1- SBP ANNUAL REPORT
2-
STRENGTHS & WEAKNESSES OF PAKISTAN'S ECONOMY

 

STRENGTHS & WEAKNESSES OF PAKISTAN'S ECONOMY

 

 

By TAHIR MAHMOOD NADEEM
Nov 04 - 10, 2002

 

 

At the time of independence, our reliance was more on agriculture which is a vulnerable sector to the natural calamities. Moreover, like other developing nations, agriculture sector was quite backward in Pakistan with average yield of various crops being quite low. It is commonly believed that an economy totally relying on agriculture sector cannot grow rapidly. Prof J.K. Galbraith rightly remarked that a pure agricultural country is likely to be un-progressive even in its agriculture. However, in case of Pakistan, the non-agricultural sectors have fared well and the share of agriculture in GDP has reduced from 53% in 1950 to 25% in 2002. On the other hand, the share of manufacturing sector in GNP has improved from 7% in 1950 to 18% in 2002. This structural change has provided considerable strength to our economy.

STABLE PRICE LEVEL

Inflation is said to be a double-edged sword that not only adversely affects the purchasing power of a common man but also results in hike in the cost of development projects of the Govemment thereby causing delay in the completion of the development activities. Therefore, a stable price level is of crucial value for the sustained growth of an economy. In the late nineties, inflation rate in Pakistan has been quite stable and within the single-digit figures. Although the general public feels the prices in the country, especially of utilities like electricity, telephone, gas, POL products, and even basic needs items like edible oil, sugar, medicine have increased sharply during the past couple of years, yet the official statistics of CPI (Consumer Price Index) has shown a reasonably stable trend as is evident from the Table-1.

Table: 1

YEAR

ANNUAL CHANGE IN CPI

1990-91

12.66

1991-92

10.58

1992-93

9.83

1993-94

11.27

1994-95

13.02

1995-96

10.79

1996-97

11.80

1997-98

7.81

1998-99

5.74

1999-00

3.58

2000-01

4.41

2001-02 (Jul-Mar)

2.55

Source: Economic Survey 2001-02

STRONG FOREX RESERVES

Foreign exchange reserves are considered an effective barometer to gauge the health of an economy. This helps stabilize the exchange rate and price level in the country. Quite recently, our forex reserves have risen to the unprecedented levels (US$ 7.4 Billion at the end of August 2002). This can be attributed to a number of factors like the following:

i) Improvements in trade and current account balances;
ii) Substantial relief in debt repayment/ debt re-scheduling;
iii) Availability of grant assistance and inflow of assistance from donor countries;
iv) Increased remittances from Pakistanis working abroad through normal banking channels.

STRONG AGRICULTURAL SECTOR

Although the share of agriculture in GDP has been reduced yet it is still the backbone of our economy. Agriculture currently employs 48% of our labour force. Agrarian production has considerably improved over the years due to enhanced mechanization, use of quality seeds, fertilizers, pesticides, availability of more credit at concessional rates, better marketing facilities. This has helped Pakistan achieve self sufficiency in the production of food-grains despite the prolonged spell of drought. Presently, about 70% of our exports are agro-based.

INCREASED ROLE OF PRIVATE SECTOR

It is an admitted fact that Government can't run all the business. Instead, its sphere of activities should be limited to provision of basic amenities of life to citizens and give them protection internally and externally. Leaving apart the ramifications of the policy of nationlization, adopted in 1970s, the role of private sector has been increasing in the development and growth of our economy. For the last about over one decade, successive governments have pursued the policy of corporatization and eventually privatization of various public sector entities including utilities, banks and corporations. This has given boost to the productivity as well as cost effectiveness of these entities.

In recent past, the Government has de-regulated the oil and gas sector where prices are now determined by the Oil Companies Advisory Committee (OCAC) on fortnightly basis. Similarly, the prices of electricity are not determined by the Government as had been the practice in the past. Instead, an independent regulatory body, NEPRA, determines the same which also looks after the interests of other stake-holders including the consumers as well as small power producers. Now public hearings are arranged by these regulatory bodies and every interested/ affected party is allowed to express its viewpoint before taking any decision. Even in near future, the Govt. plans to sell off key institutions like Oil and Gas Development Corporation (OGDC) and Karachi Electric Supply Corporation (KESC) and Pakistan Telecommunication Company (PTCL) which reflects the confidence Government reposes in the private sector.

IMPROVED QUALITY OF MANPOWER RESOURCES

The rate of literacy has improved substantially in the last few years. In the year 2002, the overall literacy ratio stands at 50.5% whereas the same is 63% among male population and 38% among female population. This is the result of spread of conventional education and technical education in every corner of the country. The IT revolution has also opened up new vistas of growth for the IT Specialists which are found in large numbers throughout the country. This has also helped various sectors of the economy achieve better and more output.

STRENGTHENING OF INSTITUTIONS

Coupled with the increased role of private sector in economic activities, has been the establishment of regulatory institutions in the economy which is a good omen for the stable and sustained growth. Now with the corporatization of power sector, NEPRA (National Electric Power Regulatory Authority) has been established which is regulating the determination of prices of electricity. Similarly, with the deregulation of oil and gas sector, OGRA (Oil and Gas Regulatory Authority) has been set up. In the telecommunication sector, PTA (Pakistan Telecommunication Authority) has been regulating the tariff structure of telephone companies besides monitoring the implementation of their prescribed performance standards. In the money market, State Bank of Pakistan is playing a pro-active role to effect necessary corrections in the market. Similarly, Securities Exchange Commission of Pakistan (SECP) has been set up to oversee the working of Stock Exchanges in the country.

DEFENCE PRODUCTION

Pakistan has acquired self sufficiency in production of a variety of defence equipment and thus saving foreign exchange worth billions of dollars which it used to spend on military purchases from abroad. It is also earning several million dollars of foreign exchange by selling its products to countries in the Middle East. Of late, Pakistan has also started exporting training aeroplanes to gulf countries.

Having considered the strong points of the Pakistan economy, now we have a look at the weak points of our economy.

LOW GROWTH RATE OF GNP

As against the buoyant trends of 1980s and even early 1990s, the growth rate of GNP has come down drastically in the past couple of years. This can be visualized from the statistics Table- 2.

Table- 2

Year

%age Growth at  GDP

Constant Factor Cost GNP

1980s

6.1

5.5

1990s

4.6

4.0

1999-00

3.9

3.5

2000-0 1

2.5

2.5

200 1-02

3.6

5.4

Source: Economic Survey 2001-02

13. The reasons for this slow down of economic growth can be found in a number of factors including worsening of macro-economic environment, serious lapses in implementation of stabilization policies and structural reforms, adverse law and order situation, inconsistent policies, poor governance, ever rising prices of utilities resulting in high cost of inputs, implementation of WTO regime, acute drought conditions prevailing in the last two-three years.

DECLINING INVESTMENT LEVELS

It is an established fact that investment is one of the most important determinants of long-term economic growth. However, Pakistan economy has been facing a declining trend in this vital area (see Table 3).

Table 3

YEAR

AS %AGE OF GROSS DOMESTIC TOTAL INVESTMENT

PRODUCT (CURRENT MP) GROSS FIXED INVESTMENT

1991-92

20.1

18.6

1992-93

20.7

19.1

1993-94

19.4

17.8

1994-95

18.4

16.9

1995-96

18.8

17.2

1996-97

17.7

16.1

1997-98

17.3

14.7

1998-99

15.6

13.9

1999-00

16.0

14.4

2000-01

15.9

14.3

2001-02

13.9

12.3

Source: Economic survey 2001-02

This is the most serious manifestation of an economic slow down because it is going to affect not only the pace of economic~growth in the coming years but also many other key sectors like employment and exports. This decline in investment is shared by both the public and private sectors, but public sector has declined more sharply in the past 10 years. Within the public sector, development expenditure has declined from 7.6% in 1991-92 to 3.5% in 2001-02 (Jul-Mar). (see Table 4)

Table 4

YEAR

AS %AGE OF GROSS DOMESTIC PUBLIC INVESTMENTS

PRODUCT (CURRENT MP) PRIVATE INVESTMENT

1991-92

8.7

9.8

1992-93

9.1

10.1

1993-94

8.3

9.6

1994-95

8.2

8.7

1995-96

8.2

9.0

1996-97

6.8

9.4

1997-98

5.2

9.6

1998-99

6.1

7.9

1999-00

6.0

8.4

2000-01

6.3

8.0

2001-02

4.7

7.6

Source: Economic Survey 2001-02

The reasons for this unhealthy trend can be found in worsening law and order situation, inconsistent policies, poor governance, ever rising prices of utilities resulting in high cost of inputs, implementation of WTO regime, acute drought conditions prevailing in the last two-three years.

ENORMOUS DEBT BURDEN

Over the years, Pakistan has been trapped into complex debt trap. In June 2002, Pakistan's external debt liabilities stood over US$ 38 Billion. Although foreign aid is essential for a resource starved developing country like Pakistan, yet the problem lies in its improper utilization and even embezzlement in many cases. Thus the foreign aid has added more to the debt-service liability burden and less to the development of the country. In the budget for FY 2002-03, Rs 290 Bln out of the total outlay of Rs 742 Bln have been allocated for debt-servicing. In the Budget for the year 2001-02, Rs 320 Bln were earmarked for debt servicing. Such huge liabilities leave very little resources for the development activities in the economy.

DEFICIENCY OF CAPITAL

Capital formation is one of the major factors in economic development. Capital formation refers to increase in the stock of both material and human capital by making available a part of society's currently available resources. Capital formation results when some proportion of society's present income is saved and invested in order to increase material as well as human capital. In other words, capital formation consists of both tangible goods like plants, tools and machinery and intangible goods like high standards of education, health, scientific tradition and research.

1. DEFICIENCY OF CAPITAL IS ONE OF THE MAJOR WEAKNESSES OF OUR ECONOMY.

Main factors responsible for deficiency of capital are:

i) Low per capita income.
ii) Higher level of expenditure on consumption.
iii) Inequalities of wealth; rich getting richer and the poor getting children.
iv) Wealthier class spending money on the purchases of gold, land, building, real estate, speculation.
v) Limited market for the manufactured goods.
vi) Low rate of savings.
vii) Low rate of investment. Low rate of capital formation further decreases capital stock in the economy.

Table-5 gives an insight into the situation of low capital formation.

Table-5

YEAR

%AGE GROWTH OF (AT 1980-81 PRICES)

PER CANITA INCOME (AT CURRENT MARKET Prices)

NATIONAL SAVINGS AS %AGE OF GDP

1997-98

-0.6

7.5

14.3

1998-99

1.9

7.3

11.4

1999-00

1.2

4.2

14.1

2000-01

0.2

6.1

15.0

2001-02

3.2

9.2

15.4

Source: Economic Survey 2001-02

PERENNIAL BUDGET DEFICITS

Fiscal balance is another weak area that continues to be a source of concern. A general deterioration in public finances in Pakistan has caused serious macroeconomic imbalances and subsequent rise in public debt. Failures in enhancing tax revenues consistent with the growing expenditure requirements have aggravated fiscal imbalances over the period. The year-wise position of fiscal deficit as %age of GDP (see Table 6).

Table 6

YEAR

BUDGETARY DEFICIT AS % OF GDP.

1990-91

8.8

1991-92

7.5

1992-93

8.1

1993-94

5.9

1994-95

5.6

1995-96

6.5

1996-97

6.4

1997-98

7.7

1998-99

6.1

1999-00

6.6

2000-01

5.3

2001 -02

5.7

Source: Economic Survey 2001-02

However, in the past couple of years, prudent fiscal management, better tax enforcement and wide-ranging tax reforms including Tax Survey have had their impact in reducing fiscal deficit despite the fact the Sep 11 and Dec 13 events affected our economy adversely.

PERENNIAL TRADE DEFICITS

Balance of trade is the difference between the values of exports and imports of physical items (goods) of a country during a given period of time. If the value of commodity exports exceeds the value of commodity imports, the balance of trade is said to be favourable. The country becomes a creditor. In case the value of imports of a country which are recorded at the custom exceed the value of exports in a given time period, the balance of payments is said to be unfavourable and the country becomes debtor.

Balance of trade account has an important bearing on the economy of a country. If the balance of trade is favourable, it enhances the capacity of a country to import goods and services. There is expansion in foreign trade. The tempo of development increases. In case the balance of trade is persistently unfavourbale, it reduces the capacity of a country to import goods. The foreign trade is reduced. The rate of growth/development slows down. Pakistan, since independence, has been experiencing deficit in her external merchandise account with the exception of 3 years 1947-48, 1950-51 and 1971-72. The trend of deficit in trade balance is depicted in the Table 7.

Table 7

YEAR

TRADE DEFICIT AS %AGE OF GDP.

1990-91

5.5

1991-92

4 6

1992-93

6.4

1993-94

3.9

1994-95

4.2

1995 96

5.9

1996-97

5 0

1997 98

3 0

1998-99

3.5

1999-00

2.3

2000-01

2.1

Source: Economic Survey 2001-02

Main causes of the unfavourable balance of trade of Pakistan are as under:

i) Narrow export base.
ii) Import oriented Industries.
iii) Consumption oriented society.
iv) Less modernization of machinery.
v) Increase in sick industrial units.
vi) Less production of value added goods.
vii) Political uncertainty.
viii) De-valuation.
ix) Tough competition in the Market.
x) POL imports.
xi) Rise in freight charges.
xii) Propaganda about exploitation of child labour.
xiii) Increase in prices of in-puts.
xiv) Anti-dumping duties.
xv) Technical barriers.
xvi) Global economic recession.

RAPID GROWTH OF POPULATION

The population of a country portrays a double-faced phenomenon. It is on the one hand an asset and vital factor in the development process of a country. On the other hand, its rapid growth has hampered development in many less developed countries of the world including Pakistan. Almost all the developing countries are having a high population growth rate and a declining death rate. The development made with low per capita incomes and a low rates of capital formation here is swallowed up by increased population. As a result, there is no or very slow improvement in the living standards of the people. Although the rate of growth of population has been brought down from 3% in early 1990s to 2.2% in year 2002, it is still one of the highest rates in the world.

The trend of population growth vis-a-vis the growth of per capita income at constant prices (see Table 8).

Table 8

YEAR

TOTAL POPULATION

POPULATION GROWTH RATE (%)

GROWTH OF REAL PER CAPITA INCOME (AT 1980-81 PRICES)

GROWTH RATE OF REAL PER CAPITA INCOME (%)

1991-92

115.54

2.60

4,326

3.9

1992-93

118.50

2.56

4,303

-0.5

1993-94

121.48

2.51

4,367

1.5

1994-95

124.49

2.47

4,505

3.2

1995-96

127.51

2.43

4,644

3.1

1996-97

130.56

2.38

4,601

-1.0

1997-98

133.61

2.34

4,575

-0.6

1998-99

136.64

2.29

4,662

1.9

1999-00

139.76

2.24

4,719

1.2

2000-01

142.86

2.22

4,730

0.2

2001-02

145.96

2.16

4,881

3.2

Source: Economic Survey 2001-02

Factors of the rapid growth can be found in the following:

i) The practice of early marriage;
ii) Warm climate where puberty is attained at a relatively early age;
iii) Joint family system;
iv) Polygamy;
v) Absence of recreational facilities;
vi) Low standard of living. People are not afraid of further fall as a result of the higher birth rate;
vii) General illiteracy. People are not aware of the economic distress caused by high birth rate;
viii) In rural areas particularly, large family is regarded as a source of power and a means to subdue the people around them;
ix) Substantial drop in death rate;
x) Unprecedented refugee influx.

HIGH UNEMPLOYMENT RATE

Unemployment in Pakistan is defined as all persons ten years of age above who during the period, under reference, were

a) without work i.e. were not in paid employment or self employed;
b) currently available for work, i.e. were available for paid employment or self employment; and
c) seeking work, i.e. had taken specific steps in a specified period to seek paid employment or self- employment.

According to this definition, about 3.25 million persons in the labour force of 41.54 million have been estimated as unemployed in 2002. Data of the unemployment rate for the last couple of years (see Table 9).

Table 9
UNEMPLOYMENT RATE (%AGE OF LABOUR FORCE)

Year

Total

Rural

Urban

1994-95

5.37

4.80

6.90

1995-96

5.37

4.80

6.90

1996-97

6.12

5.65

7.17

1997-98

5.89

4.98

7.95

1998-99

5.89

4.98

7.95

1999-00

7.82

6.94

9.92

2000-01

7.82

6.94

9.92

2001-02

7.82

6.94

9.92

Source: Economic Survey 2001-02

The reasons for this alarming phenomenon can be found in slow down of economic growth, rapid growth of population, prolonged ban on new employments in the public sector, political instability in the country, law and order situation, use of capital intensive techniques of production, acute drought and lack of rainfall, etc.

The best way to create employment is to promote economic growth. Higher economic growth is likely to create demand for labour which will, in turn, reduce unemployment. Presently, the areas of focus for the Govt. are agriculture, oil & gas sector, small & medium enterprises (SMEs) and the information technology. These have potential for rapid growth and more employment with relatively less investment. Above all, there is urgent need to address the governance issues which relate to bureaucratic hurdles, unnecessary rules and regulations intended to enhance the role of Govt. machinery in setting up and running an industry, humiliating attitude of tax authorities and provision of proper infrastructure facilities in various parts of the country.