Pakistan Afghanistan Regent Street The Economist Building 25/F, Dah Sing Financial Centre London 111 West 57th Street 108 Gloucester Road SW1Y 4LR New York Wanchai United Kingdom NY

COUNTRY PROFILE

Pakistan

AfghanistanOur quarterly Country Report on Pakistan and Afghanistananalyses current trends. This annual Country Profileprovides background political and economic information

1996-97The Economist Intelligence Unit15 Regent Street, London SW1Y 4LRUnited Kingdom

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ISSN 0269-5634

February 4, 1997 Contents

Pakistan

3 Basic data

4 Political background4 Historical background7 Constitution and institutions8 Political forces9 International relations and defence

10 The economy10 Economic structure11 Economic policy14 Economic performance15 Regional trends

16 Resources16 Population17 Education18 Health18 Natural resources and the environment

19 Economic infrastructure19 Transport and communications19 Energy provision21 Financial services

22 Production22 Industry23 Mining and semi-processing24 Agriculture and forestry

26 The external sector26 Merchandise trade28 Invisibles and the current account29 Capital flows and foreign debt30 Foreign reserves and the exchange rate

32 Appendices32 Sources of information33 Reference tables

1

EIU Country Profile 1996-97 © The Economist Intelligence Unit Limited 1997

Afghanistan

51 Basic data

52 Political background52 Historical background58 Constitution and institutions59 Political forces60 International relations and defence

62 The economy62 Economic structure63 Economic policy

64 Resources64 Population65 Education65 Health66 Natural resources and the environment

66 Economic infrastructure66 Transport and communications67 Energy provision68 Financial services

68 Production68 Industry68 Mining69 Agriculture

70 The external sector70 Merchandise trade70 Invisibles and the current account71 Foreign debt71 Foreign reserves and the exchange rate

73 Appendices73 Sources of information73 Reference tables

2


Pakistan

Basic data

Land area 796,095 sq km

Population 131.63 million (January 1996 estimate)

Main towns Population in ’000, 1981

Karachi 5,100 Rawalpindi 920Lahore 2,920 Hyderabad 795Faisalabad 1,090 Islamabad 204

Climate Sub-tropical, cold in highlands

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

Languages English is the official language, and Urdu is the national language

Measures Imperial system, changing to metric. Local measures include:

1 seer=0.933 kg

1 maund=40 seers=37.32 kg

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

Currency Rupee=100 paisa. Average 1995 exchange rate: PRs31.64:$1. Exchange rate onJanuary 24, 1997, Prs40.08:$1.

Time 5 hours ahead of GMT

Fiscal year July 1-June 30

Public holidays(1997)

January 10 (start of Ramadan), February 9 (end of Ramadan), March 23(Pakistan Day), April 18, May 1, May 9, May 18, July 18, August 14(Independence Day), September 6, September 11, November 9, December 25,December 31 (start of Ramadan)

Pakistan: Basic data 3


Political background

The Islamic Republic of Pakistan is a federated parliamentary democracy. Thehead of state, elected every five years by the national and provincial assembliesand the Senate, enjoys important discretionary powers under a controversial1985 amendment to the constitution, including the right to dismiss the govern-ment. The amendment, invoked to sack every elected administration since, waslast used on November 5, 1996 by the president, Farooq Leghari, against BenazirBhutto, whose Pakistan People’s Party (PPP) had emerged from the October1993 elections as the largest party in the National Assembly and formed acoalition government with a splinter faction of the Pakistan Muslim Leagueheaded by Hamid Nasir Chattha, the PML (C). President Leghari named MerajKhalid, a former speaker of the National Assembly, as head of a caretaker govern-ment to oversee fresh elections on February 3, 1997, which Nawaz Sharif won.

Historical background

Successive invasions The area that comprises 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 early in the 17th century. As the Moghul empire declined the Britishextended their influence and by the late 19th century had secured control ofthe Indian subcontinent.

The formation ofPakistan, 1947

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

Following a succession of civilian and military governments, the first nationalelections were held in December 1970. An overwhelming majority of seats inthe east was won by the Awami League, while Zulfikar Ali Bhutto’s PakistanPeople’s Party (PPP) took a substantial majority in the west. Confronted by thereluctance of Mr Bhutto and the army (led by West Pakistan) to countenance aBengali-dominated government, in March 1971 the Awami League launched acampaign of civil disobedience which immobilised the east. A brutal militarycrackdown, in which hundreds of thousands of Bengalis were killed, came toan abrupt end in December that year with the intervention of the Indian armyand the declaration of Bangladesh as an independent state.

General Zia removesMr Bhutto—

Mr Bhutto became president and chief martial law administrator of a truncatedPakistan, then, following the passage of a new constitution in April 1973, itsprime minister. While his PPP easily won elections held in March 1977, strong-arm tactics employed against the opposition at local level sparked widespread

4 Pakistan: Historical background


protests. On July 5 that year, the chief of army staff, General Muhammad Zia-ulHaq, removed Mr Bhutto and declared martial law. Mr Bhutto was put on trialfor alleged complicity in the murder of a political opponent, convicted, andhanged on April 4, 1979. General Zia’s increasingly harsh rule was characterisedby an Islamisation programme ostensibly designed to fulfil the original purposeof Pakistan but aimed in reality at generating elusive popular support.

—whose death paves theway for Benazir—

Political opposition focused on the Movement for the Restoration ofDemocracy (MRD), of which the most important component was the PPP, nowled by Benazir Bhutto, daughter of the former prime minister, who returned

Important recent events

September 1991: Nawaz Sharif of the Pakistan MuslimLeague, the PML (N), elected prime minister a year earlier,expels Agha Murtaza Poya, leader of a small Islamic group,from the eight-party Islami Jamhoori Ittehad (IJI—IslamicDemocratic Alliance) government, the first of a series of expul-sions and defections that will severely undermine the coalition.

April 1992: Jamaat-i-Islami, another fundamentalist party,decides to quit the IJI, accusing Mr Sharif of procrastinating onIslamisation.

May 1992: The deployment of 30,000 troops and paramili-taries in Sindh province, ostensibly to restore law and order,leads to a severe crackdown on the Mohajir Qaumi Movement(MQM), provoking it to withdraw support from the IJI govern-ment.

April 1993: Following a protracted power struggle, the pres-ident, Ghulam Ishaq Khan, dismisses Mr Sharif, accusing hisgovernment of “maladministration, corruption and nepotism”,and installs a caretaker administration which includes membersof Benazir Bhutto’s Pakistan People’s Party (PPP).

May 1993: By a majority of 10-1, the Supreme Courtreinstates Mr Sharif, ruling that Mr Khan has exceeded his con-stitutional rights. But the battle for supremacy between thehead of state and leader of the government continues.

July 1993: Moeen Qureshi, a former vice-president of theWorld Bank, is sworn in as interim premier after General AbdulWaheed, the chief of army staff, obliges Mr Sharif and Mr Khanto resign.

October 1993: Ms Bhutto becomes prime minister followingfederal and provincial elections that enable the PPP to formcoalitions, along with a breakaway faction of the PML led byHamid Nasir Chattha, the PML (C), at the centre and in Punjab.The PPP also wins an outright majority in the Sindh Assembly.

November 1993: Farooq Leghari, deputy leader of the PPP,is elected head of state by federal and provincial parlia-mentarians and senators, easily defeating acting presidentWasim Sajjad of Mr Sharif’s Muslim League, the PML (N).

April 1994: The PPP’s Aftab Sherpao is elected chief ministerof North West Frontier Province after Mr Leghari contro-versially dismisses its government led by the PML (N).

June 1995: Altaf Hussain, the MQM’s London-based leader,threatens agitation for a separate mohajir province includingKarachi, the country’s economic capital and main port, unlesshis party’s demands for better representation are met.

July 1995: Talks between the government and the MQM,ostensibly aimed at ending Karachi’s mounting political andethnic violence, begin, but intransigence on both sides—in-cluding the PPP’s apparent determination to crush mohajirextremists by force—ensures they make no headway.

September 1995: Mr Leghari suspends the Punjab govern-ment, paving the way for the removal of the province’s asser-tive chief minister, Mansour Wattoo, and the election in hisplace of Arif Nakai, a far more malleable fellow member of thePML (C).

July 1996: Fifteen opposition parties, including the PML (N),the MQM and Jamaat-i-Islami, join forces, pledging to bringdown Ms Bhutto’s government.

November 1996: Pressurised by the army high command,Mr Leghari sacks Ms Bhutto, accusing her government of mal-administration and corruption, and installs a caretaker regimeto oversee fresh elections on February 3, 1997.

February 1997: Nawaz Sharif easily wins the generalelection.

Pakistan: Historical background 5


home from exile in April 1986. General Zia died in a plane crash—most prob-ably the result of sabotage—on August 17, 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, securing 93 out of 217 seats, at the November1988 elections. It formed a government after reaching an understanding withthe militant Mohajir Qaumi Movement (MQM), which represents Urdu-speakers from India who settled in urban areas of Sindh province at partition.

—as head of anothershort-lived PPPadministration

Her administration seemed doomed from the outset, however. Rivalry for con-trol of Sindh, the PPP’s traditional heartland, saw relations with the MQM sourrapidly; the Islami Jamhoori Ittehad (IJI), a multiparty alliance dominated bythe Pakistan Muslim League (PML), which had come a close second in thefederal polls and won control of the Punjab assembly, the key provincial parlia-ment, proved an implacable opposition; and the all-powerful “establishment”,the army high command and senior civil servants, increasingly resented agovernment it considered not only weak and corrupt but also unfit to handlesensitive defence and foreign-policy issues. Mr Khan sacked Ms Bhutto20 months into her five-year term, and installed a caretaker administration tooversee fresh elections within 90 days.

Nawaz Sharif’sgovernment

The polls, in October 1990, were won by the PML-led IJI, and Nawaz Sharif, awealthy industrialist and former chief minister of Punjab, became prime min-ister. Despite enjoying a two-thirds majority in the National Assembly, effectivecontrol of all four provincial parliaments and the backing of the military and thepresident, the essentially artificial nature of the IJI—hastily cobbled together bythe Inter Services Intelligence (ISI) directorate after General Zia’s death to meetthe challenge posed by Ms Bhutto and a resurgent PPP—soon became apparent.Initially supportive parties, including the fundamentalist Jamaat-i-Islami andthe MQM, were alienated. Relations between Mr Sharif and Mr Khan degener-ated into a no-holds-barred battle for political supremacy, which resulted in thesacking of the prime minister by the head of state on April 18, 1993 and theinstallation of another caretaker regime, which included members of the PPP.Although Mr Sharif was reinstated six weeks later by the Supreme Court, whichruled that Mr Khan had exceeded his powers, the power struggle persisted. It wasbrought to an end on July 15 when the army chief, General Abdul Waheed,forced both men to resign.

Ms Bhutto returns At elections the following October, overseen by an interim government headedby a former vice-president of the World Bank, Moeen Qureshi, the PPP wasreturned as the largest party in the National Assembly with 86 seats, followedby Mr Sharif’s PML with 72. Thanks to the support of Hamid Nasir Chattha’sbreakaway faction of the PML, the PML (C), Ms Bhutto was able to form acoalition government both at the centre and, crucially, in Punjab province. Butthe PPP-led administration failed to address widely felt grievances, includingdeclining living standards, mounting lawlessness and terrorism as well asrampant high-level corruption. Yet it was Ms Bhutto’s increasingly brazenmanipulation of the democratic process to sustain and prolong her rule, notleast the extrajudicial killing of hundreds of MQM activists and supporters,

6 Pakistan: Historical background


that prompted the army high command to prod Mr Leghari, who for yearsbefore his elevation to the presidency had been deputy leader of the PPP, tooust her, which he did on November 5, 1996.

Constitution and institutions

Constitutionalamendments legitimise

authoritarianism

The 1973 constitution, framed by Zulfikar Ali Bhutto’s PPP government, pro-vided for a federal democratic structure. Although still in force, it has under-gone major amendment at the hands of autocratic administrations. It was firstmodified at Mr Bhutto’s behest, as early as 1974, to legitimise his government’screeping authoritarianism. Limits were imposed on freedom of association andprovisions introduced for the indefinite detention without trial of anyonedeemed a threat to state security.

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, inter alia, assumed the right todissolve the National Assembly without the prime minister’s consent, and wasempowered to appoint the head of the government, the three chiefs of thearmed forces, ministers of state, provincial governors and key judicial figures.As a result, the National Assembly’s ability to formulate policy was limited.

While the 1993 election manifestos of both the PPP and the PML (N), themainstream faction of the PML, contained commitments to scrap the eighthamendment, which allows the president to dismiss the government, no actionwas taken for a number of reasons. The animosity between the two mainparties meant that the requisite support of two-thirds of the members of theNational Assembly could not be mustered; the opposition considered theamendment a useful potential check on Ms Bhutto’s powers, not least becausethe chairman of the Senate, Wasim Sajjad, the PML (N), would assume thepresidency if Mr Leghari became incapacitated or otherwise unavailable; andsenior generals wanted the amendment to remain in place because, byenabling them to impose their will indirectly through the president, it obviatedthe need for a full-blooded army intervention in politics—as underlined byPresident Leghari’s move against Ms Bhutto in November 1996.

Opposition parties have routinely lobbied for the modification of the constit-ution in order to guarantee the supremacy of parliament, the independence ofthe judiciary and the neutrality of the civil service and the election commis-sion. Such institutions have traditionally been used—or abused—as instru-ments of power by whatever government is in office. The campaigns havemade little headway precisely because such changes require the approval oftwo-thirds of federal parliamentarians—a level of support only a comfortablyensconced government can garner.

A much-abused judiciaryfinally asserts itself

In a major verdict handed down in March 1996, the Supreme Court ruled thatthe government was henceforth obliged to appoint judges solely on the basisof seniority, and that its nominees needed the endorsement of the chief justiceof the relevant court. Ms Bhutto’s government initially lodged an appeal

Pakistan: Constitution and institutions 7


against the ruling, claiming the court had exceeded its constitutional rights,but subsequently backed down.

Political forces

The PPP Since its foundation more than a generation ago, the PPP has been an uncom-fortable amalgamation of socialists and conservatives. However, the lattergroup, epitomised by the wealthy landowning class to which the Bhuttosbelong, has always, except during a brief period following its creation, domi-nated. Like the party’s founder, Zulfikar Ali Bhutto, its current leader, hisdaughter, Benazir Bhutto, 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 has preached the virtues of participatorydemocracy while seeking to promote the PPP to the exclusion of all otherparties, and to secure undisputed control within it. Such a fundamentallyself-serving strategy was her father’s downfall and led to her own abrupt dis-missal, for the second time, in November 1996.

The PML The PML has traditionally been seen as the party closest to the powerful “estab-lishment” of army generals and senior bureaucrats. Nawaz Sharif, the currentleader of the PML (N), was groomed as a politician by General Zia, and thecoalition he headed from 1990 to 1993 was originally contrived by militaryintelligence as a counter to the PPP. But Mr Sharif alienated the military duringhis period in office. In opposition, the PML (N) was weakened by officialharassment, as well as by the PPP’s sometimes successful attempts to lure awayprominent members. While it sought to build bridges to smaller oppositionparties in a bid to strengthen its position and undermine the PPP, suchalliances tended to lack unity of purpose. Yet the sacking of Ms Bhuttoinevitably reinvigorated the PML (N) ahead of the February 1997 elections.

The MQM While its support base is largely confined to the main cities of Sindh, partic-ularly Karachi and Hyderabad, the MQM is the country’s third most popularparty. However, its militancy and reputation as an unreliable ally have pre-vented it from capitalising on its potential as a power broker. Nevertheless,having boycotted the 1993 federal polls—for reasons that have yet to be ex-plained—it will be seeking to extract maximum mileage from the February1997 elections.

The role of the generals The army remains Pakistan’s ultimate political arbiter. It has run the countryfor as long as civilian governments and been the driving force behind thepremature removal of the last three elected administrations—Ms Bhutto’s in1990, Mr Sharif’s in 1993 and again Ms Bhutto’s in 1996—all of which paid theprice of seeking to consolidate themselves at the expense of the military.

8 Pakistan: Political forces


Main political figures

Benazir Bhutto: First ousted from the premiership for mismanagement and corrup-

tion at the army’s behest in August 1990 after just 20 months in office, the discredited

PPP leader was removed a second time for similar reasons in November 1996, three

years into a five-year term, and can hardly expect another stint in office.

Nawaz Sharif: After his unceremonious removal by the military in 1993 and the

PPP-led government’s subsequent no-holds-barred victimisation of him and his party,

the PML (N) chief was given a new lease of life by Ms Bhutto’s dismissal, and went on

to win the February 1997 general election.

Farooq Leghari: Despite once being Ms Bhutto’s loyal lieutenant as deputy leader of

the PPP, the president had, since his elevation in late 1993, become increasingly

concerned over her uncompromising approach to delicate problems, poor governance

and persistent reports of high-level graft. Yet he would not have moved against her

without the prodding of the army high command. The newly elected government

seems bound to respect him.

General Jehangir Karamat: Having insisted national security was his prime concern,

the chief of army staff has followed the lead of his supposedly apolitical predecessor by

securing the departure of an elected civilian government, confirming the military high

command’s status as the country’s ultimate political arbiter.

Altaf Hussain: Despite the extrajudicial killing of his supporters endorsed by Benazir

Bhutto’s second government, the firebrand MQM leader bears much of the responsi-

bility for Karachi’s chaos. He exerts an awesome influence over domestic political

developments from his London exile.

Hamid Nasir Chattha: The leader of the PML splinter group that was the PPP’s

minority partner in the federal and Punjab coalition governments had publicly be-

moaned the assertiveness of Ms Bhutto’s party and threatened reunification with

Mr Sharif’s mainstream faction. His future and that of his breakaway group are uncer-

tain in the wake of the PPP-led government’s dismissal.

Qazi Hussain Ahmad: Although his fundamentalist Jamaat-i-Islami party has few

parliamentary seats, its self-appointed role as sacred keeper of the national con-

science—which helped bring large, troublesome crowds on to the streets and thereby

hastened the demise of the Bhutto government—seems set to ensure it a lasting,

potent place in the political process.

Imran Khan: While the cricketer-turned-philanthropist’s launch of a political move-

ment in April 1996 and his promises of a war on corruption and the protection of basic

rights have struck a chord among Pakistanis exasperated by mainstream politicians, his

naiveté, arrogance and emphasis on Islam limit his electoral appeal.

International relations and defence

India remains publicenemy number one

Fraught relations with India since the traumatic and bloody partition of 1947have led to three full-scale wars, several lesser skirmishes—most recently alongthe so-called Line of Control dividing the disputed state of Kashmir—and avigorous weapons race. Following Delhi’s detonation of an atomic device in1974, Islamabad launched its own nuclear programme. It is now believed tohave several bombs broken down into components that could be quickly

Pakistan: International relations and defence 9


assembled, and to be refining a delivery system. American threats of punitivesanctions seem to have forestalled active deployment, but pressure aimed atencouraging both sides into meaningful non-proliferation negotiations hasyielded little. Pakistan recently declined to sign the Comprehensive Test BanTreaty because India refused to do so. The tension is bound to persist whilegovernments on both sides remain convinced there is political mileage to bemade from the stand-off, and their respective opponents at home continue toexploit any perceived slackening of resolve, however slight or well intentioned.

China is the mostsupportive ally

Friendship with China, born out of a shared antipathy towards India and theformer Soviet Union, is one of the most consistent features of Pakistan’s foreignpolicy. Officials of the US Central Intelligence Agency are convinced thatBeijing has supplied Islamabad with nuclear technology and parts, as well asM-11 ballistic missiles capable of delivering assembled weapons.

Relations with Kabul arenever easy

Although it was the most active external sponsor of Afghanistan’s holy warri-ors during their war against the Red Army and Kabul’s Moscow-backed govern-ment, Pakistan has not enjoyed consistently good relations with anymujahideen (holy warriors) group since the communists’ defeat in April 1992.The ambivalence of its Afghanistan policy, designed in part to prevent theemergence of another powerful neighbour to the west, is largely to blame.Islamabad’s support for the ultra-orthodox Taliban militia, the Sunni Muslimgroup that seized Kabul in September 1996, severely strained ties with Iran,which adheres essentially to the Shia sect of Islam.

Pandering to the USA Given the circumstances surrounding its birth, Pakistan has always been keento curry favour with fellow Muslim states. Ms Bhutto was no different from herpredecessors in this respect. Yet to the fury of some of the country’s hardlinereligious groups, securing a resumption of US assistance—cut off in 1990 whenthe then US president George Bush declared he was unable to certify thatPakistan did not have a nuclear weapons capability—was one of her foremostforeign policy priorities. She succeeded to some extent, and pleased the armedforces by negotiating the release of embargoed military equipment, includingaircraft, missiles, radar and artillery pieces. (See Reference table 1 for nationalstatistics on defence spending.)

The economy

Economic structure

The central importance ofthe cotton harvest—

Agriculture accounts for the lion’s share of GDP, contributing 24.8% in1995/96, 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, because it determines the availability and costof the main 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 1995/96 harvest at between

10 Pakistan: Economic structure


10.6m and 12m 170kg bales, compared with the 1994/95 outturn of 8.7m balesand the record 11.9m bales achieved in 1991/92.

Main economic indicators, 1995/96a

GDP growth (%) 6.1

Consumer price inflation (%) 10.8

Current-account deficit (% of GDP) 17.1

Total external debt ($bn) 31.9

Exchange rate (PR:$) 33.1

Population (m) 131.6

a Fiscal year ending June 30, 1996.

Source: Ministry of Finance, Economic Survey, 1995/96.

—and the failure to makethe most of it

Despite being one of the world’s largest producers of raw cotton, value additionremains minimal. Exports of lint were expected to reach 2m bales in 1995/96,while the domestic spinners’ lobby said its members needed a further 9m bales.Since most of their yarn is exported, relatively little goes to downstream textilemanufacturers whose earnings potential is substantially higher. Private con-sumption accounted for no less than 76% of expenditure on GDP in 1995/96,and public consumption 11.3%. Capital formation contributed 17.4%, largelyunchanged from a decade earlier.

Comparative economic indicators, 1995

Pakistan Bangladesh India Malaysia Sri Lanka Vietnam

GDP ($ bn) 60.6 29.1 322.1 81.2 12.9 19.8

GDP per head ($) 467 242 343 4,042 713 268

Consumer price inflation 12.3 5.8 10.3 3.4 7.7 16.8

Current-account balance –3.6 –0.8 –5.3 –7.1 –0.5 –1.9

Exports of goods ($ bn) 8.2 3.7 32.4 73.1 3.8 5.2

Imports of goods ($ bn) 10.9 6.1 39.4 72.9 4.7 7.5

Foreign trade (% of GDP) 31.5 33.6 22.3 179.8 65.9 64.3Source: EIU.

Economic policy

A consensus on the needfor economic

liberalisation—

There is a bipartisan consensus on the need for economic liberalisation andreform, despite the animosity between the PPP and the PML (N) and the harshpolitical realities of office (and of their members’ personal interests), which havetempered their enthusiasm for austerity and adjustment. Declining GDP growthrates in recent years underscore severe problems, most of a structural nature.

—but political needshinder progress on fiscal

reform—

Foremost among them is the perennial problem of the fiscal deficit. Pakistan’sgovernments routinely spend much more than they raise in revenue, andoutlays are largely unproductive: the army and debt-servicing absorb as muchas two-thirds of the total. While the Washington multilaterals initially laudedMs Bhutto’s second government as the first elected administration for yearsseriously prepared to tackle the deficit, which fell from 9% of GDP in 1992/93to 5.6% in 1993/94, political expedience precluded further progress. Officials

Pakistan: Economic policy 11


estimated the 1995/96 outturn at 5%, but independent economists put it at aminimum of 5.4%. An inability to contain spending and meet projected reve-nue targets lies at the heart of the problem.

—or on the reduction ofhigh levels of monetary

growth

Heavy government borrowing from the domestic banking system to supportspending has fuelled money-supply growth, notwithstanding recent attemptsby the State Bank of Pakistan (SBP, the central bank) to render monetary policymore market-oriented. This has been achieved by scrapping the credit/depositratio and greater recourse to open market operations, including the auctioningof government securities such as six-month Treasury Bills and FederalInvestment Bonds, as well as judicious changes in liquidity/cash reserve require-ments and the discount rate. (See Reference table 3 for historical data on themoney supply, and Reference table 4 for interest rates.)

The IMF and World Bankdictate the direction of

policy reforms—

In recent years, the formulation and direction of economic policy have beenlargely governed by the terms of agreements reached with multilateral credi-tors, particularly the IMF and World Bank. Before its return to power inOctober 1993, the PPP’s election manifesto spoke of the need for a drasticoverhaul of the economy. Once in office, it began devising a strategy designedto meet medium-term macroeconomic objectives agreed with the IMF: annualGDP growth of 6.5%; inflation below 6% per year; a fiscal deficit equivalent to4% of GDP; meaningful reductions in the ratios of domestic and external debtto GDP; a strengthening of the balance of payments; and foreign reservesequivalent to at least ten weeks’ imports.

—and the public-sectordeficit becomes the focus

of much attention

A major contraction of the public-sector deficit was deemed a crucial prereq-uisite for macroeconomic stability. To this end the Bhutto government prom-ised, inter alia, to expand agricultural taxes and extend the general sales tax(GST) to the trade and services sectors before converting it into a broader-basedvalue-added tax. These plans were in keeping with its commitment to shift thefocus of official revenue-raising efforts from levies on international trade to-wards income and consumption taxes. Higher sales tax revenues were to offsetlower earnings from duties on exports and imports. To reduce spending, thegovernment promised progressively to eliminate subsidies and contain outlayson defence.

IMF credits in 1994— While few initially questioned the government’s commitment to reform, it wasclear that the planned changes would be difficult to implement because of thecomplex domestic political environment, the fact that the programme wouldtarget the country’s powerful elite and the traditional weakness of officialagencies such as the tax administration. Nevertheless, in February 1994 theIMF approved credits totalling $1.3bn from its Enhanced Structural Adjust-ment Facility (ESAF) and Extended Fund Facility to support the programme.

—are followed by areforming 1994/95

budget—

The 1994/95 budget, unveiled the following June, respected the Fund’s pre-scriptions, but met strong criticism from domestic business lobbies, whichparticularly resented the extension of the GST to hundreds of new items andthe lowering of the maximum tariff rate to 70%. One purpose of tariff reformwas to render domestic industry more competitive, both by confronting it with

12 Pakistan: Economic policy


quality finished products from abroad and by affording it cheaper raw materi-als. The government’s problems were compounded by a poorly performingeconomy. Drought and viral damage hit the cotton crop, undermining agricul-tural growth, depriving the key textiles industry of raw material and depressingexports. The slowdown also fuelled inflation and adversely affected tax reve-nue, exacerbating the fiscal deficit.

—but backsliding in1995/96

The Fund, acknowledging that the debilitating factors were largely exogenous,agreed in March 1995 to relax some performance criteria, including the inflationand fiscal deficit targets. However, the government effectively repudiated theIMF three months later when the 1995/96 budget projected a fiscal deficit equi-valent to 5% of GDP rather than the previously agreed 4%, and lowered themaximum tariff rate to 65% instead of 45%. Having earlier stopped disburse-ments, it responded by scrapping the medium-term adjustment programme.

Federal government financesa

(PRs bn unless otherwise indicated)

% change,1995/96 year on year

Total revenue 404.7 15.0 of which: tax revenue 270.5 20.2 Direct taxes 76.2 31.3 Indirect taxes 194.3 16.3

Total expenditure 434.6 15.4 of which: defence expenditure 115.2 14.9 debt servicing 157.3 17.8 development expenditure 96.5 17.8

Balance –29.9b 22.0

a Budgeted. b Includes extrabudgetary spending by major public corporations.


Emergency measures inOctober 1995—

The government was soon obliged to relent. Other creditors had followed theIMF’s lead and suspended lending, yet the overall financing requirement wasmounting rapidly as the economy continued to deteriorate. The most dramaticevidence of this was a worsening balance of payments situation. During thefirst quarter of 1995/96, the combination of a 5% drop in exports and a 21%surge in imports contributed to a dangerous plunge in foreign reserves. InOctober, following discussions with the Fund, the government announced aseries of emergency measures, including a 7% devaluation of the rupee. Toattenuate the inflationary effect of the adjustment it promised stricter controlson public spending, measures to contain demand, especially for imports, andtighter credit and monetary policies. Two months later the IMF approved a$600m stand-by credit, to be drawn down over 15 months.

—but the 1996/97 budgetfails to deliver

But the deal was automatically suspended, and the government’s chances ofsecuring substantial ESAF credits in the medium term dashed, when the1996/97 budget again failed to lower the maximum tariff rate to the promised55%. In the face of post-budget protests the authorities also abandoned plansto extend the GST in some areas.

Pakistan: Economic policy 13


The tax and export basesneed broadening

The key to reducing the fiscal deficit—and therefore the government borrow-ing from the banking system which crowds out more productive potentialdebtors—is to broaden the tax base and improve collection. Yet the CentralBoard of Revenue is aware that the possibilities for generating additional re-ceipts from existing sources are limited. Unless hitherto exempt areas of theeconomy are brought squarely into the tax net—particularly the agriculturalsector and the wealthy landowners who dominate it—collection levels arelikely to stagnate. (See Reference table 2 for a historical breakdown of govern-ment revenue and expenditure.)

A qualitative improvement in the balance of payments would require struc-tural changes in the trade and capital accounts. These include a diversificationof the cotton- and textiles-dominated export base and the replacement offoreign debt by direct investment. However, the poor state of the economy andfears of further political instability, particularly in the business capital, Karachi,seem to preclude large-scale capital inflows in the medium term.

Economic performance

Gross domestic product(% real change)

Average1995/96a 1991/92-1995/96

Agriculture 6.7 4.4

Manufacturing 4.8 5.3

Services 5.8 5.1

GDP 6.1 5.0

a Provisional.


Numerous obstacles toimproving growth

While overall GDP growth has averaged 5.2% annually since the mid-1980s,wide variations—7.7% in 1991/92, but 2.3% the following year—reflect theeconomy’s vulnerability to exogenous shocks, such as adverse weather, and itsnarrow production base. Macroeconomic imbalances, particularly the publicsector and external deficits, have constituted a major impediment to highergrowth. (Reference table 5 gives GDP figures; Reference table 6 breaks downGDP by expenditure; Reference table 7 breaks it down by sector.)

Overambitious annual growth targets are usually predicated on an assumptionof accelerating agricultural output. This key sector has, however, been subjectto even sharper fluctuations than the broader economy: farm production ex-panded by 9.5% in 1991/92, then shrank by 5.3% over the next 12 months. Itsexcessive dependence on a cotton crop vulnerable to drought, flooding, pestand viral damage is largely to blame.

Despite dubious official figures putting its annual average growth rate over thepast ten years at 6%, manufacturing output likewise remains well below poten-tial. The narrow production base is partly a product of overgenerous conces-sions bestowed by successive governments on a handful of sectors, includingyarn spinning and sugar refining—whose output, in volume terms, tripled in

14 Pakistan: Economic performance


the ten years to 1995/96—and frequently disappointing harvests which lead toraw-material shortages.

Investment growth hasslowed

Investment has slowed in recent years. According to official figures, overallprivate capital formation, as a proportion of GDP, averaged 11.7% a year be-tween 1992/93 and 1994/95, down from 22.9% in the period between 1989/90and 1991/92. One reason is that manufacturers traditionally indulged by thedomestic banking system have often failed to honour their debts—yarn spin-ners and sugar refiners are the biggest defaulters—contributing to a debilitatingfinancial haemorrhage. Despite an abundance of cheap labour, a large dom-estic market and access to regional markets, would-be foreign investors for theirpart are discouraged by a complex and ambiguous legislative environment,widespread corruption, law and order problems (especially in Karachi, theindustrial hub) and infrastructure bottlenecks.

Electricity supplies lagbehind demand

Power shortages constitute a major constraint on a higher level of economicactivity, most notably in Karachi. While private investment in new generatingcapacity has begun to flow since the PPP-led government announced an attrac-tive incentives package early in 1994, accelerating consumption for electricityand dwindling reserves of the natural gas needed to power such plants suggestthe demand-supply gap will not be significantly reduced in the medium term.

Inflation Excessive public-sector borrowing to fund the fiscal deficit has also fuelledconsumer prices. While inflation is officially said to have declined from 13% in1994/95 to 10.8% in 1995/96, independent analysts calculate that it is runningat about 25% a year. 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. (Reference table 8 includeshistorical data on a number of price indices, and Reference table 9 breaks thesedown by income group.)

Inflation(% change)

1995/96 Average(Jul-Apr) 1991/92-1995/96

Consumer price index 10.0 11.0Source: Ministry of Finance, Economic Survey, 1995/96.

Regional trends

Would-be secessionistsstill abound

Pakistan, a product of the break-up of British India and the subsequent seces-sion of ethnic Bengalis, has continued to be dogged by the threat of furtherdismemberment. An uprising by Baluchi nationalists in the 1970s, Pashtuncampaigns for a separate homeland and, most recently, MQM warnings ofpossible agitation for an independent mohajir state have all been motivated bya sense of neglect and victimisation, economic as well as political.

Punjab and Sindh aremore favoured—

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’s mostinfluential institutions—and accounting for the bulk of the agricultural

Pakistan: Regional trends 15


production that is the economy’s mainstay. Sindh too is blessed with largeexpanses of fertile land and some hydrocarbons, and has produced enoughprime ministers to ensure that it too is disproportionately favoured in thedistribution of national resources.

—than Baluchistan andNWFP

Barren Baluchistan and North West Frontier Province (NWFP), by contrast,remain poor and backward. Federal development programmes have done littleto redress the imbalances: since tax revenues earmarked for the provinces aredistributed on the basis of their population size, Punjab and Sindh are far andaway the biggest beneficiaries.

Provincial budgets, 1995/96(PRs bn)

Punjab Sindh NWFP Baluchistan

Total revenue 131.0 61.8 35.2 18.1 Total tax revenue 65.8 34.5 20.6 12.5 Provincial taxes 5.9 3.4 0.7 0.2 Share federal taxes 59.3 23.9 13.9 5.4

Total expenditure 82.5 41.8 29.6 15.9 Current 68.5 34.8 22.0 11.0 Development 14.0 7.0 7.7 4.9Source: Ministry of Finance, Economic Survey, 1995/96.

Resources

Population

The population growthrate is said to be slowing

The population was officially estimated at 131.6m in January 1996, comparedwith 84.3m at the last census in 1981, when 56.1% lived in Punjab, 22.6% inSindh, 13.1% in NWFP, 5.1% in Baluchistan, 2.6% in the Federally AdministeredTribal Areas (FATAs) and 0.4% in Islamabad, the national capital. The growthrate remains high, at 2.8% per year, although it is said to have declined from3.1% in 1992, thanks in part to the increased—though still modest—coverage offamily planning programmes. (Reference table 10 shows population estimates for1991-96, and Reference table 11 breaks down the labour force by sector.)

Population, 1996(estimates)

Total (m) %

Males 69.10 52.5

Females 62.53 47.4

Total 131.64 100.0Source: Federal Bureau of Statistics, Labour Force Survey.

Survey reveals somedisturbing trends

While a 1993 survey showed that the infant mortality rate (the number ofdeaths per 1,000 live births) had fallen to 102 from 131 in the early 1980s, itindicated a major disparity between urban and rural areas, where rates were73.5 and 112.7 respectively. The survey also revealed a male:female ratio in thepopulation of 104:100, attributable partly to the persistence of female

16 Pakistan: Population


infanticide; as well as a substantial dependency ratio—46.1% of the populationis under 15 and 4.1% over 65.

Population by age structure, 1993

Total (m) %

0-14 56.87 45.7

15-64 62.97 50.6

65 & above 4.61 3.7

Total 124.45 100.0Source: Federal Bureau of Statistics, Labour Force Survey.

The rural-urban drift isaccelerating

An average population density of 106 per square km in 1981 masked regionaldifferences, ranging from 230 in Punjab, the wealthiest province, to just 13 inBaluchistan, the poorest. While official statistics currently put the proportion ofthe population in the countryside at 67.6%, only slightly down from 71.7% in1981, urbanisation is accelerating rapidly. Karachi’s population, for example, issaid to be expanding at a potentially explosive 6% a year.

Political sensitivitiesprevent a census from

being held

While the constitution requires that a census be held every ten years, both theNawaz Sharif and Benazir Bhutto governments balked at the prospect, partlyfor fear of igniting simmering regional and ethnic tensions. Powerful vestedinterests played a part too. Punjab is reluctant to see its share of national wealthreduced; rural Sindhis, championed by the PPP, fear they may have to giveground to urban-based mohajirs, and therefore the MQM; while Baluchis fear aheadcount could reveal that they are a minority in their own province, owingto an influx of Pashtun refugees from Afghanistan.

Education

Government outlays on education increased from PRs34.8bn in 1993/94 to abudgeted PRs54.1bn—just 2.5% of GDP—in 1995/96. Recurrent spending ac-counts for 84.6% of the total. Enrolment in primary schools was put at 73%—89% of boys and 57% of girls—but at only 32% for secondary schools. Fewerthan 72,000 were attending university, compared with almost 84,000 threeyears earlier. The official literacy rate of 37.9% is probably an exaggeration.This figure breaks down, in percentage terms, into a male:female ratio of 50:25and an urban:rural ratio of 58:28, indicating major disparities.

Deficiencies are unlikelyto be addressed

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). Top-heavy with wealthy landowners reluctantto take on the small but vocal Islamic lobby, the recently deposed PPP-ledadministration failed to make the quantum leap needed to begin redressing thesituation, despite its professed aim of providing basic schooling for all childrenwhile discriminating positively in favour of females and rendering the overalleducation system more responsive to the needs of a developing marketeconomy.

Pakistan: Education 17


Health

The health service is inbad shape—

Official negligence over the years means that the provision of healthcare islikewise poor, notwithstanding government statistics indicating a slow butsteady increase in the number of doctors and nurses. Medical staff assigned torural clinics frequently fail to turn up for work.

—and malnutrition iscommon

Per head daily calorie intake was officially estimated at 2,570 in 1995/96,fractionally above the UN’s recommended minimum of 2,550, while proteinconsumption averaged 67.88g, 13.1% above the recommended minimum.Given the tendency of governments to exaggerate their achievements, and thevast differences in income levels, it is reasonable to conclude that a substantialproportion of Pakistanis are undernourished, many of them seriously so.Nearly 600,000 people suffering disorders associated with iodine deficiencywere treated at hospitals in Islamabad, the federal capital, according to the1995/96 Economic Survey, suggesting that the problem is a major one country-wide. Iodine deficiency adversely affects the productivity of the labour force;tests indicate that the IQs of sufferers are significantly below average.

Wealthy Pakistanis areoften treated abroad

Budgeted outlays on health were PRs16.35bn in 1995/96, equivalent to a mere0.75% of GNP. But just as rich Pakistanis tend to send their children abroad foran education, so they or members of their families travel overseas to obtainmedical attention, and if they are on the right side of the political divide thegovernment will often foot the bill.

Natural resources and the environment

Extremes of temperaturecause problems

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 andbelow in the depths of winter on the northern mountain ranges. Droughtsfrequently ravage livestock herds and standing crops, as do floods, which alsodestroy physical infrastructure. One of the main problems afflicting agricultureis the failure to harness the waters that begin flowing from the mountains withthe onset of the spring thaw, and rush through Punjab and Sindh, thecountry’s main growing areas, despite their extensive irrigation systems.

Heroin manufacturersflourish in neglected

NWFP

NWFP and Baluchistan seek to compensate for the bareness of their soil andtheir perceived victimisation at the hands of successive central governments,by resorting to the black economy, notably the processing of opium—much ofit grown in neighbouring Afghanistan—into heroin. Pakistan is the source ofmuch of the heroin consumed in Europe and North America.

Baluchistan’s gas reservesare largely out of reach

While 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 that the province’s tribal chiefs, over whomthe central government exerts little control, have been demanding too high aprice for permission to drill. Most of the foreign companies awarded concessions

18 Pakistan: Health


there have been obliged to declare force majeure faced with the obstruction fromBaluchi tribesmen. Expatriate workers are frequently abducted.

Economic infrastructure

Transport and communications

Infrastructure needs hugeinvestments

If the high economic growth rates needed to sustain the rapidly growing pop-ulation are to be achieved and sustained, massive investment will be requiredin physical infrastructure, including roads, ports, air transport and telecom-munications, most of which currently suffer severe bottlenecks. Securing therequisite capital—from private investors and commercial banks, given the pau-city of public funds—is one of the country’s biggest development challenges.Because guarantors for major infrastructure projects are scarce—the WorldBank and its affiliate, the International Finance Corporation, say they arealready overexposed—high risk premiums can push their cost to levels thatmay render them unviable.

Highways, for example, account for only 6,500 km of the 200,000-km roadnetwork, yet have to carry a rapidly rising proportion of total freight andpassenger traffic—60% in 1995/96—not least because Pakistan Railways seemsto be in terminal decline. PRs10bn is spent annually extending/upgrading thehighway system. This sum is not only insufficient but often, in the view of thecountry’s creditors, unwisely spent. The biggest project currently under way isa prestigious 355-km six-lane motorway between Lahore and Islamabad.Costed at PRs29bn and scheduled for completion in December 1997, it wasinitiated by the first Sharif administration.

The privatisation processis bedevilled by

shortcomings

While recent governments have opened up the transport and communicationssectors for private participation, they have failed to follow up by offeringsufficiently attractive incentives, such as regulatory frameworks that providefor non-government operators. Bureaucratic obstruction is another problem.Recently licensed private airlines claim victimisation by the state-run CivilAviation Authority, which they allege has reneged on promises to allow themto fly international routes not served by PIA, the national carrier. Would-beinvestors have also been given pause for thought by the failure of the presentgovernment to transfer 26% of its shareholding in, and management controlof, the mammoth Pakistan Telecommunications Company, a process due tohave been finalised by end-1995. The divestment is said to have been stalled byofficial reluctance to relinquish such a profitable entity. (Reference table 12provides a variety of transport statistics.)

Energy provision

Imports and investmentare seen as the key to

boosting supplies

Demand for energy is accelerating but known hydrocarbons reserves aredwindling and public money available for new power projects is severely con-strained. The government is hoping to plug the widening gap by means of

Pakistan: Transport and communications 19


large-scale gas imports and attracting more private investment in electricitygeneration. There are long-term hopes of building plants in Sindh fired byindigenous coal.

Private investment issought—

Power shortages have constituted a major brake on improved economic growthrates. The combined generating capacity of the two public producers and dis-tributors, the Water and Power Development Authority (WAPDA) and theKarachi Electricity Supply Corporation (KESC), reached 12,851 mw in 1995/96.Thermal power, which in 1993/94 replaced hydropower as the main source,accounted for 56.6% of the total. Experts project additional capacity require-ments by 2018 to total 54,000 mw, and in March 1994 the government un-veiled an incentives package—including a bulk power tariff of 6.5 US cents perkilowatt hour (kwh) for the first ten years’ sales to WAPDA/KESC—designed toattract private investment in generation.

—and the privatisation ofenergy companies begins—

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 government has sought financial advice on the privatisation of five othergeneration and distribution companies, with a total capacity of 3,231 mw, butsubsequent sales, including that of the inefficient and indebted 1,738-mw KESC,which, like WAPDA, suffers heavy transmission and distribution losses andtheft, may not be so easy.

Energy balance, 1995(m tons oil equivalent)

Elec- Oil Gas Coal tricity Other Total

Primary supplyProduction 2.7 12.1 1.3 5.7a 7.5 29.3Imports 13.3 0.9 14.2Exports 0.7 0.7Stock changeTotal 15.3 12.1 2.2 5.7a 7.5 42.8

1.9b 39.0

Processing and transformationLosses and transfers 3.7 4.3 0.1 1.2 0.4 9.7Transformation output 0.1 3.6b 3.7

Final consumptionTransport fuels 7.8 7.8Industrial fuels 1.7 3.7 2.1 2.0b 1.0 10.5Residential etc 1.7 2.2 2.3b 6.1 12.3Non-energy uses 0.4 2.0 2.4Total 11.6 7.9 2.1 4.3b 7.1 33.0

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

Source: Energy Data Associates.

—but generous incentivescould depress consumption

Nonetheless, there are fears that the generous bulk tariff will drive user chargesbeyond the means of many and severely aggravate WAPDA’s and KESC’salready poor financial position. Official claims that the nationwide productionshortage during peak demand hours has fallen to 600 mw (in 1995/96), from

20 Pakistan: Energy provision


2,418 mw in 1993/94, suggest that recent increases in user charges have alreadyslowed consumption significantly. (Reference table 13 includes national dataon energy supplies.)

Financial services

Despite liberalisation,commercial banks are

in trouble—

The financial sector has undergone major liberalisation since the early 1990s.Two of the biggest state-owned commercial banks have been privatised, severalnew banks licensed, exchange controls all but eliminated, prudential regul-ations tightened and monetary and credit policies rendered more market-ori-ented. But major weaknesses persist and are particularly marked in the case ofthe four remaining government-run commercial banks, which account for thebulk of deposits and advances. The total assets of domestic commercial banksamounted to PRs1.77trn on March 31, 1996, up from PRs1.56trn a year earlier.During the nine months to end-March their advances and deposits rose byPRs46bn and PRs62bn respectively. These banks have traditionally had littleincentive to be competitive or to manage their portfolios carefully. Politicalpressure to make bad loans and stop collection efforts has resulted in high ratesof default. Outstanding loans totalled an estimated PRs120bn in mid-1996,compared with PRs82bn three years earlier.

—and government-owneddevelopment institutions

are little better off

The portfolios of the 16 state-owned development finance institutions, whichprovide the bulk of long-term lending to industry and agriculture, likewisetend to be of poor quality. Their lending is less diversified and more risky thanthat of commercial banks, while their costs are higher and margins lower.Unless they are restored to profitability, long-term loans from internationalcreditors, their main source of funds, could dry up.

Deregulation is designedto lower interest rates

The inefficiency of most banks, their excessively high administrative costs andpoor record in attracting savings have contributed to relatively high interestrates. In September 1995 the SBP made what it said was the “last step towardsmarket-based credit and monetary management” by scrapping the credit/deposit ratio, a move designed to encourage stiffer competition among banks toattract savings as a way of raising their capacity to provide credit, and therebyreduce the spread between lending and deposit rates. Most of the 16 localcommercial banks in the private sector are in better shape than their public-sector counterparts, and the 19 foreign banks better off still. As a result, taxesand regulatory requirements are applied to them with far more administrativevigour than they are to local banks. (Reference table 14 provides a historicalbreakdown of advances by borrower.)

Reform of the capitalmarket

Pakistan’s capital market, already 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—is undergoing further refinement tomake it a more attractive source of funds. In the nine months to end-March1996 there were 33 new listings on the Karachi Stock Exchange, the largest ofthe country’s three bourses, bringing the total to 775. Average daily turnover hasrisen from 1.12m shares in 1990 to 42.2m in 1996. (Reference table 15 includes

Pakistan: Financial services 21


historical data on the general index of share prices; Reference table 16 givesKarachi Stock Exchange statistics.)

Foreign investors treadcarefully

Inflows from abroad, much of them from emerging market and newly estab-lished Pakistan-specific funds, have increased significantly. However, intereststill tends to be highly speculative and narrowly based. One reason is the poorenforcement of rules relating to investor protection. Since many traded firmsare closely held, suspicions that corporate insiders do not act in the best inter-est of their shareholders remain widespread. Many companies, for example, arebelieved to conceal income to avoid taxes.

Production

Industry

Manufacturing, 1995/96a

(% change in volume of output, year on year)

Sugar –11.3

Cotton yarn –19.3

Cotton cloth –25.5

Cement –12.4

Totalb 3.9

a July-March. b Based on index of manufacturing output 1980/81=100.


The manufacturing sectordevelops slowly—

Before 1947 there was little manufacturing in the area that comprises presentPakistan. Its primary role was that of a supplier of raw materials, includingcotton, to industrial hubs across British India such as Bombay. There weresubsequently dramatic fluctuations in the sector’s growth, which averaged 9%a year during the first two decades of independence, but dropped to less than3% in the 1970s, when large-scale nationalisation sent investment levelstumbling. The rate recovered in the 1980s, averaging 7.6%, but fell back to5.5% in the first half of the 1990s. (See Reference table 17 for a breakdown ofmanufacturing production 1991/92 to 1995/96.)

—remains narrowly basedand generates little value

added—

Over the years there has been considerable import substitution, especially ofconsumer goods, while industry has made an increasingly important contrib-ution to exports. In rupee terms, manufactured products made up 60% of allforeign sales in 1995/96, when the sector accounted for 15% of GDP. Despitethe introduction of reforms in the early 1990s designed to stimulate invest-ment—including the removal of import licensing, the liberalisation ofexchange controls, easier access to credit, tax breaks and more equal treatmentof foreign investment—the sector remains characterised by its utilisation ofrelatively basic technologies, low value addition, a high level of tariff protec-tion and a narrow production base. Successive governments have favoured,through subsidies and other concessions, a handful of sectors—notably yarnspinning and sugar refining.

22 Pakistan: Industry


—owing to low levels ofinvestment—

On assuming office, the last two elected governments promised to work to-wards a substantial diversification of the manufacturing base, encourage theproduction of high value-added goods and achieve significantly increased lev-els of capital formation in the sector. Their subsequent records have proved lessthan impressive. Industrial investment is officially estimated to have increasedby 37.6% since 1994/95 to PRs104.5bn in 1995/96, the private sector account-ing for no less than PRs100.8bn. It is, however, a strongly held perceptionwithin the local business community, which voted heavily in favour of thePML (N) in 1993, that the economic policies pursued by the PPP are biased infavour of the farmers who constitute the backbone of its support base.

—particularly from abroad Local industrialists also complain they are disproportionately burdened by atax system from which the agricultural community remains all but exempt,and claim raw material, utility and credit costs are higher than they should be.Manufacturers owe the lion’s share of the banking system’s unrecovered loans;textiles manufacturers, followed by sugar refiners, are the biggest culprits. Not-withstanding recent reforms designed to attract manufacturers from overseas,disincentives—including a shortage of skilled workers, inadequate physicalinfrastructure, pervasive official corruption, discrepancies between declaredpolicy and actual practice and political instability, notably in Karachi—con-tinue to outweigh the incentives.

Many state companies aresold off

The privatisation of public-sector manufacturing companies got under way,after considerable debate, in mid-1991. While 63 units were sold during thenext two years, the disposal rate slackened thereafter as most of the remainderwere heavily indebted lossmakers. By end-June 1996, 82 firms had beenoffloaded.

Mining and semi-processing

Crude oil reserves aredwindling—

Unless there are major new discoveries, crude oil production—which averaged57,600 barrels a day (b/d) in 1995/96, satisfying only 20% of the country’srequirements, compared with a peak of 61,390 b/d in 1991/92—will ultimatelypeter out. Recoverable reserves are put at only 230m barrels. Crude and productimports rose by 31% to PRs46.6bn during the first nine months of 1995/96,accounting for 16.3% of all imports.

—as are those of gas With natural gas production averaging 1.8bn cu ft/day in 1995/96, 10.8%higher than the previous year, known recoverable reserves, estimated at21trn cubic feet, likewise face rapid depletion. The huge deposits believed to beunderground in Baluchistan are rendered largely inaccessible by its warrior tribes-men. To offset the looming production shortfall and feed a national gridupon which power stations, fertiliser plants and industrial and domestic consumersdepend, the government has reached understandings with three potential foreignsuppliers—Qatar, Iran and Turkmenistan—providing for up to 7bn cu ft/day.However, each of the three pipeline-based projects faces problems: the Qataris sayPakistan is unwilling to pay a commercial price; viable investors for the Iranianscheme are discouraged by US sanctions; and an overland pipeline from

Pakistan: Mining and semi-processing 23


Turkmenistan would have to cross Afghanistan, where the civil war shows littlesign of abating. A new policy aims to boost exploitation.

Non-fuel minerals Pakistan boasts an extensive range of non-fuel minerals. Deposits of magnesite,rock salt, limestone, marble, china clay, dolomite, gypsum, silica, ochre, sul-phur, barytes, bauxite, iron ore and emeralds are being exploited, albeit mostlyon a relatively small scale. The country’s biggest development project is in theremote Chagai district of Baluchistan, where the Metallurgical ConstructionCorporation of China has recently begun mining blister copper and is ulti-mately aiming to reach an annual production level of 15,800 tons. It is alsohoping to exploit some of the area’s gold and silver reserves. Chromite, anti-mony, phosphate, porcelain and certain gemstone deposits remain largely un-tapped. A new mineral policy designed to boost the sector’s tiny contributionto GDP, essentially by encouraging higher levels of foreign investment, wasannounced in September 1995, but its impact thus far has been modest. (SeeReference table 18 for historical data on non-fuel minerals production.)

Extraction of main non-fuel minerals, 1994/95(’000 tons)

Limestone 9,682

Rock salt 890

Gypsum 620

Marble 467

Dolomite 227

Barytes 20

Chromite 13

Magnesium 5

Sulphur 5Source: Federal Bureau of Statistics, Pakistan Statistical Yearbook.

Agriculture and forestry

Production of key crops(m tons)

Average1994/95 1991/92-1994/95

Wheat 17.00 16.01

Rice 3.45 3.45

Sugarcane 47.17 42.13

Cotton 1.48 1.64Source: Ministry of Finance, Economic Survey, 1995/96.

Stagnation amid growth— While the production of key crops such as wheat, rice and sugar cane increasedby 20.6%, 21.8% and 25.7% respectively between 1990/91 and 1995/96, thankslargely to yield improvements of 14.1%, 18.8% and 15.3%, in other respectsthe agriculture sector is suffering from stagnation. Over the same period seeddistribution went up from 8.3m tons to only 8.4m tons, fertiliser offtake from1.9m to 2m nutrient tons and credit disbursement from PRs14.9bn toPRs22.4bn—a fall in real terms. (Reference table 19 gives basic data on agricul-ture; Reference table 20 gives agricultural output by product.)

24 Pakistan: Agriculture and forestry


—is reflected in anexcessive reliance on

cotton—

There are many symptoms of the fundamental problems afflicting the agricul-tural sector, which directly supports three-quarters of the country’s population,employs half the labour force and accounts for one-quarter of GDP. One isexcessive dependence on a cotton crop highly susceptible to adverse weather andpest damage. After peaking at 2.18m tons in 1991/92, the lint harvest dropped to1.37m tons the following season. While the area sown had declined from 2.84mha to 2.81m ha, the average yield plunged from 769 kg/ha to 488 kg/ha.

—and a rising foodimport bill

Another symptom is the food import bill, which is rising rapidly notwithstand-ing a steady increase in crop, livestock and fruit production. Purchases of edibleoil from abroad rose from 960,000 tons in 1990/91 to 1.4m tons in 1994/95,while wheat imports soared from 972,000 tons to 2.62m tons. Successivegovernments have been reluctant to address these basic deficiencies for avariety of social, cultural, political and economic reasons.

Any plans for a majoroverhaul—

Experts say the sector’s traditional sources of growth—including improvementsin seeds and fertilisers, better crop management and incentives—are all butexhausted. This is borne out by the fact that net resource transfers from agricul-ture, which were once substantial, are now negligible. As a result, the need formajor institutional and policy changes is more urgent than ever. The potentialfor improvement is considerable. The difference between the average and high-est yields for staple crops such as wheat, rice and maize, for example, is in therange of 30-50%.

—would be resisted bywealthy landowners

The key to better productivity, agronomists say, lies in a more efficient use ofscarce resources, principally land and water. But change will not come easily,not least because the status quo suits the wealthy landowners who dominatethe sector—and the federal and provincial parliaments. Large landowners own40% of the arable land and largely control the irrigation system. Yet assess-ments by independent agencies including the World Bank show them to beless productive than smallholders—poor taxpayers, heavy borrowers and baddebtors. Smallholdings predominate numerically: 27% of farms are less than1 acre (0.4 ha), 81% under 5 acres (about 2 ha).

Land is less productivethan it should be—

The total cropped area has remained largely static in recent years, increasingfrom 21.8m ha in 1990/91 to only 22.1m ha in 1995/96. Almost one-third of itis less productive than it should be owing to soil erosion, waterlogging andsalinity. Land is also damaged by farmers seeking to maximise short-term gainsby cultivating unsuitable crops. Tenure systems achieve a less than optimalallocation of resources because they prevent the distribution of land to those whowould use it more efficiently. Insecurity of tenure, which derives in large measurefrom the powers of arbitrary eviction “feudal lords” enjoy, is a major problem.

—while water supplies arealso inadequately

exploited

The irrigation system, on which the farm sector is heavily dependent, is alsodeficient. Reservoir capacity is inadequate, while water deliveries are supply-rather than demand-driven, inequitably distributed and inefficiently used. TheWorld Bank has advocated institutional reforms, notably the creation of apowerful regulatory authority to police a network of public utilities on the

Pakistan: Agriculture and forestry 25


supply side and users’ associations on the demand side. Water prices should bedetermined by the market, it says.

A freeing up of marketswould benefit poor

farmers

The farmgate prices of key crops such as cotton, sugarcane, wheat and rice,traditionally set by the government, should be similarly determined, accordingto the World Bank. The rationale is that higher prices would discourage thesmuggling of huge amounts of farm produce into neighbouring India, Iran andAfghanistan, where scarcities tend to ensure higher returns. Extra purchasingpower for small farmers, including easier access to cheap credit, would not onlyimprove the lives of the rural poor but also stimulate growth in other areasof the economy. While Benazir Bhutto’s second administration was moregenerous than its predecessors when raising producer prices, it was also reluc-tant to allow them to be set by the market for fear of sparking unrest amongurban consumers.

Much of the forest cover islogged out

Many of the country’s wooded areas are severely depleted as a result of over-exploitation. Forestry production has declined from 1.07m cubic metres in1990/91 to 377,000 cubic metres in 1995/96.

The external sector

Merchandise trade

Merchandise trade, 1994/95(PRs bn)

Exports (fob) 251.2

Imports (fob) 320.9

Trade balance –69.7Source: Federal Bureau of Statistics.

Main items traded, 1994/95(PRs bn)

Exports fob 251.2 Cotton yarn 47.2 Garments & hosiery 41.1 Cotton cloth 33.4 Synthetic textiles 17.8 Rice 14.0

Imports fob 320.9 Non-electrical machinery 64.6 Petroleum & products 49.0 Chemicals 32.7 Edible oils 30.8 Transport equipment 27.6Source: Federal Bureau of Statistics.

26 Pakistan: Merchandise trade


Main trading partners, 1994/95

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

USA 16.2 Japan 9.6

Germany 7.0 USA 9.4

Japan 6.7 Malaysia 8.8

Hong Kong 6.6 Germany 6.7

UK 4.1 Kuwait 5.8Source: Ministry of Finance, Economic Survey, 1995/96.

The trade deficit rises— Pakistan has recorded a trade deficit every year since 1972/73. In recent years itslevel has fluctuated considerably—$3.27bn in 1992/93, $2bn the following year,for example. However, the overall trend is upwards—$2.69bn for the first ninemonths of 1995/96, 65% higher than the $1.63bn posted in the correspondingperiod of the previous year—notwithstanding the priority placed by the last twoelected governments on narrowing the gap.

—as disappointing exportgrowth—

While the value of exports has risen steadily from $2.49bn in 1984/85 to$8.14bn in 1994/95, with growth averaging 16.4% and 7.7% a year in rupeeand dollar terms respectively between 1991/92 and 1994/95, foreign sales haveconsistently lagged behind official projections, and behind imports, despite asteady erosion in the value of the rupee vis-à-vis the currencies of most of thecountry’s major trading partners. Between June 1995 and April 1996 alone therupee depreciated by no less than 10.5% against the dollar as a result of delib-erate official manipulation, including a 7% devaluation in late October 1995.(Reference table 21 gives a historical breakdown of exports by commoditycategory; Reference table 23 breaks down exports by product.)

—betrays a host ofproblems—

The narrowness of the product base is the foremost reason for the persistentlydisappointing sales performance. Five categories of goods—cotton yarn, gar-ments and hosiery, cotton cloth, raw cotton and rice—still accounted for 60%of export earnings in 1995/96. A second major reason is the vulnerability of keyproducts, and especially notably cotton, to exogenous shocks. But there aremany others, including the small proportion of high value-added goods in thesales mix, low product quality and poor marketing.

—and imports accelerate If export growth has tended to be below official expectations, the growth ofimports, which averaged 17.8% and 9.2% a year in rupee and dollar termsrespectively between 1991/92 and 1994/95, has usually exceeded them. Hereagain the reasons are many and varied. Industry is dependent on foreign rawmaterials and capital goods, which helps explain why non-electrical machineryhas constituted the largest single category since 1991/92. With known reservesof crude oil being rapidly depleted, petroleum and refined-product purchaseshave continued to grow. Changes in consumption patterns and the failure ofdomestic manufacturers to adjust have led to a rapid acceleration in edible-oilimports. (Reference table 22 breaks down imports by commodity category;Reference table 24 divides them up by product.)

The USA and Japan are thelargest trading partners

The USA has long been Pakistan’s largest export market, absorbing 16.2% oftotal sales in 1994/95, while Germany, Japan and the UK have likewise been

Pakistan: Merchandise trade 27


major outlets. Japan is the country’s biggest supplier, accounting for 9.6% oftotal imports in 1994/95. The USA, Germany and Saudi Arabia have also beensubstantial sources for many years. A doubling of imports from Malaysia toPRs28.2bn in 1994/95, when that country became the fourth biggest supplier,was largely attributable to a surge in edible-oil purchases. (Reference table 25gives historical data on main trading partners.)

The outcome of worldtrade talks is

disappointing

The conclusion of the Uruguay round of GATT was regarded as less thansatisfactory by Islamabad. On the one hand it extended for another ten yearsthe Multifibres Arrangement restricting access to developed markets for Paki-stani textiles; on the other, it obliged the country progressively to dismantle itstariff barriers—although this process has been far slower than agreed.

Invisibles and the current account

Current account, 1994($ m)

Trade balance –2,228

Services balance –774

Investment income balance –1,672

Net transfers 2,870

Current-account balance –1,804Source: IMF, International Financial Statistics.

The invisibles accountdeficit widens—

The deficit on the invisibles account has likewise been increasing as the gapbetween receipts and payments continues to widen. The difference betweenservices debits and credits has progressively increased from $1.38bn in 1987/88to $2.55bn in 1994/95 and $2.56bn during the first nine months of 1995/96.Pakistan’s generally perceived status as a less than attractive tourist destination,as well as its small and shrinking shipping fleet, which have led to mountingnet payments for transport and associated services, are partly to blame. Netflows of interest and income have also been increasingly negative over the pastseveral years, reaching a record $1.73bn in 1994/95, not least because of risingdebt-servicing commitments. Total payments rose from $933m in 1987/88 to$1.88bn in 1994/95.

—and large-scaleremittances—

Private transfers are an important and positive component of the currentaccount; remittances from Pakistanis abroad, most of them in the Arabian Gulfand North America, habitually account for 90% of the total until the early1990s. However, having peaked at $2.89bn in 1982/83, remittances fell to$1.45bn in 1993/94 before recovering somewhat to $1.87bn in 1994/95. Someof the overall decline has been attributable to workers taking advantage of theliberalisation of the country’s banking laws in 1990 by opening foreignexchange accounts rather than transferring money via drafts subsequentlyconverted into rupees.

28 Pakistan: Invisibles and the current account


Workers’ remittances($ m)

Jul-Mar1994/95 1995/96 % change

Saudi Arabia 705.2 506.7 –28.1

USA 105.9 108.4 2.4

UK 81.2 87.6 8.0

Oman 68.7 67.3 –7.3

Kuwait 74.4 47.7 –35.9

Total incl others 1,414.9 1,149.0 –18.8

—are insufficient to putthe current account in

profit

The current account is therefore invariably in deficit. Having hit a record$3.69bn in 1992/93, this declined to $1.97bn the following year but has sincebeen on the increase again: $2.40bn in 1994/95 and $3.31bn during the firstnine months of 1995/96. (Reference table 26 gives IMF estimates of the balanceof payments; Reference table 27 gives national estimates.)

Capital flows and foreign debt

The debt burdencontinues to mount—

Pakistan has relied heavily on official borrowing to finance its current-accountdeficits and otherwise help offset the low level of national savings. The propor-tion of grant and grant-like aid has progressively declined from 80% of totalinflows in the late 1950s to 9% in 1995/96. Disbursed and outstandingmedium- and long-term debt, on the other hand, has grown rapidly, rising byan annual average of 7.4% between 1991/92 and 1995/96 to reach an officiallyestimated $23.11bn, equivalent to 35.7% of GDP. Despite the significantchange in the composition of the assistance portfolio, most credits still carrygenerous interest-rate and maturity terms. (Reference table 28 provides WorldBank data on external debt.)

—thanks to the generosityof Western creditors

The major source of external funding is the Aid to Pakistan Consortium, whichcomprises the main multilateral lending institutions and a large number ofbilateral creditors. Its members accounted for 93.6% of the stock of outstandingdisbursed debt as of June 30, 1995, which the government put at $22.12bn. TheWorld Bank, along with its soft-loan arm, the International DevelopmentAssociation, accounted for 26.4% of the total, Japan for 18.5%, the AsianDevelopment bank for 18.1% and the USA for 12.0%. Washington suspendedfresh economic assistance in 1990 amid concerns over Pakistan’s nuclear pro-gramme, and has not resumed it.

Absorptive capacity islimited

This largely explains why commitments peaked at $3.44bn in 1989/90, thenfell to $1.90bn in 1992/93. However, their level climbed again to $3.24bn in1995/96. Disbursements as a proportion of total commitments have also fallenover the years, from 104% in the late 1960s to an estimated 77% ($2.51bn) in1995/96. The downward trend latterly reflects not only the country’s limitedabsorptive capacity—undisbursed debt amounts to $10bn—but also a highlevel of commitments.

Net inflows decline The rapid accumulation of foreign loans and the steady decline in the value ofthe rupee against the currencies of Pakistan’s main creditors has led to a

Pakistan: Capital flows and foreign debt 29


corresponding acceleration of the debt-servicing requirement, which rose by anaverage of 9.4% a year between 1990/91 and 1995/96 to a record $2.10bn—$1.34bn principal and $756m interest—equivalent to 3.4% of GDP and 23.2%of export earnings. As a result, net inflows as a proportion of gross disburse-ments have declined from 95% in the early 1960s to 30% in 1980/81 and 21%in 1994/95. With debt-service payments in 1995/96 $58m higher than in1994/95 and gross disbursements $83m lower, the proportion fell to just 16%.

Disincentives limitforeign directinvestment—

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.While foreign direct investment has been rising in recent years, havingofficially jumped by 94.1% to $639.2m during the first nine months of1995/96, the absolute value of inflows remains modest and the number ofbeneficiary sectors narrow. The essential problem is that the disincentives tendto outweigh the incentives. Given the perceived risks, for which guarantors arescarce, international commercial and investment banks are reluctant to lendfor ventures in Pakistan, and charge hefty premiums when they do.

—and indirect investment The attitude of foreign portfolio investors to Pakistan’s equity market has like-wise been characterised by extreme caution since its liberalisation in 1991.There was a flurry of interest in 1993/94 when inflows from abroad, many fromemerging markets and newly established Pakistan-specific funds, trebled to anestimated $1.2bn. The loss of overseas buying momentum that afflicted allemerging markets following the Mexican peso crisis in late 1994, as well asworsening political violence in Karachi and mounting economic uncertainty,were among the many factors contributing to the subsequent downturn. Whilesome foreign investors have since returned, a number of negative funda-mentals, including a relative shortage of tradeable shares and inadequate pro-tection, would seem to preclude a major influx in the medium term.

Foreign reserves and the exchange rate

Reserves sometimesplunge to dangerous lows

The level of reserves has fluctuated considerably in recent years from a low of$910m during 1990 to a high of $3.97bn in 1994, but never exceeded morethan a few weeks’ imports. Its main determinants are foreign sales and pur-chases, which have similarly been subject to wide variations. At times reserveshave dropped low enough to threaten the country’s capacity to pay somesignificant import bills and, more ominously, its ability to service foreigndebts. On June 30, 1995 they stood at $3.54bn, the healthiest ever year-endfigure, having reached a high of $3.66bn and a low of $1.85bn during thepreceding 12 months. (Reference table 29 shows historical data on reserves.)

30 Pakistan: Foreign reserves and the exchange rate


Exchange rates(PRs per currency unit)

Average1994/95 1991/92-1994/95

US $ 30.85 27.95

£ 48.70 44.91

¥ 0.3277 0.2548

DM 20.68 17.56

Rs 0.9797 0.9656Source: State Bank of Pakistan.

The rupee depreciatessteadily

Using the so-called “managed float” mechanism, the SBP has encouraged asteady downward drift in the value of the rupee vis-à-vis the currencies ofPakistan’s main trading partners so as to help offset often sizeable inflationdifferentials. The central bank has also, on occasions when exports need asubstantial fillip, and/or a slowdown in imports is called for, opted for sudden,sharp devaluations. This happened, for example, in October 1995, as decliningexports and accelerating imports caused a dramatic widening of the trade andbalance of payments deficits and sent reserves plunging to an unprecedentedlow. The rupee’s average value against the dollar has fallen from PRs12.7:$1 in1982/83 to Prs30.9:$1 in 1994/95. However, exporters have repeatedly insistedthat depreciation be even more rapid, claiming that foreign rivals, notably inIndia, were gaining market shares at their expense owing to a more competitiveexchange rate. (See Reference table 30 for historical data on exchange rates.)

Pakistan: Foreign reserves and the exchange rate 31


Appendices

Sources of information

National statistical sources Agricultural Development Bank of Pakistan, Annual Report, Islamabad

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

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 Cooperatives, Annual Report, Islamabad

Ministry of Food, Agriculture and Cooperatives, Census of Agriculture, 1990,Islamabad

Pakistan International Airlines Corporation, Annual Report, Karachi

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

International statisticalsources

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

International Institute for Strategic Studies, Military Balance (annual)

IMF, International Financial Statistics (monthly)

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

UN, Monthly Bulletin of Statistics

World Bank, World Development Report (annual)

World Bank, World Investment Report (annual)

Select bibliography 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

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

32 Pakistan: Sources of information


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

Bapsi Sidhwa, Ice-Candy Man, Penguin, Harmondsworth, 1989

Khushwant Singh, Last Train to Pakistan, Grove Press, New York, 1956

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

Reference tables

Reference table 1

Defence spending

1991/92 1992/93 1993/94 1994/95 1995/96

PRs bn 75.8 87.5 91.8 100.2 115.3

% of total spending 23.6 25.0 25.2 23.4 23.3

% of GDP 6.3 6.5 5.9 5.3 5.3Source: Ministry of Finance, Economic Survey, 1995/96.

Reference table 2

Federal government budget(PRs bn unless otherwise indicated)

1991/92 1992/93 1993/94 1994/95 1995/96

Total revenue 216.6 239.5 270.7 319.8 374.4 Tax revenue 164.3 178.3 208.4 256.7 299.2 Non-tax revenue 52.3 61.1 62.3 63.1 75.2

Total spending 321.4 348.6 364.9 428.2 494.9 Current 230.1 272.4 293.4 346.3 398.4 Development 91.3 76.1 71.4 81.9 96.5

Deficita 90.0 107.5 92.2 103.4 108.5 Deficit (% of GDP) 7.4 8.0 5.9 5.5 5.0

a Includes spending by major public corporations.


Pakistan: Reference tables 33


Reference table 3

Money supply(PRs bn unless otherwise indicated; stocks at end-Jun)

1992 1993 1994 1995 1996a

Currency in circulation 151.8 166.9 184.7 215.6 246.4 % change 10.8 9.9 10.7 16.7 14.3

M1 300.3 326.2 357.4 421.7 450.5 % change 14.9 8.9 9.6 18.0 6.8

M2 480.5 567.2 662.8 773.0 837.8 % change 30.3 18.0 16.9 16.6 8.4

M3 654.2 749.2 881.6 1,032.0 1,138.4 % change 21.7 14.5 17.7 17.1 10.3

a End-March.

Source: State Bank of Pakistan.

Reference table 4

Interest rates(%; end-Jun)

1991 1992 1993 1994 1995

Advance ratea 10.89 10.72 13.09 12.78 13.17

Stock exchange a n/a 11.75 13.24 9.58 12.04

Real estatea n/a 11.43 12.63 12.33 13.04

Financial obligationsa n/a 7.82 8.22 15.81 13.30

Returns on PLS depositsb 9.58 10.40 10.82 10.44 10.30

a Weighted average of rates offered by scheduled banks other than profit-loss sharing. b Averagereturns from domestic scheduled banks on six-month term deposits for first half-year.


Reference table 5

Gross domestic product(market prices)

1991/92 1992/93 1993/94 1994/95 1995/96a

Total (PRs bn)At current prices 1,211.4 1,341.6 1,572.8 1,865.6 2,174.9 At constant (1980/81) prices 539.1 549.5 570.7 595.7 631.2 Real change (%) 7.7 2.3 4.5 4.4 6.1

Per head (PRs)At current prices 4,638 4,578 4,596 4,687 4,821 At constant factor costs 4,137 4,097 4,137 4,222 4,349 Real change (%) 3.3 –1.0 0.5 1.8 3.0

a Provisional.


34 Pakistan: Reference tables


Reference table 6

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

1991/92 1992/93 1993/94 1994/95 1995/96a

Private consumption 375.4 384.3 398.3 426.1 479.6 (13.8) (2.4) (3.6) (7.0) (12.6)

Government consumption 60.4 71.1 63.9 67.4 71.2 (–7.9) (17.7) (–10.1) (5.5) (5.6)

Gross fixed investment 92.5 96.4 95.5 98.3 109.7 (10.3) (4.2) (–0.9) (2.9) (11.6)

Exports of goods & services 99.8 101.1 104.3 99.3 99.6 (13.8) (1.3) (3.2) (–4.8) (0.3)

Imports of goods & services 97.7 112.2 100.1 103.9 138.7 (31.0) (14.8) (–10.8) (3.8) (33.5)

Changes in stocks 8.7 8.7 8.8 8.7 9.8 (14.5) (0.0) (1.1) (–1.1) (12.6)

GDP 539.1 549.5 570.7 595.7 631.2 (7.8) (1.9) (3.9) (4.4) (6.0)

Net factor income from abroad 4.9 3.7 1.3 4.3 3.5 (–48.4) (–24.5) (–64.9) (230.8) (–18.6)

GNP 544.0 553.2 572.1 600.1 634.6 (6.8) (1.7) (3.4) (4.9) (5.7)

a Provisional.




Comparative economic indicators, 1995

0 100 200 300 400

India

Indonesia

Singapore

Pakistan

Bangladesh

Vietnam

Sri Lanka

Gross domestic product$ bn

Sources: EIU estimates; national sources.

0 200 400 600 800

Singapore

Indonesia

Sri Lanka

Pakistan

Bangladesh

India

Vietnam

Gross domestic product per head$


28,46428,46428,46428,46428,46428,46428,46428,46428,46428,46428,46428,464

0 2 4 6 8 10 12 14 16 18

Vietnam

Pakistan

India

Indonesia

Sri Lanka

Bangladesh

Singapore

Consumer prices% change, year on year


0 2 4 6 8 10

Vietnam

Singapore

Indonesia

India

Sri Lanka

Bangladesh

Pakistan

Gross domestic product% change, year on year


36


Reference table 7

Gross domestic product by sector(PRs bn; constant 1980/81 prices; % change year on year in brackets)

1991/92 1992/93 1993/94 1994/95 1995/96a

Agriculture 125.4 118.8 125 132.3 141.3 (9.5) (–5.3) (5.2) (5.8) (6.8)

Mining 2.6 2.6 2.8 2.6 2.9 (4.0) (0.0) (7.7) (–7.1) (11.5)

Manufacturing 85.3 89.9 94.8 97.5 102.2 (8.0) (5.4) (5.5) (2.8) (4.8)

Construction 19.6 20.7 21.0 21.3 22.2 (5.9) (5.6) (1.4) (1.4) (4.2)

Utilities 16.8 17.9 18.5 20.5 23.3 (9.1) (6.5) (3.4) (10.8) (13.7)

Transport & communications 47.2 50.3 52.2 53.6 55.8 (10.5) (6.6) (3.8) (2.7) (4.1)

Distribution 78.8 81.1 83.3 86.7 93.9 (7.4) (2.9) (2.7) (4.1) (8.3)

Banking & insurance 10.3 11.1 12.6 13.0 13.5 (4.0) (7.8) (13.5) (3.2) (3.8)

Ownership of dwellings 25.6 26.9 28.4 29.9 31.4 (5.3) (5.1) (5.6) (5.3) (5.0)

Public administration & defence 32.5 33.3 33.8 34.8 35.8 (2.5) (2.5) (1.5) (3.0) (2.9)

Other services 36.3 38.7 41.2 43.9 46.8 (6.5) (6.6) (6.5) (6.6) (6.6)

GDP at factor cost 480.4 491.3 513.5 536.2 569.0 (7.7) (2.3) (4.5) (4.4) (6.1)

a Provisional.

Source: Ministry of Finance, Economic Survey, 1995/96

Reference table 8

Price indices(1980/81=100)

1991/92 1992/93 1993/94 1994/95 1995/96a

Consumer prices 110.58 121.45 135.14 152.73 168.04 % change 10.58 9.83 11.27 13.02 10.02

Wholesale prices 227.26 243.42 280.02 325.64 356.13 % change 9.26 7.11 15.04 16.29 9.36

Sensitive price indicatorb 233.21 257.19 285.01 329.30 361.66 % change 9.29 10.28 10.82 15.54 9.83

Export prices 209.59 214.93 243.75 308.48 345.43 % change 6.36 2.55 13.41 26.56 11.98

Import prices 253.34 266.72 297.14 348.38 383.43 % change 0.22 5.28 11.41 17.24 10.06

Terms of trade 82.73 80.58 82.03 88.55 90.09 % change 6.13 –2.60 1.80 7.95 1.74

a July-April. b 46 essential items.




Reference table 9

Consumer price indices by income groups(monthly income; 1990/91=100)

1991/92 1992/93 1993/94 1994/95 1995/96a

Up to PRs1,500 110.83 122.62 136.22 155.21 170.60 % change 10.83 10.64 11.09 13.94 9.92

PRs1,501-4,000 110.63 121.66 135.36 153.39 168.65 % change 10.63 9.97 11.26 13.32 9.95

PRs4,001-7,000 110.45 120.66 134.42 150.90 166.02 % change 10.45 9.24 11.40 12.26 10.02

PRs7,001-10,000 110.24 119.92 133.68 148.93 164.45 % change 10.24 8.78 11.47 11.41 10.42

More than PRs10,000 110.06 119.60 133.14 147.50 163.02 % change 10.06 8.67 11.32 10.79 10.52

All groups 110.58 121.45 135.14 152.73 168.04 % change 10.58 9.83 11.27 13.02 10.02

a July-April.

Source: Federal Bureau of Statistics.

Reference table 10

Population estimates

1991/92 1992/93 1993/94 1994/95 1995/96

Population (m) 117.31 120.83 124.45 128.01 131.63

Growth rate (%) 3.1 3.0 3.0 2.9 2.8Source: Ministry of Finance, Economic Survey, 1995/96.

Reference table 11

Labour force(m)

1991/92 1992/93 1993/94 1994/95 1995/96

Employed labour force 31.04 32.08 33.02 33.96 34.92 Agriculture 14.98 15.25 16.52 16.99 17.47 Mining & manufacturing 3.88 3.53 3.34 3.43 3.53 Construction 1.97 2.23 2.15 2.21 2.26 Utilities 0.25 0.27 n/a n/a n/a Transport 1.71 1.77 1.63 1.68 1.73 Trade 4.07 4.27 4.22 4.34 4.46 Others 4.19 4.76 n/a n/a n/a

Unemployed 1.93 1.60 1.68 1.73 1.78

Total labour force 32.97 33.68 34.70 35.69 36.70Source: Ministry of Finance, Economic Survey, 1995/96.



Reference table 12

Transport infrastructure

1991/92 1992/93 1993/94 1994/95 1995/96a

Railb

Passengers carried (m) 73.3 59 61.7 67.7 51.5 Freight carried (m tons) 7.56 7.77 8.04 8.11 5.10 Length of track (km) 8,775 8,775 8,775 8,775 8,775

RoadVehicles registered year-end (’000) 2,924 3,179 3,351 3,544 n/a Cars & jeeps 732 819 868 903 n/a Trucks 107 111 114 118 n/a Buses 89 95 99 107 n/a Taxis 33 41 48 52 n/a Motorcycles 1,381 1,497 1,573 1,679 n/a Network (’000 km) 179.4 188.3 197.7 198.9 n/a

Airc

Passengers carried (’000) 5,584 5,780 5,645 5,517 3,994 Passenger load factor (%) 65.9 64.2 66.7 65.5 64.5 No of aeroplanes 45 45 47 47 47

SeaExportsd (’000 tons) 5,186 4,914 4,959 5,572 n/a Importsd (’000 tons) 15,266 17,255 17,610 17,526 n/a No of vesselse 28 29 27 15 n/a Deadweight tonse (’000) 495.0 519.0 595.8 264.4 n/a

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


Reference table 13

Energy supplies

1991/92 1992/93 1993/94 1994/95 1995/96a

Crude oil extraction (m barrels) 22.5 21.9 20.7 19.9 15.8

Crude oil imports (m barrels) 30 29.4 30.8 28.4 23.2

Natural gas output (bn cu ft) 550.7 583.5 624.2 628.2 496.7

Refined oil production (’000 tons) 6,360 6,180 6,276 5,912 4,756

Refined oil imports (’000 tons) 5,275 6,612 7,875 8,737 7,228

Coal production (’000 tons) 3,627 3,266 3,534 3,043 2,500

Coal imports (’000 tons) 985 994 1,094 1,096 750

Hydroelectricity (gwh) 18,247 21,112 19,436 22,858 17,065

Thermal power (gwh) 26,375 27,057 30,707 30,176 n/a

Nuclear power (gwh) 418 582 497 511 380

a July-March.

Source: Ministry of Petroleum and Natural Resources.



Reference table 14

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

1991 1992 1993 1994 1995

Foreign constituents 253 362 313 432 246Domestic constituents 235,075 279,989 343,729 395,126 453,667 Governments 18,674 24,869 32,373 38,506 44,337 Federal government 11,151 15,131 20,518 26,045 30,553 Provincial governments 7,523 9,738 11,731 12,461 13,417

Public-sector enterprises 16,435 20,356 19,372 20,704 26,426 Agriculture 54 54 43 75 128 Mining & quarrying 860 708 2,686 1,111 1,731 Manufacturing 8,335 8,854 6,188 7,315 10,519 Construction 136 1,031 347 151 126 Power, gas & water 3,088 4,470 2,569 4,260 4,509 Commerce 1,575 3,095 2,811 2,235 2,801 Transport & communication 138 265 1,709 1,934 2,722 Services 79 57 54 1,279 1,425 Others 2,170 1,823 2,966 2,344 2,466

Private sector 178,900 222,573 259,021 290,758 332,019 Agriculture 51,302 54,211 54,834 53,527 59,139 Mining & quarrying 943 1,190 1,773 2,912 2,798 Manufacturing 72,769 95,783 109,350 123,071 149,812 Construction 3,897 6,033 5,838 7,537 7,976 Power, gas & water 963 874 1,143 2,864 4,346 Commerce 33,710 49,471 51,673 58,814 61,517 Transport & communications 1,240 1,707 11,319 12,659 13,992 Services 2,144 3,088 2,396 2,570 3,111 Others 11,933 10,218 20,694 26,704 29,327

Personal 20,473 11,706 32,485 43,288 49,323

Others 593 486 479 1,871 1,562

Total 235,328 280,351 344,042 395,558 453,913Source: State Bank of Pakistan.

Reference table 15

General index of share prices(end-Jun; 1991=100)

1992 1993 1994 1995 1996a

Prices 188.50 161.72 290.23 186.85 180.63

% change 88.5 –14.2 79.5 –36.5 –3.3

a End-March.




Reference table 16

Karachi Stock Exchange statistics

1991/92 1992/93 1993/94 1994/95 1995/96a

Total turnover of shares (m) 955 893 1,832 2,229 3,524

No of new listings 98 57 44 65 33

Funds mobilised from new listings (PRs bn) 21.17 12.61 9.75 37.80 15.17

a July-March.

Source: Karachi Stock Exchange.

Reference table 17

Manufacturing production(’000 tons unless otherwise indicated)

1991/92 1992/93 1993/94 1994/95 1995/96a

Sugar 2,322 2,397 2,922 2,665 2,365

Vegetable ghee 639 725 671 678 536

Cotton yarn (m kg) 1,171 1,219 1,310 1,370 1,106

Cotton cloth (m sq metres) 308 325 315 322 240

Jute textiles 101 98 76 67 54

Cigarettes (m) 29,673 29,947 35,895 32,747 31,599

Beverages (m dozen bottles) 85.3 139.8 113.7 151.3 109.5

Motor tyres (’000) 784 712 783 912 567

Cycle tyres (’000) 3,751 3,826 3,872 3,523 2,881

Cement 8,321 8,551 8,100 7,913 6,932

Urea 1,898 2,306 3,104 3,000 2,412

Other fertilisers 897 897 774 826 677

Soda ash 186 186 187 185 161

Paints & varnishes (tons) 18,950 16,626 10,093 6,987 5,195

Bicycles (’000) 478 574 564 475 416

Electric bulbs (m) 43 43 43 42 34

Paper board 24 27 113 115 79

Index of manufacturing output (1980/81=100) 218.5 227.5 236.9 238.3 247.5

a July-March.




Reference table 18

Minerals production(’000 tons)

1991/92 1992/93 1993/94 1994/95 1995/96a

Limestone 8,528 9,015 9,125 9,682 6,813

Rock salt 833 895 916 890 739

Marble 321 388 460 467 308

Gypsum 471 533 667 620 290

Dolomite 181 220 228 227 144

Silica 132 158 169 152 131

Fire clay 139 132 116 152 62

China clay 42 37 48 31 28

Magnesite 6 5 7 5 21

Chromite 28 23 11 13 17

Bauxite 22 19 35 32 14

Barytes 30 26 18 20 12

Ochre 1 1 0.7 5 7

Celestite 11 17 44 14 6

Iron ore 0.9 2 4 8 1

Index of mining output (1980/81=100) 277.8 278.4 275.2 270.8 n/a

a July-March.


Reference table 19

Agriculture: basic data

1991/92 1992/93 1993/94 1994/95 1995/96a

Cropped area (m ha) 21.72 22.44 21.87 22.14 22.14

Seed distribution (’000 tons) 65.93 63.93 63.27 76.87 84.17

Water availability (m acre ft) 122.1 124.7 128.0 129.7 130.9

Fertiliser use (’000 nutrient tons) 1,884 2,148 2,147 2,183 1,973

Credit disbursed (PRs bn) 14.5 16.2 15.7 22.4 14.2b

a Provisional. b July-January.




Reference table 20

Agricultural production

1991/92 1992/93 1993/94 1994/95 1995/96a

FoodgrainsWheat (m tons) 15.68 16.16 15.21 17.00 17.57 Area sown (m ha) 7.88 8.30 8.03 8.17 8.37 Yield (tons/ha) 1.99 1.95 1.89 2.08 2.10 Rice (m tons) 3.24 3.12 4.00 3.45 3.97 Area sown (m ha) 2.10 1.97 2.19 2.13 2.16 Yield (tons/ha) 1.55 1.58 1.83 1.62 1.83 Maize (m tons) 1.20 1.18 1.21 1.32 1.28 Area sown (m ha) 0.85 0.87 0.88 0.89 0.88 Yield (tons/ha) 1.42 1.36 1.38 1.48 1.46 Total foodgrains (m tons) 20.63 21.06 20.92 22.42 23.39

Cash cropsSugarcane (m tons) 38.87 38.06 44.43 47.17 45.23 Area sown (m ha) 0.90 0.89 0.96 1.00 0.96 Yield (tons/ha) 43.38 43.02 46.14 46.75 46.94 Cotton (m tons) 2.18 1.54 1.37 1.48 1.80 Area sown (m ha) 2.84 2.84 2.81 2.65 3.00 Yield (kg/ha) 769 543 488 557 601

Fruit (’000 tons)Citrus 1,630 1,665 1,849 1,933 n/a Mango 787 794 839 884 n/a Apple 295 339 442 533 n/a Banana 44 52 53 80 n/a Apricot 109 122 153 153 n/a Guava 373 384 402 420 n/a

LivestockMilk (m tons) 16.28 17.12 18.01 18.97 19.92 Beef (’000 tons) 803 844 887 931 979 Mutton (’000 tons) 713 763 817 875 937 Poultry meat (’000 tons) 169 265 296 308 321 Wool (’000 tons) 49.3 50.5 51.7 53.1 54.4 Hides & skins (m) 39.9 42.1 44.0 44.4 47.1

Forestry & fishingFish (’000 tons) 518.7 553.1 557.1 558.1 609 Forestry (’000 cu metres) 491 691 703 413 377

a Provisional.




Reference table 21

Exports(PRs bn; fob)

1991/92 1992/93 1993/94 1994/95 1995/96a

Cotton yarn 29.17 29.18 38.08 47.19 34.74

Garments & hosiery 25.82 28.15 33.85 41.05 29.88

Cotton cloth 20.37 22.43 24.79 33.37 27.33

Raw cotton 12.94 7.00 2.38 1.92 15.33

Rice 10.34 8.21 7.32 14.03 11.23

Synthetic textiles 10.40 13.08 19.61 17.75 9.83

Leather 6.00 5.77 6.77 8.40 5.97

Sports goods 3.52 3.42 6.03 8.17 5.39

Carpets & rugs 5.71 4.52 4.58 6.12 4.30

Fish & products 2.85 4.73 4.64 4.76 3.28

Surgical instruments 2.25 2.66 2.82 3.51 3.20

Drugs & chemicals 0.56 0.62 0.73 1.22 1.21

Footwear 1.00 0.98 1.14 1.51 1.20

Total incl others 171.73 177.03 205.50 251.17 197.78

a July-March.


Reference table 22

Imports(PRs bn; fob)

1991/92 1992/93 1993/94 1994/95 1995/96a

Non-electrical machinery 54.55 55.65 48.04 64.62 51.21

Petroleum & products 34.41 40.10 42.18 48.98 46.63

Chemicals 21.10 23.14 25.95 32.70 33.33

Edible oils 10.03 15.19 14.70 30.78 21.80

Iron, steel & products 10.24 9.76 11.94 14.84 14.67

Grains, pulses & flours 9.98 14.33 8.85 15.30 14.54

Transport equipment 20.64 32.75 25.03 27.62 11.82

Electrical goods 7.47 6.96 8.90 8.56 10.33

Fertilisers 6.37 6.44 8.02 3.95 8.55

Drugs & medicines 5.18 5.98 6.99 8.15 8.24

Non-ferrous metals 2.78 2.86 3.05 3.77 4.46

Tea 4.31 5.39 5.62 5.79 4.12

Paper, board & stationery 4.03 3.66 3.85 4.04 4.03

Dyes & colours 2.95 3.22 4.11 4.17 3.67

Silk yarn 2.61 1.97 1.76 1.36 1.45

Total incl others 229.89 258.64 258.25 320.89 285.83

a July-March.




Reference table 23

Exports(m sq metres unless otherwise indicated)

1991/92 1992/93 1993/94 1994/95 1995/96a

Cotton yarn (m kg) 506 555 579 522 360

Cotton cloth 1,196 1,128 1,047 1,161 829

Raw cotton (’000 tons) 455 263 75 31 273

Rice (’000 tons) 1,512 1,032 984 1,852 1,015

Synthetic textiles 511 601 875 671 320

Leather 16 15 16 18 11

Carpets & rugs 4 3 3 3 2

Fish & products (m kg) 64 87 69 63 46

Footwear (m pairs) 11 10 9 11 6

a July-March.


Reference table 24

Imports(’000 tons)

1991/92 1992/93 1993/94 1994/95 1995/96a

Crude petroleum 4,076 4,178 4,102 3,928 2,927

Petroleum products 5,206 6,531 7,474 8,177 7,452

Chemical fertiliser 1,269 1,427 1,524 602 1,104

Edible oils 1,046 1,231 1,131 1,395 824

Wheat 2,018 2,868 1,902 2,617 1,505

Tea 110 126 116 117 84

a July-March.


Reference table 25

Main trading partners(PRs bn)

1991/92 1992/93 1993/94 1994/95 1995/96a

Exports to:USA 22.0 24.5 29.5 40.6 29.6 Hong Kong 12.5 11.7 14.9 16.6 17.8 Germany 12.2 13.8 16.4 17.6 13.2 Japan 14.2 12.1 16.5 16.8 12.9 UK 11.4 12.7 16.0 17.7 12.3 UAE 7.7 10.6 13.0 10.2 8.7 South Korea 5.1 4.3 5.5 8.4 6.6 France 6.7 7.6 8.4 8.3 6.3 Netherlands 3.7 4.7 6.3 8.1 6.2 Italy 5.5 4.5 5.6 7.4 5.6 Saudi Arabia 7.3 8.3 7.2 6.9 4.7 OECD 94.3 100.3 123.3 147.2 108.0 OIC 25.1 28.4 28.1 32.3 25.4 ASEAN 9.6 9.2 7.6 10.1 11.4 Total 171.7 177.0 205.5 251.2 197.8

continued



1991/92 1992/93 1993/94 1994/95 1995/96a

Imports from:Japan 32.9 41.1 30.4 30.7 29.6 USA 24.1 24.4 27.4 30.1 26.8 Malaysia 9.7 13.3 14.2 28.2 22.0 Kuwait 2.1 8.5 13.7 18.7 17.9 Germany 18.3 19.4 20.0 21.7 16.5 Saudi Arabia 12.0 14.1 14.0 15.9 16.2 Switzerland 6.0 5.9 5.4 7.5 13.7 China 9.9 10.9 13.2 14.1 13.2 UK 12.5 13.4 12.7 16.4 12.6 Italy 9.5 8.7 6.2 16.8 10.1 South Korea 7.6 11.6 9.5 10.3 8.1 France 10.9 10.7 10.4 7.8 5.8 Australia 4.9 5.7 5.5 5.3 5.2 Singapore 3.3 4.1 5.1 5.7 5.1 Iran 3.8 4.6 3.9 5.1 4.6 Netherlands 3.7 5.2 4.2 4.3 4.2 UAE 8.1 7.9 8.5 12.8 3.9 OECD 134.9 147.4 134.5 155.7 139.6 OIC 37.9 43.7 53.9 68.4 62.6 ASEAN 16.9 22.0 24.6 40.4 33.1 Total 229.9 258.6 258.3 320.9 285.8

a July-March.


Reference table 26

Balance of payments, IMF estimates($ m)

1990 1991 1992 1993 1994

Goods: exports fob 5,380 6,381 6,881 6,761 7,083

Goods: imports fob –8,094 –8,642 –9,671 –9,336 –9,311

Trade balance –2,714 –2,262 –2,790 –2,574 –2,228

Services: credit 1,423 1,524 1,552 1,566 1,744

Services: debit –2,063 –2,303 –2,671 –2,626 –2,518

Income: credit 96 73 73 62 149

Income: debit –1,175 –1,256 –1,478 –1,602 –1,821

Current transfers: credit 2,820 2,877 3,485 2,326 2,905

Current transfers: debit –40 –49 –40 –38 –35

Current-account balance –1,654 –1,396 –1,868 –2,887 –1,804

Direct investment abroad –2 4 12 2 –1

Direct investment in Pakistan 244 257 335 347 419

Portfolio investment assets 0 0 0 0 0

Portfolio investment liabilities 87 92 370 292 1,464

Other investment assets –363 –309 –565 –285 –282

Other investment liabilities 1,206 847 2,405 2,962 1,363

continued



1990 1991 1992 1993 1994

Financial balance 1,172 891 2,557 3,318 2,963

Capital account nie credit 0 0 0 2 0

Capital account nie debit –1 –1 –1 0 0

Capital-account nie balance –1 –1 –1 2 0

Capital-account balance 1,171 890 2,556 3,320 2,963

Errors & omissions –103 –78 120 –6 175

Overall balance –585 –583 807 427 1,334

Financing (– indicates inflow)Movement of reserves 469 –216 –494 –424 –1,736Use of IMF credit & loans –165 227 100 –4 401Liabilities constituting foreign authorities’ reserves 0 0 0 n/a n/aExceptional financing 282 573 –414 n/a n/aSources: IMF, International Financial Statistics.

Reference table 27

Balance of payments, national estimates($ m)

1991/92 1992/93 1993/94 1994/95 1995/96a

Goods: exports fob 6,762 6,782 6,685 7,884 6,137

Goods: imports fob –8,998 –10,049 –8,685 –10,137 –8,676

Trade balance –2,236 –3,267 –2,000 –2,253 –2,539

Services: credit 1,581 1,628 1,720 1,942 1,341

Services: debit –3,805 –4,376 –4,075 –4,488 –3,902

Services (net) –2,224 –2,748 –2,355 –2,546 –2,561

Investment income: credit 69 71 96 154 128

Investment income: debit –1,335 –1,569 –1,694 –1,883 –1,592

Investment income (net) –1,266 –1,498 –1,598 –1,729 –1,464

Private transfers (net) 3,114 2,327 2,390 2,397 1,792

Current-account balance –1,346 –3,688 –1,965 –2,402 –3,308

Private capital (net) 568 1,175 1,958 1,911 1,524

Direct & portfoliob 562 447 649 1,530 727

Other long-term 446 804 719 352 90

Short-term –440 –76 590 29 707

Official capital (net)c 942 1,898 1,513 871 733

Long-term disbursements 2,339 2,346 2,470 2,516 1,904

Long-term repayments –794 –1,156 –1,293 –1,584 –1,304

Others –603 708 336 –61 133

Capital-account balance 1,510 3,073 3,471 2,782 2,257

Errors & omissions (net)d –34 26 79 –138 156

Overall balance 130 –589 1,585 242 –895

Changes in reserves (– indicates increase) –130 589 –1,585 –242 895

a July-March. b Portfolio investment exclusive of Foreign Exchange Bearer Certificates and Dollar Bearer Certificates. c Includes official unrequitedtransfers. d Includes private short-term capital.




Reference table 28

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

1990 1991 1992 1993 1994

Total external debt 20,661 23,046 24,194 26,173 29,579 Long-term debt 16,640 17,845 18,672 20,552 23,165 Short-term debt 3,185 4,134 4,394 4,500 4,856 of which: interest arrears on long-term debt 0 0 0 0 0 Use of IMF credit 836 1,068 1,127 1,122 1,557

Public & publicly guaranteed long-term debt 16,503 17,730 18,551 20,429 22,993 Official creditors 15,788 17,102 17,728 19,135 21,839 Multilateral 6,894 8,078 8,749 9,907 11,493 Bilateral 8,894 9,024 8,978 9,228 10,345 Private creditors 714 628 823 1,294 1,155 of which: banks 404 323 467 868 410 bonds 0 0 0 0 150Total debt service 1,917 2,010 2,371 2,513 3,423 Principal 1,088 1,066 1,366 1,399 2,121 Interest 829 944 1,005 1,114 1,302 of which: short-term debt 254 323 339 387 466

Ratios (%)Total external debt/GNP 49.5 49.4 49.0 50.1 56.6Debt-service ratioa 23.2 21.4 24.2 25.2 34.8Short-term debt/total external debt 15.4 17.9 18.2 17.2 16.4Concessional long-term debt/ total long-term debt 72.9 71.2 68.4 65.4 67.0Variable interest long-term debt/ total long-term debt 13.4 14.4 17.7 21.0 19.2

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

Source: World Bank, World Debt Tables.

Reference table 29

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

1991 1992 1993 1994 1995

SDRs 7 0 1 0 15

Reserve position in the IMF 0 0 0 0 0

Total reserves excl gold 527 850 1197 2929 1733

Golda 710 681 692 792 721

Total reserves incl gold 1,237 1,531 1,889 3,721 2,454

Gold (m fine troy oz) 1.961 2.021 2.044 2.052 2.055

a National valuation.

Source: IMF, International Financial Statistics.



Reference table 30

Exchange rates(PRs per unit of currency; annual averages)

1991/92 1992/93 1993/94 1994/95 1995/96a

US $ 24.84 25.96 30.16 30.85 33.13

£ 43.75 42.03 45.16 48.7 51.50

¥ 0.1896 0.2177 0.2843 0.3277 0.3295

DM 15.08 16.58 17.90 20.68 22.98

Rs 0.9611 0.9405 0.9609 0.9814 0.9699

IMF SDR 34.14 35.62 42.22 46.16 49.38

a July-March.




Afghanistan

Basic data

Land area 652,000 sq km

Population 16.6 million (1976 sample census); 20.14 million (mid-1995 IMF estimate)

Main towns Population in ’000 (1982 estimate)

Kabul 1,036Kandahar 191Herat 150

Climate Continental (extremes of temperature)

Weather in Kabul(altitude 1,815 metres)

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

Languages Pashtu and Dari (Persian)

Measures Metric system. Local measures include:

1 gazi jerib=0.7366 metre1 jerib=0.195 ha1 charak=1.7665 kg1 seer=8.066 kg

Currency Afghani=100 puls. Average 1995 exchange rate: Af50.60:$1 (official rate).Exchange rate on January 24, 1995, Af4,750.00:$1

Time 4 hours ahead of GMT

Fiscal year March 21-March 20

Public holidays(1997)

January 10 (start of Ramadan), February 9 (end of Ramadan), March 21, April19, 27, May 1, 18, July 18, August 18 (Independence Day), December 31 (startof Ramadan)

Afghanistan: Basic data 51


Political background

Historical background

After centuries ofconquest—

At the crossroads of central Asia, the area that comprises modern Afghanistanhas been subjected to constant invasion throughout recorded history. Betweenthe 6th century BC and the 6th century AD the list of conquerors includedPersians, Alexander the Great’s Macedonians, Scythians, Parthians, BuddhistKhushans and White Huns. Islam was introduced by the Arabs in the 7th cen-tury and for a brief period at the beginning of the 11th century the Turks,under Mahmoud of Ghazni, made the area a centre of Islamic power andcivilisation. Genghis Khan invaded early in the 13th century and Tamerlane,another Mongol conqueror, added the area to his empire at the end of the14th century. Babar, a descendant of Tamerlane, established the Moghul empirefrom his base in Kabul early in the 16th century. Over the next two centuriesAfghanistan was divided between the Moghuls and the Safavids of Persia.

—the Pashtuns takeprecarious control

By the mid-18th century the Pashtuns had thrown off the Persian yoke andestablished their own kingdom under Ahmad Shah Durrani, who is creditedwith being the founder of the modern Afghan state. It was the rivalry betweenthe British and Russian armies, which extended their respective empires to thecountry’s borders during the 19th century, that gave Afghanistan a semblanceof national cohesion. Between 1837 and 1919 the UK, worried by what it sawas Russian designs on India, invaded Afghanistan three times, always withdisastrous consequences for the UK.

Communists gain afoothold—

The country’s most peaceful period began in 1933, when Zahir Shah wascrowned king, and lasted for 40 years. In July 1973 the king was overthrown byhis cousin and brother-in-law, General Mohammed Daud, who became primeminister and president. The coup was initiated by young army officers and hadwide support from left-wing student groups, whose members made up the bulkof the new regime’s central committee. A new constitution approved in 1977provided for a one-party parliamentary system with real power vested in thepresident. General Daud’s increasing powers and his regime’s slow implement-ation of promised social reforms led to left-wing disenchantment and thefeeling that the revolution had been betrayed. In April 1978 the president andmany of his immediate family and supporters were killed in a bloody militarycoup. Nur Mohammed Taraki was installed as president of a Moscow-orientedregime centred on the radical Khalq faction of the communist People’sDemocratic Party of Afghanistan (PDPA). In September 1979 Mr Taraki washimself deposed by his prime minister, Hafizullah Amin. The latter’s own termof office, marked by excesses as political opponents were purged, was alsoshortlived.

—paving the way for the1979 Soviet invasion—

In late December 1979 some 100,000 Soviet troops invaded Afghanistan.Mr Amin was deposed and executed and Babrak Kamal, the leader of the mod-erate pro-Soviet Parcham wing of the PDPA, was installed as president. TheSoviet Union justified its intervention by invoking the treaty of friendship

52 Afghanistan: Historical background


between the two countries and claiming it was made in response to “appealsfrom within Afghanistan”. Its influence, which had been building sinceGeneral Daud’s assassination, became paramount, with Soviet advisers control-ling all government departments and the media.

—which in turn sparks amujahideen rebellion

The conservative tribesmen of the countryside rebelled against a governmentthey saw as anti-Islamic and willing to sacrifice the country’s independence.Their ranks were swollen by deserters from the once 80,000-strong Afghan armyand they enjoyed the backing of neighbouring Pakistan and of the USA. In spiteof ruthless repression, mainly in the form of air and ground strikes on themujahideen (holy warriors) and their villages, the insurgents were able to pindown Soviet forces. Yet lack of unity and cohesion in the various mujahideengroups dissipated the military effort and prevented agreement on the compos-ition of an alternative government-in-waiting. Despite international condemn-ation of its invasion, Moscow ignored calls for its withdrawal, giving rise tospeculation that it intended to make Afghanistan a Soviet satellite. This wasfurther fuelled by policies designed to make the country more dependent on it,notably the systematic integration of the economy of northern Afghanistanwith that of the southern Soviet republics. In May 1986 Mr Karmal was replacedas PDPA leader by Mohammed Najibullah, a fellow member of the Parchamfaction and head of Khad, the secret police. A few months later, after consolid-ating his position by removing members of rival factions from prominent office,Dr Najibullah ousted Mr Karmal from the presidency.

Despite the Red Army’swithdrawal—

Efforts to end the war had got under way in 1982 with proximity talks involvingAfghanistan and Pakistan. But for years they came to nothing, owing to dis-agreement on the timetable for the withdrawal of Soviet troops. Islamabad,backed by the USA, demanded that this be accomplished in a matter of months,while Kabul insisted it should take three years. Early in 1987 Dr Najibullahannounced a ceasefire and offered to hold talks with the mujahideen, overturesthe resistance leaders rejected outright. At the outset of UN-mediated multi-lateral negotiations in Geneva in March 1988, the Afghan delegation agreed thata Soviet withdrawal should be phased over nine months, with half the troopsleaving in the first three months. This was formalised the following month, andthe pullout was scheduled to begin on May 15. While the USA and the USSRagreed on paper to respect Afghanistan’s neutrality and committed themselvesto non-interference, each superpower nevertheless reserved the right to aid itsAfghan allies militarily if the other did. Both sides continued to do so, duringthe withdrawal period and beyond it. Moscow met the February 15, 1989,deadline for the removal of all its troops.

—intra-mujahideen riftsgive a new lease of life to

Kabul’s communists—

With the Soviet army gone, few gave the Najibullah regime much chance ofsurvival. In particular, it was felt that the Afghan army would crumble in theface of intensified pressure from the mujahideen, who had not signed theGeneva accord. But he and his administration held firm. This was partly be-cause the supply of Soviet arms and ammunition continued unabated, but alsobecause the withdrawal of Soviet troops exposed the underlying divisionsamong the mujahideen: between the political groups based in the westernPakistani city of Peshawar and the fighters in the field; between fundamentalist

Afghanistan: Historical background 53


and moderate parties; between Sunnis and Shias, and between the majorityPashtuns and minorities such as the Tajiks. The mujahideen groups formed aso-called Afghan Interim Government (AIG) comprising members of the sevenmain Peshawar-based parties, but it was unable to function with any unity.Nor, owing to lack of coordination among mujahideen factions in the field andtheir limited fighting skills, was it able to establish itself on Afghan soil. Therewere also doubts about the AIG’s claim to be the legitimate representative ofthe Afghan people, since only four countries recognised it. The USA, for itspart, halted arms supplies to the mujahideen.

The failed coup in the USSR in August 1991 and the subsequent removal fromthe Soviet communist party of hardliners who had been the Kabul regime’sstaunchest supporters further encouraged Dr Najibullah to try to entice themujahideen into a government of national reconciliation. He renamed thePDPA the Watan (Homeland) Party, and stepped up efforts to negotiate withmoderates among the resistance leaders. Hardliners, such as GulbuddinHekmatyar of the largely Pashtun Hezb-i-Islami, insisted publicly they wouldnot even deal with Dr Najibullah’s representatives. Pressure on these leaders tosue for peace, from the Pakistan government among others (although not fromPakistan’s Inter Services Intelligence agency, which helped orchestrate themujahideen’s war against the Soviet army and was keen to continue supportingtheir efforts to secure power by force), was to no avail.

—whose fate is sealed asnorthern generals rally to

the resistance—

At the end of January 1992, less than a month after an agreement betweenWashington and Moscow formally ending arms supplies to their Afghanprotégés came into force, Dr Najibullah tried to replace General Abdul Momin,an army brigade commander at Hairatan in the north. General Momin refusedto obey the order and was backed by the powerful Uzbek and Ismaili militialeaders, Rashid Dostam and Syed Nadieri, in the process depriving Dr Najibullahof his supply route from the former Soviet Union. Ahmad Shah Massoud, themilitary commander of the predominantly Tajik Jamiat-i-Islami, one of thebiggest mujahideen parties, struck a deal with the mutineers, which enabled himto seize control of much of north-eastern Afghanistan.

—and their leader agreesto bow out

Dr Najibullah further hastened his own departure with an announcement onMarch 18 that he would relinquish power once ongoing UN efforts to devise aninterim administration bore fruit. Smelling blood, the mujahideen began clos-ing on Kabul. On April 16 Dr Najibullah resigned and made a bid to leave thecapital, only to be turned back at the airport by Uzbek militiamen who hadbeen airlifted in from the north. By now the leaders of the northern Tajik-Uzbek coalition had linked up with ethnic kinfolk in Kabul who had assumedprecarious control of the all but defunct government. Mr Hekmatyar had like-wise been adopted by the crumbling administration’s Pashtuns. On April 21Hezb fighters who had infiltrated the city over the previous three days seizedall its strategic installations except the militia-controlled airport. Thousands ofDostam and Massoud supporters were airlifted into the city. Fierce battles ragedacross the capital for the next three days, culminating in the expulsion of theHezb fighters.



As rival mujahideengroups battle for the

capital—

With the UN’s hopes of installing a broad-based administration killed off,mujahideen leaders meeting in Peshawar agreed, after days of bickering, a frame-work for an interim government. This provided for a 51-member transitionalcouncil, and for Professor Sigbhatullah Mojadedi, leader of the moderateJabha-i-Nijat-Milli, to be head of state for two months. He was to be succeededby Professor Burhanuddin Rabbani, Jamiat’s political leader, for four months.The premiership was offered to Hezb, but Mr Hekmatyar turned it down. Hisforces began a protracted rocket and artillery bombardment of Kabul, osten-sibly to dislodge Mr Dostam’s militia and “communists” working with the newregime. In reality, Mr Hekmatyar wanted sole control of the city.

The chaos and divisiveness that had characterised the mujahideen’s 14-yearholy war became even more acute following their takeover of Kabul. Constantsquabbling erupted into vicious battles between heavily armed rivals on thestreets of the capital. The most intense were between Hezb-i-Wahdat, made upof minority Shia tribesmen from Hazarajat, and Ittehad-i-Islami, a hardlineSunni Pashtun party. The Uzbek militia lived up to its reputation for lack ofdiscipline, indulging in murderous looting sprees and other criminal activities.Amid the confusion, Mr Mojadedi sought to prolong his term by promotingMr Dostam to the rank of four-star general and bringing Wahdat into thegovernment. But military impotence obliged him to step down on schedule inlate June 1992.

—Jamiat’s BurhanuddinRabbani becomes head

of state—

Although Mr Rabbani was duly sworn in as president and Hezb finally took upthe offer of the premiership, sending Abdul Farid, an ethnic Tajik, to assume thepost, peace proved shortlived. Within less than a month Hezb launched its mostmurderous assault yet on Kabul, a three-week bombardment that killed some2,000 civilians and sent many more fleeing into the countryside. Mr Rabbaniannounced that Mr Farid was no longer premier and that there was no place forhis party in the government. A major counter-offensive by Jamiat and militiaforces turned the battle decisively in their favour, after which Pashtun andPakistani mediators helped negotiate a ceasefire. Mr Rabbani claimed, however,that Hezb’s backers in Pakistan were continuing to send large supplies ofweapons across the border.

—and controversiallycontrives a lengthy

extension of his term

By the time Mr Rabbani’s four-month term expired on October 28, the machin-ery for electing a successor was still not in place, once again because of bicker-ing between the parties vying for the job. While their leaders agreed to givehim an additional 45 days in office to establish the necessary mechanism,Mr Rabbani used the time to organise a shura (assembly) of delegates from thecountry’s 29 provinces. This met in Kabul on December 30, 1992 and returnedhim to office for two more years. The controversial nature of the gathering wasunderlined by the absence of five of the nine main mujahideen groups and therocketing of Kabul while the votes were still being counted. Mr Rabbani’s re-election sparked weeks of fighting between Jamiat and Hezb, now militarilyallied with Wahat. Mr Dostam, meanwhile, had opted for neutrality.

A peace pact signed by themain mujahideen groups

proves shortlived

Mediation by Pakistani and Saudi government officials brought the mainfaction leaders to Islamabad in March 1993, where another power-sharing dealwas worked out. This provided for Mr Rabbani to remain in office until June



1994, for Mr Hekmatyar to become prime minister and form an all-partygovernment and for the creation of a commission to organise elections to aconstituent assembly that was in turn to pave the way for presidential andparliamentary elections. But the pact was seriously flawed because it paperedover fundamental differences between the signatories and effectively excludedMr Massoud and Mr Dostam, two of the country’s most powerful warlords. Thegovernment Mr Hekmatyar belatedly formed was unable to function, becausehe was afraid to enter Kabul and rival factions sabotaged cabinet meetings inCharasiab, Hezb’s headquarters south of the capital. The subsequent monthssaw widespread fighting across the country between Hezb and Jamiat. Havingbeen denied formal recognition by the Jamiat leadership, Mr Dostam threw inhis lot with Mr Hekmatyar and on January 1, 1994 Hezb and the Uzbek militia,backed by Wahdat, began a prolonged but ultimately unsuccessful offensiveaimed at driving the Rabbani administration from Kabul.

The Taliban emergesuddenly andsuspiciously—

In late 1994, after Pakistan declared its intention to reopen an ancient traderoute through Afghanistan to central Asia shut down by the 1979 Soviet inva-sion, yet another army emerged, quickly becoming a major force in the war.The Taliban were mostly Islamic students from madrassahs (religious colleges)in Baluchistan and North West Frontier Province, Pakistani provinces thataccommodated large numbers of Afghan refugees. That they burst on to thescene by freeing the first convoy to ply the route when it was ambushed bymujahideen brigands shortly after crossing the border into Kandahar province,and were organised and well equipped, seemed to confirm suspicions they hadbeen moulded into a fighting force at the behest of powerful elements in thePakistan government. A few days later, the overwhelmingly Pashtun move-ment overran Kandahar city, Afghanistan’s second biggest, and over the nextfew weeks several southern provinces. Most fell with little or no fighting, notleast because many mujahideen commanders were reluctant to take up armsagainst the students owing to their perceived Islamic legitimacy.

—are initially routed fromKabul by Jamiat—

The Taliban were scathing about all mujahideen groups, accusing them of hav-ing betrayed the trust of the Afghan people by 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 Hekmatyar beat a hasty retreat from his Charasiabheadquarters early on February 14, 1995 as the Taliban pressed northwards. Heclaimed to have abandoned his stronghold so as not to obstruct their route toJamiat-controlled Kabul. Mr Massoud, having fought long and hard to take andretain the capital, rejected the Taliban’s ultimatum to surrender it. When fight-ing erupted between the two sides on March 8, the students were quicklyrouted and driven beyond rocket range. A spring offensive in the west of thecountry was likewise thwarted by Jamiat after some initial gains.

—before conquering thewest of the country—

However, an autumn offensive in the west proved rather more successful.Fighting began there in earnest when Mr Massoud, under pressure from theTaliban around Kabul and further north from Mr Dostam’s Uzbeks, orderedIsmail Khan, the Jamiat governor of Herat, to open a front against the students.After suffering a series of setbacks, the Taliban rallied—apparently thanks to



fresh supplies of manpower and weapons from inside Pakistan and bombingraids by Mr Dostam’s air force—and swept back up towards Herat, which theyoverran without a fight. Mr Khan and several hundred of his fighters fled intoIran. The Taliban’s victory in the west gave them control of 14 provinces andreduced Jamiat’s fiefdom to only five, that is essentially Kabul and its environs.Encouraged by their success, the students mounted a vigorous assault on thecapital from their positions to the south, and made some progress.

—and eventually thecapital

Taliban reluctance to join forces with other anti-Jamiat elements helped thebeleaguered Kabul administration minimise the military threat these posed.Mr Dostam opted for neutrality and, on May 24, 1996, Mr Hekmatyar signed apower-sharing agreement with Mr Rabbani. A month later the Hezb leaderentered the capital for the first time in 20 years and was sworn in as primeminister. Shia Iran, determined to neutralise the vehemently Sunni Taliban,was the driving force behind the deal, which had been six months in themaking. On August 13 Mr Dostam signed a formal ceasefire with the Kabulgovernment and two weeks later agreed to reopen the strategic north-southSalang highway, giving the Rabbani regime a supply route from central Asia.

The Taliban responded by stepping up their bombardments of Kabul and seiz-ing a number of Hezb-held areas protecting the capital’s eastern supply route.Then, in an overwhelming, rapid-fire, ten-day, east-to-west offensive along theroute beginning in mid-September, they took the city of Jalalabad, Sarobi townand finally, with hardly a fight, Kabul itself. Their seizure of the capital, whichJamiat had held for more than four years, was as surprising as it was swift. Fewbelieved the Taliban leadership capable of planning and executing the sophis-ticated, multi-pronged advance that secured them Kabul. Once again, accusingfingers pointed in the direction of Pakistan. While Jamiat’s retreat was hasty, itwas nevertheless organised. A contingency plan for such an eventuality hadlong been in place.

Indeed, had Mr Massoud chosen to stand and fight for the capital, his forceswould have been cut off from their traditional stronghold in the Panjshir valleyto the north, whence they repaired and regrouped. Dr Najibullah, a de factoprisoner at a UN guesthouse since his thwarted attempt to flee in April 1992,declined an invitation to go with them, and was seized and executed bythe Taliban soon after they entered the city. The student militia set up asix-member supreme council, headed by its second-in-command, MullahMohammad Rabbani, to run Kabul, which pledged to do so in accordance withthe strict Islamic principles already in force in other areas under their control.They also took their war north of the capital, but suffered a series of reversals atthe hands of the newly combined Jamiat and Uzbek forces.



Important recent events

January 1992: Army and militia generals in the north revolt against beleaguered

communist president Mohammad Najibullah and join forces with Ahmad Shah

Massoud, commander of the Jamiat-i-Islami mujahideen group.

March 1992: Dr Najibullah declares his willingness to surrender power to a UN-

sponsored administration, prompting rival mujahideen factions to converge on Kabul.

April 1992: Following the collapse of the communist government, the predominantly

Tajik Jamiat, backed by Rashid Dostam’s ethnic Uzbek militia, defeats the Hezb-i-Islami

faction of Gulbuddin Hekmatyar, a Pashtun, in a brief but intense battle for the capital.

Minority mujahideen party leader Sigbhatullah Mojadedi begins a two-month term as

head of the new Islamic state.

June 1992: Jamiat leader Burhanuddin Rabbani’s installation as president provokes a

protracted Hezb bombardment of Kabul.

December 1992: Mr Rabbani is controversially re-elected for two more years.

March 1993: A Pakistani- and Saudi-brokered deal confirms Mr Rabbani as head of

state and elevates Mr Hekmatyar to the premiership, but sparks widespread clashes

between Jamiat and Hezb.

January 1994: Hezb and Mr Dostam’s Uzbek militia launch a blistering offensive in a

bid to dislodge Kabul’s Jamiat-dominated administration.

November 1994: The previously unknown Pashtun Taliban militia seizes Kandahar

city and begins a successful sweep northwards.

March 1995: Having gained control of several southern provinces and reached the

outskirts of Kabul, the Taliban are driven beyond artillery range of the capital by Jamiat.

September 1995: The Taliban overrun Herat, bringing to 14 the number of prov-

inces under their control.

June 1996: Following an Iranian-negotiated agreement between Jamiat and Hezb,

Mr Hekmatyar is sworn in as prime minister.

September 1996: After a rapid advance from the east, the Taliban seize Kabul from

retreating Jamiat forces.

Constitution and institutions

A Sunni-Shia disputeblocks the adoption of a

mujahideen constitution—

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 to differ-ences 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”.

—but the Taliban proveless sensitive to minority

views

Nevertheless, most of the mujahideen groups had championed Islam as anideological response to the imposition of Soviet Marxism and as a base onwhich to build a modern state. By contrast, the traditionalist and sociallyconservative Taliban, whose education is by and large limited to a narrow studyof the Koran and other scriptures, disapprove of this modernist interpretationof Islam, and have vowed to rule Afghanistan in accordance with what theydeem to be pure sharia. In areas under their control they have imposed rigid

58 Afghanistan: Constitution and institutions


Sunni strictures, closing girls’ schools, prohibiting women from working, re-quiring men to grow beards and instigating centuries-old Koranic punish-ments, such as 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 and remains one of the country’s few major export earn-ers. Although they control half the country, including the capital, there is noTaliban government as such. Individual regions and cities are ruled by shuras(assemblies) of mullahs, who have shown themselves to be inept, excessivelyharsh and therefore unpopular administrators.

Political forces

Governmentstraditionally hold little

sway beyond the capital—

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-hungry war-lords. Today, political power remains a function of military might.

—a trend the increasinglyunpopular Taliban are

keen to buck—

The Taliban owe their sudden emergence two years ago and subsequent mili-tary successes to Pakistani sponsorship, the reluctance of rival factions to fightthem and popular exasperation with the mujahideen’s failure to bring peace andimprove living standards. While initially welcomed for neutralising and dis-banding many of the violent and mercenary militias they encountered duringtheir drive northwards and westwards from Kandahar, their repressive brand ofIslam, as well as their often indiscriminate bombardment of civilian centres—notably Kabul before it fell to them and towns and villages to the north im-mediately thereafter—did much to erode their popularity, even among theSunni Pashtun majority to which they belong.

—in the face of stiffresistance from rival

factions

Their declared intention of taking over the entire country is highly ambitious,not least because the movement is becoming increasingly factionalised. Thereare also powerful rivals to contend with. Foremost among these is Jamiat, thelargest of the mujahideen groups, whose leadership is dominated by ethnicTajiks. Although driven from Kabul by the Taliban in late September 1996, itsforces quickly regrouped after repairing northwards, and inflicted a series ofmorale-boosting defeats on the pursuing students. Jamiat hopes to underminethe Taliban further by opening battle fronts against them in other parts of thecountry. Its hand has been strengthened by an alliance with Mr Dostam’sethnic Uzbek militia, which controls seven provinces across the north. Smallerfactions, including Mr Hekmatyar’s Hezb, and Wahdat, the Shia grouping, like-wise have more in common with Jamiat than they do with the Taliban.

Afghanistan: Political forces 59


Main political figures

Mohammad Omar: A former mujahid who took up religious studies in 1989 after

losing an eye in battle, the Taliban’s Kandahar-based leader is a reclusive and largely

unknown figure.

Ahmad Shah Massoud: The ethnic Tajik commander of Jamiat’s army gained a

reputation as Afghanistan’s most astute military strategist during the Soviet occupation

and orchestrated his faction’s seizure of Kabul following the communists’ collapse in

April 1992.

Burhanuddin Rabbani: President from June 1992 to September 1996, Jamiat’s

political leader was more willing than his military commander to accommodate rival

faction chiefs in his administration.

Rashid Dostam: The opportunistic Uzbek militia commander has changed sides

more often than most leaders, successively supporting Kabul’s communist govern-

ment, Jamiat, Hezb-i-Islami and Jamiat again.

Gulbuddin Hekmatyar: An ethnic Pashtun and the most ruthless of the mujahideen

faction chiefs, the Hezb leader, twice appointed prime minister, faces an uncertain

future in the wake of the Taliban’s takeover of Kabul.

International relations and defence

Of the many countriesdetermined to influence

the outcome of the war—

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 is the mostdogged—

Pakistan’s attempts to determine the course of events have been the mostpersistent and, in the view of many Afghans, the most pernicious. In themid-1970s its military began secretly training young Afghan Islamists to chal-lenge Kabul’s increasingly pro-Moscow government, quickly resolving that thePashtun Mr Hekmatyar and his Hezb faction should run the Islamic state ithoped to create. Pakistan’s Inter Services Intelligence (ISI) agency thus ensuredthat Hezb received the lion’s share of the US- and Saudi-funded military hard-ware it was responsible for channelling to the resistance during a holy war itsought—and by and large succeeded—to direct.

—and opportunistic After the communist collapse the ISI continued its aggressive sponsorship ofMr Hekmatyar, while deliberately undermining rival factions, especially Jamiat.When his Pakistani patrons realised the devious Mr Hekmatyar was incapable ofuniting the Pashtun majority behind him, they ditched him and created theTaliban, nurturing the students into a powerful fighting force. Pakistan’s effortsto prod Mr Dostam and the Taliban into an anti-Jamiat coalition were lesssuccessful. So it stepped up its covert assistance to the students, enabling themto capture Herat on September 5, 1995—which provoked a Jamiat-orchestratedsacking of Islamabad’s mission in Kabul the following day—and the capital justover a year later. Pakistan was the first country to recognise the new regime.

60 Afghanistan: International relations and defence


Shia Iran supports Jamiatagainst the Sunni

Taliban—

Iran’s interests in Afghanistan are governed by its concern for the welfare of theShia minority and its long-term aim of forging a zone of influence across thecountry into central Asia. As such, it viewed the rise of the vehemently SunniTaliban, and Pakistan’s support for them, with thinly disguised alarm. Havingbacked Wahdat and its Hezb and Uzbek allies in their war against the Rabbaniadministration for control of Kabul, the sudden emergence and success of thestudent militia propelled Tehran into an accommodation with the Persian-speaking Jamiat leadership. It began airlifting in weapons, fuel and other sup-plies to assist Mr Massoud’s war effort, and helped blunt the Taliban’s firstmajor offensive in the west during the spring of 1995 by sending troops acrossthe border to help Ismail Khan’s foundering fighters. The students’ seizure ofHerat a few months later was seen as a major setback by Iran, which feared itwould spark uprisings by Baluch, Turkmen and Azeri Sunni minorities along itseastern frontier. Tehran welcomed Mr Khan and hundreds of his combatantswhen they fled across the border, and intensified its efforts to persuadeMr Dostam to bury his differences with Mr Massoud, which ultimately, ifsomewhat belatedly, succeeded. It was also, for the same reason, the catalystbehind the May 1996 reconciliation between Mr Rabbani and Mr Hekmatyar.

—as do Uzbekistan andRussia—

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 insurgencythat engulfed neighbouring Tajikistan. The Tashkent government considersMr Dostam, an ethnic Uzbek and former communist, as a useful buffer, and hastherefore been bankrolling his war effort. It also encouraged him to mendfences with Mr Massoud so as to help undermine the Taliban, which havemade their expansionist designs on former Soviet central Asia abundantlyclear. So too, for the same reason, did Moscow, which, despite having spentmore than a decade trying to prevent the likes of Mr Massoud and Mr Rabbanitaking 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 its centralAsian underbelly it deems to be considerable.

—to the dismay of the USA The USA, however, believes that Russia’s faith in Jamiat as a bulwark againstthe spread of militant Islam is misplaced. Government officials say thatMr Rabbani’s staunchest ally since 1992, the Ittehad leader Abdurrab RasoolSayyaf, continues to fund and oversee camps where Muslim extremists aretrained to carry the holy war further afield. Jamiat, for its part, having bitterlydenounced the USA for abandoning Afghanistan following the collapse of theSoviet Union, sees the rise of the Taliban as part of a conspiracy blessed, if notdeliberately contrived, by the USA in order to undermine Iran.

The UN’s mediationefforts are frustrated bypower-hungry warlords

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 assume tempo-rary control of Kabul as a prelude to a more durable solution to the conflict.Mahmoud Mestiri, a former Tunisian foreign minister who resigned in mid-1996 after more than two years as head of the UN’s mediation effort, attributed

Afghanistan: International relations and defence 61


the failure of his mission partly to lack of support from the major powers,saying they had refused to underwrite the cost of the neutral security force heinsisted would be required in the capital if a broad-based administration wereto be installed there. He singled out the USA for special criticism, accusing it offailing to appreciate the complexity of Afghanistan’s chaos. He frequentlydenounced the support given by foreign governments to their Afghan proxies,arguing it was one of the main factors responsible for the continuation of thewar. Like his predecessors and successor, Mr Mestiri’s had faced a virtuallyimpossible task, caught up as he was in the conflicting agendas of the mainwarlords, each of them seemingly convinced that military strength would ulti-mately ensure total victory.

The economy

Economic structure

Main economic indicators, 1995

GDP growth (%) n/a

Consumer price inflation n/a

Current account n/a

Foreign debt n/a

Exchange rate (Af:$) 50.60a

Population (m) 20.14

a Official rate.

Source: IMF, International Financial Statistics.

War devastatesagriculture—

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. Afghanistan is traditionally a subsistence agricultural eco-nomy, much of the arable land fell into disuse with the onset of war, as millionswere uprooted from 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 by sabotag-ing economic installations and infrastructure. During the jihad years, the sub-sectors of the economy that received most attention were those from whosedevelopment the Soviet Union benefited, such as the exploitation of natural gasand other minerals, and government services, including defence. The SovietUnion took the bulk of the country’s exports (mainly natural gas), providedmost of its imports and accounted for most of its industrial and infrastructureinvestment.

—and industry Inevitably, the damage caused to the agricultural sector had a knock-on effect onindustry. There was some manufacturing activity in the major urban centres,particularly Kabul, but much of this ground to a halt as a result of the destructive

62 Afghanistan: Economic structure


factional feuding that followed the mujahideen takeover. On the other hand thecommunist collapse led to something of a revival of the rural economy as largenumbers of refugees returned from abroad. In a 1993 rehabilitation action plan,the UN Development Programme (UNDP) estimated GDP in 1991/92 atAf124.7bn, compared with Af117bn in 1978/79, the year of the Soviet invasion.Agriculture accounted for 45.5% of output, down from 52.8% in the late 1970s.Mining, trade, construction and transport and communications had shares of13.6%, 8.4%, 4.5% and 2.7% respectively. Services were estimated to account for16.9% of GDP.

Economic policy

With the tax systemin ruins—

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. It acknowledged the absence of a functioningcentral government and advocated schemes assisted by non-governmentalorganisations (NGOs) focusing on local communities. However, since the im-plementation of the plan was made conditional on the restoration of peace, itnever got beyond the drawing board.

During the four and a half years it held sway in Kabul, the Jamiat-led adminis-tration’s main economic policy priority was to secure sufficient funds to meetits military objectives: retaining power and extending its control where pos-sible beyond the capital. The devastated economy’s capacity to generate re-sources for the government was extremely limited. The formal tax system,previously hardly functional in tribal Afghanistan, had completely collapsedearly in the war. While an informal tax system grew up quickly following themujahideen takeover—local commanders across the country became heavilydependent on the arbitrary tariffs they levied on commercial traffic passingthrough their territory—little of the revenue reached Kabul. When the Talibanremoved the checkpoints erected for this purpose in the areas they conquered,grateful local traders responded with generous donations.

—and the patience of itsforeign backers

exhausted—

Foreign governments, indulgent until the mujahideen factions turned theirguns on each other (just as the communist regime had been heavily dependenton loans and grants from the Soviet Union), insisted lasting peace was neces-sary before any sizeable pledges could be made.

—Jamiat prints money tosurvive—

Strapped for cash, Jamiat reactivated an agreement, concluded between Kabuland Moscow when both had communist governments, under which largequantities of afghanis were printed in Russia and airlifted to its territory. Inaddition to being used to pay Jamiat troops and buy off rival faction leadersand commanders, the bills were exchanged in the Kabul and Peshawar moneymarkets for hard currency, which in turn underwrote weapons and other pur-chases for the war effort from abroad. Given that the administration’s overrid-ing priorities were of a military nature and it could order any amount ofafghanis, public finance management became a meaningless concept. Yet an-nual budgets were supposedly drawn up. Officials claimed the draft for 1994/95(April-March) envisaged revenues of Af536bn and outlays Af613bn. The latter

Afghanistan: Economic policy 63


was said to be routine spending, exclusive of the cost of maintaining tens ofthousands of civil servants and armed combatants. Officials admitted the an-ticipated expenditure would have to be entirely funded by printing new notes.

—fuelling runawayinflation

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 cooperative shops. These dampeners largely disappearedwith the mujahideen takeover. By mid-1993 officials at the by now defunct Bankof Afghanistan (central bank) estimated the annual inflation rate at more than150%. While there have been no exhaustive independent measurements since,anecdotal evidence suggests it has accelerated dramatically, fuelled, inter alia,by the massive injections of unsupported currency and widespread shortages ofbasic foodstuffs. Frequent blockades of Kabul by anti-Jamiat forces in 1992-96meant that prices for staples were substantially higher in the capital thanelsewhere. Since the economy is essentially a subsistence one, Afghans in paidemployment, including civil servants and combatants, were among the hardesthit by soaring inflation. The wage increases they received were never sufficientto offset the runaway price rises.

Resources

Population

The war claims onemillion lives and creates

five million refugees—

While there has never been a census, a sample headcount in 1976 calculatedthe population at 16.6m. An official estimate three years later put it at 15.5m.At the time, some 90% of Afghans lived in rural areas. Uncertainty about thesize of the population was compounded by the war that began following theSoviet invasion in late 1979. The conflict claimed the lives of more than 1mAfghans, propelled some 5m others into exile abroad, mostly to Pakistan andIran, creating the world’s largest refugee population, and caused a massiveexodus from the countryside into the cities. The population of Kabul morethan doubled.

—whose return is slowedby continued fighting—

Refugees began returning from neighbouring states after the mujahideen victoryin April 1992, and by mid-1996 more than half had been repatriated. Theinflux would have been more rapid but for the continued fighting, which at itsfiercest led to larger numbers fleeing the country than returning and createdsizeable populations of internally displaced. Intense and prolonged battles forKabul after 1992 led to a major exodus and to the sprouting of tented citiesclose to peaceful urban centres, such as Jalalabad, accommodating hundreds ofthousands of the capital’s former inhabitants.

—which is largely alongethnic lines

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 in the foothills of theHindu Kush constitute a further 20%. Some 10% of the population are Turkic,

64 Afghanistan: Population


mostly Uzbeks and Turkmen who live in the northern plains. There are some20 other distinct ethnic groups—of which the Hazaras in the centre, the Baluchin the desert south and the Nuristanis in the mountainous east are the largest—speaking more than 30 languages. Since the overthrow of the communist re-gime in 1992, the war has been largely, although not exclusively, an ethnic oneamong Pashtuns (Hezb and the Taliban), Tajiks (Jamiat), Uzbeks (Mr Dostam’smilitia) and Hazaras (Wahdat).

Education

The fighting shuts downmost schools—

The vigorous implementation of an ambitious education policy during the latterhalf of King Zahir Shah’s reign made primary schools accessible to half thepopulation under 12, meant secondary schools were functioning in most pro-vincial towns and allowed the national university in Kabul to offer increasinglysophisticated graduate-level courses. Nevertheless, 90% of the population werestill illiterate in 1979. Seventeen years of war have virtually destroyed thecountry’s education infrastructure. Initially the damage was most severe in ruralareas, where government teachers were among the main targets of anti-Sovietresistance. Most abandoned the profession and many fled the country.

—leaving Afghanistanfunctionally illiterate

Schools and colleges in urban areas continued to function until the mujahideentakeover, but many were forced to close by the intense factional feuding thatfollowed. This took a particularly heavy toll in Kabul, whose university was formore than two years in the heart of one of the main battle zones and remainedclosed most of the time. The poorly educated Taliban shut it down after takingthe capital in September 1996 and, as in other areas under their control, out-lawed schooling for girls. Afghanistan has the world’s highest rate of illiteracy.Only a tiny fraction of Afghans can now read and write and internationalexperts warn that the country may remain functionally illiterate for generationsto come.

Health

The war destroys a badlyneeded health service

While Afghanistan’s needs are huge after so many years of war, the conflict hasdevastated 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 1996 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. Over 2m Afghans have been physi-cally maimed and many more mentally traumatised. All require regular moni-toring and care; few receive it. Each month hundreds of civilians andcombatants are wounded in armed clashes, or by the mines and unexplodedordnance strewn across 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. Infectious and parasitic diseases, such asdiarrhoea and malaria, partly a product of dismal sanitation and water supply

Afghanistan: Education 65


conditions, are widespread, as is malnutrition. Foreign relief organisations,such as the International Committee of the Red Cross, UN agencies and Care,are present in the country, but limited funding means that the bulk of thepopulation, and often the most needy, are beyond their reach. The Taliban’sban on working by women, and on the treatment of female patients by maledoctors, creates even more avoidable hardship.

Natural resources and the environment

The climate is harsh 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 thewest, Pakistan in the south and east and China in the extreme north-east. It isa country of rugged mountains—dominated by the Hindu Kush, the western-most extension of the Karakoram and the Himalayas—and arid plains whichbecome deserts in the south-west. As a result, Afghanistan endures the mostextreme temperatures on earth; lows of –50°C and highs of 53°C have beenrecorded. Average annual rainfall is about 180 mm, and rarely more than380 mm anywhere in the country. While the runoff from the mountains intothe main rivers—the Kunduz, Kabul, Helmand and Herat—is heavy for a briefperiod during the spring thaw, sometimes causing floods and landslides, there-after it tends to be irregular and low. The irrigation system has been almosttotally destroyed by the war. The combination of a harsh climate and thin soilmakes for relatively sparse but sturdy vegetation. Thin grasses briefly providemountain grazing for nomads’ herds in the spring and summer. Tree cover islargely concentrated in the east.

Economic infrastructure

Transport and communications

The road networkrequires extensive repair—

In the decade before the Soviet invasion a major proportion of foreign aid, muchof it from the USA and the Soviet Union, was spent on road construction andrehabilitation. Over 2,000 km of asphalt and concrete roads were built, givingthe country a modern network, which linked all the major urban centres. Butthe war has taken a heavy toll. The 1993 UNDP assessment said that about 60%of the 2,500 km of highways required “significant pavement reconstruction”and that regional roads were in “generally poor condition”. Since then, thecondition of all roads has deteriorated considerably, as has that of the passengercars and commercial vehicles plying them. Hundreds of bridges have also beendestroyed.

—but funds are notforthcoming

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 politically contro-versial. Early in 1996 the Rabbani administration dismissed as unacceptableinterference a plan announced by Islamabad to spend $3m to repair the 880-kmlink between Spin Boldak in south-eastern Kandahar province to Torghundi

66 Afghanistan: Natural resources and the environment


near the border with Turkmenistan in the north-west. The ostensible aim was toreduce travel time along the route from nearly two days to half a day andfacilitate access to former Soviet Central Asia. Kabul’s irritation derived from thefact that the five provinces through which the road runs were controlled by theTaliban. Given the lack of foreign funding and the absence of a functioningcentral government the UNDP said road repair would best be carried out by localcommunity-based or NGO-associated contractors. Rehabilitation of the networkis crucial to the recovery of other sectors and to the restoration of normaleconomic activity.

The issue of transit rights Being landlocked, Afghanistan is dependent on transit rights through neigh-bouring countries. Much of its foreign trade was traditionally conductedthrough Pakistan, whose southern city of Karachi is the nearest port. While theoverland route through the USSR became much more important during theSoviet occupation, its use declined with the sharp downturn in economicactivity and upsurge in factional feuding that followed the mujahideen take-over. The scrapping of duty-free concessions on certain Afghanistan-boundgoods through Karachi in 1994 and 1995 prompted a search for alternativeroutes, and a major volume of commercial traffic transited through Iran whileJamiat controlled Kabul and the western provinces.

Aviation and the telecommunications infrastructure are in a sorry state. The wardestroyed many civil aircraft belonging to Ariana, the national carrier, andrendered most of its airports and air corridors either unusable or too dangerousfor commercial traffic. The UNDP plan advocated an emergency project topermit air traffic services to function safely. It has yet to be implemented. So toohas its proposed scheme to establish satellite links to allow telecommunicationswith major international centres and transportable satellite links to facilitatecontact between the capital and other Afghan cities. The plan euphemisticallydescribed the country’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 due to the development by the Soviet Union of the country’sreserves of natural gas, its main energy resource.

Power generationcapacity needs to be

increased

War damage, looting and lack of maintenance and spare parts mean that actualelectricity generating capacity is far below the theoretical level of some 400mw, 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, as againstinstalled capacity—much of which had fallen into disrepair—of 150 mw. In-deed, most of the capital has had little or no power since mujahideen factionsbegan battling for it that year. In mid-1993 the UNDP estimated that 60% oftransmission lines countrywide were inoperative. Around the same timePakistan promised to explore the possibility of financing the construction ofdams on the Kunar and Laghman rivers in the east to generate electricity forboth countries, but no progress was made. The immediate needs include funds

Afghanistan: Energy provision 67


to repair generating plants, substations, transformers, switchgear, distributionand transmission lines, and to purchase fuel for thermal facilities.

Financial services

Banks no longer operate 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 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. After they closed down moneychangers were the onlyproviders of financial services.

Production

Industry

There is little or nomanufacturing

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% of indus-trial output in 1979.

Mining

Gas reserves are large, butproduction is now

minimal

Reserves of natural gas are estimated at up to 150bn cu metres. Extraction fromfields in the northern provinces of Jozjan and Faryab amounted to 3bn cu me-tres or so in 1988, much of it exported to the USSR via a pipeline to Dushanbebuilt in 1967. During the 1980s gas sales accounted for as much as 50% of exportearnings. In February 1989, as the last Soviet troops withdrew, the northerngasfields were capped to prevent their sabotage by the mujahideen. While theNajibullah regime began preparations for the resumption of extraction andexports a year later, these came to nothing owing to price disagreements withTajikistan, the target market, which has its own reserves. Preliminary rehabilita-tion of badly deteriorated and partly destroyed gas infrastructure has since al-lowed for a limited resumption of production, for local consumption at thefields, which are now in Mr Dostam’s fiefdom.

Oil resources are believedto be sizeable

While officially estimated at only 100m barrels in the 1980s, the country’syet-to-be-tapped oil reserves are believed to be substantially higher, judging bythe interest of Soviet surveyors during that decade and Moscow’s declared

68 Afghanistan: Financial services


intention to build a 50,000 ton/year refinery in the north. Proven coal reserveshave been put at 100m tons but are likewise believed to be as much as fourtimes greater. Output from the country’s main mines at Karkar Dodkashpeaked at 218,000 tons in 1978/79, much of it used to fire a nitrogenousfertiliser plant in Mazar-i-Sharif.

Non-energy mineralsreserves remain largely

untapped

While the country’s mineral resources have been incompletely surveyed, thereare major deposits of iron, chrome, copper, coal, salt, natural gas and possiblyoil, as well as quantities of uranium, mercury, gold, silver, zinc, tin, lead, nickel,bauxite, lithium, wolfram, rubies, emeralds, lapis lazuli, sulphur, barytes,fluorite, talc, mica and magnesium. To date only gas, coal, chrome, copper,barytes and salt have been exploited on any major commercial scale, owing toshortages of capital and transportation problems. Before the mujahideen take-over there had been some renewed interest in mineral prospecting and exten-sive geological surveys were carried out.

Agriculture

The output of theunderdeveloped farm

sector—

While agriculture is the mainstay of the economy, traditionally accounting forup 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, sugar cane and beet widelygrown and fruits and nuts, vegetables, wool, cotton, hides and skins (especiallykarakul) the major exports. (Reference table 1 includes Asian DevelopmentBank estimates of agricultural production.)

—plunges during the war— The years of fighting, the accompanying displacement of large sections of therural population, the scorched-earth policy pursued by communist forces andthe widespread laying of mines cut production substantially. The governmentestimated that foodgrain output fell by 30% between 1978/79 and 1986/87.Despite the diminished population there was evidence of persistent food short-ages. These were somewhat alleviated by imports from the Soviet Union ofaround 250,000 tons a year. An extensive survey carried out by a team of 70 ledby a former agronomist at Kabul University and published in 1988 foundthat 30% of former agricultural land was uncultivated and that on land stillcultivated yields had dropped by 35%, mainly because of the destruction ofirrigation channels and the lack of fertilisers and new seeds. As a result totalagricultural output was only about 45% of the 1978 level and food productionhad declined to little more than half of its pre-1979 level. In 1991/92 the areacultivated was 3.2m ha, of which 1.5m ha were irrigated, according to theUNDP, which also estimated farm output to be about half its pre-war level andsome crop yields as much as 70% lower than before the war.

—but opium productionsoars

The situation has worsened since. Independent experts put the wheat deficitfor 1993 at 600,000 tons, exclusive of what was needed to feed returningrefugees. A contributing factor was the steady increase, throughout the war, inthe area under poppy. According to the UNDP this had jumped from 6,000 hain the late 1970s to 57,000 ha by the early 1990s, generating 3,200 tons ofopium and making Afghanistan by far the world’s largest producer of the raw

Afghanistan: Agriculture 69


material for heroin. Deteriorating economic circumstances and the absence ofofficial sanction encouraged farmers, and later returning refugees, to growpoppy as a cash crop.

Livestock numbers arehalved

The livestock population, estimated in the late 1970s at 6.5 million karakulsheep, 15 million ordinary sheep, 3.7 million cattle, 3.2 million goats and500,000 horses, was hard hit by the war, and numbers fell dramatically. Ac-cording to the 1988 survey cattle numbers were down by 55%, sheep and goatsby 65%, while the number of draught oxen, essential for ploughing for mostfarmers, had declined by 30%. The 1993 UNDP plan argued that the top prior-ity for the agricultural sector should be the restoration of self-sufficiency. Thefocus would be on community-based smallholder production schemes, and thereconstruction of ruined irrigation systems would be a crucial component.

The external sector

Merchandise trade

Exports and imports fallsharply—

Official statistics, which excluded a huge amount of illegal transactions,showed a major trade deficit throughout the 1980s. Between 1985/86 and1989/90 the value of exports almost halved, dropping from $566.8m to$235.9m. The slump underlined the importance of natural gas sales to theSoviet Union. Production and exports had peaked in 1984/85, and the fieldswere capped in February 1989, weeks before the start of the 1989/90 financialyear. Other key foreign exchange earners were fruit, vegetables and nuts, whichwent chiefly to Pakistan and India, karakul for Europe’s fur markets, and car-pets and cotton. Imports also declined steadily, albeit more slowly, over thesame period, from $1.19bn to $822m. The extent of the integration of theAfghan economy with that of the Soviet Union, which had accelerated afterthe 1979 invasion, was illustrated by data for officially recorded trade duringthe 1989-91 period, when the USSR took 72% of the country’s exports andsupplied 57% of its imports.

—as more trade is routedthrough Pakistan

After the collapse of the Soviet Union in late 1991 and of Kabul’s communistgovernment a few months later, there was a large upsurge in imports throughPakistan, with which an agreement according duty-free access for Afghanistan-bound goods had been in force since 1965. In 1994 Islamabad imposed severerestrictions on the traffic in 1994-95, ostensibly because a substantial propor-tion of the goods, particularly air-conditioners, televisions and car parts, werebeing diverted on to the Pakistani market and undermining local assemblersand manufacturers, but also because its relations with Kabul’s Jamiat-ledadministration had become severely strained. Resourceful traders began char-tering planes to airlift these and other items from the Gulf, mainly the UnitedArab Emirates, to Jalalabad, capital of the eastern Nangarhar province, fromwhere they were trucked north and west to central Asia and east to Pakistan.(Reference table 2 includes Asian Development Bank estimates of trade withmain trading partners.)

70 Afghanistan: Merchandise trade


Invisibles and the current account

The current-accountdeficit is believed to be

considerable

Standardised IMF data for the latter years of the communist government showedthat the impact of the chronic trade deficit on the current-account balance wasoften mitigated by large public transfers, mostly in the form of Soviet grants. In1988 these, together with smaller merchandise and services deficits as total tradedeclined, put the current account into surplus for the first time. After the sus-pension of gas exports the following year, the current account went back intodeficit. Given that exports have almost dried up, the country has become moredependent than ever on imports. The tourism and financial services industriesare defunct and investment income is non-existent. The current-account hasundoubtedly deteriorated under the Taliban.

Foreign debt

Lending and debtservicing are suspended

Following the Soviet invasion, only very limited funds came from sources out-side eastern and central Europe. Afghanistan’s external public debt is estimatedto have stood at $5bn in 1990, the bulk of it owed to the Soviet Union, and allbut a marginal amount on concessional terms, with the result that servicepayments tended to remain very low, representing just 7.6% of export earningsin 1988. No foreign debt has been serviced or repaid since the mujahideen take-over. The Jamiat administration tried unsuccessfully to persuade the IMF, WorldBank and Asian Development Bank to resume funding. (Reference table 3 in-cludes Asian Development Bank estimates of foreign debt.)

Foreign reserves and the exchange rate

The mujahideen quicklyspend the reserves they

inherit

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 were quicklyliquidated by the cash-strapped Jamiat administration. At the time Afghani-stan’s gold reserves were estimated at $700m-800m. Since the bulk of these areheld abroad, cashing them in proved more difficult. In November 1994 Jamiat’sthen finance minister, Hamidullah Tarzi, travelled to Washington in an unsuc-cessful attempt to persuade the IMF to release Afghanistan’s $8m reservetranche. (Reference table 4 includes IMF data on foreign reserves.)

The official exchange ratecounts for little—

An official exchange rate of Af45:$1 was introduced in 1963 and initially ap-plied to export earnings from karakul, cotton and wool, to certain governmentforeign exchange receipts, and to foreign exchange payments by the govern-ment for imports and other purposes. In mid-1981 the rate was changed toAf50.6:$1, which technically stood until the collapse of the Najibullah regimein April 1992. During this time it applied only to government transactions, partof the foreign currency salaries of foreigners working in the country and spec-ified transactions under bilateral agreements. Exporters were required to sur-render a proportion of their foreign exchange earnings, ranging from 10% formedical products, raisins and non-karakul skins to 100% for karakul skins, atmixed rates above the official rate.

Afghanistan: Invisibles and the current account 71


—as the market sends theafghani on a downward

spiral

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 minted 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 spiral. Between late1994 and mid-1996 the exchange rate tumbled from Af4,000:$1 toAf24,000:$1.

72 Afghanistan: Foreign reserves and the exchange rate


Appendices

Sources of information

National statistical sources No statistical data are now published.

International statisticalsources

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

IMF, International Financial Statistics monthly

World Bank, World Development Report monthly

Select bibliography 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, OUP, Oxford, 1991

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

O Roy, Islam and Resistance in Afghanistan, CUP, Cambridge, 1986

A Saikal and W Maley, (eds), The Soviet Withdrawal from Afghanistan, CUP,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 tons; fiscal year beginning Mar 21)

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 0Source: Asian Development Bank, Key Indicators of Developing Asian & Pacific Countries.

Afghanistan: Sources of information 73


Reference table 2

Main trading partners($m)

1992 1993 1994 1995

Exports to:China 1.9 2.3 10.7 15.3Pakistan 6.0 9.1 10.1 14.0Russia 0.0 6.6 6.9 8.9Germany 14.0 14.6 9.2 8.8Total 181.0 n/a 75.9 85.0

Imports from:Japan 96.1 100.7 88.8 92.0China 26.0 35.6 30.1 34.8Singapore 57.1 37.4 43.7 23.7Pakistan 17.6 16.9 28.4 19.5Source: Asian Development Bank, Key Indicators of Developing Asian & Pacific Countries; estimates.

Reference table 3

External debt

1990 1991 1992 1993 1994

Total outstanding & disbursed 5,086 5,305 5,405 5,579 5,586

Long-term 5,046 5,269 5,381 5,569 5,577

Public & publicly guaranteed 5,046 5,269 5,381 5,569 5,577

Private non-guaranteed – – – – –

Short-term 40 35 24 10 9

Use of IMF credit – – – – –

Debt service 115 70 – – – Principal repayment on long-term debt 12 11 – – – Interest on long-term debt 101 57 – – – Interest on short-term debt 3 2 – – –Source: Asian Development Bank, Key Indicators of Developing Asian & Pacific Countries; estimates.

Reference table 4

Official overseas reserves($ m)

1991 1992 1993 1994 1995

SDRs 6.7 4.4 2.8 1.4 0

Reserve position in the IMF 7.0 6.8 8.8 7.2 7.3

Foreign exchange 221.2 n/a n/a n/a n/aSource: IMF, International Financial Statistics.

Editor:All queries:

David BainTel: (44.171) 830 1007 Fax: (44.171) 830 1023

74 Afghanistan: Reference tables


Documents

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