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COUNTRY REPORT

Pakistan

Afghanistan

3rd quarter 1996

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

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ISSN 0269-7173

Summary

Pakistan, Afghanistan 3rd quarter 1996

August 30, 1996

Pakistan Political and economic structures pages 3-4

Outlook: Benazir Bhutto’s government wants to be the first elected govern-ment to complete its term of office. The budget for 1996/97 has galvanised theopposition, but there are problems over what strategy to follow to topple thegovernment. The army is becoming concerned about the economy.Ms Bhutto’s appointment of her husband as investment minister will causeproblems. The government’s growth forecast is ambitious, particularly as ind-ustry continues to suffer. The current-account deficit will continue to rise. Thegovernment is likely to get an IMF stand-by loan at the World Bank/IMFconference in late September. pages 5-8

The political scene: A new opposition group has been formed. A judicialdecision has caused problems for the government and has split the judiciary.The Supreme Court has restored local bodies in Punjab. Imran Khan’s politicalmovement has yet to take shape. There have been family troubles forMs Bhutto, involving her brother. Ms Bhutto has held a rally in Karachi asviolence in the city eases, but bombings in the Punjab have continued. The PPPhas done well in provincial elections in Pakistan-controlled Kashmir. A majorairforce deal has provoked controversy. There has been little progress towardstalks with India. The US ambassador to India has visited Pakistan. There hasbeen progress with the Afghan government. pages 9-16

Economic policy and the economy: The budget for fiscal 1996/97 hasincreased expenditure by 15.1% and has raised taxes, only to be forced to lowerthem after widespread protests. GDP growth targets for 1996/97 are ambitious.Inflation has slowed. The IMF deal has been stalled because the budget has notbeen finalised. An economist for the World Bank has painted a grim picture ofthe country’s prospects. pages 16-18

Agriculture: The budget has smiled on landowners again. Agriculture outputhas risen, as has cotton production. Wheat cultivation has improved slightly,but sugar production has done less well. The Agricultural Development Bankhas recovered. pages 18-19

Industry: Industry has been divided over the budget concessions. The TextileMills Association has criticised the government’s export targets. The presidenthas entered into the cotton debate. The cement industry has not been happyabout the new taxes in the budget. Investment in industry has grown.

pages 20-21

1

EIU Country Report 3rd quarter 1996 © The Economist Intelligence Unit Limited 1996

Energy, and transport and communications: The Kott Adu power-plantdeal has been finalised. The Privatisation Commission has said that bids foreight electricity distribution units will be allowed soon. The manufacture of anew power barge has been funded by the USA. The Iranian oil minister hassigned two agreements. Partial privatisation of the Pakistan Telecommun-ications Company has stalled. pages 21-23

Banking and finance, and foreign trade and payments: A commissionis to be set up to investigate loans. Exports have been growing slowly, butimports have been growing rapidly. Remittances have fallen sharply.

pages 23-24

Afghanistan Political and economic structures pages 25-26

Outlook: The interim government will have to work hard to stay together.General Dostam’s position will be crucial to its survival. The Taliban are look-ing weak, but can still pose a threat to the government. The prime minister isexpected to move against the Taliban. Relations with Pakistan are likely toimprove, which will further isolate the Taliban. The UN is trying to restore itscredibility. The local currency will remain very weak. pages 27-30

Review: Gulbuddin Hekmatyar has been appointed prime minister and hasformed a new government. Jamiat’s Ahmad Shah Massoud and Mr Hekmatyarhave no faith in each other. Mr Hekmatyar has announced Islamic policies.Government moderates have clashed with fundamentalists. BurhanuddinRabbani has wooed the Nangarhar Shura, but has failed to bring them onboard. Fighting has erupted in Nangarhar. The government has turned toGeneral Dostam. The Taliban have continued their opposition against thegovernment, but have improved relations with Iran. Iran has offered economichelp. Pakistan has shifted its Afghan policy. pages 30-33

Statistical appendices pages 34-35

Editor:All queries:

David BainTel: (44.171) 830 1007 Fax: (44.171) 830 1023

2


Political structure: Pakistan

Official name: Islamic Republic of Pakistan

Form of state: federated parliamentary system

The executive: the president is head of state, and is elected for a period of five years by a joint sitting of thefederal legislature; the incumbent, Farooq Leghari, has pledged to support moves by the PPP government todeprive him of the important discretionary powers he has under the eighth amendment

National legislature: bicameral legislature; lower house, the National Assembly, has 217 directly electedmembers who serve for five years, of whom ten represent minorities; upper house, the Senate, has 87 memberselected for six years with one-third retiring every two years; each of the four provinces elects 19 senators, theremaining 11 are elected from the Federal Capital Territory and the tribal areas

Provincial government: Pakistan has four provinces which enjoy considerable autonomy; each province hasa governor, and a Council of Ministers headed by a chief minister elected by a provincial assembly

Last national election: October 6, 1993 (National Assembly)

Next elections due: October 1998 (National Assembly); November 13, 1998 (presidential)

National government: after the election on October 6, 1993, the PPP, backed by a coalition of small partiesand independents, formed the national government with Benazir Bhutto as prime minister

Main political organisations: Pakistan People’s Party (PPP); Pakistan Muslim League (Nawaz) (PML (N));Pakistan Muslim League (Chattha) (PML (C)); Jamaat-i-Islami (JI); Mohajir Quami Movement (MQM); Awami National Party (ANP); Jamiat-e-Ulema-e-Islam (JUI)

Main members of Council of MinistersPrime minister & minister of finance Benazir Bhutto

Key ministers agriculture Yousuf Talpur commerce Ahmad Mukhtar defence Aftab Shaban Mirani education Khursid Ahmad foreign affairs Sardar Asif Ali information Khalid Kharal interior Nasirullah Baber investment Asif Ali Zardari parliamentary affairs Sher Afgan Niazi petroleum Anwer Saifullah population welfare Julius Salik production Mohammad Asgar states & frontier regions Mohammad Afzal Khan water & power Mustafa Khar works Amin Fahim

Governor of the State Bank of Pakistan Mohammad Yaqub

Pakistan 3


Economic structure: Pakistan

Latest available figures

Economic indicators 1991 1992 1993 1994 1995a

GDP at market pricesb PRs bn 1,020.6 1,211.3 1,341.9 1,564.9 1,835.9

Real GDP growthb % 5.5 7.8 1.9 4.0 4.3

Consumer price inflation % 11.8 9.5 10.0 12.4 12.3

Population m (mid-year) 115.6 119.1 122.6 126.1 129.7

Exports fob $ bn 6.38 6.88 6.76 7.01 7.73

Imports fob $ bn 8.64 9.67 9.31 9.60 11.0

Current account $ bn –1.40 –1.87 –2.94 –3.15 –4.46

Reserves excl gold $ m 527 850 1,197 2,929 1,733c

Total external debt $ bn 23.0 24.2 26.2 29.6 32.3

Debt-service ratio % 25.2 27.9 30.1 39.6 36.2

Exchange rate (av) PRs:$ 23.80 25.08 28.11 30.57 31.64c

August 30, 1996 PRs35.5:$1

% of % ofOrigins of gross domestic product 1994/95 total Components of gross domestic product 1993/94 total

Agriculture 25.6 Private consumption 71.9

Manufacturing 17.8 Government consumption 12.1

Wholesale & retail trade 15.9 Fixed investment 17.6

Transport & communications 10.2 Change in stocks 1.4

Public administration & defence 7.7 Exports of goods & services 15.6

Others 22.8 Imports of goods & services –18.8

GDP at factor cost 100.0 GDP at market prices 100.0

Principal exports 1993/94d $ m Principal imports 1993/94d $ m

Cotton yarn 1,266 Non-electrical machinery 1,597

Garments & hosiery 1,125 Petroleum & products 1,402

Cotton fabrics 824 Chemicals 862

Raw cotton 792 Transport equipment 832

Rice 243 Edible oils 489

Total incl others 6,803 Total incl others 8,569

Main destinations of exports 1994 % of total Main origins of imports 1994 % of total

USA 14.4 USA 9.7

Hong Kong 7.7 Japan 9.3

UK 7.6 Germany 7.8

Germany 7.3 Malaysia 7.4

Japan 7.3 UK 5.3

United Arab Emirates 5.4 China 4.7

a Official and EIU estimates. b Fiscal years ending June 30. c Actual. d Customs basis converted from rupees at average exchange rate forfiscal year.

4 Pakistan


Pakistan

Outlook

The government is defiant The coalition government led by the Pakistan People’s Party (PPP) of BenazirBhutto is still trying to make history by becoming the first administration tocomplete its term of office. There has never been a smooth transfer of power inthe country. The government is just over half way to achieving its goal, as thenext general elections are due in October 1998, but its policies are increasing thelikelihood of instability. The national budget announced on June 13 has beenalmost universally unpopular. It has given the opposition an issue to rally aroundafter two and a half years of relative impotence. However, the government hasshown, up to now, an ability to weather the political storms and controversies.

The budget is announced— The budget of June 13 imposed some of the heaviest taxes in the country’s history,aiming to raise an additional PRs40.8bn ($1.2bn), principally through extendingthe General Sales Tax (GST) to all imported and manufactured goods except forsugar, edible oil, petroleum products, unprocessed foodstuffs and agriculturalproducts, and by raising the standard rate from 15% to 18%. The government saidit was a time for tough measures to meet its budget targets. The prime minister’sspecial adviser on finance, V A Jaffrey, said the nation would have to make sacri-fices to achieve a deficit-free budget for the next generation in Pakistan.

—but it is not wellreceived at home—

But the budget was deeply unpopular. Businessmen reacted strongly againstthe government’s attempt to introduce a new sales tax. They opposed the tax,saying it would cause recession as it would adversely affect corporate profits. Atfirst their reaction was widely seen as being fairly standard, as budgets in thepast have led to similar protests.

—and prompts a series ofnationwide strikes

Many parts of commerce, industry and manufacturing opted for strikes and thethreat of strikes to try to get concessions. An indefinite transport strike started onJuly 30, which ended after three days when the government made a number of taxconcessions. Many small traders held a two-day strike from August 10. For yearsPakistani businessmen have protested about new taxes when budgets have beenunveiled, but this time many are predicting a rough road ahead for the Pakistanieconomy, suggesting that these protests may be more genuine than in the past.

The budget may galvanisea jaded opposition—

The opposition parties were predictably disgusted with the budget. The hardlineIslamic party, Jamaat-i-Islami, organised a demonstration on June 24 with theaim of marching on the capital, Islamabad. The protest ended in violence, withthe army being called out to quell the disturbance. Three protesters were shotdead and more than 50 injured. The incident helped to persuade the oppositionas a whole that they finally had an issue with which to try to challenge the

Pakistan 5


government. On July 24, 15 parties decided to launch a joint movement to bringdown the administration. They called for a campaign of civil disobediencestarting on August 25, with a demonstration in the city of Peshawar, the capitalof North-West Frontier Province, followed by the other three provincial capitals.Between them, they do not have enough votes to force a vote of no confidenceagainst the government. Their best hope would be to spark large enough publicprotests to force the president, Farooq Leghari, to use his constitutional powersunder the eighth amendment to dismiss the administration.

—but it remains lacklustre But the call has so far failed to strike a chord with the public. Despite theopposition group’s rhetoric, the opposition parties are divided on almost everyissue. Further, they are unclear on exactly how they are going to get thegovernment out of office before the next general election.

The army holds meetingswith economic experts

The army is keeping a close eye on developments. Highly placed sources saysenior members of the armed forces have held a number of meetings recentlyat which they have been given briefings from local economic experts, sum-moned for the purpose, on the state of the economy. The major factor in anygovernment’s survival or demise is the influence of the Pakistani armed forces,which has been involved in every change of power. There has been a newchief-of-staff since January 1996, General Jehanghir Karamat, and he has kepthis opinions on the situation to himself. Like his predecessor he maintains hehas little interest in politics, but past experience has shown such positions tobe highly flexible in the face of instability.

Cabinet expansion bringsin the prime minister’s

husband—

On July 31 Ms Bhutto made a long-delayed cabinet expansion, the first majorexpansion during her term of office, and made a decision which is in one waya solid response to opposition criticism that her leadership was flagging, but onthe other hand a move which will cast doubt on her good judgement. She gaveher husband, an MP, Asif Ali Zardari, a cabinet post. Until now he has been thehead of the country’s Environment Protection Council.

—and makes himinvestment minister

The next day the portfolios were announced and Mr Zardari was chosen tohead a new Ministry for Investment. It is a risky gamble for Ms Bhutto. Herhusband has faced years of allegations from many political groups about cor-ruption. In the past he had been jailed for more than a year and a half by theopposition when they were in power on a number of corruption charges. Hewas subsequently cleared of all wrongdoing, and has denied all the subsequentaccusations of corruption, describing them as an opposition smear campaign.Ms Bhutto has already been warned in the past by sources in her party and byelements in the armed forces to limit her husband’s role.

The government’s growthforecast is ambitious—

GDP (at factor cost) is officially estimated to have grown by 6.1% in fiscal year1995/96 (the target was 6.5%), up from 4.7% in 1994/95. The 6.3% growthtarget set for 1996/97 is not going to be easy to meet. Early indications suggestanother good year for cotton output. The secretary for food and agriculture,Zafar Altaf, is quoted as saying that “we are heading towards a situation wherethe cotton crop (in the current fiscal year) will beat the 11.92m bales record setin fiscal 1991/92, as we expect more than 12m bales this fiscal year”. However,

6 Pakistan


cotton output levels, which had fallen in early August, later steadied followingan unconfirmed report in the local press that the leaf curl virus had hit 30-40%of the 1996/97 crop in the Multan region of Punjab. (Punjab contributes 8.7mbales to the government’s current estimate of 10.6m bales).

—particularly as industrycontinues to suffer—

The government’s prediction of 7.2% manufacturing growth in fiscal 1996/97,compared with an estimated 4.8% in 1995/96, seems optimistic. Industry is indeep crisis, with a narrow base and little value-added. It needs massive invest-ment, but there is little sign of this materialising. Foreign investment shouldcontinue to grow, but only a small proportion of it is being earmarked forindustrial ventures. The June budget has not benefited industry and invest-ment sentiment is very weak, despite the improved law and order situation inKarachi. Even if the agricultural sector experiences healthy growth, GDPgrowth (at factor cost) is not expected to exceed 5.2% in 1996/97.

—against a background ofhigh inflation—

The June budget has set an ambitious target of reducing the budget deficit to4% of GDP by 1996/97. But later tax concessions and the government’s inabil-ity to keep to expenditure targets in the past will almost definitely mean thatfurther deficit financing through printing money is inevitable. This, along witha depreciating local currency, will ensure inflation remains high in calendar1996 and 1997, averaging 12% in both years.

—and a risingcurrent-account deficit

Export growth shows no sign of accelerating rapidly in the next 18 months—butimport growth will. During the first 11 months of 1995/96, merchandise exportsgrew by only 5.8% in dollar terms. Although exports of cotton and its relatedby-products (excluding synthetic textiles) grew by 15% during the period fromJuly 1995-April 1996, all other major items were down over the same period. Themerchandise import bill for July 1995-April 1996 rose by 16.5% (in dollar terms)to $10.9bn, but the State Bank of Pakistan (the central bank)’s Economic Surveywarns that the “present developmental needs may result in excessive import ofmachinery, chemicals, iron and steel, which may lead to higher imports”. Omi-nously for Pakistan, remittances from overseas workers are falling. Workersremittances—the principal source of foreign exchange earnings after merchan-dise exports—fell by 18.8% during July 1995-March 1996, to $1.1bn. The prin-cipal reason was that remittances from oil-producing countries fell steeply by24.4% during the period (down 35.8% from Kuwait, and 28.1% from SaudiArabia) to $833.16m from $1.1bn in 1994/95. Pakistan will not be able to avoida bigger current-account deficit in calendar 1996 as remittances continue to falland imports grow at a more rapid rate than exports, and thus the deficit of$4.4bn in 1995 is likely to reach $5.5bn in 1996. Without drastic measures toslow import growth the deficit could easily reach $6.2bn in 1997.

The government needs anIMF deal soon

The government says its June budget is aiming to achieve the IMF target of afiscal deficit of 4% of GDP, but its failure to reduce the maximum tariff rate from65% to 55% and to scrap the 10% regulatory duty on imports imposed inOctober 1995 means it has reneged on commitments it made to the IMF beforethe approval of the 15-month $600m stand-by loan in late 1995. The IMF hasdelayed disbursements of two tranches amounting to nearly $200m due in the lastfiscal year (1995/96). The stand-by arrangement with the IMF will have to be

-8

-6

-4

-2

0

1993 94 95 96 97

Trade

Current account

External balances$ bn

Source: EIU.

Pakistan 7


renegotiated, but a planned trip to Islamabad by a delegation from the IMF atthe beginning of August to discuss the release of the third tranche of $65.5m waspostponed. Now Pakistan will have to wait until the annual World Bank/IMFconference in Washington in late September before any new deal can be brokered.

Forecast summary($ m unless otherwise indicated)

1994a 1995a 1996b 1997b

Real GDP growth (%)c 4.0 4.7 6.1 5.2 of which: agriculture 2.8 4.9 6.7 5.8 manufacturing 5.6 4.4 4.8 6.5

Consumer price inflation (year-end; %) 8.0 10.8 10.4 14.3

Merchandise exports fob 7,005 7,734 8,538 9,386

Merchandise imports fob –9,600 –11,049 –12,372 –13,444

Current-account balance –3,148 –4,465 –5,540 –6,232

a Official and EIU estimates. b EIU forecasts. c Fiscal year ending year stated; at factor cost.

Economic results and forecastsa

(PRs bn at constant 1987 prices; % change year on year in brackets; fiscal year ending year stated)

1993b 1994c 1995c 1996d 1997d

Private consumption 383.10 398.50 423.78 454.29 481.48 (1.8) (4.0) (6.0) (5.7) (6.5)

Public consumption 71.10 70.90 71.40 74.97 73.8 4(17.7) (–0.3) (0.7) (5.0) (–1.5)

Gross fixed investment 96.40 100.90 102.25 103.46 109.29 (5.2) (4.7) (2.7) (4.2) (6.1)

Stockbuilding 8.70 9.00 8.50 9.00 8.50 (0.0) (3.4) (1.4) (1.5) (1.3)

GDP at market prices 549.50 571.30 595.87 623.28 654.44 (1.95) (3.97) (4.30) (4.60) (5.00)

Exports of goods & services 101.20 101.10 100.80 106.84 115.39 (1.4) (0.0) (–0.3) (6.0) (8.0)

Imports of goods & services 111.00 109.10 113.90 125.29 134.06 (13.6) (–1.7) (4.4) (10.0) (7.0)

a Fiscal years July-June. b Actual. c Official and EIU estimates. d EIU forecasts.

0

1

2

3

4

5

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1993 94 95 96(a) 97(a)

Pakistan

Asia excl Japan

Gross domestic product % change, year on year

(a) EIU forecast. (b) Nominal exchange rates adjusted forchanges in relative consumer prices.Sources: EIU; IMF, International Financial Statistics.

60

70

80

90

100

110

1990 91 92 93 94 95 96(a) 97(a)

Pakistan rupee: real exchange rate (b)1990=100

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8 Pakistan


Review

The political scene

A new oppositiongrouping takes shape—

The decision on July 24 by 15 opposition parties to group together marks thefirst time that the opposition has collectively called for the removal of thegovernment in more than two and a half years. Besides the main oppositionparty, Nawaz Sharif’s faction of the Pakistan Muslim League, the PML (N), thegroup includes parties from the hardline Islamic Jamaat-i-Islami to the left-wing Awami National Party, and the main opposition party in Pakistan’s larg-est city, Karachi, the Mohajir Quami Movement (MQM). A joint declaration bythe group after its first meeting described the government as corrupt and inef-ficient and called on the president to dismiss it and replace it with a neutralcaretaker administration. The declaration also called for the setting up of anindependent commission to investigate charges of corruption.

—and Jamaat-i-Islamiseems to be closer to the

PML (N)—

The grouping brings Jamaat-i-Islami closer to the PML (N) after a period ofantagonism. The Jamaat-i-Islami had backed Mr Sharif at the general electionsin 1990, and he won. But the two parties developed differences over Islamicissues and Jamaat-i-Islami refused to support him at the 1993 elections. Ele-ments in the PML (N) still blame Jamaat-i-Islami for his defeat. Something ofan uneasy rapprochement is under way, but Jamaat-i-Islami still refuses to saywhether it will support the PML (N) at future elections.

The grouping, which calls itself the Save Pakistan Movement, has called acampaign of nationwide civil disobedience in August 1996 to try to achieve itsaim. It hopes this will be enough to change the government, but it is dividedabout what other measures to take if street protests do not work. The move-ment is considering whether its members should resign en masse from thecountry’s elected bodies—a move unprecedented in Pakistan. Jamaat-i-Islami,which supports the idea, is trying to force the debate. Its leader, Qazi HussainAhmed, says he has decided to resign from parliament and has sent his resig-nation to the chairman of the Senate.

—but divisions exist overstrategy

There are divisions in the opposition over the resignation tactic: the PML (N)says it will resign en masse, as a kind of coup de grâce for the government oncestreet protests are under way. There is little chance of an agreement on the issueuntil the extent of any lasting protest becomes clear. And there is no sign thatthe opposition call has struck a major chord with the public. The governmentis confident. Benazir Bhutto says the resignations of opposition party memberswill only give her coalition a safer majority. On the opposition’s plan to bringher down with a disobedience campaign, she said: “There is no harm in wishfulthinking.”

A judicial decision causesproblems for the

government—

A ruling made by Pakistan’s Supreme Court in March is turning out to be amajor source of controversy. The court decided to curtail the power of thegovernment to appoint and transfer judges. The prime minister reacted bysaying there were elements in the country trying to topple the government byusing the judiciary. The government said the court had gone beyond its

Pakistan 9


powers, and asked it to think again, applying for a review. But on July 7, withno sign of the court backing down, the government withdrew its appeal forreview of the decision on a technicality and now has to accept the judgment.Lawyers for the government had insisted that the Chief Justice of the court,Sajjad Ali Shah, should not be among the judges hearing the case, arguing thathis own position depended on the outcome of the case. He rejected this, andthe government withdrew its petition. This is the legal end of the road for thegovernment’s efforts to challenge the decision. The Chief Justice rejected theprime minister’s accusation as an attempt to drag the judiciary into politics.

—and splits the judiciary The judiciary is now split between those who think the judgment is a boldmove asserting the independence of the courts, and a smaller number of otherswho think the move is unconstitutional and undemocratic. Judge ShafiMuhammadi of the Federal Shariat Court in Islamabad recently made a num-ber of remarks about the judgment when he was giving a ruling on a bailpetition. The details of the comments are not known, as the Supreme Court hasbanned their publication. But, in an unprecedented move, the Supreme Courtsummoned the judge to explain what the court describes as unwarranted ad-verse comments about the ruling which it says he made in an insulting man-ner. The Court says it will ask him to explain why action should not be takenagainst him for contempt of court. The Supreme Court is also facing oppositionto its ruling from a number of high court judges whose appointments havebeen declared invalid by the judgment. Some have refused to step down.

The Supreme Courtrestores local bodies in

Punjab—

One example of the poor state of relations came on June 26 when the SupremeCourt decided to restore local bodies in Punjab, which had been dissolved bythe interim government of the then prime minister, Moeen Qureshi, in 1993.Although that decision had benefited Ms Bhutto because most local bodieswere controlled by her main opponents, the PML (N), or the Jamaat-i-Islami,her government delayed holding fresh elections, worried that it would bebeaten again. A lengthy legal battle finally made it to the Supreme Court. Itsfull bench restored the local bodies and ordered their functionaries to be al-lowed to complete their terms, which expire in February 1997.

—only to face open andimmediate defiance from

the government—

However, the next day, in defiance of the judgment, the government passed abill in the Punjab assembly to repeal the Local Bodies Ordinance, and tens ofthousands of local body members were again without a post. The decision isbeing challenged in the Supreme Court, and it is being asked to initiate con-tempt of court proceedings against the chief minister of Punjab, Arif Nakai, forintroducing the bill.

—but the crucial battle isyet to come

The most potentially destabilising case for the government is waiting in thewings. It involves the former chief minister of Punjab, Mansour Wattoo, whowas removed from office last year by the president. He is challenging hisdismissal and wants to be reinstated. The Supreme Court has not allowed himto challenge his dismissal directly and has referred the petition back to theLahore High Court. If Mansour Wattoo is reinstated it could throw Pakistan’smost politically and economically important province into turmoil. Punjabreturns most seats to the National Assembly because of its population, and the

10 Pakistan


Bhutto administration is holding control of it by a slim majority. The primeminister went down to Lahore when the case came up and encamped there forseveral days, ready for the worst. Instead the government received a reprieve.The Chief Justice of the High Court decided to delay the case until after thesummer vacations. That means it will not be heard before September at theearliest. Despite the breathing space, the danger for the government has notgone away.

Imran Khan’s politicalmovement goes nowhere—

The entry of the former Pakistani cricket captain, Imran Khan, into the polit-ical arena has been a non-event so far, despite widespread sympathy for hisaims. The overwhelming reaction has been that while there is nothing wrongwith his ambitions, he seems confused and incapable of achieving them. Hehas said he will contest the next elections, whenever they come, with the aimof becoming prime minister, as the only way of ridding the country of corrup-tion, a nose-diving economy and a “VIP culture”. He hoped that his move-ment, launched in April 1996 and called the Tehrik-i-Insaaf (Movement forJustice) would draw massive support from the public. But there has been nosign of that so far. He has had little chance to put his claim to a real test withnationwide rallies. He undoubtedly commands considerable grass-roots sup-port but it is unclear if an already cynical Pakistani public will accept him as acredible alternative to the two main entrenched political rivals, the PakistanPeople’s Party (PPP) and the PML (N). Imran Khan is four years past the peak ofhis popularity, when he led the cricket team to victory against England in the1992 World Cup.

—while he is preoccupiedwith legal battles abroad

While his movement continues to promise a full agenda of policy proposalssoon, Imran Khan has been preoccupied with libel cases against him in Londonby his fellow (English) cricketers, Ian Botham and Allan Lamb, which he won.Although closely followed in the Pakistani press, no observers see a politicalprofit to Imran Khan from the victory. Coverage focused purely on his cricket-ing past, an indication of how little Imran Khan is regarded as a realistic threatto the political establishment at the moment. Nevertheless, Ms Bhutto hascontinued a verbal campaign of attrition against him. She used a speech inKarachi on July 4 to accuse him of corruption, describing him as a spoiled bratwho had used public donations to the charity cancer hospital he set up to fundhis way into politics. He has denied similar accusations in the past from otherpoliticians in her party.

Corruption issuesdominate the political

agenda for a while—

The ever-present issue of corruption has forced its way to the top of the polit-ical agenda again. The opposition believed it had the government on thedefensive in June, when Mr Sharif wrote to the president, urging him to call areferendum to consider whether a judicial commission should be set up to lookat corruption allegations against politicians and all other public servants. Anopposition resolution calling for the commission was voted down by the gov-erning coalition in parliament the previous week. Few Pakistanis have any faithin the existing government anti-corruption bodies and agencies, which haveproved largely ineffective.

Pakistan 11


—fuelled by a report froman anti-corruption agency

The controversy surfaced following the annual report, at the end of May, bythe federal anti-corruption commission, which concluded by saying that cor-ruption in Pakistan is so rampant—and extends so far into the corridors ofpower—that the commission itself had been crippled in its attempts to find outthe truth. The committee said that most countries where corruption is a prob-lem (giving the examples of Japan, South Korea and China) have a sense ofshame about it. The head of the anti-corruption committee said the only wayto start getting the proof required for prosecution was for there to be a nationalchange of heart. The government, however, says its anti-corruption efforts areadequate and working well.

Allegations about a housepurchase—

On June 9 a UK newspaper, the Sunday Express, published an article allegingthat the prime minister and her husband, Asif Ali Zardari, had bought a $3.75mmansion and 350 acres of land in the English county of Surrey. Ms Bhuttorepeatedly denied the report. She said: “I am too busy running the governmentto go shopping for houses.” The article was brought to the attention of parlia-ment by her main political rival, Mr Sharif.

—make an appearance atthe budget session

When Ms Bhutto entered the parliament chamber for the budget session onJune 13, most of this opposition members rose to their feet and waved copiesof the newspaper, specially flown from London, open at the page of the article.The opposition continues to try to make capital out of the allegations. Just afterthe new session of parliament started at the end of August, Mr Sharif made along and detailed speech revealing what he said were the records of telephonecalls from phones associated with the prime minister and her husband andtheir friends dialling a certain number in Surrey, England. He listed the sup-posed numbers and the time and duration of the calls. The prime minister’shusband says the alleged purchase of the mansion is a figment of the oppo-sition leader’s imagination.

There are family troublesfor Ms Bhutto too—

On July 7 Ms Bhutto and her brother, Murtaza Bhutto, met for the first time insix years. They developed differences about the direction of the PPP, foundedby their father, Zulfikar Ali Bhutto, in the 1960s. They met for three hours inIslamabad. Murtaza Bhutto said the meeting had been arranged at the requestof their mother, Nusrat Bhutto. Ms Bhutto has been fighting pressure from hermother to give her brother a bigger role in the PPP. A few years ago, the twowomen split over the issue and Ms Bhutto removed her mother from the postof Chair of the party. They are now closer, but the issue has not been resolved,and Murtaza Bhutto leads a small faction of the party accusing his sister ofcorruption.

—as a reconciliationmeeting fails

Murtaza Bhutto said he had made two demands at the talks: for his mother tobe restored as the Chair of the PPP, and for the removal from it of what hecalled remnants of the military administration which hanged their father in1979. Addressing a news conference in the city of Peshawar after the meeting,Murtaza Bhutto said he had been hoping for a reconciliation, but his sister hadshown no signs of wanting one, and that the gulf between them had grown. Hesaid she was completely divorced from reality and that she wrongly thoughtthat everything in the country was all right. He said the party faction he led

12 Pakistan


should now be considered as separate from the PPP. This is not a big blow forthe prime minister, since her brother has little popular support. But her partyfears that he could become a rallying point for the opposition.

Ms Bhutto holds rallies inKarachi—

On July 3 and 4 Ms Bhutto held two public rallies in Karachi, the first suchappearances in front of large crowds there since becoming prime minister. Sheannounced the formation of committees to consider dropping criminalcharges against some of the hundreds of suspected activists of the MQM, whohave been arrested by the authorities over the last year. She says the govern-ment has finally brought peace to the city. To try to reinforce the point, hersecond rally of the week was held in Orangi, an area dominated by supportersof the MQM. The last time a senior government official visited the area it wasin an armoured car. A few thousand people came to see her—there were noanti-government demonstrations. MQM supporters stayed away.

—where the situationcontinues to improve

There has been a remarkable turnaround in the situation in Karachi this year,with an unprecedented lull in violence since February. In June last year morethan 300 people were killed. In June this year it was less than 20. The govern-ment says a big security operation has defeated the MQM—many suspectedactivists have been killed and hundreds arrested. Ms Bhutto said that as agesture, the authorities would consider dropping charges against suspectedactivists not charged with murder. On August 15 the government of Sindhreleased 51 members of the MQM who it said had been involved in minorcrimes. The MQM says the lull in violence is merely a fragile peace, and couldbe “the calm before the storm”.

Bombings continue inPunjab

Law and order in Punjab, however, have continued to deteriorate. On June 10there were three bomb explosions within 20 minutes of each other near thecity of Gujranwala—one in a bus, killing at least four people and injuring morethan 12. Another bomb exploded in the waiting area of a railway station in thecity of Faislabad on July 8, killing three people and wounding at least 14 others.Earlier this year there were two bomb attacks on buses, including one of theworst attacks in the country’s history, with 40 people killed. Pakistan contin-ued to blame India for most of the attacks. On July 31 Ms Bhutto announcedthat the authorities had arrested two terrorists who had confessed to two of themajor attacks: the bombing of Lahore airport nine days before, in which sixpeople were reported killed and more than 50 injured; and the bombing inApril of the cancer hospital set up by Imran Khan in Lahore, in which sixpeople were killed and more than 30 injured. She said that two bombs hadbeen recovered from them, and that the men had admitted working for Indianintelligence. The prime minister also said the two recent bus bombs werecarried out by India to divert attention from the elections it was holding inIndian-administered Kashmir.

Ms Bhutto said in a speech on Kashmir on August 13 that the struggle wasentering a crucial phase. “Renegades and mercenaries trained and financed byIndia have been let loose for counter-insurgency to terrorise, intimidate andeliminate the authentic representatives of the Kashmiri people.” She added:“More immediately, the purpose is to facilitate the exercise of state assemblyelections.” Critics of the government say it has latched on to the issue of the

Pakistan 13


Kashmir elections to provide a convenient explanation for a situation it cannotcontrol, and does not really know the reason for. Ms Bhutto had initiallyblamed the opposition in Pakistan for the bombing of Imran Khan’s hospital.

The PPP gains in Kashmir A new administration has started work in Pakistani-administered Kashmirdominated by Ms Bhutto’s political party, the PPP, for the first time in over fiveyears. The party and its allies won a landslide victory at assembly elections atthe end of June. The return to control for the PPP is sweet revenge, after its lastadministration was dissolved in 1991, just nine months after being sworn in.The party was only formed in Pakistani-administered Kashmir in 1972 duringthe time when Ms Bhutto’s father was leading Pakistan. The PPP has never hada full term of office there. Its only previous administration was in 1975, cutshort in 1977 when General Zia ul Haq overthrew the national government inan army coup, imposed martial law and later hanged Zulfikar Ali Bhutto forconspiracy to murder. The new officials have acted immediately to try to wipeout part of that legacy. The new prime minister of Pakistani-administeredKashmir, Sultan Mehmood Chaudry, has revoked the holiday which used to beobserved on August 17 marking the anniversary of the death of General Zia.Whatever political party is in control, the issues for the administration remainthe same, namely the economy and job-creation.

Another major concern is Pakistani-administered Kashmir’s demand for a roy-alty to be paid to the administration from the central government, for a hydro-electric dam in the region, the Mangla dam. The national government stoppedpaying a royalty in 1972, and officials in Kashmir calculated that the resump-tion of the payment could bring PRs4bn ($110m) annually. The issue of thefuture of the region is also on the agenda, but there is less urgency for asolution than the national government makes out. The priority for mostpeople is an improvement in their standard of living.

A major air force dealprovokes controversy—

The Pakistan navy is continuing to negotiate the purchase of 32 Mirage aircraftat the cost of around $4bn. Each plane will cost $90m, with the rest spent ontraining and spare parts for each aircraft. The deal has split the armed forces byinfuriating the army, which wants to cancel the deal, and has also provoked astrong behind-the-scenes tussle in the government. The offices of the primeminister and the defence minister are reported to be strongly against a reviewof the decision since the defence committee of the cabinet gave the deal thego-ahead in 1993. The implications of the purchase for other deals and forgovernment spending in general are the major cause of concern. Pakistanreportedly wants to go ahead by raising half the money itself, and askingFrance for a loan for the other half. But it may prove impossible to raise around$2bn from Western banks in the current poor economic climate.

—but other purchases goahead

On July 31 Ukraine announced that Pakistan had purchased 300 T-80 UD mainbattle tanks costing more than $500m; the first major arms purchase from amember of the former Soviet Union. The tanks are due to be delivered over thenext three years, starting with a first consignment early next year. They arefitted with advanced features including the ability to fire at a target whilemoving. The Pakistan army preferred the Ukranian tank to the Chinese T-85and the Polish T-72. Pakistani defence sources say the deal includes training

14 Pakistan


and maintenance. Meanwhile, the first shipment of arms released by the USAunder the Brown Amendment has left the USA and is scheduled to arrive inKarachi later this year.

Little progress towardstalks with India

Hopes of a return to talks with India at foreign secretary level, which brokedown in early 1994, have diminished. Ms Bhutto had made the offer of a returnto dialogue in the first place. India’s new prime minister, H D Deve Gowda,replied positively in early June. Then a bizarre waiting game ensued, withMs Bhutto saying that she was busy with the budget and would reply soonafterwards. India waited patiently, but no reply came, while the Pakistani for-eign office made repeated statements that a letter would be sent in the nearfuture. Then the foreign minister, Aseff Ahmad Ali, surprised everyone with astatement that no reply would be made. He said there was no need to writeanother letter; the modalities of talks just needed to be worked out, since bothsides had already expressed a willingness to meet. Ms Bhutto’s accusations ofinvolvement by India in Punjab’s law and order situation have put paid to anyimmediate prospects for talks.

So has the Comprehensive Test Ban Treaty (CTBT). Whether to sign the CTBThas been a dilemma for the Pakistani government. Its policy had shown signsof wavering in the face of widespread pressure to sign without India ratifyingthe treaty. The foreign office at one point started to hedge its bets, appearing tofavour the signing of the treaty as long as it did not come into force until all thefive nuclear powers and three threshold nuclear states had ratified it. But theprime minister repeated on August 1 that Pakistan would not sign unless Indiadid, in the interests of national security.

The US ambassador toIndia visits Pakistan

The US ambassador to India, Frank Wisner, visited Pakistan in July and ap-pealed for both countries to seize the opportunity for “greatness within theirgrasp”. Speaking to the Armed Forces Command and staff college in Quetta onJuly 10 he said that, while acknowledging that America had found commonground with both countries, “the truth is, as our relationships grow in breadthand complexity, the likelihood also grows of divergent opinions surfacing”. Heappealed for India and Pakistan to pay particular attention to formalising tradeties and to the bilateral political relationship, especially over Kashmir. He said:“Elections in India pose no threat to Pakistan, to your sovereignty, your prin-ciples, or to your claims on Kashmir. A political process is the single bestantidote to the violence that plagues the Valley. It will rejuvenate a wearypeople and revitalise a moribund economy.”

Embarrassment over theSecurity Council agenda

Another part of the Jammu and Kashmir issue appears to have caught thePakistani foreign office completely off guard. On August 22 its spokesman, GulHanif, said that Pakistan was making urgent efforts to try to prevent the UNSecurity Council from deleting a permanent item on its agenda relating toPakistan’s dispute with India over the region of Jammu and Kashmir. He said theissue was among 50 items scheduled to be deleted from the agenda on Septem-ber 15. What has embarrassed Pakistan is that it did not get wind of the decisionearlier. Pakistan, he said, regarded the decision to delete the item as incorrect,immoral and frivolous; the main reason for it appeared to be an overcrowdedagenda. What is more, the foreign office said a committee of the Security

Pakistan 15


Council had taken the decision, without consultation, in a closed meeting.Mr Hanif said the Security Council has agreed to review its decision, and thatPakistan had been told that a UN working group would meet soon to finalise itsrecommendations. For Pakistan the removal of a permanent item on the issuewould be a major blow and embarrassment. Its position is that the people ofJammu and Kashmir should be allowed the right to self-determination accord-ing to UN resolutions passed in the General Assembly. It does not want the UNitself to lose interest so publicly.

There is progress with theAfghan government—

Pakistan’s relations with Afghanistan have taken a major step forward for thefirst time in over a year. On August 10 four senior members of the Afghangovernment—the interior, foreign, and deputy foreign and deputy commerceministers—arrived in Islamabad for talks with Pakistani officials led by theprime minister’s adviser on finance and economics, V A Jaffrey. It was only thesecond official meeting since September 1995, when a mob of Afghan govern-ment supporters burned down Pakistan’s embassy in Kabul. In the first meetingon May 7, 1996, there were only a few hours of discussion focusing onPakistan’s demand for compensation for the attack.

—as Pakistan says it willreopen its embassy in

Kabul

This time, Pakistan said it would consider reopening its embassy shortly. Theforeign secretary, Najumiddin Shaikh, is due to make an official visit to Kabulto see where a new embassy could be built. Both sides say the main topic at thetalks was the supply of food and petroleum to Afghanistan through Pakistan.Officials said Pakistan had agreed to make a goodwill gesture by allowing adelegation from the Afghan government to buy food and fuel from local mar-kets to supply the immediate requirements of the people of Kabul. The newdynamic in the relationship coincides with the first representation in thegovernment of the Hezb-i-Islami leader, Gulbuddin Hekmatyar, who was re-cently made prime minister after switching sides from the opposition.

Economic policy and the economy

The budget increasesexpenditure—

The draft budget for fiscal year 1996/97 (July-June) projected overall spending atPRs500.2bn ($14.4bn), up 15.1% on the budget estimates of PRs434.7bn for1995/96, with outlays on debt servicing (PRs186.1bn, up from a revised figure ofPRs164.5bn last fiscal year) and defence (PRs131.4bn, up from PRs115.2bn lastfinancial year) accounting for 63% of the total. The budget forecast total incomeat PRs439.3bn, up 8.4% on budget estimates for 1995/96 of PRs405.1bn. Ex-pected revenue from domestic sources, primarily taxes, will rise by 7.2% com-pared with the estimated 1995/96 outturn, to PRs336.4bn. Indirect and directtax receipts were forecast to rise by 12.2% and 14.8% respectively—an ambitioustarget, which looks unlikely to be realised. Surcharges are expected to increaseby 4.8%. Non-tax revenue has been projected at PRs90.5bn in 1995/96, com-pared with PRs94.3bn in the revised estimates of 1995/96.

—and raises taxesinitially—

The draft budget set out to raise an additional PRs40.8bn in new taxes, takingdomestic taxes to PRs320bn, principally through extending the General SalesTax (GST)—a crude sort of value-added tax—to all imported and manufacturedgoods except for sugar, edible oil, petroleum products, unprocessed foodstuffs

16 Pakistan


and agricultural produce, and by raising the standard rate from 15% to 18%.The government aims to raise PRs25.8bn from the extension of the sales tax.Tax holidays for industry were abolished; import duties were lowered on cer-tain machinery for textiles and manufacturers, as well as for some primary rawmaterials for the plastics industry; and many income tax exemptions wereeliminated. There was only a small increase in direct taxes—the target is to raisean extra PRs3bn.

—only to be forced tolower them after

widespread protests

Opposition parties, workers and members of the business community stagedwidespread protests against the budget in June. The business sector was espe-cially unhappy over the expanded scope of the GST. The government was alsocriticised for not imposing taxes on large landowners or cutting military ex-penditure. Responding to the fervent criticism, the government reduced someof the proposed taxes and lowered the revenue target. A tax on buses, trucksand oil tankers was reduced, and plans to impose the 18% general sales tax onmany industrial products was eased.

Comparative budget positiona

(PRs m; fiscal year)

1995-96 1996-97Budget Revised Budget

Income 405,123.0 405,350.9 439,302.2 Internal income 324,526.6 313,737.9 336,400.3 Revenue receipts (net) 265,884.7 260,612.1 280,034.5 Capital receipts (net) 37,141.9 30,473.7 26,120.4 Financing for SAP from privatisation proceeds 12,000.0 12,000.0 14,000.0 Financing by provinces of PSDP 9,500.0 10,652.1 14,045.4 Financing by Sindh & Punjab – – 2,200.0 External resources 80,596.4 91,613.0 102,901.9

Expenditure 434,689.7 440,471.7 500,156.8 Current 338,189.7 353,228.7 395,405.8 Development (PSDP) 96,500.0 87,243.0 104,751.0

Less expected cash build-up – 4,608.3 –

Deficit 29,566.7 30,512.5 60,854.6

a Before concessions were made.

Source: Ministry of Finance.

GDP growth targets are asambitious as ever—

Although GDP (at factor cost) is estimated to have grown by 6.1% in fiscal year1995/96 (the target was 6.5%), up from 4.7% in 1994/95, the growth target of6.3% for 1996/97 is not going to be easy to meet. The cotton crop will need tobe well over the estimated 1995/96 outturn of 9.94m 170-kg bales. While higherprices available to growers over recent months should encourage a further ex-pansion of the area under cultivation, the return of adverse weather or theleaf-curl virus which have devastated previous harvests cannot be ruled out.

—but inflation has slowed Policy-makers will be happy with recent inflation figures. Consumer priceinflation was 10.3% year on year in July, compared with 10.8% in May and11.8% in July 1995. In his budget speech to the National Assembly the financeminister, Makhdoom Shahabuddin, called for a further lowering of the infla-tion rate through “tight control over fiscal deficits and monetary expansion”.

Pakistan 17


The budget for the current fiscal year (1996/97) does not look encouraging forinflation.

The IMF deal is stalled— The government says its budget is aiming to meet the IMF target of a fiscaldeficit of 4% of GDP, but its failure to reduce the maximum tariff rate from65% to 55% and to scrap the 10% regulatory duty on imports imposed inOctober 1995 means it has reneged on commitments it made to the IMF beforethe approval of the 15-month $600m stand-by loan in late 1995. The IMF hasdelayed disbursements of two tranches amounting to nearly $200m due in thelast fiscal year. The stand-by arrangement with the IMF will have to be renego-tiated. A planned trip to Islamabad by a delegation from the IMF at the begin-ning of August to discuss the release of the third tranche of $65.5m has beenpostponed.

—because the budget hasnot been finalised

The key reason is that the budget has not been finalised. The IMF has not beenimpressed by the failure of the government to make progress with major privat-isations, or by its attempts to massage budget figures by retiring enough loansa few days before the conclusion of each quarter to meet the quarter’s borrow-ing requirement, and then re-borrowing the amount within days. The govern-ment retired and re-borrowed an average of PRs30bn ($868m) in each quartersince the end of the second quarter in December 31, 1995. This appears to havejeopardised the chances of obtaining substantial Enhanced Structural Adjust-ment Facility (ESAF) credits from the IMF in the medium term. Bilateral credi-tors are likewise expected to withhold funds.

Agriculture

The budget smiles onlandowners again

The longrunning issue of whether landowners and farmers should pay tax ontheir agricultural income has progressed little further. The budget increased thewealth tax by 60%, but it will only raise about PRs20m ($565,000) for thegovernment. This compares with a wealth tax on houses, plots and apartmentsin urban areas, which is expected to raise over PRs100m. There is a new capitalvalue tax on the purchase of large agricultural land holdings, from which thegovernment is predicting an extra PRs300m. However, landlords who pay littlewealth tax will be exempt from the tax. The issue of tax for the agriculturalsector is delegated to the provincial governments where little is done in theface of powerful lobbying.

Agriculture output rises— The State Bank of Pakistan (the central bank)’s Economic Survey reports anoverall growth of 6.7% in the agricultural sector in 1995/96, up from 5.9% inthe previous year. It attributes this to an expansion of 9% in major crops, 4.9%in minor crops, 5.6% in livestock and 8.3% in the fishery sector. The report saysthe overall growth would have been much higher but for a decline in forestry.

—and estimates for lastyear’s cotton crop are

encouraging

There are mixed messages on the performance of cotton to date, but it seems tohave recovered this year and may be heading for a big crop. The EconomicSurvey for 1995/96 estimates it at 10.6m bales, compared with 8.7m bales in1994/95, up 21.7% because of improved weather and an increase in the areaunder cultivation to 2.99m ha, from 2.65m ha in 1994/95. Later government

18 Pakistan


predictions suggest an even higher crop, in what appear to be governmentleaks ahead of the publication of official estimates. The secretary for food andagriculture, Zafar Altaf, is quoted as saying that: “We are heading towards asituation where the cotton crop will beat the 11.92m bales record set in1991/92, as we expect more than 12m bales this fiscal year.” However, cottonoutput levels, which had slid in early August, later steadied following an un-confirmed report in the local press that the leaf curl virus had hit 30-40% of the1996/97 crop in the Multan region of Punjab. Punjab contributes 8.7m bales tothe government’s current estimate of 10.6m bales.

Rice production is higher— The production of rice in 1995/96 totalled 3.97m tons (of which 1.48m tonswas basmati and the rest irri and other varieties), an increase of 15% comparedwith 3.45m tons in fiscal year 1994/95. The total area under cultivation in1995/96 is reported to be 2.16m ha.

—and wheat cultivationhas also improved

slightly—

The Economic Survey said that the country had slightly exceeded the targets forwheat cultivation set for the year, which were for production of 17.4m tons,with 8.2m ha under cultivation. In 1995/96 the crop was reported to be 17.57mtons, with 8.37m ha under cultivation, up by 3.3% and 2.4% respectively.Pakistan imported 27.5% less wheat during the period from July 1995-April1996, but the import bill rose by 10%, owing to the “unprecedented” 51.6% risein its unit value. The sharp increase in the price on international markets tookthe import bill up by $39.2m.

—but sugar productiondoes less well

The report also says that sugar production was 2.5m tons during 1995/96,down compared with 3m tons last year. Some areas under sugar cultivationwere switched to cotton production, leaving a total sugar cultivation area of960,000 ha compared with 1.09m ha in 1994/95. Four mills had been closed,the report says—leaving a remaining 70 working mills in the country (37 inPunjab, 27 in Sindh, six in North-West Frontier Province).

The AgriculturalDevelopment Bank

recovers

The chairman of the Agricultural Development Bank of Pakistan (ADBP), TariqSultan, presented an overview of the bank’s recovery on August 21. He said thatduring the fiscal year 1995/96 some PRs12.8bn ($360m) has been recovered,compared with PRs9.8bn the previous year. The total credit disbursement dur-ing the last financial year was PRs10.3bn. Recovery had been achieved becauseonly PRs478m of loans had been rescheduled compared with a record resched-uling of PRs4.7bn in the previous financial year. The bank had resumed dis-bursements in March 1996 after, in effect, suspending credit in August 1995after a cash crisis following years of imprudent lending. Speaking at the meet-ing, Pakistan’s minister of state for finance, Makhdoom Shahabuddin, said therecovery programme of the bank was pleasing compared with what he de-scribed as a “shambles” in the past. He appealed for a change in the culture inthe agricultural and rural sector. There was, he said, “no culture of repaymentof loans”.

Pakistan 19


Industry

Industry is divided overbudget concessions

A team from the Federation of Pakistan Chambers of Commerce and Industry(FPCCI) met the government shortly after the announcement of the budget inJune in an attempt to get concessions. The head of the team, and president ofthe FPCCI, senator Ilyas Bilour said: “The policies of the present governmenthad shaken the confidence of industrialists and the community had lost confi-dence.” He said the draft budget was, “smuggling oriented”. The Federationdescribed the budget as anti-poor, anti-industry and anti-traders, predicting itwould lead to massive unemployment.

The FPCCI gets little fromthe government—

The meeting with government finance officials, on July 18, yielded little for theFPCCI. The Federation withdrew a number of demands, including the loweringof the 18% General Sales Tax (GST) for 28 industries under the fixed-tax re-gime, zero-rated GST for export-related industry, GST concessions on cottonwaste, and GST concessions for the poultry feed industry. It did not come awayempty-handed, however. A 5% central excise duty on soap and matches waswithdrawn, the country’s cottage-industry GST exemption of PRs300,000 wasraised to PRs10m, and a 4% turnover tax was brought down to 2%.

—and annoys the businesscommunity

But the meeting infuriated parts of the business community, especially sincethe Federation had come away from the meeting claiming that it had gotalmost everything it wanted. On July 24 a meeting of the Pakistan ExportersForum, grouping 19 export associations, said they would withhold the pay-ment of sales tax on zero-rated industry, with the possibility of a nationwidestrike, to be discussed. It said the FPCCI had failed to convince the governmentof the gravity of the situation.

The APTMA criticises thegovernment’s export

target—

The All Pakistan Textile Mills Association (APTMA), an influential lobby, haswarned the government that the allowance of 1.8m bales for export in 1995/96is forcing mills across the country to close. An extraordinary meeting of theassociation on July 27 in Lahore said the “majority of its member mills” hadbeen closed because of a cotton scarcity, leading to the increased prices of newcrop arrivals. Officials say 87 textiles mills had closed up to April 1996, but saidmany of them had been inoperative for years. Some industry analysts say theAPTMA is trying to get a pledge from the government for a ban on the exportof cotton until the end of the year.

—and Mr Leghari entersinto the cotton debate

The Pakistani president, Farooq Leghari, has blamed the textiles mill owners fordepriving cotton growers of acceptable prices. Speaking at a conference on cottonand textiles in July organised by the Cotton Export Corporation, he floated theidea of the formation of a body to bring together the different parts of the industryfrom grower and ginners to traders and exporters, to formulate a consensus. Someother industries have been unhappy at a number of government concessions tothe mill owners, including the restructuring and rescheduling of loans.

The cement industry isnot happy about the new

taxes—

The cement industry has immediately felt the pinch of the budget. It was hit bya number of measures, particularly the increase in furnace oil prices by 25%,the raising of the sales tax up to 18% from 15%, and a rise in excise duty from

20 Pakistan


25% to 35%. The price of a bag of cement in the local market was PRs145-160before the budget. Following the imposition of excise duty at 35% and sales taxat 18%, the price is now PRs185-204. There is going to be a knock-on effect inthe construction sector. The industry was hoping to export cement by 1998,expecting capacity to rise to 12.7m tons compared with a projected domesticdemand of 9.7 tons. Some 20 cement units are operating at the moment, witha capacity of 9.97m tons, and 16 of the units are in the private sector, accordingto government figures. The government reported that production fromJuly 1995-March 1996 was 6.93m tons, up 12.4% compared with the previousyear. There was one piece of good news for domestic producers—the budgetraised import duties for cement from 25% to 100%.

—but not all of industry isunhappy about the budget

Some sectors of industry benefited from the budget. Import duty on the ship-breaking industry has been reduced from 45% to 10%. Customs duty on ironand other ores has been lowered to 10% from 15%. Import duty on timber hasbeen decreased and has been exempted from regulatory duty. Import duty onpaper machinery was reduced from 20% to 10%, and customs duty on paperpulp was reduced from 35% to 10%.

Investment in industrygrows

The Economic Survey reports an overall 37.6% increase in industrial investmentfrom 1995/96 compared with the previous year, including a 40.3% increase ininvestment in large-scale public-sector industry, and a 300% increase in invest-ment in small-scale public-sector industry—PRs120m, compared with PRs30min 1994/95, but well short of the 1993/94 total of PRs173m. The government’sprediction of 7.2% manufacturing growth in 1996/97, compared with an esti-mated 4.8% in 1995/96, seems optimistic. Industry is in deep crisis, with anarrow base and poor value-added. It needs massive investment, but there islittle sign of this materialising.

Energy

The Kott Adu dealis finalised—

The privatisation of the 1,600-mw Kott Adu power-plant, the largest thermalplant in South Asia, was formalised by the signing of 12 agreements betweenthe Privatisation Commission and National Power on June 28. National Powerwas the highest bidder, with an offer price of $218m for 26% of the shares andstrategic management of the plant. The finalisation of the deal paves the wayfor the disposal of a similar stake in the 880 mw oil-fired Jamshoro facility nearHyderabad. Its assets are estimated to be worth about PRs15bn. Final bidding isexpected to be held in late October.

—but the government isnot open to criticism

The privatisation of the Kott Adu Plant has led to the sacking of the chairman ofthe National Electric Power Regulatory Authority, Dr Gulfaraz Ahmad, after hecriticised the government’s power policy. In a letter to V A Jaffrey, quoted by theweekly newspaper, the Friday Times, Dr Ahmad said: “Before privatisation,WAPDA’s generation cost at Kot Addu was PRs1.21/kwh. After privatisation wewill be buying back power from Kot Addu at more than twice this value.”

Pakistan 21


Bidding for electricitydistribution units to

begin soon

The Privatisation Commission says bids for a 26% stake in the Faislabad AreaElectricity Board (FAEB) will be invited before the end of 1996; this will be thefirst of eight distribution companies on offer. The commission wants to con-clude the deal during the first quarter of 1997. It includes the transfer of man-agement control to the private sector. The International Finance Corporation,adviser to the Commission on the sale, has recommended that a consortium oflocal and foreign investors would be the best buyers. The post-privatisationregulatory framework has not yet been drawn up.

A new power barge getsfunding

The US Maritime Administration has approved a $402m credit to Pakistan fora 450-mw power barge complex at Port Qasim, Karachi. It is a platformmounted plant which is expected to take 28 months to complete. The powerwill be sold to Karachi Electric Supply Corporation (KESC). The project expectsto increase KESC’s current power supply by 25%, providing electricity for45,000 households in Karachi.

The Iranian visit focuseson the pipeline deal—

The Iranian oil minister, Gholamreza Aghazadeh, arrived in Islamabad onAugust 19 for a three-day visit and talks with the Pakistani authorities on a1,600-km gas pipeline deal worth $3.5bn-4bn, that could be hit by US sanc-tions against Tehran. The official government news agency quotedMr Aghazadeh as saying on arrival that the USA sanctions would not put“time-tested Pakistan-Iran ties in jeopardy. This is a very small political prob-lem which should not become an impediment in Pakistan-Iran relations”.

—and two agreementsare signed

The talks ended with two deals, one of which was a $1.2bn contract to build ajoint oil refinery in Pakistan’s Baluchistan province to process 120,000 b/d ofIranian crude. Tehran Radio reported that 75% of the cost would “be met byinternational sources and the rest will be paid jointly by the two countries”.The two countries also signed an agreement to conduct a feasibility study forthe pipeline. Pakistan and Iran had earlier decided to invite bids in July 1996for the pipeline project. Australia’s Broken Hill Proprietary Ltd (BHP) has con-firmed that it and several other Western companies had held talks with Iran onthe proposed gas export project but that BHP had not made any commitments.

Transport and communications

Partial privatisation ofPLC remains stalled

The sale of a 26% stake in the Pakistan Telecommunications Company to anoverseas operator is still being delayed. Officials say the delay is because ofworries that the response from potential buyers could be disappointing as anumber of other state-controlled telecommunications companies outsidePakistan are also up for sale. It seems very unlikely that the sale will be finalisedthis year. But companies are still lining up in interest. On August 20 thePakistan Air Force’s business and welfare group, Shaheen Foundation, joined aDutch-Indonesian consortium to launch a possible bid. A Shaheen Foundationstatement said it had joined with the Setdco group of Indonesia and Dutch PTTTelecom. The statement added that if successful the consortium would mod-ernise and expand the present communication network in the countrythrough substantial investment.

22 Pakistan


Transporters strike— An indefinite national strike was called on July 30 by an umbrella group oftransport associations, the Supreme Council of All Pakistan Public TransportAssociations, to protest at the provisions in the budget which affected theindustry, including: the imposition of capital value tax of 15% on the firstregistration of a vehicle; a 100% increase in the professional tax; a 400% in-crease in vehicle fitness certificates; 18% sales tax on spare parts; and 3% onlubricants. It lasted three days, causing widespread disruption, bringing theport of Karachi to a virtual standstill with trucks refusing to operate, andcausing panic-buying of fuel in many areas.

—and win concessions It ended because an emergency negotiating team from the government gave into a number of demands. The sales tax stays, but the government withdrewcapital value tax on public transport, exempted ten-year-old trucks from taxes,and said it would scrap the increase on vehicle fitness certificates and permitfees.

The railways are in deeptrouble

The Economic Survey reports that the railways carried 51.5 million passengersduring July 1995-March 1996. It also paints a grim picture of the railway’sassets. It says 60% of rails, 55% of sleepers, 60% of diesel locomotives, 50-60%of plant and machinery, and 100% of steam and electric locomotives are overage. Reports cite a recent government inspection Commission looking intoPakistan railways as saying that “malpractice and over-staffing have causedbillions of rupees of loss”, and the system was “on the verge of collapse”.

Banking and finance

A commission is to be setup to investigate loans

The government announced on August 19 the setting up of a commission toidentify bank loan defaulters. The information minister, Khalid Kharal, saidthat the cabinet had approved the suggestion from the Economic CoordinationCommittee of the cabinet for a commission to investigate non-performingloans in banks and financial institutions from January 1, 1980, with particularreference to loans above PRs10m ($282,000). The commission will be made upfrom three retired judges, an economist or banker, and an official from theState Bank of Pakistan. The minister said the commission would prepare a liston a quarterly basis of defaulters, cases of loans extended without proper secu-rities, and loans improperly written off, rescheduled or readjusted. More thanPRs109bn is yet to be recovered from the defaulters of loans from banks andfinancial institutions. While the announcement of the commission has beenwelcomed there is little confidence that it will be able to make significantprogress, and its detailed terms of reference and powers are unclear.

Foreign trade and payments

Exports are still growingslowly—

There seems little prospect of a meaningful upturn in merchandise exports,which grew by only 5.8% (in dollar terms) in the first 11 months of fiscal year1995/96. The State Bank of Pakistan (the central bank)’s Economic Survey esti-mated that merchandise export earnings for 1995/96 would be $9.2bn. For theperiod July 1995-April 1996, the survey reports earnings from the cotton group,

Pakistan 23


excluding synthetic textiles, at $4.19bn, 15% up compared with the sameperiod in 1994/95. However, all other major items quoted were down over thesame period; rice (by 1.1% in dollar terms), leather (9.6%), leather manufac-tures (11.1%), fish and fish preparations (15.3%), carpets and carpeting(12.9%), petroleum products (26.4%), synthetic textiles (27.8%) and fruit andvegetables (12%). The major sources of exports remained stable in 1994/95,with the greatest share taken by the USA (16.2%), followed by the UK (7.1%),Germany (7%), Japan (6.7%), Hong Kong (6.6%), Dubai (4%), France (3.3%)and South Korea (3.3%).

—but there are ambitiousplans to increase export

growth—

On July 16 the commerce minister, Ahmed Mukhtar, announced an merchan-dise export target of $10bn for fiscal year 1996/97 (July-June). He said a specialteam of leading industrialists and exporters is drawing up a report on how toincrease exports, which is due to be published soon. He announced measuresto try to facilitate trade, including permission for the private sector to exportcement rather than go through government channels. A 180-day export fi-nance facility would be provided to cotton-textiles goods, non-textiles itemsand minerals.

—while imports areexpanding as rapidly as

ever

The Economic Survey projected the merchandise import bill for 1995/96 to be$10.9bn, but it warns that the “present developmental needs may result inexcessive import of machinery, chemicals, iron and steel, which may lead tohigher imports”. During July 1995-April 1996, it said merchandise imports roseby 16.5% (in dollar terms), up to $9.6bn. The report says the higher billstemmed primarily from the increased import of machinery (excluding trans-port equipment), petroleum products, chemicals, iron and steel, paper andpaper board, milk and milk food, and pulses. It said the import of these sevenitems had risen by 26.8% during the period, with their share in total exportsduring the period standing at 58.2%. The official expectation that merchandiseimports, which jumped by 17% (in dollar terms) during the 11 months to theend of May 1996, will grow no more than 5.9% in 1996/97 also looks unrealis-tic, as it is based on the hope that the prices of crude oil, petroleum productsand edible oil will stabilise. All of them are being required in larger quantitiesowing to rising consumption and declining domestic production. The reportquotes 1994/95 figures for the major sources of imports. They show Japan asthe principal source (9.6%) followed by the USA (9.4%), Malaysia (8.8%, upfrom 5.5% in 1993/94), Germany (6.8%), Kuwait (5.8%), the UK (5.1%), SaudiArabia (4.9%), and China (4.4%).

Remittances fall sharply The balance-of-payments position had “come under pressure” in 1995/96, re-ports the survey, but improved after the devaluation of the rupee in October1995. During July 1995-March 1996, private unrequited transfers (net) rose by$24m to $1.79bn. However, workers’ remittances—the principal source of for-eign exchange earnings after merchandise exports—fell by 18.8% during thesame period, to $1.1bn. The principal reason was that remittances from oil-producing countries fell steeply by 24.4% during the period (down 35.8% fromKuwait, and 28.1% from Saudi Arabia) to $833.16m from $1.1bn.

24 Pakistan


Political structure: Afghanistan

Official name: Islamic Republic of Afghanistan

Form of government: interim government

The executive: an agreement signed on March 7, 1993, by leaders of eight mujahedeen parties effectively madeGulbuddin Hekmatyar prime minister with substantial executive power. Burhanuddin Rabbani was confirmed aspresident, in an essentially advisory capacity

National legislature: the agreement stipulated that there should be elections within eight months to aConstituent Assembly responsible for drawing up a constitution paving the way for presidential andparliamentary elections

Last national election: April 1988 (Assembly)

Next national election: yet to be decided

National government: the agreement authorised the prime minister to form a government in consultationwith the president

Main political organisations: Hezb-i-Islami; Jamiat-i-Islami; Ittehad-i-Islami; Harakat-i-Inqilab-i-Islami;National Liberation Front; National Islamic Front; Shia Hezb-i-Wahdat

Afghanistan 25


Economic structure: Afghanistan

Latest available figures

Economic indicators 1991 1992 1993 1994 1995

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

Real GDP growtha % n/a n/a n/a n/a n/a

Consumer price inflation % 56.7 n/a n/a n/a n/a

Population m (mid-year) 16.43 19.06 n/a n/a n/a

Exports foba $ m 140.4 n/a n/a n/a n/a

Imports cifa $ m 411.4 n/a n/a n/a n/a

Current account $ m n/a n/a n/a n/a n/a

Reserves excl gold $ m 234.9 226.7b n/a n/a n/a

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

Exchange rate (av) Af:$c 50.60 50.60 50.60 50.60 50.60

August 30, 1996 Af4,750:$1

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

Agriculture & forestry 52.6 Private consumption 70.6

Industry 28.5 Government consumption 35.0

Construction 5.8 Gross fixed capital formation/increase in stocks 17.3

Trade 7.9 Exports of goods & services 19.6

Transport & communications 3.5 Imports of goods & services –50.3

Services 1.7 Statistical discrepancy 7.8

GDP at factor cost 100.0 GDP at market prices 100.0

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

Fruit & nuts 93 Capital goods 293

Carpets 44 Food 150

Wool 10 Textiles 117

Karakul skins 3 Petroleum products 99

Cotton 3 Sugar & vegetable oil 53

Total incl others 235 Tyres 50

Total incl others 900

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

Soviet Union 72.4 Soviet Union 56.3

Germanyd 3.1 Japan 9.4

India 3.1 Singapore 5.6

Belgium-Luxembourg 2.3 India 2.9

UK 1.9 South Korea 2.2

Czechoslovakia 1.2 Germanyd 1.7

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

26 Afghanistan


Afghanistan

Outlook

The interim governmentmust work hard to stay

together

The future of the marriage of convenience between the Pashtun Hezb-i-Islami ofthe prime minister, Gulbuddin Hekmatyar, and the mainly Tajik Jamait-i-Islamiof the president, Burhanuddin Rabbani, is uncertain. Mr Rabbani’s top militarycommander, Ahmad Shah Massoud, has differences both with Mr Rabbani andMr Hekmatyar, which could become more serious. Mr Hekmatyar said in Julythe interim coalition aimed to bring general elections to Afghanistan within6-12 months. This seems nearly impossible given political differences in thegovernment and continuing confrontation with the opposition, mainlyPashtun, Taliban.

General Dostam’s positionis crucial

General Abdul Rashid Dostam, who controls seven provinces in northernAfghanistan, signed a ceasefire with the government on August 13 and agreedto open the vital Salang Highway on August 29. If the highway remains openit will allow the government to join trade routes in central Asia and lessen itsdependence on food and fuel imports from Pakistan. It will be a huge boost forthe coalition and strengthen Mr Hekmatyar’s position. The ceasefire wasde facto as there had been no fighting for a year between General Dostam andthe government. But at the end of July fierce fighting broke out betweenGeneral Dostam’s forces and Mr Massoud’s forces in Kohestanat and Sanjerakdistricts, government-held pockets in General Dostam’s territory. Since theagreement there have been battles between General Dostam’s troops and forcesbelonging to Mr Massoud and to Anwar Akbari’s Hezb-Wahdat. Foreign ob-servers say the government may be putting pressure on General Dostam to signa deal and avoid a full-scale war. His popularity in the north rests on peace.General Dostam may take up a post in the government but it is far from certain.The north has been peaceful for some time and is growing economically.General Dostam has even started his own international airline service, BalkhAir, which flies to Iran, Pakistan and the United Arab Emirates. He will bereluctant to lose his autonomy.

A Dostam deal could spellthe end of the Taliban—

A Dostam/Rabbani alliance would divide Afghanistan equally between thegovernment and the Taliban. General Dostam has good links with Pakistanwho may then completely stop support for the Taliban.

—which is in disarray— The Taliban is split; some favour negotiating with Mr Rabbani’s governmentand others favour fighting it. The group is facing a growing amount of localand tribal rebellion. Fierce fighting in the Taliban-held southern province ofPaktia has recently forced the Taliban commander-in-chief to leave his positionon Kabul’s outskirts.

Afghanistan 27


—but still poses a threatto the government

The government announced on August 25 it had lost the strategic Hazb-i-Islamibase at Spina Shega in Paktia, adjoining Nangarhar province. Spina Shega,south-east of Kabul, connects by road to the Hezb-controlled Sarobi district,50 km east of Kabul on the main road to Pakistan. Sarobi controls access to thenorthern Tagob valley leading to plains where Bagram military airbase is situ-ated. The base, one hour’s drive from Kabul, is the capital’s only functioningairport. The government will need to defend Sarobi to protect the highway toPakistan and access to Bagram. The government will also need the cooperationof the independent Nangarhar Shura.

Mr Hekmatyar must moveagainst the Taliban—

Mr Hekmatyar must push the Taliban out of rocket-range of Kabul to guaranteehis position in the government. The agreement with General Dostam, if itdevelops, will allow him to concentrate on the Taliban. On August 3 the primeminister claimed that Taliban morale was at breaking point and that the militiahave adopted defensive positions around Kabul. Later that month, the govern-ment began night movements of troops and heavy weapons in Kabul and theTaliban were said to be moving their troops to Logar province, adjoining Kabulin the south. The Taliban have also intensified rocket attacks on south Kabul.If the government can push the Taliban away from south-west Kabul thenstrategically there is no suitable base for the militia in south-west Afghanistanuntil its stronghold in the southern city of Kandahar, 490 km from Kabul.

—although thegovernment failed last

time—

The government failed in its attack on the Taliban near Kabul in late May-earlyJune, but the Taliban fared worse. The militia suffered major losses of life whenit counterattacked. The government gained some territory but lost it again andthe front lines remained basically the same with some minor government gains.

—and there will be noattack on Herat

The Taliban have controlled the western city of Herat, near the Iranian border,for the past year. The government’s plans to capture Herat are not possible atpresent, unless there is a spontaneous uprising against the Taliban followingthe murder of the government’s top commander in the region, Allaudin Khan.Like General Dostam’s deputy, Rasool Pahlawan, Mr Khan was killed by hisbodyguard. The murder, on July 4, happened in the Pashtun Zarghoon districteast of Herat, where Mr Khan had relocated after the Taliban captured controlof Ghor province on May 31. Ghor was planned as the government base fromwhich to attack Herat. Mr Khan was entrenched in Zarghoon and in Junecarried out a number of successful guerrilla attacks against the Taliban, whoclaim they ordered his murder.

Relations with Pakistanare improving—

There have been shifts in the government’s favour and Pakistan does not wantto be left out of Afghanistan’s end-game. Islamabad is aiming for a betterrelationship with Kabul. Pakistan is soon to reopen its embassy and the deputyforeign secretary, Najmuddin Shaikh, visited Kabul in late August.

—which may isolate theTaliban

The Afghan government has also invited the Pakistan interior minister,Nasirullah Babar, to Kabul. He is widely believed to be the founder and control-ler of the Taliban and his visit could hasten its demise. Many observers believethe Taliban is an artificial creation which could disappear as quickly as itappeared if Pakistan finds another vehicle for its influence.

28 Afghanistan


Iranian efforts for peacecontinue

Iran welcomed the new government and at the end of July sent its deputyforeign minister, Alauddin Brugerdi, on a short visit to Afghanistan. Iran’s pastsuccesses in shuttling between rival Afghan troops is leading Mr Brugerdi tostep up his efforts to bring a peace deal between the government and theTaliban. Tehran is hosting a peace conference in October which should beattended by all of Afghanistan’s factions.

The UN is trying to restoreits credibility

The new UN envoy is trying to restore confidence in the UN lost by theprevious envoy, Mehmoud Mestiri, who achieved little during two years in thejob. His replacement, Dr Norbert Holl, is more vigorous, has based himselfwithin Afghanistan and is trusted by the Kabul government. He is likely tomove the UN political office from Jalalabad to Kabul in the near future. Such amove would give further official status to the coalition and would see other UNoffices move to Kabul.

The USA will watch andwait—

Washington is said to be taking a greater interest in Afghanistan but there are nosigns it will act, especially in a presidential election year. The two visits this year,most recently in August, by a Republican senator, Hank Brown, mean little as hehas no influence over the administration’s policy. Mr Brown’s Afghan peaceconference from June 25-28 in Washington brought together representatives ofAfghan’s rival faction leaders but did not advance the peace process.Mr Hekmatyar and other important government members were not invited tothe conference, a snub badly received in Kabul. Mr Hekmatyar was Washing-ton’s golden boy during the Jihad but has long since fallen from favour.

—and may charge Hezbwith links to

international terrorism

Mr Hekmatyar’s Hezb-i-Islami has for some time been accused of links to inter-national terrorism and of sheltering international terrorists. This accusation hasnot been helped by the arrival in Jalalabad on June 24 of Osman Bin Laden, thedenationalised Saudi billionaire, previously living in Sudan. Mr Bin Laden saidhe timed his arrival to be in the country for Mr Hekmatyar’s swearing-in asprime minister, with whom he has had “friendly relations” since the Jihad. TheAmerican Federal Bureau of Investigation announced in late August that Mr BinLaden is one of the chief suspects if the TWA flight 800, which blew up justbefore the Atlanta Olympics, is discovered to have been destroyed by a bomb.

340

360

380

400

420

440

1989 90 91 92 93 94

Gross domestic product per head (a)$ per year

(a) Estimates. (b) Nominal exchange rates adjusted for changesin relative consumer prices.Sources: EIU; IMF, International Financial Statistics.
















100

200

300

400

500

600

700

800

1980 . 82 . 84 . 86 . 88 . 90 91

Afghani: real exchange rate (b)1980=100

Af:$Af:$Af:$Af:$Af:$Af:$Af:$Af:$Af:$Af:$Af:$Af:$Af:$Af:$Af:$Af:$Af:$Af:$Af:$

Af:¥

Af:$

Af:¥Af:¥

Af:DMAf:DMAf:DMAf:$

Af:¥

Af:$

Af:¥Af:¥

Af:DMAf:DMAf:DMAf:$

Af:¥

Af:$

Af:¥

Af:$

Af:¥

Af:$

Af:¥

Af:$

Af:¥

Af:$

Af:¥

Af:$

Af:¥

Af:$

Af:¥

Af:$

Af:¥

Af:$

Af:¥

Af:DM

Afghanistan 29


The Afghani hasdepreciated steeply

The local currency, the Afghani, will continue to decline in value and hugeprice increases will also persist. At the beginning of 1996 the exchange rate wasAf5,000:$1; by August 22 it was Af24,000:$1. Furthermore, the rate of decline isspeeding up—on August 18 the rate was Af20,000:$1. The situation has ledsome observers to compare Afghanistan with the German Weimar Republic.

Review

The political scene

Mr Hekmatyar comes toKabul—

Against most expectations the prime minister, Gulbuddin Hekmatyar, came toKabul for the first time in 20 years to take up his premiership. The arrival onJune 26 of his 350-vehicle convoy was greeted by a day-long assault on Kabulby the Taliban. Hundreds of rockets and mortars killed at least 61 people andinjured hundreds more.

—and forms a new cabinet Nine cabinet ministers were announced on July 4; the remaining posts were leftopen to attract more parties into the interim coalition government. Until then,ministers holding unassigned positions were given acting minister status.Hezb-i-Islami’s intelligence chief, Washidullah Sabaoon, became defence minis-ter and another top Hezb official, Abdul Hadi Arghandiwal, took on finance. AJamiat member, Yonous Qanuni, moved from defence to interior and the actingprime minister, Ahmad Shah Ahmadzai, switched to education. Mr Ahmadzai isa deputy to Professor Abdul Sayyaf, head of Ittehad-i-Islami. His party colleague,Qiamuddin Kashaf, became culture and information minister. AiatullahMohseni’s Shiite Harakat-i-Islami party was given two cabinet positions: SaeedAli Jawed became planning minister and Saeed Hussain Anwari social welfareminister. Saeed Hussain Alami Balkhi received the commerce post. He is a mem-ber of the Shiite Hezb-i-Wahdat faction, led by Anwar Akbari. Finally, a sup-porter of Jamiat, Samiullah Najibi, became minister for martyrs and thedisabled. There was disagreement over who was to be foreign minister. Thepresident, Burhanuddin Rabbani, favoured the incumbent Najibullah Lafraie,while Ahmad Shah Massoud preferred Mr Lafraie’s deputy, Abdul RahimGhafourzai. Mr Lafraie is now minister of state for foreign affairs. The foreignminister’s post has been left open to entice more parties into the government.

Jamiat is divided— Foreign observers say the disagreement between Mr Massoud and Mr Rabbanigoes deep. Mr Massoud was not completely informed about negotiations withMr Hekmatyar and knew of his coming to Kabul only a few days before hearrived. Jamiat is split into two camps—those pro-Rabbani and those pro-Massoud. The Massoud camp wanted Mr Hekmatyar to bring more parties intothe coalition before being allowed into Kabul. But the pro-Rabbani camp saw achance to assert themselves against Mr Massoud and lobbied successfullyagainst imposing conditions. The day after Mr Hekmatyar came into Kabul,Mr Massoud held a secret meeting at his base in Jabul Saral, where he blastedJamiat government members for disloyalty. Mr Massoud also told Mr Rabbanithat he keeps the president in power.

30 Afghanistan


—and Mr Massoud andMr Hekmatyar have no

faith in each other

The hatred between Mr Massoud and Mr Hekmatyar has existed since they firstmet. Soon after the prime minister came to Kabul the tension spilled overpublicly. On July 14 a spokesman for Mr Massoud criticised Mr Hekmatyar’spolicies announced four days earlier. The spokesman said they were Hezbpolicies, not the government’s, and needed approval from the High StateCouncil. The Hekmatyar camp said it did not need approval from the Council.Mr Hekmatyar has been pushing for Mr Massoud to take up a governmentposition so that he can exert some control over him, but Mr Massoud is resist-ing this. Mr Hekmatyar’s forces have been split up and concentrated on theoutskirts of Kabul, in Pul-i-Charki to the east and Karga in the west. Some of theestimated 2,000 Hezb troops deployed in Kabul are around front lines such asRishkor. Mr Massoud’s troops are keeping a close eye on them.

Mr Hekmatyar announcesIslamic policies—

In mid-July Mr Hekmatyar closed Kabul’s cinemas and banned light music onradio and television. He ordered women to wear Islamic dress and made com-pulsory the saying of prayers five times a day. On July 10, in a broadcast on thegovernment station, Radio Kabul, he said the wish of 1.5 million Afghans whohave died in the years of fighting had still not been achieved—“the estab-lishment of a real Islamic system”. Mr Hekmatyar is the most popular andrecognisable Pashtun leader in Afghanistan and foreign observers say he will bea challenge to the Taliban.

—which get a mixedresponse from Kabul’s

citizens—

Women’s groups held a series of meetings warning the prime minister to treadcarefully where women’s rights were concerned. Expatriate workers say Kabul’sresidents will accept almost anything to gain peace but their morale dropped toan all-time low when Mr Hekmatyar came to town. He is not trusted because ofhis previous actions, which claimed up to 45,000 civilian lives and destroyedmuch of Kabul.

—while governmentmoderates clash with

fundamentalists

The deputy foreign minister, Mr Ghafourzai, denied on June 15 reports that hehad resigned two days earlier, but admitted there were differences in the govern-ment over the role of Islam in the administration. Ittehad-i-Islami demanded onJuly 11 the removal of all “communists and atheists” from the government. Theparty’s central committee, chaired by Professor Sayyaf, told its party members,the education and information ministers, to “Islamise” their ministries or re-sign. The committee said it would review its support of the government if itfailed to introduce Sharia law. Two months later, on August 20, the governmentannounced its first dismissals of “communists”. It is unclear if this move willaffect relations with General Abdul Rashid Dostam, still seen by many as acommunist.

Mr Rabbani woos theNangarhar Shura—

Mr Rabbani visited the eastern city of Jalalabad on June 28 to hold talks withthe leader of a Hezb faction, Yunis Khalis, the head of Harkat-i-Inquilab-i-Islami, Nabi Mohammadi, and the head of the National Islamic Front ofAfghanistan, Pir Gaillani. All three are members of the Nangarhar Shura, anindependent body very much in control of the booming Nangarhar province.Mr Khalis is head of the Shura and controls the province governor, HajiQuadeer. Mr Khalis and Mr Mohammadi both have close links to the Taliban,as a number of their former commanders now hold important positions within

Afghanistan 31


the militia. Mr Mohammadi was until a year ago a member of the Rabbanigovernment.

—but fails to bring themon board—

The key supply route from Pakistan to Kabul passes through Nangarhar and itwould have been a big coup for the government if the Shura had joined thecoalition. The foreign ministry post was offered to Mr Khalis or to his deputy,but Mr Khalis declined the offer. The Shura rejected joining the coalition andis unlikely to change its mind but talks are continuing. The Shura is not knownto have a deal with the Taliban, but Taliban troops have been sighted inNangarhar and such a deal would be potentially disastrous for the government.

—and fighting erupts inNangarhar

In early August a local commander in the Nangarhar switched loyalties to theRabbani government and established his own customs post at Torkham, nearthe Pakistani border. The government was reported to be aiding the rebelcommander. The Nangarhar Shura sent a force to Torkham and claim to haveregained control.

The government turns toGeneral Dostam—

General Dostam refused Mr Hekmatyar’s May 30 invitation to join the govern-ment and said he would talk to Mr Rabbani, but as head of Jamiat, not aspresident. Mr Rabbani said on June 4 he was ready to share power with GeneralDostam and the Taliban. From the beginning of July onwards there were low-level contacts between the government and General Dostam’s officials. In earlyAugust a high-level government delegation led by Mr Hekmatyar’s brother-in-law, Humayun Jarir, went to General Dostam’s stronghold in Mazar-i-Sharif.

—whose position changesfollowing his deputy’s

murder

General Dostam’s deputy, Rasool Pahlawan, ruled the north with an iron fistand was widely feared. Politically, General Dostam was never in trouble butmilitarily he faced competition from Mr Pahlawan who commanded his ownloyal troops. Mr Pahlawan vehemently opposed détente with Mr Rabbani’sgovernment and was reported to have threatened to join the Taliban.Mr Pahlawan’s murder by one of his bodyguards in Mazar-i-Sharif on June 24changed the balance of power. On the one hand it freed General Dostam tomake a deal with the government but on the other he was weakened militarily.

The Taliban remainsagainst the government—

Mr Rabbani called on all other parties on June 4 to join the coalition and putin demands for ministerial positions. His offer came as a big Taliban meetinggot under way in Kandahar. The leader of the Jaba Nijat-i-Milli party,Sibqatuilah Mojaddadi, an important member of the opposition SupremeCoordination Council, joined the talks. The meeting concluded on June 7 witha call for Mr Rabbani’s resignation. Ten days later, the Dutch minister fordevelopment cooperation visited Herat and Kabul. Jan Pronk, the most seniorWestern politician to visit Afghanistan recently, said he “did not see muchwillingness to negotiate on the side of the Taliban”.

—and Mr Hekmatyar’sappointment makes no

difference

On July 1 a delegation from Mr Mohammadi’s Harkat-i-Inquilab-i-Islami partywent to Kandahar to persuade the Taliban to enter into peace talks with thegovernment, but days later the Taliban rejected such a move. A Taliban jetfighter pilot and his MIG-21 defected to the government on July 16. The pilotsaid he was the deputy commander of Kandahar air base and had left because

32 Afghanistan


Pakistan was supporting the Taliban, helping repair and service the planes. Hesaid the Taliban’s small fleet of around ten fighters and fighter-bombers are ina poor state, despite Pakistani help.

The Taliban signs withWahdat to improve

relations with Iran—

The Taliban have been worried by reports that the government would launchan offensive on Herat in the west by using bases in Iran. Shia Iran has kept aclose watch on the fate of the minority Shias in Afghanistan and the SunniTaliban sought to show they are not anti-Shia. They signed an agreement onJuly 14 for peaceful coexistence with Karim Khalili’s wing of the Shiite Hezb-i-Wahdat, based in the central Bamian province. The other branch, led by AnwarAkbari, is in the Rabbani coalition. All routes to Bamian pass through Talibanareas following the Taliban’s capture of Ghor province in May.

—which offers economichelp

Iran is consolidating its political success with economic cooperation. It signedtwo deals with the government in June on trade and training. A loan for foodand fuel was reported to be worth $500m. Iran has also offered to rebuildAfghanistan’s shattered power network.

Pakistan shifts its Afghanpolicy

The prime minister of Pakistan, Benazir Bhutto, congratulated Mr Hekmatyaron his appointment and sent a personal representative to his swearing-in cere-mony. Some 50 Pakistanis attended the ceremony in the first official contactbetween the two countries since the sacking of the Pakistani embassy in Kabullast September. The government interior minister, Yonous Qanuni, headed theAfghan delegation to Pakistan on August 10. Both sides agreed not to interferein each other’s internal affairs. An economic working committee was set upand the governments agreed to prioritise the gas pipeline project withTurkmenistan and the reconstruction of Afghanistan’s roads.

Afghanistan 33


Appendix 1

Quarterly indicators of economic activity in Pakistan and Afghanistan

1994 1995 1996

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

PAKISTAN

Exports Monthly av

Cotton, lint ’000 tons 4.7 1.0a 0.0 0.0 1.3 9.1 1.6 16.1 31.8b n/a

Rice “ 79.3 104.1a 90.3 198.1 126.5 202.5 69.3 128.2 112.6b n/a

Industrial production

Manufacturing 1980/81=100 282.0 217.4 193.3 243.6 278.8 236.0 n/a n/a n/a n/a

Cotton:

yarn ’000 tons 110.6 112.7 108.2 115.1 116.5 121.8 109.3 132.3 n/a n/a

fabrics m sq metres 25.6 28.1 28.7 27.6 25.5 25.5 24.6 27.1 n/a n/a

Prices

Consumer prices: 1990=100 143.5 148.4 153.4 159.8 164.4 165.5 172.5 176.5 180.2 183.7c

change year on year % 11.8 12.2 12.0 13.4 14.6 11.5 12.5 10.5 9.6 n/a

Wholesale: general 1990=100 146 155 158 164 171 173 178 181 185 191c

Share prices “ 97 99 98 84 73 65 69 62 66 59c

Money End-Qtr

M1, seasonally adj: PRs bn 380.6 396.3 410.7 429.0 437.5 470.6 474.7 479.9 502.3 514.4d

change year on year % 2.0 13.7 13.0 15.0 15.0 18.7 15.6 11.9 14.8 n/a

Foreign trade Qtrly totals

Exports fob PRs bn 51.33 59.15 52.90 61.82 59.55 77.99 51.23 63.95 53.17e n/a

Imports cif “ 62.84 71.56 65.91 71.43 86.45 97.10 81.96 97.18 65.77e n/a

Exchange holdings End-Qtr

State Bankf:

goldg $ m 590 585 592 592 583 597 592 594 617 601

foreign exchange “ 1,936 2,305 3,128 2,929 2,627 2,741 1,523 1,718 1,579 1,881

Exchange rate

Market rate PRs:$ 30.50 30.61 30.65 30.80 30.88 31.01 31.55 34.25 34.52 34.97

1990 1991 1992

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

AFGHANISTAN

Prices Monthly av

Consumer prices: 1990=100 97.5 93.8 95.4 113.5 126.7 152.1 172.5 175.4 233.6 n/a

change year on year % n/a n/a n/a n/a 29.9 62.2 80.8 54.5 84.4 n/a

Money End-Qtr

M1, seasonally adj: Af bn n/a n/a n/a 346.18 371.48 n/a n/a n/a n/a n/a

change year on year % n/a n/a n/a 39.8 34.4 n/a n/a n/a n/a n/a

Foreign trade Qtrly totals

Exports fob $ m 72.3 50.2 49.2 63.3 47.8 57.6 76.8 60.8 n/a n/a

fruit & nuts “ 23.1 23.9 19.3 27.0 16.9 21.7 45.1 n/a n/a n/a

Imports cif ” 261.8 171.4 244.5 258.8 205.0 131.5 215.9 184.6 n/a n/a

Exchange holdings End-Qtr

Bank of Afghanistan:

goldg $ m 294 265 277 275 268 261 259 261 254 n/a

foreign exchange “ 221 233 240 250 265 231 244 221 214 n/a

Exchange rate

Market rate Af:$ 50.60 50.60 50.60 50.60 50.60 50.60 50.60 50.60 50.60 50.60h

Note. Annual figures of most of the series shown above will be found in the Country Profile.a Average for April-May. b January only. c April only. d End-April. e Total for January-February. f Excluding assets with Reserve Bank of India.g End-quarter holdings at quarter’s average of London daily price less 25%. h Unchanged to end-2 Qtr 1996.

34 Statistical appendices


Appendix 2

Foreign trade of Pakistan($ m)

Total USA Japan Germany UK

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Imports cif 1993 1994 1993 1994 1993 1994 1993 1994 1993 1994

Foodstuffs 757.6 629.8 239.6 223.0 6.8 5.9 3.2 32.2 1.8 2.9

of which:

cereals & preparations 350.1 289.2 236.7 219.3 0.0 0.0 0.0 28.9 0.0 0.1

Textile fibres & waste 202.1 406.9 11.5 51.2 25.8 19.0 7.3 10.7 14.6 23.9

Petroleum & products 1,570.2 1,393.4 37.7 1.4 1.7 1.3 11.4 0.7 2.4 2.0

Animal & vegetable oils & fatsa 601.3 790.9 0.5 90.0 1.3 0.9 0.3 1.7 0.3 0.2

Chemicals 1,564.1 1,462.8 239.7 196.0 94.1 94.4 173.0 161.2 123.1 123.8

of which:

elements & compounds 437.4 426.5 31.2 25.9 38.2 41.7 55.7 41.2 32.8 43.6

medicinal & pharmaceutical prods 235.3 243.1 23.8 19.0 11.7 11.0 30.0 31.1 24.5 23.6

fertilisers 258.4 170.9 130.4 109.5 0.0 0.0 0.0 6.5 0.0 0.0

Paper & manufactures 133.2 121.8 3.6 2.7 7.3 5.6 11.4 11.7 6.2 8.9

Textile yarn, cloth & mnfrs 100.5 76.8 4.1 2.5 18.7 14.5 8.8 5.0 2.6 3.1

Iron & steel 350.1 331.4 27.3 28.1 64.6 71.5 56.1 44.6 34.3 20.2

Non-ferrous metals 112.1 102.9 0.2 0.9 3.3 3.0 1.0 6.3 2.6 11.7

Metal manufactures 69.4 97.6 3.9 4.4 8.2 10.4 8.3 4.7 4.4 15.8

Machinery incl electric 2,112.4 1,966.9 143.2 148.9 457.0 255.8 334.1 371.6 156.5 199.7

Transport equipment 1,346.9 568.3 131.8 52.9 757.4 300.6 31.6 16.4 51.6 23.0

Scientific instruments etc 152.2 123.8 17.7 15.4 39.8 24.4 16.3 12.7 12.7 9.1

Total incl others 9,739.7 8,897.0 906.8 869.2 1,515.3 832.7 694.8 700.4 465.6 474.8

Total USA Hong Kong UK Germany

Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

Exports fob 1993 1994 1993 1994 1993 1994 1993 1994 1993 1994

Food 633.4 696.1 25.0 34.4 6.9 6.2 38.7 36.0 5.4 4.8

of which:

fish & preparations 201.9 143.4 15.5 24.3 6.1 5.3 23.4 20.8 2.3 2.4

cereals & preparations 272.8 319.3 3.3 4.6 0.2 0.2 4.2 3.9 0.2 0.4

Cotton raw 237.1 83.1 0.5 0.3 37.4 6.3 6.8 9.6 1.1 3.5

Leather & manufactures 216.4 259.6 15.6 17.4 24.2 23.5 4.8 6.1 27.0 30.7

Textile yarn, cloth & mnfrs 3,506.8 3,984.8 343.3 415.6 289.1 516.6 244.6 256.2 180.9 160.6

of which:

cotton manufactures 1,982.3 2,311.9 83.8 99.7 281.3 506.1 73.4 70.2 35.5 31.9

Clothing 1,558.1 1,577.8 484.5 557.5 12.3 9.1 167.3 196.7 285.9 264.4

Footwear 37.8 41.1 0.2 0.2 0.0 0.0 3.4 4.3 7.6 9.3

Scientific instruments etc 109.5 97.8 57.4 45.5 0.3 0.4 6.8 7.1 13.7 13.3

Total incl others 6,841.7 7,341.2 1,004.1 1,158.8 375.6 567.6 507.3 563.2 568.3 541.6

a Imports from Malaysia, January-December 1994, $605.5m.

Statistical appendices 35


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