I. Current Development Trends and Issues
A. Recent Political and Social Developments
1. In October 2004, the National Assembly passed a bill allowing President Pervez Musharraf to retain the office of army chief beyond 31 December 2004. Following the completion of their term, local governments were dissolved on 1 July 2005 and local government elections are scheduled for August and September 2005. Pakistan intensified its efforts to curb militancy and extremism as part of the global response to terrorism. In foreign affairs, high-level policy dialogue with India continued and additional confidence-building measures were announced. Because of the tsunami disaster in the region, political developments in Nepal, and other related issues, the South Asian Association for Regional Cooperation (SAARC) summit planned for January 2005 in Bangladesh was postponed. The summit will now be held in November 2005. Results of the recent Pakistan Social and Living Standards Measurement Survey (PSLSM [2004-2005]) show significant improvements in social sector indicators over the past four years.
B. Economic Assessment and Outlook
2. Pakistan's economic performance continued to improve and GDP growth accelerated to 8.4% in fiscal year (FY) 2005, the highest in last two decades (Appendix 1, Table A 1.2). GDP growth was led by the manufacturing sector, which grew by 12.5%. The agriculture sector also witnessed robust growth of 7.6%, while the services sector grew by 7.9%. The economic growth of recent years has had positive impact on unemployment level, which fell from 8.3% in FY2002 to 7.7% in FY2004, with a significant drop from 16.5% to 12.8% in female unemployment. However, because of steep increases in oil prices and continued high domestic demand (fuelled by negative real interest rates and a rapid expansion of private sector credit), there was a sharp increase in inflation, which rose to 9.3% in FY2005 as against 4.2% in the previous year.
3. The fiscal deficit in FY2005 was 3.2% of GDP, up from 2.3% in the previous year. This was primarily due to a 23.7% increase in federal government current expenditure, and a fall in the collection of the petroleum development surcharge. Total development expenditure, including that by provincial governments, increased by 25.9% from the previous year. The first eleven months of FY2005 saw a large deficit of $1.8 billion in the balance of payments (BOP) current account compared with the comfortable surplus of $2.0 billion in the corresponding period of the previous year. It is estimated that the deficit in BOP current account in FY2005 will be about 1.3% of GDP, primarily because of higher imports and a sharp increase in the service accounts deficit. The State Bank of Pakistan's foreign exchange reserves on 25 June 2005 stood at $9.8 billion. The Government made substantial progress in privatizing and deregulating the financial, telecommunications, energy, and oil and gas sectors. The privatization of Pakistan Telecommunication Company Limited and National Refinery Limited, and public offerings of shares (Pakistan Petroleum Limited and Kot Addu Power Company) through the stock market proved successful. Unfortunately, the final outcome of Karachi Electric Supply Corporation (KESC) privatization is still uncertain due to nonpayment by the winning bidder.
4. The high level of inflation is a major economic challenge. Measures being taken by the Government in this regard include tightening the monetary policy and improving the supply of essential items by reducing duties and taxes on imports. Inflation notwithstanding, with continued high growth rates and overall macroeconomic stability, the medium-term prospects for the Pakistan economy continue to improve. It is estimated that GDP growth in FY2006 and FY2007 will be sustained at 7% or more, inflation will be contained at around 8.5% after the sharp increase in FY2005 provided, and the fiscal deficit will remain below 4.0% of GDP. Trade and current account deficits, while rising, should not be difficult to finance. However, sustaining the high growth rate and economic stability will require managing such risks as the possibility of a relaxation in macroeconomic management; slow progress on second generation reforms, particularly improving tax administration and promoting private sector investment; and continued weaknesses in capacity to implement policies and projects. These risks could be mitigated by continued support for the Government's efforts to implement sound economic and governance policies, promote a business-friendly environment, and improve portfolio performance.
C. Implications for Country Strategy and Program
5. The focus of the country strategy and program (CSP) that was approved in May 2002 is to support poverty reduction in Pakistan through interventions in the following three areas: supporting good governance (devolution, legal, judicial, and police reforms, as well as sector- and province-based reforms); sustainable pro-poor growth (rural development and employment generation); and inclusive social development (education, health, water supply and sanitation, and social protection). The major focus of the CSP is good governance. In addition, subregional cooperation, sustainable environmental management, and gender and development were identified as crosscutting themes in the CSP.
6. Under the country strategy and program update, CSPU (2005-2006), endorsed by the Board in September 2004, ADB supported the Government's shift in emphasis towards higher sustained growth. Given the favorable economic and political situation, the strategy updated in CSPU (2005-2006) continues to be relevant. The emphasis on lending for economic infrastructure will be continued, which is consistent with the high priority attached to it in the Government's medium-term development framework (MTDF). ADB's support for economic infrastructure development will be mainly, but not exclusively, in the areas of water resources, power, transport and communications, and urban renewal and development. ADB views itself as one of Pakistan's strategic development partners for infrastructure development. The capacity building and strategic planning technical assistance (TA) loans for infrastructure (power, water resources, and energy), rural modernization and mega city renewal included in the 2005 assistance program will provide an overall strategic framework to further strengthen and promote long-term partnership in these sectors. The TA loans will, among other things, support sector assessments, preparation of projects, and capacity building in these sectors.
7. ADB's strategic focus on social sectors will continue to support progress towards attainment of the Millennium Development Goals (MDGs) and improvements in social development outcomes. Following stagnation and weak performance in the social sectors in the 1990s, the PSLSM (2004-2005) indicates that there have been substantive improvements in social sector indicators over the past four years (para. 1). Assistance will be provided to consolidate this improved performance through province-based support for social sectors and provincial resource management programs that permit more spending on social sectors. This approach of financing social sectors through the budget will help to ensure increased expenditures are sustained. By making sure funds for social sectors flow through provincial finance commissions to local governments, this approach is also in line with devolution. For direct support for the social sectors, new and flexible social sector lending products-Social Sector Development Projects (SSDP)-are proposed. The mode of assistance will be defined at the project preparatory technical assistance (PPTA) stage and may include a sector development program, sector, program, or other suitable instrument, based on an assessment of the ongoing Devolved Social Services Programs (DSSP), and the specific needs identified at the design stage in the individual provinces. This generation of lending products will strengthen the capacity and functioning of local governments in delivery of social services as mandated under the devolution framework.
8. However, the recent Sector Assistance Program Evaluation (SAPE) carried out by the Operations Evaluation Department (OED) for the social sectors in Pakistan has raised a number of important issues. Consequently, several recommendations are already being considered for implementation. For instance, a dedicated unit will be established to strengthen the implementation capacity of Pakistan Resident Mission (PRM) for DSSP activities. Also such recommendations in the SAPE "as the need to promote public private partnerships in delivery of basic services" are being incorporated in designing the new DSSP for Balochistan. Finally, a review of ADB strategy for social sector operations in Pakistan will be an integral part of the new CSP, work on which shall be starting soon.
9. Governance continues to be mainstreamed in all ADB operations. The focus will be on ensuring effective implementation of the Access to Justice Program (AJP) and the Decentralization Support Program (DSP), as well as on provincial resource management programs (RMPs). ADB's support for improvements in governance also covers second-generation reforms concerned with access to justice, province-level governance reforms, ensuring all ADB operations are aligned with the devolution process, mainstreaming gender and civil society participation in the development process, and capacity development at all levels.
10. Against the backdrop of continuing improvements in economic fundamentals and progress in domestic capital markets, ADB is promoting the role of the private sector as a driver of investment, growth, and employment generation. It supports expanding the outreach of small and medium-sized enterprises and microfinance services and strengthening institutions with private sector participation. ADB currently has a portfolio of equity investments, loans, and complementary cofinancing loans in power generation, cement production, export finance, and venture capital, among others. Consideration is being given to supporting private sector investment projects in water, power, and energy infrastructure, mining, and local currency financing. In addition, ADB is currently processing a Private Partnership in Infrastructure Development (PPID) Project.
11. In view of the continuing positive political developments in the subregion, with relative stability in Afghanistan and an improving Pakistan-India relationship, there appears to be increasing recognition among political leaders of the need to enhance collaboration in trade, commerce, and other areas. ADB can play a catalytic role in promoting and strengthening regional cooperation in South and Central Asia. In addition to support for the feasibilities studies of the Turkmenistan-Afghanistan-Pakistan Gas Pipeline Project (TAP) and projects to improve regional connectivity among Pakistan, Afghanistan and the Central Asian Republics, new road projects are proposed for 2005 and 2007 that will further strengthen regional connectivity and facilitate trade. Pakistan is also part of a continuing high-level policy dialogue facilitated by ADB among the South and Central Asian countries on the need to improve infrastructure and remove any non-infrastructure barriers to better trade cooperation.
II. Implementation of the Country Strategy and Program
A. Progress in Poverty Reduction
12. The Government's poverty reduction strategy paper (PRSP), completed in December 2003, is a holistic strategy, with accompanying targets, to address poverty. However, the most recent systematic data on poverty is from FY2001, although a new survey is underway that will enable an analysis of recent poverty trends in the country. As already noted, social sector indicators have shown a substantive improvement at both national and provincial levels since FY2001. In the education sector, the PSLSM results show that gross and net primary, middle, and secondary enrolment rates, as well as the literacy rate, increased over the past four years. In the health sector, immunization rates among children significantly increased. A larger proportion of children received treatment for diarrhoea, and prenatal and postnatal consultations also increased. Progress towards achievement of PRSP expenditure targets is encouraging. PRSP expenditure increased to 4.7% of GDP in FY2004, compared with 4.3% in FY2003 and 3.8% in FY2002. PRSP expenditures in the first nine months of FY2005 were 23% higher than in the corresponding period of FY2004. The Government has recently published its assessment of progress towards the MDGs. The report concludes that all indicators are "achievable", except for the indicator pertaining to eliminating gender disparity in schools, which has been classified as being unlikely to be achieved (Appendix 1, Table A1.1 and Table A1.3).
B. Progress in the Country Strategy and Program Focus Areas
13. Good Governance. Under the 17th constitutional amendment passed in December 2003, the Local Government Ordinance (LGO) was formally made part of the Constitution. ADB is committed to designing its projects so they are compatible with the governance structures provided under the LGO. A positive development is that the federal, Sindh, Balochistan, and Punjab gender reform action plans (GRAPs) have all been approved, leaving only approval of the GRAP of North-West Frontier Province (NWFP) outstanding. Approval of GRAPs increases the opportunities for promoting gender equity through institutional and fiscal measures, and capacity building.
14. The DSP, approved in November 2002, made considerable progress on all fronts and ADB released the second tranche in December 2004. The $7 million gender and governance mainstreaming TA loan is expected to become effective shortly. Under the ongoing Local Government Performance Enhancement TA loan1, progress has been made on various capacity development initiatives, preparation of a budget training module, and training for local government officers, and support for provincial finance commissions (PFCs), particularly in preparation of provincial finance commission awards for FY2006.
15. The AJP continued to support justice sector reforms. In August 2004, the Ministry of Law approved a gender affirmative action policy, ensuring increased participation of women in legal and judicial professions. All provinces passed legislation for consumer protection, all high courts implemented delay reduction guidelines, and the federal government agreed to establish centers of excellence in legal education in the public and private sectors. However, utilization of the TA loan and implementation of the Access to Justice Development Fund (AJDF) continued to be a concern. As part of its governance operations, ADB emphasizes cooperation with a broad range of non-government organizations (NGOs) and civil society to support broad based stakeholder participation and improve development effectiveness. In this regard, the Institutional Strengthening for NGO-Government Cooperation TA2, a number of pilot projects were carried out in 2004. New TA projects in the governance area included in the 2005 assistance program reflect ADB's continued commitment to devolution, access to justice, and gender equity.
16. Agriculture and Rural Development. To support the Government in reducing rural poverty, ADB is assisting a number of agriculture and rural development projects. Progress on rural development projects?DG Khan, Bahawalpur, Malakand, and NWFP barani (rain-fed) areas are on track, although the Sindh Rural Development Project is behind schedule because of delays in recruiting consultants and staffing the project management unit (PMU). Processing of the Federally Administered Tribal Areas (FATA) Rural Development Project was affected by delayed approval of its project documents (PC-1s) by the Government. Slow progress on agriculture reforms has delayed release of the second tranche of the ADB-assisted Agriculture Sector Program Loan II by almost a year. A new Sustainable Livelihoods in Barani Areas Project (Punjab) to improve incomes and quality of life of rural population in selected poor districts of the province was approved in 2004. Two new PPTA projects for preparing the Balochistan Rural Development and Drought Mitigation Project (currently being processed), and the Sindh Coastal And Inland Community Development Project, were also approved. ADB's assistance in the sector was strengthened in 2005 with the approval of the Agribusiness Development Project, while a TA loan on Rural Modernization is also being processed for approval in 2005. This TA loan will stimulate rural economic growth in Pakistan through public-private partnerships that create non-farm income and employment opportunities.
17. Infrastructure Sector. In the transport and communications sectors, ADB is supporting medium and long term capacity building for the national and provincial highway network, as well as rural roads, in order to make transport operations more efficient and to generate economic activity and employment. This approach is being implemented through road sector development projects, approved in all four provinces during 2001-2004. In the energy sector, progress has been made on important reforms to create an enabling environment for future public sector investment projects and to promote private sector participation. However, several challenges remain. The privatization of KESC is still to be completed, and the sector continues to face high technical and financial losses, dependence on subsidies, overstaffing, and service deterioration. In view of anticipated needs to strengthen the energy sector, in the short term, ADB is helping the Government conduct sector analysis, capacity building and project identification, development, and implementation. Over the medium term, it is supporting larger infrastructure development projects in renewable energy, and in power transmission and distribution.
18. Inclusive Social Development. The ADB-assisted DSSP approach in the social sectors has been designed to facilitate further administrative devolution of social services, improve social sector financing and flow of funds, rationalize services, and encourage public-private partnerships. In this regard, progress was made under the Sindh DSSP, which was approved in December 2003, and local governments in Sindh for the first time started receiving conditional grants to finance and support specific social sector activities and projects. The Punjab DSSP was approved in 2004 and its major focus is on improving health service delivery. The Balochistan DSSP, for which a PPTA was approved in 2004, is currently being processed. The ADB-assisted Decentralized Elementary Education Project in Sindh, approved in 2002, has experienced implementation delays.
C. Highlights in Coordination of External Funding and Partnership Arrangements
19. ADB further reinforced its partnership and cooperation with development partners (Details of their assistance to Pakistan is in Appendix 1, Table A1.5), and strongly pursued cofinancing possibilities with them. The Department for International Development of the United Kingdom (DFID) provided $50 million in grant assistance for the ADB-financed Punjab Devolved Social Services Program approved in December 2004. The DFID-funded Poverty Reduction Cooperation Fund (PRF) also provided assistance for another four technical assistance projects in 2004 for a total of $2.25 million. The Netherlands Government provided $1.9 million in grant assistance for the water-related components of the ADB-financed Balochistan Resource Management Program (BRMP) loan, approved in 2004, and additional cofinancing for the PPTA for BRMP. The Government of Denmark provided cofinancing for the PPTA for Balochistan Rural Development and Drought Mitigation and the ADTA for Capacity Building for Alternate Energy Development Board. The Canadian International Development Agency (CIDA) committed $3.6 million for the 2005 TA on Support to Implementation of Gender Reform Action Plans. In view of the synergy between DFID's strategic priorities in Pakistan and the ADB-supported governance programs, DSP and AJP, DFID committed cofinancing of $35 million to support the implementation of devolution and justice reforms. Of this amount, $27 million is to finance an ADTA project Support Demand Mobilization for Governance Reforms and the remaining $8 million would finance an ADTA project Support to Implementation of Decentralization III. The Government of Japan, through the Japan Fund for Poverty Reduction (JFPR) will support two projects-Capacity Building to Support Flour Fortification and Enhancing Road Improvement Benefits to Poor Communities in NWFP- in 2005. The Japan Special Fund (JSF) supported four TA projects approved in 2004: Sindh Basic Urban Services, Transport Policy Support, Sindh Coastal and Inland Community Development, and Renewable Energy Development. In conjunction with its lending program, ADB will continue to pursue cofinancing opportunities from official and commercial sources. It will continue to discuss with the Government appropriate financing for the projects it will support during 2006-2008, specifically the use of its credit enhancement products.
20. Effective coordination with key multilateral and bilateral donors was ensured through consultative meetings organized during the country programming mission, as well as through coordination meetings on specific topics. ADB actively participated in various donor groups, including chairing the interagency gender and development group (INGAD) during the first half of 2004 and co-chairing the governance group. ADB also took the initiative to establish a donor poverty reduction working group to provide the Government with coordinated policy recommendations and technical inputs on poverty and is acting as the secretariat for the group. ADB, DFID and the World Bank prepared a coordinated working approach to social protection in Pakistan, worked together on a three-volume study Devolution in Pakistan on the devolution processes, and collaborated on an economic report for Punjab province. The World Bank and ADB are also collaborating on an economic report for Sindh province. Finally, ADB continued to participate in various donor coordination meetings organized by the Government, and supported the Government in organizing the Pakistan Development Forum (PDF).
III. Portfolio Management Issues
A. Portfolio Performance
21. As of end 2004, 239 loans, including private sector loans, amounting to $14.26 billion and 293 TA projects amounting to $137.94 million have been extended to Pakistan. Pakistan had 61 ongoing public sector loans amounting to $5.08 billion by end December 2004 (Appendix 1, Table A1.9). 64 active TAs amounting to $53.88 million were also being implemented. ADB's private sector portfolio comprises four equity investments ($4.76 million), two loans ($26.0 million), and two complementary cofinancing loans ($36.4 million).
22. The disbursement ratio in 2004 improved to 21.9% from 16.5% in 2003, and was higher than the ADB-wide ratio of 17.4% in 2004 (Appendix 1, Table A1.7). Similarly, the contract award ratio improved to 18.6% in 2004 from13.9% in 2003, and was higher than the ADB-wide ratio of 17.3% in 2004. Disbursements in 2004 for Pakistan totaled a record $638.78 million; however, this was still less than the target of $880.75 million. Contract awards totaled $643.39 million against a target of $806.23 million. The contract awards and disbursements, although higher than in recent years, were below target mainly because of fairly high projections in 2004 and delays in project implementation. The reasons for delays in contract awards were delayed establishment of PMUs, slow processing of tender documents, and delayed recruitment of consultants. For smaller contracts, delays also occurred because of lack of proper interagency coordination. Finally, the lower-than-targeted disbursement is also attributable to delays in program loan tranche releases. By end 2004, 11.5% of the portfolio (7 loans) was "at risk," which was an improvement from 17.2% (10 loans) in 2003 (Appendix 1, Tables A1.6 and A1.9).
B. Performance Monitoring and Evaluation
23. Efforts to improve Pakistan's portfolio of ADB projects continued in 2004. The country portfolio review mission agreed with the Government on a two-pronged approach to improve portfolio performance, comprising (i) strengthening, monitoring, and evaluating project performance through results-based monitoring; and (ii) strengthening project implementation capacity. The project monitoring and evaluation system and results-based monitoring of projects are being strengthened with the help of two ADB technical assistance projects3. The scope of the monitoring system is being extended to capture design phase parameters to assess the adequacy of project designs with respect to (i) linkage with PRSP; (ii) assessment of risks, sustainability, and capacity; (iii) accuracy of data and information used; and (iv) assessment of strategy, approaches, and arrangements adopted. The monitoring system is also being expanded to include line ministries at the federal level and line departments in the provinces, as well as subsequently to include non-ADB projects. Finally, assistance is being provided to improve the quality of government planning documents (PC-1s) to enable proper control points for results-based monitoring of projects to be established. Measures to strengthen the project implementation capacity of the executing agencies includes streamlining PMUs, establishing core project management units (CPMUs) from the loan fact-finding stage, strengthening auditing and accounting capabilities of PMUs, and improving the environment for consultants to enable them to perform better.
24. OED has carried out four evaluations since the CSP approval in May 2002. (Appendix 1, Table A1.8 shows loans distribution by evaluation ratings evaluated during 1996-2004). The Second Barani Area Development Project, evaluated in August 2002, was found partly successful. In January 2003, the technical assistance performance audit report on Selected Advisory Technical Assistance for Capital Market Development in Pakistan evaluated six TAs? one highly successful, three successful, and two partly successful. Also in 2003, the Population Project was rated successful, while the Livestock Development Project was found to be unsuccessful during the evaluation conducted in 2004. A Country Assistance Program Evaluation (CAPE) for Pakistan conducted by OED is presently underway.
IV. Country Performance and Assistance Levels
A. Proposed Lending Level
25. The proposed 2006-2008 lending program comprises 32 firm loans for $3.72 billion, averaging $1.24 billion annually, and one standby loan. (Appendix 1, Table 1.10). This is higher than the average proposed lending level of $978 million under the CSPU (2005-2006), but is justified on the basis of continued improvements to Pakistan's debt management position and absorptive capacity. As a percentage of GDP, external debt and liabilities had declined from 51.7% at end-June 2000 to 33.1% by end-March 2005. Likewise, as percentage of total foreign exchange earnings, external debt and liabilities declined from 297.3% in 1999-2000 to 145.9% by end-March 2005. In view of the Government's borrowing strategy and its emphasis on higher growth, the strategic focus on infrastructure has been maintained in the assistance pipeline and 14 infrastructure loans have been included for $2.44 billion (including Megacity Project loans I and II), which is 66% of the total proposed ADB assistance to Pakistan during 2006-2008. Assistance for governance and second-generation reforms, social sector development, and livelihood improvements has also been emphasized in the lending pipeline4. Concept papers for 2006 lending products are in Appendix 2.
B. Nonlending Program
26. The currently identified nonlending program for Pakistan amounts to $14.0 million for 31 projects during 2006-2008. The detailed nonlending program (Appendix 1, Table A 1.11) includes project preparatory and advisory TA in various sectors. The nonlending program will help in designing and implementing ADB-assisted projects and help in building capacity for improved development effectiveness of ADB operations. Concept papers for 2006 nonlending products are in Appendix 3.
C. Summary of Changes to Lending and Nonlending Programs
27. In close consultation with the Government to ensure it has full ownership of the loans included in the assistance pipeline and to promote greater development effectiveness, a number of changes have been reflected in the proposed program for 2006, the only year of overlap between the previous and the present CSPU. First, four loans that could not be processed in 2005 for various reasons have been moved to the 2006 lending pipeline. These include Sindh Basic Urban Services, Renewable Energy Development, Private Participation in Infrastructure Development, and the FATA Governance TA Loan (Appendix 5, Table A 5.1). Second, one loan, District Roads Resource Management, has been dropped from the 2006 pipeline because of weak ownership. Third, three loans in the 2006 program have been moved to 2007, because of the requirement for further preparatory work and greater consultations with stakeholders. These include Social Health Insurance, Punjab Local Justice Support Program, and Punjab Resource Management Program Subprogram III. Finally, one loan, Microfinance Sector Development Program II, proposed for 2007, has been brought forward to 2006 in view of the faster-than-anticipated utilization of funds under the first phase of the program.
28. Changes have also been proposed in the nonlending program for 2006. Two PPTA projects, previously included in 2006, have been moved to 2007, with the accompanying loans now included in the 2008 program. One PPTA project has been dropped as the loan has been moved to 2006, and one new ADTA project has been added to the 2006 pipeline. Finally, an ADF grant of $5 million for control of HIV/AIDS5, Malaria, Tuberculosis, and Early Childhood Infectious Diseases has been integrated into the NWFP DSSP in 2006.
Source: Country Strategy and Program Update 2006-2008 - Pakistan - ADB.org
A. Recent Political and Social Developments
1. In October 2004, the National Assembly passed a bill allowing President Pervez Musharraf to retain the office of army chief beyond 31 December 2004. Following the completion of their term, local governments were dissolved on 1 July 2005 and local government elections are scheduled for August and September 2005. Pakistan intensified its efforts to curb militancy and extremism as part of the global response to terrorism. In foreign affairs, high-level policy dialogue with India continued and additional confidence-building measures were announced. Because of the tsunami disaster in the region, political developments in Nepal, and other related issues, the South Asian Association for Regional Cooperation (SAARC) summit planned for January 2005 in Bangladesh was postponed. The summit will now be held in November 2005. Results of the recent Pakistan Social and Living Standards Measurement Survey (PSLSM [2004-2005]) show significant improvements in social sector indicators over the past four years.
B. Economic Assessment and Outlook
2. Pakistan's economic performance continued to improve and GDP growth accelerated to 8.4% in fiscal year (FY) 2005, the highest in last two decades (Appendix 1, Table A 1.2). GDP growth was led by the manufacturing sector, which grew by 12.5%. The agriculture sector also witnessed robust growth of 7.6%, while the services sector grew by 7.9%. The economic growth of recent years has had positive impact on unemployment level, which fell from 8.3% in FY2002 to 7.7% in FY2004, with a significant drop from 16.5% to 12.8% in female unemployment. However, because of steep increases in oil prices and continued high domestic demand (fuelled by negative real interest rates and a rapid expansion of private sector credit), there was a sharp increase in inflation, which rose to 9.3% in FY2005 as against 4.2% in the previous year.
3. The fiscal deficit in FY2005 was 3.2% of GDP, up from 2.3% in the previous year. This was primarily due to a 23.7% increase in federal government current expenditure, and a fall in the collection of the petroleum development surcharge. Total development expenditure, including that by provincial governments, increased by 25.9% from the previous year. The first eleven months of FY2005 saw a large deficit of $1.8 billion in the balance of payments (BOP) current account compared with the comfortable surplus of $2.0 billion in the corresponding period of the previous year. It is estimated that the deficit in BOP current account in FY2005 will be about 1.3% of GDP, primarily because of higher imports and a sharp increase in the service accounts deficit. The State Bank of Pakistan's foreign exchange reserves on 25 June 2005 stood at $9.8 billion. The Government made substantial progress in privatizing and deregulating the financial, telecommunications, energy, and oil and gas sectors. The privatization of Pakistan Telecommunication Company Limited and National Refinery Limited, and public offerings of shares (Pakistan Petroleum Limited and Kot Addu Power Company) through the stock market proved successful. Unfortunately, the final outcome of Karachi Electric Supply Corporation (KESC) privatization is still uncertain due to nonpayment by the winning bidder.
4. The high level of inflation is a major economic challenge. Measures being taken by the Government in this regard include tightening the monetary policy and improving the supply of essential items by reducing duties and taxes on imports. Inflation notwithstanding, with continued high growth rates and overall macroeconomic stability, the medium-term prospects for the Pakistan economy continue to improve. It is estimated that GDP growth in FY2006 and FY2007 will be sustained at 7% or more, inflation will be contained at around 8.5% after the sharp increase in FY2005 provided, and the fiscal deficit will remain below 4.0% of GDP. Trade and current account deficits, while rising, should not be difficult to finance. However, sustaining the high growth rate and economic stability will require managing such risks as the possibility of a relaxation in macroeconomic management; slow progress on second generation reforms, particularly improving tax administration and promoting private sector investment; and continued weaknesses in capacity to implement policies and projects. These risks could be mitigated by continued support for the Government's efforts to implement sound economic and governance policies, promote a business-friendly environment, and improve portfolio performance.
C. Implications for Country Strategy and Program
5. The focus of the country strategy and program (CSP) that was approved in May 2002 is to support poverty reduction in Pakistan through interventions in the following three areas: supporting good governance (devolution, legal, judicial, and police reforms, as well as sector- and province-based reforms); sustainable pro-poor growth (rural development and employment generation); and inclusive social development (education, health, water supply and sanitation, and social protection). The major focus of the CSP is good governance. In addition, subregional cooperation, sustainable environmental management, and gender and development were identified as crosscutting themes in the CSP.
6. Under the country strategy and program update, CSPU (2005-2006), endorsed by the Board in September 2004, ADB supported the Government's shift in emphasis towards higher sustained growth. Given the favorable economic and political situation, the strategy updated in CSPU (2005-2006) continues to be relevant. The emphasis on lending for economic infrastructure will be continued, which is consistent with the high priority attached to it in the Government's medium-term development framework (MTDF). ADB's support for economic infrastructure development will be mainly, but not exclusively, in the areas of water resources, power, transport and communications, and urban renewal and development. ADB views itself as one of Pakistan's strategic development partners for infrastructure development. The capacity building and strategic planning technical assistance (TA) loans for infrastructure (power, water resources, and energy), rural modernization and mega city renewal included in the 2005 assistance program will provide an overall strategic framework to further strengthen and promote long-term partnership in these sectors. The TA loans will, among other things, support sector assessments, preparation of projects, and capacity building in these sectors.
7. ADB's strategic focus on social sectors will continue to support progress towards attainment of the Millennium Development Goals (MDGs) and improvements in social development outcomes. Following stagnation and weak performance in the social sectors in the 1990s, the PSLSM (2004-2005) indicates that there have been substantive improvements in social sector indicators over the past four years (para. 1). Assistance will be provided to consolidate this improved performance through province-based support for social sectors and provincial resource management programs that permit more spending on social sectors. This approach of financing social sectors through the budget will help to ensure increased expenditures are sustained. By making sure funds for social sectors flow through provincial finance commissions to local governments, this approach is also in line with devolution. For direct support for the social sectors, new and flexible social sector lending products-Social Sector Development Projects (SSDP)-are proposed. The mode of assistance will be defined at the project preparatory technical assistance (PPTA) stage and may include a sector development program, sector, program, or other suitable instrument, based on an assessment of the ongoing Devolved Social Services Programs (DSSP), and the specific needs identified at the design stage in the individual provinces. This generation of lending products will strengthen the capacity and functioning of local governments in delivery of social services as mandated under the devolution framework.
8. However, the recent Sector Assistance Program Evaluation (SAPE) carried out by the Operations Evaluation Department (OED) for the social sectors in Pakistan has raised a number of important issues. Consequently, several recommendations are already being considered for implementation. For instance, a dedicated unit will be established to strengthen the implementation capacity of Pakistan Resident Mission (PRM) for DSSP activities. Also such recommendations in the SAPE "as the need to promote public private partnerships in delivery of basic services" are being incorporated in designing the new DSSP for Balochistan. Finally, a review of ADB strategy for social sector operations in Pakistan will be an integral part of the new CSP, work on which shall be starting soon.
9. Governance continues to be mainstreamed in all ADB operations. The focus will be on ensuring effective implementation of the Access to Justice Program (AJP) and the Decentralization Support Program (DSP), as well as on provincial resource management programs (RMPs). ADB's support for improvements in governance also covers second-generation reforms concerned with access to justice, province-level governance reforms, ensuring all ADB operations are aligned with the devolution process, mainstreaming gender and civil society participation in the development process, and capacity development at all levels.
10. Against the backdrop of continuing improvements in economic fundamentals and progress in domestic capital markets, ADB is promoting the role of the private sector as a driver of investment, growth, and employment generation. It supports expanding the outreach of small and medium-sized enterprises and microfinance services and strengthening institutions with private sector participation. ADB currently has a portfolio of equity investments, loans, and complementary cofinancing loans in power generation, cement production, export finance, and venture capital, among others. Consideration is being given to supporting private sector investment projects in water, power, and energy infrastructure, mining, and local currency financing. In addition, ADB is currently processing a Private Partnership in Infrastructure Development (PPID) Project.
11. In view of the continuing positive political developments in the subregion, with relative stability in Afghanistan and an improving Pakistan-India relationship, there appears to be increasing recognition among political leaders of the need to enhance collaboration in trade, commerce, and other areas. ADB can play a catalytic role in promoting and strengthening regional cooperation in South and Central Asia. In addition to support for the feasibilities studies of the Turkmenistan-Afghanistan-Pakistan Gas Pipeline Project (TAP) and projects to improve regional connectivity among Pakistan, Afghanistan and the Central Asian Republics, new road projects are proposed for 2005 and 2007 that will further strengthen regional connectivity and facilitate trade. Pakistan is also part of a continuing high-level policy dialogue facilitated by ADB among the South and Central Asian countries on the need to improve infrastructure and remove any non-infrastructure barriers to better trade cooperation.
II. Implementation of the Country Strategy and Program
A. Progress in Poverty Reduction
12. The Government's poverty reduction strategy paper (PRSP), completed in December 2003, is a holistic strategy, with accompanying targets, to address poverty. However, the most recent systematic data on poverty is from FY2001, although a new survey is underway that will enable an analysis of recent poverty trends in the country. As already noted, social sector indicators have shown a substantive improvement at both national and provincial levels since FY2001. In the education sector, the PSLSM results show that gross and net primary, middle, and secondary enrolment rates, as well as the literacy rate, increased over the past four years. In the health sector, immunization rates among children significantly increased. A larger proportion of children received treatment for diarrhoea, and prenatal and postnatal consultations also increased. Progress towards achievement of PRSP expenditure targets is encouraging. PRSP expenditure increased to 4.7% of GDP in FY2004, compared with 4.3% in FY2003 and 3.8% in FY2002. PRSP expenditures in the first nine months of FY2005 were 23% higher than in the corresponding period of FY2004. The Government has recently published its assessment of progress towards the MDGs. The report concludes that all indicators are "achievable", except for the indicator pertaining to eliminating gender disparity in schools, which has been classified as being unlikely to be achieved (Appendix 1, Table A1.1 and Table A1.3).
B. Progress in the Country Strategy and Program Focus Areas
13. Good Governance. Under the 17th constitutional amendment passed in December 2003, the Local Government Ordinance (LGO) was formally made part of the Constitution. ADB is committed to designing its projects so they are compatible with the governance structures provided under the LGO. A positive development is that the federal, Sindh, Balochistan, and Punjab gender reform action plans (GRAPs) have all been approved, leaving only approval of the GRAP of North-West Frontier Province (NWFP) outstanding. Approval of GRAPs increases the opportunities for promoting gender equity through institutional and fiscal measures, and capacity building.
14. The DSP, approved in November 2002, made considerable progress on all fronts and ADB released the second tranche in December 2004. The $7 million gender and governance mainstreaming TA loan is expected to become effective shortly. Under the ongoing Local Government Performance Enhancement TA loan1, progress has been made on various capacity development initiatives, preparation of a budget training module, and training for local government officers, and support for provincial finance commissions (PFCs), particularly in preparation of provincial finance commission awards for FY2006.
15. The AJP continued to support justice sector reforms. In August 2004, the Ministry of Law approved a gender affirmative action policy, ensuring increased participation of women in legal and judicial professions. All provinces passed legislation for consumer protection, all high courts implemented delay reduction guidelines, and the federal government agreed to establish centers of excellence in legal education in the public and private sectors. However, utilization of the TA loan and implementation of the Access to Justice Development Fund (AJDF) continued to be a concern. As part of its governance operations, ADB emphasizes cooperation with a broad range of non-government organizations (NGOs) and civil society to support broad based stakeholder participation and improve development effectiveness. In this regard, the Institutional Strengthening for NGO-Government Cooperation TA2, a number of pilot projects were carried out in 2004. New TA projects in the governance area included in the 2005 assistance program reflect ADB's continued commitment to devolution, access to justice, and gender equity.
16. Agriculture and Rural Development. To support the Government in reducing rural poverty, ADB is assisting a number of agriculture and rural development projects. Progress on rural development projects?DG Khan, Bahawalpur, Malakand, and NWFP barani (rain-fed) areas are on track, although the Sindh Rural Development Project is behind schedule because of delays in recruiting consultants and staffing the project management unit (PMU). Processing of the Federally Administered Tribal Areas (FATA) Rural Development Project was affected by delayed approval of its project documents (PC-1s) by the Government. Slow progress on agriculture reforms has delayed release of the second tranche of the ADB-assisted Agriculture Sector Program Loan II by almost a year. A new Sustainable Livelihoods in Barani Areas Project (Punjab) to improve incomes and quality of life of rural population in selected poor districts of the province was approved in 2004. Two new PPTA projects for preparing the Balochistan Rural Development and Drought Mitigation Project (currently being processed), and the Sindh Coastal And Inland Community Development Project, were also approved. ADB's assistance in the sector was strengthened in 2005 with the approval of the Agribusiness Development Project, while a TA loan on Rural Modernization is also being processed for approval in 2005. This TA loan will stimulate rural economic growth in Pakistan through public-private partnerships that create non-farm income and employment opportunities.
17. Infrastructure Sector. In the transport and communications sectors, ADB is supporting medium and long term capacity building for the national and provincial highway network, as well as rural roads, in order to make transport operations more efficient and to generate economic activity and employment. This approach is being implemented through road sector development projects, approved in all four provinces during 2001-2004. In the energy sector, progress has been made on important reforms to create an enabling environment for future public sector investment projects and to promote private sector participation. However, several challenges remain. The privatization of KESC is still to be completed, and the sector continues to face high technical and financial losses, dependence on subsidies, overstaffing, and service deterioration. In view of anticipated needs to strengthen the energy sector, in the short term, ADB is helping the Government conduct sector analysis, capacity building and project identification, development, and implementation. Over the medium term, it is supporting larger infrastructure development projects in renewable energy, and in power transmission and distribution.
18. Inclusive Social Development. The ADB-assisted DSSP approach in the social sectors has been designed to facilitate further administrative devolution of social services, improve social sector financing and flow of funds, rationalize services, and encourage public-private partnerships. In this regard, progress was made under the Sindh DSSP, which was approved in December 2003, and local governments in Sindh for the first time started receiving conditional grants to finance and support specific social sector activities and projects. The Punjab DSSP was approved in 2004 and its major focus is on improving health service delivery. The Balochistan DSSP, for which a PPTA was approved in 2004, is currently being processed. The ADB-assisted Decentralized Elementary Education Project in Sindh, approved in 2002, has experienced implementation delays.
C. Highlights in Coordination of External Funding and Partnership Arrangements
19. ADB further reinforced its partnership and cooperation with development partners (Details of their assistance to Pakistan is in Appendix 1, Table A1.5), and strongly pursued cofinancing possibilities with them. The Department for International Development of the United Kingdom (DFID) provided $50 million in grant assistance for the ADB-financed Punjab Devolved Social Services Program approved in December 2004. The DFID-funded Poverty Reduction Cooperation Fund (PRF) also provided assistance for another four technical assistance projects in 2004 for a total of $2.25 million. The Netherlands Government provided $1.9 million in grant assistance for the water-related components of the ADB-financed Balochistan Resource Management Program (BRMP) loan, approved in 2004, and additional cofinancing for the PPTA for BRMP. The Government of Denmark provided cofinancing for the PPTA for Balochistan Rural Development and Drought Mitigation and the ADTA for Capacity Building for Alternate Energy Development Board. The Canadian International Development Agency (CIDA) committed $3.6 million for the 2005 TA on Support to Implementation of Gender Reform Action Plans. In view of the synergy between DFID's strategic priorities in Pakistan and the ADB-supported governance programs, DSP and AJP, DFID committed cofinancing of $35 million to support the implementation of devolution and justice reforms. Of this amount, $27 million is to finance an ADTA project Support Demand Mobilization for Governance Reforms and the remaining $8 million would finance an ADTA project Support to Implementation of Decentralization III. The Government of Japan, through the Japan Fund for Poverty Reduction (JFPR) will support two projects-Capacity Building to Support Flour Fortification and Enhancing Road Improvement Benefits to Poor Communities in NWFP- in 2005. The Japan Special Fund (JSF) supported four TA projects approved in 2004: Sindh Basic Urban Services, Transport Policy Support, Sindh Coastal and Inland Community Development, and Renewable Energy Development. In conjunction with its lending program, ADB will continue to pursue cofinancing opportunities from official and commercial sources. It will continue to discuss with the Government appropriate financing for the projects it will support during 2006-2008, specifically the use of its credit enhancement products.
20. Effective coordination with key multilateral and bilateral donors was ensured through consultative meetings organized during the country programming mission, as well as through coordination meetings on specific topics. ADB actively participated in various donor groups, including chairing the interagency gender and development group (INGAD) during the first half of 2004 and co-chairing the governance group. ADB also took the initiative to establish a donor poverty reduction working group to provide the Government with coordinated policy recommendations and technical inputs on poverty and is acting as the secretariat for the group. ADB, DFID and the World Bank prepared a coordinated working approach to social protection in Pakistan, worked together on a three-volume study Devolution in Pakistan on the devolution processes, and collaborated on an economic report for Punjab province. The World Bank and ADB are also collaborating on an economic report for Sindh province. Finally, ADB continued to participate in various donor coordination meetings organized by the Government, and supported the Government in organizing the Pakistan Development Forum (PDF).
III. Portfolio Management Issues
A. Portfolio Performance
21. As of end 2004, 239 loans, including private sector loans, amounting to $14.26 billion and 293 TA projects amounting to $137.94 million have been extended to Pakistan. Pakistan had 61 ongoing public sector loans amounting to $5.08 billion by end December 2004 (Appendix 1, Table A1.9). 64 active TAs amounting to $53.88 million were also being implemented. ADB's private sector portfolio comprises four equity investments ($4.76 million), two loans ($26.0 million), and two complementary cofinancing loans ($36.4 million).
22. The disbursement ratio in 2004 improved to 21.9% from 16.5% in 2003, and was higher than the ADB-wide ratio of 17.4% in 2004 (Appendix 1, Table A1.7). Similarly, the contract award ratio improved to 18.6% in 2004 from13.9% in 2003, and was higher than the ADB-wide ratio of 17.3% in 2004. Disbursements in 2004 for Pakistan totaled a record $638.78 million; however, this was still less than the target of $880.75 million. Contract awards totaled $643.39 million against a target of $806.23 million. The contract awards and disbursements, although higher than in recent years, were below target mainly because of fairly high projections in 2004 and delays in project implementation. The reasons for delays in contract awards were delayed establishment of PMUs, slow processing of tender documents, and delayed recruitment of consultants. For smaller contracts, delays also occurred because of lack of proper interagency coordination. Finally, the lower-than-targeted disbursement is also attributable to delays in program loan tranche releases. By end 2004, 11.5% of the portfolio (7 loans) was "at risk," which was an improvement from 17.2% (10 loans) in 2003 (Appendix 1, Tables A1.6 and A1.9).
B. Performance Monitoring and Evaluation
23. Efforts to improve Pakistan's portfolio of ADB projects continued in 2004. The country portfolio review mission agreed with the Government on a two-pronged approach to improve portfolio performance, comprising (i) strengthening, monitoring, and evaluating project performance through results-based monitoring; and (ii) strengthening project implementation capacity. The project monitoring and evaluation system and results-based monitoring of projects are being strengthened with the help of two ADB technical assistance projects3. The scope of the monitoring system is being extended to capture design phase parameters to assess the adequacy of project designs with respect to (i) linkage with PRSP; (ii) assessment of risks, sustainability, and capacity; (iii) accuracy of data and information used; and (iv) assessment of strategy, approaches, and arrangements adopted. The monitoring system is also being expanded to include line ministries at the federal level and line departments in the provinces, as well as subsequently to include non-ADB projects. Finally, assistance is being provided to improve the quality of government planning documents (PC-1s) to enable proper control points for results-based monitoring of projects to be established. Measures to strengthen the project implementation capacity of the executing agencies includes streamlining PMUs, establishing core project management units (CPMUs) from the loan fact-finding stage, strengthening auditing and accounting capabilities of PMUs, and improving the environment for consultants to enable them to perform better.
24. OED has carried out four evaluations since the CSP approval in May 2002. (Appendix 1, Table A1.8 shows loans distribution by evaluation ratings evaluated during 1996-2004). The Second Barani Area Development Project, evaluated in August 2002, was found partly successful. In January 2003, the technical assistance performance audit report on Selected Advisory Technical Assistance for Capital Market Development in Pakistan evaluated six TAs? one highly successful, three successful, and two partly successful. Also in 2003, the Population Project was rated successful, while the Livestock Development Project was found to be unsuccessful during the evaluation conducted in 2004. A Country Assistance Program Evaluation (CAPE) for Pakistan conducted by OED is presently underway.
IV. Country Performance and Assistance Levels
A. Proposed Lending Level
25. The proposed 2006-2008 lending program comprises 32 firm loans for $3.72 billion, averaging $1.24 billion annually, and one standby loan. (Appendix 1, Table 1.10). This is higher than the average proposed lending level of $978 million under the CSPU (2005-2006), but is justified on the basis of continued improvements to Pakistan's debt management position and absorptive capacity. As a percentage of GDP, external debt and liabilities had declined from 51.7% at end-June 2000 to 33.1% by end-March 2005. Likewise, as percentage of total foreign exchange earnings, external debt and liabilities declined from 297.3% in 1999-2000 to 145.9% by end-March 2005. In view of the Government's borrowing strategy and its emphasis on higher growth, the strategic focus on infrastructure has been maintained in the assistance pipeline and 14 infrastructure loans have been included for $2.44 billion (including Megacity Project loans I and II), which is 66% of the total proposed ADB assistance to Pakistan during 2006-2008. Assistance for governance and second-generation reforms, social sector development, and livelihood improvements has also been emphasized in the lending pipeline4. Concept papers for 2006 lending products are in Appendix 2.
B. Nonlending Program
26. The currently identified nonlending program for Pakistan amounts to $14.0 million for 31 projects during 2006-2008. The detailed nonlending program (Appendix 1, Table A 1.11) includes project preparatory and advisory TA in various sectors. The nonlending program will help in designing and implementing ADB-assisted projects and help in building capacity for improved development effectiveness of ADB operations. Concept papers for 2006 nonlending products are in Appendix 3.
C. Summary of Changes to Lending and Nonlending Programs
27. In close consultation with the Government to ensure it has full ownership of the loans included in the assistance pipeline and to promote greater development effectiveness, a number of changes have been reflected in the proposed program for 2006, the only year of overlap between the previous and the present CSPU. First, four loans that could not be processed in 2005 for various reasons have been moved to the 2006 lending pipeline. These include Sindh Basic Urban Services, Renewable Energy Development, Private Participation in Infrastructure Development, and the FATA Governance TA Loan (Appendix 5, Table A 5.1). Second, one loan, District Roads Resource Management, has been dropped from the 2006 pipeline because of weak ownership. Third, three loans in the 2006 program have been moved to 2007, because of the requirement for further preparatory work and greater consultations with stakeholders. These include Social Health Insurance, Punjab Local Justice Support Program, and Punjab Resource Management Program Subprogram III. Finally, one loan, Microfinance Sector Development Program II, proposed for 2007, has been brought forward to 2006 in view of the faster-than-anticipated utilization of funds under the first phase of the program.
28. Changes have also been proposed in the nonlending program for 2006. Two PPTA projects, previously included in 2006, have been moved to 2007, with the accompanying loans now included in the 2008 program. One PPTA project has been dropped as the loan has been moved to 2006, and one new ADTA project has been added to the 2006 pipeline. Finally, an ADF grant of $5 million for control of HIV/AIDS5, Malaria, Tuberculosis, and Early Childhood Infectious Diseases has been integrated into the NWFP DSSP in 2006.
Source: Country Strategy and Program Update 2006-2008 - Pakistan - ADB.org
