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Legal framework for economic development

Legal and regulatory framework for economic development is often ignored or not given the importance that it deserves.

ByDr. Tariq Hassan
Dec 11 - 17, 2000

Economic development does not take place in a vacuum. It requires an enabling environment, which includes a proper legal and regulatory framework. The Government plans to lay down such an orderly framework for carrying out its economic reforms. The purpose of this article is to provide an overview of the Government's legislative agenda for economic reform.

Legislative agenda for economic reform: For the implementation of its economic reform program, the Government has, as a matter of policy, formulated an extensive legislative agenda cutting across various sectors of the economy, including the banking and financial sectors, commerce and industry sectors, energy sector, information technology sector, social sector, and last but not least the administrative and judicial system.

Banking and financial sectors: Mindful of the magnitude of the defaulted loans, the banking companies' loan recovery law is being strengthened to facilitate the process of mortgage, foreclosure and expeditious settlement of banking disputes. Furthermore, a Banking Laws Review Commission has been formed to review all the banking laws and regulations with a view to updating, consolidating and rationalizing the same. Legal measures to build confidence, which had eroded after the freezing of foreign currency accounts, are also being introduced to prevent such occurrences in the future.

Industrial finance is being revived through a restructuring of the banking and financial sectors. Priority will be given to the needs of small and medium industry with an export orientation. Efforts will be focused to promote small and medium industries, having high labour intensity.

As a follow-up of its poverty alleviation programme, the Government has, through an enabling legislation, established a new bank for enhancing poor peoples' access to credit. Micro-finance Bank will mobilize funds and provide sustainable micro-finance services to poor persons, particularly poor women, in order to mitigate poverty. The Micro-finance Bank will promote the process of establishing community organizations, which can sustain credit operations and promote saving habit among the poor. It will lend to individuals through groups with the help of such community organizations.

A Corporate and Industrial Restructuring Corporation (CIRC) has also been established through an enabling legislation to provide for the realization of non-performing loans and other assets of various banks and development financial institutions. The primary purpose of CIRC is to clean out the balance sheet of nationalized commercial banks and financial institutions and to prepare them for privatization.

A law providing for the manner and methods of privatization is being promulgated to ensure realization of the highest price, transparency and fair play. This law would not only enable the Pakistan Privatization Commission to execute the process efficiently but would lay the guidelines for its working and provide for an expeditious mechanism to resolve all disputes relating to privatization. The proceeds from privatization would be used exclusively for the retirement of debt.

A new Insurance Law has been promulgated to provide for a deregulated, competitive and safe environment for insurance business.

A new law has also been framed to provide for easy mergers, and acquisitions, take-over and liquidation of public listed companies and is likely to be promulgated very soon.

Changes in the Monopoly Control Authority law are also under consideration to make it more effective without diluting growth incentives for business.

Commerce and industry sectors: Laws' relating to trade marks, intellectual property rights, industrial relations, workers compensation, bonded labour, and work conditions, are being reviewed with a view to being improved.

The importers and exporters registration law is being modified to simplify procedures and to provide for an automatic database upgrade.

Mindful of the need to protect industries against any unfair competition, efforts are being made following the new trade policy to forestall any unwarranted surge of imports, or any dumping, or any trade practices that pose an injury to domestic industry. An antidumping law has been prepared and will be promulgated soon. This will be followed by effective countervailing and safeguard measures.

Energy sector: Legal cover is being provided to policy commitments in order to revive investors' confidence. Regulatory authorities are being established for the orderly operation and development of the oil and gas sectors. A gas regulatory authority and a petroleum regulatory board are being established to regulate the oil and gas sectors.

The petroleum sector is being deregulated and the privatization process therein is being expedited for greater efficiency, for new investment and for the retirement of public debt.

Information technology sector: Following the recently announced Information Technology Policy, an appropriate legal framework is being developed to regulate the IT industry, protect intellectual property rights and promote electronic-commerce in the country.

Social sector: A national food stamp program has been launched to provide sustenance to the poorest of the poor and improvements in the Zakat and Ushr laws are under consideration. Furthermore, the quota for disabled persons as per the special education/social welfare law is intended to be enforced strictly.

Administrative and judicial system: There is expected to be a significant cut in the size of the government consistent with its role as a regulator and facilitator.

The tax system is being simplified. Two task forces have been formed to review the existing tax administration and laws and to recommend changes therein for the said purpose. A tax ombudsman has been appointed to deal with public complaints against maladministration by the revenue authorities and its employees.

Systems are being put in place to ensure that public contracts are awarded on merit. For example, a Public Procurement Regulatory Authority is being established to regulate and guide the process of public procurement and hear complaints in this regard under a separate procurement legislation to be formulated by it. Similarly, all other economic activities like banking, finance, aviation, telecommunications, power, gas etc., will be regulated by independent agencies, to be formed under the law. Its members will have security of tenure without being answerable to any executive authority.

In addition, as part of the good governance policy, use of executive discretion would be subject to pre-specified criteria. Furthermore, access to public information will be allowed through an appropriate legal cover. The Government is committed to eradicating corrupt practices and has enacted an accountability law to deal with corruption at the national level.

As part of the judicial reform programme, the entire system of dispute resolution will be modernized and made inexpensive for ordinary citizen. Alternative Dispute Resolution (ADR) mechanisms, particularly community participation systems like the punchaiyat, will be introduced wherever possible.

Contractual issues: A major irritant, which has damaged Pakistan's image as an investor friendly country is the issue of the Independent Power Producers (IPPs). Tariff negotiations with thirteen IPPs have been concluded and the issues with remaining two are likely to be settled soon. The second problem that Pakistan is facing today is the crisis of confidence because of the freezing of the foreign currency accounts. Legislative measures are being taken to prevent such an occurrence in the future as indicated above. The focus of the Government is to generate economic activity through developing investors' confidence. It intends to achieve this by ensuring stability and continuity of policy and adherence to lawful commitments.


Businesspersons usually look at monetary and fiscal incentives in various business policies of the Government. The importance for a proper legal and regulatory framework for economic development is often ignored or not given the importance that it deserves. It is evident from the above account that the Government fully realizes the need for such an orderly framework and has provided for an ambitious legislative agenda to meet its policy commitments. In fact, most economic policies have so far been backed by governmental action and are being implemented through some legislative or regulatory measures.

From the extensive legislative agenda and the legislative and regulatory measures taken so far, one can conclude that the Government is taking a comprehensive economic development approach that covers all sectors. The economic reform programme was developed by the Government—through a professional and participatory approach—with the help of an Economic Advisory Board—comprising professional managers and technocrats—established by the Ministry of Finance. The emphasis therein regarding poverty alleviation through the introduction of a food stamp programme and the development of the small and medium enterprise sector clearly suggests the people oriented philosophy of the Government. The concepts of transparency and fairness are being introduced in economic legislation and the rule of law is sought to be established through the lessening of administrative discretion, particularly in fiscal laws.

It is evident that the Government is not only trying to establish a proper legislative and regulatory environment but is also trying to bring about the necessary structural changes in the institutional framework. The nationalized banks and development finance institutions are being restructured, as is the system of revenue administration. The administration of justice is being strengthened with a view to making courts more efficient and effective.

In addition to establishing a legislative and regulatory framework and bringing about the much-needed institutional reforms, it is equally important to maintain consistency in policies and to honour contracts. As has been aptly stated by the State Bank of Pakistan in its 1999 Annual Report: "For attracting foreign investment, a set of monetary and fiscal incentives is not enough. Maintaining of consistency in policies and honouring the contractual commitments, providing improved infrastructure facilities and better law and order situation, and upgrading labour force skills are the important areas that need immediate attention" (Executive Summary).

*Based on a speech made by the author to the Pakistan France Business Alliance at Marriott Hotel, Karachi on 29 August 2000.

*Adviser, Minister of Finance, Ministry of Finance & Economic Affairs; SJD/LLM, Harvard Law School.