Pakistan Afghanistan · 2007-07-24 · widespread protests. On July 5th 1977 General Muhammad Zia ul-Haq, the chief of army staff, removed Mr Bhutto and declared martial law. Mr Bhutto

COUNTRY PROFILE

The full publishing schedule for Country Profiles is nowavailable on our website at http://www.eiu.com/schedule.

1999-2000The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Pakistan

AfghanistanThis Country Profile is a reference tool, which providesanalysis of historical political, infrastructural and economictrends. It is revised and updated annually. The EIU’squarterly Country Reports analyse current trends andprovide a two-year forecast.

The Economist Intelligence UnitThe Economist Intelligence Unit is a specialist publisher serving companies establishing and managingoperations across national borders. For over 50 years it has been a source of information on businessdevelopments, economic and political trends, government regulations and corporate practice worldwide.

The EIU delivers its information in four ways: through subscription products ranging from newsletters toannual reference works; through specific research reports, whether for general release or for particularclients; through electronic publishing; and by organising conferences and roundtables. The firm is amember of The Economist Group.

LondonThe Economist Intelligence Unit15 Regent StLondonSW1Y 4LRUnited KingdomTel: (44.20) 7830 1000Fax: (44.20) 7499 9767E-mail: [email protected]

New YorkThe Economist Intelligence UnitThe Economist Building111 West 57th StreetNew YorkNY 10019, USTel: (1.212) 554 0600Fax: (1.212) 586 1181/2E-mail: [email protected]

Hong KongThe Economist Intelligence Unit25/F, Dah Sing Financial Centre108 Gloucester RoadWanchaiHong KongTel: (852) 2802 7288Fax: (852) 2802 7638E-mail: [email protected]

Website: http://www.eiu.com

Electronic deliveryEIU ElectronicNew York: Lou Celi or Lisa Hennessey Tel: (1.212) 554 0600 Fax: (1.212) 586 0248London: Jeremy Eagle Tel: (44.20) 7830 1183 Fax: (44.20) 7830 1023

This publication is available on the following electronic and other media:

Online databases

FT Profile (UK)Tel: (44.20) 7825 8000

DIALOG (US)Tel: (1.415) 254 7000

LEXIS-NEXIS (US)Tel: (1.800) 227 4908

M.A.I.D/Profound (UK)Tel: (44.20) 7930 6900

NewsEdge Corporation (US)Tel: (1.718) 229 3000

CD-ROM

The Dialog Corporation (US)SilverPlatter (US)

Microfilm

World Microfilms Publications(UK)Tel: (44.20) 7266 2202

University Microfilms Inc (US)Tel: (1.800) 521 0600

Copyright© 1999 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication norany part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording or otherwise, without the prior permissionof The Economist Intelligence Unit Limited.

All information in this report is verified to the best of the author's and the publisher's ability. However,the EIU does not accept responsibility for any loss arising from reliance on it.

ISSN 0269-5634

Symbols for tables“n/a” means not available; “–” means not applicable

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

EIU Country Profile 1999-2000 © The Economist Intelligence Unit Limited 1999

Comparative economic indicators, 1998

1

© The Economist Intelligence Unit Limited 1999 EIU Country Profile 1999-2000

Contents

Pakistan

4 Basic data

5 Political background5 Historical background8 Constitution and institutions9 Political forces

10 International relations and defence

12 Resources and infrastructure12 Population13 Education13 Health13 Natural resources and the environment14 Transport and communications15 Energy provision

16 The economy16 Economic structure17 Economic policy19 Economic performance20 Regional trends

21 Economic sectors21 Agriculture and forestry22 Mining and semi-processing23 Manufacturing23 Construction24 Financial services

25 The external sector25 Trade in goods27 Invisibles and the current account27 Capital flows and foreign debt29 Foreign reserves and the exchange rate

30 Appendices30 Sources of information31 Reference tables31 Population31 Labour force32 Transport infrastructure32

Energy supplies

33 Federal government budget

October 22nd 1999

2


33 Money supply33 Interest rates34 Gross domestic product34 Gross domestic product by sector35 Gross domestic product by expenditure, current prices35 Gross domestic product by expenditure, constant prices36 Consumer price inflation36 Agriculture: basic data36 Agricultural production37 Minerals production38 Manufacturing production39 Banking: classification of outstanding advances by borrower39 Karachi Stock Exchange statistics40 Exports by value40 Exports by volume41 Imports by value41 Imports by volume42 Main trading partners43 Balance of payments, IMF estimates44 Balance of payments, national estimates44 External debt, World Bank series45 Foreign reserves45 Exchange rates

Afghanistan

46 Basic data

47 Political background47 Historical background52 Constitution and institutions52 Political forces54 International relations and defence

56 Resources and infrastructure56 Population56 Education57 Health57 Natural resources and the environment58 Transport and communications59 Energy provision

60 The economy60 Economic structure61 Economic policy63 Economic performance

3


63 Economic sectors63 Agriculture64 Mining65 Manufacturing65 Financial services

66 The external sector66 Trade in goods66 Invisibles and the current account67 Capital flows and foreign debt67 Foreign reserves and the exchange rate

68 Appendices68 Sources of information68 Reference tables68 Agricultural production, estimates69 Main trading partners69 External debt69 Official overseas reserves

4 Pakistan


Pakistan

Basic data

796,095 sq km

143.51m (January 1999 estimate)

Population in ‘000, 1998Karachi 8,761 Rawalpindi 3,351Lahore 6,212 Hyderabad 2,840Faisalabad 5,340 Islamabad (capital) 799

Subtropical, cold in highlands

Hottest month, June, 28-34°C (average daily minimum and maximum); coldestmonth, January, 13-25°C; driest month, October, 1 mm average monthlyrainfall; wettest month, July, 81 mm average rainfall

English is the official language; Urdu is the national language

Imperial system, changing to metric. Local measures include:

1 seer=0.933 kg1 maund=40 seers=37.32 kg

Numbers are still commonly expressed in crores and lakhs: 1 crore=10m,written 1,00,00,000; 1 lakh=100,000, written 1,00,000, although in 1978 theinternational system of millions, billions, etc was introduced

Rupee=100 paisa. Average 1998 exchange rate: PRs44.55:$1. Exchange rate onOctober 22nd 1999: PRs51.84:$1

5 hours ahead of GMT

July 1st-June 30th

January 8th 2000a (end of Ramadan; Eid Ul Fitr), March 23rd (Pakistan Day),April 6tha (Muharram), April 15tha (Ashoura), June 15tha (Eid-i-Milad-un-Nabi), August 14th (Independence Day), September 6th (Defence of PakistanDay), November 9th (Allama Iqbal Day), November 28tha (beginning ofRamadan), December 25th (Birth of Quaid-i-Azam and Christmas Day),December 28th (end of Ramadan; Eid Ul Fitr)

a These holidays are dependent on the Islamic lunar calendar and may vary slightly from the dateslisted.

Land area

Population

Main towns

Climate

Weather in Karachi

Languages

Measures

Currency

Time

Fiscal year

Public holidays

Pakistan 5


Political background

The Islamic Republic of Pakistan is a federated parliamentary democracy. Since1988, when the death of General Muhammad Zia ul-Haq brought about theend of a period of military rule, the country has undergone frequent changesof government. This is because of the important discretionary powers—including the right to dismiss the prime minister and dissolve the NationalAssembly—enjoyed by the head of state under a controversial 1985amendment to the constitution. However, in April 1997 the prime minister,Nawaz Sharif, used his two-thirds majority in the National Assembly to scrapthis so-called eighth amendment and continued manoeuvring thereafter toconsolidate his hold on power. However, in October 1999 his attempt to sackthe army chief, General Pervez Musharraf, prompted the army to overthrow hisgovernment. General Musharraf was installed as the “chief executive” incharge of an appointed civilian government.

Historical background

The area that makes up modern Pakistan was successively invaded in ancienttimes by Aryans, Persians, Alexander the Great’s Macedonians, Central Asians,Huns, Turks, Arabs and Moghuls. Merchants of the British East India Companyarrived in the early 17th century. As the Moghul empire declined, the Britishextended their influence and, by the late 19th century, had secured control ofthe Indian subcontinent.

The idea of a separate homeland for the region’s Muslims was first enunciatedin 1930 by a poet, Muhammad Iqbal, and formally adopted by the All IndiaMuslim League, led by Muhammad Ali Jinnah, on March 23rd 1940. Pakistanwas formed out of the partition of British India on August 14th 1947 andoriginally consisted of two wings separated by 1,600 km of Indian territory,West Pakistan (now Pakistan) and East Pakistan (now Bangladesh). Pakistantoday comprises the four provinces of Punjab, Sindh, North West FrontierProvince (NWFP) and Baluchistan, as well as the Federally Administered TribalAreas and the Federal Capital Area (FCA) of Islamabad.

Following a succession of civilian and military governments, the first generalelection for a national assembly was held in December 1970. An overwhelmingmajority of seats in the east was won by the Awami League, while Zulfikar AliBhutto’s Pakistan People’s Party (PPP) took a substantial majority in the west.Confronted by the reluctance of Mr Bhutto and the army (led by WestPakistan) to countenance a Bengali-dominated government, in March 1971 theAwami League launched a campaign of civil disobedience, which immobilisedthe east. A brutal military crackdown, in which hundreds of thousands ofBengalis were killed, came to an abrupt end in December that year when theIndian army intervened and Bangladesh was declared an independent state.

Mr Bhutto became president and chief martial law administrator of a truncatedPakistan and, following the passage of a new constitution in April 1973, its

Successive invasions

The formation of Pakistanin 1947

General Zia removesMr Bhutto—

6 Pakistan


prime minister. While his party, the PPP, easily won the election of March1977, strong-arm tactics employed against the opposition at local level sparkedwidespread protests. On July 5th 1977 General Muhammad Zia ul-Haq, thechief of army staff, removed Mr Bhutto and declared martial law. Mr Bhuttowas put on trial for alleged complicity in the murder of a political opponent,convicted and hanged on April 4th 1979. General Zia’s increasingly harsh rulewas characterised by an Islamisation programme ostensibly designed to fulfilthe original purpose of Pakistan but aimed in reality at extending his own ruleby generating popular support.

Political opposition centred around the Movement for the Restoration ofDemocracy (MRD), of which the most important component was the PPP, nowled by Benazir Bhutto, the daughter of the former prime minister, whoreturned from exile in April 1986. General Zia died in a plane crash—probablythe result of sabotage—on August 17th 1988 and, in accordance with theconstitution, was succeeded as head of state by the chairman of the Senate,Ghulam Ishaq Khan, a former civil servant. Ms Bhutto’s PPP became the largestparty in the National Assembly at the November 1988 election. It formed agovernment after reaching an understanding with the Muttahida QaumiMovement (MQM), which represents Urdu speakers from India (mohajirs) whosettled in urban areas of Sindh province at partition.

Her administration seemed doomed from the outset, however. Rivalry forcontrol of Sindh, the PPP’s traditional heartland, made relations with theMQM sour rapidly; the Islami Jamhoori Ittehad (IJI), a multiparty alliancedominated by the Pakistan Muslim League (PML), which had come a closesecond in the federal polls and won control of the Punjab assembly, the keyprovincial parliament, proved implacable in opposition; and the“establishment”—the all-powerful army high command and senior civilservants—increasingly resented a government it considered not only weak andcorrupt but also unfit to handle sensitive defence and foreign policy issues.Mr Khan sacked Ms Bhutto 20 months into her five-year term and installed acaretaker administration to oversee a fresh election within 90 days.

The polls, in October 1990, were won by the PML-led IJI, and Nawaz Sharif, anindustrialist and former chief minister of Punjab, became prime minister.Despite enjoying a two-thirds majority in the National Assembly, effectivecontrol of all four provincial parliaments and the backing of the military andthe president, the essentially artificial nature of the IJI—hastily cobbledtogether by the Inter-Services Intelligence (ISI) directorate after General Zia’sdeath to meet the challenge posed by Ms Bhutto and a resurgent PPP—soonbecame apparent. Initially supportive parties, including the fundamentalistJamaat-i-Islami and the MQM, were alienated.

Relations between Mr Sharif and Mr Khan degenerated into a no-holds-barredbattle for political supremacy. At last, in April 1993, the head of state dismissedthe prime minister and installed another caretaker regime, which includedmembers of the PPP. Although Mr Sharif was reinstated six weeks later by theSupreme Court, which ruled that Mr Khan had exceeded his powers, the power

—whose death paves theway for Benazir—

—as head of another short-lived PPP administration

Nawaz Sharif’s firstgovernment

Pakistan 7


Important recent events

October 1993: Benazir Bhutto becomes prime minister; herPakistan People’s Party (PPP) forms coalitions at the centreand in Punjab, and wins an outright majority in the Sindhassembly.

November 1993: Farooq Leghari, deputy leader of the PPP,is elected head of state.

November 1996: Mr Leghari sacks Ms Bhutto, accusing hergovernment of maladministration and corruption, and installsa caretaker regime to oversee a fresh election.

February 1997: Mr Sharif’s Pakistan Muslim League (Nawaz)((PML (N)) easily wins the federal and provincial elections,securing a two-thirds majority in the National Assembly.

April 1997: The National Assembly and Senate amend theconstitution to deprive the president of sweeping discretionarypowers, including the rights to dismiss the government and toappoint the chiefs of the armed forces and senior judges.

December 1997: Mr Leghari resigns as president and SajjadAli Shah is sacked as chief justice following a protracted powerstruggle with Mr Sharif. Rafiq Tarar, a Sharif loyalist, is electedpresident.

May 1998: Pakistan explodes six nuclear devices after Indiaconducts five tests. A state of emergency is declared and severalcountries, including the US and Japan, impose economicsanctions.

October 1998: Remarks made by the chief of army staff,General Jehangir Karamat, that the economy, and not an externalenemy, is the real threat to Pakistan lead to his removal and theappointment of General Pervez Musharraf as the new army chief.

February 1999: The Indian prime minister, Atal Bihari Vajpayee,arrives in Pakistan aboard a bus overland from India to sign theLahore Declaration.

May 1999: Pakistan-backed rebels and Pakistani regular soldierscapture hills in Indian-administered Kashmir. At first, India sufferedembarrassing military reverses. But after an offensive in the firstweek in July, several important positions were recaptured; theremaining positions were either vacated by withdrawing fightersor taken in turn.

October 1999: The prime minister, Nawaz Sharif, and hisgovernment are overthrown by a bloodless military coup, afterMr Sharif tried unsuccessfully to fire General Musharraf. GeneralMusharraf instals himself as Pakistan’s chief executive withoutsetting a timetable for the return to democracy.

struggle persisted. It was brought to an end on July 15th when the army chief,General Abdul Waheed, forced both men to resign.

At an election in October 1993, overseen by an interim government headed bya former vice-president of the World Bank, Moeen Qureshi, the PPP wasreturned as the largest party in the National Assembly, followed by Mr Sharif’sfaction of the PML, the PML (N). Thanks to the support of Hamid NasirChattha’s breakaway faction of the PML, the PML (C), Ms Bhutto was able toform a coalition government both at the centre and, crucially, in Punjabprovince.

But the PPP-led administration failed to address widely held grievances,including declining living standards and mounting lawlessness and terrorism,as well as rampant high-level corruption. Yet it was Ms Bhutto’s increasinglybrazen manipulation of the democratic process to sustain and prolong her rule,not least the extrajudicial killing of hundreds of MQM activists and supporters,that tipped the balance against her. The army high command urged FarooqLeghari, who had been deputy leader of the PPP for years before his elevationto the presidency, to oust her, which he did in November 1996.

Ms Bhutto returns but isagain ousted prematurely—

8 Pakistan


The depth of popular disaffection with the PPP propelled Mr Sharif’s PML (N)to an overwhelming victory in federal and provincial parliamentary electionsin February 1997. Within weeks he had used his two-thirds majority in theNational Assembly to eliminate the constitutional right of the president todismiss elected governments and to appoint the chiefs of the armed forces andSupreme Court judges. Mr Sharif’s attempts to consolidate his personal andofficial powers embroiled him in a series of disputes with the chief justice,Sajjad Ali Shah, the president, Mr Leghari, and the army chief, JehangirKaramat, leading to the departure of all three men.

The PML (N)-led government also targeted Ms Bhutto—whose PPP had wononly 18 National Assembly seats in the February election—by filing severalcases of corruption and abuse of power against her in the courts. However,Mr Sharif faced increased opposition on all fronts: he had lost severalimportant electoral allies (such as the MQM); the regional parties were angeredby his perceived bias in favour of Punjabi interests; the opposition wasincreasingly vocal; and his sharia bill had been attacked by religious extremistsand liberals alike. But his failed effort to fire General Musharraf finally resultedin his own dismissal, when the army retaliated by overthrowing thegovernment in a bloodless coup in October 1999.

Constitution and institutions

The 1973 constitution, framed by Mr Bhutto’s PPP government, provided for afederal democratic structure. Although still in force, it has undergone majoramendments. It was first modified at Mr Bhutto’s behest as early as 1974, tolegitimise his government’s creeping authoritarianism.

General Zia’s martial law regime created even greater repression. Its mostsweeping changes, announced in March 1985, formalised the concentration ofpower in the hands of the president who, among other things, assumed theright to dissolve the National Assembly without the prime minister’s consent,and was empowered to appoint the head of the government, the three chiefs ofthe armed forces, ministers of state, provincial governors and key judicialfigures. As a result, the National Assembly’s ability to formulate policy waslimited.

These provisions held for many years, for a number of reasons, not leastbecause senior generals wanted them to remain in place so that they couldimpose their will indirectly through the president, avoiding the need for a full-blooded army intervention in politics. However, soon after being sworn inFebruary 1997 Mr Sharif used his two-thirds majority in parliament toeliminate many of the executive powers of the president, including the powerto sack governments.

In recent years tensions between the executive and the judiciary have risen. In1996 the Supreme Court defied Ms Bhutto by ruling that the government washenceforth obliged to appoint judges solely on the basis of seniority, and thatgovernment nominees needed the endorsement of the chief justice of the

Constitutionalamendments legitimise

authoritarianism

A much-abused judiciary

—paving the way forMr Sharif’s return

Pakistan 9


relevant court. Elements in the judiciary mounted even stronger resistance tomoves by Mr Sharif, following his re-election, to circumvent its authority byestablishing special summary courts, assert the supremacy of the executive andassume the right to appoint senior judges. The dispute developed into a powerstruggle between the then chief justice, Sajjad Ali Shah, and Mr Sharif, as wellas the then president, Mr Leghari (who sided with the chief justice). Mr Sharifemerged victorious from the stand-off, securing the departure from office ofboth the chief justice and the president. Thereafter, the proposedconstitutional package aimed at curtailing the powers of the chief justice bygiving the prime minister the right to choose senior judges, thus doing awaywith the principle of seniority, was passed.

However, following the October 1999 coup, the armed forces declared theconstitution “in abeyance”. General Musharraf has appointed a constitutionalscholar to the National Security Council and has signalled his intention toaddress the perceived weaknesses of the constitution.

Political forces

Since its foundation more than a generation ago, the Pakistan People’s Partyhas been an uncomfortable amalgamation of socialists and conservatives.However, the latter group, epitomised by the wealthy land-owning class towhich the Bhuttos belong, has always dominated, except for a brief periodfollowing its creation. Like the party’s founder, Zulfikar Ali Bhutto, its currentleader, his daughter Benazir, is often characterised as an ideological schizo-phrenic. Yet her overriding political aim has been, as his was, to attain powerand keep it. Thus, like him, she preached the virtues of participatorydemocracy while seeking to promote the PPP to the exclusion of all otherparties and to secure undisputed control within it. This fundamentally self-serving strategy was her father’s downfall and led to her own abrupt dismissal,for the second time, in November 1996. Having won only a fraction of the 217seats in the National Assembly at the February 1997 election, the PPP’s future isuncertain, as is that of Ms Bhutto, who was charged with corruption by theSharif government and now lives outside Pakistan.

The Pakistan Muslim League has traditionally been seen as the party closest tothe powerful establishment of generals and senior bureaucrats. Mr Sharif, theousted PML (N) prime minister, was groomed as a politician by General Zia,and the coalition he headed from 1990 to 1993 was originally contrived bymilitary intelligence as a counterweight to the PPP. But like his nemesis,Ms Bhutto, Mr Sharif was reluctant to learn the basic lessons of Pakistanipolitics. Having paid the ultimate price during his first period in office forseeking to concentrate power in his own hands, he embarked on a similarlyrisky path the second time around, which led to his dismissal by the army.

Although its support base is largely confined to the main cities of Sindh,particularly Karachi and Hyderabad, the Muttahida Qaumi Movement is thecountry’s third most popular party. However, its militancy and reputation as an

The PPP

The PML

The MQM

10 Pakistan


unreliable ally—most recently it left its alliance with the PML (N) in the Sindhgovernment—have prevented it from capitalising on its potential as a power-broker.

The army remains Pakistan’s ultimate political arbiter. It has run the countryfor as long as civilian governments and was the driving force behind thepremature removal of the last four elected administrations—Ms Bhutto’s in1990 and 1996; Mr Sharif’s in 1993 and 1999—all of which paid the price forseeking to consolidate themselves at the expense of the military.

Main political figures

Benazir Bhutto: First ousted as prime minister formismanagement and corruption at the army’s behest inAugust 1990 after just 20 months in office, the leader of thePakistan People’s Party was removed a second time for similarreasons in November 1996, three years into a five-year term,and can hardly expect another stint in office. She is chargedwith corruption and lives in exile outside Pakistan.

Nawaz Sharif: After his removal by the military in 1993, thePakistan Muslim League (Nawaz) chief was given a new leaseof life by Ms Bhutto’s dismissal, and went on to win theFebruary 1997 general election. Despite the landslide victory,he was again quick to make enemies in high places and wasousted as prime minister by the army in October 1999.

General Pervez Musharraf: The self-designated “chiefexecutive” of Pakistan, following the October 1999 bloodlesscoup, General Musharraf was appointed as army chief by MrSharif in 1998 after General Jehangir Karamat resigned. Ofmohajir origin, he is viewed as a reformer with pro-Westernattitudes but nonetheless is credited as one of the mainstrategists behind the recent crisis in Kargil Kashmir.

Altaf Hussain: Leader in exile of the Muttahida QaumiMovement (MQM). While Mr Hussain has welcomed the militarytakeover, court cases against him filed by the Bhutto and Sharifgovernments stand. There is thus no chance that he will return toPakistan soon. There is every chance that the military will crackdown on the MQM for its role in a number of offences.

Parliamentary elections(No. of seats)

1988 1990 1993 1997

Pakistan People’s Party 93 44a 86 18

Pakistan Muslim League 54b 106b 72 134

Muttahida Qaumi Movement 13 15 – 12

Awami National Party 2 6 3 9

Others 42 36 45 31

Total 204 207 206 204

a People’s Democratic Alliance (PDA) coalition, led by the PPP. b Islamic Democratic Alliancecoalition, led by the Pakistan Muslim League and the Jamaat-i-Islami Pakistan (JIP).

Source: EIU.

International relations and defence

Tense relations with India since the traumatic and bloody partition of 1947have led to three full-scale wars, several lesser skirmishes—most recently in theKargil sector along the so-called line of control dividing the disputed state ofKashmir—and a vigorous arms race. Following India’s detonation of an atomic

The role of the generals

India remains publicenemy number one

Pakistan 11


device in 1974 Pakistan launched its own nuclear programme. In May 1998,after the newly elected Bharatiya Janata Party (BJP)-led government in Indiatested nuclear devices, Pakistan did the same, prompting several countries,including the US and Japan, to impose economic sanctions. The signing of theLahore Declaration by Mr Sharif and his Indian counterpart, Atal BihariVajpayee, in February 1999 seemed to be a positive step towards thenormalising of relations, but any perceived gains were quickly erased by theundeclared war in Kargil. Improvements in relations will remain negligible aslong as the governments’ respective opponents at home continue to exploitany perceived slackening of resolve, however slight or well intentioned.

Friendship with China, born out of a shared antipathy towards India and theformer Soviet Union, has been one of the most consistent features of Pakistan’sforeign policy. Officials of the US Central Intelligence Agency believe thatBeijing has supplied Islamabad with nuclear technology and parts, as well asM-11 ballistic missiles capable of delivering assembled weapons. However,during the recent skirmish in Kargil, China’s vocal support for Pakistan wasmuted. Pakistan’s cold-war ally may be beginning to see the difficulty ofsupporting Pakistan on one hand while battling its own Islamic insurgenciesand the demands for the self-determination of Tibet.

Pakistan was the most active external sponsor of the Afghan guerrillas duringtheir war against the Soviet army and Kabul’s Moscow-backed government, butthe country has not enjoyed consistently good relations with any mujahideengroup since the communists’ defeat in April 1992. The ambivalence of itsAfghanistan policy, designed in part to prevent the emergence of anotherpowerful neighbour to the north-west, is largely to blame. Islamabad’sshadowy support for the ultra-orthodox Taliban militia, the Sunni Muslimgroup which now controls most of Afghanistan, severely strains ties with Iran,which adheres essentially to the Shia sect of Islam and is itself suspected offomenting sectarian violence in Punjab province.

Recent governments, including those of Ms Bhutto and Mr Sharif, have soughtto ingratiate themselves with the US, essentially in a bid to secure a resumptionof US military and economic assistance. US aid was cut off in 1990 when theUS president, George Bush, declared that he was unable to certify that Pakistandid not have a nuclear weapons capability. But the collapse of the alreadyfragile Pakistani economy following the May 1998 nuclear tests threatened apossible sale of nuclear technology to rogue states—and also rendered Pakistanmore vulnerable to destabilising domestic political developments.Consequently, the Clinton administration successfully prodded the USCongress to allow it to waive sanctions temporarily in the interest of nationalsecurity. In 1999, facing nearly worldwide censure for its organisation of theincursion into Indian-administered Kashmir, Pakistan was compelled tonegotiate the details of its withdrawal with the US. The US is also seekingPakistan’s assistance in the extradition of a Saudi dissident and alleged terrorist,Osama bin Laden, who is currently living in Afghanistan, as well as itssignature on the Comprehensive Test Ban Treaty (CTBT). However, the failure

China is the mostsupportive ally

Relations with Afghanistanare never easy

Pakistan panders to the US

12 Pakistan


of the US Senate to ratify the treaty has lessened Washington’s moral leveragein this matter.

Resources and infrastructure

Population

While the 1998 census estimated Pakistan’s population at about 131m as ofJanuary 1999, independent sources peg this figure higher, at over 140m.Punjab’s share of the total fell to 55.6%, from 56.1% in 1981, Sindh’s rose to23% from 22.6%, that of North West Frontier Province (NWFP) increased to13.4%, from 13.1%, and Baluchistan’s was unchanged at 5%. The remaining3% of the population lived in the so-called Federally Administered Tribal Areasand in Islamabad, the national capital. The census showed that the populationgrowth rate had fallen to 2.4%, from 3.1% in 1972-81, a trend that derives inpart from the increased, if still modest, coverage of family planningprogrammes. (Reference table 1 gives population estimates for 1994-98 andReference table 2 breaks down the labour force by sector.)

Population by age structure, 1998a

(m)

Years Total %

0-14 55.04 43.215-64 68.02 53.465+ 4.36 3.4Total 127.43 100.0

a Excludes Federally Administered Tribal Areas.

Source: Federal Bureau of Statistics, Labour Force Survey.

Although infant mortality (the number of deaths per 1,000 live births) fellfrom an average of 112 in the latter half of the 1980s to 95 in 1997, there is alarge disparity between urban and rural areas. This ratio was 67.8:115.7,according to a 1995 survey. In 1998 the male:female ratio in the totalpopulation rose to 108:100. This is attributable partly to the persistence offemale infanticide and to a substantial dependency ratio; 43.2% of thepopulation was aged under 15 years and 3.4% over 65. The labour force hasgrown at an annual average rate of about 3% in 1994-99, while the officialunemployment rate (a crude measure in most countries, but even more so in acountry with a massive undocumented labour force) has risen from under 5%in 1994 to over 6% in 1998.

The average population density rose from 106 per sq km in 1981 to168 per sq km in 1998, but this still masks regional differences, ranging from353 in Punjab, the wealthiest province, to just 19 in Baluchistan, the poorest.While the March 1998 census put the proportion of the population in thecountryside at 67.5%, only slightly down from 71.7% in 1981, urbanisation is

The population growthrate is said to be slowing

Disturbing developmenttrends persist

The rural-urban drift isaccelerating

Pakistan 13


accelerating rapidly; Karachi’s population, for example, is said to be expandingat a potentially explosive 6% per year.

Education

Government outlays on education increased from PRs58.3bn ($1.5bn) in1996/97 to a budgeted PRs68.3bn—just 2.2% of GNP—in 1998/99. Recurrentspending accounted for 88% of the total. Enrolment in primary schools wasput at 92% of boys and 62% of girls—falling to 45% and 26% respectively insecondary schools. About 94,000 were attending university and a further136,000 professional colleges in 1998/99. The official literacy rate of 45%, anexaggeration, breaks down into a male:female ratio of almost 2:1 and anurban:rural ratio of just over 2:1, indicating major disparities.

Pakistan’s education system is among the most deficient and backward in Asia,reflecting the traditional determination of a feudal-dominated ruling elite topreserve its hegemony and, to a lesser extent, the recent mushrooming ofmadrassahs (Koranic schools). Another problem that has surfaced is that of“ghost” schools and teachers—which exist on paper only.

Health

Official negligence over the years means that the provision of healthcare ispoor, notwithstanding government statistics indicating a slow but steadyincrease in the number of doctors and nurses. Medical staff assigned to ruralclinics frequently fail to turn up for work.

Daily calorie intake per head was officially estimated at 2,606 in 1998/99,fractionally higher than the UN’s recommended minimum of 2,550, whileprotein consumption averaged 69.61 g, 16.1% above the recommendedminimum. Given the tendency of governments to exaggerate theirachievements, and the vast differences in income levels, it is reasonable toconclude that a substantial proportion of Pakistanis are undernourished, manyof them seriously so. The government has started various programmes, withlimited success, which include control of iodine deficiency disorder, anaemia,and vitamin A deficiency, and promotion of a breast-feeding programme.

Budgeted outlays on health were PRs20.8bn ($450m) in 1998/99, equivalent toa mere 0.7% of GNP. But just as rich Pakistanis tend to send their childrenabroad for their education, so they or members of their families travel overseasto obtain medical attention, and if they are on the right side of the politicaldivide the government will often pay the bill.

Natural resources and the environment

Pakistan experiences the most extreme temperatures on earth, ranging from50°C or more at the height of summer in the deserts of Sindh to –50°C and

Deficiencies are unlikely tobe redressed

The health service is in badshape—

—and malnutrition iscommon

Wealthy Pakistanis areoften treated abroad

Extremes of temperaturecause problems

14 Pakistan


below in the depths of winter on the northern mountain ranges. Droughtsfrequently ravage herds and standing crops, as do floods, which also destroyphysical infrastructure.

Parts of the NWFP and Baluchistan seek to compensate for the bareness of theirsoil and their perceived victimisation at the hands of successive centralgovernments by resorting to the “black” economy, notably the processing ofopium—much of it grown in neighbouring Afghanistan—into heroin.Smuggling across the porous border with Afghanistan is also a large constituentof the economy.

Sindh’s proven hydrocarbons deposits are to a large extent being tapped.International exploration and development companies would, if they could,flock to Baluchistan, which is believed to possess massive reserves, particularlyof natural gas. The problem is that the province’s tribal chiefs, over whom thecentral government exerts little control, have been demanding too high a pricefor permission to drill. Most of the foreign companies awarded concessionsthere have been obliged to declare force majeure, faced with obstruction fromBaluchi tribesmen.

Transport and communications

If the high economic growth rates needed to sustain the rapidly growingpopulation are to be achieved and sustained, massive investment will berequired in physical infrastructure, including roads, ports, air transport andtelecommunications, most of which currently suffer severe bottlenecks.Securing the requisite capital—from private investors and commercial banks,given the paucity of public funds—is one of the country’s biggest developmentchallenges.

Highways, for example, account for only 7,144 km of the road network. Theydo, however, have to carry a rapidly rising proportion of total freight andpassenger traffic—63% in 1997/98—not least because Pakistan Railways seemsto be in terminal decline, although it could come up for sale in the comingyears. (Reference table 3 provides transport statistics.) Each year, billions ofrupees are spent on extending and upgrading the highway system. This sum isnot only insufficient but is also, in the view of the country’s creditors, oftenunwisely spent. The motorway between Lahore and Islamabad cost PRs35.5bn($770m). It was initiated by Nawaz Sharif during his first term as primeminister and completed in November 1997. With traffic a mere 10% of thetargeted level, the government has had little success in leasing the motorwayto a private operator. Nevertheless, the deposed Pakistan Muslim League(Nawaz) government awarded another contract for the Peshawar-Islamabadmotorway. It has also taken over the control of national highways, previouslyin the hands of provincial governments, and will lease them to groups that willdevelop toll-roads. The military’s Fauji Foundation and National Logistics Cellwere given control over the Karachi-Hyderabad highway and the road thatruns between Lahore and Rawalpindi as a first step.

Heroin manufacturersflourish in the neglected

NWFP

Baluchistan’s gas reservesare largely out of reach

Infrastructure needs hugeinvestments

Pakistan 15


Although recent governments have opened up the transport andcommunications sectors for private participation, they have failed to followthis up by offering sufficiently attractive incentives, such as regulatoryframeworks for non-government operators. Those that have been established,like the Pakistan Telecommunications Authority, remain ineffective.Bureaucratic obstruction is another problem as is political expediency. Privateairlines continue to complain of unfair advantage given to the state carrier,Pakistan International Airlines, and the military-owned Shaheen Airlines. Thesale of Pakistan Telecommunications Company (PTCL) continues to be delayedbecause of lack of investor interest and because it is a major foreign-exchangeearner for the government.

Energy provision

The combined generating capacity of the two public energy producers anddistributors, the Water and Power Development Authority (WAPDA) and theKarachi Electricity Supply Corporation (KESC), reached 9,945 mw in 1998/99.Private producers contribute an extra 3,771 mw, bringing the total installedcapacity to 13,716 mw. Thermal power, which in 1993/94 replacedhydropower as the largest source of energy, now accounts for two-thirds oftotal installed capacity as well as energy supply.

While demand for energy is accelerating, the government is locked in a tusslewith international oil and gas exploration companies over the price at whichgas is bought by the gas distribution companies. Plans to import gas have beenpushed back because of the impressive discoveries made by oil and gasexploratory companies in the past four years. The government intends toincrease dependence on domestic gas, rather than oil imports. (Historical dataon energy supplies are given in Reference table 4.)

The row between independent power producers (IPPs) and the governmentover tariffs has scared off foreign investors in this sector. Particularly messy isthe row between Hub Power Company, or Hubco, which is partly owned byNational Power of UK and the state power utility, WAPDA. The PML (N)government accused the IPPs of bribing officials of the previous PPPgovernment and jacking up power rates beyond what was initially agreed. TheIPPs strongly reject this. Before its removal, the PML (N) government hadmanaged to settle issues with the smaller IPPs. But reforms to the power sector,initiated by the World Bank, remain stalled as a result of this row. For its part,WAPDA is near financial bankruptcy. (The handing-over of the administrationof WAPDA to the army earlier in 1999 helped increase revenue throughchecking power theft, but it did not led to the massive reorganisation that theutility badly needs.)

Management control of a WAPDA-run, 1,600-mw thermal plant at Kot Addu inPunjab was transferred in mid-1996 to the UK’s National Power following itssuccessful bid for 26% of the government’s stake in the facility. The subsequentsale of an additional 10% to the same buyer is now the subject of a corruption

The privatisation process isbedevilled by shortcomings

Pricing issue resolutionkey to boosting supplies

IPP row scares offinvestors—

16 Pakistan


investigation by the government. The privatisation commission has shortlistedinterested parties for the sale of KESC, which is expected to be sold off by 2001.

The government has sought financial advice on the privatisation of fivegeneration and distribution companies, with a total capacity of 3,231 mw. Thesale of area electricity boards (AEBs), which are distribution companies, willcommence soon as the required break up of WAPDA’s distribution networkinto individual companies is almost complete.

Energy balance, 1998(m tonnes oil equivalent)

Oil Gas Coal Electricity Other Total

Primary supplyProduction 2.9 14.2 1.5 6.4a 21.5 46.5Imports 15.2 0.0 0.8 0.0 0.0 16.0Exports –0.5 0.0 0.0 0.0 0.0 –0.5Total 17.6 14.2 2.3 6.4a 21.5 62.0

– – – 2.1b – 57.7

Processing and transformationInput to refining –7.0 0.0 0.0 0.0 0.0 –7.0Input to transformation –4.9 –4.4 –0.2 –6.4a –0.4 –16.3Transformation output 7.0 0.0 0.0 5.7b 0.0 12.7Losses & transfers –0.5 –0.6 0.0 –1.5b 0.0 –2.6

Final consumptionTransport fuels 8.0 0.0 0.0 0.0b 0.0 8.0Industrial fuels 2.4 4.0 2.1 1.2b 2.3 12.0Residential etc 1.4 3.2 0.0 3.0b 18.8 26.4Non-energy uses 0.4 2.0 0.0 0.0b 0.0 2.4Total 12.2 9.2 2.1 4.2b 21.1 48.8

a Expressed as input equivalents on an assumed generating efficiency of 33%. b Output basis.

Source: Energy Data Associates.

The economy

Economic structure

Main economic indicators, 1998

GDP growth (%)a 3.9

Consumer price inflation (av; %) 6.2

Current-account balance (% of GDP) 3.2

Total external debt ($ bn) 31.4b

Exchange rate (PRs:$; av) 44.55

a Fiscal year 1998/99. b EIU estimate.

Sources: Ministry of Finance, Economic Survey, 1998/99; IMF, International Financial Statistics; World Bank, Global Development Finance.

—and the privatisation ofenergy companies begins

Pakistan 17


Agriculture accounts for the largest share of GDP, contributing 24.5% in1998/99, according to government estimates. The size of the annual cottoncrop, the bulk of it grown in Punjab province, is a crucial barometer of thehealth of the overall economy, as it determines the availability and cost of themain raw material for the yarn-spinning industry—much of which isconcentrated around the southern port city of Karachi—and has a large bearingon the level of exports. Official estimates put the 1998/99 harvest at some9.2m 170-kg bales, compared with the 1997/98 outturn of 8.5m bales and therecord 12.8m bales achieved in 1991/92. Although Pakistan is one of theworld’s largest producers of raw cotton, value added in cotton productionremains minimal. Since most of the yarn is exported, relatively little goes todownstream textile manufacturers whose earning potential is substantiallyhigher.

Comparative economic indicators, 1998South

Pakistan India Korea China Japan

GDP ($ bn) 64 431 321 945 3,782

Population (m) 142 971 46 1,242 127

GDP per head ($) 450 444 6,908 761 29,904

Consumer price inflation (%) 6.2 13.2 7.5 -0.8 0.7

Current-account balance ($ bn) –2.0 –6.9 40.0 29.3 120.7

Foreign-exchange reserves ($ bn) 1.0 27.3 52.0 149.2 203.2

Debt-service ratio (%) 27.0 20.2 13.8 9.7 n/a

Sources: IMF, International Financial Statistics; national sources.

Private consumption accounted for no less than 73% of expenditure on GDPin 1998/99 and public consumption for 10.7%. Gross fixed capital formation asa percentage of GDP has fallen over the past decade, from around 17% in thelate 1980s to 14% in 1998/99.

Economic policy

There has long been a bipartisan consensus on the need for economicliberalisation and reform. But no recent government has tackled the severestructural problems that have contributed to modest or declining GDP growthrates in recent years. Foremost among them is the perennial problem of thefiscal deficit. An inability to contain spending, improve tax compliance andexpand the tax base lies at the heart of the problem. Moreover, spending islargely unproductive and inelastic: the army and debt servicing absorb as muchas two-thirds of the total. (See Reference table 5 for data on the federalgovernment budget.) Heavy government borrowing from the domesticbanking system to support spending has fuelled money supply growth in mostyears as well as prevented an easing of domestic interest rates. (See Referencetable 6 for historical data on the money supply and Reference table 7 forinterest rates.)

The central importance ofthe cotton harvest—

Severe structural problemsremain unaddressed

18 Pakistan


The formulation and direction of economic policy have been largely governedby agreements reached with multilateral creditors, particularly the IMF and theWorld Bank. However, slippages in policy implementation, partly the result ofpoor economic performance, have exacerbated macroeconomic imbalances,retarded growth and strained relations with many concessional lenders.

Summary of federal government finances, 1998/99a

% change, PRs bn year on yearb

Total revenue 518.5 15.4 of which: direct taxes 123.0 20.9 indirect taxes 231.6 18.3

Total expenditure 606.3 8.6 of which: defence expenditure 145.0 8.3 debt servicing 275.6 12.8 development expenditure 110.6 24.1

Balance –87.8 9.1

a Budgeted. b From the revised estimates for 1997/98.

Source: Ministry of Finance, Economic Survey, 1998/99.

Pakistan has never completed a lending programme with the IMF. Problemshave typically arisen when the government became unwilling or unable tocomply with conditions attached to a particular loan package. However, asfinancing tightens—owing to the departure of the IMF and the resultingcaution of other lenders—Pakistan is usually obliged to relent by agreeing tosome conditions, allowing the restart of an IMF loan.

The latest IMF package began in October 1997, when the fund approved athree-year financing package worth $1.56bn from its enhanced structuraladjustment facility and extended fund facility. The objectives of the 1997/98-1999/2000 programme were: to raise the real GDP growth rate to 5-6%; toreduce inflation to 7%; to reduce the current-account deficit to 4-4.5% of GDP;and to cut the overall budget deficit to 4% of GDP. While the governmentpromised various measures to try and maintain IMF lending flows, it continuedto drag its feet on their implementation, partly because of domestic opposition.

The imposition of sanctions on Pakistan following the May 1998 nuclear testsresulted in a freeze on further lending from the IMF—which had alreadydisbursed $450m out of its three-year commitment of $1.56bn—as well asfurther funding from other multilateral and bilateral lenders. A slight easing ofsanctions allowed for the resumption of IMF funding in late 1998. Shortlythereafter Pakistan agreed to an external debt-rescheduling arrangement withthe Paris Club, the country’s consortium of official lenders, and the LondonClub, the consortium of commercial lenders. (The rescheduling agreementswith the Paris and London Clubs can be considered an effective default onPakistan’s external debt obligations, since the original terms of the variousloans have been altered to the creditors’ detriment.) As a result of the various

The IMF and World Bankdictate the direction of

policy reforms

IMF programmes comeand go

Pakistan 19


measures, the country’s foreign-exchange reserves rose to above $1bn afterhaving fallen well below that total during the year.

However, as of late October 1999 the IMF package is again stalled, as the Fundhas refused to release the latest $280m tranche (first because it said that thegovernment was not adhering to various conditions, and later because of themilitary coup). Continued inflows from the IMF are essential to keep theeconomy solvent, for several reasons. The disbursements from the IMF packageprovide vital foreign exchange. Perhaps more importantly, the IMF’s stamp ofapproval maintains confidence levels among both domestic and internationalinvestors and lenders. Moreover, as long as IMF assistance continues, otherfinancial institutions such as the World Bank and the Asian Development Bankwill continue lending to Pakistan.

Economic performance

Gross domestic producta

(% real change, year on year)

Annual average1998/99b 1994/95-1998/99

Agriculture 0.4 4.4

Industry 4.7 4.3

Services 4.1 4.1

GDP 3.1 4.3

a At factor cost. b Provisional.


Although overall GDP growth has averaged 5.3% per year since the mid-1980s,the economy’s narrow production base (namely its dependence on cotton-based manufactures) renders it vulnerable to exogenous shocks, such as adverseweather. Macroeconomic imbalances, particularly the public-sector andexternal deficits, have also constituted a major impediment to higher growth.(Reference table 8 gives GDP figures; Reference table 9 breaks down GDP bysector; Reference table 10 gives expenditure in current price terms, whileReference table 11 gives constant price data.)

The agricultural sector has been subject to even sharper fluctuations than thebroader economy; its excessive dependence on a cotton crop that is vulnerableto drought and flooding as well as pest and viral damage is largely to blame.Manufacturing output likewise remains well below potential, despite officialfigures putting its annual average growth rate over the past ten years at 5.1%.The narrow production base is partly a product of overgenerous concessionsbestowed by successive governments on a handful of sectors, including yarnspinning and sugar refining—whose output, in volume terms, tripled in theten years to 1995/96—and frequently disappointing harvests, which lead toraw-material shortages.

Numerous obstacles toimproving growth

20 Pakistan


Investment has slowed in recent years. According to official figures, theexpansion of real gross fixed investment has declined from an average of 4.3%a year between 1989/90 and 1993/94 to –0.5% annually in 1994/95-1998/99.One reason is that manufacturers, who are traditionally indulged by thedomestic banking system (particularly yarn spinners and sugar refiners), haveoften failed to honour their debts, contributing to a debilitating financialhaemorrhage. Despite an abundance of cheap labour, a large domestic marketand access to regional markets, would-be foreign investors for their part arediscouraged by widespread corruption, law and order problems (especially inKarachi, the industrial hub) and infrastructure bottlenecks.

Excessive public-sector borrowing to fund the fiscal deficit has also fuelledconsumer price inflation. IMF figures point to a recent decline in the inflationrate—to just over 6% in 1998 from double-digit inflation in the previous fiveyears—thanks in part to soft world dollar prices for oil and other commodities,not to mention depressed domestic demand. However, anecdotal evidencesuggests that actual price increases are running much faster, at perhaps twicethe official rate. Food-production shortfalls, increased electricity and fuelcharges, the higher cost of key imports and a depreciating currency are amongthe reasons for the persistence of upward pressure on inflation rates, andreason for its imminent return. (Reference table 12 gives historical data onconsumer price inflation.)

Inflation(%)

Annual average1998 1994-98

Consumer prices 6.2 10.5

Source: IMF, International Financial Statistics.

Regional trends

Pakistan, a product of the break-up of British India and the subsequentsecession of ethnic Bengalis, has continued to be dogged by the threat offurther dismemberment. An uprising by Baluchi nationalists in the 1970s andPashtun campaigns for a separate homeland, among other nationalistmovements, have all been motivated by a sense of neglect and victimisation,economic as well as political. The perceived bias of the deposed prime minister,Nawaz Sharif, towards the interests of his home state of Punjab, only served tofuel further nationalist tendencies in Sindh, North West Frontier Province(NWFP) and Baluchistan.

Punjab has always been the most privileged of Pakistan’s four provinces, fillingthe upper echelons of the army and the bureaucracy—by far the country’smost influential institutions—and accounting for the bulk of the agriculturalproduction that is the economy’s mainstay. Owing to the role of the NWFP inthe Afghan war, and its importance as a major transit point for the drug andarms trade, government’s attention is focused on this province as the next in

Investment growthhas slowed

Inflation

Would-be secessionists stillabound

Punjab and NWFP are morefavoured—

Pakistan 21


priority. After Punjabis, the next highest number of government employeescome from this province.

Barren Baluchistan and politically difficult Sindh, by contrast, remain poor andbackward (although the main business centre, Karachi, is in Sindh). Federaldevelopment programmes have done little to redress the imbalances.Corruption and political interference mean that the standard of living in therural areas is generally low and very little government projects actually end uphelping the people.

Economic sectors

Agriculture and forestry

Fundamental problems afflict the agricultural sector, which directly supportsthree-quarters of the country’s population, employs half the labour force andaccounts for one-quarter of GDP. (Reference table 13 gives basic data onagriculture; Reference table 14 gives agricultural output by product.) Onesymptom is excessive dependence on a cotton crop highly susceptible toadverse weather and pest damage. After peaking at 2.18m tonnes in 1991/92,the lint harvest has since fluctuated considerably, ranging from a low of 1.37mtonnes in 1993/94 to a high of 1.8m tonnes in 1995/96. Output amounted to1.5m tonnes in 1998/99, according to official estimates. Another symptom isthe food-import bill, which is rising rapidly notwithstanding a steady increasein crop, livestock and fruit production.

Some agronomists claim that the sector’s traditional sources of growth—including improvements in seeds and fertilisers, better crop management andincentives—are all but exhausted. This is borne out by the fact that netresource transfers from agriculture, which were once substantial, are nownegligible. As a result, the need for major institutional and policy changes ismore urgent than ever. The potential for improvement is considerable. Thedifference between the average and highest yields for staple crops such aswheat, rice and maize, for example, is in the range of 30-50%.

The key to better productivity lies in a more efficient use of scarce resources,principally land and water. But change will not come easily, not least becausethe status quo suits the wealthy landowners who dominate the sector—and thefederal and provincial parliaments. Large landowners own 40% of the arableland and control most of the irrigation system. Yet assessments by independentagencies including the World Bank show them to be less productive thansmallholders, poor taxpayers, heavy borrowers and bad debtors. Smallholdingspredominate numerically: less than one-third of farms cover less than 1 acre(0.4 ha) and about three-quarters are under five acres.

The total cropped area has remained largely static in recent years, increasingfrom 21.8m ha in 1990/91 to only 23m ha in 1998/99. Almost one-third of it is

—than Baluchistanand Sindh

Stagnation amid growth inagriculture

Wealthy landowners resistplans for a major overhaul

Land, water and pricingissues hinder development

22 Pakistan


less productive than it should be, because of soil erosion, water-logging andsalinity. Land is also damaged by farmers who seek to maximise short-termgains by cultivating unsuitable crops. Optimal allocation of resources cannotbe achieved because tenure systems prevent the distribution of land to thosewho would use it more efficiently. Insecurity of tenure, which derives in largemeasure from the powers of arbitrary eviction that “feudal lords” enjoy, is amajor problem. The irrigation system is also deficient. Reservoir capacity isinadequate, while water deliveries are supply-driven rather than demand-driven, inequitably distributed and inefficiently used. Finally, the freeing offarm-gate prices of key crops such as cotton, sugarcane, wheat and rice,traditionally set by the government, would discourage smuggling of farmproduce into neighbouring India, Iran and Afghanistan and raise farmincomes.

Many of the country’s wooded areas are severely depleted as a result of over-exploitation. Forestry production declined from 1.07m cu metres in 1990/91 to310,000 cu metres in 1998/99.

Mining and semi-processing

Unless there are major new discoveries, crude oil production—which averaged55,702 barrels/day in 1998/99, satisfying under 18% of the country’srequirements, compared with a peak of 61,390 b/d in 1991/92—will ultimatelypeter out. Recoverable reserves were 238m barrels. Crude and product importscost $1.11bn during the first nine months of 1998/99, accounting for 14.9% ofall imports.

Natural gas production averaged 2.01bn cu ft/day in 1998/99, about 5% abovethe previous year, while known recoverable reserves were estimated at over21trn cu ft at end-1998, an improvement on the previous year’s estimate. Thegovernment has been faced with the prospect of having to buy this gas atinternational oil prices, since it had earlier promised to do so. However, it canill afford the price, and this has caused problems with the gas explorationcompanies. Just before the government’s fall, a new pricing formula was beingworked out to settle the issue amicably. In the meantime, the plans to pursueunderstandings with three possible foreign suppliers—Qatar, Iran andTurkmenistan—providing for up to 7bn cu ft/day, will be delayed.

There is an extensive range of non-fuel minerals. Deposits of magnesite, rocksalt, limestone, marble, china clay, dolomite, gypsum, silica, ochre, sulphur,barytes, bauxite, iron ore and emeralds are being exploited, albeit mostly on arelatively small scale. The country’s biggest development project is in theremote Chagai district of Baluchistan, where the Metallurgical ConstructionCorporation of China is mining blister copper. It is also hoping to exploit someof the area’s gold and silver reserves. Chromite, antimony, phosphate,porcelain and certain gemstone deposits remain largely untapped. (SeeReference table 15 for historical data on non-fuel minerals production.)

Crude-oil reserves aredwindling—

—but gas discoveries areencouraging

Non-fuel minerals

Much of the forest cover islogged out

Pakistan 23


Manufacturing

Before 1947 there was little manufacturing in the area that makes up present-day Pakistan. Its primary role was that of a supplier of raw materials, includingcotton, to industrial hubs across British India, such as Bombay. Growth in thesector subsequently fluctuated dramatically, averaging 9% per year during thefirst two decades of independence, but dropping to less than 3% in the 1970s,when large-scale nationalisation sent investment levels tumbling. The raterecovered in the 1980s, averaging 7.6%, but fell back to 4.4% in the five yearsto 1998/99. (See Reference table 16 for a breakdown of manufacturingproduction in 1994/95-1998/99.)

Industry has made an increasingly important contribution to exports. In rupeeterms, manufactured products made up 64% of all foreign sales in 1998/99,when the sector accounted for 18.6% of GDP. Despite the introduction in theearly 1990s of reforms designed to stimulate investment—including theremoval of import licensing, the liberalisation of exchange controls, easieraccess to credit, tax breaks and more equal treatment of foreign investment—manufacturing still characteristically utilises relatively basic technologies,generates little value added and has a narrow production base. Successivegovernments have favoured a handful of industries, notably yarn spinning andsugar refining, by offering subsidies and other concessions.

Successive governments have promised to work towards a substantial diversi-fication of the manufacturing base, encourage the production of high value-added goods and achieve significantly increased levels of capital formation inthe sector. Their subsequent records have proved less than impressive.Notwithstanding recent reforms designed to attract manufacturers fromoverseas, disincentives—including a shortage of skilled workers, inadequatephysical infrastructure, pervasive official corruption, discrepancies betweendeclared policy and actual practice, and political instability, notably inKarachi—still outweigh the incentives. Investment in manufacturingaccounted for just $90.5m of the $296.1m in foreign direct investment thatPakistan attracted in the first nine months of 1998/99.

The privatisation of public-sector manufacturing companies got under way,after considerable debate, in mid-1991. Over the next two years, 63 units weresold, but thereafter the disposal rate slackened as most of the remainder wereheavily indebted loss-makers. By end-June 1999, 103 firms had been offloaded.

Construction

Following the ouster of the PML (N) prime minister, Nawaz Sharif, in October1999, his plan to build 100,000 housing units under the Mura Gar (My House)housing scheme, at a cost of PRs50bn ($1bn) has been abandoned. At the timeof the coup, the scheme was in its initial stages of planning; manyconstruction companies have begun basic work on building sites but have not

The manufacturing sectordevelops slowly

The sector is narrowlybased and generates little

value added

Investment is low

Many state companies aresold off

24 Pakistan


been paid. Apart from this scheme, which had promised to generate over300,000 jobs, there is no major construction project in the country beingundertaken by the government or the private sector. The fate of the Lahoreairport project and the Islamabad-Peshawar motorway also hangs in thebalance, and there is no indication from the new military government whetherthese projects will be given its endorsement. In recent years the governmenthas slowly conceded most construction activity to the private sector. However,the poor state of the economy and rising cement prices have hurt the industry.

Financial services

The financial sector underwent major liberalisation in the first half of the1990s. Several new banks were licensed, exchange controls all but eliminated,prudential regulations tightened, and monetary and credit policies renderedmore market-oriented. But major weaknesses persist and are particularlymarked in the case of the three remaining government-run commercial banks,which account for the bulk of deposits and advances. The total assets ofdomestic commercial banks amounted to PRs1.58trn ($34bn) on March 31st1999, down from PRs2.22trn a year earlier. These banks have traditionally hadlittle incentive to be competitive or to manage their portfolios carefully.Political pressure to make bad loans and stop collection efforts has resulted inhigh rates of default. The State Bank of Pakistan (the central bank) has beenworking to reform the public banks in preparation for eventual privatisation, acampaign which is sure to be encouraged by the military-appointedadministration. The portfolios of the 16 state-owned development financeinstitutions which provide the bulk of long-term lending to industry andagriculture likewise tend to be of poor quality. (Reference table 17 provides ahistorical breakdown of advances by borrower.)

The inefficiency of most banks, together with their excessively highadministrative costs and poor record in attracting savings, have contributed torelatively high interest rates. Attractive deposit schemes initiated by the largerbanks brought in more deposits for a short term but raised the cost of money.However, the central bank intervened and had these schemes phased out, andat the same time pushed down interest rates from 18% to over 14%.

Pakistan’s capital market suffered in 1998 and 1999 from the imposition ofcapital controls on the repatriation of funds (which were imposed by the StateBank of Pakistan in response to the foreign-exchange crisis that began in 1998).In addition, the row between Hubco and WAPDA has hurt market sentiment,since Hubco is a major player in the market. Before the imposition of thecapital controls, Pakistan’s market was one of the freest in the region; limits onshareholdings, taxes on capital gains and restrictions on the repatriation ofcapital and profits were lifted in 1991. However several factors, including thegenerally gloomy economic climate, have led to a steady reduction in newlistings on the Karachi Stock Exchange (KSE). (Reference table 18 gives KarachiStock Exchange statistics.)

Despite liberalisation,commercial banks are

in trouble

The capital marketdevelops slowly

Pakistan 25


Inflows from abroad, notably from emerging market and Pakistan-specificfunds, have also eased. Interest in the market tends to be highly speculativeand narrowly based. One reason is the poor enforcement of rules relating toinvestor protection. Since many traded firms are closely held, suspicions thatcorporate insiders do not act in the best interest of their shareholders remainwidespread. Many companies, for example, are believed to conceal income toavoid taxes.

The external sector

Trade in goods

Foreign trade, 1998/99a

($ bn; fob)

Exports 5.65

Imports –6.84

Trade balance –1.19

a July-March.

Source: Federal Bureau of Statistics.

Pakistan has recorded a trade deficit every year since 1972/73. According tocalendar-year data, exports rose from $2.54bn in 1984 to $8.5bn in 1997,averaging about 4% annual growth in 1993-97, compared with nearly 12%average annual growth in 1987-92. However, growth of foreign sales hasconsistently lagged behind official projections, despite a steady erosion in thevalue of the rupee vis-à-vis the currencies of most of the country’s majortrading partners.

In the first ten months of the 1998/99 fiscal year (July-June), exports fell by11.7% owing to depressed international commodity prices, a smaller thanexpected cotton crop harvest and a policy of import suppression, which bothraised import costs and diverted sales to the domestic market. (Reference table19 gives a historical breakdown of exports by value; Reference table 20 breaksdown exports by volume.)

The narrowness of the product base is one of the reasons for the persistentlydisappointing sales performance. Five categories of goods—cotton yarn,garments and hosiery, cotton cloth, raw cotton, and rice—still account for over60% of export earnings. A second major reason is the vulnerability of keyproducts, notably cotton, to exogenous shocks. But there are many others,including the small proportion of high value-added goods in the sales mix, lowproduct quality and poor marketing.

If export growth has tended to be below official expectations, the growth ofimports, which averaged 2.6% (in dollar terms) in 1993-97, compared with

The trade deficit stemsfrom disappointing export

growth

Foreign investors treadcarefully

A narrow export base

Main imports: capitalgoods and raw materials

26 Pakistan


9.2% in 1987-92, has usually exceeded them. Industry depends on foreign rawmaterials and capital goods, which helps explain why non-electrical machineryhas constituted the largest single category since 1991/92. Petroleum andrefined-product purchases have continued to grow. Changes in consumptionpatterns and the failure of domestic manufacturers to adjust to them have ledto a rapid acceleration in edible-oil imports.

Main items traded, 1998/99a

(PRs bn; fob)

ExportsGarments & hosiery 50.88Cotton cloth 40.30Cotton yarn 33.93Rice 19.44Synthetic textiles 14.61Sports goods 9.13

ImportsNon-electrical machinery 52.76Petroleum & products 44.87Chemicals 40.33Edible oils 31.89Transport equipment 18.25Grains, pulses & flours 14.95

a July-March.


According to national statistics, imports have declined recently—from$12.02bn in 1995/96 to $10.3bn in 1997/98 and $7.5bn in the first ninemonths of 1998/99—owing to various restrictions imposed on imports, whichincluded a controlled release of foreign exchange and imposition of conditionson opening letters of credit, as well as weak domestic demand and softer worldprices for key imports. (Reference table 21 breaks down imports by value andReference table 22 by volume.)

Main trading partners, 1998/99a

Exports to: % of total Imports from: % of total

US 21.5 US 8.2

Hong Kong 7.3 Japan 8.2

Germany 6.6 Malaysia 7.3

UK 6.5 Saudi Arabia 6.7

UAE 5.1 UAE 6.6

a July-March.


The US has long been Pakistan’s largest export market, absorbing over 21% oftotal sales in the first nine months of 1998/99. Germany, Hong Kong and theUK have also been major outlets. In recent years, Japan and the US havealternated as Pakistan’s top supplier. (Reference table 23 gives historical data onmain trading partners.)

The US: largest tradingpartner

Pakistan 27


Invisibles and the current account

Current account, 1998/99($ m)

Merchandise exports (fob) 5,653

Merchandise imports (fob) –6,844

Trade balance –1,191

Services and income balance –1,519

Net transfers 1,174

Current-account balance –1,536

Source: State Bank of Pakistan.

The difference between services debits and credits has decreased from $3.66bnin 1996/97 to $1.5bn in the first nine months of 1998/99, according to theState Bank of Pakistan (the central bank). This narrowing of the services deficitis in part a reflection of the narrowing of the merchandise trade gap: as tradeactivity has waned, so too has demand for trade-related services. But Pakistanhas persistent weaknesses in the provision of services, as shown by theconsistent weakening of the services deficit over the last 15 years (even as thetrade deficit fluctuated). Partly to blame is the fact that Pakistan holds littleattraction for tourists and that its shipping fleet is small and shrinking;consequently, net payments for transport and associated services havemounted. Net flows of interest and income have also been increasinglynegative over the past several years, not least because of rising debt servicingcommitments.

Private transfers are an important and positive component of the currentaccount; remittances from Pakistanis abroad, most of them in the Gulf andNorth America, habitually accounted for 80% of the total until the mid-1980s.However, having peaked at $2.89bn in 1982/83, remittances fell to under$1.5bn in 1998/99. The freeze in 1998 on foreign-currency withdrawals fromforeign-currency accounts may have scared away fresh inflows in 1998 and1999, while the gap between the official and open market exchange rates forthe rupee deterred inflows through official channels (although therationalisation of the exchange rate in 1999 may address the later problem).The current account is therefore invariably in deficit. Having hit a record$4.58bn in 1995/96, the deficit declined to $1.92bn in 1997/98. (Referencetable 24 gives IMF estimates of the balance of payments; Reference table 25gives national estimates.)

Capital flows and foreign debt

Pakistan has relied heavily on official borrowing to finance its current-accountdeficit and otherwise help offset the low level of national savings. Theproportion of grant and grant-like aid has declined from 80% of total inflowsin the late 1950s to less than 10% in the late 1990s. (Signed grant agreementsfell from $326m in 1990/91 to just $98m in 1997/98, although the total should

The invisibles deficitwidens

Large-scale remittances failto plug the gap in the

current account

The debt burden continuesto mount

28 Pakistan


rise in 1998/99.) But disbursed and outstanding medium- and long-term debtgrew steadily to an estimated $23bn, at end-June 1998, from $14.2bn in1988/89, according to national sources. Despite the significant change in thecomposition of the assistance portfolio, most credits still carry concessionalinterest-rate and maturity terms. (Reference table 26 provides World Bank dataon external debt.)

The major source of external funding is the Pakistan Development Forum(previously known as the Aid to Pakistan Consortium), which comprises themain multilateral lending institutions and a large number of bilateral creditors.Its members accounted for over 90% of the stock of outstanding disbursed debtas of December 31st 1998, which the government put at $22.4bn. The WorldBank along with its soft-loan arm, the International Development Bank,accounted for 31% of the total, the Asian Development Bank for 22.5%, Japanfor 15.6% and the US for 11.3%. Washington suspended fresh economicassistance in 1990 amid concerns over Pakistan’s nuclear programme; otherbilateral and multilateral creditors followed suit after the May 1998 tests,causing some slippage in debt and aid disbursal totals. Thinner inflows fromdebt and aid sources, as well as private remittances and trade receipts, forcedPakistan to reschedule some of its external debt payments with the Paris Club,the country’s consortium of official lenders, and the London Club, theconsortium of commercial lenders. (Payments that were originally scheduled tofall due on January 1st 1999 to December 31st 2000 were rescheduled.)

The rapid accumulation of foreign loans and the steady decline in the value ofthe rupee against the currencies of Pakistan’s main creditors have led to acorresponding acceleration of the annual debt-servicing requirement, whichhas doubled from $1.22bn in 1988/89 to a record $2.57bn in 1998/99,consisting of $1.82bn in principal and $735m in interest. This is equivalent to3.9% of GDP and 32% of export earnings, according to national estimates(fiscal year basis). As a result, debt-servicing payments as a proportion of grossdisbursements have risen from 5% in the early 1960s to 84% in 1997/98.

As access to soft credits from overseas is likely to become much more difficultin the coming years, future financing shortfalls will be averted only if Pakistanmarkedly improves its ability to tap international private capital markets. Thelevel of foreign direct investment is low—it declined by 32.1% year on year to$296m in the first nine months of 1998/99, according to official data—and thenumber of beneficiary sectors is narrow. The essential problem is that thedisincentives tend to outweigh the incentives. The recent shabby treatment ofindependent power producers, for example (see Energy provision), has givenwould-be investors in other areas pause for thought. Given the perceived risks,for which guarantors are scarce, international commercial and investmentbanks are reluctant to lend for ventures in Pakistan, and charge heftypremiums when they do.

The attitude of foreign portfolio investors to Pakistan’s equity market haslikewise been characterised by extreme caution since the market’s liberalisationin 1991. There was a flurry of interest in 1993/94 when inflows from abroad,

Concessional lendingdominates

Absorptive capacity islimited

Disincentives limit foreigninvestment

Pakistan 29


many from emerging markets and newly established Pakistan-specific funds,trebled to an estimated $1.2bn. The loss of overseas buying momentum thatafflicted all emerging markets following the Mexican peso crisis in late 1994, aswell as worsening political violence in Karachi and mounting economicuncertainty, were among the many factors contributing to the subsequentdownturn. While some foreign investors have since returned, a number ofnegative fundamentals, including a relative shortage of tradeable shares andinadequate protection, seems to preclude a major influx in the medium term.

Foreign reserves and the exchange rate

The level of reserves has fluctuated considerably in recent years from a high of$3.97bn in the course of 1994 to less than $500m in July 1998. In the secondhalf of 1998 reserves fell to precarious levels, owing to the freeze on foreign-currency deposits that followed the nuclear tests (which sharply reducedremittances from abroad), low levels of foreign investment, a freeze on manysources of foreign aid and debt and lacklustre export growth. In mid- and late-1998 foreign-exchange reserves dropped low enough to undermine thecountry’s capacity to pay some significant import bills and, more ominously,its ability to service foreign debt, forcing Pakistan to reschedule payments withits external creditors. (Reference table 27 gives historical data on reserves.) As aresult, since early 1999, reserves have recovered to above $1bn.

Pakistan adopted the floating interbank exchange rate (FIBR) as the officialexchange rate in May 1999. This followed a ten-month period during which amultiple exchange-rate system was in place. The mid-1998 plunge in reservesled the government to introduce this system in order to discourage importsand encourage the rapid repatriation of export proceeds. Prior to July 1998Pakistan had maintained a so-called managed float whereby the SBPadministered a downward drift in the value of the rupee vis-à-vis the currenciesof Pakistan’s main trading partners, so as to help offset often sizeable inflationdifferentials. The rupee’s average value against the dollar fell from PRs12.7:$1in 1982/83 to PRs46.13:$1 in the first nine months of 1998/99. (See Referencetable 28 for historical data on exchange rates.)

Reserves sometimes plungeto dangerous lows

The rupee depreciatessteadily

30 Pakistan


Appendices

Sources of information

Agricultural Development Bank of Pakistan, Annual Report, Islamabad

Federal Bureau of Statistics, Labour Force Survey (annual), Islamabad

Federal Bureau of Statistics, Monthly Statistical Bulletin, Islamabad

Federal Bureau of Statistics, Pakistan Democratic Survey (1993), Islamabad

Federal Bureau of Statistics, Pakistan Statistical Yearbook, Islamabad

Ministry of Finance, Economic Survey (annual), Islamabad

Ministry of Food, Agriculture and Co-operatives, Annual Report, Islamabad

Ministry of Food, Agriculture and Co-operatives, Census of Agriculture, 1990,Islamabad

Planning Commission, Draft Eighth Five-Year Plan (1993/94-1997/98),Islamabad

Population Census Organisation (1981)

State Bank of Pakistan, Annual Report, Karachi

State Bank of Pakistan, Bulletin (monthly), Karachi

Dr Mahbub Ul Haq Human Development Centre, Annual Report 1999,Islamabad

Bank for International Settlements, International Banking and Financial MarketDevelopments (quarterly), Basle

Energy Data Associates, 1 Regent Street, London SW1Y 4NR

International Institute for Strategic Studies, Military Balance (annual), London

IMF, International Financial Statistics (monthly), Washington

OECD, Geographical Distribution of Financial Flows to Developing Countries(annual), Paris

UN, Monthly Bulletin of Statistics, New York

World Bank, World Development Report (annual), Washington

World Bank, World Investment Report (annual), Washington

Benazir Bhutto, Daughter of the East, Hamish Hamilton, London, 1988

S J Burki, Pakistan under Bhutto, 1971-77, Macmillan Press, New York, 1980

Emma Duncan, Breaking the Curfew, Michael Joseph, London, 1989

Tehmina Durrani, My Feudal Lord, Sterling, New Delhi, 1991

National sources

International statisticalsources

Select bibliography

Pakistan 31


J Keay, The Gilgit Game, John Murray, London, 1979

Christina Lamb, Waiting for Allah, Viking/Penguin, Harmondsworth, 1991

Geoffrey Moorhouse, To the Frontier, Hodder and Stoughton, London, 1984

V S Naipaul, Among the Believers, Penguin, Harmondsworth, 1982

Omar Noman, Pakistan: Political and Economic History since 1947, Kegan Paul,London, 1990

Salman Rushdie, Shame, Jonathan Cape, London, 1983

Isobel Shaw, Pakistan Handbook, John Murray, London, 1989

Stanley Wolpert, Zulfi Bhutto of Pakistan, OUP, Oxford, 1993

Reference tables

Reference table 1

Population(m; % change year on year)

1994 1995 1996 1997 1998

Source: IFS 126.47 130.25 134.15 138.16 141.90 % change 3.0 3.0 3.0 3.0 2.7

Source: government of Pakistana 119.39 122.36 125.38 128.42 131.51 % change 2.5 2.5 2.5 2.4 2.4

a Fiscal years, ending June 30th.

Source: IMF, International Financial Statistics; Ministry of Finance, Economic Survey, 1998/98.

Reference table 2

Labour force

1994/95 1995/96 1996/97 1997/98 1998/99

Employed labour force 31.80 32.58 34.59a 35.42a 36.23a

Agriculture 14.88 15.24 15.25 15.62 15.98 Mining & manufacturing 3.34 3.42 3.87 3.97 4.06 Construction 2.29 2.35 2.35 2.41 2.46 Utilities 0.26 0.27 0.34 0.35 0.36 Transport 1.61 1.65 1.97 2.02 2.07 Trade 4.61 4.72 5.05 5.17 5.29 Others 4.81 4.93 5.07 5.17 5.29

Unemployed 1.80 1.85 2.25 2.31 2.36

Total labour force 33.60 34.43 36.84 37.73 38.59

a Totals do not add in source.


32 Pakistan


Reference table 3

Transport infrastructure

1994/95 1995/96 1996/97 1997/98 1998/99a

Railb

Passengers carried (m) 67.7 73.7 68.8 64.9 48.0 Freight carried (m tonnes) 8.1 6.9 6.4 6.0 4.0 Length of track (km) 8,775 8,775 8,775 8,775 8,774

Road (‘000 unless otherwise indicated)Vehicles registered, year-end 3,538 3,670 3,838 4,174 4,263 of which: cars & jeeps 924 967 1,068 1,084 n/a trucks 119 124 131 131 n/a buses 114 114 119 120 n/a taxis 53 55 83 83 n/a motorcycles (2-wheel and 3-wheel) 1,818 1,912 2,072 2,130 n/a Network (‘000 km) 207.6 218.3 229.6 240.9 181.8

Airc

Passengers carried (‘000) 5,517 5,399 5,883 5,531 3,866 Passenger load factor (%) 65.5 63.9 66.5 65.8 67.0 No. of aeroplanes 47 47 47 47 45

SeaExportsd (‘000 tonnes) 5,572 5,570 5,113 5,570 4,284 Importsd (‘000 tonnes) 17,526 17,114 18,363 17,114 13,302 No. of vesselse 15 17 15 15 15 Deadweight tonnese (‘000) 264.4 290.4 261.8 261.8 261.8

a July-March. b Pakistan Railways. c Pakistan International Airlines. d Through Karachi port. e Pakistan National Shipping Corporation.


Reference table 4

Energy supplies

1994/95 1995/96 1996/97 1997/98 1998/99a

Crude oil extraction (m barrels) 19.9 21.1 21.3 20.5 15.3

Crude oil imports (m barrels) 28.4 31.0 28.6 29.8 25.9

Natural gas output (bn cu ft) 628.2 666.6 697.7 699.7 551.4

Refined oil production (‘000 tonnes) 5,884 6,343 5,930 5,858 4,875

Refined oil imports (‘000 tonnes) 8,737 10,135 10,398 11,064 7,494

Coal production (‘000 tonnes) 3,043 3,638 3,553 3,159 2,219

Coal imports (‘000 tonnes) 1,096 1,080 840 960 720

Hydroelectricity (gwh) 22,858 23,206 20,858 22,060 17,979

Thermal power (gwh) 30,176 33,257 37,921 39,669 25,489

Nuclear power (gwh) 511 483 346 375 284

a July-March.


Pakistan 33


Reference table 5

Federal government budget(PRs bn unless otherwise indicated)

1994/95 1995/96 1996/97 1997/98 1998/99a

Total revenue 321.3 370.5 384.3 449.2 518.5 Tax revenue 247.2 292.9 309.4 297.6 354.6 Non-tax revenue 74.1 77.6 74.8 151.6 163.9

Total spending 421.8 506.9 549.8 545.7 606.3 Current 326.3 404.3 456.4 456.6 495.7 Development 95.5 102.6 93.4 89.1 110.6

Balance –100.5 –136.4 –165.5 –96.5 –87.8

a Initial budget.


Reference table 6

Money supply(PRs m unless otherwise indicated; end-period)

1994 1995 1996 1997 1998

Money (M1) incl others 435,388 490,961 528,011 699,806 732,291 % change, year on year 15.1 12.8 7.5 32.5 4.6

Quasi-money 278,960 322,037 448,144 470,719 523,238

Money (M2) 714,348 812,998 976,155 1,170,525 1,255,529 % change, year on year 17.4 13.8 20.1 19.9 7.3


Reference table 7

Interest ratesa

(%; end-Jun)

1994 1995 1996 1997 1998

Advance rate 12.78 13.17 13.04 12.76 16.09

Stock exchange 9.58 12.04 13.58 14.08 16.38

Real estate 12.33 13.04 12.16 11.85 16.23

Financial obligations 15.81 13.30 13.66 13.95 16.32

a Weighted average of rates offered by scheduled banks other than profit-loss sharing.


34 Pakistan


Reference table 8

Gross domestic product(market prices)

1994/95 1995/96 1996/97 1997/98 1998/99

Total ($ m)At current prices 61,004 64,513 61,924 63,884 66,986

Total (PRs m)At current prices 1,882,080 2,165,600 2,414,630 2,759,520 3,101,987At constant (1980/81) prices 600,086 630,151 637,876 658,928 684,683Real % change, year on year 5.1 5.0 1.2 3.3 3.9

Per head (PRs)At current prices 14,450 16,143 17,477 19,446 21,283At constant (1980/81) prices 4,607 4,697 4,617 4,643 4,698Real % change, year on year 2.1 2.0 –1.7 0.6 1.2

Sources: IMF, International Financial Statistics; Government of Pakistan, Finance Division, Economic Survey 1998/99

Reference table 9

Gross domestic product by sector(PRs m at constant 1980/81 prices, factor cost; % of total in brackets)

1993/94 1994/95 1995/96 1996/97 1997/98

Agriculture 125,005 133,215 148,832 149,016 154,708(24.3) (24.6) (25.8) (25.3) (25.2)

Mining 2,765 2,646 2,833 2,886 2,725(0.5) (0.5) (0.5) (0.5) (0.4)

Construction 21,040 21,253 21,944 22,183 22,463(4.1) (3.9) (3.8) (3.8) (3.7)

Electricity, gas & water supply 18,464 21,572 23,759 23,068 25,136(3.6) (4.0) (4.1) (3.9) (4.1)

Manufacturing 94,734 98,228 102,939 104,271 112,484(18.4) (18.2) (17.8) (17.7) (18.3)

Services 251,627 263,614 276,773 286,767 295,942(49.0) (48.8) (48.0) (48.8) (48.2)

GDP at factor cost 513,635 540,528 577,080 588,191 613,458

Source: Source: Ministry of Finance, Economic Survey, 1998/99.

Pakistan 35


Reference table 10

Gross domestic product by expenditure, current prices(PRs; % of total in brackets)

1993/94 1994/95 1995/96 1996/97 1997/98

Private consumption 1,121,640 1,367,060 1,590,000 1,812,130 1,999,270(71.3) (72.6) (73.4) (75.0) (72.4)

Government consumption 189,100 219,120 268,100 288,810 318,810(12.0) (11.6) (12.4) (12.0) (11.6)

Gross fixed investment 280,880 318,310 369,080 390,270 405,040(17.9) (16.9) (17.0) (16.2) (14.7)

Stockbuilding 24,600 28,200 34,340 38,280 71,380(1.6)a (1.5)a (1.6)a (1.6)a (2.6)a

Exports of goods & services 254,180 311,800 358,370 390,290 446,900(16.2) (16.6) (16.5) (16.2) (16.2)

Imports of goods & services –297,300 –362,410 –454,290 –505,150 –481,880(18.9) (19.3) (21.0) (20.9) (17.5)

GDP 1,573,100 1,882,080 2,165,600 2,414,630 2,759,520

a Change as a percentage of GDP in the previous year.

Source: Source: IMF, International Financial Statistics.

Reference table 11

Gross domestic product by expenditure, constant prices(PRs m at 1980/81 prices; % change year on year in brackets)

1994/95 1995/96 1996/97 1997/98 1998/99

Private consumption 427,038 458,798 478,913 477,393 501,955(7.2) (7.4) (4.4) (–0.3) (5.1)

Government consumption 67,360 71,944 65,933 70,423 73,163(5.5) (6.8) (–8.4) (6.8) (3.9)

Gross fixed investment 99,981 104,929 100,946 95,461 93,227(4.6) (4.9) (–3.8) (–5.4) (–2.3)

Stockbuilding 8,660 9,558 9,427 16,496 10,054(0.0)a (0.1)a (0.0)a (1.1)a (1.0)a

Exports of goods & services 101,075 103,091 96,353 99,961 98,784(–3.1) (2.0) (–6.5) (3.7) (–1.2)

Imports of goods & services –104,028 –118,169 –113,696 –100,806 –92,500(4.0) (13.6) (–3.8) (–11.3) (–8.2)

GDP 600,086 630,151 637,876 658,928 684,683(5.1) (5.0) (1.2) (3.3) (3.9)

a Change as a percentage of GDP in the previous year.

Source: Government of Pakistan, Finance Division, Economic Survey 1998/99.

36 Pakistan


Reference table 12

Consumer price inflation1994 1995 1996 1997 1998

Source: IFS (1995=100) 89.0 100.0 110.4 122.9 130.6 % change, year on year 12.4 12.3 10.4 11.4 6.2

Source: government of Pakistan (1990/91=100)a 135.1 152.7 169.2 189.2 204.0 % change, year on year 11.3 13.0 10.8 11.8 7.8

a Fiscal year ending June.


Reference table 13

Agriculture: basic data

1994/95 1995/96 1996/97 1997/98 1998/99a

Cropped area (m ha) 22.14 22.59 22.93 23.04 23.04

Seed distribution (‘000 tonnes) 76.87 76.25 66.00 71.93 71.93

Water availability (m acre ft)b 129.7 130.9 132.1 133.3 133.8

Fertiliser use (‘000 nutrient tonnes) 2,183 2,515 2,413 2,659 2,035

Credit disbursed (PRs bn) 22.37 19.20 19.55 33.39b 30.65

a Provisional; July-March. b As listed in source.


Reference table 14

Agricultural production

1994/95 1995/96 1996/97 1997/98 1998/99a

Foodgrains of which: wheat (m tonnes) 17.00 16.91 16.65 18.69 18.06 rice (m tonnes) 3.45 3.97 4.31 4.33 4.67 maize (m tonnes) 1.32 1.28 1.26 1.25 1.30 Total (m tonnes) 22.42 22.75 22.75 24.90 24.66

Cash cropsSugarcane (m tonnes) 47.17 45.23 42.00 53.10 55.19 Cotton (m tonnes) 1.48 1.80 1.59 1.56 1.50

Fruit (‘000 tonnes)Citrus 1,933 1,960 2,003 2,037 n/a Mango 884 908 914 917 n/a Apple 533 554 569 573 n/a Banana 80 82 83 94 n/a Apricot 178 191 188 189 n/a Guava 420 442 448 455 n/a

continued

Pakistan 37


1994/95 1995/96 1996/97 1997/98 1998/99a

LivestockMilk (m tonnes) 18.99 22.97 23.58 24.22 24.88 Beef (‘000 tonnes) 931 898 919 940 963 Mutton (‘000 tonnes) 875 587 602 617 633 Poultry meat (‘000 tonnes) 308 355 387 284 297 Wool (‘000 tonnes) 53.1 38.1 38.3 38.5 38.7 Hides & skins (m) 45.6 39.7 41.6 42.6 43.8

Forestry & fishingFish (‘000 tonnes) 558.1 541.9 555.5 590.0 616.5 Forestry (‘000 cu metres) 684 720 343 319 310

a Provisional.


Reference table 15

Minerals production(‘000 tonnes unless otherwise indicated)

1994/95 1995/96 1996/97 1997/98 1998/99a

Limestone 9,682 9,740 9,491 11,166 8,719

Rock salt 890 958 1,066 971 870

Marble 467 458 459 345 291

Gypsum 620 420 522 307 160

Dolomite 227 185 216 116 103

Silica 152 184 154 135 90

Fire clay 152 112 110 94 61

China clay 31 43 66 68 54

Magnesite 5.2 15.0 6.7 3.4 2.9

Chromite 13 27 35 35 22

Bauxite 32 20 34 28 42

Barytes 20 14 30 30 20

Ochre 4.6 8.1 2.0 3.1 2.8

Celestite 1.4 0.8 0.8 1.0 0.5

Iron ore 8.1 6.0 4.6 5.5 180

Index of mining output (1980/81=100) 270.8 296.7 305.6 302.5 n/a

a July-March.

Source: Federal Bureau of Statistics.

38 Pakistan


Reference table 16

Manufacturing production(‘000 tonnes unless otherwise indicated)

1994/95 1995/96 1996/97 1997/98 1998/99a

Sugar 2,964 2,426 2,383 3,555 3,081

Vegetable ghee 678 717 714 735 615

Cotton yarn (m kg) 1,370 1,495 1,521 1,532 896

Cotton cloth (m sq metres) 322 327 334 340 221

Jute textiles 69 71 69 92 63

Cigarettes (m) 32,747 45,506 46,101 48,215 38,119

Beverages (m dozen bottles) 143 131 116 150 106

Motor tyres (‘000) 912 1,003 525 767 614

Cycle tyres (‘000) 3,523 3,989 4,112 3,445 2,660

Cement 7,913 9,567 9,536 9,364 6,832

Urea 3,000 3,260 3,259 3,294 2,615

Soda ash 196 221 247 239 186

Paints & varnishes (tonnes) 6,865 8,030 8,005 5,917 4,355

Bicycles (‘000) 473 545 432 452 368

Electric bulbs (m) 42 46 56 63 50

Paper board 106 110 198 167 126

Index of manufacturing output (1980/81=100) 241 248 243 262 n/a

a July-March.


Pakistan 39


Reference table 17

Banking: classification of outstanding advances by borrower(PRs m; end-Jun)

1994 1995 1996 1997 1998

Government 38,506 44,337 50,616 55,605 66,462 of which: federal government 26,045 30,553 36,521 40,665 45,448 provincial governments 12,461 13,417 13,483 14,756 20,833

Public-sector enterprises 20,704 26,426 31,780 44,709 58,088 Agriculture 75 128 203 364 1,050 Mining & quarrying 1,111 1,731 2,003 3,599 3,105 Manufacturing 7,315 10,519 11,865 17,215 21,694 Construction 151 126 333 747 578 Power, gas & water 4,260 4,509 6,032 6,085 5,931 Commerce 2,235 2,801 3,646 5,608 7,319 Transport & communication 1,934 2,722 4,293 7,567 11,209 Services 1,279 1,425 746 133 429 Others 2,344 2,466 2,659 3,391 6,774

Private sector 290,758 332,019 358,504 404,446 478,610 Agriculture 53,527 59,139 55,012 59,727 80,904 Mining & quarrying 2,912 2,798 4,088 3,642 7,820 Manufacturing 123,071 149,812 174,918 203,506 250,852 Construction 7,637 7,976 6,857 8,836 9,595 Power, gas & water 2,864 4,346 5,264 4,670 3,836 Commerce 58,814 61,517 64,494 69,594 65,177 Transport & communications 12,659 13,992 13,380 14,311 11,917 Services 2,570 3,111 4,551 5,578 5,696 Others 26,704 29,327 29,941 34,582 42,812

Personal 43,288 49,323 60,490 70,152 54,280

Others 1,871 1,562 1,253 3,006 11,555

Total domestic constituents 395,126 453,667 502,642 577,918 668,994

Foreign constituents 432 246 4 0 0

Total 395,558 453,913 502,645 577,918 668,994


Reference table 18

Karachi Stock Exchange statistics

1994/95 1995/96 1996/97 1997/98 1998/99a

Total turnover of shares (m) 2,229 5,200 8,095 14,992 17,113

No. of new listings 65 38 14 2 0

Funds mobilised from new listings (PRs bn) 38 21 16 0.4 0

a July-March.


40 Pakistan


Reference table 19

Exports by value(PRs bn; fob)

1994/95 1995/96 1996/97 1997/98 1998/99a

Cotton yarn 47.19 52.16 55.24 49.99 33.93

Garments & hosiery 41.05 45.66 55.53 62.36 50.88

Cotton cloth 33.37 43.28 49.35 53.99 40.30

Raw cotton 1.92 17.42 1.24 5.48 0.12

Rice 14.03 17.14 18.45 24.56 19.44

Synthetic textiles 17.75 15.44 20.05 26.73 14.61

Leather 8.40 8.73 9.32 8.97 6.35

Sports goods 8.17 8.38 12.13 16.59 9.13

Carpets & rugs 6.12 7.13 7.82 8.71 6.72

Fish & products 4.76 4.70 5.80 7.37 4.50

Surgical instruments 3.51 4.29 4.94 5.41 4.12

Drugs & chemicals 1.22 1.54 1.44 1.91 1.38

Footwear 1.51 1.72 2.01 1.87 1.32

Total incl others 251.17 294.74 325.31 373.16 283.54

a July-March.


Reference table 20

Exports by volume(m sq metres unless otherwise indicated)

1994/95 1995/96 1996/97 1997/98 1998/99a

Cotton yarn (m kg) 522 536 508 462 302

Cotton cloth 1,161 1,323 1,257 1,271 949

Raw cotton (‘000 tonnes) 31 311 21 89 2

Rice (‘000 tonnes) 1,852 1,601 1,767 2,091 1,317

Synthetic textiles 671 506 594 710 366

Leather 18 16 14 13 9

Carpets & rugs 3 4 4 4 3

Fish & products (m kg) 63 66 80 77 55

Footwear (m pairs) 11 9 8 8 7

a July-March.


Pakistan 41


Reference table 21

Imports by value(PRs bn; fob)

1994/95 1995/96 1996/97 1997/98 1998/99a

Non-electrical machinery 64.62 71.13 90.67 69.34 52.76

Petroleum & products 48.98 67.34 88.35 67.51 44.87

Chemicals 32.70 45.90 46.19 51.75 40.33

Edible oils 30.78 28.68 23.91 33.30 31.89

Transport equipment 19.06 18.75 21.66 20.85 18.25

Grains, pulses & flours 15.30 18.60 20.65 32.70 14.95

Iron, steel & products 14.84 20.56 23.69 19.00 13.11

Fertilisers 3.95 11.77 14.95 9.08 9.75

Drugs & medicines 8.15 11.01 10.63 10.75 9.36

Tea 5.79 5.71 5.22 9.81 8.73

Electrical goods 8.56 14.82 16.53 13.24 4.88

Dyes & colours 4.17 4.98 5.25 5.93 4.77

Paper, board & stationery 4.04 5.41 5.16 5.44 4.10

Non-ferrous metals 3.77 6.13 5.03 4.26 3.16

Silk yarn 1.36 1.96 1.95 1.66 1.63


a July-March.


Reference table 22

Imports by volume(‘000 tonnes)

1994/95 1995/96 1996/97 1997/98 1998/99

Crude petroleum 3,928 3,992 3844 4,048 3,436

Petroleum products 8,177 10,370 1,0418 9,670 7,306

Chemical fertiliser 602 1,493 1,703 1,049 1,250

Edible oils 1,395 1,143 1,057 1,179 996

Wheat 2,617 1,968 2,500 4,088 2,163

Tea 117 115 85 99 94

a July-March.


42 Pakistan


Reference table 23

Main trading partners(PRs bn)

1994/95 1995/96 1996/97 1997/98 1998/99a

Exports to:US 40.6 45.7 57.6 76.7 60.9 Hong Kong 16.6 26.9 30.5 26.4 20.7 Germany 17.6 20.1 24.4 23.3 18.9 UK 17.7 18.8 23.3 25.6 18.5 UAE 10.2 14.0 15.6 14.0 14.4

OECD 147.2 163.1 194.2 222.0 168.4 OIC 23.1 27.1 31.3 37.4 28.9 ASEAN 10.1 15.5 8.3 11.8 9.2


Imports from:US 30.1 35.6 56.0 49.0 26.7 Japan 30.7 42.7 40.1 34.2 26.6 Malaysia 28.2 28.6 22.0 30.8 23.7 Saudi Arabia 15.9 23.5 27.8 23.7 21.8 UAE 12.8 19.6 37.9 23.5 21.5

OECD 155.7 194.8 223.5 201.0 133.4 OIC 58.1 77.2 104.4 90.2 66.5 ASEAN 40.4 44.6 41.9 54.7 48.4

Total incl others 320.9 397.6 465 333.2 324.4

a July-March.


Pakistan 43


Reference table 24

Balance of payments, IMF estimates($ m)

1993 1994 1995 1996 1997

Goods: exports fob 6,917 7,247 8,509 8,662 8,503

Goods: imports fob –9,551 –9,526 –11,453 –12,386 –10,946

Trade balance –2,634 –2,279 –2,944 –3,724 –2,443

Services: credit 1,602 1,785 1,891 2,053 1,678

Services: debit –2,687 –2,576 –2,991 –3,522 –2,707

Income: credit 64 152 190 179 149

Income: debit –1,639 –1,863 –2,164 –2,238 –2,440

Current transfers: credit 2,379 2,972 2,658 2,789 4,011

Current transfers: debit –39 –36 –50 –55 –41

Current-account balance 2,953 –1,845 –3,410 –4,518 –1,793

Direct investment in Pakistan 355 429 736 939 729

Direct investment abroad 2 –1 0 –7 25

Inward portfolio investment (incl bonds) 298 1,498 4 266 420

Outward portfolio investment 0 0 0 0 0

Other investment assets –291 –289 –199 –167 –40

Other investment liabilities 3,031 1,394 1,954 2,529 1,212

Financial balance 3,395 3,032 2,494 3,560 2,345

Capital account nie credit 0 0 0 0 0

Capital account nie debit 0 0 0 0 0

Capital account nie balance 0 0 0 0 0

Net errors & omissions –6 188 –310 159 –6

Overall balance 435 1,375 –1,225 –798 547

Financing (– indicates inflow)Reserve assets –434 –1,776 1,202 964 –520Use of IMF credit & loans –4 401 23 –166 –27


44 Pakistan


Reference table 25

Balance of payments, national estimates($ m)

1994/95 1995/96 1996/97 1997/98 1998/99a

Goods: exports fob 7,759 8,311 8,096 8,434 5,653

Goods: imports fob –10,296 –12,015 –11,241 –10,301 –6,844

Trade balance –2,537 –3,704 –3,145 –1,867 –1,191

Services: credit 2,150 2,100 1,840 1,708 1,053

Services: debit –4,534 –5,349 –5,499 –4,972 –2,572

Services balance –2,384 –3,249 –3,659 –3,264 –1,519

Private transfers balance 2,437 2,378 2,958 3,210 1,174

Current-account balance –2,484 –4,575 –3,846 –1,921 –1,536

Long-term capital balanceb 2,702 2,599 2,018 1,708 2,428

Errors & omissions (net)c 20 1,096 255 –665 311

Overall balance 238 –880 –1,573 –878 1,203

a July-March. b Includes official unrequited transfers. c Includes private short-term capital.


Reference table 26

External debt, World Bank series($ m unless otherwise indicated; debt stocks as at year-end)

1993 1994 1995 1996 1997

Public medium- & long-term 20,402 22,686 23,728 23,595 23,565

Private medium- & long-term 1,057 1,178 1,593 1,995 2,338

Total medium- & long-term debt 21,459 23,864 25,322 25,590 25,902

Official creditors 19,095 21,516 22,609 22,361 21,557 Bilateral 9,190 10,054 10,425 10,166 9,647 Multilateral 9,906 11,462 12,184 12,195 11,910Private creditors 2,364 2,348 2,713 3,230 4,345

Short-term debt 1,946 1,938 3,235 2,816 2,481 of which: interest arrears 0 0 0 0 0

Use of IMF credit 1,122 1,557 1,613 1,396 1,281

Total external debt 24,527 27,359 30,169 29,802 29,665

Principal repayments 1,521 2,469 1,988 2,100 2,826

Interest payments 866 999 1,195 1,189 1,233 of which: short-term debt 80 109 203 225 294

Total debt service 2,386 3,468 3,183 3,289 4,059

Ratios (%)Debt/GDP 47.0 52.2 49.0 46.1 46.7Debt-service ratio, paida 23.9 35.0 26.6 27.6 36.1

a Debt service as a percentage of earnings from exports of goods and services.Note. Long-term debt is defined as having original maturity of more than one year.

Source: World Bank, Global Development Finance.

Pakistan 45


Reference table 27

Foreign reserves($ m unless otherwise indicated; end-period)

1994 1995 1996 1997 1998

Total international reserves excl gold 2,929 1,733 548 1,195 1,028

Golda 592.10 594.00 580.08 583.02 585.93

Total reserves incl gold 3,521 2,327 1,128 1,778 1,614

Memorandum itemsGoldb 809 736 704 649 616Gold (m fine troy oz) 2 2 2 2 2

a Valued at 75% of the fourth-quarter London price. b National valuation.


Reference table 28

Exchange rates(PRs per currency unit; annual averages)

1994/95 1995/96 1996/97 1997/98 1998/99

$ 30.85 33.57 38.99 43.20 46.13

£ 48.70 51.91 63.07 71.15 76.29

¥ 0.328 0.328 0.338 0.341 0.371

DM 20.68 22.97 24.42 24.10 26.82

Rs 0.981 0.978 1.089 1.129 1.086

IMF SDR 46.16 49.64 55.25 58.47 63.39

a July-March.


46 Afghanistan


Afghanistan

Basic data

652,000 sq km

16.6m (1976 sample census); 20.9m (mid-1998 IMF estimate)

Population in ‘000 (1982 estimate)

Kabul (capital) 1,036Kandahar 191Herat 150

Continental (extremes of temperature)

Hottest month, July, 16-33°C (average daily minimum and maximum); coldestmonth, January, minus 8-2°C; driest month, September, 1 mm averagemonthly rainfall; wettest month, April, 102 mm average rainfall

Pashtu and Dari (Persian)

Metric system. Local measures include:

1 gazi jerib=0.7366 metre1 jerib=0.195 ha 1 charak=1.7665 kg1 seer=9.066 kg

Afghani=100 puls. End-1997 exchange rate: Af3,000:$1 (official rate); spotexchange rate on October 22nd 1999: Af4,679:$1

4 hours ahead of GMT

March 21st-March 20th

January 8th 2000a (end of Ramadan; Eid Ul Fitr), March 21st (New Year’s Day),April 15tha (Ashoura), April 18th (Liberation Day), August 18th (IndependenceDay), November 28tha (beginning of Ramadan), December 28th (end ofRamadan; Eid Ul Fitr)

a These holidays are dependent on the Islamic lunar calendar and may vary slightly from the dates

listed

Land area

Population

Main towns

Climate

Weather in Kabul (altitude1,815 metres)

Languages

Measures

Currency

Time

Fiscal year

Public holidays

Afghanistan 47


Political background

Afghanistan became a Russian-style communist state in the 1970s and sincethen the country has been war-torn. Various mujahideen groups have emergedand fought against communism and, more recently, among themselves. TheTaliban emerged in the mid-1990s and quickly took control of most of thecountry. Fighting continues amid accusations of serious violations of humanrights, and UN-orchestrated peace talks have so far been unsuccessful.

Historical background

At the crossroads of Central Asia, the area that makes up modern Afghanistanhas been subjected to constant invasion throughout recorded history. Since thesixth century BC conquerors have included Persians, Alexander the Great’sMacedonians, Scythians, Parthians, Buddhist Khushans and White Huns. TheArabs introduced Islam in the seventh century AD. Genghis Khan invadedearly in the 13th century and Tamerlane, another Mongol conqueror, addedthe area to his empire at the end of the 14th century. Babar, a descendant ofTamerlane, established the Moghul empire from Kabul early in the 16thcentury. Over the next two centuries Afghanistan was divided between theMoghuls and the Safavids of Persia. By the mid-18th century the Pashtuns hadthrown off the Persian yoke and established their own kingdom under AhmadShah Durrani, credited with being the founder of the modern Afghan state.Rivalry between the British and Russian armies, which extended theirrespective empires to the country’s borders during the 19th century, gaveAfghanistan a semblance of national cohesion.

The country’s most peaceful period began in 1933, when Zahir Shah wascrowned king, and lasted 40 years. In July 1973 the king was overthrown by hiscousin and brother-in-law, General Mohammed Daud, who became primeminister and president. A new constitution approved in 1977 provided for aone-party parliamentary system with real power vested in the president. InApril 1978 the president and many of his immediate family and supporterswere killed in a bloody military coup. Nur Mohammed Taraki was installed aspresident of a Moscow-oriented regime centred on the radical Khalq faction ofthe communist People’s Democratic Party of Afghanistan (PDPA). Taraki washimself deposed in September 1979 by his prime minister, Hafizullah Amin.Amin’s term of office was short-lived: in late December that year 100,000Soviet troops invaded Afghanistan and Amin was deposed and executed.Babrak Karmal, leader of the moderate pro-Soviet Parcham wing of the PDPA,was installed as president. The Soviet Union invoked a treaty of friendshipbetween the two countries in response to, it claimed, “appeals from withinAfghanistan”. Its influence, which had been on the increase since GeneralDaud’s assassination, became paramount, with Soviet advisers controlling allgovernment departments and the media.

The Moghuls gave way tothe Pashtuns

Communists gain afoothold in the 1970s—

48 Afghanistan


Meanwhile conservative tribesmen of the countryside, known as themujahideen or warriors, began to rebel. They saw the government as atheist,anti-Islamic and willing to sacrifice the country’s independence. They enjoyedthe backing of neighbouring Pakistan and of the US. This sparked a war in1982 and, in spite of ruthless repression, the mujahideen were able to pindown Soviet forces. But lack of unity and cohesion among the various groupsprevented the successful formation of an alternative government-in-waiting.The war was exacerbated by Moscow’s refusal to withdraw its troops fromAfghanistan, and this gave rise to speculation that it intended to make thecountry a Soviet satellite. However, following UN-mediated multilateralnegotiations in Geneva in March 1988, the troops had completely pulled outby February 15th 1989. Nevertheless the communist regime, now led byMohammed Najibullah who had ousted Karmal in 1986, held firm, in partbecause the supply of Soviet arms continued.

Then a failed coup in the Soviet Union in August 1991, leading to the removalof Soviet Communist Party hardliners who had been the regime’s staunchestsupporters, prompted Najibullah to attempt a reconciliation with themujahideen. He renamed the PDPA the Watan (Homeland) Party but wasunsuccessful in efforts at negotiations with the resistance leaders.

Najibullah weakened his position of power at the end of January 1992 when hetried to replace General Abdul Momin, an army brigade commander atHairatan in the north. The general refused to obey the order and was backed bypowerful Uzbek and Ismaili militia leaders, including Rashid Dostam. A dealwas struck between them and Ahmad Shah Massoud, the military leader of thepredominantly Tajik Jamiat-i-Islami, one of the largest mujahideen parties,enabling him to take control of much of north-eastern Afghanistan.

The mujahideen began closing in on Kabul, spurred by Najibullah’sannouncement that he would relinquish power once the UN had devised aninterim administration. On April 16th 1992 Najibullah resigned and made abid to leave the capital, only to be turned back at the airport by Uzbekmilitiamen who had been airlifted in from the north. On April 21st largelyPashtun Hezb-i-Islami fighters who had infiltrated the city over the previousthree days seized all its strategic installations except the militia-controlledairport. Thousands of Dostam and Massoud supporters were airlifted into thecity and fierce battles raged between the mujahideen militia groups across thecapital for the next three days, culminating in the expulsion of the Hezb-i-Islami fighters.

With the UN’s hopes of installing a broad-based administration killed off,mujahideen leaders meeting in Peshawar agreed a framework for an interimgovernment. It had a 51-member transitional council and installed ProfessorSigbhatullah Mojadedi, the leader of the moderate Jabha-i-Nijat-Milli, as headof state for two months. The office of prime minister was offered to Hezb-i-Islami, but it was not enough for its leader, Gulbuddin Hekmatyar. He wantedcontrol of Kabul, so his forces began a protracted rocket and artillerybombardment.

—which eventually bearsfruit—

—sparking a mujahideenrebellion—

Afghanistan 49


The chaos and divisiveness that had characterised the mujahideen’s 14-yearholy war became even more acute following their takeover of Kabul. The mostintense battles were between Hezb-i-Wahdat, made up of minority Shiatribesmen from Hazarajat, and Ittehad-i-Islami, a hardline Sunni Pashtun party.The Uzbek militia in particular indulged in murderous looting sprees and othercriminal activities. Amid the confusion, Professor Mojadedi’s efforts to prolonghis term—by promoting Mr Dostam to the rank of four-star general andbringing Hezb-i-Wahdat into the government—failed, and he stepped down onschedule in late June 1992.

As planned, Professor Burhanuddin Rabbani of Jamiat was sworn in aspresident for a four-month term. Hezb-i-Islami finally agreed to name theirprime minister as Abdul Farid, an ethnic Tajik. But peace was short-lived. Inless than a month Hezb-i-Islami launched its most murderous assault yet onKabul, a three-week bombardment that killed some 2,000 civilians and sentmany more fleeing into the countryside. Mr Rabbani sacked Mr Farid and hisparty from government. A major counter-offensive by Jamiat and militia forcesturned the battle decisively in their favour, after which Pashtun and Pakistanimediators helped negotiate a ceasefire. Meanwhile Mr Rabbani claimed thatHezb-i-Islami was being supplied with weapons by backers in Pakistan.

Further fighting between Jamiat and Hezb-i-Islami was instigated by thecontroversial manner in which Mr Rabbani was returned to office when hisfour-month term expired. In the time allowed to set up the necessarymachinery for electing his successor, Mr Rabbani organised an assembly ofdelegates from the country’s 29 provinces, in which five of the nine mainmujahideen groups were not represented, but which returned him to office fortwo years. Rockets were fired in Kabul while the votes were still being counted,and weeks of fighting ensued.

In March 1993 the main faction leaders, mediated by Pakistani and Saudigovernment officials, worked out a power-sharing agreement in Islamabad.Mr Rabbani was to remain in office until June 1994, Mr Hekmatyar was tobecome prime minister and form an all-party government, and a commissionwas to be set up to organise the election of a constituent assembly and thenpresidential and parliamentary elections. But the pact excluded Mr Massoudand Mr Dostam, two of the country’s most powerful warlords. The followingJanuary Hezb-i-Islami and the Uzbek militia, backed by Hezb-i-Wahdat, began aprolonged but unsuccessful offensive aimed at driving the Rabbaniadministration from Kabul.

In late 1994, after Pakistan declared its intention to reopen an ancient traderoute through Afghanistan to Central Asia (closed following the 1979 Sovietinvasion), yet another army emerged, quickly becoming a major force in thewar. The Taliban, overwhelmingly Pashtun, were Islamic students frommadrassahs (religious colleges) in Baluchistan and North West FrontierProvince, Pakistani provinces that accommodated large numbers of Afghanrefugees. When they burst onto the scene they were organised and wellequipped, confirming suspicions they had been moulded into a fighting force

Jamiat’s BurhanuddinRabbani becomes head

of state

A peace pact signed by themain mujahideen groups

proves short-lived

The Taliban emergedin 1994—

—but rival mujahideengroups battle for the

capital

50 Afghanistan


at the behest of powerful elements in the Pakistan government. A few dayslater the Taliban overran Kandahar, Afghanistan’s second largest city, takingseveral southern provinces in the following weeks.

The Taliban criticised the mujahideen groups for continuing to fight amongthemselves and failing to establish a genuinely Islamic government. Theirdeclared aim was to take control of the entire country, pacify it and imposesharia law throughout. Mr Massoud’s Jamiat rejected the Taliban’s ultimatumto surrender control of Kabul and the west, and managed to thwart them inMarch 1995. However in the autumn of that year a new Taliban offensiveproved rather more successful, sweeping towards Herat, which they overranwithout a fight. This gave them control of 14 provinces and reduced Jamiat’sfiefdom to only five—essentially Kabul and its environs. Spurred on by theirsuccess, the students mounted a vigorous assault on the capital, but theirreluctance to join forces with other anti-Jamiat elements minimised theirthreat.

In May 1996 a power-sharing agreement between Mr Hekmatyar andMr Rabbani was signed, and a month later the Hezb-i-Islami leader enteredKabul for the first time in 20 years and was sworn in as prime minister. ShiaIran, determined to neutralise the hardline Sunni Taliban, was the driving forcebehind the deal. In August Mr Dostam, who was now neutral in the battle,signed a formal ceasefire with the Kabul government and agreed to reopen thestrategic north-south Salang highway, giving the Rabbani regime a supplyroute from Central Asia. The Taliban responded by embarking on a ten-dayoffensive in which they succeeded in taking Jalalabad, Sarobi and finally, withhardly a fight, Kabul itself. Their seizure of the capital, which Jamiat had heldfor more than four years, was as surprising as it was swift. Once again, accusingfingers pointed in the direction of Pakistan.

The student militia set up a six-member supreme council, led by its second-in-command, Mullah Mohammad Rabbani, to run Kabul in accordance with thestrict Islamic principles already in force in other areas under its control. Theyalso took the war north of the capital, overrunning key Jamiat bases. TheTaliban’s ominous progress towards Mr Dostam’s northern fiefdom spurredhim into an alliance with Mr Massoud, called the Supreme Council for theDefence of Afghanistan (SCDA). Both sides had their successes and as a resultthe frontlines shifted frequently and sometimes dramatically.

In late May 1997 the Taliban swiftly seized much of the north owing in part toa decision by Abdul Malik, Mr Dostam’s foreign minister and the governor ofFaryab province, to switch sides. His power base crumbling, Mr Dostam fledacross the border to Uzbekistan and then to Turkey. But the Taliban victoryproved short-lived. Just two days after taking Mazar-i-Sharif, the capital of thenorth, their attempts to disarm a group of Hazaras belonging to thepredominantly Shia Wahdat faction sparked a revolt not just by the forces thathad been defending the city but also by the general population. Mr Malik,realising the depth of popular resentment against the Taliban, reversed hisdecision to defect and ordered his troops to attack them. In the bitter battles

—gained controlsuspiciously fast—

—and conquered the westof the country, including

Kabul—

—before trying their lucknorthwards

After an initial setback—

Afghanistan 51


that ensued thousands of Taliban were captured—many of them reportedlysummarily executed. Further south, Mr Massoud capitalised on theirmisfortunes by overrunning the Taliban’s depleted bases along the strategicSalang highway.

Important recent events

November 1994: The previously unknown Pashtun Talibanmilitia seizes Kandahar and begins a successful sweepnorthwards.

March 1995: Having gained control of several southernprovinces and reached the outskirts of Kabul, the Taliban aredriven beyond artillery range of the capital by Jamiat.

September 1995: The Taliban overrun Herat, bringing to14 the number of provinces under their control.

June 1996: Following an Iranian-negotiated agreementbetween Jamiat and Hezb-i-Islami, Gulbuddin Hekmatyar issworn in as prime minister.

September 1996: After a rapid advance from the east, theTaliban seize Kabul from retreating Jamiat forces.

October 1996: The Supreme Council for the Defence ofAfghanistan, an anti-Taliban alliance comprising Jamiat,

Rashid Dostam’s Uzbeks and the predominantly Shia Hezb-i-Wahdat, is formed.

May 1997: The Taliban briefly take control of Mazar-i-Sharif andmuch of the north, but are soon routed.

August 1998: The Taliban overrun Mazar-i-Sharif, theheadquarters of the opposition alliance, and other key northerntowns.

August 1998: America launches cruise missile attacks on parts ofAfghanistan to destroy what it calls are terrorist bases operated byOsama bin Laden, a Saudi fugitive.

September 1998: Bamiyan, the blockaded headquarters of theWahdat faction, falls to the Taliban.

August 1999: A major truck bomb attack in Kandahar, the firstof its kind, kills brothers of Omar Mohammad, the Taliban leader,and several others. Suspects include Iran-backed Shia militants.

Throughout the second half of 1997 the Taliban laid siege to the centralprovince of Bamiyan, homeland of the Hazaras. International aid agencieswarned that tens of thousands of people risked starvation. The Taliban becameeven more repressive in Kabul, partly out of fear of a popular uprising similarto the one that had taken place in Mazar-i-Sharif. It was their rigid and oftenbrutal enforcement of their interpretation of Islam and the hardship that thiscaused, in particular among women, who were victims of all manner ofarbitrary, even whimsical, discrimination, that alienated Kabulis most. This wascompounded by the Taliban’s ineptitude as administrators. By late 1997 somefour-fifths of the capital’s population was suffering from malnutrition,according to the International Committee of the Red Cross. However, divisionsamong the opposition—exemplified by continued feuding between the forcesof Mr Dostam and Mr Malik and in-fighting within Wahdat—ensured thatTaliban control was more solid than it might otherwise have been.

The Taliban seized Mazar-i-Sharif in August 1998 after buying off oppositioncommanders on the outskirts of the city. Although its defenders offered littleresistance, the Taliban reportedly slaughtered thousands of Shia Hazaras,civilians as well as Hezb-i-Wahdat fighters, in the days that followed. Thereafterthe Taliban consolidated its control in the north, overrunning several other keytowns. In mid-September they took the central town of Bamiyan, the Wahdat

—the Taliban seized most ofthe north—

52 Afghanistan


stronghold blockaded for more than a year, and again there were allegations ofatrocities against the civilian population.

By the middle of 1999 the Taliban, led by Mullah Mohammad Omar, hadextended its control to cover nine-tenths of Afghanistan. Mr Massoud and theremnants of the opposition forces, a group loosely termed the NorthernAlliance, still held the north-eastern provinces of Takhar and Badakshan and afew pockets elsewhere in the north. Various peace agreements between the twogroupings were negotiated in 1999 but almost immediately collapsed. UN-sponsored peace talks similarly achieved little result.

Constitution and institutions

Within days of taking office in June 1992 Mr Rabbani announced that a newconstitution being drawn up by religious scholars and intellectuals would bebased on sharia. No such document was ever approved, largely owing todifferences of opinion between leaders of the majority Sunni and minority Shiamujahideen groups. Wahdat warned that the planned adoption of the SunniHanafi rite as the official religious doctrine would “destroy the country”.

Nevertheless, most mujahideen groups championed Islam as an ideologicalresponse to the imposition of Soviet Marxism and as a base on which to build amodern state. By contrast, the traditionalist and socially conservative Taliban,whose education is by and large limited to a narrow study of the Koran andother scriptures, disapprove of this modernist interpretation of Islam and havevowed to rule Afghanistan in accordance with what they deem to be puresharia. In the areas under their control they have imposed rigid Sunnistrictures, closing girls’ schools, prohibiting women from working, requiringmen to grow beards and instigating centuries-old Koranic punishments, suchas limb amputation for theft.

On the other hand, they have been slack in the prosecution of other crimes,notably the cultivation of opium poppy, the raw material for heroin, whichcontinues to flourish as one of the country’s few major export earners.Although they control half the country, including the capital, there is noTaliban central government as such. Individual regions and cities are ruled byshuras (assemblies) of mullahs, who have shown themselves to be inept,excessively harsh and therefore unpopular administrators.

Political forces

Even as a monarchy, Afghanistan never had a properly functioning centralgovernment capable of exerting authority across the entire country. AfterKabul’s communist administration crumbled in April 1992, religious, regional,linguistic and ethnic divisions deepened, yielding a patchwork of oftenautonomous fiefdoms controlled by mutually antagonistic, power-hungrywarlords. Today, political power remains a function of military might.

A Sunni-Shia dispute blocksthe adoption of a

mujahideen constitution

The Taliban prove lesssensitive to minority views

Governments traditionallyheld little sway beyond

the capital

—but the fightingcontinued into 1999

Afghanistan 53


The Taliban owed their sudden emergence in late 1994 and subsequentmilitary successes to Pakistani sponsorship, the reluctance of rival factions tofight them and popular exasperation with the mujahideen’s failure to bringpeace and improve living standards. While they were initially welcomed forneutralising and disbanding many of the violent and mercenary militias theyencountered during their drive northwards and eastwards from Kandahar, theirrepressive brand of Islam, as well as their often indiscriminate violence againstcivilians, have done much to erode their popularity, even among the SunniPashtun majority to which they belong.

The Taliban have taken over almost the entire country but still have somerivals to contend with. The opposition Northern Alliance, made up ofAfghanistan’s religious and ethnic minorities, has been fighting hard to holdonto the small areas that remain under its control. Foremost among these isJamiat-i-Islami, the largest of the mujahideen groups, led by a veterancommander and ethnic Tajik, Ahmad Shah Massoud. In addition to thePanjshir Valley, Mr Massoud and the remnants of the Northern Alliance haveheld onto most of the north-eastern provinces of Takhar and Badakshan andpockets of territory elsewhere in northern Afghanistan. The Uzbekgovernment’s support for Mr Dostam and his ethnic Uzbek militias seems tohave waned since he fled Afghanistan in 1998. Wahdat, the Shia grouping, hasshown itself to be a formidable fighting force, even though its Bamiyanstronghold fell to the Taliban in September 1998.

Main political figures

Mohammad Omar: A former mujahid who took up religious studies in 1989 afterlosing an eye in battle, the Taliban’s Kandahar-based spiritual leader is a reclusive andlargely unknown figure. He is the Amir-ul-Mumineen (commander of the faithful) andissues commands from his ideological headquarters.

Ahmad Shah Massoud: The ethnic Tajik commander of Jamiat’s army gained areputation as Afghanistan’s most astute military strategist during the Soviet occupation.He orchestrated his faction’s seizure of Kabul following the communists’ collapse in April1992, its strategic retreat as the Taliban advanced in September 1996 and much of thefighting against the hardline Islamist militia since then.

Burhanuddin Rabbani: President from June 1992 to September 1996, Jamiat’spolitical leader now has little choice but to defer to his military commanders, particularlyMr Massoud.

Rashid Dostam: The opportunistic Uzbek militia commander has changed sides moreoften than most leaders, successively supporting Kabul’s communist government,Jamiat, Hezb-i-Islami and Jamiat again. Once the dominant force in the north, hisinfluence has waned since the Taliban gained control of the area in September 1998.

The emergence of theTaliban

Rival factions

54 Afghanistan


International relations and defence

The power struggle between the various fighting factions in post-communistAfghanistan has been mirrored by intense jockeying for influence by foreigngovernments keen to advance their own interests and those of their proxies inthe country.

Pakistan’s attempts to determine the course of events have been the mostpersistent and, in the view of many Afghans, the most pernicious. In the mid-1970s its military began secretly training young Afghan Islamists to challengeKabul’s increasingly pro-Moscow government, quickly resolving that thePashtun Mr Hekmatyar and his Hezb-i-Islami faction should run the Islamicstate it hoped to create. Pakistan’s Inter-Services Intelligence (ISI) agency thusensured that Hezb-i-Islami received the greatest share of the US- and Saudi-funded military hardware it was responsible for channelling to the resistanceduring a holy war it sought—by and large successfully—to direct.

After the communist collapse in 1992 the ISI continued its aggressivesponsorship of Mr Hekmatyar, while deliberately undermining rival factions,especially Jamiat. When his Pakistani patrons realised the deviousMr Hekmatyar was incapable of uniting the Pashtun majority behind him,they ditched him and created the Taliban, nurturing the students into apowerful fighting force. Pakistan’s efforts to prod Mr Dostam and the Talibaninto an anti-Jamiat coalition were less successful. So it stepped up its covertassistance to the students, enabling them to capture Herat on September 5th1995, the capital just over a year later, and much of the north in September1998. Pakistan was the first country to recognise the new regime. To the angerand frustration of the Taliban, few others have followed its lead.

Iran’s interests in Afghanistan are governed by its concern for the welfare ofthe Shia minority and its long-term aim of forging a zone of influence acrossthe country into Central Asia. As such, it viewed the rise of the Sunni Taliban,and Pakistan’s support for them, with thinly disguised alarm. Having backedWahdat and its Hezb-i-Islami and Uzbek allies in their war against the Rabbaniadministration for control of Kabul, Iran was propelled by the suddenemergence and success of the student militia into an accommodation with thePersian-speaking Jamiat leadership.

It began airlifting in weapons, fuel and other supplies to assist Mr Massoud’swar effort, and helped blunt the Taliban’s first major offensive in the westduring the spring of 1995 by sending troops across the border to help IsmailKhan’s foundering fighters. The students’ seizure of Herat a few months laterwas seen as a major setback by Iran, which feared it would spark uprisings byBaluch, Turkmen and Azeri Sunni minorities along its eastern frontier.

Tehran welcomed Mr Khan and hundreds of his combatants when they fledacross the border in autumn 1995, and intensified its efforts to persuadeMr Dostam to bury his differences with Mr Massoud, which ultimately, ifsomewhat belatedly, succeeded. Tehran responded to the Taliban’s seizure of

Many countries weredetermined to influencethe outcome of the war

Pakistan has been the mostdogged

Shia Iran supports Jamiatagainst the Sunni Taliban—

Afghanistan 55


northern Afghanistan in 1998—and particularly the killing of Shia civilians,including nine Iranian diplomats at its consulate in Mazar-i-Sharif—by massingsome 200,000 troops close to its border with Afghanistan.

The policy of Uzbekistan’s neo-communist government towards Afghanistanhas been primarily dictated by a determination to prevent hardline Islamistsfrom crossing into its territory from the south and fuelling the sort ofinsurgency that engulfed neighbouring Tajikistan. The Tashkent governmentconsidered Mr Dostam—himself an ethnic Uzbek and former communist—tobe a useful buffer, and therefore financed his war effort. It also encouraged himto mend fences with Mr Massoud to help undermine the Taliban, who madetheir expansionist designs on former Soviet Central Asia abundantly clear.

So too, for the same reason, did Moscow which, despite having spent morethan a decade trying to prevent the likes of Mr Massoud and Mr Rabbani fromtaking power in Kabul, began actively supporting them after the emergence ofthe Taliban. It sees them as more desirable rulers than the fundamentaliststudents, whose potential for influencing grassroots clerics across Central Asiait deems to be considerable. However, in 1999 the Uzbek government, for one,seems to have begun adopting a more neutral position in Afghan affairs,indicated by improving relations with the Taliban and the hosting of UN-sponsored peace talks in July. There are several possible motives behind thisshifting stance—including an acceptance of the reality on the ground inAfghanistan or the need to contain its own militant Islamists.

The US has long argued that post-communist Afghanistan is a fertile breedingground for Islamic extremists bent on carrying their holy war further afield. OnAugust 20th 1998 it fired several cruise missiles at supposed “terrorist” trainingcamps in Khost province allegedly funded by Osama bin Laden, a wealthySaudi Arabian suspected of orchestrating the earlier bombing of the Americanembassies in Kenya and Tanzania and of a military base in Saudi Arabia.

The presence in Afghanistan of Mr bin Laden will continue to cause problemsfor the Taliban. In 1998 the Saudi government withdrew its envoy from Kabuland expelled the Taliban’s representative from Riyadh because of it. The US hasoffered a $5m reward for information leading to his arrest and conviction, andhas imposed sanctions against the Taliban in retaliation for their support ofterrorist networks (particularly that of Mr bin Laden). The US will remainseriously upset about Mr bin Laden’s continued evasiveness and is unlikely tostop in its efforts to track him down.

Since the late 1980s the international community, through the UN, has soughtto persuade Afghanistan’s warring factions to bury their differences and agreeon the composition of a broad-based administration that could assumetemporary control of Kabul as a prelude to a more durable solution to theconflict. The latest effort—a UN sponsored “six-plus-two” group, comprised ofAfghanistan's neighbouring states (Iran, Turkmenistan, Uzbekistan, Tajikistan,Pakistan and China) as well as the US and Russia—ended with little result. UNenvoys have variously attributed the failure of their missions to a lack ofsupport among the major powers and excessive intervention by regional

—as do Uzbekistan andRussia—

—to the dismay of the US

The UN’s mediation effortsare frustrated by power-

hungry warlords

56 Afghanistan


governments. But the UN faces a virtually impossible task, caught up as it is inthe conflicting agendas of the main warlords, each of them seeminglyconvinced that military strength will ultimately ensure total victory.

Resources and infrastructure

Population

There has never been a census, but a sample head count in 1976 calculated thepopulation at 16.6m. An official estimate three years later put it at 15.5m. Atthe time, some 90% of Afghans lived in rural areas. Uncertainty about the sizeof the population was compounded by the war that began after the Sovietinvasion in late 1979. The conflict is thought to have claimed the lives of morethan 1m Afghans, propelled 5m others into exile abroad, mostly to Pakistanand Iran, creating the world’s largest refugee population, and caused a massiveexodus from the countryside into the cities, more than doubling thepopulation of Kabul.

Refugees began returning from neighbouring states after the mujahideenvictory in April 1992, and by mid-1996 more than half had been repatriated.The influx would have been more rapid but for the continued fighting, whichat its fiercest caused larger numbers to flee the country than to return andcreated sizeable populations of internally displaced persons. Intense andprolonged battles for Kabul after 1992 led to a major exodus and to thesprouting of tented cities close to peaceful urban centres, such as Jalalabad,accommodating hundreds of thousands of the capital’s former inhabitants.

Pashtuns are the dominant ethnic and linguistic community, accounting forabout half the population, and are concentrated in the east and south. Dari(Persian)-speaking Tajiks from the fertile eastern valleys constitute a further20%. Some 10% of the population are Turkic, mostly Uzbeks and Turkmenwho live on the northern plains. There are some 20 other distinct ethnicgroups—of which the Hazaras in the centre, the Baluch in the desert south andthe Nuristanis in the mountainous east are the largest—speaking more than30 languages. Since the overthrow of the communist regime in 1992, the warhas been largely, although not exclusively, an ethnic one among Pashtuns(Hezb-i-Islami and the Taliban), Tajiks (Jamiat), Uzbeks (Rashid Dostam’smilitia) and Hazaras (Wahdat).

Education

The vigorous implementation of an ambitious education policy during thelatter half of Zahir Shah’s reign made primary schools accessible to half thepopulation under 12, which meant that secondary schools were functioning inmost provincial towns and allowed the national university in Kabul to offerincreasingly sophisticated graduate-level courses. Nevertheless, 90% of the

The war claims 1m livesand creates 5m refugees—

—whose return is slowed bycontinued fighting—

—which is largely alongethnic lines

The fighting shuts downmost schools—

Afghanistan 57


population were still illiterate in 1979. Nearly two decades of war have virtuallydestroyed the country’s education infrastructure. Initially the damage was mostsevere in rural areas, where government teachers were among the main targetsof anti-Soviet resistance. Most abandoned the profession and many fled thecountry.

Schools and colleges in urban areas continued to function until themujahideen takeover, but many were forced to close by the intense factionalfeuding that followed. This took a particularly heavy toll in Kabul, where theuniversity was at the heart of one of the main battle zones for more than twoyears and remained closed most of the time. The poorly educated Taliban shutit down after taking the capital in September 1996 and, as in other areas undertheir control, outlawed schooling for girls. Afghanistan has the world’s highestrate of illiteracy. Only a tiny fraction of Afghans can now read and write andinternational experts warn that the country may remain functionally illiteratefor generations to come.

Health

Years of war have left Afghanistan in huge need of healthcare and at the sametime devastated the healthcare system. Most medical professionals have left thecountry and training programmes are non-existent. Most hospitals and clinicshave been destroyed or are otherwise out of commission—in late 1997 onlyfour of Kabul’s hospitals were functioning, three of them only barely so—whilein the absence of a central government supplies of equipment and essentialdrugs are sporadic if they materialise at all. More than 2m Afghans have beenmaimed and many more mentally traumatised. All require regular monitoringand care; few receive it. Each month hundreds of civilians and combatants arewounded in armed clashes or by the mines and unexploded ordnance strewnacross the country.

Other legacies of the war include some of the world’s worst health indicators:the highest maternal, infant and child mortality rates, as well as the highestproportion of widows and orphans. In 1999 the UN Children's Fund (UNICEF)announced that its annual polio vaccination campaign reached a higherpercentage of Afghan children under five than ever before. The vaccinationstargeted 4m Afghans as part of the UN’s campaign to eliminate polio in thenext few years. However, infectious and parasitic diseases, such as diarrhoeaand malaria, partly a product of dismal sanitation and water supply conditions,are widespread, as is malnutrition. Under the Taliban, women are banned fromworking and female patients may not be treated by male doctors. These andother restrictions on women’s access to healthcare create even more avoidablehardship.

Natural resources and the environment

Afghanistan has a land area of 652,000 sq km (about the size of France) and isbordered by Uzbekistan, Tajikistan and Turkmenistan in the north, Iran in the

—leaving Afghanistanfunctionally illiterate

The war destroys a badlyneeded health service

The climate is harsh

58 Afghanistan


west, Pakistan in the south and east and China in the extreme north-east. It isa country of rugged mountains—dominated by the Hindu Kush, thewesternmost extension of the Karakoram and the Himalayas—and arid plainswhich become deserts in the south-west. As a result, Afghanistan endures themost extreme temperatures on earth; lows of –50°C and highs of 53°C havebeen recorded.

Average annual rainfall is about 180 mm, and rarely more than 380 mmanywhere in the country. The run-off from the mountains into the mainrivers—the Konduz, Kabul, Helmand and Herat—is heavy for a brief periodduring the spring thaw, sometimes causing floods and landslides. Thereafter ittends to be irregular and low. Irrigation systems have been almost totallydestroyed by the war. The combination of a harsh climate and thin soil makesfor sparse but sturdy vegetation. Thin grasses briefly provide mountain grazingfor nomads’ herds in the spring and summer. Tree cover is largely concentratedin the east.

Transport and communications

In the decade before the Soviet invasion a major proportion of foreign aid,much of it from the US and the Soviet Union, was spent on road constructionand rehabilitation. Over 2,000 km of asphalt and concrete roads were built,giving the country a modern network which linked all the major urbancentres. But the war has taken a heavy toll. The 1993 UN DevelopmentProgramme (UNDP) assessment said that about 60% of the 2,500 km of roadsrequired “significant pavement reconstruction” and that regional roads were in“generally poor condition”. Since then, the condition of all roads hasdeteriorated considerably, as has that of the passenger cars and commercialvehicles plying them. Hundreds of bridges have also been destroyed.

Various countries have promised reconstruction assistance, such as Pakistan,Iran and Saudi Arabia, but none has materialised, either because of thecontinued fighting or because planned schemes have been politicallycontroversial. Early in 1996 the Rabbani administration dismissed asunacceptable interference a plan announced by Islamabad to spend $3m torepair the 880-km link between Spin Boldak in south-eastern Kandaharprovince to Torghundi near the border with Turkmenistan in the north-west.

The ostensible aim was to reduce travel time along the route from nearly twodays to half a day, and facilitate access to former Soviet Central Asia.Burhanuddin Rabbani’s irritation derived from the fact that the five provincesthrough which the road runs were controlled by the Taliban. Given the lack offoreign funding and the absence of a functioning central government theUNDP said road repair would best be carried out by contractors based in thelocal community or associated with non-governmental organisations (NGOs).Rehabilitation of the network is crucial to the recovery of other sectors and tothe restoration of normal economic activity.

The road network requiresextensive repair—

—but funds are notforthcoming

Afghanistan 59


As a landlocked country, Afghanistan is dependent on transit rights throughneighbouring countries. Much of its foreign trade was traditionally conductedthrough Pakistan, whose southern city of Karachi is the nearest port. Theoverland route through the Soviet Union became much more importantduring the Soviet occupation, but its use declined with the sharp downturn ineconomic activity and upsurge in factional feuding that followed themujahideen takeover. The scrapping of duty-free concessions on someAfghanistan-bound goods through Karachi in 1994 and 1995 prompted asearch for alternative routes, and a major volume of commercial traffictravelled through Iran while Jamiat controlled Kabul and the westernprovinces.

Aviation and the telecommunications infrastructure are in a sorry state. Thewar destroyed many civil aircraft belonging to Ariana, the national carrier, andrendered most of its airports and air corridors either unusable or too dangerousfor commercial traffic. Ariana still flies to Dubai and Peshawar although itsservices to the Indian city of Chundrigar were suspended in 1999. A UNDPplan advocated an emergency project to permit air traffic services to functionsafely. It has yet to be implemented. So too has its proposed scheme toestablish satellite links to allow telecommunications with major internationalcentres, and transportable satellite links to facilitate contacts between thecapital and other Afghan cities. The plan euphemistically described thecountry’s telecommunications network as “demobilised”.

Energy provision

Commercial energy consumption levels per head were among the world’slowest before 1979. Their rapid increase thereafter was partly related to the warbut mainly a result of the development by the Soviet Union of the country’sreserves of natural gas, its main energy resource.

War damage, looting and lack of maintenance and spare parts mean that actualelectricity-generating capacity is far below the theoretical level of 400 mw,which in turn is substantially below the country’s needs. In late 1992 theauthorities in Kabul put the city’s winter requirement at 300 mw, comparedwith installed capacity—much of which had fallen into disrepair—of 150 mw.Most of the capital had little or no power after mujahideen factions beganbattling for it that year.

The situation has improved since the Taliban takeover. In mid-1993 the UNDPestimated that 60% of transmission lines nationwide were inoperative. Aboutthe same time Pakistan promised to explore the possibility of financing theconstruction of dams on the Kunar and Laghman rivers in the east to generateelectricity for both countries, but no progress was made. Immediate needsinclude funds to repair generating plants, substations, transformers, switchgear,distribution and transmission lines, and to purchase fuel for thermal facilities.

The issue of transit rights

Power-generation capacityis insufficient

60 Afghanistan


The economy

Economic structure

Main economic indicators, 1998

GDP growth (%) n/a

Consumer price inflation (av; %) n/a

Current account ($ bn) n/a

Foreign debt ($ bn) n/a

Exchange rate (Af:$) 3,000a

Population (m) 20.88

a End-period, unofficial rate.


Afghanistan is traditionally a subsistence agricultural economy. But much ofthe arable land fell into disuse with the onset of war, as millions of people wereuprooted from the countryside, crowding into towns and cities or fleeing toneighbouring Pakistan and Iran. In addition, the Soviet army adopted ascorched-earth policy to undermine the mujahideen, who retaliated bysabotaging economic installations and infrastructure. During the war years, thesubsectors of the economy that received most attention were those from whosedevelopment the Soviet Union benefited, such as the exploitation of naturalgas and other minerals, and government services, including defence. TheSoviet Union took the bulk of the country’s exports (mainly natural gas),provided most of its imports and accounted for most of its industrial andinfrastructure investment.

Inevitably, the damage caused to the agricultural sector had a knock-on effecton industry. There was some manufacturing activity in the major cities,particularly Kabul, but much of this ground to a halt as a result of thedestructive factional feuding that followed the mujahideen takeover in April1992 and the Taliban seizure of the capital in September 1996. On the otherhand the communist collapse led to something of a revival of the ruraleconomy as large numbers of refugees returned from abroad.

In a 1993 rehabilitation action plan, the UN Development Programme (UNDP)estimated GDP in 1991/92 at Af124.7bn ($1.72bn), compared with Af117bn in1978/79, the year of the Soviet invasion. Agriculture accounted for 45.5% ofoutput, down from 52.8% in the late 1970s, and trade and mining accountedfor a further 22% of output (see table).

War devastates agricultureand industry

Afghanistan 61


UNDP estimates of GDP, 1991/92

GDP (Af bn) 124.7

GDP ($ bn) 1.72

% shareAgriculture 45.5Services 16.9Mining 13.6Trade 8.4Construction 4.5Transport & communications 2.7

Source: UN Development Programme rehabilitation action plan, 1993.

Anecdotal evidence suggests that land previously used for wheat farming isincreasingly being turned over to the cultivation of more profitable crops, suchas onion, potato and—to an increasing extent—opium poppy. The UN DrugControl Programme (UNDCP) reported in September 1999 that opiumproduction in Afghanistan in 1999 reached an estimated 4,600 tonnes. This isnearly 120% above 1998 production levels and three times higher than thetotal production of the rest of the world. The area under cultivation rose from64,000 ha to 91,000 ha.

Poppy was grown for the first time in Jowzjan and Konduz provinces, bring to18 the number of provinces now cultivating opium. Some of the increase isdue to 1998's poor harvest, which saddled farmers with debts they could onlyrepay with more opium. According to an earlier report by the UNDCP,Afghanistan produces 50% of the world's opium and 80% of Europe's heroin.In February 1999 Taliban authorities said they had ordered the destruction ofthe numerous heroin factories in Afghanistan, but the industry continues tothrive.

Economic policy

In the area of economic management, the UNDP plan saw the primary task asreviving growth in output and stabilising prices, while maintaining a viablebalance-of-payments position. However, since the implementation of the planwas made conditional on the restoration of peace, it never got beyond thedrawing-board.

During the four and a half years when it held sway in Kabul, the Jamiat-ledadministration’s main priority in economic policy was to secure sufficientfunds to meet its military objectives so that it could retain power and extendits control where possible beyond the capital. The devastated economy’scapacity to generate resources for the government was extremely limited. Theformal tax system, previously hardly functional in tribal Afghanistan, hadcompletely collapsed early in the war.

An informal tax system grew up quickly following the mujahideen takeoverwhereby local commanders levied arbitrary tariffs on commercial trafficpassing through their territory. However, little of the revenue reached Kabul.The Taliban earned favour in the areas they conquered by removing the

The tax revenue system isin ruins

62 Afghanistan


checkpoints erected for this purpose, and they received generous donationsfrom grateful local traders.

During the Jamiat rule in Kabul, large quantities of the currency, afghanis, wereprinted in Russia and airlifted to its territory. In addition to being used to payJamiat troops and buy off rival faction leaders and commanders, the bills wereexchanged in the Kabul and Peshawar money markets for hard currency, whichin turn underwrote weapons and other purchases for the war effort fromabroad. Given that the administration’s overriding priorities were of a militarynature and it could order any amount of afghanis, public finance managementbecame a meaningless concept. Yet annual budgets were supposedly drawn up.Officials claimed the draft for 1994/95 (April-March) envisaged revenue ofAf536bn and outlays of Af613bn. Officials admitted the expenditure wouldhave to be entirely funded by printing new notes.

The Taliban’s increasing money problems are surely a major factor behind themassive increase in opium cultivation, despite vigorous claims to the contrary.In 1998 funding from Saudi Arabia was curtailed, while Pakistan is facing itsown domestic finance problems. To continue waging their battle to secure therest of Afghanistan, Taliban leaders must pay their fighters; drugs are the mostobvious way to get funds (whether by cultivating opium or taxing the trade).

The ongoing conflict also provides the ideal climate for drug barons to flourish.Unfortunately, this can also contribute to the perpetuation of the fighting as itis in the interests of those who profit from the drug trade, both inside andoutside the country. Foreign aid to the country fell markedly in 1997, partly inresponse to the human rights abuses perpetrated by the Taliban. Annual UNaid appeals have consistently missed their target.

During the communist period the inflation rate was high—prices in Kabulincreased almost tenfold between 1978/79 and 1990/91, according to theUNDP—but was nevertheless restrained by controls, subsidies, and plentifulsupplies in state and co-operative shops. These dampeners largely disappearedwith the mujahideen takeover. By mid-1993 officials at the by now defunctBank of Afghanistan (the central bank) estimated the annual inflation rate atmore than 150%. Although there have been no exhaustive independentmeasurements since then, anecdotal evidence suggests that it has accelerateddramatically, fuelled, among other things, by the massive injections ofunsupported currency and widespread shortages of basic foodstuffs.

Frequent blockades of Kabul by anti-Jamiat forces in 1992-96 meant that pricesfor staples were substantially higher in the capital than elsewhere. Since theeconomy is essentially a subsistence one, Afghans in paid employment,including civil servants and combatants, were among those hit hardest bysoaring inflation. The wage increases they received were never sufficient tooffset the runaway price rises. The situation has deteriorated dramatically sincethe Taliban’s seizure of Kabul.

Budget operations aredefunct

Runaway inflation

Afghanistan 63


Economic performance

The economy of Afghanistan, one of the world’s poorest and least developedcountries, has never been well documented. Even before the Soviet invasion,data were frequently incomplete and contradictory. Official statistics all butdried up after 1979 and have been non-existent since the fall of the communistgovernment in 1992.

Economic sectors

Agriculture

Although agriculture is the mainstay of the economy, traditionally accountingfor up to 50% of GDP, output has always been far below potential. Before theSoviet invasion, only 30% of the total arable land area of some 15m ha wascultivated, with wheat the principal food crop, sugarcane and beet widelygrown, and fruits and nuts, vegetables, wool, cotton, and hides and skins(especially karakul) the major exports. (Reference table 1 includes estimates ofagricultural production by the Asian Development Bank.)

The years of fighting, the consequent displacement of large sections of therural population, the scorched-earth policy pursued by the communist forcesand the widespread laying of mines, cut production substantially. Thegovernment estimated that foodgrain output fell by 30% between 1978/79 and1986/87. Despite the diminished population there was evidence of persistentfood shortages. These were alleviated by imports from the Soviet Union ofaround 250,000 tonnes/year. An extensive survey, carried out by a 70-strongteam led by a former agronomist at Kabul University and published in 1988,found that 30% of former agricultural land was uncultivated and that on landthat was still cultivated yields had dropped by 35%, mainly because of thedestruction of irrigation channels and the lack of fertilisers and new seeds. As aresult total agricultural output was only about 45% of the 1978 level and foodproduction had declined to little more than half its pre-1979 level. In 1991/92the area cultivated was 3.2m ha, of which 1.5m ha were irrigated, according tothe UNDP, which also estimated farm output to be about half its pre-war leveland some crop yields as much as 70% lower than before the war.

The situation has worsened since. According to the UN's World FoodProgramme (WFP), in 1999 Afghanistan was facing its worst recorded foodshortages, largely because of the lowest level of precipitation in 40 years.Afghanistan depends to a large extent on melting snows to provide irrigationwater. According to the WFP, very low snowfall last winter and late and erraticspring rains have caused a serious shortage in the water supply. The problem iscompounded by an increase in insect damage to harvests and by the increasein cash crops, such as onion, potato and—to an increasing extent—opiumpoppy. In 1998/99 Afghanistan produced over 4,600 tonnes of opium, making

The output of theunderdeveloped farm

sector—

—plunges during the war—

—but opium productionsoars

64 Afghanistan


Afghanistan by far the world’s largest producer of the raw material for heroin.Deteriorating economic circumstances and the absence of official sanctionsencouraged farmers, and later returning refugees, to grow poppy as a cash crop.The Taliban effectively endorse its cultivation, arguing that farmers have littlealternative and that, in any case, the end-product is mostly destined forWestern markets.

The livestock population, estimated in the late 1970s at 6.5m karakul sheep,15m other sheep, 3.7m cattle, 3.2m goats and 500,000 horses, was hit by thewar, and numbers fell dramatically. According to the 1988 survey cattlenumbers were down by 55%, and sheep and goats by 65%, while the numberof draught oxen, essential for ploughing for most farmers, had declined by30%. The 1993 plan of the UN Development Programme argued that the toppriority for the agriculture sector should be the restoration of self-sufficiency,focusing on community-based smallholder production schemes, and thereconstruction of ruined irrigation systems a crucial component.

Mining

Reserves of natural gas are estimated at up to 150bn cu metres. Extraction fromthe northern provinces of Jozjan and Faryab amounted to 3bn cu metres or soin 1988, much of it exported to the Soviet Union via a pipeline to Dushanbebuilt in 1967. During the 1980s gas sales accounted for as much as 50% ofexport earnings. In February 1989, as the last Soviet troops withdrew, thenorthern gasfields were capped to prevent their sabotage by the mujahideen.Although the Najibullah regime began preparations for the resumption ofextraction and exports a year later, these came to nothing because of pricedisagreements with Tajikistan, the target market, which has its own reserves.Preliminary rehabilitation of badly deteriorated and partly destroyed gasinfrastructure subsequently allowed for a limited resumption of production, forlocal consumption at the fields. An international consortium led by Unocal ofthe US attempted to negotiate with the Taliban and its rivals the constructionof a pipeline to carry gas from Turkmenistan to Pakistan via Afghanistan buthas now shelved the project.

Officially estimated at only 100m barrels in the 1980s, the country’s yet to betapped oil reserves are believed to be substantially higher, judging by theinterest of Soviet surveyors during that decade and Moscow’s declaredintention to build a 50,000-tonnes/year refinery in the north. Proven coalreserves have been put at 100m tonnes but are likewise believed to be as muchas four times greater. Output from the country’s main mines at Karkar Dodkashpeaked at 218,000 tonnes in 1978/79, much of it used to fire a nitrogenousfertiliser plant in Mazar-i-Sharif.

The country’s mineral resources have been incompletely surveyed, but thereare major deposits of iron, chrome, copper, coal and salt, as well as quantitiesof uranium, mercury, gold, silver, zinc, tin, lead, nickel, bauxite, lithium,wolfram, rubies, emeralds, lapis lazuli, sulphur, barytes, fluorite, talc, mica and

Livestock numbers arehalved

Gas reserves are large, butproduction is now minimal

Oil and coal resources arebelieved to be sizeable

Non-energy mineralsreserves remain largely

untapped

Afghanistan 65


magnesium. To date only gas, coal, chrome, copper, barytes and salt have beenexploited on any major commercial scale, owing to shortages of capital andtransport problems. Before the mujahideen takeover there had been somerenewed interest in mineral prospecting and extensive geological surveys werecarried out.

Manufacturing

Almost all manufacturing enterprises have ceased to operate or are producingwell below capacity because of war damage and shortages of raw materials andspare parts. Before its collapse the sector was predominantly concerned withprocessing local agricultural raw materials. Among the larger producing unitswere several cotton mills and rayon, woollen textiles, sugar and cement plants.Chemical fertilisers were produced from natural gas, and later coal, at Mazar-i-Sharif. Soviet-assisted ventures were said to have accounted for 36% ofindustrial output in 1979. Few, if any, new ventures are starting up in theunstable political climate. In early 1999 the Taliban stated that a Chinesebusinessman was considering building a cement factory in southernAfghanistan. In addition, a joint Czech and Slovak delegation visitedAfghanistan in April to evaluate prospects for two other cement factories.

Financial services

The banking system is another casualty of the war; its collapse coincided withthe mujahideen’s seizure of power. Until then the Bank of Afghanistan acted asboth a central and a commercial bank. Other institutions included PashtaniTejerati Bank, Construction Bank, the Industrial Credit Fund, the IndustrialDevelopment Bank, Agriculture Bank, Export Promotion Bank and BankeMillie Afghan, the only one privately owned. It was nationalised in 1976.

The resources of all banks were limited and their operations were essentiallyretail- or trade-related. Since they closed down, money-changers are the mainproviders of financial services. Within this system, opium has become a vitalsource of credit for Afghanistan’s poorest people who otherwise would notsurvive the harsh winter months. Under this informal loan system, whichtraditionally was based on wheat, a creditor (usually a shop-keeper) gives goodsin exchange for a fixed amount of crop. The reliability of opium as a crop hasmade it more popular than wheat as a source of credit. In its report the UNDrugs Control Programme (UNDCP), suggests UN action to stop drugproduction should include credit schemes aimed at opium-growing areas.

There is little or nomanufacturing

Banks no longer operate

66 Afghanistan


The external sector

Trade in goods

Official statistics, which exclude a huge amount of illegal transactions, showeda major trade deficit throughout the 1980s. Between 1985/86 and 1989/90 thevalue of exports almost halved, dropping from $566.8m to $235.9m. The slumpunderlined the importance of natural gas sales to the Soviet Union. Otherimportant foreign-exchange earners were fruit, vegetables and nuts, whichwent chiefly to Pakistan and India, karakul for Europe’s fur markets, and carpetsand cotton. Imports also declined steadily, if more slowly, over the same period,from $1.19bn to $822m. The extent of the integration of the Afghan economywith that of the Soviet Union, which had accelerated after the 1979 invasion,was illustrated by data for officially recorded trade in 1989-91, when the SovietUnion took 72% of the country’s exports and supplied 57% of its imports.

After the collapse of the Soviet Union in late 1991 and of Kabul’s communistgovernment a few months later, there was an upsurge in imports throughPakistan, aided by an agreement according duty-free access for Afghanistan-bound goods that had been in force since 1965. Islamabad imposed severerestrictions on the traffic in 1994-95, ostensibly because a substantialproportion of the goods, particularly air-conditioners, televisions and car parts,were being diverted onto the Pakistani market and undermining localassemblers and manufacturers. It also objected because its relations withKabul’s Jamiat-led administration had become severely strained. Resourcefultraders began chartering planes to airlift these and other items from the Gulf,especially the United Arab Emirates, to Jalalabad in the eastern Nangarharprovince, from where they were trucked north and west to central Asia andeast to Pakistan. Trade with Pakistan increased significantly after the Taliban’sassumption of power in Kabul, but most of this is unaccounted for andincludes import of basics like fuel, wheat, cement, and other commodities.(Reference table 2 includes Asian Development Bank estimates of trade withmain trading partners.)

Invisibles and the current account

Standardised IMF data for the latter years of the communist governmentshowed that the impact of the chronic trade deficit on the current-accountbalance was often mitigated by large public transfers, mostly in the form ofSoviet grants. In 1988 these, together with smaller merchandise and servicesdeficits as total trade declined, put the current account into surplus for the firsttime. After the suspension of gas exports the following year, the currentaccount went back into deficit. Given that production has almost dried up, thecountry has become more dependent than ever on imports. The tourism andfinancial services industries are defunct, and there is no investment income.The current account has undoubtedly deteriorated under the Taliban.

Exports and imports fallsharply—

—as more trade is routedthrough Pakistan

The current-account deficitis believed to be

considerable

Afghanistan 67


Capital flows and foreign debt

Following the Soviet invasion, only very limited funds came from sourcesoutside eastern and central Europe. Afghanistan’s external public debt isestimated to have stood at $5bn in 1990, the bulk of it owed to the SovietUnion, and all but a marginal amount on concessional terms. No foreign debthas been serviced or repaid since 1992. (Reference table 3 includes AsianDevelopment Bank estimates of foreign debt.)

Foreign reserves and the exchange rate

Locally held foreign reserves, whose stability since the mid-1970s had rested onlarge inflows of official long-term capital, principally from the Soviet Union,amounted to the equivalent of only $214m at the end of 1992 and werequickly liquidated by the cash-strapped Jamiat administration. At the time goldreserves were estimated at $700m-800m. Since the bulk of these are heldabroad, cashing them in proved more difficult. In November 1994 the thenfinance minister, Jamiat’s Hamidullah Tarzi, travelled to Washington in anunsuccessful attempt to persuade the IMF to release Afghanistan’s $8m reservetranche. (Reference table 4 includes IMF data on foreign reserves.)

An official exchange rate of Af45:$1 was introduced in 1963 and initiallyapplied to export earnings from karakul, cotton and wool, certain governmentforeign-exchange receipts, and foreign-exchange payments by the governmentfor imports and other purposes. In mid-1981 the rate was changed toAf50.6:$1, which technically stood until the fall of the Najibullah regime inApril 1992. During this time it applied only to government transactions, partof the foreign-currency salaries of foreigners working in the country, andspecified transactions under bilateral agreements. The official rate was adjustedto Af3,000:$1 from April 1996, although it is still only applicable to a specificrange of transactions.

Bank rates were linked to those prevailing in the bazaar, which became the solearbiter after April 1992, when the market rate hovered around Af320:$1.Despite the paucity of reserves and rampant money creation at Jamiat’s behest,the market-determined exchange rate remained surprisingly stable for a time,declining from around Af1,000:$1 in late 1992 to only Af1,500:$1 a year later.One reason was that a large proportion of the newly printed afghani notes thatarrived in Kabul were hoarded by their ultimate recipients instead of being putinto circulation. However, the Jamiat administration’s introduction in Octoberand November 1994 of new Af5,000 and Af10,000 bills—until then the largestdenomination had been Af1,000—sparked a prolonged inflationary spiral.Between late 1994 and early 1997 the market exchange rate tumbled fromAf4,000:$1 to around Af26,000:$1.

Lending and debt servicingare suspended

The mujahideen quicklyspend the reserves they

inherit

The official exchange ratecounts for little

The market sends theafghani on a downward

spiral

68 Afghanistan


Appendices

Sources of information

No statistical data are now published

Asian Development Bank, Key Indicators of Developing Asian & Pacific Countries

IMF, International Financial Statistics (monthly)

World Bank, World Development Report (annual)

G Arney, Afghanistan, Mandarin, London, 1990

L Dupree, Afghanistan, Princeton University Press, Princeton, 1973

N Dupree, An Historical Guide to Afghanistan, Afghan Tourist Organisation,Kabul, 1977

G M Fraser, Flashman in the Great Game, Pan, London, 1976

P Hodson, Under a Sickle Moon, Hutchinson, London, 1986

P Hopkirk, The Great Game, Oxford University Press, Oxford, 1991

E Newby, A Short Walk in the Hindu Kush, Pan, London, 1981

O Roy, Islam and Resistance in Afghanistan, Cambridge University Press,Cambridge, 1986

A Saikal and W Maley (eds), The Soviet Withdrawal from Afghanistan, CambridgeUniversity Press, Cambridge, 1989

M Urban, War in Afghanistan, Macmillan, London, 1988

M Yousaf and M Adkin, The Bear Trap, Cooper, London, 1992

Reference tables

Reference table 1

Agricultural production, estimates(‘000 tonnes; fiscal years beginning Mar 21st)

1991 1992 1993 1994 1995

Wheat 1,726 1,650 1,700 1,700 1,700

Maize 420 300 350 360 360

Grapes 365 330 330 0 0

Rice, paddy 335 300 300 350 300

Potatoes 223 224 228 0 0

Barley 217 150 170 180 0

Sugarcane 38 38 38 0 0

Source: Asian Development Bank, Key Indicators of Developing Asian & Pacific Countries.

National sources

International sources

Select bibliography

Afghanistan 69


Reference table 2

Main trading partners($ m)

1994 1995 1996 1997 1998

Exports to:China n/a 15.3 3.0 1.0 0.3Pakistan n/a 14.0 25.0 30.0 9.8Russia n/a 8.9 6.6 6.9 0.9Germany n/a 8.8 1.0 2.9 2.3

Imports from:Japan n/a 92.0 116 97 n/aChina n/a 34.8 35.6 36.1 81.0Singapore n/a 23.1 138.0 101.0 29.0Pakistan n/a 19.5 138.0 101.0 31.0

Sources: Asian Development Bank, Key Indicators of Developing Asian & Pacific Countries; EIU estimates.

Reference table 3

External debt1993 1994 1995 1996 1997

Total outstanding & disbursed 5,479 5,586 5454 5489

Debt service 12 5 8 – –

Sources: Asian Development Bank, Key Indicators of Developing Asian & Pacific Countries; EIU estimates.

Reference table 4

Official overseas reserves($ m)

1993 1994 1995 1996 1997

SDRs 2.0 1.0 0.0 6.0 0.0

Reserve position in the IMF 4.93 4.93 4.93 4.93 4.93


Editor: Elisabeth PaulsonAll queries: Tel: (44.20) 7830 1007 Fax: (44.020) 7830 1023

Documents

Pakistan Afghanistan · 2007-07-24 · widespread protests. On July 5th 1977 General Muhammad Zia ul-Haq, the chief of army staff, removed Mr Bhutto and declared martial law. Mr Bhutto