public disclosure authorized report no. 22219-pak public...

Document ofThe World Bank Group

For Official Use Only

Report No. 22219-PAK

MEMORANDUM OF THE PRESIDENT

OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

AND THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ONA

COUNTRY ASSISTANCE STRATEGY PROGRESS REPORT

FOR

THE ISLAMIC REPUBLIC OF PAKISTAN

May 16,2001

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not be otherwise disclosed without World Bank authorization.

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The last Country Assistance Strategy for Pakistan (R95-213/1) was discussed on December 19, 199:1 anda Progress Report fR98-307) was discussed on January 21, 1999l

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 IPPs Independent Power ProducersAsDB Asian Development Bank KESC Karachi Electric Supply CompanyAIDS Acquired Immunodeficiency Syndrome LPG Liquified Petroleum GasAJK Azad Jammu Kashmir MIGA Multilateral Investment Guarantee AgencyBSAL Banking Sector Adjustment Loan MTR Mid-term ReviewCBR Central Board of Revenue MTBF Medium-term Budget FrameworkCFAA Country Financial Accountability NAB National Accountability Bureau

Assessment NCBs Nationalized Commercial BanksCIRC Corporate and Industrial Restructuring NEPRA The National Electric Power

Corporation Regulatory AgencyCOFOG Classification of the Functions of NGOs Non-Governmental Organizations

Government NRB National Reconstruction BureauCPAR Country Procurement Assessment Review NWFP North West Frontier ProvinceCPI Consumer Price Index OFWM On-Farm Water ManagementDFIs Development Finance Institutions PACs Public Accounts CommitteesDS Debt Service PFP Policy Framework PaperEFF Extended Funding Facility PIA Pakistan International AirlinesESAF Extended Structural Adjustment Facility PIFRA Improvement to Financial Reporting andFMCs Fiscal Monitoring Commtittees Auditing ProjectFPSC Federal Public Service Commission PPL Pakistan Petroleum LimitedGDP Gross Domestic Product PRGF Poverty Reduction and Growth FacilityGEF Global Environment Facility PRI Political Risk lnsuranceGFS Govemment Financial Statistics PRSC Poverty Reduction Support CreditGRA Gas Regulatory Authority PRS/PRSP Poverty Reduction Strategy PaperGST General Sales Tax PSDP Public Sector Development ProgramHBL Habib Bank Limited PTCL Pakistan Telecommunications CompanyHIPC Highly Indebted Poor Countries Ltd.HIV Human Inmmunodeficiency Virus SAC Structural Adjustment CreditHUBCO The Hub Power Company SAL Structural Adjustment LoanIBRD International Bank for Reconstruction and SAP Social Action Program

Development SME Small and Medium EnterpriseIDA International Development Association SSGC Sui Southern Gas Co.IDF Institutional Development Fund UBL United Bank LimitedIFC International Finance Corporation WAPDA Water and Power Development AuthorityIMF International Monetary Fund WBI World Bank Institute

Vice President Mieko Nishimizu, SARVPCountry Director John W. Wall, SACPKTask Team Leader Zoubida Allaoua, SACPA

FOR OFFICIAL USE ONLYTABLE OF CONTENTS

Summary

A. Social and Political Context ............................................................ 1

Introduction ............................................................ 1Social Context ............................................................ 2A Country with a Turbulent Political History ............................................................ 2

B. Political and Economic Developments Since the 1998 CAS Progress Report ................. 3

Economic Performnance and Macroeconomic Sustainability Underthe New Government ............................................................ 4

C. Government Poverty Reduction Strategy ............................................................ 5

D. Progress in Implementing the Bank Group's Assistance Strategy ................................ 12

E. The Bank Group's Assistance Strategy ........................................................... 18

F. Bank's Assistance Strategy for Fiscal 2001-2002 ........................................................... 20

G. Risks ........................................................... 22

BOXES

Box 1 Building the Knowledge Base: Analytical Activities. 11Box 2 Consultations on the Forthcoming CAS .20

TABLES

Table 1 Social Indicators .2Table 2 Pakistan: Macroeconomic Indicators, 1997/98-2003/04 .4Table 3 Debt Service Ratios .19

APPENDIX

Appendix I Performance on CAS Benchmarks

ANNEXES

Annex AI Key Economic & Program IndicatorsAnnex A2 Pakistan at a glanceAnnex B2 Selected Indicators of Bank Portfolio Performance and ManagementAnnex B3 Bank Group Program Summary for Pakistan (IDA, IFC, MIGA)Annex B4 Summary of Non-lending ServicesAnnex 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

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not be otherwise disclosed withoutWorld Bank authorization.

PAKISTANCountry Assistance Strategy - Progress Report

May 16, 2001

Summary. The last CAS and CAS Progress Report, discusse at the Board in December 1995, April 1997, andJanuary 1999, respectively, put forth a country assistance stratgy aimed at helping Pakista achieve macroecouomicstabilty, improve human development, build an enabling environment for private sector developenot and sustainablegrowth, and stregthen governance. A Bank Group full CAS is planned tD be presented to the Board by December 2001along with a joint assessment of the Bank and the DOP on the goverment Povarty Reduction Strateg Pawe (PRSP)which is also czurrently being prepared.

Notwithstanding setbaks and Pakistan's politica turmoil in earlier years, Progress In implementing the reformprogram is now sufficient to place Pakstan in the High Base Cas lending scenario. But this progress has been uneven.After July 1999, the implementation of the reforms under the Poliy Framework Pape MTf) and the IMP ESAF programwent off track, leading to suspension of disbursements under the ESAF progrm,L Similarly the Bank CGroup stoppedlending and focused on non-lending activities which included economic and sector work on a poverty assessment, afiduciary assesment (financial mnagqement and procurement reform), diaogue with the province on their econmic andfiscal reformis, policy advice and anAalyiical work on governance particulary regulatory and pricing issues in power, oil,and gas, and bankig reforms.

Since the change of regime in October 1999, the goverment has put forward, and suarted to implemet. acomprehensive reforma program with governance improvement and povert reduction at the forefront Soon after takngover, the new goverment issued a seven-point agenda to restore growth, roo out endemic corruption, depoliuciwe stateinstituidons, devolve power to the grassroot level, and improve checks and balance. Signfican progress has been madein implementing fth reforms and Pakitan's reform program which underpins its poverty red..cuon strategy is gainingstrength and credibility particlarly on macro economic stabilzation, deregulation, governanc, and devolution. Thegovernmsent has also articlate and started implementing a social sector strategy to address decades-long instiutionxlproblems that have plagued the delivery and quality of basic services The goverment expect the devolution of power tolocal governments-which is underway--to provide a stroger foundation to democrati processes, and to make thepublic secto more accountable to the users and more efficien at delivering base social services-basic education, publichealth and family planning, rural water and santation and other forms of coummunty infrastructure.

This progress report outlines the Bank Group assistance strateg for Pakistan for the period up until thie full CAS isfinalized. Work under the full CAS is well advanced (see Box 2) and the Bank Group CAS is plannd to be preseted tothe Board by December 2001. The planned program of lending and non-lendng service in this Progress Report isconsistent with the on-going CAS's objetives of supportig strong reforms wihb a series of one-trawhe adjustmentoperations within a medium-term macroeconmic and structura reforms approach which will also help strengthenPakidstan's creditworthines.

The program includes a Structura Adjustment Credit for US$35) million this fiscal year. a Banking SectorRestructuring and Privatization Projec for US$300 million in the first half of FY02 and other smallr investmen projectfocused on reforms and improving the delvery of basic services,-which are the two mmai thelme of fth Bank Groupsmtrtgy in Pakistan. The proposed opertios fall within the planned lending levels guided by the scenarios identfied inthe FY96 CAS and the FY99 CAS progress report (see Appendfix 1) and are within the IDA 12 allocation for Pakista.

Pakistan's debt indicators are higher than thos of HIPC grop of countries. Given Pakistan's debt situatio,financial assistance in support of the goverment's Poverty Rduction Staitegy should be extended-O dhe extenpossible-on cocassional tems. The Bank does not propose any BRD lending thi calendar year. The next full CASwill discuss a new lending strategy in light of Pakista's PRSP, reform progrm, andi externa debt situation. As Pakistanimplements its reform program with the support of its development partnes, its debt inicator are expected to imiproveover the medium-tem.

The Bank Group's continued involvement in Pakistan will help miitigate the risks that are inherent to the Bankrowup's work in Pakistan in view of its political and economic difficulties. Coordination with Pakistans development

partnes should helip Pakidstan implement the strong stabilization and reform program that is expected to help accelmertgrowth and reduce poverty over the medium-termi.

PAKISTANCountry Assistance Strategy - Progress Report

May 16,2001

A. SOCIAL AND POLITICAL CONTEXT

Introduction

1. More than fifty years after its independence, Pakistan continues to face the same formidabledevelopment challenges: building democratic institutions and implementing a wide-range of economicreformns to lay the basis for sustainable and equitable growth to reduce poverty. Pakistan's track recordas a reformer has been weak and turbulent. Progress was made in some areas, particularly on tradeliberalization and banking sector reform, and reversal of reforms has been extremely rare. However, thecountry failed to meet several of the structural reform goals it set for itself, and macroeconomicstabilization remained elusive. Thus, the economy has grown increasingly vulnerable, balance ofpayments crises have recurred in recent years, and external debt indicators have exceeded those of thehighly indebted countries (HIPC).

2. The change in government which took place on October 12, 1999, has led to renewed optimismby the people of Pakistan for better economic and social performance over the medium-term. Thisoptimism has been sustained and increased as the reforms progressed. It has also been reconfirmedduring the Pakistan Development Forum which took place in Islamabad during March 12-15, 2001. Thepolitical leadership took time to form its new government (through an extensive search that led to aselection of a well respected group of female and male technocrats, public officials, NGOs leaders, andothers with unblemished past record) and formulate its development strategy. It put poverty reductionand good governance at the core of its development strategy, now being formulated into a PovertyReduction Strategy. Wider consultations were held by the government on the development strategy withmajor stakeholders, including the poor, nationwide. The government intends to hold a second round ofconsultations in the next few months on the PRSP. Deep consultations with representatives of thepoor-33 percent of Pakistan's population-will be a lengthy process. Accordingly, over the past yearthe Bank has been using its knowledge base to support the government in the formulation of its PRSPwhich will form the basis for the Bank's forthcoming CAS.

3. The last CAS and subsequent CAS Progress Reports, discussed at the Board in December 1995,April 1997, and January 1999 respectively, put forth a country assistance strategy for poverty reductionbased on helping Pakistan achieve macroeconomic stability, improve human development, build acompetitive environment for private sector development and sustainable growth, and strengthengovernance. While these strategic objectives remain valid, developments in Pakistan since October 1999provide a basis for the Bank to review its assistance strategy and tailor it to the government's povertyreduction strategy. This progress report introduces the emerging pillars of the Bank Group CAS that isexpected to be presented to the Board by December 2001 along with a joint assessment of the Bank andthe IMF on the PRSP which is also currently being prepared.

2 Pakistan Assistance Strategy - Progress Report

Social Context

4. Pakistan grew in the 1990s at a rate-4.1 percent a year-that is insufficient to reduce povertysignificantly in the medium-term. With a population growing by 2.5 percent a year over the same period,per capita income grew by only 1.6 percent per year. About a third of the population (32.6 percentnationwide according to data from the latest Pakistan Integrated Household Survey) remains poor. Whilesocial indicators have improved over the 1990s (see Table 1), more progress is needed. Less than half(42 percent) of children aged 5-9attend school and only half of the Table 1. Social Indicatorschildren aged 12-23 months are 1990-97 1998 199immunized. Gender gaps in literacyand enrollment remain high. The Headcount Index (%) I/ 28.2 .. 32.6health status of the population is Illiteracy rate, adult female (% of females 15+) 75.6 71.1 70.0low, particularly among women and Illiteracy rate, adult male (% of males 15+) 46.4 42.0 41.1children, with low coverage of basic Illiteracy rate, adult total (% of people 15+) 60.4 56.0 55.0services such as access to safe water Life expectancy at birth, total (years) 60.1 61.7 62.5and sanitation. To generate the Mortality rate, infant (per 1,000 live births) 103.7 95.0 89.8resources needed to invest in humancapital and basic infrastructure, Growth Rates %Pakistan needs to grow at much GDP at market prices 4.1 2.5 4.0higher rates than the 5 percent GDP at factor costs 4.6 3.5 3.1growth rate of the past four decades. Per capita GDP at market prices 1.6 0.1 1.5That is going to be a major I/ The head count index is for 93-94. The 1999 Headcount Index figure is forchallenge. 1998-99.

A Country with a Turbulent Political History

5. Its turbulent political and social history has contributed to limit its growth potential which in turnhas constrained its ability to develop its human capital to reduce poverty. First, the country's wrenchingsocial change since its independence, vast influx of refugees, and its increasing internal schisms (result ofa difficult economic situation and the impact of the Afghan war) have contributed to social fragmentationwith an adverse impact on the formation of social capital-so crucial for institution building anddevelopment. Discord between its diverse ethnic groups (Pathans, Baluchs, Punjabis, and Sindhis), age-old schisms between Sunnis and Shiites, Sindhis and Muhadjirs, and the continued political dominanceof large landowners have contributed to deteriorating law and order and have kept much of Pakistanrelatively backward both socially and economically.

6. Second, poor and deteriorating governance has accentuated the turmoil. Since 1990 fourdemocratically elected governments have been dismissed, two of them on corruption charges. At thecore of the governance problem is the political leadership's politicization and abuse of the state'sdemocratic institutions. Those in charge of encouraging modernization and social change were often theones blocking it with a consequent disregard for the separation of powers and respect for the rule of law.The confrontational politics and widespread corruption have weakened the country's ability to buildstrong democratic institutions, generate growth and improve human development. As a result, there isincreasing concern that religious militancy, fuelled by the Afghan war, will contribute to strengtheningfurther Pakistan's internal schisms, posing a major threat to reforms and poverty reduction. On thepositive side, the politicians with extreme religious views have not been able, so far, to strengthen theirhold on the majority of Pakistanis who are moderate and who by and large would like to see Pakistandevelop into a modern Islamic state.

Pakistan Country Assistance Strategy - Progress Report 3

7. Third, the continuing tensions in the region starve Pakistan of crucial resources (while reducedfrom over 6 percent in the 1980s, defense spending still absorbs 4.7 percent of GDP) and reduceopportunities for closer regional integration. The end of the cold war and the war in Afghanistan has alsoconstrained Pakistan's development prospects. Foreign aid-which underpinned a large share of the highgrowth of the last few decades-was reduced significantly. Millions of Afghan refugees have become aheavy burden on the local infrastructure (3 out of 4 outpatients in government clinics in NWFP provinceare Afghans, for example) and have contributed to fuel social tensions.

B. POLITICAL AND ECONOMIC DEVELOPMENTS SINCE THE 1998 CAS PROGRESS REPORT

8. In late 1998, Pakistan was on the verge of a major balance of payments crisis. The May 1998nuclear tests led the G-7 countries to impose economic sanctions and oppose any new lending byinternational financial institutions beyond that needed to meet basic human needs. The sanctionsexposed the vulnerability of the Pakistan economy. They led to severe balance of payments difficulties(reserves fell from US$1.3 billion in May 1998 to US$400 million in early December 1998); spendingcuts; import restrictions; tax increases; and substantial external debt service arrears. In November 1998,the government prepared a strengthened macroeconomic stabilization and medium-term structural reformprogram to manage the balance of payments crisis and sustain growth. The program was supported bythe IMF (US$575 million under the ESAF/EFF arrangement), the Bank (through a SAL for US$350million), and the AsDB (for US$125 million). The Paris Club also rescheduled about US$3.5 billion inexceptional financing (out of which US$1.3 billion in rescheduling). The London Club restructuredUS$877 million in commercial debt. About US$610 nillion of Eurobond obligations were alsorestructured-the first such rescheduling of Eurobonds.

9. This financial support enabled Pakistan to rebuild its foreign exchange reserves and clear itsexternal debt arrears in early 1999. The stabilization program was also successful in achieving lowerinflation (5.7 percent in 1998/99 compared with program target of 7 percent), maintaining growth (3.1percent in 1998/99 compared with 3.5 percent in 1997/98), and keeping the balance of paymentsmanageable. International reserves were rebuilt from US$400 million in December 1998 to US$1.5billion by end-September 1999. These developments contributed to improve the overall economicclimate, which was reflected in a rebound in the stock market.

10. Considerable initial progress was made with structural reforms, broadly in line with theobjectives under the ESAF and the Bank's structural reform program. However, starting in the spring of1999, there were increasing concerns that the government's commitment to the reform program wasfaltering. In particular, resource mobilization and governance improvements remained weak. Theimplementation of the power and banking sectors reforms slowed. A dispute with the Independent PowerProducers (IPPs) was allowed to linger on further undermining Pakistan's investment climate and itsability to attract concessional financial assistance. Finally, the government's refusal on September 23,1999 to increase petroleum prices in line with international oil prices and implement a market-basedpricing formula for petroleum products-two conditions for IMF Tranche release under the ESAFprogram-led the IMF to f rmally suspend the ESAF program. In parallel, the domestic politicalsituation worsened while tensions between the Prime Minister and the military intensified.Dissatisfaction with the Priihe Minister led to numerous successful strikes and demonstrations. OnSeptember 7, 1999 the leaders of the main political parties and 14 other political groups formed analliance to oust the Prime Minister. This period of political instability ended on October 12, 1999, whenthe military took over in a coup which was largely well received domestically.


Economic Performance and Macroeconomic Sustainabiity Under the New Government

11. The new government's first challenge was to manage a vulnerable macroeconomic situa:ion withlow levels of reserves and a severe deterioration in the terms of trade due to rising oil prices. LDuring itsfirst year and a half in office, the government was successful in stabilizing the economy (see Table 2).Overall GDP grew by 4.8 percent in 1999/2000 from 3.1 percent in 1998/1999. Inflation declined to 3.6percent in 1999/2000 from 5.7 percent in 1998/1999, despite increases in domestic petroleum productprices. The current account deficit was narrowed to 1.6 percent of GDP in 1999/2000 from 3.J percentof GDP in 199811999, largely through an increase in private transfers, the result of the central bank'sactive foreign exchange purchases. The fiscal deficit increased to 6.4 percent of GDP in 1999/200)0 from6.1 percent in 1998/1999 due to the accumulated impact of tax refunds and the lag effect of adjustment ofpetroleum prices which was implemented in December 1999 rather than July 1999 as initiallyprogrammed (see para. 10).

Table 2: Pakistan: Macroeconomic Indicators, 1997/98 -2003/04 /aActual Estimate Projections

1997/98 1m998/ 1999/00 2000/01 2001/02 2002/03 2003/04

Output and Prices (annuail changes In percent)

Real GDP at factor cost 3.5 3.1 4.8 3.1 3.2 5.) 6.0

Consumer Prices 7.8 5.7 3.6 5.0 5.9 5.o 5.3

Savings and Investment (percent of GDP)

GrossNationalSavings 15.0 11.1 13.3 13.4 13.4 15.i 17.1

Gross Capital Formation 17.7 15.0 15.0 15.0 15.6 16.:i 17.7

Public Finances (percent of GDP)

Budgetary Revenue 15.8 16.3 16.5 16.4 17.0 17.!, 18.1

Budgetary Expenditure 23.5 22.4 22.9 21.8 2!.3 21.: 20.8

Budgetary Balance -7.7 -6.1 -6.4 -5.4 -4.4 -3.e, -2.7

Primary Balance -0.3 1.3 1.2 1.5 2.2 2.LI 2.7

Net Public Debt 89.4 91.9 91.6 95.4 95.8 92.4 88.5

Merchandise Exports 13.5 13.0 13.3 15.2 16.3 16.!; 17.7

Merchandise Imports 16.5 16.5 15.6 16.9 18.4 18.(1 18.2

Current Account Balance, excluding official transfers -3.1 -4.2 -1.9 - 1.8 -2.4 -I.:" -0.9

Current Account Balance, including official transfers -2.7 -3.8 -1.6 -1.6 -2.2 -1.1 -0.6

External Sector (percent of current FE receipts)

Total Extenal Debt 267.7 324.4 278.3 269.9 265.4 251.9 237.5

Total Debt Service 58.0 40.4 34.9 28.8 36.5 32.4 29.4

Gross Reserves (US$ million) - Excl. use of IMF 932.0 1672.0 916.0 1635.5 2088.3 2688.2 3478.3resources(in weeks of next year imports) 3.9 7.8 4.2 6.5 8.1 9.1 12.5

Financing Gap (US$ million) . .. 2562.0 1940.C 1972.0

Source: World Bank and IMF staff Estimates.a. Pakistan's fiscal year is I July to 30 June.

12. In parallel with its stabilization program, the government carried out an intensive policy dialoguewith the IMF and the Bank for the formulation of a comprehensive program of macroeconomic,structural, and social reforms to address both short-and-long-term structural constraints that are at the


root of the fragility of the balance of payments. The government wanted the reform program to underpinits poverty reduction strategy. Following the 2000/2001 Budget, which signaled the government'sdevelopment policy, the government reached an agreement with the IMF in November 2000. TheUS$600 million ten-month Stand-By arrangement was a necessary first step to support the government'smacroeconomic stabilization program and address Pakistan's pressing balance of payments needs. TheStand-By was followed by a Paris Club debt rescheduling (US$1.8 billion) in January 2001.

13. Economic performance over 2000/2001 is expected to be adversely affected by exogenousfactors, and in particular a severe fourth consecutive year of drought. Real GDP growth is expected to belower than planned at 3.1 percent for 2000/2001, compared with an initial target of 4.5 percent. Inflationis expected to pick up to 5 percent compared with a target of 6 percent, due in part to lags in priceadjustments as some of the recent price increases and exchange rate depreciation may have not workedtheir way through into the CPI yet. The current account deficit is also expected to be contained at 1.6percent of GDP. Shortfall in exports and profit transfers have been compensated by higher workerremittances and lower imports. However, gross officials reserves (excluding foreign currency deposits)now stand at US$740 million as of May 10, 2001 (3 weeks of imports), short of the target of aboutUS$1.64 billion. Finally, the consolidated fiscal deficit (including grants) is expected to remain withinthe target of 5.4 percent of GDP, with shortfall in tax revenues more than compensated by higher-than-projected federal non-tax revenue and lower current expenditure (see Table 2). In particular, currentspending is expected to be reduced by about 1 percent of GDP due to a lower interest bill and a smallreduction in defense spending (0.3 percent of GDP) to stay within the agreed fiscal deficit target.

14. Performance under the Stand-By is satisfactory despite the lower than projected level of growth,the drought, and the major terms of trade shock. The successful implementation of the reform programwill give Pakistan an opportunity to rebuild its track record. This is essential to mobilize further supportfrom the Bank and the AsDB as well as from bilateral donors in support of the government's povertyreduction strategy next fiscal year. However, despite these favorable developments, there are stillconcerns over the fragility of the external position and future growth prospects. Shortfalls in externalfinancing are another risk especially since the macroeconomic framework relies on significantexceptional financing.

15. The government has also been carrying out an intensive dialogue with the Bank regarding Bank'sassistance to its comprehensive reform program. The program of reforms is focused on governanceimprovement (see the Structural Adjustment Credit (SAC) President Report which accompanies thisProgress Report and paras. 34-53) through pricing and regulatory reforms in oil, gas, and power sectorsand banking reforms, civil service reform, procurement and financial management reforms, as well asreforms to improve delivery of basic services following devolution to district governments. The Bankplans to support this reform program with a series of adjustment and investment credits, starting with theSAC, a Banking Restructuring and Privatization Project (see paras. 47-48) and other smaller investmentprojects focused on reforms and improving basic service delivery. The SAC will support up-frontimplementation of reforms within a medium-term reform program that is underpinned by thegovernment's poverty reduction strategy. The SAC will also provide the flexibility needed to managerisk in an uncertain environment, while establishing the basis for long term engagement that will bediscussed in the upcoming CAS.

C. GOVERNMENT POVERTY REDUCTION STRATEGY

16. Soon after the October takeover, 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 improve checks and balances and democratic processes in society. In December 1999,


following nationwide consultations with civil society, including the poor, the government anncunced itsdevelopment strategy which focused on: (i) strengthening governance and the integrity of the civilservice; (ii) creating opportunities through accelerating growth of agriculture, small and medi um scaleindustries, information technology, and oil and gas sectors; (iii) reducing poverty through revival ofgrowth and re-orienting public expenditure towards human capital development and poverty ritduction.This reform agenda is now the backbone of the government's Poverty Reduction Strategy (PRS).Further consultations are expected in the next six months to strengthen the country's ownership of thePRS. Significant progress has been made in implementing Pakistan's reformn program which tinderpinsits poverty reduction strategy particularly on macro economic stabilization, deregulation, goverrance anddevolution. This is a clear break from the past.

17. More than eighteen months after assuming power and eighteen months before the etii of itsmandate, the present government is keen on building the foundations for accelerated and -ustainedgrowth to reduce poverty. In particular, the government has articulated and is already implemeritiing (seepara. 29) a social sector strategy to address decades long institutional problems that have plagued thedelivery and quality of basic services. The government expects that the devolution of power to localgovernments-which are expected to be in place by August 2001 when local elections tc districtgovernments are completed-will play a major role in putting in place an institutional framework thatwould make the public sector more accountable to the users (particularly to the bottom half of thepopulation) and more efficient at delivering basic social services-basic education, public health andfamily planning, rural water and sanitation and other forms of community infrastructure.

18. Strengthening Governance. The government is currently implementing a far reachirig set ofreforms to improve governance. These include: (i) civil service reform; (ii) improved public linancialmanagement, accountability, and transparency through access to information; (iii) devolution: (iv) ananti-corruption drive; and (v) privatization and deregulation to reduce incentives for rent seekingbehavior. Work on judiciary and police reforms is at an early stage. The government is ;1oweverformulating and implementing a number of reforms in the judiciary and the police.

19. The government is putting civil service reform at the heart of its governance improvementagenda. The government is preparing a comprehensive program of civil service reform that ncludesreforms of recruitment, training and personnel management, and pay and pensions in line with therestructuring and rightsizing of the federal government. It chose to start the reforms in some of the mostimportant federal institutions-the Ministry of Finance/Planning, the Central Board of Revenue (CBR),and Railways Department. The aim was to use the reforms of these institutions as a role mode for therest of the administration as well as to show the government's determination to improve the perfi.rmanceand accountability of its administration. To depoliticize recruitment, promotions, and careerdevelopment, a new law restoring the autonomy of the Federal Public Service Commission (F.SC) byremoving the discretionary powers of the bureaucracy was promulgated in December 2000). Theordinance enhances the independence and powers of the FPSC by appointing the chairman and riiembersof the commission for a non-renewal five year term, extending its powers for recruitment above girade 16(middle professional level) and expanding its responsibilities for recruitment at grades 11-16 (entry levelsfor professionals) especially in institutions that are prone to corruption, such as the CBl'., auditdepartments, and the Anti-Narcotics force. The civil service act has been amended to ena.ble thegovernment to manage the service more efficiently, including the implementation of an exit stra .egy forstaff who have completed 25 years of service or do not have the required skills. Similarly, a Removalfrom Service (Special Powers) Ordinance has been issued to remove from the service corrmpt civilservants.


20. The Promotion Board for high level civil servants will be operating under more transparent rulesand be chaired by the FPSC chairman (as opposed to a special appointee by the Prime Minister as in thepast). The Pay and Pensions Reforms and Restructuring and Rightsizing Committees and the Task Forcein charge of the reforms of the CBR have completed their reports. The Cabinet is expected to reviewtheir recommendations in the next few weeks. The Railways Department has already implemented anumber of far reaching reforms (including a 30 percent staff cut, concessions to private sector) thatimproved dramatically consumer service and the Railways' financial position. Implementation ofreforms have already led to the elimination of 40,000 out of 135,000 positions and 23,000 "ghost"pensioners. Training is gaining in importance through existing government training institutes andthrough newly developed executive training programs.

21. To improve public financial management and accountability, the government has implementedfundamental structural reforms to strengthen the audit and accounting functions. It has promulgatedordinances establishing the autonomy, powers, and respective responsibilities of the Auditor General andthe Office of the Controller General of Accounts. The new legal framework is comprehensive in scopeand goes well beyond the initial objective of separating the accounting and audit functions. TheAuditor's General Ordinance is the first in the country's history. The accounting function is now underthe purview of the newly established Controller General of Accounts Department in the Ministry ofFinance. The separation of audit and accounting respcnsibilities will become operational in July 2001.A new Chart of Accounts will modernize budget presentation in line with GFS/COFOG classifications.Ad-hoc Public Accounts Committees (PACs) have been set up at both the Federal and Provincial levels toclear the backlog of Audit Reports not yet reviewed, and take appropriate follow-up action. And theNational Reconstruction Bureau (NRB)-the agency in charge of the devolution plan-has beenentrusted with developing a framework for fiscal decentralization and financial management systems atthe district level. A joint Bank-Government Country Procurement Assessment Review (CPAR) has beencompleted. The government will establish by July 2001 a National Procurement Authority to lead theprocess of change in this area. A new procurement law is expected to be promulgated by the end of2001. In the meantime, the government has taken measures to improve procurement practices in criticalareas, such as in the education sector, where a fifty year old monopoly for the publication of text-bookshas been dismantled.

22. As part of this program, during the next two years, Pakistan will: (i) improve its expendituremanagement through the implementation of a medium-term budget framework (to be launched with the2001/02 budget at the federal level, and, 2002/03 at the provincial level); and (ii) publish thegovernment's quarterly fiscal accounts to enable public monitoring of budget implementation. Inaddition, Fiscal Monitoring Committees (FMCs) have been set up at the Federal and Provincial levels tooversee the preparation of reconciled and accurate accounts.

23. An important part of the strategy to improve governance is to make information easily availableto the public. The government is committed to making itself accountable and more transparent throughthe passage of a Freedom of Infonnation Ordinance now under public discussion. Finally, a majorreform of public procurement is expected following the enactment of the new procurement law. TheBank is assisting with the implementation of this reform program through the Project for Improvement ofFinancial Reporting and Accounting (PIFRA). The IMF is also offering technical assistance for thefiscal monitoring component.

24. To reduce corruption and increase tax compliance, the government launched an unprecedentedtax survey and registration drive in May 2000. It is also currently reviewing the recornmendations of theTask Force for the Reform of the Central Board of Revenue-largely seen as the most corrupt institution.With income tax paid by less than 1.5 percent of the population and less than 25,000 corporations, and


scores of small and medium size traders operating outside the General Sales Tax (GST) net, the successof this program is seen as crucial to solving Pakistan's chronic fiscal problems. The first phase of thisprogram has been completed leading to registration of 120,000 new tax-payers and an updated databaseon 1.3 million businesses and individual tax-payers. At the moment there are about 1 .S millionindividuals and businesses that are registered tax-payers, yet only 1.2 million are actually filing taxreturns. The other component of the government's anti-corruption strategy includes removingopportunities for rent-seeking activities through removing public officials discretion in recruitinent andpromotions, tax collection, deregulation, and privatization of state assets.

25. The National Reconstruction Bureau (NRB) prepared a very ambitious devolution plan to redresschronic problems of governance and lack of accountability in service delivery. The plan is expected toprovide a better political framework for local control of schools and other basic public services i ncludingpolice and the judiciary. Pakistan will have a three tier government, each having its own responsibilitiesfor the delivery of these services. Local government elections were held in 18 out of the 106 di stricts inDecember 2000, elections in 20 districts were held in March 2001, and the elections in the remainingdistricts will be held by June 2001. The new structure is expected to be operational by Auguist 2001.Several bilateral donors and the Bank are currently helping with putting in place the new district-basedadministrative and fiscal framework and with training to build local capacity to manage.

26. The National Accountability Bureau (NAB) has been mandated to investigate and prosecute casesof corruption. A large number of high government officials, politicians, and senior military offic ers havealready been sentenced to prison terms, heavy fines, and banned from holding public office for 2"1 years.Major loan and tax defaulters were also forced to repay their overdue loans and taxes. About US$500million have been recovered so far.

27. Sustaining Macroeconomic Stability and Growth. In addition to governance improvennent, thegovernment is determined to focus its role on maintaining macroeconomic stability and fostering aninvestment climate in support of private investment and growth. In addition to the sh brt-termstabilization measures, the government has also set up a High Level Debt Management Commlittee toadvise the government on a medium-term adjustment strategy to manage its debt burden. The Coammitteehas issued its report which projects an adjustment through: (i) removing distortions to .ncreaseproductivity in agriculture and industry; diversify exports; and attract private foreign capital to developoil and gas sectors; (ii) reducing the fiscal deficit to less than 3 percent of GDP by 2004; inc:reasingpublic savings (primary fiscal surplus in excess of 2.5 percent of GDP by 2004) through an annual 2percentage points increase in Tax/GDP ratio; mobilizing privatization proceeds of US$3 billion over theperiod; and keeping defense spending constant in real terms; and (iii) improving the effectiveness ofpublic spending through a reduction in the size of the government (both reduction in the level of staffingand reduction in the role of government) and a rationalization of development spending (elirninating lowreturns projects).

28. Recognizing that Pakistan's growth and poverty reduction prospects are severely constrained byPakistan's high indebtedness and poor social indicators, the Committee's recommendations include alsoseeking substantial exceptional financing, of about US$1.5 billion per year, from the IMF, the Bank, andthe AsDB and rescheduling from the Paris Club over the four year period (including this fiscal year) tofinance the growth strategy and reduce external vulnerability by building up international reserves. TheComnmittee stressed the need for Pakistan to adjust its finances while seeking also concessional assistanceto sustain a level of growth adequate to reduce poverty and service its heavy debt obligations falling dueduring the next few years. With a 6 percent GDP growth rate, it will take Pakistan at least five years tobring the external debt burden to sustainable levels and ten years to bring total public debt to sustainablelevels.


29. Improving the Quality of and Access to Basic Social Services to support the government'seconomic growth and poverty reduction strategy. The government is aware of the poor delivery of basicsocial services. It attributes the collapse of basic service delivery to poor governance. It expects thecoming devolution of power to provide a more effective political framework for making the localgovernment accountable, nearer to the people, and responsible for the delivery of basic social services-basic education, public health and family planning, community infrastructure (including rural watersupply & sanitation). The federal and provincial governments are in the midst of a systemicrestructuring to move from the present set up of provincially based decisions regarding staff, budgets,policies, and supervision to the new one where district governments will be in charge of managing basicservice delivery. Such restructuring will involve change in leadership, strengthened human resources,effective business processes and the right technical expertise. To implementing the new social sectorstrategy, the government intends to:

* Appoint new education, health, family planning and community infrastructure provincial and districtmanagers following the devolution to district government. The quality and continuity of leadershiphas severely hampered the Social Action Program's (SAPII) ability to improve these services overthe last decade.

- Improve the quality of staff in the social sectors-both administrators and field staff (e.g. teachers,medical staff)-through merit-based appointment and adequate training. In education, thegovernment has already taken action in this respect. Nationwide, all new teachers will be appointedthrough a selection process involving a competency test and a selection panel including communitymembers and members of the private sector. Assignment will be on two-year contract and schoolspecific. The renewal of their contract will be based on feedback from community leaders in whichthe school is located. Should they refuse to report to the particular school, their contract will beterminated. The education and health departments will rely on both community leaders, NGOs,private sector representatives and the newly elected council members (under the devolution of powerto district administrations) to monitor performance of teachers and health officials.

* Provide a good governance environment within which social sector staff operate. At present,teacher, medical and health workers' absenteeism is endemic and teaching materials and medicalsupplies are in short supply. Fixing these mean dealing with the problems of wrongly sited educationand health facilities, mis-deployed staff, and lack of accountability for chronic staff absenteeism.Some provinces (Sindh in particular is far advanced in this area) have started a media campaignadvertising the names of absentee teachers and giving them a deadline by which they have to reportto school or be terminated. This is the only way evidence can be gathered to terminate them onground of "absenteeism" to avoid the lengthy court litigation. The program of pre-service and in-service training is being revitalized for both new and existing teachers. In some egregious cases ofpolitically based appointments, the teachers are being tested for competency. A number of those whodid not meet eligibility criteria are already being asked to leave the service.

* Improve the financing environment through adequate and timely provision of operating budgets formaterials and supplies in the schools and health facilities, and setting up proper incentive systems forthe staff (i.e. dismissing non-performing staff and refusing to pay salaries to absentee staff). Federaland provincial governments have increased education budgets and stressed their commitment toprotecting non-salary budgets. In health, the government has also taken a number of actions tosupport specific programs of immunization, maternal and child care, and family planning which arelargely under the purview of the federal government. In addition, the government is examining therecommendation of the High Level Debt Management Committee regarding a gradual decrease in


defense spending from 4.7 percent GDP in 1999/2000 to 3 percent of GDP by 2009/ 010 andreallocating part of the savings to double current spending on social sectors.

* Fix business processes in the social sectors by appointing high quality staff and ensuring cc:ritinuity,at all levels (from Secretary level to district officer level); establishing good financial mar agement(see paras. 21-22) and supervision systems; creating a student and school performance assessmentsystem; and opening multiple channels of publicly financed service delivery through publ ic, NGOand private sector institutions to expand opportunities, particularly to the poor and improve d -livery.

* Improve the quality and content of what gets delivered in these basic facilities, such as teachingmaterials and teaching practices in the education sector. The government has already made afundamental change in this area by deregulating textbook printing and publishing to imp.-ove thequality of textbooks and their timely delivery. In health, the government is focusing on publi.i health,improving access to preventive care, and improving the regulatory environment as the privae sectoris an important provider (80 percent of outpatient visits are to private providers).

30. Reducing Poverty and Vulnerability. Poverty incidence in 1998/1999 is estimated to lx around32.6 percent nationwide and has increased compared with the level over the 1990-97 period. Thegovernment is concerned over the lack of progress in reducing poverty and has therefore put povertyreduction, social protection, and empowerment at the forefront of its development agenda. Thegovernment recognizes that it needs to put in place a policy environment that would stimulate growth andimprove access to basic services, especially education to be able to make progress in its fighl againstpoverty. In addition, as a first step in implementing its social protection strategy, the governmlent hasincreased its contribution (to 0.6 percent of GDP) to a demand-driven public works prograri. Theimplementation of the public works program has already changed some rural infrastructure, with smallschemes such as rural access roads being completed with people's financiaVlabor contributior.s. Thegovernment has also launched direct cash-transfer programs for poor families; and is strengthening theZakat, an Islamic-inspired contributory charity program that targets widows, orphans, and the disabled.Overall, spending allocations on the revamped anti-poverty targeted programs-at 2.9 percent of GDP inFYO1-is the largest since 1995. To monitor the impact of these programs, the governmlent isestablishing a poverty monitoring cell in the Planning Commission and is launching a ParticipatoryPoverty Assessment to gain a better understanding and inform public policy on the causes of pov.: rty andvulnerability in Pakistan. The Bank is working closely with the Planning Commission on the povertyanalysis and monitoring front (see Box 1). The government has been particularly concerned dhat theimpact of the adjustment and structural reform program does not create hardship for low income gToups.In particular, it has introduced the necessary price increases of electricity and gas, for example, in phases,protecting the lowest income groups. It has created a pool of surplus labor following the restructuring ofsome government departments to allow the retrenched staff to be trained and find other employmentopportunities. It has also sought to offer severance payments to retrenched personnel.

31. And Empowering the Poor, especially Women. Recognizing that women in Pakistan are highlyvulnerable and the least empowered, the government has issued a 10-point agenda to remove la ws thatare discriminatory to women. A National Commission for the Status of Women has been set up. TheCommission is composed for a large part of well established women professionals known for their strongcommitment to gender equity. The Commnission has formed several working groups to revi zw theexisting laws pertaining to women's rights with a view to recommending reforms to reduce genderdiscrimination and promote gender equity. The government has already declared that all "honor killings"will be treated as murders. The government is also seeking to improve women's voice and access toresources by increasing their political representation (a third of local council seats have been reserved forwomen-4,000 women have been elected in the first round of local government elections) and reducing

Pakistan Country Assistance Strategy - Progress Report 1]

their vulnerability to rule of law violations. The government is receiving a significant level of technicalassistance from bilateral donors and UN agencies to implement the reform agenda for gender equity inPakistan.

Box 1. Building the Knowledge Basew Analytical Activities

To enhance die Bank's development effectiveness in Pakistan, the country strategy team has endorsed a program ofAnalytical and Advisory Activities (AAA) ha will underpin its stegy formulation and lending operaions and covers thecore diagnostic areas. It includes:

A Poverty Assessment-to be completed in PY02-seeks to undersand better the determinants of poverty andvulnerability in Pakistan. Te work which is being cared out in close colaboration with the government of Pakistan (andresearch centers thr) is expected to contribute significantly to shape the Bank Group's assistance strategy in the comingyears. The poverty assessment wil provide the first pportunity to put into action the famework suggested by the 2000World Development Report on poverty. The latter arficulates three pillars for an effective poverty reduction strategy, namelyopportunity, secrty and empowermen Accordingly work is underway on vulnerability and goverance to provide keyinsights for policy action on security and empowerment. As new government programs are desined and PRSP formulated.the results of this work will be crucial in informing and contributing to a more holistic poverty reduction samegy.

Refomsfor Improved Quality and Access to Basi Services. A number of studies will be taunched this fiscal year-as part of the focus on provincial reforms-to gain a beter understanding of how to make decentralization work for improvedsevice delivery in educaion and health. The findings of a number of oter studies, which are under-way in health areexpected to help underpin our policy dialogue with the provincial goverents on communicable disea control familyplanning, and development of District Level manged health systems.

A Country &onomic Memorndum scheduled for FY02 will present an integrative assessment of Pakistan'sdevelopmnt plans, prospecu, and priorities for acbon in the social. structural, and sectoral areas. The analysis will be used toinform the policy dialogue and provide advice and knowledge transfer under the full CAS,

A Couwry Finali Accountabiity Assessmen (CPAA) is under way to provide a systematic risk assessm entconcerning financi management and accountability in Pakistan. The CFAA will be used to inform future Bank support forstrengthening Paksan's financial management and accountability systems. The Govermen has accepted therecommendations contained in the CPAR which was carred out jointly with the Bank. An implemnctadon plan is beingprepared staring with the setting up of the National Procurement Authority by July 2001 to lead the reformn agenda in thisarea

An analysis of the proviwial iances and their fiscal sustainability was completed in FY00 when it becameapparent that Pakistan's four provinces were facing a fiscal cnsis which has crippled their ability to deliver on their mandate.Given severe restrictions on provincial borrowing, this crisis manifesed itself not through large fiscal deficits. but through adetioration in the composition of pubic spnding, undmining their capacity to deliver on the existing poverty reductionprograms which the Bank was supporing (health. education, and basic infrastuur), This analytical work, which includesan annual review of the fedal investment plan and a Public l4pendiure Review for Punjab in FYO1, showed that theprovinces had little fiscal space to undertake new projects. The Bank thus focused its poicy dialogue with both the federaland provincial governments on advisory services on economic reforms that would put the provinces back on a sustainablefiscal path.

A Financial Sector Review was caried out in FY00. It helped lay the basis for the second generation of reforms inthe financial sector which the Bank would support through a Banking Sectr Restmrturing Project in FY02.

A number of stdes are under way in the ener8y sector, particularly analytical work on regulatory and pricingissues in power, oil ad gas to strengthen the Bank's ability to continue to advie thc government in this area. The results ofthis work wii help inform the debate on sequcing the reforms and will underpin the Bank's fiuure assistanc statg in thesector.

A poit &ank-IFC private sector assessment will be prpared (FY02) with the view to updatig our knowledge baeon private sector issues in Pakisa The Bank-C team is currently undertakng an in-depth review of the 'main five'industries (sugar, cemnt, steel, textiles and fertilizer) which operae under a very distorted policy environment. Te Bank hasalso initiated a firma-level survey to identif the constraits on small and medium-size enterprise growth performance.


D. PROGRESS IN IMPLEMENTING THE BANK GRoup's ASSISTANCE STRATEGY

32. In January 1999, the Board of Executive Directors discussed the CAS Progress Report forPakistan at the same time as it approved a US$350 million IBRD Structural Adjustment Loan (SAL) insupport of governance improvement. In June 1999, the Board approved a US$90 million IDA credit for aPoverty Alleviation Fund. Sustained implementation of the comprehensive reform program, thai. was setout at the time under the PFP and the SAL, was expected to lay the basis for lending to Pakistan at HighCase levels during FY00. This did not happen as the govemment's reform program went off track (seepara. 10) and the Bank stopped lending. Accordingly over the past two years and particularly since thenew govemment took over, the Bank focused its assistance on policy advice and other non-lendingservices as indicated above (see also Box 1).

33. The Bank's ongoing assistance strategy remains focused on helping reduce poverty in Pakistanby investing in people and promoting sustainable economic growth. The key elements of the strategy areto:

* achieve macro stability, improve resource allocation and raise the quality of public expenditures;* improve human development;* build an enabling environment for private investment and sustainable growth; and* strengthen governance and institutional development.

34. Achieving Macro Stability. The Bank's strategy in this area has been to work closely with theIMF on the structural policies that underpin macroeconornic stability. The Bank has complemented theIMEF's short-and-medium term macroeconomic stability through analytical work and policy advice to thegovernment on reforms in the social sectors and the key sectors such as power, oil, and gas, banking, andagriculture (including agricultural income tax issues) whose performance have a strong bearing orn publicfinances and the balance of payments. The Bank has also been assisting the government strengthen itsfinancial management (through the PIFRA project) and public expenditure management through itsannual public investment reviews. An Institutional Development Fund (IDF) grant was also pro vided toassist the government with the reforms of the CBR (see Appendix 1 for more details). A mediuim-termbudget framework (MTBF) will be implemented at the federal level with the 2002 budget. The MTBFwould help improve the overall quality of financial management as its implementation will require agood information base regarding the government's financial position including its contingent liabilities(see Appendix 1).

35. Improving Human Development. Despite significant progress in enrollment both in rural andurban areas and a reduction of the gender gap, overall results in this area remain disappointing despite thesignificant investments from the government and the international donor community, includirg IDA-financed interventions. Primary education is by far the worst performing; but very poor governance(weak financial management, poorly motivated teachers with lax accountability for results), lack ofleadership and resistance to mobilizing NGOs' help undermined efforts in primary health. familyplanning, and community infrastructure as well. Pakistan achieved the same or less social progress(measured by improvement in infant mortality and female literacy) than other low income countbies thatgrew far less or at the same rate as Pakistan.

36. The country's main instrument through which it aimed to expand access and improve the qualityof basic social services since 1992 has been the Social Action Program (SAP I & II Projects). The SAPis a national program, supported by the Bank and a number of other donors. Its focus is on improving thedelivery of elementary education, primary health, family planning, and rural water supply and sanitation.The provinces are responsible for its implementation. Overall, despite the program's effort to protect the


expenditures for these basic services, outcomes have fallen far short of the SAP's targets. According tohousehold surveys, half of Pakistan's children do not actually attend school, the utilization of publicprimary health facilities is very low, and the increase in access to clean water in rural areas has beenlimited. In particular, despite increased participation of the private sector in schooling, enrollments andachievements (less than half of elementary age children complete five years of basic education) at alllevels of education are very low in Pakistan and within South Asia. While the gender gap has beenreduced to some extent, due to sharp rises in girls attending rural government schools, very significantgender gaps still remain, especially in rural areas. Government and donors agree that the public deliverysystem has virtually collapsed and is in need of a radical overhaul.

37. To address these issues, the government is changing the structure of the elementary educationsystem through devolution and decentralization of service delivery (of education, public health, andcommunity infrastructure including rural water supply and sanitation) from provinces to districts andbelow. Accountability for outcomes will rest with the local governments. The implementationmodalities of this strategy, especially the plans for financing and monitoring district programs, are beingworked out in line with the overall devolution framework. In parallel, the Chief Executive and thefederal and provincial education ministers are working on an education strategy which aims to addressthe root of the poor quality of delivery of education (see para. 29 for the actions taken to date inimplementing the new strategy). The Bank and other bilateral donors have responded to government'srequest for assistance to build local government capacity-critical factor in ensuring that the devolutiondelivers the expected benefits-to manage the new district based education delivery system.

38. The government is also carrying out an inventory of the maintenance requirements of the existinginfrastructure to restore it to acceptable conditions and ensure the safety of those attending the schools.In this context, the federal and provincial governments have increased education budgets and promised toprotect non-salary budgets (although the actual spending is once again threatened by the shortfalls inrevenue and the uncertainty due to the introduction of the decentralization to district educationdepartments). The education departments are undertaking an inventory of unused school buildings-making significant progress at the same time in eliminating "ghost teachers"-and pursuing a variety ofavenues for their disposal. The government expects to sell or transform unused schools into hostels forteachers in rural areas and other such purposes. The new education strategy includes opening morechannels for financing and delivering primary education by including non-government and privatesectors. Sindh for example has put in place an "Adopt a School Program" which has been verysuccessful in attracting corporate and other funds to finance textbooks, schools uniforms, and othersupplies as well as maintenance of buildings. The non-formal literacy program is being transformed intoan apex funding operation for education delivered at low cost through NGOs. The primary schoolcurriculum is being revamped, along with the textbooks. The government abolished recently themonopoly of the Textbook Publishing Boards over text book printing and publishing. These variouscomponents of the new education system are in different stages of actual implementation acrossprovinces, and in the capital and the federally controlled areas.

39. The health outcomes while less bleak are still nevertheless poor. In the last two years, the Bankhas continued to encourage the federal and provincial governments to improve their performance in someof the areas which are key to further improvements in health status-mainly maternal and child health(including family planning) and communicable disease control. Bank assistance in this regard has beenprovided through a variety of instruments, including several investment projects (all of them now closed),the on-going Social Action Program Project II, and free-standing technical assistance. Governmentperformance has improved since 1998, though much more remains to be done.


40. Following (he announcement of the devolution plan, the Bank has been assisting two provinces(Sindh and Punjab) to plan for the provision of basic health services by the newly established third tierlocal government. Overall, the government's health strategy is moving in the right direction. ' here is adesirable shift of focus and spending towards communicable diseases and immunization. The budget forthe Expanded Program of Immunization has been increased and a medium-term plan is under pr.. parationto increase its coverage. At present the percentage of fully immunized children 12-23 months of age isstill far too low at about 52 percent overall, with a large urban-rural differential (68 percent i ersus 47percent) and a smaller male-female differential (55 percent versus 50 percent). Much progress has beenachieved in eradicating polio. The government has now a sound tuberculosis control program that needsto be strengthened to increase coverage of the population beyond the current 12 percent. In H V/AIDS(where prevalence is still low, but the risks of a devastating epidemic are great) the governinent hasformulated a strategic plan to scale up its prevention efforts. The Bank is helping the governm-ent withimplementation of the HIV/AlDS prevention strategy through technical assistance (and a possibleHIV/AIDS project for FY02) and by leveraging funds from other donors.

41. Urban and Rural Water Supply and Sanitation. Water supply and sanitation service deliveryremains very poor even in urban areas. At least 40 percent of the total urban population wh o live in"katchi abadis" (slum and low-income settlements) does not have access to these basic service,. Sincethe last CAS progress report, the Bank has focused its assistance on improving the delivery of basicinfrastructure through community-driven projects such as the NWFP Community Infrastructuro Projectand the Rural Water Supply Project. Building on the experience of these community-based approaches,the Bank is currently preparing-at the request of both the Federal government and the goverunment ofAzad Jammu Kashmir (AJK)-a Community-District Infrastructure Services Project. In the urb an areas,the Bank is helping the city of Peshawar (NWFP)-with financial assistance from the Cities Alliance-develop a City Assistance Strategy that would enhance city management and municipal services andsupport the proposed devolution plan to decentralize municipal services.

42. Rural Development, Natural Resource Conservation, and Poverty. The 1995 CAS focusedmainly on strengthening institutional capacity and initiating pilot resource conservation approaches. Aspart of the mid-term review of the National Conservation Strategy, a new environment strategy aas beendeveloped with a focus on: (i) strengthening environmental govemance through credible enforcementand policy coordination; and (ii) mainstreaming the environment to contribute to poverty reductionthrough mitigation of the health impacts of pollution (indoor and outdoor air pollution, acces to safedrinking water and sanitation services, and waste management), and improved livelihoods throughconservation and productivity of natural resources (particularly land and water resources).

43. The Bank will support these gains through two projects: these are the Protected Areamanagement Project (approved by the Board on April 24, 2001) and the proposed NWFP Clin-Farm-Water-Management Project (NWFP OFWM accompanying this Progress Report). The Proteci:ed Areamanagement Project will help set up sustainable conservation management of natural resources inivolvinglocal communities in areas of both high vulnerability and global bio-diversity values. In addition, theproject will help Pakistan fulfill its obligations under international environmental treaties, particularly theBio-diversity and the Ramzar Convention. The NWFP OFWM Project would help impreve rurallivelihoods through improved irrigation efficiency and sustainable agricultural practices, empcwermentof Farmer Organizations, and fiscal sustainability.

44. Building an Environment for Private Investment and Sustainabk Growth. Key elemrients ofthe private sector development strategy include: further trade liberalization, deregulation, andprivatization, including of banks, power, oil and gas, and transport sectors.


45. Trade Liberalization and Market Deregulation. The government is expected to further reducetariffs and streamline tariff structure. The on-going tax reforms are also expected to reduce further tariffdistortions. The restrictions on exports of agricultural products have been lifted except for wheat-whose exports have been only temporarily authorized; otherwise the agricultural sector is largelyderegulated. Helped by the analyses carried out by the Bank, the government intends to deregulate thelarge protected industrial sector, including power, oil, gas, and telecommunications. The Bank togetherwith IFC is also carrying out a private sector assessment to examine the regulatory constraints to privatesector development (see Appendix 1 and Box 1).

46. The Bank Group has continued to encourage the government to move ahead with theprivatization program. However, progress has been slow over the last three years. The recent sale ofgovernment's assets in LPG business of SSGC (Sui Southern Gas Co) and 7 percent shares in MuslimCommercial Bank are the first to be done under the new privatization law. This was due to many factorsincluding the absence of an adequate legislative and regulatory framework, the difficulties in changingthe policy framework to make public companies attractive to private investors, and finally the difficultenvironment of the past two years (see Appendix 1). With the resolution of the long-standing anddamaging dispute with the Independent Power Producers (IPPs) and the enactment of a PrivatizationOrdinance-providing legal cover to investors' rights, which, on occasion, have been challenged incourt-prospects for privatization have improved. The Privatization Commission is focusing onsuccessfully privatizing large public sector interests in telecommunications, banks, oil and gas. Financialadvisors from internationally recognized firms have been hired for this effect.

47. Banking Reforns. As a result of the 1997 banking sector reforms which were supported by theBanking Sector Adjustment Loan (BSAL) and which addressed the root cause of Pakistan's bankingcrisis-abuse by vested interests-Pakistan's banking system performance improved by the end of 1999when measured against internationally accepted performance benchmarks. Nationalized CommercialBanks (NCBs) stemmed operating losses through staff reductions (30 percent) and closure of 500 loss-making branches. A third of the stock of loan defaults was recovered by the end of 1999. Thegovernment has supplemented loan recovery through the establishment of a government agency, theCorporate and Industrial Restructuring Corporation (CIRC), which is in the process of assuming from theNCBs and Development Finance Institutions (DFIs) all private sector non-performing loans of amountsabove Rs. 10 million and which have already court orders for recovery. Disclosure standards, bankingregulation and supervision were also strengthened through a more independent central bank; improvedcorporate governance through the introduction of private sector boards and management in state-ownedbanks; and reduced intermediation costs. These measures helped the banking system improve capitaladequacy, asset quality, efficiency and profitability. However, as the banking crisis eased and financialinstitutions began to heal, the reform process slowed down. In May 1999, political interference resumedthrough new centrally-mandated credit programs; loan recovery weakened; and bank privatization stalled.However, the work to strengthen the central bank's regulatory capacity did continue with good results.

48. Despite some setback as mentioned above, the Bank continued through its policy dialogue andthe technical assistance to the central bank to encourage the government to deepen banking reformns. Atthe request of the current government a financial sector update was completed in May 2000. It laid thebasis for this government's banking sector reform program. The government believes that the best wayto insulate the financial sector from political interference is to privatize all NCBs and reduce the numberof DFIs from 17 to 3. Accordingly, the plan is to privatize two NCBs (Habib Bank Limited (HBL), andUnited Bank Limited (UBL)) within the tenure of the current government and prepare a third bankNational Bank of Pakistan (NBP) for privatization. Because of the distressed conditions of these banks(high cost structure and depleted balance sheets), potential buyers have indicated they are not interestedin taking the banks in their present conditions. The government is therefore seeking Bank support this


calendar year to finance the cost of restructuring the banks to improve their prospects for sale. Therestructuring plan includes inter alia cost restructuring of NCBs to achieve a cost/income ratio of 0.65through staff reduction (40 percent), branch closure, and outsourcing of non-core activities. I:(C is alsoconsidering further investments in the financial sector. The government needs to remove the ur,certaintysurrounding the application of the Shariah code to all financial transactions as per the Decemrber 1999supreme court decision.

49. Power. The major development since the time of the last progress report has been the risolutionof the government's damaging disputes with the Independent Power Producers (IPPs). Pakistan was ableto attract substantive private investment in power generation and oil and gas exploration in the mid-nineties despite its poor track record in implementing the required market liberalization reforms in thesesectors. That ability to attract private capital to the sector was reduced, however, following the previousgovernment's dispute with the country's 12 IPPs (IFC invested in five IPPs projects while the 13ank andMIGA provided guarantees to 5) which seriously damaged Pakistan's image abroad and its investmentclimate. The present government inherited a situation with a very poor private sector-go iernmentrelationship and managed within a year to resolve all the disputes with the IPPs. The Bank played afacilitating role over December 1998-2000-when the last and largest IPP-HIJBCO-reaLched anagreement with the government in December 2000.

50. While the restructuring of the Water and Power Development Authority (WAPDA) and theprogram of efficiency improvements are proceeding, progress on unbundling WAPDA and theprivatization of WAPDA successor companies has been slower than expected. Following a majorefficiency improvement drive, WAPDA's financial position has improved to some extent. Bill collectionincreased (close to 100 percent for private customers), system losses fell, and government arrears toWAPDA are being progressively settled as planned, although provinces are still finding it hard to settletheir electricity bills arrears due to their fiscal position and also disputes regarding WAPDA. s billingaccuracy. The privatization of WAPDA companies, the Karachi Electric Supply Company (KESC), andmost of the oil and gas sector remains crucial to lock in the gains that have been made so far an-d obtaineven greater efficiencies so as to reduce the need for tariff increases in the future.

51. Natural gas. Natural gas and petroleum sectors reforms were put on the reform agenca by thepresent government. The government is eager to develop the gas and petroleum sectors to capture thesignificant balance of payments savings (estimated to be at around an annual US$500 million),efficiency, and environmental gains offered by substituting domestic natural gas for fuel oils, forexample. The government's reform program which is being formulated with Bank's advice seeks toeliminate price distortions, reduce the role of government in commercial operations, accelerate thedevelopment of domestic natural gas, and strengthen the sector's regulatory framework througih a newGas Regulatory Authority (GRA), for which an ordinance was enacted in early 2000. The new gas tariffpolicy-which is crucial for the success of the reforms and which the government began implementing inMarch 2001-will include the phased elimination (over four years starting from September 200C1) of thecost-plus pricing formula through bi-annual price adjustments for the largest natural gas ?roducerPakistan Petroleum Limited (PPL). Subsidies to all consumers will also be eliminated over a th-tree-yearperiod, except those targeted to the poor. Subsidies to the fertilizer sector for which ccrntractualobligations exist would be made transparent and part of the budget. The Cabinet has approved theprivatization of PPL and the two petroleum transport and distribution companies. IEFC is consideringinvestments in the gas sector, where foreign investment is needed to help with the development of provengas reserves.

52. Petroleum. Following an intensive policy dialogue between the government and the Bank, thesector is undergoing a major liberalization and deregulation. The markets for furnace oil and LPG are


being liberalized by freeing imports, domestic freight, and prices throughout the production anddistribution chain. LPG privatization has been initiated with some success (e.g. a dramatic fall in retailprices). The liberalization of diesel is scheduled to start in mid 2001 and lower-lead content gasoline hasbeen introduced. Government interests in retail, transport, and distribution, are being privatized and anew, independent regulatory agency, is being created. In addition prices will be revised quarterly in thefuture. Over the past two years, motor gasoline price has been increased by over 30 percent, diesel pricesby 55 percent and kerosene by about 30 percent to reflect international price changes.

53. Transport. Pakistan's poorly performing public transport system handicaps Pakistan's growthpotential and export competitiveness. This has led the government to encourage privatization of thetransport infrastructure. The Bank is assisting the government develop a national transport policy using ahighly consultative process. A three year technical assistance project for trade and transport facilitationreform was approved by the Board this fiscal year. The government has consolidated the institutionalframework by merging all modes of transport infrastructure into a single ministry of communications(Roads, Ports & Shipping) and railways. It is currently developing an integrated Transport Policy andRoad-Rail Action Plan. There is a major turnaround in the railways department. Service delivery andfinancial performance have improved significantly as a result of the new personnel management policiesand incentives framework. More than 40,000 (30 percent) staff were dismissed (most were absentees) toreduce overstaffing and measures have been put in place to root out corruption. For roads, there is awelcome shift towards operations and maintenance and cost recovery, road safety, completing of existingprojects and scaling back previous large projects such as the Islamabad-Peshawar Motorway (reduced to4 lanes from initial 6); mobilizing additional revenues through tolls for road maintenance; and creation ofa Road Maintenance Fund financed from fuel levies. The cabinet has approved the privatization ofPakistan International Airlines (PIA) through sale of shares to a strategic investor.

54. Portfolio Management. Considerable efforts were made to improve the quality of the Pakistanportfolio over the last three years (FY98-00). In FY98, it was ranked among the 25 worst performersBank-wide with more than 50 percent of projects and commitments at risk. Beginning in mid FY98, theBank, together with the federal and provincial governments, initiated an aggressive portfolioimprovement strategy. The traditional project-based approach was supplemented by a more systemicvision of portfolio management based on outcomes, financial management, and procurement. Quarterlyportfolio reviews with the Federal Finance Minister and periodic provincial portfolio reviews are now thenorm. Building on this portfolio strategy, two Portfolio Improvement Plans were developed in FY99 andFY00 leading to substantial progress in improving portfolio performance. The number of "projects atrisk" went down from 52 percent in FY98 to 19 percent in FY00, while commitments at risk decreasedfrom 54 percent in FY98 to 20 percent in FY00 (see Annex B2).

55. The number of projects in the Pakistan portfolio declined from 42 in FY97 to 15 as of April 30,2001, with outstanding commitments of US$1.18 billion (net of cancellation). The decline in newentrants to the portfolio relative to closings can be attributed to a number of factors including: enhancedselectivity and "quality at entry" criteria; fiscal constraints to counterpart funds, political turmoil, unevenprogress on policy reforms and lack of an adequate macroeconomic framework; sanctions and borrower'sweak capacity.

56. Portfolio performance has been turned around to some extent also with the help of field-basedsupervision teams working closely with the government and reducing response time. The Bank has alsostrengthened its safeguards oversight by strengthening financial management and internal controls andproviding training to clients on Bank procurement guidelines. The Bank will continue to aggressivelypursue its objective of a lean and client driven portfolio.


57. IFCs ability to do business in Pakistan has been constrained. The 1998 balance of paymentscrisis, the large external indebtedness, political instability, disputes with investors (especiaily in thepower sector), and the loss of investor confidence have increased the perceived risk and discour aged newinvestment. Moreover, distortionary policies-for cement, automotive, oil and gas for example -furtherdeter private investment and handicap IFC's support.

58. IFC has therefore focused on restructuring its own portfolio, while helping existir g clientsrestructure and strengthen their companies' balance sheets. This has led to cancellations of someUS$260 million in commitments to 23 companies. As a result, Pakistan now ranks as IFC's lh largestexposure, down from 6 th in December 1998. IFC's disbursed own account portfolio is currently US$422million in 45 companies, of which 39 percent is in five IPP projects. All of the IPPs are now opz.rational.The B Loan portfolio is currently US$241 rnillion in 12 companies, with a strong concentrition (58percent) in power. Of the 45 portfolio companies, 9 are not current, US$77 million are overd le and innon-accrual, while reserves for loan losses are US$78 million.

59. IFC recently committed a US$100 million Trade Enhancement Facility which v ill makeavailable additional resources for confirmation of import letters of credit. This would be of particularhelp to smaller companies. IFC is considering further investments in the financial sector, and i n the gassector, where foreign investment is needed to help with the development of proven gas reserves.However, the pace of future IFC investments will depend on continued progress towards economic andpolitical stability, a more transparent, non-discriminatory and market-based policy environnent, andprivatization of banks and other public enterprises. Subject to such progress, priorities for fi ture IFCinvestments are to develop the financial sector to improve access to finance by SMEs an J micro-enterprises, and improve the efficiency of commercial banking; investments in gas production andtransportation; support for private investment in infrastructure; and investments in industries with stronggrowth prospects which can be competitive without dependence on government protection or sul-sidies.

60. MIGA. With approximately US$111 million in Political Risk Insurance (PRI) cover, P,kistan isMIGA's tenth largest country in terms of net exposure. The portfolio covers investments in the Iinancial,infrastructure (including three IPPs), and manufacturing sectors. MIGA' s activities in Pakistan !iave alsobeen hampered by Pakistan's poor investment climate. Nonetheless, while foreign investors haveadopted a wait and see attitude toward Pakistan, interest in MIGA guarantees in the country remainsstrong, as evidenced by numerous inquiries received by the Agency in various sectors, nrcludingfinancial, agriculture, construction, and oil and gas.

E. THE BANK GROUP'S ASSISTANCE STRATEGY

61. National elections are scheduled to take place before October 2002 (as mandated by P ikistan'sSupreme Court). With this time frame in mind, the government's short-term objective is tc, achievesignificant progress in reviving growth, improving governance, and the delivery of social se -vices toreduce poverty, while laying the basis for sustained structural reforms that are likely to take a loi ger timeframe. The government wants to put in place a new economic and governance structure and set off in theright direction before it returns to the barracks. For the remainder of this fiscal year and next, I he BankGroup's strategy will support up front actions in Pakistan's evolving reform program as spelled out in itsinterim PRSP through a combination of lending and non-lending services. In particular, the straegy willcontinue to focus on knowledge transfer first followed by demand driven lending to suppor!: (i) thecomprehensive reform program to strengthen governance, the efficiency of the civil service, and thedelivery of basic services; (ii) the dialogue and assistance to governance improvements through reformsin the oil, gas, petroleum, power and banking sectors; (iii) the dialogue with provinces and thLe newly


established district level governments for provincial/district based assistance strategies focused ongovernance, human development and community-based services such as rural infrastructure, water, andsanitation.

62. The focus of the non-lending services will be on strengthening the dialogue on governanceimprovement, social sector strategy in the new decentralized environment, and targeted programs forpoverty reduction. The main lending vehicle would continue to be a series of one-tranche adjustmentcredits to help finance the adjustment costs of major reforms closely linked to poverty reduction, in thecontext of external or fiscal financing gaps. In addition, the Bank Group would use a pool of otherfinancial instruments (investment lending, sector adjustment operations, and guarantees), selectively forthe highest development impact and transfer of global knowledge and expertise. Consultations inPakistan with major stakeholders and development partners are taking place (see Box 2) to articulate themain pillars of the Bank Group Strategy for FY03-05 which is planned for discussion by the Board byDecember 2001 subject to the completion of the PRSP, continued satisfactory performance in theimplementation of the reform program, and an update on Pakistan's debt position.

63. 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 daunting. Current balance of payments projections indicate that through 2003/04, Pakistan willneed over US$6.5 billion (US$2.7 billion for 2001/02 alone) to finance an adjustment program that isexpected to lead to a recovery of growth to about 6 percent after 2004 and maintain foreign exchangereserves at a safe level (see Table 2). This requires a sharp adjustment in the current account of thebalance of payments (balanced current account by 2004 from a deficit of 1.6 percent in 2000/01) and anunprecedented growth in export earnings of about 10 percent per year. Furthermore, the Paris Club reliefthat can be expected for this period is unlikely to exceed US$1 billion per year, and the extent of debtrelief beyond this fiscal year are uncertain.

64. Creditworthiness. Pakistan is a heavily indebted country. Pakistan's total external public andpublicly guaranteed debt stood at US$26.4 billion, or 43 percent of GDP at the end of 1999/2000, and isexpected to rise to 50.3 percent of GDP by 2003/2004. Debt service as a share of exports of goods andservices is estimated to fall from 30 percent in 2000/2001 to 24 percent by 2004. Pakistan's exposureratios are reaching or are above those recommended for IBRD lending. The debt service to IBRD as ratioof exports of goods and services at 3.9 percent in 1999/2000 was close to the 4 percent guideline. Thepreferred creditor ratio (debt service to preferred creditor as a ratio of total public debt service)-46.4percent in 2000/01-is also way above that recommended by IBRD exposure guidelines and is estimatedto reach 50.6 percent in 2004 (see Table 3).

Table 3: Debt Service Ratios

1999/00 2000101 2001/02 2002/03 2003/04External Debt/FE Receipts 278 270 265 252 238DS/FE Receipts 34.9 28.8 36.5 32.4 29.4IBRDDS/totalpublicDS 11.7 14.1 12.1 13.1 13.8IBRD DS/exports of G&S 3.9 3.5 3.3 3.0 2.9Share of IBRD portfolio 2.7 2.4 2.4 2.3 2.2Preferred Creditor Ratio 38.2 46.4 43.5 48.6 50.6

65. The present value of long- term public and publicly guaranteed external debt to exports reached240 percent at the end of 2000-above the indicative level of sustainable debt (150 percent) for HIPCcountries. The share of multilateral claims is also high in comparison to other countries. For example,the share of multilateral claims in long-term debt is over 10 percentage points higher than that for the


HIPCs as a group. In terms of liquidity, Pakistan's risk remains high. The level of reserves i, low anddeclining while the ratio of short term debt to reserves is high at more than 200 percent. Finally,Pakistan's exports and overall GDP growth remain highly dependent on the agriculture sector, addingfurther volatility to its debt servicing capacity. Pakistan's ability to take on new debt will improveslowly, as its macro restraint, faster growth and concessional financial assistance causes its basiccreditworthiness to improve.

F. BANK'S ASSISTANCE STRATEGY FOR FISCAL 2001 - 2002

66. Pakistan is clearly now in the "getting back on track" or High Base Case lending Scetiario thatwas described in the 1999 CAS Progress Report (see Appendix 1). The recent positive developments inPakistan, regarding macroeconomic performance as evidenced by compliance with IMF beiichmarksunder the Stand-By arrangement, the strong country ownership and implementation of a comprehensivereform program to stimulate growth and reduce poverty (paras. 11-31), provide the basis for a strongeroperational engagement by the Bank Group than has been the case in the past two years. Thegovernment's reform program is comprehensive, and progress in implementation has established itscredibility. In particular, the pattern ofgrowing corruption and deterioration of key Bo2mi 2att n theFoto g CASpublic institutions has been arrested, and rapid A 0 ns atfin tdof withprogress is being made on implementing the g *_m e dja level, business 4*Munty,governance and institutional reforms needed and v s s iding villagess, wo dtto lay the foundations for growth and poverty Spo i astins w crre out in Oo 2000 inreduction, including the delivery of key tw provteand Sservices to the poor (para. 29). This is a clear raon=break from the past. Despite a very svkcpom at tie*08 iwt Wconstrained fiscal situation, there has been a o se u i l in su in d i bsignificant increase in resources for targeted PatcarYtipoegvrac,ceteO)1iRt5 Upoverty reduction programs (from 1.8 percent , Tof GDP in 1999/00 to 2.9 percent of GDP in c Wo a t nthe 2000/01 budget). New anti-poverty p * e in view of th fed t inboprograms have been set up, and existing ones pnce of envronm deg o eare being strengthened. Most importantly gch dayperhaps, the program has been developed at fo pnwad rntg tearig u u tethe government's own initiative, and has fo i the ta of law ad oter textensively relied on technical competencies d andfr not hepig in aetsto poof Pakistani nationals in the country and O The twantte Bank to sabroad. ie o i i psvt sect dekip

(icldngeayiaon 4 o rdit andtchoog,anld rdingthe0cost tha poor govrnce eseialy corpion

67. Work under the full CAS is well tad law ad prblems exact frm n b5¢9sdadvanced (see Box 2) and the Bank Group indiils).CAS is planned to be presented to the Board A e _ iby December 2001. The proposed program of held in A r f iv te atn e beittglending and non-lending services up to the le. IFC MaMrch2001 withr e tpresentation of the full CAS is consistent with f th pv t s ne also benhlwtthe comprehensive response strategy adopted k devloprnn With thee ounds ofby the Bank in coordination with the IMEF and wdads maiAsDB in the 1999 CAS progress Report. The ptof these olas an okey feature of the Bank's assistance was to i citurvey wll be used to e e e Bassupport strong reforms with a series of one- iolnna based on ourcaveadvanta


tranche adjustment operations-with all required actions taken up-front-starting with the StructuralAdjustment Loan (Approved by the Board on January 21, 1999) aimed at securing governanceimprovements in the key areas of banking, taxation, power sector, and public spending.

68. The proposed program of assistance under this progress report will also help strengthenPakistan's creditworthiness. The program would start with a proposed Structural Adjustment Credit forUS$350 million (see the President Report that accompanies this Progress Report), and investment creditsfocused on supporting reforms and improving the delivery of basic services. The program of assistanceincludes a Trade and Transport Facilitation Project for US$3 million (already approved by the Board onApril 24, 2001) plus proposed operations including a US$21.35 million project to support water resourcemanagement in North West Frontier province (see para. 43), a Banking Sector Investment Credit forUS$300 million (see paras. 47-48), another on-farm water resource management in another province(US$27 million), a community infrastructure project in Azad Jammu and Kashmir (US$30 million), anHIV/AIDS project (US$10 million) and possibly a Punjab Irrigation Systems Improvement project(US$175 million) if the reform program is sufficiently advanced to justify support for Punjab in this area.In addition, during this period the Bank Group's policy dialogue will be supported by a strong programof non-lending services (see Box 1 and Annex B4). The proposed operations amount to a totalcommitment from IDA of US$374 million in FY01 and around US$542 million for FY02. In response toGovernment's request for assistance to mitigate the adverse impacts of the drought, a note will bedistributed to the Board this fiscal year proposing the reallocation of savings from the existing portfoliofor short-term drought mitigation and rehabilitation. The Government and the Bank will reassess thesituation after the monsoon to see if further assistance is needed next fiscal year. The lending and non-lending services program beyond FY02 will be discussed in the forthcoming full CAS. The proposedcommitments fall within the total planned annual lending level under the high base case scenario guidedby the scenarios identified in the FY96 CAS and FY99 CAS progress report. The proposed lendinglevels are also within the IDA12 allocation for Pakistan. The triggers for these operations are discussedbelow. Given Pakistan's high indebtedness level, the Bank does not propose any IBRD lending thiscalendar year.

69. In view of Pakistan's fragile external position, the proposed Structural Adjustment Credit (SAC)has two main objectives. The first is to extend and deepen reforms in governance and power startedunder the Structural Adjustment Program approved by the Board on January 21, 1999. The SAC is also abridge to a series of one tranche adjustment operations (possibly PRSCs) which during the next three tofour years will support the implementation of the Government Poverty Reduction Strategy. The RMF isalso considering support to the PRS through a PRGF possibly later in FY02. The SAC would support up-front implementation of reforms before Board presentation. It will provide the flexibility needed tomanage risk in an uncertain environment, while establishing the basis for long term engagement that willbe discussed in the upcoming CAS. The second objective is to provide financial assistance as part of afinancing package for FY01 estimated at US$4.0 billion. The package includes the ten-month US$600million Stand By approved by the vIMF Board on November 29, 2000. The AsDB is expected to providebalance of payments support of about US$400 million (of which US$380 million has already beendisbursed). Additional liquidity relief-about US$1.8 billion (including clearance of arrears)-wasprovided by the Paris Club on January 25, 2001. Other creditors are also contributing to this exceptionalfinancing package.

70. This financing is critical to maintain the country's solvency and macroeconomic stability neededfor the implementation of the government's program of structural reform. Implementation of thestabilization and structural reforns under the government's Poverty Reduction Strategy are expected tohelp stabilize the economy and build the foundation for an acceleration of growth.


71. Lending Triggers for Bank Assistance. Satisfactory implementation of the macroeconomicstabilization program, sufficient progress in the preparation of the PRSP, and measurable pr3gress inimproving governance (see Matrix of SAC President Report for the various governanc, reformcomponents and the timetable for their implementation) will be the conditions under which the Bank'sassistance strategy will be triggered for FY02. In addition, to these overall conditions, a nuimber ofspecific prior actions have or will be identified for all lending operations that are planned to be presentedto the Board this fiscal year and next. These prior actions have been fulfilled up-front before Boardpresentation. The President's Reports for the SAC and the On-Farm Water Management ProjectAppraisal Document for North West Frontier Province contain a matrix of the respective pric(r actionsand the dates of their implementation. The triggers for the proposed Banking Sector Investment Creditare likely to include: (i) amendment of policy to allow banks to open and close branches or' basis ofcommercial reasons; (ii) revision of tax policy and administration to reduce the taxation of the financialsector; (iii) publication of the ordinance amending the Loan Recovery Act of 1997 to faci itate theforeclosure of loan collaterals; (iv) reform of the National Savings Schemes (significant progress hasalready been made in this area since the outset in October 1999); and finally (v) ending of the.: ForeignCurrency Deposit Scheme.

G. RISKS

72. Pakistan's economy faces serious challenges and major risks emanating from a variety e internaland external sources. First, to restore business confidence and build a sound basis for economnc growthand for poverty reduction, effective economic reforms are needed across a wide range of sectors. Sincethese reforms challenge existing economic interests, a major risk is sustained political commitment to therequired pace and sequencing of macroeconomic and structural reforms. The risk of some n.:versal-particularly of the far reaching governance reforms and proposed devolution plans-remains since thisgovernment's term in office ends in eighteen months. This risk may be mitigated by the government'sintentions to build support and communicate more actively its reform plans and actions to date with thepopulation at large, in order to sustain the reforms beyond its mandate. There is a also a risl; that thedevolution plan-could be hastily implemented and captured by the powerful interest groups furthercompounding the challenges facing Pakistan. The government is mitigating this risk by adopting aphased approach to devolution.

73. A second risk is social discontent, arising from the difficult economic situation, anld toughadjustment measures needed to address the balance of payments crisis. A third major risk relates toPakistan's ability to finance its balance of payments in the face of its very weak, vulnerable starl ing point(extremely low reserves, a large debt burden, and weak export performance). This situation is .;uch thateven if reforms are successfully implemented a viable macroeconomic framework may require furtherfinancial concessional assistance. Building a strong track record is essential to ensure that Pikistan'sdevelopment partners, including the Bank, the IMF, and the AsDB remain engaged and continue theirsupport to help Pakistan overcome the transition period until reforms lead to the supply response thatwould sustain growth and hence reduce Pakistan's external vulnerability. In addition, adopting! policiesfor a conducive investment climate is crucial to restoring private sector flows.

74. Lastly, an added risk is the implication of the December 1999 supreme court decision regardingthe implementation of the Shariah code to all financial transactions. A task force with the Ministry ofFinance and a "transformation commission" with the State Bank of Pakistan are working on tl-ie policyguidelines and technical measures-with IMF technical assistance-to ensure a smooth transition.Meanwhile, the government has given assurances to the Bank Group and all its development pan ners thatadopting such a code would not undermine business confidence, detrimentally affect business contracts,or deter foreign private investment.


75. While the risks involved in supporting Pakistan's poverty reduction strategy are significant, it isthe management view that they are acceptable and less than the risks of not supporting such a program inview of Pakistan's high incidence of poverty and the political risks of sustained high poverty incidencefor the country. A social discontent like that experienced by some countries during the East Asian crisiswould have disastrous economic, social, and possibly political consequences for Pakistan given its muchweaker economic and social foundation. Several factors (including approaches taken by the Bank)mitigate the risks. Perhaps most important, the reform program that has underpinned the PRSP is bothcomprehensive and "home-grown" in nature, and the plans for implementing it have been worked out bythe government with due attention to political realities and implementation capacity. To manage risks,and in a radical departure from the past, the government has carried out extensive consultations duringthe preparation of its reform agenda to ensure legitimacy and widen support. A second mitigating factoris our intensive monitoring of reform implementation along with maintenance of an active policydialogue led from the field by the country director to encourage effective, sustained implementation ofreforms and ensuring financial discipline.

76. A third rmitigating factor is the comprehensive response strategy adopted by the Bank incoordination with the IMF and AsDB in the 1999 CAS progress Report. The key feature of this responseis a series of one-tranche adjustment operations-with all required actions taken up-front. This responsestrategy remains valid and will help build a track record of implementation in an overall consistentframework of reforms. Finally, to mitigate social and poverty-related risks, the Bank will be taking amulti-pronged approach, focused on improving the quality of and access to basic service delivery andpromoting community-based anti-poverty initiatives. In addition, the Bank-supported Pakistan PovertyAlleviation Fund (PPAF) has been supporting successful NGOs to expand their micro-credit and smallscale community infrastructure programs, targeted to the poor, especially women.

James D. Wolfensohn

President

By Shengman ZhangWashington, D.C.May 16, 2001

Appendix IPage 1 of 5

PAKISTAN: PERFORMANCE ON CAS BENCHMARKS

Base Case Performance Results on the GroundBenchmarks

(High Base Case Scenario)

Progress in completingfiscaladjustment, including:

Macro stability with fiscal Upon taking office in October 1999, the government's major challenge was to maintaindeficit at 4-5 percent of GDP stability in the midst of a very difficult extemal environment. This included a severe

deterioration in the terms of trade (9.5 percent), absence of an IMF program, and nosignificant aid flows. Favorable performance of the agricultural sector helped to boostreal GDP growth from 3.1 percent in FY99 to 4.8 percent in FY00, and notwithstandingincreases in domestic petroleum and gas prices, the average rate of inflation declinedfrom 5.7 percent to 3.6 percent over the same period. The current account deficit wasalso reduced from 3.8 percent of GDP in FY99 to 1.6 percent in FY00 due largely to anincrease in private transfers. The capital account of the balance of payments turnedsharply negative, however, due to lower public medium and long term capital flows. As aresult, during FY00 reserves declined from US$1.7 billion to US$600 million bySeptember 2000 increasing pressure for a devaluation. In response the governmenttightened monetary policy and liberalized the exchange rate leading to a depreciation byend-September of the rupee against the dollar by 13 percent. This paved the way for anagreement with the IMF on a ten month Stand by Program.

Following the new administration's discovery of mis-reporting of the fiscal data goingback as far as 1993/94, the 1997/98 and 1998/99 fiscal deficit ended up at 7.7 percent ofGDP and 6.1 percent of GDP respectively-1.5 and 2 percentage points of GDP largerthan reported. Pakistan was required to repurchase about SDR41 million from the IMF asa result of the mis-reporting. Despite the efforts of the new administration to contain thefiscal deficit through tax initiatives and a reduction in public investment expenditures, thebudget deficit increased further to 6.4 percent of GDP in 1999/2000, from 6.1 percent ofGDP in 1998/99. This increase was difficult to avoid given the delay in implementing theadjustment of petroleum prices (a measure that needed to have been taken at thebeginning of the fiscal year by the preceding administration), the increase in the interestbill, and the settlement of accumulated tax refunds. The government has since taken anumber of measures to correct these overruns. The fiscal deficit for 2000/2001 isexpected to be reduced to 5.4 percent of GDP. In terms of fiscal adjustment, the cut infiscal deficit from 7.7 percent of GDP in 1997/98 to 5.4 percent of GDP in 2000/2001yields a fiscal deficit adjustment of 2.3 percentage points of GDP-0.7 percent larger thanthat anticipated before the rnis-reporting was discovered.

The targets for 2000/2001 under the Stand-By program include a GDP growth rate of 3.1percent (down from the initial 4.5 percent target due to the impact of the drought onagricultural growth), annual inflation of about 5 percent, a fiscal deficit of 5.4 percent ofGDP (amounting to a primary surplus of 1.5 percent of GDP), maintenance of currentaccount deficit at 1.6 percent of GDP and a build up of reserves to about US$1.635billion. The IMF has satisfactorily completed its review of the first quarter of the Stand-By arrangement. Pakistan has met all the IMF macroeconomic and structuralperfonnance benchmarks except for tax revenues (which have been more than offset bylower expenditures to remain within the fiscal deficit target by the end of the fiscal year)and the level of foreign exchange reserves which remain too low and underscores thecontinued fragility of the external position.

Appendix I

Page 2 of 5



(High Base Case Scenario)The government has sought IMF technical assistance to improve fiscal reportirg andtransparency, notably the publication of quarterly fiscal data, public contingenw liabilities,greater disclosure of quasi-fiscal activities, and publication of the schedule of t ixexpenditure. To drive this work forward, the government set up a fiscal reforn. unit inFebruary 2001. The government will also speed up the process of reconciliaticn ofprovincial fiscal data, especially against the background of the forthcoming de-olution ofmany fiscal tasks to the newly created district administrations. At the provinci.l level, atleast quarterly detailed expenditure accounts will be also prepared with a lag ol'no morethan two months.

Recognizing the weakness in the coverage, accuracy, and timeliness of nationa accountsstatistics in general at present, the government has developed a plan with techn calassistance from the IMF and the Bank (through the PIFRA project) to improve the qualityand frequency of national accounts statistics. The plan envisages the productic i of newnational accounts statistics-with 1999/2000 as base year-by end-June 2002.

Broadening of the tax base A new Income Tax Law will be in place by July 2001. The General Sales Tax 'GST) hasthrough adoption of an been transformed into a Value Added Tax with a single rate. Despite vocal anc activeagriculture income tax for all opposition from the business community, the GST coverage has been expandec' to include4 provinces, extension of imports, more manufacturing stages, electricity, petroleum products, agricultur. I inputs,GST, reduction in tax and retail and services. Despite considerable resistance a major tax survey anclexemptions, timely and non- registration drive was launched in April 2000 to document the economy and br. ng moredistortionary increase in individuals and businesses into the tax net. A program of institutional reform f;r theenergy prices Central Board of Revenue (CBR) is now under consideration by the Governmen.t. The

large agriculture sector is being brought into the tax net in all four provinces. S tartingwith the July 2001 Budget the federal governient will collect the agricultural imcome taxon behalf of the provinces (since agricultural income tax is a provincial subject like theGST on services) and transfer it to the respective provinces. In addition a wide range oftax exemptions in GST, income tax and customs have been considerably reduce dimproving prospects for better compliance. Petroleum product prices are being adjustedin line with intemational prices to reduce subsidies. Four rounds of price increases havealready taken place in the last twelve months. Similarly gas prices have also been. adjustedto improve gas sector privatization prospects and reduce pricing distortions amc ng energyproducts. With the recent 14.4 gas price increase, consumer subsidies have beeui reducedfrom 32 percent at present to 24 percent.

Adequate funding of SAP and Allocations for social spending under the SAP have been largely protected desp te theCore Development Program, tight fiscal situation. In fact non-salary allocations for the SAP were increased by theand adjustments in large current government. However, actual spending has fallen short of the allocatiolisexpenditure programs (e.g., because of the structural constraints that still affect the delivery of social services.defense) to permit more Delivery of social services rather than current level of expenditures seem to be t iedevelopment spending binding constraint.

The bulk of the fiscal adjustment program relies on increased revenues and redu -eddefense spending. In 1999/2000, Government increased spending on anti poveryprograms including allocating about 26%.of the Public Sector Development Pro.lJram(PSDP) to a new poverty alleviation program-the Kushul Pakistan. In additior, theshare of defense spending in GDP declined by 0.4 percent to 4.7 percent of GDI: in1999/2000. The government aims to reduce defense spending further to 4.5 per,. ent ofGDP in 2000/2001 yielding an overall reduction in defense spending of 1.3 perc,ntage

Appendix IPage 3 of 5

PAKISTAN: PERFORiMANCE ON CAS BENCHMARKS


(High Base Case Scenario)points of GDP since the start of the on-going assistance strategy in 1995/96. As a resultof reduced defense spending and lower interest bill, current spending is expected todecline by 1. I percent of GDP in 2000/2001. Development expenditures are expected toremain at the same level as in 1999/2000 which is about 3 percent of GDP.

Expajndig AcXee ad.Improving flvery o eCore

Agreement with the Bank on A SAP mid-term review (MTR) is underway and it is likely to lead to a majorall federal sub-programs, 10 restructuring of the SAP to improve its effectiveness in delivering basic services since thisout of 12 provincial sub- is the binding constraint to expanding access to basic social services. The government isprograms, and 10 out of 12 focusing in a first step on overhauling its strategy for the delivery of education and healthFederal Areas sub-programs services (see para. 29 in the text). In particular, service delivery (of education, public

health, and community infrastructure including rural water supply and sanitation) will bedecentralized from provinces to districts and below. The implementation modalities ofthis strategy, especially the plans for financing and monitoring district programs, arebeing worked out in line with the overall devolution framework. In particular, theaccountability for outcomes will rest with the newly constituted local governments,NGOs, and community leaders who will be monitoring performance in schools and localhealth centers.

Suppookig a loeCompetive nvlronmeatfor Prl*te -4- "_ _ _ _ _ _ _ . _..Investment and AcceleratedGrowth

.... ......... ...... ........... ..... .................................................. ................ ....... .. ............................... ...................... . . . . . . . . . . . . . ..................................................................................

Satisfactory progress in Deregulation and trade liberalization have continued. Exports of raw cotton have beenestablishing a more liberalized and the domestic price of wheat has been allowed to increase to internationalcompetitive enabling levels. The restrictions on exports of other agricultural products have been lifted exceptenvironment, including: for wheat-whose exports have been only temporarily authorized; otherwise the

agricultural sector is largely deregulated. Maximum tariff will be reduced from 35percent to 30 percent in July 2001 and 25 percent in January 2003. Measures have beentaken to eliminate or reduce the differential application of excise taxes to imports anddomestic products. Regarding the heavily regulated oil sector, a number of importantreforms have already been implemented. The markets for furnace oil and LPG are beingliberalized by freeing imports, domestic freight, and prices throughout the production anddistribution chain. In particular, imports and prices of furnace oil and LPG have beenderegulated. A large share (75%) of diesel fuel imports have been deregulated with theremaining 25% imports expected to be deregulated by April 2001. LPG privatization hasbeen initiated with some success. Retail prices of petroleum products are now determinedaccording to a pricing formula that will pass on movements in international oil pricesdirectly to consumers. Retail prices have started falling-reflecting the fall inintemational oil prices-as a result of the application of the formula. Govemmentinterests in retail, transport, and distribution of oil are being privatized and a new,independent petroleum regulatory agency is being created. The role of government incommercial activities is also being reduced in the natural gas sector while the sector'sregulatory framework is being strengthened through a new Gas Regulatory Authority(GRA), created through ordinance in early 2000.

A'ppendix ]

Peage 4 of 5




Effective implementation of A comprehensive devolution plan is under implementation to decentralize servic!deregulation at working of delivery and other administrative functions to district level governments. Elections weregovernment held in 38 out of the 106 districts nationally and the new local governments are e vpected

to be in place by August 2001when all the elections would have been completed. Inaddition, as part of governance reform agenda, the government is implementing a. farreaching civil service reform agenda to improve service delivery and increaseaccountability. A number of measures have already been taken. In particular, a rnew lawrestoring the autonomy of the Federal Public Service Commission and enhancin! its rolein recruitment and promotions has been promulgated. Reforms are also underway toimprove governance and performance of several government departments/agencies,including the Central Board of Revenue (widely known as highly corrupt), the Ministry ofFinance and Planning, and Railways (see para. 19).

Establish regulatory The legislative frameworks for telecommunications and power regulation have b -enenvironment for telecoms and established. The National Electric Power Regulatory Agency (NEPRA) is nowpower sectors and initiate operational and so is the Telecommunications regulatory agency. A new Gas Regulatoryjudicial reformns Authority (GRA) was also established in early 2000 and a Petroleum Regulatory Agency

is being set up. The government is also working on reforming the judicial systei,i. Inparticular, with AsDB's assistance, training of judges is being improved andcomputerization of the judicial system is underway.

Continued privatizatlon, A Privatization Law has been promulgated providing legal cover to investors rigits. Theincluding Habib Bank Cabinet has approved the Privatization Commission's work program which includesLimited and gas companies. selling government interests in banking, power, oil, gas, telecommunications.

With the exception of the successful sale of state's interest in LPG business of Sai.Southern Gas distribution company and in Muslim Commercial Bank, progress /:nprivatization has been slow overall. This was due to three main factors. First,privatization of problem banks, poorly performing utilities and transport companies wasdifficult in the absence of an adequate legislative and regulatory framework. Second,there was no real commitment to make these companies attractive to private inve stors byrestructuring them, including changing management, and downsizing. Third, e-en if theabove measures were in place, Pakistan would have found it difficult perhaps to sell stateassets under the external environment of the past two years. Now that the politicalsituation has stabilized; that the long-standing dispute with the IPPs has been resolved;and a Privatization Ordinance has been enacted-providing legal cover to investors'rights, which, on occasion, have been challenged in court-prospects for privati:ationhave improved.

Privatization plans in the power sector will focus on the distribution sector. Theprivatization of KESC and at least one other distribution company are anticipated over thenext two years. The government is looking at a major restructuring program to aet banksready for sale. In the case of Pakistan Telecommunications, the government has alreadyissued tender bids for the privatization of PTCL-the telecommunications company.

Appendix ]

Page 5 of 5




Disbursement ratio at 19-20 Considerable efforts were made to improve the quality of the Pakistan portfolio over thepercent. last three years (FY98-00). Disbursement ratio improved to above 22 percent during

FY0 1. An aggressive portfolio improvement strategy was also adopted by thegovernment and the Bank, including quarterly portfolio reviews with the Federal FinanceMinister, and provincial portfolio reviews with each of the four provinces. Followingthese reviews, a number of measures were taken to improve performance, including earlyclosure/major restructuring of persistent problem projects; cancellation of unused funds; a"zero tolerance" policy against poor govemance and corruption issues; and establishmentand achievement of portfolio quality targets.

As a result, portfolio performance improved significantly: (i) problem projects fell from14 in FY98 to 3 in FY01 while commitments at risk decreased from 54 percent in FY98to 20 percent in FY00; (ii) Realism and pro-activity indices reached 100 percentindicating continuous efforts by task teams to resolve problem projects; (iii)governance/corruption issues which hampered project implementation received increasedattention from government at the highest levels. In addition, starting from October 1999,the Bank has put in place demanding entry criteria for projects: (i) strong and cleargovernment "pull"; (ii) clear value added of the Bank in responding to the "pull"; (iii) thework fits into the Bank's mandate and area of expertise; and (iv) readiness forimplementation. Since the beginning of CYOO some 17 projects have been dropped fromthe pipeline since they did not meet these entry criteria. This 'Just in-time rapid servicedelivery" strategy has reduced the inventory of "work in progress".

Annex AlPage I of I

Key Economic & Program IndicatorsChange from Last CAS Progress Report

Forecast in Last CAS a Actual Current CASForecast '

Economy (CY) FY99 FYOO FYO FY00c FYO est. FY02Growth rates (%)

GDPatfactorcost 3.0 3.0 4.5 4.8 3.1 3.2Exports b 3.5 4.8 5.8 14.2 5.3 4.3Imports b -14.6 1.8 5.3 1.0 8.7 8.2

Inflation (%) 11.1 10.0 8.0 3.6 5.0 5.9

National accounts (% GDP)Current account balance c -2.8 -2.2 -1.2 -1.6 -1.6 -2.2Gross investment 15.0 14.5 15.5 15.0 15.0 15.6

Public finance (% GDP)Fiscal balance -4.3 -3.3 -2.5 -6.4 -5.4 -4.4Foreign financing 3.1 1.6 1.1 2.3 3.5 2.0

International reserves 1,300 1,700 2,100 916 1636 2088(reserves as weeks of import of 7.4 9.5 11.0 4.2 6.5 8.1goods, CIF)Program (Bank's FY) FY99 FYOO FYO FYOO FYO FY02Lending ($ million) d 1,015 875 715 0 374 542

IDA 265 200 285 0 374 542IBRD 750 675 430 0 0 0

Gross disbursements ($ million) 952 907 724 207 629 379IDA 305 312 282 112 470 312IBRD 647 595 442 95 159 67

a. 1999 CAS progress report projections.b. Exports and imports of goods and non factor services in 1981/82 prices.c. Includes official transfers.d. Commitments.e. Projections beyond FY02 are still being discussed under the full CAS which is planned to be discussed by the Board by

Dec. 2001.

Annex A2Page I of 2

Pakistan at a glancePOVERTY and SOCIAL South Low-

Pakistan Asia Income Development diamond'2000Population, mid-year (millions) 138.1 1.329 2,417 Life expectancyGNP per cadita (Atlas method, US$; 490 440 410GNP (Atlas method. US$ billions) 68.3 581 988

Averaae annual arowth, 1994-00

Population I%) 2.4 1.9 1.9Labor force (%) 3.0 2.3 2.3 GNP Gross

per prmaryMost recent estimate (latest vear available. 1994-001 capita AnrmllmAnf

Povertv (% of population below national povertv line. 33Urban population (% of total Dopulation) 37 28 31Life exDectancv at birth (vears) 63 62 60Infant mortalitv (per 1,000 live birthsJ 90 75 77Child malnutrition (% of children under 5J 38 51 43 Access to safe waterAccess to improved water source % of oopulation) 88 77 84Illiteracv (% of poDulation ape 15+J 54 48 39 PakitGross primary enrollment (% of school-aae population; 74 100 98 san

Male 101 110 102 Low-income groupFemale 45 90 86

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1980 1990 1999 2000Economic ratios*

GDP at martket prices (US$ billions) 23.7 40.0 58.2 61.7Gross domestic investment/GDP 18.5 18.9 15.0 15.0 TradeExDorts of goods and services/GDP 12.5 15.5 15.2 15.7Gross domesticsavinas/GDP 6.9 11.1 10.1 11.5Gross national savings/GDP 14.8 15.6 11.2 13.4

Current account balance/GDP -3.7 -3.4 -3.8 -1.6 DomesticstneInterest pavments/GDP 1.0 1.3 1.5 1.5 C InvestmentTotal debWGDP 41.9 51.6 59.2 54.0 SavingsTotal debt service/exports (Medium and LT' 18.3 23.0 30.5 39.8Present value of debt/GDP 43.0Present value of debt/exports 252.0

Indebtedness1980-90 1990-00 1999 2000 200044

(average annual growth,GDP at factor cost 6.2 4.2 3.1 4.8 4. 6 PastanGNP per capita 3.8 1.2 1.6 3.3 2.3 Low-incomne groupExports of ooods and services 8.4 1.7 -2.4 14.2 5.2

STRUCTURE of the ECONOMY1980 1990 1999 2000 Growth of investnent and GDP (%/)

(% of GDP)Agriculture 29.5 26.0 27.2 26.3Industrv 24.9 25.2 23.5 23.3 10

Manufacturing 15.9 17.4 15.6 15.3 0

Services 45.6 48.8 49.4 50.4 _10 ss 9B 97 9B 00

Private consumption 83.1 73.8 78.4 78.0 -20General government consumpton 10.0 15.1 11.5 10.4 - GDI 0-GDPImports of goods and services 24.1 23.4 20.1 19.2

(average annual growth, 1980-90 199040 1999 2000 Growth of exports and Imports 1%)

Agriculture 4.3 4.5 1.9 7.0 20Industrv 7.3 3.8 2.5 3.3 15

Manufacturing 7.7 3.5 4.2 1.6 10-Services 6.8 4.3 4.1 4.6 5

0 --

Private consumption 4.3 5.0 8.0 3.0 4 95 sr 00General govemment consumption 10.3 1.2 -5.1 15.6 1 Gross domestic investment 5.8 1.4 -11.8 4.7Imports of goods and services 2.1 2.6 -6.2 1.0 Expors lIportsGross national product 6.6 3.7 4.1 5.8

Note: 2000 data are preliminary estimates.

The diamonds show four kev indicators in the countrv (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete.

Annex A2Page 2 of 2

Pakistan

PRICES and GOVERNMENT FINANCE

Dome.stic prices 1980 1990 1999 2000 Inflation (%)

(% chanqe) 15

Consumer prices .. . 5.7 3.6 * oImplicit GDP deflator 12.0 6.3 5.5 4.2

Govemment finance(% of GDP, includes current orants) oCurrent revenue . 18.0 16.3 16.5 95 8g 97 88 5ii 00

Current budget balance . -1.0 -3.0 -3.5 - GDP deflator -- cP,Overall surplus/deficit .. -6.6 -6.1 -6.5 _

TRADE _

(US$ millions) 1980 1990 1999 2000 Export and import levels (US$ mill.)

Total exports (fob) 2,365 4,954 7,779 8,589 14,00 -Cotton .. 443 2 73 12,000t

Rice .. 239 533 540 i0,oo 0 IIIi0IIManufactures 1,371 2,489 4,538 5,034 80r00 IIr-I I rrI_I

Total imports (cif) 8,054 10,456 10,361 B,000 -

Food .. 1,066 1,622 896 4r000 -

Fuel and energy . 1.163 1,485 2.783 2,000Capital goods 1,788 3.027 3,130 094 55 gol 97 53 99 00

Export Price index (1995=100) 58 90 92Import price index (1995=100) 52 102 105 0 Exports 1E ImportsTerms of trade (1995=100) 112 88 88 __

BALANCE of PAYMENTS

(UJS$ millions) 1980 1990 1999 2000 Current account balance to GDP (%l

Exports of goods and services 2,958 6,217 8,838 9,678 0 - 1Imports of goods and services 5,709 9,351 11,688 11.818 *1j- 84 0 9 97 7 9 99Resource balance -2,751 -3,134 -2,850 -2,140 2 INet income -281 -966 -1,808 -2,065 t 1 Net current transfers 2,163 2,748 2,471 3,195 -4 - -

Current account balance -869 -1,352 -2,187 -1,010

Financing items (net) 1,148 1,352 3,441 801 -7-Changes in net reserves -279 0 -1,254 209 -B

Memo: -Reserves including gold (US$ millions) .. 1,311 2,228 2,805Conversion rate (DEC, locaWAUS$) 9.9 21.4 50.1 51.6

EXTERNAL DEBT and RESOURCE FLOWS1980 1990 1999 2000

(US$ millions) Composition of 2000 debt (US$ mill.)Total debt outstanding and disbursed 9,931 20,663 34,423 33,272

IBRD 330 1,816 3,315 3,323 G- 1,410 A: 3,323IDA 821 2.106 3,905 4,255 F: 3,468

Total debt service (Medium and LT) 869 1,902 3,045 4,277 3B. 4, rt5

IBRD 58 199 434 421IDA 9 34 86 91

Composition of net resource flows C 1,824Official grants 268 538 194 135Offidal creditors 539 904 1,588 1,500 E: 10,874

Private creditors 166 -63 -596 438Foreign direct investment 68 200 478 467Portfolio equitY 0 87 28 74 D: 8,120

World Bank programCommitments 185 972 440 0 A - IBRD E - BilateralDisbursements 90 491 627 308 B - IDA D - Other multilateral F - PnvatePrincipal repavments 29 92 283 287 C -IMF G - Shc, t1emmrNet fiows 61 399 344 21 1 __ _

Interest Pavments 39 141 237 225Net transfers 22 258 107 -204

Development Economics 5,15101

Annex B2Page I of I

PakistanSelected Indicators* of Bank Portfolio Performance and Management

As of Date 04/30101

Indicator 1998 1999 2000 2001Portfolio AssessmentNumber of Projects Under Implementation a 29 23 16 15Average Implementation Period (years) b 4.3 4.3 4 4.3Percent of Problem Projects by Number a, c 34.5 13 18.8 13.3Percent of Problem Projects by Amount a, c 28.5 33.8 19.6 23.4Percent ofProjects at Risk by Number a, d 51.7 13 18.8 13.3Percent of Projects at Risk by Amount a, d 53.5 33.8 19.6 23.4Disbursement Ratio (%) e 17 18.2 22.1 20.9Portfolio Management PlannedCPPR during the year (yes/no) Yes Yes Yes NoSupervision Resources (total US$000) g 3,507 3,862 3,384 2,195Average Supervision (US$000/project) g 106 110 123 120

Memorandum Item Since FY 80 Last Five FYsProj Eval by OED by Number 113 26Proj Eval by OED by Amt (US$ millions) 7261.2 2626.1% of OED Projects Rated U or HU by Number 23 23.1% of OED Projects Rated U or HU by Amt 28.6 23.1

a. As shown in the Annual Report on Portfolio Performance (except for current FY).b. Average age of projects in the Bank's country portfolio.c. Percent of projects rated U or HU on development objectives (DO) andlor implementation progress (IP).d. As defined under the Portfolio Improvement Program.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.

g. Due to changes of budget structure, these figures are not easily comparable.* All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio,

which includes all active projects as well as projects which exited during the fiscal year.

Annex B3Page I of 2

CAS Annex B3 - Bank Group Program Summary for PakistanAs of April 30,2001

Proposed IBRD/IDA Base-Case Lending Program"

Strategic Rewards b Implementation bFiscal year Project Name US$(M) (H/M/L) Risks (HZI11L)

2001 Structural Adjustment Credit 350.0 H L

Trade and Transport 3.0 H L

NWFP On Farm Water Management 21.4 H M

Result 374A

2002 BSRPP 300.0 H M

Commnunity-Distr. Infra Services AJK 30.0 H M

HIV/Aids Program I0.0 H L

Punjab Irrigation Systems Improverent 175.0 H M

Sindh On Farm Water Management 27.0 H M

Result 542.0

2003 \c Highways Rehabilitation 125.0 H M

Punjab On Farm Water Management 68.5 H M

Power Sector Restructuring Project 200.0 H M

Result 393.5

Overall result 1,309.9

a. This table presents an indicative program for the next three fiscal years, and will be revised/confirmed in the full CAS to be

discussed by the Board in December.

b. For each project, indicate whether the strategic rewards and implementation risks are expected to be high (H), moderate (M),

or low (L).

c. Indicative

Annex B3Page 2 of 2

CAS Annex B3 (IFC & MIGA) for PakistanPakistan - IFC and MIGA Program, FY 1998-2001

1998 1999 2000 2001

IFC approvals (US$m) 39.25 0.00 83.00 12.1

Sector (%)CEMENT & CONSTRUCTION 0 .. 40

CHEMICALS & PETROCHEMS 36FINANCIAL SERVICES 64 .. 60

Total 100 0 100 0

Investment instrument(%)Loans 100EquityQuasi-EquityOther 0 .. 100 100

Total 0 0 100 100

MIGA guarantees (US$m) 170 147 144 111

Annex B4Page I of )

Pakistan - Summary of Nonlending ServicesAs of April 30,2001

Product Completion FY Cost (US$000) Audiencea Objectiveb

Recent completionsEnvironment Issues in Energy 2000 37 Bank Knowledge GenerationProvincial Finances Study 2000 131 Govemment Knowledge GenerationCountry Procurement Assessment 2000 148 Bank Knowledge GenerationFinancial Sector Update 2000 223 Bank Knowledge GenerationOil and Gas Sector Study 2000 105 Bank Knowledge GenerationPublic Sector Monitoring 2000 68 Bank Knowledge GenerationPunjab Public Expenditure Review 2001 188 Government Knowledge GenerationPakistan Development Forum Note 2001 12 Donors Public Debate

Underway

Financial Accountability Assessment 2001 80 Bank Knowledge GenerationEnvironment Strategy 2001 125 Bank Knowledge GjenerationPolicy Note on SME 2001 182 Government Knowledge GenerationOil and Gas Policy Advice 2001 127 Govemment Problem Sol vingTransport Sector Dev. Initiative 2001 107 Public Knowledge GenerationPrivate Sector Dev. Policy Note 2001 50 Government Knowledge GenerationCity Development Strategy 2002 63 Government Knowledge GenerationPoverty Assessment 2002 460 Bank Knowledge 13eneration

PlannedSubnational Economic Reform 2002 200 Government Knowledge GenerationImproved Quality and Access to BasicServices 2002 180 Government Knowledge GenerationCountuy Economic Memorandum 2002 250 Bank Knowledge GenerationPrivate Sector Assessment 2002 200 Bank Knowledge G.eneration

a. Govemment, Donor, Bank, Public Disseminationb. Knowledge Generation, Public Debate, Problem Solving

Annex BSPage I of I

Pakistan Social IndicatorsLatest single yoar Same reion/income group

0South Low-

1970-75 198085 1993-99 Asia IncomePOPULATIONTotal populatbon, mid-year (mIlons) 71.0 94.8 134.8 1,329.3 2,417.1

Growth rate (% annual average for period) 3.2 2.7 2.5 1.9 1.9Urban population (% of population) 26.4 29.8 36.5 28.0 31.4Total fertDlity rate (births per woman) 3.4 3.7

POVERTY(% of population)National headcount index 33.0

Urban headcount indexRural headcount index

INCOMEGNP percapita(USS) 150 380 470 440 420Consumer price Index (1995=100) 141 136 138Food price Index (1995-100)

INCOMEICONSUMPTION DISTRIBUTIONGini IndexLowest quintile (% of income or consumpton) 8.0 9.5Hlghest quintile (% of income or consumption) 41.8 41.1

SOCIAL INDICATORSPublic expendure

Healt (X ot GDP) ... .0.9 1.2Education (% of GNP) .. .. .. 3.1 3.3Social securty and welfare (% o GDP)

Gross primary school enrollhent rat.(% of shool age population)

Total 74 100 96Male 101 110 102Female 45 90 86

Ace*ss to an Improved wafer source(% of populaion)

Total 38 88 87 76Urban 77 96 92 88Rural 22 84 85 70

Immunization rate(% under 12 months)

Measles 63 64DPT 75 70

Child malnutition (% under 5 years) 38 47LUb expectancy at birth(years)

Total 52 57 63 63 59Male 62 58Female 63 60

MortalityInfant (per thousand liv births) 134 122 90 74 n7

Under 5 (per thousand bve births) .. . . 99 116Adult (15-59)

Male (per 1,000 population) .. .. .. 223 288Female (per 1,000 populatlon) .. .. .. 212 258

Maternal (per 100,000lvebits) .. .. . ..Births attended by sWiled health staff (%) 49

CAS Annex B5. This table was produced from the CMU LDB system. 5101Note: 0 or 0.0 means zero or less than half the unit shown.Latest year for acce"s to an improved water source data Is 2000.

Annex B6Page I of 2

Pakistan - Key Economic Indicators

Actual Estimate ProjectedIndicator 1996 1997 1998 1999 2000 2001 2002 2003 2004

National accounts (as % of GDP)

Gross domestic product' 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100 0 100.0

Agriculture 25.5 26.7 27.3 27.2 26.3 26.0 25.1 24 3 23.5

Industry 24.2 23.5 23.8 23.5 23.3 23.8 24.2 24.1 24.1

Services 50.4 49.8 48.9 49.4 50.4 50.2 50.7 51.6 52.5

Total Consumption 89.1 89.7 86.8 89.9 88.5 88.7 88.4 86.5 84.9Gross domestic investment 18.8 17.7 17.7 15.0 15.0 15.0 15.6 16,5 17.7

Exports of goods and services 16.2 15.7 16.2 15.2 15.7 17.4 18.7 19.3 20.0Imports of goods and services 24.1 23.1 20.7 20.1 19.2 21.0 22.8 22.4 22.7

Gross domestic savings 10.9 10.3 13.2 10.1 11.5 11.3 11.6 13,5 15.1

GrossnationalsavingSb 12.0 12.0 15.0 11.1 13.3 13.4 13.4 15 5 17.1

Memorandum itemsGross domestic product 63159 62284 61840 58154 61656 60164 60407 6330) 66533(US$ million at current prices)GNP per capita (US$, Atlas method) 510 500 480 470 490 450 430 43i) 440

Real annual growth ratesGross domestic product at factor cost 5.5 1.7 3.5 3.1 4.8 3.1 3.2 5.9) 6.0Gross Domestic Income 3.8 1.8 4.6 3.1 5.6 4.3 3.6 6.1 6.1

Real annual per capita growth ratesGross domestic product at market prices 1.4 -1.5 0.1 1.5 3.8 1.4 0.8 3.4 5.0Total consumption 4.7 -0.1 -1.4 3.8 2.0 2A 1.1 1.4 3.4Private consumption 4.8 1.5 -2.2 5.4 0.6 2.1 1.3 1.:1 3.0

Balance of Payments (US$ millions)Exports of goods and services 10227 9781 10017 8838 9678 10452 11299 1222 13334

Merchandise FOB 8311 8096 8433 7527 8163 9046 9794 10689) 11730Importsofgoodsandservices 15227 14418 12819 11688 11818 12655 13743 14150 15086

MerchandiseFOB 12015 11241 10301 9612 9598 10097 11112 1136: 12112Resource balance -5000 -4637 -2802 -2850 -2140 -2203 -2444 -1921: -1753Net current transfers 2610 3247 3430 2471 3195 3184 3090 317, 3229Current account balance -4343 -3560 -1702 -2187 -1010 -980 -1338 -656 -412

Net private foreign direct investment 1106 712 602 478 467 515 417 480 506Long-term loans (net) 1061 761 1594 922 -619 463 1421 1411 1497

Official 1116 878 827 1588 128 781 -388 -22c1 -196Private -55 -117 768 -666 -747 -318 1809 1631 1694

Other capital (net. incl. erors & ommissions) 1781 888 -642 2041 953 496 5 -29% -397

Change in reserves' 395 1199 148 -1254 209 -494 -505 -93t: -1193

Memorandum itemsResource balance (% of GDP) -7.9 -7.4 -4.5 -4.9 -3.5 -3.7 -4.0 -3.C' -2.6Real annual growth rates

Exports of goods and services 2.0 -6.5 -5.7 -2.4 14.2 5.3 4.3 5.1 6.7Imports of goods and services 13.6 -3.8 -5.6 -6.2 1.0 8.7 8.2 1.l 5.1

(Continued)

Annex B6

Page 2 of 2

Pakistan - Key Economic Indicators

(Continued)

Actual Estimate Projected

Indicator 1996 1997 1998 1999 2000 2001 2002 2003 2004

Public finance (as % of GDP at market prices) dCurrent revenues 17.4 15.8 15.8 16.3 16.5 16A 17.0 17.6 18.1Current expenditures 19.9 18.6 19.5 19.3 20.0 18.8 18.0 17.5 16.7Current account surplus (+) or deficit (-) -2.5 -2.8 -3.7 -3.0 -3.5 -2.6 -1.0 0.1 1.4Capital expenditure 4.7 3.6 3.9 3.0 2.8 3.0 3.3 3.6 4.1Foreign financing 1.8 1.1 1.4 5.0 2.3 3.5 2.0 1.5 1.5

Monetary indicatorsM2/GDP 44.3 43.3 44.0 44.0 44.0 42.9 42.9 42.9 42.9GrowthofM2(%) 13.8 12.1 12.0 8.6 9.4 6.3 9.3 11.8 11.6Private sector credit growth / 38.5 45.3 52.3 138.0 18.4 166.3 57.4 57.4 57.4total credit growth (%)

Price indices (1995=100)Merchandise export price index 110.7 114.6 74.2 95.4 102.7 106.4 110.3 113.6 116.2Merchandiseimportpriceindex 110.5 115.6 71.3 112.1 102.9 101.2 101.3 102.8 104.2Merchandise terms of trade index 100.2 99.2 104.2 85.1 99.8 105.2 108.9 110.5 111.5

Real exchange rate (US$/LCU)f 98.2 101.4 92.0 97.8 103.9 114.5 122.0 126.8 130.7

Consumer price index (% change) 10.8 11.8 7.8 5.7 3.6 5.0 5.9 5.6 5.3GDP deflator (% change) 8.5 13.4 7.5 4.7 2.7 5.0 5.9 5.6 5.3

a. GDP at factor costb. Includes net unrequited transfers excluding official capital grants.c. Includes use of IMF resources.d. Consolidated central government.e. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.

Annex B7Page I of I

Pakistan - Key Exposure Indicators

Actual Estimate ProjectedIndicator 1996 1997 1998 1999 2000 2001 2002 20(13 2004

Total debt outstanding and 29825 30069 32296 34422 33272 34117 36245 3'i677 38855

disbursed (TDO) (US$m)a

Net disbursements (US$m)a 1083 1619 681 1251 -558 422 1389 1125 1092

Total debt service (TDS) (Medium and LT) 3286 4083 2304 3045 4277 3457 4023 3599 3649

(US$m)o

Debt and debt service indicators

(%)TDOIXGSb 251.2 265.0 277.7 344.5 310.0 291.0 287.0 27T3.3 257.9

TDO/GDP 47.2 48.3 52.2 59.2 54.0 56.7 60.0 'i9.5 58.4

TDS/XGS 27.7 36.0 19.8 30.5 39.8 29.5 31.9 26.1 24.2Concessional/TDO 53.4 49.9 51.9 54.8 58.2 55.4 52.7 'i1.0 49.7

IBRD exposure indicators (%)

IBRDDS/publicDS 16.5 12.1 21.7 20.7 11.7 14.1 12.1 3.1 13.8

Preferred creditor DS/public 48.3 41.0 58.1 69.5 38.2 46.4 43.5 48.6 50.6

DS (%)

IBRD DS/XGS 3.7 3.5 3.3 4.3 3.9 3.5 3.3 3.0 2.9IBRD TDO (US$m)c 3007 3046 3136 3315 3323 3017 2853 2(47 2353

Share of IBRD portfolio (%) 2.8 2.8 2.6 2.7 2.7 2.4 2.4 2.3 2.2

IDA TDO (US$m)c 3480 3526 3800 3905 4255 4360 4505 4573 4833

IFC (US$m)

Loans(Disbursed and Outstanding) \d 77 409 423 396 347 308

Equity and quasi-equity \e 23 101 111 110 108 108

MIGA \fMIGA guarantees (US$m) \g 137 158 165 147 144 111

a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short-

term capital.

b. "XGS" denotes exports of goods and services, including workers' remittances.

c. Includes present value of guarantees.

d. Values do not include off-balance sheet items such as guarantee and risk management products.

e. Includes equity and quasi-equity types of both loan and equity instruments.

f. Denotes gross exposure outstanding each fiscal year.g. As of December 30, 2000.

Note: Debt data is from the World Bank Debt Reporting System.

of 3

CAS Annex B8 - Pakistan

Status of Bank Group Operations (Operations Portfolio)As ofApr11 30,2001

Clsed Projeeft 178

-DA Total Dislursed 10,148.35

of which has betn repaid 3,011.99

Totai Hed Now by IBRDhlDA 6724.67Amount Sold 45.45

Total Undisbursed 580.10

Aedve Proiecb Difference setwDwLwt PSR Eapecked and Acdual

Supersilnn Rating Ork4d A nt In USSM D

Project ID Project Nine DeJobbent Pmnisshi Flsz Year IBRD IDA GRANT Cn( L Undlsh Orig. Fnn Rev'd

P010482 BALOCHISTAN COMMUNITY IRRIGATION & AGRI. S S 1996 0 26.7 0 0 6.4 0.4 -2

P010470 FINSECTORDEEPENING&INTEGRATION S S 1995 216 0 0 188 19.5 207.5 14.6

P035823 GEF-PROTECTED AREAS MANAGEMENT # # 2001 0 0 0 0 0 0 0

P039281 GHAZI BAROTHA HYDROP S S 1996 350 0 0 0 85.8 74.5 32.8

P036015 IMPR FIN REP & AUDIT U S 1997 0 28.8 0 0 20.3 10.6 0

P0105C0 NATIONAL DRAINAGE PR S S 1998 0 285 0 0.2 182 47.3 0

P037834 NORTHERN EDUCATION S S 1998 0 22.8 0 0.1 17.2 9.1 0

P010478 NWFP COMMUNITY INFRA S S 1996 0 21.5 0 0 9.6 5.2 5

P034301 PHASE OUT OF ODS PRE S S 1997 0 0 13 0 10.8 -0.7 0

P049791 POVERTY ALLEVIATION FUND S S 1999 0 90 0 0 735 -2.7 0

P010481 PUNJAB FOREST SECTOR S S 1995 0 24.9 0 5.5 4.8 3.8 -2.6

P010501 PVT SECTOR GROUND WA S S 1997 0 56 0 25.3 10.8 22.9 -3.8

P037835 SOCIALACTIONPRGII U U 1998 0 250 0 0 126 4.8 0

P034101 TELECOM REG & PRIVAT S S 1996 35 0 0 10 10.5 20.5 10.5

P056213 TRADEANDTRANSPORT S 5 2001 0 3 0 0 2.9 0 0

Overal tresult Result 601 808.7 13 229.1 580.1 403.2 545

a. Intended disbursenents to date minus acttal disbursements to date as projected at appraisal.

Annex B8Pakistan Page 2 of 3

STATEbME OF IFC'sHeld and Disbursed Portfolio

As of Marth, 2001IFC Data Warehouse (Amounts In L.S Dollar Millions)

IFC Hedd - E?C Disbunred -PY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1995 ABAMCO Mgmt 0.00 0.29 0.00 0.00 0.00 0.29 0.00 0.001995 AES Lal Pir 33.83 9.50 0.00 0.00 33.83 9.50 0 00 0.001996 AES Pak Gen 16.84 9.50 0.00 32.20 16.84 9.50 0.00 32.201996 Atlas Inv Bank 3.44 0.00 0.00 0.00 3.44 0.00 0 00 0.001994 Atlas Lease 3.60 0.36 0.00 0.00 3.60 0.36 0.00 0.001995 Bank ot Khyber 1.13 0.00 0.00 0.00 1.13 0.00 0 00 0.001998 BRRIL 0.00 0.24 0.00 0.00 0.00 0.24 0.00 0.001991/94/95 BRRIM 0.00 0.76 15.00 0.00 0.00 0.76 15 00 0.001995 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 0.00 0.00 0.16 0.00 0.001993197 Crescent Greenwd 11.77 5.10 0.00 6.85 11.77 5.10 0 00 6.851996 Crescent IBank 8.25 0.00 0.00 0.00 8.25 0.00 0.00 0.001994195196/00 D.B. Khan 22.48 5.49 0.00 33.72 22.48 5.49 0 00 33.721998 Engro Asahi 8.00 0.00 0.00 0.00 8.00 0.00 0.00 0.001991/95/97 Engro Chemical 9.23 3.90 0.00 5.61 9.23 3.90 0.00 5.611996 Engro Vopak 8.43 0.00 0.00 3.51 8.43 0.00 0.00 3.511993/94 Fauji Cement 22.40 5.00 0.00 17.50 22.40 5.00 0.00 17.501990/92/98 FIIB 1.92 1.50 0.00 0.00 1.92 1.50 0.00 0.001995 First Crescent 0.00 0.00 5.00 0.00 0.00 0.00 5 00 0.001994/96 First Leasing 1.50 1.69 0.00 0.00 1.50 1.69 0 00 0.001995 First UOL 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.001998 Gul Ahmed 21.50 4.10 0.00 24.46 21.60 4.10 0.00 24.461988 Halo Spinning 3.55 0.00 0.00 0.00 3.56 0.00 0.00 0.001991195 IKFL 2.13 0.87 0.00 0.00 2.13 0.87 0.00 0.001992/96 JSCL 0.00 1,11 0.00 0.00 0.00 1.11 0.00 0.001995 Kohinoor 18.75 6.30 0.00 22.37 18.75 6.30 0.00 22.371994/95/97/00 Maple Leaf 27.66 5.72 0.00 31.88 27.68 5.72 0.00 31.881985/92 Marl Gas 2.586 0.00 0.00 0.00 2.86 0.00 0 00 0.001993 Muslim Comm Ban 2.34 0.00 0.00 0.00 2.34 0.00 0.00 0.001984/94 NDLC 4.22 1.25 0.00 0.00 4.22 1.25 0.00 0.001994196 Orix Finance 0.00 0.58 0.00 0.00 0.00 0.58 0.00 0.001994/98 Orix Leasing 4.22 1.25 0.00 0.00 4.22 1.25 0 00 0.001965/80/82/87/91/ Packages 6.80 3.46 0.00 0.00 6.80 3.46 0.00 0.0094/951994 PACRA 0.00 0.10 0.00 0.00 0.00 0.10 0.00 0.001993 Pakistan Service 4.00 3.00 0.00 0.00 4.00 3.00 0.00 0.001995 Pakistan Unit Tr 0.00 1.48 0.00 0.00 0.00 1.48 0.00 0.001994 PI&CL 1.88 0.00 0.00 0.00 1.88 0.00 0.00 0.001991(94/95 PILCO 3.75 1.04 0.00 0.00 3.75 1.04 0.00 0.00

Note: Values do not rflect off.balamns shed itznudi as Wamte and rsk marAgemat products.EAs Da±sUpdate: March31,2001 RWnDita: May 10.2001

Pakistan Annex B8STATEhMEn OF EFC's Page 3 of 3

Held and Disbursed PortfolloAs o March, 2001

IFC Data Warehouse (Amounts In US Dollar Millions)

IFC Held IFC Disbured -

FY Approval Company Loan Equity Qusi Partic Loan Equity Quasi Partic

198318"4/95 PPL 1.07 1.56 0.00 0.19 1.07 1.58 0.00 0.19

1991 Prudential 0.00 0.40 0.00 0.00 0.00 0.40 0.00 0.00

1994 Regent Knitwear 6.07 0.00 0.00 2.80 6.07 0.00 0.00 2.80

1995 Rupatab 5.50 0.00 0.00 0.00 5.50 0.00 0.00 0.00

1992 RUPAFIL 0.00 0.00 0.31 0.00 -0.00 0.00 0.31 0.00

1993/96/01 Sarah Textiles 3.83 0.19 1.39 0.00 3.83 0.19 1.39 0.00

1996 Uch Power 40.00 0.00 0.00 75.00 35.03 0.00 0.00 59.97

Total Portfolio: 313.04 7F.40 31.70 256.09 308.08 76.40 31.70 241.06

Note: Valua do ano realed Hf.bance saeet item such s guaee and ds manm products.

LatD a Lfpdt: March31.2001 RunDaft: May 10.2001

public disclosure authorized report no. 22219-pak public...

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