Pakistan Economic

Performance
during 1947-1958

PEP
Mirza AqeeL Baig
THE PLIGHT OF ECONOMY 1947

• Influx of 7 million refugees

• Lack of industrial base
• Lack of investment capital
• Lack of entrepreneurial expertise
• Pakistan started off with a sum of Rs. 200 million
• Collapse of Banking System
• No Central Bank and no currency
• Lack of availability of food, shelter and clothing and
had to import all its food requirements from abroad.
 PRIME MINISTERS OF PAKISTAN
Name Entered office Left office Political party
(Birth–Death)
Liaquat Ali Khan 14-Aug-47 16-Oct-51 Muslim League
(1896–1951)
Sir Khawaja Nazimuddin 17-Oct-51 17-Apr-53 Muslim League
(1894–1964)
Muhammad Ali Bogra 17-Apr-53 12-Aug-55 Muslim League
(1909–1963)
Chaudhry Muhammad Ali 12-Aug-55 12-Sep-56 Muslim League
(1905–1980)
Huseyn Shaheed Suhrawardy 12-Sep-56 17-Oct-57 Awami League
(1892–1963)
Ibrahim Ismail Chundrigar 17-Oct-57 16-Dec-57 Muslim League
(1898–1968)
Sir Feroz Khan Noon 16-Dec-57 7-Oct-58 Republican Party
(1893–1970)
PRESIDENTS OF PAKISTAN
Name Entered office Left office Political party
(Birth–Death)
Iskander Mirza 23-Mar-56 27-Oct-58 Republican Party
(1899–1969)
Ayub Khan 27-Oct-58 25-Mar-69 Military
(1907–1974)
THE PLIGHT OF ECONOMY 1947

• There was no natural gas and per capita electricity generation

100 KWH in 1947
• One of the most poorest county in the world with an average
income of about less than $60 in 1947
• Wheat and Cotton were major crops of West Pakistan while
Rice and Jute were major crops of East Pakistan
• 70% of the total trade between 1948 -49 was with India
• 75% of the country's 75million population was directly engaged
in agriculture which contributed to 60% of total GNP
• 5.9% share of manufacturing in total GNP
• In 1947 there were 9 railway systems in India, of which Pakistan
received only two
• Hence, Survival was the main goal
 Survival
• After the independence of Pakistan “SURVIVAL” was
one of the main objective of Pakistan.
• Pakistan, was indeed, a predominantly
agrarian, underdeveloped, newly dependent
nation, with little industry, few services, and no
infrastructure. But was blessed with abundant of
Natural resources by nature. (e.g. 70% world jute
output and app. 16 million cotton bales per annum)
 Influx of Refugees

 Till the end of 1955 it is estimated that about 7 million

refugees entered West Pakistan (in East Pakistan it was 1.25
million) as compared to about 5.6 million Hindus and Sikh
refugees who had left Pakistan for India.
 The extent of the impact of the refugee influx on the local
population can be measured by the fact that (according to the
1951 census) the migrants, as a percentage of the total
population of Karachi, were 55 per cent and, in the case of
the Punjab, 25.6 per cent.
 Collapse of Banking System
• The banking and financial sector suffered a similar fate
due to partition, which had eventually collapsed
because of migration of Non Muslims to India who
had dominated the Banking System
• Pakistan had no central bank or banking system worth
the name.
• The Reserve Bank of India, which was legally a common
property of both India and Pakistan, continued to
operate as a currency and banking authority for
Pakistan, and had its operation directed and controlled
from New Delhi until June, 1948.
United India had 3,496 branches of scheduled banks, but only 631 were located
in the areas that were to become Pakistan. The paid-up capital and reserves of
these banks amounted to no more than 10% of the total paid-up capital and
revenues of undivided India.

 Of the 631 branches before partition, only 213 were functioning when
Pakistan came into being. The paid-up capital and reserves decreased from to
a mere 1.5 per cent after partition.

 A year later, when the State Bank of Pakistan was established, the number of
branches of scheduled banks had declined to only 195, of which only 65
existed in Pakistan

 The Hindus migrated to India with all economic activity coming to a standstill.
With a large number of commercial banks ceasing to function, sources of all
types of credit for trade, commerce, and agriculture dried up.

 The only scheduled bank that remained in Pakistan was the Muslim-owned
Australasia Bank - too small and ill-equipped to handle the business.
Pakistan started off with a sum of Rs.
200 million

• At the time of partition, the cash balances of undivided India stood at about Rupees
4,000 million.
• At the beginning of December 1947, India and Pakistan mutually came to an agreement
that Pakistan would get Rupees 750 million as her share.
• Rupees 200 million had been already paid to Pakistan while Rupees 550 million were to
be paid immediately. But this amount was withheld on the plea that Pakistan would use
it in the war going on in Kashmir.
• However, as this stand was morally untenable, the remaining amount was later on
released after Gandhi's fast and under world pressure on January 15, 1948.
No Central Bank and No Currency

• After partition Pakistan had no central bank and no currency.

Jinnah worked out a sound economic policy, established an
independent currency and the State Bank of Pakistan.
• In May, 1948 Muhammad Ali Jinnah (Founder of Pakistan) took
steps to establish the State Bank of Pakistan immediately. These
were implemented in June 1948, and the State Bank of Pakistan
commenced operation on July 1, 1948.
• The Pakistani rupee was put into circulation in Pakistan after
the partition of British India in 1947. Initially, Pakistan used
Indian coins and notes simply over-stamped with "Pakistan".
New coins and banknotes were issued in 1948.
 Lack of industrial base

 Former East Pakistan was the main producer and supplier of jute.
But there was not a single jute factory, cotton was produced but it
had no big factories to process and manufacture cotton. They were
all situated in the areas which went to the share of India.
 Out of 921 industrial units operating in the British India, Pakistan got
only 34 industries i.e 4%of the total industries
 There is an annual production of over 15 lac [1.5 million] bales of
good quality cotton
 Abundant production of hides and skins, wool, sugarcane, tobacco.
 Pakistan’s considerable resources in minerals, petroleum and power
remain untapped.
 In laying down any policy of industrialization, note has to be taken of
these deficiencies and handicaps, and a concerted effort made to
overcome them.
POLICY FRAMEWORK

(PREFERENCES)
 INDUSTRIAL POLICY PERFORMANCE

Objectives:
• To manufacture its own products of its raw materials.
• To meet requirements of the home market for consumer goods for which Pakistan
was dependent on outside sources.
Import substitution of consumer goods was main Economic Frame-work:with high
protection and domestic production of raw material. Tariffs on the goods were low too.
The result of the objectives was that between 1949 and 1958 the growth rate of
industry in Pakistan was amongst the most rapid for any country in the world. In United
Pakistan large scale manufacturing grew at a phenomenal 23.6% between 1949 and
1954.
•What is Import Subsitution>
• Produce anythingb that can be produced utilizing domestic resources
• Discourage the import of alternative foreign items
•Advantages/Disadvantages
 INDUSTRIAL POLICY PERFORMANCE

• Even though there was no increase in per capita income in that decade –
in united Pakistan GNP per capita grew on average by 0.2% between 1949-
54 and at 0% in next 5 years

• In west Pakistan the growth rates were even more impressive with large
scale manufacturing growing at 19.1% between 1949-58 and per capita
income increasing by 6.97% in the same period
• The main feature of the 1950s was the establishment and expansion of
the large scale manufacturing sector, which ranged from a high annual
growth of 28.7% in 1953-4 to a low 4.9% in 1957-8.
 Annual growth rate in Large scale manufacturing
sector (%)
30

25

20

15 28.7
23.5 23.6 24.1 23.6
10 18.7 17.5
13.6
5 8.1
4.9
0
 INDUSTRIAL POLICY PERFORMANCE
• The industrial sector, mostly agro-based continued to
obtain supplies of agricultural raw material prices at
prices far below the world prices.
• It only once in this period showed the double digits
growth rate
• But in this period agriculture suffered negative growth
rate also
• The government ensured that the prices of agricultural
commodities continued to remain low through
combination of price controls and export duties on
agricultural products.
 INDUSTRIAL POLICY PERFORMANCE

• Establishment and expansion of large-scale

manufacturing sector – laid the foundations of a
consumer goods industry.
• Agriculture stagnated to the extent that its growth
was not even enough to cope with the growth in
population, resulting in a fall in per capita
consumption of food grain and the need to import
food as well.
• The per capita income saw NO increase in this period
 TRADE

• The areas that became Pakistan were net importers of

industrial goods from India and used to produce agricultural
commodities such as cotton, wheat and jute.
• In 1948-49 Pakistan's major trading partners were India and
UK, which together accounted 67% of Pakistan's trade.
• Pakistan along with both these countries, was a member of the
sterling area.
• The pound sterling was devalued as were the currencies of
numerous countries including that of India.
• Pakistani government did not devalue its own currency
 Why Pakistani government did not
devalue its own currency?

• One reason why this decision was taken was

to announce to the world that Pakistan was
an independent country and did not mimic
Indian economic policy.
• Other reason was to continue to sell raw jute
to India at a now higher price and to be able
to import machinery and capital goods at a
cheaper price.
Our decision not to devalue the Rupee landed us in difficulty as India broke
trade relations and we had to find new markets.
• In June 1950, war in Korea broke out this meant increase in the demand in
the prices of our industrial raw material which was mainly jute and
cotton, so between June 1950 and March 1952 our exports expanded and
increased by 109% but we did not conserve the foreign exchange and
liberalized the import.
• As much as 85% of the imports were virtually without license. Though the
balance of payments position improved substantially and trade with India
was also restored.
• Following the collapse of the Korean boom, it was a difficult time as we did
not devalue the rupee. So we could not cope up with the climb in foreign
exchange earning.
• The government imposed strict exchange controls. However, these controls
were abolished during Ayub Khan’s reign, who devalued the rupee on July
31, 1955. In 1955-6 the BOP showed surplus, but domestic prices rose and
cost of living index rose.
 BALANCE OF PAYMENT (Rs million)

174

1949-50 1950-51 1951-52 1952-53 1953-54 1954-55 1955-56 1956-57 1957-58

-117
-150
-183
-223

-292

-552

-818
-881
 TRADE PERFORMANCE

The Korean War export boom resulted in traders and merchants amassing
considerable amounts of wealth.
Conversion of merchant capital into industrial capital due to collapse in prices.
With controls imposed on imports, especially on consumer goods, the Prices of
these goods increased sharply in the domestic market which changed the terms
of trade in favor of industry and against agriculture.
THE TRADE POLICY REGIME
Three major aspects:
• overvaluation of the rupee relative to other countries
• use of quantitative controls on imports to regulate the level and
composition of imported goods
• highly differentiated structure of tariffs on imports, and export taxes on the-
two principal agricultural exports: jute and cotton
 Trade Policy
 Govt. favor tariff protection and promoted Cascaded tariff structure

lower tariffs on intermediate and capital goods

tight controls over the import of luxuries

controls on other consumer goods

easier access to capital goods and industrial raw materials

IMPORT LICENSING SYSTEM AS EXCHANGE-SAVING DEVICE
• The principal determinant of the structure of imports and the set of
domestic relative prices was the import licensing system. Licensing was
used explicitly as a protective or exchange-saving device.

• Direct quantitative controls were dominant in setting prices and

incentives.

• Through their substantial impact on relative prices, these controls

speeded the process of structural change both by imposing the
inducements to invest in various industries and by transferring substantial
amounts of income to industrialists who reinvested them in the profitable
manufacturing sector.

• Restrictions were placed on the imports of non essential goods mostly

consumer goods.

• High incentives for domestic production were given to those items for
which the domestic market was the smallest: luxury consumer goods and
consumer durables.
Import substitution progressed easily and
very rapidly in those industries that had
the highest protection, i.e. consumption
goods, and those that had cheap and
ready access to domestically
produced, primarily agricultural, raw
materials, such as cotton, jute and leather.
 Average Rate of duty on Imported goods (%)
160

140

120

100

80

60

40

20

0
1955/6 1956/7 1957/8 1958/9 1959/60 1960/1 1961/2 1962/3 1963/4

Consumer goods Consumer goods Consumer goods Raw material for consumer goods Raw material for consumer goods
• Towards the end of the 1950s, Pakistan was in a position
to produce export surpluses as well.

• foreign exchange could be saved regardless of cost, and

its desire to produce domestically almost anything that
technologically could be produced.

• Private sector initiative in economic growth. The annual

returns on investment ranged from 50 to 100 per cent in
the early 1950s, but dropped to between 20 and 50 per
cent in the latter part of the decade.
 Pakistan Industrial Development
Corporation (PIDC)
• Major objective was to help establish industries which
were handed the private sector when they were
completed
• Pakistan Industrial Development Corporation (PIDC) set
up in 1950 and it started working in 1952.
• It was set up with the authorized capital of Rs.10m
• During the early fifties the PIDC set up a number of
industrial projects in the area of
cement, pharmaceuticals, iron and steel which were
then handed over to the private sector.
 FISCAL
• Fiscal policy is deliberate changes in
government expenditure and income so as to
achieve desired economic and social
objectives.
• Fiscal policy is an instrument of economic
development that can have major impacts on
income distribution and poverty through
taxes, public borrowing and public
expenditure.
 Objectives of Fiscal Policy
• To influence the level of aggregate demand in the
economy in an effort to achieve economic objectives of
price stability and economic growth
• To influence the consumption pattern so that economic
stability can be maintained.
• To raise the level of employment
• Redistribution of income from the rich to the poor.
• Expansion of exports
• Control of import of luxury and non-essential goods
• promotion of investment
 Fiscal
• The main source of revenue has historically
been custom duties, i.e. taxation on trade.
• Tax from imports were until recently the main
source of revenue.
• The central government offered loans &
grants-in-aid that totaled Rs.257million during
1947-8 to 1957-8.
• The Center also imposed taxes to raise funds
which yielded Rs.119million till March 1957.
 Fiscal Policy
Tax efforts
• The ratio of state bank, Government tax revenue to GDP at
5.2% in 1955-58 was only moderately higher than in 1949-50.
• Total central government revenues showed improvement
because of improved earnings from commercial departments.
Deficit financing
• Throughout the 1950’s there were reliance on deficit financing
as an instrument of government policy.
• Credit creation in the public sector at Rs 679 million was a
record in 1957-8.
• Though the proportion of government budget deficits financed
from money creation came down to less than 40% during 1955
from nearly 90% in the past years
 Foreign aid to Pakistan
The Government of Pakistan turned down proposed US
assistance three times in 1950, under the premiership of
Liaqat Ali Khan. The cabinet was also split over the question
of going to the World Bank for loans the same year.
Commonwealth aid was, however, accepted
As security concerns dominated the new country's
policies, further weakening its infrastructure, Pakistan quickly
became dependent on foreign assistance

Foreign Aid
Commitment Aid per Capita
Years
(Current US$ (Current US$)
Millions)
1947-55 453.837

1955-60 1,012.80

1960 252.17 5.49

 Fiscal Policy
• Pakistan joined the two alliances SEATO (South
East Asia Treaty Organization) and CENTO (Central
Treaty Organization)
• The US provided nearly $2.5 billion in economic
aid and nearly $700 million in military aid to
Pakistan between 1954 and 1964
• Foreign aid contributed significantly to Pakistan's
growth from the late 1950s; without it, the rapid
increase in development in the 1960s could not
have been possible
 Monetary Policy
• Given the conditions prevailing in 1948 the SBP
adopted a monetarist approach so far as achievement
of price stability was concerned.
• One of the objectives of money policy was to develop
the various aspects of the financial sector particularly
the banking system.
• In the early years of the country's economic history size
of private sector was small and banks were very
conservative in lending so the private sector used only
25% of the total bank credit during 1947-58.
• Government used 75% of the bank credit during 1948-
58.
Bulk of the credit was used by the government to meet its
expenditures; it was used to finance foreign trade and commerce. Though
the private sector got very small parts of the bank credit.
The number of branches of the commercial banks expanded in the
1950’s, these banks continued to mobilize increasing domestic saving and
also supplied credit to domestic industries.
In 1952 the total advances made to different sectors were from:
38% by Pakistani banks
22% by Indian banks
40% by foreign banks
In 1953, 48% of all advances by banks were focused on
commercial activity. The bulk of loans were utilized in financing the
wholesale and retail trade of the country. Advances were made:
16% to manufacturing
One third for metal products and one fifth for textiles.
Not surprisingly, a greater share of credit was extended to West
Pakistan to East Pakistan.
 Monetary Policy
The demand for bank credit from the Public Sector
emanated from the following factors:
1) Growing need of liquidity in the economy.
2) Government’s heavy expenditure on the
development of infrastructure.
3) Pakistan Industrial Development Corporation
(PIDC) was setup to make up for investment in
projects where the private sector was reluctant to
enter.
4) Funds for commodity operations.
Percentage Share in Total Credit 1950-51 to 1959-60
 Issues In Monetary Management
Public sector
• Monetary policy gave importance
to asset side of the banking
system and up to 1960 bulk of
monetary expansion was on
account of credit to the
government sector- used 75% of
the bank credit during 1948-58
Private sector
• Size of private sector was small
and banks were very conservative
in lending so the private sector
used only 25% of the total bank
credit during 1947-58
The responsibilities of the State Bank during the early years of
its existence (1948–59) went beyond the conventional
functions of a Central Bank. These included restoration of the
banking system and ensuring its growth through helping the
setting up of financial institutions, developing the money
market and training bankers.
 Restoration of Banking System
• State Bank of Pakistan (SBP), which took over central
banking from the Reserve bank of India (RBI) with
effect from July 1, 1948
• The payments system was strengthened by establishing
the National Bank of Pakistan (NBP)
• The State Bank of Pakistan began operations on 1 July
1948 and became the sole note-issuing authority but
the government of Pakistan at that time had no note
printing press to print them on. The State Bank of
Pakistan was faced with the huge task of establishing a
banking system after the collapse at the time of
partition
 Restoration of Banking System
Several Banks and Financial Institutions were set up.
• MCB in 1947
• NBP (National Bank of Pakistan) was set up in 1949. The role of the National
Bank of Pakistan until June 1950 was restricted to financing jute operations.
• ADFC (Agricultural Development Finance Corporation Act) was set up in
1952. It was set up to meet credit needs of the agriculturalists and to provide
long term finance for the purchase of mechanical and other equipment.
• In 1956 Agriculture Credit Department was set up in SBP. It was set up to
assess the credit requirements of farmers from time to time.
• PIFC (Pakistan Industrial Finance Corporation) was set up in 1949.
Important task was to make medium and long-term credit available to
industrial concerns in Pakistan
• PICIC (Pakistan Industrial Credit and Investment Corporation) was set up in
1957. A financial institution in Pakistan, one of the first Development finance
institutions established with the World Bank Group assistance
 Conclusion
• The most developed areas within the year 1948 to 1958, was the restoration of the
banking sector which improved gradually because most of the banks were
dominated by non Muslims of United India.
• The development of industrial sector was also impressive for the new born
Pakistan, yet agricultural sector should not have been ignored and the
development of both the sectors should have been done together, to get better
sustainable economic growth.
• Investments in education and health were minimal and they had very low priority
in the total development expenditure.
• This era also marked the reason for the now independent Bangladesh, because of
the biasness showed by the government to West Pakistan.