Oct 08 - 21, 2007

Service sector has been playing a vital role in the growth of Pakistan's economy since last few years. Economic significance of this sector in the country's economy is that it contributes 53.3% to the Gross Domestic Product (GDP) and 3/5th to the real GDP growth of 7% in the fiscal year ended June 30, 2007. Services sector as a whole contributed almost 60% (or 4.2% points) in the strong economic growth of 2006-07. It primarily consists of transport, storage and communications, wholesale and retail trade, finance and insurance, ownership of dwellings, public administration and defense, and community and social services. Government of Pakistan (GOP) has set the growth target for this sector as 7.1% for the fiscal year 2007-08 while it grew by 8.5% in 2004-05, by 9.6% in 2005-06 and by 8.0% in 2006-07 which is primarily attributable to strong growth in the finance and insurance sector, better performance of wholesale and retail trade, as well as social services sector. The services sector continued to perform strongly in 2006-07 and even in current fiscal year. Construction also continues to show strong performance, partly due to the activity in the private housing market, spending on physical infrastructure, and reconstruction activities in the earthquake affected areas. Consumer spending remains strong while investment spending gained momentum. These sectors collectively employ 44% (including construction sector) of the labor force of the country. It is interesting to note that finance and insurance sector remained major driver of the growth in this sector for the last three years and the growth has touched 30.8%, 33.0% and 18.2%, respectively in these three years. While looking at the contribution of various countries in this sector, it appears that it has a very low share in the international market. In contrast, its share in Pakistan's GDP is relatively lower than the developed countries i.e. about 75%; 65% in Singapore, 54% in Sri Lanka, 52% in India and 42% in Indonesia. Like many other developing countries, Pakistan has not yet taken full advantage of the opportunities that exist in the international market for the export of services.

The export proceeds were above US$400 million in first quarter of fiscal year 2007-08 as against US$370 million in the same quarter prior year whereas imports were above US$1.2 billion against US$1 billion over the same quarter prior year. Thus exports went up by almost 8% in the first quarter of the current fiscal year over the same quarter last year. Statistics showed that export of services witnessed a robust growth in current year because of stagnation in last year. There is a potential for further liberalization of exports and seeking extensive market for export service providers.

One must not forget that the service sector produces intangible goods, some well known - government, health, education - and some quite new - modern communications, information, and business services. Producing services tends to require relatively less natural capital and more human capital than producing agricultural or industrial goods. As a result demand has grown for more educated workers, prompting countries to invest more in education-an overall benefit to their people. Another benefit of the growth is that by using fewer natural resources than agriculture or industry, it puts less pressure on the local, regional, and global environment. Conserving natural capital and building up human capital may help global development become more environmentally and socially sustainable. Growth of the sector will not, however, be a miracle solution to the problem of sustainability, because agricultural and industrial growth is also necessary to meet the needs of the growing world population.

All the components of services sector registered strong growth with the exception of ownership in dwellings which continues to grow at 3.5% for the last four years. Transport and communication, wholesale and retail trade, finance and insurance and public administration and defense have grown robustly. This sector has various sub-sectors which are significant at their own place and are transport, storage and communications, wholesale and retail trade, finance and insurance, ownership of dwellings, public administration and defense, and community and social services, which grew by 5.8%, 7.1%, 18.2%, 3.5%, 6.9% and 8.5% respectively in 2006-07. Except for public administration and defense, the private sector is increasing its share in these sectors, with education, health, housing and transport seeing maximum growth.

Transport, Storage and Communications this sub-sector is based on the profits and losses of Pakistan Railways, Pakistan International Airlines and other airlines, Pakistan Posts & Courier Services, Pak Telecom and motor vehicles of different kinds on the road. This sector grew by 5.8% in 2006-07 and 6.9% in 2005-06, though there is a dip in the growth as compared to the preceding year, but essentially immense usage of mobile phones, internet services, and motor vehicles are the main reasons for growth in this area. Pakistan has also seen an explosive growth in the information and communication technologies in the last few years with deregulation and ending of the monopolies of the state sector. The number of mobile phones achieved their 2007 target two years earlier, and the recent deregulation of long distance (LDI) wireless local loops (WLL), other sections have served to provide faster, better and wide coverage, all at lower costs. A strong, efficient and affordable infrastructure is a critical element of a good investment climate and therefore, is a pre-condition to sustain the growth momentum. Transport and Communications both are important elements of infrastructure services and are essential in maintaining economic growth and competitiveness

Wholesale And Retail Trade During 2006-07, the gross value added in this sub-sector decreased to 7.1% as compared to last year of 8.7%. The activities included in this sector are: (a) wholesale and retail trade including import and export of goods (b) purchase / sale agents and brokers and (c) auctioning being imported and domestically produced.

Finance and Insurance-Banks, DFIs and insurance companies, account for 98% of value added in this sector. The finance and insurance sector comprises State Bank of Pakistan (SBP), all scheduled (domestic and foreign banks) development financial institutions (DFIs), all insurance (life and general) companies, Modaraba/leasing companies, moneychangers and stock exchange brokers. The financial sub-sector also consists of all resident corporations principally engaged in financial intermediations or in auxiliary financial activities related to financial intermediation.

SBP has continued to pursue growth accommodative policy stance since 1999-2000 which has helped promotion of competition and deepening of the financial sector while broadening its coverage to include the middle and lower income groups of the population. The impact of this broad based access to institutional credit on the economy was found to be direct as well as indirect, as it has diversified the client base from a narrow focus on government, corporate and foreign trade financing to larger spectrum of financial services extending to consumer finance, small and medium enterprises (SMEs), agriculture, housing, construction and micro-finance.

The insurance sector and non-bank financial institutions (NBFIs) are also performing relatively better than preceding years. Presently, above 60% of the total insurance market is life insurance, but a significant population do not insure their lives on religious grounds. While the insurance industry is regarded as a strong pillar in the economy it is constrained by issues of legislation, reinsurance, and taxation. The need for professional manpower is more immense than investment of capital or technology, as the number of those professional is very small.

Ownership of dwellings it is estimated that almost 90% of the housing sector is financed out of personal savings or borrowings, and only 10% comes from the corporate sector. Recent liquidity of banks and relatively easier credit terms have enabled fast growth sector, but a major skills shortage and a skills gap is appearing in this sector, as more houses with better standards are in demand. The vendor industry for the fittings in the housing sector is generally robust. Having realized the importance of the housing sector in the overall economic development of the country, the government, as an immediate measure, declared Housing and Construction as a priority industry and simultaneously formulated a pragmatic and workable National Housing Policy. This is aimed at revitalizing the housing sector, providing therein various incentives for the construction industry and the private sector builders/developers As a result of the coordinated efforts of Federal and Provincial Governments and concerned private sector stakeholders, a large number of policy measures have so far been implemented resulting in the improvement of overall housing situation in the country besides availability of affordable housing finance to the extent of Rs 34 billion in the market.

Public administration and Defense This sector consists of wages and salaries of government employees compiled from the budgets of federal, provincial and local governments. Public administration is synonymous with governance and the quality of service it offers to the country's population. Governments around the globe are gradually coming online using processes in which Information and Communications Technology (ICT) play an active and significant role, beyond simple digitalization, or automation of governance services, or provision of LANs, since it is ultimately a tool for good governance and human development. The main objectives of e-Governance are to increase transparency of government working, increase and diversify public information and its value, and increase the quality of products and services being currently offered. This helps reduce high transaction costs (in terms of time, efforts and opportunities lost) by timely and relevant access to government information, especially for those who are disadvantaged or marginalized or living in remote rural areas.

Community, social & personal services Income arising in this sector consists of income of persons engaged in private education, medical & health and other household and community services. Voluntary services by citizens and NGOs are growing in the country in order to mobilize communities and local stakeholders in the process of development. This has been effective in highlighting the cause of universal literacy, and gender empowerment and affirmative actions. This has helped first to supplement the state programs in poverty alleviation and development, and more important, it has provided a benchmark for comparison. Madrassa are an important form of this private social net.


Pakistan's share in world service sector has been stagnant and could not grow beyond 0.23% due to number of factors. Many issues are involved in expanding the ability of developing economies to take advantage of emerging opportunities in the sector. Although market access is one issue but openness of domestic services markets can help build the capacity to participate in the global markets. Analysts believed that there is a vast potential for trade like financial, construction and other business such as computer, technology, engineering, legal, accounting and other services. However, export are confronted to a number of issues like quality, acceptance of professional credentials, visa problems and the most importantly the image problem, which the country has been confronted since long. Moreover, Pakistan has a relatively lesser share in the export of information technology related services as there are many shortcomings in the sector, which made it less competitive with those of other countries. There is also a lack of skilled labor, quality educated professionals, basic infrastructure, training of human resources, research and development, low extent fiber optic connectivity to more locations in Pakistan and piracy. The most important factor in sustainable growth of the sector as a whole is the human resource. Lack of quality education is making hindrance in the progress of the sector.

Pakistan has potential to export financial services to both developed and developing countries. However, many Pakistani banks closed its branches in various countries due to restrictions of high pre-paid capital, non-recognition of the credentials of Pakistani banks and some other home regulations. In past, MCB Bank closed down its branches in various countries though now Pakistani banks are in an effort to establish branches outside country especially in India. It is also observed that foreign countries such as Sri Lanka, India should remove restrictions on repatriation of earnings from customer companies. Similarly, countries like United Arab Emirates and Saudi Arabia should not require foreign companies to take on local partners as they often edge out the foreign partners. There is a problem of re-certification in UK and Canada, which restrict selling of Pakistani services to those markets.

Nevertheless further growth in the export of services is dependent on how these issues are being tackled in the coming days particularly to improve the country's image abroad to penetrate both the developed and developing markets.


Various areas can be identified through which exports can be increased including strengthening the institutional support for service providers, streamlining the regulatory environment by the government, strengthening the infrastructure, providing better information, support and access to finance to stakeholders. It is required to strengthen the export oriented policies of the government, training, financing and encouragement to form services coalition and enterprise networks. Other organizations such as the Overseas Employment Corporation (OEC), the Small and Medium Enterprises Development Authority (SMEDA), the Industrial Information Network (IIN) and the Pakistani mission abroad can also play stronger roles in enhancing services exports by addressing the trade issues within their domains. Furthermore regulation needs revision, where ever possible, so as to simplify polices to facilitate exporters. No regulatory environment can be effectively streamlined until it addresses the concerns of the stakeholders, and this needs to be pursued through consultation. It is equally important to strengthen services infrastructure including human resource development based on national needs, improve financial lending environment, a stronger telecommunications infrastructure, and better utilities and transport. A skilled human resource base, matching international market need, is the key to the export of many services. While priority should also be given to education and training with special emphasis on improving English language skills.

According to the government sources, it is expected that annual growth increment will be around 8% till 2009-10. The projected average growth rate is not an aggressive target and can be achieved if commodity producing sectors (especially agriculture and manufacturing) simultaneously perform well and provide the associated demands likewise the high growth rate of 8.6% on the average in case of wholesale and retail trade can be achieved on account of better performance of commodity producing sectors. It is therefore needed to rapidly increase the base of primary, secondary and tertiary education in terms of quantity as well as quality at all levels. An efficient educational system needs to be put in place in which thinking; innovation and creativity are encouraged and promoted. For inculcating these traits in the students, teachers must be trained in the latest teaching methodologies. I.T. needs to be introduced at all levels; e.g. tertiary, secondary/higher secondary, middle and finally primary in descending order of priority. Also, incentives in the shape of scholarships need to be offered to the talented students for promoting I.T. education.

An efficient transport system is a pre-requisite for Pakistan to become globally competitive. The growth in capacity must be achieved while increasing service levels and decreasing costs. Internationally, prices of transport services have fallen due to increased productivity, increased competition between suppliers and pressure from users who face growing global competition in their own markets. There would be need for a higher level of investment in transport with enhanced private sector participation in the provision of transport infrastructure and services. In order to increase the share of individual sub-sector in this sector, it is essential to make major expansion in transport and communication sector where investment be made in telecommunication, information technology (IT), ports and improvement in the operating surplus of railways, PIAC and other supporting and auxiliary transport activities. As far as wholesale & trade is concerned major contribution to its growth can come from the import of industrial raw materials and capital goods whereas health, education and security related activities can bring growth in public administration & defense sector. It is rightly anticipated that this sector's contribution in the national economy can also be increased with major expansion in other services like real estate, renting, advertising, tourism, sporting, recreational, computer and computer related activities.

Financial and insurance sector has great potential and can contribute significantly by utilizing the maximum potential through regulations. The insurance business would increase if religious objections to the present system are resolved by introduction of Takaful business in this country by providing relevant rules under the umbrella of Insurance Ordinance. Some financial institutions have already made preparations for launching Takaful companies in anticipation of approval of relevant rules and regulations. Governmental data and information remains disputed since long and without financial transparency it is not possible to accurately analyze the progress and further potential of the sector. It is therefore critical to have a formal information gathering process. Whereas Federal Bureau of Statistics should extend it's data collection network. Needless to say that without additional measures and efforts growth, investment and employment may remain un-captured.

Summing up, Service sector is very sensitive sector yet highly lucrative therefore bold, unconventional and strategically correct decisions are required whereas leaders with vision and administrative competence are the need of the day. It wouldn't be wrong to say that a consensus has now developed that this sector indeed has a major role in the recent revival of the Pakistan's economy. It is therefore obvious that services exports are critically important to the country's economy and can not only increase the foreign exchange earning, strengthen the domestic capacity and decrease reliance on imports, but also provide job opportunities for skilled and semi-skilled people. GOP has to give serious thought while providing incentives to the local stakeholders. In short, if Pakistan fails to grasp the situation at this moment; its regional competitor will further push it back which Pakistan can't afford under current global competitive business environment.