Speech at the GRIPS (Graduate Institute of Policy Studies) Tokyo July 2001 Professor …Horono. Honourable Faculty Members, Distinguished Course Participants, Ladies and Gentlemen, It is a rare honour for someone like me who has no particular background in economics to be invited to speak on such a technical and specialized subject in a very prestigious and highly regarded institution of higher learning and before an audience of such skill, experience and academic excellence. I really feel very diffident. It is a vast subject and I had half a mind to ask Professor Hirano if he could limit or narrow its scope but then decided against it, as a narrower and sharply focused subject might have made my task even more difficult. I am, therefore, taking the liberty of approaching the subject the way I know it, as a diplomat and public administrator. It may not correspond fully to your expectations or perceptions, but at least I would have given you a perspective, that is my perspective, for what it is worth. What I will do is give you first historical background to Japan’s Official Development Assistance to Pakistan, without a statistical overload but sufficient facts and figures to make it meaningful. Since 1998 the aid remains suspended to Pakistan, as well as to India, on account of the nuclear tests. I will briefly dwell on this suspension, not necessarily to make a political case for the resumption of aid but to highlight what we have been missing in the relationship, specially by way of economic cooperation and how it has adversely affected economic partnership between Japan and Pakistan. By stressing this negative the idea is to underline the importance of ODA to a developing country’s economic progress as well as to overall economic relationship between the donor and the recipient country. In the later part of my presentation I may briefly refer to issues like globalization, poverty alleviation and environmental degradation, and the role of civil society and their bearing on ODA and vice versa. Japan has been extending Official Development Assistance (ODA) to Pakistan within the framework of Aid-to-Pakistan Consortium since 1961 and has so far provided approximately 10 billion dollars of aid in the form of project loans (61%), commodity loans (22%), grant (15%) and technical assistance (2%). The interest rate on loans has been very low (around 2.5% or less) and average repayment period 29 years including a grace period of 9 years. The level of Japanese loan assistance during the past few years is as under: Japanese Financial year Yen(Billion) US$ (Million) 1992-93 47.249 387.87 1993-94 58.416 552.2 1994-95 34.818 357.0 1995-96 49.804 484.0 1996-97 59.651 568.1 While the loan assistance has been rising, the level of grant assistance, which is basically for development in the social sector, has declined. The year-wise grant allocations have been as under: Japanese Financial year Yen(Billion) US$ (Million) 1992-93 6.80 60.17 1993-94 7.30 64.60 1994-95 7.60 67.25 1995-96 6.50 57.52 1996-97 6.08 53.80 1997-98 5.73 46.20 Except for grant aid all Japanese aid is untied. There is another kind of grant called KR-II grant aimed at helping raise food production which can be used for the import of fertilizers, pesticides and small agriculture implements. This too has been declining. From 25 million dollars in 1983-84 it has gone down to 4.7 million dollars in 1997-98. On average, Government of Japan, therefore, has been extending financial assistance of approximately US$ 500 million per annum during the past few years. In addition there are other official flows i.e. aid by Export-Import Bank of Japan, now part of a new financial institution called JBIC (Japan Bank for International Cooperation). It provides both Tied and Untied loans and guarantees. At the end of 1997 its total loan and loan guarantee commitments to Pakistan had reached approximately 2.45 billion dollars and 600 million dollars respectively. Of the total loan commitments about 40% (about 900 million dollars) were Untied. Problem areas: Government of Japan was concerned about the pace of utilization of its assistance for some of the major projects. The low utilization of loan assistance was due to problems relating to counterpart funds, delay in nomination of villages for electrification, acquisition of land and cost escalation etc. Most of these problems have since been tackled and the projects have started picking pace. The Government of Pakistan has taken a number of measures to improve aid utilization. A periodical review of all Japanese assisted projects is carried out. Regular review meetings are also held between the Economic Affairs Ministry and Embassy of Japan to monitor the progress of the projects. A committee under the Chairmanship of Deputy Chairman, Planning Commission holds monthly meetings to review the progress of problem projects. In order to overcome the problem of local funding, most of the Japanese aided project have been included in the list of core projects earmarked for priority of investment. As a result of the above measures the Japanese aid utilization has improved. The utilization of loan assistance during 1993-94 was 6.7%. It has improved during the next four years as indicated below. The ratio of disbursement during 1995-96 and 1996-97 was more than OECF’s world over average disbursement. Year Aid Pipeline Disbursement Disbursement Million Yen Million Yen Ratio (%) 1993-94 155.383 10353 6.7 1994-95 178.930 20549 11.5 1995-96 207.471 37851 18.2 1996-97 208.644 31153 15.2 1997-98 177.491 20375 11.5 Despite their own increasing financial constraints, Japan has not fixed upper or lower limits for Official Development Assistance to any country; the level still is determined largely by the comparative merit which includes political conditions and by competition not only between countries but between candidate projects proposed for assistance by the recipient countries. However, the over-all aid budget was cut by 10% by Japan in fiscal 1998 as part of its deficit reduction programme and the lingering problems in the Japanese economy have given rise to the voices that it may be further reduced in the future. The key to successful loan negotiations with Japan has always been in the selection of projects which may be highly feasible, economically viable and fit in with the Japanese ODA guidelines. The Japanese also expect that their laid down procedure for selection and implementation of the projects would be respected, the dead-lines in preparation and submission of the proposals would be adhered to; there would be efficient and timely implementation of the on-going projects and their proper maintenance after the completion; timely provision of counterpart funds by the recipient government for the on-going Japanese financed projects and faithful implementation of every project, once it has been mutually agreed upon and approved. The fact that the aid to Pakistan had been on the rise, that is before the sanctions, reflects Japanese confidence in Pakistan’s economy and the development planning process as well as its satisfaction with the utilization and administration of aid. Before the sanctions, Pakistan had on the whole received 68 Yen loans from OECF, now JIBC, amounting to about 612 billion yens. Out of these 44 loans have been fully disbursed and on-going loans number 22. With the cumulative loans Pakistan has ranked 6th highest among 85 ODA recipient countries, after Indonesia, China, India, Philippines and Thailand. On cumulative basis Pakistan has actually received 4% of the former OECF’s total commitment of loans since its establishment in 1961. Japan has financed or co-financed projects of great national importance in Pakistan in the following sectors: power, water, railways, telecommunications, irrigation, physical planning, health and agriculture. Some of these projects are Indus Highway project (Japanese loan assistance 53 billion yens), Ghazi Brotha Hydropower Project (Japanese loan assistance 34.5 billion yens), National Drainage Programme (10.8 billion yens), Rural Roads Construction Project (11.4 billion yens), On-farm Water Management Project (8.2 billion yens), Water Supply Projects such as Khanpur Dam and Simly Dam, Rural Electrification, Thermal Power Projects and a major Fertilizer plant. These projects have made enormous contribution to Pakistan’s economic development and have played no small part in Pakistan’s impressive growth rate of 6% in 80s and first half 90s. It has led to substantial increase in our trade and investment relationship with Japan. In mid-nineties, that is before the sanctions, Japan became the second largest trading partner of Pakistan. Beginning with mid-eighties Japanese companies made major investments in automobiles, chemicals, pharmaceuticals, power generation and textile sectors in Pakistan. ODA Charter and the Japanese Stance on Non-Proliferation: In pursuance of its non-proliferation policy and to accommodate the sensitivities of the Japanese people about weapons of mass destruction, the Japanese government through a Cabinet decision on June 30, 1992, adopted an ODA Charter under which the following four principles became the guidelines for disbursement of Japan’s economic assistance to the developing countries: · Pursuance of environmental conservation and development in tandem; · Avoidance of ODA for military purposes or for aggravation of international conflicts; · Full attention to be paid to the trends in recipient countries’ military expenditure, their development and production of weapons of mass destruction and missiles, their export and import of arms etc.; · Full attention to be paid to efforts for promoting democratization and introduction of a market-oriented economy and the situation regarding the securing of basic human rights and freedoms in the recipient countries. The ODA Charter, the adoption of which apparently was also prompted by the outbreak of Gulf war, has since been used by the Government of Japan as a major tool to further its nuclear non-proliferation initiatives. Though the Charter was never presented to the Diet to provide it a legislative cover, the successive governments have upheld the sanctity of this executive decision and applied it as if it were a law. As far as reduction of defence expenditure requirement was concerned, Japan to a greater extent had shown understanding that Pakistan’s military expenditure was directly related to its regional security environment. Japan remained mindful of the fact that despite India’s build-up of conventional arms Pakistan had exercised self-restraint and had kept its military expenditure confined to its bare minimum requirements for an adequate defence capability. On the nuclear programs of India and Pakistan Japan maintained a balanced and equitable stance by applying equal pressure on both the countries to move towards non-proliferation. However, the fact that Japan did not link the disbursal of economic aid to Pakistan in the past with the removal of nuclear irritant corroborated the impression that Japan had an understanding of Pakistan’s difficult security situation. This belief was further strengthened when in 1994-95 Japan did not accept the US suggestions to apply sanctions on aid to Pakistan because of its nuclear programme. On the inclusion of nuclearization of India in BJP’s election manifesto, Japan informed New Delhi in January 98, that Japan would be constrained to invoke the nuclear clause of its ODA Charter in case the BJP after forming the government proceeded to implement its election manifesto on the nuclear issue. The Economic Sanctions Following the Indian nuclear tests in 1998, followed by Pakistan’s response in self-defence, Japan was obliged to apply sanctions on both the countries. Under the sanctions, the commitment of fresh Yen loans and general grant aid has been stopped. The sanctions, however, do not cover the following areas: Project grant under the Emergency/Humanitarian Aid. Grass Root Assistance (Grant for NGOs) Technical Assistance which comprises training facilities, dispatch of experts and assistance for feasibility of Development Surveys etc. Buyer and Supplier’s Credits extended by former EXIM Bank (now wing of Japan Bank for International Cooperation - JBIC). We agree that the world community and specially Japan has a legitimate interest in containment of nuclear dangers. For lack of any umbrella, it became necessary to develop indigenous deterrence. Secondly, our programme is modest. Pakistan has no ambition to global or regional power status. We have neither the desire nor the need to engage in any arms race. Thirdly, we were not the first country in our region to conduct tests. These tests were to demonstrate that Pakistan too possessed the capability to deter another adventure against the independence and integrity of our State. Having done so, Pakistan declared a moratorium on further tests. We will not be the first to resume testing. In effect, we are implementing the main purpose of the Comprehensive Test Ban Treaty, which is to bring a halt to nuclear explosion tests. Pakistan voted in favour of the treaty in 1996. We have not signed the treaty only because we have not yet succeeded in our efforts to build domestic consensus. We need to convince our people that signing the treaty will not degrade the deterrence. Meanwhile, Pakistan has pursues a unilateral policy of restraint and responsibility. Our nuclear doctrine of minimum credible deterrence rules out any arms race. Also we have devised and adopted measures to reinforce custodial controls and foreclose risks of accidental or unauthorized launch of nuclear weapons. But let me be candid with you. Nuclear issue should not be a bilateral question. It is a regional and global issue and I wonder if bilateral relations can provide enough leverage to achieve Japan’s non-proliferation objectives which require a global effort, specially balanced and fair obligations and responsibilities between nuclear weapons and non-nuclear weapons states, between disarmament and non-proliferation. Japanese insistence that Pakistan and India sign CTBT before economic sanctions could be lifted has to be reviewed by Japan, in view of changing international perceptions about the Treaty itself specially the position of the United States, a close ally of Japan. What is important is that both Pakistan and India are abiding by the spirit of the Treaty. But signing and ratification present a more complex problem linked to international community’s approach to security or disarmament issues indeed the whole approach to the nuclear weapons. This will require a vastly different environment for peace and security leading to total elimination of such weapons. A selective country specific approach will not work unless, of course, basic issue of peace and security is addressed and a whole new world order is achieved. While such objectives remain elusive the net effect is that sanctions have hurt Pakistan’s economy. These have affected Japan’s exports to Pakistan specially exports that were supported by ODA or Suppliers’ credits. As Pakistan proceeded to absorb the effects of sanctions and take steps to conserve scarce foreign exchange and capital it adversely affected its ability to repay our loans as well as make payments to private companies. Though we did not default and the payments to Japanese companies have been resumed but emergency measures such as debt re-scheduling or IMF’s help have sent mixed signals about Pakistan’s economy to the foreign business community. This has caused the Japanese investments to decline. Ironically, this emergency situation has perhaps have galvanized the government to bring about major structural reforms in its economy such as : · Implementing fiscal reform, including tax reform and curtailment of non-development expenditures · Controlling inflation · Continuing economic liberalization through deregulation in various areas and privatization · Strengthening the international competitiveness of industry · Reducing the trade deficit · Implementing measures to alleviate poverty and controlling the high population growth rate · Enhancing social services such as education, and health and medical services · Upgrading the economic infrastructure, including the areas of electric power and transportation · Boosting agricultural productivity in order to achieve a stable, self-sufficient food supply. It is time, therefore, to resume economic aid to Pakistan so that restructured economy can be given a boost to grow. Pakistan faces big economic challenges with difficult social and economic problems such as high population growth rate, low literacy rate, inadequate energy resources and budgetary and trade deficits. It has, therefore, great need for development assistance. The government has taken major steps to accelerate programmes to address investor’s concerns: new sector and export promotion support measures are being implemented, full support to existing and new investments is being provided, the privatization program is being given high priority, the tariff and tax systems and related institutions are being restructured and streamlined. All these efforts need help from the friendly countries like Japan, to be successful. The business opportunities are manifold: our domestic market of 140 million people is growing and we offer access to the tremendous market potential of the landlocked economies of Central Asia; our labour force is well trained and diligent; industries with strong potential for investment include; textiles; oil and gas, food processing, engineering industries, tourism, and a wide range of services that have recently been deregulated. Though Pakistan may not be rich in capital resources, it has rich natural and human resources. Human resources constitute the foundation for any major Information Technology initiative. Thus in it’s new IT policy announced last year, emphasis has been placed on further human resource development by allocating US$ 250 million for development of this sector. Pakistan’s 7 major educational institutes - having the advantage of expertise in the language of the IT, namely English - produces over 10,000 IT engineers a year which will be raised to 30,000 in the next 2 years. Pakistan’s present potential will increase manifold in the next couple of years. With the approach of the 21st century, the industrial countries of the world face the common challenges of supporting developing countries to achieve sustainable and environmentally sound development. As the world’s second largest economy and the largest donor of official development assistance (ODA), Japan shoulders the important responsibility of contributing to sustainable social and economic development in developing countries. This is a role through which Japan has won the confidence and appreciation of the international community. As such, economic assistance promotes Japan’s best interests, including the maintenance of peace. Economic aid which contributes to development indirectly contributes to stability of a country which is a major factor in the peace and stability of the region. Stable and prosperous Pakistan can play important role in enhancing peace and security of South Asia.