I. The Setting

Pakistan, today, may become the second-largest recipient of US foreign assistance (outstripping Israel, the largest recipient) according to US budget documents. Additionally, other bilateral donors and multilateral partners have enhanced their aid commitments and disbursements (economy and sector-wide) to help the country’s efforts for infrastructure development, poverty alleviation, humanitarian relief, and especially in its endeavors to combat the financing of terrorism. This paper addresses implications of these developments for the external development partners and especially for domestic economic policymaking in Pakistan. It: (a) briefly elaborates on the historical structural patterns in utilizing foreign assistance; (b) discusses current modalities and procedures (as a departure from past practices) for engaging various stakeholders; and (c) concludes with suggestions for the development of Pakistan’s institutional capacity for the designing of economic programs that are amenable to the evaluation of the results of foreign assistance.

(A) Historical structural patterns in utilizing foreign assistance

Formal civilian foreign assistance, mainly by the US, to Pakistan commenced in 1952 with the signing of the Mutual Defense Agreement (with pledges of military and economic aid). This assistance accelerated with the formulation of Pakistan’s First Five-Year Plan (FY 1955-1960), complemented by humanitarian food aid and health care. Subsequently, several bilateral and multilateral donors grouped together to establish an annual Aid-to-Pakistan Consortium (now known as the Pakistan Development Forum) which would respond to the government’s list of “aid-worthy” projects. Concurrently, to support the development of the private sector, lines of credit were extended to the newly-established Pakistan Industrial Credit and Investment Corporation (PICIC) and the Industrial Development Bank of Pakistan (IDBP).

Throughout these years, albeit intermittently, the US has served as the largest source of bilateral aid to Pakistan. However, this US assistance has exhibited a pattern of extreme volatility.

Beside the suspension of military aid in 1965 (because of the Indo-Pakistan conflict), all economic assistance aside from food aid was cut off in 1976 as a response to Pakistan’s nuclear enrichment facility. This aid was to resume in 1981 following the Soviet invasion of Afghanistan. Once again, the US administration terminated all aid from 1991 to 1999 because of the Pressler amendment and two presidents’ failure to certify that Pakistan did not possess nuclear weapons. In effect, the USAID mission to Pakistan remained closed for eight years during this period. Any residual economic assistance was further curtailed after the 1998 nuclear tests. It was only in the aftermath of 9/11 that this aid spiked again and the US Congress tripled the previous level of assistance with commensurate debt relief.

Notwithstanding the fluctuations in US assistance during 1960-2000, most of the foreign resources have flowed through other multilateral banks (notably the Asian Development Bank, the World Bank, Islamic Development Bank). And, since the early 1970s, several non-OECD countries, most significantly, China and Saudi Arabia, have drastically increased their funding to Pakistan. The International Monetary Fund (IMF) too has extended its credits (Oil Facility, ESAF, etc.) several times especially in the 1980s—albeit with stringent conditions for economic reform.

Last but not least, recent efforts to coordinate and encourage donor assistance to Pakistan have revolved around the “Friends of Democratic Pakistan” Group—which includes 22 donors, including the IFIs. Nonetheless, these pledges have been slow to materialize because of several factors: notably, concerns with the financial mismanagement by the implementing agencies in charge of crises and reconstruction.

From the Government of Pakistan (GoP) side, the management and utilization of this Official Development Assistance (ODA) has been the exclusive domain of the economic ministries and that within the gamut of five-year plans and annual development programs (ADPs). The participating agencies in the Government of Pakistan are also: (a) the Economic Affairs Division (EAD) and the Planning Commission of Pakistan, with more modest contribution by the provincial administrations and/or sectoral ministries/agencies. A more fundamental shortcoming has always been the absence of an oversight agency to monitor—let alone— evaluate the use of foreign assistance. The sectoral ministries and provincial authorities provided a “wish list” of foreign exchange and domestic resource requirements, whereas the Central/Provincial Working Parties (committees reporting to the National Economic Council (NEC)) approved this list of pro-forma “priorities” to be presented to international development partners. Still, a lacuna persisted with the absence of a rigorous cost-benefit analysis; instead, political considerations became a surrogate for economic planning.

Notably, this modus operandi also included concessional assistance sought from IFIs. Pakistan became a member of the World Bank in 1950 and began borrowing on commercial terms in 1952. Also, with the establishment of the International Development Association (IDA) in 1962, soft-term (grant) assistance started forthcoming extensively. In absolute terms, the country became one of the World Bank Group’s 10 largest borrowers.

(B) Current modalities and procedures (as a departure from past practices)

Over the years, and especially in the1980s, there has been increasing attention to: (a) maintaining field presence by the development partners at the national and provincial capitals; (b) enhancing the role of the non-state actors; and (c) direct sub-national lending (to the provincial authorities in the Punjab, Sindh, Khyber-Pukhtunkhwa (KP), Federally-Administered Tribal Areas (FATA), and Baluchistan.

The sequence of direct lending to provincial governments (mainly Sindh and KP) was intended as part of the Federal Government’s program of devolution. Though some progress has been made in financial management, there are still issues of service at the district level. In addition, because the tax base of the provinces is very low (almost less than one percent of the gross provincial domestic product), the main source of provincial revenues derives from distributions and directives from the Federal Government. Equally, if not more important has been the increasing role of non-traditional development partners in supporting selected projects/programs – though most of this assistance requires “sovereign guarantee” by the Federal Government. Last but not least, there has been a proliferation of the civil society (NGOs, CSOs, research institutions, and think tanks)—covering all aspects, ranging from social sectors, relief efforts, and rehabilitation and reconstruction. Simultaneously, today there is no dearth of semi-official agencies which operate under the aegis/patronage of federal and provincial authorities.

But the fundamental weaknesses in governance have not been addressed. Pakistan has a history of policy plans, not achieving objectives. It is widely recognized that effectively implementing the revised modalities is a major weak link. Overall, while formal assessments are non-existent, the weak results are evident from country-wide community consultations. Yet, there is no independent non-partisan entity or organization that primarily focuses on why these strategies have not worked and/on identifying key factors that impede their successful implementation.

In spite (or because of) changes in the management of intermediation of foreign assistance, the administrative and technical problems that have plagued Pakistan from the outset have either remained pervasive and have exacerbated in various forms:

(a) In macroeconomic terms, after outpacing its South Asian neighbors in gross domestic product (GDP) growth over the first four decades of its existence, Pakistan has begun to trail them and has not fared well on a number of key social indicators. And, macroeconomic stability together with high outstanding debt-to-GDP ratio represents a perennial issue.

(b) Continuing high poverty levels have been due in large part of the limited access to the poor to productive assets and to inadequate public services.

(c) Similarly, human development (based on combined measures of life expectancy, school enrollment, literacy, and income) continues to be stagnant.

(d) Governance issues have long been an impediment to development, and have become more prominent in recent years in the shape of outright nepotism and corruption. Not surprisingly, in the 1990s, two democratically-elected governments were dismissed on the basis of corruption charges. Further complications arise from the stalling of already-low tax revenues. As of 1996, when the World Bank Institute (WBI) started collecting survey data, Pakistan was ranked in the 15th percentile on surveys of control of corruption—the lowest in the South Asia Region.

In sum: the current shortcomings are summarized as follows:

- waste, fraud; and abuse in allocation of civilian foreign assistance;
- aid supplanting rather than supplementing domestic resources for project expenditures: unclear earmarking of development priorities;
- absence of feedback mechanisms and inadequate political will to improve the effectiveness of supplementary resources;
- failure to employ nascent indigenous capacities; and
- lack of accountability, be it: inspections, audits, investigations, and evaluations.

Assertions and opinions in this Policy Insight are solely those of the above-mentioned author(s) and do not necessarily reflect the views of the Middle East Institute, which expressly does not take positions on Middle East policy.