Background Paper by the Asian Development Bank

An Overview of Development Challenges Facing Pakistan and ADBs Strategy

Pakistan Development Forum Paris, 29 - 30 April 2002
Distinguished participants, on behalf of the Asian Development Bank, I welcome this opportunity to present ADB's observations on the development challenges facing Pakistan, and the key elements of ADB's development strategy for the country. Although GDP growth remained low in Pakistan in fiscal year (FY) 2001, primarily due to the effects of the drought on the agriculture sector, the Governments attempts to correct macroeconomic imbalances and stabilize the economy in 2001 were fairly successful, and the countrys macroeconomic indicators showed significant improvement. By end June 2001, the fiscal deficit had declined to the lowest level in over two decades, inflation was low, exports had started to grow, the balance-of-payments deficit had declined, and foreign exchange reserves were already building up. The events of 11 September 2001, however, threatened to seriously destabilize the economy and jeopardize the progress made thus far in macroeconomic stabilization and structural reform. ADB's response to these events reflected its commitment to partially mitigate the negative impacts of the regional conflict on Pakistans economy. The level of official assistance to Pakistan for 2001 was increased from a programmed level of $620 million to almost $1 billion. Data for the first six months of the current fiscal year suggests that due to the combined effects of drought, global economic slowdown, and continuing low levels of domestic and external investments, GDP growth in FY 2002 is likely to be some 3.5 percent compared to the target of 4 percent. Despite the projected low growth, Pakistan's economy appears to have withstood the shock of regional events relatively well, partly due to the support offered to the Government by the international community. In particular, the successful completion of the standby arrangement (SBA) and the agreement on the Poverty Reduction and Growth Facility (PRGF) with the IMF, the lifting of economic sanctions and resumption of bilateral assistance, greater access to the G-7 markets and the debt restructuring agreement reached with the Paris Club in December 2001 have made it possible for Pakistan to achieve sustained, high growth in a much shorter period than earlier thought possible, provided the Government stays the course of the reform agenda. While GDP growth may well be back on track by 2003, and may even reach the levels of the 1980s in the medium term, efforts will have to be made to ensure that this growth is pro-poor and broad based. As participants of this Forum are well aware, Pakistan's social indicators have lagged behind other countries with comparable levels of per capita GDP, in spite of the fact that the country has had relatively high GDP growth rates in the past. The tendency to neglect social sectors because of the national security focus of all governments in Pakistan has been reinforced by the social and economic structure of the country. In the last decade, economic growth has slowed significantly, and poverty is estimated to have increased such that a third of the population is now estimated to be below the poverty line. In these circumstances, bringing about an improvement in the level of human development requires a strong commitment on the part of the Government and its development partners. The
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recently organized Human Development Forum, sent a strong positive signal to the donor community in this regard, but the effort has to be sustained. Past experience of social sector programs, particularly the Social Action Program (SAP) suggests that while lack of resources is a serious constraint in the improvement of human development, mismanagement and other governance issues resulting in poor service delivery are a more pressing concern in Pakistan. For human development and poverty reduction in all its dimensions, it is imperative to address governance issues responsible for social exclusion of the poor, women, and minorities from access to basic services, poor public sector performance, endemic corruption, and the loss of trust by the citizens in public institutions. Consequently, the achievement of Pakistan's longterm development and poverty reduction objectives hinges on the success of the Governments wide-ranging governance reforms which are to be implemented in partnership with civil society institutions and the private sector. Improving governance is critical for the revival of economic growth. To revive growth it is necessary to create an environment conducive for private economic activity, and encourage domestic and foreign investment. That requires improvements in governance over a broad front including judicious implementation of macroeconomic stabilization policies, better management of public resources, establishment and enforcement of the rule of law, and a move to a less intrusive system of economic regulation. It is generally accepted that medium-term strategic goals to achieve the long-term vision for poverty reduction require a sharper focus on (i) improving good governance including peoples participation and involvement in public, corporate and financial sectors; (ii) generation of productive employment opportunities, and provision of suitable physical infrastructure for faster economic growth; and (iii) increasing allocations for social sectors, and improving delivery of basic social services to enhance human development. The key areas of ADB assistance have been defined, in consultation with the Government, around the shared strategic priorities of sustainable pro-poor growth, inclusive social development, and good governance. Good governance, including management of the development process, public resource and expenditure management, transparency and accountability of economic policies, strengthening institutions, systems and capacity, and promoting local participation and ownership is the primary thrust of ADBs poverty alleviation and development strategy for Pakistan. A two-pronged approach is envisioned. First, all interventions, such as support for public sector management reform, enforcement of female and child rights, promoting public/private partnerships in the provision of social services, the provision of basic services in rural and urban areas, and the development of an affordable social protection system, will be designed and implemented so as to complement overall governance reforms. Second, direct assistance for the Governments governance reform agenda will constitute a significant proportion of ADB assistance to Pakistan in the medium term. ADB will also help the Government to implement a range of reforms that have major implications for relations between the state and non-state sectors. ADB also aims to assist the Government in making devolution a success and improving service delivery of social infrastructure at the grassroots level. The activities to be supported include establishing decentralized financing systems, enhancing planning and delivery of selected social services (e.g., education, health, and social welfare), improving quality of primary education by supporting changes in governance, and improving municipal services in the context of devolution, with particular focus on services for the poor.

To encourage pro-poor growth, ADB will work with the Government to support structural reforms in key sectors including energy, finance and trade, agriculture and environmental management. ADB is supporting restructuring and privatization of loss making public utilities in the power sector, reform of the trade regime and export finance, and improved public debt management capacity. ADB will also continue to support the Governments efforts for development of indigenous energy sources such as natural gas and creation of an enabling environment to attract private foreign investment. In addition, the growth strategy will focus on the development of small and medium enterprises (SMEs) to encourage further employment generation and will support policy and regulatory reforms to encourage new enterprises, as well as the development of supporting institutions, infrastructure, business support services, and enhancing access to credit. In view of the key role of the financial sector in private sector development, and ADBs successful assistance for capital market development in the past, assistance will also be provided to extend capital market reforms for development of the debt market and sound contractual saving institutions and instruments, and the restructuring and privatization of selected state owned financial institutions. This should lead to the emergence of an efficient and dynamic enabling environment for the private sector. ADB supports the Governments strategy of ensuring that environmental issues are effectively addressed in physical infrastructure projects, particularly at the design stage. As part of the devolution of administration to the district level, environmental management is also being decentralized, and ADB will work with the Government to support capacity building measures at the district level. ADB will also support the Governments initiatives in promotion of sustainable, energy efficient and environmentally sound industrial development, and will actively assist in the development of renewable energy resources. ADB will also work with the Government to develop regional transportation networks and infrastructure for regional gas transmission and distribution systems. Given Pakistans low gender development index ranking, there is a n eed to actively promote womens participation in the workforce, government, and judiciary. In addition to mainstreaming gender in all projects, the Government and the ADB wish to ensure that growth of SMEs and agribusiness also helps to expand female employment opportunities. In addition, ADB will work with the Government to control crimes against women. ADB through its Pakistan Resident Mission has been working with the Government to improve the absorption of assistance provided through improved portfolio management. This is an area where serious efforts are necessary to rectify problems such as delayed startup of projects, weak project management, inadequate staffing and counterpart funds and lack of ownership of projects. The net outcomes of these deficiencies are substantial delays in realizing the benefits from investment projects and wastage of resources. The Pakistan Resident Mission is actively engaged in dialogue with the Government, both at the Federal and Provincial levels, relating to the reform agenda and improving project implementation and aid absorption to ensure that the objectives of ADBs assistance are realized for the betterment of Pakistan.