13225438 Economic History of Pakistan

7/31/2019 13225438 Economic History of Pakistan

1/27

Analysis of Pakistani Industries

TABLE OF CONTENTS

TOPIC Page No.

Introduction 2

Gross Domestic Product (GDP) 2

Inflation 5

Unemployment 7

Income Inequality 8Balance of Payments 10

Foreign Trade 13

Exchange Rates 16

Foreign Direct Investment (FDI) 17

Pakistans Strengths and Weaknesses 19

World Trade Organization (WTO) 22

Conclusion 22

Bibliography 23

Appendix 24

Glossary 25

Page1


2/27


INTRODUCTION

At partition in 1947, the new government lacked the personnel, institutions, and resources to play

a large role in developing the economy. To rise from such a state surely is a great task, especially

when ones borders are also insecure. Since then Pakistani officials have sought a high rate of

economic growth in an effort to lift the population out of poverty. Rapid industrialization was

viewed as a basic necessity and as a vehicle for economic growth. For more than two decades,

economic expansion was substantial, and growth of industrial output was striking. In the 1960s,

the country was considered a model for other developing countries. Rapid expansion of the

economy, however, did not alleviate widespread poverty. In the 1970s and 1980s, although a high

rate of growth was sought; greater attention was given to income distribution. In the early 1990s,

a more equitable distribution of income remained an important but elusive goal of government

policy.

GROSS DOMESTIC PRODUCT (GDP)

The disruptions caused by partition, the cessation of trade with India, the strict control ofimports, and the overvalued exchange rate necessitated immediate action on the part of thegovernment. Government policies afforded liberal incentives to industrialization, while publicdevelopment of the infrastructure complemented private investment. Some public manufacturingplants were established by government holding companies. Manufacturing proved highlyprofitable, attracting increasing private investments and reinvestment of profits. Except for largegovernment investments in the Indus irrigation system, agriculture was left largely alone, andoutput stagnated in the 1950s. The broad outline of government policy in the 1950s and early

1960s involved squeezing the peasants and workers to finance industrial development.

Much of the economy, and particularly industry, was eventually dominated by a small group ofpeople, who were largely traders who migrated to Pakistan's cities, especially Karachi, atpartition. These refugees brought modest capital, which they initially used to start trading firms.Many of these firms moved into industry in the 1950s as a response to government policies.Largely using their own resources, they accounted for the major part of investment andownership in manufacturing during the first two decades after independence.

Between 1947-1952 Pakistans average GDP was just 3%, however, in 1952, Korean War brokeout and the overall demand of goods increased worldwide and Pakistan benefitted from itsignificantly with its GDP increased at a whooping rate of 9.4%. After Korean War ended therewas a worldwide recession. However, Pakistan was the sole exporter of Jute at that time andPakistans conditions didnt get worse. Till 1958 Pakistan maintained an average GDP of 3%.

If one examines Pakistan economic growth record, the 1960s stands out as the decade with thebest performance. Throughout 60s Pakistan maintained the average GDP of 6.2%. The reasonfor this was Ayub Khans extensive industrialization and development. The high growth rate inlarge scale manufacturing continued in the first few years of the Ayubs regime with the average

Page2


3/27


for the period 1960-5 rising to a phenomenal 16.9%. In 1966 the GDP fell to 3.1% because ofwar with India but it continued to grow after that and reached as high as 9.8% in 1970.

In 1971 Pakistan lost its east wing which became Bangladesh. It greatly affected our economybecause East Pakistan was the major producer of Jute. Bhutto became the Prime Minister ofPakistan and he nationalized all the major industries of the country. This act of Bhutto

discouraged the private sector and industrialists were no longer interested in investing inPakistan. In 1972 GPD fell to just 1.2%. This occurred mainly because of war with India andalso because Pakistan lost revenue which it used to earn from Bangladesh. Then Bhutto devaluedthe Rupee by 131% which boasted our exports by 153%. He introduced several reforms andpublic development projects because of which Pakistan was able to achieve the average growthrate of 7.5 till 1974. 1975, the height of Bhuttos nationalization program, private sectorinvestment was only 15% of the total. Cotton crop was also destroyed and there were severalfloods during his last years of rule. 1976 saw Pakistans worst floods, devastating large areas ofcultivated land. All these factors caused Pakistans GDP to fall significantly and from 1974-1977,the average GDP was just 3.6%.

Zia-ul-Haq revived the confidence in Private Sector to invest in the country again. The process of

privatization was carried out gradually. The inflow of foreign aid from US and other countriesincreased because of Pakistans role in war against the USSR. This increased the income of localpeople and the domestic demand of goods and services increased. This aid also helped Ziaregime to finance in the industrial sector. This all caused Pakistans GDP to grow by average6.5% during1980-88 and at that time it was only exceeded by that of Korea, China and HongKong.

During the period 1988-99, there were seven different governments and two elected primeministers who were both elected twice. This was a highly uncertain period and no governmentcompleted their constitutional tenure. The economy of Pakistan slowed to an average annualgrowth of 3.8 percent during the 1990s (MSN Encarta). Factors contributing to the sluggishgrowth included corruption and mismanagement at the highest levels of government and the rise

of ethnic and sectarian violence in Karachi and other urban centers. These factors shook investorconfidence.

The economic performance of the 1990s was also related to the structural adjustment programs(SAPs) of the World Bankand the International Monetary Fund (IMF). Loans from theseinternational lending agencies were subject to conditions on Pakistans national economicpolicies. Pakistan received its first formal loan in 1988. In Pakistan the primary focus of theIMF-sponsored program was to lower the budget and current-account deficits. These objectives

Page3
http://encarta.msn.com/encyclopedia_761576922/International_Bank_for_Reconstruction_and_Development.htmlhttp://encarta.msn.com/encyclopedia_761553862/International_Monetary_Fund.htmlhttp://encarta.msn.com/encyclopedia_761576922/International_Bank_for_Reconstruction_and_Development.htmlhttp://encarta.msn.com/encyclopedia_761576922/International_Bank_for_Reconstruction_and_Development.htmlhttp://encarta.msn.com/encyclopedia_761553862/International_Monetary_Fund.htmlhttp://encarta.msn.com/encyclopedia_761553862/International_Monetary_Fund.htmlhttp://encarta.msn.com/encyclopedia_761553862/International_Monetary_Fund.htmlhttp://encarta.msn.com/encyclopedia_761576922/International_Bank_for_Reconstruction_and_Development.html


4/27


5/27


INFLATION1

Inflation means a sustained rise in prices. Inflation can be Creeping, walking or trotting, running,hyper or gallop, demand pull, cost push, mixed, markup or stagflation according to velocity andnature. Inflation is caused by some demand side factors (Increase in nominal money supply,Increase in disposable income, Expansion of Credit, Deficit Financing Policy, Black moneyspending, Repayment of Public Debts, Expansion of the Private Sector, Increasing PublicExpenditures) and some Supply side factors (Shortage of factors of production or inputs,Industrial Disputes, Natural Calamities, Artificial Scarcities, Increase in exports (excess exports),Global factors, Neglecting the production of consumer goods, Application of law of diminishingreturns)

Inflation rates from 1991 to 1995 have ranged between 9.25 and 12.9 percent. The high rates ofmonetary expansion, low rate of economic growth in three out of the five years and adjustmentin administered prices contributed to the relatively high rates of inflation. Growth in internationalprices (in dollar terms) has been moderate or negative. Except in 1995 when price of tradable (inrupee terms) increased by 19 percent. Substantial depreciation of the exchange rate in 1990 andin 1994 also resulted in a relatively sharp increase in the price of tradable (in rupee terms) inthese two years. The pressure on international reserves and an appreciation of the real exchangerate necessitated depreciation in 1994.The pressure on the exchange rate and reserves was caused because of the fiscaland monetary indiscipline during 1991-1993. The period also marked a major thrust in economicliberalization of the economy. The rate of economic growth, which had flattered in 1989 and1990, recovered strongly in the next two years. The recovery was short lived as growth rateplummeted in 1993 to its lowest level in over two decades.

The rate of monetary growth which had been brought down to 4.6 percent in 1989 climbed up to12.6 percent in 1990 and since then has been in the region of 16 to 18 percent except in 1992when it reached an unprecedented 30 percent. High budget deficits during these years

1Most of the material has been taken from the article Forecasting Inflation in Developing Nations: TheCase of Pakistan, details in reference sheet

Page5


6/27


contributed to the monetary expansion. In 1994 the rate of monetary growth was 16 percent,although budget deficit was brought down to 5.8 percent of the GDP. The growth in moneysupply in 1994 was mainly on account of accumulation of net foreign assets rather than domesticcredit creation. As mentioned above, the buildup of foreign reserves had become necessarybecause of a drawdown of reserves in the previous years. Thus the reasons for the increase inmoney supply in 1994 were qualitatively very different from those in the previous three years.Pakistan has experienced sustained inflation hovering between 10.0 to 13.0 percent range duringthe first eight years of the 1990s. Not surprisingly, one of the thorniest issues in Pakistans policyarena during those periods has been how to put inflation under effective control The persistenceof a double-digit inflation along with large fiscal deficit (7.0% of GDP) have been the majorsource of macroeconomic imbalances in the 1990s. There has been a general agreement that theexcessive growth in money supply, the supply side bottlenecks, the adjustment in government administered prices, the imported inflation (pass through of exchange rate adjustment),escalations in indirect taxes, and inflationary expectations has the major factors responsible forthe persistence of a double-digit inflation during most periods of the 1990s. Both food and non-food inflation contributed to the persistence of the double-digit inflation. Food and non-foodinflation averaged 11.6 percent and 10.3 percent, respectively during the eight years of the

1990s. During Fiscal / Financial Year 2002 (FY02) despite the aftermath of events ofSeptember 11 and continuation of a drought-like situation in the country. Better availability ofessential commodities, due to improved production of food and non-food items as well as thefood stocks for prior periods, had a moderating influence on inflation.

Inflation Among the most appreciated developments, during fiscal year 2005-06, was thesignificant abatement of price pressure over the course of the year. For the first ten months of thefiscal year JulyApril 2005-06, all important barometers of price pressure in the economyindicated a steady deceleration in inflation. Inflation during the first ten months July-April of thecurrent fiscal year is estimated at 8.0 percent as against 9.3 percent in the same period last year.April 2005 (last-time it was at 15.7 percent in May 1994), yielded handsome dividend in theshape of overall inflation decelerating to 6.2 percent and food inflation to 3.6 percent in April2006. The expenditure on food items constitutes bulk of the monthly expenditure of the poorsegment of the society. Sharp increases in the prices of some of the strategic food items putpressure on the poor. The higher inflationary trend in Pakistan over the last two years has beenthe outcome of pressure that emanated from demand and supply sides. Four years of strongeconomic growth has given rise to the income levels of various segments of the society. Therising level of income have strengthened domestic demand and put upward pressure on prices ofessential commodities. Supply side pressure emanated from a variety of factors, prominentamong those are: increase in support price of wheat for three years in a row, shortage of wheatowing to less than the targeted production, mismanagement in wheat operation in one of thewheat deficit province, inter-provincial ban on the movement of wheat resulting in sharpincreases in prices of wheat and wheat flour. Lower production of sugar due to a relatively lower

production of sugarcane and a sharp increase in the international prices of sugar brought aboutby a significant diversion of sugarcane into ethanol (petroleum substitute), by the largestproducer, Brazil, also contributed in building inflationary pressure in Pakistan.

Inflation is one of the obstacles on the way of development. In Pakistan, it has squeezed themajor part of the population. It needs to be controlled by strategic planning. Domestic productionshould be encouraged instead of imports; investment should be given preference in consumergoods instead of luxuries, Agriculture sector should be given subsidies, foreign investment

Page6


7/27


should be attracted, and developed countries should be requested for financial and managerialassistance. And lastly a strong monitoring system should be established on different levels inorder to have a sound evaluation of the process at every stage.

UNEMPLOYMENT

Unemployment is one of the major problems of Pakistan. It is the root cause of several otherproblems and is a result of a number of problems. High unemployment results in wastage ofresources and depression of income. And most certainly it also effects the social and emotionallife of a person.

It is very unfortunate but true that searching for statistics regarding the unemployment rate ofPakistan, it is nearly impossible to find relevant figures due to a lack of base data and massivegovernmental tempering of statistics which have made the validity of the available dataquestionable. In 1955, there was a survey held which tried to give the false impression of fullemployment in the agriculture sector. However this proved wrong when in 1965 a survey washeld and it was found that the economy of Pakistan was most stagnant in the region and a 50%ratio of un- and underemployed labor to the total working force could be taken as nearer toreality.2

In all the five-year plan starting from 1955, policies were included at the reduction ofunemployment, however due to inadequate efforts on the part of the government most of themproved wane.

According to labor force survey 2001-02, Pakistan labor force stands at 43.17 million and 3.6million people were of active labor market, looking for a job. Recent trend indicates thatunemployment rate increased from 7.8 percent in FY00 to 8.3 percent in FY02. However it againfell to 7.7% in FY04. According to an article by Dr. Ishrat Hussain the main reasons for thedecline in unemployment during this time is inefficient utilization of factors of production that

2Dr. Khushi M.Khan Unemployment and the Peoples Works Programme

Page7


8/27


was a characteristic of public sector dominated economy has been minimized as a result ofstructural reforms in tariffs, taxation, financial markets and privatization. The demand for laborinputs per unit of output has consequently been reduced due to this compositional shift from thepublic to private sector employment. At the same time labor force participation rate is on anupward incline because of the entry of large number of females. High unemployment rates underthese conditions of productivity and efficiency gains are therefore not surprising.Regional disparity is evident with regard to unemployment rate. Urban unemployment rate (9.8percent) was higher than the rural one (7.5 percent). This also includes the disguisedunemployment in agriculture sector in the form of unpaid family helpers.According to an article by Dr Ishrat Hussain, the unemployment rate of Pakistan was 6% inOctober 1999, and it rose to 8% in October 2004.

There are a number of reasons for unemployment in Pakistan, firstly, there is a serious mismatchbetween the jobs demanded by the emerging needs of the economy and the supply of skills andtrained manpower in the country. While the economy is moving towards sophisticated sectorssuch as telecommunications, information technology, oil and gas, financial services, engineeringgoods the universities and colleges are turning out hundreds of thousands of graduates in Arts,

Humanities and languages. This mismatch has created waste and misallocation of resources onone hand and the shortages of essential skills required to keep the wheels of the economymoving. There is also a lack of technical and vocational training to fill out the gaps between thedemand if skills and their availability, and so there large number of experienced technicians andprofessionals who have migrated to the Middle East and elsewhere.

INCOMEINEQUALITY

Economic inequality refers to disparities in the distribution of economic assets and income. Theterm typically refers to inequality among individuals and groups within a society (Wikipedia).Various studies on income inequality in Pakistan show different estimates but the one mostcommonly used in the studies is the Gini coefficient.

The Gini coefficient is a measure of statistical dispersion most prominently used as a measure ofinequality of income distribution orinequality of wealth distribution. It is defined as a ratio withvalues between 0 and 1: A low Gini coefficient indicates more equal income or wealthdistribution, while a high Gini coefficient indicates more unequal distribution. 0 corresponds to

Page8
http://en.wikipedia.org/wiki/Economichttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Incomehttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Wealth_condensationhttp://en.wikipedia.org/wiki/Ratiohttp://en.wikipedia.org/wiki/Economichttp://en.wikipedia.org/wiki/Economichttp://en.wikipedia.org/wiki/Economichttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Incomehttp://en.wikipedia.org/wiki/Incomehttp://en.wikipedia.org/wiki/Incomehttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Wealth_condensationhttp://en.wikipedia.org/wiki/Wealth_condensationhttp://en.wikipedia.org/wiki/Wealth_condensationhttp://en.wikipedia.org/wiki/Ratiohttp://en.wikipedia.org/wiki/Ratiohttp://en.wikipedia.org/wiki/Ratio


9/27


perfect equality (everyone having exactly the same income) and 1 corresponds to perfectinequality (where one person has all the income, while everyone else has zero income).(www.Wikipedia.com)

In studies conducted for Pakistan, Gini coefficient is generally higher in the urban than in therural areas because:

Urban labor force is more diversified in terms of skill, education, union membership, coverageby the minimum wage legislation and therefore the wage incomes are more unevenly distributedthan in rural areas;

Income from self-employment is more concentrated in urban areas than in rural areas becauseurban self-employed ranges from wealthy businessmen to poor workers whereas the rural self-employed are mostly in informal sector enterprises.

The Gini coefficients show different trends over time and across urban and rural areas. In theurban areas Gini coefficient increased from 0.3698 to 0.4068 over 1963-67 but declined to0.3694 by 1969-70. In urban areas, the poorest 20% lost the income share and the richest 20%

gained significantly over the period 1963-67 but in the subsequent period changes in the sharesreversed. Income inequalities in rural areas, on the other hand, declined from 0.3543 to 0.3122over the 1963-70 period. The shares of various income values also show similar trends. Theincrease in income inequalities in urban areas up to 1967 indicate that high growth was job-lessand real wage rates had been declining. Improvements in gini coefficient in the subsequentperiod of the 1960s may have been due to increase in wages and legislation aimed at protectingthe workers as a response to the demonstrations against the government policies that had led torising income inequalities. The decline in inequalities in rural areas seems to have been due togreen revolution divisible technology which might have benefited the poor as well.

Gini coefficient increased from 0.3394 to 0.3946 over 1970-79 periods, break-up of this value isthe increase in rural areas from 0.3122 to 0.3450 and in urban areas from 0.3694 to 0.4118. This

is contrary to the general perception because land reforms, nationalization of major industrial andfinancial undertakings of the government focus on the basic needs strategy during the periodwere expected to result in lower income inequalities. Probably the sharp increase in inflationduring the period had taken a toll of the poor resulting in a reduction in the share of income ofthe poor and the middle class. Moreover, the banks were nationalized in the 1970s on the pretextthat the small producers did not have access to credit.During the 1980s Gini coefficient in both the rural and urban areas declined sharply over 1979-88 from 0.3450 to 0.3227 and from 0.4118 to 0.3782 respectively.

Overall Gini coefficient declined from 0.3946 to 0.3608. The main factor behind the improvedtrends in income inequalities in 1980s has been the increases in employment and real wages inthe agriculture and manufacturing sectors.

Whereas in the next three years, 1988-91, Gini coefficient in the urban areas remained somewhatconstant, however it increased sharply in the rural areas. The ratios of shares of lowest andhighest income values also show sharp increases in income inequalities. In the rural areas theGini coefficient declined but there has been mixed trend in urban areas up to 1996-97. However,to a smaller extent in the rural areas and to a large extent in the urban areas income inequalities

Page9


10/27


have increased since then. Gini coefficient increased in rural areas from 0.3517 to 0.3762 and inurban areas from 0.3691 to 0.4615 over the 1997-2002 period.

Whereas the income inequality in 1996-97 had been low, the inequalities have been themaximum in the 1990s compared to any time period in the history of Pakistan.

The gini coefficient in 2000-01 shows a marginal decline only because of a decline in the ruralareas. In the urban areas, however, income inequality increased rapidly. The urban incomedistribution in 2001-02 turned out to be the most unequal. On the basis of 2004-05 PLSM data,government has recently announced a sharp reduction in the proportion of poor below thepoverty line.

Pakistan has all along relied on indirect taxes which are generally regressive.However both because the indirect tax rates on the products consumed by the rich were higher aswell as progressive, the incidence of taxes up to 1988 was higher on richer sections of thesociety. However the decline in corporate income tax rates and tariff rationalization policies havebenefited the producers, while with the broadening of sale tax base, the tax burden on the poorhas increased.

BALANCEOF PAYMENTS

The balance of payments (BoP) means a systematic record of all the economic transactionsbetween residents of a country with the rest of the world during a given period of time.

It covers exchange of visible (merchandise) and invisible (services) items. The balance of trade(BoT) covers the exchange of visible items only. Deficit in balance of payments means that theimport bill exceeds the export bill.

3During pre-plan period (1948-49 to 1954-55), Pakistan's performance in the foreign trade sector

was reasonably good, however due to lack of industrial base Pakistan was unable to export itsagricultural produce. It had surplus Balance of Trade up to 1954-55. The year 1955-56 was thelast year in which Pakistan had a favorable balance of trade. After that it ran into BOP problemsdue to an overvalued exchange rate and so our exports became uncompetitive. Since that time,Pakistan has been facing a serious problem of deficit in its Balance of Trade and Balance ofPayment.In 1971, Pakistan's exports decreased considerably and its imports surged, especially of capitalgoods, thus creating a trade deficit. A number of Pakistanis during this time migrated to theMiddle East. Workers remittances, especially from the Middle East countries, increasedtremendously which helped a great in stabilizing the BoP.

The deficit in Balance of Trade was $836 million on an average while current account deficit in

BoP was $699 million on an average between 1971-72 and 1977-78 (the tenure of late Mr. Z. A.Bhutto). The trade deficit as percentage of GNP remained 6.3 per cent while current accountdeficit in BoP remained 5.6 per cent on an average during 1971-72 to 1977-78.

3The problem of deficit in balance of payments by Mohammad Ishaq Javed and Dr. ShaikhMuhammad Ashfaq

Page10


11/27


Pakistan's balance of payments was highly dependent on workers remittances but theseremittances were not sustained over a long period of time. They increased after 1971-72.There was a sudden upsurge in the workers remittances in late seventies and early eighties. Itgrew up from $107 million in 1971-72 to a peak level of $2989 million in 1982-83 and exceededthe total merchandise export of $2627 million.

The BoP position deteriorated during Zia's regime (1978-79 to 1984-85).The inflow of workers remittances continued increasing, especially from the Middle East, from1977-78 to 1982-83 and reached a peak level of $2886 million in 1982-83. This inflow graduallydecreased in the last two years of his regime.

The magnitude of workers' remittances from 1978-79 to 1984-85 was $1849 million on anaverage. The trade deficit as percentage of GNP rose to 9.9 per cent while current account deficitin BoP on an average decreased to 3.7 per cent in this period.

The external BoP gained strength during Junejo's period from 1985-86 to 1987-88. Exports grewon an average by 33 per cent while imports decreased during first two years while increased in

the last year. Export remained at a level of $3601 million on an average during this period.Deficit in the balance of trade decreased to $2631 million and current account deficit in the BoPdecreased to $1211 million on an average during these years. The magnitude of workersremittances on an average between 1985-86 and 1987-88 was $2295 million.

However, these inflows began tapering off since 1982-83, excluding inflows from Kuwait in1994-95. This year workers remittances were $ 1866 million. After 1994-95, workersremittances depicted a declining trend.The current account deficit in balance of payment declined to 3.1 per cent during 1985-86 and1987-88.The BoP position witnessed a significant improvement during first tenures of both Ms. BenazirBhutto (1988-89 to 1990-91) and Mohammad Nawaz Sharif (1991-92 to 1993-94). The deficit inBoT decreased to $2728 million on an average between 1988-89 to 1990-91 and to $2501millionon an average during 1991-92 to 1993-94.The current account deficit in BoP fell to $1998 million on an average between 1988-89 to 1990-91and to $2333 million on average between 1991-92 and 1993-94. This reveals that BoP andBoT remained stabilized during the first tenures of both- Benazir and Nawaz Sharif - (1988-89 to1993-94).Trade deficit as a percentage of GDP stabilized on an average around 4.7 per cent duringBenazir's and Nawaz's tenures. The current account BoP as a percentage of GDP on an averagewas 4.7 per cent in Benazir's period while 4.6 per cent in Nawaz's period.

Pakistan's external balance of payment deteriorated in the second tenure of Ms. Benazir (1994-95

to 1996-97). The deficit in BoT and current account deficit in BoP increased to $3128 millionand $3635 million on an average between 1994-95 and 1996-97 respectively.

Trade deficit as a percentage of GDP on an average was 4.7 per cent while deficit in currentaccount balance of payments increased to 5.8 per cent. There was a sudden upsurge in the inflowof workers remittances from Kuwait and were $1866 million in 1994-95. This inflow could notmaintain its momentum and was reduced in the following two years of Benazir's government.

Page11


12/27


The magnitude of inflow of workers remittances from 1994-95 to 1996-97 on an average was$1578 million.

This adverse performance in foreign balance of payment was due to the weak macroeconomicmanagement and lack of commitments to undertake difficult structural reforms.The overall balance of payment position during the second tenure of Nawaz Sharif (1997-98 to1999-00) witnessed a significant improvement despite the adverse external environment.However, a number of fiscal and monetary activities were implemented which discouraged freetrade and economic transactions abroad, for instance the freezing of FCAs, Hub Power Disputeand Political uncertainty eroded the confidence in the economy.Both current account deficit in BoP and BoT decreased in this period. The deficit in the balanceof trade decreased to $1788 million while current account in the BoP decreased to $1833 millionduring 1997-98 and 1999-00 despite the sanctions imposed by the G-8 countries on bilateral andmultilateral lending as a consequence of Pakistan's nuclear tests in May 1998.The deficit in the balance of trade as percentage of GDP on an average declined to 2.5 per centwhile current account deficit in balance of payments declined to 2.9 per cent on an averageduring 1997-98 and 1999-00. Workers' remittances exhibited a declining trend during these

years. The magnitude of workers remittance on an average was $1178 million.

The economy started showing signs of improvement with the start of Musharaf's regime. Hisgovernment launched a comprehensive set of economic stabilization and structural reformmeasures. The government took steps in the early 2000s to liberalize and deregulate theexchange and payments regime. Pakistan moved to a dual exchange rate system in 2000.

Pakistan's exports increased from $7.8 billion in 1999-00 to $9.2 billion in FY00-01. The deficitin Balance of Trade (BoT) decreased to $1269 million while current account BoP decreased to$513 million in FY00-01.

In 1999-00 workers remittances were reduced to $ 983 million. After the event of September 11,

FY01 workers remittances increased tremendously especially from USA, UK and otherEuropean countries and reached to $4237 million in FY02-03.

One major structural problem of exports is that it is based on relatively low value addedproducts. Pakistan's exports are highly concentrated in cotton group, leather group, rice,synthetic textiles and sports goods. However the imports rely on a limited number ofcommodities namely machinery, petroleum & petroleum products, chemicals, transportequipments, edible oil, iron and steel, fertilizer and tea.

There was a sharp decline in trade deficit in FY01-02. The trade deficit fell by 75.5 per cent to$286 million over the level of $ 1338 million of FY00-01. The current account deficit in balanceof payment emerged with a surplus of $913 million in FY01-02.

The magnitude of surplus in current account BoP for FY01-02 was $1338 million, for FY02-03 $3165 million and for FY03-04 (July-March FY03-04) was $1369 million. Export growth in2000/01 was primarily due to higher exports of primary commodities such as rice, raw cotton,and fish, and other manufactures such as leather, carpets, sporting goods, and surgicalinstruments. Imports increased in 2000/01 primarily due to higher imports of petroleum andpetroleum products, and machinery.

Page12


13/27


These five categories of exports accounted for 82.6 per cent of the total exports during 2002-03.Among these five categories cotton group alone contributed around 63.3 per cent of total exports,followed by leather (6.2 per cent) and synthetic textiles (5.1 per cent) and rice (5.0 per cent).Such a high degree of concentration of exports in few items has led to instability in exportearnings.Pakistans balance of payments showed a deficit of $ 6,878 million in its current accountbalance during 2006-07 as against a deficit of $ 4,990 million during 2005-06. The capitaland financial account showed a net inflow of $ 10,449 million and increased by $ 4,378million over net inflows of previous year resulting in an increase of $ 2,396 million in overallsurplus during the year 2006-07.

Although Pakistan is trading with a large number of countries, yet major portion of importscomes from a few selected countries. Almost 50 per cent of imports come from USA, Japan,Kuwait, Saudi Arabia, Germany, the UK and Malaysia. Such a high degree of geographicconcentration of imports is undesirable and is in favor of exporting countries.

FOREIGNTRADEPakistans balance of payments has always been in the deficit mainly becausesuccessive governments of Pakistan have focused on saving the foreignexchange rather than earning it. On the one hand, there has been an anti-exportbias and on the other hand a very complex system of foreign exchange controlto contain the imports to levels of foreign exchange availability.

Foreign trade is important to the economy because of the country's need to import a variety ofproducts. Imports have exceeded exports in almost every year since 1950, and Pakistan had adeficit on its balance of trade each year from FY 1973 through FY 1992. In FY 1991, exportswere US$5.9 billion, compared with imports of US$8.4 billion, which resulted in a deficit ofUS$2.5 billion. In FY 1992, exports rose to an estimated US$6.9 billion, but imports reachedan estimated US$9.3 billion, resulting in a trade deficit of US$2.4 billion. Economists forecasta trade deficit of around US$2.5 billion for FY 1993. Pakistan's terms of trade , expressed in anindex set at 100 in FY 1981, were 78.0 in FY 1991 and 82.7 in FY 1992.

Crude oil and refined products are significant imports. Their value varies with internal demandand changes in the world oil price. In FY 1982, oil products accounted for around 30 percent ofPakistan's imports, falling to an annual average of 15 percent in FY 1987 to FY 1990, rising toover 21 percent in FY 1991, but dropping back to 15 percent in FY 1992. Other importantcategories of imports in FY 1992 included non electrical machinery (24 percent), chemicals (10percent), transportation equipment (9 percent), and edible oils (4 percent).

Although import-substitution industrialization policies favored domestic manufacturing ofsubstitutes for imports, officials also encouraged manufactured exports in the 1950s and 1960s.In the early 1980s, incentives were again provided to industrialists to increase manufacturedexports. There was some diversification during the late 1980s as the share of manufacturedgoods rose. This share of primary goods fell from 35 percent to 16 percent between FY 1986and FY 1993. During the same period, the share of semi manufactures rose from 16 percent to20 percent, and that of manufactured goods rose from 49 percent to 64 percent.

Page13


14/27


15/27


Now almost 50 per cent of imports come from USA, Japan, Kuwait, Saudi Arabia, Germany, theUK and Malaysia. Such a high degree of geographic concentration of imports is undesirable andis in favor of exporting countries.

Page15


16/27


EXCHANGE RATES

During the past five decades, Pakistan's foreign exchange regime has been moving towards aderegulated and market-oriented direction:

Before the 1970s, Pakistan linked its currency, rupee, to the Pound Sterling. With the economicinfluence of the USA getting more apparent, in 1971, Pakistan linked rupee to the U.S. Dollar. In1972 Bhutto devalued Pakistani rupee by 131%. The exchange rate at that time was $1= PKR 11.This act significantly increased our export revenue. Despite the loss of East Pakistans exportableproduce, West Pakistan doubled its foreign exchange earnings. However, in 1973, OPECincreased the price of oil and Pakistan had to pay higher price to import oil. During that yearthere was a worldwide recession and the demand for goods and services decreased throughoutthe world which also caused Pakistans export to decline. All these factors greatly damagedPakistans economy.

Pakistan fell into a budget deficit in 1982, when the strengthening U.S. Dollar made remittancesabroad through official channels slumped. In this view, Pakistan put the rupee on a controlled

floating basis.In 1998, to alleviate the financial crisis in Pakistan, the authorities adopted a multiple exchangerate system, which comprised of an official rate (pegged to U.S. dollar), a Floating InterbankRate (FIBR), and a composite rate (combines the official and FIBR rates). Export proceeds,home remittances, invisible flows, and "non-essential" imports can be traded at the FIBR rate.

Page16


17/27


From 1999-2007 during Musharrafs rule, the exchange rate remained stable at $1=PKR 60. Thereason for this was high amount of foreign air and remittances inflow in Pakistan.

In 2008 due to sky rocketing rates of oil and unstable political and security conditions, Pakistanfelt short of it foreign reserves and the price of $1 reached all time high to PKR 86.7.

Currently the exchange rate of Pakistani Rupee is $1=PKR 79.36 (10 Feb, 2009)

The historical exchange rates of Pakistan are as follows:

FOREIGN DIRECT INVESTMENT ( FDI )

FDI plays an important role in the economic growth of the host country, especially if it isaccompanied by sound economic policies and greater openness (hec.gov). It also tends to crowdin local investment and it promotes growth, increases competitiveness and exports.

Pakistan was an agricultural economy upon its independence in 1947. It lacked the industrialcapacity to process locally produced agricultural raw material, as well as the funds to create newcapital. So the was a need on the part of the government to obtain funds from abroad to invest itin the local industries, and improve the countrys manufacturing capacity. Different types ofindustrial policies have been implemented in different times with a changing focus on either theprivate sector or the public sector.

The private sector was the main vehicle for industrial investment during the 1950s and the 1960sand the involvement of the public sector was restricted to very few industries. It was set that inthe event of private capital not forthcoming for the development of any particular industry ofnational importance, the public sector might set up a limited number of standard units. Foreigninvestment was not allowed in the field of banking, insurance, and commerce.

On 1 January 1972, the GOP issued an Economic Reforms Order taking over the management often major categories of industries, 7 commercial banks, development financial institutions, andinsurance companies. In 1975 there was another round of nationalization of small-sized agro-processing units. The sudden shift toward nationalization of private sector industrial unitsshattered private investors confidence.

After the dismal performance of the industrial sector following the 1972 nationalization, achange occurred in September 1978 in the governments approach toward the role of the publicand private sectors. The role of the public sector was restricted to consolidating existingenterprises, and further government investment in this sector was strictly restricted. The role ofthe public sector was elaborated in the industrial policy statement enunciated in June 1984. The

statement reiterated that the government would continue to pursue a pattern of a mixed economy.

The industrial policy statement of 1984 not only accorded equal importance to the public andprivate sectors but also encouraged the private sector to come forward. However, the process ofprivatization was not initiated. Had this been initiated, Pakistan might have attracted aconsiderable amount of foreign direct investment in subsequent periods.

Page17


18/27


Foreign investment was also encouraged in industrial projects involving advanced technologyand heavy capital outlay like engineering, basic chemicals, petrochemicals, electronics, and othercapital goods industries.

In order to encourage foreign direct investment in export-oriented industries, an ExportProcessing Zone (EPZ) was set up in Karachi. Apart from foreign investors, overseas Pakistanis

were also encouraged to invest in industrial projects in the EPZ. The concessions and facilitiesoffered by the EPZ included duty-free imports and exports of goods and tax exemptions.

Pakistan began to implement a more liberal foreign investment policy as part of its overalleconomic reform program toward the end of the 1980s.

In the 1990s, to facilitate foreign investment no special registration was required for FDI, and thesame rules and regulations were applied to FDI as to domestic investors. The requirement forgovernment approval of foreign investment was removed, with the exception of a few industriessuch as arms and ammunition, security printing, currency and mint, high explosives, radioactivesubstances, and alcoholic beverages. In all industrial sectors other than those indicated above, notonly foreign equity participation of up to 100% was allowed but also, foreign investors can

purchase equity in existing industrial companies.

A number of fiscal incentives such as a three-year tax holiday to all industries throughoutPakistan set up between 1 December 1990 and 30 June 1995. Investments in delineated ruralareas, industrial zones, and less developed areas enjoyed five and eight years tax holidayrespectively, together with special custom duty and sales tax concessions. The import policy wasalso liberalized considerably.

There is a strong perception among foreign investors that the pro-business policies andinducement used to attract prospective new investors are somehow weak given realities whenthey actually begin to set up and operate their business in Pakistan.

During 2000s, government based its investment policies on the principle of privatization,deregulation, fiscal incentives and liberal remittance of profits and capital. The policy was basedon promoting investment in sophisticated, high-tech and export-oriented industries while almostthe entire economic activity in other fields, encompassing agriculture, services, infrastructure,social sectors, etc. were thrown open for foreign investment with identical fiscal incentives andother facilities, including loan financing from local banks.

A number of incentives were given by the government in the recent investment policies. Thiswas indeed a welcome move but it is yet to be seen whether the investment interest havingremained on the sidelines would at all show a positive response to the latest package ofincentives. (Muhammad Zakaria)

Trends in Foreign Direct Investment

The success of FDI policies can be judged by the size of the inflows of capital. Pakistan has beenmaking efforts to attract FDI and such efforts have been intensified with the advent ofderegulation, privatization, and liberalization policies initiated at the end of the 1980s.

Page18


19/27


There were inflows of foreign investment in Pakistan during 1976-1997. The amount of foreigninvestment rose from a tiny $10.7 million in 1976/1977 to $1296 million in 1995/1996, thusgrowing at the annual compound growth rate of 25.7 percent. However, it declined to $950million in 1996/1997. The increase here is mainly due to the liberalization policies.

Foreign participation appears to be the major factor responsible for the increase in portfolio

investment in the 1990s, due to the above mentioned incentives. The decline in internationalinterest rates was also important in portfolio allocations toward Pakistani assets. Withglobalization, numerous international portfolio funds were created that were invested inemerging capital markets seeking for better returns. Pakistan was among the first countries inemerging markets to take measures to open up its stock markets to foreign investors.

The amount of foreign investment rose from $ -8.4 million in 2001-02 to $8416 million in 2006-07. However, it declined to $2985 million in 2007-08.

Foreign direct investment (FDI) including privatization proceeds finally touched US$3.531billion in 2005-06, as reported by the State Bank. The FDIwithout privatization proceeds alsoshowed a healthy figure close to $2 billion.

The FDI landed mostly in telecommunication sector, which attracted the highest amount. TheFDI without privatization remained at $1,980.7 million and large share of this amount went tothe sectors like construction, food, Chemicals and trade

Oil and gas exploration proved once again the attractive area for the FDI and total $312.7 millionwere invested in this sector

Privatization of Karachi Electric Supply Company (KESC) made the power sector figuresattractive by showing an inflow of $320.6 million as FDI during the whole year. It included theprivatization proceeds of $255 million.

Analysts said that the inflow of FDI without privatization was also encouraging and some newsectors like food, real estate and construction have developed attraction for foreign investment.

US and UK have been the major sources of FDI in Pakistan, although the shares of both US andUK have fluctuated widely, falling as low as 8.8% for the US and 4.7% for the UK and rising ashigh as 63.7% and 35.2%, respectively. The share of the US has been, by far, the greatest.

It may be noted that Japan, which has emerged as a major investor globally has annually investedvery little in Pakistan.

Factors Influencing the flow of FDI in Pakistan

In a study by Ashfaque H. Khan and Yun-Hwan Kim, the major reasons were mentioned which

were responsible for Pakistan being unable to attract adequate FDI, like its counterparts,Malaysia, China, Thailand and India have been able to attract.

In view of these determinants, the fundamental requirement that governs foreign investment inPakistan revolves around ten main factors. These are political stability; law and order; economicstrength; government economic policies; government bureaucracy; local business environment;infrastructure; quality of labor force; quality of life; and welcoming attitude.

Page19


20/27


In a more in-depth discussion, it has been found that

Pakistans business strength includes:-

Abundant Land and Natural Resources

Geo-strategic Location

Trained Workforce

Investment Policies

Infrastructure and Legal Systems

Financial Markets

Weaknesses

Law and Order

Political Stability

Economic Strength

Government Bureaucracy:

Local Business Environment

Transparency of Regulatory System

Protection of Property Rights

Infrastructure

High Business Cost

Labor Force

Quality of Life

Judicial System

Welcoming Attitude

Child Labor

Tax Structure

Page20


21/27


Recommendations4:

Government of Pakistan should take the following steps on priority basis to enhance bothdomestic and foreign investment in the country:-

Law and Order: Satisfactory law and order situation is critical to attract investment in

Pakistan. The countrys political leadership must take practical steps to improve law and ordersituation particularly in the major growth poles of the country including Karachi.

Political Stability: Satisfactory political stability is also critical to attract investment.

Macroeconomic Stability: Pakistans fiscal and balance of payment situations and foreignexchange reserves position is under considerable strain for some time making themacroeconomic environment less conducive for foreign investors. Some drastic and far reachingmeasures are needed to reduce the fiscal deficit on the one hand and to raise trade surplus andforeign exchange reserves on the other.

Removal of Bureaucratic Hurdles: Although the investment approval requirement has been

removed, numerous permits and clearances from different government agencies at national,regional, and local levels are still applied to investors, causing delays to complete the process.The authorities should streamline administrative procedures regarding approval and officialclearances. The laws and regulations should be simplified, updated, modernized, and transparent,and their discretionary application must be discouraged.

Fiscal Incentives: Fiscal incentives should be given liberally by the government to investors.Import of plant and machinery for new industries may be allowed duty free in case suchmachinery is not manufactured in Pakistan. Tax relief in the form of accelerated depreciationallowance may also be available to priority industries, besides the availability of similar relief toexisting industries undertaking balancing, modernization and expansion in production facilities.

Credit Facilities: Foreign firms operating in Pakistan are currently facing cash flow problems.That these firms cannot borrow more than their equity capital has further aggravated the cashflow problem. There is a need to review credit facilities given to investors.

Labor Laws: Overprotective labor laws do not encourage productivity and frighten awaymuch needed productive investment. There is a need to rationalize the labor laws and multiplelevies on employment that inhibit business expansion and job creation.

Infrastructure: In most infrastructure services, Pakistan is highly deficient as compared withmany developing countries that have attracted higher levels of foreign investment. If Pakistanwants to catch up gradually with the development of the economies of East and Southeast Asia, itwill have to investment more in the areas of education and physical infrastructure.

Confidence-building Measure: The close relationship between private and public sector isessential to build confidence. It is suggested that a forum may be established where the privateand public sectors could sit together to discuss business promotion-related issues. This kind ofpartnership between the government and private sector will help restore investors confidence.

4These have been taken from an article by Ashfaque H. Khan and Yun-Hwan Kim, details in ReferenceSheet.

Page21


22/27


Identification of Potential Investors and Sectors: To promote investment government shouldidentify potential countries. Government should move from traditional investors (USA, UK,Japan, Saudi Arabia, UAE, Libya, Lebanon) to new directions (China, Malaysia, Korea).Government should also identify new sectors for investment (mining and quarrying, tourism,construction, etc.) rather than focusing on traditional sectors (financial business, textiles, oil andgas, etc.)

Improvement in Tax Structure: There is an urgent need to reduce the number of taxes andcontributions, to streamline tax regulations and administrative procedures, and most importantlyto reduce the contact of firms with a large number of tax and contributions collecting agencies.There is also a need to examine tariffs of plant and machinery with a view to substantiallyreducing them.

Transfer of Technology: There should be no restriction on payment of royalty and/or technicalservice fees for the manufacturing sector. There should be Intellectual and Industrial PropertyRights in conformity of WTO Agreements.

WORLD TRADE ORGANIZATION (WTO)

The World Trade Organization (WTO) is the international organization dealing with the rules oftrade between nations. It is the most powerful legislative and judicial body in the world. Bypromoting the "free trade" agenda of multinational corporations above the interests of localcommunities, working families, and the environment, the WTO has systematically undermineddemocracy around the world.

Established in 1995, the World Trade Organization (WTO) is a powerful global commerceagency, which transformed the General Agreement on Tariffs and Trade (GATT) into anenforceable global commerce code. The WTO is one of the main mechanisms of corporate

globalization.The WTO agreements are, negotiated and signed by the bulk of the worlds trading nations andratified in their parliaments. The goal is to help producers of goods and services, exporters, andimporters conduct their business.

WTO rules can be enforced through sanctions. This gives the WTO more power than any otherinternational body. The WTO's authority even eclipses national governments.

Under the WTO's system of corporate-managed trade, economic efficiency, reflected in short-run corporate profits, dominates other values. Decisions affecting the economy are to beconfined to the private sector, while social and environmental costs are borne by the public.

CONCLUSION

Pakistan has achieved macroeconomic stability, introduced structural reforms, improvedeconomic governance and resumed the path for high growth rates. But there is no room forcomplacency as we are confronted with challenges of poverty reduction, employment generation,balanced regional growth, upgrading social indicators and containing inflation.

Page22


23/27


The second generation reforms aimed at strengthening the countrys institutions and theircapacity to deliver basic services along with the continuation of sound and consistent economicpolicy and investment in human development and infrastructure will be able to steer the countryon the right course. There is a need to understand that development is more of an integratedprocess, it's not just a list of projects. (Dr. Kaiser Bengali)

Reference Sheet:

Article: Income Inequalities In Pakistan And A Strategy To Reduce Income Inequalities

by A.R. Kemal Foreign Direct Investment In Pakistan: Policy Issues And Operational Implications by

Ashfaque H. Khan and Yun-Hwan Kim, EDRC REPORT SERIES NO. 66

http://countrystudies.us/pakistan/47.htm foreign trade

Education, Employment And Economic Development In Pakistan By Ishrat Husain1

Dr. Khushi M.Khan Unemployment and the Peoples Works Programmehttp://www.springerlink.com/content/e23473415h246m35/

www.hec.gov.pk

www.sbp.org.pk

www.google.com

MSN Encarta Articles by Dr. Kaiser Bengali

www.wikipedia.com

World Currency Yearbook. (WCY)

IMF Annual Report on Exchange Arrangement and Exchange Restriction. (IMF)

"2000 Country Reports on Economic Policy and Trade Practices: Pakistan", the Bureau

of Economic and Business Affairs, U.S. Department of State, March 2001 (CR2000)

"2001 Country Reports on Economic Policy and Trade Practices: Pakistan", the Bureau

of Economic and Business Affairs, U.S. Department of State, February 2002 (CR2001) Forecasting Inflation in Developing Nations: The Case of Pakistan*by Muhammad

Abdus Salam, Shazia Salam and Mete Feridun; International Research Journal of Financeand Economics; ISSN 1450-2887 Issue 3 (2006)

The problem of deficit in balance of payments by Mohammad Ishaq Javed and Dr.

Shaikh Muhammad Ashfaq

Page23
http://www.hec.gov.pk/http://www.sbp.org.pk/http://www.google.com/http://www.wikipedia.com/http://www.hec.gov.pk/http://www.sbp.org.pk/http://www.google.com/http://www.wikipedia.com/


24/27


Appendix

LONG-TERM STRUCTURAL CHANGE AND GROWTH

Page24


25/27


The table above has been taken from the site of State Bank of Pakistan.

http://www.sbp.org.pk/about/speech/economic_management_policies/2005/Economy_of_Pakistan_Expo_2005.pd

Glossary

Agriculture: The process of growing crops

by cultivating large areas of soil.

Balance of Payments (BoP): a

systematic record of all the

economic transactions between

residents of a country with the rest

of the world during a given period

of time.

Exports: Goods and services that areproduced domestically and sold to buyers in

another country.

Foreign Direct Investment: Investment made

by a foreign individual or company in

productive capacity of another country.

Gini Coefficient: The Gini coefficient is a

measure of statistical dispersion most

prominently used as a measure of inequality

of income distribution orinequality of

wealth distribution.

Gross Domestic Product (GDP): The total

value of a nation's output, income, or

expenditure produced within a nation's

physical borders within a year.

Gross National Product (GNP): A country's

total output of goods and services from all

forms of economic activity measured at

market prices for a calendar year.

Imports: Goods or service that are produced

in another country and sold domestically.

Page25
http://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Wealth_condensationhttp://en.wikipedia.org/wiki/Wealth_condensationhttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Income_inequality_metricshttp://en.wikipedia.org/wiki/Wealth_condensationhttp://en.wikipedia.org/wiki/Wealth_condensationhttp://en.wikipedia.org/wiki/Wealth_condensationhttp://en.wikipedia.org/wiki/Wealth_condensationhttp://en.wikipedia.org/wiki/Wealth_condensationhttp://en.wikipedia.org/wiki/Wealth_condensation


26/27


Industrialization: The development of

industry on an extensive scale.

Inflation: The general rise in prices across

the economy over a year.

Martial Law: The suspension of normal civillaw and its replacement by strict military

control. Often declared during times of civil

unrest.

Nationalization: The act of taking formerly

private assets into public or state ownership

Political unemployment: Political corruption

is the use of governmental powers by

government officials for illegitimate private

gain

Privatization: The transfer of a company or

organization from government to private

ownership and control

Tax: a financial charge or other levy

imposed on an individual or a legal entity by

a state or a functional equivalent of a state.

Unemployment: It is the state in which a

person is without work, available to work,and is currently seeking work.

Page26


27/27


Page27

Documents

13225438 Economic History of Pakistan