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COUNTRY REPORT

3rd quarter 1999

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Pakistan

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ISSN 0269-7173

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1

© The Economist Intelligence Unit Limited 1999 EIU Country Report 3rd quarter 1999

Contents

3 Summary

Pakistan

5 Political structure

6 Economic structure

7 Outlook for 1999-2000

13 The political scene

19 Economic policy

22 The domestic economy

22 Economic trends

22 Industry

23 Agriculture

24 Infrastructure and services

25 Foreign trade and payments

Afghanistan

29 Political structure

30 Economic structure

31 Outlook for 1999-2000

32 The political scene

36 Quarterly indicators and trade data

List of tables

9 Pakistan: forecast summary

27 Pakistan: external reserves

36 Pakistan: quarterly indicators of economic activity

37 Pakistan: foreign trade

38 Pakistan: structure of trade

39 Pakistan: direction of trade

List of figures

11 Pakistan: exports and imports

12 Pakistan: external balances

12 Pakistan: gross domestic product

12 Pakistan: Pakistan rupee real exchange rates


3

Summary

3rd quarter 1999

Pakistan

Civil-military relations may come under strain. Domestic opposition groupswill continue to agitate. Cracks in the ruling party may emerge. Sindh may facerising law and order problems. Relations with India will remain on hold, whilethose with the US may sour. The IMF’s patience will be tested by a failure tomeet most economic targets. Agriculture may boost GDP growth in 1999/2000,but industrial growth will barely accelerate. The trade and current-accountdeficits will widen. The rupee will continue to depreciate.

The military campaign against India backfired. The US government mediated awithdrawal by Pakistan. Mr Sharif has tried to claim a diplomatic victory, butthe domestic audience is not convinced. The opposition and various religiousparties have begun to agitate against Mr Sharif’s government. A new governorhas been appointed in Sindh. The MQM has come under attack as it beginstalks with the PPP. An editor has been the latest target of attacks on the press.Ms Bhutto has remained on the fringe

The IMF visit has been postponed. The 1999/2000 budget simplifies some taxprocedures. Ambitious targets for revenue and expenditure have been set.Pakistan has continued to resist the rescheduling of its eurobonds.

• Real GDP growth slowed in 1998/99. Inflation fell, and foreign investmentwas deterred by poor political and economic conditions.

• Industrial growth slowed. Production and export of cotton yarn and textilesslumped. Cement production rose and the automobile sector boomed.

• Agricultural growth was poor in 1998/99. Cotton output slumped; wheatand rice output fell; sugar production rose.

• The government’s row with Hubco has continued. The company has filedtermination notices against WAPDA. The army has led restructuring efforts atWAPDA and KESC. Privatisation has failed to take off. The big three banks haverecorded profits.

Imports and exports contracted in 1998/99. Imports may be picking up. Theexchange-rate system has been rationalised. New export incentives have beenintroduced. Foreign-exchange remittances may have fallen further.

Afghanistan

The Taliban will fight to take the 10% of the country that remains outside itscontrol. The Northern Alliance will struggle to hold its positions. Whilefighting continues, the peace process will stall. A Taliban victory might not

August 3rd 1999

The political scene

Economic policy

The domestic economy

Foreign trade andpayments

Outlook for 1999-2000


EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999

4

bring an end to the war. A Saudi dissident will continue to cause problems. TheUN is optimistic that aid flows will resume

The Taliban launched a three-pronged offensive in July against the lastremaining opposition force. The latest peace talks have failed. The Talibanleadership has met the Uzbek foreign minister. Rumours of human rightsabuses in central Afghanistan abound. Mullah Omar has warned the Talibanagainst retaliatory attacks in Bamian. The UN will resume operations innorthern Afghanistan and has warned of impending food shortages. The USgovernment has imposed sanctions. One of the famed giant Buddhas has beenirreparably damaged. The UN has researched Afghanistan’s opium tradingsystem. Another mystery disease has appeared.

Editor: Elisabeth PaulsonAll queries: Tel: (44.20) 7830 1007 Fax: (44.20) 7830 1023

Next report: Our next Country Report will be published in November

The political scene

Pakistan


5

Pakistan

Political structure

Islamic Republic of Pakistan

Federated parliamentary system

As a result of constitutional changes in 1997, the prime minister now holds supremeexecutive authority. The president is head of state and is elected by an electoral college,consisting of both houses of the federal parliament as well as members of all fourprovincial legislatures

Bicameral legislature: lower house, the National Assembly, has 217 directly electedmembers who serve for five years, of whom ten represent minorities; upper house, theSenate, has 87 members elected for six years with one-third retiring every two years.Each of the four provinces elects 19 senators; the remaining 11 are elected from theFederal Capital Territory and the tribal areas

Pakistan has four provinces, which enjoy considerable autonomy. Each province has agovernor and a council of ministers headed by a chief minister elected by a provincialassembly

February 3rd 1997 (National Assembly); next elections due December 2002(presidential), February 2002 (National Assembly)

After a mid-term general election in February 1997, the PML(N) formed a governmentwith Nawaz Sharif as prime minister

Pakistan Muslim League (Nawaz) (PML(N)); Pakistan People’s Party (PPP); Jamaat-i-Islami(JI); Muttahida Qaumi Movement (MQM); Awami National Party (ANP); Jamiat-e-Ulema-e-Islam (JUI); Tehrik-i-Insaaf (Movement for Justice); Millat Party

President Rafiq Tarar

Prime minister Nawaz Sharif

Commerce, finance & economic affairs Ishaq DarForeign affairs Sartaj AzizInterior Shujaat HussainWater & power Gauhar Ayub

Mohammad Yaqub

Official name

Form of state

The executive

National legislature

Provincial government

National elections

National government

Main political organisations

Key ministers

Central bank governor

Pakistan


6

Economic structure

Latest available figures

Economic indicators 1994 1995 1996 1997 1998

GDP at market pricesa (PRs bn) 1,573.1 1,882.1 2,165.6 2,414.6 2,759.5

GDPa ($ bn) 52.2 61.0 64.5 61.9 63.9

Real GDP growth at factor costa (%) 4.5 5.2 6.8 1.9 4.3

Consumer price inflation (av; %) 12.4 12.3 10.4 11.4 6.2

Population (mid-year; m) 126.5 130.3 134.2b 138.2b 141.9b

Exports fob ($ bn) 7.1 8.3 8.5 8.3 8.5b

Imports fob ($ bn) 9.3 11.2 12.1 10.7 9.1b

Current-account balance ($ bn) –1.81 –3.34 –4.42 –1.76 –1.99b

Reserves excl gold ($ m) 2,929 1,733 548 1,195 1,028

Total external debt ($ bn) 27.4 30.2 29.8 29.7 31.4b

Debt-service ratio, paid (%) 32.6 26.5 27.1 35.2 27.0b

Exchange rate (av; PRs:$) 30.54 31.61 36.04 41.07 45.01

July 30th 1999 PRs51.22:$1

% of % ofOrigins of gross domestic product 1998/99a total Components of gross domestic product 1998/99a total

Agriculture 24.5 Private consumption 72.5

Manufacturing 18.6 Government consumption 11.4

Electricity, gas & water supply 4.1 Fixed investment 13.6

Construction 3.6 Change in stocks 2.4

Mining 0.5 Exports of goods & services 15.2

Services 48.7 Imports of goods & services –15.3

GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports 1998c $ m Principal imports 1998c $ m

Cotton fabrics 1,142 Machinery 2,043

Cotton yarn 984 Petroleum & products 1,310

Knitwear 731 Palm oil 627

Ready-made garments 690 Wheat 356

Rice 556 Plastics 305

Total incl others 8,105 Total incl others 9,028

Main destination of exports 1997/98a % of total Main origins of imports 1997/98a % of total

US 20.5 US 11.2

Hong Kong 7.1 Japan 7.8

UK 6.9 Malaysia 7.1

Germany 6.3 Saudi Arabia 6.7

UAE 5.1 UAE 6.6

a Fiscal years ending June 30th. b EIU estimate. c Customs basis.

Pakistan


7


The Pakistani government, led by the prime minister, Nawaz Sharif, appearsnot to have reckoned on the far-reaching political consequences of the recentconflict in Kargil. When several hundred mujahideen and Pakistani soldiersdisguised as Kashmiri militants crossed the line of control (LoC) into Indian-held Kashmir in April—a fact that the Pakistani government largely denies—they provoked the most serious military conflict with India since the war in1971. Faced with international isolation and increasing pressure to withdrawits forces back to Pakistan’s side of the LoC, Mr Sharif was left with no choice.He called for the Islamic freedom-fighters (as he described them) to come downfrom their positions. In the eyes of many Pakistanis, the initial military victoryin Kargil was perceived to have been turned overnight into a diplomatic defeat.

Mr Sharif has tried to give the impression that the military hierarchy did notsufficiently consult him before embarking on the military adventure. Heprobably did this to fend off domestic and international censure of the actionsof his civilian regime. However, this tactic seems to have alienated the militaryhigh command. The army chief, General Pervez Musharaf, has tried to quellmisgivings by publicly stating that “everyone”, including the prime minister,was “on board” over the decision. But speculation is rife of a rift betweenMr Sharif and General Musharaf; and both appear to be looking for scapegoatsto reduce political pressure. Relations between the two men may thereforeworsen, weakening the military high command’s tacit support for the primeminister.

The perceived climbdown has also been a boon for the splintered andfrustrated opposition parties. There is, finally, something concrete to agitate foror protest against. The various Islamic jehadi groups have banded together in a15-member alliance, the United Jehad Council, to insist that they will not bebound by the government’s “surrender” and will carry the struggle for Kashmirdeep inside Indian territory.

Their street demonstrations will be buttressed by the protests of other parties,particularly the fundamentalist Jamaat-i-Islami, which drew more than 50,000people to an anti-government demonstration in Lahore on July 25th. Theleader of the Tehrik-i-Insaaf, Imran Khan, a former cricket player, is calling forthe formation of a united front to topple Mr Sharif. Farooq Leghari, the formerPakistani president and leader of the Millat Party, will also weigh in with hissupporters. It is therefore likely that every political party, big or small, willpitch in against Mr Sharif. If the individual protests swell into a unitedmovement aimed at overthrowing the government, Mr Sharif is bound to reactwith repressive measures. The situation may deteriorate rapidly if violent streetclashes lead to bloodshed at the hands of the police.

Although dissent is severely discouraged in the ruling Pakistan Muslim League(Nawaz), or PML(N), this has not stopped some members from askingembarrassing questions about what happened at Kargil and who wasresponsible. Some have actually expressed reservations about Mr Sharif’s style

The fallout from the Kargilcampaign—

—is likely to strain civil-military relations—

—galvanise domesticopposition to Nawaz

Sharif—

—and lead to cracks in theruling party—

Pakistan


8

of decision-making and government. Notable among these are Ijaz ul-Haq, theson of the former military dictator General Zia ul-Haq, and Abida Hussain, whorecently lost her job as minister for social welfare and population planning.The former has openly criticised the “defeatist” government policies relating toKashmir, while both have called for the establishment of a national securitycouncil, including the three service chiefs, for assistance in critical decision-making. Mr Sharif’s worries would increase considerably if other voices were tojoin these two members of the ruling party. Members of Mr Sharif’s party whoare unhappy with his leadership style, but hitherto have been afraid to expresstheir views openly, may take advantage of rising levels of popular discontent,or growing rifts with the military, to challenge Mr Sharif’s leadership. It is notinconceivable that a movement for a change in the leadership of the PML(N)in parliament might succeed in toppling Mr Sharif, despite the party’sconstitutional ban on dissent.

Serious differences between the civil and military hierarchy, violent agitationby the combined opposition parties on the street , rising discontent within theranks of the ruling party—all or any of these are possible ingredients forrenewed political instability in Pakistan.

There are several possible outcomes to all this. Mr Sharif might pre-empt anysign of rebellion by sidelining the army chief—firing him as army chief of staffwhile allowing him to retain the largely ceremonial role of chairman of thejoint chiefs of staff committee—and by reasserting civilian authority. Thatwould certainly dampen the protest movement and ensure Mr Sharif’s survival.Alternatively, the army high command might take advantage of the wave ofpolitical protest and friction within the ruling party and either insist on theformation of a national security council (which would formalise its politicalrole), instigate a revolt against him in parliament or—most unlikely—overthrow him in a coup. Political instability will increase in the next fewmonths, as the issue of Kargil is still fresh and can bring people to the streets.However, if Mr Sharif can survive the next few months, either by repressing thestreet movement or by changing the army chief and consolidating his position,then his position will become increasingly secure.

The imposition of central rule in Sindh province last October ended politicalsquabbling over the spoils of power and restored a little peace to Karachi,Pakistan’s main commercial city. But conflicts lie ahead. Confusingly, politicalpower in Sindh province will probably not be wielded by the appointedgovernor, Mamnoon Hussain, but by his all-powerful advisor, Ghaus Ali Shah.An ally of Mr Sharif, who was chief minister of the province in 1985, Mr Shahis likely to concern himself with collecting a sufficient number of provincialmembers of parliament to form a PML(N)-led provincial government. TheMuttahida Qaumi Movement (MQM), Mr Sharif’s old alliance partner, will alsobe dealt with severely, if only to prevent it from entering into any alliance withthe Pakistan People’s Party (PPP), led in absentia by Benazir Bhutto. Theincidence of so-called police encounters with MQM activists will probablyincrease, as will strikes, protests and shutdowns.

—resulting in politicalinstability

Sindh may face law andorder problems again

Pakistan


9

Relations with India are unlikely to improve quickly, despite urgings from theUS government. India will not have a new government until the end of 1999,following a fresh general election in September and October, which will delayany form of dialogue until 2000. Thereafter, the next Indian government islikely to demand an end to Pakistan’s support for the Kashmiri militants beforeit will agree to return to the agenda established in Lahore in February 1999.However, Mr Sharif will not be able to make any new concessions withoutrisking his own political survival, which suggests that relations between the twocountries will remain poor until both countries come under new leadership.

Relations with the US may also remain sour, since Pakistan will find it difficultto meet a number of promises and demands. These include: signing theComprehensive Test Ban Treaty (CTBT) before September; co-operating withthe US government in locating, arresting and repatriating the Saudi dissident,Osama Bin Laden; and restarting talks with India. Complying with theserequests would certainly weaken Mr Sharif’s political position at home; forexample, if Pakistan signs the CTBT by September and India does not (which islikely), Mr Sharif will come under attack from opposition parties. Moreover, thepolitical opposition will criticise any diplomatic overtures to India, followingPakistan’s climbdown from the latest conflict.

Pakistan: forecast summary

1997a 1998a 1999b 2000b

Real GDP at factor costc (% change) 1.9 4.3 3.1a 3.5 Agriculture 0.1 3.8 0.4a 3.5 Industry 0.6 6.8 3.8a 4.1 Services 3.6 3.2 4.1a 3.2

Real GDP at market pricesc (% change) 1.2 3.3 3.9a 3.1 of which: private consumption 4.4 –0.3 5.1a 4.8 public consumption –8.4 6.8 3.9a 2.0 gross fixed investment –3.8 –5.4 –2.3a 3.0 exports of goods & services –6.5 3.7 –1.2a 0.0 imports of goods & services –3.8 –11.3 –8.2a 7.0

Consumer price inflation (av; %) 11.4 6.2 7.0 8.5

Merchandise exports fob ($ m) 8,324 8,528d 8,055 8,489

Merchandise imports fob ($ m) 10,716 9,122d 9,545 10,739

Current-account balance ($ m) –1,755 –1,994d –2,980 –3,515

Exchange rate (av; Rs:$) 41.04 45.01 50.20 56.81

a Actual. b EIU forecasts.c Fiscal years ending June 30th. d EIU estimates.

The IMF was expected to review the state of the economy and governmentpolicies in July and disburse the next tranche of Pakistan’s loan package (worth$280m) in September. But its mission was postponed. A number of contentiousissues are in dispute: the government’s reluctance to raise petroleum prices; itsfoot-dragging on the imposition of a 15% sales tax on the retail and servicessector; its continued opposition to a tax on agricultural income; and theagonisingly prolonged negotiations with the independent power producers, inparticular Hub Power (Hubco), over the reduction of power tariffs. The latter

Relations with India willnot improve quickly—

—and those withWashington may

not improve

The patience of lenders willbe tested—

Pakistan


10

issue, in particular, is of concern to the World Bank, whose approval is criticalbefore the IMF will resume lending to Pakistan. Although the EIU’s forecastassumes that the loan package will not be cancelled, the persistent uncertaintywill negatively affect the confidence of creditors and lenders.

Pakistan may get near its 6% target for inflation, helped by depressed worldprices and slack demand. But other domestic economic targets may be missed.The budget for the 1999/2000 financial year (July-June) sets a revenue target ofPRs356bn, based on real GDP growth of 5%, driven by a 5.8% expansion inlarge-scale manufacturing and 4.3% growth in agriculture. However, thesetargets are ambitious (see below). Assuming slower GDP growth and nosubstantial change in tax compliance levels, a revenue target of PRs325bnappears more likely. We also doubt whether spending targets can be met,especially with the cost of the two-month conflict with India. In sum, thebudget deficit may easily overshoot 5% of GDP. To finance this deficit, thegovernment may have to resort to increased monetisation, since assistancefrom the Pakistan Development Forum (PDF) is likely to be late, as discussionswere delayed by the Kargil conflict.

The 1999/2000 budget widened the credit allocation for farmers and reducedduty on tractors and cattle feed. But the farming sector remains plagued by lowlevels of investment, especially in irrigation and drainage, poor research andlow quality seeds, fertiliser and pesticides. These factors are likely to preventagriculture from achieving the government’s 4.3% growth target for1999/2000—up from 0.4% in 1998/99 and 3.8% in 1997/98—although a rateof 3.5% may be achievable, from a low output base in 1998/99. Assuming apick-up in agricultural growth, real GDP growth (at factor cost) will rise to 3.5%in 1999/2000, up from 3.1% in 1998/99.

In the case of the country’s main crop, cotton, the short-term outlook is poor.The government’s cotton crop target is 9.7m bales. But in each of the last fiveyears, the government set a target of about 10m bales, only to be faced with ashortfall of at least 2m bales. There is concern that the cyclone that hit parts ofSindh and lower Punjab in May 1999 may have destroyed some of the newcrop in the early stages of growth. Rice and wheat production are expected tofare better, although world prices of rice are projected to contract by 13.9% in1999 (eroding export revenues) and wheat production will remain below dom-estic consumption requirements (necessitating extensive imports). World pricesfor sugar, another major crop, are expected to contract by over 30% in 1999.

We expect that industrial growth will contribute very little to this finaloutturn. According to the State Bank of Pakistan (the central bank), industrialgrowth fell from 6.8% in 1997/98 to 3.8% in 1998/99 (an estimate whichappears high, given the poor performance of manufacturing and stagnantdemand and investment). In the 1999/2000 budget, the government accededto virtually all of the demands made by the main industrial groups, includingthe abolition of local taxes. But industry remains in a slump, plagued by lowlevels of investment, high production costs and low demand. The recentconflict in Kargil only increased uncertainty over the future direction of

—as economic targets arestrained

Agriculture may help GDPgrowth in 1999/2000—

—but industry will makelittle contribution

Pakistan


11

industry, and is likely to dampen gross fixed investment (which contracted by2.3% in 1998/99). New direct foreign investment is lacking, while the cautionof domestic banks over lending will constrain domestic investment.

Industrial costs have been rising in recent years. The effect on import prices oflower import tariffs and a rationalised exchange rate will be outweighed byrising oil and utility prices in 1999 and 2000 and a depreciating currency,boosting manufacturing costs. Fibres prices will also firm in 2000, squeezingmanufacturers that use imported cotton inputs. An unfavourable externaltrading environment will hurt Pakistan’s export-oriented industry, particularlytextiles, yarns and leather goods. Consequently, industrial growth in1999/2000 is forecast to rise only marginally, to 4.1%—boosted mainly bybetter agricultural output growth.

Annual consumer price inflation has remained surprisingly subdued in recentmonths, owing to stagnant domestic demand, very soft import prices andcomparatively low levels of deficit monetisation. However, we still expectinflation to begin to rise in the second half of 1999 and into 2000. Faced with arevenue shortfall—because of the slowdown in GDP growth and the loweringof import tariffs—coupled with lower levels of external financing, thegovernment will be compelled to resort to central bank financing(monetisation) of the deficit, resulting in faster money supply growth.Although last year’s poor harvest may tighten domestic supply conditions,world commodity prices will remain soft, curbing the inflationary effect ofrising food imports. But rising international oil prices will force thegovernment to raise local petroleum and gas prices, while electricity rates arealso expected to increase as the two utilities are prepared for privatisation.However, low inflation in the first half of the year has prompted us to lowerour inflation forecast for 1999 to 7%, rising to 8.5% in 2000, in line withstrengthening world commodity prices, the wider application of the sales taxand higher prices for fuel, transport and telecommunications.

We estimate that the merchandise trade deficit narrowed sharply in 1998,owing to a sharp contraction in dollar-denominated imports—a result ofstagnant domestic demand, falling import prices and import and exchangerestrictions. The lowering of import tariffs, and the elimination of most capitalcontrols in 1999 will boost import volumes as will increased demand for oil(following the depletion of reserves as a result of the Kargil conflict) and wheat(owing to an expected shortfall of 3m tonnes). Meanwhile, in 1999 importprices will be buttressed by firming world oil prices (although commodityprices will remain soft). Consequently, imports are forecast to rise by nearly 5%in US dollar terms in 1999.

We expect exports to contract in dollar terms. There is little in the domestic orinternational environment to support faster export growth. The cost ofimported inputs will remain high, owing to the expected increase in energyprices as well as the depreciation of the rupee. The low level of industrialactivity, continued shortages of exportable surpluses and stiff competition fromrival exporting countries may also dampen export growth—as will persistentsupply-side constraints (poor harvests and deteriorating infrastructure).

Inflation will edge upslightly—

—and the trade deficit willwiden—

-15

-10

-5

0

5

10

15

1996 97 98(a) 99(b) 2000(b)

Exports

Imports

Pakistan: exports and imports% change, year on year

(a) EIU estimates. (b) EIU forecasts.Sources: EIU; IMF.

Pakistan


12

Assuming a 6% contraction in the dollar value of exports, the trade deficit is setto widen to $1.5bn in 1999. Although export growth will be positive in 2000, afaster acceleration in imports (on the back of strengthening non-oilcommodity prices and slightly firmer domestic demand) will cause a furtherwidening of the trade deficit, to $2.3bn.

A sharp fall in expatriate remittances through official channels, largely due tothe freeze on foreign-currency accounts and the unfavourable rate of exchange,has already prompted a fall in inward transfers. This caused the current-account deficit to widen slightly in 1998, to $2bn, despite a narrowing of thetrade deficit.

Our forecast for the current account in 1999 and 2000 assumes that the sharpfall in inward private transfers will not be corrected. Firmer oil prices may stemthe downturn in remittances from some oil-exporting Middle Easterncountries, while a narrowing of the gap between the interbank and open-market rates may redirect expatriate transfers into official bank channels (and,hence, official statistics). But confidence will remain weak, owing touncertainty about future policy on foreign-exchange transfers and accounts,preventing a recovery in inflows. Consequently, inward transfers will remainwell below pre-1998 levels in both 1999 and 2000. Assuming that services andincome flows grow in line with merchandise flows, we expect the current-account deficit to rise to $3bn and $3.5bn in 1999 and 2000 (equal to 4.5%and 5.4% of GDP respectively).

The rationalisation of the exchange-rate system in May will encourage theinflow of private transfers through official channels, by narrowing the spreadbetween the market rate (currently about PRs53:$1) and the interbank rate.Nonetheless, downward pressure on the rupee is likely to persist as a result ofthe widening trade deficit, resulting in an annual depreciation of over 15%,from PRs46:$1 (the official rate at end-1998) to PRs54.5:$1 by end-1999. (Therate of depreciation in 1999 is slightly higher than recent trends as a result ofthe adjustment from the four-tier currency system, which entailed adevaluation of about 10%, from the official rate of PRs46:$1 to PRs51:$1, the

—as will the current-account deficit—

—putting downwardpressure on the rupee

0

1

2

3

4

5

6

7

1996 97 98(b) 99(c) 2000(c)

Pakistan (a)

Asia excl Japan

Pakistan: gross domestic product % change, year on year

(a) Fiscal years ending June 30th. (b) EIU and officialestimates. (c) EIU forecasts. (d) Nominal exchange ratesadjusted for changes in relative consumer prices.Sources: EIU; IMF, International Financial Statistics.

70

80

90

100

110

1990 91 92 93 94 95 96 97 98 99 2000

Pakistan: Pakistan rupee real exchangerates (d)1990=100

PRs:$PRs:$PRs:$PRs:$PRs:$PRs:$PRs:$PRs:$PRs:$PRs:$PRs:$PRs:$PRs:$PRs:$PRs:$PRs:$PRs:$

PRs:¥

PRs:$

PRs:¥PRs:¥

PRs:DMPRs:DMPRs:DM

PRs:$

PRs:¥

PRs:$

PRs:¥PRs:¥

PRs:DMPRs:DMPRs:DM

97 98(b) 99(c) 2000(c)

PRs:$

PRs:¥

PRs:$

PRs:¥

PRs:$

PRs:¥

PRs:$

PRs:¥

PRs:$

PRs:¥

PRs:$

PRs:¥

PRs:$

PRs:¥

PRs:$

PRs:¥

PRs:$

PRs:¥

PRs:$

PRs:¥

PRs:DM

97 98(b) 99(c) 2000(c)97 98(b) 99(c) 2000(c)97 98(b) 99(c) 2000(c)97 98(b) 99(c) 2000(c)97 98(b) 99(c) 2000(c)

PRs:$PRs:$

-4

-3

-2

-1

0

1

2

3

4

1997 98(a) 99(b) 2000(b)

TradeTransfersCurrent account

Pakistan: external balances$ bn

(a) EIU estimates. (b) EIU forecasts.Sources: EIU; IMF.

Pakistan


13

current interbank rate.) An 8% depreciation, to a year-end rate of PRs59.2:$1 isforecast for 2000. However, the rupee’s downward slide will not be smooth;adverse political or economic developments may spark bouts of volatility.

The political scene

The Pakistani government continues to deny its direct participation in theinfiltration of fighters across the line of control (LoC) into Indian Kashmir inthe first and second quarters of 1999. Although the army chief, General PervezMusharaf, admitted in an interview with the BBC that Pakistani soldiers hadtaken part in “aggressive patrolling” across the LoC, which separates Indian-held and Pakistani-held Kashmir, in an effort to pre-empt Indian attacks, thegovernment has never admitted—as India claims—that the infiltrators werecomprised mainly of Pakistani troops disguised as Kashmiri mujahideen. Duringthe final stages of the conflict, the government even tried to avoid using theterm “withdraw”, which would implicitly acknowledged that the infiltratorswere not indigenous agitators from Indian Kashmir, although at one stageGeneral Musharaf mentioned that Pakistan would not accept a “unilateralwithdrawal”. But its direct involvement in the co-ordination and execution ofthe campaign—which involved the infiltration across the LoC and the seizureof certain strategic heights overlooking the road between the Indian towns ofSrinagar and Leh—and the participation of Pakistani soldiers now seemscertain.

The reasoning behind the government’s decision was both simple andpowerful. It probably believed that the capture of these strategic positionswould even the military score with India after Pakistan’s “loss” of the Siachenheights in 1984. (This corridor by Kargil in the LoC had for many years beenviewed as the best point of attack on the Indian position. The former primeminister, Benazir Bhutto, has reportedly stated that she vetoed a similar planon two occasions.) A victorious campaign would also boost domestic supportfor the prime minister, Nawaz Sharif, and clock up a military success for thearmy chef, General Musharaf. It would enable Pakistan to disrupt the Indianarmy’s communication links within Kashmir and lift the flagging fortunes ofthe Kashmiri insurgents in the Kashmir Valley. It would not be easy for theIndian army to dislodge the infiltrators, who would be well-protected in strongbunkers and immune from air strikes on the narrow snow-covered ridges. Butthe Pakistani government would be able to distance itself from the operationand deny any violation of the LoC; Kashmiri militants based in Azad Kashmirin Pakistan would immediately take responsibility for the action—as theyeventually did—thereby “internationalising” the struggle for self-determination or independence from India by certain Kashmiri insurgentgroups in the disputed Himalayan region. Finally, it is most likely that neitherthe prime minister nor the army expected that India would force a war, just asPakistan had not forced a war in 1984 when India seized most of the Siachenglacier on what Pakistan claimed was its side of the LoC.

The military campaignagainst India—

Pakistan


14

In the event, however, some of these assumptions quickly proved false. Indiawas quick to launch a major diplomatic counterattack. In late May, the Indiangovernment denounced the “infiltration” from Pakistan. It claimed that severalhundred Pakistani troops, along with well-armed contingents of Islamicmilitant groups based in Pakistan, had secretly crossed the LoC in the sectors ofKargil, Dras, Batalik and Mushkoh; that they had seized some critical mountainridges overlooking the only road from Srinagar to Leh; and were disruptingtraffic on this critical supply route by means of heavy artillery fire. The Indiangovernment termed the operation “an act of war” by the Pakistanigovernment, which India would repulse at all costs.

By the end of May, India had moved three mountain divisions to the area andlaunched large-scale military operations to flush out or drive back the so-calledintruders. For the first time since the war between India and Pakistan in 1971,the Indian air force began an air campaign in the area, strafing and bombingthe mountain hideouts of the infiltrators. The border clashes took a menacingturn when two Indian aircraft and a helicopter were shot down by ground fireor surface-to-air missiles, leaving one pilot missing or dead and another inPakistani custody.

Pakistan now announced that its troops were in control of certain mountainson the Pakistani side of the LoC and exchanging fire with Indian forces.Casualties began to mount on both sides. By mid-June, as the death tollcontinued to rise, the Indian press and main political parties were, with

—backfires badly—

—and raises the spectre of afourth war on the

sub-continent

Pakistan


15

increasingly urgency, calling for a full-fledged retaliation to the invasion. Therhetoric turned bellicose. The Bharatiya Janata Party (BJP), which is leading thecaretaker government until fresh elections in September and October—andwhose Hindu nationalist roots and decision to test nuclear devices in 1998 hadestablished its hawkish credentials vis-à-vis Pakistan—was being criticised forthe security failure which had led to the invasion and the delay in addressingit. Wary that the battle might drag into the election period, leaving the BJPpolitically vulnerable to military events in Kashmir, the interim governmentreiterated its determination to repel the invasion at any cost. It implied, butdid not confirm, the option of striking positions across the LoC.

By late June, Western governments were gravely concerned. India was refusingto talk with Pakistan until the withdrawal of the infiltrators to the Pakistan sideof the LoC was complete. Pakistan was in a semantic muddle, unable toacknowledge the possibility of “withdrawal” since it still claimed that thefighters were indigenous insurgents from Indian Kashmir and not under itscontrol. Instead, Pakistan was calling for talks with India to discuss a ceasefire.

Unfortunately for Pakistan, no Western government announced its belief inPakistan’s version of events and few doubted the presence of Pakistani troopson India’s side of the LoC, camouflaged by mujahideen. On June 25th GeneralAnthony Zimmi, the commander of US Central Command (USCENTCOM),arrived in Islamabad and delivered a message on behalf of the US president, BillClinton, calling for the withdrawal of Pakistani infiltrators from the Indian sideof the LoC. Faced with increasing international censure, and worried about theimpact of a costly and devastating war on an already crippled economy,Mr Sharif flew to Beijing on June 28th in search of Chinese support. But theseven-day trip was cut to two days when the Chinese leadership—perhaps waryof the parallels between the Kashmiri movement for self-determination and thestatus of Tibet—advised Mr Sharif to respect the sanctity of the LoC and resolveits problems with India bilaterally.

Isolated and afraid of being overtaken by the rush of military events, Mr Sharifflew to Washington to meet Mr Clinton. A joint statement issued on July 4thnoted that Pakistan had agreed to respect the sanctity of the LoC and take“immediate and concrete steps” to withdraw the “intruders” from Indianterritory in exchange for a “personal” commitment by Mr Clinton to helpresolve the 50-year-old Kashmir dispute between Pakistan and India.

The withdrawal of the infiltrators to positions on the Pakistani side of the LoCbegan shortly afterwards, and was completed by July 20th. Mr Sharif claimedthe high ground of statesmanship for having averted a nuclear war. He alsotrumpeted his success in highlighting the plight of Kashmir before aninternational audience.

But no one in Pakistan seemed to be listening. The public mood was one offrustration and bewilderment at the unexpected transformation of the militaryvictory at Kargil into a diplomatic defeat in Washington. However, the angerwas less about Mr Sharif’s surrender in Washington, in the form of an agree-ment to facilitate the withdrawal of the invaders, than about the perceived

Washington mediates anuneasy peace—

—which Mr Sharif vainlytries to turn into a

diplomatic victory—

Pakistan


16

recklessness of the operation, which had cost many lives, jeopardised theeconomy, again risked international isolation and destabilised the government.

The opposition is attempting to tap this discontent, for political gain. Jamaat-i-Islami is organising street marches and public demonstrations, such as ademonstration in Lahore on July 25th which drew an estimated 50,000 people.The various Islamic jehadi groups have banded together in a 15-memberalliance, vowing not to adhere to the government’s agreement and to renewguerrilla warfare against Indian forces in Indian Kashmir.

The mood of the armed forces is also in question. As international pressure onPakistan began to build, the government had tried to convey the impressionthat it had not been sufficiently consulted by the army during the planningand execution of the Kargil operation. But the army has continued to insistthat it did not act alone and that the government was fully in the picture. Thearmy has done nothing to dispel the impression that a military victory inKargil was lost at the negotiating table in Washington, nor has it given muchcredit to Mr Sharif’s claim that his agreement averted all-out war.

The Sindh provincial government—a fractious alliance of the Pakistan MuslimLeague (Nawaz), PML(N), and the Muttahida Qaumi Movement (MQM) whichexcluded Benazir Bhutto’s Pakistan Peoples Party (PPP)—was dismissed byMr Sharif in October last year (4th quarter 1998, page 18). The province wasplaced under central rule and a retired general, Moinuddin Haider, became thenew governor. His job was to combat ethnic terrorism, restore law and orderand provide a good, firm and neutral administration. However, Mr Haider’sneutral policies came under fire from members of the PML(N), in thesuspended Sindh provincial parliament who felt marginalised in the newdispensation (2nd quarter, page 15).

On June 17th, as the crisis in Kargil was heating up, Mr Sharif replacedMr Haider, appointing a little known Karachi businessman, MamnoonHussain, as governor and a Sindh PML(N) member of the federal parliament,Syed Ghaus Ali Shah, as his adviser. The adviser was given powers similar tothose of an elected chief minister. Mr Shah served as chief minister of Sindhunder the martial law regime of General Zia ul Haq in 1985 and was trailed byallegations of corruption (which were not pursued by the Bhutto government).His appointment, and some of his actions since becoming adviser (such aspassing the provincial budget in June without the approval of the half-functioning Sindh assembly) have been challenged in the Supreme Court.

The changes have created confusion about where authority truly lies. Forexample, the Sindh chief secretary and inspector-general of police arereportedly unsure whether or not Mr Shah has the legal authority to appointofficials and issue executive orders. But his agenda seems clear: to replace thepolitically neutral officials appointed to senior positions in the province by theformer governor with those more amenable to the PML(N). This would entailreplacing the chief secretary and home secretary and most of the deputyinspectors-general of police, in addition to setting up an advisory council of

—but the opposition isquick to challenge him

The army keeps its distance

Mr Sharif’s controversialSindh strategy—

—has led the province intoadministrative confusion—

Pakistan


17

politicians from the various parties—which would certainly be dominated bythe PML(N). The confusion is compounded by the fact that Mr Shah isexpected to share power with Haleem Siddiqui, a powerful PML(N) politicianfrom Sindh with influence in Islamabad, and with the governor, Mr Hussain—who has publicly stated that he is opposed to any large-scale reshuffle in theadministration and will not allow illegal orders to be passed. Mr Shah isthought to have promised Mr Sharif that he would be able to install a PML(N)-led government within three months. But this will not be easy, especially givenreports that talks between the PPP and MQM are in progress.

Administrative confusion may be the least of the problems facing Sindh. Acrackdown on the MQM is under way, in what appears to be a plan to keep theMQM from allying with the PPP. The government has ordered the arrest ofthose MQM members who were released on parole in 1997, when the PML(N)-MQM coalition government still ruled the province. This led, on July 17th—following the killing of an MQM activist in an “encounter” with the police(which is often considered a cover for extra-judicial killings)—to the firstviolent demonstrations in Karachi since October 1998, when the Sindhprovincial government was dismissed and the provincial parliamentsuspended. The MQM has alleged the murder of another four activists by thepolice. The party has also accused the government of seeking to “eliminate” atleast 200 of its activists who face charges of murder and terrorism, as part of aplan to kill those MQM activists whose cases were originally sent for trial to thesummary military courts before such courts were declared illegal by theSupreme Court in February 1999 (1st quarter 1999, page 16).

If there were any doubts about Mr Sharif’s hostility towards the independentpress, those were dispelled with the arrest on May 8th of Najam Sethi, theoutspoken editor of the Friday Times, a Lahore-based weekly which haspublished many investigations into the financial affairs of the prime minister’sfamily. Mr Sethi, who has long-standing connections with The EconomistGroup, was minister for accountability in the 3-month interim nationalgovernment formed in November 1996 following the dismissal of the Bhuttogovernment.

In the early morning of May 8th, Mr Sethi was beaten, blindfolded and takenfrom his home by police without a warrant. For several days, the governmentrefused to acknowledge that Mr Sethi was in its custody. Later, it wasannounced that he had been detained by the military authorities for alleged“anti-national” activities in connection with a speech he had given in NewDelhi on April 30th. On May 13th, the attorney-general of Pakistan told theLahore high court that it had no jurisdiction in military matters and thatMr Sethi would face a court martial for sedition under the Army Act. But thecase took an unexpected turn after his wife, Jugnu Mohsin—who is also ajournalist and the publisher of the Friday Times—announced that the speechfor which her husband had allegedly been detained had earlier been deliveredby Mr Sethi to a select gathering of top army officers at the National DefenceCollege in Islamabad, the country’s premier defence institution, where it hadbeen well received. This statement highlighted the hollowness of the charges

—and renewed urban strife

An editor is the target ofthe latest attack on the

press—

Pakistan


18

against Mr Sethi. (The government’s annoyance with the sharp editorialswritten by Mr Sethi and an interview he gave in late April to a BBC film crewinvestigating money-laundering charges against the prime minister’s familywere widely thought to be main reason for his detention.) Ms Mohsin’sstatement also complicated the military’s position, compelling its officialspokesman to announce that the army had nothing to do with the case.

By distancing itself from the case, the military seems to have foiled thegovernment’s strategy. Although initially denied by the government, it nowseems that Mr Sethi was taken at the behest of the Accountability Bureau, andhanded over to the Interservices Intelligence Agency, Pakistan’s top intelligenceservice. The government perhaps had planned to use the ISI to prosecuteMr Sethi under military law for sedition so that it could not be accused ofattacking press freedom. But the plan went awry after the military changedtack. Strong pressure on the government to drop the case—from the domesticand international media, the US government and the EU as well as humanrights and press freedom groups—finally prompted the government to drop allcharges and set Mr Sethi free on June 2nd.

Although Mr Sethi is no longer being detained, his harassment—and that ofother journalists—continues. His newspaper has been served with over 50income tax notices, in what seems to have become a standard way of harassingpolitical opponents or newspaper owners (1st quarter 1999, page 19). He wasalso prevented from leaving the country to collect an award from AmnestyInternational in London. A PML(N) MP, Zafar Ali Shah, has petitioned the chiefelection commissioner to declare Mr Sethi a “non-Muslim”, which woulddisenfranchise him and prevent him from standing for public office, and lodgedsedition charges against him. According to Mr Sethi, his newspaper’s three topjournalists have suffered severe harassment from the intelligence services.

Several others have faced the wrath of the government in recent times. HussainHaqqani, a journalist and politician who writes a column for Mr Sethi’s paper,was charged with corruption, arrested and denied bail for two months. RehmatShah Afridi, the owner-editor of the Frontier Post, a daily paper from Peshawarin the North-West Frontier Province (NWFP), was arrested in May and chargedwith drug smuggling. This trend has not been limited to journalists. On July19th, Naimuddin Khan, the head of the bad-loan recovery division of UnitedBank, was detained by the Federal Investigation Agency without warrant orspecific charges. He was taken from his home in Lahore to Islamabad, where hewas questioned for two days without being charged.

Since her conviction on charges of corruption last April (2nd quarter 1999,page 13), Ms Bhutto has been reluctant to return to Pakistan for fear of arrest.Instead, she has tried to act as the opposition leader from exile. Whilecontinuing to criticise the prime minister, she also seems to be following apolitical line which might be acceptable to, among others, the US govern-ment—even if it means admitting that her own policies while in power on anumber of issues, including Kashmir and relations with India, were“misguided”. Unfortunately for her, this strategy has not worked. Few accept

—which did not goaccording to plan

But he is not free fromharassment—

—nor are others

Ms Bhutto remainson the fringe

Pakistan


19

her as an alternative to Mr Sharif, partly because she has lost much popularsupport and partly because she has failed to deliver on two previous occasionsas prime minister. Her supporters are also extremely disillusioned with her,while her party hierarchy is in considerable disarray. Her husband, Asif Zardari,remains in prison. She is now calling for the formation of an interim govern-ment, which should hold elections immediately, without saying how aninterim government is to come to office while Mr Sharif is still in power.

Economic policy

Before the recent outbreak of fighting between India and Pakistan along theLoC was resolved, there was great concern that the International MonetaryFund would delay the release of the next $280m tranche (originally due fordisbursement in July 1999) until September 1999. An IMF review team was dueto arrive in Islamabad after the budget announcement in June but its trip waspostponed. As a result of the uncertain border situation, the PakistanDevelopment Forum (PDF), the consortium of donor countries and agencies,also postponed its meeting, at which $2bn worth of pledges had been expectedfrom bilateral and multilateral sources. At the time of writing, the timing of thenext disbursement is still in doubt, despite the easing of tensions on the LoCfollowing Mr Sharif’s meeting in July with the US president, Bill Clinton.

Pakistan signed its latest funding programme with the IMF in November 1998(4th quarter 1998, page 24). Shortly afterwards, Pakistan agreed to a $3.3bnexternal debt rescheduling arrangement with the Paris Club, the country’sconsortium of official lenders. The IMF had stopped releasing funds toPakistan in June 1998 after suspending the last $1.56bn package as a result ofthe imposition of economic sanctions following the government’s nucleartests in May 1998. The resumption of IMF funding came after the US decisionto end the sanctions placed on Pakistan which had blocked the lending. TheIMF deal was also accompanied by a $350m structural adjustment loan fromthe World Bank. More recently, the government brokered a deal with theLondon Club, the consortium of commercial lenders, to reschedule $877m ofloans, including commercial debt and trade loans (although the fate of thecountry’s eurobonds has yet to be confirmed—see below). The release of IMFfunds and the agreement with the Paris Club to reschedule $3.3bn of debtsaved Pakistan from having to formally default on its sovereign obligations(although the rescheduling of external debt payments may be considered aneffective default, since the original terms of the various loans have beenaltered to the creditors’ detriment). As a result of the various measures, thecountry’s foreign-exchange reserves have risen from a low of $400m in June1998 to over $1.7bn in June 1999.

Continued inflows from the IMF are essential to keep the economy solvent, forseveral reasons. The disbursements from the IMF package provide vital foreignexchange. Perhaps more importantly, the IMF’s stamp of approval maintainsconfidence among both domestic and international investors and lenders.Moreover, as long as IMF assistance continues, other financial institutions such

The IMF visit ispostponed—

—prompting questionsabout the IMF loan package

Pakistan


20

as the World Bank and the Asian Development Bank will continue lending toPakistan. Any delay to the loan might weaken foreign-exchange levels anddamage foreign and domestic investment confidence.

The IMF package, like most of its predecessors, imposes a tough set ofconditions on the economy, including targets for faster tax reform, tariffreduction and privatisation, demands for higher investment in the social sectorand a reduction in the fiscal deficit (1st quarter 1999, page 22). Tax reform isthe core condition, as problems with revenue collection are at the heart ofbudgetary problems and, consequently, broader economic failings.

The federal budget for the 1999/2000 financial year (July-June), announced inJune, has been patterned to meet the targets and conditions contained inPakistan’s loan agreement with the IMF. The budget aims to reduce the deficitto 3.3% of GDP, down from an estimated outturn in 1998/99 of 4.7%(budgeted at 4.3%).

The budget forecasts a 15.6% rise in tax revenue, generated in part by reformsto the tax system. To boost tax compliance and possibly widen slightly the taxnet, the self-assessment scheme has been extended to private limitedcompanies, in addition to individuals and registered firms, allowing thesetaxpayers to file a one-page tax return; an important condition of using thenew system is that taxpayers will have to pay 30% more in taxes than they didlast year, or else use the old system. (In addition, in order to curb thediscretionary powers of tax officials, necessary contact with tax offices issharply reduced.) The maximum income tax rate is also raised from 20% to30%. The budget also abolishes the zila tax, charged on the movement ofgoods and commodities and administered by local bodies. Although thesemoves will decrease the ability of provinces and local bodies to raise revenue,they will also curb widespread corruption of the tax network. However, plansto restructure the main tax collection agency, the Central Board of Revenue,which is riddled with inefficiencies and corrupt practices, have once again beendelayed. In addition, Pakistan’s tax system still leaves the agriculture sectorlargely untaxed.

Total revenue in 1999/2000 has been projected at PRs356bn ($6.9bn), up fromabout PRs300bn in 1998/99 (compared with an original budget target ofPRs354bn). Direct taxes are projected to rise to PRS127bn and indirect taxes toPRs229bn. Of this total, customs duties are expected to generate PRs65.5bn,sales tax PRs96.5bn and the petroleum surcharge PRs58bn.

However, once again targets appear ambitious. The reduction in the maximumcustoms tariff—from 45% to 35% in 1998, in accordance with World TradeOrganisation directives—and sluggish trade activity will make it difficult forthe government to increase revenue from customs duties. Rising internationaloil prices will also prevent the government from increasing revenue throughthe petroleum surcharge. As the sole importer of petroleum and petroleumproducts, which it then distributes through the country’s three oil marketingcompanies, the government has in the recent past made a windfall profit fromthe difference between the international price at which it imports oil and the

The IMF’s conditions—

—are partly reflected in the1999/2000 budget—

—which includes ambitioustargets for revenue—

Pakistan


21

domestic price (set by the government) at which it is sold. This developmentsurcharge is a crucial component of government revenue and often makes upfor revenue lost from other sources. In 1998/99 oil surcharge collectionsreached PRs73bn, compared with the budgeted amount of PRs43bn. But therecent rise in international oil prices will make the PRs58.1bn target nearlyimpossible to achieve.

Spending on the public-sector development programme has been targeted atPRs116.3bn, compared with last year’s original estimate of PRs110bn, whichwas later reduced to PRs98bn. However, Pakistan’s development expenditure isalways the first item of spending to be cut when fiscal pressures mount, in partbecause of the rigidity of other large spending items (mainly defence andinterest payments on government debt—see below). In addition, mostdevelopment spending is financed through foreign funds from the PDF, whichhas not yet pledged funds to Pakistan for this year. Spending on defence anddebt servicing accounts for more than two-thirds of total budget expenditure.Defence spending in 1999/2000 is set at PRs142bn, compared with last year’soriginal estimate of PRs144.5bn and the revised figure of PRs128bn. However,this target was set before the escalation of fighting with India, and is thereforelikely to be exceeded.

The fate of Pakistan’s $750m stock of eurobonds—two floating-rate notes(FRNs) and two sovereign bonds—is still not clear. Coupon payments continueto be made by the State Bank of Pakistan (the central bank), which executed a$300,000 coupon payment on June 25th and a $17.6m payment on a four-year$150m FRN on June 27th. The FRN was issued in June 1996 and is due tomature on December 26th 2000. Earlier, on May 27th Pakistan made a $13.5mcoupon payment on a three-year $300m FRN due to mature on May 30th2000. The Paris Club, Pakistan’s consortium of official lenders, is asking for arescheduling of Pakistan’s eurobonds—traditionally excluded from debtrescheduling exercises—on the grounds that all credits require equal treatment.But the Pakistani government has so far not agreed to this, arguing that arescheduling would significantly damage investor confidence and reducePakistan’s ability to float commercial bonds in the future.

The domestic economy

Economic trends

In the 1998/99 fiscal year (July-June) real GDP growth (at factor cost) slowed to3.1%, compared with a target growth rate of 6% and an actual4.3% in 1997/98,according to the latest official estimates. Poor growth in both industry andagriculture was the cause of the slowdown. The slump in agricultural outputgrowth, from 3.8% in 1997/98 to just 0.4% in 1998/99, probably had a knock-on effect in the industrial sector (particularly spinners, weavers, and textile andclothing manufacturers) and services. The government is targeting 5% realGDP growth in the current fiscal year, in line with the IMF’s medium-term

Real GDP growth slowed in1998/99—

—and expenditure

Pakistan insists on makingpayments on its eurobonds

Pakistan


22

target of 5-6%. However, with industry still in recession, GDP growth may failto rebound so strongly.

Inflation has slowed. In 1998/99 consumer price inflation dropped to 6.1%from 8.2% in 1997/98, allowing Pakistan to meet the 6% inflation target set bythe IMF. Year-on-year inflation fell from 6.4% in December to 4.8% in March,4.6% in April and 4.3% in May. Low international commodity prices havehelped stabilise prices in the domestic market.

The most recent blow to both foreign direct and portfolio investment was theKargil crisis and the threat of war in South Asia. The government has targetedtotal inflows from foreign direct investment (FDI) of $7.5bn over the next fiveyears. During l998/99, FDI totalled just $296m, compared with $436m theprevious year. Large outflows of foreign portfolio investment reduced netinflows to just $4.7m from $204m in 1997/98.

Pakistan’s prospects of attracting foreign investment have been damaged by aseries of political crises and industrial rows, such as the government’s row withthe independent power producers, which still continues with the Hub PowerCompany (Hubco). The imposition of certain foreign-exchange controls anddelays in processing foreign-exchange demands also caused problems forforeign companies invested in Pakistan. On a positive note, in 1998/99 severalforeign restaurant chains entered Pakistan. In addition, Microsoft is reported tohave pledged to open a number of servicing centres throughout the country.However, foreign investment in other sectors remains flat, and the prospects ofan imminent investment upturn are remote.

Industry

According to provisional figures from the State Bank of Pakistan (the centralbank), manufacturing output grew by 4.7% in 1998/99, compared with 7.9%the previous year. Within this category, large-scale manufacturing grew by2.7%, down from 7.6% in 1997/98, while the small-scale sector grew by 8.4%.

The textile industry, which is the backbone of the manufacturing sector andthe prime contributor to export earnings (generating more than 60% of totalexport receipts), had another difficult year. A poor cotton crop—of around8m bales compared with original estimates of 11m bales—led to a shortage ofraw material and higher cotton lint prices. The price of cotton, whichconstitutes almost three-quarters of the total cost of cotton yarn production,rose in 1998/99, eroding the competitiveness of Pakistan’s yarn and clothexports. In addition, textile mills suffered from liquidity problems, as thecommercial banks became increasingly cautious lenders.

Cotton cloth production (both mill and non-mill sectors) rose by only 1.7% in1998/99. Increased competition from rival exporters in South-east and SouthAsia and low world demand further hurt the industry. Consequently, exports ofcotton textiles fell by 15.5% (in dollar terms) year on year in 1998/99, as the

—and inflation eases

Foreign investors remaindeterred

Industrial growth slows—

—led by a slump in theproduction and export ofcotton yarn and textiles—

Pakistan


23

unit value of cotton cloth fell sharply. Meanwhile, the production of cottonyarn rose by a meagre 0.2%, while exports fell by 13% in volume terms.

The export volume of finished garments rose by 3%, but export receipts fell by13.6% owing to depressed international prices. The same pattern was recordedfor towels, exports of which grew by over 6% in volume terms but fell by 5% invalue terms. However, knitwear exports rose by almost 5% in dollar terms and5.6% in volume.

Sugar production fell by just under 2% year on year, while cement productionrose by 3% (although stagnant domestic demand has exacerbated the over-capacity in the industry). The automobile sector boomed in 1998/99, partlyowing to the rationalisation of capital value tax rates. Production of cars roseby 11.3%, of buses by almost 200% and of tractors by 68%.

Agriculture

Agricultural output rose by just 0.35% in the 1998/99 financial year (July-June),according to provisional government estimates, down from 3.8% in 1997/98.The poor performance of agriculture, which comprises almost one-quarter of total GDPand has extensive linkages to industry and the services sector, pulled downoverall GDP growth last year. Despite its importance to the overall economy, thefortunes of agriculture remain largely dependent on the vagaries of the weatherand international prices.

Overall the production of the major crops (cotton, sugarcane, rice, wheat andmaize) contracted by 0.6%, compared with 8.3% growth in 1997/98. Minorcrops grew by just 0.36%, compared with 3.3% the previous year. The cottoncrop fared very poorly. Originally forecast at 11m 375-lb bales, estimates forlast year’s cotton crop have now fallen to below 8.7m bales, down from 9.2mbales in 1997/98. (The country’s target for cotton production in 1999/2000 is9m bales, of which Sindh is projected to produce 2.1m and Punjab 6.9m bales.)

Cotton production in 1998/99 was affected by virus attack on the crop, poorweather conditions in both the cotton growing provinces of Sindh and Punjaband a reduction in the area under cultivation. There is some concern that pooreconomic conditions this year may prevent farmers from using sufficientfertiliser and pesticide during this year’s planting season, which started in Mayand June, leaving the crop vulnerable to pest attack this year as well.

According to provisional figures for 1998/99, wheat production fell by 3.4%,from around 18.7m tonnes in 1997/98 to around 18m tonnes in 1998/99. Butthe rice and sugar crops exceeded targets. Rice production rose by an estimated7.9%, to 4.7m tonnes, up from 4.3m tonnes in 1997/98 and a target of 4.4mtonnes. However, in the first 11 months of 1998/99 rice exports of 1.6m tonneswere 19.2% lower than the 2m tonnes exported in the same period of 1997/98.Sugarcane production in 1998/99 rose by 3.9% year on year, to 55.2m tonnes,compared with a target of 51.2m tonnes.

—and other garments—

—as well as a mixedperformance by secondary

industries

Poor agricultural growthin 1998/99—

—was due mainly to lowcotton output—

—while wheat output felland rice rose

Pakistan


24

Infrastructure and services

The row over power tariffs between the government and the independentpower producers (IPPs) was largely settled by the agreement of many IPPs tolower power tariffs (1st quarter 1999, page 26). But the conflict with the HubPower Company (Hubco), owned by the UK’s National Power—which stemsfrom government accusations that Hubco paid bribes to the then primeminister, Benazir Bhutto, to secure higher tariffs for itself—continues tosimmer. The Water and Power Development Authority (WAPDA) still claimsthat it cannot afford the electricity that Hubco sells—a claim supported by thePakistani government but denied by Hubco and its foreign backers.

In July the row took an ominous turn when Hubco issued various preliminarytermination notices to WAPDA because of alleged breaches in the powerpurchase agreement (PPA). According to Hubco, it is owed PRs8.9bn inaccumulated underpayments by WAPDA. The power company also issued a30-day default notice to WAPDA when Hubco’s majority senior lenders rejectedthe new letter of credit opened by WAPDA, as it was arranged through theNational Development Finance Corporation (NDFC) instead of a scheduledbank as required by the PPA. (WAPDA replaced ANZ Grindlays Bank with theNDFC in June 1999.)

For its part, WAPDA claims that Hubco is not meeting certain conditions of thePPA, making it difficult, among other things, properly to monitor individualgenerating plants to determine start-up and running hours. Negotiationsbetween WAPDA and Hubco on reducing the tariff are now scheduled forAugust, and both sides appear keen to come to a compromise.

In the wider power sector, the installation of army personnel in the topmanagement posts of the two electricity utilities—WAPDA and the KarachiElectric Supply Corporation (KESC)—has helped to initiate a long overduerestructuring at both corporations. The army’s attempt to curtail power theft,which is endemic in both WAPDA and KESC, has had some success. But littlehas been done to prepare WAPDA for privatisation, either by reducing its140,000-strong workforce or recovering $1.4bn in overdue payments owed tothe corporation. WAPDA is expected to report a PRs74bn loss for 1998/99—40% more than in 1997/98. Meanwhile, the privatisation of the KESC has beenpostponed from June 1999 until December, and may be delayed even longer.

But Pakistan’s ambitious privatisation plan—which encompasses the sale ofstate-run banks, energy sector companies and Pakistan Telecommunication(PTCL)—remains stunted, despite pressure from the IMF. The government hadset June 1999 as the deadline for the sale of the country’s largest bank, HabibBank, and was expected to follow swiftly with the sale of the remaining sharesin Muslim Commercial Bank and Allied Bank of Pakistan and the privatisationof PTCL. But it is behind schedule. The sale of the two gas companies, SuiSouthern Gas Company and Sui Northern Gas Pipelines, has been frequentlydelayed. Even the sale of small Pakistan Tourist Development hotels has beendelayed by litigation. The privatisation process is hindered by the slow pace of

The government’s row withHubco persists—

—as the company filestermination notices

The army leads therestructuring drive at

WAPDA and KESC—

—but privatisation fails totake off

Pakistan


25

restructuring the relevant companies, the lack of political will, insufficienttransparency and low levels of investor confidence. The prime minister,Mr Sharif, recently formed a new privatisation board, which he is leading. Butgiven the constant change of deadlines for the sale of state-owned corporationsand the abject lack of investor interest, few (if any) sales are expected in 1999.

Pakistan’s banking sector had a particularly tough year in 1998/99, when thesector’s aggregate deposit base was eroded as a result of the freezing of $11bn offoreign-currency accounts. Meanwhile, the industrial slowdown depressedcredit demand. As a result, the profitability of the banking sector fell. Toimprove their performance, several banks have launched aggressive depositmobilisation strategies while maintaining a cautious lending policy.

Under a $250m World Bank loan—approved in 1997 and aimed atstrengthening the country’s legal infrastructure to help deal with a burgeoningbad loan problem (estimated at PRs140bn in 1997) and to assist the reform ofthe three state-owned commercial banks—professional, private-sectormanagers were brought in to replace the bureaucrats heading the three big,state-owned banks: Habib Bank, United Bank (UBL) and National Bank ofPakistan. Since then, all three banks have been restored to profitability afterbeginning loan recovery drives, reducing the number of staff and closingbranches. Pre-tax profits of the biggest of these three banks, the National Bankof Pakistan, rose to PRs1.9bn in 1998, compared with PRs995m the previousyear and a PRs1.2bn pre-tax loss in 1996. Similarly, UBL’s profits after tax roseto PRs3bn, compared with a PRs21bn loss in 1997. The reforms undertaken atthe banks exerted considerable competitive pressure on foreign banksoperating in the country, allowing the nationalised commercial banks to takeback market share from their foreign competitors. Foreign banks’ market sharedeclined from 22% in 1997 to 18% in 1998, while the share of the big state-owned banks grew from 55% to 62%.

The ultimate objective of the World Bank loan, however, was to prepare thestate-owned banks for privatisation. Although balance sheets have beencleaned up, procedures improved and profitability restored, the governmentwill still find it hard to find buyers for the banks. The PrivatisationCommission has already invited and received expressions of interest in the saleof Habib Bank; the due diligence exercise has been completed at UBL as well.But given the government’s strained relationship with foreign investors,attracting buyers is likely to prove a slow task.

Foreign trade and payments

According to the Federal Bureau of Statistics (FBS), exports fell by 10.5% in the1998/99 financial year (July-June) to $7.72bn, from $8.63bn in 1997/98. Theimport bill contracted by 8.2%, from $10.12bn to $9.29bn, causing the tradedeficit to widen slightly by $79m to $1.57bn. (The EIU estimates that the tradedeficit narrowed in 1998 (calendar year)—in line with FBS figures for the first

The banking sector has atough year in 1998/99

The big three banks recordprofits—

—but privatisation remainsthe final goal

In 1998/99, the tradedeficit widened slightly—

Pakistan


26

9 months of the fiscal year, which show a narrowing of the deficit as a result ofan 11.8% contraction in exports and a 14.9% contract in imports.)

On the export side, the export of primary commodities and textilemanufactures registered the greatest decline in dollar terms, as both exportedvolumes and unit prices fell. Slack global demand, greater competition fromEast Asian exporters and domestic supply constraints were responsible for thedecline in exports.

In 1998 merchandise imports were deliberately squeezed by the governmentthrough the imposition of a 30% cash margin requirement (which was laterabolished) as well as the imposition of a more expensive exchange rate forimport transactions. Slack investment and consumption was also responsiblefor low import demand. However, anecdotal evidence now suggests thatimports are beginning to strengthen, following the government’s decisionearlier this year to cut import tariffs on consumer goods, intermediate goods,chemicals and components, and basic raw materials, as well as ease the sale offoreign exchange to importers and rationalise the exchange rate used for alltrade activity. Firming oil prices from the second quarter of 1999 will also boostimport costs. However, demand remains flat.

In May, as agreed with the IMF, the government replaced the four-tierexchange-rate system with a two-tier system. The government had establishedthe four-tier exchange-rate system in May 1998, in an attempt to stem theoutflow of foreign-currency reserves following the nuclear tests and theimposition of sanctions. Both the official rate (previously pegged at PRs46:$1)and the composite rates of exchange were abolished. The floating interbankrate was adopted for all foreign-exchange transactions. The import of oil andoil products, as well as wheat, will now be transacted at the floating interbankrate (rather than the pegged, official rate) as will the conversion of foreign-exchange account holdings into rupees. An open-market exchange rate alsoexists alongside the interbank rate.

The State Bank of Pakistan (SBP, the central bank) had, in fact, been preparingfor complete unification in the preceding months, by altering the formula forcalculating the composite rate to give greater weighting to the interbank rateand less to the official rate of exchange. Moreover, the SBP had beenintervening extensively in the interbank market, injecting around $60m-70minto the foreign-exchange market to boost liquidity in the ten days prior to thechange. In order to cushion the deposit base of the banking sector, whichcould be eroded by a mass conversion of foreign-exchange accounts intorupees, the SBP also announced cuts in the bank cash reserve from 5% to 3.5%and in statutory liquidity ratios from 15% to 13% . The central bank has alsokept a vigilant eye on currency trading on the open market to ensure that theopen-market rate does not exceed the interbank rate by more than PRs1.50,pressuring money dealers to reduce the gap.

The steadiness of the interbank exchange rate following the elimination of theofficial rate suggests that the strategy was successful. From PRs50.2:$1 on

—but imports may bepicking up

The exchange-rate system isrationalised—

—following a period ofpreparation—

—which helps to avert acollapse

Pakistan


27

May 18th, the rupee slipped only slightly, to PRs50.8:$1, the day after theexchange rate system was rationalised. It then slipped to a low of PRs52.15:$1on May 21st before settling in the range PRs51.2-51.9:$1 since early June. OnJuly 30th, the rupee finished at PRs51.22:$1.

With a more competitive currency in place, the government hopes thatdouble-digit export growth can be achieved, narrowing the trade deficit in1999/2000. Recognising that higher export earnings are crucial to maintainingits current level of foreign-exchange reserves (and, hence, making foreign debtrepayments), the government has announced a host of export incentives in itslatest trade policy, announced in July.

Pakistan: external reserves($ m; end-period)

1997 1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Reserves excl gold 960 1,249 1,193 1,195 1,271 844 676 1,028 1,650

Source: IMF, International Financial Statistics.

To assist the ailing textile sector, the export refinance facility for certain gradesof cotton yarn has been extended from June 1999 to December 1999 and theimport of polyester staple fibre has been allowed in the no-duty, no-drawbackscheme. In addition, tax on the export of rice and packed food products(including fish) has been reduced and incentives have been announced for thesetting up of new packaging units to encourage the export of packaged foodproducts. In an effort to encourage the export of non-traditional goods, the taxon uncut precious and semi-precious stones has been reduced and incentivesare being offered for the import of refrigeration trucks for the transport of fish,fruit, vegetables, dairy products and other perishable goods. All these measures,aimed at diversifying Pakistan’s narrow export profile, are well intentioned. Butthe dominance of low value-added, cotton-based goods in the export profilewill take years, not months, to alter.

The government’s trade targets are in line with IMF targets for narrowing thecurrent-account deficit, which widened from $937m in the first nine monthsof 1997/98 to $1.5bn in the same period of 1998/99 (latest available data).However, the low level of industrial activity, continued shortages and toughcompetition from elsewhere in Asia may constrain export growth, despite theintroduction of these incentives. Moreover, as international oil prices rise onthe back of OPEC supply cuts, dollar-denominated import costs will surge,widening the trade deficit.

There will be little relief from inward remittances, which have traditionallybeen an important foreign-exchange earner for the country. Inward foreign-exchange remittances fell to less than $800m in 1998/99, according togovernment figures, compared with over $1.3bn the previous year. The widegap between the composite and the kerb rate of exchange discouraged workersfrom transferring funds through official banking channels, as did the ban onforeign-currency withdrawals from foreign-currency accounts. The government

—bringing down theexternal deficits

Foreign-exchangeremittances remain thin

The government hopes newincentives will boost

exports—

Pakistan


28

has set targets for 1999/2000 of $1.3bn for remittances and $500m forincremental inflows into foreign-currency accounts. But anecdotal evidencesuggests that inward workers’ remittances fell further in May, June and July1999, perhaps in response to the uncertainty created by the conflict with India.

Afghanistan 29


Afghanistan

Political structure

Islamic State of Afghanistan

De facto government by the Islamic Taliban movement, which seized power onSeptember 27th 1996 from the previous administration of Burhanuddin Rabbani

April 1988 (Assembly); next election yet to be decided

Six-member ruling council, which holds power until a government is formed. Notimetable for the formation of a government has been given

Taliban; Hezb-i-Islami; Jamiat-i-Islami; Ittehad-i-Islami; Harakat-i-Inqilab-i-Islami;National Liberation Front; National Islamic Front; Hezb-i-Wahdat; Junbush-i-Milli

Official name

Government

National elections

National government

Main political organisations

30 Afghanistan


Economic structure

Latest available figures

Economic indicators 1994 1995 1996 1997 1998

GDP at constant 1978/79 pricesa (Af bn) n/a n/a n/a n/a n/a

Population (mid-year; m) 18.88 19.66 20.88 n/a n/a

Exports foba ($ m) 24.0 26.0 n/a n/a n/a

Imports cifa ($ m) 142.0 50.0 n/a n/a n/a

Total external debt ($ m) n/a n/a n/a n/a n/a

Exchange rateb (av; Af:$) 425.1 833.3 2,333.3 3,000.0 3,000.0

July 30th 1999 Af4,679:$1 (market rate)

Origins of gross domestic product 1989a % of total Components of gross domestic product 1981a % of total

Agriculture & forestry 52.6 Private consumption 70.6

Industry 28.5 Government consumption 35.0

Construction 5.8 Gross fixed capital formation/increase in stocks 17.3

Trade 7.9 Exports of goods & services 19.6

Transport & communications 3.5 Imports of goods & services –50.3

Services 1.7 Statistical discrepancy 7.8

GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports 1990a $ m Principal imports 1988a $ m

Fruit & nuts 93 Capital goods 293

Carpets 44 Food 150

Wool 10 Textiles 117

Karakul skins 3 Petroleum products 99

Cotton 3 Sugar & vegetable oil 53

Total incl others 235 Tyres 50

Total incl others 900

Main destinations of exports 1990 % of total Main origins of imports 1990 % of total

Soviet Union 72.4 Soviet Union 56.3

Germanyc 3.1 Japan 9.4

India 3.1 Singapore 5.6

Belgium-Luxembourg 2.3 India 2.9

UK 1.9 South Korea 2.2

Czechoslovakia 1.2 Germany 1.7

a Fiscal years beginning March 21st. b Official rate. c Includes former East Germany from July.

Afghanistan 31



The Taliban, an extreme Sunni Muslim and predominantly Pashtun group,which controls nearly all of Afghanistan, will continue trying to take over the10% of the country that remains outside its control. In late July Taliban forcesstarted their long-expected campaign against the opposition Northern Allianceby attacking northwards from the Afghan capital, Kabul. According to thelatest reports, a Taliban push is also coming from the north-eastern province ofKunduz, in a bid to cut off alliance supply routes to Tajikistan. With itsexistence at stake, the Northern Alliance, made up of Afghanistan’s religiousand ethnic minorities, will be fighting hard to hold on to the few areas thatremain under its control.

The new campaign followed the meeting in Tashkent on July 19th-20th of theUN sponsored “six-plus-two” group—comprising Afghanistan’s neighbours(Iran, Turkmenistan, Uzbekistan, Tajikistan, Pakistan and China) as well as theUS and Russia, which is seeking a peaceful political settlement for the war-torncountry. The meeting ended with a rejection by the Taliban of a ceasefireproposal. With the Taliban again on the offensive, further peace efforts areunlikely in 1999. The UN’s special envoy to Afghanistan, Lakhdar Brahimi,recently acknowledged the failure of the UN’s peace attempts, stating that hehad achieved little in two years as a peace emissary and that he was pessimisticabout future efforts.

Mr Brahimi predicted that the conflict in Afghanistan would not end with atotal victory by the Taliban, given the high level of dissatisfaction with themovement’s strict Islamic rule. Moreover, victory would not assure it formalinternational recognition. Currently, only Pakistan, Saudi Arabia and theUnited Arab Emirates recognise the Taliban as the Afghan government.

The presence in Afghanistan of the Saudi exile and alleged terrorist Osama binLaden will continue to cause problems for the Taliban. In 1998 the Saudigovernment withdrew its envoy from Kabul and expelled the Taliban’srepresentative from Riyadh because of it. The US accuses Mr bin Laden ofmasterminding the 1998 bombings of US embassies in two African cities, hasoffered a $5m reward for information leading to his arrest and conviction, andhas imposed sanctions against the Taliban in retaliation for its support ofterrorist networks (particularly that of Mr bin Laden).

Rumours abounded in the region in July and early August of an impending USmilitary strike on Afghanistan, one year after the last punitive attack. Reportsof US commandos ready to pounce on Mr bin Laden appear regularly in theregional media, although hard evidence is lacking. It is clear, however, that theUS will remain seriously upset about Mr bin Laden’s continued evasion ofjustice, and is unlikely to cease its efforts to track him down. The US thereforemay launch more air strikes against Afghanistan.

The Taliban has done little to attract international aid to Afghanistan. Theseeming endlessness of the war and the stream of alarming reports about the

The Northern Alliance willbe fighting for its

survival—

—and the peace process willstall—

—although a Talibanvictory may not bring the

desired spoils

A Saudi dissident willcontinue to cause problems

for the Taliban

The UN is optimistic,although aid flows thin

32 Afghanistan


Taliban’s activities will continue to divert donors’ funds to countries deemedmore worthy. Officials at the United Nations, however, remain doggedlyoptimistic. Delegates at a June meeting of the Afghan Support Group inStockholm—a bi-annual meeting of donors and aid officials—were confidentthat funding would eventually be forthcoming. But contributions to the UN’sannual appeal for Afghanistan have steadily declined over the past few years.This year’s appeal has so far only raised one-quarter of the $112m needed forthe most essential programmes in Afghanistan.

The political scene

The Taliban, which controls nine-tenths of Afghanistan, launched a three-pronged offensive on July 28th against the last remaining opposition force inAfghanistan. At the time of writing, in early August, the fighters of the NorthernAlliance, under their veteran commander, Ahmad Shah Massoud, an ethnicTajik, had pulled back to their headquarters in the Panjshir Valley as Talibanforces pushed up from Kabul. Frontlines which had not changed for the pasttwo years were overrun. Mr Massoud lost his forward positions only 25 km fromKabul, from where his men could launch rocket attacks on the capital.

In addition to the Panjshir Valley, Mr Massoud and the remnants of theNorthern Alliance hold the north-eastern provinces of Takhar and Badakshanand pockets of territory elsewhere in northern Afghanistan. On August 3rdMr Massoud made a public appeal to the international community to help aquarter of a million refugees, mainly ethnic Tajiks, who he said had fled to thePanjshir Valley because of the Taliban advance.

A meeting in Tashkent on July 19th-20th of the UN-sponsored “six-plus-two”group—consisting of Afghanistan’s neighbours (Iran, Turkmenistan,Uzbekistan, Tajikistan, Pakistan and China) as well as the US and Russia, whichis working to find a peaceful political settlement to the war-torn country—ended with little result.

This failure prompted comments from the UN’s special envoy to Afghanistan,Lakhdar Brahimi, lamenting the failure of the UN’s peace process. At the samebriefing, Mr Brahimi spoke of the thousands of young people from Pakistanand several Central Asian and Arab countries who are fighting with theTaliban. Alleged Pakistani support for the Taliban is an old story. But now thestory is being talked about openly; and it is not just Pakistanis who are said tobe fighting on the Taliban’s side. Mr Brahimi warned of the implications forthese countries and stressed that the participation of their nationals in thecurrent conflict differs from the resistance to the ten-year Soviet occupation ofAfghanistan: instead of repelling an invading force, these volunteers are takingpart in a local feud.

The Uzbek foreign minister, Abdul Aziz Kamilov, met the leader of the Taliban,Mullah Mohammed Omar, in Kandahar in early June. It was the first visit by asenior Uzbek official since relations between the two were established late last

Fighting continues—

—for the remaining piecesof land held by the

opposition—

—as the latest peace talksfail

The Taliban holds alandmark meeting with

Uzbekistan—

Afghanistan 33


year. The talks were described as positive, and the two parties said they agreedon the “maintenance of friendly and neighbourly” relations in the hope ofimproving Afghanistan’s economic situation.

The Uzbek government is now publicly adopting a more neutral position inAfghan affairs, indicated by its improving relations with the Taliban and thehosting of the UN-sponsored peace talks in July. The Uzbek government hasalso permitted the UN to transport aid supplies across the Amu Darya River,which divides southern Uzbekistan from northern Afghanistan. (The landroute, however, remains closed.) There are several possible motives behind thisshifting stance—including an acceptance of the reality on the ground inAfghanistan and Uzbekistan’s need to contain its own militant Islamists.

Better relations between Uzbekistan and the Taliban will be a setback for theNorthern Alliance and also reflects the alliance’s weakened position. One of itsleaders, the ethnic Uzbek general, Abdul Rashid Dostum, once controlled thepart of northern Afghanistan bordering Uzbekistan. In the past, the generalmaintained good relations with Uzbekistan. But since he fled Afghanistan in1998, the Uzbek government’s support for him seems to have waned.

According to UN sources, there are eyewitness reports of atrocities carried outby the Taliban against the Shia Muslim Hazara population who live in thecentral Bamian region. The area has changed hands several times in the pastten months. The London-based human rights organisation, AmnestyInternational, said in late May that evidence was emerging of the brutaltreatment of civilians by Taliban fighters, including systematic killings, thedisappearance of men, women and children, and the burning of homes.Amnesty International also accused the Northern Alliance of abuses, such asthe beating of suspected Taliban collaborators and the arbitrary detention andill-treatment of their families.

The Taliban leader, Mullah Mohammed Omar, went on the radio in Maycalling on his supporters not to take revenge on their opponents in Bamian. Healso condemned the revenge actions by his supporters. Mullah Omar has rarelymade such appeals in the past. His announcement may be the sign of aweakening in the chain of command within the Taliban, with those on theground beginning to make their own decisions.

In July the UN announced that international staff would return to Mazar-i-Sharif at the beginning of September, after a two-year absence. UN staff wereevacuated after an escalation of fighting in the region caused a completebreakdown of law and order. For the past year the city has been under Talibancontrol and the area is reported to be largely peaceful.

Eight Afghan and two international staff members of the InternationalCommittee of the Red Cross (ICRC) were attacked in mid-June as they travelledthrough a Taliban-controlled area between Kabul and Bamian. According to thehead of the ICRC’s Pakistan office, six armed men took the staff to a nearbyvillage where they were beaten and threatened with death. In protest, some

—as the Uzbeks take on aneutral role—

—at the cost of theNorthern Alliance

Rumours of human rightsabuses in central

Afghanistan abound—

—bringing an unusualannouncement

The UN is to resumeoperations in northern

Afghanistan—

—though International RedCross staff are badly beaten

34 Afghanistan


international staff were withdrawn from Afghanistan for a short time. Talibanofficials issued a warning against such behaviour by its supporters and has set apenalty of five years imprisonment for attacks on foreign aid workers.

According to the UN World Food Programme (WFP), Afghanistan is facing itsworst food shortage on record, largely because of the lowest rainfall for 40years. Around 2.5m Afghans may be affected by the shortage, and the countrywill need to import an additional 1m tonnes of cereals.

Afghanistan depends to a large extent on melting snows to provide irrigationwater. According to the WFP, very low snowfall last winter and late and erraticspring rains have caused a serious shortage in the water supply. The problem iscompounded by an increase in insect damage to crops and by the increase incash cropping. Anecdotal evidence suggests that land previously used for wheatfarming is increasingly being turned over to the cultivation of more profitablecrops, such as onion, potato and opium poppy.

Wheat imports to Afghanistan may be threatened by the imposition by the USof financial and commercial sanctions on July 6th, in retaliation for theTaliban’s support of terrorist networks (particularly that of Osama bin Laden).Although Mullah Omar claims not to be concerned about the sanctions, theUS president, Bill Clinton, said the move would deepen the Taliban’sinternational isolation and demonstrate the need to conform to acceptednorms of behaviour. The sanctions do not affect aid from the US.

A news agency in Pakistan reported that the Taliban had signed an agreementwith the Kazakh government for the purchase of 60,000 tonnes of wheat, ofwhich 8,000 tonnes has already been imported to the western Afghan city ofHerat. The report said a Taliban delegation visited the Central Asian state lastmonth and signed the $8m deal. This will meet less than one-tenth of thepredicted food deficit.

The Society for the Protection of Afghan Cultural Heritage (SPACH) publishedphotographs of damage done to the smaller of the two giant Buddha statues inBamian. A large part of the face has been destroyed, reportedly by Talibanfighters, despite Mullah Omar’s instructions to preserve the ancientmonument.

A report by the UN Drug Control Programme (UNDCP) has analysed theworkings of Afghanistan’s opium trade. According to the report, the opiumtrade is divided into two distinct markets, and is generally based on trust. Thereis centralised trade in eastern Afghanistan, where opium is sold in largeamounts in a central bazaar. High prices are paid, as the bazaar draws in tradefrom smaller markets. In the south, a free-market system exists where opiumsells for lower prices at a number of bazaars. The UNDCP discovered thatsmaller mark-ups on sales in southern Afghanistan lead to the addition of moreadulterants to opium than in the east, where the quality is much higher. TheUNDCP also found that the opium traders are reasonably educated and amajority have performed their Haj, the pilgrimage to Islam’s holiest site in

The UN warns of foodshortages

The US governmentimposes sanctions—

—and reports of a wheatdeal emerge

A famed giant Buddha isirreparably damaged

The UN investigatesAfghanistan’s opium

trading system—

Afghanistan 35


Saudi Arabia. In interviews with traders, the UNDCP was told that those witheducation trade opium, those without education cultivate it. But in either case,the lack of other employment opportunities continues to draw more people tothe market.

The UN Children’s Fund (UNICEF) announced that its annual vaccinationcampaign had reached a higher percentage of Afghan children under five thanever before. Improved access allowed UNICEF to reach children in parts ofnorthern Afghanistan which had been missed by previous vaccinationcampaigns. The vaccinations targeted 4m Afghans as part of the UN’scampaign to eliminate polio in the next few years.

The UN World Health Organisation (WHO) issued warnings in May about amystery disease which has killed dozens of people in western Afghanistan.According to the WHO, the disease is caused by a plant known locally aschalmac, which grows in wheat fields. Consumption of the plant produces atoxic effect which causes death within weeks. There is no known cure.

—and moves closer to itstarget of eliminating

polio—

—as another mysterydisease appears



Quarterly indicators and trade data

Pakistan: quarterly indicators of economic activity

1997 1998 1999 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr

Industrial production Monthly avManufacturing 1995=100 87.6 84.7 107.6 134.9 96.2 88.7 109.4 136.3a n/a Cotton: yarn ‘000 tonnes 129.0 129.0 130.4 125.7 125.7 125.2 128.8 128.4a n/a fabrics m sq metres 26.9 28.6 29.9 27.9 27.0 30.2 33.2 29.1a n/a

PricesConsumer prices: 1995=100 122.5 123.7 125.7 127.1 129.6 132.0 133.7 134.3 135.0 change, year on year % 13.0 10.9 8.8 6.1 5.8 6.7 6.4 5.7 4.2 Wholesale: general 1995=100 123 124 125 127 130 133 134 136 136 Share prices “ 75 77 73 67 55 50 49 50 54b

Money End-QtrM1, seasonally adj: PRs bn 577.2 592.4 684.7 633.8 647.7 697.9 716.5 n/a n/a change, year on year % 13.3 15.1 32.5 13.8 12.2 17.8 4.6 n/a n/a

Foreign trade Qtrly totalsExports fob PRs bn 89.49 82.88 102.67 93.25 97.65 91.62 99.96 94.64 65.79c

Imports cif “ 127.04 107.25 123.43 102.48 103.18 100.85 112.80 110.71 85.25c

Exchange holdings End-QtrState Bankd: golde $ m 529 501 475 456 467 450 458 447 436f

foreign exchange “ 1,248 1,189 1,184 1,270 841 674 1,027 1,649 1,710f

Exchange rateOfficial rate PRs:$ 40.46 40.52 44.05 44.05 46.00 46.00 46.00 46.00 46.00f

Note. Annual figures for most of the series shown above will be found in the Country Profile.

a Average for January-February. b Average for April-May. c Total for April-May. d Excluding assets with Reserve Bank of India. e End-quarterholdings at quarter’s average of London daily price less 25%. f End-May.

Sources: Federal Bureau of Statistics, Monthly Statistical Bulletin; IMF, International Financial Statistics.

Quarterly indicators and trade data 37


Pakistan: foreign trade($ m)

Total US Japan Germany UK Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Imports cif 1997 1998 1997 1998 1997 1998 1997 1998 1997 1998

Foodstuffs 1,342.5 885.7 435.8 241.7 1.6 2.0 4.9 7.0 17.6 12.7 of which: cereals & preparations 809.8 361.4 431.6 226.4 0.0 0.0 0.0 3.2 0.1 0.2Textile fibres & waste 289.3 297.4 46.6 37.2 14.9 12.8 7.0 5.8 18.3 15.1Petroleum & productsa 2,063.3 1,317.0 0.9 1.4 1.4 1.5 1.0 1.0 2.7 1.3Animal & vegetable oils & fatsb 771.4 985.1 3.0 9.8 2.3 0.1 0.4 2.8 4.7 6.8Chemicals 1,843.8 1,895.4 251.2 227.4 103.1 113.7 153.4 143.1 133.3 142.5Paper & manufactures 126.1 117.6 5.9 6.2 3.0 7.0 16.0 6.7 8.2 3.8Textile yarn, cloth & mnfrs 85.1 91.6 7.6 5.1 12.9 12.6 3.4 3.5 2.3 3.1Iron & steel 400.6 307.5 35.9 31.6 80.3 60.3 59.4 38.4 15.9 17.5Non-ferrous metals 112.5 95.2 1.4 0.9 5.4 5.7 5.0 4.1 8.6 10.0Metal manufactures 127.8 116.1 10.8 6.6 6.6 6.6 14.5 6.2 7.2 4.4Machinery & transport eqpt 3,033.0 2,126.5 495.7 295.7 576.7 476.1 420.9 169.4 211.4 155.9 of which: transport equipment 476.4 510.4 195.6 45.1 289.7 261.0 9.0 22.8 27.0 34.2Scientific instruments etc 136.7 127.1 15.2 13.3 25.1 21.0 11.9 12.4 12.5 11.4Total incl others 11,558.0 9,312.5 1,366.5 912.9 869.9 751.0 720.0 419.6 489.9 415.5

Total US Hong Kong UK Germany Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Exports fob 1997 1998 1997 1998 1997 1998 1997 1998 1997 1998

Food 857.4 1,115.1 27.3 25.2 9.4 6.1 53.4 60.8 10.1 6.6 of which: fish & preparations 176.3 131.9 12.2 8.3 5.5 4.8 32.2 24.4 2.9 1.3 cereals & preparations 488.7 577.3 6.9 7.3 0.2 0.6 6.3 17.7 3.7 1.4Cotton, raw 155.6 85.0 0.7 0.3 9.5 8.5 7.7 7.2 2.9 1.6Leather & manufactures 233.4 199.6 10.3 11.8 37.4 39.0 2.5 1.2 25.2 26.8Textile yarn, cloth & mnfrs 4,592.1 4,302.1 676.6 812.1 636.0 513.7 291.0 282.2 194.3 187.3 of which: cotton manufactures 2,644.5 2,213.7 217.8 234.5 618.0 496.6 89.1 73.9 44.4 28.8Clothing 1,803.9 1,839.4 744.4 820.8 11.8 21.0 180.8 154.7 246.8 232.4Footwear 48.3 39.0 0.6 0.5 0.0 0.1 5.9 4.4 8.8 4.0Scientific instruments etc 138.7 126.8 58.9 49.4 0.3 0.5 9.4 7.8 18.2 19.0Total incl others 8,605.6 8,437.2 1,624.1 1,824.3 730.0 599.8 602.3 567.2 578.4 550.8

a Imports from Kuwait, January-December 1998, $439.9m; imports from Saudi Arabia, January-December 1998, $399.0m. b Imports fromMalaysia, January-December 1998, $649.5m.

Source: UN, External trade statistics, series D.



Pakistan: structure of trade($ m)

Jan-Dec Jan-Mar 1997 1998 1998 1999

Imports cifFood 1,934.9 1,539.4 512.1 411.1 of which: wheat, unmilled 802.0 356.5 193.9 112.5 sugar 139.6 3.6 0.5 0.2 tea 169.4 236.5 67.8 58.2 palm oil 575.7 626.9 196.0 137.9Textile fibres & manufactures incl clothing 216.6 203.6 52.5 40.5 of which: synthetic fibres 110.7 115.3 29.8 17.5Petroleum & products 2,070.0 1,310.5 332.9 308.1Chemicals 1,842.7 1,823.2 403.2 379.9 of which: medicines 264.4 252.2 56.4 53.4 fertilisers 233.0 248.6 29.7 48.8 plastics 321.0 304.9 79.2 69.8Ores, metals & manufactures 474.1 348.6 88.9 69.6 of which: iron & steel 402.6 295.3 74.2 59.0Machinery & transport equipment 3,041.7 2,042.9 476.2 518.7 of which: road motor vehicles 368.6 314.9 84.4 44.4Total incl others 11,565.9 9,028.4 2,320.1 2,246.9

Domestic exports fobPrimary commodities 1,137.2 1,081.4 382.7 298.7 of which: fish & preparations 175.7 126.0 29.0 28.6 rice 483.4 556.0 224.1 179.0 leather 224.4 187.6 48.3 39.5Textile manufactures 5,222.8 5,156.9 1,266.2 1,092.9 of which: cotton yarn 1,357.8 984.1 257.6 227.0 cotton fabrics 1,293.0 1,142.3 298.6 261.2 synthetic fabrics 565.3 538.8 157.9 73.3 knitwear 610.2 731.3 162.4 152.1 garments 769.1 689.6 160.5 141.4 bed linen 483.8 539.4 101.3 126.4Other manufactures 1,267.9 1,138.8 289.1 240.6 of which: leather manufactures 364.2 339.8 65.9 62.9 carpets 196.6 201.2 49.1 44.8 sports goods 353.8 324.0 97.8 61.1Total incl others 8,610.3 8,105.0 2,100.2 1,864.8

Source: State Bank of Pakistan; Monthly Bulletin of Statistics.

Quarterly indicators and trade data 39


Pakistan: direction of trade($ m)

Jan-Dec Jan-Dec Jan-Feb Jan-Feb Domestic Jan-Dec Jan-Dec Jan-Feb Jan-FebImports cif 1997 1998 1998 1999 exports fob 1997 1998 1998 1999

Japan 870.1 745.9 110.2 139.4 US 1,621.5 1,793.4 243.5 229.8Malaysia 638.0 726.2 138.8 120.4 Hong Kong 732.7 596.6 83.3 82.7Saudi Arabia 780.1 592.5 124.1 120.2 UK 603.6 564.9 88.8 73.7US 1,364.5 910.6 224.7 97.7 Germany 579.8 548.3 82.0 84.4UAE 1,029.7 583.8 108.5 92.4 UAE 443.6 422.5 73.6 70.2Switzerland 255.7 296.3 57.8 81.6 Japan 448.1 288.0 50.2 51.5Kuwait 698.4 486.2 71.2 81.5 Netherlands 279.0 273.5 42.5 39.5UK 491.7 413.6 56.3 72.4 Italy 238.3 222.7 35.9 34.7Total incl others 11,565.9 9,028.4 2,320.1 2,246.9 Total incl others 8,610.3 8,105.0 2,100.2 1,864.8

Source: State Bank of Pakistan; Monthly Bulletin of Statistics.

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