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ADB Report on Pakistan's economy

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Three more areas of glaring deficiencies identified

From Shamim Ahmed Rizvi, Islamabad
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 high—at 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 development process.

"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 order.

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 services.

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 government.

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 performance.

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 programme.

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 diminished correspondingly.

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.