Economic growth attracting more investment

SHABBIR KAZMI, Special Correspondent
Aug 21 - Aug 27, 2006

Despite an extraordinary surge in global oil prices and a devastating earthquake less than a year ago, Pakistan's economy exhibited its resilience once again. The country registered 6.6% economic growth and investment rate reached a new high at 20% of gross domestic product (GDP). During the last financial year real per capita GDP grew by 4.7% and per capita income in current dollar terms was up by 14.2 per cent to $847. According to a World Bank report released in 2005, Pakistan was the top reformer in the region and the number 10 reformer globally.

The country has also been reported to be one of the emerging economies among growing nations such as China, India and Brazil. At purchasing power parity, Pakistan's GDP in 2005 was estimated at about US$ 385 billion larger than that of Saudi Arabia, but slightly smaller than the GDP of the Philippines. Pakistan with the world's sixth-largest population has been enjoying positive growth rate since 1951. The economy averaged an impressive growth rate of 6% per annum during the 1980s and early 1990s.

Under the current regime wide-ranging reforms have accelerated country's economic growth. Manufacturing and financial services sectors have experienced rapid growth. One of the biggest achievements has been substantial increase in foreign exchange reserves of the country. In May 2006, Pakistan's foreign exchange reserves were more than $13 billion. According to the State Bank of Pakistan (SBP), country's long-term growth prospects remain intact, with real GDP growth exceeding 6% for the third successive year. The country has embarked upon reform agenda based on deregulation, liberalization and privatization.

Pakistan's real wealth is its natural resources, the most important being land and water. About 25% of Pakistan's total land area is under cultivation. It is irrigated by one of the largest irrigation systems in the world. Agriculture accounts for about 23% of GDP and employs about 44% of the labour force. In 2005, Pakistan produced 21.6 million tons wheat, more than the total quantity of wheat produced by Africa and nearly as much the quantity produced by South America. Pakistan's industrial sector accounts for another 24% of GDP. Cotton textiles and clothing constitute the largest part of Pakistan's industries, also contributing about 64% to total exports. Other major industries include cement, fertilizer, edible oil, sugar, steel, tobacco, chemicals, machinery and food processing.

Pakistan had faced debt servicing problem in nineties and at times default looked imminent. However, after the present economic managers came up with 'home grown' plan the situation has completely reversed. Now the lenders and donors are willing to extend credit/soft term loans. The World Bank has expressed intention to lend up to US$ 6.5 billion under a new four-year aid strategy aimed largely at beefing up the country's infrastructure. Similarly the Asian Development Bank is willing to commit about US$ 4 billion development assistance. Japan will also provide half a billion dollars annual economic aid to Pakistan.

President Pervez Musharraf has been emphasizing Pakistan's geo-strategic location, at the heart of critical regions, including Western parts of China, Central Asian states, Afghanistan, Iran, India and the oil-rich Gulf countries. He strongly believes that Pakistan has the potential to become the trade and energy corridor for China and landlocked Central Asian countries.

The work is being done to improve Pakistan-China inter-connectivity in terms of energy and trade. Improvement in Korakoram Highway, development of railway link and gas and oil pipeline linkages and even fibre optics connectivity along the KKH are some of the strategic plans. Strengthening of a quadrilateral arrangement between Pakistan, China, Kazakhstan and Kyrgyzstan can play important role in achieving mutually beneficial economic growth.

The State Bank of Pakistan (SBP) has warned that in the fiscal year 2006-07, there is a clear need for corrective policy measures to protect long-term growth prospects of Pakistan's economy. The emerging macroeconomic imbalance risks included the possibility of an increase in inflationary pressures, gradual weakness in fiscal indicators, and the widening of the current account deficit. The SBP also revealed that the pressure on the country's external account had increased substantially during the last fiscal year because of the sharp rise in current account deficit.

The current account deficit had swollen to a historic peak at the close of last financial year. As a percentage of gross domestic product (GDP), the annual current account deficit is estimated to have risen from 1.4% of GDP in the fiscal 2004-05 to 3.2% of GDP in the fiscal 2005-06, indicating that a continued weakening could raise grave risks to macroeconomic stability achieved in recent past. The major share of the trade imbalance came from sharply rising oil import bills due to high oil prices in the international markets and from huge machinery imports. A tight monetary stance since April 2005, supplemented by administrative measures to improve supply of key commodities, contributed to a significant decline in the volatility of inflation. It also helped in keeping the average inflation rate within the stipulated target.

The monetary measures taken by the central bank and other measures were much needed to correct the imbalances.

The government aims at boosting Pakistan's exports to US$ 40 billion over the next five years. A decision has been taken to enhance exports from 13% of GDP to 15% over the next five years. The economic managers are currently busy in preparing blueprints to achieve the target. The proposed plan would be approved by Prime Minister Shaukat Aziz, who has already held the first meeting with all stakeholders. These included private sector representatives, exporters, ministries and other departments concerned. The objective was to come up with a view to working out ģcertain practical export planī. In the next few meetings with stakeholders, a number of new products would be identified for value addition and ultimately for the exports.

The economic managers are conscious of the fact that without identifying new products the country cannot achieve US$ 40 billion target over the next five years. The government is also studying the potential and strength of the infrastructure, technologies and manpower to ensure achieving the stipulated target.

The government is considering extending further incentives and concessions for substantially enhancing country's exports. Since the private sector has become the real engine of growth, the government aims to facilitate it in the most appropriate manner. The government is also cognizant of the various weaknesses and constraints which are hurdle in increasing country's exports significantly.

Pakistan has to compete in the global markets by exporting quality products and achieving this will not be possible without qualifying to the international standards. In the past industrial sector was suffering from various structural problems resulting in slow growth rate of output and exports, low levels of investment, high concentration of manufacturing industries, technical inefficiency, poor quality of products, low level of research and development activities, making Pakistani products uncompetitive in the world markets.

It may be of some interest to refer to 'strategic directions to achieve vision 2030' prepared by the Planning Commission. According to this the share of medium and high technology in overall value-added manufacturing sector is approximately 35% for Pakistan compared with around 58% for India and China, 61% for Korea and 65% for Malaysia. The share of high technology goods in manufactured exports for Pakistan remains low at one percent compared with 5% for India, 23% for China, 32% for Korea and 58% for Malaysia.

The vision aims at developing strategy to usher in an export-led industrial growth and studying threats to domestic businesses and industry from the point of identifying appropriate restructuring and business improvement required. There are also plans to examine the incentives and policies needed for pioneering industries, whether they are new products, processes or technologies, so that the range of activities can be expanded. However, these will be different from the incentives offered to small and medium enterprises.

It is widely claimed that telecom sector has emerged as a success story in Pakistan in the recent times. It is important to assess whether telecom is really a success story or just bashing about it. Assuming that it is a success the critics must review the factors contributing to the success and lessons learned may also be replicated in other sectors of the economy. Some of the critics may not believe the figures released by the government and question the authenticity. It is often because one does see what is being claimed. However, in case of telecom sector growth one has no option but to believe the figures pertaining to the telecom developments in Pakistan.

At present nearly every 5th Pakistani has a mobile phone, which was considered a rich man's prerogative a few years back. Teledensity (telecom access per inhabitants) is a crude method to gauge the telecom access in any country. Pakistan seems to be competing with countries, which are much ahead of it in terms of economic development, i.e. Malaysia and Singapore. It may be rightly claimed that deregulation has usher in a new era. The fruits of deregulation and liberalization policies in the telecom sector are now being enjoyed by masses, evident form increased consumer choices, greater access, value added services and affordable prices.

Telecom access, which was merely 4% in 2002, stands at above 23% in 2006. Today mobile subscriber base has reached 30 million whereas two million new connections on average are added per month in total subscriber base. Mobile services have become more affordable for common man due to increased competition and reduced prices. Similarly, services like Wireless Local Loop and broadband are becoming popular in the country. Fixed line subscribers are also increasing and tariffs of all types of telecom services have been drastically reduced.

The tremendous growth in telecom sector has spill-over effects on all the sectors of the economy. The sector has been contributing largely to the national development and the share of telecom in GDP has been on the rise. Telecom sector contribution to national exchequer is growing over the last few years. This contribution includes revenue generated by PTA in the form of regulatory fees from the licensees, activation tax that is paid on activation of every mobile connection and GST/CED that is collected on provision of telecom services. In addition income tax and custom duty on telecom equipment is also part of revenues that government collects from telecom sector.


(Rs. Million)

2001-02 38 1,200 8,810 . . 10,048
2002-03 470 1,910 11,526 15,573 147 29,626
2003-04 694 4,020 12,119 21,009 555 38,397
2004-05 17,725 7,577 20,397 19,799 1,627 67,126
2005-06* 15,034 10,510 25,178 20,854 696 72,272
* Estimates based on actual data of 9 months

There is need to consider factors behind the success story of Pakistan telecom sector. There is also need to explore if the policy can be replicated in sectors of the economy. Government issued telecom deregulation policy on 13th July 2003 which ended the monopoly of PTCL and allowed competitors to enter in the market. Cellular Mobile Policy was another contributing factor. Government also issued Broadband Policy in year 2004.

Another important factor contributing to the telecom success story is the presence of a strong and effective regulator. The government withstanding its commitment, ģIt is not the business of government to do business but its job is only to regulate the business". The government is also abstaining from politicizing the Regulator and avoiding the usual practice of overcrowding the public sector organizations.

Third important reason for success of telecom has been documentation of all the rules, procedure and methods for awarding of licenses and their publicity through media, seminars and other sources. The fourth important factor is the transparency in implementing the policies. Last but not least the important factor contributing to the success is the strong economic indicators of Pakistan economy, which signaled strongly to foreign investors for making investment in Pakistan.