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Pakistan's economy: under new stresses and strains.

* According to the latest UNICEF report, the population in Pakistan is increasing at the horrifying rate of 3.6 per cent annually.

* The GDP growth is estimated at only 3 per cent in 1992-93 because of negative growth rate of 3.9 per cent in agriculture sector. Meanwhile manufacturing sector registered a growth of 5.6 percent which is less than the target and the previous year.

* Exports during 1992-93 stood at $ 5.048 billion against imports of $ 7.049 billion, widening the trade gap to $ 2.001 billion in 1993. The trade gap in 1992 was $ 2.325 billion.

* The Inflation rate is around 25 % according to unofficial estimates.

POPULATION

Pakistan's population-related statistics are quite frightening, to say the least. According to the latest UNICEF report, the population is increasing at the horrifying rate of 3.6 per cent annually. This is much more than the officially-stated rate of 3.1 per cent As indicated in the report, the estimated population in Pakistan was 121.5 million in 1991. However according to the Government's claim the estimated population during 1992 was 116 million. The UNICEF report further explained that only 56 per cent people in Pakistan have access to safe drinking water while the percentage of those who get safe drinking water in Bangladesh is 81 per cent, and in India 86 per cent.

GDP

The GDP growth is estimated at only 3 per cent in 1992-93 as compared to the growth rate of 7.6 per cent in 1991-92. This decline was due to the negative growth rate of 3.9 per cent in agriculture sector. The agriculture sector's share of GDP declined from 38.9 per cent in 1969-70 to 26.2 per cent in 1991-92. It fell to 24.4 per cent in 1992-93 due to weather induced declines in cotton and other kharif crops. Manufacturing's share in GDP rose to 18.3 per cent in 1992-93 from 17.8 per cent last year and 16 per cent in 1969-70.

AGRICULTURE

Major shortfalls occurred in the production of cotton (9.33 million bales against the target of 12.0 million bales), rice (3.08 million tons against the target of 3.48 million tons), sugarcane (36.51 million tons against the target of 39.7 million tons), and maize (1.18 million tons against the target of 1.28 million tons). Over 90 per cent of the decline in the output of kharif crops is attributed to cotton alone, followed by sugarcane (6.7%), irri rice (3.4%) and maize (0.5%). Unlike the kharif crops, the output of Rabi crops (still uncertain) is expected at last year's level, with gains from wheat totally offset by losses in gram.

FOREIGN AID

Pakistan is seeking $ 2.6 billion aid for 1993-94 from Aid to Pakistan Consortium. The caretaker Government was also seeking about 120 million dollars separately from Consortium. For this purpose a Policy Framework Paper (PFP) has been prepared and duly sanctioned by the World Bank and IMF outlining major structural adjustment over the next three years. According to the PFP, "The macro-economic programme incorporates a considerable up-front adjustment, particularly in the fiscal account. Specifically, it envisages an overall fiscal adjustment equal to 2.6 per cent of GDP in 1993-94, followed by an additional adjustment of 2.4 per cent of GDP over the following two years.

DEVALUATION

The massive devaluation of rupee on July 22 to the extent of 10 per cent is bound to affect all other prices. It may be noted that prices of petrol has been linked with the value of rupee in the federal budget and the increase is bound to be effective shortly. The rupee had recorded a huge depreciation of 3.16 per cent vis-a-vis the dollar on July 15. Thus, within a short span of 15 days or so the rupee has suffered a total loss of 9.74 per cent or Rs. 2.65 which has brought the aggregate depreciation to Rs. 19.95 since the delinking, with the dollar gaining as much as 201.51 per cent in terms of value.

The caretaker government defended the devaluation on the plea that the trade gap was widening. The exports have gone down by 16 to 20 per cent. They believed that now things would start settling down and export would now take an upturn.

Devaluation is not likely to benefit as Pakistan has very few items for exports. Cotton and textiles contribute about sixty per cent of the foreign exchange earnings from merchandise. Exports of rice and cotton dropped because their tradeable surplus was adversely affected by floods. The textile industry has done nothing to improve its efficiency. Practice of price-cutting on the part of exporters has invited the application of anti-dumping laws against our exports in a number of countries. Such measures were taken by Turkey, South Korea, Australia and Chile.

FOREIGN TRADE

Exports during 1992-93 (July-March) stood at $ 5.048 billion against imports of $ 7.049 billion (July-March) widening the trade gap to $ 2.001 billion in 1993 as compared to $ 2.325 billion in 1992. A number of severe exogenous shocks including domestic and external together caused a setback to economic growth. There were heavy rains in the southern part of the country in July 1992. Soon after there were the unprecedented floods during August and September. These caused extensive damage to standing crops, livestock, industry, physical infrastructure, transport and the irrigation systems. The total loss has been estimated at over Rs. 59 billion.

The cotton crop bore the additional brunt of the leaf curl virus and international recession hit the textile industry. The effect of the global recession was not, of course, confined to textiles. Other exporting activities also suffered and there was a substantial deterioration in the terms of trade.

As much as 85 per cent of country's imports consist of machinery, plants and raw materials for industrial development. The cost of these items have gone up sharply. It may be mentioned that textile mills have been set-up under PAYE scheme. In the last three years about hundred mills have been set-up in this way and sponsors of these units are still paying bank loans which also included foreign exchange component against suppliers credit. The liability of these mills has increased suddenly and they are now defaulting on their loans. Debt servicing and imports on government accounts have become costlier. Even the textile industry which import machinery, spare parts, polyester fibre, dyes and chemicals will not escape price hike.

Trade Reforms

A package of reforms is due to be announced in the trade sector by the caretaker government of Moeen Qureshi. This will include reduction in tariff bringing it to below 50 per cent within three years starting, from the next fiscal year, estimation of all export taxes, withdrawal of restrictions on imports, imposition of tariff on currently duty-free importable items and undoing of import licence fee and Iqra Surcharge. Full convertibility of rupee on trade account is also included in the proposed reforms. The reforms will include significant reduction in the average tariff with minimal dispersion in the context of a rationalisation of the tax system through:

* adoption of a simplified structure based on a maximum of 4-5 banks with products allocated according to efficiency considerations

* a simultaneous reduction in the value of imports subject to exemption and concessions, and

* a consolidation of various import taxation elements through their incorporation in the basic rates.

According to the new reforms, "the requirement of the import licence fee and export taxes will be eliminated by June 30, 1994". According to the package, the medium-term adjustment and reforms programme will include further liberalisation of the exchange and trade system. Efforts in this regard will include:

* eliminating the restricted list

* ensuring that the negative list covers only items subjected to religious security, health, and reciprocity considerations;

* consolidating and reducing, consistent with GATT obligations, the maximum rate, average rate, and dispersion of import duties, with corresponding adjustments in intermediate rates; and

* removing restrictions on the provision of foreign exchange for certain invisible payments and machinery goods.

With the reforms package the government intends to replace lost non-tariff barriers by tariff. To this end, steps in 1993-94 include removing all items on the negative lists that are not related to religious, health, security, and reciprocity consideration; and eliminating the restricted list through removal of products and consolidation with procedures covering health, security, standards, and procedural elements.

In addition, the government intends to eliminate ceilings on imports of machinery and millwork against cash licences and those by actual users by December 31, 1993. All restrictions on provision of foreign exchange for current transaction will be eliminated in 1993-94 in the context of a specified timetable.

MANUFACTURING

Manufacturing sector registered a growth of 5.6 per cent (less than the previous year as well as the target), with large scale manufacturing growth by 4.5 per cent and small scale by 8.5 per cent. Major items, constituting 78 per cent weight, showed an output growth of 9.3 per cent while the remaining items, having a weight of 22 per cent, recorded a negative growth of 11.8 per cent. The decline in cotton production alone has led to a 27 per cent decline in cotton ginning. Substantial increase in the production of sugar, blended tea, cooking oil, beverages, cigarettes, paper and board, trucks and tractors, pig iron, cotton yarn, cloth and cement were the principal sources of dynamism in the manufacturing sector.

Performance of Textile Sector

Textile industry is passing through a crisis. Several mills during the half year have shown losses. Out of the 82 six monthly reports analysed, it is significant to note that as many as 62 textile mills showed losses. Of course the international recession was the main cause which sent the textile units into red, but other reasons were also important. 1992-93 cotton crop was damaged by floods and leaf curl virus resulting in about 30% reduced crop and large increase in prices of raw cotton, cole cotton, which should have been available normally around Rs. 850/- per maund went as high as Rs. 1150 per maund. Cotton constitutes about 70% of the total cost of production in a textile unit. Bullish condition in cotton market gave fillip to widely prevalent malpractice of mixing foreign matter and addition of excessive moisture etc. in lint cotton increasing wastage and creating problem during spinning.

The over supply of yarn and massive devaluation of currency by India and China has adversely affected the industry. However, corrective measures were taken by devaluing the Pak Rupee by 9.54% on July 22, 1993. The prices of yarn and fabrics in the international markets were under pressure due to world wide recession and this has affected the profitability of all the textile mills.

PRIVATISATION

Privatisation policies are currently being pursued all over the world. The Privatisation Commission initiated privatisation of 155 public sector industrial units out of which 73 came under the Ministry of Production (MOP) and 40 under the Ministry of Industries.

The privatisation is no more going at jet speed for the last 2 years. Upto now 74 of the over 100 units advertised for sale on Pakistan have been privatised, including six which have been bought by their employees. Some of the 16 units advertised by the Nawaz Sharif Government were there in earlier auction lists but had no takers or received low offers from prospective buyers. Many of them like Bela Engineering have suffered huge losses and have small prospects of recovering soon unless substantial investments are made.

Bela Engineering with a subscribed capital of Rs. 34 million had a cumulative of Rs. 07 million by the end of 1991. Who would like to buy the shares of such a company or the once prestigious Pakistan Engineering Company which is buried under a mountain of debt and has asked for Rs. 400 million more from the government to revitalise the industry. The same goes for PNSC which has disappointed the persons, who had bought its shares a long time ago.

On dismissal of Nawaz Sharif's government which decided to privatise 26 per cent shares of PTC, foreign investors keen on investing in Pakistan's telecommunication sector have become a bit confused as their confidence has been shattered.

"We don't know whether the caretaker government or the successive government which will come into power after elections will continue the privatisation programme as such let alone the PTC privatisation", said a source close to one of the nine international telephone agencies who had shown interest in purchasing PTC in response to the then government's offer to privatise PTC.

The international consortium of consultants appointed for PTC privatisation had finalised their recommendations and forwarded it to the Committee a few months back. They said the consultants had inter alia determined the value of PTC assets which was in the vicinity of Rs. 4.5 to Rs. 5.0 billion. PTC Staff Union (CBA) sees no justification for the PTC privatisation. CBA General Secretary Sabir Hussain said: "PTC is a profit earning organisation staffed with the best telecommunication workers in the world," adding: "We don't see any reason for privatising PTC". Sabir said PTC workers had always opposed the privatisation process and will still oppose it.

When the new owners of the privatised units came they started cutting production and raising prices. These new owners were trying to recover the bad money which they had deposited with the government. The truth was that cement prices had gone up by 30 per cent, Ghee prices by 50 per cent, Steel prices by 30 per cent and vehicles prices by 100 per cent. A large number of units amongst those nationalised now had valuable property attached to it, hence the charge that the government was only interested in disposing off real estate.

The fact is that all the resources that usually would have gone into new investments were diverted towards buying the already established and profit-making public sector units. Even here, it is important to note that the buyer had paid only 40 per cent of the prices while providing bank guarantees for the remaining 60 per cent, which if one went by the Pakistan experience is never fulfilled. In some cases, even the 40 per cent has been funded through undervaluation of the assets and inventories of the sold units.

In some cases the accumulated duty drawbacks were allowed to go with the units which, in almost all cases, were more than the total prices. So, all in all, privatisation has been a process through which more white money was converted into black with the added assurance of accelerated flow from white to black through tax evasion. Sectorwise privatisation of industrial sector has been given in the following paragraphs.

Cement: In the cement sector 7 cement units have so far been sold at a total bid value of Rs. 4658 million. Name of the units privatised are: Dandot Cement, D.G. Khan Cement, Gharibwal Cement, Kohat Cement, Maple Leaf Cement, Pak Cement, White Cement and Zeal Pak Cement. Dandot Cement was running in losses due to very old plant and machinery.

Chemicals: The Commission has so far sold 5 chemical units including Kurrum Chemicals, National Fibres, Pakistan PVC, Sindh Alkalis and Antibiotics Limited. An amount of Rs. 411 million was received towards the down payment of these units. Pakistan PVC passed on to the previous owners while Sindh Alkalis purchased by the Employees Group. Both these units are showing satisfactory performance with their new owners.

Engineering: The Commission sold 4 engineering units belonging to the State Engineering Corporation against a sum of Rs. 81.89 million as down payment. Karachi Pipe Mills passed on to the original owners. Engineering units in the public sector were not operating on full capacity due to various constraints. The units which were passed on to the private sector included Karachi Pipe Mills, Pakistan Switchgear, Power Steel and Metropolitan Steel Aggregate net loss of these units during the year ending June 1990 was Rs. 12 million.

Automobile: Automobile units were controlled by Pakistan Automobile Corporation. Five units have so far been privatised. These included Al-Ghazi Tractors, Balochistan Wheels, Millat Tractors, Naya Daur Motors (was handed over to Tawakkal group) and National Motors. The last named unit was passed into the original owner Lt. General (Retd.) Habibullah Khan.

Fertilizers: Out of the seven units under the control of National Fertilizer Corporation (NFC) only one unit was privatised at a total value of Rs. 457 million netting a sum of Rs. 183 million towards down payment. The name of unit privatised is Hazara Phosphate Fertilizer Company Limited. It was a new unit established by NFC.

Vegetable Ghee: As many as 10 Vegetable Ghee units were privatised by the Commission at a total bid value of Rs. 51.2 million. Net amount received against handing over these units amounted to Rs. 215 million.

Rice and Roti Plants: Six Rice units and 10 Roti Plants were privatised at a total bid value of Rs. 185.55 million and Rs. 62.68 million respectively. Net amount received as down payment for the sale of these units was Rs. 118.14 million including Rs. 60.86 million for rice units and Rs. 57.24 million for roti plants.

Banking: Banking is still in the privatisation process. Two nationalised banks have already been privatised. These are Allied Bank and Muslim Commercial Bank. At present 4 Commercial Banks are still in the public sector. These are: (1) First Women Bank, (2) Habib Bank Limited, (3) National Bank of Pakistan, (4) United Bank Limited. Decision has already been taken that National Bank of Pakistan would not be privatised. United Bank Limited and Habib Exchange Bank Limited (former BCCI) a wholly-owned subsidiary of Habib Bank Limited are being simultaneously offloaded for privatisation. This recommendation was finalized by the Privatisation Commission which met under the chairmanship of A.G.N. Kazi.

United Bank: UBL's inherent strength is generated from its overseas branches whose earnings are unmatched compared to any other national institution. It is believed that Rs. 700 million income is generated by UBL from its branches and subsidiaries most of it stemming from the Middle East. Twenty-six per cent shares of UBL will be offered for transfer of management to run around 1400 branches. One-third of the staff is said to be redundant and UBL has one of the strongest unions in the banking sector. Around Rs. 900 million are expected to be raised in the sale.

Habib: Privatisation Commission reportedly felt that Habib Bank is too big an institution and it was better to spin off Habib Exchange Bank Limited which has a clean portfolio. Around Rs. 600 million can be raised from its sale, Habib Exchange Bank Limited has three branches at Karachi, Islamabad and Lahore.

DFIs: In respect of IDBP and NDFC it was felt that converting them to joint stock companies is the firm priority before being put for sale. Foreigners have been made eligible to bid in the sale of banks and DFIs and pre-qualification along with sealed price bids would need to be submitted. Only those who prequalify will have their price bid envelopes opened for consideration. Meanwhile, the Privatisation Commission, held detailed deliberations to evolve policy parameters for privatisation in industrial banking, telecommunication and power sector.

The cases of both these banks have been pending with the Commission. Previously their privatisation was put off due to unattractive bids. This time, the Commission might decide to invite bids for HBL and UBL. Before inviting bids, the Commission will seek approval of the Cabinet Committee on Privatisation.

State Life Insurance Corp.

Will the government disinvest a portion of government shareholding or privatise the State Life Insurance Corporation of Pakistan (SLIC) and what are the viable options available with regard to this giant monopoly worth around 4.6 billion dollars? These are the questions which are being asked in the insurance field.

It is said selling this company to a foreign entity would lend charge of a sell out as SLIC with its 360 or odd offices spread over all the nooks and corners of this country has become for all practical purposes a national institution. SLIC will have to be converted into a joint stock company before its shares could be put on the market to local or foreign entities or individuals.

Over 80 per cent of SLIC's investment portfolio is invested in government securities; 15 per cent return on special bonds issued for SLIC have been an important earner in building up the life fund since its inception. SLIC has had annual compound growth rate of 12.9 per cent, which could have been improved upon had it not been under the direct control of Islamabad. Delays in updating notices and processing of claims is mainly due to slow induction of software packages into its computerization. Except for 'Jiwan Sathi' scheme there have been few innovative schemes. SLIC, however, has the potential in terms of income and its assets base to buy the most updated technology available either directly or through joint venture arrangements.

Only big name international giant insurance companies which are in the field of life insurance for over half a century or more stand a chance to compete with SLIC which would force the virtual monopoly company to pull up its boot straps in order to maintain its hold in the field.

WAPDA

The Council of Common interests which met recently under the chairmanship of Ahmad Faruque, Federal Minister for Communications and Railways agreed unanimously to amend the WAPDA Act 1958 to enable the Privatisation Commission to proceed with privatisation of the thermal power units and distribution of power according to a phased programme.

The privatisation of Hydro-electric projects and the national grid was not agreed and these would continue under the purview of WAPDA. The Council asked the Privatisation Commission to ensure the representation of the provinces in their decision making for consultation purposes and taking into consideration the interest of the individual provinces.

LABOUR

On the economic scene vital changes are visible. The workers' wage ceiling has been increased from Rs. 1500 to 3000 by the caretaker government. Under the revised eligibility ceiling, many more workers would be covered under the Social Security Ordinance, 1965, the Employees Old-Age Benefits Act, 1976, the Workers Children (Education) Ordinance 1972, and the Companies Profits (Workers' Participation) Act, 1968. An Ordinance to give effect to the decisions of the government and to amend the relevant laws, is to be issued. At present the workers crossing the wage limit of Rs. 1500 per month become ineligible for various welfare schemes launched by the government. The workers becoming ineligible for the schemes were going to increase in view of the recent announcement of the government to allow Rs. 100 per month as cost of living allowance to the workers in the private as well as the public sector. With the increase in the ceiling upto Rs. 3000 per month, a larger number of workers will be covered under the welfare schemes. The textile industry would be largely affected with this change. However, the benefits would not be passed on to the labour class because a large part of the labour class work under contract.

OIL

The total availability of oil in the country has increased from 42,639 thousand barrels in 1985-86 to 58,283 thousand barrels in 1991-92. The demand for POL products is projected to increase with a growth rate of 10.03 per cent per annum during the 7th Plan period on the basis of which the demand is projected to increase to over 14.50 tonnes/annum by 1992-93 against the existing production capacity of about 7.5 million tonnes per annum. This leaves a supply gap of about 7 million tonnes. The growth rate during the year 1985-86 to 1991-92 worked out to 5.42 per annum. Over 1988-2003 period average annual growth has been estimated at 9.8 per cent. Yet another analysis estimated average annual growth at 10 per cent during the 90s. Oil refining capacity has stagnated around 140,000 barrels/day for quite long because of the ill conceived policy of the government. Expansion and modernisation of the refining sector is imperative to meet the current demand of 250,000 barrels a day growing at 7 to 8 per cent annually. The new Petroleum Policy has introduced a number of measures in de-regulating the upstream and downstream activities of the oil and gas sector.

Presently the three refineries in the country meet only 50 per cent of petroleum product demand. Out of this capacity, 50 per cent is more than 25 years old and shall need to be gradually replaced, modified and modernised. Although crude oil supply is rightly regarded as a key element in our calculations, the establishment of economically viable refining capacity in the country is extremely necessary. The world refining industry has gone through a tough period during the 80's and the recovery has been slow and painful, but the refining business is now healthy again. Future prospects of refining sector in Pakistan, are therefore, very bright. This is mainly due to the large and increasing consumer population and the geographical location.

INFLATION

The inflationary pressure is being felt everywhere. The common man has been caught up in a whirl pool. Officially manipulated figures showed the rate of inflation to be around 10 per cent but unofficial estimate put it between 20 to 25 per cent. Petrol (High Octane) price was increased from Rs. 11.31 to Rs. 14.40 showing a rise of 27.32 per cent. Although the international prices of oil have shown a downward trend the devaluation of the rupee may well outpace the benefits from a cheaper dollar per barrel. Once oil becomes more expensive the prices of many other essential items will almost inevitably go up because of higher production in industry and agriculture.

Prices of vegetable ghee, milk, atta, bakery products, soap, sugar have all shot up. With wages and salaries at a stagnant position, a wage earner has no relief. Minimum wages are being kept at low level. Debt servicing and imports on government accounts (items like wheat and defence equipment) have become costlier. The budget deficit will mount. The dollar is available for Rs. 32.40 while official rate is around Rs. 30. This means another devaluation is not far off.

More tough measures are in the offing through which electricity and natural gas tariffs as well as prices of wheat and vegetable ghee are to be increased in order to get an assistance package of around 1.2 billion dollars from the IMF and the World Bank. The IMF insisted upon the elimination of subsidy on wheat which is currently Rs. 3.0 billion.

The biggest rise will be in the electricity tariff. A 25 per cent across the board has been envisaged in the electricity of WAPDA. Similarly a 15 per cent increase in gas charges will be carried out in domestic consumers as the rates for commercial and industrial consumers had already been recently raised. Subsidies on wheat and ghee have been declining in the past. However, the total elimination of subsidies would substantially increase the prices of these two items.
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Author:Haidari, Iqbal
Publication:Economic Review
Article Type:Cover Story
Date:Sep 1, 1993
Words:4556
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