Pakistan: Perspectives oa EcoBOfnlc Aid
Pakistan should see some easing of its currentillion foreign financing gap byo perbaps SIillion. Nevertheless, Islamabad will still face the prospect each year of lining up sufficient foreign financing to cover tbe
Pakisun must continue to receive0 million lo SI billion in annual aid it now gamers from Western, Persian Gulf, and multilateral donors over tbe next three years. The governmento have to demonstrate better management of its economic affairs and improve the investment climate lo0 million0 million annually in private capital inflows. In addition, Islamabad will have to move vigorously to arrange for0 million annually from new sources of foreign capital, debt relief, or expanded current aid programs.^H
| ; I'
We do not expect any decrease in current aid levels from tbe "Pakistan Consortium" of Western and multilateral donors in the. We assume thatulf slates, especially Saudi Arabia, will continue to ante up several hundred millionear in aidH
A substantial boosv in aid above present levels is doubtful. Besides0 million US aid package, Pakistan has been relatively unconcerned about future financing of the gap and has yet to mount an effective aid subscription campaign. Most Western donors arc reluctant to boost their aid commitments dramatically, and Saudi Arabia nnd other Arab states who could easily afford to do so have not beens^
:j
Even if aid is boosted much beyond current levels, Pakistan's ability to absorb it is limited by its extreme underdevelopment. The sole seaport, Karachi, the internal transportation network, and the institutional and administrative structure are poorly suited to receive and distribute much larger level? of rid efficiently.^
The most sanguine feature narrowing the financing gap in thestan* exhibited capacity to boost the earnings of its major commodity exports, especially textiles and rice. Import growth will be moderated somewhat by rising domestic production of petroleum and fertUizeriiOf course, substantially higher aid would itself be translated into higher import
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Remittances
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Pakistan: Perspectires oa EcotBOank AJd igfffl
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Pakisun'* annual foreign financing, gap, which is now8 bullion, is the resorta chronically adverse trade balanceegacy of payments due on iniernattonal borrowing.ore than doubling of export earnings sincepurt in export growth inndho trade deficit has widened cavernously0 million to more than S2 billion (seever the next several years tbe trade gap will probably level off at aboutillion annually. Cf course, substantial additions to current aid programs would permit tbe gap to widenin ;nc short term. Tbe main elements in curbing tne steady rise of the trade deficit will be increased domestic production of petroleum and fertilizer.
* Tbe focal voir inonc ot UM naiad voir.
Cce-asaodtryTrtaatij
r/wrt Trxitl-exports should lose some of tbe volatility tbey bare exhibited over much of tbe past decade, but will still remain Pakisun's leading export comrnoditica. Inextile exportsS million and constitutedercent of toul exports. Foreign sales dropped sharply thereafter and bymounted5 million, or only one-fourth of total exports (seehe falloff was due in large part to* steady decline in the quantity and quality of Pakisun's cotton crop and failure to update or replace the aging stock of textile machinery. These problems sencusly eroded Pakisun's ability to sell in ihc highly competitive internaiional textile market. The depressed world market for ur'.ilcsdded to Pakistan's problems. Becausehad faded to mainuin reasonable quality lUn-
S
Millioa US S
1
exporters lost tales lo more reliable suppliers In, for example, Hong Kong, India*Soulh Korea, and
mm mrnrnm ;
An improved cotton crop and government^ nducec' incentives began to turn textile indus'ry aroundfter sereral veers of govemmcr' meddling that investment in the industry, tbe government private investment through exportredit, redu-ed tariffs on imported raw iterial, and more favorable tax treatment for textile processors. Cotton textile exports jumpedercent0 million innd should0 million inSynthetic textile exports have grown from S3 million inillion in FY79.
Over the next few years the growth of textile exportsshould be more modes't. If Pakistan can sustain the turnaround in the domestic textile industry, if there is no serious cotton crop failure, and if the market base on be expanded, textile erports could0 million byvenossible slowdown in demand from the industrialized nations Textile ex* pons to the European Community and the Unitedmost importantlimited by quotas, Currently exports arc bumping into ceilings for many important commodity categories, such na women's shirts and blouses, and towelling. The textile agreements with the United States cull for >
average annual volume growthercent; those with the EC specify growthercent toercent, depending on the commodity
'" * I i 'I '* ' exports shouid continue to expand in bothearnings on the strength of the Persianfor Pakistan's favored, high-duality,However, rice is an erratic foreignsubject to both the vagaries of Ihe weather(for basmati rice) that have in recentfrom less0 to more0 acontinued high prices0oritercent offavorable weather, rice exportsin value on the order ofercent annually,million in0 million inf volume, Pakistan's rice exportsillioa metric tonsduring the same period. With the availabilityfor export assured by Pakistani consumers'for wheat products, Pakistan is likely toto continue expanding iu share of theercent inoercent inthis level, Pakistan would be the world'sexporter, behind the United States
Recent dramatic increases in some of Pakistan's othercarpels and leathercontinue allightly slower pace. Exports of hand-knotted carpets have grownillion in FY0 million ineatherillionillionhe same period. Together, these products account7 percent of total exports and shouldillion byarpet exports in particular have been stimulated by heightened demand for collectable artistic invesiment goods, and decreased supplies from traditional Iranian producers.'
Export prospects for other manufactured goods are limited over the next few years by- tbeof Pakisun's small, modern, industrial sector. Exports of chemicals, cement, medicaland footwear touted lessillion innd show no significant upward trend. The policies pursued in tbe early andfnationalization, restrictions on private sector activity, and the expansion of the public sector, to spearhead industrial investment and growth actually hobbled Pakistan's industrial development. Most of these policies have been changed and incentives to jprivate manufacturing investment put in place.easure of private sector confidence has beenn smail-tc-mcdium investment projects having fairly rapid returns, but industrialists arc still beststant to commit themselves to the large-scale investment that wouldubstantial impact on industrial output and exports of manufactured gt
Imports.perceri* annual growth of Pakistan's imports sincehould moderate over the next few years, but will remain high enough to support real economic growth rates on the orderercent annually. Increased domestic production of petroleum, fertilizer, and foodgrains will help cot import growth. Despite slow progress in oil exploration andsome improvement In domestic production should occur over the next few years so that by FY K11 imports will account for aboutercent of tout petroleum consumptionarrels per day compared with current net import levels at nearlyercent of total consumptionseconetheless, the net oil import bill will5 billion byf OPEC raises nominal oil prices by onlyercent annually, ajj
Balance1
30
120
tmporu_ Exports
25
125
110
13
106
Fiscal rear endimune ol staled year. 'FjtimatsaV
The eight foreign firms currently exploring for and developing oil in Pakisun have scaled back operations in recent months. Drilling problems, difficultwith the government over oil pricing, and the ir^ubtesomc domestic political environment haveto lack of significant progress over the past six months. Earlier estimates that Pakisun could produceercent of its oil demand byersus thecurrentercent appear out of reach. There arcumber of oil discoveries lhat have not been fully developed,ood chance exists of finding additional oil in the vast, unexplored, and unsurvcyed areas of Pakisun. Bye estimate production may, and net imports will remain. Pakistan is likely to continue exporting excess petroleum products (residual fuel oil and small quantities ofrom its domestic refineryoperations. These exports will offset aboutercent of the oil Import billfM ii
;
Domestic production of fertilizer is scheduled to double byubstantially reducing Ihc volume of fertilizer Imports. In the past two years, Pakisun has importedillion tons of fertilizer annuallyost" million0 million (seeeduction takin the subsidy given to farmers for fertilizer purchases will likely be offset by higher support prices for crops; hence, domestic fertilizer demand will remain strong. Over the next several years world fertilizer prices are likely to remain high because they are closely tied tc international oil prices. Nonetheless, we expect domestic production toreduce the fertilizer import billeak0 million Ijauga.
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MiflkoUSS
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6 7 * 9 EMmutcd
13
f*5l' W MT5 l> > 4JW W
90
100
S3
60
105
205
230
300
100
330
230
Capitalamrod
103
120
133
200
165
240
240
230
360
270
[ PtirolenDi
Vegetable oil. Other
113
560
245
720
180
715
495
65
400
135
580
300
300
270
300
245
ane of Mated year.
of capital goodsan vportation equipment are likely lo grow an average ofercent annually to Siril.ofiheconomic recovery under way sincehich real GNP has grown by an annual rateercent, should continue largely on the strength of good agricultural performance and the expansion of industry from its small base. Assuming lhat traditional aid programs continue, increased imports of capital goods will be neededupport irrigation, agricultural processing, manufacturing, and transportation proj-ecul
"The Zia government has not been willing to take the politically unpopular steps of reducing the growth of consumer goods Imports, which account forapproxt-malelyercent of totalelatively high level of imports is needed lo meet the inflationary Ionsumer demand that results from the government's deficit spending, and from remittances from Pakistanis working abroad. We assume that continued substantial foreign aid will permit Ihegnore many of the consequences of its pattern of ckfidtor at least tbe acxi several
DeblSrr.irr
Pakistan's large expenditures on slow-maturingprojects for much of the past decade have saddled the economy with an anneal debt service burden (principal and interest) of0 million. By the beginning ofutstanding disbursed debt owed to donors of official development assistance amounted to nearlyillion and required interest paymenu of0 million. Toul debt, including Ibe undisbursed portion, is0 billion. Byebt service payments will still be0 million. Without additions to annual aid programs or rescheduling of payments, debt service alone would absorb ove( three-quarters of annual aidat leastki:
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More than on*half of the debt is owed to ten of the eleven member nations of the "Pakisun Consortium, set up by the World Bank0 lo coordinate aid to Pakisun. The United Sutes is Pakisun's largest
' For farther deulb. of foreign debt, see CIA,oklsiem. Some Dimension* of lis Imemmttonal Ftmmetal Problems,ecretM
v,1
(ingle creditor, holding iboutercent of toUl debt. The OPEC countries, which arc not mcmbert of ibc consortium, have become majoril crisis and oowhcWaomcercent of the debt. Iran has contributed tbe largest amount, almostmillion.tallica in debt is held by-multilateraJ icuttitutions such as the World Bank, the Asian Development Bank, and tbe International onetaryM'AM 'I'*",
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TW Scope of Aid
Pakistan's foreign resource gap has long been covered by economic assistance in tbe form of grants, concessionary loans, and import credits,ariety
l of multilateral,nd private sourcea.aid has accounted for roughlye*centotal aid disbursements during the lastears, and project aid the bulk of the remainder. Multilateral aid has focused largely on loans and credits for basic infrastructure projects, especially oa electric power, highway and rail transport systems, port development, and Large-scale water controlhe massive Indus Basin Tar belt dam project, for example, has .
! absorbedillion In aid funds since theombination of multilateral and
| bilateral sources, working within the framework uf the
r
orld Bank-led consortium of aid
: Commodity aid hu consisted mainly of foodespecially wheat and edible oils from the United States. The level of this assistance varies sharply from year to year depending on the outcome of doaneatic , gricultural productioniven year. Foroor crop In8illion tonsheatumper wheat harvest in9
;Ienabled food Imports,! imports, to be reduced
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Artcril price increase, Pakistan turned to the Muslim nations for additional economicmeetly la the form ol balance of payments upport. Under tbe Shah, Tehranillionoan,ecame the second most important recipient of Iranian
Table 5
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foreign aid commitments. More recently, Saudi , Arabia baa become Pakistan's chief Muslim benefic-tor. Saudi aid baa gone for specific projects, including fertilizer and cement plants, and facilities associated with the Tarbela dim, and balance ofupport, Libya also has disbursed aid amounting to0 millionll told,PEC countries4 billion Inssistance4ome ofould have been used for military purchases. In addition, Pakistan has received funds from the Islamic Development Bank and OPEC Special Fund. ^
M
Ccmmunist aid commitments lo Pakistan total8 billion, of0 million is Chinese. Most of this aid wu committed inndnd consislci largely of lines of credit forrojects. Moscow currently is constructing an1 nomically questionable steel complex at Karachi. Pakistan's largest industrial project,0 million in credits provided for lhe plant1
laeCorral Ptefan;
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Pakistan has so far shownasual concern for securing sufficient support for itsndinancial gaps. General Zia has for now rejected the United States' aid offer0 million over two years, split equally between economic aad military aid. Moreover, Islamabad has yet to mount an active campaign of seeking increased aid from the other consortium members. Pakistan has, however, been quietly approaching Saudi Arabia and Ihe United Arab Emirates for new aid, nu doubt on the grounds that aid from iu Muslim brothers is more politically acceptable lhan aid from the West mmt
Coiiorrmmest Germany, Japan, Canada, and France are the keys to increased aid from lie West. They and other members of the aid consortium for the most part are reluctant to answer Ihc US call for substantially increased aid in response to the Soviet Invasion of Afghanisun. Many feel that Pakisun will bo unable to absorb quickly anda US-proposed boost in bilateral coasortiurii aid0 million io overillion annually. On boUaot, many of ibe consortium members are also relucunt lo make remote and nnsuble Pakisun the focus of their foreign policy response. West Germany, for example, has already taken the lead In economic aid for Turkey, which Bonn views as more crucial. The countries are also averse to jeopardizing Important trade ties with tho Soviet Union, and of being judged overly reactive lo US policy interests that may not ccMdo totally with their own.p^
So far, only Japan has decided lhat subounllally higher aid is both politically and economicallyJapoa will boon its aid program In FYmillion comparedillion Inseef thisillion willon credit
on concessional terms,illion willrant. The grant Is the largest Japan has ever made to an aid recipient. Although the end use of the funds remains to be worked out. the allocation is expected to favor rapid disbursementrge share of commodity rather than project aid. Despite the increase in Japanese aid, the package falls short of0 million requested by Islamabad. In addition, Islamabad had requestedillion in debt rescheduling from Tokyo, bul tbe Japanese arc still relucunt to offer debt rescheduling until this form of relief is approved by Ibe United States J
West Germany apparently plans no increase in ail levels ineyondillion committed before the invasion of Afghanisun. The West Germanis alreadyercent greater lhan last >
illion financial aid
illion technical assistance
illion commodity aid and education fellowships.
Bonn favors conot isi onebt rescheduling for Paki* sunay to rapidly and effectively inject aid. For West Germany, rescheduling could Involveillionillion in debt rcpaymenu, of whichillion has already been rescheduled. For debt relief of this magnitude. Bonn would require universalamong all consortium donors that debt relief is appropriate, as well as Islamabad's adoption of an economic subluxation program under Ihe auspices of tho IMF. mm
* | I
Among other consortium donors, the aid response has been poor. Canada is unlikely iout in aid90 millionillion because of Pakisun's ongoing nuclear weapons program,casiiga tion of Canada at tho nonaligned meeting in Havana last year, and Ottawa's own need for fiscal austerity. Ia lateranco sUtcd that it couldillion to anillion already in the pipeline "ifut was dismayed that Pakistan has been stow to draw on the earlier offering. The Netherlands has designated Pakistantargeted developing country" but Is reluctant to assignounts of how aid because it feels that Pakisun Is having trouble absorbingillion committed forritain Is promising
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in capital and technical assistance for7 million in debt relief. tJJJi r .
NomewortiMmAii. Islanutbed's immediateo the Soviet invasion of Afghanistan was to line0 million in new or accelerated funding from Saudi Arabia. The Saudis stepped up deliveryfllion contributioh'towarc^ fare fund, which bad originally been scheduledreceipt iniyadh also0 '. million in Islamabad's central bank to boost Pakistan's foreign exchange reserves. I
Nonetheless, the truly munificent offers of military and economic aid that Islamabad seems to expect from theSaudis and other Arab states have not material- !
jjtatd. Part of the problem Is Pakistan's inabilityoncise, efficient "shopping list" of its actual
{laid needs to current or potential donors. Instead.
jilstamabad has indicated that Its;aid requirementsimplynd expects donors to makeate offers unsolicited. Indicative of thettitudes of the Pakisunis isthrirjreported refusal on grounds of inadequacy ofa Saudiillion program for military purchases. The Saudis
j|Were reportedly stung by this action and until recently
jiiiave been reluctant to continue any dialogue with PakisUni idpresentatives. For their part, the'and other likely Arab aid donors such as Kuwait, Qatar, and the United Arab Pjnirktes-4are treading
'.carefully in their
actual needsrcfltbne|suteoviet aggresstou. The Persian Gulf nations are certainly worried byoviet Union's Invasion of: 'Afghanistan, but are unwilling to make any commit-menu toward Pakistan's dtferise ilntiliiis clear that Pakistan is indeed threatened and is capable of being transformedolitically and economically stable
^nation: Since the Arab nations are characteristically
; conservative, they also may be.wattlnsjore !
"coherent Western response Worejfiitalizing their own
states
lithe monetary cost to the jPaktstan Is probably not atof oil prices, the Tace unprecedented
For farther detail*IA EK
East Ccmneetton, February IMCSocm Nofora.1
v>-Akm>!-
budget surpluses over the next few years. This revenue ttreameomesatatimewhcnseveraloftheoil xporters are deliberately slowing their economic development programs. The Saudi budget surplusor example, willillion.The Saudis ccild easilyillion or more per year, but would require assurances that the money will be used effectively, and that the extent of Saudi funding will, ooj be widely
Workers' Remittances. There arecivilians working in the Persian Gulf and rge portion of their earnings to the homeland. These workers are fcr the most part unskilled but earn00 per month, as muchjas six times what they could etrn in Pakisun. Remitunces from workers have grown3 million inhen they were equal toercent of merchandise export earnings, to the current levelillion, orercent of export earnings. Given (he sizable and worsening foreign trade deficit, thebase been crucial in alleviating the pressure on Pakistan scxternsl account
The sharpgrowth of workers* remitunces under way since theppears to be over, and the number of Pakbuni workers employed abroad may decline. In addition to scaling back their development plans and cutting back on the number or size of projecu using foreign labor for both political and economic reasons, several countries, noubly the United Arab Emirates, are tightening controls on foreign tobor. Workers in the UAE without visas will be asked to leaveew law that will be fully implemented this summer, and workers with valid visas will be prohibited from changing jobs to extend their suyj Kuwait has begun asimilar crackdown on workers who have entered the country illegally. M
The;efTeeUof the development slowdown and the crackdown on illegal workers arc beginning to be felt. Islamabad's estimates for workers' remitunces for mOandFYSi have leveled off5 billionillion after growingercentannually, sine*emittances are unlikely to Increase beyondcvelsinfYSI and beyond, and Islamabad maydditional economic assUunce to compensate for'-sicwdown'. The trend in the Indian state of Kerela, which has anorkerse CMtt
give* tome credenceikely decline in remittancesersian Gulf to South Asian labor exporters.erala arepercent fall inpri ite transfers in recent monition
llSffNRi
bsorbing Aid I
.! iff' Even if Pakistan should successfully line up annual economic assistance of about SI billion5 billion or more, its ability to absorb aid efficiently is limited by its decades of underdevelopment:
."he growth of" the co-ge'.ed physical infrastructure has not kept puce with tbe demandseveloping
The government's institutional mechanism foraid planning and deliveries on suitable projects and programs is bogged down in bureaucratic red
&f it hM-BwIi-'
Punjabi dominance at the decisionmaking level guarantees that other provinces most in need of aid are likely to be shortchanged.
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has an overhang of undisbursed aid com-mitments of5 billion. During the past five years, for example, Pakistan bas received an average ofillion in official development assistance while disbursements have averagednnually. In the past, donor nations have been
'I reluctant to boost aid commitments while unused
,
TraaaaortatJe. Infrastructure
One of the major coostraints to rapid absorption of aid is Pakistan's obsolete, undercapadty transportation systemKarachi Is the country's onlyeaport and bas to handle Pakistan's,mall share of Afghanistan's, foreign trade (iceespite [several expansion projects since Pakistan's inde-
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incetaaed recnc'.TUcalejBr^l' j' ,'
A aot her portunder commicUM at Port Qoiim.ilometer. caalc/KancM. hiatal**bail!lacoajuactica*iUiUMScrtM-fatidad steel ceenpleiaiwtie iron era aad otbtr raw maictUii Lrrpooi. Th* port, tchadnkd ta barm opaniwr tjicr UNayear, wgi
pendencehe port is under considerable strain trying to handle steadily rising volumes of trade. Congestion is partly tbe result of past policies that emphasized construction of berths while neglecting modernization of cargo-hand ling equipment. Under the best of circumstances, annua! cargo handling capacity Isillionillion tonsillion tonsntil9 andarachi was one of the most congested ports in the world. Judicious scheduling, better organization of the dockworkers, and constructionew wharf have eliminated many of the delays at the port; however, as long at Pakistan remains to heavily dependentarachi, congestion problems could resurfaceaster planalls for eight additional cargo berthsontainer terminal,oubling of petroleum-handling capacity. MMMj^
Inadequate transport from Karachi to internalpointsajor tjotttencck. Most of the government-owned railway system that connects all of Pakistan's major citit. is in need of extensive repair and modernization, save for the main line between Karachi and Lahore, which is partially electrified and relatively well maintained. Past policies havecostly new rail facilities in selected areas where the political return was far greater than Ihe economic benefit, rather than improvements to and linkages with existing
Likewise, the road network is seriously deficientextent relative to Pakistan's size and into tbe needs of its developing economy.concentration of roads is in thesection of the country, white westernregions are sparsely served. Baluchistan,which comprisesercept ofarea andillion people, is servedone main road. Nonetheless, the governmentstaledmillion superhighway to link Sindhii n'.ii towns along the Indus river,betweenPeshawar. Nationwide, only one-Cii<arter ofroads arc bituminous surfaced. Most arenarrow, and subject to serious breakuptraffic. Secondary roads are gravel or dirtimpassable during the July to September !w
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lb* transport system can handle small volumes for local carriage, it is swamped by any large shipment. Fertilizer, for example, typically arrives in bulk lots of0 tons. The low-capacity road and rail system combine with Inadequate warehousini at the port and at inland distribution points to clog the system for weeks. Besides these physicalrice controls on many goods do not encourage merchants to invest in facilities to store bulk commodities^
Lack of Skilled Manpower n practical terms, aid absorption is limited by the lack of skilled lower- and middle-level technicianswork on projects and to transmit tbe benefits to the population. Pakistan's low level of literacyajor [impediment to achieving the efficient use ofesources and technologies. The government bas in tbe 'past locused its educational expenditures on highereducation in urban areas rather than oneducation in agriculture andarge aid expenditures frequently havemall impact on output and productivity. This problem ia especially acute In the agricultural sector, and baa slowed development of agriculture's reasonably bright long-term potential. For example, extension services suffer from insufficient staffing and inadequate facili-ties to the extent thatenu do little more than market agricultural
lottal km
Finally, any substantial increase in foreign aid is at least initially likely to come bead-in-bead against Pakistan's sharply defined regional rivalries. Punjabi-dominated Islamabad has been slow in formulating aid programs and channeling aid receipts to less favored provinces of Sind, Northwest Frontier, and especially Baluchistan. Baluchis resentolonial-style over-[ordshipot the government and the massive presence of the Punjabi-dominated Army. The Baluchis blame the government for th: lack of economic developmentaluchistan, for the dearth of waterrojects there, and for allowing Punjabi and Sindi settlers to migrate into the few newly opened irrigation projects in Baluchistan. They also resent the almost total exclusion of Baluchis from state government, the local police force, and other organizations of authority. Baluchis almost certainly would resent any large aid program that did not specifically address the province's severe underdevelopment-gHU
; I . '
Even ifrecifically targeted for non-Punjabi areas, tribal frictions in Baluchbtan and otherwill prevent any easy consensus on how to distribute aid. Powers not taken by the federal government in Islamabad arc assumed and exercised by the provincial governments.arge part of agricultural policy, population, health, education, and other services are provincial preserves.esult, many decbions that fall between competing groups fail to get implemented, and provincial governments may not feel bound by policies and plans emanating from Islamabad. In particular, the interest and powers oi relatively large landlords generally reign in theand mike success difficult for aid schemes that erode their power base or benefit other groups, tm
Original document.
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