z15% Pakistan - iuj.ac.jp · Printed and distributed by Redhouse Press Ltd, Unit 151, ... Pakistan rupee real exchange rate. 3 ... economic and domestic security problems quickly

COUNTRY REPORT

4th quarter 1999

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

z15%

Pakistan

AfghanistanThe full publishing schedule for Country Reports is nowavailable on our website at http://www.eiu.com/schedule.

The Economist Intelligence UnitThe Economist Intelligence Unit is a specialist publisher serving companies establishing and managingoperations across national borders. For over 50 years it has been a source of information on businessdevelopments, economic and political trends, government regulations and corporate practice worldwide.

The EIU delivers its information in four ways: through subscription products ranging from newsletters toannual reference works; through specific research reports, whether for general release or for particularclients; through electronic publishing; and by organising conferences and roundtables. The firm is amember of The Economist Group.

LondonThe Economist Intelligence Unit15 Regent StLondonSW1Y 4LRUnited KingdomTel: (44.20) 7830 1000Fax: (44.20) 7499 9767E-mail: [email protected]

New YorkThe Economist Intelligence UnitThe Economist Building111 West 57th StreetNew YorkNY 10019, USTel: (1.212) 554 0600Fax: (1.212) 586 1181/2E-mail: [email protected]

Hong KongThe Economist Intelligence Unit25/F, Dah Sing Financial Centre108 Gloucester RoadWanchaiHong KongTel: (852) 2802 7288Fax: (852) 2802 7638E-mail: [email protected]

Website: http://www.eiu.com

Electronic deliveryEIU ElectronicNew York: Lou Celi or Lisa Hennessey Tel: (1.212) 554 0600 Fax: (1.212) 586 0248London: Jeremy Eagle Tel: (44.20) 7830 1183 Fax: (44.20) 7830 1023

This publication is available on the following electronic and other media:

Online databases

FT Profile (UK)Tel: (44.20) 7825 8000

DIALOG (US)Tel: (1.415) 254 7000

LEXIS-NEXIS (US)Tel: (1.800) 227 4908

M.A.I.D/Profound (UK)Tel: (44.20) 7930 6900

NewsEdge Corporation (US)Tel: (1.718) 229 3000

CD-ROM

The Dialog Corporation (US)SilverPlatter (US)

Microfilm

World Microfilms Publications(UK)Tel: (44.20) 7266 2202

Copyright© 1999 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication norany part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording or otherwise, without the prior permissionof The Economist Intelligence Unit Limited.

All information in this report is verified to the best of the author's and the publisher's ability. However,the EIU does not accept responsibility for any loss arising from reliance on it.

ISSN 0269-7173

Symbols for tables“n/a” means not available; “–” means not applicable

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

EIU Country Report 4th quarter 1999 © The Economist Intelligence Unit Limited 1999

Contents

3 Summary

Pakistan

5 Political structure

6 Economic structure

7 Outlook for 2000-01

13 The political scene

20 Economic policy

22 The domestic economy

22 Economic trends

23 Industry

23 Agriculture

26 Infrastructure and services

26 Foreign trade and payments

Afghanistan

28 Political structure

29 Economic structure

30 Outlook for 2000-01

31 The political scene

34 Economic policy and the economy

35 Quarterly indicators and trade data

List of tables

7 Pakistan: forecast summary

21 Pakistan: non-performing loans, Oct 31st 1999

35 Pakistan: quarterly indicators of economic activity

36 Pakistan: foreign trade

37 Pakistan: structure of trade

38 Pakistan: direction of trade

List of figures

12 Pakistan: imports and exports

13 Pakistan: gross domestic product

13 Pakistan: Pakistan rupee real exchange rate

3


Summary

4th quarter 1999

Pakistan

The military-led government is likely to last until at least 2001. Generalelections are unlikely to be held in 2000-01. The military regime will pursue anambitious reform agenda. The regime’s current—but possibly transient—popular legitimacy will be eroded if the military is not seen to redress pressingeconomic and domestic security problems quickly. Islamic extremists willremain a problem. Traders and farmers will try to derail tough reforms.Relations with the US could deteriorate, and those with the IMF will stayfraught. A better cotton crop will boost GDP growth in 1999/2000. The tradeand current-account deficits will widen slightly in both 2000 and 2001.Inflation will rise from its recent, and very unusual, low level.

A coup in Pakistan has been triggered by the sacking of the army chief. The riftbetween the army and the prime minister had been brewing for months.General Pervez Musharraf is the self-appointed chief executive, but is “firstamong equals”. The core members of the military government have extensiveexperience in the Interservices Intelligence Agency. The reaction of Pakistanisto the coup has been muted if not supportive. Opposition parties havewelcomed Nawaz Sharif’s ousting. General Musharraf has announced a reformagenda but not a timetable for the restoration of civilian rule. He has alsodisplayed his secular leanings.

The IMF has delayed the latest tranche of a loan package. A crackdown on loandefaulters has begun. The military regime is reviewing the recent decisions onsales tax exemptions and cotton support prices.

• Business confidence has not been hurt by the coup. July-October taxrevenues was near to target. Inflation has remained low.

• Manufacturing output contracted in March. Prior to the coup, a new bus-manufacturing venture involving a foreign vehicle company had beenannounced. The first Oka car is to be produced in early 2000.

• Cotton crop estimates have been revised upwards. Cotton farmers andspinners have battled over policy changes. A bumper rice crop has beenprojected, but export prospects have remained dim. Incentives have beenextended to wheat farmers.

• The International Chamber of Commerce has called Hub Power Companyand the government of Pakistan to appear before its tribunal. The new financeminister has pledged to resolve the long-running dispute.

Exports, in dollar terms, fell by 0.7%; year on year; in January-June 1999, whileimports rose by almost 15%. Exports of manufactured textile goods rose by

November 10th 1999

The political scene

Economic policy

The economy

Outlook for 2000-01

Foreign trade andpayments

4


6.4% in July-September. Rice exports rose by over 16% in this period butleather exports contracted by over 19%. A cash margin requirement for importshas been introduced.

Afghanistan

Fighting between the Taliban and the opposition forces is likely to continue.Ahmad Shah Massoud will continue to thwart the Taliban’s goal of controllingall of Afghanistan. The UN will continue to try to restart a peace process, butthe momentum behind the fighting will counter its efforts. The Taliban is setto come under increasing financial and international political pressure, as wellas suffer possible internal rifts.

Taliban troops and opposition forces launched fresh offensives before the onsetof winter. The number of displaced people has risen, as has the incidence ofpoverty. There is evidence that the Taliban is training foreign terrorists. The UNSecurity Council has voted to impose limited sanctions against the Talibanunless it hands over Osama bin Laden by mid-November. In August a truckbomb exploded close to the home of the Taliban’s leader. Both the Taliban andthe Northern Alliance have formed new cabinets. Violence against womenremains rampant.

A record opium harvest is in prospect. Drug addiction has risen.

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

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

Outlook for 2000-01

The political scene

Economic policy and theeconomy

Pakistan 5


Pakistan

Political structure

Islamic Republic of Pakistan

Federated parliamentary system suspended by military coup on October 12th

As a result of the October 12th coup, the chief of army staff and chairman of the jointchiefs of staff committee, General Pervez Musharraf, is now designated the chiefexecutive of Pakistan. The prime minister, who held supreme executive authority as aresult of constitutional changes in 1997, has been dismissed. The president remains inplace as head of state. The president is elected by an electoral college, consisting of bothhouses of the federal parliament as well as members of all four provincial legislatures

Bicameral legislature: lower house, the National Assembly, was suspended on October12th. It has 217 directly elected members who serve for five years, of whom tenrepresent minorities; the life of the suspended National Assembly will last until February2002 unless it is abrogated earlier by the military authorities; upper house, the Senate,has 87 members elected for six years with one-third retiring every two years. (The nextSenate election is due March 2000 but the senate will have to be restored by the militarygovernment.) Each of the four provinces elects 19 senators; the remaining 11 are electedfrom the Federal Capital Territory and the federally administered tribal areas

Pakistan has four provinces, which enjoy considerable autonomy. Each province has agovernor and a council of ministers headed by a chief minister, who is elected by aprovincial assembly. All provincial governments stand dismissed and all assembliessuspended. Each province now has a governor appointed by the military

Originally scheduled for December 2002 (presidential) and February 2002 (NationalAssembly), the next round of elections has been postponed indefinitely. The military-ledgovernment authorities have given no timetable for the next elections

The PML(N) government of prime minister Nawaz Sharif, formed in February 1997, wasousted in a military coup on October 12th

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

President Rafiq TararChief executive General Pervez Musharraf

Chief of air staff Marshal Pervaiz Mehdi QureshiChief of navy staff Admiral Abdul Aziz MirzaFinance Mohammad YaqubForeign affairs Attiya InayatullahLaw Sharifuddin PirzadaNational affairs Imtiaz Shahibzada

Commerce Razaq DaudFinance Shaukat AzizForeign affairs Adbus SattarInterior Lieutenant-General (retired) Moinuddin Haider

Mukhtar Nabi Qureshi

Official name

Form of state

National legislature

Provincial government

National elections

National government

Main political organisations

Key cabinet ministers

The executive

National Security Council

Central bank governor (acting)

6 Pakistan


Economic structure

Latest available figures

Economic indicators 1994 1995 1996 1997 1998

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

GDPa ($ bn) 52.2 61.0 64.5 61.9 63.9

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

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

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

Exports fob ($ bn) 7.1 8.3 8.5 8.3 8.6

Imports fob ($ bn) 9.3 11.2 12.1 10.7 9.2

Current-account balance ($ bn) –1.81 –3.34 –4.42 –1.76 –2.03

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

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

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

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

November 5th 1999 PRs51.89:$1

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

Agriculture 24.5 Private consumption 72.5

Manufacturing 18.6 Government consumption 11.4

Electricity, gas & water supply 4.1 Fixed investment 13.6

Construction 3.6 Change in stocks 2.4

Mining 0.5 Exports of goods & services 15.2

Services 48.7 Imports of goods & services –15.3

GDP at factor cost 100.0 GDP at market prices 100.0

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

Cotton fabrics 1,142 Machinery 2,043

Cotton yarn 984 Petroleum & products 1,310

Knitwear 731 Palm oil 627

Ready-made garments 690 Wheat 356

Rice 556 Plastics 305

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

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

US 20.5 US 11.2

Hong Kong 7.1 Japan 7.8

UK 6.9 Malaysia 7.1

Germany 6.3 Saudi Arabia 6.7

UAE 5.1 UAE 6.6

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

Pakistan 7


Outlook for 2000-01

Pakistan: forecast summary1998a 1999b 2000c 2001c

Real GDP at factor costd (% change) 4.3 3.1 4.5 5.0 Agriculture 3.8 0.4 4.5 3.5 Industry 6.8 3.8 6.0 6.2 Services 3.2 4.1 4.2 5.4

Real GDP at market pricesd

(% change) 3.3 3.9 4.0 4.4 of which: private consumption –0.3 5.1 6.0 5.0 public consumption 6.8 3.9 2.0 2.5 gross fixed investment –5.4 –2.3 3.0 6.0 exports of goods & services 3.7 –1.2 0.0 3.6 imports of goods & services –11.3 –8.2 7.0 6.5

Consumer price inflation (av; %) 6.2 4.5 7.0 8.5

Merchandise exports fob ($ m) 8,642 8,422 8,876 9,584

Merchandise imports fob ($ m) 9,241 9,761 11,007 11,972

Current-account balance ($ m) –2,031 –2,860 –3,446 –3,630

Exchange rate (year-end; PRs:$) 46.00 52.06 55.69 60.36

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

The Pakistan Muslim League (Nawaz), or PML(N), government, led by theprime minister, Nawaz Sharif, was deposed in a military coup on October 12th.The interim political arrangement, although populated with civilians, will berun from behind the scenes by the military. The army chief, General PervezMusharraf, has installed himself as the chief executive of a military-led govern-ment. The junta has established a National Security Council (NSC) as thesupreme decision-making body of the country. The NSC is headed by GeneralMusharraf and includes the air and navy chiefs. Its four civilian members areall fairly ineffectual remnants of ancient regimes. The cabinet, which is alsoheaded by General Musharraf, includes fairly stolid civilians who are unlikelyto challenge the political leanings of the generals although they may be able toreinvigorate crucial economic reforms. The provinces will be run by governorsassisted by civilian cabinets, which in turn will be monitored by the military’scorps commanders in each region. Most of the governors are retired soldiers,with the exception of the Baluchistan governor, who is a retired judge.

General Musharraf has confirmed that the military will monitor all political,legal and administrative decisions and actions of the various cabinets andcouncils being established in the country. But the general himself must balancethe demands of the core military figures, of whom he is probably the mostmoderate. The other generals involved in the coup acted jointly to thwart atakeover of the headquarters by two generals loyal to the prime minister. Thecoup was effected by a small group—indeed, General Musharraf was airbornewhen his sacking was announced—in defence of its own interests. AlthoughMr Sharif’s attempt to fire the chief of army staff has united the armed forces,General Musharraf cannot ignore the interests of those to whom he isbeholden for his current position, especially in foreign policy matters.

The military will be firmlyin charge—

8 Pakistan


General Musharraf’s seven-point policy programme pledges the government toinitiate an across-the-board purging of corrupt individuals, to revive theeconomy, to decentralise power and restore national cohesion, to rebuildnational morale, to ensure law and order and the speedy application of justice,and to depoliticise state institutions. But General Musharraf has refused to givea timetable for the restoration of democracy as demanded by several foreigngovernments. He says it will be “years and not months” before “truedemocracy” is restored because his seven-point agenda—progress on whichmust precede the restoration of democracy—cannot be accomplished quickly.

Consequently, the EIU expects the current political arrangement to last atleast until 2001; a general election in the intervening period is unlikely. In themeantime, the main political parties will try to regroup, and minor parties,such as the Millat Party of a former president, Farooq Leghari, will jockey forposition. We expect the government to convict two former prime ministers,Benazir Bhutto and Nawaz Sharif (and their cronies), for corruption, ban themfrom participating in politics for many years, and sentence them to stiffprison terms.

The expectations of the people of Pakistan are running high. At the very least,they would like to see the military regime come down hard on corruptpoliticians, bureaucrats, businessmen and semi-feudal landlords, resulting inthe expropriation of their assets and their imprisonment. They are alsodesperate for a measure of law and order and security, as well as a swifteconomic revival that stops their living standards from declining any further.

Changes, however, will probably not come quickly enough to meet theseexpectations. It will be months before the items on the popular agenda can beaddressed. For example, a National Accountability Bureau (NAB), under thedirection of a serving general, has been established. But the legal frameworkunder which it will operate and prosecute corrupt individuals is still unclear. Ifthe conviction of the leading offenders is not forthcoming for months, it willlead to mass cynicism and erode the regime’s current—but possibly transient—popular legitimacy. It will also make it more sensitive to international pressuresto restore democracy more quickly. Pushed to the wall, the military regimewould probably turn inwards and seek to quash rising criticism. This wouldend the current honeymoon period that exists between the military and theindependent press, with the former deeming the latter’s critical writingirresponsible.

Although there is broad, general support for the anti-corruption campaign, themilitary government will face as much opposition as its civilian predecessors inimplementing other reforms. For example, the junta is targeting bankborrowers whose loans are in default. According to General Musharraf, 322industrial groups owe PRs200bn ($3.9bn) to the banks. Over 3,000 alleged loandefaulters have been banned from leaving the country, presumably until theycan prove that their loans are in good standing. However, there is someconcern that the junta will fail to distinguish between wilful defaulters and

Pakistanis’ expectationswill remain high—

—and elections will not be“rushed”

—although their patiencemay not last—

—and traders and farmerswill try to derail reforms

Pakistan 9


those in genuine economic distress. If arrests for loan defaults are indis-criminate, public agitation could bubble up.

In the same vein, the traders and the bazaaris (bazaar traders) will resort tostrikes if attempts are made to enforce the general sales tax (GST), one of themain conditions attached to the International Monetary Fund (IMF) loanpackage. The farmers of Pakistan may also gear up for protest demonstrations.The new finance minister, Shaukat Aziz, has withdrawn the subsidies to cottongrowers and ginners, announced by the Sharif government in October when agood cotton crop and falling prices in the international market led to a fall indomestic cotton prices and reduced agricultural incomes. Efforts to enforce a taxon agricultural income will also be resisted. Given the junta’s lack of electorallegitimacy, popular resistance can only be countered with greater might.

In addition, General Musharraf’s policy statements envisage no change inPakistan’s foreign policy, a reflection of the roots in the InterservicesIntelligence Agency (ISI) of many of the junta leaders. General Musharraf hassaid that there is no point in talks with India aimed at building mutualconfidence and trust unless solutions to the “core” issue of Kashmir areconcretely pegged to the discussions, a position India has consistently rejectedfor many decades but one which Mr Sharif had also abandoned in favour ofgreater flexibility in recent times. This stance reflects both the instinct of self-preservation as well as the intrinsic hawkishness of parts of the militaryleadership, particularly those with an ISI background.

General Musharraf has gone out of his way to portray himself as Westernisedand modern, in an effort to assuage international fears that Pakistan, run by aregime of former ISI military men, may become an extremist Islamic state. Hehas pledged his commitment to building a moderate and tolerant Muslimcountry—a view that flies against the passions of the Islamic parties and groupsin the country. The leader of the Jamaat-i-Islami, Qazi Hussain Ahmad, hasstrongly criticised General Musharraf for expressing a liking for Kemal Ataturk,the secular founder of modern Turkey, a pro-Western state with a majorityMuslim population. He has also accused the military of staffing the federal andprovincial cabinets, as well as the NSC, with pro-US lackeys. More alarmingly,Hafiz Mohammad Saeed, the leader of the militant Islamic Dawat-wal-Irshad,which is the main sponsor of the Muslim insurrection in Kashmir, has warnedthe military regime not to curb the activity of the Islamic mujahideen “insideor outside Pakistan”. Until now, Mr Saeed had confined himself to supportingIslamic insurrections outside Pakistan and studiously refrained fromannouncing a jihad (holy struggle) for the enforcement of Islam in Pakistan.But in an unprecedented policy statement on November 3rd, he urged GeneralMusharraf “to enforce Islam and make the Koran the constitution of Pakistan”.The Dawat-wal-Irshad boasts many committed (and armed) followers. It has itsheadquarters in the outskirts of Lahore, the capital of Punjab province, fromwhich the army is mainly drawn. Other armed Islamic groups are expected tojoin in making such demands.

If the military junta gives in to the Islamic fundamentalists, it will be isolatedabroad. On the other hand, a crackdown on such groups may be neither

—and Islamic extremistswill be a problem

Foreign policy could bedivisive—

10 Pakistan


feasible nor desirable from the regime’s point of view. These groups are muchtoo organised and powerful to be contained easily. But more importantly, theISI depends on them to further its strategic agendas in Indian-administeredKashmir and Taliban-controlled Afghanistan.

Unlike the Commonwealth and the European Union (EU), both of whichreacted rather aggressively to the coup, the reaction of the US government hasso far been muted. While all American economic assistance to Pakistan willremain suspended until democracy is restored (in accordance with US law), theClinton administration is keen to engage—rather than isolate—Pakistan. TheUS will not impede funding from the IMF and the World Bank.

However, the US attitude could harden. The US government is already insistingthat even if General Musharraf cannot provide a timeframe for the restorationof civilian rule, he should at least provide a “road-map” of his intentions. TheUS government will also review continuously the military government’sforeign policy options, especially in so far as these impinge on Americanconcerns such as nuclear and missile non-proliferation, terrorism (particularlythe whereabouts of a Saudi dissident, Osama bin Laden), and other aspects ofregional relations. If there is no progress on any of these fronts, the USgovernment’s frustration will be reflected in strident demands for a restorationof civilian rule or the imposition of fresh sanctions.

The IMF is not going to make undue concessions to the military regime. A$280m tranche of the IMF loan, which was due to be dispersed in September,was postponed until October because the Sharif government had not fulfilledIMF conditions, including the resolution of the quarrel with the Hub PowerCompany (Hubco), an increase in petroleum prices and an extension of theGST to retail trade and services. The new regime may face the same policy testsin addition to behind-the-scene pressures to formulate a timetable for therestoration of democracy (at the behest of the Clinton administration). Indeed,the US government may use its leverage with the IMF to ensure that theactions of the military regime do not conflict with the US’s strategic objectivesin South Asia. If the military regime drags its feet on the IMF’s and WorldBank’s economic conditions, oversteps the boundaries of restraint on supportfor Islamic militancy in Kashmir, or decides to test nuclear weapons, it mayagain find itself cut off from international funds.

Structural economic problems are so deep rooted that a quick fix will beimpossible. Like previous IMF loan agreements, the current one calls forincreased financial discipline to be achieved by reducing the public payroll,lowering defence expenditure, enlarging the tax base, increasing tax revenueand speeding up privatisation. But mass lay-offs by the government (the singlelargest recorded employer) will provoke widespread protest. A reduction indefence expenditure is unlikely given that the army is now in direct control ofthe government (and the budget), and eager to keep pace with India, which iscurrently re-equipping its armed forces. Efforts to enlarge the tax base will bechallenged by both by the absence of a tax-paying culture and the recent poorperformance of the economy. The privatisation programme, however, could be

Relations with Washingtoncould deteriorate—

—and those with the IMFwill remain fraught

Structural problems willrequire more than a quick

fix—

Pakistan 11


relaunched, especially as the new finance minister’s efforts to resolve the rowbetween the government and certain power companies appear genuine (seeInfrastructure and services). Assuming some success with the campaign againstloan defaulters, and a new round of privatisation, the government may be ableto bring the budget deficit nearer to 15% in 2000/2001 (July-June).

We expect real GDP to rise in 1999/2000 (July-June), owing mainly to animproved outlook for agricultural output. GDP grew by only 3.1% in 1998/99(July-June). Agriculture value added grew by less than 1%, dragged down by apoor cotton crop (which indirectly affected cotton-based industry andservices). In addition, the imposition of international economic sanctions andforeign-exchange controls, the loss of domestic business confidence, and thedrying up of foreign direct investment (FDI) and private remittances inflowsnegatively affected investment and industrial growth.

In 1999/2000 a better cotton crop is in prospect, which should boost agri-cultural growth to 4.5%. Since agriculture comprises almost one-quarter oftotal GDP and has extensive linkages to the industry and services sectors,improved performance in this sector will also boost GDP growth this year.Lower prices for cotton will aid the cotton ginning, weaving and textilesmanufacturers, and boost associated services such as trade and transport.Moreover, business confidence has not been hurt by the coup; in fact, it mayimprove now that there is a perception—correct or not—that the militarygovernment is intent on taking difficult but rational economic decisions in linewith IMF conditions. Consequently, we expect industrial growth to expand by5% in 1999/2000, led by 6% growth in manufacturing, and overall GDP toexpand by 4.5%—an upward revision from last quarter’s forecast. In 2000/01we expect industrial growth to rise slightly, to 6.2%, driven by fasterinvestment. Assuming slightly slower agricultural growth, GDP at factor cost isprojected to grow by 5%.

The average annual rate of consumer price inflation fell to 3.4% in September1999, compared with 6.4% in September 1998, thanks to low internationalcommodity prices, stable food and household goods prices, and no formaldevaluation this year. But inflation should begin to rise in the final months of1999 and into 2000, driven by the imposition of a 15% GST plus a similarpercentage increase in petroleum prices. Moreover, after contracting in 1999,world commodity prices are forecast to rise in 2000, driven by an 11.8% rise innon-oil commodity prices. Consequently, we expect average annual inflationto rise to 7% in 2000, from 4.5% in 1999.

In 2001 the EIU expects commodity prices to rise further, adding to the importbill (or prompting upward revision in the price of domestically producedcommodities). We also expect further increases in domestic energy, utility andtelecommunications prices, in an effort both to boost the viability of thesecompanies and perhaps prepare a few of them for privatisation. This infla-tionary push may be offset slightly by a fall in interest rates as the rate offinancial intermediation (the difference between the lending and borrowingrates of interest, currently at about 6 percentage points) begins to narrowfollowing the repayment of loans by defaulters, and an improvement in the

—but a good cotton cropwill boost GDP growth

Inflation will rise

12 Pakistan


health of the banking sector. Nevertheless, inflation should rise further,averaging 8.5% in 2001 (in line with the long-term average).

Pakistan’s trade deficit narrowed to under $700m in 1998 (calendar year),owing mainly to a 15.6% contraction in imports. However, in the first half of1999 exports fell by nearly 1% (in dollar terms) year on year, while importsrose by almost 15%. Although we expect imports to have eased slightly in thesecond half of 1999, owing to political uncertainty as well as new import curbs,we still expect imports to rise by nearly 8% in 1999. Assuming a slightcontraction in export growth, the trade deficit is set to widen to $1.3bn. Exportgrowth will resume in 2000, reflecting a pick-up in rice and textile exports. Butfaster growth in imports will nonetheless cause the trade deficit to widen to$2.1bn in 2000. Import growth (in dollar terms) will ease slightly in 2001, asoil price increases ebb. Meanwhile, the further acceleration in world tradegrowth, despite a slowdown in GDP growth in the US (Pakistan’s largest exportmarket), will boost exports, with a forecast trade deficit of $2.4bn.

The changes in the trade account will largely drive the forecast expansion ofthe current-account deficit. The current-account deficit rose in 1998, despitethe narrowing of the trade deficit, owing to a sharp fall in net transfers. In1999 we do not expect a rebound in officially tracked private remittances.Consequently, the current-account deficit is forecast to rise to $2.9bn in 1999,equal to 4.3% of GDP. We expect net transfers to rise slightly in 2000 and 2001,to $2.3bn and $2.7bn respectively, boosted by better earnings amongstexpatriate workers in the Middle East as well as by the rationalisation of theexchange-rate regime (which has narrowed the spread between the kerb ratefor the dollar and the inter-bank rate, thus lessening the attraction of illegaltransfers). This resultant rise in net transfers will moderate the widening of thecurrent-account deficit to $3.4bn and $3.6bn of GDP in 2000 and 2001 (whichtranslates into 5.3% of GDP in both years).

The inter-bank rupee exchange rate has held at about PRs51.9:$1 since mid-September, and the kerb rate at about PRs54:$1. Although the IMF espouses adevaluation of about 15%, in order to boost exports, the historical record doesnot show a strong link. This may explain why the State Bank of Pakistan (SBP,the central bank) has been intervening heavily in the money market to propup the rupee whenever it has been hit by a bout of speculative fever. We expectthis policy to continue, allowing the rupee to depreciate slowly over time. Thewidening external deficits and thin foreign-exchange inflows will result incontinued downward pressure on the rupee, bringing the rupee to PRs55.7:$1by end-2000 and PRs60.4:$1 by end-2001. However, there is always the riskthat a suspension of IMF assistance to Pakistan, either because of unfulfilledconditions or as a result of political pressure from the Clinton administration,could cause the rupee to fall more sharply amidst a collapse of confidence.Given the low level of foreign-exchange reserves, the country would be likelyin this scenario to re-impose exchange and import controls to preserve foreignexchange and stem any outflow.

The trade deficit willwiden—

—and the rupee could comeunder pressure

Pakistan 13


The political scene

The Pakistan Muslim League (PML(N)) government has been overthrown by amilitary coup. On October 12th the Pakistan army seized control of key install-ations in the capital, Islamabad, announced the dismissal of the primeminister, Nawaz Sharif, and his government, and detained him and his closeassociates. In the early hours of October 13th the army chief, General PervezMusharraf, announced on television that he had been compelled to act “toprevent any further destabilisation” after “Nawaz Sharif tried to politicise thearmy, destabilise it and create dissension within its ranks”.

The announcement followed hours of speculation about who was in charge ofthe country. At 5 pm on October 12th, the state-controlled Pakistan Television(PTV) announced that General Musharraf had been sacked as army chief by theprime minister, Mr Sharif, and replaced with General Khwaja Ziauddin.General Ziauddin, a Sharif loyalist, was the director-general of the InterservicesIntelligence Agency (ISI), the country’s intelligence agency. At the time of theannouncement, General Musharraf was aboard a Pakistan InternationalAirlines (PIA) flight to Karachi from Colombo, Sri Lanka.

But shortly after 6 pm, PTV stopped repeating the announcement. Soon there-after, its transmissions went off the air. This occurred after troops loyal toGeneral Musharraf, acting on the orders of General Mohammad Aziz, the chiefof the general staff (second in command of the army and a Musharraf loyalist),and the Rawalpindi corps commander, General Mahmood Ahmad, seized PTV,surrounded the prime minister’s house and refused to allow the army chief-designate, General Ziauddin, to enter general headquarters (GHQ) in nearbyRawalpindi to assume charge. General Ziauddin was told that he would have towait for General Musharraf to return to the country before command of thearmy could be handed over to him.

While an uneasy situation prevailed in Islamabad that evening, rather moredramatic events were unfolding in the airspace over Karachi. As the PIA flight

A coup in Pakistan—

—is triggered by thesacking of the army chief

Mr Sharif’s covert plan—

14 Pakistan


carrying General Musharraf, his wife, aides and 200 other passengers, includingover 50 foreigners, entered Pakistan airspace at about 7 pm, the pilot received arequest from Karachi’s airport control tower for information regarding theaircraft’s fuel reserves (which are reported to have stood at about 45 minutes atthat point). When the aircraft came close to Karachi ten minutes later, the pilotwas told that he could not land at any airport in Pakistan and was ordered tofly to Muscat in the United Arab Emirates to land. When the pilot protestedthat he did not have sufficient fuel to reach that destination, he was ordered totry landing in Ahmadabad in India. The pilot consulted General Musharraf,who insisted that the plane land in Karachi. Another series of confusingdirectives from Karachi airport followed. Finally, the pilot was contacted bysenior army officials who had seized the control tower in Karachi and told toreturn and land in Karachi. At that point, the aircraft had sufficient fuel foronly a few minutes of flying.

After landing in Karachi, General Musharraf, protected by his troops, learnedthe details of his sacking by the prime minister. The government had plannedto divert the plane to Nawabshah in Sindh province where police officers werewaiting to arrest the army chief. Instead, the army chief landed in Karachi andsoon after ordered the arrest of the prime minister and his top aides inIslamabad. By 9 pm the news was announced that the army chief wouldaddress the nation shortly. Several hours later, he announced that the civiliangovernment had been deposed.

The EIU expected that the fallout from the Kargil campaign in Kashmir lastMay would create a rift between the prime minister and army chief, and straincivil-military relations (3rd quarter 1999, page 7). Mr Sharif wanted GeneralMusharraf to take the rap for the campaign, but the general stubbornly insistedthat both civilian and military leaders were accountable. We expected thatMr Sharif would try to sideline the army chief—perhaps by replacing him witha new army chief while confirming General Musharraf’s move to the largelyceremonial role of chairman of the joint chiefs of staff committee for threeyears. A military coup, however, was thought unlikely, largely because it wasassumed that Mr Sharif would not be foolish enough to try to sack the armychief—a move that would surely provoke a severe backlash from the army highcommand. Moreover, an offensive coup was never planned and, in the end,did not occur.

By mid-September relations between Mr Sharif and General Musharraf haddeteriorated considerably. The row between the two became quite bitter whenNiaz Naik, a retired civil servant close to Mr Sharif, gave an interview to thepress in which he claimed that before the Kargil campaign he had beencarrying out secret shuttle diplomacy between the prime ministers of Pakistanand India with a view to clinching a negotiated settlement on the disputedregion of Kashmir. Mr Naik then accused the army of sabotaging Mr Sharif’speace efforts by launching the military campaign in Kargil. General Musharrafconfronted both Mr Naik and the prime minister, and accused Mr Naik ofacting at the prime minister’s behest in order to discredit the army.

—backfires badly

The rift between the primeminister and army chief—

Pakistan 15


Mr Sharif appeared to begin to sow the seeds of division in the upper echelonsof the armed forces as well. For Mr Sharif, this was tested strategy used tosecure power for himself. A perceived rival could be weakened by creatingdivisions within his ranks. Once isolated, he could then be overpowered. Thatwas how Mr Sharif had contrived the removal of the chief justice of theSupreme Court, Sajjad Ali Shah, in 1997 when ten of the 15 judges on thecourt were compelled by the government to revolt against their chief and ousthim in a judicial coup. A similar move now seemed afoot. At least one corpscommander, General Tariq Pervez, and the director-general of the ISI, GeneralZiauddin, were said to have been encouraged to challenge the authority ofGeneral Musharraf in private and in public.

This campaign was taken abroad as well. According to EIU sources, GeneralZiauddin was sent to Washington to warn the US government of the influenceon the army of a coterie of extreme Islamist generals headed by GeneralMusharraf. In an apparent countermove, General Musharraf replaced onSeptember 20th a Sharif sympathiser, General Saleem Haider, who was incharge of the strike force stationed at Mangla, fifty miles from Rawalpindi, witha hardline general loyal to himself. The move was widely seen as an act by thearmy chief to protect his flanks.

On that same day, an unnamed US administration official was reported to havestated that the US government would be strongly opposed to any attempt bypolitical or military actors to overthrow the Sharif government “through extra-constitutional means”. This announcement came immediately after a visit toWashington by Mr Sharif’s younger brother, Shahbaz, the chief minister ofPunjab province. The announcement clearly heartened the Sharif admini-stration, even though additional statements from US officials went to greatlengths to explain that by opposing a break from democratic processes the USwas endorsing the Pakistani constitution and democracy, and not Mr Sharif inparticular.

Speculation mounted in the following days, as reports of differences betweenthe two leaders continued to emerge. When asked at a press conference onSeptember 24th whether he thought he might be asked to resign or be sacked,the army chief insisted that he would complete his tenure, implying that hewould not step down as had his predecessor, General Jehangir Karamat,in 1998.

The general called a private meeting of his corps commanders during whichthose present reaffirmed their oath to protect the army chief and the militaryin the event of a civilian coup against them. Mr Sharif quickly moved toplacate General Musharraf. On September 29th he confirmed GeneralMusharraf’s appointment as chairman of the joint chiefs of staff committee forthree years while allowing him to remain army chief until his term expired twoyears later. But the general was clearly not entirely confident of the primeminister’s intentions. On October 10th General Musharraf sacked General TariqPervez, a Sharif loyalist, for insubordination: the corps commander at Quettain Baluchistan province was thought to have met Mr Sharif without the armychief’s approval or knowledge, despite orders not to do so. The same day,

—had worsened in recentmonths—

—prompting openspeculation—

—and defensive action

16 Pakistan


General Musharraf left for a conference in Sri Lanka. As reported above, twodays later, while he was en route from Sri Lanka to Pakistan and out of contactwith GHQ in Rawalpindi, Mr Sharif tried to sack General Musharraf. However,the army chief had made sure that Mr Sharif’s plan would fail.

Each of the three military coups in Pakistan’s 51-year history has been uniquein terms of the motives of the coup-making army chief, the orientation of themilitary government that followed the coup and its political impact on thecivilian polity after the army returned to the barracks. General Ayub Khan,who seized power in 1958 and ruled for ten years, was personally ambitiousand politically manipulative. As commander-in-chief of the army, hemanoeuvred to become the defence minister before ordering a coup against thegovernment of which he was a part. But he was not beholden to any of hisgenerals, either for helping him during the pre-coup period or for riskinganything out of the ordinary (other than obeying orders) during theimplementation of the coup. Therefore, General Ayub was free to stamp hisown political ideas on the military regime and the political system thatfollowed. He became president of Pakistan in a highly centralised, secularregime based on an electoral college of 80,000 representatives called “basicdemocrats” and a constitution tailored to fit his “guided democracy”.

General Zia ul-Haq seized power in 1977. Unlike General Ayub’s coup, his coupwas in response to militant and widespread public dissatisfaction with thedemocratically elected but authoritarian-socialist regime of Zulfikar Ali Bhutto.Also, unlike the earlier coup, the 1977 coup was orchestrated by General Zia incollaboration with a coterie of like-minded generals. But, like the first militaryregime, General Zia’s era lasted a long time (11 years) and he too established acentralised regime in which he became president of Pakistan. But his regimesought to derive its legitimacy from Islam (as opposed to the earlier bouts ofsecularism and socialism), and was run by a junta in which he was initiallyprimus inter pares (first among equals). In due course, however, General Ziaeased his coup-making colleagues out of decision-making positions andbecame an all-powerful dictator after consolidating his personal power basewith the help of opportunist civilian politicians and Islamist parties.

General Musharraf’s coup of October 12th is, in two ways, different from theseearlier coups. Its origins lie neither in personal ambition nor conspiracy on thepart of a general (as in 1958), nor directly in response to widespread publicpressure (as in 1977). Instead, it was a desperate response to a reckless attemptby the deposed prime minister, Mr Sharif, to divide and control the armedforces in order to stamp his personal authority over every institution of thestate. General Musharraf and his top commanders acted to save themselvesfrom being purged by Mr Sharif; the coup was therefore initially billed by thecoup-makers as a “counter-coup”. Only later did the military see the greatadvantage of being perceived as Pakistan’s rescuers, rather than as simply theagents of their own self-preservation.

But General Musharraf’s coup has one critical point of similarity with GeneralZia’s coup: it was made by several critically placed pro-Musharraf generalsbased at the army’s GHQ in Rawalpindi, near Islamabad. These generals acted

The story of the coups inPakistan—

—suggests that GeneralMusharraf is “first among

equals”—

Pakistan 17


jointly to thwart a takeover of the headquarters by two generals loyal to theprime minister after General Musharraf’s sacking had been announced onstate-controlled radio and television. Indeed, the “counter-coup” wassuccessfully effected while General Musharraf was still out of the country. (IfMr Sharif’s legally appointed army-chief designate, General Ziauddin, and hislegally appointed corps commander-designate, Rawalpindi, General Haider,had been allowed to occupy their posts, there would have been no militarycoup against the government.) This would imply that the October coup wasmade by a junta in defence of its own interests. More critically, it wouldconfirm that General Musharraf starts his political tenure even more of aprimus inter pares in 1999 than General Zia was in 1977. Balancing the demandsof the various leading military figures will prove a formidable challenge for themoderate general.

Another departure from the two earlier coups is that all the inner group ofgenerals in the current junta, except for General Musharraf, have at one timeserved in the ISI. Lieutenant-General Mohammad Aziz, the chief of the generalstaff of the Pakistani army, played a crucial role in thwarting the sacking ofGeneral Musharraf. He served in the ISI for three years, running operations inIndia and Afghanistan before moving to GHQ last year under GeneralMusharraf. He is also credited with overseeing the Kargil incursion, whichthreatened a full-scale war with India and precipitated bitter differences withMr Sharif. Major-General Anis Bajwa, the current military chief of staff toGeneral Musharraf, was also in a senior position in the ISI before he moved tothe army’s GHQ in 1998. General Jamshed Gulzar, another senior ISI man, hasbeen promoted to lieutenant-general and appointed commander of the armycorps that encompasses Rawalpindi, where the GHQ is based. GeneralMahmood Ahmad, the corps commander in Rawalpindi whose troops arrestedthe prime minister and installed General Musharraf in power on October 12th,has now been appointed the director-general of the ISI. The director-general ofthe ISI in 1995-98, General Nasim Rana, who retired from service earlier thisyear, has been pulled out of retirement and appointed defence secretary.Lieutenant-General Javed Ashraf Qazi, the director-general of the ISI in1993-95, who retired in 1995, has been appointed secretary in the railwaysministry. He is thought to be a close confidant of General Musharraf.

From 1978 to 1988 the ISI, in alliance with the US Central Intelligence Agency(CIA), directed the resistance against the Soviet forces in Afghanistan andformed the bedrock of General Zia’s regime. After General Zia’s death in amysterious air crash in 1988, the ISI actively destabilised the regime of a formerprime minister, Benazir Bhutto, and then ensured the election of Mr Sharif inthe 1990 election. Its internal political role was then superseded by its activeinvolvement under all subsequent civilian regimes in formulating andimplementing Pakistan’s foreign policy, including the training and arming ofthe Islamic mujahideen in Kashmir and the Taliban in Afghanistan.

The reaction of the people of Pakistan to the coup, as relayed through theurban press, was muted if not supportive. While a few people lamented theinterruption to democracy, even fewer sympathised with Mr Sharif. In the past

The coup did not causealarm at home—

—in a junta of formerintelligence officers

18 Pakistan


two years the Sharif government has been perceived as having becomeincreasingly despotic, reckless and corrupt. It had failed to reverse, or evenstem, the country’s chronic economic problems, and the deterioration ofdomestic security. Public confidence had evaporated, and discontent—particularly in the smaller provinces—had risen. A Gallup poll, taken the dayafter the coup, revealed that the vast majority of Pakistanis polled welcomedthe ousting of the Sharif government and wanted the army to remain in powerfor at least two years.

The opposition parties—which had drawn large and angry crowds at anti-government rallies across the country in recent months—welcomed theremoval of the Sharif government and extended their support to the newregime. Even some of Mr Sharif’s own party members in the PML(N) have lenttheir support, although a larger number are hoping to challenge the coup inthe country’s high courts. Unsurprisingly, all the opposition party leaders,including those of the Islamic parties, agree that the military regime shouldpurge the political class of its most corrupt members before holding electionsand restoring democracy. None of these parties have asked for a timetable for ageneral election.

Outside Pakistan, the reaction has been mixed. The EU announced a sus-pension of all economic assistance and demanded a swift restoration of full-fledged constitutional democracy. The Commonwealth suspended Pakistan’smembership, sent a fact-finding mission to Islamabad and deferred a decisionto expel the country until mid-November, when the Commonwealth countriesare to meet in South Africa. But the US government, whose response wasdeemed the most important, was more circumspect. Officials announced thatthe government regretted the military intervention and asked GeneralMusharraf to restore democracy as soon as possible. But more importantly, theUS government indicated that it would continue to engage with the newregime so that its strategic concerns (namely nuclear and missile proliferation,Islamic terrorism, and regional peace) could be addressed. Indeed, following ameeting with General Musharraf, the US ambassador to Pakistan, WilliamMilam, told the press that the US was “heartened” by General Musharraf’sdeclaration that he had not imposed martial law and by his reiteration that hedid not intend to stay in power indefinitely. The IMF and the World Bank werealso not distraught for long. Both now say that they will deal with the newregime on the basis of its economic commitments and performance.

On October 17th General Musharraf announced his priorities and policy goals,all of which lack contentiousness and provoked little surprise. The agendaitems include: the rebuilding of national confidence and morale; the strength-ening of the federation and restoration of national cohesion; the revival of theeconomy and restoration of investor confidence; ensuring law and order anddispensing speedy justice; depoliticising state institutions; devolving power tograss-roots level; holding across-the-board accountability of corrupt politicians,civil servants and judges; and prohibiting the exploitation of religion for sect-arian or political interests.

—but the rest of the worldis watching and waiting

General Musharrafannounces a reform agenda

Pakistan 19


In the first few days of his rule, General Musharraf imposed a state ofemergency in Pakistan but stopped short of imposing martial law. For example,the national and provincial parliaments have been suspended, but notdismissed, and the civilian president of Pakistan, Rafiq Tarar, remains in place.Moreover, according to General Musharraf, the constitution has been put in“abeyance” or temporary suspension, not abrogated, and most fundamentalrights remain in place. The civil courts continue to function much as before,except that no one may challenge the military intervention or any orderspassed by the military authorities. (No summary military courts have yet beenestablished.) The press is free to print and publish; no restrictions have beenplaced on, and no advice has been issued to, journalists.

General Musharraf refers to himself as the chief executive of Pakistan. He is thehead of the newly formed National Security Council (NSC), comprising the airand navy chiefs, and four civilians with expertise in law, finance, foreign andnational affairs. The NSC will be assisted by a body of think-tanks and advisors.A cabinet of ministers headed by General Musharraf will run the government.The provinces will be administered by governors and provincial cabinetsappointed by the chief executive. But no date has been announced forelections and the restoration of democracy.

Although certain reforms may meet popular resistance, few will oppose anaccountability campaign targeted at prominent politicians and businesspeople.A National Accountability Bureau (NAB), under Lieutenant-GeneralMohammad Amjad, has been established. The list of those being investigatednumbers over 3,000 people, including former prime ministers, chief ministers,governors and leading politicians from all the political parties that have beenin government at any time since 1985. The regime has uncovered about 50cases of alleged corruption and misuse of power by Mr Sharif since 1985, andhearings on the cases have been ordered. Corruption cases against a formerprime minister, Ms Bhutto, filed during Mr Sharif’s tenure are already pendingin the courts.

Dispelling suspicions abroad that he may be an Islamic fundamentalist,General Musharraf has quickly moved to portray himself as a modern, seculargeneral from a middle-class family of professionals. In a meeting with theforeign press shortly after the coup, the women in his family were photo-graphed without the customary dupatta over their heads while GeneralMusharraf was seen with a poodle in each arm: strict Islamists view dogs asunclean and do not touch them. According to the press handout, the general’smother was until recently employed with a UN agency in Islamabad, his son isstudying in the US where a brother is a physician. In an interview to theTurkish press, General Musharraf conversed in Turkish, a language he learnedduring his childhood when his father was posted in Istanbul, and alluded toKemal Ataturk, the secular founder of modern Turkey, in favourable terms.

—and advertises hismoderate and secular

leanings

—promptly begins aninvestigation into past

corruption—

The new chief executive—

20 Pakistan


Economic policy

The IMF has yet to release a $280m tranche of Pakistan’s lending package.Disbursal was originally scheduled for July 1999, following a review of thevarious targets of the June budget. But the outbreak of military hostilitiesbetween India and Pakistan in Kashmir in June and July forced thepostponement of the IMF team’s visit to Pakistan. In August negotiations inWashington between the then finance minister, Ishaq Dar, and the IMF brokedown following Nawaz Sharif’s refusal to comply with some IMF demands.These demands included the imposition of a flat 15% general sales tax (GST)on retail trade, a final settlement of the row over tariffs with the independentpower producers (particularly the Hub Power Company, Hubco) and anincrease of at least 15% in the price of petroleum products, in order to keep inline with rising world oil prices and boost stagnant government tax revenue. InSeptember, however, the Sharif government announced an agreement withprotesting retail traders on a new tax regime that was expected to satisfy bothtraders and the IMF: in return for accepting the 15% GST on retail trade, thegovernment agreed to levy a charge of only 0.75% on traders with turnover ofless than PRs5m ($96,000), and also exempted them from maintaining orshowing documentary proof of their turnover. But on the eve of the Octobercoup, the IMF was still insisting that the disbursement would be held backuntil the row with Hubco was settled and an increase in petroleum prices wasannounced.

After the October 12th coup the IMF first stated that all loan discussions withPakistan would remain suspended until democracy was restored. Pakistan’sdebt rescheduling agreements are also in some flux. In February Pakistanfinalised agreements with official creditors, negotiating under the auspices ofthe Paris Club, to reschedule debt payments worth $3.3bn and, later in theyear, with international banks to renew $877m in commercial loans. However,the deals have not yet been ratified.

The IMF’s public stance has softened. Following a meeting with General PervezMusharraf on October 15th, William Milam, the US ambassador to Pakistan,indicated that the US was likely to support further IMF aid if GeneralMusharraf continued to recognise certain elements of a democratic system,such as human rights and press freedom. The IMF then issued a statementclarifying that since its aid disbursements were not based on “politicalconsiderations”, it would restart talks with the new military government onthe outstanding points of the unresolved economic agenda. There seemed tobe an immediate response among potential foreign investors that the militarycould not possibly fare worse in economic policymaking than its civilianpredecessors, since the military supposedly can take the tough decisions thatthe politicians could not. However, lacking a democratic mandate, it isuncertain how the military will be able to implement unpopular reforms in theface of popular resistance.

In his first executive order, General Musharraf ordered the settlement of alldefaulted bank loans by mid-November. Mr Sharif had previously vowed to

—and its response to thecoup softens slightly

The new regime goes afterloan defaulters

The IMF postpones thedisbursal of the latest

tranche—

Pakistan 21


round up the large defaulters, but later shied away from the task since many ofthem were either members or supporters of his ruling Pakistan Muslim League(PML(N)) party. Stringent new laws are now in preparation to speed up loanrecoveries. New accountability laws and banking tribunals are also beingprepared to deal with the flow of cases.

Non-performing loans (NPL) in the domestic banking system are currentlyestimated at about PRs335bn ($6.5bn), up from about PRs200bn at the end of1996. But this picture obscures the fact that nearly PRs56bn in bad loans havebeen recovered since 1997 even as new amounts have piled up from fresh casesof default. Political patronage, lack of continuity in government policies anddeteriorating economic conditions have resulted in this large portfolio of badloans. Insufficiently strong laws and the log-jam in the legal system have alsocontributed to the pile-up. Nearly 50,000 cases have been filed by variousbanks before various courts for recovery of about PRs110bn to date. The stockof bad debt is in large part responsible for prohibitive interest rates prevailingin the country. (Current lending rates are around 15-18%.)

Pakistan: non-performing loans, Oct 31st 1999(PRs bn)

Category Total NPLs NPLs of over PRs1m

Public-sector banks 97 78

Development finance institutions 46 22

Specialised banks 31 14

Privatised banks 17 15

Private banks 9 7

Foreign banks 8 7

Provincial banks 2 1

Othersa 125 50

Total 335 194

a Estimate, which includes non-performing loans in investment banks, leasing companies, Islamicmodarbas, overseas Pakistani banks, contingent obligations of sick entities and the unclassified debtof classified borrowers.

Source: Habib Bank Asset Remedial Management.

The new administration has announced its intention to cancel thecompromise agreement hammered out between the Sharif government andmerchants in September whereby small retail traders with turnover of less thanPRs5m were exempted from paying the 15% GST and not required todocument their sales. The government is now considering an across-the-boardGST of 15% payable by all retail sectors of the economy, including the smalltrading and services sector, in an effort to facilitate the release of $280m by theIMF in November.

The military government has also moved swiftly to clarify the policy on cottonpricing. The prices of cotton will henceforth be freed from minimum pricecontrols, thereby annulling the agreement between the Sharif government andcotton growers, ginners and spinners signed in late September. Under thatagreement, the state-controlled Trading Corporation of Pakistan was expected

The sales tax policy isreviewed—

—as are recent decisions oncotton prices and sales

22 Pakistan


to buy up to 2m bales from ginners at a government-fixed price. The resultantincrease in prices was made in response to pressure from cotton farmers, whocomplained that cotton production was becoming unattractive owing todeclining cotton prices. These were a result in part of the government’sdecision earlier in the year to allow the import of more than 1m bales ofcotton, hurting early-harvest prices this year. However, the government hasretained the import duty on cotton imports but removed the export tax topromote crop exports. On November 3rd the government announced a rise inthe wheat support price from PRs6.6 per kg to PRs7.13 ($0.14) per kg. TheSharif government had raised this price from PRs6 per kg to PRs6.6 per kg onSeptember 22nd.

The domestic economy

Economic trends

GDP grew by only 3.1% in 1998/99 (July-June) against a target of 6%.Industrial and investment growth was negatively affected by the imposition ofinternational economic sanctions and foreign-exchange controls, the loss ofdomestic business confidence, and the drying up of foreign direct investment(FDI) and private remittances inflows. It was also a bad year for Pakistan’s maincash crop, cotton, which accounts (directly and indirectly) for nearly 60% ofthe country’s merchandise exports.

The tax revenue target for 1999/2000 (July-June) was set at PRs356bn ($6.9bn)in the June budget. Given that annual tax revenue has remained at aroundPRs300bn in the last few years, this target appeared optimistic, especially as norecent government has been determined enough to impose a wide-ranginggeneral sales tax (GST) or extend the tax net. But the figures released by theCentral Board of Revenue (CBR) for the first four months of 1999/2000 suggestthat the government is not too far off from its target for the year. Tax collectionin July-October was PRs98bn, compared with PRs80bn during the same periodin 1998/99. If the new government is able to impose a 15% GST on retail tradeand services, and raises petroleum prices by 15% as demanded by the IMF, thenPRs356bn is not out of reach. According to some private-sector estimates, theimposition of these two new measures could yield an additional PRs50bnin revenue.

The average annual rate of consumer price inflation has slowed sharply.According to the Federal Bureau of Statistics, it fell to 3.5% in July, 3.1% inAugust and 3.4% in September, compared with 6.4% in September 1998. Thisis well within sight of the official target for 1999/2000 of 6%. Low inter-national commodity prices, stable food and household goods prices, and noformal devaluation of the rupee so far in 1999 have helped keep inflation low.According to the State Bank of Pakistan, money supply (M2) has also slowed,to 7.1% in June from over 14% in June 1998.

GDP growth may riseslightly

Inflation is down

Tax revenue is closeto target

Pakistan 23


Industry

The government’s target for large-scale manufacturing growth in 1999/2000 is4.3%, based largely on 10% projected growth in cement production, 21%growth in the production of road vehicles and a 10% increase in the cottonginning sector. Up-to-date figures for this sector are unavailable. However, theindex of manufacturing production contracted, year on year, in March 1999,led by a year-on-year fall in the manufacture of blended tea, cigarettes, jutegoods and cement. In that month, the index for automobile manufacturingrose by 14%, fertiliser by 15%, cotton cloth by less than 2% and cotton yarnby 4.4%.

Anecdotal evidence suggests that there has not been a swift turnaround inmanufacturing output. Several manufacturers, including Unilever of the UK,have cited the high cost of imports (due in large part to the range of indirectimport curbs that have rendered imports more expensive) as negativelyaffecting their costs and, therefore, profitability. The latest move, introduced toconserve foreign exchange, requires importers to deposit a minimum cashmargin to open a letter of credit (11 import items are exempted). The marginon imports of industrial raw materials is 10%, 20% for machinery and spareparts, and 35% for all other goods.

Automobile production could be boosted by new foreign investment projects.Prior to the coup, a Swedish vehicle manufacturer, Scania, had agreed toproduce about 3,000 buses over the next three years in co-operation with aPakistan-based busmaker. The project is part of a campaign by the Sharifgovernment to modernise Pakistan’s urban bus fleet. Under the memorandumof understanding, Scania will also be responsible for managing service depotsand providing maintenance training and the transfer of managerial andoperational technology. Another new automobile project is scheduled toproduce its first car, the Oka, in early 2000. The 750cc engines for the Oka arebeing produced at Sindh Engineering’s automobile assembly plant.

The automobile industry has grown in recent years. In 1998/99 Pakistanproduced nearly 39,000 passenger cars, 9,000 light commercial vehicles, 1,000trucks, 1,200 buses, 27,000 tractors and 88,000 two- and three-wheel vehicles.But many barriers remain. Smuggling is probably the main inhibitor to fasterexpansion of the industry. Automotive parts and vehicles are smuggledinto Pakistan, undercutting local manufactures and deterring newforeign investment.

Foreign investors have not been scared off by the coup. Some press reportseven cited an increase in interest in investing in Pakistan. However, the base isvery low. According to press reports, FDI fell by nearly 40% in 1998/99, to$376m, from $601m the previous year.

Agriculture

There is the prospect of a better cotton crop this year. The most optimisticestimate for the cotton crop is that of the Standing Committee on Cotton Crop

Industrial growthremains elusive

A good cotton crop—

Automotive projectslook promising

24 Pakistan


Assessment (CCCA), which projects a cotton crop of 10.5m-11m bales (170 kg)in 1999/2000, up from its previous estimate of 9.7m bales, and well above lastyear’s harvest of 8.7m bales. Some non-industry estimates are lower, at justover 9m bales.

Favourable weather is one reason for the revision. According to the CCCA,among the other factors that contributed to the higher overall estimates are anincrease in the acreage devoted to cotton cultivation, which rose by over 2%year on year, low incidence of pest attacks and wider sowing of virus-resistant,newly developed varieties. The abundant domestic supply of cotton shouldbenefit the spinning and textile sectors, and could help re-open units that hadpreviously closed.

With domestic industry demand limited to about 9m bales, about 2m baleswill be available for export.

Unfortunately for Pakistani cotton farmers, falling world cotton prices hadencouraged Pakistani spinners to import up to 1.5m bales of cotton, mostlyfrom Central Asia, earlier in 1999. The shortfall in supplies of domestic cottonfrom last season’s poor crop, of only 7.5m bales, had prompted the imports.

To address concerns of cotton growers, on September 13th the previousgovernment imposed a 15% duty on cotton imports but allowed any amountpaid on cotton imported by textile exporting units to be refundable under theduty drawback scheme. This first measure was taken partly in response to thefarmers’ demand that all cotton imports be banned so that domestic pricescould be artificially propped up. The second measure was taken to ensure thatvalue-added textile exports were not priced out of the international market.

Neither cotton growers nor ginners were fully satisfied. The strong farmers’lobby continued to demand higher prices for cotton while the spinners’ lobbydemanded low prices in line with current reduced prices in the internationalmarket. In another effort to appease the two groups, on September 29th thegovernment decided to allow the free export of cotton. It also raised thesupport price for seed cotton by 33% and the support price for lint by 84%.These sharp increases were made in response to pressure from growers whocomplained that despite better returns this year cotton production wasbecoming unattractive owing to declining prices. The recently announcedsupport prices for seed cotton (PRs20,875 per tonne or about 18.2 cents per lb)and lint (PRs48,400 per tonne or about 42.2 cents per lb for grade Afzal ofstaple length 1-1/32”) are above domestic market prices. The government alsoauthorised the Trading Corporation of Pakistan (TCP), a public-sectorcompany, to buy up to 2m bales of cotton in order to ensure that farmers wereable to obtain the new support prices for their produce.

As discussed above, the new military government has now overturned many ofthe Sharif government’s proposals, although imports are still beingdiscouraged. Official procurement of cotton through the TCP has ceased.However, cotton growers will still receive some protection from cheaper cottonimports from the 15% duty on imports, which is being retained. Cottonimports of high-quality staple for value added textile exports will be exempt

—creates a clash ofinterests

Pakistan 25


from the duty. Exports of raw cotton will be encouraged by the withdrawal ofthe required 3% bank guarantee on each consignment.

This year’s rice production target of 4.7m tonnes, up from 4.3m tonnes in1998/99, is within sight. The dry weather has helped guard against widespreadpest attacks.

Export prospects, however, have yet to brighten. Pakistani exporters of IRRI-6variety were compelled in mid-October to lower prices to $175 per tonne from$185 previously (and well over $200 per tonne in previous weeks) in order tomatch prices offered by other top exporters, such as China and Vietnam. Also,over 150,000 tonnes of high-quality basmati rice from last year’s stock is stillavailable for export to traditional buyers in the Gulf, Middle East and Malaysia,but large shipments are not forecast until domestic prices fall upon the arrivalof the new crop. Rice exports totalled about 72,000 and 60,000 tonnes in Julyand August respectively, compared with about 47,000 and 92,000 tonnes in thesame period in 1998, according to official statistics. The export of rice fromPakistan is expected to generate at least $650m in 1999/2000, compared withabout $525m last year, which was about 7% below the earlier year’sexport figure.

The previous government set a wheat production target of 20m tonnes for1999/2000, up from last year’s actual production of 18.2m tonnes. (The wheatcrop is sown in October-November and harvested in March-April.) Domesticdemand is about 21m tonnes, excluding about 1.5m tonnes for Afghanistan,necessitating imports, usually from the US and Australia. In 1998/99 Pakistanimported 3.2m tonnes of wheat, and the previous government was expectingthis to fall to 2.5m tonnes in 1999/2000.

The production target was raised from 19.5m tonnes to 20m tonnes inSeptember after the Sharif government raised the support price for domesticwheat by 10.4% from PRs240 to PRs265 ($5.10) per 40-kg bag—an increase thatwill cost the government an additional PRs2.5bn ($48.5m). However, the newprice is well below the price for which wheat farmers were lobbying, of PRs320per 40-kg bag. In a bid to give farmers greater incentives to grow wheat, themilitary government announced on November 3rd a further increase in thesupport price of wheat from PRs265 to PRs285 per 40-kg bag.

The sugar crop could slide to below 51m tonnes in 1999/2000 from a high of55m tonnes last year, according to industry sources. In 1998/99 Pakistanexported 505,000 tonnes of sugar, mostly to India and Indonesia. But a lesssanguine outlook for the crop, the sowing area of which has fallen sharply inthe province of Punjab, could undermine the export potential.

A bumper rice crop isexpected—

—but export prospectsare dim

Wheat production targets—

—are supported byincentives

Sugar is on the slide

26 Pakistan


Infrastructure and services

The long-running dispute between the Hub Power Company (Hubco)—inwhich both the UK’s National Power and Saudi Arabia’s Xenel Industries havestakes—and the previous government is heading for a climactic end. (Hubcooperates a 1,292-mw plant on the edge of Karachi.) The dispute centres oncharges that Hubco paid bribes to the former prime minister, Benazir Bhutto,in 1994 to secure a highly favourable revision in tariffs for itself. The disputehas taken many twists and turns, including the issue of warrants of arrest forsenior Hubco officials on charges of corruption, delayed and reduced paymentsto Hubco by the Water and Power Development Authority (WAPDA), recourseto Pakistani courts by the government to forestall international arbitration byHubco, and invocation of sovereign financial guarantees by Hubco for breachof contract by the government of Pakistan. Several rounds of talks between thetwo sides have not yielded a compromise solution.

On October 19th the International Chamber of Commerce called Hubco andthe government of Pakistan to appear before its tribunal in Paris on November8th and 9th and November 25th and 26th for arbitration to resolve their bitterdispute. But Hubco is debarred by Pakistan’s Sindh High Court from taking thedispute to an international tribunal for arbitration, and the Supreme Court ofPakistan has extended the ban until December.

Far from agreeing to accept a lower tariff, Hubco is claiming PRs1.2bn inpayments due over the past year from WAPDA. It has also asked the Pakistanigovernment to encash its guarantees, which means that the governmentwould have to buy $400m in equity from Hubco’s sponsors at the premiumdecided by international auditors. Hubco has a paid-up capital of PRs11.57bn.

News of a possible settlement comes from the military government’s financeminister, Shaukat Aziz. Before his appointment, Mr Aziz was a highly regardedexecutive of Citibank in charge of its global private banking operation runfrom New York. Citibank is also the lead bank in the consortium that controlsHubco. According to Mr Aziz, shortly after taking over as finance minister, hehad discussions with World Bank and IMF officials in Washington on how toresolve problems with Hubco and other private power producers in Pakistan.He claims to have devised a formula for tariff reduction and paymentschedules, which could be discussed with Hubco. Mr Aziz is keen to resolve thedisputes with power producers as soon as possible in order to help restoreconfidence amongst foreign investors. The IMF has delayed releasing $280m inassistance to Pakistan until the dispute with Hubco is resolved.

Foreign trade and payments

According to the IMF’s International Financial Statistics, merchandise exports(fob) rose by 6% in the first half of 1999, from PRs190bn to PRs202bn ($3.9bn).Imports (cif), however, rose by nearly 23%, from PRs206bn to PRs252bn. In

Problems with Hubco—

—may be finally sorted out

The trade deficit is notlooking good—

Pakistan 27


dollar terms, exports fell by 0.7%, year on year, while imports rose byalmost 15%.

According to national sources, this trend continued in the third quarter of theyear. In July-September exports rose by 5% to $1.94bn while imports rose by15%, year on year, to $2.42bn. Imports were dominated by petroleum productsand machinery while the main exports remain cotton fabrics, leather and rice.

Exports of manufactured textile goods rose by 6.4%, year on year, in July-September. This rise was driven by a 15% rise in knitwear exports and a 24%rise in bed linen. But cotton yarn and cotton fabrics, the two largest exportitems in the category, rose by 6.7% and 1.8% respectively. Rice exports rose byover 16%. However, leather exports have not performed well, contracting byover 19% in the same period. According to industry sources, unusually hotweather in Europe has stunted the sale of leather garments. Industry represent-atives also claim that large sums of funds are tied up in the government’s salestax refund and rebate scheme, undermining investment.

At the end of October Pakistan’s foreign-exchange reserves were about $1.5bn,according to the State Bank of Pakistan (SBP, the central bank). With importsrising faster than exports, the SBP moved on October 14th to conserve foreignexchange by imposing a minimum cash margin on importers. Henceforthimporters must deposit a cash margin of 10-35% to open a letter of credit.Eleven import items are exempted, including petroleum products, edible oils,wheat, pharmaceuticals, pesticides, fertiliser and seeds. The minimum cashmargin on industrial raw materials is 10%, rising to 20% for machinery andspare parts, and 35% for all other goods.

Karachi Port has hired a local software company to computerise portoperations. All operations including inventory, ship movement, berth control,the loading and unloading facility, and accounts control, will be computerised,helping to speed up the painfully slow turnaround times at the port.

Karachi Port willcomputerise

—forcing the State Bank toimpose controls

28 Afghanistan


Afghanistan

Political structure

Islamic State of Afghanistan

De facto government by the Islamic Taliban movement, which seized power onSeptember 27th 1996 from the previous administration of Burhanuddin Rabbani. Onlythree countries recognise the Taliban administration. The UN recognises the oustedRabbani government

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

Leadership Shura, which holds power until a government is formed, but ultimateauthority for Taliban rule rests in the Taliban’s inner Shura (Council), located in thesouthern city of Kandahar, and in Mullah Mohammad Omar

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

Chair Mohammad Rabbani

Members Mohammad Hassan AkhundAbdul Razzaq AkhundMohammed Abbas AkhundSaid GiasuddinMawlavi Amir Khan Mutaqi

Head of administration Mawlavi Amir Khan MutaqiDeputy head of cabinet Mohammad Hassan AkhundMinister of foreign affairs Mawlavi Wakil Ahmad MutawakilMinister of interior Abdul Razzaq AkhundMinister of justice Nuruddin TurabiMinister of public health Abbas AkhundGovernor of Kabul Abdul Manan Niyazi

Official name

Government

National elections

National government

Main political organisations

Leadership Shura

Key cabinet members

Afghanistan 29


Economic structure

Latest available figures

Economic indicators 1994 1995 1996 1997 1998

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

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

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

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

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

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

November 5th 1999 Af4,679:$1 (market rate)

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

Agriculture & forestry 52.6 Private consumption 70.6

Industry 28.5 Government consumption 35.0

Construction 5.8 Gross fixed capital formation/increase in stocks 17.3

Trade 7.9 Exports of goods & services 19.6

Transport & communications 3.5 Imports of goods & services –50.3

Services 1.7 Statistical discrepancy 7.8

GDP at factor cost 100.0 GDP at market prices 100.0

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

Fruit & nuts 93 Capital goods 293

Carpets 44 Food 150

Wool 10 Textiles 117

Karakul skins 3 Petroleum products 99

Cotton 3 Sugar & vegetable oil 53

Total incl others 235 Tyres 50

Total incl others 900

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

Soviet Union 72.4 Soviet Union 56.3

Germanyc 3.1 Japan 9.4

India 3.1 Singapore 5.6

Belgium-Luxembourg 2.3 India 2.9

UK 1.9 South Korea 2.2

Czechoslovakia 1.2 Germany 1.7

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

30 Afghanistan


Outlook for 2000-01

Ten years after the Soviet Union ended its ten-year occupation, fightingcontinues to rage in Afghanistan. Each season will bring the same backwardsand forwards movements between the Taliban, an extreme Sunni Muslim andpredominantly Pashtun group, and the opposition Northern Alliance, mainlycomprising Afghanistan’s minority ethnic and religious groups. Both sides willpronounce their interest in pursuing a peace process while at the same timekeeping their fighters on the battlefield. Commanders will continue to switchsides without shame, depending on which group has more momentum ormoney. True allegiance to a cause is not the norm, thus creating the dynamicfor endless conflict. The UN will continue its efforts to stop the cycle but at thisstage the momentum behind the fighting seems set to run for some time.

Taliban forces control about 90% of the country. The main opposition leader isthe veteran commander, Ahmad Shah Massoud, who is an ethnic Tajik.Mr Massoud, along with the former president, Burhanuddin Rabbani, drive theopposition’s efforts in the Panjshir Valley, the north-eastern provinces ofTakhar and Badakshan, as well as in pockets of territory elsewhere in the north.Other notable opposition figures have been pushed from the scene in the pasttwo years and despite promising to make comebacks, none have yet done so.Because of the dwindling of the opposition forces, Mr Massoud will remainunable to change the balance of power. However, he will continue to thwartthe Taliban’s goal of controlling all of Afghanistan. The Taliban's increasinginternational isolation—as well as concern among neighbouring countries thatthe Taliban’s model could be replicated abroad—will channel more support,funding and weapons towards the opposition which may try to re-assert itsauthority in the central Afghan region of Hazarajat.

There is some speculation in international circles that the Taliban has peaked.Although it is too early to write the movement’s obituary, it is certainly truethat the Taliban is set to come under increasing financial and internationalpolitical pressure. The financial pressures associated with the loss of fundingfrom Saudi Arabia and the imposition of sanctions by the UN will becompounded by a strong international response to the astonishing growth ofopium poppy cultivation in Afghanistan (see Economic policy and theeconomy). These pressures may lead to a slow breakdown of the movement,similar to what happened to the mujahideen fighters, who lost power throughin-fighting in the 1990s.

There are also reports of ideological differences between Taliban leaders andthose on the ground. Many senior Taliban are said privately to be in favour ofextending better rights to women (partly owing to international pressure andpartly because some actually favour this change). However, this belief is indirect conflict with the beliefs of many of the fighters who have spread Talibanrule across Afghanistan. Other evidence of differences in the ranks is thedecree issued in late September by the Taliban leader, Mullah MohammadOmar, aimed at regulating the activities of the intelligence, vice and virtue, and

Fighting will continue—

—and areas of control willvary little

The Taliban will comeunder pressure for funds—

—and from within

Afghanistan 31


security departments. Under the order, only security officials can administerjudicial and criminal cases—a directive aimed at stopping the differentdepartments from interfering in each others’ affairs. The hardline approach ofthe religious police (who fall under the ambit of the vice and virtuedepartment), who have been flexing their muscles in Kabul, is the target ofmuch of the external and domestic criticism of the Taliban regime. Earlier inSeptember Mullah Omar urged civilian and military officials to avoid vice,another indicator of a creeping breakdown in discipline. A further sign oftrouble was a call for effective counterpropaganda. The Taliban leadership willfind it increasingly difficult to match the demands of its followers and backerswith those of the international community.

The political scene

The usual jockeying for position before the onset of harsh winter snows was infull thrust during the last quarter of 1999. Troops fighting on behalf of theTaliban—an extreme Sunni Muslim and predominantly Pashtun group—firedthe opening salvo in mid-1999 with a renewed thrust towards the headquartersof Ahmad Shah Massoud, the main opposition leader, in the Panjshir Valley,80 km north of Kabul. The Taliban managed to push back the frontlines, whichhad held for three years, 25 km north of Kabul, before being forced to retreatonce again.

Mr Massoud replied to the offensive by opening fronts in eastern Afghanistanin mid-August, thus greatly widening Taliban frontlines. At the same time, hewas trying to counteract a Taliban thrust in the north-east towards theprovince of Takhar and his last remaining supply route, to the Tajik border.Taliban fighters nearly reached the gates of the provincial capital, Taloqan, butwere then pushed back. At the time of writing, Mr Massoud was reported tohave restored frontlines in Kunduz back to August positions. In late Octoberthe opposition Northern Alliance forces again began launching surprise attacksin north-western Afghanistan, claiming advances in Samangan and Saripulprovinces, and the death in battle of the Taliban governor of the neighbouringJowzjan province.

According to the UN, since the beginning of August almost 21,000 displacedfamilies have arrived in Kabul. More than 12,000 displaced people are living ina former diplomatic compound with basic food supplies provided by the UNand local authorities. Others are staying with relatives who, already worn downby years of hardship in the capital, now may be supporting several families inaddition to their own. Shelter and heating will prove problematic as wintersets in.

Not surprisingly, poverty is increasing in Kabul. According to the UN, inflationremains high and prices of basic supplies have increased sharply owing todisruptions to exports from Pakistan, following the military coup. Limitedeconomic activity means few people can rely on wages from casual labour.

Fighting continues—

—with devastatingconsequences for civilians

in Kabul—

32 Afghanistan


Food is in such short supply that displaced people picked this year’s crops ofvegetables, fruit and maize before the produce was ripe.

Around 13,000 internally displaced people (IDPs) are scattered among thenorth-eastern areas of Takhar, Kunduz and Pul-i-Khumri, and 16,000 inBadakshan, according to the same UN report. In September the NorthernAlliance claimed that the once fertile region of Dar-i-Suf in Samangamprovince was largely destroyed during a Taliban onslaught, which included theburning of houses, shops and schools, and the destruction of farmland andfruit trees. The UN estimates that up to 35,000 people have been made home-less by Taliban’s actions. Aid sources reported in November the burning of2,400 homes in Takhar by retreating Taliban fighters. Such “scorched earth”tactics will obviously do little to enhance Taliban popularity in non-Pashtunareas such as these.

Although people in the central region of Hazarajat have not been affected bythe current fighting, according to the UN they are facing hunger and poverty.Surveys identified 200,000 to 300,000 people in need of immediate help. In theBamiyan district, 10% of the population were displaced by last spring’sfighting, and households in neighbouring districts are hosting as many as fourfamilies. Rebuilding of the shattered Bamiyan city, where half the houses aredestroyed or damaged, has been taking place.

There is evidence that the Taliban is being aided by foreign terrorists. A short-age of Afghans willing to fight for their cause is partially to blame for this. (TheTaliban continues to face recruitment problems.) According to independenteyewitnesses at the frontlines north of the Afghan capital, Kabul, one sectionof the frontline was controlled by a force of Arabs and another by Pakistanis.The assumption is that those who train in the Taliban’s camps are required toserve a tour of duty in the Taliban's fight against the Northern Alliance inexchange. These eyewitnesses also report that there are direct links betweenthis practice and the insurgency in Kashmir, with the non-Afghans viewing theexperience of fighting in Afghanistan as preparation for fighting Indian forcesin the disputed territory of Kashmir.

On October 15th the UN Security Council voted to impose limited sanctionsagainst the Taliban unless the alleged terrorist, Osama bin Laden, was handedover in one month’s time. Mr bin Laden is still living in Afghanistan andissuing threats against the US, which believes he was responsible for the 1998bombing of the US embassies in Africa. Under the sanctions, flights owned,leased or operated by the Taliban will be banned from taking off from orlanding at international airports, and foreign funds and other financialresources of the Taliban will be frozen. The national carrier, Ariana, which fliesfrequently to the Middle East, would be affected. The Security Council alsodemanded that the Taliban stop giving “sanctuary and training forinternational terrorists and their organisations” and ensure that the territoryunder its control is not used for terrorist installations and camps, or thepreparation or organisation of terrorist acts.

—and elsewhere inthe country

The UN imposes sanctionson the Taliban

Terrorist training mayrelieve the shortage of

recruits

Afghanistan 33


A truck bomb exploded close to the home of the Taliban’s leader, MullahMohammad Omar, on August 24th, killing at least ten people. The Talibanleader was unharmed but the incident raises questions about the Taliban’ssecurity, given that the attack occurred in the Taliban’s southern stronghold.No one claimed responsibility for the attack.

In October the Taliban leadership made some changes in its administration.The reasoning behind the shuffle was unclear, apart from the appointment ofMawlavi Muttawakil, the experienced Taliban spokesman, to the post offoreign minister. His move is probably an attempt to improve the movement’sinternational image. The new governor of Kabul, Abdul Niyazi, was governorof the northern city of Mazar-i-Sharif at the time of the massacre of at least2,000 people in that city in August 1998. Eyewitnesses said he made speechesurging violence against the minority Shi’ite Muslim Hazara people.

In mid-September the Northern Alliance formed a cabinet led by Mr Massoud.Mr Massoud’s spokesman, Mr Abdullah was appointed cabinet deputy andacting foreign minister. A political office was also formed, and will be chairedby the ousted president, Burhanuddin Rabbani. Mr Rabbani is still recognisedas head of state by the UN. A veteran leader, Ustad Rassoul Sayaf, is the newdeputy chair. The other members of the cabinet include Abdul Rahim AbbasKarimi, Mr Massoud, Sayed Husain Anwari, Haji Qadir (the former governor ofthe eastern province of Nangarhar), Qurban Ali Erfani, Wahidullah Sabaoon,Sayed Noorullah Emad and Abdullah Wardak.

Mr Massoud has long maintained his intentions to put a political structure inplace before launching a concerted military push. This announcement maysignify that the alliance is finally beginning to recoup the massive damagecaused by the accidental death two years ago of a leading Northern Alliancepolitical light, Abdur Rahim Ghafourzai, in a plane crash. His death was a cruelblow for the alliance’s fledgling government, which had been built around thewidely respected Mr Ghafourzai, a former politician and diplomat who was theAfghan representative at the UN during the Soviet occupation of Afghanistanin the 1980s. Mr Ghafourzai was a Pashtun, from Kandahar, who could appealto the Taliban's Pashtun support base.

The UN special rapporteur for violence against women, RadhikaCoomaraswamy, made a two-week visit to the region following six years ofallegations about violence against women in Afghanistan. She found that wide-spread and systematic violations of women’s human rights remain officialpolicy in Afghanistan, although there was some evidence that Talibanauthorities were responding to international and domestic pressure to modifytheir policies. Ms Coomaraswamy noted some improvements over the past twoyears including the existence of home schools, limited education administeredby the religious ministry in Kabul, improved access to healthcare andpermission for widows to work.

Substantiation of abuses was also obtained, including evidence of violations ofwomen's physical security and the practice of lashings and beatings, andviolations of the right to healthcare, education and employment. The extreme

The Taliban leader survivesan attack

The Taliban forms a newadministration—

—as does the NorthernAlliance

Violence against Afghanwomen remains rampant

34 Afghanistan


limitations on employment are cited as responsible for the rise in begging andprostitution. In general she attributed the poor situation to the long years offighting and poverty. The report was greeted with some hostility inAfghanistan and Pakistan, with the Taliban rejecting the report’s criticisms ofits policies.

Economic policy and the economy

The United Nations Drug Control Programme (UNDCP) reported in Septemberthat opium production in Afghanistan in 1999—estimated at 4,600 tonnes—isthe highest ever recorded anywhere and three times total production in therest of the world. The 1999 estimate represents a 120% increase over 1998production, in part due to an increase in the area under cultivation from64,000 ha to 91,000 ha. Poppy was grown for the first time in Jowzjan andKunduz provinces, making a total of 18 provinces now cultivating opium.Some of the increase is due to the poor harvest in 1998, which saddled farmerswith debts they could only repay with more opium.

After meeting with Taliban officials in September, the head of UNDCPAfghanistan reported their willingness to co-operate with drug controlmeasures. Some destruction of laboratories and fields has since taken place.However, the Taliban’s financial constraints are surely a major factor behindthe massive increase in drug production this year. Foreign funding isincreasingly thin. To continue fighting, Taliban leaders must pay their fighters.Revenue from drugs (either by cultivating the drug or taxing the trade) is one ofthe most obvious sources of funds, regardless of the vigorous denials. Theongoing conflict also provides the ideal climate for drug barons to flourish, andhas allowed some of them to become too powerful for the Taliban to controlshould it wish to. Unfortunately, this balance of power can also help perpetuatethe fighting as it is in the interests of those who profit from the drug trade—both inside and outside the country—to maintain an unstable situation.

A UNDCP report released in October found drug use in Afghanistan on the riseowing to factors such as continuing impoverishment, unemployment, socialdisplacement and war-related mental health problems such as depression andpost-traumatic stress disorder. A rapid increase in heroin and opium use isexpected and comparisons have been made with Pakistan, where heroin useescalated from a few users in 1978 to an estimated 2.4m one decade later. TheUNDCP warned of the possible accompanying increase in blood-borne diseasessuch as hepatitis and HIV/AIDS, and called for urgent consideration of publichealth education.

Opium production risessharply—

—aiding Afghanistan’songoing fighting—

—but leading to a rise indrug addiction

Quarterly indicators and trade data 35


Quarterly indicators and trade data

Pakistan: quarterly indicators of economic activity 1997 1998 1999

3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Industrial production Monthly avManufacturing 1995=100 84.7 107.6 134.9 96.2 88.7 109.5 137.1 n/a n/a Cotton: yarn ‘000 tonnes 129.0 130.4 125.7 125.7 125.2 128.8 n/a n/a n/a fabrics m sq metres 28.6 29.9 27.9 27.0 30.2 33.2 n/a n/a n/a

PricesConsumer prices: 1995=100 123.7 125.7 127.1 129.6 132.0 133.7 134.3 135.0 n/a change, year on year % 10.9 8.8 6.1 5.8 6.7 6.4 5.7 4.2 n/a Wholesale: general 1995=100 124 125 127 130 133 134 136 136 n/a Share prices “ 77 73 67 55 50 49 50 53 n/a

Money End-QtrM1, seasonally adj: PRs bn 591.8 679.4 633.8 648.9 697.2 710.3 703.9 n/a n/a change, year on year % 15.0 32.3 13.8 12.2 17.8 4.5 11.1 n/a n/a

Foreign trade Qtrly totalsExports fob PRs bn 82.88 102.67 93.25 97.65 91.62 99.96 94.64 107.60 n/a Imports cif “ 107.25 123.43 102.48 103.18 100.85 112.80 110.71 141.60 n/a

Exchange holdings End-QtrState Banka: goldb $ m 501 475 456 467 450 458 447 426 405 foreign exchange “ 1,189 1,184 1,270 841 674 1,027 1,649 1,677 1,493

Exchange rateOfficial rate PRs:$ 40.52 44.05 44.05 46.00 46.00 46.00 46.00 51.39 51.61

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

a Excluding assets with Reserve Bank of India. b End-quarter holdings at quarter’s average of London daily price less 25%.

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



Pakistan: foreign trade($ m)

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

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

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

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

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

Food 857.4 1,115.1 27.3 25.2 9.4 6.1 53.4 60.8 10.1 6.6 of which: fish & preparations 176.3 131.9 12.2 8.3 5.5 4.8 32.2 24.4 2.9 1.3 cereals & preparations 488.7 577.3 6.9 7.3 0.2 0.6 6.3 17.7 3.7 1.4Cotton, raw 155.6 85.0 0.7 0.3 9.5 8.5 7.7 7.2 2.9 1.6Leather & manufactures 233.4 199.6 10.3 11.8 37.4 39.0 2.5 1.2 25.2 26.8Textile yarn, cloth & mnfrs 4,592.1 4,302.1 676.6 812.1 636.0 513.7 291.0 282.2 194.3 187.3 of which: cotton manufactures 2,644.5 2,213.7 217.8 234.5 618.0 496.6 89.1 73.9 44.4 28.8Clothing 1,803.9 1,839.4 744.4 820.8 11.8 21.0 180.8 154.7 246.8 232.4Footwear 48.3 39.0 0.6 0.5 0.0 0.1 5.9 4.4 8.8 4.0Scientific instruments etc 138.7 126.8 58.9 49.4 0.3 0.5 9.4 7.8 18.2 19.0Total incl others 8,605.6 8,437.2 1,624.1 1,824.2 730.0 599.8 602.3 567.2 578.4 550.8

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

Source: UN, External trade statistics, series D.

Quarterly indicators and trade data 37


Pakistan: structure of trade($ m)

Jan-Dec Jan-Jun 1997 1998 1998 1999

Imports cifFood 1,934.9 1,539.4 729.4 811.8 of which: wheat, unmilled 802.0 356.5 199.8 250.0 tea 169.4 236.5 118.0 104.8 palm oil 575.7 626.9 289.5 252.6Textile fibres & manufactures incl clothing 216.6 203.6 112.0 90.8 of which: synthetic fibres 110.7 115.3 64.8 42.9Petroleum & products 2,070.0 1,310.5 645.5 793.4Chemicals 1,842.7 1,823.2 898.1 854.3 of which: medicines 264.4 252.2 118.6 122.5 fertilisers 233.0 248.6 101.8 117.9 plastics 321.0 304.9 158.4 158.9Ores, metals & manufactures 474.1 348.6 179.9 169.7 of which: iron & steel 402.6 295.3 152.5 143.8Machinery & transport equipment 3,041.7 2,042.9 1,063.1 1,092.9 of which: road motor vehicles 368.6 314.9 167.9 143.9Total incl others 11,565.9 9,028.4 4,645.9 4,904.3

Domestic exports fobPrimary commodities 1,137.2 1,081.4 654.7 553.6 of which: fish & preparations 175.7 126.0 64.8 59.0 rice 483.4 556.0 351.8 317.9 leather 224.4 187.6 101.6 86.5Textile manufactures 5,222.8 5,156.9 2,664.4 2,406.5 of which: cotton yarn 1,357.8 984.1 531.8 478.9 cotton fabrics 1,293.0 1,142.3 610.8 556.7 synthetic fabrics 565.3 538.8 317.8 174.6 knitwear 610.2 731.3 348.9 353.5 garments 769.1 689.6 347.4 309.6 bed linen 483.8 539.4 240.0 299.2Other manufactures 1,267.9 1,138.8 605.1 521.5 of which: leather manufactures 364.2 339.8 134.6 133.9 carpets 196.6 201.2 112.4 101.1 sports goods 353.8 324.0 205.6 138.3Total incl others 8,610.3 8,105.0 4,285.8 3,898.6

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



Pakistan: direction of trade($ m)

Jan-Dec Jan-Dec Jan-May Jan-May Domestic Jan-Dec Jan-Dec Jan-May Jan-MayImports cif 1997 1998 1998 1999 exports fob 1997 1998 1998 1999

Japan 870.1 745.9 282.4 342.8 US 1,621.5 1,793.4 699.5 702.8Saudi Arabia 780.1 592.5 261.5 316.0 Hong Kong 732.7 596.6 236.5 232.0Malaysia 638.0 726.2 301.0 278.3 Germany 579.8 548.3 221.1 227.3UAE 1,029.7 583.8 237.6 272.1 UK 603.6 564.9 231.5 223.2Kuwait 698.4 486.2 181.8 268.8 UAE 443.6 422.5 187.0 195.9US 1,364.5 910.6 418.4 264.1 Japan 448.1 288.0 124.3 125.0Switzerland 255.7 296.3 138.0 209.1 Netherlands 279.0 273.5 113.6 103.2UK 491.7 413.6 148.3 183.3 Indonesia 89.4 118.2 84.8 103.0Total incl others 11,565.9 9,028.4 3,685.6 3,958.6 Total incl others 8,610.3 8,105.0 3,496.2 3,153.7

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

Documents

z15% Pakistan - iuj.ac.jp · Printed and distributed by Redhouse Press Ltd, Unit 151, ... Pakistan rupee real exchange rate. 3 ... economic and domestic security problems quickly