Three more areas of glaring
From Shamim Ahmed
Sep 06, 1999
The Asian Development Bank, in its review report on Pakistan's economy
for 1998, has warned Pakistan against excessive external and internal borrowing. The
report which has been submitted to government of Pakistan has pointed out, besides wanton
borrowing, three more areas of glaring deficiencies i.e. poor portfolio performance, weak
governance and lack of absorptive capacity.
The Bank has advised the government to exercise extreme caution while
arranging fresh foreign loans. "Pakistan's massive external debt burden, it said, is
the result of financing persistently large current account deficits through external
borrowing over many years. It adds that by December 31, 1998, Pakistan's total outstanding
external debt was $32 billion, including principal and interest arrears of $ 1.2 billion.
The ratio of external official debt stock to GDP is about 66 per cent whereas the ratio of
external debt service, as compared to the exports on goods and services, excluding
worker's remittances, is about 48 per cent. The level of official domestic debt is also
very highat about $ 23 billion equivalent.
The assessment report says that improved debt management and
initiatives to expand foreign exchange earning potential through export growth are vital
to ensure that Pakistan is able to avoid future difficulties in meeting debt obligations
and to take full use of the recent Paris Club rescheduling. Pakistan's poor portfolio
performance, the Bank noted, requires relatively greater staff inputs in the country than
other countries with similar income levels.
The assessment report speaks of Pakistan's continuing poor track record
in meeting policy covenants and commitments to operation and maintenance expenditures,
long delays in project implementation and lack of adequate in-country ownership of the
"These issues, combined with severe shortage of counterpart funds
that are expected over the medium term, highlight the need to develop a conservative and
performance-linked approach to new lending to the country" the report said.
In another poor area of government, the report says, weak government
can be attributed to lack of accountability, weak institutions, lack of fiscal discipline,
over-centralization of government functions, lack of transparency in decision making,
evasion of taxes and other public charges, ineffective law enforcement, poor delivery of
justice and opportunities for rent seeking behaviour.
Major manifestations of poor governance in Pakistan include an
inefficient and centralized civil service structure, an outdated and poorly resourced
legal and judicial system, misuse of public resources, weak institutional capacity,
ineffective policy implementation, limited accountability and serious breaches of law and
Weak governance, both structural and systemic, has been a factor in
Pakistan's poor economic performance and related problems. Lack of transparency, failure
of accountability and reduced efficiency and effectiveness, are pervasive in politics and
in the economy and have resulted in mismanagement of resources and poor delivery of basic
Political uncertainties through confrontations between various organs
of the state, which have distracted attention from economic management, undermined
investors' confidence, and diverted government's attention from development and
implementation of necessary strategies and policies are: i) politicization of economic
decision making, and political interference in the use of public resources; ii) failure of
public institutions to fulfill their mandate, limited accountability, and ineffective
policy implementation; iii) an outdated legal and judicial system; iv) persistent law and
order problems, and sectarian violence; and v) lack of fiscal discipline, tax evasion,
loan defaults, non-payment of utility bills, and corruption.
According to the report, despite satisfactory disbursement
implementation delays remain a widespread feature of the Bank's portfolio in Pakistan. Of
the undisbursed amount of $ 1.9 billion $ 800 million or 42.1 per cent is on account of
delayed project implementation In addition, the Bank's portfolio now shows a relatively
high average age of about five years.
In 1998, primarily to rationalize the programme, a spring cleaning
exercise was conducted by the Pakistan Resident Mission (PRM) and by the end of the year
some $ 215 million in savings had been identified and cancelled, in cooperation with the
Portfolio performance has been constrained by genetic issues. These
include; I) legal and administrative issues related to the government's own processing
procedures and requirements; II) process coordination and procedural issues; and III)
technical and project management issues.
Invariably, these issues result in implementation delays, with often
negative financial and economic consequences. In addition, non-compliance with specific
covenants, particularly with regard to submission of audited accounts and financial
management, diminish accountability and transparency as well as project's sustainability.
The limited availability of counterpart funds has emerged as another major concern.
Recent portfolio reviews in Pakistan show that portfolio performance
has not improved significantly. For example, 44 months average delay in projects completed
in 1998, poor track record in meeting policy covenants and commitments for operation and
maintenance expenditures, and lack of adequate ownership. The persistent portfolio
performances issues, combined with the shortage of counterpart funds expected over the
medium-term, will require the Bank to follow a conservative and increasingly strict
In addition to the performance of specific projects, the Bank is paying
particular attention to the policy environment in which projects are formulated. Issues of
governance, capacity building and achievement of development objectives will be monitored
and taken into consideration by the Bank in preparing the operational
The ultimate value of the portfolio is its effect on Pakistan's
development. Post-evaluation findings have shown that the development impact on many
completed projects in Pakistan has been much less than anticipated. The reasons for this
are diverse but typically have included inadequate implementation of loan covenants, lack
of in-country ownership and involvement in project design, and inability to meet
commitments for sustained operation and maintenance of completed project facilities. All
new projects will, therefore, have strong participatory characteristics and carefully
designed benefit monitoring and evaluation components, where appropriate, and the means to
monitor governance issues and development impact, the report said.
The main focus of the comprehensive report spread over hundred of pages
is on alarming rise in external indebtedness, which far exceeds the domestic debt. This is
an issue which is being constantly agitated in the national press as well. It has been
noted with serious concern that there has been an increase of over Rs290 billion in
foreign debt burden during the year, 1998-99.
The government has been publicizing the fact that there has been
significant retirement of its domestic rupee denominated debt with the banking system of
over Rs. 62 billion during 1998-99. This is being hailed as a great accomplishment by the
government in reducing the burden of outstanding debt. But what has not been highlighted
is that there has simultaneously been a massive build up of external debt, which is larger
than domestic debt. External debt has increased by over Rs 290 billion in 1998-99. This
dwarfs the retirement of domestic debt by almost five times. What explains this dramatic
change in the composition of public and publicly guaranteed debt in 1998-99. The answer
lies in the debt relief obtained from the Paris Club. This has enabled Pakistan to defer
the repayment of some of the external debt. Consequently, the net inflow of foreign
assistance is substantially higher. Given the borrowing requirements of the government
(depending upon the size of the budget deficit), the need for domestic borrowing has
How heavy is this burden of debt? In relation to our Gross Domestic
Product? It was 46 per cent in 1995-96 and has risen to over 54 per cent of the GDP by
1998-99, and could approach 59 per cent in 1999-2000. If we include domestic debt, almost
95 per cent of our GDP is effectively mortgaged. A more direct measure of debt servicing
capacity is the relationship of the total stock of external debt to our export earnings.
It is indeed extremely worrying that the ratio was already high at just over 300 per cent
in 1995-96 and has increased to almost 416 per cent in 1998-99.
Prime Minister Nawaz Sharif who came into power with a commitment to
the nation to break the begging bowl, should take a serious note of the topsy turvey style
of running his government. He may put aside the notes of warning by independent Pakistan
economists describing it as disinformation of the opposition but he cannot possibly and
should not ignore what the Asian Development Bank is saying.