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Analysis of Pakistani Industries

TABLE OF CONTENTS

TOPIC Page No.

Introduction 2
Gross Domestic Product (GDP) 2
Inflation 5
Unemployment 7
Income Inequality 8
Balance of Payments 10
Foreign Trade 13
Exchange Rates 16
Foreign Direct Investment (FDI) 17
Pakistan’s Strengths and Weaknesses 19
World Trade Organization (WTO) 22
Conclusion 22
Bibliography 23
Appendix 24
Glossary 25

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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 one’s 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 of
imports, and the overvalued exchange rate necessitated immediate action on the part of the
government. Government policies afforded liberal incentives to industrialization, while public
development of the infrastructure complemented private investment. Some public manufacturing
plants were established by government holding companies. Manufacturing proved highly
profitable, attracting increasing private investments and reinvestment of profits. Except for large
government investments in the Indus irrigation system, agriculture was left largely alone, and
output 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 of
people, who were largely traders who migrated to Pakistan's cities, especially Karachi, at
partition. 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 and
ownership in manufacturing during the first two decades after independence.
Between 1947-1952 Pakistan’s average GDP was just 3%, however, in 1952, Korean War broke
out and the overall demand of goods increased worldwide and Pakistan benefitted from it
significantly with its GDP increased at a whooping rate of 9.4%. After Korean War ended there
was a worldwide recession. However, Pakistan was the sole exporter of Jute at that time and
Pakistan’s conditions didn’t get worse. Till 1958 Pakistan maintained an average GDP of 3%.
If one examines Pakistan economic growth record, the 1960’s stands out as the decade with the
best performance. Throughout 60’s Pakistan maintained the average GDP of 6.2%. The reason
for this was Ayub Khan’s extensive industrialization and development. The high growth rate in
large scale manufacturing continued in the first few years of the Ayub’s regime with the average

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for the period 1960-5 rising to a phenomenal 16.9%. In 1966 the GDP fell to 3.1% because of
war 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 economy
because East Pakistan was the major producer of Jute. Bhutto became the Prime Minister of
Pakistan 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 in
Pakistan. In 1972 GPD fell to just 1.2%. This occurred mainly because of war with India and
also because Pakistan lost revenue which it used to earn from Bangladesh. Then Bhutto devalued
the Rupee by 131% which boasted our exports by 153%. He introduced several reforms and
public development projects because of which Pakistan was able to achieve the average growth
rate of 7.5 till 1974. 1975, the height of Bhutto’s nationalization program, private sector
investment was only 15% of the total. Cotton crop was also destroyed and there were several
floods during his last years of rule. 1976 saw Pakistan’s worst floods, devastating large areas of
cultivated land. All these factors caused Pakistan’s 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 countries
increased because of Pakistan’s role in war against the USSR. This increased the income of local
people and the domestic demand of goods and services increased. This aid also helped Zia
regime to finance in the industrial sector. This all caused Pakistan’s GDP to grow by average
6.5% during1980-88 and at that time it was only exceeded by that of Korea, China and Hong
Kong.
During the period 1988-99, there were seven different governments and two elected prime
ministers who were both elected twice. This was a highly uncertain period and no government
completed their constitutional tenure. The economy of Pakistan slowed to an average annual
growth of 3.8 percent during the 1990s (MSN Encarta). Factors contributing to the sluggish
growth 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 investor
confidence.

The economic performance of the 1990s was also related to the structural adjustment programs
(SAPs) of the World Bank and the International Monetary Fund (IMF). Loans from these
international lending agencies were subject to conditions on Pakistan’s national economic
policies. Pakistan received its first formal loan in 1988. In Pakistan the primary focus of the
IMF-sponsored program was to lower the budget and current-account deficits. These objectives
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were to be achieved by reducing public expenditures and broadening the tax base. In addition, in
1992-1993 the IMF further insisted that Pakistan reduce defense expenditures, impose an
agricultural tax, and improve methods of tax collection. These reforms were never fully
implemented, however, and the IMF-sponsored program did not achieve the desired result. After
Pakistan exploded a nuclear device in May 1998, it faced the imposition of international
sanctions. Many countries including US and UK stopped importing goods from Pakistan which
also affected our production. (Source: MSN Encarta)

During the time of General Pervez Musharraf, the economy grew at an average rate of 6.3 per
cent a year. After Pakistan joined in the war against terror it received foreign aid of billions of
dollars. Heavy development projects were launched and ignited the growth rate. 7 licenses were
sold to cellular companies at a very high cost and many state owned companies were privatized.
These firms started to perform well and their productivity increased. Tax collection increased by
18 percent during July-April 2007 and exports increased by 18.3 percent and imports up by 8.9
percent. Source (Pakistan Times). However, only the Services sector grew significantly and not
the manufacturing sector. No major industries were set up and in 2008 when there was a
worldwide recession, Pakistan’s economy suffered heavily.

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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 and
nature. Inflation is caused by some demand side factors (Increase in nominal money supply,
Increase in disposable income, Expansion of Credit, Deficit Financing Policy, Black money
spending, Repayment of Public Debts, Expansion of the Private Sector, Increasing Public
Expenditures) 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 diminishing
returns)
Inflation rates from 1991 to 1995 have ranged between 9.25 and 12.9 percent. The high rates of
monetary expansion, low rate of economic growth in three out of the five years and adjustment
in administered prices contributed to the relatively high rates of inflation. Growth in international
prices (in dollar terms) has been moderate or negative. Except in 1995 when price of tradable (in
rupee terms) increased by 19 percent. Substantial depreciation of the exchange rate in 1990 and
in 1994 also resulted in a relatively sharp increase in the price of tradable (in rupee terms) in
these two years. The pressure on international reserves and an appreciation of the real exchange
rate necessitated depreciation in 1994.
The pressure on the exchange rate and reserves was caused because of the fiscal
and monetary indiscipline during 1991-1993. The period also marked a major thrust in economic
liberalization of the economy. The rate of economic growth, which had flattered in 1989 and
1990, recovered strongly in the next two years. The recovery was short lived as growth rate
plummeted 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 to
12.6 percent in 1990 and since then has been in the region of 16 to 18 percent except in 1992
when it reached an unprecedented 30 percent. High budget deficits during these years

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

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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 money
supply in 1994 was mainly on account of accumulation of net foreign assets rather than domestic
credit creation. As mentioned above, the buildup of foreign reserves had become necessary
because of a drawdown of reserves in the previous years. Thus the reasons for the increase in
money 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 during
the first eight years of the 1990s. Not surprisingly, one of the thorniest issues in Pakistan’s policy
arena during those periods has been how to put inflation under effective control The persistence
of a double-digit inflation along with large fiscal deficit (7.0% of GDP) have been the major
source of macroeconomic imbalances in the 1990s. There has been a general agreement that the
excessive 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 for
the 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-food
inflation 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 of
September 11 and continuation of a drought-like situation in the country. Better availability of
essential commodities, due to improved production of food and non-food items as well as the
food stocks for prior periods, had a moderating influence on inflation.

Inflation Among the most appreciated developments, during fiscal year 2005-06, was the
significant abatement of price pressure over the course of the year. For the first ten months of the
fiscal year July–April 2005-06, all important barometers of price pressure in the economy
indicated a steady deceleration in inflation. Inflation during the first ten months July-April of the
current 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 the
shape of overall inflation decelerating to 6.2 percent and food inflation to 3.6 percent in April
2006. The expenditure on food items constitutes bulk of the monthly expenditure of the poor
segment of the society. Sharp increases in the prices of some of the strategic food items put
pressure on the poor. The higher inflationary trend in Pakistan over the last two years has been
the outcome of pressure that emanated from demand and supply sides. Four years of strong
economic growth has given rise to the income levels of various segments of the society. The
rising level of income have strengthened domestic demand and put upward pressure on prices of
essential commodities. Supply side pressure emanated from a variety of factors, prominent
among those are: increase in support price of wheat for three years in a row, shortage of wheat
owing to less than the targeted production, mismanagement in wheat operation in one of the
wheat deficit province, inter-provincial ban on the movement of wheat resulting in sharp
increases 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 about
by a significant diversion of sugarcane into ethanol (petroleum substitute), by the largest
producer, 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 the
major part of the population. It needs to be controlled by strategic planning. Domestic production
should be encouraged instead of imports; investment should be given preference in consumer
goods instead of luxuries, Agriculture sector should be given subsidies, foreign investment
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should be attracted, and developed countries should be requested for financial and managerial
assistance. And lastly a strong monitoring system should be established on different levels in
order 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 other
problems and is a result of a number of problems. High unemployment results in wastage of
resources and depression of income. And most certainly it also effects the social and emotional
life of a person.
It is very unfortunate but true that searching for statistics regarding the unemployment rate of
Pakistan, it is nearly impossible to find relevant figures due to a lack of base data and massive
governmental tempering of statistics which have made the validity of the available data
questionable. In 1955, there was a survey held which tried to give the false impression of full
employment in the agriculture sector. However this proved wrong when in 1965 a survey was
held 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 to
reality.2
In all the five-year plan starting from 1955, policies were included at the reduction of
unemployment, however due to inadequate efforts on the part of the government most of them
proved wane.
According to labor force survey 2001-02, Pakistan labor force stands at 43.17 million and 3.6
million people were of active labor market, looking for a job. Recent trend indicates that
unemployment rate increased from 7.8 percent in FY00 to 8.3 percent in FY02. However it again
fell to 7.7% in FY04. According to an article by Dr. Ishrat Hussain the main reasons for the
decline in unemployment during this time is “inefficient utilization of factors of production that
2
Dr. Khushi M.Khan “Unemployment and the People’s Works Programme”

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was a characteristic of public sector dominated economy has been minimized as a result of
structural reforms in tariffs, taxation, financial markets and privatization. The demand for labor
inputs per unit of output has consequently been reduced due to this compositional shift from the
public to private sector employment. At the same time labor force participation rate is on an
upward incline because of the entry of large number of females. High unemployment rates under
these conditions of productivity and efficiency gains are therefore not surprising.”
Regional disparity is evident with regard to unemployment rate. Urban unemployment rate (9.8
percent) was higher than the rural one (7.5 percent). This also includes the disguised
unemployment 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% in
October 1999, and it rose to 8% in October 2004.
There are a number of reasons for unemployment in Pakistan, firstly, there is a serious mismatch
between the jobs demanded by the emerging needs of the economy and the supply of skills and
trained manpower in the country. While the economy is moving towards sophisticated sectors
such as telecommunications, information technology, oil and gas, financial services, engineering
goods 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 on
one hand and the shortages of essential skills required to keep the wheels of the economy
moving. There is also a lack of technical and vocational training to fill out the gaps between the
demand if skills and their availability, and so there large number of experienced technicians and
professionals who have migrated to the Middle East and elsewhere.

INCOME INEQUALITY

Economic inequality refers to disparities in the distribution of economic assets and income. The
term 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 most
commonly used in the studies is the Gini coefficient.
The Gini coefficient is a measure of statistical dispersion most prominently used as a measure of
inequality of income distribution or inequality of wealth distribution. It is defined as a ratio with
values between 0 and 1: A low Gini coefficient indicates more equal income or wealth
distribution, while a high Gini coefficient indicates more unequal distribution. 0 corresponds to

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perfect equality (everyone having exactly the same income) and 1 corresponds to perfect
inequality (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 the
rural areas because:
• Urban labor force is more diversified in terms of skill, education, union membership, coverage
by the minimum wage legislation and therefore the wage incomes are more unevenly distributed
than in rural areas;
• Income from self-employment is more concentrated in urban areas than in rural areas because
urban 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 the
urban areas Gini coefficient increased from 0.3698 to 0.4068 over 1963-67 but declined to
0.3694 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 shares
reversed. Income inequalities in rural areas, on the other hand, declined from 0.3543 to 0.3122
over the 1963-70 period. The shares of various income values also show similar trends. The
increase in income inequalities in urban areas up to 1967 indicate that high growth was job-less
and real wage rates had been declining. Improvements in gini coefficient in the subsequent
period of the 1960s may have been due to increase in wages and legislation aimed at protecting
the workers as a response to the demonstrations against the government policies that had led to
rising income inequalities. The decline in inequalities in rural areas seems to have been due to
green 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 is
the 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 and
financial undertakings of the government focus on the basic needs strategy during the period
were expected to result in lower income inequalities. Probably the sharp increase in inflation
during the period had taken a toll of the poor resulting in a reduction in the share of income of
the poor and the middle class. Moreover, the banks were nationalized in the 1970s on the pretext
that 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 improved
trends in income inequalities in 1980s has been the increases in employment and real wages in
the agriculture and manufacturing sectors.
Whereas in the next three years, 1988-91, Gini coefficient in the urban areas remained somewhat
constant, however it increased sharply in the rural areas. The ratios of shares of lowest and
highest income values also show sharp increases in income inequalities. In the rural areas the
Gini 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

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have increased since then. Gini coefficient increased in rural areas from 0.3517 to 0.3762 and in
urban 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 the
maximum 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 rural
areas. In the urban areas, however, income inequality increased rapidly. The urban income
distribution 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 the
poverty 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 as
well as progressive, the incidence of taxes up to 1988 was higher on richer sections of the
society. However the decline in corporate income tax rates and tariff rationalization policies have
benefited the producers, while with the broadening of sale tax base, the tax burden on the poor
has increased.

BALANCE OF PAYMENTS
The balance of payments (BoP) means 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.

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 the
import bill exceeds the export bill.
3
During 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 its
agricultural produce. It had surplus Balance of Trade up to 1954-55. The year 1955-56 was the
last year in which Pakistan had a favorable balance of trade. After that it ran into BOP problems
due 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 of
Payment.
In 1971, Pakistan's exports decreased considerably and its imports surged, especially of capital
goods, thus creating a trade deficit. A number of Pakistanis during this time migrated to the
Middle East. Workers’ remittances, especially from the Middle East countries, increased
tremendously 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 account
deficit in BoP remained 5.6 per cent on an average during 1971-72 to 1977-78.

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

Muhammad Ashfaq

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Pakistan's balance of payments was highly dependent on workers’ remittances but these
remittances 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. It
grew up from $107 million in 1971-72 to a peak level of $2989 million in 1982-83 and exceeded
the 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, from
1977-78 to 1982-83 and reached a peak level of $2886 million in 1982-83. This inflow gradually
decreased in the last two years of his regime.

The magnitude of workers' remittances from 1978-79 to 1984-85 was $1849 million on an
average. The trade deficit as percentage of GNP rose to 9.9 per cent while current account deficit
in 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 grew
on 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 BoP
decreased to $1211 million on an average during these years. The magnitude of workers’
remittances 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 in
1994-95. This year workers’ remittances were $ 1866 million. After 1994-95, workers
remittances depicted a declining trend.
The current account deficit in balance of payment declined to 3.1 per cent during 1985-86 and
1987-88.
The BoP position witnessed a significant improvement during first tenures of both Ms. Benazir
Bhutto (1988-89 to 1990-91) and Mohammad Nawaz Sharif (1991-92 to 1993-94). The deficit in
BoT decreased to $2728 million on an average between 1988-89 to 1990-91 and to $2501million
on 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 and
BoT remained stabilized during the first tenures of both- Benazir and Nawaz Sharif - (1988-89 to
1993-94).
Trade deficit as a percentage of GDP stabilized on an average around 4.7 per cent during
Benazir's and Nawaz's tenures. The current account BoP as a percentage of GDP on an average
was 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 million
and $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 current
account balance of payments increased to 5.8 per cent. There was a sudden upsurge in the inflow
of workers’ remittances from Kuwait and were $1866 million in 1994-95. This inflow could not
maintain its momentum and was reduced in the following two years of Benazir's government.

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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 macroeconomic
management and lack of commitments to undertake difficult structural reforms.
The overall balance of payment position during the second tenure of Nawaz Sharif (1997-98 to
1999-00) witnessed a significant improvement despite the adverse external environment.
However, a number of fiscal and monetary activities were implemented which discouraged free
trade and economic transactions abroad, for instance the freezing of FCAs, Hub Power Dispute
and Political uncertainty eroded the confidence in the economy.
Both current account deficit in BoP and BoT decreased in this period. The deficit in the balance
of trade decreased to $1788 million while current account in the BoP decreased to $1833 million
during 1997-98 and 1999-00 despite the sanctions imposed by the G-8 countries on bilateral and
multilateral 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 cent
while current account deficit in balance of payments declined to 2.9 per cent on an average
during 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. His
government launched a comprehensive set of economic stabilization and structural reform
measures. The government took steps in the early 2000s to liberalize and deregulate the
exchange 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 deficit
in 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 other
European countries and reached to $4237 million in FY02-03.
One major structural problem of exports is that it is based on relatively low value added
products. 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 of
commodities namely machinery, petroleum & petroleum products, chemicals, transport
equipments, 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 balance
of 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 in
2000/01 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 surgical
instruments. Imports increased in 2000/01 primarily due to higher imports of petroleum and
petroleum products, and machinery.

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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 export
earnings.
Pakistan’s balance of payments showed a deficit of $ 6,878 million in its current account
balance during 2006-07 as against a deficit of $ 4,990 million during 2005-06. The capital
and financial account showed a net inflow of $ 10,449 million and increased by $ 4,378
million over net inflows of previous year resulting in an increase of $ 2,396 million in overall
surplus during the year 2006-07.

Although Pakistan is trading with a large number of countries, yet major portion of imports
comes 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 geographic
concentration of imports is undesirable and is in favor of exporting countries.

FOREIGN TRADE

Pakistan’s balance of payments has always been in the deficit mainly because
successive governments of Pakistan have focused on saving the foreign
exchange rather than earning it. On the one hand, there has been an anti-export
bias and on the other hand a very complex system of foreign exchange control
to 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 of
products. Imports have exceeded exports in almost every year since 1950, and Pakistan had a
deficit on its balance of trade each year from FY 1973 through FY 1992. In FY 1991, exports
were US$5.9 billion, compared with imports of US$8.4 billion, which resulted in a deficit of
US$2.5 billion. In FY 1992, exports rose to an estimated US$6.9 billion, but imports reached
an estimated US$9.3 billion, resulting in a trade deficit of US$2.4 billion. Economists forecast
a trade deficit of around US$2.5 billion for FY 1993. Pakistan's terms of trade , expressed in an
index 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 demand
and changes in the world oil price. In FY 1982, oil products accounted for around 30 percent of
Pakistan's imports, falling to an annual average of 15 percent in FY 1987 to FY 1990, rising to
over 21 percent in FY 1991, but dropping back to 15 percent in FY 1992. Other important
categories of imports in FY 1992 included non electrical machinery (24 percent), chemicals (10
percent), transportation equipment (9 percent), and edible oils (4 percent).
Although import-substitution industrialization policies favored domestic manufacturing of
substitutes for imports, officials also encouraged manufactured exports in the 1950s and 1960s.
In the early 1980s, incentives were again provided to industrialists to increase manufactured
exports. There was some diversification during the late 1980s as the share of manufactured
goods rose. This share of primary goods fell from 35 percent to 16 percent between FY 1986
and FY 1993. During the same period, the share of semi manufactures rose from 16 percent to
20 percent, and that of manufactured goods rose from 49 percent to 64 percent.

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Analysis of Pakistani Industries

Nonetheless, in the early 1990s the export base remained primarily dependent on two
agricultural products, cotton and rice, which were subject to great variations in output and
demand. In FY 1992, raw cotton, cotton yarn, cotton cloth, and cotton waste accounted for 37
percent of all exports. Other important exports were ready made garments (15 percent),
synthetic textiles (6 percent), and rice (6 percent).
In the early 1990s, Pakistan's balance of trade remained particularly vulnerable to changes in
the world economy and bad weather. Sharp increases in crude oil prices, such as those of 1979-
81 and 1990, raised the nation's import bill significantly. Total exports, on the other hand, were
more sensitive to agricultural production. The decline in cotton production in FY 1993, for
instance, seriously affected the export level.
Sources for imports and markets for exports were widely scattered, and they fluctuated from
year to year. In the early 1990s, the United States and Japan were Pakistan's most important
trading partners. In FY 1993, however the United States accounted for 13.7 percent of
Pakistan's exports and 11.2 percent of its imports. Japan accounted for 6.6 percent of exports
and 14.2 percent of imports. Germany, Britain, and Saudi Arabia were also important trading
partners.
The subsequent decade saw a considerable increase in the trade statistics due to several
expansionary policies adopted by President Parvez Musharraf. Overall exports of the economy
booted by more than 100 % from $8.5 billion, which were stated when Musharraf took the
office till $18.5 billion annually in the Fiscal year 2007. The growth too of its major leading
export boosting sector was seen quite considerably. Textile industry which accounts for a major
percentage of Pakistan’s exports from a poultry $5.2 billion to a massive $11.2 billion (source
Mirza Rohail B Economic Comparison 1999-2007 and beyond).
On the import bill however the decade saw a considerable increase in imports but, however
unlike the previous decades, this era was marked by heavy import of massive capital tools to
boost the industrial competitively and pace. On the other hand, apart from petroleum import
increase, the deficit on the Balance of Payments dropped by 14% average annually.

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Analysis of Pakistani Industries

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

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Analysis of Pakistani Industries

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

Before the 1970s, Pakistan linked its currency, rupee, to the Pound Sterling. With the economic
influence of the USA getting more apparent, in 1971, Pakistan linked rupee to the U.S. Dollar. In
1972 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 Pakistan’s exportable
produce, West Pakistan doubled its foreign exchange earnings. However, in 1973, OPEC
increased the price of oil and Pakistan had to pay higher price to import oil. During that year
there was a worldwide recession and the demand for goods and services decreased throughout
the world which also caused Pakistan’s export to decline. All these factors greatly damaged
Pakistan’s economy.
Pakistan fell into a budget deficit in 1982, when the strengthening U.S. Dollar made remittances
abroad 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 exchange
rate system, which comprised of an official rate (pegged to U.S. dollar), a Floating Interbank
Rate (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.

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Analysis of Pakistani Industries

From 1999-2007 during Musharraf’s rule, the exchange rate remained stable at $1=PKR 60. The
reason 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, Pakistan
felt 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 is
accompanied by sound economic policies and greater openness (hec.gov). It also tends to crowd
in local investment and it promotes growth, increases competitiveness and exports.
Pakistan was an agricultural economy upon its independence in 1947. It lacked the industrial
capacity to process locally produced agricultural raw material, as well as the funds to create new
capital. So the was a need on the part of the government to obtain funds from abroad to invest it
in the local industries, and improve the country’s manufacturing capacity. Different types of
industrial policies have been implemented in different times with a changing focus on either the
private sector or the public sector.
The private sector was the main vehicle for industrial investment during the 1950s and the 1960s
and the involvement of the public sector was restricted to very few industries. It was set that in
the event of private capital not forthcoming for the development of any particular industry of
national importance, the public sector might set up a limited number of standard units. Foreign
investment 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 of
ten major categories of industries, 7 commercial banks, development financial institutions, and
insurance companies. In 1975 there was another round of nationalization of small-sized agro-
processing units. The sudden shift toward nationalization of private sector industrial units
shattered private investors’ confidence.
After the dismal performance of the industrial sector following the 1972 nationalization, a
change occurred in September 1978 in the government’s approach toward the role of the public
and private sectors. The role of the public sector was restricted to consolidating existing
enterprises, and further government investment in this sector was strictly restricted. The role of
the 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 and
private sectors but also encouraged the private sector to come forward. However, the process of
privatization was not initiated. Had this been initiated, Pakistan might have attracted a
considerable amount of foreign direct investment in subsequent periods.

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Analysis of Pakistani Industries

Foreign investment was also encouraged in industrial projects involving advanced technology
and heavy capital outlay like engineering, basic chemicals, petrochemicals, electronics, and other
capital goods industries.
In order to encourage foreign direct investment in export-oriented industries, an Export
Processing 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 facilities
offered 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 overall
economic reform program toward the end of the 1980s.
In the 1990s, to facilitate foreign investment no special registration was required for FDI, and the
same rules and regulations were applied to FDI as to domestic investors. The requirement for
government approval of foreign investment was removed, with the exception of a few industries
such as arms and ammunition, security printing, currency and mint, high explosives, radioactive
substances, and alcoholic beverages. In all industrial sectors other than those indicated above, not
only 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 throughout
Pakistan set up between 1 December 1990 and 30 June 1995. Investments in delineated rural
areas, industrial zones, and less developed areas enjoyed five and eight years tax holiday
respectively, together with special custom duty and sales tax concessions. The import policy was
also liberalized considerably.
There is a strong perception among foreign investors that the pro-business policies and
inducement used to attract prospective new investors are somehow weak given realities when
they 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 based
on promoting investment in sophisticated, high-tech and export-oriented industries while almost
the entire economic activity in other fields, encompassing agriculture, services, infrastructure,
social sectors, etc. were thrown open for foreign investment with identical fiscal incentives and
other facilities, including loan financing from local banks.
A number of incentives were given by the government in the recent investment policies. This
was indeed a welcome move but it is yet to be seen whether the investment interest having
remained on the sidelines would at all show a positive response to the latest package of
incentives. (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 been
making efforts to attract FDI and such efforts have been intensified with the advent of
deregulation, privatization, and liberalization policies initiated at the end of the 1980s.

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There were inflows of foreign investment in Pakistan during 1976-1997. The amount of foreign
investment rose from a tiny $10.7 million in 1976/1977 to $1296 million in 1995/1996, thus
growing at the annual compound growth rate of 25.7 percent. However, it declined to $950
million 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 international
interest rates was also important in portfolio allocations toward Pakistani assets. With
globalization, numerous international portfolio funds were created that were invested in
emerging capital markets seeking for better returns. Pakistan was among the first countries in
emerging 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$3.531
billion in 2005-06, as reported by the State Bank. The FDIwithout privatization proceeds also
showed a healthy figure close to $2 billion.
The FDI landed mostly in telecommunication sector, which attracted the highest amount. The
FDI without privatization remained at $1,980.7 million and large share of this amount went to
the sectors like construction, food, Chemicals and trade
Oil and gas exploration proved once again the attractive area for the FDI and total $312.7 million
were invested in this sector
Privatization of Karachi Electric Supply Company (KESC) made the power sector figures
attractive by showing an inflow of $320.6 million as FDI during the whole year. It included the
privatization proceeds of $255 million.
Analysts said that the inflow of FDI without privatization was also encouraging and some new
sectors 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 and
UK have fluctuated widely, falling as low as 8.8% for the US and 4.7% for the UK and rising as
high 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 invested
very 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 in
Pakistan revolves around ten main factors. These are political stability; law and order; economic
strength; government economic policies; government bureaucracy; local business environment;
infrastructure; quality of labor force; quality of life; and welcoming attitude.

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Analysis of Pakistani Industries

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


Pakistan’s 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

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Analysis of Pakistani Industries

Recommendations4:
Government of Pakistan should take the following steps on priority basis to enhance both
domestic and foreign investment in the country:-
Law and Order: Satisfactory law and order situation is critical to attract investment in
Pakistan. The country’s political leadership must take practical steps to improve law and order
situation particularly in the major “growth poles” of the country including Karachi.
Political Stability: Satisfactory political stability is also critical to attract investment.
Macroeconomic Stability: Pakistan’s fiscal and balance of payment situations and foreign
exchange reserves position is under considerable strain for some time making the
macroeconomic environment less conducive for foreign investors. Some drastic and far reaching
measures are needed to reduce the fiscal deficit on the one hand and to raise trade surplus and
foreign 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 official
clearances. 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 such
machinery is not manufactured in Pakistan. Tax relief in the form of accelerated depreciation
allowance may also be available to priority industries, besides the availability of similar relief to
existing 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 cash
flow problem. There is a need to review credit facilities given to investors.
Labor Laws: Overprotective labor laws do not encourage productivity and frighten away
much needed productive investment. There is a need to rationalize the labor laws and multiple
levies on employment that inhibit business expansion and job creation.
Infrastructure: In most infrastructure services, Pakistan is highly deficient as compared with
many developing countries that have attracted higher levels of foreign investment. If Pakistan
wants to catch up gradually with the development of the economies of East and Southeast Asia, it
will have to investment more in the areas of education and physical infrastructure.
Confidence-building Measure: The close relationship between private and public sector is
essential to build confidence. It is suggested that a forum may be established where the private
and public sectors could sit together to discuss business promotion-related issues. This kind of
partnership between the government and private sector will help restore investor’s confidence.
4
These have been taken from an article by Ashfaque H. Khan and Yun-Hwan Kim, details in Reference
Sheet.

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Analysis of Pakistani Industries

Identification of Potential Investors and Sectors: To promote investment government should


identify 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 and
gas, etc.)
Improvement in Tax Structure: There is an urgent need to reduce the number of taxes and
contributions, to streamline tax regulations and administrative procedures, and most importantly
to 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 substantially
reducing them.
Transfer of Technology: There should be no restriction on payment of royalty and/or technical
service fees for the manufacturing sector. There should be Intellectual and Industrial Property
Rights in conformity of WTO Agreements.

WORLD TRADE ORGANIZATION (WTO)


The World Trade Organization (WTO) is the international organization dealing with the rules of
trade between nations. It is the most powerful legislative and judicial body in the world. By
promoting the "free trade" agenda of multinational corporations above the interests of local
communities, working families, and the environment, the WTO has systematically undermined
democracy around the world.
Established in 1995, the World Trade Organization (WTO) is a powerful global commerce
agency, which transformed the General Agreement on Tariffs and Trade (GATT) into an
enforceable 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 world’s trading nations and
ratified in their parliaments. The goal is to help producers of goods and services, exporters, and
importers conduct their business.
WTO rules can be enforced through sanctions. This gives the WTO more power than any other
international 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 be
confined to the private sector, while social and environmental costs are borne by the public.

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

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Analysis of Pakistani Industries

The second generation reforms aimed at strengthening the country’s institutions and their
capacity to deliver basic services along with the continuation of sound and consistent economic
policy and investment in human development and infrastructure will be able to steer the country
on the right course. There is a need to understand that “development is more of an integrated
process, 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 People’s Works Programme”
http://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 Finance
and Economics; ISSN 1450-2887 Issue 3 (2006)
• The problem of deficit in balance of payments by Mohammad Ishaq Javed and Dr.
Shaikh Muhammad Ashfaq

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Appendix
LONG-TERM STRUCTURAL CHANGE AND GROWTH

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Analysis of Pakistani Industries

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/Econom
y_of_Pakistan_Expo_2005.pd

Glossary

Agriculture: The process of growing crops Gini Coefficient: The Gini coefficient is a
by cultivating large areas of soil. measure of statistical dispersion most
prominently used as a measure of inequality
Balance of Payments (BoP): a of income distribution or inequality of
systematic record of all the wealth distribution.
economic transactions between
residents of a country with the rest Gross Domestic Product (GDP): The total
of the world during a given period value of a nation's output, income, or
of time. expenditure produced within a nation's
physical borders within a year.
Exports: Goods and services that are
Gross National Product (GNP): A country's
produced domestically and sold to buyers in
total output of goods and services from all
another country.
forms of economic activity measured at
Foreign Direct Investment: Investment made market prices for a calendar year.
by a foreign individual or company in
Imports: Goods or service that are produced
productive capacity of another country.
in another country and sold domestically.
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Analysis of Pakistani Industries

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 civil
law 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.

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