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Pakistan's economy: facing new challenges.

* GPD to increase by 6.5 per cent against actual

growth of 4.7 per cent.

* Devaluation to aggravate the inflationary pressure.

* Population growth to come down 2.7 per cent.

POPULATION

Population growth according to Pakistan Economic Survey 1994-95 stood at 2.86 per cent per annum. A well conceived strategy carried out during the last two years is likely to reduce the population growth to 2.7 per cent by the end 1997-98 by preventing 4.661 million births and offering family planning services to 20.904 million acceptors. About Rs. 310 million will be spent annually on organising these facilities will hope reduce unemployment meeting the skilled workers requirements of domestic market, besides facilitating export of manpower.

GDP

The real GDP growth rate in 1995-96 will be at 6.5 percent against actual growth rate of 4.7 per cent in 1994-95. To achieve the growth target it is expected that cotton output would recover to 9.5 million bales in 1995-96. In the industrial sector sick units would be revived while textile industry would be on the track as a result of textile package issued on October 2, 1995.

State Bank of Pakistan in its Annual Report 1994-95 expressed concern over the rate of national savings which is the lowest among the group developing countries and excessive public sector borrowings which has swelled the inflation rate to 12.9 per cent. The gross domestic product (GDP) though slowed an improvement but could not meet the target of 6.9 per cent. The improvement was mainly attributed to an expansion in agricultural output from 2.9 per cent in 1993-94 to 4.9 per cent in 1994-95.

Real GDP Growth at

Constant Factor Cost

 Growth
Year Rates

1990-91 5.6%
1991-92 7.7%
1992-93 2.3%
1993-94 3.8%
1994-95 4.7%
1995-96 6.5%


Source: State Bank Annual

Report, 1995-96

AGRICULTURE

Cotton production is estimated at 9.5 million bales this year. According to Federal Minister for Food and Agriculture and Livestock Mr. Yusuf Talpur cotton was grown over an area of 6.5 million acres in the country which was 7 to 9 percent higher than last year. Recent rains have caused negligible damage to the cotton crop. Meanwhile Pakistan and Turkmenistan concluded a deal to expand-cotton trade during President Farooq Leghari's visit to Turkmenistan. Production target of 4.0 million tonnes of rice may not be attained. Actual yield of current rice harvest would hardly exceed 3.5 million tonnes. Wheat crop is expected to perform well. It is expected that wheat crop would yield 12 million tonnes against the previous production figures of 16 million tonnes. Sugarcane crop is around 45 million tonnes despite delay in the commencement of crushing season.

The production of pulses and other minor crops is expected to be good on rains. The sources said that the crop yield growth rate of the pulse crop is expected to be over five per cent against 4.2 per cent during last year. Furthermore, livestock had experienced a growth rate of 5.9 per cent while the fisheries production had stayed at around four per cent.

Agriculture sector, has always been a key factor in evaluation of the financial position of the country. During the current fiscal year the agriculture sector is estimated to remain around 25 per cent of the GDP against 24 per cent in the preceding year. During the decades of 50s and 60s the agriculture sector contributed 60 to 70 per cent of the national income.

MANUFACTURING

During 1995-96, the value added in manufacturing sector is expected to increase by 5.8 per cent, with large scale manufacturing contributing an increase of 6.0 percent. To achieve this growth, efforts will be made during the year to remove constraints faced by this sector during 1994-95.

A Rs. 4 billion modern cement plant claimed to be the biggest in Pakistan with 4,000 tons per day capacity, is expected to commence commercial production in March next year. The Lucky Cement plant being built with machinery from China and Europe, construction of which is progressing ahead of schedule, is fast taking shape with stacks and kilns rising along a hillside in Pezu near Bannu in Dera Ismail Khan.

Pakistan's entry in a new era of indigenous textile machinery manufacturing confirmed when the first shuttleless loom manufactured locally by M.R. Group of Industries in technical collaboration with South Korea is put on display.

Plans are underway to set-up a chain of mini-sugar mills all over the country with a view to solving the frequent sugar crises plaguing the country recently. Big landowners are being advised to set up mini-mills of their own and give a fair competition to the existing sugar mills, which are creating problems for the consumers and the growers simultaneously.

Textile Industry

It is for quite some time that textile industry is sick. According to APTMA 30 per cent spindles and 45% rotors are presently closed. A new textile package has been announced by Commerce Minister on October 2, 1995. It is felt that incentives announced will only revive the industry for a while. Family ownership is one of the biggest hurdles in the development of a true corporate culture in the textile industry. A further devaluation of Pakistani rupee is likely to take place on the recommendation of IMF.

Cement Industry

Fourteen new cement manufacturing units with a total capacity of 13.1 million tonnes per annum are at various stages of implementation and some are likely to go into production by the year 2,000 AD. Besides, five existing units are under the process of expansion to enhancing their production capacity. After commissioning of the new units the number of cement manufacturing plants in the country will increase from the 23 existing units to 37 and the production capacity will increase, from 9.7 million tonnes, to 22.5 million tonnes.

Expansion of existing units will give another 8.23 million tonnes making a total of 31.0 million tonnes. Cement demand is growing around 8 per cent per annum. Demand will be about 15 million tonnes by the year 1998. The projection would also change should a few major projects like Ghazi Barotha DamGwadar Port Motorway Hydel/Thermal and infrastructure projects come on stream.

INFLATION

The State Bank of Pakistan has blamed the higher than targeted growth in money supply for the hike in inflation rate (CPI) to 12.9 per cent as compared to the budgetary estimate of 7 per cent as compared to the budgetary estimate of 7 per cent. The SBP Annual Report says in 1994-95 the inflation rate was targeted at 7 per cent which was consistent with the targets of growth in real GDP of 6.9 per cent and increase in money supply of 11.8 per cent. However, a lower than targeted growth in GDP, and higher than targeted increase in money supply led to a widening of the inflationary gap, defined as money supply growth less real GDP growth.

Credit

The National Credit Consultative Council (NCCC) allowed 15 per cent expansion in domestic credit and 13 per cent in monetary assets. A task force has been set up for the production loans for agriculture. So far the banks and DFIs have failed to recover the stock-up Rs. 68 billion from the defaulters. Average lending rates by banks stood at 16.76 per cent in July 1995 as compared with 16.12 per cent a year ago.

LABOUR

Labour policy has further been delayed. The Task Force on Labour has submitted its recommendations almost a year ago. Delay in announcement of a clear cut labour policy in conformity with much publicised agenda of change is intriguing. Labour force participation rate is estimated at around 28 percent which places total labour force at 35.7 million as on 1st January, 1995. The employed labour force is estimated at about 34 million of which 9.8 million is in urban and 24.2 million in rural areas. The open unemployment rate is estimated at 4.74 percent in 1994-95 which is less than 6.28 per cent in 1990-91 and 5.85 in 1991-92.

EXPORTS

Pakistan export target for the current year is $9.2 billion against the last year export volume of $8.86 billion. The target is not difficult to achieve. However, in the first quarter of the financial year has shown the decline of five per cent. A new incentive package has been given to textile industry. It is to be hoped that textile industry would give better performance at the end of the year. To boost export Ahmed Mukhtar. Federal Commerce Minister said that rupee would be depreciated by at least 3 per cent at the end of the year. The rupee has been depreciated by 65 paisa against US dollar since July 1. Apparently the central bank is implementing a planned devaluation policy. However, this policy has so far failed to boost exports. Exports of cotton and cotton products increased by 21 per cent in 1994-95 by earning an amount of Rs. 4623.6 million dollars in 1993-94. Rice recorded a significant increase and its export went up by 87.4 percent in 1994-95. The rice export earned an amount 455.8 million dollars.

FOREIGN AID

IMF conditionalities for the current financial year are to reduce the budget deficit to four per cent of GDP bringing down inflation to 7 per cent, increase economic growth to 6.5 per cent and curtail the economic bank borrowing to Rs. 30 billion through financial discipline both at the level of Federal and provincial governments and public sector corporations. IMF officials have emphasised the vitality of further devaluation of Pak rupee for increase in Pakistan exports.

They also stressed upon the Government of Pakistan the need to take immediate steps to cut short its mounting non-development expenditures causing ascalation in budgetary deficit every year. They have also proposed early privatisation of different state-owned enterprises like Pakistan Steel, Railways and Water and Power Development Authority.

In addition to that World Bank also threatened that if their suggested steps for the stability of the economy were not taken immediately then it would become difficult for the international donor agencies to continue their aid programmes for Pakistan from the next financial year 1995-96 besides disbursement of aid commitments for the development projects included in the 8th Five Year Plan. And due to failure of the Government of Pakistan regarding enforcement of IMF proposals disbursement of over 300 million dollars was suspended by the donor agency.

INCENTIVES

The Federal Government has prepared a special package of incentives for investors in agri-food industries all over the country. The Board of Investment (Bol) has prepared a list of eight industries that can be set up at various places. Foreign and local investors will be welcome to set up these industries.

The project selected for investment are: Cattle and sheep farming for the production and processing of meat, milk, and related dairy products, processing, canning, packing, grading and preservation of fruits and vegetables; inland farming and preservation of fish, particularly in water-logged and saline areas; production and multiplication of high yielding seeds; edible oil extraction; poultry farming, poultry processing and poultry feed; cattle feed and milk processing.

Incentives and concessions include the import of plant and machinery not manufactured locally subject to Customs duty at 10 percent with complete exemption from sales tax. Income tax holiday to entrepreneurs under this policy for a period of three to eight years depending upon the location of the enterprise.

The capital structure of projects in agri-food industry will be entitled to debt-equity ratio of 70-30. Projects will be entitled to financing from all banks and development finance institutions (DFIs).

The project shall enjoy 50 per cent exemption from the central excise duty for five years from the date of commencement of commercial production. Expatriate personnel of the units will be entitled to import their personal effect, excluding motorcycles, free of duty and taxes in accordance with the personal baggage "Transfer of Residence Rules". They will also be allowed to import food items and other consumables without any duty and taxes subject to a maximum limit of 2,000 dollars per person per year.

Import of breeding stock will be allowed subject to an import duty of 10 per cent. Locally manufactured machinery will be provided credits under the LMM credit line. The project may be exempted from provincial and municipal taxes for five years from the date of commencement of commercial production. Parts and components upto five per cent of initial C&F value of imported plant and equipment shall be imported at 10 per cent duty if imported together with the plant.

PRIVATISATION

Prime Minister Benazir Bhutto reportedly given a deadline to the Privatization Commission to handover the management of United Bank limited to the Private Sector before the end of the year. Credit Lyonnaise Securities Asia (CLSA), financial advisor for the privatization of United Bank, apprehends that the government will not be able to sell the Bank on an 'as is where is basis' as if faces a minimum capitals shortfall of Rs. 17.3 billion. United Bank has negative net worth because of shortfall of approximately Rs.15.5 billion in under provisioning in relation to the State Bank's prudential regulations. it is being feared that the government will be left with "no buyers" for the 26 per cent stake it would offer to a prospective strategic buyer if it goes ahead with the idea of privatization without bridging the capital shortfall.

Meanwhile, the Privatisation Commission has so far identified 51 industrial units for handing over to the private sector. Of these, 28 units have so far been put up for bidding. Before June 1995, two units Nowshera PVC (Rs.20.40 million) and Swat Elutraition (Rs. 12.99 million) were transferred; and between June - six units were transferred while four units are under process of transfer. The units transferred are:

Units Transferred
 (Rs in million)
Name cost

Swat Ceramics 24.08
Makerwal Collieries 5.00
Cotton Ginning Factory 1.75
Mashriq Peshawar 26.60
Ittehad Chemicals 180.90
Pak By-Oils 27.25

Units Under Process

National Petrocarbon 18.91
Ravi Engineering 59.00
General Refractories 35.00
Textile Machinery Co. 11.52


Source: Business Recorder, 06.10.1995

INVESTMENT

Pakistan is certain to get an investment of $5.5 billion in the energy sector by June 1996. Of this, $4 billion will be in power sector, $800 million in refinery oil pipeline and storage and the remaining in transmission lines.

It is relevant to mention here that the funding criteria agreed under the Private Sector Energy Development Project-I (PSEDPI) have been fine-tuned as follows:

* Total cost includes the costs of goods

and services and other provisions

necessary to mobilise commercial

financing under limited recourse.

* The maximum debt/equity ratio for

sub-project companies would be 80.20

though higher equity ratios would be

preferred.

* The normal limit of its subordinate

debt will be 30 per cent of the overall

costs. Although, in exceptional cases,

PSEDF could finance up to 40 per

cent of the overall cost with special

concurrence from the World Bank.

* Preference would be given to

investments requiring minimum

support from PSEDP.

* The commercial debt financing

required under limited resources

should be at least 40 per cent of the

overall financing. It has been learnt,

reliably, that in the making of such

decisions the major foreign donors in

the sector played an important role.

While talking on the base tariff issue, which is considered to be one of the debatable issues in the government's current energy policy, sources were of the view that there was nothing wrong in the base tariff of c6.5/kWh available to new power generation projects under the new energy policy potentially offered competent operators attractive rates of return (IRR).

But, the sources expressed concern regarding the risks of lower or no return in the event their plants failed to operate as initially agreed. In this regard foreign investors have been assured of full reparation and rupee convertibility of dividends, principal and expenses.

Pakistan is also in need of more foreign capital in the country's power sector. it needs to develop about 7,000 megawatts (MW) of capacity by 1998 to meet shortages. This is estimated to cost about Rs. 329 billion (US$10.3 billion). Of this amount, public funds will contribute about US$8.6 billion and the rest has to come from the private sector. Pakistan has begun streamlining policies to attract more foreign investment in their power sectors.

"To sustain the development and the shortage is about 2000 MW of peak power. This shortage has cost Pakistan, between $5.0 and $12 billion annually in direct and indirect economic losses. By 2018, Pakistan's installed capacity needs to increase to 54,000 megawatt (MW) from 11,500 MW now. The government's preference is for investments in the under developed hydroelectric power sector which has a potential of 30,000 MW capacity, which is yet to be exploited to optimum levels. Pakistan has 31 projects worth over $7.6 billion "under active consideration".

Several lucrative incentives and concessions are available to the investors in the mineral sector. Income of an industrial undertaking set up between 1 st July 1981 and June 1998 engaged exclusively in the exploration and extraction of mineral deposits (other than petroleum) is exempt from income tax for a period of five years from commencement of its commercial production.

The mining equipment and machinery is also exempt from customs duty in excess of 25 per cent ad valorem and whole of sales tax. The main minerals being produced are coal, natural gas, crude oil, marble, china clay, chromite, dolomite, gypsum, limestone, magnesite, sulphur, etc. The aim of the policy is to attract foreign capital in the country to explore the mineral wealth that Pakistan is rich in. There are huge resources of gold, copper, zinc, lead and tin in Pakistan which could not be explored because of lack of fund. Mineral exploration is a costly business and countries such as Pakistan cannot undertake the task on its own.

NEW PROJECTS

Parco Refinery

PARCO, a joint venture between Pakistan and Abu Dhabi, is the biggest and most modern refinery. The project after completion will meet the petroleum requirements of Punjab and NWFP which constitute 60 per cent of the total country's dependence on expensive imported petroleum products. The capacity of the refinery is 84,000 barrels per day and the total cost is $760 million. It will reduce the country's dependence on expensive imported petroleum products and would help save $100 million per annum of much needed foreign exchange.

Copper Refinery

The government is considering to set up the first-ever copper refinery at Chagai, Balochistan, with the assistance of China. The feasibility report of this refinery has been prepared by the Metallurgical Construction Company of China which is already working on Saindak Copper-Gold Project. The feasibility report estimated that the refinery would cost around $10 million. There finery will be used to produce blister copper locally. This refinery is part of the Saindak Copper-Gold Project, which is currently in progress. The Saindak Copper-Gold Project has been delayed till November 1995. The project was to commence commercial production by August 1995.

Al-Noor Fertilizer

Project

This project is coming up at Dhabeji 50 km from Karachi for the manufacture of urea and DAP, the two main types of fertilizers used in Pakistan. The designed capacity for urea will be 396,000 tonnes per annum (tpa) while that of DAP will be 390,000(tpa). Technically the project strikes an optimal balance between the production of urea and DAP while aiming to fully exploit the synergies in marketing the two products. The estimated total project cost is Rs. 6.8 billion which includes foreign currency component of Rs. 3.9 billion. Anfil has acquired 750 acres of land for the project on the main National Highway. The site has all the necessary infrastructure for heavy industry. Port Qasim Authority has also allocated two acres of land to the project for building a phosphoric acid terminal.

ANZ Grindlays Bank has arranged 19.24 million pound sterling ($30m) from UK Export Credit Agency (ECGD) as support financing. Besides ECGD, the foreign currency component for the $200 million urea and DAP fertilizer project is also being financed by the Manila based Asian Development Bank, Nisho Iwai of Japan and Supplier credit from OPZ Ukraine.

135MW Power Plant

The underwriting agreement for setting up of a 135MW power plant was signed between the Islamic Investment Company of the Gulf and Japan Power Generation Limited of Pakistan. The total cost of the project is expected to be $122 million and the equity-debt ratio shall be 33:67. The project is designed with a gross capacity of 135MW, and shall provide 107 MW net dependable capacity to Wapda by Japan Power Generation Ltd. Furnace oil required for the project shall be supplied by Pakistan State Oil Company Ltd. (PSO) for the project life under the Fuel Supply Agreement (FSA) executed with PSO.

The project is located in the close vicinity of Jia-Begga Railway Station off Lahore-Raiwind Road at about 18 km from Lahore. The project shall be equipped with the machinery manufactured by the world renowned Mitsubishi Heavy Industries of Japan. The machinery comprises 24 No. D/GT sets of 5.65MW capacity each. The generators are operated through V-type four stroke reciprocating 18-cylinder diesel engines working on the compression ignition principle. This technology has been tried and tested for over 60 years in power generation system.

Mineral Project

Leading American companies Trans Continental Development Partners (TDP) American Travitine and Crown Resources Corporation have started extensive exploration for gold, copper and granite deposits in Balochistan. These US firms plan to commence open pit mining of grantie, early Spring. An accord on worldwide distribution and marketing of Balochistan high quality granite had already been signed. Consortium is also involved in economic exploration and correct utilisation of gold and copper deposits in Balochistan.

OIL

All is set for the establishment of an oil refinery in Sindh to refine Badin crude oil, part of which at present is being exported as there is no refining facility available in the country to process it because of its high wax content. The Board of Investment has prepared a feasibility report for the oil refining industry in Pakistan. One refinery for Badin oil may shortly be set up either at Badin or Port Qasim. Korean Investment is expected for the establishment of the proposed refinery in Sindh with a capacity of 4.5 million tonnes per annum

In Badin block, just one oil company has discovered oil in 62 wells whose total production comes to more than 18,000 barrels per day (BPD). Total production of Badin crude at present is about 30,000 BPD. But most of this crude oil is lying unutilised and dormant awaiting the establishment of a new refinery, says the Bol study. The country's total production of crude oil is about 64,000 BPD, out of which about 34,000 BPD of waxy crude oil is produced in Badin. The two refineries in Karachi-the National Refinery and Pakistan Refinery are refining some of the waxy crude after mixing it with the Arabian crude. The remaining Sindh crude at present is exported to China and other countries.

According to the study conducted by the Board of Investment, the three refineries operating at present can only meet 50 per cent of petroleum products demand of the country. Fifty per cent of the machinery of the existing plants is more than 25 years old and needs to be gradually replaced or modernised. Therefore, additional refining capacity needs to be created without any loss of time.

The total refining capacity in Pakistan has been stagnant around 140,000 barrels per day. This refining is done by National Refinery, Pakistan Refinery and Attock Oil Refinery. The latest government statistics indicate that the oil import bill is well beyond $1,578 million per annum. It is expected to increase to $2,300 million by the end of the current century. It is learnt that one more oil refinery with the capacity of six million tons will be set up in Balochistan with financial assistance from Kuwait, beside the one which is going to be built by Pak-Arab Refinery (Parco) near Multan.

RUPEE PARITY

Foreign exchange reserves have plunged by more than a billion dollars as on September 30, 1995 to $1600 million as compared to $2.70 billion as on June 30, 1995. On the capital account side the flow of funds from the IMF has stopped abruptly. Rupee is going down the current rate being 1$=34.41 (after devaluation on October 28, 1995). The July-August trade gap widened to a provisional $608 million from $307 million a year earlier. September trade figures are expected next week. The monthly deficit rose to a provisional $342 million in August, from $297 million in July and $ 189 million in August 1994, according to the Federal Bureau of Statistics.

The present downward adjustment by the Central Bank, was only to attract foreign buyers for exports. But this step would hardly serve the purpose because the devaluation of the Indian currency is greater than of the Pak rupee. Indian rupee parity is around Rs. 36 against Pakistan around 34.41.

Rupee is still going down, because the G-7 has decided to strengthen the dollar versus the other European currency units. This would also affect our market because the strength of the dollar had always affected our currency. The devaluation could only be exploited if Pakistani exporters explore new markets in Europe. Otherwise it may bring a flood of inflation in the country.

According to experts "Devaluation worked when there was a fixed exchange rate and no other way of depreciation". However, in the presence of a market system linking all the currencies' devaluation is an outdated instrument.

Since Pakistan devalued the rupee in 1993, exports have been down, the exact opposite of what should have been the case. That the country's exports failed to pick up despite the 8 per cent devaluation announced by the Moeen Qureshi government indicates that the instrument is no more workable. The orthodox wisdom that macro-economic stability comes first does not hold grounds any more. It has to be the other way around. Only a growing economy can think of the stability that the IMF and the World Bank often refer to. Exchange rate like many other problems is the symptom of a disease which is the lack of economic growth. Devaluation may provide a symptomatic relief-even that is doubtful-it cannot cure the disease.

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Title Annotation:Economic Policy and Planning
Author:Haidari, Iqbal
Publication:Economic Review
Article Type:Cover Story
Date:Oct 1, 1995
Words:4474
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