been estimated that, at present, more than one-half the gross
inflow of water into the irrigation system is lost through seepage and per-
colation. These losses have reduced crop production and, together with low
utilization rates of public tubewells, have contributed to a serious drainage
problem; in about 60% of the Indus Basin the water table is within 10 feet of
the land surface. Investments such as watercourse improvements and canal
rehabilitation not only promise high returns but would also reduce the need
for investments in drainage.
53. The importance of such investments in irrigation has been recognized
by GOP and the revised Three-Year Public Sector Development Program provides
for a shift of public expenditures in the water sector towards:
(a) the rehabilitation and adequate operation and maintenance of the
irrigation system;
(b) improving water conservation through the implementation of minor
works, primarily below the canal outlet, such as watercourse and
on-farm improvements, which together with more optimal water
scheduling would permit available irrigation water supplies to
be used more efficiently;
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(c) enhancing water supplies while reducing public sector expendi-tures through promotion of private tubewell development inusable groundwater areas (including areas now under publictubewells); and
(d) necessary drainage in waterlogged and saline areas to complementthe existing surface distribution and tubewell system.
54. Within the agriculture sector, the pattern of expenditures plannedfor FY82-84 indicates a marked shift from the past emphasis on fertilizersubsidies towards a more balanced development program which provides forincreased expenditures on foodgrain storage, rural roads, agriculturalresearch, extension services (through the training and visit system andextensive use of radio broadcasts), increased production of quality seeds,improved credit facilities and other essential complementary activities.
55. As Table 4 shows, while the proportion of total development expendi-tures devoted to agriculture and water is to remain roughly constant at27-28% during the three years to FY84, a substantial shift of resources is torake place within each sector. In agriculture, the share devoted to thefertilizer subsidy is to fall from 9.2% to 2.9% of total development expendi-tures, with the share allocated to agricultural investment rising from 5.3%to 9.2% of the total; since the major thrust of the agricultural program isin areas that are provincial responsibilities, the provincial share wouldrise much more rapidly than the federal. Federal allocations to the watersector (excluding Tarbela) are to be sharply increased, as shown, with theproportion of allocations to drainage and reclamation rising from 40% of thetotal in FY81 to 50% in FY84.
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Table 4: ALLOCATIONS FOR THE AGRICULTURAL AND WATER SECTORS, FY82-84
(Rs millions: % shares of total development expenditures)
FY81 FY82 FY83 FY84
Agriculture 3,878 (14.5) 3,672 (12.6) 4,401 (13.6) 4,197 12.1)
Fertilizer subsidy 2,448 (9.2) 1,950 (6.7) 1,589 (4.9) 997 (2.9)
Other federal 708 (2.6) 910 (3.1) 1,240 (3.8) 1,286 (3.7)
Provincial 722 (2.7) 812 (2.8) 1,572 (4.9) 1,914 (5.5)
Water 3,153 (11.8) 3>971 (13.6) 4,271 (13.2) 4,748 (13.7)
Tarbela/IndusBasin 1,007 (3.8) 1,346 (4.6) 882 (2.7) 731 (2.1)
Other federal 1,598 (6.0) 1,955 (6.7) 2,627 (8.1) 3,062 (8.8)
Provincial 548 (2.0) 670 (2.3) 762 (2.4) 955 (2.8)
Rural Development /a 507 (1.9) 739 (2.5) 385 (1.2) 445 (1.3)
Totals with fertilizersubsidy andTarbela/IndusBasin 7,538 (28.3) 8,382 (28.7) 9,057 (28.0) 9,390 (27.1)
Totals withoutFertilizer subsidyand Tarbela/IndusBasin 4,083 (15.3) 5,086 (17.4) 6,586 (20.3) 7,662 (22.1)
/a Rural development consists of activities which lend support
to agriculture such as the construction of farm-to-market roads,
improved storage facilities, and soil conservation.
Source: Annual Development Plans and the Three-Year Public Sector
Development Program.
56. These shifts in expenditures will be reviewed and carried further
during the preparation of the FY83-85 and subsequent public sector develop-
ment programs. This continued reorientation of investment programs in
agriculture and water will be aided by the preparation of further
high-priority projects in these sectors including: (a) projects to give
effect to GOP's "SCARP Transition Program," designed to promote private
tubewell development in usable groundwater areas through investments in rural
electrification, supervised credit schemes and other measures. Wherever
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practicable, GOP intends to phase out and/or divest public tubewells to theprivate sector in order to reduce the heavy budgetary cost of operation andmaintenance; (b) drainage projects in saline areas; (c) projects to improvethe efficiency of water use in selected canal command areas; and(d) complementary agricultural projects. This major project preparationeffort, which is to take place over the next 18-24 months, would be supportedby the proposed IDA Technical Assistance Project and by a UNDP technicalassistance project for which the Bank is executing agency.
57. In addition to the reorientation of development expenditures, the
Government's program also provides for additional spending on the operationand maintenance of the canal system and public tubewells to prevent furtherdeterioration of existing facilities and to reduce the extent of waterlog-
ging. GOP has recognized that Provincial Governments face severe constraintsin financing such expenditures and a special allocation of Rs 150 million wasmade in the FY82 Federal Budget to enhance the funds available to the provin-ces for canal maintenance. GOP has undertaken to increase budgetary alloca-tions for canal maintenance substantially in real terms during the comingyears in order to meet the requirements (as estimated in consultation withthe Bank) for the operation and maintenance of the surface irrigation systemby FY85. In the short term, GOP also intends to increase allocations con-siderably to meet the full requirements for the operation and maintenance ofexisting public tubewells. In the medium to long term, as noted in paragraph56 above, emphasis will be placed on the promotion of private investment insubsurface irrigation in order to reduce the necessity for public sectorinvolvement in this area.
58. To help finance these enhanced operation and maintenance expendituresfor irrigation, water charges and/or other levies on the supply of irrigationand drainage services will be increased. Since, according to Bank estimates,expenditures on the surface irrigation system alone would need to be doubledto raise maintenance standards to the agreed satisfactory levels, an increasein user charges to cover all operation and maintenance outlays must neces-sarily be phased. GOP has already increased water charges by 25% per year inthree of the last four years and intends to increase charges further (atintervals of not more than two years, subject to any necessary legislativeapproval) or make other appropriate financing arrangements to achieve fullcost recovery in accordance with final deadlines for various provinces asagreed with the Association.l/
1/ A number of these undertakings concerning increased expenditures on theoperation and maintenance of the irrigation system and periodic increasesin water charges reflect agreements concluded with the Federal andProvincial Governments in connection with the Irrigation SystemsRehabilitation Project which was approved by the Executive Directors onMay 4, 1982.
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59. Agricultural pricing policies: The Government intends to continue
its policy of periodic adjustments to agricultural input/output prices in
order to align them with long-term trends in international prices and to
provide appropriate incentives to producers while reducing input subsidies to
release resources for other high-priority expenditures. The 50% increase in
fertilizer prices in February 1980 reversed the previous rapid escalation in
the subsidy bill; in the absence of such price increases the fertilizer
subsidy would have reached US$375 million in FY80, whereas it was contained
to US$250 million in FY81 and is estimated at US$200 million in FY82.
60. Further fertilizer price increases averaging around 10% were
announced in March 1982, with relatively larger increases imposed on
nitrogenous fertilizers. The Government intends to make further adjustments
in order to meet the targets for reducing the subsidy set in the FY82-84
Public Sector Development Program, as well as to reach its objective of
eliminating the subsidy by mid-1985 as agreed under the 1980 Fertilizer
Imports Credit. Remaining pesticide subsidies are to be eliminated by 1983.
Present domestic farmgate prices for agricultural produce are generally below
world prices, so that it will be possible to compensate farmers for increased
costs resulting from the gradual removal of the fertilizer subsidy in the
short term. In the longer run, a continuing policy of incentive crop prices
together with reduced input subsidies will need to be accompanied by a
gradual improvement of yields and crop diversification. These objectives are
being pursued through the extension, research, water management and other
programs included in the FY82-84 Development Program.
61. In view of the complexities of input/output price relationships in
the agricultural sector, the Government has determined that the recently
established Agricultural Prices Commission (APC) will play a central role in
guiding future pricing decisions. The APC's terms of reference, drawn up in
consultation with the Bank, direct APC to provide consistent and timely
recommendations on appropriate input and output prices, based on scientific
analysis of farm-level data and the effects of prices on productivity, con-
sumers, and the international competitiveness of Pakistan's agricultural
produce. The Commission is to be adequately staffed by June 1982 and its
initial work program, based on an outline agreed with the Bank, will be
directed toward designing a system for the collection of farm-level data;
initiating and assisting the collection of information on international
prices and production of Pakistan's major crops; and developing methods of
measuring the impact of price recommendations on consumers' and farmers' real
incomes. This work program is to lead to the development of a methodology
for preparing price recommendations (with supporting analysis) on a timely
basis. Assistance in these areas would be provided under the proposed Tech-
nical Assistance Project.
62. Diversification of agriculture: GOP's 1980 National Agricultural
Policy stresses the importance of a balanced emphasis on all aspects of
agriculture, including livestock, fisheries and new crops in addition to the
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four existing major crops of wheat, rice, cotton and sugarcane. The mostintensive effort toward diversification in the immediate future will be toincrease the domestic supply of oilseeds. Since the present supply of edibleoil is mostly a by-product of cotton production and specialized oilseed cropsare not grown on an extensive scale, domestic production has not been able toincrease in step with the rapid growth of consumer demand and the import billhas risen rapidly to US$300 million a year.
63. To remedy this situation, the Government has created a high-levelOilseed Development Board to advise on both the agricultural and processingaspects of increasing oilseeds and edible oil production. An oilseeddevelopment plan has been drawn up to promote a rapid expansion in acreagefor three non-traditional oilseeds (sunflowers, soyabeans and safflower) withsupporting pricing and input supply programs for increasing crop yields; agradual improvement in the yields of the traditional oilseeds (rape andmustard); and improved extraction techniques. A substantial expansion inacreage (from 11,000 to 85,000 acres) under non-traditional oilseeds isplanned over the next three years. For the traditional oilseeds, the prin-cipal effort is to be made through the extension system and an annual 5%increase in yields has been targeted. Technical assistance has been providedby UNDP/FAO and is expected from USAID. To improve the extraction rate, aprogram to rehabilitate oil extraction plants is being planned with assis-tance from UNDP/FAO.
III. The Energy Sector
64. Pakistan possesses a range of alternative commercial as well astraditional energy sources. There is considerable scope for further develop-ment of each of these sources. Of the estimated potential of 10,000 MW whichcould be economically generated from hydro-electricity, about 20% has so farbeen harnessed; there has been no significant use of coal for thermal powergeneration to date; and there are sizable known reserves of natural gas, andreasonably good prospects for discoveries of additional commercial oil andgas fields. Since large capital requirements and long lead times are neededto increase the available supply of energy from non-petroleum sources, GOP'sshort-term response to the increased cost of imported energy is focused onthe accelerated development of Pakistan's oil and gas potential. Over thelonger term, a coordinated development of economically efficient alternativedomestic energy sources is to be promoted.
65. In order to reverse a trend of increasing petroleum imports and avertthe prospect of an increasingly serious shortage of natural gas supplies, GOPhas recently revised its previous approach to setting producer prices ofdomestic crude oil and natural gas; taken steps to devise a realistic gassupply development strategy; and initiated institutional and managerialreforms of the public sector Oil and Gas Development Corporation (OGDC). Inaddition, GOP has recognized the need for a stepped-up effort in petroleumexploration and is endeavoring to promote the role of private companies in
-25-
this effort. These policy developments are taking place under thestrengthened leadership of the Ministry of Petroleum and Niatural Resourceswithin an overall policy framework determined by a high-level National EnergyPolicy Committee (chaired by the Minister for Finance) which was establishedin 1980. A special committee chaired by the Governor of the State Bank wasset up in June 1981 to resolve a number of urgent pricing issues in the oiland gas sectors and agreements have already been reached with privateproducers which will lead to substantially increased investments.
66. Crude oil production and exploration: The first important step inGOP's recent efforts to improve domestic oil production has been torenegotiate the pricing and production agreement with the major existingprivate producer, Pakistan Oilfields Limited (POL). Under the terms of a1978 agreement with POL, output from the company's Meyal field was to expandfrom 9,000 to 17,000 barrels per day by 1983. The well-head price of crudeoil was set at Rs 44 per barrel, which at that time was judged to be adequateto cover expected production and investment costs over the five years andyield an adequate rate of return to the producer. However, drilling coststurned out to be considerably higher than originally expected, while produc-tion per well was below estimates. In view of these developments, a newpricing formula has recently been agreed between GOP and POL under which theprice of crude oil produced from new wells at Meyal will be substantiallyincreased to 30% of the import parity price.
67. This new arrangement has a number of important advantages over theprevious fixed average price. Firstly, the new arrangements recognize theconsiderably higher marginal cost of additional, as compared to existing,production and provide a positive incentive for the continuation of drillingat the Meyal field. Secondly, the new approach contains an explicit linkageto the economic value of the product rather than merely to expected costs;under the new arrangements, there will be an automatic incentive for anaccelerated development program if the world price of oil were to increasefurther. This arrangement is expected to provide sufficient funds to com-plete an agreed development program of eight additional wells by 1987 inorder to achieve the originally planned increase in the rate of production.GOP has indicated to the Bank that the well-head price will be kept underreview to ensure that an adequate incentive is maintained for additionaleconomic investments (for example, in secondary recovery).
68. GOP is also taking steps to improve operations at the Toot field,which is being developed by OGDC with assistance from IDA and other donors(Credit No. 867-PAK of January 12, 1979). Although performance at Toot hasrecently improved, the pace of drilling and production has been well beloworiginal expectations due to a number of factors including technical dif-ficulties (in part due to complex geology), the loss of skilled personnel tothe private sector and to oil companies in the Middle East, and deficienciesin the management structure of OGDC. These problems are being addressed inthe short term by the recruitment of a team of experts to assist OGDC. In
-26-
the medium term, there is to be a progressive reorganization of OGDC alongmore commercial lines (see paragraph 76).
69. Since 1976 GOP has signed a number of joint venture explorationagreements with private oil companies for concessions in previously unex-plored areas. Under these agreements the price for "new oil" from any dis-coveries in these concession areas would be linked to international prices(the domestic well-head price would be reduced by a 12.5% royalty and anegotiated domestic price differential in the range of 10-12.5%) and themaximum share of profits accruing to the Government has been fixed in theseagreements at 50-55%. The agreements also provide for OGDC to participate upto an agreed share in the development of any commercial discovery. The termsof these agreements are consistent with accepted international petroleumindustry practice and provide a strong incentive for exploration in Pakistan.Seven exploratory wells were drilled in FY81 and a further eight are due tobe drilled in FY82. One small commercial discovery has resulted so far fromthese efforts.
70. Although the present pace of exploration is a significant improvementover the early 1970s, it remains low relative to Pakistan's hydrocarbonpotential. A principal reason for this is that some of the more obviouslypromising structures are held under license by OGDC, which because of itsfinancial and technical limitations can only sustain a modest explorationeffort. In order to step up the pace of exploration of OGDC-held areas, theGovernment has recently decided to invite private sector participation inexploring these prospects, either through joint ventures or through contractsfor exploratory drilling by private companies. GOP intends to negotiateappropriate terms for participation in the development of 10 to 15 structuresto supplement OGDC's own exploration efforts and some of these negotiationsshould be completed during 1982. GOP has also requested assistance from theBank for geological and geophysical studies to identify additional prospec-tive structures.
71. Natural gas production and pricing: Although the Government's suc-cessful promotion of the use of natural gas has dampened the adverse effectof rising world energy prices on Pakistan's economy, shortages of gas haveemerged since the end of 1980 due to lack of effective forward planning. Anin-depth study of Pakistan's gas supply/demand situation commissioned by GOPin 1981 indicates that the current need for load-shedding during the peakperiods of demand in winter will become increasingly serious and that, unlesssubstantial investment in increasing gas production takes place, a supply gapof up to 40% of total demand could open up by the mid-1980s. =
72. The supply/demand study (carried out by foreign consultants andfunded under the Bank's Project Preparation Facility) has also confirmed thatsubstantial, economically recoverable reserves of gas exist in Pakistan.However, the extremely low producer gas prices set by GOP in the past havediscouraged needed investment in the sector. Up to the end of 1981 the
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well-head price for gas from the principal field at Sui was Rs 0.74 perthousand cubic feet (mcf), while gas from the Mari field was priced at aroundRs 1.10 per mcf; these well-head prices are under 3% of the current cost ofthe equivalent energy which can be derived from fuel oil, although fuel oilis currently being substituted for natural gas in thermal power generationduring periods of peak demand. GOP has recognized the need for a substantialrevision of its approach to gas producer prices, and a new pricing policy hasbeen developed to facilitate the implementation of a strategy to close thepresently widening supply-demand gap. Agreement was reached in February 1982for additional investments of over $150 million over the next 2-3 years tomaintain the current rate of production from the Sui field by means of addi-tional drilling and field compression. Subject to further detailed reservoirstudies, the gas development strategy may also include:
(a) subsequent additional drilling to increase thesustainable rate of production from the Sui field;
(b) doubling of production from the Mari field; and
(c) development of new gas fields at Pirkoh andKhandkot.
73. The revised pricing arrangements for the above investments are toreflect the ownership and characteristics of each field. For the Pirkohfield, which is to be developed by a wholly owned subsidiary of OGDC withassistance from the Asian Development Bank, the well-head price will beadjusted periodically to ensure a 12% discounted cash flow after-tax rate ofreturn on investments. For investments at Sui (which is 70% privatelyowned), the recently agreed pricing arrangements for the investments requiredto maintain the current rate of production are designed to provide a substan-tial share of investment requirements through internal cash generation; theaverage well-head price for all production will be adjusted annually in orderto generate a negotiated rate of return to share capital, after allowing forproduction and development costs, taxation, debt service and an agreed rateof accumulation of reserves for future re-investment. On this basis thewell-head price for Sui gas for 1982 is set at over Rs 3 per mcf.
74. With respect to investments to generate additional gas supplies fromany other source, GOP has adopted a general pricing policy which represents amajor departure from its traditional cost-plus or fixed rate-of-returnapproach. In each case, a "base price" would be negotiated to yield anagreed discounted cash flow real rate of return on the total estimated costsof the proposed development project and this "base price" would be indexed toworld oil prices. In each case, the rates of return would be negotiatedtaking into account the different risks applying to various proposed develop-ments. In cases where the costs of development remain subject to con-siderable uncertainty at the time of initial negotiations (e.g., becausesubstantial further exploration or appraisal is required), the base price may
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be subject to review at a pre-determined point in the development schedule,once the scope and costs of the project have been more precisely defined.Negotiations on the above basis have been commenced with the privateoperators of the Mari and Khandkot fields. Progress towards implementing anadequate gas supply strategy on the basis of this revised approach to pricingwill be reviewed jointly by the Bank and GOP in October/November 1982.
75. In order to encourage conservation, the average prices of petroleumproducts to consumers have been increased so as to remain in line with risinginternational petroleum prices over the past few years and the Governmentintends to continue this policy of promptly passing on cost increases tofinal users. In contrast, gas consumer/user prices were riaintained atextremely low levels, in order to encourage the substitution of gas for oilconsumption and to counterbalance other domestic inflationary pressures. Upto the end of 1981, the average consumer price of natural gas was about Rs 10per mcf, well above the present average cost of domestic gas production anddistribution but only around 25% of the value of the fuel oil energy equiv-alent. However, the time when one large low-cost field (Sui) could meetPakistan's increasing gas requirements is now over, and the marginal costs ofadditional gas supplies are likely to be considerably higher. In addition,with gas consumption increasing rapidly and serious gas shortages emerging,the need to limit the growth of demand and to encourage conservation has beenunderlined. The Government has accordingly adopted a policy not only to passon any increases in producer prices resulting from revised well-head pricingarrangements but also to achieve a gradual rationalization of user prices forall alternative sources of energy, while avoiding undue inflationary shocksto the economy. An initial average increase in gas consumer prices ofapproximately 20% was implemented effective January 1, 1982, and the Govern-ment intends to implement further phased increases so that the average priceof natural gas to consumers would reach two-thirds of the value of equivalentenergy derived from fuel oil by FY88. The Government will review the gaspricing situation annually and take necessary action to maintain adequateprogress towards these objectives.
76. Reorganization of OGDC: GOP has commenced the implementation of aprogram to reorganize OGDC to correct existing deficiencies in its managementstructure and operating efficiency following a recently completed managementstudy which recommended the restructuring of OGDC along commercial lines,including the setting up of independent operating companies to undertake thedevelopment of individual fields. In recent months, salaries for key OGDCstaff have been increased and there has been an increasing delegation ofauthority to field development teams. As noted above, an independent companyfor the development of the Pirkoh gas field is being formed as a wholly ownedsubsidiary of OGDC. GOP has approached private companies as a first step tonegotiating a joint venture agreement for the development of the Dhodakgas/condensate field. GOP is also investigating the feasibility of settingup a separate independent drilling subsidiary of OGDC which would assume themanagement of four modern rigs currently owned by OGDC and contract drilling
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services to other segments or subsidiaries of OGDC as well as to private
companies undertaking exploration and development work in Pakistan.
77. Energy sector planning: On the instructions of the National Energy
Policy Committee, a 10-year national energy development plan is being drawn
up under the direction of the Planning Commission. This plan is to draw
together information on energy subsectors to ensure a coordinated development
of all alternative potential sources. The terms of reference of this study,
to be carried out with the help of consultants, have been drawn up and a
preliminary report is to be prepared by December 1982 in order to provide the
basis of the energy sector strategy for the Sixth Five-Year Plan.
78. GOP has also requested assistance from the Bank and other donors for
detailed subsectoral studies which would be integrated into a final draft of
the long-term energy plan. The recently completed gas study represents the
first stage of these subsectoral studies. The proposed IDA Technical Assis-
tance Project includes provision for further studies in the oil and gas
sectors and the power sector; a feasibility study of the major Kalabagh Dam
Project has commenced (financed by UNDP with the Bank acting as executing
agency); and several donors, including the Bank, are expected to assist
studies of the coal sector.
IV. Industry
79. As described in Part I above, the Government's industrial policy
since 1977 has been to encourage the private sector and limit the role and
improve the efficiency of the public sector. GOP has already implemented a
wide range of measures to achieve this fundamental reorientation of policy
with encouraging results. There has been a substantial increase in private
investment, especially in medium and small-scale enterprises. At the same
time, GOP is aware that further streamlining of procedures and incentives, as
well as simplification of regulations, is desirable to maintain the momentum
of the recent recovery. A flexible exchange rate regime has been introduced
recently to support already existing export promotion measures. A policy of
import liberalization is also being followed in consultation with the IMF
in order to give domestic industry better access to imported inputs while
promoting improved efficiency by gradual exposure to competition from
imports. In addition, a number of surveys and studies are being undertaken
by GOP to provide the basis for further industrial policy reforms. Some of
this work will be supported by the proposed IDA Technical Assistance Project
as well as by sector work to be undertaken by Bank staff over the next 18
months.
80. Industrial Incentives Study: The process of modifying industrial
policy in Pakistan has been complicated by the existence of the present
overly complex system of industrial incentives. Because of numerous
piecemeal alterations to incentives over the years, the precise effect of the
existing system on the industrial sector as a whole or on specific industries
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is unclear; there is no comprehensive information on the protection that itprovides or its impact on resource allocation.
81. GOP has accordingly commissioned a comprehensive study of effective
protection based on a large-scale sample survey of industrial enterprises, inorder to provide a review of the system of incentives including taxes, sub-sidies, tariffs and other controls, on the basis of which standard measuresof prevailing degrees of effective protection will be calculated. This
analysis will guide GOP in a simplification and reform of the structure ofincentives in order to achieve a more uniform level of effective protection.The study, which is being carried out by the Pakistan Institute of Develop-
ment Economics, has been initiated with funds from IDA's Project PreparationFacility (PPF) and would be continued under the proposed IDA Technical Assis-tance Credit; it is expected to be substantially completed by December 1982.The Government has appointed a committee chaired by the Minister of Financeto review the progress of the study and its findings. In the light of thecommittee's recommendations, GOP intends to introduce appropriate changes intariffs and fiscal incentives beginning July 1, 1983.
82. Public sector enterprises: To bring about further improvements inthe efficiency of the public manufacturing sector, GOP has decided to estab-lish a Public Enterprises Signaling System which would develop a set ofobjective performance criteria to be used in evaluating and rewardingmanagers of public manufacturing enterprises and would provide the basis fora strengthened incentive system for managers. The project, recommended by arecent study of the public sector by a Bank-financed consultant, would con-sist of the development of an information system to measure enterprise per-formance; a performance evaluation system to translate goals into explicitenterprise objectives in quantitative terms; and the provision of incentives
for managers, linking benefits with achievement of specified targets. Theproject would be financed under the proposed IDA Technical Assistance Creditfollowing initial funding from the PPF. Work on this project commenced inNovember 1931 and is to be completed according to an agreed, detailedtimetable over three years. The work program has been designed so that themonitoring and evaluation of enterprises can be implemented progressivelyonce the initial phase of setting up a management information system iscompleted during 1982.
83. Financial sector study: Pakistan's relatively low domestic savings,the growing emphasis on the role of the private sector and the difficultiesbeing experienced by private companies in raising domestic financing point to
the need to improve the performance of financial markets and institutionsboth in terms of mobilizing and allocating resources. Improvement inpolicies and institutions in this area would, inter alia, assist GOP toattain the desired improvement in the savings rate over the medium term (see
paragraph 30). A Bank financial sector mission to survey and review theperformance of existing financial institutions and markets visited Pakistanin March 1982 and a report containing policy recommendations for discussion
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with GOP is to be finalized shortly. It is envisaged that selective reforms
of the financial sector, as well as the implementation of a revised
industrial incentive system and of the Public Enterprises Signaling System,
might be elements of a possible SAL II.
84. Public/private sector balance: GOP's objective of shifting the
balance of total investment substantially towards increased private invest-
ment (see paragraph 30(c) above) is to be pursued by the active promotion
of private investment in industry. In addition to offering improved fiscal
and other incentives, GOP is concerned to ensure that unnecessary constraints
on private industry are removed. A detailed inventory of regulatory con-
straints on industry is being prepared by GOP with a view to eliminating all
unnecessary government interventions.
85. The need for further policy improvements is evident in the case of
large-scale industry. Although GOP has been successful in promoting a wel-
come resurgence of private investment, especially in smaller-scale ventures,
there have so far been few proposals for large-scale investments despite the
fact that, given the size of the market and Pakistan's resource endowments,
there is considerable scope for further efficient large-scale import sub-
stitution. While GOP's policy preference is that such projects should be
promoted in the private sector, the Government is aware that, due to the
lumpiness of such investments, there may be difficulties in obtaining a
sufficient flow of private funds and foreign exchange financing for such
projects.
86. As part of the preparatory work for the Sixth Five-Year Plan, GOP
will study key industrial sectors in order to identify the likely extent of
such investments required over the next decade, determine the types of
policies necessary to promote such investments and consider the possible need
for and/or relative advantage of government involvement through joint ven-
tures with the private sector, or if necessary through sole public ownership.
These studies will, inter alia, analyze the adequacy of sectoral policies
(including pricing) and will assess the associated needs for infrastructure,
raw materials and credit to promote the necessary volume of investment.
Support for these studies would be provided under the proposed IDA Technical
Assistance Project as well as through the Bank's own economic and sector
work.
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Table 5: PAKISTAN: STRUCTURAL REFORM PROGRAM
Structural Reform ProgramSector and Policy Issues Objectives Recent Actions and Performance Further Steps to be Taken
MACRO-ECONOMIC MANAGEMENT AND RESOURCE MOBILIZATION
1. Ecoonmic Growth GOP aims to maintain a Since FY77 GDP has grown at Improved sectoral policies,growth rate of 6.5% p.a. over 6% p.a. with agriculture as outlined below, designedin GDP through FY88, with expanding at 4.2% and industry to transform the recentsectoral growth rates of at 8% p.a. recovery in performance to5% for agriculture and a period of sustained growth.10% for manufacturingindustry.
2. Domestic Resource Gross national savings Gross national savings have Program development: A studyMobilization are to be increased to increased from 11% of GNP in of the performance of financial
14% of GNP by FY83* and 1977 to over 13% in 1981. markets is being conducted,to 16% by FY88 through inter alia, to improve theirtaxation measures, re- effectiveness in mobilizingductions in subsidies savings; results to be discussedand improved self- with Bank during FY83.financing of investmentsby public sector enter- Government Expenditures: Tight Actions:prises as well as continued restraints imposed, with subsidies (a) improved framework andrestraint of Government falling from 12% of budget in procedures for formulatingspending, but with special FY79 to 7% in FY81. Special programs of developmentprovisions for essential allocation of Rs 150 million for expenditure (see 5 below);eKpenditures. canal maintenance in Federal FY82 (b) continued restraint on non-
budget. essential current expenditures;*and
(c) subsidies to be progressivelyreduced in real terms.*
Taxation: Revenues increased by Further simplification and20% p.a. from FY77 to FY81. rationalization of taxationReview of indirect taxation system with emphasis onsystem has been conducted and improved collections.*inplementation of recommendationshas begun.
Government Services and Public Further progress towardsEnterprises: Improvements in cost-recovery for specificcost recovery and self-financing services (e.g., irrigation,of public enterprise investments. electricity),* and implement-
ation of system for monitoringpublic enterprise performance(see 17).
Domestic bank financed Overall budget deficit declineddeficit to be limited to from 8.9% to 4.7% of GDP between2% of GDP.* FY79 and FY81 with domestic bank
financing falling from 4.4% toless than 1% of GDP.
3. Monetary/Credit Domestic inflation to Monetary expansion has been Actions: Annual average growthPolicies be reduced and limited progressively reduced to be of liquidity to be limited to
to annual average of in line with nominal increases 14-15%, with specific sub-10% p.a.* in GDP. Special allocations ceilings for borrowing by
of credit have been reserved Government for budgetary andfor fixed private industrial commodity operations.*investment and priorityagricultural activities.
4. Balance of Payments/ To narrow current From FY77 to FY81 exports Actions: Promotion of exportsExchange Rate Policies account balance to and imports have grown at and import replacement as
2.5% of GNP by 13% p.a. and 8% p.a., described under sectoralmaintaining a growth respectively (in constant headings.of exports well in prices). The currentexcess of the growth account balance of paymentsof imports. declined from 6.8% to 3.3%
of GNP over the same period.
The fixed rupee/USi link was Action: The exchange rate is toended in January 1982; the be managed in a flexible mannerexchange rate is now defined in order to maintain internationalin terms of a basket of competitiveness.*currencies. There has beenan 11% gradual devaluationagainst this basket overrecent months.
a These aspects are to be monitored by the IMF as part of the agreed EFF program.
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Structural Reform Program
Sector and Policy Issues Objectives Recent Actions and Performance Further Steps to be Taken
DEVELOPMENT PLANNING
5. Revised Planning Restoration of sound Following disruption of the Actions:
Framework medium-term development inplementation of the Fifth (a) updated three-year program to
planning to a central Five-Year Plan (FY79-83), be prepared for FY83-85 and
role in economic due to shortfalls in resources, to be completed and reviewed
policy formulation. GlP has drawn up a revised with Bank before November
three-year public sector 1982; anddevelopment program for (b) Sixth Five-Year Plan (FY84-88)FY82-84 in consultation to be drawn up by mid-1983.with Bank.
6. Plan Priorities Redirection of resources The FY82-84 development Actions: Under the revised FY82-84
towards the agriculture, program provides for development program:
water, eoergy and social significant progress (a) the fertilizer subsidy will be
sectors by reducing towards these objectives. reduced from 9.2Z of total
fertilizer subsidies development expenditures in
and public sector industry FY81 to 2.9% in FY84;
investments. (b) the sectoral share for public
industry will decline from15.6% to 4.9% of total develop-ment expenditures; and
(c) resources will be reorientedtowards high-priority invest-ments in agriculture, water,energy and the social sectors(see also 8 below).
Redirection of resources to be pursuedfurther during the preparation of theFY83-85 public sector developmentprogram and the Sixth Five-Year Plan.
7. Planning Procedures Improvement of the capacity Planning staff has been Actions:
of the planning staff strengthened and a new (a) adequacy of staff for plan
to formulate policy Planning Minister has preparation and possible need
proposals, implement been appointed. for technical assistance to
planning procedures and be reviewed;
monitor implementation. (b) staffing and capability of
the project monitoring sectionof the Planning Division to bestrengthened during 1982; and
(c) rigorous project evaluation andapproval procedures to befollowed.
AGRICULTURE AND WATER SECTOR
8. Reorientation of In line with GOP's National Substantial reallocation Actions:
Public Expenditures Agricultural Policy, expend- of expenditures in line (a) preparation of a pipeline of
itures in the agricultural with these priorities high-priority projects,
sector are to be shifted envisaged in FY82-84 including the promotion of
from input subsidies towards development program. private sector tubewells,
improved storage; rural according to an agreed,transport; research and detailed schedule, financed
extension; improved seeds; by technical assistance from
and increased credit UNDP and IDA;
availability. Expenditures (b) expenditures in the agricultural
in the water sector are to and water sectors excluding the
be reoriented towards: fertilizer subsidy will be
(a) rehabilitation and mainte- increased during the revisednance of the existing three-year development program
irrigation system; from 19.1% of total development
(b) improving water conser- expenditures in FY81 to 24.2%
vation and scheduling; in FY84;
(c) promotion of private (c) allocations for the operation
sector tuhewells supported and maintenance of the irri-
by rural electrification gation system to be increased
and supervised credit progressively to meet agreedschemes; and targets by FY85; and
(d) improvements in drainage. (d) water user charges to be
increased to cover an increasingproportion of O&M expendituresin accordance with an agreedschedule.
* These aspects are to be monitored by the IMF as part of the agreed EFF progran.
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Structural Reform ProgramSector and Policy Issues Objectives Recent Actions and Performance Further Steps to be Taken
9. Agricultural Agricultural input and rOP has implemented a series of Actions:Pricing Policies output prices are to be increases in agricultural input (a) APC staffing to be completed
aligned with the long- and crop support/procurement and an agreed work programterm trend of international prices. Since FY77, wheat prices implemented over next 18prices. have been increased by 46%; seed months;
cotton by 27%; IRRI rice by 68%; (b) crop support/procurementBasmati rice by 56%; sugarcane prices and key input pricesby 517. Fertilizer prices were to be reviewed on the basisincreased by an average of 50% in of APC's recommendationsFebruary 1980 and by 9.3% in prior to the sowing of theMarch 1982. Pesticide subsidies 1982/83 winter crop;have been eliminated in two major (c) fertilizer subsidies to beprovinces and water charges have eliminated by mid-1985; andbeen increased by 75% in the last (d) all pesticide subsidies tofour years. An Agricultural Prices be eliminated by end of 1983.Commission (APC) was establishedin 1981 in order to provide asystematic basis for future pricingdecisions.
10. Diversification Diversification of An Ounseed Development Plan has Actions: Implementation of Oilseedof Agriculture agriculture, with been prepared to accelerate growth Development Plan through:
particular emphasis on of domestic production. (a) provision of inputs (includingedible oil to reverse improved seed), advice andthe trend of increasing marketing services to prospectiveimports. Acreage under new growers of nun-traditionalnon-traditional oilseeds varieties in selected areas;is to be increased from (b) intensification of adaptive11,000 to 85,000 acres research and extension servicesover three years. A to increase yields of traditionaltarget of 5% p.a. improve- varieties;ment in yields has been (c) development of detailed programset for traditional to improve processing industry;oilseeds. and
(d) producer and consumer priceadjulstments.
ENERGY SECTOR
11. Petroleum Reduce petroleum imports Exploration of previously Actions: Implementation of a recentExploration by intensified efforts to unexplored areas has been GOP decision to accelerate explora-
esplore and develop new accelerated through joint tion of OGDC license areas bysources of domestic ventures, with one new inviting bids for private sectorpetroleum. discovery to date. However, participation to explore 10 to 15
there has been inadequate structures during 1982.exploration of prospectsunder license to the publicsector Oil and Gas DevelopmentCorporation (OGDC).
12. Development of Maximize domestic oil and Output of oil from existing Program Development: GOP analysisDomestic Oil and gas produced from already domestic fields has fallen short of recent gas demand/supply study,Gas Fields and known sources. of expectations, with develop- leading to the adoption of aProducer Pricing inc.t of the major private sector medium-tern investment strategyPolicies field impeded by inadequate expected to be completed by mid-1982.
prices. GOP has recently re-negotiated pricing arrangements Action: Conduct of negotiations forfor both public and private sector investments to implement the gasoil fields. Gas production supply strategy; progress to beincreased by over 40% from FY77 reviewed with Bank in October/to FT82. However, recent November 1982.analysis of the demand/supplysituation indicates need formajor investments to maintainand increase supplies. Revisedpricing arrangements have beenagreed for investments to maintainsupplies from the major gas field.A new general ga. producer pricingapproach has been adopted fornegotiating investments to increaseproduction.
These aspects are to he monitored by the IMF as part of the agreed EFF program.
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Structural Reform ProgramSector and Policy Issues Objectives Recent Actions and Performance Further Steps to be Taken
13. Oil and Gas Consumer Rationalization of energy Consumer prices of petroleum Actions:Pricing Policies consumer prices with products have been increased (a) consumer prices of petroleum
opportunity costs. sharply since 1978 to remain products to be increased atin line with rising world least in line with increasedprices. Gas consumer prices costs;* andhave been kept at low levels; (b) consumer prices of natural gashowever, GOP has recently to be progressively increasedadopted a policy of gradual towards the value of equivalentrationalization of natural energy derived from fuel oil.
* gas prices relative to otherenergy sources. An initialincrease in gas consumerprices averaging around 20%was implemented in January1982.
14. Role of the Public Improve the efficiency The performance of OGDC has been Actions:Sector Oil and Gas of OGDC, inter alia, by adversely affected by loss of (a) strengthening the staff andDevelopment placing its operations qualified staff and weaknesses technical capacity of OGDC; andCorporation (OGDC) on a commercial basis. in the management structure. A (b) conduct of negotiations for
study of the structure of OGDC private oil company participationwas completed in 1981. GOP has in exploration (see 11 above) asdecided to promote the formation vell as the development of soweof independent operating companies already discovered OGDC fields.and the use of joint ventures orrisk service contracts to developindividual OGDC fields.
15. Long-Term Energy Consistent development of GOP has taken decision to prepare Studies: Implementation of aPlanning all available energy a comprehensive 10-year energy program of data collection
sources. plan to coordinate the accelerated and analysis, including:development of oil and gas with (a) follow up studies of the gasthat of other energy sources. The sector;work program is to include sub- (b) further analysis of geologicalsectoral studies and has commenced data to identify additionalwith the recent gas demand/supply petroleum prospects;study (see 12 above). (c) evaluation of coal prospects;
and(d) a power development strategy up
to year 2000 and a feasibilitystudy of the Kalabagh DamProject;
leading up to the preparation of along-term energy plan. A preliminarydraft is to be prepared for inclusionin the FY84-88 Sixth Five-Year Plan.
These aspects are to be monitored by the IMF as part of the agreed EFF program.
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Structural Reform ProgramSector and Policy Issues Objectives Recent Actions and Performance Further Steps to be Taken
INDUSTRIAL POLICIES
16. Public/Private Revival of private sector No major new investments in Action: An inventory of regulatorySector Balance investment while restricting puiblic sector industry since constraints on industry is being
public industrial investment 1977. A wide range of incentives prepared with a view to eliminatingto the completion of ongoing have been introduced (see 18 and all unnecessary governmentprojects (see 6 above). The 20 below) and investment sanction- interventions.share of private and public ing procedures have been stream-sectors in total investment lined. Private investment has Study: GOP policy is to minimizeis to be shifted from 36% recovered, especially in small the future involvement of the publicat present to 50% in FY88. and mediuim-scale enterprises, sector in industry. A study of large-Government regulations and and increased by 14% p.a. in scale investment needs will beother constraints on private real terms between FY79 and PY81. carried out during preparation ofinvestment to be minimized. the Sixth Five-Year Plan to deter-
mine the policies required to promoteadequate investment Is these sub-sectors and assess the desirability
for any further public sectorinvolvement; any such investmentswill be subject to rigorous economicproject selection criteria.
17. Public Sector Improve the efficiency and The gradual decentralization of Action: Progressive implementationEfficiency financial performance of decision-making and delegation over three vears of a system for
public sector enterprises. of responsibility for staffing evaluating the performance of publicand pricing decisions to enterprises and providing managementindividual enterprises have incentives for improved performance.contributed to a recovery of Phase I of this system - establishmentpublic enterprise productivity of an information base and enterpriseand profitability. performance indicators - to become
operative during FY83.
18. export Promotion Maintain the recent The range of standard rebates Action: The need for measures torecovery in industrial of import and excise duties on promote further export growth,export performance. imported inputs has been extended, including flexible exchange rate
additional rebates have been policies, to be kept under review.*introduced for specific exportsand concessional export financehas been made available. Exportsincreased by 13% p.a. in realterms from FY77 to FY81 buthave recently been adverselyaffected by world price move-ments and other developments.
19. Import Improve access of domestic Since 1980, GOP has commenced Action: Agreed program of importLiberalization industry to imported a gradual process of import liberalization to be completed by
capital and intermediate liberalization, involving a the end of the present EFF program.*goods, while encouraging transition from a "positiveefficiency through exposure list" (permitted imports) toto foreign competition and a "negative list" (prohibitedtechnology. imports) and a progressive
replacement of bans byappropriate tariffs.
20. Restructuring Simplification of the tariff The range of incentives has been Study: Completion of the industrialof Industrial structure and achievement in,proved in recent years, but the incentives study and review by aIncentives of a more uniform level of structure of incentives has high-level GOP committee.
effective protection. become overly complicated andits impact on specific industries Action: Introduction of appropriateis unclear. GOP has commissioned changes in tariffs and fiscala comprehensive study of the incentives. beginning July 1, 1983.incentive system.
* These aspects are to be monitored by the IMF as part of the agreed EFF program.
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PART III - THE STRUCTURAL ADJUSTMENT LOAN AND CREDIT
Loan and Credit History
87. The possibility of structural adjustment lending was first raised byGOP in the fall of 1980 as a follow up to the agreement on fertilizer pricingand other agricultural policy changes reached in connection with the Fer-tilizer Imports Credit of October 1980. Subsequent work towards the prepara-tion of the SAL program has involved an in-depth analysis and discussion ofkey economic issues between GOP and Bank staff; the Bank's Country EconomicMemorandum for 1981,1/ which contained a discussion of the structural issuesfacing Pakistan during the 1980s, provided an initial focus for this dialogueand was followed up by detailed sector work in relevant fields. The proposedLoan/Credit was appraised in November 1981. Negotiations took place inWashington from April 22 to April 28, 1982; the GOP delegation was led by Mr.Ejaz Ahmad Naik, Secretary for Planning and Economic Affairs.
Cooperation with the IMF
88. GOP's program of structural adjustments to be supported by theproposed Loan and Credit complements the measures incorporated in thethree-year EFF Program agreed with the IMF in late 1980. Bank staffcooperated with the IMF in identifying key structural issues and participatedin Fund missions to Pakistan in 1980 and 1981 to advise on specific sectoralpolicy measures to be implemented under the EFF program, the key objectivesof which are summarized in Part II (paragraphs 33 to 36). In reaching under-standings with the Pakistan authorities concerning their respective financialarrangements, the two organizations have cooperated closely to ensure themutual consistency of development and adjustment goals. It has been agreedthat, in the course of monitoring the Government's structural adjustmentprogram, the Bank would provide assistance to the Fund in evaluating thedesign and implementation of sectoral policies as described below (paragraphs90 to 93). Similarly, the Fund would assist the Bank in assessing themacro-economic framework within which sectoral policies would be applied.The current, and scheduled, use of IMF resources by Pakistan is detailed inAnnex V.
Monitoring of Actions
89. GOP's reform program consists of a number of significant policyimprovements in the areas of development planning, agricultural/water sector
1/ "Pakistan: Economic Developments and Prospects," Report No. 3328-PAK,April 10, 1981.
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policies, energy sector policies and industrial sector policies which havebeen described in Part II of this report. A substantial range of measureshave already been taken since the commencement of SAL-related discussions
(see Table 5, pages 32-36). Over the next 12-18 months, significant furtherprogress is expected to be made by GOP in the following areas, which would beclosely monitored by the Bank:
90. Development Planning: GOP has commenced work on the preparation ofan FY83-85 Public Sector Development Program (see paragraph 47) and a
detailed review of the overall size, financing and composition of the FY83-85program would be undertaken during October/November 1982. In addition, GOPhas already commenced the preparation of a Sixth Five-Year Plan to cover the
FY84-88 period; assistance for designing the macro-economic framework of thislonger-term program would be provided under the proposed Technical AssistanceProject.
91. Agriculture and water sector policies: continued progress towardsthe implementation of GOP's National Agricultural Policy is expected to bemade by:
(a) further shifts in the size and composition of investment alloca-tions for agriculture and water in line with this policy withinthe FY83-85 program. Moreover, the Sixth Plan will provide anopportunity for setting out a longer-term investment strategy,
taking into account the respective responsibilities of theFederal and Provincial Governments;
(b) the preparation of high-priority projects and programs in linewith the National Agricultural Policy, including preparationactivities financed under the UNDP Project and the proposed IDATechnical Assistance Credit (paragraph 56). A detailed programof project preparation has been agreed with GOP; the monitoringof the SAL program would pay particular attention to thepreparation of a SCARP Transition Project aimed at reducingpublic tubewell operations in usable groundwater areas, a com-mand water management project to improve the efficiency of wateruse in specific canal command areas, and a detailed program toincrease the production of oilseeds;
(c) further financial measures, including those to be included inthe FY83 budget, in respect of:
(i) providing increased budgetary allocations for the
operation and maintenance of public tubewells and theirrigation canal system (paragraph 57);
-39-
(ii) progressive increases in user charges aimed atrecovering an increasing proportion of the O&M expen-ditures on the irrigation system (paragraph 58); and
(iii) the reduction of the fertilizer subsidy, includingagreement on target levels for the fertilizer subsidyfor FY83, FY84 and FY85 (paragraph 60); and
(d) the completion of the agreed staffing of the Agricultural PricesCommission and the implementation of its work program (paragraph61), with particular emphasis on making recommendations forcoordinated adjustments of key input and crop sup-port/procurement prices prior to each cropping season.
92. Energy sector policies: Over the coming 12-18 months, GOP willcontinue:
(a) the promotion of accelerated exploration of concession areasheld under license by the Oil and Gas Development Corporation,inter alia, through the negotiation of private sector participa-tion (paragraph 70);
(b) the implementation of GOP's revised gas development strategy,inter alia, through inducing additional private investment (see
paragraphs 72 to 74);
(c) the progressive rationalization of consumer/user prices of
natural gas in relation to alternative energy forms (paragraph75);
(d) the strengthening and reorganization of the Oil and Gas Develop-ment Corporation (paragraph 76); and
(e) initial work on an agreed program of data collection andanalysis leading up to the preparation of a long-term integratedenergy plan for Pakistan (paragraphs 77 and 78).
93. Industrial sector policies: In addition to carrying out the agreedprogram of import liberalization in the context of the EFF program, GOP will:
(a) complete and review the study of the structure of industrialincentives, with appropriate changes in tariffs and fiscalincentives being introduced from July 1, 1983 (paragraph 81);
-40-
(b) implement the system of performance evaluation of publicenterprises in line with the schedule agreed under the proposedTechnical Assistance Project (paragraph 82);
(c) prepare and review a comprehensive inventory of regulatoryconstraints on industry in order to eliminate all unnecessarygovernment interventions (paragraph 84); and
(d) conduct an examination of long-term investment needs andassociated policies in large-scale manufacturing (paragraph 86).
Schedule of Disbursements
94. It is proposed that the Structural Adjustment Loan of US$60 millionand Credit of US$80 million equivalent be released in two installments asfollows:
IDA IBRD TOTAL($ million equivalent)
First Tranche 51.0 39.0 90.0Second Tranche 29.0 21.0 50.0
Total 80.0 60.0 140.0
The first installment of US$90 million would become available for disburse-ment on Loan and Credit effectiveness; the second installment of US$50 mil-lion would become available after the Bank has reviewed and is satisfied withthe progress made in the implementation of the SAL program. This review isexpected to take place in October/November 1982. Prior to the conduct of thereview GOP would prepare and submit to the Bank (Section 3.03(a) and Schedule4 of the draft Loan Agreement and Section 3.03(a) and Schedule 3 of the draftDevelopment Credit Agreement):
(a) an FY83-85 Public Sector Investment Program consistent with arealistic estimate of prospective available resources and withthe sectoral priorities of the SAL program;
(b) a report on the Government's decisions with respect to agricul-tural support/procurement prices and key input prices, includingfertilizer prices, to apply for the 1982/83 winter croppingseason, following the receipt of recommendations from theAgricultural Prices Commission based on a review of domesticcost and international price trends and taking into account theeffect of these recommendations on budget subsidy targets set inthe FY83-85 program; and
-41-
(c) a report describing progress in implementing an accelerated gassupply development program and assessing the need for any fur-ther policy measures, including producer pricing policies, whichmay be required to assure adequate investments.
Procurement and Disbursement
95. The funds provided under the Loan/Credit could be used to helpfinance all imports other than a short list of excluded items as specified inSchedule 1 of the draft Loan and Development Credit Agreements. Eligibleimports would include raw materials, intermediate goods, capital goods andspare parts for both the public and private sectors. The proposedLoan/Credit of US$140 million would finance less than 2% of the value of allimports during the expected 18-month disbursement period. Imports directlyfinanced from other sources would not be eligible for Bank financing andthere would be no displacement of alternative financing on acceptable termsavailable to Pakistan, either generally or for commodities eligible forfinancing from the Loan/Credit. Not more than 25% of the proceeds of theLoan or Credit would be used to finance the import of any trade class-ification subgroup.
96. Procurement would be limited to goods from countries eligible underthe Bank-s Guidelines for Procurement. Both private and public sectorimports would be eligible for financing. Procurement by private firms wouldfollow normal commercial practices. Public sector imports would be procuredin accordance with standard government procurement practices, which areacceptable to the Bank. Contracts exceeding $5 million in size would beawarded through international competitive bidding. These contracts would besubject to ex-post review; that is, a brief report containing evidence thateach was let in accordance with Bank guidelines would be submitted prior toor with the withdrawal applications.
97. The proposed Loan and Credit would finance 100% of the c.i.f. cost ofeligible imports, subject to documentary evidence that they had been paid onor after signing. The State Bank of Pakistan would be responsible for col-lecting appropriate supporting documentation, the preparation and submissionof withdrawal applications and the maintenance of necessary accounts for theloan/credit funds. The documentation supporting withdrawal applicationswould consist of a copy of the invoice from the supplier, evidence of paymentand evidence of shipment.
Counterpart Funds
98. The Pakistan rupee equivalent generated by the foreign currencywithdrawals from the loan and credit accounts would be credited to a specialaccount with the State Bank of Pakistan and used to finance expendituresunder the annual development programs of the Federal Government to supportdevelopment expenditures, consistent with the objectives of the agreed struc-tural reform program, in key economic and social sectors (Section 3.06 of the
-42-
draft Loan Agreement and Section 3.05 of the draft Development Credit Agree-ment).
Benefits and Risks
99. The proposed Loan and Credit would provide quick-disbursing foreignexchange to finance essential imports and would assist GOP in meeting themacro-economic targets which have been set under the agreed EFF program.This direct financial contribution of structural adjustment lending to Pakis-tan would be relatively minor in relation to total financing needs. Themajor benefit of the proposed Loan/Credit would be through its indirectcontribution to the improvement of development planning and the successfulimplementation of improved policies in the key sectors of agriculture andenergy which should have a major positive effect on Pakistan's balance ofpayments over the next 3-5 years. The rationalization of industrial policiesshould yield longer-term dividends. These improvements should, inter alia,also assist Pakistan's access to medium-term commercial borrowing onreasonable terms from world capital markets. As noted in paragraph 28,substantial commercial borrowing will be required to permit continued growthin per-capita incomes over the medium term. At present Pakistan has accessonly to short-term borrowing; the existence and implementation of a struc-tural adjustment program would be a significant positive factor in estab-lishing Pakistan's creditworthiness for longer-term borrowing.
100. The recent interchange between GOP and Bank and IMF staff has beenhelpful not only in shaping the program of reforms to be implemented underthe EFF and proposed SAL programs, but also in formulating a coherent programfor future Bank Group project operations in Pakistan as discussed in Part IV.In addition, the proposed Loan and Credit would provide an opportunity for acontinued intensive dialogue with GOP on major issues of economic developmentpolicies.
101. There is a risk that political events either inside Pakistan or inthe region may impede the implementation of the reform program. However,GOP has been able to build up an impressive record of policy improvementsdespite the adverse developments in the region and the world economy inrecent years. The Government has demonstrated a commitment to a gradualrationalization of the economy through the implementation of measures whichhave, in many cases, involved politically difficult decisions.
PART IV - OTHER BANK GROUP OPERATIONS IN PAKISTAN
102. The cumulative total of Bank/IDA commitments to Pakistan (exclusiveof loans and credits or portions thereof which were disbursed in the formerEast Pakistan) now amounts to approximately US$2 billion. During its longassociation with Pakistan, the Bank Group has been involved in almost allsectors of the economy. This has included its involvement with other donors,
-43-
over a 20-year period, in the major program of works to develop the waterresources of the Indus Basin. Approximately 36% of total Bank/IDA commit-ments to Pakistan have been for public utility services, 31% for industry (ofwhich 9% was for industrial imports), 30% for agriculture and 2% for educa-tion. IFC has made investments totaling $74 million.
103. The proposed SAL program would reinforce the effectiveness of future* project lending, particularly in the agriculture, water and energy sectors,
by addressing broad macro-economic and sectoral policy issues. A substantialpipeline of prospective projects is being developed in the agriculture andwater sectors to support the consensus on policies which has evolved in thesesectors. Similarly, future projects in the energy sector would support thecoherent development strategy now emerging for the sector as a whole.
104. In recent years, the Bank has placed greatest emphasis on theagriculture and water sectors, where past operations have assisted the con-struction of major irrigation facilities and the reclamation of land bycontrolling salinity and waterlogging. Other operations have been designedto raise agricultural productivity through support for research and extensionand by improving the supply and effective use of agricultural inputs. Thedialogue between GOP and Bank staff on future investment needs in agricultureand water has resulted in an agreed program of project preparation (paragraph56), which is to be supported, in part, by the proposed IDA Technical Assis-tance Project. The preparation of these projects will lay the foundationsfor future Bank operations in these sectors.
105. In the oil and gas sectors, the significant reforms commenced by GOPwill form the basis for an expanded program of Bank operations in this vitalsector. Past operations have included assistance for the extension of thegas distribution system and for domestic oil production at the Toot field.Possible future projects include the development of the Dhodak gas/condensatefield; a petroleum exploration promotion project; and extensions of the gasdistribution network. Further projects are also planned to assist thedevelopment of electric power generation, transmission and distribution.
106. In industry, most Bank lending to date has been channeled throughdevelopment finance companies. Direct lending for industry has includedassistance to three large fertilizer plants and for small-scale industry.IFC has made investments in 14 Pakistan enterprises. The proposed financialsector study and the study of large-scale investment proposals (paragraphs 83and 86, respectively) may identify further opportunities for Bank Groupoperations to support industrial development.
107. The focus of Bank lending for transport and communications hasshifted increasingly towards promoting better utilization of existingcapacity by improving the efficiency of operations and strengthening theinstitutions responsible for these services, especially the Karachi Port
-44-
Trust, Pakistan Railways, Telephone and Telegraph Department, and federal andprovincial highway agencies. A second water supply project in Lahore iscurrently under implementation. Five IDA credits for education, totalingUS$62.5 million, have assisted in upgrading primary, post-secondary andhigher technical and agricultural education, middle-level training of primaryteachers and agricultural extension agents, and vocational training. Aproposed population project, to support GOP's newly revised Population Plan,is presently being prepared.
108. Annex II contains a summary statement of Bank loans and IDA creditsas of March 31, 1982, and notes on the execution of ongoing projects. Creditand loan disbursements have been generally satisfactory. Some projects haveexperienced initial delays due to government procedures for project approval,which are now being strengthened, and to slowness in appointment of consult-ants. Rapid turnover of managerial and technical staff, in part due tomigration to the Middle East, and budgetary constraints have been problems inthe case of some projects.
PART V - LEGAL INSTRUMENTS AND AUTHORITY
109. The draft Loan and Development Credit Agreements between the IslamicRepublic of Pakistan and the Bank and the Association, respectively, thereport of the Committee provided for in Article III, Section 4(iii) of theArticles of Agreement of the Bank and the Recommendation of the Committeeprovided for in Article V, Section 1(d) of the Articles of Agreement of theAssociation are being distributed separately to the Executive Directors.Proposed special conditions for disbursements are described in Annex III.
110. I am satisfied that the proposed Loan and Credit would comply withthe Articles of Agreement of the Bank and the Association.
PART VI - RECOMMENDATION
111. I recommend that the Executive Directors approve the proposed Loanand Credit.
A.W. ClausenPresident
by Ernest Stern
AttachmentsMay 11, 1982
-45- ANNEX I
TABLE 3APAKISTAN - SOCIAL INDICATORS DATA SHEET
REFERENCE CROUPS (WEIGHTED AVERACESLAND AREA (THOUSAND SQ. KM.) PAKISTAN - MOST RECENT ESTIMATE)-
TOTAL 803.9 MHST RECENT LOUW INCOME MIDDLE INCOMEACRICULTURAL 249.9 1960 lb 1970 /b ESTIMATE lb ASIA 6 PACIFIC ASIA & PACIFIC
CNP PER CAPITA (US$) 60.0 130.0 260.0* 232.3 1136.1
ENERGY CONSUMPTION PER CAPITA(KILOGRAKS OF COAL EQUiVALENT) 136.0 196.1 218.2 *".4 1150.6
POPULAT10N AND VITAL STATISTICSPOPULATION. MID-YEAR (THOUSANDS) 45850.5 60448.9 79705.0 *- *-URBAN POPULATION (PERCENT OF TOTAL) 22.1 24.9 27.8 17.3 40.e
POPULATION PROJECTIONSP0PULATION IN YEAR 2000 (MILLIONS) 141.2STATIONARY POPULATION (MILLIONS) 340.0YEAR STATIONARY POPULATION IS REACHED 2100
POPULATION DENSITYPER SQ. KH. 57.0 75.2 99.1 153.6 373.1PER SQ. KE. AGRICULTLRAL LAND 201.0 249.0 309.4 360.3 2382.8
POPULATION AGE STRUCT1RE (PERCENT)0-14 YRS. 43.8 46.3 46.4 37.4 39.6
15-64 YRS. 51.8 50.5 50.7 59.2 56.765 YRS. AND ABOVE 4.4 3.2 2.9 3.5 3.5
POPULATION GROWTH RATE (PERCENT)TOTAL 2.3 2.6 3.1 2.1 2.3URBAN 4.6 4.0 4.3 3.4 3.8
CRUDE BIRTH RATE (PER THOUSAND) 48.4 47.3 44.4 27.7 29.7CRUDE DEATH RATE (PER THOUSAND) 22.6 17.4 14.3 10.2 7.5GROSS REPRODUCTION RATE 3.2 3.7 3.2 2.5 1.9FAMILY PLAhNING
ACCEPTORS, ANNUAL (THOUSANDS) .. 1908.1 2085.0UI£ERS (PERCENT OF MIARRIED WOKEN) .. .. 6.0 20.4 44.1
FOOD AND hUIRITIONINDLX Oe FOOD PRODUCTION
PER CAPITA (1969-71-100) 89.0 102.0 101.0 107.1 123.7
PER CAPITA SUPPLY OFCALORIES (PERCENT OF
REQUIR£HENTS) 83.0 97.0 9.0 98.6 112.6PROTEINS (GRAMS PER DAY) 55.0 60.0 63.0 56.9 62.5
OF WHICH ANIMAL AND PULSE 22.0 20.0 20.0 14.2 19.7
CHILD (AGES 1-4) MORTALITY RATE 24.0 18.4 14.8 14.6 4.8
HEALTHLIFE EXPECTANCY AT BIRTH (YEARS) 43.5 48.8 52.2 57.7 64.0INFANT MORTALITY RATE (PERTHOUSAND) 135.0/c .. .. 89.1 50.2
ACCESS TO SAFE WATER (PERCENT OFPOPULATION)
TOTAL .. 21.0 29.0 30.1 45.9URBAN *- 77.0 60.0 65.8 68.0RURAL .. 4.0 17.0 20.1 34.4
ACCESS TO EXCRETA DISPOSAL (PERCENTOF POPULATION)
TOTAL .. 3.0 6.0 17.6 53.4URBAN .. 12.0 21.0 71.0 71.0RURAL .. .. .. 4.8 42.4
POPULATION PER PHYSICIAN 11000.0/d 4299.0/e 3758.0/e 3857.7 4428.7POPULATION PER NURSING PERSON .. 13305.97e 9984.87; 6411.8 2229.7POPULATION PER HOSPITAL BED
TOTAL 1742.9 1860.1 1896.8 1132.8 588.5URBAN 507.2 648.5 709.2 322.3 579.6RURAL 22850.0 12476.0 11819.6 5600.5 1138.5
ADMISSIONS PER HOSPITAL BED .. ..
HOUSINGAVERAGE SIZE OF HOUSEHOLD
TOTAL 5.4 5.3URBAN 5.5 5.5RURAL 5.4 5.2
AVERAGE NUMBER OF PERSONS PER ROOHTOTAL 3.1 2.8/fURBAN 3.1 2.77 ..RURAL 3.1 2.8T ...
ACCESS TO ELECTRICITY (PERCENTOF L'WLI.INCS)
TOIAL 17.9/fUKEAN 54.4/fRURAL .. 4.97 ..
-46- ANNEX I
TABLE 3APAKISTAN - SOCIAL INDICATORS DATA SHEET
REFERENCE CROUPS (WEICHTED AVtRAGESPAKISTAN - MOST RECENT ESTIMATE)!-
MOST RECENT LOW INCOME MIDDLE INCOME1960 /b 1970 /b ESTIMATE /b ASIA 6 PACIFIC ASIA & PACIFIC
EDUCATIONADJUSTED ENROLLMFNT RATIOS
PRIMARY: TOTAL 30.0 44.0 51.0 85.9 99.8MALE 46.0 62.0 69.0 94.4 100.6FEMALE 13.0 24.0 32.0 64.5 98.8
SECONDARY: TOTAL 11.0 14.0 17.O/ 38.0/aa 53.5MALE 18.0 22.0 25.O0/ 34.6/ac 58.4FEMALE 3.0 6.0 8.O02 18.0o7/ 48.6
VOCATIONAL ENROL. (I OF SECONDARY) 1.0 1.5 1.5LI 3.8 21.1
PUPIL-TEACRER RATIOPRIMARY 39.0 41.0 40.0 32.8 34.2SECONDARY 24.0 20.0 19.0/. 19.9 31.7
ADULT LITERACY RATE (PERCENT) I5.0/j 20.7 24.0 52.8 86.5
CONSUMPTIONPASSENGER CARS PER THOUSAND
POPULATION 1.0 2.6 2.8 1.7 12.7RADIO RECEIVERS PER THOUSAND
POPULATION 6.0 17.1 66.8 35.3 174.1TV RECEIVERS PER THOUSAND
POPULATION .. 1.6 8.3 3.7 50.6NEWSPAPER ("DAILY GENERALINTEREST') CIRCLLATION PERTHDUSAND POPULATION 7.0 *- 13.3 14.6 106.8CINEMA ANNUAL ATTENDANCE PER CAPITA 0.8 3.0/h .. 3.4 4.3
LABOR FORCETOTAL LABOR FORCE (THOUSANDS) 14447.6 17364.1 21787.1
FEHALE (PERCENT) 8.6 9.3 10.4 29.3 37.4AGRICULTURE (PERCENT) 60.8 58.9 57.2 69.8 50.2INDUSTRY (PERCENT) 17.9 18.7 19.9 14.1 21.9
PARTICIPATION RATE (PERCENT)TOTAL 31.5 28.7 27.3 39.7 40.2MALE 55.2 50.4 47.5 51.5 49.8FEMALE 5.7 S.5 5.9 23.3 31.1
ECONOMIC DEPENDENCY RATIO 1.5 1.7 1.8 1.1 1.1
INCOME DISTRIBUTIONPERCENT OF PRIVATE INCOMERECEIVED BY
NIGHEST 5 PERCENT OF HOUSEHOLDS 20.3/i 17.8HIGHEST 20 PERCENT OF HOUSEHOLDS 45.3/i 41.8LOWEST 20 PERCENT OF iHOUSEHOLDS 6.4/i 8.0LOWEST 40 PERCENT OF HOUSEHOLDS 17.5/1 20.2
POVERTY TARGET GROUPSESTIMATED ABSOLUTE POVERTY INCOMELEVEL (USS PER CAPITA)
URBAN .. 68.0 176.0 134.1 248.6RURAL .. 47.0 122.0 111.6 193.7
ESTIMATED RELATIVE POVERTY INCOMELEVEL (US$ PER CAPITA)
URBAN .. 34.0 88.0 .. 249.8RURAL .. 22.0 58.0 .. 234.3
ESTIMATED POPULATION BELOW ABSOLUTEPOVERTY INCOME LEVEL (PERCENT)
URBAN .. 42.0 32.0 41.7 21.2RURAL .. 43.0 29.0 51.7 32.2
. Not vailableNot applicable.
NOTES
/a The group averages for each indicator are population-weighted arithmetic means. Coverage of countriesamong the indicators depends on availability of data and is not uniform.
/aa China included in total only.
/b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969and 1971; and for Most Recent Estimate, between 1976 and 1979.
Ic 1962-65; /d Includes Bangladesh; /e Registered, not all practicing in the country; /f 1973;/ 1960-62; /h 1972; /i 1963-64; L_ 1975.
* Ihe updated I9bD GNP per c.'pita and popu1;,tion csLiratcc eic$300 (at 1978-1980 a pevmr' pric.s) and 82,1S3.000 r-spccti lly. Key, 1981
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4.iossotyo .q .i~ .uiil i.o6t o30v,
0olt.o 930 0603 oodt'd i 19 603403301 66)90391 * bot 00,00, ni i9 (9 606t40%i 6031633 09
-48-
ANNEX I
ECONOMIC DEVELOPMENT DATA
GROSS NATIONAL PRODUCT IN 1980/81 ANNUAL RATE OE GROWTH (%, constant prices)
US$ billion X 1969/70-1974/75 1975/76-1980/81 1980/81
GNP at Market Prices 29.99 100.0 3.5 6.3 6.2Gross Domestic Investment 4.87 16.2 -5.S 5.4 4*4Gross National Saving 3.94 13.1 -2.1 8.2 10.3Current Account Balance -0.95 -Resource Gap -2.93 -9.8 6.7 15.1 -29.4
OlTPFUT. LABOR FORCE AND PRODUCTIVITY IN 1979/80La
Value Added Labor Force V.A. Per WorkerUS$ million ; Million X CSS million X
Agriculture 7,538 30 13.2 54 571 56Industry 6,490 26 4.5 18 1,442 141Services 11,127 44 6.9 28 1.613 158
Total/Average 25,155 100 24.6 100 1.023 100
GOVERN'IENT FINANCE
General Governocnt Central Governrent(Rs billion) X of GDP (Rn billion) X of GDP1980/81 1980/S1 1976/77-1980/81 1980181 1980/81 1976/77-1960/81
Current Receipts 46.8 16.9 16.2 36.1 13.0 12.4Current Expenditures 36.8 13.3 14.0 28.6 10.3 10.5Current Surplus/Deficit 100.0 3.6 2.2 7.5 2.7 1.9Capital Expenditures 25.0 9.0 9.7 21.5 7.8 7.8External Assistance (net) 5.7 2.0 3.0 5.7 2.0 3.0
MONEY, CR:DIT AND PRICES
1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 19 8 0/ 8 1/b
Money and Quasi Money 33.1 41.6 51.7 63.7 76.5 90.7 104.0Bank Credit to Public Sector (net) 17.7 22.9 29.5 34.3 43.1 48.1 53.8Bank Credit to Private Sector (gross) 19.7 23.1 30.1 35.7 42.7 50.6 58.7
Money and Quasi Money as % GDP 31.6 34.3 38.1 40.5 42.8 42.7 41.7Wholesale Price Index (1969/70 - 100) 211.3 229.4 255.3 271.4 289.7 316.7 358.8
Annual Percentage Change in:Wholesale Price Index 23.6 8.6 11.3 6.3 6.7 9.3 13.3Bank Credit to Public Sector (net) 21.2 29.4 28.8 16.6 25.6 11.6 11.8Bank Credit to Private Sector (gross) 26.3 17.3 30.3 18.6 19.6 18.5 16.0
/a Labor force data are official figures of the Ministry of Finance and Planning. Serious underenumeration say enist, especially of wonen./b Provisional.
Not applicable.
February 1982
-49-
ANNEX 1
IIA_ E OF PAYMENTSg (USS million) MERCHANDISE EXPORTS (AVER.MGC 1977/79-l9RfO/l)
1976/77 1977/78 1978/79 1979/80 1980/81 la US$ Million
Export. of Goods. NFS 1.404 1.651 2.107 2.955 3.450 R.. Cotton 259.4 8.5
lport. of Cood.. NFS 2.877 3.297 4.485 5.709 6.385 Cotton Yarn 179.3 9.8
Rasor-e Cap (deficit - - ) -1.473 -1.646 -2,378 -2.754 -2,935 Cotton Cloth 219.2 12.4
Rice 393.2 19.6
Interest Paynts -172 -183 -261 -285 -322 All Other Commodities 1,034.6 49.7
Worker.' Zemictancrs 578 1,166 1.395 1,748 2,117 Total 2,085. 7 100.0
Other Factor Payments (net) 15 62 134 151 193
Net Traw.xfer. -- -- -- -- EXTERNAL DEBT, DEC£EBR 31. 1980
Blance on Current Account -1,052 -601 -1.110 -1,140 -947
Direct Foreign bnve-stent . USS ail ion
Net MLT Borroing Public Debt, Incl,iding Guaranteed 8,775.3
Di.burse-rets 961 841 813 1.134 1.067 Non-g.aranceed Pri-ate Debt /f
Amorti.ation -175 -122 -235 -310 -358 Total O.t.t.nding and Dioborsed 8.775.3
Sob Total 786 719 578 824 709
Transactions vith Iff /b 44 41 -14 78 331 DEBT SERVICE RATIO FOR 1979/80 /z
Other Itens .n.-. /c 24 163 238 600 217 US$ Million
Increase in i.enrve- (-) 198 -322 308 -362 -310. Pblic Debt. 1-1lding Guaranteed 12.1
Croa. Rea er-es (year end) /d 372 694 386 748 1.058 Kon-goaranteed Private Debt
Net Re.erves (yeoe end) /I -146 150 -92 340 330 Total
Official Gold (year end; milli.n ounces) 1.6 1.7 1.8 1.8 1.8 IlRD/IDA LENDIX; (SEFTERI8t8 1991) '0SS uillionl
Fuel and Related Materials 18RD IDA
Percole,m Importo 413 497 530 1,079 1.535 OutStanding and Disb-rsed 312.2 825.6
Petroleun Exports 27 63 61 178 169 UOdisbut rdd 36.5 549.9
ItATE OF EXCHANGE ~~~~~~~~~~~~~~~~~~~~~Outstanding. including U'ndisbor-d 348.7 1,375.5
RATE 0F EXCbANGE
Through Ma 11. 1972 May 11. 1972 - Februare 15. 1973 February 15. 1973 - .anuary 8. 1982 Jnuar. 8. 19S2 lb
US$ e Rs 4 7619 US$ - 11.00 USS - 9.90 US$ 3 ;01.
Na e US$0.2100 R$ - 0.0909 Rs - 0.1010 Rs - 0.09
/- Government estiet.
lb Including Tront F-d./c 1oclud-g not short-tern b-rrowing and errors and omissloos
/d Foreign orhbange and SDR holdings of the State Bank.
/e E-.ludieg cse of IMF credit./f Private debt is negligible.LI Latin of debt service to etports of goodse non-factor nervices and orkers' renittance-; not including thort-term or IMF charges.
jh Since January 8, 1982. value of rupee is being managed vith reference to a .eighted bunket of currencies
Not available.February 1982
-50-ANNEX II
STATUS OF BANK GROUP OPERATIONS IN PAKISTAN
A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of March 31, 1982)
(US$ million)Loan/ (Amount net of cancellations)Credit Fiscal Undis-Number Year Purpose Bank TW IDA bursed
Eighty loans and credits fully disbursed /a 611.2 634.3
492 1974 Fourth Karachi Port 16.0 0.41107 1975 Fourth Sui Northern Gas 53.0 - 0.7546 1975 Industrial Development (NDFC) - 30.0 0.51208T 1976 Power (Second WAPDA) - 32.0 -- 1.8620 1976 Seed Project - 23.0 7.51326 1976 Development Finance (PICIC X) 25.0 - 0.4630 1976 Second Lahore Water Supply - 26.0 7.4648 1976 Irrigation & Drainage (Khairpur) -- 14.0 7.01366T 1977 Livestock Development (Punjab) -- 10.0 - 9.81372) 1977 Railways 35.0 - 12.8684 ) 1977 Railways - 25.0 1.3678 1977 Third Education 15.0 7.8751 1977 Hill Farming Development 3.0 1.6754 1978 Salinity Control & Reclamation -- 70.0 69.1755 1978 Hazara Forestry Pre-investment - 1.7 1.5813 1978 Punjab Ext. & Agric. Dev. - 12.5 7.8846 1978 Fauji Fertilizer - 55.0 6.6867 1979 Toot Oil & Gas Development - 30.0 2.5877 1979 Salinity Control & Recl. (Mardan) - 60.0 58.8892 1979 Primary Education - 10.0 8.6922 1979 Sind Agricultural Extension - 9.0 9.0957 1979 Agricultural Development (ADBP) - 30.0 17.6968 1980 Power (Third WAPDA) - 45.0 39.2974 1980 Third Highway - 50.0 41.31019 1980 Development Finance (PICIC XI) - 40.0 29.21066 1981 Fertilizer Imports - 50.0 29.41109 1981 Vocational Training - 25.0 25.01113 1981 Small Industries - 30.0 29.91157 1981 Grain Storage - 32.0 32.01158/b 1981 Agricultural Research - 24.0 24.01163 1981 On-Farm Water Management - 41.0 41.01186/b 1982 Industrial Development (IDBP II) - 30.0 30.0Total7 724.2 42.0 1,432.5 561.5of which has been repaid 432.3 - 28.4
Total now outstanding 291.9 42.0 1,404.1Amount sold 23.9of which has been repaid 23.92-
Total now held by Bank and IDA7T- 291.9 42.0 1,404.1Total undisbursed 13.9 11.6 536.0 561.5
/a Excludes the disbursed portion of loans and credits wholly or partly forprojects in the former East Pakistan which have now been taken over byBangladesh.
lb Not yet effective.Ic Prior to exchange adjustments.
-51-
ANNEX II
B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1982)
Fiscal Amount In US$ MillionYear Obligor Type of Business Loan Equity Total
1958 Steel Corp of Rolled Steel 0.63 -- 0.63Pakistan Ltd. Products
1959 Adamjee Industries Textiles 0.75 -- 0.75Ltd.
1962- Gharibwal Cement Cement 5.25 0.42 5.671965 Industries Ltd.1963- PICIC Development -- 0.52 0.521969- Financing19751965 Crescent Jute Textiles 1.84 0.11 1.95
Products1965- Packages Ltd. Paper Products 4.43 0.84 5.2719801967- Pakistan Paper1976 Corp Ltd. Paper 5.38 2.02 7.401969 Dawood Hercules Fertilizers 1.00 2.92 3.92
Chemicals Ltd.1969 Karnaphuli Paper Pulp and Paper 5.60 0.63 6.23
Mills Ltd.1979 Milkpak Ltd. Food and Food 2.40 0.39 2.79
Processing1979 Pakistan Oilfields Chemicals and 29.00 1.82 30.82
Ltd. and Attock PetrochemicalsRefinery Ltd.
1980 Fauji Foundation Woven Polypropy- 1.78 -- 1.78lene bags
1980 Premier Board Particle Board 2.70 -- 2.70rMills Ltd.
1981 Habib Arkady Food and FoodProcessing 3.15 0.17 3.32
Total Gross Commitments 63.91 9.84 73.75
Less: Cancellations, Terminations,Repayments and Sales 38.85 1.01 39.86
Total Commitments Now Held by IFC 25.06 8.83 33.89
Undisbursed (including participants) 3.15 0.53 3.68
-52-
ANNEX II
C. PROJECTS IN EXECUTION 1/
Credit No. 771 Tarbela Dam: US$35 Million Credit of March 10, 1978;Effective Date: April 4, 1978; Closing Date: June 30,1982
Work to construct a flip-bucket at the outlet of Tunnel No. 4 is in
progress and will be completed in 1983. Serious erosion in the plunge poolbelow the service spillway during 1977 necessitated additional protectionworks which, together with work in the downstream channel, were completed inJune 1980. Similar protection work in the auxiliary plunge pool is virtuallycompleted. Since 1975, irrigation requirements from the dam have been met.Power generation by the first four units began in 1977. Construction of asecond power plant with six units is in progress. All Credit proceeds havebeen disbursed; the Bank continues to administer the Tarbela DevelopmentFund.
Credit No. 492 Fourth Karachi Port: US$16 Million Credit of July 8,1974; Effective Date: September 18, 1974; ClosingDate: December 31, 1981
The project is completed and, as of March 31, 1982, disbursementsamounted to US$15.6 million. The balance is committed and final withdrawalsare expected by end-April 1982.
Loan No. 1107 Fourth Sui Northern Gas: US$60 Million Loan of May 15,1975; Effective Date: July 5, 1975; Closing Date:December 31, 1982
The Closing Date of the Loan has been extended to December 31, 1982to allow the Borrower to utilize undisbursed funds toward increasing thecapacity of the Islamabad/Rawalpindi natural gas distribution system. Con-struction should be completed in June 1982.
1/ These notes are designed to inform the Executive Directors regarding theprogress of projects in execution, and in particular to report anyproblems which are being encountered, and the action being taken toremedy them. They should be read in this sense, and with the understand-ing that they do not purport to present a balanced evaluation ofstrengths and weaknesses in project execution.
-53-
Credit No. 546 National Development Finance Corporation (NDFC):US$30 Million Credit of May 15, 1975; EffectiveDate: July 17, 1975; Closing Date: December 31, 1981
The Credit was closed on December 31, 1981. The undisbursed amount(about US$0.5 million) will be cancelled in April 1982.
Loan No. 1208-T Second WAPDA Power: US$50 Million Third Window Loanof February 19, 1976; Effective Date: April 30, 1976;Closing Date: December 31, 1981
Most of the project components were commissioned in the last quarterof 1980. Some payments are outstanding pending final comriissioning of theremaining components. The Government has requested an extension of theClosing Date to September 30, 1982 to accommodate payment of these sums.
Credit No. 620 Seed Project: US$23 Million Credit of March 29, 1976;Effective Date: November 29, 1976; Closing Date:June 30, 1983
Project implementation remains behind schedule, with the most impor-tant delays being the construction and equipping of three processing plantsin Punjab due to disputes with civil works contractors. As presentlyscheduled, the Punjab component should be completed by June 1983. The plantin Sind is complete except for some silos and the machinery is installed.The Closing Date, originally December 31, 1981, has been extended to June 30,1983.
Loan No. 1326 Development Finance Company (PICIC IX): US$25 MillionLoan of September 14, 1976; Effective Date: November29, 1976; Closing Date: December 31, 1981
This Loan was closed on December 31, 1981. The undisbursed amount(about US$0.4 million) will be cancelled in April 1982.
Credit No. 630 Second Lahore Water Supply, Sewerage and DrainageProject: US$26.6 Million Credit of June 8, 1976;Effective Date: September 21, 1976; Closing Date:December 31, 1982
All major works have been contracted. Construction delays, however,continue and will probably cause a further delay in project completion.
-54-
Credit No. 648 Khairpur Tile Drainage and Irrigated FarmingDevelopment Project: US$14 Million Credit of July 22,1976; Effective Date: March 14, 1977; Closing Date:July 31, 1982
Overall progress is currently about two years behind schedule due todelays in employing consultants and procurement problems. Canal remodeling,surveys, and extension services are proceeding satisfactorily but the tileand collector drain construction has progressed slowly. Actions have beeninitiated with the Association's concurrence to curtail cost overruns andreduce completion delays.
Loan No. 1366-T Punjab Livestock Development: US$10 Million ThirdWindow Loan of February 18, 1977; Effective Date;August 3, 1977; Closing Date: December 31, 1982
The Government and the Bank have conditionally agreed on a revisedproject which would aim to rehabilitate the Lahore Milk Plant and to estab-lish about 300 Village Livestock Associations and their related serviceactivities. The contract of the milk plant consultants has been extended tocover the period of construction and commissioning of the plant.
Loan No. 1372 Tenth Railway: US$35 Million Loan and US$25 Millionand Credit of March 8, 1977; Effective Date: May 9, 1977;
Credit No. 684 Closing Date: June 30, 1982
The project is proceeding satisfactorily. The telecommunications andsignaling srheme is making good progress and the complete network is expectedto be commissioned before mid-1983. Procurement has been completed and thetotal proceeds of the Loan/Credit have been committed.
Credit No. 678 Third Education: US$15 Million Credit of February 18,1977; Effective Date: July 6, 1977; Closing Date:December 31, 1982
The project is generally making good progress. Nearly all of civilworks contracts have been awarded and about 80% have been completed. Oneproject study has been completed and the two others are nearing completion.About 70% of the project equipment has been procured and the balance is inthe process of procurement. Technical assistance specialist services are now-being provided satisfactorily and about 90% of the fellowships have been usedor committed. Project implementation in Sind and Baluchistan is behindschedule by about one year, due to initial delays in building construction.
-55-
Credit No. 751 Hill Farming Technical Development: US$3 MillionCredit of December 1, 1977; Effective Date: March 7,1978; Closing Date: September 30, 1983
Staff vacancies are causing implementation problems, and the com-
ponents dealing with fodders, demonstration farms, apples and land-use are
progressing slowly. Nevertheless, most technical developments are progress-
ing satisfactorily and the training program is on schedule. A draft proposal
for a follow-up project has been received. Expenditures and disbursements
have been less than expected because of cost savings and procurement delays.
Credit No. 754 SCARP-VI: US$70 Million Credit of January 19, 1978;
Effective Date: December 28, 1978; Closing Date:November 30, 1986
Although the project is about three years behind schedule, sig-
nificant momentum has now begun in project implementation following the
resolution of budgetary and other initial problems. Progress has been made
in awarding the first civil works contracts and obtaining necessary equip-
ment, vehicles and materials.
Credit No. 755 Hazara Forestry: US$1.7 Million Credit of January 29,
1978; Effective Date: July 14, 1978; Closing Date:December 31, 1983
There has been significant progress in different project activities.
The Guzara socio-economic study, chir pine forest inventory and pulping test
for chir pine, and the first phase of the feasibility study have been com-
pleted. As a result of these developments, the final phase of the
feasibility study is expected to commence in the Fall of 1982.
Credit No. 813 Punjab Extension and Agricultural Development:US$ 12.5 Million Credit of June 6, 1978; EffectiveDate: September 12, 1978; Closing Date: June 30, 1984
The project is behind schedule despite some progress in staff
recruitment, acquisition of building sites and construction work. Implemen-
tation of the T&V system and the research-extension linkages continue to be
weak. Low salaries for village level staff and delays in recruiting consult-
ants remain problems.
Credit No. 846 Fauji Fertilizer: US$55 Million Credit of September 14,
1978; Effective Date: December 19, 1978;Closing Date: June 30, 1982
The plant is nearing completion and commercial production is due to
start in April 1982.
-56-
Credit No. 867 Toot Oil and Gas Development: US$30 Million Credit ofJanuary 12, 1979; Effective Date: April 25, 1979;Closing Date: March 31, 1983
Two new producing oil wells in the Toot field have recently beencompleted despite very difficult drilling problems. However, seriouswell-drilling and management problems still persist. Project implementationis about 15 months behind schedule. The Closing Date, originally December31, 1981, has been extended to March 31, 1983, to allow completion of theoriginal 8-well drilling program.
Credit No. 877 Salinity Control and Reclamation Project (SCARP) Mar-dan: US$60 Million Credit of February 7, 1979; Effec-tive Date: October 16, 1979; Closing Date: June 30,1986
Initial budgetary and other problems have been resolved and CIDA (theproject co-financier) is assisting WAPDA in scheduling implementationactivities as well as in preparing subsurface drainage design and specifica-tions. The project is about two years behind schedule.
Credit No. 892 Primary Education: US$10 Million Credit of April 18,1979; Effective Date: October 23, 1979; Closing Date:June 30, 1985
Good progress is being maintained. About 80% of the project inputsincluding civil works, equipment, staff appointments and trainilng have b*enprovided with less L'Lian six months' delay. the evaluation program is beingredesigned after the experiences gained in the first 18 months of evaluation.
Credit No. 922 Sind Agricultural Extension and Adaptive ResearchProject: US$9 Million Credit of June 12, 1979; Effec-tive Date: June 26, 1981; Closing Date: June 30, 1984
Critical staff has been recruited and project implementation hasstarted. Recruitment of consultants has been delayed pending signing of aproject agreement between UNDP and the Government.
Credit No. 957 Fourth Agricultural Development Bank: US$30 MillionCredit of December 7, 1979; Effective Date: June 5,1980; Closing Date: December 31, 1982
Overall progress of the agricultural credit component has been satis-factory and the agricultural engineering training component has begun. It isanticipated that project completion will be about one year behind schedule.
-57-
Credit No. 968 Third WAPDA Power: US$45 Million Credit of January 10,1980; Effective Date: July 30, 1980; Closing Date:December 31, 1984
Despite some delays, mainly in land acquisition, execution of theproject is proceeding satisfactorily. Procurement action schedules and
construction targets for substations and transmission lines are generally
being met.
Credit No. 974 Third Highway: US$50 Million Credit of April 9, 1980;Effective Date: August 21, 1980; Closing Date: June30, 1984
Of the five rehabilitation contracts, two are nearing completion, onehas been terminated due to poor performance by the contractor and re-awarded,and work is progressing slowly on the remaining two contracts. Discussionsare in progress on equipment procurement and provision of technical assis-tance to two provincial governments to improve road maintenance, and several
contractors have shown interest in using loans through IDBP for purchase of
mechanical equipment.
Credit No. 1019 PICIC Industrial Development: US$40 Million Credit ofMay 30, 1980; Effective Date: October 29, 1980; Clos-ing Date: March 31, 1984
As of March 31, 1982, about US$29 million had been authorized forsub-loans and US$10.8 million disbursed. The Government and PICIC have taken
corrective measures to improve collections on past sub-loans, and implementa-tion of the project is proceeding well.
Credit No. 1066 Fertilizer Imports Credit: SDR 38.2 Million Credit(US$50 Million equivalent) of October 17, 1980; Effec-tive Date: December 1, 1980; Closing Date: September30, 1982
As of March 1982, about US$21 million had been committed. The Clos-
ing Date, originally June 30, 1981, has been extended to September 30, 1982to accommodate the award of contract for and shipment of the remaining fer-tilizer under the project.
Credit No. 1109 Fifth Education (Vocational Training): SDR 19.7 Mil-lion Credit (US$25 Million equivalent) of April 24,1981; Effective Date: October 27, 1981; Closing Date:December 31, 1986
Agreements have been reached with ILO for the provision of technicalassistance services and for procurement of equipment, and a contract signedwith architectural consultants for the provision of design services. The
-58-
institutional and in-plant training components are about six months behindschedule.
Credit No. 1113 Small Industries: SDR 23.6 Million Credit (US$30Million equivalent) of April 24, 1981; Effective Date:October 6, 1981, Closing Date: December 31, 1985
Sub-loan commitment started in January 1982 after key commercial bankloan officers were trained in November/December 1981. Bidding for equipmentand selection of consultants for the service centers are in progress.Evaluation of proposals and selection of consultants for the export promotionand the project development components are ongoing.
Credit No. 1157 Grain Storage: SDR 26.1 Million Credit (US$32 Millionequivalent) of October 21, 1981; Effective Date: March15, 1982; Closing Date: December 31, 1985
This Credit was declared effective on March 15, 1982.
Credit No. 1158 Agricultural Research: SDR 19.7 Million Credit (US$24Million equivalent) of August 19, 1981; Effective Date:April 29, 1982; Closing Date: December 31, 1986
This Credit is not yet effective.
Credit No. 1163 On-Farm Water Management: SDR 33.4 Million Credit(US$41 Million equivalent) of August 19, 1981; Effec-tive Date: March 31, 1982; Closing Date: December 31,1984
This Credit was declared effective on March 30, 1982.
Credit No. 1186 Second Industrial Development Bank of Pakistan(IDBP II): SDR 26.7 Million Credit (US$30 Millionequivalent) of February 19, 1982; Effective Date:May 19, 1982; Closing Date: June 30, 1985
This Credit is not yet effective.
-59-
ANNEX III
PAKISTAN
STRUCTURAL ADJUSTMENT LOAN AND CREDIT
Supplementary Project Data Sheet
Section I: Timetable of Key Events
(a) Date of Loan/Credit request to Bank/IDA:
October 1980
(b) Date of departure of appraisal mission:
October 1981
(c) Date of completion of negotiations:
April 1982
(d) Planned date of effectiveness:
July 1982
Section II: Special Bank/IDA Implementation Actions
A supervision mission, to assist in preparation of disbursementrequests, is tentatively scheduled for end June 1982.
Section III: Special Conditions
1. It is proposed that the Loan and Credit would be released in twotranches: $90 million (comprising $51 million equivalent from the Credit and
$39 million from the Loan) would be available for disbursement on effective-ness and $50 million (comprising $29 million equivalent from the Credit and
$21 million from the Loan) after the Bank has reviewed and is satisfied withthe progress made by GOP in implementing the program outlined in GOP's state-
ment of development policies (Annex IV). The tranche review would take placein October/November 1982. Paragraphs 89 to 93 outline the aspects of theprogram on which significant progress is expected over the next 12-18 monthsand which the Bank would closely monitor. Prior to the release of the secondtranche, GOP would submit to the Bank (see paragraph 94):
-60-
(a) its FY83-85 Public Sector Development Program;
(b) a report on GOP's decisions with respect to agriculturalinput/output prices for the 1982/83 winter cropping season,following the receipt of recommendations from the AgriculturalPrices Commission; and
(c) a review of the progress in implementing its accelerated gassupply development program and of the need for any furthermeasures required to assure adequate investments.
2. The Pakistan rupee equivalent generated by the foreign currencywithdrawals from the loan and credit accounts would be credited to a specialaccount with the State Bank of Pakistan and used to finance expendituresunder the annual development programs of the Federal Government to supportdevelopment expenditures in key economic and social sectors (paragraph 98).
-61-
Annex IV
May 11, 1982
Mr. A. W. Clausen, PresidentThe International Bank for Reconstructionand Development and InternationalDevelopment Association
1818 H. Street, N.W.Washington, DC 20433
Dear Mr. Clausen:
GOP STATEMENT OF DEVELOPMENT POLICIES
1. Over the past four years the Government of Pakistan has made deter-mined and sustained efforts to revive and restructure the economy. Afurther phased reform program is to be implemented over the coming yearsincluding policies designed to raise productivity and economic growth,focusing in particular on strengthening the overall supply position of theeconomy; policies aimed at mobilizing domestic resources and attainingprice stability; and external policies to promote exports, encourage effi-cient import substitution and liberalize import restrictions. We requestthe World Bank to support our efforts with a program of structural adjust-ment loans and associated technical assistance, commencing in 1982.
2. The major medium-term objectives of the Government's reform programare outlined in paragraphs 3 to 9 below. To place this program in context,paragraphs 10 to 20 provide a summary of recent economic developments andprospects, and the policy changes already made to address the problemsconfronting the economy. This is followed by details of the proposedfurther reforms which we intend to implement towards improving developmentplanning (paragraphs 21-28), the agriculture and water sectors (paragraphs29-41), the energy sector (paragraphs 42-55) and the industrial sector(paragraphs 56-63).
Objectives of the Government's Reform Program
3. Macro-economic targets have been tentatively fixed for the SixthFive-Year Plan (FY84-88) in initial exercises. The Plan is likely to seeka target growth rate of GDP of about 6-1/2% p.a. through FY88 with sectoralgrowth rates in agriculture and manufacturing forecast at 5% and 10% p.a.,respectively. Investment is planned to increase from 16% to the maximumrate consistent with the savings and external balance objectives set outbelow. Gross national savings are targeted to rise from 13% to 16% of GNPwith additional public sector resources to be derived from taxationmeasures, reductions in subsidies and the internal generation of profits bypublic sector undertakings through the pursuit of flexible pricing
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policies. Efforts will be made to induce a substantial shift in thebalance between the private and public sector in total investment expendi-ture: private investment is likely to rise from about one-third of thetotal at present to about one-half during the Sixth Plan despite the needfor considerable public investment in the energy sector. The accelerationin private industrial investment is expected to be even more pronounced.Special emphasis will be directed towards improving private sector perfor-mance by minimizing regulatory constraints on investment and providinggreater access to imported inputs.
4. In the external sector, GOP recognizes that a fast rate of growthof exports will be the key to successful external adjustment and restora-tion of balance of payments viability. Adjustment measures envisaged underthe SAL reform program will strengthen production and investment andthereby contribute to export expansion. A shift of resources to the exportsector will be stimulated by expanding access of exporters to imports andforeign technology and the pursuance of a flexible exchange rate. Exportsare thus projected to rise significantly faster than the rate of importgrowth, with the latter reflecting substantial import substitution inenergy, steel, fertilizer production, etc. The share of external resourcesin total investment is projected to decline; the current account deficit ofthe balance of payments is projected to fall as a proportion of GNP.Another factor which will dampen import demand and promote export competi-tiveness is the Government's intention of keeping expansion of domesticliquidity in line with GDP growth in current prices and bringing about adecline in the rate of inflation. Furthermore, fiscal deficits financedfrom the domestic monetary system will be held at a level consistent withthe objective of reducing inflationary pressures and freeing an expandingproportion of the total credit available for private sector use.
5. Within the context of these broad macro-economic targets, thePublic Sector Development Expenditure Program for FY82-84 will shiftresources away from fertilizer subsidies and public sector industry towardspriority programs in agriculture, water, energy and social sectors. Inaccordance with this program we propose to progressively reduce the alloca-tions for fertilizer subsidy and public sector industry from 9.2% and 15.4%in FY81 to around 2.8% and 4.1% in FY84 while increasing allocations foragriculture and water sectors (excluding the fertilizer subsidy) from 19%to 24% and allocations for the energy sector from 21% to 28% of totaldevelopment expenditures. These basic objectives will be retained for theFY83-85 program and the Sixth Plan. All projects to be included indevelopment programs will be carefully evaluated to ensure that they are inaccordance with the priorities and policy objectives of GOP and that theymeet appropriate tests of economic efficiency.
6. A major effort will be made to accelerate the pace of expansion ofeducation and primary health care (especially for females and in the ruralareas) as well as rural services (roads, electrification, etc.) during theSixth Plan both to develop human capital resources and to establish a moreequitable base for economic growth.
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7. In the agriculture sector, GOP will continue with its policy ofadjusting agricultural prices so as to bring them in line with thelong-term trend of international prices; maintaining incentives to farmerswhile eliminating subsidies; improving cultural practices and water manage-ment, and optimizing the use of the existing irrigation system throughimproved maintenance and cost recovery. The newly estahlished AgriculturalPrices Commission will provide a firmer foundation for the implementationof future output and input pricing decisions, especially in view of GOP'saim of adjusting fertilizer prices as necessary to secure the intendedshLft .n resources envisaged in the PY82-84 Public Sector Program and toeliLminate the subsidy by the end of FY85. GOP will also increase alloca-tions for the operation and maintenance of the irrigation system so as tomeet the anticipated requirement for adequate recurrent funding in FY85 andraise water charges, or make other appropriate financing arrangements, at arate consistent with the objective of covering an increasing proportion ofoperation and maintenance costs and achieving full cost recovery in accord-ance with schedules already agreed with IDA. Finally, steps will be takentowards the objectives of reducing the budgetary burden of public tubewellsby phasing out and/or divesting tubewells to the private sector wherefeasible in fresh groundwater areas.
8. In the energy sector, GOP is preparing an integrated perspectiveplan for the coordinated development of all energy sources, the findings ofwhich will be reflected in the strategy of the Sixth Five-Year Plan to beready by June 1983. High priority is to be accorded to accelerating andsustaining domestic oil and gas production through appropriate pricingpolicies aimed at stimulating increased private sector investment in theenergy sector. GOP will continue to monitor closely the adequacy of thesepricing decisions and make such further adjustments as may be necessary inthe light of changing circumstances. A medium-term plan for increasing gasproduction and distribution is being prepared in consultation with com-panies so as to ensure that the investments necessary to avert emerging gasshortages will take place. Furthermore, GOP intends to place the opera-tions of the Oil and Gas Development Corporation (OGDC) on a commerciallysound footing by establishing independent operating companies which wouldclosely associate OGDC and contractors and/or private partners in anaccelerated exploration program and the execution of development projects.It is also proposed to continue with a policy of phased rationalization ofconsumer prices of all energy forms particularly with respect to achievinga more appropriate relationship between natural gas prices and the price ofalternative energy forms.
9. In the industrial sector, GOP will continue its strategy of reviv-ing private sector confidence in order to promote investment and exports.A key element in this strategy is the program of import liberalizationdesigned to give domestic industry still greater access to imported capital
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and intermediate goods while, at the same time, encouraging greater produc-tive efficiency through exposure to foreign competition and technology. Acomprehensive study on the incentive structure facing manufacturingindustry is presently underway which will provide the basis for a progres-sive simplification of the tariff structure and the achievement of a morerational level of effective protection. GOP is also preparing an inventoryof regulatory constraints on industry with a view to eliminating allunnecessary government intervention. A study on the performance of finan-cial markets is also being conducted in order to improve their effective-ness in mobilizing equity and debt financing and directing resources intoproductive investment within the framework of the objective of progressiveintroduction of an Islamic economic order. An action plan, designed toimprove the efficiency and financial performance of public sectorenterprises, is to be implemented from this year. It will provide forfurther improvement in the information reporting system, in systems toimprove economic performance measurement and a performance incentive sys-tem.
Recent Developments and Prospects
10. On assuming office in 1977, the present Government was confrontedwith an untenable economic situation created by the pursuit, over a periodof several preceding years, of excessively expansionary and misdirectedpolicies in a severely adverse international economic environment. Con-siderations of productivity, efficiency and growth received insufficientattention, private enterprise was sapped by the threat of nationalization,and, while private investment dwindled in the manufacturing sector, thedegree and speed of public sector vYr n.iderably exceeded thefinancial, managerial and organlzatio i -R .urces at its command. TheGovernment has, since 1977, sought '*o ivi snd implement policies andprograms aimed at the revival and cons lid; o. of economic growth and thecorrection of past imbalances and at c nba g adverse external circumstan-ces. These policies have been built o a niation of a firm commitmentto disciplined financial management, s as ., restrain budget and balanceof payments deficits within reasonable ou .d.
11. Due to a number of external fa::or:;. the task of economic manage-ment has been exceptionally difficult ii r,cent years. Events on Pakis-tan's borders have created a need to improTe the nation's defenses and alarge burden of support to an influx of refugees. Pakistan's balance ofpayments position has been adversely affected by the steep reduction in netaid inflows during the latter years of the 1970s and the sharp, 28%deterioration in its external terms of trade between 1978/79 and 1980/81.Despite these difficulties, the Government has been able to bring budgetdeficits down from 4% of GNP in FY79 to 1% of GNP by FY80 through concertedefforts to limit expenditures, including the deferment or delaying of someimportant but costly development projects, and through a sustained effortto raise revenues. Internal revenues have grown at an average rate of
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10.4% in real terms over the past four years, or from 14.9% to 16.6% ofGNP. The Government is also committed to phasing out budgetary subsidiesas speedily as possible except where they effectively serve an importantspecific objective and to an extent which is consistent with soundbudgetary management. The share of subsidies in the Budget has fallen from10.3% in FY79 to 8.4% in FY81 and is projected to fall to 6.0% in FY82.
12. Because of resource constraints, the investment program of theFifth Five-Year Plan (1978/79-1982/83) could not be implemented asoriginally envisaged. Given the need to limit investment spending and tocomplete large ongoing projects commenced in earlier years, the intendedshift away from industrial towards agricultural, energy and social sectorinvestments could not take place. Accordingly, a new program for publicsector development has been drawn up for FY82-84 to consolidate and rein-force the priorities laid down in the Fifth Plan strategy. This programrepresents one of several measures that the Government has taken to stimu-late structural adjustments; its major objectives as well as further stepsto strengthen the planning process are described later in this letter.
13. On the supply side, our actions in the agricultural, industrial andenergy sectors have emphasized improvements in incentives, in the institu-tional framework and in the allocation of public resources to stimulateincreased domestic production for export or for import substitution. Inagriculture, the Government has been redirecting its development activitiesin conformity with the statement on National Agricultural Policy issued inearly 1980, the primary objectives of which are to increase rural incomesand welfare through improvement in government extension, research and otherservices; more efficient pricing for agricultural output and inputs;redirection of government expenditures toward higher-yielding,shorter-gestation projects; and better operation and maintenance of exist-ing assets. Several price increases have been announced to improve farmerincentives while containing and reducing the budgetary burden of subsidieson farm inputs. An Agricultural Prices Commission has been established toadvise on a continuation of price adjustments in line with these objec-tives.
14. In industry, the principal objective of government policy overrecent years has been to encourage a revival of private investment andimprove the performance of the public sector. The provision of budgetaryfunds for investment in new public sector projects has been kept to aminimum. In both private and public industry, we have sought to improveefficiency by providing appropriate signals and incentives; exposingproducers to increased competition from within and abroad; reducingadministrative restrictions; giving public enterprises greater autonomy;and increasing labor productivity through training. These improvementscall for complex decisions and difficult structural changes which willnecessarily take time to implement fully. However, several measures havealready been taken to improve incentives for exports and for efficient
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import substitution, and a substantial start has been made towards importliberalization; this process will be extended by further reducing thenumber of items subject to import bans and by rationalizing the system oftariff and tax incentives.
15. The world energy :risis has had a pronounced effect on Pakistan'sbalance of payments; between FY73 and FY81 the share of POL in the totalvalue of imports has escaLated from 8% to 26%. The substitution of domes-tic sources of energy for imported oil has, therefore, assumed major impor-tance. We have sought to pursue this objective by developing and utilizingnon-oil forms of indigenoA1s energy such as hydro-electric power and nuclearenergy; by prospecting fo: new oil and gas fields; by accelerating thedevelopment of known fields and by energy conservation. We have alreadymade encouraging progress in energy conservation and development. Succes-sive adjustments in consumer prices of petroleum products have led to adecline in household kerosene use. In the past few years, substantialinvestments have been made in hydel generation and transmission facilities.In addition, government policy has been successful in generating new domes-tic oil exploration activity and seven new agreements have been signed inthe last three years involving commitments to drill about 15 exploratorywells. Nonetheless, the Government recognizes that further steps must betaken in the areas of conservation, integrated energy planning and develop-ment, if a growing energy gap is to be avoided.
16. While much remains to be done, the consistent pursuit of thepolicies described above has already contributed to an encouraging recoveryin the economy. Since FY78, Pakistan's GDP has increased at an averagerate of over 6% p.a. Agricultural growth has averaged 4.2% p.a. The 35%improvement in total wheat production during this time has had a par-ticularly beneficial effect on the balance of payments. Our objective ofeliminating wheat imports has recently been attained, and there is areasonable hope that Pakistan will be able to sustain the cherished goal ofself-sufficiency in this important food commodity. Value added in themanufacturing sector has increased by 8% p.a. over the last four years andfurther increases can be expected following efficiency and productivitygains in existing units, the completion of major public sector projects andthe recent welcome recovery of private industrial investment, which hasincreased by 86% during FY78-81 and by an estimated 27% in FY81 alone.
17. These improvements in agricultural and industrial production havehad a positive impact on the country's balance of payments. Exportreceipts, which had more than doubled between FY77 and FY80, rose by afurther 20% in FY81. Despite a sharper increase in prices, imports havegrown less rapidly than exports, due to successful import substitution ofitems such as wheat and fertilizers as well as general demand management.Pakistan's balance of payments has also been assisted by a rapid growth ofremittances by Pakistani workers in the Middle East. As a result of thesefactors, the current account deficit in the balance of payments declined
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sharply from 6.7% of GNP in FY77 to 2.7% of GNP in FY81 despite a sharpdecline in our external terms of trade.
18. The Government's determined efforts to strengthen the economy havebeen recognized by the international community. In response to theimprovements already achieved and in support of a continuing policy ofsound demand management, phased progress towards import liberalization andother supply side measures, Pakistan has been able to negotiate a substan-tial medium-term arrangement for assistance from the IMF's Extended FundFacility. We have also arranged a short-term rescheduling of debt servicedue on official concessional loans from bilateral members of the PakistanConsortium. In addition, there has been a welcome recovery in the trend offoreign assistance for our development efforts since 1980. Consequently,we can be reasonably confident of a manageable balance of payments situa-tion to the end of FY83, provided that the prospects of the increase in aidinflows is realized to the extent envisaged and the geo-political situationdoes not take another turn for the worse.
19. Looking beyond FY83 to the remainder of the 1980s, however, severaldifficulties can be foreseen. First, there is a danger of further worsen-ing of Pakistan's terms of trade due to rising energy prices, stagnation inworld economic growth and a continuation of protectionist policies bydeveloped countries. Uncertainties also exist with regard to the futuregrowth of workers' home remittances. In addition, we cannot rely in thelong run on a sustained growth in external support to meet our financingrequirements. Based on these considerations, our projections indicate thatsubstantial balance of payment financing gaps are likely to emerge by themid-1980s.
20. We recognize, therefore, that there can be no relaxation in theprocess of policy adjustments on which we have embarked and, over thecoming years, we intend to manage the balance of payments by promotingagriculture, energy and industry through reinforcing the actions alreadytaken with a program of measures aimed at improving sectoral policies andinstitutions, and by strengthening the planning of public investments tosupport these productive sectors. The details of this program of struc-tural reforms are set out in the following sections.
Proposed Reform Program
I. The Planning of Development Expenditures
21. As the Fifth Five-Year Plan (FY79-83) draws to a close, it appearsthat actual performance will bear a mixed relation to its targets.Achievements are quite satisfactory in some areas; for example, outputgrowth rates, export and import performance have all been close to planprojections. In particular, record output of all major crops have beenobtained, resulting in self-sufficiency in wheat and reaching of export
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targets for rice and cotton well before the terminal year of the plan.However, there have also been significant shortfalls especially in theexecution of the investment programs. At the time that the plan was drawnup, it was not possible to foresee the 1979 oil crisis and subsequentslowdown in world economic activity, the sharp decline in net inflow ofconcessionary assistance (accompanied by a reduction in the proportion of
non-project assistance), or the political developments in Afghanistan withthe attendant need for increased budgetary outlays on refugees and defense.Owing to these factors, balance of payments and budgetary deficits havebeen larger than anticipated in the plan. The resulting resource con-straints, together with cost overruns on ongoing projects (notably Tarbelaand the Steel Mill) and increase in fertilizer subsidies due to rising
world prices, have meant that the increased emphasis intended to be givento the public investment program for the agricultural, water, energy andsocial sectors has been difficult to achieve.
22. In order to address these problems, we have drawn up a three-yearpublic sector investment program together with other stabilization measuresfor FY82-84 which would, with improved domestic mobilization and greaterexternal assistance, place Pakistan on a financially viable, efficientgrowth path. This calls for a continued effort at increasing the rate ofinvestment to GNP together with further improvements in the ratio of publicsavings to public investment. Reliance on government borrowing from domes-tic banks is to be maintained at around 2% of GDP which is markedly belowthe levels prevalent in the 1970s. A key feature in the program is thereorientation of government expenditures over the three-year period awayfrom fertilizer subsidies and public sector industries, toward those sec-tors which can contribute most significantly to medium-term structuraladjustment. The combined share of the fertilizer subsidy and publicindustry will decline over the three-year period from 25% of total develop-ment expenditures in FY81 to 8% in FY84. Excluding the fertilizer subsidyand some other non-capital formation items, the investment component ofdevelopment expenditures will rise significantly in real terms.
23. As described in more detail later in this letter, the focus of theFY82-84 public development program in agriculture and water will be on
applied research, improvements in extension services, expansion of grainstorage capacity, increased provision of credit, the development of qualityseed production and marketing arrangements, rehabilitation of the irriga-tion system and improvements in watercourses and on-farm water managementaccompanied by improved operation and maintenance. The programs representa balanced approach to raise yields per acre and to achieve a more effi-cient use of available inputs. The program for the energy sectoremphasizes the development of known sources of domestic energy, par-ticularly hydro-electric power and gas, and the exploration of additionalindigenous oil, gas, nuclear and coal resources. These efforts will besupported by policies and programs to conserve energy and utilize it moreefficiently. Programs in the social sectors will focus on the provision of
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essential requirements such as primary education, basic health care, andsafe drinking water along with accelerated efforts to arrest the hiah rateof population growth.
24. The Government intends to "roll over" the FY82-84 program for oneyear to cover the FY83-85 period, furthering the shift in emphasis inpublic development expenditures outlined above and extending coverage ofthe program to include the extra-budgetary activities of publicenterprises.
25. In addition, to provide a longer-term perspective for development,the Government intends to prepare a Sixth Five-Year Development Plan cover-ing fiscal years 1983/84 to 1987/88. This plan will stipulate basic objec-tives, spell out the development thrust and strategy, specifymacro-economic and sectoral targets, identify supporting governmentpolicies and lay down investment programs for each sector. The investmentprogram will blend indicative targets for private sector capital formationand its financing with firm programs for public sector investments andtheir financing. The public sector component, including expenditure onand financing of programs not directly funded through the budget, willidentify the nature of the project portfolio in each sector and aggregativeexpenditure phasings by sector. Greater detail of individual projectschedules for the first two years of the public sector investment programwill be available in the three-year program for 1983-85 which is currentlyunder preparation.
26. As in the case of the fifth and earlier plans, the implementationof the Sixth Plan may be affected by unforeseeable circumstances like therecent geo-political developments and the considerable degree of uncer-tainty surrounding such key plan parameters as international commodityprices, world economic activity, migrant remittances and aid inflows.Accordingly, the Government will conduct a mid-plan review at the end ofthe second year of the plan which will not only assess the likely devia-tions from targets but take note of new circumstances and adjust, to theextent necessary, the plan programs for the remaining three years. At thatstage, the Government intends to readjust the allocations to sectors andmajor projects and the financing of these outlays for those three years inthe greater detail associated with the recent three-year program. Sincethe first two years of the plan will be covered by the public sectorinvestment program being prepared for the period 1983-85 and the last threeyears by the envisaged mid-plan review, we shall maintain throughout thenext six years a detailed three-year public sector program within thecontext of five-year plans.
27. The Government has taken various steps in recent years tostrengthen the planning mechanism and intends to reinforce them with othermeasures in the next year or two. Medium-term planning was revived after alapse of several years with the launching of the Fifth Five-Year Plan in
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1978. The recently formulated three-year Public Sector Program for 1982-84underlined the Government's desire to maintain up-to-date public sectorprogramming. As noted, the three-year program is being extended in anexpanded form for another year and work has been initiated on preparing theSixth Five-Year Plan. The Government has also instituted of late certainprocedures directed at safeguarding plan priorities and promoting timelyexecution of projects. All new project proposals are carefully evaluatedon the basis of a reasonable economic rate of return before being imple-mented within the public sector development program. In the case of aidedprojects, instructions have been issued to all government agenciesprohibiting aid negotiations without the involvement or prior consent ofthe Planning Division and insisting upon formal clearance of the projectbefore an aid agreement is concluded.
28. Although the revised procedure for clearance and processing of
projects will introduce greater efficiency, we recognize that the prepara-tion of good projects is a necessary pre-condition in the first instance.The Government has been operating a number of courses on project prepara-tion and a review of the courses suggests that improvements can be broughtabout by there being a permanent institute to coordinate and run mostcourses. We intend to establish such an institute utilizing the servicesand facilities already available in the country, soon after the Sixth Planwork ends in June 1983. The Government has also signed an Umbrella Projectwith the UNDP which would, with the collaboration of the World Bank, placefunds and expertise for preparation of specific projects at the disposal ofthe Government. One area in which problems largely remain unresolved isthat of project monitoring and evaluation. The Government intends tofinalize shortly a plan for satisfactory monitoring of projects includingan expansion in the number and capability of the staff in the projectmonitoring section of the Planning Division. It is also intended to tacklesome other areas in which capability is deficient such as in economicforecasting and energy sector planning. We will seek, whereverappropriate, World Bank's advice and assistance in the measures forstrengthening the planning mechanism.
II. The Agriculture and Water Sectors
29. As already noted, the Government has embarked on a long-term effortto reorient its approach towards improving the productivity of agriculture.Under our 1980 National Agricultural Policy (NAP), we intend to build onrecent efforts and take further actions to (i) increase the size andimprove the pattern of public expenditures within the agricultural andwater sectors; (ii) improve the provision of agricultural inputs to andtheir efficient use by farmers; (iii) set appropriate relations between keyagricultural input and output prices; and (iv) make progress towards diver-sification of agriculture.
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30. Reorientation of Public Expenditures. Under the NAP, we intend toshift expenditures towards:
(a) the rehabilitation and improved operation and maintenance ofthe irrigation system;
(b) coordinating, designing and participating in the minor workscarried out by farmers below the canal outlet, such as water-courses and on-farm improvements which, together with waterscheduling, will permit available irrigation water supplies tobe used more efficiently;
(c) promotion of private tubewell development in sweet groundwaterareas where this is consistent with drainage requirements,supported by the expansion of rural electrification and super-vised credit schemes;
(d) necessary drainage in waterlogged and saline areas to comple-ment the existing surface distribution and tubewell systemwhere adequate drainage is the key constraint; and
(e) agricultural research, extension services, quality seed produc-tion, credit arrangements and other essential complementaryactivities.
The enhanced expenditures on these programs will be financed from an
increase in allocations to the agriculture sector as well as from curtail-ment of fertilizer subsidy. We shall continue to aim at a progressivereduction in the subsidy on fertilizer expressed as a proportion of thetotal cost of producing, importing and distributing fertilizers. We intendto eliminate the subsidies altogether by June 30, 1985, so long as thisdoes not render Pakistan's exports uncompetitive in world markets,seriously disrupt cropping patterns, or impose socially unacceptable costincreases.
31. The three-year (FY82-84) public sector development program has beendrawn up in line with these objectives. Allocations for agriculture(excluding the fertilizer subsidy), water (excluding expenditures on com-pletion of the Tarbela Dam) and rural development will be increased from15% of the total Annual Development Program (ADP) in FY81 to about 22% inFY84; the fertilizer subsidy as a percent of total ADP is projected todecrease from 9% to 3% over the same period. Similarly, allocations foragriculture, water and rural development to Provincial ADPs will be sub-stantially increased (from 19% to 34% of total ADP allocations for thesefunctions) to permit an expanded flow of resources to high-priorityactivities which fall within the provinces' jurisdiction such as watermanagement, irrigation system rehabilitation, agricultural extension, seedmultiplication, rural roads and rural electrification. Federal allocations
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to the water sector alone (excluding Tarbela) will be increased by about50% over the three-year period, with the heaviest allocations for drainageand reclamation; the proportion of the Federal ADP (again excluding Tar-bela) for the water sector allocated to drainage and reclamation will beincreased from 40% in FY81 to 50% in FY84.
32. For the agricultural sector, the most significant change is theprojected decrease in the relative and absolute size of the fertilizersubsidy; the consequent release of resources will permit the allocations toother aspects of agriculture to be more than doubled from FY81-84. Follow-ing the substantial increase in fertilizer prices in February 1980, fer-tilizer retail prices were increased by an average of just under 10% inMarch 1982. We intend to keep the need for further adjustments underreview and will make adjustments as required to meet the targets forreduced fertilizer subsidies as set out in the FY82-84 development program.Taken together, the federal and provincial allocations for research, exten-sion, foodgrain storage, seed supply, water management and fisheries havebeen substantially increased; and substantial further additional alloca-tions will be made to support the rehabilitation of the irrigation system(see below).
33. These shifts in expenditures will be further reviewed during thepreparation of the FY83-85 and subsequent public development programs.Particular emphasis will be given over the next 18-24 months to thepreparation of future projects in line with the objectives of the NationalAgricultural Policy. Some of this preparatory work is to be carried outunder the recently signed UNDP technical assistance agreement (the UmbrellaProject) for which the World Bank is to act as executing agency; theprojects to be prepared under this UNDP facility will include projects forcommand area water management and drainage in saline groundwater areas aswell as the promotion of private tubewell development in usable groundwaterareas.
34. Public sector tubewells in SCARP (salinity control and reclamationprogram) areas were intended to lower the watertable to eliminate waterlog-ging and improve soil drainability. In usable water zones, their pumpagewas to be used to supplement surface water supplies. By and large theseobjectives have been achieved but due to scarcity of O&M funds and sometechnical and managerial constraints some tubewells did not perform asoriginally planned. GOP will take remedial action in the short term byconsiderably enhancing the allocations for public tubewells to provide forthe full requirements for their maintenance and operation. As noted above,in the medium to long term, we intend to reduce the budgetary burden ofpublic tubewells by promoting private tubewell development in all usablegroundwater areas, wherever this is consistent with drainage requirements,and by phasing out and/or divesting public tubewells, based on the findingsof the SCARP Transition Project Preparation Study, which is being preparedwith the assistance of the UNDP and the World Bank. This transition is to
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be supported by the expansion of rural electrification and supervisedcredit schemes.
35. Better use of existing assets will also be achieved by the real-location of expenditures towards the improved operation and maintenanceof canals. A special allocation of Rs 150 million has been made to theprovinces for urgently required canal works in the FY82 Federal Budget.Notwithstanding this increase, allocations for canal maintenance stillremain insufficient to meet requirements. In connection with theIDA-funded Irrigation Systems Rehabilitation Project, the required levelsof operation and maintenance expenditures for the irrigation system havebeen estimated up to FY85. Allocations for O&M will be increased annually,in excess of the expected rate of annual cost increases, in order to reachthe specified estimated requirements by FY85 or appropriately revisedfigures as may be agreed with IDA. To improve the extent of cost recoveryfor such expenditures, water charges have been increased by 25% in each ofFY79, FY81 and FY82. In future years, Provincial Governments will increasewater charges periodically (at intervals of not more than two years, sub-ject to any necessary legislative approval) or make other appropriatefinancing arrangements to achieve full cost recovery in accordance withfinal deadlines for various provinces as agreed with IDA.
36. Under the Constitution of Pakistan, the Provincial Governments arevested with the right and responsibilities of maintaining and developingthe water resources within their boundaries. However, the Federal Govern-ment has assumed responsibility in the case of certain functions such aswaterlogging and salinity control because the lumpiness, long-gestationperiods and complexity of the task often placed these essential require-ments beyond the financial, organizational and technical capability of theProvincial Governments. The division of responsibilities between theFederal and Provincial Governments has on occasions led to an upsetting ofpriorities. The Government reviews the priorities on the basis of a com-prehensive assessment whenever five-year plans, or the more recentthree-year programs, are prepared and at other times as well if the needfor a review has arisen. The Government will be fixing the prioritieswhile preparing the Sixth Five-Year Plan and will also consider in thatcontext any impediments to the fulfilling of priorities. Meanwhile, theGovernment has shown flexibility in relaxing normal procedures where theystood in the way of implementing key activities; for example, it hasdecided to provide aid as a supplement to budgeted provincial AnnualDevelopment Programs in the case of the IDA-funded Irrigation SystemsRehabilitation Project.
37. Improved Supply of Inputs. The adequacy and timeliness of thesupply of agricultural inputs are being improved by a combination of betterplanning prior to the sowing of major crops and close monitoring ofprogress during the cropping season. Supplies of water, for example, arebeing managed so that releases from irrigation canals and the operation of
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public sector tubewells are geared to the seasonal requirements of farmersin different parts of the country. As indicated above, we also plan toincrease substantially the efficiency and the operational capability ofpublic tubewells in usable groundwater areas which will enhance the supplyof irrigation water in coming years.
38. The Government has arranged for the supply of additional amounts ofgood quality seed through government agencies and has launched seed cer-tification programs to extend coverage to the private sector as well. The
IDA-supported seed project, which is a central part of this effort, is nowwell under implementation and will be completed with all possible speed.
Efforts to ensure that fertilizer is available in required quantities inall parts of the country at the required time, and is backed up by adequatecredit arrangements, have also made good progress and will be continued.Over the period FY79-82, institutional credit to agriculture has increased
at an annual average rate of 35% p.a.
39. Agricultural Pricing Policies. The Government's policy of setting
crop support/procurement prices for major crops to provide incentives forincreased production has helped to bring about the recent welcome improve-
ment in agricultural production. However, we have become increasinglyaware that, up to now, the determination of support/procurement prices for
eachl crop has been somewhat subjective. In order to rectify this, anAgricultural Prices Commission (APC) was set up in March 1981. Its termsof reference, formulated in consultation with the Bank, direct the APC to
provide consistent and timely recommendations on appropriate crop and inputprices based on a continuing and scientific analysis of farm-level data andtaking into account effects of prices on agricultural productivity andtheir indirect impact on other parts of the economy.
40. The APC, though not yet fully staffed, has already begun to perform
its function of strengthening the information and analytical basis foragricultural pricing decisions. The APC headed a recent task force which
has provided guidance to the Government on medium-term fertilizer pricingpolicy. In the coming months, necessary steps will be taken to staff theAPC. In addition, studies will be initiated to improve the quality ofAPC's work. An initial work program, based on an outline discussed withthe Bank, would be directed toward (a) designing a system for the collec-tion of farm-level data; (b) initiating and assisting the collection ofinformation on international prices and production of Pakistan's majorcrops; and (c) developing methods of measuring the impact of price recom-mendations on consumers' and farmers' real incomes. Such a work programwould lead to the development of a methodology for preparing price recom-
mendations, with supporting analysis, on a timely basis. Assistance fromIDA in these areas under the proposed Technical Assistance Credit will be
important to APC in this early phase of its development.
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41. Diversificatior. of Agriculture. The NAP stresses the importance ofa balanced emphasis on all aspects of agriculture, including livestock,fisheries and new crops in addition to the four existing major crops ofwheat, rice, cotton and sugarcane. The most intensive effort toward diver-sification in the immediate future will be to increase the domestic supplyof oilseeds. Current domestic production of edible oil is mostly aby-product of cotton production and specialized oilseed crops are not grownon an extensive scale. As a result, domestic production has not been ableto increase in step with the rapid growth of demand and imports have risenat an alarmingly high rate. The import bill for edible oil is alreadyapproaching $300 million a year and is likely to climb higher. To remedythis situation, the Government has prepared and introduced a crash programfor oilseed cultivation which envisages an increase in the area undercultivation of soybean, sunflower and safflower from 11,400 acres in1978/79 to 85,000 acres in 1982/83. Research on quality seeds and croppingpractices, extension work, institutional support and price incentives willbe focused on the attainment of these targets. A high-level Board has beenset up to advise the Government on the various aspects of increasing oil-seed production in the shortest possible time.
III. The Energy Sector
42. The Government is conscious of the urgent need for the developmentof domestic sources of energy and for increased emphasis on energy conser-vation as a response to the sharp increase in international energy prices.Pakistan possesses a number of potentially important donestic sources ofenergy including hydro-electricity, oil, natural gas, coal, atomic energy,fuelwood and other renewable forms. We are taking steps to promote anorderly development of all of these potential sources.
43. In April 1981, the National Energy Policy Committee directed that aten-year integrated energy plan should be prepared. Preliminary work onthe energy plan has been started by the Director-General of Energy Resour-ces under the Ministry of Petroleum and Natural Resources. GOP has inviteda team of experts from the International Energy Development Corporation tohelp prepare the energy plan. This work will be coordinated in the Plan-ning Division. A comprehensive study of the projected demand and supply ofgas, which was completed with Bank financial assistance in December 1981,will form the basis of a medium-term gas supply strategy and will beintegrated into a coherent long-term energy plan after other subsectoralstudies have been completed. The tentative findings of the study will beincluded in the strategy of the Sixth Five-Year Plan due to be ready byJune 1983.
44. While the exact role of various domestic energy sources remains tobe clarified by the above studies, there is a clear need to promote furtherexploration for domestic oil and gas supplies and to accelerate thedevelopment of already known fields in order to reduce the present high
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dependence on imported oil and to avert the large supply shortages fornatural gas which would emerge in the absence of increased production.Domestic crude oil production currently accounts for less than 15% ofrequirements and has fallen short of planned volumes in recent years. Themajor private domestic oil producer has encountered serious difficultiesdue to lower than estimated reserves and high development costs associatedwith difficult drilling conditions. The Government has recently respondedto these problems by renegotiating the well-head price for production fromnew wells to take account of the higher marginal cost of incremental asagainst existing production. The new, higher marginal price has beenindexed to maintain it as a constant proportion of world marker crude oilprices and will provide an adequate incentive for the completion of plannedwork programs over the coming years.
45. Import-parity related prices are also offered for oil to beproduced from fields where discoveries have already been made but wherefurther exploration is required prior to commercial production, and for oilproduced from newly discovered fields. In each case, the contracts provideincentive well-head prices which reflect the different degrees of risk andlikely costs involved in development. These arrangements have been suc-cessful in attracting interest in exploration and further development. Arecord number of 26 wells are expected to be drilled in Pakistan during the12 months ending in June 1982 and domestic production of crude oil isexpected to reach 14,800 b/d in FY82 and 17,500 b/d in FY83, compared to10,000 b/d in FY80.
46. Domestic natural gas supplies currently meet 42% of total commer-cial energy use in Pakistan, with almost all production coming from twolarge fields (Sui and Mari). Negotiations have recently been completedwith the operator of the Sui field which will ensure that necessary invest-ments take place to maintain the existing volume of gas delivered from theSui field.
47. A new general approach has been recently adopted by the Governmentfor negotiations to induce investments to increase gas supplies beyondcurrently contracted amounts. These new arrangements represent a departurefrom the previous policy of fixed nominal prices or fixed rates of returnon share capital, to an approach that is more in line with recognizedinternational practice. For each proposed development, (i) a "base price"will be negotiated to yield an agreed internal rate of return on totalproject costs; and (ii) the "base price" will be indexed to world oilprices.
48. The rates of return will be negotiated taking into account thedifferent risks applying to various developments. In cases where the costsof development remain subject to considerable uncertainty at the time ofinitial negotiations (e.g., because substantial further explora-tion/appraisal is required before development), the base price may be
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subject to review at a predetermined point in the development scheduleafter the scope of the required investment has been more precisely defined;the modalities of such a review would be agreed at the time of the initialnegotiations.
49. The success of our new approach will have to be judged by itsresults in terms of inducing the investments which will be necessary toeliminate the emerging gas supply shortages. In this context, we havereviewed the analysis contained in the World Bank financed Gas Supply andDemand Study. In the light of this study, we have drawn up a proposedmedium-term plan for increasing domestic gas supplies. We are currentlyengaged in negotiations with various companies to ensure that the necessaryinvestments to increase gas production in line with this plan take place.We have agreed with the Bank that we will review the progress made in thesenegotiations and consider in consultation with the Bank by October/November1982 if any modifications in our approach are necessary.
50. We envisage an important continuing role for the public sector Oiland Gas Development Corporation (OGDC) in the development of domesticenergy sources. In the recent past, OGDC has experienced difficulties inimplementing its work program at the Toot field due to the difficult drill-ing conditions and problems caused by the loss of experienced personnel.The overall performance of OGDC also needs improvement. We have receivedproposals from consultants for strengthening OGDC and for restructuring itsactivities. We have taken these recommendations into account and haveadopted a reform program designed to place OGDC on a more commercial foot-ing. Salaries for key staff have been increased; increased delegation ofauthority to field development teams has been provided, with independentoperating companies to be established for the development of Pirkoh andDhodak fields; and the well-head price of oil produced by OGDC is beingraised.
51. At the same time, we have undertaken a review of strategies andpriorities for OGDC in order to develop activities in line with OGDC'simplementation capacity and the prospectivity of areas held by OGDC underlicense. In view of past difficulties in implementation at the Toot field,arrangements with drilling contractors have been revised and a new manage-ment structure has been set up, supported by expatriate experts. Over thenext few years, the public sector fields at Pirkoh and Dhodak will bebrought into production. We have negotiated a loan with the Asian Develop-ment Bank for the development of the Pirkoh gas field by a fully ownedsubsidiary of OGDC which is scheduled to begin production of 72 millioncubic feet of gas per day in December 1983. For the development of Dhodakgas and condensate field a reservoir engineering study, financed by theBank's Project Preparation Facility, has been completed. To facilitatedevelopment of this field, initially through a pilot project based on gasreinjection to recover between 2,000-3,000 barrels per day of condensate,we intend to negotiate joint venture or contract arrangements with
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experienced operators witlhin a financial framework in which payments to thecontractor are related to performance.
52. The Government has also assessed OGDC's capability to conduct anadequate exploration program over its license areas. We have directed OGDCto enter into joint ventures with private companies, to drill prospectswhere OGDC cannot conduct exploratory drilling using its own resources inthe medium term; any such arrangements would need to reflect adequatelypast expenditures and risks taken by OGDC, the potential for the areasconcerned, and also provide adequate incentives to investors.
53. The Government is fully aware that energy conservation throughavoidance of waste, encouraging efficiency of energy use and the curbing ofexcessive demand are imperative. Over the past three years, we have raisedprices of petroleum products in response to sharply increased internationalprices and intend to continue to follow a policy of passing on furtherincreases in petroleum product costs to final users.
54. The Government has pursued a policy of maintaining user prices ofnatural gas at relatively low levels in order to encourage the substitutionof gas for oil consumption and to counterbalance other inflationary pres-sures on costs. The prices of natural gas to users at the end of 1981averaged about $1 per mcf, well above the present average cost of produc-tion and distribution but well below the value of the fuel oil energyequivalent. However, the time when one large low-cost field (Sui) couldmeet Pakistan's increasing gas requirements is now over, and the marginalcosts of additional gas supplies are likely to be considerably higher. Inaddition, with gas consumption increasing rapidly and serious gas shortagesemerging, the need to limit the growth of demand and to encourage conserva-tion has been underlined.
55. We have, accordingly, embarked on a policy of rationalizing theprices of alternative energy forms to all users through a program of phasedincreases in gas prices. As a first step, prices to users were raised by aweighted average of around 20% from January 1, 1982. While the size andtiming of further increases will need to be carefully determined, we intendas a minimum to raise gas prices to cover all incremental costs of develop-ment and exploration. However, in order to achieve a more appropriaterelationship between natural gas consumer prices and the price of alterna-tive energy forms, we intend to implement further increases so that, byFY88, internal gas prices will equal two-thirds of the fuel oil energyequivalent measured in relation to the average unit f.o.b. values of fueloil re-exports from Pakistan in that year. We intend to review the situa-tion annually and take necessary action to maintain adequate progresstowards these objectives.
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IV. The Industrial Sector
56. Ever since it took office in 1977, the present Government has takeneffective steps to restore dynamism and efficiency in the industrial sec-tor. In order to revive the interest and confidence of entrepreneurs, whowere demoralized by a series of abrupt nationalizations in the precedingyears, the Government announced various safeguards, incentives and othermeasures inviting fuller participation from the private sector in thecountry's industrial development. Thousands of units for processingagricultural crops were denationalized early on and some other units sub-sequently; a provision was made in the Constitution guaranteeing fair
* compensation in case of any further nationalization; the previous demarca-tion of the spheres for the public and private sectors was altered openingup almost all areas for private investment; an investment schedule wasannounced for the Fifth Plan period identifying the dimensions of invest-ment being sought in various product groups; the procedures for investmentsanctions were streamlined and simplified; and various fiscal and commer-cial facilities were provided to induce investment in and promote exportsof manufactures. Side by side with reviving private investment, theGovernment carried out certain reforms to enhance efficiency andprofitability of public enterprises. The various steps taken by theGovernment have met with a good response. Between FY77 and FY81, valueadded in the manufacturing sector has increased at an average annual rateof 8% per annum compared with 2.8% in the previous seven years; exports ofmanufactures have increased at a rate of 10% per annum in volume terms; allpublic corporations in the manufacturing sector are now making profits; andprivate investment has recovered.
57. The efficient expansion of the private sector within an acceptablesocio-political framework, and the consolidation and improved performanceof the public industrial sector continue to form the primary aim of ourindustrial policy. Although the recent recovery in both private and publicindustry has been encouraging, the general state of the industrial sectorin Pakistan needs to be further improved. We recognize that furthermeasures will be required to modernize the industrial structure, toincrease the competitiveness of industry, and to strengthen the base forindustrial growth over the longer term.
58. After the completion of ongoing public industrial projects, theGovernment's policy will require public enterprises to meet most of theirinvestment needs through self-financing or sources outside the Government'sdevelopment program. Public exchequer funding of industrial developmentwill generally be confined to modernization and balancing of capacity ofexisting public sector units and investments in such areas where theprivate sector is not forthcoming. In sectors where it proves difficult toattract private investment, we will examine closely the incentives andpossible problems facing investors; in all cases public sector investmentfrom budgetary or non-budgetary sources will only be undertaken after
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thorough feasibility studies to ascertain the economic viability of theproposed project.
59. In order to increase the profitability and efficiency of publicsector manufacturing enterprises, the Government has already implemented anumber of reforms such as the establishment of boards of directors, includ-ing representatives of private shareholders, for each unit; the delegationof increased authority to these units and to the public sector holdingcorporations; the closure of several plants which had little prospect ofimproved financial performance; and the sale of some units to the privatesector. We are actively considering the further divestment of twelvepublic companies in order, inter alia, to reallocate scarce managerialtalent to achieve improvements in the performance of retained enterprises.For another five enterprises, steps are being formulated to strengthentheir financial position through injection of equity capital and revisionsof duties, taxes and sale prices.
60. In addition to streamlining and decentralizing the structure ofpublic sector production, the Government wishes to link greater autonomywith greater accountability; more operational flexibility must be accom-panied by more responsibility for results. The Government has decided toestablish, under the direction of the Experts Advisory Cell in the Ministryof Production, an information and signaling system for monitoring andevaluating the behavior of public enterprises, together with an incentivesystem for rewarding managers for performance. This project started inAugust 1981 and will, over a period of three years, develop and applyincreasingly effective methods for evaluation and for providing incentivesfor improved performance. We have requested technical assistance from theWorld Bank to support this project.
61. The Government has offered a number of improved incentives forexports and efficient import substitution over the past four years. Thefixed link of the Pakistan rupee to the US dollar was terminated in January1982 and the exchange rate has moved from Rs 9.9 = US$1 in January to Rs11.7 = US$1 in April 1982. As already noted, the exchange rate will be setin a flexible manner to help ensure the competitiveness of Pakistan'sexports. The scope of the export financing scheme has been expanded, thesystem of standard rebates of taxes on inputs for manufactured exports hasbeen extended and minimum export price controls have been substantiallyabolished. We have also embarked upon a major program for importliberalization in consultation with the IMF which would not only giveproducers greater access to raw materials but expose many shelteredindustries to competition from imports (export industries already enjoy theprivilege of importing banned raw materials). The Government has alreadyallowed imports of over 300 banned raw materials and intermediate goods andis contemplating further liberalization in the coming years. It will beour endeavor to replace by July 1984 the present "positive list" importpolicy in which imports are deemed to be banned unless explicitly allowed
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to a "negative list" in which imports will be allowed except whenexplicitly banned. We intend to reduce the items on the negative list toas small an amount as is compatible with our social and economic interest.
62. We recognize that the measures already taken and the contemplatedliberalization should be reinforced by a review of the overall set ofincentives facing industry with a view to rationalizing a system which hasevolved over a long period of time in response to diverse sets of circum-stances and objectives. Our objective, as noted in paragraph 9 above, isto achieve a progressive simplification of the tariff structure and theachievement of a more uniform level of effective protection. To preparefor such rationalization, a study of the system is necessary to determineits impact and the extent to which present incentives deviate from govern-ment objectives. To this end, the Government has initiated a large-scalestudy on "Effective Protection and Incentives Reform" to be conducted bythe Pakistan Institute of Development Economics (PIDE) and supervised by ahigh-level steering group chaired by myself. To support this study, whichwe expect to be completed by December 1982, the Government has requestedtechnical assistance from the Bank. Following the review of the findingsand recommendations of the study by the steering group, the Governmentwould introduce changes in tariffs and other fiscal incentives to applyfrom July 1, 1983. The Government is currently compiling a comprehensiveinventory of the regulations and other restrictions facing industrialenterprises, with a view to considerably reducing their number.
63. As a result of our efforts to stimulate private industrial activityin order to facilitate the shift in public sector development expenditurestowards other high-priority areas, there has been a welcome, rapid resur-gence of private investment in the last three years. The bulk of thisinvestment has been in medium and small-scale projects. However, we arealso concerned with the need to promote larger scale investments. Giventhe size of the domestic market and Pakistan's resource endowments, thereis considerable scope for large-scale projects requiring long-gestationperiods, some of which would be required to make further progress towardsimport replacement. In view of the risks and lumpiness of such projects,there may be difficulties in obtaining a sufficient flow of private invest-ment in these capital-intensive areas. We have decided to carry outstudies of some key sectors in order to identify the likely investmentsrequired in these sectors over the next decade, determine the types ofpolicies necessary to promote such investment, and consider the possibleneed and/or relative advantage of Government involvement through joint
* ventures with the private sector, or if necessary through sole ownership.These studies will, among other things, analyze the adequacy of infrastruc-ture, raw materials, credit and financial incentives and pricing policiesto promote the necessary volume of investment. We plan initially to under-take such studies for fertilizers, cement, chemicals and downstreamfacilities for utilizing output from the Pakistan Steel Mill and haverequested World Bank assistance for the studies on fertilizer and cement.
Signed: Ghulam Ishaq KhanMinister for Finance,
Planning and Economic Affairs
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ANNEX V
PAKISTAN
STRUCTURAL ADJUSTMENT LOAN
Use of Fund Resources
(In millions of SDRs)
Gross Credit Drawings 4/ Undrawn BalanceCompensatory Regular Trust 2/ Net of Agreedand Buffer Oil Stand-Bys Fund 1/ Repay- 3/ Credit Stand-By or
Stock Drawings Facility and EAs Borrowing Total ments Charges Drawings EA 5/
1973 60.00 60.0 40.00 2.41LY 20.00 15.001974 97.94 32.00 129.94 20.00 4.14 109.94 58.001975 103.42 58.00 161.42 25.00 14.64 136.421976 90.50 34.65 -18.00 7/ 107.15 42.00 23.84 65.151977 27.00 40.00 25.15 92.15 68.91 26.74 23.24 40.001978 40.00 72.26 112.26 84.33 27.05 27.931979 21.22 21.22 80.65 23.68 -59.431980 105.01 131.37 236.38 107.00 19.56 129.38 1,169.001981 482.86 0.89 483.75 132.58 25.45 351.17 749.00Thru Feb.1982 2.17 20.00k' -2.17 749.00Mar.-Dec.1982 375.00 9/ 76.04 71.311983 374.00 9/ 30.91 130.321984 71.05 140.921985 158.16 131.651986 244.87 111.841987 303.49 83.671988 277.89 53.431989 211.54 29.451990 144.85 14.501991 82.78 5.7210/
1/ Use of Fund Credit (regular stand-by drawings, EFF drawings, oil facility drawings,compensatory facility drawings; and buffer stock drawings) plus Trust Fund borrowing.
2/ Repayments through Repurchase and Repayments of Trust Fund borrowing.3/ Interest on Credit Drawings and on Trust Fund borrowing.4/ 1 - 2.5/ Undrawn balance of stand-by or extended arrangement with statement of remaining period of
atrangement.6/ Repayments made during period May 1-December 31.7/ Represents reclassification of credit tranche drawings as compensatory drawings in
July 1976.8/ Charges to date.9/ Projected.10/ Reflects charges through end October only in the case of CFF and ordinary resources
purchased under SBA and EFF.
IBRD 16248
64° 72L U. S S R MARCH 1982
C HNA
PAKISTAN I-
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