PAKISTAN'S ECONOMY: THE BOOM IS LIKELY TO END

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89S01450R000200150001-9
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• Original Classification: C
• Document Page Count: 27
• Document Creation Date: December 27, 2016
• Document Release Date: June 28, 2012
• Sequence Number: 1
• Publication Date: March 1, 1988
• Content Type: REPORT

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Pakistan's Economy:
The Boom Is Likely To End
An Intelligence Assessment
PROJECT NUMBER
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NESA 88-10016
March 1988
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Directorate of Confidential
Intelligence
Reverse Blank
Pakistan's Economy:
The Boom Is Likely To End
An Intelligence Assessment
This paper was written by Office
of Near Eastern and South Asian Analysis,
Comments and
queries are welcome and should be directed to the
Chief, South Asia Division, NESP1
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NESA 88-10016
March 1988
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Key Judgments
Information available
as of! February 1988
was used in this report.
Pakistan's Economy:
The Boom Is Likely To End
Pakistan's overall economic growth has been impressive in the decade since
President Zia assumed power. Among low-income countries, only China
has surpassed Pakistan's average real increase of 6.8 percent per year in
GNP. In the midst of this rapid growth, Pakistan has avoided the severe in-
ternational debt and payments problems plaguing many other developing
countries. Factors beyond the control of Pakistani officials?including high
worker remittances, large amounts of foreign assistance, favorable world
commodity prices, and good weather?were the major contributors to the
country's economic success.
Pakistan's relative prosperity masks major gaps in its social and economic
development:
? Large government budget deficits, sparked by growing defense spending
and outlays for interest payments on domestic debt at the same time that
the government is loath to impose taxes on agricultural income.
? Domestic savings and investment that are too low to sustain rapid
economic growth over the long term.
Pakistan's economic performance is likely to deteriorate before 1990.
Worker remittances are likely to decline as employment opportunities and
wage rates in the Gulf states shrink. Textile exports will level off as they
bump against import quotas. Islamabad will have to make difficult choices
between curbing government spending and raising taxes if it is to contain
the government's deficit. Increasing political party activity leading to
elections scheduled for 1990 and ethnic rivalries will make businessmen
and policymakers less willing to take the risks required to sustain high
economic growth.
Islamabad most likely will be able to cope with the increasing strains
without an abrupt balance-of-payments crisis or unacceptable political
instability, but with increased unemployment, shortages, and inflation.
Pakistan's foreign payments position is most vulnerable, forcing policy
responses that will probably limit longer term development prospects.
Faced with increased uncertainty about import and credit restrictions,
private investors will proceed more cautiously in implementing their
investment plans, slowing real GDP growth by 1990 to less than 3.5
percent a year. As the slowdown spreads to labor-intensive sectors, the
unemployment rate would rise?perhaps exceeding 8 percent in urban
areas.
111
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NESA 88-10016
March 1988
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Although less likely, there is a 1-in-3 chance of a severe downturn that
would probably begin with international financial problems. In this
scenario, import shortages and loss of confidence by domestic investors
would lead to a marked slowdown in manufacturing. Ethnic and regional
grievances would intensify economic troubles and ultimately might lead to
political protest and violence. We would not rule out a return to martial
law.
We see some, although much slimmer, likelihood that Pakistan could
achieve sufficient export growth to permit an increase in foreign exchange
reserves and relatively high economic growth. Islamabad would have to
implement more economic reforms than it has so far and depend on good
luck with world prices and weather. Under these circumstances, private
investors would be more willing to expand capacity or undertake new
ventures.
A gradual economic deterioration would probably not entail fundamental
changes in Pakistan's relations with the United States over the next couple
of years or affect US interests in regional stability. Islamabad, however,
will look to Washington for help in coping with the economic slowdown. As
Pakistan's largest creditor, the United States would have a major role in
shaping any financial relief. Should the United States cut or substantially
reduce its aid to Pakistan, Islamabad would be in much greater danger of
facing a foreign exchange shortage. The United States almost certainly
would be made the scapegoat for severe economic troubles, whether or not
they were triggered by a US aid cutoff.
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Contents
Page
Key Judgments
111
Impressive Economic Gains
1
Rapid Growth
1
Satisfactory Balance of Payments
1
Afghan Refugees: Not a Burden
2
Causes of Success
4
External Factors
4
Policy Initiatives
5
Constraints to Sustained Growth
7
Low Savings and Investment Rates
8
Narrow Industrial and Export Base
9
Political Constraints on Economic Policy
10
Declining Prospects Through 1990
10
Shaky Balance of Payments
10
Election Politics
11
Muddling Through
11
Sources of Volatility
12
Significant Risk Scenario
12
Optimistic Scenario
14
Implications for the United States
14
Appendix
Selected Economic Policy Changes .
15 .
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Soviet Union
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vi
Boundary repreeentation is
not necesearity authoritative.
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Pakistan's Economy:
The Boom Is Likely To End
Impressive Economic Gains
Rapid Growth. Pakistan's overall economic growth
has been impressive in the decade since President Zia
assumed power. Among low-income countries, only
China has surpassed Pakistan's average real increase
of 6.8 percent per year in GNP, according to World
Bank data. Even with rapid population growth, real
GNP per capita has increased 3.6 percent per year to
$330 at present, enough to permit a noticeable in-
crease in the availability of basic consumer goods and
to provide more luxury items.
Agricultural successes have provided indispensable
support for the expanding economy. Crop output,
though occasionally depressed by bad weather and
pests, has averaged a satisfactory 4.8-percent annual
growth in real terms, according to official Pakistani
statistics. Acreage and yields have increased for
wheat?the main food crop?and new seed technol-
ogies and the larger area under cultivation produced
bumper cotton harvests?the main export crop?
during the past three years. These gains had a ripple
effect in other sectors because agriculture employs
more than half the work force, provides a substantial
portion of raw materials for domestic industry, and, in
normal years, accounts for about 60 percent of export
earnings.
Small-scale industries also have been booming. Ac-
cording to a fiscal year 1983 Pakistani Government
survey, these industries grew 9.4 percent in real
terms.' Because Pakistani statisticians projected the
growth rate to continue during the past four years,
government statistics indicate that small-scale indus-
tries now account for 30 percent of manufacturing
output and 80 percent of employment in manufactur-
ing. The gains include a wide variety of production for
the domestic market, as well as rapid expansion of
garment production for export. Planning Minister
' Pakistan's fiscal year ends on 30 June. Fiscal year 1983 refers to a
one-year period beginning on 1 July 1982.
1
Mehbub-ul Haq, who in 1968 dramatized the lack of
small firms by noting the economic dominance of 22
families, observed in 1983 that Pakistan had devel-
oped more than 22,000 small, enterprising, labor-
intensive businesses.
Larger private firms, although less dynamic than the
small-scale sector, helped maintain a satisfactory rate
of industrial growth, compensating for a targeted
decline of $1.1 billion in public-sector investment in
manufacturing during the 1983-88 Five-Year Plan
compared with the previous five-year plan. Most of
the leading business houses were still implementing
ambitious expansion plans in early 1987
In addition, crude oil pro-
duction?two-thirds generated by private firms?has
more than tripled to 42,000 barrels per day since
1984, supplying one-fourth of domestic petroleum
consumption.
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Satisfactory Balance of Payments. In the midst of
this rapid growth, Pakistan has avoided the severe
international debt and payments problems plaguing
many other developing countries. Infusions of US aid
following the Soviet invasion of Afghanistan and
remittances from Pakistanis working in the Gulf
states helped cover chronic trade deficits. Recently, 25X1
Pakistan has benefited from an increase in the volume
of its textile exports and an inflow of private bank
deposits. Imports, more than twice as large as exports
as recently as fiscal year 1986, were only 1.6 times as
large as exports in fiscal year 1987 because of falling
world prices for major imports, such as petroleum and
fertilizers. Even during temporary troubles?follow-
ing the international oil price increases of 1979-80,
and in 1984 when pests and bad weather reduced
cotton exports?Islamabad has avoided imposing ad-
ditional import controls that would have hampered
the economy. 25X1
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Figure 1
Pakistan: Annual Growth Rates, 1981-87
Percent
16
12
8
4
Manufacturingb
Agriculture
Gross
National
?4
?8
1981 82
Fiscal years ending 30 June
a Estimate.
b Large and medium-scale units.
83 ? 84
85 86 878
Product
Afghan Refugees: Not a Burden. We believe the
benefits to the Pakistani economy, particularly in the
North-West Frontier Province and Baluchistan, in the
past few years have matched, and perhaps exceeded,
the cost of caring for the roughly 3 million Afghan
refugees. An economic boom generated by the inflow
of aid funds has created new jobs for Pakistanis. Some
6,000 Pakistanis work in the North-West Frontier
Province to assist in the administration of refugee
camps, according to the US Consulate in Peshawar.
Several hundred more jobs have been created by
private voluntary organizations, often at salaries high-
er than those paid by Pakistani employers.
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316486 3-80
The refugees' willingness to work for low wages at
unskilled or seasonal jobs has benefited Pakistani
employers. Refugees routinely accept 15 to 25 ru-
pees-90 cents to $1.50?per day for unskilled work,
while Pakistani laborers seek as much as 30 rupees?
$1.80?per day, according to a UN High Commission
for Refugees report. Afghan masons, carpenters, and
day laborers substantially undercut established wage
scales, sometimes by 20 to 40 percent, according to a
Baluchistan official.
2
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Figure 2
Pakistan: International Financial Reserves,
1981-88
Million US $
2,400
2,000
1,600
1,200
800
400
I I I I I I I I I I I I I I I I I I I
I II III IV I II III IV I II III IV
1981 82 83
Fiscal years ending 30 June
a End of period.
I II III IV I II III
84 85
1 1 1 1 1 1 1 1 1 1
IV I . II III IV I II III IV I
86 87 88
Pakistani landlords, particularly in Peshawar, have
reaped windfall profits from soaring rents caused by
the influx of refugees, wealthy Afghan businessmen,
and officials of relief agencies. On the basis of
conversations with tenants and landlords, officials of
the US Consulate in Peshawar report that residential
rents have risen by as much as 500 percent since
1979. New construction abounds, with lots once con-
sidered suitable for a single residence now subdivided
to accommodate three or four houses.
the
boomtown look of many frontier cities is caused
mostly by profits obtained by corruption in the
3
316487 3-88
distribution of refugee relief. Legitimate commercial
activity generated by the refugees represents only a
small part of the frontier economy, according to the
US Consulate in Peshawar. Press reports claim that
Pakistani administrators in refugee camps regularly
charge up to $100 for new ration cards, which are
supposed to be given to the refugees at no cost. Other
press accusations include charges that Pakistani mid-
dlemen control nearly all aid-related distribution and
use their influence for personal gain.
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Table 1
Pakistan: Foreign Payments, FY 1982-87 a
Million US $
1982
1983
1984
1985
1986
1987 b
Trade balance
-3,450
-2,989
-3,324
-3,552
-3,042
-2,292
Exports, f.o.b.
2,319
2,627
2,669
2,457
2,942
3,539
Imports
5,769
5,616
5,993
6,009
5,984
5,832
Services balance
1,678
2,279
1,986
1,626
1,582
1,294
Of which:
Interest payments e
-416
-425
-585
-529
-593
-650
Worker remittances
2,225
2,886
2,737
2,446
2,595
2,300
Private transfers
163
153
307
241
226
250
Current account deficit
-1,609
-557
-1,031
-1,685
-1,234
-749
Principal repayments d
-649
-501
-599
-740
-1,138
-1,100
Aid disbursements e
1,855
1,843
1,207
1,256
1,528
1,466
Other, net
154
316
245
109
1,099
358
Change in reserves
-249
1,101
-178
-1,060
255
-25
e Data for fiscal periods ending 30 June of the stated years.
b Estimated.
e Excluding military payments and some interest paid on suppliers'
credit.
d Includes IMF repurchases; excludes military debt service.
e Includes debt relief and IMF credits.
Causes of Success
External Factors. In our judgment, factors beyond the
control of Pakistani officials-including high worker
remittances, large amounts of foreign assistance, fa-
vorable world commodity prices, and good weather-
were the major contributors to the country's economic
success. As a result, Pakistan has had the income and
foreign exchange that allowed consumption to in-
crease substantially. Remittances from Pakistanis
working in Middle Eastern oil-exporting countries,
which peaked at $2.9 billion in fiscal year 1983, have
more than compensated for the increased cost of
petroleum imports. We estimate 1.8 million Paki-
stanis had jobs in the Middle East in 1985, and in
some years their remittances brought in more foreign
exchange than was obtained through merchandise
exports. Overseas employment eased the problem of
finding productive jobs for a labor force growing at 3
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percent a year. Aid disbursements averaging $1.5
billion in recent years provided valuable foreign ex-
change, and good weather-except for the drought in
1984-boosted agricultural output.
Falling world commodity prices have helped contain
Pakistan's import bill in the latter half of the decade.
In the early 1980s, petroleum and fertilizers account-
ed for more than one-third of total import value
compared with 18 percent now. Increased domestic
crude production also permitted a slight reduction in
the volume of oil imports. The price of imported
fertilizer has fallen by 22 percent since the early
1980s. Although world prices for edible oils and tea-
Pakistan's other major imports-surged in fiscal years
1984 and 1985, they have declined during the past
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two years. Public-sector trading organizations con-
tributed to government coffers by not passing along
the lower prices of petroleum and edible oils to
Pakistani consumers, according to US Embassy re-
porting.
Ironically, textile quotas imposed by industrial coun-
tries helped spur Pakistan's garment export industry
during this decade. We believe low-quality Pakistani
exports that might not have been competitive gained
entry into industrial countries' markets because of
quantitative restrictions imposed on major competi-
tors like Hong Kong and South Korea. As a result,
Pakistani clothing exports have quadrupled from $103
million in 1980 to $463 million in 1986, according to
government statistics. Cotton yarn exports have also
been booming recently, partly because competing
producers such as China have been diverting yarn
from export markets for use in their own textile
industry. At present, Pakistan is also benefiting from
rising world prices for cotton because droughts have
limited output by some major producers.
Economic aid receipts?$1.5 billion in each of the last
two years?have also been indispensable to Pakistan's
economic success. During the past several years, aid
receipts have been equivalent to roughly two-thirds of
the government's development expenditures. The
World Bank overtook the United States in 1987 as
Pakistan's largest donor (US military support is ex-
cluded), providing $406 million?more than one-
fourth of the country's aid receipts, according to
Pakistani Government estimates.'
Foreign aid not only supports specific programs and
projects but also eases general foreign exchange short-
ages and provides revenue to the government. General
balance-of-payments support accounted for 6 percent
of aid receipts in fiscal year 1985. Moreover, when aid
funds are used to meet the domestic costs of projects,
foreign exchange becomes available for other uses.
Islamabad also obtains local currency for discretion-
ary spending by selling commodities, such as fertilizer
and edible oil, that have been imported with foreign
aid funds.
Although gross economic aid receipts are large, net receipts per
capita, according to World Bank data, are among the lowest in the
world, a reflection of Pakistan's large population and high principal
repayments.
5
Policy Initiatives. Economic conditions imposed by
aid donors have played a small role in Pakistan's
economic successes by promoting policy reforms, in
our judgment. For example, a World Bank require-
ment that the public-sector power authority finance
internally at least 40 percent of its development costs
led to an increase in user fees that will prompt energy
conservation. Donor influence on policy, however, is
limited. Islamabad has declined World Bank and
International Monetary Fund (IMF) loans that would
have required substantially higher taxes and fees or
exposed domestic industries to more competition.
Pakistan's own policy moves to attract foreign funds,
to allow the rupee to depreciate, to maintain agricul-
tural incentives, to control unions, and to loosen
restrictions on the private sector have helped ease
foreign payments strains and promoted growth in
recent years. In mid-1985, Islamabad issued several
types of tax-free, zero-coupon bearer bonds yielding
as much as 17 percent a year. Foreign exchange
bearer certificates garnered $148 million during the
first year they were available, according to the IMF.
Since then, net receipts have slowed considerably.
High interest rates during fiscal year 1986 also
attracted $480 million in foreign currency deposits
from commercial banks abroad.
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Depreciation of the Pakistani rupee against the cur-
rencies of major European trading partners and Japan
has helped promote Pakistani exports, particularly
since early 1985, by making them more competitive. 25X1
After a weak balance-of-payments performance in
fiscal year 1985, Islamabad decided to let the rupee
move down with the dollar against other currencies.
The floating rate for the rupee is now managed with
reference to several currency baskets and bilateral
rates. Between January 1982 and March 1987, the
real effective exchange rate had depreciated by 37
percent against the currencies of industrial countries,
according to IMF data. Despite the higher local
currency cost of imports, domestic inflation was only
moderate during this period because the availability
of basic food items increased and the government
intervened to regulate many prices.
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Figure 3
Pakistan: Foreign Trade, 1981-87
Million US $
Exports
4,000
3,000
2,000
1,000
Other
Rice
Cotton
Textiles a
0
1981 82 83
Fiscal years ending 30 June
a Cotton, cloth, thread, and yarn only.
b Commodity shares based on data for nine months only.
84 85 86 87b
Imports
8,000
6,000
4,000
2,000
0
1981 82
Fiscal years ending 30 June
83
c Industrial raw materials for capital goods.
a Industrial raw materials for consumer goods.
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84
85
86
87c
Capital
inputs c
Finished
consumer
goods
Capital goods
Finished
consumer
inputsd
c Commodity shares based on data for nine months only.
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Pricing policies for agricultural inputs and main crops
have helped sustain the incentive for increased pro-
duction?but until recently have required substantial
subsidies, more than $588 million in fiscal year 1986,
according to US Embassy reports. Until domestic
distribution was decontrolled in April 1987, the gov-
ernment lost money by buying wheat from farmers at
high prices and selling flour to domestic consumers at
low prices. Government agencies still sell imported
phosphatic fertilizer below cost. Perhaps most impor-
tant, charges for irrigation water are too low to
provide for adequate maintenance and operation of
the irrigation system, much less contribute toward
capital costs.
Government restrictions on labor unions have mini-
mized disruptions to production. Under martial law,
which ended in December 1985, strikes and protest
demonstrations were prohibited. Union activity is still
banned in "essential services" and companies such as
Pakistan International Airlines, hospitals, and police.
Opposition political parties have tried to energize the
labor movement, but, as US Embassy officials noted
in mid-1986 and we believe still holds, the Pakistani
worker is not dissatisfied enough to risk his job in a
political confrontation. Real wages for skilled workers
and for agricultural laborers probably rose during the
decade before 1984(
land Pakistani
economic officials note that wages per unit of output
are probably higher than in other South Asian coun-
tries.
Cautious easing of detailed government controls on
investment, imports, and prices has stimulated private
industrial output and expansion plans, in our judg-
ment. Although President Zia and Prime Minister
Junejo have consistently promised more liberalization
than they have delivered, comment in the Pakistani
press indicates that business leaders appreciate the
gradual shift from the disruptive populist policies of
the Bhutto regime toward policies that favor the
private sector. Since 1977, Islamabad has:
? Exempted many small and medium investors from
onerous government approval procedures.
? Reduced government investment in manufacturing,
leaving more scope for the private sector.
? Adjusted import licensing rules to ease access to
intermediate inputs and capital goods.
7
Figure 4
Pakistan: Literacy Rates, 1981
Percent of population age 15 and above
70
60
50
40
30
Male
20
10
Female
0
Urban Rural Total
3164903-88
? Lowered tariffs, but not enough to expose domestic
industries to competition.
? Linked producer prices for new oil and gas fields to
international prices.
These economic reforms have eased the bureaucratic
obstacles confronting smaller producers who rely on
local resources. Recent changes, such as permitting
private-sector investment in electricity generation,
have opened new opportunities for larger investors
with foreign connections.
Constraints to Sustained Growth
Pakistan's relative prosperity?visible to visitors from
other South Asian countries and evident in overall
growth data?masks major gaps in social and
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Figure 5
Pakistan: Health and Education
Deaths per 1,000 live births
Infant Mortality, 1985
120
80
40
0
Pakistan
Low-income
countries
Life Expectancy at Birth, 1985
Years
90
60
30
economic development. A World Bank study pub-
lished in 1986 commented that Pakistan has been
living on borrowed time. Islamabad has slighted
development of human resources and has postponed
self-reliance by failing to mobilize more internal
resources. We believe these shortcomings not only
limit the quality of life for Pakistanis but, increasing-
ly, will also constrain economic growth, particularly if
the economy experiences a string of bad luck.
Many government officials and international donors
see large government budget deficits, which escalated
to almost 10 percent of gross domestic product (GDP)
last year, as the key economic issue facing the coun-
try. We do not believe that expenditures can continue
to grow rapidly without tapping politically sensitive
sources of revenue or risking severe inflation. Defense
costs are 25 percent of current spending compared
with 20 percent for India. Interest payments on
domestic debt are rising about 20 percent a year,
according to US Embassy reports. According to the
World Bank, the tax base is not growing fast enough,
in part because many earnings?particularly agricul-
tural income?are exempt, evasion is extensive, and
reliance on import duties is excessive. Proposals for a
Low-income substantial hike in tax rates were hastily withdrawn in
countries June 1987 following widespread business protests.
During the past several years, Islamabad has avoided
Pakistan painful tax reform because it obtained additional
revenue from high-interest domestic borrowing. Com-
pounding the impact on the deficit, the interest earned
from many of these loans is not taxed.
Male Female
Primary School Enrollment, 1984'
Percent of age group
120
80
Low-income
countries
40
Pakistan
0
Male Female
a Enrollment ratios exceed 100 percent because some pupils are
younger or older than the country's standard primary school age.
Confidential
316489 3-88
Low Savings and Investment Rates. Domestic savings
and investment are too low, in our judgment, to
sustain rapid economic growth over the long term.
The domestic savings rate has fluctuated between 4
and 8 percent of GDP in recent years, far below the
average of about 24 percent for low-income countries,
according to World Bank data. Islamabad has so far
been lucky to achieve a tepid investment rate of about
16 percent of GDP compared with an average of 29
percent for low-income countries because a large
share of worker remittances and foreign loans and
grants makes its way into investment spending. The
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Figure 6
Pakistan: Savings and Investment
as a Share of GNP, 1981-87a
Percent
20
16
12
8
Investment
Domestic
savings
0
a Estimate.
1981 82
Fiscal years ending 30 June
83 84
85 86 87
downside of Pakistan's past success in attaining high
growth with low investment rates can already be seen,
according to World Bank analysis, in deteriorating
roads and irrigation facilities, low levels of education,
and the technical backwardness of the private sec-
tor?all signs that Pakistan is depleting its capital
base.
Despite the moves toward liberalization in recent
years, a plethora of detailed bureaucratic regulations
still hinder private diversification and development
initiatives. Government permission is still required for
ventures that have foreign equity or a high import
content. Central government allocations of bank cred-
it, far more regulated than in most countries, limit
access to working capital. Policymakers have tried to
9
316488 3-88
retain control of major business decisions and still
consider the government responsible for preventing
investment in sectors where overcapacity is likely, in
our judgment. ?
Narrow Industrial and Export Base. Islamabad's
plans to diversify exports and industrial production
have not yet succeeded, leaving Pakistan vulnerable to
fluctuating world prices, poor weather, agricultural
pests, and growing protectionism in industrial coun-
tries. Cotton and textiles still account for more than
?one-third of merchandise exports. Completion of a
Soviet-aided steel mill has not led to industrial diver-
sification into downstream engineering products even
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though Islamabad subsidizes the steel and has offered
financial incentives and protection for new industries.
Political Constraints on Economic Policy. In addi-
tion to economic impediments, Pakistan's political
development has provided neither a reliable mecha-
nism for reconciling conflicting economic interests nor
consistently offered the stability that encourages long-
term investment. In each of Pakistan's smaller prov-
inces (Baluchistan, North-West Frontier, and Sind),
according to US Embassy officials, ethnic and region-
al political groupings?based primarily on resentment
of perceived Punjabi domination?are the most seri-
ous threat to Pakistan's internal cohesion. Sporadic
large-scale ethnic rioting between Pushtuns and Mu-
hajirs closed most businesses in Karachi and led to
hundreds of deaths during the past year.' Longstand-
ing rivalries have become much more disruptive dur-
ing the past several years because the availability of
firearms has increased?a side effect of the war in
Afghanistan.
Prime Minister Junejo and President Zia have shown
little interest or skill in using political parties or
interest groups to build support for needed economic
reforms. At the same time, in our judgment, they are
extremely sensitive to pressure from key groups?not
only the major landowning and industrial families,
but also small businessmen and traders in Punjab who
have a vested interest in the status quo. As a result,
the Junejo government has taken a cautious approach
to economic reform and has quickly retreated at the
first sign of trouble. Within days of protests, it
scuttled the tax increases originally proposed in the
government budget for fiscal year 1988. Public debate
that might help shape a consensus about economic
policies is only just beginning, according to US Em-
bassy reports.
Pushtuns are the dominant ethnic group in the North-West
Frontier Province and part of Baluchistan. Many have migrated to
Karachi in search of better economic opportunities. Muhajirs?
refugees?came to Pakistan from India after partition of the two
countries in 1947. They and their descendants are sometimes
regarded by other Pakistanis as a separate ethnic group, especially
in Karachi
Confidential
Declining Prospects Through 1990
Pakistan's economy is likely to deteriorate before
1990, but we believe Islamabad will be able to cope.
Long-term financial problems are likely to become
more acute as world markets and aid donors become
less accommodating. Meanwhile, we believe that in-
creasing political party activity leading up to the
election scheduled for 1990 and ethnic rivalries will
make businessmen and policymakers less willing to
take the political and economic risks required to
sustain high economic growth.
Shaky Balance of Payments. Pakistan's balance-of-
payments position is particularly vulnerable. We be-
lieve Pakistan's international financial reserves will
remain uncomfortably low and remittances from
workers will continue to decline as employment oppor-
tunities and wage rates in the Gulf states shrink.
Short-term funds that were attracted by high interest
rates could be the source of a large foreign exchange
drain in coming years if holders become concerned
about Pakistan's economic outlook. Moreover, export
revenues are likely to slow because Pakistan probably
cannot continue growth in export volume at the
unusually high rates of the past two years. This is in
large part because Islamabad is running into quota
limits for textile sales to the United States and
European countries and lacks the equipment, technol-
ogy, and funds to upgrade extensively to higher value
products. Weather will play a crucial role. For exam-
ple, a lack of substantial rainfall this winter may force
Pakistan to import 1.5 million metric tons of wheat,
according to the US Embassy.
Compounding the foreign payments crunch, foreign
aid inflows in the late 1980s could be much lower than
the levels recorded in recent years, in part because
Pakistan may fail to meet associated economic policy
conditions. In July 1987, following Islamabad's back-
pedaling on the budget, the World Bank warned that
high levels of support could be sustained only if
Pakistani officials develop and implement a medium-
term strategy that includes tax and tariff reform. As
of late October, according to US Embassy reports,
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Islamabad had mollified the World Bank by promis-
ing to plan such reforms, but we expect Pakistani
officials to continue to drag their feet, perhaps leading
to delays in World Bank aid. Islamabad is also likely
to have continuing trouble?because of its deficit
problems?finding the domestic funds that are re-
quired for some project-related foreign loans. More-
over, continuing concerns about Pakistan's nuclear
policies and US budgetary constraints could prevent
Islamabad from receiving all of the $4 billion US aid
package for US fiscal years 1988-93.
Islamabad will face politically difficult choices be-
tween curbing expenditures and raising taxes if it is to
contain deficit spending. We believe, however, the
Pakistani Government will not tackle this problem
unless forced to as a condition for IMF assistance in
the event of a foreign exchange crunch. Debt servicing
costs from several years of attracting private funds by
offering high rates of return and tax concessions will
soon begin to divert resources from private invest-
ment, according to World Bank analysis. Yet addi-
tional investment in physical infrastructure is essen-
tial, in our judgment, because shortages of electricity
and inadequate transportation already impede eco-
nomic growth. Rapid expansion of credit to both
government and private sectors could lead to excessive
inflation. Prime Minister Junejo, who rescinded 1987
tax increases following business protests, is probably
leery of again attempting to increase the burden on
taxpayers.
Election Politics. We believe that internal political
competition in the runup to the national election
promised for 1990 will make economic reforms more
difficult. We see little popular support for or under-
standing of economic decontrol proposals and tax
revisions. To avoid creating a campaign issue, govern-
ment leaders will probably give more weight to pro-
tests by businessmen with political clout who would be
hurt by exposure to foreign and domestic competition
or by reduced subsidies. Members of the parliament
who direct the allocation of some development funds
in their constituencies will be tempted to ignore
priority needs in order to buy votes. Potential private
investors may prefer to delay their projects if they
suspect the Pakistan People's Party might come to
power. Although party leader Benazir Bhutto has
11
denied plans to return to the disruptive populist
policies her father instituted as prime minister in the
1970s, businessmen remain concerned, according to
US Embassy reports.
Unemployment will become an increasingly signifi-
cant political factor. By 1993, according to World
Bank projections, 3.8 million people?almost 11 per-
cent of the labor force?could be without jobs com-
pared with roughly 5 percent in 1985. Long-term
trends toward greater capital intensity in industry and
agriculture, as well as the return of expatriate workers
from the Middle East, account for much of the
expected increase. We anticipate increased social and
political strains from competition for jobs and proba-
bly more violence even if the increase in unemploy-
ment is 2 or 3 percentage points less than projected by
the World Bank. Under these circumstances, the
government would come under pressure to adopt
expansionary policies that would worsen the foreign
payments situation and inflation.
As the economy slows, ethnic conflict is likely to
intensify over the next several years, increasing the
reluctance of investors. Many of the Pushtun and
Punjabi workers who return from the Middle East
will probably settle in overcrowded Karachi, increas-
ing the competition for jobs and housing. Banditry in
rural Sind, no longer an isolated nuisance, is becom-
ing part of an ethnic and political protest against
Punjabis. Communal-political parties, such as the
Muhajir Quami Movement recently formed to ad-
vance Muhajir interests, are becoming more active.
Even when businesses are not destroyed, increased
ethnic rioting forces them to shut down because
employees cannot get to work. Slowdowns at Karachi
Port and occasional disruption of traffic on the main
highway to Punjab would spread the effects of distur-
bances in Sind to other parts of the country.
Muddling Through. Islamabad most likely will cope
with these increasing strains without an abrupt bal-
ance-of-payments crisis or unacceptable political in-
stability, albeit with increased unemployment, short-
ages, and inflation. We project a financial gap of
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roughly $2 billion a year through fiscal year 1990,
assuming export volume growth of 5 percent and
import growth of less than 2 percent in fiscal years
1989 and 1990.4 Capital inflows?aid receipts, foreign
direct investment, and net short-term capital flows,
for example?have amounted to about $2 billion
annually in recent years. Thus, as long as capital
inflows do not decline, Pakistan could get by without
having to draw down its foreign exchange reserves.
Pakistan's policy response will probably limit longer
term development prospects. Meeting the projected
import targets may require Islamabad to impose
tighter import licensing restrictions, adding to the
government's budget problems because customs re-
ceipts account for about 40 percent of tax revenues.
We believe Islamabad would try to cope with revenue
shortages by cutbacks in areas that are already
shortchanged?primary education and health, for ex-
ample?further impairing the quality of the labor
force. Maintenance of roads and irrigation facilities is
also likely to suffer.
Foreign suppliers' credits or additional commercial
borrowing probably could be found to pay for projects
that require considerable quantities of imported ma-
chinery?electricity plants, for example?but the debt
servicing costs would mount after the usual grace
period of two to five years. Islamabad also might be
willing to make the minor improvements in economic
policy or bureaucratic efficiency needed to accelerate
disbursements from the substantial foreign aid
funds?probably more than $5 billion?that have
been committed but not yet used.
The import restraint and budgetary stringency im-
plied in this scenario would slow real GDP growth by
1990 to less than 3.5 percent a year, permitting
almost no increase in per capita GDP. Faced with
increased uncertainty about import and credit restric-
tions, we believe private investors would proceed more
? The financial gap is the sum of projected current account balances
and principal repayments and indicates the magnitude of capital
inflows that would be required to avoid drawing down foreign
exchange reserves.
Confidential
cautiously in implementing their investment plans.
Moreover, their costs would increase because of spot
shortages and the deteriorating transportation net-
work. As the slowdown spread to labor-intensive
sectors, such as construction and services, the unem-
ployment rate would rise?perhaps exceeding 8 per-
cent in urban areas.
Sources of Volatility
A variety of circumstances?fluctuations in foreign
aid, weather, the economic health of the Gulf states
and the OECD?could affect the Pakistani economy,
entailing some risk for our forecast of "muddling
through." Because a substantial portion of the coun-
try's economic success in recent years has been based
on Pakistan's ability to take advantage of favorable
external factors, such as good weather, we see a
considerable downside risk if one or more of those
factors changes. For example, Pakistan is experienc-
ing a drought that will depress agricultural production
and exports if the spring monsoon does not material-
ize. Conversely, there is a slimmer chance that favor-
able factors, combined with prudent economic poli-
cies, could result in an even healthier economy.
Significant Risk Scenario. Although less likely than
"muddling through," there is a 1-in-3 chance of a
sharp deterioration that would probably begin with
international financial problems but quickly spread
throughout much of the economy. If, for example,
drought or pests limit crop production so that export
volume growth falls to 2 percent a year while imports
grow 5 percent and worker remittances rapidly
plunge, Pakistan's financial gap could reach $3.5
billion by fiscal year 1990. Even under the most
optimistic circumstances, we do not believe that capi-
tal inflows would increase sufficiently to avoid 'a
major foreign exchange crisis. Even under the previ-
ous scenario, Islamabad would face similar financial
straits if capital inflows fell sharply?a possibility we
would not rule out, especially if the United States
should cut aid because of Pakistan's pursuit of its
nuclear program or its reluctance to initiate economic
policy reforms required by such donors as the World
Bank.
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Such financial problems would be severe. We believe
investors would panic and attempt to cash in their
short- and medium-term securities for foreign ex-
change, worsening the crisis in the process. Foreign
commercial bankers would be unwilling to lend to
Pakistan except in limited amounts and at high
interest rates. Under this scenario, Pakistan would be
forced to try to reschedule some of its debt repay-
ments and might even default on some of its loans.
Any economic rescue package put together by inter-
national financial institutions would be conditional on
implementation of tax measures and other economic
reforms that Islamabad has so far deemed politically
unacceptable.
The import cuts that would become necessary under
this scenario would lead to a slowdown in manufactur-
ing because of input shortages. We believe economic
growth could decline by as much as 3 percent annual-
ly. Lower industrial output and trading activity would
translate into higher unemployment-perhaps more
than 10 percent. Shortages could boost inflation into
double digits despite continuation of some adminis-
tered prices. Pakistani businessmen-already familiar
with informal channels for getting money out of the
country-would abandon many of their investment
and expansion plans.
In our judgment, already existing ethnic and regional
grievances would be magnified by such economic
strains. We believe ethnic parties and non-Punjabi
business groups would claim to see a pro-Punjabi bias
in almost any expenditure cuts or tax revisions man-
dated by foreign aid donors and creditors. Competi-
tion for jobs, which already contributes to ethnic
violence in Karachi, would become even more intense.
With foreign financial support contingent on reduc-
tion of budget deficits, Prime Minister Junejo and
President Zia could not appease key interest groups
with subsidies or handouts.
Under these circumstances, we would not rule out a
return to martial law. Public opinion is not prepared
for austerity, and, given the budget fiasco last sum-
mer, we are not confident that the Junejo government
has the necessary political adroitness to successfully
13
Table 2
Pakistan: Financial Gap Scenarios,
FY 1988-90 a
Million US $
25X1
25X1
1988
1989
1990
Most likely scenario
Trade balance
-2,380
-2,380
-2,370
Exports, f.o.b.
3,960
4,320
4,700
Imports, f.o.b.
6,340
6,700
7,070
Services and transfers balance
1,340
1,270
1,180
ReMittances
2,100
2,050
2,000
Other
-760
-780
-820
Current account balance
-1,040
-1,110
-1,190
Principal repayments '
-1,000
-900
-950
Financial gap
-2,040
-2,010
-2,140
Significant risk scenario
Trade balance
-2,560
-2,880
-3,260
Exports, f.o.b.
3,780
4,020
4,250
Imports, f.o.b.
6,340
6,900
7,510
Services and transfers balance
1,340
1,080
730
Remittances
2,100
1,900
1,700
Other
-760
-820
-970
Current account balance
-1,220
-1,800
-2,530
Principal repayments
-1,000
-900
-950
Financial gap
-2,220
-2,700
-3,480
Optimistic scenario
Trade balance
-2,070
-2,070
-2,070
Exports, f.o.b.
4,200
4,670
5,180
Imports, f.o.b.
6,270
6,740
7,250
Services and transfers balance
1,440
1,450
1,500
Remittances
2,200
2,200
2,200
Other
-760
-750
-700
Current account balance
-630
-620
-570
Principal repayments
-1,000
-900
-950
Financial gap
-1,630
-1,520
-1,520
z, Data for fiscal periods ending 30 June of the stated years.
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handle the repercussions of economic stringency. We
would anticipate that if riots, strikes, and other
violence get out of hand?particularly if Punjab
Province is greatly affected?the Army would reim-
pose martial law.
Optimistic Scenario. We see an even slimmer possi-
bility?perhaps 10 to 15 percent?of a scenario in
which Pakistan could achieve sufficient export growth
to permit an increase in foreign exchange reserves and
relatively high economic growth. If worker remit-
tances level off at $2.2 billion a year and export
volume grows more than 7 percent annually, import
volume could increase almost 4 percent a year and
Pakistan could narrow its financial gap in fiscal year
1990 to about $1.5 billion. Assuming capital inflows
at the $2 billion level of recent years, Islamabad could
add to its foreign exchange cushion. Under this
scenario, we believe that the economy would grow by
5 percent a year in real terms.
Islamabad would have to implement more economic
reforms than it has so far and depend on good luck
with world prices and weather to achieve this kind of
scenario. High growth and improved public welfare
are possible, according to a World Bank analysis with
which we agree, only if Islamabad adopts measures
such as tax and fee increases, slows growth in govern-
ment expenditures on subsidies and defense, relaxes
industrial controls, eliminates most import restric-
tions, and provides a more effective system of tax-free
inputs for exporters. Under these circumstances, we
believe private investors would be more willing to
expand capacity or undertake new ventures. Islam-
abad could use some of its revenues from import taxes
to repair infrastructure and boost education, for ex-
ample.
Implications for the United States
A gradual economic deterioration probably would not
entail fundamental changes in Pakistan's relations
with the United States before 1990 or affect US
interests in regional stability. Islamabad, however,
will probably look to Washington for help in coping
with the coming economic slowdown. As Pakistan's
largest creditor, the United States would have a major
role in shaping any financial relief. We believe that
Pakistani officials will seek rescheduling of some debt
service obligations to the United States, US support in
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softening the economic policy conditions for loans
from the IMF and the World Bank, and greater
access to US textile markets.'
Should the United States cut or substantially reduce
its aid to Pakistan, Islamabad would be in much
greater danger of facing a foreign exchange shortage.
A cutoff of US aid would be especially likely to
frighten potential investors and lead to additional
capital flight. We believe, however, that an aid cutoff
that is not accompanied by other economic problems
would be manageable, at least during the next three
years. The United States provides less than 18 percent
of Pakistan's economic aid receipts, and loss of bene-
fits from some projects like coal-based power genera-
tion that could be delayed or dropped would not be
evident for several years. Islamabad would probably
turn to China or Western Europe rather than forgo
acquisition of new tanks, artillery, and fighter aircraft
but might be able to postpone initial payments beyond
1990. Seeing the opportunity for a propaganda coup,
the Soviet Union might offer additional low-interest
loans, probably tied to purchases of Soviet goods. The
most immediate financial effect of a US aid cutoff
would be the loss of commodity loans and of foreign
exchange from aid that finances the domestic costs of
development projects. We estimate that such aid is
less than $200 million a year.
The United States almost certainly would be made
the scapegoat for severe economic troubles, whether
or not they were triggered by a US aid cutoff. Any
Pakistani government would try to deflect criticism
outward, and Washington is the most likely target
because, according to many Pakistani press articles, it
is already seen as interfering in Islamabad's economic
policy choices. During rapid economic deterioration
accompanied by intensified social unrest?our second
scenario?we believe President Zia would be much
less responsive to US preferences on political as well
as economic topics
Although this paper excludes consideration of Pakistan's repay-
ment of its military debt to the United States, we believe the
coming economic slowdown could make repayment for US military
equipment an issue of growing importance in US-Pakistani rela-
tionsi
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Appendix
Selected Economic Policy Changes
Event
Comments
Martial law government
March 1978
Investment. Five-year tax holiday and exemption
from import duty on machinery offered for indus-
tries in specified underdeveloped areas. Conces-
sions later extended to additional areas and to a
few industries regardless of location.
Effort to promote economic links between poor,
remote areas and rest of country. Signaled sup-
port for private sector. Financial incentives insuf-
ficient to compensate for lack of infrastructure in
remote areas.
September 1978
Exports. "Compensatory rebates" of 7.5 percent
to 12 percent of f.o.b. value offered for some
textiles.
Provided an export subsidy; 'payments were in
addition to rebate of indirect taxes.
February 1979
Investment. Protection of Rights in Industrial
Property Order prohibited arbitrary acquisition of
industrial property and provided judicial review
of compensation.
Contrasted with nationalizations of previous gov-
ernment. Intended to attract domestic and foreign
investment.
October 1979
Investment. Major policy statement promised
that public sector would be limited to basic
industries, those in which private sector was not
interested, or those whose nationalization would
be in national interest.
Continued effort to stimulate private industrial
investment and growth.
June 1980
Islamization. Proceeds from new taxes on finan-
cial assets and agricultural production would be
disbursed by private committees, used for educa-
tion and social welfare. Similar tax on imports
imposed in 1984.
Receipts and expenditure would not appear in-
central government budget.
January 1981
Islamization. Domestic banks began gradual
shift from interest payments by accepting profit
and loss accounts. By July 1985 all commercial
banking in rupees was interest free.
Interest payments would be permitted on foreign
currency deposits and foreign loans. Changeover
introduced flexibility in rigid credit controls by
providing equivalent of positive real interest rates.
March 1981
Agriculture. Commission established to advise on
prices for major crops and inputs. Asked to
consider production incentives, rational use of
land and water.
Effort to rationalize government policy, limit
subsidy burden on government budget. Probably
not an attempt to move toward free market
prices.
January 1982
Exchange rate. Rupee unlinked from dollar.
Managed floating rate system guided by currency
baskets introduced.
Permitted substantial depreciation to make ex-
ports more competitive.,
July 1983
Imports. Any item could be imported unless
specifically prohibited. Previously only goods al-
ready on approved list could be imported.
Intended to provide better availability of import-
ed items, not to permit competition for domestic
producers. New negative list was extensive.
May 1984
Imports. Tariffs restructured?generally lower
except on raw materials for consumer goods and
on machinery for which domestic substitutes had
become available.
Attempt to remove anomalies in tariff structure
rather than to liberalize trade. Prompted by study
that found some industries underprotected.
Changes reflected, in part, advice from multilat-
eral aid donors.
15
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Selected Economic Policy Changes (continued)
Event
Comments
June 1984
Industrial policy. Raised value of projects and
imports below which government approval of
private investment not required. Future public-
sector investment would be limited to moderniza-
tion and to projects that businessmen are reluc-
tant to undertake.
Significant easing of bureaucratic barriers to
small- and medium-scale investment. Did not
apply to large projects, those with foreign equity,
many specified industries, or if payments for
foreign loans and technology exceeded standard
terms.
February 1985
Textiles. Expansion of spinning industry allowed.
Imports of textile machinery could be financed
from any source.
Reversed earlier policies that opposed new spin-
ning units because of excess capacity. By March
1987, 12 new units had begun production.
Martial law?elected parliament
May 1985
Government budget. Reduced taxes on corporate
and personal income, dividends. Increased rail
fares, some electricity rates, price of gas to
business users. New import surcharge.
Business reaction mixed, mostly negative.
Proposed sale of shares in some profitable public-
sector enterprises. Established National Deregu-
lation Commission to help dismantle unnecessary
controls. National Taxation Reforms Commission
would ensure that taxes were equitable and
growing.
Raised aid donor expectations for comprehensive
economic reform.
New government securities. Tax-free foreign ex-
change bearer certificates and rupee bonds of-
fered high yields. Provided channel to legitimize
"black" funds.
Successful but expensive way of easing foreign
payments and domestic budget strains. Money
flows could be reversed on short notice.
May/June 1985
Cement. Prices decontrolled for private produc-
ers. New factories could be established without
government permission.
Attracted additional private investment. Contin-.
ued tariff protection against imports and cross-
subsidization of high-cost producers within public
sector.
June 1985
Natural gas. Producer price for new fields linked
to international prices.
Prompted by interest in attracting private explo-
ration and development and by World Bank loan
condition.
September 1985
Electricity. Private sector permitted to invest in
power generation. Must sell to government trans-
mission system. Investors must provide at least 25
percent of cost from resources other than loans.
Major shift from public-sector monopoly.
Prompted by shortages of revenue and electricity.
Civilian government
April 1986
Edible oil. Removed price controls, import re-
strictions, and production ceilings for Private-
sector producers. Retained support prices for
farmers.
Significant decontrol of basic consumer item ad-
vocated by aid donors. Investment in new plants-
would still require government approval.
May 1986
Nitrogen fertilizer. Price and internal distribu,
tion controls removed. Efficient producers no
longer required to subsidize less efficient.
Eased government subsidy burden. Led private-
sector plants to increase production. Foreign aid
donors had urged this move.
Basmati (luxury) rice. Farmers allowed to sell to
highest bidder. In past, had to sell 83 percent of
harvest at government-fixed price.
Response to declining production. Rice exports
remained government monopoly.
Import tariff Structure simplified?duty on
plant and machinery no longer to vary among
categories of end users. Rates lowered for indus-
trial raw materials, machinery not manufactured
locally, and goods frequently smuggled.
Majdr revision. Tariff reductions since early
1980s were substantial, especially for capital
goods, but retained protection for local industry.
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Selected Economic Policy Changes (continued)
Event
Comments
June 1986
Export subsidies. "Compensatory" rebates on
manufactured exports and textiles abolished from
September 1986. Indirect tax rebates and tax
credits for exporters continued.
Depreciation of rupee made payments unneces-
sary, according to official explanation. Fear of
retaliation'by importing countries and budget
costs probably also prompted politically risky
decision.
Five-Point Program (1986-90). Quantified state- Rural projects considered necessary trade-off for
ment of national goals made as martial law lifted patronage lost when industrial controls liberal- -
in December 1985. Emphasized rural develop- ized. World Bank staff saw emphasis on jobs for
ment, social services, jobs. Modified Priority educated youth as politically motivated waste of
Plan, which modified Five-Year Plan for 1983- money.
88.
September 1986
. .
Crude oil. Revised between international and Maintained incentive for petroleum production
domestic producer prices, despite decline in world prices.
October 1986
Raised electricity prices for about 10 percent of
domestic consumers.
Met policy condition for World Bank loan. Price
hike partly reversed in February 1987.
January 1987
National Taxation Reform Commission recom-
mendations. Lower import duties but eliminate
exemptions. Broaden sales tax to cover all prod-
ucts except fresh food. Remove ban on trade in
foreign currency. No consensus about agricultur-
al income tax.
Detailed, unpublished recommendations called
for flat 15-percent import duty plus 5-percent
Islamic surcharge, 5-percent sales tax. US Em-
bassy officials doubted government would imple-
ment fully, despite potential for substantial reve-
nue gain.
February 1987
Flour rationing. Government supply of cheap
grain to consumers abolished from 15 April.
Subsidized distribution would continue in deficit
areas. Farmers still protected by support price.
Intended to ease government subsidies. High
stocks protected consumers against price in-
creases in near future. Corrupt rationing system
had not been effective.
Fertilizer. Private-sector imports permitted.
Complemented May 1986 deregulation of fertiliz-
er prices and production.
March 1987
Privatization. Offered to sell 40 percent of shares
of Bankers' Equity Limited, a development insti-
tution that invests in private sector.
Intended to provide additional funds for super-
vised investment without burden on government
budget. Offer unsuccessful?private buyers did
not see enough potential for capital gains.
April 1987
Investment. Businessmen no longer needed gov-
ernment permission to invest in 12 previously
regulated industries, including basic steel and
cotton spinning, or in projects that cost less than
$30 million.
Effective September 1987. Foreign investment
required government approval.
June 1987
Budget. Proposed "defense tax"?surcharge on
import, excise, income, and wealth taxes?and
increased energy prices.
Led to strong protests from businessmen and
within ruling party. Officials recognized need for
additional revenue but had not prepared the
public and the parliament for harsh measures.
Budget revision. Hastily withdrew major part of
proposed tax and price hikes. Substituted in-
creased import license fee, cutbacks in expendi-
ture, and plans to curb tax evasion.
Revenues likely to fall short of revised
projections.
Trade policy. Reduced some import restrictions
on raw materials and intermediate goods, but
added protection for electrical equipment. Pro-
posed restructure of income tax concessions for
exporters to favor domestic content.
Restatement of existing activities designed to
produce sense of forward motion without chang-
ing or costing much.
17
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Selected Economic Policy Changes (continued)
Event-
Comments
Countertrade. Would seek links between export of
machinery and import of tea, edible oil, petro-
leum. Government agency would replace private
importers for most tea.
Previous countertrade efforts had not been
successful.
Privatization. Private sector permitted to export
cotton and luxury rice.
Restrictive conditions, in practice, retained gov-
ernment monopoly of cotton exports.
August 1987
Local content. Would revise "deletion" program .
that required certain manufacturers to reduce the
import content of their production, to provide
penal import duties for noncompliance, but eased
restrictions on production.
Confidential
Existing programs for vehicles and durable con-
sumer goods unrealistic, not enforced. This policy
statement not yet implemented.
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