f This document has a restricted distribution and may be used by recipients only in the performance of FILE Copy Document of The World Bank

Transcription

1 Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY FILE Copy Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE ISLAMIC REPUBLIC OF PAKISTAN FOR A SMALL INDUSTRIES PROJECT February 24, 1981 Report No. P-2967-PAK f This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS Currency Unit - Pakistan Rupees (Rs) US$1 = Rs 9.90 Rs 1 = US$0.101 ACRONYMS EPB - Export Promotion Bureau IDBP - Industrial Development Bank of Pakistan IPB - Investment Promotion Bureau NCCC - National Credit Consultative Council NDFC - National Development Finance Corporation NWFP - North West Frontier Province PBC - Pakistan Banking Council PICIC - Pakistan Industrial Credit and Investment Corporation PSIC - Punjab Small Industries Corporation SBP - State Bank of Pakistan SIC - Small Industries Corporation SIW - Small Industries Wing SSI - Small-Scale Industries SSIC - Sind Small Industries Corporation FISCAL YEARS Government of Pakistan: July 1 - June 30 Commercial Banks: January 1 - December 31

3 PAKISTAN FOR OFFIC'IAL USE ONLY SMALL INDUSTRIES PROJECT Credit and Project Summary Borrower: Amount: Terms: Beneficiaries: Project Description: Relending Terms: Islamic Republic of Pakistan. SDR 23.6 million (US$30 million equivalent). Standard. Small-scale industries (SSI) which would receive credit through commercial banks and extension services through the small industries corporations (SICs)--Punjab Small Industries Corporation, Small Industries Development Board of NWFP, Sind Small Industries Corporation, and Baluchistan Small Industries Wing--and through the Export Promotion Bureau. The project would provide credit for the development of small-scale industrial enterprises in promising subsectors; assist the Punjab and NWFP SICs in providing extension services in woodworking and leather goods; expand export promotion of handicrafts and small industry products; aind initiate project development activities in Baluchistan. The project also includes subsector studies and project preparation in support of the credit component. The Credit would provide US$26 million for onlending to the Industrial Development Bank of Pakistan (IDBP) for refinancing loans by five commercial banks, and US$4 million for the technical assistance components. Project risks relate mainly to dealing with institutions that are new to the Association. Monitoring by IDBP of the credit component and technical assistance to the small industries corporations should reduce these risks. US$4 million would be passed on by the Government on IDA terms for the technical assistance components to the agencies concerned; and USS26 million would be onlent by the Government to IDBP for the credit component at % interest p.a., depending on subloan size, over a period of 15 years, including five years' grace. IDBP would charge the commercial banks % interest p.a. for up to 12 years, including three years' grace, and the commercial banks would lend to sub-borrowers for 3 to 10 years, including a maximum of two years' grace, at an interest rate of not less than 11% p.a. The Government would bear the foreign exchange risk. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 - ii1 - Estimated Costs: 1/ Local Foreign Total US$ million Credit Component Overseas Training for Commercial Banks Technical Assistance Components Gujrat Service Center Bannu Service Center Export Promotion Subsector Studies Baluchistan Project Development / Financing Plan: Local Foreign Total US$ million IDA Commercial Banks Private Sponsors Government Estimated IDA FY FY81 FY82 FY83 FY84 FY85 Disbursements: US$ million Annual Cumulative Rate of Return: Appraisal Report: Not applicable. Pakistan Small Industries Project, Report No. 3216a-PAK, dated February 20, Map: / Duties and taxes are negligible. 2/ Totals rounded.

5 INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE ISLAMIC REPUBLIC OF PAKISTAN FOR A SMALL INDUSTRIES PROJECT 1. I submit the following report and recommendation or- a proposed development credit to the Islamic Republic of Pakistan for SDR 23.6 million (US$30 million equivalent) on standard IDA terms, to help finance a Small Industries Project. US$26 million of the credit would be made available to sub-borrowers at not less than 11% p.a. interest through five commercial banks and a refinancing arrangement by the Industrial Development Bank of Pakistan (IDBP), and US$4 million would be made available on IDA terms to various agencies providing technical assistance, promotion and extension services to small industries. PART I - THE ECONOMY 2. The most recent economic report "Pakistan: Economic Developments and Prospects" (No PAK, dated April 15, 1980) was distributed to the Executive Directors on April 21, Although budgetary and balance of payments problems have persisted, the past three years have witnessed a significant economic recovery in Pakistan. GDP growth during FY78, FY79 and FY80 averaged over 6% p.a. This growth has been accompanied by a recovery in agricultural and industrial production well above the rate of population growth, currently averalging 3% p.a., and by a rapid growth in exports. Exports increased in real terms by 11% in FY78, 20% in FY79, and 23% during FY80. Value added in agriculture rose by 6% in FY80 following increases of 4.2% in FY79 and 2.5% in FY78, and in industry by 8.1% in FY80 following 9.2% growth in FY78 and 4.2% in FY79. This performance contrasts markedly with the economic stagnation of the early and mid-1970s, when the growth of GDP averaged only 3-4% and goods production 1.1% p.a., and export growth was negligible. 4. The recovery in the economy since 1977 has been aided by several factors, including favorable weather, improved foreign demand for Pakistan's exports and higher domestic demand associated with better crops, rising rural incomes and workers' remittances from the Middle East. Various policy changes introduced by the Government have also contributed to the recovery. 5. In recent years the Government has taken a number of initiatives to improve agricultural production. Particular attention has been given to improving farmer incentives and input supplies. Support prices for all major crops have been raised so that they are now closer to world prices. At the same time inputs, particularly fertilizer, have been heavily subsidiized 1/ Parts I and II are substantially the same as Parts I and II of the President's Report No. P-2960-PAK (Fifth Education Vocational Training Project) dated February 18, 1981.

6 (the Government has recently taken steps to reverse this policy, which is now creating budgetary problems), and efforts have been made to improve the fertilizer distribution system by expanding the marketing network and by ensuring adequate supplies and timely delivery of fertilizer imports. A better balance between nutrients has also been attained. In addition, the Government has begun to address the deep-seated problems affecting productivity at the farm level. A start has been made in improving extension services through the adoption of the so-called training and visit system. Preliminary reforms have been initiated to the agricultural research system in line with the findings of a recent USAID/World Bank study. The Government has also accepted and has begun to act on the main recommendations of a recently completed UNDP study on irrigated agriculture, which emphasizes the need to improve the efficiency of the water delivery system through the rehabilitation of distributaries and better scheduling of water deliveries to the farmer; and to expand the role of the private sector, for example, through the promotion of private tubewell development in sweet groundwater areas. Other programs--in pesticides, seeds, agricultural credit and farm power--have also been strengthened. These initiatives are still at an early stage and a breakthrough from the problems of low productivity at the farm level is yet to take place. 6. Major changes have been made during the past three years in Government policies in the industrial sector. The policies pursued in the early and mid-1970s of extensive nationalizations, tight restrictions on the private sector, and rapid expansion of the public sector to spearhead industrial investment and growth have been gradually reversed. Most agricultural processing and some industrial units have been denationalized; constitutional safeguards have been provided to private industry against further arbitrary Government acquisitions; and the areas open to the private sector have been widened. A wide range of incentives including tax holidays, excise and import duty concessions, easier access to imported raw materials, concessionary credit and income tax provisions, and direct cash rebates have been granted to encourage private investment and exports. The investment sanctioning procedure has been streamlined. These measures have led to an improvement in private sector confidence and to a sharp increase in proposals for relatively smaller-scale private investment projects, though industrialists are still hesitant to commit themselves to large-scale investments involving long pay-back periods. 7. At the same time, the Government has embarked on the difficult and inevitably long process of reforming the public sector, which has been plagued by low efficiency and profits. Major studies have been completed of the management and organization of the public sector, and the performance of individual enterprises. In accordance with the recommendations of these studies, the Board of Industrial Management (BIM) has been abolished, the number of sector holding corporations has been reduced, and boards of directors have been established at the enterprise level. Some public sector units which have little prospect of improved financial performance have been closed down. In addition to the denationalizations mentioned earlier, further public disinvestment is being considered on a case-by-case basis. A mutual fund has been formed for the sale of equity holdings in public sector enterprises to private investors. 8. The higher level of economic activity during the past three years and the Government's efforts to raise existing tax rates, introduce new taxes

7 - 3 - and reduce tax evasion have helped to improve public revenues from 15% of GNP in FY77 to 17% in FY80. Nevertheless, the budget has remained under strain as expenditures have risen as rapidly as revenues. The Government's policies of encouraging production and exports through subsidized inputs and export rebates, and the political and social constraints to making substantial price adjustments on a number of items of mass consumption, have inflated subsidies. Rising debt service, following the expiration at the end of FY78 of the fouryear debt relief arrangement with member countries of the Pakistan Consortium, and increased defense spending have contributed to the growth in non-development expenditures. In addition, commitments under the ongoing public investment program and higher subsidies for agriculture led to further increases in development spending between FY77 and FY79. Despite the increased revenues, budget deficits remained around 3-4% of GNP. 9. An improvement in the situation occurred during FY80. The FY80 budget presentation in June 1979 included major new revenue measures which yielded about Rs 4.7 billion. In addition, substantial increases were announced in domestic prices of petroleum products, railway fares and fertilizer prices during the year. The Government has also been making, a determined effort to restrain both development and non-development expenditures, and supplementary allocations have generally been small. While post-budget increases in import prices and other exogenous factors (including expenditure on Afghan refugees) added to budget outlays, improved revenues and additional external assistance from the IMF's Trust Fund and from Saudi Arabia limited the domestically financed budget deficit to about Rs 6.3 billion in FY80, less than 3% of GNP. A further slight improvement in the budget situation is expected in FY Pakistan's export performance has improved considerably in recent years, although its share of world exports still remains below the level of the early 1970s. Rapidly rising workers' remittances from abroad, from US$578 million in FY77 to over US$1.7 billion in FY80, have also greatly assisted the external position. These increases have, however, been offset by a rapid increase in the value of imports, mainly POL, fertilizer, edible oil and capital goods. The current account deficit was US$1,120 million or 4% of GNP in FY80, compared to US$1,050 million or nearly 7% of GNP in FY77 in current prices. The financing of these deficits has become more difficult since program-type assistance from OPEC countries (which was substantial in the mid-1970s) as well as net aid flows from Consortium sources have declined. This situation is now expected to change as a result of Pakistan's recently concluded agreement with the IMF for US$1.7 billion of EFF resources over the next three years, signs that the aid community is becoming more ready to increase aid commitments, and the further debt rescheduling agreement concluded among members of the Pakistan Consortium in January 1981 (see below). 11. The balance of payments presents the Pakistan Governmernt with its most intractable problem. With imports roughly double the level of exports, exports must rise at a substantially faster rate than imports simply to prevent a worsening in the sizable foreign trade deficit--a task made even more difficult by the sharp increase in the petroleum import bill. Secondly, following the termination of the rescheduling agreement, debt service payments have increased sharply, though this will be alleviated by the recent agreement of Consortium countries to reschedule 90% of debt service falling

8 due on concessional official credits over the 18-month period from mid-january 1981 to mid-july In these circumstances, Pakistan has been fortunate that substantial workers' remittances have helped to reduceate the pressure on the external account. However, foreign exchange reserves remain low and further major efforts will be required by the Government to increase savings and encourage production and exports. 12. Thus, notwithstanding recent improvements in output and exports and in the overall management of the economy, financial difficulties persist. To a considerable extent these difficulties reflect continuing pressures on resources, despite rapid output growth and the Government's efforts to restrain public investment. These pressures have led to substantial imbalances between savings and investments and between exports and imports, which have been reflected in sizable budgetary and balance of payments deficits. Further measures appear essential if these and other basic issues limiting economic growth in the longer term are to be adequately addressed. These issues include the farm-level factors affecting low productivity in agriculture; the structure and competitiveness of the industrial sector; the factors lying behind continued rapid growth in population; the need to redirect social service expenditures; the inadequate performance of public sector enterprises; and the problems of public resource mobilization. 13. Agriculture remains the economy's mainstay, accounting directly for roughly a third of GDP, employing about 60% of the labor force and, directly or indirectly, providing nearly two thirds of total exports. Despite the recent recovery in output, a number of fundamental factors continue to limit agricultural productivity at levels well below the potential implied by the resources and technologies already available. Generally, output growth has not been commensurate with the substantial increases in inputs, especially water and fertilizer. While considerable potential still exists for the additional use of fertilizer and other inputs, it appears essential to give greater priority to evolving complementary policies and programs which would have a direct impact on yields at the farm level. The importance of increasing farm productivity is now more widely recognized in the Government and a beginning has been made in addressing this problem. Nevertheless, support for programs to strengthen research, extension, water management and other programs in the agriculture and water sectors needs to be intensified, while fertilizer subsidies must be further reduced, accompanied by necessary adjustments in output and consumer prices. 14. Industry contributes about 15% of GDP and during much of the 1950s and 1960s provided a major stimulus to growth. Growth rates in manufacturing production, though recently better, remain well below those attained in the 1960s. The textile industry, in particular, which accounts for about 40% of value added in large-scale industry, has suffered from problems of inefficiency, excess capacity and a lack of competitiveness in foreign markets, while manufacturing growth generally has been affected by the unsatisfactory performance of public sector enterprises. While there has recently been a sharp increase in private investment sanctions, it remains to be seen whether these will lead to a substantial improvement in actual capital expenditures. To maintain the increased momentum in the industrial sector will require, among other things, an adequate supply of local and foreign financing both for investments and

9 -5- current inputs. At the same time, it is necessary to ensure that the Government's incentive system supports those industries in which Pakistan has a comparative advantage; more analysis is needed to determine levels of effective protection for formulating an appropriate industrial development strategy for the 1980s. The recovery in industry also needs to be reinforced by improvements in labor-management relations and by further measures to rehabilitate the textile industry, to improve the performance of the public sector and to increase exports. 15. The Government's efforts to deal with the energy situation by adjusting domestic oil prices, and by encouraging the substitution of other energy forms and the exploration and develooment of domestic oil resources, have met with some success. Growth of petroleum consumption has been restrained by the development of hydro electricity and natural gas resources. At the same time, activity in the oil sector has been stepped up, in some instances through joint ventures with foreign private companies. Domestic programs for exploration and development of mineral fuels, as well as other energy solarces, hold out the hope of a considerable improvement in Pakistan's balance of payments outlook in the late 1980s. However, a number of issues relating to such matters as energy planning, pricing and organization will need to be addressed if this potential is to be realized. 16. While it is clearly vital to sustain rapid growth in the commodityproducing sectors, it is also necessary to contain the rapid growth in population, currently running at about 3% p.a., which has seriously handicapped the country's ability to improve living standards. Family planning programs have so far had little effect and there have been few changes in the socio-economic environment of a type that usually accompany declines in fertility. Rapid population growth places severe burdens on Government resources simply to maintain education and health programs at their current inadequate standards. However, without higher literacy rates, improved health facilities and a reduction in child mortality, it is doubtful that population growth rates can be much reduced. Expenditures on social services remain comparatively low and undue emphasis has been given to higher education and urban health facilities. High priority needs therefore to be given not only to increased allocations for family planning and social service expenditure but also to its redirection to serve the wider interests of the population and the economy. While the substantial migration from Pakistan to the Middle East over the past few years has to some extent relieved the pressures resulting from rapid population growth, this clearly cannot be relied upon to provide an answer t:o the situation in the long run. The Government has recently shown more awareness of this problem; a new population program has been adopted and is in the initial stages of implementation. 17. Policies that face the longer term issues in both the productive and the social sectors will take time to have an appreciable effect and will have to be implemented in the context of continued domestic and external resource constraints. To improve the budget and the balance of payments a fundamental improvement is required in the overall savings levels in the economy, particularly in public savings. Although national savings at around 12% of GNP are substantially above the levels of the early and mid-1970s, there has been little further improvement over the past few years. The continuation of the Government's recent efforts to restrain public spending and

10 encourage private investment will help to reduce present imbalances between investment and savings flows, while increased opportunities for private investment should attract resources from less productive uses. At the same time, an increase in savings inevitably calls for restraining private consumption through appropriate price adjustments and selective duty increases on non-essential imports. While the Government has made several price increases in the past 12 months or so, further adjustments will directly reduce the budgetary burden of subsidies. Continued restraints on development spending and measures to further improve revenues through improvements in tax administration and tax and rate increases, for example, property taxes, domestic water rates and irrigation water charges, are also needed. 18. Increased agricultural production of major crops (particularly rice and cotton) will help directly to sustain export growth. Efforts are also necessary to stimulate the output of minor crops, for example, pulses, potatoes, onions and fruits, for which markets exist in neighboring countries. In addition, substantial scope exists for increasing Pakistan's exports of manufactured goods such as textiles and engineering products, as well as of a wide range of goods produced by the small-scale industries sector. Increased domestic output of wheat, edible oil, sugar, mineral fuels and fertilizer would help to moderate import growth considerably. 19. Total external public debt outstanding at the end of FY80 amounted to about US$8.7 billion, of which US$5.0 billion was due to bilateral members of the Pakistan Consortium, US$1.1 billion to OPEC, US$1.5 billion to multilateral agencies and the balance to other bilateral and private lenders. Contractual debt service to multilateral and bilateral aid agencies rose from US$313 million in FY73 to US$397 million in FY78, although the burden of these payments was eased to US$200 and US$261 million, respectively, as a result of debt relief arrangements. Following the termination of these arrangements, debt service payments rose sharply to about US$500 million in FY79. Contractual payments in FY80 were about US$650 million and are projected to be considerably more in subsequent years, although there will be some alleviation in FY81 and FY82 as a result of the debt rescheduling agreed recently by Consortium countries. As a proportion of exports, non-factor service payments and workers' remittances, service on all external debt remained at about 15% in FY80. Pakistan's debt to the Bank and IDA at the end of FY80 was about 13% of its external public indebtedness. The share of the Bank Group in total debt service is now about 10%. PART II - BANK GROUP OPERATIONS IN PAKISTAN 20. The cumulative total of Bank/IDA commitments to Pakistan (exclusive of loans and credits or portions thereof which were disbursed in the former East Pakistan) now amounts to approximately US$2.0 billion. During its long association with Pakistan, the Bank Group has been involved in almost all sectors of the economy. This has included its involvement with other donors, over a 20-year period, in the major program of works to develop the water resources of the Indus Basin. Through FY80, 38% of total Bank/IDA commitments to Pakistan were for public utility services, 30% for agriculture, 31% for

11 -7- industry (of which 9% was for industrial imports) and 2% for education. Lending for public utility services has included loans and credits for railways, electric power, gas pipelines, ports, highways, telecommunications and water supply. 21. Lending operations in Pakistan have three main objectives: first, to support the directly productive sectors of the economy; secondly, to support the expansion of, and to improve the institutions which are responsible for, the principal public services supporting economic growth; and thirdly, to meet basic needs in the areas of rural and urban development. 22. In pursuit of these objectives, the Bank Group has placed special emphasis on lending for agriculture, which is the mainstay of the Pakistan economy. Projects in this sector are aimed at augmenting the supply of essential inputs, principally irrigation water, fertilizer, seeds and credit; strengthening research, extension and other agricultural supporting services; improving water management; reclaiming land by controlling salinity and waterlogging; and providing essential facilities including tubewells, livestock development and dairy processing. An important purpose of this lending is to assist the Government's program to increase the productivity of available land and water resources in the Indus Basin through quick-yielding investments, as recommended recently in a UNDP-financed study for which the Bank was Executing Agency. 23. In industry, most lending for the private sector has been through the DFCs, principally through eleven loans/credits amounting to US$270 million for the Pakistan Industrial Credit and Investment Corporation (PICIC). Direct lending for industry has comprised three large fertilizer plants. Projects are envisaged for further increasing domestic fertilizer capacity, as well as for small-scale industry. IFC has made investments in 13 Pakistan enterprises for a total of US$70.2 million, of which US$60.7 million was by Way of loans and US$9.5 million by equity participations (these are shown in Annex II). About US$35.9 million remains outstanding. The enterprises assisted by IFC include three in the field of pulp and paper products, two in texctiles and one each in cement, steel, fertilizers, food processing, plastics, wood processing and petrochemicals. IFC is also a shareholder in PICIC. 24. The focus of Bank Group lending for transport and commuanications has shifted increasingly towards assisting Pakistan to better utilize existing capacity by improving the efficiency of operations and strengthening the institutions responsible for these services, especially the Karachi Port Trust, Pakistan Railways, Telephone and Telegraph Department, and Federal and Provincial highway agencies. In the power sector, the Bank Group has assisted the Karachi Electric Supply Corporation (KESC) and the Water and Power Development Authority (WAPDA) with four and three projects respectively; the sector has also been assisted by the construction under the Indus Basin Development Program of Mangla and Tarbela dams. 25. In the oil and gas sector, the two Sui gas transmission companies have been assisted with five projects, while IDA has recently financed a petroleum development project and begun to play an important role in strengthening the Oil and Gas Development Corporation. A dialogue on key energy policy issues has been initiated. These efforts are assisting in the efficient

12 development and utilization of Pakistan's domestic energy resources. In the field of urban development, Bank Group missions have worked with the municipal authorities of Karachi and Lahore, Pakistan's major cities, and following UNDP and IDA-financed technical assistance efforts a project is now under preperation for Lahore. A second water supply project in Lahore is currently under implementation. Four IDA credits for education, totalling US$37.5 million, have assisted in upgrading primary, post-secondary and higher technical and agricultural education, middle-level training of primary teachers and agricultural extension agents. 26. Annex II contains a summary statement of Bank loans and IDA credits as of December 31, 1980, and notes on the execution of ongoing projects. Credit and loan disbursements have been generally satisfactory. Some projects have experienced delays due to government budgetary constraints and to slowness in appointment of consultants. The Government has recently increased the rates charged by some public utilities to improve their financial position. Rapid turnover of managerial and technical staff, in part due to migration to the Middle East, has been a problem in the case of some projects. 27. A number of further projects for Bank Group financing are currently under appraisal or being prepared in Pakistan. These include projects for agricultural research, oil and gas development, water management and irrigation and flood rehabilitation. Pakistan continues to have domestic resource constraints for the reasons set out in Part I. To assist the Government to finance agricultural and other high-priority projects which have a low foreign exchange component, financing of some local expenditures in specific cases, as in the one now proposed, is justified. 28. In addition to lending, economic and sector work provides the basis for a continuing dialogue between the Bank Group and the Government of Pakistan on development strategy, and for the coordination of external assistance within the Pakistan Consortium. PART III - THE INDUSTRIAL SECTOR Industrial Sector 29. After agriculture, manufacturing is the largest sector, contributing about 15% of GDP and accounting for about 13-15% of employment in the 1970s. During the first half of the 1960s, industrial value added grew in real terms at about 15% p.a. This, however, fell to about 8% p.a. in the second half of the 1960s, due to a number of external and internal factors: the 1965 war with India, deterioration of the investment climate, uncertain political conditions, tight credit policies and erratic raw material supplies. This trend continued into the first half of the 1970s with industrial employment growing at only 2% p.a. (compared to 3% in the 1960s), due to adverse political and economic policies and events, particularly the separation of the East Wing resulting in loss of supply and markets, the oil price increase of 1973 and subsequent world recession of 1974/75, Government nationalization and takeover of 31 major manufacturing enterprises, and labor unrest. In the last few years, as a result of a more favorable economic climate, and various

13 - 9 - incentives and policy measures by the Government, private industrial investment has revived and industrial output as well as exports have grown at a higher rate. While cotton textiles continue to dominate manufact-ured exports, the share of other products such as carpets, surgical instruments, leather and leather goods has been increasing. There are still major problems in the sector, the most important of these being low productivity, management problems and excess labor force in public sector corporations, which the Government is currently addressing. Characteristics and Role of Small-Scale Industry (SSI) 30. SSI is defined by the Government as units with fixed assets, excluding land, of less than Rs 3 million (US$303,000 equivalent) valued at historical cost. Although SSI accounts for only 25% of industrial output, it employs about 85% of the industrial workforce. The share of SSI in total exports has been increasing from an estimated 12% in FY75 to about 20% in FY79; its share of manufactured exports was 47% in FY79. In recent years, the SSI sector appears to have expanded more rapidly than the large and medium-scale private manufacturing sector as indicated by higher rates of investment. Small firms seem to have been less affected by the past political and econom,ic uncertainties than large and medium-sized firms. Some industries are dominated by small-scale units, e.g., sports goods, surgical instruments, wooden furniture and carpets. 31. Based on data from the first phase of a UNIDO-assisted study which was undertaken in 1978/79 as part of proiect preparation, about 80% of SSI units employ less than 10 people and have an average investment of about US$14,000. SSIs are more labor-intensive than large-scale units; investment cost per job is US$1,600, compared with US$21,000 for a sample of large-scale private sector projects financed by PICIC during the last two years. The average capital-output ratio of SSIs was 0.6 compared with 1.0 t:o 1.5 for large-scale units. The low use of capital by SSIs is partly due to the simple technology used. It is also due to their poor access to institutional credit markets, lack of know-how in dealings with financial institutions and reluctance by banks to lend to them due to higher costs and risks. About 60% of the units have no bank accounts and about 80% have never approached a financial institution. Almost all SSI units claimed to have received very little technical assistance from existing agencies. Most SSI units faced raw material supply and market/marketing problems. However, SSIs do have access to cheap labor, real wage costs being low due to lack of unionization and exemption from legislatively required social benefits. 32. In general, the Government's industrial policies are sector rather than scale-based. Nevertheless, certain incentives have been introduced for SSI, such as lower interest rates on loans, prior to 1978, and quicker clearance procedures on investment license applications. However, these measures seem to have been marginal in improving the relative attractiveness of SSI; more important have been the exemptions from labor laws, minimum wage legislation, various taxes and other administrative requirements. On the other hand, during the 1960s when generous incentives were provided to private industry, there was a large element of de facto discrimination against SSI. The import-control system tended to allocate import licenses and grant duty exemptions on imported equipment and materials to large enterprises.

14 Financing of Small Industry 33. Since 1972, the State Bank of Pakistan (SBP) has been allocating credit to small business and industry by means of mandatory targets for commercial banks. The lending target, which is expressed in terms of the net increment in small loans disbursed and outstanding as of the end of each fiscal year, consists of: (i) loans under the SBP Small Loans Scheme; (ii) the SIC schemes; and (iii) general lending by the banks to small units. The targets are monitored weekly and shortfalls are penalized by means of interest-free deposits with SBP for the amount of the shortfall until the gap is closed. During FY73-79, actual loans failed to meet the mandatory targets in four of the seven years due to overall credit ceilings imposed by the National Credit Consultative Council (NCCC), which sets the policies for overall monetary and credit expansion. Thus, while total small loans increased from Rs 419 million in FY73 to Rs 816 million in FY79 with an average growth rate of 14% p.a., loans to commerce and industry increased by 16% during the same period. Loans also have gone to commerce rather than industry and for working capital rather than fixed investment. SBP has now begun to set separate lending targets for industry and commerce, as well as for fixed and working capital. 34. SBP Small Loans Scheme. This scheme defines small loans as: (i) all loans irrespective of amount provided to industrial units with fixed assets, excluding land and buildings, whose original investment value does not exceed Rs 3.0 million; and (ii) any loan up to Rs 100,000 provided to small businessmen and firms. The scheme was intended to expedite the processing of loan applications and to emphasize the need to increase lending to SSI units. For a new business or industry, a loan was provided to meet initial investment requirements on the guarantee of two creditworthy parties acceptable to the lending bank. However, for established customers collateral requirements were relaxed. 35. Credit Guarantee Scheme (CGS). To encourage the commercial banks to lend under the Small Loans Scheme, SBP created in 1972 a CGS with an initial amount of Rs 20 million, whereby credit guarantees up to 50% of losses would be provided. The scheme, however, is not functioning effectively. To date, 93 claims have been filed, but none paid out. As a result, the commercial banks do not rely on the CGS. SBP is working with the banks to improve its CGS. The Association has prepared manuals for improved procedures of credit guarantee schemes. 36. The SIC Scheme. Since the 1960s, the small industry corporations (SICs) have had special consortium schemes for the financing of SSI units either by commercial banks or the Industrial Development Bank of Pakistan (IDBP). The two schemes were basically similar, except that the commercial banks provided local currency, while IDBP provided foreign currency financing. The SICs agreed to share 50% of any loss on loans made by the commercial banks and 75% on loans made by the IDBP. The SICs' functions were to promote and appraise the projects, while the commercial banks/idbp were responsible for determining creditworthiness, and for disbursements and collections. Loan decisions were vested in a Technical Advisory Committee (TAC) composed of representatives from the provincial government, the SIC and the bank concerned. In practice, loan processing has been lengthy (sometimes taking months) and repayments poor (about 30% of loans are in arrears). Responsibilities for

15 appraisal and supervision were not clearly allocated between the banks and the SICs and disagreements soon developed. Given the dissatisfaction on the part of all parties with these consortium arrangements, the proposed Credit adopts a clear division of labor under which the commercial banks would be responsible for project appraisal, supervision and collections, and the SICs for promotion and extension services. Technical Assistance for SSI 37. Technical assistance for SSI is primarily a provincial government responsibility assigned to semi-autonomous agencies: the Punjab Small Industry Corporation (PSIC), the Sind Small Industry Corporation (SSIC), the Small Industry Development Board (SIDB) of the North West Frontier Province (NWFP), and the Small Industry Wing (SIW) of the Department of Commerce and Industry of Baluchistan. 1/ The SICs, however, perceive their role to be broader, encompassing all aspects of small industry development, and are particularly inclined to be involved in financing, which has resulted in less attention being devoted to promotion, technical assistance and extension services. Several national agencies are also involved in assisting SSI in specific fields such as technology research and development, preparation of financial and economic studies and surveys, export market development, etc. 38. Organization of SICs. The SICs used to be area offices of the West Pakistan Small Industry Corporation (WPSIC) which was established in 1965 and based in Lahore. In 1972, WPSIC was split into four SICs. Since most of the staff, projects and activities of WPSIC were concentrated in the Punjab, PSIC inherited most of them. The other SICs have been expanding following the PSIC or WPSIC model. Thus their policies, organizational structure and projects are similar. Combined personnel strength of the SICs is 3,385, of whom 350 are considered professional staff. About 37% of the professional staff are based at their respective headquarters. For institutions whose main function is to provide technical services to SSI units in the field, the SICs have relatively too many non-professional staff and too many professionals based at headquarters. 39. Activities. The main programs and projects of the SICs consist of: (a) Industrial Estates. The SICs currently administer 16 estates; two of these estates in the Punjab were assisted by an IDA Credit of US$6.5 million in FY63. Some of these estates are not being fully utilized, and the proposed Credit will be available to assist SSIs to establish units on them. (b) Service Centers. There are 19 service centers, with the larger ones located in the Punjab. The centers provide common facilities and equipment that small units cannot afford or do not need full-time in their own shops; skills training based on formal curricula; and advisory services through demonstration in the centers or consultancy in SSI workshops. Aside from these promotional services, the centers are engaged in limited amounts of commercial production. (c) Handicraft and Carpet Centers. This is the 1/ Collectively referred to as the SICs.

16 largest program in terms of number of centers (147) and reaches into the rural areas. About 70 handicraft centers are involved in embroidery, marblecraft, mat-making, knitting, handlooms, etc. While these centers are designed to impart training, some have retained their graduates on a piece-rate basis and have become partly production centers. (d) Handicraft Marketing. The SICs market handicrafts through retail outlets mainly for the tourist trade and the domestic market. In FY79, the outlets sold over Rs 5 million worth of goods. While these stores are intended to provide an outlet for goods produced by private craftsmen and small units, they presently also sell the output of the training centers. 40. To date, the SIC approach has concentrated on the construction and management of physical facilities without sufficient interaction with the adjacent private sector units. The underlying shortcoming has been a lack of clear definition of target groups and their technical assistance needs. The proposed project includes components for the SICs which are designed to develop an effective technical assistance program, extension services and training in selected subsectors. The services and types of facilities could later be replicated for other subsectors and on a broader regional basis. PART IV - THE PROJECT 41. The proposed project was prepared by the Ministry of Industries, the SICs and the commercial banks, and appraised in May/June Negotiations were held in Washington in January The Pakistan delegation was led by Mr. Aftab Ahmad, Additional Secretary, Ministry of Industries. A Staff Appraisal Report (No. 3216a-PAK, dated February 20, 1981) is being distributed separately to the Executive Directors. Attached as Annex III is a Supplementary Project Data Sheet. objective and Scope 42. The project seeks to meet the following objectives: (i) encourage the development of SSI units in promising subsectors by providing funds for term lending through IDBP and the commercial banks; (ii) assist in orienting the commercial banks towards a longer-term project appraisal approach in their SSI lending; (iii) provide specific extension services to woodworking and leather goods enterprises; (iv) support export promotion of selected handicrafts and SSI products; and (v) initiate project development exercises in Baluchistan. 43. The project would help to streamline the roles of the various agencies involved in SSI development. Through its proposed institutional arrangements for credit and for subsector-specific technical assistance, it would encourage the SICs to concentrate on technical assistance tasks.

17 The project would be national in scope and would consist: of two main parts, each with its components: (a) Credit Component (i) A line of credit to be onlent to IDBP for refinancing of subloans by five commercial banks according to eligibility criteria and procedures agreed between the Association, the Government, IDBP, and the commercial banks; (ii) training of commercial bank officers in appraisal methodology of SSI fixed investment projects; and (iii) monitoring and ex-post evaluation systems. (b) Technical Assistance (i) Construction and equipping of a service center in Gujrat to assist the woodworking industry improve its technology and productivity; (ii) establishment of a service center in Bannu to assist SSI enterprises in converting from footwear to leather goods manufacture; (iii) export promotion of selected handicrafts by the SSIC and manufactured products by the Export Promotion Bureau; (iv) assistance to the SIW of Baluchistan in practical project identification and preparation of immediate opportunities in the province; (v) creation of a fund within IDBP to finance the preparation of subsector studies, as well as project preparation for subloans under the credit component; and (vi) monitoring and ex-post evaluations of the two service centers to be financed under the Credit. Credit and Institutional Arrangements 45. The credit component would be implemented by the IDBP and five commercial banks, namely: Allied Bank of Pakistan Limited, Habib Bank Limited, Muslim Commercial Bank Limited, National Bank of Pakistan, and United Bank Limited. The commercial banks would be responsible for sub-project appraisal, subloan approval and disbursement, and for project supervision and subloan administration and would bear the full credit risk. IDBP would be responsible for subloan refinancing, and monitoring and reviewing the credit component. The commercial banks already have small industry departments in their Karachi head offices since they have ongoing small industry loan schemes.

18 These operations involve, however, mainly short-term credits and rollover of working capital, and are based primarily on collateral and creditworthiness criteria. Within the present small loans departments, the banks would be required to create special small industries loan divisions which would be responsible for subloans under the Credit. US$0.15 million has been earmarked to finance training of the key officers of each bank in project appraisal and supervision methodology. The Government would prepare detailed training proposals, acceptable to the Association, by June 30, 1981 (Section 3.04 of the draft Development Credit Agreement). Eligibility Criteria for Subloans 46. Eligibility Criteria. In line with the objectives of the Credit to expand output and employment, criteria directly related to productionoriented loans would be adopted for the commercial banks' subproject financing, namely: (a) units should have fixed assets not exceeding Rs 3 million as defined by the SBP; (b) subloans would assist the setting up of new or expansion of existing units in the industrial sector, including industrial services; (c) working capital financing would be provided only when attached to a fixed investment loan, and only for the permanent working capital portion of a given subproject, such as raw materials and spare parts; (d) a minimum of 30% of subproject costs should be provided by the sponsor in the form of equity; (e) subprojects should be labor-intensive with fixed costs per job generally not exceeding Rs 60,000 equivalent; and (f) at least 50% of the overall credit should be allocated to subloans of less than Rs 800,000. Although the primary focus of the project would be the five subsectors studied by UNIDO (textiles/garments, surgical goods, leather goods, sports goods and light engineering), eligibility for credit purposes would not be confined to these product groups. Other subsectors that appear to warrant support are agro-industries, small brickmaking units, woodworking/furniture units, and carpet producers. The commercial banks would apply economical, financial and technical appraisal standards and procedures satisfactory to the Association. Terms and Conditions 47. Subloans would bear an interest rate of not less than 11%, the current rate fixed by the Government for all long-term rupee lending. Since the current annual inflation rate is estimated at around 10% and projected to remain at this level over the next 2-3 years, this would entail a positive

19 real lending rate. The Government would carry out periodic reviews of the adequacy of the lending rate for SSI projects and, if necessary, make adjustments in order to maintain a positive relending rate under the Credlit. It would also increase the lending rates for SSI subprojects if the general level of interest in the country is raised (Section 3.05 of the draft Development Credit Agreement). The spreads and onlending terms under the Credit would be as follows: Subloans Less Than Subloans at and Above Rs 800,000 Rs 800,000 ( ) Government onlending rate to IDBP IDBP Spread Charge to Commercial Banks Commercial Banks' Spread Lending Rate to SSI Units The Government would carry the exchange risk without charging a special fee. IDBP would repay the Government on a fixed schedule, payable over 15 years, including 5 years' grace. The commercial banks would lend to sub-borrowers for periods of 3 to 10 years, including up to 24 months' grace, and would repay IDBP on a fixed schedule of 12 years inclusive of 3 years' grace. In order to provide sufficient incentive to the banks to develop the smaller SSI units, the banks would (as indicated above) be allowedl a differential spread of 5.25% for subloans of less than Rs 800,000 and 4%' for those at and above Rs 800,000. All subloans at and above Rs 800,000 would be reviewed by the Association prior to authorization for disbursement. For subloans of less than Rs 800,000, the Association's advance approval would not be needed, but the banks would be required to submit a list of projects to IDBP with sufficient details as a basis for IDBP's refinancing of the subloans. IDBP would apply review procedures and criteria for subproject appraisal, and approve and finance subloans on terms and conditions, all of which shall be satisfactory to the Association (Section 3.08 of the draft Development Credit Agreement). Technical Assistance Components 49. Gujrat Woodworking Service Center. The center would be a project of PSIC, but would operate independently with its own Management Committee, on which the Gujrat Furniture Makers Association would be represented. The objective of the service center would be to assist the wooden furniture industry in Gujrat and surrounding areas in converting its present traditional technology of solid wood and custom designs to utilizing lower cost wood-based materials and standardized designs in order to expand its market and improve its long-term prospects. Gujrat is one of the traditional centers for wooden furniture manufacture, with an estimated 500 units employing about 2,500 workers. The center would provide: extension services to individual enterprises to guide them in technology improvements; common facilities for specialized equipment and processes; training of machine operators; and standardized designs of straight-line furniture. The center would also be engaged in a limited amount of commercial production in order to demonstrate technology and production methods. Income from the commercial operation would be used to subsidize the promotional aspects. The center would cost about

20 US$1.73 million, of which the proposed Credit would finance US$0.66 million for imported equipment, US$0.50 million for 50 man-months of advisors, and US$0.07 million for a monitoring and evaluation system, for a total of US$1.23 million. 50. Bannu Leather Goods Service Center. This center would be a project of the Small Industries Development Board of NWFP and would also operate with its own Management Committee, which would include representatives of the Bannu Leather and Shoe Manufacturers Association (BLSMA). The objective of the service center would be to assist the leather footwear industry in Bannu and surrounding areas in converting from leather footwear to leather goods manufacture. In Bannu, there is a concentration of about 600 small units (500 of which are members of BLSMA) making leather sandals. The industry uses crude production methods, and output per worker is about one-tenth of that of his counterpart in the more organized units in Pakistan. The units plan to gradually move out of footwear and into leather goods manufacture which is still a labor-intensive industry. The center would assist the industry by providing training/retraining of the labor force in appropriate skills; demonstrating the proper set-up and management of a leather goods unit; setting up individual workshops; and in developing market strategies and effective marketing channels for the domestic urban market and for exports. The center would establish a subcontracting scheme with the individual units by which it would develop the market for leather goods and, at the same time, provide in-plant technical assistance at the production end. The center would cost about US$1.47 million; the proposed Credit would finance US$1.02 million, of which US$0.22 million would be for imported equipment, US$0.05 million for imported spares and raw materials, US$0.60 million for 60 man-months of advisors, US$0.08 million for overseas training of center and industry candidates, and US$0.07 million for a monitoring and evaluation system. 51. Export Promotion. With assistance from marketing and design consultants, this component would be implemented by two institutions, the Export Promotion Bureau (EPB) for manufactured exports, and the Sind Small Industries Corporation (SSIC) for handicraft exports. The component is intended to expand (with some modifications) the ongoing activities of the EPB. It would carry out practical product adaptation exercises for selected handicrafts and SSI manufactures on a full-cycle basis, starting from product identification, pinpointing of suppliers, and product design/redesign, to buyer matching and holding of specific marketing events. Private exporter associations would be involved throughout these exercises. Tentatively, the following products have been identified: for SSIC, onyx (marble) products, brass and copperware, embroidery and handloom goods, wood and lacquercraft; for EPB, garments, surgical instruments, leather goods, sports goods and processed food. Since EPB has had effective export promotion activities mainly in the EEC, this component would concentrate on the North American market. The foreign exchange cost of advisors and marketing events, estimated at US$50,000 per product line, or US$500,000 for SSIC and US$500,000 for EPB, would be financed out of the proposed Credit. 52. Project Development for Baluchistan. Since Baluchistan is the least developed of the provinces, special assistance would be provided to the Small Industry Wing of the Department of Commerce and Industry in

21 Baluchistan for project development work in specific subsectors. Credit funds would be used to finance a team of three or four subsector specialists to identify and prepare 5-10 projects using Baluchistan's main resources: animal skins, fruit and vegetables, onyx, and wool, and taking into account the present production and market structures. Small-scale projects would be financed under the proposed Credit; larger ones would be promoted f-or financing by IDBP and PICIC. This component would cost about US$110,000,, of which the foreign exchange cost of some US$100,000 (about 10 man-months of specialists) would be financed out of the Credit. 53. Fund for Subsector Studies and Project Preparation. This component would provide a Fund within IDBP to finance the preparation of subsector studies and specific project proposals for SSI units. The subsector studies would be used to improve SSI lending and technical services by moving from a general to a subsector-specific approach. The project preparation facility would enable the SICs to assist sub-borrowers prepare their projects for submission to, and appraisal by, the banks. Each subsector study would be awarded by contract, and each contract (including terms of reference) would need prior approval from the Association. For project preparation, procedures and a schedule of fees would be agreed with the Association and reimbursement made periodically (Section 3.08 of the draft Development Credit Agreement). The Fund is estimated at US$0.50 million, or 2% of the credit component, to be allocated equally between the two sub-components. Project Administration 54. Cost and Financing. The total cost of the project is estimated at US$60 million. 1/ The foreign exchange cost is estimated at US$15 million, or 25% of total costs. The Credit of SDR 23.6 million (US$30 million equivalent) would finance the foreign exchange costs of the project and about US$15 million of the local costs, or about 50% of total costs. The credit component would generate total investments of about US$55 million, of which US$26 million would be from IDA, US$7 million from the commercial banks and US$22 million from sponsors' equity. Total cost of the technical assistance component is about US$5.3 million, of which IDA would finance US$4 million, the Government US$1 million and private sector associations US$0.3 million. The cost of consultants' services is estimated at US$10,000 per manmonth for expatriates and US$3,000 per manmonth for local consultants. 55. Procurement. Under the credit component, goods and services costing US$20,000 equivalent or more per item or US$50,000 equivalent or more per contract would be procured through international shopping (limited international tendering) on the basis of at least three competitive quotations; for contracts of goods and services with single items costing less than US$20,000 or combined items costing less than US$50,000 equivalent, the commercial bank would ensure and certify that these are reasonably priced and suitable to the requirements of the investment project (Section 2.04(a) of the draft Development Credit Agreement). For subloans under the Credit, the banks would be required to maintain records of procurement, and to summarize the offers and 1/ Duties and taxes are negligible.

22 awards when presenting the larger subloans to IPBD/the Association for approval (Section 3.08 of the draft Development Credit Agreement). Imported machinery and equipment for the two service centers would be procured through international shopping on the basis of at least three competitive price quotations (Section 2.04(b) of the draft Development Credit Agreement). 56. Disbursements. In view of the large number of subprojects involved and the small subloan sizes, the normal DFC procedure of disbursing against expenditures on individual subproject accounts would be inappropriate. Accordingly, all disbursements for foreign or local expenditures made by the commercial banks would be financed equally up to 80% of subloan amounts. Disbursements for permanent working capital and for the smaller subloans (below Rs 800,000) would be made against certified statements of expenditure. Reimbursements to the commercial banks out of Credit proceeds would be limited to expenditures made by the sub-borrower not more than 120 days prior to the Association's receipt of IDBP's request for reimbursement. To assist IDBP's refinancing of subprojects, the Government would create a special start-up fund of Rs 10 million to be made available as a line of credit to IDBP (Section 3.01(a) of the draft Development Credit Agreement). For the Gujrat and Bannu Service Centers, disbursements would be made at the rate of 100% for imported equipment and materials; consultants' services; overseas training; and costs of setting up a detailed monitoring and evaluation system. Disbursements for locally manufactured goods would be made at the rate of 100% of ex-factory cost, and 75% of imported goods procured locally. For the export promotion component, disbursements would be made at the rate of 100% of consultants' services and foreign exchange costs of marketing events. Withdrawal applications, which would be fully documented, would be submitted directly to the Association by the implementing agencies. Before withdrawals can be made in respect of payments for expenditures under the credit component, at least two participating banks would each: (i) have to expand and adequately staff its small loans division; (ii) sign a Participation Agreement with IDBP; and (iii) approve a statement of operating policies and procedures satisfactory to the Association (Schedule 1, paragraph 4 of the draft Development Credit Agreement). 57. Monitoring and Evaluation. In order to monitor the utilization of the Credit, particularly the subsector distribution, regional diversification, and relative speed and strength of appraisal processing by the individual banks, the Association would design monitoring/evaluation check-sheets which would be completed by each bank semi-annually. Since the service centers component is a relatively new area for the Bank Group, comprehensive in-depth monitoring and post-evaluation systems would be designed and carried out. The systems would survey and analyze the target groups in order to define the present state of the industry in relation to the objectives and functions of the service centers, e.g., appropriateness of technology in terms of productivity and factor substitutions, organizational and managerial systems, worker skills and labor productivity. At the end of each project year, and more comprehensively at the end of the fourth year, the same study would be carried out in order to compare the industry before and after the establishment of the centers. An amount of US$0.07 million has been allocated under each service center for this purpose.

23 Justification, Benefits and Risks 5R. Project Benefits. The SSI sector has significant employmentgeneration effects, export growth potential, and income redistribution effects. The project would aid the growth of the SSI sector by increased credit, technical assistance and extension services to promising enterprises. About 475 subprojects would be financed under the project with total costs, including sponsors' equity, of about US$55 million. The project would increase the involvement of commercial banks in longer-term and more development-oriented lending. The commercial banks would be encouraged to concentrate their lending on the smaller-sized projects through differential spreads. Direct employment that would be generated is estimated to be about 13,000 full-time jobs, with investment costs per job (excluding land costs) of about US$3,500 on average. Many SSIs have significant forward and backward linkages and indirect employment benefits are expected, though these are difficult to assess. Export revenue benefits would result from assistance to export-oriented SSIs such as surgical instruments and sports goods. Support for the export promotion activities of SSIC and EPB would also increase export earnings by SSI. The proposed service centers would improve the long-term prospects of their target groups by assisting them to upgrade their technology and adapt to changing markets. Industry workers would be trained in more efficient methods to improve their productivity. The component for project development in Baluchistan would encourage growth of SSIs in this underdeveloped province, with consequent economic benefits. Funds for subsector studies are expected to provide guidance for further ways to improve lending and technical assistance for SSIs. 59. Risks. This is the first project of its kind in Pakistan. Although the commercial banks are already involved in long-term lending to SSIs, the proposed institutional arrangements are new and may need time to become fully established. The IDBP refinance and review arrangements should help ensure project success, and the relationship between IDBP and the commercial banks would be a critical element in effective project execution. 60. The Government is considering proposals for the introduction of interest-free or profit and loss sharing banking in Pakistan. It: is cognizant of the complex issues involved, and numerous seminars have been held to discuss proposals on how to implement a system that would be practical and equitable. Given the difficulties, it seems likely that interest-free banking will be introduced extremely gradually and in parallel with conventional banking. The Government has previously assured the Bank that foreign loans and credits would not be affected by any future Government measures. Thus, specialized development banks like IDBP would not be directly affected. Should the Goverrnment move towards abolishing interest charges on rupee denominated loans, the recovery of subloans by commercial banks could be affected. However, the Government has indicated that other fees or charges would be introduced to substitute for interest. 61. The risks inherent in the two service centers are that they may not adequately meet the needs of the private sector, they may not be costeffective, and the local counterparts may not be readily trained to take over the project once the advisors complete their assignments. By inclusion of private sector representatives on the Management Committees, these risks

24 would be reduced. Both centers have been designed to utilize the most appropriate machinery and equipment; expertise in Pakistan is improving and, in the case of the Gujrat Center, trained service personnel could be hired from the existing Peshawar Woodwork Center. The monitoring arrangements should help to ensure that problems are identified at an early stage and corrective action taken. PART V - LEGAL INSTRUMENTS AND AUTHORITY 62. The draft Development Credit Agreement between the Islamic Republic of Pakistan and the Association, the draft Project Agreements between the Association and the provinces of Baluchistan, Punjab, North West Frontier and Sind, respectively, and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement are being distributed to the Executive Directors separately. 63. Special conditions of the project are listed in Section III of Annex III. Additional conditions of effectiveness include: (a) execution of a Subsidiary Loan Agreement between the Government and IDBP on terms and conditions satisfactory to the Association (Section 6.01(b) of the draft Development Credit Agreement); and (b) execution of Participation Agreements, satisfactory to the Association, by at least two participating banks, and approval by the Board of Directors of each such bank. of a statement of operating policies and procedures acceptable to the Association (Section 6.01(c) of the draft Development Credit Agreement). 64. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VI- RECOMMENDATION 65. I recommend that the Executive Directors approve the proposed Credit. Robert S. McNamara President Attachments February 24, 1981

25 - 21- ANNEX I TABLE 3A pakistan - SOCIAL INDICATORS DATA SHEET REFERENCE GROUPS (WEIGHTED AkCtS LAND AREA (THOUSAND SQ. KM.) PAKISTAN - MDST RECENT ESTISHAT)- TOTAL MOST RECENT LOW INCOHE MIDDLE INCOtE AGRICULTURAL /b 1970 lb ESTIMATE /b AsIA & PACIFIC ASIA & PACIFIC GNP PEE CAPITA (05$) ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 61.Of 98.0/ POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (MILLIONS) URBAN POPULATION (PERCENT OF TOTAL) POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) STATIONARY POPULATION (MILLIONS) YEAR STATIONARY POPULATION IS REACHED 2150 POPULATION DENSITY PER SQ. EM PER SQ. EH. AGRICULTURAI LAND POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS YRS YRS. AND ABOVE POPULATION GROWTH RATE (PERCENT) TOTAL URBAN CRUDE BIRTH RATE (PER THOUSAND) CRUDE DEATH RATE (PER THOUSAND) GROSS REPRODUCTION RATE FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) USERS (PERCENT OF MARRIED WOMEN) FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA ( ) PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREHENTS) PROTEINS (GRAMS PER DAY) OF WHICH ANlMAL AND PULSE CHILD (AGES 1-4) MORTALITY RATE HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) INFANT MORTALITY RATE (PER THOUSAND) 135. Ojc ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL URBAN RURAL ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL URBAN RURAL POPULATION PER PHYSICIAN O/d /e 3780.Oje POPULATION PER NURSING PERSON Že /e POPULATION PER HOSPITAL BED TOTAL URBAN RURAL ADMISSIONS PER HOSPITAL BED HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL URBAN RUJRAL AVERAGE NUMBER OF PERSONS PER ROOM TOTAL /f URBAN RURAL ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL /f URBAN RURAL.. 4.9

26 ANNEX I TABLE 3A PAKISTAN - SOCIAL INDICATORS DATA SHEET PAKISTAN PAKISTAN REFERENCE ~~~~~- M)ST GROUPS RECENT (WEIGHTEDAVR_AGES ESTIMATE) MDST RECNT LOW IllCCfE MIDDLE INCOfE 1960 /b 1970 /b ESTIMATIS / ASIA 6 PACIFIC ASIA & PACIFIC EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL MALE FEMALE SECONDARY: TOTAL MALE FEMALE VOCATIONAL ENROL. (Z OF SECONDARY) PUPIL-TEACHER RATIO PRIMARY SECONDARY ADULT LITERACY RATE (PERCENT) 15.0Jg CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION RADIO RECEIVERS PER THOUSAND POPULATION TV RECEIVERS PER THOUSAND NEWSPAPER ("DAILY GENERAL POPULATION INTEREST") CIRCULATION PER THOUSAND POPULATION CINEMA ANNUAL ATTENDANCE PER CAPITA /h LABOR FORCE TOTAL iabor FORCE (THOUSANDS) FEMALE (PERCENT) AGRICULTURE (PERCENT) INDUSTRY (PERCENT) PARTICIPATION RATE (PERCENT) TOTAL MALE FEfALE ECONOMIC DEPENDENCY RATIO INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 20-3L HIGHEST 20 PERCENT OF HOUSEHOLDS 45. 3L LOWEST 20 PERCENT OF HOUSEHOLDS 6. 4ji LOWEST 40 PERCENT OF HOUSEHOLDS 17. 5i POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOKE LEVEL (US$ PER CAPITA) URIIAN RURAL * ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN RURAL * ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN RURAL * Not gvailable Not applicable. NOTES /a The group averages for each indicator are population-wighted *rithletic meana. Coverage of countries mong the indicators depends on availability of dsta and is not uniform. X Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for between 1969 and 1971; and for Most Recent Eatiuste. between 1974 and /c ; d Includes Bangladesh; L Registered, not all practicing in the country; /f 1973; ; Lh 1972; Li Most recent estimate of GNP per capita is for 1979, all other data are as of April October, 1980

27 ANNX I DEPINITIONS OP lstcia. INDIICATORS Notes: Although the data are dree fot- sorcsgeerly judged the mat authoritative and reliable, it ahould also be noted that they oay tot he interatturally compoatble because of ths lath, of atandtadled dofiteito and coacpte used by difforeot conetries in collecting the date. The dat.. are,noe the1b.es osf. 1 to de..c.tlb udtter of eagittde, todieta creade, and ch-aterie certain major diffar-oer. betwee countries. The afstance groups are (1) the o councoy gpoop of the eshject cutry end (2) a coutry group etch s.omehat bigbro averag inome then the.eutrey group of rh.obuje-c country Conce.pt f or "Capital Surplus Oil feptrcer" group where Middle Income North Africa cud Middle teat" is chosen hec... of etr-oge aotir-cultorl affinictee). In the ref-sac group deco the averages ate population wtnhted arithmetic -er for each tidtcator cud sh-owsel whe at Iboa.t half of the ceuntrtee in a group h.. date fs orthat itdicetur. tints the covrags of coutee.. e..ng the irdictors depends 00 the oliablility of data sod is not u-if.te, cation mt ha exercised to touting avrages of toe iodtcatcr to snothar. Three avrages err ociy useful in coparing the value of one indicator soat t among the conotry and retf-oc groups. IAMD AREA (thousand eq.he.) Ppula Ition cer phraicia- Population divideod by number at prantlicig phy- Total - Tota enrfece aen. ie. load a..a ant Inland waters. siotas qoalifted fro a- mdical echoi at university lewd. Asci-ultur.1 - Ettfacte of agriru1tcl te1 nee..d temporarily or yarmanetly Ponato ar Nursing Person - Population divided by nuber of pretticleg tar crope, potores, macht and htohen gardea or to lie fellow; 1927 data, talc end fol graduate nurses p-eticai aes,ed..ssistantnr. Poo..lation eec Hoeital Rod - coral. uchan and rural - Popolation (total. imp CAPTA Pt il)) -GNP per.. pict. etioatee at ctor-a-t macht prices, cc1- uran an.d rura) divided by theic ceapctiv- number of hospital beds colated by en convrstoc method cc World Bach Atlas ( beets); 1960, avilable in public and private genera sod opocieted hospital mad tel970. end 1979 data. habilitetion centers. Hospitals ore setablishmante penmuantmly staffed by at leat on physiia.- etablimhaents pooviding principelly custodial fhergy _ CONSUMfPTION PER CAPITA - Amanal oosesptloo of tamercia1 energy (co.i taeamat itacld.d. Rural hospitals, howeve. inc1.oe health nt medical end lignite, petroleu, otuta1 gas sod bydro-, oucisar sod ge-theemal sa- ctancrs ac permasantly staffed by a physicisa (hut by a meition vacttere. tr icicy) he kilogram of coal eqoi-alt pot rapita; , astd 197 mors, tidifa. etc.) ehiuh offer ic-patient -- otmt:l sad provide a data, limited osage of medical tacilitiem. For atatisutral pboroas -tha hoaputla include VW.t principal general and apecialised hospitals. oed -onrl rpoplation AND VITAfL STATISTICS h.i..i.l...pt.- d.l- o.-t aa Totcl S'opulatin.. Mid-Year (millions) - Ax of July 1; , -d 1978 Aosplt.. aolceor rurit1 al hopitale ando medical iend tatrr rente.rs.. date, from -hospitals divided b ''-. f.. Urbh t Paylatioo (P.oer t of total) - tatin of uben to total population;byte obds different deisitione of urban aceas may efft toopcability of data HOUSING smeeg cootries;1960, 170, and 1978 date. Aesrass Sis. of Household (pers.ons pen house.hold) - tot _al.uban. and cora~l- Pocoulatlee Projections ~~~~~~~~A householid coneiste of a goon of individuals who share living quarters PPalatt.ALo i year Currest papoletio projection are base.d I. 19B end their mete meal. A boader or ldger say or my sot ha tac1uded he ctiel popolato by age eat so and their mortality sot fertility atote. the household for statiottal purp-on. Poojeccion parameters for mortality rates comprise of those level asso- Aveae". ero eene cro totl. arhan, cad rcra - Avera ge - tag life eapectat y at birth ftcrosing with c.outry's pee capita incom bo of. pebooof potroes,.i Pallubnrnt rrln padtnetna leve, ondfemal life aepecteny stailloing at 77.5 yeats. The Pats dwellings, repectively. Swellings oclade no--parmanct struc.tures end moceos forfertility rate alan have three leel assum..ing decli Loa inunccpied perte. f-rtilit ty ccrding to incom leve and pea family planing performance Access to Electricity (rere' o dwellings) - total, ura,ad ua1 Oathtcatnty isthe asige use ot.fpthese nine otbimain f..eiy o n Ioa dwalling with eatriotty in living quarler as poecentage end frilit rcds fo prjcin P.0.ose. of total, urban, ad rura dwellings -p-ctivoly. Stationer opolaitios - InI a ettinoay popolatlun chore is no grcbc since the birth race is equal tc the death rtat, and Lso the gs structure re- EUCATION sloe consat. This to schived aly after fectility rates dooms. to AAJueted Enca11mn Satins chr repaeetlvl fui e eroduction rar, ohms each ganettior P,riay shool - to,tal, male-sd f_tae-irtoss cocci, male end tamale of waorpae itol exactl. Th ttioner populationes winseromn o l age athca prioery lovo as parc...tages of..epo-tilm estimated ce2the basistof the projected carataristic- of the popintioe primary a-hnu1-ag p:oplations;. normally itelude children aged. 6-il isthe year jolt rd ch. rate of decline of fertility rate toelee yent bat adjusted fur different lengtho of primary education; foe moot level. coun~~~~~~~~~~tries with ui-r-rea aduc..tion -ne1im-t may oscood 155 perceet Tea stationr aultoi rchd- The par when stationay populatios 5 sic sm pupils are biow or bhov tar oficial sohoo1 age. si he.. eahod..bee Secondry shol - tot!al,maalef sodfeal - Compted x aho-; secondary FPutultior D-nito edcaineuie a las t fu easo aprc-ve 5rimay Onstruttion; Par as. he. - Stid-ymar populatio per sqexo hilomtar (l50 betters) of providesg so. lercl.votaucl. rr teacher traling ituerutions for popib total are. osualy of 12 to 17 yosro of age; coeryodoncrct,oeo are geascally Per so. he. agicultural lend - Computed so shov for agric-ltural land ocindda. ~rm-cen Puoulo!tion )Ass Ecrature - Children (0-14 year) weting-age (15- icuetcia,idurc,crohrprogram wh:c oprte P. iedopa- 64 years,adreid. (6. yar and ever) aspercetages of mid-year popo- dently or as departments of.secondary icoticutiona. lation; , act 1900 data. Luo-echrrto -4rth yr. an scondory - Total totdeta enrolld to P IuatnGot pret oa - Anna grwh aeso to alid- pomt n_sceay levl diridebynmrsctahrsiro yapouaion f_ or ext 'r coyrrepondlg 1-lev.. fporlatiunfgrowt Sate, (portent) - uoba - Annul growh aton- of othe pop.- adult.liceracy rats Itatteott - Literate s.tar (able tc read ext weite) Lation_ o 195. '0, da P. sepo ts crag forccl adult ponlation aged 15 yar sad over. Crude Birth Rtac (Ioar thousand) -Anul live births prr thousand of alt-yea pop. tie an 1978 data. Cooglop-TlOg Crude Beah Sae(oar thoed A-tAnal teethe par thousand of mid-yea asne ae(petosn uaio)-pergrcr copim motor po::pula,t:~tio; l, end 1976 data, cars exting laos than sight persons; ccladee asbu1lso..s, hearse eed tressrudcto Sat - Average oumbe of daughters a us ill hear io militacy vehicle.. hor to-im esproduotive period if she seporiece proseot age-specific for- Bi. tovr (Par thonagod prulati-r) - All types of raosiv-ra for radt rtty ce ; salyftiv-ya avarge ending is 1960, ad hrcdcats no neoscl1 public pe Ihosn nfppltiu;acludas noli- Paths Plcanina - A..eptore. Annual (thousands - Annua usher of actaptore canoed rciesi oce a-dtin yeacd whnrgfrtono ai e ofbirth-oatrol devices une - asice ofetionl family plexlon program. was inafec; data. fer recent years may nut he cmp,-r1h since meet really Picunine lat (pecen of married woen - Pocnae fmried countries ebulohed licesig -rn uf child-beaing age (15-4t years) who wee birth-cotrol de-t... to TV teceirer (per thousand. crorvon T.. rcivers for broadcast to oll marriad ocea in san age group. gonra1 public per thoneo"d ypuisltion; occludes ul:tcoaed TV recivers P200 An41 ffiteitoni oo -trios aad in yace whoa regiettoti.t of TfV so':s wee is off-mt. Howraor irulaio (cr hosan otult Sh)-Ihw the avrage circut laden of Peed Poduottion Per Capita ( ) - Iodaa of Per topics annul tiorof "daily go..oral.itersmesae" defined.0periodical pubprdctoi f all food -omedities. Prdutioto excldes sed oat fondand llcati.c devrted primarily t eodn gero Iowe. It is conidered is no calndr year basis. Co-editios comae primary goads (e.g. suace.oh diy"i oapasc eatfutie et inetact of,sugac) which are edible and cocta nutrients (e.g. coffee and ChexaAce ACpdne e aita par ear -hess..d 00 the nuber If tea are onldd). Agrg-g- production of eac h.- atry is base.d 00 cicisu said durn h er ecuigamsin to driv-to cinanc tarionelaeag rudoc..r prico weights; , 1970, and 1970 date. endk t.bie unite. y.r.. dg i. Per eacit supply of (prcent.uf (opoe racucamete) - Computed 0t camb. i energy euvln of ne.fo spplie e voilable in country Per capita LABOR5 PORCE per day. Avai1abla supplies comprise deesotlo prodoction, imports less Tetal Labor Pote (iosad) -E oically active persons, including onprte. and changes in stock. Nost s,ppliot onoludo comi et,sed, forces.d. are - en = 1ducplyad but solnldiog htwia,stdents, etc qonetitios used in fond pr-cexelg. and losse in distribotis. Esquire- -efdtionl in variou cucie ar o upc ;16.17 n soewoeetimatd by PAP beast en physiological needs for matial arti- 17 us vicnd d hat noidrtg ovromet11t-prour *0 body' weghs,ae em (pq.o.nt) -Peal labor force ne percetcge of total imbue force. sdendsrbution of populatio.. an sitn ipret fur waste at riccituto- -Labor tteat) force io farming, fores try, hunttig end h,ousehold lave; , 1970,. nd 1977 data, fishing as percectane of total labor forte; 1960, 1I70 eat i97m data. tar capita eucol of Protei (arane car day) - ProtLo cuetent nof pot capita Indusr ecen) -- - Labo force he miing,..occtrutlon. matfoeltuing not supyo odpr day. Hot supply of food is defined as abev. Re- an eetricity,wtradgoa ooa eo oa ao oc;1960, qi.t=mucs foe all7 cutries eatebliehad by USDA provide for minimu 97 n 1976 dtac. elou1 c of rm I f total protein per day eat 20 gram of animal.od PorIciainSte7ecn).oa,mae o aml at7te oo paneprtein Lof which 10 gram should be animal petain. These etad- ocvt ue e upoe sttl ae n eaelbrfrea ccds are lower than those of 75 grams of total pratein and 23 groos of.tiytt...ptd.tt1 -, df.lbrf" sn lprecein as amaeraeto the weid, propose.d by tail in the Third pecoae f total, mlo and f a1ol poplatina of slcagastaacioy World fuevey; fond 1961-e, 17so197dt.660, 1970, sod 1975 data. Those ore I 1.0' perticipattue reta reflecting PoeI coeit troni eur61l6 cot exaisd 197dtals-Poensppyo oddn ag-eo tstruotur f thepopulation, end long ctne trn. A few matifrom 1 ealmal and pulses is gre e a; , 1970 and 1977 icta. me ess a.r. tram ouio.-i rs rivet N lt Et Pr = prda Ecnui 1,g gp-edoncysatio - Satie of ppdaconun 15 sot 65 eat evec Child -i) Mrtalit ease taco(oar housad) - Anua.l deaths per th-ousd is toterua-aorfro age group 1-4 years, to rhiltr- oni this age group; for meet devlaping coutries data derived frca life tables; 1960, 1970 and 1907 data. INCOME DISTRIBUTI0N ~~~~~~~~~~~~~~~~~~PeronteS. EXALTH If Private moon (both in cash and hind) - irc..ivadtby rihest life Eccoctacy abirth (y -Avrage Ar) number uf years of life remining 5ypret.t richest 2t percet, pooract 20 percet, so Ponas ho percet (Y h...~~~~~~~~~~~o hous 1odo. Inant Mortalit Sate, (on huad) - Aun1a deaths of inants under oeyear POVERTY TARGET GROUPS ef ego per tho...ed live births. txae Abso-lute Pr ty Incom Level (TS$ pot urban endrurl- _oea to Safe Water (percet of IV =ltin - total, urban, and rural -, oetyiom -:Aslt ee s htir ee beo Ahh inia fisher of.peip. (tota, urbex adralwihrnexeble ecesa to saf autricton-ly adequate diet Plus eseta o-toc reuir La iset' wecor supply (includesltreated esfecs oatter or ustratd hut unetaminatd affordable. water each a- chec from proctxcd btahols, springs, and sanitary wells) ZaEtiatad Orlati- Pov-rcy I.om level (0s$ ca toio -ubn adrus Percentages of their epotive populations. In an urban area publie Rural relative p-ety IncI lvla one-third of avrage Pop capita footaio cc tcndpnat located nut mere than 200 meters foam a hoosm may ho Pesmliceofteoury tbalylisdivdrmthrrl conidee as ben-iharaoe co fta os.i ua ra lee with adjustment for bieho- coat of liviag it, urban areas. resoobl aces in d Imply thenth cbshuseife ut mebers of the house.hold ta,imated.peuaijoblwaslt oet nue ee orat ra do our hove to spend adisproportionate part of the day in fettching the and trca - eret of population (Pbe ad rural3) who are "abslute pear". famiy's mater needs. rura umbr - ofpoo1s tstalt rben an= rura)tsores by earc diepra as. poce Iga f their respective populasio-. toccata die- uenemoic sod Burial Dcts Division P.ea ma y ioclute the ca11ection and dispneal. with or withet treasamuo Ecoaomic Analysts and Pu.J.cotitn Dpaper te nf huma onrets -an westa-tan by weter-beru sysutm or the.. of October 1960 pit privies sod similar inseslletione.

28 ANNEX I ECONOMIC DEVELOPMENT DATA GROSS NATIONAL PRODUCT IN 1978/79 ANNUAL RATE OF GROWTH (%, constant prices)/b USS billion. 1976/ / /79 GNP at Market Prices Gross Domestic Investment Gross National Saving Current Account Balance Resource Balance OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1978/79la Valje Added Labor Force V.A. Per Worker US$ million 7. Million 7 US$ million X Agriculture 5, Industry 4, , Services 8, , Total/Average 17, GOVERNMENT FINANCE General Government Central Government (Rs billion) % of GDP (Rs billion) 7. of GDP 1978/ / / / / / / /79 Current Receipts Current Expenditures Current Surplus/Deficit Capital Expenditures External Assistance (net) MONEY, CREDIT AND PRICES 1976/ / / 7 glc l9797w t9805y (billion Rs outstanding at end of period) Money and Quasi Money Bank Credit to Public Sector (net) Bank Credit to Private Sector (gross) Money and Quasi Money as % of.dp Wholesale Price Index (1969/70 = 100) Annual Percentage Change in: Wholesale Price Index Bank Credit to Public Sector (net) Bank Credit to Private Sector (gross) /a Labor force data are official. figures of the Ministry of Finance and Planning. Serious underenumeration may exist, especially of women. b GDP at factor cost. /c Provisional. Not applicable. April 1980

29 ANNEX I BALANCE OF PAYMENTS MERCHANDIS EXPORTS (AVERAGE 1976/ /79) 1976/ / / / 8 0 /a US$ million % million) Exports of Goods, NFS 1,449 1,746 2,302 3,405 Raw Cotton 69 5 Imports of Goods, NFS 3,339 3,804 5,198 6,208 Rice 278 2( Resource Balance -1,890-2,058-2,896-2,503 Cotton Yarn Cotton Cinch Interest Payments on External Debt Carpets Workers' Remittances 578 1,166 1,395 1,575 Other Goods Other Factor Payments (net) Total 1, Net Transfers Balance on Current Account -1, ,110-1,008 EXTERNAL DEBT, JUNE Public M6LT Loans US5 Disbursements mli Repayments million Net Disbursements Outstanding and Disbursed 7,7b7.9 Mlb Undisbursed 2,536.3 Transactions with IND Outs tanding Including Undisbursed 10,304.2 Short-Term Borrowing Uther Items I/ DEBT SERVICE RATIO, /7 9 / Changes in Reserves (minus sign = increase) Errors and Omissions IBRD/IDA LENDING, DECEMBER (US5 million) Gross Reserves (year end)d IBRD IDA Net Reserves (year end)/e Official Gold (year end; million ozs.) Outstanding and Disbuirsed Undisbursed Fuel and Related Materials Outstanding Includinig Undisbursead ,071.1 Imports ,203 of which: Petroleum Exports of which: Petroleum RATE OF EXCHANGE Through May 11, 1972 May 11, February 15, 1973 Since February US$ = Rs US$ = US$ = 9.90 Rs = US$ Rs = Rs = /a Government estimate. lb Including Trust Fund. /c Includes extraordinary inflows from Saudi Arabia of $420 million and an SDR allocation of $39 million. /d Foreign exchange and SDR holdings of the State Bank. /e Excluding use of IMF resources. /f External public debt only; private debt is negligible. Ratio of debt service to exports of goods and non-factor services. = Included elsewhere. April 1980

30 ANNEX II STATUS OF BANK GROUP OPERATIONS IN PAKISTAN A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of December 31, 1980) US$ million Loan or Amount (less cancellation) Credit Undis- Number Year Borrower Purpose Bank TW IDA bursed Seventy-eight loans and credits fully disbursed /a Pakistan Karachi Port III Pakistan Karachi Port IV SNGPL Gas Pipeline IV Pakistan Industrial Development (NDFC) T 1976 Pakistan Power Transmission Pakistan Seed PICIC Industrial Development Pakistan Lahore Water II Pakistan Irrigation and Drainage Pakistan Livestock / Pakistan Railways Pakistan Education Pakistan Hill Farming Pakistan SCARP-VI Pakistan Hazara Forestry Pakistan Tarbela II Pakistan Punjab Extension Pakistan Fauji Fertilizer Pakistan Toot Oil & Gas Development Pakistan Salinity Control & Reclamation Pakistan Primary Education Pakistan Sind Agricultural Extension lb -- (9.0) (9.0) Pakistan Fourth Agricultural Dev. Bank Pakistan Third WAPDA Power Pakistan Third Highway Pakistan PICIC Industrial Development Pakistan Fertilizer Imports (SDR 38.2 M) Total ,241.1 of which has been repaid Total now outstanding ,217.4 Amount sold 23.9 of which has been repaid Total now held by Bank and IDA /c ,217.4 Total undisbursed /a Excludes the disbursed portion of loans and credits wholly or partly for projects in the former East Pakistan which have now been taken over by Bangladesh. /b Not included in totals: Credit number 922-PAK is not yet effective. Ic Prior to exchange adjustments.

31 ANNEX II B. STATEMENT OF IFC INVESTMENTS (December 31, 1980) Fiscal Amount In USS Million Year Obligor Type of Business Loan Equity Total 1958 Steel Corp of Rolled Steel Pakistan Ltd. Products 1959 Adamjee Industries Textiles Ltd Gharibwal Cement Cement Industries Ltd PICIC Development Financing Crescent Jute Textiles Products Packages Ltd. Paper Products Pakistan Paper 1976 Corp. Ltd. Paper Dawood Hercules Fertilizers Chemicals Ltd Karnaphuli Paper Pulp and Paper Mills Ltd Milkpak Limited Food & Food Processing 1979 Pakistan Oilfields Chemicals & Limited and Attock Petrochemicals Refinery Ltd Fauji Foundation Woven Polypropylene bags Premier Board Mills Limited Particle Board Total Gross Commitments Less: Cancellations, Terminations Repayments and Sales Total Commitments Now Held by IFC IJndisbursed (including participants)

32 ANNEX II C. PROJECTS IN EXECUTION 1/ Credit No. 771 Tarbela Dam: US$35.0 Million Credit of March 10, 1978; Effective Date: April 4, 1978; Closing Date: June 30, 1982 This credit, together with other additional contributions arranged in 1978, is intended to help finance the repairs and additional works required to complete the project. In September 1973, the Indus River was diverted through tunnels on schedule to enable the final stage--the construction of the closure section of the dam--to be undertaken. By end-june 1974, the main embankment had been completed to full height, and the first impoundment began on schedule in July In early August, difficulties were encountered in the operation of the tunnel gates and damage to one of the tunnels necessitated the emptying of the reservoir and repair of the tunnels and outlet structure. Agreement was reached with the parties of the Indus Basin and Tarbela Development Funds whereby special contributions were made by a number of parties, including IDA (Credit 581-PAK), to help with the cost of repairs and additional remedial works. The stilling basins suffered further damage in August 1975 and again in April Stilling Basin 3 has now been repaired and has operated satisfactorily. Work to construct a flip-bucket at the outlet of Tunnel No. 4 is scheduled to begin in 1981 and will be completed in Serious erosion in the plunge pool below the service spillway during 1977 necessitated additional protection works. Final protection work in the service spillway plunge pool and in the downstream channel will be completed in Final protection work in the auxiliary plunge pool will be completed in 1981/82. Since 1975, irrigation requirements from the dam have generally been met. Power generation by the first four units began in Loan No Tenth Railway: US$35.0 Million Loan and US$25.0 Million and Credit of March 8, 1977; Effective Date: May 9, 1977; Credit No. 684 Closing Date: June 30, 1982 Physical aspects of the project are proceeding satisfactorily. Pipri Marshalling Yard has been completed and was opened on March 18, Kotri Bridge has been completed and was opened to traffic on February 14, Four shunters for Pipri Yard have been received. Spare parts for diesel locomotives have been fully ordered; 55% have been received already. Work on the telecommunications and signalling system has started. Proposals for increasing freight traffic are under discussion with the Government. Credit No. 422 Third Karachi Port: US$18.0 Million Credit of July 19, 1973; Effective Date: December 14, 1973; Closing Date: June 30, / These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.

33 ANNEX II Credit No. 492 Fourth Karachi Port: US$16.0 Million Credit of July 8, 1974; Effective Date: September 18, 1974; Closing Date: December 31, 1981 Work on the Juna Bunder Berths is nearing completion. iquay piling and shed construction have been completed and auxilliary works are in progress. The initial and subsequent delays in construction of the Napier Mole Bridge will mean that completion is likely to be delayed until early about 3 years behind schedule. Most of Credit 422 has been disbursed. Construction of the oil berth has been completed and it has been operational since November More than 70% of the channel dredging works has also been completed. A study report commissioned by KPT for rationalizing the port tariff structure is under review by KPT. An interim tariff increase averaging 100% was approved by the Government last year, and has already contributed to lessening the port congestion. Virtually all the funds under the Credits have been committed. Loan No Development Finance Company - PICIC: US$25.0 Million Loan of September 14, 1976; Effective Date: November 29, 1976; Closing Date: December 31, 1981 This loan has been fully committed and at December 31, 1980, disbursements amounted to US$23.7 million. The Closing Date, originally December 31, 1980, has been postponed to December 31, 1981 to allow time to complete three subprojects. Credit No. 546 National Development Finance Corporation (NDFC): US$30.0 Million Credit of May 15, 1975: Effective Date July 17, 1975; Closing Date: December 31, 1981 The Credit has been fully committed and US$28.3 millicon had been disbursed as of December 31, The Closing Date, originally September 30, 1979 and postponed to November 30, 1980 has been further postponed to December 31, 1981 to allow time to complete one subproject. Loan No Fourth Sui Northern Gas: US$60.0 Million Loan of May 15, 1975; Effective Date: July 5, 1975; Closing Date: December 31, 1981 Project activities are generally on schedule. Savings amounting to US$3.7 million are being used for the construction of a pipeline from Meyal and for partial replacement of the Faisalabad-Shahdara transmission line. An additional amount of US$7 million in savings has been cancelled. Credit No. 620 Seed Project: US$23.0 Million Credit of March 29, 1976; Effective Date: November 29, 1976; Closing Date: June 30, 1981 Project implementation remains behind schedule, with the most important delays being with the construction and equipping of the three seed processing plants which are now estimated to commence operations two years later than anticipated.

34 ANNEX II Credit No. 630 Second Lahore Water Supply, Sewerage and Drainage Project US$26.6 Million Credit of June 8, 1976; Effective Date: September 21, 1976; Closing Date: December 31, 1982 All the works have been contracted after some design delay and retendering. Construction is about 2-1/2 years behind schedule, and the Closing Date, originally December 31, 1980, has been postponed to December 31, Because of this delay and general inflation, project costs are estimated to be about 40% over the original estimates. The engineering consulting service financed by UNDP has been strengthened and extended to cover the prolonged project period. Technical assistance provided by ODA (UK) for engineering and financial management, leak detection and training has been reorganized to better meet the needs of the project. Financial results of Lahore WASA have deteriorated; an interim tariff increase was effected October 1, Loan No T Second WAPDA Power: US$50.0 Million Third Window Loan of February 19, 1976; Effective Date: April 30, 1976; Closing Date: June 30, 1981 Construction of the 336-mile transmission line between Faisalabad (formerly Lyallpur) and Guddu and installation of associated equipment has been progressing well. The project will be substantially complete by December 1980, about one year behind schedule. Due to lower-than-expected prices, there will be estimated savings of $18 million, $15 million of which has already been cancelled. The Closing Date has been extended mainly to accommodate the disbursement of retention money. Credit No. 648 Khairpur-II Tile Drainage and Irrigated Farming Development Project: US$14.0 Million Credit of July 22, 1976; Effective Date: March 14, 1977; Closing Date: July 31, 1982 Overall progress is about 23 months behind schedule. However, with the recent completion by WAPDA and their consultants of the project plan report and construction of ancillary works and facilities, WAPDA should be able to maintain consistent and seasonable progress in the critical task of drain pipe installations after delivery of most of the heavy equipment, which took place in mid Credit No. 678 Third Education: US$15.0 Million Credit of February 18, 1977; Effective Date: July 6, 1977; Closing Date: December 31, 1982 The project provides facilities for: (a) primary teacher training, an experiment on adult functional literacy and related studies; and (b) agricultural education to assist in developing higher and middle level agricultural manpower, farmer training and related studies. Project implementation remains about five months behind schedule; civil works are about 80% complete. The specialized technical services program is in progress after an initial

35 ANNEX II delay of 18 months. Disbursements remain low because of earlier implementation delays and slow submission of documentation by Provincial Governments. Loan No T Punjab Livestock: US$10.0 Million Loan of February 18, 1977; Effective Date: August 3, 1977; Closing :Date: December 31, 1982 In July 1979, GOP, GOPunjab and IDA agreed that the project would be reduced in scope and that PLB would concentrate its efforts on Village Livestock Association (VLA) development activities and milk processing. Since then steps have been taken to improve the viability of the existing milk plant and VLA formation has increased almost three-fold. Based on the consultants' report, the Lahore Milk Plant (LMP) would be expanded for the production of 65,000 liters per day (lpd) of ultra-high temperature (UHT) milk in tetrapak plus 15,000 lpd of pasteurized milk in bulk. Agreement has been reached in principle that LMP would be established as a cooperative entity and for the appointment of a General Manager acceptable to the Bank and the recruitment of three expatriate executive managers (processing and engineering, procurement and marketing, and finance) who would assist the General Manager in operating the plant. Credit No. 751 Hill Farming Technical Development: US$3.0 Million Credit of December 1, 1977; Effective Date: March 7, 1978; Closing Date: September 30, 1981 This project is generally proceeding satisfactorily. Pilot programs for food crop trials, vegetables, apples, forestry and livestock are operating close to schedule. There has been some delay in commencing preparation of the proposed follow-up project. Credit No. 754 SCARP-VI: US$70.0 Million Credit of January 19, 1978; Effective Date: December 28, 1978; Closing Date: June 30, 1985 The project is about two years behind schedule due to the delayed appointment of consultants, who are assisting with detailed project design and implementation, and GOP financial constraints. GOP and IDA staff have agreed on revisions to the project's scope. Credit No. 755 Hazara Forestry: US$1.7 Million Credit of January 29, 1978; Effective Date: July 14, 1978; Closing Date: December 31, 1983 There has been some progress in different project activities, but implementation is behind schedule, notably in the silvicultural work. The silviculturalist will be recruited by FAO, as executing agency of a UNDPfinanced project. The first phase of the feasibility study is expected to commence in early 1982.

36 ANNEX II Credit No. 813 Punjab Extension and Agricultural Development: US$12.5 Million Credit of June 6, 1978; Effective Date: September 12, 1978; Closing Date: June 30, 1984 Project implementation is delayed about 18 months. Lately, there has been progress in staff recruitment, building site acquisition and construction. IDA and GOP have recently agreed on proposals to expedite implementation. Credit No. 846 Fauji Fertilizer: US$55.0 Million Credit of September 14, 1978; Effective Date: December 19, 1978; Closing Date: June 30, 1982 Engineering and procurement are practically completed and construction is well advanced. The marketing program is being implemented satisfactorily. Credit No. 867 Toot Oil and Gas Development: US$30.0 Million Credit of January 12, 1979; Effective Date: April 25, 1979; Closing Date: December 31, 1981 Project implementation is about eight months behind schedule mainly due to technical difficulties in drilling and slow procurement. However, with the availability of better equipment, materials and services, drilling performance has started to improve. The drilling management contractor, who started work in April 1980, is now managing three OGDC rigs at Toot field. With the completion of one new well and working over another, Toot oil production has reached approximately 2,000 b/d, an increase of 50% since mid Measures to remedy institutional problems at OGDC have been agreed and are in the initial stages of implementation. Credit No. 877 Salinity Control and Reclamation Project (SCARP) Mardan: US$60.0 Million Credit of February 7, 1979; Effective Date: October 16, 1979; Closing Date: June 30, 1986 The project is one year behind schedule, due to GOP financial constraints. GOP and IDA staff have agreed on revisions to the project's scope. Credit No. 892 Primary Education: US$10.0 Million Credit of April 18, 1979; Effective Date: October 23, 1979; Closing Date: June 30, 1985 The project pursues four objectives in primary education: greater access, fewer dropouts, increased learning achievements and reduced unit recurrent costs. Special attention is given to the education of girls. The project is experimental, covering about 8% of the nation's schools. After some initial problems, the project is now progressing satisfactorily. Civil works, equipment and furniture procurement and staff training are about three months behind schedule.

37 ANNEX II Credit No. 957 Fourth Agricultural Development Bank: US$30 Million Credit of December 7, 1979; Closing Date: December 31, 1982 ADBP's lending has increased rapidly, reaching Rs 712 million in FY80 from Rs 417 million in FY79, a 75% increase. Tractor lending still predominates with the minor irrigation component progressing slowly due to delays in the importation of high speed diesel engines. Import ofe the latter has just been authorized. Credit No. 968 Third WAPDA Power: US$45.0 Million Credit of January 10, 1980; Closing Date: December 31, 1984 Procurement is proceeding satisfactorily. Contracts have been signed for some principal items and tenders for several other major equipment orders have been received. Credit No. 922 Sind Agricultural Extension and Adaptive Research Project: US$9.0 Million Credit of June 12, 1979; Closing Date: June 30, 1984 This Credit is not yet effective. IDA and GOP have recently agreed on proposals to expedite implementation. Credit No. 974 Third Highway: US$50.0 Million Credit of April 9, 1980; Closing Date: June 30, 1984 Delays in credit effectiveness and contractors' inability to plan their work effectively have delayed construction and will call for a revision of contract timing to bring required outputs into line with the zontractors' abilities. Credit No PICIC Industrial Development: US$40 Million Credit of May 30, 1980; Closing Date: March 31, 1984 This Credit became effective October 29, 1980 and US$1.5 million has been committed. Credit No Fertilizer Imports Credit: US$50 Million Credit of October 17, 1980; Closing Date: June 30, 1981 This Credit became effective December 1, Procurement of 180,000 tons of fertilizer is underway. A joint review to evaluate the effect of fertilizer price increases on agricultural output will take place early-1981.

38 - 3- ANNEX III PAKISTAN SMALL INDUSTRIES PROJECT Supplementary Project Data Sheet Section I: Timetable of Key Events (a) Time taken to prepare project: Three years. (b) The agency which prepared the project: Ministry of Industries (with UNIDO assistance), commercial banks and small industries corporations. (c) Date of first presentation to IDA and date of first mission to consider the project: February (d) Departure of appraisal mission: May 22, (e) Date of completion of negotiations: January 28, (f) Planned date of effectiveness: June Section II: Special IDA Implementation Actions None. Section III: Special Conditions (a) The commercial banks would establish special small industries loan divisions within their present small loan departments (paragraph 45);

39 ANNEX III (b) The Government would prepare detailed training proposals by June 30, 1981 (paragraph 45); (c) The Government would periodically review the adequacy of the lending rate for small industries projects in order to maintain a positive relending rate under the Credit, and would increase the lending rate for subprojects if the general interest level is raised (paragraph 47); (d) IDBP would apply subproject review and refinancing procedures satisfactory to the Association (paragraph 48); (e) The Government would make available to IDBP a line of credit of Rs 10 million as a start-up fund to assist in refinancing of subprojects (paragraph 56); (f) With regard to the credit component, the following would be conditions of disbursement, i.e. that at least two participating banks have: (i) strengthened their small loans division; (ii) signed Participation Agreements with IDBP; and (iii) approved a statement of operating policies and procedures satisfactory to the Association (paragraph 56); and (g) The following would be conditions of effectiveness (paragraph 63): (i) the execution of a Subsidiary Loan Agreement between the Government and IDBP, satisfactory to the Association; (ii) the execution of Participation Agreements between IDBP and at least two participating banks, satisfactory to the Association; and (iii) the approval by the Boards of Directors of such banks of a statement of operating policies and procedures acceptable to the Association.

40

41 -OX *'~~~ ~~~~~~~4-6'2 7'2- U. S. S. R. IBRD PAKISTAN C. CHINA PAKISTAN SMALL SCALE INDUSTRIES PROJECT LI 36- Project areas of service centers d R *o National capital / SWAT O Provinciol capitals SIR..J to ZARA... App,....w. Iii,. of -t,ol,o o Selected major cities * District boundaries *jgardas.( Provincial boundaries PeshoI >* International boundaries *' NORTH AWAR 5 ISLAAIAA awasirislan \r!) -abed Rivers CAMPRRLLPORE jkroat.rawalpinsi - / JHELUM O t,*. / N' \..., i m R,si*AT w,-'south 9 '> G uw Gvjie 3 WAZIRISTANt /t j.r SIALKOT - '32- j SEA / a o ; 'N ~ 3z- IL 32AIL DEMOCRATIC REPUBLIC ZHOa N <HPURAIANWAL}r O e, YH JNOG S S/Ura E^IZAL LAHoR " saw 2 : S ~~~~ ~~/ OF AFGHANISTAN f 11$HIN MUZAFFARHI / OAR1f frovs SANIWAL~~~~~~~~~~~~~~~~AR tea /SDERA P J / \ to A~~~~~~~LAI -' MUTAINAGARBAHAWA k 'HAOAI <*/ j EAC H,RKALAT 8UG T I j A H A G A I,'KACIR' V / ~~~~~~~C N D I A.7,,_,.8AL/C.(.H--IR5 TAN 8AHAWALPUR,_,JRAH,meR,' j 28- (,,. K H A RAM j t,j ACO8AA8-2. I R A N LARKAN - > ~~MAKIAN /.. _ r (-. < j J,/ KILOMETERS ( \ NAWABSHAE\ MILES O I.f ' _,,_,,_,,j \ '' 1 ' 7*2- SASSU SANGHAR 'LAS BELA U S.S.R.~ - '~'~.O)~* '-L--' CHINA YDL.APERABAD ~?i;m. REP. OF.? *R- N THAR PARKAR IRAN,AFGHANI- j d; KARACHI.S'~~~~~~~~~~N TAN IInoif KUP*Ch ~~~BASIN/ r.-. 2t A re bs a 87 5e a % 24* 24- _ I b! N D DI I A~~~~~~~~~~~~~~~~~ SAUDIINI ARABIA JM AV 00 twwm*s 198 SPTE *BR 1980