RESTRICTED ILE COPY Report No. AS-109 This report was prepared for use within the Bank and its affilioted organizations. They do not accept responsibility for its accurocy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION ECONOMIC DEVELOPMENT OF PAKISTAN VOLUME I MAIN REPORT April 26, 1965 South Asia Department CURRENCY EQUIVALENTS 4.762 rupees = U.S. $1.00 1 rupee = U.S. $0.21 1 million rupees = U.S. $210,000 1 billion rupees = U.S. $210 million 1 crore rupees = 10 million rupees U. S. $2. 1 million FILE COPY i4EMORANDU I ON RECENT ECONOMIC DEVELOPMENTS AND PROSPECTS IN PAKISTAN Introduction 1. A report entitled "The Economic Development of Pakistan" (AS-109, April 26, 1965), was circulated to the Executive Directors on April 29, 1965. It contained an evaluation of achievements of the Second Five-Year Plan (1960-1965) and an appraisal of the proposed Third Five-Year Plan (1965-1970). This memorandum gives an account of more recent developments in the economic field, in particular those arising from the hostilities between India and Pakistan. 2. During 1964/65 the economy grew by 4.8 per cent and the prospects are that a similar rate of growth may be achieved in 1965/66. This is possible because of the exceptionally good outlook for agricultural produc- tion. However, such a rate is well below the growth target of 6.5 per cent per annum for the whole Third Plan. General Economic Effect of Hostilities 3. The physical damage to productive facilities during recent hostilities with India is reported to have been limited. However, of serious consequence for the development effort have been the disruption of the flow of foreign aid, the diversion of public funds and of foreign exchange reserves to defense, and the loss of momentum resulting from the slowing down of economic activities in the private sector. The hostilities have also disrupted inter- national shipping to Pakistan, delaying the export of the current jute and cotton crops. Nlo shortages of critical supplies developed during the hostil- ities nor did it become necessary to introduce rationing of foodgrains or price cQntrols or other administrative controls over production and distri- bution. Changes in the 1965/66 Budget and Development Program 4. The Minister of Finance, in presenting the Budget of the Central Gov- ernment to the National Assembly on June 14, announced that it was the intention of the Pakistan Government to implement the Third Five-Year Plan only within the framework of monetary stability and that the 1965/66 annual development program had been formulated in conformity with the Third Plan. Although the Plan's phasing would have required budgeting for Rs. 4,700 million for the public sector, the 1965/66 annual development plan was established at Rs. 4,460 million. - 2 - 5. Early in October a number of fiscal measures were announced to strengthen incentives for private investment. At the end of October the Government announced a reduction amounting to about 23 per cent in proposed expenditure for the 1965/66 development program. The revised total of Rs. 3,420 million is referred to as the "Hard Core Development Program". The reduction in the development appropriation was attributed to a loss of revenue receipts owing to the hostilities, the slowdown in expected arrivals of foreign aid goods, and the increase in planned expenditure for defense. 6. On November 22 the Finance Minister introduced into the National Assembly a Supplementary Finance Bill. He stated that there would be a reduction of non-development expenditures of the Central and Provincial Governments estimated at Rs. 150 million and announced some new taxation proposals. Those proposals took the form of a defense surcharge of 25 per cent on the existing rates of sales tax, import duties (except on machinery) and excise duties on petroleum products. The net savings arising from (a) the reductions in budgeted development and non-development expenditures, after taking account of the loss of revenues and of receipts from foreign aid, and (b) the revenue from additional taxes (estimated at Rs. 295 million).. plus (c) the bulk of the existing provision of Rs. 350 million for contin- gencies, will all be used for defense. In addition-, the Government is rais/ng some funds by voluntary contributions to a Defense Fund and the sale of Defense Bonds. However, no estimate of the comprehensive additional defense expenditures has been given. In the fiscal year ending June 30, 1965, expenditures on defense services amounted to Rs. 1321 million and Rs. 1361 million was originally budgeted for this purpose for 1965/66. Monetary Policy 7. Because of the inflationary dangers apparent at the beginning of 1965, in January the State Bank had tightened credit controls. After registering a nominal increase of only about Rse 30 million in the first six months of 1965, the money supply declined by about Rs. 290 million from July 1 to September 30. In October, because of the possibility of deflationary tendencies emerging in the economy, and with the intention of reviving nonai;L economic activity, credit restrictions were eased. This change consisted of a lowering of the statutory cash reserve ratio of commercial banks, the elimination of the quota system which was designed to limit Central Bank advances to the commercial banks, and the reduction of margin requirements on loans for imports and for inventory financing. Import Liberalization Program 8. The import liberalization program, started early in 1964, was modified on October 2, 1965. While the principle of a Free (unlicensed) List is retained, the number of items on the List was reduced from 56 to 31. The import liberalization program was developed on the assumption of foreign assistance being received in the form of non-project aid, and with the prospect of its severe reduction it has been necessary for Pakistan to eliminate some of the items previously allowed to be imported on the Free List. There was also some tightening of restrictions on all other imports. These measures have been taken because of the decline in foreign exchange reserves which fell by about a quarter from July 1, 1964, to September 30, 1965. A further loss of reserves was experienced in October. Prospects for the Third Plan 9. The reduction of the 1965/66 annual development program, referred to above, indicates that public sector development expenditures this year will be below the 1964/65 level. The revised annual development program attempts to ensure that there will be no significant reduction in productive schemes, particularly in agriculture, and that there will be no interruption in schemes where international commitments have already been made or where projects have a bearing on the export effort. The Government proposes to make a comprehensive review of the Third Plan in January 1966, and the Bar-,k is planning to send an economic mission i:n February to make a review of economic conditions and the prospects for the Third Plan, by which time more informatio:n will be available and the Government's review of the Plan should have been completed. On the evidence available now, the recent hostilities have given only a limited setback to the economy; however, the extent to which the economy will recover its former buoyancy, following the measures outlined above,.will depend on many factors, including the revival of confi- dence in the private sector and the availability of foreign exchange. Consortium 10. At the Seventh Meeting of the Pakistan Consortium, Pakistan requestec'. new aid commitments of $500 millio.n for the year 1965/66. To date, Canada, Germaniy, Italy and Japan have informed Palkistan of the financial assistance they propose to make available for 1965/66. The amounts are as follows: Canada $25.5 million compared with $23.6 million in 1964/65, Germany $38.1 million (unchanged), Italy $20 million compared with $10 million in the previous fiscal year, and Japan $30 million (unchanged). The United Kingdom, France and the Netherlands are also making new aid available but have not made any formal pledges. South Asia Department December 30, 1965 CONTENTS BASIC STATISTICS MAP SUPMARY AND CONCLUSIONS i - vi INTRODUCTION Chapter Page 1. Economic Developments During the Second Plan 1 Economic Growth and the Use of Resources 1 Production 3 Trade and Finance 9 Utilization of Foreign Aid 21 2. The Third Plan - General Frame 26 Size of the Plan 26 Allocations as Between Public and Private Sectors 32 Regional Allocation of Investment 32 Growth Target 33 Points of Emphasis in the Third Plan 35 3. Domestic Resources for the Plan 36 Division between Public and Private Sectors 37 4. External Resources 45 Exports 49 Imports 51 5. Plan Allocations and Programs 55 Agriculture 56 Industry 60 Pbwer 65 Transport and Communications 67 Education 67 Health, Manpower, Social Welfare and Housing 68 6. Prospects 70 Perspective Plan 70 Third Plan Prospects 72 Requirements for External Investment Resources 72 M,1obilization of Domestic Resources 73 Aid Requirements for 1965/66 74 Foreign Debt Position 75 Economic Policies 76 STATISTICAL APPE1DIK ANNEXES 1. Export Projections 2. Agriculture 3. Industry 4. Pbwer 5. Transport and Communications 6. Social Services 7. Capital Market 8. Recent Tax Changes 9. Tax System BASIC STATISTICS Area: 365,529 square miles West Pakistan 310,403 square miles East Pakistan 55,126 square miles Population: (1963/64 estimates) 109.6 million (300 per sq. mile) West Pakistan 50.1 million (160 per sq. mile) East Pakistan 59.5 million (1,070 per sq.mile) Population Growth: 2.6 - 3 per cent Political Status: Member of U.N., Commonwealth, CENTO, SEATO, RCD. Gross National Product (1963/64): U.S. $9,025.2 million (constant prices) Rate of Growth 1959/60 - 1964/65 5.2 per cent per annum 1962/63 - 1963/64 7.5 per cent Per capita GNP in 1963/64 U.S. $83 Gross Domestic Product at Factor Cost (1963/64) u.s. $8,624.0 million Of which, in per cent, 1959/60 1963/64 Agriculture fishing forestry 53.7 50.1 Mining and quarrying 2.2 2.8 Manufacturing 9.6 10.5 Other economic sectors 30.3 32.3 Public administration, defense 4.2 4.3 Per Cent of GDP at Market Prices Average Projected 1963/64 1959/60-1963/64 1969/70 Gross investment 16.9 13.1 19.3 Gross savings 10.2 8.3 14.1 Balance of payments current account deficit 6.9 4.9 6.0 Investment income payments 0.2 0.1 0.8 Government taxation receipts 8.0 7.1 10.2 Government current revenue 11.1 9.4 12.9 Resource gap as Per Cent of Investment 1963/64 39.1 per cent Average 1960/61-1964/65 38.8 per cent Projected 1965/66-1969/70 34.4 per cent -2- Money and credit Conversion 1 Pak. Rupee = $.21 1 dollar = 4.76 Pak. rupees Relationship to large monetary or customs area: rate pegged to pound sterling (Rs. million) 1963/64 Per cent change June '60-June '65- Total money supply 7,988.7 53.4 Time and savings deposits 2,432.1 231.1 Commercial bank credit to private sector 702.0 1Q Rate of change in prices 6 - 8 per cent2/7 1/ 1962/63 2/ Calendar year 1964 3/ Planning Commission's I7/ IMF Cost of Living Index estimates for 1964/65 Public Sector Operations (Rs. million) 1960/61 1963/64 Per Cent Change Govn't revenue receipts 3,1971/ 4,797 50 Govn't non-development expenditures 2,776 3,979 43 Revenue surplus 2/ 421 818 94 Govn't development expenditures_ 1,894 3,500 85 Public investment expenditures2/ 1,823 3,131 72 External assistance to public sector 1,023 1,634 60 Of which Commodity aid 481 788 64 PL 480 160 500 212 Project and Tech. Assist. 382 646 69 1/ Excluding customs on commodity aid. 2/ Excluding Indus. External Public Debt (In thousands of US dollar equivalents) June 30, 1964 Total external public debt 1,341,255 Net of undisbursed 624,760 Total annual debt service (1964/65) 64,012 Of which amortization 41,066 interest 22,949 Debt Service ratio 10 per cent IMF Position - Drawings Outstanding $16 million (gold tranche) -3- Balance of payments (Rs million) Per cent change 1963/64 60/61 - 64/65 2/ Total exports merchandise 2271 Invisibles 514 Total exports earnings 2785 33.4 Total imports FOB V8W0 Invisibles 1/ 1093 Total imports 5933 81.6 Current account balance 1/ 3148 152.0 of which amortization payments -T; 1/ including amortization payments of official debt; 2/ Planning Commission's estimates for 1964/65 Average 1963/64 59/60-63/64 Commodity concentration of exports 53.8 per cent 54.4 per cent (raw jute and raw cotton) Gross foreign exchange reserves (Rs.mill-ion)* 1,506.9 1/ 1,45607 2/ (or 3 months (or 3 montns of imports) of iaports) 1/ December 1964; 2/ December of each year * These figures do not include IMF Gold tranche, which the Government of Pakistan does not use to compute the ratio of reserves to currency in circulation. GENERAL MAP OF PAKISTAN CAPITAL CITY M U A N D PROVINCIAL CAPITALS © INTERNATIONAL BOUNDARIES 'ML- ( / 0 50 100 50 200 IAL MILES MINWALi!a K j SARGO H . :) / ' _ ' 5 0 t~~~~~~~~~~~~~~~tYA PUR PISHIN II >NEARNAI DERA. UTA ) IRAN~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~, ?RS/4 5( Zu/ i \§ J < ,/ * C~AST PAKSTAH I R A N 't X 2 l /!( ! () t 9 _ I ; RANGPUR<,,^ R_~~~~~~~~~~~I D A csu; JJNE 1963 IBRD-2 2 A S A4 R 4' 5 -t, JUNE 1963 IBRD-296RI2 SUMMARY AND CONCLUSIONS i. This report assesses the progress of the Second Five-Year Plan (1960/61-1964/65) and examines the general framework of the Third Plan (1965/66-1969/70). The Second Plan ii. The Second Plan has been a success. During the first four years of the Plan, a cumulative economic growth of 23 per cent was recorded as against an estimate for the five years of 24 per cent. The likely growth over the whole Plan is 28-29 per cent. Between 1959/60 and 1964/65 private consumption increased by less than 23 per cent but private investment grew by nearly 200 per cent. Pakistan was able to finance 62 per cent of her program from her own resources, 15 per cent more than had been originally contemplated. The disbursement of foreign aid was 23 per cent short of expectations but this was more than compensated by the larger mobilization of domestic rupee and foreign exchange resources. In real terms, total national resources are estimated to have increased by 37 per cent. Aid- financed imports contributed only about 20 per cent of this increase. By the end of the Plan, Pakistan was using 15.4 per cent of these resources for investment compared with 9.5 per cent in 1959/60. iii. The favorable relationship between gross investment and incre- mental output (capital/output ratio) was a contributing factor to the growth achieved in the Plan. This resulted partly from the comparatively quick return from investments in the private industrial sector and from investment in quiclc pay-off inputs, notably water and fertilizer, in agri- culture. iv. Production trends are difficult to measure in agriculture because of the weather variable, but production increased by 3.5 per cent per annum in the first four years of the Second Plan. Of greater signifi- cance was the change from stagnation in the 1950's to growth in the 1960's. A major share of investment in agriculture was financed from the savings of farmers' demands for fertilizer, machinery, pesticides and other mate- rials out-running the capacity of the government organizations to deliver. Industry remained the leading sector in the economy with a growth of over 9 per cent annually, mainly in larger-scale establishments. v. To a large extent, the Pakistan Government has moved from direct controls to reliance on fiscal and monetary measures to regulate the economy. The taxation system has aimed at encouraging more savings and investment and holding down consumption. This policy has accentu- ated the concentration of economic power, but it has allowed savings to increase and it has produced a climate conducive to private enterprise. - ii - vi. The consolidated revenue surplus of the Central and Provincial Governm.ents increased by 2-1/3 times corapared with the first year of the Second Plan and there was available 16 per cent more revenue than ori- ginally estimated for financing development. However, the Provincial Governments have had to rely principally on the Center for their develop- ment resources since their own receipts have not been sufficient to allow them to much more than cover their mounting recurrent expenditures. vii. The balance of payments position has been encouraging, parti- cularly on the export side. Little growth was expected in Palcistani exports at the start of the Plan, but actually, it has been averaging 7 per cent. The stagnation of the First Plan period has thus changed to a satisfactory rate of growth and the five year target for exports will have been exceeded by 84 per cent. Exports are now growing faster than GNP. The major cause of the improvement was an upsurge in produc- tion of crops such as raw cotton and superior rice and in fish. Despite rapid industrial growth the exports of manufactured products declined in importance from 25 per cent in the first year of the Plan to 22 per cent in 1963/64. At the same time, imports have been lower than expected. This has been achieved by increased import substitution for industrial products and by the relatively slow disbursement of project-type aid for the public sector. The balance of payments deficit over the five years will be 25 per cent lower than expected. viii. The Pakistan Government has an import policy based on liberal- izing the inflow of goods for the development of the economy while re- taining controls on other imports or making them more expensive through the exchange rate mechanism. There has recently been a reduction in controls, but the Government has had to be cautious because of possible effects on foreign exchange reserves. The removal last July of 51 items, mainly raw materials and components from import control, has improved the utilization of the existing industrial capacity. While realizing that the import price of essential raw materials should not be too high, the Mission considers that a price level should be sought for imports gener- ally which will not discriminate against domestic production. There appears to be a preference for imported, over local material and equip- ment because of the exchange rate. The Government in the 1964/65 Budget, with this in mind, made a beginning with increased import and customs duties and sales taxes. More needs to be done in this direction. ix. It is too early to assess the full effects of freeing imports from quantitative controls in July 1964, but it is believed that the results will justify the financing provided. Raw materials are not now considered in short supply but modernizing and balancing equipment is a limiting factor in expansion. - iii - x. The striking features in the utilization of aid have been that Pakistan resources provided 62 per cent of Plan outlays compared with the anticipated 47 per cent, and the shortfall by 23 per cent in foreign resources used. The Plan estimates had projec-ted a gross in- flow of capital of $2,770 million (excluding PL 480 but including the Indus project). It is now estimated that foreign aid disbursements will be about $2,000 million. Considerable delays in the commitment of aid pledges have been the main reason for this relatively slow utilization of aid. There has been improvement in the later years of the Plan. It is likely that the Plan will finish with a pipeline of unused pledges and undisbursed commitments equal to two-thirds of disbursements for the Second Plan and one-third of the foreign aid requirements estimated for the Third Plan. The Mission considers that there may be some reduction during the Third Plan in the fund of $1,086 million of unused commitments and pledges. xi. Administrative performance was considered in the 1964 report. A number of recommendations were made aimed at improving the system. Some improvement has been seen. To assess one measure of administra- tive performance, the carry-over of unutilized pledges at the end of the Second Plan will be much lower than at any time during the Plan. It is recommended that the Planning Commission keep more closely in touch with the implementation of projects and that plans be made for the phasing of project preparation, so that there will be an adequate flow, thus preventing the bunching which has been noticeable in the Second Plan. Some of the committees which have been established to advise on tariff structure and other subjects and which have not yet reported should expedite their work. Absence of such studies makes the examination of the proposals of the Third Plan difficult. xii. It was envisaged in the Second Plan that money supply wvould increase by Rs. 1,500 million over the Plan period. The Plan did not provide for any drawdown of foreign exchange resources or increases in the size of government net borrowings from the banking system. Credit expansion in the private sector will be only 20 per cent above expec- tations but public deficit financing has been about equal to the credit expansion to the private sector. The increase in money supply has, therefore, doubled. After a remarkable stability in the first three years, including an accumulation of reserves in the third year, the increase in money supply that occurred in the fourth and fifth years is now exercising some upward pressure on the price level. The State Bank has now taken measures to restrain the rate of credit ex- pansion. However, the Third Plan will start with a backlog of excess liquidity in the economy with potentially inflationary consequences. - iv - The Third Plan xiii. The principal objectives of the Third Plan are: (1) to increase the rate of economic growith to 6.5 per cent a year compared with 5.2 per cent for the Second Plan; (2) to accomplish this primarily by increasing the mobilization of domestic resources to cover 68 per cent of Plan outlays compared to 62 per cent in the Second Plan; (3) bring about a more balanced growth in the economy by increasing the rate of growth of agricultural output byl.5 per cent to 5 per cent a year, and by directing a large share of industrial investments to capital goods industries; (4) to increase exports in relation to GNP and imports; and (5) to narrow the discrepancy between per capita income in the two Provinces. The direction of a larger share of in- vestments to capitalgoods industries will require a sharp increase in industrial investment to be channeled through the public sector, parti- cularly in East Pakistan. xiv. The Third Plan will be about double the financial size of the Second, and in real terms, probably some 85 per cent larger. The country's total development effort will be about Rs. 57 billion (around $12 billion), includ4n}g the Indus Basin Works and the Tarbela project if it is undertaken.±/ The Bank has completed its Study in which the Tarbela project was found to be technically feasible and economically justifiable. In making comparisons between the Plans, it must be re- membered that in the Second Plan there was rapidly increasing annual investment amounting to 156 per cent between 1959/60 and 1964/65. The increase as between the last year of the Second Plan and that proposed for 1969/70 is 65 per cent. The Third Plan assumes a steadily increas- ing rate of investment at about 10.5 per cent per annum. xv. The allocation of resources (including the Indus Basin Works) between the public and private sectors gives a higher share to the public (60 per cent), which is about the same proportion as in the Second Plan. Excluding the Indus Basin Works, the public sector share is approximately 58 per cent or a little higher than in the Second Plan. xvi. It is expected that there will be a higher proportion of both public and private investment in East Pakistan in the Third Five-Year Plan period. 52 per cent of Plan funds are earmarked for that Province. The investment in the public sector industries in East Pakistan is planned to increase three-fold compared with the Second Plan. xvii. The growth strategy of the Third Plan is to maintain the Second Plan growth in non-agricultural sectors of around 7 per cent a year and improve the growth rate in agriculture from 3.5 to 5.0 per cent, by greater emphasis on water investment and better provision of farm supplies. The Mission believes that the growth targets of the Third Plan are feasi- ble, providing agriculture receives the urgent attention it requires. 1/ Without Tarbela, Plan and Indus outlays will be about Rs. 55.3 billion (about $11,613 million). xviii. The export target is an annual increase of about 9.5 per cent per annum. The Mission considers this rate to be too high and thinks it will be around 8 per cent. One iriportar±t factor in achieving the growth objective of the Third Plan is the timing and scale of returns on invest- ments. The Government envisages some increase in the capital/output ratio during the Third Plan. This will depend on the project composition of the Plan wLhich has not yet been finally determined. xix. The growJth of population is quite high, estimated at between 2.6 and 3.0 per cent per annum, and this problem is being tackled by increased emphasis on family planning, but the Wqission is not optimistic about short-term results and emphasizes that the program must be organized and implemented in a vigorous manner. xx. Although the domestic resources of the Third Plan are forecast as much larger than those in the Second, the strategy demands an increase in the marginal savings rate only from 21 per cent to 22 per cent. How- ever, the average rate of savings would increase much more, i.e., fro, around 10 to over 13 per cent. The high level of marginal savings in the Second Plan came from the encouragement given to large-scale industries by the removal of controls and the Government's ability to mobilize public savings through increases in taxes. These two lines of policy will be continued during the Third Plan. However, the contribution of agriculture to the Third Plan growth would increase from 18 to 20 per cent while that of industry would decline from 40 to 33 per cent. This emphasizes the necessity of increasing savings and tax collections in the agricultural sector. xxi. The industrial strategy in the Plan is to stress more capital goods in relation to consumer goods production. The Mission has consider- ab'Le reservations regarding t:lis policy, because some o-f the projects contemplated may not accord with Pakistan's comparative economic advantage and also because the capital intensive character of such industries makes little contribution to the red-ct-on in unemployment. There is also a politically motivated urge to establish similar industries in both East and West Pacistan. The proposal to set up capital goods industries means that under-priced capital will be used more extensively, while labor, whose real cost is often lower than its market price, is under-utilized. xxii. On the assumption of a 37 per cent growth, the Government esti- mates that the revenues of the Central and Provincial Governments will increase by two-thirds in the next five years. The revenue surplus is estimated at nearly three times that of the Second Plan. The return from additional taxation has been set by the Planning Commission at Rs. 3 billion, pending a decision on taxation and tariff rates and policies for the Plan period. To obtain Rs. 1 billion of additional domestic resources for the Government financed program, it is planned to transfer private resources to the public sector by associating more private investment with public corporations. The remaining Rs. 1.5 billion of the Rs. 16.5 billion required for the public sector program would be obtained through deficit financing. - vi - xxiii. The Government is requesting $2,700 million of consortium aid and requires about $4,550 million of gross capital inflow of all types ($4,300 million excluding amortization) for the Plan and the Indus project. As compared with the absorption of foreign assistance during the last year of the Second Plan, the average annual foreign aid require- ment for the Third Plan may be about one-third greater. From the stand- point of new commitments required, the increase will be less because of the build-up of the aid pipeline in the mid years of the Second Plan. xxiv. The principal conclusions of the Missibn on the mobilization of domestic and external resources for the Third Plan are: (1) The overall Plan target of mobilizing Rs. 35,500 million ($7,455 million of domestic resources for development expenditures may be achieved if the economy grows as forecast and if financial stability is maintained. (2) At the same time, it appears likely that there will be a short- fall of Rs. 2 billion or so from the Rs. 16.5 billion that the Government plans to mobilize for public sector development expenditures. (3) If our less optimistic export forecasts are correct, there will also be $200 million or so less domestically generated foreign exchange for development imports. (4) If some reduction is required in the public sector program, it may not affect total investment in the economy as a whole or the distribution of investment as between the commodity produc- ing and other sectors. xxv. It may be difficult to achieve the full public sector program with the inflow of foreign assistance that is being requested without impinging to some extent on resources for the private sector program. Therefore, the Government should adopt a flexible policy towards annual development programs. If the Government considers it essential to meet the full public sector expenditure target in the Plan, it should set higher targets for revenues, net capital receipts or for other non-expan- sionary domestic financing instead of seeking to mobilize funds through deficit financing. The amount of foreign assistance requested by Pakistan appears to be necessary to carry out a development program of about the magnitude envisaged. The aid requested from the consortium for 1965/66 conforms to the needs of the economy at the start of the Third Plan. It is not much in excess of the level of disbursements expected in 1964/65. A substantial portion of 1965/66 aid should be for commodities or programs that will assist in continuing the trade liberalization program undertaken last year. xxvi. In respect of Pakistan's future foreign borrowings, the credit- worthiness of the country has improved during the Second Plan despite the increase in her external indebtedness. Therefore, while requiring the bulk of assistance on easy terms, she appears capable of borrowing about 20 per cent of her Third Plan funds on conventional terms. About half of these new borrowings would be offset by amortization on existing hard debt. INTRODUJCTION7 The purposes of this report are to review the economic progress made by Pakistan during the Second Five-Year Plan (July 1, 1960-June 30, 1965) and to appraise the Third Plan (July 1, 1965- June 30, 1970) from the standpoint of its overall magnitude and objectives. Since, at the time of the Mission's visit in February of this year, the Government had not completed a comprehensive Third Plan document, including descriptions of the new projects it expects to initiate during the Plan period, this report will not contain a detailed evaluation of the sector-by-sector programs. Hlowever, it will comment. on the more important lines of development envisaged and the sectoral allocations of financial resources. The report also comments on the current economic situation in Pakistan. The Pakistan submission to the Consortium will deal in more detail with these subjects, including the need for foreign assistance in 1965/66. The last report on Pakistan's economic development program (AS-106a) was circulated to the Executive Directors and members of the Pakistan Consortium on April 28, 1964. It dealt with the first four years of the Second Plan and the prospects for 1964/65. The Bank's report (AS-96a) of February 1963 considered in more detail the general economic structure of Pakistan. That subject is dis- cussed in this report only incidentally to our consideration of the progress achieved during the Second Plan. CHAPTER 1 ECOTNOMIC DEVELOnPENTS DURING THE SECOMD PLAN Economic Growth and Use of Resources. 1. By nearly all standards the Second Plan was a success. The Plan target was a 24 per cent growth in real product over the five years. Up to June 30, 1964, actual growth was about 23 per cent, and indications are that over 5 per cent will be achieved in 1964/65. This would mean an average of about 5.2 per cent a year or at least 28 per cent for the Plan period. Plan expenditure is now estimated at about Rs. 26.3 billion ($5,529 million) as cormpared with Rs. 24.6 billion originally projected.l/ 2. The accomplishment in the Secorld Plan is in sharp contrast with the First Plan (1955-60), when the goal was 15 per cent but the achievement only about 10-11 per cent. Since population growth during the Second Plan is estimated at 13.7 per cent, the growth in production per capita would be in the order of 15 per cent or, say, 2.6 per cent a year compounded. No increase in real income per capita occurred during the First Plan. 3. The following table compares the rates of change of certain key variables during the Plan with expectations when the Plan was drawn up. Table 1 CHAINGES DURING PERIOD l960/61-1964/65 (Per Cent) Plannedi/ Probable Actual Real Growth in GNP (factor cost) 24.2 28-29 Annual Growth in GNP 4.4 h.2 Increase in Population 11.1 13.7 Real Per Capita Income 11.8 14.0 Agricultural Production 1)4.2 18.7 Manufacturing Production 50.2 >1.1 IMarginal Savings Rate 25.0 21.0 Share of Domestic Resources in Total Plan Investment Expenditure_/ 47.0 62.0 Share of Domestic Foreign Exchange none 37.2 in Foreign Exchange Costs of Plan Export Growth 17.8 32.9 1/ Second Five-Year Plan, June 1960, p. 34. 2/ Including the Rural Works program but excluding the Indus Basin Works. Total investment (including Indus) is estimated at about Rs. 30.2 billion. 1/ The growth reflected in these data is a little higher than that cited in previous Bank reports on the Second Plan because of a revision in Pakis- tan's national accounts which is still in progress. The upward revision in growth estimates are partly because the revised estimates of produc- tion in the base year (1959/60) are lower than previous data and partly because recent increase in agricultural production has been larger than previous estimates indicated. -2- 4. The only significant cause for concern is the unexpectedly high rate of population growth which, as during the First Plan, considerably exceeded expectations. Although the marginal savings rate fell considerably short of the target, the latter was unrealistic and, thanks to the higher than expected growth rate, total domestic savings will substantially exceed the Plan target. 5. Appendix tables 3 and 5 show the origin and utilization of total national resources during the Second Plan on a year-to-year basis. That ouitput is still subject to considerable variation because of weather and other conditions affecting agriculture is evident from the low growth achieved in 1962/63 (3.4 per cent) as compared with the sharp comeback of 1963/64 (7.5 per cent). The fact that private consumption increased less than 23 per cent, wihile private investment grew by nearly 200 per cent betwJeen 1959/60 and 1964/65 was, of course, the main factor in enabling Pakistan to finance 11 per cent more of her program from her own resources than had been contemplated when the Plan was drawn up. The use of total national resources over the Plan period may be summarized as follows: Table 2 USE OF NATIONAL RESOURCES (Rs. Billion - 1959/60 Prices) Cumulative Change during Plan Period 1960/61 - 1964/65 1959/60 1964765 Amount Percent Percent Percent GNP (Miarket Prices) 191.7 88.8 90.3 86.7 Imports 244.2 11.2 9.7 13.3 Development Imports 14.9 7.0 4.9 8.5 Non-development Imports 9.3 14.3 4.8 14.8 Total National Resources 215.9 100.0 100.0 100.0 Consumption 177.7 82.3 86.4 78.9 Private 159.2 73.7 75.7 69.4 Government 1/ 18.5 8.6 7.7 9.5 Investment 26.9 12.6 9.5 15.4 Private 2/ 11.4 5.8 4.8 7.0 Public 3/ 15.5 6.8 4.7 8.4L Exports 11.3 5.1 4.1 5.7 Total Utilization of Resources 215.9 100.0 100.0 100.0 1/ Includes Rs. 2,173 million of government current development expenditure. 2/ Includes Rs. 1,030 million of investment in stocks. 3/ Includes Rs. 2,548 million for Indus Basin Replacement Works. Source: Appendix Table 5. 6. In zeal terms the availability of total national resources for the Pakistan economy increased about 37 per cent over the Second Plan. Aid-financed imports contributed about 7.5 per cent of this in- crease or roughly one-fifth. 7. While total consumption rose about 27 per cent, it declined appre- ciably as a proportion of total resources. Per capita consumption rose by about 13 per cent, or less than half the increase in aggregate con- surnption. By the end of the Plan, Pakistan was using 15.4 per cent of her resources for investment (17.8 per cent of GNP) as compared with 9.5 per cent (10.5 per cent of GNP) in 1959/60. A fifth of the absolute in- crease in investment was due to the Indus Works, and the remainder to the Plan. 8. Even at the end of the Plan, Pakistan's performance measured by the relation of gross savings and govern-meint revenues to GNP was quite modest as was the percentage of total resources used for invest- ment. However, the increases are encouraging and augur well for the Third Plan. In 1964/65, probably about 10.5 per cent of Gross Domestic Product (market prices) will be saved and about 11 per cent will accrue to the Government in the form of taxes and other revenues. Comparable figures for 1959/60 were about 6.3 per cent and 8 per cent. 9. A contributing factor to the growth achieved during the Second Plan was the favorable relationship between gross investment and incre- mental output (capital/output ratio). This ratio seems to have averaged about 2.4 over the Second Plan period (Appendix table 11 ). Considering the large amount of infrastructural investment required to cope with the great distances and difficult terrain of the country, and particularly its division into two regions separated by over 1,200 air- and 3,000 sea- miles, such a favorable result is rather surprising, particularly in view of the inclusion of Indus with a limited, and as yet, unrealized development potential. The results are attributable largely to (1) the comparatively quick return fropi investment in the private industrial sector; (2) agricultural inputs, notably water and fertilizer, in the private agricultural sector; and (3) the fuller utilization of excess capacity partly because of import liberalization. 10. At the inception of the Second Plan, the public sector was expected to use about 64 per cent (as compared with the 62 per cent that now seems likely) of the total resources available, so that there has been some relative shortfall in its performance, as compared with expec- tations, whereas the private sector has substantially exceeded its investment target. Production. 11. Agriculture. Indications are that during the first four years of the Second Plan, agricultural production increased about 3.5 per cent per year.l/ Production of major crops which represent about 60 per cent of the agri- cultural GIWP increased by 4.6 per cent a year. Rice, cotton and sugar cane I/ Based on estimates of G1NP at factor costs (1959/60 prices). - 4 - increased over base period (1959/60) production by 39, 42 and 38 per cent respectively. Jute, tea and tobacco exhibited no significant trend. Esti- mates of GNP growth in agriculture and production of principal crops are in Appendix tables 3 and 8. 12. Preliminary estimates for 1964/65 indicate a slight drop in rice and cotton production from the record 1963/64 levels, but tea, wheat and sugar cane are expected to increase. Jute production declined for the third successive year. Prospects are that total agricultural output in 1964/65 will probably not exceed the record 1963/64 level. Assuming that 1964/65 output equals that of 1963/64, the annual rate of growth during the Second Plan would be 3.1 per cent per year in terms of GNP,and Second Plan targets for rice, cotton, sagar cane and total foodgrains would have been exceeded. 13. Whether the actual rate of growth during the Second Plan period has been 3.1 per cent or 3.5 per cent per year is not too important. The important thing is that the agricultural sector has moved from its stagnant position through most of thie fifties to progress and growth. The table below summarizes production from the principal crops in the last fifteen years: Table 3 PRODUCTION OF PRINCIPAL CROPS (Thousand tor;s) Annual Average Plan 1950/51- 1955/56- 19$0/61- Target 1954/55 1959/60 1963/64 1963/64 1964/65 Rice 8,334 8,409 10,636 11,629 10,164 lWheat 3,220 3,644 4,015 4,118 4,329 Other foodgrains 1,095 1,165 1,211 1 ,234 1,428 Total foodgra&ts 12,649 13,218 15,862 16,981 15,921 Cottonl/ 1,536 1,680 1,999 2,370 2,292 Jute 1/ 5,333 5,954 5,900 5,875 7,300 Sugar cane 10,764 13,975 19,526 21,248 20,800 Tea 2/ 48.5 52.5 52.0 55.0 63.8 Tobacco 2/ 196.7 202.3 215.4 228.4 254.7 1/ Thousand bales. 2/ M4illion pounds. All crops, with the exception of jute, have had substantial increases. Jute production has declined steadily for the past three years as a result of low prices and unfavorable weather. However, improvement in prices since - 5 - November 1964 can be expected to result in a larger crop in 1°65/66. Tea production should also increase over the next several years because of newl plantings during the Second Plan period. 14. The major factors behind this increase in agricultural output have been the development of additional water resources in West Pakistan and improved flood control and drainage in East Pakistan. Increases in other inputs such as fertilizer have also contributed. 15. The Second Plan provided for public development expenditures of Rs. 2,520 million for agriculture and Rs. 2,580 million additional for water dev-elopment. It is estimated that about 83 per cent of the alloca- tion for agriculture and 100 per cent of the allocation for water will have been spent by June 30, 1965. In addition, the Plan estimated Rs. 880 million for private investment in agriculture. Although data on private investments and savings are fragmentary, a survey of private investments in 1962/63 indi- cated that private investments in the agricultural sector, excluding housing, orchards and livestock, amounted to about Rs. 800 million in the one year alone, of which about Rs. 90 million were for private tubewells and farm machinery. On this basis, private investment during the Second Plan would amount to roughly Rs. 4 billion, more than four times the Plan allocation. The Agricultural Development Bank of Pakistan, cooperatives and direct government loans to cultivators provided roughly Rs. 1,200 million of credit, about half of which was on a medium- and lont-ttmr bl-sis. This would indi- cate that a major share of the private investment in agriculture was financed out of the savings of the farmers and landowners. 16. The importance of the private investment effort can be illustrated by the water developments in West Pakistan. Out of a total potential avail- ability of 114 million acre feet in the Indus Basin, only 52 million acre feet had been developed at the beginning of the Second Plan. During the Second Plan period private tubewells developed an additional 4.7 million acre feet while public tubewells developed 2.5 million acre feet, and public sur- face water development provided 3 million acre feet. Thus water availabilityj increased nearly 20 per cent in only 5 years. 17. In East Pakistan, public investment in the Coastal Embankments Project involving construction and strengthening of 1,600 miles of tidal embankments and various other flood protection and drainage works made a significant contribution to increased output. Progress was made toward completing the Kushtia Unit of the Ganges Kobadak Project, the Teesta sub- project and the Ground Water and Pump Irrigation Project, but the effective use of the water for irrigation has been slow in developing. The Ganges Kobadak Project has shown relatively little increase in area irrigated in 1964/65, although some improvements in practices were reported. Difficul- ties were also being encountered in organizing farmers to develop irrigation under the Ground Water and Pump Irrigation Project. - 6 - 18. The Planning Commission estimates that, for the country as a whole, about 2.1 million acres of new land have been brought under irrigation and that 7.2 million acres have been provided with improved irrigation drainage or flood protection during the Second Plan. The total land affected by these improvements was about 17 per cent of the cropped area in 1963/64. With increased water availability, more intensive cropping becomes possible and the supply of complementary inputs becomes essential. Fertilizer use moved from 31,000 tons (NPK equivalents) in 1959/60 to 111,000 tons in 1963/64 and is projected to be 160,000 tons in 1964/65. Plant protection activities of the Government have been trebled but still only 12 per cent of the acreage is being treated. Progress has also been made in increasing the use of improved seed, but the Government is finding it difficult to meet the demand. Subsidized programs for fertilizer, plant protection, seed multi- plication and distribution and mechanization cost about Rs. 900 million during the Second Plan, or almost half of the Government's development expenditures for agriculture (excluding water development). 19. However, until 1963/64 the supply of all agricultural inputs was subject to government restrictions either because of government monopolies or severe import restrictions. The basic philosophy was that government must teach the peasant the value of these inputs and that government control was necessary to prevent improper use by cultivators and malpractices by middlemen. The sharp increase in fertilizer sales which occurred in 1963/64 as a result of the liberalization of fertilizer distribution shows quite clearly that fanners are prepared to expand fertilizer usage and that pri- vate enterprise is better equipped to handle distribution thar; government agencies. There is growing evidence that farmers' demand for farm machinery, pesticides and seed has also outrun the capacity of goverrnent agencies. 20. The justification for continued government control and large-scale subsidization of farm inputs has been usually couched in terms of the needs of the small, low income farmers who cannot afford to pay the full price for these services, and the need for equitable distribution of scarce input items. In fact, how^Jever, the restricted availability of supplies and services and financing have probably been more important hindrances to development than price. Moreover, larger, more influential farmers have received the bulk of the subsidized services often at the cost of repeated trips to government offices and crop losses resulting from unnecessary delays. 21. Various reorganizations of agricultural agencies carried out early in the Second Plan led to some disruption of existing programs. These included the abolition of the Village AID program and the establishment of the Agri- cultural Development Corporations (A.D.C.) in each wing; the change from the Land Utilization Committeeand the Soil Reclamation Board to the Land and Water Development Board; the reorganization of the Agriculture Department in West Pakistan; the establishment of the West Pakistan wholesale supply cooperative; and the establishment of the Agricultural Development Bank of Pakistan. Most of these changes were necessary and have contributed to the recent growth of agriculture, but the uncertainties before and after each major reorganization caused serious delays in the implementation of the Plan. This was particularly true of the Agricultural Development Corporations whose contributions have been much short of expectations. 22. Industry. During the First Plan (1955-1960) investment in industry was only ab6ii-j8 per cent of the ivlan target. Foreign exchange difficulties were mainly responsible for the shortfall. However, production in large and medium-scale industry rose by more than 80 per cent between 1954 and 1959, whereas the Plan target was for an increase of 65 per cent. 23. The Second Plan target for investment in industry was Rs. 6,107 million, over three times the actual First Plan investment. The private sector was expected to invest Rs. 3,719 million and the public sector Rs. 1,460 million. In addition, the Plan made provision for Rs. 928 million of working capital. In fact, the private sector has invested about Rs. 4,440 million and the public sector Rs. 1,352 million. This total is about 95 per cent of the five-year target (Appendix table 10 ). The dynamic private industrial sector exceeded its target by over 20 per cent. 24. The Second Plan aimed at increases in production of 65 per cent in lkrge-and medium-scale industry and of 25 per cent in small-scale and cottage industry. In 1964/65, it is expected that the contribution of the manufac- turing sector to gross national product will be about 11 per cent compared to 9.5 per cent in 1959/60. Industry contributed about 20 per cent of the growth in GNP during the Second Plan period. 25. Large-scale manufacturing output rose by about 65 per cent in the first four years of the Plan and the total increase is estimated at 87 per cent, i.e. over 13 per cent per annum. The largest increases up to 1963/64 were for chemical fertilizers, basic metals, newsprint, vegetable oil and petroleum processing. Relatively small advances were made in cotton and woolen cloth, soda ash and such items as soap and beverages. (See Appendix table 9 and Annex 3 for analysis of output by specific industries). It is extremely difficult to assess the growth in small-scale manufacturing (plants of less than fifty employees).I/ The rate of growth during the Second Plan for small-scale industry has been estimated at 2.6 per cent per annum, much below the Plan target of 4.6 per cent. 26. The rate of growth for total manufacturing activities is estimated to have been around 9 per cent during the Second Plan, around 11 per cent per annum in East Pakistan and about 8 per cent per annum in West Pakistan. This is not unreasonable in view of the fact that in East Pakistan large- scale manufacturing sectors started from a lower base. Factors which affect these growth rates are: (a) Entrepreneurial capacity. and profit incentives favorable to industrial investment. (b) Credit to promote investment, specially foreign exchange from development banks (PICIC, IDBP). (c) Improved supply of raw materials. (d) Larger (though still limited) demand for products being produced. 1/ In 1959/60, the relative weights in -value added for the small-scale and large-scale manufacturing sectors was 43.6 and 56.4 per cent respectively. - 8 - 27. Industry and Import Liberalization. Up until about mid-1964, Pakistan industry, with some notable exceptions such as textiles, was operating well below even one-shift capacity. The main factor hindering the full utiliza- tion of capacity was the shortage of industrial raw materials, components and spare parts. 28. In January 1964 an important liberalization measure was taken by placing four iron and steel items on free import list, which meant that eli- gible importers could import these items from the United States (which was providing the financing) without import license. In July 1964, a major extension of the liberalization policy was announced and the free list was expanded to 51 items, largely intermediate products. With minor changes, the free import list has been continued for the first half of 1965 and it is the stated government policy to continue it within the limits of foreign ex- change availability. Since machinery to implement the enlarged list did not begin to function till August 1964 and given the time required for placing orders and arrival of goods, it is too early for a proper analysis of the impact of the free list on the utilization of industrial capacity. However, recent studies indicate that the degree of utilization of capacity is defi- nitely rising and is approaching 100 per cent (from around 75 per cent) in many lines l_ However, in most factories visited by the *lission, the degree of utilization of capacity was still only fair. Moreover, the sample may show above average utilization as it included several relatively well-organized industries which had the technical and managerial talents to operate effici- ently. The major reasons for excess capacity are the still irregular supply of imported raw materials and components, the general shortage of skills and the lack of markets. 29. Industry is still a profitable field for the Pakistan entrepreneur and the rupee capital is available in the lorm of profits to be reinvested. V The Mission heard some complaints concerning a relative decline of profits in some industries due to keener competition because of the more liberal import policy. However, profits remain high although reliable information on their amount is scarce. In 1963 net profits after tax as a percentage of net worth. 1/ Some notion of the effect of the import liberalization can be gained by studying the price of specific items. Reduction in steel prices has been attributed to the introduction of the free import list. The prices of G.P. sheets have come down from Rs. 1,500 per ton in July 1964 to Rs.1,330 per ton in December 1964, a fall of 11.5 per cent. For the same period, prices of G.I. wire have gone down from Rs. 1,915 per ton to Rs. 1,475 per ton and of structurals (joists) from Rs. 1,400 per ton to Rs. 1,225 per ton. In other cases, reduction of over 20 per cent has occurred in Chloro- mycitin, tanning substances, carbon black, laboratory glassware, scienti- fic instruments, pigments, condensed milk and gum. 2/ About 75 per cent of gross profit (including depreciation) is said to be reinvested in representative large-scale industries. - 9 - were about 14 per cent for cotton textiles and jute goods, 42 per cent for sugar, 20 per cent for cement, 10 per cent for tobacco, o per cent for engineering, paper and board (see [riex 3). A tentative comparison with the level of profitability in Latin Ainerica and the United States is also given in tThe Annex. Coiiibined with a liberal ta; inceintive systen, these profits provide a good basis for further investment. 30. iHore detailed discussion of Pakistan's industrial derelopment during the Second Plan, together with the controls used and finarncing provided, is in Annex 3 . Trade and Finance. 31. Financial Policy. In the main, the fiscal and monetary strategy and policies outlined in the Second Plan were followed effectively. As intended, there were significant departures from an extensive use of direct controls in favor of reliance on fiscal and monetary measures to regulate the economy. The budget and taxation systems were used to encourage more savings and mobilize increasing resources for government financed development expenditures and for holding down consumption. This was accomplished by extending or rais- ing excises, sales taxes and import tariffs, reducing export duties to promote larger exports, and modifying direct taxes to strengthen incentives for in- creased production and investment. Subsidies and other measures were also used to secure desired resource allocation. However, only a beginning was made to achieve a more income-elastic tax system. Tax policy was not effective in checking the concentration of economic powier and, indeed, such checks might have reduced private savings. Over most of the period, the fiscal and mone- tary measures followed by the Government resulted in financial stability. 32. Fiscal Performance. An outstanding feature of the fiscal performance has been the buoyancy of the revenue surplus. Despite a rise in non-development expenditures of about 48 per cent during this period, there was available for government financed development undertakings 16 per cent more revenue resources than had been projected. 33. Taxes have roughly doubled in volume from Rs. 2.0 billion in 1959/60 to about Rs. 4.0 billion in 1964/65, and tax receipts on the average have increased about a fifth each year or from 6.1 per cent of GIIP in 1959/60 to an expected 8.7 per cent in 1964/65. Half the increase, or Rs. 1 billion, has come from excises and customs. Increased collections from the sales tax pro- duced another Rs. 440 million of the increase. Returns from these three categories of indirect taxes increased about 90 per cent. Income and corporate taxes have increased less rapidly from a level of Rs. 370 million in 1959/60 to an estimated Rs. 633 million in 1964/65. However, these direct taxes increased from about 14.6 to 15.9 per cent of total tax revenue. Land revenue collec- tions,which are the responsibility of the Provincial Governments,increased even more slowly from the 1959/60 rate of Rs. 220 million to Rs. 307 million esti- mated for 1964/65. - 10 - 34. Tile non-tax receipts of the Central and Provincial Governments (revenues from railways, posts and telegraphs and othor public undortakings charges for irrigation and electricity and miscellaneous receipts) also about doubled from 1960/61 to 1964/65. Total non-tax revenues were about 30 per cent above the Plan target of Rs. 4,150 million. 35. The Plan target for the increase in administrative expenditure was 4 per cent per annum and for the rise in the recurrent cost of development schemes, 14 per cent yearly. In these projections an allowance was made for an anticipated long-delayed adjustment in goverrment pay scales. In fact, the in- crease in normal administrative expenditure has averaged about 6 per cent per year, whereas the expenditures of development departments have gone up about 16 per cent annually. The burden of debt services has increased rapidly and surpassed the five-year Plan expectation of Rs. 1.4 billion by well over Rs. 1.0 billion. The debt service and defense expenditures together accounted for the entire excess of non-development spending over the target. 36. The Second Plan set forth a tentative target of Rs. 200 million for contributions from local bodies to national development. The local bodies or Basic Democracies in 1959 were given increased tax powers as well as addi- tiorLal responsibilities for development work, but only fragmentary data are ava:K'.able on their financial contribution. The Planning Commission estimates, however, indicate that the target was reached. 37. At the provincial level, government income has increased, partly as a result of the Provinces' own slightly improved revenues but primarily on account of better revenue collections by the Central Government and a corres- ponding higher share distributed to the Provinces.!/ On the other hand, 1/ The share of the two Provinces in centrally collected taxes is worked out as follows: (a) 50 per cent of the net proceeds of Income Tax including Corporation Tax but excluding the tax on federal emoluments. (b) 60 per cent of the net proceeds of the Sales Tax. (c) 60 per cent of the Excise Duties on tea, betel-nuts and tobacco. (d) 100 per cent of Export Duties on jute and cotton. (e) 100 per cent of the Estate and Succession Duty in respect of agri- cultural land. (f) 100 per cent of taxes on capital value of immovable property. The apportionment between the two Provinces is according to the following formula: (a) Sales Tax. 70 per cent on the basis of popu- lation and 30 per cent on the basis of incidence. (b) Estate and Succession Duties in respect of agricultural land and Each Province receives an amount equal to the collection in the taxes on the capital value of Province concerned. immovable property. (c) Other Taxes and Duties. On the basis of population. The "net proceeds" of a tax or duty is the total proceeds thereof reduced by the cost of collection. On the basis of population, East Pakistan re- ceives 54 per cent and West Pakistan 46 per cent of the proceeds assigned to the Provinces. - 11 - the growing recurring costs of completed development schemes, debt servicing of foreign loans and other factors have increased non-development expendi- tures over the 1960/61 rate by 94 per cent in East Pakistan and 80 per cent in West Pakistan. Excluding taxes shared with the Central Government, the provincial deficit on non-development account has increased from about Rs. 143 million in the first year of the Second Plan to an estimated Rs. 478 million in 19614/65. Provincial revenue sources are financing a smaller pro- portion of the expanding non-development spending. 38. The increase in public savings during the Second Plan period was at a rate almost double the rate of growth in GNP and roughly kept pace with the rate of increase in total domestic savings. The Central and Provincial Governments also mobilized receipts from small private savings, public borrow- ing from non-bank sources, sale of public industrial assets, depreciation funds of the railways, posts and telegraphs, other reserve funds, and other non- expansionary sources. Total public financial resources rose from 8.7 per cent of GNP in 1959/60 to about 12.1 per cent in 1964/65. They amounted to nearly 12 per cent of the additional income generated in the economy during the Second Plan. 39. Money and Credit. The Second Plan envisaged that money supply could be allowed to increase by Rs. 1,500 million over the five-year period. This increase was to come about through net increase in credit to the private sector. The Plan did not provide for any drawdown of the country's foreign exchange resources, nor for any increase in the size of the Government's net borrowings from the banking system. 40. It is estimated that the Plan will end with the net credit expansion to the private sector only 20 per cent above expectations but with almost an equal amount of public deficit financing. The result is that even with some reduction of foreign exchange reserves, the increase in money supply will be more than double that anticipated, amounting to a cumulative expansion of over 53 per cent. The situation is summarized in the following table: Table 4 FACTORS IN MOINEY SUPPLY (Millions of Rupees) 1960/61 1961/62 1962/63 1963/64 1964/651" Total 1. Private Bank Credit 416.5 690.2 792.1 914.4 1250.0 4063.2 Time deposits -281.5 -279.6 -428.1 -496.9 -700.0 -2186.1 Net change 135.0 410.6 364.0 417.5 550.0 1877.1 2. Government borrowings 372.0 -114.1 402.3 421.2 500.0 1581. Counterpart funds -264.1 403.7 -237.5 205.5 100.0 207.6 Net deficit financing 107.9 289.6 164.8 626.7 600.0 1789.0 3. Foreign sector -60.0 79.0 273.5 -196.7 -250.0 -312.2 4. IBRD Indus Account -- -186.1 54.2 66.4 50.0 -15.5 5. Unclassified -157.2 -208.5 25.1 88.2 50.0 -202.4 Changes in money supply 25.7 226.6 881.6 1002.1 1000.0 3135.0 Per cent increases 0. 4 14.4 14.3 12.5 3.2 1/ Planning Commission estimates. Sources: Appendix table 19. - 12 - 41. During the first twio years of the Plan stability in money supply was maintained and the monetary overhang at the start of the Plan was absorbed in the growth of the economy. In the third year the accumulation of reserves added substantially to money supply. Thereafter, public deficit financing (plus the drawdown of counterpart funds) started to grow while private bank credit continued to expand. In December 1964, foreign exchange reserves almost fell to the statutory limit of 30 per cent of currency in circulation, leading Pakistan to draw its gold tranche of $16 million and to arrange a standby of $37.5 million from the IfF. 42. The price level had also remained stable in the first years of the Second Plan. During 1964, a substantial rise in prices occurred, with a perceptible acceleration during the second half. The general index of whole- sale prices in November 1964 was 6.2 per cent above November 1963, which in turn was only 1.1 per cent above November 1962. The cost of living reflected the following increases: Table 5 INCREASES El COST OF LIVIIG (Per CentF 1963 1964 General cost-of-living index for industrial workers in: Lahore 4.0 10.3 Narayanganj 0.1 12.7 Consumers' price index for Government and commercial 3.5 6.9 employees in Karachi 43. Food items accounted for most of these increases. However, the consumers' price index for government and commercial employees in Karachi showed increases in 1964 for all expenditure groups, ranging from 2.2 per cent for clothing and footwear to 11.2 per cent for housing and household needs, with 8.9 per cent for food items. It is reported that the fast rate of urbanization is creating bottlenecks for the supplies of such items as pulses and meat, dairy products and vegetables which will take time to remove. Though no data are published on wages,manifestations of social unrest due to the rise in the cost of living have been reported, and some wage increases have been granted in the public and semi-public sectors. - 13 - 44. One important factor accounting for the unusually strong demand for bank credit has been the import liberalization program. Larger imports, some of which were speculative, and a fuller utilization of industrial capacity, created a strong demand for credit in 1964. Some restrictive credit measures could have been usefully applied simultaneously with the liberalization of imports in July 1964. 45. During the first fortnight of January 1965, the State Bank con- sidered it essential to take measures to restrain the rate of monetary expansion.i/ They are designed to contain the unusual buoyancy of private bank credit. Their selectivity in favor of exports and of small business should be welcome. The penalties they put on speculative imports and in- ventories have received a less enthusiastic reception. They are not so strong as to curtail the long-term expansion of credit needed for the development of agriculture, industry and commerce. 46. From the standpoint of total monetary supply, the State Bank can do little to restrain the expansionary influence of the Government's defi- cit financing. Commodity procurement operations and the development program, for which such financing is needed, have a high priority. 47. A part of the unusual expansion that occurred during the second half of 1964 was due to seasonal and accidental factors, whose effects may be expected to diminish during the second half of 1964/65. But, there is little doubt that, if the Government does not take steps to reduce its re- liance on the banking system, the rate of money expansion for the whole of 1964/65 will be at least as high as it was in 1963/64, even though the draw- down of foreign exchange reserves will be greater. 1/ On the recommendations of the Credit Committee established in 1962, the State Bank introduced in August 1963 a quota system with graduated interest rates for State Bank lending to commercial banks. Under this system, borrowing at the rate of 4 per cent is limited to individual bank ceilings equal to the statutory balances the bank holds with the State Bank, above which the rate is increased in steps up to 6 per cent as borrowings from the State Bank exceed this quota. An exception is made for borrowing against loans of up to Rs. 25,000 to small businesses. This latter provision is in response to the Government's concern about the lack, since Partition, of adequate credit facilities for the small- man. In January 1965 the State Bank took action in three fields: (1) tighten- ing of the quota system and expansion of its coverage to include all types of loans and advances from the State Bank; (2) imposition of a 25 per cent marginal requirement against the opening of L/Cs for imports; and (3) increase in the cash reserve requirements of the banks from 5 per cent to 7½! per cent to be effective from April 1965. Borrowings from the State Bank by IDBP and ADBP and by commercial banks to finance the small-man (up to Rs. 25,000) and to finance exports are exempt for the purview of the quota system. - 14 - 48. Balance of Payments. Although overall Plan expenditures have exceeded the target by about 9 per cent, aggregate imports during the Plan are now expected to be about Rs. 1.7 billion below the original projection of Rs. 26 billion (excluding Indus Basin imports). This is attributed partly to a higher than expected amount of import substitution. The larger proportion of investments in the private sector (whose import dependence is considerably less than the pub'lic sector) may also have contributed. 49. In the Second Plan, Pakistan's exports (including invisibles) are now estimated to yield total earnings of about Rs. 13.2 billion, almost Rs. 2 billion more than projected in the Plan frame. As a consequence of the lower imports and higher exports, the quinquennial deficit in the balance of payments, covered by foreign assistance, is now smaller than estimated, by about Rs. 3.7 billion or 25 per cent. 50. The bala"nce of payments for the Plan period is summarized in the following table.l/ Table 6 FIVE-YEAR BALANCE OF PAYMENTS 1960-1965 Original Estimates Latest Estimates Rs. Billion US$ Billion Rs. Billion US$ Billion Development Imports 8.83 1,854 13.281/ 2,789 Non-Development Imports 12.30 2,583 7.02 1,483 Debt Service 1.45 304 0.95 200 Indus Basin Imports 1.86 391 1.53 322 PL 480 3.44 722 3.09 649 Total Payments 27.88 5,854 25.87 5,433 Foreign Exchange Earnings 11.25 2,362 13.25 2,783 Total Deficit 16.63 3,492 12.62 2,650 Less: Indus.2/and PL 480 5.68 1,193 4.72 992 Plan Deficit 10.95 2,299 7.90 1,658 1/ Including materials for production of capital goods not included in original estimates. 2/ Including $80 million for Indus rupee purchases, of which only $21 million was used. 1/ Unfortunately the breakdown of imports between development and non- development in the original estimates is not comparable with the latest estimates in the table because of a classification shift of materials for capital goods production from non-development to development imports. - 15 - Pakistan's balance of payments position has thus proved to be considerably better than anticipated in every respect, includirng debt service. 51. Imports. Pakistan's total imports (net of debt service) increased from Rs. 3.7 billion in 1960/61 to an estimated Rs. 6.65 billion in 1964/65, or about 12 per cent a year. Much of this increase was induced by the investment effort; development imports, which account for 55 per cent of the total pay- ments, increased by almost 100 per cent over the same period, while non-develop- ment imports other than those under PL 480 increased by about 32 per cent. 52. Development imports have formed a quite stable portion of develop- ment expenditure (excluding the Indus Works) as is shown in the following table. This appears to indicate that the small domestic capital goods industry has expanded about in line with the increase of development expenditures. Table 7 IMPORT DEPENDENCE OF DEVELOPMEINT EXPENDITURES (Millions of Rupees) 1960/ 1961/ 1962/ 1963/ 1964/ 1961 1962 1963 1964 1965 Total 1. Development Expenditurel/ 3,349 4,444 4,787 6,3)45 7,455 26,330 2. Development Importsl/ 1,905 2,142 2,402 3,069 3,768 13,286 2. as Percent of 1. 57 48 51 49 49 50 Of which: (a) Capital Goods c.i.f. 1,267 1,573 1,855 2,221 2,708 9,644 (b) Raw MIaterials c.i.f. and 638 569 537 848 1,060 3,642 Technical Assistance 1/ Excluding Indus. 53. Imports of consumer goods increased by a modest 13 per cent, and part of this increase is attributable to the availability of export bonus vouchers and another part to liberalization of the import of medicines and - 16 - books.Y- Intermediate goods, which are used in the domestic production of consumer goods and of capital goods in a proportion of about 2:3, have shown a more sizeable increase from Rs. 866 million to Rs. 1,455 million, or by 67 per cent. This reflects the process of increasing import substi- tution for consumer goods, the raw materials for which have to be imported. 54. Imports of raw materials going into the production of consumer goods have been growing faster than those going into capital goods produc- tion. This is explained by the early stage of development of the capital goods industry in Pakistan. During the last 15 years, industrialization has been concentrated on consumer goods, but it is expected that in future an increasing volume of capital goods will be produced locally. 55. Imports under the U.S. PL 480 program amounted to about $650 million during the Second Plan. Despite rising foodgrain production, imports of wheat averaged about 1.3 million tons a year and appear to be stable or rising slightly. The higher per capita income with a relatively high income elasticity for food probably accounts for this. 56. Import Policy. Pakistan will be entering the Third Plan with an import system that has been substantially liberalized, compared with the system that prevailed at the beginning and during the earlier years of the Second Plan. There has been significant progress towards eliminating quantitative controls and permitting the flow of imports to respond to the requirements of the market, particularly in respect of industrial raw materials and components.2/ 1/ Under the Export Bonus Scheme, an exporter who earns $210 in foreign ex- change has to sell this to the State Bank of Pakistan at the official rate of exchange, of Rs. 4.76, that is for Rs. 1,000. But in addition, if entitled to bonus as most manufactured items are, he receives in addition a voucher that entitles him,or the person to whom he sells it, to purchase foreign exchange at the official rate of Rs. 4.76 for a percentage of the value of his exports. The bonus percentage is either 30 or 20 per cent, depending on the item. If the bonus is 30 per cent (as it is in most cases) and the voucher is sold at 150 per cent of the official rate, the exporter would receive Rs. 450 from the bonus if he sold it on the Karachi Stock Exchange at present. Added this to the Rs. 1,000, his effective export rate would be 45 per cent above the official rate or Rs. 6.90 to the dollar. The import rate on goods imported with the vouchers would be 150 per cent higher than the official rate or about Rs. 12 to the dollar. 2/ The freeing of the requirements of industries from controls has been in stages. Before July 1960, no imports were permitted except against in- dividual licenses. Allocations for industries were based on government assessment of plant requirements for single shift operations. In that year, 118 industries were permitted to import raw materials on the basis of a single request rather than assessment of needs. In 1961, eleven types of raw materials were placed under so-called OGL (Open General Li- cense). The term OGL was a misnomer, as the system was still rigid. The number of OGL items was subsequently enlarged, and an export incentive was built into the scheme by granting additional import licenses in a limited amount for imports of raw materials against evidence of export performance. - 17 - 57. The most important recent change in import policy was the removal, in June 1964, from import control (putting on the "free list" means freedom from licensing, not from tariffs) of 51 items, most of which were intermediate materials and components. The impact of this action on industrial production is discussed above. It supplemented, on a broader front, the action taken in January 1964., when four iron and steel items, financed with U.S. commodity aid, were placed on the free list. Prior to liberalization, these 51 items consti- tuted about 39 per cent of all imports other than those under project aid. 58. Notwithstanding the heavy ordering of these items, particularly in November and December 1964 (which was attributable partly to anxieties about the continuation of liberalization and to the impending elections), the Govern- ment in January announced the continuation of the "free list", and the import policy for the current shipping period (January-June 1965) is virtually un- changed. 59. The Government has had to approach the liberalization of imports carefully, since it has been hard to gauge demand in the market after over a decade of controls and with an exchange rate that made the landed cost of most goods very low in relation to domestic prices. This was evident from the price paid for bonus vouchers (Appendix table 24 ). In the case of most consumer goods except those imported against bonus vouchers (mainly durable consumer goods, and some quasi-luxuries and certain capital equipment), a combination of high import duties and quantitative restrictions was necessary to contain demand. Where these restrictions are handled liberally, as in the case of medicines, domestic prices were very low by any standard. Similarly, all capital goods, including those financed with foreign aid, bear very lowi import duties, and since they are usually priced into the economy at the par rate, tend to stifle domestic attempts at producing similar goods.-/ The solution, applied so far in a few cases, of banning the import of directly competitive goods, is certainly not the right answer. The last Bank report pointed out that the present exchange rate system tends to give an artificial stimulus to demand for those goods that are imported under direct licensing at the par rate, and that the only practical solution would be to combine the lifting of quantitative controls with a policy designed to bring effective domestic demanid into line with available foreign exchange resources. 60. The Mission recognizes the need to keep the price of essential raw materials at a reasonably low level if,in coming years,new producers' goods industries, based partly on imported raw materials, are to be established on an economical basis, and are to withstand competition from aid-financed capital goods on which it wrould be impractical to impose high protective 1/ Duties on capital goods are about 7½2 per cent in East and 12½ per cent in West Pakistan. Consumer goods tariffs average about 50 per cent and intermediate goods 15 - 20 per cent. - 18 - duties. But a price level should be sought also for the.e imported raw materials that will not continue to discourage the use of similar or alterna- tive domestic materials. 61. The acceleration in the disbursement of commodity aid made available during the last three years, has, of course,been effective in reducing the excess of domestic demand over the supply of foreign exchange. Indeed, it has made it possible to initiate the removal of quantitative controls without sub- stantial price measures directed at restraining effective demand. But a rising level of commodity aid should not be postulated to continue for the future on grounds merely of meeting internal demand not associated with higher levels of investmerit and economic growth. 62. With the natural practice by private as well as government agencies to make present and future cost calculations on the basis of c.i.f. prices for imported capital and intermediate goods, rather than the real cost of foreign exchange, a propensity to prefer imported goods over "expensive" local alter- natives clearly exists, and tends to build import dependence into the economy. The Government has recognized the need to encourage the use of resources that can be found domestically, and, with the intent of correcting some of the undervaluation of imports, it requested regulatory powers in the 196h/65 budget to enhance import duties, customs and sales taxes, each by a maximum percentage of 25 per cent of the existing duty or 10 per cent ad valorem. The authority was given for the fiscal year 1964/65. Some import duties wvere accordingly enhanced by 10 per cent ad valorem, but the overall increase so far has been less than 5 per cent. Only about a third of the authority given by the legis- lation has been used. It is expected that the Committee on Tariffs and Taxa- tion, which is studying the problem at present, will make their recommendations on these matters in the near future. 63. It is clear that substantial increases in the import tariff would bring down commercial profit margins in the import trade. The Mission thinks that this is one sector of the economy which is in need of drastic rationali- zation. It is difficult to assess the total number of active importers in the country, but from available information it appears that in East Pakistan alone, the number of importers must be close to 15,000, handling an annual volume of about $200 million equivalent. This would make for V average of $13,000 per firm but considerably less for the majority of them.- In West Pakistan, the situation would seem to be not much different. Mlost of these importers could be better employed in an economy generally short of managerial talent. 6h. It should be expected that the removal of quantitative controls would in due course tend to eliminate that part of the import trade whose business had been,in the past,limited to creaming off the scarcity value of import licenses. No such effects have been reported so far; this may be due to special measures 1/ Small importers are said to handle only 25 per cent of the $200 million. - 19 - taken to protect small traders, particularly in East Pakistan. The Mission does not think that such measures can be economically justified. 65. Domestic wholseale prices have come down by 10 per cent to 25 per cent for those items which were placed on the free list in January 1964. Representatives of private industry pointed out to the Mission that, benefi- cial as the import liberalization was felt to be, it still contains some elements of inconsistency where non-availability of crucial items under regular licensing made it difficult to realize the full benefit of the free list. This criticism has been met in part by putting such items on the bonus import list. Also, the marginal deposit requirement introduced in December was felt to be overly effective in restraining demand as, of course, it was intended to do. However, there was no disagreement in the fact that substantial improvements had been made possible in the utilization of indus- trial capacity. 66. Exports. When the Second Plan was drawn up, a very modest 2 per cent annual growth of exports was forecast; this was subsequently raised to 3 per cent, still less than the expected growth in GNP and quite out of proportion with the expected growth of imports.2/ Actual export performance, however, has been much better. So far, it has been at a compound rate of 7.2 per cent a year, rising from $442 million in 1959/60 to Y$585 million in 1963/64. The overall Plal target may be exceeded by 15 per cent. 67. The success of Pakistan's exports during the Second Plan was not a consequence of changes in market conditions abroad or unusually favorable weather. Nor can it be attributed to special measures of export promotion, since the Export Bonus Scheme had largely played out its role when the Plan projections were made. The principal cause was a sudden break-through in the production of exportable crops, chiefly raw cotton, rice and fish, and has to be viewed in the context of the overall growth of the economy. Very largely, the economic growth during the Plan must be attributed to the per- formance of agriculture; the same is true for exports. The proportion of manufactured goods in total exports declined from 25 per cent in the first year to 22 per cent in 1963/64. For cotton textiles, not even the original target is being reached, and in the case of jute goods, it is likely to be exceeded only by a small margin, if at all. 1/ Pakistan's exportsin 1959 were just about the same as a decade earlier. This stagnation was interrupted only by the lKorean boom, the subsequent slump, and later by a short-lived improvement after the 1955 devaluation. In 1959 the Export Bonus Scheme came into operation. It provided a partial upward adjustment of the effective rate of exchange; about 37 per cent of all exports benefited from the scheme, and these registered a 165 per cent increase in one year. However, the impact of the scheme worked itself off; physical limitations on production assumed greater importance as the Second Five-Year Plan got underway in 1960. - 20 - 68. The composition of exports expected for 1964/65 as compared with the base year is shown in the following table. Table 8 COMPOSITION OF EXPORTS 1959/60 and 1964/65 (Millions of Dollars) 1959/60 1964/65 5-Year Increase of Raw Jute 160 36 172 27 +8 Jute Manufactures 47 11 74 11 +57 Raw Cotton 36 8 84 13 +134 Cotton Manufactures 48 11 36 6 -26 Hides and Skins 20 5 15 2 -25 Wool 171/ 4 19 3 -8 Rice 10- 2 29 5 +198 Fish 10 2 19 3 +91 Other Exports 40 9 82 13 +104 Invisibles 66 15 111 17 +69 CIF/FOB Adjustments -13 -3 Total 441 100 641 100 +45 Y -Estimate. 69. Natural fibers and their products are still the predominant elements accounting for 73 per cent of total merchandise exports in 1963/64. The performance of jute, cotton and their manufactures, the key items, is dis- cussed in Annex 3 . Their markets are neither easy to hold nor fast growing, and, since the war, they have been subject increasingly to technological substitution. Of the other 27 per cent, three-quarters are primary commodi- ties; the proportion of manufactured goods other than textiles in total exports is only 7 per cent. 70. The proportion of1 2xports in Pakistan's GNP is still very low and it is not changing rapidly 1/ Exchange earnings as percentages of GNP have been as follows: 1959/60 1960/61 1961/62 1962/63 1963/64 1964/65 6.4 6.4 6.3 6.9 6.5 6.7-/ .a/ Estimate. - 21 - Utilization of Foreign Aid. 71. The Plan estimates had projected a gross inflow of capital of $2,770 million over the Five-Year Plan period excluding PL 480. Th:Ls figure included private foreign investment and technical assistance as well as foreign grants and loans. $2,300 million of this was expected to be dis- bursed for the Plan and $470 million for the Indus Basin Project. It is now estimated that foreign aid disbursements (in this sense) will be $2,015 million, of which $1,672 million will be for the Plan and $343 million will be for the Indus Works. Our discussion of the costs of the overall develop- ment program including Indus, is deferred till the next chapter. Here we will consider only the utilization of aid for the Plan. 72. The breakdown of foreign financing for the Plan, including the Rural Works Program, is showin in the following table: Table 9 PLANNED AID ACTUAL FINANCDIG OF SECOND PLAN (Millions of Dollars Equivalent) (1) (2) Planned Actual (Est) Percent Amount Percent Amount Percent (2) of (1) Expenditure Plan 4830 93 5361 97 111 Works Program 336 7 168 3 50 Total 5166 100 5529 100 107 Financing Project Aid and Loans 1365 28 825 15 60 Commodity Aid and Loans 735 14 694 12 94 Sub-total 2090 42 1519 27 73 Private Foreign Investment 126 2 95 2 75 Technical Assistance 74 1 90 2 122 PL 480 Counterpart 4641 / 9 414- 7 89 Sub-total 664 12 599 11 90 Foreign Resources 2754 53 2118 38 77 Pakistan Resources 2412 47 3411 62 141 Total: 5166 100 5529 100 107 1/ $338 million (Rs. 1,600 million)for Works Program and $126 million (Rs. 600 million) for Plan. 2/ $168 million (Rs. 800 million) for Works Program and $246 million (Rs. 1,172 million) for Plan. - 22 - 73. The most striking feature in addition to the shortfall of foreign resources of 23 per cent (27 per cent if only "aid" in the stricter sense of project and commodity assistance is considered) is the concomitant fact that Pakistani resources have met 62 per cent of Plan outlays as compared with about 47 per cent originally intended. If Plan expenditures had not exceeded expectations, the foreign resources actually received would have covered 42 per cent of such expenditures (instead of 38 per cent). The 41 per cent, by which the use of Pakistan's own resources have exceeded expec- tations, was made necessary to the extent of about two-fifths by an increase in Plan expenditures and three-fifths by a shortfall in the disbursement of project aid. The dominant role of the shortfall in project aid is evident from the table. The net capital inflow (foreign resources received less foreign debt service for the Plan was $1,902 million, as compared with the $2,450 million originally intended. 74. At the inception of the Second Plan, foreign aid requirements were computed in terms of disbursements and there was insufficient appreciation of the delay between the commitment of funds and their disbursement. By the end of the Plan period, however, the foreign aid pipeline probably will have increased by about $646 million or over 110 per cent. While total foreign resources used were 23 per cent less than contemplated by the drafters of the Plan, total funds pledged, together with private investments, technical assistance and PL 480, amounted to over $3,000 million. 75. The remainder of this discussion has to do only with project and commodity aid for the Plan, thus excluding PL 480, private investment, and technical assistance. The actual disbursement of aid in this narrower sense is likely to reach only 73 per cent of the target as table 9 shows. 76. The utilization of such assistance pledged or committed from con- sortium as well as non-consortium sources (including estimates for the last half of 1964/65) is shown in the following table. - 23 - Table 10 UTILIZATION OF AID, 1960/61 - 1964/65 (Millions of Dollars) Consortium Other Total Members Funds Available Opening Pipeline 295 12 307 Consortium Pledges 1816 -- 1816 Outside Consortium 309 173 482 Total: 2420 185 2605 Funds Committed Prior to Plan 295 12 307 First Four Years 1546 84 1630 1964/65 (estimate) 504 31 535 Total: 2345 127 2472 Estimated Uncommitted 751/ 58 133 Pledges - July 1, 1965 Funds Disbursed First Four Years 990 48 1038 1964/65 (estimate) _465 16 481 Total: 1455 64 1519 Undisbursed Commitments (Pipeline) 890 63 953 Pipeline plus Uncommitted Pledges 965 121 1086 1/ Assuming funds for the Karachi Steel Mill and related projects are all committed ($82 million) by July 1, 1965. Source: Appendix Table 6. 77. Details as to the phasing of commitments and disbursements over the Plan period are shown in Appendix table 6 . Considerable delays occurred in the commitment of aid pledges in the earlier years of the Plan. In the first two years, the amounts annually committed were only slightly greater than disbursements from the then existing pipeline. Since on average only about 10 per cent of project aid is disbursed in the year of commitment and about 35 per cent in the second year, this earlier slowness in commitments severely limited the flow of disbursements in subsequent years. The main reason for these delays must be sought in the limited availability of new projects ready for execution, but procedural difficulties also played a role. As it turned out, this limitation in the availability of aid in the early years did not have balance of payments consequences as severe as might have been expected, - 24 - had the calculations of the Plan's import coraponent aad the country's export capability been correct. In the middle of the Plan, commitments began to swing upwards; while project aid disbursements showed only a gradual acceleration 1962/63 was the turning point both for a larger volume of commodity aid and substantially higher export earnings, the combination of which gave greater flexibility for investment, particularly in the private sector, and permitted a smooth transition from a controlled economy to domestic decontrol and sub- stantial liberalization of imports. This helped to improve the investment climate, and together with fiscal and other incentives made it possible to exceed Plan targets for investment in the privately financed sector by more than a third. 78. The annual rate of commitments reached a peak of almost $700 million in 1963/64, a considerable part of which had been carried from preceding years in the form of uncommitted consortium pledges, held up pending the completion of feasibility reports and their approval by creditor countries and the Bank. 79. Total availabilities of pledges for fiscal year 1964/65 were $613 million, of which $435 million were new pledges. Commitments up to December31, 1964 amounted to $232 million. The proposed commitment rate in the current 6-month period therefore is $303 million; whether this figure is reached will depend, among other things, on the speed with which arrangements for the Karachi Steel Mill can be finalized. If the steel mill funds are committed, it appears that the carryover of uncommitted pledges will be about $75 million. 80. It appears that Pakistan will end the Plan period with a pipeline of unused pledges and undisbursed equal to about two-thirds of disbursements during the Second Plan and about one-third of foreign aid requirements now estimated for the Third Plan. Most of this build-up occurred during the third and fourth year of the Plan, when marny projects reached a stage of preparation when funds could be committed to them. The last year of the Plan will prob- ably show a relatively small further accretion to the pipeline (see Appendix table 6 ). As is indicated below, the Mission feels that some reduction of the fund of $1,086 million unused commitments and pledges may be possible during the Third Plan despite the increase contemplated in overall Third Plan outlays. All of the uncommitted pledges at the end of the Second Plan will be earmarked for projects then under consideration by aid-giving countries and agencies. Therefore, it can realistically be regarded as part of the end-of- Plan pipeline. 81. Nearly 40 per cent of the project assistance furnished to Pakistan during the Second Plan was committed and disbursed for projects in the private sector. There appears to have been little difference in the speed with which project aid was used in the two sectors. In both the public and private sectors, about 46 per cent of commitments (including undisbursed commitments at the beginning) were disbursed during the Plan period. Data showing the commitment and disbursement of project assistance by categories of the Plan are not yet available for 1964/65. However, its distribution for the first four years is shown in Appendix table 30 . - 25 - 82. In its 1964 report (AS-106a), the Bank examined in some depth Pakistan's administrative performance during the Second Plan. A number of recommendations were made for improved organization and staffing in the agencies most immediately concerned with the preparation and execution of the Plan. The Evaluation of the Second Plan (Chapter 6), prepared by the Planning Commission, discussed the improvements in public administration that have been made or that are now in progress, and concludes that sub- stantial progress has been achieved, though more improvement is needed in certain areas. The Mission agrees with this evaluation. The rate of aid utilization is one indicator of administrative performance. The carryover of unused pledges remaining at the end of the current year is likely to be much smaller than at any time since the establishment of the consortium and will be a result of special problems in finalizing aid negotiations on certain projects together with the terms on which certain aid is offered, rather than slowness in project preparation per se. In respect of the rate of disbursement and the consequent size of the pipeline, non-project aid is being disbursed about as rapidly as it is committed, allowing for the in- evitable delays in allocating it to the private or quasi-private sector. The closing level of pipeline for this type of aid may be a little smaller than at the start of the Plan. The disbursement of project aid is only now reaching the amount that was contemplated as an average for the Second Plan as a whole. Considering the level that Plan expenditures have now reached, the disbursement of project aid is clearly still quite slow. This, as well as difficulties and problems which the Mission observed in connection with a number of projects, leads us to repeat the recommendation in last year's report that the Planning Commission establish a section charged with keeping closely in touch with the implementation of projects. This should not interfere at all with the Provinces' responsibility for project preparation and execution. 83. In respect of the preparation of Third Plan projects, a large number of feasibility studies have been completed or are nearing completion. The projects that will emerge from these studies, together with the large number of on-going projects, should permit a steadily rising level of development expenditure. What seems to be deficient or lacking are plans for the appro- priato time-phasing of projects. For example, decisions as to which projects are J .e undertaken during the first year of the Third Plan and which left for later had not yet been taken at the time of the Mission's visit. 84. In respect of a broader field, preparations for the Third Plan have also moved quite slowly. The special committee that was established a year or longer ago to prepare recommendations on new sources of government revenue for the Plan has not yet reported. Also, the overhaul of the tariff structure to provide a substitute for direct import controls is still awaited. These delays in reaching decisions on matters of basic economic and fiscal policy make the task of preparing as well as reviewing the Third Plan more difficult. CHAPTER 2 THE THIRD PLAN - GENERAL FRAIE Size of the Plan 85. The financial magnitude of the Third Plan is about double the Second, Rs. 52 billion ($10,920 million) as compared writh about Rs. 26 billion.l/ In real terms the increase proposed is somewihat less. Prices of investment goods increased about 8 per cent over the Second Plan period and assuming this rate to continue through the Third Plan, the latter would be roughly 85 per cent larger than the Second Plan in real terms. By any standards the Third Plan represents a very substantial stepping-up of the country's investment effort. 86. For the Third, as in the Second Plan, the Government is treating investment in the Indus Basin Works as outside the frame of the Plan. The foreign exchange and a large portion of the rupee costs of this undertaking have, of course, been provided by the group of friendly oountries through the Indus Fund. The costs of the proposed Tarbela project are also not included in thle Plan. The proposed Third Plan expenditures, together with projected disbursements on the Indus Works are shown in Table 1 in comparison with corresponding expenditures and financing for the Second Plan. Since no decision has been reached as to when and whether the Tarbela project will be undertaken during the Third Plan, its costs and financing are not included in this table. These data do, howiever, include the Rural Works Program, which was treated as outside the Second Plan but which has now been incorporated as an integral part of the Third Plan. Thus just over Rs. 55 billion (about $11.6 billion) would be spent on all development undertakings in Pakistan during thle Third Plan period if Tarbela is excluded. l/About Rs. 25,500 million of this was spent on the Second Plan itself and about Rs. 800 million on the Rural Works program. Projected expenditures on the latter are included in the Third Plan. - 27 - Table 1 (a) PAKISTAII DEVELOPMKj\T PROGPAM (IMillions of Dollars) Second Plan Third PlUi' Foreign Foreign Total Exchange Rupees Total Exchange Rupees Expenditures Plan and Rural 5523 2772 2751 10920 47252' 6195 Wiorks Program Indus Basin Works 590 3433/ 247 691 409 282 (1) Total Expenditure 6113 3115 2998 11611 513k 6477 Financing 2622 2047 575 4333 3661 672 External Of which Private investment 95 95 147 147 Technical assistance 90 90 105 105 PL 480 counterpart 5754/ 575 672 672 Tndus Fund 343 343 409 409 Other foreign assistance 1519 1519 3000 3000 (2) Pakistan's own 3491 1068 2423 7278 1473 5805 resources Percent (2) of (1) 57 34 81 63 28 90 (including Indus) Percent (2) of (1) 62 39 88 66 31 94 (excluding Indus) 1/ Plan expenditures and financing are Planning Commission estimates. Indus expenditures are Bank estimates. 2/ Using Planning Commission estimate that foreign exchange is 43 per cent of total Plan expenditures. Compares with 50 per cent in Second Plan. 3/ Includes $21 million from the Indus Fund for the purchase of rupees from the State Bank of Pakistan used for the Indus Basin Works. V. $414 million equivalent for the Second Plan and Rural Works Program and $161 million equivalent for Indus. - 28 - Table 1 (b) PAKISTAN DEVELOPETNT PROGRA1M (Millions of Rupees) Second Plan Third Plan1' Total Foreign Rupees Total Foreign Rupees Exchange Exchange Expenditures Plan and Rural 26300 13200 13100 52000 225002/ 29500 Works Program Indus Basin Works 2802 16273/ 1175 3289 1947 1342 (1) Total Expenditure 29102 14827 14270 55268 24436 30832 Financing External 12481 9744 2737 20625 17426 3199 Of which Private investment 450 450 700 700 Technical assistance 430 430 500 500 PL 480 counterpart 27374/ 2737 3199 3199 Indus Fund 1633 1633 1947 1947 Other foreign assistance 7230 7230 14300 14300 (2) Pakistan's own 16621 5083 11533 34643 7011 27633 resources Percent (2) of (1) 57 34 81 63 28 90 (including Indus) Percent (2) of (1) 62 39 88 66 31 94 (excluding ILdus) 1/ Plan expenditures and financing are Planning Commission estimates. - Indus expenditures are Bank estimates. 2/ Using Planning Commission estimate that foreign exchange is 43 per cent of total Plan expenditures. Compares with 50 per cent in Second Plan. 3/ Includes %621 million from the Indus Fund for the purchase of rupees from the State Bank of Pakistan used for the Indus Basin Works. 4/ $414 million equivalent for the Second Plan and Rural Works Program and $161 million equivalent for Indus. - 29 - 87. In making comparisons between the two Plans, it must be borne in mird that during the Second Plan Palkistan had a rapidly accelerating annual rate of development expenditures which increased about 156 per cent between 1959/60 and 1964'65. As between the last year of the Second Plan and 1969/70, the increase proposed is 68 per cent. Thus comparing the aggregates for the two Plans over-emphasizes the acceleration in spending that is involved. What is envisaged is a steadily increasing annual amount of development spending and foreign resource inputs during the Third Plan, with the former increasing about 11 per cent a year and the latter about half that rate or 5.6 per cent annually. 88. Table 1 also shows the proposed sources of financing for this development effort. Appendix Tables 31 and 32 give the expenditures and financing for the Plan and for the Indus undertaking separately. The latter would be entirely financed from external sources. On the foreign exchange side, the financing would be from the funds already committed by the Indus Club, and on the rupee side from PL 480 counterpart. 89. The authors of the Plan contemplate that, despite the sharp increase in investment envisaged, the mobilization of domestic resources through private and public savings would increase consideraby more than the increase in investment. During the Second Plan period, about 57 per cent of total development outlays (including Indus) was raised internally. For the Third Plan period, this would be about 63 per cent. For the Plan itself (excluding Indus) the Pakistan contribution i-s planned to be 66 per cent as compared with about 62 per cent in the Second Plan. This will involve a marginal rate of domestic saving of 22 per cent as compared with 21 per cent for the Second Plan 90. It will be observed from Table 1 that the direct and indirect foreign exchange component of the development program (including Indus) is e;xpected to decline from about 51 per cent in the Second Plan to 43 per cent in the Third. This is based on an estimate of the Planning Commission and seems to reflect expected import substitution in the capital equipment field. The mission feels that this assumption may be a little optiXiistic. However, the larger Rural Works Program during the Third Plan will make for a somewhat lower foreign exchange component. During the Second Plan about 34 per cent of the foreign exchange costs of the Plan plus Indus was met from Pakistan's own foreign exchange earnings. This would decline to 28 per cent for the Third Plan. Thus, although exports are expected to increase at a rapid rate (9.5 per cent is forecast by the Government and about 8 per cent by the Mission), the proportion of export earnings available after paying for consumer goods imorts and meeting debt service is not likely to increase quite as rapidly as gross investment. Development Exoenditures as Compared with Investment 91. It is necessary to distinguish between Plan expenditures and the total gross investment taking place in the economy. The latter is the more relevant for growth analysis. Plan expenditure includes a certain amount for development, but not strictly investment purposes. Ecpense involved in the initial operation of public projects is an example. This type of outlay is estimated at about Rs. 4,600 million for the Third Plan, - 30 - roughly 9 per cent of total Plan expenditure. On the other hand, invest- ment in the non-monetized sector of the economy and inventory investment are not included in the Plan. These two elements are estimated at Rs. 3,950 million, roughly balancing the non-investment expenditures in the Plan (see Table 2). However, there is no statistical basis for determining investment in the non-monetized sector and the amount included is estimated by assuming that a small percentage (2%) of farm income is invested in the non-monetary sector. Obviously any such estimate is a guess.2/ I/ By doing a census type survey of investment for 1962/63 and extrapolating by treating investment in other years as a function of inputs of steel, cement, machinery and equipment, (using 1962/63 parameters) the Planning Commission has estinated gross fixed investment in broad sectors for the Second Plan. Using parameters derived from this analysis the investment output relationships proposed for the Third Plan have been checked for consistency with the overall and sectoral growth targets using input/output model projections. More detailed work with a larger number of sectors is required but the results to date indicate a fair degree of consistency in the Flan. Table 2 PLAN EXPENDITURES AND GROSS INVESTMENT 1960 - 1970 (Mvlillion Rupees, current prices 1960-65, constant 1965 prices thereafter) Actual Estimate Projection Total Total 59/60 60/61 61/62 62/63 63/64 64/65 Second 65/66 66/67 67/68 68/69 69/70 Third Plan Plan Plan Expenditures: Private Sector 890 1457 2051 2077 2734 3181 11500 3500 3900 4350 4850 5400 22000 Public Sector (a) 1870 1894 2364 2722 3200 3850 14030 4400 4950 5500 6050 6600 27500 Public Vlorks - - - 100 300 400 800 500 500 500 500 500 2500 Total Plan Expendi- tures (a) 2760 3351 4415 4899 6234 7431 26330 8400 9350 10350 11400 12500 52000 Non-monetized Investment 400 400 450 430 450 450 2180 470 490 510 530 550 2556 Changes in Stocks 430 170 40 320 250 250 1030 300 250 250 300 3°0 1400 Indus Basin Works - 100 210 780 890 925 2005 822 822 822 822 - 3288 Total Plan Expenditures & Other Investments 3590 4021 5115 6429 7824 9056 32445 9992 10912 11932 13052 13350 59238 ,ess: Non-investment Plan expenditures 160 246 355 463 5W4 655 2263 740 830 920 1010 1100 4600 Total Gross Investment 314130 3775 4760 5966 7280 8401 30182 9252 10082 11012 12042 12250 54638 (a) Including non-investment development expenditures. - 32 - Allocations as Between the Public and Private Sectors 92. Of the Rs. 52 billion of Third Plan expenditures, public sector expenditures (including the financing of private sector investment from public funds) are not to exceed Rs. 30 billion. For the Second Plan public sector development outlays (including the Rural Works Programs is expected to be about Rs. 14.8 billion out of Rs. 26.3 billion. The share of the public sector would thus increase~ a little fi7om about 56 per cent to 58 per cent as between the two Plans. Public development expenditure as a percentage of the total of such expenditures has been increasing steadily over the last fifteen years, rising from only 29 per cent in 1949/50 to 50 per cent in 1959/60 and to over 57 per cent in 1964/65. However, there is a considerable amount of public development expenditure used to finance private investment, and non-Plan investment (stocks and non-monetized investment) is largely in the private sector. Taking account of these factors the share of private investment in the total (excluding Indus) will probably not change much as between the two Plans. The share of the public sector may rise a little because of the public sector industries planned for East Pakistan. 93. As in other mainly private enterprise economies, the Plan invest- ment targets for the public sector are more explicitly defined (in terms of sectors and projects) than is true of the private sector. The former is an operationaI program while the latter is an "indicative" one, reflect- ing the plannerst conception of how private sector development should proceed. This is not to say that the Government is without means of steering private investment into lines it considers best for national growth. The sanctioning of industrial investment and the advancing or withholding of Pakistan Industrial Bank and Agricultural Development Bank credit are the most direct of these means. Import controls, tariffs and fiscal measures are others, the first of which is gradually being supplanted by the second and third. The export bonus scheme, inasmuch as it provides different export rates for different commodities and the program of providing tax relief as incentive for new industries, are other means at the Government's command for encouraging or discouraging particular private investments. Recently in East Pakistan, the East Pakistan Industrial Development Corpora- tion arrangements for joint participation in the jute goods industry with the private sector is another means used to influence the direction of private investment. Regional Allocation of Investment 9h. The Third Plan provides that about 54 per cent of public sector and 52 per cent of total investment will be in East Pakistan. The invest- ment in public sector industries in the Eastern Province is expected to increase threefold during the Third as compared with the Second Plan. During the last five years, a particular effort has been made to accelerate the rate of development in East Pakistan and, according to the revised national accounts estimates, the growth of per capita income from 1959/60 to 1963/64 was 2.7 per cent per year in East Pakistan as compared with only 2.4 per cent in the IJest. The same relationship obtained between the growth in GNP which, during the first four years of the Second Plan, averaged 5.4 per cent in East Pakistan and 5.0 per cent in West Pakistan. In 1963/64 - 33 - per capita income in West Pakistan was still 25 per cent higher than in East Pakistan. Growth Targ-et 95. The overall increase in real GNP now projected for the Third Plan is 37 per cent or 6.5 per cent a year compounded, about 13 per cent a year larger than during the Second Plan. This target had just been established when the Bank Mission left Pakistan. The previous one was 30 per cent. The bench marks from which Third Plan growth will be measured are the trend values for 1964/65 -1/ 96. The raising of the sights was because recent improvements in national accounts estimates indicated that a higher rate of growth had been achieved during the Second Plan than previously thought, with resulting higher "bench marks" (1964/65) for savings, investment and other parameters of growth for the Third Plan. The higher rate of growth will, according to Pakistani estimates be, in a sense, self-generating, since it will evoke higher levels of domestic resource mobilization. On this basis the overall level of the Plan was raised from Rs. 45,500 billion to Rs. 52,000 billion without increasing the requirement for foreign assistance. The growth targets for the productive sectors of the economy are shown in Table 3. The national accounts show a growth in the agricultural sector of 3.5 per cent a year and in the rest of the economy of 7.1 per cent per annum during -the Second Flan, Broadly speaking, the growth strategy of the Third Plan is to maintain this rate of increase in non-agricultural sectors and step- up the growth of the agricultural sector by 2 per cent, i.e. from 3.5 to 5,0 per cent a year. This is an over-simplification, since the different elements in the non-agricultural sector are calculated to grow at disparate rates. Obviously, also, the composition of Gross Domestic Product as between the agricultural and non-agricultural sectors will change as will the composition of the non-agricultural part of production. As Table 3 shows, the most striking change in the annual growth rates is in construc- tion, wshich is largely connected with the stimulus given to that sector by the Indus Basin and Rural Works program during the Second Plan. 1/ Based on a ten-year least squares computation. - 34 - Table 3 SECTOR GROWTH Percent Annual Growth Rates % Contribution to GNP Second Plan Third Plan 1964/65 1969/70 Agriculture 3.5 5.0 49.0 46.7 lManufacturing 8.6 9.0 10.9 12.7 Large Scale 13.0 12.9 7.1 9.5 Small Scale 2.6 3.0 3.8 3.2 Mining 9.8 11.1 0.3 0.4 Construction 22.2 11.8 4.4 5.5 Public Utilities 21.5 18.4 0.8 1.1 Transport and Communication 5.8 5.5 6.2 6.2 Other Services 5.3 5.5 25.1 24.5 Unallocatedl/ 4.7 5.2 3.3 2.9 1/ Central Government, PIA, Banking and Insurance. Source: Planning Commission. 97. The most important factor in Pakistan's accomplishing the growth objective of the Third Plan, in addition to the amount of investment, is the timing and scale of return on this investment. The Government envis- ages some increase in the capital/output ratio during the Third Plan, the basis for this conservative assumption being that the social sectors and long gestation industrial projects will receive a larger portion of total investment funds. It seems unlikely, however, that projects with a long pay-off period will be relatively more important during the Third as com- pared with the Second Plan. Of course, the share of large-, as compared with small-scale industries will increase as it has been doing over the last 15 years, and this may cause industrial investment to require a longer gestation period. On the other hand, in agriculture, with greater emphasis on water investment and on providing more nearly adequate farm supplies, this should mean that Third Plan investments in this sector will yield a faster and larger return than investment in agriculture and water did during the Second Plan. This is implicit in the assumption that the spread be- tween agricultural and industrial growth will be narrowed during the Third Plan, a process that was already underway during the last five years. For these and other reasons discussed below, it seems likely that the growth target of the Third Plan can be achieved if agricultural production receives the urgent attention it requires. 98. The export target for the Third Plan calls for an annual increase in foreign exchange earnings of about 9.5 per cent. T e Mission's evaluation of this target is given in Chap-ter 4. The export projections - 35 - will involve further important shifts in their composition away from agri- cultural raw materials towards manufactured products. The agricultural component of exports has already declined from 90 per cent in 1951/52 to about 52 per cent in 1964/65, largely because of the growth of the textile industry. As indicated above, the expansion of exports during the Third Plan is expected to reduce gross foreign capital requirements from about 9 to 8.2 per cent of GNP. 99. The principal indicators that Pakistan is moving towards self- sufficiency during the Third Plan are that the ratio of the increase in imports to increase in GNP (marginal import rate) is expected to decline from 15.5 per cent in 1965/66 to 12.1 per cent in 1969/70 and the fact that the relative increase in capital requirements measured by the capi- tal/output ratio (assumed as about 2.8 per cent) times the growth rate (6.5 per cent) is about 18, or lower than the projected marginal rate of saving of 23 to 24 per cent. This means that the resource gap at the assumed growth rate should narrow in relation to investment, and later absolutely. Other supporting evidence is that exports should increase faster than imports by a fair margin (8.1 as compared with 7.2 per cent per annum). 100. The growth in population estimated at between 2.6 and 3 per cent per annum is being tackled by increased emphasis on family planning during the Third Plan. The Mission is not optimistic about the near-term results and, however successful, the program will not affect the size of the labor force during the next 15 years or so. However, it seems probable that the rate of increase of capital stock during the Third Plan will be consider- ably greater than the increase in the labor force, so that productivity per worker should continue to rise even after tacing into account some increase in the capital/output ratio. Points of Emphasis in the Third Plan 101. The principal objectives of the Third Plan may be summarized as follows: (1) to increase the rate of economic growth of the economy by about 1 per cent per annum as compared with the Second Plan; (2) to accomplish this primarily by increasing the mobilization of domestic re- sources, and thus reduce the resource gap as a percentage of total invest- ment; (3) bring about a more balanced growth in the economy by increasing the rate of growth of agricultural output byl.5 per cent a year and by directing a larger share of industrial investment towards capital goods industries; this will require a sharp increase in the proportion of total industrial investment that is channeled through the public sector parti- cularly in East Pakistan; (4) increase exports in relation to GNP; and (5) narrow the discrepancy between per capita income in the two Provinces. 102. Aside from financial limitations, the principal constraints during the Third Plan are likely to be (1) the required regional division of investment; (2) social welfare objectives which may (in the short-run at least) run somewhat counter to optimum savings and return on investment; (3) lack of basic and technical education; and (4) public administration. CHAPrER 3 DOMESrIC RESOURCES FOR THE PLAN 103. This chapter will consider the feasibility of mobilizing the amount of domestic resources which the Planning Comission conlsiders will be necessary to carry out the Plan. In the concluding chapter we will discuss the overall investment target for the economy as a whole, its implications for domestic consumption, and the external assistance that appears necessary to achieve the growth target of 6.5 per cent a year. 104. Two considerations are paramount in assessing the feasibility of mobilizing Rs. 35,500 million of domestic financial resources for develop- ment during the Third Plan: First, the economy's capacity to generate the required levels of income and savings; second, the prospect of transferring an adequate proportion of the savinr into private and public development expenditure. With the economy growing during the Second Plan at 5.2 per cent a year in constant prices, it was possible to mobilize over Rs. 16,000 million (Table 1, Chapter 2) of domestic resources for development purposes as the average rate of domestic savings increased from about 6.5 to 10.5 per cent of the gross domestic product. Under the assumptions of foreign assistance in the Third Plan frame, the domestic financial resources re- quired would mean the average savings rate would have to be raised to around 14 per cent of the gross domestic product. This implies that a little more than a fifth of the total additional income generated would be saved. 105. During the-SecondL Plan, the Mission estimates that the marginal savings rate was, about 21 per cent and the Third Plan calls for it to in- crease only to 22 per cet, assuming, of course, that the planned economic growth actually oceurs.-. 106. While the increase appears modest, to expect an economy with per capita GNP of around $80 to save nearly a quarter of any addition shows a considerable confidence in the willingness of the people to undergo aus- terity and of the Goverrment to adopt strong measures. 107. The Planners pointed out, however, that, owing to the higher levels of per capita income during the Third Plan than in the Second, the per capita marginal rate of saving could decline from about 33 per cent to 28 per cent. On a per capita basis, proportionately less of the addi- tional1 income would be required to be saved, thus imposing relatively less austerity on the nation. 1/ One percentage point addition to the marginal rate of savings means over Rs. 1.7 billion of additional domestic resources for the Plan. - 37 - 108. The strategy of the Third Plan calls for continuing the favorable treatment accorded in the Second Plan to the sectors of the economy which are most productive of savings such as large-scale industry. However, it is expected that industry's relative contribution to the increase in GNP will be a little less during the Third Plan than in the Second (20 per cent as compared with 18 per cent), while that of agriculture will increase (33 per cent to 40 per cent). Because of industry's proven propensity to save, this may tend to reduce the marginal savings rate unless more inducements (and/or requirements) are given to the agricultural sector to save and invest. Better supplies of agricultural inputs, particularly machinery, and new efforts in the field of agricultural taxation are necessary to this end. 109. The Mission feels that the comparatively high level of savings achieved during the Second Plan was due in large part to two factors: (1) the encouragement given to savings and investment by the removal of controls; and (2) the Government's ability to mobilize public savings through increases in taxes. Both these lines of policy are to be further pursued during the Third Plan, though concrete steps to be taken are not yet always clearly es- tablished. Howiever, the Mission feels that Pakistan can and will take the necessary action to accomplish the overall savings objectives of the Third Plan, assuming, of course, that the present high priority given to economic development continues. Division between Public and Private Sectors. 110. The Goverlnment is setting a target of Rs. 19,000 million for pri- vate domestic savings and Rs. 16,500 million for public savings to meet the domestic resources requirements of the Third Plan. The comparison with the Second Plani is shown in the following table: Table 1. FEIANCING OF DOMESTIC RESOURCES REQUIREMENTS UNDER SECOND AND THIRD PLANS (Rs. Million) 1959/ 1964L/ 2nd Plan Third 1960 1965 Revised Percent Plan Percent (Est.) Estimates Government financed Sector: 1 1/ Revenue Surplus 30 1382 3963Y- 24.4 11600- 32.7 Net Capital Receipts 214 400 1746 10.8 2400 6.8 (Incl.Local Bodies) Borrowings from Banks -- 365 911 5.6 1500 4.2 Possible Additional 1000 2.8 Sources Total: 244 2147 6620 40.8 16500 46.5 Private Sector Domestic Savings 776 2589 9620 59.2 19000 53.5 Total: 1020 4736 16240 100.0 35500 100.0 1/ Includinlg additional taxation and customs duties on Commodity Aid. Source: Planning Commission. - 38 - i11. Thus the Third Plan will involve a considerably larger transfer of development resources from the private to the public sector in propor- tion to total domestic savings than the Second Plan. At the same time, domestic savings retained for investment in the private sector would have to be approximately doubled. 112. Private Sector. The assumption that this larger transfer of financial resources to the Government is compatible with the private investment target depends on private economic activity continuing to pick up momentum. The rise in domestic private savings flowing into fixed monetized investment from about Rs. 800 million in 1959/60 to around Rs. 2,600 miliion in 1964/65 is remarkable. A further increase to Rs. 3,000-h,000 million by 1969/70 appears feasible. Domestic private investment of this magnitude is dependent upon continued fiscal incentives favorable for investment and other positive factors influencing the investment climate. The recent trade liberalization should be one of such incentives. 113. The Plan contains only very rough estimates of the specific sources of the Rs. 19 billion of private development funds. The Goverrimeiit estimates that self-financing and reinvestment of profits will contribute Rs. 10 bil- lion, bank credit expansion Rs. 6 billion and net issues on the capital market Rs. 3 billion. The Rs. 6 billion of bank credit expansion includes credit advanced by specialized government corporations (except PICIC, which provides foreign loans). The contributions from these sources in the Second Plan are estimated at Rs. 4.5 billion, Rs. 4 billion and Rs. 1.12 billion, respectively. Thus self-financing and issues on the capital market are ex- pected to increase by about 120 per cent and 168 per cent respectively, while bank credit expansion would increase by 50 per cent. Tne bank credit expan- sion seems compatible with monetary stability but perlaps not if the public sector also requires substantial deficit financing. Experience during the Second Plan indicates that the other targets may be attainable. The overall private savings target would involve a private sector marginal savings rate of about 10 per cent of GNP, the same as that achieved during the Second Plan. 114. The bulk of the private savings is expected to come from the indus- trial sector through reinvested earnings, new capital issues and other forms of self-financing. This, of course, is the fastest growing part of the economy. Self-financing of investment in the agricultural sector, stimulated by price incentives and other measures, and self-financing in housing are expected to increase significantly. In particular, the Government is looking for a spurt in private investment in East Pakistan in response to fiscal incentives, distribution of foreign loans through PICIC and IDBP and through a modified industrial investment schedule. 115. Given the amount of credit expansion proposed, the savings and investment targets for the private sector may be reached. However, this will mean a continuance of austerity in consumption and wages during the Plan period. - 39 - 116. Public Sector. In the Mission's view, securing sufficient domestic resources to finance the public sector program will present a more serious problem because of the relatively larger portion of total domestic savings destined for the public sector, the lack, at present, of a firm program for securing all the necessary revenues, and the greater commitment of the Government to the public sector program because of the nature of the plan- ning and plan implementation processes in Pakistan. As noted above, the public program is "operational", whereas the private program is "indica- tive". 117. The Government estimates that the consolidated revenues of the Central and Provincial Governments on the basis of a 37 per cent growth rate will increase by approximately two-thirds. It is also expected that non-development expenditures will increase more slowly than revenues, rising by 36 per cent from Rs. 16.7 billion to about Rs. 22.8 billion. Excluding debt servicing and recurring expenditures of the development departments, the increase in administrative expenditure (including de- fence) has been about 6 per cent a year and the comparable figure for the Third Plan is under 3 per cent. The resulting revenue surplus, which is the principal item of government domestic development financing, is esti- mated at Rs. 11.6 billion or about triple the Second Plan volume of Rs. 3.96 billion (including returns from new taxes and increases in rates). The returns from additional taxation, a key element in the forecast, are tentatively set by the Planning Commission at Rs. 3.0 billion, pending the report of a high level Commission on Taxation and Tariffs, appointed by the National Economic Council both for this purpose and to recommend improvements in tax administration and in the tariff structure.l/ 118. The net proceeds of the capital transactions of the Central and Provincial Governments, including the local authorities, are estimated at Rs. 2.4 billion and compare with about Rs. 1.7 billion raised during the five years ending 1964/65. Gross receipts in this category are estimated at almost Rs. 900 million above the Second Plan but a third of this in- crease will be utilized for meeting the increased liability on account of foreign loan repayments. 119. To obtain one billion of the remainder of Rs. 2.5 billion of domestic resources required for the government-financed development pro- gram, it is planned to transfer private resources to the public sector by associating more private investment with public corporations, particularly the PIDC's. The remaining Rs. 1.5 billion would be obtained by means of 1/ The Commission on Taxation and Tariff was appointed on March 23, 1964, to study taxation measures which could be taken at Central, Provincial and local levels for mobilizing additionalresources for the Third Plan; to study the working of tax collection machinery at Central and Pro- vincial levels; and to review and make recommendations for rationaliz- ing the existing tariff structure. It lhas not yet reported. - 40 - deficit financing. This contrasts with the commitment of the Government in the Second Plan not to undertake any net deficit financing, although deficit financing (about Rs. 1.8 billion for the public sector as a whole) did take place. As in the Second Plan, the relative role that deficit financing is to play is to be determined yearly when the budget is formu- lated in the light of the prospective yields from existing and new taxes, capital receipts, expansion of private credit and other factors influencing the fiscal and monetary position. 120. The fiscal program is summarized in the following table: Table 2 DOKESTIC RESOURCES FOR FINANCIlNG DEVELOP12NT PLAN EXPENDITURES (Millions of Rupees) Percentage Increase 1964/ 1969/ 1964/65 1969/70 3rd Plan 1965 1970 Second Third over over over (Est.) (Proj.) Plan Plan 1959/60 1964/65 2nd Plan Government-financed 2147 3790 6620 16500 780 77 149 Sector 1. Revenue Receipts 5094 8170 20700 34355 93 60 66 Taxes 3981 6500'/ 15700 27631 99 63 76 Non-tax Revenues 1113 1670 5000 6724 74 50 34 2. Non-development 3712 5180 16741 22755 42 40 36 expenditures Defense 1297 1434 5496 6690 35 11 25 General adminis- 1126 1320 5441 6462 28 17 19 tration Development 817 1515 3456 5855 78 85 69 Departments Debt Services 472 911 2348 3548 31 93 51 3. Surplus on Revenue 1382 2990 3963 11600 4507 116 193 Account (1-2) 4. Net Capital Receipts 400 500 1746 2400 87 25 37 (Incl. Local Bodies) 5. Borrowing from 365 911 1500 65 Banks (Govn't only) 6. Possible Addi- -- 30-- 1000 tional Sources 1/ Including estimated additional taxation of Rs. 920 million. 2/ Arbitrary estimate based on total. - 41 - 121. The liission believes that the revenue objectives can be accomplished, although this will not prove to be easy either politically or administratively. The projected growth of the Pakistan economy should provide sufficient margin for meeting the target, i.e. that of increasing government tax revenues by approximately three-fourths over the Second Plan. This would mean that total tax revenues would have to increase approximately 12 per cent a year as be- tween the average for the two Plans. However, the increase from 1964/65 to the final year of the Third Plan would be less, about 10.2 per cent a year (1.57 times the projected growth in GNP). 122. During the Second Plan tax revenues increased more than twice as fast as the gross national product but they comprised a smaller proportion of GNP than is estimated in the Third Plan, 7.6 per cent compared with slightly less than 10 per cent. However, the proportion of the annual increment in GNP that would be taken in taxes would approximate the take in the Second Plan, that is, roughly 15 per cent. These relationships are indicated in the follow- ing table: Table 3 TAX REVENlUE EFFORT OF CENTRAL ATD PROVINCIAL GOVEILNkNTS (Millions of Rupees) (1) (2) (3) (4) (5) (6) (7) (8) GNP % Annual Tax (Market Prices) Tax Revenues Increase in: Col.(4) Reve- Annual Annual Tax as a of nues Total Increment Total Increment GNP Revenues Col.(2) as % of GNP 1959/60 32710 __ 2000./ - _ __ 6.1 1960/61 36110 3410 2430 / 425 10.4 21.5 12.5 6.7 1961/62 37760 1650 2750/ 324 4.5 11.7 19.6 7.2 1962/63 39930 2170 2950 201 5.7 7.3 9.3 7.3 1963/64 42960 3030 3400 bL8 7.5 15.1 1h.8 7.9 1964/65 45540 2580 3980 583 6.o 17.1 22.6 8.7 (Estimate) 1969/70 62770 3910 6500Q/ 510 6.6 8.5 13.0 10.3 (Projected) Annual Average Second Plan 40460 2570 3100 396 6.8 14.7 15.4 7.6 Third Plan 55420 3450 5538/ 504 6.6 10.3 14.6 9.9 1/ Excluding customs duties on Commodity Aid. 2/ Assuming Rs. 3,000 million of additional taxation during the Plan period. - 42 - 123. Further discussion of Pakistan's tax system, changes in recent years and an analysis of the bases for the projections is in Annexes 8and9. 124. Non-tax revenues are expected to yield about Rs. 6.7 billion compared with Rs. 5.0 billion in the Second Plan. The nearly two-fold gain in non-tax receipts from Rs. 640 million in 1959/60 to an estimated Rs. 1,113 million in 1964/65 might suggest that the Third Plan projection of a 34 per cent increase by 1969/70 is too modest. It implies that non- tax receipts would be laggirg a little behind the growth of the economy. However, this conclusion of under-estimation may not be warranted. Debt services (i.e., interest receipts primarily on loans from the Central Government to the Provincial Governments and on loans extended by the latter to municipalities, railways and public corporations) were the principal source of non-tax revenues in the Second Plan and are expected to maintain this position in the Third Plan. This source of revenue is not likely to increase rapidly. With new post offices opening, postal and telephone and telegraph traffic expanding, and expansion of the tele- communication system, net receipts from these sources are expected rough- ly to double in volume. Receipts from other sources (i.e., fines, fees, forfeitures, and collections for services rendered by General Administra- tion and Beneficient Departments, irrigation receipts, Currency and Mint receipts, revenues from sale of timber and other forest receipts, "extra- ordinary" receipts, etc.) are pro-ected at their estimated 1964/65 levels or at slowly rising trends.1 125. The projections of non-development spending in the Third Plan imply that there iiill be no necessity for large increases in defense out- lays. They also iaiply that it will be possible to keep the average annual increase in administration expenses at approximately 3 per cent. The Second Plan experience strongly suggests that the Central and Pro- vincial Governments may be unable to raaintain non-development expendi- tures at these rates. 126. A deceleration in the upvard trend in ordinary civilian expeindi- tures from an average rate in the Second Plan of roughly v per cent per year to an average rate in the Third Plan of about 3Uz per cent is hardly to be expected. This wJould imply no significant salary adjustments during the 1/ In the case of net irrigation receipts in lWlest Pakistan and receipts from Civil Administration and Beneficient Departments in East Pakistan, the levels are below those achieved in the Second Plan. However, net receipts other than interest receipts, posts and telegraphs and currency and mint would in aggregate increase approximately 35 per cent over the Second Plan volume. Government enterprises such as posts and telegraphs are pushing up rates and tariffs and it may be possible to transfer some of the additional income to Government; raising fees, fines, etc. could also provide opportunities for augmenting non-revenue receipts. - 43 - next five years. The non-development expenditures of the development departments are expected to increase by approximately 85 per cent during the next five years compared with roughly 78 per cent during the Second Plan. In viewy of the prospective expansion of capital outlays in the Third Plan, there is a danger that the current expenditures required by the old aind nei capital investments may be much larger than presently envisaged. 127. Miost of the outlays will fall on provincial budgets. The non- development expenditures of the Provincial Governments have escalated sharply with the widening of their administrative responsibilities under the new 1962 Constitution and increased expenditures of development depart- ments and debt services in both Wings. In the three years ending in June 1965, not counting debt services, they will have grown by approximately a third in West Pakistan and by a fourth in East Pakistan. On a comparable basis the projections for the next five years indicate an even more rapid growth, averaging about 15 per cent per year in the West and 13 per cent per year in the East. Even if these rates of increase are sharply reduced, unless new sources of provincial tax revenues are located and effective measures are taken to increase non-tax revenues much more rapidly than estimated, the small but dwindling revenue surplus of the Provincial Governments, made possible by tax sharing with the Center, will disappear. The Provincial Goverrments would then be turning increasingly to the Center for more tax sharing and grants to finance current expenditures, draining these funds away from development uses. The findings and recommendations of the Financial Commission in respect to the taxes to be reserved for the Center, the possibilities of transferring certain taxes to the Provinces, the tax-sharing formulas, etc., will be reflected in the Third Plan as finally written. 128. In summary, it seems likely that the non-development expenditures are understated by perhaps 5 per cent and that the revenue surplus in the Third Plan on this account might turn out to be around Rs. 1.0 billion smaller than visualized. 129. The Third Plan projection of Rs. 2,400 million of net capital receipts, including contributions from local bodies, should not be too difficult to attain considering the experience during the Second Plan and the magnitude of domestic savings envisaged during the next five years. Savings mobilized in this form are expected to rise moderately from an estimated level of Rs. 400 million in 1964/65 to about Rs. 500 million a year in the Third Plan. If the ratio of net capital receipts to gross domestic savings achieved during the past five years could be maintained during 1965/66-1969/70, net capital receipts would easily exceed Rs. 3,400 million, or Rs. 1 billion larger than projected. This would offset the probable under-estimation of current expenditures, but of course it is contingent upon efforts to mobilize small savings and sell government assets to the private sector. - 44 - 130. The Government regards its projections of revenue surplus and net capital receipts as conservative and sees the possibility that domestic re- source mobilization through these means may be larger. However, if actual domestic and foreign resources fall short of the Rs. 30,000 million ceiling established on the implementation of the public sector program, the Govern- ment sees several possible choices ahead. One, which the Mission strongly supports, is to look to private enterprise to take on some of the under- takings presently reserved for the public sector. This might be done on a joint venture basis (see Annex 3 ). Revising the pricing policies of public enterprises to realize some profits is another possibility. The pricing policies of the public enterprises should be re-examined with a view to enabling them to carry more of the burden of their future expansion out of their own resources. 131. Finally, the Government would rely on deficit financing tenta- tively estimated at Rs. 1,500 million, which it regards as consistent with the likely demand for money and credit needs of the private sector during the Third Plan. The Mission does not favor this as a planned development resource. The private sector is likely to require all the credit expansion compatible with monetary stability. The Government would be well advised to seek all possible financing of the development program through non-expan- sionary means rather than commit itself to deficit financing for 9 per cent of its required domestic resources. Conclusion. 132. The Mission feels that the overall savings target of the Third Plan may be achieved. However, the problems connected with transferring sufficient funds to the public sector, so that 46 per cent of total domes- tic development financialresources are used for government-financed projects, are formidable and some have not yet been resolved. This is evident perhaps in the Government's reliance on deficit financing and other uncertain sources of funds to make up 15 per cent or so of public sector domestic resources. The Mission does not predict that no funds from these sources can or should prudently be used. However, in one way or another, their mobilization or use will affect the scale of investment possible in the private sector. This, together with the uncertainties surrounding the PL 480 program alluded to in the next chapter, leads to the conclusion that about Rs 2.5 billion of the domestic resources counted on for the pub- lic sector program may not be forthcoming without impinging on the private sector program. This shortfall might be increased to about Rs. 3 billion if the Tarbela project is undertaken fairly early in the Third Plan period. CHAPTER 4 EXTERNAL RESOURCES 133. The gap between the proposed Plan expenditure of Rs. 52 billion and the domestic resource projection of Rs. 35.5 billion discussed in the preceding chapter would be met by an inflow of foreign resources of Rs. 16.5 billion ($3,465 million) which is the gross foreign assistance requirement estimated for the Plan. In addition, to complete the Indus Basin Works, which would be financed with foreign resources, an estimated disbursement of about Rs. 3 billion will be required. 134. If the proposed Tarbela project is undertaken early in the Plan period, an additional requirement for foreign resources of perhaps about Rs. 2 billion would be involved. Thus, Pakistan's total resources gap during the Third Plan, assuming the postulated mobilization of domestic resources would be between Rs. 19.5 billion ($4,095 million) and Rs. 21.5 billion ($4,515 million) depending upon whether and when the Tarbela project is undertaken. 135. In table 1, chapter 2, which excludes Tarbela, external financing is given as Rs. 20,625 million and internal as Rs. 34,643 million for the Plan and Indus. The reason for the difference be- tween these amounts and the Rs. 19,500 million external and Rs. 35,500 million internal resources referred to above is that the Third Plan postulates Rs. 2,200 million of PL 480 counterpart to be used for the Indus Basin Works and Rs. 1,000 million for the Plan. These amounts have been included as external resources in the table in Chapter 1. However, according to present estimates, the Indus Basin Works, exclud- ing Tarbela will only require about Rs. 1,340 million during the Third Plan. Thus there would be Rs. 860 million for other purposes, and in the aforementioned table this is reflected in a reduction of Pakistani resources from Rs. 35,500 million to about Rs. 34,640 million. If Tarbela is undertaken early in the Third Plan,between Rs. 600 million and Rs. 1,000 million would probably be required for its rupee financing. In this event, the rupee requirements for Indus and Tarbela could be approximately covered from PL 4o80 counterpart, if PL 480 supplies come up to the Planning Commission's estimates and Rs. 35,500 million of domestic resources are generated for the Plan. 136. The Mission finds it very difficult at this stage to estimate PL 480 absorption. The Planning Commission estimate would involve an increase of about $150 million or $30 million (23 per cent) a year over the Second Plan. In the face of the target increase in domestic agri- cultural production of 5 per cent a year (substantially more for food- grain production) to also postulate an increase in the absorption of PL 480 supplies implies a substantial increase either in per capita domestic food consumption or in exports of agricultural products or both. An increase in the former may well occur, but the export position is uncertain because of PL 480 policies in respect of the export of agricultural products (mainly rice) while Pakistan is receiving PL 480 - 46 - wheat. In our own estimates of Pakistan's official capital requirements (table 1, chapter 6), we have assumed PL 480 counterpart of $10 million a year less than the Planning Commission's estimates. If the problem with U.S. authorities is resolved satisfactorily, the generation of about Rs. 2,500 million of PL 480 counterpart during the Third Plan may be feasible. This wouild be about Rs. 500 million short of the amount re- quired for Indus, Tarbela and the Planoi/ However, the uncertainty of the situation counsels a conservative evaluation of the domestic resources for the Third Plan as mentioned in chapter 3. 137. Apart from the Rs. 1 billion of PL 480 counterpart, Rs. 15.5 billion ($3,255 million) of other foreign resources would be required for the Plan. Of this, about Rs. 700 million ($147 million) might be met from net private foreign investment and Rs. 500 million ($105 million) from technical assistance. This would have Rs. 14.3 billion ($3,000 million) to be met from project and non-project loans and grants. 138. The Planning Commission has estimated that Rs. 22.5 billion ($4,725 million) of development imports (capital equipment and materials to make capital equipment plus technical assistance) will be required for the Plan itself. The Kission believes this estimate is reasonable though perhaps a little conservative. Deducting for private investment and tech- nical assistance receipts anticipated, this would leave about $4,473 million of development imports to be covered from the above-mentioned $3,000 million of foreign aid and about $1,473 million of Pakistan's foreign exchange earnings. The rest of this chapter will examine whether Pakistan's export prospects are sufficiently promising to finance this flow of development imports together with the requirements for non-devel- opment imports and foreign debt service. 139. The following table summarizes the balance of payments for the Second Plan and for the Third Plan as estimated by the Government. 1/ If started in 1966 the Tarbela project would involve disbursements totalling about $350 million up to June 30, 1970, according to estimates of the Bank Group. About $225 million of this would be in foreign exchange and $125 million equivalent (roughly Rs. 600 million) in rupees. At the end of the Second Plan, the undisbursed commitments for the Indus project should be about $600 million. There is no firm basis at present for calculating the final cost of the Basin Works, but barring events that might increase such costs, the residual left for Tarbela is estimated at between $165 million and $230 million. $275 million to $340 million additional in foreign exchange would be required up to 1976 for the completion of the project. The rupee costs of Tarbela during the Third Plan are, of course, small in relation to the rupees the Government hopes to raise for the public sector for the Plan and the rupee costs of the Indus Basin Works which total about Rs. 18 billion. Rupee requirements for Tarbela would be between 3 and 4 per cent of this amount. - 47 - Table 1 BAIXCE OF PAYIDNTS ESTl:iATES (Millions of Dollars) Per cent Second Plan Third Plan Increase Expenditures Development Imports 2,789 4,725 69 Non-development Imports (including 1,483 2,140 44 net invisiblT) PL-480 Imports - 649 798 23 Indus Basin 322 409 27 Debt Service 200 596 198 Total 5,433 8,668 60 Foreign Exchange Earnings 2,783 4,200 51 Deficit 2,650 4,468 69 Financing Project Assistance Plan 825 1,853 125 Non-project Assistance Plan 694 1,156 67 PL-480 649 798 23 Indus Basin Fund 343 2/ 409 19 Technical Assistance 90 105 17 Private Foreign Investment 95 147 55 Subtotal 2,696 4,468 66 Short-term capital and change in reserves (-increase) -46 1/ Mission estimates PL-480 imports are larger than PL-480 counterpart availabilities because of rupees used for U.S. purposes, changes in counter- part balances etc. 2/ Includes $21 million used to purchase rupees from the State Bank. Source: Planning Commission. - 48 - 140. The Government estimates imply that export earnings available for Plan purposes will be 33 per cent larger than in the Second Plan in spite of the substantial increase in debt service. However, the disbursements of project and non-project aid for the Plan will be about twice as large as in the Second Plan, which is about the proportionate increase in the Plan. 141. The commodity export targets set by the Government compared with those of the Mission are as follows for the base and final years of the Plan: Table 2 EXPORT TARGETS FOR THIRD FIVE-YEAR PLAN (million rupees) 1964/65 1969/70 1969/70 Estimates Government Estimates Mission Estimates Primary Commodities Jute 820 750 750 Cotton 400 550 550 Hides and Skins 70 80 80 Wool 90 90 90 Rice 140 350 300 Fish 90 250 170 Miscellaneous 140 250 250 Total 1,750 2,320 2,190 Manufactures Jute Manufactures 350 800 700 Cotton " 170 350 350 Paper and Newsprint 20 50 20 Other 230 600 500 Total 770 1,80 1,570 Invisible Earnings 530 680 700 TOTAL EARNINGS 3,050 4,800 4,460 - 49 - Exports 142. Our more detailed comments on Pakistan's export targets are in Annex 1 . Only general comments on some of the principal items are given below. About 88% of Pakistan's present merchandise exports are what may be called traditional exports, namely, primary commodities and textile goods made from jute and cotton. The substantial acceleration of export earnings in recent years had increased this proportion slightly from what it was at the beginning of the Second Plan. The increases have been predominantly in raw cotton and rice. The future outloek is for the maintenance of the present pattern, with the major shift occurring in the case of jute and cotton from the raw fibers to fabrics. Products of other light industries are expected to increase faster than overall exports, but their share in the total is unlikely to grow by more than a few percentage points. 143. On the supply side, the overall growth targets for exports between 1964/65 and 1969/70, and prospects of their being achieved, are therefore very largely a function of agricultural development. As pointed out in the next chapter, prospects in the next five years are particularly good for agricultural production in West Pakistan, owing to the presently very favorable relation between yields and additional inputs of fertilizer and irrigation water. Cotton. fine rice, and miscellaneous primary commodities are produced almost entirely in West Pakistan. The mission believes that the Government is right in setting ambitious targets for the export of these items, and thinks that it is reasonable to expect that their combined earn- ings could increase from a present level of PRs.680 million to about PRs.l,100 million in 1969/70, or by over 60%. The most important single commodity, however, is raw jute, accounting for over one-fourth of total export earnings. Here the scope for increased production is less bright, and with drastic expansion of use by domestic mills it is expeoted that export earnings from raw; jute will decline somewhat. 144. The target for both jute and cotton manufactures is at least to double the present value of exports, which of course implies not only a large effort by industry by also in the supply of the fibers. While there is hardly any doubt about the availability of cotton in the volume proposed for both export and mill consumption, the same cannot be said for jute. Although the potential for agricultural development in East Pakistan is very large if viewed from the purely technical angle, with the high fertility of the soil and the relatively low cost of lift irrigation water, structural and adminis- trative problems at the present stage make it difficult to achieve an early breakthrough. Jute production has in fact been stationary over the last five years; a major effort as well as a considerable amount of ingenuity for the improvement of production and marketing will be a precondition for meeting the proposed requirements of both export and mill consumption. To achieve the export target for cotton tex- tiles, it will be necessary to reduce the attractions of the home market relative to exports, thus inducing manufactures to lower export prices. 145. While the targets for the major raw materials, although conspicuously high, appear on the whole to be capable of achievement, the Mission has serious doubts in the case of fish about the realism of increasing exports by over 150 per cent from a present level of Rs. 90 million. Similar doubts exist with regard to the new target for miscellaneous manufactures. 146. On the demand side, Pakistan is not a typical country with a "commodity problem". The largest single export item -- raw jute -- today accounts for not more than 27 per cent of all earnings and its foreign markets, although not growing fast, are relatively stable by comparison with sugar or coffee. And the next largest item, raw cotton, is a relatively safe bet because of Pakistan's small share in world exports; furthermore, whatever may happen to those two comnodities, it will not happen at the same time. On other export items, Pakistan is even more a marginal supplier than for cotton. 1h7. Pakistan's problem lies more in her terms of trade which have long been declining because of the predominance of raw material exports, and they are not likely to improve significantly during the Third Plan. Whatever gains may be made in export prices of raw materials can be offset by rising import prices. 148. However, there is not much choice for Pakistan's export strategy. To maximize earnings, raw material exports have to be pro- moted along with the policy of diversification. Clearly, however, exports of manufactures have to be expanded as fast as quality con- siderations permit. The Mission endorses the objective of doubling them in five years, even though this implies some sacrifice to domestic consumers. During the Second Plan, about 13 per cent of the increment in the value added by manufacturing industries was exported; during the Third Plan, this ratio should go up to 18 per cent, which means that, with the same rate of growth in output, there will be a slower growth of domestic consumption. 149. Pakistan's industry is young but has shown some signs of vigor. For those industries which have a profitable home market, strong incentives are needed to activate their export capability. Others, like the jute industry, have been most effective in promot- ing their sales abroad. This is a hopeful sign; the strategy in the Third Plan is to diversify exports by adding more manufactured goods to the existing range. Still, at this early stage, products of - 51 - advanced technology, such as petrochemicals, electronic equipment and components, automotive parts, refrigeration equipment and machine tools, will only start to make their appearance during the Third Plan and their export will be experimental. In the long run there is little doubt that Pakistan will have the skills and the wage advantages for embarking on a policy of exporting, besides textiles, some of the more advanced products of industry on a large scale; but with present facilities, the decision has to be for maximum output of those commodities whose export- ability has been demonstrated. Within total exports, manufactured pro- ducts account for about 27 per cent at present, and this ratio is to go up to 38 per cent by the end of the Third Plan. 150. In summary, the Mission feels that Pakistan may achieve about 93 per cent of the growth in exports aimed at in the Third Plan. This would mean an annual growth of about 8 per cent a year or 46 per cent overall. This compares with the Government's estimate of 9.5 per cent annually. Imports. 151. The Mission has not attempted to make a detailed estimate of imports on an item by item basis. However, the Planning Commission has made an estimate (partially by input-output analysis) by main categories for the base year (1964/65) and the last year of the Plan 1969/70. The results of this analysis compared with 1960/61 are shown in the following table: Table 3 ISflORTS DURING SECOND AND THIRD PLAN_' (Rs. Million) Annual % Increase Actual Estimate Projections Second Third 1960/61 1964/76 1969/70 Plan Plan Capital goods f.o.b. 1,166 2,450 3,050 20.4 4.5 Raw materials for capital goods f.o.b. 549 870 1,570 12.2 12.5 Freight/increase 127 348 440 28.6 4.8 Tech. Assistance 63 100 100 12.2 -- Total development imports 1,902 3,768 5,160 18.7 6.5 Consumer goods 570 645 760 3.2 3.3 Raw materials for consumer goods 317 585 920 16.5 9.5 Freight/Insurance 67 134 165 19.0 4.3 Invisibles 328 370 465 3.1 4.7 Total Non-development imports 1,282 1,734 2,310 7.7 5.9 Total 3,184 5,502 7,470 14.7 6.3 1/ Excluding Indus and PL 480. Source: Planning Commission. - 52 - 152. Using the results for these two years, imports for the Plan as a whole were estimated as shown in table 1 above. The total import requirement (excluding debt service) would be Rs. 38,815 million. The Mission made an independent estimate of import requirements by sub- tracting gross domestic savings from gross investment and adding the difference (the internal resources gap) to our projection of exports. As is shown in table 1, chapter 6, our total was Rs. 39,769 million. We then checked our derived imports against estimated year-to-year final demand (exports plus investment plus consumption) and found that the import dependency ratio was fairly stable (in fact rising slightly) as compared with the last years of the Second Plan (see table 1, chapter 6). 153. The most striking change as between the annual increase in imports during the Second and Third Plans (see table 1 above) is in the imports of capital goods. 154. In the absence of import substitution, the Plan requirements for imported capital goods would increase very substantially in the next five years. During the Second Plan period, the increase in capital goods im- ports was in pace with the increase in Plan expenditures (excluding works program), namely 20.5 per cent per year. The average annual increase in these expenditures during the next five years is expected to be 11.2 per cent. If imports of capital goods would keep in the same relation, they would reach Rs. 4s170 million by 1969-70. The Planning Commission pro- jects a figure of only Rs. 3,050 million implying an annual increase of 4.5 per cent. This is in line with the emphasis on capital goods indus- tries in the industrial sector of the Third Plan. The projected growth rate for the latter is 10.6 per cent per annum while it is only 7.9 per cent per annum for consumer goods output. The implication of this for the balance of payments is that import substitution will be primarily in the intermediary and capital goods fields. The remaining scope for import substitution of an economical kind is small in consumer goods. 155. Not the whole explanation for the relatively slower growth of capital goods imports is on account of direct import substitution; in fact the change in the physical mix of sectoral investments from the Second to the Third Plan (A greater proportional share fo education, health, rural works and social investment within the total Plan -- see next chapter) results in a greater proportional use of the country's own physical resources for over-all investment. It is not possible at this stage to quantify this effect. The Planning Commission assumes that the foreign exchange component of the Third Plan will be 43.3 per cent as against 50.5 per cent for the Second; this takes account of both import substitution and the change in investment patterns. A third element, the increase in non-investment outlays in the Third Plan (a large part in the form of subsidies and free supply of Government services to agri- culture) has only a negligible effect on imports, since they grow in about the same proportion as total Plan expenditures. The projections of imports imply that the combined effect of these factors in the case of capital goods imports is a reduction of import requirements in 1969/70 - 53 - by Rs. 1,120 million. As a consequence the ratio of capital goods imports (f.o.b.) to total development expenditures would decrease from about 33 per cent in the Second Plan to 27 per cent during the Third Plan period (see table 4 below). Direct import substitution of capital goods is projected to be Rs. 322 million, which would leave about Rs. 800 million to be ac- counted for by the change in the Plan composition in favor of investments with a lower import component. This indirect substitution effect would seem to be quite large and the Mission feels that it may be somewhat over- stated. Of course, if imports of capital goods are larger than anticipated, requirements for materials to produce capital goods domestically would be reduced, although not in proportion. 156. In the field of intermediary manufactured goods, the scope as well as the need for import substitution is considerably larger than in capital goods industries. Some substitution should also be expected in freight charges through substnatial investment presently contemplated for shipping. But this is likely to be partly or wholly offset by the struc- tural change in industrial output. Consumers goods industries which pro- duce the greater part of manufacturing output have so far relied heavily on domestic raw materials (cotton, jute, food), and their import component is only about 16 per cent. Capital goods and intermediary goods indus- tries which are to grow considerably faster during the Third Plan, have to rely on imported raw materials to the extent of about 47 per cent; and this percentage is likely to grow even higher because of the higher quality of their inputs. The existing foundries and rerolling mills, importing pig iron and billets, have a higher ratio of domestic value added to the value of output than the proposed heavy electrical machinery plants or the machine tool factories, importing high grade steel alloys, aluminum and copper. 157. Detailed enough material is not available for the Mission to make an accurate estimate of these factors. The Planning Commission., while projecting a five-year increase in total industrial production of 52.3 per cent, calculated an increase in the requirement of raw material imports considerably larger, namely, by 71.1 per cent. This wJould mean that even after assuming some import substitution in intermediary products, the net additional foreign exchange cost attributable to industry's growing import dependence would be as much as Rs. 274 million in the last year of the Third Plan. This compares with a saving of Rs. 322 million through import substitution of investment goods. Although the Mission thinks that the basic considerations underlying these projections are correct, there would seem to be some ground for expecting an overall net import substitution a little larger than Rs. 48 million. 158. The import dependence of Plan investment would appear to be some- what under-estimated for the Third Plan, particularly if the rates of increase in table 3 above are compared, where development imports are ex- pected to increase by just 6.5 per cent per year, compared with 18.7 per cent during the Second Plan. This is, however, somewhat misleading because of the delays in foreign aid disbursements during the early years, resulting in a rapid increase in subsequent years. Table 4 IMIORTS AS PERCENTAGES OF PIAN EXPENDITURE Second Plan Third Plan Capital goods f.o.b. 33.2 26.7 Raw materials f.o.b. for investment 11.2 11.8 Total development imports c.i.f. 50.5 43.3 The preceding table shows that the change in relation to the Plan as a whole is a slight increase in import dependence for raw materials for investment, reflecting the requirements of expanded domestic production of capital goods, and which cannot be entirely offset by import substi- tuion in intermediary goods. The implied trend in the import dependence of the whole economy has been checked by the Mission against table 1, page 78 below, where it increases substant ally during the Second Plan and remains about stable during the Thirdl!, mainly on account of the factors mentioned in paragraph 155. On the whole, the Mission thinks that Pakistan's import projections during the Third Plan are slightly on the low side. 159. As indicated above, the Plan assumes that $14,473 million will be available from Pakistan's foreign exchange earnings for development imports. Since our estimate of foreign exchange earnings are about $4,000 million and non-development imports plus debt service totals about $2,740 million, it would appear that only about $1,260 million would be available for development imports from Pakistan's exports. Thus a shortfall of around $200 million appears to exist between the requirements of the Plan and the sources of financing postulated by the Planning Commission. This, of course, is only 4.5 per cent of development imports and certainly well within the margin of error in- evitable in these calculations. It is much smaller than the gap of about $450 million ($600 million with Tarbela) in domestic resources for the public sector which was indicated as likely in the previous chapter. It may be concluded that Pakistan will need to disburse at least as much and maybe a little more foreign aid than is indicated in table 1 above, in order to carry out this Plan. 1/ If the Indus lWorks expenditures are taken out from this table, the import dependence shows an increase from 9.6 per cent in 1959/60 to 11.2 per cent in 1964/65, and a gradual increase thereafter to 11.7 per cent in 1969/70. Chapter 5 PLAN ALLOCATIONS AND PROGRAMS 160. The Third Plan divides total development expenditures Rs.30 billion to the government-financed, and Rs.22 billion to the private sector. The expenditure programs within this broad division were still being prepared when the Bank mission was in Pakistan. However, the planned outlays by principal categories are about as follows in comparison with the estimated actual expenditures during the Second Plan. Table 1 SECTORAL ALLOCATIONS (Millions of Rupees) (1) (2) (3) Second Plan (Est.) Third Plan (Proposal) Increase Amount Percent Amount2/ Percent (2) over (1) Percent Agriculture 3,500 13.3 8,942 15.4 155 Water and Power 4,881 18.6 8,528 15.2 75 Industry 6,365 24.2 ) 14,745 26.1 103 Fuels & Minerals 894 3.4 ) Transport and Communications 4,494 17.1 10,114 17.9 125 Housing I/ 3,892 14.8 7,176 12.7 84 Education 1,000 3.8 2,882 5.1 188 Health 394 1.5 1,330 2.3 236 Manpower and Social Welfare 79 0.3 283 0.5 258 Works Program 800 3.0 2,500 4.8 212 Less Expected Shortfall - 4,500 26,300 100.0 52,000 100.0 98 1/ And physical (town) planning. Source: Estimated from Third Five-year Plan, March 1965. 161. Thus, in general, the breakdown of the allocations are quite similar as between the two Plans particularly if the agricultural and water sectors are viewed in combination. The largest percentage increases are in the social welfare fields of education and health and the rural works program, though less than 8 per cent of the total outlay is planned for the two former areas. This is a reflection of the administrative problems connected with a rapid acceleration in - 56 - these fields and perhaps also of a desire to concentrate on physical production at this stage of development. However, there is a very pressing need to improve both primary (literacy rate is about 15 per cent) and technical education in Pakistan. The elimination of illiteracy is recognized as an important goal in Pakistan's longer term planning discussed in the next chapter. The mission feels that even a larger expansion of the education allocation during the Third Plan would be desirable. 162. The sectoral allocations indicated above are, of course, only a guide to annual development programming. During the Second Plan there were significant departures from the original allocations both between and within the public and private sectors, mainly for administrative and other pragmatic reasons. The authorities would be well advised to preserve flexibility during the Third Plan as well. The shortfall of resources that the mission foresees for the public Bector,particularly if Tarbela is undertakeiz and the managerial and other advantages of having the private sector undertake some of the industriess and agricultural supply functions now earmarked for the public sectors are compelling reasons for such flexibility. 163. The Mission's comments on the principal sector programs are summarized as follows. More detailed discussions of each sector are in their respective annexes. Agriculture 164. The Third Plan calls for a sharp acceleration of growth in the agricultural sector from the 3.5 per cent par year during the Second Plan to 5 per cent per year. To achieve this, the highest priority is being given to measures to increase water availability and use of fertilizer. The Plan calls for maintaining strong farm incentives and strong support for the entire range of agricultural programs. Allocations of public development expenditures for agriculture and water have been roughly doubled over the levels achieved in the Second Plan and provisions are also being made for a considerable increase in development credit for financing private on- farm investments. Together these programs amount to over 30 per cent of planned development expenditures (35 per cent including the Rural Works Program). Provisions have also been made for increasing the supply of essential farm inputs and gradually transferring responsi- bilities to the private sector. Research and extension activities are to be strengthened further and increased emphasis is to be given to land consolidation, colonization, range land development, soil conservation and agricultural marketing. 165. Water Development. Experience during the Second Plan - demonstrates clearly that water has been the major limiting factor in both West and East Pakistan. In West Pakistan, the problem has been one of trying to spread too little water over too much land. In East Pakistan the problem has been too much water in the rainy season and not enough in the dry season. This has resulted in periodic droughts, floods, water-logging, salinity and consequent low yields. - 57 - The 20 per cent increase in water availability developed during the Second Plan has been the major growth factor in West Pakistan. The improvements in flood control and drainage resulting from the Coastal Embankment Project and otber smaller works have been important factors in East Pakistan. With better control of water and reduced crop losses, more intensive cropping has been made possible and farmers have been in a better position to invest in other inputs such as better varieties of seeds, fertilizers and farm machinery. 166. In the Third Plan, public investments in water will be roughly doubled. In West Pakistan, the aim is to develop 24 million acre feet of additional water, almost a 40 per cent increase in irrigation water. Efforts will be concentrated on developing the sweet water areas and considerable encouragement is to be given to private tubewell development. The low lift pump irrigation programs in East Pakistan will be acceler- ated and possibilities for large scale sale of small low lift pumps to individual farmers and development of private tubewells will also be given priority. Major emphasis is to be given to completion of the Coastal Embankments Project and other on-going projects and rapid implementation of a major flood control program for East Pakistan. As a result of these programs, in both wings 5.5 million acres of land will be newly irrigated and 21.7 million acres will receive an improved water supply. This is expected to provide about 35 to 40 per cent of the planned increase in output and provide the basis for improvements in cropping practices and i ncreases in other inputs. 167. In both East and West Pakistan, apart from on-going projects which have already been financed, there are very few major projects which have reached the stage of detailed formulation. Considering the lags which can be expected between detailed project formulation, financing, construction, operation and actual use of the water, an all-out effort will be required to carry out the water development program. This will call for rapid completion of on-going projects, maximum support to private sector development and a sharp acceleration in preparation of new projects. On the basis of past performance and the present status of the preparation of projects, the Mission doubts whether a development of this magnitude can be carried out in the five-year period. 168. Fertilizer and Other Inputs. Fertilizer use which has increased from 31,000 nutrient tons (NPK) to an estimated 162,000 tons (NPK) during the Second Plan is expected to increase to 484,o00 tons (NPK) at the end of the Third Plan. The Plan calls for construction of additional fertilizer plants, continuation of subsidies to offset high costs of domestic production, con- tinued imports at a level sufficient to avoid recurrence of shortages and further transfer of distribution to the private sector. Necessary credit arrangements are also to be provided. Fertilizer is expected to produce about one-third of the planned increase in agricultural output. However, since demand is already in excess of domestic supply, every effort will have to be made to step up imports and to expedite construction of new plants. - 58 - 169. Plant protection, improved seed, mechanization, improved practices and increased labor inputs are expected to provide the remaining 30 per cent of the planned increase in output. Plant protection becomes increasingly important with intensification of production and higher yields. On the present subsidized government operated basis only 12 per cent of the cultivated area is covered and the target is to reach 19 per cent in 1969/70. The mission does not believe that this is adequate and that immediate steps should be taken to encourage maximum private sector participation. Similarly, the improved seed and the mechanization programs place too much emphasis on subsidized government services and do not provide sufficient scope for private sector development. (Annex 2 ). 170. Agricultural Administration and Development. The public sector program for agricultural development has lagged behind targets set in the Second Plan. The major reorganization of agricultural agencies carried out during the first several years of the Plan was undoubtedly disruptive. On the other hand, the sharp increase in private tube- well development and the unfilled demand for tractors, farm machinery, fertilizers and plant protection services show clearly that farmers have become development minded. The increase in agricultural output which has been achieved in spite of the limited availability of essential farm inputs and the inadequate farm credit system indicates a considerable scope for further acceleration of growth. 171. To date, developmental expenditures for agriculture proper have consisted largely of subsidies for various inputs and expenses associated with building up a large governmental bureaucracy engaged in large part in administering a wide range of services. The mission believes that Palkistan could absorb a much higher level of inputs if a larger share of the supply and service functions were turned over to the private sector and government concentrated on those areas which cannot be handled by the private sector. This could bring about a substantial savings in development expenditures and personnel currently earmarked for subsidized inputs and services and make it possible to provide adequate support for the essential agricultural functions of government. 172. While considerable progress has been made in strengthening and expanding research and extension services, a number of serious gaps remain. In the past water has been the most important limiting factor. As a result of the water development program, water is no longer a limiting factor in many areas. Suitable crop varieties and fertilizer are becoming increasingly important in maximizing crop output. This calls for an accelerated research program aimed at developing more high yielding varieties responsive to conditions of optimum water and fertilizer application. It also calls for a further expansion in extension activities to expedite the transfer of results from the research stations to the better farmers. - 59 - 173. With the increased intensification of agriculture which is currently underway, the cash requirements of farmers for fertilizer, seed, farm machinery, tubewells and land improvement can be expected to increase sharply. To date, a substantial part of the investments in tubewells and farm machinery has come out of private savings and non-institutional forms of credit. The Third Plan provides for only a modest increase in institutional forms of farm credit. "Taccavi loans" (direct government loans) will be maintained at about current levels and expenditures on cooperative credit are to be increased somewhat. The Agricultural Development Bank of Pakistan, which has been the principal source of agricultural development credit, plans to increase its lending operations by about 50 percent in the next five years. The mission believes that a much greater increase will be necessary if the objectives of the Plan are to be realized. 174. Conclusions. In summary, the proposed growth rate of 5 per cent per year during the Third Plan is extremely ambitious. To achieve this rate an all-out effort will be required. Immediate steps should be taken to assure action in the following key areas: 1. Water. A general acceleration of the public water development program, particularly the preparation of flood control, irrigation, drainage and reclamation projects integrated into the respective provincial water resource development plans and maximum encouragement to private tubewells and low-lift pumps. 2. Fertilizer. Highest priority to fertilizer imports and construction of additional fertilizer plants to prevent recurrence of current shortage (including timely release of necessary foreign exchange for fertilizer imports). 3. Strengthening and expanding extension and research activities in order to carry out an intensive campaign to stimulate proper use of fertilizer (phosphatic as well as nitrogenous), plant protection measures, improved seed and improved cultural practices. 4. Maximum encouragement to private sector participation in the production and distribution of all inputs with a view toward reducing government's role as rapidly as is consistent with an orderly transition and acceleration in the use of inputs. 5. A sharp increase in institutional credit to farmers, particularly the lending activities of the Agricultural Development Bank of Pakistan. 6. Maintaining adequate incentives to farmers through a market support system aimed at a gradual improvement of the terms of trade. Until project preparation has proceeded much further,it is not possible to pass final judgment on the financial allocation for agriculture but it is probably about the minimum required to do the job envisaged. - 60 - Industry 175. The industrial sector of the Plan had been programmed only in a general way when the mission was in Pakistan. In West Pakistan an inventory had been made of major industrial projects underway or in the planning stage. In East Pakistan, this analysis was still in progress. A few preliminary studies have bean undertaken for some projects in the chemical and engineering sectors. This work had not yet provided a substantial basis for Plan projections. 176. Based on general projections given to the mission, production by industries producing investment goods and intermediate products would increase at 10.6% per annum compared with 7.9% for consumer goods industries. The share of the former in total industrial output would rise from about 33 per cent in 1964/65 to about 36 per cent in 1969/70. The manufacturing sector as a whole would grow by 9.5 per cent per annum versus 9.2 per cent per annum during the Second Plan. Large scale industry would grow 12.1 per cent per annum compared to 13.3 per cent. The contribution of industry to economic growth during the Third Plan would be about 18 per cent as compared with 20 per cent during the Second Plan. 177. It is assumed that the relative share of factory industries in the total manufacturing output would increase at the expense of cottage and other small scale industries. Though there would be a higher growth than in the past in the latter activities (by about 3 per cent a year versus 2.6 per cent during the Second Plan), the share of small scale industries would decline from about 32 per cent of total industry in 1964/65 to 24% in 1969/70. However, the productivity assumptionsfor small industry are not specifically stated and the basic data available for estimating value added in this sub-sector are extremely weak. The mission recommends that necessary benchmark data should be collected through a quinquennial census of small industries in both the Provinces. 178. The employment impact of the proposed expansion in factory industries is still under study. It is assumed that the increases for employment promotion in organized industries in the urban areas will continue and include fuller utilization of existing industrial capacity by the introduction of multiple shifts and removing handicaps, such as the non-availability of raw materials and spare parts. However, in some industries such as petrochemicals and steel, it is necessary to use high productivity techniques. Since the Third Plan stresses the need to develop more capital intensive industries, it will be difficult to reconcile the need to provide more industrial employment opportunities, especially in the urban areas, with the introduction of industries which are not labor intensive. - 61 - 179. Of the total projected increase of Rs. 3,089 million industrial output during the Third Plan, the Planners expect Rs. 1,954 million to be absorbed by the domestic market and Rs.1,135 million to be exported. Rs. 900 million of the domestic absorption would be import substitution and Rs. 1,054 million normal increase in domestic demand. Thus, about two-thirds of the increased industrial production will be directly related to the "international" sector of the economy, i.e., exports and import substitution, emphasizing the need for greater attention to Pakistan's competitive position. 180. Despite the mission's reservations on some of the industries, we feel that the target of Rs. 900 million of import substitution may be met during the Third Plan, though some of the projects suggested will not be ready in time to yield import substitution by 1969/70. Since import substitution will occur once the plant is built, whether or not it is economic, one can speak with greater assurance about import substitution capability than about exports.l/ 181. The mission believes that the projected overall industrial growth rate of 9.5 per cent a year is attainable. The share of large, as compared with small scale, industries will increase as it has been doing over the last fifteen years. Large scale industries should grow at a rate of 12.1 per cent per annumi, which is below the average rate of 13.3 per cent registered during the last five years. The reason for the small deceleration is that consumer goods will grow at a slightly lower rate than during the Second Plan. The mission feels that this assumption is acceptable, although Plan targets for important items such as sugar and edible oil may be on the low side. However, it is also felt that Plan targets for textiles and jute goods are optimistic and, given the weight of these industries in the total industrial output, one may expect that, on the whole, consumer goods will not go faster during the Third Plan than during the Second Plan. 182. Intermediate goods would grow at a higher rate during the Third Plan, i.e., 10.5% per annum. A large part of the increase will be due to the development of fertilizers, various metal products, paper and cement, for which there is a growing market. Several new plants are under construction or are to be undertaken soon. 183. Production of capital goods will continue to bring only a small contribution to total industrial output and the Plan assumes that it is not likely to grow faster than during the Second Plan, i.e. 10.8 per cent per annum. Since most of the heavy capital goods projects included in the Plan will not be in full production before 1969/70, such an approach seems realistic. 1/ See Chapter 4. - 62 - 184. On balance, the assumption of a slightly higher increase in intermediate products should not result in an overall industrial growth rate superior to that achieved during the Second Plan. The Pakistan industrial structure should remain what it has been for a number of years, based on consumer goods and only progressively shift- ing towards the output of intermediate and, to a minor extent, heavy capital goods. 185. Investments in organized industry would grow from Rs. 5,656 million during the Second Plan to about Rs. 13,000 million during the Third Plan. Two-thirds of planned investments would be made by the private sector. East Pakistan would absorb about 55 per cent of total investments. However, investment costs are still largely tentative and only a small part of the projection is supported by specific cost estimates for industrial projects. For that reason, they can only be used as partial check on the econometric calculations on which the global investment targets for manufacturing are based. 186. The calculations of investment requirements were based upon the assumption that there would be a gradual increase in the ratio of investment to output from about 1.65 in 1960/65 to about 3.0 in 1965/70. This would result mainly from more capital intensive investments. Although the mission agrees that the capital/output ratio is likely to increase during the Third Plan, the percentage of "capital intensive" industries is not likely to be so much higher than it was during the Second Plan as to justify such a steep increase of the capital/output ratio. The mission feels that there is a tendency to a systematic over-evaluation of the investment requirements for fixed capital, perhaps by as much as 25 per cent. 187. Since it is important to arrive at a reasonably correct view of the need for industrial investments (particularly from the point of view of the balance of payments outlook and the need for industrial finance), the mission recommends that a critical review be made of the basic assumptions underlying the investment cost estimates. The cooperation of industrial associations and major firms should be obtained in revising these estimates. More weight should be given to the peculiar circumstances currently facing each industry and relatively less weight to econometric calculations, useful as the latter are for checking. 188. Investment Pblicy. One important objective of the investment program during the Third Plan will be to shift the emphasis from consumer goods industry to the establishment of capital goods industries and so to reduce the country's dependence on foreign assistance for the import of capital goods. The mission has substantial reservations regarding this policy, both because of the capital-intensive character of capital goods industries and the comparative small contribution they will make to reducing unemployment. 1/ Steel mills, heavy machinery, machine tools, heavy chemicals, heavy electricals. - 63 - 189. Undoubtedly, Pakistan, as other developing countries, finds herself in a difficult situation as she tries to diversify her economy and move in the direction of a balanced structure. She env-isages her- self as faced with an inelastic demand abroad for the prorj' :t-; of her consumer goods industries, but at the same time she wiil !.a7re real difficulty in achieving large enough markets at home and a±-odd for capital goods industries so that the economies of scale an be obtained. There is also a danger that the pace of investment and iLld'strial growth will be gradually s'lowed after the painless and profitable take-over of the existing market from foreign competition has been accomplished. This can be seen, for instance, with the textile industry which had a relatively slow growth during the Second Plan. One possibility would then be to induce investment in the production of the equipment and intermediate goods used in the consumption goods industries. That is, import substitution could be extended to the prior stages of production. 190. The Planners apparently feel, with justification, that profits to be obtained from capital goods production in Pakistan will be comparatively low. For this reason, most of these industries are proposed for the public or semi-public sectors leading to questions of management and real costs to the economy. What is required instead is that profits from private consumer goods industries be diverted from reinvestment there to investment in equipment and material supply- ing industries. But the capital market is not sufficiently developed to make this kind of reallocation of profits easy. The most likely place for reinvestment of profits is in the industry where they are earned. Development banks and some big industrialists are becoming progres- sively interested in non-consumption goods industries, but this development is still at an early stage. Moreover, capital is required in much larger amounts per unit of output in the steel or the machine tool industry than it is in the consumer goods industries. Tnis puts an even greater strain on already scarce capital resources. 191. The principal argument for balanced economic growth, namely that it will produce external economies such as cheaper factors of production and sources of materials, must be weighed against the obvious drawback of the limited market. Eventually, Pakistan will develop new sources of raw materials and such a development should be given high priority. By developing local raw materials and perhaps new consumer goods industries to utilize their products, Pakistan will achieve some of the important linkage effects that balanced growth is expected to produce. However, this is a long-term consideration and in the shorter run several industries are being constructed which, by their capital intensive character, result in the utilization of the relatively scarce factor, capital, the real cost of which is higher than its market price. On the other hand, labor, the real cost of which is considerably lower than its market price, goes comparatively underutilized. Therefore, we may conclude that, while there are some possibilities in Pakistan of producing capital goods, there are very important limiting factors involved. - 64 - 192. The Third Plan will continue to rely on private enter- prise for achieving most of its investment and industrial targets. However, the size of the public sector allocation for industries is proportionately larger than in the Second Plan, i.e., 35 per cent of the total compared to 24 per cent in the Second Plan. The reason given is that there is a "need for accelerating the pace of industriali- zation in East Pakistan where private capital or initiative is not adequate". In fact, the potential investment capacity of the private sector in the East Wing is unknown. Some industries (such as the jute industry) have shown high rates of return and actual private invest- ment during the Second Plan seems to have been about 20 per cent above Plan targets. One of the weaknesses of the private sector in East Pakistan remains the persistent lack of skills and entrepreneurship. The same is true of the public sector except where imported talent is used. 193. In order to give to East Pakistan a larger share in industrial investments, the Plan allocates a very substantial amount to the State-owned Industrial Development Corporation (EPIDC). However, the mission was informed that government now considers the allocation to the "public" sector should in fact cover a number of projects in which EPIDC (and also West Pakistan PIDC) would have some participation, but which could also be financed by development banks, domestic and/or foreign private investors and the general public. The mission strongly supports that approach. Those public sector schemes of the Third Plan in which domestic or foreign companies have an interest should be set up under such arrangements whenever possible. Several investors have already expressed interest in new projects included in the public sector. Government is still working on the future allocation for industry in the public sector. The mission hopes that the final allocation will clearly show the projects which are intended to be financed by joint ventures, and will indicate the tentative amount of EPIDC participation in such ventures. Then the total amount of funds earmarked for government investments in industry could be substantially reduced. 194. Conclusions. The mission is generally in agreement with the industrial program in terms of the projected overall growth rate. However, we believe that the magnitude of industrial investments is over-estimated to achieve this growth target. We also have reservations regarding the possibility of raising investments in East Pakistan to the projected high level in such a short period of time. The mission recommends that a critical review be made of the basic assumptions underlying the investment cost estimates. Most important,the Government should approach the development of highly capital intensive industry very cautiously and, where such industries are undertaken, if possible, obtain the participation of the private sector, financially and managerially. The mission is not impressed with the argument frequently heard in Pakistan that where the market will accommodate only one plant (usually one in each wing) it must be in the public sector to avoid monopoly pricing. International prices plus tariff would govern selling prices in Pakistan unless the present undesirable practice of banning imports is continued and extended. - 65 - Power 195. The Third Five-year Plan proposes to more than double capital expenditures on power from Rs. 1,772 million during the Second Plan to Rs. 3,628 million for the Third. Investments to be made in East Pakistan would be 40 per cent of total expenditures against 20 per cent during the Second Plan. 196. The program would concentrate heavily on transmission and distribution schemes, which are now the bottleneck in the electric supply industry. Expenditures on transmission and distribution would then be about two-thirds of the total allocation. 197. Installed capacity would reach 2.6 million kw in 1969/70 against 1.1 million kw in 1964/65, indicating the scale of the program. East Pakistan capacity would grow from 0.2 million kw to 0.7 million kw., which may be overly optimistic unless demand increases at a much faster rate than now seems likely. West Pakistan (including Karachi) would have 1.5 million kw capacity in 1969/70 compared to 0.64 million in 1964/65. The target may also prove somewhat optimistic, but seems attainable on the demand side if the tubewell program gains even more momentum and the industrial targets can be achieved. 198. In West Pakistan, an estimate of load growth has been made for the WAPDA system in the form of a power market survey. A special question is the tubewell pumping loads, which are especially difficult to forecast. The load is projected to grow over 120 per cent between 1965 and 1970. WAPDA's forecast for 1970 has been judged somewhat optimistic by the Bank study, "Report on a Dam in the Indus at Tarbela". The report forecasts a total load of 930 mw in 1970 versus 1,005 mw envisaged by WAPDA. Realistic judgments regarding the proper projection of load requirements for planning purposes must await completion of the comprehensive phase of the study of the water and power resources of West Pakistan, sponsored by the World Bank. WAPDA's and the Bank's preliminary results are indicated in Annex 4 199. Projections made by WAPDA for the period up to 1970 indicated that, in West Pakistan, it would be desirable to allocate 60 per cent of the total Plan allocation for power to distribution. The actual allocation seems to be 57 per cent. This ratio confirms the distribution problem now existing in the grid area. It is estimated that 100,000 new customers will be connected in each year of the Plan. The provision of these service connections is covered by a planned allocation of Rs. 425 million. All efforts should be made to improve the distribution system during the next five years. Since it is known that resources are urgently needed to improve the distribution system, which is getting almost 60 per cent of the total Plan allocation, the mission feels that the proposed expenditure of Rs. 1,708 million for the WAPDA program in West Pakistan should not be considered excessive. - 66 - 200. In East Pakistan, the WAPDA power program is estimated to cost Rs. 1,481 million against Rs. 353 million during the Second Plan. The estimated load in 1970 would be 713 mw against 180 mw in 1965. The mission considers this forecast as optimistic on the demand side. Agricultural use of power is expected to jump from 10 mw in 1966 and 20 mw in 1968 to about 120 mw at the end of the Plan. Some increase can be expected as a result of newly installed tubewells, but such a sharp increase over just one or two years is over-optimistic. Also, the forecast assumes a very large growth in power consumption in small towns and villages, but time will be required before the distribution system can be improved to the extent needed to handle the increase. Finally, industrial use is supposed to grow at a very fast rate. The mission has some doubts regarding the full achievement of industrial targets in East Pakistan which are discussed in Annex 2 For the above reasons, it is doubtful whether the deficits in capacity will be as large as implied in the Plan. Some shortage may develop during the early years of the Plan and until capacity is built at Karnafuli, Siddhiranj and Khulna, but the number of new plants proposed for 1969/70 is definitely on the high side. 201. A large allocation of Rs. 578 million has been provided for secondary transmission and distribui:ion and fcr rural electrification. This reflects the uy:enri net!d to i:Yprove the distribLtion system. However, the proposed 3,50C miles of new line3 is unrealistic given the administrative capablLities of WAPDA and the heavy requirements in foreign exchange. A balance will lave to be s..ruck betweea the need to improve the existing distribution system and the desire to connect many small localities to the main line. One of the most costly items is the rural electrification scheme which aims at bringing power to about 2,000 villages. IF a village is located near a tubewell in which electricity is to be installed, there may be good justification for immediate electrification of the village. However, the number of consumers that WAPDA expects will take electricity once it is brought to the villages is way out of proportion with what can be achieved. In other words, the mission feels that the difference in income level between the villages and the larger urban areas has been underestimated. 202. The mission realizes that East Pakistan needs cheaper, more abundant and better distributed power. To achieve these objectives it is quite legitimate to provide for a generous provision under the Third Plan, but it must also be realized that many of the Second Plan schemes remain to be completed and that WAPDA's present capabilities to undertake a very large number of new projects at the same time are limited. For these reasons, we feel that the allocation of Rs. 1,481 million Lor power in East Pakistan is definitely high. - 67 - 203. Transport and Communications. Better transport facilities are necessary in Pakistan if an improved rate of growth is to be achieved. In the Third Plan a larger allocation has been provided in order to move the planned increase in agricultural and industrial production. With this increase in planned production will go a change in traffic patterns. The railways and IWTA, while continuing to carry the long haul mineral and agricultural production, will lose some traffic to road transport particularly in West Pakistan. 204. The Third Plan proposes to continue with general aims of earlier Plans. The priority of transport has increased slightly being given about 18 per cent of total expenditure compared with 17 per cent in the First and Second Plans. In East Pakistan much improved land, water, road and air transport is contemplated and in West Pakistan ongoing road projects, renewal of railway equipment and improvement in port facilities and expansion of the shipping fleet. 205. Inter-modal transport studies are being undertaken and as a result there may well be further changes in emphasis. If roads are to gain in importance, then road transport will have to expand with larger truck fleets and concommitant maintenance and spare parts services. Emphasis on road transport should lead to more domestic assembly of trucks or the import of a greater number of complete vehicles. The development of a spares and components industry would be of great value to the economy, by reducing the requirement for foreign exchange. 206. The increase in the international shipping fleet raises questions since in the present state of the world shipping market many countries are eager to sell new or old ships to Pakistan. The ships will have to be used well to cover their costs. 206. With such large areas and the division of the country, there is a great need for better communications. Telephones are to be increased in number, there are proposals for improved postal services between the Provinces, for a co-axial cable to join the Wings and for a submarine cable between Karachi and Chittagong. The relative importance of these various programs needs to be assessed. As far as the mission was able to judge the allocation for transport and communications seems reasonable. 207. Education. The main objectives in the education sector in the Third Plan are to widen the base of primary education and make available increased facilities for technical and vocational training. With the aim of reducing wastage in primary schools and consolidating university education as well as diversifying courses in secondary schools, larger finances are proposed. - 68 - 208. Quality as against quantity is the rationale. Although it is open to question whether more funds should be devoted to education, there would still remain the difficulty of obtaining at an early date an adequate supply of teachers and other personnel to mount a larger program, The position should be kept under review in annual programs and continuing research and improvement in statistical information on education should be undertaken in order that the program can be as flexible as possible and use resources most efficiently. 209. Health, Manpower, Social Welfare, and Housing. An increase of 1 in the percentage allocation has been proposed for the health and social welfare sectors in the Third Plan. Emphasis is to be placed on preventive rather than curative medicine. It is proposed to do this by improving water supplies, sewerage services and similar facilities. Since many of the diseases in Pakistan are water-borne, these can be controlled through improving water supplies, which although important to the health of the population are projects within the housing and physical planning sector. Rural health centers and other organizations for providing advice are to be increased in number but the shortage of skilled manpower will prevent a great expansion of services within the period of the Third Plan. 210. Family planning has been given much greater importance in the Third Plan. The program is included in the health sector where it is possible that it will not receive the attention it deserves. The importance of success or failure in population control is such that the subject might be made the responsibility of a separate ministry. There will be family planning advisers in all the impnrtant ministries associated with the program but while advice-is valuable, energetic administration of the program will be vital for its success. Much thought and effort is being given to the problem. 211. Linked with this question of population cortrol is that of manpower and employment. Unemployment is one of the gravest problems facing Pakistan; it is estimated that almost one-fifth of the available manpower is wasted every year for lack of opportunity. It is said that the Second Five-Year Plan absorbed all the new additions to the labor force, thanks partially to the employment created by the Rural Works Program. It is calculated that employment for some 6.5 million persons will be generated by investments during the Third Five-Year Plan, cutting a little into the unemployed backlog. The possible use of labor intensive schemes requires further study as the capital intensive methods employed by developed countries are not of particular advantage to Pakistan. 212. Most of the housing and town planning investment will ba in the private sector and is therefore outside the direct control of Government. An exception is construction on the new capitals at Islamabad and Dacca but requirements for theae-were largely provided in the Second Plan. The reduction, percentageiiwise in the allocation for housing may be more a wish than a reality in view of the urbanization going on and the activity of the private housing sector. - 69 - 213. The Mission regrets that more resources cannot be devoted to social welfare programs in the Plan. However, imaginative administration can make up, in part, for the lack of financial resources. CHAPTER 6 PROSPECTS The Perspective Plan. 214. The Planning Commission has outlined broad goals for the economy during the twenty years from 1965 to 1985. The Third Plan has been formu- lated within this general framework. In addition to more than quadrupling GNP (annual target growth rate 7.2 per cent) and tripling per capita income, four other major objectives to be accomplished by the end of the twenty-year period or sooner are in this Perspective Plan. They are: (1) full employ- ment by about 1975; (2) equalize per capita incomes in the two Provinces; (3) universal literacy; and (4) elimination of requirements for further net capital inflow after 1985. 215. We will not attempt to appraise the Perspective Plan which is primarily a set of targets and broad policies. It is an excellent state- ment of objectives. The Government intends to revise it every time a new Five-Year Plan is prepared, and presumably project it for another five years so that a twienty-year perspective is held always in view. It is of interest, however, to examine to what extent the lines of development ex- pected during the Third Plan will advance the economy towards the attain- ment of these long-range objectives. 216. The growth rate set as the objective of the Perspective Plan appears to have been attained only in 1963/64, a year of exceptional agri- cultural production, and it is well above the target for the Third Plan. The Mission has not taken issue with the Third Plan growth rate. Pakistan certainly needs encouragement to strive for as substantial a degree of progress as possible within the limits of resources and capabilities. How- ever, there is a possibility that the Second, and even more so the Third Plan growth rates will not be easy to exceed. During the late 1950's the Pakistan economy was largely stagnant and some elements, such as exports, were declining. The growth achieved during the Second Plan was a recovery from that condition. For this reason, it may not be easy to exceed it in the future. Also, only four years (1964/65 results are still uncertain) is too short a period, particularly in a predominantly agricultural economy on which to base long-term trends. The very favorable agricultural results in 1963/64 had a lot to do with the growth for the Second Plan as a whole. 217. The Perspective Plan target assumes that manufacturing industry will continue to be the leading sector and will increase its share of GNP from 12 to 21 per cent over the twenty years, while the share of agricul- ture will decline from 49 to 36 per cent. This is in line with current trends, but both sectors will have to continue to grow a little faster than projected for the Third Plan to attain the Perspective Plan target. It appears that the amount of investment and saving projected for the Perspec- tive Plan period is high (to increase marginal savings above 22 per cent will be difficult), but the Mission feels that the capital/output ratio of about the present level is reasonable and this is roughly what is projected for the Perspective Plan. Domestic savings will naturally be affected by - 71 - attempts to more nearly equalize income distribution both between and within the Provinces. At the same time, the Mission agrees with the Planners that a higher level of consumption is not inconsistent with and rather is a condi- tion for rapid economic growth in the long run. 218. In respect of the full employment objective (defined as decreasing unemployment from over 20 per cent in 1965 to about 5 per cent of the labor force in 1985), experience during the Second Plan does not make for optimism. Hopefully, the rate of growth of the population may start to decline before 1985. if the family planning program succeeds, but this will not affect the labor force during the Perspective Plan period. The Planning Commission estimates that the labor force will increase by 7 million in 1980-85, culmi- nating in a total increase of 27 million over the twenty-year period. The use of rural works type investment is proposed to offset the capital-intensive character of industrial investment. One must conclude that no plans are being considered to adequately cope with Pakistan's unemployment problem. 219. The objective of equalizing per capita incomes in the two Provinces is politically, rather than economically, motivated. I;hether it can be achieved without accepting a lower return on investment, and thus lower average incomes in the country as a whole than otherwise would be possible, depends a great deal on the development of improved administration in East Pakistan and also curbing population growth in that Province. Otherwise, the allocation of larger public sector investment resources to East Pakistan may contribute to the objective but at a considerable price in terms of the economic growth of the whole economy. The concern expressed in the Plan that differential growth rates favoring East Pakistan may be difficult to reverse when parity is a- chieved seems somewhat premature. 220. The goal of universal literacy by 1985 should be vigorously pursued but will require more attention to primary education than it is given in the Third Plan. 221. The last objective of becoming independent of net capital inflow after 1985 is premised upon considerably larger capital inflows in the interim (particularly during the next ten years) than Pakistan has had in the past, substantial as they have been. During the Third Plan, Pakistan's internal and external resource gap will continue to increase, but if exports and savings materialize as expected, it will start to decrease as a proportion of total investment. This, of course, is a first step in the direction indicated by the Perspective Plan. No one can say at this stage how long it will require to reach the point where only refinancing of old debt will be required. This will depend not only on the factors determining Pakistan's economic growth but also on the level of real per capita income and consumption that Pakistan and her friends abroad consider satisfactory for the political and social stability of the country. 221a. The Perspective Plan assumes that the marginal rate of saving will rise from 22 per cent in the Third Plan to 28 per cent in 1975-80. Also, the propen- sity to import will be reduced from 12 per cent in 1970 to 4 per cent in 1985. These are quite optimistic assumptions. Nevertheless, our calculations indicate that, with these assumptions, while the requirement for net capital inflow would start to decline during the Fourth Plan, it will not be eliminated by 1985 or even by 1990 (Appendix table 35). Furthermore, even if f ture official capital iE secure on very easy terms f2 per cent, 5 years grace, 25 years repayment), amor- tization will increase about as fast as the need for net capital inflow declines. The assumptions in Appendix table 35 are those of the Plann mg Commission's, use, in preparing the Perspective Plan. - 72 - Third Plan Prospects. 222. Pakistan has clearly enjoyed a rapidly accelerating rate of eco- nomic growth during the last decade, and the Mission feels that this will continue during the Third Plan. If the level of investment resources en- visaged is available, the Third Plan growyth target (6.5 per cent a year) appears to be reasonable though the hazards surrounding its accomplishments are obviously considerable in a country so heavily dependent on agriculture and the natural risks associated thererxith. While this Third Plan growth target is high even in relation to the successes of the Second Plan, it is not out of line with the results in the last two years. The most crucial sector will, of course, be agriculture. If the increase in the annual agri- cultural growth rate from 3.5 to 5 per cent is achieved, the 37 per cent cumulative growth in real terms for the economy as a whole should be within reach. Therefore, a speed-up in the use of resources directed towards quick returns in agriculture will be essential. Requirement for External Investment Resources. 223. Using as independent variables the 6.5 per cent a year annual growth rate projected for the Third Plan, the rate of growth of exports estimated in Chapter 4 (over 8 per cent), a marginal rate of savings of 22 per cent, and the capital output implied by the investment levels postu- lated in the Plan, the Mission has calculated the external capital require- ments Pakistan will probably need to carry out the Plan. The results of this projection are shown in Table 1. In this computation, the difference betwieen gross investment and gross domestic savings (internal resource gap) has been added to the Missicn's estimate of exports plus net factor income payments abroad to calculate the required level of imports. The latter was then checked against the economy's total use of economic resources (final demand). The resulting import dependency ratio is consistent with previous experience. Also the close similarity between our derived import require- ments and those directly calculated by the Planning Commission by input- output analysis gives us some confidence in our results (see Chapter 4). 224. The total national resources provided by this flow of imports plus gross domestic product will provide the investment resources required for the Plan plus consumption per capita increasing between 3.0 and 3.2 per cent a year. 225. The gross inflow of foreign resources required for all purposes except amortization of foreign debt during the Third Plan would be about $4,307 million and, including the foreign debt repayment, slightly over $4,554 million. After allowing for PL 480 imports, private foreign invest- ment and of technical assistance, the gross official capital requirement would be reduced to about $3,633 million for the five-year period (last line in Table 1). This includes, of course, the expenditures on the Indus Replace- ment Works../ If the disbursement estimated for the latter is excluded (the 1/ But not the Tarbela project. - 73 - estimated $409 million for this will come from the Indus Fund), the residual to be covered from the present foreign aid pipeline or from new coimmitments would be $3,225 million. 226. The lMission believes that the substantial aid pipeline which is likely to be nearly $1.1 billion (including uncommitted pledges) at the end of the Second Plan could be drawn down by at least $200 million during the Third Plan. This would reduce the additional aid requirement to about $3 billion. 227. Looking at the problem from the standpoint of the consortium, a further reduction may be made for aid from non-consortium sources. The Mission believes that $200 million or so may be forthcoming. In round numbers, the Third Plan as now proposed seems to require about $2.8 billion in consor- tium aid. The Pa'd.stan request is for $2.7 billion. 228. The Mission agrees with that amount as a fair estimate of the aid required to carry out a Plan of Rs. 52 billion. We feel that, if this level of aid is not forthcoming, either the overall level of the Plan expenditures would have to be reduced or the structure of the program would have to be changed to reduce its foreign exchange content, combined with reasures to further raise the rate of domestic saving. Mobilization of Domestic Resources. 229. During the Second Plan, 57 per cent of total development funds (including Indus) were mobilized by the domestic economy, and 43 per cent were obtained from abroad. This involved a marginal rate of saving of about 21 per cent. For the Third Plan, the Government expects to mobilize nearly 63 per cent internally (68 per cent excluding Indus), involving a marginal rate of saving of about 22 per cent. The average rate of saving would have to rise to 13.5 per cent during the Third Plan as compared with about 10 per cent for the Second. We believe that this is a reasonable target. 230. However, the Mission is not equally sanguine about the financing for the public sector program of Rs. 30 billion while maintaining financial stability. In Chapter 3 we concluded that there is considerable scope for imposing new taxes or raising existing tax rates to realize about Rs. 3 billion additional taxes, assuming that the economy grows at about the rate envisaged in the Plan. This would mean an increase in the portion of GNP accruing to the Government from about 11 to 13 per cent. This is still a modest percentage of the national product to be set aside for government expenditures. However, public savings within the presenit revenue framework plus the additional taxes would provide only about 14.3 billion of the Rs. 16.5 billion required for the public sector. 231. This would indicate that the public sector program is over Rs. 2 billion higher than present public savings estimates warrant. The Government intends to make up this shortfall be deficit financing (Rs. 1.5 billion) and from certain other schemes for increasing transfers from the private to the - 74 - public sector. Ln view of the lilcely requirements of the private sector for new credits, the Mission does not believe that any dependence should be placed on meeting public sector expenditures by deficit financing. During the last few years, the private sector credit requirements have absorbed all the monetary expansion that the economy could safely stand. 232. As for additional transfers from the private sector, it must be borne in mind that in principle all private savings are already fully ear- marked for private sector investments or they w-rould have to come from new credit creation iwhich might have inflationary consequences. On the other hand, some of the measures suggested, such as securing private investments in joint ventures with the public sector, have merit. Also, some govern- ment expenditures classed as development and included in the Plan which represent free government services should, in future, be provided against payment. This wiould reduce the net demand on government budgets and accomplish part of the desired transfer of resources from the private sector. 233. Therefore, while there are elements of doubt in the financing of the public sector program and a somewhat lower expenditure target would be wise, wie believe the problem can be met if the Government does not adopt an inflexible policy regarding annual expenditure targets and adapts them to its best year-to-year estimates of available financial resources. We do not feel, in any case, that the foreign aid requiremrient is overstated. It is based, in part, on quite an optimistic export forecast and on quite a low estimate of the foreign exchange content of the Plan. Therefore, the proposed inflow of externally financed resources would still be re- quired even if total Plan expenditures should fall somewihat below present expectations. Aid Requirement for 1965/66. 234. The Government expects that its requirement for foreign aid will increase progressively over the course of the Third Plan_/ and has re- quested $500 million of new pledges for 1965/66. $300 million of this would be for project commitments and $200 million for non-project aid. It seems probable that Pakistan will end the Second Plan with upwards of $75 million of pledges of project aid still uncommitted but firmly earmarked for projects. Our analysis of the trade liberalization program to date indicates that in order for this program to have its intended impact of substantially raising utilization of existing capacity and providing the business community with confidence in the future of the liberalization program, the request for non- project aid should be met. Although the implementation of many projects remaains slow, the rising termpo of commitments and disbursements (Appendix table 6) indicates that Pakistan will be able to utilize effectively the foreign aid requested. 1/ The annual phasing of the Third Plan increases from Rs. 8,400 million in 1965/66 to Rs. 12,500 million in 1969/70. - 75 - Foreign Debt Position. 235. Pakistan's external public debt has been increasing substantially in recent years. By the end of 1964, including the undisbursed portion, it amounted to about $1,714 million as compared with approximately $1,200 million a year before (Appendix table 1). Judging by the additional commit- ments expected in the last six months of the Second Plan, the total may be just over $2 billion by June 30, 1965. A little over half of this or about $1,060 million will probably have been disbursed by that date, leaving a pipeline of around $953 million (Appendix table 6) at the start of the Third Plan. 236. Thanks to the favorable terms on which over 60 per cent of Pakistan's foreign aid requirements have been met in recent years, foreign debt service has been increasing much less rapidly than the principal amount of debt outstanding. The additional debt likely to be incurred during the last year of the Second Plan (1964/65) will increase her debt service payments over the period of the Third Plan by only about 23 per cent, even though debt outstanding is likely to increase by about 47 per cent in that year. 237. The service on Pakistan's existing foreign public debt through 1978/79 is shown by the heavy line at the bottom of the chart (line A). The relatively flat contour of the curve reflects the favorable terms on which aid has been received. 238. Pakistan's export performance during the Second Plan and the even more optimistic outlook for the Third Plan has made her debt service ratio, present and future, considerably less ominous than it was formerly thought to be. Thus, although service on existing debt rises from about $64 million in 1964/65 to over $85 million in 1968/69 (the peak year of service on present debt), exports are expected to increase about propartionately so that the ratio would remain at about 10 per cent. Including service on the new debt that should be incurred to finance the Third Plan, the debt service ratio will rise to about 17 per cent by 1969/70. 239. In the chart (line B), we have projected Pakistan's foreign public debt service tbrough 1978/79 under the assumption that the amount of foreign assistance required will average about $600 million a year and that it will be provided on the same terms as last year's consortium pledges. We have assumed that the growth of exports will not continue at the Third Plan rate after 1970 but will decline to 6 per cent a year. This seems realistic in view of the likely reduction in the growth of such items as jute manufac- tures. We would expect, however, that this would be compensated by a corres- ponding slow-down in the growth of imports. In any event, these longer-term projections do not alter the fact that debt service is likely to require over 20 per cent of Pakistan's foreign exchange earnings starting about 1974/75. PAKISTAN: EXTERNAL PUBLIC DEBT SERVICE PROJECTIONS (MILLIONS OF U.S. DOLLAR EQUIVALENTS) 500 I I 1 1 1 I E X 500 400 4 400 300 300 AP,%AKITN,ISA ER - - ~ o 200/65 IBD-coomc Departmt - Q4 200 2o00/ 0jF-TE SE TAft- 19 07oFPpoJECCRE~A I 00~ ~~~~~~~~-~NB~ 100 (A) 0 0 _ _ _ _ _ _ _ _ _ _ _ _ _ _ '64/65 '65/66 '66/67 '67/68 '68/69 '69/70 '70/71 '71/72 '72/73 '73/74 '74/75 '75/76 '76/77 '77/78 '78/79 PAKISTANI FISCAL YEARS 4/8/65 I BRD - Economics Department 2607 - 76 - Out of $600 million a year gross capital inflow, by 1978/72 over $216 million would be required for amortization. The resulting net capital inflow of $384 million is only a little over half that required for Pakistan's Perspec- tive Plan (Appendix table 35). In an economny so heavily dependent on agri- culture this must be considered rather large, thus emphasizing again the need for as much aid as possible on easy terms. However, thankcs to her export performance and prospects as well as the overall growth of the economy, Pakistan now appears to be more creditworthy for some additional loans on converntional terms. The Mission would hope that they will not need to exceed about 20 per cent of her aid requirements. Economic Policies. 240. In the 1963/64 and 1964/65 budgets, the Government took tax measures adequate to meet the fiscal requirements of the Second Plan and particularly in 1964/65 to substitute tariffs and internal taxes for direct import controls as a means of containing demand for imports. However, the Government has uti- lized only a portion of the authority given to it in the 1964/65 budget to impose higher levies on imported goods. The Mission believes that this autho- rity should be much more fully utilized in the future to the advantage of both the balance of payments and the fiscal positioni of the Government and should be extended to items not on the free list. Also, in the field of taxation, we have made a number of other recommendations (see Annex 9), notably, suggestions made in previous reports that the time has now come to reduice the incentives given to industries in the form of tax holidays and to treat income from agri- culture on the same basis as other incomes insofar as direct taxation is con- cerned. Certainly, these and other measures will be necessary to meet the financial requirements of the public sector program. 241. In respect of monetary policy, the Mission feels that the measures (see paragraph 45) taken early this year were necessary and in no way incom- patible with the Government's trade liberalization program. In fact, they were very necessary to enable this program to be carried out without a conti- nuing excessive drain on the country's foreign exchange reserves. A better balanced flow of industrial materials, components and spare parts is required as the next step in trade liberalization. However, the Mission does not be- lieve that further large-scale import liberalization should be undertaken until the increase in exports forecast by the Government becomes a reality. In this connection, it would be desirable to abolish the remaining export tax on raw jute in order to provide adequate incentives for increase in production which will be necessary to meet the export targets. In respect of exports of indus- trial products, the Mission understands that the Government intends to continue the present simplified export bonus arrangements. While this scheme needs to be continued for the time being, it should be further simplified and modified to become a more effective instrument of export promotion and import liberali- zation. 242. Ln addition to the obvious need of Pakistan for rapid economic growth, the country's most serious problems are the apparently still rising rate of population growth and the large amount of unemployment or under- employment in both the rural and urban areas. IJhile a program of population control is clearly essential, it will not cope with unemployment over the next several Five-Year Plans. While recent estimates of the growth in jobs during the Third Plan indicates that some inroads will be made into the 20 per - 77 - cent unemploynent, the liiission has doubts regarding its statistical basis for this forecast. During the Second Plan, the growth of jobs barely kept pace with the increase of labor force. IJhile the tripling of the rural works program may contribute considerably to reducing rural unemployment, the capital intensive character of much of the planned industrial invest- ment in the Third Plan may result in a larger investment per new worker than the economy can afford. The M4ission believes that the Government needs to take more account of this factor than it has done up to now in sanctioning projects. Tablf 1 PAKSlTANS CA,PITA~L !NFLO1Y REQUIREIENTS (Current prices 1959/6o-1.964/65; Projections at, 1964/65 prices) Actuals Pro jections Estimates Total Total 59/6o 60/61 61/62 62/63 63/04 64/65 Second 65/66 66/67 67/68 6P/69 69/70 Third Plan Plan (Million Rupees) GNP (market prices) 32705 36112 37759 39931 42961 45541 48528 51755 55192 58859 62764 GDP (market prices) 32738 36144P 37796 40009 43057 45675 48715 52029 55543 592897 63274 GDP annual increment 3406 1652 2213 3046 2618 3040 3314 3514 3744 3987 GDP % annual increase 10.4 4.6 5.9 7.6 4.3 6.7 6.8 6.8 6.7 6.7 Population (000) 98880 101450 1:04090 106790 109560 112400 115320 118320 121390 124550 127790 Per capita GDP 331 356 363 375 393 406 422 440 458 476 495 Gross investment 3430 3775 4760 5966 7280 8401 30182 9252 10082 11012 12042 12250 54638 Public sector 1710 1648 2009 2359 2956 3595 12567 4160 4620 5080 5540 6000 25400 Private sector 1720 2027 2541 2827 3434 3881 14710 4270 4640 5110 5680 6250 25950 Indus works - 100 210 780 890 925 2905 822 822 822 822 - 3288 Capital/Output ratio including Indus 1.0 2.2 2.1 1.7 2.4 2.5 2.5 2.6 2.7 2.8 2.9 Capital/Output ratio including Indus 1.0 2.3 2.2 2.0 2.8 2.8 2.8 2.9 2.9 3.0 2.9 Gross Domestic Savingm 2075 2310 3202 4024 4397 4787 18720 5497 6294 7127 8011 8952 35881 Resource Gap 1355 1465 1558 1942 2883 3614 11462 3755 3788 3885 4031 3298 18757 Net factor income payments 33 32 37 78 96 134 377 187 274 351 428 510 1750 Current account deficit 1388 1497 1595 2020 2979 3748 11839 3942 4062 4236 4459 38108 20507 Exports (goos/esice) 200 2286 2384 2748 275 3050 13253 3254 3530 3828 4150 4500 196 Imports (goods/services) 3468 3783 3979 4768 5764 6798 25092 7196 7592 8064 8609 8308 39769 iAimortization payments 67 67 80 127 169 194 637 195 219 238 252 271 1175 Total foreiF-n paymsents 3535 3850 4059 4895 5933 6992 25729 7391 7811 8302 8861 8579 hO9Ld Consumption 30663 338934 34594 35985 38660 40888 43218 45735 48416 51276 54322 ionnual increase % 10.3 2.2 4.0 7.4 5.8 5.7 5.8 5.9 5.9 5.9 Per capita consumption 310 334 332 337 353 364 375 387 399 412 425 Annual increase % 7.7 -0.6 1.5 4.-7 3.1 3.0 3.2 3.1 3.2 3.2 Final demand 361-73 39895 41738 L44699 48725 512339 55724 59347 63256 67468 71072 lImport dependence o6 9.51 0.5 10.7 11.8 13.0 12.9 12.8 12.8 1.2.8 13.7 (I-aillion $) Net capital inflow current account deficit 292 314 335 424 626 787 2486 828 853 P.90 936 800 4307? (of which: offici-al intere-t. 6 78 13 6 22 66 365 086 103 349 ArmortiA ziAon 14 IL- 17 27 3- 41. 134 41 48 50 53 57 7 Orposs canital requirement 306 328 352 451 - -661 828 2620 869 899 94~0 989 857 )tSSh private fn,eign investment 1 19 i 19 17 19 21 95 24 28 32, 36 40 160 Techrical Assistance 13 ]3 16 27 21 90 23 25 2R 30 30 136 PL 4890 Imports 106 68 145 17 5 155 6249 1251 12-5 I;,5 125 121 625 Subtotal 138 1 0( 178 221 -197, R34 172 178 18L 191 195 921 "inrca Official Capital Requ.irer en t 190 ?52 273 144 631 1786 697? 72) 755 798 662 3633 ;.id/t,oans Disrursements 196, 244F 340 n 050-, 578 1812 Exchange reserves and short. terrr capi:.a. (net) -6 + -67 -10 453 EXPLANATORY NOTES - Table 1 1. GD? equals GNP plus net factor income payments abroad. Third Plan projections of GDP are based upon a 6.6% compound growth of GNP and inde- pendent projections for net factor income payments. For the latter, inter- est on official debt is taken from provisional debt service projections, and private interests and dividend payments abroad were assuiaed to grow from the 1964-65 level at the same rate as GNP. 2. Gross Investment figures are taken from Table 2, Chapter 3. Public sec- tor investineM eq`ta1 Plan expenditures less non-investment development ex- penditures. Peivate sector investments equal Plan expenditures plus non- monetized investments plus changes in stoclks. All Plan expenditure data are from material submitted by the Planning Commission. Non-monetized investment projections for the Third Plan are calculated on the basis of 2% of agri- cultural income; changes in stocks during the Third Plan are M4ission estimates, and expenditures for the Indus Basin Works are projected arbi- trarily at Rs. 822 million per annum in the first four years of the Third Plan, assuming that they would be completed by mid-1969. 3. The capital output ratios are derived by comparing gross investnment in the year to which they apply with the resulting increment in GDP in the fol- lowing year. Throughoutt the ten-year period they are derived from GDP and Investment projections and serve only to indicate the trend. 4. Gross Domestic Savlnos for the Second Plan period are calculated by deducting the current az:court deficit from gross invest.ment (= Grcss National Savings) and addirng net factor income payments abroad. For the Third Plan period, Gross Naticnal Savings are projected from the base year 1964-65 on the basis of a 2,5 rnarginal savings rate on GNP. To arrive at Gross Domestic Savings, projected factor income payments are again added to GNS. 5. The Resource Gap is the difference between gross investment and gross domestic savings. 6. Exports for the Third Plan are Mission estimates and differ from the Pakistan Government projections in that they are increasing at about 8.1% per annum compound rather than 9.5%. Imports of goods and services include factor income payments abroad but not amortization of debt; the series is derived in the Third Plan period by adding the current accounts deficit to exports. 7. Consumption equals GDP minus gross domestic savings. 8. Final Demand equals consumption plus gross investment plus exports. The Import Dependence, relating imports of goods and services to final de- mand, serves as a test to measure the adequacy of the level of derived imports. This level can also be comnpared with the import projections based on detailed input evaluation (see paragraphl51 )- STATISTICAL APPENDSD 1. External Public Debt 2. Estimated Contractual Service Payments on External Public Debt 3. Gross National Product at Factor Cost 4. National Expenditure in Current Prices 5. National Expenditure in Constant Prices 6. Commitments, Disbursements and Pipeline 7. Area Under Principal Crops 8. Production of Principal Crops 9. Indices of Industrial Production 10. Sector Allocations (Second and Third Plans) 11. Productivity of Investment 12. Direct and Indirect Tax Receipts 13. Tax Receipts of Central and Provirncial Governments 14. Capital Receipts and Liabilities of Central and Provincial Governments. 15. Distribution of Taxes Collected at the Center 16. Provincial Revenue Receipts 17. Money Supply 18. Sunmiary of the Monetary Accounts 19. Causative Analysis of Changes in Money Supply 20. Scheduled Banks Borrowings from the State Bank 21. Claims of the Banking System on Government 22. Classification of Scheduled Banks' Advances (Percent) 22a. Classification of Scheduled Banks' Advances by Major Economic Groups 23. New Loans Made by Institutions Other Than Commercial Banks 24. Prices of Bonus Vouchers 25. Wholesale Prices Index 26. Wholesale Prices of Commodities 27. Cost of Living Index 28. Consumers' Price Index for Government and Commercial Employees 29. Total Foreign Trade 30. Distribution of Commitments and Disbursements of Project Assistance 31. Indus Basin Works 32. Third Plan 33. Balance of Payments For the Second Plan 34. Balance of Payments Projections for the Third Plan 35. Capital Requirements - Perspective Plan Table 1: PAKISTAN - EXTERNAL PUBLIC DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF JUNE 30, 1964 WITH MAJOR REPORTED ADDITIONS JULY 1 - DECEMBER 31, 1964 Debt Repayable in Foreign Currency (In thousands of U.S. dollar equivalents) Debt outstanding Major reported Item June 30, 1964 additions Net of Including July 1 - _undisbursed undiaburesd Pgcember 11.1964 TOTAL EXTERNAL PUBLIC DEBT /1 624,760 1,341,255 372,890 Privately-placed debt 36,868 78,384 IBRD loans 1292724 311,523 - IDA credits 16 179,350 63,790 U,S. Government loans 276,593 403,865 309.100 Export-Import Bank /2 19,1502O 500 AID 2h2,367 360,700 308,600 IWheat loan 15,000 15,000- Lend-lease silver 76 76 Loans from other governments 170 064 348 698 - Canada France - 3,534 - Germany 69,529 163,857 - Japan 25,623 44,031 _ United Kingdom 69,698 119,674 - Yugoslavia - 11,728 - Loans from USSR 9,535 19,435 _ /1 Frame agreements have not been included except in so far as actual contracts are known to exist. Pakistan's frame agreements are as follows: a) with Yugoslavia $10,000,000 equivalent (contracts to the value of $11,728,000) b) with China $60,000,000 (no contract) c) with USSR (contracts to the value of $24,639,000) d) with Italy $63,000,000 (contracts to the value of $3,054,00o) e) with Switzerland SwF 43,000,000 (no contract) f) with France $35,000,000 (contracts to the value of $3,534,000) /2 Does not include the following loans: a) $15,069,600 from Export-Import Bank to Pakistan Government (unallocated) b) $2,500,000 from Export-Import Bank to Industrial Developnient Bank - Pakistan (unallocated) Statistics Division IBRD-Econamics Department March 24, 1965 Table 2: PAKISTAN - ESTIMATED CONTRACTUAL SERVICE PAYMES ON EXTERNAL PUBLIC DEBT OUTSTANDIN3 INCUDING UNDISBURSED AS OF JUNE 30, l964 WITH MAJOR REPORTED ADDITION JULY 1 - DECEMBER 31, 1964 /1 Debt Repayable in Foreign Currency (In thousands of U.So dollar equivalents) PAGE 1 -GRAND-- TOtAL YEAR DEBT OUTST BEGIN- (BEGIN OF PERIOD) PAYMENTS DURING PERIOD NING INCLUDING AMORTI- JUIJ 1 UNDISBURSED ZATION INTEREST TOTAL 1964 1,312,279 41,066 22,946 64,012 1965 1,615,848 41,331 28,895 70,226 1966 1,574,517 46,581 31,603 78,184 1967 1,527,937 53,227 31,764 84,991 1968 1,474,710 54,810 3O,682 85,492 1969 1,419,900 52,684 31,072 83,756 1970 1,367,217 51,701 29,830 81,531 1971 1,315,515 53,253 27,678. 80,932 1972 1,262,262 53,912 25,503 79,415 1973 1,203,351 50,831 23,443 74,275 1974 1,157,519 55,'461 21,269 76,730 1975 1,102,059 53,693 19,219 72,912 1976 1,048,366 - 49,507 17,445 66,952 1977 998,859 46,593 15,928 62,521 1978 952,266 44,240 14,592 58,832 PRIV.-PLACED DEBTS - TOTAL YEAR _ DEBT OUtST BrnIN_-(BEGIN OF PERIOD) PAYMENTS DURING PERIOD NING INCLUDING AMORTI-__ __ __ JULY 1 UNDISflURSED zATION INTEREST TOTAL 1964 77,408 11,440 2,398 13,838 1965 65,968 6,822 2,958 9,781 1966 59,146 6,762 2,999 9,161 1967 52,384 8,013 2,885 10,898 1968 449371 7,791 2,477 1092671 1969 36,580 5,914 2,052 7,966 1970 30,666 4,899 1,736 6,635 1971 25,767 4,899 1,450 6,348 1972 20,868 4,899 1,_63 6,062 1973 15,970 3,915 891 4,806 1974 12,055 3,425 668 4,093 1975 8,630 2,903 473 39376 1976 5,728 2,861 301 3,162 1977 2,866 1,611 129 1,740 1978 1,255 360 70 430 Table 2: PAKISTAN - ETfKATED CONTRACTUAL SERVICE PAYMENTS ON EXTERNAL PUBLIC DEBT OUTSTANDINO INCLUDIN UNDISBURIED AS OF JUNE 30, l964 WITH MAJCR REPORTED ADDITIONS JULY 1 - DECEMBER 31, 1964 /1 (CONT.) Debt Repayable in Foreign Currency (In thousands of U.S. dollar equivalents) PAGE_2 IBRD LOANS YEAR DEST OUTST BEGINBIBEGIN OF PERIOD) PAYMENTS DURING PERIOD .NING INCLUDING AMORTI- __ _ jULY 1 UNDISBURSED ZATION INTEREST TOTAL 1964 311,523 10,922 6,865 17,787 1965 300,601 13,082 7,962 21,044 1966 287,5i9 16,566 9,117 25,683 1967 270,953 17,122 8,797 25,919 1968 253,831 18,626 8,513 27,139 1969 235,204 19,036 10,160 29,196 1970 216,168 19,926 10,088 30,014 1971 196,242 20,706 9,506 30,212 1972 175,536 21,073 8,916 29,989 1973 154,463 16,576 8,228 24,804 1974 137,887 15,456 7,323 22,780 1975 122,431 11,274 6,536 17,810 1976 111,158 9,282 5,950 15,232 1977 101,875 9,119 5,458 14,576 1978 _92757 8_214 4,976 13 190 IDA LOANS YEAR DEBT OUTST BEGIN- (BEGIN OF PERIOD) PAYMENTS DURING PERIOD NING INCLUDING AMORTI-_ __ __ _ JULY 1 UNDISBURSED ZATION INTEREST TOTAL 1964 179,350 - 122 122 1965 243,140 - 550 550 1966 243,140 - 897 897 1967 243,140 - 1,187 1,187 1968 243,140 - 1,398 1,398 1969 243,140 - 1,566 1,566 1970 243,140 - 1,673 1,673 1971 243,140 15 1,720 1,735 1972 243,_125 175_1,766 1,941 1973 242,950 907 1,809 2,716 1974 242,043 1,887 1,812 3,699 1975 240,156 1,960 1,797 3,758 1976 238,195 1,960 1,783 3,743 1977 236,235 1,960 1,768 3,729 1978 234,274 1,960 1,753 3kt14 Table 2: PAKISTAN - ESTIMTED CONTRACTUAL SERVICE PAYMENTS ON EXTERNAL PUBLIC DEBT RITSTANDII3 INCWDING UNDISBURSED AS OF JUNE 30, 1964 WITH MAJOR REPORTED ADDITIONS JULY 1 - DECE25ER 31, 1964 /1 (CONT.) Debt Repayable in Foreign Currency (In thousands of U.S. dollar equivalents) PAGE i U.S. GOVT. LOANS -- TOTAL ER DEBT OUTST BEGIN-(BEGIN OF PERIOD) PAYMENTS DURING PERIOD NINC} INCLUDING AMORTI-___ JULY 1 UNDISBURSED ZATION INTEREST TOTAL 1964 403,865 2,781 3,348 6,129 1965 681,930 2,955 5,072 8,027 1966 678,975 3,013 5,709_ 8,721 1967 675,962 3,207 6,041 9,248 1968 672,755 3,468 6,273 9,742 1969 669,287 3,477 6,278 9,755 1970 665,810 2,981 6,089 9,070 1971 662,829 3,952 5,946 99897 1972 658,877 6,674 5,818 12,492 1973 652,204 11,016 5,719 16,735 1974 641,188 17,450 5,595 23,045 1975 6239739 22,041 5,400 279441 1976 601,697 22,051 5,182 27,234 1977 579,646 22,062 4,967 27,029 1978 557,584 _22,072._ 4,750 26,822 US GOVT. LOAN - EXIM YEAR DEBT OUTST BEGIN-(BEGIN OF PERIOD) PAYMENTS DURING PERIOD NING INCLUDING AMORTl-____ JULY 1 UNDISBUP.SED tATION INTEREST TOTAL 1964 28,089 2,402 1,057 3,459 1965 27,033 2,644 1,203 3,847 1966 24,389 2,694 1,176 3,87C 1967 21t695 2,880 1,130 4t01C 1968 18,815 3,134 1,025 4,159 1969 15,682 3,134 851 3,984 1970 12,548 2,629 670 3t299 1971 9r920 2P116 535 2,651 1972 7,804 632 436 1t067 1973 7,173 632 399 103 1 1974 6,541 632 364 995 1975 5,910 632 328 960 1976 5,278 632 291 922 1977 4,647 632 256 888 1978 4,015 632 219 851 Table 2: PAKISTAN - ESTIKATED CONTRACTUAL SERVICE PAYMENTS ON EXTERNAL PUBLIC DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF JUNE 30, l964 WITH MAJOR REPORTED ADDTrIONS JULY 1 - DECEM2BER 31, 1964 /1 (CONT.) Debt Repayable in Foreign Currency (In thousands of U.S. dollar equivalents) __ ___________________________________ _ _ _ PAGE 4 _ US GOVT. LOAN - OTHER YEAR DEST OUTST BE3IN- (BEGIN OF PERIOD) b AYMENTS DURING PERIOD NING INCLUDING AMORTI- JULY 1 UNDISBURSED ZATION INTEREST TOTAL 1964 375,776 379 2,291 2,670 1965 654,897 311 3,870 4,181 1966 654,586 319 4,532 4,851 1967 654,267 327 4,911 5,238 1968 653,940 335 5,248 5,583 1969 653,605 343 5,428 5,771 1970 653,262 352 5,419 5,771 1971 652,910 1,836 5,410 7,246 1972 651,073 6,042 5,383 11,425 1973 645,031 10,384 5,320 15,704 1974 634,647 16,818 5,231 22,049 1975 617,829 21,410 5,072 26,482 1976 596,419 21,420 4,892 26,312 1977 574,999 219430 4,711 26,142 197 553,569 __21,441 4,531____ _25,971 LOANS-FROM--OTHER GOVTS. YEAR DEBT OUTST BEGIN- (BEGIN OF PERIOD) PAYM1ENTS DURING PERIOD NING INCLUDING AMORTI- JULY 1 UNDISBURSED ZATION INTEREST TOTAL 1964' 320,698' 14,139 9,562 23,701 1965 306,559 15,697 11,641 27,338 1966 290,862 17,465 12,271 29,736 1967 273,397 22,109 12,345 34,455 19683 251-, 287---22,1tl-ll,613- - 33,763 1969 229,137 22,472 10v709 33,180 1970 206,666 23,101 9,992 33,094 1971 183,564 22,887 8,849 31,736 1972 160,677 20,297 7,674 27,970 1973 _ 140,381 17,624 6,671_ 24,295 -197'4- '1'22,757- 16,'4'48--- 5,787 '22,235 1975 106,308 14,720 4,970 19,690 1976 91,588 13,351 4,229 17,580 1977 78,237 11,841 3,606 15,447 1978 66,397 11,633 3,043 14,676 Table 2: PAKISTAN - ESTIMATED CONTRACTUAL SERVICE PAYMENTS ON EXTERNAL PUBLIC DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF JUNE 30, 1964 WITH MAJOR REPORTED ADDITIONS JULY 1 - DECEMBER 31, 1964 /1 (CONT.) Debt Repayable in Foreign Currency (In thousands of U.S. dollar equivalents) PAGE 5 LOANS FROM SOVIETS Y1-AR DEBT OUTST BI3XIN-ABEGIN OF PERIOD) PAYMENTS DURING PERIOD NING INCLUDING AMORTI- JULY 1 UNDISBURSED ZATION INTEREST TOTAL 1964 19,435 1,785 649 2,434 1965 17,650 2,775 711 3,486 1966 14,876 2,775 610 3,385 1967 12,101 2,775 5019 3,284 1968 9,327 2,775 4013 3,133 1969 6,552 1,785 307 2,091 1970 4,767 795 250 1,045 1971 3,973 795 209 1,003 1972 3,178 795 167 961 1973 2,384 795 125 920 1974 1,589 795 83 878 1975 795 795 42 836 /1 Includes service on all debt listed in Table 1 prepared March 24, 1965 except the following loans for which the amortization terms are not readily available: a) NF 1,415,968.25 French credit for Pahartari Textile and Hosiery Mills No.2, Chittagong b) NF 3,400,000 French credit out of £ 10,000,000 Superphosphate and Sulphuric Acid Plant c) £ 10,000,000 from ECGD of the U.K. Government to Govt. of Pakistan d) $ 7,200,000 AID loan to Govt. of Pakistan e) $ 3,400,000 AID loan to Govt. of Pakistan f) $ 6,000,000 AID loan to Govt. of Pakistan g $ 12,500,000 AID loan to Govt. of Pakistan Statistics Division IBRD-Economics Department March 2h, 1965 Table 3 GROSS NATIONAL PRODUCT AT FACTOR COST OF 1959/60 1959/60 to 1964/65 (Millions of Rupees) Estimate 1964/65 Index 1959/60 1960/61 1961/62 1962/63 1963/64 1964/65 1959/60=100 Industrial Origin of Gross Domestic Product: Agriculture, forestry, 16753 17285 18183 18272 19366 20140 120.2 fishing Mining 70 82 88 100 110 120 171.4 Manufacturing, large-scale 1565 1765 1993 2254 2550 2900 185.5 Manufacturing, sm1ll-scale 1365 1402 1439 1477 1515 1540 112.8 Construction 651 796 982 1086 1510 1880 288.7 Transport, Communications 1857 2008 2004 2219 2309 2430 130.8 Electricity, Gas, Water 107 120 125 173 233 280 261.6 Wholesale, Retail Trade 3665 3893 4140 4376 4697 5070 138.3 Banking, Insurance 224 247 268 299 325 360 160.7 Public Administration, Defense 1331 1367 1419 1467 1677 1790 134.5 Ownership of Dwellings 1772 1814 1860 1917 1985 2060 116.2 Other Services 2112 2198 2279 2365 2453 2560 121.2 Gross Domestic Product, 31472 32977 34780 36005 38730 41130 130.7 factor cost Net Factor Income from Abroad -33 -31 -36 -76 -93 -130 Gross National Product, factor cost 31439 32946 34744 35929 38637 41000 130.4 Plus Indirect taxes 1316 1485 1610 1725 2110 2280 ress Subsidies -50 -68 -108 -154 -208 -286 Gross National Product 32705 34363 36246 37500 40539 42559 130.1 at market prices ___ Population (in millions) 98.9 101.5 104.1 106.8 109.6 112.4 113.7 Per capita income (rupees) 318 325 334 336 353 368 115.7 Sourcet Central Statistical Office and Planning Commission. Table 4 NATIONAL EXPENDITURE IN CURRENT PRICES, 1959/60-1964/65 (Rs. Million) Value Index 1959/60 1960/61 1961/62 1962/63 1963/64 1964/65 1964/65 Gross National Product 31,439 34,622 36,192 38,258 40,955 43,365 137.8 (at factor cost) Indirect Taxes 1,316 1,562 1,680 1,837 2,226 2,439 185.4 Subsidies -50 -72 -113 -164 -220 -263 526.0 Gross National Product 32,705 36,112 37,759 39,931 42,961 45,541 139.5 (at market prices) Imports: (i) development 1,730 1,965 2,312 2,692 3,469 4,068 235.2 (ii) non-development 1,460 1,885 1,747 2,193 2,464 2,764 189.7 Total National Resources 35,895 39,962 41,818 44,816 48,894 52,373 140.2 Private consumption 27,742 30,879 31,437 32,550 34,306 35,982 129.7 Government consumption 2,563 2,776 2,882 3,090 3,979 4,276 166.8 Government current development expenditure 240 246 355 463 544 655 272.5 Total consumption 30,535 33,901 34,674 36,103 38,829 40,913 133.9 expenditure Public investment (including local 1,795 1,823 2,184 2,602 3,131 3,670 204.3 government, Works Program) Private investment 1,055 1,682 2,326 2,263 3,009 3,210 320.2 (incl. non-monetized) Indus Basin Replacement - 100 210 780 890 950 - Works Stock formation 430 170 40 320 250 250 - Total Investment expenditure 3,280 3,775 4,760 5,965 7,280 8,400 256.5 Exports 2,080 2,286 2,384 2,748 2,785 3,040 146.2 Source: Planning Commission. Table 5 NATIONAL EX PEDITURE IN CONSTANT PRICES (1959/60-1964/65) (Rs. Million) 1964/65 1959/60 1960/61 1961/62 1962/63 1963/64 1964/65 (Index 1959/60=100) Gross National Product 31,439 32,946 34,744 35,929 38,637 40,525 128.9 (at factor cost) Indirect taxes 1,316 1,485 1,610 1,725 2,110 2,280 173.5 Subsidies -50 -68 -108 -154 -208 -286 482.0 Gross National Product 32,705 34,363 36,246 37,500 40,539 42,559 130.0 (at market prices) Imports: (i) Development Imports 1,730 1,850 2,405 2,830 3,610 4,170 241.0 (ii) Non-development imports 1,410 1,850 1,620 1,320 2,140 2,380 168.8 Total National Resources 35,895 38,063 40,271 42,250 46,289 49,109 136.8 Private consumption 27,742 29,915- 30,779 31,127 33,085 34,106 122.9 Government consumption 2,563 2,680 2,820 2,960 3,830 4,053 158.2 Government current 240 238 347 443 524 621 259.2 development expenditure Total consumption expenditures 30,535 32,833 33,946 34,530 37,439 38,780 127.0 Public investment (incl. 1,795 1,760 2,040 2,280 2,720 3,307 184.3 local Government and Works Program) Private investment (incl. 1,055 1635 2,140 2,005 2,605 3,150 298.6 non-monetized) Indus Basin Replacement Works - 35 195 685 775 858 - Stock formation 430 170 40 320 250 250 - Total investment expenditure 3,280 3,660 4,415 5,290 6,350 7,565 230.7 Exports 2,080 1,570 1,910 2,430 2,500 2,764 132.9 Source: Planning Commission. Table 6 COMMITMENTS, DISBURSEMENTS A:JD PIPT,INE (In Millions of Dollars) Commitments Disbursements PiDOline Proj- Non- Total Proj- Non- Total Proj- Non- Total ect Proj- ect Proj- ect Proj- ect ect ect June 30, 1960 199 108 307 1960/61 131 90 221 82 101 183 June 30, 1961 248 97 345 1961/62 144 86 230 118 94 212 June 30, 1962 274 89 363 1962/63 351 130 481 143 134 277 June 30, 1963 482 85 567 1963/64 513 185 698 201 165 366 June 30, 1964 794 105 899 1964/65 g/ 333 202 535 281 200 481 June 30, 1965 846 107 95.3 Total 1,472 693 2,165 825 694 11519_ 2,/ Consortium and non-consortium. Excluding private investnent, technical assistance and PL 480. Commitments include loans authorized. 2/ Government estimate. During first half of 1964/65, comnitfmelets (excluding previous authorizations) were about i250 million arnd disbursements $207 million. .2/ Pipeline as of December 31, 1964 was $953 million. Table 7 AREA UNDER PRINCIPAL CROPS DI PAKISTAN For the Years 1950/51 to 1963/674 (Thousand Acres) 1950,'51- 1955/56- Crops 1954/55 1959/60 1960/61 1961/62 1962/63 1963/64 Average Average Estimate Rice 23226 22767 24804 23964 24414 25437 Wheat 10363 11741 11603 12310 12592 12151 Bajra 2282 2066 1844 2055 2104 1831 Jowar 1267 1173 1177 11269 1204 1156 Maize 1010 1107 1207 1191 1151 1249 Barley 546 557 536 544 561 495 Total food grains 38694 39413 41171 41333 42026 42319 Gram 2705 3198 2881 3093 3168 3179 Total food crops 41399 42611 4405f2 44426 4519L, 45494 Sugarcane 853 1161 1238 1388 1630 1526 Rape and Mustard 1687 1191 1791 1704 1818 1673 Sesamum 209 206 211 250 246 194 Jute 1521 1466 1518 2061 1723 1700 Cotton 3209 3494 3242 3488 3435 3672 Tea 74 77 78 79 81 84 Tobacco 194 195 198 220 219 203 Total under crops 49146 51129 52328 53616 54346 54546 Source: Ministry of Agriculture. Table 8 PRODUCTION OF PRINCIPAL CROPS EN PAKISTATi For the Years 1950751 to 1963/64 (thousand tons) 1950/51- 1955/56- 1963/64 Crops 1954/55 1959/60 1960/61 1961/62 1962/63 (Unofficial) -Average Average Rough Estimate Rice (cleaned) 8334 8409 10533 10575 9808 11629 Wheat 3220 3644 3786 4002 4148 4oi4 Bajra 345 322 301 364 416 356 Jowar 235 226 218 245 248 234 Maize 389 464 439 487 486 522 Barley 126 153 135 132 143 122 Total foodgrains 12649 13218 15412 15805 15249 16877 Gram 581 674 636 650 705 718 Total foodcrops 13230 13892 16048 16455 15954 17595 Sugarcane (cane) 10764 13975 15412 18548 22897 21248 Rape and Mustard 279 325 308 305 361 297 Sesamum 36 33 31 37 37 33 Jute 5333 5954 4457 6969 5145 (thousand bales) (4500)1' (6800) (6300) (6200) Cotton (lint) 1536 1680 1711 1840 1993 (thousand bales) (1625) (1722) (2050) (2350) Tea (million lbs.) 48.5 52.5 42.3 58.8 52.0 55.0 Tobacco ( " " ) 196.7 202.3 189.0 224.8 224.2 212.7 1/ Trade sources in parentheses. Source: Ministry of Agriculture and Central Statistical Office. Table 9 IiDICES OF INDUTSTRIAL PRODUCTION Discontinu.ed Index Industrial Year Mining iManufacturing production (Mining and manufacturing) 1950 100.0 100.0 100.0 1951 108.5 123.6 122.0 1952 133.6 155.4 153.2 1953 147.7 202.4 196.7 1954 149.9 265.3 253.2 1955 156.8 336.6 318.0 1956 184.9 381.7 361.0 1957 192.8 404.2 382.0 1958 219.3 430.8 408.6 1959 227.7 482.5 455.9 1960 268.2 510.3 485.1 1961 297.9 539.8 514.4 Revised Index Base: 1959/60 (July - June) 100 1959/60 100.0 100.0 100.0 1960/61 114.7 107.0 107.8 1961/62 124.0 118.9 119.2 1962/63 July-September 133.9 123.8 124.4 Oct.-December 145.4 133.9 134.6 Jan.-March 141.5 1/ 131.7 132.3 1963/64 July-September 141.8 1/ 147.8 147.4 Oct.-December 157.1 1/ 156.5 156.5 Jan.-March 166.0 1/ 149.1 150.1 1/ Provisional. Source: Central Statistical Office. Table 10 SECTORAL ALLOCATIOFS (Millions of Rupees) (1) (2) (3) Second an (Est. Third aan(Prosa) Increase Amount Percent Amount-' Percent (2) overT(1) Percent Agriculture 3500 13.3 8942 15.4 155 Water and Power 4881 18.6 8528 15.2 75 Industry 6365 24.2 ) ) 14745 26.1 103 Fuels and Minerals 894 3.4 ) Transport and 4494 17.1 10114 17.9 125 Communications Housing/ 3892 14.8 7176 12.7 84 Education 1000 3.8 2882 5.1 188 Health 394 1.5 1330 2.3 236 Manpower and 79 0.3 283 0.5 258 Social Welfare Works Program 800 3.0 2500 4.8 212 Less Expected Shortfall 45000 26300 100.0 52000 100.0 98 1/ And physical (town) planning. Source: Third Five-Year Plan, March 1965. Table 11 PRODUCTIVITY OF INVEST1RNIOT (Millions of Rupees) Capital/Output Resulting Alloca- Ratio Increase in tion Last Year of Output Second Plan Agriculture, Water and Power 15,270 2.3 6,639 Industry, Utilities and 15,700 2.5 6,280 Construction Transportation 8,970 8.0 1,121 Other 12,000 2.3 5,217 Total 52,000 2.8 19,257 Table 12 Direct and Indirect Tax Receipts of Central and Provincial Governments (Rs. Million) Actual Estimate Project_on__ _ Total 1960/ 1961/ 1962/ 1963/ 1-- %1965/ 1966/ 1967/ 1968/ 19 9/ Second Third Tax 61 62 63 64 65 66 67 68 69 70 Plan Plan Tax Rewenues (total) 2 425 2,749 2,950 3,398 3,981 4,610 5,030 5,500 5,990 6,500 15,503 27,630 Direct Taxes (total) 741 855 867 1,031 1,139 1,306 1,442 1,600 1,794 1,938 46338O80 Income and Corporaticu 381 459 503 570 633 718 802 897 1,026 1,115 2,546 4,558 Land Revenue 2)2 261 222 283 307 354 377 410 443 467 1,315 2,051 Agricultural Income 18 13 13 19 15 35 45 55 65 76 78 276 Stamp and Registration 72 84 89 95 104 109 113 118 125 130 414 595 Other 28 38 40 64 80 90 105 120 135 150 250 600 Indirect Taxes (total) 1,684 1,894 2,083 2,367 2,842 3304 3,588 3,900 4,196 4,562 10,870 19,550 Excise Duties2/ 435 $55 555 763 900 991 1,086 1,191 1,321 1,451 3,108 6,040 Custom Duties- 621 731 823 832 1,080 1,250 1,300 1,360 1,410 1,450 4,087 6,770 Sales Taxes 467 492 552 680 750 850 930 1,030 1,112 1,228 2,941 5,150 Other 161 216 153 92 112 213 272 319 353 433 734 1,590 1/ Including additional taxation of Rs. 3,000 million distributed annually by IB7dD on the basis of tentative unpublished preliminary estimates by Planning Commission. 2/ Excluding customs on Commodity Aid. Source: Planning Commission, 'Iinistries of Finance, East and tIest Pakistan. Table 13 Tax Receipts Qf Central -And Provincial Governments (Rs. Billion) Actual Estimate* ProJections'/ Total Collection Source 1960/ 1961/ 1962/ 1963/ T7967 1965/ 1966/ 1967/ 1968/ 1969/ Second Third and Tax 61 62 63 64 65 66 67 68 69 70 Plan Plan Tax Receipts (total) 2.53 2.85 2.95 3.40 3.98 4.61 5.03 5.50 5.99 6.50 15.70 27.63 Customs (totai) .72 T.7 3 .1. 05 1.25 1.30 1.36 1.1 1.45 6.77 Commodity Aid ( .10) (.10) - - - - (.20) - Fxcise Duties .40 .42 .51 .71 .85 1.04 1.19 1.34 1.52 1.70 2.89 6.79 Sales Tax .47 .19 .55 .68 .75 .85 .93 1.03 1.11 1.23 2.94 5.15 Income and Corporation Tax .38 .46 .50 .57 .63 .72 .80 .90 1.01 1.12 2.55 4.54 Land Revenue .24 .26 .22 .28 .31 .29 .30 .30 .30 .31 1.32 1.50 Other Taxes .31 .39 .34 .32 .36 .46 .51 .58 .64 .70 1.72 2.89 Central Government 2.04 2.33 2."4 2.81 3.34 3.87 4.25 4.66 5.08 5.53 12.96 23.40 Customs (total) .72 1.07 1.725 1.30 1. -3T 7- 677 Commodity Aid (.10) (.10) -- - - - - - - - (.20) - Excise Duties .40 .42 .51 .71 .85 1.04 1.19 1.34 1.52 1.70 2.89 6.79 Sales Tax .47 .49 .55 .68 .75 .85 .93 1.03 1.11 1.23 2.94 5.15 Income and Corporation Tax .38 .46 .50 .57 .63 .72 .80 .90 1.01 1.12 2.55 4.54 Other Taxes .07 .13 .05 .01 .03 .03 .03 .03 .04 .04 .30 .15 East Pakistan .21 .26 .19 .25 .27 .27 .29 .31 .32 .33 1.18 1.52 Land Revenue .11 .15 .08 .13 .5 *.13 *.13 T173 .13 -.13 .6T1 --6 Agricultural Income Tax .02 .01 .01 .02 .01 .02 .02 .02 .02 .02 .o6 .10 Provincial Excises .01 .01 .01 .01 .01 .01 .02 .02 .02 .02 .o6 .08 Stamps .03 .04 .04 .04 .05 .05 .05 .05 .05 .05 .20 .23 Other .05 .06 .05 .05 .05 .06 .07 .09 .10 .11 .25 .45 West Pakistan .27 .26 .32 .34 .37 .45 .50 .54 .59 .61 1.56 2.71 Land Revenue .13 .12 17 .1T5 .16 T17 .17 .17 17T .71 ---BT Agrictural Income Tax-/ .003 .003 .003 .003 .003 .02 .03 .03 .04 .05 .02 .17 Provincial Excises .02 .02 .04 .h0 .04 .04 .1 .0*4 .03 .03 .15 .18 Stamps .03 .03 .03 .04 .05 .05 .06 .o6 .07 .07 .17 .30 Motor Vehicles .02 .03 .03 .o1 .04 .05 .05 .06 .07 .08 .16 .30 Other .07 .06 .07 .07 .08 .13 .15 .18 .21 .23 .35 .*92 See Footnotes on Page 2. 2 1/ Including additional taxation of Rs. 3.0 billion distributed annually by IBRD on the basis of tentative unpublished preliminary estimates of Planning Commission. 2/ In West Pakistan paid only by those who pay Rs. 250 or more Land Revenue or have 100 acres or more of land. Land revenue in West Pakistan is paid by about 6 million but the agricultural income tax by only 12,000; in East Pakistan levied only on those with gross income of Rs. 3,000 or more and who have 30 acres or more; in the East largely con- fined to a tax on tea gardens or corporate farms. Province collects only 60 per cent of the amount payable. Forty per cent is considered as a tax on industrial income and is collected by the Center. Source: Planning Commission, Ministries of Finance, East and West Pakistan. Numbers are rounded and do not necessarily add to totals. * Budget estimate. Table L4 Capital Receipts and Liabilities of Central and Provincial Governments (R,s. Billion) Actual Estimate,- Projections Total 1)60/ 1961/ 1962/ 1963/ 196h/ -196/ 1966/ 1967/ 1W6/ T1969/ Second Third Item 61 62 63 64 65 66 67 68 69 70 Plan Plan 1. Capital Receipts (o tal) .46 .49 *47 .55 .56 .61 .66 .70 .75 3.28 Unfunded Debt (net) .10 T1TT .1 .13 .13 17 T1 .15 .16 .17 .b .77 Sale of PIDC assets .05 .02 - .01 .04 .01 .05 .07 .o8 .09 .11 .30 Reserve Funds Posts & Telegraph .02 .02 .02 .02 .02 .03 .04 .04 .05 .o6 .09 .21 Railways & Other .09 .17 .17 .15 .18 .22 .19 .20 .21 .22 .76 1.04 Borrowings from Non- Bank Sources .07 .04 .08 .07 .09 .09 .09 .10 .11 .11 .33 .50 Other Receipts .05 .08 .08 .09 .09 .08 .09 .09 .10 .11 .B2 .47 Central Government .30 .36 .26 .24 .28 .30 .32 .34 .35 .38 1.44 1.68 Unfunded Debt (net) T0 .11 .12 .10 .10 .11 .12 .12 .13 .51 Sale of PIDC Assets .05 .02 - - - - - - - - .07 - Posts Ri Telegraph Depreciation Funds .02 .02 .02 .02 .02 .03 .04 .04 .05 .06 .09 .21 Railways and Other Reserve Funds .09 .17 .08 .05 .08 .08 .o8 .08 .08 .09 .47 .41 Borrowings from Non- Bank Sources .07 .o4 .05 .05 .06 .07 .07 .08 .o8 .09 .27 .37 Other Receipts - - - .02 .02 .02 .02 .02 .02 .02 .03 .10 F,ast Pakistan .02 .05 .06 .07 .10 .o6 .09 .11 .11 .12 .30 .49 Unfunded Debt (net) .01 .01 .01 .01 .01 .1 .01 .01 .01 -- T .06 Sale of PIDC Assets - - - .01 .04 - .03 .04 .4 .04 .05 .15 Railway Depreciation Reserve Funds - - .02 .02 .02 .02 .02 .0? .02 .03 .05 .11 Ilarket Loans - - - - .01 .01 .01 .01 .01 .01 .01 .05 Other Receipts .01 .0 °4 .03 .03 .02 .02 .02 .03 .03 .15 .12 Webst Pakistan .05 .06 .17 .17 .17 .21 .20 .22 .24 .26 .6? 1.12 Unfunded Debt (net) .01 .02 .02 .02 .Oc .02 .o3 .03 .03 .o3 .09 .7h Sale of PIDC Assets .01 .02 .03 .04 .05 - .15 Railway Depreciation Reserve Funds - - .08 .09 .08 .12 .09 .10 .10 .11 .25 .51 Market Loans - - - .0, .0? .02 .02 .02 .02 .02 .04 .o8 Other Receipts .014 .0) .o6 .03 .05 .05 .05 .05 .05 .06 .2L .25 -2- Actual Estimate* Projections Total 1960/ 1961/ 1962/ 1963/ 1964/ 1965/ 1966/ 1967/ 1968/ 1969/ Second Third 61 62 63 6) 65 66 67 68 69 70 Plan Plan ?. Capital Liabilities .12 .08 .09 .13 .15 .17 .20 .21 .26 .32 .56 1.16 Defense Services0 7 .02 .01 - _ _ _ _ _ Foreign Debt Services .04 .05 .06 .07 .08 .10 .13 .17 .22 .28 .31 .91 Other Liabilities .02 .02 .03 .o6 .07 .07 .07 .03 04 .04 .19 .25 3. Net Capital Receipts .27 .38 .40 .34 .40 .45 .45 .51 .51 .50 1.79 2.42 Central Government .20 .27 .17 .12 .13 .13 .11 .13 .10 . 05 w . 5 East Pakistan .02 .05 .06 .07 .10 .06 .09 .11 .11 .12 .30 .49 Ilest Pakistan2 .05 .06 .17 .15 .17 .21 .20 .22 .24 .26 .62 1.12 Local Bodies . (.03) (.03) (.04) (.05) (.05) .05 .05 .06 .07 .07 (.20) .30 Budget estimate. 1/ All liabilities on account of defense are being charged to revenue account effective from 1963/64. 2/ Estimated net capital receipts for local bodies are included in the total for 1960/61 through 196)/65. 3ource: Planning Commission, Ministries of Finance, East and West Fakistan. Table 15 DISTRIBUTION4 OF TAXES COLLECTED AT CENTER, EAST AND WEST PAKISTAN (Rs. Million) Center Share West Pakistan East Pakistan Total Tax 1962/ 1963/ 1964/ 19627 1963/ 1964/ 1962/ 1963/ 19647 1962/ 1963/ 1964/ It' 1963 1964 1965 1963 1964 1965 1963 1964 1965 1963 1964 1965 Customs Receipts 676 747 941 41 39 19 46 46 22 763 832 982 Excise Duties 499 602 720 43 51 60 51 61 70 593 714 850 Sales Tax 216 273 296 168 220 238 1i0 187 201 524 680 735 Income and 277 297 331 100 126 139 123 147 163 500 570 633 Corporation Tax Land Revenue - - - 145 153 157 77 130 150 222 283 307 Other Taxes 55 80 92 177 190 223 112 116 116 344 386 431 Total Taxes: 1723 1999 2380 674 779 836 549 687 722 2946 3465 3938 1/ 1964/65 Budget Estimates Source Ministry of Finance, Pakistan, Finance Department East and Viest Pakistan. Table 16 PROVINCIAL REVENUE RECEIPTS (Rs. Million) lWest Pakistan East Pakistan 1962/ 1963/ 1964/65 Uq27-T 1963/ 1964/ 1963 1964 (Budget 1963 1964 1965 Estimate) Land Revenue 148 153 157 6o0/ 130 1.50 Agriculture Income 3 3 3 10 16 12 Tax 3/ Provincial Excises 35 36 37 12 13 14 Stamps 33 40 47 42 43 45 MIotor Vehicles 30 38 39 6 7 7 Other 52 73 83 24 37 38 Subtotal - taxes 301 343 366 174 246 266 Other Revenues: Irrigation 88 58.2! 59 - - - Forests 27 30 33 15 17 17 Other Receipts 4/ 160 231 223 109 58 49 Subtotal-non-tax 275 319 315 124 75 66 Grand total 576 662 681 298 321 332 Note: Excludes Central Grants for which credit is taken in the Provincial Revenue Receipts. 1/ Low because of storm damage. T/ Reduction because of increased costs of administration. Gross receipts are expected to be higher in 1964/65. 3/ In West Pakistan paid only by those who pay Rs. 250 or more Land Revenue or have 100 acres or more of land. Land revenue in West Palcistan is paid by about 6 million but the agricultural income taxS by only 12,000; in East Pakistan levied only on those with gross income of Rs. 3,000 or more and who have 30 acres or more; in the East largely confined to a tax on tea gardens or corporate farms. Province collects only 60 per cent of the amount payable. 40 per cent is considered as a tax on industrial income and is collected by the Center. 4/ Excluding credit for debt service. Source: M4inistries of Finance, East and West Pakistan. Table 17 MONEY SUPPLY (Rs. Million) Other Deposits Currency Demand With S.B.P. Money Date in Deposits Excluding IMG Supply Circulation (General) A/c No. 1 June 1949 1725.6 902.7 34.8 2663.1 June 1950 1747.6 999.9 36.8 2784.3 June 1951 2029.8 1098.2 36.5 3167.5 June 1952 2238.3 1045.2 37.7 3321.2 June 1953 2238.7 1118.1 21.1 3377.9 June 1954 2418.4 1201.8 20.1 3640.3 June 1955 2603.4 1270.2 29.5 3903.1 June 1956 3052.7 i431.2 72.6 4556.5 June 1957 3432.1 1490.1 88.3 5010.5 June 1958 3626.7 1689.2 46.0 5361.9 June 1959 3646.3 1869.6 43.9 5559.8 June 1960 3815.0 1997.1 43.7 5855.8 December " 4179.3 1932.8 47.0 6159.1 June 1961 3845.7 1990.7 45.1 5881.5 December "I 4054.2 2100.0 51.2 6205.4 June 1962 3865.4 2190.1 49.3 6104.8 December " 4103.3 2358.6 50.2 6512.1 June 1963 4157.2 2779.8 49.6 6986.6 October 4165.5 2740.5 45.1 6951.1 December 4537.2 2881.5 50.8 7469.5 March 1964 4790.8 3018.3 51.0 7860.1 June 4661.1 3274.0 53.6 7988.9 July 4586.9 3285,0 56.8 7928.8 Augustl/" 4604.3 3471.6 61.6 8137.5 1/ Provisional. Source: State Bank of Pakistan. Table 18 SUhMARY OF MONErARY ACCOUNTS FOR THE SECOND PLAiN PERIOD (Millions of Rupees) June June June June June June 1960-65 Percent Contribution 1960 1961 1962 1963 1964 1965 Absolute Change to ____________________________ __ _ _Change Change Money Supply 5852.7 5878.4 6105.0 6986.6 7988.7 8988.7 3135.0 53.4 Causative factors 1. Private sector Bank borrowings 1489.3 1906.3 2593.0 3388.6 4303.0 5553.0 4063.2 272.7 Time Deposits 946.0 1227.5 1507.1 1935.2 2432.1 3132.1 -2186.1 231.1 Net 543.3 678.8 1086.4 1453.4 1870.9 2420.9 1877.1 345.1 +59.9% 2. Government sector Bank borrowings 4956.1 5328.1 5214.0 5616.3 6037.5 6537.5 1581.4 31.9 Counterpart funds 570.7 306.6 710.3 472.8 678.3 778.3 207.6 36.4 Net 5526.8 5634.7 5924.3 6089.1 6715.8 7315.8 1789.0 33.9 +57.0t% 3. Foreign exchi-nge reserves 1963.7 1903.7 1824.7 2098.2 1901.5 1651.5 -312.2 - 9.9 4. IBRD Indus A/c -- -- 186.1 131.9 65.5 15.5 -15.5 ) ) - 7.0` 5. Other ... ... ... ... ... ... -202.4 100.0!. Table 19 CAUSATIVE ANALYSIS OF CHANGES IN MONEY SUPPLY DURING THE FIRST AND SECOND PLANS (Millions of Rupees) 1955/ 1956/ 1957/ 1958/ 1959/ Total 1960/ 1961/ 1962/ 1963/ 1964/ Total 1956 1957 1958 1959 1960 First 1961 1962 1963 .1964 1965, Second Plan Est.-- Plan Changes in 653.4 454.0 351.4 197.8 296.1 1952.7 25.7 226.6 881.6 1002.1 1000.0 3135.0 Money Supply % Increase 10.0 7.0 13.7 5.3 o.4 3.8 14.4 14.3 12.5 53.4 Causative Factors 1. Private Sector-/ 99.5 237.0 41.5 -4.2 357.5 731.3 416.5 690.2 792.1 914.4 1250.0 4063.2 Less Time Deposits -44.4 -4.8 -131.6 -53.2 -192.6 -426.6 -281.5 -279.6 -428.1 -496.9 -700.0 -2186.1 Net .1 232.2 -90.1 -57.4 164.9 304.7 135.0 410.6 364.0 417.5 550.0 1877.1 2. Public Sector2/ 321.5 862.1 706.5 250.3 124.0 2264.4 372.0 -114.1 402.3 421.2 500.0 1581.4 Counterpart -155.2 -446.1 -35.8 -26.8 -157.9 -1020.8 -264.1 403.7 -237.5 205.5 100.0 207.6 funds Net 166.3 416.0 670.7 223.5 -33.9 1242.6 +107.9 289.6 164.8 626.7 600.0 1789.0 3. Foreign Sector 846.6 217.1 -282.3 236.0 160.7 1178.1 -60.0 -79.0 273.5 -196.7 -2500. -312.2 4. IBRD Indus A/c -- -- -- -- -- -- -- -186.1 54.2 66.4 50.0 -15.5 5. Other factors -70.02) 22.9 53.1 -90 03/ -55.1 139.1 -157.2-/-208.5 25.1 88.2 50.0 -202.4 Total (1+2+3+4+5) 653.4 454.0 351.4 197.8 296.1 1952.7 25.7 226.6 881.6 1002.1 1000.0 3135.0 1/ Loans of banks to private sector and banks' investments in private securities. 2/ Loans of banks and of State Bank to government sector and their investments in government securities. Includes devaluation adjustments. 4/ Includes $12.5 million payment to IMF for increase in quota. 5/ Planning Commission's latest estimatesw "Other factors" includes also the German and U.S. loan accounts and unclassified items. Source: State Bank of Pakistan. Table 20 SCHEDULED BANKS' BORROWINGS FROM THE STATE BAI, AND EXCESS RESERVES (Millions of Rupees) Borrowing from Excess State Bank Reserves 1955 178.4 51.4 1956 214.4 45.9 1957 147.1 32.3 1958 181.4 35.1 1959 97.5 31.2 1960 411.7 34.1 1961 497.8 36.7 1962 501.8 33.1 1963 September 423.5 42.8 October 263.1 81.7 November 440.5 39.3 December 408.8 50.4 1964 January 735.9 35.1 February 852.0 50.0 March 902.9 54.8 April 957.8 44.3 May 873.3 61.2 June 783.1 50.8 July 817.2 104.9 August 659.2 19.7 September 886.2 36.7 October 1018.7 26.2 November 1177.1 24.4 December 1376.8 18.1 1965 January 22 1552.1 N.A. Source: State Bank of Pakistan. Table 21 CLAIMS OF THE BANKING SYSTEK ON GOVENW4ENT June 1960 - December 1964 (Millions of Rupees) Loans from Commercial Total State Bnk. Investments in Governments' Governments' Banks to Governments Bank Loans Securities by: Permanent End of Food Pro- Credit to Stat1 Commercial Total Debt curement Total Governments Bank-/ Banks Outstanding June 1960 158.8 159.1 1617.4 125.4 2196.8 1199.6 3396.4 2701.3 June 1961 330.0 330.7 2202.8 15.0 2183.9 1278.0 3461.9 2694.2 June 1962 326.6 326.7 2861.5 95.9 2353.7 1253.3 3612.0 2872.4 June 1963 336.6 378.1 3670.1 56.3 2559.4 1298.2 3857.6 3024.6 June 1964 -- 605.3 4791.3 132.5 2997.3 1411.1 4408.4 3576.1 Dec. 1964 __ 631.8 6002.9 12.8 3264.4 1631.1 4945.5 __ 1/ Held by the Issue Department. Source: State Bank of Pakistan. Table 22 CLASSIFICATION OF SCHEDULJED BAINKS1 ADVANCES (In Per Cent of Total) (1) By Major Economic Groups June 30 June 30 September 30 1960 1964 1964 Agriculture, Forestry, Fishing 4.9 7.4 7.2 Manufacturing 38.4 34.6 35-4 Of which: Textiles (14-3) (16.0) (15-3) Metal Products ( 2.5) ( 2.8) ( 3-3) Commerce 43.3 38.h 37.1 Other Economic Groups 13.4 19.6 20.3 Total 100.0 100.0 100.0 (2) By Securities Pledged Stock exchange securities 9.6 7.9 6.9 Merchandise 65.8 56.o 54.0 Of which: Export Commodities (24.4) (19.0) (18.4) Import Commodities (18.5) (16.6) (18.2) Other Merchandise (21.8) (19-7) (16.5) Rice ( 8.6) (12.8) (10-7) Machinery and Fixed Assets 2.4 6.6 6.8 Other Securities 22.2 29.5 32.3 Total 100.0 100.0 100.0 Source: State Bank of Pakistan. Table 22a CLASSIFICATION OF SCHEDIJLED BA1dXS' ADVANCES BY MAJOR ECONnOIC GROUPS (1Millions of Rupees) June 30 June 30 Jurne 30 June 30 June 30 Sep.30 Economic Group 1960 1961 1962 1963 1964 1)964 A. Agriculture, Forestry, 42.8 120.0 208.1 232.7 320.8 337.1 Hunting and Fishing B. Mining and Quarrying 15.2 14.2 12.5 11.6 21.7 29.8o C. Manufacturing 554.0 618.3 895.3 1236.5 1542.3 1658.9 Of which: Food Industries 41.1 46.2 54.7 110.5 92.1 91.3 except beverages Textiles 206.2 234.2 387.3 508.1 695.0 719.2 Paper and paper products 17.6 9.7 6.2 21.1 10.2 7.4 Chemicals 14.4 25.8 40.7 54.9 76.0 7g.9 Metal products 36.6 60.7 51.7 79.4 120.9 153.9 Machinery 11.5 5.1 4.2 36.9 45.4t 52.2 Electrical machinery 10.6 10.2 15.2 36.6 53.1 50.6 Transport equipment 25.6 10.3 29.4 31-5 30.5 37.4 D. Construction 15.5 11.1 73.3 90.5 91.9 122.2 E. Electricity, Gas, Water 2.6 53.6 18.5 7.3 14.4 4°.9 F. Commerce 624.6 771.6 827.7 131]5.7 1666.1 1738.4 G. Transport, Storage, 15.2 27.7 51.0 76.3 113.0 96.9 Communications H. Services 77.8 154.5 272.2 257.6 340.7 413.9 I. Employees and Activities 97.3 149.5 243.1 79.9 231.1 240.0 not adequately described Total: 1445.0 1920.4 2592.7 3308.0 14342.0 4687.0 Source: State Bank of Pakistan. Table 23 NEa LOANS MADE BY INSTITUTIONS OTHER THA1N COERCIAL BAIZS (Yiillioris of Rupees) 1960/61 1961/62 1962/63 1963/64 Government loar.s "taccovill 25 34 38 49 Cooperatives 117 107 106 -- ADBP 77 95 81 85 IDBP 1/ -- 195 258 331 PICIC -- -- 170 193 HBFC -- 29 9 -- Total: -- -- 702 -- 1/ Newr loans and advances net of repayments anad including rupee loans and advances against opening of L/Cs as well as foreign currency loans. Source: Government services and institutions concerned. Table 24 READY PRICES OF BONUS VOUCHERS (In Rupees) Premium per End-Month Rs. 100 at Official Rate June 1960 143.00 September 1960 124.00 December 1960 136.00 March 1961 118O00 June 1961 108.00 September 1961 103.75 December 1961 154.00 March 1962 176.00 June 1962 133.50 September 1962 162.00 December 1962 158.00 March 1963 172.25 June 1963 162.50 September 1963 165.50 December 1963 159.25 January 1964 154.75 February 1964 151)25 March 1964 146.25 Source: State Bank of Pakistan. Table 25 TDEY( NTUKBERS OF WHOLESALE PRICES BY GROUPS OF COMNODITIES (1959/60 = 100) Raw Fuel General Food Materials Lighting Manufactures Lubricants 1960/61 102.99 100.50 119.15 99.21 101.24 1961/62 105.88 106.63 107.30 98.70 102.12 1962/63 104.80 104.92 105.06 98.96 104.92 1963/64 104.62 104.62 105.32 104.49 105.82 November 1962 106.05 107.28 102.51 98.64 104.43 November 1963 107.26 107.82 106.36 104.59 105.76 November 1964 113.89 114.90 118.83 104.51 106.05 East Pakistan November 1962 110.25 113.84 95.32 99.67 103.30 November 1963 109.14 111.40 100.82 108.14 102.26 November 1964 113.62 114.84 113.75 103.33 104.55 West Pakistan November 1962 100.87 97.82 106.99 98.20 104.82 November 1963 104.78 102.67 109.80 103.10 106.94 November 1964 113.87 115.00 121.98 105.01 106.56 Source: Central Statistical Office. Table 26 INDEX NUMBERS OF WHOLESALE PRICES BY COMMODITIES 1/ October October Commodity 1956/57 1957/58 1958/59 1959/60 1960/61 1961162 1962/63 1963/64 1963/64 1964/65 Rice 104.58 94.27 96.39 100 91.32 95.60 103.03 92-73 107.91 98.64 Wheat 95.32 95.75 95.83 100 114.36 106.14 100.31 110.88 105.26 122.13 Gram 74.75 78.23 94.20 100 105.54 106.71 107.85 97.17 95.45 128.59 Other Pulses 116.64 108.71 89.99 100 106.59 103.55 102.37 101.04 100.06 129.16 Vegetable Ghee 99.55 120.74 111.78 100 99.26 97.83 93.96 93.63 92.89 103.47 Gur 96.47 80-.55 73-09 100 122.73 122.83 82.67 107.61 95.57 170.41 Salt 101.19 102.12 99.90 100 85.92 105.60 96.91 93.96 97.29 92.36 Jute 125.68 101.56 77.97 100 219.88 119.88 103.15 103.56 104.71 145.32 Cotton 98.36 96.70 86.20 100 109.11 100.12 96-73 97.09 94.30 101.75 Wool 99-35 89.84 84.44 100 96.70 98.06 96.05 109.38 105.54 108.83 Hides 68.60 67.97 74.84 100 99.54 94.05 96.62 86.35 83.93 81.34 Skins 64.67 71.90 79.64 100 74.45 68.67 65.47 64.82 64.40 69.60 Oilseeds 93.83 125.06 111.25 100 99.14 101.59 104.33 109.51 100.75 149.22 Tobacco 84.34 86.32 72.48 100 104.88 96.54 96.54 92.16 108.42 113.46 Cotton yarn 97-15 113.98 96.96 100 110.84 110.98 106.66 111.85 111.06 113.03 Cotton manufactures 96.68 91.30 78.31 100 99.43 100.65 97.24 95.54 95.98 96.62 Jute manufactures 91.84 87.82 79.90 100 129.07 113.49 104.91 97.62 96.61 108.94 Tobacco products 111.02 100.44 100.96 100 100.51 101.72 116.24 125.59 127.80 129.90 General 95.37 95.62 93.94 100 102.99 105.88 104.80 104.62 108.07 114.58 I/ Compiled as an average. Source: Central Statistical Office. Table 27 GENIERAL COST-OF-LIVINiG IDEX NU'MBERS FOR INDUSTRIAL WORKERS IN SELECTED CENTERS (April 1948-April 1949=100) West Pakistan East Pakistan Period Karachi Lahore Sialkot Narayanganj 1958/59 118.32 103.44 99.31 117.25 1959/60 125.04 110.65 107.76 122.51 1960/61 127.32 118.36 116.85 123.32 1961/62 130.01 124.38 117.44 128.13 1962/63 128.02 120.33 114.60 132.36 1963/64 131.87 127.13 122.58 133.20 December 1962 127.46 120.51 114.46 130.71 June 1963 131.40 119.93 114.68 135.84 December 1963 130.39 125.31 320.26 130.84 June 1964 132.74 128.52 122.00 133.54 December 1964 139.08 138.20 126.49 147.58 Per Cent Increases December 1963/December 1962 2.3 4.0 5.1 0.1 Dece.mber 1964/December 1963 6.7 10.3 5.2 12.7 December 1964/June 1964 4.8 7.8 3.7 10.5 Source: Central Statistical Office. Table 28 CONSUMERS' PRICE INDEX FOR GOVERNMENT ANiD COMERCIAL EMPLOYEES (CLERICA)INTKARACHI BY EXPEifDITURE GROUPS (Base: 1956=100) Clothing Housing Period General Food and and Miscellaweous Index Footwear Household 1950 90 92 77 1/ 91 90 1951 91 94 80 o/ 91 92 1952 96 103 79 _/ 93 92 1953 98 102 97 95 94 1954 98 100 96 95 96 1955 97 97 93 95 97 1956 100 100 100 100 100 1957 107 109 119 103 100 1958 ill 114 130 100 101 1959 106 114 107 97 98 1960 115 125 127 101 99 1961 116 131 122 102 96 1962 116 131 121 102 97 1963 119 134 121 102 99 1964 2/ 121 139 122 102 100 December 1963 119 134 122 103 100 June 1964 122 141 122 102 100 December 1964 127 146 124 115 103 1/ EXcluding footwear. 2/ Index compiled as an average for eight months only, January- August, 1964. Source: Central Statistical Office. Table 29 TOTAL FOREIGN TRADE (Rs. Million) Imports Exports Total West East Total West East Pakistan Pakistan Pakistan Pakistan 1947-481Y 359 319 40 703 456 247 1948-492/ 1459 1177 282 958 529 429 1949-50 1297 912 385 1194 565 629 1950-51 1620 1167 453 2554 1342 1211 1951-52 2237 1474 763 2009 922 1087 1952-53 1384 1017 366 1510 867 642 1953-54 1118 824 294 1286 641 645 1954-55 1103 783 320 1223 491 732 1955-56 1325 964 361 1784 742 1041 1956-57 2335 1516 819 1608 698 909 1957-58 2050 1314 736 1422 434 988 1958-59 1578 1025 554 1325 444 881 1959-60 2461 1806 655 1843 763 1080 1960-61 3188 2173 1014 1799 540 1259 1961-62 3109 2236 873 1843 543 1301 1962-63 3819 2800 1019 2034 785 1249 1963-64 44243/ 2975 1441 16834/ 577 1101 1/ August 15 to June 30. 2/ July to June. 3/ Provisional. 77/ July-may only. Note: Data on Sea-borne trade with India are included since April 1948 and land-borne trade since July 1949. Date on exports to Afghanistan are included since July 1949, whereas data on imports from Afghanistan are included from March 1951. Data on Land-borne trade with Iran are included since July 1949. Totals may not add due to rounding. Source: Central Statistical Office. Table 30 DISTRIBUTION OF COIOMTMITS AND DISBURSE1VENTS OF PROJECT ASSISTANCE (1960/61-1963/64) (Millions of Dollars) - (1) ~~~~(2) (F37 Commit- Disburse- Percent mentsl/ ments (2) of (1) Agriculture 46.6 21.7 46.6 Water and Power 318.7 114.8 36.0 Industries 411.0 192.7 46.9 Fuels and Minerals 51.0 11.7 22.9 Transport and Communications 428.0 196.1 45.8 Housing and Physical Planning 62.1 4.7 7.6 Education 13.0 -- -- Health 14.3 2.5 17.5 Total: 1,344.7 544.2 40.5 l/ Includes pipeline as of June 30, 1960. Source: Draft Evaluation Report (Table 4.8). Table 31 INDUS BASIN WORKS (In Millions of Dollars) Second Plan Third Plan Foreign F.reign Total Exchange Total Exchange Expenditure Indus Basin Works 590 343 O 691 409 (1) Subtotal 590 343 691 409 F'inancing Pakistan's Own Reseurces 86 -- -_ Indus Club for Basin Wcrks 343 343 409 409 PL-480 161 -- 282 -- (2) Total 590 343 691 409 1/ Includes $21 million for the purchase of rupees under the original agreement. Table 32 THE THIRD PLAN (In Millions of Dollars) Second Plan Third Plan Foreign Foreign Total Exchange Total Exchange Expenditure Development Program 5,523 2.772 10.920 4.696_ (1) Total 5,523 2,772 10,920 4,696 Financing Pakistan's Own Resources 3,405 1,068 7,278 1,444 External Resources: 2.118 1,704 3.642 3,252 Private Foreign Investment 95 95 147 147 Technical Assistance 90 90 105 105 PL-480 Counterpart 414 -- 390 Aid Requirement 1.519 1.519 3.000 3.000 (2) Total 5,523 2,772 10,920 4,696 Table 33 BALANCE OF PAYMENTS FOR THE SECOND PLAN (Rs. I4illion) 1964-65 Total Annual 1960-61 1961-62 1962-63 1963-64 (Esti- 2nd Percentage mates) Plan Increase IMPORTS: I. Development: Capital goods 1,166 1,410 1,690 2,019 2,450 8,735 20.5 Raw materials for investments 549 459 415 652 870 2,945 12.2 Freight charges & insurance 127 209 220 270 348 1,174 28.5 Technical assistance 63 64 77 128 100 432 12.3 Sub Total 1,905 2,142 2,402 3,069 3,768 13,286 18.7 II, Non-Development Consumer goods 570 547 563 598 645 2,923 4.4 Raw materials for consumer goods 317 334 306 339 585 1,881 16.5 Freight/insurance 67 92 93 95 134 481 19.0 Invisibles 328 331 352 357 370 1,738 3.1 Sub Total 1,282 1,304 1,314 1,389 1,734 7,023 7.7 III. Debt servicing 100 120 188 243 300 951 31.6 Total Imports and Payment 3,287 3,566 3,904 4,701 5,802 21,260 15.3 FINANCED BY: I. Own Earnings 2,286 2,384 2,748 2,785 3,050 13,252 7.0 II. External Resources 924 1,165 1,475 1,963 2,502 8,129 28,5 Project assistance 390 562 681 957 1,350 3,940 37.0 Non-project assistance 481 4h9 636 788 952 3,306 18.7 Technical assistance 63 64 77 128 100 432 12.3 Foreign private investment 90 90 81 90 100 451 2.2 III, Change in ,Reserves -56 97 -307 70 250 54 -- IV. Short term Movements 33 -80 - 12 -117 -- -176 --- Total P4L. 480 Imports 503 323 691 632 7L0 3,089 Indus Basin Imports 60 170, 300 400 450 1,380 Source: Planning Commission. T.able 34 BALANCE OF PAYMENTS PROJECTIONS FOR THE THIRD PLAN (Rs. 4illion) Total Annual 1965-66 1966-67 1967-68 1968-69 1969-70 Third Percentage Plan Increase IMPORTS: I. Development: Capital goods 2,520 2,630 2,790 2,930 3,050 13,920 4.5 Raw materials for investments 950 1,050 1,170 1,380 1,570 6,120 12.7 Freight charges 355 365 390 410 440 1,960 4.2 Technical assist- ance 100 100 100 100 100 500 --- Sub Total 3,925 4,145 4,450 4,820 5,160 22,500 6.5 II. Non-Development: Consumer goods 670 700 720 740 760 3,590 3.3 Raw materials for industries 600 670 750 820 920 3,760 9.0 Freight charges 135 135 140 155 165 730 4.3 Invisible payments 390 400 410 445 465 2,110 4.8 Sub Total 1,795 1,905 2,020 2,160 2,310 10,190 5.8 III. Debt Servicing: 380 470 560 650 750 2,810 20.0 Total Payments 6,100 6,520 7,030 7,630 8,220 35,500 7.3 FINANCED BY: I. Own earnings 3,280 3,570 3,950 4,400 4,800 20,000 9.5 EXTERU1'AL IRESOURCES 2,620 2,950 3,080 3,230 3,420 15,500 6.5 Project assistance 1,620 1,680 1,740 1,820 1,940 8,800 Non-project as- sistance 1,000 1,050 1,100 1,150 1,200 5,500 Technical as- sistance 100 100 100 100 100 500 Private foreign investment 100 120 140 160 180 700 Indus imports 383 383 383 383 __ 1,532 P.L. 480 imports 760 760 760 760 760 3,800 Source: Planning Commission, except for Indus imports which are Mission estimates. Table 35 CAPITAL REQUIREMENTS1/ PAKISTAN - PERSPECTIVE PLJWi (4illions of Dollars) 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 Resource Gap 697. 716. 700. 673. 649. 804. 890. 849. 806. 760. 745. 730. 621. 517. 406. 375. 436. 380. 320. 255. 183. Gross Capital Inflow 775. 806. 807. 798. 795. 975. 1081. 1065. 1067. 1070. 1103. 1146. 1CO. 1056. 1001. 1023. 1135. 1133. 1121. 1100. 1061. Of which: Grants and P.L. 480 176. 148. 150. 153. 155. 153. 100. 100. 100. 100. 100. 100. 100. 100. 100. 100. 100. 100. 100. 100. 100. Direct Inmvestment 21. 24. 28. 32. 36. 40. 50. 50. 50. 50. 50. 50. 50. 50. 50. 50. 50. 50. 50. 50. 50. Official Borrowing 578. 634. 629. 613. 604. 782. 931. 915. 917. 920. 953. 996. 950. 906. 851. 873. 985. 983. 971. 950. 914. Amortization 41. 41. 46. 53. 63. 77. 83. 91. 118. 151. 183. 224. 271. 316. 360. 402. 443. 485. 522. 555. 583. Net Capital Inflow 787. 765. 761. 745. 732. 898. 998. 974. 948. 920 921. 922. 829. 740. 641. 622. 693. 619. 599. 544. 481. Net Official Borrowing 590. 593. 583. 560. 541. 705. 848. 824. 798. 770. 771. 772. 679. 590. 491. 472. 543. 499. 449. 394. 331. Total Debt Service 2/ 78. 90. 107. 125. 146. 171. 191. 216. 261. 310. 358. 416. 479. 539. 595. 648. 699. 753. 801. 845. 881. Exports 610. 701. 767. 840. 920. 1008. 1096. 1151. 1295. 1408. 1533. 1663. 1804. 1957. 2123. 2310. 2425. 2546. 2673. 2806. 2940. Debt Service Ratio 12. 13. 14. 15. 16. 17. 17. 18. 20. 22. 23. 25. 27. 28. 28. 28. 29. 30. 30. 30. 30. 1/ This projection is based on the following assumptions: 1965-70 1970-75 1975-80 1980-85 GDP Growth Rate 6.5 7.3 7.5 7.5 Export Growth Rate 9.5 8.8 8.6 5.c Import Growth Rate 6.2 4.7 3.6 3.5 Incremental Capital/Output Ratio 2.8 2.9 2.9 2.9 Marginal Savings Rate 27.0 25.0 28.0 26.0 2/ 2 per cent interest, 5 years grace, 25 years repayment.