Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-7284 PAK REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED STRUCTURAL ADJUSTMENT LOAN IN THE AMOUNT OF US$350 MILLION TO THE ISLAMIC REPUBLIC OF PAKISTAN December 28, 1998 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. P-7284 PAK
REPORT AND RECOMMENDATION
OF THE
PRESIDENT OF THE
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
TO THE
EXECUTIVE DIRECTORS
ON A
PROPOSED STRUCTURAL ADJUSTMENT LOAN
IN THE AMOUNT OF US$350 MILLION
TO
THE ISLAMIC REPUBLIC OF PAKISTAN
December 28, 1998
This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
CURRENCY EQUIVALENTSCurrency Unit: Rupees (Rs.)
Official rate: US$1 = Rs. 46.23 (Composite rate: 49.52)
FISCAL YEARJuly 1 to June 30
GLOSSARY OF ABBREVIATIONS
ADB - Asian Development BankBSAL - Banking Sector Adjustment LoanCBR - Central Board of RevenueDISCO - Distribution CompanyEFF - Enhanced Financial FacilityESAF - Enhanced Structural Adjustment FacilityFATA - Federal Administrated Tribal AreaFCD - Foreign Currency DepositFIRs - First Investigation ReportsGDP - Gross Domestic ProductGOP - Government of PakistanGST - General Sales TaxIMF - International Monetary FundIPP - - Independent Power ProducerKESC - Karachi Electricity Supply CorporationMLP - Muslim League PartyNCB - Nationalized Commercial BankNEPRA - National Electric Power Regulatory AuthorityNPL - Non-Performing LoanOECF - Overseas Economic Cooperation FundOGDC - Oil and Gas Development CorporationPEPCO - Pakistan Electric Power CompanyPFP - Policy Framework PaperPPAF - Pakistan Poverty Alleviation FundPRA - Pakistan Revenue AuthorityPSDP - Public Sector Development ProgramSAL - Structural Adjustment LoanSAP - Social Action ProgramSBP - State Bank of PakistanSNGPL - Sui Northern Gas Pipelines LimitedSSGCL - Sui Southern Gas Company LimitedTIWP - Tameer-i-Watan ProgramWAPDA - Water and Power Development Authority
Vice President : Mieko NishimizuCountry Director : Sadiq AhmedSector Manager : Roberto ZaghaTask Leader : John Wall
FOR OFFICIAL USE ONLY
THE ISLAMIC REPUBLIC OF PAKISTANSTRUCTURAL ADJUSTMENT LOAN
LOAN AND PROGRAM SUMMARY
Borrower: The Islamic Republic of Pakistan
Amount: US$350.0 million
Terms: Single Currency Loan in US Dollars, with a twenty year maturity and a graceperiod of five years with an interest rate of LIBOR Base plus LIBOR TotalSpread.
Description: The proposed Structural Adjustment Loan (SAL) is the second in a series ofWorld Bank adjustment loans in support of the reforms that the Government ofPakistan has initiated to correct serious macroeconomic imbalances and restorethe basis for rapid growth and poverty reduction. It builds on the work initiatedunder a Banking Sector Adjustment Loan (BSAL) approved in November 1997.From the reforms supported by this operation and further expected follow upreforms, should gradually emerge: (a) a banking system that is largely in privatehands, operating under banking regulations and prudential norms that meetinternational standards; (b) a financially viable energy sector with a growingrole for private investors, with independent regulatory authorities; (c) anautonomous, efficient and equitable tax administration that progressively raisesthe tax to GDP ratio by broadening the tax base and improving enforcement;and (d) an expenditure policy that subjects public spending to rigorous appraisaland spending ceilings.
Benefits: Besides helping Pakistan overcome its external financing crisis and restoreinvestors' confidence and creditworthiness, the proposed loan will support amajor program of reform to improve fiscal and financial governance. Theprogram includes a deepening of reforms aimed at improvements in efficiencyin the three key areas of banking, energy and taxation.
Risks: The two main risks are (a) political commitment to the pace and sequencing ofoverall macroeconomic and structural reforms needed in the face of likelystrong political opposition; and (b) Pakistan's vulnerable starting point. Withexternal reserves now at virtually irreducible levels, Pakistan's ability towithstand external shocks or delays in implementing reforms is almost nil.
Disbursement: The loan would be disbursed in one tranche in an amount equivalent to $350million upon effectiveness. The program was designed to emphasize actionstaken prior to loan approval to demonstrate, as indicated above, theGovernment's commitment to structural reforms.
This document has a restricted distribution and may be used by recipients only in theperformnance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.
REPORT AND RECOMMENDATIONOF THE PRESIDENT OF THE INTERNATIONAL BANK FOR
RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORSON A PROPOSED STRUCTURAL ADJUSTMENT LOAN
TO THE ISLAMIC REPUBLIC OF PAKISTAN
Table of Contents
Page No.
LOAN AND PROGRAM SUMMARY ............................ i
I. INTRODUCTION .I
II. RECENT POLITICAL AND ECONOMIC DEVELOPMENTS .I
A. Recent Political Development .B. Macroeconomic Framework .2C. The GOP Program and macroeconomic Developments in 1997/98 .3
III. THE STRUCTURAL ADJUSTMENT PROGRAM .6
A. Banking Sector .. 8B. Power Sector .0C. Natural Gas Sector .12D. Taxation .............................................................................. 13
E. Public Sector Expenditure .15
IV. THE LOAN .15
A. Pakistan's Assistance Strategy and Rationale for Bank Involvement .15B. Board Presentation and Tranche Release Conditions .17C. External Financing Requirements and Creditworthiness .18D. Benefits and Risks .21
V. RECOMMENDATION OF THE PRESIDENT .22
ANNEXES
Annex 1: Letter of Development PolicyAnnex 2: Policy Matrix -Conditions for Board PresentationAnnex 3: Key Economic IndicatorsAnnex 4: Key Exposure IndicatorsAnnex 5: Pakistan At-A-Glance Tables
REPORT AND RECOMMENDATIONOF THE PRESIDENT OF THE INTERNATIONAL BANK FOR
RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORSON A PROPOSED STRUCTURAL ADJUSTMENT LOAN
TO THE ISLAMIC REPUBLIC OF PAKISTAN
I. INTRODUCTION
1. To support its on-going structural reform program and to instill the culture of disciplineand respect for the rule of law, the Government of Pakistan (GOP) has requested this StructuralAdjustment Loan. The GOP embarked on its current reform program in 1997 and has beenmaking substantial progress. The Prime Minister's speech of June 11, 1998, presented a visionof a people that live up to their obligations, repay their loans and pay their tax and utility bills,irrespective of their influence. Since that date, the public agencies concerned have taken steps-managerial, institutional and legal-to begin to clear up the outstanding amounts due. Instillinga culture of discipline and respect for due process in public expenditure is a second area ofreform being tackled. The reforms supported by this operation are part of an agenda theGovernment has developed over several years, and extensively discussed with the Bank. Fromsuch reforms, and further reforms expected to be implemented in the coming 1-2 years, shouldgradually emerge: (a) a banking system that is largely in private hands, operating under bankingregulations and prudential norms that meet international standards; (b) a more efficient andfinancially viable energy sector with a growing role for private investors, with independentregulatory authorities; (c) an autonomous, efficient and equitable tax administration thatprogressively raises the tax to GDP ratio by broadening the tax base and improving enforcement;and (d) an expenditure policy that subjects public spending to rigorous appraisal and spendingceilings.
2. This report is organized as follows. Recent political and economic developments and themacroeconomic program are presented in Section I. The structural adjustment programs,especially those in banking, power, gas and tax sectors, as well as revisions needed in publicdevelopment expenditure are discussed in Section II. The proposed Bank strategy and thisStructural Adjustment Loan (SAL) is presented in Section III.
II. RECENT POLITICAL AND ECONOMIC DEVELOPMENTS
A. Recent Political Developments
3. Following the dismissal of Ms. Bhutto's Government in November 1996, on corruptioncharges and economic mismanagement, Mr. Nawaz Sharif was elected Prime Minister inFebruary 1997, with the Pakistan Muslim League (PML) winning a large majority in theparliament. He strengthened his Government's position by amending the Constitution toeliminate the President's power to dismiss the National Assembly and Government-containedin the 8' amendment to the Constitution that was introduced by General Zia in 1985, and used
2
four times since to dismiss democratically elected governments. The Assembly also passed aresolution that brought cross party voting under control.
4. Afterward, the Government embarked on an ambitious legislative agenda to promotepolitical and economic reforms and restoring, to a large extent, confidence among the businesscommunity even though civil unrest, especially in Karachi (the country's main commercial andfinancial center), as well as sectarian conflict and ethnic strife remained worrisome.
5. These reforms paid off and Pakistan, judged by its economic indicators through May1998, showed increasing signs of economic growth and stability. However, events followingPakistan's nuclear testing in May 1998 hampered the reform process and challenged politicalstability. The international community condemned the testing and major industrial nationsimposed economic sanctions, including opposition to any new lending beyond those meetingbasic human needs by international financial institutions. This led to severe balance of paymentsproblems, expenditure compression, import restrictions, and tax increases.
6. People's initial euphoria after the testing gave way to public criticism of theGovernments' handling of the economy, street protests, strikes and upsurge in violence andcriminal activity. Politically-based violence revived in Karachi and the GOP again has had toimpose Governor's rule and revive military courts as a means to quell it. The government wasfurther weakened by the withdrawal of support frorn a number of political parties in the coalition.The United States' bombing of suspected terrorist camps in Afghanistan enraged sympatheticgroups in Pakistan while Prime Minister Sharif's proposed 15" constitutional amendment underwhich the Sharia code (religious law) would become the supreme law of the country furtherfuelled political tensions. The amendment has already passed the National Assembly and wouldbecome effective if approved by the Senate, where it has met stiff opposition.
B. Macroeconomic Framework
7. Background. Since the late 1980s, Pakistan has been pursuing structural reforms thathave begun to lay the basis for future acceleration of its growth and development. The GOP hasadvanced these reforms in fits and starts despite political and ethnic turmoil and periods ofmacroeconomic instability. Since the early 1990s, there has been a progressive shift in thestructure of the fiscal budget (see Table 1). There has been a shift from foreign to domestictaxes, with a rise in the share of direct and sales taxes. There has been a shift away from defenseexpenditures and public enterprise investment with some, albeit modest, corresponding gains forthe Social Action Program (SAP), which is the only major (non-interest) category of publicexpenditure that has risen as a pefcent of total public spending since 1993/94. The primarydeficit improved by 5 percentage points of GDP-from -3.6 percent of GDP in 1992/93 to asurplus of 1.2 percent of GDP in 1997/98 and is expected to reach 2.3 percent of GDP in1998/99. The GOP has pursued privatization in the banking, industrial, and energy sectors,consummating many transactions, particularly in 1994-96. External trade was liberalized,maximum tariffs were reduced and the custom code was simplified.
8. The main problem in this reform program has been the fall rather than the rise inGovernment tax and non-tax revenues. Pakistan has one of the lowest tax to GDP ratios in the
3
developing world at its income level. Tax and non-tax revenues have fallen by 1.5 percentagepoints of GDP (partly due to lower import tariffs) between 1992/93 to 1997/98. In addition, thefinancial performance of the public sector banks and Water and Power Authority (WAPDA) havesuffered from low collections of amounts due. There are serious governance problems that haveinhibited these collections, as well as constrained tax collection (through tax evasion andgranting of widespread tax exemptions and concessions), undermined tax administration,hampered the effectiveness of public expenditure, opened the way for massive waste in publicenterprises, and contributed to the build up of the non-performing loan portfolio of the bankingsystem. When combined with structural impediments, these weaknesses in the area ofgovernance are serious threats to fiscal sustainability.
Table 1: Pakistan-Indicators of Macro and Fiscal Adjustment
C. The GOP Program and Macroeconomic Developments in 1997/98
9. Immediately after taking office in February 1997, Mr. Sharif's Government announced a"home-grown" program of stabilization and structural reforms aimed at correcting the country'sunsustainable macroeconomic imbalances, reversing the trend of declining economic growth andrising inflation, improving Pakistan's competitiveness in the new global environment, andpromoting human development and poverty alleviation. In July 1997, the Government reachedan agreement with the IMF and the World Bank on a Policy Framework Paper (PFP)underpinning the Government's reform initiatives. This program has been supported by: (i) theIMF through a US$1.56 billion ESAF/EFF arrangements starting from October 1997; (ii) the
4
Bank with the Banking Sector Adjustment Loan (BSAL, US$250 million with an equivalentamount in co-financing from Overseas Economic Cooperation Fund, OECF, of Japan) inDecember 1997; and (iii) the Asian Development Bank through the Capital Market DevelopmentLoan (US$250 million with an equivalent amount in co-financing from the Export-Import Bankof Japan, JEXIM) in January 1998.
10. The 1997 GOP Program. The GOP's policy objectives agreed in the PFP for the three-year period 1997/98 to 1999/2000 and supported by the ESAF/EFF program aimed to accelerateeconomic growth from 1.3 percent to 5-6 percent a year, progressively lower the annual inflationrate from about 11 percent to 7 percent, and reduce the current account deficit of the balancepayments from 6.2 percent of GDP to 4 percent with a significant build up of official reserves byend-June 2000. The key policy actions included: (i) lowering the fiscal deficit to 4 percent ofGDP by the third year of the program, supplemented by significant improvements in theoperating position of major public corporations; (ii) deceleration of monetary expansion; and (iii)a substantial increase in domestic investment and national savings. On the structural reformfront, the program also included tax and trade policy reforms, banking and capital marketreformns, rationalization of public enterprises/utilities and their privatization, public expenditureand civil service reforms, and reform of social sectors under the proposed second phase of theSocial Action Program (SAP).
11. Developments during 1997/98. Estimates indicate that in 1997/98, Pakistan performedwell in relation to the targets for the domestic economy under the PFP. Real GDP grew by 5.4percent (from 1.3 percent in 1996/97), virtually as programmed, reflecting a favorableperformance of agriculture responding to wheat policy reforrns and its indirect contribution to theexpansion in manufacturing, as well as a recovery in other sectors. Inflation fell to 7.8 percent(well below the program target of 10.5 percent) from 11.8 percent in 1996/97, reflecting tighterdemand management policies, recovery in output growth, and a decline in import prices. Theextermal current account deficit was halved to 3.2 percent of GDP compared with the programtarget of 5.1 percent of GDP (due mainly to lower than programmed level of imports). Thebudget deficit was contained within the program ceiling (the budget deficit ratio was higher-at5.5 percent-than the programmed ratio of 5 percent due to downward revisions in the nominallevel of GDP which reflected lower than originally estimated industrial output growth in 1996/97and lower inflation in 1997/98). The growth of money was substantially below the programtarget, reflecting deterioration in net foreign assets.
12. The current account deficit of the balance of payments performed significantly better thanexpected, mainly on account of lower imports. As a percentage of GDP it fell to 3.2 percentfrom 6.2 percent in 1996/97, compared to the program target of 5.1 percent. However, theimprovement in current account was more than offset by a weak capital account performnance,brought about by the financial turmoil in East Asia and, after May 1998, the economic sanctions.As a result, gross official reserves-about US$0.9 billion by end-June 1998-fell substantiallyshort of their program target of US$1.6 billion.
13. Developments Since May 1998. Following the nuclear testing on May 28 by Pakistanand imposition of sanctions, the Governnent declared an emergency (as per Constitutional
5
provisions) by which effective immediately it suspended withdrawal in foreign exchange fromForeign Currency Deposits (FCDs), then US$11.2 billion, to protect foreign reserves. Thisemergency action added to the loss of investor confidence and about US$4 billion in expectedprivate capital inflows did not materialize. In combination with lower new lending (resultingfrom the sanctions) by multilateral financial institutions, this development brought gross officialreserves down to about US$500 million by mid-December 1998 while external payments arrearsrose to US$1.7 billion.
14. Following an 8 percent devaluation of the rupee in October 1997, the Governmentdevalued the rupee vis-a-vis the dollar by a further 4.4 percent on June 26, 1998 to Rs. 46/US$.Subsequently, a dual exchange rate system was adopted on July 22 consisting of the official rateof Rs. 46 and a floating inter-bank rate (FIBR), which effectively led to further devaluation of therupee. Imports of petroleum, wheat, fertilizers, pharmaceuticals, conversion of FCDs into rupeesand debt service were carried out at the official rate of Rs. 46/US$. All other transactions werecarried out at a composite rate (60 percent official, 40 percent FIBR). Over time, the Governmentmoved an increasingly large number of transactions from the official rate to the composite rateand reduced the weights of the official rate in estimating the composite rate. As of mid-December 1998, all transactions except for imports of wheat, petroleum, and conversion of FCDsinto rupees, are being carried out at the composite rate. On December 21 't the GOP revised theweights to 20/80 respectively for the official rate and the floating inter-bank market rate.
15. Following the suspension of withdrawal in foreign exchange of individuals' FCDs, theGovernment has given both resident and non-resident FCD holders the option of purchasingfederal foreign currency bonds in addition to the facility of conversion into rupees at the officialexchange rate. As of mid-December 1998, about US$4 billion of resident FCDs have beenconverted into rupees.
16. The slowdown in growth, devaluation, and the compression of imports adversely affectedinflation and budgetary revenues, and despite additional fiscal measures taken after May 28,1998 (1.2 percent of GDP) to reinforce macroeconomic adjustment, the budgetary deficitwidened in the first quarter of 1998/99. However, it is now expected to remain within theprogram ceiling for the year as a whole. Moreover, a new electricity subsidy for householdconsumers introduced in October 1998, is estimated to have a budgetary cost of 0.3 percent ofGDP in 1998/99, which will be largely financed through cuts in unproductive expenditure andincreases in taxation.
17. Macroeconomic Objectives and Policies for 1998/99-2000/01. The macroeconomicobjectives underpinning the 1998 Policy Framework Paper for 1998/99-2000/01 are: (i)increasing real GDP growth from 3-4 percent during 1998/99-1999/2000 to a medium term rangeof 5-6 percent; (ii) reducing inflation steadily from about 11-10 percent in 1998/99-1999/2000 toabout 6 percent in 20001/02; (iii) contracting the external current account deficit (excludingofficial transfers) from 3 percent of GDP in 1998/99 to less than 1.5 percent of GDP in 2001/02;and (iv) reducing the fiscal deficit to 2.1 percent in 2001/02 from 4.3 percent in 1998/99. Boththe fiscal and current account deficits of the balance of payments are already below or at thelevels originally envisaged for the third year of the initial 1997 program-1999/2000.
6
18. To underpin such objectives, gross capital formation would need to increase by at leastone percentage point of GDP in 2001/02 from less than 15 percent of GDP in 1998/99, largelyreflecting a recovery in private sector investment. To support higher investment rates andaccommodate external adjustment, gross national savings would need to rise from about 12percent to about 16 percent of GDP during the same period largely on account of increasedpublic sector savings.
19. Fiscal consolidation will be the key to achieving the macroeconomic objectives. Astronger budgetary position is consistent with the need for increased resource availability to theprivate sector and with the need to reduce the vulnerability associated with the large stock ofpublic debt. To achieve the fiscal target, in addition to measures already incorporated in the June1998/99 budget, and those implemented in July, the PFP program includes the followingmeasures: (i) raising the rate of General Sales Tax (GST) from 12.5 to 15 percent and extendingthe GST to services; (ii) a reduction in the budgeted amount of defense expenditure; (iii)strengthening the financial position of WAPDA and KESC; (iv) a reduction in the federalsubsidy on wheat; and (v) lowering of several components of non-interest current expenditure.In 1998/99, the Government is also committed to maintaining the level of the budgetary PublicSector Development Program (PSDP) at Rs. 98 billion (11 percent lower than initially budgeted)withholding approval and allocation for any new projects by autonomous public agencies whileprotecting allocations for high-priority projects and basic social services under the Social ActionProgram.
III. THE STRUCTURAL ADJUSTMENT PROGRAM
20. Thie Program of Medium-Term Structural Reforms. The future structural reformagenda more fully described in the PFP is largely focused on the budget and on restructuring andstrengthening of the financial position of the public, enterprises. Substantial efforts will have tobe made to broaden the base of domestic taxes, revamp tax administration, implement therestructuring plans for the energy sector and a number of other public sector enterprises, andraise the productivity of government expenditure. In parallel, the government will move forwardwith privatization of financial institutions, trade liberalization, and make further progress in thedevelopment of the market-based foreign exchange and payments system.
21. The structural reforms supported with this loan are designed to support this medium-termstrategy. Reforms in the bangking sector (started with support of the Banking Sector AdjustmentLoan in December 1997) will help prepare for the divestiture of the government's remainingownership interests in the Muslim Commercial Bank and Allied Bank Limited and privatizationof Habib Bank Limited (HBL), National Bank of Pakistan (NBP), National DevelopmentFinance Corporation (NDFC), and Industrial Development bank of Pakistan (IDBP). Whilemany of these banks are at or close to the point of sale and the intention is to complete these salesover the next two years, the government cannot proceed with their privatization until marketconditions improve. Privatization will need to be supported by external governance from aneffective regulator and supervisor, competitive markets and a well-functioning legal and judicialsystem. This involves making all prudential regulations on capital adequacy, loan classificationand provisioning, loan concentration and exposure limits, and accounting and auditing standards
7
consistent with intemational norms; and then ensure the regulatory process makes the banks meetthese standards of performance. It also means making the legal environment supportive toefficient banking, through revised laws, improved administrative measures and good governanceof contractual obligations.
22. In power the medium-term reform agenda would focus on completing the corporatizationof WAPDA and establishing commercially oriented autonomous corporations, with NEPRAissuing licenses for the new corporate entities; implementing theft and loss reduction programsand introducing other efficiency improvements; intensifying bill collection from both public andprivate customers so that the level of overdues remains within normal business limits;implementing financial and other restructuring measures, including if necessary, tariff adjustmentto restore the financial viability of the energy utilities; implementing the orderly framework toregularize and maintain normal commercial relations with independent power producers; andaccelerating the privatization program for the thermal generation and electricity distributioncompanies. Specifically, during 1999/00, at least three electricity distribution companies will bebrought to the point of sale. We plan to support the next stages of this reform agenda through aPower Sector Adjustment Loan, later in FY99.
23. In the gas sector shares of Sui Northern (SNGPL) a major gas distribution company, willbe offered for sale to a strategic investor, while the government is studying the restructuring ofthe Oil and Gas Development corporation (OGDC, the state-owned hydrocarbon exploration andproduction company) to separate its technical services from its exploration and productionfunctions, with a view to its subsequent privatization during the next two years. Natural gasconsumer tariffs will be adjusted to achieve a rate of return on assets as agreed with the Bank andthe Natural Gas Regulatory Authority is to be made fully operational by June 1999.
24. Reform of tax adminiistration are to be intensified over the next two years. Thegovernment's program aims to improve taxpayer compliance, reduce compliance costs, andbroaden the tax base in order to achieve a sustained growth of tax revenues. The Central Boardof Revenue will be converted into an independent and autonomous body; a unique tax identifiernumber will be introduced to replace all previous numbering systems by May, 1999. Acomputerized information exchange system will be operational by end-June, 1999; this willallow the harmonization of the efforts of the various tax departments. Ambitious targets havebeen set for the registration of new taxpayers. Tax enforcement will also be strengthened with aview to reducing the number of non-filers for the general sales tax to 10 percent by June 1999.The auditing function will be strengthened and will cover 10-15 percent of tax payers bySeptember 1999 and 20-25 percent by December 1999.
25. Improvements in expenditure policy concentrate on focusing government spending onpublic goods and services; and increasing the returns to this spending and improve theinstitutional mechanisms that govern this spending. The Planning Commission is to go through arestructuring to improve its strategic functioning to develop a medium-term expenditureframework for use in preparation of annual budgets. It will also prepare multi-year developmentplans to ensure that the consequences of new and ongoing projects are taken into account. By the1999/00 budget, the development and recurrent expenditure budgets will be integrated, initially
8
within existing departments and other public sector entities, but subsequently moving towardsector- and program-based budgeting. In civil service reform the GOP has prepared operationalplans for restructuring government ministries and division, attached departments andautonomous bodies. These operational plans are to be implemented in a phased manner. Basedon a completed study, the GOP will prepare a program of civil service reform and an action planfor implementation by June 1999, with implementation to begin in 1999/2000. We plan tosupport the next stages of reform in tax policy and administration, expenditure policy and civilservice reform through a Structural Adjustment Loan, possibly in FY00.
A. Banking Sector
26. Vision for the Banking Sector. The Government's medium-term objective for thebanking system is one that is largely in private hands, operating under rigorous bankingregulations that meet international standards of capital adequacy; loan classification andprovisioning; loan concentration and exposure limits; and accounting and auditing; withoutpublic or private abuse in mobilizing and allocating financial resources.
27. Background. By 1996 Pakistan's banking system was on the verge of a crisis due to abreakdown of governance and loss of financial discipline. Political interference had abused thefinancial intermediation function of the banking system, and borrowers expected not to repayloans they took, especially from the state-owned banks. Private sector banks without any publicownership were managed better, in general. One of the root causes of problems has been politicalinterference in both lending and loan recoveries in banks with public sector ownership. As aresult, the stock of non-performing loans grew by imore than 400 percent from 1989 to 1997 andwas Rs. 128 billion as on June 30, 1997 (4 percent of GDP) and Rs. 146 billion as of end-June,1998. Once a loan became non-performing the legal recourse was slow and costly. The legaland judicial systems in Pakistan became a haven for defaulters rather then a deterrent todefaulting.
28. Reform Program. The BSAL, a one-tranche adjustment loan provided in December1997, supported major Government programs to strengthen banking system governance, bring inprivate sector management to all banks under government ownership, arrest the flow of badloans, curtail loss-making, and conserve assets of the nationalized banks prior to theirprivatization. It also revitalized its medium-term program to strengthen central bank supervisoryand regulatory capacities, enhance central bank independence, and build the capacity of the legaland judicial system for loan recovery.
29. Achievements to Date. After one and a half years of implementation, the reform programis showing results. The hemorrhage caused by politically motivated lending and operating losseshas been stemmed. Corporate governance has been improved with the change in managementand the protection given to new management from political interference. Operating lossesthrough overstaffing and over-branching have been reduced through staff separations and branchclosures. Prudential regulations and disclosure standards have been brought to internationallevels to increase transparency. Banking supervision is being strengthened with the help ofinternational consultants.
9
30. Loan Recoveries. Cash recoveries improved significantly with Rs. 35 billion collectedsince January 1, 1997 till November 1998. The stock of non-performing loans has finallystopped rising. Although the stock of non-performing loans (NPLs) above Rs. 1 million for allbanks and DFIs increased to Rs. 146 billion as of June 30, 1998 from Rs. 128 billion as of June30, 1997, this was due to recognition of bad loans previously being carried on books as good.The total stock was still Rs. 146 billion at the end of October 1998, due to prudent lendingpolicies of the new management of the NCBs and DFIs. Banking experts estimate only abouthalf of NPLs are recoverable with the rest to be written off. The State Bank of Pakistan (SBP)has set targets for banks to bringing the stock to outstanding advances ratio down to 10 percentover a three year period. These targets need to be actively pursued along with recoveries toachieve acceptable portfolio quality.
31. Legal Enforcement. The legal and judicial processes for enforcement of financialcontracts have been strengthened with the adoption in 1997 of loan recovery and banking courtlegislation. The court system has been improved with setting up of 34 banking courts to dealwith banking cases for amounts of Rs. 30 million and below while high court judges entertaincases above Rs. 30 million. In Punjab and Sindh, two high court judges have each beenappointed exclusively for this purpose. So far, through end-October 1998, under the newlegislation more than 50,000 cases for a total of Rs. 55 billion have been filed, of which 15,000decrees for Rs. 13.6 billion have been granted.
32. Prior Actions in Banking. The GOP is committed to collecting a further Rs. 12 billionin cash from NPLs from June 1 through December 31, 1998. These recoveries are the sum for allpublic sector banks (including partially privatized banks) and public sector development banksand financial institutions. A committee of banks has agreed with the Government on a set ofadministrative steps to facilitate recovery by financial institutions of debt in default and henceaccelerate loan recovery. These include: (i) issuing an approved panel of public auctioneersavailable for appointment by the courts in suits brought by financial institutions and involvingthe disposal of property by public auction; (ii) requiring judges to appoint auctioneersexclusively from the panel established under (i) above; and (iii) issuing guidelines for use by thecourts in restricting the number of times a property can be put up for auction in cases where thesame property is required to be put up for auction more than once because of dispute arising overthe value of the bids obtained.
33. Next Steps. The program, however, is far from complete. The permanent solution toPakistan's banking sector problems will stem from achieving corporate governance throughgenuine privatization of banks and financial institutions, supported by external governance froman effective regulator and supervisor, competitive markets and a well-functioning legal andjudicial system. When the banking system is privatized, the country would need a depositinsurance scheme to protect small depositors and contain the cost of any bank failure in thefuture. With World Bank-funded technical assistance, the State Bank is now engaged inrestructuring of the financial institutions with Government ownership and preparing them forprivatization. The preparation for privatization process (staff reduction, appropriaterationalization of branches before privatization, removal of bad assets and sale of remainingGovernment shares) is expected to be completed within the next two years. The Bank also
10
expects to provide a second banking sector adjustment operation when to time for privatizationcomes.
B. Power Sector
34. Vision for the Power Sector Reform. The Government's medium term objective is toestablish an electric power system consisting of autonomous, financially viable, and efficientlyoperated entities for generation, transmission, and distribution governed by an independentregulatory authority. There will be a growing role for the private sector. WAPDA's powerfunctions will be separated from WAPDA's Water Wing and its 11 thermal generation units,transmission assets and eight Area Electricity Boards would be converted into 12 limitedcompanies, of which eight would be distribution companies, three would be generationcompanies and there would be a National Grid Company. The remaining WAPDA will beresponsible for the development of Pakistan's water resources and hydro-electric (hydel)generation. The Karachi Electric Supply Company (KESC) and all of WAPDA's assets, exceptthe National Grid Company, about which a decision will be made later, will be privatized as soonas feasible.
35. The Frustrated Reform Programn. Over the last few years, there have been many "upsand downs" in the power sector reform programs. The Government has been pursuing a two-pronged approach consisting of encouraging private sector investments in new energy supplyfacilities, while initiating the restructuring and partial privatization of the energy utilities. Thisstrategy has succeeded in attracting private investments in thermal power plants, i.e.,Independent Power Producers (IPPs), but the economic slowdown and corresponding decline inthe growth of demand for electricity, has resulted in temporary excess generating capacity. Theefforts at restructuring had until now been frustrated by militant opposition within the entire138,000 strong organization of WAPDA. Negotiations with IPPs to obtain voluntary tariff reliefgot mired in an approach that lumped together corruption charges and contract disputes.
36. Operational efficiency deteriorated as demonstrated by higher level of losses and poorerbill collection. Pricing reforms for natural gas and electricity aimed at reducing cross-subsidiesand adjusting average tariffs to fully reflect changes in the costs have been implemented at aslower pace than originally envisaged. Consequently, the financial situation of the energyutilities has rapidly deteriorated and there has been a substantial build up of cross-arrearsbetween the Government, the utilities, and the fuel suppliers. WAPDA, KESC, SNGPL, andSSGC all have great difficulties in meeting their financial obligations and the situation hasbecome untenable.
37. The Government took a few steps to address the financial difficulties of the energyutilities and accelerate the reform programs. In December 1997, the National Electric PowerRegulatory Authority (NEPRA) was established, although it could not begin to function as a realregulator of tariffs. This stop-and-go pattern began to change in 1997/98. Electricity tariffs wereincreased in March 1998 by an average of 21 percent. These adjustments included a muchneeded reduction in cross-subsidies to households and agricultural tubewells.
11
38. Prior Actions in the Power Sector. The chairman of WAPDA has been changed and thePakistan Electric Power Company (PEPCO) has been created by executive order to implement,with help of WAPDA's management, the restructuring process, including the commercializationand efficiency improvement programs and to prepare the companies for privatization. TheWAPDA Act is to be amended to allow for the creation of the National Grid Company. The LawMinistry has confirmed the law allows the transfer of consumer contracts from WAPDA to thedistribution companies and the transfer of WAPDA staff to the corporate entities. TheGovernment of Pakistan and the provincial Governments have cleared up their arrears toWAPDA, which had amounted to Rs. 34 billion accumulated over several years through1997/98. These now have been cleared, partly by a cash payment of Rs. 16 billion and partly bya reduction by reconciliation (excess billing) of Rs. 18 billion. WAPDA has designed a theft lossand arrears reduction program. Corporations have already been registered and the transfer ofassets, liabilities, and staff is in progress. Financial restructuring plans for WAPDA and KESChave been designed. Preparatory work for the privatization of KESC has been initiated with theassistance of the Asian Development Bank. WAPDA has made a tariff filing to NEPRA toincrease tariffs and adjust its structure. WAPDA and the GOP have re-established theimplementation of the orderly framework that is defined in the legal agreements betweenWAPDA and the independent power producers (IPPs).
39. Independent Power Producers. A new IPP committee, which includes representatives ofthe private sector has been created to accelerate the resolution of outstanding issues. There was abreak-through in the month of November 1998 and all of the IPPs which had outstanding legaland commercial constraints to their normal functioning are well on their way to being settled.The solutions to these disputes are being handled via an agreed orderly framework with a cleardistinction between corruption proceedings and commercial negotiations.
40. Next Steps. The Government needs to ensure regular payments of current electricity billsand settlement of cross-arrears between energy utilities and Governments. NEPRA should befully operational, regulate the corporate entities, and provide necessary comfort to investors andconsumers. Cross-subsidies to households and agricultural consumers have to be substantiallyreduced and the average tariff level increased to reflect costs. Flat-rates to agricultural tubewellsand FATA consumers should be converted into metered tariffs. The Government shouldcomplete the corporatization process of the power wing by September 1999. By the end ofDecember 1999, at least three electricity distribution companies should be brought to the point ofsale. We envisage a power sector adjustment loan to support the continuation of the reforms;with good progress, this PSAL could be prepared for presentation to the Board by next Spring.
41. Medium-Term Reform Program. Over the medium term, the reform agenda for thepower sector would focus on: (i) completing the corporatization process and establishingcommercially oriented autonomous corporations, with the National Electric Power RegulatoryAuthority (NEPRA) issuing licenses for the new corporatized entities; (ii) implementing theftand loss reduction programs and introducing other efficiency improvements; (iii) intensifying billcollection efforts from both public and private customers so that the level of accounts receivableremains within three months of sales equivalent; (iv) implementing financial and otherrestructuring measures, including if necessary, tariff adjustments, to restore the financial viability
12
of the energy utilities and the remaining operations of WAPDA; (v) implementing the orderlyframework to regularize and maintain the normal commercial relations with the IPPs, and (vi)accelerating the privatization program for the thermal generation and electricity distributioncompanies.
C. Natural Gas Sector
42. Vision for the Natural Gas Sector. The Government's vision for natural gas is one ofgas exploration, development, production and distribution system with good financialperformance largely in private hands, with Oil and Gas Development Corporation (OGDC), theSui Northem Gas Private Limited ) SNGPL, and the Sui Southern Gas Company (SSGCL)privatized, with a public, autonomous Natural Gas Regulatory Authority issuing licenses forexploration, production and distribution and regulating the well-head and retail tariffs.
43. Backgrounid. The Government has been committed for a long time to the privatization ofthe two companies (Sui Northern and Sui Southern) through a strategic sale with managementrights and the creation of an independent gas regulatory authority which promotes competition inthe sector and de-politicizes tariff setting. The progress on this privatization has been slow andthe finances of these companies are poor, mainly due to low collections of bills and low tariffs.As of June 30, 1998, the total stock of overdue bills for Sui Northern (SNGPL) and Sui Southern(SSGCL) amounted to over Rs. 15.5 billion, comprising Rs. 7.2 billion from WAPDA (46percent), Rs. 3.9 billion from KESC (25 percent), Rs. 1.0 billion from Government agencies (6percent) and Rs. 1.5 billion from private customers (10 percent).
44. Reform Program. The Government has encouraged the companies to enhance their cashflow through non-tariff measures, including improving operational efficiency, reducingadministrative expenditures, cutting the developmental budget, and improving bill collection.
41. Prior Actions in thie Natural Gas Sector. To address this, a vigorous drive was launchedin June 1998 to improve recoveries, disconnect defaulters and eliminate gas pilferage in thecountry. The Government has undertaken to reduce the stock of overdues as well as improve thelegal basis for gas tariff setting and collections. The gas companies made significant strides inthe first two months of the campaign with the support of the federal and provincial Governments.The latter's commitment has since tapered, however, due in part to an ineffective legalframework to penalize tampering with gas pipelines and meters. As of November 7, 1998, thegas companies have been successful in collecting about Rs. 880 million or 59 percent of theoverdue bills as of June 30, 1998 from private customers and about Rs. 600 million or 62 percentfrom Government agencies for a total of about Rs. 1.5 million. Sui Northern (SNGPL)conducted 23,848 site inspections, leading to 82 arrest, 175 First Investigation Reports (FIRs)and 10,638 disconnections of suspected thefts. Sui Southern (SSGCL) has conducted 8,841 siteinspections, leading to 73 arrests and 35,239 disconnections. They have committed to collect atotal of Rs. 1.6 billion by the end of December 1998 from the Rs. 2.5 billion stock of arrears ofGovernment and private consumers. The Natural Gas Regulatory Authority Act is to be re-submitted to the National Assembly, after incorporating the revisions suggested by thePrivatization Commission, with which the Bank agrees,, by the end of December 1998.
13
45. WAPDA and KESC Gas Bills. The public sector power producers have been slower topay. As of June 30, 1998, Rs. 590 million or 15 percent of amount in default was recovered fromKESC and Rs. 1,015 million or 14 percent from WAPDA. WAPDA and KESC are expected topay Rs. 4 billion by end-May 1999, half of these outstanding arrears are as of June 30, 1998.
46. Next Steps. The agenda for reform includes eventual privatization. In the near term, itincludes further improvement in the financial discipline of the gas distribution companies,reduction stock of overdue bills and improvement in the legal basis for gas tariff setting andcollections. Specifically, these include: (i) completion of cash recovery from stock of overduebills from the private sector, reduction in WAPDA and KESC arrears and keeping the paymentof gas bills by WAPDA and KESC current; and (ii) enactment by the National Assembly of theNatural Gas Regulatory Ordinance and amendment of the penal code to make tampering with gasmeters a crime.
D. Taxation
47. Vision for Tax System and Fiscal Sustainability. The Government envisages toestablish an autonomous, efficient and equitable tax administration with a well-functioningPakistan Revenue Authority that progressively raises the tax to GDP ratio by extending thegeneral sales tax (GST) and income tax base to more taxpayers while reducing taxes on foreigntrade; and increasing the yield of provincial agricultural taxation by reducing exemptions,updating the assessments and raising the rates on the land base.
48. Reform Program. The Government has developed a tax reform program comprisingboth policy and administrative reforms. The GOP aims to raise tax revenue by one percentagepoint of GDP, despite further reductions in custom tariffs, (from a current level of 13 percent). Itis putting in place a tax administration which is more efficient and responsive. The programincludes actions to reform tax administration; broaden the base of domestic taxes; furtherliberalize the trade regime; and increase tax revenues while these institutional reforms are beingundertaken.
49. Achievements in Tax Administration. The GOP has formulated a thorough-goingadjustment of its federal tax collection institution. The Central Board of Revenue (CBR), aGovernrnent department, will be converted into a more autonomous Pakistan Revenue Authority(PRA). The PRA will be empowered to manage its own operations, engage managerial andprofessional staff from the private sector, and whose budget will be performance-based. Theunderlying objectives of the reform are to improve service to the taxpayer, ensure equity andfairness, simplify procedures and processes, while maintaining a credible and effective control ontax evasion. The tax enforcement program is being strengthened with a more effective taxregistration program, an information exchange program, better administration of the taxpayeridentification number and a strengthened tax audit regime. Twenty tax tribunals have beenapproved; seven are fully staffed and have started functioning and a total of fifteen are expectedto be fully operational by December 1998.
14
50. Achievements in Sales Tax Policy Reform. Significant progress has been made over thelast two years in reforming the General Sales Tax (GST) into a modem, broadly-based value-added tax. Important amendments to the 1990 GST Act were introduced in June 1996,expanding the horizontal coverage at the manufacturing and import stages, removing excise-typefeatures, and establishing a turnover threshold for registration. This was followed by majorimprovements including compulsory registration of importers, wholesalers, and distributors, andabolition of replacement invoices; effective extension of the GST to textiles and steel sectors ofthe economy; improvement in refund procedures; and strengthening of the legal provisions todeal with delinquent tax payers, curb tax fraud, and minimize evasion. Also, GST rates wereunified into a single standard rate of 12.5 percent in the 1997/98 budget and has just been raisedto 15 percent. The GST has been extended to retail and more recently to services. The nextstages of reform will involve removing the exemptions on electricity and petroleum products bySeptember 1999, and agricultural inputs by December 1999.
51. Achievements in Income Tax Reform. Steps aimed at expanding the base of the incometax have already been taken. The concept of taxable income has been redefined to includeperquisites in cash and in kind, and certain deductions have been reduced. With regard to therate structure, personal income tax rates have been reduced to 20 percent maximum (from 35percent) while the rates of corporate tax have also been reduced The Government will undertakea comprehensive review of the income tax system (with IMF technical assistance) with a view toidentifying steps aimed at imparting simplification and neutrality.
52. Achievement in Import Tariff Reform. Pakistan has made significant progress inliberalizing its trade regime in recent years. This has included phasing out most quantitativerestrictions on exports and imports, elimination of export taxes, and reduction in tariffs and theirdispersion. Building on this progress, the tariff reform is oriented toward further lowering andrationalizing the rate structure as well as merging most of the remaining concessional rates withthe statutory regime. Recently, the maximum tariff was brought down to 45 percent (from 65percent), the number of slabs was reduced from 14 to 6 and the 10 percent regulatory dutyintroduced in October 1995 was eliminated, except for a few items. The Government has agreedto reduce the maximum tariff rate to 30-35 percent by June 1999, with a simultaneous reductionin the number of tariff rates from five to four.
53. Prior Actions in Tax Administration. By the end of December 1998, the GOP is tosubmit the act creating the Pakistan Revenue Authority to the National Assembly; the CBR is toincrease the number of income tax payers with IDs to 1.6 million; the Law Ministry is to increasethe number of fully functioning Tax Tribunals from sever to fifteen; and collect Rs. 3 billion oftax arrears.
E. Public Sector Expenditure
54. Vision for Public Expenditure Management. The Government envisages an expenditurepolicy and practices that prioritize and curb wasteful public investment; subject both budget andautonomous agency spending that impinges on the Government to rigorous appraisal and overallmacroeconomic spending ceilings; rationalizes spending on personnel; reallocate budgetary
15
resources toward high-priority and essential operating and maintenance expenditure; provideadequate budgetary allocations for basic social services in the Social Action Program (SAP); andimprove the planning and monitoring of budgetary expenditures.
55. Prior Action in Public Expenditures. To help achieve the fiscal deficit target andimprove the quality of public investments, the Government in November 1998 adjusted its publicsector development program (PSDP) allocations. This entailed: (a) reducing the 1998/99 PSDPsize from Rs. 110 billion to Rs. 98 billion by imposing cutbacks on the low-priority portion ofthe PSDP; (b) dropping or postponing most of the new projects included in the 1998/99 PSDP,retaining only a few very high-priority projects; (c) redesigning and reducing the size of theTameer-i-Watan Program (TIWP-a district-based infrastructure funding program) so as to meetTIWP's specific objectives in a non-politicized manner; (d) significantly reducing allocations forsome on-going low-priority projects (e.g. Pakistan Steel Mills, Lahore and Karachi Mass Transit,and the Chashma Nuclear Power Plant); (e) withhold approval and expenditure on any newprojects by autonomous public agencies that involve any Government financing through debt orcontingent liabilities; (f) redressing the shortfalls in allocations for high-priority projects and forSAP-related development activities by appropriately revising and protecting these allocationsagainst budgetary cutbacks; (g) ensuring adequate and timely release of funds to all high-priorityprojects; and (h) strengthening monitoring and evaluation of development projects. ThePlanning Commission is currently building its capacity to strengthen its oversight functions tobetter manage the budgetary and non-budgetary development expenditure programs and theircontingent liabilities.
56. In November 1998, the Ministry and Finance and the Planning Commission established afocal point at the level of "Member of the Planning Commission" to collect the informationneeded to monitor spending plans of autonomous public bodies through among other ways,participating in the board meetings of these bodies. The GOP will use this information to governthe level of total government commitment to finance with cash, debt, guarantees or contingentliabilities to ensure consistency with the overall macroeconomic framework. It has alsocommitted itself to maintaining a ceiling on government external borrowing and contingentliabilities within its PFP and the IMF programs.
IV. THE LOAN
A. Pakistan's Assistance Strategy and Rationale for Bank Involvement
57. The Situation. Prior to the sanctions imposed after the nuclear tests on May 28, Pakistanhad been performing in the High Base Case against policy triggers set in the CAS, had beenimplementing reform measures essentially consistent with the PFP, and was on-track with theIMF's ESAF/EFF programs. Financing for Pakistan's structural reform program, however, driedup following imposition of sanctions. While imposing a number of emergency economicmeasures to minimize the economic damage caused by the sanctions, Government has alsoreiterated its commitment to the reform course. In particular, the Government recognized thatthe imposition of sanctions offered an opportunity to deal with a number of governance issues, asannounced by the Prime Minister on June 11. Despite a series of emergency and adjustment
16
measures, however, Pakistan's reserves depleted (falling from US$1.4 billion on May 11-whenIndia conducted its nuclear tests-to just US$500 million by mid-December 1998). Thefinancing gap for FY99 is estimated at about US$5.5 billion. The proposed operation wouldcontribute to financing this gap along with assistance from bilateral donors, private creditors, theIMF and the ADB.
58. Bank Strategy. The last CAS and CAS Progress Report, discussed at the Board in FY96and FY97 respectively, put forth a country assistance strategy based on helping Pakistan toachieve macroeconomic stability, improve human development, build a competitive environmentfor private sector development and sustainable growth, and strengthen governance. In November1998, after indications that sanctions would be partially lifted, the Government agreed with theIMF and the Bank on an updated Policy Framework Paper and an IMF program to be supportedby an ESAF/EFF arrangement. The newly agreed reform program is much stronger than thatenvisaged prior to the sanctions, except for the timing of privatization, which has becomevirtually impossible in the current circumstances. This reflects a more realistic assessment of themarket situation, and the need for Pakistan to rebuild a track record of implementation tostrengthen business confidence.
59. To help the Governnent implement the ambitious reform program in this difficultenvironment, the Bank in close coordination with the IMF and the ADB, has adopted acomprehensive response strategy. This strategy is covered in more detail in the Pakistan CountryAssistance Strategy Progress Report before the Board along with this loan. The key feature ofthis strategy by the Bank is a series of one-tranche adjustment loans to support actions alreadytaken in the major reforms covered under the PFP. This started with the Banking Sector AdjustmentLoan approved in December 1996. The next step is this Structural Adjustment Loan, to be followedlater with others including a Power Sector Adjustment Loan. At the same time, we are continuingour program of investment lending and helping Government to identify a social protection program.While the current loan was not included explicitly in the ongoing CAS, the program proposed isfully consistent with the CAS's objectives and scenarios of supporting strong reforms withadjustment lending. Our planned lending levels will be guided by the scenarios and triggersidentified in the last CAS and the FY99 CAS Progress Report.
60. This approach of having a series of operations thus embodies our risk managementstrategy, as the one-tranche adjustment loans would be based on prior actions and would containbullet repayments in the case of policy reversals. The total amount of each individual operationand the prograrn as a whole would depend on Pakistan's needs for extraordinary financing and onburden-sharing arrangements among the Bank, IMF, the ADB, and other donors. We arepreparing a new full CAS, for Board discussion in early FY00.
61. Performance Benchmarks for Adjustment Lending. The key prior actions expected tobe accomplished before we consider the next adjustment operation (possibly by Spring 1999)-aPower Sector Adjustment Loan-in addition to rapid progress in all aspects of the restructuringand corporatization of WAPDA would be the implementation of the tariff adjustment as decidedby NEPRA; strong progress in the agricultural metering program and the conversion of flat ratesto metered rates for agricultural customers; the enactment of the amendments to the WAPDA act;
17
amendments to the WAPDA act; the continued implementation of the orderly framework forhandling IPP issues; satisfactory financial performance of WAPDA and the 12 corporations,including maintaining normal business standards in both receivables and payables; andsatisfactory progress of the KESC privatization plan as agreed with the AsDB.
62. For a Banking Sector Adjustment Loan, the key prior actions would be privatization ofthe main nationalized commercial banks and development finance institutions--Habib BankLimited, United Bank Limited, National Bank of Pakistan, National Development FinanceCorporation and Industrial Development Bank of Pakistan.
B. Board Presentation and Tranche Release Conditions
63. The full program of actions to be supported by SAL is set out in the SAL Matrix (AnnexII). Within this program, a subset of key actions has been identified as prior conditions for Boardpresentation. Besides the implementation of these specific actions, a general condition will bethat the implementation of the full program is satisfactory overall.
64. Conditions for Board Presentation of SAL. Prior to Board presentation, theGovernment will have:
1. agreed with the Bank on a macroeconomic framework for FY 1998-99 and beyond asdescribed in the letter of development policy (Attachment 1).
2. ensured collections in the banking system of over Rs. 12 billion from loan defaulters fromJune 1, 1998, through December 31, 1998.
3. issued: (a) an approved panel of public auctioneers to banking courts to assist in the saleof properties belonging to judgement letters; and (b) guidelines for use by the bankingcourts in restricting the number of times a property can be put up for because of disputearising over the value of the bids obtained.
4. issued an Executive Order empowering PEPCO to manage the implementation of theBorrower's power sector reform program.
5. submitted to its National Assembly the WAPDA Act to allow for, inter alia,corporatization of WAPDA into separate entities, including separate generationcompanies, a National Grid Company and several Distribution Companies (DISCOs), andfurnished evidence satisfactory to the Bank of the legal basis for (a) transfer of consumercontracts from WAPDA to the DISCOs; and (b) transfer of WAPDA's staff to the saidgeneration companies, National Grid Company and DISCOs.
6. put in place an orderly framework, as agreed with the Bank, to handle disputes withIndependent Power Producers.
7. had WAPDA prepare a theft, loss and arrears reduction plan satisfactory to the Bank.8. ensured that federal and provincial Governments have cleared their past bills with
WAPDA and given an understanding satisfactory to the Bank to stay current on theirfuture reconciled electricity bills as they become due.
9. ensured that the Ministry of Water and Power issue a statement on the Government'ssocio- and economic-policy objectives regarding tariff setting to NEPRA.
18
10. ensured that NEPRA has issued under the NEPRA Act its Tariff Standards andProcedures Rules, and other terms and conditions related to generation, transmission anddistribution by licensees.
11. ensured that WAPDA has submitted a comprehensive tariff filing to NEPRA.12. accelerated cash recoveries in the natural gas sector to achieve for the period June through
December 1998 collections of over Rs. 1.6 billion of overdues from private consumersand federal and provincial Governments.
13. submitted to its National Assembly a bill to establish a Natural Gas Regulatory Authorityto, inter alia, regulate tariff setting and strengthen collection.
14. collected over Rs. 3 billion in tax arrears from June through December 1998.15. (a) submitted to its National Assembly a law for the establishment of the Pakistan
Revenue Authority; (b) increased the number of income taxpayers with ID numbers to atleast 1.6 million; and (c) increased the number of fully functioning tax tribunals from 7 toat least 15.
16. agreed with the Bank on the size and content of the budgetary and non-budgetary publicdevelopment expenditures in line with its development priorities and the agreed macroeconomic framework. This includes withholding approval and expenditure on any newprojects by autonomous public agencies that involve any government financing throughdebt or contingent liabilities.
17. ensured that federal and provincial Govermnents have provided adequate funds to meetagreed levels of expenditure as agreed with the Bank under the Social Action Program ofthe Borrower and have allocated adequate non-salary expenditures for the education andhealth sectors.
C. External Financing Requirements and Creditworthiness
69. Pakistan's gross external financing requirements during 1998/99 and 1999/00-atUS$15.5 billion-are daunting. Because of the fragile balance of payments situation over thepast few months, Pakistan was forced to build-up arrears on external payments despite prudentmacroeconomic policies, which have led to severe compression of imports. In October 1998,Pakistan was on the verge of defaulting on its obligations to its preferred creditors.
70. The program, which the proposed operation supports, aims to help Pakistan manage itsexternal finances at a critical time and accelerate at the same time implementation of thosestructural reforms that carry very large macroeconomic consequences, without which Pakistancannot get its economy back on a path of sustainable growth and minimize a risk of political andsocial crises of hitherto unknown magnitude.
71. To achieve the macroeconomic objectives set out under this program (see paras.17-19 andthe PFP for more details), including a build-up in gross official reserves to a minimum of US$1.3billion by end-June 1999 (equivalent to less than 2 months of imports) and US$1.7 billion byend-June 2000 (equivalent to 3 months of imports), the Government is determined to implementtight fiscal and monetary policies, move to a market-determined unified exchange rate by July 1,1999, implement comprehensive structural reforms, and mobilize external resources, includingthrough debt relief by official and commercial creditors.
19
72. The first step in resuming a normal level of activities and rebuilding confidence requiresthe Government to pay all its preferred creditors (US$400 million) before the EMF boardpresentation in January 1999 and clear end-December outstanding stock (US$630 million) ofarrears on current account transactions and payments on private debt in two installments, in linewith the programmed improvement in the availability of foreign exchange inflows, includingfrom foreign assistance. Accordingly, one half (US$198 million) of the stock of arrears oncurrent account payments and two thirds (US$156 million) of arrears on private external debtservice are scheduled to be cleared by end-March 1999. The remaining stock (US$276 million)of arrears on current account transactions and private debt is to be eliminated by end-June 1999.In addition, the Government has agreed to remove exchange restrictions on travel and educationand move to a de-facto market-determined exchange rate now. Full unification of the exchangerate system is due in July 1999. The authorities have also agreed to eliminate by March 1999 theremaining exchange restriction (thirty percent import margin) and reduce the maximum importtariff to 35 percent (from 45 percent) and the number of tariff rates to four (from five).
73. To secure the success of this strategy, significant up-front financial support is cruciaLPossible shortfalls in meeting the projected residual financing gap (after support frommultilateral institutions is taken into account), which is currently estimated at around US$3.5billion (see para. 75 below) for this fiscal year (including from expected debt rescheduling fromofficial bilateral and commercial creditors) will constrain imports or put undue pressures on theexchange rate. Both of these potential developments will adversely affect growth performance,with negative consequences for budgetary revenues, fiscal targets, and the protection of poor.Furthermore, restoration of private investment and capital flows will depend on return of marketconfidence. The balance of payments projections over January to June 1999 (Table 2) clearlyindicate that without the financial support from the multilateral financial institutions, Pakistanwill be forced to accumulate new arrears which would be in violation of its agreed reformprogram and its financing. With such support, Pakistan will remain current on its obligations tomultilateral institutions and clear all its outstanding arrears on current account and private capitaltransactions (as required under the IMF program) while meeting its minimum target level ofreserves of US$1.3 billion dollars by end-June 1999. Although the recently announced release ofUS$326 million (on account of payments against the F-16s) by the US Government should helpincrease international reserves, which stood at less than US$500 million (a large part of which isunusable) in mid-December 1998, a more sustained and rapid build-up of international reserveswould improve investors confidence and reduce the downside risks associated with delays inresumption of private transfers and capital inflows. This would also allow the government toimplement its planned reduction in import tariffs by March 1999.
74. The financing plan over the two fiscal years 1998/99 and 1999/2000 assumes:
* US$3.3 billion from international financial institutions (US$1.5 billion from the IMF, US$1billion from the World Bank; and US$700 million from the ADB).
* Possible rescheduling of US$3 billion in official bilateral debt and US$1.2 billion ofcommercial debt.
* Voluntary rollover of institutional deposits in commercial banks and the central bank ofUS$1.4 and US$1.2 billion in the next two years, respectively.
20
Table 2: Summary Balance of Payments1997/98 1998/99 1998/99
Use of Fund Credit 160 -74 -118 -192Financing Gap 0 3186 2385 5571
Probable Financing 2110 2110
Multilateral Disbursements 1710 1710Fund 860 860World Bank 550 550Asian Development Bank 300 300
Bilateral Disbursement 400 400
Residual Financing 3186 275 3461
End of year Gross Official Reserves 932 413 1340 1340Source: Bank staff and IMF ESAF/EFF projections.
75. Creditworthiness Indicators. Pakistan's creditworthiness is expected to graduallyimprove over the medium term. At end-1997/98, total external public and publicly guaranteeddebt (not including FCDs) stood at US$28.9 billion, or 46 percent of GDP. Total external debt toGDP is projected to rise to 59 percent by 2000, or even higher with Paris Club restructuring,before declining to 40 percent by the end of the next decade. The debt service ratio rose to 34percent in 1998/99 from 20 percent in 1989/90 and is expected to decline to 23 percent by 2008.Pakistan's exposure ratios remain within IBRD guidelines, except for debt service to preferredcreditors as a ratio of total public debt service. This ratio is estimated to reach 48 percent inFY99 (compare to the guideline of 35 percent), and 58 percent in FY01 before declining to 42percent in FY08. This ratio has risen to levels above the guidelines as a result of the sharpdecline in official bilateral flows since the end of the cold war and the Soviet withdrawal fromAfghanistan, a significant increase in flows from multilateral institutions, including the IMF, and
21
the expected rescheduling of official bilateral debt over the next three years. Pakistan's IBRDdebt service as a percent of total public debt service will rise to about 18 percent in 2000 beforefalling while IBRD debt service as a percent of exports of goods and services will rise to 4.1percent in 2000 before falling, and Pakistan's share of the total IBRD portfolio, now 2.7 percent(3.0 percent with guarantees), will fall to about 2.5 percent by 2008. Over the coming years,IBRD's share in financing should begin to drop as Pakistan's access to international privatefinancing gradually improves.
D. Benefits and Risks
76. Benefits. Besides helping Pakistan overcome its external financing crisis and restoreinvestors' confidence and creditworthiness, the proposed loan will support a major program ofreform to improve fiscal and financial governance. The program includes a deepening andmonitoring of reforms aimed at improved performance in collecting arrears, overdue andoutstanding amounts, and improvements in efficiency in three key sectors through: furtheracceleration in reducing non-performing loans due to the banking sector; implementation ofmeasures in the energy sector to restore financial viability; and steps for the tax administration toenhance tax collectability and accountability. Together, these measures imply an improvementin public finances of the Government and improved financial discipline for economic agents inthe economy.
77. The proposed loan will provide support for the Public Sector Development Program andSocial Action Program to protect the high priority public expenditures against the impact ofcrisis and potential shortcomings in public revenues. The Government has agreed to curbspending of autonomous agencies that impinge on government financing; and it has set up amechanism to assemble information and monitor spending of these agencies at one place. Thus,the program is expected to have positive effect on growth and social development in the long-term.
78. In sum the proposed SAL will assist the restructuring of its economy. The internationalfinancial system at large, will also benefit from restoration of viability to Pakistan's balance ofpayments.
79. Risks. The Bank's strategy in Pakistan carries high risks, and the year ahead is noexception. To re-engender business confidence, and to build a basis for economic growth and forpoverty reduction, economic reforms are needed across a range of sectors. In a strategy thatinevitably challenges existing economic interests, indeed the main risk is that political oppositionmay derail the pace and sequencing of overall macroeconomic and structural reforms needed. Inthe past, for example, private traders have staged strikes against widening of the general salestax, and WAPDA engineers have walked out in protest against restructuring and possibledownsizing. and it is possible similar protests could take place. A second risk stems fromPakistan's vulnerable starting point. With external reserves (net of very short term bridgefinancing) now at virtually irreducible levels, Pakistan's room for maneuver is almost nil.Already Pakistan has built up a large volume of bilateral and commercial external arrears,imports have been compressed and export potential lost. If Government is unable to carry forth
22
the agreed reform agenda, or if the global economic slowdown contributes to furtherdeterioration within Pakistan, Pakistan may have insufficient resources to service even itsmultilateral debts, possibly also leading to a situation where World Bank and other guaranteesmight have to be called.
80. In our view, the risks of not supporting the program are greater than the risk of failure.By agreeing to strong measures in the IMF and Bank-supported programs, the Government hasshown its willingness to tackle the identified problems. In addition, we will mitigate the risksthrough active dialogue with the authorities; by aiding the implementation of Pakistan'sESAF/EFF and other actions to re-establish business confidence, particularly to resolve issueswith the IPPs and by helping to strengthen financial discipline in power, banking and taxation.Our financial support will also catalyze similar support from the Asian Development Bank (forexample in supporting power sector reforms), and along with the IMF and ADB, the World Bankwill provide needed resources while Pakistan re-establishes a track record so that private flowswill once again come in substantial amounts.
V. RECOMMENDATION OF THE PRESIDENT
81. I am satisfied that the proposed loan would comply with the Articles of Agreement ofIBRD and I recommend that the Executive Directors approve it.
James D. WolfensohnPresident
By Caio Koch-Weser
Washington, D.C.December 28, 1998
Annex 1
From: Mohammad Ishaq Dar,Minister for Finance,Economic Affalrs and Statlstics.Tel: 9213204
9203687 Q' aP. c 440w)
D.O. No. 4Oos -FM/98 Islamabad, December 21, 1998
Mr. James D. Wolfensohn,President,Intemnatlonal Bank for Development and Reconstruction,Washington, D.C. 20433U.S.A.
Subject: STRUCTURAL ADlUSlMENT LOAN
Dear Mr. Wolfensohn:
1. INTRODUCTION
1.1. The government Is determined to build a solid basis for growth anddevelopment In the future. For this we Intend to take measures to improve efficlency andgovernance In delivering the public services such as -basic educadon, prlmary health andpublic Infrastructure.
1.2. We believe that good governance requires strong Institutions, clear rules andregulations, respect for the law and the will to apply these rules, regulations and laws acrossthe board. I describe below a program to strengthen the institutdons, revise the laws, establishthe regulatory framework and make all these work in a falr and effective manner.
1.3. As our Prime Minister said In his address to the natiol on June 11 of this year,the country needs major structural, institutional and legal reforms for better economicmanagement and better govemance. Our economic policy fiamework relies on the privatesector as the engine of Investment and growth with the government providing support In theform of private sector filendly economic policies, sound physical Infrastructure, improvedsocial framework and a deregulated and efficient economy. A lean, efflcient and wellfunctioning government working In a transparent manner Is die essential requirement forachievemenit of the social and economic objectives of the country.
-:2:-
1 .4. Immediately on taking office In February 1997, our government Initiated a far-reaching program of stabilization and refomi to accelerate growth, reduce Inflation andstrengthen the balance of payments. We prepared a three-year economic program for1997/98 through 1999/2000 In consultation with the World Bank and IMF. By the Springof 1998, the Implementation of structural and stabilization policies had begun to bear fruit.
Growth had accelerated, the flscal deficit and Inflation were falling, the balance of paymentswas improvlng and there were expectations for a sizeable lincrease of private capital Inflows.
1.5. The developments since May 1998 have Impacted the economy unfavorably.Roughly $7 billion of capital Inflows anticipated for the present year, 1998/99, were lost,creating an unsustainable resource gap. Over $4 billion of these were expected from privatecapital Inflows; the remainder were anticipated flows from official aid agencles andinteniational financial Instdtutlons that suspended some of their assistance. We had to takestrong measures to manage our economy.
1.6. We continue to believe that sound economic management requires goodgovernance. A culture of financial discipline is a pre-requisite for good governance. Severalsteps liave been taken to Improve financial discipline. I expect that during the currentfinancial year we will recover Rs 18 billion from loan defaulters, Rs 2 bIlilon from privatesector electricity arrears, an addidonal Rs 8 billion from reducing theft of electricity, Rs 8billion from overdue gas bills Inclusive of recoveries from WAPDA and KESC and Rs 7 billionfrom tax arrears. Of this, at least Rs 37 bililon (over one percent of GDP) will comedirectly from the public In 1998/99. In addition, we have cut the budget provision for lowpriority projects In the public sector development program by Rs 1 2 billion and have frozenapprovals of new off-budget projects that require any formn of government flnancIng-currentallocations, debt or contingent liabilities.
1.7. This creates the foundation for stronger public and private institutions withmuch better financial prospects for the future. In the banking system, our objective Is tor educe the stock of non-performing loans In absolute amounts, Instead of building them uprapidly, as happened In the years just before our government took offlce. WAPDA will beset on a commercial course, with the prospect of financial viability for the flrst time In years.Our gas companles will be able to pay their bills to the gas producers and other suppliers.The vicious circle of Interlocking public debt will shrlnk Into a diminishing spiral and
(t)4
i 'u l-uINL rrHA TO: 202 477 7352 JAN 11, 1999 6:36PM 0375 P.04
eventually disappear. Our tax administration will not only catch up with the backlog ofunpald taxes but will be able to Identify and tax very large number of addidonal taxpayers.Our public expenditure will be much leaner, with sliarpened priorities, Including a furthershift toward basic public goods-elementary education, rural health, roads, water supplies,and other public Infrastructure.
2. RECENT DEVELOPMENTS AND MACROECONOMIC FRAMEWORK
2.1. In 1997/98, Pakistan performed well In relation to the targets for the domesticeconomy. Real GDP grew by 5.4 percent (up from 1.3 percent In 1996/97), vlrtually asplanned, reflecting a favorable performance of agriculture, large scale manufacturlng, as wellas a recovery In other sectors. Infladon fell to 7.8 percent (well below the target of 10.5percent) from 1 1.8 percent In 1996/97. The external current account defldt was halvedto 3.2 percent of GDP compared with the target of 5.1 percent of GDP. Macroeconomicdata up to end-May 1998 Indlcated that economic performance was on track for achievingthe economic targets for 1997/98. These targets were for the three-year period 1997/98-1999/2000: (I) an annual growth rate of GDP In the 5-6 percent range; (II) an Infladon rateof about 7 percent; (Ill) an external current account deficit (excluding offlclal transfers) Inthe 4-4.5 percent of GDP range; and (lv) an overall budget deficit of 4 percent of GDP In1999/2000. However, the impositlon of sanctions In May 1998 led to a shampdeterloration In the capital account of the balance of payments. External payments arrearshave accumulated to US$1.6 billion. Imports had to be drastically cut back, resulting Inadverse effects on the growth of the economy and business activities.
2.2. The slowdown In growth and the compression of Imports adversely affectedbudgetary revenues. Our Govemment took addidonal fiscal measures-a 25 percent IncreaseIn gasoline prices, revised telephone tariffs and cuts In development expenditure--amountingto over one percent of GDP. Nevertheless, the budgecary deficit widened In the first quarterof 1998/99 (although It Is now expected to remain within the program ceiling for the yearas a whole). In addition, the financial perfomiance of the public sector banks and publicutilltles-Water and PowerAuthority (WAPDA), Karachi Electricity Supply Company (KESC)and the natural gas distrbution companies-have suffered from Inadequate bIllilng and lowcollections of amounts due. The govemment's reform progranm described below seeks to
e-Kum:OMNIFAX TO: 202 477 ?352 JAN 11, 1999 6:36PM #375 P.05
address these govemance problems, restore macroeconiomic balance, and Implement a far-reaching structural reform program to restore the growth momentum over the medium-term.As there will be adjustment palns In terms of lower growth and higher Inflation, we will takemitigating measures to minimize the adverse effects on the poor.
2.3. The macroeconomic objectives for 1998/99-2000/01 are: (1) Increasing realGDP growth from 3-4 percent per year during 1998/99-1999/2000 to a medium-termrange of 5-6 percent; (ll) reducing Inflation steadily from about 11-10 percent per year In1998/99-1999/2000 to about 6 percent In 2001/02; (111) contracting the extemal currentaccount defidt (excluding officlal transfers) from 3 percent of GDP In 1998/99 to less than1.5 percent of GDP In 2001/02; and (lv) reducing the flscal deficit from 5.5% of GDP In1997/98 and 4.3% in 1998/99 to 3.3 percent of GDP In 1999-2000.
2.4. To underpin such objectives, gross capital formation would need to Increase byat least one percentage point of GDP In 2001/02 from less than 15 percent of GDP In1998/99, largely reflecting a recovery In private sector investment. To support higherInvestment rates7and accommodate extemal adjustment, gross national savings would needto rise from about 12 percent to about 16 percent of GDP during the same period, largelyon account of Increased public sector savings.
2.5. Fiscal adJustment will be the key to achieving our macroeconomic objectives.A stronger budgetary posidon I consistent with the need for Increased resource availabilityto the private sector and with the need to reduce the vulnerability associated with the largestock of public debt. To achleve the fiscal target, In additlon to measures alreadyincorporated In the June 1998/99 budget, and those bilplemented In July, we Intend toadopt the following measures: (I) raising the rate of General Sales Tax (GST) from 12.5 to15 percent and extending the GST to services; (11) reducdon in non-productive expenditures;(Iii) strengthening the financial positlon of WAPDA and KESC; (Iv) a reduction In the federalsubsidy on wheat; and (v) a lowerlng of the budget appropriadon for several components ofnon-interest current expenditure. In 1998/99, the government Is also committed to maIntalnthe level of the budgetary Public Sector Development Program (PSDP) at Rs. 98 billion (1 1percent lower than Inidally budgeted) while protecting allocatlons for high-priority projectsand baslc social servkes under the Social Action Program (SAP).
-:5s:-
3. STRUCTURAL ADJUSTMENT POLICIES
3.1. Our Govemment's Policy Framework Paper presents a comprehensive programof macroeconomic and structural refornms which we Intend to Implement over the programperiod. A crucial sub-set of these Is discussed here-banking, tax administradon, power andnatural gas and public expenditure. These are die areas of intensive dialogue between theWorld Bank and the GOP leading toward long-lasting structural reforms.
3.2. The medlum-term vislons for these sectors are as follows:
3.2.1. Banking-We Intend to have a largely private banking system that Is operatingunder rigorous banking regulations that meet intemational standards of capital adequacy; loanclassiflcation and provisioning; loan concentration and exposure limits; and accounting andauditing without public or private abuse In mobilizing and allocadng flnancial resources.
3.2.2. Power-We Intend to develop an elecuic power system that Is comprised ofautonomous, financially viable, and efficIendy operatedentitles for generation, transmission,and distribution govemed by an Independent regulatory authority. There will be a growingrole for the private sector. WAPDA's power functdons will be separated from WAPDA'sWater Wing, and Its 11 thermal generatlon units, transmission assets and elght AreaElectriciy Boards would be converted Into 12 limited conmpanies, of which eight would bedIstribution companies, three would be generation companies and there would be a NationalGrid Company. The remaining WAPDA will be responsible for the development of Pakstan'swater resources and hydel generadon. The Karachli Electric Supply Company (KESC) andall of WAPDA's assets, except the Natlonal Grid Company, about whkh a decision will bemade later, will be privatized as soon as feasible.
3.2.3. Natral Gas-We Intend to creaEe a natural gas exploration, development,productlon and distrIlbudon system with good financial performance, largely In private hands,with the Oil and Gas Development Corporation (OGDC), the Sul Northem Gas PrivateLimited (SNGPL) and the Sul Southem Gas Company (SSGCL) privatized, with a public,autonomous Natural Gas Regulatory Authority issuing licenses for exploradon, productionand distributdon, and regulating the well-head and recall tariffs.
(C)M(
3.2.4. Taxadon-We Intend to develop an autonomnous, effMclent and equitable taxadministration wlth a well-functioning Pakistan Revenue Authority (PRA) that progressivelyralses the tax/GDP ratio by extending the general sales tax (GST) and Income tax base tomore taxpayers while reducing taxes on foreign trade; and increasing the yield of provincial
agricultural taxation by reducing exemptions, updating assessments and raising the rates.
3.2.5. Public Expendlture-We Intend to implement an expenditure policy and
practice that prioritizes public Investment; subjects both budget and autonomous agencyspending to rigorous appralsal and overall macroeconomic spending ceilings; rationalizesspending on personnel; reallocates budgetary resources toward high-priorty and essentialoperating and malntenance expenditure; provides adequate budgetary allocations for basicsocial services In the Social Acdon Program (SAP); and Improves the planning and monitoringof budgetary expenditures.
3.3. Our main mnacroeconomic problem has been Inadequate revenue mobilization.In addition, there were problems In payments of loans, taxes and utility bills All together,these areas are the main sources of leakage of government resources that need to be stemmedto create a govemment that works well. This Is our prmary challenge.
3.4. Banking Sector
3.4.1 . Our government Implemented with World Bank support far-reaching reformsIn the banking sector during 1997/98, which improved financial discipline considerably. Theprogram achleved success in Insulating the nationalized commercial banks (NCBs) anddevelopment finance Institutions (DFls) from undue outside interference and effecdivelycontrolling operating losses. It stemmed the flow of bad loans In the NCBs and DFIs. Itenhanced banking supervision authority In the central bank (SBP) and strengthened Itsregulatory functions. It promoted market integration and compedtion. It improved legal andjudicial processes for enforcement of financial contracts. It adopted loan recovery legislationand strengthened the banking court system.
3.4.2. The main objectives of these refoilis are to Improve the health of the bankingsystem, Increase the efflclency of flnanclal Intermedlation, enhance competition throughprivadzation of the Nationalized Commercial Banks (NCBs) and Development Flnance
FROM:O1NIFRX TO: 202 477 7352 JAN 11, 1999 6:38PM #375 P.08
Institutions (DFIs) and further strengthen the legal system. The root cause of Pakistan'sbanking sector problems was undue Interference in the public sector banking Institutdons.Because of this, the stock of non-performing loans extensively grew durdng the last ten years.
3.4.3. The reforms thus far Implemented have managed to arrest the flow of new badloans. This was due to prudent lending policies of the new management of the NCBs andDFIs. The stock which had Increased to Rs. 146 billion as on June 30, 1998, from Rs. 128bililon as on June 30, 1997, (mainly due to the uncovering of bad loans previously hidden)has since June remained at that level. While the legal and judicial process has beenconsiderably strengthened, further improvements are planned to allow timely disposal of casesand for recoveries through the court process. To address these problems the current refonnsare focused on (1) reducing the stock of non-perfomilng loans; and (II) Improving theadmInistrative process for recovery of non-performing loans and functioning of the bankingcourts.
3.4.4. The NCBs and DFis have made significant progress In reducing the stock ofNPLs wlth cash recoveries of Rs. 10.4 billion for the period of June through November1998. We expect this to reach around Rs 12 billion by the end of December. The StateBank of Pakistan has put the banks on a three year program with specific targets for cashcollections and for reducing the overall level of NPLs. The goal Is to reduce NPLs to 10percent or less of their outstanding loan portfolios.
3.4.5. The recovery process considerably Improved with the amendment of the LoanRecovery Act of 1997 and the establishment of 34 banking courts. Nevertheless, theprocess of execution of cases remains weak. Therefore, the govemment in consultation withthe banks has agreed to a set of administrative measures to simplify the procedures for thesale of mortgaged property, after a decree Is obtained and hence accelerate loan recovery.These Include: (a) indimadng an approved panel of public aucdoneers to the banking courcsto assist in the sale of propertles belonging to judgenient debtors; and (b) providing guidelinesfor use by the banking courts restricting the number of times a property can be put up foraucdon In cases where the same property Is required to be put up for auction more than oncebecause of disputes arlsIng as the value of the bid obtained, all with a view to facilitatingrecovery by financlal InsdtutIons of debt In default.
FROM:OMINIFAX TO: 202 477 7352 JAN 11, 1999 6:39PM t375 P.09
-:8:-
3.4.6. The program, however, Is far from complete. The permanent solution toPakistan's banking sector problems will stem from achieving corporate govemance throughgenuine privatlzatlon of banks and financial insdtutions, supported by extemal governancefrom an effecdve regulator and supervisor, competiEdve markets and a well-functdoning legaland ludidial system. When the banking system is privadzed, the country would need a depositInsurance scheme to protect small depositors and contain the cost of any bank failure In thefuture. With World Bank-funded technical asslstance, the State Bank Is now engaged Inrestructirlng of the financial Insttutlons wlth some form of govemment ownership andpreparing them for privadzation within the next two years. We will approach the Bank toprovide a second banking sector adjustment loan to help finance the restructuring costs of thebanks.
3.4.7. Under the Prlme Minister's Natlonal Agenda, the govemment has launched twomajor initlatives to enhance opporunitdes for self-employment and for development of smalland medium-size enterprises ln Pakktan. The major thrust of these inidatives Is to facilitateaccess of small businesses to bank credit, In particular focusing on the neglected geographicalareas and small trade and Industry. Cognizant of the need to further enhance the capitalstrength and the quality of loan portfollo of the banking system, the govemment Is committedto ensure that credit extension under such schemes will be left to the lending Institutdons tobe Implemented In a professlonal manner consistent with the prescrlbed prudentlal standardsand subject to usual loan evaluadon procedures of these institutions.
3.5. Taxation
3.5.1. The Government has developed a tax reform program comprising both policyand adminirative refoms. The GOP alms to raise tax revenue by one percentage polnt ofGDP from a current level of 1 3 percent, despite furtlier reductions In custom tariffs, over thenext two years. It Is putting in place a tax administration which Is more efficlent andresponsive.
3.5.2. The Central Board of Revenue (CBR), a govemment department, will beconverted Into an autonomous body-the Pakistan Revenue Authority (PRA). The PRA willbe largely free from the curnt clvil service compensation or recruitment policies. PRA willbe provided with resources to acquire and malntain suitable facilities, equipment, and
lu. did 44 (YeJ52 JAN 11, 1999 6:39PM #3 P.10
supplies. The underlying objecdves of the refomi are to Improve service to the taxpayer,ensure equity and faimess, simplify procedures and processes, while maintalning a credibleand effective control on tax evasion. The tax enforcement program Is being strengthenedwith a more effective tax registration program, an Infotmation exchange program, betteradministration of the taxpayer identificatdon numbers and a strengthened tax audit regime.Twenty tax tribunals have been approved; seven are fully staffed and have started functioningto speed loan recovery.
3.5.3. Slgnlficant progress has been made over the last two years In reforming theGeneral Sales Tax (GST) Into a modern, broadly-based value-added tax. Importantamendments to the 1990 GST Act were Imroduced In June 1996, expanding the horizontalcoverage at the manufacturing and Import stages, removing excise-type features, andestablishing a tumover threshold for registration. This was followed by major ImprovementsIncluding compulsory registradon of importers, wholesalers, and ditsibutors, and abolitionof replacement Invoices; effective extension of the GST to textiles and steel sectors of theeconomy; Improvement In refund procedures; and strengchening of the legal provislons todeal with dellnquent tax payers, curb tax fraud, and minimize evasion. Also, GST rates wereunified Into a single standard rate of 12.5 percent In the 1997/98 budget. These rates havebeen Increased to 1 5 percent. Bullding on these achlievemencs, the next steps In GST reformwill involve removing some of the exemptions and extending It to the retail stage.
3.5.4. Steps almed at expanding the base of the Income tax have been taken. Theconcept of taxable Income has been redefined to Include perquisites In cash and In kind, andcertain deductions have been reduced. With regard to the rate structure, personal Incometax rates have been reduced to 20 percent maxlmum (from 35 percent) while the rates ofcorporate tax have also been reduced The govemnient will undertake a comprehensiverevlew of the Income tax system widt a view to Identifying steps aimed at impartingsimpllflcation and neutrality.
3.5.5. At the provincial level, the govemment will take steps to Increase substantiallyrevenue from the agricultural taxation To this end, It Is committed to Increasing the revenuetarget for agricultural tax revenue from Rs 2.5 billion In 1998/99 to Rs 3.5-4.00 billon In1999/00, an Increase of about 50 percent. The government Intends to reach agreementwith the World Bank on a package of measures to widen the base (by updadng assessments)
K?,.
rUli- UMNIt-HX TO: 202 477 7352 JAN 11, 1999 6:40PMt 375 P.11
-:10:-
and lincrease rates. In additdon, the government will seek agreement with the provinces, inconsultation with the World Bank, on a strategy to rehabilitate and upgrade the systdn ofland recordatlon, land assessment, distrct courts, and tax collection. These reforms will aimat raising steadily the level of revenue from agiicultural taxation to 0. 3 percent of GDP overthe medium term.
3.5.6. Pakistan has made signiflcant progress in liberalizing Its trade regime In recentyears. This has Included phasing out all quantitative restrictions on exports and mostrestrictions on Imports, elimination of export taxes, and reductlon In tariffs and theirdispersion. Building on this progress, the tariff reform is oriented toward further lowering andrationalizing the rate stucture as well as merging most of the remaining concesstonal rateswith the stawtory regime. In early 1997, the maximum tariff was brought down to 45percent (from 65 percent), the number of slabs was reduced from 14 to 6 and the 10percent regulatory duty Introduced In October 1995 was eliminated, except for a few items.Foliowing a review of the performance of customs dudes and of the evolution of Imports, themaximum tariff rate will be lowered to 35 percent by March 1999, with a simultaneousreductlon In the number of slabs to five. It is envisaged that the maximum tariff rate will befurther reduced to the 25-30% range by June 2000.
3.5.7. We have recently submitted an act cleating the Pakistan Revenue Authority tothe Nadonal Assembly. For effective monitoring and control of tax evasion, CBR has staitedwork on centralizing and creating a unifled tax number (Comiimon Tax ldentdfler-CTI), whichIt will test out by the end of 1998. It Intends to Increase the number of taxpayers to 1.6million by December 31, 1998 and to 1.8 million by May 31, 1999. The Law MinIsry willstrengthen tax tribunals by Increasing the number of fully functioning tribunals from seven tofifteen by the end of 1998 and to twenty by the end of May, 1999. In addition, thegovernment has embarked on a program to recover tax arrears and has collected Rs. 3 bil(lonfor the period of June 30, 1998 to December 31, 1998.
3.6. Power Sector
3.6.1. A very Important goal of my government Is to modenize, expand and Improveelecuicity seivices, accelerate the collections of arrears, eliminate excessive losses and theft
-:1 1:-
and Improve customer services. These objectives can only be achleved through fundamentaloverhaul of WAPDA and KESC, and strengthening reguladon.
3.6.2. WAPDA has made Important contributions to Pakistan's economicdevelopment. However, as presently organized, WAPDA can neither be cost-efficient norImprove customer service.
3.6.3. The Govemment, therefore, has decided to accelerate Implementation of thefollowing restructuring plan to reform the power sector:
3.6.4. WAPDA's Power Wlng would be separated froni Its Water Wlng.
3.6.5. The power wing would be spilt Into eight distrlbution companies, threegeneration companies and one nadonal grid company. Each company would operate like anIndependent commercial company with Its own Board of Directors, employees and bestavailable professional management This would restore flnancial viability, Improve efficlency,make companies more accountable to customers and prepare them for privatizatlon.
3.6.6. A new specialized company--Pakistan Electric Power Company (PEPCO)--hasbeen established to Implement this plan with the help of WAPDA's management.
3.6.7. Over the next few years, the distribudon and generation companies, and KESC,would be privatized. Privatizatlon Is necessary to Improve efclency and customer service,and mobilize new Investment in the sector. While privatizing, the Interests of employees andconsumers would be fully protected.
3.6.8. The regulatory authority-National Electric Power RegulatoryAuthority-will bestrengthened and provided full autonomy for taiiff settng and other enabling reguladons.
3.6.9. The Govemment Is committed to ensuring a healthy climate for privateInvestments In the power sector. Toward this end, the Government has agreed with theWorld Bank on an Orderly Framework to resolve all outstanding IPP issues. The OrderlyFramework entails separating commerclal and contractual Issues fiom corrupdon Issues.Implemeitation of this Orderly Framework Is now well under way. Specifically, a new
FROM:OMNIFAX TO: 202 477 7352 JAN 11, 1999 6:42PM #375 P.13
*:12:-
committee, with majorlty private sector participadIon, has been set up to handle discussionson commercial and contractual matters with IPPs. The Ptivate Power and InfrastructureBoard (PPIB) Is recruiting flnancial and legal experts, to support the IPP committee In itsnegotiatdons with the sponsors. The Government has concluded voluntary agreements withthe IPPs to withdraw the Notices of Intent to Terminate (NITs) or Notice of Termilnatlon(NT) which were Issued in July 1998. These IPPs have also been Invited to discusscommercial issues with the new IPP committee. As well, WAPDA has providedinterconnections wherever so needed.
3.6.10. Once the restructuring plan Is fully inmplemenited, the power sector will belargely privately owned. As a result of efficlency improvements, elimination of theft andgreater Investments, consumers would be able to get reliable electricity at the lowest possiblecost. This would also enable expansion of coverage to areas which do not have electricity,and improve productivity and service conditions of employees of power companies. Thesector will be efficiently regulated to protect the genuine Interests of consumers and powercompanies. Last, but not least, timely Implementatlon of this plan Is critical to restoringfinancial health of the country and accelerating economic growth.
3.6.11. To Implement this plan, we have appointed new management for WAPDA andPEPCO, and shortly the WAPDA Act would be amended. In addidon a Policy Committee,chaired by the Federal Minister for Water and Power, has been established to oversee andgulde the Implementation of the power sector reforms.
3.6. 12. WAPDA will carry out a vigorous theft and loss reductlon campaign, which Isexpected to Increase revenues by around Rs 8 billion during this current fiscal year. IIaddition, the federal and provincial governments have largely cleared up their past bills withWAPDA and from now on will pay tihelr electricity bills as and when they become due.
3.7. Natural Gas Sector
3.7.1. The agenda for reform In this sector Includes further Improvement In thefinancial discipline of the gas distribution companiles, reduction in the stock of overdue billsand Improvement In the legal basis for gas tariff setting and collections. The steps Include:(I) completion of cash recovery from the stock of overdue bills from the private sector,
FROM:OMNIFRX TO: 202 477 7352 JAN 11, 1999 6:42PN p375 P.14
*:13:-
reduction in WAPDA and KESC arrears and keeping the payment of gas bills by WAPDA andKESC current; and (in) enactment by the National Assembly of the Natural Gas RegulatoryOrdinance and (IlI) make tampering with gas meters a crime. Our ultimate goal Is to see thenatural gas seccor In private hands.
3.7.2. One of the problems facing the gas sector is the Inability of the two gasdistribution companies, Sul Northern Gas Pipelines Limited (SNGPL) and Sul Soutlher GasCompany Llmited (SSGCL) to enforce collection of overdue bills. As of June 30, 1998, thetotal overdue bills for SNGPL and SSGCL amounted to over Rs. 1 5.5 billion, comprising Rs.7.2 billion from WAPDA (46 percent), Rs. 3.9 billion from KESC (25 percent), Rs. 1.0billion from govemment agencies (6 percent) and Rs. 1 .5 billion from private customers ( 1 0percent). In June 1998, a vigorous drive was launched to inprove recoveries, disconnectdefaulEers and eliminate gas pilferage In the couinity.
3.7.3. As of December 1998, the gas companies have been successful In recoveringabout 60 percent of the overdue amount from government agencies and private customers.Recoveries In the first two months of the program were very rapid; the pace has since fallenoff, as the remalnder of the arrears are more difficult to collect. Over 95% of arrears byindustrial users have been cleared. The remaining arrears are due by a large number ofsmaller consumers. We Intend to strengthen the hand of the collection authorities withtougher penalties and collecdon procedures under the law.
3.7.4. Due to the liquidity problems faced In the power sector, only about 1 5 percentof recoveries have been made from WAPDA and KESC. SNGPL and SSGCL havecumulatively recovered a total of Rs. 3.1 billion and conducted 32,689 ralds leading to 155arrests, 796 FIRs and 45,877 disconnections of suspected thefts. We expect the gascompanies to collect Rs 1.6 bIllilon of arrears from the private and govemment sectors byend-December 1998 and clear up virtually all recoverable amounts from these by end-May,1999.
3.8. Public expenditures
3.8.1. Our public expenditure policy will emphasize greater effectiveness anddevelopnient Impact. The govemment Implemented measures to contain the level of
expenditures and rationalized Its Investment program In 1996/97 and 1997/98. The growthin expenditures on general administratlon and subsidies has been stopped In nominal terms.Low-priority expenditures of the development budget have been sharply reduced. During1998/99 we are faced with the need for substantial further fiscal adjustment; the governimentwill again cut the size and Improve the composidon of development spending.
3.8.2. SpecIflcally, It will:piioritize and scale back the public investment program In order to help reduce the fiscaldeflcic and Improve the quality of pubic Investment; the PSDP financed by the budget hasbeen cut from Rs 1 10 billion In July to Rs 98 billion-an1 I I percent decline by stopping alarge number of new projects and by reducing/eliminating allocations for lower-priorityongolng projects;- reallocate budgetary resources to protect high-prlority uses such as baslc socialservices and other essential non-wage operation and malntenance and high-retumdevelopment projects;
-withhold approval and not undertake new projects sponsored by autonomouspublic agencies which Involve any government fRnancing-budget allocations, debt, guaranteesor condngent llab)iides for the government;
- rationalize spending on personnel, Initially by reallocating staff In accordancewith staffing needs and reducing Identifled surplus staff In govemment departmients and otherpublic sector entities;
- restructure ministries and attached departmenits and take Initial steps In civilservice reform; and
Improve the planning and monitoring of budgetary expenditures.
3.9. Social Action
3.9.1. The federal and provincial governments have recentdy re-conflrmed thelrconEinuing commitment to the Social Action Program, wlich seeks to expand and Improvethe delivery of elementaey education, basic health, family planning and rural water supply to
FROM:OMNIFAX TO: 202 47? 7352 JAN 11, 1999 6:44PM #375 P.16
the people. We have worked hard to Iron out details at the operatlonal and flnanclal levelsto minimilze the disruption caused by the weaker macroeconomic circumstances we face. Wehave agreed, following Intensive discussions at the provincial level and Involving SAP donors,to protect a minimuni level of Rs 56.5 billilon In SAP spending, including at least Rs 5.5billion on critical qualIty-enhancing nonsalary recurient expenditure, for 1998/99, and toreestablish a medlum term framework for SAP expenditures by the end of this fiscal year.
3.9.2. We have revised all our operational plans and Insdtuted an effective process ofreviewing quarterly monItoring reports. We will take steps at the federal and provincial levelsto limit transfer of managers and staff experlenced with SAP and we will ensure that criticalvacant posts are filled.
3.9.3. Despite the flnancial crisis, we will make substantial progress In SAP this year.We will protect SAP expenditures relative to other public expenditures. We will protect SAPexpenditures on the critical, quality-enhancing and public health components In absoluteterm. We will focus on key elements of the program that do not require substantial financialresources but that Improve quality, efficiency and governaiice. The provincial and federalgovernments will revise their expenditure programs to take account of the resource shortfall,and by mid-year revlew these programs wlth the World Bank to conflrm that SAP prioritlesare being maintatned.
3.9.4. We will protect the absolute levels of spending on the critIcal non-salary Itemsthat raise quality In education and health-textbooks, school supplies, repalrs, medicalsupplies, In-service training and funds to ensure mobility for supervisors to backstop fielddeliveiy staff. We will also protect key federal programs essential for pubilc health, and thecomponents of the rural water supply and sanitation programs most needed to acceleratetransfer of schemes to communitles. We will reinfoice this by ensurlng that theItems/materials so needed reach the facilities In time. It will be ensured that funds for thispurpose are made avallable by the Provinces on time. We will also Improve the compositionof these expenditures and to monitor delivery and Impact at the facillty level.
3.9.5. The focus on qualiky, effectiveness, eMciency, governance, communityparticipation and capacity bullding Is even more appropriate today than when we firstdesigned the SAP with these features. We will ensure that measures are put In place to use
FROt1:OMNIFPX TO: 202 477 7352 JAN 11, 1999 6:45PM 4375 P.17
-:16:-
our scarce resources better, especially those related to Improvements In procurement, siteselecton, recrultment and reducdon In absenteeism. These measures will be Incorporated Inthe operational plans for effective implementation. Consultants to support the federal andprovincial govemments In procurement and In financial management will be recruited and putIn place at the earliest possible date.
4. The reform program outlined above Is an ambItlous one. It will demand thegovernment unrelenting effort to Implement It. If any obstacles arise, we would redouble ourefforts to get the lob done. We believe this program Is a strong one and deserves the WorldBank's full support.
M1-0. Ml-R. Mi-P.Ensure macroeconomic Implement adequate Agree with the World Bank and IMF onbalance. macroeconomic framework. adequate macroeconomic framework for
1998/99, and beyond.
Banking --_-_____ ___
Bl-O. Bl-R. Bl-P.Improve financial Accelerated cash recovery from Collect Rs. 12 billion in cash between June Idiscipline and reduce stock of classified loans, 1998 and December 3 1st, 1998.stock of non-performing preferably from the largestloans. defaulters.B2-0. B2-R. B2-P. .Enable simpler Create a modem and simple Take a set of administrative steps to facilitateforeclosure on collateral collateral foreclosure system to recovery by financial institutions of debt into facilitate recovery of facilitate gaining of control of default and hence accelerate loan recovery.debts in default. security and recovery of debt by These include: (i) issuing an approved panel of
financial institutions. public auctioneers to banking courts to assistin the sale of properties belonging tojudgement debtors; and (ii) issuing guidelinesfor use by the banking courts in restricting thenumber of times a property can be put up forauction in cases where the same property isrequired to be put up for auction more thanonce because of dispute arising over the valueof the bids obtained.
Power . .
Pl-0. P1-R. P1-P.Improve Management of Change management. Executive Order empowering PEPCO toPower Sector. manage the Reform Program and act as
owner's representative in corporatized entitiesissued.
.2-.. ... . ..... .... .P2-R. P2-P.Improve legal Provide legal framework to Introduce amendments to the WAPDA Actenvironment to facilitate implement restructuring into the National Assmeblyl to allow for: therestructuring and program. corporatization of the National Grid Companyprivatization of NGC); and provide evidence of the legal basisWAPDA. to all (a) transfer of consumer contracts from
WAPDA to the DISCO's; and (b) transfer ofWAPDA staff to the corporatized entities.
P3-0. P3-R. P3-P.Make use of independent Provide IPPs supportive Implement agreed orderly framework forpower producers (IPPs). environment. resolving Independent Power Producers(IPPs).
Annex 2Page 2 of 3
Objectives Reform Measures Prior Actions
P4-0. P4-R. P4-P.Commercialize Embark on and sustain loss and * WAPDA to design and begin toWAPDA's operations. theft reduction campaign. implement vigorous loss and theft
P5-0. P5-R. ~~~~~~~~P5-P.Improve financial Accelerate collection of Clear up federal and provincial governmentdiscipline and accelerate outstanding bills (90 days to 2 arrears .collection of overdues. years). * Federal and provincial governments to be
current on WAPDA bills from July 1onwards.
P6-0. P6-R. P6-P.Use regulatory process to NEPRA to become fully * ensure that the Ministry of Water andset power tariffs. operational as an independent Power issue a statement on the
regulator. Government's socio- and economic-policy objectives regarding tariff settingto NEPRA.
* ensure that NEPRA has issued under theNEPRA Act its Tariff Standards andProcedures Rules, and other terms andconditions related to generation,transmission and distribution by licensees
* WAPDA/DISCOs to submit acomprehensive Tariff Filing to NEPRA
-_________________ Natural GasNG1-0. NG-R. NG1-P.Improve financial Accelerate cash recovery from * Collect Rs. 1.6 billion of overdues fromdiscipline and reduce stock of outstanding bills. government and private consumers,stock of overdues. between June 12th, 1998 and December
Improve legal basis for Legislate new regulatory and Natural Gas Regulatory Act which strengthengas tariff setting and enforcement mechanisms. the collection of gas tariffs and the de-collections. politicization of tariff setting to be submitted
to the National Assembly.
2l11i 15 N
TI-0. T1-R. Ti-P.Recover tax arrears. Embark on tax arrears Collect Rs. 3 billion of tax arrears between
Establish a professional Give the Pakistan Revenue PRA Act to be submnitted to the Nationaltax administration Authority legal standing. Assembly by December 31, 1998.service.
Annex 2Page 3 of 3
Objectives Reform Measures Prior Actions
T3-O. T3-R. T3-P.Expand the tax net. Increase the number of Increase numbers of income taxpayers ID to
T4-O. T4-R. T4-P.Improve legal framework Strengthen and increase number Increase number of fully operational Taxfor tax collections. of tax tribunals. Tribunals from 7 to 15 by December 31.
1 0---. --> - :-- - - Public Sector ExpenditurePSDP-O. PSDP-R. PSDP-P.Adjust the size and Reduce the size and re- * Government reduces the size of therevise content of prioritize the 1998/99 and budgetary PSDP to Rs 98 billion in linebudgetary and non- formulate the 1999/2000 public with the macroeconomic framework, andbudgetary public development expenditures plan specifies the composition of the budgetarydevelopment to fit within the agreed envelope PSDP in line with developmentexpenditures to fit and protect the core program. priorities.*resource envelope and * Government specifies and adjusts size andnational priorities. composition of non-budgetary PSDP in
line with macroeconomic situation andsectoral priorities. The Governmentagreed to withhold approval andexpenditure on any new projects byautonomous public agencies that involveany government financing through cash,debt, guarantees or contingent liabilities.
....... ... .... .. ..I.. .. .... .... . ......"1 1 1 ............ ......... ..... ............ ......... ....................... ....... .* SAP-O. ~~~~~SAP-R. SAP-P.Provide adequate Provide funds for SAP as Provide federal and provincial funding tofinancing to implement agreed with provincial meet agreed levels of 1998/99 expenditureSAP. governments, IDA and donors. and ensure provincial ways and means
position will permit substantial non-salaryexpenditures for education and health.
a. If GDP components are estimated at factor cost, a footnoote indicating this fact should be added.b. "GNFS" denotes "goods and nonfactor services."c. Includes net unrequited transfers excluding official capital grants.d. Includes use of IMF resources.e. Should indicate the level of the government to which the data refcr.f. "LCU" denotes "local currency units." An increase in IJS$/l.CIJ denotes appreciation.
Population (Y.) 2.8 1.9 2.1 GLabor force (%/6) 3.2 2.2 2.3 GNP Gross
per < primaryMost recent estimate (latest year available, 1991-97) capita enrollment
Poverty (% of population below national poverty fine) 34Urban population (% of total population) 22 27 28Life expectancy at birth (years) 61 62 59Infant mortality (per 1,000 live births) 87 71 78Child malnutrition (% of children under 5) ., 63 61 Access to safe waterAccess to safe water (% of population) 60 77 71Illiteracy (% of population age 15+) 62 51 47Gross primary enrollment (% of school-age population) 65 99 91 Pakisan
Male 80 109 100 Low-income groupFemale 49 89 81
KEY ECONOMIC RATIOS and LONG-TERM TRENDS
1976 1986 1996 1997Economic ratios'
GDP (US$ billions) 13.3 31.9 64.7 61.7Gross domestic investment/GDP 17.2 18.8 18.7 17.4 TradeExports of goods and services/GDP 10.7 12.3 16.5 16.2Gross domestic savings/GDP 7.9 10.9 14.2 12.4Gross national savings/GDP 11.0 16.4 15.0 14.1
Current account balance/GDP -6.2 -2.4 -6.5 -5.8 Domestic vInterest payments/GDP 1.0 1.1 1.4 1.6 Savings InvestmentTotal debt/GDP 51.0 46.6 44.3 47.0 avigTotal debt service/exports 21.6 25.4 25 2 26.2Present value of debt/GDP 0.0 0.0 35.9Present value of debt/exports 0.0 0.0 194.3
Indebtedness1976-86 1987-97 1996 1997 1998-02
(average annual growth)GDP 6.8 4.7 4.7 -0.4 5.8 PakistanGNP per capita 4.4 1.2 1.1 -3.2 3.0 Low-income groupExports of goods and services 9.2 6.7 1.9 -6.5 5.0
STRUCTURE of the ECONOMY1976 1986 1996 1997 Growth rates of output and Investment (%)
Private consumption 5.2 5.0 7.0 3.7 0General government consumption 8.0 1.8 6.8 -8.4 .10Gross domestic investment 7.5 3.9 5.4 -7.0 -20Imports of goods and services 3.9 4.7 13.6 -1.4 -Exports 0-ImportsGross national product 7.6 4.1 3.8 -0.6 I
Note: 1997 data are preliminary estimates.
The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete.
World Bank programCommitments 189 766 868 370 A - IBRO E - BilateralDisbursements 129 252 519 645 8 - IDA D - Other mutilateral F - PrivatePrincipal repayments 27 50 261 260 C - IMF G - Short-termNetflows 102 202 258 385 _
![A.I. Enterprises Ltd. and A.I. Enterprises Ltd. et …...[2014] 1 R.C.S. A.I. ENTERPRISES c. BRAM ENTERPRISES 177 A.I. Enterprises Ltd. et Alan Schelew Appelants c. Bram Enterprises](https://static.documents.pub/doc/80x56/5e918dac94e60f42b949e30a/ai-enterprises-ltd-and-ai-enterprises-ltd-et-2014-1-rcs-ai-enterprises.jpg)
