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Overview of Pakistan's economy and programme of reforms.

This paper gives an overview of Pakistan's economy and highlights the programme of economic reforms undertaken by the present Government in the last one year. Section I deals with past trends and current economic situation while Section II discusses the various elements of the economic reforms and policy changes, in particular those relating to exchange and payments, foreign investment, trade liberalization and privatization. Part III gives the outlook for future.

Economic Situation

In the past four and a half decades, Pakistan has come a long way by registering a sustained economic growth. Over these years, its Gross Domestic Product (GDP) in real terms increased by 6 times and per capita by three-fold. The economy has undergone a structural change and the share of manufacturing sector in the Gross Domestic Product has gone up from 8 per cent in 1949-50 to 17.6 per cent in 1990-91. Agricultural output has expanded by 3 to 4 per cent per annum while industrial production has maintained a growth trend of 8 to 10 per cent per annum. Not only have exports expanded manifold but their composition has also changed drastically with the share of manufactured exports going up to 59 per cent in 1990-91.

This persistent growth has been the main element of strength of the economy. There have been periodical fluctuations of course reflective of general economic climate and/or policies pursued by governments at the time. Thus in the sixties the GDP growth rate averaged around 7 per cent per annum as against 3 per cent in the fifties. Again, after registering a slower growth of around 4 per cent per annum between 1969-70 and 1976-77 it rose to 6.5 per cent per annum between 1977-78 and 1987-88. In 1988-89 and 1989-90, the growth rate slowed down to 4.7 per cent but revived to 5.6 per cent in 1990-91. Both agriculture and manufacturing sectors were responsible for this positive growth rate. A notable feature of the economy has been the relative stability in prices compared to many other developing countries where inflationary pressures have tended to be severe.

In the external sector the performance of exports and home remittances (again with some exception years like 1960-61, 1969-70, 1981-82 and 1984-85) was significant particularly from the early seventies. Since 1971-72 exports have increased by ten-fold (from $ 591 million in 1971-72 to $ 6114 million in 1990-91). Similarly home remittances peaked to $ 2886 million in 1982-83 from a modest level of $ 16 million in 1971-72. Since then they have gradually declined and stabilized at around $ 2 billion per annum.

This sustained economic growth which was characterized by good performance by agriculture, manufacturing, exports and home remittances and relative price stability has not been without weaknesses and imbalances. Some of these weaknesses were the result of development process itself while others were of structural and historical character such as high population growth of over 3 per cent. The national savings rate of 12 to 14 per cent and investment of 17 to 18 per cent of GNP have been low. Similarly budget deficits and difficult balance of payments situation have kept the economy under pressure. Slower growth in infrastructure and lagging education, health and other social facilities and regional disparities have also blurred the social contours of economic progress.

Current Situation

In 1990-91, despite Gulf crisis, GDP (fc) grew by 5.6 per cent compared with 4.6 per cent last year. This growth was largely contributed by agriculture and manufacturing sectors. Agriculture registered a growth of 5.1 per cent against 2.7 per cent during 1989-90. The growth of agriculture was mainly contributed by major crops which recorded a growth rate of 5.8 per cent against almost a zero growth rate of last year. Production of cotton at 9.6 million bales and wheat at 14.5 million tonnes was the all time record level achieved so far. Manufacturing sector's growth at 5.7 per cent was slightly higher than that of last year, with large scale manufacturing growing at 4.72 per cent and small scale at 8.4 per cent. The growth of services sector remained higher than the commodity producing sector. Services sector grew at 8.5 per cent against 4.9 per cent during 1989-90 while commodity producing sectors grew at 5.6 per cent against 4.5 per cent during 1989-90.

Another notable feature of fiscal year 1990-91 was the growth of exports (fob) which grew at 18.7 per cent as against 12.3 per cent rise in imports (fob), resulting in a slight improvement in the balance of trade. However, current account deficit increased to $ 2.1 billion against $ 1.9 billion in 1989-90. This increase emanated from an enhancement in the services account (net) and decline in the private transfers during the year. Overseas workers remittances fell by 4.8 per cent mainly due to lower remittances from Kuwait by $ 180 million. After adjusting for long term capital and IMF transactions etc., the year ended with a draw down of $ 6 million against build up of $ 377 million in the reserves, last year. This was caused largely by non-availability of IMF (SAF) loan during 1990-91 compared with $ 217 million in 1989-90. Inflation, monetary expansion and fiscal deficit continued to be the areas of weakness. The rate of inflation was 12.7 per cent as both the monetary and fiscal accounts remained under serious pressures due to additional demands created by the Gulf crisis.

For the current year (i.e. 1991-92), a strong stabilization programme has been put in place to achieve high growth with stability. A GDP (fc) growth target of 6.7 per cent has been set. This is planned to be achieved through 10.3 per cent growth in manufacturing and 4.3 per cent in agriculture. It is also planned to maintain the high growth rate in export of over 20 per cent. The current account deficit is proposed to be brought down from $ 2.1 billion or 4.6 per cent of GNP to $ 1.6 billion or 2.9 per cent of GNP. The overall fiscal deficit during the current year is targeted at 4.8 per cent of GDP and monetary expansion at 10.7 per cent. Efforts are being made through improved demand management and supply position to bring down the inflation rate to around 8 per cent.

The performance of the economy in the first quarter of the current year (i.e. July-Sept.) is satisfactory. During the period exports have increased by 20.4 per cent. Foreign exchange reserves have stabilized. Tax revenue collection have increased by 32.6 per cent. Monetary expansion has remained moderate. Consumer price index increased by 3.7 per cent as against 4.4 per cent in the corresponding period last year. Industrial and agricultural production have also expanded and the stock market has shown an upsurge. The main economic indicators are shown in Annex.

Reforms and Economic Policies

The present democratic government of the Islamic Jamhoori Ittehad which took over in the vortex of the Gulf Crisis is engaged in boldly grappling with the central issues that inhibit quick economic growth and impede wider spread of socio-economic benefits. A set of wide ranging reforms in key areas of economic policy has been designed. It aims at increasing national income by 7 per cent, industrial production by 12 per cent and exports by 20 per cent annually. The emphasis will be on rural industrialization and growth of infrastructure to facilitate economic development and the strategy will consist in lifting all holds that impede private sector participation in making the country self-reliant, which is the government's central goal. Broadly speaking the main planks of the long-term socio-economic strategy are: a) Gradually convert the economy from a relatively closed and inward looking to an open and outward looking one. b) Denationalize and privatize public enterprises and encourage private sector in areas hitherto reserved for the public sector. c) Deregulate the economy, promote market mechanism and create conditions conducive to rational and efficient allocation of resources. d) Develop physical and social infrastructure to support rapid growth and promote development of rural and backward areas. e) Correct macro economic imbalances, in particular fiscal and balance of payments. f) Create conditions conducive to rapid growth of export oriented industries as against import substitution ones. g) Decentralize and devolve authority from Federal to Provincial and local bodies. h) Improve quality of public services and make institutional arrangements in this regard. i) Increase literacy rate, improve quality of education and facilities for scientific and technical education. j) Provide primary health care, clean water and sanitation to all. Eliminate and control preventable diseases. k) Enlarge employment opportunities through accelerated economic activity dispersed in all parts of the country.

The focus of economic policies is on privatization and deregulation. The policy of deregulation and privatization is not confined to industrial sector alone but extends to other economic activities as well, like banking, trade, telecommunications, roads, shipping and aviation.

Industrial Investment

In the past trade and industrial policy was dominated by Governmental controls. Now all restrictions on industrial investment have been removed and a package of incentives was announced in December 1990. This includes, inter alia, 3 to 8 years' tax holiday; 50 to 100 per cent exemption from customs duty and surcharge on import of machinery; and 2 per cent concessional rate of import licence for industries to be established in rural areas.

Exchange and Payment Reforms

In the case of foreign exchange and payments system a bold step was taken in February 1991 by introducing reforms in exchange control regulations. The basic objectives of these reforms are to facilitate foreign investment, liberalize trade and other transactions and allow resident and non-resident Pakistanis and others to have freer access to foreign exchange. Through these reforms and the flexible exchange rate policy it is intended to make the Pakistan rupee a fully convertible currency in a short time. Some specific measures include.

Foreign Investment

a) No government approval is now required for foreign investment in industry (except for security and social reasons in very few industries). Purchase of shares of Pakistani companies by foreign investors would also not require prior approval. b) All restrictions have been removed on domestic borrowing by foreign owned firms for fixed investment. Those companies which export 50 per cent or more of their production can also borrow working capital from domestic credit institutions without any limit. Other foreign manufacturing companies can borrow working capital upto their equity. c) No permission of the Federal Government or State Bank of Pakistan (SBP) is required regarding the terms of foreign loans which are not guaranteed by the Government of Pakistan. d) The ceilings for the payment of royalty and technical fee have been abolished. e) Prior permission of State Bank of Pakistan is no longer required for issue and transfer of share certificates to the foreign investors (as well as to resident Pakistanis making investment in foreign exchange). f) Remittance of principal amount and dividends accruing to foreign investors is now allowed through authorized dealers, without prior permission of the State Bank of Pakistan (except for banks, insurance companies, foreign airlines and foreign shipping companies, which are subject to special procedures). g) Restrictions on the under-writing of shares by foreign banks working in Pakistan have been greatly liberalized: they can under-write shares up to 30 per cent of the issue of their subscribed capital i.e. the same basis as allowed to Pakistani banks.

Other Related Exchange And Payments Reforms

a) Non-residents and foreign investors can invest in the share capital of companies through the stock exchange by payment in foreign exchange. Remittance of principal, and dividends against such shares is allowed without any prior permission. b) Government has introduced dollar-denominated bearer certificates. They can be purchased by any resident Pakistani, non-resident Pakistani and foreign investors against payment in foreign exchange. These dollar-denominated certificates can be encashed in foreign or local currency. Profits will also be payable in foreign exchange. c) Resident Pakistanis, including firms and companies, can now maintain foreign currency accounts on the same basis as non-residents. Limit on the amounts allowed to be kept in bank accounts abroad by residents have been removed. Foreign and Pakistani nationals are now allowed to operate their non-resident rupee accounts without permission of the State Bank. Foreign currency account holders can obtain rupee loans on the collateral of foreign currency account balance. d) Now there is no restriction on resident Pakistani, non-resident Pakistani or a foreigner on bringing in, possessing or taking out foreign currency abroad. The authorized dealer will reconvert rupees into foreign exchange on production of receipt of encashment of foreign currency without any limit. e) A host of other restrictions on foreign payments have been removed e.g., for foreign advertisement, trade fairs and exhibitions, education, professional institutions, journalists fees etc.

Trade Liberalization and Export Promotion

The Government has also taken a number of steps to promote exports and liberalize trade. They include: a) The schemes for duty drawback, bonded duty free imports for export processing and export finance credit have been streamlined. The improvements include automatic payment of 80 per cent of the duty drawback within three days, with the remaining amount paid, after scrutiny, within one week. b) The scheme for Export Processing Units (EPUs) meant for higher value added manufactures which allows duty-free imports of machinery and inputs has been made more attractive by exempting the EPUs from the import licence fee of 6 per cent. Also, the list of industries covered by the scheme has been expanded. b) The income tax rebate scheme for exporters has been overhauled, with higher value added items being given higher rebates. c) Foreign companies have been allowed to undertake export trade and the public sector monopoly in the export of rice and cotton has been abolished. d) A number of measures have been initiated to improve infrastructural support for exports. They include priority to exporters in the provision of electricity and new electric connections, deregulating charter of cargo flights, improved port facilities including cooling sheds for perishable exports. e) On the import front, licensing has been eliminated except for a relatively small number of items on a negative and a restricted list, which are being reduced further. f) The maximum tariff rate has been reduced from 125 per cent to 90 per cent and further reductions are planned. Non-tariff barriers are being dismantled, except where reasons of security, health, religion and reciprocity do not permit this. The process is to be completed in the next import policy.


The privatization and disinvestment programme includes the transfer of public sector industries and financial institutions and supply of gas and electricity to private control, banking and financial institutional reforms and establishment of banks in the private sector. A Deregulation and Disinvestment Commission was set up in April 1991 which has finalized its recommendations and these are in their first phase of implementation. The Bank Nationalization Act has been amended to set up banks in private sector. The Muslim Commercial Bank and the Allied Bank have been privatized and bids for another two leading banks and financial institutions have been invited. Allied Bank has been handed over to the Allied Management Group representing the management and employees of the bank which is a bold and encouraging step.

The privatization of public sector units is also in process and 235 bids received for 82 units have been scrutinized and more than 30 units are likely to be privatized in the first phase. In the telecommunications sector Telephone & Telegraph Department has already been converted into a corporation. As a first step towards privatization consultants are being appointed for recommending regulatory framework and preparing financial packaging. One of the biggest foreign investment in the power sector perhaps anywhere in the developing countries is the 1.5 billion dollars investment in a power generation project at Hub.

Social Sectors

Development of the social sectors, in particular, education, health and sanitation was not given due attention in the past. BY handing over some of the activities of the physical infrastructure building to the private sector funds would be available for diversion to social sectors. Moreover, the 1991-92 Budget has initiated a matching grant scheme for opening schools and hospitals. This scheme may have larger impact with smaller resources, as against the earlier situation when large resource spending had a smaller impact. A social sector action plan is also being prepared which will be launched in early 1992.

Future Outlook

One year is too short a period to assess fully the impact of reforms and policy changes undertaken by the Government. However, there is enough evidence to show that we are moving on the right path. The growth rate of GDP (fc) at 5.6 per cent in 1990-91 was much higher than 4.6 per cent recorded in the earlier year. Information available for the first quarter of the current year (1991-92) show that the target for GDP (fc) growth of 6.7 per cent will be reached. Similarly other macro-economic elements seem to be on target. It is expected that during the year the rate of inflation will come down from 12.6 per cent last year to 8 per cent, the current account deficit from $ 2.1 billion to $ 1.7 billion and the fiscal deficit to 5 per cent of GDP. The policy changes and economic reforms will accelerate growth, mobilize greater savings and investment, ensure economic stability and expand job opportunities and social services.
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Author:Alimullah, Qazi M.
Publication:Economic Review
Date:Jan 1, 1992
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