analysis of pakistan

TABLE OF CONTENTS

Agriculture

Phases and Trends ……………………………………………………………………...1-2Graphical Presentation ……………………………………………………………………2Policy Evaluation & Growth …………………………………………………………...3-4

Industrial Development

Trends & Phases ……………………………………………………………………….5-8Privatization in Pakistan …………………………………………………… ……………9Efficiency & Productivity ………………………………………………………………10

Foreign Trade

Importance ………………………………………………………………………………11Pakistan’s International Trade ………………………………………… ……………11-16Statistics from 1984-2005 ……………………………………………………………….16

Economic Planning

Economic Planning in Pakistan ……………………………………………………...17-19

Foreign Aid

Introduction ……………………………………………………………………………...20Foreign Aid in Different Regimes …………………………………………………...21-23Impact of Foreign Aid …………………………………………………………………...24

Fiscal Policy

Budget ……………………………………………………………………………….25-28 Ordinary Budget Development Budget

Fiscal Deficit …………………………………………………………………………….29

CONCLUDING REMARKS. …………………………………………………………...30

AGRICULTURE

PHASES AND TRENDS:

Over the past fifty-eight years, the agriculture sector in Pakistan has confronted an uneven growth coinciding with different policies under different regimes.

▪ 1950s

Agriculture was neglected from 1947 till 1953 because of a number of problems faced by Pakistan at the time of independence. The emphasis was laid down more on industrialization rather than agriculture but when Pakistan had to import food items to meet its local demand, the government realized the importance of agriculture sector. In first five-year plan 1955-1960, targets were set out to increase the food items production. Though they were not achieved but it had gained the attention of the governing body.

▪ 1960s

The stagnation in the 1950s was followed by a growth surge in the 1960s owing to the large scale public investment in the irrigation sector, the green revolution, introduction of high-yielding varieties in wheat and rice and macro policies that helped increase agricultural productivity and profitability.

▪ 1970s

The trend was reversed in the 1970s, mainly because of climatic factors and depressing effect of the viral attack in the cotton sub-sector. From 1970-77, the growth rate was declining to 2.5% as against 4.5% in 1968-69 but in 1977-78 it was improved to 4.2%.

▪ 1980s

1980s, however, witnessed another period of growth, because of improved cotton management practices, coupled with incentives for agriculture sector, through policy instruments.

▪ 1990s

Over the years, Pakistan’s drive to promote the manufacturing sector has led to a fall in the share of agriculture to GDP, from 45% in 1960 to 25% of GDP in 1999-00. The importance of agriculture sector can be derived from the fact that it makes the largest share of Pakistan’s export earnings, including processed exports and in the 1990s it provided 70% of export earnings. In 1990-95 growth rate was 5.1% and in 1996-99 the growth rate declined to 2.2%.

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Agriculture

▪ 2000-2002

Agriculture has suffered severe setback during 2000-02 of the present government as a result of the catastrophic drought, resulting in water shortage between 41 to 50 percent from the normal supplies. Despite unprecedented drought, agriculture grew by an average rate of 1.6 percent per annum during these three years as against 2.2 percent of the last three years prior to this government.

▪ 2003-2005

2003 was facing an off and on condition regarding supply of irrigation water but it witnessed a modest recovery in agricultural sector.A stronger than expected performance of agriculture has been one of the hallmarks in 2004-2005 with growth reaches as high as 7.5%.Principal crops in 2004 (with output in metric tons) included sugarcane, 52 million; wheat, 19.8 million; rice, 7.6 million; cotton lint, 6 million; and corn, 1.8 million. Livestock included cattle, water buffalo, sheep, goats, and poultry, fisheries and forests grew by 2.3%, 2.1%, and 0.4% respectively.

GRAPHICAL PRESENTATION:

The rise and fall in the GDP due to agriculture from 1955-2004 is shown below:

-2-Agriculture

POLICY EVALUATION AND GROWTH:

Historically, Pakistan’s agriculture policy has been defined by a pervasive direct or indirect government intervention through state bodies, although the extent of intervention has varied considerably under various regimes. The government influenced the agriculture sector through sectoral as well as economy-wide policies with its two stated objectives: food security for urban consumers and price stability for agriculture producers and consumers.

A related policy objective was that of industrial development through structural transformation of the economy, which was pursued at the expense of agriculture sector growth. These conflicting objectives were pursued through a combination of indirect policies aimed at depressing agriculture prices such as overvaluation of exchange rate and export taxation resulting in indirect taxation of agriculture producers. For food security of urban consumers, agriculture producers’ prices were artificially depressed (below world prices). A price stabilization policy was carried out through administered producers’ prices under compulsory procurement of crops by the state, as well as providing nominal subsidy on various inputs.

During the 1960s, large public investments in the agriculture sector in pursuit of food security objectives as well as private investments led to a positive impact on agriculture sector growth. The 1970s, however, brought resumption of state controls and increased government intervention in the agriculture sector through nationalization of many production units. The devaluation of Pakistani Rupee during the period and consequent price rises, however, contrary to expectations, did not transfer any benefits to agriculture due to increased export taxes and appropriation of profits by state trading enterprises.

The 1980s was a decade of agriculture sector liberalization and reforms, albeit, in compliance with the country’s structural adjustment program, it brought agriculture input/output prices closer to the world prices, thus reducing state intervention and increasing the role of private sector. These policies resulted in a number of drastic steps in the agriculture sector; most of the subsidies (on pesticides, seeds and mechanization) were withdrawn immediately while a program for phased withdrawal of fertilizer subsidies was set up. In pursuit of government’s commitment for an increasing role of the private sector and due to its inherent inefficiencies the ration shops system was abolished in 1988. The private sector was encouraged in agriculture commodities trade, procurement of rice and cotton, and distribution of pesticide and fertilizer, even though the government remained the major distributor. In 1981, as a follow up of the new agriculture policy, the Agriculture Price Commission was established to advise the government on changes in support prices for major crops.

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Agriculture

In addition to these sector-specific policies, exchange rate overvaluation was reduced during 1980s; there was a significant reduction in exchange rate overvaluation, from -37.6% in 1960-65 to -19.2% in 1986-87.

Extensive empirical evidence exists from national and international sources suggesting large transfers from agriculture producers to consumers due to distortions as a result of state intervention. Commodity-wise negative values of nominal rates of producer protection (except for sugar cane) indicate the extent of these transfers during the period 1961-87. Taking these measures of protection as a criteria, the 1980s liberalization of agriculture sector could only be of limited scope and the substantial depreciation of the Rupee during the 1980s forced the government to be careful in liberalizing agriculture prices any further.

Although government price intervention policy was successful in stabilizing prices by insulating farmers from fluctuation of world prices, however, the policy led to a depressed supply side response, resulting in loss of income and foreign exchange, with net effect as negative.

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INDUSTRIAL DEVELOPMENT

TRENDS AND PHASES:

Over the forty years, 1949-50 – 1989-90, the annual growth rate of GDP was 5.2 percent excluding the first decade it was 6 percent. Large-scale manufacturing was the fastest growing sector: an annual rate of 10.3 percent over the four decades.

▪ 1950s

The end of the Korean boom found Pakistan with a class of merchants who had accumulated sizeable fortunes during a period of an overvalued exchange rate, rising imports and scarcities created by the disruption of trade with India. As imports were cut, reduced profit opportunities in trade were accompanied by increased opportunities for huge profits in manufacturing for the domestic market. In addition to heavy protection, the manufacturing sector was provided a host of other incentives. In a context of microeconomic stability, investment rose sharply. “Within our seven countries, only Pakistan had to discover an entrepreneurial class”.

Within a decade had done so. East Pakistan, however, did not and its annual growth was just above 2 percent during the 1950s. The transfer of resources from agriculture to industry also implied a transfer from East to West Pakistan to finance the “primitive capital accumulation: of industry.

▪ 1960s

The periods 1950- 60 – 1964-65 witnessed a number of important departures in the economy; notably

a. Introduction of export bonus scheme and a host of other new and strengthened incentives for exporting.

b. A substantial increase in foreign aidc. Significant liberalization of imports and other direct controlsd. The beginning of the “green revolution” in agriculture and relatedly a major

liberalization of agriculture (notably with respect to fertilizer distribution and private tube wells)

Large scale manufacturing growth accelerated to nearly 17 percent a year from a much more substantial base. Manufactured exports responded powerfully led by textiles, but a variety of new exports also appeared. The 1960s also saw a fall in the relative price of

manufactures and an improvement in the domestic terms of trade of agriculture. In the spring of 1965, foreign aid of Pakistan was cut back and this was followed by the war with India.

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Defense expenditures and imports squeezed public investments and developmental imports. Some of the imports liberalization of the preceding 5 years was reversed. The growth of industry, though not its imports, slowed to under 10 percent, but as the green revolution gained momentum during 1964-65 - 1969-70, aggregate output maintained its annual growth of close to 7 percent. The rise in agricultural productivity and incomes occurred at a time when the limits to the expansion in the domestic market for manufacturing led by import substitution were being increasingly felt. In a context of civil strife and war, between 1969-70 and 1971-72, the growth of Pakistan’s GDP and industry fell to below 2 percent a year.

▪ 1972-77

The break up of Pakistan was followed in rapid succession by a major break in industrialization policies and the first oil shock. The reversal in policies was the shift from private to public ownership. This was also a period of liberalization with devaluation and unification of exchange rate. There was a burst of rapid growth early on, partly reflecting the diversion of exports from the former East Pakistan to the international market. But the effects of this liberalization are impossible to distinguish from those of the “shocks” noted above. Large scale manufacturing growth was meager and agricultural growth also slowed in a period of drought, floods and a major pests attack on cotton. GDP growth averaged 4.8 percent a year.

▪ 1977-88

Industrial growth was led by a rapid expansion of domestic demand, and by the coming on stream of the heavy, long-gestation investment by the public sector made in the previous period. Worker’s remittance rose sharply after 1977 from some $ 0.5 billion in 1976-77 to $ 2.9 billion by 1982-83. Industrial growth returned to the rates of the 1960s, as did GDP growth at 6.8 percent a year. Another important factor contributing to the expansion of domestic demand was the rise in foreign resource inflows and illicit exports related to the war in Afghanistan. By its very nature this illicit trade remains shrouded in mystery but it probably continued to grow for sometime after remittance began to decline in 1985-86 to $ 2.6 billion and then more rapidly fell down to $ 2 billion over the next three years. Industrial and GDP growth slowed but not as much as they would have had there not been a rapid increase in the fiscal deficit.

▪ 1988-90

By 1988, all these trends, which had fuelled a rapid expansion in domestic demand for industrial products, had been reversed. Overseas remittances decline and in 1988-89, the government embarked upon a stabilization program with a reduction n the fiscal deficits as its centerpiece.

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Afghan war related foreign resource inflows also began to decline and there was a substantial terms of trade deterioration in 1088-89. Also, there were civil disturbance in Sindh particularly in Karachi.

Increased growth of agriculture, aided by good weather an a rise in non traditional manufactured exports were unable to prevent a decline in the growth of GDP and large scale manufacturing both to 5 percent a year.

▪ 1990-1995

In the period of 1990-95 the percentage of development in manufacturing was 5.7% and in large scale manufacturing it was 4.7%

▪ 1995-1999

The manufacturing sector was grown by 3.0% and large scale manufacturing development was 3.6%.

▪ 1999-2000

The growth in large-scale manufacturing slowed considerably in the 1990s for a variety of reasons including worsening of macroeconomic environment, adverse law and order situation, inconsistent policies and poor governance. As against an average growth of 8.2 percent in the 1980s, large-scale manufacturing slowed to 4.7 percent in the first half of the 1990s and further to 3.0 percent during three years prior to this government. The growth in large-scale manufacturing has picked up and averaged 4.7 percent during the last three years of this government [see Table 7].

▪ 2000-2001

Large-scale manufacturing is targeted to grow by 6.2 percent in 2000-01. Information for the first six months (July-December) of the current fiscal year suggests that the industrial production grew by 1.9 percent as against 7.5 percent of the comparable period of last year. However, excluding sugar, the large-scale manufacturing has registered a growth of 6.0 percent as against 6.3 percent of the comparable period of last year. Sugar production has declined by 8.0 percent because of the sugarcane production and delayed in

sugarcane crushing. Vegetable ghee (13.0%), cooking oil (12.5%) and cigarettes (16.1%) performed well in food, beverages and tobacco group, but even then influence of sugar made the group to decline by 13.8%. Cotton cloth (18.3%), and woolen and carpet yarn (9.3%) performed well in textile sector, which grew by 4.1 percent. Leather products show a reasonable growth of 5.6 percent while basic metal industries registered a growth of 12.8 percent. Most importantly, automobile sector has picked-up.

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▪ 2002-2005

The growth rate in the year 2003-2004 was 14.1%. However it grew to 12.5% in the year 2004-2005.The main contributors of this economic growth were textile and apparel group, chemicals, petroleum group, tyres and tubes group, non-metallic mineral products, engineering goods group, electrical items group, and automobile group.The privatization pace maintained its pace during 2004-2005 and succeeded in privatizing some high-ticket items despite an in-hospitable global environment.

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PRIVATIZATION IN PAKISTAN:

In Pakistan, last 30 years have witnessed sharp changes in policy –from nationalization and emphasis on the public sector to more reliance on the private sector. In fact a policy of privatization remained an enunciated policy in the 1950s and 1960s, which was again adopted in the late 1970s. However it was not until late the 1980s that concerted efforts were mounted to breath life into the moribund program of privatization.

Pakistan has a number of constraints in the way of privatization program. Supply of capital, resistance from various economic groups, legal constraints, biased investor preferences etc are standing in the way of successive privatization program in Pakistan. Sound macro-economic policies are critical for the health of both private and public enterprises. In turn a pre-requisite of state enterprise reform is de-regulation in areas such as pricing, labor, trade, and finance. In the absence of an appropriate regulatory framework, deregulation and decentralization of operations, achievements of the privatization program may be affected.

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EFFICIENCY AND PRODUCTIVITY:

It has been widely noted that during the 1950s and 1960s, the extensive systems of controls was administered reasonably competently and relatively modest corruption. There has probably been deterioration on both these counts. There also has been a gradual liberalization since the late 1970s and macroeconomic stability throughout the period. Inflation was measured 2.12 percent a year during 1949-50 – 1950-60 and 3.2 percent between 1959-60 and 1969-70. The annual increase has ranged between 4 percent and 12 percent in the last 15 years: after 1976-77 exceeding 10 percent in only 3 out of 13 years. Wild fluctuations in the real exchange rates have been avoided and there have been long periods of relative stability in the rate.

Industrialization in its initial stages was dominated by textiles and other simple consumer goods of the type, in which a low-income country could hardly be said not to have a comparative advantage. Also there were system of industrial and import licensing through which the government sought to influence the allocation of resources within the country. Thus high protection in the early years seems to have affected mainly the rate rather than the pattern of industrialization

There is considerable evidence of inefficiencies. First there is the strong presumption of inefficiencies created by the complex, and often irrational system of direct controls. For example rationing imported inputs on the basis of capacity and the effort involved in obtaining various licenses created a strong incentive to build excess capacity. There is also the evidence on the waste of capital through the choice of excessively capital-intensive techniques. Nonetheless, there were enough and probably growing incentives in a number of industries, for substantial improvements in efficiency. Over the period of 1958-70 there was a substantial improvement in labor productivity and that it was not due mainly to capital deepening.

Pakistani industrialization in the period up to 1969-70 has received much more research attention than the industrial development of the last two decades. As for the operational efficiency of public enterprises, they have often been saddled with non-economic objectives and excessive labor force and, on balance, their performance has not been impressive.

Favorable shocks on the context of macroeconomics stability in the decade of 1977-87 allowed the resumption of rapid industrialization without much policy reform. 1980s enjoyed the protection with a number of anomalies but the system of protection remains in great need of rationalization.

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FOREIGN TRADE

IMPORTANCE:

Export is critical for any country for a variety of reasons.

▪ Export sector usually has a high rate of profits and a higher propensity to save. Their profits are high because they produce for world market and therefore achieve greater economies of scale and production efficiency.

▪ Export sector generate foreign exchange earnings and overcome the foreign resource constraints for greater imports and the attendant rise in the level of economic activity.

▪ Exports and particularly manufactured exports are highly employment intensive. An increase in exports creates jobs for workers directly engaged in the production of the export commodities. If raw materials and machinery used in such production are supplied by domestic industries, increased demand for their products creates more employment.

▪ Higher exports growth help achieve higher economic growth.

Given the apparent importance of exports in the economic transformation of nations, the ability to achieve strong export-led economic growth has become vital for Pakistan’s overall economic progress and prosperity of the nation.

PAKISTAN’S INTERNATIONAL TRADE:

Export performance is sensitive to both domestic factors, particularly the ability to compete in the world markets, as well as external market conditions. Comparison of the supply-side and demand-side variables indicates that export performance of Pakistan is relatively more sensitive to demand-side variable than to other factors.

▪ 1950s-1990s:

Pakistan's exports fluctuated widely during the last fifty years. Exports received little or no attention during the 1950s, registering an average decline of 5.7 percent per annum. Exports recovered in the 1960s and grew at an average rate of 10.7 percent per annum. The 1970s witnessed acceleration in export growth, to an average rate of 22.3 percent. The 1980s and the 1990s then saw a decline in export rates in comparison with the 1970s.

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Foreign Trade

When viewed against the experiences of many successful developing countries, Pakistan's export performance during the 1990s has been lackluster. The main reason for this is that, unlike many East Asian countries, Pakistan has not adopted an effective trade liberalization regime. Another reason for the fluctuating export rate has been the variation in agricultural production, which is largely dependent upon weather conditions. The decline in agricultural production not only affected exports, but also had a great bearing upon the manufacturing sector. Furthermore, changing geo-strategic conditions after the September 11 terrorist attacks greatly affected exports. For example, the war on terrorism in Afghanistan made Pakistani exports vulnerable, and the continuous tension and threat of war with India has similar effects. For these reasons, Pakistan's trade deficit has remained and continues to be among the most important areas of concern for successive governments.

1997:

When Sharif became prime minister in 1997, he introduced tariff reforms. These reforms were aimed at the liberalization of the economy. Furthermore, these reforms provided for tariff cuts on imports, reducing the top rates for customs duties from 65 percent to 45 percent. Automobiles were the only exception where the previous rates remained in force. Duties on imported machinery for industry were also fixed at standard 10 percent. These tariff reforms were aimed at achieving three objectives:

To discourage smuggling, estimated to cost the Pakistani economy at least Rs. 100 billion (~$2.5 billion) annually

To force industry to become more competitive To meet part of the requirements put forward by the IMF for gaining new loans.

1997-1998:

On July 17, 1997, the then commerce minister, Ishaq Dar, unveiled an ambitious new trade policy to increase exports from $8.26 billion in 1996-97 to $9.58 billion in 1997-98, and to reduce the merchandise trade gap from $3.4 billion in 1996-97 to $2.3 billion in

1997-98. The new trade policy also reduced the interest rate for exporters, whereby 50 percent of the admissible duty drawbacks to exporters will be paid within three days of presentation of the documents; and import duties on a host of raw materials for export of finished goods were reduced or eliminated altogether. Furthermore, the new trade policy removed the restrictions on importation of gold and silver. Sales tax exemptions were granted to imported raw materials and components to be used by the export suppliers against international tenders.

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Foreign Trade

According to Ishaq Dar, as a result of this trade policy, exports rose by 5 percent in dollar terms in the first seven months of fiscal year 1997-98, while imports contracted by 8 percent. Consequently, the merchandise trade gap narrowed by about $780 million in the first seven months of 1997-98. However, the narrowing trade gap was not all-good news. Falling machinery imports suggest that industrial growth remained lackluster, while the contraction in the petroleum bill reflected a softening in international oil market prices.

1998-99:

On June 15, 1998, the government introduced its trade policy for fiscal year 1998-99. The main purpose of the policy was to reduce the trade deficit by increasing exports and reducing imports. In the new policy, the export target was set at $10 billion, up by 17.6 percent compared with an estimated $8.5 billion in the last financial year. The imports for 1998-99 were projected to remain at approximately the same level as the prior year, i.e. $10.05 billion, thereby eliminating the merchandise trade deficit in 1998-99. The government claimed that it would achieve its export goals by "improving and modernizing export incentives" and "strengthening institutional export mechanisms" for its export regime. Among the export incentives offered were:

Exporter refund claims were to be settled within thirty days. The State Bank of Pakistan (SBP) at 8 percent interest instead of the existing 11

percent interest rate made export refinance funds for at least Rs 25 billion ($570 million) available.

Companies classed as export processing units (those exporting 70 percent of their production) were allowed to import inputs without payment of customs duties.

A ban on exports of fifteen particular items was lifted. The private sector was allowed to export coke, rock salt, and caustic soda which

were previously exportable by the public sector only. Restrictions on export quotas were lifted on maize, grains, soda ash, breeding

camels, native birds, and cement.

The trade policy also introduced certain measures for rationalizing the import regime. The main features of import incentives have been given below:

Import duties on gold were to be reduced by 40 percent. Import of scrap plastic was banned. Import of diagnostic/testing/analytical equipment was allowed to non-resident

Pakistanis paying in foreign exchange. Import of second-hand machinery, except computers, was banned. Maximum import duties on many items were reduced from 45 percent to 35

percent.

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Foreign Trade

According to the Federal Bureau of Statistics (FBS), exports fell by 10.5 percent in the fiscal year 1998 to $7.72 billion from $8.63 billion in 1997. Meanwhile, imports contracted by 8.2 percent, from $10.12 billion to $9.29 billion, causing the trade deficit to widen slightly by $79 million to $1.57 billion.

According to the IMF's "International Financial Statistics" report, merchandise exports rose by 6 percent in the first half of 1999, from PRs 190 billion to PRs 202 billion. Imports, however, rose by nearly 23 percent from PRs 206 billion to PRs 252 billion. In dollar terms, exports fell by 0.7 percent, year to year, while imports rose by almost 15 percent. Petroleum products and machinery dominated imports, while the main exports remained cotton fabric and rice.

▪ 2001

In 2001, the military government of General Musharraf took two important measures in the area of foreign trade. These measures were to explore different markets and diversify trade and, secondly, to reduce imports. In the area of trade diversification, Pakistan improved its trade ties with different countries. Some results, even if small, were evident: Pakistan's exports to China went up by 75 percent; to the United Arab Emirates (UAE) and Saudi Arabia by 25 percent each; to Bangladesh by 20 percent; to Indonesia by 161 percent; and to Korea and Australia by 9 percent each. Other than the UAE and Saudi Arabia, all other countries are referred to as non-traditional markets in the context of Pakistan's previous export patterns. Furthermore, efforts were made to improve trade relations with Kenya, Nigeria, and Syria. In addition, the military government provided the following incentives to exporters:

Exporters who posted at least a ten percent growth over the prior year's exports were allowed to retain 50 percent of the additional exports in their local foreign currency account. They could use this amount for the purchase of machinery, equipment, raw materials, and payment of commissions and promotional expenses.

Export development charges were waived on additional exports. Exporters who demonstrated better performance were given monetary rewards.

An "incentive scheme" that sought to reward three categories of exporters (large, medium, and small) for increases in overall exports, entering new markets, value

addition, etc., was devised. An amount of Rs 2 billion was allocated for this project.

Foreign Trade

▪ 2002

With regard to trade liberalization, on June 30, 2002, the maximum trade tariffs were reduced from 30 percent to 25 percent. The government established three tariff categories with duty rates of 25 percent, 15 percent, and 5 percent. However, Pakistan's trade policy in 2002 continued to ban thirty items, mostly on religious, environmental, security, and health grounds. Automobiles continued to face high duties ranging between 80 percent and 200 percent. But there remains a great need to continue efforts for trade liberalization and diversification of exports for the economy's improvement. As a result of these measures introduced by the government, Pakistan's exports reached $9 billion in 2000-01 for the first time ever. Imports remained stable at $10 billion in the same period, thereby reducing the trade deficit.

Pakistan’s exports evolve broadly in line with total world imports. Accordingly, Pakistan’s share in world imports was remarkably stable during the last 20 years, ranging between a minimum of 0.12 percent in 1980 and a maximum of 0.18 percent in 1992. In 1999-2000, the share was 0.15 percent. This would suggest that Pakistan’s export performance was not worse than that of the world on average. Compared to regional competitors, however, the performance was unimpressive.

▪ 2003

The foreign trade of Pakistan consists largely of the export of raw materials and basic products such as cotton yarn and the import of manufactured products. In 2003 exports earned $11.9 billion and imports cost $13 billion. The chief exports were cotton textiles, cotton yarn and thread, clothing, raw cotton, rice, carpets and rugs, leather, fish, and petroleum products; the main imports were machinery, electrical equipment, petroleum products, transportation equipment, metal and metal products, fertilizer, and foodstuffs.

The United States is the largest trading partner of Pakistan. The United States is also one of the largest contributors of direct foreign investment in Pakistan. In 2000 Pakistan imported more than $646.5 million worth of U.S. products, mostly wheat, chemicals, fertilizers, machinery, and transport equipment. Pakistan’s exports to the United States amounted to $2.12 billion. Pakistan’s other trading partners are Japan, the United

Kingdom, South Korea, Saudi Arabia, China, Germany, Hong Kong, France, the Persian Gulf States, and Iran.

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Foreign Trade

▪ 2004-2005

Exports were up by 14.6 percent during the first nine months of the financial year 2004-2005 rising to $10206.6 billion from $8905.2 billion. One half of the net increase in exports amounting to $650.7 billion has come from the non-traditional export items (other exports). Imports during this period were up by 37.8 percent rising from $10497.4 billion to $14468.6 billion.

STATISTICS FROM 1984-2005:

In Million US $

Years Exports Imports

1984-1985 2491 59061985-1986 3070 56341986-1987 3686 53801987-1988 4455 63911988-1989 4661 70341989-1990 4954 69351990-1991 6131 76191991-1992 6904 92521992-1993 6813 99411993-1994 6803 85641994-1995 8137 103941995-1996 8707 118051996-1997 8320 118941997-1998 8628 10118

1998-1999 7779 94321999-2000 8569 103092000-2001 9202 107292001-2002 9135 103402002-2003 11160 122202003-2004 12313 155922004-2005 10206 14468

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ECONOMIC PLANNING

According to M.P. Todaro:

“Economic planning is a deliberate and conscious

attempt by the state to formulate decision on

how the factors of

production shall be allocated among different uses or industries, thereby determining how much of total goods and services shall be produced in the

ensuing periods”

ECONOMIC PLANNING IN PAKISTAN:

Six-year planPakistan's economic development planning began in 1948. By 1950 a six-year plan (1951-57) had been drafted to guide government investment in developing the

infrastructure. But the initial effort was unsystematic, partly because of inadequate staffing.

First Five-Year Plan

More formal planning--incorporating overall targets, assessing resource availability, and assigning priorities--started in 1953 with the drafting of the First Five-Year Plan (1955-60). In practice, this plan was not implemented, however, mainly because political instability led to a neglect of economic policy, but in 1958 the government renewed its commitment to planning by establishing the Planning Commission.

Second Five-Year Plan

The Second Five-Year Plan (1960-65) surpassed its major goals when all sectors showed substantial growth. The plan encouraged private entrepreneurs to participate in those activities in which a great deal of profit could be made, while the government acted in those sectors of the economy where private business was reluctant to operate. Pakistan's success, however, partially depended on generous infusions of foreign aid, particularly from the United States.

Third Five-Year Plan

After the 1965 Indo-Pakistani War over Kashmir, the level of foreign assistance declined. More resources than had been intended also were diverted to defense. As a result, the Third Five-Year Plan (1965-70), designed along the lines of its immediate predecessor, produced only modest growth.

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Economic Planning

Fourth Five-Year Plan

When the government of Zulfiqar Ali Bhutto came to power in 1971, planning was virtually bypassed. The Fourth Five-Year Plan (1970-75) was abandoned as East Pakistan became independent Bangladesh. Under Bhutto, only annual plans were prepared, and they were largely ignored.

Fifth Five-Year Plan

The Zia government accorded more importance to planning. The Fifth Five-Year Plan (1978-83) was an attempt to stabilize the economy and improve the standard of living of the poorest segment of the population. Increased defense expenditures and a flood of refugees to Pakistan after the Soviet invasion of Afghanistan in December 1979, as well as the sharp increase in international oil prices in 1979-80, drew resources away from

planned investments. Nevertheless, some of the plan's goals were attained. Many of the controls on industry were liberalized or abolished, the balance of payments deficit was kept under control, and Pakistan became self-sufficient in all basic foodstuffs with the exception of edible oils. Yet the plan failed to stimulate substantial private industrial investment and to raise significantly the expenditure on rural infrastructure development.

Sixth Five-Year Plan

The Sixth Five-Year Plan (1983-88) represented a significant shift toward the private sector. It was designed to tackle some of the major problems of the economy: low investment and savings ratios; low agricultural productivity; heavy reliance on imported energy; and low spending on health and education. The economy grew at the targeted average of 6.5 percent during the plan period and would have exceeded the target if it had not been for severe droughts in 1986 and 1987.

Seventh Five-Year Plan

The Seventh Five-Year Plan (1988-93) provided for total public sector spending of Rs350 billion. Of this total, 38 percent was designated for energy, 18 percent for transportation and communications, 9 percent for water, 8 percent for physical infrastructure and housing, 7 percent for education, 5 percent for industry and minerals, 4 percent for health, and 11 percent for other sectors. The plan gave much greater emphasis than before to private investment in all sectors of the economy. Total planned private investment was Rs292 billion, and the private-to- public ratio of investment was expected to rise from 42:58 in FY 1988 to 48:52 in FY 1993. It was also intended that public-sector corporations finance most of their own investment programs through profits and borrowing.

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Economic Planning

Eighth Five-Year Plan

In August 1991, the government established a working group on private investment for the Eighth Five-Year Plan (1993-98). This group, which included leading industrialists, presidents of chambers of commerce, and senior civil servants, submitted its report in late 1992. The plan reflects the initiatives and incorporates the policies of government geared to the dynamic and equitable economic system. The main emphasize were on social sectors, energy, drainage, physical infrastructure, public-private partnership, empowerment of the community, and lower echelons of government.

Ninth Five-Year Plan

Ninth Five-Year Plan (1998-2003) reflected the apathy of federal government towards disaster management despite recurrent losses due to floods landslides in the preceding

years. However it incorporates environmental issues in a more harmonized manner as compared to the previous efforts at state level. Poverty alleviation, employment generation, population control and education advancement objectives were continued in ninth five-year plan.

Tenth Five-year Plan

Tenth Five-year plan (2003-2008) is in operation. Population welfare program, urban water supply, building and maintaining infrastructure, crisis management, and stable economic growth are of the main emphasis.

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FOREIGN AID

“Foreign aid is the glow of resources and technical assistance from a developed country or an international organization to stimulate domestic development efforts of a less

developed country”

INTRODUCTION:

Since independence Pakistan has had to depend on foreign assistance in its development efforts and to balance its international debt payments. Foreign aid has always been an important source of capital for Pakistan, especially during the 1960s and 1970s. During this period, Pakistan was one of the largest aid recipients in Asia. In the 1980s, Pakistan would again receive large foreign aid flows due to its front-line role in the American-Russian conflict

over Afghanistan. These aid inflows, which reached US$2 billion annually by the mid-1980s, are claimed to have supplemented meager domestic savings and foreign remittances, and enhanced the credit worthiness of Pakistan.

Nonetheless, foreign aid flows to Pakistan have also been moving in parallel with the world trend. It has been decreasing over time and moving towards loan-type aid. According to Pakistan Economic Surveys (various issues), the share of grant-type aid in total aid commitment reduced sharply from 80% in the 1st Plan to 12% in 1970-1978 and to less than 9% since 1993. Also, the aid agencies, such as IMF and WB, have become more influential in dictating the GOP.

In 1960 the World Bank organized the Aid-to-Pakistan Consortium to facilitate coordination among the major providers of international assistance. The consortium held 92 percent of Pakistan's outstanding disbursed debt at the end of June 1991. The consortium's members include the United States, Canada, Japan, Britain, Germany, France, and international organizations such as the World Bank and the Asian Development Bank (ADB). The World Bank accounted for 26 percent of the outstanding debt, and the ADB, which was the largest lender in the early 1990s, accounted for 15 percent. Most non-consortium funding comes from Saudi Arabia and other oil-producing Middle Eastern countries. Most aid is in the form of loans, although the proportion of grants increased from around 12 percent in the late 1970s to around 25 percent in the 1980s, mainly because of food aid and other funds directed toward Afghan refugees. With the decline in this aid after 1988, the proportion of grants decreased to 16 percent in FY 1992.

The United States has been a major provider of aid since independence and was the largest donor in the 1980s. All United States military aid and all new civilian commitments, however, ended in October 1990 after the United States Congress failed to receive certification that Pakistan was not developing a nuclear bomb. As of early 1994, United States aid had not resumed, but Agency for International Development projects already under way in October 1990 continued to receive funds.

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FOREIGN AID IN DIFFERENT REGIMES:

▪ Ayub Khan regime (1960 to 1973)

In 1958, he led a military coup and declared himself President; he instituted extensive social reforms. He oversaw three primary economic policies:

Rapid Industrialization.

This policy was based on “import substitution,” that is the use of tariffs protections, subsidies, tax concessions and an “export bonus scheme” which gave vouchers for foreign exchange to manufacturers who exported goods (primarily in the textile industry). These vouchers developed a secondary market. However, in fact these were an incentive to become inefficient because they benefited producers who produced products that cost more to produce than they brought in – so called “negative value added.” This set the mold for dependency on foreign loans and slow economic growth. Exports were rising during this period, but earnings were not. In fact from the period of 1960 to 1973 foreign aid increased five-fold!

Wealth transfer

Believe it or not, the economists of the day were successful in arguing for a policy that transferred wealth from the poor to the rich in an effort to maximize economic growth. As counterintuitive as it sounds on its face, the arguments for this policy went something like this: we can’t equitably share a small pie, let’s first make the pie big, grow fast, maximize national savings the poor need all their disposable income for necessities and the rich have a higher propensity to save – so let’s ensure the wealthy are made wealthier and we’ll reap the benefits of added savings in economic expansion. As a result, 15% of the resources created by the agricultural sector (largest component of the economy) were diverted to the manufacturing sector.

But guess what . . . The rich did not save as expected, in fact he national savings rate held steady at about 10% of GDP. Economists estimated that at least a 20% savings rate was needed. This created a gap between investment and savings, which again needed to be filled by; you guessed it, Foreign Aid and Loans. Loans became larger and shifted away from grants to higher interest notes. Debt service became a drag on the economy.

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Foreign Aid

Poverty

As a result of #1 and 2 above, poverty began to expand dramatically and wealth became more concentrated. In fact 43 families owned 46% of all agricultural production. Some 60% of the population experienced an “absolute” decline in their level of income – real wages shrank by 25%. In the rural sector a “green revolution” was taking place – new technology increased yields but ended up making the undereducated rural population poorer.

Most land at the time was tenant farmed, but as yields began to rise, property owners began to reclaim their land. The number of large farms increased, by means of tenant evictions from small and medium-sized farms. These undereducated or uneducated farmers moved to urban centers looking for work. Most moved into shantytowns outside the city limits – eventually economically strangling urban areas – leading to unrest and protests.

▪ Zulfikar Ali Bhutto Regime (1973-1978)

The negative conditions prevailed in Ayub’s regime set the stage for Zulfikar Ali Bhutto, who became a champion for the poor. Following elections in 1970, in which his party won a majority in West Pakistan but was unable to reach agreement with the East Pakistan (now Bangladesh) majority winner, Khan resigned and Bhutto took over power. Among his first acts were to use the resources of the state to transfer wealth to his client base, thereby building a base of power. Bhutto also nationalized some 43 industries, including banks and insurance companies. These became a resource domain for the ruling party by providing jobs for key allies and licenses for certain industries. Private sector investment in Pakistan plummeted – dropping by one-half. Now public sector industries were hampered by inefficiency and budget deficits rose – but this time foreign aid was not ready or willing to come to Pakistan’s aid. Economic growth slowed and a huge mountain of public debt was looming.

▪ Zia-ul-Haq Regime (1978-1988)

Next came the era of Zial ul Haq, another military dictator, who ruled from 1978 to 1988. He recognized that Pakistan was a front line state in the war in Afghanistan against Russia. During this period, foreign aid to Pakistan grew from $800 million annually to over $3.2 billion – a fourfold increase. He also instituted foreign policy consistent with the needs of the government. He put state money into madrassahs, religious schools that

trained jihadis, the freedom fighters that eventually ejected the Russians from, and subsequently became the ruling Taliban in Afghanistan. This “investment” lead to a quantum increase in sectarian violence, which in turn lead to less foreign investment.

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▪ General Pervez Musharraf

Current president, General Pervez Musharraf, came to power by a coup d’état in 1999 and has overseen the restructuring and rebuilding of Pakistan’s economy. As he assumed power, 1/3rd of the nation was living in poverty, the economy was on the verge of collapse, democratic institutions had failed and the judiciary had collapsed. The events of 9/11 brought about a dramatic change in foreign policy, from support for the Taliban to support for western interests. This brought with it much needed foreign aid, a restructuring of the nation’s debt, and eventually inflows of investment. In addition, financial and banking reforms were put in place and budget deficits began to decline.

Pakistan has received significant loan/grant assistance from international financial institutions (e.g., the IMF, the World Bank, and the Asian Development Bank) and bilateral donors, particularly after it began using its military/financial resources in the war on terror. The United States recently pledged $3 billion for FY 2005 to FY 2009 in economic and military aid to Pakistan. In addition, the IMF and World Bank have pledged $1 billion in loans to Pakistan. In 2004 to 2007 alone, the World Bank has pledged over $500 million in investment projects.

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Foreign Aid

IMPACT OF FOREIGN AID:

During the 1960s, 70s, and 80s Pakistan was among the largest aid recipient countries. But, as most of us might agree, the benefits of this aid have not stretched to the whole society. Although one of the “explicit aims” of the Pakistan Perspective Plan for the period 1965-85 was “elimination of dependence on foreign assistance,” foreign assistance increased substantially. This, however, does not seem to lead to socio-economic development. For example, during the 1960s and 1970s, when Pakistan was the largest aid recipient among Asian countries, the average percentage of population living under poverty declined only marginally from 43% to around 39%. This foreign aid also could not induce the government to improve the education standards of the country. Although the country received huge foreign aid inflows during the 1960s and 1970s, the illiteracy rate in Pakistan remained almost unchanged (around 59-65%) in the last three decades. In contrast, other Asian countries, like Malaysia or Sri Lanka that received only US$2.4 and US$3.9 per head of aid in 1970, respectively (compared with US$7 per head of Pakistan), were able to improve the literacy rates significantly. Other social indicators, like health, employment and so on, present the same picture. Econometric studies also suggest that aid has not had any positive influence on economic growth. For example, Khan (1997) finds a negative causal effect of aid on GDP and a statistically robust negative impact of aid on economic growth. Besides the ambiguous impacts of foreign aid on the development process, aid agencies and donor countries have assumed a more eminent position in the policy configuration and have left the GOP with little liberty to formulate its own policy framework.

To sum up, it could be argued that the huge inflows of foreign capital in the shape of foreign aid have not been utilized for the development of the economy. Rather, this aid has served the vested interest of a small group of individuals and has “delayed the day of reckoning”. Furthermore, the increase in loan-type aid during the 1990s has exacerbated the foreign debt problem of the country.

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FISCAL POLICY

“Fiscal Policy is the process of shaping government taxation and government expenditure so as to achieve desired economic and social objectives”

BUDGET:

The federal budget has two main parts:

▪ The ordinary budget

- which covers current expenditures.

▪ The development budget (Public-Sector Development Programme)

- which covers capital investment and development programs.

ORDINARY BUDGET:

▪ Revenue Collection:

Revenue collection in early years of Pakistan’s history were amounted to be Rs.776.5million in 1948-49 to 49-50, Rs.1267.8 million in 50-51 to 54-55, Rs.1562.7 million in 55-56 to 58-59.

Tax collections historically have constituted a smaller proportion of GDP than that of many other countries--between FY 1984 and FY 1992, they averaged 13.8 percent. The 1993 budget estimates called for an increase to 15.1 percent, up from 13.9 percent in FY 1992. Income and corporation taxes provided 12.9 percent of tax revenues in FY 1993. Tax evasion, however, is thought to be widespread. The agricultural sector was exempt from income tax until 1993, when the Qureshi government introduced a temporary levy on large landowners. In early 1994, it appeared unlikely that this tax would be re-imposed by the new government led by Benazir, herself a large landowner in Sindh.

Indirect taxes are the main source of revenue. They provided 84 percent of tax revenues in FY 1991 and an estimated 83 percent in FY 1992 and FY 1993. Customs duties were expected to account for 35.0 percent of all government taxes in FY 1993. Excise duties made up 17 percent of revenues, and sales taxes made up 10 percent. Potential foreign aid donors consider the heavy reliance on indirect taxes regressive and inflationary and an impediment to the general policy of trade liberalization. Under pressure from the International Monetary Fund, the government reduced import duty rates in the FY 1992 and FY 1993 budgets.

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Fiscal Policy

The performance of revenue collection during three years (1996-97 to 1998-99) was dismal. Tax collection grew at an average rate of 4.8 percent per annum during the period 1996-99. Almost Rs. 40 billion additional tax revenue was collected by the Central Board of Revenue during these three years despite Rs. 70 billion worth of additional tax measures taken in three federal budgets. During the three years of this government, revenue collection has improved significantly. Tax collection grew at an average rate of 9.5 percent during the last three years. Including fiscal year 2001-02, which was affected adversely by the events of September 11, the growth in revenue collection is estimated at 14 percent. During the last three years, almost Rs. 96 billion additional revenue has been collected as against 40 billion in three years prior to this government.

▪ Expenditures:

Pakistan mainly spends on defense, debt servicing, civil administration, law and order, service provision, subsidies etc.

Defense expenditure:

YEAR DEFENCE EXPENDITURE %AGE OF GDP (in Rs. Million)

1948-50 664.5 3.2 1950-55 822 3.8 1955-59 819.7 3.1 1960-65 5.5 2.8 1965-70 12.38 4.0 1972-77 8.0 5.6 1979-80 12.7 5.4 1982-83 23.2 6.4 1985-86 35.6 6.9 1987-88 47.0 7.0 1988-89 46.6 5.7 1989-90 62.0 6.8 1990-91 63.6 6.3 1991-92 75.8 6.3 1992-93 87.4 6.5 1993-94 493.8 5.9 1994-95 104.2 5.5 1995-96 119.7 5.5 1996-97 127.4 5.1 1997-98 133.8 4.8 1998-99 145.0 5.1 1999-00 143.4 4.5 2000-01 131.6 3.8

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Fiscal Policy

Defense spending has always been given a high priority. In the first few years after the partition, defense spending was equal to 85 percent of central government’s revenues. In the first half of the 1950s, defense expenditure exceeded development spending by a wide margin.

Debt servicing:

Debt servicing is the sum of interest payments and repayments of principal on the external guaranteed debt. Pakistan has been facing the problem of debt payments allocations in its budget. Debt servicing eats up most of the revenues. This is one of the biggest expenditure in Pakistan.

YEAR DEBT SERVICING %AGE OF GDP

(in Rs. Million)

1960-61 17$ -

1976-77 2.8 1.9

1979-80 4.8 2.0

1982-83 7.7 2.1

1985-86 19 3.7

1987-88 32.2 4.9

1988-89 55.1 6.6

1989-90 65.1 5.4

1990-91 63.8 4.9

1991-92 80.1 5.2

1992-93 101.6 5.9

1993-94 128.8 5.8

1994-95 133.1 5.2

1995-96 135.7 6.1

1996-97 165.7 6.7

1997-98 202.4 7.6

1998-99 220.1 7.5

1999-00 277.4 8.3

2000-01 255.6 7.4

DEVELOPMENT BUDGET:

▪ Revenue:Main source of revenue in development budget is government savings i.e. surplus from the revenue budget. Pakistan has been facing continuous fiscal deficit therefore there is no revenue for capital expenditures from the source of government savings. Pkaistan mainly depends on internal and external borrowing. It borrows internally from either banks or non-bank resources. Eternal borrowing consists of the money taken from other countries or institutions.

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Fiscal Policy

▪ Expenditure:

Development expenditure is measured up by the allocation of resources for public investment. Public investment in developing countries accounts for nearly half of total investment, public and private both. In industrial countries, by contrast, public investment accounts for less than one-fifth of total investment.

Even though opportunities for financing infrastructure investment, notably in energy, transport and telecommunications, from the private sector are being increasingly explored, public investments in infrastructure, irrigation, highways, ports, schools and hospitals remain critical and are generally complementary to private investment.The degree of effectiveness with which the large resources devoted to public investment (often 8-10 % of GDP are used) can make a significant difference to the economic performance and growth of a country.

YEAR DEVELOPMENT EXPENDITURE %AGE OF GDP

(in Rs. Million)

1948-50 261.5 1.3

1950-55 449.3 2.1

1955-59 939.2 3.5

1960-65 13.95 7.1

1965-70 21.75 7.1

1972-77 8.82 9

1979-80 21.8 9.3 1982-83 29.4 8.1 1985-86 39.8 7.7 1987-88 46.7 6.9 1988-89 46.7 6.3 1989-90 56.0 6.5 1990-91 63.0 6.4 1991-92 79.1 7.5 1992-93 69.9 5.7 1993-94 74.1 4.5 1994-95 81.9 4.4 1995-96 94.2 4.4 1996-97 85.2 3.5 1997-98 89.1 3.2 1998-99 110.6 3.4 1999-00 116.3 3.2 2000-01 120.4 2.8

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Fiscal Policy

Fiscal Deficit

Government tax and non-tax receipts fell far short of total expenditures in the 1980s and early 1990s. Many economists believe that the increasing government debt is a growing threat to Pakistan's future economic growth. The overall deficit, as a percentage of GDP, was around 5.3 percent in the early 1980s and averaged 7.5 percent between FY 1984 and FY 1990. It reached 8.8 percent in FY 1991, but the provisional figure for FY 1992 was

6.5 percent. The FY 1993 budget forecast a deficit of 4.8 percent of GDP, but spending was higher and revenues lower than anticipated, and provisional data indicate that the deficit exceeded 9 percent. The continued gap between government revenues and spending is a major concern to potential donors of foreign aid, and in 1993 Qureshi's caretaker government raised taxes and cut spending. In 1994 the Benazir Bhutto government aimed to reduce the budget deficit to 4.5 percent of GDP by FY 1996. The government relies on bond sales and on borrowing from the banking system to finance its deficit. Internal public debt was estimated at 49.9 percent of GDP in FY 1992. By contrast, in FY 1981 internal public debt had constituted 20.9 percent of GDP.

The persistence of large fiscal deficit has been the major source of macroeconomic imbalances in Pakistan during the 90s, which, in turn, has impeded growth. Fiscal deficit as percentage of GDP has averaged almost 7 percent during the 1990s. Strong fiscal discipline pursued by the present government resulted in lowering fiscal deficit to 5.0 percent of GDP in 2001-02. As a result of improved fiscal discipline, expenditures on interest payments and defense have declined considerably during the last three years. Interest payments were 34 percent of total expenditure in 1998-99 and were reduced gradually to 30.4 percent in 2001-02. Similarly, defense spending was 22.2 percent of total expenditure in 1998-99 but was reduced gradually to 18.5 percent in 2001-02. The resources released from these two items have been used to finance poverty and social sector related spending. Poverty and social sector related expenditures, which stood at Rs. 119 billion, or 3.4 percent of GDP has been increased to Rs.161 billion or 4.0 percent of GDP in 2002-03.

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CONCLUDING REMARKS:

Pakistan is a developing country with the world's sixth-largest population, and an economic growth rate that has been consistently positive since a 1951 recession. Like most developing countries, Pakistan is confronted with the problems of rapid population growth, sizable budget deficits, and heavy dependence on foreign aid and loans. At purchasing power parity, Pakistan's GDP in 2005 was estimated at approximately $368 billion, larger than that of Saudi Arabia, but slightly smaller than the GDP of the Philippines (World Bank, PDF).

Pakistan's economic outlook has brightened in recent years in conjunction with rapid economic growth and a dramatic improvement in its foreign exchange position as a result of its current account surplus and a consequent rapid growth in hard currency reserves.

The administration of President Pervez Musharraf has sought and received debt relief from international lenders, reducing its external debt from $32 billion to a discounted present value less than half of that. The government is using Pakistan's surplus to prepay expensive debt and replace it with commercial debt, which it has been able to obtain at low interest rates as a result of its improved credit rating.

Present economic agenda includes measures to widen the tax net, privatize public sector assets, and improve its balance of trade. Pakistan has made governance reforms, privatization, and deregulation the cornerstones of its economic revival.

Pakistan's economic outlook has brightened and its manufacturing and financial services sectors have experienced rapid expansion. There has been a great improvement in its foreign exchange position and a rapid growth in hard currency reserves as a result of its current account surplus.

But, a much more attention is needed to the neglected sectors so as to increase the rate of sustainable economic development in Pakistan.

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A G R I C U L T U R E

Farming is Pakistan's largest economic activity. Agricultural products, especially cotton yarn, cotton cloth, raw cotton, and rice, are important exports. Although there is agricultural activity in all areas of Pakistan, most crops are grown in the Indus River plain in Punjab and Sindh. Considerable development and expansion of output has occurred since the early 1960s; however, the country is still far from realizing the large potential yield that the well-irrigated and fertile soil from the Indus irrigation system could produce. The floods of September 1992 showed how vulnerable agriculture is to weather; agricultural production dropped dramatically in FY 1993.

LAND OWNERSHIP & REFORMS

Conditions After Independence:

At independence Pakistan was a country with a great many small-scale farms and a small number of very large estates. Distribution of landownership was badly skewed. Less than 1 percent of the farms consisted of more than 25 percent of the total agricultural land. Many owners of large holdings were absentee landlords, contributing little to production but extracting as much as possible from the sharecroppers who farmed the land. At the other extreme, about 65 percent of the farmers held some 15 percent of the farmland in holdings of about two hectares or less. Tenants, including sharecroppers, most of whom had little security and few rights, cultivated approximately 50 percent of the farmland. An additional large number of landless rural inhabitants worked as agricultural laborers. Farm laborers and many tenants were extremely poor, uneducated, and undernourished, in sharp contrast to the wealth, status, and political power of the landlord elite.

After independence the country's political leaders recognized the need for more equitable ownership of farmland and security of tenancy. In the early 1950s, provincial governments attempted to eliminate some of the absentee landlords or rent collectors, but they had little success in the face of strong opposition. Security of tenancy was also legislated in the provinces, but because of their dependent position, tenant farmers benefited only slightly. In fact, the reforms created an atmosphere of uncertainty in the countryside and intensified the animosity between wealthy landlords and small farmers and sharecroppers.

Resolving the problems:

Ayub Khan’s government:

In January 1959, accepting the recommendations of a special commission on the subject, General Mohammad Ayub Khan's government issued new land reform regulations that aimed to boost agricultural output, promote social justice, and ensure security of tenure. A ceiling of about 200 hectares of irrigated land and 400 hectares of non-irrigated land was placed on individual ownership; compensation was paid to owners for land surrendered. Numerous exemptions, including title transfers to family members, limited the impact of the ceilings. Slightly fewer than 1 million hectares of land were surrendered, of which a little more than 250,000 hectares were sold to about 50,000 tenants. The land reform regulations made no serious attempt to break up large estates or to lessen the power or privileges of the landed elite. However, the measures attempted to provide some security of tenure to tenants, consolidate existing holdings, and prevent fragmentation of farm plots. An average holding of about five hectares was considered necessary for a family's subsistence, and a holding of about twenty to twenty-five hectares was pronounced as a desirable "economic" holding.

Bhutto’s government:

In March 1972, the Bhutto government announced further land reform measures, which went into effect in 1973. The landownership ceiling was officially lowered to about five hectares of irrigated land and about twelve hectares of non-irrigated land; exceptions were in theory limited to an additional 20 percent of land for owners having tractors and

tube wells. The ceiling could also be extended for poor-quality land. Owners of expropriated excess land received no compensation, and beneficiaries were not charged for land distributed. Official statistics showed that by 1977 only about 520,000 hectares had been surrendered, and nearly 285,000 hectares had been redistributed to about 71,000 farmers.

The 1973 measure required landlords to pay all taxes, water charges, seed costs, and one-half of the cost of fertilizer and other inputs. It prohibited eviction of tenants as long as they cultivated the land, and it gave tenants first rights of purchase. Other regulations increased tenants' security of tenure and prescribed lower rent rates than had existed.

In 1977 the Bhutto government further reduced ceilings on private ownership of farmland to about four hectares of irrigated land and about eight hectares of non-irrigated land. In an additional measure, agricultural income became taxable, although small farmers owning ten hectares or fewer--the majority of the farm population--were exempted.

Zia-ul-Haq government:

The military regime of Zia ul-Haq that ousted Bhutto neglected to implement these later reforms. Governments in the 1980s and early 1990s avoided significant land reform measures, perhaps because they drew much of their support from landowners in the countryside.

Results:

Government policies designed to reduce the concentration of landownership had some effect, but their significance was difficult to measure because of limited data. In 1993 the most recent agricultural census was that of 1980, which was used to compare statistics with the agricultural census of 1960. Between 1960 and 1980, the number of farms declined by 17 percent and farms decreased in area by 4 percent, resulting in slightly larger farms. This decline in the number of farms was confined to marginal farms of two hectares or fewer, which in 1980 represented 34 percent of all farms, constituting 7 percent of the farm hectarage. At the other extreme, the number of very large farms of sixty hectares or more was 14,000--both in 1960 and in 1980--although the average size of the biggest farms was smaller in 1980. The number of farms between two and ten hectares increased during this time. Greater use of higher-yielding seeds requiring heavier applications of fertilizers, installations of private tube wells, and mechanization accounted for much of the shift away from very small farms toward mid-sized farms, as owners of the latter undertook cultivation instead of renting out part of their land. Observers believed that this trend had continued in the 1980s and early 1990s.

Still land reform remained a controversial and complex issue. Large landowners retain their power over small farmers and tenants, especially in the interior of Sindh, which has a feudal agricultural establishment. Tenancy continues on a large-scale: one-third of Pakistan's farmers are tenant farmers, including almost one-half of the farmers in Sindh. Tenant farmers typically give almost 50 percent of what they produce to landlords.

Fragmented holdings remain a substantial and widespread problem. Studies indicate that larger farms are usually less productive per hectare or unit of water than smaller ones.

CULTIVABLE LAND

Pakistan's total land area is about 803,940 square kilometers. About 48 million hectares, or 60 percent, is often classified as unusable for forestry or agriculture consists mostly of deserts, mountain slopes, and urban settlements. Some authorities, however, include part of this area as agricultural land on the basis that it would support some livestock activity even though it is poor rangeland. Thus, estimates of grazing land vary widely--between 10 percent and 70 percent of the total area. A broad interpretation, for example, categorizes almost all of arid Balochistan as rangeland for foraging livestock.

Since independence, the amount of cultivated land has increased by more than one-third. This expansion is largely the result of improvements in the irrigation systems that make water available to additional plots. Substantial amounts of farmland have been lost to urbanization and water logging, but losses are more than compensated for by additions of new land. In the early 1990s, more irrigation projects were needed to increase the area of cultivated land.

The scant rainfall over most of the country makes about 80 percent of cropping dependent on irrigation. Fewer than 4 million hectares of land, largely in northern Punjab and the North-West Frontier Province, are totally dependent on rainfall. An additional 2 million hectares of land are under non-irrigated cropping, such as plantings on floodplains as the water recedes. Non-irrigated farming generally gives low yields, and although the technology exists to boost production substantially, it is expensive to use and not always readily available.

IRRIGATION

In the early 1990s, irrigation from the Indus River and its tributaries constituted the world's largest contiguous irrigation system, capable of watering over 16 million hectares. The system includes three major storage reservoirs and numerous barrages, headworks, canals, and distribution channels. The total length of the canal system exceeds 58,000 kilometers; there are an additional 1.6 million kilometers of farm and field ditches.

Indus Waters Treaty of 1960

Partition placed portions of the Indus River and its tributaries under India's control, leading to prolonged disputes between India and Pakistan over the use of Indus waters. After nine years of negotiations and technical studies, the Indus Waters Treaty of 1960 resolved the issue. After a ten-year transitional period, the treaty awarded India use of the waters of the main eastern tributaries in its territory--the Ravi, Beas, and Sutlej rivers. Pakistan received use of the waters of the Indus River and its western tributaries, the Jhelum and Chenab rivers.

Construction of canals, dams and barrages

After the treaty was signed, Pakistan began an extensive and rapid irrigation construction program, partly financed by the Indus Basin Development Fund of US$800 million contributed by various nations, including the United States, and administered by the World Bank. Several immense link canals were built to transfer water from western rivers to eastern Punjab to replace flows in eastern tributaries that India began to divert in accordance with the terms of the treaty. The Mangla Dam, on the Jhelum River, was completed in 1967. The dam provided the first significant water storage for the Indus irrigation system. The dam also contributes to flood control, to regulation of flows for some of the link canals, and to the country's energy supply. At the same time, additional construction was undertaken on barrages and canals.

US aid in 1968

A second phase of irrigation expansion began in 1968, when a US$1.2 billion fund, also administered by the World Bank, was established. The key to this phase was the Tarbela Dam on the Indus River, which is the world's largest earth-filled dam. The dam, completed in the 1970s, reduced the destruction of periodic floods and in 1994 was a major hydroelectric generating source. Most important for agriculture, the dam increases water availability, particularly during low water, which usually comes at critical growing periods.

Deficiencies

Despite massive expansion in the irrigation system, many problems remain.

The Indus irrigation system was designed to fit the availability of water in the rivers, to supply the largest area with minimum water needs, and to achieve these objectives at low operating costs with limited technical staff. This system design has resulted in low yields and low cropping intensity in the Indus River plain, averaging about one crop a year, whereas the climate and soils could reasonably permit an average of almost 1.5 crops a year if a more sophisticated irrigation network were in place. The urgent need in the 1960s and 1970s to increase crop production for domestic and export markets led to water flows well above designed capacities.

Completion of the Mangla and Tarbela reservoirs, as well as improvements in other parts of the system, made larger water flows possible. In addition, the government began installing public tube wells that usually discharge into upper levels of the system to add to the available water. The higher water flows in parts of the system considerably exceed design capacities, creating stresses and risks of breaches. Nonetheless, many farmers, particularly those with smallholdings and those toward the end of watercourses, suffer because the supply of water is unreliable.

The irrigation system represents a significant engineering achievement and provides water to the fields that account for 90 percent of agricultural production. Nonetheless,

serious problems in the design of the irrigation system prevent achieving the highest potential agricultural output.

Government management

Government officials, who often assume that investments in physical aspects of the system will automatically yield higher crop production, do not practice good water management. Government management of the system does not extend beyond the main distribution channels. After passing through these channels, water is directed onto the fields of individual farmers whose water rights are based on long-established social and legal codes. Groups of farmers voluntarily manage the watercourses between main distribution channels and their fields. In effect, the efficiency and effectiveness of water management relies on the way farmers use the system.

Farmer’s attitude

The exact amounts of water wasted have not been determined, but studies suggest that losses are considerable and perhaps amount to one-half of the water entering the system. Part of the waste results from seepages in the delivery system. Even greater amounts are probably lost because farmers use water whenever their turn comes even if the water application is detrimental to their crops. The attitude among almost all farmers is that they should use water when available because it may not be available at the next scheduled turn. Moreover, farmers have little understanding of the most productive applications of water during crop-growing cycles because of the lack of research and extension services.

Water management is based largely on objectives and operational procedures dating back many decades and is often inflexible and unresponsive to current needs for greater water use efficiency and high crop yields. Charges for water use do not meet operational and maintenance costs, even though rates more than doubled in the 1970s and was again increased in the 1980s. Partly because of its low cost, farmers often waste water.

As a result, improvements in the irrigation system have not raised yields and output as expected. Some experts believe that drastic changes are needed in government policies and the legal and institutional framework of water management if water use is to improve and that effective changes can result in very large gains in agricultural output.

DRAINAGE

The continuous expansion of the irrigation system over the past century significantly altered the hydrological balance of the Indus River basin. Seepage from the system and percolation from irrigated fields caused the water table to rise, reaching crisis conditions for a substantial area. Around 1900 the water table was usually more than sixteen meters below the surface of the Indus Plain. A 1981 survey found the water table to be within about three meters of the surface in more than one-half the cropped area in Sindh and more than one-third the area in Punjab. In some locations, the water table is much closer

to the surface. Cropping is seriously affected over a wide area by poor drainage—water logging and by accumulated salts in the soil.

Water logging and Salinity

Although some drainage was installed before World War II, little attention was paid to the growing water logging and salinity problems. In 1959 a salinity control and reclamation project was started in a limited area, based on public tube wells, to draw down the water table and leach out accumulated salts near the surface, using groundwater for irrigation. By the early 1980s, some thirty such projects had been started that when completed would irrigate nearly 6.3 million hectares. By 1993 the government had installed around 15,000 tube wells. Private farmers, however, had installed over 200,000 mostly small tube wells, mainly for irrigation purposes but also to lower the water table. Private wells probably pumped more than five times as much water as public wells.

Steps taken by the government

Officials were aware of the need for additional spending to prevent further deterioration of the existing situation. Emphasis in the 1980s and early 1990s was on rehabilitation and maintenance of existing canals and watercourses, on farm improvements on the farms themselves (including some land leveling to conserve water), and on drainage and salinity in priority areas. Emphasis was also placed on short-term projects, largely to improve the operation of the irrigation system in order to raise yields. Part of the funding would come from steady increases in water use fees; the intention is gradually to raise water charges to cover operation and maintenance costs.

MAJOR CROPS

Wheat

Wheat is by far the most important crop in Pakistan and is the staple food for the majority of the population. Wheat is eaten most frequently in unleavened bread called chapatti. In FY 1992, wheat was planted on 7.8 million hectares, and production amounted to 14.7 million tons. Output in FY 1993 reached 16.4 million tons. Between FY 1961 and FY 1990, the area under wheat cultivation increased nearly 70 percent, while yields increased 221 percent. Wheat production is vulnerable to extreme weather, especially in non-irrigated areas. In the early and mid-1980s, Pakistan was self-sufficient in wheat, but in the early 1990s more than 2 million tons of wheat were imported annually.

Rice

Rice is the other major food grain. In FY 1992, about 2.1 million hectares were planted with rice, and production amounted to 3.2 million tons, with 1 million tons exported. Rice yields also have increased sharply since the 1960s following the introduction of new varieties. Nonetheless, the yield per hectare of around 1.5 tons in FY 1991 was low compared with many other Asian countries. Pakistan has emphasized the production of

rice in order to increase exports to the Middle East and therefore concentrates on the high-quality basmati variety, although other grades also are exported. The government increased procurement prices of basmati rice disproportionately to encourage exports and has allowed private traders into the rice export business alongside the public sector Rice Export Corporation.

Other food crops

Other important food grains are millet, sorghum, corn, and barley. Corn, although a minor crop, gradually increased in area and production after independence, partly at the expense of other minor food grains. Chickpeas, called gram in Pakistan, are the main nongrain food crop in area and production. A number of other foods, including fruits and vegetables, are also grown.

Cotton

The area planted in cotton increased from 1.1 million hectares in FY 1950 to 2.1 million hectares in FY 1981 and 2.8 million hectares in FY 1993. Yields increased substantially in the 1980s, partly as a result of the use of pesticides and the introduction in 1985 of a new high-yielding variety of seed. During the 1980s, cotton yields moved from well below the world average to above the world average. Production in FY 1992 was 12.8 million bales, up from 4.4 million bales ten years earlier. Output fell sharply, however, to 9.3 million bales in FY 1993 because of the September 1992 floods and insect infestations.

Other cash crops

Other cash crops include tobacco, rapeseed, and, most important, sugarcane. In FY 1992 sugarcane was planted on 880,000 hectares, and production was 35.7 million tons. Except for some oil from cottonseeds, the country is dependent on imported vegetable oil. By the 1980s, introduction and experimentation with oilseed cultivation was under way. Soybeans and sunflower seeds appear to be suitable crops given the country's soil and climate, but production was still negligible in the early 1990s.

Area of Major Crops, Selected Fiscal Years, 1961- 92(In thousands of hectares)

Crop 1961 1981 1991 1992

Wheat 4,639 6,984 7,911 7,823

Rice 1,181 1,933 2,113 2,097

Corn 480 769 845 847

Chickpeas 1,106 843 1,092 1,021

Sugarcane 388 825 884 880

Cotton 1,293 2,108 2,662 2,836

Source: Based on information from Pakistan, Ministry of Finance, Economic Survey Statistical Supplement, 1991-92, Islamabad, 1992, 63.

Production of Major Crops, Selected Fiscal Years, 1961-92(in thousands of tons)

Crop 1961 1981 1991 1992

Wheat 3,814 11,475 14,565 14,694

Rice 1,030 3,123 3,261 3,243

Corn 439 970 1,185 1,204

Chickpeas 610 337 531 499

Sugarcane 11,641 32,359 35,989 35,658

Cotton 301 715 1,637 2,181

Source: Based on information from Pakistan, Ministry of Finance, Economic Survey Statistical Supplement, 1991-92, Islamabad, 1992, 64.

LIVESTOCK

Livestock provides the draft power available to most farmers as well as food, fuel, manure, wool, and hides. Livestock contributed about 30 percent of the value added by agriculture in FY 1993. In Balochistan raising sheep and goats on the arid rangeland is an important source of cash to a considerable part of the population, although many areas are overgrazed.

In FY 1993, the livestock population was estimated at 17.8 million cattle, 18.7 million water buffalo, 27.7 million sheep, 40.2 million goats, and 5.4 million other animals, including camels, horses, and mules. Production of animal products in FY 1993 was estimated to include 17 million tons of milk, 844,000 tons of beef, 763,000 tons of mutton, 50,500 tons of wool, and 42.6 million tons of hides and skins. Despite substantial increases in livestock production in the 1980s, the country faces shortages because of the limited amount of feed and grazing areas. In the 1980s, the government increased the size of cross-breeding programs and took other measures to increase productivity, but production still fell short of demand.

Commercial chicken farming is exceptional because production using modern methods has expanded rapidly since the 1960s. Although many farmers raise some poultry, the commercial chicken farms account for most of the increased availability of eggs and poultry. Poultry meat production increased from 14,000 tons in FY 1972 to 75,000 tons in FY 1983 and 188,000 tons in FY 1993. Egg production increased from 14 million in FY 1972 to 4.2 billion in FY 1983 and 5.4 billion in FY 1992.

FORESTS

Forests cover about 3 million hectares, less than 4 percent of the country. Many forests are in the Northern Areas and Azad Kashmir, where coniferous trees predominate, but the management and exploitation of these forests is hampered by the remoteness of the land. Elsewhere, most of the native forest was destroyed before independence by population pressure, over-cultivation, and overgrazing. The lack of tree cover contributes to many of the problems the agricultural sector has experienced since independence, including soil erosion, the silting of streams, flooding, and a shortage of timber and firewood.

In the mid-1990s, government efforts to increase the extent of forests have had little success, but tree-planting programs continue. Many of the nation's forests, including some irrigated tree plantations in the Indus River basin, are under government control. These forests produced 321,000 cubic meters of timber and 534,000 cubic meters of firewood in FY 1993, but production was far short of demand. Imports filled part of the requirement for timber, while cutting trees and shrubs on private land met part of the need for firewood. In October 1993, however, the government imposed a two-year nationwide ban on the private felling of trees. This action was taken because of concerns that Pakistan was fast losing the little tree cover that existed.

I N D U S T R Y

In 1947 only some 5 percent of the large-scale industrial facilities in British India were located in what became Pakistan. The country started with virtually no industrial base and no institutional, financial, or energy resources. Three small hydroelectric power stations provided limited electricity to a few urban areas. Firewood and dung were the main sources of energy; commercial energy sources supplied only about 30 percent of the energy consumed. Further, there was a shortage of management personnel and skilled labor.

MANUFACTURING

The pace of industrialization since independence has been rapid, although it has fluctuated in response to changes in government policy and to world economic conditions. During the 1950s, manufacturing expanded at about 16 percent annually; during the first half of the 1960s, it expanded at around 11 percent a year. The pace slowed to under 7 percent a year in the second half of the 1960s. Between FY 1970 and FY 1977, the index of manufacturing output increased an average of only 2.3 percent a year. Between FY 1977 and FY 1982, the index raised an average of 9.9 percent a year. Growth averaged 7.7 percent during the Sixth Five-Year Plan (1983-88) and 5.4 percent from FY 1989 through FY 1992. In FY 1993, manufacturing accounted for 17.3 percent of GDP at current factor cost, of which large-scale manufacturing accounted for 61 percent and small-scale manufacturing for 39 percent. Manufactured goods accounted for 64 percent of all exports by value in FY 1993, but the bulk of these exports came in the relatively low-technology areas of cotton textiles and garments.

Total fixed capital formation in manufacturing was estimated at Rs57 billion in FY 1993. During the 1980s, private investment became much more important than public investment. In FY 1982, private investment was 53.9 percent of the total, but in FY 1993 the proportion was 96.1 percent. Total investment in manufacturing was 5.1 percent of GNP in FY 1993.

Major industries:

In the early 1990s, food processing and textiles dominated the manufacturing sector. Provisional figures for FY 1992 indicated that sugar production was 2.1 million tons, vegetable ghee 819,000 tons, cotton yarn 862,000 tons, and cotton cloth 234 million square meters. Other industrial products included motor tires (647,000 units), cycle tires (2.2 million units), cement (6.1 million tons), urea (1.4 million tons), soda ash (147,000 tons), bicycles (364,000 units), and paperboard (13,000 tons).

Pakistan has one steel mill, located near Karachi, with a production capacity of 1.1 million tons per year. A major undertaking, the mill required the bulk of public industrial investment in the late 1970s and early 1980s, although the plant was designed and partly financed by the Soviet Union. It produced at 81 percent of capacity in FY 1993, and it was dependent on imports of iron ore and coking coal. As of early 1994, the mill had not achieved sustained profitability, but there were plans to expand it.

Public Sector:

Public-sector firms produced about 40 percent of the total manufacturing value added in FY 1991, and they absorbed about 48 percent of gross fixed investment. The total value of public sector industrial output in FY 1991 was Rs36 billion (in constant FY 1988 prices), but pretax profits were only Rs1.3 billion, reflecting the inefficiencies and overstaffing prevalent in these enterprises.

Private Sector:

To improve the efficiency and competitiveness of public sector firms and end federal subsidies of their losses, the government launched a privatization program in FY 1991. Majority control in nearly all public-sector enterprises will be auctioned off to private investors, and foreign investors are eligible buyers. In March 1992, twenty units had been privatized, but by 1993 only about 30 percent of the government's target number of firms had been sold because some of the enterprises were unattractive for private investors. In 1994 the government led by Benazir Bhutto was committed to continuing the policy of privatization.

Percentage Shares of Manufacturing Sector in GDP

(Percent)

Year Percentage Share in GDP of Manufacturing

Total Large Scale Small Scale1949-50 6.39 1.83 4.561959-60 9.91 5.67 4.231969-70 13.44 10.46 2.981979-80 14.51 10.55 3.951989-90 17.59 12.70 4.891999-00 16.69 11.65 5.032000-01 17.52 12.35 5.172001-02 17.65 12.39 5.26

Period Averages1950s 8.78 4.38 4.411960s 12.41 8.85 3.561970s 13.99 10.42 3.571980s 16.65 12.26 4.381990s 17.68 12.32 5.361950-2002 13.37 9.27 4.09

Source: 50 Years of Pakistan Volume I SummaryEconomic Survey, Various Issues

SOURCES OF GROWTH

Import substitution has played a major role in the growth of manufacturing industries of Pakistan during its earlier stages of development. During the period 1951-52 to 1954-

55, 96.9 percent of growth was accounted by the import substitution. The contribution of export expansion and increase in domestic demand was negligible.However, since 1955, it has never been a major source of the manufacturing growth.Export expansion has been as important as import substitution but both were overshadowed by increase in domestic demand. In 1988-89 to 1991-92, however, export expansion was a major source of industrial growth.

Sources of Manufacturing Growth

Period Domestic Demand Export Expansion Import Substitution

1950-51 to 1954-55 2.4 1.8 96.6 1954-55 to 1959-60 53.1 24 22.9 1959-60 to 1963-64 95.7 4.6 -0.3 1963-64 to 1970-71 60 15 25 1980-81 to 1988-89 79.7 10.2 10.1 1988-89 to 1991-92 60.4 37.9 1.7

No doubt the growth of manufacturing sector has been quite impressive. However, value added in this sector is grossly over stated and highly distorted. If value added in the manufacturing sector is evaluated at the world prices, its contribution to GDP is relatively much smaller, reflecting gross inefficiencies and/or excessive profits. Even in 1991 when some of the distortions had already been removed, more than 30 percent of value added

could be ascribed to protection. Since 1991 a number of initiatives have been taken to reduce the level of protection further and maximum import duty has been reduced to 45 percent by the end of century and to 30 percent during 2002-03 budgets.

F O R E I G N T R A D E

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.

EXPORTS

Pakistan’s exports over last 50 years period have increased in (current) dollar terms at a rate of 8.69 and in constant (Rupee) prices at a rate of 7.05 percent. As a result, the share of exports in the GDP at market prices has increased from less than 4 percent in 1947-48 to about 14 percent in 1999-00. Pakistan’s exports have fluctuated widely during the fifty years period. While exports declined in the Fifties, they have grown around 11.93 percent in the other periods. In the Seventies, however, the worldwide inflation and diversion of inter-wing to international trade resulted into rather high growth rate of 22.35 percent. In the first half of the Eighties Pakistan’s exports hardly registered any growth, rising at a mere 2.09 percent per annum. This unsatisfactory performance is attributable to world recession and to shortfalls in the output of major export items. Exports recovered their growth momentum during the second half of the Eighties, rising at an average rate of 15.02 percent per annum. During the first half of the Nineties Pakistan’s export performance was encouraging, growing at an average rate of 10.90 percent per annum. The performance would have been even better, had cotton crop not affected by the leaf curl virus during 1992-93 to 1994-95. The performance of exports during the latter half of the Nineties was adversely affected by the decision to test nuclear weapons, the imposition of sanctions and general global economic slowdown, resulting in an average growth rate of 1.31 percent.

Growth Rates Of Exports(Percent)

Year Current Prices (US $million) Constant Prices (Rs Million) 1950-51 to 1959-60 -5.72 1960-61 to 1969-70 10.72 11.85 1970-71 to 1979-80 22.35 2.75 1980-81 to 1989-90 8.55 8.44 1990-91 to 1999-00 6.11 5.15 1950-51 to 1999-00 8.69 7.05 1950-51 to 2000-01 8.66 7.12

Source: Economic Survey 1999-2000 Statistical SupplementEconomic Survey 2001-0250 Years of Pakistan Volume I, SummaryNot only exports have grown, there has also been a structural transformation of the exports. While in 1947-48, Pakistan hardly exported any manufactured goods and even by 1955, the manufacturing goods accounted for only 8.7 percent of the exports, the manufactured good accounted for 72 percent of the exports in 2000-01. We may add, however, that 50 to 60 percent of Pakistan’s exports consist of raw cotton and textile products and as such whenever cotton crop is poor it results in lower exports. This is why foreign exchange earnings are still volatile and without diversification of exports the instability in foreign exchange earning may continue.

Exports of Pakistan

(Percent)

Year Share in Total Exports Primary Commodities Semi-Manufactures ManufacturedGoods

1970-71 33 24 44 1975-76 44 18 38 1980-81 44 11 45 1985-86 35 16 49 1990-91 19 24 57 1995-96 16 22 62 2000-01 13 15 72

Period Averages

1970-71 to 1979-80 40 20 40 1980-81 to 1989-90 31 17 52 1990-91 to 1999-00 14 21 65

1970-71 to 1999-00 28 19 53 1970-71 to 2000-01 28 19 53Source: Pakistan Economic Survey, Various Issues

Pakistan is not a major player in the world export market: the share of Pakistan’s exports in the world market was only 0.18 percent in 1990, which barely climbed to 0.28 percent in 1997. Despite a low share of its total exports in the world market, Pakistan has a relatively significant market share in some product groups such as textiles and clothing and carpets and rugs. The country managed to capture an increasing share of the world market of textiles and clothing products: its share in the world export market more than doubled during the period, rising from 1.64 percent in 1990 to 3.36 percent in 1997.Pakistan lost its share in the world market for carpets and rugs during the early part of the 1990s (from 17.34 percent in 1990 to 13.67 percent in 1995), but regained ground thereafter as its share in the world market jumped to 21.61 percent in 1996 and then to24.37 percent in 1997. The share of Pakistan’s exports in the world market for leather and leather goods continuously declined from 1990 to 1996 (from 2.83 percent in 1990 to 1.14 percent in 1996), before recovering slightly in 1997 to 2.57 percent. The country made some inroads into the world market for fish and fish products during the early part of the 1990s: its share rose from 0.37 percent in 1990 to 0.61 percent in 1993. However, the country lost its market share in fish and fish products during the period from 1994 to 1996 before regaining it in 1997.

IMPORTS

Pakistan’s imports have grown by 9.07 percent over the 1950-51 to 2000-01 period.Like exports, import growth also fluctuated widely: for example, during 1980-2000, the growth rate ranged between 21.43 percent and -14.93 percent. While imports grew by an average of 4.67 percent in the first half of the Eighties, there was a slowdown in import growth (3.67%) in the second half due mainly to a fall in world prices of Pakistan’s import items. The first half of the Nineties witnessed a growth rate of 9.25 percent per annum due mainly extraordinary increase in the imports of machinery, transport equipment under the Yellow Cab Scheme, and chemicals. These three items accounted for 52 percent of total imports. There has been a compositional change in imports as well. However, this compositional change is only up to 1959-60. Since then raw material/intermediate goods have been the major imports.There has been a structural transformation of the imports as well. Whereas at the time of partition the manufactured consumer goods formed an overwhelming proportion of the imports, at present these are the industrial raw materials and the capital goods, which account for almost 90 percent of the imports.

Imports of Pakistan

(Percent)

Year Share in Total Imports Capital Goods Industrial Raw Material Consumer Goods

1970-71 52 37 11

1975-76 35 34 21 1980-81 28 58 15 1985-86 37 45 18 1990-91 33 51 16 1995-96 35 51 14 2000-01 25 61 14

Period Averages

1970-71 to 1979-80 36 43 21 1980-81 to 1989-90 33 51 16 1990-91 to 1999-2000 35 50 15 1970-71 to 1999-2000 35 48 17 1970-71 to 2000-01 34 49 17

Source: Pakistan Economic Survey, Various Issues

F I S C A L P O L I C Y

FISCAL PERFORMANCE INDICATORS

As no single indicator can properly assess the overall fiscal performance of a country, a set of indicators has been presented to gauge the consolidated fiscal operations of the federal and provincial governments.

DEFICIT INDICTORS

The unadjusted overall budgetary deficit has clearly deteriorated during FY02; not only is it higher than the actual budgetary deficit in FY01, the rise clearly disturbs the overall downward trend visible since FY99 However, the increase in the deficit over the FY02 target is almost entirely attributable to exceptional expenditures; excluding these gives an "adjusted" deficit of 4.6 percent of GDP, i.e. maintaining the recent downtrend.

Summary Of Public Finance Consolidated Federal And Provincial Governments

(BILLION RUPEES)

FY99 FY00 FY01 FY02

FY03

Budget

Budget Provincial

1.Revenue receipts (a+b) 468.6 536.8 546.4 657.9 630.3 691.9

a) Tax revenue 390.7 406.0 445.0 528.2 476.6 n.a.

b) Non-tax receipts 77.9 131.0 102.0 129.8 153.7 n.a.

2.Total expenditures (a+b+c)

647.8 743.6 726.9 844.8 873.1 854.4

a) Current 547.3 642.9 650.7 714.6 717.7 720.4

b) Development 98.3 95.6 92.5 130.0 123.6 134.0

c) Net lending to PSEs etc.

2.2 5.1 -16.3 0.2 31.9

3.Revenue surplus/deficit (1-2.a)

-78.7 -106.1 -104.3 -56.6 -87.3 -28.5

4. Overall balance (I-2) -179.2 -206.8 -180.5 -186.9 -242.8 -162.5

5. Adjusted balance - - - - -168.4 -

6. Financing through: 179.2 206.8 180.4 186.9 242.8 162.5

a) External resources (net)

97.1 67.0 118.8 121.6 106.6 129.1

b) Internal resources (i+ii)

82.1 139.9 61.6 65.3 136.2 33.4

i) Domestic non-bank 155.9 100.0 93.9 54.8 123.7 64.5

ii) Banking system -73.8 40.0 -32.3 10.5 12.5 -31.1

As per cent of GDP (mp)

1.Revenue receipts (a+b) 15.9 17.1 16.0 17.3 17.1 17.1

a) Tax revenue 13.3 12.9 13.0 13.9 12.9 n.a.

b) Non-lax receipts 2.7 4.2 3.0 3.4 4.2 n.a.

2.Total expenditures (a+b+c)

22.0 23.6 21.3 22.3 23.7 21.1

a) Current 18.6 20.4 19.0 18.8 19.5 17.8

b) Development 3.3 3.0 2.7 3.4 3.4 3.3

c) Net lending to PSEs etc.

0.1 0.2 -0.5 0.0 0.9 0.0

3. Revenue surplus/deficit (1-2.a)

-2.7 -3.4 -3.1 -1.5 -2.4 -0.7

4. Overall balance (1-2) -6.1 -6.6 -5.3 -4.9 -6.6 -4.0

5. Adjusted balance - - - - -4.6 -

6. Financing through: 6.1 6.6 5.3 4.9 6.6 4.0

a) External resources (Net)

3.3 2.1 3.5 3.2 2.9 3.2

b) Internal resources (i+ii) 2.8 4.4 1.8 1.7 3.7 0.8

i) Domestic non-bank 5.3 3.2 2.7 1.4 3.4 1.6

ii) Banking system -2.5 1.3 -0.9 0.3 0.3 -0.8

Source: Ministry of Finance

The performance of the overall budget deficit is similar to that of another indicator, the revenue deficit, i.e. the gap between revenues and current expenditures, which indicates the portion of the government's revenues consumed by non-development expenditures.

Borrowings undertaken to meet current expenditures are a matter of some concern, as the expenditures do not add to the repayment capacity of the country, but they increase the debt burden. Pakistan has been experiencing a revenue deficit for last two decades, but this has declined significantly in FY02 to 2.4 percent of GDP.

To its credit, the government appears to recognize that even the FY02 revenue deficit figure is high. This concern is explicitly accepted in the government's proposed Fiscal Responsibility and Debt Limitation Ordinance, 2002 that aims to gradually eliminate the revenue deficit by FY07.

A troubling development for FY02 is the abrupt reduction in the primary surplus to 0.1 percent of GDP from 2.0 percent of GDP in the previous year. This indicator is arrived at by deducting interest expenses from the overall budgetary deficit, and is used to gauge a country's ability to finance its expenditures in the absence of a debt burden. Pakistan has been running primary surpluses (or almost negligible deficits) since FY94, but it was only in the last few years that substantial primary surpluses had been generated, reflecting the increased emphasis on containing the debt burden.

The abrupt loss of this surplus in FY02 is largely attributable to the exceptional expenditures witnessed during the year. The absence of these in future years could therefore lead to the re-appearance of large primary surpluses.

REVENUE INDICATORS

FY02 has seen a surprisingly strong jump in the revenue-to-GDP ratio, which rose by 1.1 percentage points even as the tax revenue to GDP ratio remained almost unchanged (see Figure 4.2). In other words, the buoyant 15.4 percent growth in revenues is primarily driven by rising non-tax collections, which is based on three main sources: (1) interest income on government loans, (2) dividends from corporations, and (3) profits from other organizations such as the SBP. None of these has traditionally been a stable income source, as evident from the high variance in these receipts over the last 12 years. Tax revenues as a percent of GDP showed some growth from FY92 to FY97 and afterward remained worryingly stagnant despite the considerable efforts over the years to broaden the tax base of the economy. Clearly, the efforts to capture the tax potential of the economy have not succeeded so for.

Selected Fiscal Indicators (FY91 to FY02)

Average Standarddeviation

Co-efficientof variation

As percent of GDP

Tax revenues 13.4 0.5 3.6

Non-tax revenues 3.6 0.8 21.7

Total revenues 16.9 0.9 5.3

Current expenditures 19.3 0.8 3.4

Defense 5.5 0.9 17.0

Interest payments 6.3 1.0 16.5

Development expenditures 4.6 1.5 33.4

Total expenditures 23.9 1.7 7.0

As percent of budget targets

Revenue receipts 92.1 3.7 4.0



Buoyancy estimates

Tax revenues 0.9 0.3 34.3

Non-tax revenues 1.3 2.8 217.8

Total revenues 1.0 0.6 61.0



Total expenditures 1.0 0.8 75.8

To gain more insight, the buoyancy of revenues has also been computed for a 12-year period to assess the overall growth in revenue receipts. The estimated buoyancy of tax revenues averaged 0.9 as compared to 1.3 for non-tax revenue. In other words, the average growth and volatility in non-tax revenues remained significantly higher than for tax revenues over the estimation period.

During FY02, the share of non-tax revenues and its buoyancy estimates were higher than the average for the 1990s. However, the concern due to the historical volatility may be misplaced, as the restructuring of public sector enterprises in recent years may finally

permit them to regularly service their debt to the government. If so, this would add greatly to the stability of non-tax revenues going forward.

EXPENDITURE INDICATORS

The total expenditure to GDP ratio approximates the government's share in the overall economy and provides information on the fiscal stance of the government. As evident from Figure 4.3, after falling sharply in the first half of the 1990s, it depicts a gradual downtrend in succeeding years. Unfortunately, this gradual slide was almost exclusively at the cost of development expenditures.

The average buoyancy of total (1.0), current (1.1), and development (0.5) expenditures computed for the preceding 12 years reinforces the conclusions drawn above. While expenditures kept pace with GDP on average, it is current expenditures that grew at the faster pace, driven mainly by a sharp rise in interest payments, and cutting development expenditures largely made fiscal adjustments.

During FY02, the total expenditures to GDP ratio has jumped sharply from 21.3 to 23.7 percent, largely on account of current expenditures. However, for once, this rise is not at the expense of development expenditures, which has also rose by 0.7 percent of GDP. Moreover, incorporating the one-off spending, the "adjusted" FY02 expenditures to GDP ratio falls to 21.7 percent.

A compositional breakdown of current expenditures over the years also provides interesting insights. As a ratio to GDP, expenditure on public sector development programs and defense recorded considerable declines since the early 1990s. However, the realized reductions did not lower the overall budget deficit, as the interest payments picked up over the same period. On the positive side, over the last three years, the interest payments to GDP ratio has also witnessed a notable decline, reflecting the government's emphasis on better debt management.

MANAGEMENT INDICATORS

The ratio of budgetary targets to actual performance, for various revenue and expenditure heads, provides interesting insights on the government's ability to set realistic targets and perform within these budgetary parameters. It is pertinent to note here that both large positive or negative deviations from the target are not desirable. Revenue receipts remained persistently lower than the target, and strikingly, there has been very little deviation from the mean, i.e. there is a very consistent upward bias in the government's budgetary revenue estimates.

The expenditure ratio shows greater variability; current spending has seen both positive and negative deviations from targets, but on average, positive deviations (realized figures greater than budget targets) have dominated. On average development expenditures are over-estimated.

ECONOMIC INDICATORS

Economic Indicators (July 2004 - June 2005)

Indicators 2000 - 01 2001 - 02 2002 - 03 2003 - 04 2004 - 05 + (-) %

Exports (Billion $) 9.20 9.13 11.16 12.31 14.41 17

Imports (Billion $) 10.72 10.34 12.22 15.59 20.62 32

Trade Balance (Billion $) (1.52) (1.20) (1.06) (3.28) (6.21) 90

Net Revenue (Billion Rs.) 393.9 404.1 460.6 518.8 591.09 14

FDI (Million $) 322.40 484.70 798.00 949.40 1524 61

Workers Remittances (Billion $)

1.09 2.39 4.24 3.872 4.17 8

Forex Reserves (Billion $) 3.22 6.43 10.72 12.33 12.61 2

Exchange Rate (Rs./ US$) 58.4 61.0 57.7 57.92 59.66 3

Stock Exchange Index 1300 1520 3402 5279 7450 41

GDP Growth 2.6% 3.6% 5.1% 6.4% 8.4%

Inflation 4.4% 3.4% 3.3% 3.9% 9.3%

F O R E I G N A I D

STRUCTURAL ADJUSTMENTS IN PAKISTAN

While no country, rich or poor, has escaped the impact of neo-liberal structural adjustments in the age of globalization, let us keep our focus on Pakistan's dilemma of development. For the technocratic development elite of Pakistan, long used to complying with the conditionalities of World Bank/IMF loans, the implementation of structural reforms was simply the next step to be followed in the process of development planning. Perhaps they did not have much of an option as the country was brought to heavy dependence on foreign economic assistance. By 1980 Pakistan had become the 10th largest recipient of the World Bank/IMF loans.

Invasion of Structural Adjustment and its trends during different regimes:

Zia-ul-Haq

The first of the loans under the Structural Adjustment Program (SAP) was approved in 1982 when General Zia had established his military rule. But after receiving the first tranche of the SAP loan the General's economic managers decided not to proceed with the rest, perhaps anticipating with some foresight that the enforcement of required adjustments will hurt the common people, making the General more unpopular than he already was. In any case the country had once again become the front line state in the American supported Islamic jihad against the Soviet communists, and as such was being well supplied with economic aid directly by the US and its allies.

Benazir Bhutto

The crunch of SAP loans came after Zia's demise in 1990s and during the alternating civilian governments of Benazir Bhutto and Nawaz Sharif. The outgoing Zia regime had almost doubled the country's foreign debt liabilities, which stood at $15.5 billion in the year 1990-91, creating greater dependency on SAP loans.

Nawaz Sharif

When Sharif replaced Benazir's first short-lived government, he launched the first substantial package of structural adjustments to the economy in earnest. Controls on foreign exchange were lifted, first batch of state assets were privatized, business and industry was deregulated, and public expenditures on social programs were curtailed. Pleased with this performance, the World Bank/IMF released an average of $400 million in SAP loans over the 3 years of Sharif's first government.

Moen QureshiWhen in 1993 Moen Qureshi was brought in from the World Bank to serve as interim Prime Minister he implemented another round of structural adjustments, including 10 percent devaluation of currency, increase in prices of petroleum and electricity, dismantling of price controls on flour and cooking oil, and further reduction in Tariffs. Whatever these reform may gave accomplished for the health of the economy, for common people they spelled more misery of inflation and rising costs of basic necessities.

● Return of Benazir Bhutto

But more was yet to come. After Qureshi's departure and return of Benazir to the Prime Minister's office a new World Bank/IMF Extended Structural Adjustment Facility (ESAF) loan of $1.5 billion was signed up to be disbursed in installments. To meet the conditions of this loan privatization was stepped up, a new regressive General Sales Tax was imposed on 268 items, import duties were further reduced and later in October, 1995, the rupee as devalued by another 7 percent. What the Benazir government failed to do was to meet the other important condition of the ESAP loan, the cutting of the budget deficit from 5.6 % of the GNP to 4.0 %, while over 80 percent of the budget revenues were tied up in debt servicing and defense expenditure. As a result the ESAF loan was suspended after payment of the first tranche. It took long and intense negotiations in Washington before the World Bank/IMF authorities agreed to replace the ESAF concessional loan with a $600 million standby loan at 5.0 percent rate of interest.

● Return of Nawaz Sharif

While the people of Pakistan were smarting under the cumulative burden of these structural adjustments, the Benazir government was dismissed by presidential dictate, and she was forced to contest fresh elections against her main political rival Nawaz Sharif in 1997. But the traditional working class supporters of the PPP having endured the bitter medicine of structural adjustments lost interest in voting and Nawaz Sharif walked away with an easy victory based on a small turnout of voters.

Back in office, Sharif continued on the path of structural reforms, claiming a heavy electoral mandate. Then in May 1998 when the people of Pakistan were waiting for the structural reforms to work their magic, and the economy was going from bad to worse with GDP increase rate stalled at about a jittery 4 % average, India exploded a nuclear device for the second time as a test of its atomic weaponry. And in reaction the Sharif government followed suit by detonating its own nuclear contraption against a spate of

warnings issued by the United States and other G-8 countries. United States and Japan, the two major aid donors immediately imposed sanctions on both India and Pakistan, which came as a blessing in disguise for Sharif government's economic woes. Blaming the economic crisis of Pakistan on these sanctions, and taking advantage of the nationalist xenophobia generated by the nuclear tests, his government declared emergency in Pakistan on May 28 and froze $11 billion in foreign currency bank accounts held by local and expatriate Pakistanis.

But this move was hardly enough to save the day for Nawaz Sharif, as the economy kept teetering on default. In America there was already talk about Pakistan's future as a "failed state." The US could have made, in the words of Henry Kissinger, a horrible example of Pakistan, but in December 1998, after a meeting with Nawaz Sharif in Washington President Clinton decided to rest the matter after obtaining assurances from the Prime Minister to observe non-proliferation and negotiate peace with India. As an incentive to compliance, Clinton also promised his support of an IMF bailout package to Pakistan.

Structural Reforms

In fact IMF has had little problem with its aid operations in Pakistan as the country's development planners have rarely declined to comply with the conditionalities of its loans, the latest of the series euphemistically called structural reforms. The real problem that IMF and the Bank were having in 1990s was the mounting discontent with their development strategies blamed for enriching the rich and impoverishing the poor. By the fiftieth anniversary of the birth of Breton Woods institutions this discontent had turned into a loud and widespread campaign under the rallying cry of "Fifty Years Is Enough."

IMF’s Structural Adjustments with Poverty Reduction and Nawaz Govt. swept away by Military coup:

Faced with these protestations, the Washington twins were compelled to do something about their image without changing their ideological commitment to neo-liberal globalization. The IMF came up with the novel idea of integrating poverty reduction with its structural adjustment agenda. In September 1999 it changed the name of its Extended Structural Adjustment Facility (ESAF) to Poverty Reduction Growth Facility (PRGF).

This reformulated lending procedure was ready when a month later the Nawaz Sharif government was swept aside by yet another military coup. The economic managers of the new administration under the leadership of a new finance minister, no stranger to the financial world of Washington, had little problem producing Pakistan's first comprehensive Poverty Reduction Strategy Paper (PRSP) required to qualify for the PRGF loan. The strategy paper met quick approval of the IMF Executive Board on December 6, 2001, resulting in a new round of concessional lending in tranche.

This brings us to the latest phase of Pakistan's development planning. The picture of how Pakistan's PRSP has worked in practice as a policy document controlled by IMF

(although "owned" by Pakistan) emerges from three years of its implementation closely monitored by the Fund staff through no less than nine documented reviews. Economic growth as measured by the rate of increase in GNP remains the number one concern, but is yet to move up to the celebrated high figures of the Ayub and Zia eras. The main instrumentality of growth remains the relentless implementation of structural adjustments based on the "Washington Consensus." That means privatization which is proceeding well although IMF would like to see more progress in the sale of major state assets, investment environment for both foreign and local capital is improving, the reduction of budgetary deficit and public debt is on target, customs and tariff reforms to lower the costs of doing business in Pakistan are well under way, tax concessions and subsidies are being eliminated, poverty reduction expenditures are rising, and above all macroeconomic situation looks very good. The foreign currency reserves have also increased sharply, which may not have as much to do with structural adjustments as with the windfall from America's Operation Enduring Freedom and a rebounding of remittances generated from the sweat and labor of expatriate workers.

There are of course other sociologically interesting objectives embedded in IMF's new poverty reduction discourse, such as devolution of power, participation of the civil society, empowerment of the poor, the challenge of inclusion, good governance, and transparency. But these potent phrases strike one like mantras flowing out of a sorcerer's bag than having much to do with the real life situation of Pakistanis living in poverty.

Incompatibility of Structural Adjustments and Poverty Reduction:

What is more telling about Pakistan's economic performance under the PRGF arrangement, monitored closely by the Fund staff, is the lack of any significant reduction in poverty. In its ninth and final review under the PRGF arrangement, the IMF Board, while praising Pakistan's "strong recovery from the economic crisis of the 1990s," goes on to conclude that the country "continues to face major challenge ... to achieve significant and lasting reduction in poverty." In other words Pakistan's perennial dilemma of development remains unresolved. On their part, Pakistan authorities have decided not to proceed with the last and final tranche of the PRGF amid affirmations from both sides of continued cooperation in matters of economic development.

The fact of the matter, which does not receive mention by either side, is that the neo-liberal globalization agenda which the IMF and the Bank have been extending to Pakistan since 1980s in the form of structural adjustments has practically foreclosed the possibility of any significant reduction in poverty.

Why is it so? The answer to this question lies in the common observation that the overwhelming majority of poor in the world, including one third of the people of Pakistan who live below the national poverty line, are workers, employed, unemployed, or underemployed, including their dependents and many women whose work remains unrecognized and un-waged. It therefore stands to logic that any effective program of reducing poverty must be directed at improving the position of workers in the labor market and the work place. Yet most of the structural adjustments - the diminished role of

the state, free market fundamentalism, privatization, deregulation, flexibility of labor - which operate at the heart of neo-liberalism accomplish the opposite, creating the structural conditions which make it virtually impossible for workers to climb out of poverty

In the ongoing process of restructuring the world economy on neo-liberal lines the position of capital and its cross-border mobility has been enhanced tremendously. The role of the state as a key player in promoting distributive justice has been undermined and subordinated to the so-called free market. Labor and working classes have turned out to be the biggest losers, bearing the burden of "competitive austerity."

There are some revealing figures about what this restructuring of relations between capitals, state and labor has accomplished worldwide. In the United States, the organic core of liberalized global capitalism, the income gap between the top fifth and the bottom fifth of households was narrowing before 1973, but between 1973 - 1996 this gap increased by 50 %. In 1950 one third of American waged and salaried workers belonged to trade unions but in 1995 this figure dropped to only 14.2 percent; just in one decade of neo-liberal ascendancy between 1985-1995 union membership in the U.S. declined by 21.1 % and in U.K. by 27.7 % . During roughly the same period of globalization child poverty increased by one third in America and by one half in Britain.

The affluent worker of the America of 1950s and 1960s is now displaced by the flexible worker who lacks a job for life, is adjustable with respect to wages and hours of work, lacks collective bargaining and union protection. The flexible worker is often a single mom or single dad and if married needs a working spouse to make ends meet or keep up with the American standards of consumption.

Gone are also, I might add, those thriving farming communities that were to be seen around the State University I attended from 1958 to 1961. Last time I visited my American Alma Mater before 9/11 those prosperous farming settlements had either disappeared from sight or reduced to ghost towns. But those farms were still green and growing bountiful genetically altered crops now owned by agribusiness corporations.

Obviously, what goes under "Washington Consensus" has failed the working people of America. It can hardly be expected to work for the toiling people of Pakistan whose position has never been enviable and is certainly much too vulnerable to be left to the mercy of the unregulated market. From what one can glean from the available data on Pakistan, union membership in the country has continued to decline from 850,517 in 1985 to 296,257 in 1999; the proportion of employees covered by collective bargaining has declined from 1.44 % in 1990 to 0.91 % in 1999; and the wage costs as proportion of total production in Pakistan stood at the terribly low figure of 6.0 % in 1999

E C O N O M I C P L A N N I N G

DEFINITION

According to Dickinson:

“Planning is the making of major economic decisions of what and how much is to be produced, how,

where and when is to be produced, for whom it is to be allocated, by the conscious decision of a determination authority, on the basis of comprehensive survey of the economic system as a whole”.

ECONOMIC PLANNING

Six-year Plan In1950:

Pakistan's economic development planning began in 1948. By 1950 a six-year plan had been drafted to guide government investment in developing the infrastructure. But the initial effort was unsystematic, partly because of inadequate staffing.

Five-Year Plans:

First Five-Year Plan:

More formal planning--incorporating overall targets, assessing resource availability, and assigning priorities--started in 1953 with the drafting of the First Five-Year Plan (1955-60). In practice, this plan was not implemented, however, mainly because political instability led to a neglect of economic policy, but in 1958 the government renewed its commitment to planning by establishing the Planning Commission.

Second Five-Year Plan:

The Second Five-Year Plan (1960-65) surpassed its major goals when all sectors showed substantial growth. The plan encouraged private entrepreneurs to participate in those activities in which a great deal of profit could be made, while the government acted in those sectors of the economy where private business was reluctant to operate. Pakistan's success, however, partially depended on generous infusions of foreign aid, particularly from the United States.

Third Five-Year Plan:

After the 1965 Indo-Pakistani War over Kashmir, the level of foreign assistance declined. More resources than had been intended also were diverted to defense. As a result, the Third Five-Year Plan (1965-70), designed along the lines of its immediate predecessor, produced only modest growth.

Fourth Five-Year Plan:

When the government of Zulfiqar Ali Bhutto came to power in 1971, planning was virtually bypassed. The Fourth Five-Year Plan (1970-75) was abandoned as East Pakistan became independent Bangladesh. Under Bhutto, only annual plans were prepared, and they were largely ignored.

Fifth Five-Year Plan:

The Zia government accorded more importance to planning. The Fifth Five-Year Plan (1978-83) was an attempt to stabilize the economy and improve the standard of living of the poorest segment of the population. Increased defense expenditures and a flood of refugees to Pakistan after the Soviet invasion of Afghanistan in December 1979, as well as the sharp increase in international oil prices in 1979-80, drew resources away from planned investments. Nevertheless, some of the plan's goals were attained. Many of the controls on industry were liberalized or abolished, the balance of payments deficit was kept under control, and Pakistan became self-sufficient in all basic foodstuffs with the exception of edible oils. Yet the plan failed to stimulate substantial private industrial investment and to raise significantly the expenditure on rural infrastructure development.

Sixth Five-Year Plan:

The Sixth Five-Year Plan (1983-88) represented a significant shift toward the private sector. It was designed to tackle some of the major problems of the economy: low investment and savings ratios; low agricultural productivity; heavy reliance on imported energy; and low spending on health and education. The economy grew at the targeted average of 6.5 percent during the plan period and would have exceeded the target if it had not been for severe droughts in 1986 and 1987.

Seventh Five-Year Plan:

The Seventh Five-Year Plan (1988-93) provided for total public sector spending of Rs350 billion. Of this total, 38 percent was designated for energy, 18 percent for transportation and communications, 9 percent for water, 8 percent for physical infrastructure and housing, 7 percent for education, 5 percent for industry and minerals, 4 percent for health, and 11 percent for other sectors. The plan gave much greater emphasis than before to private investment in all sectors of the economy. Total planned private investment was Rs292 billion, and the private-to- public ratio of investment was expected to rise from 42:58 in FY 1988 to 48:52 in FY 1993. It was also intended that public-sector corporations finance most of their own investment programs through profits and borrowing.

Eighth Five-Year Plan:

In August 1991, the government established a working group on private investment for the Eighth Five-Year Plan (1993-98). This group, which included leading industrialists, presidents of chambers of commerce, and senior civil servants, submitted its report in late 1992. The plan reflects the initiatives and incorporates the policies of government geared to the dynamic and equitable economic system. The main emphasize were on social sectors, energy, drainage, physical infrastructure, public-private partnership, empowerment of the community, and lower echelons of government.

Ninth Five-Year Plan:

Ninth Five-Year Plan (1998-2003) reflected the apathy of federal government towards disaster management despite recurrent losses due to floods landslides in the preceding years. However it incorporates environmental issues in a more harmonized manner as

compared to the previous efforts at state level. Poverty alleviation, employment generation, population control and education advancement objectives were continued in ninth five-year plan.

Tenth Five-year Plan:

Tenth Five-year plan (2003-2008) is in operation. Population welfare program, urban water supply, building and maintaining infrastructure, crisis management, and stable economic growth are of the main emphasis.

C O N C L U S I O N

Clearly, the development project that was initiated in the 1950s with a focus on eradicating poverty and inequality from Pakistan got lost somewhere in the labyrinth of development "fashions" and econometric modeling learned diligently by our scholars in the Ivy League universities of America and IMF/World Bank seminars. The question that I want to leave here is whether it is possible to revive that original development project defined, at least rhetorically, around normative worry with poverty mitigation and equality?

It seems to me that there are a few favorable conditions at the moment, which raise that possibility. First of all, inevitable as the hegemonic sweep of neo-liberal globalization may appear, its agenda is under attack both from within and without. From within, there are emerging warnings that capitalism in its neo-liberal articulation is headed towards depression economics and an internal crisis with its purely market calculations. From

without the system it is under frontal challenge by worldwide social movements such as the World Social Forum and many environmental and feminist initiatives.

Foreign debt is the main lever used by donor countries and multilateral aid organizations to break resistance to the imposition of external economic agendas and development policies. Pakistan authorities have made this year a $1.1 billion repayment of foreign debt, which is an encouraging sign if the intent of this move is to break out of the vicious circle of loans and debts. More encouraging in this respect is the re-energized India-Pakistan peace movement, which can lead to decrease in heavy defense spending, and therefore less reliance on foreign debt accompanied by policy constraints.

Yet another hopeful development is the reactivated interaction being witnessed in the context of South Asian Association for Regional Cooperation, SAARC. Cooperation among South Asian countries, where an estimated 40 percent of the world's poor live, is the key to building an environment in which indigenous policies can be designed to solve South Asian problems in the context of South Asian realities. One must remember that Pakistan is historically, geographically, culturally and temperamentally part of the South Asian subcontinent and will remain so no matter what kind of national ethos are trying to impose on the country. Pakistan stands a better chance of setting its own priorities of development in cooperation and concerted action with its South Asian neighbors, India in particular, than trying to resist alone the agenda of globalization set elsewhere.

But first it has to be seen whether there is a will and a consensus among the countries of South Asia to bring poverty reduction to the center stage of development planning.

INTRODUCTION

While Pakistan has realized a respectable growth rate during the last fifty

years (on average the growth rate of GDP has exceeded four percent), it falls

behind considerably those countries with which it was competing in the

Fifties. Considering the myriad constraints that the economy is facing - low

levels of savings and investment, poor human resource development,

inadequate infrastructure, and frequent changes in economic policies ---

major challenges lay ahead for the country to achieve sustained and self-

reliant growth.

Growth rates in Pakistan show large fluctuations across the years and the

decades. While some of the fluctuations may be attributed to the changes in

climatic conditions as the share of agricultural output in GDP that has fallen

from more than 50 percent at the time of independence is still 25 percent,

most of the fluctuations have been due to policy changes. The policies have

not only impacted the investment levels but also utilization of capital and the

growth of productivity. It is, therefore, essential that not only trends in GDP,

investment, employment, and other variables are examined, but they are put

in the context of policy changes and initial conditions.

PERIOD ANALYSIS

THE DECADE OF FIFTIES

THE EARLY YEARS: 1950 - 1960

INITIAL CONDITIONS

As a result of the partition of the Indian sub-continent, Pakistan emerged as

an independent sovereign State on August 14, 1947. While both India and

Pakistan were underdeveloped at the time of partition, Pakistan was

relatively more underdeveloped and poor. The early years of Pakistan’s

economic history were marked by the dominance of agriculture, absence of

a well-developed industrial sector, and weak institutional and physical

infrastructure. There were considerable regional disparities in the pattern of

industrialization in the sub-continent, and the areas which constituted

Pakistan lagged behind in industrial development.11 To make the situation

worse, infrastructural facilities were extremely inadequate. With less than

25 MW of power generation, even low levels of power consumption required

import from India. Railways were particularly affected by the partition as

many of the major railway lines were disrupted by the new borders. In

addition, the limited handling capacity of Karachi and Chittagong ports did

not help the country’s foreign trade.

ECONOMIC PERFORMANCE

During the period 1949-50 to 1959-60, the economy grew at a moderate rate

of 3.14 percent per annum. Given the predominant share of agricultural

output in GDP, the growth performance was obviously influenced primarily

by the agricultural sector, which grew by a modest 1.76 percent per annum.

Notwithstanding an expansion in cropped area in West Pakistan, growth in

agricultural output was dampened by stagnant average yields of major

crops.

GROWTH IN GDP AND COMPONENTS

YEARS SECTOR GDP%

(FC)AGRICULTU

RE

MANUFACTURI

NG

SERVICES

1950-51 2.55 8.30 4.60 3.82

1951-52 -8.82 7.74 4.01 -1.73

1952-53 0.16 9.96 2.25 1.86

1953-54 14.93 12.98 4.00 10.03

1954-55 -2.78 12.35 5.00 1.66

1955-56 2.32 10.05 2.94 3.49

1956-57 2.02 5.43 3.09 2.91

1957-58 2.07 3.74 2.33 2.63

1958-59 3.76 4.18 7.05 5.49

1959-60 0.83 2.53 .85 .93

Owing to the low level of manufacturing activity in Pakistan at the time of

partition, the manufacturing sector exhibited high growth rates during the

Fifties: the growth rate in manufacturing averaged over 10 percent annually

in the first half. Import substitution was the hallmark of the government's

industrial policy in the early years, and protection of domestic industry

provided strong impetus to the production of a broad range of commodities

including cotton textiles, sugar, vegetable ghee, and cement. Though the

expansion in large-scale manufacturing did not make an appreciable

contribution to the overall performance of the economy due to its small

share in the gross domestic product, the creation of a more diversified

economic structure than was inherited at independence was a major

achievement of these early years.

The development of the industrial sector was made possible by heavy initial

investments: fixed investment rate in Pakistan increased sharply from 2.8

percent of nominal GDP in 1949-50 to 9.3 percent in 1959-60. Despite a

sharp increase in the price of investment goods triggered by the devaluation

of the rupee in 1955, the rate of investment, especially public investment,

remained upbeat primarily due to the fact that increased availability of

foreign resources helped the government to meet the high cost of capital

goods. Increased level of public investment in infrastructure --- electric

power, ports, telecommunications, and irrigation ---- laid the basis for faster

growth.

SECTORAL SHARES IN GDP

Though the share of agricultural sector dropped from 52.58 percent in 1949-

50 to 45.61 percent in 1959-60, the economy continued to be dominated by

the agricultural sector, with an average share in GDP of around 47.70

percent. There was a considerable expansion in the manufacturing sector:

its share in GDP increased from 6.39 percent in 1949-50 to 9.91 percent in

1959-60. While the services sector contributed significantly to national

output (average share of 41.07 percent), there was little variation in its

share over time.


YEARS SECTOR

AGRICULTU

RE

MANUFACTURI

NG

SERVICES

1950-51 51.94 6.68 39.68

1951-52 48.48 7.32 42.00

1952-53 47.67 7.90 42.16

1953-54 49.80 8.11 39.85

1954-55 47.62 8.97 41.16

1955-56 47.08 9.53 40.95

1956-57 46.67 9.77 41.02

1957-58 46.42 9.87 40.90

1958-59 45.66 9.75 41.50

1959-60 45.61 9.91 41.47

IMPORT, EXPORT AND BALANCE OF TRADE

On the external

economic front, the

surge in Pakistan’s

export earnings led

by the Korean war-

related commodity

boom in 1950

quickly subsided

owing to at least

three broad factors.

First, Pakistan's

decision not to

follow the sterling

and the Indian rupee

in devaluation hurt

Pakistan’s exports.

Second, stagnation

in agricultural

output meant lack of

exportable surpluses

in agricultural

commodities. Third,

international

recession weakened

the commodity

prices of Pakistan’s

exportables. Not

surprisingly,

therefore, there was

a sharp fall in export

earnings in the first

half of the decade.

Export performance,

however, recovered

in the second half,

helped mainly by the

devaluation of the

Pakistani rupee in

August 1955. On

average, imports

grew at an

accelerated pace in

the second half of

the decade mainly

because of the need

to import large

quantities of food

grains. Except for

the year 1950-51

when Pakistan had a

surplus on its trade

account, the country

continued to face a

growing deficit in its

balance of trade.

THE DECADE OF THE SIXTIES

INITIAL CONDITIONS

The initial conditions of this period can be summarized as follows:

• The foundations of the industrial sector were laid.

• Administrative machinery of government as well as vital institutions such

as the central bank were in place.

• Agriculture remained the dominant sector of the economy; but its growth

had stagnated.

• There was a rapid expansion in the large scale manufacturing sector.

• The rate of population growth outpaced that of agricultural growth,

resulting in a decline in per capita food availability.

• Per capita income was stagnant.

• There were regulations on investment, imports and exports, prices,

foreign exchange and many other sectors of the economy.


Measured by GDP growth, economic performance in Pakistan in the Sixties

clearly surpassed initial expectations: the growth rate of the economy more

than doubled from 3.11 per cent per annum in the Fifties to 6.60 per cent in

the Sixties. After exhibiting stagnant and even negative growth in the initial

years, the agricultural sector recorded a healthy growth rate of 6.04 percent

in 1961-62. Growth in the agricultural sector peaked at 11.66 percent in

1967-68, before decelerating sharply to 4.15 percent in 1968-69, and then

rebounding to 9.12 percent in 1969-70. It is noteworthy that agricultural

sector performed relatively well in the second half of the Sixties as

compared to the first half: the average annual rate of growth in the

agriculture sector climbed from 3.88 percent in the first half to 6.36 percent

in the second half.

Large scale manufacturing sector posted strong growth in both halves of the

Sixties, though there was a marked slowdown in the second half when

industrial output grew at an average annual rate of 8.11 percent, down from

11.72 percent in the first half. Several factors contributed to the impressive

performance of the industrial sector in the Sixties.

GROWTH RATES OF GDP AND COMPONENTS

YEAR

SSECTOR

GD

P %

(FC

)

PER

CAPITA

INCOM

ECOMMODIT

Y

PRODUCIN

G

AGRICULTU

REMANUFACTURING

SERVIC

ES

1960-

61

3.75 -0.39 12.85 5.98 4.67 2.01

1961-

62

6.86 6.04 13.28 3.89 5.61 2.65

1962-

63

6.91 4.91 11.18 7.05 6.97 3.85

1963-

64

6.86 3.83 11.34 6.34 6.65 3.76

1964-

65

6.83 4.99 9.93 13.22 9.46 6.22

1965-

66

3.01 0.86 8.58 11.67 6.70 3.84

1966-

67

5.17 6.00 5.65 1.95 3.74 0.83

1967-

68

9.57 11.66 6.37 3.48 6.90 4.08

1968-

69

6.58 4.15 8.62 5.56 6.15 3.13

1969-

70

10.83 9.12 11.32 6.72 9.10 6.20

First, a large and lucrative market for domestic production was created by a

restrictive import regime, especially for consumer goods, resulting in high

profits in the industrial sector. Second, relaxation in direct controls on

investment coupled with improved profitability in the industrial sector led to

a substantial increase in real gross fixed investment. Third, there was cheap

availability of agricultural raw materials to the industrial sector, thanks

largely to export controls on these products which depressed domestic

prices of these commodities relative to their world prices.

PERCENTAGE SHARES IN GDP

With an average share in GDP of around 41 percent, the agricultural sector

continued to play a dominant role in the economy. On the other hand, while

vigorous industrialization efforts helped to raise the share of manufacturing

sector in GDP from 10.68 percent in 1960-61 to 13.44 percent in 1969-70,

the average share of manufacturing sector remained low during the decade

at about 12.41 percent. The share of services in GDP did not show much

variation during the period, and its average share stood close to 42 percent.

PERCENTAGE SHARES IN GDP

YEARS SECTOR

COMMODITY

PRODUCING

AGRICULTU

RE

MANUFACTURI

NG

SERVICES

1960-61 58.02 43.41 40368 41.98

1961-62 58.70 43.58 11.45 41.30

1962-63 58.67 42.74 11.90 41.33

1963-64 58.79 41.61 12.43 41.21

1964-65 57.37 39.91 12.48 42.63

1965-66 55.39 37.73 12.70 44.61

1966-67 56.16 38.55 12.94 43.84

1967-68 57.56 40.27 12.87 42.44

1968-69 57.80 39.51 13.17 42.21

1969-70 58.71 39.52 13.44 41.29


Pakistan’s exports recorded a nearly three-fold increase during the period,

increasing from US$ 114 million in 1960-61 to US$ 338 million in 1969-70

with an average annual growth rate of 10.72 percent. The strong growth in

exports was accompanied by rising imports, which grew at an average rate

of 7.37 percent. The country’s trade balance remained in deficit throughout

the decade.

THE DECADE OF THE SEVENTIES

INITIAL CONDITIONS


• Healthy growth in the industrial sector, occasionally disrupted by the

demonstrations in late Sixties.

• Strengthening of administrative machinery and institutions.

• Agriculture remained the dominant sector of the economy, though its

performance significantly lagged behind that of the manufacturing sector.

• Concern for income distribution, wage rates, and welfare was heightened.


The overall performance of the economy during the Seventies was rather

subdued as compared with the Sixties: on average GDP grew at a rate of

4.66 percent per annum as against 6.60 percent in the previous decade.

With the relatively sluggish growth rates in the commodity producing

sectors (agricultural and manufacturing sectors grew at average annual

rates of 2.32 percent and 5.50 percent respectively), growth in the GDP was

fuelled primarily by the services sector, which grew at a healthy rate of 5.94

percent per annum. It is noteworthy that there was a sharp difference in the

economic performance in the first and second halves of the Seventies, and

an upturn in economic activity occurred in 1977-78 led by an impressive

recovery especially in the manufacturing sector. Thanks largely to the high

growth rate of agriculture and large-scale manufacturing, the commodity –

producing sector exhibited a growth rate of 7.24 percent per annum in the

second half, as against 4.62 percent per annum in the first half. The

improvement in performance of the commodity-producing sectors in the

second half owed as much to a fuller utilization of idle capacity in the

manufacturing sector as to an unusual spell of good weather which helped

recovery in the agricultural sector.


YEAR

S

SECTORGD

P %

(FC

)

PER

CAPITA

INCOM

ECOMMODIT

Y

PRODUCIN

G

AGRICULTU

REMANUFACTURING

SERVICE

S

1970-

71

0.16 -2.79 6.44 2.31 1.05 -2.29

1971-

72

1.19 2.77 1.26 3.33 2.08 -0.12

1972-

73

4.62 1.70 8.73 9.52 6.70 3.09

1973-

74

5.45 3.85 6.35 9.05 7.01 3.80

1974-

75

-0.74 -2.52 0.54 8.29 3.26 0.50

1975-

76

4.47 4.47 1.39 1.79 3.37 2.19

1976-

77

2.90 2.98 1.82 2.71 2.81 2.06

1977-

78

5.76 3.50 10.21 10.37 7.84 9.60

1978-

79

5.03 3.41 8.01 6.18 5.57 3.25

1979-

80

7.84 5.89 10.25 5.87 6.91 3.31


Total exports increased manifold in the Seventies, rising from US $ 420

million in 1970-71 to US$ 2365 million in 1979-80, registering an average

annual rate of growth of 22.35 percent. The growth trend in imports

exhibited a similar pattern: on average, total imports grew at about 24

percent per annum, increasing from US $ 757 million in 1970-71 to US$

4740 million in 1979-80. As in the previous decade, the country faced a

growing deficit in its trade balance during the Seventies.

THE EIGHTIES DECADE

INITIAL CONDITIONS


• Weakening of growth momentum in the industrial sector.

• Enhanced role of the public sector, though in the late Seventies there were

indications to reverse the trend.

• Agriculture remained the dominant sector of the economy, with a sluggish

performance as compared with the manufacturing sector.


Economic growth averaged 6.12 per cent per annum during the Eighties,

matching the high growth performance of the Sixties. The commodity

producing sectors grew at an average annual rate of 7.33 percent, whereas

the services sector exhibited an average growth of 6.60 percent. The

manufacturing sector showed a healthy performance during most of the

decade with an average annual rate of growth of 8.21 percent. The

performance of the agricultural sector improved somewhat as compared

with the Seventies but growth in this sector remained rather weak

averaging 4.10 percent during the Eighties. Economic growth slowed down

markedly during the second half of the decade owing largely to the slow

pace of growth in the manufacturing sector: growth in GDP averaged 5.60

percent in the second half, down from 6.65 percent in the first half.


YEAR

SSECTOR

GD

P %

(FC

)

PER

CAPITA

INCOM

ECOMMODIT

Y

PRODUCIN

G

AGRICULTU

RE

MANUFACTURI

NG

SERVIC

ES

1980-

81

6.12 3.93 10.63 6.31 6.21 1.48

1981-

82

7.27 4.72 13.75 7.90 7.56 3.78

1982-

83

4.64 4.40 7.03 9.24 6.79 6.42

1983-

84

0.38 -4.82 7.89 7.90 3.97 0.06

1984-

85

9.48 10.92 8.09 7.92 8.71 3.79

1985-

86

6.94 5.95 7.55 5.77 6.36 3.32

1986-

87

5.76 3.25 7.53 5.86 5.81 0.94

1987-

88

6.12 2.73 9.98 6.77 6.44 0.44

1988-

89

5.77 5.87 3.96 3.81 4.81 0.93

1989-

90

4.69 3.03 5.72 4.48 4.59 1.81

SECTORAL SHARES OF GDP

While the share of

the agricultural

sector in GDP

peaked at 30.83

percent in 1980-81,

it declined to 25.83

percent in 1989-90,

averaging at 27.62

percent during the

decade. The

manufacturing

sector accounted for

an increasing share

in GDP: its share

stood at 17.59

percent in 1989-90,

up from 15.11

percent in 1980-81.

There was a slight

shift in the relative

importance of

commodity

producing sectors

and the services

sector: whereas the

share of commodity

producing sectors

declined from 53

percent in 1980-81

to 50.85 percent in

1989-90, the share

of the services

sector edged up

from 46.57 percent

to 48.62 percent

during the same

period.

SECTORAL SHARES OF GDP

YEARSSECTOR

COMMODITY

PRODUCING

AGRICULTU

REMANUFACTURING

SERVICES

1980-81 53.43 30.83 15.11 46.57

1981-82 53.28 30.01 15.98 46.72

1982-83 52.21 29.34 16.02 47.79

1983-84 50.41 26.86 16.62 49.59

1984-85 50.76 27.41 16.52 49.24

1985-86 51.04 27.30 16.71 48.96

1986-87 51.01 26.64 16.98 48.99

1987-88 50.86 25.71 17.55 49.41

1988-89 51.33 26.22 17.40 48.67

1989-90 51.38 25.83 17.59 48.62


Pakistan’s exports increased from US$ 2958 million in 1980-81 to US$ 4954

in 1989-90, exhibiting an average annual growth rate of 8.55 percent. As

compared to the sluggish export growth (2.09 percent) in the first half of the

decade, there was a marked improvement in the export performance in the

second half when exports grew at an impressive rate of over 15 percent.

Growth in total imports averaged 4.17 percent during the period. Despite

healthy growth in exports, Pakistan faced a persistent deficit in the trade

balance.

ECONOMY IN THE NINETIES AND BEYOND

INITIAL CONDITIONS


• A healthy rate of economic growth.

• Very large fiscal and balance of payments deficits.

• Aid flows had started declining.

• The process of structural adjustment and economic reforms initiated in the

late Eighties, and there was danger that the trend of improvement in income

distribution may be reversed.


The Nineties were marked by a slowing down of the rate of economic growth

along with rising incidence of poverty. GDP growth rate during this period

averaged 4.41 percent compared to 6.12 percent per annum during the

previous decade. The slowdown in the overall growth was notwithstanding

an acceleration in agricultural growth to 4.54 percent per annum (compared

to 4.10 percent per annum during the Eighties), and mainly reflected a

sharp reduction in the rate of growth in the manufacturing sector to 3.88

percent per annum from 8.21 percent annual rate in the previous decade.

While the overall economic performance was quite satisfactory in the first

half, there was as a deceleration in the rate of economic growth in the

second half: the average annual GDP growth fell from 5.07 percent in the

first half to 3.76 percent in the second half.


YEAR

SSECTOR

GD

P %

(FC

)

PER

CAPITA

INCOM

ECOMMODIT

Y

PRODUCIN

G

AGRICULTU

RE

MANUFACTURI

NG

SERVIC

ES

1990-

91

5.91 4.96 6.25 5.21 5.57 4.49

1991-

92

8.61 9.50 8.05 6.76 7.71 3.92

1992-

93

0.09 -5.29 5.35 4.63 2.27 -0.53

1993-

94

4.87 5.23 5.48 4.20 4.54 1.49

1994-

95

5.66 6.57 3.60 4.80 5.24 3.16

1995-

96

8.45 11.72 4.80 4.99 6.76 3.09

1996-

97

0.37 .12 1.29 3.61 1.93 -0.93

1997-

98

2.39 4.52 -1.61 1.64 2.03 -0.57

1998-

99

3.42 1.95 4.07 4.99 4.18 1.90

1999-

2000

3.67 6.09 1.53 4.15 3.91 1.22


The composition of GDP did not show much variation during the decade. On

average, the agricultural sector accounted for about a quarter of GDP,

whereas the share of the manufacturing sector stood at almost 18 percent.

The aggregate share of the commodity-producing sectors in the GDP fell

slightly from 51.55 percent in 1990-91 to 50.94 percent in 1999-2000. On

the other hand, the share of the services sector edged up from 48.45 percent

to 49.06 percent during the same period.


YEARSSECTOR

COMMODITY

PRODUCING

AGRICULTU

RE

MANUFACTURI

NG

SERVICES

1990-91 51.55 25.68 17.71 48.45

1991-92 51.98 26.11 17.76 48.02

1992-93 50.87 24.18 18.30 49.13

1993-94 51.03 24.34 18.46 48.97

1994-95 51.23 24.65 18.17 48.77

1995-96 52.04 25.79 17.84 47.96

1996-97 51.25 25.33 17.73 48.75

1997-98 51.43 25.95 17.10 48.57

1998-99 51.05 25.40 17.08 48.95

1999-

2000

50.94 25.93 16.09 49.06


On average, the export sector performed relatively well during the first half

of the Nineties when exports grew at an average annual rate of 10.90

percent, as against a meager 1.32 percent in the second half. The annual

rate of growth of total imports peaked at 21.4 percent in 1991-92, and

decelerated from 1994-95 onwards. The slowdown in the rate of growth of

total imports partly reflects a relative slump in economic activity during the

latter half of the Nineties. Deficit in the trade balance widened in the first

half of the Nineties, increasing from US$ 1488 million in 1990-91 to US$

3574 million in 1996-97. However, the deterioration in the trade balance

reversed in 1997-98, when the deficit fell by more than half from the

previous year to around US$ 1490 million in 1998-99.

REVIEW OF THE ECONOMIC PERFORMANCE

SINCE INDEPENDENCE

ECONOMIC GROWTH

Despite frequent changes in the basic economic policies and the poor

economic base at the time of independence, Pakistan's growth record has

been quite respectable; on average the growth rate of GDP has exceeded

four percent and per capita income has increased from Rs. 316 to Rs. 1,039

(at 1959-60 prices) and from $ 116 to $ 470 over the period. With the

exception of Sri Lanka, per capita income of Pakistan is the highest in South

Asia. Had the growth rate not faltered and workers remittances not fallen

during the Nineties the per capita income would have ranged between $600

and $700. With the successful completion of the Stabilization Programs,

prospects for investment and growth during the current decade have

brightened considerably.

The growth of GDP has been contributed to by all sectors of the

economy but the manufacturing sector has been the leading one. The

manufacturing sector has grown at a rate of 6.8 percent as against 3.4

percent growth rate in the agriculture sector. There have been major

structural transformations of the economy; share of agriculture in

GDP has gone down from 52.6 percent to 24.11 percent and that of

the manufacturing industries has increased from 6.4 percent to 17.65

percent, making the economy of Pakistan less vulnerable to the

vagaries of weather and lending some stability to the economy. There

are similar changes in the structure of employment, but with one

significant difference that the share of manufacturing in output

started falling from 1969-70 and the labor force released by the

agriculture sector started moving towards the services sector.

AGRICULTURE

Value added in agriculture has grown at a rate of exceeding 3

percent. Production of wheat, rice, sugarcane and cotton, the major

crops of Pakistan, have grown at the rate of 3.3, 3.8, 4.2 and 4.5 percent

respectively. The areas under these four crops have increased at the rate of

1.8, 1.6, 0.8 and 2.5 percent respectively. These growth rates have been

brought about by an increase in area as well as increase in yield per acre.

While average performance of agriculture has been quite satisfactory, the

performance has been quite dismal in some of the years. During the Fifties,

it grew at a rate of just 1.71 percent mainly because terms of trade were

against agricultural sector; agricultural produce was procured at low prices

and their exports were subject to various types of restrictions. Performance

of agriculture during the decade of the Sixties improved significantly; it

grew at an average rate of 5.1 percent per annum. The performance was

exceptionally impressive during the last three years of the decade when it

grew by an average rate of 8.6 percent per annum. The high growth rate in

this period owes to the Green Revolution technology. The technology

consisted of better seeds, more fertilizer and water use and as this

technology was divisible, both the small and large farmers benefited from it.

Resultantly, the production per acre has increased significantly.

Agricultural growth slowed down to 2.32 percent during the Seventies due

to various factors including uncertainty created by selective implementation

of land reforms, climatic shocks, floods, and a cotton virus. The performance

of agriculture sector in the Eighties improved to 4.10 percent and to 4.54

percent in the Nineties. This is despite the fact that cotton crops had

repeated failures and in certain years, wheat and sugarcane crops also

suffered from drought.

The increase in agricultural output has helped in the increased availability of

cereal per capita. It has increased from 139.3 to 172.7 kg, consumption of

sugar from 17.1 to 32.4 kg, milk from 107.0 to 148 kg, meat from 9.8 to 18.2

kg, and edible oil from 2.3 to 12.3 kg. Except for tea and edible oil, Pakistan

is self-sufficient in food production. As a matter of fact, Pakistan is exporting

rice and cotton all over the world.

With a view to keeping the prices of essential goods within reasonable

limits, agricultural output prices were kept below international

market prices through deliberate government policies. Such policies

had a dampening impact on the incentives to increase agricultural

production. No doubt the government had instituted a price support

mechanism to ensure that minimum guaranteed prices were paid to farmers,

but until recently they were well below world market price levels. Crop

yields would have grown more rapidly if farmers had been allowed to sell

their crops at international market prices. The agriculture sector also

suffered from poor rural infrastructure such as farm to market roads,

electrification of villages etc. Nevertheless, successive governments since

the Sixties have also ensured provision of higher and timely availability of

water, fertilizers, pesticides, better quality seeds etc. at reasonable prices.

Certified seeds for most of the crops are being provided and the use of

chemical fertilizers has increased from virtually zero to 2.8 million nutrient

tonnes. Whereas hardly any tractors were used in 1947, as many as 20,000

farmers acquire tractors every year. Similarly, tube wells installed every

year have been in the range of 5,000 to 10,000, and total credit to farmers

has increased from just less than Rs. 5 million in 1947-48 to over Rs. 40

billion in 1999-00. However, water has been the main source of increase in

per hectare yield but has become scarce in recent years because of the

drought and the failure to increase reservoir capacity in the country.

MANUFACTURING

Starting from

virtually scratch at

the time of

independence,

Pakistan has made

significant advances

in the

industrialization

process. A handful of

industrial units

producing sugar,

vegetable ghee, tea

blending, cement

and cotton textiles

comprised the total

large-scale industrial

assets of Pakistan at

the time of

independence and

they contributed

only 1.83 percent of

GDP. The small-scale

industries however,

contributed 4.56

percent of GDP.

While the share of

small-scale

industries is 5.26

percent, the share of

large-scale

industries has

increased to 12.39

percent. The large-

scale industries have

grown at a rate of

8.78 percent and the

total manufacturing

sector at a rate of

6.78 percent during

the period. Except

for the Seventies

and Nineties, the

manufacturing

sector has grown at

a rate of around 8

percent. The manufacturing industries grew at a rate of 7.73 percent during

the Fifties and the large-scale industries grew at a phenomenal rate of

15.75 percent. The industrial policy during the Fifties aimed at

manufacturing the products based on indigenous raw materials such as

cotton, jute, hides and skins, etc. for which there was an assured market at

home and abroad, and developing the consumer goods industries to meet

the requirements of home market for which the country was heavily

dependent on imports at that time. The two main characteristics of the

policies during this period have been direct controls on imports, investment,

prices etc., and the bias against exports.

Growth of manufacturing sector accelerated even further to 9.91 percent

during the Sixties. A number of initiatives helped in realizing the high

growth rate, which included liberal import policy, subsidy to exports through

a number of schemes such as Export Bonus Scheme, tax rebates, tax

exemption, Export Performance Licensing, Pay-As-You-Earn Schemes etc.

Protection rates in the period were rather high resulting into excessive

profits for the producers. Moreover, tax holidays and accelerated

depreciation allowances to increase the post-tax profits in the production of

manufactured products were also granted.

A sharp fall was

witnessed in the

growth of

manufacturing

sector in the

Seventies, the

growth rate fell to

5.50 percent and for

the large-scale

manufacturing it fell

to just 4.84 percent.

The policies pursued

during the Seventies

have also long run

impact bearing on

the industrialization

process in the

country. Most

important initiative

was the

nationalization of

heavy industry and a

number of sectors

including cement,

fertilizer, oil

refining,

engineering,

chemicals etc. were

exclusively reserved

for the public sector

and the policy of dis-

investing profitable

public sector units

was discontinued.

Moreover, the

industrialists faced a

number of

restrictions

including price

fixation by the

government under

Profiteering and

Hoarding Act. These

measures created

considerable amount

of uncertainty,

resulting into fall in

private investment

and flight of capital. During the Eighties direct controls were replaced with market-oriented

forces; import policy was liberalized, tariff structure was rationalized, par

value of rupee was brought nearer to its equilibrium value and it was made

convertible on capital account, investment licensing was no longer required,

prices were de-controlled, and performance of public enterprises improved

due to signaling system. The market friendly policies did result into an

acceleration of growth to 8.21 percent during this period. The growth rate

decelerated once again in the Nineties to 3.88 percent largely on account of

political uncertainty and global economic slowdown.

The performance of large-scale manufacturing during the Nineties

was rather disappointing – it grew at an annual average rate of 3.54

percent. More so, the growth in this sector slowed down to an average

of 2.26 percent per annum during the last four years of the decade. A

number of economic and non-economic factors have been responsible

for the deceleration of growth in this sector. Prominent among those

are political instability, worsening of law and order situation in the

major growth poles of the country; setback to cotton crop and

consequential inadequate power supply along with frequent

breakdown of some power units around industrial areas: emergence

of significant infrastructure bottlenecks in power transport and other

sectors, and insufficient industrial investment. All these factors

caused virtual stagnation in large-scale manufacturing.

FISCAL POLICY

A sound fiscal management is essential for a stable macroeconomic

environment. Weak fiscal balance has been the major source of

macroeconomic difficulties in the 1990s. After six years of extensive efforts

through the reform of the tax system and tax administration, Pakistan has

succeeded in attaining fiscal stability. The overall fiscal deficit that averaged

nearly 7.0 percent of the GDP in the 1990s has been reduced to 2.3 percent

in 2003-04 but increased to 3.2 percent on account of substantial loss in

revenue under Petroleum Development Levy (PDL). The revenue deficit

(total revenue minus current expenditure) has been narrowed from 3.0

percent of GDP in the late 1990s to 0.2 percent or Rs.13.9 billion in 2004-05.

The primary balance (total revenue minus total non-interest expenditure)

has remained in surplus for the last many years. Public debt burden has also

registered a sharp declinein recent years and is fast moving towards a

sustainable level.

TRADE DEFICIT

Pakistan’s trade deficit has widened beyond target for the current fiscal year owing to a

much faster increase in imports compared with exports. Given the stronger-than-

anticipated surge in domestic economic activity, the widening of trade gap in the short-

run is quite normal. The widening of trade gap is not worrisome as long as it is caused by

rising import which is enhancing the production base of the economy. It should be a

matter of concern if it is caused by rising imports of consumer durables and faltering

exports. In the case of Pakistan, the trade gap has widened because of the extra-ordinary

surge in investment driven imports, which is enhancing the production base of the

economy.

PRIVATIZATION

The privatization program has progressed at a much faster pace this year. Since 1990 and

until mid-April 2005, Pakistan has completed or approved 146 transactions with gross

proceeds of Rs.148.4 billion. Of this, a sum of Rs.13.6 billion was received during the

first nine and a half months (July – mid April) of the current fiscal year. In addition,

bidding for Karachi Electric Supply Corporation was held on February 4, 2005 the

proceeds of which amounted to Rs.20.24 billion are still awaited. A new feature of the

privatization program has been the offering of the shares to the general public through the

stock market, which was well received.

SUMMARY AND CONCLUSIONS

Gross domestic product of Pakistan has increased at a respectable rate of

4.79 percent during 1950-2005, with the growth rate exceeding 6 percent in

the second, third, fifth and sixth plan periods i.e. during the Sixties and in

the 1978-88 period. Over the same period, employment increased at a rate

of 2.50 percent with maximum growth of 3.31 percent during the Seventies

and minimum of 1.67 percent in the Sixties. On the other hand, growth in

the capital stock exceeded 4 percent throughout the period.

Agricultural sector has grown at a moderate rate of 3.43 percent. The

highest growth rate (7.03 percent) has been observed over the Third

Plan period (1965-70) when major breakthrough was made in the

development of hybrid seeds, followed by the Sixth (1983-88) and

Seventh Plan (1988-91) periods, when Neab variety of cotton was

introduced. While total factor productivity in the agricultural sector

grew at around 4 percent in the Sixties, it declined in the Seventies (-

0.77 percent) and Eighties (-1.32 percent) before achieving positive

growth in the Nineties (1.52 percent). The introduction of IRRI and

Mexi-Pak varieties has been the major factor driving the productivity

growth in the Sixties. Growth rates of value added in the agricultural

sector appear to be positively related to gains in total factor

productivity: except for the Eighties, agricultural growth exceeded 4

percent in those decades when productivity gains were substantial.

Moreover, productivity gains have been observed in the periods when

there was a major breakthrough in bio-technology.

Pakistan started industrialization from a very narrow base but has been able

to realize growth rate of 6.78 percent in the manufacturing sector since

independence. The industrial growth in the Fifties was substantial though

largely reflecting the narrow base. Nevertheless high growth rates were

sustained in the subsequent periods except for the period 1970-78 and the

1990s. Despite high growth rates of output, the manufacturing sector

employed very little labor; employment in manufacturing increased at a rate

of only 2 percent. On the other hand, capital stock in the manufacturing

sector increased at a rate of 4.22 percent. Total factor productivity in the

manufacturing sector increased at a rate of 3.21 percent, accounting for

50.23 percent of productivity gains. While growth in total factor productivity

for the manufacturing sector exceeded 4 percent in the Sixties, it slowed

down in the Seventies to 2.01 percent, before peaking at 5.38 percent in the

Eighties. There has been a sharp deceleration in TFP growth in the Nineties

to 1.64 percent.

Gains in productivity in Pakistan, especially in the early years, seem to have

arisen from learning by doing [Kemal, 1979]. For example, productivity

improved in the early years mainly because the major commodity producing

sectors overcame the teething problems. Major gains in productivity were

also observed during the Sixties which may be attributed to three main

factors. First, exposure to foreign competition resulted in an improvement in

productivity. Second, deregulation of the economy and liberal import policy

led to higher level of capital utilization. Third, learning by doing resulted in

an improvement in productivity.

During the 1970-83 period, the productivity in manufacturing suffered

due to a number of factors. First, while devaluation of the rupee

exposed domestic firms to foreign competition, domestic producers

were not prepared for the transition. Since they had not made

sufficient provision for repayment of debt in case of devaluation, a

large number of these industrial units became sick. The firms were

closed down and capital remained idle. Second, sharp increase in oil

prices required massive adjustments in technology. However, because

Pakistan did not have the capability to develop indigenous technology

or adapt the existing technology and new investment in the existing

industries was rather small, they lost the competitive edge in the

world market. Third, recession in the world market led to slackness in

demand and consequently to low level of capital utilization. Fourth,

nationalization of industries coupled with the absence of the requisite

management experience in the government sector for running the industrial

units led to lower levels of productivity.

There has been a more rapid increase in productivity in the manufacturing

sector in the Eighties. This is the result of three important factors. First,

induction of improved technology in response to more incentives for

balancing, modernization and replacement (BMR), and reduction in import

duties on machinery and equipment. Second, administration of public sector

industries improved considerably. While the public sector industries are still

under the control of Ministry of Production, the units are now much more

independent. Third, deregulation policies have allowed the producer to

invest in accordance with the profitability of an industrial activity. Import

liberalization has also led to a more efficient use of equipment. The

slowdown in productivity in the Nineties may be attributed to inadequate

technological development and lack of human resource development.

As observed by Solow (1956), technical change proceeds through induction

of new machines that embody the modern technology. When investment

increases rapidly, induction of new technology is more probable. Since pace

of investment has been quite slow in Pakistan, very little new technology has

been inducted. Furthermore, all types of new technology do not lead to

higher total factor productivity, and gains in productivity are ensured only if

new technology corresponds to a country’s factor endowments. Developing

the capability to adapt (or invent) the machines which accord with a

country’s factor endowments would require more attention on research and

development.

The evidence on the macroeconomic determinants of economic

growth in Pakistan confirms that investment in physical capital

formation, population growth, government consumption, inflation, and

openness are the major driving factors in the process of economic

growth. Consistent with a large volume of theoretical and empirical

literature on economic growth, our results support the view that rate

of investment has important positive effects on economic growth. We

found a positive association between rate of government consumption and

economic growth. This suggests that increased government consumption has

facilitated economic growth in Pakistan presumably through spending on

productive activities such as education and health. Our finding that inflation

is negatively related to economic growth confirms the view of Fischer

(1993), who argues that a high rate of inflation is often a symptom of

macroeconomic mismanagement and thus has adverse consequences for

economic growth. Finally, we found a positive link between openness and

economic growth confirming the popular belief that increased openness is

conducive to economic growth.

REFERENCES

Overview of the economy: economic survey of Pakistan 2004-05

50 Years of Pakistan Volume I Summary Economic Survey, Various

Issues hare

Census of Manufacturing Industries

GLOBAL RESEARCH PROJECT: PAKISTAN COUNTRY REPORT by A. R. Kemal , Musleh ud Din ,Usman Qadir,August 2002, Pakistan Institute of Development Economics , Quaid-i-Azam University Campus, Islamabad

Overview of the Economy

Pakistan's overall economic performance during the outgoing fiscal year 1999-2000 offers grounds for optimism. For the last several years, Pakistan's economy has been facing serious difficulties owing to persistent lapses in implementation of structural reforms and stabilization measures. The imposition of economic sanctions following nuclear tests of May. 1998 exposed Pakistan's underlying vulnerability and precipitated a balance of payments crisis. Following .October 1999, an attempt was made initially to stabilize the situation. There are signs which suggest that the economy has begun to stage a modest turnaround. The recovery in economic growth is fully supported by a strong rebound in agriculture and a pick up in large-scale manufacturing excluding sugar. Also contributing to the current year performance is a fall in rate of inflation,-a "V-shaped" recovery in exports, a much greater degree of exchange. rate stability, stable foreign 'exchange reserves, substantial progress made in restructuring Pakistan's foreign debt, and improvement in credit rating in international bond market. Major challenges, however, include improving fiscal account, restoring investors' confidence .further, and achieving higher' growth on a sustainable basis.

Pakistan's .economic 'performance during the outgoing fiscal year must be evaluated against a backdrop of the developments taken place on the economic scene during the 1990s. The macro-economic performance in the 1990s has been marked by declining growth, stagnant/declining tax-to-GDP ratio causing persistently large fiscal imbalances, stagnant exports causing unsustainable current account deficit, double-digit-inflation, declining public sector investment constraining growth potential, deterioration in physical infrastructure, poor state of social sector, and institutional weaknesses resulting in poor governance.

There is a dear and perceptible evidence that growth performance of Pakistan's economy has deteriorated in the 1990s. As against an average growth rate of 6.0 percent in the 1980s, real GDP growth slowed to an average of 5 percent and further to 4.0 percent during the first and second half of the 1990s, respectively. While agriculture maintained an average growth rate of slightly above 4 percent during the last two decades (1980s, 1990s) it is the large-scale manufacturing' and. services which contributed to the deceleration of growth. in the 1990s. Asagainst an .average growth of 8.2 percent per annum in the 1980s, large-scale manufacturing slowed to an average of 4.7 percent and further to 2.3 percent in the first and second half of the 1990s, respectively. Services sectors grew at an average rate of 6.6 percent in the 1980s but slowed to an average .of 5.1 percent and 4.1 percent during the first and second half of the 1990s respectively. Fixed investment as percent of GDP declined significantly in the 1990s. As against an average rate of close to 17 percent in the 1980s, fixed investment declined to 15.3 percent in the second half of the 1990s. During (viii) Overview of the Economy this period, public sector investment declined sharply in relation to private sector. As against an average of 9 percent of GDP, it has declined to 6 percent in the second half of the 1990s while private sector investment in fact remained around 8 percent during the same period.

Large fiscal deficit continues to pose a serious threat to macro-economic stability. The trends in fiscal deficit that existed in the 1980s continued to persist in' the first half of the 1990s. However, fiscal deficit was reduced to an average of 6.4 percent in the second haft of the 1990s mainly by cutting development expenditure. In other words, the quality of fiscal 'adjustment. has been poor.

Current account deficit is yet another indicator of macro-economic imbalances. It has deteriorated since the 1980s---rising from .3.9 percent of GDP to 4.5 percent in the first and the second half of the 1990s.

Declining economic growth, persistence of severe macro-economic imbalances, lack of social safety nets, and poor governance in the 1990s have had adverse effects on the country's poor and most vulnerable. All these factors have been the major cause of poverty in many low income countries and Pakistan is no exception. The incidence of caloric-based poverty has increased from 17.3 percent in 1987-88 to 22.4 percent in1992-93 and further to 32.6 percent in 1998-99. In other words, the number of poor people who cannot .meet their daily minimum nutritional requirements and fell below the poverty-line, increased from 17.6 million in 1987-88 to 44 million in 1998-99. it is well-known that entrenched poverty and rising income inequality can themselves be impediments to growth.

When viewed against the developments described above, the current year's overall economic performance appears more than satisfactory. There are some positive developments which have taken place on the economic scene in the outgoing fiscal year, but there are also some weaker elements which will require serious attention of the policy-makers in the short-to-medium term.

A modest recovery in growth is certainly a positive development of the outgoing fiscal year 1999-2000. Real GDP grew by 4.5 percent as against 3.2 percent of last year and an average of 4.0 percent for the second half of the 1990s. The modest recovery in growth is fully supported by an impressive recovery in agriculture on account of bumper cotton and wheat crops, and a good rice crop. Agriculture grew by 5.5 percent as against 1.9 percent of last year [while estimating current year's agriculture growth the size of wheat crop was estimated at 19.3 million tonnes. Recent information suggest that wheat crop may exceed 21 million tonnes. if this is the case, agriculture growth would be 7.1 percent and accordingly, the real GDP growth would be 4.9 percent].

Although. in statistical' term, the performance of manufacturing in general and large-scale manufacturing in particular, appear weak as they grew by 1.6 percent and 0.04 percent respectively. The weak performance is mainly due 'to a 24 percent decline in sugar production. Excluding sugar, the large-scale manufacturing grew by 6.4 percent as against 3.5 percent of last year. in fact, the performance of large-scale manufacturing (excluding sugar,)has been the best over the last five years.

Another positive development of the outgoing fiscal year has been the fall in inflation. Inflation, measured on the basis of Consumer Price index, declined to 3.4 percent during July-April 1999-2000' as against 6.1 percent of the comparable period of last year. This has been the lowest inflation in the last two decades. Food inflation has also been the lowest in the last two decades, hovering around 2.0 percent in the current year as against 6.2 percent last year. The containment of monetary growth to the targeted level is yet another positive development. Money supply grew by 3.2 percent during the first nine months (July-March) of the current 'fiscal year against the whole year target of 9.4 percent. The slower growth in money supply played an important role in reducing inflation in the current year.

One of most positive development of the outgoing fiscal year has been a strong rebound in exports. At least, three factors are responsible for a "V-Shaped" recovery in exports. Firstly, the bumper cotton crop and its reduced prices made the textile sector buoyant. This coupled with a good rice crop and pick up in manufacturing output (excluding sugar), improved the supply of exportables. Secondly, the policy of maintaining a stable and predictable exchange rate following the sharp depreciation in previous years, helped Pakistan maintain its external competitiveness. Thirdly, the strong recovery in global economy made possible by the continued strong growth in the United Stated, recovery in Europe, and stronger than anticipated recovery in the crisis--hit East Asian economies firmed up the demand for Pakistani export in its major markets. Hence, the improved supply of exportables, stronger demand in international markets and a much greater

degree of exchange rate of stability have been mainly responsible for a strong recovery of exports in the outgoing fiscal year. Exports during the first ten months (.July-April) of the current fiscal year grew by almost 10 percent as against a decline of almost 12 percent in the comparable period of last year.

Like exports, imports have also picked up during the first ten months (July-April). of the current fiscal year. Overall imports grew by 10.9 percent as against a decline of 9.4 percent in the comparable period of last year. Although, most of the increase in imports is due mainly to higher import bills of petroleum products, what isimportant, however, is the non-food non-oil imports which have registered an increase of 4.3 percent. This is an important development as it suggests that economic revival appears to be taking place. The current account balance has improved by 34 percent during the first nine months (July-March) of the current fiscal year-- declining from $ 1812 million to $ 1195 million. The current fiscal year is going to end with a current account deficit of 2.4 percent of GDP--substantially lower than 4.1 percent of last year.

Yet another positive development in the outgoing fiscal year has been the progress made in restructuring Pakistan's foreign debt. The rescheduling of $ 3 billion debt under Paris Club bilateral agreements were signed/initiated as on May 1, 2000. :In addition, the Government has successfully rescheduled its Euro bonds maturing between December 1999 to February 2002 through a voluntary exchange offer with a single rescheduled bond of extended maturity. The offer received up to 98 percent acceptance against the outstanding amount of $. 608 million. With the completion of Euro bond and commercial debt rescheduling, Pakistan's credit rating in international bond market has improved from "D" to "B" minus on December 8, 1999 by the"Standard & Poors' International Credit Rating Agency."

In the series of positive developments mentioned must be made about the foreign exchange reserves. Despite being current in all external payment obligations, Pakistan's foreign exchange reserves remained stable at around $1.5 billion. The stable foreign exchange reserves provided much needed stability in the exchange rate.

Along side the positive developments there have been some weak areas which would require serious attention in the short-to-medium term. First and foremost is the issue of fiscal, deficit which has emerged as a major source of macro-economic imbalances Although, Pakistan has succeeded in reducing fiscal deficit from 7.7 percent of GDP in 1997-98 to 5.8 percent in :1999-2000 (as on May 30, 2000)--an adjustment of 2 percentage points in 2 years, the current size of the deficit itself is unsustainable. Further fiscal adjustment is essential for restoring macro-economic .stability. Unlike in the past, any fiscal adjustment will have to rely mostly on revenue raising measures with focus on taxation. Reducing fiscal deficit by cutting development expenditure is no. longer a viable option. Continued weaknesses in the tax effort and substantial debt service payments have constrained policy choices particularly by limiting much-needed outlays for infrastructure and social sectors (health and education). Increasing tax-to-GDP ratio by broadening the tax bases and strengthening the tax administration along with improving the composition and effectiveness of budgetary expenditure, will go a long way in reducing fiscal deficit in orderly and qualitative fashion. The efforts of the present Government to document the economy through the "Tax Survey" is a step in the right direction. This will help in widening the tax bases. Furthermore, elimination of "Whitenet Scheme" and "Tax Amnesty Scheme" will help in reducing tax evasion.

Another area that. would require more attention is restoring investors' confidence. This is vital for achieving higher and sustainable economic growth. Low inflation, low interest rate, policy consistency, better law and order situation, lesser corruption and improved governance will go a long way in restoring investors' confidence.

Yet another area that would require immediate attention is arresting the increasing tends in poverty. The incidence of caloric-based poverty has increased in the 1990s. Sustainable

economic growth accompanied by macro-economic stability is ultimately the most powerful means of reducing poverty over the medium term. Sustained pro-poor growth based on private sector activity and investment should be the key element of the poverty reduction strategy. Macro-economic policies should be integrated with social and sectoral objectives to ensure that plans are mutually supportive and consistent with a common set of objectives to spur growth and reduce poverty. It is equally true that focus on growth alone will not be sufficient to reduce poverty. Direct anti-poverty programmes would be required to have greater impact on reducing poverty.

Although economic growth staged a modest recovery the task now is to sustain the growth momentum. Recent developments in the growth literature have emphasized that economic conditions and implementation of appropriate public policies influence the rate of economic growth. The Government can influence growth by creating stable macro-economic environment, which can be created through macro-economic policies that are conducive to growth. The key macro-economic policies are considered to be monetary, fiscal, and exchange rate policies designed to keep inflation low and predictable, a stable and sustainable fiscal balance but not at the cost of development spending, appropriate real interest rates, a competitive and predictable exchange rate, and a viable balance of payments. The signaling effect government management has on the private sector is one of the key mechanisms through which macro-economic policies would influence growth.

Growth and Investment a) Growth TrendsReal GDP is estimated to grow by 4.5 percent as against 3.2 percent of last year and current year's target of 5.0.percent. The modest recovery in growth is supported by an impressive recovery in agriculture and large-scale manufacturing (excluding sugar), and a slight pick-up. in services sector. Agriculture grew by 5.5 percent in 1999-2000 as against 1.9 percent of last year. The growth in agriculture is mainly supported by a strong recovery in major crops. Against a negative 0.04 percent growth of last year, major crops registered a growth of 9.6 percent mainly because of bumper cotton and wheat crops, and a good rice crop [while estimating current year's agricultural growth the. size of the wheat crop was estimated at 19.3 million tonnes. Recent information suggests that wheat crop may exceed 21.0 million tonnes. if this is the case, agriculture growth would be 7.1 percent and accordingly the growth of real GDP would have to be revised upward to around 4.9 percent]. Agriculture contributed :l.4 percentage points in the growth of real GDP.

Although the performance of manufacturing in general and large-scale manufacturing in particular, appears weak as they grew by :t.6 percent and 0.04 percent respectively, their performance is not so bad. The apparent weak performance is mainly due to a 24 percent decline in sugar production. Excluding sugar, the large-scale manufacturing has grown . by 6.4 percent as against 3.5 percent of last year. In fact, the performance of large-scale manufacturing excluding sugar has been by .far, the best in last five years. As a result of a new survey conducted by the Federal Bureau of Statistics, the growth of small-scale manufacturing is also adjustment downward to 5.3 percent as opposed to 8.4 percent, beginning from 199F-98.

The mining and quarrying sector recorded an impressive growth of 7.7 percent as against a modest increase of 3.6 percent last year. The construction sector and electricity & gas distribution also witnessed impressive growth of 6.2 percent and 7.8 percent, respectively, in 1999-2000 as against negative 6.2 percent and3.5 percent, respectively, last year. The commodity-producing sector grew by 4.5 percent in 1999-2000 as against 2.2 percent last year. The commodity-producing sector accounted for 2.3 percentage points of the real GDP growth while services sector shared 2.2 percentage points

The recovery in growth was also supported by services sector, which grew by 4.5 percent as against 4.l percent of last year. The sub-sectors finance and insurance, transport & communication and public administration depicted 6.9 percent, 3.9 percent, and 5.6 percent

growth, respectively, in1999-2000 as against 15 percent, 3.1 percent and 2.4 percent growth, respectively, last year. With net factor income from abroad declining by 74.6 percent, primarily because of lower inflow of workers' remittances, the real GNP grew by 3.9 percent in 1999-2000 as against 3.2 percent growth last year

b) Savings and InvestmentTotal investment outlay in ]999-2000 is estimated at Rs.476.3 billion as against Rs 435.9 billion during the last year, which shows an increase of 9.3 percent in nominal term. Fixed investment increased by 9.5 percent in nominal term from Rs 387.9 billion in t998-99 to Rs 424.6 billion in 1999-2000. The public sector investment grew by 9.6 percent while sector investment increased by 9.4 percent in :t999-.2000. The increase in public sector investment is attributed to 35.9 percent increase in capital formation in agriculture sector and 16,5 percent increase in transport and communication sector. The private sector investment increased by 23.9 percent in manufacturing, 5.6 percent; in agriculture and 17.6 percent in construction sector during :1999-2000.

Total investment and fixed investment rates [as percent of GDP] stagnated around 15 percent and 3.4 percent, respectively in 1999-2000. National savings are estimated to finance 81.3 percent of total investment while the remaining 18.7 percent is financed by foreign savings. National saving rate [as percent of GDP] has increased from 11.l percent to 12.2 percent and foreign savings as percentage of GDP decreased from 3.8 percent to 2.8 percent in 1999-2000. This suggests that the reliance on foreign savings in financing domestic investment has declined considerably in 1999-2000. The domestic saving as percent of GDP has improved from 12.3 percent last year to 14.0 in 1999-2000.

AgricultureThe agriculture sector achieved a growth of 5.5 percent, as against 1.9 percent of last year. The production of rice increased to 5156 thousand tonnes as compared to 4674 thousand tonnes last year, while the production of cotton reached to11240 thousand bales from 8790 thousand bales last year, showing an increase of 10.3 percent and 27.9 percent, respectively. The production of sugarcane is estimated at 46363 thousand tonnes which is lower by about 16 percent as compared with last year due to: i) delay in payments by the sugar mills which discouraged farmers to grow sugarcane, ii) abolition of flat rates of electric tubewells by the WAPDA in Punjab created water constraints, and iii) less rainfall. The production of wheat during the current year is estimated at 19272 thousand tonnes or higher by 7.9 percent over last year's production of . 17856 thousand tonnes (Recent estimates suggest that wheat production may exceed 21.0 million tonnes), This increase is attributed to the enhancement of support price of wheat from Rs.240 to R$,300 per 40 kg or by 25 percent and timely disbursement of agricultural credit to the growers, The production of onion, potatoes, mung and masoor pulses have increased by 43.2, 3.3, 3.1 and 7,4 percent respectively, which greatly helped maintain stable prices of the essential food items.

Agricultural credit amounting to Rs.27912.6 million has been disbursed in 1999-2000 (July-March), as against Rs.30652.0 million during the corresponding period last year, thereby registering a decline of 8.9 percent. This decline is mainly due to lower demand for production loan The fertilizer off-take during the first nine months(July-March) of the current year is 2123 thousand nutrient tonnes, as compared with 1988 thousand nutrient tonnes for the same period last year, showing an increase of 6.8 percent.

Manufacturing, Mining and InvestmentThe growth performance of overall manufacturing in general and large-scale manufacturing in particular, has been lackluster at best in the 1990's. After growing at an average rate of 8.2 percent in the 1980's, the growth of large- scale manufacturing slowed to an .average of 4.7 percent in the first half and further to 2.5 percent in the second half of the 1990s. During the first 9 months (July-March) of the current fiscal year, overall manufacturing has grown by 1.6 percent as against 4.7 percent of the corresponding period of the last year. The performance of large-scale

manufacturing when viewed in terms of statistics, has been weal( during July-March 1999-2000. As against 2.7 percent growth of comparable period of last year ,the large-scale manufacturing has registered an almost zero growth in this year.

The true performance of large-scale manufacturing has been over shadowed by a massive 24 percent decline sugar production. With a relatively large weight of sugar in the overall quantum index of manufacturing the otherwise impressive and broad- based performance of large-scale manufacturing has been overshadowed Excluding sugar, the large-scale manufacturing has registered an impressive growth of 6.4 percent in the first 9 months of the current fiscal year. As soon as the adverse impact of sugar started filtering into the overall statistics, the performance of large scale manufacturing got distorted.

The group-wise break-up of growth indicates that the performance of two out of 11 major groups exhibited substantial decline. These include food, beverages & tobacco group, which depicted a decline of 18.2 percent and automobile group by 19.2 percent. The major items, which depicted a negative growth in the food, beverages and tobacco group include sugar (24.0 percent), cooking oil (6.2 percent), Lea blended (8.4 percent) and cigarettes (11.2 percent); and jeeps & cars (23.5 percent), light commercial vehicles (43.2 percent) and motor cycles/ scooters (3.8 percent) in automobile group.

The six major groups that exhibited tremendous increase in production include textile & apparel group (121 percent); paper & board group (14.1 percent); chemicals, rubber & plastic group (7.0 percent); basic metal industries group (13.1 percent); and metal products, machinery and equipment group (15.7 percent). The major items that depicted positive growth include cotton yarn (9.3 percent), cotton cloth (15.1 percent) and cotton ginned (27.1 percent) in textile & apparel group; footwear (18.0 percent) and sole leather .(16.9 percent) in leather group; liquids/syrup (6.8 percent), caustic soda (17.7 percent), nitrogenous fertilizer (6.8 percent), phosphatic fertilizer (33.4 percent), flakes & detergents (30.7) percent) and Cosmetics (39.5 percent) in chemical, rubber & plastic group; steel products (13.5 percent) in basic metal group, and diesel engine (24.1 percent), tractors (53.9 percent), wheat thrashers (182.6 percent), refrigerators (8.4 percent) and T.V. sets (8.3 percent) in metal product, machinery and equipment group.

The industrial investment or capital formation in the manufacturing sector witnessed an increase of 20.4 percent during 1999-2000. The private sector investment in large-scale manufacturing registered a sharp increase of 30.6 percent during the course of the year while public sector investment recorded a marginal increase of6 percent growth.

The net foreign private investment (FPI) inflows stood at US $ 449.6 million during July-April 1999-2000 as against US $ 415.0 million in the parable period of last year, thereby, showing n overall increase of 8.3 percent. The portfolio investment was severely affected by the external and internal stocks last year but recovered fromUS $ 7.4 million during July-April 1998-99 to US $ 57.1 million in July-April 1999-2000. However, theforeign direct investment (FDI) inflows declined marginally to US $ 392.5 million during July-April 1999-2000 as against US $ 407.6 million in the same period last year, which implies a decline of 3.7 percent.

The value addition in the mineral sector is concentrated in three principal minerals like coal, natural gas and crude oil. These three minerals account for four-fifth of the weight in the total value addition in the mineral sector. Due to healthy growth in the value addition in these three minerals during the year. 1999-2000, theoverall growth in the mineral sector is estimated at 7.7 percent as against 3.6 percent in tc1998-99

Income Distribution and Poverty.There is a general consensus that poverty has increased and income distribution has worsened in the 1990s in Pakistan. The increase in poverty is mainly attributed to declining economic growth, persistence of severe macroeconomic imbalances, reduction in the flow of remittances from overseas' Pakistani workers, lack of social safety nets, and poor governance.

According to the calorie-based poverty (headcount ratio), the incidence of poverty has increased significantly in the 1990s_ rising from 17.3% in 1987-88 to 22.4% in 1992-93 and further to 32.6% in 1998-99. The number of poor people that can not meet their daily requirements and fell below the .poverty line, has increased from 17.8 million in 1987-88 to 43.9 million in 1998-99. Similar trends are observed in case of rural and urban poverty. According to the basic needs approach, the poverty has increased from 28.6 percent in 1986-87 to 35.9 percent in 1992-93 and further to 35.7 percent in 1993-94, but at a greater pace in the rural areas than in the urban areas.

Income distribution .has also worsened in the 1990s. The Gini coefficient (a measure of income inequality) increased from 0.369 in 1984-85 to 0.40 in 1996-97. Another indicator of income inequality is the shares of the lowest 20 percent and the highest 20 percent of households in the income. The ratio of highest 20 per. cent to lowest 20 percent increased from 5.5 in 1986-87 to 7.1 in 1996-97, showing the worsening of income distribution. Further analysis suggest that income distribution has worsened in the rural area while it has slightly improved in the urban areas during 1979 to 1996-97.

The government has taken a conscious decision to bring the issue of poverty alleviation at the centre-stage of economic policy making. The fundamental shift in policies would make the poor the focal point of the country's socio-economic development process. A strategy to reduce poverty and improve income distribution has been'prepared. Sustained pro-poor economic growth, based on robust private sector activity and investment is the key element of the poverty reduction strategy.. Macroeconomic policies are being integrated with social and sectoral objectives to ensure that plans are mutually supportive and consistent with a common set of objectives to spur growth and reduce poverty. The government has also prepared the anti poverty programme consisting of five major elements, namely integrated small public works programme, food supplement programme, revamping the Zakat system, micro credit bank, and improving social indicators. Reduction in poverty is likely to improve the distribution of income as well.

Fiscal DevelopmentSound fiscal policy fosters macro-economic stability. A poor or deteriorating fiscal position limits the options open .to government to support economic recovery, sustainable growth, and poverty alleviation. The importance of a prudent al policy, therefore, cannot be over emphasized. Fiscal deficit has emerged as one 6f the major source of macro-economic imbalances in Pakistan. Persistent slippage on both revenue and expenditure sides has contributed to mounting financial imbalances. The serious macro-economic imbalances that persisted in the 1980s in terms of large fiscal deficit (7.1% of GDP) continued in the first half of the 1990s despite several revenue measures introduced in the successive budgets on the one hand, and cutting development expenditure on the other Fiscal deficit remained, on average, at 7.1 percent of GDP in the first half of the 1990s. It declined slightly to 6.4 percent of GDP in the second half of the 1990s, mainly by further reducing the development expenditure. In other words the quality of little fiscal adjustment has been poor as it was not achieved by enhancing tax efforts (tax-to-GDP ratio), but mainly at the cost of further growth potentials.

Successive governments have made attempts to narrow the revenue-expenditure gap by taking new fiscal measures in federal budgets, but little improvement has taken place in the overall fiscal deficit. Why is it so? Pakistan's tax system is still characterized by a narrow and punctured base over reliance on distortionary import-related taxes high tax rates on the one hand and tax concessions and exemptions on the other, and weak tax administration. The combined effects of these structural weaknesses resulted in low and stagnant tax-to-GDP ratio on the one hand, and

tax elasticity and buoyancy on the other.

Pakistan need to push forward with tax reforms to develop and effectively implement a broad-based, buoyant, and equitable tax' system, which will improve incentives and competitiveness in the private sector as well as reduce the fiscal deficit to a sustainable level. It is in this spirit that the present government is accelerating the pace of tax reform with a view to broadening the tax base, minimizing tax evasion, restructuring the tax administration, listening to the grievances of the tax payers, improving the refund process, documenting the economy, and reducing smuggling through anti-smuggling measures. Expenditure reforms are also necessary for ensuring macro-economic stability, promoting growth and enhancing the efficiency of public expenditure. It is in this spirit that the government is pursuing prudent expenditure policy. Public spending would be made more efficient through improvement in budgeting and expenditure management.

In the consolidated budget 1999.2000, the total revenues have been estimated at Rs.520.1 billion. Of these, Rs.420.6 billion are to be. collected from taxes and Rs. 99.5 billion from non-tax sources. The total expenditures have been projected at Rs.703.8 billion, resulting in an overall fiscal deficit of Rs. ~83.7 billion. This budgetary gap is to be financed through external borrowing (Rs 79.3 billion) and domestic borrowing (Rs billion) which includes bank & non-bank borrowing Fiscal deficit was as high as 7.7 percent of GDP in 1997-98 but was reduced to 5.8 percent in the outgoing fiscal year-- an adjustment of about 2.0 percentage percentage points in two years.

Persistence of large fiscal deficit over a extended period has resulted in the rapid growth of public debt since the mid-1980s, which, in turn resulted in exponential growth of debt servicing, threatening the macroeconomic stability of the country. The public debt has grown at a faster rate since 1984-85--both in absolute number and relation to GDP. The domestic debt in relation GDP. averaged at 44 percent during the first seven years (1990-97) of the 19905. It rose to 48.8 percent in 1997-98, 49.9 percent in 1998-99 and further to 51.1 percent in 1999-2000.

The burden of interest payments has emerged as the most serious fiscal problem because it not only consumes large government resources but also reduces the government's ability to spend on key development activities like social and physical infrastructure and alleviation of poverty. The interest payments on domestic debt have increased from Rs.37.0 billion (3.6% of GDP) in 1990-91 to Rs.186.5 billion (6.4 percent of GDP) in 1998-99 and further to 194.0 billion in 1999-2000 but as percent of GDP, these are likely to decline to 6.1 percent. Fiscal vulnerability of Pakistan can also be judged from the fact that more than 81.5 percent of tax revenues or 65.9 percent of total revenues is consumed by debt servicing (both interest and principal), constraining government's ability :to spend .on key development activities. Being a. single largest item, the debt servicing now accounts for 56.8 percent. of current expenditure and 48.7 percent of total expenditure in 1999,2000. Interest payments' were 29.1 percent Of total revenue and 38.6 percent of tax revenue in 1990-91, increased to 47.0 percent and 58.1 percent, respectively in 1999-2000. As percentage of expenditure, the interest payments had also risen from 19.2 percent of' total expenditure and 33.2 percent of current expenditure in 1990-91 to 34.7 percent and 40.6 percent in 1999-2000, respectively. In other words, it has emerged as a single largest item of expenditure.

There is no quick solution to reduce debt burden. Two pronged strategy will be required to reduce debt burden. Macro-economic stability, good governance, and market-friendly policies will be the essential ingredients to further restore investor's confidence, keep real interest rates low and renew growth. On the other hand, concerted efforts will be needed in other areas including maintaining primary surplus of at least 2 percent of GDP in the next several years, containing off-budget losses, speedy privatization to retire public debt and building capacity to manage debt.

Money and CreditA number of important steps have been taken during 1999-2000 to improve working of the money and banking sector and investment environment, including reduction in lending rates by the leading commercial banks, downward adjustment of repo rate by the SBP and reduction in the

deposit rates of national saving schemes. The State Bank of Pakistan lowered its repo rate from 14 percent in May 1999 to 11 percent in January 2000. As a follow up, the five major banks also announced reduction in their lending rates by an average of 1.5 to 2.0 percentage points. Accordingly the monthly weighted average rate of return on advance (overall) declined to 14.4 percent in December, 1999 from 14.8 percent in June, 1999.Steps were also taken to ensure the flow of credit to the private sector at lower cost in line with persistent decline in the inflation rate since1997-98.

Credit Plan for the fiscal year 1999-2000 envisaged monetary expansion at 9.4 percent (Rs 121.0 billion) with net domestic assets and net foreign assets of the banking system to increase by Rs 109 billion and Rs 12 billion respectively. Government sector was projected to realize a retirement of Rs 15.0 billion on account of net budgetary borrowings. Credit to the private sector and public .sector commercial enterprises (PSCEs) was targeted to increase by Rs 104.5 billion after anticipated placement of Rupee equivalent of PSCEs' rescheduled foreign debt of Rs 14.5 billion.

Monetary expansion during July-March 1999-2000 was recorded at 3:2 percent, compared with 3.5 percent in the same period last year. Net domestic credit of the banking system expanded by 2.2 percent, compared with an increase of 0.9 percent recorded last year. The Government net budgetary borrowing showed a rise of Rs 24.1 billion, against a retirement of Rs 45.3 billion in the same period last year. Bank credit to private sector including PSCEs increased by Rs 36.9 billion during the first nine months of the current fiscal year, as against a credit expansion of Rs 70.6 billion in the comparable period of last year.

Total non-performing loans (NPL) of all commercial banks amounted to Rs 173.4 billion, as on 31st December, 1999, compared to Rs 151.8 billion in December, 1998 indicating an increase of1 4.2 percent during the year. The share of nationalized/privatized banks in total NPL of the banking industry was 59.4 percent as on December 31, 1999 compared to 74.6 percent as on December 31, 1998. Cash recovery to NPL of the banking industry improved from 11.1 percent in 1988 to 16.5 percent in 1999. Out of total loan defaults of all commercial banks amounting to Rs 185.2 billion as of 12th October, 1999, total cash recovery upto 15th March, 2000 amounted t Rs 12.1 billion. The profitability of banks showed significant improvement during 1999. In absolute term, the profit (after tax) increased from Rs 1.5 billion in 1988 to Rs 9.3 billion in 1999.

Capital MarketAfter touching-the lowest ebb in the preceding years, the leading market indicators display modest recovery in the very beginning of the current financial year. The KSE index increased from 1055 points in June 1999 to 1252 points in July 1999. Aggregate market capitalization of ordinary shares also recorded a gain of Rs 41.2 billion within one month. From July 1999 to November 1999, the market indicators however, remained almost unchanged.

By the end of March 2000, the main business barometers further consolidated and the KSE index increased to 1999.7 points on March 31, 2000 from 1054.7 points on June 30, 1999, market capitalization increased to a record level of Rs 500.1 billion on March 31, 2000 from Rs 289.2 billion in June 1999. During the first nine months of the current year, the KSE price index, SBP general index, and aggregate market capitalization have increased by 89.6 percent, 46.8 percent and 72.9 percent restively, as against their growth of 20.1 percent 4.3 percent and 11.7 percent in the same period last year. Total turnover of shares on KSE more than doubled to 34.7 billion, from 17.1 billion in the same period last year. Funds mobilized by KSE amounted to Rs 7.7 billion. Upward business trends were also witnessed at other two stock exchanges namely, the Lahore and Islamabad Stock Exchanges.

The present Government has taken several measures to rehabilitate the ailing economy which included: initiation of steps for speedy privatization process, positive movement towards early resolution of the IPP issue, establishment of National Gas Regulatory Authorised and autonomy granted to oil and gas Companies, allowing foreign investors to repatriate their funds without any restriction from the SBP, reduction in the interest rates, recover outstanding/over due loans,

termination of various lottery scheme (Crore Pati Scheme etc.), reduction in interest rates by banks and national savings organization, rescheduling of foreign debts and considerable improvement in economic fundamentals such as higher revenue collection, lower inflation, rising export earnings and higher industrial growth excepting sugar. All these measures have greatly contributed to the bullish sentiment of the market.

InflationThe inflation pressure which persisted in the early 90s due to excessive monetary overhand combined with shortage of essential commodities continued until 1996-97. Inflation rate during the first seven years (1990-97) of the 1990s averaged at 11.4 percent but continued its declining trend thereafter. Inflation, as measured on the basis of Consumer Price Index (CPI), declined to 7.8 percent in 1997-98 and further to 5.7 percent in 1998-99. During the first ten months of the current fiscal year (July-April) inflation rate is further reduced to 3.4 percent - lowest during the last two decades. Food and non-food inflation also remained subdued and followed the overall inflationary trends. However, the rate of deceleration was more pronounced in the case of food inflation which was as low as 2.0 percent as compared with non-food inflation of 5.0 percent. Similarly, the pace of increase in WPI and SPI is also considerably low at 1.6 percent each during the referred period. The main contributory factors towards deceleration in inflation in the last two years as well as in the current year have been the containment of the growth of money supply higher agricultural production, easing supply bottlenecks and depressed international market prices of essential items.

Trade and PaymentsPakistan's external trade has staged a 'V-Shaped' recovery during the outgoing fiscal year1999-2000. Both exports and imports have exhibited a strong rebound from a significant downturn of last year. The exports during July-April, 1999-2000 registered an increase of 9.8 percent, as against a decline of 1:1.7 percent in the comparable period of last year -increasing from $. 6307.9 million to $ 6927.2 million. Likewise, imports in this period registered an increase 10.9 percent to $ 8337.1 million, as against . a decline of 11.2 percent in the corresponding months of last year. The impressive recovery in exports is mainly attributed to the improved supply of exportables, stronger demand in international markets and stable and predictable exchange rate. However, the higher POL imports ($ 2174.4 million)have caused trade balance to deteriorate by 16.7 percent to $ 1409.9 million over the level of $ 1208.0 million in the same period last year.

The various policy measures introduced during tile year have favourably impacted the balance of payments in the current fiscal year. The current account deficit during July-March, 1999-2000 narrowed sharply by 34.0 percent to $ 1195 million as against $ 1812 million of the comparable period of last year, implying a net reduction of $ 617 million. The trade deficit (f.o.b) showed a reduction of 3.0 percent while deficit in services (net) widened by $ 224 million. The private transfers in this period rose substantially by 48.6 percent to $ 2430 million, depicting a net increase of $ 795 million. Workers remittances, however, declined by almost 9 percent and flow under long term capital (net) was limited to $ 274 million.

Foreign Economic AssistanceThe disbursed and outstanding external debt (medium & long term) by end June, 2000 is estimated to have risen to $ 25.5 billion or by 39.4 percent of GDP and about 306 percent of export earnings. Similarly the annual external debt service payments have risen substantially over time and squeezed the net inflow of foreign resources. However, due to rescheduling of debt, the service payments during 1999-2000 are expected to decline by .8.5 percent to $ 1400 million, that is, 2.2 percent of GDP. There is also a declining trend in the commitments and disbursements of aid and are likely to aggregate at $ 1659 million and $ 1966 million respectively during the current fiscal year, 1999-2000.

EducationNational Education Policy envisaged to achieve 55 percent literacy rate by 2003 and 70 percent by 2010. :It is hoped that target would be achieved. The number. of primary and

middle/elementary schools has increased substantially to 170524 and 24902 respectively in 1999-2000. Primary Education has been the top priority area within education sector. Half of the education budget/allocation had been earmarked for the promotion of primary education. Participation rate of secondary level will be raised from 35 1998 to 45.8 percent by 2003 and 70 percent by 2010. The overall participation rate at primary stage is 89 percent, at middle stage 47.5 percent, and at high stage 29.5 percent. During the current fiscal year, total public sector expenditure on education is estimated at Rs.71.1 billion, showing an increase of 1.7 percent as compared to last year. Public sector expenditure on education as percentage of GDP for the last three years remained, on average, at around 2.2 percent. During implementation of SAP-II (1997-2002), it is planned to spend 66 percent of the total SAP-II outlay of Rs.498.8 billion on the elementary education (primary & middle).

Health & NutritionHealth facilities are still inadequate. However, over the years general health facilities have improved greatly. Today health services are provided to the general public through a vast infrastructure of health facilities. The existing national network of health facilities consists of 877 hospital 4.625 dispensaries, 5,152 Basic Health Units, 530 Rural Health Centres and 855 Maternity Child Health Centres. The output of doctors, dentists and nurses have been estimated at 87,105, 3,867, 35,979 respectively. To increase the efficiency of health sector, 12 new BHUs, 22 RHCs and UHCs were constructed and 35 existing facilities of BHUs and 22 RHCs were upgraded during 1999-2000. Moreover 3,388 new doctors, 308 dentist, 2,460 nurses and 5,304 paramedics have been trained. Under the preventive programme, 23 million packet of oral rehydration have been distributed and 4 million children have been immunized against six killer diseases of childhood. The total outlay on health sector during1999-2000 is Rs 14.6 billions (Rs 9.1 billion current expenditure and Rs 5.5 billion development expenditure) which is 0.5 percent of GNP. The priority health programmes gave special focus to the major health problem of the country. Cancer treatment, anti AIDs programme and malaria control programme were carried out in 1999-2000. Per capita caloric intake per day is 2,715 calories and per capita protein availability is 71.03 grams in1999-2000.

Population, Labour Force and EmploymentPopulation of Pakistan has increased in absolute terms by about 55 percent over the last census held in 1981 but its growth rate has decelerated to 2.4 percent by mid-1998 and further to 2.2 percent by March, 2000. The growth rate is projected to further slowdown to 2.0 percent by the year 2003. The crude birth rate is 33.8 per thousand population and Crude death rate per thousand population is estimated at 8.9 (9.7 rural area and 7.3 urban area).

Labour force has grown at an annual average rate of 2.7 percent as against the population growth of 2.4 percent during the last 8 years. Estimated on the basis of population of 137.5 million for mid-year 2000, the total labour force comes to 39.4 million. Of this, 26.9 million or 68.2 percent is in the rural areas and 12.5 million or 31.8 percent is in the urban areas.

The Government has launched an economic revival plan whereby the economy will be revitalized. As a result of which, economic activities will generate more job opportunities in the country. The plan focuses on higher investment and. promotion of labour intensive sectors. Government has established a micro credit bank for provision of credit facilities for self-employment. Various Vocational Institutes and Bureau of Immigration & Overseas Employment have been geared up to improve skills both for domestic and overseas employment opportunities.

Social Action Programme, Social Welfare and Rural DevelopmentPakistan's social indicators need improvement. The Social Action Programme (SAP-I) was launched with a view to improving access to basic social services like primary education, primary health care, population welfare services, and potable water & sanitation. The first phase of the SAP had been completed during 1993-96 at an aggregated investment autlay of Rs. 106.4 billion, indicating utilization of 83.4 percent of the planned outlay. 'The objectives of SAP-I have been to increase the level of allocations and expenditures on SAP sectors with focus on access and

quality; institutional strengthening; involvement of the NGOs; private sector and community based organisations and building of political will and bureaucratic support

After the successful implementations of SAP-I, the Government has initiated another five and a half year SAP Phase-II (January 1997 to June, 2002) with an outlay of Rs. 498.8 billion with almost the same aims and objectives but with additional focus on middle schooling and-also on the water supply & sanitation in the less previlaged localities of the urban areas. Out of total expenditure, the donor assistance is envisaged to be Rs. 101.0 billion (20.2 percent) and Government of Pakistan's financing is Rs. 397.8 billion (79.8 percent).

In order to mitigate the miseries of the disabled and socially marginalized groups and to reduce poverty, the government has designed social welfare programme throughout the country. During the current, fiscal year, Rs. 136.8 million have been provided to the Social Welfare Sector under the Annual Development Programme which is 25.1 percent higher than last year's utilization of Rs. 109.4 million. The Pakistan Bait-ul-Mal has also launched 'many projects for the welfare of the needy and deserving persons.

The National Zakat Foundation also provides grant-in-aid to the NGOs registered under voluntary Social Welfare Agencies for sharing the capital cost of their projects for helping the poor, orphans, ,widows and disabled persons. The foundation has sanctioned Rs. 19.68 million, as grant-in-aid for 72 projects during July-March 1999-2000.

The present Government gives top priority to the empowerment of women and bring a positive change in their lives. For this purpose, special efforts have been made for the protection of women's rights. A package of facilities has been announced by the present Government for the Welfare of Women to enable them to participate in the policy and decision making process at various levels.

Rural development is a multi-sectoral approach for the development of physical and social infrastructure. During 1999-2000, an amount of Rs. 3370.0 million including foreign aid of Rs. 3348.6 million has been provided for rural development. During July-March 1999-2000, 863 villages have been provided electricity bringing the total number of electrified villages in Pakistan to 67351.

Transport and CommunicationsConsiderable progress has been made in the transport and communication sector during the current fiscal year. During July-March 1999-2000, the total length of roads in the country was249,959 km, including 138,726 Km of high type. and 111,233 km of low type. Total number of motor vehicles on roads stood at 4.085 million during the same period. The construction work on Islamabad-Peshawar Motorway which started in1998, is expected to be completed with the cost of Rs.26 billion by December 200:1. Pakistan Railways network consists of 7,791 route km during July-March, 1999-2000. Its major assets include 582 locomotives, 2,029 passenger coaches and 22,247 freight wagons.. During 1999-2000 (July-March). it carried 49.2 million passengers and 3.8 million tonnes freight and its gross earnings stood at Rs.7,208 million. The network of Pakistan International Airlines covers. 37 international destinations and 35 domestic stations covering almost all parts of the country.

Its fleet consists' of 48 aircrafts of varied types. Presently, three .private airlines i.e. Shaheen Air International, Bhoja Air Line and Aero Asia are operating on local and international routes, while the fourth private sector airline--Safe Air International is operating on domestic routes only. The country has two major sea ports namely, Karachi Sea Port and Port Qasim. Beside, two Fish Harbour-Cum-Mini Ports are being developed at Gawadur and Keti Bunder. The Karachi Port has handled 18.0 million tons of cargo during July-March, 1999-2000, compared with 1.7.6 million tons of cargo during the corresponding period of last year.

Pakistan is now connected with most of the countries of the world through international gateway exchanges. Value added services such as internet, E-mail, cellular mobile telephone, optical fiber system, card' pay phone, paging services etc. are now available in the country which are providing innovative and modern services to the consumers. At present, about 21,000 customers are connected through internet, whereas the total number of internet users in Pakistan upto March, 2000 are 120,000. There are more than 3.8 million telephone lines, out of which about 3.03 million lines are connected to the customers, 2,663 telephone exchanges, 1,362 NWD exchanges, 10,256 VHF PCOs, 393 telegraph offices and 112 customers service centres are working in the country. The estimated number of TV and VCR sets in the country as on June 30, 1999 were 3.035 million and 0.136 million respectively. As on March 31, 2000, the TV and VCR sets are estimated to be 3.150 million and 0.136 million respectively.

EnergyDuring July-March, 1999-2000, the production of crude oil per day increased to 56,141 barrels from 55,703 barrels per day during the same period last year, showing an increase of 0.8 percent. The total production of crude oil declined to 15,158 million barrels during July-March, 1999-2000, from15,263 million barrels during the comparable period of last year. The production of crude oil declined due to depletion of oil fields. The production of gas per day stood at 2,217 million cubic feet during July-March, 1999-2000 as compared with 2,012 million cubic feet over the same period of last year, showing an increase of 10.2 percent. The total production of gas increased to 598,590 million cubic feet during July-March 1999-2000, from 551,392 million cubic feet of the comparable period of last year.

The installed capacity of electricity (hydel and thermal) increased by 6.6 percent during the first nine months of the current fiscal year and stood at 1.6,764 mega watt. During July-March, 1999-2000 47,577 Gwh of electricity was produced against 43,468 Gwh during the same period of last year. The number of villages electrified increased to 68,047 during July-March 1999-2000, from 67,183 during 1998-99.

Housing and EnvironmentAs a result of rapid urban and higher population growth, the housing situation in Pakistan has remained under tremendous pressure. According to the 1998 Population & Housing Census of Pakistan, there were over 19.3 million housing units in the country (67.7 percent rural and 32.3 percent urban). Of the total housing units, 81 percent were owned, 9 percent rented, and 10 percent rent-free. The level of congestion in terms of persons per housing unit reflects the housing conditions as well as living standard of the society. The average household size (persons/rooms per housing units) is 6.6 person against 6.7 persons, in 1980. Increasing population especially in urban areas is generating greater demand for civic amenities. On the basis of population increase, the current backlog of housing units is 4.3 million and about 0.3 million housing units are .added to the housing stock annually by public land private sectors.

During 1999-2000, one lakh residential plots will be developed. The government has also initiated a housing programme under which it is planned to construct approximately 20 to 30 thousand housing units. This will meet only a small component of the requirement of housing sector. In this regard, a pilot project of 10,000 housing units has been launched. Besides, one thousand government servants housing units are likely to be constructed. Under the water supply schemes, 2.0 million of the urban and 3.0 million of the rural population will be served. Under the sewerage and drainage, an additional 1.5 million people in the urban, 3.5 million in the rural and 0.050 million people of the katchi abadies are likely to be. served. Overall size of the PSDP, 1999-2000 of PP & H Sector is Rs.9807.3 million i.e. 33.3 percent higher than the last year's actual utilization.

The protection of the environment and agriculture growth is an essential component of development and without adequate environmental protection, economic development is undermined. The most pressing environmental challenge in Pakistan in the next few decades will come from lack of agriculture planning, environment degradation and poverty. In the PSDP 1999-

2000, an allocation of Rs.14:[6.6 million has been made for the projects pertaining to environment and forestry.

A. GROWTH, DISTRIBUTION AND POVERTYChapter 1.

Growth and Investment

Against a backdrop of declining economic growth in the 1990s, the current year’s growth performance offers grounds for optimism. Serious difficulties emanating from the deep-rooted structural weaknesses resulted in deceleration of economic activity. Following October 1999, an attempt was initially made to arrest the declining trend in the economy. Recent information, however, suggest that economic growth has staged a modest recovery during 1999-2000. Real GDP grew by 4.5 percent as against 3.2 percent of last year but fell short of the current year’s target of 5.0 percent. The modest recovery in growth is fully supported by agriculture, which staged a strong "V-shaped" recovery on account of bumper cotton and wheat crops, and a good rice crop. Agriculture grew by 5.5 percent in 1999-2000 as against 1.9 percent of last year and current year’s target of 4.3 percent * . From statistical point of view, the performance of manufacturing sector in general and large-scale manufacturing in particular has been weak. They grew by 1.6 percent and 0.04 percent respectively in 1999-2000. The weak performance is mainly due to a 24 percent decline in sugar production, which has large weight in the quantum index of manufacturing. Excluding sugar, the large-scale manufacturing has registered a sharp increase of 6.4 percent as against 3.5 percent last year. In fact, the performance of large-scale manufacturing excluding sugar has been, by far, the best over the last five years [See Chapter 3 for a detailed discussion]. The recovery in growth was also supported by services sector, which grew by 4.5 percent as against 4.1 percent of last year. With net factor income from abroad declining by 74.6 percent, primarily because of lower inflow of workers’ remittances, the real GNP grew by 3.9 percent in 1999-2000 as against 3.2 percent of last year. With population growth of 2.26 percent, the real per capita GNP at factor cost has increased by 1.6 percent as against 0.9 percent of last year.

* While estimating current year’s agricultural growth the size of the wheat crop was estimated at 19.3 million tonnes. More recent information suggest that wheat crop may exceed 21.0 million tonnes. If this is the case, agricultural growth would then be 7.1 percent and accordingly, the real GDP would grow by 4.9 percent

Notwithstanding a modest recovery in the outgoing fiscal year, the fact remains that Pakistan’s growth performance has deteriorated in the 1990s for a variety of reasons, including serious lapses in implementation of stabilization policies and structural reforms. As against an average growth rate of 6.1 percent in the 1980s, the real GDP growth slowed to an average of 5.1 percent in the first half and 4.1 percent in the second half of the 1990s. The large-scale manufacturing and services sectors contributed largely to the deceleration process in the 1990s. The former grew by an average annual rate of 8.2 percent in the 1980s, slowed to an average of 4.7 percent in the first half and further to 2.3 percent in the second half of the 1990s. In effect, over the last one decade, the growth momentum of large-scale manufacturing reduced to less than one-half of what was achieved in the 1980s. The services sector also slowed from an average growth of 6.6 percent in the 1980s to 5.1 percent in the first half and further to 4.1 percent in the second half of the 1990s—a loss of one-third in the growth momentum[See Table 1.1].

Table 1.1Growth Performance of Real Sector

Item Unit 1980’s 1990-95 1995-2000 1999-2000

A. GDP GROWTH RATE % 6.1 5.1 4.1 4.5

a. Agriculture % 4.1 4.2 4.6 5.5

b. Manufacturing % 8.2 5.7 4.0 1.6

c. Large-scale Manufacturing

% 8.2 4.7 2.3 0.04

d. Services % 6.6 5.1 4.1 4.5

B. TOTAL INVESTMENT As % of GDP

18.6 22.2 17.1 15.0

a. Fixed Investment -do- 16.8 18.0 15.3 13.4

b. Public Investment -do- 9.1 8.6 6.1 5.3

c. Private Investment -do- 7.8 9.4 8.8 8.1

C. NATIONAL SAVING 14.7 14.2 11.1 12.2

a. Domestic Saving -do- 7.7 13.4 14.6 14.0

Source: Federal Bureau of Statistics

Investment is essential for sustaining higher economic growth. It has also registered a decline in the 1990s. Total investment and fixed investment averaged 18.6 percent and 16.8 percent of the GDP in the 1980s respectively, which actually increased in the first half of the 1990s to 22.2 percent and 18.0 percent despite the fact that economic growth slowed to an average of 5.0 percent. This is because of the loss in growth momentum of large-scale manufacturing and services sectors on the one hand and less efficient use of capital on the other. In the second half of the 1990s, the total and fixed investment rates declined sharply to 17.1 percent and 15.3 percent of GDP, culminating in a steep fall in 1999-2000 to about 15 percent and 13.4 percent, respectively [See Table 1.1]. As shown in Figure-1, investment rate never reached the level of the 1980s beginning from 1994-95 and with the passage of time, the gap continued to be widened.

Declining investment rate has contributed to the deceleration of growth in the 1990s. However, further disaggregation of investment rate suggests that private sector investment as percentage of GDP,in fact, has registered an increase in the 1990s as compared with the 1980s. It is the public sector investment, which has declined sharply from 9.1 percent of GDP in the 1980s to 8.6 percent in the first half and further to 6.1 percent in the second half of the 1990s, culminating in a steep fall in 1999-2000 to 5.3 percent. National saving rate also witnessed a sharp decline from 14.7 percent in the 1980s to 14.2 percent and further to 11.1 percent in the first and second half of the 1990s, respectively [See Table-1.1]. Two points clearly emerge from the analysis. Firstly, the decline in overall investment rate in the 1990s owes mainly to the declining public sector investment and secondly, the decline in economic growth in the 1990s is largely attributed to a decline in public sector investment [See Fig-2]. It may be pointed out that in an effort to reduce fiscal deficit in the 1990s the successive governments curtailed development expenditure instead of mobilizing tax revenues. The development expenditure continued to decline from 6.4 percent of GDP in 1990-91 to 3.2 percent in 1999-2000. The declining trend in Public Sector Development Programme (PSDP) is clearly reflected in declining public sector investment, which, in turn, has caused the deceleration in economic growth in the 1990s.

Although economic growth has staged a modest recovery in 1999-2000 the task now is not only to sustain a higher growth momentum but also restore investors’ confidence. Recent developments in the growth literature have emphasized that economic conditions and

implementation of appropriate public policies influence the rate of economic growth. The government can influence growth by creating stable macroeconomic environment, which can be created through macroeconomic policies that are conducive to growth. The key macroeconomic polices are considered to be monetary, fiscal, and exchange rate policies designed to keep inflation low and predictable, a stable and sustainable fiscal balance but not at the cost of development spending, appropriate real interest rates, a competitive and predictable exchange rate, and a viable balance of payments. The signaling effect government management has on the private sector is one of the key mechanisms through which macroeconomic policies influence growth.

Having discussed the overall growth and investment relationship in the 1990’s in general and the current year in particular, it is now appropriate to have detailed discussion on the growth performance of the components of gross national product for the outgoing fiscal year 1999-2000 which are well-documented in Table 1.2.

Table 1.2Growth Performance of Components of Gross National Product

(At Constant Factor Cost)

(Percent)

1980’s 1990’s 1997-98 1998-99 1999-2000(P)

Commodity Producing Sector 6.5 4.6 5.3 2.2 4.5

1. Agriculture 5.4 4.4 3.8 2.0 5.5

- Major Crops 3.4 3.5 8.3 -0.0 9.6

- Minor Crops 4.1 4.6 3.3 4.3 2.7

- Livestock 5.3 6.4 -0.7 3.2 2.8

- Fishing 7.3 3.6 7.8 0.6 8.5

- Forestry 6.4 -5.2 -9.8 -4.3 -38.2

2. Mining & Quarrying 9.5 2.7 -9.7 3.6 7.7

3. Manufacturing 8.2 4.8 7.9 4.2 1.6

- Large Scale 8.2 3.6 7.6 3.7 0.0

- Small Scale 8.4 7.8 5.3 5.3 5.3

4. Construction 4.7 2.6 1.3 -6.3 6.2

5. Electricity & Gas Distribution 10.1 7.4 9.0 3.5 7.8

Service Sector 6.6 4.6 3.2 4.1 4.5

6. Transport, Storage and Communication

6.2 5.1 8.1 3.1 3.9

7. Wholesale & Retail Trade 7.2 3.7 2.8 2.1 2.5

8. Finance & Insurance 6.0 5.8 -22.4 15.0 6.9

9. Ownership of Dwellings 7.9 5.3 5.3 5.3 5.3

10. Public Administration & Defence 5.4 2.8 2.0 2.4 5.6

11. Services 6.5 6.5 6.5 6.5 6.5

12. GDP (Constant Factor Cost) 6.1 4.6 4.3 3.2 4.5

13. GNP (Constant Factor Cost) 5.5 4.0 4.2 3.2 3.9

Source: Federal Bureau of Statistics and Economic Adviser Wing.

Commodity Producing SectorThe commodity-producing sector has considerably improved its performance during the year 1999-2000. The value added in the sector grew by 4.5 percent against a target of 4.9 percent and actual achievement of 2.2 percent in 1998-99. The poor growth profile of the manufacturing sector is mainly responsible for slight slippage from the target while rest of the sub-sectors of the commodity-producing sector has performed well. The impressive performance of agriculture sector has especially contributed this healthy performance. Given below is an overview of performance of components of the commodity- producing sector.

Agriculture sector has improved its share in the GDP from 25.6 percent in 1998-99 to 25.9 percent in 1999-2000. Furthermore, it accounted for 55.6 percent of value added in commodity-producing sector during 1999-2000, which was 54.8 percent in the last year. Agriculture surpassed the growth target of 4.3 percent by a fair margin and grew by 5.5 percent. The impressive recovery is due mainly to the bumper cotton and wheat crops and a substantial increase in rice production. The size of the cotton crop increased from 8.8 million bales in 1998-99 to 11.2 million bales in 1999-2000, surpassing the target of 9.7 million bales by a wide margin. The lower prices and increase in output of cotton would provide a much-needed impetus to jumpstart the textile industry. Wheat production is estimated at 19.3 million tonnes, which is 7.9 percent higher than the last year’s crops of 17.9 million tonnes. [The recent information indicates that the wheat production may exceed 21.0 million tonnes. If this is the case, then agricultural and real GDP growth would increase to 7.1 percent and 4.9 percent, respectively in 1999-2000]. The increase in wheat crop is mainly due to enhancement of the support-price of the crop, timely rain and increase in the area under cultivation. The increased output has enabled a considerable decline in import bills of wheat. Rice production also increased by 10.3 percent, increasing from 4.7 million tonnes in 1998-99 to 5.2 million tonnes. The impressive agricultural recovery was however, restrained by a 16 percent decline in sugarcane production. As against a production of 55 million tonnes last year, sugarcane production declined by 16 percent in 1999-2000. The overall growth of major crops is estimated at 9.6 percent during the year 1999-2000 as against the target of 5.4 percent and actual achievement of a negative growth rate of 0.04 percent.

The minor crops are estimated to grow by 2.7 percent in 1999-2000 against the target of 4.5 percent and actual achievement of 4.3 percent in 1998-99. The slackening of growth is due to fall in production of gram, barley, bajra and jowar, owing to decline in area under cultivation and drought conditions in certain parts of the country.

The Livestock sub-sector has grown by 2.8 percent against the target of 3.0 percent in the year 1999-2000 and achievement of 3.2 percent in 1998-99. The production of milk, egg and mutton are estimated to go up by 2.8, 2.5 and 2.7 percent respectively. Due to substantial increase in the fish catch (marine fishing by 9.5 percent and inland fishing by 7.1 percent), the fisheries sub-sector is estimated to grow by 8.5 percent as against a minor increase of 0.6 percent last year. The value added of the forestry has, however, declined by 38.2 percent mainly because of imposition of ban by Punjab and N.W.F.P on woodcutting to bridle deforestation.

The mining and quarrying sector has surpassed the growth target of 4.5 percent and recorded an impressive growth of 7.7 percent in 1999-2000 as against a modest increase of 3.6 percent last year. The production activity in the sector is mainly concentrated in crude oil, natural gas and coal and the value added in these have increased by 1.4 percent, 17.6 percent and 10.0 percent,

respectively.

The manufacturing sector was planned to grow by 5.8 percent during the year on the basis of a growth projection of 4.3 percent and 8.4 percent for large-scale and small-scale manufacturing sub-sectors, respectively for the year 1999-2000. From statistical point of view the large-scale manufacturing exhibited a marginal increase of 0.04 percent in the first nine months (July-March 1999-2000) of the outgoing fiscal year. However, the overall growth figure is undermined by the impact of massive fall in the sugar production. Excluding sugar, the large-scale manufacturing grew by 6.4 percent during July-March 1999-2000 and the growth was broad-based as well, albeit, cotton textile leading the proceeding. In fact, the performance of large-scale manufacturing excluding sugar has been, by far, the best during the last five year. The major industries which registered impressive growth include tractors (53.9 percent), buses (51.2 percent), cosmetics (39.5 percent), phosphetic fertilizer (33.4 percent), paints & varnishes (21.5 percent), billets (18.8 percent), cotton cloth (15.1 percent), paper & board (14.1 percent) and beverages (8.3 percent). The declining trend was prominent in two major groups, i.e. food, beverages and tobacco group and automobile groups. The industries which depicted decline in these two groups include sugar (24.0 percent), cigarettes (11.2 percent), light commercial vehicles (43.2 percent), jeeps & cars (23.5 percent), trucks (6.7 percent) and motorcycles (3.8 percent).

The growth rate of small-scale manufacturing has been adjusted downward on the basis of a new Survey conducted by the Federal Bureau of Statistics in 1996-97. Therefore, beginning from 1997-98 onward the growth rate for small-scale manufacturing is taken as 5.3 percent as against the traditional practice of assuming a growth of 8.4 percent.

The construction sector has once again showed tremendous potential and grew by 6.2 percent in 1999-2000 as against a negative growth of 6.2 percent last year. The recovery is mainly attributed to higher investment in land improvement, construction of residential and non-residential building, highways, bridges and commercial ventures.

The electricity and gas distribution sector continued their expansion and grew by 7.8 percent in 1999-2000 as compared to 3.5 percent last year and yearly target of 5.0 percent. The growth is mainly attributed to the government’s efforts towards village electrification and increase in generation capacity.

The Services Sector grew by 4.5 percent in 1999-2000 as against 4.1 percent growth of last year. The sub-sector, wholesale & retail trade, witnessed slower growth and grew by 2.4 percent during the year which is slightly higher than 2.1 percent growth of last year but still far below the target growth of 4.8 percent.

The finance and insurance is the only sub-sector among services which surpassed the growth target of 5.0 percent and grew by 6.9 percent during 1999-2000 as against 15.0 percent growth of last year. The growth is largely attributed to an impressive increase of 31.0 percent in the insurance companies and of 15.5 percent increase in operating surplus of scheduled banking companies. The transport & communication sub-sector is estimated to grow by 3.9 percent during the current fiscal year as compared to 3.1 percent last year and target of 5.3 percent for the year. The public administration and defence has also surpassed the targeted growth of 3.5 percent and witnessed a growth of 5.6 percent as against 2.4 percent growth in last year. Two minor sectors i.e. ownership of dwellings and social services have maintained the estimated growth path of 5.3 percent and 6.5 percent, respectively.

Relative Sectoral Contribution Towards GDP GrowthWhich sector has contributed most to the GDP growth in the outgoing fiscal year? The analysis reveals that commodity producing sector has contributed to the extent of 2.27 percentage points while the services sector contributed 2.20 percentage points in the growth of real GDP. More specifically, the contribution of agriculture has been the largest with 1.44 percentage points due to its impressive growth and largest weight. The weak performance of manufacturing sector reduced

its contribution to 0.26 percentage points, which is even lower than the contribution of electricity & gas distribution. This sector, inspite of its small weight has contributed 0.34 percentage points.

In services sector, the main contribution came from transport & communication (0.39 percentage points), trade (0.37 percentage points) and public administration & defence (0.35 percentage points). The commodity and services sectors account for 51 and 49 percent, respectively, in the GDP. It is therefore noteworthy that both sectors have evenly contributed to the national output growth.

Sectoral Shares in GDPThe shares of the various components of the Gross Domestic Product have changed little over last one decade. The shares of agriculture, manufacturing and services have remained, more or less, unchanged. However, when viewed from the loner-run perspective major structural transformation in the components of GDP can be observed. As shown in table-1.3, the share of commodity producing sectors declined from 61.1 percent in 1969-70 to 51.0 percent in 1999-2000 and at the same time the share of services sector increased from 38.4 percent to 49.0 percent during the same period. Within the commodity-producing sector, the share of agriculture has declined from almost 39 percent to 26 percent—a decline of 13 percentage points in three decades. However, what is interesting to note is that the share of manufacturing has remained stagnant over the last three decades. The decline in the share of agriculture has been compensated by the almost equal increase in the share of services sector.

The structural transformation has various stages. In the first stage of transformation, the decline in the share of agriculture is compensated by an almost equal increase in the share of manufacturing sector, with the share of services remaining more or less stagnant. In the second stage of development, substitution of share takes place between manufacturing and services with agriculture remaining stagnant. In the case of Pakistan the data reveals only one stage of transformation, i.e. from agriculture to services with manufacturing remaining the same. The details of sectoral share are given in Table 1.3:

Table 1.3Sectoral Share of Various Sectors in Gross Domestic Product

(At Constant Factor Cost)

(Percent)

1969-70 1997-98 1998-99 1999-2000(P)

Commodity Producing Sector 61.6 51.4 51.0 51.0

1. Agriculture 38.9 26.0 25.7 25.9

- Major Crops 23.4 10.7 10.4 10.9

- Minor Crops 4.2 4.8 4.9 4.8

- Livestock 10.6 9.3 9.3 9.2

- Fishing 0.5 0.9 0.9 0.9

- Forestry 0.1 0.1 0.1 0.1

2. Mining & Quarrying 0.5 0.5 0.5 0.5

3. Manufacturing 16.0 17.1 17.8 16.8

- Large Scale 12.5 12.2 12.3 11.7

- Small Scale 3.5 4.9 5.0 5.1

4. Construction 4.2 3.7 3.4 3.5

5. Electricity & Gas Distribution 2.0 4.2 4.2 4.3

Services Sector 38.4 48.6 49.0 49.0

6. Transport, Storage and Communication

6.3 10.2 10.2 10.1

7. Wholesale and Retail Trade 13.8 15.4 15.2 14.9

8. Finance and Insurance 1.8 2.2 2.4 2.5

9. Ownership of Dwellings 3.4 5.8 5.9 6.0

10. Public Administration and Defence 6.4 6.2 6.2 6.3

11. Other Services 6.7 8.9 9.1 9.3

12. GDP (Constant Factor Cost) 100 100 100 100

(P) Stands for provisional.Source: Economic Adviser Wing Finance Division

Per Capita IncomeThe per capita income has bounced back after remaining subdued for the past three years. In real terms, the per capita income has increased by 1.6 percent in 1999-2000 as against 0.9 percent increase of last year. In terms of US dollar, the per capita income rose by 2.1 percent. One positive development about recent rise in per capita income is that it was consistently declining in dollar terms for the four years but bounced back in 1999-2000, mainly because of the stable exchange rate. The developments in per capita income are summarized in Table 1.4.

Table 1.4Growth in Per capita Income

Per Capita Income (GNP) at`

FC 1980-81 (Rs)

% Growth Current MP (Rs)

% Growth US $ % Growth

1991-92 4326 3.9 10908 14.3 439 3.1

1992-93 4303 -0.5 11749 7.7 453 3.2

1993-94 4367 1.5 13373 13.8 443 -2.2

1994-95 4505 3.2 15686 17.3 508 14.7

1995-96 4644 3.1 17233 9.9 513 1.0

1996-97 4601 -1.0 19212 11.5 493 -3.9

1997-98 4575 -0.6 20415 6.3 473 -4.1

1998-99 4615 0.9 21712 6.4 434 -8.3

1999-2000 4688 1.6 22939 5.7 443 2.1

Note: FC means factor cost and MP represents market prices.Source: 1) Federal Bureau of Statistics

2) Economic Adviser Wing

Resources and Their DistributionThe total resource availability for the year 1999-2000 is estimated at Rs.3206.7 billion including GDP at market price of Rs.3173.7 billion and net external resource inflow of Rs.88.1 billion. These resources are added with outflow of net factor income from abroad of Rs.55.1 billion and the remaining resources are utilized for the purpose of total consumption, fixed investment and changes in stocks.

The total consumption and fixed investment are likely to increase by 6.9 percent and 9.3 percent in 1999-2000 whereas, changes in stocks are likely to improve marginally. The increase in volume of fixed investment is equally shared by public and private sector. The fixed investment by public and private sector increased by 9.3 and 9.4 percent respectively.

Saving and InvestmentThe outlay for Gross National Investment (GNI) was projected to grow by 36 percent for the year 1999-2000 but it managed to grow by 9.3 percent. Gross Fixed Investment (GFI) recorded 9.5 percent growth over fixed investment of Rs.387.9 billion in 1998-99. The total and fixed investment remained more or less unchanged in 1999-2000 as compared with previous year. The private sector investment also remained unchanged at 8.1 percent of GDP in 1999-2000.

The public sector investment grew by 9.6 percent while private sector investment increased by 9.4 percent in 1999-2000. The increase in public sector investment is attributed to 35.9 percent increase in capital formation in agriculture sector and 16.5 percent increase in transport and communication sector. The encouraging development regarding private sector investment is an increase of 23.9 percent in manufacturing, 15.6 percent in agriculture and 17.6 percent in construction sector during 1999-2000. However, tremendous decline is witnessed in private sector activity in the sectors like mining & quarrying (34.1 percent) and electricity & gas distribution sector (49.8 percent) in 1999-2000, which were main recipients of private investment in the past.

The national savings as percent of GDP has increased from 11.1 percent in 1998-99 to 12.2 percent in 1999-2000. Pakistan’s saving and investment records are not very encouraging. The gross domestic investment (GDI) were only 13.4 percent of GDP in 1999-2000 as compared with the weighted average investment rate of 25 percent of GDP for South-Asia of which Pakistan is a member of the community. Even some of the less developed countries (LDC’s) have higher investment rate than Pakistan.

Gross National Savings (GNS) during the year 1999-2000 were only 12.2 percent of GDP as against the target of 18 percent of GDP. It means national saving could only manage to finance 81.5 percent of total investment outlay while the remaining 18 percent is expected to be financed from foreign savings. An increase in domestic savings and decline in dependence on external resources is noteworthy in recent years. The domestic saving as percent of GDP has improved from 12.3 percent last year to 14.0 in 1999-2000 while foreign savings declined from 3.8 percent of GDP in 1998-99 to 2.8 percent in 1999-2000. Tables-1.5 A and 1.5 B reflect changing patterns of saving and investment over the years.

Table 1.5 ASaving and Investment

(Rs.Billion)

Description 1996-97 1997-98 1998-99 1999-2000 (P)

Total Investment 436.0 468.0 435.9 476.3

Changes in Stock 38.3 71.4 48.0 51.7

Gross Fixed Investment 397.8 403.9 387.9 424.6

- Public Investment 166.0 141.4 154.2 169.0

- Private Investment 231.7 262.5 233.7 255.6

Net External Resource Inflow 150.0 83.0 111.4 88.1

National Savings 249.8 286.1 323.4 387.2

Domestic Savings 315.6 421.3 359.5 443.3

GDP (Market Prices) 2457.4 2677.7 2913.5 3173.7

Source:1) Federal Bureau of Statistics2) Economic Adviser Wing

Table-1.5 BStructure of Saving and Investment

(As Percent of GDP)

Description 1996-97 1997-98 1998-99 1999-2000 (P)

Gross Total Investment 17.7 17.1 15.0 15.0

Changes in Stock 1.6 2.6 1.7 1.6

Gross Fixed Investment 16.2 14.5 13.3 13.4

- Public Investment 6.8 4.9 5.3 5.3

- Private Investment 9.4 9.6 8.0 8.1

Net External Resource Inflow 6.1 3.0 3.8 2.8

National Savings 10.2 10.5 11.1 12.2

Domestic Savings 12.8 15.4 12.3 14.0

Note: (P) stands for provisional

analysis of pakistan

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