FIRST SUPPLEMENTARY MEMORANDUM SUBMITTED
BY THE DEPARTMENT FOR INTERNATIONAL DEVELOPMENT
PAKISTAN
In her evidence to the Committee in December,
the Secretary of State undertook to advise the Committee about
the outcomes of upcoming DFID and IMF missions to Pakistan. We
had hoped to be in a position to write earlier but, as explained
below, the IMF negotiating mission has been delayed. This letter,
therefore, provides an interim update.
The DFID team, led by the Head of our Western
Asia Department, visited Islamabad on 14 to 16 December. Its purpose
was to discuss the new administration's plans for implementing
key reforms, and the basis on which we might feel able to support
them. The background to those discussions, about which the Secretary
of State had written to Pakistan's Finance Minister earlier in
December, was a British Government paper (copy enclosed). This
contains proposals which, we believe, would improve the reform
programme that had been agreed with the IMF by the previous administration.
The DFID mission reported a receptive reaction
from the Pakistani authorities. The latter provided details of
economic and governance reform measures already taken and those
planned; they explained their outline plans for holding local
government elections before December of this year, introducing
an anti-corruption programme, and reforming and de-politicising
state institutions; and they requested resumption of our bilateral
assistance (frozen since the coup in October) to help with their
reform agenda. Our mission gave no undertakings to assist, but
established dialogue on which both sides could build.
The Secretary of State took forward this dialogue
herself on 2 February, when she met Pakistan's Finance Minister
in London. The meeting offered a full and frank discussion on
a wide range of issues, including the Finance Minister's plans
for reform and poverty reduction—and the Secretary of State's
goal of securing clear commitments to firm action on both. The
Secretary of State said she would be willing to provide help with
reforms on corruption and poverty to pave the way for further
programmes subject to some furtherre-assurances from Pakistan.
The anticipated IMF mission (to negotiate resumption
of Pakistan's engagement with the Fund) has been delayed at the
request of the Pakistani authorities. This followed their discovery
of discrepancies, in some of the budget figures which they quite
properly wish to have resolved before the mission takes place.
We understand that the problems are now being addressed, with
assistance from the IMF; and that the basis and timeframe for
future negotiation of Pakistan's re-engagement with the Fund should
become clearer shortly.
The Committee asked about the costs of our freeze,
specifically in terms of its effect on poverty reduction. The
continuing uncertainty over the nature and timing of the IMF's
re-engagement with Pakistan—and thus of our consideration
of whether a suitable basis exists for us to do likewise—means
that we are still unable to form a judgement on this as the Secretary
of State said in her evidence to the Committee. She would be glad,
however, to offer the Committee a further update when the position
is clearer
Department for International Development
February 2000
Attachment
THE ESAF/EFF PROGRAMME AND GOVERNANCE REFORM
IN PAKISTAN
1. Pakistan needs stable, transparent and
genuinely accountable government in order to sustain its economic
reform programme. IFI lending is key in promoting this, in particular
the current IMF programme. A resumption of IMF lending should
depend on a credible commitment to a clear and transparent reform
package, including a drive against corruption.
2. As a starting point, the current IMF
programme should be fully adhered to, as should related Paris
Club commitments including seeking comparable treatment from Eurobond
holders. All along, the UK has argued that the current IMF programme
is not strong or credible enough. Irrespective of the change in
administration, we see a need for a more rigorous programme with
greater attention to governance issues. We are ready to support
conditions relating to the quality of governance (in its broad
sense) where it is clear that fulfilment of these conditions is
necessary for the success of the programme.
3. The new administration has not yet established
any credibility for its economic reform programme. Until it has
demonstrated a credible commitment to reform through completing
substantive actions, further IMF lending would not be warranted.
We would encourage IMF Staff to identify substantive actions that
GoP must complete before the next tranche is brought to the Board
for approval. These should include:
— full agreement on formula to settle
IPP dispute;
— implementation begun of a realistic
action plan for restructuring Eurobonds;
— implementation of petroleum taxation
adjustment mechanism;
— extension of GST to the services
sector; and
— a public mini-budget statement confirming
revenue and expenditure plans for the remainder of the financial
year.
4. When the programme returns to the Board,
it would be with a revised Policy Framework Paper containing specific,
monitorable benchmarks for progress that will be made in the next
year. These benchmarks will support the Government's economic
plan due to be announced in mid-December and should be related
explicitly to the five further scheduled tranches for the next
12 months. The prior action relating to Eurobond restructuring
is crucial; without its completion the IMF programme will have
a financing gap; we are encouraged by the progress already made
by the new administration in this area. We do not expect to see
the July and September 1999 reviews combined into a single payment;
the reviews should be rephased to continue rewarding actions rather
than plans.
5. As part of the move towards transparent
and accountable government, we propose new benchmarks, or strengthening
of existing ones, in a number of key governance areas. Whilst
some of these conditions can be easily monitored by Fund staff,
others will require additional expertise, in a similar way to
the Fund's current reliance on World Bank judgements for IPP and
SAP progress.
6. In order to assist with monitoring against
governance benchmarks, in particular corruption and devolution,
a local donor group, consisting of key bilateral and multilateral
donors, could be established. This follows the precedent set in
Kenya, where a local donor group focused on Economic Governance
has proved to be a successful mechanism for creating broad based
support to the reform programme.
7. The following sets out possible new governance
benchmarks for either the ESAF/EFF programme or the PFP, by specific
subject area. It is not a comprehensive list. It is only a menu
attempting to insert all of the below into the programme would
lead to an overly complex set of conditions. We favour limited,
well-enforced benchmarks rather than extensive conditionality
with discretion over enforcement. These proposed benchmarks provide
a basis for negotiation with GoP, they are not a blueprint.
POSSIBLE NEW
GOVERNANCE BENCHMARKS
1. Refocusing of public expenditure as part
of the development of a credible poverty reduction strategy:
— Publish consultation document on
National Poverty Reduction Strategy—June 2000;
— Establish Medium Term Resource Framework—April
2000 (need associated TA);
— Identify core expenditure areas (against
poverty reduction criteria) and ensure adequate budgets (recurrent
and development) in 2000-01 Budget;
— Departments (federal and provincial)
authorised to re-appropriate between establishment and O&M
costs—December 1999;
— Strategy for implementation of a
Medium Term Expenditure Framework—October 2000.
2. Implementation of measures to address
corruption, including revised procurement regulations, the provision
of independent audits, and the introduction of non-discretionary
tax and administrative regulations:
— Local donor group to support anti-corruption
effort established January 2000;
— Government anti-corruption strategy
finalised April 2000 and annual reporting cycle thereafter;
— Rs x million non-performing loans
recovered by March/June/September 2000;
— Separation of authority for compilation
of accounts and their audit by June 2000;
— Annual scrutiny of audits of government
accounts and sanctions applied, mechanism in place by April 2000
(used to be Parliamentary Body, who will do it now?).
3. Implementation of public sector reforms
including the reform and de-politicisation of the civil service/state
institutions, and improved service delivery:
— Action Plan for medium term Civil
Service Reform by January 2000 (this is already in the programme
for June 1999);
— Monthly reporting of staff transfers
shows steady reductions.
4. The devolution of powers and responsibilities
to provinces and local governments to increase their decision
making responsibilities and strengthen their links with local
communities:
— Action plan for devolving powers
by function and level of government—January 2000;
— Matching federal grants for poverty
reduction expenditure at provincial level in 2000-01 Budget.
5. Implementation of arrangements to strengthen
the independence of the judiciary and the delivery of commercial
justice:
— Development of a scheme on establishment
of commercial courts/commercial divisions within the high courts—date?
(taken from ADB Legal and Judicial Reform Project—they would
be the monitoring body here).
6. Implementation of a public information
strategy for the economic reform programme:
— Revised PFP published; explanatory
articles by senior government officials/ministers in Urdu and
English press—January 2000;
— Budget information and analysis publicly
available;
— Taxpayer education programme initiated
June 2000.
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