LI / ji--- '7 3Document of

The World Bank

FOR OMCAL USE ONY

RprtNo. P-6225-PAK

MEMIORANDUM AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

OF SDR 145.2 MILLION

TO THE

ISLAMIC REPUBLIC OF PAKISTAN

FOR A

SOCIAL ACTION PROGRAM PROJECT

MARCH 8, 1994

MICROGRAPHICS

- Report No: P- 6225 PAKThis document has a restricted distribution and Type: MOPtheir official duties. Its contents may not oth,

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CURRENCY EQUIVALENTS

Currency Unit = Rupees (Rs)US$1.00 = Rs 30.5 (January, 1994)

FISCAL YEAR (FY)

July 1 - June 3G

ACRONYMS USED

ADB = Asian Development BankAJK = Azad Jammu and KashmirGDP = Gross Domestic ProductGOB = Government of BalochistanGONWFP = Government of North-West Frontier ProvinceGOP = Government of PakistanGOPUNJAB = Government of PunjabGOS = Government of SindhIBRD = International Bank of Reconstruction and DevelopmentIDA = International Development AssociationMSU = Multi-Donor Support Unit for the SAPNWFP = North-West Frontier ProvinceRWSS = Rural Water Supply and SanitationSAP = Social Action ProgramSDR = Special Drawing Rights

FOR OMCIL USE ONLY

ISLAMIC REPUBLIC OF PAKISTAN

SOCIAL ACTION PROGRAM PROJECT

CREDIT AND PROJECT SUMMARY

Borrower: Islamic Republic of Pakistan

Beneficiaries: Four Provinces, Azad Jammu and Kashmir, and federallyadministered areas and territories of Pakistan; and theFederal Ministries of Education; Finance and EconomicAffairs; Health; Planning and Development; and PopulationWelfare.

Amount: SDR 145.2 million (US$ 200.0 million equivalent)

Terms: Standard, with 35 years maturity

Relending Terms: Not applicable

Financing Plan: For the three year period 1993/94 - 95/96

Sources of Funding for the SAP in FY93/94-95196(Current US$ million)

Total %Government's internal resources 3,050 75.9Existing/expected aid 552 13.7Program Assistance 313

IDA (SAP Project) 200 5.0ADB 100 2.5

Government of the Netherlands 13 0.3Additional Assistance to be Mobilized 105 2.6

Total 4,020 100.0

Rate of Return: Not applicablePoverty Category: Program of Targeted InterventionsStaff AppraisalReport: Report No. 12588-PAK

MAP: IBRD Reference No. 23805R

This document has a restricted distribution and may be used by recipients only in the perforrnanceof their official duties. Its contents rnay not otherwise be disclosed without World Bank authorization.

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORSON A PROPOSED CREDIT TO THE ISLAMIC REPUBLIC OF PAKISTAN

FOR A SOCIAL ACTION PROGRAM PROJECT

1. I submit for your approval the following report and recommendation on a proposeddevelopment credit to the Islamic Republic of Pakistan for SDR 145.2 million, the equivalent of US$200 million, on standard IDA terms with a maturity of 35 years to help finance Pakistan's SocialAction Program (SAP). Part I of the document discusses Pakistan's development problems and theBank Group's assistance strategy. Part 11 of the document describes the proposed credit.

1. COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY

Background

2. Over the past decade and a half, Pakistan has experienced the fastest growth in theSouth Asia region, with real GDP increasing on average by 5 to 6 percent per annum. Thisperformance reflects solid growth in agriculture and industry (especially cotton and textiles), strongexport growth, and access to substantial external financing. However, efforts to translate thiseconomic progress into social gains, have had only limited success. High population growth (about3% per annum) has eroded half of the gains in per capita terms, and social indicators remain poor.By the late 1980s, high fiscal deficits and continued slow progress in remedying shortfalls in socialand physical infrastructure, highlighted the need for major changes in economic and social policies, ifPakistan was to ensure sustained growth and improve living conditions for its people over the longerterm. To achieve these goals, Pakistan embarked upon a comprehensive stuctural reform program in1988 aimed primarily at: deregulating and liberalizing the economy to make it more competitive,providing a stable macro-economic environment, and redressing weak social sector performance.

3. The reform process remains in midstream. Substantial progress has been made inopening up the economy, improving the environment for the private sector, and reducing the scope ofpublic sector activities through an ambitious privatization effort, all of which has helped to maintainthe economy's strong growth performance. More recently, progress is being made in improving socialsector performance through policy reforms and increased expenditures for basic social services(education, health, population, and water supply and sanitation). On the other hand, the adjustmenteffort has been weakened by poor public finance performance. The country has also experiencedconsiderable political turmoil and numerous changes in Government since starting the reform process.These political constraints have slowed implementation of the reform program and contributed to thecountry's weak fiscal performance. Nevertheless, the main thrust and principal objectives of theadjustment program are shared by all major political groups and each successive Government hascontinued the adjustment effort.

4. Pakistan continues to grapple with difficult political, social and governance issueswhich affect the pace and effectiveness of its economic development effort. Ethnic and domesticregional rivalries have contributed to political instability and have delayed efforts to reach a consensuson development policies and programs. Ethnic and tribal conflicts have also contributed to periodiclaw and order problems, which have been exacerbated by drugs and corruption. There are also sharpsocial and economic inequalities. These in turn have slowed implementation of development projects

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and impacted on the location and size of new investment. Government efforts to increase resourcemobilization have long been undermined by the exemption of agriculture incomes from taxation, andby a political environment which has condoned the non-rayment of taxes and other charges. Resourceconstraints are further compounded by the high priority placed on maintaining a large militaryestablishment, given strained relations with India.

5. During the past year, political developments became particularly intense, culminatingin the resignation of both President and Prime Minister in July 1993, their replacement by a non-partisan caretaker Government headed by Prime Minister Moeen Qureshi, and the holding of Federaland Provincial elections in early October 1993. The caretaker Government--in consultation will keypolitical groups--moved quickly to expand and accelerate on-going etonomic stabilization andadjustment efforts and avert a potential financial crisis, marked by a fall in gross external reserves toless than two weeks of imports. The program received strong international support, including approvalin mid-September of a US$250 million Public Sector Adjustment Loan (PSAL) by the Bank and aSDR 265 million standby arrangement by the Fund. The renewed adjustment effort--with its focus onstrengthening public finances, privatization, and social sector reform--continues and builds upon thereform initiatives already underway.

6. The non-partisan nature of the Qureshi regime enabled it to focus more forcefully onlongstanding governance issues, including corruption, drugs, and law and order. The caretakerGovernment published lists of major tax evaders, loan defaulters, and those delinquent on utilitypayments, without regard to family name and rank in society. The Government also put in place anexpanded effort to curb drug trafficking and continued efforts to address law and order problems. Theregime's efforts were not intended to resolve these issues, but to demonstrate that they could beaddressed and thus facilitate further efforts along these lines Ly the elected Government.

7. In the October elections, neither of the two main political groups (the PPP led byBenazir Bhutto and the Muslim League group led by Nawaz Sharif) won an outright majority.However, the PPP, with an advantage in seats, was able to form the Government with the support ofother small parties and independents. The new Government, headed by Prime Minister BenazirBhuno, took office on October 19, 1993. PPP-led coalitions also control both major provinces (Sindhand Punjab) and participate in the Balochistan Government. The victory of the PPP candidate, FarooqLeghari, in the Presidential elections in mid-November, has substantially increased prospects for amore stable political environment. Nevertheless, political uncertainties remain, particularly since theruling coalition faces a strong opposition controlling a substantial bloc of votes in the NationalAssembly. This could slow politically sensitive elements of the adjustment program.

8. Since taking office, the Blhutto Government has moved ahead with implementation ofthe reform program. It has stressed its commitment to key elements of the orogram, includingprudent macro-economic management, privatization (with due consideration given to improvingtransparency and facilitating broader private ownership) and accelerating trade reform. TheGovernment has also emphasized human development objectives, including the need to strengthenfamily planning activities. It has also implemented an agricultural wealth tax and is moving aheadwith the (provincial) taxation of agricultural income, even though much of the PPP's support comesfrom landowners. Progress under the ongoing IMF standby has been satisfactory and the Governmenthas reached agreement with the IMF on its request for an ESAF/EFF arrangement. The three yearUS$1.4 billion program was approved by the IMF Board on February 22, 1994. The Government ofJapan has also recently announced its decision to co-finance the PSAL in an amount of US$150million. While these early efforts reveal a strong commitment to the adjustment program, there

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remains a long and difficult policy reform agenda to implement, including sensitive issues which couldupset vested interests.

A. Recent Economic and Social Performance

Macro Economic Developments and Policy Reform

9. Although growth fell sharply to 3% of GDP in FY93--owing mainly to the impact ofthe devastating September 1992 floods and a cotton virus, overall GDP growth under the first phase ofthe adjustment program (FY89-93) averaged 5.2% per annum. Real industrial output grew by about7% p.a. and agriculture expanded by over 4% p.a. over the same period. The strong growthperformance was supported by a large expansion of exports (12% per annum).

10. Substantial progress has been made in redefining the role of the public and privatesectors. An ambitious privatization program was launched in 1990, with 67 industrial sector units andtwo of the four nationalized commercial banks privatized to date. Successful measures were alsotaken to deregulate the economy. Investment licensing was virtually abolished, the exchange systemwas substantially liberalized, and areas of investment previously closed to the private sector opened upin power, banking and transport. Trade policy reform measures were also taken, including a reductionin the maximum tariff from 225% to 92%, as the first phase in an on-going trade reform effort.. T hefinancial sector underwent considerable reformn: an auction system for Government securities wasinstituted in early 1991, banking regulation and supervision was strengthened, and the banking systemwas expanded with the licensing of new banks.

11. However, reforms aimed at improving the allocation and use of public expenditures,which are needed to address shortages of human and economic infrastructure, fell short ofexpectations. In the initial years of the adjustment program, development spending was kept down inan effort to reduce the budget deficit. When an increase did take place, especially in FY93, it mainlywent into poorly conceived "prestige projects", leaving little room for the social sectors or other highpriority needs. With respect to current expenditures, allocations for operations and maintenancecontinued to be inadequate. Some progress was achieved in controlling the growth of defenseexpenditures and reducing subsidies, but interest payments increased.

12. Implementation was weakest in the area of fiscal policy and few program targets wererealized. Since FY88, fiscal deficits exceeded 7% of GDP and public savings were negative in everyyear but one. In FY93, the public sector borrowing requirement (PSBR) reached a record high of9.5% of GDP. Although the yield on direct taxes increased, tax concessions and exemptions coupledwith weak tax administration continued to undermine tax reform. As a result, budget revenues wereno higher as a proportion of GDP in FY92 than in FY88, despite annual discretionary tax measures.Financing of the deficit added to inflationary pressures; inflation was 9.4% in FY93. Gross fixeddomestic investment and national savings have remained relatively low at about 18% of GDP and 14%of GDP, respectively, during most of the adjustment period. Pakistan's balance of payments alsoremained weak, as strong export growth was insufficient to compensate for the dL .erioration in theservices balance and the sharp decline in workers remittances. In FY93, the current account deficit(excluding official transfers) deteriorated to 6% of GDP, with gross official reserves falling to US$435million (equivalent to about 2 weeks of imports) as of end June 1993. Recent trends in key economicindicators are summarized in Table 1.

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13. Based on preliminary estimates for the first half of FY94, and expectations for the restof the fiscal year, economic performance is expected to rebound from last year's setback. GDPgrowth, which was initially projected to grow by 7.5% is now expected to grow between 5.5 and 6%.Continuing problems with the cotton virus are expected to reduce cotton production by about 20%below initial estimates, which is the main reason for the lower GDP projections. The balance ofpayments is expected to improve from last ),;ar, but remains fragile. Although import growth slowedduring the first six months of the current fiscal year, major exports have also declined during the sameperiod, especially cotton and rice (although non-traditional manufacturing exports have increased).Remittances are somewhat lower compared with last year. Gross foreign exchange reserves haveincreased from their nadir of about I week of gross imports to about 5 weeks (about US$1 billion) asof the end of December 1993, but remain inadequate. Efforts to strengthen fiscal performance are alsoon track, with revenues increasing generally as programmed, and expenditures remaining undercontrol. Assuming these trends continue during the second part of the fiscal year, the Governmentwould be able to achieve a significant reduction in the fiscal deficit.

Table 1: Recent Trends in Key Economic Indicators(In % unless otherwise indicated)

FY88 FY89 FY90 FY91 FY92 FY93

riDP Growth 7.8 4.8 4.3 5.6 7.7 3.0Export Growth (volume) -4.2 12.8 8.9 21.7 17.9 -0.8Import Growth (volume) -2.0 3.9 4.2 0.4 11.4 9.6Consumption Per Capita Growth 6.0 0.3 0.5 -0.4 4.6 -0.7Inflation Rate 6.3 10.4 6.0 13.0 9.1 9.4

Total Debt Outst. & Disb/GDP 36.0 39.1 44.0 46.2 46.5 46.8Total Debt Serv/Exp. Goods & Services 22.9 22.8 24.3 22.2 22.5 24.6

Overall Fiscal Balance/GDP -8.5 -7.7 -6.5 -8.7 -7.4 -9.5Current Account Balance/GDP -4.4 4.8 -4.7 4.3 -3.1 -6.0Resource Balance/GDP -8.1 -7.9 -7.8 -6.8 -6.5 -8.2

Gross InvestmentlGDP 18.5 18.9 18.9 19.0 18.6 20.4Foreign 155 177 200 230 562 455Investment (US$ million)

Poverty Issues and Social Sector Performance

14. Pakistan is a low income country with GNP per capita estimated at US$416 in 1992.Although poverty levels vary considerably between regions, poor living conditions prevail for a largepart of the population. The poor quality of life is reflected in Pakistan's social indicators, whichremain well below other countries at similar stages of development. Social indicators tend to besubstantially worse in rural areas than in urban areas and women and children are particularlydisadvantaged. Maternal and child mortality rates remain high, infectious and communicable diseasesare widespread, and malnutrition affects about half of Pakistan's children. Only about half of eligiblechildren are enrolled in primary school. About one-fourth of school age girls attend primary schoolcompared with 96% in low income countries. The literacy rate is about 30%, with female literacymuch lower, especially in rural areas.

15. Improving social sector performance has long been cited as a key developmentobjective, but progress has been limited by weak political commitment, inadequate funding and poorimplementation capacity. This now appears to be changing. Government, business, and politicalcircles are more aware that human development is vital as both an objective and means ofdevelopment. They recognize the negative impact which inadequate development of Pakistan's humanresources will have on growth and on Pakistan's capacity to compete effectively in the worldeconomy. One result has been the Government's decision to develop a Social Action Program (SAP)as the country's principal policy vehicle for expanding the coverage, quality and effectiveness of basicsocial services (including primary education, primary health, family planning and rural water supplyand sanitation). The SAP--which the proposed Social Action Program Project supports--puts in placepolicy and institutional measures to improve and better monitor performance, sets targets for increasedfunding and serves as a mechanism for strengthening political commitment to social sector goals. TheSAP offers no instant solutions, but will help improve social indicators over time, assuming itcontinues to receive the funding, implementation, and political support needed.

B. External Environment

16. The external environment impacts on Pakistan's development and adjustment effortsin a number of ways. Pakistan's export market is not well diversified and performance dependsheavily on international market conditions for coccon and cotton-based manufactured goods, whichmake up 60% of total exports. Imports of oil and oil products are high and are expected to grow, thusany sharp increase in international oil prices would have an immediate negative impact on theeconomy. Increased reliance on private capital inflows to meet financing requirements also increasesvulnerability to changes in international interest rates. Despite successful deregulation and otherreforms to develop a more liberal private sector environment, Pakistan remains less attractive thanother countries in the region to foreign investment, owing in large part to its poor social and physicalinfrastructure, but also to somewhat exaggerated perceptions of political uncertainty and governanceissues. In particular, there is insufficient recognition of the extent of commitment to liberalizationacross all major political coalitions.

17. Export Markets. The environment which Pakistani exporters face in the 1990s issignificantly more competitive than in the 1980s. On the supply side, Pakistan will face stiffcompetition not only from countries already well established in cotton and cotton-based and other lightmanufactured goods, but also from new entrants. Demand side factors will also make competition ininternational markets keen. Pakistan's export market is expected to grow by 3.5% per year into the21st ce.itury, which is only slightly above the 1980-1990 average and below the 4% effective exportmarket growth rate of Indonesia, a major trading competitor.

18. As a result of the GATT agreement, the quantitative export constraints associated withthe Multi-Fiber Arrangement (MFA) will be phased out over a 10 year period beginning in 1995.Product quotas will be gradually removed over time, with the bulk of them being eliminated towardsthe end of the period. The effect on demand for Pakistani textiles and garments will depend on theproducer's ability to compete in both quality and price. Access to domestic raw cotton will continueto give Pakistan a competitive advantage, but it will only be able to increase its market share if higherlevels of productivity and quality can be achieved. The global trade liberalization therefore needs tobe accompanied by improvements in the domestic incentive system to prepare Pakistani industry forthe more competitive world market.

19. Terms of Trade. Projected international commodity price trends indicate thatPakistan's terms of trade are likely to improve from the 1992 trough into the mid-1990s. On theimport side, prices for petroleum (a major import) are expected to average near present levels innominal terms. Prices for wheat (also a major import) are expected to increase slightly in nominalterms in 1994, but decline thereafter. 01 the export side, rice prices continued to decline into 1993,but are projected to turn upwards in 1994. In 1994, the price of cotton is expected to reverse its two-year decline in nominal terms and continue to rise into 1995. In the second half of the decade, theimprovement in terms of trade is expected to slow down. Real cotton prices are expected to revert totheir declining trend over the longer termn, while higher petroleum prices increases are probable as thesupply picture tightens.

20. Remittances. Workers remittances, which represented about 30% of export receipts inFY91, are a major but declining source of foreign exchange. Approximately two-thirds of theremittances come from oil producing countries and the remainder from OECD countries. Remittancesare not expected to decline any further in nominal termns, assuming a recovery in oil prices andeconomic recovery in OECD countries. Remittances as a source of foreign exchange are expected tocontinue to decline in relative terms over the medium termn. However, part of this could show up inFCA deposits (see below).

21. Capital Account and Foreign Currencv Deposits. Pakistan's financial vulnerability tochanges in international interest rates has increased recently. Traditionally, Pakistan's balance ofpayments has been relatively protected against such changes since it relied heavily on official andconcessional sources of capital rather than private capital for meeting foreign exchange needs.However, shifting priorities and budget constraints affecting major donors, are expected to limitPakistan's access to official and concessional sources in future. This will force Pakistan to rely moreheavily on private capital inflows to meet its financing requiremenits, thereby becoming morevulnerable to changes in international capital market conditions. In addition, the sharp rise in ForeignCurrency Accounts (FCAs) over the past several years has increased the current account's sensitivityto changes in international interest rates. FCAs are mostlv short-term and increase the volatility of thebalance of payments.

22. Attractiveness to Foreign Investment. The deregulation and finanicial sector reformshave improved the overall investment climate. However, there are still major constraints which limitPakistan's attractiveness as a location for foreign investment. The low level of education and skills,and the severe constraints on basic infrastructure, especially power aind transport bottlenecks, and poorurban infrastructure, discourage outside investors. Assuming continued progress in addressing anumber of these issues as part of the ongoing adjustment effort, and a less uncertain politicalenvironment, Pakistan's investment climate should improve over the medium term. As prospects forincreased aid flows from official sources decline, Pakistan must increasingly rely on private flows tomeet its financing needs. These needs will have to be met both from increased domestic savings aswell as from higher non-debt creating flows (foreign direct and portfolio investment). Both willrequire continued improvement in the policy environment, including strong macroeconomic and policyreform performance.

23. Drugs. Over the past decade, Pakistan has become increasingly active in theinternational drug trade. Pakistan is a producer of opium (mainly in the tribal areas). Pakistani druglords also control the refining, transport and marketing of substantial quantities of heroin, utilizingPakistani opium and much larger quantities of opium produced in Afghanistan. Government efforts tocontrol narcotic trafficking and address increasingly serious problems of domestic drug use have

increased in recent years, but their impact has been limited. The problem is complicated by theminimal control which the Government has over the tribal areas, the difficulties of effectivelycontrolling the country's long and isolated border with Afghanistan, and the enormous profitability ofdrugs relative to other ways of earning a living in these areas. The drug trade has a negative effect onPakistan's international image and contributes to corruption and to other criminal activity.

24. Summary Assessment. Although Pakistan remains vulnerable to external pressuresand risks, continued implementation of the adjustment program will help to reduce this vulnerability.On the export side, Pakistan needs to improve competitiveness and increase efTiciency if it is tocapitalize on external market opportunities. This requires further actions to reduce domestic policyand infrastructure bottlenecks, with a particular emphasis op maintaining macro-economic stability andcarrying out the trade reform program. Implementation ot the reform program should also improvethe environment for attracting private funding. While Pakistan will have to rely increasingly onprivate financing as official sources of aid diminish, it can reduce its external vulnerability byattracting more direct foreign investment and other non-debt creating investment. This will happen tothe extent that Pakistan is able to demonstrate to foreign inves.ors that its policy environment hasimproved and that progress is being made in addressing governance concerns.

C. Pakistan's Development Objectives and Policies

Principal Development Issues

25. Pakistan faces significant medium and longer term development challenges. Its poorsocial indicators reflect long years of inadequate attention to basic social services. Rapid populationgrowth is putting an increasingly heavy burden on the economy. Even with an accelerated effort toimprove basic services, educate women, and strengthen family planning (just getting underway),Pakistan's population could double in two more decades to about 240 million. The investmentrequired to catch up with existing large shortfalls in physical and social infrastructure and ,t se sametime cover the basic needs of this rapidly expanding population will be massive. The COu*L.., s heavydependence on cotton and cotton based manufactures as the major source of growth and exportearnings leave it highly vulnerable to external shocks. Diversification is essential to reduce thisvulnerability, strergthen the economy's competitiveness and improve growth prospects. The naturalresources base is coming under increasing pressure from rapid population growth, poor management ofwater resources, and lack of attention to urban environmental issues. More attention to environmentalissues, especially improving management of Pakistan's vital irrigation and drainage system whichsupports 90% of agriculture production is also essential to future growth. The level of investment andsavings in the economy remains far too low to meet requirements for sustained growth. As aconsequence, Pakistan compares unfavorably with other fast growing economies in Asia in terms ofphysical infrastructure (basic transport, power and telecommunications) and even more so in humanresources development.

Government's Medium Term Strategy

26. Since the late 1980s, Pakistan has developed a comprehensive policy reformframework to address its development challenges. This policy framework has been broadly agreed byall major political groups. The strategy concentrates on three broad development goals: acceleratingefforts to tackle poverty and human resource development issues; strengthening the enablingenvironment for the private sector, and improving management of Pakistan's natural resources and the

environment. The Government's reform program is detailed in several major policy/operationaldocuments: the Fourth Policy Framework Paper, the Letter of Development Policy for the PSAL, theLetter of Intent for the ESAF, the Social Action Program, and the National Conservation Strategy(NCS).

27. Now that Pakistan has a clearer idea of its development priorities and has a soundbroad strategy in place to tackle them, the main challenge is implementation. In some areas detailedreforms are already in place or drawn up. For example, tax restructuring reforms are well developedand preparatoty work for continued privatization is well advanced. In other areas, more work isneeded to develop specific reforms. One such area is agriculture, where efforts to develop the privatesector's role in management of the irrigation system are just getting started. Another area is theenvironment. The NCS lays out the issues and suggested approach, but more work is needed todevelop the legislation and institutions to implement it. The Government's principal reform objectivesand ongoing reform initiatives are highlighted below.

28. Human Resources Development. Developing Pakistan human resources is perhaps thecountry's most difficult challenge. Building facilities and increasing access to basic services is onepart of this challenge. The other part is to ensure a decent quality standard for these services. All ofthis requires a sustained national commitment over the medium and longer term. The Government'sSocial Action Program to improve basic services is one important part of this effort. But theperformance of basic services also depends on the effectiveness of secondary and higher level servicesand resource mobilization and financing for the social sectors as a whole. Thus efforts will also haveto focus on broader health and education reform to improve cost effectiveness at all levels of service.A key element in the Government's program, is the effort to expand basic services for women andgirls, including policy and institutional cbanges to help overcome constraints on finding enoughwomen teachers and health care workers. The focus on female education and basic health care is alsokey to effective family planning.

29. Private Sector Development. Government efforts to strengthen the enablingenvironment for the private sector focus on freeing the economy from remaining controls, continuingtrade and financial sector reforms, and accelerating improvements in basic infrastructure. Tradereform has moved slowly up to now, but may now accelerate, with the new Government agreeing toreduce the maximum tariff levels from 92 to 35 percent over three years. In the financial sector,reforms focus on strengthening the regulatory environment, improving the legal framework for loanrecovery, increasing the share of credit going to the private sector, and supporting development of thecapital market. An improved environment for the private sector also requires substantial investment inbasic infrastructure, especially in energy and transport, including both new capital investment as wellas financing of rehabilitation and increased attention to operations and maintenance. Policy,institutional, and infrastructure improvements are also needed to maintain strong agriculture growth(especially strengthening management and maintenance of the irrigation system, improving weaksupport services, and correcting inappropriate pricing and marketing policies).

30. Changing Public and Private Sector Roles. Restructuring the roles of the public andprivate sectors in the economy is another key reform objective. The goal is to get the public sectorout of tasks that can be more efficiently performed by the private sector, while facilitating a largerprivate sector role in developing and operating basic infrastructure and social services. At the sametime, the Government must ensure that the restructured public sector is able to carry out the key tasksor services that remain-such as improving social services--in an efficient and cost effective manner.There is wide public support for privatization and the process has gone well up to now. However the

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next phase will more difficult since many of the enterprises are large and may require resolvingcomplex financial and managerial issues. The next task is to complete the sale or liquidation of publicmanufacturing enterprises previously put up for sale but not yet sold, sell the remaining twonationalized banks, and initiate efforts to sell other financial institutions and other industries recentlyapproved for privatization. The privatization initiative also covers the sale of the telecommunicationscompany and partial privatization of the power sector (thermal plants and distribution). However,given their complexity, privatization of these two enterprises can only be completed over time. TheGovernment must also establish appropriate regulatory institutions for private utilities to functionproperly, a task which is only just getting underway.

31. Public Finances. Improving public finances remains the centerpiece of the reformeffort. This task is complex and politically difficult to carry out. In essence, the Government'schallenge is to mobilize more revenues by reforming the structure of taxes and strengthening taxadministration to ensure that taxes and other charges are collected, and then utilize the revenues toreduce the fiscal deficit and increase spending on priority development needs. On tax structure, theGovernment's main objectives are to broaden the coverage of direct and indirect taxation and shifttaxation from international trade to domestic income and value added. To do this, the main focus ison expanding the General Sales Tax, turning it into a true VAT, and implementing taxes onagriculture income and wealth. On the expenditure side, the main aim is to improve the structure ofcurrent expenditures by containing unproductive expenditures and increasing allocations for O&M.The allocation for military spending was reduced by almost 1% of GDP in the FY94 budget and theGovernment is committed to consider further reductions. However, progress will continue to be linkedto security considerations. The program also aims at increasing development spending as a share ofGDP, with an emphasis on increasing allocations for the social sectors and basic infrastructure.However, money spent for development purposes must be utilized more effectively through carefulpriority setting and improved implementation.

32. Protecting the Environment. The Government's development agenda includes seriousenvironmental challenges. As a basically arid country heavily dependent on irrigated agriculture,growth prospects are closely linked to making progress in watershed management, improvingmanagement of the country's vital irrigation system (to reduce waterlogging and salinity) andaddressing serious urban pollution problems. These urban pollution problems, which irnclude untreatedindustrial and other waste, contribute to air, water and marine pollution and raise serious public healthconcerns. The Government's National Conservation Strategy was completed in 1992 with externaldonor and NGO assistance. It provides a comprehensive analysis of environmental problems and lavsout a broad strategy for tackling them. Effective implementation of the strategy requires strengtheningGovernment and private sector commitment to environmental goals, coupled with continueddevelopment of environmental institutions, policies and enforcement mechanisms.

Prospects for Sustained Growth

33. Pakistan's good growth record underscores the dynamism of its private sector, whichhas been strengthened in recent years with the progress made in liberalizing the economy. There islittle reason to doubt the capacity for continued solid growth in the private sector in Pakistan.However, growth prospects are closely linked to progress in strengthening macro-economicperformance, especially in the fiscal area, and in overcoming social, infrastructure, and governanceconstraints. Economic projections under a strong adjustment scenario are shown in Table 2 below.They are based on the Government's targets set out in the PFP for FY94-96 and assume successfulimplementation of the adjustment program, which would reduce public sector borrowing requirements,

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free scarce resources for increased private sector investment, aiud improve private sector efficiency, astax and regulatory distortions are reduced.

34. The three-year program aims at achieving an annual GDP growth rate of 7.5% inFY94, followed by 6.5% in FYs 95 and 96. Although revised est;mates indicate that the FY94 growthtarget will not be achieved, primarily because of a severe cotton virus, FY94 growth is still expectedto be excellent, ranging between 5.5% to 6%. Other targets over the three year period includereducing the fiscal deficit to 4.3%; lowering the current account deficit to under 2% of GDP; andincreasing gross international reserves to about 10 week of imports. The PFP macro targets areambitious and require a sustained fiscal effort both to contain low priority expenditures and raiserevenues. The projections are conservative, and show only a very small increase in direct foreigninvestment, reflecting continuing private sector concerns about the political and policy environment.Hlowever, as discussed earlier, the potential is there for much higher investment.

Table 2: Macroeconomic Projections, FY94-96

FY94 FY95 FY96

GDP Growth Rate 7.5 6.5 6.5Exports Growth Rate (volume) 12.0 9.6 7.7Import Growth Rates (volume) -7.9 4.5 5.3Total Consumption per Capita -1 1 2.2 2.8Inflation Rate 8.1 6.5 5.5

Total Debt Outstanding & Disbursed/GDP 48.0 46.1 43.7Total Debt Service/Export of Goods and Services 21.1 19.3 18.1

Overall Budget Deficit/GDP -6.7 -5.3 -4.3Current Account of Balance of Payments/GDP -3.0 -2.0 -1.7Resource Balance/GDP -4.3 -3.3 -2.9

Gross Capital Formation/GDP 20.0 21.2 21.9

Direct Foreign Investment 500 550 600(US$ millions)

D. Bank Group's Country Assistance Strategy

Program Focus

35. The Bank's assistance strategy in Pakistan focuses on two closely linked developmentgoals: poverty reduction and reducing constraints to sustained growth. To address the povertyreduction objective, the Bank's approach highlights improving inadequate basic social services and soimproving weak social indicators. To support the growth objective, which will help with the income-related aspects of poverty reduction, Bank efforts concentrate on: structural reforms, with an emphasison public finance issues and improving the enabling environment for the private sector; strengtheninginadequate basic infrastructure; reducing constraints on agriculture productivity; and protecting

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Pakistan's natural resources base. Much of Bank assistance, not on3y in the social sectors, but also inthe urban and agricultural/natural resources sectors, has a direct impact on poverty reduction.

36. The poverty reduction and growth objectives of the program are closely interlinked. Amore supportive enabling environment for the private sector is essential to mect growth objectives. Italso provides the basis for expanding income opportunities for the poor. Similarly, the priority givento human resource development is important both to improve social indicators--an important objectivein itself--and to have the human capital needed to support sustained growth. The increased focus onenvironmental concems is also directly linked to both poverty reduction and growth objectives.Improving water supply and sanitation, reducing urban pollution and slowing and repairing degradationof natural resources are needed for sustainable growth and for improving the quality of life andincome potential for the poor. Better management of public expenditures, with emphasis on helpingensure increased funding for social and physical infrastructure, supports both poverty reduction andgrowth objectives.

Lending Program Size and Composition

37. World Bank and IDA assistance to Pakistan steadily increased over the last decade,with average annual commitments growing from about US$225 million in the early 1980s to US$640million during FY85-87. During the period FY88-91, the annual average commitment level increasedto about US$730 million, owing largely to substantial adjustment lending. In FY92, commitments fellbelow US$400 million reflecting delays in reaching agreement on new adjustment lending. Newcommitments in FY93 (US$428.9 million) also fell below programmed levels owing mainly to poorfiscal performance which delayed agreement on adjustment lending, and slow progress in finalizing alarge power development loan.

38. Planned base case IBRD/IDA lending for FY94-96 is estimated in the US$1.8 to 2.2billion range, including IDA lending of US$750 to US$1.0 billion equivalent, with about 6 operationsprogrammed annually. IBRD lending at the base case level is linked to overall satisfactory, but lessthan exemplary, progress in carrying out the adjustment effort. In particular, we would be looking athow well fiscal reforms are doing, progress in increasing development spending in priority sectors, andthe status of efforts to increase private sector involvement and investment in key sectors such asenergy and irrigation and drainage. The actual level of lending in any given year would also dependon the status of project preparation and other sectoral reforms. IDA lending is earmarked primarilyfor projects and programs which address poverty concerns and which improve social sectorperformance. Continued IDA lending at the currently programmed level assumes further progress inimproving social sector performance and addressing underlying poverty issues. If the Government isable to make excellent progress in the adjustment program over the next one to two years, we wouldconsider moving into the high case, with the programmed lending level increasing to around US$2.7billion on a three year basis.

39. Should the adjustment effort and reform program, including essential social sectorreforms, slow down significantly or stall and there appear little immediate chance of putting it back ontrack, IBRD lending would be reduced sharply, putting total lending into the low case, ie. with IBRDand IDA lending of about US$400 million per annum. IDA lending would be maintained atprogrammed levels in the low case scenario, unless, as noted above, satisfactory progress is not madein addressing social sector and poverty concems.

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40. The contenit of our lendinig program has shifted substantially since the late 1980s.Dturing the FY80-88 period, 70% of total Baank and IDA commitments were allocated to agriculture(including irrigation) and infrastructture (mainly energy), wvith the remaining commitments dividedbetween industry (about 17%) and the social and urban sectors (about 6% each). Sinice FY88, thecomposition of lending has shiited sharply to reflect the support for adjustinent and the mujch higherpriority being given to the social sectors. As a result, adjustment lendinig hias accounted for about 20%of commitments, with lending to the social sectors increasing almost threefold to 16%. To make roomfor these changes, commitments tor agriculture and infrastructure have been lower than in the past,and lending for industry has fallen more sharply to about 5% of total lending during the last fiveyears.

41. Over the next threce to lbur years, the share of lendinig to the social sectors isprogrammed to increase even fuirther to over 20%. Lendinig to infrastructure is expected to absorbbetween 35 to 40%, reflectinig the higlh capital and ioreign exchanige costs, especially in the powersector. Another 25% is programmed for agricuilture (includinlg protection of natural resources), withthe remaining 10 to 15% of new comm11itmeints planned for industry/finance and/or further adjustmentlending.

Priority Areas of Bank Assistance Strategy

42. To achieve the twin goals of poverty reduction and sustained growth, the assistancestrategy and work program concentrate on four priority areas: strengthening social sector performance;overcoming infrastructure constraints; improving agriculture productivity and strengtheningmanagement of natural resources; and supporting adjustment (with emphasis on improving theenabling environment for the private sector and improving management of public expenditures).

43. Social Sectors. Our strategy in the social sectors emphasizes: (i) improving the qualityand coverage of basic social services; (ii) improving the overall efficiency of the health and educationsectors; and (iii) developing new approaches to expand local community participation in improvingsocial services. The present focus on strengthening basic services (including family planning), aims atboth improving social indicators and increasing productivity and earning capacity. Programs andprojects in the social sectors incorporate a heavy emphasis on women's issues, since improving thestatus of women and strengthening their role in development is key to slowing population growth andmaking progress in poverty reduction. An important component of the Bank's program in the socialsectors over the past two years has been to assist the Government in developing its Social ActionProgram (SAP). Technical assistance for the SAP is provided through IDA lending and through amulti-donor support unit set up at the Bank's Resident Mission. Bank financial support for the SAP issignificant. It includes both ongoing and planned projects to support improvements in the four basicservice areas (primary education, primary health, family planning and rural water supply andsanitation) as well as the proposed sector investment operation to support the SAP as a whole. Theprocessing and timing of future assistance to the social sectors, will be closely tied to satisfactoryprogress in meeting SAP expenditure targels and progress in carrying out policy/institutional reformsto improve the quality and effectiveness of basic social services.

44. In addition to the proposed SAP operation, future assistance to the social sectorsincludes a project to strengthen primary education in NWFP, a project to strengthen the Government'sfamily planning activities, possible assistance for nutrition, and a project to support reforms insecondary education. Since we already have ongoing primary education projects in the other three

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provinces, the NWFP primary education project will complete a first rounld of support for primaryeducation covering all four provinces.

45. Infrastructure. Pakistan's infrastructure development requirements exceed thefinancing capacity of the public sector. For this reason, and to improve efficiency, an important goalfor the Bank is to assist Pakistan in developing a variety of meclhanisms to expand private sectorparticipation in and funding of infrastructure. These have included establislhment of a Private SectorEnergy Development Fund (PSEDF) as a vehicle for facilitating private sector energy projects; supportfor joint venture arrangements in the oil and gas subsector; use of the Bank's guarantee authority(ECO) to attract commercial bank financing in the energy sector (Hub project); and support for thecorporatization and eventual privatization of parts of the national pow er authority (WAPDA). Piogressin developing these initiatives has been slower than expected. As a result, the expected largeexpansion in private investment in energy has not yet materialized. In particular, finalization of theHub project, for which the Board approved an ECO arrangement in December 1991, has been delayed.This has happened owing to the large number of parties involved, tne very large size of the project,and the complexity of the operational and financial agrcements required, particularly in the context ofdeveloping a new project financing concept. However, final arrangements are being made and theproject is now expected to reach financial closure before the end of FY94. Preparation of otherprivate sector power projects are well advanced, and once financial arrangements for Hub arecompleted, private investment in power is expected to move ahead much faster.

46. Lending for infrastructure in the next few years is expected to concentrate on supportto the energy sector. We expect to present a Private Sector Energy and Infrastructure DevelopmentFund project later this year. It would include additional financing for the Hub project and the nexteligible energy project; widen the coverage of the Fund from energy to infrastructure in general; andsupport institutional improvements to encourage private investment in infrastructure. Other plannedoperations in energy include: a large Power Development Project to finance a time-slice of WAPDA'sinvestment program and support WAPDA's privatization strategy; a major run-of-the river hydroproject (Ghazi Barotha); and continued support for restructuring institutions in the oil and gassubsector and promoting private sector participation. The Power Development Project is welladvanced, but Board presentation has been delayed pending amendment of WAPDA's legal frameworkto permit its corporatization and eventual partial privatization. Processing of the US$2.5 billion GhaziBarotha project, is expected to be supported in two phases, with an initial small lending operation tosupport preliminary works, followed by a larger operation to support the main project. Bank financingfor Ghazi Barotha would be linked to environmental acceptability, agreement on a satisfactoryfinancing plan, including substantial support from other external donors, and progress in furtherimproving WAPDA's financial and operational performance. Future lending in the oil and gassubsector would be linked to progress in strengthening sector institutions and increasing private sectorparticipation.

47. In addition to assistance to the energy sector, we also plan to provide support to theGovernment in restructuring the legal and institutional framework for the telecommunications sector tofacilitate privatization and provide limited support for other infrastructure development, includingtransport and urban infrastructure. Lending for urban infrastructure would focus mainly on improvingurban services (especially water supply and sewage) and upgrading basic services for low incomegroups.

48. Agriculture and Natural Resources Management. In agriculture, the focus of ourpolicy dialogue is on reshaping public and private sector roles. For the public sector, the main

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objectives are to improve capacity to efficiently carry out large public investment programs inirrigation and drainage, strengthen support services in research and extension, and improvemanagement of watersheds and water resources. Bank efforts to support conservation andenvironmental protection goals focus on: policy and legal reform; strengthening of Pakistan'senvironmental institutions; and financing specific interventions to reduce environmental damage. Withrespect to the private sector, recently completed economic and sector work (ESW) on irrigation anddrainage recommends a fundamental shift in the management of the irrigation and drainage system toreduce the need for public financing and give the private sector a greater stake in the efficientmanagement of the system. The objective is to move towards a demand based system of allocatingwater, involving commercialization of the system, with the private sector, including particularly fannerorganizations, to gradually take over responsibility for financing and managing operations andmaintenance of all irrigation systems at the canal command level and below. The public sector wouldretain responsibility for operation of all main canals.

49. The Bank's assistance program in agriculture/natural resources management in comingyears would emphasize sector investment and project lending to support: (i) development of nationalprograms to overcome irrigation and drainage problems and initiate the shift towards market orientedprivate sector management of the irrigation system; (ii) further policy reforms in pricing, marketingand institutional development; (iii) improvement of research and extension; and iv) improving naturalresources management in Baluchistan and forest management in the Punjab. The principal policytrigger for high levels of lending in agriculture, especially for irrigation and drainage, would be linkedto continuing progress in improving public expenditure performnance (including better cost recoveryand improving implementation of the investment program) and progress in developing the privatesector's role in the sector, especially in terms of management of the irrigation and drainage system.The Bank has also been working closely with the Government in developing a priority action plan forimplementing Pakistan's National Conservation Strategy, which forms the basis for Pakistan'sEnvironmental Action Plan. An Environmental Management Study planned for FY95 will develop amore elaborate Bank strategy for addressing environmental issues, with lending to be linked toinstitutional and policy goals.

s0. Structural Adiustment. Bank support of Pakistan's ongoing adjustment effort focuseson two main areas of reform: policy and institutional changes aimed at strengthening the enablingenvironment for the private sector; and steps to improve management of public expenditures, as a keyelement in strengthening macro-economic performance.

(i) Continued efforts to complete Pakistan's financial sector reforms and revamp theindustrial incentive regime are needed to further improve the environment for privatesector development and increase Pakistan's attractiveness to foreign investment. Aproposed Financial Sector Deepening and Intermediation project, currently underpreparation, would build on the policy reforms introduced under the earlier FinancialSector Adjustment Loan (FSAL). It would support further policy and institutionalreforms to strengthen financial institutions, and provide term resources to help meetprivate sector financing needs. Industrial incentive policies and trade reform would betaken up as part of the Bank's ongoing dialogue on adjustment issues. We are alsopreparing a Private Sector Assessment, which would develop an agenda andframework for further policy and institutional changes needed to strengthen privatesector goals and investment prospects.

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(ii) The Bank continues to work closely with the Government (in cooperation with theIMF) in strengthening macro economic management. The focus of the Bank has beenon improving the allocation and utilization of public expenditures, with emphasis onincreasing the level of development spending, strengthening mechanisms for settingexpenditure priorities; ensuring adequate allocations for operations and maintenance;and supporting steps to improve public administration and cost effectiveness. Over thepast four years, the Bank has undertaken an annual review of the draft investmentbudget as input into the Government's budget preparation process, with emphasis onreviewing priorities and the level of sectoral and specific project financing. We havealso increasingly focused on sector and subsector expenditure programming issues aspart of preparatory work for new lending operations and increasingly made use ofsector investment lending as a vehicle for reaching agreement on broader expenditureneeds. Planned lending and ESW work will continue the focus on public expenditureissues. The recently approved Public Sector Adjustment Loan (PSAL) also focuses onpublic expenditure issues. It supports Government efforts to: improve the prioritizing,planning and control of development expenditures; reduce duplication and eliminatepublic sector functions no longer required (as recommended by the Government'sEconomy Commission); and move ahead with its privatization initiative. Furtheradjustment lending would depend on progress in implementing the PSAL andstrengthening macro-economic performance.

Country Dialogue and Economic and Sector Work Program

51. The Bank has been engaged in an active country dialogue on sector policy issues andbroad structural reforms to support its assistance strategy. Since the start of the reform program in thelate 1980s, this dialogue and supporting ESW has focused heavily on redefining the roles of the publicand private sectors (including privatization issues), public expenditure issues, and reformns in trade andthe financial sector. The Bank also continues to work closely with the Government and the IMF onmacro-economic issues. Bank policy discussions and related ESW have also covered agriculture sectorissues, especially institutional and policy constraints which undermine productivity and growth. Morerecently the policy dialogue in this sector has focused on strengthening management of the country'sirrigation system, including the need for sharply expanding private sector participation in the operationand maintenance of the system. Substantial analysis of social sector issues has also been carried out,including work on population, women, poverty and health and education reform issues. This analysishas supported a significal1t expansion of lending to the social sectors, and helped lay the policy andinstitutional basis for the Government's Social Action Program.

52. ESW priorities for the next few years reflect the broad themes of the countryassistance strategy. In addition to monitoring the Government's ongoing adjustment effort, the ESWprogram will focus on: (i) public expenditure issues, including review of the public investmentprogram and federal/provincial fiscal issues; (ii) studies on private sector development issues, includingthe private sector assessment, analysis of the private sector's role in the provision of basicinfrastructure, an energy options study, and work on policy and institutional issues in agriculture; (iii)continued work on environmental issues to develop options for implementing the Government'senvironmental strategy; and (iv) further analytical work on human resources development and povertyissues, including a poverty assessment. The poverty assessment, currently under preparation, willexpand and update the initial poverty sector work completed in FY91. It will take an indepth look atthe poverty profile and develop key inputs for designing a comprehensive povertv reduction strategy.

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53. The ESW program also supports a variety of mechanisms to enhance the discussionand dissemination of economic and sector work and expand Pakistani involvement and participation inanalytical work which the Bank is undertaking. A recent seminar organized by the Bank focused onmanagement of the irrigation system and how to expand private sector participation. Two otherworkshops or seminars are planned in the near future. One will discuss poverty related issues andresearch topics as part of the preparation work for the Poverty Assessment. The other will focus onprivate sector issues to help lay the basis for the Private Sector Assessm,' it.

Portfolio Management

54. As of December 31, 1993, the loan and credit portfolio consisted of 47 operations fora total lending commitment of US$4.6 billion. The overall status of the portfolio has shown animproving trend, as the number of problem projects has declined from 24% of the portfolio in FY92to 14% in FY93. Disbursement performance declined slightly in FY93 given a decline indisbursements under adjustment operations, with disbursements under investment operations continuingto show improvement over the past few years. Nevertheless, implementation and disbursementperformance continues to suffer from systemic implementation constraints. Six operations remain inthe problem project category. Systemic implementation bottlenecks fall into three main categories:financing and expenditure issues, namely inadequate counterpart funding, delays in release of funds,and poor cost recovery and inadequate funding for operations and maintenance; institutional issues,such as insufficient delegation of authority to project managers and too rapid turnover of key projectstaff; and procedural bottlenecks, including delays in the appointment of project staff and consultants,slow processing of project documentation by the Government, procurement constraints, and problemswith Special Accounts. These type of problems have affected all externally funded assistanceprograms, with total committed but undisbursed aid totaling about US$9 billion.

55. To address these issues, the Bank, in close coordination with other donors, hasincreasingly emphasized implementation issues in its country dialogue. This emphasis has includedthe holding of annual Country Portfolio Performance Reviews (CPPR) starting in FY90, discussion ofimplementation issues at successive meetings of the Pakistan Consortium, and a concerted effort toclean up the portfolio by closing out or restructuring projects suffering long delays or facing majorproblems. The FY93 CPPR reached agreement on a Plan of Action focused specifically on keygeneric implementation issues, with emphasis on reducing project funding problems, improving projectmanagement, reducing delays in effectiveness, and speeding up appointment of key staff andconsultants. This Action Plan is reviewed by the Resident Mission at regular intervals with the federaland provincial governments. The Resident Mission has also taken on an enhanced role in projectsupervision and follow-up of CPPR understandings, with local higher level staff assigned fullsupervision responsibility for a number of projects to facilitate a more intensive supervision effort.

56. As a result of these efforts, the Government has taken a number of steps to addresslonger-term project management issues. A three-year rolling investment program has been preparedand will be updated annually to help plan project financing requirements over the medium term.Annual core investment budgets are being prepared to help ensure adequate allocations for priorityprojects. If institutionalized, these initiatives should reduce counterpart funding problems, althoughdelayed release of funds is still likely given tight budget constraints. Provincial water charges havebeen increased by 25% to provide increased funds for O&M, although budgetary allocations stillremain inadequate. Revised procedures for the operation of Special Accounts have been put intoeffect to facilitate a more rapid flow of project funds. The Government is also taking steps to reduceprocurement delays. Standard Bidding Documents have been developed. In addition, the Government

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is initiating a national procurement reform program to identify and develop specific legal andadministrative changes required for a more efficient and transparent procurement system throughoutPakistan. The program is being supported through an IDF grant. A Project Management System isbeing established in the Economic Affairs Division of the federal government and with provincialgovernments to improve monitoring and support of project implementation management. TheGovernment is also undertaking a review of its overall project portfolio to identify projects which nolonger fit its development priorities and which need to be restructured or cancelled.

57. Increased Bank and Government attention to portfolio management issues is beginningto pay off, but continued close attention to implementation issues is needed. To ensure continuedimprovement and reduce future problems, the Bank's portfolio management strategy focuses on: (i)improving quality upon entry, through enhanced borrower participation during preparation, upfrontagreement on policy and institutional reforms, and preparation of detailed implementation plans; (ii)minimizing project start-up delays by advancing the Government's approval process for new projectsand holding project launch workshops to intensify Government commitment and minimize initialimplementation problems; and (iii) a continued emphasis on increasing the effectiveness ofsupervision, including further intensive supervision of problem projects, tightened management ofclosing dates, holding mid-term reviews, and an ac.;ivist approach to reformulating or redesigningprojects when necessary and without waiting for problems to reach crisis proportions. All problemprojects have time-bound action plans which are closely monitored.

58. Beneficiary participation in project preparation and implementation has beenconsiderably expanded. Close work with community groups is a feature of the ongoing BalochistanPrimary Education Project. The Northern Pakistan Resources Management project incorporates astrong community participation element, with the Agha Khan Rural Support Program providingsupport in project design and in community organization. The proposed Punjab Forestry Project isusing local sociologists to work directly with villages to assess range and scrub forest rehabilitationneeds. Preparatory work for the Balochistan Minor Irrigation Project builds on and expands earliercommunity participation efforts to ensure that there is full community involvement in the design andimplementation of local irrigation schemes. The proposed NWFP Primary Education Project makesuse of parental and community groups to work out solutions for improving primary education at thelocal level, including education for girls and more local control over quality. The Pakistan Irrigationand Drainage Review highlights the importance of beneficiary participation for sustainable irrigationand drainage investments. Future operations in these subsectors would redefine the role ofbeneficiaries, NGOs and the Government.

IFC

59. Since 1958, IFC has made commitments in Pakistan totalling US$360.5 million, ofwhich US$252.8 million has been repaid, sold, terminated or cancelled. Of the balance of US$107.6million, US$90.6 million represents loans and US$17.0 million equity. Over the past few years, IFChas been expanding its operations in Pakistan, reflecting progress in developing a more open and moresupportive environment for private sector led growth. Recent investments have focused on the generalmanufacturing and textile sectors, where Pakistan enjoys a comparative advantage, and in capitalmarkets. In FY93, IFC investments almost quadrupled compared with FY92, with projects ininfrastructure, construction material, the value added end of the textile sector, and hotels and smallbusinesses through a bank credit line. IFC has become an important catalyst for private sectorfinancing in Pakistan and has developed a solid and well diversified pipeline of new projects. As jointventures with overseas technical partners will play a key role in generating increased value-added for

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Pakistan, IFC investments will utilize this approach to the extent possible. In the near term,investments under preparation would provide continued support for infrastructure (oil and gas andprivate power generation) and aim at strengthening the capital market activity, with a focus ondeveloping more sophisticated financial institutions and a corporate bond market. Preparatory workhas been completed for the establishment of a credit rating agency, the provision of a credit line to sixleasing companies, and establishment of a full service investment bank. Preparatory efforts continuewith respect to developing commercial paper and convertible instruments. To support energy sectordevelopment, IFC and the Bank are working with the Government to standardize criteria for setting upprivate sector power projects, with two gas-based generation projects and one oil fired facility underpreparation. Work is also urderway to develop two oil and gas projects, one for gas compression inthe Sui gas field and the other a new company to provide the fuel oil pipeline for the Hub Powerproject.

MIGA

60. MIGA has been active in Pakistan since 1991, with coverage issued up to US$150million, mainly for investments in banking, but also including a small number of investments inmanufacturing and telecommunications. MIGA is also exploring the possibility of providinginvestment insurance services to Pakistanis seeking to invest abroad. MIGA has also been active ininvestment promotion, including sponsorship of an Investment Promotion Conference in late 1991. Inaddition, the Foreign Investment Advisory Services (FIAS) has completed a study of the foreigninvestment environment and is assisting Pakistan in the development of its foreign investmentpromotion institution.

Cooperation with Other Institutions

61. The Bank maintains a close working relationship with all major bilateral andmultilateral development assistance programs in Pakistan. There are no major issues or disagreementson lending and policy matters. Cooperation with the IMF has been extensive in the context ofadjustment program preparation and implementation, with Bank staff participating in all major Fundmissions. Cooperation with ADB and Japan, the other two largest providers of development assistanceto Pakistan, has also been excellent. Both ADB and Japan participate in Bank missions whenappropriate either for supervision or project preparation and Bank staff visit Manila and Tokyo forcoordination purposes. Close contact is also maintained with other assistance agencies, with theResident Mission taking the lead in exchanging information and ensuring adequate coordinationthrough periodic coordination meetings in Islamabad. Among the other aid agencies or bilateraldonors working closely with the Bank, including cofinanciers, are UNDP, the Netherlands, the UK,Canada, and Germany. The Bank has also worked closely with USAID, although US assistance toPakistan will now end this year. Given the high priority which all donors give to improving socialsector performance, cooperation with other donors has been particularly intense during preparation ofthe Government's Social Action Program. The Multi-donor Support Unit for the SAP is funded withsupport of UNDP, ODA and Japan, with contributions from other donors being processed. Staff fromUSAID, ADB, and the Netherlands have participated in preparation and appraisal of the proposedSocial Action Program Project.

62. As chair of the Pakistan Consortium, the Bank is actively involved in reviewing themacroeconomic and sectoral policy framework for donor assistance. The annual Consortium meetingin Paris is an important means for continuing to secure high levels of external assistance and as avehicle for a two-way exchange on development prospects and problems. Over the past few years

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several bilateral assistance programs have been curtailed, given changing priorities and policies as wellas competition from other countries and regions for ever tighter aid budgets. As a result aidindications given at the Consortium have declined somewhat to around US$2.5 billion. In today'smore competitive aid environment, the Consortium remains a useful vehicle for putting forwardPakistan's case, for coordinating and focusing the donor community on key policy issues, and forcommunicating donor views to the Government.

External Financing Requirements

63. To help achieve its development goals, Pakistan will require sustained externalsupport. During FY94-96, Pakistan's external financing needs are estimated at about US$4.0 billionp.a., with gross disbursements from official source remaining constant at about US$2.5 billion perannum excluding IMF purchases. Prospects for raising additional aid from official sources are notfavorable, although the large stock of committed but undisbursed official aid (US$9 billion at endFY93) suggest that official disbursements should not decline over the medium-term. Therefore,private capital sources, would be required on a significantly larger scale than in the past. As extemalfinancing requirements expand over the medium to longer term, Pakistan will have to rely increasinglyon the international private capital markets, which underscores the importance of improvingcreditworthiness.

Creditworthiness and IBRD Exposure Indicators

64. Pakistan is not a severely indebted country, but by FY93 total civilian public andpublically guaranteed debt had increased to US$24.4 billion, or 46.8% of GDP. The debt service ratioreached at about 23% of exports of goods and services in FY88, and has increased only marginallysince then to 24.6% of GDP in FY93, mainly as a result of strong export performance. Assumingsatisfactory progress under the adjustment program, creditworthiness would strengthen steadily, withtotal debt as a percentage of GDP falling below 45%, and the debt service ratio falling below 20% byFY96.

65. Pakistan remains prompt in servicing IBRD and IDA debt. Nevertheless, the level ofnew IBRD commitments will be linked closely to improvements in macroeconomic policies. IBRDdebt service indicators would increase in the short to medium term as ongoing loans are disbursedmore quickly and as loans disbursed in the late 1980s become due. Debt service to preferred creditorsas a ratio of total public debt service has increased to about 48%, and is expected to continue toexceed guidelines. This reflects the fact that official bilateral flows have declined significantly, whileflows from multilateral institutions, especially the IMF, have risen significantly. IBRD debt service asa share of exports will remain over 2.5% in the medium term, but decline to 2.3% by the end of thedecade.

E. Agenda for Board Consideration

66. There is broad agreement between Pakistan and the Bank on the country's principaldevelopment goals and the Bank's strategy and program. The Government has indicated that it wouldlike the Bank to move faster with additional fast disbursing support for the adjustment program, butthis would be reviewed in light of progress in implementing the PSAL and in strengtheningmacroeconomic performance. The principal policy objectives and performance indicators aresummarized in the matrix on page 22.

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67. Implementation of the proposed lending program is linked to progress in carrying outreforms in three basic areas:

(i) Structural Reforms. Continued progress in strengthening macro-economicperformance, especially fiscal, and completing the structural reform agenda, remainscritical to strengthening creditworthiness and providing the policy environment forprivate sector development. With a well developed reform program underimplementation, progress will depend heavily on maintaining the political supportneeded for timely implementation of the refortn agenda. A key reform objective israising adequate resources to finance priority development programs and projects,while improving the management and utilization of public resources. Satisfactoryprogress in this area remains crucial to effective implementation of the Bank'sprogram. We expect public expenditure issues to continue to dominate the countrydialogue in the short a; I medium term. One result will be the continued heavy use ofsector investment operations as the principal lending vehicle for achieving broadsector-wide expenditure and public sector management related reforms.

(ii) Social Sector Agenda. Support for Government efforts to address poverty and humanresources development goals remains the highest priority for the Bank. However, theBank's ability to move ahead with the high level of support proposed depends heavilyon the effectiveness of Government efforts to strengthen sector institutions, increasefunding and improve overall absorptive capacity. This in turn depends heavily onsustained and active political commitment to social sector goals. The Social ActionProgram provides a strong framework for securing this political commitment as well asneeded funding and implementation reforms. The timing and coverage of additionalBank support for the social sectors will be closely linked to progress in carrying outthe SAP.

(iii) Public and Private Sector Roles. The speed and effectiveness of Government efforts toredefine public and private sector roles in the economy and in economic development--a key objective of the reform effort--will also have a major impact on theimplementation of the Bank's program. This redefinition of roles is a common threadrunning through policy and institutional reform efforts in energy, transport, irrigationand drainage, agriculture support services, and the environmental sector. Banklending in these sectors will emphasize increasing private sector participation in areaswhere the private sector has a comparative advantage, strengthening public institutionswhere public involvement is essential to achieve development goals, and developmentof appropriate regulatory institutions to ensure cost effective private involvement,especially in public utilities.

68. Country progress in addressing Pakistan's development and adjustment challenges willbe monitored in various ways. With respect to macro-economic performance, key criteria includefiscal, monetary, and balance of payments indicators. Satisfactory implementation of the publicinvestment program will be assessed in line with agreements reached tnder the PSAL. We will alsoassess improvements in project implementation, in line with our CPPR Action Program, including therate of disbursement of project aid and progress in resolving generic implementation issues.Strengthening the role of the private sector will be monitored by progress in carrying out trade andfinancial sector reform and improving the incentive regime as well as by changes in the level

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MAIN OBJECTIVES AND INSTRUMENTS OF COUNTRY ASSISTANCE STRATEGY

POLICY OBJECTIVES ACTION PRIORITIES IBRD/IDA SUPPORT

Strengthen human resources - Implement Social Action Program (SAP') to - Proposed SAPl'roject.development and slow improve basic health. education, water supply - IProject and sector investment lending inpopulation growth. and population services. Emphasis on increasing population, primary education, and nutrition.

access, with focus on women: and strengthening - 'I'cchnical Assistance to SAP through Multi-Donorimplcmentation capacity, quality and cost Support Jnit based in Resident Mission.effectiveness through institutional/policy refonns. - tSW. including Poverty Assessment (FY95) to

refine Bank S ategy.

Expedite public and private - Ixpand investment in basic infrastructure. P I'roposed Power Sector Development Project tosector efforts to meet basic especially power, with increased emphasis on support WAPDA restructuring/privatization.infrastructuire requirements. demand side management and further - Completion of 1IUB Power project financing/

rationalization of pricing policies. ECO.Inerease private sector participation in financing - Proposed replenishment of Private Sector Energyand implementing projects in basic infrastructure. Development Fund and expansion to include other

- Follow through with privatization of power and infrastructure.telecommunications including establishing - Ghazi Barotha Hydro Power project.regulatory frameworks. - Punjab Urban Environment Project.

- Further develop mechanisms to facilitate private - Karachi Water Loss Prevention project.sector investment in basic infrastructure.

- Improve urban infrastructure, includingupgrading basic services for low income groups.

Improve management of - Develop private sector, including farmer - ESW on management ofin igation and drainage;natural resources and organization, role in financing, operation and support for enhanced private sector role.strengthen agriculture maintenance of irrigation system. - Sector investment lending in drainage andproductivity. - Strengthen research and extension institutions. irrigation.

- Strengthen public sector capacity to cany out - Baluchistan Natural Resource Conservationlarge investments in irrigation and drainage. Project (FY94); Proposed Punjab Forestry Project

- Develop federal/provincial capacitv to monitor - Lending for agriculture support services.and enforce environmental regulations. - Environmental Management Study (FY95).

- Support implementation of NationalConservation Strategy.

Strengthen enabling - Strengthen macroeconomic management. - Implementation of PSAL supported program.environment for Private - Follow through on privatization of industry. - On-going policy dialogue in coordination withSector. - Carry out trade reform as spelled out in PFP. IMF to strengthen macro framework and overall

- Further financialbanking sector reforms. investment climate.- Further reduce bureaucratic and regulatory - Proposed Financial Sector Deepening and

bottlenecks to private investment. Intermediation Project- Private Sector Assessment (FY95) and sector

work in trade and industry.

Improve allocation of public - Prepare annual core investment program. - Monitoring ofpublic investment program as partexpenditures in linc with - UJpdate 3-year rolling investment program. of PSAL.development priorities. - Contain non-productive expenditures, including - ESW on public expenditure issues (including

defense. annual review of investment budget).- Increase allocations for priority sectors, including - Sector investment operations in social,

the social sectors, operations and maintenance. irrigation/drainage and power sectors, with focuson expenditure programming.

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of domestic and foreign private sector investment. Progress in privatization will be measured usingthe Government's targets for privatization as also agreed in connection with the PSAL.

69. With respect to poverty reduction, changes in social indicators will take time tomaterialize. Progress will be monitored through implementation of the Social Action Program, whichwill include an institutional arrangement for monitoring, with targets and indicators spelled out inadvance. More specifically, progress will be monitored in terms of Government spending on health,education and family planning as well as improvement in specific indicators such as enrollment ratios,especially for females. Progress in health and education would also be monitored in respect to qualityof service, including policy and other changes to increase staff effectiveness and adequate provision ofmaterial and supplies. Progress in meeting environmental challenges will be measured in terms ofdeveloping an adequate legal framework, particularly the establishment of environmental qualitystandards; implementing environmental assessment procedures for new investment; and effectiveenforcement. Over the medium term progress will be measured by improvements in air and waterquality and the reduction in the area of waterlogged and saline soils.

II. THE PROPOSED CREDIT

Background

70. The Social Action Program (SAP) is the name Pakistan has given to its overall effortsto improve basic social services over the five year period 1993/94-1997/98. The Government's SocialAction Program, and the proposed SAP Project which would support it, address Pakistan's relativeweakness in basic social services, which has become a major shortcoming in, and constraint on,Pakistan's development accomplishments. Although health indicators and educational attainments haveimproved over the past twenty years, they generally remain below expected levels for countries ofcomparable income, especially for women and girls. For instance, roughly half of all school-agechildren in Pakistan and about 40% of the girls are enrolled in primary school. Yet the South Asiaregion as a whole has made faster progress: comparable figures for neighboring India are 97% for allchildren and 83% for girls, while those for Bangladesh are 73% for all children and 68% for girls. Forlow-income countries as a whole, these averages approach 100%.' Because of high female mortality,the female proportion of Pakistan's population is among the lowest in the world. Not surprisingly,Pakistan's total fertility rate is 5.7 compared with 3.8 for low-income countries as a whole and 3.9 forIndia. As a result, its population includes a relatively high proportion of dependent children, whoseneeds--if met--would absorb substantial resources.

Project Objectives

71. The Government of Pakistan, like IDA and many donors, believes that a broad-basedeffort to improve the most basic social services is now needed. It has therefore embarked on a Social

1/ Gross Enrollment Rates at the primary level are dcfined to be the numb er of children of allages enrolled in primary school divided by the population of children of primary-school age.For some countries the GER may exceed 100% because some pupils are younger or older thanthe country's standard primary age.

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Action Program to improve and expand primary education, primary health care, family planning, andrural water supply and sanitation (RWSS). These investments in basic social services will boosteconomic productivity, reduce poverty, and promote smaller, healthier, and better educated families.Returns on investments that reach women will be especially high. The proposed SAP Project wouldstrengthen the implementation, design, and level of effort of Pakistan's entire Social Action Program.Monitorable targets for achievement for each of the SAP sectors have been agreed. To help ensure thatgains achieved will be sustainable, the SAP Project will help build and institutionalize politicalcommitment. establish adequate financing for recurrent as well as development costs, and encouragegreater community and user responsibility for basic social services.

Project Description

72. The proposed SAP Project would provide a multi-sector investment and maintenancecredit to strengthen implementation of Pakistan's Social Action Program (SAP). The Project wouldreinforce existing social sector programs and projects, whether or not aid-financed, by focusing on afew core problems that impair performance throughout the social sectors. It would help finance thefirst three years (1993/94-1995/96) of the Social Action Program. For planning and monitoring, theSAP is divided into constituent sub-programs. The main ones cover three basic social services --primary education, primary health care, or rural water supply and sanitation (RWSS) -- in each ofPakistan's four provinces plus the national population program. Others cover selected federallyadministered basic health and education programs, and basic services in areas directly administered bythe federal Government. The Project would also provide funds to improve monitoring and managementand to help non-government organizations promote community involvement in basic social services.Project funds would be needed to finance a part of all expenses incurred to deliver the target services,including salaries, operating expenses, supplies, goods, civil works and maintenance expenses.

73. The SAP Project would take a broad-based, "umbrella" approach to complementexisting programs and more narrowly focused projects because many of Pakistan's problems in thesocial services are not sector-specific but endemic--common across services and areas of the country.These problems fall into three categories: (I) implementation of social services has been deficient; (2)design of social services has been flawed; and (3) levels of effort in social services have been too low.Underlying all three sets of problems are political considerations--insufficient political commitment atprovincial and national levels and inappropriate political interference, particularly at local levels. Weakinstitutions in the social sectors reflect past political neglect. Until now, sector- and province-specificgovernment programs and donor projects have addressed these core problems piecemeal, often withdisappointing results. This Project would instead simplify the process of policy reform by cuttingacross sectors and provinces to identify a few core problems that impede the social sectors as a whole.It would then concentrate attention, resources, and political will on these core problems, therebyimproving the "implementation climate" for all programs and projects. The proposed Project wouldthus complement and undergird other IDA or donor projects--present or future--that focus morenarrowly but in greater depth on one sector in one or two provinces.

Improving Implementation

74. Existing basic social services tend to operate inefficiently. In particular, they sufferfrom poor planning and budgeting techniques, bureaucratic delays in release and expenditure ofallocated funds, recruitment bans and excessive staff turnover, over-centralized management ofdispersed front-line services, and insufficient beneficiary participation. As a result, sector-specific,province-specific projects often disburse more slowly and achieve less than planned. The SAP Project

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will complement such projects by addressing implementation problems common to all the basic socialservices. Solutions to many of the implementation problems must involve not just the sectoralministries, but also the finance and planning ministries at provincial and federal levels. Preparation forthe SAP Project has already led to up-front actions that relieve implementation problems, therebystrengthening existing projects. For instance, in contrast to history, the Government is now protectingsocial-sector budgets in its new fiscal retrenchment program and has instituted new mechanisms torelease social sector funds on time to line agencies. It has hired thousands more teachers and healthworkers despite overall bans on recruitment.

Improving Program Design

75. Social services in Pakistan ought to focus more intensively and consistently on basic orprimary levels of social services, and the basic services ought to focus more on quality and on accessfor the poor, especially for women and girls. The Social Action Program will shift the focus to basicservices. The SAP Project would lay particular emphasis on quality and access, by increasing attentionto inputs like books and medicines and by encouraging Pakistan to adopt approaches that have workedin other countries. Some progress has already occurred, for instance in dusigning basic services toinvolve beneficiaries more and to include more female providers to serve other women and girls. TheSAP Project will also highlight sector-specific design issues, such as including more family planningin health services. It thus reinforces sector-specific projects.

Improving Level of Effort

76. As implementation capacity expands and design improves, Government expenditure onbasic social services should increase. The SAP Project builds visibility for the social services as awhole and focuses attention on this central level-of-effort issue. The Project has already helpedGovernment develop plans that are a "reach", but realistic. Total expenditures on the basic socialservices will rise from about 1.7% of GDP in 1991/92 to about 2.6% in 1997/98 -- a substantialincrease, though still well short of what many low-income countries spend. The Government's share ofincremental costs will rise from about 46% in 1993/94 to 59% in 1995/96 and about 69% in 1997/98.

Building Political Will

77. One important underlying cause of all the weaknesses in Pakistan's basic socialservices had been lack of political will to change. The SAP Project has helped to build politicalcommitment, by its very scope and by its reliance on annual assessments to determine funding.Pakistan's three recent Governments all gave or give high priority to the SAP and have takenimportant steps to fund and implement it.

Implementation of the Project

78. The SAP Project emphasizes a continuing policy dialogue, phased funding, andcompetition for resources among provinces and sectors based on performance. The SAP Project hasbeen appraised for 1993/94-1995/96, with a focus on 1993/94 because the Government preparesdetailed operational plans year by year. Disbursements can be made to any sub-program only after theBank and the Government reach agreement on each year's operational plans (including budgets andimplementation plans) through annual assessments. In effect, sub-programs compete for funds. Theannual budgets cover both development (investment) budgets and recurrent budgets. Theimplementation plans cover policies, identifying problems and specifying prior actions and measurable

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targets for progress in each year. The assessment therefore amounts to an expenditure review,addressing performance of programs and of projects, policies, and proposed expenditure programs anddrawing on IDA's and other donors' experience from other social-sector projects that treat specificsectors in more detail. Once agreement is reached, IDA expects to reimburse a share of theexpenditures for that year, subject to the normal understanding that performance will be adequate. Ifperformance of a sub-program proves weak, failure to spend may reduce the current year'sdisbursements. The next year's agreement will reflect performance on programs and on projectsfinanced by donors as well as new plans (again with prior actions and targets). Proceeding "bottomup", IDA will help the Government determine core problems impeding progress in social services as awhole and focus on them. The feasibility of the annual-agreement process was demonstrated duringappraisal, when Government and IDA agreed on the 1993/94 program, including actions on policy andbudgets that have been taken.

79. The SAP also includes US$6 million to strengthen the Government's monitoring andmanagement capacity and conduct studies to improve service effectiveness. Finally, US$5 million willbe allocated as a first step to help non-Government organizations promote innovation in basic servicedelivery and active community involvement in services funded by the Government under SAP. Anadditional $5 million will be made available if the program warrants. A Multidonor Support Unit(MSU) managed by the World Bank has been established to help the Government develop the SAPand to coordinate among donors. The Secretary of Planning will carry the main responsibility forimplementing the SAP -- and the SAP Project -- at the federal level, assisted by a SAP Secretariat.The Chairman, Planning and Development, (P&D), and the Additional Chief Secretaries (P&D) willbe similarly responsible at the provincial level, also assisted by SAP Cells to help with implementationand coordination. The Secretaries of Economic Affairs and Finance are also involved and committed.The Deputy Chairman of the Planning Commission will hold quarterly reviews of the SAP.

Preliminary Accomplishments

80. During the appraisal of the SAP project, the parties initialed the first annualagreement, for 1993/94. Because performance is good and the fiscal year is more than half over,retroactive financing of up to 20% is proposed. During the policy dialogue leading to this first annualagreement, reinforced by the dialogue for related operations, Pakistan has already moved in severaldifficult areas. Steps taken include:

(a) Improvements in Level of Effort and Implementation

* In every province, far better annual operational plans have been developed for primaryeducation, health, and RWSS, with higher levels of effort and greater realism. Similarprogress has been made on the national population program.

* Total Government budgets for basic social services are up sharply. For instance, the1993/94 population budget will exceed the previous year's by over 40%. Expenditureshave been substantially increased for inputs, such as books and medicines, critical toimprove quality of services.

* The Government has moved to resolve the long-standing problem of funding delays: ithas instituted at both federal and provincial levels new mechanisms to protect SAPfunds and ensure their timely release to the provinces.

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Steps have been taken to reduce political interference in the location of schools. Allprovinces have agreed that sites for new schools will be selected according to wherethe children are, not where local leaders may prefer to build. Three of the fourprovinces have already submitted lists of sites selected according to the new criteria.

* Monitoring and evaluation have been strengthened. All provinces have established MISsystems for education, with plans for expansion down to district level.

(b) Improvements in Program Design

o To improve female access, basic service programs are being designed to recruit, train,and post more women teachers and health workers in rural areas. Several provinceshave relaxed age and qualification requirements for women and have decided toprovide incentive payments for women who wvork in rural areas. In the Punjab, all newschools will 'iave female/male teachers in the ratio 70/30. Provinces are also promotingwomen to more senior posts for the first time.

Steps have been taken to increase school enrollment of girls. Historically girls' andboys' schools have been separate, and often girls had no school. Now all provinces areshifting towards co-education or, where resistance to co-education remains, are givingpriority to construction of girls' schools (which boys may be allowed to attend).

* 5Communities--and particularly parents--are becoming more involved in social services,especially in education and RWSS. In Balochistan, for instance, parents' committeeshave been formed to help oversee public schools, and this year some 100 communitieswithout schools have built their own and found women to teach--women who will betrained and paid by Government. Throughout the country, more communities areparticipating in RWSS programs. Several provinces and areas are preparing policies,reorganizing Government agencies, and operating pilot projects to shift responsibilityfor operation and maintenance of RWSS to communities. Communities have set upf"users' committees" to work with Government and NGOs to develop moreparticipatory approaches. Greatest progress has been made in Balochistan, Sindh, andmost federal areas. In Balochistan, for example, under a new policy, new RWSSprograms will involve village organizations and town water associations; communitieswill cover operation and maintenance costs of simple rural schemes, with a subsidy topoor communities; user charges will be set for more complex rural schemes and fortowns.

* Family planning services are being expanded rapidly. All provinces have agreed totrain basic health workers in family planning, and the training is under way. Some 800health facilities in the Punjab now have workers trained in family planning. Tocomplement these efforts and build demand for family planning, the Ministry forPopulation Welfare is instituting a community-based outreach program meant toprovide at least one village-level worker for each of Pakistan's 12,000 villages by mid-1997. Recruitment for the first 3,000 villages is to be completed by July 1994. Finally,to promote efficiency as the population program expands, the MPW has decided todecentralize management to the provinces.

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(c) Stronger Political Comnmitment

The SAP has attracted political commitment and public attention to social services.Pakistan's three recent Governments all gave, and give, high priority to the SAP. Tofulfill the po:ential of the SAP, this level of commitment must be sustained for thenext several years. The SAP Project is already helping to accomplish this, by its veryscope, by its reliance on a continuing policy dialogue and annual agreements todetermine funding, and by its emphasis on cooperation among donors.

Project Costs, Financing and Sustainability

81. The SAP Project, covering the first three years of the five-year SAP will cost about $4billion (development and recurrent costs), including increments of about $1.5 billion over comparableearlier expenditures. The Government expects to contribute about $3 billion of the total (about 76%)and to use $552 million more in existing or expected donor assistance. It seeks funding for theremaining gap of $418 million. IDA has reached agreement with the Government on the framework ofthis three-year program . The SAP Project would provide $200 million. 5% of the total cost and about48% of the gap. The Government is exploring contributions from other donors, with whom IDA iscooperating closely; if performance continues to be good, several donors have indicated willingness toconsider additional contributions. The financing for the first two years is obtained. IDA is workingwith other donors, (including ADB and the Netherlands) and the Government to close any remaininggap. The three-year SAP program should be seen, however, in the context of the five-year SAP. Thefull program will cost about $7.7 billion, including increments of about $3.4 billion over comparableearlier expenditures. The Government expects to contribute $5.9 billion and to use $1.1 billion more inexisting or expected donor assistance. It seeks funding for a total gap of $0.7 billion for the five-yearperiod. The Government has undertaken to increase its share of incremental cost financing from 46%in 1993/94 to 59% in 1995/96 and 69% in 1997/98, which IDA judges to be well within feasiblelimits even under a disciplined macroeconomic program. Increased beneficiary participation will alsogradually promote cost recovery and so ease the financial burden on the Government. The GOP willmake the funds required to implement the SAP available in a timely manner to the implementingagencies; it will protect these funds from diversion to lower priority uses.

Retroactive Financing

82. The SAP program as agreed with the Government started on July 1, 1993. Asperformance has been good so far, retroactive financing of up to $40 million (20% of the IDA credit)is proposed to reimburse expenditure incurred after July 1, 1993 (but no more than 12 months beforecredit signing) on goods and services, including salaries and operating expenses.

Specific Agreements with the Government

83. During negotiations, the federal, provincial and AJK governments provided signedletters conveying the 1993/94 operational plans of the governments participating in the SAP andcommitting them to carry out the programs as agreed. The Governments provided assurances on thefollowing:

(a) The federal and provincial governments participating in the SAP will prepare annualoperational plans setting forth, inter alia, proposed subprograms to be carried out ineach successive year, will agree with IDA each year on their expenditure and reform

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content, and will participate in an annual assessment of each past year'simplementation of the SAP and each successive year's plans.

(b) The Federal and Provincial Governments will carry out quarterly reviews of theimplementation of the SAP and furnish IDA with progress reports: and will participatewith IDA and other donors in an annual review of each past year's performance aspart of the process of reaching agreement in each successive year.

(c) To protect the priority of basic social services in the SAP sectors, the GOP and thegovernments of AJK, the provinces and the federal territories will not ban recruitmentof staff to deliver these services.

(d) The Government will pass on to selected NGOs grants on terms or conditions agreedwith IDA.

(e) The Government also reached agreement that the overall level of spending on the SAPwill rise to the levels agreed with IDA within the framework of the SAP (Tables 3.1,3.2 and 3.3); in no case will these levels be allowed to fall below 2.05% of GDP in1993/94, 2.15% in 1994/95 and 2.3% in 1995/96; and that within that totalexpenditure, that the Government's own contribution will rise to agreed target levels(Table 3.2 and 3.3): 1.6% of GDP in 1993/94, 1.7% of GDP in 1994/95 and 1.8% ofGDP in 1995/96 (para3.7).

Lessons From Experience

84. The SAP Project is innovative but reflects experience. The first lesson is that mostearlier donor projects have focused on key needs in a given sector but were often frustrated by thebroader implementation problems described earlier. Recent sector-level operations have thereforetended to move away from partial approaches toward strengthening programs at the provincial level asa whole, and those operations have worked better. The SAP Project takes the program approach a stepfurther. It supports programs in all four basic services as a whole, province by province, and aims atimproving the overall implementation environment as well as addressing important sector-level issues.It provides a framework for reaching consensus within Government and among donors on core reformsaffecting the whole program as well as its individual components. Once carried out, the reformnsintroduced under the SAP Project should increase the Government's implementation capacity in thesocial sectors, enabling it to comply more readily with legal covenants under IDA projects andspeeding implementation of all social-sector projects.

85. Second, other projects have sometimes had disappointing results because they did notfocus sufficiently on basic services. The SAP Project focuses deliberately on the basics.

86. Third, projects have run into difficulty when they were too complex. The SAP Projectis in one sense complex because it supports all four sectors in the different provinces and areas. Itsimplifies, however, by providing one framework for annual assessments, by focusing annually on keyreforms that are timely and feasible, and by adjusting to promote other reforms as the SAP proceeds.It manages the remaining complexity by subdividing the work into more tractab'e sub-programs thatare sector-specific and province-specific. It also strengthens the monitoring and implementationcapacity of the federal and provincial governments. Nonetheless, complexity remains a concern.

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87. Fourth, some projects have had difficulty for lack of Government follow-through oncommitments to carry out agreed reforms. As discussed in the next section, the SAP project isdesigned to require and strengthen such follow-through, but Government commitment also remains aconcern.

Risks

88. The main risk is that so large and comprehensive a Project could over-strain themanagement capacities of the Government and the supervisory resources of IDA. The SAP and theProject address this risk in five ways. First, the Project focuses on a few core issues. Second, the cellstructure means that work done through the SAP and the Project will reinforce GOP and donor workon province- and sector-specific activities, and vice versa. For instance, IDA can send dual-purposesupervisory missions. Third, the SAP effort is building the Government's capacity to plan, budget, andimplement. Fourth, the Multi-donor Support Unit (MSU) is already assisting the Government with theSAP and improving coordination and monitoring. Finally, the Project has a carefully designedimplementation plan.

89. A second risk is that the intended reforms will not be achieved or will be seriouslydelaved. This risk is addressed by unusually intensive monitoring through the MSU and by the phasedannual release of funds based on annual agreements reflecting performance and identifying prioractions and monitorable targets. Moreover, the Project draws on lessons from past and existingprojects supported by IDA and other donors, who were closely involved in Project preparations.

90. A third risk is that the SAP Project will undermine existing donor- and IDA-supportedprojects by providing a softer option with weaker conditionality than those projects require. This riskis addressed by treating existing or future aid as "above the line" when defining the annual fundinggap that the SAP Project will help fill, thus removing the temptation to substitute Project funds forother aid. The risk is also addressed by including performance of other aid projects in annualassessments of programs. The MSU promotes donor coordination that also helps prevent suchproblems.

91. A fourth risk is that Government commitment will weaken. This risk too is addressedby phased funding and by insistence on annual agreements, with monitorable targets. It is alsoaddressed by the broad scope and multi-ministerial team-building emphasis of the Project. And it isaddressed by giving oversight responsibilities to coordinating committees that include the highestlevels of the federal and provincial governments.

92. A fifth risk is that the SAP, and particularly its recurrent costs, will be financiallyunsustainable because it depends too heavily on donors. The Project would finance recurrent as well asdevelopment costs because recurrent costs are the main costs of basic social services. These costs areproperly investments in human capital, in any event. Moreover, the Government will assume a risingshare of total as well as recurring costs as the SAP proceeds. Although SAP expenditures will rise to2.6% of GDP by 1997/98, this level is well below levels of effort for basic social services incomparable low-income countries and should be sustainable by the GOP, even within a stringent fiscalpolicy. The Project will also emphasize the need for more beneficiary contributions and cost recovery,especially in RWSS. Over time, donor financing of incremental SAP costs will fall, from 53% in1993/94 to 41% in 1995/96 and to 30% by 1997/98. This is only slightly higher than the share ofcosts for basic services that donors covered before the SAP began. If this Project does well, therecould be a subsequent one with a further decline in the share financed by donors.

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Environmental Aspects

93. No detailed environmental analysis of the project was carried out, since the projectdoes not involve activities likely to endanger the environment. Rather, as the project helps to slowpopulation growth, it should ease pressures on the environment.

Consistency with Country Assistance Strategy and IDA Rationale

94. The proposed SAP Project is fully consistent with the Country Assistance Strategydescribed in Part I of this Memorandum. Poverty reduction and reducing constraints to sustainedgrowth are the twin goals of the Bank's assistance strategy. The SAP program, with its emphasis onimproving basic social services and the poor's access to these services, provides a key vehicle forhelping achieve the Bank's goals. The proposed SAP Project--along with efforts to sustain theeconomic policy improvements--therefore take the highest priority in IDA's work on Pakistan todayand fully support World Bank policy on use of IDA funds. As the poor are disproportionatelydisadvantaged by the lack of adequate basic social services, the proposed SAP project, with itsconcentration on basic social services, would provide significant benefits for the poor and help redressthe existing bias against the poor.

Poverty Category: Program of Targeted Interventions

95. The Project is designed explicitly to reduce poverty and misery by attacking coreproblems in implementation, design, and level of effort that now impede or prevent access to socialservices particularly for the rural poor, who constitute the majority of Pakistan's population and whodisproportionately lack social services. The Project would especially help women and girls.

Benefits

96. The SAP Project would help Pakistan's Social Action Program redress the genericweaknesses of basic social services in Pakistan, by focusing on core problems that now impairperformance of those services. It would help expand the Government's implementation capacity in thesocial sectors and could pave the way for greater donor involvement, either through traditional projectsthat address key needs in a sector or through operations that provide "program support" but treat thesector in more depth than the SAP Project would. The SAP Project would thus help improve thequality of basic services and increase access, particularly for women and the poor. The emphasis onbasic services and on greater community participation in their design and delivery would mean thatservices are better run and better used, and communities would be more likely to contribute to theircosts. In addition, popular political support for Government prograrms would be likely to grow,enhancing Government commitment to investments in social services. As a result, the proposedProject would promote productivity, reduce poverty, and encourage smaller, healthier, and bettereducated families. It would also help slow Pakistan's exceptionally rapid population growth.

97. Gains in the four basic social services will be mutually reinforcing. Healthy and wellnourished children are better able to learn. The most effective way to improve children's health is toeducate their mothers, while providing better health care. Satisfactory rural water supply and sanitationreduce the high risk of diarrheal and other water-borne diseases, and thus complement basic healthservices. Demand for, and use of, family planning services rises when women and girls are bettereducated and when children receive health care that increases their chances of survival to adulthood.Finally, improvements in health and learning promote greater economic productivity.

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Recommendation

98. I am satisfied that the proposed credit would comply with the Articles of Agreementof the Association and recommend that the Executive Directors approve it.

Lewis T. PrestonPresident

AttachmentsWashington, D.C.March 8, 1994

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Schedule APage I of 2

Costs of the Social Action Program(Current US$ million and Rs million)

In Current US Dollars (Million) In Current Rupees (Million)Three- Five- Three- Five-

Starting Year Year Starting Year YearYear Program Program Year Program Program

(1993/94) (FY94-96) (FY94-98) (1993/94) (FY94-96) (FY94-98)

PUNJAB 532 1.789 3.457 1618 S7.242 112.832Education 362 1,259 2,434 11,023 40,276 79,455Health 79 260 532 2,412 8,314 17,353RWSS 90 270 491 2,750 8,652 16,024

S1NDH 237 782 1.471 7 204 25.031 47.998Educaion 175 578 1,096 5,335 18,497 35,760Health 36 105 190 1,096 3,345 6,204RWSS 25 100 185 773 3,189 6,034

NWFP 157 594 1,156 4,790 19,00 37.729Education 99 378 736 3,024 12,088 24,016Health 19 99 182 579 3,156 5,956RWSS 39 117 238 1,188 3,758 7,757

BALOCHISTAN 116 364 689 3.517 11.6S 22,Education 57 168 315 1,736 5,375 10,280Health 23 107 218 694 3,436 7,123RWSS 36 89 156 1,087 2,849 5,100

PROVINCIAL SUB-TOTAL 1.041 3,529 6.773 31.695 112.934 221.063Education 694 2,382 4,581 21,117 76,236 149,512Health 157 570 1,122 4,781 18,250 36,636RWSS 190 576 1,070 5,798 18,447 34,915

AZAD JAMMU & KASHMIR 28 104 207 837 3,319 6,772Education 17 65 130 524 2,076 4,236Health 5 20 41 164 652 1,330RWSS 5 18 37 149 591 1,207

FEDERAL SUB-TOTAL 88 387 751 2667 1.3745Other Federal Areas 36 137 275 1,108 4,393 8,964

Education 19 79 166 563 2,522 5,408Health 7 26 49 201 845 1,608RWSS 11 32 60 341 1,027 1,947Population 35 173 350 1,054 5,533 11,425Communicable Disease Control 16 66 116 475 2,099 3,773Paricipatozy Development Program 0 5 5 0 160 163SAP Monitoring & Evaluation 1 6 6 30 192 196

NATIONAL TOTAL _1.56 4.020 7.731 35.200 128.630 252.356

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Schedule APage 2 of 2

Sources of Funding for the SAP in FY93/94-95/96(Current US$ million)

Total %

Government's internal resources 3,050 75.9Existing/expected aid 552 13.7Program Assistance 313

IDA (SAP Project) 200 5.0ADB 100 2.5

Government of the Netherlands 13 0.3Additional Assistance to be Mobilized 105 2.6

Total 4,020 100.0

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Schedule BPage 1 of 2

ISLAMIC REPUBLIC OF PAKISTANSOCIAI, ACTION PROGRAM PROJECT

Allocation and Disbursement of the Proposed IDA Credit

Amount of theCredit Allocated % of(Expressed in SDR Expenditures

Categorv Eauivalent) To be Financed

(1) Sub Programs for FY94Balochistan 5,400,000 13.2% during FY94NWFP 3,700,000 6.1% during FY94Punjab 17,300,000 17.3% during FY94Sindh 7,000,000 5.5% during FY94AJK 800,000 5.3% during FY94FATA 1,900,000 14.7% during FY94FANA 1,500,000 25.9% during FY94ICT 400,000 10.2% during FY94Government of Pakistan's 3,000,000 100% of foreign expenditurePopulation Program 17.5% of local expenditure during FY94

(2) Vaccines, medicines, supplies and 100% foreign expenditure,Pesitcides for the Communicable 2,100,000 100% of local expenditure (ex factory cost)Disease Control Program for FY94 and 60% of local expenditure for

other items procured locally

(3) Grants for the 0 100%Participation DevelopmentProgram in FY94

(4) Consultants for Monitoringand Evaluation in FY94 100,000 100%

(5) Operating Cost forMonitoring & EvaluationCost in FY94 200,000 100%

(6) Equipment in FY94 100,000 100% foreign expenditure; 100%/o of localexpenditure (ex factory cost) and 60% of localexpenditure for other items procured locally

(7) Unallocated 101,700,0002

Total 145,200,000

2/ These funds represents expected disbursements on the FY95 and FY96 annuam programs and will beallocated in the course of reaching detailed agreement with the Govemment on these programs

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Schedule BPage 2 of 2

Estimated Disbursement Schedule

(US$ Million)

1993/94 1994/95 1995/96Annual Disbursements 50 80 70Cumulative Disbursements 50 130 200

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Schedule CPage 1 of 1

ISLAMIC REPUBLIC OF PAKISTANSOCIAL ACTION PROGRAM PROJECT

Timetable for Key Processing Events

(a) Time taken to Prepare 12 months(b) Prepared by Government of Pakistan, Government of AJK,

Balochistan, NWFP, Punjab and Sindh

(c) First IDA Mission September, 1992

(d) Appraisal Mission Departure September 8, 1993

(e) Negotiation February 14 to February 18, 1994

(f) Planned Date of Effectiveness April 15,1994

(f) List of Relevant PCRs and PPARs 1) PCR No. 6827 for Primary Education datedJune 19, 1987 and PPAR No. 8859 datedJune 29, 1990;

2) PCR No. 6252 for Education 11 dated June16, 1986 and PPAR No. 8859 dated June29, 1990;

3) PCR No. 9262 for Population, Health andNutrition dated December 28, 1990

4) PCR NO 8212 for Vocational Trainingdated December 11, 1989 and PPAR No.8859 dated June 29, 1990.

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Annex 1Page I of I

Pakistan's Selected Indicators ofBank Portfolio Performance and Management

FY91 FY92 FY93 FY94 a/

Portfolio Performance

No. of Projects under Implementation 59 57 59 49Average implementation period (years) 1/ 4.8 5.1 4.6 I.1Average Ratings

Development Objectives 2/ 1.51 1.65 1.62 1.57Overall Status 3/ 2.05 2.07 1.98 1.98

Percent of projects rated 3 4/Development objectives 3 12 8 6Overall status 20 23 14 12

Canceled during FY 0 0 0 0Disbursement Ratio (%) 5/ 15.2 16.9 17.5 22Disbursement lag (%) 33 29 26 29Memorandum Item: % completed

projects rated unsatisfactory 6/ - 0

Portfolio Management

Supervision resources (total US$millions) na 2.4 3.1 3.2Average supervision (US$thousands/project) na 42 52 61Supervision Resources by Location (in %)

Percent headquarters 75 73 73 73Percent resident mission 25 27 27 27

Supervision resources by rating category(US$thousands/project)

Projects rated I or 2 na 37 45 54Projects rated 3 or 4 na 48 61 71

Memorandum item: date of next CPPR 4/94

a/ Annualized based on actual data as of December 31, 1993.

1/ This is the average age of a project in the Bank's portfolio.2/ Extent to which the project will meet its development objectives. A rating of "I" means that all development

objectives are expected to be achieved; "2," some of the minor objectives may not be achieved but major objectivesare expected to be met: "3," major project objectives will probably be achieved only in part, and the continuedjustification of the project is uncertain; and "4," major objectives will probably not be achieved, and the projectappears to be not longer justified (Annex D2 of OD13.05).

3/ Assessment of overall performance of the project based on the ratings given to individual aspects of projectimplementation (e.g., management, availability of funds, compliance with legal covenants, etc, and to developmentobjectives. A rating of "I" means no significant problems; "2," moderate problems; "3," major problems butappropriate actions are being taken to address the problems; and "4," major problems, but the problems are notbeing adequately addressed or are caused by exogenous factors with no readily available solution. The overallstatus rating is not given a better rating than that given to project development objectives (Annex D2 of OD 13.05).

4/ The portfolio had no projects rated "4" in FY91-94.5/ Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the

year (investment projects only).6/ For FY94 only: from the OED Database.

- 38 -

Annex 2Page 1 of 2

Pakistan Bank Group Fact SheetIBRD/IDA LENDING PROGRAM, FY91-97

PAST CURRENT PLANNED

FY91 FY92 FY93 FY94 FY95 FY96 FY97

Commitments (US$m) 677.1 324.2 428.9 600-700 600-700 600-700 600-700

Sector (°/O)Agric.(Incl.Nat Res.Protection) 15 9 19 5 35 30 20Industiy & Finance 12 0 0 0 30 15 0Energy 32 55 0 45 S 25 35Public Sector Management 0 0 0 30 0 0 0Other Infras. incl.Urban Devt. 33 0 45 5 0 15 25Social Sectors 6 36 36 20 30 15 20

TOTAL 100 100 100 100 100 100 100

Lending Instrument (%)Adjustment Loans 4 0 0 30 0 25 0Specific Inv. Loans & Others 96 100 100 70 100 75 100

TOTAL 100 100 100 100 100 100 100

Disbursements (US$m) 536.7 663.7 536.5 630 675 700 700Adjustment loans 111.2 165.2 23.7 130 125 100 100Specific investment loans &others 425.5 498.5 512.8 S00 550 600 600

Repayments (US$) 103.0 149.0 178.0 143.0 161.0 168.0 203.0

Interest (US$) 160.0 189.0 186.0 202.0 217.0 239.0 253.0

- 39 -

Annex 2Page 2 of 2

PAKISTAN: IFC and MIGA Program, FY91-93

PAST

FY91 FY92 FY93

IFCApprovals (US$m) 61.8 16.3 129.9

Sector (%)Agri-business 0.0 0.0 0.0Capital Markets 19.6 10.7 19.8Chem-Fertilizer 80.0 0.0 0.0Infrastructure 0.0 0.0 10.4Manufacturing 0.4 89.3 58.3Oil-Mining 0.0 0.0 0.0Tourism 0.0 0.0 11.5

TOTAL 100.0 100.0 100.0

Investment Instrument (%)Loans 82.5 86.8 89.8Equity 17.5 13.2 10.2Quasi-equity 0.0 0.0 0.0

TOTAL 100.0 100.0 100.0

MIGA guarantees (US$) 9.0 42.8 81.4MIGA commitments (US$) 17.0

- 40 -

Annex 3Page I of 2

Parstan: Priority Poverty Indicators

Me Semare iea*wuur Nat25.50 1.20 rt hhme

Unatof YeS s a Sout U,. incoMWIndicator nuaastw age age (NW) Asia _iome gq-

POVERTYUpperpoveatylim lowian. m .. 2,916 _ _ _Heaount Wn %tpop, 3l .. 31

Lower povety line lowr. __ .. r - *-Headcount fnxes %ofpop . _ .. .. _ _

GNP per capita USS 110 130 400 320 350 1.610

SHORT TERM INCOME INDICATORSUnsied urban wags. lol .. .. cUnskilled mns_ 192Rural teams oftrad ..

CnAUiepriceindex 1987-100 17 43 143Lowe income ___Food * _ 145 _ _ _UrbanRwal

SOCAL INDICATORSPublic cxpendinanbasic socsalvics %ofGDP .. _ 2Gross nrdo matsatiosPrinwy %schoolagep*p 40 40 47 95 113 100Malo ' 59 57 61 106 122 106Female * 20 22 32 82 106 98

Mortaliinfanmortality toLlivebihls 149 134 97 92 70 40

Under 5 motality ' _ 138 128 98 53InmmiizationMesles %argrop s o 50 57 73 70DPT ._ 43 75 81 74

Child malnutition (und.5) - 40 _Life expotsacToWl yean 46 so 59 59 63 67FenaJa/is raio 0.95 0.96 S OG 1.01 0.95 1.08

Total fertility rno bitthsperwoman 7.0 7.0 5.7 4.2 3.7 3.5Maenl moralty mro 100,000 live bir .. 270 _ - _

Population growth rate Infant mortality rate Primary enrolHment(pervert) (ScthL oflie ) birthst

6 + 250 120+

S 0 100

4 t0150

3 Le 10MX60i 0~~~6

2 -4

1 ~ O o -. 1

inid60s mid70s asm mid60s nid7a ran mid60s mid70a nma

okid;LObW,

-41 -

Annex 3Page 2 of 2

Pakistan: Resources And Expeditures

M aw ,qwJ.ecerw.ag y4wN~

Unis4f yw. yews uSeaM Seed La Lus%WWJndi&totor n~~~~~~~Waswe q"ae (au# Asial iuwne gowl

HUKAN RESOURCESPopulation (mre-1991) Mau"on 33 71 116 1,152 3,127 774Age dependency ratio rati* 0." 0.94 0.88 0.73 0.66 0.71Urban %o*fpop. 23.S 26.4 33.0 26.0 40.1 53.9population gpvwh rate Annual% 2.6 3.1 3.1 2.1 1.9 1.7Urban 3.8 4.3 6.1 2.2 5.2 3.1

Labor fore. (I -44) tmillions 17 22 35 420 1.448 302Agpicultue %ofiabor font 60 57 .

Industry is 17 .

Female *9 10 32233 32Female per 100 maleaUrban numnber 76 87 .

Rural *94 96 -

NATURAL RESOURCESArea thou. Sq. kin 796 796 796 5,133 38,828 23,99Density pop~. pr sq. km 66.0 89.0 137.0 215.0 77.0 31.0Agricultu-al land % o land ram 31.5 32.2 33.4 58.9 47.4 41.8Change in agriculurzl land samual 2.2 1.1 0.3 0.0 0.0 0.0Apiculturul land under irrigWa io 47.3 S4.9 62.0 26.2 13.7 12.6Forests and woodland thou. sq. Im 21 28 35 809 9,197 5,396Defor-st*zion (net) a~mi 5.5 1.4 1.2 .. -

INCOMEHousehold incomeShame of top 20% ofbhouseholds % Of incomeo 45 42 46Share ofbottong 400%9ofhousebold 1a 21 19Share ofbottom 20% of household *6 8 8

EXPENDIT'UREFood %ofGDP .. 46.1 28.1 36.2Staples - 16.0 9.3Meal. fish, milk. dzese, eW 14 .0. 8.4

Cereal mrporza thou menctuoime 1,591 1,39 2,048 5,596 36,0O& 44,418Food aid incemeals - . 94 428 2.408 6,669 4,047Food production per capita 1979-41-100 8S 94 103 113 122 101Fertilizer consumption kg/b 4.0 28.0 82. 57.5 47.5 94.2Share ofagricultur in GDP %of0DP 37.2 29.9 22.8 28.6 28.7Housing % oEODP . 9.4 12.4 Average household size persons per household .. 6 ..

ueban .. 6Fixed invesuneit housing %of GDP .. 2.0 1.7-Fuel and power %ofGDP .. 3.8 3.7 ..-

EnerD consumption per capita kg of oil equiv. 135 137 233 207 350 1,249Households with elecuticityurban %of households ... ..

Rural ...-

Transport and conuuunlstlon %ofGDP . 1.6 10.0Fixed inveunen ftrnsport equipment - . 1.6 1.7Total mad length km ... 111,237IN,vESTMENT IN HUMAN CAPITALHealthAcoes to health cam %ofpop .....

Populatio per physician person . 4,300 2.96 2.459Populaton per nurse 9,909 6,600 3,042 .. 1-4 oPopulation per hospital bed . 1,900 1.769 1,4 108 0Access to safe wate % ofpop. .. 25.0 56.0 70.3 70.6Urban . 75.0 20.0 76.5 79.3Rural .. 5.0 45.0 66.9 62.8

Oral rehydyrazon therpy (uiidv.5) %ofcases ... 42 189 32EducationGross eniollrnert ratioSeconeAy % ofschool.agopop. 12 I S 20 39 44 56Female - 7 14 3 1 37

pupil-teacher ratio: primary pupils perteache 42 40 41 59 39 2 5pupil-teacher ratio: secoondary 20 18 19 23 20pupils ra%hing grade 4 %ofoohort .. 57 51IRepeater raze: primarY %o pop.o (age 15.)liliteacy %o.. (P1+ 76 65 54 39Female %offemn. (age 13.) - .. 79 62 52

Ne~wspsr circulation per thou pop. 35 I 18Source: World Bank Internationul Eacoasies Department, April 1993

- 42 -

Annex 4Page 1 of 2

Pakistan: Key Economic Indicators

Actual Estimated Projected

1989 1990 1991 1992 1993 1994 1995 1996

National Accounts (% of GDP atcurrent market prices)

Gross Domestic Product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0Agriculture a/ 23.9 23.1 22.8 23.4 22.4 -- -- -

Industry a/ 22.3 22.3 22.9 22.7 23.1Services a/ 43.6 43.3 43.2 42.9 44.0 - - -

Consumption 88.4 86.5 87.8 87.9 87.8 82.7 81.6 81.1Gross Investment 18.9 18.9 19.0 18.6 20.4 21.6 21.7 21.7

Private Investment 12.6 12.3 12.2 11.4 11.8 12.5 13.2 13.7Government Investment 6.3 6.6 6.8 7.2 8.6 9.1 8.5 8.0

Exports GNFS b/ 14.5 14.8 16.3 16.9 15.9 17.9 18.6 18.9Imports GNFS b/ 21.8 20.2 23.2 23.4 24.1 22.2 21.9 21.7Gross Domestic Savings c/ 11.6 13.5 12.2 12.1 12.2 17.3 18.4 18.9Gross National Savings 14.6 16.6 14.9 15.7 14.4 18.7 19.7 20.1

Memorandum items:

Gross Domestic Product (millionUS$ at current prices) 40171.0 40041.1 45625.2 48876.2 52288.6 54022.9 58840.5 64601.4

Gross National Product per capita(US$, Atlas method) 373 382 384 407 421 440 452 470

Gross Domestic Productat market prices (% growth) 4.8% 4.3% 5.6% 7.8% 2.6% 7.5% 6.5% 6.5%

Gross Domestic Income (% growth) 4.3% 4.5% 2.1% 7.0% 2.9% 7.3% 6.4% 6.5%

Real annual per capita growthrates (°/0, calculated from 1987 prices)

Gross Domestic Productat market prices 1.6% 1.1% 2.4% 4.6% -0.2% 4.3% 3.3% 3.3%

Total Consumption 0.5% -0.3% -0.4% 4.6% -0.7% -1.1% 2.2% 2. %Private Consumption -2.3% 0.9% 0.1% 4.3% -1.6% 1.2% 1.7% 1.7%

a/ At factor costs; as percent of GDP in market prices.b/ "GNFS" denotes "goods and nonfactor services".c/ Includes net unrequited transfers excluding official capital grants.

- 43 -

Annex 4Page 2 of 2

Pakistan: Key Economic Indicators

Actual Estimated Projected

1989 1990 1991 1992 1993 1994 1995 1996

Balance of Payments (US$million)Exports (GNFS) b/ 5577.0 6217.0 7450.0 8268.0 8316.2 9653.8 10934.8 12191.8

Merchandise f.o.b. 4634.0 4927.0 5902.0 6762.0 6752.0 7981.9 9139.5 10248.4Imports (GNFS) b/ 8736.0 9351.0 10563.0 11438.0 12592.7 11986.5 12889.8 14040.3

Merchandise f.o.b. 7837.0 8053.0 9094.0 9874.0 10941.7 10204.5 10976.2 11978.9Resource balance -3159.0 03134.0 -3113.0 -3194.2 -4276.6 -2332.7 -1954.9 -1848.6Net current transfers (includingofficial current transfers) 2100.0 2210.0 2292.0 2961.0 2395.0 2115.0 2174.0 2149.0

Current account balance (afterofficial capital grants) -1347.0 -1352.0 -1544.0 -1257.0 -3031.0 -1474.4 -1027.2 -908.6

Net private foreign direct investment 177.0 200.0 230.0 562.0 455.0 501.0 551.0 606.0MLT Loans (net) 937.1 803.7 786.7 2242.9 1751.0 1488.0 1198.0 1065.0

Officiai 1260.0 996.6 1114.0 1694.9 1868.0 1523.0 1418.8 960.5Private -322.9 -192.3 -327.3 548.0 -117.3 -35.0 -220.3 104.6

Other capital (net, incl.errors & omissions) 232.8 348.5 533.2 -1417.8 174,0 199.5 207.2 215.1Change in reserves c/ (-: increase) 0.1 -0.2 -6.0 -130.0 651.0 -713.9 -929.2 -977.5

Memorandum items:Resource balance (% of GDP atcurrent market prices) -7.9% -7.8% -6.8% -6.5% -8.2% -4.3% -3.3% -2.9%

Real annual growth rates (current US$)Merchandise exports (f.o.b.) 6.2% 6.3% 19.8% 14.6% -0.1% 18.2% 14.5% 12.1%Merchandise imports (c.i.f.) 29.7% 2.8% 12.9% 8.6% 10.8% -6.7% 7.6% 9.1%

Public Finance (% of GDP at current market prices)

Current revenues 18.0% 18.5% 15.5% 17.8% 18.0% 18.4% 18.5% 19.6%Current expenditures 20.1% 19.5% 18.6% 18.7% 20.3% 19.5% 16.7% 16.8%Current account surplus (+) or deficit (-) -1.1% -0.3% -3.0% -0.9% -2.3% +0.9% +1.8% +2.8%Capital expenditure 6.3% 6.6% 6.5% 5.6% 6.0% 6.2% 5.5% 5.0%Foreign financing 2.4% 2.8% 2.2% 1.2% 1.5% 2.3% 1.9o% 1.2%

Monetary IndicatorsM2/GDP (at current market prices) 39.0% 39.1% 36.6% 37.2% 37.7% 37.4% 37.2% 37.1%Growth of M2 (%) 7.4% 11.6% 11.6% 20.6% 13.6% 15.3% 12.9% 12.1%Private sector credit growth/total

credit growth (%) 119.3% 139.1% 402.3% 55.8% 123.2% 170.8% 181.4% 189.9%

Price Indices (1992=100)Merchandise export price index -- -- - 100.0 101.4 105.1 108.6 112.5Merchandise import price index - 100.0 100.5 103.9 106.9 110.6Merchandise terms of trade index -- -- - 100.0 100.9 101.1 101.6 101.7Real exchange rate (US$QLCU d/) -- -- - 100.0 100.2 93.7 93.7 93.7Real interest rates - -- -- -- - -Consumer price index (% growth rate) 10.4% 6.0% 12.7% 9.6% 9.3% 8.0% 6.5% 5.5%GDP deflator (% growth rate) 8.7% 6.7% 12.8% 10.1% 9.6% 8.0% 6.5% 5.5%

b/ "GNFS" = "goods and nonfactor services".c/ Includes use of IMF resources.dl "LCU" denotes "local currency units". An increase in the index denotes appreciation.

- 44 -

Annex 5Plage I of I

Pakistan: Key Exposure Indicators

Actual Estimated Projected

1989 1990 1991 1992 1993 1994 1995 1996

Total Debt Outstanding and Disbursed(TDO) (US$million) a/ 15699.0 17616.0 21067.0 22722.0 24455.7 25943.8 27141.2 28206.4

Net Disbursements (US$million) a/ 1056.0 1207.0 1039.0 1850.0 1853.0 1764.0 1517.0 1261.0

Total Debt Service (TDS) (US$million) a/ 1733.3 2007.0 2079.1 2209.7 2451.2 2367.0 2445.2 2550.6

Debt and Debt Service Indicators (%)TDO/XGS b/ 206.2 213.1 224.6 231.6 245.9 231.5 213.9 200.2TDO/GDP 39.1 44.0 46.2 46.5 46.9 48.0 46.1 43.7TDS/XGS 22.8 24.3 22.2 22.5 24.6 21.1 19.3 18.1ConcessionalfrDO 68.7 64.5 55.2 56.7 57.4 58.2 59.3 59.3

IBRD Exposure Indicators (%)IBRD DS/public DS 9.5 9.3 11.9 14.5 12.8 13.9 15.5 15.4Preferred creditor/public DS 26.7 34.2 39.9 32.8 44.9 48.2 51.5 58.1IBRD DS/XGS 2.2 2.4 2.7 3.0 2.8 2.7 2.6 2.5

IFC (US$million)Loans 8.78 46.08 41.2 14.38 33.0 40.1 d/Equity and quasi-equity c/ 0.7 4.1 9.9 1.2 4.8 8.1 d/

MIGAMIGA guarantees (US$million) -- - 9.0 42.8 81.4 17.0 e/

a/ Includes public and publicly guaranteed debt, private nonguaranteed use of IMF credits and net short-term capital.b/ "XGS" denotes exports of goods and services, including workers' remittances.c/ Includes equity and quasi-equity types of both loan and equity instruments.d/ As of December 31, 1993.et As of March 1, 1994.

- 45 -

Annex 6Page I of 3

Status of Bank Group Operations in PakistanStatement of IBRD Loans and IDA Credits

(as of December 31, 1993)

Undisbursed a/ Last ARPPAmount in USS million relative to superv. rating

(less cancellations) appraisalLoan or Fiscal projection DevelapmentOverall

credit no. year Borrower Purpose IBRD IDA Undisbursed (USSmillion) objectives status

57 Loans and 75 credits have been fully disbursed 2225.75 1963.78

Cr. 1243-PAK 1982 Republic of Pakistan Balochistan Agricultural Dev. 14.00 0.78 0 1 2Cr. 1375-PAK 1983 Republic of Pakistan Fourth Drainage 33.74 6.62 0 2 1Cr. 1532-PAK 1985 Republic of Pakistan Left Bank Outfall - Stage I 150.00 124.94 69.00 2 2Cr. 1602-PAK 1985 Republic of Pakistan Secondary Primary Education 52.50 14.42 0 2 2Ln. 2556-PAK 1985 Republic of Pakistan Fifth l APDA Power 100.0 4.05 0 2 2Cr. 1652-PAK 1986 Republic of Pakistan Karachi Special Development 70.00 16.20 0 2 3Cr. 1670-PAK 1986 Republic of Pakistan Second Vocational Training 40.20 26.79 16.91 3 3Ln. 2743-PAK 1987 Republic of Pakistan Telecommunications V 100.0 2.78 0 1 2Cr. 1755-PAK 1987 Republic of Pakistan Third Technical Assistance 7.00 3.68 2.18 1 2Cr. 1762-PAK 1987 Republic of Pakistan Agric. Extension & Adaptive 11 42.10 14.62 6.05 2 2Cr. 1821-PAK 1987 Republic of Pakistan Third Primary Education 145.00 74.92 61.48 2 2Ln. 2792-PAK 1987 Republic of Pakistan WAPDA VYI-P%Nr Plant Efficiency 70.00 6.64 6.48 2 2Ln. 2814-PAK 1987 Republic of Pakistan Fourth Highways 152.00 44.15 35.62 1 2Ln. 2839-PAK 1987 Republic of Pakistan SMdll Industries III 54.00 36.47 36.00 2 3Ln. 2842-PAK 1987 Republic of Pakistan Refinery Energy Conservation 21.00 16.56 15.83 1 2Ln. 2884-PAK 1988 Republic of Pakistan Cement Industry Modernization 96.00 1.23 0 1 2Cr. 1888-PAK 1988 Republic of Pakistan Second Irrigation Systems Rehab 79.50 40.40 36.89 2 2Cr. 1895-PAK 1988 Republic of Pakistan Punjab Urban Development 90.00 47.54 40.94 2 2Cr. 1936-PAK 1988 Republic of Pakistan National Oilseed Development 20.00 13.10 9.41 3 3Ln. 2973-PAK 1988 Republic of Pakistan National Oilseed Development 31.40 31.40 31.40 3 3Ln. 2982-PAK 1988 Republic of Pakistan Private Sector Energy Development 150.00 132.49 121.28 1 2Cr. 1982-PAK 1989 Republic of Pakistan Industrial Investment Credit III 2.00 0.26 .20 2 2Ln. 3019-PAK 1989 Republic of Pakistan Industrial Investment Credit III 148.00 20.16 20.10 2 2Cr. 1987-PAK 1989 Republic of Pakistan Karachi Water & Sanitation nI 125.00 71.68 59.05 1 2Ln. 3107-PAK 1989 Republic of Pakistan Energy Sector Loan II 250.00 17.04 16.75 2 2Cr. 2004-PAK 1989 Republic of Pakistan Private Tubewell Development 34.40 4.18 1.60 1 1Ln. 3147-PAK 1990 Republic of Pakistan Power Trans. Ext. & Reinforce. 162.00 106.28 91.39 1 2Cr. 20-8-PAK 1990 Republic of Pakistan Rural Electrification 37.00 27.86 18.97 3 3Ln. 3 148-PAK 1990 Republic of Pakistan Rural Electrification 123.00 121.04 104.92 3 3Cr. 2102-PAK 1990 Republic of Pakistan Sindh Primary Education 112.50 87.82 55.11 2 2Cr. 2153-PAK 1990 Republic of Pakistan Agriculture Credit 1.50 1.45 1.48 3 3Ln. 3226-PAK 1990 Republic of Pakistan Agriculture Credit 148.50 84.15 73.00 3 3Cr. 2154-PAK 1990 Republic of Pakistan Agriculture Research 11 57.30 56.64 24.78 2 2Ln. 324 1.PAK 1990 Republic of Pakistan Transport Sector Investment 184.00 119.83 39.46 2 2Ln. 2884.1-PAK 1991 Republic of Pakistan Cement Industry Modernization 56.40 35.81 33.22 1 2Ln. 3107-1-PAK 1991 Republic of Pakistan Energy Sector Loan lI Suppl. 28.00 18.78 18.61 2 2Ln. 3252-PAK 1991 Republic of Pakistan Corp. Restruct. & Systems Expan. 130.00 60.90 33.86 2 2Ln. 3252-1-PAK 1991 Republic of Pakistan Corp. Restructuring Suppl. 60.00 60.00 49.98 2 2Cr. 2228-PAK 1991 Republic of Pakistan Rural Water Supply & Sanitation 136.70 123.20 12.75 1 2Ln. 3318-PAK 1991 Republic of Pakistan Microenterprise 26.00 22.70 i0.22 1 2Cr. 2240-PAK 1991 Republic of Pakistan Famil) Health 45.00 41.90 7.03 1 2Cr. 2245-PAK 1991 Republic of Pakistan Third On-Farm Water Management 47.30 21.05 20.37 2 2

- 46 - Annex 6Page 2 of 3

Undisbursed Last ARPPAmount In USS million relative to superv. rating

(less cancellations) appraisalLoan or Fiscal projection DevelopmentOverall

credit no. year Borrower Purpose IBRD IDA Undisbursed (USSmillion) objectives status

Ln. 3327-PAK 1991 Republic of Pakistan Third On-Farm Management 36.30 36.30 7.19 2 2Cr. 2257-PAK 1991 Republic of Pakistan Second SCARP Transition 20.00 18.64 4.83 1 2Ln. 3335-PAK 1991 Republic of Pakistan Karachi Port Modernization 91.40 72.12 50.30 1 2Cr. 2354-PAK 1992 Republic of Pakistan Punjab Middle Schooling 115.00 111.49 8.50 1 2Cr. 2383-PAK 1992 Republic of Pakistan Env. Prot. & Resourse Conservation 29.20 29.64 2.64 1 1Ln. 3500-PAK 1992 Republic of Pakistan Domestic Energy Resources 180.00 180.00 93.96 1 2Cr. 1987-1-PAK 1993 Republic of Pakistan Karachi Water & Sanitation 11 91.90 91.96 74.26 1Cr. 2410-PAK 1993 Republic of Pakistan East. Sadiqia South Irrigation 54.20 52.73 4.92 1 1Cr. 2464-PAK 1993 Republic of Pakistan Family Health 11 48.00 48.45 3.94 1 1Cr. 2468-PAK 1993 Republic of Pakistan 1992 Flood Damage Restoration 100.0 100.82 9.00 1 1Cr. 2482-PAK 1993 Republic of Pakistan Balochistan Primary 106.00 105.81 0 NR NRCr. 2512-PAK 1993 Republic of Pakistan North Pakistan Resources Mgt. 28.80 28.25 0 1 1Cr. 2542-PAK 1994 Republic of Pakistan Public Sector Adjustment 100.00 52.05 0 NR NRLn. 3645-PAK 1994 Republic of Pakistan Public Sector Adjustment 150.00 76.96 0 NR NRCr. 2558-PAK 1994 Republic of Pakistan Sindh Special Development 46.80 46.80 0 NR NR

Total 4773.75 4046.42? 2814.53 1441.86of which has been repaid 1050.97 199.36

Total now outstanding 3722.78 3847.06

Amount sold 33.09of which has been repaid 33.09

Total undisbursed 2814.53

a/ Disbursement lag: Difference between actual disbursements and estimated disbursements from original appraisal projections.

b/ IDA Credits beginning with the 6th Replenishment are denominated in SDRs, and are shown in US$ equivalents at the time of negotiations. Disbursedamounts are computed at the exchange rate applicable at the date of this statement.

- 47-

Annex 6Page 3 of 3

The Status of Bank Group Operations in PakistanStatement of IFC Investments

(as of December 31, 1993)

Amount ($mfillions)Date Borrower Purpose Loan Equity Total

1958 Steel Corp. of Pakistan Iron & Steel 0.63 0.631959 Adamjee Industries Ltd. Textiles 0.75 0.751961/65 Gharibwal Cement Ltd. Cement 4.76 0.42 5.181963/64/75 PICIC DFC 3.00 3.0087/89/921965/80/82 Packages Limited Paper Products 17.00 1.24 18.2487/88/911965 Crescent Jute Textiles 1.83 0.11 1.941967 Pakistan Paper Corp. Paper 4.83 2.02 6.851969/89 Datvood Hercules Fertili-er 18.30 2.92 21.221979 Fauji Foundation Polyp,.. ylene Bags 1.78 1.781979 Attock Refinery Ltd. Chemicals & Petrochemicals 7.50 0.86 8.361979 Milkpak Ltd. Food Processing 1.90 0.40 2.301979/82 Pakistan Oilfields Ltd. Chemicals & Petrochemicals 7.00 1.18 8.181980 Premier Board Particle Board 2.70 2.701981 Habib Arkady Ltd. Food & Food Processing 3.15 0.16 3.311982 Asbestos Cement Ird. Ltd. Cement & Construction Material 4.02 0.51 4.531983/85 Pakistan Petroleum Ltd. Chemicals & Petrochemicals 25.30 1.56 26.861985 NDLC Leasing 5.49 0.37 5.861986/92 Mari Gas Company Ltd. Chemicals & Petrochemicals 44.48 44.481987/89 Anglo-Suisse Chemicals & Petrochemicals 6.80 6.801988 Fecto Cement Cement & Construction Material 18.58 18.581988 Millat Tractors Tractors 4.90 4.901989 Shams Textiles Textiles & Fibers 2.76 2.761989 Suraj Cotton Textiles & Fibers 2.76 2.761989 Hala Spinning Textile Spinning 3.26 0.66 3.921990 Pakistan Suzuki Automotive 18.17 18.171990 Rupali Polyster Synthetic Textiles 22.38 2.00 24.381990 FIIB Capital Markets 1.57 1.571990 Housing Finance Corp. Capital Markets 5.:3 0.49 6.021991 Engro Chemicals Pak. Ltd. Chemicals & Petrochemicals 36.20 8.50 44.701991 PILCO Capital Markets 5.00 5.001991 Prudential Discount Guarantee Capital Markets 0.40 0.401991 ElM, The Fund Capital Markets 0.78 0.781991 EIL Capital Markets 0.24 0.241992 J.S. Stock Brokerage Capital Markets 0.86 0.861992 Rupafil Limited Synthetic Textiles 14.38 0.34 14.721993 Sarah Textiles Textiles 6.00 1.50 7.501993 Central Securities Depositor Capital Markets 0.25 0.251993 Muslim Commercial Bank Capital Markets 15.00 15.001993 Pakistan Services Limited Tourism 12.00 3.00 15.001994 Crescent Greenwood Ltd. Textiles 16.10 3.101994 Fauji Cement Cement 24.00 5.00

Total Gross Commitrnents --

358.44 50.24 360.48

Less Cancellations, Termination ExchangesAdjustments, Prepayments and SalesWriteoffs and Sales 267.83 33.24 252.87

Total Commitments now held by IFC 90.61 17.00 107.61

Total Undisbursed 85.82 12.25 98.07

IBRD 23805R36 64 74' 74. 38'bZBEKISTAN TAJIKISTAN TAJIKISTAN

CHINATURKMENISTAN

AFGHANISTAN

3~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4

_ C Pes~~~~~~~~~~~~~~~~~~~~hawor JAMMU A)

ISIAMIC X 4 SRERIF PAKISTAN

; Rivers* Province Capitalsf National Capital

26 ' Province Boundariesl Intemotional Boundaries

, -; f _ G " Hyderabad

Arabian Seac24t 0, 2,0, 40 60, so Too 24-

6r 64 7 76

JULY 1993