Analysis of Pakistani Industries
TABLE OF CONTENTS
Introduction Gross Domestic Product (GDP) Inflation Unemployment Income Inequality Balance of Payments Foreign Trade Exchange Rates Foreign Direct Investment (FDI) Pakistan¶s Strengths and Weaknesses World Trade Organization (WTO) Conclusion Bibliography Appendix Glossary
2 2 5 7 8 10 13 16 17 19 22 22 23 24 25
Analysis of Pakistani Industries
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
In 1966 the GDP fell to 3.5 till 1974. In 1972 GPD fell to just 1.5% during1980-88 and at that time it was only exceeded by that of Korea. This all caused Pakistan¶s GDP to grow by average 6. Loans from these
. Then Bhutto devalued the Rupee by 131% which boasted our exports by 153%.Analysis of Pakistani Industries
for the period 1960-5 rising to a phenomenal 16. the average GDP was just 3. In 1971 Pakistan lost its east wing which became Bangladesh. China and Hong Kong. 1976 saw Pakistan¶s worst floods. devastating large areas of cultivated land.6%. This occurred mainly because of war with India and also because Pakistan lost revenue which it used to earn from Bangladesh. 1975. These factors shook investor confidence.1% because of war with India but it continued to grow after that and reached as high as 9.9%. He introduced several reforms and public development projects because of which Pakistan was able to achieve the average growth rate of 7. This was a highly uncertain period and no government completed their constitutional tenure.8 percent during the 1990s (MSN Encarta). During the period 1988-99.
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). It greatly affected our economy because East Pakistan was the major producer of Jute. All these factors caused Pakistan¶s GDP to fall significantly and from 19741977. The inflow of foreign aid from US and other countries increased because of Pakistan¶s role in war against the USSR. This aid also helped Zia regime to finance in the industrial sector. Cotton crop was also destroyed and there were several floods during his last years of rule. Zia-ul-Haq revived the confidence in Private Sector to invest in the country again. This increased the income of local people and the domestic demand of goods and services increased. Bhutto became the Prime Minister of Pakistan and he nationalized all the major industries of the country. private sector investment was only 15% of the total. The economy of Pakistan slowed to an average annual growth of 3. This act of Bhutto discouraged the private sector and industrialists were no longer interested in investing in Pakistan.2%. there were seven different governments and two elected prime ministers who were both elected twice. the height of Bhutto¶s nationalization program. The process of privatization was carried out gradually.8% in 1970. 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.
In Pakistan the primary focus of the IMF-sponsored program was to lower the budget and current-account deficits. Tax collection increased by 18 percent during July-April 2007 and exports increased by 18. only the Services sector grew significantly and not the manufacturing sector. 7 licenses were sold to cellular companies at a very high cost and many state owned companies were privatized. (Source: MSN Encarta)
During the time of General Pervez Musharraf. After Pakistan exploded a nuclear device in May 1998.3 percent and imports up by 8. in 1992-1993 the IMF further insisted that Pakistan reduce defense expenditures. impose an agricultural tax. In addition. These reforms were never fully implemented. These firms started to perform well and their productivity increased. However. Source (Pakistan Times). Many countries including US and UK stopped importing goods from Pakistan which also affected our production. These objectives were to be achieved by reducing public expenditures and broadening the tax base.9 percent. Pakistan received its first formal loan in 1988. it faced the imposition of international sanctions. Heavy development projects were launched and ignited the growth rate.
. the economy grew at an average rate of 6. No major industries were set up and in 2008 when there was a worldwide recession. and the IMF-sponsored program did not achieve the desired result. however. and improve methods of tax collection. After Pakistan joined in the war against terror it received foreign aid of billions of dollars.3 per cent a year. Pakistan¶s economy suffered heavily.Analysis of Pakistani Industries
international lending agencies were subject to conditions on Pakistan¶s national economic policies.
markup or stagflation according to velocity and nature. The rate of economic growth. The rate of monetary growth which had been brought down to 4. Natural Calamities. details in reference sheet
. The pressure on the exchange rate and reserves was caused because of the fiscal and monetary indiscipline during 1991-1993. The pressure on international reserves and an appreciation of the real exchange rate necessitated depreciation in 1994. The recovery was short lived as growth rate plummeted in 1993 to its lowest level in over two decades. Expansion of the Private Sector. Inflation is caused by some demand side factors (Increase in nominal money supply. The period also marked a major thrust in economic liberalization of the economy.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.6 percent in 1989 climbed up to 12. Inflation can be Creeping. Expansion of Credit.Analysis of Pakistani Industries
Inflation means a sustained rise in prices. High budget deficits during these years
Most of the material has been taken from the article µForecasting Inflation in Developing Nations: The Case of Pakistan¶. Neglecting the production of consumer goods. 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. Global factors. Black money spending. Artificial Scarcities. recovered strongly in the next two years.25 and 12. Except in 1995 when price of tradable (in rupee terms) increased by 19 percent. The high rates of monetary expansion. hyper or gallop. cost push. 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. Repayment of Public Debts. Increasing Public Expenditures) and some Supply side factors (Shortage of factors of production or inputs. running. Deficit Financing Policy. Increase in disposable income. walking or trotting. Growth in international prices (in dollar terms) has been moderate or negative. Application of law of diminishing returns) Inflation rates from 1991 to 1995 have ranged between 9. Increase in exports (excess exports).9 percent. demand pull. mixed. Industrial Disputes. which had flattered in 1989 and 1990.
prominent among those are: increase in support price of wheat for three years in a row.2 percent and food inflation to 3. due to improved production of food and non-food items as well as the food stocks for prior periods. Sharp increases in the prices of some of the strategic food items put pressure on the poor. Better availability of essential commodities.3 percent in the same period last year. In 1994 the rate of monetary growth was 16 percent. escalations in indirect taxes. As mentioned above.6 percent and 10. respectively during the eight years of the 1990s.0% of GDP) have been the major source of macroeconomic imbalances in the 1990s. Pakistan has experienced sustained inflation hovering between 10. Not surprisingly. mismanagement in wheat operation in one of the wheat deficit province. During Fiscal / Financial Year 2002 (FY02) despite the aftermath of events of September 11 and continuation of a drought-like situation in the country. during fiscal year 2005-06. the supply side bottlenecks. the adjustment in government ± administered prices. Inflation Among the most appreciated developments. Four years of strong economic growth has given rise to the income levels of various segments of the society. Thus the reasons for the increase in money supply in 1994 were qualitatively very different from those in the previous three years. was the significant abatement of price pressure over the course of the year. shortage of wheat owing to less than the targeted production. In Pakistan.8 percent of the GDP. The higher inflationary trend in Pakistan over the last two years has been the outcome of pressure that emanated from demand and supply sides. all important barometers of price pressure in the economy indicated a steady deceleration in inflation. Supply side pressure emanated from a variety of factors.0 percent as against 9. Food and non-food inflation averaged 11. The growth in money supply in 1994 was mainly on account of accumulation of net foreign assets rather than domestic credit creation. Brazil. Domestic production
. also contributed in building inflationary pressure in Pakistan.Analysis of Pakistani Industries
contributed to the monetary expansion. it has squeezed the major part of the population.7 percent in May 1994). There has been a general agreement that the excessive growth in money supply. April 2005 (last-time it was at 15. Inflation is one of the obstacles on the way of development. Both food and nonfood inflation contributed to the persistence of the double-digit inflation. had a moderating influence on inflation. although budget deficit was brought down to 5. by the largest producer. the imported inflation (pass through of exchange rate adjustment). It needs to be controlled by strategic planning. Inflation during the first ten months July-April of the current fiscal year is estimated at 8.0 percent range during the first eight years of the 1990s. 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). yielded handsome dividend in the shape of overall inflation decelerating to 6.6 percent in April 2006. the buildup of foreign reserves had become necessary because of a drawdown of reserves in the previous years. For the first ten months of the fiscal year July±April 2005-06. 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. The rising level of income have strengthened domestic demand and put upward pressure on prices of essential commodities.0 to 13. and inflationary expectations has the major factors responsible for the persistence of a double-digit inflation during most periods of the 1990s. The expenditure on food items constitutes bulk of the monthly expenditure of the poor segment of the society.3 percent. inter-provincial ban on the movement of wheat resulting in sharp increases in prices of wheat and wheat flour.
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. Recent trend indicates that unemployment rate increased from 7.6 million people were of active labor market. Pakistan labor force stands at 43.8 percent in FY00 to 8. According to labor force survey 2001-02.17 million and 3. Khushi M. It is very unfortunate but true that searching for statistics regarding the unemployment rate of Pakistan. 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. investment should be given preference in consumer goods instead of luxuries. policies were included at the reduction of unemployment. It is the root cause of several other problems and is a result of a number of problems.2 In all the five-year plan starting from 1955. there was a survey held which tried to give the false impression of full employment in the agriculture sector. however due to inadequate efforts on the part of the government most of them proved wane. Agriculture sector should be given subsidies.Analysis of Pakistani Industries
should be encouraged instead of imports.and underemployed labor to the total working force could be taken as nearer to reality. and developed countries should be requested for financial and managerial assistance. In 1955. looking for a job.Khan Unemployment and the People s Works Programme
.3 percent in FY02. However it again
Dr. foreign investment should be attracted. 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. And most certainly it also effects the social and emotional life of a person. High unemployment results in wastage of resources and depression of income.
Unemployment is one of the major problems of Pakistan.
7% in FY04. taxation.´ Regional disparity is evident with regard to unemployment rate. This also includes the disguised unemployment in agriculture sector in the form of unpaid family helpers. High unemployment rates under these conditions of productivity and efficiency gains are therefore not surprising. 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.Analysis of Pakistani Industries
fell to 7. At the same time labor force participation rate is on an upward incline because of the entry of large number of females. There are a number of reasons for unemployment in Pakistan. While the economy is moving towards sophisticated sectors such as telecommunications. Ishrat Hussain the main reasons for the decline in unemployment during this time is ³inefficient utilization of factors of production that was a characteristic of public sector dominated economy has been minimized as a result of structural reforms in tariffs. firstly. Urban unemployment rate (9. There is also a lack of technical and vocational training to fill out the gaps between the demand if skills and their availability. financial services. According to an article by Dr. 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. the unemployment rate of Pakistan was 6% in October 1999.5 percent). financial markets and privatization. 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.8 percent) was higher than the rural one (7. The term typically refers to inequality among individuals and groups within a society (Wikipedia). information technology. According to an article by Dr Ishrat Hussain. Humanities and languages.
Economic inequality refers to disparities in the distribution of economic assets and income. It is defined as a ratio with values between 0 and 1: A low Gini coefficient indicates more equal income or wealth
. 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. Various studies on income inequality in Pakistan show different estimates but the one most commonly used in the studies is the Gini coefficient. engineering goods the universities and colleges are turning out hundreds of thousands of graduates in Arts. and so there large number of experienced technicians and professionals who have migrated to the Middle East and elsewhere. oil and gas. and it rose to 8% in October 2004.
The shares of various income values also show similar trends. In the urban areas Gini coefficient increased from 0. while everyone else has zero income).Wikipedia. Gini coefficient in the urban areas remained somewhat constant. declined from 0.3608. Overall Gini coefficient declined from 0. break-up of this value is the increase in rural areas from 0.4118. However.3450 to 0. 1988-91.4068 over 1963-67 but declined to 0. the banks were nationalized in the 1970s on the pretext that the small producers did not have access to credit. Whereas in the next three years.3694 by 1969-70. however it increased sharply in the rural areas. on the other hand.3122 over the 1963-70 period.3694 to 0.3543 to 0. In the rural areas the Gini coefficient declined but there has been mixed trend in urban areas up to 1996-97. coverage by the minimum wage legislation and therefore the wage incomes are more unevenly distributed than in rural areas. Income inequalities in rural 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.3782 respectively.3698 to 0. Moreover. 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. This is contrary to the general perception because land reforms.3450 and in urban areas from 0. In urban areas. The Gini coefficients show different trends over time and across urban and rural areas. 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. 0 corresponds to perfect equality (everyone having exactly the same income) and 1 corresponds to perfect inequality (where one person has all the income.
.4118 to 0. Gini coefficient increased from 0. Gini coefficient is generally higher in the urban than in the rural areas because: Urban labor force is more diversified in terms of skill.3946 over 1970-79 periods. During the 1980s Gini coefficient in both the rural and urban areas declined sharply over 197988 from 0.com) In studies conducted for Pakistan. 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. 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. education.3122 to 0.3227 and from 0.Analysis of Pakistani Industries
distribution. 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. union membership. while a high Gini coefficient indicates more unequal distribution.3394 to 0. The ratios of shares of lowest and highest income values also show sharp increases in income inequalities. 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. (www. 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 selfemployed are mostly in informal sector enterprises.3946 to 0.
After that it ran into BOP problems due to an overvalued exchange rate and so our exports became uncompetitive. especially of capital goods.
The problem of deficit in balance of payments by Mohammad Ishaq Javed and Dr. Z.3762 and in urban areas from 0. Workers¶ remittances. However the decline in corporate income tax rates and tariff rationalization policies have benefited the producers. however. The gini coefficient in 2000-01 shows a marginal decline only because of a decline in the rural areas. It had surplus Balance of Trade up to 1954-55. the inequalities have been the maximum in the 1990s compared to any time period in the history of Pakistan. income inequality increased rapidly. the tax burden on the poor has increased. 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. In the urban areas. while with the broadening of sale tax base.4615 over the 1997-2002 period. On the basis of 2004-05 PLSM data.
During pre-plan period (1948-49 to 1954-55). Shaikh Muhammad Ashfaq
. Gini coefficient increased in rural areas from 0. Pakistan has been facing a serious problem of deficit in its Balance of Trade and Balance of Payment.Analysis of Pakistani Industries
to a smaller extent in the rural areas and to a large extent in the urban areas income inequalities have increased since then. however due to lack of industrial base Pakistan was unable to export its agricultural produce. The balance of trade (BoT) covers the exchange of visible items only. Pakistan has all along relied on indirect taxes which are generally regressive. The year 1955-56 was the last year in which Pakistan had a favorable balance of trade. Whereas the income inequality in 1996-97 had been low. Deficit in balance of payments means that the import bill exceeds the export bill. However both because the indirect tax rates on the products consumed by the rich were higher as well as progressive. Pakistan's performance in the foreign trade sector was reasonably good. The urban income distribution in 2001-02 turned out to be the most unequal. increased tremendously which helped a great in stabilizing the BoP.3691 to 0. A number of Pakistanis during this time migrated to the Middle East. Since that time. thus creating a trade deficit. the incidence of taxes up to 1988 was higher on richer sections of the society. government has recently announced a sharp reduction in the proportion of poor below the poverty line.
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. especially from the Middle East countries. A. Pakistan's exports decreased considerably and its imports surged. In 1971.3517 to 0.
excluding inflows from Kuwait in 1994-95. 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. Trade deficit as a percentage of GDP stabilized on an average around 4. The magnitude of workers¶ remittances on an average between 1985-86 and 1987-88 was $2295 million. Pakistan's external balance of payment deteriorated in the second tenure of Ms. After 1994-95. from 1977-78 to 1982-83 and reached a peak level of $2886 million in 1982-83.7 per cent while deficit in current account balance of payments increased to 5. workers remittances depicted a declining trend.Benazir and Nawaz Sharif .8 per cent.(1988-89 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. Export remained at a level of $3601 million on an average during this period.6 per cent on an average during 1971-72 to 1977-78. They increased after 1971-72. 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. This year workers¶ remittances were $ 1866 million.9 per cent while current account deficit in BoP on an average decreased to 3. The trade deficit as percentage of GNP rose to 9. Benazir Bhutto (1988-89 to 1990-91) and Mohammad Nawaz Sharif (1991-92 to 1993-94). The current account deficit in BoP fell to $1998 million on an average between 1988-89 to 199091and to $2333 million on average between 1991-92 and 1993-94.3 per cent while current account deficit in BoP remained 5. The current account deficit in balance of payment declined to 3. The current account BoP as a percentage of GDP on an average was 4. these inflows began tapering off since 1982-83. The external BoP gained strength during Junejo's period from 1985-86 to 1987-88. However. The magnitude of workers' remittances from 1978-79 to 1984-85 was $1849 million on an average.1 per cent during 1985-86 and 1987-88. Exports grew on an average by 33 per cent while imports decreased during first two years while increased in the last year.6 per cent in Nawaz's 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. There was a sudden upsurge in the inflow
. The BoP position witnessed a significant improvement during first tenures of both Ms. Benazir (1994-95 to 1996-97). There was a sudden upsurge in the workers¶ remittances in late seventies and early eighties. This inflow gradually decreased in the last two years of his regime. The trade deficit as percentage of GNP remained 6.7 per cent in Benazir's period while 4. especially from the Middle East. The BoP position deteriorated during Zia's regime (1978-79 to 1984-85).Analysis of Pakistani Industries
Bhutto). Trade deficit as a percentage of GDP on an average was 4.7 per cent during Benazir's and Nawaz's tenures. Pakistan's balance of payments was highly dependent on workers¶ remittances but these remittances were not sustained over a long period of time.7 per cent in this period. This reveals that BoP and BoT remained stabilized during the first tenures of both. The inflow of workers¶ remittances continued increasing.
One major structural problem of exports is that it is based on relatively low value added products. However the imports rely on a limited number of commodities namely machinery. UK and other European countries and reached to $4237 million in FY02-03. 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. petroleum & petroleum products. fertilizer and tea. After the event of September 11. Hub Power Dispute and Political uncertainty eroded the confidence in the economy. FY01 workers¶ remittances increased tremendously especially from USA. Pakistan's exports increased from $7. The magnitude of inflow of workers remittances from 1994-95 to 1996-97 on an average was $1578 million.5 per cent while current account deficit in balance of payments declined to 2. The government took steps in the early 2000s to liberalize and deregulate the exchange and payments regime. However. Workers' remittances exhibited a declining trend during these years. The economy started showing signs of improvement with the start of Musharaf's regime. Pakistan moved to a dual exchange rate system in 2000. synthetic textiles and sports goods. The trade deficit fell by 75. Export growth in
.9 per cent on an average during 1997-98 and 1999-00. rice. There was a sharp decline in trade deficit in FY01-02. 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. a number of fiscal and monetary activities were implemented which discouraged free trade and economic transactions abroad. The current account deficit in balance of payment emerged with a surplus of $913 million in FY01-02. The deficit in Balance of Trade (BoT) decreased to $1269 million while current account BoP decreased to $513 million in FY00-01. chemicals.Analysis of Pakistani Industries
of workers¶ remittances from Kuwait and were $1866 million in 1994-95. The magnitude of surplus in current account BoP for FY01-02 was $1338 million. edible oil. In 1999-00 workers¶ remittances were reduced to $ 983 million. iron and steel. transport equipments.8 billion in 1999-00 to $9. The deficit in the balance of trade as percentage of GDP on an average declined to 2. Both current account deficit in BoP and BoT decreased in this period. for FY02-03 $ 3165 million and for FY03-04 (July-March FY03-04) was $1369 million. The magnitude of workers remittance on an average was $1178 million. for instance the freezing of FCAs.5 per cent to $286 million over the level of $ 1338 million of FY00-01. His government launched a comprehensive set of economic stabilization and structural reform measures. This inflow could not maintain its momentum and was reduced in the following two years of Benazir's government. leather group. This adverse performance in foreign balance of payment was due to the weak macroeconomic management and lack of commitments to undertake difficult structural reforms.2 billion in FY00-01. Pakistan's exports are highly concentrated in cotton group.
were 78.9 billion. carpets.6 per cent of the total exports during 2002-03. Saudi Arabia. falling to an annual average of 15 percent in FY 1987 to FY 1990. and fish.4 billion.878 million in its current account balance during 2006-07 as against a deficit of $ 4. but dropping back to 15 percent in FY 1992. Their value varies with internal demand and changes in the world oil price.5 billion. and machinery. incentives were again provided to industrialists to increase manufactured
. Pakistan¶s balance of payments showed a deficit of $ 6. Almost 50 per cent of imports come from USA. sporting goods. These five categories of exports accounted for 82. and Pakistan had a deficit on its balance of trade each year from FY 1973 through FY 1992. the UK and Malaysia.0 in FY 1991 and 82.378 million over net inflows of previous year resulting in an increase of $ 2. In FY 1992.449 million and increased by $ 4. yet major portion of imports comes from a few selected countries. Other important categories of imports in FY 1992 included non electrical machinery (24 percent). Although Pakistan is trading with a large number of countries. Pakistan's terms of trade . Among these five categories cotton group alone contributed around 63.0 per cent). chemicals (10 percent). expressed in an index set at 100 in FY 1981. which resulted in a deficit of US$2. and surgical instruments. compared with imports of US$8. In the early 1980s. On the one hand.9 billion. and edible oils (4 percent). exports rose to an estimated US$6. Kuwait. Japan.4 billion.
Foreign trade is important to the economy because of the country's need to import a variety of products.3 per cent of total exports. followed by leather (6. Although import-substitution industrialization policies favored domestic manufacturing of substitutes for imports. The capital and financial account showed a net inflow of $ 10. Imports increased in 2000/01 primarily due to higher imports of petroleum and petroleum products. Such a high degree of concentration of exports in few items has led to instability in export earnings. exports were US$5. In FY 1982. Crude oil and refined products are significant imports.7 in FY 1992.5 billion for FY 1993.Analysis of Pakistani Industries
2000/01 was primarily due to higher exports of primary commodities such as rice. and other manufactures such as leather. but imports reached an estimated US$9. Economists forecast a trade deficit of around US$2. Germany.3 billion. 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.396 million in overall surplus during the year 2006-07. In FY 1991. Such a high degree of geographic concentration of imports is undesirable and is in favor of exporting countries. rising to over 21 percent in FY 1991. transportation equipment (9 percent).
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. Imports have exceeded exports in almost every year since 1950. resulting in a trade deficit of US$2. raw cotton.990 million during 2005-06.2 per cent) and synthetic textiles (5. officials also encouraged manufactured exports in the 1950s and 1960s.1 per cent) and rice (5. oil products accounted for around 30 percent of Pakistan's imports.
for instance. Sources for imports and markets for exports were widely scattered. cotton yarn. in the early 1990s the export base remained primarily dependent on two agricultural products.6 percent of exports and 14. Britain. and Saudi Arabia were also important trading partners. raised the nation's import bill significantly. This share of primary goods fell from 35 percent to 16 percent between FY 1986 and FY 1993. On the other hand. There was some diversification during the late 1980s as the share of manufactured goods rose. Pakistan's balance of trade remained particularly vulnerable to changes in the world economy and bad weather. this era was marked by heavy import of massive capital tools to boost the industrial competitively and pace. On the import bill however the decade saw a considerable increase in imports but. Other important exports were ready made garments (15 percent). In the early 1990s. and rice (6 percent). however the United States accounted for 13. cotton and rice. on the other hand.5 billion. which were subject to great variations in output and demand. The decline in cotton production in FY 1993. seriously affected the export level. and that of manufactured goods rose from 49 percent to 64 percent. the United States and Japan were Pakistan's most important trading partners. which were stated when Musharraf took the office till $18.2 billion (source Mirza Rohail B Economic Comparison 1999-2007 and beyond). Total exports.5 billion annually in the Fiscal year 2007. and cotton waste accounted for 37 percent of all exports. The growth too of its major leading export boosting sector was seen quite considerably.Analysis of Pakistani Industries
exports. however unlike the previous decades.7 percent of Pakistan's exports and 11. raw cotton. Japan accounted for 6. synthetic textiles (6 percent).2 percent of imports. Sharp increases in crude oil prices. apart from petroleum import increase. In FY 1992. the deficit on the Balance of Payments dropped by 14% average annually.2 percent of its imports. and they fluctuated from year to year. the share of semi manufactures rose from 16 percent to 20 percent. The subsequent decade saw a considerable increase in the trade statistics due to several expansionary policies adopted by President Parvez Musharraf. cotton cloth.2 billion to a massive $11. During the same period. Textile industry which accounts for a major percentage of Pakistan¶s exports from a poultry $5. Nonetheless. were more sensitive to agricultural production.
. Germany. such as those of 197981 and 1990. In FY 1993. In the early 1990s. Overall exports of the economy booted by more than 100 % from $8.
Kuwait. Such a high degree of geographic concentration of imports is undesirable and is in favor of exporting countries. Germany. Japan.
. Saudi Arabia. the UK and Malaysia.Analysis of Pakistani Industries
Now almost 50 per cent of imports come from USA.
From 1999-2007 during Musharraf¶s rule. in 1971. to the Pound Sterling. It lacked the industrial capacity to process locally produced agricultural raw material. and "non-essential" imports can be traded at the FIBR rate. dollar).gov). invisible flows. Pakistan fell into a budget deficit in 1982. In 1972 Bhutto devalued Pakistani rupee by 131%. 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. West Pakistan doubled its foreign exchange earnings. as well as the funds to create new capital. All these factors greatly damaged Pakistan¶s economy. Dollar made remittances abroad through official channels slumped. Despite the loss of East Pakistan¶s exportable produce. the authorities adopted a multiple exchange rate system. Pakistan put the rupee on a controlled floating basis. Pakistan felt short of it foreign reserves and the price of $1 reached all time high to PKR 86. and a composite rate (combines the official and FIBR rates). in 1973. The exchange rate at that time was $1= PKR 11. The reason for this was high amount of foreign air and remittances inflow in Pakistan. Export proceeds. OPEC increased the price of oil and Pakistan had to pay higher price to import oil. In this view.S. It also tends to crowd in local investment and it promotes growth. This act significantly increased our export revenue. a Floating Interbank Rate (FIBR). to alleviate the financial crisis in Pakistan. In 1998. With the economic influence of the USA getting more apparent. which comprised of an official rate (pegged to U. So the was a need on the part of the government to obtain funds from abroad to invest it in the local industries.36 (10 Feb.7. However. increases competitiveness and exports. In 2008 due to sky rocketing rates of oil and unstable political and security conditions.S.Analysis of Pakistani Industries
During the past five decades. 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. Pakistan's foreign exchange regime has been moving towards a deregulated and market-oriented direction: Before the 1970s. Pakistan was an agricultural economy upon its independence in 1947. the exchange rate remained stable at $1=PKR 60. rupee. Different types of
. Pakistan linked its currency. home remittances.S. and improve the country¶s manufacturing capacity. especially if it is accompanied by sound economic policies and greater openness (hec. Dollar. Pakistan linked rupee to the U. when the strengthening U. Currently the exchange rate of Pakistani Rupee is $1=PKR 79.
a change occurred in September 1978 in the government¶s approach toward the role of the public and private sectors. insurance. In order to encourage foreign direct investment in export-oriented industries. Investments in delineated rural
. Pakistan began to implement a more liberal foreign investment policy as part of its overall economic reform program toward the end of the 1980s. Had this been initiated. 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. the public sector might set up a limited number of standard units. It was set that in the event of private capital not forthcoming for the development of any particular industry of national importance. foreign investors can purchase equity in existing industrial companies. currency and mint. and the same rules and regulations were applied to FDI as to domestic investors. However. an Export Processing Zone (EPZ) was set up in Karachi. Pakistan might have attracted a considerable amount of foreign direct investment in subsequent periods. The sudden shift toward nationalization of private sector industrial units shattered private investors¶ confidence. the process of privatization was not initiated.Analysis of Pakistani Industries
industrial policies have been implemented in different times with a changing focus on either the private sector or the public sector. In the 1990s. to facilitate foreign investment no special registration was required for FDI. petrochemicals. The requirement for government approval of foreign investment was removed. The role of the public sector was restricted to consolidating existing enterprises. and commerce. In all industrial sectors other than those indicated above. Apart from foreign investors. Foreign investment was also encouraged in industrial projects involving advanced technology and heavy capital outlay like engineering. basic chemicals. with the exception of a few industries such as arms and ammunition. and insurance companies. 7 commercial banks. and further government investment in this sector was strictly restricted. and alcoholic beverages. After the dismal performance of the industrial sector following the 1972 nationalization. and other capital goods industries. not only foreign equity participation of up to 100% was allowed but also. radioactive substances. electronics. On 1 January 1972. overseas Pakistanis were also encouraged to invest in industrial projects in the EPZ. The role of the public sector was elaborated in the industrial policy statement enunciated in June 1984. Foreign investment was not allowed in the field of banking. 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. The statement reiterated that the government would continue to pursue a pattern of a mixed economy. the GOP issued an Economic Reforms Order taking over the management of ten major categories of industries. 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. development financial institutions. high explosives. In 1975 there was another round of nationalization of small-sized agroprocessing units. The concessions and facilities offered by the EPZ included duty-free imports and exports of goods and tax exemptions. security printing.
due to the above mentioned incentives. Foreign participation appears to be the major factor responsible for the increase in portfolio investment in the 1990s. 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. The amount of foreign investment rose from a tiny $10. fiscal incentives and liberal remittance of profits and capital. infrastructure. With globalization. numerous international portfolio funds were created that were invested in emerging capital markets seeking for better returns. were thrown open for foreign investment with identical fiscal incentives and other facilities. The import policy was also liberalized considerably.7 million in 1976/1977 to $1296 million in 1995/1996. The amount of foreign investment rose from $ -8.
. A number of incentives were given by the government in the recent investment policies. However. thus growing at the annual compound growth rate of 25. encompassing agriculture.531 billion in 2005-06. including loan financing from local banks. industrial zones. social sectors. The decline in international interest rates was also important in portfolio allocations toward Pakistani assets. The FDI without privatization proceeds also showed a healthy figure close to $2 billion.7 percent. deregulation. together with special custom duty and sales tax concessions. services. Foreign direct investment (FDI) including privatization proceeds finally touched US$3. (Muhammad Zakaria)
Trends in Foreign Direct Investment The success of FDI policies can be judged by the size of the inflows of capital.4 million in 2001-02 to $8416 million in 200607. it declined to $950 million in 1996/1997. high-tech and export-oriented industries while almost the entire economic activity in other fields. it declined to $2985 million in 2007-08. etc. During 2000s. Pakistan was among the first countries in emerging markets to take measures to open up its stock markets to foreign investors. The policy was based on promoting investment in sophisticated. and liberalization policies initiated at the end of the 1980s.Analysis of Pakistani Industries
areas. 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. There were inflows of foreign investment in Pakistan during 1976-1997. and less developed areas enjoyed five and eight years tax holiday respectively. However. government based its investment policies on the principle of privatization. privatization. The increase here is mainly due to the liberalization policies. Pakistan has been making efforts to attract FDI and such efforts have been intensified with the advent of deregulation. as reported by the State Bank.
Factors Influencing the flow of FDI in Pakistan In a study by Ashfaque H. economic strength. These are political stability. food.7 million and large share of this amount went to the sectors like construction. real estate and construction have developed attraction for foreign investment. government economic policies. quality of labor force. government bureaucracy.7% and 35. In view of these determinants. local business environment.2%. The share of the US has been. It included the privatization proceeds of $255 million.6 million as FDI during the whole year. In a more in-depth discussion. respectively. although the shares of both US and UK have fluctuated widely. Analysts said that the inflow of FDI without privatization was also encouraging and some new sectors like food. quality of life.Analysis of Pakistani Industries
The FDI landed mostly in telecommunication sector. which has emerged as a major investor globally has annually invested very little in Pakistan.980. and welcoming attitude. infrastructure. Khan and Yun-Hwan Kim. 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
. by far. Chemicals and trade Oil and gas exploration proved once again the attractive area for the FDI and total $312. which attracted the highest amount. China. the greatest.8% for the US and 4. falling as low as 8. The FDI without privatization remained at $1. like its counterparts. the fundamental requirement that governs foreign investment in Pakistan revolves around ten main factors. Malaysia. It may be noted that Japan. Thailand and India have been able to attract. US and UK have been the major sources of FDI in Pakistan.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 $320.7% for the UK and rising as high as 63. law and order. the major reasons were mentioned which were responsible for Pakistan being unable to attract adequate FDI.
These have been taken from an article by Ashfaque H. details in Reference Sheet. Khan and Yun-Hwan Kim.Analysis of Pakistani Industries
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
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. 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. The country¶s political leadership must take practical steps to improve law and order situation particularly in the major ³growth 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.
and local levels are still applied to investors.
. it will have to investment more in the areas of education and physical infrastructure.Analysis of Pakistani Industries
Removal of Bureaucratic Hurdles: Although the investment approval requirement has been removed. Fiscal Incentives: Fiscal incentives should be given liberally by the government to investors. If Pakistan wants to catch up gradually with the development of the economies of East and Southeast Asia.) rather than focusing on traditional sectors (financial business. updated. regional. There should be Intellectual and Industrial Property Rights in conformity of WTO Agreements. Government should also identify new sectors for investment (mining and quarrying. Pakistan is highly deficient as compared with many developing countries that have attracted higher levels of foreign investment. The authorities should streamline administrative procedures regarding approval and official clearances. That these firms cannot borrow more than their equity capital has further aggravated the cash flow problem. besides the availability of similar relief to existing industries undertaking balancing. Infrastructure: In most infrastructure services.) Improvement in Tax Structure: There is an urgent need to reduce the number of taxes and contributions. There is a need to review credit facilities given to investors. Lebanon) to new directions (China. Libya. to streamline tax regulations and administrative procedures. There is also a need to examine tariffs of plant and machinery with a view to substantially reducing them. Government should move from traditional investors (USA. Identification of Potential Investors and Sectors: To promote investment government should identify potential countries. construction. and most importantly to reduce the contact of firms with a large number of tax and contributions collecting agencies. modernized. Saudi Arabia. causing delays to complete the process. The laws and regulations should be simplified. tourism. There is a need to rationalize the labor laws and multiple levies on employment that inhibit business expansion and job creation. Korea). etc. Confidence-building Measure: The close relationship between private and public sector is essential to build confidence. Japan. Tax relief in the form of accelerated depreciation allowance may also be available to priority industries. Transfer of Technology: There should be no restriction on payment of royalty and/or technical service fees for the manufacturing sector. Malaysia. modernization and expansion in production facilities. Import of plant and machinery for new industries may be allowed duty free in case such machinery is not manufactured in Pakistan. UK. textiles. Labor Laws: Overprotective labor laws do not encourage productivity and frighten away much needed productive investment. etc. It is suggested that a forum may be established where the private and public sectors could sit together to discuss business promotion-related issues. Credit Facilities: Foreign firms operating in Pakistan are currently facing cash flow problems. oil and gas. and transparent. UAE. This kind of partnership between the government and private sector will help restore investor¶s confidence. and their discretionary application must be discouraged. numerous permits and clearances from different government agencies at national.
reflected in shortrun corporate profits. economic efficiency. Under the WTO's system of corporate-managed trade. exporters. which transformed the General Agreement on Tariffs and Trade (GATT) into an enforceable global commerce code. improved economic governance and resumed the path for high growth rates. Decisions affecting the economy are to be confined to the private sector. (Dr. Established in 1995. WTO rules can be enforced through sanctions. the WTO has systematically undermined democracy around the world. and importers conduct their business.Analysis of Pakistani Industries
WORLD TRADE ORGANIZATION (WTO)
The World Trade Organization (WTO) is the international organization dealing with the rules of trade between nations. The WTO's authority even eclipses national governments. introduced structural reforms. negotiated and signed by the bulk of the world¶s trading nations and ratified in their parliaments.
Pakistan has achieved macroeconomic stability. Kaiser Bengali)
. 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. it's not just a list of projects´. The goal is to help producers of goods and services. By promoting the "free trade" agenda of multinational corporations above the interests of local communities. balanced regional growth. dominates other values. This gives the WTO more power than any other international body. employment generation. while social and environmental costs are borne by the public. The WTO is one of the main mechanisms of corporate globalization. But there is no room for complacency as we are confronted with challenges of poverty reduction. There is a need to understand that ³development is more of an integrated process. The WTO agreements are. upgrading social indicators and containing inflation. the World Trade Organization (WTO) is a powerful global commerce agency. It is the most powerful legislative and judicial body in the world. working families. and the environment.
sbp.gov. (WCY) IMF Annual Report on Exchange Arrangement and Exchange Restriction.pk www. U. Kemal Foreign Direct Investment In Pakistan: Policy Issues And Operational Implications by Ashfaque H. Department of State.com World Currency Yearbook.S.pk www.google. February 2002 (CR2001) Forecasting Inflation in Developing Nations: The Case of Pakistan*by Muhammad Abdus Salam. Kaiser Bengali www. the Bureau of Economic and Business Affairs.Khan ³Unemployment and the People¶s Works Programme´ http://www.S. Khushi M.htm foreign trade Education. EDRC REPORT SERIES NO. U.R. International Research Journal of Finance and Economics. Shazia Salam and Mete Feridun. the Bureau of Economic and Business Affairs.wikipedia.com MSN Encarta Articles by Dr.us/pakistan/47.springerlink.org. Khan and Yun-Hwan Kim.Analysis of Pakistani Industries Reference Sheet:
y y y y y y y y y y y y y y y y
Article: Income Inequalities In Pakistan And A Strategy To Reduce Income Inequalities by A.com/content/e23473415h246m35/ www. March 2001 (CR2000) "2001 Country Reports on Economic Policy and Trade Practices: Pakistan". Department of State. Shaikh Muhammad Ashfaq
. Employment And Economic Development In Pakistan By Ishrat Husain1 Dr. ISSN 1450-2887 Issue 3 (2006) The problem of deficit in balance of payments by Mohammad Ishaq Javed and Dr. 66 http://countrystudies. (IMF) "2000 Country Reports on Economic Policy and Trade Practices: Pakistan".hec.
.Analysis of Pakistani Industries
LONG-TERM STRUCTURAL CHANGE AND GROWTH
The table above has been taken from the site of State Bank of Pakistan.org.sbp. http://www.pk/about/speech/economic_management_policies/2005/Economy_of_Pakistan_Ex po_2005.
Martial Law: The suspension of normal civil law and its replacement by strict military control. income. and is currently seeking work. Foreign Direct Investment: Investment made by a foreign individual or company in productive capacity of another country. Exports: Goods and services that are produced domestically and sold to buyers in another country.
. 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. available to work. 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.Analysis of Pakistani Industries
Agriculture: The process of growing crops by cultivating large areas of soil.
Industrialization: The development of industry on an extensive scale. or expenditure produced within a nation's physical borders within a year. Inflation: The general rise in prices across the economy over a year. Often declared during times of civil unrest. Balance of Payments (BoP): a systematic record of all the economic transactions between residents of a country with the rest of the world during a given period of time. Gross National Product (GNP): A country's total output of goods and services from all forms of economic activity measured at market prices for a calendar year. Gross Domestic Product (GDP): The total value of a nation's output. Imports: Goods or service that are produced in another country and sold domestically.