memorandum of the president - world...

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The World Bank Group

Renort No. 24399-PAK

MEMORANDUM OF THE PRESIDENT

OF TU

INTERNATlONAL BANK FOR RECONSTR-IUCTION AND0 DEVELOPMENT

AND THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

AND THE

INTERNATIONAL FINANCE CORPORATION

EXECUTIVE DIRECTORS

ONA

COUNTRY ASSISTANCE STRATEGY

FOR

TH. TTLAMHC REPIRL(TT OF PAICJqTAN

J un A'4, 2002

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The last Country Assistance Strategyfor Pakistan (R95-213/i) was discussed on December 19, 1995 anda Progress Report (R2001-0076) was discussed on June 12, 2001

CURRENCY AND EQUIVALENTS

Currency Unit = Pakistan RupeeUS$1 = PKR 60.50 (March 2001 Floating Inter Bank Rate)

FISCAL YEAR

July 1 - June 30

ABBREVIATIONS AND ACRONYMS

AAA Analytical and Advisory Activities MDG Millennium Development GoalsADBP Agricultural Development Bank of Pakistan MIGA Multilateral Investment Guarantee AgencyAsDB Asian Development Bank NAB National Accountability BureauAG Auditor General NBP National Bank of PakistanAIDS Acquired Immunodeficiency Syndrome NCBs Nationalized Commercial BanksAJK Azad Jammu Kashmir NCSW National Commission for the Status of WomenBMP Bait-ul-mal NDP National Drainage Program

CAO ^-un..; Assis* 0-.c Th'ts ED. e Na fiona! ID-.--~; D-c P>A-,. Au'.or;.

CBR Central Board of Revenue NEAS National Education Assessment SystemCFAA Country Financial Accountability Assessment NHA National Highway AuthorityCGA Comptroller General of Accounts NGOs Non-Govemmental OrganizationsCIP Community Infrastructure Project NRB National Reconstruction BureauCPAR Country Procurement Assessment Review NWFP North West Frontier ProvinceDLC Distance Learning Center OFWM On-Farm Water ManagementDEC Development Economics & Chief Economist OGDC Oil & Gas Development CorporationD F sh Deve-lop.m._ r..t F;.n^nce LntttosPACs- Publii A--utsCm... -....... teDISCOs Distribution Corpanies PHC Primary Health CareDPR Development Policy Review PHIRD Policy and Hunan Resource Dev. FundESR Education Sector Reform PIFRA improvement to Financial Reporting andEU European Union Auditing ProjectFESCO Faisalabad Electric Supply Company PPAF Pakistan Poverty Alleviation FundFMCs Fiscal Monitoring Committees PPF Project Preparation FacilityFSDIP Financial Sector Deepening and PPL Pakistan Petroleum Limited

Lw. . mi_Aa't;on P.o,-ect .... PPRwM MWv-.^ .dcin e cnv V.............GBHP Ghazi Barotha Hydropower Project PRGF Poverty Reduction and Growth FacilityGDLN Global Development Learning Network PRSC Poverty Reduction Support CreditGDP Gross Domestic Product PBRSP Poverty Reduction Strategy PaperHBL Habib Bank Limited PTCL Pakistan Telecommunication LimitedHIPC Highly Indebted Poor Countries RDPR Rural Development Policy ReviewHIV Human Immunodeficiency Virus SAC Structural Adjustment CreditHUBCO The Hub Power Company SAL Structural Adjustment Loan1B" hit.mat o^nal Ban.k for,rR onstutioh,n, arid S.AP Social ,Action P---_m

Development SBP State Bank of PakistanICT Information, Communication and Technology SDR Special Drawing RightsIDA Intemational Development Association SME Small and Medium EinterpriseIFC Intemational Finance Corporation SMEDA Small and Medium Enterprise Dev. Ag,encyIMF Intemational Monetary Fund SRO Statutory Rule Order

IPPs Independent Power Producers TABS Technical Assistance for the Banking SectorI-PRSP Interim Poverty Reduction Strategy Paper UBL United Bank LimitedJSA o -- CS..af A ..... A.... t tl.CEF Y-; -4.-.A.. .....suAJSDF Japan Social Development Fund UNDP United Nation Development Progmnmu eKESC Karachi Electric Supply Company USAID United States Agency for Intemationai Dev.LHW Lady Health Workers WAPDA Water and Power Development AuthoiityLIL Learning Innovation Loan WBI World Bank InstituteLPG Liquified Petroleum Gas WHO World Health Organization

Ine FYorWDld ankVice President Mieko Nishinizu, SARVPCountrv Director John W. Wall, SACPKTask Manager Zoubida Allaoua, SACPK

The International Finance CorporationVice President Assaad Jabre, CIO VPCountry Director Mary Ellen Iskenderian, CSADRTsick MnrcPigr NeiWAl reoyn rSASr…~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-- -, _

T AItLE OFU CONN I *N I S

EXECUTIVE SUMMARY .. 1..............

T I.i~ DOLrTI. A SOm ^i AL A MDI ECONOMy'C C OT.A TUPTULEN iiDJ'lE' A nE 1A. JL%J, A ~LIIItVK1,9 k3'.JIL.-iJl, tiLIAiJ A RIIK £ 4DL5 .....

A. From Crisis to Growth .B. Development Challenges .C. Recent Economic Developments ............................. ....................................................................... 5

II. PAKISTAN'S POVERTY REDUCTION STRATEGY .6

A. 1Ppctnrinor Rii.2ninhIp. nine 'Rnnid (Trnwth6A~~~~~~~~~~~~~~- r. Rs. . ^ .utnal .d .. pi .o . ............................................. .. .. ..

B. Restoring the Integrity and Accountability of State Institutions ............................................. 9Ci~L~I.Ui5 AccelraU.111 LJTV1ur UL^.......................... e.-.t11

m. THE BANK G-ROUP'S ASSISTANCE ST IATEGY OVER FY03-05 ............................................ i4

A. Overview of Bank Group Strategy ....................... 14B. Inputs to Strategy Formulation ....................... 15C. Strategic Engagement Principles ....................... 17D. Program Priorities ....................... 21

IV. WORLD BANK PORTFOLIO AND ASSISTANCE PROGRAM ............................................. 27

A. IBRD/IDA Portfolio Management ............................................. 27B. VDonor Coornumauon ............................................. 29

C. FY03-05 Lending Program and hnplementation Challenges ............................................ 30D. Non Lending Services ............................................. 34E. Monitoring & Evaluation ............................................. 35

V. IFC PORTFOLIO AND PROGRAM ............................................. 35

VI. MIGA PORTFOLIO AND PROGRAM ............................................. 35

VII. OPERATIONAL DECENTRALIZATION ............................................. 36

VIH. RISKS MANAGEMENT ............................................. 36

BoxEs

Box 1 Who Are the Poor? .......................................................... 2~UA L L,G.T -AJ .-. lU)aA 1-A.- fl4-4+ IVL.,Box 2 Land Co wxx%p &inF Touodu.i;i; .... ......................... . 3 L,

Box 3 The Lady Health Worker Program: Documented Success - Impressive Potential .............. 13Box 4 Consultations for tLhe CAS ......................................................... I/

TABLES

Table 1 Social and Economic Indicators .......................................................... 2Table 2 Pakistan-Macroeconomic Indicators 1998/99-2003/04 .......................................................... 5Table 3 NAB Performance 2001-2002 1......................................................... 1Table 4 Debt Service Ratios ......................................................... 31

'r.ll. 4 T pA;nAiwr p1-"i4enro - 1ZVI)A2J"2T 0J.- .e 5 v a. n8 . ., .t o . . .. . ........................................................ 3 31

Table 6 Triggers for Bank Assistance Over FY03-05 .............................. 32't1_ - x - _kT- T . r__1__ -_ . A A A r__ T... _ 1 T17 1 AI ie L ,' o ui vNUu-ilUuu1g i4i- anu tUI JAl ruiu I.-, r iui-r IV UJ ......................I..I. ........................... 3J.

ANNEXES

Annex T I lonsultations with Pakistan Citi7.enq

Annex II Pakistan Private Sector StrategyA ~~- -_1 1_ _1 - ' '! - -- I 1 -Annex m1 Bank rarmnirsmps wiiin Bilaterai anu iviutuiterai Agencies

Annex IV Millennium Development Goals (MDGs), Targets and Selected Output Indicatorsfor Pakistan

Annex V Pakistan Countrv Program Matrix (FY03-05)Annex B1 Pakistan at a glance,A nex~ B2~ Selec.ted 1nd:caitnra of Barkil Portfolio Perfe1 noi, .. ~ ?aAav ardM r.age..e.n.

Annex B3 Bank Group Program Summary for Pakistan (IDA, IFC, MIGA)A___ TNA -,. hT-- 1 ~

A1iIi1 BX4 SuiuuIW4y Uo 4null-IC1VULU iSL vices

Annex B5 Pakistan Social IndicatorsAnnex B6 Key Economic indicatorsAnnex B7 Key Exposure IndicatorsAnnex B8 Status of Bank Group Operations and Statement of IFC's Held and Disbursed

Portfolio

EXECUTIVE SUMMARY

From Crisis to Growth-Pakistan's Poverty Reduction Strategy

1. Palistan has started the new millennium with more hope. Starting from a position of extremevulnerability at the end of the i990s-a financiai crisis, domestic tensions, and external isolation-it hasachieved a remarkable turnaround. A major factor behind this turnaround is strong leadership in thecountry with internal cohesion and a clear sense of direction. The latter is manifested in the interim-Poverty Reduction Strategy (I-PRSP) anchored in a comprehensive reform program for poverty reducinggrowth, human development, and governance improvement. The government is engaged in fundamentalpolitical, institutional, economic, social and gender transformation for Pakistan's transition to a modernIslamic state.

2. The government implemented a far reaching devolution program which led to locally electedofficials with the legitimacy and mandate to improve public service delivery. Women were given morevoice than in the past (33 percent of the total local governments seats were reserved for them and thenumber of reserved seats was tripled in the future national and provincial assemblies). Despite severeshocks-the worst drought in decades-GDP at factor cost grew by 2.7 percent in 2000/01; inflation islow and reserves have reached US$3.5 billion on March 31, 2002, one third of imnorts, their hiehestlevel in a decade. The government formulated a credible education and health reform strategy. It startedalon a nro-poor public works program to ease the impacts of the eononmic C hncks and the drought.

3. Pakistan however- Rtill faceq formidahle challenoes (nolitinal, atfitidina1i and nnliyvl tn fuillv

develop human capital, improve the investment climate, and increase productivity growth to bring theeconomy to the 5-6 perce.nt annual growth rate ach.ipeved irn earlier decades, or even higher, tosignificantly reduce poverty.

4. The policy reforrm record of the military government which took over on October 12, 1999, has.4"ually , -reve hope~ UIQ.z UL;.es develo ............... .ertQ;lrg a.b e-;ously Ma lld ................ p;. sLLDW UL01 hLas

been reconfirmed in the recent Interim Poverty Reduction Strategy. The full PRSP is expected to becomnpleted a's;' UI. O'oJUbL erVi. 20 UI02 ec s JoWirL .aLUI Asssbs1lmnL on Ui,e I-rSPar was uisussed by

the Boards of the Bank and the 1MF on December 4, and 6, 2001, respectively).

Bank Group Strategy

5. The main goal of the Bank Group's Assistance Strategy is to support these fundamental reformsfor a transition to a modern islamic state t'nrough a program of analytical services, institutionai capacitybuilding, and demand-pull lending. The triggers underpinning the Bank Group's assistance strategy willbe based on measurable outcomes wnich have the MDGs as a frame of reference in alignment withcorporate priorities and global public goods.

6. The Bank Group CAS has been shaped by: (i) the lessons learned from the implementation of thepast Bank Group CAS in Pakistan, including IFC's and MIGA's experiences as investors and advisors;(ii) the results of the 2000 Client Survey; and (iii) the concerns of Pakistani women and men expressedduring the extensive consultations held by the Bank Group all through 2000.

Strategic Engagement Principles

7. The Bank Group's support will be guided by three strategic engagement principles: (i) Strong"client pull" to reform and selectivity; (ii) A programmatic approach focused on transfer of knowledge

and canacitv building first: and resources second. in a flexible nursuit of key development outcomes: and(iii) Partnerships and Outreach.

8. Selectivity. The Bank Group's strategic priorities will be subdivided into three categories: (i)Dee.p engaeTmnnt; (ii) Low enganement: aind (iii) Mnnitnrinor LFC.'s investment±q and mmlrtnart will alsodepend on progress in establishing a competitive market framework.

Business Areas for Deep Engagement. While cooperating with other donors, the Bank Group-il1 +.I-^ fhe laoAn rnrt to:

>ynlIA.L ^*1 ~Q O~ a" f-lJ-1.-

> econ"omric ma nagenment an.d finan.cial gov,emans^ce, incl.uding 'echnical an.d financial assis+nceto the State Bank of Pakistan (SBP), the Comptroller General of Accounts (CGA), theZ UULLUL [U.4%1 a _LV Ir ' kAJ*, OL&jM LIl Ul1i IU IXIIl Ui U1 '.UU41 IDVUJU UL A%iV SUUi, U1r.

civil service,

> investment climate, including support to reform the governance and regulatory environmentfor power, gas, oil, financial sector, pricing and tariffs reforms, and privatization

, ___ -_'-__I __ _ __- __ __ r '. . . . ...I prov-mcial anu Uitrict govcrnmcns reiorms, mcluamg eaucanon, nealtu, water managementand rural development, district services, and community infrastructure. The level of supportat this stage of the Bank Group engagement wiii include both non-lending and lendingservices as required.

* Business Areasfor Low Engagement. The Bank Group will keep a low level of engagement inareas where the client has been "reform-shy" such as for urban development and transport orwhere there have been reversals of reforms or slow progress. The Bank Group will focus onanalytical services and leveraging the resources of WBI to play an advocacy role to encouragereforns.

* Business Areas With No-Lending Services. These are areas where the Bank would monitordevelopments such as on areas where the IMF has comparative advantage (macroeconomicstabilization); areas where the reforms are on-going (sometimes with other donors suDDort) orneed only IFC or MIGA's engagement (capital markets, SMEs); and areas where thecommitment to reform is verv low. Areas of business from which the Bank has disengagedcompletely will also figure in this category. This includes financing physical investments inrailwavys telecom and nnrtt, oil and g_s, public indiist:riep lnarWe lrml cprvij-pe' a.nA tn,,.rsmn

where the private sector can invest with the support of IFC and MIGA as required. No lending

90 Pp~,Ymmnm,,hi Annrn ~h Pal,-;afa"'S UDDID D n.+16 -

ambitious reform program covering political, institutional, economic, and social areas, including genderequiL;. T.hes L f-.. s .U1 ; hI1-e-lLLy long tei LU in ascU acfUIVWlVUdgeU uy ULU gOUVViUlMML UaU caIn

therefore be more effectively supported by multi-year programs-both at the national, provincial, anddistrict level-hence the need for a progralmaiuc approach ior iie Banki Group's assistance strategy.The system wide reforms being envisaged for example for the tax administration (CBR), the institutionsin charge of financial management (the Comptroller Generai of Accounts, the Auditor General's Office),the civil service, also require a programmatic approach.

10. Programmatic Instruments. The instruments used under this CAS follow directly from thestrategy. The Bank will use (i) policy based fast disbursing lending to pursue the economic management

Pakistan Countrv Assistance Stratepv iii

and governance agenda at both the federal and provincial levels and the sectoral reform agenda (finance,power); (ii) programmatic sector and investment lending to support the implementation of the reforms toimprove the economic and social infrastructure and delivery systems for education and health, andcommunity infrastructure services (including water management) at all levels of governments; and (iii)analvtical work and other non-lending serviceS to monitor develonments in the areas of low en,eagementand encourage reforms. The Bank Group will use its non-lending services to build a coherent strategy fornanrift biuildinc,r fill the lnuopa'p gaps in key arpea of rpfnrim s t helpT the =rnwnt artitu1latp its

reform strategies and strengthen its implementation strategy.

11. Partnerships and Outreach. The Bank has been instrumental-as it pursued the ComprehensiveLJVVr.IVp1lV;L ItUIVWUiIL F1j4,I1oltir-I pulIlUir,g aloUgi UUd,Uob LU UUIlU buLL115VL pa UIVLbIUP i l *UjJSUpL Uo

the government's reform program and its I-PRSP. The Bank Group will continue under this CAS itsciose collaboraton with the ivr, the AsDB, ana UN agencies (basea on eacn msmtunon-s comparatveadvantage). Facilitating partnerships and donor coordination by the Bank will assume an even greaterrole over the CAS period now that sanctions have been lifted and many bilaterai donors are reviewingtheir assistance strategy to Pakistan with a view of scaling it up. An important complement topartnership is the Bank Group's overall outreach. The Bank has increased its interactions with thedifferent levels of governments, the Pakistan media, civil society, and business community to establishpartnerships based on a shared vision for Pakistan's development.

Bank Group Program Priorities

12. The Bank Group's program priorities will be focused on the reforms to (i) strengthenmacroeconomic stability and government effectiveness; (ii) improve the business environment forgrowth; and (iii) improve equity through support for pro-poor and pro-gender equity policies.

Strengthening the Basis for Macroeconomic Stability and Government Effectiveness

13. Macroeconomic Stability. The Bank will support in partnership with the IME the macro-economic stabilization program agenda to restore fiscal sustainability, reduce internal and external debt,and improve the competitiveness of the economy through supportive trade, monetary, and exchange ratepolicies. The Bank Group's key contributions will be in improving public expenditure management andsupporting reforms of tax administration, safe and sound banling, efficient public utilities, and structuralfiscal and governance reforms. In particular, the Bank will continue to carrv out the annual reviews ofthe Government's Public Sector Development Program at the federal level and will complete a NationalPublic Pxnenditure Review in FY03.

14. Governance Reform. Tmnroving government effectiveness at federal, provincial, and dstrinct

levels, will remain at the heart of the Bank's assistance strategy. Specifically, over the past years theTRtanl- lsne hadt a ciornifionnit inrnroram of wnn"vtial wnrlr inrolliIinr flip niril cprwrir-p rpftrm c6p rn mt*rr

Financial Accountability Assessment (CFAA), and the Country Procurement Assessment (CPAR)-Fre ts, vVflUch haws bee. inflfl.Ob tot t.he policy dialope ;, this ama. Ami..e Bwikk will s-UpFort m. UtLIh

future (i) furthering transparency and accountability through Freedom of Information, effectivefurlc.^;o-4rn of sheUblic AcclsCrmtes n -uIe esaU_ L,, of - las.,r, r,si.-.o.a bssfr_IUML.LIUMUIi, Uk U1l, I UUILV -'.. JUUIiL0 tUUIUU l~~ U Ui'., UbL4Uk1Uhi0ILVl '.11 ii 1OLU1S ULiOULULIU1IU1 Utt1IZ LUf

the agency mandated to fight corruption-the National Accountability Bureau; (ii) the extension of themodernization of ute government's accounting and auditing functions to district governments through asecond PIFRA project which is currently under preparation; (iii) the implementation of the first stage ofthe Central Board of Revenue functional re-organization and the fundamentai cultural change within thetax administration; (iv) the development and implementation of medium-term fiscal frameworks at the

Pakistan Country AssWstance Strateev

federal and provincial levels to improve accountability; (v) the implementation of the CPAR'srecommendations, including the establishment of a Public Procurement Authority and the promulgationof a Procu rement Ordinance to foster conimetition and transDarency through a uniform set of procurementrules at the federal level and across provinces and public agencies; (vi) policy advice and financialassisftance to imp!lement the necessary deremulation and otber policv reforms to reduce the incentives for

corruption and improve the investment climate; (vii) the completion of the corporate governance reformsin the financial sector; and tviii 1 ! svice reform through analytical work and advisory services for

the continued implementation of the systems for better performance evaluation, merit-based promotions,and Uairning programs, as well as the imrrplementation of the reforms. of the pay an.d pension systems.

1J. T,e Ba1,. "s support, to govemarice reir.. wil! also include supp-rt for the des;,-- of in-depthLid I1e 'armK .UJJJ LlP Vl 1Aw.L f .fn,fn,, .,....

governance and corruption diagnostic surveys and institutional capacity building for oversight andmonitoring. Thiis will be done through training :i uthe areas of public expenditure and financialaccountability, media development, and the interaction between parliament and the Auditor General,including support to strengthening legislative oversight once parliament is reinstated.

Strengthening the Enabling investment Cidmate

16. Tne Bank Group's support to strengthening the investment climat'e -will include a combination ofanalytical work and financial assistance targeted to reforms in key sectors. The Bank Group willcontinue to encourage the federal and provincial governments to pursue the trade liberaiization andmodernization of industrial, business and labor regulations that are already under way. To build theknowledge base to underpin the policy dialogue on private sector development, the Bank Group pians tocarry out a significant program of analytical work. In addition to a Development Policy Review(completed in FY02) which provides the Bank's assessment of the adequacy of the current developmentpolicy agenda, including for rural development, to achieve rapid growth and poverty reduction; the Bankwill complete in FY03 an Investment Climate and Economic Performance Study. The latter aims torelate key aspects of the investment climate (basic economic infrastructure, and regulatory andgovernance frameworks) with the performance and productivity of private manufacturing firms, smalland large. An analysis of the trade regime will also be undertaken in FY03. In addition to thegovernance reforms which have a direct bearing on the investment climate, the Bank Group will alsocontinue to support financially the reforms of the governance and regulatory environment for power, gas,oil, financial sector, pricing and tariffs reforms, and privatization, as well as support to provincial anddistrict governurients reforms to iimprove the quality of basic infrastructure and social services.

!7. WC will suRport the development of new nroducts to better meet the needs of the private sector(e.g., long-term finance for infrastructure), and expand access to financial services to new clients (e.g.,the bankable poor through micro-finance or leasing institlutinns), and to the under-serve4 small and

medium enterprises sector.

Supporting Pro-Poor and Pro-Gender-Equity Policies

18. The Bank Group will support the I-PRSP's core objective to empower people by creating greateropportuait-es for increasing real incomnes by irnpov,ing ac.ess to eAduc,ation and hnealth e, ic

especially for girls, and to safety nets programs. The Bank's support to these three areaLs-promotingeducation and healtih, supportirg pro-poor rural developrrent and cormmunity ifastucture, as well as

supporting targeted poverty alleviation programs reflect their importance as well as the Bank'scomparative advantage.

19. -durSa1on for Al- The World Bank CGirmun's -SSiqtqnne strate,v will he driven hv sunnort to the

implementation of the Education Sector Reform (ESR) Strategy. The Bank support will focus on thoseinte trentions ins tiepA ed,ucation, secton thkat mi'lA lpln the anal nf a,,pipiVincr inivrstval pnrim>-; PeilPtienn

with particular focus on improving the quality of education provided, and giving priority to the poor andA__A .,__+__AJ -9s-U A-A _ U _ .1 A _ _. 1 ^ AfT_ - j.1 _ ^;_^; tAf1~UlOGUVGlLa~llbU JiFu L&1"1O Y 17 II v O 1I'U LIUZl' 1 I U.kl C& % LUJ. I .ULGL, U.l 5 IUI1 41 . lk

will be crucial to the fight against child labor. Accordingly the Bank will focus on: (i) sector adjustmentfIUlii,ig LU 5UP-UIL ULV 1'NLIUUai1l Ed-MuatUio Sec'.o r1XU[lll SalLVgy, (ii) iUppoUIL LU UI', P44ML1Ui14 EdUU;L1U1

Assessment System through a L1L; (iii) a program of analytical work to underpin the policy dialogueduring the implementation of thie ESR; and (iv) province-based support to implementing the ESR withinthe fiscal and economic reforms of Sindh and NWFP to start with. The support could also include adviceand technicai assistance to reform higher education.

20. The Bank Group assistance to health sector reforms, will support the government s priority ofstrengthening the public health programs-immunization, communicable diseases such as malaria, TB,HIYV/AIDS; and maternal and child health and family planning. To this effect, the Bank will use multipleinstruments, including analytical work, technical assistance, policy dialogue, and adjustment andinvestment lending as appropriate. IFC will seek opportunities to invest in private education andhealthcare providers.

21. Supporting the rural sector through community-based infrastructure projects (particularly forwater supply and sanitation services) and the spread of micro-credit have been part of the Bank Group'sstrategy to reduce and mitigate risks for Pakistan's poor. The Bank will continue, under this CAS, topilot new approaches, and also help scale up those which have proven effective such as the CommunityInfrastructure and Services Proiect (CIP) and the Pakistan Poverty Alleviation Fund (PPAF). The NGO-implemented program of building social and physical capital and extending micro-credit schemes underthe PPAF is a very successful scheme which will be scaled up during the coming CAS. The on-goingPPAF has already provided loans to over 60,000 borrowers, over two thirds of which are women. A

nocial rick aqqeqnment is also planned for FY03 which will also help undernin the Rank Grun'psintegration of social protection in the Bank's future operations.

22. Pro-Gender-Equity Policies. The Bank Group plans to intensify its efforts to mainstreamgernder. The m.ost effectfive policy througmh which to nirrmrov.e crp.dPr equiis to s to irnrrve access to and

quality of education and health, particularly to women and children, girls especially. In this context, the"Cum %.oJ'VUpJ Will asi LU'..' 5 oJv'.AJ.L4,e.1L 11;.. p1Le.1.Ur.t I U11 co;npone.. of u11hL1& MR LIMu L.oJnX U JLI UVJOLLU115

incentives-through vouchers system, food for school, and other targeted subsidies-to increase girlsenrollment. A nere tare iany oier c&iuiuides for gender-specifc prograns inrough which the DankGroup's support can improve gender equity and help reduce poverty. These are water supply schemes athousehold level, femaie literacy programs, extensive micro-credit systems, and rurai empioymentschemes.

23. A significant program of analytical work is also planned to show the opportunities that gender-responsive policies create for enhanced growth and poverty reduction. The Bank, the government, andthe other donors, including UNDP and DFID, have been working together to strengthen thegovenment's analytic capacity on gender sensitive policies. The Bank has a Poverty Assessmentunderway, with a survey geared to capturing gender issues with a view of informing public policyregarding the formulation of a gender strategy. A Country Gender Assessment is planned for FY04,which would provide the knowledge base for future Bank's policy dialogue and operationalinterventions.

vi fl.1.ot r .Cu.,A*,ta... S'.,ate,..

IAorld Blank Pnr*fnl;.o anA d 4is*anj' Programi

24. Th.e quality of the Pakistan portfolio has improvzpA P1nc!rPrnbly, althnough. prnblenismc affecting twomajor projects remain, which loom large now that the "lean portfolio" strategy has taken hold. By earlyFY03,V2 wiu. she clos of ^ADDI and resolution of issues relat+edto tho - 4,e -s large -njt- (KTP,I' 1L V-?, VUL U 1% til' VlOUJ% .J LJCL A.~ O.1 *t0JAJ1t5 IF *0A%,- LtaA ' v -.-Llf%, LVw. -W5 k-flJ -%b

GBHP), the "commitments at risk" are expected to fall to a single digit.

25. Lending Scenarios and Triggers. An SDR 1.0 billion (equivalent to US$400 million per year)tuA allca_o 'ras be-, e for- base cas ---- ---- --- billion (euvae. to US60 TTillion% -erLIJJti lilULUkLIUI1 IJdb MULL bVL LVI UIV, LmV V4b M1U .0LJX%. I.'t UlIIVIL kUII .Vd41VaI11L LU LJ1J.PUUU jijijujLLi a yvaij

for the high case over FY03-05. The Bank will resume IBRD lending under the high case starting fromFY04. Tnree iending scenarios (low, base, and high case) combining in base and high case policy basedlending and investment lending are outlined for FY03-05. The lending scenarios will be guided by twosets of triggers; (i) entry and exit triggers linked to provincial reforms; and (ii) global triggers linked toeach of the three pillars of the assistance strategy, macroeconomic stability and govemrance, enablingenvironment for private investment, and human development.

26. JFC and MIGA. Future investment will depend on further progress mi key policy reforms toopen up opportunities for private investment. lFC's ability to do new business is constrained by itsability to provide competitive financing. IFC's equity and foreign currency loans are unattractive becauseof the high country risk premium. IFC is therefore exploring providing local currency financing bymeans of partial credit guarantees. MIGA's portfolio is diverse, covering 7 investments in the financial,infrastructure, and manufacturing sectors. Over the last two years, foreign investors in general haveadopted a wait-and-see attitude toward Palistan, which is reflected in the small number of projects thatMIGA has underwritten.

27. Non-Lendinz Services will be used to support the PRSP process, strengthen governance reformsat both the federal and provincial levels, and support capacity building and knowledge sharing. Torecapitulate. over the period FYOO-02. the Bank Group would have completed a CPAR, a CFAA, aNational Public Expenditure Review (PER), a Development Policy Review (DPR), a PovertyAssessment. a Provincial Finances Renort. A Puniab PER- and a number of other important policy notes.Over FY03-05, the Bank Group non-lending services will include a Financial Sector Assessment (FY03),a (FAATT FY03), a National Pu blic Expenditure Review (FY04), Provincial Economwic R12ports (FY03-05), and a Gender Assessment Review (FY04). Other analytical work in FY03 will include a policy noteto launch the policy dialorne ..Ath the - ,1liv gova,er,e. It af.er October 2002, an nvestm-ent ClimateReview, an Oil and Gas and Power Sectors Report, a Rural Development Policy Review (FY04), and a

'Y vac KceOUCC lViLanarC'11CIRL MUUy k1 A4V)FJ. .Ie M14L.yMLl,41 WULF. Will unIUdIpiII UiV. BarisK G-rIUUp s

support to capacity building and will be reinforced by a series of learning and knowledge disseminationprogarns to be delivered by w Bi, in collaboration witn Pakistani hiinK nks and academic institutions.

2. Risk Management. Pakistan's economy iaces serious cnallenges and major risks emanatingfrom a variety of internal and external sources. The main risks associated with this CAS are:

29. There is unavoidable uncertainty about the sustained implementation of the reform agendaoutlined in the I-PRSP post October 2002, particularly in the face of domestic oppositionL from vestedinterest, possible future opposition to the modernizing policies introduced by this government; inparticular the reform of the elementary education system, including the attempt to regulate: the Madaris(religious schools), and the pro-gender equity policies. The government has rightly decided not tocomplete the full PRSP until after the new government is in office to ensure that it endorses it. Hence,continuity and change issues will be discussed in a CAS Progress Report after the full PRSP is completed

Pakstan Country Asszisance Si,1ategy vii

to Aeteprmi,ip x%i1itwp.r tf.e rain M%ippt-pes of the CASA , rvp,aio raliA lit aAAititvn trhin,pre hv,xp 1ee.n

designed to help the Bank Group manage this political uncertainty.

30. Technical and institutional capacity constraints especially for the reforms that involve.P~on+n nf L 0 "Clial ^_s A;+- ;-+ 1-f.,1> Vk- ;-- rA ;_+- 44-1 -,- -. 44 -A ^s U

5 VYtaiuiixa,to at t' jJ± * y I a.n UtOU.Lftt *9V*0, Ula i.IAIJJ V9LU flt%,kna." nal *momn IV. VOLLtV , Wl Uflk

access to increased concessional financing may pose a risk of implementation or complacency. Tormianage U'le IIIIPiIpuLuLelt4 risk ul BDar ki4iu UUIr. UUIliu[ ar WaULItiuLUg CU1VI WIUI. Ul1 'u goVvenlicIlt tobuild capacity. The complacency risk is mitigated by the sound, if daunting, debt reduction strategywnich has been under implementation for the past three years to rapidly restore creditwortniness andreduce over-reliance on International Financial Institutions' financing.

31. There are also several other risks to the achievement of the poverty reduction outcomes. Thelow tax/GDP ratio may prove difficult to raise significantly over the next three years. Lower growthcaused by the impact on exports of a longer than expected global slowdown or protracted militaryoperations in Afghanistan, or weather related shocks to agricultural output. These shocks could be, inpart, weathered by the floating exchange rate regime but would have also to be met through acombination of additional adjustment measures and external financing-none of which can be taken forgranted. If concurrent with timid debt relief, exogenous shocks would also delay the return to externalsustainability, which is a key condition to achieving Pakistan's growth and poverty reduction objectives.

32. The portfolio risks are manageable in this CAS period. Credit worthiness indicators are movingin the right direction (though the preferred creditor ratio will continue to increase as debt reschedulingdecreases the share of bilateral debt in total debt). To manage this risk, however, IBRD lending isplanned only under the high case and starting in FY04 when the uncertainty regarding continuitv ofreform would have been resolved. Given on-going repayments, this leads to negative net IBRD lending.

33. The Bank Group support program is self-adjusting to mitigate the risk of reform derailment.Substantial lending will continue only as long as Pakistan continues its excellent imnlementationperformance of the past two years. Adjustment lending is subject to Pakistan being "on track" inimlplentning the. pnvPertv reduition and economir management sttegy, including those under thePRGF.

34. The Pakistan CAS has been prepared during a period of renewed prospects for a recovery leadingto sustaained growti. and i-mproved gover.ance. At t.L s-. +rea t ia a pe;rod of inceaseduncertainty-arising from the impact of the war in Afghanistan, domestic tensions with the hard-line

fiundanist - +_ous tls;ons -9+U TndAz, -- A +U- shdue __U_A. III to- de._c w."l. naioa a.L.Ua.LUCLLlL4A&01o .VUFO L%.LI 1u 1o 4 "Y1 U M Lf.I, CLfL.L ULMI 0%.1a..uuiA4V 11LULLI U UW ilL4I. WLIu 1iaLtiUilai UUU

provincial elections in October 2002-which as discussed above may increase the risks facing theI ,IpleLII.iLULIU11 UiI Uof u.Ie UMUC, a n UeLgy. 1'iULWIUZiLu H1Hg U1ebI risks, uii govmiiienL rermams engageu

in fundamental reforms for Pakistan's transition to a modem Islamic State.

PAKISTANCOUNTRY ASSISTANCE STRATEGY

I. POLITICAL, SOCIAL AND ECONOMIC CONTEXT-A TURBULENT DECADE

A. From Crisis to Growth

1. Pakistan entered the new millennium with more hope. Starting from a position of extremevulnerability at the end of the 1990s-a financial crisis, domestic tensions, and external isolation-it hasachieved a remarkable turnaround. A maior factor behind this turnaround is strong leadershin in thecountry with internal cohesion and a clear sense of direction. The latter is manifested in the InterimPnvprtv Rediirtinn qtnitPcv (I-PR.RP) rn.,hnrktd in s ^r.nmnrPhPncivP rPfnrm nrnomm fnr nnvPrtv rPeld.incy- -------- - - - ---- / ----.- - - --- r- -growth, human development, and governance improvement. The government is engaged in fundamentalpolitia!, mncls'u.leanol nana, ecor.omic soial andAgndr tar.scfor....;on for Pakis'ar.'s t,ar.sit.;n '.o a r,A.ode

Islamic state.

2. The current government implemented a far reaching devolution program which led to locallyA1 A + A 2 A . 1-- s+U +U- , <_ Pn _ A.A_ A_A l _ AA U1%,LGiJ VlaWLUI ULLH 1 r1LUL Ri1aLy 1u1u llIaL IV . 111k1VVvv FUUVIL" vL4 VL9% U11IV916. TV UJI.11A WAlI W VL.II

more voice than in the past (33 percent of the total local governments seats were reserved for them andtne nlumber of reserved seats was tripled in 'the futuLe national an.d provuicial assemb.blies). Despite se-vereshocks-including the worst drought in decades-GDP at factor cost grew by 2.7 percent in 2000/01;inflation remained low at 4.4 percent, and reserves have reached US$3.5 billion on March 31, 2002, onethird of imports, their highest level in a decade. The government formulated a credible education andhealth reform strategy. It started also a pro-poor public works program to ease the impacts of theeconomic shock and the drought.

3. Pakistan, however, still faces formidable challenges (political, attitudinal, and policy) to fullydevelop human capital, improve the investment climate, and increase productivity growth to bring theeconomy to the 5-6 percent annual growth rate achieved in earlier decades, or even higher, tosignificantly reduce poverty.

B. Development Challenges

4. Pakistan's past track record as a reformer has been erratic. Over the previous decade, Pakistanhad failed to complete on schedule any of the nine programs supported by Fund arrangements. Progresswas made in some areas, particularly on trade liberalization and banking sector reform; and reversal ofreforms has been rare. Successive governments started off well with ambitious home grown reformprograms but failed to carry through sustained reform. This undermined investors' confidence andprevented lasting improvements in the fiscal and external positions, as well as human development.

5. Pakistan became more inward looking in the 1990s at a time when competing Asian economieswere aggressively integrating into the global economy (see Annex II). A large share of Pakistan's privatesector was content with onerating behind hi h nrotective harriers and snecial tax privileges-rent-seeking behavior often referred to as the Statutory Rule Order (SRO) culture-or "tailor maden:1,pgps"_.w.hi(h h,_v.ep inwv.-ntisd it frnm rpaning the hp,pfitc nf inti-matingr intso wnt%A iarn-lptv Tb%vsituation created an increasingly unfavorable investment climate which has constrained Pakistan's

-,+I, -nt_...;l.l b . -,A,.na4 . a a+- n- t exports, VX, ar. -raA-"-., growth ;a. 4. - ;...-fA-ial

sector.

2 Paiusian kCounliy A51sMuflncu S ruicgy

6. AC a res .lt average9 fnnlfal w,,th a nT,9rpA ur,,iw A ar,i4pArpt o the 1 o9on A follingo fay ratio

-to 15-16 percent of GDP resulting from a narrow tax base, poor governance, and weak collection andemuri mcerne n lHULU goUVeMCHhI1 U ability to pro-viUC c-riiUic social services anu U irdstrucwure. inefiscal deficit remained well above 6 percent of GDP throughout most of the 1990s, causing a continuousincrease in pUIlicsector Table 1. Social and Economic Indicatorsindebtedness 1990-97 1998 2001 I-PiSP Lowwhich when 20D4 Incomecombied withabuse of the HedPcudrimt PnvPrtLvTx () 28.2 32.6*banking sector Illiteracy rate, adult female (% of females 15+) 75.6 71.1 67.7 .. 47.2kept real interest n1it yte,9u1te(% of ..^5 ) A 4 2.0 39.2 .. 28.5

rates high (now at Illiteracy rate, adult total (% of people 15+) 60.4 56.0 52.9 40.0 37.810 percent). Life expecancy atbittotlyes) 60.1 61.7 63.9 64.4 59.Limited budgetary Mortality rate, infant (per 1,000 live births)* 103.7 90.0 85.0 77.0 77.3space for Growth Rates

development GDP at market prices 4.1 2.5 3.4 5.5 5.1expenditure and GtDP at factor costs 4.6 3.5 2.7 5.5inefficiency-if Per capita GDP at market prices 1.6 0.1 0.9 3.7 1.3not outncLhtnorruptiouvig * The head count index is for 98/99. Infant mortality rate for 2001 is from Paldstan Iteproductivecorruption-mn Health & Family Planning Survey.

.)( ~. £Ar jJa1, U. ITVI 1 U L'V.Vr.VPIUIIUIIL IUUII..4LU01 ZV £ 10 .

managementresulted in poor a.0at. (see T 0 1). .. mnal front, .eu.L and

uncompetitive foreign exchange regime discouraged export diversification and resulted in unsustainable.A AS A AA IA& A - T -I_._L,Li~11 AA4JL1LUV1II.,1W. LAW IJAiV4L

investment inflows and the recourse tosnort-term debt and foreign currency Iu = uuw U

deposits only delayed an external debt | 0 _ loyE=crisis, which was eventually triggfere 1 mo0T e iIhih 4by economic sanctions following oim Pakistan's nuclear test in 1998. Ihus, edl' S =n ofiithe economy grew increasingly "con vulnerable, balance of paymnents crises io ,hy h oet o~recurred, leaving Paldstan with debtindicators higher than those of the an dHIPC group of countries (see Pakistan ~~*~ ~ tn,-.~Development Policy Review, April 3, l ! r t2002. Report No.23916-PAK). 1

7. There are also significant poor, Isgender gaps in both literacy and health | _ E _ _ Eistatus in Pakistan which are _compounded by outright discrimination lagainst women (due to institutinnal anid - 9IuyP

attitudinal factors) in access to _ iaieducation, hponltlk P.im1lnvmen* aintother productive assets, and justice.1.aesgaps ,rse+r.t a stark n.-re o.

gender inequity.

Pakistan Country Assistance Strategy 3

0. rLiiVi rapidgU rLUWU1 ULLr.11. UL-e L.UO U18 lL 1'.U LU to10LL IrUULcL,ion iII JUV-IL.y, loJWIWer C,LU volatile

growth in the 1990s has led to stagnation of poverty measured in consumption terms. Differences across-- -- i~~~~~,,I- V1TL1. . 11 1A I Alfl flu -J Inno nfl

regions .-and provincebs persisted or -wiUerieU. VYIUlIC UrbOU pO-vety LeIl VOLW-efn 19Y9-91 aiun 1998-79

(from 28 percent to 24 percent), rural poverty stayed at 36 percent (see Box 1). This shows a weak linkbetween rural growth and reduction of rurai poverty due in part to a skewed land distribution and iowagricultural productivity (see Box 2). This is d of particular concern since more than two- iAthirds of Pakistan's population live in ruralareas. j s jo f

A Turbulent Political and Social History

9. Pakistan's turbulent politicalI andsocial history has also contributed to limit its l airna od h ~~

growth potential. This in turn has

capital. First, the country's wrenching social |__ 'E

change since its independence, vast influx of l _ n 1 t

refugees, and its increasing internal schisms onn(result of a difficult economic situation lexacerbated by the impact of Afghanistan's DIili~I fL1 ~ii iiJ ~9conflict) have contributed to socialfragmentation. Discord between its diversee'thnir grniinq sectariain and ethnic schi~ms - iesS~

and the continued political dominanice oflarge laindoners (Box 2) haue all .contibuted to deteriorating law 'and ordera&uu% Alv. A.p w. ~L A IR5

backward both socially and economically.

10. Another factor which may haveUUIIUIUUtWU LU LIIC, bUU1A1 V.U FUIILIVll1 LULLIUIiIL UkJ LVAAA[iL yrjIb lb UIW, rLUWU18 FUWVI 1 L IUIILUIIL IVIAUal lb

(Muslim religion-based seminaries). The radicalization of some of these institutions started with theirpoliticization during the ;980s. with active support from, tne Zia regime (;977-;988), Madaris withextremist administrations were established along the Pakistan-Afghan border. The objective was to forma cadre of religiously motivated "Mujahideen to fight in Afghanistan and provide political support toZia's regime. Madaris degrees were made equivalent to degrees obtained from formal universities. Thisfacilitated recruitment of Madaris students into the civil service, leading to the state's accommodation ofactivities encouraging religious intolerance and sectarian divides.

11. The contribution of these "Mujahideen" to the Afghan victory, poverty, falling standards ofpublic education, and weak governance, account for much of the success of the Madaris in the 1990s.Since they provided free boarding and lodging, they became popular with the parents of poor childrenand a steady stream of Afghans fleeing the factional fighting in Afghanistan. Marginalized, the graduatesfrom the non-mainstreamed Madaris (those which did not include the formal education curricula) with nocareer-oriented education, resorted to violence to influence the country's policies. Successivegovernments did little to restrain them or bring them into the' mainstream education system. It isestimated that 15-20 percent of the Madaris are involved in military related teachings and training.

4 Pakistan Country Assistance Strategy

1L2. ScondJlU', UIV con.6ILUIUJIrI '.V.IUII LIl UV,e ,IU-egI, sL'iVVe PdaJULkis o UL iaUi .sOVUUI' ces uIg ( Ul-euc

from over 6 percent in the 1980s, defense spending still absorbs 4.7 percent of GDP') and reduceopportunities for closer regional integration. wnile over tie meuium-term Pakistan s gro-wth potentialmay be enhanced by Afghanistan's reconstruction plan, in the short-run, the war in Afghanistan, and itsspillovers to Paidstan, and tensions aiong the border with India, are adding to the political turmoii andraising the risk of doing business in Pakistan.

13. Third, Pakistan's poor and deteriorating governance has accentuated the political and socialturmoil. Since 1990 four democratically elected governments have been dismissed, three of them oncorruption charges. The frequent changes of government over the 1 990s and the ensuing unpredictabilityof the policy stance undermined business confidence. At the core of the governance problem is the abuseof the state's institutions, widespread corruption, and disregard for the separation of powers and respectfor the rule of law.

Service Delivery in Crisis

14. Pakistan is a federation of 4 provinces-Punjab, North West Frontier Province (NWFP),Balochistan, and Sindh-seven tribal areas (excluding five tribal areas adjoining settled areas called asFrontier regions); and the Northern Areas. Pakistan's 1973 constitution grants major responsibility to theprovinces for regulat6rv oversight, provision of infrastructure (including irrigation and agriculturalextension services) and social services. The provinces account for 80 percent of total governmentsnendinp on health. education. and irrigation In contrast- and contrarv to exnerience with other fedemlilcountries, tax authority is concentrated at the federal level. The federal govemment revenue transfersaGnint fnr ns much s R4 npernit of nrnvinciil rPcnhircsP wuepaviiln. thle arcnintnhiilitu of ywnft,Uicl

governments to taxpayers, as expenditure and revenue decisions are made at two different levels of

1,. Ac a csuhl* arnd lIkAe +*16 wnr,nl cs a n,hole Paclsfan's prov-,nes have beer. facin..g -a c.rsis o

public finances, public service delivery, and public institutions and governance. The provinces sufferoIIL laIrg eLU WzL.-*LoL-s UeIr.:... "kdiIc4iI Ul ofspe.UULrd...g ar.d SI vic UeILV iVL.-LaLIVCP IU needs) il UuI

funding, delivery, and quality of social services (education, health, rural water supply and sanitation).Similar pro-vincial infras-tucLure deficits (roads, irrination and drainage, and municipai serices) increasethe cost of doing business and impose a heavy burden on the economy and the general public. Vitalirrigation water services are unreliable and controlied by antiquated, non-transparent and unresponsivedepartments. The multiplicity of provincial regulatory agencies harass the private sector and discourageentrepreneurship and economic activity. The police is widely perceived as ineffective and corrupt, whilethe judicial services are subject to long delays and are also seen as sometimes corrupt and out of reach ofthe average citizen, let alone the poor.

16. There is a tremendous opportunity for the provinces to turn around the performance of theirpublic sector. The following factors are conducive to reform.

* There is a reforming government at the federal level, which has put at the heart of its povertyreduction strategy a program of reforms to foster growth and reduce poverty.

* The provinces-particularly Sindh and NWFP-have already initiated a number of promisingreforms to restore good governance, improve their public finances and public service delivery.

Pakivtan rnuntry A.vsistanrn,e Strnteov 5

* Pakistan's devolution Dlan reDresents a major oDDortunitv to reverse decades of over-centralization of public sector management by creating more accountable elected localgovernments. which wnould he reqnnin-ble for thre nroviqinn of Iocal public services.

17- The nplicv reform reenrd nf the militarv government which tnok nver nn Octnber 12. 1999 ha.-gradually led to renewed optimism that these development challenges can be seriously tackled. Thisnntiniminm hnab hpn rp-.nnfirn,pd i th,e rern,-ntlv vliblich,pA T.n,t,pm Pnveprh 14PAi-utieni .tmte , (T-WPQP

There are also signs of an economic revival.

C. Recent Economic Developments

18. Prior to September 11, 2001, Pakistan was already reforming for nearly two years and showings011s of ar. eo ric J r e.; 2'000/01, A-spite a severe WoU U t, toLaL C-.JD PLL Lat LSJI ft UO L &VW by

2.7 percent while CPI inflation remained low at 4.4 percent, notwithstanding large increases in fuel andeleC'uicity prieU adU ta b1signif1iL uvptUr.;ioUnu uo Urv nupee. tIueUUgu ue prUguLtIUs Uwx cUllectionl

targets were not achieved, the Central Bureau of Revenue (CBR) tax ratio increased by 0.4 percentagepoints of GDP. The budget deficit was contained at 5.3 percent of GDP compared with 6.5 percent theprevious year (Table 2). Low inflation and successful reserves accumulation-US$3.5 billion by March3i, 2002, the highest level in a decade-refiected responsive monetary management supported by theintroduction of a floating exchange rate regime. The tightening of anti-money laundering measures inUS, Europe, and the Gulf countries has also triggered a large repatriation of holdings abroad by Pakistaniresidents through the official banking channel since end-September.

Table 2: Paldtn: Macroeconomic Indicaton, 199899 -2003/04

EtI ratel Projections1998/99 i9991001 2000/01 2001/02 2002/03 2003104

Output and Pries (annual changes In peent) I _Real GDP at fictor coast 4.2 3 91 2.71 ? 33 A4? 5 2Consumner Prices 5.7 3.6 4.4 3.0 3.9 4.0

Savins and Investment (Dereent of GDP!Gross National Savings 11.9 13.5 12.8 15.4 15.4 15.8

Government -3.0 -3.6 1.81 0.2 0.8 1.4Non-Government 15.0 17.2 1461 15.2 14.6 14.3

Gross Capital Formation 15.6 15 6 14.7 15.2 16.6 17.5C-vvwt 3.7 321 I 37IA 14 '69

Non-Government 11.9 24 120 118 130 13.6Publc Finances (nereent of GDP)Budgetary Revenue 16.2 16.51 15.71 16.9 17.3 17.3Budgetary Expenditure 22.2 23.0 21.0 22.7 21.5 20.6Budgetary Balance -6.0 -6.5 -5.31 -5.7 -4.2 -3.3Primary Balance 1.3 1.1 1.5 1.2 2.1 2.4NetPbic Debt -93.6 9! I009 94.42 90.5 83.6Interest Payments 7.3 7.6 68 7.0 6.3 5.7External Sector ( nereent of GDP)Merchandise Exports 12.8 13.31 15.01 14.9 15.4 15.8Merchandise Imports 16.4 15.6 17.1 16.4 16.9 17.1Current Account Balance excluding official transfers -4.6 -361 -3.3 -2.3 -2.7 -2.1Current Account Balance including official transfers -3.6 -2.1 -1.9 0.2 -1.2 -1.7Totalv E- De tb+ f-wt of c9wt cz r 32S. ! 1 -0 0I0 a 05 29Total Debt Service (percent ofcurrent receipts) 41.7 38.9 3251 33.9 30.4 26.8Gross Ro.. ine (nLtS milli.nn i 7'f n onR n I ldtl A 770o7 n U. fA AC<C A

(in weeks of next year imnports) 7.7 3.9' 7.51 1;6 14.4 17.0Financing Gap (US$ million) I I t100.0 200.0

Including Public Enterprises.Sources: World Bank and IMF staff Estimates.

6 P-aus.tanl C-Uuniry AsYsistunce StMIuwgy

19.~ The .-ex, e;,irno. tlkreatf4idA n pr" pt.ni, abouft sci-ri.tu risre Aum tn the wuv r in Afah2innist2n1

tensions with India, together with the global economic slowdown, have worsened prospects for growth,export0- zr. A Vnf.ws T.k.e -- +-..alfI.a g gap fr_ fisca --a 200A1 /A2 4--As by- 1-t latTUS$1eXuiL auu JJi LLiJiUWO. i. 11L.ALILU iUiliLUl 5 aJ L%P X1lovc 3 Lu i Y JII'J~. Mlu uv uoL.J U) xvU

billion (or 1.7 percent of GDP) after the September 11 shock.

20. On September 26, 2001, the IMF's Board agreed that performance under the program supportedby_ nT~" A-I --'I '_ . .J T'b- A - 'LT ...1... - l- 1% % in - ---..i .. _J Uya aLJSDR 45 mniUllon auUIU-y tUrLArgeIIVIs (app.-veU Uon -4UVn111UVI 2, 20.VV) stablish,1V a guuu *Uack

record of macroeconomic policy and structural reform implementation. This laid the ground for a three-year support program under the Poverty Reduction and Growin Facility (PRGF), approved in November2001. The first review of the PRGF program was successfully completed in end-March 2002.

21. The international community's response post September 11 helped reduce the financing gap.T he US provided direct budgetary support of US$600 miilion to protect spending on heaith, education,and anti-poverty programs and cover some of the cost due to the increased number of Afghan refugees.Other donors (Japan, UK, EU, Canada and European countries) also contributed. The external financingpackage which is supported by the IMF (PRGF-US$1.25 billion over FY02-04) includes UJS$3.3 billionin debt relief from the Paris Club over the next three years. However, despite these favorabledevelopments, the external and domestic public debt are both quite large and hence there are stillconcerns over the fragility of the external position and future growth prospects. The September 11 shockhas also increased the longer term risks to the balance of payment position by making more uncertain anearly resumption of long-term private capital inflows as well as increased access to international capitalmarkets.

II. PAKISTAN'S POVERTY REDUCTION STRATEGY

22. Soon after the military coup, the new government issued a seven-point agenda to revive theeconomy, root out endemic corruption, depoliticize state institutions, devolve power to the grass-rootlevel, and imDrove checks and balances and democratic processes in society. In December 1999.following broad national consultations, the government announced its development strategy whichfocused on: (i) strengthening governance and the integritv of the civil service; (ii) creatihng opponrtnitiesthrough accelerating growth of agriculture, small and medium scale industries, informaticin technology,anA nil and one qertnre; aid (iii) rdwuiino rinuprtv thlrniioh reui.ual nf mrrw.th a-nd rP.^.nr,,tivng puiblic

expenditure towards human development and poverty reduction. This reforn agenda is now theb-kbfo,.ej prof.h suove .me... .+rmPv,;.teu..o.S,ae.. Silj.ifiLJ%c^nt p.-Fess l%OLas bee.- .-.- e

already in implementing this reform program particularly on macro economic stabilization,, deregulation,govei-iirance and UeVUfiUon. uL n full. Mr is Apvepc'u to bu com-pleted anLr October Luul when the

newly elected government takes office (A Joint Staff Assessment (JSA) on the I-PRSP was discussed bytne Boards of tne Bank and tne iME on December 4, and 6, 200i, respectively). A referendum was heldon April 30, 2002 in which President Musharraf sought voters confidence for a five-year presidentialmandate, arguing that this is the only way to ensure sustaina'bility of the on-going reforms. National andProvincial elections are to be held between October 1-11 with the transfer of power andl formation offederal and provincial governments to take place shortly after.

A. Restoring Sustainable and Rapid Growth

23. The govemment recognizes that the incidence of poverty and the vulnerability of the poor willnot be reduced without sustained, broad based economic growth. This growth can only be generated andsustained by the private sector. For this to happen, a reasonable investment climate is required with apolicy framework that provides ample room for private firms, small and large, to invest and create jobs inagriculture, industry, and services. The government's main preoccupation has therefore been to improve

Pa>sta Cor..A-WisarceS,aer7

govemnrmet effectiveness in creating the political, economic, and insititutinnal setiing for .markets andentrepreneurship to flourish. In particular, it focused on ensuring macroeconomic stability, goodnn'crnrnarp.. I,ot p.tn otadeqste A .rop; r4-;-,+. -bc A zr.d , of cnt,+ra-+_ -. +l,n, a fme.a.r-, -If

bLsV kiiiS' iji p5,i.t,,. sajSAi Ji.q- i-F - "LIU9. am UU. L L VUI,LLQ at.tI- I itu C u lma WVLZ f L

regulations underpinned by a functioning legal system and curtailment of corruption.

24. Strengthening Macroeconomic Stability. The path of fiscal consolidation envisaged in the I-PUXRS3P is ajppIupIia.ely 411UIUIV0us LU U:.LVd.se Udor.sicU saVUrpb to f1[inar rIIW 1iV-UflU1L aInU cU-Ui

unfavorable public debt dynamics. This is essential as the I-PRSP is appropriately cautious on prospects2.- t t I-- I n - T "LT9. " (ITO . .iur nigner pri-vae sa-vmgs. inc -ri-Pi rigntly stresses that these fiscal iargets hinge upon the realizationof the government's projected revenue increase. Implementation of CBR reform, and measures tobroaden tne tax base, including bringing agricuitural income in the tax net, and eliminate tax exemptions,are therefore crucial. The strategy also seeks to re-orient expenditures towards the social sectors byreducing the costs of domestic debt, public enterprises, and defense spending (see graphs below).

A4ustmnut under the I-PRSP poargm 1 [anging C onpwidee ofEqnditure In I-PRSP

,V 1 14 I:

-- ~ ~ ~ ~ ~ 401 - ~~~~~4i 60 A 4050- 0.iz13 3; ~ .

4O 13 cme _DvlorPaiB +Fsa di _Ddeeepnhu(wolpns)

30 Impro-vln1 the .I

reducevthe cost of dopmening aid businessOn, t"" pr piputUzt opU' more- Oew Po-poor p-Pi servce

/.J improvIncu ODInV5rN3 9iimRIe. In alUmuon TO MaCrOeCOnomic StaDiuity ana governanceimprovemenit, reforms in this area focused on reducing the level of protection through de-regulation,trade liberalization, tariffs reduction and rationalization, and policy reforms to raise productivity andreduce the cost of doing business through privatization or more efficient public services.

26. In power, the vision is to build a competitive electric power system consisting of autonomous,financially viable, and efficiently operated entities governed by an independent regulatory authority.Commercialization leading to privatization forms the cornerstone of the government's power sectorreforms, which requires credible pricing and regulatory frameworks to improve efficiency and attractprivate investment.

27. Despite the Government's commitment to this vision, progress in implementing it has beenpainfully slow. The four year old National Electric Power Regulatory Authority (NEPRA) has not beenable to play its regulatory role effectively because of lack of capacity and weaknesses in the regulatoryframework regarding tariff setting policy. It has not been able to find a balance between the interests ofconsumers and producers. Improvements in the operational performances of the Water and PowerDevelopment Authority (WAPDA) and the Karachi Electricity Supply Corporation (KESC) also havelagged. In fact, the government recognizes that the large losses of KESC may endanger some of its fiscalachievements and poses therefore an important risk for macroeconomic balances. Adjustments in tariffshave been largely inadequate to finance the viability of nower sunnliers.

28. Natural Gas. The natural gas sector has significant potenttsl fnr growth, foreign exchYi-ange

savings (estimated to be about US$500 million a year), efficiency gains as well as environmental

8 Pakistan Country Assistance Strateev

benefits. Its development has been stifled, however, by insufficient investment in exploration andproduction, inadequate infrastructure, administered prices, heavy taxation and disproportionate cross-subsidies. The government strategy is to establish a credible, market-based mricing frameworlk across theproduction, transmission and distribution chain. The govermment also intends to privatize PakistanPetrnleuim T.imited (PPT.) the largest nroducer of gas and two Transmission and Distribution utilities.

29. The cnmerstone of this reform is the imnlementation of a new gas tariff nolicy. For gasproduction, well-head gas prices will now be linked to intemational crude prices. The price of gasa-1piableI- tPP pT i;ll hbe aidjuslteA mdAiiallu t.r:ce a ye2ar. gimilarlv rPtail tnriffe uill als be .diiiQtpdi

biannually with a view to eliminating subsidies for households (except for a lifeline block targeted to thepo,--). A rajuior setback hIa beer. +-h G -v .-,r. ts dAcision '.-l4-r.. to ramLarn ab.o..E. fl. lo

tariffs for the existing units in the fertilizer industry.

30. Petroleum and Minerals. Implementation of reforms has continued at a rapid pace and extendedtO the pVUUirolI UUij.dUV,- r VeLaU. rUnUWUig sco. lo 11UVLaL1LZL1U11 io iUI14l.o V oil aur LPG'..J, u1e evuuo.u

of the three government-owned LPG plants has been privatized. Markets have been further deregulated;oil marketing companies and large consumers are now free to import all products. Petroleum productsprices are set on a fortnightly basis consistent with import parity levels. Pakistan is the first country inSouth Asia to adopt automatic adjustment formuiae for petroleum prices. Subsidies to the refineries arenow budgeted. Environmental standards have been strengthened but continue to suffer from poorenforcement. Unleaded gasoline is now available across most of the country. There is, however, a needto enhance competition throughout the distribution chain. Pakistan has considerable mineral resourceswhich, if properly developed, could contribute to job creation, economic growth, and poverty reduction.The federal government has formulated a new Mineral Development Policy which is now helping shapeactivities in Provinces. The Sindh Coal Authority has been established and is now preparing adevelopmental and promotional action plan.

31. Infrastructure. The government has developed a National Transport Policy to improve thequality of services and reduce their costs. It has refocused its priorities. For roads, there is a welcomeshift at the national level towards operations and maintenance, cost recovery (mobilizing additionalrevenues through tolls earmarked for road maintenance), completion of existing projects, and scalingback nreviouslv large projects. Provincial governments (notably Sindh and NWFP) are starting toreplicate some of these reforms. Last year's major effort to turnaround the railways department hascontinued hbt the railways remain the largest nuhlic sectnr loss makinsg enternrkse Privati7atinn of therailways or significant private sector participation is not an option in the National Transport :Policy. Theimple.m.entat.ion of t+h.e gradual n'nnract.iv. out to fi.,ote sectotr of Pactati' two port .,f s beer stalled.

32 'TI,0e A,,nelnrA---t of 44,., IfTf..nns ',, C .... or.sc n.An .Tecn,&.mnl , -T) scl: or is oane o

the priorities in the I-PRSP because of its role in building competitive markets, facilitating private sectorUrvelopULU eUr, anu 11le cn11U1U.ULU1r, LU rowuLI. rA natioInal ICT Plicy -wa arLuiuuiLiIVu iU AnUrut 2000,

setting in motion a program to increase access to information infrastructure and use ICT across sectors toimprove public service elivery. iimplemenitaion o0 uis poiicy m 200 I resulted in the growtn of serviceproviders. The government recognizes, however, that growth in the sector will come from introducingcompetition in ail market segments. Since Pakistan Telecommunication Limited's (PTCL) monopolyover fixed line services expires at the end of 2002, the government is preparing for liberalization bylicensing operators in basic, long distance, and internationai service provision.

33. Financial Sector Reforms have been accelerated. T he government believes that the best way toinsulate the banking sector from political interference is to privatize all Nationalized Commercial Banks(NCBs) and consolidate (restructure, merge, or liquidate) the Development Finance Corporations.


Accordingly, tne strategy incluues ine privauzauon o0 two INCBs kriaDio B5anK Li1mted iiBL), andUnited Bank Limnited (UBL)) within the tenure of the current government and preparing a third bankNational Bank of Paidstan (N.BP) for privatization.

34. Tne tnree large nationalized commercial baniks are being restructured to reduce tneir costs andmake them more attractive for privatization. More than 8,000 staff have opted for voluntary retirementand 650 branches have been closed, mostly in urban areas. The National Finance DevelopmentCorporation-the largest state-owned non-bank financial institution-has been merged with the NationalBank of Pakistan. The government has divested 6 percent of its shares in Muslim Commercial Bank, andis committed to sell off the remaining 9 percent. For Allied Bank Limited, the Privatization Commissionhas already advertised for a block sale of Government's 49 percent shareholding. The strengthening ofprudential regulations continues.

35. The government is working on removing the uncertainty arising from the implication of theapplication of the Shariah code to all financial transactions which has held potential investors at bay.The government considers that Islamic banling should be viewed as an opportunity to diversify thesupply of financial products and deepen financial intermediation. The 'government is therefore seekingSupreme Court approval for a dual approach where traditional and Islamic finance institutions wouldcoexist. The first Islamic bank (with 90 percent investment from a consortium which includes theIslamic Development Bank and 10 percent from Societe Generale) has iust been established. Te StateBank of Pakistan (SBP) intends also to rely on other countries' experiences of such a dual approach tot1e,velnn its cpircityv t remilate and mn-nitor TIdamifr flinanncp nroditnc nn nnqpr_tnrs.

36. Rural Develnrnment and N.atur-al ResnLre Management. T.he I-pRRp rightl!y ,high,lights th,e keyrole that agricultural growth must play in poverty reduction. The government has made significant7,rnarress iin, imiwr.u1vin the imtpnftiupc rpmnrrn foir ag-ih-c,al 4 A- .4-- +-4e .- A pc

regimes have been substantially liberalized to the point that very few distortions remain. Thegovemr.uner.trecogrzshenee to fo -n0prd"gacs *.o_ ,.-kes(a,,c-Ad. ar, ir-,P-v- _ ___.__ g3_51. V 4 1U~11L1 1 11*.40 lP. 11144. 11. Lvu14U L .JJ.1u14AJJ,1aUU 1 v,0 LU 1 11u 1..Lq , 1411U kia 1u W UILJ 411U lILIJA UVV U1r

their functioning. And stresses that the most important reform for accelerating rural growth is theimrIovement in uje nianagelment ofuna. uilUl reso-5rces, particularly watcr. Gi-ven tnc on-going drough-t,the I-PRSP focuses on expanding water storage, by building new dams. There is, however, a welcomeemphiatsis on a realistic pricing of water and better recovery of user cnarges, and improved waterconservation and management-particularly to address saline soils and water logging in the Indus Basinirrigation system-to protect the long-term sustainability of agriculture in Paicstan. The strategy givesincreased emphasis also to investment in on-farm water management (OFWM), recognizing the cost-effectiveness of this participatory approach at community level relative to other alternatives. A watermanagement strategy that analyzes access, distribution, and pricing is therefore crucially needed.

B. Restoring the Integrity and Accountability of State Institutions

37. Improving Government Effectiveness has been and remains the hallmark of this government'sreform program. The far reaching set of reforms to improve governance are all at an advanced stage ofimplementation. These include: (i) reforrns of some of the country's fundamental institutions ofeconomic and financial management: the Central Bank of Pakistan (SBP), the Central Board of Revenue(CBR), the Auditor General and Controller General of Accounts, the police, the judicial system, and thecivil service; (ii) improved public financial management, accountability, and increased transparency andinformation on government activities to facilitate public oversight; (iii) devolution; (iv) an anti-corruption drive; and (v) privatization and deregulation to reduce incentives for rent-seeking behavior.

lo Pakistan Country Assistance Strategy

38. After detailed analytical work, including widespread consultations, a strategy for thefundamental reform of the Central Board of Revenue (CBR) was approved by the Cabinel: in October2001. The strategy was translated into an action plan using the recommendations of the Task Force forthe Reform of the Central Board of Revenue. A new CBR management has assumed the leadership forits implementation.

39. To improve public financial management and accountability, the government has implementedfundamental structural reforms to strengthen the audit and accounting functions. It has lpromulgatedordinances establishing the autonomy, powers, and respective responsibilities of the Auditor General andthe Office of the Controller General of Accounts. Ad-hoc Public Accounts Committees (PACs) have beenset up at both the Federal and Provincial levels to clear the backlog of Audit Reports not yet reviewed,and take appropriate follow-up action. For the first time in more than a decade, the Federal PublicAccounts Committee is reviewing the accounts of a government in office. The proceedings of the FederalPAC have been onened to the media and it is exnected that the nractice will be extended to thle ProvincialPACs. The government is establishing a National Procurement Authority to lead the process of changein this

40. The Comntroller Gen_ir of Acenu1nts (CGTA) has formilated a strateyv to improve financialmanagement. In the short-term, the focus is on improving the existing system through training of districtlp'inl officl.s mi.A im irrvincr the p-nergpvp nf rpnnnciliatnon nf ac,-nirnta Tin tlip minA;ii,rn ta.rm lIa t"ai,e

public chart of accounts and financial reporting requirements,.announced by the President in December<1) S%,1 ArkAA -11 Up -- A -+A_A A._4 -- -A_ T A A__ A_+ ; s t_A_ A

Uvvv, LviLI UV W 11iUVL GVVW.,'JULULLi 5 03 a v0t1A1. *L1sw r.J V- illJliLt la 1vvv U1 vU

extending the modernization of its accounting and auditing functions to the district governments andbelow. As part of this proraLm, dUrig tLle next two yers, Pakistanl will: (i) imp-rove its ex-pendituremanagement through the implementation of a medium-term budget framework; and (ii) publish thegovernment's quarterly fiiscai accounts to enaDie pubiic monitoring of budget implementation. inaddition, Fiscal Monitoring Committees (FMCs) have been set up at the Federal and Provincial levels tomonitor the preparation of reconciled and accurate accounts. Civil service reforms now include an entryand exit strategy, training, consolidation of functions, simpler procedures, and a phased program of payand pension reforms.

41. The Government's far. reaching Access to Justice Reform Program focuses on police andjudiciary reforms. The government is keen on creating an environment that respects the rule of law,protects property, and offers its citizens, particularly the poor, access to an independent and professionaljustice and police.

42. Devolution. The government expects that the devolution of power to local governments will playa major role in putting in place an institutional framework that would make the public sector moreaccountable to the users and more efficient at delivering basic social services-basic education, primaryhealth care, rural water and sanitation, policing, justice, and other forms of community infrastructure.Local government elections were completed as scheduled in August 2001. Building the administrativecapacity to govern and providing the financial resources to deliver these services are, howvever, yet tocome. Fiscal devolution to allow local Boverments to fulfill the service deliverv asRionments ichampered by the general scarcity of funds at all levels of government. The effective working of districtlevel govermentls and tlw heibliniin of the requisite institutional c-apacity are likelyltobe len.gthI y andchallenging processes.


43. Atier tle s-uccessiul prosecution oi a large numoer ksee iaoie 3) o0 nign gUvernLnene U11cials,

politicians, senior military officers and major tax and loan defaulters which brought in about US$1.5billion to the treasury, the National Accountability Bureau (NAB), wnich has been mandated toinvestigate and prosecute cases of

Tahle 3: NAB Perfornmane 2001-2002corruption, is worling on mstitutionalizingits anti-corruption strategy to prevent Investigation Prosecutioncorruption through improved governance. Authorized 1060 Cases Filed in Courts 397

Completed 312 Cases Decided 19844. Finally the govermnent has On-going 668 Convicted 169completed and issued key environmental Closed 80 Acquitted 23impact assessment regulation. It delegated Cases Wi Progress 6monitoring and enforcement responsibilityto provincial environmental agencies. It has made progress in the preparation of a modern resettlementpolicy. These initiatives will need to be supported by adequate recurrent budgets, further strengtheningof human resources and information system capacity, and a clear system of accountability forimplementation and enforcement.

C. Accelerating Human Development

45. The government has now put in place a credible strategv to make progress towards achieving theMDGs for education and health. Federal budget allocations for education and health programs werealmost doubled this fiscal year using the fiscal snace created by external sunnort after Sentember 11. Asystem to track expenditures on education and health is also being developed. There is now a stronglesadershipa fir the e'dacsation se-~tor at hoth the Federsi sand sa!! fouir inv. intisal e~disat:n ,m, inie W1hile

education is a provincial subject, the Federal Education Minister has been successful in building apnortnpralv.p ,mtl. 11na! ion sm. .ni-tare n ortr.cu

1 ating fnvn.s ar atacrnes to it+npnt Ahoni

The partnership has been sealed with Memoranda of Understandings linking resource transfer to

tu. li LAP,1I V111JUUV"V11L.3 Lu u1L 0UCL&,y LU IILLjJL%JVV, UUL,V4L%4u 1 UUIuIiussss U11%,1UUVq u1V IUIUWl1r-. kl) oLL

overall framework-Education Sector Reform (ESR), launched in 2001-laying down the foundation forute Education For All agenda; (ii) a major Scnooi Rehabilitation Program; (iii) a Teacner TrainingProgram; (iv) Learning Centers at the District Level which aim at universalizing access to primaryeducation, with a special focus on giris (covering the entire eiementary stage of education for ages 6-14);(v) Public/Private Partnerships; providing public funding for low cost private education through theEducation Foundations (the government has also taken the lead in restructuring the National EducationFoundation providing it with greater autonomy under the Societies Act); and (v) a National EducationAssessment System (NEAS) to measure outcomes by enabling stakeholders in the elementary educationsystem to understand how well the elementary education system in Palistan is performing and to designtargeted interventions to improve the system to achieve desired learning outcomes. In addition, the ESRencompasses new innovative programs in examination reform, video textbook libraries, a comprehensiveliteracy program, early childhood education and an "adopt a school" program. The Federal Minister isnow in charge of donor coordination and is looking for assistance with the implementation of thesevarious components, including experience with school feeding programs and use of vouchers.

47. The Islamabad Capital Territory has been used to test ideas and encourage reforms by piloting anumber of the initiatives included in the ESR. These include the recruitment of teachers on schoolspecific contracts, introducing training programs for head teachers and learning centers to improveteachers' academic knowledge- ungrading entrv qualificatinns for teachers and intrnducning a teacher-focused code of ethics to address chronic teacher absenteeism. Federal transfers are also being used to


encourage reform. in this context, federai fundimg nas been ngniiy reiocuseu on rexwEilULIrng UIW

existing infrastructure-with funding targeted to rehabilitating those schools which are in worstconditions. Federal funding is also being put where it is expected to have catalytic impact onperformance. The budget for the NEAS has been doubled and is linked to outcomes. A HumanDevelopment Task Force is also working on a program to build district capacities for service deliverythrough pilot initiatives referred to as "incubators". The latter are expected to serve as role models fordistrict staff and below to better deliver social services. A Human Development Commission has alsobeen set up to coordinate initiatives to further public private partnerships.

48. In parallel with the federal government's ESR initiative, provincial governments are alsobeginning to put in place measures that address some of the most fundamental problems of the system,such as calling teachers to account throuigh a re-certification process, linking pay with performance(through monitoring attendance), hiring new teachers on school specific contracts, and exploring ways touse under utilized school buildings. Each province has started to seriously monitor teacher attendance.To improve facilities, the focus is on maintenance rather than new investment. Education departments

unre idertaking iventories of unused schools and investiaating ontions for their utilization, inter-alia,through "contracting out" to the private sector.

49. Learning from the experience of the Social Action Program (SAP), the Government's priority is+wk-iF^vre- 4to . hp tesocial deplivPru svytem nf its seiver anvprnance nrnhlems first then nddress the

funding issue expecting that assistance from donors and the on-going reform program (through its impacton growth) would geerAate the necessary resources to fund adequAtely the. sfuiol spto-nrs Siu-pe,cfillexperiences which have relieved the funding constraint are being scaled up or replicated. The SindhIJUVVVI1ULIUL t IIUU"JL a Sc.ihol" proiuaii LIas UbeI. V.jLI3 V0IUi s s ClUG4LL1L5acI.JL

1co t adoL

funds to finance textbooks, schools uniforms, and other supplies as well as maintenance of buildings, andis being replicatea min diferent parts of0 the country.

50. Tne goveunment's meuiunm term- health strategy under the I-PRSP is rightly cu;uunntauing onprevention and control programs, especially in the area of reproductive health, child health, nutrientdeficiencies and communicable diseases. Programs include adoption of updated strategies against TB5and malaria, introduction of Hepatitis B vaccination and plans of response to HIV/AIDS. The IPRSPincludes targets for 2003/04 for reducing child mortality, increasing the number of Lady Hiealth Workers(See Box 3), reducing the prevalence of malnutrition among pre-school children, and increasingcontraceptive prevalence rate, among others.

51. Strengthening public-private sector partnerships features strongly in the Health Policy reform aswell as making more effective use of existing facilities and skills. It is proposed, for exampile, that everymedical college in the public and private sector be required to adopt at least one district hospital orprimary health facility in addition to the teaching hospital affiliated to it. Reforms of the regulatoryenvironment are also being considered.

52. A start has been made already to improve personnel management. In the health sector, NWFPand Punjab are increasingly resorting to contract employment in an effort to reduce absenteeism and fillvacancies in remote rural areas. The provinces have also started to strengthen management for thedeliverv of social services at district level. To this effect, they have redeployed staff from the provincialto district level. Of the four provinces, NWFP is by far the most advanced in decentralizing staff fromthe center to the distrinct level facilities where they are most needed-

C53. Pak-istan hnq rntifled qeve-n of tlhe 110 core labor ennverntinris A mainr effort is on Lyoing toaddress with support from ELO and the Bank child labor issues (see Annex Ml). It has also been grantedm0rn f-orableh treatme~nt wrnder thli Em-riean UTnion-' r-4P in vipuw of its pffnrkc tn P~nmihft dnirio

production and trafficking. The government has also strengthened its track record regarding itsL,LIIUIIV,11L LU 5Vf&"MCT Uc.jn.&y. *~,

5lLA11LT 'JAlt Ut=UZi--.A( .*~fl 4l. S* &* .l*

emipowered, the 1eaveihWnk rnfa'Dcmtd

after it took ove a-1- :' 'T li' i 1 ote 1til L4f I,.4 -'l*'point agenda to repeai me j..-Federal.Golaws that are thzb~nih4I9V4..Fuianed1almo--t' ennly~m' Qver en.sourcesiiitj,.p Wm uii&II .~~~~~~~~44?Lt - -, .-. ~ ~ ~ _. ,' ... .',, V`

A National Commission ~~ina es-uAezr w fi~-f..aeci6 cpdn.tdar'(slPn si be~iiia 36W2: eaii ff~'h%rn -aiae 8 educati'a'ra-:' i'vtrn .3.for the Status of Women "hontiiof ftil'd-.iiie,laining'Wihd, 1 4 mon1hsoffinsrv-i,e'wiIia 4 Bic?'a LHW j;61v es1(NCSW) was established - ~fsrSOi.abR iS 2 per: mo?Ctj" adi e•4 ib.li for ~b l!.',I00&populat-ion i.P .Thrrlowlibollilto review the existing laws 60,000 LHWs adtoss the councry, micludrgi about- 13,000, village' bas01,fluil~iy welar -I ~ ~ ~~~~~~ i6by.the1fhistryof Pop'ulaio6n &'Welfnire andb'bave~-Iwith a view to opgny-enrecommending reformns to 4 ' -_ i

and p ~~~~~~~~~dcatesadareduce gener 4 -, ningrou,vauadn- Ih

discrimination and ~SlgnilICant inP~aC1 On, I11ortanL a1SPeCCSl M r!N:, anC- Mzmly planning. A-iQswI8jrm,1oieod .surv Sgib~,d;ibosd; villagtsl'%iLhJ- L"Nso lb iief{bcer -acc'es.to. iai

p3romote Render equity. 4f- lrl "'Thp nnlv P Pve-nti,Wi .&inji; r~ gr.n rC k;I in,4imn'nnn u,h"Tp al%hAV.pnfl?

After extensive ,bt4 s efor'deltVe,i P,sr~e~, .. ~K''*1*, '~ 1~!'

consultations with ~AI~''~constitutional lawyers and F J I] 3C"U~. ,,

exnertq- a nrominent NGO0 -ll,"latrs' M' ,

the Foundation, has' K~~ ;u UUTN ru It.

a ini i.L511r 1f -c I 4.

Muslim Lawsz tomk ioodm o

1i666r otbi'~iinhIS td'd9.iltgby011rtraOndhat worker'2 3 15 These include theFaiyF usnoonpon(R ~ I*'"Ladws U rH eaa.eerLytghdVa, ,

Nikahnama form (marriage NuimSui"'f'cbilIdrien 'l'it di ihea:i+'Q-.r %1 5 -

licence');, Farmily CoUurts tdarea,3?r * 4

Act; Dissolution of XI N cide.1 5mnh Iu~nnzdV ~ ~ Yr Muslim Manriages Act; .iiojnJa 3CEIIeLvV;ogram, nas. utmiicia flDl3ma JocusCa on 1 ns10 nll

itiraitilgic .vision'adndpc4bI- ledei"sbip.' V s -to, superviio lY,_and Child Marriage a rnnae s'i hj1i adJ%nar

Restraint Act. Ihe pha~hxouiprnghejr - Zrl.goverrnment hs already N '~~¶'

declared that all "honor **. 5 ~ S * -control-aieasiert'iMis lt Imuchro- I rnj druat servicesklig"(see Annex I, Box k~Lc of:conu-~i6~t It u seL', deIa &fA

4) will be treated as 'VlcU'yohea-lth 9fafflikve a1i6ffiTd ' ith-p

murders. L ,,.. .. 1.hM.. I. Mr. , ;corn t conerigaboui 6

54. TheCommission rew H nti'~~ 5hofr.; the -LHWfis focusing on. lat " t-'' coeorecommending the repeal ' ' ' " dioatrkonunn,()prvli 8

of one of the most '~I1 eLoc L11 ucao rudiscriminatory laws h I4- nh . tV~"i'i\' t..t~i"4.~'

Hudood Ordinances 'rill'.. 4 . . .- ' 4

(which cover rane,~ ~~* -:I~ ~ '.Il :'iJ;i$ i. c;'~iadultery and prostitution) I


and offenses related to Qazf (false accusation relating to women chastity). under the nudoodordinances, the testimony of adult Muslim males is the only admissible evidence and this has createdmany instances of egregious arbitrariness and discrimination against women. Besides the Hudoodordinances, other discriminatory laws include the Qanoon-e-Shahadat (law of evidence), Qisas (coversretribution) and Diyat (covers blood money).

55. Beyond changes in the laws, the government is also seeking to improve women's voice andaccess to resources by increasing their political representation and reducing their vulnerability to rule oflaw violations. A third of local council seats have been reserved for women (resulting in a total of36,007 women elected across all four provinces). On January 17, 2002, the governmenlt announced atripling in the number of seats reserved for women under the future National Assembly from 20 to 60.Women's rePresentation in the future provincial assemblies will also be increased. This is a clear breakfrom the past. The government is receiving a significant level of technical assistance from bilateraldonors and UN agencies to implement the reform agenda for gender eouitv in Palistan.

56. A number of targeted interventions, such as Pakistan Bait-ul-mal (BPM). the Pa!kistan PovertvAlleviation Fund (PPAF), the Zakat Foundation, are used also to provide assistance to poor women andchildren These incltde the Fond I.Runnnrt Prooranm direct financial and medical assistance, andeducational stipends. The government has also established the Khushali Bank (micro credit bank) to

ix,omen's access to wrol iiptiuve assets.

57. Mo-e gne rallxy, th.e T-PRSP artm e t.he need for a com.preheasnve soc pro'ecton stategy toaddress both poverty and vulnerability. The government seeks to reduce the vulnerability of the poor byexpar.ding vuugeted :ic.e.un tr,sfer J al°l m LL. s L Va p.-oLd:.n U". access LU assets Uli gUh UHl.roVedL

access to credit, housing, and distribution of government-owned land. The govermnent has alsoembaur'vu on1 a1 1reIlulll VI Ue sAiLU1 safeLy net p-rogram41s uy FVngRgu1in1g u1 e iMistitutionLs in charrge 01

their implementation and monitoring, increasing transfers, and extending the targeting to reach a further1.5 miilion benenfciaries. For example, the government's Knusnal Pakistan Program, as iaid out in the i-PRSP, attempts to improve targeting by incorporating active community participation. As districtgovernments start functioning under the devolution program, the government expects Khushal Pakistanto gain further importance and local ownership (See the Poverty Assessment and the DPR).

m. THE BANK GRoup's ASSISTANCE STRATEGY OVER FY03-05

A. Overview of Bank Group Strategy

58. The government of Pakistan is engaged in fundamental reform for a historical transition of thecountry to modernity. These reforms cover a broad spectrum-politics, institutions, economic, gender,and social. They provide a clear break with the past, especially regarding gender equity. The main goalof the Bank Group's Assistance Strategy is to support these fundamental reforms for a transition to amodern Islamic State through a program of analytical services, institutional capacity building, anddemand driven lending. The triggers underpinning the operationalization of the Bank Group's assistancestrategy will be based on measurable outcomes which have the MDGs as a frame of reference inalignment with corporate priorities and global public goods.

PaFdkitan Coun.try Assistance Str-ate, 15

MILLENNIUM DEVELOPMENT GOALS I

Poverty Reduteon N(The Overarching Objective)

Pakdstan's I-PRSP Strategy: Growth with Equlty

(Government Effeene Business CUimate N ( Pro-Poor Growth )

• Macr Stability Politincanv 8l/acror Stabilit Edu on Reiorrn l* Fiscal Reform n Regime for: * Health Reform* Governance Reform * Power, Oil & Gas, ICT * Rural Development

tw-vu L'VUJUUUII * Financial Services a Gender Equity* Infrastructure Services * Social Protection

i' World Bank Group Strategic Prindples

Client "Pull" and Selectivity Programmatic Approach Partnerships and Outreach l

B. Inputs to Strategy Formulation

59. The Bank Group CAS will also be shaped by: (i) the lessons learnt from the implementation ofthe past Bank Group CAS in Paiistan, including iFC`s and MIGA;s experiences as investors andadvisors; (ii) the results of the 2000 Client Survey; and (iii) the concerns of Pakistani women and menexpressed during the extensive consultations held by the Bank Group all through 2000 (see Annex I).There was no Country Assistance Evaluation by the Operations Evaluation Department.

60. Lessons from the On-Going Bank Group Country Assistance Strategy. Experience withimplementation of the on-going CAS has been positive and has taught a number of lessons.

* The Bank's shift in emphasis towards knowledge transfer (to underpin policy advice) andcapacity building has paid off.

> Significant policy reforms took place in a number of areas without financial assistance. Thiswas particularly successful in energy and transport, where no sector specific lending took


place over the past 10 years, yet the dialogue continued and reforms have progressed. Andfinancial sector reforms were deepened well before any financial assistance accrued. Thelarge and eff-ective pro-poor public works program is another important example of a positiveoutcome arising out of the dialogue with the Government.

> The partnership between the Bank Group and the Government of Pakistan has beenstrengthened. The latter camne to see the Bank Group as a committed development partnerand not solely a lending institution. This was true both at the federal as well as provinciallevels where the Bank became a more engaged partner in encouraging provinces to reformand support their efforts through analytical services and policy dialogue.

* The substantial progress in macroeconomic management at the federal level and weaker policyand implementation performance at the provincial and sector levels (fiscal, power, agriculture,irrigation, infrastructure, including water and sanitation, and human development) led the Bankto refocus its assistance on the provincial reforms and on the cross-cutting governanceimorovement issues-accountabilitv (nublic sector financial management. transnarencv)-compliance (taxation, civil service reform, strengihening central bank's supervision andregulation capacitv), and q rnnnrt to A5evnliitinn (mrn-VinniI refnrmc aind dietritt ra,nt- it hi,ilAinc)to improve the investment climate and service delivery. For the future, Bank support for reformsneed to v giue mnre atte.ntionv n implementation capacity.

Wek gverac a--ld h-ig incidenc- Uoty 1L"-

private sector, leading to market distortions which undermined IFC's support: to building aCOMIP VelVe VUUi rIII. iUi pLLVa4L seorLUL UCVVVIUjJLIIU-L. -I 'UH5 en-ViLVUmUeiJZL, 1I1lUIaialIy

attractive investments often have low economic value added, further limiting opportunities forLE- s catalytic role for private invesunent in Pakistan.

* Tne message from tne experience of the Social Action Program (SAP) is to focus Bank'ssupport on helping the government improve the governance structures (systematically nottopically) that underpin service delivery and help achieve results in the MDGs areas of healthand education. The message from the implementation of the National Drainage Program is thatfundamental institutional reforms require high level political commitment and "champions" tolead them. Sindh is showing the way in this respect and reforms are progressing well.

61. Client Survey Results. The lessons from the client survey echo those from the implementationof the CAS. They stress the need to (i) sharpen the Banks Group's assistance priorities; (ii) increase thepoverty focus across the spectrum of Bank Group's activities; (iii) increase the effectiveness of theBank's assistance through more consultation and participation of stakeholders; (iv) pay more attention toimplementation capacity in the country; (v) be flexible in adjusting to changing country circumstances:and (vi) strengthen capacity of local training and research institutes. Clients view interactions with BankGroup Staff as important and very useful and stressed the need for Bank Staff to increase their outreachand interactions with clients and civil society.

62. Consultalons and Their Imnact on Stratewv Formulation. A series of very extensiveconsultations were organized both on lessons learnt frdm past Bank Group Assistance and on prioritiesfor this CAS. The Rank (Trnirn Cn,intrv tenm (nvPr 20 staff in nl1ahnrntinin with wBT snent a total of

five weeks, one week in a district in each of the four provinces, and one week between the federal and,wrin.cial capitala lietpingto onupr 5l0fl Aart-irininto rAvnum &om anbroad rnge nf hbc.rrn1inds (eeP Bloy

4 & Annex I). These consultations gave participants the opportunity to learn more about the BankC.L oups' mAssion ALL A '-Oe L6L11 11% JO Our, flO UWAt! fut. P Ip.pnIs V' %IS.ed this oppSr.Jflty

(for' many it was the first time) to discuss directly with Bank Group staff their country's developmentciiaiLvii-ges, zutcu conceillb, andu hopes Ior 'Ule LuLure. A orr.all riOvup vf p.0totestes irIMVU -.o Uie &LILL-

globalization movement boycotted the consultations in Karachi and Lahore. Most participants remained;however, for the whole duration of the one day workshop and while tIey -were also criical of a numnberof the Bank Group's activities in Pakistan, they were more constructive in offering advice andsuggestions. T-ney stressed the need to continue this diaiogue with civii society on the BanKi Groups'assistance strategy to Pakistan on a more c 7 -. I

. ~ ~ ~ ~ ~ ~ ~ ~ 7periodic basis. I ,t . :flf, Bo' 4., Conosultzaons,f,or te (iA-r' .h.i;;- i,r. ,b t1 -. r i , is.o

63. The consultations helped increase the lEL ee-rit,rocunci-, -lextensivc9clnsu ltoes-thr iUi

Bank Group's awareness of the impact of its __ is rIc -tev., b snr ;assistance in Pakistan and ground the main .- i-_i ipillars of its future strategy in the reality of |11WHAM-WA 'a MOM rw -o pF6-yiq7ql Qpast implementation record. For example, the RMrionne db- iifd1iH" PM ' citin inbry

consultations showed how high on eveTyone's Olr,s r ;Mo ,

agenda is the issue of quality and reliability of |sXaa Vo[-exnenslve'cn .mn

water and education delivery services to both Inc udeRApepttz 7 ot ; Ithe wealthy and the poor (see Annex 1). The e ddi -e hei eld,consultations with the Drivate setor|olllrn-h20,,izersttepvt~ highlighted the importance of "getting the l*toy. onIt'vgnvernment off the back of businesses" by %$-, g ,, n,4oP reducing the burden of taxes and regulations, start h_____21(1tinA fl,wnnnrhinitia- that thi-.ir 2I-lnini'ctr2ntininq. hgi~.nkrtP?r-lva main

offers for corruption. In contrast to the hist or, eof lobbyin.g gSovernmen.t for intersventionsv" to A" > ____*P;favor specific industries or companies, the -tcnove-arc.ludW,g ui.enne was uiat WiLaL the pJriV4L | _ u2 u

sector most needed from government was to be l a .. .W1'NPOV icLI I4 1 - -L

C. Strategic ngagement Prln

o'. Inc Bank Group's suppor Dwil e be I U' um* .U UU U

guided by the following three strategic jengagement principies: (i) Strong "ciient pu eroto reform and selectivity; (ii) a programmatic c e u _ essE 5approach tocused on transter ot knowlecge and so t or eransaiD ;:Eo4:Icapacity building first; and resources second, go ae _ _ n i do'pin a flexible pursuit of key development ! -in. . ;Ioutcomes; and (iii) Partnerships and Outreach.


Client "Pul" and Selectivity

65. Underiying botn the seiection of The Bank Groups strategic priorities and their implementation isthe principle of "strong client pull" for reform and selectivity. Part of the strategic objective behind the"demand pull"' approach is to aim for capacity building through lending and non-lending support and tolearn together with the client. There is a need to focus, not just on what is important, but also on areaswith strong client commitment to carry out the necessary reforms. Bank Group financial support isuseful only among these. For example, the Bank's assistance strategy has already been reoriented tofocus first on those provinces-Sindh and NWFP-which have embarked on a comprehensive fiscal andeconomic reform program and have sought Bank's assistance. Subsequently the Bank's dialogue willalso focus on those newly established district level governments which would be committed to reform.IFC's investments and support will also depend on progress in establishing a competitive marketframework. For example, the extent of IFC's involvement in the gas sector depends on government'saction on regulatory and price reforms and privatization.

66. Using this principle, the Bank Group's strategic priorities will be subdivided into threecategories: (i) Deep engagement; (ii) Low engagement; and (iii) Monitoring (see graph below).

67. Business Areas for Deep Engagement. The Bank Group will engage fully with its full set ofservices in areas where the government has shown the strongest conmitment to reform and hasdemonstrated such comnmitment through measurable actions already taken. While cooperatng with otherdonnrq the Bank (G'roou will take the lead on support tn en.nnnmic management and financial grnance,including technical and financial assistance to the State Bank of Pakistan (SBP), the C!omptroller Generalof Accouents (G.A), the Auditonr (nera1's Office (AG) support for the reforr. of th.e Cerl Board ofRevenue, the civil service, investment climate (including support to reform the governance andregunaton.T Owneshipower, gas, oil, financial Ownership Instrumentssector, p-....cA.O andL -.ft A

reforms, and privatization),-1 - - A .-- -. Reformed * inanna- nuhlir crnnfleprovinciai anu UiSLlCtr

governments reforms, * Guaranteeseducation, health, watermanagement and rural ReforCing _ s

Reforming 1~~~- '1 A A A

*development, district services, _ U AA

and community infrastructure.The level of support at this -l stage of the Bank Group Reform-shy * LILengagement will include both '"why" AAAnon-lending and lending *services as required.

68. Business Areas for LowLow Enzarement. The Bank Low CAS Relevance ffighGroup will keep a low level ofengagement in areas where the client has shown so far a relatively low degree of reform resadinese ciulh asfor urban development and transport or where there have been reversals of reforms or slow progress. TheBank GIrmop will focsii on ananlvyticl qrvinpe and leve.raging the resouirces of BI to play an advocacyrole to encourage reforms.

Pn/rivdan (nunfrv AVViVtOnneP StrntPov 19

69. Business Areas With No-Lending Services. These are areas where the Bank would monitordevelopments such as on areas where the IMF has comparative advantage (macroeconomic stabilization),areas where the reforms are on-going (sometimes with other donors sunport) or need only IFC orM[GA's engagement (capital markets, SMEs), and areas where the commitment to reform is very low.Arte2 nfhimiginPQe frim which the lRnnlc ha disenagepd cornplettelv will alqn fimire in this categrorv Thisinclude financing physical investments in railways, telecom and ports, oil and gas, public industries,aon4.iJlhi1 s. Zavcs A t nd riv ur,n ,,,lhrp t.h4.e ,a , -.fstor pmn, iwu.yp'at ixnith ti c,nr"ni-t nf TFlw snd AAiA

& ... - - .01H ... , -- V e _ - s w. Lth U.- _,, _

as required. No lending will take place at this level of engagement.

Programmatic Approach

70. Pakistan's I-PRSP sets out the process underlying a sweeping and ambitious reform programcov r.g zll U o jAJILI%.01, UA0&ItULIWInlU, econor,^.., O-.d social m-eas, ir,cuir..g gener. equity. II..ese re. *.Msare inherently long term in nature as acknowledged by the government and can therefore be more

1L__ _U.1- .L - A .- , _ _3-… 1_ CeLIeC1ivly su-ppUorU. Uy n, 1u-;ru-yoU1 aIU8141UVUU tUL UIV na.LoU11r1, pFUVUhiAaI, aUnU UdLUc level-,hence

the need for a programmatic approach for the Bank Group's assistance strategy. The system widereforms being envisaged for example for the tax administration (CBR), Tne institutions in charge offinancial management (the Comptroller General of Accounts, the Auditor General's Office), the civilservice, also require a progranmmatic approach.

71. Programmatic Instruments. Tne instruments used under this GAS follow directly from thestrategy. The Bank will use (i) policy based fast disbursing lending to pursue the governance andsectoral reform agenda (finance, power); (ii) programmatic sector and investment lending to support theimplementation of the reforms to improve the economic (TA to the Central Bank, CBR, CGA, and AG)and social infrastructure and delivery systems for education and health, and community infrastructureservices (including water management) at all levels of governments; and (iii) analytical work and othernon-lending services to monitor developments in the areas of low engagement and encourage reforms.The Bank Group will use its non-lending services (AAA, TA, and advisory services) to build a coherentstrategy. for capacity building, fill the knowledge gaps in key areas of reforms to help the governmentarticulate its reform strategies and strengthen its implementation strategy (see Table 7).

72. The core program of fiscal and governance reforms at both the provincial and district levels is anarea for which the Bank's programming approach is best suited; reforms take several years to yieldresults. and sutport needs to be flexible and consistent to withstand the uncertainties inherent in such anendeavor. Moving forward with reforms will also require assurance of a reasonable degree of financialsunnort over the medium-tern. The Bank's nlanned use of a series of one tranche adiustment credits tothe federal and provincial governments will provide a predictable and performance-based support toenahle hnth the refhrmincr nrnvince tore t.nre their filnrcinl en,lniiiihrilim while ,rndeirtnring the diffirult

and politically controversial reforms. The approach will also help the Bank manage risks by pacing itsacaaat+nna -,i;lI +tim Ahh.1rA nnrj'prnp,it'c 6tl,- al fo rsue rnfnorrn n.d to infl.e - a,nc-- of "u,,a+t in '4m-"

support.

73. A programmatic approach is also effective in community-based rural development projects which;-.-.ov -_ctorI po1c6c.-e as vvell as - 1high Aegre of -xe-e.ainz-.d Aio:.g A-44--l. -

programmatic investment lending approach whereby individual projects are tailored to the particularcUI1.U 1 s'fulcesU and Ub .ed of a UVUrvgC VI U15LriLVL allvW IUnMUg adIU 1VtUUUI7iiig lo LUaKe plac, wmici iiC

projects are implemented. With the devolution of social service delivery and rural infrastructure servicesto the newly formed district governmenTs (97 in totai), me iBank wiii aiso seek to support building thecapacity of local governments for effective planning, management, and implementation of relatedpolicies and district services programs. This support will initially be extended through a combination of

20 Pakistan Country Assisiance Strategy

anL,aly -JA1 Uliw.-A and h n.ec.f,..icl aaos,s.*-e f+,U-LO5 .1 LTlLsO *,Jf +a-.. to t 1Q sfer ov ledge -Ult- expe.;se

as needed. Bank support may eventually be expanded to include outcome-based programmatici,nvesuL.,1L ler,dir,g '. assisOL LIn Uuilng -dUUL,aL.iUn aru, zIeaul U;. L1L u IdlivU.;y ayamwau. I U' J4ayw4iia

Government-funded PHRD grant technical assistance will continue to be a very useful instrument inbuilding local govermnent capacity to implemelnt refuiris.

Partnership-s and Outreach

74. Tne Bank has been instrumental-as it pursued tne Comprehensive Development Frameworkapproach-in pulling along donors to build stronger partnerships in support of the govermient's reformprogram and its I-PKSP. The Bank supported the government from its first days drawing on its expertiseto help it formulate its comprehensive reform program. The Bank Group will continue under this CAS tobase its financial assistance on a sector-wide programtmatic approach. In this context, and using theselectivity principle, the Bank Group will seek better donor coordination in the areas of Blank Group'sdeep engagement. The Bank is leading the effort to mobilize technical expertise and financial assistanceto modernize the Central Board of Revenue; leveraging the support of the IMF and DFII) in the process.In the financial sector area, the Bank will continue to support the banling sector governance reforms (andprivatization with IFC's support) while AsDB is focusing on supporting capital market development, therestructuring of the Agricultural Development Bank of Pakistan (ADBP), micro-credit, ane SMEsdevelopment. IFC will complement the Bank's work on baikin8 sector reforms and AsDB's on SMEs.In education, the Bank will lead the effort to support the sector-wide reforms (through the EducationSector Reform) and suDport pilot initiatives such as the nlanned LTT to the Natinnal FihuationAssessment System (NEAS). AsDB and USAID will support basic education and health thkrough projectlending. Tn healtlh, the Bank wil1 cnntiniue tn crnnernt-.P with the relevant TJN agncGies, inliuding aWH,UNAIDS, UNICEF, and UNFPA on a range of common concerns such as HIV/AIDS. The Bank willalso mnin-taini a co-nt.uous dialogule on healkth m vs ri. the .A aT r.d oA o+... l141.w+.l a.d ilat.l

- -- - -A --- tU.lt' --l -Wlt.UC A Culi ulIAL%,La,

donors active in the sector (EU, DFID, the Japanese Government, and prospectively USAID).Pauer;hip U4- 4++k- TT;. T UN 41 faul ;,it fc-- -re tor Pas for- A-1o..;on, gende equ:.1, _ld lboA aiunIMM.OMF TAI IV 1111th U±~JaUMAY£ LW ItsIJ%UUO LUCWL IV aULaI WI Eal11U_~YWULWi19 , 5;iIU.L vI4uLLY, V.dUIU I4vuI

are also important. UNDP is leading the support to the implementation of the devolution. IncreasinglyUle Bank Lb work1ig WitU NGs and otuhler mrem1lbers of civil society in designing and implementing itsprojects (See Annex mI for more details).

75. Partnerships are also central to IFC's work, since it is always a minority investor. IFC willcontinue to work closely with domestic and international investors in Key industries such as gas and thefinancial sector to facilitate new investment. EFC will also work closely with domestic financialinstitutions to help mobilize long-term domestic financing, e.g. through partial guarantees of bank loansor bonds. IFC and MIGA's activities will aim to crowd in private investment. The approach is throughinvesting in, and guaranteeing investments in, projects which have a strong catalytic impact in mobilizingadditional private investment, or which are pioneering new opportunities for private investment, or whichsupport new mechanisms for raising finance.

76. Outreach. An irnportant complement to partnership is the Bank Group's overall outreach.Accordingly, the Bank has increased its interactions with the different levels of governments, thePakistan media, civil society, and business community to establish partnerships based on a shared visionfor Pakistan's development. In this regard, the Bank Group's intensified its efforts to build the localmedia's capacity to better understand and accurately report on important socio-econornic issues andgovemance. The Bank routinely conducts training programs for business and economic renorters usuallythrough the WBI and in collaboration with local universities. In keeping with the Bank's goal of sharingknowledge, increasingy transparencv- and enhancing accoiLntabilitv_ the Bank GfrOni has launchrned a website dealing specifically with its operations in Palistan but providing worldwide best practices and links


to irC and vu'Umiis wcesites. ine Bank Groups outreach will expand Luruier once Farakstn develops itsDistance Learning Center (DLC) as part of the Global Development Learning Network (GDLN), a globalnetwork of interactive classrooms with full muitimedia connectivity to other centers of inowledgearound the world. Joining the GDLN will greatly increase the Bank Group's outreach in Pakistan bybringing WBkl learning and capacity building activities to larger numbers of government officiais, privatesector representatives, members of civil society, and other stakeholders. In addition, and in response tothe feedback received during the CAS consultations (see Annex 1), a special effort will be made to extendthe Bank Group's outreach through more periodic dialogue with stakeholders. This will be done throughwider dissemination of the Bank Group's reports and disclosure of project documents (especially in locallanguages), greater engagement with civil society organizations and opinion makers. The Bank willcontinue also its highly effective consultative process in the preparation of specific projects.

D. Program Priorities

77. The Bank Group's program priorities will be focused on the reforms to (i) strengthenmacroeconomic stability and government effectiveness; (ii) improve the business environment forgrowth; and (iii) improve equity through support for pro-poor and pro-gender equity policies.

Strengthening the Basis for Macroeconomic Stability and Government Effectiveness

78. Macroeconomic Stability. The Bank will support in partnership with the IMF the macro-economic stabilization program agenda to restore fiscal sustainability, reduce internal and external debt,and improve the competitiveness of the economy through supportive trade, monetary, and exchange ratenolicies. The Bank Groun's key contributions will be in inmroving public exnenditure management andsupporting reforms of tax administration, safe and sound banlking, efficient public utilities, and structuralfiscal and governanGe refhrme. Tn particular, the Bank wvill Gnntinue to carrv out the anniul revi-ws ofthe Government's Public Sector Development Program at the federal level and will carry out a National= SCV,li Aaedtjf.flftfl .*te Re ASi., Vto be. tonA ltj t.ed ... *i 03).

70 Cnn...mns,. D a snw T.nmn,rin nnran,nrm+ o# fi.te ofa;Aa ..rntinAl nnA A. Ox+nla701. T--.- VealJ" --t

55;V S *t S..S.-,-.fOO O. AS.LAS., jJ*AJ Vf l , and t.ll.c,

levels, will remain at the heart of the Bank's assistance strategy. The ongoing Project to ImproveI-LUajl,4ial AXp1-7ULig arlu r%UuXlzrl g, Ia.tTLA) I4lU uiilauivU U%l OJWVq-ilUllek1L Lt UdeVeUlJ a INew rkV%A.Vu1LLU1rg

Model which consists of revised forms, principles and methods of accounting and financial reportingmee'ting the requirements of an Integra'ted Financial Management System in Pakistan. Tne PiFRAproject also provides for introduction of a double entry computerized General Ledger system for all

, *_ * 9, , * * s s * X_ r r~~.. - 1 - . .. A . .. 'governent financial transactions in a pnased manner. Specifically, over me GAb penoa, the Bank wlllsupport:

* Furthering transparency and accountability through Freedom of Informnation, effectivefunctioning of the Public Accounts Commnittees, and the establishment of a lasting institutionalbasis for the National Accountability Bureau;

* The completion of the second part of the Pakistan Country Financial Accountability Assessment(CFAA). The first part which was shared with the government reviewed four aspects of financialaccountability: (i) budgetary processes; (ii) accounting, financial reporting and internal controlsystems; (iii) auditing; and (iv) legislative and public oversight. The second part of the CFAAwhich is expected to be completed in FY03 would cover (i) financial accountability underdevolution; (ii) review of internal control practices within Government; (iii) accountabilityframework to support transparency under future governments; (iv) financial accountability ofpublic enterprises/autonomous bodies and quasi-fiscal management; and (v) extending the


analysis to duie pnivate sectoor fiinancial iiiuagement anU MAcoUnUUMEL alyaI1e-work. E,ased u uie

findings and recommendations of the final CFAA, an action plan for strengthening financialaccountability in Pakistan would be agreed witn tne governnent.

* The impiementation of the FiYO i CPAR recommendations, including the establishment of a. Public Procurement Authority and the promulgation of a Procurement Ordinance to foster

competition and transparency through a uniform set of procurement rules at the federal level andacross provinces and public agencies;

* The extension of the modernization of the government's accounting and auditing functions todistrict governments through a second PIFRA project which is currently under preparation;

* The implementation of the first stage of CBR functional re-organization and support thefundamental cultural change within the tax administration, through a PPF at first;

* The development and implementation of medium-term fiscal frameworks at the federal andprovincial levels to improve accountability;

* Policy advice and financial assistance to implement the necessary deregulation and other policyreforms to reduce the incentives for corruntion and improve the investment climate;

* The completion of the corporate governance reforr in the financial sectOr- nidCivl! seric:e reform throughm a.al.,fi-calh .-l *r"a aA - sri- fr, +U.e c.-44-A

implementation of the systems for better performance evaluation, merit-based promotions, anduaiun;ng prograrns, as well zs the, unpFle.-..e.-.ta.^;onU of1% IT1011e VA.o.. s f LVe pay _ULd 1XnIoLL1 S-jStGIlS.

U8. A .' -. l B s suppo..t 5'o g IeIr.&r.ce II . L-e orr lsUI'.clude hdeig. %.IA0 ofriI UI I1-dIeptLI rVVViii4.laeV

and corruption diagnostic surveys which will include: (i) establishing a benchmark for the quality ofgovernance; (ii) prLovidiLng inLp-uts LU a UtioLeIIW1uu govenlance. adu ani-corruption action plan; (iii)promoting coalition building and long-term partnership among key segments of government and civilsociety; and (iv) buildiung local capacity to monitor and assess government performance. Tne Bank willalso support institutional capacity building for oversight and monitoring through training in the areas ofpublic expenditure and financiai accountabiiity, media development, and the interaction betweenparliament and the Auditor General, including support to strengthening legislative oversight onceparliament is reinstated.

81. Devolution. Initially, the Bank will continue to use analytical work, technical assistance, andpolicy dialogue as more appropriate instruments to support the implementation of the devolution strategy,particularly the strengthening of district level capacity to manage public service delivery. Since anumber of Pakistan's development partners are supporting also the implementation of the government'sdevolution program, the Bank will focus on areas where it has a comparative advantage, in financialmanagement, planning and budgeting, and social service delivery. Specifically, the Bank will focus onthe implementation of the recommendations of the part I of the CFAA. The latter reviewed provincialfinancial accountability issues, including the Local Government financial accountabilitv framework.This was possible because the fundamental financial rules goveming federal and provincial governmentsdescribed in the Constitution are similar. and nrovinces mostly follow the federal government budgetarvrules, since financial accountability institutions are centralized. The federal government's ControllerGrenera of Account'q office attaGhed to the Federal Miniftry of Finance, is respc sible for th.epreparation of the Civil Appropriation Accounts of all Governments, from the federal to the district level.

Pakivtan Cnuntrv AsAvitangnp Stratpo-v 2 3

The Pakistan Auditor General's office is responsible for all audits except for those of the smallest tiers oflocal Governments, which are audited by the Local Fund Board. The Bank has already made a start insunnorting the devolution aLgenda in the area of financial management through its dialogue on provincialreforms. The support to Sindh's fiscal and structural reform program includes (i) improving publicaccounkt through imprnved reonrnilintintn (ii) etrencthoniinog n,pnr,ntnhilit-v thrnigh seti.:na lin of ni

effective Public Accounts Committee; (iii) improving budget implementation; and (iv) preparing amr.edim. term.. fin-aricial m. r.agemrn.e.n.t ref...rm.. -.. a

82. .rnt ,h.;l .'*e .inenti en "nd P-er- M..., a 1'b -flBb, p neeAd to r-1ild-A 4i'

knowledge base on private sector development issues given the changes since the last private sectorassessm.en-t ftn 1 MC. Trl ^dAA.44- o r 4.- trla ---v'. ------- asesle-t jo.l,l 1ree by ' t" _r Id~~O~ii~11L1.17.7- J11 OCUUII,14UI LU a11 UUIIVIiaI FA1V4K, bgI.~LVL t%bb11V1JHU J1VFaU1VU Uy Ulu, LU'... 4U

the Bank, in FY02, and an SME policy note describing the key features of SMEs and their constraintskemerigmg Hrum U uLLSiesS s-urvey ConUUULCU M r iV 1), wne nanik Group plans to carry out a signincantprogram of analytical work over the next two years to underpin its advisory services in this area. Theseinclude: (i) A Development Policy Review (completed in r F u) which provides the Bank's assessmentof the adequacy of the current development policy agenda to achieve rapid growth and poverty reduction;and (ii) an Investment Climate and Economic Performance Study (to be completed in FY03). The latteraims to relate key aspects of the investment climate (basic economic infrastructure, and regulatory andgovernance frameworks) with the performance and productivity of private manufacturing firms, smalland large. To build domestic capacity for this analytical and monitoring work in the future, the study isbeing carried out jointly with SMEDA-the Small and Medium Enterprises Development Agency. Ananalysis of the trade regime will also be undertaken in FY04.

83. The Bank will also continue to encourage the federal and provincial governments to pursue thetrade liberalization and modernization of industrial, business and labor regulations that are already underway. In addition, the Bank Group has advocated the strengthening of the anti-trust authority. At thefederal level, the Bank will support the newly established deregulation committee. The latter will helpwith the implementation of the deregulation agenda with soecial focus on SMEs. At the provincial level,the Bank's dialogue and proposed assistance to Sindh and NWFP will also focus on reforms which fallwithin the provinces' purview (such as labor and industrial regulations) to improve the investmentclimate. On SMEs development, given the selectivity principle, the Bank's contribution will be onknowledge, dissemination- and possible technical assistnnce given that the AsDB is taking the lead w:ith

the preparation of a SME project. This project will support the first generation of reforms alreadyidentified in the Bank's ar.al,tical work on the SMws. WC wil cor.tinie to play a lead.ng, role isupporting the development of private financial institutions serving SMEs.

84. IFC and MIGA will seek opportunities to mobilize additional private investment in infrastructure~ nf ~e+n;~ 1.4n W-~~k. A-+-..+ I,. -_+_+ UnT .4..

.., .n o.e face of subsva.n-al. polit.cal riskn wLAuch ha.s beer. .VW.,11, v* a detet LU f1ve, lt.1fL TV iLJUI U1.h1GAU%,L.UV,

the Bank Group will give strategic priority to the development of the natural gas sector. The Bank willcont.inue LU IfoUb iLt assistance11 on al-ytiCal workn whichU hUa LuleuipJnIVU muchn 01 L--h regiiatory,pricing, and policy reforms undertaken in the gas and petroleum sectors over the past two years. An Oiland Gas Seclor Review Will be completed m r Y u3 to assess progress anda iaentiy rurtner opportunesfor growth, IFC and MIGA will aim to mobilize additional private investment through loans andguarantees.

85. in petroleum, the Bank Group will continue to support the government's reform guided by theimportant program of analytical work carried out over the past two years. Over the next three years thefocus will be on supporting the implementation of the deregulatory reforms to strengthen competition in

24 Pakistan Count7y Assistance Strategy

'uhe sec'.or, .- Ad assit;ln vv -uSepr-^; .^;o of +Uhe ";l &nd I-- Developlull To ] ion .- A&nUliO.vAI "LIU CaOOaILru. W'Y It L41%, JJLLY OL*ZaAVl* VA Ut'. P* atm .JLU O t"o ~VV .f-.ytdL~L fULjFlJ. -Ln~n .t m

Pakistan State Oil Ltd expected to take place by March 2003. Regarding mining, the Bank is wellposiLiUUVU LU [respUoU LU WIILL puII iUILI UUUI bouVIUM c LU ar,d piOfvliUX 8UVVLU1IUtZL kSUCh as UIO LrVeVIL

demand from the Sindh Government), for assistance regarding reform of the legal/regulatory and fiscalframeworks and development of institutional capacity to iaciliiate and promote environmentaly andsocially responsible private sector mining development both for coal and for non-fuel minerals.

86. The Bank Group will continue its deep engagement in the power sector reforms. The powersector reforms wiil continue to be supported through policy dialogue and adjustment lending which, bystrengthening macroeconomic stability and reducing exposure risk, is expected to improve the investmentclimate for private investment. In addition, the Bank Group will support through programmaticinvestment lending the privatization of the distribution companies. In particular, IFC will aim tomobilize private investment for the power sector, particularly for the privatized distribution companies.IFC will also continue to act as adviser to the government on the privatization of Faisalabad ElectricSupply Company (FESCO).

87. In line with the selectivity principle, the Bank Group support for transport, over the CAS, will belimited to analytical and advisory services, given the lack of strong pull from the government, theimportance of private sector participation in the sector, and the extent of involvement of other donors inthe road sector. Accordingly, project lending will be limited to supporting the National HighwayAuthority's (NHA) reforms, especially financial management, through the National HighwayRehabilitation Proiect-currentlv under nrenaration but delaved for manv vears due to NHA'q erraticcommitment to reform-provided the NHA's new management shows strong commitment to reform withr.easr 1ale a.oons taken uprvfront. Fi.na"cial support to policy reafnrre ir, 1oftirniay a.A

transport operations will be considered for Sindh and NWFP within their provincial fiscal and economicre-fr__ prograrns.

00. LLiLC .'.. LIIIjUVtU %-LUIMcLAVLj iLs essei I t, L L rL1l.l froWUA, .. cudI...gUUi U14LIll Uof, Al JIUuAuy, andU fo Ule

poor to benefit from technological change, the Bank Group will continue its dialogue with thegoUvermriien onU an adequaie poulicy rUIU -rgulaiory iralnuwurt inUroduce competition against theincumbent and attract private,investment. In FY02, MIGA supported a software development project inKarachi from Japanese investors. in addition, a telecom project was approved by tne Board on April 30,2002. IFC and MIGA will seek opportunities to support the growth of the IT industry.

89. The Bank Group will continue its support to financial sector development, another majorcomponent of the on-going CAS. In particular, over the CAS period, Bank Group support will continueto focus on deepening banking sector governance reforms, support to bank privatization and tostrengthening the regulatory and supervisory capacity of the State Bank of Pakistan. This last outcome issupported through a Technical Assistance for the Banling Sector (TABS) Project. The proposed TABSis a follow-on to the ongoing Financial Sector Deepening and Intermediation Project (FSDIP). It willsupport (i) the completion of the State Bank of Pakistan's restructuring program aimed at modernizingthe central bank and strengthening its capacity to regulate and supervise the banking sector; (ii) staffdevelopment to re-align personnel management policies with international best practices; (iii) thestrengthening of the country's payment systems and credit information services for better disclosurestandards to all stakeholders; and (iv) strengthening the capacity of regulators and enforcers to controlmoney laundering and financial fraud.

90. EFC will support the emergence of strong private commercial banks and Non-Bank FinancialInstitutions through selective investmentq- IFC wAll also piinnnrt the develonment of new producte tobetter meet the needs of the private sector (e.g., long-term finance for infrastructure), and expand access


to financial services to new clients (e.g., the bankable poor through micro-finance or leasing institutions),and to the under-served small and medium enterprises sector.

91. Creating the Conditions for Accelerated, Sustainable Rural Growth. Agricultural trade andpricing regimes have been substantially liberalized to the point that few distortions remain at themacroeconomic level. However, a significant agenda of second generation reforms remain to address theunequal opportunity and capacity to access assets and markets-land, water, financial intermediation,technology and output markets. The Bank will therefore focus its assistance over the next three years on:(i) monitoring developments on agricultural policies to improve further the investment climate inagriculture; (ii) filling the knowledge gap on the policies and institutional and regulatory frameworksgoverning the functioning of rural markets as well as o.portunities for off-farm employment; (iii) seekingopportunities to improve access to financial services with IFC's support; and (iii) supportinggovemnment's Strategy to improve water managemernt and irrirastionn Arenrdincrlv

* A Ruiral Develonpm.ent POlicY Review (RDPR) irl16 be preparedin, Y4 which would assess theadequacy of policies to accelerate rural growth; this would include inter alia an analysis of landanrA c-eAd -,r.-o4- .- A tim --,A.an',4.nmn 4

s n e-.r-e.

=-A Sector o,. on W -, -will be 141 irlr. .o J fl,1r'L ~JL3eLUl 1X-.JUL L on11 VY amImaviXuI %,V IvIcular5MIUMUtl WElMMAUliJ~~ l IU ULLUiJLlLdU

Group's assistance for sustainable water and natural resource management and implementationo0 an iteg-rated iuresry- mranagement and vu watershned uevelopmeni. In aWuiuoon, toe i1aik will

support strengthening the capacity of local environmental and natural resource managementagencies in the areas of information systems, drougnt preparedness and management, andmonitoring and enforcement.

* The Bank will continue its support for policy reforms and institutional capacity building forimgation and drainage under a restructured NDP. The provincial governments will be eventuallyresponsible for sector policy and regulatory oversight only.

* EFC will support the development of private micro-finance institutions to extend theirgeographical reach in rural as well as urban areas.

Supporting Pro-Poor and Pro-Gender-Equity Policies

92. Promoting Education and Health for All. The Bank Group will support the I-PRSP's coreobjective to empower people by creating greater opportunities for increasing real incomes by improvingaccess to education and health services, especially for girls, and to safety nets programs. The Bank'ssupport to these three areas-promoting education and health, supporting pro-poor rural developmentand community infrastructure, as well as supporting targeted poverty alleviation programs (PPAF, CIP),reflect their importance as well as the Bank's comparative advantage.

93. Education Reforms. The World Bank Group's assistance strategy will be driven by support tothe implementation of the Education Sector Reform (ESR) Strategy. The Bank support will focus onthose interventions in the education sector that would help the groal of achieving universal nrimarveducation, with particular focus on improving the quality of education provided, and giving priority tothe poor and disa.idvantaged, particularly goirs and child ren in nral areaS. Tin pariculGar, increasincgchildren enrollment will be crucial to the fight against child labor. Accordingly the Bank will focus on:(i) sector *Adjustm..+. I-A.din to suppor t.+h.e aioa VuA.-44- SectoDr- CPvefor . /ttO;A(i s-,-ort to.rnjto- - - -b. rnn -t. Ot.- JtFW. *A. -- f'Jf~l .J.0.ltl JltJ - - -Stfl lii L%L I ULL 0tV&j, kLIJ OUJJjUL L LU

the National Education Assessment System through a LIL; (iii) a program of analytical work to underpinUlf, policy Uialogue Uulllr Ul.e ilellllll4LUVl VI Uof uLe rS;l anU iLV) pLUVIlAX-IJUNU sLLuppOri to

26K PA.-ictan rntn,ft., A vritan,p Nfratpov

implementing the ESR within the fiscal and economic reforms of Sindh and NWFP to start with. Futuresupport will take the form of outcome-based programmatic support for district delivery of both educationntid he2!th qerviceq The siinnnrt couild alsn inclu-de advice and tec'h-nical aqsistance to reform hiaher

education along the lines of the Bank Group's global and Pakistani specific analytical work. IFC willcePPr nrnnmtiniti pc tn invPQt iin ?nrivntP Plltfllntin ,nviuPrd

9A. 'The Bonnlr Group assistin.ce on keanth saetor rpfrm, u,ll C.a! unrot 1-h. gof.M.rly t'a prw orty of

strengthening the public health programs-iimmunization, communicable diseases such as malaria, TB,TXn/AM A r ; -,d.+..a-.d .. l .-. Al. &-.d ;IA pl-n:,n.- T , - O U;. _ffe +U_. Bar-1 -. 11 - mu.14-1leIll v .' nas.J, an% Lt. *UflA I*U anti Ut.Ini iit.AILi .Ui% .AuuiLy FI.ULXIii.A& .% ULLO ~ n'LU.L J.it WRIt~~-.. tACt'SiULjf-

instruments, including analytical work, technical assistance, policy dialogue, and adjustment and11VesUIL1L ilHiuHIg as pUpiUJ[pII,t. C... Will sVee UoJpUpLU LILes Lo uIIVesL uIs piVULV IIV4IUI1[LVr proY-UVId.

95. oru-XUUr rurw& 1nJru3&ruivS"r unu dcrvicey uand .ouci" XrutecugIn. .uppunLiUi 'uicudee Lilig

of the rural asset base through rural community-based infrastructure projects (particularly for watersupply and sanitation services) and tie spread of micro-credit nave been part of the Bank Group'sstrategy to reduce and mitigate risks for Pakistan's poor. The Bank's efforts to support key investmentsin rural infrastructure and support services are designed not only to promote more rapid and sustainedrural growth but also to directly attack rural poverty and support social protection. Since the 1998 CASprogress report, the Bank has integrated social protection in its operational work through its support toimproving the delivery of basic infrastructure and access to micro-credit through conmmunity-drivenprojects such as the NWFP Community Infrastructure and Services Project (CIP) and the PakistanPoverty Alleviation Fund (PPAF). The NGO-implemented infrastructure and micro-credit schemesunder the PPAF is a very successful scheme which will be scaled up during the coming CAS. The on-going PPAF has already provided loans to over 60,000 borrowers, over two thirds of which are women.Building on the experience of these community-based approaches, the Bank is currently preparing aCommnunity Infrastructure and Services Project (CIP). The Bank will continue, under this CAS, to pilotnew approaches, and also help scale up those which have proven effective such as the CIP and the PPAF.A programmatic approach is key. This enables the government and the Bank to tailor projects to theparticular circumstances and needs of individual provinces and districts, leaming and adjusting as theygon and scaling up as successes are identified. A sncial risk assessment is also planned for PY3O whi-chwill also help underpin the Bank Group's integration of social protection in the Bank's future operations.

96. Pro-Gender-Equity Policies. Since Gender equity is an issue of development effectiveness, theBank Group plans to intersify its e.fforts tn maniinstream. gernder inte com.ing CAS e m..ost effectivepolicy through which to improve gender equity is better access to and quality of education and health,

Ut'UJl 13 UJ t wor..e.. etALLt t'iiuiti-., b.0 especially. Uu thisIV-onAt, LLt' BLk JIVUjJ WAu "ill assist .UIe

govermment implement the component of the ESR focused on boosting incentives- through voucherssystem, food for school, and other targeted subsidies-to increase gieis enrollment. Sindh has alreadymoved in this direction with its successful food program (providing edible oil for girls who attendschools) which has increased giris enrollment. Women's empowerment is a prominent component of theBank-supported education, health, CIP and PPAF.

97. A significant program of analytical work is also planned over the CAS period to show theopportunities that gender-responsive policies create for enhanced growth and poverty reduction. TheBank, the govenment, and the other donors, including UNDP and DFID, have been working together tostrengthen the government's analytic capacity on gender sensitive policies. The Banl: has a povertyassessment underway, with a survey geared to capturing gender issues with a view of informing publicpolicy regarding the formulation of a gender strategy. A country gender assessment is planned for FY04,which would provide the knowledge base for future Bank's policy dialogue and operationalinterventions.

Pakistan Country Assistance Strategv 27

98. A rural access and mobility pilot initiative-currently under preparation with JSDF support-isexpected to recommend ways of improving rural women's access to markets and social services. Supportto rural development strategies at the federal and provincial levels will hi2hlight the need to ensureproperty rights for women. The Japanese Govenmment's funded JSDF program will continue to be usedfor niloting innovative social nrograms designed and imnlemented by beneficiaries with high potentialfor improving the living conditions of the poorest and most vulnerable groups.

IV. WORLD BANK PORTFOLIO AND ASSISTANCE PROGRAM

A. IBRDIEDA PortfoI;o Management

99. Portfolio Management Strategy. The quality of the Palistan portfolio has improvedconsiderbahly, althnloglh wrnhblae.s af'f't'ingc t.w.on mna>r ,n,pprt,ip rpmair (epp inana 1C)A. T n FVOR .inith A1

projects, it was ranked among the 25 worst performers Bank-wide with more than 50 percent of projectsand Cconlt"at risk". Si.ce then, ulele has zAll z tic c4nge M w...A1lla. nc,-ethe size and the quality of the portfolio as well as the Bank's approach and strategy for portfolio,,riarage.,lsinL..

100. BegL)L.L1 111 Ul li' F 1 70, u1e iuall, LU .eu1L WIUI ULF I.e.4ll anUU plUVUlLLaLl gVoVlUJ1ulit0, UllU0.Ge

an aggressive portfolio improvement strategy. The traditional project-based approach was supplementedby a more systemic vision of portfolio management based on outcomes, ownership, and goodgovernance. Quarterly portfolio reviews with the Federal Finance Minister and periodic- provincialportfolio reviews are now the norm. Building on this portfolio strategy, two Portfolio improvement Planswere developed in FY99 and FY00. The number of projects in the Pakistan portfolio declined from 41 inFY98 to 16 as of May 3, 2002, with outstanding commitments of US$1.5 billion (net of cancellation).The decline in the number of projects was the result of two actions: (i) a 'no-extension' policy outside of"force majeure"; leading to closure of 32 projects; (ii) few new entrants to the portfolio in FY00 andFYOI, relative to closings, as a result of enhanced selectivity and "quality at entry" criteria. This trendhas already been reversed starting from FY01 due to this government's strong track record in reformimplementation.

101. The Bank is now engaged with the clients on key thematic issues affecting portfolioperformance. In this regard, the Bank has initiated thematic portfolio reviews-on impactloutcomeindicators and on social and environmental risk management-with senior policy makers as part of astrategy to mainstream these development challenges within the Government's own monitoring andevaluation framework. A workshop was held in March 2002 with key government staff to disseminatebest practice on "outcomes" measurement. Portfolio performance has been turned around to some extentalso with the heln of field-based sunervision teams working closely with the government and reducingresponse time. Projects are now managed with increased participation of communities and beneficiaries.Thew Bank has alson trenothened its safemnirAQ oversicrht hv strenathpiina financial mrnnagpment andiinternal controls and providing training to clients on Bank procurement guidelines. The Bank willcontinue to aggressively pursue its objective of a lean and clien.t driven portfolio 1,r the CAS

1 no. Rencomii7ziny thot "gonnA nalithy sat ent-y" anA frstrong dient nximernlin are v,-v otnrc 1k1,inAsve~~~.*- s _o ,>L zv -1-- .. ._, "**vsb _ _ UfOSl X-v * … 1mm ~ -wov_

portfolio performance, the Bank weeded out from the portfolio all operations which were not driven by asutrg Full vor4AA whr W11.l4pFYle.ltlal 1111act'Utcorr.JL e -. claly UdefrLVUe. As a IrUsLt, Ulu

Bank's "work-in-progress" has been reduced from over 30 projects in the pipeline to 12 projects in theC'UIrlenIt lenldling pipelinle Withll slighLly over US$2 m-illion "0wo-rk-,in-progress" budget.

28 Pakistan Countrv Assistance tratev

103. Using the lessons learnt from project implementation and taking into account the emerging clientneeds led to the restructuring in FY01 of two major high risk projects, namely the Second Social ActionProgram (SAPP2) and the National Drainage Program (NDP). The scope of the SAP was substantiallynarrowed in light of government's changed human development strategy under the new devolutionsystem. The Rank has recnmmendned diwnsi7ina the NDP tn alion it hetter with the newjv Federal andi

Provincial governments priorities.

104. Portfolio Performance. As a result of the above measures, portfolio performance improved; there-.n.be of '9prn eto at rtcV' ixrent 41,.uM frno V) 52 -pe,,t i PVOQ to 6 per_e.pit i PV'l iola

"commitments at risk" decreased from 54 percent in FY98 to 21 percent in FYOI (see Annex B2).t1-1-er these -4-n e-e erLodedA m_ +U-e r-+s .. 1lf of L.I 02 because ofr +Lt-ee larg p.-oblellpr1LASJW~V~I,V L110. rL IGU W~I% LU'.L%U LAI UL% LLI.3L LGIL VI± IL A Vd', uL.aa ,I uu,% IaLr5%; FJIvu"IdU FJAvJ%,.Lw

SAPP2, NDP and Ghazi Barotha Hydropower Project (GBHP)-which account for 60 percent of the___- -_:__ __ r:_sv: c ArTM% v__ _ i _s_t__ _ _:.s ___ _ _ _.. __svremaining purIu11u. vv Lnn antrrF nMb UVii Hi prUUIvIn plUJV;;L slaUb ur UnL pUaL 'LWO Yab, Lnt

remaining two (NDP, GBHP) have been downgraded to unsatisfactory performance in the last fewmontns. As a result, "commitments at risk!' have increased again from 20 percent in F1'uii to 60 percentat end-December 2001. The specific factors behind the unsatisfactory ratings for these three projects andactions taken to address them are:

* The restructured SAPP2 is now being implemented satisfactorily but will be closed early in June2002 with a U rating. The U rating for DO will not be removed because the time span sincerestructuring is too short. The SAP2's restructured component accounts for about 15 percent oftotal credit, the remaining balance has been fully disbursed. Efforts over the next few monthswill be directed at ensuring satisfactory implementation of the restructured component.

* Regarding NDP, the restructuring recommended by the FYO mid-term review--reducing theimplementation to only one canal command in each province-has not yet been implemented.Sindh has accepted the recommendation to focus on one canal command which has led toimprovement in the implementation of the project in that province. But since the institutionalreforms underpinning the project are not widely shared by all government departments, andthere are comnlex inter nrovincial iSqSUeS the other nrorinreq are waitinor fnr the

recommendations of a Government's commission which has been set up to examine options toreach a consiensus among all the 4akeholderts on the scop~e of reatviicturng. The c:oim..ission .hasjust completed its work but it will take time for the main stakeholders to reach consensus.

* Regarding the GBHP, major disputes on claims emerged during FY01 between WAPDA and themnain con-UCtor, a consolumU1n IVU uy ulv Iianw I.aI WHIy MLuprVVgiiU. iLne dUspULt UdvlIoped into

a crisis following the contractor's evacuation of the site after the start of the Afghan war. Thedispute nas since Deen resolved. As soon as tne agreed upon financiai settlement is honored andthe contractor resumes work, implementation progress is likely to pick up and ratings areexpected to De upgraded.

* By early FY03, with the closure of SAPP2 and resolution of issues related to the other two largeprojects (NDP, GBHP), the "commitments at risk" are expected to fall to a single digit.

105. Outcomesfrom the last CAS. The last CAS was discussed by the Board in December 1995 andthe CAS Progress Report was reviewed in June 12, 2001. The volume of IBRD and IDA commitmentswas linked to the strength of Pakistan's reform program, maintenance of macroeconomic stability, and toprogress in social sectors. In addition the level of IBRD's commitments was linked to irnprovements inthe country's creditworthiness. In early 1997, policy reforns had been slowed and Pakistan was in thelow base case. In fact, after lending US$420 million from DBRD in FY96; there was no EBRD lending in

FYV7. Lending from IDA also fell dtring those vears- averaging only US$80 mnillion ner year. With theimplementation of a comprehensive package of macroeconomic stabilization and structural reforms, inFV98, PaL,St&n, r,nnv,A i nto th.e High. Bae. raep sernpmrin TIn YVQR IBRRT nrovvided IUS250 million for

the Banking Sector Adjustment Loan, and IDA provided a total of US$558 million (including for theSocial Action P - -.-ogrn. a .AUTf.4 -10 TL"#lA1.a .- 11 -Jra t * tD'J UO.

1 A. TIn FYV9O ar.A A-- - -4...efr. l, io,,ny. .anrpqo, r. a r..r.n.ber of key irea, -ti.iarluILIV. JUL 1 LX11 W L JAflfl, VT11 tjL111 JJlf A*J_A~llLtl 1 * 1 L 1fJ - o -- a)

in power, banking, and govemance, Pakistan remained in the High Base Case lending scenario.A - 1- rnrflXTn Tmn"T% TT041CA 11.... -.. A AAZ..-.....l 1,... -UZI. TmAAuccrdingly III r 1 77, IDJn1J jLJUViUV US$O.D350 IUIILUIt foI a S0UUU.LUr1 SVUJUs.U1W11L lar1 wil. e WA

provided US$90 million for a Poverty Alleviation Fund. Sustained implementation of the comprehensivereform program as envisaged in the 1999 CAS Progress Report was expected to lay the basis for lenldingat High Case levels during FY00. That never happened. Reform implementation slowed down overFYOO, with a worsening of the investment climate as the Nawaz Sharif govemment engaged in a verydamaging dispute with Independent Power Producers, NGOs, and corruption became rampant. As aresult, the Bank stopped lending over FY00 and focused on non-lending services.

107. The positive developments in Pakistan in FY01 provided the basis tor a stronger operationalengagement by the Bank Group in FY01. Accordingly over FY01, the program of assistance included aStructural Adjustment Credit for US$350 million and investment credits focused on supporting reformsto improve the investment climate and the delivery of basic services. These included a Trade andTransport Facilitation Project for US$3 million, a US$21.35 million project to support water resourcemanagement in North West Frontier province, and a GEF. A Banking Sector Restructuring andPrivatization Project (US$300 million) was approved in October 2001. The assistance over FY01 andthe first half of FY02 was supported by IDA as outlined in the CAS Progress Report discussed by theBoard on June 12, 2001.

B. Donor Coordination

108. The Bank Group will continue to play its role of bridging partnerships between the Governmentof Pakistan and the donor community. Over the past two years, the Bank Group has increased its focuson donor coordination and continued to play an important role in intermediating information on theaovernment's reform program and implementation record to donors. It has also encouraged thegovermment to communicate with its domestic public opinion makers, and other major stakeholders aboutt.he Ma.in, nhipJptiu-eC of the fi1nd_.mPntn1 ref.fnrms heing irnpmlepentpd mnd th5 tmk-c rrnord todate to hn.ild

consensus around the reforms.

109. The government is therefore taking the lead on donor coordination. A donors meeting was heldin Tlaniabad in March 1_*e fr dn r.eet.. a flk ee At A rat

information about Pakistan's reform program and its implementation record and seek the support of theU017101 'UVUUIIIUrLLY LVI 1LO M.IL1U~UM IIJSISI4II.IUUU "lilr U1, .1 GL.1DL411 LJUV,VSAJJk1SA,1t E-ULU4AII LI

Islamabad was to allow the entire Federal Cabinet, provincial ministers, heads of key public agencies-tne "change leaders!!-and businessmen-wno were invited to attend and speak a tihe Forumi-oparticipate. The location was also to enable development partners to learn about Pakistan's EconomicRevival Program, in the local grass-roots context and see for themselves that the government is truly inthe "driver's seat" and that its program represents a "real break" from the past.

110. Learning from this positive experience, the government invited its partners to a HumanDevelopment Forum which was held in Islamabad in January 2002 to elicit donors feedback on thegovernment's human development strategy and seek donors support and stronger engagement in theimplementation of the strategy. Building upon these positive experiences, the provincial governments of

30 Pakistan Country Assisirance Strategy

Sri dii anU n4wrr are aiso seeIng 'o Wilgage 'UULe- doo0 - comimUl'niUyU U In 1 e I I UI1JrL11rLLtaLW11 VI Uof U

provincial reform programs and poverty reduction strategies. A Sindh Development Forum was held inFebruary, 2002; another one is being planned for NwrP. Tne second Pacistan De-velopment Forum(PDF) was held in Paris on April 29-30, 2002. High level representation from 14 bilateral donors and 18international agencies attended the Forum. For the first time NGOs (inciuding 'TransparencyInternational) were also invited to attend the forum which was also open to the press both in Paris andPaiistan. This was followed on May 2, 2002 by a Private Sector hnvestors' Forum and a discussion onthe Government's I-PRSP. Both events were attended by a large number of CEOs representinginternational and Pakistani businesses, academics and members of influential think tanks.

111. Facilitating partnerships and donor coordination will assume an even greater role over the CASperiod now that sanctions have been lifted and many bilateral donors are reviewing their assistancestrategy to Pakistan with a view of scaling it up. The Bank will continue to facilitate the annual donorsmeetings as well as provincial and special topic forums on Pakistan's development. The Bank will alsocontinue to support other donors initiatives to organize thematic donors meeting.

C. FY03-05 Lending Program and Implementation Chalenges

112. Despite the implementation of very tight macroeconomic policies, that have already led tocompression of imports and falling current account deficits, Pakistan's external capital requirementsremain large. Current balance of payments projections indicate that through 2003/05 Pakistan will needover US$5.7 billion (US$1 billion for 2001/02 alone) to finance the reforms under the I-PRSP.

113. Creditworthiness. Pakistan remains a heavily indebted country despite the recent Paris Clubrescheduling. Pakistan's total external public and publicly guaranteed debt stood at US$31.4 billion, or53 percent of GDP at the end of June 2001, and is exnected to rise to UTS$317 hillinn (45-8 percent ofGDP) by June 2005. Debt service as a share of foreign earnings is estimated to fall as a result of the debtrp-'es1.Aelina frnm. 29 pr'epnt in 20f01 tn lindAr 22 tperprpnt in 2005. Th. preser.t valiiu nf lnng- twvmpublic and publicly guaranteed external debt to exports fell by 30 percentage points to around 230pe-.-cet i.n fisca 20.2, -r.d *v1 realch aU lev-l close too 210 per-cer.t ;. in A . fill. abUov t, 4-ndiati. Vt

level of sustainable debt (150 percent) for HIPC countries. The debt service to IBRD as ratio of exportsUf gooUs iUU DLticeVM,V aL 37.J Fec.L,V.11 LUt inJ201 Ls UbelW UIVs pVLrc.Lt11L gU1uridel.V L.WUL1L,UUU V ul DIU.J

lending and is projected to fall significantly to 2.6 percent by 2005. The preferred creditor ratio (debtservice Ct preferre creditors as a raMiUo Uo W't a p-ublc debt servUAce)b5.3 percent in 20Ui/02-iS weiiabove that recommended by IBRD exposure guidelines (see Table 4). This is the result of recentbilaterai debt reductions and past initiai non-multilaterai iending to Paiastan. At this level, Pakistan isonly marginally creditworthy for IBRD and the government has refrained from borrowing on IBRD termsfor FYOO-01 and is not expected to borrow at those terms in FY03.

114. Given the strength of the Government's I-PRSP, its implementation record ito date, poorprospects for higher private capital flows particularly given the current regional tensions, the largefinancing requirements, and high indebtedness and poverty incidence, the Government oi Palcistan hasrequested an increased access to 1DA13 allocation to finance the comprehensive federal amd provincialreform program. The Bank's level of financial assistance over the next three years is a key element ofthis CAS.

PnIdictan rOunt v Assistance S1rategy 31

Table 4: Debt Service Ratios

2000/01 2001/02 2002/03 2003/04 2004/05External Debt/FE Receipts 273.8 255.7 240.4 225.9 210.4DS/FE Receipts 29.4 29.4 26.0 23.4 21.7LDXJSLJW.oLL aJpJUU1b Lc D:.0 . 1i.J 11.1 11. 1.2

IBRD DS/exports of G&S 3.5 3.1 2.9 2.7 2.6Share of IBRD oortfolio 2.5 2.3 2.1 1.9 1.7Preferred Creditor Ratio 45.8 45.3 51.3 54.9 53.4

115. IDA AUlocaton. Given these considerations, and the likelihood of an increase in demand forBank's assistance from the provinces, an SDR 1.0 billion (equivalent to US$400 million per year) IDAallocation has been set for the base case and SDR 1.4 billion (eauivalent to US$600 million a vear) for

the high case over FY03-05. The Bank will resume IBRD lending only under the high case and startingfrom FY04.

116. Lending Scenarios. Three lending scenarios cormbininag policy based le.ndinrg and inv.ectm.entlending are envisioned for FY03-05 (see Table 5). Following the completion of the full PRSP, a CASProgress Report -All be prepare,A -4,1, ll outline any . ui44-+ar to thAe ass,stonce nron, and +the

triggers that are considered necessary to fully align the Bank's program with the PRSP.

Table 5: Illustrative Lending Scenarios - FY03-05(US$ '000)

FY03 FY04 FY05

IDAInvestment 200 200 200

Total 200 200 200l~~~~~~~~~~~~~~~~

mA

Adjustment 150 200 200Investment 250 200 200

TOtl 400 400 400

!SAAdjustment 350 300 300Investment 250 300 300Sub Total 600 600 600

IBRDAdjustment 0 300 300Investment 0 0 0a U *UL1 V .3uU 3 00

Total 600 900 900

i i7. Lending Triggers for Bank Assistance. hne lending scenarios will be guided by two sets oftriggers; (i) entry and exit triggers linked to provincial reforms; and (ii) global triggers linked to each ofthe three pillars of the assistance strategy, macroeconomic stability and governance, enablingenvironment for private investment, and human development (see Table 6). In addition, the SACH andfollowing adjustment operations, include detailed short-and-medium-term triggers for each of the threepillars of the assistance strategy, macroeconomic stability and governance, enabling environment forprivate investment, and human development.

118. These tg;cero oh.ould be inter-preted as indiatin,g the key areas of depn reforms: (i) macrnstability; (ii) governance; (iii) enabling enviromnent for private investment; (iv) human development; and(v) portfolio mana-germent. Within .those, the bullet are inAdicators t+ht t-jl be used t caA oae rroe in

each of these five areas. These indicators are not intended to represent prior actions. Theimplemenitationl of so,-Le o'ffiv,se refLS c-an On be don re L-. Le

in each of the above five areas will be needed for the high case. Failure to show progress iin any of thefive areas above will move Pakistan to ihe low case.

Table 6: Triggers for Bank Assistance Over FY03-5|

Low Cas I Base Case mHig uase

Of f-track * On track-as demonstrated, for example, by * On track-as demonstrated, for example, by meeting allthe fulfillment of the PRGF fiscal and PRGF performance indicators and benchmarks in

* OM-tracK . I ne functionai reorganization of CBR nas * CBR will have completed its humnan resourced audii,been completed. implemented its reconmnendation; new recruitment,

* A Tnrg,e TanY Pave Init will have heen performance assessment, training, and promotion policiesestablished in Karachi established

* A new performance-based pay-scale for CBR wifl haveDeen approvea oy government Rightsizing o0 CBRpersonnel based on skills needed will have started

* CBR performnnce i dir_tni,r shared wih the puhlir *^ n

| regular basis

Financial ,Man2aament

* Off-track | * PACs current in their review of past audits * Federal and provincial governments have agreed to aI* PACs : - I ............ time-bound programn to assign public accounting and

e PACs cu-_nt in mi- - audim atresy responsibilities among the federal, provincial,new government and district governments. A new human resource policy

* Regular and Accurate Audits far the feder_and,wnvincialACpOUntinoandA,,di

* National Procurement Ordinance cadre definedpromulgated * Extension of PIFRA reforms to Districts to strengthen

fiduciary framework

* Satisfactory Implementation of National ProcurementOrdinance

Civil Service Reform

* Off-tsck * Merit recruitment * Implement civil service training plan

* Initiation of pay & pensions reform | Follow-through on Pay & Pensions Reforns

Improvement in professionaVACS ratio

* Satisfactory | * Improved Performance of the Regulators (oil, | * Deregulation Comnmittee will have amended laws togas, power) and anti-bust bodies. reduce unnecessary regulations in the arnas of. (i) labor

* Approval of telecommunications legislation; (ii) health, industrial, and environmentaliiberaiization policy regulations; an.d Rrii) SOs

* Bring to point of sale * Competition Law Ordinance Issued to replace theI I N bib,. .BL . IMonopoly and Restrictive Trade Practices Act of 1978

|N|*KECBs abb L * MOST to complete operating license documents for new* KESC ICT entrants

l -* .wWv | * No new tax, duty exemptions, or special privileges forincome tax, custom duties, or GST. No new regulatory

I I I~~~~~~~~~~~~~~~~~~~~~~l.e dubes. hca out oftirni;-..hn,,n r.neglc*ws ;,Thmnpv dutivs

* Bring to sale 2 Discos, PSO, OGDC, PPL, PTCL,

National Bank

I __________________ l ___________________________________ | * Fertilizer Policy without gas subsidy for new investme t


Table 6: Triggers for Bank Assistance Over FY03-05

Low Case Base Case Elgb Case

* Satisfactory * Budget allocations for human development * Promulgation of Provincial Finance Awards (perand pro-poor expenditures increased to 4.4 province) regulating transfer of resources from thepercent of GDP provinces to the districts

The consolidated budget allocations of the * Share of human development and pro-poor expendituresfederal, provincial, and district govemment in the consolidated federal, provincial, and districtbudgets for education have increased to 2.0 governments budgebt increased in fiscal vear 2002/2003percent of GDP to at least 4.6 percent of GDP and for fiscal year 2003/04

* The imnplementation of the National Health to at least 4.8 percent of GDPPolicy has been strengthened through the * Education, health, and population expenditures inlaunching of the enhanced Expanded consolidated federal, provincial, and district governmentsImmunization Program for children; the budgets increased in FY03 and FY04 in line withstrengthening of the Lady Health Workers recommendatons from Public Expenditure Reviews andProgram through the hiring of new workers, full costing of reforms under the PRSPthe expansion of uithe TubC luai5 flo conuo1 * The coverage of the Expanded Program of hITnunizationproVgram; and the formulaion of a naional for children will have increased by at least 5 percent fromstrategic HIV/AIDS prevention prograi 50 nercent in FY02 to 55 peent in FY03Proposals for implementation of the * The government will have hired 10,000 new Lady HealthExpanded Progam of Immunization for Workers (LHW) for a total of 78,000 workers to achievechildren approved by federal and provinciai the target of 100,00 LHW reaching 100 million womengovemments and children by 2005

I Iic * egove-Iisiiiw Will ia-ve LtillIIuni rpUIo llluililiul

of the expanded HIV/AIDS prevention program.r* Programs of capacity buildine with a focus on budgeting

and financial management will have been implemented

* Continued monitoring of human development outcomeI indicatorsl

* Comntitment at risk * Commitment at risk under 25% * Commitment at risk equal or under 15%over 30% * Disbursement ratio equal or over 15% * Disbursement ratio over 18%D uisbursementratio

|_less tban 15%_l___l

119. Entry and Exit Triggers for Bank Assistance to Provinces. Pakistan's provinces face a fiscalcrisis-itself the resuit of poor governance and economic management-which has crippled their abilityto deliver on their mandate. Since a significant volume of the Bank's lending program is linked tostructural reforms to improve the provinces' fiscal performance and strengthen their capacity to deliverbasic services, the Bank's lending program will take place only under the high case scenario and will beregulated by the following entry criteria.

* There is a reforming government at the provincial level with committed "reform champions" atthe top and capable reform leaders within the administration.

* The provinces would have already initiated a number of reforms to restore good governance andimprove their public finances and public service delivery. This includes:

O Fiscal discipline translated into reduced short-term borrowing for deficit financing

O Improved Performance of Financial Management Commlittees and PACs.

O Initiation of civil service reform including pay & pensions adjustment, rightsizing byeliminating positions as per skills requirements at the pDrovincial and in autonomous andsemi-autonomous bodies.

Paiustan ountiry Assi-sance Strate 35

E. Monitoring and Evaluation

122. For the programmatic approach to succeed, the Bank needs to significantly enhance its capacityto monitor intermediate targets and final outcomes-be they policy reforms ai the national, provincial,district level, or of individual projects-and to incorporate the lessons learnt in future work. The Bank isalso working with the government on developing poverty and social monitoring systems to track changesin key intermediate and outcome indicators, including access to public services as well as income andnon-income dimensions of poverty. This includes: (i) monitoring spending (disaggregated by economicclassification such as salary vs. non-salary) in important sub-sectors such as primary education, healthand safety net programs; (ii) adopting a national poverty line and updating it; (iii) selecting priorityindicators for monitoring poverty outcomes and related intermediate targets, incorporating genderconcerns; and (iv) building technical capacity, particularly in the provinces and districts, for effectivemonitoring.

123. The success of the Government's poverty reduction strategy as well as the effectiveness of BankGroup support for that strategy can be judged ultimately by Pakistan's progress towards achieving theMillennium Development Goals (MDGs). The Bank plans to suDport the Federal government to bettermonitor these and related key development outcomes (see Annex IV).

V. IFC PORTFOLIO AND PROGRAM

124. Over the past three years IFC has focused on restructuring its existing portfolio, while helpingclients to restructure and strennthen their comnanies. It is nearin8 conmnletion of the reqtructuhrin ofinvestments in three cement and two textile companies. As a result, Pakistan now ranks as IFC's 9hlargeszt enxrntre. dnwn from Ath in !Q9 TIC's disbhursed own acounmft portfolio is cu rrPntly US442.4million in 48 companies including US$76 million in equity. The B Loan portfolio is currently US$229rriv,l.on i,n I1 1 pnnm o ties. T hie biggt e posIe isa i t3 6pocer sctor: 36 npc.t of the A moan portfolo

*Afl*SSS U fl.*~~A*~J. 5aU- . S T * Q'.J..t * -- -l * -W ft ......

is in five IPP projects. All five IPPs are operational and four are current (Uch is currently beingreasut^ut-c.-Lu-vd.4

i~~J. IUa. l UUILJ LU UV LLVW UL&OLLV,0 LO %AJ1VUIOUQLJU U)' ILW UUIIL3 LU JP1UV1UU LoUII1JJ.LILIYV IUiIl1~

IFC's equity and foreign currency loans are unattractive because of the high country risk premium. IFCis iieref-urc expioruig provuidmig local currency financing by means of parial creudit guarantees.

LAO. iI r I VI, JC l,ha oUIUULLeU a US$a3 HiULULL tA loan in upprL01 o.fl. iiie B -GS DeCvCIopment

project, and will invest in two microfinance institutions. EFC sees good prospects for further investmentsin gaS and mining, where clients value Lrk's poliiical risk mitigation. irC is also pursuing opporunitiesto invest in financial services, manufacturing (especially garments and textiles), telecoms, health andeducation, ri and SMEs through partial guarantees. New investment is expected to be in the range ofUS$150-250 million over the next three years which will keep IFC's exposure near existing levels.

VI. MIGA PORTFOLIO AND PROGRAM

127. As of March 31, 2002, MIGA has a gross exposure of US$92.3 million in Pakistan representing1.9 percent of the Agency's portfolio. The portfolio is diverse, covering 7 investments in the financial,infrastrucwre, and manufacturing sectors.


ViH. IOPERATIONAL DECENT (ALIZATION

128. Tne South Asia Region initiated a umndamenial shift in organization, culture and work processesin July 1997 with the single objective of strengthening client effectiveness. The unique character of thenations of South Asia created the opportunity for more strategic choices in where work was conducted:in the country itself, in Washington, or in another location in the region. To that end, the Bank's SouthAsia operations have been significantly decentralized to the field already. A powerful global team wasformed, co-located between Washington and the field, teaming global knowledge in Washington, andproximity to the social, cultural, and political business context of development work in the field.

129. The management support structure in South Asia, including for Palistan, consists of CountryDirectors (CD) in country offices and Sector Directors (SDs) in Washington, working as ai global team.SDs remain in Washington to work closely with network families and sector boards. For Pakistan,experience has shown that having the Country Director (CD) in the Islamabad Office has huge benefits.Some of the Sector Managers who complement the managerial role of Sector Directors will also belocated in country offices further strengthening technical capacity in these offices. Task leadership isbased on competencies, business needs and skills (not location). There has been a large increase in field-based leadership, for AAA as well as lending tasks including supervision. Recruitment strategv forsector staff located in Country Offices, within the context of sector strategies, is to hire the best andbrightest South Asians (some living abroad and willing to return home) For Pakistan, theimplementation of the shift to province and district-based CAS over the forthcoming three years willnene'citnte q hicgher deoree nf nnoratininl denentrmli7ntinn ann n cornsequent renewal nf sLills

130 S(AR has no core service init in Washington Tin October 2000, the RegionalR Mancage.mePnt Teamagreed a "hub" concept for regional services could strengthen client service and mitigate against theWorld Bank tanking responsibility forwork that should be done by t-he bA, wh-,ile r,ai.-,;,,,ir.gfiduciary control. Subsequently regional procurement and information management hubs wereestblished_ ;u Tnda4. to p,r-ovid -,4-c to all Co,n, Ofies:, ;.-eg.on, '--Ilu ... g P 3 s'-n *s.'I.3 LaUlO %J U ii W LJVL%& Oi VV...L LU all 'kLl ..WILAA.0 Lill UIIL LIL- 6U1k, nwllJA.iUrn rd.kL;niu, lubJL'u1g

in consolidation of some procurement and information management functions from both Washington andother Country Offices. Fancial Manageet and Reso-urces Mvanagement functions are beingstrengthened in Country Offices. There are Human Resources Officers in the three larger countries,Paidstan, india, and Bangiadesn. Legal has just established a "nub" in india which wiii cover aiicountries in the region. External Relations has been asked to consider ways to move work to CountryOftices.

131. Feedback from governments is positive, the Bank Group is better understood, and responsivenessand product cycle-time have improved. Quantifiable improvements are being seen in the quality ofportfolio, economic and sector work, and supervision.

VIII. RISK MANAGEMENT

132. Palistan's economy faces serious challenges and major risks emanating from a variety of internaland external sources. The main risks associated with this CAS are highlighted below.

133. With national elections scheduled to take place by October 2002 (as mandated by Palistan'sSupreme Court), there is unavoidable uncertainty about the sustained implementaton of the reformagenda outlined in the I-PRSP post October 2002. Lack of continuity would threaten many of thebenefits expected from the program.

Pakistan Country Assistance Strateev 37

134. The government has rightly decided not to complete the full PRSP until after the newgovernment is in office to ensure that it endorses it. While it is expected that the new govermnent wouldendorse the strategy to reduce poverty in Pakistan as outlined in the I-PRSP, there is inevitably someuncertainty regarding what economic policies the new government would focus on and what their impacton private investment will be. The best risk mitigation against reversal is the benefits the Dost 1999reforms have on the people of Pakistan. The reforms to increase transparency and accountability withinthe government the Central Board of Revenue reformsr the human develonment strateov, the devolutinonwith elected officials now taking charge of public service delivery and accountable to the voters, arehnibnd to lhnvt mrnior bepnefito whinh the npnnle of Pakigtn,i .wolld inot likp to f^regon 1pnn.p n,intmluitu

and change issues will be discussed in a CAS Progress Report after the full PRSP is completed todetermi.ne , f,.1hhr th. main ob,ecti;ves of th.e rAC reai'n. -,.1iA TIn AAdd4,4., b. des- Ugi, ed. A--.

..-. e __J_C _ _ _. _._~~Lt C *WC* _Ut._ _ . %t..fl4J* 4 C M -V .U~ilt'f5 f

(see table 6) to help the Bank Group manage this political uncertainty.

135. Another political risk is the opposition to the modernizing policies introduced by thisguvwiiu-..e.t; in particul'ar, the r-eform. of th.e elementary ed-ucation systeml, incl-udinlg thle atemlpt toregulate the Madaris (religious schools), and the pro-gender equity policies. Following the September 11e-vents, tuhe government has Ueen more aggressi-ve in its communications surategy, stressing the need todevelop Pakistan into a modern Islamic state and stressing the important benefits Palistan stands to gainfrom integrating into the worid economy. 'Wnile the govemment is trying to manage this risk and there isstrong support for the President's stand against intolerance, the risks posed by these militant groupscannot be underestimated.

136. A risk of complacency may lessen the compulsion to improve the investment climate now thatinternational reserves are rising and seem likely to continue to rise due to the increasing capture ofworkers' remittances by the banking system. The Paris Club debt restructuring and exceptional financingby IDA and other donors may add to the complacency. This risk is mitigated by the sound debt reductionstrategy which has been under implementation for the past three years to rapidly restore creditworthinessand reduce over-reliance on International Financial Institutions' financing.

137. There are also.implementation risks stemming from the technical and institutional capacityconstraints especially for the reforms that involve governments at the provincial and district levels. Tomanage this risk, the Bank and other donors are working together with the government to build capacity.

138. Domestic public finance risk to poverty reduction outcomes. The low tax/GDP ratio mayprove difficult to raise significantly in the next three years. All levels of government are under-fundedfor their basic assignments, with the lower tier the most under-funded when accounting for itsresponsibilities for basic service delivery.

139. A foreign concessional risk to poverty reduction outcomes. The September 11 shock hasincreased the risks to the balance of navment position by maiking more lnertin an early resuimpntion oflong-term private capital inflows as well as access to intemational capital markets. Inadequate extemalfiu,ni,tinc, Wull indermine the mnnroeronounnmin firm.euwork as it relies on ein.i4 icant excepntinnal fina"c,inc

140. Finally, ogenos shocks may require ad-ustm--e.nt in fiscal an.d exter..-al policies beyond ,what isbeing envisaged. In particular, growth may tum out to be less than anticipated in the current

ri roga. T nwxer ,wt* coulA dk. be-.aA by +-i on exportsof a longe; +U--

expected global slowdown or protracted military operations in Afghanistan, or weather related shocks toarp1iCultUl,_I1 ouitp ut IL - A-LoAs 1A L_ - _A '.^s -___1 ---- I L - __<- -_ L_ __._ 1_-tat;i'..u.iuiai uuLpuL. sI Iio 0Ifl1'.1D .,uUIu U,, In Pala, WVaulul U uy ui Lluu4ulg vAnuig raw rcgimuc UULwould have also to be met through a combination of additional adjustment measures and extemalfinancing-none of wicn can De raKen ior granied. if concurreni with excessively timid debt reiief,

exogenous chocks would also delay the return to external sustainabilityv which is a keyr cnndition toachieving Pakistan's growth and poverty reduction objectives.

141. The Bank Group support program is self-adjusting to mitigate the risk of reform derailment.Substantial lending will raOntinule only as long as Pakistan continiues its imT plemtation per.fo.rmn n-ce ofthe past two years.

142. The portfolio risks are manageable in this CAS period. Credit worthiness indicators are movingir. th-e r;h.i -,of-. .A, c .wll cor.';nue '.o i;.-.cease as -debt - - A s

the share of bilateral debt in total debt). To manage this risk, however, 1BRD lending is planned onlyuden utLL high case and sIu Lr i J .0t wihiei LHI L.c aILY MgM4ILu vulg con ui.; ofLy UL XlI -Li WUUiU uavebeen resolved. Given on-going repayments, this leads to negative net IBRD lending.

Jiimes D. WoiiensonnPresident

By:Shengman Zhang Peter Woicke

Washington, D.C.

Page I of 13

ANNEX I: CONSULTATIONS WITH PAKISTAN CITIZENS

1. A series of very extensive consultations were organized both on lessons leamt from past BankGroup" AsSitrnnnp nAnii n"r:or.tin for t.h;c rCAS The Bon-, contry team. I (ovr 20 staff) i.n

collaboration with four NGOS (see attached program) and WBI spent a total of four weeks, one week in adistrict in each r-nxrmMince, and -r.ohr ,veek in +1-0 feAdral, ar.d -p.ol capitals, listernng to over 5000

participants drawn from a broad range of background.

Consulting the People of Pakistan

2. No vibrant society speaks with a single voice, and Pakistan-among other things-is a vibrantsociety. Dunrng extensive consultations that the Bank conducted in 0LUU and 200 i in preparation for theCAS, Pakistanis at all levels predictably spoke with feeling about a wide range of concerns, hopes andfears. Extensive though the Bank's consultations were in time and area covered, they do not constitute ascientific survey of public opinion in Pakistan. Their intent, instead, was to enable Bank Group staff tohear directly from people, particuiarly those the Bank Giroup staff do not frequently meet in the ordinarycourse of business-judges and police, students, joumalists, tribal leaders, religious scholars, and womenand men locked up in jails. Nevertheless, in the hundreds of discussions that Bank Group staff held inimpoverished villages and bustling cities, four themes clearly dominated. They were:

* A hunger for education, especially basic education for girls;* A thirst for water, particularly for clean, accessible drinking water;* A yeaming for justice, for the maintenance of law and order to curb violence, corruption and

abuse of political influence; and* A criticism of the World Bank's and IMF's pDolicies and Dractices. particularlv for their Derceived

collaboration with corrupt, anti-poor governments.

3. Not every group raised all these points. Many rural Palistanis also highlighted the importance ofaccess to oualitv healthcare and the infrastructural deficiencies in roads and puhlic transpnrt as well aspower and water supply. Some small town entrepreneurs stressed the importance of access to credit alongwith transparency in tAxation and regulation. Notahly, however, wliile some ordiznary citize.ns could notsee the direct link between the improvement in their lives and the government's tax reform, devolution,aint ndiVAt7IAtt1: nrnorams they nnnethele-s saw a e1nQP link hbetween. th. govprnmPr nts' sroia! and

infrastructure sectors reforms and their improved access to education, health, water, sanitation and meansof tanspoJrtation. At the ssroots, the prospect of devolu-ion was greeted as often as not withskepticism shading into a cynical expectation that devolution will continue to enshrine the existingnnlitinnl p%nwer eri(tlure. Tin mnrp th2n. non.e ingtnn.o Ap, dml1jXn:n -,v taoggcnasA n nar inr ; it.iHn- voatl

than the government's own initiative.

Deficient Governance - Rural participants blame it on the government while Urban participants Blame

A '1 ir A4-n.~ -f +1,- ne-4.+n4-.n. ..-- A,.,.o -A;s .. A--0 a -4r1...~

I Te fin.ng. of &he &nsl4n, produce u.tu1ap -+ ie uLauof aV ailure 01 uvLiii.iice :.n

almost every area of daily life in Pakistan.

5. Few of the Pakistanis who engaged in the consultative exercise used the word "governance" inspeailng of their lives and problems. Th ale tellr is a specialied one Utat ,has riot passed into ordinalyspeech in Pakistan or elsewhere. The umbrella concept of top-to-bottom inefficiency and outrightcorruption-in the delivery of social services, infrastructure and tne preservation of the ruie of iaw-does, however, go far to explain most of the disparate failings of development cited by citizens.

Pnbiv.ta. Con,,,,h-u Avvivtnn' sIrnhtpov Annex IPage 2 of 13

6. Those include schools with neither fumirhis-ngs nor qualified teachers, clinics without medicinesor skilled staff, villages without water or sanitation, unpaved and untended rural roads, inaccessibleveterin,ary services, unreliable public transport, backlogged conurtrooms, hbrie-tahing tax and utility

inspectors, extortionist highway police and civil servants indifferent to all but political cronyism. ThePakistanis who aired their grievances to Bank representatiVes were most articulate about situations theyknew first-hand. Collectively, though, they painted a portrait of a non-functioning system that impedesdevelopr.n_t an.d ,rv%uprh rdiirftin and gerpine.rat dee ds JicillSiinlmpl-nt

7. Pakisn women and men living in rural porhy, rrely blarn.ed their plight on the World PanicThey blamed their governments. They saw their problems as local ones, signs of wider, systemic failures,but bically challenges that should noi y have been or can be met by the A- - -- offi.r _ oe oranother government agency. Without significant exception, they listed education as an urgent need and asorlly egLccted oniie. IMLa.y saiu in Piau ar. simple language: "if our leaders d.d .ot steal cas much ',Ve

would not be leaving in these filthy conditions with animals and people using the same pond"; withpregnant womer, oyLfl n the way to hospitalsu ard With chs.'rr.r; dyi,,g of dia,,hea because thedocto

in the village health clinic has not showed up for months ". For many of these rural poor, both elected andgover[iiMen1t offiCials only kr,ow how to help h0ersel-Ves'1U Le ar.dA forg the. poor; m. a -c e

devolution, indicating they saw it all before, and did not expect much unless the elected district officialsare firom liicir own vuilage.

8. in the workshops in tne provincial capitais-'Lahore, Karacni, Pesnawar, and Quetta-many ofthe urban elite and representatives of the middle class blamed the Bank and IMF policies for "hurtingPakistan and creating poverty." Tne Bank, urged one speaker, shouid "write off Pakistan's debt andwithdraw." "Facilitate but do not promote a western dominated policy agenda in the country ",recommended another participant in Peshawar. Bank policies shiould change, said another, -fromdictatorial to friendly." Echoing an appeal to "please leave us alone," a third claimed to speak forPakistan's citizens when he said "This nation is fed up with the IMF and world bank agenda". Somethought 80 percent of Bank loans are in technical assistance payments to foreign firms and consultants.Very few understood that Paiistan was a blend country eligible for both 1BKD and IDA terms, mostquoted interest rates they thought the Bank charged that were far in excess of those actually charged andalmost none knew the IDA terms. Such criticism came in large measure from educated, articulate, urbanprofessionals. The perception among urban elites of the Bank as an accomplice in official sins ofomission and commission adds another challenge to the Bank's work in Pakistan. Surprisingly thesecriticisms and anger were not echoed in the federal capital, Islamabad where the Bank office is situated.

9. Other participants from this same gathering of urban professionals, instead praised the Bank'sassistance strategy to Pakistan and argued for increased assistance on concessional terms. Some said theBank should "give priority to education for women, technical education andfamily planning and health."Repeatedly, the participants in the district-level consultations urged the Bank to connect more closely tocommunity-based and non-governmental organizations. A Peshawar participant, for instance, counseledthe Bank to work with "formally organized" groups of the poor who "can best identify wlat will takethem out of poverty." In Peshawar, Karachi, and D.G Khan district, some speakers citod "religiousgroups" as deserving "direct" Bank support and encouragement. "The best building in any village and thecleanest," asserted a participant, "is the mosque, because the community manages it." Others in Kohat(NWFP) praised the Bank's support using as example the Community Infrastructure and Services Project(CTh-being imnlemented in some villages there with community participation-where there was visibleimpact of Bank's support in improved rural roads and rural water supply and sanitation schemes.

10. A number of those consulted pressed the case for more attention to women's groups at all sociallevels both as soLirces of advice and as "delivery mechanisms" for Ba nk-supported progrms. The failure

Pakistan Country Assitance Strategy Annex IPage 3 of 13

to "recognize women as partners in development in Pakistan," in the view of a Karachi participant, "is amajor source of siow development." Recommended solutions: ire More ferMale teachers-less tan two

percent of all teachers in some 200 villages are female-and make a special push to bring "literacyprograms to adolescent girls, the primary group affected by maternai mortality." A parallel concern thatsome political activists (but few others) raised was continued population growth in Pakistan. An"illiterate population," said a discussant in Lahore, "does not practice tamily planning because largefamilies provide them with safety." Female illiteracy, she added, "is the most important reason for lowlevels of contraceptive use, poor family health status, and empowerment.

11. The consultations with politicians representing the major parties in Islamabad, Karachi, Lahore,Peshawar, and Quetta, uniformly featured criticism of the Bank,, some mild, some harsh. Somewhat morecharitably, many of the political i

representatives of the major parties, | l 'tended to acknowledge Palistan's , :lshortcomings in various areas as ii __E,

primarily the work of Pakistanis IIs vjthhfrhr thecityoi-Shikrr4,, lothemselves. While some stuck to the dli e hoEofntheB h abeVafl;.araLunder |party line and praised their parties abis S l 96neloiherl.bo a-reachievements while deriding other en;rol tsn r lhoogroo.concrte WIdw h a.parties' policies, many still blamed rce ilet -bIo n d-ien Baki smaflthe Bank for supporting past Wsd n.ne acher sonndutV. takih9 ail: fi-egovernments, imposing ill-conceived It c aie sbrion orpolicies and project design, or not D m It pI n hwd l lspeaking strongly enough against the a A n sw'r e r u etBeen 4Oa 50mismanagement of their past F iAV- hi u i r intn ini isn ihe .

governments. Many asked the Bank neighbor oo 'to share in the blame when discussing Ly~t~ ~~past government failures. | TJ a7 7 flsJW -I

eemTSon rastAih areasun cnnsodl billouTroom.bnck12. Religious scholars and uim misine i;h he viIlage

renresentatives of reliLious narties 1111TrA r-Iri s-hrhemyh n i'1Mwho attended the consultations top M " he o5;uVeiv A icsstressed that they were for education. i =; h,q n NCT Or.n-ni

including of girls but only in XStuden s u on ug te agsZo tx ooks1 mtdesksvegrreorit-ed sqchonn While the 2and menonzing o traheir

Jammat-I-Islami representatives edeable 1;b9hty.inacepntetd that girls could atte1nd mixed a 60 o1

schools for the elementary cycle but ss p es ;;Wr .oo As,needed to attend proper girls schookn 3lOuzcomiareaKi nforrsaitthngchos echnthereafter, representatives of the more the ot _1 . L tconse artivp "arhr_ Tnm TTlema-e-IB i be MA ohe,o, tis,vlaitr:idituoniandIslam (JU)-were more opposed to i c utayo onraianrressIsttreemnqixed schools in generaI and w,.,,ed iU1~oIn iaeR J hajdt

sc.hols T.e weeie chisoe ada nt.h g|Pl 5 e __' ;;the Bank against pushing mnixed

opposed to all forms of socialLUliaLLIUiI aJ.u VV&nd IIIw&..L& unat q WILI wiligt II LLaU all ut.e 1'q.3JC-Os whic,h we.-L, th'ei V1%,ew-

through their social mobilization to impose a western way of life and inciting rural women to adopt4LLILUUdes %orUarLY LU 1IslamIc UaUiLIUIID.

Pakistan Country Assistance Strategy Annex IPage 4 of 13

Hungering for Education

13. Mehrab Khan is an extraordinary 19-year-old from an ordinary Sindh village-Nim Sharif abouttwo hours outside Shikarpur. What makes him extraordinary is his determination to get a college degree,a goal that involves commuting by bus three hours a day to a college in Rotadero and that requires hisfather to devote half of the household's meager income (Rs. 30 a day) to Mehrab's expenses.

14. Sixteen-year-old Rubina Khoso is even 1 X -; -

more extraordinary. Where Mehrab is one of 8-10 | 'L

boys from Nim Sharif seeking a B.Sc. degree,Rubina and her sister, Amina, are the only two girls . MIfrom their Shikarpur village, Qadir Bux Khosa, ever Ito go to college. Her family's income is some three , 5 '

times that of Mehrab's, and her bus commute is only | =half as long, but as a woman she fears to make it Ialone. As a result, one or two days a week -withno companion to shield her from harassment-she i .- _ .. .. ' -. Idoes not make the journey at all.

15. Rubina, child of an enlightened and well to- ..do familvy hones to follow the examnle of hber sister, Inow taking a masters degree in economics. Mehrab,whose father operates a wheat-milling machine andti ahas three other sons in school, does not know where iMLhe will fin.d uwork onc-e he gets his dp&r,-m Tnn S Ok

young to teach in the village school, he sees himselfas too eA--ctedA 'o beconne a mason or SUht;l+ o - -professions that are needed in the village-or a |weiueur- or autwmreCh i`C.,

16. He will, at any rate, have an advance education. His sisters will have none. Nim Sharifhas no scnooi set aside just for giris, and Menrab's 5 E * Y i 9- conservative parents would not consider sending ,r * -their daugnters to any other idnd of institution. Intheir village and others like it, in any case, girls not only have no place for education but little time for it.Once they are married, usually between the ages of 13 and 15, they are committed to work days-cooking, cleaning, washing clothes, making dung cakes, collecting firewood, preparing animal fodder andworking either in the fields or at embroidery-that last 14-16 hours. As soon as they are old enough toattend school, girls follow similar, grueling schedules. In some places, families need their school-agedaughters as babysitters for younger children while their mothers walk long distances carrying water forthe household. At least, Nim Sharif villagers have accessible water supplies.

17. In the arid stretches of the NFWP, the women of Toolanj Jadeed-a settlement of 500households-say they spend an average 25 hours a week fetching water from wells a kilometer or morefrom the village center. In the summer, they must trek to a deeper well three kilometers awav. In thesame season, their neighbors in Dohk Alwara must walk to the Indus River for water, taking ten hours aweek to provide a household necessity.

Pakistan Country Assistance Strategy Annex iPage 5 of 13

18. Still, even the 70 or so men of the Toolanj Jadeed Community Organization who talked withBank visitors in October 2000 recognized the need io educate mneir daugnters. Ine village nas no schoulfor girls, and parents are reluctant to send their daughters to an all-girls school more than two kilometersaway for many of the same reasons tnat keep Rubina Ksnoso irom taking unescorted bus trips. I noseanxieties and the need for women's hands in household work also result in girls dropping out of thevillage' s five primary schools for boys after the third or fourtn class. -No giris attend tne one secondaryschool, and efforts to obtain at least one school just forgirls have tailed. A buildmg for them that was put up IS llsome ten years ago on shamilati land (donated land) was I d _rhtnever occupied because title was not properly I l n otransferred. Parents, however, continue to seek l

educational opportunities for their daughters. They had _seo irm fi 3wYIiwritten the provincial education department about the eervillage's deprivation. Some had even written to the 1 n iria_a Xh f E ,-dsecretary of education. None have received a response. I _1a'E s | 1

Another Option - Islamic Education ers 1w

19. The school in Allah Bux Khoso is one of 120 ipublic schools open in the Shikarpur district. Ninety- I --

three others are closed because no teachers can berecruited to work at them. Responding to that shortage | sand to rligou convictions, many families send theirsons to Islamic schools, known as madaris. Pakistan had |3,000 such schools in 1978. It has more than 15,000_institutions for which the curriculum was designed by a _ Mogul emperor three centuries ago. Their student body I _is estimated to be close to a million. A number of | hparticipants indicated that lack of access to public a s 1 _ w b _ Leducation and inability to pay for private schooling lead dparents to send their children to Madaris. Many said that i _an ain a Mwhile they want their children to know about Islam, they odid not want them to become Islamic scholars. Theyonly want them to be educated (see Box 3).

Water - Too Scarce and Too Unhealthy

20. Water availability and its quality have a direct bearing on educational and health outcomes,particularl,y in riural Pakeistn. Watching thte yovnger children while adldit womten fptlh water iS acommon duty that keeps girls, especially, out of school. Water-borne diseases keep school attendanceerratic and is amain contributor to the high infant Iinortahtr rate. Andl at anofthr rpmovep inaidequate

water supplies that limit agricultural production even in fertile soil also keep the children of farmingfaum ilies .from. schools sin.^ce they are t,oo irpa.4ntt hue..lA i^.corn, to be~ spoare for f1i. ,classrtoom..

21 To one degree or another, the scarcity and low qualit, of -,ater are serious dev-elopmet issues irevery district that Bank staff visited in the course of the consultations. The Dera Ghazi Khan district ofD_;._U is ar. exn aw+., exar.ple, n.ot just becaus of- a A .r=;eoc=lnn d.-o.,,- A z. elder tA, +. D-

U.IiJau..a .a. ... ,.e aupL,*ll tO Lfl . &tL -I SLL-,tff fS- -%Mtl8Lll -lf Itf1. "LUU* fAIAflww- fL

Tribal Area put the situation: "we are still living in the Stone Age." People and animals in the village ofuatchLed huts dUrIUI u1ie sa1La% rL&I V1V" waLte, UUL LU. LULUUII. iias MUCIe rIuuiy caLle, a,..U LforceU .iiaii VI

Roongan's people to mnigrate. Among those who remain, women and girls spend 5-8 hours a day carryingwaLer. MoIUUCSL UU'.Uys LU I .IC ULU WHULUI Uof nLuldl .fIl[l he 111 UII a aad bI U UU.IIUs illl 511711 Ukils 0on neadriby


hill torrents would produce a reliable water supply, but the villagers have only their own unskilled laborto invest in such projects. Children bring their own brackish water in bottles to school since the schoolhas no running water and no toilets. Of the five diseases that claimed the lives of 30 Roongan children in2000, three are water-bome: diarrhea, typhoid and cholera.

22. Far to the north in the NWFP village of Toolanj Jadeed, water is as high a priority as in Punjaband Baluchistan, but its provision by the Public Health and Environment Department (PHED) has beenmarked by so many false starts that the local inhabitants have lost faith in the government's promises. Inthe 1980s, PHED did pipe water from mountain springs to small tanks in the village. Without a system topump the water onward from the tanks, however, the enterprise failed within a month. According to aPHED representative, an agreement with ten members of the community in 1995/96 had established theconditions for digging a tubewell some distance from the village and piping water from it to Toolanj.None of the 70-odd village men who met with Bank staff recalled any such agreement. They did recallthat a well had been dug but had failed to produce water.

23. A second well was being tested at the time of the October 2000 Bank visit and, if it provedproductive. water was to be piped to Toolani at a monthly charge of Rs. 50 per household. The villagemen said they would be willing to pay that bill but would only believe the reality of piped water when andif it started to flow. Meanwhile their women and girls (before they reach the age of purdah) tramp toshallower dug wells once or more a day, wasting time and strength and risking accidents each time theyhaul heavy buckets up and over the large logs that cross the mouths of the wells.

InAfrstrurture - Roads and Power

24. Mainte-nance and general investment nrohlems are not confined to water supply. They mark thestate of Pakistan's roads and its delivery of electricity, not least for irrigation pumps, as well. In villagesand some cities, residents were q,uick to point out sueh deficiencies and their cost. The 12215 residents ofthe Shikarpur District village of Allah Bux Khoso, mostly landless farmers, have to make their way alongtw.o eilometers of unpaved road and across a nA1rrOw and nrmbling concrete bridcre to get to nublic

transport on a paved roadway. If the unpaved road, not repaired since it was built in 1996, were in decentshape, said sno,. nf the ul:!uiger', the nost of grettina their rine and whes t to mnrket w ould he cuit in halfThe dirt track connecting the NFWP village of Dohk Alwara to the main Kohat-Pindi road is sevenkilom.eters long, a ri.bbon of .mud in the rainu seant arnd anm obstarle course at any tirn.e fnT the v ullAge.rs

who need regular access to Kohat, 40 kilometers away, for health services and access to districtadmin ristrati.on but mus3t now depen.d on tractors or th.eir legs to get them. th.e first sixth. of th.e w ay.

25. Siilr Lu-^rlspoIL-'tionI -yVUr.oblen-n IVW, po'ULoleU hiI.LWdYb '-eV U"le oneV be.wee.-. S0LAWuM aiu-.Sukkur in Sindh province-are barriers transporters cite to the growth of private bus service betweencities and outlying villages and on the congested streets of ShiiKarpur itseif. in Punjab, where the bridgeon the Multan-Karachi highway is so ill-maintained that traffic must creep across it. The impact of poorinfrastructure is direct and heavy on the poor and on the prospects for rural development. Pakistanis in theDera Ghazi Khan district, Punjab, for instance, tied the sorry state of the roads and, in consequence, ofpublic transport to high rates of teacher absenteeism, particularly among women teaching at the primaryschool level, low rates of school enrollment generally and distressing rates of death in emergency caseswhen transport is too slow or unavailable.

26. Shortages of electricity are another impediment to poverty reduction. Again, in Allah Bux Khoso,of two transformers supplied by WAPDA, only one functions. The other has burned out, but villagershave been unable to get the agency to send a repair crew. In Dohk Alwara, lack of electricity forcesvillagers to use hand pumps-at a. construction cost of about Rs. 25,000 each-to move water from

£ unwss t.AG^u.y Ass usa. 5.at ,. I

Page 7 of 13

ponds to homes. In the summer, however, the ponds dry up and, as noted above, the village women musthike four kilometers t.o '. TA.. Co wat

Healh Cae - cone IsIsonrg

2I. i LULe d. .ectL c UU11 UVLWUL,II b e ULpable W4ate1 a,iu good .Uiiaiui is nU sc,-VL LU rLual I aisU'wU.

They understand that many of their illnesses and deaths, in particular, those of their children areconseque,-,ces of'I. dInking ULLULr. WaLte, IL IUL VI Uof dLAUaIIIjcJdIyIg ILaK Uo sUILULI UIIU UaIldurirge iII

their communities. What many understand less well is why is the government so indifferent to theirplighiL! VYiiy are UULdUlo WIU UU nUL [VpoUt LU WU-K Mr inunc villagc nca; n ceniers knDnu) or rciuse tO Utealthem even when they are there? Why do these people remain unpunished were repeatedly askedquestions. inc trnial areas arc tne worst 'i Dy lacK o0 imrastructure anu neaith care. A female doctor,wife of a powerful landlord and former politician, assigned to the tribal area of Dera Ghazi Khan,acKnowledged that sne rarely visit the nealth ciinc sne was assignea to, inalcatng That ner salary aoes notcover for the price of gasoline for her to use her car and travel to the tribal health clinic. Still sheadmitted she continues to draw her salary despite not reporting to work. Her husband found it nornai thatshe should draw her salary while not reporting to work. He went on a tirade against World Bank'spolicies and foreign interference-he found it preferable to discussing his and his wife's accountability.

28. In the Shikarpur District village of Nim Sharif, for instance, women listed a hospital-along witha school and drainage-as their top priority. The village has no trained birth attendant or public medicalfacility. The nearest hospital is an hour away, too far for one expectant mother in September 2000. Sheand her unborn baby died en route. For the 1200 residents of.another ShikarDur village-Allah BuxKhoso-the nearest health facility is an hour away on foot. A self-styled 'hakim' (quack), however, livesin Allah Bux Khoso.

29. Tn the Ralaichitnn villaire of Chih Kalmniti N2gore, in rnntmf,t a diqnpn'cpr hirth attpnAinnt nind

two support staff run a basic health unit (BHU) that serves local inhabitants and those in neighboringvihages. A nilmher nf rpQitpntQ agreedtt l2tthe (w,uvrdnr A:sr:t .hA m, uelA prorh ss i, rrrI,nAiT. health

care and stimulating population planning. At the same time, they noted that the shortage of qualifiedmedical rpersonn.1l Pxtene,ti firnm the abepncpeof n tli.nt foeratee htospital1 e-ui-.ernt in G-,ad,ar tothe distance-30 minutes by car-from Chib Kalmati Nagore to the nearest doctor. The villagers do nothave C&-S£. *S.e sick have to be caU,&L5Ie L M.her Uon. UCd,% VIko a Udor1-e or1V Un a li.er, ardU Ul JUoUI.-.ey lasts

for hours.

30. In Toolanj Jadeed, a doctor is supposed to be on duty at the BHU that serves two neighboringvillagesO. Resid-.ts1 saiu, LEV;ITVVe1, ULatL he. dUob notL c.eui L a%UrIIy CeCIe 'I.ugh, when he uucs -visii iruin

Peshawar, he signs register entries indicating that he had been present for all the days he was absent.vV .UIVUL 1111L, UIV' .-II.Ii-cILIUJlb n isLVsfe uy LWU para-nedUIcal persUnlcI. A LUuy ricaln W orker assignedto the village stayed only a few months. No midwife lives there, and no medicines are delivered. To get

t _ _ -3 .t-' _¢ _ _ wTsT -.rr _. _ - - -- - -- ' I " I . .s Ithem anu thcir salaries, BU stafi nhave to go to Kohat, paymg ior the mp themselves.

31. Tne most noticeabie shortage in the heaith care field is that of medically trained women, a vitalelement in delivering everything from immunizations to neonatal advice to other women. The reason thatthere are too few midwives or Lady Health Workers or women doctors, however, does not lie in thehealth field. It originates in the failure to educate girls, to give them the skills to take charge of their ownlives and help save the lives of others. Without that empowerment, many of the women with whom Bankstaff spoke mentioned health problems only in passing. The root of their greatest problems, they appearedto indicate, lies elsewhere.


The Crippled Arm of the Law ' . . - -

'Box 4- -Aven omenBox4: Avenng Dishonor, Vicuiri-ingi oien

32. Whether in rural or urban Pakistan, -- '

the weakness-even absence-of law I .- s: i rurai distrilcs arou.nd S hiSarur, iinj, ,dru -

enforcement summons protest from those who the provincial border in Baluchistan, tribal traditions have long.|

see themselves as denied elementary justice. allowed wTonged huands to avenge-u.ty by killingbot the

Among the victims are Sindh villagers in Nim w"ay-iad wifeandherparner. $upposedlyamsof passionor:

Sharif (Shikarpur District) who complain of -UUL, U. r JIa.I4.y IA MIV IOl. - t oe.:p -

frequent cattle theft and of the ransom they - 7anyplieeswherecustomalawandsocietalatilidesfavorthe-- Z. usj1 .1. ,J nt TT. -in..4 . 4r 6~i , c

must often pay to recover their livestock. alVUilUIUfliaU. IJUIt! lwui3l S o ISince the police do not respond to such registetid Karo-Kani casesin 1999 10 of t in Shikarpur

incidents, the herders have stopped reporting d i s suvn a plac e UUUicLlIu mill XIJ.,

them. Instead, their wives said, they have 'however, areJoiuing forces to raise awareness of ind thc penty-

bought rifles to protect their livestock and for, ir-ari iunlng,' a signiucant i o auloa pow

themselves. And women are put in jail to structures d valuesystems: -I

protect them from being killed by relatives ° ".e!"ently-; a recent prictice, Karo-vKai plays out fi"uentla

when there is no government safe house for * . . ! . l - -.- -,rt.n -et,ta mrd.er. Pal charges br -oah. It-e

womenmin the area. .wotnn. w,hose husband rnay"atually- be; eelking a, cbot.firee,ArIPf +-xrro, nran.+ nn b P r4.onlv.. h- * ,inQnn@ I

33. Not all the aggrieved, however, are 5 payments from the alleged adulterer.Ai6th6er cases,poor peasants. Members of the Bus Owners hhiti a,zition iJq the real reison hehmF.te:acsadh. IW

Association in Shikarpur feel doubly somneone wants soieldy else's land'andffe latterIdoes pot want

victimized by police misconduct. On one I to sell the former kills a wormai from his sid'e §Ld acc'ises the'.

hand, untrained policemen levy heavy fines on reluctant seller of havm ha an al ithi the re on° -their vehicles without due cause. IThe accused runs away feaing1br ihslifieleavingbis property-

,behind for gra. '': .,0 ::

34. Orne young police sunerintendent, ei f g ; ; : . -

respected in the city the Bank staff visited for nIn some cases ajirga tditional tribf)nhis honesty and his impnact since he took over, bythe tribal chief (sardar) takes'h case andttris to resole #theA

judges that 95 percent of police officials he Idispute by imosin fnes and ke taccuisedomenuner

oversees are corrupt. Misdeeds range from -.its,pr9tePddn°iitiiajudgementis passed. - --

bribe-taking at high levels to the 47 officers , Ifo.dU 1 to be hprnin aAAdite, T . ;. he ractice of Karo,-1;ad, perTsists. The law

*' * . . , . . -now- calls' it murder Between- th law. and ts enf6rcemethe says, is so crippled that beyond B ersen wh enc still ives

extori :t r. do nttle to prevenrt or pnimic c .- ,. ti

crime. l -. '' I. ;

35. A parallel situation-including low-level bribery-has brought the courts into disrepute. In the

KO,.at Dsu;ct o ,n'TVm DLte .. iCad of bhe bar association befie'Ves. td-A main. obstacle is a shotange ofijudges

so severe that each judge has a docket with 70 cases pending at any one time. The judges of the district,

whi'le agreefirg *IhL LIi r,-arl w-- -were '.oo1 L. cited poor police work as a morr p.-ble...m;... ci.m.ial cases

along with the inability of the police or courts to provide protection to witnesses. They also citedlanguage boiamers. Tle 11973 constion requaireVu that couL proceeuirgs ble condductid :... Urdu ior

Pashtun, the languages most widely understood, but to this date, court proceedings are still in English

which few if any poor understand. In Shikarpur, several judges and their aides were suspended in2000 on charges of stealing evidence (heroin) to sale. The Bar Association president listed illiteracy andthe distance that litigants have to travel as an impediment to justice, a concern voiced in Kobat as well.

36. The breakdown of law enforcement and the judicial system in many parts of Pakistan has severeconsequences for the entire society, not least for small private entrepreneurs left unprotected against the

Pakistan Country Assistance Strategy Annex 1Page 9 of 13

depredations of what is known as the "inspector raj." Its members are the legion of petty officials withthe authority to license businesses, read utility meters, inspect premises for heaitm and iabor regulationsviolations, impose highway tolls and assess taxes. Many small busiriessmen told Bank staff one story ofharassment after another. A WAPDA officiai, for instance, bumed one businessman's electricity meterafter being denied a bribe and then charged the trader with tampering with the apparatus. According tomembers of the group, an "army of people" 15 strong typically descend on them to conduct the taxassessment, usually sending an emissary ahead to intimidate and extort a bribe.

37. The assessors include income tax, excise,police, public health, labor, WAPDA and telephoneofficials. In addition, in some areas, army membershave joined the gang of inspectors and bribe-takers. I I Le 9 O i tOne participant in the CAS consultation told of an |Ilarmy wife who bought merchandise from him and _ I1gemanaoM IMUMIRIsought to exchange it after using it. His refusal g1eamed him arrest and the closing of his shop for W il I W 9 Ii

three days. But in D.G Khan, the army monitoring O a g t e unit there was praised for curbing corruption on Eli W 4 X I

government poverty schemes since they were m i . I lcharge of overseeing their implementation. i N 3 S. . a

38. Official lawlessness breeds civilian | _r_scofflaws. The small businessmen indicated they 1 Nwould circumvent any attempt to document theirincome for tax purposes. They recommended l _ereturning the country to the self-assessment system |_of taxation that they said worked two decades ago 1

and had the merit of making bribery unnecessary. |Without a stable relationship between government 1and business, shaped by mutual respect for law, they iinisaid they would not expand their investments eveninto promising opportunities. One trader-the man whose meter was burned-said he was thinking ofjoining relatives in the United States. Many others, he suggested, were ready to fnllnw suit.

39. With them and their energy and their capital would go one of Pakistan.'s prime hopes fordevelopment and for the sustained creation ofjobs capable of reducing poverty.

40. But there is potential for a more vibrant private sector in all the districts visited. Manyhi.cinpeC!er.pf arlmn.wlprdapri that .whilp mnr. n to hp ain.np tn reiruce h,.rass.ope.t they.r saw a r.et

improvement in the investment climate over the past two years. This was more visible in Karachi andLahore but also in Gvradar district. The coastal strip on t+h-e',-a Al sea holdAs a I.hug un-ped +.a1

for both fisheries and tourism. According to various statistics, the area is capable of producing at least7000 ,.or,e fish th& it A-es cu- -.t on a.. nnaua! basi msafviid. } ws.. ~Jvv*UJ AfloAt uilOil IL Sfl%' ~1--1J tI.. Of! WUUOlu JU.fl. "AjO.IU 001 VtOItt.U LVYU FJAUtdt00UfLr, aLIt

packaging plants (one foreign owned off-shore). There is potential for more we were told and the currentowners A +U- +rA - -AA ; -A A1-A+A 1-AA _1- r_ -- -- -- , A_ _ ; _ ---_ A_A 1- _1 _A _ _ r _ A --- A --0 L t4t. vwv pit.t.toon.." p.ut * FOa.f lAvl t.Gpat.JLJy t.ajmjaOIUI. CL u L% aiauv FItaLo jul iuau auiU

port developments but reliable power supply was a serious constraint to this private sector developmentpLter.tial.


Pakistan CAS Consultations 2001 - Itinerary and ProgramDistrict Kohat, NWFP, consultation facUitated by the National Rural Support Program (PRSP) NGO

October 21" - * Meeting with Mr. Mueen Afzal, Secretary General, Finance, and Economic AffairsISLAMA BAD Department Staff, Ministry of Finance, Govt. of Pakistan.

October 23rd - 27' * Meeting with Divisional & District AdministrationKOHAT- NWFP * Combined meeting with district officials (Education, Health, Agriculture, Irrigation,

Forestry, WAPDA, C&Wand others).* Meeting with major NGOs working in the Kohat District.* Meeting with -members of chamber of commerce.

October 24"- * Walk through and meet with government officials in the Divisional Complex Konat.* Walk through District Courts.* Meeting with iawyers.* Visit to the Center supported by the Poverty Alleviation Program.* Visit to Police Stadion and meeting with Police officials* Meeting with Revenue Department staff* MUeeting w--ith Judges.

VILLAGE groups, farmer groups,

tehsildars, putwaris, extension workers, dispensaries, local health workers.* "'al 'thr - .h ill -

* Visit schools, rural health centers.

October 26h * Meeting with district line departments officials.VILLAG.F DIJOKV

October 2 7h * Meeting with Ulemas (Relizious scholars).* Briefing on the Tribal System by the District Administrator.* Meeting with Tribal areas journalists.* Meeting with Tribal elders.

District Shikarpur, Sindh, consultation facilitated by the Strengthening Participatory Organization(SPO) NGO

October 3 0fh * Briefing by Stren thening Participatory Organization (SPO) on Program.* Meeting with Divisional & District Administration

October 31 * Meeting with District Officials.* Walk-about and meet people in District Courts.* Meeting with Lawyers in the Bar Room.* Visit to Judicial Lock-up.* Meeting with Police Officials.* Meeting with local NGOs.

Panlrimnnrounnr, 4vijvtnnr.P R.trnt.P Annpr I

Page 11 of 13

November I' * Visit to Village Nim Sharif and Village Darhi Jhakhri (Tehsil Gorhi Yasin)* Meeting with communitiesu community organizatinym women grounx._farmer grouns.* Meetings with government officials of sub-district level line departments, including

tehsildars. putwaris, extension workers. dispensaries! local health workers.* Walk through village.* Visit schools, rural health centers.* Meeting with religious scholars

November 2"d * Visit Tehsildar office in Tehsil Lakhi.* Spend the day in Village Qasim Goth (Tehsil Lakhi)

November 31d * Meeting with Transport Association.* Meeting with traders, Bazaar Association.* Meeting with Growers Association .

District D. G. Khan, Punjab, consultation facilitated by the National Rural Support Program (NRSP)

February 12'h O Meeting with Federal Government Officials (Finance Ministry, Planning Commission).* Briefing by National Rural Support Program (NRSP) on the team's program in the

surrounding villages in D. G. Khan.

February 13' * Meeting with Divisional & District Administration.* Walk through District Courts.* Meeting with district officials ILine Departments.* Meeting with Teachers, Doctors and Paramedics.* Meeting with local NGOs.

February 14" * Briefing and Visit to IRUDP/PAP Schemes.* Travel to Roongen - Tribal area of D. G. Khan & meeting with the tribals.* Meeting with community.

February IS" * Meeting with Police Officials.* Visit to Local Prison.* Spend a day in the villages - One Jrom a rain-Jed area, One from canal irrigated area.* Meeting with Chamber of Commerce and Industry and Traders.* Meeting with the Army Monitoring Team.

February io6" * Meeting witn locally elected representatives.* Meeting with Journalists.* Visit to audrassau and meeting with religious leaders.* Meeting with Growers Association.* ,U,eeing with Clerk-' Associtullon.* Cultural Event hosted by the Divisional Administration .

Pakistan Country Assistance Strategy Annex iPage 12 of 13

District Gwadar, Balochistan, consultation facilitated by the National Rural Support Program(NVRSP)

February 2(/h * Briefing by NRSP.

February 21i' * Meeting with Divisionai & District Administration.* Meeting with Judicial Magistrate and Lawyers.* Visit to Qazi Court.* Visit Judicial Lock-up.* Visit Police Station, Police Lock-up and meeting with Super-intendant of Police (SP).* Meeting with Community Activists/NGOs.

February 22""d * Meeting with Villagers of Village Chib Kalmati.Meeting witn rFefmue Gruup, HU andU Shoo/VMeeViRngs witn Villgers..

* Visit to Akra Dam.Inctainerg wtith rr,'Mome, Ilfishe,,uar Uri" ,liforgylursera tin Surbandar Village.

* Meeting with elected Nazims, Naib Nazims and Councilors.• eein with- j7sh.-* - De-w *tst Qmdv v 4---

* Visit male andfemale groups in Gazarwan Ward, meetings with Villagers.

February 24h * Visit School, Hospital, Power House and Salt Making Plant.* Visit Snn nf Sea Prno-essinag Plnt.* Meeting with Fishermen, ABC Fishery Processing Plant.

February 25' Visit Poverty Alleviation Program Projects .* Visit Women Handicrafts Center.

Pakiswan CAX. Consunltainni- with th PrivnleSvRortAr

May 15- 23, 2001Cn"onvend hip Mr

Corporation, and Banks)SMAn,.h 1 ' * iC'nne,ZitntinnV With tho Pri.vt,t, .Sp,'tnp in kIC7,n,'hi fF-i- T.-Of- Pnzti,.tri

Corporations, and Banks)

Federal and Provincial Levels ConsultationsrgJjn,1qa 2,0i

W"I and Regional Staff managed the discussion with the support of NGOs

May 15t * CAS Workshop in Islamabadfacilitated by the National Rural Support Arogram7NVR VP) facilitatpd

May 16'b * Meeting with representatives of main nolitical narties.

May 17 th * CAS Workshop in Karachi facilitated by NGO Resource Center - Agha KhanFoundation (NGORC-AKF)

* Meeting with representatives of main political parties

of 13

May 19th * CAS Workshop in Quetta facilitated by the NGO Taraquee.* .AAaot'r. ,un,;t ranroonnstni,,oc of nenin nnhlrnS.cl nartiot

May 2l" * CAS Workshop in Peshawar facilitated by Sarhad Rural Sunpport norporation (S'RSr)* Meeting with representatives of main political parties.

May 22nd * CAS Workshop in Lahore.* Meeting, with representatives of main political Darties.

Pvak]r7Stnn C'un,,,,r, A ,sVh.tAnnr Vh-tont,,} A.".XF7 1!

Page I of 23

ANNEX II: PAKISTAN PRIVATE SECTOR STRATEGY

1. The 1990s were a decade of lost -ortunities for PakIistan From in,e, deA nce tn AprP t e I O1ne

Pakistan outperformed the rest of South Asia. Then in the 1990s progress ground to a halt. Povertyremained shck at hj-1, levels, econo-rc .ov,,t sloo,ed, institutions fanctinedi badly, a a seoumacroeconomic crisis erupted.

2. What went wrong? To explain some of the trends of the last decade, this annex probes aspects ofthe investment climate, viewed broadly to include the macroeconomic enviromnent, political stability,incentive regime, and infrastructure and regulatory framework.

3. A key reso for +1 poor record of +u-1 190 o was.. +u- oer.etsfilr c .u+r FL f l~y A,LDUAIJ IML Ulk, jJ%UVI LL4,VJUX II UIC~ 1-.~7U wao U1W r'VC4I11IIL4L a ICULUIC IAm lli1UlLVEJ11 a

favorable investment climate for dynamic, competitive, and sustainable private sector growth. The effectsUI L11V UUaI VI10LLaUUL0 VI a l1110rUUL1,U HIC01LIM M,L11 aL~UiL lu aii MaiUCI4ULM LqrU14LVIY I1d1a.1W1MO. VIUL

infrastructure were exacerbated by an unstable and risky macroeconomic environment. But these failingshadU VLL aroUIIU .UL years. VY HiaL Wasr IIW Wdas UIq- way U1L M aUn .Ulwl.LlUlg, UULIUbiVU UdeI'eULLUI1 HI 'uie

govemance of public institutions weakened economic management and created an increasingly-IUrfVolabe UiVIVejUllerLt cU111 . J3?ZLWVCn I990 iuanU L2VV, ULIe counuty had eignt udifrernt guvcrprments,

each averaging 16 months in office. Four democratically elected governments altemated with interimregimes.

4. This deteriorating governance aggravated the inadequacies and opacity of the incentive regimeand regulatory framework. It encouraged rent-seeking by the private sector and discouragecl productivitygrowth and international competitiveness. While other developing countries were increasingly integratinginto the global economy, their private sectors becoming more outward looking and less dependent ongovernment protection, Pakistan's private sector became increasingly inward-looking and dependent ongovernment interventions. Its weakening performance set the stage for the macroeconomic crisis of thesecond-half of the 1990s.

5. The current government of Pakistan is determined to turn the situation around. Its r ecent InterimPoverty Reduction Strategy Paper (l-PRSP) sets out a sweeping program of political, economic, andinstitutional reforms that aim to establish the foundations of an open, modern, and prosperous nationthrough revived broad-based growth. The Worid Bank Group's private sector strategy tor Pakistan isbased on support for this program, particularly efforts to improve the investment climate by restoringprivate sector confidence in the economy. 'T'hree areas will receive special attention: the government'smacroeconomic stabilization program; a growth-oriented structural reform agenda that encouragesproductivity growth and more efficient resource allocation; and timely implementation of key structuralreforms of the incentive regime and the regulatory framework in infrastructure.

P~as.Lvta 's PWvsate Sector: Ufrtfi^ul,w.lled ,Poterd.ay

6. A clear consensus in Pakistan has emerged that private sector led growth is essential in order toprovide better economic opportunities and to reduce poverty faster. The shift in emphasis has beencharacterized by the public sector's withdrawal from production activities through privatization, and bythe substantial advancement of the public sector's role as facilitator and regulator (Table 1).

Pakistan Country Assistance Strategy Annex iiPage 2 of 23

It is only in key areas of infrastructure Table 1: Units Privatdzed 1991 - 2001services - power, oii, natural gas, _transport, telecommunications, andbanking- that the public sector stili -Auramebiledominates. With several landmark Automobile 7 _1kprivatization transactions in baning, Bndg 8.2

power, oil and gas underway, this is Cement Producfionexpected to change by the end of this year ChemicaU Fertilizer 14 1.8(Table 2). Ener 5 10.7

7. Agriculture, the largest sector of Ghee Production 19 0.6the economv- contributes 25 nercent of D-. n Di 15

GDP and employs more than half the labor Telecom 2 30.6force. As the pnrirnarv sinnier nf raw I I .1material (cotton) for the main industry othrs |20 1.2(tpytilp-rl it Pnrne rrinnt nf tht- r,niintrv's- 20 1.2 (f.-xeles, it-1 -- --.- -- ---st of Ih,e r n,hy S Total 108 61.2foreign exchange (from cotton and its I 1dArivativsc) CronutAl hasc rnainiu e.nm A c, ..... A-- r D ^.^.

from adoption of modem inputs,cont"hireA uAth1 oxpnaioein of irrgahedwater supplies. However, this strategy has Table 2: Privatizatlon Program - Upcoming Transactions

on better management of existing levels of anldng & Financereore AanAO ^s^p -A+ -s.1-.A;_^ -1.-A-, P.. .. . _ . .. ... . ., - .. - -u LVLjJUMO, unirc tSanK UmireO (UBL) marcni Apli 2Uf

access to land and credit. Agricultural trade Allied Bank Limited (ABL) 11 Qtr. 2002a.riU LI,U,, L.-gires h ave J I beeII ... i nuUb1aHLl"ljy Bank Al Falah .. i Qtr. 2002liberalized, but policy reforms are needed Habib Bank Limited (HBL) - first tranche 11 Qtr. 202

.LU 11i1r1Vp, UIo v UlWliar,e-W11U, Ut oflaLU aur Muslim Commercial Bank (MCB) 11 Qtr. 2002

water resources. Since the issues are Habib Bank Limited (HBL) - second tranche I Qtr. 2003

largely bVULV1-bpuLaifi, Ulu agii.UILulU Ilndustry & Real Estate Isector is not discussed further in this annex. National Investment Trust (NiT) March 2002

8. Manufacturing, which employs Pak Saudi Fertilizer Limited March 2002about 11 percent of labor force, has I Faletti's Hotel H Qtr. 2002

stagnated, remaining at around 16 to 17 | Investment Corporation of Pakistan (ICP) | 1 Qtr. 2002

percent of GDP since the 1970s. The latest liol & Gas l

Census of Manufacturing Industries (CMI, Working interest in 9 oil & gas fields April 2002

1995-96) counted 4,474 private | Attock Refinery Limited (ARL) Il Qtr. 2002

manufacturing entities and 42 public sector Pakistan Oilfields Linmited (POL) 11 Qtr. 2002

entities, which together employ under 1 I Oil & Gas Develovment Corporation Limited (OGDCL) III Otr. 2002 Ipercent of the 4.06 million people in the Pakistan State Oil (PSO) III Qtr. 2002

manufacturing and mining sector. Textiles I Pakistan Petmleum L_imited (PPL.) - I 0tr 2003 Iand clothing are the largest industries, Sui NortherasPipelinesLimited(SNGPL) IQtr.2w3

accountinLm for 79 nercent of Pakistan's I 4z-tuh-t .-,Co,. r -- ,,n T.rueA (SSCrCLT ! 2n 1

merchandise exports (in 1999), employing |Power lover 40 nercent of the sector's lahor force I D ,,...,, .A,. _ AX wl Iand contributing nearly 29 percent to Karachi Electric Supply Corporation (KESC; September 2002mainufacturing valiie added in 1995/96 Faisa;ali Eiecic"---;'Corporation (FESCO) IV .

The food industry (including edible oils, L IGecol (Janshoro) I Qtr.2003grrAin milling, sugar, beverages and clelenom ltobacco) is the second largest. Iron and Pakistan Telecom Corporation Limited (PTCL) Il Qtr. 2002 JS,tPPI PbPtira"~le lplnprinal PnhiTu'iPrt ___automtvee, andpharmaeuticalin equipr Puivatization Cent, ' r

automotive, and p-harmaceutical industries Source: Privatization Conunission Annual Report 2001.


make up the rest of the sector. During the 1990s, most private investment went to capital-intensiveindustries. The share of the "Big Four" capital-intensive industries--sugar, textiles (cotton yarn and graycloth), cement, and fertilizer-rose from 28 percent of total value-added in large-scale manufacturing tomore than 40 percent.

Dualistic Industrial Structure

9. Large-scale activities dominates manufacturing output (70 percent of value-added) while smalland medium-size enterprises (SMEs) provide the bulk of employment. The most important areas ofactivity for the SME sector are grain milling (16 percent), cotton weaving (13 percent), wood andfurniture (10 percent), metal products (7 percent), and other textiles (6 percent). The five largestindustries account for half of the SME sector, and cotton weaving and other textiles are their chiefexports. Although SMEs produce a quarter of manufacturing exports, most are low value-added productsthat rely on traditional technologies.

1 fl 1...... flfE m sIV. vCI 90 per ciLtL oI i1T1Is in

Pakistan are SMEs, most of which Chart 1: Sectoral Disribution of Non-Agricultural Labor Inin- ,_ I - Pakistnoperate in tne imormai sector.

According to the latest Small HouseholdMvanufacturnng inaustries Survey(SHMI, 1996), there are some 400,000 Others Constructionsmall-scale manufacturing units, Whozesaiel 12%

Retail/Hotels___ 600,000 services units, and one million 2R % 'dil/Hot s Manufingretailers in the country. Together they __ ___ 19%contribute about 11 percent to GDP and -employ roughly 80 percent of thenonagricultural labor force. Most such

.. .. ~~~~~~ ~ ~ ~~~~Soclal/ Stoiraae/finrms are engaged in nonagricultural, Personal Comrmlow-productivity service activities Service 10%(household services, small-scale trade 29%

and retail activities) that depend in largemeasure on demand from other sectorsin the formal economy (Chart 1).

11. Until the 1990s the government discouraged private sector involvement in most infrastructureservices, from power, oil, and natural gas to transport and telecommunications. And even during the1990s, despite considerable private investment in thermal power generation and natural gas, weaknessesin the regulatory framework kept the public sector the dominant supplier in all key areas of infrastructureservices (Table 2).

12. Pakistan faces an enormous challenge in meeting its energy needs. Costs in largely state-ownedMeAtsMl,r,ses ahe 1ighL auld iLnfrastucture is brossly iriadequate. Tne power sector is largely governmentcontrolled. The state-owned Water and Power Development Authority (WAPDA) and Karachi ElectricSupply CorpoULtion (kE SC) together control almost the wnole electric distribution and transmissionmarket. WAPDA also accounts for 65 percent of generation; 21 independent power producers accountior me rest.

13. State control also characterizes oil and gas. Both of the largest natural gas Droducers. accountingfor more than 80 percent of total production, and the country's two gas transmission and distributioncompanies are state owned, as are extensive assets that include refineries, transport and retail facilities=The performance of public sector entities has been steadily declining, largely because of the rigidities ofpublic sector management and weak implementation of structural reforms. Demand for nil and gas has

Pakistan Country Assistance Strategy Annex IIPage 4 of 23

increased significantly in recent years, mainly from the independent power producers (Box 1). Amounting consensus holds that substituting natural gas for fuel oil would bring considerablemnacroeconomic gains, improved performance by power plants, and lower power tariffs.I A i-1- .1.iI,4. rakistan 's miing puienusi iss clarge. Although it could contribute asmuch as 3 percent of GDrP under iZL i i Pei U IId b"cptrilconservative assumptions, mining r ! i . e .. ... . . . A . ~ a t nn _ae 3o noDw.ef ner .Betwe 9lM9-5dpresently contrioutes bareiy V.4 percent. 7 eThe industry is dominated by federaland provinciai development E 7 tcorporations, with little foreign t einvestment.

15. Excent in road transnort tservices, government agencies also ISe lY ~ a5Li r

dominate the transpoTt sector (Trailwavs,airlines, port). Inefficiencies and high costs have seriously handicapped Pakistan's economic growth andexport onmpnetitiveness. Acncrding to World Bank estima -tes, some 6 percent of GDP is lost because ofinadequacies in the transport system. Despite partial divesture (12 percent of shares) of Pakistan Telecom(PTCL) in thp. parly 1 QQnc the anvPrnfmpnt retin a minnnnoly PTT 'c evxclusiavty n a1 1 tieftion-l

and domestic fixed line telephony services expires on December 31, 2002. Four mobile cellularcompanies - including a subsidiary of PT,T - are now- rpmrit4i,g in the c P s

PTCL privatization are under process and it is expected that the transaction will be brought to the point ofsale b%y T i,ne 2002.

Disappofnting Economic Growth16. Slo,-,in --- growth, poor export. -er...^e, -.dA rl; -S ;- were tfeturesF--- -F... ~ ~ ~ *OiU L ULII iUAV%, LUMILIO %A LIMt, J%aL%OUL

the deteriorating performance of Pakistan's economy during the 1990s, a lost decade in the fight againstpovert^;. .XTo only di fAhe ir.idnc o-A-- f -- 4-.^ I-r;.air un'1aile nnwe n 19/91 -A I nd 199899 -u.Y -S-t 'JAA tfU LAflt " AU~AtIt,LV,t MAi jJ.VtdLY X.IIIaLII UL&L&ILaLILrVU UJt,LW%,-,I1 L.77V/.71 CILU 1770177, UUL

more people were actually living in poverty in 1998/99 than 10 years earlier.

17. GDP growthdecelerated considerably Table 3: Growth Performanee in the Plitan Eeononmv

during the decade, falling to2.6 percent in 2000/01 after __averaging 5 percent over the | t 61

previous four decades GDP growth rate(Table 3). According to (% FC, constant rupees) 6.1 4.9 4.0 3.9IAgriculture 4.1 4.2 4.8 6.1recent analysis (Arby, SBP, Manufacturing 8.2 4.8 3.2 1.42001), the slowdown relates Large 8.2 4.7 2.4 -0.2

to the decline in the trend ASmaed 6.6 8.4 |65 |53

GDP growth rate, starting asearly as the mid-1980s. Total investment . . 7 15 lcombined with the Fixed 16.8 18.0 15.2 14.0recessionary Phase of a I Public I 9.1 I 8.6 I 6.4 5.8business cycle that began in Private 7.8 9.4 8.8 8.2

the early 1 990s. Most of I TO nnP r I Ithe deceleration came from | (%,Cvonstant uSs) | 8.7 8.0 | -3.8' 10... 1the halving of a- 1995 to 1999; b: in nominal terms; c: July-April

Source: Pakistan Economic Survey 2000-2001, World Bank.manufacturing's growth rateto 3.7 nercent during the1990s from 8.2 percent in

Pakistan Country Assisance aSiraIegy AInUJX IIPage 5 of 23

the 1 980s, and to a lesser extent from the weak performance of the service industry (Table 3). In contrast,agUIGultlue pe-ormIRued beUerl UU1l1rg LtIh 177V0, I1ip1ui LU sustLaIn UYve1LL groVWL1 bUcUsV ol it large

contribution to GDP and employment.

18. Within manufacturing, the decline in growth was uneven. It was more pronounced in large-scalemanufacturing, with a larger share in manufacturing value added, than in small and medium-sizeenterprises (see Table 3), though there is some uncertainty in those figures since the quality of economicinformation on small firms is poor. Among large firms, the decline was also more pronounced for export-oriented industries than for domestic-oriented industries, which have a much Chart 2: Growth In Industrieslarger share of manufacturing value flndex of physical output)added (Chart 2)=

Domestic oriented

Dramatic Fall in Exports Reflects 15% M onentedFailure to Share in Global Production 10%

19. After growing rapidly during 0%the 19?0s and 1980s (7.1 percent or /5% ,more a year), export eamings (in realUS dollars) fel1.9 percetayearbetween 1992 and 1999, lagging behindlow- .- A --t,lUs arA tfl.Jethfl A. -t.d t.fle JV11 Asiz0 -.. on ( .JI. 3A). jJUUI poor U expor por.-..c

reflects Pakistan's rising reliance on a few products (textiles and clothing accounted for 79 percent of.. ec.hands exports ;i.n 19 up1 111 ar. alreauy L1I V p.-cr.t Lil 1970) W,1,ose VAjIJLL LULL V, v-b

stagnated (Chart 3B) and whose export prospects are dim relative to the exports from other, moresuccess P- Asi, cour. iesr(Tale 4).

Chart 3: Pakistan Export Performance

A BEvae% cdrCvod S.nerve in ,.n.l.r, 4 @t1 6H,e.v 4070 I n I

_"r ~ ~ ~ w_w __'---- . A._-. _ ro.wai * iniwwLui rna WUl w

7 100) (1995= 100)79 __ _ _ _ _ _ _ _ _ _ _ _ ___ 140 ___ _ _ _ _ _ _ _ _

.6DD_ I12D-W&MIdde

2 1 1 D _ 1100

10 9_ 1_- 40

1970 1975 1980 1986 199 1996 1970 1975 1980 1985 1990 1995


Table 4: Export Prospects, Pakistan and Competitors

Pakistan 1.6 Synthetc weaves (14 percent), Linens (I1 percent), Cotton fibers (8 percent), Leather cloth(5 percent), Cotton garments (5 percent)

| China 39 Toys (8 percent), Footwear (6 percent), Machinery Parts (3 percent), Handbags (3 percent),Outwear knit (2 percent)

India 2.6 Di9nonds (97 percent) Cotton yamn (4 percent), Shell fish (3 percent) Precious jewelry (2.5percnd)a 2cotton6I gaaod t1 (p 2 Co tton

Sri Lanka 3.0 Outer garnients (9 percent), Outwear knit (6 percent), Tea (5 percent), Blouses (5 percent),I ~...IConon ga1iiWeL (4.5 perIerit)a. The index reflects the influence of global demnand growth, assuming no change in the country's competitive position. The higher theindex, the higher the export market prospects. Countries with an index greater than unity have above average export mfarket prospects.Source: World Bank.

20. Pakistan's deteriorating exportperformance seems to reflect an inability Chart 4: Trade Openness - Pakistan Loses Groundto integrate into the global economy and 50participate in global production sharing a 40 _(specializing in different stages of the J I | Iproduction chain), as many of its we 30competitors across Asia are doing. While 20competing Asian economnies were _

increasingly integrating with the global o 10economy, Pakistan's trade openness n. , , .

declined both in absolute terms and 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000relative to other Asian economies'(Chart

4). ~~~~~~~~~~~16_wPakistana PChina 0DImndia -*Indonesia -4-Sri Lanka|4).

21. This retreat - particularly dramatic in the textile and clothing industry-contrasts sharply withtrends in Bangladesh, China, India, and Sri Lanka, where textile and clothing exports performedsignificantly better than in Pahistan. 'T'hese competitors capitalized on their comparative advantage mlabor-intensive clothing production by establishing zero-tariff schemes for imports of needed rawmaterials such as cotton and blended yarns and fabrics. China's intra-industry trade index in textiles, forexample, increased from 34 percent to 54 percent during the last decade, enabling China to develop itsclothing industry and become the world's largest clothing exporter (Table 5).

Table 5: Global Production Sharing In Pakistan and Other Asian Economies

(Intra-Industry Trade Index, 1990 and 1999)

| Algoods 9.6 86 29.0 30.3 14.2 31.0 34.4 440.2 16.6 20.2 7.4 6.7

All fnanufactures 7.5 6.6 30.3 2S.9 i 7. 3.7 3.5 452 16. 20.6 7.4 7.3Textiles 11.6 6.7 34.0 53.8 54.7 46.5 21.6 17.9 7.6 23.2 17.9 15.6Clothing 1.2 1.2 63.2 10.2 63.4 2.9 44.3 2.2 67.1 6.0 2.2 10.2Chemicals 4.2 4.7 41.4 65.1 28.9 65.1 39.4 |57.5 | 14.1 15.7 20.0 21.2Machinery and transport 2.6 5.8 49.6 53.7 7.6 53.7 24.3 40.1 9.6 19.8 1.8 5.2Other manufactures 14.2 15.9 247 26.4 195 26.4 54 61 4n.8R 4A ! 72 64d

Note: The intra-industry trade index ranges between 0 and 100. The higher ratios indicate that gains from specialization in different productsare being exploited and that the participating country is increasing its integration into the global economy.

Source: World Bank.

PAnric.tnn rn,intr, Aeaic#nn A.Vfrt.o A"n,or TI

Page 7 of 23

22. Had Pakistan encouraged global production sharing in the textile industry by easing imports ofra- materials, itStextile and clothing expwts ixrould probably both have pi4n,.nieA sigr.antii, hettAr

Global integration would have enabled these industries to import the raw materials they needed todiverAs,fiy L.e; nx,--rl -i-A.-cq -Anlf to n ex*kn ninnAnna .+h .-.nlr -.7 1-_.AA_A .-A dy.cA,nn

(volume or price) market prospects, and take better advantage of the global relocation of the textile andcl-oUL.- ;.ndustr U-+a occ.-Ae A-run +.e 1990ns. It wouldA also U-a, enabled- A-pos indusu;es +- -44ws +1~1UILFUAA a UL %A y U lLaL lJtLULtLA AUUI 1LA J, I1% 1.'i.' IL TV ULUA GIa. 1WQ% V % t4WUIL.U UI00% IIIULSU LLMI' lU OULLWD1 UIlk

impact of the poor domestic cotton crops of the 1990s, inoculating their export potential against the

FallingInvestments

23.~~~~~~~~~~31L Vne",l. fela hr o D Vog.utu. 90,ra%.l.il. an all-k6rewill V L 2000/01.d,.. rnIVU- LIUVILL IVII aLOa 4 VWI~ UJ JLJI IUtLLVLrIUUL UIV, I77WO9~i,II a IUI 11 11~JJ.II

The rapid decline in investment by government and public enterprises accounted for most of the dropI,1..ILL1 S A). AN veu..wU by - - I.e p1 -V---A-- sec or 4a L -UI IIUU177Us, followed by a igp-.t, s.. i3VH

spike and then a sharp drop after the 1998 sanctions and ensuing macroeconomic crisis. Averaging less*U1i I L percer.t I GJDr, Uo[ei51 direLc ULIVebUlICILL krul) iexnIImCU smalUl PMiswri u'iirOUgioUi iii9 I0YYUS,

with the exception of 1995-97. Between 1996 and 2001 (years for which. disaggregated data areavailable) must rEL was airected to domestic-orented and mgmy caplital-mtensive mdustries, notabiypower generation, oil and gas, and chemicals (fertilizer, synthetic fibers), but surprisingly little to export-onented industries such as textiles (Chart 6). investment in manufacturing has fallen steadily since1993/94, especially for large manufacturers (Chart 5 B).

PDIEb I =. tmb_I@ U'JIIIUBUE 9____-__ll IWUUU oIJ_

A B

Gross Capital Formation 1 Gross Capital Fonnaton In Ianufacturing(% o GDP) (as % of GDP)

LU ~~~~~~~~~ ~4%18%

16% -I ~ ~ ~ ~ ~~fl ~3%4 -

14% *Gowmment12% Publi 210% go PdIaete18% * LSM *SME

_ _ _ _ ____ _ ___ _ __ __ Ni --J

24. Another change in nrivate investment Chart 6: DIstribution of FDI (1996-2001)patterns in the 1990s was the increased reliance on Agmbusirew

external finance. Until about 1996, donmentfi re;esbanks were reducing their exposure to the private nicaCtsectnr, encolurgino the nrivate sectnr tn hnrrnwu

abroad (Chart 8 shows that the flow of private Gas.Ytpmrnal APIht i n'rparld at the t.ime uhlien ,wI'inst

sector claims as a percentage of bank assets werefa1Bi&.g) PQidi, AAm.d..1p ;n..t i .-att r4lt,Vr t4x... rnar alc1s

foreign interest rates also expanded arbitrage TrarogStme

abrou.n.. uie,e r eSt Bank .of Plt fa .. c.litate o wtswmWonabroad. The State Bank of Pakistan facilitated CoiUdnf

Pakistan Country Assistance Strateev Annex 11Page 8 of 23

external commercial borrowing by private Chart 7A: Which Private Sectors Gained or Lost Ininvestors through a Foreign Exchange Risk Access to Domestic Bank Lending? (1985-2000)Insurance Scheme, at least until 1995, NAgrculture making such arbitrage opDortunities E 40%- E Mining

extremely attractive. 3 Manufacungg; 30% '>'' i iOConstrudUon

*u uinies8 20% _Commerce

Poliies hehind the Incentive Regime of the P1990s and Deteriorating Governance 1

I n0/,25. An unfriendly business climate X °'helps to explain the declining economic -10% 7performance and stagnating poverty of the 20 _ _ _ _ _|1990s. Yet the incentive regime (the trade aand investment regimes, industrial policies,tax administration and regulations) of the 1990s did not look very different from that of the 1980s. Ifanything, it should have been better. The government had initiated a series of structural reforms in the1990s, notably reform of the financial sector, government withdrawal from manufacturing, and externaltrade reforms.

26 . The 11". -C.-Imtrel degree Af Chart 7B; Which Private Manufacturing Industry.. '.' .S Gained or Lost In Access to Domestic Bank

political istability, however, undermined Lending? (1985.2000)ti, 6se aA-nceg0 i' m a *pid deteArinrat.ion in

the governance of public institutions and Textiede;pcs -sr ofr s.t.o.t-lv-A 25% EC _ _______1....~~~ T1.~ s ries - _ _ _ _ _ _ _ _ _ _ __a_ _

governments, each with its own priorities 20% i mCementarLu vesteu UL.t'at'OL, e rtd U policy II uMhuniuyinstability and the opacity of an incentive 15% _ _

and labor-intensive industries, discouraged Xproduclivi<v~ ~~~~-__ gr-tl id be ag 5%__[UUUVLIVILY gIJWul, tL1HU uicu iwigc .

inefficiencies. The incentive regime relied X 0% UneaV-iyO on shUo-[liVVU, Mustly enu-ubsr f 5% 0based instruments that combined high tariff m *protection with special concessions a =10%(exclusive licenses, franchises, taxconcessions, preferentiai access to subsidized Chart 8: Sources of Private Sector Finandngcredit). The resultant uncertainties and Cecgoverance failings undermined the business __J 7o ri-escwr cia Iconfidence of domestic and foreign investors r-.-Rivate Ext Debt (exci FCD) 1,200and became a major deterrent to pnvate , A -tsector confidence and investment. m l\ . n- SO

__~~~~~~~~~~~~~~~~ o A _ n ItuuChanves in the Trade Regime Are Not Yet 4 A 1I l- 200 -Biding _ 200

27. Until 1997, an inward-looking trade co | _Ml -200 Sregime made extensive 'use of directed t 50% * *-_ __ 1__-4_incentives, principally end-user based tarif ; ; *600 $exemptions or concessions (known as A . -' . oon a.Statutory Rules Orders-SROs). The regime _,sprovided high nominal protection and,through cascading tariffs and exemptions,even higher effective protection to import-

Pakistan Countryv Assistance Stratevv Annex IIPage 9 of 23

substituting and capital-intensive industries (fertilizer, cement, synthetic fibers, motor vehicles) whilediscriminating heavily against exports by raising the cost of inputs and raw materials. Exports were hurtfurther by dysfunctional duty drawback schemes managed by the Central Board of Revenue. The biasagainst exnort-oriented industries helps explain Pakistan's noor exnort nerformance during the 1990s.

28. Policy shifts in 1997 began a move toward world prices. In April-May 1997, the maximum tariffwas lowered from 65 percent to 45 percent and the number of slabs from 1 1 to 5. By January 2003, thenumber of tariff exemptions and concessions (SROs) is to be reduced; the maximum tariff is to be cut to25 percent; and slabs are to drop to three.

29. Although these changes look significant (chart 9) they do not tell the fihll stnry. While thenumber of SROs has been cut, they still account for a 30 percent of the difference between potential dutycollections (had all imports paid the fill statu_torv du ty) and actual collections. Mnost of t!ne rem.minigexemptions are in the manufacturingscptor, nrT+irilnllrv in mlitnmnnhiIq-sector, particularly in automobie -Chart 9: Changes In distribution of Statutory Ratesassembly (imports of parts and 1995196 to 2000101onmn,pbtpehd ulhiiGpeS Arn,i Adscif,t the

overall move toward lower and fewer 4 1 a U20000tariffe cvimifirant thAin,h fu 351

=-=^- --0.^^-.~-, o'^- " *1s 3 a 1995196domestic industries continued to 2 5-1 1bt.n.n,fit arom.n ,hAA. W..ff -F.-SA. cd.iS0n. U 25 * .These exceptions are consistent with c 201 | _ lobsenedA groww, rates for_ = 0 d_ Imanufacturing for 2000/01, which 5sossw high grOwth for ismport- _substituting industries such as auto ° loassemUly (23 jpe1,-1e,t) anUd kV.LU11LZ Tariff Slabs (y oDu 65+

(8.5 percent), but slow growth in theexpoit-olienLted Llex-iles iIUUsUty (2.7

percent).

30. All this means that by 2002 the private sector is likely to be increasingly exposed to internationalcompetition, but the anti-export bias and nontransparent trade regime remains. The tariff reductions andrapid devaluation of the currency since 2000 are probably behind the improvements in exportperformance in recent years. But the trade regime and prospective reforms need to be assessed carefullvfor their effectiveness in correcting the anti-export bias and in improving the terms of trade to encouragefaster growth and a greater export orientation. International experience suggests that low, uniform tariffswould do much to spur a more efficient allocation of resources in the economy, eliminating the anti-export bias and encouraging competitiveness and nroductivity growth.

Industrial Poieies Have Discouraged Productvity Growth and Contributed to Decing Openness

31. Since the early 1990s. the govemment has gradually withdrawn from direct involvement inmanufacturing. It continues, however, to attempt to pick winners through its industrial policies despiteincreasing evidence that these policies discouirage nrodiuctiivity grnwth and restruinfiring i.n significadntmanufacturing industries.

32. industrial policies are also likely to have played a key role in the decreasing openness of theeconomy during the 1990s (see Chart 2) and the bias in resource allocation away from export-orientedand labor-intensive small and medium-size enterprises and toward domestic market-oriented and capital-intensive industries (see Charts 6 and 7). Constraints on private investment tightened during the 1990s,initially in domestic financing and later in extemal financing (see Chart 8) as reserves andmacroeconomic imbalances mounted. In this increasingly restrictive setting, the government's industrialpolicy assumed greater importance by lowering perceived risks for private investors (by raising retumsboth over and under the table). As Box 2 illustrates, this intensified the bias of private investment toward

Pakistan Gountrv Assistance Strategv Annex 11Page 10 of 23

inward-looking and capital-intensive industries where government can more easily "protect" returns oncanital than it can for exnort-oriented industries.

B6ox 2: How Seetoi2l Policies Encourmged pr ,D'i :6od,0 0

rerLu4aer. LUC I;989 e r 1LUK= PUUl Pi ViJVIUVU vL awThu Oy ie Suab,'U.e na^ 4IW" OX J^U

to the domestic fetimlizer ifdustiy. The subsidy, jahile prempting'$R',2 billion wR iof invesmiems in urea prodcti,on ii t.1990s, also encouraaed'su6h aross ine.ciency in ,prouction t'ati on avera_e'factories operate at-least-25 belowinternatiqnal-.benclitarkc: Al6ng .with sirrila w;ste` in distribution due to the absence of product sharfig,g the subndylsot

uted productity growth in ag e ome ,Opeaifulturepaapplidly faineir was 'asted-and byd iventiscal.jtsource'tfmn, proven growthe-e"ncing, public expenditures in-educaqoi4n, ingaton andcdl;age, ,ecinoIogy Idevelopmenf and disseminatio-n, r,-ur infras truture. " -'

The n,ew, fertilizer, poiicy announced in August 2001, althou`b' an mprovement over the 1989 policy, still seiVds the,'wrong signals to investo-rs by -d,,scouraging productivity gaiis. And by °petuatng' noatnsparent subsidies and 'diiect1

Flup?71WUt UIU;I7Vvyllu 1UUL*U1wS.UW11&b kIULunitu ui v~bumLUb. Lium FUCV Ull.) subM 11db 11l14ki14VLVJL.UU1Wt. 4YJA4L1VU lklU~bU1

later section).Athe,po ipy'rafins the'diiuS(feedstock-fueI) gas pricing regime,,btings 4inestic feedstoclgas price iiine9if ,Middle East price leveis.`phases out the feedstock subsidy by 2606 forold 'fertilizer plant and by 2008 (contract ns)¶foi j

',ew plants, introduces a new feedstock suheidy (10 percent of The Middle 1s parity price) fof futplants with a 0year;loc,kin price featre, dedicaies an existing gas field for use'fy,ft eiaffirms the ̀ of '

Textle: and c ohng'Grodwh; in'ite*ele and clotiing.e*portii rose about 13 percent a year (in,US dollar sbetweeni 1990 14nd 1995_ thcfell to -2 percent'inl995 before'risiing-slightlyto 3 .ercent in. 1999. The industry's' deteriora,|

-,.,ino,nftherniare cornlple,te dependence ocottoand hea-vy r eliance on low,valnue-added pro,ducts-with'limited m oadcttwr r el h'dtn

,d ''T,he highOe,ctiv,p;ritition ofte cottn-textile an'd s;nfibetic fibe indl ies-urt tae export competitiveness of the'c,,otg industrr, eQrntegl'ngit to:r'ely on a narrow and iowqiaiy7nge of yarend cipmand:lieavily protecied sy)meticnti mrsI producedi loCaUYi.P 2The -tektile; induWy b,enCefited f£rom cheapy' tcottol through e' - cottn 'exp'ort tax and export restrict,;ris -:'ev,ent i,alVi, tia durlg nthe ,Qlq.g _ id_ frm, nrfeetil agesritnto:b, r1ii'M ^redit,nrdoth nednI -iaiwin^en !i^Hib' imnortariffs (2545 perctorbas oniports of semi-manufactured textile inuts:coupl'ed,witlvysfurIcdinal irmrport.ury and'sales> tax, reibate stc;'lE avediscouraged diversification and been a majorj obstacle to imioved export performance by the clothing

.industry These policieahave prevented the clothirg aid textile indtst frorh-ttg a tge of global productioti sharing (se*TablevS) : a 4 , r , 5°' '' 9 - < ~ 1r D;

m S~rgr. e zlgizt tif,xclutiverig;for, gt nl;torwcn o ptiid ra (de-zoning) in 1 987, coupled~[with highr ge ves p1 intm in the industry. Mvore than 40 percent of the 67.j.mlls operating in -iA',/uvv enaterec toe,mKt¶y sner is,. Yet e e mema susy siersu irom poor tecniicai, iinanciai, ant,etconomic perform*ance, ivith? roductivity'grou., 'ither atthe'field or riull' level4lagging behind other major sugar producing.ciUntri&q CChar( tO)r De-vojngp niMat.ias enco4:d new and 1,rer sugar mills to coninete with existino mills and divert canefrnj theni has camied a-cost inlilling capacity utlhzatlQn, large capital JnvestTmqntk'highunit costs of production. and low and.

-declIiiin" (relative to the voil4Jcane and sigar yield'(hart 0)., The abserce of'oning discourages nills from investing in out-t:grower fields with'ligher aneeand sucrose.yields since' they r,6,'nonger askured of sharing,in the beneSits-of.bti-gher.

'y=productivity leves m theYte1dXor factoryi Pe-zpning is the mainrason, for the poor,ptrodu,ctvity phrane otth.s se`fltfh.;+Co s> rfl54+ QIAU IfI;SAt .L W s13Q. SM -- V. *%'1 t$I LA. . 7 * * *:, . .' '

'also suffers'fromi the eff cts of r'nisguided poli'cy.n irif protecti6on for at- ed Pakistan .a nicci i(raSovuL-)s ii iuripvucu uwe5vewpmvm of UUWflbUa5m ,eeecn&mudua s. Jsrlvi icc~ mees auu,t aLn'uru u0 UICc6untry's steeld demXd bid .at prices sonii5' p'-rcent higher tha international p -ices. High tariffs penalize e:xporters of-,enint; ihose oroducts are uncomome:itive in the interational markeL

FLuaucial Policies and Institutions Are Still Weak

33. Until 1997, the banking system was dominated by public institutions and suffered frominadequate prudential regulaotin and sunervi:sion and a .weak legral and judicial envirnnmernt Rv the mid-1990s, public sector banks were in severe distress, a consequence of poor governance in the bankingsystem and deteriorng ,govemnane in the incentivee repaime nf the real sector. Developu men-nt financeinstitutions accumulated non-performing loans ranging from 30 to 70 percent of their portfolios andaccown.ffin.hg w fonrb t 0R ru-_-rwn.t nf th.e band' lnar. nf the 1rnlri'n e'ictprm. The onnr nialit, of ha"Vmcv


assets was especially acute in the fertilizer and sugar sectors; non-performing loans totaled 89 percent ofadvances to th'e fertiuizer industry and 60 percent to the sugar industry.

34. The government introduced reforms in 1997 to strengthen governance and financial discipline inthe banking sector. The reforms upgraded prudential regulation and strengthened the auth,ority of thecentral bank to supervise banks and enforce regulations, imDroved legal and judicial processes forenforcing financial contracts and facilitating foreclosures, and initiated corporate governance reforms inthe nationalized commercial banks.

Chart 10: Productivity Indicators in the Sugar Industry

-. iI .. .. I. B S V~

Source: LMC.

35. While details of the reforms are described in the Country Assistance Strategy (GAS), two points

~~.h'* L ,l u1- -f.A.'il9,Th.,fs,,'k. A.i,E,, - - _-+-n -

*r.- -.-.. l.- *n r r . Fi ... F .... ow *o lI.., pLJ.... "Il LlllU a uiIV.JI l11.J.IlllZ. Ud,iaL_

and in restructuring banks, non-performing loans and intermediation costs are still high enough to keep

Iedn ra- ' ;I - I-- 1- -1_ i-A+

l~AihlRR 1 LLA&A 1551 55 L, m L~ a L %L A 1l & LAIUb a.LuU L%JUJLO%,VUUI4r H1 vpillV-U11L.

36. The second is that weaknesses in the legal and judicial system impede corporate restructuring andasset restructuring by the financial system. The stronger than normal links between s-olvency andperformance in the corporate and financial sectors in Paldstan because of the heavy concentration and co-mingling of political and economic powers make it especially critical that corporate restructuringaccompany bank restructuring. Future growth depends as much on restructurine induistries whereovercapacity or low productivity is rampant (such as cement, textiles, and chemicals) as on newinvestmnents. And future growth requires a financial system that facilitates the reallocation of resourcesfrom low to high efficiency sectors or fims. Thus the long-term success of financial sector reforms,including bank privatization, hinges on strengthening the legoal and judicial framework to facilitate theexit of fi-rms and the foreclosure or restructuring of distressed assets by financial institutions. While someprogzress has been made (in bankruptcy law. for example). much more remains to be done.


In vestment Regime Still Not Business Friendly

37. During the 1990s, the government tried to make the investment regime more attractive toforeigners, especially in certain sectors of the economy. It established the Board of Investment as a "one-stop shop" to facilitate and coordinate the needs of foreign (and domestic) investors. Notably, the newinvestment policy announced in 1997 lifted the requirement that foreign imnvestrs get governmentapproval for projects. It also eliminated foreign exchange restrictions; allowed remittances of salaries,profits, and dividends without restriction or innrova! of the Stqte Bank; remnoved ill cnntrnlv on the

transfer of technology; and eliminated ceilings on the amount of royalties or technical fees a technologyhu,ver may navy

38. Yet the latest Foreign Investment Advisory Service study (FIAS 1999) found that, "Pakistan is aninefficient investment location, with the country becoming less attractive relative to other investmentlocations in the Region." Moreover, "whilst appropriate on paper, [the current foreign investment regime]is simply not implemented at the ground level." The study noted that the investment policy was subject toboth inconsistent interpretation and arbitrary changes. FDI was encouraged through directed incentivessuch as user-based import tariff concessions or exemptions (on raw material and other inputs), high tariffprotection on output, exemptions from income and sales taxes, exclusive licenses or franchises, and otherspecial treatment. Implementation of these measures failed to create a transparent and level playing fieldfor investors, instead encouraging rent-seeking at the expense of intemational competitiveness andproductivity growth. Chart11: Wo,lddSuine,s Survey1999

39. T c of f '' -11.0 (%firms ranking obstacles as moderate to major)

and predictability, uncertainty over the 90 _asEaaNI _~~~~~~- ;- - pler -14 . er.t.o ar.d D.r n g Sout Asia .......... _

1UUap~1*14UtOAUUIOJfl "I14AW 51 pUUl y Fv1Y Launf Amstatements, and lack of accountability 80GIUL Ua1LL JG1IIh.3 iLtdll4lll oVLvuO '-

problems. Events of the late 1990s- 60UiLCIIstU,axrLa policalU1 bsain.;lUU1s, t 50military coup, a balance of paymentscrisis, foreign ex'unage resnrictions, 4nand the independent power producers 30debacle (Box 1) furtner undermined 20already low investor confidence in 10Palu'stan. i.nus substanu"at N

imipediments, uncertainty, and risks Policy Instability Financing Taxes & Infrastucture InflationlPncecontinue to face foreign investors, regulations instablity

imposing high transaction costs for Iinvesting and doing business in a-tPakistan.

Policy lnstabiIity, fla1x= - = Administration, and RegulationRaise the Cost of DoingBusiness l_ g w5dest & d t

40. In the 1999 World Bank Mwean .

World Business Environment Survey a(Chart 11) and CAS discussions with dO sprivate sector in 2001 (Box 3), firms ds _ n identified policy instability as the _leading constraint on the operationand growth of private sector actii;ty (91 prcen.t of f...1s consid.ed it a moderate or mejor obstacle tobusiness), followed by difficult access to financing (83 percent of firms), tax administration andregullation (20 npecrt of .- ), nn a . bril atractive in


Palcistan than elsewhere in all its aspects. Policy instability and difficult access to financing (especiallyhigh interest rates and highn collaterai requirements) stand out as particularly damaging to the businessclimate (Chart 11). The policy instability reflects the unfolding macroeconomic crisis of the late 1990s,policy slippages or reversals of successive governments througnout the i990s, and the deterioratinggovernance in public institutions and economic management that created a lack of transparency andpredictability in government policies. While tax administration is a criticai constraint for the entireprivate sector, regulation is more of a binding constraint for small and medium-size-enterprises (Box 3).1This perception is also reinforced by the results of a recent SME survey carried out in Paidstan in whichmore than 80 percent of the respondents cited regulations.as a major barrier in their smooth functioning(Charts 12 A&B).

41. Taxatdon and tax administratian. After policy uncertaintv and financing. firms rank taxes andregulations as the biggest constraint to business in Palistan (Table 6 and Charts 12 A&B). Across the1nnrnI-lnrce firmT and smati mmnqlf2chlirtnr firms and errviceq-thev cite high taxes as the chief tax and

regulatory constraint, a verdict consistent with the overall regional rankings in Chart 11.

Chart 12: Taxation & Regulatory Constraints for SMEs In Pakistan

A B

- . -- - . .. F ~~~~~~~~~Govnrmment, intennsity nlF ProblemsReguiation ana utner uovL Keiatea issues 80

60 s8 706

-401 | I >4

20 co1 302 0 1 1 _ _ _ _ _ _ _ _ _ _ __~~~~~~~~~2

01 _ I _M - e0 i

e. -o

Note: Mulbple responses were allowed; total may exceed 100 l Note: Multple responses were allowed; total may exceed 100

Source: SME Policy NoAt, Worid Bank, June 2001.

42. Tax administration is the second biggest regulatory constraint, especially for large firms. Smallerfirmn are mnre likely to underrenort income. Some 80 percent of firms eittimnate that "typical" firmnc avoidsome portion of taxes by underreporting income, with 22 percent reporting less than 50 percent of theirinr.onmr the hiohe-t nnrtinn in the Soith Asia reoinn The nriv2t§ tectnr is hianhlv crititl nofthe Crntrnl

Board of Revenue, which they consider to be corrupt and inefficient, with too much discretion.

Pakistan Country Assistance Strategy Annex IIPage 14 of23

Table 6: Taxation and Regulatory Constraints by Size and Sector in Pakistan, 1999(percentage of finns ranking obstacle as moderate or major)

m,tj~~~~~~~~~~~~~~~~~_ 7

IHigh taxes 86 74 75 77 79 79Tax regulations 75 65 90 72 76 74Customs regulations 72 65 71 67 74 69Business regulations 64 58 70 64 63 63Labor regulations 57 53 60 54 60 56Environmental regulations 62 44 44 49 56 50Foreign investment 46 48 45 40 53 46

iFiretsafety regulations 43 46 33 42 46 43

Source: World Business Environment Survey, 1999.

43. Recognizing these problems, the government set up a Task Force on the Reform of TaxAdministration. The radical reforms it recommended in an April 2001 report, endorsed in the 2001budget, focus on reducing the number of taxes at federal and provincial levels as well as tax rates andpenalties. The program also calls for simplification of assessment and collection procedures, reform oflabor levies, greater efficiency in dispute resolution, broadening of the tax base, and honesty andefficiency in administration.

AA. A T1. uuoliness coniJfnur-y welcor.ed we A UJfLIIU*d1+L.I1O Uo Ul LEM AXL,LWL11 A aOa A Uk Porc and its

subsequent endorsement at the highest level. The recent establishment of a tax reform wing under a newl- A_-1 D- - D A. -U 4 . --- A_ -gfU -_ - Ai - 4F+- _ _ -4 _A. ~ ._ Ir- 4- _ + AA A

'..l.ual V D1ULW U vau 4laliJlJl, %1IuIur, vYIul FtjF9iui a 1LsLUIULIL-LA-IIIA 111FLLMWiLMilaLIVI OUCLLI,Y IUXI LLIS

reform program, is another move in the right direction. Timely implementation of proposed reforms willUV Lsey LU I vLvr1 FIv privLat sAeLVI coLnUU,de -.

45. Regulation. Regulatory constraints include lack of predictability of laws and regulations relatedto customs, business, labor,.environment, and foreign investment, among others (see Table 6). TheWorld Bank Business Environment Survey of 1995 had already identified the constraints caused byPakistan's poor business climate (Private Sector Assessment 1996). Recent survey work suggests thatconditions have worsened. Most regulatory roadblocks place a bigger burden on small firms than largeones, encouraging them to remain in the informal sector (see Table 6 and Charts 12 A&B). Because traderegulations protect many domestic producers, it is not surprising that few firms consider the trade regimeto be especially burdensome.

'40. wnat many ousinesses object to in ihc reguiatory framework is tne uncertainty: regulations areunpredictable, changing without advance notice or consultation, and interpretations are inconsistent. Onaverage businesses report being informed in advance about changes in policies that affect them "seldom"or "sometimes," with 45 percent of enterprises reporting that they are "never" or "seldom" informed inadvance. More than a third (37 percent) of the firms in the Pakistani sampie agreed to some extent thatinformation on laws and regulations is not easy to obtain.

47. To improve the regulatory environment for businesses, the government recently established aCommittee for Reforms in Regulatory, Legal and Policv Environment. Building on the govemment'songoing regulatory reforms, the committee is mapping out a comprehensive program of regulatory reformincludina the imnlementation stens needed to lower Costq of doing husiness and enhancing internationalcompetitiveness of industry in Pakistan. Because of the many sectors involved and the links between thecenter and the provinces in regulatorv affairs. coherent and effective reform will require significnntcoordination among a wide range of government departments and ministries. And it will require strongcommitment ove.r time-

Pakistan Country Assistance Strategy Annex IIP'age 15 of 23

w'ear Reguixiory Frxmlework A Lojrsrcr

48. Infrastructure services also suffer from a weak regulatory framework that hurts the investmentclimate by inhibiting private investment in infrastructure, undermines the competitiveness of theeconomy, and exacerbates macroeconomic vulnerabilities. Since the mid-1990s, the government haspursued policies aimed at attracting private sector investment in infrastructure. However, progress hasbeen impeded by the risks stemming from a weak and unstable regulatory framework for the efficientprovision of infrastructure services.

49. Altnough Pakistan was one of the first developing countries to open its power sector to privateinvestment in the mid-1990s and thereby eliminate much of the generation capacity shortage, itsmishandiing of the independent power producers crisis of i997 snattered private sector confidence,particularly for foreign investors (see Box 1). Despite the new capacity, reliability and efficiency remainpoor, the sector's financial position has deteriorated, and only a little more than half the population (about55 percent) has access to electricity.

50. To reinvigorate the power sector reform program, the government, in a new policy statement in199R8 reiterated its commitment to the establishment within 5-10 years of a comnetitive nnwer syste_m_made up of autonomous, financially viable, and largely privately owned generation, transmission, anddistribution entities. An indenendent remilatnrv agoencv (NFPRA) would oversee the sector. The firetphase of the program, now under implementation, focuses on the financial restructuring andnomnrafi7ntin1n of WAPT)A sand ICRF5C WAPDA ' new man2agerPent hnc tAren etPfle to innmrnvup iteefficiency and financial performance through a focus on loss reduction, improved billing and collections,nAn, redprpe of WAPTA 's finnnninl diffin,ltiP FPnar WFNCs aftpr cPvUr,-l v arc nf tr%Annf t r ii,A- t

utility's operational and financial performance, the government has opted for fast-track privatization, withthe help of t.he Asian DeVelopr.me.nt Bankl.

51. Even with these measures, many regulatory implementation issues remain. Tariff standards andrules are vague, and clear policy guidelines from the government on future competitive market structureare lacking. Private investors are unlikely to respond unless further progress is made on creating anenabling regulatory environment in the sector by strengthening the independence of the regulatory agency(NEPRA), reducing regulatory risks by moving toward formula-based and multiyear tariff settingmechanisms, and establishing a legal framework for safeguarding foreign investments.

52.. TiA .ece. years, I AisUx a already we.ak exi'.,1 balUa.ces wo.j I ill patU. beas UIVegovermment was unable to interest the private sector in investing in natural gas production wvhen demandfor ;..-..ore -oil a.-.d -oil pr.ce vv.eri;.g.ebll for- -r..pv.e 4oil al.s dobld Cm $1.Jbllior, _ ,nJVL l uiqVJi LU UJ1L' ml'J F'JII jJ1U, Lv, VV'L.4 'r,1aU11. I ul UI WI 1115JLu vlU aUIIVO11UL UULUUII-U, LIVULI . I .J UIIIIUIL Lil

1999 to just under $3 billion in 2000, bringing home the macroeconomic importance of developing thecou,Uy's oU^11estL1c na11l4al gas ,-esources *I reduce -V-ulVrUa14V11ILy LU eALeH17lI b[IUUU. Unmvtainty about

government policies has perpetuated the dominance of state enterprises in production, transmission, andUdiLUUiULIon at UIe coUsL Uo UIV bVsetULr' d uVIUpIILenL.

53. While gas exploration was encouraged by promises of remunerative well-head Drices under the1994 petroleum policy, production never materialized because the policy was not implemented. A weakregulatory framework and contract disputes discouraged further investments by the private sector. Themain regulatory issues are low and administered prices at the retail level, involving heavy subsidies tofertilizer and households; low and administered well-head prices for existing state-owned nroducers-inability of new producers to enter into long-term contractual relationships with consumers because of theadministered gas allocation system. Additionally, pricing arrangements for the state-owned tranmisssionand distribution companies discourage efficiency and cost savings and are inconsistent with the gaspricing regime. The institutional environment is also defective; the Ministrv of Petroleun and NatulResources plays the conflicting roles of policymaker, regulator, and market participant.

54. The government has taken steps to redress some of these inadequacies, appointing experiencedstaff, for example, to the management and boards of state-owned companies. A new gas pricingframework adopted in March 2001 uses international oil prices in setting well-head prices; phases in


adjustments in consumer prices that reflect cost of service; phases out subsidies over a three-year period,except for existing fertilizer contractuai obligantons and for a lifeline rate for nousenolds; and establishesa Gas Regulatory Authority. The new fertilizer policy, however, is inconsistent with the new gas pricingframework in many respects. T-he latter continues a dual (feedstock and fuei) gas pricing regime thai setsdomestic feedstock gas prices at parity wit-h Middle East prices (around $0.77/mmbtu) when Pakistan'sopportunity cost of gas is considerably higher (around $1.76/mmbtu) and introduces a new feedstocksubsidy for future plants with a 10-year price lock-in feature.

55. The inefficient transport system is another drag on Pakistan's competitiveness. The World Bankesti.martes th.at trAnznnrt weaknesses canse annual nmn etitiveneqs-based losses of some Rs.220 billion, or6 percent of GDP. Similarly, inefficient public sector utilities impose a heavy fiscal burden on theeconomy tat a tim.e when more public investments in infinrstucture and human develonment (health.education) are badly needed.

56. The current government is addressing some of the key transport problems. The NationalHighway Authority, rather than focusing on constructing new roads, is emphasizing completing ongoingprojects, upgrading existing corridors, and mobilizing resources for maintenance through tolls. The newmanagement of Pakistan Railways cut losses in 2000 some 25 percent over the previous year by reducingexcess staff, rehabilitating assets, and shedding non-core operations. The freight business has hugepotential and could interest private sector investors if the right framework were in place, but PakistanRailways is reluctant to give up its freight business, which cross-subsidizes its passenger services.Although Pakistan Railways had once indicated a willingness to consider letting private freight operatorsrun their own trains in exchange for a track access fee, the government's draft National Transport Policy(March 2001) contains no mention of privatesector participation in any form. Furthermore,implementation has stalled on a government decision to gradually phase in private operating concessionsat all ports. In aviation, the sale of shares of Pakistan International Airlines to strategic investors has beenproposed, but substantial pre-privatization technical and financial restructuring would be needed to attractprivate sector interest.

57. Pakistan's rich and extensive mineral resources (zinc, copper, gold, iron ore, coal, marble, amongOuterS) couid, unuer consevaiuve ass-bumlIpLiuls, puoeliuallHy coruibute tInUIual 101eil v111 VAni4i .qu ofmIV

$1.7 billion, or 3 percent of GDP and tax revenues to central and local governments of $200 million ayear. Development of mineral resources would also act a powerful en^.gLIne of growtu for SMEs andlocal community development in largely remote regions of the country, such as Balochistan. Today,however, mineraI exploitation contributes barely 0.4 percent of GDP despi e go-verrnment's in erest indeveloping the sector.

58. The mining industry is dominated by the public sector through federal and regional developmentcorporations, with little foreign investor involvement. There is little or no modem exploration, and whatlittle development has occurred has been restricted to simple technologies and has been poorly plannedand managed, especially the environmental and social imnacts. The main reasons for the missedopportunities are the uncertainty created by the inadequacies of mining concession rules, which fail tomeet international standards; lack of supporting infrastructure (such as railway freight); and perceptionsof political and security risk associated with the geographic location of the bulk of mineral resourcesRa1nchistan)

59. The federal government recently issued its National Minerals Policy, which approachesintemational standards and provides a basis for improving the business environment. It has also created anexport processing zone arrangement for export-oriented mineral development (for example, Saindakprospect). These recent developments are steps in the right direction, but they remain untested. And moreremains to be done to bring the mining regulatory structure up to international standards and make itattractive to foreign investors. Modemization of the regulatory framework rests largely with provincialgovernments but will also require further actions by the federal government (such as in foreign exchangeand trade regulations) to provide the right incentives to private investors and to provincial governments tomodemize.

Pakistan Country Assistance Strategy Annex 11Page 17 of23

Growth Has Been Unsustainable

60. The pattern of growth that unfolded during the 1990s proved so unsustainable that ushered in amaceroeconom.ic crisis lat'e in th,k deip,Anp iUlnmilnatin.g in the balance of payme^nt cnriki nf 1998.Ultimately, although quantitative analysis remains to be done, it appears that productivity growth fellA-r can^4.nllh, A .- ^.. +t.h 1 00A, n^1o,-n +1,. thntn nf mniv+th ,incmatiaiinnhlp Ac thp rnrpu,niic Air.liceinintuanflntnt.annj J11 5s .nn. -.. sI--- -_ k- --- -.- …___._..

illustrates, the deteriorating business climate of the 1990s failed to provide the appropriate incentives topri vate -L-- orr toap..lic u.n.i..o it, p rs. p.o1-ductivity 5 1,J-tf1.k

61. Macroeconomic stabilization is the first priority for reducing poverty and improving the businessclimate since it will reduce policy instability, the leading deterrent to business confidence. Thestabilization program (fiscal adjustment, flexible exchange rate regime, and tight monetary policies)together with high indebtedness and limited extemal financing leave the central government with verylittle maneuvering room for encouraging private sector-led growth. In particular, the stabilizationprogram imposes strict limits on the capacity to increase public (and private) investment in the economy.

62L.. zbprcially u11Udi uighL mac4role1onorl.l. conLst%r1a , .^a+LL0 palivaLe 0%,"1-MlU groWU1^ a VLld pVeLL.Y

reduction hinge on higher productivity growth and more efficient allocation of investment amd resourcesLlrlLUgIl S U uI4I1wU bUULLLUGI MlVIlb . 1l Wit. fl iiL i uhpl1UV-llU U1e lULV1LIVcr.t M11i . VVII GallU l.UALLdir.

regulatory risks in the provision of infrastructure.

Summary

63. To sum up, the diagnostic section elucidates that it is the govemment's failure to maintain aU1vU1-aUie Uir.vestr.er IUclinateI in 'U1 iecowuity Uiat hats consurailled i uL-U U owXu^L oi a d1ynanCL', %JJLIIFVLILIVV adIU

sustainable private sector in the 1 990s. To turn around the declining trend of investment and exports, theP.11 - 1 … P- . . - - - ..St~ L ii …- --following key a 1reaui u of erinl iuorPrIVabu nLo . bI1U e auudresdu.

* An inadequate incentive regime resulting from a combination of unfinished trade Policy reforms,continuing reliance on sectoral industrial policies, an unfriendly investment regime, poor taxadministration, excessive regulatory burden, and a recurring pattem of policy instability.

* Risky and weak regulatory framework in infrastructure, particularly, in the key growth-supporting sectors of gas, mining, power and telecom.

* Weak financial nnlicies and institutions that discouragei svailahilitv nf finRnning for nrivt.te

investment.

* Risky macroeconomic environment.

64 Th.e crrent goverm ent of Pakls* is A tn isernern, the ir.ep+mstr. c1ira+e ,t.

country. While the vision for private sector-led development is well-articulated, the country is still in theprocess of 1.-10flhiatI.ning a Os.Lteg; to 1LAflfA the vision. 1g.311 thrft 0W.'v.3 ofthe key in1vesl,.,e.t cI;I.-LuLa

issues are beginning to be tackled are apparent.

The Government's Evolving Private Sector Strategy

65. In its recent Interim Poverty Reduction Strategy Paper (I-PRSP) - a document that reflects thestrctteg; papers prepared by- +he C_rt-! oet.m.tsrc c.r199zdth eo. rpe.e.e

since then - the government sets out a sweeping and ambitious program of political, economic, and1li.LLUutiiail ref IIo sLzir.ed atL estabi10L1. SAIr iULUi aUfU1JA ofl Gr. o59per., r.UodeLrr, andU jp.-ospLe-us socieLy. LIt

seeks to revive broad-based economic growth and eliminate poverty and social inequities through three&uy sutaterip ilU1u1LIVVb. a Piu;laglI wU IIIIJIUVV bIUliU2i.UIliUlUL UUlIlLy GlIU rUVVllUlllUIL ViLUCLVullbS, a

reform agenda in key sectors to foster broad-based growth; and a social and human developrnent agenda.

66. Getting the macroeconomic fundamentals right and improving government effectiveness throughgovernance refonns and devolution are the government's first priorities. Fiscal consolidation is

F,a.^tar -orysta.e.ateÂre

Page 18 of 23

considered vital for curbing unfavorable public debt dynamics and boosting national savings in order tofinanrce higher prirate in-vestent. Fiscal targets hinge o realizi.g the gover;_n__-t's p.roj +Âincreases-a key weakness in past fiscal adjustment efforts. Implementation of the Central Board ofPvve- - eforms ar.d mreasures U-.A bradr.+e txbase a.. el.. M_t x..pôsi rWil.T

J V A UPJ WX I.LJU IlDO 3t fl*0 0, J ------ ,A "I~ W . JO., flu I.LkIIIIat0 -...a.. fL -Lnsfll L.~ flf11. A1

government's strategy also envisages rationalization of public expenditures to enable increased public:nvesu.,.-44- in-+' -Aca^;n .helth ard -.er o;+. area such as :.n-w-un."eU1VUIf'.iI.. 11 'u" "IM.0A LJ19 i,C&IU.IJJ CUI%A %J~Ll~k JJA%JLII.y 0.LL OU01 110 UIALOLALUOU L&L.U.

67. "Sustained pro-poor economic growth, based on robust private sector activity and enhancedinvestment, are the main elements of Pakistan's [I-PRSP]. Therefore, the essence of Pakistan's povertyreduction strategy is to maintain an environment conducive to trade and investment, including foreigninvestment" (I-PRSP, p. 23). Promoting private sector-led growth in agriculture, services, and export-oriented manufacturing will therefore be critical for accelerating growth and poverty reduction andreducing Pakistan's vulnerability to internal and external shocks.

00. 1 pap[;L aclLUVW1 Ugt;D Ul1.L U JULLWHI0 Ul groWU [l1nb [ut Uc;tn UU UU iVW Lu V1IIp UIyll IWL

generation and has neglected external markets, productivity growth, and international competitiveness. Itatributes tne siow pace and ina-pprupriave ptLwrn 01 growmn to tne long neglect of te agriculitural sectorand misguided policies in manufacturing, as well as an inadequate macroeconomic environment,insufficient investments in 'numan capital, and weak infrastructure. Accordingly, recognizing the need tospur greater export orientation and more labor-intensive growth, it envisions complementing trade andfinancial sector reiorms with reforms in Keys sectors nlKe agriculwre, maustry, mirasuructure, andinformation technology.

69. To revive private sector growth, sectoral committees will be constituted with all key stakeholdersto develop recommendations for the textile, chemical, engineering goods, automobile, and edible oilsectors. In manufactured exports, the prime concern is to encourage the production of value-addednroducts in Pakistan's textile exports, mainly garments. As these are labor intensive, they also have highpotential for employment generation. Within manufacturing, SMEs have been earmarked as holding thegreatest notential for generating emnlovment and creating an exnort base in the countrv. The focus is onprograms for developing managerial, technical, and informational support for SMEs.

70. in trade, the government intends to reduce maximum tariffs to 25 percent by 2003 and thenumber of tariff slabs to three, to rationalize duty drawback and export-financing schemes for exporters,and to comply with the WTO trade regime and standards.

71. Recognizng the. rave inefficiencies in tratnnnrt infra.vtru,-turo (rqilwn,vq roads, nin wv6atinn'

and its role as a catalyst in economic growth, the government is reorienting infrastructure priorities. Inthe enDrau sectnr inihttv.eq have focus-ed nn de-reeiilatiinn lihprali7ntinn nriVati7Atinin , iad orrter use ofindigenous resources and on a shift from thermal and fumace oil to hydroelectric, gas, and coal.Attno.tin fhrpion invep.tment nid enteri.no intn new alliainpc wu*ith inter,niotinr2 nil o i ned gas cor. pnnipe are

important goals. The oil and gas sector has earned priority because of its potential role in reducingmacroecononnic nivl-nerability by providing a depe.ndble domestic source of emrgy to replace flte hii"ghforeign exchange cost of imported oil. A new investment policy for offshore oil and gas exploration was

- u- Tor- J on.-aml1 on"A t0- -nu,.nrnnnt lono tn nl-;r_t fnrni 1fl m m .,+'I, * .. .- AIMfl f...v -l. - .. - -v ., - 6-- V- F -W *-t . -.f . M-lV0.0IJRfl0.1 -&lA us tJS k 'o 1

WItI

downstream sectors. Marble and gem industries will be encouraged near the point of deposit, to add,VzClue +- tc, c-,er,t l -o -- AA-Azde prod..cts.

72. Although the I-PRSP provides an impressive vision for private sector development (PSD), thedocument falls short of clarifying a PSD strategy that translates this vision into a comprehensive andcohesive road-map ahead.

73. The Bank has tried to assist the government in the process of formulating its private sector0UaLC.y. Lhe pi,-cess of WVLLLUAr1 WiLUL UII. r1JVVL,UI0.1IL LI1 Uin dveIop:,J Uhe: L OIJ PDgidIUa 1h4a bUser.gUhe.-U

in the past eighteen months.

Pakistan Country Assistance Strategy Annex LIPage 19 of 23

The World Bank Group's Private Sector Assistance Strategy

74. The World Bank Group (WBG) private sector strategy aims to support the Government ofPakistan (GOP) in encouraging dynamic private sector-led growth that can reduce poverty moreeffectively, while reducing macroeconomic vulnerabilities, and fostering productivity growth andefficient resource allocation. Based on WBG's diagnostic work, this would be achieved by supporting thegovernment in pursuing the following outcomes:

* Establishing a more neutral incentive regime that significantly reduces the appareni bias againstexports, labor-intensive industries and SMEs, and productivity growth in key industries; keyelements of this outcome include: furtner trade liberaiization; policy adjustments to facilitate thereallocation of resources from less to more efficient industries and firms, and restructuring oflarge scale manufacturing industries.

* creating an investrnent friendly regrime that is attractive to fnreign and tinTnestic investnrs; key

elements include: transparent trade policy formulation, deregulation, tax administration reformnind nnlicyv tnhilitv

* Strengthening the financial sector to mobilize resources for private investment; lkey elementsinclude: commercial bank privatization, development of capital markets, and expansion ofcommercial microfinance.

75. While the outcomes being sought are clear, the Bank still needs to come to an agreement with thegov,Zernmene-tt on a shared pnmnr.

4.,,ehixre PSD agen-da. A.lr.aA, +LiTinthe las eigh'.eer Alon'whs, 'whe I. - +l +of--

working with the government, through continued dialogue and analytical work, has been enhanced. Thisprocess ha Ws inclueAd.

* Analytical inputs: The Bank has provided inputs to policy-making through sectoral notes onfertilizer and cement industries, an Investment Climate note by World Bank's Chief Economist,and an SME Policy note based on a country-wide survey; IFC has provided advice on financialmarket development, including reviews of insurance and housing finance.

* Capacity building: Given that thre government has been responsive to analytical inputs anddialogue, the Bank has followed on its support through capacity building efforts. Amongst otherthings, this has included: (i) an iTJF grant to push forward the dereguiation agenda through therecently established Committee for Reforns in Regulatory and Legal Policy Environment; (ii) anLDF grant to support the government's championing of tax administration reforms through theestablishment of a Task Force on Tax Administration Reforms in 2000. Based on therecommendations of the Task Force, a program of reform was approved in November 2001 by thePresident; the Bank is providing a Project Preparation Facility (PPF) to implement amd prepare aproject for restructuring of tax administration, along the lines recommended by the Task Force;and (iii) in response to a government request, a three-day WTO training workshop was organizedby the WBG, in joint sponsorship with the Ministry of Commerce. Aside from disseminatinginformation regarding WTO, its requirements and implications, it helped to build capacity withinthe government.

*tS.&0& 6 Ra,;s.r. a&,varene A.,I.Bea 1 as LLUb . wo~r.k. tAo assist010 L11 5V..V L -&1tU1L ;r. %t.A.AULLLUULU1 jJIIoILY

reforms areas -- the on-going Investment Climate Study (ICS) to help identify the key bottlenecks;.1 ;.vestnm. A v,1 .. ate ;n Pakis. OL, io an1 exa..ple of one suchIL U1LI.4a.LLv-. I 11B- iNUs I dl LULUU'L4UI.g

this study in joint collaboration with the Small and Medium Enterprise Development Authority01VIL,DrXJ DU asO Lt he'Ip UUIIU ctap4aLc.y WiUILiI UI, LUU,UUy LU U1UVILa&V ULiU Labk Ur a regUlr ubass.

* Desk-based review services: In response to government's reauest, the Bank has prcvided timelydesk-based review of its new Competition Law which may soon replace the antiquatedMonopolies and Restrictive Trade Practices Ordinance. 1970. Recently, an informal review wasalso provided for the proposed Pharmaceutical Policy. In both cases, the Bank was able to drawon exnertise within the networks.

Pakistan Country Assistance Strategy Annex IIPage 20 nf 23

76. To provide continuing support to COP for its evolvi.ng PS1 .strategyq the World Bank Cironun willfocus on four key areas, selected on the basis of WBG's diagnostic and their impact on growth andpoverty reduction, and of the Group's comparative advantage:

* Supporting economy-wide policy and institutional reforms that improve the overall incentiveregime and investment climate, and cataly ing private investment in response to theseimprovements;

* Supporting the establishment of regulatory frameworks in the key growth-supporting sectors ofgas, mining, power and telecom, and catalyzing private investments under these new frameworks;

* Building the knowledge base on constraints to private sector development; and

* Supporting the further development of thefinancial sector to improve availability of financing forprivate investment.

77. In alignment to the outcomes being sought, support by the WBG will be provided in the form offollowing instruments:

* Policy dialogue and adjustment lending to suDDort the imDlementation of macroeconomic andsectoral reforms aimed at improving the investtnent climate and overall incentive regime;

* Advisory work to support institutionai and reguiatory reform, inciuding privatization;

* Analytical work to improve understanding of constraints to Drivate investment and Droductivitvgrowth, and identify institutional, policy and regulatory frameworks which will encourage privateinvestment and productivity growth;

* Equity and loan investments and guarantees to mobilize private investment in reformed sectors

78. The World Bank will take the lead in analytical and advisory work, drawing on the perspectivesof IFC and MIGA, and in supporting GOP reforms. IFC will invest equity and loan finance, and makepartial credit guarantees; MIGA will offer political risk insurance through its guarantee program. Thematrix below summarizes the Private Sector Strategy and World Bank Group interventions in support ofthem.

[| I World Bank IFC MIGAIPolicy

Analysis & Dialogue&Economy- ____________ I Adi. | TA Investment Advisory G'tees

v>wuuvuu,y - sexAaVaSory Adj

wide Mir. |.|lllTr_ Id &_, Mg. .N- I I

growth Power &...sectors Tplpi'nrnc

Financial Banks l 1 | * | * __l _ l

| sector I NBFIs I I

Improving the Investment Climate

79. Tne Worid Bank will support economy-wide policy and regulatory reforms through balance ofpayment operations and technical assistance in areas such as tax administration by the Central Board ofRevenue and deregulation of industriai, business, and labor regulations. Tnis dovetails with the WorldBank's program of support for strengthening government effectiveness. Strengthening public institutions


like the CBR both imDroves the accountabilitv and efficiencv of the Dublic sector and improves theinvestment climate for the public sector.

80. Consistent with the Bank's earlier diagnostic, priority will be given to elements of the traderegime that discourage export orientation and participation in global production sharing, productivitygrowth, and international competitiveness. Actions would include timely implementation of scheduledtariff reforms, the phasing out of regulatory duties that still provide protection well beyond the maximumtariff rates, the elimination of SROs that distort resource allocation or undermine business conficlence, andreforms of the tax administration to eliminate the shortfalls of general sales tax refunds and dutydrawbacks to exporters. External trade reforms would need to be complemented by selected economy-wide (e.g., labor, business) or sector-specific regulatory reforms to relieve constraints that are holdingback private investment (domestic and foreign) and productivity growth.

81. The Bank will continue to encourage the federal and provincial governments to pursue the tradeliberalization and modernization of industrial, business and labor regulations that are already under way.A Committee for Reforms in Regulatory and Legal Policy Environment was recently established (January2002) to review commercial and labor regulations with a view to eliminate those that constraincompetition and/or impose unnecessary compliance costs. A World Bank team has started to support theCommittee and will work with the government in identifying policy measures in these areas that could besupported by adjustment lending.

82. At the provincial level, the Bank's iialogue and proposea assistance to Sminh ana INWIw', whichsought Bank's assistance, will also focus on reforms that fall within the provinces' purview (such as laborand industrial regulations) to improve the investment climate.

Key Growth Sectors

0.3. I11U, VVUILU Jd.aN Bz JIUUJJ Will Ub IVIeleV- i LlllVls Vf 4LUU d UIVZi.Lr, sUiLctal poll.cy aLdU

regulatory issues, and promoting private investment. Priority will go to sectors with significant impact onecoiiuiiu,. grWiLL zU a 41%d al. oJf llL i.e. gas, mi.Unin, povwez v l sec.O.

QA T-o prrity wll1 on tn nat3al gase whl,ich of'fmrc t.he largest -npn 4oQl fnr rpAi.r.g n.croecnnorn,

vulnerabilities, attracting FDI, restoring private sector confidence, and encouraging efficient substitutionof dom,.esti;c resowces for inm.ports. Cornnsise-ent .t thA atu e. PnVe uivcsnn thqe nhienti,.o eIll h; tirnAl,,. _d - .... '.....-.'..,-I.-- 'J-- _..-- ie

and consistent implementation of regulatory reforms to create an environment for accelerateddevelopme-nt of gas reserves The str-tegy will be to surppnrt implementatiion of the planned p.rogram. ofretail and producer price adjustments, including bringing feedstock gas prices to the fertilizer industry inline with prrices to th.e rest of the indulstrial sec-tor and rerflctin-g any fertilizer sibsidiy in the budgert. The

strategy includes privatization of PPL, restructuring of transmission and distribution companies, andliberalizatinn of transmissinn under a common carrier reaime. Thess reforms wrill be supponted hy thegradual dismantling of the administered gas allocation system and implementation of a new regulatoryreoim- for tranqmiqqinn that nermits both contractino between larve nartieq anti the intrndiitiiinn nf new

tariffs. The World Bank would concentrate on advice and financial support to expedite introduction of anappronriatei fully onerating regulatorv cframework. LFC would consider financing annronriate businessopportunities to increase the country's gas reserves by supporting early development of newly discoveredfields and imnrovement of the gas transmission infrastructure.

85. In Detroleum, the Bank Group will continue to supDort the government's reform guided by theimportant program of analytical work carried out in FY01. Over the next three years the focus will be onadvancing the implementation of the deregulatory reforms to strengthen competition in the sector andassisting with the privatization of the Oil and Gas Development Corporation Ltd and Pakistan State OilLtd expected to take place by March 2003.


86. The World Bank Group will accord greater priority than in the past to development of the miningsector, because of its potential importance in improving macroeconomic stability through external andfiscal accounts and broadening access to growth and employment opportunities geographically andsocially. While the expected benefits will materialize beyond the planning horizon of this CAS, theimmediate objective of the 'Worid Bank Group will be to support establishment of a modern reguiatoryenvironment for mining that enhances Pakistan's competitive position in attracting private investment andencourages environmental and social sustainability. Ine strategy will focus on supporting the federal andprovincial governments in their elaboration and implementation of a modern regulatory framework andimproving their capacity to mranage the instability of govern-ent revenues associated wi't extractiveindustries. The Bank will respond to client "pull" from both central and provincial govemments (such asULe LUUMIL UVI1I 1U ULUIII fr IV , IUII S JUVVII1UIIdh G I1L), fUo asilbante ill rfolurring uhe luegiiuLi.egugiiawy aiIU fisl

frameworks and developing institutional capacity to facilitate and promote environmentally and sociallyrUeso l 111%, s ,nj 11VUM it.j%AVl LILf,, U LVVV ito tP.tIL UUU1 lUL 5Udi1 R iUU'lUl OUL,-tIt lul ilUil.dib.

Q87. 'T.he -1 B rb _ G .. ,II -wi!! c.;nu Ats deep erggr-en . h pwrscor h oe sector

reforms will continue to be supported through policy dialogue and adjustment lending which, by.trength n- - r----r- .r..hLr atoilih, an.d rsA,,nmg expo ncdr i expected '.o ;rr.p:o e .te im.t...r..entclimate for private investment, particularly for the privatization of the distribution companies. InaAAitinni thfB Rin. (rrnim will imn nnt fm nnp,allw tlfrn--, rh n,onrinnn-otw in.rta- t 1-Ainn ih---- i -~~G. s -p rt*^ _arr ..... J Vb-- r- 6- --*-6

privatization of the distribution companies. In particular, IFC will aim to mobilize private investment forthe power set'tnr particularly for the privati7fA Arih:ulinn cmor.par.ies. LTC will also continue to act asadviser to the government on the privatization of Faisalabad Electric Supply Company (FESCO).

88. Since improved connectivity is essential for growth, including that of the IT industry, and for thepoor to benefit from technological change, the Bank CGroun will continue its dialogue with thegovernment on an adequate regulatory framework to attract private investment. In FY02, MIGAsupported a software development project in Karachi by Jananese investors and is looking at a telecomproject in FY03. IFC and MIGA will seek opportunities to support the growth of the 1T industry.

Building the Knowledge Base

89. In order to underpin this assistance strategy and the policy dialogue, the World Bank Group willneed to build its knowledge base about the main impediments to an improved investment climate. Whilethe broad impediments have been identified --trade and investment regime, industrial policies, taxadministration, business and labor regulations-- the precise microeconomic distortions of the investmentclimate and incentive regime and their relative impact on productivity growth, resource allocation, andprivate investment need to be identified and quantified more precisely. For example, more needs to beknown about the impact of the current and prospective (2003) trade regime on private sector incentives inorder to judge the effectiveness of trade reforms in encouraging stronger and more export-orientedgrowth.

90. In documenting these domestic constraints, priority will be given to industries with the potentialto contribute significantly to macroeconomic stability, growth and employment. The textiles and clothingindustry is an obvious candidate. With close to 80 percent of merchandise export earnings, the industryapproaches the imminent phase-out of the Multi-Fiber Arrangement in need of crucial domestic reformsthat can put it back in competition after a decade of losing ground (see Table 3). Another candidate mightbe the sugar industry. Current sugar policies that fuel the huge sugar cycles that destabilizemanufacturing and agricuitural growth also retard productivity growth in the mills and on the farm anddiscourage more efficient use of scarce water resources.

91. In addition to an informal private sector assessment jointly prepared by the IFC and the WorldBank in FYr , and an SM1E Policy ivote describing tne key features of Sivus ana their constraints(emerging from a business survey also conducted in FY01), the program of analytical work includes: (i) a


Development Policy Review (to be completed in FY02) which will provide thie Bank's assessmnent of theadequacy of the current development policy agenda to achieve rapid growth and poverty reduction; (ii) a'Trade Policy note (to be completed in FY04); (iii) an tiuiI Administrative Barriers Reform study to beconducted by FIAS; and (iv) an Investment Climate and Economic Performance Study (to be completedin FY03). 1Tne latter aims to relate key aspects of the investment climate tbasic economic inuastructure,and regulatory and governance frameworks) with the performance and productivity of privatemanufacturing firms, small and large. To build domestic capacity for tius analyticai and monimring workin the future, the study is being carried out jointly with SMEDA.

Reforming the Banking and Financial System

92. In response to the financial crisis of 1996, implementation of the government's banking andJ.JahcLial - t-r.I - st- ~5 ae sfd Ut eaWl..est 1997 and is well ad-vm-.ed. Th tt-me is '--o--d a5r,L .4tt

between the government and the Bank on the vision for Palistan's financial system - a market-oriented,,.redonA nar+.tly -ratel,y on.eA bank1- an.d .in-inal sysftw. f+lit -orftes ,.d a -+rnn- raenilnfnr,framework, is supported by an effective legal and judicial system, mobilizes the capital needed to financersniA n-nr-fa e.nnnr nrnn,fl, snA .nfu'o oaa fn ...iol Cannnaa ho, fh- nnn- ('nnan,ntlar fls.

Bank Group and ADB have been actively supporting implementation of the strategy with adjustmentlending, restructuring and pi-ivatzation operations, technical assistance to strengthen t'he fir.ncial

infrastructure, including the payments system, credit information and anti-money laundlering, andeyxpnding the micro-finance te-rtnor Mudh progress has been mAde in srengthening pnrdentialregulations and supervision for banks and the capital market, and this needs to be extended.. Prioritiesinchlde adherincg to the nrivatimation schedule far the NCR- closinty mnst of the TlFT.- imnrnvino the

legal and judicial system for financial contract dispute resolution, and achieving full market integration bynhasing out snecial credit programs and closinLg tax and regulatory arbitrage onnortunitieq

93. IFC will supDort the emergence of strong Drivate commercial banks and Non-Bank FinancialInstitutions through selective investments. The IFC will also support the development of new financialproducts to better meet the needs of the private sector (e.g.. long-term fmance for infrastructure, access tofinance in agriculture/agribusiness, guarantees for SME finance). Such products should also expandaccess to financial services to new clients (e.g. the bankable poor through micro-finance institutions orleasing institutions) and to under-served SM[Es.

Pakistan Country Assistance Strategy Annex IInP age I °S I

ANNEX m: BANK PARTNERSHIPS WITH BILATERAL AND MULTILATERAL AGENCIES

Gender | The Interagency Gender and Development Group, comprising all major donors, is supportingvanous activities to nromote gender eciuitv in Pakistan. The Bankl the govermment and maiorbilaterals and multilaterals, including all UN agencies, are also working together to strengthenthe govermment's analytic capacity on gender sensitive policies. Specific projects include:"Women's Political Participation and Gender Sensitive Strategy", a UNDP- Gender EqualityUmbrella Project; "Family Protection" and "Gender Equality Project" by DFID; and "GenderReform" TA grant by AsDB.

Power rower Reforms are supported by the Bank and other donors, particuiarly AsDB and iapan. ixneReforms Ghazi Barotha Hydropower project is one such example which is supported by a number of

do_nor ;-ncA;-ing D-1,B^ AsB n B!C T.T , IDB, T B!B.T A!o -2er is0- te sl_iiamong various donors, with the Bank supporting WAPDA restructuring while AsDB taking onKESC reforms.

Oil and Gas The Bank, CIDA and AsDB are supporting policy reforms through TA and Grant funds.

[Provincial The Bank is supporting the economic reform programs of the Sindh and NWFP provinces whileReforms AsDB is assisting Punjab on publc resource management.

Devolution A number of development partners are supporting the Government's devolution program. I-e e|UNDP is leading the effort while the Bank is focusing on areas where it has a comparative

~~~~~I--:--A I..J_+ _1_:__ -- .A _ A A_ -:1 Av._. A- TsrIk - -adv=wautge sUac uG aIs,UGUII Gr l as u Guu IQ OLP.,QU OVI VIV U%.si UVU-y. flu r- 5auL ralready been provided to the National Reconstruction Bureau.

Child Labor The Govermment of Pakistan has initiated over the past decade a mnajor campaign to meet thechallenge of child labor, including enactment of key legislation prohibiting child labor inhazardous occupations and bonded labor, joining the ILO Program for Elimination of ChildLabor (IPEC). The Bank is collaborating with ILO in building partnerships with the privatesector and NGOs in tackling the child labor issues.

Poverty Iiie ksank, along with other major donors, particuLarly AsDB and DFu-I is supporting key aspectsReduction of the government's Poverty Reduction Strategy (PRS). A Workshop was recently organized

^rriw ~ ~ ~ U DDzd z 6spp. on develop:1,u 111CICa+.or to ITMeu E11 pe,1..11,11ce VI soc"ia

services delivery within the PRSP framework.

[ Rural Water I The Water and Sanitation Program (WSP) is supported by 15 bilateral and multilateral donors, 1SuoPpl I including the Bank.

[sAgriculture and { The Bank and other major donors, including AsDB and JBIC, have pooled resources to support]Irrigation policy reforms and investments in irrigation and drainage under the Government's National

Drainage Program. The Bank and the Dutch government are supporting community irrigationprograms in Balocistan. Th e Bank is also working witn tne w wI on forestry and bio-diversity.

1JUl15 WIa 1il~ DUI ille Bn InnuGLmLuun w.ui uuI UUIeldU, incuduing DrFLD, L'.IVV, has proviueu bUppO LU

| Development | provincial education and health projects. Future support by the Bank will take the form ofII nrtgranmatic umnport for dictriet deliverv nf hnth pAnn^tinn anti henlth qervi.ec -

Health I To combat HIV/AIDS. TB, we have collaborated with UNAIDS, UN Drug Control Program at 1-the policy and planning level.

Pakistan Countrv Assistance Strateeg Annex IVPage I of 4

ANNEX IV: MILLENNIUM DEVELOPMENT GOALS (MDGs), TARGETS AND SELECT OUTPUT

INDICATORS FOR PAKISTAN

1. This note summarizes the long term indicators consistent with the MDGs for Pakistan, thebaseline data issues, and the output indicators selected as part of the monitoring and evaluation exercisefor Pakistan's PRSP. The I-PRSP for Pakistan provides an elaborate M&E framework, outlining thevarious issues surrounding the choice of indicators and the related sources of data and measurement (seeI-PRSP document, Annex 1, final version Dec 4t" 2001). This note will also describe the progress made sofar on these technical issues as well as on the process of reaching a consensus on these and theinstitutional accountabilities for this exercise.

Tracking Progress towards Millennium Development Goals

2. Table 1 below summarizes the Millennium Development Goals (MDGs), and the long termindicators that will be tracked at the national level, along with the sources for these indicators. The long-term indicators proposed to measure progress towards the MDGs are readily available from existingdatabases. A few outstanding issues however remain, w'hich require timely resolution.

> fle challenge, however, is to reconcile the baselines in instances (e.g. gross enroliment rates)where more than one source of information exist. The PRSP Implementation Committee underthe PRSP Secretariat (Ministry of Finance), in consultation with the relevant ministries and theFederal Bureau of Statistics, would need to identify the source to be used for baseline andtracking of sucn indicators. in tne interim, we have recommended the Pakistan, integratedHousehold Survey (PIHS 1998-99) as the preferred source, since it is a representative householdsurvey t'hat is regularly fielca. iLms wiii aiso ensure ithat capacity-building can be focused onthe agency currently accountable for the PIHS.

> Pakistan does not have a national poverty line. The choice of a poverty line has been the sourceUs IIIUtII UeUUMV UVVI Ul; yVNI15. 114IaUMU prugrt;b wWrUUb Uf 1VILJ.lvlb IllrXb5llaltb tt uia l Iun a

national poverty line that can be consistently updated over time to measure progress in reducingpovlL,y. rA reglional WVLAZ1LUji spJUIiouirU uy UIIV vYvOIIU Basl& 1 Jd.e1Lup -wiu 1V1s'I41

Institute of Development Economics has helped in building consensus which should result in theI Lic. ,o1 oi ar. ofJ1c1l FG jvrL.LVM- y l;Lne. Ti, L PRSP .J1I1FjJlemIeat CLorUL , ,r,,iteLULL lb er,co.U4igedU tU piay

a facilitating role in expediting this decision.

> The indicators would also need to be disaggregated at the provincial level. Setting baselines forp,-o, VLL.1al ulr.dicatr, W;.a are W c Iste.-.t WIUI ULWOL. Uo UIV. una.IVIal iul-.dators, 10 0U4d48igL1LW&aLU

since the data sources for the most part can be disaggregated at the provincial level. However,tag -sb Ar-n.c -,;i! -.- A to bke worked out wi+.k. p-ovincial. gOv....MCnAts .. sli process is

currently being initiated by the PRSP Secretariat. Ultimately these targets are endogenous to--.plem.en--aio. of __. eol ;v plar. De_,ou_.;o ot.e itc e,e rdblo scr..underway, for which the fiscal framework is yet to be full implemented. Therefore the exerciseof Settidn"g redible targets for indivi:dual provinAc c or.! e when the devolution processhas been completed. In the interim, it would be best to focus on the national levels and arrive at avrAcnliifinin fnr thnp int.tinnsal. inAinntnrc ir. Pa1r;etan.

'The PIHS closely follows the model of the Living Standards Measurement Surveys that are fielded regularly in a number ofdeveloping countries.

Pakistan County Assistance Strategy Annex IVPage 2 of4

3. Given the issues raised above, particularly the ones outlined in the first two bullets, the targetsshould be seen as indicative. Moreover, for some indintnrc thtar mnnitnr2hle (smuh ns the nnes inTable 2), targets are not meaningful. Tracking progress towards MDGs, which comprise ofinternationally set goals, will be challenginga where the firt.t step will he to a how realistic suich goals,are in the specific context of Pakistan. The Bank is facilitating this process in Palcistan, using SIMSIP (asimulation software nackage develoned by the Bank) to assess how realistic these targets are. inconjunction with the exercise of costing the targets. The regional workshop made a beginning in thisdirection. by conducting training sessions for representatives for all countries in the reffion. includingthose from Pakistan.

Poverty Monitoring and Tracking of Output Indicators

4. In order to measure progress towards the MDGs, it will be necessary to track some outputindicators that change over short spans of time, are leading indicators for the goals, and provide feedbackto policymakers about the results of policy initiatives on the ground. Such indicators should be monitoredregularly - annually or semi-annually - so that the findings can inform policymakers on a continuousbasis. Table 2 provides a list of such output indicators for Pakistan. This list has evolved from themonitoring framework provided by the I-PRSP, further refined at the workshop held by the PRSPSecretariat to bring about consensus among provincial and district authorities on the selection ofindicators. Implementation of this monitoring mechanisms will require finalization of the set ofindicators, setting up mechanisms to collect the information, and building capacity for rapid analysis ofthe data gathered.

5. The process outlined above entails the following steps in the context of Pakistan:

> Evaluation of existing monitoring systems, like the management information systems foreducation and health (NEMIS and HMIS), identifying bottlenecks and possible' areas ofimprovement. This is likely to be completed by May 1, 2002 with the help of DFID consultants.

> Creating a database to measure the selected output indicators; this involves identifying new datasources, as well as developing a survey-based tool that is easy to administer, implement, andcovers a large sample that is representative at the district level. Most importantly, the analysis ofthe data must be completed with a quick turnaround time, to have maximum impact onl policyformulation.

> In the context of Pakistan, given the criticality of improving service delivery, the survey toolshould collect information at the facility level, as well as the household level. This, whentriangulated with the expenditure tracking exercise (which is part of the proposed monitoringframeworkt), will provide a quick and effective diagnostic of progress in education, health andtargeting efficiency of the major poverty programs.

6. We expect the full implementation of this monitoring exercise to be completed by the end of thiscalendar year. A critical outstanding issue is to clarify the institutional arrangements and accountabilityfor implementing the monitoring exercise. Ongoing dialogue is expected to expedite this process. In thecontext of Pakistan, institutional accountability and the roles and responsibilities of CIPRID and PRSPSecretariat would need to be specified.


o nflrhLUFUCWICHL oL lU A^LIU1-bYWil1aic tachiV ar.dU 1L%.aldUh WVJLAA-1 cor.acts, c1AUV.G V.

absenteeism; and implementation of performance-based remuneration and teacher trainingprograms.

120. Correspondingly, Bank iending to the provinces will be g-uided uy tlhe follow-ing exit crIteria:

* Reappearance of substantial short-term borrowing to finance tie budget deficit.

* Expansion of public sector contingent liabilities (through off-budget financing of publicenterprises and other entities).

* Deterioration or reversal of reforms to improve social service and governance improvements.

D. Non Lending Services

121. The Bank Group non-lending services will include the completion of a Poverty AssessmentReport (FY02), a Development Policy Review (FY02), a Financial Sector Assessment (FY03), CFAA(FY03), a National Public Expenditure Review (FY03), Provincial Economic Reports (FY03-05), and aGender Assessment Review (FY04). Other important analytical work in FY03 will include a policy noteto launch the policy dialogue with the new government after October 2002, an Investment ClimateReview, an Oil and Gas Sector Report, a Rural Development Policy Review (FY03), and a WaterResource Management study (FY04). Support to the implementation of the PRSP will also be part of theBank Group's non lending services (see Table 7). The analytical work will underpin the B3ank Group'ssupport to caDacity building and will be reinforced by a series of leaming and knowledge disseminationprograms to be delivered by WBI, in collaboration with Pakistani think taiks and academic iinstitutions.

Table 7: Components of Non-Lending Tasks and AAA for Pakistan, FY01-FYO5

Current CAS Ne-t CAS l

r yol xv TV r lUO r IV-# X rrue _5

CPARIP I DPR IPER ||Poveiy AssessmentPunjab PER Poverty Assessment CFAAI DPRCFAAI CPAPII

Provincial Finance Review Environmental Inv. Climate Review Poverty Monitoring Private Sector Assessment

1DF Paper e--rsector Asessmnent *

tPovety Monitoring Poverty Monitoring Rural DevelopmentFSAP Policy Review

.l A r.i.. __ ____Social Risk Assessment

Ptmjab PER I JSA Provincial Economic 1 Provincial Economic Provinicial Economic

| SnE c Reform NWFPEcoReform _ Policy Note for New GOP W Water Resource Mgmt Policy Review

CAS Progress Report CAS 1 CAS Progress Report CAS CAS lrre ReportPOlicY Nnt. On SME I Support for I-PRSP I Sunnort for PRSP D Sup.ort for PRSP I Supnnrt for PRSP|Deveopment Forum Papers | Development Forums | Development Forums | DevelopmentForums [Devdlpment Forums

Pakistan Country Assistance Strategy Annex IVPage 3 of 4

Table 1: Tracking Progress Towards MDGs

MDGs Long Term Indicators Baseline (1998-99)' Medium-Tlerm Targets (20)r(Outcome)

Economic Well-being: > Pverty gap C0rato, .Econonuc wei-beilig: > Pvcr^.Ay hcco ......... t> 32.6% > _age_et be d-eternuAnmdreducing the proporfion of > Poverty gap ratio > 7.0poor livinR in extreme > Gini index of consumption > 30.6poverty by at least half by > Percentage of rural population with > 61.4%2015 no ownership of agricultural land

Social development &Empowerment of Women IUniversal primary > Gross primary enrollment > 71% > 80%education by 2015 > Net primary enrollment

> Literacy rate (i 5 and above) > 05% (urban; 66.5%,rural: 45.2%)

> 42.5% (urban: 63%. rural: > 59%34%)

Reduce gender disparity in > Difference in primary enrollments i 13.6 % (net enroliment); > i 2% gap (Grossprimary education by 2005 (net and gross) between girls and 18% (gross enrollment) enrollments:- Male: 87%,

boyvs Ifemale: 750/6)> Differences in literacy rates between > 30.8% (male: 58%, > 21 % (Male: 70%, female:

males and females female: 27.2%) 49%)

Increase participation of > Proportion of seats held by women 11> Available after national-,;,omen winpoi I _ in nnationa!a n,rir-nmp,t I e1ections in October, 2002 decision-making

Reduce infant and child > Infant mortality rate > 90 per 1000 live births > 65 per 1000 live births(below age5) mortality (127 in 1991) > Tobe determined

Ira.tes by 132 Of 1el90-9 1 > U-der=5 child mAort_lihy.t-le > !!6per!000!ieb mfis rate, by 2015 > Immunization rate (% of children > 49% > 62%

12-23 months old that are fullyimmunized)

[ Reduce maternal mortality I > Bhsattende d 1.> 19, > 25%

by 4between 1990 and personnel (doctor/nurse/ Lady2015 Health Visitor)

|> Percentage of pregnant women > 31% > 500%using prenatal care

Provide access to > Contraceptive prevalence rate > 28% (PRHFPS); 19.5% > 39°/,[reproductive health services I

through primary health caresystem for all individuals of[ appropriate ages by 2015

ni-n.rovements in Other > Population with access to safe > To be filledIndicators drinking water

> Total fertility rate> Life expectancy at birth > 4.5; 4.8 (t'RHr-Sj) I 4.1> % of TB cure rate > To be filled

I_> Unknown _

2 Data source for all long-term indicators, unless otherwise specified, are from PIHS (1998-99). Other sources are: PakistanRenroductive Health and Family Planning Survey (PRHFPS) 2000-01.

Pakistan Country Assistance Strategy Annex IVPage 4 of 4

Table 2: Output Indicators for Poverty Monitoring (measured annually)

1 Access

> Utilization Rates disaggregated by BHU/RHC and by curative andpreventive care: Source: HINUS

> | % of population covered by LHWs ; Source: LHW/MlS

Quality

IIk % of FLCF (BHUs/RHCs) that were out of stock of 5 essential drugs,Leading indicators to monitor or contraceptives for period of more than one month each in a givenI health out.com.n,es I yeaL; Sourc;e: X3UVJS I

> % of FLCF (BHUs/RHCs) with doctors and/or female paramedicpresent; Souree: Pronosed Annnual FaciIty Su.rvey

>x Number of female health providers trained in midwifery;Source:Ministry/Departments of Health

| % of children aged 12-23 months fully immunized against DPT-3Source: Annual Surveys conducted by independent agencies under theGAVI initiative

t Number of functional schools: facilities with physical infrastructure - atleast a b- 8 , .oet, Q VVate .Source: NEMIS

Percentage of teachers with in-service trainingSource: Proposed Annual Facility Survey; NEMIS

Leading indicators to monitor Quality of schoolingeducation outcomes

> Availability of textbooks, blackboard and chalk, student-teacher ratio;Source: NEMIS

> Teacher absenteeism: teacher present or not at the time of survey;"U-UrI rIopuseu iuUuiar n uieilty Survyy

| |______________________ Proposed Annual Household Survey JSocial Protection/Safety Net Programs

) ' Employment generated througn public works programs under KnushalPakistan Program; Source: Proposed Annual Household Survey

Leading~~ ~ ~~ indiator to monitor^ie of7Z y.yp fassnc ruLeadig idicators to monitor > Number of borrowers and size of credit under PPAF and Khushalianti-poverty programs Bank Drograms; Source: Proposed Annual Household Survey

> Number and composition of small infrastructure projects and trainingsupported by microcredit

> Number of beneficiaries by province (rural/urban) of the Food Support |________________________ |I Program; Source: Pakistan Bait-ul-Maal l

Pakistan Gguntry Assist,ance Strategv Annex VPage I of 6

ANNEX V- 'AKISTAN COUNTRY PROGRAM MAT]RIX (FY03-05)

external and savings to finance nev * ReducEd Fiscal DefIcitiGDP *SC FO-5 rvne iclsaiiaiidornestic pijblic investment aniJ curb . Sustainable CUrTent acountnt * Provincial space restoreddespitiegot P uinavestcnt * deficits Adjustment s Improved Publicdebt are both quite unfavhrable pubcc debt defcits forms Creits sector management

large andrhne uodynaniics. This hinge * Continued tight management (FIY03-05)there are still upon the of external borrowingconcerns over the implementationi of CBR o* DPR (FY05)fragility of the reform, and measures * Sound finandal position of Poveexternal position to broaden the tax WAPDA Assessmentandl future growth base, including (IY05)prospects. The agricultural income, andSeptember 11 eliminate tax * PFublic Expenditureshock has also exemptions. The Review (FY03)increased the risks strategly also seeks to * Annual Publicto the balance of re-orient expenditures Investmentpayment position by towards the scdal Reviews (FY03-15)maldng more sectonr by reducing the * Trade Policyuncertain an early costs of domeitic debt, Review (FY03)resuimption of long- public enterprises, andtemn private capital defense spendlinginkows as vwell asIncreased aiccess tointemational capitalmaikets m -- I I IU ih, Hm.

* At the core of the * Improvement in * The Comptroller * Ad-ho Public Accounls * Country Financial * Improved public * Statistical capacity buildin!gpoor governance govemment effectiveness General of Accounts Committees (PA%Cs) have Accountability & sector, accounting, * Accounting and auditing,problem in l'akistan at federal, provincial, anid (CGA) has forrnulated deared at both the Federal and Assessment auditing, and lecgalIs the leadership's distict levels an Action Plan to Provincial levels the backlog of (CFAA 11, FY03) reporting capacityabuse of state * Transparent budgetary improve financial Audit Reports not yet reviewed, * PIFRA 11 i(FY04) * Improved publicinstpreadons, Proces management and take approprate follow-up sector uinanialcoesrrutoeand Independlent audliting o Reforms of somne of thie action acPR (Y0)sctorufinanialfcodrupgion, and * Impenent ino countres fundamental * Furthering transparency and * Improveddisr,sgard for the I rnprovement in overall institutions of economic accountability through procurementseparation (A quality of financial and financial Freedorn of Information,powiers and respect management thru the management: the effective functioning of thefor the rule of law ATBF ___I _ _ _ _- ___ ___ _.__ I -- .

Paklstan County Assistance Strategy Annex VPage 2 of 6

Central Bank of Public Accounts Committees,Pakistan (,'BP), thie agreement lo andCentral Board of actions on the outcomes ofRevenue (GBR), ttie the second phase of theAuditor General and CFAA, and the establishmentController iGeneral of of a lasting institutional basisAccounts, the police, for the Naticinal Accountabilitythet judicial system, BureauandJ the civil service;(ii) improved public * Proceedings of the FPovincialfinancial management, PACs opened to the media.accountability, and Promulgatior of a Procurement

increased ~~Ordiniance Nationalinreaispaedcn Procurement Authoritytransparency and establishedinformationi onesaihdgovemmerit activities * Better perfonmance evaluation,to facilitate public merit-based promotions, and

* Oveirsight; (iii) training programs, as well asdevolution; I(iv) an anti- the irnplementation of theoorrupton drive; and (v) refonns of thie pay and pensionprivatization and systelms-dereguiationi to redLiceincentives for rent-seeking behiavior

"""" 1"""" "" l,|,S,iX, W"" "S" lN"3"~ 0~ i* Heavy burden oa tax Low tax and regulation * National Aaountability * Lower compliance costs * Trade Policy note * Improvement in * Incentives framework

administration aid compliance costs Bureau, Central Board repoited in business * Invesbnent Climnate investment cCimate, * Legal, judidal andregulation, and Increased value added of Revenue reform lo environment surveys study including regulatory institutional frameworksrelated coupton from i ompetlive adminisin and * Lower levels of effecive * Natonal and eosts of doing * Financial sector andr Unstable, distorted indusfrioes c eupiion cvsts protecUon provincial-level businesslmprrovemen capital rnarketsiidustial policies l Increased exprts c * Higher FDI adjustnent lending t in banking sector

* Anti-export policy o f * Deregulabon Task * Higher exports suppoitng relevant coreDratebias domInceastic availability of Forc to review and ihreprsspolicyingrelevant covrpoate,tiias domesbc financdng for simplify regulations * Higher private investment p .g* limited availability of privatie investmnent * IFC investments modeemization of the

financing from weak * Increased employment * Phase out distortionary * Increase in output and and MIGA central bank's corefinancial scor a increased e dnploymet policies in autos, employment in SMEs guarantees for funcions of iprice andfinanciaa sector and vialue added frorn chemicals, edible ois, * Sound financial position of exportuoriented banking syslem

* SME sector SMEs textile, sugar, fertilizer VWAPDA & KESC manufacturing and stab lityparticularly Greater pnvale provision and cement sectors contributing to servics

isadvarntaged by of infrastructure * Introduce lower, rriacrostability * aP * Banidng sectorthe above I formula-based and reforms, induding

Pakistan Country Assistance Strategy Annex VPage 3 of 6

High regulatory and * Development ol extractive multi-year tariffs setting * WAIPDA coiporadation * 1A to SBP reduced costs,policy nsks; for Industries * Strengthen banking completed * IFC investments in reduced NPLs,pdvate investment regulation, pmidential * Effective reg)ulation thru private commercial improved capitalin extractive standards, supervisioni NEIPRA banks and NBFIs adequacy, &industries and * Commercial bank * KESC Privatized Blank Group rsheetsinfrastructure financial and support for SME set

operational fnancing * Privatization ofrestructuring and banks, power & gaspuiva6zaion . * Analytical work cn utilities, and telecomCapited market infrstructure and Expanded acoess todevelopment industries, micro-credit

* Support development of regulatory and * Support to PRSPmicrotinance, SME pricing frameworksfinance * PSAS privatization

* Strengthen regulatory advisory mandatesframeworks fer fDr FESC:Oinfrastnucture and * IlFCIMIGA supportextracfive industries for private

* Allow private entry to infrastructuretelecoms services * F'olicy acdvioe onmarkets and privatze power sectorPTCL reform

* Complete WAPDA's * IFC investmentscorporatizafion and MIGA

* Privatize FESCO and guarantees inKESC eotractuve

* Privatize PPL, SSGC, industriesSNG C

* Skewed larid * Higher Rural Growth * Policy dialogue * Update knoWtedge on rural * Fural DF'R (FY03) * Full implementation * The Water and Sanitationdislibuton and low * improved efficiency of * Support to development * WaterSector of institutonal and Program (WSP) isagricultural insttutions in irrigation and decentralization * Land and Water Rights Study Fleport (FY04) physical rehabilitaon suippoted by 15 bilateralprodudfivitv drai;nage, Str aw Devolutioni and Delivery of P rovind"al On- reform in 1 major and multilateral donors

- ~~~~~~~~~~~~~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~canal command o A(ricultunaf policies, rural* Weak link between * Improved and expandecl * Water Resource Rural Services Farm Water (Nara Canal) c*rdit irrigation aidrural growthi and irrigationi and dr-ainage Managemnent Strategy Managementreductton of rural InfrastructureManagement';trategy . Fojects (Sindh, * Improved lancl and draingagepvreutio atrrl Ifatutr NWFP) water mnarketsStrengthenedReuevunrbly

commurilty/armer * NDP supervision * Reducoedvulnerabtlity_ _organizations - _ o_ _r__ _t

Pakistan Country Assistance Strategy Annex VPage 4 qf 6

* E ducation service , Improved access to, * Support for the * Impimentation of Education * National Eduation * Implementation of * Project assistance(USAIDdelivery system in quality of, and equity in Education Sector Reform Strategy Assessment Education Reform AsDB)crisis primary education, mDving Reform (ESR) at * Strengtheneti and expanded (FY03, NEAS lI-L) Straegy

* Low enrollment, towards the MIDG goal of federal and provincial key public health programs, * Adjustment Credit * Improvedpoor actilevements, universal primary levels induding Lacly Health Workers, for Education govemance in socialpoor quclity of enrollment by 2015 . Advisory services and TB-Dots, EPII, polio Sector Reform service deliveryeducation , Closing of the gender gap technical assistance for eradication, malaria, HIV/AIDS, (FY03405) * Developmerit of a

* Very poor in primary and secondary the ireforms of higher and family * Analytcal work on reliable monitoringgovernance education by 2005 education planning/reproductive health ESR and system for HID

* Support to * Improved govemanae in sodal montcring of outcomesdecentralization service delivery MDGs * Sucissfulstrategy * Development of a reliable * Support to implementation of

monitoring system for HD Provncial Reforms district based deliveryoutcomes (Sindh, NWFP, of education services

* Successful irnplementation of FY034)5)district based delivery of health * Support to SACsand education services * Support to PRSP

(FYO3.05) -

* Support for districtdelivery ofeducalion andhealth services(FY03 .05)

* Law public a Reduce mortality and * Impiroving govemance * Increase in the % of births Ongoing * HIV/AIDS Prevenion * ADB: Wbmen's Healthspending and poor nmordity with a focus on and the efficiency of attended by itained provider; * Social Acdon Project effectve by Project, Reproductvevalue for money women and children public expenditure to 25% by 2C03 04 Program Project II, Q2 of FY03 Heaflth Projectd lechnicalbecause of Reduxe fertililly through devolution to * Increase in the % of fully Northem Healih * Lessons of SAPP II assistance for healthgovernance and C'ount Outcos n the local govemiments and immunized dhildren to 85% by Education Project adequately drawn in sector neform in NWFPmnanagemnent ome the other measure 2003 04 AAA/policy the ICR * JICA: program to eradicateweaknesses l-PRSP, to be- achievied by daotenoadttns2003-04 indude: to reduce * Developing effective * Increase in the coverage of dialogue * HNF' components in neonatal tetanus.

* Weak capacity in the IMIR to 65/1000, to disbict healh systems prenatal caret to 50% by 2003- Flanned adjustment * GAVI: assistance to thethe public sector for reduce child mortality to * Focusing on basic care 04 * HIV/AIDS operations aire immunization programpolicy formulation, 17/1000, to reduce the especially * Increase in tie % of population Prevention Project; effective in * WHO and other UNprogramming, TFR lo 4.1 children per conmmunicable disease with acxss to LHWs to 90g National and supporting major agencies: various technicaliimplementation, woman, The l-PRSP also conrol, chili care and by 2003-04. Provindal-level reforms and assistatoe programsand M&E ses targets in terrns of reproductive health multisectoral initiatives in line wAit

* Poor quality of imprved coverage of * Developing in le CPR to 39% by ausent the vernent * DFID ad other bilateralprivate Ihealth care water and sanitation, oartshi ;with th_e I _ _ __ _ operations with strategies and soughit av

Pakistan Countr Assistance,StrategV Annex VPage 5 ofJ6

services and education, and partnerships with the Increase in public expenditure! health aind outcomes. for polio eradicatononsumer abuse consurnplion poverty prvate sector both to on health and nutitiori as a educatkon

Important factors improve the efficiency percentage of GDP components policy * EU cofinancing of SAPPIou tside the health of govemment-financed dialogue; Public; and free-standinc technicalsector indlude health expenditure and * Increase in the share of non- Expenditure assistance program.poverty lick of to improve the quality of salary expenditures in total Review (alleducation pnivate health care government health expenditure sectors)especially of services e Increase in the share ofwomen, * Improving the government suabsidy in healthenvironmental regulatory framework. services accruing to the poorfadcors, and many * Creatng ma;s [Note: a baseline has to behouseholds lacking awareness in public established first]access to safe hat atiwater and sanitation

* Bridging nutrition gapsin reproductive-agewomien and youngchildren

* Promoting greatergender equity

* Capacity building at theFederal level and low,erlevels

* Very poor rural * Improved infrastructure * Policy dialogute * Rural asset base deepened * Supporl to PRSP lo Strengthened * Ftural infrastructuLre, waterinfrastructure and quality, efficiency, and (Transport; through rural community-based * Sub-national governance and and sanitation, riral microscdal service growth Urban/Nater) infrastructure projects and Adjustment improved delivery of creditdeilivery systems * Community driven * AAA (Peshawar CDS; spread of micro-credit. Progranns (Sindh; basic infrastricture

* High vulnerability of development of local Distridc level needs and NWFP, FY03-05) selices at the localrural poor to service provision capadty assessmenl * AJK Community levelidiosyncratic shocks study) Infrastructure , Rehabilitated

* Impleiment Trade andl (FY03) highways, improvedTransport Fadlitation * Highways NHA fnancialprogram Rehabilitation management

* Support to Project (FY03)decentralization * Suppol to Locailstrategy Gov. Servioes

___ _ _______ _ _______ __ ______ __ _ (FY04-U5) _ ___ _

PaAistan Country Assistance Strategy Annex VPa,ge 6 ojr6

* S gnificarit gender * National Resellement * Indigenous peoples * Changes in LUs to promote * Suppori to PRSP National * DFID: Women's Politicalgaps in both literary Plan Policy policy gaps gendeir equity thru Saial Risk Reseltement Plan F'arlcipalon and Genderaid healt1h status * National Gender Policl * Oialogue on gender * Resolution of outstanding Assessment Policy , 'ensitive Stategly, aInStuional and * Support to Resettlement cases (FY03) mr National Gender UNDP-Gender Equalityattitudinal deetaizto Country, Program Poliqf Ulmbrella Project; Familydiscrimination detra tin Risk Management Resollution of E .qualion andedagainst women strategy (FY03-05) outstanding Equality Proect

* Country Gender Reseltlement cases * AsDB: Gender Reform TAAssessment (CGA, girantFY04)

Pakistan Countpy Assistance Strategy Annex BlPage I of 2

Pakistan at a giance S15/02

POVERTY and SOCiAL South Low-Pakistan Asia Income Developrmnt diamond'

2000Population, mid-year (millions) 138.1 1,355 2,459 Life expectancyGNI per capita (Atlas me0tWd US$) 440 460 420GNI (Atlas method, US$ billions) 61.0 617 1,030 TAverage annual growth, 199440 1Population i(f) 2.4 1.9 1.9 /I\Labor force (%) 3.0 2.4 2.4 GNI Gross

per 7 Nj prImaryMost recent estimate (iatest year availabie, 1199440) capita X /' enrollment

Poverty (% of population below national poverty line) 33 .. .. N IUrban Dopulation /% of total oDoulation) 37 28 32Ufe expectancy at birth (years) 63 63 59 lInfant mortality (per 1,000 live births) 90 74 77Child malnutrlton 1% of children under 5 38 47 .. Access to improved water sou rceAccess to an Improved water source (% of population) 88 87 76Illiteracy (% of population age 15+) 54 45 38Gross rlmary enrollment 96 of school-age population) 69 100 96 Palsten

Male 77 110 102 | Low4ncome groupFemale 60 90 86 L-

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1980 1990 1999 2000Eeonomic ratios-

GDP (US$ billions) 23.7 40.0 58.6 61.6Gross domestic investmenVGDP 18.5 18.9 15.6 15.6 TradeExports of goods and services/GDP 12.5 15.5 15.1 15.5Gross domestic savings/GDP 6.9 11.1 10.6 12.1Gmss nabonal savings/GDP 13.7 14.2 11.0 12.0 1Current account balance/GDP -4.8 -4.7 -4.6 -3.6 Domestic |r//mn

Interest payments/GDP 1.0 1.3 1.6 1.4 savings InvestmentTotal debtUGDP 41.9 51.6 57.8 52.2Total debt service/exports 18.3 23.3 29.4 26.7Present value of debtGDP .. .. 42.5 TPresent value of debt/exports .. .. 249.0 I

Incebte ness19840 199040 1999 2000 200044

(average annual growth) IGDP 6.3 3.7 3.7 4.4 4. -PakisianGDP per capita 3.5 1.2 1.2 1.9 1.9 - Low-Income grouupExports of goods and services 8.4 1.7 -2.9 16.0 0.5 _

STRUCTURE of the ECONOMY

(96 of GDP) 1980 1990 1999 2000 G owtho lnvestnent and GDP (9)

Aqriculture 29.5 26.0 27.0 26.3 ' TIndustry 24.9 25.2 23.7 22.8

Manufacturing 15.9 17A 15.5 15.1 oServices 45.6 48.8 49.2 50.9 4 so 9 03 s - -OD

Private consumption 83.1 73.8 79.0 76.9 .1no VGeneral govemment consumpton 10.0 15.1 10.4 11.0 - GDI 0 -GDPPimports of goods and services 24.1 23.4 20.0 119.11

195040 1 90-00 1999 20001 Growth or(average annual growth) r exports ana importAgriculture 4.3 4.4 1.9 6.1 20 1industry 7.3 3.9 4.9 -i 1 Al. / I

Manufacturing 7.7 3.5 4.1 1.4Services 6.8 4.4 50 4.8 0

Private consumption 4.3 4.9 7.5 0.9 InvGeneral govemment consumption 10.3 0.7 -6.9 7.0 .20 Gross domestic investment 5.8 1.8 -9.2 4.1 |Expors 0 -Imports Imports of goods and services 2.1 2.5 -5.4 -2.3

The diamonds show four key Indicators in the country (in bold) compared with its Income-group average. If data are missing, the diamond willbe incomplete.

Note: 2000 data are preliminary estimates. The debt figures in this table are from the WB debt reporting system and may differ from those inAnnex B7 because they cover calendar years rather than Pakistan's fiscal years (July 1 -June 30).

Pakistan Country Assistance Strategy Annex BlPage 2 of 2

Pakistan

PRICES and GOVERNMENT FINANCE1980 1990 1999 2000 Inflation (%j

Domestic wicesI(°h change) 'SConsumer prices , . . 5.7 3.6 icImplicit GDP deflator 9.1 8 5 5.9 3.7 s

Government finance(% of GDP, Includes current grants)Current revenue .. 18.0 15.2 1d.8 5 I B s9 97 Oa ooCurrent budget balance -1.0 43.0 -3.5 -GDP de8ator --- CPIOverall surplus/deflcit .. -6.6 -6.0 -6.3

TRADE1980 1990 1999 2000 F-tanr nd !po tev ls S$' l.'

(USS millions) Total exports (fob) 2,365 4,927 7,528 8,191 15.0o0

Cotton 443 2 73Rice 239 533 540Manufactures 1,371 2,489 6,993 7,579

Total Imports (cifl) 7,411 9,613 9,602 ,qll I r l ,u ,nllFuel and energy 1.163 1,477 2.793Capitalgoods . 1,788 2,921 2,705 | o -'i

Export price lndex (1995=100) .. 102 87 84 9^ 95 90 97 98 99 00Import pdwe Index (1995=100) . . 87 93 oExports 0 importsTermrs of trade (?9-9S=?00) .. .. 100 91

BALANCE of PAYMENTS _____________________

(US$ millions) 11= w9.0 1909 200. Current account balance to GDP(%)Exports of goods and services 2,958 6,217 8,842 9,575 0 , 1 , I , 1, ,1, ,import of goods and --s 5,709 9,351 11,737 11762 t 17 I 1 I 1 Resource balan;e -2,751 -3,134 -2,895 -2,187 *2 *jjNet income -281 -966 -1,808 -2,018 ___

Net current transfers 1,895 2,210 2,005 1,997 |4I I U 1Current account balance -1,137 -1,890 -2,698 -2,208 |

FInancIng Items (net) 1,890 3,952 2,000 |Changes In net reserves .. 0 -1,254 208

Enema:, Reserves Including gold (USS millions) .. 1.311 2,228 1,606Converslon rate (DEC, locaW/US$) 9.9 21.4 50.1 51.7

EXTERNAL DEBT and RESOURCE FLOWS1980 1990 1999 2000

(US$ millions) p..miion d iuwo^iebtCuSSmlii. j Tota debt outstandIng and disbursed 9,931 20,663 33,886 32,182 0 e

IBIRD 330 1,816 3,315 3,093 G. 1,519,,A |iDA 821 2,106 3,905 3,8Z8 2

Total debt service 870 1,926 2,940 2,850 | F: 3,94\B: 3,828lRRD -58 199 434 408IDA 9 34 86 93

ComposiUon of net resource flows Q 1,529Officlal grants 268 538 573 926Officlal creditors 544 913 876 452Private creditors 167 -63 -477 -381 E:11,659 Foreign direct investment 68 200 472 471 D: 6,6C0Portfolio equity 0 87 28 74

Wond Rnnk progrnmaCommitments 185 972 808 0 A -IBRD E-tsiates IDisbursments 90 494 628 301 D B- A D-tlirm tiaterai F.-PFateP-n-n-- -navymeniss 29 Q9 283 291 C-IMF n -AhAJ.-Net flows 61 402 345 10 1Interest payments 39 141 237 210Net transfeea 99 22 1 in -2ni

Development Economics 5/15/02

Note: 2000 date are preliminary estimates. The debt figures in this table are from the WB debt reportng system and may differ from those in AnnexB7 because they cover calendar vears rather than Pakistans flscal years (Juiy 1 -June 30).

Pakistan County Assistance Strategy Annex B2-,-oP- I,of !

Selected Indicators* of Bank Portfolio Performance and ManagementAs of 05/03/2002

Indicator 1999 2000 2001 2002Portfolo Assessment1NUmber o01 'PojuW 'vade[ 1iuVl au0wU0U- U 23 10 L6 10

Average Implementation Period (years) b 4.3 4 3.9 4PercentofP.-oblemr ....o-jec-b..w by-3 a, c 113 18.8 1Q.8

Percent of ProblemProjects by Amount a, c 33.8 19.6 20.6 41DMTDWOT++ a4S;nea 2;1 vNlo A I12 12Q2 w)

Percent of Projects at Risk by Amount a, d 33.8 19.6 20.6 60.5Dihbursem_nt aio(%)e 18.2 221 30.9 AA.3PortfolUo Management

U..,rrv.. uuUn Yu= kVLiyowuu, I I I I0 0b

Supervision Resources (total US$'000) 3,507 3,384 2,041 (est.) 1,306A ._ .....,,. >;nlT'cnnnlflI.............. 1ln 1o1 02 { o CAA- sv-"^s - s^ vlFa3 v w - tist.) 59JMerageSc upex-vWision (TISVJbJe projectSJ.) I A4I1

Memorandum Item Since FY 80 Last Five FYsProi Eval b y OED by Number 121 29Proj Eval by OED by Amt (US$ millions) 8072.8 2894.7% of OED Proiects Rated U or HU by Number 24 24.1% of OED Projects Rated U or HU by Amt 31.3 28.9

a. As shown in the Annual Report on Portfolio Performance (except for current FY).b. Average age of projects in the Bankes country portfolio.c. Percent of projects rated U or HU on development objectives (DO) and/or inplementation progress (IP).d. As defined under the Portfolio Improvement Progran.e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the

beginning of the year: Investment projects only.f. Includes quarterly and biannual portfolio reviews with federal and provincial governrnnets.

* All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio,which includes al active proiects as wel as projects which exited during the fiscal year.

Paastan Coawty Asstuance Strategy Annex B3Page I of 2

Pairirtan - PrnivoeId TR ,fflDAA Base-Case TL.nding Pronram

(As of May 15, 2002)-

__ Proc NStrategei ImplementationFiscui ProJect Name US$(M) Rewar RlsAs

Year Project IDA (HIM/) a. (HIMZL) e2002 b/ Drought Emergency Recovery Assessment c/ 130 M H

b/ BSRPP 300 H MAJK Comnuniity Infrastructure Services Project 20 H MTA for Banldng Sector 27 M LSAC II 500 H HSindh SAC 100 H HResult 947

2Mnn3 !L-g6na, D. inn M M

HIV/AIDS Prevention Project 20 H HNatinnal Eduastinn Asse5ment 5vrtem I.R. S H HEducation Reform SAC 150 H MTax Admnin. Reform 100 H HEco Reform TA 25 H HResult 400

2004 PiFKA 11 100 H H,Sindh On Farm Water Management 50 L MLocal Government Support 50 H HSAC II 200 H H

AC.I 400

2005 Local Government Support 100 H HWater Sector Management 100' H MSAC IV 200 H HResult 400

a/ Indicates whether Strategic Rewards and Implementaton Risks are expected to be High (H), Moderate (M), or Low (L).b/ Operation already approved In FY02.cd $130 mdlilon of Drought Emergency Recovery Assessment Is a reallocation of existing commitments under SAPP-II and NDP.

An=e B3NVg 2 of 7

Paldstan - Proposed JJJRDA-I'A High-Case Lending Program(As of May 15, 2002)

Fiscal Project Name USU(M) Rcw_rds Rlsks

Year Project IBRD IDA (HIMIL) a/ (Hl V/2002 b/ Drought Emergency Recovery Assessment c/ 130 M H

b/ BSRPP 300 H iMAJK Community Infistructure Services Project 20 H MTA for Banling Sector 27 M LSAC i Soo H HSindh SAC 100 H HReesMu 947

2003 NWFP PSAC 90 H HHighways Rehabilitation 100 M MHIV/AIDS Prevention Project 20 H HINWAUrWJ rUU~ULI ~ILul--- .-y .Le-. . . I L I H MEducation Reform SAC 150 H HTax Admnin. Reform 100 M MProvincial Adjustment Credits (Sindh, NWFP) 110 H HEco Reform TA 25Result 600

'I00A nTUD A nI HA,V~~~~fl rAn anti nyU ~~~~~~~~~~~~~~iT rIT

Sindh On Farm Water Management 50 L MProvincial Adiustment Credits II 250 H HSAC III 300 50 H HLocal Government Support 150 H HResult 300 600

2005 Lo-cl C-ove,nmt Sott 100 H MPEFRAIII 100Water Sector Management 100 H HProvincial Adjustment Credits III 250 H HSAC IV 300 50 H HResult 300 600

Overail Result 600 2 747

a/i ndicates wl,et,Uer StdWdirtagc RewadIus and implmentUon Rtisks are ezedV tD Itbe High (Hj, Moderait (M), or Low (L).b/ Operations already approved In FY02.c/ $130 million of Drought Emergency Recovery Assessment is a reallocaton of existing commitments under SAPP-11 and NDP.

Pakistan Country Assistance Strategy AnnexB3Page 3 of 3

Pakistan - IFC and MIGA Program, FY 1999-2002

1999 2000 2001 2002

IFC approvals (US$m) 83.00 55.10 52.10 24.04

Sector (%)FINANCE & INSURANCE 60 100NONMETALLIC MINERAL 40OIL, GAS AND MINING 77TrDVVT1TrD ADDADT:T R.TV 112

Total 0 100 100 100

Investment instrument(%)

Loans 77Ezqui; I °°

Quasi-EquityOther 100 23Total 0 100 100 100

,vYLGjr- mitees kLJS) 14711 14. 5 4 I 96.76I 8

Pakistan Country Assistance Stratgy Anner B4Page I of I

Paldstan - Summary of Nonlending ServicesAs of May 3, 2002

cofwp e ..... J..L,,. NV Cowl _5_e00 A (fAl , ... c _ 1

Recent completdons

Punjab Public Expenditure Review 2001 190 B, G, P KPolicv Nnte onMB 2001 87 B, G, P KNoteforPakistanPev. Forum 2001 12 B,G,P KFinancial Accountability Assessment 2001 110 B, G, P. KOii and Gas Sector Poiicy Advice B 2001 120 B, G, P KCAS Progrss Report 2001 43 B, G, P KTA for Energy Sector Dialogue & Policy Advice 2001 181 B, G KTA for Provincial Health 2001 90 B, 0 KTA for mmunization and HlV/AIDs 2001 219 B, G KTA fo, Pri;,a _iat 200! 333 B, a KTA for Financial Setor Monitoring 2001 115 B, G KTA for Subnational Economic Reforn 2002 206 B, G KJoint StaffAssssnient - IPRSP 2002 43 B, G, P KDevelopment Policy Review 2002 188 B, 0, P KPrivate Sector Stratesv 2002 92 B. G. P K

Underway

Environment Strategy 2002 124 B, G, P KTransport Sector Strategy 2002 122 B, G, P KPoverty Assessment 2002 582 B, G, P KCountry Assistance Strategy 2002 150 B, G, P K

Planned

investment Climate 2003 I1w B, 0, P KProvincial Economic Reforn 2003 100 B, G, P KPolicy Note to New Government 2003 100 B, G KJSA -PRSP 2003 100 B, G, P KCFAA 11 2003 100 B, G, P KCPl An 2n' Inn B, G-,p

Oil & Gas Sector Review 2003 150 B, G KFinancial Sector Assessment 2003 150 B, G, P KCAS Progress Report 2003 100 B, G, P KPublic Expenditure Review 2003 150 B, G, P KR_r1l Devolnnn,ent PolicV Revi-w 2003 130 B; C, P KPower Sector Review 2003 100 B, 0, P KSindh Rural Development Policy Review 2003 100 B, G, P KSociai Riisc Assessment 2003 i10 B, G, P K

a/ Government (G), Bank (B), public dissenmnination (P)b/ Knowledge generation (K)

Pakistan Country Assistance Strategy Annex B5Page I of I

Pakistan Social IndicatorsLatest single year Same reglon/lncome group

South Low-11970f75 1 15 1994A00 Asia income

POPULATIONTotal populatbon, mid-year (millions) 71.0 94.8 138.1 1,354.7 2.458.7

Growth rate (% annual average forperlod) 3.2 2.7 2.4 1.9 1.9Urban populatIon (% of population) 26.4 29.8 37.0 28.4 31.9T,otal ;i*e,u;Ly rate (bi;t,Vhs perf woiari) 7.0 6.5 4.8 3.4 3.7

POVERTY,(76 of popuiaUoriJ

National headcount Index .. .. 32.6Urban headcount index .. ..

Rural headcount Index .. ..

INCOMEGNI per capita (US$) 150 330 440 460 420Consumer price index (1995=100) 20 42 146 136 142Food pnti, Indnx (1PS5100) .. 39 134

INCOME/CONSUMPTION DISTRIBUTIONGini index - 3112Lowest quinUile (% of hncome or consumption) 8.0 .. 9.5Hlghest quinUle (% of dncome or consumption) 41.8 .. 41.1

SOCIAL INDICATORSPublic expenditure

Heaui (m,6 or GDP .. .. 0.9 0.9 1.2Educaton (X of GNI) 2.2 2.9 2.7 3.1 3.3Social security and welfare (% of GDP) 0.3 0.9

Gross primary school enrollment rate(56 of age group)

TIob; .. .. 69 100 96Male .. .. 7 110 102Female .. .. 60 90 86

Access to an Improved water source(% of population)

T otai .. 38 88 87 76Urban .. 77 96 92 88Rural .. 22 84 85 70

ImmunIzaton rats(% under 12 months)

Measls .. 38 8i 63 64DPT .. 77 80 75 70

Child malnutrition (% under 5 years) .. 22 38 47Lfe expectancy at birth(years)

;1I 52 57 63 63 59Male 52 57 62 62 58Female 52 58 64 63 60

MortalityInfant (per thousand live births) 134 122 90 74 n7Undar 5 (per tousand libirths) 183 161 i26 99 ii6Aduft (18-59)

Male (per 1,000 population) 339 283 188 223 288Female (per 1,000 population) 381 291 153 212 258

Matemal (per 100,000 live births) .. .. 340Births attended by- skled health sL)ff. 9 .. .. 9

CAS Annex B5. This table was produced from the CMU LDB system. 02/1302Note: 0 or 0.0 means zero or less than hatf the unit shown. Net enrollment ratios exceeding 100 Indicate discrepanciesbetween the estimates of school-age population and reported enrollment data.

Pakistan County Assistance Strategy Annex B6Page I of 2

Pakistan - Key Economic Indicators

Actual Estimate ProjectedIndicator 1999 2000 2001 2002 2003 2004 2005

National accounts (as % of GDP)

Gross domestic productL i00.0 i00.0 i00.0 i00.0 i00.0 i00.0 i00.0

Agriculture 27.0 26.3 25.2 25.1 25.3 25.1 24.9

indusuy 2. 22.8 23.5 23. 23.8 24.0 24.4

Services 49.2 50.9 51.3 51.2 50.9 50.9 50.7

Total Consumption 89.4 87.9 89.0 87.8 86.5 85.5 84.9Gross domestic investment 15.6 15.6 14.7 15.2 16.2 16.8 17.0

GoVC-ove.n,.r.t ir.vest-2ent 3.7 3.2 2.7 3.4 3.6 3.9 4.0Private investnent 1/ 11.9 12.4 12.0 11.8 12.6 12.9 13.0

Exports (GNFS)b 15.1 15.5 17.2 17.3 17.4 18.3 18.5Imports (GNFS) 20.0 19.1 21.0 20.2 20.5 21.3 21.1

Grossdomesticsavings 10.6 12.1 11.0 12.2 13.5 14.5 15.1

Gross national savingsC 11.0 12.0 13.3 15.8 17.0 18.3 18.8

Memorandum itemsGross domestic product 58615 61623 59605 59783 63038 64368 '69198(US$ million at current prices)GNP per capita (US$, Atlas method) 470 440 410 400 410 410 430

Real annual growth rates (%, calculated from 1981 prices)Gross domestic product at market prices 3.7 4.4 3.4 3.4 5.2 5.5 5.5

G2fss Dor.estic L.corne 3.0 3.0 3.1 3.8 6.1 5S 5.S

Real annual per capita growth rates (%, calculated from 1981 prices)in Ln .An flfl in3 q.A q

GrsUbb UUUWDo LIL proUUcL aL WllU s .2 :.9 0.9 0.7 2.7 I 3.0 3.0

Total consumption 3.1 -0.9 2.0 0.3 2.6 2.5 2.9Private consumption 4.9 -1.5 2.5 0.1 2.9 3.0 2.6

Balance of Payments (US$ milHons)R.n,rt-c(NFRb RR42 9575 10269 10336 10991 11776 127R8

Merchandise FOB 7528 8191 8926 8914 9588 10351 11230

Imports(GNFS)b 11737 11762 12492 12104 12951 13690 14631Merchandise FOB 9613 9602 10171 9780 10496 11187 12032

Resource balance -2895 -2187 -2223 -1768 -1960 -1914 -18481, v c u rULe r L tr-ausfeMr 2005 3. 1771 997 t7 24 29 2 4 5 9 L3493

Current account balance -2698 -2208 -1946 -1365 -1659 -1375 -1261Nu - r_ _:_---: m_. diec in 47 47 t* 3z- - ^ e A..1'cLpnvaw OiLULgisl Ui[vLUI W1Ulu 'ILA 'tI v- 3vU 'tOv JOi JUU

Long-term loans (net) 591 -1452 -655 -611 -123 686 1276Official 876 452 -480 251 155 81 -824Private -285 -1904 -175 -862 -278 605 2100

Other capital (net. inl. erors & ommissions) 2889 2981 2967 2597 2812 1362 200

Change in reservesd -1254 208 -688 -822 -1431 -1173 -714

Memorandum itemsResource balance (% of GDP) -4.9 -3.5 -3.7 -3.0 -3.1 -3.0 -2.7Real annual growth rates ( YR81 prices)

Merchandise exports (FOB) -6.6 13.9 6.8 -4.1 0.9 3.7 4.1Manufactures -5.0 11.2 6.1 -11.0 -3.6 0.9 1.6

Merchandise imports (CIF) 0.8 -6.5 -12.1 -6.2 9.3 5.4 6.1

(Continued)

Pakistan Country Assistance Strategy Annex B6Page 2 of 2

Pakistan - Key Economic Indicators(Continued)

Estimate ProjectedIndicator 1999 2000 2001 2002 2003 2004 2005

Public finance (as % of GDP at market prices)Current revenues 16.2 16.6 15.7 17.0 17.2 17.3 17.9Current expenditures 19.2 20.1 18.9 19.1 17.8 16.6 16.4Current account surplus (+) or deficit (-) -3.0 -3.5 -3.2 -2.1 -0.6 0.7 1.5Capital expenditure 3.0 2.8 2.2 3.6 3.6 4.0 4.2Foreign financing 5.0 2.2 32 2.4 2.3 1.6 0.5

Monetarv indicatorsM2/GDP 43.6 44.0 44.0 45.1 45.0 44.7 44.4Growth of M2 (%) 6.2 9.4 9.0 9.1 9.1 9.0 9.0Private sector credit growth 187.2 19.8 107.3 28.4 15.0 46.6 68.8total credit growth (%)

Price indices( YR81 =100)Merchandise export price index 97.5 94.3 91.9 95.7 102.0 106.3 110.8Merchandise import price index 91.5 97.3 108.2 111.0 109.0 110.2 111.7Merchandise terms of trade index 106.6 96.8 84.9 86.3 93.6 96.4 99.2

aI LJLF%LIVG IAafahI~L4 ktJoWlA.tjJ IU. I IJ.* I IV. I JO. U.j IvJn.W 1V9¾

Consumer price index (% change) 5.7 3.6 4.4 3.0 3.9 4.0 4.0GDP deflator (% change) 5.9 3.7 5.5 2.9 4.0 4.0 4.0

a. GDP at factor costb. "GNFS" denotes "goods and nonfactor services."c. Includes net unrequited transfers excluding official capital grants.d. Includes use of IMF resources.e. Consolidated central govermnent.f "LCU" denotes "local currency units." An increase in US$/ICU denotes depreciation.

Pakistan Countiy Assistance Strategy Annex B7Page 1 of 1

Paldstan - Key Exposure Indicators

Actual Estimate ProjectedIndicator 1999 2000 2001 2002 2003 2004 2005

Total debt outstanding anddisbursed (TDO) (US$m)a 29318 29757 31398 31099 31400 31523 31697

Net disbursements (US$m)a 511 439 1641 -299 301 123 174

Total debt service (TDS) 3726 3771 3369 3580 3400 32615 3200

OUS$MY

Debt and debt service indicators (%)TDO/XGSb 267.2 278.8 273.8 255.7 - 240.4 225.9 210.4

TDO/GDP 50.0 48.3 52.7 52.0 49.8 49.0 45.8TDS/XGS 34.0 35.3 29.4 29.4 26.0 23.4 21.2

TDDTr A (;0 L 0/

IBRDDS/publicDS 10.9 11.2 11.8 10.5 11.1 11.7 12.2Preferred creditorDS/pubiic 45.7 39.1 45.8 45.3 51.3 54.9 53.4DS (%).

IBRD DS/XGS 3.7 4.0 3.5 3.1 2.9 2.7 2.6IBRD TDO (US$m)d 3438 3332 3043 2861 2654 24083 2132Share of IBRD portfolio (%) 2.9 2.7 2.5 2.3 2.1 1.9 1.7TDA TDO (IJS$m) d 373 4123 404 480R9 5232 i1RA 589Q7

Loans 396 347 0 0Equityand quasi-equity /e 110 108 0 2

Guarantee, Standby & Risk Management 95 22

MIGAMIGA guarantees (US$m) 147 143 97 81

a. Uiri'UUde pUULbc andU pjUb'c:y MicUtLLu-u udeb, -u5s oU Vivir Ur;UiW.:, auiu neL shoi-

term capital.b. "XGS' denotes exports of goods and services, including workers' remittances.c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the

Bank for International Settlements.d. Includes present value of guarantees.e. Includes equity and quasi-equity types of both loan and equity instruments.

~~~~~~g .-

ES t I h n n .R~~~~~~~~~

fl ~~~~I Ea "Zq q 'S

15~~~~~~~~~~~~~~~~~~~~~~~~~~~1sa i 0 Ex EE X00E

|~~ ~~~~~~~~~~~~~~~~~~~~~~~ 8Ii 0s3c 0^ 0 0 0" 000nsce"snxo

& l ,Il}xsl Xs }lElsill2|!SI; '

0 Xl|Xgl;g209eo'

,P"-.Ian C,.,tr,y Assistan.ce Str.aegy Annex B8Paistan Page 2 of 3

STAIEMENT OF IFC'sHeld and Disbursed Portfolio

As of March, 2002iFG nata Wamhniioa (Amounts !n US DoI!!a ,AilN..

IFC Held IFC Disbursed-

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1995 Abamcb Mgmt n.00 0.29 0.00 0 00 0.00 0.29 0.00 0.00

1995 AES Lal Pir 30.82 9.50 0.00 0.00 30.82 9.50 0.00 0.00

1996 AES Pak Gen 15.58 9.50 0.00 26.83 15.58 9.50 0.00 26.83

1996 Atlas Inv Bank 2.81 0.00 0.00 0.00 2.81 0.00 0.00 0.00

1994 Atlas Lease 2.40 0.36 0.00 0.00 2.40 0.36 0.00 0.00

Io DIBRR!L 0.00 0.24 0.00 0.00 0.00 0.24 0.00 0.00

1991/94/95 BRRIM 0.00 0.76 15.00 0.00 0.00 0.76 15.00 0.00

1995 BSJS Fund 0.00 0.50 0.00 0.00 0.00 0.50 0.00 0.001993 CDCPL 0.00 0.16 0.00 0o00 n=n 0 16 0 000 0.001993/97/01 Crescent Greenwd 5.71 5.10 0.00 2.50 5.61 5.10 0.00 2.50

196 CIresc-,: 'Bank 6.75 0.00 0.00 0.00 6.75 0.00 0.00 0.00

1994/95/96/00 D.G. Khan 10.82 5.49 0.00 30.61 10.82 5.49 0.00 30.61

1998 Engro Asahi 6.86 0.00 0.00 0.00 6.86 0.00 0.00 0.001991/95/97 Engro Chemical 5 14 3. 0 0 00 3 75 5.14 3I90! O 0.0 3 75

1996 EngroVopak 7.13 0.00 0.00 2.97 7.13 0.00 0.00 2.97i 993/94 Fauji Cement 22.40 5.00 0.00 0.00 22.40 5.00 0.00 0.00

1990/92/96 FIIB 1.54 1.50 0.00 0.00 1.54 1.50 0.00 0.001995 First Crescent 0.00 0.00 5.00 0.00 0.00 0.00 5.00 0.001994/9R First Leasina 1.25 1.69 0.00 0.00 1.25 1.89 0.00 0.00

1995 First UDL 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.00

1996 Gul Ahmed 18.90 4.10 0.00 20.61 18.90 4.10 0.00 20.61

1988 Hala Spinning 3.27 0.00 0.00 0.00 3.27 0.00 0.00 0.00

1991/95 IHFL 1.30 0.87 0.00 0.00 1.30 0.87 0.00 0.00

U.JS 1.11 0U0. 0.00 0.00 1 11 0.00 0.00

1995 Kohinoor 16.25 6.30 0.00 18.30 16.25 6.30 0.00 18.301994/95/97/00 Maple Leaf 27.19 5.72 0.00 31.25 27.19 5.72 0.00 31.25

1993/01 Muslim Comm Ba, 1.41 0.00 0.00 0.00 1.41 0.00 0n00 0n00

1984194 NDLC 2.81 1.25 0.00 0.00 2.81 1.25 0.00 0.00

1994/96 Or I Flnance 0.00 0.58 0.00 0.00 0.00 0.58 0.00 0.00

1994/98 Orix Leasing 2.81 1.25 0.00 0.00 2.81 1.25 0.00 0.00

1965/80/82/87/91/ Packages 2.25 3.46 0.00 0.00 2.25 3.46 0.00 0.0094/951994 PACRA 0.00 0.10 0.00 0.00 0.00 0.10 0.00 0.00

1993 Pakistan Service 1.25 3.00 0.00 0.00 1.25 3.00 0.00 0.00

1995 Pakistan Unit Tr 0.00 1.48 0.00 0.00 0.00 1.48 0.00 0.001994 PI&CL 1.25 0.00 0.00 0.00 1.25 0.00 0.00 U.00

1991/94/95 PILCO 2.50 1.04 0.00 0.00 2.50 1.04 0.00 0.00

i8i84i94i95 PPL -0.00 1.56 0.00 0.00 0.00 1.56 0.00 0.00

1991 Prudential 0.00 0.40 0.00 0.00 0.00 0.40 0.00 0.00

Note: Values do not reflect offbalne sheet items vuch as guarntee and risk tmnagement products.Last Data Update: March 31. 2002 Run Date: May 06, 2002 Page:-of 2

Pakictan Cnuntru uAtsvan.-P Strateav Annpr RR

Pakistan Page 3 of 3STATEMENT OF IFC's

Held and Disbursed PortfolioAs of March, 2002

IFC Data Warehouse (Amounts In US Dollar Millions)

IFC Held IFC Disbursed

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

1194 Reoenf Knitwear A.oo 0.00 n .00 2.80 6.00 O.00 000 2 Rn

1995 Rupafab 3.67 0.00 0.00 0.00 3.67 0.00 0.00 0.00

1993196/01 Sarah Textiles 1.28 0.00 0.00 0.00 1.28 0.00 0.00 0.00

1996 Uch Power 38.05 0.00 0.00 71.24 33.09 0.00 0.00 56.20

Total Portfolio: 249.40 76.22 30.00 210.86 244.34 76.22 30.00 195.83j Approvals Pending Commitment i

FY ADDroval Project Name Loan Equity Quasi Partic

2001 Lasmo Pakistan 40.00 0.00 0.00 0.00

2002 Microbank 0.00 1.64 0.00 0.00

Total Pending: 40.00 1n.64 0.00 .nn

Note: Values do not reflec off-bale sheet item msudh as aantee and risk managoent pxducts.Last DatUpdate: March 31.2002 Run Date: May 06, 2002 PaRe:2 of 2

Svo :edAliV%d 66'ZC4 : oN ljode I

memorandum of the president - world...

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