World Bank Documentdocuments.worldbank.org/curated/en/287801468089973272/pdf/multi-page.pdf · PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$50.0 MILLION AND A ... MCB Muslim Commercial

Document of

The World Bank

FOR OFFICIAL USE ONLY

'ALE CO?Y ,

Report No. P-3704-PAK

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

AND THE INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALENT TO US$50.0 MILLION

AND A

PROPOSED CREDIT

IN AN AMOUNT EQUIVALENT TO SDR 47.3 MILLION

TO THE

ISLAMIC REPUBLIC OF PAKISTAN

FOR AN

INDUSTRIAL INVESTMENT CREDIT PROJECT

January 3, 1984

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Pakistan Rupee (Rs)US$1 = Rs 12.7Rs 1 = US$ 0.0787

FISCAL YEAR

July 1 - June 30

ACRONYMS AND ABBREVIATIONS

ABL Allied Bank LimitedADB Asian Development BankADBP Agricultural Development Bank of PakistanBEL Banker's Equity LimitedDFIs Development Finance InstitutionsDSCR Debt Service Coverage RatioEPF Equity Participation FundFBC Federal Bank for CooperativesGOP Government of PakistanHIBL Habib Bank LimitedICP Investment Corporation of PakistanIDBP Industrial Development Bank of PakistanIIC Industrial Investment CreditMCB Muslim Commercial BankNBP National Bank of PakistanNCBs National Commercial BanksNDFC National Development Finance CorporationNIT National Investment TrustPBC Pakistan Banking CouncilPICIC Pakistan Industrial Credit and Investment

CorporationPFIs Participating Financial InstitutionsPPCB Punjab Provincial Cooperative BankPSEs Public Sector EnterprisesPTC Participation Term CertificateSBFC Small Business Finance CorporationSBP State Bank of PakistanSFYP Sixth Five Year Plan - FY81-FY85UBL United Bank Limited

FOR OFFICIAL USE ONLY

PAKISTAN

INDUSTRIAL INVESTMENT CREDIT PROJECT

Loan, Credit and Project Summary

Borrower: Islamic Republic of Pakistan

Beneficiaries: Industrial Development Bank of Pakistan (IDBP)National Development Finance Corporation (NDFC)Pakistan Industrial Credit and Investment Corpora-

tion Ltd. (PICIC)Habib Bank Ltd. (HBL), andUnited Bank Ltd. (UBL).

Amount: Loan: US$50.0 million equivalent (including capitalizedfront-end fee)

Credit: SDR 47.3 million (US$50.0 million equivalent)

Terms: Loan: Repayable in 20 years, including five years of grace,at the standard variable interest rate.

Credit: Standard terms.

On-Lending Terms: The Government would relend the proceeds of the loanand credit to the Participating Financial Institutions(PFIs) at terms which would provide a spread of 3%-4%to the PFI with an onlending rate of 14% (inclusiveof a 3% foreign exchange risk fee) to the finalborrowers. IDBP, PICIC and NDFC would repay theirloans over 15 years, including a grace period ofthree years. The Nationalized Commercial Banks wouldrepay their loans on the basis of the actual amortiza-tion schedule of each sub-loan. The Government wouldbear the foreign exchange and interest rate risk.

Project Description: The proposed project would support the Government'sefforts to improve the efficiency of the deliverysystem for industrial finance by providing loans tomedium and large industrial enterprises in the privateand the public sectors through five PFIs. To addressinstitutional weaknesses in the PFIs technical assis-tance and training is also included. While presentGovernment policies augur well for continued growth inthe industrial sector, the main risk for the proposedproject is that the PFIs would not achieve their lend-ing targets because of institutional difficulties orsluggish growth in the sector.

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Estimated Costs

Local Foreign Total---------US$ million---------

Industrial Credit Component 150.0 97.9 247.9Technical Assistance - 2.0 2.0

Capitalized Front-End Fee - 0.1 0.1Total 150.0 100.0 250.0

Financing Plan

Local Foreign Total---------US$ million---------

IBRD/IDA - 100.0 100.0Others 150.0 - 150.0

Total 150.0 100.0 250.0

Estimated Commitments and Disbursements:

FY85 FY86 FY87-------US$ million----

Commitments 96.0 4.0 -Disbursements

Annual 45.7 49.2 5.1

Cumulative 45.7 94.9 100.0

Appraisal Report: No. 4637-PAK dated December 30, 1983

Map: IBRD 16248R

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENT TOTHE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND CREDIT

TO THE ISLAMIC REPUBLIC OF PAKISTAN FOR ANINDUSTRIAL INVESTMENT CREDIT PROJECT

1. I submit the following report and recommendation on a proposed Loanfor the equivalent of US$50.0 million and a proposed Credit of SDR 47.3million (US$50.0 million equivalent) to the Islamic Republic of Pakistan tohelp finance an Industrial Investment Credit Project. The loan would have aterm of 20 years, including five years' grace, at the standard variableinterest rate; the credit would be on standard IDA terms. The proceeds ofthe loan and credit would be onlent to the Participating FinancialInstitutions (PFIs) at terms which would provide a spread of 3%-4% to the PFIwith an onlending rate of 14% (inclusive of a 3% foreign exchange risk fee)to the final borrowers. IDBP, PICIC and NDFC would repay their loans over 15years including a grace period of three years. The Nationalized CommercialBanks would repay their loans on the basis of the actual amortizationschedule of each sub-loan. The Government would bear the foreign exchangeand interest rate risk.

PART I - THE ECONOMY 1/

2. The most recent economic report "Pakistan: Review of the SixthFive-Year Plan" (No. 4706-PAK, dated October 20, 1983) was distributed to theExecutive Directors on October 20, 1983.

3. Economic developments during FY83 were generally favorable. GDP grewby 5.8%, with value added in agriculture rising by 4.8% and in industry by8.3%. Continued stagnation in (fixed) investment, which declined slightlyfrom 13.6% of GNP in FY82 to 13.3% of GNP in FY83, was among the few unfavor-able events. National savings, on the other hand, rose sharply from 10.7% toan estimated 14% of GNP. The declining trend in the rate of inflationcontinued; as measured by the consumer price index, the rate of inflationslowed from 9.7% in FY82 to 4.2% in FY83.

1/ Parts I and II are substantially the same as Parts I and II of thePresident's Report P-3701-PAK (Second Toot Oil and Gas DevelopmentProject), dated December 19, 1983.

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4. There was a dramatic turnaround in the balance of payments in FY83.The current account deficit, at US$429 million (1.4% of GNP), was less thanhalf the size of deficits in recent years. This outcome reflected three mainfactors: a resumption in the growth of exports following a substantialdecline in FY82; a slight decline in the value of imports; and buoyant remit-tances from migrant workers. The 13% growth in exports, which enabledexports to nearly regain their FY81 level, was all the more impressivebecause the value of all major exports except raw cotton and cotton yarndeclined. The striking feature of the export performance was the growth ofnon-traditional exports, which increased by over a third. The drop inimports reflected, inter alia, higher domestic production of oil and import-substitution in some key commodities. The incipient recovery in world tradeand delinking of the exchange rate from the U.S. dollar in January 1982, withits subsequent depreciation, contributed significantly to the improvedbalance of payments picture. Given the favorable outcome on the currentaccount, normal levels of net inflows of long-term capital, and net IMFpurchases, Pakistan's reserves more than doubled. At the end of FY83, grossofficial reserves stood at US$1,927 million, the equivalent of 3.5 months' ofimports of goods and non-factor services.

5. Notable progress was made in many areas during the Fifth Five-YearPlan Period (FY79-83). Real growth rates in national output (6.3%), agricul-ture (4.4%), industry (9.1%) and exports (9.2%), though below Plan targets,were all substantially above the rates achieved during 1970-78 and veryrespectable compared to the performance of other LDCs over the same period.This growth - coupled with increased inflows of migrant remittances -benefited large segments of the urban and rural population. The output ofall major crops reached record levels and self-sufficiency in wheat and sugarwas achieved. Encouraged by improved government policies, private investmentin manufacturing expanded by 8% p.a. in real terms; this expansion was morethan offset by the declining public investment in the sector, however. Thebalance of payments performance was quite satisfactory: the current accountdeficit declined significantly relative to GDP and foreign exchange reservesrose from the equivalent of 1.2 months of imports to 3.5 months. Governmentfiscal and credit policies reduced budget deficits and monetary expansion andinflationary pressures gradually subsided. This progress was made despite anumber of unforeseen events: (a) world recession; (b) a 30% decline in theexternal terms of trade after 1979; (c) the Afghan crisis, which necessitatedincreased outlays for defense and refugee assistance; and (d) a continueddecline in real net aid flows.

6. The economy's good performance since 1977 has been aided by severalfactors, including favorable weather and higher domestic demand associatedwith better crops, rising rural incomes and workers' remittances from theMiddle East. Improvements in agricultural, industrial and fiscal and creditpol.icies contributed significantly to better economic performance.

7. In recent years the Government has taken a number of initiatives toimprove agricultural production. Particular attention has been given to

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improving farmer incentives and input supplies. Support prices for all majorcrops have been raised so that they are now closer to world prices. At thesame time, steps have been taken to reduce the fertilizer subsidy (which hasbeen creating budgetary problems) and to separate it from the developmentbudget for agriculture in order to protect allocations for other priorityagricultural projects and programs. An Agricultural Prices Commission hasbeen set up to make recommendations on appropriate changes in crop supportand input prices on a consistent and timely basis.

8. The Government has formulated and begun to implement a new agricul-tural policy based on the main recommendations of a UNDP study on irrigatedagriculture which emphasizes the need to improve the efficiency of the waterdelivery system through the rehabilitation of distributaries and betterscheduling of water deliveries to the farmer; and to expand the role of theprivate sector, for example, through the promotion of private tubewelldevelopment in sweet groundwater areas. Other programs--in pesticides,seeds, agricultural credit, extension, research and farm power--have alsobeen strengthened. These initiatives are still at an early stage and abreakthrough from the problems of low productivity at the farm level is yetto take place.

9. Major changes have also been made during the past five years ingovernment policies in the industrial sector. The policies pursued in theearly and mid-1970s of extensive nationalizations, tight restrictions on theprivate sector, and rapid expansion of the public sector to spearheadindustrial investment and growth have been gradually reversed. Most agricul-tural processing and some industrial units have been denationalized; con-stitutional safeguards have been provided to private industry against furtherarbitrary government acquisitions; and the areas open to the private sectorhave been widened. A wide range of fiscal incentives have been granted toencourage private investment and exports. These have been supplemented by aliberalization of imports which has improved the availability of inputs. Theinvestment sanctioning procedure has been streamlined. These measures haveled to an improvement in private sector confidence and stimulated privateinvestment, mainly in small and medium-scale projects.

10. At the same time, the Government has embarked on the difficult andinevitably long process of reforming the public industrial sector, which hasbeen plagued by low efficiency and profits. Major studies have been com-pleted of the management and organization of the public sector, and theperformance of individual enterprises. In accordance with the recommenda-tions of these studies, the Board of Industrial Management (BIM) has beenabolished, the number of sector holding corporations has been reduced, andboards of directors have been established which have helped to increaseautonomy at the enterprise level. Some public sector units which have littleprospect of improved financial performance have been closed down. Thesemeasures, together with additions to capacity and steps to retain skilledtechnical personnel through salary adjustments, for example in the fertilizer

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sub-sector, have helped to increase production and capacity utilizationsubstantially in the public sector.

11. Fiscal performance improved significantly over the Fifth Plan period.The overall budget deficit and government borrowing from the banking system,which stood at 8.8% and 4.3% of GDP in the first year of the Plan, fell to6.4% and 1.7%, respectively, by the final year. Reduced levels of governmentborrowing from banks, together with overall credit restraint, led to lowerrates of growth of the money supply and lessened inflationary pressures;prices rose by 4% in the final year of the Plan as compared with 7% in thefirst year. The improvement in fiscal performance was, however, largely theresult of expenditure restraint rather than better revenue performance. Realexpansion in current expenditures on economic and social services barely keptpace with population growth and development expenditures declined relativelyto GDP. At the same time, government revenues remained constant at 16% ofGDP and public savings, having risen in the first half of the Plan periodfrom 1% to 3.8% of GNP, amounted to only 1.6%0 in the last year of the Plan.Greater resource mobilization by the public sector will be critical for theimplementation of the Sixth Plan.

12. The developments in the Pakistan economy since 1977 represent welcomesteps towards the solution of a set of problems which are essentially struc-tural and long term in nature. Notwithstanding these improvements, furtherwide-ranging measures to address the basic issues which would limit long-termeconomic growth are necessary if Pakistan is to sustain its recently improvedeconomic performance over the Sixth Five-Year Plan period (FY84-88) and bringabout a continuing modest improvement in the living standards of its popula-tion. These issues include the farm-level factors affecting low productivityin agriculture; the structure and competitiveness of the industrial sector;the need to restrain the growth of energy demand and improve the exploitationof domestic energy resources; the factors lying behind continued rapid growthin population; the need to redirect social service expenditures; and theproblems of resource mobilization.

13. Agriculture remains the economy's mainstay, accounting directly forroughly a third of GDP, employing about 55% of the labor force and, directlyor indirectly, providing nearly two thirds of total exports. Except in theimportant case of wheat, agricultural growth since the mid-1970s has been theproduct of acreage expansion with little improvement in yields. Because ofthe diminishing supply of uncultivated land, as well as the high cost ofextending the irrigation system, a switch to more intensive agriculture isessential. The achievement of higher productivity will require improvedagricultural services and increased efficiency of the irrigation system aswell as continued attention to producer incentives. Toward the latter partof the Fifth Plan, some progress was made in reorienting expenditures towardsprojects designed to rehabilitate and improve the operation and maintenanceof the irrigation system, increase the efficiency of water use, improve

quality of research and extension, and increase the supply of complementaryagricultural inputs. These efforts will need to be accelerated during the

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Sixth Plan period. At the same time, to limit budgetary requirements in thewater sector, private investment in irrigation and drainage in freshgroundwater areas must be further encouraged. To encourage greater agricul-tural yields, the Government must also continue to rationalize prices ofagricultural outputs and inputs. In recent years, pricing decisions havebeen taken in a more systematic and timely fashion based on recommendationsby the newly formed Agricultural Prices Commission; procurement prices havebeen brought more nearly in line with international prices and subsidies for

fertilizers and pesticides substantially reduced. These efforts, too, willneed to be continued during the Sixth Plan period.

14. Manufacturing contributes about 15% of GDP and during much of the1950s and 1960s provided a major stimulus to growth. After a period of

stagnation during the period 1970-77, manufacturing growth has againaccelerated averaging about 9% p.a. over the past six years. To provide asolid economic basis for continued rapid growth, incentives for greaterprivate and public manufacturing enterprise efficiency will have to beimplemented. Despite some success in reviving the private sector and improv-ing the performance of public enterprises, much remains to be done to bringabout a major restructuring of industry and place it on a competitive basis.The efficient long-term development of the industrial sector will requireboth a relaxation of government controls and rationalization of industrialincentives. While incentives for manufactured exports have been improved,the trade system still provides a very wide variation in incentives for thedomestic manufacture of various exportables and import substitutes. To

encourage industrial growth more in line with Pakistan's comparativeadvantage, the process of import liberalization initiated over the past fewyears must be continued. In addition, the differential rates of protectiongiven to various domestic products need to be substantially narrowed. Toprovide further encouragement for private investment as well as to attractrisk capital, the number of administrative regulations must be reduced. In

addition, the scope of price controls should be substantially narrowed,especially the use of cost-plus pricing which discourages improvements in

efficiency and energy conservation. Further strong measures to increaseefficiency and self-financing capacity in the public sector are alsoessential; the performance standards expected of public enterprises must bemore clearly specified and managers given more responsibility and incentivesfor meeting them. The implementation of the Public Enterprises SignalingSystem in PY84--which will set performance objectives for individual

enterprises and provide bonus incentives for managers--will be a major steptoward reaching these objectives.

15. Energy shortages have become a significant constraint to rapideconomic growth in Pakistan. Power and gas shortages are common and thecountry imports 90% of its petroleum needs costing over 26% of total imports.

Energy investments to improve the energy situation total over 33% of publicinvestment in the Sixth Five Year Plan. The Government's efforts to dealwith the energy situation by adjusting domestic oil prices, and by encourag-ing the substitution of other energy forms and the exploration and develop-

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ment of domestic oil resources, have met with some success. Growth ofpetroleum consumption has been restrained by the development of hydroelec-tricity and natural gas resources as well as by petroleum price adjustments.At the same time, activity in the oil sector has been stepped up, in someinstances through joint ventures with foreign private companies. Never-theless, due to a variety of technical, geological and other reasons,progress on exploration of new fields as well as the development of existingfields has been slow and Pakistan's considerable potential in the oil and gassector has yet to be realized. The Government has begun to implement anumber of reforms relating to such matters as energy planning, pricing andorganization in order to accelerate progress.

16. While it is clearly vital to sustain rapid growth in the commodity-producing sectors, it is also necessary to contain the rapid growth in popula-tion, currently running at about 2.8% p.a., which has seriously handicappedcapped the country's ability to improve living standards. Family planningprograms have so far had little effect and there have been few changes in thesocio-economic environment of a type that usually accompany declines infertility. Rapid population growth places severe burdens on governmentresources simply to maintain education and health programs at their currentinadequate standards. However, without higher literacy rates, improvedhealth facilities and a reduction in child mortality, it is doubtful thatpopulation growth rates can be much reduced. Expenditures on social serviceshave been low and undue emphasis has been given to higher education and urban'health facilities. The Government has recently shown more awareness of thisproblem; a new and more promising population program is in the initial stagesof implementation, and several special programs to improve basic health and,education facilities, especially in the rural areas, were introduced in theFY83 budget.

17. Policies that face the longer-term issues in both the productive andthe social sectors will take time to have an appreciable effect and will haveto be implemented in the context of continued domestic and external resourceconstraints. National savings, which averaged 12% of GNP over the Fifth PlanPeriod, are substantially above the levels of the early and mid-1970s, butare still low for a country at Pakistan's per capita income level and stageof development. To improve the budget and the balance of payments, a fun-damental improvement is required in the overall savings levels in theeconomy, particularly in public savings. Given the size of the publicsector-s domestic resource requirements, a comprehensive strategy that util-izes all available instruments, including taxation policy, greater relianceon user charges, curtailment of open and implicit subsidies and improvedself-financing of investment by public enterprises, will be needed.

18. The Sixth Five-Year Plan, initiated on July 1, 1983, represents apragmatic overall strategy for Pakistan's continued rapid development. ThePlan puts heavy stress upon improvements in economic policies as well as on apublic expenditure program. Recognizing the importance of a dynamic privatesector for rapid economic growth and the limitations on public sector

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resources, it calls for reduced regulations on the private sector, increasedemphasis on market incentives for greater production and eFficiency and forincreased participation in sectors where the Government has previously playeda large role. The size and composition of the public sector developmentprogram is appropriate. While public development expenditures would expandonly as rapidly as gross domestic product, this is a realistic target givenprojected available resources and the demands for improved public services.To achieve such an expansion - a reversal of the declining trend experiencedunder the Fifth Plan - and to finance an increasing share from domesticresources will require a major mobilization effort. The largest increases insectoral allocations have gone to energy, agriculture and irrigation, and thesocial sectors. The shift in the composition of the public sector develop-ment program is justified because of the threat to future growth posed byenergy shortages, the need to increase agricultural yields by improvements inagricultural and irrigation/drainage services, and the past neglect of thesocial sectors.

19. Although, as described above, the Pakistan economy continues to facea number of difficulties, the improvements over the past few years in demandmanagement and in planning, incentives and government programs in agri-culture, industry and energy have helped to create a climate more conduciveto rapid economic growth and better international trade performance, and haveestablished an improved framework within which further reforms can be effec-tively pursued. The Sixth Plan represents an important indication of theGovernment's intention to continue these improvements. These policy initia-tives have improved Pakistan-s creditworthiness for commercial borrowing andfor a blend of Bank and IDA borrowing.

20. At the end of calendar 1982, Pakistan's external public debt (exclud-ing the undisbursed pipeline) stood at US$9.2 billion, of which US$4.8 bil-lion was owed to bilateral members of the Pakistan Consortium, US$1.3 billionto OPEC and US$1.8 billion to multilateral agencies and the balance to otherbilateral and private lenders. In 1982, the Bank Group-s share in Pakistan'sexternal public indebtedness was 15.2% and in external debt service was12.1%. According to Bank forecasts, provided recent policy improvements aresustained, Pakistan's debt service ratio (debt service divided by exports ofgoods and factor and non-factor services), which was about 13.6% in FY82, islikely to remain below 15% during the 1980s, even assuming substantial com-mercial borrowing.

PART II - BANK GROUP OPERATIONS IN PAKISTAN

21. The cumulative total of Bank/IDA commitments to Pakistan (exclusiveof Loans and Credits or portions thereof which were disbursed in the formerEast Pakistan) now amounts to approximately US$2.9 billion. During its longassociation with Pakistan, the Bank Group has been involved in almost allsectors of the economy. This has included its involvement with other donors,

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over a 20-year period, in the major program of works to develop the waterresources of the Indus Basin. Approximately 30% of total Bank/IDA commit-ments to Pakistan have been for agriculture and irrigation; 26% for industryincluding import program credits; 21% for transport, telecommunications andpublic utility services; 14% for energy including power, gas pipelines and1?etroleum; 4% for social programs in education, population and urbanlevelopment; and 5% for a SAL.

22. Lending operations in Pakistan have three main objectives: first,to support the directly productive sectors of the economy; secondly, tosupport the expansion of, and to improve the institutions which are respon-sible for, the principal public services supporting economic growth; andthirdly, to meet basic needs in the areas of rural and urban development.

23. In pursuit of these objectives, the Bank Group has placed specialemphasis on lending for agriculture, which is the mainstay of the Pakistaneconomy. Projects in this sector are aimed at augmenting the supply ofessential inputs, principally irrigation water, fertilizer, seeds and credit;strengthening research, extension and other agricultural supporting services;improving water management; reclaiming land by controlling salinity andwaterlogging; and providing essential facilities including tubewells, live-stock development and dairy processing. An important purpose of this lendingis to assist the Government's program to increase the productivity of avail-able land and water resources in the Indus Basin through quick-yieldinginvestments, as recommended recently in a UNDP-financed study for which theBank was executing agency.

24. In industry, most lending for the private sector has been through

the DFCs, principally through eleven Loans/Credits amounting to US$274 mil-lion for the Pakistan Industrial Credit and Investment Corporation (PICIC),and two Credits to the Industrial Development Bank of Pakistan (IDBP), total-ing US$50 million. Direct lending for industry has also included assistance

to three large fertilizer plants, a refinery engineering loan, as well as forsmall-scale industry. As of September 30, 1983, IFC had made investments in16 Pakistan enterprises for a total of US$182.0 million, of which US$170.4million was by way of loans and US$11.6 million by equity participations(these are shown in Annex II). About US$55.7 million of these investmentsremained outstanding. The enterprises assisted by IFC include three in thefield of pulp and paper products, two each in textiles, food and foodprocessing, and petrochemicals, and one each in cement, steel, fertilizers,plastics, and wood processing. IFC is also a shareholder in PICIC.

25. The Bank has had a long standing involvement in the energy sector.In power, the Bank Group has assisted the Karachi Electric Supply Corporation(KESC) and the Water and Power Development Authority (WAPDA) with four andthree projects respectively; the sector has also been assisted by the con-struction under the Indus Basin Development Program of Mangla and TarbelaDams. In petroleum, the two Sui gas transmission companies have beenassisted with five projects, while the Bank group is financing two petroleum

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projects, for production and exploration, and is playing an important role instrengthening the public Oil and Gas Development Corporation. An IDA creditto support a Coal Exploration Project was recently approved. These effortsare assisting in the efficient development and utilization of Pakistan'sdomestic energy resources and in establishing a policy and institutionalframework for increased private investment in the sector. In addition, IFChas made three loans in the petroleum sector.

26. The focus of Bank Group lending for transport and communications hasshifted increasingly towards assisting Pakistan to better utilize existingcapacity by improving the efficiency of operations and strengthening theinstitutions responsible for these services, especially the Karachi PortTrust, Pakistan Railways, the Telephone and Telegraph Department, and federaland provincial highway agencies. IDA has financed four projects in the urbanand water supply sector, three of which are currently being implemented.Five credits for education, totaling US$62.5 million, have assisted inupgrading primary, post-secondary and higher technical and agriculturaleducation, middle-level training of primary teachers and agricultural exten-sion agents. A first population project was recently approved.

27. In addition to financing specific high-priority projects in keysectors of the economy, the Bank has from time to time supported Pakistan'sdevelopment through program assistance. A first structural adjustment lend-ing operation (SAL) was approved by the Executive Directors in June 1982.This SAL program consists of a number of significant reforms in governmentdevelopment planning and in policies and programs in the agriculture, energyand industrial sectors.

28. Annex II contains a summary statement of Bank Loans and IDA Creditsas of September 30, 1983. Credit and loan disbursements have been generallysatisfactory. Some projects have experienced initial delays due to protractedgovernment procedures for project approval, which are being addressed, andto slowness in the procurement of goods and services. Rapid turnover ofmanagerial and technical staff, in part due to migration to the Middle East,and budgetary constraints have been problems in the case of some projects.

29. A number of further projects for Bank Group financing are currentlyunder appraisal or being prepared in Pakistan. These include projects forpower transmission and generation, direct and indirect industrial investments,oil and gas development, irrigation, agriculture and education. Pakistancontinues to have domestic resource constraints for the reasons set out inPart I. To assist the Government to finance agricultural and other high-priority projects which have a low foreign exchange component, financing ofsome local expenditures in specific cases is justified.

30. In addition to lending, economic and sector work provides the basisfor a continuing dialogue between the Bank Group and the Government ofPakistan on development strategy, and for the coordination of external assis-tance within the Pakistan Consortium.

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PART III - THE INDUSTRIAL SECTOR

31. Industrial Structure and Performance. In FY82 industryl/ accountedfor about 23% of GDP and employed 19% of the economically active population.Manufactured and semi-manufactured pr)ducts accounted for 55% of totalexports, of which textiles accounted for 40%. Textiles and food processingindustries are estimated to account f,r more than half of manufacturing valueadded; other major sectors are engineering and chemicals. In large-scaleindustry, public sector enterprises (PSEs) produce about 15% of value addedand have substantial shares in a number of key industries (cement,fertilizers, chemicals and heavy engineering).

32. During the 1970s, GOP nationalized a large part of industry. Thepresent Government, which took office in 1977, has taken several measures toreverse these policies, and is committed to having the private sector play aleading role in industrial development. In this regard, GOP has alreadydenationalized most agricultural processing and a number of manufacturingunits, introduced safeguards against nationalization, widened areas open tothe private sector, restricted public sector industrial investment to thecompletion of ongoing projects and key marginal investments, liberalizedtrade policy, and introduced a range of export and investment incentives. Asa result of these measures, private investment and output has improved since1977, real annual growth has averaged 9% for industrial value added, 10% forprivate fixed industrial investment, 10% for manufactured exports, and 4% forindustrial employment.

33. Industrial Strategy and the SFYP. GOP's industrial strategy for theSFYP sustains the strategy and policies pursued since 1977. Encouragement ofthe private sector will continue with GOP concentrating on removinginfrastructure bottlenecks and acting as investor of last resort. The Planenvisages a reduced dependence on imports in sectors such as cement, fer-tilizers and edible oils. The drive to expand and diversify exports willfocus on agro-based industries, with other sectors such as engineering andselected textiles also making major contributions. The Plan targets stronggrowth in the industrial sector. Real growth of industrial output and valueadded is expected to be 9% p.a. Manufactured exports are projected to growby about 11% p.a. in real terms, which would increase the share of manufac-tured exports from 55% to 64% of total exports by FY88. Private industrialinvestment is expected to grow at 29% p.a. in nominal and 22% in real terms.The ratio of industrial investment to GDP is projected to increase from 4% inFY83 to 5.3% by FY88.

I/ Including construction.

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34. During the SFYP period, GOP projects a substantial acceleration ofprivate industrial investment. Medium and large scale private fixedinvestment, of about US$304 million in FY83, is projected to grow by 34.5%p.a. (28% in real terms) during the Plan period. This compares with 25%nominal growth and 12% real growth annually during the first four years ofthe Fifth Plan (FY78-FY82). Medium and large scale private fixed investmentduring FY84-86 is projected at US$1.7 billion, with about US$600 million inforeign exchange. This level is supported by the existing pipelines ofprojects of IDBP, NDFC and PICIC, for which foreign exchange requirements areabout US$316 million and the two commercial banks which have pipelines ofabout US$300 million. The proposed project of US$100 million and a similarADB project would meet part of these requirements.

35. The success of the Plan's industrial strategy will depend, to a largeextent, on GOP's ability to address problems in the industrial sector includ-ing the incentive structure, industrial regulations and controls, theefficiency of PSEs, and infrastructure deficiencies. The Bank Group issupporting GOP's industrial strategy through an active policy dialogue,economic sub-sector work, technical assistance and project lending. Underthe Technical Assistance Project (Cr. 1256-PAK), GOP commissioned a com-prehensive study of effective protection to guide it in simplifying andreforming tariffs and industrial incentives. Bank Group financing of techni-cal assistance is now being used in converting the results of the study intoa reform program, and is developing institutional capabilities to use effec-tive protection principles in continuous incentive reform. On publicenterprises, the Bank Group is supporting the implementation of a performanceevaluation and incentive system to reward performance on the basis of agreedtargets. Based upon recommendations of a Bank Group financed study, GOPrecently announced the adoption of a management bonus system in FY84 for 21of the 55 PSEs; enterprise-specific targets will be negotiated every year andbonuses of up to three months of salary will be paid to managers on the basisof established performance grades. Deregulation and "cost plus" pricing arebeing addressed at the sub-sector and project levels. Infrastructureimprovements are being supported through ongoing projects inTelecommunications, Transport, Water Supply and Power. Industrial energyconservation is being tackled in the fertilizer and refinery sectors. Theproposed industrial investment credit project will focus on rationalizing andstrengthening the delivery system for industrial finance.

36. Structure of the Financial System. The financial system in Pakistanconsists of nationalized and foreign commercial banks, and a range of spe-cialized financial institutions. The State Bank of Pakistan (SBP), thecentral bank, regulates and directs the financial system. Within overallpolicies set by GOP and the SBP, the Pakistan Banking Council (PBC) guidesand regulates the functions of and flow of funds to the nationalized commer-cial banks (NCBs), while the Ministry of Finance monitors the operations ofthe other financial institutions.

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37. With total assets of Rs 194.6 billion, or 80% of the assets of thefinancial system as of June 30, 1982, and a network of around 7,200 branches,commercial banks play a dominant financing role. Five NCBs accounted forabout 91% of deposits, 85% of advances, 82% of commercial bank net profits.Since 1979, a number of steps have been taken to improve the overall perfor-rmance of the NCBs: branch expansion has been limited; uneconomic branchesare being closed down; hiring of staff, except for middle level management,has been stopped; a staff performance review and disciplinary system has beenintroduced; promotion is now based more on merit than seniority; centraltraining institutes such as the Institute of Bankers are being strengthened;and NCBs will be allowed to build up their capital to a prudent level, withGOP not requiring dividends for the next three years. These actions resultedin a 91% increase in NCB's profitability in FY82, with further improvementsprojected in FY83.

38. In the area of term lending operations, commercial bank long-termlending to the manufacturing sector (37% of total advances in FY82) is wellabove the level observed in other developing countries. This is due in largepart to GOP's policy of encouraging commercial banks to provide term loansfor industry, directly and through consortium lending led by the developmentfinance institutions. From 1978 to 1982, advances by the commercial banksincreased from Rs 28.5 billion to Rs 57.4 billion, with the manufacturingsector receiving the major share.

39. A number of specialized financial institutions fund medium and largeindustry. The Industrial Development Bank of Pakistan (IDBP), and thePakistan Industrial Credit and Investment Corporation (PICIC) - the onlyfinancial institution with majority private ownership - makes foreignexchange loans to medium- and large-scale private industry. NationalDevelopment Finance Corporation (NDFC) provides term financing and workingcapital to the public and private industrial sectors. Three joint venturecompanies, Pak-Kuwait, Pak-Libya and Pak-Saudi, have been establishedrecently to provide loans and venture capital to industry. The InvestmentCorporation of Pakistan (ICP) arranges industrial equity financing and con-sortium lending by NCBs, and manages close end mutual funds. Bankers EquityLtd. (BEL) provides risk capital to private industry by underwriting equityissues and arranging consortia financing by NCBs.

40. Sources of Industrial Finance. One notable change is the industrialfinancing system during the last decade has been the emergence of the NCBsand new specialized institutions as a major force in term lending.Initially, IDBP and PICIC were the main institutions providing term financingfor industrial development. However, in 1982 GOP allowed NDFC to diversifyits activities to include lending to the large- and medium-scale privatesector; NDFC is now the largest industrial lending institution in Pakistan.Other institutions such as BEL, ICP and the joint venture companies also haveincreased their role in term financing of private industry taking over alarge part of the market area serviced by IDBP and PICIC.

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41. Although the increase in the number of institutions involved in termfinancing means more outlets, institutional imbalances and anomalies havebeen created in the process. NDFC, while not a scheduled bank, has beenallowed to perform most commercial banking functions; this latitude in bor-rowing and lending operations has helped it outperform PICIC and IDBP inrecent years. IDBP is a scheduled bank but has chosen not to perform fullbanking operations; while empowered to raise short term deposits, IDBP'sCharter restricted its ability to finance working capital. PICIC isrestricted by the Nationalization Act of 1974 from performing banking func-tions such as deposit taking, export finance, and participating in the inter-bank market. Thus, PICIC is forced to rely almost exclusively on multi-lateral lines of credit for its resources. PICIC also is subject to cor-porate tax whereas NDFC, and the three Pak-Middle East joint venture com-panies are exempt, although they compete in the same market. Several ofthese issues are now being addressed as a result of the proposed project(paragraph 53).

42. In spite of the NCBs increasing involvement in industrial termfinancing, they have not fully developed their project appraisalcapabilities. About 80% of the NCBs lending for fixed industrial investmenthas been carried out through consortia organized by BEL, ICP and NDFC. Whilethese institutions will continue to provide appraisal and supervision serv-ices for large-scale consortium financing, the NCBs increasing involvementin project financing warrants an upgrading of their internal project evalua-tion and supervision capabilities. Under the Small Scale Industries Project(Cr. 1113-PAK), the NCBs have strengthened their project-based lendingcapabilities. GOP and the PBC agree on the need to build this expertise forlarger industrial projects.

43. The Capital Market. After a promising start in the late 1950s, whensubstantial savings were invested in new equity issues and dividend rateswere high, the capital market ceased to be a major source of industrial

financing, stagnating from the late 1960s to the end of the 1970s. In 1982and 1983, however, there were signs of a resurgence in stock market activitywith issues oversubscribed and dividends increased. Although improving,trading volumes remain low, with about 85% of listed shares controlled bymanagement groups and public investment institutions. As a result, the stockmarket is still not a significant source of funds for industrial investment.GOP is exploring appropriate measures to resolve the situation includingsetting up independent money market trading houses to provide a market forcorporate commercial papers and debentures; introduction of leasing as asupplementary source of project finance; and setting up independent invest-ment companies to provide venture capital.

44. Islamization. Since 1981, GOP has introduced a number of changes inthe financial system as part of its Islamization process. The objective offinancial Islamization is partial shifting from an interest-based financialsystem to one operating on the principle of profit and loss sharing (PLS).Changes in the financial system relevant to industrial finance include the

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introduction of: (i) PLS working capital loans (Musharika); (ii) participa-tion term certificates (PTCs) based on the PLS principle, to replace deben-ture financing; (iii) Modaraba companies, which operate as investment fundsin accordance with Islamic tenets; and (iv) the conversion of a number ofnon-bank financial institutions, including National Investment Trust, HouseBuilding Finance Corporation and Small Business Finance Corporation, to anon-interest basis of operation.

45. Since the process of Islamization is being implemented gradually andpragmatically, it is too early to evaluate its full economic and financialimplications. However, indications are that, on the whole, Islamization hashad a positive impact. By not imposing restrictions on the terms and condi-tions which can be negotiated between lenders and borrowers using the newinstruments, GOP is in effect freeing financial rates of return. Thisapplies in particular to term financing through PTCs, and the arrangementsfor hire purchase and leasing currently under consideration. Since there area number of potential problems in the operation of a parallel interest andPLS-based system, GOP will remain involved in the regulation of the financialsystem for some time. During this process, GOP may find it difficult toadjust interest rates on traditional term lending and, without theflexibility afforded by interest rates, may have to continue to resort todirect intervention in financial markets to meet its macroeconomic anddevelopmental objectives.

46. Credit Allocation. An important feature of the growth and distribu-tion of domestic credit in Pakistan is the centralized system of creditallocation. Despite its inherent drawbacks, this system has functionedreasonably well in responding to credit requirements of the private sector.However, the system will need to be made more responsive to changing marketconditions. GOP is aware of the need to increase the flexibility of thesystem, and has taken measures to improve coordination and reallocate fundsbased on actual requirements.

47. Interest Rates. The interest rate structure for deposit-takinginstitutions is characterized by a crossing of rates; deposit rates rise withmaturity while domestic lending rates fall with maturity. Interest rates ondomestic term loans are fixed at 11%, while working capital loans carry arate of 14%. Deposit rates, on the other hand, rise with maturity from 5.5%p.a. for 7 to 29 day deposits to 13% p.a. for five-year deposits. Foreignexchange loans made by the DFIs are normally made at 14%, including 3% for-eign exchange risk fee payable to the Government. Issues relating to inter-est rates have been discussed extensively with GOP. GOP agrees that indirectsubsidized lending for selected sectors and the crossing of deposit and termlending rates, which leads to a negative spread on term lending, acts as adisincentive to NCB lending. However, GOP does not feel that an immediaterevision of interest rates is necessary as real interest rates are risingrapidly as a result of lower inflation and under its stated policy ofIslamization the cost of funds is becoming more responsive to marketconditions.

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Bank Group Lending Strategies

48. To date, the Bank Group has supported industrial investment credit

in Pakistan through individual lending to three development finance institu-tions (DFIs): IDBP, NDFC and PICIC. Among the three DFIs, the Bank Group

involvement with PICIC has been largest in volume. Up to 1982, 11 loans andcredits totalling US$274 million have been made to PICIC for onlending to

medium- and large-scale private sector projects. Three loans and creditstotalling US$80 million have been made to IDBP for direct lending and to

refinance commercial banks' loans to a large number of small industrialprojects. US$30 million has been channeled to NDFC for financing large

projects in the public manufacturing sector. Project completion reports forprevious industrial credits to PICIC, IDBP and NDFC have been prepared and a

Project Performance Audit Report (PPAR) was completed for the credit to IDBP,Credit 177-PAK.1/ These reports concluded that for PICIC and IDBP the

institution strengthening objectives of Bank lending had been considerablyconstrained by political and economic events. Nonetheless, the institutionalcapability of IDBP and NDFC had improved during the period of the credits.The major problem then facing IDBP and PICIC was their low collections and

resulting high level of arrears. Many of these problems had emanated fromthe massive devaluation of the rupee in 1972, the partition of East Pakistanand subsequent nationalization of major private industries, as a result ofwhich PICIC and IDBP ran into severe financial problems. The Bank Group and

ADB have worked closely with GOP to revitalize the institutions. With theconcrete measures taken by GOP and the net management of PICIC and IDBP,substantial progress has been made since 1981, and the medium term prospectsfor both institutions are generally good.

49. The rationale for dealing individually with the DFIs was theirclearly defined roles in different market segments. IDBP concentrated on

SSIs, PICIC catered to medium and large private industries, and NDFC dealtwith the public sector. Since 1981, however, considerable overlap in the

client base of the DFIs has developed. IDBP and PICIC now both concentrateon direct lending on medium- and large-scale private industries, whilelending to SSIs is handled mainly by the NCBs. Also the NCBs were instructedby GOP to fill the gap in industrial term lending created by the resurgence

in credit demand and the financial problems of IDBP and PICIC. By FY82,annual term lending to industry by NCBs was about Rs 1.4 billion (US$110

million). Under the SFYP, the NCBs are expected to finance 34% of privateindustrial investment or about three times the combined lending of all DFIs

including the three Middle Eastern finance companies.

50. Given these changes in the environment and the decline in the share

of industrial financing by the DFIs, the Bank Group needs to reorient its

1/ Report No. 2555, dated June 22, 1979 (SecM79-494).

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lending strategy, moving to focus on the system of industrial financing as awhole. By doing so, the Bank Group would be positioned to discuss generalfinancial sector issues with GOP, and to influence the relative roles andperformance of key institutions in industrial finance. The Bank Group can,at the same time, continue to assist in strengthening the DFIs by estab-lishing strict eligibility criteria to bring about necessary institutionalreforms without affecting the flow of credit to private industry. By involv-i'ng the NCBs, the Bank Group can help improve the appraisal and supervisioncapabilities of these major sources of industrial finance.

PART IV - THE PROJECT

51. The proposed project addresses a number of the issues affectingindustrial financing including the efficiency with which funds for industrialinvestment are delivered. It expands the Bank Group's involvement with keyinstitutions engaged in industrial finance, by including two major commercialbanks.

'2. The proposed project was appraised in March 1983. Negotiations wereheld in Washington, D.C. from November 29 to December 2, 1983; the PakistanDelegation was led by Mr. Inamul Haq, Joint Secretary, Ministry of Finance.Staff Appraisal Report entitled "Pakistan Industrial Investment CreditP'roject" (Report No. 4637-PAK, dated December 30, 1983) is being circulatedseparately to the Executive Directors. A supplementary data sheet isattached as Annex III.

P'roject Objectives and Scope

53. The proposed project is designed to: (i) improve credit delivery forindustrial finance by focussing on the system as well as individualinstitutions; (ii) reduce the possibility of jeopardizing industry's accessto term finance as a result of a participating institution's non-compliancewrith conditionality/eligibility criteria by expanding the sources offinancing; (iii) remove operating anomalies which hamper competition amongDFIs; (iv) encourage competition among PFIs by expanding and improving theservices offered by them; (v) strengthen individual institutions throughtechnical assistance programs; and (vi) develop a more consistent and con-tinuous method of providing foreign exchange financing for industry inP'akistan. The design of the project would enable the Bank Group to work withGOP in addressing the problems affecting the flows of industrial credit in asystematic manner, while maintaining a direct involvement with individualinstitutions. The capabilities of IDBP and PICIC would be enhanced byinstituting a number of operational and institutional improvements, andupgrading programs would be implemented in the other institutions to enabletheir participation in the proposed project. Appraisal and supervisioncapabilities of the NCBs would be strengthened and NCBs would be able to

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provide clients with a full range of banking services including foreignexchange term loans.

Project Cost, Components and Financing Plan

54. As of June 30, 1983, the foreign exchange requirements of the DFIsfor the period FY84-86 totalled US$316 million (see paragraph 34) while thatof Habib Bank Limited (HBL) and United Bank Limited (UBL) is estimated atUS$300 million. To meet a part of these requirements, a loan and creditpackage of US$98 million (including a front-end fee of US$0.2 million)through a 50:50 blending of IBRD and IDA funds is recommended. The remainingforeign exchange gap would be financed by a US$100 million ADB credit linewhich is similar in structure to the proposed project,l/ free foreignexchange allocations from the SBP (US$100 million), bilateral lines ofcredit, and from other foreign sources arranged by the sub-project sponsors.In addition, the NCBs, which have overseas offices and funding capability,would blend their resources with the funds from the proposed loan and credit.A US$2 million technical assistance component would finance (i) organizationand system studies (US$750,000); (ii) training (US$750,000); and (iii) sub-sector studies (US$500,000). The organization and system studies which havebeen agreed in principle would be focused at the DFIs. A major part of thetraining component would be used by the participating NCBs to strengthentheir appraisal capabilities, while HBL, NDFC and PICIC are expected toutilize the funds for subsectoral studies aimed at manufactured exportindustries. The Bank Group would review all technical assistance subprojects(Section 3.02(v) of the draft Development Credit Agreement).

Participating Financial Institutions (PFIs)

55. Three DFIs, IDBP, NDFC and PICIC, and two NCBs, Habib Bank Ltd. (HBL)and United Bank Ltd. (UBL), have been selected to participate in the proposedproject subject to fulfillment of terms and conditions of eligibility. Themain eligibility conditions are that their respective Boards approveStatements of Strategy and Operating Policy and undertake the trainingprograms which were agreed during negotiations (Schedule 1 of the draftDevelopment Credit Agreement). The agreed Strategy Statements (i) outlinethe PFI's credit policies for term lending, (ii) quantify the PFI's expectedinvolvement in industrial financing, (iii) indicate sub-sector lendingpriorities, (iv) detail institutional upgrading necessary to achieve opera-tional objectives, and (v) outline appraisal and end use criteria/procedures.The agreed training programs provide for intensive exposure to current prac-tice in working capital operations, development banking (including economicaspects of project evaluation) and sub-sectoral analysis. The latter wouldbe closely linked with the proposed sub-sector study program of each PFI. As

1/ ADB appraised an Industrial Investment Project in July 1983 and Boardapproval is expected in early 1984.

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relatively new participants in the field of industrial financing, staff fromthe NCB's would be required to undergo intensive pre-participation training.HBL has already established an adequately staffed project financing section,which is a condition for its access to project funds (Schedule 2, paragraph(a) of the draft Development Credit Agreement). All PFIs would also berequired to enter into Subsidiary Loan Agreements with GOP in order to makewithdrawals from the proceeds of the proposed loan/credit. The execution ofat least one Subsidiary Loan Agreement would be a condition of effectivenessof the proposed loan and credit (Section 6.01 of the draft Development CreditAgreement). Access to the pool of unallocated funds (paragraph 69) by anyDFI would be dependent upon meeting agreed financial ratios (debt/equity anddebt service coverage), and collection targets (Schedule 2 of the draftDevelopment Credit Agreement).

56. Industrial Development Bank of Pakistan (IDBP). IDBP was establishedin August 1961 to finance small and medium sized enterprises. In 1969, itwas 58% owned by GOP and 42% by private institutional and individualinvestors; in 1974, the private shareholdings were taken over by GOP underthe nationalization of the domestic banks. In 1971, when the partition ofEast Pakistan took place, IDBP, with its headquarters in Dhaka, faced severeoperational and financial difficulties, which were exacerbated with the 130%devaluation of the rupee in 1972 and subsequent nationalization of majorprivate industries. During the early 1970s, the textile sector, whichaccounted for about half of IDBP's portfolio, suffered from several years oflow international prices and slack demand with resultant delays in payment toIDBP. By 1980, the impact of economic recession and financial difficultieswas such that the institutional fabric of IDBP has been severely weakened.

57. The Bank Group and ADB have been working closely with GOP to improvethe operations and financial structure of IDBP. In 1981, under an IDA creditof US$30 million (Cr. 1186-PAK), GOP initiated an action program of farreaching measures to increase recoveries and strengthen DFIs.l/ Theseincluded: (i) the passing of a special debt recovery ordinance; (ii) cur-tailment of credit by the commercial banks to defaulting borrowers; (iii)disallowance of investment sanctions to the defaulters to the DFIs; (iv)establishment of a GOP committee for sick projects headed by the Secretary ofFinance; (v) a joint GOP/IDA/ADB periodic review of the loan recovery perfor-mance of the DFIs; and (vi) a presidential order ruling on the issue of theexchange rate for debt settlement. A new Managing Director was appointed inmid-1982, and has been effectively addressing the problems faced by IDBP. Asa result of these actions, IDBP has reduced its debt/equity ratio to 4.6:1

1/ IDBP and PICIC were both effected by the partition of East Pakistan in1971, the rupee devaluation and the nationalization of major privatesector industry. A similar action program was developed for PICIC, andGOP and the Bank Group meet regularly with ADB to monitor the performanceof both institutions.

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and improved its DSCR to 1:1. Significant progress has been made towardmeeting its collection targets and improving the quality of its portfolio.To facilitate IDBP providing a broader range of banking services, as recom-mended by the Bank Group, GOP has recently passed legislation amending theIDBP Ordinance which allows IDBP more flexibility in making working capitalloans and mobilizing deposits.

58. To position itself to compete in the changing financial environment,IDBP has prepared a new business strategy and policy statement. With itsfinancial restructuring and implementation of its new business strategy, IDBPshould be able to improve its performance over the next few years. IDBP'sterm lending operations are projected to grow at a real rate of 5%-6% p.a.while increasing working capital loans to about Rs 200 million p.a. by FY87and expanding deposits at a rate of Rs 200 million p.a.

59. During FY84-FY86, IDBP plans to lend Rs 1.8 billion with about Rs 845million (US$67 million) in foreign exchange from its existLng ADB loan (US$40million); from Cr. 1186-PAK (US$5.0 million); and the balance from theproposed project. IDBP's local currency requirements would be met byincreases in deposits, two new debenture issues, recoveries and retainedearnings. Because of the recent measures taken by GOP to restructure IDBP'sliabilities (paragraph 57), higher levels of activity, and a better businessmix, IDBP's financial results and position during FY84-FY88 are projected toremain satisfactory with a debt/equity ratio of 5:1 and DSCR of 1.1:1.

60. National Development Finance Corporation (NDFC). In January 1973,GOP set up NDFC to provide local and foreign currency financing, both shortand long-term, to the industries nationalized in 1972,1/ and to theindustrial units wholly or partially owned by GOP. NDFT's management ini-tially placed heavy emphasis on mobilizing domestic resources by way ofdeposits and building NDFC into a viable financial institution. Because thebulk of NDFC's deposits were of less than one year in maturity, it had toplace funds accordingly for liquidity reasons. NDFC's term lending opera-tions were funded out of an IDA credit (Cr. 546-PAK), approved in 1975, itsequity, and suppliers' credits from SBP. With the changes in GOP industrialpolicy which restricted public industrial investment and enhanced the role ofthe private sector, NDFC's role in term financing of public enterprise becamelimited. The situation was complicated further by a scarcity of long-termresources which forced NDFC to continue increasing its working capital loanportfolio. In 1979, NDFC adopted a strategy of diversification and mobi-lization of additional resources; at the same time, its role and lendingpolicies were redefined to allow it to finance private sector projects withincertain restrictions. In 1982, the restrictions were removed allowing NDFC

1/ In 1972, GOP took over the management of 31 major manufacturingenterprises in the key sub-sectors.

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to finance project4 in the private sector while remaining the banker forexisting public sector enterprises.

61. NDFC has performed well during a difficult political and economicperiod and has developed into a well managed and profitable DFI. DuringFY78-FY82, NDFC's assets increased by 23% p.a. while lending grew by 30% p.a.Growth was financedi mainly by deposits, which expanded by 17% annually duringthe period. NDFC earned an average of 20% on its net worth and itsdebt/equity ratio -emained well below the agreed 5:1 level. As of December31, 1982, arrears -epresented 5.4% of NDFC's portfolio. NDFC's financialposition and portfolio augur well for continued growth. NDFC's total loanapprovals are projected to increase at an annual compounded rate of 12% inreal terms reaching Rs 6.6 billion by FY87; these growth expectations,predominantly in lending to private industry, are likely to be exceeded.NDFC has prepared - Corporate Strategy Statement for FY83-FY87 which outlinesNDFC's objectives, sector priorities, major operational plans and resourcemobilization goals; these statements emphasize measures NDFC plans to take inits vigorous expansion in lending to private industry.

62. Based on its foreign currency lending projections, NDFC would needabout US$275 million for loan commitments during FY83-FY87. As of August 30,1983, NDFC's uncommitted foreign exchange resources consisted of US$40 mil-lion from its second ADB loan, leaving a gap of US$235 million. The new ADBloan is expected to cover an additional US$50 million; an initial allocationof US$15 million is provided under the proposed project; and a further US$50million in foreign exchange would be available from GOP's free foreignexchange resources. Assuming the market conditions are favorable, NDFC plansto borrow at least US$50 million in Euro dollar markets in 1985. NDFC'sprojected financial statements for FY83-FY87 indicate continued strong finan-cial viability with asset growth of 25% p.a. Net profit as a percentage ofaverage net worth is projected to remain over 25% during the period, givingN-DFC a DSCR above 1.1 and a debt/equity ratio of less than 7:1.

63. The Pakistan Industrial Credit and Investment Corporation (PICIC).PICIC was set up in 1957, with technical and financial assistance from theBank Group as a privately-owned corporation to provide term loans mainly inforeign currencies to private industry. PICIC performed very well during the1960s and developed into a sound institution. However, the 1970s proved tobe a very difficult period for DFIs in Pakistan (paragraph 56). PICIC'ssituation was complicated by its management's decision to resolve financialproblems through litigations and GOP rulings rather than through directnegotiations with its clients. By mid-1981, PICIC was in serious financialdifficulties and needed massive liquidity support from the SBP to meet itsdebt obligations. During this period, PICIC also lost a large number of itsexperienced professional staff, weakening its operational structure. TheBank Group and ADB have worked closely with GOP to resolve PICIC-sdifficulties. The last Bank credit/loan to PICIC was approved in 1980 (Cr.1019-PAK).

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64. During FY81-FY82, GOP took a number of actions to revitalize PICICand a new managing director was appointed in late 1981. However, theunwieldly structure and composition of PICIC's Board and some lack of clarityin the decision-making process still limited the effectiveness of PICIC'smanagement. Over the past year GOP has moved to address these issues byincreasing the loan approval authority of the Executive Committee andconfirming, through a resolution of the Board, the Managing Director as theChief Executive of PICIC. As a result of these measures and concertedefforts made by the new management, PICIC's collections are ahead of agreedtargets and it has been able to repay its borrowings from the SBP. A finan-cial restructuring of PICIC's portfolio is now practically complete and thishas given PICIC's management an opportunity to focus on its future. In 1983the improvement in PICIC's financial condition allowed it to declare a 10%cash dividend for the first time since 1979 and share prices, which hoveredaround Rs 6.50 during 1982, had risen to Rs 9.25. The new Managing Directorhas made a very positive contribution to PICIC. During negotiations, anunderstanding was reached with GOP that in the event a new Managing Directoris to be appointed, the Bank Group would be consulted.

65. Based on the industrial policy outlined in the SFYP (paragraph 33),PICIC has prepared a new business strategy and amended its policy statement.A key feature of the strategy is an emphasis on increasing PICIC-s workingcapital portfolio in order to reach a long/short-term portfolio compositionof 70:30. PICIC's lending operations are projected to increase, in realterms, by 18% p.a. to reach Rs 1,089 million by 1987. Given that the privateindustrial investment in the medium- and large-scale industries is expectedto grow at 28% p.a. in real terms, PICIC's share of industrial financing willcontinue to fall. PICIC's management is aware of this but has opted for aprudent strategy of slower growth to ensure a high quality portfolio whilemaintaining an adequate return on capital. Based on the projected level ofcommitments for 1983-85, PICIC needs about US$125 million in additionalforeign exchange resources which it expects to receive from ADB (US$40million), the Bank Group (US$20-30 million) and bilateral sources (US$30million). Based on present financial conditions, PICIC's projected resultsindicate that its financial position should improve with an increase on itsreturn on equity from 10% in 1983 to 13% in 1987, and maintenance of DSCR anddebt/equity ratios of 1.1 and 7:1, respectively.

66. The Participating NCBs. All five NCBs have term lending operations.However, the bulk of term lending to industry is done by the HBL and UBL.HBL, with a long history of industrial financing, is the better equipped ofthe two. Its Corporate Credit Division is well staffed to prepare term loanproposals for financing and consortia lending; HBL already has taken a numberof steps satisfactory to the Bank Group to expand and train suitable staff toexpand its industrial project appraisal capabilities. Thus, HBL would beable to participate in the project as soon as its subsidiary loan agreementbecomes effective (paragraph 55). While UBL also has experience in termlending to industry, it would nevertheless need to employ and train addi-tional staff capable of carrying out project appraisals to Bank Group

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standards. UBL would, therefore, initially receive technical assistanceunder the proposed project to address these weaknesses and would eventually

participate in the industrial credit component when it has built up a satis-factory project appraisal capability and has met the eligibility criteria foraccess to the pool of unallocated funds.

67. As a condition for access to the pool of unallocated funds, HBL andUBL would be required to establish suitably staffed project appraisal sec-tions for industrial term lending operations within their Head OfficeCorporate Finance Department. Initially, each section would have at leastthree officers (financial analyst, economist and engineer) with qualifica-

tions and experience acceptable to the Bank Group. In addition to itsCorporate Credit Division, HBL already has established a project appraisalsection and appointed nine qualified officers. The participating NCBs wouldalso be required to continue training staff in project a)praisal with financefor external training provided under the technical assistance component ofthe project. The PBC, which already has taken measures to upgrade thecapabilities of the NCBs, would be responsible for coordinating trainingprograms. HBL has prepared a Strategy and Policy Statement, satisfactory tothe Bank, outlining its credit policies regarding term lending especiallyrelated to the proposed project operations.

Credit and Administrative Arrangements

6:3. Amount and Allocation of Funds. The proposed IBRD loan of US$50million (including a capitalized front-end fee) and IDA credit of US$50million equivalent (SDR 47.3 million) would finance about 6.0% of theproposed total fixed private industrial investment in medium- and large-scaleindustries during FY84-FY86, provide US$2 million for technical assistance

for the PFIs, and meet about 18% of foreign exchange requirements. Thenecessary local currency finance would be provided by the sponsors who wouldbe required to provide a minimum of 40% of the equity, and PFIs. Based onthe existing pipeline of projects and size criteria of eligible subloans,it is expected that about 40-50 projects would be financed under the proposedproject. In most cases, IDBP and PICIC would combine their term loans withthose of the NCBs, while HBL and UBL would blend their resources with BankGroup funds. The loan/credit funds are expected to be fully committed within24-30 months of Board approval.

69. In the initial allocation of project funds, PICIC, IDBP and NDFCwould each be allocated US$15 million, with US$53 million placed in a pool ofunallocated funds (Section 3.01(b) of the draft Development Credit Agree-ment). HBL would have immediate access to the unallocated pool provided itmeets its eligibility criteria. Initial allocation of funds would ensureadequate access by the PFIs to foreign exchange resources during the initialperiod of the proposed project. Each DFI would be given six months from thetime of the Loan/Credit signing to fulfill participation conditions, and 12months from the time of Loan/Credit effectiveness to utilize its initialallocation of US$15 million (Schedule I, paragraph 2 of the draft Development

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Credit Agreement). After 12 months, any unutilized portion of their initialallocations would be transferred to the pool of funds (Schedule 1, paragraph3 of the draft Development Credit Agreement). PFIs which do not meeteligibility criteria or fail to make satisfactory progress in implementingagreed action programs would be excluded from access to the pool of funds.Progress by UBL in meeting staffing, training and other criteria would bereviewed when the unutilized funds from the initial allocation are trans-ferred to the unallocated pool of funds. This would take place after thefirst year of the project, giving UBL time to meet its eligibility criteria(Schedule 2, paragraph (d) of the draft Development Credit Agreement).

70. Onlending Rates and Spread. As GOP is reluctant, for fiscal reasons,to introduce a uniform tax treatment for IDBP, NDFC and PICIC, a differentialspread would be utilized to equalize the impact of the present taxationstructure. GOP has agreed to a onlending rate to borrowers of 14% p.a.including a spread of 4% for PICIC and IDBP and a spread of 3% for NDFC andthe NCBs. In line with its policy, GOP would bear the foreign exchange andinterest rate risk (Schedule 3 of the draft Development Credit Agreement).The US$2 million of the credit for technical assistance would be treated asdevelopment expenditures and made available to the PFIs on a non-reimbursablebasis.

71. The present official local currency term lending rate of 11% p.a.reflects the cost of capital in Pakistan and is positive; the net lendingrate of 14% p.a for foreign currency term loans is also positive with infla-tion as measured by the CPI being about 7% and projected to remain well below10% over the next few years. Although the present rate levels are reasonablein relation to present levels of inflation, GOP has undertaken to make thenecessary adjustments to ensure that the onlending rate under the proposedproject remains positive (Section 4.05 of the draft Development CreditAgreement).

72. Free Limits and Subproject Reviews. To ensure satisfactory appraisalstandards and minimize the risk of premature approval of subloans by thePFIs, the Bank Group would review all sub-projects (Section 3.02(iii) of thedraft Development Credit Agreement). The minimum and maximum size ofeligible subloans are set at US$1.0 million and US$4.0 million, respectively,with exceptions on a case by case basis (Section 3.02(vi) of the draftDevelopment Credit Agreement). On this basis, it is expected that 40-50projects would be financed under the project. Project appraisals would beprepared in a form satisfactory to the Bank Group covering the financial,technical and economic viability of the subproject (Section 3.02(vii) of thedraft Development Credit Agreement).

73. Beneficiaries. The proposed project is primarily aimed at financingprivate sector projects. However, there is a demonstrated need for financingexpansion and balancing, modernization and rehabilitation projects of exist-ing public sector enterprises, it was agreed that up to US$10 million, ofNDFC's initial allocation, could be used for these purposes (Schedule 3,paragraph E of the draft Development Credit Agreement).

-24-

'74. Amortization Schedule. GOP would onlend the funds to DFIs for aperiod of 15 years, including a grace period of three years. The NCBs,however, would repay GOP on the basis of an actual composite amortizationschedule of subloans (Schedule 3 of the draft Development Credit Agreement).Onlending on a fixed amortization schedule of 15 years would provide the DFIsa rollover of funds which would augment their local currency resources andenable them to provide working capital finance to their clients. PFIs wouldonlend the funds to industrial projects based on the cash flow requirements.However, the maximum maturity would normally be limited to 10 years includingthe grace period.

75. Procurement and Disbursement Procedures. The five proposed PFIs havesound procurement procedures which require evaluation of procurement on thebasis of at least three bids submitted under Limited International Tendering(LIT), and LIT would be required for individual contracts above US$2.0million. In these cases, the PFIs would require project sponsors to contactembassies and trade representatives of Bank Group member countries andSwitzerland represented in Pakistan; however, they would not be required toadvertise in international publications. For smaller contracts, the PFIswould employ their existing procurement procedures which provide for competi-tive quotations from at least three established sources and conform to theBank-s guidelines. The PFIs would maintain records in a format satisfactoryto the Bank Group that could be monitored through regular supervisionactivities.

76. Disbursements are projected to be completed in three years. Theproceeds of the Loan and Credit would be disbursed at the rate of 100% of theforeign exchange costs of goods and services of eligible subloans and 60%of local expenditures for the costs of imported equipment bought off theshelf, corresponding to the estimated foreign exchange content of theseitems. As in the case of prior Bank Group loans and credits to DFIs, fulldocumentation of expenditures would be submitted to the Bank Group. For thetechnical assistance component, the credit proceeds would be disbursed at therate of 100% for consultants' services and overseas training.

'77. Reporting, Accounts and Auditing. PFIs would be required to submitquarterly progress reports in a form acceptable to the Bank Group coveringtheir operations under the proposed project. Financial statements would besubmitted annually by the NCBs and the DFIs. These would be required toconform with the Bank's standard reporting requirements with submission ofaudited financial statements within six months after the end of each fiscalyear.

Project Benefits and Risks

'78. Benefits. Besides directly assisting to fill the gap in term financ-ing available for private investment in the industrial sector, the major'benefit arising from the proposed project would be on the long-term evolution

-25-

of the credit delivery system. In the short term, the proposed project would(i) continue support for the process of industrial and financial sectorreforms; (ii) reorient the Bank Group's involvement from focussing on singleinstitutions to a broader focus on the system of industrial finance; and(iii) expand the Bank Group institution building assistance to cover, notonly the institutions financed in the past, but also other institutions inthe financial sector including the commercial banks.

79. The proposed project is expected to have a positive impact onresource generation and help GOP's efforts to stimulate an inflow of externalresources. It is estimated that the Bank Group funding would generate addi-tional resources of about US$200 million.

80. The proposed project would directly finance about 40-50 projectsinvolving a total investment cost of around US$250 million. Based on pastexperience, the subprojects to be financed are expected to be relativelylabor intensive, efficient in terms of resource utilization, and to haveeconomic and financial rates of return of at least 15%.

81. Risks. While the DFIs have had many years of project appraisalexperience, the NCBs have only recently embarked on term lending operationsbased on project viability as distinct from collateral support. Thus, thereis a risk that the NCBs will be slower than expected in moving from col-lateral to appraisal based lending, limiting their participation in theproposed project. The relatively rapid establishment of effective termlending policies and procedures, however, and the technical assistance toimprove appraisal capabilities within the NCBs should offset this risk.

82. A further risk of the proposed project is that an adequate number ofeligible subprojects might not materialize due to political uncertainties,controls inhibiting industrial development and the pace of economic growth.However, GOP has recently taken a number of steps to liberalize industrialpolicy and the pipelines of the PFIs indicate credit demand well in excess ofthe amount proposed for the project. It is probable that full commitment ofthe proposed loan could be achieved in less than three years.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

83. The draft Loan and Credit Agreements between the Islamic Republic ofPakistan and the Bank and the Association, respectively, and the report ofthe Committee provided for in Article III, Section 4(iii) of the Articles ofAgreement of the Bank and the Recommendation of the Committee provided for inArticle V, Section I (d) of the Articles of Agreement of the Association arebeing distributed separately to the Executive Directors. The execution of aSubsidiary Loan Agreement between GOP and at least one PFI would be an addi-tional condition of effectiveness. Other special conditions of the projectare listed in Schedule III of Annex III.

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84. I am satisfied that the proposed Loan and Credit would comply withthe Articles of Agreement of the Bank and the Association.

PART VI - RECOMMENDATION

85. I recommend that the Executive Directors approve the proposed Loanand Credit.

A.W. ClausenPresident

Attachments

January 3, 1984Washington, D.C.

-27-ANNEX IPage 1

T A B L E 3A

PAKISTAN - SOCIAL INDICATORS DATA SHEETPAKISTAN REFERENCE GROUPS (WEIGHTED AVERAGES) /a

MOST (MOST RECENT ESTIMATE) lb/b_ lb RECENT /b LOW INCOME MIDDLE INCOME

19601-b 1970- ESTIMATE- ASIA & PACIFIC ASIA & PACIFICAREA (TBOUSAND SQ. KI)

TOTAL 803.9 803.9 803.9AGRICULTURAL 228.8 243.3 253.2

GNP PER CAPITA (0S$) 70.0 140.0 350.0 276.7 1028.6

BLERY CONSUPrION PER CAPITA(KILOGRAMS OF COAL EQUIVALENT) 143.0 209.0 224.0 398.4 792.8

POPULATION AND VITAL STATIST7CSPOPULATION,MID-YEAR (THOUSANDS) 45851.0 60449.0 84501.0URBAN POPULATION (% OF TOTAL) 22.1 24.9 28.7 21.5 32.9

POPULATION PROJECTIONSPOPULATION IN YEAR 2000 (MILL) 148.1STATIONARY POPULATION (MILL) 410.6YEAR STATIONARY POP. REACHED 2150

POPULATION DENSITYPER SQ. KM. 57.0 75.2 102.1 161.7 260.7PER SQ. 1M. AGRI. LAND 200.4 248.4 324.1 363.1 1696.5

POPULATION AGE STRUCTURE (2)0-14 YRS 43.8 46.3 46.3 36.6 39.4

15-64 YRS 51.8 50.5 50.9 59.2 57.265 AND ABOVE 4.4 3.2 2.8 4.2 3.3

POPULATION GROWTH RATE (%)TOTAL 2.3 2.8 3.0 1.9 2.3URBAN 4.6 4.0 4.3 4.0 3.9

CRUDE BIRTH RATE (PER THOUS) 51.3 47.4 45.5 29.3 31.3CRUDE DEATH RATE (PER THOUS) 24.3 19.9 15.8 10.9 9.6GROSS REPRODUCTION RATE 3.7 3.5 3.1 2.0 2.0

FAMILY PLANNINGACCEPTORS, ANNUAL (THOUS) .. 1908.1 1244.0USERS (2 OF MARRIED WOMEN) .. .. 6.0 48.1 46.6

FOOD AND NUTRITION! D EX OF FOOD PROD. PER CAPITA

69-71-100) 89.0 102.0 106.0 111.4 125.2

PER CAPITA SUPPLY OFCALORIES (% OF REQUIREMENTS) 88.0 97.0 106.0 98.1 114.2PROTEINS (GRAMS PER DAY) 58.0 60.0 65.0 56.7 57.9OF WHICH ANIMAL AND PULSE 23.0 20.0 20.0/c 13.9 14.1

CHILD (AGES 1-4) DEATH RATE 25.4 21.5 17.3 12.2 7.6

HEALTHLIFE EXPECT. AT BIRTH (YEARS) 43.3 46.2 50.2 59.6 60.2INFANT MORT. RATE (PER THOUS) 161.5 143.0 123.2 96.6 68.1

ACCESS TO SAFE WATER (%POP)TOTAL .. 21.0 29.0/d 32.9 37.1URBAN *- 77.0 60.0o7 70.8 54.8RURAL .. 4.0 17.0/d 22.2 26.4

ACCESS TO EXCRETA DISPOSAL(2 OF POPULATION)

TOTAL .. 3.0 6.0/e 18.1 41.4URBAN .. 12.0 21.0o7 72.7 47.5RURAL .. .. .. 4.7 33.4

POPULATION PER PHYSICIAN 5400.0 4300.0/f 3480.0/f 3506.0 7771.9POP. PER NURSING PERSON 16960.0 10580.07 5820.07o 4797.9 2462.6POP. PER HOSPITAL BED

TOTAL 1790.0 1860.0 1900.0/c 1100.6 1047.2

URBAN 510.0 650.0 710.07W 298.4 651.1RURAL 22850.0 12480.0 11860.07o 5941.6 2591.9

ADMISSIONS PER HOSPITAL BED .. .. .. .. 27.0

HOUSINGAVERAGE SIZE OF HOUSEHOLD

TOTAL 5.4 5.3URBAN 5.6 5.5RURAL 5.4 5.2

AVERAGE NO. OF PERSONS/ROOMTOTAL 3.1 2. 8/URBAN 3.1 2.7 itRURAL 3.1 2. 8j

ACCESS TO ELECT. (Z OF DWELLINGS)TOTAL .. 1

7.

9/g

URBAN .. 54.4/.RURAL .. 4.9/B.

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - --_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - - - --_-_ _-_ _ -_ _ -_ _ -_-_ - -_-_ _ -_-_ _ -_ _ -_ -_ - -_ - -_ _ _ -_ _ -_ _ -_ _ -_ _ -_ _ -_ _ -_ _ -_ _ -_ _ -_ -_ -

-28-

ANNEX IPage 2

T A B L E 3A

PAKISTAN - SOCIAL INDICATORS DATA SHEETPAKISTAN REFERENCE GROUPS (WEIGHTED AVERAGES) /a

MOST (MOST RECENT ESTIMATE) /bbb RECENT ,b LOW INCOME MIDDLE INCOME

1 960/D 197- ESTIMATE- ASIA & PACIFIC ASIA & PACIFIC

EDUCATIONADJUSTED ENROLLMENT RATIOS

PRIMARY: TOTAL 30.0 40.0 57.0 96.1 101.2MALE 46.0 57.0 81.0 107.8 106.0FEMALE 13.0 22.0 30.0 82.9 97.5

SECONDARY: TOTAL 11.0 13.0 15.0 30.2 44.9MALE 18.0 20.0 22.0 37.3 50.0FEMALE 3.0 5.0 8.0 22.2 44.6

VOCATIONAL (% OF SECONDARY) 1.0 1.5 1.3/h 2.3 18.5

PUPIL-TEACHER RATIOPRIMARY 39.0 41.0 45.0 34.4 32.7SECONDARY 24.0 20.0 17.0 18.4 23.4

ADULT LITERACY RATE (E) 15.4 20.7/i 24.0 53.5 72.9

CONSUMPTIONPASSENGER CARS/THOUSAND POP 1.5 2.6 4.5/c 1.6 9.7RADIO RECEIVERS/THOUSAND POP 6.0 17.1 67.0 96.8 113.7TV RECEIVERS/THOUSAND POP .. 1.6 9.7 9.9 50.1NEWSPAPER ("DAILY GENERAL

INTEREST") CIRCULATIONPER THOUSAND POPULATION 13.2 .. 13.7 16.4 54.0

CINEMA ANNUAL ATTENDANCE/CAPITA 1.7 3.0/i 2.2 3.6 3.4

LAbOR FORCETOTAL LABOR FORCE (THOUS) 14448.0 17364.0 23375.0

FEMALE (PERCENT) 8.6 9.3 10.3 33.3 33.6AGRICULTURE (PERCENT) 61.0 59.0 57.0 69.0 50.9INDUSTRY (PERCENT) 18.0 19.0 20.0 15.8 19.2

PARTICIPATION RATE (PERCENT)TOTAL 31.5 28.7 27.7 42.5 38.6MALE 55.2 50.4 47.2 54.4 50.7PFEMALE 5.7 5.5 6.0 29.8 26.6

ECONOMIC DEPENDENCY RATIO 1.5 1.7 1.8 1.0 1.1

INCOSE DISTRIBUTIONPERCENT OF PRIVATE INCOMERECEIVED BY

HIGHEST 5% OF HOUSEHOLDS 20.3/, 17.8 .. 16.5 22.2HIGHEST 20% OF HOUSEHOLDS 45.37j 41.8 .. 43.5 48.0LOWEST 20% OF HOUSEHOLDS 6.4/j 8.0 .. 6.9 6.4LOWEST 40% OF HOUSEHOLDS 17.573 20.2 .. 17.5 15.5

POVERTY TARGET GROUPSESTIMATED ABSOLUTE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN .. 68.0/i 176.0 133.9 194.5RURAL .. 47.071 122.0 111.6 155.0

ESTIMATED RELATIVE POVERTY INCOMELEVEL (US$ PER CAPITA)

URBAN .. 34.0/i 88.0 .. 178.0RURAL .. 2 2. 07T 58.0 .. 164.8

ESTIMATED POP. BELOW ABSOLUTEPOVERTY INCOME LEVEL (%)

URBAN .. 42.0/i 32.0 43.8 24.4RURAL .. 43.0717 29.0 51.7 41.1

NOT AVAILABLENOT APPLICABLE

N O T E S

/a The group averages for each indicator are populationrweighted arithmetic means. Coverage of countries among theindicators depends on availability of data and is not uniform.

lb Unless otherwise noted, -Data for 1960" refer to any year between 1959 and 1961; "Data for 1970" between 1969 and1971; and data for "Most Recent Estimate" between 1979 and 1981.

/c 1977; /d 1976; /e 1975; /f Registered, not all practicing in the country; /g 1973; /h 1978; /i 1972; /L 1964.

May 1983

-29-ANNEX I:Page 3

DEFIfNITIOfNt OF SOCIAL INDIbCATORS

Nate.: Altttugh the date are dract- orr genraly jdge anall l atoirtn n elal.i hud.. be note that theKy cay no be -1 tnentaoaIlty1cpral becuen sh ak faadardlead def 'iettos enI nopt usd by different enctis In co~lletlolg uha date. Th. data are, nn...shelasc, casfo to

decoribs ordere1 ofeaeloe indonernds, cud a -ttrta e ieo e.Jor diffre-oe batoet natre

Therafrena goop ar (1) shss cunr grosy of the nabhIec -oconryland 10) . coantry ar00p ith s-esbt higher -orsag II_aa than the o_afey gr..ap Of tbr

solotcnay(rcp fo 'gighonne Oil rEyrear" S-pc eher niddeIIocee north Aftia and siddle -ct" s chosen becaus of stroger --oi-ItonI

afinieea.. in the1 refernc grop dete the .acrgee are pouato oihted aigh"st Iet o.rt.oactrsd he sy ahe maJority uf the ssrisI greop hen data for that idIndlano, ilso' abs cunarage of c--i.e esogo 9 ich or dpeds on the nilbtl of date asd Is Ill usif.-, taticsmstb

etsrclsednrelesin aceroge fcendica tr sanoher Thes-naagecr Inly .sefu Inc-prling lhcc-1oecfot itdi-atc-n nimea-oghbe..ustryaod

5E0 (thousand a.bo-.)Poatu sphuca - ycyletio dilgded by nohe of prsiee

TIa f otlcr ccare ecayapio IlasId area ae d inInod -a-r; I 960, physic 'ian.quatradPrnaadclshola noriyln

1971 and 1980 data. Populallos leo goralca~~~~I Perac- Papalaslot dicided by numbr o f practlicing

Agticulnrl-l asnlof egriiculur1 area used -ep-crlpl orpran- l Pla an Ienat gradutcaesasin sre,pratalarsedfo ros psurs acct and kitchen gardens or no lie fa1los; 1960, surinaatiirlc

i970 aid tt data. "Poplatiud orE H !c ta ted - total ushno. and carat - Populatics (ftotl.urban, asd cocci dIolded bytR1 th Ir rear itane ashesf hospital beda

GNP5 PEt CAPITA (01)) -GNP per -ol-a rani-ae at -- crec sarket pricen, t.ial i ulcan rnl geteca. asd 'p.Iaed hospital and

calEillliii0yssleenrsorn-hod as Acrid nnk Olles (1979-il basin); rshbilIt-iIoncles nsitl.l 5 er esnblimbh-ent pma-tlp staffed

190 ..P,sd 1981 dae y tlan n p~hyticin.. ftalahe -sproding principally tastodia1

EnRGY CONSnPTION IER CAPITA - Al-1 f -'ce arenot i-lud R. sura hospitals, hecen_, inluIde h.ahsh end

551d1 00llf0osPICPTA-ana aprrthnup tofcmcia nedial cnter eatperattlY staffed byaphala (btby a msdicai9r6resry(ca ndlgit,ptrlu, aua ga and hydra-, nula)slin ue,odtr t.) hiohl offer r-palln. ccsmdto n

190 190 and 19f0 dat. urap cotastcue-lspicia gnradoptls.n oa

POPULATION Ass clout STATISTICS) -pcalsdhopslat are include cn1ydnder.otal

Ossal osulacos. Mi-hear 7sh-oonda) - o f July 1; 19t0, 1970, and 1981 odtsuenrhaciltd-T

slcodro dinoo ordshredas. ion osrsol filde hyshenuaer f bds

Orha 'PitIn pret fctl 1ci%o re n oa ppltoesn outis;11, 91 adllldn.dero N Ia of (loueh1l -iseno can Illasld) oa, ra,en ua

roculaleas Prodeosloce -FA oocbl oeeno a grou of , Ifdicdua .c sar lesn aser

Pooaini ea 00-cret ooaicpojotc e aedc 91adneccI el.a see rldgsspo a 05h siddi

toalppu -so byaeadseadrPrscaiysdfr uytehueodfrsai ia upsscets. rojctit prasler foooralIyraeacoplise iftlrr dtrgnuhri pandune talse-- toef res cdublarraeuaeleeseulglfaenecncshrs nrasoenbcnoysa n ennarcolnluba,cruaccp1dcnetc

calmmueIre o enI ieeyacnysai llgcP.)da Ig, rpoFry.felIoe r cens-esnn rrAue n

psar. Te prcnter fo iscahiy aneals bane threedleceiOUSNocupe partn.

aP"usisog declIne anO ferlll 0atr n oIca foladpn atyWr.s A 1IecFi cil (pc'nnIdd)os stl rc, n ua

plrig efrmne ec_nocyI ceea ae oso hee0crO_erunl ahiii ih lcbiopinlss qatnaa eretgcoebineluns o cortaicy atdfecill cy areda for rojec Ics purcnos .of tota, urba, and craY delllcgsiea pactcdlIr

Inoict.ary ; pou ;io-e saIonary pouaso cteIno actnce the hint rate Is equal c t~~he dat rots, and ala ,th agety OcICAT-II dfS ttib-d

fe litlitpnatst ilylacoc lon norscllalealdctlnnuljtnyecelleulen taincr pplaio i- raceE -mcyer enaonocsysicealepuil ae r"coralIPth'o acalfcec ce

P.pltoces 001 erocod ecndryace -toel oi adtsels-Copedascos; mundrbouaioc ll.nar cItcaayu_requareed e leae_ four yersofa-roo priar dorrrtn

_tol .re;190 ilPO,.en 1980 data,EDCATONl nal fI o1 er f g;crepnec cr r

Pers. a gr-ltclled-1Yple s bn "Ill tiulnralIce gIrtdlyfeclded

ony;191,17 n 1980 data 0, locatIona dIl.lfY.l. enrllseno% (pecetIffl secodary - Ocasosl nsIttinPOcaIco P Niunre(ocer(-ChOrn 0l yae. scIg-Y-(I- ncud0tch Irat . N-utaa,o c-r r raedh praeaFped

Pocuacio Oruch cte cercuc) totl -ounul Arach oteeof ocaacia-prtecy nd socedr- -celedi-ded y-eabernof eachra I theour

Pooclciasnlroethsate(per _set -uran-esas-noh. rucio tfro nu lirrucyrace -1 I ttcen)Lierasadlts(beosd csl

rop tincc for 19l0-ho 19k-TO,hed. iO- a I pecnig f oa adulPpluietIonage 15 years an a oner,d

per 196lttn ll, (970, and 1980 data. pOI ..OP IdO ..... _d ).

Crud qsal hateg(per thosad)-Canuldetsercu-ad ofefyafasegrCc (e hood uaetn ranndsge cascoptee Fcipoplyso;190 1970, i97d en lidn.cr ei(gls hnrgt esn;ecoe muacs ere n

lease sereducilon sata-An0cage nubr"f,u,Ilalsnsilheri tlts y ','Ics

PfPrtIlit- rates; usua,llydispa nsgoedn n11,17,an cacasneee ulcprconn of populococ enol idesus5081.lil llcsondhcrl-rs i corlYa acd inpesaucgirloordo

Ps_alrPlanlte-accefnsI.ao.... (chousadt (-dan....ohtruocpor soe Onffc ;dcsorecn Ter aroneuyanlicncs

proecee950V6O,ce1n6ra (per thoudand diuiatdo by - b-roler o rodets

Ineaof--in Pod lrdnen par6C 19Caia(09-0l-lOO -"dn cpe ayn yu tlmo yu doull yr;-nor n nnd.ln uncbl. nr. i- I oniaa

Antclyn hcnI ..... ondoc--lIea-. ilh Pr -ttnu ludaoeesdac nued(yI ccsrtilacnr raek

eotfssscdneasrssuc laded).~~-All- d-traac pruducrIo -or eac coutr I nbis dmhPaled on 1960ona 197cag prducer1 prIce saIs; 91-i 17, n"10data. tR-l 000o1lt0 -R hI h .It;l-

Pehcct srl ciifor -hrcn nIf renlgchta .. ouceI fis.T.. .au forcel (chlusads(-O utt pcieproa ldo re

noporte I edha- r in snuck.l~, --nnupleaolde I 1960sl feed, sefs cumlretl; 110, 070fnd 081dsi.

Fccclty P and helhnsldrn nirseelospnnc -cp eAhl, isin a prtn-0

ro On.ial labo-'ryfoce lI 17 ndIoi sa

net, uploffn pean.ntspiofCeiadfneassosPrTIcic.. a dose(psrent - nd op al .ti -ainV and -fsmale-st cpb l eOeqarneetsfcrallcuanris esablshe hr 100pruldafonsiscun cniliyatearronpaedasatl, ale andfemle ab -focec

Pncrt ceuten so rely fron aetoa enYulePr i appyoffndse oallbo use

Ch-d (ss -lOahdt prtoan(-ana efapcsosed teP...tae f.Plnd ele ts 1-et Inceolankind) -kacte. y lha

ss " ur- plears ycnchildr Int_iSC agoupfnrnsc__i lulnC ec- nt-rclett10 pescru Sposo1 rcn odcr 0preto

ountrI.i-a dat dace from lif shdei;lol 190ad98 fala-. hounnihulddu, h ... I

ssAlTs pootofo flours osoopn~~h,y11,Inld...-.. d'-l ll- D"i! Spcsnyat-g_:rar)-Icre n hep u yas lIIfaneanegTefulcon nltacaac ayapogyl esurao onn ptole n

sn lot;lO), 07 sd 99 data. houdgb inerpete od enn97reie auton

Inftiffrtlip dseloe lncanl Anul eena f nfce uneron inieed dscuc Pusen ccarlealIOn prABOtR -uhFOadRurCE

eress f Sfe ate (n mit o onulaind - i,nhn ndrrl-tcilnalanul dInt plu sen-lalIyl iu-lc renureelainno

Number of people (total, urhan en Iarf I "hrsnchlecasrofeefodaa.-acon uppo fcclu estrde aunt, _ce saner onunren.d......c ne IePnryInocLn (S a aitl-uhn e oe

unenrlsAmi lnaoesannslanlIn i y-rc taeoedhocrhclesapIng,ndtllrleianeryc ucnedt-hlcneltnsnrasy tapa

snItilfci....dII)a fneetd eeoft' iraarric pnuitd d s.lonbpranalfcneIfheoetr. ohnleelbdrIndff-tarlaunhsearaaaunii foutaido by eanbd na lcoals sot ousnhn10 oes -duihadueee oIt

0a coatf o lIin in....h h_arsa

hos. truo hca I.. nhrarsenl sl ta h loelr cadSaa. aceto peuIile ulo ed url F=bc9 are Mlha dlus

sheda I rdingr bthe fasdi1lly scalerJ J..g

say ncioa oc cdlrr,1n cu dlnusa.,~ byn cSD clihnut foncteIi f fincl oOSca on lnlelnhatac enccstn end onser-cater cc caner-borne synnesa on is use of pit coennele deal ynia and Prfja.iluns lepfr.,sn

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-30-

ANNEX IPage 4

ECONOMIC DEVELOPMENT DATA

GROSS NATIONAL PRODUCT IN 1981/82 ANNUAL RATE OF GROWTH (%, constant prices)

'OS$ billion % 1969/70-1974/75 1975/76-1980/81 1981/82

GNP aLt Market Prices 31.68 100.0 3.5 6.3 5.0Gross Domestic Investment 5.14 16.2 -5.5 5.4 11.9Gross liational Saving 3.70 11.7 -2.1 8.2 8.0Current: Account Balance -1.53 -4.8Resource Gap -3.48 -11.0

OUTPUIT,_ LABOR FORCE AND PRODUCTIVITY IN 1980/81 /a

Value Added Labor Force V.A. Per WorkerUS$ million % US$ million % US$ million Z

Agriculture 7,825 29 13.5 51 580 58Industry 6,827 26 5.2 20 1,313 131Services 12,053 45 7.9 29 1,526 152

Tot:al/Average 26,705 100 26.6 100 1,004 100

GOVERNMENT FINANCEGeneral Goverment Central Government

(Rs billion) Z of GDP (Rs billion) % of GDP1981/82 1981/82 1977/78-1981-82 1981/82 1981/82 1977/78-1981/82

Current Recepts 51.2 15.9 15.8 39.0 12.1 12.4Current Expenditures 44.4 13.8 14.1 34.1 10.6 10.6Current Surplus/Deficit 6.8 2.1 1.7 4.9 1.5 1.8Capital Expendtures 27.0 8.4 9.3 21.2 6.6 7.4External Assistance (net) 6.3 2.0 2.8 6.3 2.0 2.8

MONEY' JCREDIT AND PRICES

1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 b/

Money and Quasi Money 33.1 41.6 51.7 63.7 76.5 90.7 103.5 114.4Bank Credit to Public Sector (net) 17.5 22.7 29.5 34.3 43.1 48.1 54.1 59.9Bank Credit to Private Sector (gross) 19.7 23.1 30.1 35.7 42.7 50.6 58.7 70.7

Money and Quasi Money as Z GDP 29.5 31.5 34.6 36.7 39.0 38.3 37.0 35.5Wholesale Price Index (1969/70-100) 211.3 229.4 255.3 271.4 289.7 316.7 358.8 398.6

Annual Percentage Change in:Wholesale Price Index 23.6 8.6 11.3 6.3 6.7 9.3 13.3 11.1Bank Credit to Public Sector (net) 21.2 29.4 18.8 16.6 25.6 11.6 12.5 10.7Bank Credit to Private Sector (gross) 26.3 17.3 30.3 18.6 19.6 18.5 16.0 20.4

la ,Labor force data are official figures of the Ministry of Finance and Planning.Serious underenumeration may exist, especially of women.

/b Provisional

February 1983

-31-

ANNEX IPage 5

BALANCE OF PAYMENTS

(US$ million) MERCHANDISE EXPORTS (AVERAGING 1978/79-1981/82)

1976/77 1977/78 1978/79 1979/80 1980/81 /a 1981/82 US$ million X

Exports of Goods, NFS 1,404 1,651 2,107 2,955 3,461 2,966 Raw Cotton 260.5 11.5Imports of Goods, NFS 2,877 3,297 4,485 5709 6,466 6613 Cotton Yarn 181.3 8.0

Cotton Cloth 230.4 10.2Resource Gap (deficit - -) -1,473 -1,646 -2,378 -2,754 -3,005 -3,847 Rice 382.7 17.4

All Other Commodities 1,196.9 52.9Interest Payments -172 -183 -261 -285 -357 -453 Total 2,261.8 100.0Workers Remittances 578 1,166 1,395 1,748 2,097 2,225Other Factor Payments (net) 15 62 134 151 274 345 EXTERNAL DEBT, DECEMBER 31, 1981

Net Transfers .. .. ..

US$ millionBalance on Current Account -1,052 -601 -1,110 -1,140 -991 -1,530

Public Debt, Including Guaranteed 8,813.9Direct Foreign Investment .. .. .. .. .. .. Non-guaranteed Private Debt /e ..Net MLT Borrowing

Disbursements 961 841 813 1,134 956 1,102 Total Outstanding and Disbursed 8,813.9Amortization -175 -122 -235 -310 -516 -492

DEBT SERVICE RATIO FOR 1981/82 /fSub-Total 786 719 578 824 440 610 Percentage

Transactions with IMFTL- 44 41 -14 78 315 358

Public Debt, Including Guaranteed 12.2Other Items n.e.i. /c 24 163 238 600 527 364 Non-guaranteed Private DebtIncrease in Reserves (-) 198 -322 308 -362 -291 198 Total 12.2

Gross Reserves (year end)/d 372 694 386 748 1,039 841 IBRD/IDA LENDING (DECEMBER 1981) (US$ million)IBRD IDA

Official Gold (year end;million ounces) 1.6 1.7 1.8 1.8 1.8 1.8 Outstanding and Disbursed 310.1 908.8

Undisbursed 32.1 505.3Outstanding, Including Undisbursed 342.2 1,414.1

Fuel and Related Materials

Petroleum Imports 413 497 539 1,237 1,602 1,683Petroleum Exports 27 63 61 178 160 185

Rate of Exchange

Through May 11, 1972 May 11. 1972-Feb. 15, 1973 Feb. 15, 1973-Jan. 7, 1982 January 8-Aug. 31, 1982 Average

USS - Rs 4.7619 US$ - Rs 11.00 US$ - Rs 9.90 US$ - Rs 11.46Rsl - US$0.2100 Rsl US$0.0909 Rsl - US$0.1010 Rs - 0.087

/a Government estimate.71; Including Trust Fund.7W Including net short-term borrowing and errors and omissions.7i? Foreign exchange and SDR holdings of the State Bank.7e Private debt is negligible.7? Ratio of debt service to exports of goods, non-factor services and worker's remittances;

not including short-term or IMF changes.

Since January 8, 1982, value of rupee is being managed with reference to aweighted basket of currencies.Not available.

-32-

ANNEX IIPage 1

STATUS OF BANK GROUP OPERATIONS IN PAKISTAN

A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of September 30, 1983) /a

(US$ million)Loan/ (Amount net of cancellations)Credit Fiscal Undis-Number Year Purpose Bank TW IDA bursed

Ninety-three loans and credits fully disbursed /b 781.4 32.0 936.1/f

620 1976 Seed Project -- 23.0 5.2630 1976 Second Lahore Water Supply -- 26.6 2.2648 1976 Irrigation & Drainage (Khairpur) -- 14.0 6.01366T 1977 Punjab Livestock Development -- 10.0 - 5.5678 1977 Third Education -- 15.0 4.7751 1977 Hill Farming Tech. Development -- 3.0 1.1754 1978 Salinity Control & Reclamation -- 70.0 68.2755 1978 Hazara Forestry - 1.7 1.2813 1978 Punjab Ext. & Agric. Dev. -- 12.5 6.7877 1979 Salinity Control & Recl. (Mardan) - 60.0 57.7892 1979 Primary Education -- 10.0 5.7922 1979 Sind Agricultural Extension - 9.0 8.4968 1980 Third WAPDA Power -- 45.0 24.3974 1980 Third Highway -- 50.0 33.31019 1980 PICIC Industrial Development -- 40.0 9.41109/e 1981 Vocational Training - 25.0 24.41113/e 1981 Small Industries -- 30.0 26.511577-e 1981 Grain Storage - 32.0 30.01158/e 1981 Agricultural Research -- 24.0 23.711637-e 1981 On-Farm Water Management -- 41.0 33.51186/e 1982 Industrial Development (IDBP II) -- 30.0 25.92122 1982 Fourth Telecommunication 40.0 - 35.72172 1982 Fertilizer Industry Rehabilitation 38.5 -- 36.82247/c 1983 Reservoir Maintenance Facilities 10.2 - 10.223057w 1983 Agricultural Dev. (ADBP V) 10.0 -- 10.02324/c 1983 Fifth Sui Northern Gas Pipelines 43.0 - 43.012397e 1982 Irrigation Systems Rehabilitation -- 40.0 38.31243/e 1982 Baluchistan Minor Irrig. & Agr. -- 14.0 14.012567e 1982 Technical Assistance -- 7.0 6.312787 1982 Eleventh Railway Project -- 50.0 49.813487- 1983 Lahore Urban Development -- 16.0 16.013507 1983 Population - 18.0 18.013557• 1983 Coal Engineering -- 7.0 7.013747w 1983 Karachi Water Supply -- 25.0 25.013757- 1983 Fourth Drainage -- 65.0 65.013807 1983 Agricultural Development (ADBP V) - 47.8 47.82218 1983 Refinery Engineering Project 12.0 - 10.8Total 871.9 42.0 1,608.9 7

of which has been repaid 473.1 0.4 34.7Total now outstanding 398.8 41.6 1,787.7Amount sold 23.9of which has been repaid 23.9 -- -- -- --

Total now held by Bank and IDA/d 398.8 41.6 1,787.7

Total undisbursed 146.5 5.5 685.3 837.3

/a The status of the projects listed in Part A is described in a separate reporton all Bank/IDA financial projects in execution, which is updated twice yearlyand circulated to the Executive Directors on April 30 and October 31.

/b Excludes the disbursed portion of loans and credits wholly or partly for projectsin the former East Pakistan which have now been taken over by Bangladesh.

/c Not yet effective.7U Prior to exchange adjustment.7e IDA Credits under the 6th Replenishment denominated in SDRs. The principal

is shown in US$ equivalent at the time of negotiation. Disbursed amounts arecomputed at the market rate on dates of disbursements.

/f By using the market rate on dates of disbursements, the current principalfor Credit 1066-PAK and Credit 1255-PAK (both fully disbursed) is$42.5 and $77.5, respectively.

-33-

ANNEX IIPage 2

B. STATEMENT OF IFC INVESTMENTS (as of September 30, 1983)

Fiscal Amount In US$ MillionYear Obligor Type of Business Loan Equity Total

1958 Steel Corp of Rolled SteelPakistan Ltd. Products 0.63 -- 0.63

1959 Adamjee IndustriesLtd. Textiles 0.75 - 0.75

1962- Gharibwal Cement1965 Industries Ltd. Cement 5.25 0.42 5.671963- PICIC Development1969- Financing -- 0.52 0.5219751965 Crescent Jute

Products Textiles 1.84 0.11 1.951965-1980- Packages Ltd. Paper Products 19.37 0.84 20.2119821967- Pakistan Paper1976 Corp Ltd. Paper 5.38 2.02 7.401969 Dawood Hercules

Chemicals Ltd. Fertilizers 1.00 2.92 3.921969 Karnaphuli Paper

Mills Ltd. Pulp and Paper 5.60 0.63 6.231979 Milkpak Ltd. Food and Food

Processing 2.40 0.37 2.771979 Pakistan Oilfields

Ltd. and Attock Chemicals andRefinery Ltd. Petrochemicals 29.00 2.04 31.04

1980 Fauji Foundation Woven Polypropy-lene bags 1.78 -- 1.78

1980 Premier BoardMills Ltd. Particle Board 2.70 - 2.70

1981 Habib Arkady Food and FoodProcessing 3.15 0.17 3.32

1982 Asbestos Cement 4.10 -- 4.101983 Pakistan Petroleum Chemical and

Ltd. Petrochemicals 87.46 1.56 89.02

Total Gross Commitments 170.41 11.60 182.01

Less: Cancellations, Terminations,Repayments and Sales 125.34 1.02 126.36

Total Commitments Now Held by IFC 45.07 10.58 55.65

Undisbursed (including participants) 95.37 0.34 95.71

-34-

ANNEX IIIPage 1 of 2

PAKISTAN

INDUSTRIAL INVESTMENT CREDIT PROJECT

Supplementary Project Data Sheet

Section I: Timetable of Key Events

(a) Time taken to prepare project:

12 months

(b) Agency which has prepared project:

Participating Financial Institutions and GOP

(c) Date of first presentation to Bank/IDA and first Bank/IDAmission to consider project:

August 1982

(d) Date of departure of appraisal mission:

March 1, 1983

(e) Date of completion of negotiations:

December 2, 1983

(f) Planned date of effectiveness:

May 31, 1984

Section II: Special Bank and IDA Implementation Actions

None

Section III: Special Conditions

(a) For each PFI, adoption by its Board of a Statement ofStrategy and Operating Policies satisfactory to the Bank,initiation of a training program for their projectappraisal staff and execution of a subsidiary loan agree-

-35-

ANNEX IIIPage 2 of 2

ment with GOP would be a condition of eligibility toparticipate in the proposed project paragraph 55).

(b) The following conditions would govern the PFIs' access tothe pool of unallocated funds:

(i) for the DFIs, maintenance of a debt/equity ratio anddebt service coverage ratio acceptable to the Bank(paragraph 55); and

(ii) for the NCBs, establishment of appropriately staffedproject sections and initiation of a training programfor project appraisal staff, acceptable to the Bank(paragraph 67).

(c) If a DFI has not fulfilled the conditions for access tothe initial allocation of funds within six months of thesigning of the Loan and Credit, the allocation may betransferred to the unallocated pool of funds (paragraph69).

(d) If a DFI has not fully committed its initial allocation offunds within one year of the Loan and Credit becomingeffective, its allocation may be transferred to the unal-located poor of funds (paragraph 69).

(e) The execution of a Subsidiary Loan Agreement between GOPand at least one PFI would be an additional condition ofeffectiveness (paragraph 55).

IBRD 16248R64n 68. 72 S . S. MAY 1983

PAKISTAN- NATIONAL CAPITAL .71° CITIES AND TOWNS @/ 'hdtiS

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+ AIRPORTS aLoa\ tOne oO/ |

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