RESTRICTED

*iJl' IV IDV A 124LlVoL 1

This renort was nrenared for use within the Bank and its affiliated organi7ations.| They do not accept responsibility for its accuracy or completeness. The report may

I nnot be nublished nor may it be nuoted as rpnresenting their views.

_ IINTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

CURRENT ECONOMIC POSITION AND PROSPECTS

OF PAKISTAN

(in two volumes)

VOLUME I

THE MAIN REPORT

April 19, 1967

Asia Department

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CURRENCY EQUIVALENTS

4. 762 rupees U. S. $1. 001 rupee = U. S. $0 721I million rupees = U.S. $210, 0001 billion rupees = U. S. $2.10 million

This report is based on the findings

of a Mission that visited Pakistan in February

1967. The Mission was composed of the follow-

ing members:

0. J. McDiarmid ChiefDahman K. Albadian Chief EconomistGeorge J. Beier Fiscal EconomistJames B. Hendry Agricultural EconomistJ. Hanns Pichler General EconomistBension Varon Jute AdviserAnnibal Villela Industrial Economistityrtle Higgins Secretary

Rudolf Hablutzel also assisted in

drafting a portion of this report.

CONTENTS

PageBASIC DATA

YAP

SUMMARY AND CONCLUSIONS i - vi

PART I

Chapter THE ECONOMY

1 General Progress of the Economy 1

Economic Growth 3Savi.gs and Investment hReconsideration of the Third Plan 5

2 Financial and Trade Performance (1965/66 and 1966/67) 9

Fiscal Performance 9Monetary Developments 13Foreign Trade and Payments 16Role of Foreign Assistance 19Foreign Exchange Reserves 20

3 1967/68 and Beyond 22

Domestic Financial Resources for 1967/68 24Foreign Exchange Prospects for 1967/68 26Import Requirements 27Utilization of Consortium Aid in 1966/67 30Foreign Aid for 1967/68 31Import Liberalization 33Foreign Debt and Creditworthiness 3l

4 Economic Policies 36

Foreian Trade Policy 36Fiscal Policy 42Agricultural Policy 44Regional Economic Relations 45Revised Sector Allocations 45

PART II

Chapter THE SECTORS Page

5 Revised Public Sector Allocations 6

6 Agriculture 5°

7 Industry 66

8 Other Sectors 72

Transport and Communications 72Education and Tra;ning 7hHealth and Family Planning 75Rural- Works 7.Physical Planning, Housing, Social Welfare, 77

±ianpower anud auor

Annexes

I Pakistan's External Trade and Exchange System 79

II Jute 88

III Central Government Revenues 1967/68 102

Statistical Appendix VoluWe II

BASIC DATA

GMllt'ivntpei a.Area: (in square miles) Total % of Totali7

Pakistan 365,529 27.5aCQ L.aabO;. CCL..)01

East Pakistan 55,126 62.1

1/ 1962/63 estimates of the Department of Marketing Intelligence andAg.i;c nura Statistics.

m - -lota'l Density per sq. mile

VVU1J i^j. % 6yuulu7 esti.naiues): ii0.4 million 324West Pakistan 54.1 million 174DasL. PakiCstuan b64.3 million 1i00Rate of growth 2.6 - 3.0% per annum

Political Status: iviemoer of u.N., uommonwealtn, ubNOTU, SEATu,RCD (Iran, Pakistan and Turkey).

Gross National Product at Market Prices (1965/66) US $11,195 million

Real rate of growth 1960/61 - 1964/65 = 5.5% (compound rate)1965/66 = 4.6%

Per capita GNP in 1965/66 = US $97

Gross Domestic Product at Factor Cost (1965/66): US $10,078 millionof which, in percent,

1960/61 1965/66

Agriculture, fishing, forestry 53.1 46.7Mining and quarrying 0.2 0.3Manufacturing 9.6 11.5Other economic sectors 33.0 35.8Public administration, defense 4.1 5.7

Percent of GNJP at Market Prices 1°6h/6< I96/66

Gross investment I 6 12.2Gross savings 12.4 8.0Balance of payments current

account deficit 6.6 4.7Investment income navmentq oh 0o.5Government taxation receipts 8.3 3.3flove?n.ment c1 7ient. ~revnue 11.8 11.14

Second Plan 35.8

Money and Credit

Conversion 1 Pak. rupee = $0.21IL do]L''La L 4.f76 rupees

A.PlUa~'ILL.Lp toV lcu-gu 11oritu-y IDZ - cU (.LL5L, adrea ueutpl- 0± of te.L±JJJr died.

%l Chrv-e

(Rs. million) 1965/66 June 1965-June 1966

Total money supply 9,398.1 15.3Time and savings deposits 4,114.4 21.6Commercial bank credit to private

sector 6,271.2 7.6Rate of change in pricesi( 4.5% 5.0%

2/ General wvholesale price index

Public Sector Qperations (Rs. million) 1960/61 1965/66 PercentR.E. Change

Government revenue receipts 3,297 6,o84 85Government non-development expenditures 2,776 6,113 120Revenue surplus/deficit 521 -29 -Government develooment exnenditures 1.827 3,200 75Public investment expenditures 1,585 3,529 123

1960/61 1965/66 % Change

External assistance to public sectorof which: 1.02h 1)1,3q ho

Commodity aid 5 lPL 1,80 160 100 -38Project & technical assistance 359 781 118

External Public Debt (In millions of US dollars)J ne~ 196 .J.Afl **a.J r

reported changes upt-o March, 1067

TotWal - 4 e^.al publi debt4 2,5,8.1

net of undisbursed 1,325.5rpA _n _ ..... n vu :A_ntn.................^ r'Xot-al ctannual debtr-v serie 1"Ut Il.

of whichamori 1izatiO 61.2interest 49.3

Debt serv-ice -ratio (on basis estimated1967 exports) 13.2

Balance of Payrnts (Rs. million) 1960/61 1965/66 % ChangeActual Actual 1960/61 - 1965/66

Total Pxnorts merc,handiqe lj877 2.751 16.6Invisible receipts 409 707 72.9

Total imports c.i.f. 3,431 4,927 43.6TLA ± JI- S _ _ I1 U_ .! *_ - -- -A .

payment on official debt) 382 1,063 178.3Current account balance I,527 27 32 6 .8

1965/66 Second Plan

Commodity concentration of exports(raw jute and raw cotton) 36% I-44%

Gross gold, dollar and sterling reservesheld and controlled by the StateBank of Pakistan (Rs. Million) 829

Two months of total developmentand nondevelopment imports.

GENERAL MAP . JI ~~~~OF ( -

| ~~~PAKISTAN -I^--CAPITAL CITY U k I IJ M U A N DPROVINC AL CAPITALS , >)1~I -yu~

t ~~~~~INTERNAT14ONAL aCL3N0ARIES - -_ *m_Aq(- t At9;A,'

*8A-K ~A S H M I RY( PEAWALPIN

0 5C loo 1SC 200

M LENIVAL iSIILOOT

) J ~~~~~SARG )HIQ~

LAbHORE -

<) -_> J g 0f~~~~~~~~~~YYALL-UR, 210 | S1

t ,_ S ~~~~~~ ~ ~~~~~~~~~~~~~KHAN

I R A N *~~~~ $) t _8 /- 16 > 15 INU iP1x0>,'

R s! N S ! I f U N D I A

A Ey ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ON VAI

fv ~~i Nrz 41-=- dl i t

* LH_'n z 41 1 ./I

(( / r__Ll t .4,-t*

IR- *SZ . E.. k ,9{

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JUNE 163 ERD-296RI2

SUMMARY AND CONCLUSIONS

i.. A Bank mission visited Pakistan in FebraJryv 1967 to appraise(a) the Progress of the Thrd Plan; (b) the prospects and external aid

ren___irem_nt f 41 ,/ 1/ and (c) chnges needed JIM ecO-JOM"0 policies

for improvement of Pakistan's economic performance.

Performance in the First Two Years of the Plan

ii. In the first two years of the Plan Pakistan has been confrontedi-th difficult economic problems requiring rlexibility in both planning

and execution. In general it has met these problems realistically, andhas redefined the targets of the Plan in the light of- changing circumstances.

iii. Growth Investment and Savings. The official estimate of therate of growth of Pakistan's economny is 14.6 percent for 1965/66 and 5.2percent for 1966/67. The growth rate for the current year is estimated bythe mission to be lower than 5 percent owing to drought, frost and a powershortage, affecting in particular the agricultural sector. 6.5 percent Isthe average growth rate envisioned in the Third Plan.

iv. The rate of investment in the first two years of the Plan isbelow the rate of 15.8 percent of GNP achieved in the Second Plan. In 1965/66and 1966/67, probably about 12.2 percent and 15.4 percent, respectively, ofGNP was invested. Only a small portion of the depletion of stocks whichoccurred in 1965/66 is expected to be replenished during the current fiscalyear.

v. The public sector program for the current fiscal year is expectedto rise substantially over the disappointing level of 1965/66. However, itwill still be well below the Plan target and also below expenditures in1964/65 if measured in real terms. About half of the outlav is likelv tobe financed from domestic sources compared to 55 percent in 1965/66. Thelower share contributed by dompqtir r enurre is rdi i.n the )if npernntrise in the program, coupled with an appreciable reduction in the relianceof the public sector on the hanking system. Although no firm estimate ofprivate fixed investment is available, there are indications that in thefirst two vears of the Plan such outlays^rll avirwmqerage sli htIr hel the1964/65 level and in real terms about lO-15 percent lower than that year.

vi. In the first two years of the Plan, the rate of savings has alsobeen below Seco1ind Plan e U-- "_- Si_i Cp upward sur ge inthe rate of savings from 7.5 percent of GNP in 1965/66 to 9.6 percent in1966/67 Occurred owing pri-aril- to better fiscal performiance resut fromlarger retvenues and reduced defense expenditures in the current year. The

rate of p-blic sav--- ngs -wi4ch bd bee n ligatve in 1965/66 is expected to be1.5 percent of MP in 1966/67 and the amount of increase is about four timesthe cutback eVfected in defense expenditures.

/ Starting July 1, 1967.

vii. Fiscal and Monetary Performance. New tax measures introduced inthe first two years of tie T lan are expc s. 6.billion of additional resources over the Plan period compared to Rs. 3.0billion stipulated in the Plan frame. This is a goou achievemrent. in tvhecurrent fiscal year, tax revenues should constitute 9.1 percent of theGNP compared to 8.3 percent in 1964/65. Taking the two years togetherhowever, the rise in current expenditures has outstripped the gain fromthe increase in taxes. There was however, no major rise in the currentexpenditure of departments responsible for operating development projects,although 13 percent annual growth in such expenditures was foreseen inthe Plan.

viii. In 1966/67 deficit financing was greatly reduiced from theexcessive level of 1965/66. However, the high level of deficit spendingin that year coupled with appreciable rise in credit to the private sectorin the current fiscal year has led to substantial increase in prices andto the erosion of the base for the preservation,much less the extension,of a liberal import policy.

ix. Balance of Payments. Eleven percent annual increase inexchanne earnings is the best feature of Pakistan's economic performance.The rise in the exports of manufactures and in trade with bilateral agree-ment partners acc-nunt for a maior part of the increase. Increases involume as well as in prices have been important.

x. Despite the vigor displayed by exports, private sector importsdeclined by about 1- percent in 1965/66 and. although in 1966/67 suchimports are expected to reach the pre-Plan level, they will be appreciablybelow the avWerage level e visaged for the Third Plan. The shortfall isparticularly marked with respect to the supplies of raw materials forindustria production. qh- r- -ct4n i;n foreign exchange oukt.lay andefease in the current year uias approximately neutralized by higher foodJ.(mpLrtAs .

The net flow of ext emnal assistn-ce i- the fi-St two years of

the Plan has been about the same as the last year of the Second Plan.Hoevr,n L4.. IOQCA - A'AsA1vv,i-+t 6 7 and 70 nprcentILow-e-ver -, prodect a,'A j. -* -6 csn

of total capital goods imports compared to about 44 percent in theSecond Plal. Private sector iMapors, whicah used up 90 nereent of non-

project aid disbursements in the Second Plan, were allotted only 60percent in 1965/66 b-ut almost their Second Plan share in 1966/67.

xii. The import liberalization program introduced in 19 vas cutback in mid-1965 and has scarcely regained its original momentum. Theonly suDstantial amount of imports genuirely frree of al qu itativerestrictions (if one includes restrictions conmected with tied aid) arethose under the export bonus scheme. Howerver, the opening of letters ofcredit for free list imports against Pakistan's own funds, which wassuspended in Decanber 1966, was partially restored in March 1967.

1967/68 and Beyond

xiii. Size of the Plan. Over the Plan period financial resources arelikely to be at least Rs. l.0 billion less than estimted in the Planwhich would reduce the size of the Plan from REs. 52.0 billion to Rs. 48.0billion and that of the public sector program from Rs. 30.0 billion toRs. 27.0 billion. In real terms this would probably be over one-thirdlarger than the Second Plan.

xiv. Domestic Resources for the 1967/68 Annual Development Pror.The public sector dsvelopment outlay for 1967/68 is exDected to be 22percent higher than that of the current year, an increase of about Rs. 1.0billione The revenue *surpus is e- , prnected to go up by Rs, h$50 million or35 percent, if defense expenditures are held at this year's amount ofRJ-2.250 mifion4 Howevers, the increase i-n t.he revenule snurplus iS confinedto the Central Government. The current expenditure of the ProvincialGio-ernm.en+4is onected to rn* te i +tnce as fast as the)ir revenues (exchlusiveof taxes collected by the Center and shared with the Provinces). The

aIrel nf' Aaef4- +c ivn snrAdig , tprobral- remain aboniit the Same as themodest level of the current year. Dormstic resources are expected tof4nance e3 percen+ P 4-.h Adevelopmert +IAl7r 4 i16(/64 cop-ared with

50 percent in 1966/67, the latter being the target suggested in last;arIs ae oro,lL c re2pjot-L LI .LoL tline cur-ret year.

xw. Balarice of P--itent as Fuorein-', EAisXp a LA mdaintaitheir buoyancy next year despite the increasing difficulty in expandingeaurninlgs from jute. Imports are also projecteu tIo cuuorio to 'Ile IH r eiLbIsshown in the first two years of the Plan. On the basis of these projections,gross capital inuflow requirements for 1967/68 work out at Rts. I03 bflhon.About Rs. 1.5 billion of this is to be spent on Indus and Tarbela, PL 480,private capital inflow and technical assistance, wnich of course areself-balancing insofar as the balance of payments is concerned. Thisleaves a balance of Rs. 2.8 billion ($590 mallion) to be covered byproject and nonproject assistance.

xvi. The Planning Commaission has proposed a list of new projectscalling for commitments of $237 million in 1967/68. in addition, Governmenthas estimated that $81 million will be required for additional financingof' ongoing projects, giving total new commitments of $318 million. Thismay be rounded off to $300 million. $50 million of such new commitmentsmay be obtained from nonconsortium sources in 1967/68, leaving $250million (out of the $300 million) to be covered by commitments fromconsortium countries. With this level of newr commitments and since theproject aid pipeline at the end of June 1967 is expected to total$861 million, on the basis of past experience we believe thatproject aid disbursements might amount to about $300 million in 1967/68.This would involve disbursing 30 percent of the amount in the pipelineand 10 percent of the new commitments.

i vr

xvii. If, as estimated in the preceding paragraph, disbursements of$300 ,m.l1n a_e rade fr P Pr-JJeCt aid, $p290 mi0ion ofX nonproject, aiddisbursements would be required to make up the $590 million referred toinf paragraph xv. Of the $i77 million nonproject aid pipeiine expectedat the end of June 1967, $160 million should be utilized in 1967/68. If_0 pe-rcent of new comiitments of nonproject aid are used up in the sameyear in which they are made (this would require substantial commitmentsearly in the year), the requirement for new commitments would be around$260 million. Of this, it is reasonable to expect that $20 million mightbe made available from nonconsortium sources. Thus, Pakistan's needs fromthe Consortium appear to be $h75 to $500 million ($250 million for projectand $225 to $250 million for nonproject assistance). This does not in-clude any new commitments for the rarbela project or for extraordinaryimports of fertilizer which we understand the Government may request.Some provision for the latter seems to be justified and should be pro-vided as soon as possible to meet requirements for the 1967/68 crops.

Economic Policies

xviii. Foreign Trade Policy. Pakistan has a complex multiple exchangerate system. Tt annneas tn remain effective on the export side but, des-pite its complexity and the large amount of nonproject aid Pakistan re-ceives.- thp PYhmnnc "n. pim-Fm ic nn+ mn aii1J¶'h"+JI fr¶YIfita fn' + pgcevsIhex g rate sysem is r.ot an equil-b-ai-5 de-rce -o thiebalance of payments so that the deficit in the current account is containedbyr qnnti3 ictions I T- 19</6C her foreign trad 4 4-ehange

rate policy was moving in the direction of fewer rates and the removal of..-- ~ 1 -r cU orAisUJ L. .L±I % 1L%.L U 6LA) , III.L.UUI. DLLJju LA ULIte EJ.Jdy UJ.01uantitafiv- restrcin in ore ogiewdrscM oD lyo

market forces with reduced discrimination as among different types of im-prters anu exporters. De-v LU6U,B` b in 1965/66 .-d 1 /O( caused areversal of this trend in fact, if not in principle.

xix. A general prescription for Pakistan's trade and exchange ratep-oLicy is outside the compass of tnis report. As first steps, the missionbelieves that Pakistan should consider measures to help in adjusting im-port demand for items now entering at the par rate to the financial re-sources wihich are likely to be available for financing them. Such measuresmight include imposing additional import charges on such items, broadeningthe scope of the export bonus scheme both by increasing the supply of bonusvouchers (possibly both by broajening entitlements and adding export itemsnow not entitled to the bonusI'and the items eligible to be importedagainst them, and if necessary, having a somewhat smaller but much lessrestricted free list than is contained in the present import policy. Inaddition, for purposes of achieving revenue and development objectives,increases in tariffs on capital goods, particularly machinery, should beconsidered.

xx. Fiscal Policy. The resource gap of the Plan is not likely to bebridged bv the tax measures introduced in +he firt+ two years of the Plan.The relative weight of indirect taxes has been increased by defense sur-charges and other ad hnn m easures. Previous missions suggested 4to sources

1/ The missiori does not exclude Dossible sal_s of hbnus vuchers byr theState Bank against its own foreign exchange or foreign aid (see para-graph 10l below).

of additional taxes, namely (a) on income derived from agriculture (nowexempt from the regular inoome tax); and (b) reduction of tax holidaysfor new industries. Some action was taken on the second point. Theremoval of the exemption accorded income from agriculture is againsuggested. Under a progressive system, the yield of the income taxgenerally would be increased and its equity improved by the removal ofthis exemption. The mission does not believe agricultural output wouldsuffer.

xxi. Agricultural Policy. In spite of greater emphasis on foodself-sufficiency programs, the provision for subsidies on fertilizer,plant protection and mechanization in West Pakistan have been reduced.Last vear. the fertilizer subsidy in West Pakistan was cut from about50 to about 35 percent, and to reduce it further might be to take toomuch risk with an input that olays a pivotal role in the food self-sufficiency and export drives. Economies can, however, be effected inother areas. There is; for examnle. scoDe for private participation inthe distribution and application of plant protection materials.

Revised Sector Programs

xxii. In December 1966, the Third Plan allocations were altered. Thefocus is now on more immaediately productive anrd less foreign exchangeintensive programs. Self-sufficiency in food is to be achieved by 1970and in fertilizer by 1971. In industr-y, a progr of consolidationthrough better utilization of existing capacity is still being formalized.In view of acute shortage of power and transport bottlenecks, these sec-tors are also emphasized in the revised Plan.

xxiii. Agriculture. For each Province, an Agricultural Policy Commit-tee has been set lip at the highest level to review periodically the pro-gress of developr;e.nt pr^.grams and find solutions to special problems.Detailed programs in terms of production targets and requisite illputs arebeing worked out. This is a sound and ambitious endeavor. The problemsof most importance include the likelihood of a shortfall in water develop-ment, in facilities needed for the import and timely distribution offertilizer and more agricultural credit.

xxiv. Industry. There has been a fall in the rate of growth of theindustrial sector from an average of about 10 percent in the Second Planto half as much in the first year of the Third Plan. The rate has notpicked up markedlv in the current vear and there is evidence of greaterunder-utilization of capacity in industries that depend on imports.

xxv. Last year's mission felt that some industries planned for thepublic sector might not be justified. These included a heavv mechanicalcomplex in West Pakistan and a machine tool plant in East Pakistan.Although foreign credits for these projectns have been arranged, thev havenot yet been started and the Government appears to have accepted therecommendat ion made ; last year's report 1hat a LJLLpartn-e should

be obtained as a prerequisite for proceeding with these types of publicsector proJects, A peTrochemical complex for producing syntnetic fibersis being postponed and three fertilizer factories originally planned forthe public sector are now shifted to the private sector. The steel millfor West Pakistan is still under study. The mission hopes that furtherreductions will be made in the public sector industrial program and thesavings transferred to such fields as education and rural development.The mission was struck with the fact that those sponsoring heavy industryare looking to very high tariffs or, preferably, an outright ban onimports.

xxvi. The Tariff Commission needs to be greatly strengthened. Betterliaison between the work of the Investment Promotion Bureau and the TariffCommission is also called for. The former is working out a revised Indus-trial Investment Schedule with more attention to controlling the futureimport liability attached to industrial investment.

xxvii. Transport and Communication. Greater emphasis is placed on thissector. Road develonmRnt is nrocR.ding fAirlv well in West Pakistan. butprogress is slower in the East Wing. The railway program is also proceed-ingf at a orace. Preliminnar" sr f-ud -for a seond prt in WrJestPakistan of one million tons initial capacity are completed. In view ofc-ongestion -at Kara-chi, it i5 ont.pae 4--t 4the -r.ew port sould bel A ;n- U ~ ,., .L,U A.b- VX&..u~IpL *~u ,a ULAl 1~' £U VV LJ AL.. ~ .

operation before the end of the Plan. Expansion of Chittagong is alsounder way. Telecommunimcations is one of th-- severa fields where the re-establishment of economic relations with India would benefit Pakistan'seco,omAliC progress.

xxviii. Education. About 13 percent cut-back in the education programis focused on primary education and teacher training. The quality andoverall balance of the educational program will probably be affected ad-versely by these cuts.

xxix. Health and Family Planning. The allocation for family planninghas been raised by 65 percent and this program appears to be making goodprogress. Other health programs have been cut from an already very lowlevel as have other social welfare programs.

Terms of Foreign Aid and Creditworthiness

xxx. The ratio of Pakistan's external debt service to its foreignexchange earnings is now about 13 percent. This is not an unduly highratio and some additional borrowing on conventional terms appears feasi-ble. However, if Pakistan's requirements for foreign capital continueto be met on present terms, after adjusting for recent increases in therate of interest on loans from some sources. and if exchange earningscontinue to rise by 10 percent per year for the remainder of the ThirdPlan and 7 nercent thereafter- the debt service will hp nearny 20 percentof export earnings in the late 1970's. To the extent possible, foreignaid to Pakistan srh.ould be provided on coneession1 terms T -heproportiof hard loans has recently been about 30-40 percent. Last year's reportrecommended a 20 percent ratio. Such a raio till appears highly desirable.

P AR T1

TIE ECONOMY

CHAPTER 1

GENERAL PROGRESS OF THE ECONOMY

Introduction

1. When an economic mission visited Pakistan in February 1967,over one and a half years of the Third Plan (July 1, 1965-June 30, 1970)had elapsed. This report will examine (a) the progress of the Plan andthe indicated economic performance of the economy in the first two yearsof the Plan; (b) economic Drospects for the remainder of the Plan withmain emphasis on 1967/68;1; (cj probable external aid requirements for1967/68; and (d) desirable nolicv changes to facilitate Pakistan's eco-nomic development.

2. Thus far, the Third Plan has not produced the acceleration ineconomir. Prowth tha+. waq viqnq1iz7.PrH thn t.hp Plnn wnq rl'nft.d. Nor hnvothe rates of domestic savings and investment come close to the expecta-tions engendered by Pakistann1' performance during the Second Plan- Hiow-ever, the shortfall in growth has been largely because of fortuitouscrcuiritances such as unfavorable weather and a temporary lack of powerand, of course, the war with India in September 1965 and its aftermath.The latter .has had s.rgnific t s ons +I supy ofiena

and external investment funds for this year as well as last, and on in-v-4tor corn"dence in1 the private sec Wor.V~ u1jj. ±~ ±1,L%LLiI&LVLX"V-IA1

3i.e food problem has moved 'o U 4t cenur of >Uclstag in Pokistthis year. Lack of timely winter rains, as in 1965/66, has raised the verylikely prospect that West Pakistan wiii have a second substandard wheatharvest in a row in 1967. This, combined with the fact that stocks areeven lower than a year ago and tne main rice crop in East Pakistan was re-duced in 1966 by exceptionally heavy storms, has obliged the Government tostep up its foodgrain imports by about one-third during this fiscal year.A reduction of PL-h80 shipments in 1966 as compared with 1965 plus theshortfall in domestic supplies, will cost over $100 million in 1966/67 inforeign exchange or short-term foreign exchange liabilities. This isabout $70 million more than Pakistan has been spending on food imports inrecent years and is an unexpected drain on her foreign exchange earnings.it wras an important factor, in combination with delays in the commitmentof foreign aid, in compelling the Goveranent to intensify import restric-tions and suspend allocations from her own foreign exchange for "free list"imports of industrial materials in December 1966. Also, the food situationmay put further strains on the balance of payments throughout this calendaryear unless foodgrain supplied as aid is substantially increased in thenext few months.

1/ Fiscal year starting July 1. 1967.

4. The actual and potential shortage of foodgrains, combined withco4 AerabLCe inl at-ionLry presr eIs gUIraed b-y last year' s budget arIdthis year's credit expansion in the private sector, has caused a sharp-11-17"Bu in -tae cost oI living with major empnasis on food prices, buTalso affecting prices of most other consumer goods. However, while themission was in Pakistan, the long awaited rains arrived and foodgrainprices, which had soared to two or three times the controlled rationingprice level, subsided quite sharply. The fear of a food crisis appearsto have diminished substantially for the time being. Some labor unrest,particularly in the transportation sector, has both contributed to andresulted from the high food prices.

5. Other short-run problems with an adverse impact this year havebeen an acute power shortage in West Pakistan and inadequate foreignexchange to buy imported materials for industrial production. A powershortage would have occurred early this year in any event, pending thecommissioning of the first stages of the Mangla hydroelectric plant andthe start of the Lyallpur thermal station scheduled for April and June,but it has been aggravated by a partial breakdown of a major thermalstation in the Punjab at Multan. The impact of the shortage has beenchiefly on Power supply for pump irrigation. While industrial uses ofpower have been curtailed, it is doubtful whether this has been as im-portant a factor in reducing industrial output as the lack of importedmaterials. The utilization of industrial capacity in plants usingimported materials. whieh had risen by about. 20 nercent in the last twoyears, is now about where it was before the import liberalization programwas adonted in 196h or aromcd 60 percent of rated one-shift capanitv

6.. Despite the ulntvoward develoments in food, pow^er and aid,Pakistan's economy has not been static this year and may in fact grow byL.< to 5 percent or at a rate that was considered as satisfactvoJry durvingthe Second Plan. Some of the main economic indicators are in Table 1.Rrigfht features are~ thes goyilds Or cotton crops

in West Pakistan which are grown on irrigated land, and an apparent re-,-r "- f. X pArVate r WIveLu.In LU J.oWi.L6U the setbackl of. l aU year. AnUJA ULImL

subject for satisfaction this year is the continuing very favorable show-ing of the export sectr+w V* prts this year are expected t 4-creaseabout 10 percent which is particularly reassuring in view of the risea,lLre-dW achL, 1OZ in ,,/66. The increase in; 1965-6w das entirely ue to

a larger volume of exports, but the rise in jute prices has been signifi-AU .LL -LgVVU1 g. 2 UUV* 1tJ U4LQu UU.L cig .LI.; X dL UUr LLLI t t1 urlWIU . tv ' Licltd LJUt:XIl

the continuing attraction of agriculture for private development expendi-tur-es, particularly in tubewelbs and fertilizer, and this may be expecWedto be further stimulated by the high food prices now prevailing.

7. On the monetary and fiscal side, it seems clear that the Govern-mrent wil do its best to avoid further deficit financing this year afterlast year's excessive monetary expansion and is holding the line on defenseexpenditures which are budgeted at 17 percent less than the very high level

of 1965/6621/ Some further action may be needed, however, to contain privatecred.T, ex-pri1on. It may not be easy to do this while preserving ,ilierntuILin the private sector. With foreign exchange reserves at their lowest pointin recent years (about two months imports), the curbing of import demand isimperative for the time being.

Economic Growth

8. The official estimate of the rate of growth of the economy duringthe first year of the Third Plan is 4.6 percent per annum. For the currentfiscal year the preliminary official estimate places the rate of growth at5.2 percent. The mission's estimate is, however, in the vicinity of 4.8percent, mainly because of a lower evaluation of the likely performance inagriculture. In that sector, the growth rate in 1965/66 was around 1.6 per-cent. For this year the official estimate is 3.1 percent, but in ouropinion, little, if any, growth in agricultural output will be achievedthis year. Even the official estimate is well below the Third Plan targetwhich, influenced by the rapid progress in that sector in the Second Plan,was pitched at the high level of 5 percent (4.5 percent in East Pakistanand 5.5 percent in West Pakistan).

9. In the manufacturing sector, low level of stocks at the commence-ment of the year and shortage of raw materials and power will hold down thegrowth rate in 1966/67. However, in the large-scale manufacturing sector,Droduction may be better than the q oercent growth achieved last year. Asfor the construction sector, total investment in Pakistan during 1966/67may surpass the 1965/66 leve lhv b hbot, 20 percent. However, this has tobe discounted by the rise in prices. The official estimate for the rateof real growth in the construction sector of about 10 percent in 1966/67,following the 5 percent decline in 1965/66, appears fairly realistic. Theservice sector n-n. also rise by as .uch as 7 percernt

'-'-. .A.~ UJLV JIAG.J ~~ % L.LQ , WJV 1Q IIL45A Ot I ~ 1 V

10'.'. Th±&e change in tLLike oVeralL c.mpoItUio.nUIAI U.L o1 Pakistan's G-Nd VwhiLch,1

occurred during the Second Plan, namely about 1 percent a year increase inUthe relatve importance of manufacturing wiLtI a similar percentiage udecreasein the relative importance of agriculture, has continued in 1965/66 and1966/6I7. ThuU, En 4e .l dU'r yea1r, dg1xcui.u.UU Will prou ctauu 45.8

percent of GNP and manufacturing 12.7 percent, wTith large-scale industrystill produuces a relatively small 8.1 percent. SiLce 1959/60, agrieultur&srelative contribution has declined by about 21 percent, while that of manu-lacturing has increasea Dy more tnan a tnira. Tnis steaay inauszrializationof the economy is likely to continue, even with the greater stress now beingplaced on increasing agriculitural output. An increase in agricuitural out-put will require a corresponding increase in supplies of agricultural inputsfrom Pakistani industry and should furnish a larger market for domesticindustries which are primarily oriented towards import substitution.

l/ Implying a reduction from 5.1 percent of GNP in 1965/66 to 3.7 per-cent in 1966/67.

Table 1

General Indicators

(In Percent)

ThirdSecond 1964/ Flan I965/ 1966'/67Plan 1965 Target 1966 (Estimated)1/

Economic Growth (real terms):GNP 5.5 4.5 6.5 4.6 4.8Per Capita GNP 2.9 1.9 3.9 2.0 2.2Agriculture 3.4 1.8 5.0 1.6 n.a.Manufacturing 10.0 8.3 10.0 5.0 6.9

Gross Investment as Percent of:GNpP 15.8 18.6 16.0 12.2 15.4Net National Resources5/ 15.0 17.5 1h.7 11.6 14.5

Gross National Savings:Average Rate 10.3 12.0 10.1 7.5 9.6

Fiscal Performance:G.ovrerrm,nfir.+Renusa 0 11.8 11 9 11a4 11 5Percent of GNP (marketprices)

Forei 1 Trade -mlualPercent Increase

'7 J. if,% '7 n1 '7 I Exports f.4 10.7 12.7 10

Imports 16.7 15.3 10.6 -13.9 27.8

Price Changes (annual average):Wholesale 3/ 4.1 11.1 -- 5.8 13.4 2/Cost of Living 3/ 3.1 11.1 -- 9.6 )4.0 r/

1/ By Mission.Z/ First quarter only.3/ IMF - International Financial Statistics.4/ First half.&'/ GNP plus net foreign resources.

Savings and Investment

11. lNational savings which declined sharply from 12.3 percent of GNPin 1964/65 to 7.5 percent in 1965/66A/ are expected to rise to 9.6 percentin 1966/67. In Table 2 we have attempted to break down savings and invest-ment between the public and private sectors. A striking development lastyear was the effect+ on publin savings of the rise of about 115 percent in

1/ The marginal rate of savings was negative.

defense expenditures. Public savings were negative in 1965/66.1/ Privatesavings, inciuding financial resources transferred tw te pUbiiC sectormainly through credit expansion, have been reasonably stable in the firsttwo years of tne Flan tnough declining as a percentage of GNP. Voluntaryprivate savings declined substantially in 1965/66 but may recover thisyear to about the 1964/65 level.

12. investment in 1966/67 has also recovered partially from the1965/66 setback when fixed investment declined by about 7 percent andtotal investment by 25 percent as compared with 1964/65. The investmentrate which slumped from 18.6 percent of GNP in 1964/65 to 12.2 percentin 1965/66 is currently estimated at 15.4 percent in 1966/67. Thehigher rate is due to 40 percent rise in Plan expenditure in the publicsector, 8 percent increase in the private sector including a possibleinventory build-up which may materialize towards the end of the year,and higher expenditures on the Indus Basin project. At current pricesgross investment is expected to increase by 37 percent in 1966/67.However, this assumes a substantial increase in stocks this year whichmay not materialize because of the foreign exchange stringency. Fixedinvestment having declined in 1965/66 is expected to show an increaseof about 15 percent this year. The fact that the Indus Basin Works arewell ahead of schedule has helped to sustain the level of investment inthe economy.

Reconsideration of thA Third Plan

13. The nrinn.innl Pnntri1.qinns of the Rnnk1 q ini+A: & nn-rici1 onf'the Third Plan (AS-109a of April 26, 1965) were that the overall PlantaIgt involvi-ng the --bilization of _ 35,5 bl f dome+_ic re=sources (out of a total Plan expenditure of Rs. 52 billion) might beachieved but .1hat th.E.ere woi1d v rpob-ly be a sh_4v_1 of --- uv R.billion or about 12 percent in the domestic resources required for theniiplice of the MU' Th ssion also cor.cluded h4bat

in addition to PL 480, the foreign exchange costs of the Indus Basin..rsprivcatte foreign inves'w,Ment andu tueChLniuca ' assbvd"Uc, P«ims tan

would require something in the neighborhood of $3 billion of gross capi-+al ir4nt owl (aou $2.4 1'__ billLo ne.v of foeg db erie wv,LLLALA"JVVV %CLJVULt Yr* UL.L.L.LVII L1UI, VI. .LU.L,gI'tJ e bU1VV1CUJ WLdIL U 1,

prospect of not more than $200 million of this coming from nonconsortiumsources. Therefore, t,he $2.7 billion which Pakistan was requesting fromthe consortium over the five-year period seemed reasonable.

14. Another major conclusion of the 1965 report was that Pakistanmight be able to acnieve the growth target of 6.5 percent per annum set

for the Third Plan period with a somewhat lower level of investment, if acareful re-examination of investment priorities were made and more empha-sis placed on projects with shorter gestation periods. Since it becameapparent tnat there might be a considerable shortfall in domestic andforeign financial resources for the Plan, the Government has been re-examining the project content of the Plan along this line.

1/ Public savings do not include all gross savings of the public sectorinasmuch as retained profits and depreciation reserves of most govern-ment enterprises are conceptually included in the private sector.

- 6 -

15. The reduction of about one-third in public sector investment lastyear; as co -nmed tltu the 'Dlan 4- get, will not be matde up hLLs year sixiceexpenditures will still be well below the original Plan phasing. Therefore,a 25-percent sbortfall in public sector developmsent expenditures appearsprobable for the first two years of the Plan. Even if such expendituresshould rise by over 20 percent In 1967/68, lthe first three years will seeonly about 40-45 percent of the public sector program accomplished in mone-tary terms and, of course, much less in real terms. For the Plan period asa whole, a shortfall of at least 10 percent in public investment measured incurrent prices seems probable. Tnis would mean a program of about Rs. 27billion ($5,670 million). Domestic financial resources for this seem to beir. sight, providing the Government holds to its present policy of containingdefense expenditures and if it raises about Rs. 1 billion in additional taxes.Problems of Plan financing in 1967/68 are examined in Chapter 3.

16. The events of 1965/66 and 1966/67 are impelling the Government tore-think its development strategy for the Third Plan, both in relation tototal investment resources and their allocation among the economic sectors.The process of re-evaluation of the details of the Third Plan which wasundertaken in the aftermath of the hostilities of 1965 is now being pursuedwith much more emphasis on quicker yielding investments. The beter utili-zation of existing capacity, whether in industry or agriculture, is theprincipal theme of this reappraisal. The achievement of self-sufficiency inagriculture by the end of the Third Plan and in agricultural inputs shortlythereafter has emerged as a principal objective. This, of course, has im-portant implications not only for the allocation of domestic and foreign in-vestment resources but also for the tvne of foreign aid required and fordomestic economic policies covering a wide range of subjects. The mission'ssuggestions on some of these matters are in Chapter L-

17. The Govern-ment seems to be moving decisively and promptly toincrease agricultural output. The problem in East Pakistan is primarily tooreanize the supply and use of water dairing the dry winter mnths i.n orderto produce a second or third rice crop, and in West Pakistan to move aheadvigorously with the fertilizer and land reclamation prograns . Dist r*t-by-district programs throughout the country are now being prepared to increaseagrici-tii-ral in.puts and to provide better plant protection services and seeds.Major reliance is placed on the new Ilexipak wheatin the West Wing and newricGe -strair.s in the "East. Thue I a 4ter Js still iLn the experJrrieritai stage.~~~ ~~. &I1 A. L.u L~ U .LJ ILU ACIII1a

18. IWen one gets do-wni - pro'ect detalls in otner sectors than agri-culture, there is no unanimity of view in the Government as to how best toimplement the new emphasis on increasing current output. Naturally, thereis resistance to slowing down projects already underway and to dropping orindefinitely -UstponIng projects on wnich a substantial amount of planningand financial resources have already been expended. Therefore, the missioncarn P-Xt to relatively few examples of projects on which a clear-cut deci-sion has been taken to remove them from the development program. We areconvinced, however, that such decisions will have to be taken if economicgrowth in Pakistan is to reach the Plan target of 6.5 percent even by theend of the Third Plan with the resources likely to be available. However,the mission feels that Pakistan is facing up to the combination of diffi-culties which have beset her this year and last with a realism that shou-dpay off in the future.

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Table 2

investment and Savings bySectors(Millions of Rupees)

1964/65 1965/66 1966/67

Public SectorPlan expenditure 3,970 3,200 4,500Noninvrestment Plan expenditure 6_0 _5 700Plan Investment 3,340 2,650 3,800Invest-ent in ndus arnd Tarbela pro9ects _30 879 1,013

(1) Total publi investment 14>7O q+29 4,813\L / *'u,. ~ W_13LL20 3L52 4 81

Tota '-ublic investment as per.cent of ON? 9.7 6.6 8o

Net foreign aid to p-ublic secur-c-l 21 C),I,7 -25943Deficit financing 232 1,695 400

N4et capital receipts 390 5633 56 ,

( 2) SUID-total 2, 920 4,5U75 3,90R

Public savins (1) - (2) 1,350 -1,046 9n5

Public savm gs as percent of G? 2.8 -2.0 1,5

Private SectorPlan investment 3,440 3,330 3,59oNon-Plan investment 1,390 -350 920

(3) Total Private investment 4,830 2,980 4,510

Private investment as percent of GNP 9.9 5.6 7.4

(4) Less net foreign aid to privatesector and change in reserves 2/ 95 8 563

(5) Investment of domestic-savings inpra sector ((3) - (4)) 3 75 2;895 3,947

p-L 'i ~~~~~ ~~~ " %'-"' , 6 7",~3,914(6) Transfers of privpte savings to

public sector 622 2R 965

Gross Private Savings ((7) (6)) 4,497 9,023 4,912

uross private savjings as peruei-t of GN2. 8.2

Tota! gross domestic investment 9,100 6,509 g,323Total gross national savings 5,847 3,977 5,817

Resources gap 3,253 2,532 3,506

See next page for footnotes.

(Table 2 fIotmntes. )

v/ Breakdown as follows: (In millions of rupees)

1964/65 1965/66 1966/67

Foreign Aid - Plan 1,520 1,704 2,269Foreign Aid - Indus and Tarbela 454 459 .477

PL 48o 463 430 4002,437') 2,593 3*, 140

Amortization 139 146 203Net 2,298 T1,447 Z, 4

2/ Breakdown as follows:

1964/65 1965/66 1966/67

Foreign Aid (including 705 330 420PL 480 subsidy)

Foreimn Private Investment 77 100 143Foreign Exchange Reserves (Increase -) 208 -487 -

Short-term Canital (Inflow +) -35 142 -

Total 955 85 563

3/ Net -prr1-. receipnts plus derieit financing for the public sector.

)i/ The slight differenGep hbtween gross savings of this table and inTable 13 is due to the exclusion of PL 480 for U.S. uses from thepresent table.

CHAPTER 2

FINANCIAL AMn TRADE PERFORMANCE (1965/66 AND 196/677)

19. Measured by public savings,fiscal performance was disappointingiD ~1096_566 desplVe substantIial1 new revrenue resources, EPvecn t-o p ro0-viden

the domestic contribution to a diminished development program, resort toheavy deficit flr.ancing was necessaCry. 19676u/ sho 'divU see a .,.arkedimprovement in public savings. However, in the first two years of thePlan borrowing by the public sector from tve bwankig system is expectedto exceed the total 5-year Plan estimate. Since credit to the privatesector expanded rapidly in the first half of 1966/67, internal liquidityhas risen at a faster rate than could be absorbed without price inflationand strain on the limited foreign exchange reserves of the country.Further, the pre-emption of a significant part of exchange earnings forpublic sector consumption (including defense and abnormal food imports)has sharply reduced the share of Pakistan's foreign exchange earningsavailable for private imports and economic development.

Fiscal Performance

20. One of the important targets of the Third Plan was an increasein the domestic contribution to public development expenditures. Thedomestic share was to be 55 percent as compared with about 51 percentin the Second Plan. Even with the reduced program in the first twoyears of the Plan, the domestic share is likely to fall short of thePlan target to about 52 percent.

Table 3

Financing of Public Sector Development Program

(Millions of Rupees)

1964/65 1965/66 1966/67

1. Domestic Contribution 2,136 1,765 2,265

2. Total Public Sector Program 3,948 3,200 4,500

3. 1 as percentage of 2 54% 55% 50%

21. Furthermore in 1965/66 this domestic contribution was derivedexclusively from net capital receipts and bank borrowing since currentrevenues f"ll slighltly short of current expendilres. (See A ntable 19.) These two sources could provide the 55 percent of the public

- 10 -

sector program without even more serious consequences only because thelatter had been reduced from the Rs. 4,700 million called for in theoriginal phasing of the Plan to Rs. 3,200 million. IWith the largerprogram in 1966/67 foreign assistance will increase by about Rs. 800million and the domestic contribution by about Rs. 500 million.Although the domestic contribution in percentage terms is likely tobe lower in 1966/67, there is a basic improvement in that the relianceof the public sector on the banking s-stem will be sharply reduced.It will be observed in the following table that this fiscal year isexpected to see a return to about the 196h/6q pattern of financing.

Tabl Ie

Gnmnnsititon of DnimatiG CGnnt.ribntinr to Piibei- SectorDevelopment Program

(In millions of rupees and percentages)

1964/65 1965/66 1966/67

Rewvenue Surplus l.. ,2e43 58% = 2 9 =2g , 30 5,7%Net Capital Receipts 390 18% 433 25% 565 25%

Ba,-'-~ ~~~~~~~~e, ql-wOwes I0 A, i 1v6177tt 4.no -18%Total Contribution 2,136 100% 1,765 100% 2,265 100%

Source: Appendix table 14.

22. Thn rpvpntiAenrn1n in 1966/67 is estimated at Rs. 1.300 million.But the surplus for this year will still fall below the annual target inthe Third Plnn. Thp Plnn nnvi-c¢innnd a rarvnip rmnrn1uq for the five-vearperiod of Rs. 11,600 million or an average of Rs. 2,320 million a year.

23. The failure of the revenue surplus to achieve target levelst..S ° fwas., ¢au by4 htn 1-frs 4r.crease~ 4vn r.4.-u!TlInnmon..e o3Tfien,i.

itures. In fact the revenue generated in the public sector exceededPlanw +a- ra+ - r Ro De 0 vnT4-111 4rv 4 C am4 iA 1a4 1i. 1 xr . nv t in qn

by Rs. 900 million in 1966/67. This good performance is largely theresult of the tax meau--res taben. prom,".pt i +i, n. the a > of 6 iOAct me t

defense expenditures. Like most taxes these also are being continueda4ser- the-L -aU1d1W,JL o-te .iz OC4 r or Wh.W1 1491C PCXOCwd.A A1s& Ls I Wnatfor the public savings effort of the country. They include a surchargeoJ. L) per-ceJL I .U,IipoU-k duti'.es o,. c- it. L ex1cep = W a LJ ^harge

of 25 percent on the petroleum excise duties and a 25 percent surchargeons s-ales luaxes.

2-4. ILn 1965066 U theO y.eLUL frvm LEthe deferse.9 suharJL-geW wasD IDs 2'C4

million and the present estimate is Rs. 519 million from this sourcein 1966/6t. An additional Rs. 330 million is expected in 1966/67 frvm

- 11 -

other new taxes. Thus in 1966/67 new taxes are to yield Rs. 848million or about 15 percent of Pakistan's total tax revenues. On thisbasis it is noTr qtjmratPd that additional taxeR imnosed to date duringthe Third Plan will yield Rs. 6,900 million over the five-year periodcomnared tn thhe Rs 3bhillin'n stinii1ntAd in the Plan frame.

25. The Gv.f%-q nt had no choice but to apply, sbshtantial newindirect taxes or to increase old indirect taxes to finance the emer-g0encyrr of 104'/#4 pnA +the higher l o ra f defens .,M c, pAnnu4ng

in 1966/67. However these measures have not improved the equity orirn_+4^.cor.e _el +1i c+ - of-+- t n r, .There tJtLaAA'. no ^ **"fbac in

direct taxes. Incomes from agriculture for example continue to beex-rs+ ftMh a *hrn.la 4 .,lone t.x A V1sD 4i ,Vmfl 4.,..,. V r 4tV .X V*a. 1i-14A,-,

industries are still provided. The net effect of a series of smallchar.ges ir. the incore tax is 1dly tobe Lit;insiit.4icar.t for th.e f,rsv

years of the Plan, although the two-year reduction in tax holidays fornew enter,vris9s m,igh.t produce noticeable effects toward t1he end of thePlan period.Y Thus the effect of the tax measures in the last two

1r'- W41 Is:AA %w5_A :_- _A_w&SUA 44_"0LV " __Vj4 U qL.L AILL

Plan taxes has been to increase the contribution of indirect taxes fromabou UVIC to over- '714 percenlt ofL totlC. t-cL re-VerV1uesz (,tFApp -Ld taleX- -L.- ).

Also since the surcharges are not shared with the provinces, they havedonre nothilg to areliorate the chronic provin1cial revenue probleJms.Provincial revenues (exclusive of taxes collected by the Center andshared with t,he provinces) in lyoo/67 wiil actua' y fa' slightlyshort of 1964/65 levels.

26. Other tax changes introduced during the Third Plan have notbeen significant in terms of revenue. The regulatory import duties andsales taxes imposed on Free List items,to contain demand within availableresources prior to the beginning of the Plan period, have been merged intothe regular rates and made more general in application. The actualrevenue effect of this change is nil, but potentially it has signifi-cance in that legally it permits the impositg9n of additional regulatorysurcharges on top of the new (merged) rates±.' Import duties onmachinery were raised to 25 percent and 20 percent (for West and EastPakistan respectively) from the old rates of 12^2 percent and 7½ percent.The immediate revenue gains from these duties was reduced by allowing

1/ Of the Rs. 70 million expected to be collected this year from new"direct taxes", Rs. 50 million is actually a forced purchase of10-year 5 percent bonds rather than a tax. The other Rs. 20 millionis an increase in the wealth tax.

2/ Thus standby power exists to impose additional regulatory duties,equal to 25 percent of specific rates or 10 percent of the value ofimports subject to ad valorem rates, over and above the rates ineffect at the beginning of 1965/66. This power is not impairedby the fact that some regulatory surcharges were included in therates at the beginning of 1965/66.

- 12 -

most of the tax liability to be paid under a deferred pavment scheme atlow interest rates. This delayed payment option is not applicable to replace-ments and spare Darts.

27. The orowth in current xpnondituire duering thp first two vyears ofthe Plan will be far in excess of planned growth, about Rs. 2,100 millionand Rs. 1.h00 millinn ahbvet the PTnn ta for 1965/6A ndri 1966/67respectively. Although the decrease in defense expenditures in 1966/67is gratiTfhintr tihey ni absorb abot 30 perentn. of eiiyrent revenues ascompared with 22 percent in 1964/65.

Table 5

Current Expenditures 196h/65 - 1966/67

(Millions of Rupees)

196h/65 1965/66 1966/67

Defense 1,262 2 710 2v250C,verramentAC,iMr1ir-alo 1,457) 1 -)-1,399 1,333

Development Departments 932 1,005 955Dnebtu Sce r-TJiCe 846 1>1> I9 114U

Total 4,497 6,113 5,686

Annual Change 1,616 -427Annnual CIhange excluding Defense +177 + 24

Source: Appendix table 17.

28. It is clear that the increase in defense expenditures wasflinanced in part by slowing down normal increases in other current expend-itures. For example expenditures of development departments were expectedto rise at about 13 percent per annum during the Plan period, but haveshown no appreciable increase in the last two budgets, while generalawdministrative -expenditures nave actually declined. Even if this austerityprogram in non-defense expenditure could be maintained, it would hardly beue5iraULe, in view of>the new responsibilitles being constantly added tothe development departments as development projects are completed. As anad hoc crisis measure severe restraint was undoubtedly necessary. Forthe remainder of the Plan period some increase in tax rates beyond thosealready imposed, will be obligatory if the domestic contribution to thepublic development program and necessary non-development expendituresare to be met.

- 13 -

Monetar'v Develonients

29. With the removal of quantitative restrictions from about 40percent of Pakistan's private sector imports in 1964/65 greater responsi-bility fell on monetarv nolicv to nreserve balance of Davments equilibrium,particularly since heavy dependence was placed for financing the "freelist" program on the uncertain availability of foreign non-proiect aid.This was recognized when various credit measures were taken followingthe annou]ncement of the liberalization program=V/ The task of the monetnrvauthority is rendered more difficult and the impact of its measures onthe priv;a+e secor has perhaps had to be more severe because of the ratherpassive role that the State Bank has played in fiscal matters.

30. As is evident from the following table, the sharp rise increditA 4to 4h pblc e- in4eC 1 6 was aco.pne --- sizabl decl- e

in the rate of increase in advances to the private sector.

Table 6Causative Analvqis of MoneV Sunnlv

(In millions of rupees)

1964/65 1965/66 July- July-_ _ecember Liecebver

Changes in factors affectingmoney supply (Total) 712.0 1,245.4 859.4 1,110.9

1. Credit to the publci 231.7 1,523.?7 667.7 4I153'Asector (Net)

2. Credit to the private 1,717.7 44L1.5 607.5 1,807.9sector

3. T.e ar.d 4av-ngs de pos-f4 ts I ( 1 (-)236.0 (-)697 0

(Increase -)

5. Other items (Increase -) (-)140.8 (-)124.4 (-) 29.4 (-)274.9

Source: Statistical Appendix Table 22.

1/ Following the ;;liberalization program, of July 1964, a 40 percentmargin requirement was imposed on advances against nearly all goodsimported under the Free List. In January 1965, importers were requiredto deposit 25 percent of the amount of their letters of credit. Thequota system, initiated in August 1963, to penalize excessive dependenceof the Scheduled Banks on the State Bank was extended in January 1965to include most types of loans and advances by the State Bank to theScheduled Banks. The amount of quota was reduced from 50 percent to25 percent of the average statutory reserves with the State Bank. Thepenalty rate of 1/2 to 2 percent above the bank rate applied to slabsin excess of the quota. Cash reserve requirement of scheduled bankswas also raised from 5 percent to 7-1/2 percent.

- 14 -

31. Tt, is appnrpnt thAt the respnective roles of the public and privatesector were reversed as between the last year of the Second Plan and thefirst ve- -r of t+he Th4rd ince-rf'r as mnnntnrv expansion is concerned.Another reversal seems in the making in the current fiscal year whenprivate credit expan.sion is far exceeding reficit finanninp by the Government.In fact, the improvement in the fiscal position of government in 1966/67 isnot ref ected falally.Jn the r.eta. d- 40rA theM fr w" +. …r-

During July-December 1966, of the Rs. 415 million increase in bank creditto t1L A.Vli s about Rs. 270 ,II qlAiJ. '.%i occurred n fisca

1965/66 and appears in the 1966/67 column in Table 6 because of ad 4f.erence b-etwe +veafo-tl ido1heSaenn ,d lt4thGovernment. If this factor is excluded, the net credit expansion to the

puU1ic~~ -!- secUo during ___he_ six moth -nil -e - 1--'14/ wo-ld Sbe of the

order of Rs. 145 million (compared to Rs. 668 million for the same-_ .- -1^ 1

peroUU ± 1y65).

32. te must) unulue tat lihe t;- z mone s u FIpI Uly Uinlg"J thes;

Third Plan has been larger than is compatible either with price stabilityor with balance of payments equlibrium under an import liber-alizationprogram. Prompter and larger availability of non-project aid wouildhave ameliorated Dut not eliminated this problem. Mloney Supply increasedby 15.3 percent in 1965166 (as compared with about 9 percent a year duringtne Second Plan) and by 16.6 percent in the first half of 1966/o7.Economic growth cum monetization of the economy cannot absorb such ratesof credit expansion.

33. The impact of changes in monetary policy on expansion or contractionof bank credit to the private sector has been somewhat delayed by otherevents in the last two years. In August 1965 the postponement of theconsortium pledging session, together with concern about relations withIndia, caused some slow down in the private sector. Also in June, theBank rate had been increased from 4 to 5 percent. So in August a policyof easier credit was adopted. The quota system was abolished, the cashreserve ratio of scheduled banks was lowered in two stages from 7-1/2percent to 5 percent, and the margin requirements for borrowing from thecommercial banks were reduced.

3k. However, in view of the India-Pakistan conflict and its aftermath,these measures did not have an immediate impact on the monetary situation.In fact, not until a year later in the last half of 1966 did Central Bankcredit rise sharply. In that period however, the increase in bank creditto the private sector was nearly 200 percent higher than in July-December2965, and about 42 percent higher than in the more normal period of July-December 1964. Two special factors explain part of the rise in 1966.The inordinate increase in stocks of jute and the late cotton harvestprobably augmented the need for bank credit. However, even without thesefactors, the increase in credit to the private sector would have been 130percent and 10 percent higher than the increases of similar periods in1964 and 1965 respectively.

- 15 -

35. Furthermore, the rate of increase in money supplv during thelast half of 1966 would have been very much faster if part of theexpansionarv factors had not been neutralized bv a very rapid rise in timeand savings deposits. Thus, the liquidity of the private sector hasincreased faster in recent months than the increase in money supnlv. Thisis shown in the following table:

Table 7

Liquidity Position

(Billions of Rupees)

June 30, June 30, December 31

Mrvn+-;,n M-TPo ri on '7 .--- -_ _w 8 vv)7. 1

M4oney Supply 8.2 9.4 10.5TW:; %A SavLngs Depost 3.4U 4* 4.8Velocity of Money 4.4 4.2 4.1Quasl-,money as lercent of Gtv

in Monetized Sector 9.4 lo.4 11.1T: _' .. :! -3.! __ n_ - _. - {n -- - -__ ___ _ n- - -J-jqU ±U±L,y .aeU±Lu kriuney PLUS iuas±-

money to Monetized GNP) 23.6 25.4 26.5

36. The increase in liquidity (apart from the increase in moneysupply itself) is, of course, a potentially inflationary factor, though,in Pakistan, time deposits have tended to increase steadily in relationto the monetized sector of the economy, apparently regardless of short-runprice and other economic factors.

37. In January 1967, the State Bank imposed some selective creditcontrols on the extension of advances to the private sector. -However,without other direct measures, such as lowering of the credit-depositratio, increasing the statutory reserve requirements and reducing thelevel of advances by the State Bank to the Scheduled Banks, the recentmeasures are not likely to be adequate.

38. Prices rose very rapidly in 1966. Although the price of food-grain increased more than the price of other items, the rise appearswidespread enough to indicate general inflationary pressure in theeconomy. The general index of wholesale prices was 17 percent higher inNovember 1966 than in November 1965. The index for food was 22 percent,fuel and raw material 11 percent, and manufactured items 4 percent higherthan a year before (see Appendix table 29). The rise in prices was muchsharper in East Pakistan than in the West. The cost-of-living index alsoreveals a similar picture and this has been accentuated by the threat offood shortage in the early months of this year.

- 16 -

T,,+U 4l , 4'. +.. - - -_ 4,~4 41,- l., .b4 ~ 4 ,~,,v39. ~Ir. the fi-st two years Wf the~ > r,Pb- s O e+d+

a current account deficit at the rate of about Rs. 3 billion ($634 million)per year. JThI-e ov-er *n posit1xon o-L theL V.lanc -LOJ,snsiss^

below:

Table 8

Balance of Payments Position

(Millions of Rupees)

Actual Estimate1964z' 196> l6/o6' i R66/o71

Imports c.i.f. 5,723 4,927 6,279Exports f.o.b. 2,403 2,751 3,100Net Invisibles 67 -356 -327Current Account Deficit 3,253 2,532 3,506Debt Repayment 139 146 203

Financing Required: 3,392 2,678 3,709

Sources of Financing

External Assistance 3,142 2,923 3,566Foreign Private Investment 77 100 143Other, including Change in Reserves 173 -345 -

Source: Appendix table 41.

ho. The export performance of Pakistan continues to be surprisinglygood despite the events of 1965 and the monetary situation described above.The Third Plan had contemplated that exports would grow about 50 percentfaster than GNP. In the first year of the Plan, however, the rate ofincrease of exports was three times, and in the current year is likelyto be at least twice the overall rate of growth of the economy. In theSecond Plan, an average annual growth of over 7 percent was achieved(as compared with the 3 percent forecast by the Government and 2 percentby the Bank). The Third Plan forecasts an increase in foreign exchangeearnings of 9.5 percent a year which previous Bank missions have consideredrather optimistic. However, in 1965/66 commodity exports grewi by aboutf1.4 percent (12.9 percent if one includes invisible receipts) and wethink a further rise of 10 to 11 percent may be in prospect for 1966/67.11.3 percent was recorded in the first half despite the lateness of thecotton crop and some stock-piling of jute.

- 17 -

&4j.*. i11(V LWU UJ.L1IIt:IILUS ±1I rmLdAL cjl,d.~ UAJLIJV. I. VIjj. O.e VILU 1I~v

for these increases have been the expansion of the export of manufacturesand trade with her bilateral agreement partners. 20 percen' of the increase

in 1965/66 exports was in the latter category and bilateral exports mayrise by 30 percent this year. The breakdown of exports by main categoriesand comparison with Plan targets is as follows:

Table 9

Export Performance in Third Plan

(Billions of Rupees)

Actual Estimate Plan

1964/65 1965i66 1966/67 Target

Primary Commodities 1.69 1.70 1.68 2.05

Manufactured Products 0.71 1.05 1.42 2.00Of which(a) Jute and cotton goods 0.51 0.83 1.01 1.20(b) Other 0.20 0.22 0.41 o.80

Total: 2.40 2.75 3.10 4.05

42. Thus far in 1966/67 as in 1965/66 primary commodity exports havefailed to grow. The export of fish, hides, skins and wool have declinedand raw jute has not increased. The declines were, however, offset by arise in export of rice and other items. The export of manufactured goodsin 1966/67 is expected to grow by 33 percent chiefly because of the increasein the export of Jute and miscellaneous manufactures such as leathergoods, ready-made clothing, molasses and electrical articles. The ratioof industrial production to exports of manufactured goods is small but willprobably be about 3.6 percent in 1966/67 as compared with 3 percent in1964/65.

43. Receipts from invisible earnings which increased by 15.6 percentin the first year of the Plan are expected to decline slightly in the currentyear because of lowier private remittances.

44. The terms of trade, which had improved in the Second Plan, saggeddue to higher import prices in the first year of the Third Plan. Provisionalestimates indicate no increase in the general level of export prices in1965/66 though it is likely they will show a considerable increase thisyear.

- 18 _

Table~ 10

Te.ms ofTrd

(195,X55~c =lOTr,dex 7um-.bers o' TT",i+ TYJAlue Ter-.s~ of Trade

A.SA.A~S Si wuJ¼KJ, 0 '.5 ~J4.x . -.&u.. -- L.

Exports Imports

1963/64 ll4.2 159. 88.6

1964/651/ 157.9 141.4 11.7

1965/66 157.9 170.8 92.4

1/ Provisional.Source: Central Statistical Office.

45. Despite her good export performance, Pakistan's nrivate sectorimports declined by about 14 percent in 1965/66. About 27 percent of thisdercline was dleP tn reduned foreignn asstacen and 73 nprent. t.n higherpublic sector outlays. In 1966/67, while private imports are expectedto be iwe71 abo¶1'c t-he~ pw-Pln levels they¶ "i51 sti1 be 1,s .5ihL-.ti41y

below the average level envisaged for the Third Plan. In other words,w:hilp. l9Q66I(67 ,-;II see a sh-ub I aC.a 0,4.t back to- .ds n.o-alcy,nevertheless the flow of imports will not recover fully to the levelthat mu'd ue des-,able Th18 iS-' 4- -tc'-1-- tr-ue of sppisOra-W%A.6'A L LJ A " VaL J . LL"O .L~ JJJL 0L. LI.L UC V.L >U.-.C L rawJmaterials for industrial production.

46. Insofar as public sector imports are concerned, the gain fromreduced defer.se outlays hla Ubeer V -<lA.Ld ULL yud.L Ljy thLel J, e J.L1

food imports made necessary by the disappointing harvests and some decline-i 480 shLLtpments. Obuviously the use of Pakistan's foreign exchangeearnings for government consumption purposes has loomed larger in the lasttwo years than, heletofore. However, this is of less significanCe thisyear than last. In 1965/66 it appears that about 35 percent of Pakistan'sforein, exchaunge earxings were used oy Governmen-t for defense and otherconsumption purposes as compared with 24 percent in 1966/67. The effectof- this larger absorption by government consumption of the country:sforeign exchange earnings has been not only to reduce the share availablefor private consumption but for development purposes as well. During thefirst two years of the Plan, the amount of her own foreign exchangeearnings that could be used for development imports amounted to onlyRs. 1.3 billion or less than 19 percent of the target for the five-yearprogram.

- 19 -

47. Pakistan- classifies her imrprt bill into development and non-development imports. The former are capital goods, or materials andcomrinnanes + pduce suiie-h goods andrt + late a-rep nil other inmports.

Movements in these two classes of imports in the first two years of thePlaon i n _o +;n 4-c P1:) r 4- no+ ~c c ofl T-

Tab-le 11

Str uct ue of Ir.port

196v/6I64l 16/6-7 Third - 1 DI.L7U)-/ 01.. .L7UU/ k I IA. L.. 1± a 4. OA 4

Target

Development Imports as Percent of:Total Imports U7 60 63Development Expenditures 38 40 143

Capital Goods Imports as Percent of 39 35 29Development Expenditures

Nondevelopment Imports as Percent of 4.1 4.4 4.5Domestic Consumption

Total Imports as Percent of GNP 9.2 lo.4 10.8

48. In respect of each indicator, the movement in 1966/67 was inthe direction indicated by the Plan. Perhaps the target with the leastchance of fulfilment is the reduction of capital goods imports to only29 percent of development expenditures. This will involve a more rapidrate of import substitution in the capital goods field than is now inprospect. While nondevelopment imports have increased in the first twoyears of the Plan at a rate faster than was envisaged, the import ofraw material, both for consumer and capital goods, has fallen below thePlan targets.

Role of Foreign Assistance

49. In the first two years of the Plan, the flow of net externalassistance has been on the average about the same as that of the lastyear of the Second Plan. It dipped sharply below the 1964/65 level in1965/66 but is expected to exceed by about 12 percent the pre-Third Planlevel in the current year. This is shown in Appendix table 41 andsummarized below by types of aid disbursed.

- 20 -

Forejo Aid

1964/65 196-r/66 1966/67

Projectu assistance 22:6 336)Nonproject Assistance 172 116 189Technical Assistance 13 16 19Indus Basin and Tarbela 95 96 100FL 4080 158 120 l 5

Total 660 613 749

Repayment of Debt 29 31 43

Net Foreign Assistance 631 582 706Percent of Investment 33 43 36

50. It is apparent from this table that the disbursement of foreignassistance in all forms even on a net basis was better sustained thantotal investment in 196q/66. Although a higher level of aid availability;particularly in the nonproject category would have produced a higher levelof outnut and nrtobably investment in the nrivate sector. a shortfall inaid has not been a major factor in the lag of the Third Plan as comparedwith the .q1nn1-,rv nf tlrmp,-M-n. finnnninl rnqr)iirP.a.

51. This is further confirmimA hby e.m.ining the role that. nproiectaid has played in financing capital goods imports. Project aid disburse-ments financed about Wm percent of capital good imports in the SecondPlan, but in 1965/66 and 1966/67 respectively they were equivalent tonhaout 67 nnA 70 noprcent of scih imonrts. T+. n1 cn nnnapnrs thnt. a 1 Irapproportion of nonproject aid disbursements in 1965/66 may have beenabsorbed br public sector activities. Tn the Seco.d Plan priat oimports were allocated about 90 percent of nonproject aid disbursementsbut in 1965/66 only 60 percent In 104/47, ho.ere*, he pvatr e sectorshare has been restored.

Foreign Exchange Reserves

52. The foreign exchange reserve position of the State Bank whichJhowed arA in.Lcrease ofL $60 m"U'J ion 11n 196;5 .JJI . 665 haudU ud.eLir,ed uy $41J00 -1 II -LLLAJ

between June 30, 1966 and the end of February 1967. At that time reservesLwere $183 m;llion, of which $37 .5 I 'AiLon was a credit' trar,che uaw,g

from the IMF. Exclusive of the latter the State Bank's reserves amountedto about 18 percent of imports and debt service which Pakistan will haveto finance in 1966/67 from her own resources (after deducting expected

'a, C

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0

;4i .2

Pg: , C

C) CD

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C3 OI cnfx

(3) (1) rr

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C) 4CO) CD .4 CD

Cr.) -r- CO

C) _,tA

0 4 0 DCD

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(04.+, 0d 0.)

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C) 4 .r4 crif\P .r

O -H 0 HS:*lC

OrATInmTn 'UlII1I I. rufL.

1967/68 AiM BEYOND

53. in 1967/68 Pakistan hopes to achieve the level of developmentexpenditure originally projected for that year in the Third Plan. She alsohopes, during tne iast two years of the Plan, to make up for ground lost in1965j66 and 1966/67. To accomplish this would require a larger mobilizationof domestic and foreign resources than now seem to be in prospect. Thelower growth rate thus far recorded, together with higher expenditures ondefense, is likely to reduce aggregate savings so that the Rs. 35.5 billionof domestically financed development expenditures anticipated in the Planmay not be achieved. Rs. 16.5 billion of this was planned to be mobilizedin the public sector and Rs. 19 billion in the private sector. We now ex-pect a shortfall of about Rs. 1.5 billion in public savings even if someRs. 1 billion of revenues from additional taxation in the last three yearsof the Plan is forthcoming. The private sector performance is, of course,more difficult to predict but an overall shortfall of domestic savings ofabout Rs. 2.5 billion seemsreasonable if not rather optimistic. In respectof net foreign resources, the outcome will of course depend on the responseof foreign sources of aid during the remainder of the Plan as well as therate of disbursement of funds already committed. In the first year of thePlan disbursement of project and nonproject assistance was about 70 percentof the Plan target for that year. A much higher percentage is contemplatedby the Government for this year though this optimism is not borne out bydisbursements during the first six months (see paragraph 73 below). Takingaccount of the somewhat larger amount of aid now expected from nonconsortiumsources including private investment, our best estimate is that there islikely to be a shortfall of Rs. 1.5-2.5 billion of external resources overthe Plan period. Thus at this still earlv stage of the Third Plan, weenvisage a reduction of about Rs. 4 billion in financial availabilities,reducing the size of the Plan from Rs. 52 to Rs. LR billion and in thepublic sector from the original Rs. 30 to about Rs. 27 billion. In monetaryterms this would still be nearlv two-thirds larger than the Second Plan and(assuming reasonable price stability for the remainder of the Plan) overone-third larger in real terms.

5L. The following table gives the maln econom-ic vari_h1Pe for the Planperiod as now foreseen by the mission. We have included the Indus BasinWorks and the Tarbhla Project in this projection. By the last year of thePlan (1969/70) we estimate that domestic savings and investment may recoverthe momentum lost in +he first -year of the P_an and rise to about the sameratio to GNP as in 1964/65, which was well above the average performanceduring the Second Plan periodT. T his event, and if adequate foreign aidis available, the rate of growth might reach 6.5 percent in real terms bythe end of the Third - lan, though - 4- rg - e-- the Plan period wouidprobably be in the vicinity of the Second Plan now estimated at 5.5 percent.However,1 V-.LQ W..L. this wJ1n ULon the s.uLccs ULIUVofI t vLellb pa t cUln-

centrate more investment on quicker yielding projects as well as the weather'seffect on £agricu.]lturalJ ou-tUput.

Table 13

Investment, Savings and GNP(Current Prices)

(In millions of rupees)

Second Plan T h i r d P 1 a n ThirdY0&4/ 1965/ 1966/ 196-7/ 1966/ 1969/ Plan

Total 1965 1966 1967 1968 1969 1970 Total Target

P'lan A nit

Private Sector 13,727 3,44o 3,330 3,590 4,180 4,700 5,200 21,000 22,000Public Sector - 14593 3,970 3,200 4,500 5,500 6,600 7,200 27,000 30,000

Total Plan Expenditure 28,320 7,410 6,530 8,090 9,680 11,300 12,400 48,000 52,000

Percent Annual IncreasePrivate Sector 24 24 -3 8 16 12 11 8.6 11.6Public Sector 17 10 -19 41 22 20 9 1i46 16.2

Noninvestment in 2-250 630 o 50 700 880 2/ 1.0502/ 1lj0q'/ L4330 4.50oPlan Expenditure I

(1) Investment in Plan P-n7n 6,780 5,980 7,390 RRnon in_pco wI-pn WA-670 h,7-qExpenditure --- ------

(2) Non-Plan Investment 6,395 2,320 529 1,933 1,981 1,764 1,622 7,829 7,823

Of which:Indus3/ 2,910 930 860 928 698 443 295 3,244Tarbela - - 19 85 473 491 477 1545 )4j323Nommonetized Private

Investment 2.310 580 550 h40 %10P/ 5304/ N04/ 2.590 2,550Changes in Stocks 1,175 810 -900 470 300 300 300 470 950

Total Gross Domestic 1-Investment (1) + (2) 3465 9,100 6,-U7 9,323 ;0,7;, I -,014 'u2r 5i,499 55,323

Net Foreign Resources5/ 11,184 3,045 3,019 3,506 3,984 4,165 4,274 18,948 20,518

Use of Foreign ExchangeReserves (Tncrease ) +1L3 +208 -h87 -- -- __ __ -487 __

Gross National Savings 21,424 5,847 3,977 5,817 6,797 7,849 8,598 33,038 34,805

GNP (Market Prices)j_ 205,478 48,823 53,287 60,613 63,974 67,784 72,190 317,821 --

Fixed Investment as Percentof GNP 15.2 17.0 13.9 14.6 16.4 17.3 17.4 16.1 __

Investment as Percent of GNP 15.8 18.6 12.1 15.4 16.9 17.7 17.8 16.2 19.1

Savings as Percent of GNP 10.3 12.0 7.5 9.6 10.6 11.6 11.9 10.4 13.3

Investment as Percent of NetNational Resources!/ 14.4 16.d 11.3 14.1 15.1 15.9 16.1 15.1 17.8

Marginal Rate of Savines 23.1% 2Ljit 7/

1/ Including Rural Works Program.2/ Estimated by assuming 16 percent of public sector program is nondevelopment. In the first two years of

the Plan the proportion was 16.2 percent compared to 14.7 percent in the Second Plan.3/ Based on 'nAPDA estimates.Iv/ Rough estimate based on Second Plan experience.5/ Current account deficit of the balance of pavments nlua inerease in resPrveR

b/ Accepting the Planning Commissionts estimate of 5.2 percent for 1966/67 and assuming 5.5, 6.0 and 6.5 per-cent rate of growth of GNP in the remaining three years of the Plan respectively.

7/ The last four years of the Plan./ GNP plus net foreign resources.

- 24-

million of domestic financial resources for development in 1967/68. Thiswill be an ic s of . 632f millionor 2900 perc nt r + over th -r

- wa s x _w 4L.;wv|sovJL a _. -_- tk-- - zz_ ---

estimate for 1966/67. A growth in the revenue surplus of Rs. 450 millionaccoMnts for mmst of this crease. The remaJ.ning Rs. 185 mil11io4n,

be provided by larger net capital receipts and possibly a small increasein deficit A L. .1c.J nCiMg bLk% LYJ It1he bnkir,g OsJ-yster,.. Assum16 public sec+or

development program of Rs. 5,500 million in 1967/68, the domestic sharewoud be albout- 53 percenAu as co,sLed-ih ULe _50 Me no forecast

for this year and the 55 percent target for the Plan as a whole.

56. The projected increase in the revenue surplus would be entirelydue tAo anL impro-vemrent in thle Central w Vverrnmeri-t!s fiscal performance, asis shown in the following table:

Table 14

Revenue Surplus

(In millions of rupees)

(1) (2)1966/67 1967/68 PercentRevised Projec- IncreaseEstimate tion (2) over (1)

1. Central GovernmentRevenue receipts (including 5,792 6,438 11.2

shared taxes)Nondevelopment expenditures 3,536 _3,678 4.oRevenue surplus 2,256 2,760 22.3

2. Provincial GovernmentsRevenue receipts (exclusive 1,194 1,242 4.0

of shared taxes)Nondevelopment expenditures 2,150_ 2X252 4.7Revenue deficit -956 -1,010 5.6

3. Total Revenue Surplus 1,300 1,750 34.6

Source: Planning Commission.

57. This projection of the central government contribution to therevenue surDlus seems fairly sound on the basis of the projections ofthe main components of revenue and expenditure. The details of therevenue projectiorE for the Central Government are given in Annex III.

- 25 -

58. On the expenditure side, defense outlays may not increase andmay even decline during the remainder of the Plan period. The portionOI mitary expenditures financed by foreign grants, loans, or supplierscredits does not appear in the accounts.l/Since unreported military creditswill probably cause no appreciable increase in debt service charges for1967/68, we assume that they will have no adverse effect on the domesticmobilization of funds for development in the short run. On the other hand,the ability to finance such unreported defense expenditures on credit lendssome credibility to the stability forecast for the military account in thebudget.

59. The remaining items in the nondevelopment expenditures accountimply a continuation of the policy of holding down nondevelopment civilianexpenditures to a minimum. The general policy of restraint in these ex-penditures seems firm, in spite of the pressure which undoubtedly willbuild up for their expansion. The administrative expenditures projectedfor the current year on the basis of experience to date, is lower than the1964/65 level, notwithstanding the emergency reduction of these expendi-tures in 1965/66.

60. Table 14 illustrates the worsening situation in respect ofprovincial finances apart from the shared tax revenues. Some small improve-ment is expected in provincial revenues from increased collection of watercharges and imnroved collection of land taxes. But these improvements de-pend upon improvements in administrative efficiency and present little hopefor short-run innreases of the order of magnitude needed to meet expansionof provincial nondevelopment expenditures. East Pakistan is currentlyundertaking ov.rerdue rationalization of aSSmentS in its land revenuesystem, but this is not expected to be completed before the end of thecln-rent Plan period.

61.. .. Thusb thefl prol.spe^tLIs. for L*SLt.. JCS the renu ned forJAS. *A'SStJ.al

government spending in the provinces appear rather grim, barring both aradical Change in ta laws or i.provemes4- 'P che

views expressed by the finance ministries of the provinces werenessi mistic o,n +hnis rqnasct+ien. PR+Th e,vr4r%nti!'1 C e%r.Yq.eh+c nns e nin-a+ sn

expansion in administrative expenditure for 1967/68 of 4 to 5 percent. This-s nreeded too eet growing deb-t service chnarges &nd thgrow.-7h ;n cren

expenditures of development departments arising from maintenance of completed-s. Tepoeton of onL a_ 'Ds_ I Ae 4; Ctr_r.-_ A ; 4 ;A_t1;;|; ^,.-.,4-,. 'L. Li P J A.. -0 010 mil11ion " L,.P4A.U4I i~n t-h-..e pro-.t-1 S VJ K:i UJO* .1 iiS jJL VJ D'L IJ.L'J V 4. V '.. I J4..L a 1b; v i .4.. v lUl lJ..LVSJ VV I '.. 5 DL.,i U ,I UIIG H- V-

vincial accounts must be regarded as optimistic. There is a good deal of4talk,4-4 in -h C.ral- - ' G-vernml,ent about- %--r 4the provinces -iac a lar-gerV A.L11. VJLL± I.i± 'J ULIIL caJ. UI.UV V±iI V1 14 '.'. UU L1W VA.LI14r, HL ! F.LUVJ.LA*...Q .L .Lidl1...1 a 3.L r,

portion of their own development programs but no concrete measures have been4takl-en t-o that- endA.

62. IIe L)k-J¶. V.1. of t:: .L1±e.Ftd1t .inres i1n nev, cLap.Ua Lecp .L fror, IIi L719/66 UV

1967/68 is expected from railway and other reserve funds and sale of govern-ment industrial assets. Both of these sources seem quite problematic. Onthe other hand, nonbank borrowing, which is projected to decrease by Rs. 135million in 1967/68 might take up the slack in the event of a shortfall fromother sources.

1/ The Government has promised to provide a statement on this subject.

- 26 -

Foreig.n. - 4--fl"g I>o=ct for 1967/68 ri? Inrk- .aP ynr.fnr

63. There appears to be no bai fo chn" ourlogertem eYnrrWt fore-.

cast which wias revised upward in last year's economic report (AS-112a) to agrowth of-vL ab 0ltU]L perIJcentL a year for th.e re of WJ. UL. T.Sr a. ---- .----

exchange earnings in 1967/68 are expected to be around Rs. 4,180 million as4.j ouA. L bI- ±Uw_ V able.

Table 1leiau._eLC.L)?

Projections of Foreign Exchange Earninrgs

( min millions of rupees)

Annual Rate of uicrease1965/ 1966/ 1967/ In first 1S67/681966 1967 1968 two yrs. over

of Plan 1966/67

Export of Primary Products 1,703 1,684 1,730 4.9 2.7

(1) Raw cotton, hides and 445 425 420 (-)13.5 -skins, raw wool and fish

(2) Raw jute, rice and 1,258 1,259 1,310 4.7other items

Export of Manufactured 1,066 1,416 1,680 35.0 18.6Products

(1) Jute 592 750 850 53.o 13.3(2) Cotton 230 250 285 10.0 14.0(3) Other 244 416 545 25.0 31.0

Invisible Earnings 707 700 770 6.9 10.0

Total: 3,476 3,800 4,180 11.0 10.0

64. As the table indicates. we are not optimistic about prospects forPakistan's primary exports during the next year. We expect some rise in theproduction of raw cotton to balance declines in the other items in the firstgroup in the table. The export of raw jute, rice and other primary productsis- likelv to increase from Rs. 1.153 million in 1964/65 to Rs. 1.259 millionin 1966/67 or by about 4.7 percent per year. The prospect for similar in-creases in the export of rice and other primary products appears good, al-though the export of raw jute is likely to decline due to greater use in thelocal manufacturing industry. Prosnects for iute and iute nroducts arereviewed in Annex II.

- 27 -

65. Of Fs. 640 million increase in the export of manu.|factures in thefirst two years of the Plan, Rs. 490 million (or 77 percent) was accountedfor by larger earnings from. nJute and co+ton textiles. The export of cottonpiecegoods has been going up at an annual rate of 10 percent during thefirst two years of the Plan. ThLis ra Ite ca b C e exceeded, provide A 4th,epro-duction of cotton textiles is augmented by the timely installation ofspindles and looms. TMhe export of Jute manufactures which has risen at anannual rate of about 53 percent in 1965/66 and 1966/67 is not likely tocontinue to ^r-,ad at t-is rat- e as i---- - J production msay be "i m ivtedby the availability J.~L of th ra maeL4±_17_ jJ-" JuL uLJ.U1LcfJt .LIJ Aby the availability of the raw material.- Raising the price would prob-ablyr encou-ge subst. i tutLion., JJL-Lus r,,aking LU Ui.L±IC"UL lor ardkistal 1.maintain her position in the international market. Export of other manu-factures which has been rising at an arnlual rate of 25 percent is expectedto go up at a more rapid pace in 1967/68 as the growth of industrial pro-duction is likely o be faster Than in the first two years of the Plan.

66. There has also been rapid increase in earnings from invisiblesincluding private remittances in the Second Plan and the first year of theTnird Plan. It is expected that next yearis invisible earnings will in-crease by about 10 percent.

Import Requirements

67. During the first two years of the Third Plan, the import depend-ency of Plan expenditure has not diminished as compared with the SecondPlan. The import of capital goods as a proportion of Plan investmentaveraged around 31.4 percent in the Second Plan and was 31.2 percent inthe first two years of the Third Plan. It is reasonable to assume thatthis relationship will not change appreciably in 1967/68. As for theimport of raw material for the domestic capital goods industry, the importof these raw materials as a proportion of value added in large-scale manu-facturing industry was around 22.3 percent in the Second Plan, and althoughthis ratio slumped to 16.8 percent in the first year of the Third Plan, itis expected to be around 24 percent in the current fiscal year. Sinceinventories of imported materials are low, it is reasonable to assume thatthis ratio will be maintained during 1967/68. The rate of expansion ofaround 15 percent in large-scale manufacturing industry that was achievedin the Second Plan is also assumed to be reasonable for the next year. Theeffects of these estimates on import requirements are set out in part A ofthe following table:

1/ Although under present circumstances domestic sale of raw jute isprobably more attractive tha n exports-

- 28 -

Table 16

Forei'n Excjhange RetuiremenfA for 1967./A8

(In millions of rupees)

Requirements for: 1965/66 1966/67 1967/68

A. Development Imports (f.o.b.)!/ 250 3,272 3,798(a) FinisLhed capi - good impor ,9

(b) Raw material for capital 563 883 1,008goodA in%dustr -

(c) Technical assistance 77 89 100

B. Nondevelopment Imports (f.o.b.) 1,032 1 465 1508f N n _ _ _. _ _ 7 _f S _,k(a Uonisumlier goods )4u ; U% 0

(b) Raw material for consumer goods 484 685 893

C. Invisible Payments 1,207 1,345 1,623

Total:-/ 4,7h4 6,082 6,929

1/ Not included in this table are PL 480 and imports for the Indusand Tarbela projects (see Table 13).

68. It was assumed in the Third Plan that the import of consumer goodswould rise by 2.5 percent per year and that of raw material for consumergoods industry by 9.5 percent per year. By applying these growth rates for1967/68 we arrive at the estimates presented in the foregoing table. Thereare two major factors that underlie these estimates. With the need for theimport of food items being assumed to be lower than in the current fiscalyear, less will be needed for the import of consumer goods in 1967/68. How-ever, the share of the private sector in total nonproject assistance willhave to be raised to meet the projected need of that sector for raw materialimports.

69. Invisible payments consist of three main elements. Interest pay-ments on foreign debt, freight and insurance, and other miscellaneous ex-penditures. The payment of interest on external debt is projected on thebasis of the repayment schedule in the Statistical Appendix (Table 1), andthe payment for freight and insurance is based on the level of imports andestimated freight and insurance cost of such imports. In the first twoyears of the Plan, the rate of expenditure on miscellaneous "invisibles"was high, owing to the inclusion of some outlay on military equipment inthis item. This is not expected to continue to increase in 1967/68.

70. Based on the foregoing estimates plus PL 480 and Indus Basinimports, the balance of payments position of Pakistan for 1967/68 shows adeficit on current account of nearly Rs. 41.0 billion. an increase of 13.6percent over 1966/67. The relation between the balance of payments posi-tion and general magnitudei in the rideve1npmnt nroram as foree-at. hv t.hemission is shown in the following table:

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Table 17

Balance of Payments PositionIn Relation to the Development Program

(In millions of rupees)

Second 1966/ Third Plan1964/ Plan 1965/ 1967 1967/68 (Projection)1965 (Annual 1966 (Esti- (Projec- (Annual

Average) mate) tion) Average)

Exports f.o.b. 2,403 22144 2,751 3,100 3,410 3,427

Imports c.i.f.-/ 5,723 4,417 4,927 6,279 7,130 6,857

Invisibles (net) 67 (-)65 (-)356 (-)327 (-)264 (-)262

Current account deficit 3,253 2,208 2,532 3,506 3,9814 3,692

Debt repayment 139 88 146 203 309 279

Gross Capital Requirement 3,392 2,296 2,678 3,709 4,293 3,971

Financing

Foreign private 77 86 100 143 150 139investment

Foreign aid (all t.vnes) 3jTh2 2,2ql 2-923 3,566 14,1143 __901

Other; including chanrnge 171 JII -345 -- -- -69in reserves. Increase (-)

Gurre.nt c.on de-ficit.

as percent of 102.9 88.2 93.5 95.9 95.2 88.6developmn nt imports

as percent of invest- 35.7 34.0 38.9 37.6 37.6 36.2ment expenditure

I/ 7T11-2t ;_l- -N11 1_QQ A reFr frorn 4+htlt t oal J; l'v6kle '1 -t4.Lj' A . , , V . Sv6 -4 I . . . S.Iw UL1A V.A, U - .1. L .1. a.U v--

because they do not include invisible payments other than insurancea.nda f r e i L Iht L- a 4nd UA- do i d PL J, ). nUd_us an, 3 d -arb lai .

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Utlza4on wf Consorvtiu.. aud in L 6/6

71 r- - 4- -4 A4a a-.. ~1-.. . V . -it4/Z17 n-1-1-L L._J L1. &1 '- 'J% M I-LL IIVMUL O. a Zi. WAi~ UZ6L141LL U±L .L.VUI 01, K_2J.0i UdLL LLdUL dL.PU LU Y.LUV.~4million of uncommitted consortium pledges (exclusive of funds tentatively ear-m by U.. A.I.DJ . dULL AjEI DAUUi .LUU1* JIo- 0U Kr chSeel Mill) .L b ut,

about $1 million of this was for projects. Up to December 31, 1966, newpledges or commitments witout pledge amounted to $h13.' to"w.on, rmaking atotal of about '580 million available for commitment. $357 million of thiswasfor proUjects and $223 million for nonproject ald. During The firsT siXmonths of 1966/67, $202 million of consortium funds had been committed, leav-ing $378 Imillion uncommitted. This nas riow been reduced by at ieast $70million by the commitment of this amount by the U.S. as nonproject aid.

72. According to the Planning Commission estimates, total commitmentsfrom consortium sources will be $471 million this year. This means that $269million will have to be committed in the second half ($199 million after therecent $70 million nonproJect loan by the U.S.j. Of the $5199 million, $41million is nonproject aid which will probably be committed without too muchdifficulty. The question is, therefore, will $158 millior, of project aid becommitted in the second half of this fiscal year? When the mission visitedPakistan in February, $211 million worth of projects were then listed as underactive consideration (in addition to U.S. projects which are involved in thesteel mill problem). While it is not possible to predict the portion of thesenegotiations that will be finalized this year, it seems apparent that thecarryover of uncommitted pledges at the end of this fiscal year will be fairlysmall, certainly as compared with the situation as of July 1, 1966.

73. Disbursements. The undisbursed commitments of consortium aid at thebeginning of this fiscal year totalled $800 million, $8 million less than atthe beginning of the Third Plan (July 1. 1965). The Government has estimateddisbursements for this year from consortium sources at $422 million, $102million higher than in l965/66. In 1965/66 total availability of aid (Dine-line plus new commitments during that year) totalled $1,120 million and dis-bursements were $320 million or a ratio of 28.6 nercent. The ratio assumedfor 1966/67 is somewhat higher, i.e., about 33.2 percent. During the firsthalf of 1966/67 total disbursements were onlv $1h0 million or about a third ofthe target for the whole year, and only $ 60 million of this was nonprojectaid.

74. It will be recalled that in last year's economicn renort; the misRionestimated disbursement requirements for nonproject aid in 1966/67 at $290million. We then felt that. in order to achieve this target. with now c-ommit.-ments of $250 million of nonproject aid wihich we were then recommending, itwould be necessarv both to reduce the nineline nnd +.o ohtain npw co.mmni+m..entsof nonproject aid fairly early in the year. In fact, it now appears very un-likelv that more than ahnii+. $180 million of nonproject aid will be disb-sedin 1966/67 and, in fact, in view of the slow disbursements during the first6 months of +his year, even this mayT be on the high side. this, of course,has had repercussions both on production, as mentioned in Chapter 1, and on

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import policy, but also on +e fairy1t high 1 niel of the nonrnproe+. -i (I ni p4P-

line at the end of this year (Appendix table 46). Parenthetically, it seemsevideln-++- 4-hat ---e +oi40 .der whic -1, np.v- 4 ai has -been maden avaniI 'la l

is slowing down the rate of its utilization in Pakistan.

Foreign Aid for 1967/68

75. This section deals with the project and nonproject aid whichr arlu wi m' ll ay need from 'Uthr c0uiis | rtium in th1e fOrml Of inew Luiumitment11Us1in L1 WMth

fiscal year 1967/68. A longer range and very tentative projection of aidrequireWents for tne remainder of the Plan is in iaole i3.

76. Whnen the mission was in Pakistan, the Government had not yet reacheda conclusion regarding its 1967/68 aid requirements, and the following esti-mate is subject to revision when more complete data are availabie in respectof 1966/67 transactions. It is based on the relation between developmentimports and net aid disbursements during the first two years oI tne Pian andon our balance of payments forecast for 1967/68 in Table 17 above.

77. The ratio of project and nonproject aid f?o_the Plan itself andnet of foreign debt service, to development imports.- during the first twoyears of the Plan was about 62 percent. There seems to be no reason forexpecting this ratio to change appreciably in 1967/68.

78. Using our estimate (Table 16 above) of development imports for1967/68 and deducting expected foreign private investment, we have Rs. 3,648million. 62 percent of this would be about Rs. 2.3 billion. This is takenas our estimate of aid disbursements required for 1967/68 net of foreign debtservice. When the latter is added, the gross aid figure would be Rs. 2.8billion.!/

1/ We have deducted from the estimate of development imports in the Planimports to be financed with private foreign investment and technicalassistance. Indus Basin and Tarbela requirements are, of course, alsoexcluded.

2/ Another possible basis for estimating overall requirements for net dis-bursement of project and nonproject aid is the ratio between such aid andtotal development expenditures. Of course, if the relationship betweendevelopment imports and development expenditures remains constant, thiswill yield results no different than we obtained above when we used theratio between net aid and development imports. As a matter of fact. thisturns out to be the case for 1967/68. During the first two years of thePlan. net nroiect and nonorolect aid was 2h percent of develonment expendi-ture, a little higher than the 22 percent assumed when the Plan was drafted.Assnming;as the Government has nroietned; a development plan of Rs. 9.h4billion in 1967/68, the net project and nonproject aid disbursement re-quirements would again hb ahniotf Rs. 2=3 hillinn net and RS, 2.8 billiongross.

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7°. One mu.st also take into account other variable factors in thebalance of payments such as exports (or rather changes in exports from thefirst two yea-s of the Pl an. to 1967/68))and changes in private investment.These factors are reflected, as nearly as they can be estimated in Table 17above. This table indicates that P lrista- will nrobably need gross foreignaid of all types of Rs. 4,143 million in 1967/68. Subtracting from thisthe foreign exchange requirements of the Indus and Tarbela nrojects, privateforeign investment, technical assistance, and likely PL 480 shipments, onearrives at a gross project and nonproj,ect aid requirement of about Rs. 2.8billion for 1967/68.

80. Assuming that gross disbursement requirements are Rs. 2.8 billion($590 million) in 1967/68, three further questions arise. They are (1) howshould this be broken down between project and nonproject aid; (2) whatamount of new comnitments in each of these categories is necessary in viewof the likely pipeline situation at the end of 1966/67; and (3) what portionof the requirement for new commitments in each of these categories sho5n i

come from the consortium in view of possible nonconsortium availabilities.

81. Project aid presents much the simpler case since the amount of newcommitments needed will depend on the speed of project preparation and accept-ance by the aid-supplying countries and agencies. The Planning Commissionhas proposed a list of new projects, the undertaking of which will requirecommitments of about $237 million in 1967/68 (Appendix table 48). In addition,the Government has estimated that $81 million will be required for additiornalfinancing of ongoing projects, making a total of $318 million of new projectaid commitments in that year. This list of projects is to be supported byinformation to be furnished the consortium by the Pakistan Government. Nordo we know how much of the foreign exchange requirements for these projectsmay be taken up by nonconsortium sources or may be financed from uncommittedpledges at the end of this fiscal year. On the first point, the PlanningCommission has estimated that about $50 million of new commitments may beobtained from nonconsortium sources in 1967/68 and it seems to the missionthat the carryover of uncommitted pledges of project aid by the consortiumwill be $25 to $50 million as of June 30, 1967. Therefore, in round numbers,about $250 million would appear to be a reasonable figure for commitmentsfrom new pledges by consortium members in 1967/68.

82. In terms of disbursement of project commitments, the amount of suchdisbursement in 1967/68 will depend not only on new commitments but also onthe level of the project aid pipeline (total commitments minus total dis-bursements) at the beginning of 1967/68. The Planning Commission has esti-mated that the total project aid pipeline will be $861 million at that time,of which $675 million would be consortium aid and $186 million nonconsortiumaid (Appendix tables 44 and 45 ). These figures are difficult to confirmbecause of many uncertainties regarding project commitments in the remainingmonths of 1966/67 (paragraph 73 above) and also the rate of disbursementthis year. Both are likely to have been somewhat overestimated by the Plan-ning Commission as in previous years. However, over-optimism about commit-ments may be more or less offset by overestimation of disbursements. If,indeed, the project aid pipeline is about $860 million at the end of this

- 33 -

year, it seenq reasonable to predi nth thef± fhp neighbnrhood of $260 millionmight be disbursed from that pipeline in 1967/68 or roughly 30 percent.l/If' newi rcm-mi tmrnt' total $250 mlion from -_h -_ c-_ ti.m, _nd te$million predicted by the Government from nonconsortium sources, and if thennrmnl in ncrroncm. of newjT rcmitmentf a n ra lhi'i-rcorl n rrn in +-I v rrnr,- -_rl- - " -_ 11 - - b sed - - a_in which they are made, Pakistan would have project disbursements of abouttn90-$300 million in 1967/68. /

83. If project aid an &,ornt to $300 illion, te obasis of the $590 million of total disbursement requirements estimated above,2900 m.illion Would have to be disIbursed in the form, of nor.project assistance.

What amount of new commitments would be required to achieve such a target?Tt 1appear no.r 1 tha tuipee onULM LJULU JJJ.JJU.L.LILt I U.Ly t 1, 197U , maidy bLeC. alo'JUt

$177 million (Appendix table 47). There seems no reason why nearly all ofU1t.Ls shlould notu ue dlsU rsedUUU anIL 197/6U8. Ass5UimLLLig a dibU.Lr)U1teI1bn of '60

million from the pipeline, $130 million of disbursements would be requiredf'rom rne-w coRMu,it-mentus. Prlovildiin such' coVuliwt,muents were notu bunch'ed' toward'sthe end of the year, about half of the funds committed should be disbursedin 1967/68. 111±5 would indicate a need for new corruitmenbs of nonpruject aidof about $260 million. If $20 million of this is obtained from nonconsortiumsources ($11 million is indicated for 1966/67), the consortium -iight reason-ably be requested to provide $t75 to $500 million of aid for the Plan in1967/68, $250 miliion of project and ;225 to $250 million of norprojectassistance.

8h. This calculation takes no account of additional commitments for theTarbela project or for fertilizer over and above that wvhich she can financewith her own resources which we understand the Government may request fornext year. An allowance for the latter at least appears justified to pro-mote the food production program and thus reduce food import requirements.However, we have no firm estimate of the amount required at the present time.Commitment of such funds would be necessary early enough to finance deliveriesby the second half of 1967.

Trport Liberalization

85. Wie have described the recent evolution of Pakistanis import policyin Annex I, and some policy suggestions on this subject are in the nextchapter. Here we will consider how the nonproject aid level we have suggestedabove, together with Pakistan's export prospects for 1966/67 may be expectedto affect the availability of foreign exchange for the private sector andhence her short range import policy.

1/ For 1966/67 the Planning Commission estimates that the ratio of projectdisbursements to the total availability of project assistance (i.e.,pipeline plus new commitments) will be about 26-28 percent.

2/ Nonconsortium sources have provided 7.2 percent or $22 million in non-project aid over the last two years and 18.2 percent or $165 million ofPakistan's total aid in terms of disbursements. On the commitments side,the nonconsortium sources had provided 6.7 percent of nonproject and25.5 percent of total aid commitments (see Appendix table 44).

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86. The most important question related tn nnnpronect aid is the ex1tentto which the aid level we have suggested might enable the country to adopt awmre' 14hgeer,'l pe-o1icytr +owna"rds n"-prriva+ sec,tr% impr v+.c Aocs2nni yn +lhat4 +the .requir e-

ments of the public sector remain at the same level as in 1966/67, which isnot overml-t opt4misi in C4 vi ew of 4-he abr.r..ll I ag foo I.vt -ha yea<,--4--4-+-. ,L V~ . L ~ .L Lf L LVL.L~ LJkJ..IAAW ..L Ul J. ± L.J'%A L.LIAt

1W.J U~ VLA 4 J' U .Y

$230 million would be required for that sector in 1967/68. In addition, about$1-+ --illo wi''4 be Meq-Uired Ifor Oservi%ce on external. debt an %ar additionL=al$55 million for other net invisible payments. If commodity exports amount to$715 m.illion as the mi,ssion estimrates, the amoLLu of Pakista's own foreignexchange earnings available for private sector imports would be about $316million. This coLmpares with about i270 million estimated ior 1yooo/o or an

increased availability for private imports of $46 million. If, of course, thepublic sect r outlays can be reduced, principally by a cut in food importsfinanced with Pakistan's own foreign exchange, an additional savings of $30-$440 million might be effected. However, it seems altogether likely that sucha savings would be absorbed in any case by, for example, additional agricul-i'uravji inputs.

87.* If one may assume that Pakistan will be able to finance $316 millionof private sector commodity imports in 1967/68 from her own earnings, thenabout $190 million of disbursements from foreign aid would be necessary torestore private imports to the 1964/65 level when a fairly liberal import pro-gram was in effect. However, in order to accommodate the normal growth in theimport requirements of the economy and to permit a return to a desirable levelof private sector imports, the level of aid disbursements we have suggestedabove seems necessary.

Foreign Debt Position and Creditworthiness

88. Total foreign capital requirement of the Third Plan is expected tobe about 73 percent higher than that for the Second Plan and, net of foreigndebt service, about 67 percent higher. This corresponds closely to the in-crease in Plan size (see paragraph 53). Foreign exchange earnings of theThird Plan are expected to be 62 percent higher than that for the Second Plan.It is not, therefore, expected that during the Third Plan the external re-sources gap would be narrowed or the debt service ratio decline.

89. Total outstanding external public debt of Pakistan now amounts to$2.58 billion, of which $1.33 billion is disbursed. The service on this debt,in 1967, is about $110 million or 13.1 nercent of foreign exchange earninngsThe terms on which these loans were provided have been very favorable (3.2percent interest, 26.3 years maturity and 6.3 years grace neriodL.l/ TfPakistan's requirement for foreign capital is met on existing terms, afteradjusting for recent increases in the rate of interest on loans from somesources, and if exchange earnings continue to rise by 10 percent per year forthe remainder of the Third Plan and bv 7 nercent thereafter, the debt servicewill be more than 15 percent of export earnings in 1975 and will approach20 percent of export earnings bv 1980. The prniojectn of service on existing

1/ Weighted average figures.

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debt is presene+d by line (A) on Chart 1. Line (B) traces the debtservice position if Pakistan continues to borrow, in the seventies, about1700 million nnnnn1r .ter Af 4-n soier Jvice o i a new debt~~~ -- **n ~~ ~ ,- -eonexS ig ns

from the gross new borrowings projected in Chart 1, Pakistan would receiveanet- capital -inf-low -' of 4a ltle over 'Q45E0 m,IllJor 3 yer for the rest ofP~ LJ~U '.9I . U.L . .L~L A. .L JWI .4 CZ L.A. U IJ.Lr YJ &±4+4J.; ItA..L L.JiWL. Q J ~ L '. VI. A. I. .J

the Third Plan. This is roughly the same as the 1966/67 level. With $700rMil.li.on a year gross bor-row-ngs durJAng tbe "O's 1 Jnet capiLt a JIL.LoVwould rise to about $500 million on the average during the first half ofthat decade and decrease sharply thereafter to about $300 million a yearby 19uO0. This inflow of net external resources follows roughly the shapeof the aid curve projected in Pakistan's Perspective Plan (1965-1985),although these amounts of net capital inflow are well below the amountsdeemed necessary in the Perspective Plan to enable Pakistan to achieve aself-sustaining rate of growth by about 1990. This example is intendedonly to illustrate the increase in gross capital required to sustain netcapital receipts at about present levels. It is not a projection of theforeign assistance Pakistan could usefully absorb.

90. A major factor in the continuing comparatively low debt serviceratio of Pakistan has been her good export performance. The prospect, how-ever, of sustaining the rate of increase in future does not appear toofavorable in the longer run because of the key role of jute (see Annex II).Consequently, although Pakistan can service some additional debt on con-ventional terms, she should continue to be regarded as a very soft blendcountry. The proportion of hard loans has recently been about 30-40 per-cent of total foreign assistance. Last year's report recommended a 20 per-cent ratio. Such a ratio still appears reasonable. This, or preferably astill lower ratio,, was recently suggested in an independent study by theDAC Secretariat.Y/

1/ I"Appropriate Terms of Assistance - Pakistan Case Study"; DAC/FA(67)1,January 17, 1967.

r,1{AWJr 1

PAKISTAN: EXTERNAL IPUIBLIC DEBT SERRVICE PROJIECTIOINS(MILLIONS OF U.S. DOLLAR EQUIVALENTS)

700 _ , _ 1 _ _ _ 7010

600 - - -- _ - 600

500- 500

4013 ___ ____~ ~6E~400

300 - - -, (B) _ 300

__00 __- __ ____ _____ ___,S, ____ _200

20 - _ -- - - --- - 5~ 00

__ _ __ _ __ __ _ __ _ o_t.tE. I 0 .10.

1967/613 1968/6!3 19169/70) 1970/71 1971/72' 197t2/731 1973/74 1974/75 1975/76 1976/77 1977/78 19713/79 1979,/80

(A): Service On existin~g debt as of December 31 1966, with rnajor changes up to Mnrch 31, 1967'(B): Service on existingl debt as of December 31 1966, with rnajor changes up to March 31, 19';7, pIus additional annunl borrowings

af $ 700 million in the seventies, $ 550 million in l967/6S~ $ 565 million in 1968/69 oncl $ 5BO millio.n in 1969/70.The projection of the service oa additional debbt is based on existing termns after allowing for higher roteS tor loans from the U.S..The distribulion of loans between Consoirtium and non -Consortium groups of countries in the seventies is assumed ta be $ 550 mnillion and $15C0 million respectively.

3/031/67 IBRD -335 1

CHAPTER 4

EGrONiOMIGr POT,TrTRS

91. This chapter discusses some of Pakistan's economic policieswhich are of particular- im, + for her ^e%nm. (cvI d nmnt and

requirement for foreign aid.

1/Foreign Trade Policy-

92. This matter is central to Pakistan's request for nonprojecta. a"is s l!s foreign t drade sysbe',D, is no easy- UU com1prehend:u. or- UV

summarize. It has evolved over the years primarily with a view to stimu-lating exports and rationing limited foreign exchlange resources with apreference for those uses deemed most important for essential consumptionand investment. The system combines a multiple exchange rate mechanismwith a combination of export taxes (principally on raw jute and cotton),import duties, surcnarges and quantitative restrictions. On the exportside, the operation of the Export Bonus Scheme results in five principaleffective exchange rates (exclusive of taxes) including the par rate.This multiplicity of rates emerges from the fact that there are threedifferent percentage exporter entitlements for bonus vouchers and twodifferent levels of premium for one of them.2/

93. On the import side, two main effective exchange rates pre-vail, namely, the par rate and the rate applicable to bonus list

l/ See Annex I for a more complete discussion of the evolution offoreign trade policy.

2/ The Bonus Voucher Scheme applies principally to manufactured goodsand some minor items and invisibles. The exporter receiving theBonus Voucher may either use it to claim foreign exchange at parfor the import, without quantitative restrictions, of materials andequipment for his own use; or for sale to others who desire to im-port a list of items (mainly less essential consumer goods but alsomaterials for certain industries) which are specified on the bonusimport list, or in the import policy, and which can only be importedby holders of vouchers. Exporters receive bonus vouchers equal to30, 20 or 40 percent of the foreign exchange value of their f.o.b.exports. The 30 percent applies to all such exports except jute andcotton manufactures which receive 20 percent and exports of cottontextiles in excess of quotas established by the Export PromotionBureau and some other main exports of manufactured goods, which re-ceive 40 percent. The bonus vouchers received by an exporter, whichhe does not wish to use for his own imnorts. may be sold on thestock exchange at the price determined by market forces and whichhas recently been 150-160 nercent of the nar eachange rate. This"bonus premium" is of course determined by the demand for those im-ports specified in the honnis import list which is mnd7ifid fronm t imeto time with a view to stabilizing the price of bonus vouchers.

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i; II-Iow-t 0-0-/ Tine L-jread bVetween the effectUive iMporv rate own items theV

importers of which are eligible to buy foreign exchange at par and those whohave to resort to the pur-chase of bon-us vouchers is equal to the bonuspremium.2./ The spread between the various rates is smaller on the exportside with the highest export rate being about 0J percent above par, wnilethe highest import rate is 150-160 percent above par depending on the

1/ The distribution of available foreign exchange among privateimporters is as follows:

Source Pakistanis Own Foreign Exchange Aid |Total

Percent 65 5% 1I00%o

Category Bonus Free List Licensed Free List Licensed J.

Percent 17±( 11 7 % 3iT% 2670 97% ±UO'

It is evident that about 60 percent of private imports arenominally not subject to quantitative restrictions, and the remain-ing 40 percent are licensable. (Imports of capital goods financedthrough development banks are not included in this calculation).Of the non-licensed imports, the Free List accounts for about 70percent and the Bonus List for 30 percent. The effective exchangerate for the latter is about Rs. 12-and for all other importsthe par rate (Rs. 4.80). About-two-thirds of the Free List isfinanced with aid and about one-third with cash.

2/ The situation has recently been further complicated by the impositionof a special surcharge (equalization levy) which the Government hasplaced on the sale of its own or other untied foreign exchange, whenit sells such foreign exchange for the import of items which arealso financed with tied aid. This of course is to adjust for thedifference between the prices at which items can be purchased withtied aid and international prices. Another feature added recentlywas a provrision under which edible oils and some other items couldbe imported with so-called "stamped" vouchers which are half thevouchers obtained by jute goods exporters. These stamped voucherscommand a lesser premium than the other bonus vouchers though withthe broadening of their use their prices have risen. Thus theGovernment established yet another, though minor, effective importrate.

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price olf bonus vrouchers.l -I- ghs r-ate ----y 'l toa-ral pr~~ '.I.~~. ~ ~ ~ o- ILI:J I1LLtLIU~iU I-clt-56 i dJ4)± Ull-Ly UVJ d. ZIIJLCLL FJO.J.

of both exports and imports. The par rate applies to a little over 40percent of exports but to over 90 percent of imprOts. These averagerates do not, of course, include surcharges on regular tariffs or onexclse dubies imposed on major imports, partly for revenue and partlyfor balance of payments reasons.

94. The exchange rate system as it exists today was not devisedto establish equilibrium in the balance of payments. Rather the balanceof payments position is protected through a system of quantitativerestrictions, reformulated every year to adjust private imports to totalavailability of foreign exchange resources including aid, and aftertaking account of Government imports which are budgeted at the same timeas the private import policy is formulated.

95. Liberalization of imports has been recognized as a top priorityobjective over the last four years, when the gradual removal of importcontrols was made possible by increased flow of nonproject assistance.The basic disequilibrium under the existing exchange rate structure hasbeen gradually reduced and until mid-1965 Pakistan was moving towarda point where removal of most controls on foreign trade could be antici-pated, This substitution of market forces for official quantitativecontrols over the use of foreign exchange would have been a remarkableachievement for a country like Pakistan, but it was predicated on abouttwo-fifths of the country's imports being financed with foreign aid, theflow of which is neither assured nor susceptible to being substantiallyinfluenced by Government policy in the short run. The events sincethe fall of 1965 have exposed this inherent weakness of the system.

96. Last year's Bank mission, in reviewing commercial andassociated policies, concluded that on the export side the existingrate system continued to be an adequate framework for future growth

1/ The same industrv may obtain part of its requirements at par(with or without quantitative restrictions depending on whetheror not the item is in the Free List) and part at the bonusimport rate.

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'n X-rais1,an's export earnings. This nas Deen borne out by even.t-s.On the import side, the mission found evidence that the liberalizationprogram was successful, so iong as it- iasted, in improving the perfor-mance of private industry as regards capacity utilization, efficiency,and exports. It also had been helpful in rationalizing commerciai tradethrough greater reliance on market forces. The mission felt howeverthat a system which permitted most imports at the par rate, includingthose on the "Free List", but compelled a small segment of industrialusers of raw materials to import under the Bonus Scheme at an effectiverate 150 percent higher, introduced an element of irrationality anddiscrimination inimical to Pakistan's long term efficiency in resourceallocation. The subsidy to exports inherent in the bonus system wasbased in large part on the import of low priority items.

97. The principal objectives in Pakistan's foreign trade andexchange rate policy today are still the same: first, to increase thescope afforded to the market mechanism for the allocation of foreignexchange resources, and second, to reduce discrimination in effectiverates between imports. Two reasons seem persuasive to suggest thatthe instruments to translate these objectives into policies and proce-dures need to be re-examined at this juncture. One is the uncertaintiessurrounding the availability of nonproject aid, at least in respect of

1/ The effect of Indian devaluation of June 1966 on Pakistan's exportperformance does not seem to have been noticeably adverse. Withrespect to major primary items competition between India and Pakistanis confined to raw cotton, hides and skins,and wool. Pakistan'sexport performance with respect to these items was not good evenbefore India changed her rate. Raw cotton, for example, has beendirected to domestic industry. As for the export of manufactures,the main competition is in jute and cotton textiles. The exportof the former has been encouraged somewhat both by favorable pricesand by incre-sing the price oP honnu vouchers throunh broadeningtheir use (see footnote 2 page 36). As for cotton textiles a newko pereent bonus is provided for e,morters that exceed certainquotas fixed by Government. Both these exports have been fairlybuoyant. There are, however, some minor exmnort items such as crudefertilizer, spices, crude sugar, handicrafts and fruits whichmay have been affected= These accollnt for onlv about 2 nercent ofPakistants exports and the adverse effect appears to have beenforestalled by increasing t-mnort bonus entitle.ments for most ofthese items.

- ho -

its timing, within any import perindal/ Second, even if nonorolectaid were certain both in amount and timing, the effective overvaluationof the rupee would still be ""es- to deflect domesti+c rerso rcer-

demand into imports, a factor that would throw doubts on the economicjustification of the resuIting mport reqireMents.

98. ~ WA Vn uhis _lattLer point', th-,e .mission last yea~r felt that asignificant degree of correction had been obtained through a combination

of rg'atory duUti-es and sur-charges on in,,ports that Iad be, 1rAA s

since 1964. I{owever, recent inflationary pressures have tended againto depreciaUe thie rCecd shadow) rate U.L excIar.ge. hVViIJJ.i.Le it is too

early to say that there has been more than a marginal change in theuuOrestiC price-induced pressures on private JU-,pot udemand (with th-e

food problem dominating price index advances and therefore malcing itcapable of subsequent decline), greater attention to the problem ofimport pricing is warranted at this stage. The Government should notcontinue to stake all the liberalization program on the availability

of nonproject aid.

99. For purposes of formulating its longer run trade policy theGovernment might assume that nonproject aid may not increase substantiallyabove its present level. On/a net basis (after debt amortization) thiscould even imply a decline.J As a practical matter it may be furtherassumed that Government non-development imports will remain at aboutthe present level. Against these assumptions the Government shouldexamine what is the optimum combination of import controls, effectiveexchange rate system and/or taxes on imports for 1967/68 and beyond.

1/ Experience has shown that nonproject aid is not particularlysuited for tackling the problem-of massive swings in inventorylevels associated with stop-and-go liberalization and ensuingspeculation. Discrepancy between expectations and realitiesof nonproject -aid-availabilities has been the principal causefor this stop-and-go policy.

2/ Project aid may be assumed to vary with the volume of invest-ment, mainly in the public sector, and will not therefore affectthe policy for Private imports.

100. Asafirst pont, we thnk tvhat the overvaluation of the rupeewith the present general level of nonproject aid may not be as great asmight be indicated by the swings in the short-termn fnr-"oan if-hnnae nsi-tion, affected as the latter is by the uncertainties referred to above.Nevertheless, as n.oted in paragraph 0) +the preset a r stemrepresents some overvaluation of the rupee as compared with an equilibriumrate, -d he,A proper -o,, of -actin 4i adnus+..ent rt1a in t+)I,I. -A .f I 4 ULI?. p. IJ ~ -%ALL2 LJ - -%. , iJ.LWAfl A& .L4J A UL*.,V p .UL.f-& L.14 1 .

effective rate applicable to Free List and licenseable items now importedat par. There is al-so a need for chngs in ULe Carf because of reve4nu eand development objectives. In this connection, we think that importedcapital goods might be taxed higher.

101. As w import controls, their abolition, though it continues tobe a high priority desideratum, must be realistically viewed against therole that is piayed by nonproject aid. The latter and the conditionssurrounding its use is both a vehicle to permit liberalization, and anobstacle to the removal of all controls. its tied nature may prevent itsutilization for purchases from the cheapest source, and therefore, neces-sitates quantitative restrictions on the latter. Since nonproject aid,which is largely tied both by source and by commodity, finances over 35percent of total private imports, Pakistan can only pursue partialliberalization.

102. Therefore, the extent to which the Free List can be re-establishedwithout the multiple restraints, which at present are attached to it, islimited. The paramount need for a continuity of whatever degree of freedomis adopted argues for a conservative approach. Liberalization is furtherlimited by the low level of reserves.

103. The above points illustrate the constraints within which Pakistancan carry out an import liberalization program. As first steps, themission believes that Pakistan should consider measures to increase theeffective import rate on items now entering at the par rate and, if neces-sary, have a somewhat smaller but less restricted Free List than is con-tained in the present import policy.

10h. One obvious way of reducing exchange rate discrimination againstbonus imports is to reduce the premium by increasing the supply of vouchers.This could be done both by increasing percentage entitlements of exportersand also by extending the voucher system to more items, including agri-cultural products, on the export side. The State Bank could also sellvouchers against Pakistan's foreign exchange earnings or against aid. How-ever, a problem might arise if bonus vouchers were used in this way. Inthat case, bonus vouchers with a claim on untied funds would probablycommand a premium over vouchers with a claim only on tied aid. A smallstep in this direction (imnlicit broken cross rates) has alreadv been takenby the surcharge now being levied on release of free exchange for certainitems that are also aid-financed. Such a nroblem seems inescapable inder

any system of free exchange rates when some of the foreign exchangebeing sold has special conditions attached to its use.

Fiscal Policy

105. Despite the important action taken in the first two years ofthe Plan to raise additional tax revenues mainly to meet higher defenseexpenditures and to limit other nondevelopment expenditures, the short-fall in public savings has placed substantial constraints on the publicsector development program. Also, additional funds are needed, particu-larly at the Provincial level, to defray the rising costs being incurredby departments concerned with development activities, notably education.For the remainder of the Plan, the Government has estimated that atleast Rs. 1.1 billion of additional resources will be needed for develop-ment purposes over and above what is likely to be collected at presentrates of taxation. This seems to the mission to be a conservative esti-mate. Furthermore, the structure of taxation which placed very heavyreliance on indirect taxes at the beginning of the Third Plan period hasgrown even more unbalanced with the ad hoc tax measures taken to dealwith the emergency situation in 1965 (see paragraph 24).

106. Previous missions have suggested two sources of additionalrevenue from direct taxation without changing basic tax rates, which,in general, are reasonably high. These were to include in the incometax base income from agricultural activities (in the same way thatother income is included); and to reduee tax holidavs for new industrialenterprises. Some action was taken on the second point when the periodof the tax holidavs wn rpvdripr1 hv two years at. t.hp innpntion of theThird Plan. We understand that the Government is committed to thepresent snbeme for the ret of +he Plnn nerined.

107. The argm.ents against taxin.g inronm. f'rnm ag-rir-ul+.rural sourcesare (1) that it would be administratively difficult and probably yieldlow npt rAtuirns: nnd (2) thnt agricuilture alreadv lahor.s undpr c'-rtain

financial disabilities mainly because of the export tax and exchangerate structure. TThere is some mr in. +he .hp second point (ynnmrt +.tyeson cotton and jute may no longer be justified), and perhaps more agri-cultural exports should be entitled to the export bonus. _oweer, wedo not feel that a good case can be made for exempting all those whodeniye income from agricultural sources (eve. if they live in uban.areas) from including it in their taxable incomes for purposes of theflrnn-r'ac i n +ax.

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108U. A recent sudUy Vof VtheZ distributior.WJ. Wt i-cor.eW'& UIIaE,nura d

rural households in Pakistanl_/ seems to indicate that perhaps 200,000 to300,000 rus-a huse"IldS ean-comsw icwoul Ib -e 'taxabe under 'ihe.)UVvwuv ruraUd I1ULL~[U.LUb) t'dlll UJUUVMZ WLJ.ULI.L WULLU LJu UWdj_ u UIii LI

present rates of the central income tax. In addition, a considerablenumDer of urban households derive a substantial arount of' theIr incomesfrom agricultural sources. The point is not only that persons do not paytaxes on their agricultural incomes bUt, more im-portant, such exemptionlowers the tax rates applicable to their other incomes. Under a progres-sive tax system, tnis not only results in a loss of revenue but alsogives rise to obviously unequal treatment as between individuals of equalincomes, which differ only as to source._/

109. The mission believes that the Government should re-examine thisproblem. We do not feel that treating agricultural income the same asother income would greatly decrease either agricultural output or invest-ment, particularly in view of the now improved terms of trade of theagricultural sector.

110. Import tax rates increased markedly during the Third Plan. Thedefense surcharge added 25 percent to most rates in a single step. Inaddition, taxes on machinery have been approximately doubled, and variousother rates were raised in an attempt to make the tariff structure more"rational". Rationality in this sense refers to the comparative levelsof taxes on consumer goods, raw materials and capital goods.

111. In spite of these increases, there may be grounds for increasingimport charges on some goods imported without bonus vouchers if the presentexchange rate system continues. Not only does demand for free list im-ports exceed supply but holders of import licenses for controlled itemscontinue to reap substantial gains. It would seem that the Governmentshould share in these gains to a greater extent than at present.

112. For goods imported under the export bonus scheme, increases inimoort taxes would reduce the value of bonus vouchers and involve a trans-fer of resources from the exporters to the Government. The desirabilityof this transfer, on eauitv grounds, is not so obvious. Also, it couldhave undesirable effects on exports. Furthermore, at the present priceof vouchers the delivered nrice of bonus imports is already very highrelative to licensed nonbonus imports. Hence increases in tariffs shouldnrobablv hp ronnn ntrntArd on t.he nonbhoniis imports.

1/ Source: Asbjorn Bergan;'Personal Income Distribution and PersonalSavings in Pakistant' Pakistan Tnstittite of Development Economics.

2/ For example, if an individual (without other exemptions) has anircm f, say, As -,000 fro nonncagiricultu.ral -sourfcej +.he aqverage

tax rate might be about 8.6 percent and the marginal rate 15 percent.However, if Rs. 4,5nn of this inrcome was from gricuil +jure, his aerag

rate would be less than 1 percent and his marginal rate only 2 percent.Of co-M'se, the di-scrimination %Tr)1 be creater +th higher +he income=

Agricul.ture Policy

113. Several important developments relating to agricultural policy havetaken place during the currenlt year. uovernment has accepted the view thata lagging agricultural sector could jeopardize the rate of progress pro-jected for the T-hird rlan period. Decisions have therefore been taken duringthis year to give highest priority to the agricultural sector, and to makeadministrative changes designed to ensure that agricultural development pro-grams would receive adequate resources and administrative attention.

114. The mission is generally in agreement with the steps which have beentaken or that are proposed. These measures are discussed in Chapter 6 . How-ever, despite this emphasis on increased production, allocations for agricul-ture and water development have been reduced in the revised versions of theThird Five-Year Plan. The major cuts for the agricultural sector have beenmade in the subsidies provided for fertilizers, plant protection, and mechani-zation in West Pakistan. Government anticipates this will not diminish thevolume of agricultural inputs below the original targets, but would shift alarger part of the cost to farmers using the inputs. Reductions in allocationsto the water sector are expected to permit completion of ongoing schemes andthe preparation of surveys and studies on projects to be carried out insubsequent Plan periods.

115. Reductions in the fertilizer subsidy in West Pakistan during thecurrent year, which have resulted in slightly higher prices to the farmers,have been accompanied by rising fertilizer sales. Further cuts in the subsidylevel constitute a means by which Government could exercise additional econo-mies in development spending. The difficulty is that the effects of this areuncertain at this time. Fertilizer is one of the inputs on which the self-sufficiency program rests heavily, and to introduce another price increase forfertilizer would be a risk. Economies could be obtained by further improve-ments in the procurement, transportation, handling and distribution system,and these should be pursued vigorously. Mareinal schemes in the agriculturalsector could again be reviewed with the objective of deferring them for laterperiods, and evaluation of the nlant nrotection nrogram may Droduce alternativeswhich result in large savings to Government. Considered from the standpoint ofPotential effect on aericultural Droduction. anv increase in the Drice of ferti-lizer at this time appears to be the least advantageous source of cost savingfor Government.

116. Plant protection remains the least satisfactory part of the inputsituation. The present plant protection activities seem largely ineffJecive,and the program requires a thorough evaluation and re-organization. There wouldappear to be scope for participation by the private sector in the distributionof plant protection materials, and for farmers to assume more direct responsi-bility for field spraying. iMiovement in this direction should reduce the coststo Government as well as improve the efficiency of plant protection activities.

117. In order to make inputs more accessible to farmers two programs areessential. More credit should be available on better terms and the distri-bution mechanism particularly for fertilizer, needs to be greatly improved.Progress is being made in both these fields but it needs to be acceleratedas discussed in Chapter 6.

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Regional mconom±c Replatlons

118. Pakistan nas been actively participating in certain ecl miccooperation arrangements with Iran and Turkey as a partner in the RCD(negional Cooperation Ior Development) framework. Tnis Organizationgives promise of yielding useful results. A joint project in petro-chemical field has already been agreed with Iran.

119. Following the Tashkent Conference, discussions at the ministeri-al level were undertaken with India with the hope that economic relationscould be restored to a more normal basis in the Subcontinent, but thus farfew tangible results are evident. The political issues involved are, ofcourse, outside the scope of this report. However, there are many areaswhere economic cooperation and intercourse between the two countries wouldyield valuable returns to Pakistan, including a more productive use of thelarge amount of foreign assistance being provided by the consortium. Com-munications between East and West Pakistan, more expeditious and economicaldevelopment of the water resources of the East Wing, which requires co-ordination with India, and procurement by Pakistan of materials which Indiais exporting to other countries are some examples of benefits that Pakistanmight derive, if economic relations with India were re-established.

Revised Sector Allocations

120. In December 1966 the National Economic Council approved arevision of the financial allocations for public sector development duringthe Third Plan. These revised allocations are discussed in Part II ofthis report. In general they purport to reflect the new emphasis onquick yielding projects, increased food production and better utilizationof industrial capacity that has been expressed by President Avub and othergovernment leaders. In themselves the revised allocations do not seem toreflect any substantial chAngAe in priorities among major sectors of theprogram but the mission was told that, within the sectors, the timingand speed of exprittion of projects will emnhesize the nRT goals

121. The mission feels that ss Iona as sight is not lost of certainlonger range objectives in such fields as education and rural development,these goals are highlyr iew;4-ahlo- TnAdeed .w fol +.hat fiiY+.hPe,r ,rpcutiontcould be made in the allocations to certain public sector industries.Su^h savings c-ould w_11 b trnsferred to educat-or, wurn1 .r.orksndhealth pro grams which have borne the brunt of the downward revision oft.he gross (before ,oireted sh.ortfalls) publi>scto aroatn

been reduced from Rs. 34 billion to Rs. 31 billion. The net (after expectedshor-tfarllS) p%rogM.mI re.nir.s- -at RPs '30 blllior. Ini is~ abou 10pre

higher than the amount of financial resources which seem to us to be in1prAAo 4se_pe__c |t a _t 4+ A _ - 1^4r.4. _. t lt _W 4

WAU -U9 V FJL VALU WAA110 *L LA LJJ.J i Lb felos sLat I.urthe WJL w JrvInes

to be done on this subject by the Government before a final judgement isMule o, theu J1(r,aSLt'uUe of thle r-e-vise SL__LcU

PART II

THE SECTORS

CHAPTER 5

REVISED PUBLIC SECTOR ALLOCATIONS

The mission estimate OI the overall magnitude and phasing of triepublic and private sector portions of the Third Plan are in Chapter 3 (seeTable 13). This chapter will cover the revisions of the program that havebeen made by the Pakistan Government as a result of its experience duringthe first eighteen months of the Plan.

124. The Government has not changed the overall amount of the Rs. 52billion program (Rs. 30 billion in the public and Rs. 22 billion in theprivate sector) that was in the original Plan document. However, the gross(before expected shortfalls) amount allocated to the different categoriesof the public sector program were reduced in December 1966 from Rs. 34.5billion to Rs. 31 billion, and the expected shortfall was lowered fromRs. 4.5 billion to Rs. 1 billion. No change has been made in the privatesector allocation which was never presented on a "gross" and "net" basis.

125. It might appear that this revision implies that the sector alloca-tions have been tightened up by Rs. 3.5 billion, but such an interpretationis hardly warranted. Rather, the meaning of the revision appears to be thatthe Government still is hoping to achieve a Rs. 30 billion program but hasfound it desirable to revise the gross sector allocations somewhat in thelight of changed circumstances.

126. Table 18 compares the original with the revised phasing. Inactual fact, the expenditures of the public sector portion for 1965/66 and1966/67 will probably be about Rs. 620 million or 7.5 percent less than isindicated in this table. The most significant program changes are notreflected in the financial magnitudes in Tables 18 and 19 7 but rather inthe difference between the original Plan and the projects and programs whichare now receiving emphasis. The changes are largely within, rather thanbetween sectors, and will be discussed in subsequent chapters. As alreadyintimated, the focus has been placed increasinglv on more immediately produc-tive and foreign exchange generating or saving projects, while programs withlone gestation neriods or hi8h imnort and canital intensitv are being reducedor postponed. In connection with this overall strategy and the proclaimedgoal to attain self-sufficiency in food by 1970. agriculture has emerged asthe sector of highest priority as far as administrative attention, if notfinancial allocations; are none-rned. On the inr1nstrial sine nrefPerenne- isbeing given to consolidation and full utilization of existing capacities. Newindustrial projects in the pniihlit- secti-.or andi further expansions will bhe easre-fully scrutinized, particularly in respect of their foreign exchange impact.

Table 18

Or:Lginal and Revised Phasing of the Third Five-Year Plan-

(In millions of rupees)

Government Financed Sector Private Sectsr ___ _ TotalYear )riginal Revised Change in Original Revised Change in Orieinal Revised Change irn

Percent Percent Percent

196';/66 4, 700 3,420 -27.2 3,700 3,700 - 8,14oo 7,120 _15.2

196U/67 5,300 5,0OOD - 5.7 I,050 4,ooo -_1.2 9,350 9,0O00 - 3.8

1967/68 6,(OO 65;,OO0 - 4,350 ,4,3oo -1.1 10,350 10, 300 - 0.5

1968/69 6,700 7,100 + 65.0 4,700 4h,8oo +2.1 11,4oo 11,9)00 + 4.h

1969/70 7,300 6,184 +16.2 5,200 5,200 - 12,500 13 680 + 9.L

Total Plan 30,000 30,000 - 22,000 22,000 _ 52,000 52,000Period

1/ Net allocatLons, i.e., excluding estimated shortfall.Nource: Planning Comnnission.

127. However, the Government is not finding i+ possible to cut backon infra-structure, since power, transport and communications are consideredof ton nriori+y for the country's immediate needs 9s well as its further eco-nomic development. The power shortage, particularly acute in West PakistandtrLring the winter of 1966/67, has proved to be detrimental to agriculturaland industrial production. Transport and communications is the only sectorshowi-.g an absolute increase in -finncial zllocat-ions as com,pared to- theoriginal Plan. This may, to a small extent, reflect defense as well as eco-nomic considerations.

128. Faced with the dilemma of rnot being able to rea'lly make a cholcebetween commodity producing investments and infra-structure, aside from thereductions in, or postponement of, public sector industry, the largest per-centage cuts have been made in such minor (insofar as capital costs areconcerned) fields as social welfare and housing. Unfortunately, educationand health and the rural works program have also been reduced more than theaverage. Family planning seems to be given continuing strong emphasis. Themission has the impression that these allocations should not be consideredas final or even an expression of clear-cut official policy.

129. The revised sector allocations by Provinces is in Appendixtable 12. Roughly the same reductions have been made in each Provinceinsofar as overall magnitudes are concerned.

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Table 1g

Onriuinl an,d ReVi4 A Public Sec$ Allocatons i the Third Plan 1570

I TnA .millior.s of rupees)

Original Plan Revised PlanSectors Alloca- , of Total Alloca- % of Total Changes

tion tion inI Percenlt

5 cLture L4 6 1115 1

Water and Power 8,450 21.3 8,o47 25. - 4.2

Industry, Fuels 5,160 1J.0 4,105 13.2 -20.4and MiLerals

Transport and 6,1460 18.7 6,711 21.6 + 3.9Cononunic ations

Physical Planning 3,025 8.8 2,477 8.0 -18.1and Housing

Education and Training 2,730 7.9 2,374 7.7 -13.0

Health 1,330 3.9 1,175 3.8 -11.7

Social Welfare 125 0.4 90 0.3 -28.0

Manpower 100 0.3 86 0.3 -14.0

Works Program 2,500 7.2 1,820 5.9 -27.2

Total: 34,500 100.0 31,000 100.0 -10.1

Expected Shortfall -4,500 -13.0 -1,000 -3,2 -77.8

Net Total: 30,000 87.0 30,000 96.8 _

Source: Planning Commission.

rMTPTFR A

AGRICULTURE

Organization, Allocations and E.phasis =Surmmary

130. Govern.m,er,t has pl -aced -U -ihe -rort th- hertoor onagi-

cultural development during the Third Plan period, and has raised produc-tior. targets for foodgrains. XL a.L.Ii. .LS.L LILUUJ. Agi La. PLOCJ % .A.jL,ite.L V h av -b-_e-

established at the highest administrative levels in each Province to pro-vid e diArecti;on ar-A super-Xsion. Each- 1Prov-cial Comm,i2tte is headed-- --y

the Governor, and includes the Deputy Chairman of the Planning Commission-A 4the Ce-1-ra S a -P- of the AgrLulta --d Food Minitr &nd- -A -1QL1Z- I.~L1 VJ1ZLU1(J. 0J - U -I' U L JL- VI LLtZ & I. ULUJULLL.J CLLIt- ItJVtA ±I4,I.L0IJJ.J CIA.4 A. .-

ing representatives of the planning, agricultural and food agencies in the

.1 fl ¶12 1LI.. -rac o1WXU1J. this new organi zational Ira,ne-wrk, each rruviii LIdh

drawn up comprehensive programs by which they hope to achieve self-sufiiciency in foodgrain production by 1969/70. Tnese programs identiytargets and the quantities of agricultural inputs which would be requiredto meet them. An effort has been made to fit the self-sufficiency programinto the revised allocations to agriculture and water development in theThird Plan.

132. West Pakistan has proposed to raise wheat production to 7 mil-lion tons by 1969/70 -- an increase of 67 percent over the estimatedproduction in the current year or an average annual rate of growth ofabout 18.6 percent. The Province also hopes to double the production ofmaize and increase the production of oilseeds by over 60 percent abovebenchmark levels at the end of the Second Plan. All of these productiontargets are above those originally established for the Third Plan. EastPakistan has not yet worked out revised rice production targets. Theoriginal Third Plan target for 12.725 million tons may be close to actualrequirements by 1969/70, but this may eventually be revised upward.

133. The major ingredient of the West Pakistan program consists ofan additional 1.5 million irrigated acres under wheat, utilizing an addi-tional 5.46 M4F of irrigation water. Out of a total planned irrigationacreage under wheat of 9.33 million acres in 1969/70, 4 million acreswould be sown with Mexican or Mexi-Pak varieties. The new wheat varietiesare expected to contribute about three-fourths of the additional produc-tion. About 45 percent of the estimated fertilizer sales of 420,000 nutri-ent tons in 1969/70 would be used on the wheat crop.

134. The program demonstrates a conscientious attempt to relate inputsto expected production increases, and efforts have been made to keep itconsistent with experience and probable input availability. Nevertheless,

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it remains a most amhbitious endeavor. Some weaknesses rem a inbe difficult to overcome in the short span of the next three years. Someof these include the likelihood of s,hortfalls in the water develoentprogram and in yields from the new wheat varieties, outlined more fullylater in this ^hapr, and -lenecks in transportation, particular'ythrough Karachi Port and in motive power on the railroads. The futuresales of fertilizer -would depend on its ready availability to farmers,the success of extension work among farmers, the incentives implicit infuture cost and price relationships, allocation of foreign exchange toinsure timely arrival of imports, and to some extent on credit availa-bility. To cite these important problems is not to oppose the new andhigher targets in foodgrain production, but they do point to certainobstacles which lie ahiead.

135* Ihe present tninking in East Pakistan also reflects an aware-ness of the importance of the necessary inputs. Also, of course, animrsportan- factor is tne weather. A year without serious floods orcyclones could bring a bumper rice harvest. In large measure, howrever,the realization of Plan targets depends on successful handling of prob-lems similar to those noted in West Pakistan.

136. Along with the increased physical production targets, thesectoral revisions in the Third Plan call for a reduction in the alloca-tion to agriculture -- from an original total of Rs. 4,670 million toRs. 4,115 million. The share of East Pakistan, however, has been in-creased by a small amount, primarily by a block provision of Rs. 224million to cover new projects and programs not now fully worked out.The major reduction thus falls on West Pakistan, and this is accomplishedprimarily through reductions in the subsidies for fertilizer, plant pro-tection and mechanization. We have commented on these reductions inChapter 4. The physical magnitudes involved under these headings remainunchanged or have been increased (e.g., fertilizer). Government there-fore believes the reduction in West Pakistan allocations for subsidieswould not result in any decrease in the inputs to be used. Governmenthas also provided for further intersectoral adJustments if agriculturalprogram requirements exceed the revised amounts. Allocations for waterdevelopment have been reduced in both Provinces, but these revisions seemin keeping with the likely implementation capacity over the next threeyears. Water programs are now designed to bring ongoing projects to com-pletion as rapidly as possible, and to carry out studies on which futureprojects would be based. Power allocations have been increased, and inWest Pakistan this is particularly important for future public and privatetubewell irrigation. A summary of the sectoral revision is given inAppendix table 12.

Current Year Performance - 1966/67

137. Agricultural production in Pakistan during the current year,1966/67, has been adversely affected by weather conditions in both Pro-vinces for the second consecutive year. Early drought at planting time,followed by floods in July and August and a cyclone in Octooer, reducedthe rice crop in East Pakistan to the lowest level since 1962/63. Wheatacreage in West Pakistan increased by about 1 million acres over theprevious year as a result of substantial early rains, increased canalflows, and increased tubewell irrigation, but these favorable factors werelater offset by uriusually frequent and sustained periods of frost and bysevere drought from November into February. Rains falling in late Februaryand March have caused Government officials in West Pakistan to reviseupward their earlier estimates of wheat production, and expectations arenow that the wheat crop may be larger than last year's, although stillbelow the level achieved in 1964/65. On balance, total production ofPakistan's two major food grains seems to have continued a decline fromthe volume which was produced in the final year of the Second Five-YearPlan period.

138. The latest estimates of sugarcane acreage and production indicatethat current year production may be less than in 1965/66, but still muchgreater than the 1964/65 production. Cotton production, also based onrevised estimates, has apparently continued to increase slightly over theprevious two years. Jute Droduction in East Pakistan remains essentiallyunchanged from 1965/66. The crop production data available at the timeof the mission's visit to Pakistan, which are largely provisional estimatesby various agencies, are shown in Table 21.

139. The Planning Commission's preliminary projections of value addedin the agricultural sector estimate an increase of 2.8 nercent over 1965/66.This has been based on the assumptions that (a) the rice crop in EastPakistan would be laraer than in 1965/66. and (b) cotton production wouldbe slightly larger than the estimate for 1966/67 shown in Table21. Evenaccepting all other assumntions made by the Planning Commission withrespect to minor crops, livestock, forestry and fishing, the productionperformance indicated by the estimates for maior crnns shown in Table 21would imply that value added in the agriculture sector for 1966/67 is"nlikpel to show Any increase over the previs year, A migrhteuenrea',a slight decline.

14o. The seriousness of the food grain position is reflected in theprices for wheat a-nd rice in both Provrinces. The average wholesale priceof wheat in Lyallpur was about 150 percent higher in January 1967 thanbut the ten January 1 w66. Thet compison is wers extreme au 5 derabade

but there the January wheat prices in 1967 were about 55 percent higher

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Table 21

Agricultural Production andPr-centa-ge -I-dUge -Zin e QU -_r± 1u-I (196/65)

1964/65 1965/66 1966/67 Percentage ChangeCrop Actual Actual Estimated (3) over ki) (i3 over (2)

- - - - ('000 tons) - - - - - - -Tpercent)- - -

Rice 11,666 11,676 10,800 a/ (_) 7.4 (_) 7.5

Wheat 4,552 3,908 4,200 b (-) 7.8 (+) 7.5

Maize 523 534 534 c/ (+) 2.1

Sugarcane 24,604 29,836 28,201 d/ (+) 14.6 (-) 5.5

Jute ('000 bales) 5,328 6,346 6,300 e/ (+) 18.2 (-) 0.8

Cotton ('000 bales) 2,139 2,347 2,434 L (+) 13.8 (+) 3.7

Tea (mill. lbs.) 63 60 65 v (+) 3.2 (+) 8.3

a/ Production estimates for West Pakistan were not available, althoughsecond estimates of acreage indicate a slight decline from 1965/66.Production estimates for the aman and boro crops in East Pakistan areprovisional. The above estimate assumes that West Pakistan riceproduction in 1966/67 will be approximately the same as in 1965/66.

b/ Unofficial estimate.

c/ Acreage (second estimate) is essentially unchanged from 1965/66, there-fore 1966/67 production has been shown as unchanged from previousyear.

d/ Second estimate.

e/ Planning Commission estimate.

f/ Secondi es.timate.P

o/ IN nnl estimaten.

Sourcess: M StatisticalM lletin_East Pakistan Agriculture Department.Dlo ingv. V omisin

than at the same time the previous year. The average price of coarse riceirn East Pmist an in ciJi±uary uo uJh year was the hghest in 20 years.Prices moved downward in West Pakistan after the February rains gave riseto expectations that the wheat crop would be larger than had been predictedearlier. Government also undertook vigorous food release program of PL-480supplies in the urban areas, and particularly in Karachi, to bring pricesdown. Both Provinces have tried to impose bans on large social gatheringsat which rice or wheat products are used.

141. The agricultural sectoris contribution to Pakistanis exportscontinued to expand in value terms in 1965/66, and the Planning Commissionprojections for 1966/67 show further increase. The major export crops ofjute, cotton, and West Pakistan fine rice were not seriously affected bythe poor weather conditions, although production of these crops did notincrease by very much over the previous year. Rice acreage in West Pakistan,according to the latest estimate, was slightly below one year ago, but thehigher export figures for 1966/67 include rice shipments out of stocks from1965/66 production. Exports of raw jute are expected to decline, but thisreflects the growing shift to export of jute manufactures as a result ofincreased capacity in East Pakistan jute mills. Raw cotton exports areexpected to bring larger earnings, although the increase may be limited bylower prices on the international market. An increase is again projectedfor cotton manufactures in 1966/67 despite a less favorable start duringthe early months of this year. The export performance and projections formajor items based on agricultural production are summarized in Table 22.The Mission feels that export of jute and jute manufactures in 1966/67may be a little lower than forecast in this table (see Annex II).

Table 22

Export Projection for Selected Agricultural Commoditiesand Manufactured Products

1964/65 1965/66 1966/67 PlanActual Actual Estimated Targets

1969/70i - - - T Rs. miflion- - -

Raw jute 925.9 977.8 900.0 750.0

Jute manufactures 319.9 591.7 750.0 800.0

RAw cotton 33°0 286.8 300.0 550Q.

Cotton mnnufactnrPe 188.A 22996 250.0 350.0

Pice A166=7 127.0C) IR= 250.0

Hides a-d skins 61.2 30.0 20.0 80.0

Raw T.Trol 73 1 A7 67t o0 (0.0~~ VU~~~~J~~L I ; WI *14

'1 2,i i o e10. ,4 i.f 0 , 870 0

Source: Planning Commission.

- 55 -

Agricultural Inputs

142. Despite the probable current year production performance which+the a-in;lable data suggest+1,- th rspctfrn grw> n DabiAc+n"Q !agrTi-

cultural sector still remain basically favorable. The significant changesw-hi ch have 4 l,en p w4h respect t o pol ; c orr la4ion, and +e h-pfocus on the role of agricultural inputs, have been discussed atove.PD 4stan has already begun lo place increased emphasiJs or, te provionf

inputs during the year under review, although climatic factors have obscured%he contr JLU Utios t'.o production r.-wch -.- , r ugh" 1 othLerw-wws have be en, e,v der.tCu..der

less adverse circumstances.

143. Fertilizers. The use of chemical fertilizers by farmers duringthe present year has gone sharply upward in both Provinces, reflecting boVhgreater efforts by Government to distribute fertilizers and increasingacceptance by the farmers. The actual distribution during the Second Five-Year Plan period and through 1965/66 is shown in Table23, along with Govern-mentis estimates for the current year and for the remaining years of theThird Five-Year Plan. It seems probable, from sales to date, that thetotals shown for this year, 1966/67, would be realized. Sales in EastPakistan for the period July-December 1966 were running 33.6 percent abovethe cGmparable period a year ago; the sales in West Pakistan from July 1966through January 1967 were running 98 percent above the sales during thecomparable months a year earlier. The estimated totals for 1966/67 in EastPakistan and West Pakistan constitute percentage increases over the previousyear of 38.5 and 109.7 percent respectively.

1LU. The distribution of fertilizers in East Pakistan is the responsi-bility of the East Pakistan Agricultural Development Corporation (EPADC),and this agency has been gradually expanding its network of private retaildealers. The reorganization of the distribution system -- from distri-bution through the Directorate of Agriculture to distribution throughprivate dealers -- has now been completed in 13 of 18 districts, and theremaining districts should be reorganized by mid-1967. Cash sales were22 percent of total sales in 1963/64, 33 percent in 1964/65, and 58 percentin 1965/66. Since a larger proportion of cash sales has been occuring ata time when total sales were also rising, it seems evident that farmers arebecoming increasingly convinced that fertilizers offer economic advantagesunder present farming conditions.

1L5. The distribution arrangements in West Pakistan are also under-going change. Government stopped retail sales through private dealersdurine the fertilizer shortage of 1965/66, but with larger stocks onceagain on hand this policy is being reversed. The West Pakistan AgriculturalDevelopment Corporation (WPADC) has appointed 1.478 private dealers in itsproject areas to retail fertilizers to farmers, and the West PakistanTIndustrial Development Corporation (WPIDC) is marketing a portion of itsdomestic fertilizer production through private dealers. In addition, theRu1ral SUpp1Y Cvoonerative rornoration (RSCC) continues to sell to r_nera-rtives for resale to individual farmers. While there has thus been some movealready toward private sector participation in fertilizer -sales; Covernment

Table 23

Fertilizer Sales, Actual and Estimated

East Pakistan West PaLkistan Total Pakistan

Sales Percentage Sales - Percentage Sal-es Percentage(Nutrient Change over (Nutrient Change over (Nutrient Change ovear

tons) Previous year tons) Previous year tOxIS) PreviousarSecond 5-Year Plan

1960/61 23,535 112,3C'0 55,835196L/62 22,991 (-) 2.3 38,6c0 (+) 19.5 61,591 1+) 10.31962/63 26,772 (+) 16.4 L1,6o0 (+) 7.8 68,372 (+) 11.01963/64 49,217 (+) 83.8 69,500 (+) 67.1 118, 717 (+) '73.619614/65 45,050 (-) 8.5 7,6 (+) 26.0 132,650 (+) i1.7

Total Plan Period 167,565 269,600 437 ,165

Tlird 5-Year Plan

1965/66 54,150 (+ ) 20.2 70,100 (-) 20.0 124,250 (-) 6.41966/67 75,0C O/ (+) 38i.5 147,000 3 (+) 109.7 222,000 (+) '78.7196'7/68 1 07,OCO (+) 42.7 273,000 (+) 85.7 :380,000 (+) 1.2 1968/69 4i 153,000 (+) 43.0 378,000 (+) 38.5 5'31,000 (+) 39.71969/70 i/ 234,12C0 (+) 52'.9 4h20,0CI (+) 11.1 65,00 (+) 23.2

Total Plan Period 623,150 1, 288, 100 1,911,250

1/ Converted (at 21 per cent N) frovi sales totals given in ternis of Anmmoniuin Sulfate.2/ Total is an estimate.Actual sales for 1966/67 through Jan. 1967 were 38,300 tons of Nutrients.3/ TDtal is an estimate, Actual sales for 1966/67 through Jan. 1967 were 80,60)0 tons of Nutrients.4,/ Fstimates only.

Table 23

Fertilizer Sales, Actual and Estimated

East Pakistan West Pakistan Total Pakistan

Sales Percentage Sales 1/ Percentage Sales Percentage(]Nutrient Change over (Nutrient Change over (Nutrient Change over

Secondi 5-Year Plana tons) Previous year tons) Previous year tonsLs) Previous year

1960/61 23,535 32,300 55,835196:1/62 22,991 (-) 2.3 38,600 (+) 19.5 61,591 I+) L0.31962/63 26,772 (+) 16.4 41,600 (+) 7.8 68,372 (+) 11.0196.3/64 49,217 (+) 83.8 69,500 (+) 67.1 118,717 ( 7) 73.619614/65 45,050 (-) 8.5 87,600 (+) 26.0 132,650 (+) 11.7

Total Plan Period 167,565 269,600 437,165

Third 5-Yiear Plan

1965/66 54,150 (o) 20.2 70,1C0 (-) 20.0 124,250 2-) 6.41966/67 75,000 2/ (+) 38.5 l,.7,000 3/ (+) 109.7 '222,C000 +) 78.7196'7/68 4/ 107,000 (+) 42.7 273,000 (+) 85.,7 380,000 7t) '11.21968/69 4/ 153,000 (+) 43.0 378,0OCX (+) 38.5 5 31,(00 (+) 39.71969/70 / 234,00 (+) 52.9 42'0,00 (+) 11U1 654,000 (+) 23.2

Total Plan Period 623,150 1,288,100 1,9511,2 250

1/ Converted (at 21 per cent N) fromi sales totals given in terms of Amumoniumn Sulfate.2/ Total is an estimate.ktual sales for 1966/67 through Jan. 15967 were 38,300 tons of Nutrients.3/ Tota. is an estimate. Actual sales for 1966/67 thrcugh Jan. 1967 were 80,60)0 tons of Nutrients.i,/ Estimates only.

Table 23

Fertilizer Sales, Actual and Estimated

East Pakistan West Pakistan Total Pakistal

Sales Percentage Sales 1/ Percentage Sales Percentage(Nutrient Change over (Nutrient Change over (Nutr ient Change over

tons) Previous year tons) Frevious year toLs) Previous yearSecond 5-'Year P1an :rya

1960/61 23,535 32,300 55.,835196:L/62 22,991 (-) 2.3 38,600 (+) 19.5 61,5'91 I+) 10.3196;2/63 26,772 (+) 16.4 41,600 (+) 7.8 68,372 (+) 11I .01963/64 249,217 (+) 83.8 69,500 (+) 67.1 U18, 717 (+) 73.619614/65 445,050 C-) 8.5 87,60 (+) 26.0 132,650 (+) 11.7

Total Plan Period 167,565 269,600 437,165

Tlird 5-Yiear Plan

1965/66 54,150 (+) 20.2 70,1C(X (-) 20.0 1224,250 (-) 6.41965/67 75, 0002/ (+) 38.5 147,OC'0 3/ (+) 109.7 222,000 I+) 78.71967/68 4/ 107,000 (+) 42.7 273,000 (+) 85..7 380,0(00 7+) '1.21968/69 4/ 153,000 (+) 43.0 378,0C0 (+) 38.5 531,()00 (+) 39.71969/70 i/ 234, (+) 52.9 424,0 (+) 1161 6524,000 (+) :23.2

Total Plan Period 623,150 1,2288,100 1, 911,250

1,/ Converted (at 21 per cent N) from sales totals given in terms of Almmonium Sulfate.2/ Total is an estimate.Actual sales for 1966/67 through Jan. 1967 were 38,300 tons of Nutrients.3/ Total is an estimate. Actual sales for 1966/67 through Jan. 1967 were 80,600 tons of Nutrients.i,/ Fstimates only.

Table 23Fertilizer Sales, Actual and Estlimated

East Pakistan West Pakisltan Total Pakistan

Sales Percentage Sales 1/ Percentage Sales Percentage(Nutrient Change over (Nutri-ent Chanige over (Nutrient Change over

tors) Prevtous year tons) PreviLous year tonALs )Etious yearSecond 5-Year Plan

1960/61 23,535 32,3C)0 55,13351961/62 22,991 (-) 2.3 38,600 (+) 19,5 61,191 (+) 10.31962/63 26,772 (+) 16.4 La,600 (+) 7.8 68,372 (+) 11.01963/64 49,217 (+) 83.8 69,500 (+) 67,1 118,717 (H) 73.6196L4/65 45,050 (-) 8.5 87,600 (+) 26.0 1L32,6550 (+) 11.7

Total Plan Period 167,565 269,600 437, L65

T]hird 5-Year Plan

1965/66 54,150 (+) 20.2 70,100 o(- 20.0 124,250 (-) 6.41965/67 75 OC0 2/ (+) 38.5 1.47000 3/ (+) 109.7 .222,000 (+) 78.71967/68 -/ 107,000 (+) 42.7 273,000 (+) 85.7 380,(00 (+) 71.21968/69 4-'~/ 153,00 (+) 43.0 378,000 (O) 38.5 531,000 (+) 39.71969/70 -/ 234000 (+) 52.9 420CO (+) .1 5400 (+) (23.2

Total Plan Period 623,150 1,288,100 1,O11,2750

1/ Converted (at 21 ;per cent N) from sales totals given in terms of Ammonium Sulfate.2/ Total is an estimate .ctuaal sales for 1966/67 through Jan. 1967 were 38,300 tons of Nutrients .3/ Total is an estimate. Actual sales for 1966/67 through Jan. 1967 were 80,6C0 tons of Nutrients.1/ F.stimates only.

- 57 -

has also opened discussions with private firms concerning exclusiveA ea'ershLps VrerW iarge i-Larket areas. o u cth dea--r tJILLUpa rL r AULLJ aArw1gtLuu±± fleWmU{LU

involve agreement with one or more firms to provide complete transport,handlng, storage, and distribution ser-vice ir- support of overall tr-getsfor fertilizer sales in West Pakistan. These discussions were stillcontinuing at the time of the ?iasson!s visit to Pakistan.

146. It is extremely important that fertilizers be available at thefarm level, in adequate quantities, at the times of the year when they areto be used on the crops. Since the bulk of the fertilizers used for thenext few years must be imported, this means that the foreign exchange forfertilizer imports must be arranged for and released to the procurementagencies (i.e., the ADCs) well in advance of the time the fertilizersshould arrive in Pakistan. The lead time necessary for this would vary,depending on the source of the foreign exchange and the countries wherefertilizer is purchased, but may range from four to seven months, possiblylonger in some cases. There has been difficulty in the past because theimportance of adequate lead time has not been fully recognized, andfertilizer stocks have not arrived by the time they were required. TheGovernment of East Pakistan has now worked out a schedule for 1967/68based on estimated requirements at the critical times during the crop year,and giving adequate allowance for the lead times involved. Foreign exchangefrom a Japanese credit has been allocated to meet these requirements, andit appears that the schedule can be met. As of the second week in March1967, the Government of West Pakistan had not received notification thatit had been allocated the foreign exchange needed to meet the importsit had scheduled for arrival during July-September 1967. It was not clearwhy the foreign exchange allocation had been delayed, but in light of thelead time reouired it seems unlikely that imDorts can arrive in time forthe fertilizer applications required for the kharif (summer) crops. Fer-tilizer sales during the summer months would then have to be made fromstocks carried over from 1966/67, plus domestic production. The Planningand fevelonment DepartmePnt, rGoverr-nment of W.est Pakistan, estimates that

carryover stocks and domestic production would be slightly less than theestimated rennlirem.entns for .lir +r th-rniuh SePnemher- The riplav in all nratingrforeign exchange thus means that it may be impossible to meet the July-Sentem.ber sAles targets unless the carrvnxer stocks are 1n-rer than nowanticipated.

11.7. Adequate storage at inland points is another requirement foreffective dictrihnti on hehsnn- fertil ir needs nre seasonnl and suppliesmust be accumulated against the seasonial demands. The EPADC has leased170,000 tons. s+oragge cvaepactnny. •nA hnnn t-o add 1,A i0A Annns of storfaecapacity by the end of the Third Plan. It is also making a study of its-nIrnr- rtr n-A cmtrn"nl¶+-r n rnoAr.ao, ii n"Aeny. +^ 4mrTvrVTOn 4I) hnnr;linr" of)

| *v~w _;Ya ,; vvz 61 _ _. n j o d s -n - v mpro.., *e)stocks. Fertilizer storage in West Pakistan is provided under moretfLemporary-ee.det p-+vly Ieav --- .-- + paterr -f thedisvr

bution system itself has not been fully decided. If arrangements aremade 4to hCandule d.;UstVrib1Utior -- ; 4ough- one or maore I age pr-lva4e fs.spresumably local storage facilities would be provided for under the termnso. the drruaxgerlItinau. Ir,e aulsezce Lf suhi CI -ri-wgereni, huwever,

storage capacity may prove to be a constraint on effective distribution.

148. Fertilizers in Pakistan have been sold to farmers at a fixedretail price, with Government aDsorbing the difference between therevenues from these sales and the full costs of bringing fertilizers totne farm level. This subsidy has been running about 50 per cent of fullcosts. Government has reduced the subsidy element in West Pakistan thisyear to about 35 percent by raising the price to farmers by slightly morethan Rs. 2 per bag of ammonium sulphate. On the other hand, the price tofarmers in East Pakistan has been kept at the previous level becausefertilizer sales in that Province have been generally slower than in WestPakistan, and Government has decided it is desirable to retain the greaterprice incentive. The proportion of subsidy would also diminish to theextent that the procurement costs of imported or domestically producedfertilizers can be reduced, or the transport and internal distributioncosts can be lowered. The Government of West Pakistan has sought to increaseits imports of nitrogenous fertilizers in the form of urea rather thanammonium sulphate,as such a cost-reducing measure.

149. Fertilizer sales in West Pakistan have grown during the currentyear at a very rapid rate. Further, reports of sales to farmers above thefixed retail price, which were circulating widely in 1965/66, have disap-peared. Because increased use of fertilizers is such a critical part ofthe self-sufficiency program, it would be unfortunate if further increasesin the fixed retail price to farmers (imposed for the purpose of reducingthe subsidy costs to Government) were to inhibit the sales of fertilizers.Subsidy reductions by savings in procurement, transport, storage and handlingcosts fall in a different category, and these should be pursued vigorously.

150. Considering the various factors which are present, the fertilizersituation in both Provinces looks nromisin, for the balance of the ThirdPlan period, and consistent with Pakistan's drive for self-sufficiency infood grains by 1970. There seems iittle doiibt t1hat farmers are increasinTlvinterested in using fertilizers on their crops, although the average levelof appliction is Still extremrely low. To tnke advantage of this favoranhTattitude, Government must insure that supplies reach the farmers on time.There are internal transport and storage problems to overcome, particularlyin West Pakistan. Credit, which is discussed further below, may also bea limiting factor as sales increa,nq although sales to date have been growingwith a declining proportion of credit to support them.

151. Improved Seed. The availability of improved varieties of riceand wheat seed corntitu+es another AMP-- o n+ , ar-.+__+ -.11 very -rdctive, input factor. The timing of this development varies slightlybetTaeen the tum Provr n ces buA +1,,e Po,ubtir fro. -ved ares

weighs heavily in Government plans to achieve self-sufficiency in foodnt no by- 1°70.

15c.~ L 4as naitn srow test-ing r.ew rioe -variet-ies from, several

sources. Varieties supplied by the International Rice Research Institute(IPu.^±/ L) inII th P pp s have recev i..veU UhLA grureatest pUubliciLy, uu Ul±ei1varieties originating in Taiwan and Indonesia also appear promising. The

results from tests of IRRI varieties are still incomplete, having startedonly during the aus season (April-July) of 1966. Yields thus far appearhigher than from local varieties, but the new varieties require largerapplications of fertilizer for best performance. The IRRI varieties arealso neutral with respect to photo-periodicity, which opens possibilitiesfor cropping patterns which are more flexible than those constrained bythe fixed flowering periods which characterize the local varieties now inuse. There are also some indications that the new varieties grow betterunder irrigated conditions than they do under rainfall. Firm recommendationson which varieties to use await further testing and experience, but theinitial results have been sufficiently encouraging that Government hasreleased the seed for general use. Government officials believe that enoughseed will be grown to plant about one million acres by late 1968, andanticipate that if irrigation facilities are available much of this wouldbe grown during the boro season (December-March).

153. The introduction of new varieties of Mexican and Mexi-Pak wheathas proceeded much farther in West Pakistan than new rice in East Pakistan.About 250,000 acres of Mexican varieties (dwarf red wheat) have beenplanted in the 1966/67 rabi season, and this is expected to produce enoughseed to meet the target of two million acres under Mexican wheat in 1967/68.The HIexi-Pak varieties (dwarf white wheat) are about one year behind thisschedule, and seed for large acreages should not become available until1968/69. Average yields on this year's crop are reportedly more thandouble the Provincial average wheat vield from indigenous varieties.Almost all of this is apparently being reserved for seed purposes, and thedistribution is nrimarilv through nrivate sales by farmers.

1 l. Despite the generally favorabhIt- recention given to the Mexican-based varieties, certain problems have emerged from the experience to datewhich should 'h hore in mind when consideringfu+.1re developments. Thenew varieties may require 30 to 50 percent more water than local varieties,and ther m.ay be mnre prone to Plnn.t dii-ses and insctattc They

require more fertilizer than local varieties, although most farmers usingthe new mA-.. ar repor+edly notU4.Ipi 4 t £ + ngeJ th '-il m appliaiorns.

The new wheats also appear to require more phosphatic fertilizer than hadbeen expected, wdhich means that further efforts must be made to increasethe proportion of phosphatic to nitrogenous fertilizers used in WestPal1-;star.. There hasc stl 'knben ~n -o.+ tet f' +.,rprfrne eas he

new varieties have been used almost entirely for seed, and little has beena 1 -- PA. Tr4- s..Up-14- q ahk.w"1ir na,r4-q" .f+v fthe

1D V - 4. 'SJ.. e4 VA.~ i VVVf & WVV|_ A ZW - J *aw j J s u

new seed has been planted on a much larger acreage, localized markets-irpL u IL-J- L4- U1,.L V 4- 4-, -L1 c -l.A ---..J. + ~ jL.~J4,-S~ U- 4. "

which might discourage production in the succeeding year. The decision toper thIL± st i o1 te ne.LlLUU UZI=LIW vaLetj.Les by plr vate sales Jeeen

farmers has probably speeded up the rate of introduction, but the adulter-atLuion W-Li Uh o LI 1LUUcal .var-ieties w-hich rIIIy cLcor,tILy ',L,is ;UL 'so

reduce the yield potential of such mixtures below that for the purevarieties. For the longer r-unr, p-rograms should be in itiatved so thatfarmers can renew their seed stock periodically by having access to seed

- 60 -

supplies of certified quality. This listing of potential problems isnot intended 4.32 -_ n-,Hsh- the s-:,i sf-c arce of'I' vhsrinput devuelopment, but-~LUU .LI1, uL L I~ bLi IJILL k ± iL L,t ~ A ) IJI±l " ±irUL U" 5JJi~ L., LJ4

continuing and coordinated efforts in a variety of related activities arenecessa-r-y if the maxim-um adviatage is to be derived fromf this new oppor-tunity. An effective extension service will be necessary to obtain maximumresa. 'atS 155. Plant Protection. Plant protection is the most disappointingaspect of the input picture. The reported coverage by curative andpreventive protection measures dropped in 1965/66 compared to the lastyear of the Second Plan period, and this reduction occurred mainly inWest Pakistan. Government in West Pakistan has ordered the Departmentof Agriculture to collect 25 percent of the plant protection costs fromfarmers during the current year, but the initial effect of this changeseems to have been a further decline in the acreage covered. The wholeplant protection program needs evaluation. In its present form it iscostly in both financial terms and the burden it imposes on the time ofextension workers in the field, but there is relatively little firmevidence on the value of the service provided. A more effective systemshould be devised, possibly with a large measure of private sector par-ticipation. This could also mean substantial economies to the Government.The adverse impact of such economies on the level of agricultural pro-duction should be much less thar~ for example, the impact of a cost-reducing measure which increases the price of fertilizer to farmers.

156. Credit. Credit for agricultural purposes thus far in the ThirdFive-Year Plan has been below projected levels. Total credit from Govern-ment sources in East Pakistan may have dropped from over Rs. 90 millionin 1964/65 to about Rs. 40 million in 1966/67. Taccavi (provincial govern-ment) loans in West Pakistan are Rs. 13.9 million short of the targetfor the first two years of the Third Plan period. A large part of this isattributable to the financial stringencY which followed the 1965 hostilitieswith India. Taccavi loans are mainly intended for relief in times ofdrought, flood, and similar calamities, but thev have also been used as asupplement to private sources of short term credit. The repayment recordhas been verv poor -- the outstanding obligations total abolut Rse 190 millionin East Pakistan and Rs. 120 million in West Pakistan. The Third Planprojects Taccavi lending for all pakistan at Rs. 120 million, or about thesame as in the Second Plan. This is understandable in light of the dif-ficulties experienced in collections-but the noint remains that thisimportant source of short term credit will be kept at no more than previouslevels at a time when the qqri t'li+m.r1l Aevelnonment. proar-ms are stressinga greatly increased use of agricultural inputs of all kinds.

157. Government has hoped that short term credit needs might be metby a sfJ'enthan.ed and improved cooperative system, and to this end hasallocated Rs. 156 million to cooperatives for the Third Plan period.Howaever, t+he past perfor.m-ance olf 1 cooperatives Ihs 'o- abeern poor, ardthis alternative seems to have sone of the debilities of the Taccavi-ystem. Cooperat-4ve credit Jn 1h46st Pakistan du-ir,ng 4-1-e Secornd Pla., perioLd

soe a dw.v ward trnd anL e c aL . Lo tive Us eL IAIe in b PLov have

showed a downward trend, and the cooperative societies in both Provinces havre

- 61 -

remained weak and relatively ineffective despite numerious reorganizationsand consolidations in recent years. The Agricultural Development Bank (ADB)has issued short term credit, but the recoveries of these loans have beenthe least successful of the ADB's lending operations.

L58. witn the support of an IDA creait, the ADB has become more activein medium and long term lending. Short term loans still constitute aboutone-fourth of ADB lending, most of it in East Pakistan, but the ADB hasprojected a program for the Third Plan period whichwould reduce this pro-portion slightly. By the end of December 1966, the ADB had sanctioned4,523 loans for tubewells and 3,591 loans for farm machinery in West Pakistanunder the IDA credit. The East Pakistan lending activity was much less,but Government has now agreed to permit the import of small capacity low-lift pumps and ADD officials were anticipating an increasing volume ofrequests for loans. ADB loans disbursed for all Pakistan totalled Rs. 109.5million in 1965/66, and disbursals during the first six months of 1966/67totalled Rs. 77.8 million. Present indications are that the IDA credit forfarm machinery and tubewells would be fully utilized during 1967, or wellbefore the expected closing period of June 1968. Government's contributionto ADB share capital in the Third Plan period is being raised to Rs. 175million from the level of Rs. 100 million established for the Second Planperiod. On the whole, the outlook for medium and long term credit to agri-culture is somewhat better than for short term credit, although total Govern-ment credit contributions through all institutional sources still amount toonly a very small fraction of the credit requirements.

Water Development

l9Q. East Pakistan. The maior contribution of irriaation in EastPakistan during the Third Plan period is now expected to come from thelow-lift nump nropram of the EPAn. There were 3.916 low-lift pumps inoperation by EPADC as of February 1967, out of a total stock of 4,200pnmns- ancd these wpre irrigating ahoiit. 225;000 arres tof horo rice. Thisis below the target figure of 4,840 pumps for 1966/67, but still representsnn inc-re2se of 1 anif t 5C00 pnimns over the prvirus vpyear. Of npssibhlvgreater significance for future operations are the changes which may be madein the organization of low-lift purmp use by farmers. A nilot. nroiectcarried out in ten areas during the current year relied on local irri-cgation commite tJi-.o sPtablsh1Jh uiahle i-r-rigatinn iinitF. to onprate anrd

finance low-lift pump irrigation. The apparent success of these com-m; + )Ic: "nrla4-e Pi 1v.+.hnw tAi ce,iic n on- +1i vn r .n+ o nnr+. .+.nq

to encourage wider participation by such groups. The general pattern ofproabkle a e d,

4- ev.4-eloena+ 4-nir clude n v-crnc am nu^l4 rn+ ' yk irri-

fr/ 13 L'O LJ.~.U WLLV U~ ~ %,V l.-JAJ*IL~*C V .LUUJ%A-.d.I - ta .3 V-I-I -S ---*J.4. .%l1%a1 L4j -..

gation committees, farmer-operation of the pumps after training by EPADC,es4-,b-14 -1,a,-4- -P -okh-,.tenar.ce 1- ViATts b..4- a 4t + sites cnt

UC L .±UJ~ .L-QLIU U 1 J..L Vdi. ±II L L L gJ~ U4S LI U . Y I Jj.L.LLtJ%.WlJ ~4U V... ~ WVVI.UI.v.

to the pumps, and coordination with the Rural Works Program to improve the-Lrrigation ch'arLLe'ls ar,,dA dr-ainage facilities -Vfiere necessary. This focusu onL

local participation could remove much of the organizational responsibilityfuromni bhie frADJUU -- a- -aUiilU vy--wich has been one of the facto1rs -LUiU-

ing the rate of growth in low-lift pump irrigation by that agency. Annualpump rentals should also increase the efficiency of pump use, for the pumpSthus become available for both the boro and aus seasons. On the strength of

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tb.i emerging change in orientation, the EPADC is planing to add 3,000pumps in 1967/68. The target for the Third Plan period remains unchangedat present at -12,0 pumps in operation by 1969/70, but if the shift togreater local participation proves workable to the extent now anticipated,this target may be revised upward.

160. The projects of the East Pakistan Water and Power DevelopmentAuthority (EfJAPDA) have thus far had relatively little effect on agri-cultural production, and the coverage of the projects remains quitelimited. ERJlAPDA tubewells and low-lift pumps were irrigating about2C,00O acres in 1967, and irrigated area within the Ganges-Kobadak proj-ect has remained at about 40,000 acres since 1964/65. This latter proj-ect is still not being operated as designed. EPWAPDA plans to initiateanother study of the project to determine the maximum efficiency at whichit can be operated. The Dacca-Narayanganj-Demra (IDA) project is current-ly irrigating only about 1,200 acres on a pilot project basis, but theremaining work on the project is scheduled for completion by June 1967.The Coastal Embankments are still under construction, but EPWAPDA reportsthat about 1.2 million acres are already receiving protection from salinetidal water. Benchmark studies are under way to determine the economicbenefits of the project but no firm data are yet available to permit anevaluation. Construction of the embankments for the Chandpur project hadjust been started by early 1967. This project had been earlier reducedin size and scope by eliminating most of the irrigation, and at the timeof the mission visit to Pakistan the future status of the remaining por-tion of the project was being actively discussed within Government. Wjorkon the Brahmaputra Flood Embankment project is continuing, but construc-tion is not scheduled for completion before 1968/69.

161. The overall imnression of EFPWAPDA's performance to date is notsatisfactory. The pace of construction has been slow on the whole, withdifficulties from several sources -- sioness in land acquisition, re=vision of original designs, delays in tendering contracts, poor adminis-tration of nroniects, destruction of partially co-'e'ed t-orks by naturalcalamities. Moreover, the implementation of projects once the construc-tion was whollvy or partiallv, completed has not been impressive. Theagricultural aspects of projects seem to have been neglected in some cases.In the GCnges-Wobadak project, for exampl e, irrigatio. was not provided tobring much increase in rabi cultivation during the dry winter months. Outof 560 EPWAPDA 1o--1rt p -mps .L y ;st 'led, or'i-J 314 aret-_in working order, and some of these are idle because of stream siltation.Respor.sibi+vy for "ter.sior. A - o i, troduce ilrrgation procedures and newcropping patterns to farmers has not been clearly established, and coordina-tion with other agencies deaLlng with agricultuure has beeni poor. Reasonssuch as these have led to the new emphasis on the role to be played by the&PADC low-lift pumps in futur-e irrigation developmnent. iiot only have tnesepumps been placed in operation more quickly than EFWAIPDA projects, but theprospects for launching coordinated programS to organize tne farmers forirrigation appear brighter. The EPADC pumps have also concentrated on boroirrigation, which has generally meant adding to the acreage under cultiva-tion and thereby bringing a more direct impact on agricultural production.

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162. West Pakistan. Water resource development in West Pakistannas been prniarily a public sector responsibility, but during the SecondPlan period the private sector contribution became increasingly important.This aspect has continued during the current year, and private sectortubewell installation has been given a prominent role in the planning forfood grain self-sufficiency. Unofficial estimates indicate that 8,000wells were installed during 1965/66, and Government believes the numberin 1966j67 is even higher. The total number of private tuTbewells inoperation by mid-1966 may have been nearly 40,000 wells. Revised projectionsfor the Third Plan now call for installation of 40,000 private wells duringthe Plan period, of which about 8,000 would be replacements. The 32,000new wells are expected to add 6 million acre feet (MAF) to Provincial watersupplies by 1969/70. In view of the private sector performance during thefirst two years of the Third Plan period, this expectation seems reasonableprovided public sector programs do not discourage private initiative.Government has taken a move in this direction by a recent policy decisionrecommending the withholding of public projects from areas where privatetubewell potential is greatest, and by continuing an Agriculture Departmentprogram which drills private wells under contractual terms that include somemeasure of subsidy. The ADB lending activity for tubewell installation hasalready been noted in the earlier discussion of credit.

163. Public sector tubewell installation is carried out by the WestPakistan Water and Power Development Authority (WPWIAPDA) and the IrrigationDepartment. In addition, the WPADC installs a small number of wells inits project areas. The WPWAPDA tubewell program for the Third Plan periodis based on development of seven Salinity Control and Reclamation Projects(SCARP). As recently revised, this calls for installation and electrifi-cation of 7,855 tubewells by 1969/70, adding about 8 MAF of irrieation water.Actual performance thus far has been electrification of 138 wells in 1965/66and about 250 wells during the first nine months of 1966/67. This leaves7,467 wells to be electrified during the balance of the Third Plan periodunder the revised nroaram; or an average of nearly 2;500 ner year. Althouehthe tubewell electrification program has been given priority during 1966/67,*nd the Planning and Development Depart-m reports that there is nofinancial constraint on this program, it is unlikely that the pace ofelectrification can be increased to the point where these targets areachieved. In any event, wells electrified during 1969/70 would not beoperating early enough to make a major -on tribl-tion to the food grainproduction in that year. Considerations such as these would tend tosupport the expectation of a shortfall in the installations u-nder 1AW.APDAIstubewell program, and there would certainly be a shortfall in the additionalrriigation water from lTx1JAPDA tubewells relative t t 8 -MA rjete by

the end of the Third Plan period. Even under the revised phasing of theprogr,-, over 3,000 wells ae scheduled to be electrified in the fnal yearof the Third Plan period, and should not be counted on to support agri-c - '"C production in 16/0

.L04. Th.e Irrigatluion Dc-par-r,ent; tube-well prograr., c 'l S Uor inst L±L'1aLL5.Lati

of 3,026 tubewells during the Third Plan period, producing an additional2 MAE of irrigation water. *Most of these Irrigation Department wells are

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scheduled to go into non-perennial areas of existing canal commands, andtheir locantion has been coorinated ri.h !A,W.UPDA riral electrificatisn plans.The bulk of these, or 2,626, are to be installed in the final three yearsof the Plan period. The tubaewels :-e nf r mi e c11 apa cr'it tnr tnhn s iisedby WPWAPDA in its SCARP projects, and the initial cropping intensity

*j.. V ti.Ji- -r ,,ore -.., The contribution to vagr c..t... production

would depend on how rapidly the wells can be electrified, but even if thein vla.U40ir, andi el.ect.rificat.ion. 41ci arLe00 r .t I1 asL now PIJned

the tubewells due to be installed in 1969/70 (925 wells) would not beoperating1r inL Ut,me UV Ctaid agrit, '>-l C. produuctio. U;n C tha Jy eC. As in t1hecase of WPWAPDA program, the additional irrigation water from these Depart-meintal(" wells s lSely to be less t4h a 4e 2 f -wJhich '-as bDeen included inthe projections.

165. Surface water availability is subject to offsetting factors.vWater from the three eastern rivers is due to be curtailed by India in1970, while full replacement under the Indus Basin Program is not expectedbefore 1972. On the other hand, the hangla Reservoir is being filledduring the current year and this should provide adequate supplies forpresent rabi season requirements. The closing of some canals during1966/67 in order to fill the lNangla Reservoir curtailed surface suppliesin certain areas during this year of drought, and also forced the closingof three hydroelectric stations. This loss of power, together with powerlosses resulting from the breakdown of two generators at the Multan plant,affected private and public tubewell operations by forcing partial shutdownsduring the rabi season. The net effect of these factors is that Governmentanticipates an increase in surface supplies of only 1 PAF by 1969/70. Theofficial estimates of additional irrigation water expected from all sourcesare summarized in the following table.

Table 24

Additional wateravailable by 1969/70

Source (I4AF) Percent of Total

WPWAPDA (SCARP projects) 8 47.1

Irrigation Department Tubewells 2 l1.8

Surface Irrigation 1 5.8

Private Tubewells 6 35.3

Total: 17 100.0

ADproximately 5.46 MAF of this additional water is assumed to be usedfor wheat production on an additional 1.5 million irrigated acres devotedto this crop by 1969/70. Efforts to increase wheat nroduction woiffd beconcentrated in the SCARP areas, where the availability of water underthese projections is greatest,

165. A re vJew has -recently1 been cor.pleted of con-sultnts' find4r.g* £~~~ .L ~~ V .L~~~JW L±J . L,Q &JUU± . AL Iq. W..LL J. .AI. L taiL .I

concerning the development of water and power resources of West Pakistan.A reportlu huas bLeern issued -wh4ich is buased" on thte-se fInd1irMs60, ar,d whLichalso contains analyses by a Bank Group under the direction of Dr. Pieter

T 4 -1.4~~~~1.. ~ ~ u -DI I .f1r ILI -1 a-ljLie.tiJnckr-, 111&ecutive Dlirector, sR.Te conicliusions and' recor,nm,endati-onsof the final draft were to be discussed with Government officials inApril 1967. Because of its comprehensive coverage and detailed analy-sisthe Study should provide a firm base for planning future water and powerdevelopment and identifying projects and programs which would promoteagricultural development in the Province.

CHAPTER 7

INDUSTRY

167. Similar to agriculture, the central theme of industrial policy isnow to accomplish the planned increase in current output with minimum in-vestment and with due attention to future import liability. Last year theBank examined the Third Plan's industrial program (Report No. AS-113a,June 15, 1966). This chapter will consider the growth of industrial produc-tion during the first eighteen months of the Third Plan, the progress ofinvestment and the modification of the program.

Industrial Output

168. In the first year of the Third Plan, there was a fall of 50 per-cent in industrial growth nompared to the average durine the Second Plan.The reasons for this are discussed in Chapter 1. The recovery of about10 nprr'An+. n.- rnf'mnnrvPd Si;+.h 1Q6C8/t6 showni hv t.h nrPliminarv indpx of in-dustrial production in the first quarter of 1966/67 is due partly tomprove.m.ent in raw material imnprts and pa'1.rt toI in in thp nrodunc-

tion of certain major industries processing local raw materials, mainlyill+ QVCrn ,-cmn"Y+ Mr" 1 "+I nvv jrrrQjute, sugar, ce-en+ snd leath-er ------

169. Th I e overall growtDh of ir,dustri31 product-on in- 4h4-rescl.LU17. LL JV~ L .VJ t,L 'JA. trVi .L. ".L~ V,L-4.' A.LJ WLA ~industry sector during 1°66/67 is expected to be around 9 percent, compared

+aJ Uaut6.2 peLr ' L7n V1965 . ShLoUA.U tLIe upp.ly Uo. radW .,materi.La.Ls to

industry be accelerated still further in the next few months and the powersituation be improved by April/nay, it is expected that tne growth rate inlarge-scale industries can be stepped up to the average of 15 percenta chieved during tne Second Plan.

The following data summarize the performance of the industrialsector:

Growth Rate EstimateSecond Plan 1965/66 1966/67

Manufacturing 10.0% 5.o% 6.9%

Large scale (150.) (6.2) (9.0)Small scale ( 2.6) (2.6) (2.6)

170. The recent $25 million IDA credit for the import of industrialmaterials, part and components for selected capital goods industries willpermit them to increase production in 1966/67 and in early 1967/68 on theaverage by one-third, compared with levels reached in the recent past.

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171 Accord;ng to the offici f1 evrts of mar.facture wnl1expand 30 percent between 1965/66 and 1966/67 and this will be the main causefor an overall -------- of about 10 perce4n inT Irc teg Q

account for about 45 percent of this but exports of miscellaneous manufacturesare xp ueted to expardl bly ,0 percen'L as between, 'these b-Wo JytearsL, increasing as

a portion of total exports from 6.9 to 10.7 percent.

Utilization of Capacity

172. The figures in the following table indicate the disparities betweenthe utl ization of industrial capacity in different categories of ilndustry in1965.

Table 25

Capacity Utilization - 1965

(In Percent)

West Pakistan

Total All Industries 74Consumer Goods 72Intermediate Goods 80 (69)1/Investment Goods 54

East Pakistan

Total All Industries 77Consumer Goods 78Intermediate Goods 77Investment Goods 58

1/ Exclusive of cotton ginning.Source: Capacity Utilization Survey, 1965 (Central

Statistical Office).

173. These data need to be used with care as is indicated in the footnotebelow-i/. Furthermore, in the particular industries which rely largely on

1/ Apart from the difficulty of defining capacity utilization which can beunderstood both from the technical and economic standpoints and thepeculiar conditions of operation of some industries such as those proces-sing raw material subject to seasonal fluctuations. it should be borne inmind that in the case of the 1965 survey carried out in Pakistan, theinformation was sought in the maioritv of cases on a single shift basis.This means that the survey does not reflect the full potential of outputwhich could flow from th Gapital installed1l Fnrtfh.rmnore the survey doesnot attempt to assess the situation of firms employing less than twentyutborkers and not usna powear. sre ofic reaserve. the of the surveymust be treated with a great measure of reserve.

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imported materials, the utilization ratios were probably considerably lowerthan the group averages given in the table. The low nernenteags for epit-algoods industries partly reflect the lack of imported materials. While up-to-date information is lacking, the ntilizatinn of indust-rial reapaity proahbhlimproved somewhat in 1966/67 but for import-using industries it is doubtfulwhp±hp$r i+. iw mcinh lacrger +.than i+ Twanc befoe th irtr%+ liberalization r% omwas adopted in 1964 or around 60-65 percent of rated one-shift capacity. Thelack of spare part aso m,.ay -e-c ope ions. The ndey oof capital equipment used in the country restrict opportunities for building

tp iner+ore or prod-cing; spOarVe parts iLn PKistLOUsn "inasUch;L aso produuucionruns would be short.

Investment in the Private Sector

174. As was described in last year's report (AS-113a), the vehicle bywhich the Government guides private industrial investment is the IndustrialInvestment Schedule (IIS). Rs. 10,880 million was the amount indicated in theCiomprehensive IIo for the Tnird rlan. Of tnis, Rs. 2,383 million or 22 per-cent was sanctioned during the first eighteen months (Appendix table 28 ).This table gives a figure of Rs. 750 million for the actual amount utilizedbut this refers only to disbursements of financial institutions and does notcover entrepreneurs! investments from other sources, including their own re-sources which have not been estimated. Also, it refers mainly to disburse-ments on sanctions granted prior to the Third Plan.

17:5. The investment pattern in the first year of the Third Plan has beenalmost identical with that followed throughout the Second Plan period. Themost favored choices of the private investors are industries having high andimmediate profitability such as textiles, chemicals and food products. Up tonow, private entrepreneurs have not shown much interest in industries produc-ing agricultural implements, machinery items, basic chemicals and processingmineral products. The private sector has also been slow in investing in metalproducts and electrical appliances which is attributed to the excess installedcapacity and uncertainty about imports of raw materials.

176. As a consequence of the greater reliance on the private sector aswell as of the reorientation of the industrial strategy towards quicker yield-ing projects, the comprehensive Industrial Investment Schedule is being modi-fied. The emphasis of the new schedule which will be finalized within threemonths will be on linking future industrial investments to import liabilitiesand the country's export effort. No further sanctions will be given to someindustries where the original Third Plan allocation has been entirely taken up.

177. The recent lending activities of the principal financial institu-tions serving the private sector are in Appendix tables 26 and 27.

178. Industrial Develonment Bank of Pakistan (TDRP) A slnww.nt.n in. n1Aapplications to IDBP occurred last year. Limitations wiere set by the reduceaavailabilitv of foreign loan funds. Some dplays in TTRPIq npTen+ionnc n-r mlsnnow being caused by the revision of the Industrial Investment Schedule. Allo-cations to East Pakistan havre inc-reased recently in relation to West Paist+anand the ratio is now 46:54.

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179. The joint financing of jute mills by IDBP and the East PakistanIndustrial Development Corporation (EPIDC) appears to be promising, althoughno final assessment can yet be made. So far, 19 mills have been financedunder this special arrangement, of which 11 are already in operation and theremaining are near completion. Private financial participation amounts toless than 20 percent. In future no more direct IDBP financing of jute millsoutside EPIDC is contemplated.

180. Pakistan Industrial Credit and Investment Corporation (PICIC). In1966 PICIC sanctioned 72 loans totalling Rs. 275.9 million of foreign exchange.Investors' counterpart totalled over Rs. 300 million. The share of cottontextiles and jute products still remains substantial, accounting for 72 percentof total loans. For the first time the share of East Pakistan in PICIC's loanswas higher than that of West Pakistan. This is due to the heavy commitment tothe financing of jute mills which alone accounted for about 90 percent of loanssanctioned in the East Wing.

181. Small Industrv Credit. There are two institutions concerned withsmall industries, i.e., the West Pakistan Small Industries Corporation (WPSIC)and an institution of the same name in East Pakistan (EPSIC'. Bv the end ofthe third quarter of 1967 all the IDA credit of $6.5 million to WPSIC willhave been disbhrse.d, before the e-cnirv date of Dlecrember '1; - 1967. Then some225 small factories will be under construction or already in operation at theinduqstrial estates at Gunjranwla andi Sialkot. As of mid-lQ6A out of Rs. hLomillion provided in the Investment Schedule for Small Industry in East Pakistanduring the Tnhdird Plan, nnlyr Rs. 7.9 million or lecs +.han 9 noercon+ were c-nnr_

tioned. Here again the major difficulty is lack of foreign exchange for buyingMn),J--- +I,-th +-4-l reurw. f -*w4CIc is -stm-t-d at -abu s. 200LuA.n,..u,~ J , V& UL A' a.. J._ a. ~I*JL , J W L ..L. " LI A. L ' L tj VJhAO- VLA. I' OJI A U £Lt*L .

million.

Public Sector

182. The original Plan allocation of Rs. 4,470 million has been reducedto Rs. 3,513 million, i.e., a reduction of 21.4 percent. However, the sanc-tioning of private sector investment in the industrial branches affected bytheU cusi pbi etr a'lcsin i9LU1 -L be) ceae.thepesnULLUO ,LU LLit PUJULU±kU se -uu L UUU1 ~L~ ~ ~ ±I J~I

shares for the two sectors are: (In millions of runees)

Original Revised

Public 4,470 (35%) 3,513 (27,%)

Private 8,300 (65%) 9,257 (73%)

Total: 12,770 12,770

183. Out of the total public sector program of Rs. 3,513 million, aboutRs. 750 million are for industries devoted entirely to agricultural inputssuch as fertilizers, insecticides, power tillers, irrigation pumps, smallagricultural tools and implements. About Rs. 700 million is for food proces-sing industries.

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18h. Table 13 in the statistical appendix shows the revised allocationof public funds for the industrial sector. In both absolute and relativeterms the largest reductions took place in the paper and paper productsindustries and the cement industry.

185. Last year's mission felt that some of the industries planned forthe public sector might not be economically justified and some would overlapexisting private sector plants or establishments that could be set up in thatsector on a more economical basis. This was particularly true of the heavymechanical complex in West Pakistan and the Machine Tool Plant in EastPakistan. Neither of these ventures has been started as vet, though a credithas been obtained from Russia for the mechanical complex. Apparently, theGovernment has acrepted thea recommendation- made in last. yearls report that aforeign partner be obtained for these and other large and complex public sec-tor oroieets- We anre also advised+ that. +the nPe-ronhPmirn1 romnplex to producesynthetic fibers that was planned for WVest Pakistan is being postponed.

186. The fertilizer industry, originally to be largely in the publicsector; has been substantially shifted to the private. Three large privatesector projects are now underway or at various stages of negotiation in WestPaki stan Tn East Pakist-an, the expnnsno of +his indUstJr iS s+ill plannedto be mainly in the public sector, though the private sector is not excluded.

187. In steel, the Chittagong Plant (150,000 tons a year) in the publicsector will be comissioned in N5y j967, a-d its exp-nsion to 2 0ff00n tonswill soon be started. No decision has been taken as regards the Karachisteel r%l^"- A`h c sto' be operated boy a private growup. The Go-ovrern,-,er.t hastj-' .*U *.- ~Xj VY.U~L" Lv 'J1 J .QU4 %AJ a J1 ~L~EL~~. ±.L~ JUL Vu LI~LU Li-

carried out new feasibility studies for the production of steel based ondo.estic Kalabagh iroon ore (32 perce-- content- and the results are rerledto be favorable, but the whole subject of steel production in West Pakistan isstll aduer stuuy.

188. The rmid ion was told that public sector industries now in operationhave not been seriously affected by the import stringency, since they aremostly based on domestic materials. The west Pakistan Industrial DevelopmentCorporation now reports a return of 5 to 6 percent on its investments. Eventhe Karachi Shipyard is beginning to pay, since it now is building two shipswith credits from Yugoslavia.

Policies Affecting Industry

189. Import and foreign trade policies are discussed in Chapter 4 andAnnex I. There have been few other important changes in policies affectingindustry. No changes were made in the tax holidays provisions for new indus-trial ventures described in the 1966 report (AS-113a), which take the form oftotal tax exemption from the company income tax on profits earned during agiven period of time, presently varying from two to six years, according todefined geographic zones. Thus, the most underdeveloped regions receive thelongest tax holiday while Karachi and other industrial centers receive theshortest.

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190. A "eanacitv tax" has been anplied to certain industries notdependent on imported materials (sugar, soda ash and cement) and may beexpanded tn other domestic material-bhasd i-ndustries_ T. replaces thepresent excise duty on these industries and is an excise levy based on+he difference between actuaIl an nl than ininimru.m levels of productionwhich are determined for each plant. Thus, production above the minimumlevel is c-emp-t from t-,r tI-axre-an yr sb.ortfa" bl bte 4 he m44nimunm 4csubject to the tax. The objective of the tax is twofold: to stimulateh,igh,er producti- 4.on and t o raierevenues. Tast4- --ye's I- y was nn+

favorable to this tax but perhaps its worst shortcomings have been avoideduy dtp.Lxy.Uig ,. L U ULLX J W UUI1LV LS.L; li X dJ'UdOU .LU ULI ±LL -I

191. A word more about tariII policy may be in order. The missiorl wasagain struclc with the fact that those sponsoring heavy industry are lookingto increased tariffs or outright ban on imports. It is true that Pakistan'stariff structure still reflects the objectives of early industrialization,i.e., to foster import substitution in consumer goods. in the 1966 report,a review of the tariffs structure was made showing that the ranges of theaverage rates of duty were as follows:

Consumption goods 56 to 144 percent

Raw materials for consumption goods 31 to 61 percent

Raw materials for capital goods 32 to 55 percent

Capital goods (consumer durables 91 percent(machinery and equipment 22 percent

192. Of course, value added may be a much lower ratio of gross valueof output for capital goods and,therefore, the amount of production on thebasis of such value added may be substantial even if nominal tariff ratesare low. Studies on this subject are in progress in Pakistan.

193. Last year's mission suggested that protection (including outrightbanning as in the case of cotton textiles) in the consumer goods industriesmight be reduced, and import substitution encouraged by raising dutiesselectively in other fields such as textile machinery and electrical appli-ances. This has not yet been done. This Year's mission was informed thatthe Planning Commission is engaged in firming up the previous estimates ofimport substitution, which were presented in the 1966 report, so as toprovide a better assessment of the impact of the industrialization program onthe balanne of navvments and to nrovide better guidanne in the selection ofindustries. Perhaps when this is done, a more definitive tariff policy canbe worked ontl- The Tiriff nommission is much in nreed of strengthening on eco-nomic problems and seems to operate on a purely ad hoc basis. There is notenouth coordination bew+een the Tariffs rommissionn and the Tnvestment Promo-tion Bureau, which operates the investment sanctioning system.

19h. We were again impressed with the fact that real wages are continuingto fall in Pakistan. This is likelv to lead to more industrial disnutes un-less rectified.

rtTAtr sn aVjLA%rLF.JLt U

OTHER SECTORS

Transport and Communications

195. One of the features of the revised Plan is the emphasis placedon Transport and Communications. It is the only sector showing anabsolute increase compared to the original program. The experience duringthe hostilities with India highlighted the importance of the sector butschemes of purely strategic value are said not to be included in theprogram outlined below. Allocations are increased for railways, civilaviation and telecommunication, with particular emphasis on the inter-wing communication system.

Table 26

Transport and CommunicationsPublic Sector Program(Millions of Rupees)

Original Percent Revised Percent Change inSnhcqetnr Pl nn Of Total PI an nf Tnt-0 Pereent

Transport 2,110 32.7 l,994 29.7 -5.5Ri;lways 2,310 3. 7 2' 316 .0 + 4.5Ports 220 3.4 198 2.9 -10.2Shipping 2e o.14 2e 0._4 =

IWTA 310 4.8 275 4.1 -11.4Telegraph1 andTelephone 890 13.8 1,151 17.2 +29.3

nJ.&.1- -1-AULIU.L-

(Tourism, Civil 595 9.2 653 9.7 + 9.7-Avia t i o Tel XPeILv-7isDior.,

etc.)

Total 6,46o 100.0 6,711 100.0 + 3.9

Source: Planning Commission.

196. Roads. With the increasing role of road transport, road develop-ment has become more and more important. The emphasis is on the imple-mentation of ongoing schemes and projects, including improvement andrehabilitation of existing roads and bridges. Road transport has increasedin particular since 1965 as part of the imported foodgrain was transportedand distributed by trucks. Roads will also play an important role instepping up fertilizer distribution.

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197. In West Pakistan. the phvsieal target of more than 'O0 miles ofadditional new and improved roads by the end of the Third Plan may beachieved. Imnpementation of ongoing project. Js nrogressing on nn heule.Three major bridges over the Ravi, Jhelum and Sutlej, are ahead of target.Regarding the lon_-rn nroiet. of the mTnni K hhiPeah"r hw-,rthe future center line of West Pakistan's road system, tenders have beeninvited for the IDA-financed Karachi-Hyterabad section, while the IT.S.A.I.D.-financed Multan-Lahore section is under study by consultants.

198. In East Pakistan, the implementation of the road program isbehind schedulA e- and it is d4obfu i. t -, 4e he Third P _lan target ofantCher1,000 miles of new and upgraded roads (added to the approximately2,00 --4'e sy-stem ot^ paved roads at the end of 4the SzeconA P'&N ^-- be.j '.,'J-y wFwS. 114 .% %.JAL U UL, AI~ WiJ. ULL ~ %JA .L I LCU.4I ~O.&j

accomplished. Only about one-fifth of the revised Rs. 1,020 millionThiArdA PlDar. alilocation Ifor- r0ads in KEatb PLkt sbudl r,1L.Y U bejl spen by te enduof 1966/67. Construction of the important Dacca-Chittagong highway has

'L. _3 _ --- A _ i _ - _ ~ j m - 1_ _ __ _ _ -L X __ A __ S 1- - - _ _ _ -' _O 4ueen UdelayeU. The poject has biee patIly reVLseu anIU ULthe Uor'Lgial cUos

estimates have now increased from Rs. 212 million to Rs. 333 million.ThIe auu±i,iuonial iZaicin..1g has yet to be provi.ada. Unu± f-uL-L. ilanu1Uing

can be secured, it is now intended to proceed with the construction ofcertain sections of the highway. Completion of this link betweeni thetwo major cities and commercial centers is of vital importance for thedevelopment of East Pakistan:s transport system. About one-third of thegoods imported via the Chittagong Port are cleared and distributed byroad and volume will increase with new industries coming up in the area.The new steel plant at Chittagong will put a further strain on the exist-ing transport capacity.

199. Rail. The progress of the railway program, which accounts formore than one-third of the total sector allocation, is satisfactory inboth Provinces. Emphasis is being placed on improvements, modernizationand certain extensions of the existing track system. In West Pakistan,the first electrification project covering 180 miles of track shouldbe completed by 1969. Due to limited allocations certain bottleneckshave arisen, in the capacity of rolling stock and of locomotive power inparticular, the procurement of which is falling substantially short ofthe assessed requirements.

200. In spite of the competition from the increase in road trans-port, the need for more rail transport facilities in West Pakistan isstill growing and demand stays ahead of capacity.

201. In East Pakistan among the new schemes, the proposed double-tracking of the Dacca-Chittagong rail link is the most important. Itis now proceeding in stages with priority for the lines near Dacca andChittagong. Progress appears to be slow. There is a definite need foradditional rail transport between the two centers. About two-thirds ofthe total volume of imported goods landed at the Port of Chittagong arenow carried by rail which is about the limit at present. Aside from theincreasing need for additional transport capacities by new industriescoming up in the area, in particular the new steel plant, a furtherexpansion of the port capacity as such very much depends on a comple-mentary expansion of land transport.

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202L. Po-t s. Tn11 VIeW o0 iIJ. CrVwdleU si-UUd.U±UL1 du bo Uith Lth mflatIJ

harbors, Karachi in West Pakistan and Chittagong in East Pakistan, portdevelopment is an urgent mater-. Preliinary stud4 es for a second portin West Pakistan with one-million-ton initial capacity have been com-pleted. It is now intended to start operation oI the new port possiblybefore the end of the current Plan period. Handling capacity at thePort of Chittagong, which is now near congestion, wifi oe increased byabout two-thirds to 6.5 million tons a year during the current Planperiod, but so far, little progress has been made. Increase in theport's capacity also has to be accompanied by concurrent improvementsin land transport connections. Funds have been all ocated in the revisedPlan for Chalna, the main port for exports in East Pakistan, but slowprogress is being made in improving the site and replacing the anchorageby a permanent port.

203. Thus, the overall port situation in Pakistan has not improvedmuch during the last year.

204. Ships. The total tonnage of Pakistan's mercantile fleet shouldreach 1 million in 1970 by adding 38 ships to the existing fleet duringthe current Plan period to a total of 98. Bilateral agreements for theprocurement of 7 new ships have already been signed; others are in theprocess of negotiation.

205. Telecommunication. High priority has been given to telecommuni-cation in the revised Plan allocation. Aside from general improvements,modernization and extensions of the telecommunication lines within thetwo Provinces, particular emphasis is being placed on improving inter-wing communication. As a short-term solution, HF radio installations arebeing extended. Earlier studies of a submarine cable connection betweenthe two Provinces are being reconsidered in view of recent development ofsatellite communication and this possibly is now being studied.

206. A UNDP sponsored telecommunications survev assessing Pakistan'sfuture requirements and including recommendations for a realistic andjustified expansion program to meet these needs is expected to be com-pleted by the end of 1967 or beginning of 1968. The outcome of this studymav still have some impact on the formulation and scope of the telecommuni-cations program during the remaining period of the current Plan.

Education and Training

207. The overall public sector allocations for Education and Traininghave been reduced hv 13 nercpnt eomn-ared to the original program- Itappears doubtful whether the original basic objectives for the ThirdPlanr, siuih as hrn=ed1nino the bas of m-imA7trv Pe,ctinn anid inGresing

technical and vocational training (which are claimed to be maintained),can still be achieved. The sharpest cuts, particularly in respect ofWest Pakistan's allocations, have been made in such crucial sectors as

- 75 -

J.L .. IO.LJ I.AtA% . JJLJ.L kJ U J.L% ,UAIJJ 04.L;A UU ,L V.L VACJ4. d L4ArI.L % ~L4. jJIZL,IUILU/*

These cuts appear to be contrary to the proclaimed Third Plan policyd.i-L ected twardUs a welJ'L-balanced and intU egrated expa1nsion a'L a'"' .Levelsof education requiring heavy investment at the primary level and specialefort-s in trainLng mUore E,d bet'er teachers. AlthougL Ui is claimedthat the physical targets of the program are still being maintained bydrastically ucouuirL-zzng trhe utilization of existing faciitiTes, thecurtailment may have an adverse effect on the quality of education.-Minor cuts have been made in the ailocations for secondary and tech-nical education and the allocation for colleges shows an increase ofabout 10 percent, which reflects the priority given to these sectors.

208. The followfing table summarizes the changes in tne program bymain sectors compared to the original Plan:

Table 27

Education and TrainingPublic Sector Allocations 1965-1970

(Millions of Rupees)

Original % of Revised % of ChangeSubsector Plan Total Plan Total in %

Primary Education 520 19.1 319 13.4 -38.7Secondary Education 615 22.5 557 23.5 -9.4Teacher Training 138 5.1 81 3.4 -41.3Technical Education 637 23.3 616 26.0 -3.3Colleges 105 3.8 116 4.9 +10.5UnivPritqiM.q and- Scholarshins r21 192 J4i47 18.8 -14.7Other 191 7.0 238 10.0 +24.6

Total 2,730 100.0 2,374 100.0 -13.0

niudlwi aniu Famil.y Palri-nlinp1

s)no 'Tir;+h;n +~hQ -",nri CQ7nel crn ntlll +h nvna"_nm_ r.hih h_qcz¢reduced by 12 percent compared to the original Plan target, great emphasishas bee.n placed on Famiyr P anning, the allocation for which has been raisedby 65 percent. This reflects the determined efforts being made in this fieldin th. face of the I nercen-. a yr,A growth of .nn0+A.nn

210. Besides the distribution of conventional contraceptives, goodprogress has been made also in IUD insertions. By the end of the firstyear three-fourths of the scheme's physical targets were fulfilled despitethe delay at the beginning caused by the hostilities with India. Hiringand training of personnel, which is planned to total more than 55,000 by1969/70, is proceeding satisfactorily.

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211. The f911o0ting breakdown of the Family Planning budget intomain components indicates the distribution of costs by various items andshowxs the cost of administration and personnel as well aSt rtl. trp1vhigh costs of contraceptives:

Table 28

Family Planning Budget1y- Mir.4 T+ems inPe.er+.+

.ftWIi±r4LL.L -C %.L c~Vt' : V±;d~i d..Ue

and IncentivesUontraceptiveS2Jeeps, Mobile Units and Equipment 7Publicity 4Urban Clinics 2

Total: 100

1/ Based on the original Plan allocation.Source: Ohlin, G., Population. ontrol and

Economic Development, OECD, DevelopmentCentre Studies No. ,R Paris, September1966.

212. Although it may still be doubtful at this stage whether theThird Plan target of reducing the birth rate by about 20 percent by 1970will be achieved, a firm administrative and organizational framework hasbeen established for effective population control. The use of incentivesseems promising.

213. The following table summarizes the original and revised public,-ieaith program:

Table 29

Public Sector Health Program 1965-1970(Millions of Rupees)

Original % of Revised 5'0 of ChangeSubsector Plan Total Plan Total in %

Nrinlnrin RrintAi-nn and -nrl 33X7 3'nn 2 -32T.B. Control

Family Pla.nning 166 12.5 274 23.3 +65.LRural Health Centers and 356 26.8 286 2h.4 -19.7

Hzospital BedsMedical Education & Training 263 19.8 256 21.8 -2.7Other,-- 94 7.2 59 CIO cf r)1 5 =8

Total: 1,330 100.0 l,175 100.0 -11.7

Source: Planning Commission.

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Rural Works Program

21h. The original tnrget of Rs. 2.q00 million for the works programhas been scaled down by about 27 percent. This reflects the rupee strin-gency- Priori+y is now being oiven t+n smnll Ioc1 nroniCts designed toincrease agricultural production.

215. In West Pakistan, only Rs. 170 million is expected to be spentd1uring thne first two years of thne PDl on -rdki h miioun+.t +o 28 npercn+. of

the revised Rs. 600 million five-year target. 1965/66 expenditures under+he- -uI progr4I u.t toj Rs. 12.0 i.i o O, whle- +hI 1966/67 allocation has

been cut almost by half to Rs. 50 million, of which only Rs. 20 millionwas re.LeasedU L.) IhLe bLr- of 1967. In 197/ a p- -gr. - - not hiher

than Rs. 100 million is expected.

216. The division of schemes under the works program in the Provinceis about 50 percernl for roads, 25 percernt for water developmItent and 25percent for miscellaneous other projects. Local contributions vary between15 percent and 30 percent of the costs which makes the implemnentation ofsmall projects cheaper in terms of Plan resources under this program thanwhen carried out by other government agencies, e.g., by the ADC.

217. In East Pakistan, Rs. 120 million have been allocated for therural works program in 1965/66 and Rs. 150 million in 1966/67. However,onmly part of this year's appropriation has been released so far.

Physical Planning and Housing, Social WJelfare, Manpower and Labor

218. Public allocations for each of these sectors have been cut inthe revised Plan compared to the original program as can be seen from thesummary table below.

Table 30

Public Sector Allocations 1965-1970

(Millions of Rupees)

Sector Original Revised ChangePlan Plan in%

Physical Planning and Housing 3.025 2,477 -18.1

Social Welfare 125 90 -28.0

Manpower and Labor 100 86 -1L.O

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219. In the rnhysical Planniing and 11lousing sector, a selectivepolicy has been applied in revising the program. The aim has been toprotect the essential targets. Projects still in a preparato-y stagehave been decelerated or postponed. Part of the reductions have madeup by adopting certain economies in the programs and by calling on theprivate sector for greater efforts. A Rs. 84 million program of theHouse Building Finance Corporation has been shifted to the privatesector entirely.

220. The curtailments in the revised allocations for SocialWelfare entail a plain reduction of the originally conceived programsincluding physical targets. In the Welfare sector the bulk of thereduction applies to Social Services for families, the handicapped andfor delinquents, However, the allocations of Social Services for child-ren and rural communities are up by 64 percent. In the Manpower andLabor sector the revised allocation for manpower training and skilldevelopment is only slightly reduced.

ANNEX I

PAKISTAN'S EXTERNAL TRADE AND EXCHANGE SYSTEM

Historical Background

1. The Pakistan rupee was devalued in 1955 from PRs. 3.31 perUS$1 to PRs. 4.76. Subsequent inflation partly nullified the effectsof this measure so in 1959 the Export Bonus Scheme was created. Withina generally restrictive import system, the Scheme permitted exportersof manufactured goods to retain claims on a nprcentage of their exportearnings in the form of "bonus vouchers" freely transferrable in themarket to importerq_ The. holders of' the vouichers could buy fnorpi0exchange at par in an amount equivalent to the face amount of the voucheraginst sii reni-er of' t.he vouc~her nhi,o ar import± licensep twi-thin a

specified list of "bonus" items. These licenses were issued by the1 ipceonc,n authrit autoi++. ic1 1 y nn only~ oce.'red the ni,rnose of con-

trolling adherence to the "Bonus Import List".

2. Soon after establishment of the Scheme a relatively highpremium estl+ sh ed itself in. the market f vc f--ctuat 4-4

the neighborhood of 150 percent of their face amount, so that theeff-rectl1.ve ratle at- -wh4lch 01bonus li4st J-ports" w"e-e priceA into h-ereonm±.L. L IJLV .duO 01 W~iIL 1± Li JZU L J.. U ±IIJ'p 1) V L L~.L .L.A ~ ' J1VW V

was 2.5 times the par rate of the rupee. In effect the Scheme worked asa subsidy to exporters, financed by importers willing to pay a hiGh pricefor "bonus imports", which basically were unessential consumer goods.I 1he siuusi±uy available UV toLPe.) Ute;-vr V deenL±U UonJ6 the percentage

"entitlement" to bonus of the type of export involved. This entitlementove - 1- - 1 _ _-_L_ _ , 4_ _ _ _ over thie years became subjecut t various changes,l aSndo a U-time a

multiplicity of percentages were applicable for different types ofexports.

3. To avoid undue multiplication of effective exchange rates forexports in 1965, the Government reduced the entitlements to only twobasic percentages, namely 20 percent for jute and cotton manufacturesand some agricultural products like rice, and 30 percent for all othermanufactures. With an average premium of 150 percent these wouldproduce effective export rates of Rs. 6.29 and Rs. 6.90 respectivelyif no other conditions were attacned to the use of vouchers. Also lastyear in order to stimulate exports for certain products an excess ofquotas set for each exporter by the Export Promotion Bureau, a 40 percententitlement was allowed on such excess exports. Actually the rateapplicable to jute products is further modif1ied since half the vouchers theyearn are transferrable in a more limited market. The effective rate forbonus list imports (which at present account for about 6 percent of totalimports) is Rs. 12.10 to the dollar. All other imports are effected atpar, although of course the effective rates are affected by widedifferences in tariff rates.

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Initial"y the Borus Schem,e proved a very successf-U st-iifalantto exports of manufactured goods; since about 1961/62 however the gainsappe ed LI vL ofL althouL1 tbe Scher,e 'as s-J1ce co,ntUJue to be asatisfactory basis to permit a balanced expansion of manufactured exports.Raw Jute and ra-w cotton have rnever been eligible for bonus earningsalthough they are Pakistan's principal export items. Indeed they havebeen ubject t o ar, expor' tax which, from a very high level at the timeof the Korean War, has gradually come down and at present is equivalentto about 5-10 percent ad valorem.

5se excess monetary liquidity that was in the Pakistan economyprior to 1958 was prevented from increasing by relatively stringent fiscaland monetary policies in the early years of the new Government, and itwas gradually absorbed by the growing economy. However, a degree ofovervaluation of the rupee persisted, so that imports at par tended tostimulate industries depending on raw material imports, and import sub-stitution was discouraged except for goods protected by high duties orby the operation of the Export Bonus Scheme. In order to promoteindustrialization against this handicap, the Government has persistentlynot included on its import lists (either free, licenseable or bonus)imports of manufactured goods for which domestic production facilitiesexist.

6. Pakistan's relatively large balance of payments deficit (35-40percent of total foreign payments in recent years) has its cause primarilyin the investment effort carried out through the Second and Third Five-YearPlans. After Pakistan's other import requirements and foreign debtobligations are met, her residual foreign exchange earnings currentlyfinances only about 35 percent of her development imports (Appendixtable 41 ).

7. The extent to which Pakistan's resource gap is financed withnonproject aid is a main factor determining the degree by which theGovernment is in a position to liberalize imports. The overvaluation ofthe rupee appeared to have diminished significantly by 1964/65 after aperiod of monetary stability, better than expected performance of exports,and a growing level of foreign assistance. Furthermore, some increasesin the c.i.f. cost of imports have resulted from increased fiscal chargeson imports.

8. Two measures have been taken in recent years to change theeffective overall exchange rate for imports other than those wrnder bonusiMostly to contain import demand with greater liberalization of tradetwo import surcharges were imposed in 196h/65 on about 30 percent ofimports, equivalent to 5-10 percent ad valorem. In November 1965 arevenue measure, the defense surcharge of 25 nprcent of the existingrates of customs and sales taxes further increased the c.i.f. rupee costof all imports other than machinery. The defense surcharge works outat about 15 percent of the value of those imports to which it applies,that is on about 60 percent of total importss. Taking accont of these

- 81 -

recent changes in customs and other levies on imnorts. the change inthe effective import rate was around 11 percent for all imports on aweighted average basis. If the effective rate for bonus imports istaken into account the total combined effect would be 21.5 percenticrease since the incention of thA honnu .nhAnme The r.nr_rn.nondinPfigure on the export side, also on a weighted average, is 15 percent.

9. In last year's report the mission felt that with the recenttariff measugres a rnrrntal oarretAnn linti been ninbioupi troward a re.,qis-q

tic effective rate for those imports to which they applied. Since then,however- four factors - havre combied to increase again the imknInnc.e hptwenpimport demand and the supply of foreign exchange. Large-scale deficitf4riancing _- 1046U146, followed by m-ssy-e -prate crei et --. s4 n h

current year, resuscitated inflationary pressures. Secondly, diversionof exchange resources to deferse caused a - ductJo4 in -- alb.141it4es

.r,~~~ ~ ~ J. Al L a ~ .a4

to the private sector despite continued growth of exports. Thirdly, a-c. -~4 -4-~~A1 4LJUJ- U~~ J. LJ u,L2 .Mr -&~ J11tAeuto th% JJ-.LA44AL Le -vo]l,.eM of1 foriewi r, a AJd .furt- hUe r 'ncr-eased,- v J J A pr e ssu reon Pakistan's own earnings; and fourthly, bad harvests created additionalimport needs o.L- food. Finally, the return in 196V/66 to a restr-ctiveimport system entailed drastic reductions in private inventories.

10. Under these circumstances, even with the expectation of aconsiderable increase in aid availabilities for 1966/6 uucmpared withthe preceding year, the volume of normal as well as pent-up demand forprivate imports was such that exchange resources could not meet the1966/67 demand. The Government in July 1966 announced the resumption

V r Ir_ Z_ T X . m _ ~ _ fo 11 -- __ _ _ __ _s- - - _ - ..- . -of ree-U ii±3t ILmports The following paragraphs summarize tne sLory orPacistan's import liberalization program.

Import Liberalization

11. Pakistan started the Second Plan with a stringent system ofquantitative restrictions for private imports which accounted for abouthalf of total imports, the remainder being public sector imports governedby the budget. Licensing for commercial importers was based on fixedpercentages of their imports prior to the introduction of quantitativerestrictions, while the standard for industrial users was an officialassessment of their import requirements.

12. In the following three years various adaptations were appliedto this system, with the basic objective of securing a larger flow ofraw materials and other industrial inputs. In 196 4l, as the result of goodexport performance and more nonproject aid,the Government took the firststep in a program to remove quantitative restrictions from a graduallyexpanding volume of essential imports, thereby permitting both an increasein the utilization of industrial capacity, and a rationalization in theallocation of resources through a shift from administrative controls tothe free play of market forces. In January 1964, four iron and steelitems financed under 'U.S. program assistance were placed on a Free List-,i.e. orders could be placed without import licenses and without quanti-tative limitations.

- 82 -

13. In JQ,1w 1964 the Free List was exrpnded to 51 items At thesame time, as noted above, the real cost of imports was increased by.ipos;iton ofP a f-10 "eren+ad"4 alre n cras i1n +e on i F Te List

imports in order to compensate for a degree of overvaluation of thePaki stn, 3r-upee. Dur-Lg L In4l/.14e 4h1i --gr. was success" ' -L " .L.J lstimulating private investment and output in industry. It was estimatedthat the general level of capacity ut'iization for import-using industriesincreased from about 50 percent prior to 1963/64 to over 80 percent inI 94). /1r'

14. in Juuly 1965) urie Government jiLtended to contviue thIis pr±ograi-Lon the same basis for the following year, but the lack of new pledges ofnonproject aid necessitated a suspension of the Free List. The outbreakof hostilities with India and the ensuing pause in the provision of foreignassistance made it impossible to resume the import liberaiization programuntil October 1965 and then on a much reduced scale. The Free List wasreduced to 31 items and imports within the framework of regular licensingwere cut back. Raw material imports for about half of all domesticindustries were made available only against export bonus vouchers.

15. In July 1966, Pakistanis foreign exchange position againappeared somewhat improved. Exchange reserves had moved slightly upwardsto reach $280 million or 2-1/2 months' imports and new commodity aidcommitments were in sight. Also, the November 1965 defense surcharge of25 percent, although imposed for revenue, was expected to significantlyraise the rupee cost of imports. Finally, the Government budget for1966/67 implied a sizeable reduction in defense imports compared withthe exceptional requirements of 1965/66. At the same time the outlookfor export earnings continued favorable after an increase by 13 percentor so in 1965/66. The new Import Policy announced in July 1966 substan-tially restored the Free List program, albeit with new restrictivefeatures, details of which are discussed in paragraph 22.

16. The resumption of the liberalization program in 1966, recommendedby the Bank, was predicated on early commitments of nonproject aid. Actualdelays in such commitments during the fall of 1966, combined with adrought that afflicted West Pakistan, and more limited availability ofPL 480 wheat shipments than the year before, were principal factors contri-buting to a fast depletion of foreign exchange reserves in the last halfof 1966. They dropped by about $100 million in the seven months periodending January 1907. In December 1966 the Central Bank directed commercialbanks not to open letters of credit for Free List imports until furthernotice, except for those covered by nonproject aid or under barter agree-ment. We understand that this restriction was lifted in March 1967following the receipt of $70 million nonproject aid from the U.S.

17. The vicissitudes to which Pakistan's import liberalizationprogram has been subiected since it was begun in 196 4i indicate that ithas been based on assumptions, regarding the availability of nonprojectaid, that became increasingly dubious, and that the margin for maneuverhas been too narrow in spite of healthy and continuous growth of exports.

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18.* The table below shows forei^. vchange al1ocatiovns for theprivate sector over the last 4 years. The increase planned for the

' L.J..1 LS V ' CJ.. LO A4L *' ----- V .fJ J1-, -AJ.~Jfl4JJ . f1~ .J.V. P '..i.LI

and would appear adequate to support a significant recovery of privatesect or acti v -' 4t 4 I--I---- LV-ie s . It Li 8,.C. clar hoVwever,L thAat t-hAe 106W"L6. le-vrel ofcapacity utilization will not be possible, nor will the allocation permit

±±L.L1cient repleniJ.s,111LUiL, tof inventories, tuo say nothing ofL s-pecu'La.Ljv arestocking for which there is strong incentive in view of the uncertain.LUUU-et V.of 'hiau Free Lm.L3L*

VoreignJ Exchange AllocaLtions for Pr-i-rat,e Sec'o

Imports between 1963/64 & 1966/67

(Millions of Rupees)

From Pakistan's FromForeign Exchange Aid Total

Earnings

1963/64 1,363.4 530.6 1,894.0

1964/65 1,790.3 613.0 2,403.8

1965/66 1,086.3 328.0 1,414.6

1966/67 1,430.0 61o.4 2,040.4

Note: Cash allocations in 1965/66 and 1966/67 include allocationsunder barter.

Features of the 1966/67 Import Policy

19. The qualitative characteristics of the 1966/67 import policyannounced in July 1966 are by and large the same as those that appliedin 1964/65 with some more restrictive features necessitated by the smallerallocation in the face of a growing economy. Administratively privateimports are divided into three categories: (a) the licensed list whichcovers approximately 40 percent of private imports, (b) the Free Listwhich is expected to cover about 43 percent, and (c) the Bonus Listfor the remaining 17 percent. (Private imports financed through develop-ment banks are excluded from this calculation because they are largelycovered with project aid and fall outside the scope of the Import ControlAuthorities.) These proportions are quite similar to those in 1964/65except for the increase in Bonus imports.

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20. Items from the licenseable list are available partly tocommercial importers and partly to industrial users, with numerous itemsavailable to both. The provision for issuing of licenses is generallymore liberal in the case of industrial users compared with commercialimporters. Initial licenses for class 'Al (priority) industries are100 percent of their entitlement and repeat facilities are available uponpresentation of evidence of utilization of 75 percent of the previouslicense. This type of treatment however extends to only 148 industriescompared to 236 industries in 1964/65. Class 'B' industries, subjectto regional control and obtaining only limited initial licenses, are nowtwice as numerous as two years ago (110 compared with 56). Class 'C'industries are compelled to import their requirements against purchase ofbonus vouchers to the extent that their requirements are not covered bythe Free List. Class 'C' had not existed prior to October 1965. In theJanuary-July 1966 import policy this list covered 150 industries. It hasnow been reduced to l4.

21. The importance of discrimination against class 'C' industriesshould not be exaggerated since only about 9 of them are industriesimporting their principal raw materials against bonus vouchers. The othersrelv on domestic materials or free list items. The more important arerayon textiles, synthetic textiles, woollen mills, automobile and motorscoOter assemvbly plants, and rolmPtinS= Even these Gan obtain theirmaintenance, spares and components, as well as tools and workshop equip-ment, under the Free List.

22. The Free List itself- however, is nOW subject to severalrestrictions. Of 66 items, only 37 can be imported through commercialchannels, and they all cary a mirimim ceiling for initial letters ofcredit. This probably is directed at some of the large firms who tended;,v n +h ^A +,-^ Arnv; ,+_ +hc. ; mvm,v+ -_A hi1+. ;* +t lla.h+vAl r hncA t.hes~~~~~~~~~+n +"nA 1i VV-%11+ z, V _ v V _ V V v

effect of limiting the total flow of imports. Free List imports byindustral users are lmited to 100 percent of each i+ndust-rysment" for initial letters of credit, and repeat letters of credit are

perltted upon 175 percentv ,_ti,liza1CtionVA V. theU A4itial &mont.JV ThisLC ..ans

that no distinction in fact remains between industrial class 'Al1 I A- :4 _ _. -_ 4 - - - - 4_ oL : :Fr_Aeea TV 4 + 44h e - e- -- +1-;+ +1 __L Xk,U11;_A tZ1t;t _ U11kJS V-L V VJLs -LU AIs wK:;~,e WAL-. WAlAOW scx bLV*s |

ment for quantitative restriction is a letter of credit instead of a-license. nAlso _Li clas A'AJ nustriesU can obt-ain onl'y hlfc. of. their annua"l"entitlement" in their initial L.C. Another important restriction of theFree List iS S 3 vautX n-i.LwousL iv,,sI.AUSl1 Uc be j,PUJ.orteU nJLy .LJ.JL spcii

countries under aid or under barter agreements. Since the commercialbanks are subJect to supervision in the issui"rg of letters of credLt,this enables the Government at any time to curb the placing of ordersabroad as was done in December.

23. 'vrwniie tne Free List program has thus Ueen restored in forr,.,

it has lost much of its substance. The question arises whether thefuture outlook for exchange availabiiity warrants a continuation of alarge free list or whether a more limited perspective should be taken.

- 85 -

Current Policy Issues

24. The economic obiectives of better resource allocation and costcompetitiveness pursued in the last 3 years are the right ones, and nonew circumstances have arisen to alter their prioritv. Under idealconditions, including reasonable certainty regarding resource availabi-litv, the instrument to achieve these obiectivpq w^ild be rcomnlete runeeconvertibility, combined with a carefully adjusted exchange rate cumtariff svstem d sim-niAd tn hrina' iPmnc1 nfi qiinnlr nf' fnor ain an^.hnnrointo balance.

25. However, Pakistan has been, and will be faced with severalimportant. uinertaintioc-_ FRvnhmn"g e=r.nwn s wa one, buti+ aftern- nal-nwi-na

for government imports and debt service, they cover less than two-thirdsof private mports t+ presen.t, and the ratio hns ben- fal stable *nrecent years. The balance is covered by nonproject aid, the availabilityof which is for all practical purpoes ar quantity from. year toyear. For this reason, the gradual removal of controls for private

iAm.or+sin te reent1 -as+ '-as b-eer., a ga=-',,be. LVvnunde theU best ofS W

circumstances the Government could not look beyond one year in estimatinga matc'^L.0 beween 4poi-4. -_rIarId on the --- side and e2porL eLiJins plus

aid disbursements on the other. As long as the latter constitutes asi.ze k:WJle parJct oL the wir± LIdJUJJJ=g fo.L- oVerai.± JJILJ.LplS, wl.'EIs si-.UdLU.Li14 WiLl

remain unchanged. It should be borne in mind furthermore that much oftJihe fo-keinJ U aiLd i £ V±iLceUU L 11, 5 Use tU purclhases iLn ute count-ry

of origin, and thereby forces the Government of Pakistan to interferewith the market iecnhalism for im-ports, however f-ree otherwise.

26. The principal uncertainty surrounding foreign aid, however0concerns its quantity. In addition to this, Pakistan has also beenfaced with uncertainties regarding food import requirements as a conse-quence of uncertain crops. This again is associated with unknownavailability of foodgrain assistance. Finally, Pakistan's foreignexchange reserves are not adequate to cover the unknown margins inthese various elements.

27. One of the lessons of the recent past and under the presentexchange rate system is that liberalization can be successful only withlong-term assurance of nonproject aid at a specific level. Since thisdoes not seem like a reasonable possibility at present, the best coursefor action as regards the Free List would be to limit it to importantkey items, while for less essential items some form of Open GeneralLicensing could be used which means, in Pakistan, the retention of somedegree of quantitative controls. Such action would not have to meana retreat from the goal of increased industrial capacity utilizationand efficiency. It would only, in the interest of stability for theirimport environment, keep resource utilization within Pakistants meansas they become available.

-86-

28. Some of the shortcomings of Pakistan's foreign trade systemhave been the object of increased attention recently, in particular bythe Institute of Desvelopmentv Econo.ics in Karachi. Th aruert allve"years ago, is again being made that Pakistan's tariff system unduly

faor the de#p-J. JAAeAl. oL11UU 0.Lsu.J god nut . T -e is UdoUUULbteUL)-

some truth in this, although the alternative of promoting capital goodsindustries is a relatively- recent possibility and shoud not be pushedtoo far indiscriminately, and the tariff as a means of protection isof+_ ;_- < A __. ___.v _X _ _e -____ s *__ ,_-- ___,.ViAAV.G v a LV LLU,U' U.L Ulls±lI VG p OLLLULl 0± cOmpe vllg mporrbss.Another point of criticism is directed at the Export Bonus Scheme and atthe issung of import license based on export performance, in thatimport substitution may be pushed to the point where in some cases itbecomes negative in terms of world market prices. Evidence for this istoo scant, however, to draw general conclusions from this possibility.A rriore important criticism is that the import system does not givesufficient room for the effective play of market prices, and resourceallocation is to a large extent a matter of abstract administrativedecision. Open General Licensing and the Free List have been steps inthe rignt direction, but have been made less operative because ofexchange stringency.

29. Under present conditions, Pakistan has been compelled to frequentlychange its monetary policy in response to changes in the balance of paymentsposition, caused by other factors. This is an undesirable instrument eventhough it has been regularly used in conjunction with direct controls,because it has to be too drastic to be effective, and in being effectiveit would disrupt the long-term pace of private investJnent. A better wayof adjusting import demand to future uncertainties without directgovernment controls would be to make the direct cost of foreign exchangemore flexible through some mechanism that would increase its cost auto-matically whenever the situation required a curtailment of imports.

30. Short of a fluctuating rate, such a mechanism would seemto offer itself on the basis of an expanded Export Bonus Scheme. Thepresent scheme already does provide for a flexible effective rate forabout 17 percent of private imports, althiough in fact the rate has beenkept rather stable through manipulation of the Bonus Import List. Ifthe Scheme were expanded and the Bonus Import List generalized, it wouldseem that the premium on the vouchers should then more efficiently trans-late changes in overanl exchange stringency into higher cost of imports.However, if fluctuation in the premium became wide, this would meandrastic changes in returns accruing to exporters from time to time.The wider the market, of course, the less violent would be the fluctuations.From this point of view, it would be best to apply a flexible rate systemto all private imports. However, if aided imports were included, theGovernment would have to create aid-vouchers whiich wiould command a premiumdifferent from that of cash-vouchers because of their being tied tobilateral procurement. A multiplicity of premia (and of-fluctuatingexchange rates) would ensue. It would also mean that aid-financed importswould be priced into the economy at two different rates frnm the samedonor country or institution, depending on whether it would be project aid

- 87 -

(at par) or nonproject aid (against vouchers). Furthermore, since manu-factured exports would not produce enough cash bonus vouchers, agri-cultural exnorts would have to be included, or supplementarv cash voucherscreated by Government.

31. Sooner or later Pakistan's exchange rate system will be in needof thorough review depending on domestic monetary developments, aid avail-ability, etc. in the next one or two years. For the time being, Pakistan'sec eption+; ll vn-rnnbs rbn"-Pe%-rnnv n wann nnc2 n"- tlfr oflmr + zr% im 'noj; ~n -+n frl-

W__tJ~~~V v_z pe- n -c wek n anj i _ s as ----- k -bre§- ad _C

jLIstment. On the other hand, resumption of a sound import liberalizationprogra.. at -p-resent s4-,IA requie soe c -es. e-..t4t4-44n- t ,.4r - art-+i-'. '5 . ~~* ~JJ. ~ U ,Li'J U~.iJ U.IL.L.± OSJLiA-,~ L h.LA.L UULV.LAj ULaJ~ ulA~j'_~ F J U

of private imports, including the Free List, to be priced in at par, while17 percer.t oil privalue impLrts are enterir.g at 2 ±L.5LU LJ.L pc of par, doess n useem conducive to optimum resource allocation in the long run. Each yearUhth LLIPUJL- UWlle of DUsUO I[UjJUI-Lp0 Lis glo-w.LLgj ULhij y,)rt hediL"t.Lr volumse willJ.

probably be equal to "Free List" imports other than under aid; they are atpresent the only imports which are truly free of quantitative restrictions.As originally conceived, the gradual increase in the supply of BonusvouchIers sholduLL hrave grauually brought the premium down, but in the ixitevr-

est of stable export rates, the Government has stabilized the premiumtnrough periodic manipuiation of the Bonus Import List.

32. NlJo ways are open to reduce tne existing excnange rate dis-crepancy for imports and thereby to facilitate removal of quantitativerestrictions from an increasing number of non-Bonus imports. One wouldbe additional import surcharges for non-Bonus imports. The other wouldbe to expand the Bonus List to supplement the "Free List". The latterwould require a substantial revision of the Export Bonus Scheme as suchbecause, with the prevailing Bonus premium the present "Free Listi" itemscould not be imported without highly undesirable repercussions on thedomestic price level. Those choices are complex. Under the circumstances,a step-by-step approach seems indicated as suggested in Chapter 4.

ANNEX II

TTTmft'

U U IL J.;$

1. Exports of raw jute and jute manufactures together account on+oV aLvrerag fr about Jp er-ce' oL tine edMport tU- I "A.' I60 Vi.L F C

although they vary considerably from year to year with fluctuations in.aw V UL 'jU VLPJUL u U L i L g r sl- d Uzi cash crop L-J £da Pakis Ucn Lb fa111V Q

whose subsistence crop is rice and generally on very small farms. TheJUta econoniy contrxibuts, in addion, w wih ±zi cuies of a large seii^eof the population of the Province who are directly or indirectly involvedin the internal marketing, baling, storage, mani'facture and exporb ofjute or jute goods. The progress of the jute economy is, therefore, ofspecial concern not only from the balance-of-payments point of view butalso in connection with the overall development of the East Pakistaneconomy.

2. Although its share in world exports of jute and jute-substitutefibers (such as meshta or kenaf) has been declining during the last eightyears, Pakistan is still the worldis largest exporter of such fibers(having accounted for about 70 percent of world exports in 1965) and thesole exporter of quality jute. Her production, consumption and exporttargets and the policies designed to achieve them have, therefore,a sig-nificant bearing on world demand and prices which in turn influence theprospects for Pakistan's exports. In addition, during the last two yearsthe world jute economy has experienced a series of significant develop-ments which are particularly relevant to assessing Pakistan's futureexport performance. Among these are the devaluation in India (the chiefcompetitor of Pakistan in jute manufactures), the development of a newgroup of synthetic substitutes, a sharp increase in jute prices, thespectacular expansion of kenaf output in Thailand, and the intensificationof the drive toward self-sufficiency in food in India and Pakistan whichmay put a brake on the expansion of, if not bring about a decline in, juteacreage. The purpose of this Annex is, therefore, to assess the recentand future performance of Pakistan within the context of recent andprospective developments (autonomous or induced) in the world jute economy.

Background

3. The Second Plan (1960/61 - 1964/65) had called for an expansionof raw jute exports from Rs. 760 million in 1959/60 to Rs. 800 million in1964/65 and an increase in exports of jute manufactures from RS. 223million to Rs. 340 million. Although exports fluctuated from year toyear, foreign exchange earnings from raw jute and jute manufactures overthe total five-year period exceeded the Plan targets by about 5 percentand 2 percent, respectively. This, however, was achieved through higherprices than had been projected in the Plan. rather than the fulfillment

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of the volinme targets .= The volurme of Jute an- nite goond exports in1964/65 fell short of the targets by about 18 percent and 25 percent,respectivel. 2/ The a-jor con ra -t to the achievement of the physical

export targets was "supply."

h. Raw jute production had been expected to increase from about 6millon bales to 7.3 mlUion bales,>/ ±argely through improved yields.This, however, did not materialize since the major programs designed toraise output per acre (such as better-variety seed and fertilizer distri-bution, and improvement of cultural practices) were behind schedule,and output averaged about 5.8 million bales over the Plan period. ThePlan had originally projected an increase in the number of jute loomsfrom 8,000 to 12,000. The target was subsequently raised to 18,000ordinary looms and 1,200 broadlooms. Although 17,000 ordinary loomsand about 800 broadlooms were sanctioned by June 1965, installed ca-pacity lagged and was 12,344 ordinary looms and about 400 broadloomsat the end of the Second Plan. As a result, production of jute goods in1964/65 was roughly two-thirds of the Plan target of h40,CCOO tons.h/

5. At the same time, worldG consumption of inte goods was increasingat an annual rate of about 4 percent, although the growth rate was show-ing signs of slackening. Aorld exports of jute and ju_te manufacti)reson the other hand, were expanding by almost 3 percent per annum. Thegrowth in consilmpntion and impnort deAmaned w-s met hy the ex-ansion ofcultivation of jute or jute-like fibers (particularly kenaf or meshta)in Tndra, Thailand, Wminlanfd China and a few Africarn and Latin Americ-ancountries. The share of Pakistan in world exports of raw jute conse-qiun+vlry declirdv f-rom a t 00 pe rcen.t 195 9 to about 70 -- e -r t

'.~~~~ ¼LaC*~~~~~~~.C .LJ. SitU a'JSJL4U~~~~~~~~~~~~~~~_W 7' /W i SiSiiJ LA & LIt~Ut CLJSVUU I - tAiUU LS

1965. Even in jute manufactures, where Pakistan's progress up to 1961had been. rearkable, her share , world exports s1hrai- from 1907 percentin 1961 to 17.3 percent in 1964 because of the failure to expand theloomzge. Otherwise, Pakistani goods were in good demand since, althoughPakistan's costs were higher than India's measured at the par exchangerate, 'uhe export bonus enabled her to undersell ildia. The bu-lk of Uheincrement in world demand, however, went to India, and India in fact ex-ceedded hLer ex-ort 4ag- oha emm wvlwea^ value.. ~ 1L~± ~AjJrIJ targets UUUL, 141 UU1111l3 01. V0U-LI1it: Ullu UVd±,

1/ Prices of jute and iute manufactures were on the averaze nearly 18percent and 20 percent, respectively, higher than the pricesanticipated.

2/ Domestic consumption of jute goods was about 69,000 tons comparedto a target of 90,000 tons. If the consumption target had been met,the shortfall in exports would have worked out to about 32 percent.

3/ One jute bale is equal to 400 lbs.

4/ In 196h/65 the industry experienced a 53-day labor strike whichdepressed production. However, even if the strike had not occurredoutput would have probably reached 350,000 tons, i.e. still 90,000tons short of the target.

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The Third Plan Targets

6. The Pakistan Third Plan aims at an accelerated expansion ofthe jute industry and an expansion of raw jute production in order tomaintain the countryts raw jute exports as well as provide more fordomestic absorption. It proposes to raise jute production from 6million bales (roughly the average of the last 10 years) to 8 millionbales, largely through improved yields, and to increase the number ofinstalled looms from 12, 3U. ordinary and about 400 broadlooms in 1965to 25,000 and 2,500 respectively. The export projections prepared bythe Planning Comnission assume the oDeration of 20,000 ordinary and 1,800broadlooms in 1969/70 (or an implicit installed capacity of about 22,000and 2,000 resnectivelv). According to the Planning Commission, exportsof jute manufactures would thus rise from an average of 230,000 metrictons in 1962/63 - 1964/65 to 6oo,000 tons in 1969/70 After allowingfor village consumption of raw jute and domestic consumption of jutegoods this would leave an export+ble sulrpnl of raw jute of 3.75 mi-llionbales, compared to an average of 3.92 million exported during the SecondPlan nerionei Pri-es are projected to remarin at. ahouit. the 1962/63A -1963/6 4 level (raw jute prices slightly higher and prices of jute manufac-tures slightly lower, appare.ntly because of the stronger internationalcompetition expected in the latter). Export earnings from raw jute wouldfall from R10s. 9/25 miillion in - 194r6 to -nS.,7rn m""lon in '1969/70,

Lb~@ ~ J~4L&'.JLL L 7. ~uL4/ U.? LU I fl , (u 111±1±1011 ±11 ±y7ul/(

whereas those from jute manufactures would rise from about Rs. 320 millionto 800 million. The nret gain in eYHO teconomy works out to Rs. 305 million or nearly one fifth of the projectedgrowth in total exports (including invis buj over the Third Plan.

Progress in 1965/66

7. The first year of the Third Plan was an exceptionally good yearfor the Pakistan jute economy. Exports of raw jute increased from Rs. 925million in the previous year to Rs. 978 million (the hignest level sincethe Korean wiJar) although the Plan had forecast a progressive decline.Exports of jute manufactures on the other hand, rose from Rs. 320 millionto Rs. 592 million, or by about 85 percent. Jute acreage expanded bynearly one fourth (stimulated by the hign prices obtained in the previousseason) and reached an all time high of nearly 2.1 million acres. Thus,although yields were somewnat lower than a year ago, output increased byabout 1 million bales to roughly 6,4 million bales. With the installationof some of the looms sanctioned toward the end of the Second Plan, thenumber of looms in operation rose from about 10,000 in 1964/65 to about11,800 in 1965/66. Production of jute goods, however, increased by alarger proportion (from about 289,000 tons to about 410,000 tons) partlyreflecting the recovery from the low point of 1964/65 attributable tolabor strikes.

8. Jute and meshta output in India declined for the second year(by about 1.14 million bales) boosting world import demand for raw juteby this amount plus the increase in Indian absorption. However, Indiawas able to obtain only 1.2 million bales (out of an estimated import

- 91

requirement of about 1.75 million bales) because of the Tndo-Pakistanconflict.o' Consequently, output of jute goods declined by about 7percent while exprorts shrank thrther (hv almost 10 nperrent) duhe -to thegrowth in home consumption.

9. Pakistan had thus no difficulty in marketing her larger export-ahle sutplus of either raw jute or jute manrfacur+es. In fact, stocksof raw jute declined by about 0.5 million bales to a bare minimum of about200 1000 bales teq valent c1 + +to rouge4-ly ia mon+4, thor ,-,n; ',A nn.

LtL2 IQ..ljI4 .

.A. V aLt,., UH 1J.i c5. 'J1A5

±tLJ 1.1S*v UIJ* vUI * J v-. 4 4

' v s w twl SF v * v - - / cS

tributed to raise exports from 3.9 million bales to about 4.5 millionbale. TheiLil t 'va V of.V e t s.J.fL, howeLvJI;r, decl_J.Uned %A . RsIL. 236 to

Rs. 220 largely because of the reduction in the export tax from Rs. 20+t Ps. 10 per b-ale. 4 4 of A VIu2r -ln fIlLlv LL.J .L'J j J CL UQi.V 0 J.;J%. LV V4 .L JLIJV 1a1C1UJ..L%,A..ALV O 441.J C LOVUA ±4. SIU "4.J5J9 WWJSJ

tons to 340,000 tons. In addition, their unit value rose by about 25percent due to the shortage and sharp Uncrease inl the prices of raw juteand jute goods in India.

The Current Situation (1966/67)

10. According to the Planning Commission, raw jute exports areestimated to fall from Rs. 978 million to Rs. 900 million in the currentseason (compared to the Plan target of Rs. 750 million), while exports ofjute manufactures are expected to register another sharp increase fromRs. 592 million to ,1s. 750 million. Jute output is estimated at about6.3 million bales,' roughly the same as a year ago, and considerablylower than the annual target of 7.0 million bales. Production of jutegoods is projected to rise from about 410 thousand tons to 500 thousandtons (equivalent to raw jute consumption of about 2.8 million bales),assuming an expansion in looms in operation from 12,500 in June 1966 toapproximately 15,000 by June 1967. After allowing for village consumptionof 100-200 thousand bales of raw jute and internal consumption of about95,000 tons of jute goods (which seems exaggerated), as well as a slightincrease in stocks, this would leave an exportable surplus of 3.2 millionbales of raw jute (compared to 4.6 in 1965/66) and 400,000 tons of manu-factures (compared to 340,000 a year ago). (In addition, approximately100,000 bales of meshta may be available for export).

1/ In September 1965, both countries imposed a mutual ban on trade witheach other (although India has since then revoked the ban, thePakistani ban continues). Consequently, India, which normally obtainsher deficit of quality jute from Pakistan, was forced to importPakistani jute from European countries thus having to pay doublefreight. In addition, the conflict disrupted the river trafficbetween Assam (which supplies one fourth of the Indian mill require-ments) and Calcutta. As a result, domestic raw jute prices rose byabout 40 percent between September 1965 and June 1966.

2/ The Jute Board and trade circles estimate current production at 6or o.i million bales. The difference, however, lies within themargin of error.

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11. The statutory minimum prices to the growers have been raisedfrom Rs. 21-23 per maundl/ (according to district) a year ago to Rs. 31-33,partly in response to the sharp increase in rice prices. Raw lute nricesare currently averaging Rs. 36,or about 40 percent above last year. Theaverage priee of raw jute exnorts is forecaRt at Rs. 275 npr hble- comnpreAto Rs. 220 in 1965/66 and nearly 40 percent above the price assumed for1 96Q/70-. 'Pg iinit +nrt liia of jiu+t crnnrxa mex 4o p-"rojece to ris from

Rs. 1,740 to Rs. 1,800 compared to a 1969/70 target price of Rs. 1,250.

12. In view of the current world demand/supply situation, the esti-mates of t-he Plarn-n-ng Co.m-ission appear som Jute in India is expected to increase from 5.8 million bales to 6.3 millionbales, though it will remain substantally below the average of the lastfew seasons. Kenaf output in Thailand is forecast to reach a record highof- a ut,". 3 LrL,L.o bales, VrL JoJabout or.e million bales U aove LJ9V L765J1/6 6U. LLUs,

total production in the three countries will increase from 14.1 millionbales to 15.6 millon bales, some-what easng the tight s-upply st-uatonwhich has prevailed in the previous two years. Although an expectationof some in.crease in price is justified, the average price of Rs. 275 perbale (25 percent above last year and 40 percent above 1961/62 - 1963/64)which has been artificially maintained this season°y appears to be abovethe market-clearing point. Import demand in the traditional markets ofWestern Europe has been sluggish so far and purchases are reported to beconfined to minimum requirements. Moreover, larger quantities of newlydeveloped synthetic substitutes are coming to the market. Although theseare being bought generally on an experimental basis, their availabilityis nevertheless depressing current demand for jute and jute manufactures.Thus, it appears quite likely that Pakistant s foreign exchange earningsfrom jute and jute manufactures may fall short of the Government pro-jections by at least Rs. 50 million due either to a decline in price inthe months ahead (to clear the market) or some stock accumulation. Exportreceipts will nevertheless remain ahead of the Plan schedule.

13. The high raw jute prices prevailing at the beginning of theseason seem to have narrowed the profit margins of the jute industry. InJanuary 1967, however, the Government expanded the list of goods which

1/ One maund equals 82.29 lbs.or 0.206 jute bales.

2/ E.P.C. (Export Price Check) prices, below which export sales cannotbe registered at the State Bank, have been repeatedly revised upward.The Jute Marketing Corporation and the Jute Board (through itsagents) are reported to have lifted large quantities of jute. Inaddition, the compulsory purchase quotas imposed on jute mills seemto have resulted in intensifying the shortage of exportable suppliesand pushing prices further up.

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could be imported with the "reserved" portion of the bonus vouchers-/and added commodities, such as edible oils, which were in strong demand.The prices of the above vouchers immediately rose from 44 to 90 percent(of the par rate) thus raising the effective export rate for theindustry.Z/

1h. The Indian devaluation aDpears to have had no significant impacton Pakistan's jute goods exports so far and is not likely to have mucheffect during the rest of the season. This is attributable primarily tothe continued severe shortage of raw jute in India and to the measureswhich were taken following the devaluation. The devaluation of theIndian rupee brought about an increase in the Indian rupee cost ofimrorted raw jute of 57 5 nercent. The Oovernment. therefore. announceda subsidy of Rs. 500 per ton on long jute and Rs. 250 per ton on meshta,which work out to roughly one half and one thnrd renPect.ive1v. of theadded cost to the Indian importers. In addition, since export volumeconl ri not. he ine-rPeqed in +he immo,eiat-e fiiu-+urh.e hecaruiqe of the sheurtaqge

of raw jute, it imposed export taxes on jute manufactures in order toavoid an absolute decline in foreign exchange earnings due to the cheaperdollar price of the Rupee. The export taxes were Rs. 900 per ton onhessiarn andg Rs. 600 on sacking anrd are equnvalentt e+ about 80 pereent. and72 percent respectively of the added Rupee return to the Indian exporter7.001,1 +; ncr fr.m +l- AA.e- ,1-. +; __ flsnA +T- --- 4nr.a+l--A (+1, ; mnnv'+* SflJ tA.J. *4. './41* VW%l V. v . VCULtVI* X 1 1x; UVWV ±uao± O0 ULW6 UJLI IU. WA- - -F- .

subsidy and the export taxes) roughly offset the benefit of the devaluation0 V 01JA.OLL II ±d%._LAJU 0 UL WUI J.U p1 ..LLO IA) LC.±J D.al.iiW0LAA,0k1e ±55

term effects of the devaluation are discussed in paragraph 36.

1/ Until January 1967, jute manufactures received bonus vouchers of 20percent of export value, half of which could be used to obtain importlicences for a list of specified commodities (the "bonus list" con-sisting mainly of luxury-type imports) and the other half for import-ing jute machinery and capital goods for specified industries. Thus,while the "free" portion of the vouchers, which could be freely traded,commanded a price of about 150 percent of the par rate, the "reserved"portion was sold at 44 percent of the par rate.

2/ The effective export rate of jute manufactures (the official rate plus10 percent bonus at 153 plus 10 percent bonus at 90) is estimated tohave increased from Rs. 5.69 to nearly Rs. 6.00 per dollar of exportproceeds.

3/ This can. be illustrated by tne following examp-le on sacking in whichthe competition between India and Pakistan is keenest: in 1965/66tne average unit value of sacking exports from india was auoutRs. 1580 per ton, with an estimated raw jute content of roughlyRs. 950. The devaluation, in spite of the import subsidy, increasedthe price of the raw material by about Rs. 300. While the grossRupee gain on a ton oI sacking attriDutaDle to the devaluation wasRs. 920, the net gain (after payment of the export tax of Rs. 600)works out to Rs. 320 and is almost entirely offset by the higherraw material cost. This is supported by recent trade reports fromCalcutta.

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15. Briefly, the progress during the first two years of the ThirdPlan roughly parallels the progress during the Second Plan: whileforeign exchange earnings are running ahead of schedule, quantum isshowing a tendency to lag behind (though less for jute manufactures),the growth in value being partly attributable to higher prices.

Outlook for the Rest of the Plan Period

16. The mission feels that although prices of both jute and jutemanufactures are almost certain to fall from their present levels, theywill nevertheless remain above the levels forecast, enabling Pakistan toreach (or even exceed) the Plan targets. The outlook for demand, supplyand prices, however, contain some elements which cloud the future beyond1970 and which may have policy implications (particularly regarding prices)for Pakistan in the short-run.

Supply

17. Raw Jute Prodrictionn Althougih +he producition target of 8 millionbales is not beyond reach (Pakistan has in fact the potential for growingeven more-) it. annprsw. morv likolkl +hnf om+.u+put in 1Q( Q)/70 *.ill nro+. evr-cerl

7.5 million bales. The Government plans to obtain 8 million bales from2 million acres through intersive cultivation. Area has averaged 2million acres in the last two years and there is no reason why, if a

favorable i,4.a price/-n4 prt ass - ed, -.. a--A car ,otbeprsevedaAJ.3'. f~ I .J...'. .LA.. JO. !.L .J. Jg L CLO- ~.LA L%, .UJ -ZCL~ % tC UkA'

on the average at around this level. The prospects for increasing yields,hot"svre, donot appear 4to be bright.

~ ~ '.~J A.~JU ~j~J la.I YIIJ JfJ La'e

18. It is often clauned that exauding output to 8 miLion balesentails merely raising yields from 3.5 bales per acre (the average for

.Le las 10yar)v40ble,- sho-uld e po-lnted out., howeever, J,tIAU Ld.O as'. yers 3o4.L u ua±Le. .L J i UOU±u I L tUJu to II Loll L)WV Ij Att..

the average yield on 2 million acres has been 3.2 bales, i.e., thereappears to b-8e - neeggatiuve uo-rrelat b, I Uetween acreage ndU yIeldU ad 111 inm oscrops. Althyugh a comparison of randomly selected years or a statisticalcor-rela i"on do not ireveal this relationship clearly (because of fluc-tuations due to weather), grouping of the post-partition years accordingto acreage lends some support to me hypotnesis:

.. o . _ ~~~~~~~~~~~2/lYo. o years Million acres Bales per acren

4 1.4 and less 4.09 1.4 to 1.8 3.55 1.8 and over 3.2

1/ R = -.408, but notice that the sign is negative.

2/ Based on Pakistan Jute Association estimates and excluding theexceptionally bad year of 1949/50 when yields were 2.1 bales peracre and output 3.3 million bales.

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I9 QIt. is not. intAndedin +^ irmply +.hat. past+ ex-nnriemnre T..lldeermine the future, but merely to point out that the task of raising yields(¶-r.+i r have been .more or less stagn.a.nt over the last fifty years) to

4.0 bales per acre may be more difficult than it may seem.

20. The major programs envisaged to raise yields include multipli--11io ar.dAVWA di%rbo .L of" mproed eeds irigaion. alndA drCa.inarg%e,Jm

,b +4 ^n .n"A A 4c.,. + -nm-4-4 r,n -4 4- - - -- .-. A A r.nA 4n4

g 44 ~.n. n,rnrn -

provement of cultural practices, application of fertilizers, and diseaseand pest cont'ro'l. ULit.tle progress 1_ appar toZ: have ben r,jade so farI -in

these fields. For example, the Plan had proposed to cover 70 percent of41- J.~~W U JI~U~ JIpU tU ~ ~ j)J~ IU U~ LLL)t- LL9,h ute area -wih ,-ro-ve' see's. ,,;,.proveA seed s-aupp-ly an-d dstribuionthis year is estimated by the Central Jute Committee to be sufficient to

_ n _ _ 1 _ n 1 I I. fl mt _ n 2cover 'Less thlasn 1U percenU OI a 1tta. 01 .0U m-llion aUreso ±nze 1eU1U-

izer need for jute alone is estimated at around 50,000 tons (or abouttwo-thirds of the total current fertilizer consumption in East Pakistan),and present consumption in jute is probably a fraction of this figure.Wnile great scope exists for improving yields through improved culturalpractices (line-sowing instead of broad-casting, better retting techniques,etc.), it is proving difficult to implement this program due to the smallsize of holdings and the vast number and wide geographic distribution ofgrowers, as well as the shortage of better implements. In addition, th.eeffectiveness of each program depends on the co-ordination and simulta-neous progress of all programs both of Twhich seem to be insufficient 0The mission, therefore, feels that the maximum yield to be achieved ona sustained basis around 1970 will probably be 3.75 bales rather than4.0 bales per acre, producing a maximum crop of 7.5 million bales.

21. Production of Jute Goods: Although the Planning Commission'sexport projections assume the operation of 20,000 ordinary and 1,800 broadlooms in 1969/70, the Government is aiming at the Industrial InvestmentSchedule target of 28,000 and 2,500 installed looms, respectively, Loominstallation has been lagging and is likely to continue to lag consider-ably behind the Government targets. The major constraints appear to bethe availability of foreign credits and the supply of machinery in theUnited Kingdom (the major supplier).

22. The Government targets had called for the sanctioning of the1,000 ordinary loom carry-over from the Second Plan, plus 10,000 new loomsunder the Third Plan. Of these 3,750 (1,000 looms carry-over plus 2,750new looms) have been allocated to the private sector (PICIC) and theremainder 7,250 to the public sector (EPIDC). PICIC has already sanctioned3,500 looms and plans to sanction the remaining 250 in the near future.EPIDC, on the other hand, has approved 2,250 looms since the beginning ofthe Third Plan. At present it has U.K. credits to finance 1,250 of theseand possibly 750 more. In addition there is some indication that theTUK. may make £ 2.1 million availahle in 1967/68 (for another 750 looms).but credits thereafter appear to be in grave doubt. W4hile a scheme forioint EPTnC-PTGTG-private financing has been worked out. little interesthas been forthcoming from private enterprise.

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23. On the other hand, the supply of machinery in the U.K. (whichhas a virtual monopoly in jute looms) continues to be increasingly tightsIn addition to the larger demand from Pakistan, the industry has ordersfrom a growing number of developing countries in Africa, the Near Eastand Latin America. It is reported that in spite of an expansion incapacity, the U.K. is in a position to supply no more than 1,500-1,600looms per annum in the future. M4oreover, the delivery period is said tohave increased from 9 - 12 months to at least 18 months. Thus, themission feels that although foreigq credits to raise the number of loomsto about 24,000 may be available,l/ installed capacity at the end of1969/70 is likely to be around 21,000 looms, 18,500-19,000 of which maybe operating (on the average) during the year. From present indications,the number of broadlooms, on the other hand, may reach 1,750 (1,500operating) compared to a target of 2,500.

24. On the basis of the above estimates, output of jute goods islikely to be 565,000 tons from ordinary looms and 75,000 tons from broad-looms comlpared to targets of 600,000 and 120,000, respectively. Totalraw jute consumption in the industry would amount to roughly 3.8 millionbales. Assuming a crop of 7.5 million bales and village consumption of250,000 bales, this leaves an exportable surplus of 3.45 million bales,or almost 10 percent short of the target. After allowing for domesticconsumption of 105,000 tons (100,000 tons from ordinary looms and 5,000tons from broadlooms), export availabilities of jute manufactures wouldwork out to L65,000 tons and 70,000 tons respectivelv, compared to targetsof 490,000 and 110,000.

World Demand

25. World consumption of jute products increased from about 2.1millinn metric tons in 1953-55 to 3.05 million tons in 1961-63 or 2t 2rate of about 5 percent per annum, compared to an historical trend of1.6 percent between 1900 and the late thirties..2 Consumption at thepresent time is estimated at about 3.3 million metric tons (equivalent toroughlvv -I -19 '.:illon % bale ofP Jute. and al-d fier) or 8.1 percer.t above-ro .±i± .x. ±7 IL±±"..LLul jL 0L ± . JULA5 L. Ud4U d,±±±e-LU L..LLJV.L0J , UlJ J~ L k LV.,1ull cxa''V~

1961-63. Although consumption in recent years has no doubt been affected

1/ 17,000 looms from the Second Plan, 3,750 through PICIC, 2,750 throughUJKT credits, plus possibly 750 through suppliers -reditts..

2/ The acceleration of consumption in the postwar period is attributable,among other things, to faster growth rates of agricultural productionin some develoning countries and centrallv-Dlanned economies. thedevelopment of new end-uses (such as carpet-backing) and the largervoltim- of food aid. (Food aid arrives in bulk and is transferred intobags for internal distribution. This largely explains the spectaculargrowth rate of 8-9 percent per annurm in Tndiants iute goods consumntion).Otherwise, the ratio of jute used in its traditional packaging uses indreTrrI nnei 'oinfiim nrinfCO!tinU-ild t delinen rani edlv Tn the TU.O for

example, the proportion of new jute bags used in the distribution ofco rinl feedA sl.r-> f.rom 37 a in 19 OI O to 1 ercntA i

1965.

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bwr a series of bad cr,- an exmination. of mIrket crniitiors suggest-sthat its sI^;kenirg has 7rJeen cue to both suipply a-d dcinand factors, asJute conU-IC,edL to) lose gyL 0 SAL4L. t

26, ~Demgrtd in 41-1ihe enW'Le where Julue is utiLiXzed (a> g

carpet-backing, etc.) is likely to continue to grow at a rapid rate intLhie future. In developi2Lng couWtriS (aind Do a large exVlen in centrally-

planned economies) jute will probably remain the chief packaging material.In developed countries (which accou-nt for hO- 5 percent of world juteconsumption), however, the proportion of jute used in its present outletsis likely to decline at an accelerated pace due to the emrlergence of newsubstitutes.

27. The threat of new substitutes is generally underestimated onthe basis that "jute consumption has grown at a rapid rate (compared toother primary commodities or the pre-war trend) in spite of similarthreats in the past." The effects of earlier substitutes (such as kraftpaper, plastic bags, containerization and bulk-handling) have in factbeen tapering off. However, jute is now faced cith new types of suDsti-tutes, such as polypropylene and polyethylene,l which seem to havedistinct characteristics not enjoyed by earlier substitutes.

28. Polypropylene and polyethylene can be manufactured in "tapes'"and woven into either hessian or sacking. They are products of thechemical industry and as such are backed by vast financial resources anda complex and rapidly advancing technology. Although their prices perpound are 2 - 3 times higher than jutels, the final products (a bag, forexample) are much lighter than comparable jute products and can be soldat competitive prices. Detailed figures on current production, sales,costs or prices are not available at this time. Information on the rela-tive quality of the synthetics versus jute is at the moment inconclusive.It is reported, however, that sizeable quantities are coming to the market,and more importantly, that capital outlays are rising rapidly.

29. 'Mhile the technology to develop these substitutes has existedfor some time. large-scale production started in 1965-66. stimulated bythe high prices of raw jute. Demand for jute is relatively inelastic inthe short-run but not in the lone-run. It is significant to note thatalthough jute prices in any of the last three years have been lower thanin either 1951 or 1961 (the Korean neak and a very bad crop year). theyhave remained higher for three consecutive years than in any three yearperiod in historv.. 'Thi.qA has idibced not only the chemical industrv butjute manufacturers and users in Western Europe, the U.S. and Japan toinveSt in the new.! Substit-mtes

30. In view of the limnited information available, it is diff'lcn1tto forecast the future course of the competition between synthetics and111 T.r +1, nr precisvior, at this tin.e. HoTw a eer arlminarr s tudy'r of

1/ Polypropylene and polvethylene are obtained through the thermal orcatalytic cracking of natural gas, refinery gases, or naphta (alight distillate or gasoline fraction).

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demand and supply and interviewqs conducted by the Bank staff in a fewmajor consuming countries suggest that if jute prices are maintainedat their present high levels, demand for jute may either stagnate oreven show an absolute decline beyond 1968/69. On the other hand, aprice decline of 20-25 percent (a return to,roughly the 1963-65 level)may slow down (although it will not arrest_/) the development ofsubstitutes. New uses for jute will probably be developed, partlyoffsetting the loss to substitutes, but the chances for a major break-through (compared to the development of carpet-backing) appear ratherslim.

31. On the above price assumption, world import demand for rawjute and allied fibers is estimated to total about 5.5 million balesin 1970, compared to 5.7 million in 1961-64 and 6.2 million in thecurrent season (attributable to the bad cron in India). W4hile demandin developed countries may decline, this will probably be offset bylarger imports into developing countrip 2nd eintrally-nhnned economies.Import demand for jute manufactures from India and Pakistan will probablyreach a mavimnm f 1.5 milIion tons-, compare to 1+1n .milio r Jn in Q16t-6_

Prospects for Pakista-n

32. Pakis -+n is epected to have no diffic- 'ty in .rket;ng its ex5ort-able surplus of 3.45 million bales of raw jute in 1969/70, in view ofthe projected w-J.o.rld LmlJpIorti der,,ar,"d of abJLout 15._15 m,J iL 11Lon les I fac -. ,

this would represent a decline in her share of world exports from 70percent 4-in 1965 to 63 Al rcen in 1970. te,4- -Ad -4i4-1- e-production have been expanding in a number of developing countries

prir,Lari uu toi~ mee interr±i.al conS-LWttij ±Un. The~ IJLJ..y Lcoui1LL which rodce

or is likely to produce large exportable supplies is Thailand, whoseoutut coU nUistU Us a lmUoU exc2lXUUSivly of01 kUe1n.* KAenUaf J S i nfteriUor to JJut[e

and is used in the manufacture of heavy goods, such as sacking, pre-ferably ln acuriixture with Jute. -/ Assuming a unit value of Rs. 225 perbale (12 percent above the target price) for raw jute, Pakistants export

1/ Experience in jute as well as cotton or wool has shown that theloss of the market to synthetic substitutes tends to be irreversible,i.e., it cannot be easily regained, even if prices fall, because ofthe investment committed. Moreover, polypropylene prices have beenfalling and will continue to fall with the expansion of capacity.The scope for price reductions due to economies of scale is parti-cularly great since polypropylene is also used for apparel, twines,ropes etc.

2/ It should be noted,however, that the shortage and high prices ofjute in the last three years have induced the manufacturers inW,1estern Europe and India to develop methods of utilizing kenaf moreefficiently. That is, although jute is superior to kenaf, the cross-elasticity of demand between the two seems to be changing.

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earnings in 1969/70 would be about Rs. 775 million compared to atarget of Rs. 750 million.

33. In jute manufactures, the mission's supply and demand pro-jections imply that Pakistan would gain about 90 percent of the growthin import demand and increase its share of world exports from about 17percent in 1964/65 to about 35 percent in 1970. Assuming an averageunit value of Rs. 1b75 for hessian and sacking and Rs. 2000 for broad-loom products, export earnings would be about Rs. 825 million, or abovethe target of Rs. 800 million. These projections seem attainable (in fact,they may prove to be conservative) in view of the problems confrontingthe Indian jute industry and provided that greater attention is paid toproduct development and diversification than in the past.

3h. The major problem facing India is the supply, quality and priceof indigenous raw jute. Normally, India is dependent on imports forabout 6-10 percent of its mill requirements. Domestic production islikely to increase in the future and additional supplies may be purchasedfrom Thailand. These additional supplies, however, will go largely tomeet the rapidly arowinsy home demA nd for inte goods. That is, totalsupplies are not expected to grow sufficiently to allow for any signi-ficant increase, in iite gnood exnpnrts. Niir+.hermore, Infdia has a shortageof quality jute. I' This is a major handicap particularly since she hasbeen concen-f-v ing on products (such as hessian and carpet-backing) forwhich a larger proportion of superior jute is required. Raw jute prices,on the other ha-nd, are likely to remain substantially higher thnnPakistan's (even if self-sufficiency is achieved) since any increase inY.-roductvion .srill ha-1-e t_o be-n induceOd by payir. the growers hkigherpics

machinery (the last mill was built in 1928), high state taxes (recentlyralse - o 43 pecn) a-- cre4t sqeee adnc deyvsi on Jrmports,higher labor costs etc. Although labor productivity in India appearsUt.o bVe considerabl.y hnigher than in .P1aklistan, lower raw matIerl 'all. costsand the export bonue give Pakistan, on balance, a competitive edge overT_A4 ; 4-U -_-,_4. 251v.LII'...La. i.1 ULAU lI1dal k u. L.'

i/ 2U-25 perueint of Juue ald a±ilied iber prUoucU±LOfl consist-s Uof m1es1Ud.

Moreover, the proportion of high-grade jute obtained is lower thanin rakistan.

2/ Tne present effective export rate of Pakistan is nearly Rs. 6.00 perdollar of export proceeds (due to the export bonus) compared to theofficial rate of Rs. 4.76. rne post-devaluation effective export rateof India works out to about Rs. 5.30 compared to the new official rateof Rs. 7.5 and the old one of Rs. 4.76.

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36. As indicated earlier, the devaluation seems to have had nosignificant effect on Pakistan's export so far due partly to the impo-sition of exnort taxes. Tn view of the inelasticity of exnort sunnlv.these taxes are not expected to be abrogated or substantially reducedin the future. However; althouph eAxorts may be difficilt to increase.the devaluation gives India the tools to keep Pakistan out of itspresent mnarketn: eAyrnrt taxes may he rAedue-d or eliminftetd selectivelyso as to improve India's competitive position in items where PakistanicomnetiJ+nn becomes accute-. -/ Thus, al+hough Pakistan may inerqePe it.sshare of the world market, it will find it difficult to induce anabsolute decrline in TndAian avnor-f . rnst reduction and product diver-sification are, therefore, necessary if Pakistan's long term expecta-

37. bl.ere are rL.o ind4icatior-. that anr noticeafle progre- J8"JI * 6al.U L -. ~±l. L IG.L IJ0 V.JIC6 U, CLI VJ%,±6WL F. V& o

being made in improving either labor productivity or management effi-clen.cy in Pnakistan. Furtherm,ore, PakistaAn has been concentrating onthe manufacture of sacking (where import demand has been declining),-.1,; I T_J 13 A -_ _- _- _ _ 5_ X__ 1_____ 21__ ___ _- =

Vd1iL.Le a .E a ihd U LLC .GLa; LGL 11tQX6 IUSCb±i, UGiA4lU ±UI- WLA. 11 GX l Ueen

rising rapidly. Pakistan has been taking a larger portion of a shrink-ing mrketL' , wLheIea ir±Uo of Une n±ew uses for Jute (such as ti eU-backing) have been pioneered or largely exploited by India and thenJterii aurupearl ±industries.

30. In conclusion, Pakistan is likely to exceed ner export targetsfor raw jute and jute manufactures in terms of value. This, however,will be made possible by (a) higher prices than projected in the Plan;(b) the problems confronting the Indian jute industry; and (c) theretention of the export bonus.

39. Although higher jute prices are to some extent justified bythe rising opportunity costs of growing jute (namely, the price ofrice) they are unhealthy from the long-term demand point of view.l]hile the dangers posed by high prices are recognized, Pakistan appearstempted to pursue a policy of short-term foreign-exchange maximizationiwithout sufficient regard to the rapidly changing demand outlook. Theproblem is one of assuring fair returns to the growers while keepingexport prices at reasonable levels. It is hoped that higher jute yieldswill enable Pakistan to reach both objectives. However, since theprospects for a major breakthrough in yields in the near future arerather slim, Pakistan may in the meantime consider eliminating theexport tax. The long-term benefits of such a move may more thanoffset the loss of revenue of Rs. 35-40 million. In addition, a more

1/ India's taxes already reflect this approach on a broad basis. Thetaxes on hessian (where output per loom per hour is estimated atabout 25 percent higher than in Pakistan) were Rs. 900 per ton;in sacling, where the difference is 18 - 20 percent, the exporttax was As. 600 per ton.

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rational management of the Export Price Check system (reflectingmore closely the demand/supply situation) may help to stimulate con-fidence in jute abroad.

40. Pakistan owes its competitive edge in jute manufacturesalmost exclusively to the export bonus. Productivity in the industryis progressing rather slowly as evidenced by the necessity to retainthe export bonus over the Third Plan period. It seems desirable, there-fore, to attune future investment plans in the industry to the prospectsfor improving productivity.

AN11Y TTT

CENTRAL GOVERNENT RELMENES 1967/68

1. _10A6ff/6 is 4the last --a fr "whch we hLL ave actual fiscal da'Therefore, our estimates of fiscal results in 1967/68 must be based onproject-ions from, that year as buase, supplement-ed wit-hf bud6get orreseestimates for 1966/67.

2. The following table gives the conclusions as far as CentralGovern,mientu reveniues are concerned:-

laDle I

Estimated Central Revenue Receipts

(i±n millions of rupees)

Actual Revised Estimate Projection1965/66 1966/67 1967/68

Customs 1,087 1,375 1,632Central Excise 984 1,422 1,540Sales Tax 819 972 1,130Income Tax 715 815 880Other Taxes 150 176 128

Total Tax Receipts: 3,755 4,760 5,310

Nontax Revenue Receipts 1,264 1,034 1,128

Total Revenue Receipts: 5,019 5,794 6,438

Source: Planning Commission.

3. The bulk of the Rs. 1,561 million anticipated growth incentral tax revenue is expected from customs (Rs. 551 million), centralexcise (Rs. 556 million) and sales taxes (Rs. 311 million). The rati-onale for these quantitatively important predictions can be brieflysummarized.

4. Customs. The predicted Rs. 1,632 million yield from thissource for 1967/68 is a reasonable estimate in view of the larger baseand higher rates as compared with 1965/66. The 1965/66 import tax yieldof about Rs. 1,025 million was realized on gross imports of Rs. 4,208million, indicating an average rate of 24 percent. But a major increasein the rates, the 25 percent defense surcharge, occurred midway throughthe year. Rs. 2,425 million of 1965/66 imports were subject to the sur-charge, Rs. 1.883 million of imports being made before the surcharge was

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imposed. In 1964/65, before the surcharge was imposed, the average rateof import duties was 21 percent. Applying this rate to the pre-surchargeimports of 1965/66, we arrive at an estimate of Rs. 395 million importduties on these imports. The remaining Rs. 630 million import dutieswere levied on the Rs. 2,425 million of imports subject to the surcharge,indicating an average rate of about 26 nercent.

Tmnnr+..q in 19Q7/A,R ar. P.timat.Md at. Rs. q.100 million (seeparagraph 67). If the average rate continued at 26 percent, the importtax yiPIci woild be RS. 1,5I A miIllion TowP.r_ arditional rate ehangresapplied in 1966/67 are expected to yield another Rs. 120 million, for a+ntal import tax of- Rw-Q 1,576 mi1 i vin. E-port duties an.d miqe ly1 -Anscustoms receipts at approximately their 1965/66 levels should produce+ha .reminier.g .PC 6 mil ion.

6. Central Excise. The base oth + cer.tral nr,'4 rI inmanufacturing, is expected to increase by about 23 percent over the two-yea -eid A -,.g4- .4-v, 4--., of 1 +thi woula increcas xcise

taxes by about Rs. 230 million. The remaining increase is the result ofpdefense surcharges omFsed during 1965,66 (adb-o4ut Rs * . 30 - and

changes in rates included the 1966/67 budget which were expected to yieldabo.UJ Ris. 14.) miL.Lio.L.Lt ir, 1966/67. No f ull year' xpe renc n.der the new

excise tax rates is available, but during the first half of 1966/67, re-ceipt-s bha-ve bUeen about RLs. 70U mi.L.L].io. n Coron v ert ir, briL toa I yearly rate(Rs. 1,400 million) and multiplying by the expected increase in 1967/68 inlarge-scale mraIn-uaacturing (1.L percent), we arri-ve a, te U prUoJI.u Vof

Rs. 1,540 million for 1967/68.

7. Sales Tax. The sales tax is levied on three classes of goods;goods subject to central excise, goods subject to customs, and locallymanufactured goods not subject to excise. The tax on goods liable tocustoms duties is at a standard rate of 15 percent on the duty paid valueof imports. The base of this segment of the tax is expected to in2:reaseby Rs. 1,400 million, the change in imports c.i.f. plus Rs. 431 million,the change in import duties. Thus the expected change in sales taxes oncustoms alone can be reckoned at about Rs. 245 million. The sales tax onlocally manufactured goods was about Rs. 365 million in 1965/66. Assumingthe base of this tax will grow by about 20 percent during the period, theyield on this segment will increase by Rs. 75 million. The yield fCrom thesurcharges imposed midway in 1965/66 should at least double the li' '766yield, an increase of Rs. 80 million. Offsetting these increases areselective downward changes in the rates of the sales tax in the 1966/67budget, which are expected to cost about Rs. 50 million in 1966/67. Inspite of this change, the estimate for 1967/68 seems quite sound.