Contents · efficiency and productivity. There is evidence in the newly industrialized economies, of a well-developed understanding of the appropriate role for the SME sector as a

January - February, 2007

Contents

§ Editor’s Corner ii§ Small and Medium Enterprise Sector in Pakistan 4§ Interest Rate Outlook 15§ Market Analysis 16§ Pakistan Economy - An Update 18§ Consumer Financing by Commercial Banks in Pakistan 20§ Commercial Banks Advances to Private Sector 22§ Book Reviews 23

NBP Performance at a Glance

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Editor’s CornerDear Readers,

The economic scene in Pakistan has substantially improved from that a decade ago. In the last few yearsthe many sectoral reforms introduced, the consistency in policies, have put the economy on the road togrowth and brought overall stability.

GDP growth averaged 7.6 percent in the last 3 years, fiscal deficit declined from an average of 7 percentof the GDP in the 1990s to an average of 3.5 percent during the last 6 years. The associated public debtburden fell sharply from over 100 percent of GDP to 56 percent in FY06. The banking sector witnessedphenomenal growth, the stock market performed well and compared to other markets in the region, theKarachi Stock market became attractive for both foreign and local investors. Market capitalisation as percentof GDP rose in all the three stock exchanges of the country. Foreign investment picked up, inflow ofremittances increased and Pakistan received upgrades in credit ratings for foreign currency, local currencyand short term sovereign ratings from Standard & Poor’s last year.

Sustaining the growth achieved would however, require attending to the challenges and the structural issuesfacing the economy. The widening trade deficit and the resultant large current account deficits, lowinvestment to GDP ratio, social sector development, concentration of export earnings on selected itemsand markets, traditional industries accounting for the major share of total manufacturing value added andemerging power and gas shortages are risks to the economy’s medium term economic prospects and needgovernment attention. It is reassuring that the policy makers are cognizant of these issues and have developedstrategies accordingly.

In addition, the country also faces the economic challenge of achieving competitive advantage ofentering/expanding into new markets. Competitiveness is driven not only by the macro economic environmentin which businesses operate, but also by the quality of microeconomic business environment (includes,corporate governance, management & staff training, enforcement of contracts, access to skilled labour,delegation & authority etc) and by the quality of business strategy and operations.

While ranking Pakistan in terms of the Global Competitiveness Index (91st) and the Business CompetitivenessIndex (67th), the Competitiveness Support Fund has shown that in analysing each index in terms of keyareas which constitute the index, Pakistan has ranked well on some indicators, but needs to focus on thehealth and primary education pillar, and on higher education and training if it is to dramatically improveits overall ranking, while also improving its technological readiness ranking.

As the pace of globalisation gathers momentum, and markets integrate, competition pressures are likelyto intensify. Developing countries, once at the periphery of the global economy, are now moving to centrestage and are becoming serious competitors in the markets of high income countries and in each other’smarkets. Pakistan is no exception.

Among other areas, countries are now focusing upon the regulations that enhance business activity andthose that constrain it. In Pakistan, the State Bank of Pakistan, the Securities and Exchange Commission,the Central Board of Revenue, the local courts, and other federal/provincial institutions are increasinglyfocusing upon building a conducive business environment which fosters growth and development of theeconomy. Implementing good practices of doing business would attract investors, business firms would

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have the opportunity to thrive, which would lower unemployment and consequently help in the reductionof poverty.

In a World Bank report, ‘Doing Business in South Asia 2007’, Pakistan ranks relatively well on someindicators of Doing Business regionally and among the countries globally. For instance, starting a businessnow takes lesser time than the South Asian average, registering property is a relatively simple process,though experiences of other countries provide simple ways to cut procedures, time and costs. It earns highscores for protecting investors in terms of disclosure, director’s liability and ease of shareholders’ suits.While recent reforms have reduced the time it takes to export and import, introduced corporate governance,brought reforms in the credit information system, among others, it still needs to modernize the outdatedmunicipal bylaws and the process for issuing permits, particularly in the large industrial areas, reform taxpolicy to widen the tax base and reduce the average tax rate, reduce the number of steps and the cost ofstarting a business, undertake extensive reforms of the labour code, strengthen creditor rights and furtherreduce the steps, time and cost necessary to develop a site, so to improve the business environment.

Despite these challenges, the medium term outlook for the economy is positive according to the ADB.Pursuing pro growth policies, increase in public sector development programme, the projected rise ininvestment, the boom in banking and telecoms due the favourable policy environment for these sectors andwith the governments’ commitment to strengthen the economic reforms of recent years, the economicprospects of the economy look promising.

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Small and Medium EnterpriseSector in Pakistan

Small and Medium Enterprises (SMEs) playa central role in creating market orientedeconomic growth, employing the growingworkforce in developing countries sohelping in income generation and inreducing poverty. The abundance of labourand the shortages of capital which arecharacteristics of developing countriesare compatible with the SMEs labour intensivecharacter.

In the industrialized countries, statisticsshow that SMEs are major contributors toprivate sector employment. Empirical studieshave shown that SMEs contribute to over 55percent of GDP and over 65 percent of totalemployment in high income countries.SMEs and informal enterprises, account forover 60 percent of GDP and over 70 percentof total employment in low income countries,while they contribute over 95 percent of totalemployment and about 70 percent of GDP inmiddle income countries.

Many of the big companies today, beganas an SME. Microsoft began as a coupleof people in a small garage in North America;Hewlett Packard started in a little wood shack;Google was begun by a couple of young kidswho thought they had a good idea, evenVolkswagen at one point was just a little carmaker in Germany. There are such successstories in Pakistan also.

Definition of SMEs varies across countries,and is usually based on the number ofemployees, and value of sales and/or valueof assets. The most commonly used variableis the number of employees. The EU and alarge number of OECD, transition and develo-ping countries set the upper limit ofnumber of employees in the SMEs between200-250, with a few exceptions such asJapan (300 employees) and the US (500employees).

Signifi-cance ofSMEs

DefiningSMEs

In Pakistan, there is no single definition forSMEs. State Bank of Pakistan (SBP), Smalland Medium Enterprise DevelopmentAuthority (SMEDA), Federal Bureau ofStatistics (FBS), SME Bank have been usingtheir own definitions. The State Bank ofPakistan has defined SMEs in the PrudentialRegulations for SME financing as an entity,ideally not a public limited company whichdoes not employ more than 250 persons (if itis manufacturing/service concern) and 50persons (if it is trading concern) and alsofulfills the following criteria of either ‘a’ and‘c’ or ‘b’ and ‘c’ as relevant:

a A trading/service concern with totalassets at cost excluding land and buildingupto Rs50 million.

b A manufacturing concern with totalassets at cost excluding land and buildingupto Rs100 million.

c Any concern (trading, service ormanufacturing) with net sales notexceeding Rs300 million as per latestfinancial statements.

An individual, if he or she meets the abovecriteria, can also be categorized as an SME.

The SME Policy 2006 has recommended fora single SME definition, and has given thevarious organizations a two year time frameto align their current SME definition in linewith the SME definition proposed in the policy(see Box).

In the last few decades there has been growingrecognition/commitment for enhancing thedevelopment of SMEs both in the developingand developed countries. For instance, in

SMEsreceivingincreasingfocus

The IFC definition

Source: World Bank Institute

Micro Small Medium

EmployeesTotal AssetsAnnual Sales

5


China, where SMEs account for 99 percent ofthe total number of firms, 60 percent of GDP,40 percent of fiscal revenue, 84 percent oftotal employment, account for 71 percent oftotal sales and 60 percent of exports, theGovernment provides support to the sector.China has set up technological innovationservice centres, scientific and technologicalparks, universities, all lending support forSMEs technological innovation. Thegovernment has also promulgated a series oflaws and regulations to protect and promotethe development of SMEs; and has helpedthem to exploit international markets.

In the newly industrialized economies of Asia,such as Korea, Hong Kong, Taiwan, there isevidence to support that the SME sector hasin many cases been the driving force,supported by clear government policy.Experience of SMEs in South and SoutheastAsia, a paper by the South Asia EnterpriseDevelopment Facility shows the comparativeexperiences of the newly industrializedeconomies. In some cases, the SME sectorwas the driving force, whilst in other cases itfollowed developments such as the growth ofexport oriented large enterprises.

For example, in Taiwan, centre firms havesupported SMEs by providing equipment orcollateral for subcontractors, whilesubcontracting between SMEs has encouragedbusiness linkages that have enhanced sectorefficiency and productivity. There is evidencein the newly industrialized economies, of awell-developed understanding of theappropriate role for the SME sector as acomponent of overall policy, and the pursuitof measures that helped SMEs fulfil thesector’s specifically required role.

Governments created an environment whereentrepreneurship could flourish. For example,from the 1980s onwards, the Taiwanesegovernment developed industrial parks, andencouraged the creation of geographic andsectoral clusters of SMEs, by targeting specificindustries.

In all cases where the SME sector experiencedsignificant growth, and despite the undoubted

South andSouth-east Asianexper-iences

importance of financial services, non-financialinstruments emerge as the primary stimulants.A range of approaches was evident, includingwell-targeted technology transfer, and thefostering of forwards and backwards linkages.Financing mechanisms were developed tosupport this growth.

The rapidly growing SME sectors in the newlyindustrialised economies generally focusedon labour intensive activities that employedmore lower-skilled workers than did largeenterprises. Consequently SMEs were a majorsource of employment creation (in China,Japan, Taiwan, Thailand and Vietnam whereSMEs account for over 70 percent of totalemployment) and so, seemingly, played a majorrole in poverty reduction.

Public sector has a major role to play in thedevelopment of SMEs, as the later areconstrained by certain inherent weaknessesand need support. Due to their small size theydo not have the same capacity to influencethe environment in their favour as larger firms,regulations impose disproportional costs onSMEs, they are limited in capability, forbecause of their small size, SMEs usually lackmanagement capacity, cannot afford costlysupport services (eg financial, humanresources, legal, training) and ability to accessand analyze information is particularly weakfor SMEs.

SMEs basically need a national SME policyframework and a favourable policyenvironment to operate. This implies providingthem with the opportunities and incentives,so they could invest productively, create jobsand expand. When entrepreneurs and firmshave a positive perception of the overallinvestment climate (the macroeconomicconditions, legal and regulatory frameworkand infrastructure) know the risks and returnsinvolved can they take meaningful decisions.Investment climate is important as it impactsfirm level productivity, opportunities andemployment, is crucial for private sector ledgrowth and poverty reduction.

Many countries have implemented explicitSME development policies and strategies.

Publicsector role

Favour-ableenviron-ment forSMEsessential

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Pakistan has announced an SME Policy 2006.In East and South Asia, economies such asHong Kong, India, Korea have formulatedspecial policies to protect SMEs from importsand have provided incentives to improveproductivity during their early development.

Many government in South Asia seem to haverecognized the key impact that the SME sectorcould have on economic growth and povertyreduction. In India, development of the SMEsector has been a consistent element ofindustrial and employment policy since the1970s, with the objective of creating jobs, andreducing economic imbalance, notably in ruraland less developed areas. Today small scaleindustry accounts for some 95 percent of allindustrial units, 40 percent of industrial outputand 35 percent of national exports.

SME play an important role in the economyof Bangladesh in terms of output, employmentand private sector activities. They are quitepredominant in the industrial structure ofBangladesh, comprising over 90 percent ofall industrial units. Together, the variouscategories of SMEs are reported to contributebetween 80-85 percent of industrialemployment. In Sri Lanka, SME sectorcomprises largely well established businesses.Most countries of South Asia and the NewlyIndustrialised Economies of Asia have adoptedpolicies/programmes to support SMEs, whichare aimed at making them more globallycompetitive.

SMEs are receiving increasing focus inPakistan because of their significance to theeconomy; contributing 30 percent to GDP,with a share of 25 percent in manufacturedexports, employing 78 percent of the industriallabour force, and contributing 35 percenttowards value addition in manufacturing. Anestimated 3.2 million SMEs operate in thecountry, where more than half are in trade,wholesale, retail, restaurants, where the bulkemploys less than 5 persons. Punjab housesmore than 65 percent of the small and mediumsized business, followed by Sindh, NWFPand Balochistan with a share of 18 percent,14 percent and 2 percent respectively.

Impact ofSMEs inIndia,Bangla-desh andSri Lanka

SMEs inPakistan

Given the significance of the SME sector,recent years have witnessed increasinggovernment/private sector focus. Studies havebeen undertaken to identify the constraintsthe SMEs face, an SME Policy has beenannounced, commercial banks are nowenhancing their lending to SMEs, someUniversities are offering programmes inEntrepreneurship and SME Management. Inits endeavours, Pakistan like some of the otherdeveloping countries has received supportfrom the Asian Development Bank.

ADB strongly supports a number of membercountries in their SME developmentundertakings. The Bank sees assistance toSMEs as an important means of addressingits strategic objectives, particularly theobjectives related to poverty reduction,sustainable economic growth and humandevelopment.

To date the bank has provided over $900million in direct loans for SME development.Besides, it has also supported SMEdevelopment indirectly through loans andgrants encouraging policy reforms and throughinstitutional reforms and capacity building.In its private sector operations, the Bank hasprovided loans and equity funds worth morethan $1.1 billion to development financeinstitutions, which in turn, directly or indirectlysupports SME development.

Recently it has also been recongnized that itis not enough just to ensure availability offunds to SMEs through DFIs, but that anenabling policy environment is critical to thegrowth of SMEs. Accordingly governmentsare improving their overall policy frameworkby removing discriminatory elements fromsector policies and programmes.

With the support of the ADB, a study to analyzethe impediments to growth of SMEs in Pakistanwas undertaken. The Paper “SME Developmentin Pakistan: Analyzing the Constraints toGrowth” Faisal Bari, Ali Cheema, Ehsan ulHaque have analyzed the concerns aboutthe small and medium scale industry, whichinspite of the government’s liberalization and

Impedi-mentsSMEsface

ADBsupport toSMEs

ADBstudy

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To formulate a basic framework for the growth and developmentof SMEs, the Government of Pakistan constituted a Task Forcefor SME Policy Development in January 2004. It was set up withthe following objectives:-

§ Identify key areas for reforms concerning laws, regulationsand achieve a policy for SMEs.

§ Develop SME Policy.

§ Define principles of SME support and set priorities.

§ Institutionalize SME support.

§ Propose detailed processes and time bound action and resourcerequirement for SME sector development.

§ Propose a National Level Authority to coordinate activitiesfor SME development.

We give below excerpts from SME Policy 2006.

The SME Policy formulation was a participatory process throughwhich private sector bodies, chambers of commerce and industries,trade associations, public sector organizations and more than1000 SMEs were consulted across the country.

The SME Policy Task Force thus recommends that private sectorled economic growth strategy should be primarily based on SMEdevelopment. To achieve this objective a coherent policyframework is presented in this SME Policy document.

While developing the Policy framework the Task Force reviewedthe past initiatives in this area. The various levels of theGovernment in Pakistan have, in the past, formulated and to anextent implemented small-scale business promotion policies.However, these policies were limited in their scope, to beginwith, and are not in line with the dynamics of present time.

Various Schemes, The Youth Investment, Yellow Cabs and Self-employment promotion initiatives of the 80s and 90s followedthe small-scale industrial promotion policy of the 60s and 70s.These schemes were limited in scope and designed as such thatthey did not address the core issues of enterprise developmentand employment growth and suffered from political manipulationaccruing to bad loan portfolios of the banks and loss of publicfunds. These schemes contributed little in economic growth andemployment creation. In some ways these initiatives created themindset of the banking community, that is to date, responsiblefor a cautious stance towards SME financing in Pakistan.

In the recent past SMEDA stands out as a significant step towardsGoP commitment to SME development. Created as an autonomousinstitution with private sector led governance structure, SMEDApromises to become an important institution spearheadingGovernment’s SME development efforts. However, in absenceof a coherent SME development Policy framework it is unrealisticto expect a single organization such as SMEDA, to be able toimplement aggressive SME development initiatives.

SME Policy-2006Box

Objective

The objective of SME Policy is to provide a short and a mediumto long-term policy framework with an implementationmechanism for achieving higher economic growth based on SMEled private sector development.

The SME Policy suggests specific policy measures in all areasof SME development.

A single SME definition is recommended.

SME DefinitionProblem Statement

Pakistan does not have a single definition of Small and MediumEnterprises. Various Government Agencies, e.g., State Bank ofPakistan (SBP), Federal Bureau of Statistics (FBS), ProvincialLabour Departments, etc. use their own definition. Absence ofa single SME definition makes it difficult to identify target firms,align development programs, collect data and monitor progress.

Policy Recommendation

GoP may adopt a single SME Definition that is accepted by allpublic and private agencies. However, various organizations maybe allowed a two-year time frame to align their current SMEdefinition in line with the SME Definition proposed in this Policy.

It is recommended that the following SME Definition may beadopted for the purpose of classifying Small and MediumEnterprises fulfilling the criteria either as “a and b” or “a and c”.

Size

Small

Medium

Sector

ManufacturingServiceTrade

ManufacturingServiceTrade

Employ-ment

(a)

51-25051-25021-50

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fiscal regulations divide enterprises by income levels and labourrelated regulations realize only two forms of enterprises smalland large, thus, not providing laws and implementationmechanisms that are sensitive to SME needs.

Policy Recommendations

§ The Task force recommends promulgation of an SME Actthat (in addition to addressing other issues related to SMEs)provides for identification of fiscal, registration, labour andinspection laws that may not apply to Small and/or MediumEnterprises and simplification of those that are required to becomplied with.

§ A business entity may be certified as an SME by a simpleprocess to be exercised by SMEDA in partnership with othergovernment agencies, chambers of commerce and industries,trade associations and other private sector representativeorganizations.

§ The Federal Government may encourage periodic review ofall fiscal laws in force with a view to facilitate and improvegrowth of the small & medium enterprises.

§ Periodic review of Labour Legislation.

§ SME Desks may be established at the Federal, Provincial,Banking and Tax Ombudsman Offices for handling andaddressing SME grievances.

§ A minimum quota is proposed to be established for SMEs forallocation of land in the Industrial estates and Export ProcessingZones (EPZs). SMEs may be charged a concessional rate ofland (at no profit no loss basis) as compared to the cost offeredto large-scale enterprises.

§ GoP may consider to support establishment of an SMEPromotion Council (including its local chapters) and SMEspecific Trade Associations for organizing SMEs and providingthem with a platform to lobby for favourable governmentpolicies.

§ Government to ensure adequate provision of physicalinfrastructure (roads, utilities etc.) in existing SME clusters.

Expected Impact

Implementation of the recommendations for creating conducive‘Business Environment’ for SMEs will result in reducing thenumber and simplifying the compliance process of SMEregulations. This is expected to trigger fast paced creation andgrowth of enterprises resulting in economic development andjob creation.

Access to Finance & Related Services

Access to finance has been identified by the SMEs, as the singlemost important impediment to growth.


§ Incorporation of SME financing in the Annual Credit Plan ofthe SBP and monitoring to cater for underserved segment ofthe SMEs.

§ Review of Prudential Regulations, periodically, in line withthe SME credit demand and supply data.

§ Establishment of Credit Guarantee and Credit Insuranceagencies, operating inline with sound international practices,to provide incentives and risk cover for banks, so as to providethem the relevant comfort in financing SMEs.

§ Support to FIs in designing and launching industry basedprogram-lending schemes.

§ Capacity building of the CIB to report positive and negativedata & sharing of SME financing data by the SBP.

§ Improvement in the regulatory procedures and fiscal incentivesfor Venture Capital companies.

§ Introduction of Bankruptcy Laws with dedicated and effectivejudicial process.

§ Expansion in the role of Banking Ombudsman to includeredressal process for SME complaints.

§ Awareness and promotion of options for formal financingand good accounting practices amongst SMEs.

§ Promotion of Islamic mode of financing for SMEs.

Expected Impact

It is expected that improvement in the regulatory framework,provision of specialized credit lines and risk sharing schemesfor FIs will result in creating an environment where banks willaggressively pursue the opportunities offered by the SME financingmarket in Pakistan. Improvement in the regulatory and fiscalenvironment and provision of matching contribution will resultin establishment of new venture capital companies. Both thesemeasures will improve accessibility of startups and existingSMEs to formal sources of financing, removing a major barrierto their growth and development.

Supporting Human Resource DevelopmentTechnology Up-gradation and MarketingProblem Statement

The poor national performance on the Human DevelopmentIndex of the UN has its consequences for SMEs in Pakistan.These include inadequate and generic education andinsufficient, poorly focused and under-serving traininginfrastructure. SMEs mostly draw their human resource (includingthe owners) from either the higher education institutions or thetechnical training infrastructure, both of which are not attunedto the SME needs nor are they equipped to address them.

This situation limits the capacity and capability of SMEs toinnovate, add value, upgrade technology and devise new marketingstrategies. Adding to these woes are the limited options availableto SMEs to invest in HRD, technology and exploration of newmarkets. As a result, the SME sector in Pakistan is usually engagedin low value added manufacturing using inefficient labour,outdated technology and operating in limited and traditionalmarkets.

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Policy RecommendationsHuman Resource Development

§ Need Assessment Survey to identify major SME needs inHRD, technology up-gradation and marketing.

§ Establishment of Institutes of Small and Medium Enterprise& Entrepreneurship Development in select business schools.

§ Capacity building and up-gradation.

§ Encouraging use of the technical training infrastructure bythe private sector.

§ Induction of genuine SME representatives in private sectorboards of the technical training institutes.

Technology Up-gradation

§ Introduction of SME specific research projects.

§ Establishment of Technology Innovation Centers.

§ Launching of pilot technology up-gradation projects for majorSME clusters on cost sharing basis.

§ Incentives for Investment in new Emerging Sectors and Skillsupgrade in the form of reduced taxes and subsidized trainingfor enterprises which sign up for up-gradation of businessproducts, processes, quality accreditation, through a BusinessImprovement Program.

Marketing

§ Encourage establishment of SME sector specific exportmarketing companies by providing matching grants inconducting international marketing research, developingmarketing strategies, developing marketing material,packaging, branding, participating and conducting trade fairsand undertaking promotional and marketing activities.

§ Matching grants for developing ‘world-class’ trade and productdirectories for major SME clusters.

§ Establishment of SME quota in trade delegations supportedby EPB.

§ Compilation and dissemination of data on local markets usingmanufacturers, distributors and retailers data.

§ Provision of support to SME associations in exploiting localmarket opportunities by holding domestic product exhibitions.

§ Establishment of Annual SME Awards for recognizingoutstanding performance in domestic and international markets,technology innovation, HRD practices etc.

Expected Impact

It is expected that effective implementation of Policy recommen-dations in supporting HRD, technology up-gradation and marketingwill create a human resource pool and necessary infrastructurefor adding value to SME businesses by technology up-gradationand innovative marketing.

Entrepreneurship DevelopmentProblem Statement

The education and social system does not encourageentrepreneurship as a preferred career option amongst the youth.Entrepreneurship is usually undertaken by those belonging tothe existing business families.

The past Government programs to encourage entrepreneurshipsuch as Self Employment Scheme, Youth Investment PromotionSociety and Yellow Cab Scheme were limited and not toocomprehensively designed and thus achieved little in promotingentrepreneurship amongst the educated Pakistani youth.


§ Revision in primary and higher education curricula forpromoting entrepreneurship amongst the educated youth.

§ Inclusion of ‘Entrepreneurship’ courses in (all professionaldegree awarding) higher education, technical and vocationaltraining institutions in Pakistan.

§ Entrepreneurship Competitions at university level.

§ Establishment of technology and business incubators inselected universities in Pakistan.

§ Identification of investment opportunities offered by backwardand forward linkages of successful services/products.

Expected Impact

Implementation of the recommendations on supportingentrepreneurship amongst the Pakistani youth will result in largersegments of the educated population taking interest in establishingtheir own businesses and some will eventually implement theirideas. As a result, a fast increase may be witnessed in enterprisecreation thus adding jobs to the economy and improving incomedistributions.

SME Policy – Implementation and Resource AllocationSME Policy – Ownership and Implementation

A large number of government Ministries and organizations (inaddition to the private sector) will have to play their role inremoving impediments and providing support for SME growth.Therefore, it is imperative that the SME Policy is approved bythe Prime Minister and endorsed by all Provincial Governments.

SME Policy – Investment and Expected Impact

The SME Policy also presents the estimates of public and privatesector investments for implementation of the policy recommen-dations and envisages benefits in terms of enterprise growth, jobcreation and poverty reduction.

Monitoring, Evaluation, and Continuous Improvement of PolicyMonitoring and Evaluation

In order to increase the quality and quantity of informationavailable on the development of enterprises in Pakistan identicalstandards have to be used for classifying enterprises.

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structural adjustment policies has not maderecovery, like the recovery shown by thelarge scale manufacturing sector during thelast couple of years. The study places specialemphasis on removing the constraints on SMEgrowth and investment.

The main aim of the study is to identify thebinding constraints [binding constraints weredefined as those constraints that were accordedan average score of 3.5 or above by the‘pooled’ sample of respondents, and whichover 30% (nearly one third) of the respondentsranked as an above-average constraint,according them a score of 3.5)] on firm levelgrowth and investment in Pakistan, withparticular emphasis on SMEs. A section in theReport has reviewed literature on the role theSMEs have played in the transformation ofeconomies from low to middle income levels,and it has been stated in the Report that, ‘theexercise is particularly relevant to Pakistanas a country at the threshold of achievingmiddle income status’.

The section reviewing the literature onConstraints on SME Growth in Pakistan haveidentified the following factors; excerpts fromthe Report are given below:-

The literature identifies the state-led modelsof industrialization followed during the1960s, 1970s, and 1980s as a major factorconstraining the growth of SMEs. There areseveral ways in which industrializationdiscriminated against SMEs during the time.

First, trade was regulated in a way that allowedlarge firms to obtain import licenses, officialexchange rates for imports, and tariff rebatesmore easily than small firms. The anti-exportbias induced by import substitution strategiesalso discriminated against the labor-intensiveSMEs. Moreover, small firms were deniedaccess to most investment incentives becauseof high rent-seeking costs.

Second, financial sector interventions alsodiscriminated against SMEs. Selective creditcontrols in conjunction with controlled interestrates prevented banks from compensating for

the higher cost of small loans by chargingmore. As a result, smaller clients were allocatedlimited credit, allowing large firms to growat the expense of small firms.

Third, the problems of dealing withgovernment regulations and tax authoritiesweighed more heavily on smaller firms in theshape of higher compliance costs, i.e., thefixed costs of complying with import/exportand tax regulations, labor market regulations,and licensing and price controls.

Fourth, Pakistan’s underdeveloped physicaland social infrastructure creates a bindingconstraint on SME growth. SMEs rely heavilyon inefficiently provided state infrastructure,and cannot afford the fixed cost of develo-ping any alternatives. Similarly, inadequateinvestment in human capital hampers SMEgrowth because of the scarcity of skilledworkers, managers, and entrepreneurs.

Lastly, the market failure inherent in adoptingtechnology in developing countries arguablyconstrains SMEs from moving onto a moredynamic growth path.

The Report has analysed the binding con-straints by using the data collected during thestudy. Financial constraints, both, lack ofaccess to credit and also the high cost offinance act as binding constraints on growthof SME.

Then the SMEs are faced with infrastructurerelated problems. The main constraints facedby the manufacturing and export sectorinclude;

• the high cost, poor service quality andunreliable supply of power;

• an inefficient transport network that isunreliable and costly to use;

• corrupt utilities

The Report states, “the country’s powertransmission and distribution losses (includingpower theft) are extremely high by developingcountry standards and are the highest inSouth Asia”.

Excerptsfrom theReport

Infra-structureproblems

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Small firms are faced with lack of trainedmiddle management, low levels of skills,education and vocational training amongworkers.

Fiscal and Regulatory constraints imposebinding constraints on firm level growth.These include, taxation, trade policy andprocedure and law and order.

The study has also identified some new areasof constraints that hamper SME growth. Theseinclude high market transaction costs andinefficient contract repudiation: constraintson the growth of SMEs and their ability totake risks, which apply to the retail andmanufacturing sectors. This is an importantinsight because it suggests that the rightregulatory framework for executing andenforcing contracts is as important for SMEgrowth as the traditional emphasis on reducingstate-control and regulation.

Removing these constraints should be anessential goal of government policy, whichalready has the stated objective of stimulatinggrowth in the SME sector. Apart from thesevariables, an inefficient power and transportinfrastructure and poor-quality human capitalconstrain the growth of SMEs and large firms.Eliminating these binding constraints wouldpropel the growth potential of the SME sectorin Pakistan.

Such constraints are not specific to Pakistanonly. In the paper “Taking Stock and Chartinga Path for SMEs in Bangladesh”, prepared bythe Bangladesh Enterprise Institute, somecommon constraints to SME growth identifiedinclude:

• lack of modern technology• lack of adequate investments• irregular/inadequate supply of power• high rate of interest on bank loans• inadequate availability of raw materials• absence of clear cut government policies• lack of skilled technicians and workers

In addition, lack of institutional credit, nonavailability of working capital, low levels of

technology, low productivity, and lack ofmarketing facilities and market access aremajor bottlenecks to SME growth inBangladesh.

The ADB Report on SMEs in Pakistan afteridentifying the constraints has then givenrecommendations to overcome each of them.It has however, not given any recomm-endations to overcome the macro and law andorder constraints, as it is beyond its scope.

We see that SMEs are not in a position to offerimmovable property as collateral to secureloans from banks, and the movable propertywhich they can offer as collateral presentsrisks because of weak judicial enforcement.The reforms suggested involves shifting thebulk of the work of repossessing and sellingcollateral out of the courts, so reduce the risksand costs. Also the initiation of measures thatsimplify documentation, processingrequirements, and credit disbursementprocedures will lower the costs of accessingcredit for SMEs.

Poorly executed court cases continue to be aproblem. The decision process takes monthsand the enforcement of foreclosure decressstill takes very long, creating considerablecosts for banks and weakening creditor rights.

The Report states, ‘although informationdisclosure has improved with the SBP’sdecision to approve a panel of auditing firmsfor FIs, the integrity of the information inaudited financial statements is still a causefor concern. Nonetheless, the SBP’s decisionis a positive step and should now be morewidely adopted across Pakistan. It shouldalso be supplemented by a broader ratingsystem for auditor firms, based on quantitativeand qualitative criteria such as the number ofqualified personnel and professional supportstaff, and firms’ experience.

There is also a need to improve the existingcredit – reporting system and the regulationsshould be strengthened to extend reportingcoverage to small and medium sizedborrowers.

Recomm-endationsforovercom-ingconstra-ints

Newareas ofconstraints

Commonconstraints

12


The Report has further suggested measuresfor reducing credit costs, and consolidatingand rationalizing taxes on financial institutions,strengthening dispute resolution systemsthrough initiatives which strengthen judicialreforms, and tax administration, tariff measureswhich would lower the costs of fiscal andregulatory constraints for SMEs and buildinghuman resource through sector specificvocational training, and creating sector –specific ‘incubators’ which provides the SMEswith credit, access to technology, vocationaland management training and extensiveconsulting facilities. This would be very usefulfor SME industrial clusters in Sialkot, Gujrat,and Gujranwala.

The significance of cluster development, hasbeen realized by SMEDA for which it hastaken several initiatives. Clusters are importantfor SMES because they provide cost effectiveopportunities to deliver targeted technicalassistance for upgrading technology,management and marketing. The clusteringleads, to greater efficiency and flexibility notattainable by individual firms operating inisolation. Cluster development has proved itscontribution in employment generationsexports and poverty reduction worldwide.

SMEDA has started Cluster DevelopmentProgramme for SMEs in Punjab, with thecollaboration of Punjab Small IndustriesCorporation and UNIDO. Initially four clusterswere selected:

Sports wear, SialkotMarble/granite, Rawalpindi/IslamabadPVC and plastic products, LahoreAutoparts, Lahore

Non availability of finances has beenrecognized as one of the major impedimentsto SME development. One of the majorobjectives of financial sector reforms inPakistan, was enabling banks to direct fundsto under served sectors of the economy, whichhave a significance for the economy but hadnot received adequate funds. Small andmedium enterprises was one such area.

Clusterdevelop-ment

To meet the financing needs of the SME sector,there is the SME Bank formed by the mergerof Regional Development Finance Corporationand Small Business Finance Corporation in2002, with loans being extended for workingcapital and medium to long term financing,programme lending and leasing through itssubsidiary, SME leasing. The SME Bank haslent to areas like CNG station, healthdevelopment, surgical instruments, fanmanufacturers, power looms, carpetmanufacturers, gems & jewellery etc.

Sector-Wise Disbursements

Financingby SMEBank

As SME bank alone cannot meet the entireneeds of the SME sector in Pakistan,commercial banks are also playing an active

(Rs.Bn)

AutoBeacon House SchoolCarpet IndustryCNG KitCommunicationChemical & PharmaceuticalsDatesEducationElectric IndustryElectrical Machinery, Appliances& FittingsFertilizerFisheriesFoodGarmentsGems & JewelleriesHand/Power LoomsHealthHotels & ServicesInformation TechnologyLeatherLight EngineeringMachinery other than ElectricalManufacturing (Glass)Manufacturing (Others)Manufacturing (Plastic)Manufacturing (Sports Goods)Manufacturing (Steel)Manufacturing (Wood)Motor cycle Rikshaw LoaderOil & GasOther Non-Metalic MineralsPowerTextileTobaccoTradingTransport IndustryTotal

Sector

10.773.200.150.730.50

--

28.67-

--

0.5035.2632.196.88

-6.30

44.296.657.306.67

-4.00

92.322.68

-11.803.25

-23.07

--

23.28-

91.85-

442.31

FY02

6.603.902.350.061.59

10.81-

34.725.93

2.501.002.30

63.5512.0023.753.13

23.6780.327.146.33

10.970.081.30

67.078.431.10

12.0913.29

-50.581.200.30

52.690.25

397.590.30

908.86

FY03

8.10-

0.3.53.60

-17.70

-17.68

-

3.49--

28.4512.153.40

12.961.50

27.050.500.809.32

--

26.975.552.30

10.559.550.94

34.510.70

-23.19

-123.06

3.54387.90

FY04

Source: SME Bank

13


The Entrepreneurship and Small and MediumEnterprise Centre at the Lahore University ofManagement Sciences (LUMS) conductedresearch on small and medium enterprises toinquire about their health. Subsequently aReport, “SME Pulse” was published,containing the results of the survey of 650firms in ten districts of the country (thesedistricts were home to 50 percent of themanufacturing SMEs in the country). Thesurvey results in the Report have been dividedinto demographics, human resource,marketing, production, finance andgovernance. We would like to share with ourreaders, some of the major findings of thissurvey by LUMS.

Demographics

• Decision making was centralized at most of theSMEs. Company owners were reluctant todelegate authority to their employees not onlyregarding strategic decisions but also for routinedecision making both at the organization leveland the department level.

• The breakup of SMEs in terms of the type ofproduct they produced, 22.1 percent of the firmswere into textile manufacturing followed byfood, fabricated metal products manufacturing.

• Firms with 7-10 employees were 50.2 percentof the total.

• The average number of employees in an SMEin Pakistan was about 16.

Human Resources

• Almost all the employees in the SME sector(manufacturing) were in the productiondepartment.

• Education level of the employees was quite low.

• Very few get proper training.

• Human resource systems in most SMEs lack aformal appraisal system. There is a high degreeof informality in the way these organizationswork.

Market/Contracts

• Over the period of last three years, only 21percent of the firms indicated an increase in

The SME Division is aggressively pursuing apolicy of product development for thefollowing main sectors; milk suppliers, small& medium auto vendors and assemblers,power looms, cutlery sector. It also workingtowards developing a more proactive approachby concentrating on SME clusters in areas likeGujranwala, Sialkot, Faisalabad, Daska,Wazirabad, Khairpur, Multan etc.

For the year 2007, the Bank plans to increasethe number of branches dealing with SMEs,identify untapped SMEs and specific marketsegments that require further support, initiatecapacity building measures, and broaden thebase of SME customers by tapping new/potential customers and introduce somenew products specifically for the SMEs.

role in this sector. By virtue of their wideroutreach they can reach far flung areas.

Recognizing the significant contribution ofSMEs to the development of the economy,National Bank of Pakistan established a SMEDivision in Lahore last year, working underthe Commercial & Retail Banking Group.Specific branches have been designated inSME concentrated regions and designated SMEdesks have been formed equipped withtechnically trained staff to look after thefinancing needs of the SMEs. The field staffalso visits business concern of prospectiveborrowers to get relevant information. Thefield staff also assists the untapped segmentof SMEs who are unable to approach a financialinstitution.

NBP performing loans to small and mediumenterprises stood at Rs24.610 billion as onDecember 31, ‘04. Within the next two years,the loans rose by Rs 7.367 billion and by endDecember ‘06 the bank managed to financea huge sum of Rs31.977 billion to theseenterprises. The figures given below speak ofthe importance given by NBP to SMEs.

NBP rolein SMEdevelop-ment

Performing SME

SME NPL

Total

(Rs.Bn)31.12.2005

30.196

3.209

33.405

31.12.2004

24.610

3.706

28.316

31.12.2006

31.977

4.321

36.298

LUMSresearch

14


sales as compared to almost 50 percentindicating a decrease in sales.

• SMEs do not seen to be too optimistic abouttheir future.

• A very low percentage of SMEs were intoexports.

• A direct relationship was observed between thesize of a firm and the percentage of firms intoexports.

• Most of the SMEs were not competiting withforeign firms.

Productivity and Technology

• Machinery used was imported, since the localmachine producing industry was not welldeveloped.

• As a percentage of sales, SMEs invested verylittle in machinery.

• There was lack of formal quality controlprocedures in SMEs in the country.

• The average labour productivity of the SMEswas Rs39,431/employee.

Finance/Trade Credit

• SMEs do not avail credit from banks. About 73percent of the long term financing needs of theSMEs was contributed by investment throughpersonal and family sources, while commercialbanks contributed only 16 percent of the totalrequirement.

• About 60 percent of total working capital needsof the firms was provided by personal investmentor investment through other family sources.

• 49.3 percent of the SMEs have a bank accountand only 43 percent of the payments are in thefirm of cheques.

• About 56 percent of the SMEs were notinterested in making new investments.Approximately 13 percent cited expensiveutilities as the foremost reason for this.

Governance

• Only 30 percent of the firms surveyed knewabout the SME Bank and SMEDA.

• About 89 percent of the respondents were nevercontacted by any of the organizations establishedby the government to boost the SME sector.

• 29 percent of the firms wanted a reduction inelectricity/utility charges and 13 perecent saidthat taxes should be reduced.

Conclusion

As SMEs encounter many obstacles indeveloping countries relating to access tofinance, skills, technology and markets, itposes a challenge for policy makers. Thebusiness environment in which they operateis changing rapidly as a result of marketoriented reforms and technological change.

The governments have to provide a supportivefriendly environment which is not restrictive,and which facilitates SME operations.Generally areas requiring government attentionare laws on taxation, compliance with labourand environmental requirements, infra-structure, training, access to finance amongothers.

15


Interest Rate OutlookInflation proved to be a very welcomingnumber this time around as CPI came in at an8-month low of 6.64 percent in January on ay-o-y basis; taking the period average to 8.14percent. It seems that government has takenState Bank of Pakistan’s comments, thatinflation may remain above the 6.50 percenttarget solely on account of burgeoning foodinflation and may dilute the effects of monetarytightening, to heart; which has resulted in foodinflation falling to 8.70 percent after remainingin double digits for the past five months. Onething that Central Bank really takes pride in(Rightly so) is core inflation. The core numbersare at 5.30 percent in January, whereas forJuly-January, core inflation was 5.80 percent.Inflation is likely to remain on a downwardfooting in February, largely due to the highbase effect which will carve its way in inflationnumbers till April.

Government borrowings for budgetary supportare well within the full year target of Rs120billion at Rs59.48 billion. Government is alsoreducing its reliance on SBP borrowings andhas issued PIBs in every quarter of the runningfiscal. Private sector credit is also within theyearly target at Rs227 billion. Reserve Money(currency in circulation + cash in T-Bills +

CPIdeclines

Monetaryassets –in control

ExternalSector

Deposits with SBP), over which the SBP hasexpressed concern in its MP-2H-FY07, is alittle higher at 17 percent after falling to 14percent in the previous week. However, growthin Monetary Assets is at 7.09 percent againsta full year target of 13.50 percent.

Strong inflows in the shape of Foreign DirectInvestment ($2.1 billion) and PortfolioInvestment ($697 million) have contributedto the build up the country’s foreign exchangereserves at $13.28 billion and have alsoresulted in Net Foreign Assets of the bankingsystem at Rs14 billion. The rupee dollar parityhas also come down to around 60.64/66 levelwhich is the level attained since November’06. Twin Deficits continue to be a reason fordisquiet as trade gap is increasing with a steadypace of $1 billion each month reaching $7.59billion during July-January. During the 1H-FY07 current account deficit stood at $4.2billion with Balance of Payments at negative$23 million.

State Bank has announced a PIB auction forthe last quarter of the fiscal year on March‘05 with settlement on March 06, 2007. Thedetails of the auction are as follows:

BondAuction

FutureOutlook

Regular PIB auctions are likely to bode wellfor the market as well as help reduce thegovernment reliance on SBP borrowings whichare inflationary in nature. The key indicatorwhich is most closely watched for determiningthe future direction of interest rates remains

our very own CPI; as for now we reiterate ourstance of a downward trend in interest ratesgoing forward, however for the time beinginterest rates are portraying a stable trend.

(Contributed by: NBP, Treasury Management Group)

Tenor Issue Date Coupon(%)

Target(R. Mn)

Last Cut-off(%)

3-Years5-Years10-Years15-Years20-Years30-Years

19-May-0619-May-0619-May-0631-Oct-0631-Oct-0622-Dec-06

9.109.309.6010.0010.5011.00

30003000300020002000200015000

9.739310.001710.527011.100511.420311.7006

16


Market AnalysisThe market has started the new year on apositive note with the KSE-100 Index gaining1,140 points or 11.3% during January –February 2007 to close at 11,180 points whileaverage daily turnover during the period underreview was 225.4m.

KSEIndexgains

Investor confidence was slightly restored withthe announcement by the Prime Minister onJanuary 8 to extend the capital gains taxexemption for another year till June 2008 andthe deferment of stamp duty (0.01% of facevalue) for 2 years by the Sindh Governmenton the transfer of shares. Despite the overalldeclining trend of international oil prices, themarket continued to rise gradually throughoutthe month of January because of the followingfactors:

• Moody's rating agency expressed a stableoutlook for Pakistani banking system andcontinued M&A developments in the sectorsuch as Shaukat Tarin acquiring 52% equitystake in Mybank at PKRs35 per share(PKR 5.5bn) led to further accumulation inbanking stocks.

• HYFY07 cement sales depicted 26% YoY toaround 11m tons helped rejuvenate limitedbuying activity in the sector especially DGKhan.

• Despite declining sales volume and downwardprice revision on Motor Spirit (-6.9%) and highspeed diesel (-2.6%), PSO's share price jumpedby PKR 45.90 (+16%) because of privatizationdevelopments such as the public disclosure of12 parties submitting SoQs (statement ofqualifications).

• Foreign fund inflow in the equity marketcontinued to influence local sentiments asJanuary 2007 saw a net inflow of US$ 103.6mand the year-to-date net inflow of US$ 381.6m.

Besides portfolio investments, growingconfidence of foreign investors was also evidentin the two important deals between a) PMI andLakson Group and b) Paktel & China Mobile.

• The Monetary Policy Statement for 2HFY07held no major surprises as the SBP reiteratedthat the tight money policy would continue asinflationary pressure still exists in the economyand that the FY07 inflation target of 6.5% wouldbe higher (7.5%) while the GDP growth ratewill likely be in-line with the target or slightlyexceed it.

The market experienced a moderate surge inthe last few trading days of the month becauseof local institutional activity which may beindicative of improved sentiments amongmajor participants. The last 4 trading sessionsof the month witnessed an average dailyturnover of 279m shares as compared to 140mshares during the first 15 sessions of the month.

The KSE-100 Index declined by 92 points or0.82% during February 2007 to close at 11,180while the KSE-30 Index shed 150 points or1.1% to 14,049. The average daily turnoverduring February was 289.4m shares comparedto 168.9m shares during January 2007. Atthe start of the month, the market continuedits bullish march that began last month becauseof foreign fund buying in major large capstocks such as OGDC, MCB Bank and NBP.Also, with cement prices shooting up toPKR 300 per bag from below PKR 200 perbag in the north zone led to a buying spree incement stocks helped support the rally. Duringthe first 9 days of February, the average dailyturnover was robust at about 427m sharesperhaps indicating some restoration of investorconfidence in the equity market. However,the rally ran out of fuel after the KSE-100Index crossed the 12,000-plateau on February9 but could not close at this level and soleading to a declining trend and eventually

Ind

ex

Sh

are

s (

m)

12000

11500

11000

10500

10000

9500

9000

500

400

300

200

100

003-Jan-07 19-Jan-07 09-Feb-07 27-Feb-07

KSE-100 Index (January-February 2007)Turnover Index

17


shifting into a consolidation phase for theremainder of the month. The main factors forthe correction are as follows:

• The market was in the overbought region fora while and so a technical correction wasexpected at any time.

• With MCB, the announcement by the bank'smanagement on February 9 that albeit they arereceiving purchase offers from foreigninstitutions, they are not considering anytransaction to sell at this moment led to sellingpressure by weak holders as most of the run-up in share price before this announcement wasdue to M&A rumors.

• The quarterly/annual results also dampenedinvestor enthusiasm as some results weredisappointing while others were in line orslightly exceeded expectations.

• News reports of President Bush decidingto officially warn President Musharraf thatthe U.S. Congress could cut aid to Pakistan if

it fails to step up its hunt for Taliban militantsled to more pressure on the market.

• Measure approved by the Chinese governmentto curb excess speculation that they believed haddriven stock prices to record highs. The precedingmove was complimented by a decline of 9% inthe Shanghai Composite Index; its heaviest fallsince 1997. Moreover, it also had a catas-trophic spill over effect on regional markets.

During the last 3 weeks of February, theaverage daily turnover has decreased from427m in the first 9 days to around 186m sharesin the last 7 days, indicating the lack ofenthusiasm among investors. In addition todeclining volumes, it appears that there wasselling activity from foreign funds as evidentfrom the decline in SCRAs during this period. In the first 2 weeks of the month there wasa net inflow of over US$ 150m in the SCRAswhile in the last 2 weeks, there has been a netoutflow of around US$ 26m till February 23.

CorporateResults

Overall, recent corporate results have beendisappointed as most major sectors aredepicting decelerating or negative growth.The commercial banking sector is one of theew positives when it comes to financialperformance with large banks posting robustearnings growth. As expected, the cementsector with a few exceptions recorded declinein earnings because of dramatic fall in cementprices due to thebreakdown in the marketingarrangement, however, we feel that 2HFY07

would be better financially as we expect themarketing arrangement to be re-established.The OMCs and refinery sectors also saw aslump in profitability because of lower prices,margins and inventory losses. The E&P sectorexperienced decelerating profit growth becauseof lower crude oil price during 2QFY07 andlower production.

(Contributed by Taurus Securitiesa subsidiary of National Bank of Pakistan)

18


Pakistan Economy – An UpdateThe economy is expected to grow by around7 percent in FY07, as agriculture andmanufacturing performance improved in thefirst half of FY07 and services appear to begrowing robustly. Last year, real GDP growthwas supported by a substantial rise in thegrowth of the services sector (primarily finance& insurance) for the commodity producingsectors particularly agriculture had showedweakness.

Agriculture had shown a sluggish growth of2.5 percent, because of the lacklusterperformance of the major crops, inspite ofimproved water availability, continued accessto credit and easing of the price of fertilizer.In FY07, production of major summer cropshave shown an improvement. Higher offtakeof fertilizers and an increase in productionloans for agriculture, as well as greateravailability of water all augur well for wintercrops. Strong performance by the livestocksub-sector offer hopes of a recovery.Agriculture is projected to grow by 4.0 percentin FY07.

The manufacturing sector is targeted to growby 11 percent in FY07, with large scalemanufacturing expected to grow by 8.6percent. The first quarterly report for the year2006-07 of the State Bank of Pakistan, showsthat the growth achieved in the first quarterof FY07 was primarily because ofimprovements in textiles, electronics,chemicals and metal industries. Limitedinformation available suggests that large-scalemanufacturing growth is slightly higher duringthe first half of 2007 compared with thecorresponding period of FY06.

In services, rising foreign investment andprivatization of Pakistan TelecommunicationCompany will help sustain the growth. Thefinancial sector has shown good performance.Profitability of the banks has risen substantiallyand the capital base has been strengthened.There has been a significant expansion in

business volume of the banking system.Consumer finance segment continued tocontribute towards credit growth and creditto the agriculture and SME sector maintainedthe rising trend. Net NPLs of all banks andDFIs stood at Rs43.86 billion as on September30, 2006 or 2.0% of net loans against Rs48.31billion or 2.2% three months earlier.

Total inflow of foreign investment nearlydoubled in the first eight months of FY07against the comparable period last year. Figuresshow that the inflow rose to $3952 million(including privatization proceeds) against$1992.5 million. During July-February 2006-07 foreign direct investment constituting threefourths ($2970.8 million) of the total, wasconcentrated in communication, financialbusiness, oil & gas exploration, trade, power,construction and petroleum refining.

On the external front, the current accountdeficit widened to $4.8 billion during July-January FY07. “Moreover, in the short-run,the financing of the large current accountdeficit has eased somewhat given strongforeign investment and financing flows.Indeed, it is likely that despite the expectedlarge fiscal and current account deficits thecountry’s debt profile will continue to improvein FY07, with a continuing fall in the debt toGDP ratio”, states the SBP Second QuarterlyReport for the year 2006-07 on the State ofPakistan’s Economy.

Trade figures for July-February 2006-07 reveala trade deficit of $8.9 billion as exports roseto $10.91 billion ($10.50 billion in July-February 2005-06) and imports stood at $19.80billion ($18.00 billion in July-February 2005-06). The sluggish growth in exports (3.86%),was because of decline in exports of itemslike rice, raw cotton, cotton cloth, bedwear,carpets & rugs, sports goods, leather andleather manufactures, footwear, surgical goods& medical instruments, chemicals &pharmaceuticals among others. Slowdown in

Agricul-turegrowthprospectsimprove

LSMexpectedto grow

Financialsectorperformswell

FDIincreases

Deficitwidens

19


exports needs to be carefully examined, forthe importance of sustaining a strong exportgrowth cannot be overstated. Meanwhile, thegovernment has revised trade deficitprojections to $13.4 billion against the originaltarget of $9.4 billion set for the year.

Meanwhile remittances from workers abroadshowed an increase of 21.82 percent to$3416.5 million during July-February 2006-07 against $2804.65 million in the comparableperiod a year earlier. This was attributable tohigher inflows from Saudi Arabia, UAE, theUS, Kuwait, Qatar and Oman.

The inflationary pressures in the economycontinued to ease in FY07, driven by the tightmonetary posture of the central bank. TheSBP continued to focus on moderating theexcess demand pressures in the economy.Headline CPI inflation declined to 7.4 percentin February 2007 YoY basis from 8.0 percentregistered in the same month of last year.However, while food inflation rose to 10.0percent from 7.5 percent in the same period,non-food inflation declined to 5.6 percentfrom 8.4 percent a year earlier. Core inflation

(non-food non energy) also declined to 5.7percent in February 07 from 7.0 percent ayear earlier. Food inflation has been in doubledigits since August 2006, except for January07. Containing inflation continues to be amajor challenge for the State Bank of Pakistan.Monetary policy tightening measures takenearlier and the downward revision in petroleumprices by the government wef January 16,2007 would have a further dampening effecton non-food inflation and the double digitfood inflation is anticipated to ease off due toimproving supply condition of key food items.

On the fiscal side, the growth in tax revenuesis quite encouraging. While direct taxcollections have risen, indirect tax receipts ofthe CBR have declined. However, revenuetargets for FY07 are likely to be achieved.Expenditures have risen with a substantialgrowth in current expenditures, essentiallycaused by a rise in domestic interest paymentsand an increase in other general public servicespending. The strong receipts are expected topush up the tax GDP ratio, but Pakistan’sperformance continues to lag behind otherregional benchmarks.

Inflation-arypressuresease

Textrevenuesgrow

20


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1194

5

2729

1.57

0.36

1258

5

2502

1.49

0.30

3638

1117

415

10

0.32

0.97

0.13

5079

1527

726

14

0.32

0.96

0.16

5828

1757

122

92

0.29

0.89

0.12

1110

11.

4914

674

1.93

1508

71.

7916

322

1.42

2297

01.

4425

691

1.29

21


* In

clud

es p

ublic

sec

tor

busi

ness

loan

s an

d co

nsum

er fi

nanc

ing.

Not

e: C

lass

ifica

tion

of a

dvan

ces

by b

orro

wer

s w

as re

vise

d in

Dec

embe

r 20

03, b

reak

-up

of A

dvan

ces

by p

ublic

/pri

vate

ban

ks w

as n

ot a

vaila

ble.

Mot

or V

ehic

les

& T

rans

port

Equ

ipm

ent

Pub

lic S

ecto

r Com

mer

cial

Ban

ksD

omes

tic P

rivat

e B

anks

Fore

ign

Ban

ks

Com

mer

cial

Ban

ks’ A

dvan

ces

(Gra

nd T

otal

)*

Com

mer

cial

Ban

ks’ A

dvan

ce T

o P

riva

te S

ecto

rB

usin

ess

(Tot

al)

Pub

lic S

ecto

r Com

mer

cial

Ban

ksD

omes

tic P

rivat

e B

anks

Fore

ign

Ban

ks

Oth

er P

riva

te B

usin

ess

& A

ctiv

ityP

ublic

Sec

tor C

omm

erci

al B

anks

Dom

estic

Priv

ate

Ban

ksFo

reig

n B

anks

Tran

spor

t & C

omm

unic

atio

nP

ublic

Sec

tor C

omm

erci

al B

anks

Dom

estic

Priv

ate

Ban

ksFo

reig

n B

anks

Com

mer

ce &

Tra

deP

ublic

Sec

tor C

omm

erci

al B

anks

Dom

estic

Priv

ate

Ban

ksFo

reig

n B

anks

Con

stru

ctio

n &

Rea

l Est

ate

Bus

ines

sP

ublic

Sec

tor C

omm

erci

al B

anks

Dom

estic

Priv

ate

Ban

ksFo

reig

n B

anks

Sub

-Tot

al

Sub

-Tot

al

Sub

-Tot

al

Sub

-Tot

al

Sub

-Tot

al

Sub

-Tot

al

6880

1894

0.92

0.25

5181

511

0.68

0.07

7141

576

0.85

0.07

4710

1379

620

59

0.41

1.20

0.18

7836

2676

637

64

0.49

1.68

0.24

1065

135

918

1166

0.54

1.81

0.06

8774

1.18

5692

0.75

7717

0.92

2056

51.

7938

366

2.41

4773

52.

41

6426

3

7205

8.61

0.96

5113

1

3810

6.71

0.50

5779

6

3817

6.87

0.45

9620

8219

356

45

0.84

7.17

0.49

1194

210

7686

5004

0.75

6.76

0.31

2142

914

9823

7957

1.08

7.55

0.40

7146

89.

5754

941

7.21

6161

37.

3297

458

8.50

1246

327.

8217

9209

9.03

8390

2248

1.12

0.30

9903

3421

1.30

0.45

1065

4

3381

1.27

0.40

934

1999

633

95

0.08

1.74

0.30

9016

3602

766

51

0.57

0.42

6474

4579

310

271

0.33

0.52

1063

81.

4213

324

1.75

1403

51.

6724

325

2.12

5169

43.

2462

538

3.15

8586

0

2147

4

11.5

0

2.88

9189

2

1616

8

11.9

8

2.12

1078

82

1456

8

12.8

1

1.73

1739

175

555

1358

9

1.52

6.59

1.19

2538

212

7327

1682

7

1.59

7.99

1.06

2870

815

7594

1879

7

1.45

7.94

0.95

1073

3414

.38

1080

7014

.19

1224

5014

.54

1065

359.

2916

9446

10.6

320

5099

10.3

3

4028

13

9545

7

53.9

5

12.7

8

4110

01

8394

3

53.7

9

11.0

2

5077

13

7853

2

60.3

0

9.33

1348

2360

1703

7990

0

11.7

652

.47

6.97

1897

5382

0215

9483

2

11.9

051

.46

5.95

2342

8610

1924

710

9417

11.8

051

.34

5.51

4982

7066

.73

4949

5464

.99

5862

4569

.63

8162

4671

.18

1104

800

69.3

113

6295

068

.66

7466

4076

1550

8419

9611

4667

715

9392

019

8520

0

1569

1337

0.21

0.18

7596

678

1.00

0.09

3898

766

0.46

0.09

1741

4825

405

0.15

0.42

0.04

2953

9131

1391

0.19

0.57

0.09

4078

1228

651

41

0.21

0.62

0.26

2906

0.39

8274

1.09

4664

0.55

6971

0.61

1347

50.

8521

505

1.09

22


* includes public/private sector business loans and consumer financing.

Note: Classification of advances by borrowers was revised in December 2003. Prior to December 2003, break-up of advances by public/private bankswas not available. 2003 figures are for end-December and are not comparable with the following three years.

Consumer Financing By Commercial Banks in PakistanClassified by Borrowers

Commerical Banks’ Advances And Weighted Average Interest Rate

Public Sector BanksAmount (Rs. Bn)% Share in TotalInterest Rate (% per annum)Domestic Private BanksAmount (Rs. Bn)% Share in TotalInterest Rate (% per annum)

Foreign BanksAmount (Rs. Bn)% Share in TotalInterest Rate (% per annum)

All BanksAmount (Rs. Bn)% Share in TotalInterest Rate (% per annum)

Dec-03 Growth Jun-04 Growth Dec-04 Growth Jun-05 Growth Dec-05 Growth Jun-06 Growth

462.842.249.10

9.38-3.16-19.04

320.025.769.21

-30.9-39.01.21

371.624.198.31

16.1-6.1-9.8

405.3023.929.25

9.1-1.111.3

444.522.9710.25

9.7-4.010.8

464.7022.4410.45

4.5-2.32.0

521.247.576.80

24.019.79

-15.42

791.3063.696.63

51.8233.90-2.50

1011.465.856.42

27.813.39-3.17

1135.2267.018.46

12.241.7531.78

1327.4068.609.91

16.932.3717.14

1424.9068.8010.36

7.350.294.54

111.710.196.72

-11.713.04-13.51

131.1010.556.51

17.373.51-3.13

152.99.967.56

16.63-5.6616.13

153.609.0710.24

0.46-8.9335.45

163.28.4312.02

6.25-6.9817.38

181.608.7713.04

11.273.968.49

1095.71007.76

12.97-

-17.45

1242.401007.28

13.39-

-6.19

1535.91006.99

23.62-

-3.98

1694.201008.81

10.31-

26.04

1935.1100

10.17

14.22-

15.44

2071.20100

10.61

7.03-

4.33

Banks/Type of FinanceEnd-Dec

2003% Sharein Total

Advances2004

% Sharein Total

Advances2005

% Sharein Total

Advances2006

% Sharein Total

Advances

End-June

House Building FinancePublic Sector Commercial BanksDomestic Private BanksForeign Banks

Sub-TotalAuto FinancePublic Sector Commercial BanksDomestic Private BanksForeign Banks

Sub-TotalCredit Cards FinancingPublic Sector Commercial BanksDomestic Private BanksForeign Banks

Sub-TotalConsumer Durables LoansPublic Sector Commercial BanksDomestic Private BanksForeign Banks

Sub-TotalPersonal LoansPublic Sector Commercial BanksDomestic Private BanksForeign Banks

Sub-TotalConsumer Finance (Total)Public Sector Commercial BanksDomestic Private BanksForeign Banks

Sub-TotalCommercial Banks’ Advances(Grand Total)*

307129064018

0.020.900.28

49965202679

0.040.570.23

2043220254930

0.131.380.31

3417313757000

0.171.580.35

17231 1.20 9698 0.85 28998 1.82 41792 2.11

2056427696174

0.142.980.43

432252415874

0.042.200.51

699585466892

0.043.670.43

227886998351

0.014.470.42

50999 3.55 31547 2.75 66137 4.15 97277 4.90

063316769

00.440.47

1154736892

00.480.60

55108038687

00.680.55

01811515408

00.910.78

13100 0.91 12376 1.08 19545 1.23 33523 1.69

766926..

0.050.06

..

1340551..

0.120.05

..

4401857

..

0.030.12

..

5101007

..

0.030.05

..1692 0.12 1891 0.16 2297 0.14 1517 0.08

147092675112020

1.021.860.84

136401820416237

1.191.591.42

357964370812344

2.252.740.77

431795649220751

2.182.851.05

53480 3.72 48081 4.19 91848 5.76 120422 6.07

178388968328981

1.246.242.02

159225598931682

1.394.882.76

3903313693932853

2.458.592.06

4733319568851510

2.389.862.59

136502 9.50 103593 9.03 208825 13.10 294531 14.84

1436680 .. 1146677 .. .. ..1593920 1985200

(Rs Mn)

23


Book ReviewsThe State of Pakistan’s Competitiveness 2007Competitiveness Support Fund

The Competitiveness Support Fund is a jointinitiative of the Ministry of Finance,Government of Pakistan and the USAID,established to support Pakistan’s goal ofshaping a more competitive economy byproviding input into policy decisions, workingto improve regulatory and administrativeframeworks and working to enhance public— private partnership within the country.

It is the first annual report on the State ofPakistan’s Competitiveness; as earlier therehad never been an indepth analysis ofPakistan’s competitiveness. With thepublication of the Report, Pakistan has joinedthe league of economies like the US, EuropeanUnion, Singapore, some Islamic countrieswho annually publish a competitiveness report,revealing strengths and weaknesses of theireconomies. It thus provides a framework forevaluation.

The objective of this Report is to present theglobal competitiveness rankings for Pakistan,explain these results and to focus attention onpotential areas of priority for improvingcompetitiveness over the short to mediumterm. There is now a way to measure Pakistan’scompetitiveness and benchmark the progressfrom year to year. For benchmarking purposes,five countries Bangladesh, China, Indonesia,Malaysia and Sri Lanka have been selected.

Pakistan ranked 67th on the BusinessCompetitiveness Index out of 121 totalcountries in 2006 (it was 77th in 2004) and91 s t (94 t h in 2005) on the GlobalCompetitiveness Index. The gap betweenPakistan’s performance in these two rankingsis partly explained by the country’s low scoresin health and education, which are includedin the GCI but not the BCI.

Pakistan’s competitiveness rankings andimpressive growth reflect increasedmacroeconomic stability. Reforms initiated

in the last few years have brought positiveresults. Pakistan ranks relatively high,especially among low income countries, withrelatively high marks given to both, the GoPfor the national business environment and toPakistan’s relatively competitive private sectorfor the quality of its operations and strategy.Pakistan ranks quite well in various areasrelated to government promotion of innovationand infrastructure.

While there has been much emphasis ongovernment reforms in Pakistan in recentyears, it appears that the private sector alsoneeds some reforming as well, especially inthe area of corporate governance and modernapproaches to the workforce. The weak pointsin the private sector are related to corporategovernance and modern management andmotivation of the workforce. The private sectorneeds to improve its use of human resources.

The Report mentions Pakistan’s position withregard to the components of the GlobalCompetitiveness Index and the conclusionsdrawn. This Index has nine components, whichare, institutions, infrastructure, macroeconomy,health and primary education, higher educationand training, market efficiency, technologicalreadiness, business sophistication andinnovation. The economy has done well inrecent years because of the reforms introduced,however, the government is conscious thatmore needs to be done in areas that are weaklike, infrastructure, business environment andis embarking on a set of second generationreforms.

Management Concepts & Cases 2007Prof. Dr. Khawaja Amjad Saeed

Management: Concept & Cases consists ofthree sections; Concepts — spreading over21 chapters, selected current articles; writtenby the author and 12 cases from South AsianRegion. The first section — Concepts coverstopics such as, Management as a Discipline,Tools of Management Thought, ManagersRole and Impact of External Environment,Corporate Planning, Organizing,

24


Decentralisation & Delegation Staffing,Motivation, Leadership, Controlling, MIS,among others.

Section II contains some articles related tothe title of the book, written by the authorearlier and presented in various conferences.These include Human Resource Management& Development, Knowledge Management,Sharing Productivity Gains: A Survey ofIncentive Plans Globally Practiced,Motivation, The Rise of Reengineering andPromoting Corporate Social Responsibility.

The Third section are Cases for Analysis,where 12 real life cases are given, in the areasof decision making, entrepreneurship,personnel management, industrial relations,managing change.

It’s a good book on Management for students,and others interested to read Managementliterature.

Denizens of Alien WorldsA study of Education, Inequalityand Polarization in PakistanDr. Tariq Rahman

The book describes the three major streamsof school education in Pakistan: madrassas,Urdu medium schools and elitist Englishmedium schools. Each caters to the differentsocio-economic classes in the country and thestudents of these institutions hold divergentviews about tolerance, war and genderequality.

The book provides new material andsuggestions for the improvement of alleducational institutions, including highereducation, so as to create a society that valuesknowledge, justice and harmony.

In the introductory chapter, the author quotessome of the books and official reports oneducation in Pakistan. It states the objectivesof the present book, which are: to give ahistorical overview of the development of

educational institutions in British India; todescribe how schools and universities aresituated in contemporary Pakistan; and tounderstand how Pakistani society is polarizedalong socio-economic lives.

The second chapter discusses the educationpolicies pursued. The next three chapters aredevoted each to the Urdu medium schools,the English medium schools and theMadrassas.

The Urdu medium schools are the largest innumber. The teachers receive low salaries andthe quality of instruction in most schoolscatering to the common people is very low.Dropout is more compared to the other typeof schools. The teachers, at least, in the boy’sschools, often carry canes and punishment isallowed. This in fact, is a major reason whychildren tend to drop out of school.

There is a demand for English mediumschools, as English is considered the key toa good future. The children of such schools,states the author, ‘are alienated from Pakistan,especially from its indigenous languages andcultures. This makes some of them look downu

Documents

Contents · efficiency and productivity. There is evidence in the newly industrialized economies, of a well-developed understanding of the appropriate role for the SME sector as a