A broad-based economic recovery, further
strengthening of macroeconomic stability and a near elimination of
external account vulnerability has been the major success for
Pakistan. However, the country still faces many challenges that
include raising investment to sustain higher economic growth, reducing
poverty, improving social indicators on sustained basis and improving
the financial health of public sector enterprises.
These successes include: a sharp pick-up in growth,
aided by stellar growth in manufacturing and a robust recovery in
agriculture; double-digit growth in per capita income, low inflation,
highly conducive interest rates environment, fiscal deficit reduction
and foreign trade, registering impressive growth. Pakistan achieved
surplus current account and foreign exchange reserves touched new
highs. Credit rating of the country also improved.
Pakistan's overall economic performance has been
relatively much stronger when compared with the economies of other
developing countries within and outside the region. Pakistan posted a
relatively stronger growth, exceeding the average growth of 4.6% of
developing countries. The growth is not only impressive but is
board-based as well as testifies to the sharp pick up in industrial
activity. This is the second highest growth achieved during the last
thirteen years. Another major success has been the sharp increase in
real GNP growth.
(GDP Growth over last year in percentage)
Pakistan faced severe fiscal imbalance and attained
rise in public debt. These imbalances have had far reaching impact on
country's investment and growth. As a results of recent efforts,
fiscal imbalances have been narrowed. Fiscal deficit has been reduced
due to improvement in revenue and curtailment of expenditure.
Reductions in fiscal deficit and interest cost to finance deficits
along with prudential debt management have resulted in substantial
decline in domestic debt.
Pakistan seems to have recovered from its difficult
past. Now it has to build on the current gains and use the strong
foundation laid through the implementation of wide ranging structural
reforms for sustained strong growth. Notwithstanding major progress
made in many areas and key economic fundamentals improving in
difficult external environment, Pakistan still faces some challenges,
which need to be tackled on priority basis. The most important
challenge being, boosting investment to sustain higher economic growth
for reducing poverty.
Investment is one of the most important
determinants of long-term economic growth. The stable macroeconomic
environment influences investment. The stable macroeconomic
environment is believed to be conducive for investment and therefore,
to growth. However, the fresh investment has not picked up to the
desired level. Analysts say, "Despite reduction in interest rates
and growing demand new production facilities are not being created.
However, most of the investment over the last couple of years has been
for balancing, modernization and replacement (BMR)."
The immediate question that comes to mind is why
the quantum of fresh investment is so low? The slow pace of fresh
investment does not perturb many analysts. They say, "During the
1990s there was a sudden and substantial increase in installed
capacities of various sectors, i.e. cement, sugar, automobile, etc.
However, the demand did not pick up and most of these sectors still
suffer from low capacity utilization. Therefore, unless capacity
utilization crosses optimum level investment for creation of new
capacities in these sectors is expected to remain low.
However, others say, "A serious concern is
that some of the sectors need immediate and substantial investment but
investors are shy to make long-term commitment. Since the local
investors are shy the country should not expect major influx of
foreign direct investment." Some analysts say, "Investment
has no nationality. It goes to only those destinations that offer
attractive return. Therefore, unless the policy planners stop
discriminating between local and foreign investors the country may not
succeed in attracting investors."
Total foreign direct investment (FDI) flows have
experienced massive contraction globally since 2000 declining from
almost US$ 1.2 trillion to US$ 500 billion in 2002. Both developed and
developing countries have been affected by the reduction in FDI flows
with the exception of China and Central/Eastern European countries
where they have continued to rise. In such a difficult external
environment, Pakistan succeeded to attract almost US$ 700 million FDI
during July-April 2002-03 as against US$ 308 million in the
corresponding period of last year. Oil and gas, financial sector
(including privatization proceeds of United Bank), chemicals and
transport together accounted for nearly three-fourth of FDI. Almost
30% of FDI have come from the UK followed by USA (25%) and UAE
The critics also do not support the GoP's policy of
inviting non-resident Pakistanis to invest in Pakistan. As stated the
non-resident Pakistanis have a right to choose the destination for
their investment. They should not be black mailed emotionally.
Pakistan's economic managers must create an environment whereby the
country becomes a preferred choice.
Privatization programme being followed by the GoP
has the potential to attract both local and foreign investors. The
size of public sector industries has shrank from twelve holding
corporations with 116 manufacturing units before the start of
privatization in 1990-91 to seven corporations with 27 units. The key
transaction yet to be concluded are — Karachi Electric Supply
Corporation (KESC), Habib Bank (HBL), Allied Bank of Pakistan (ABL),
Pakistan State Oil Company (PSO), Oil and Gas Development Company (OGDC)
and Sui twins. The other entities on the privatization list are
Pakistan Telecommunication Company (PTCL), corporatize entities of
Power Wing of WAPDA and cement and fertilizer manufacturing units.
The GoP has already initiated the process for
listing of a number of state-owned enterprises at local stock
exchanges and sale of part of government holding through offer of
shares to general public. After the successful sale of shares of
National Bank of Pakistan (NBP) Privatization Commission intends to
sell further shares of NBP, Sui Southern Gas Company (SSGC) and
Pakistan International Airlines (PIA). This is the most appropriate
time to divest GoP holding because of prevailing bullish sentiments in
the equities market.
The critics of present economic managers say,
"It is heartening to note that efforts have been made to improve
the working environment. However, the common complaints, i.e.
inconsistency, adhocism, poor implementation, etc, continue to be the
biggest irritants. Some how the other we have not come out of
colonialism myth, dividing people into two groups, the rulers and
those being ruled. Most of the policies are being prepared without
proper consultation with all the stakeholders. When the business
community pinpoints anomalies a number of meetings are held. However,
either most of these meeting remain inconclusive or even when certain
amendments are agreed the required notifications are not issued for
For example it has been a tradition that Ministry
of Finance asks chambers, trade bodies and associations to submit
their budget proposals. However, it is on record that these
suggestions are hardly considered. Some analysts say, "We
understand that the GoP was under excessive pressure from multilateral
lenders to follow their guidelines for preparing budget and often
could not accept the legitimate demands of trade and industry.
However, the practice must change now."
It may be of some interest to note the common
complaint of Ministry of Finance. The complaint is, "Most of the
proposals are either received so late that it is impossible to
incorporate them in the budget or often the demand are made in
isolation, without evaluating their impact on other
sectors/sub-sectors." Though, the Ministry may not accept it but
the fact is that there are some pressure groups in the country that
often succeed in bringing certain amendments in the GoP policies that
adversely affect the operations of other sectors/sub-sectors. The poor
state of Pakistan's economy can be best described as 'The sad saga of
toothless regulators and remorseless rent seekers'.
Some analysts say, "Lack of vision,
protectionism, promotion of investment through SROs and concessional
financing and area and industry specific incentives have been the
major reasons for poor economic development of the country. The thrust
of GoP's policy has been shifting from agriculture to industry or
import substitution to export led growth. The absence of long-term
commitment did not allow the country to achieve either of the
Though, it is often said that the largest number of
companies were listed at local stock exchanges in 1990s and banks also
disbursed very large quantum of funds, 1990s can only be termed 'lost
decade', at the best. Most of the funds were disbursed to rent seekers
only because of the SROs, a large number of units established during
that era were not economically viable and companies were listed at
stock exchanges with the sole objective of ripping off the small
investors. The results of the banks, particularly the nationalized
commercial banks and state-owned DFIs, are still carrying a heavy load
of non-performing loans.
Protection of infant industries may be a must.
However, one often fails to understand that most of the industries in
the country continue to demand protection under infant status even
though these have been in operation for decades. The two industries
enjoying the maximum protection, for the longest period, in the
country are textile and automobile. Textile sector enjoyed supply of
cotton at subsidized rates for nearly four decades and virtually
complete ban on import of textile products into the country. However,
protection only proliferated inefficiency and mismanagement.
One of the reasons for higher prices of locally
assembled automobiles is failure of the GoP to ensure implementation
of deletion programme. Non-compliance of this programme did allow
establishment and development of 'vendor' industries. The common
complaint of local assemblers has been that the components and
accessories produced in Pakistan do not comply with the quality
standards. However, it sounds strange that over the decades they have
not be able to help the local vendors. The general perception is that
they were never serious in developing the local suppliers, they always
wanted to import semi-knocked down (SKD) kits.
It has been a common complaint that locally
assembled cars are expensive and delivery period is too long. Despite
improvement in rupee yen parity, reduction in interest rates and
improvement in capacity utilization prices of locally assembled cars
have come down proportionately. This is only because Ministry of
Production has not been able to implement its own decisions.
It is interesting to note that while the government
functionaries are not able to implement their own decisions regarding
automobile industry, they are asking manufacturers of cement and urea
to reduce price — penalty for being efficient. It is true that the
government has reduced CED on cement by 25% but the industry has been
able to cut its cost mainly by switching from furnace oil to coal.
While the industry was suffering due to higher fuel cost the
government did not reduced CED for the benefit of consumers. However,
since the industry has achieved a milestone, the government is putting
pressure on the manufacturers to reduce the price.
However, policy planners do not understand that in
case cement price is reduced the biggest losers would be the
state-owned cement plants. Most of the cement plants that have been
converted from furnace oil to coal belong to private sector. Almost
all the state-owned plants are still running on furnace oil. Any
reduction in cement price can only add to their losses and dampen
prospects for their privatization.
As regards urea price, the policy being pursued by
the government is a paradox. The price of feedstock was raised in July
2003 and the increase must reflect in retail price of urea but
manufacturers were forbidden to adjust price. The premise was 'the
urea manufacturers are making too much profit and do not pass on the
benefit to farmers'. However, it is a total contradiction of the
policy the GoP has been following as regards to Pakistan State Oil
Company (PSO). The consumers of POL products are being ripped off to
ensure that the company continues to pay around 100% dividend. In the
case of PSO the biggest beneficiary has been the government. Isn't
Yet another failure of Ministry of Production is
failure to resolve the problems faced by sugar industry. No one can
deny the fact that sugar industry is the driving engine of rural
economy. The key problems of sugar industry are inadequate supply of
sugarcane, its price and absence of clear-cut sugar policy. While the
government continues to enhance support price of sugarcane it does not
allow the millers to increase sale price of sugar accordingly. Farmers
prefer to maintain limited supply in the hope of solicit price above
the fixed price. Higher support price and inadequate supply of
sugarcane does not allow the mills to achieve higher capacity
utilization. In the absence of sugar export policy even if sugarcane
is available mills are reluctant to attain higher production, due to
fear of over supply in the domestic market.
Reducing country's vulnerability requires sound
macroeconomic policies, first and foremost sound fiscal policy. A
culture of living within means and incurring debt (under reasonable
terms) only for production purpose. Though, considerable improvement
has been achieved in fiscal balance, continued vigilance is required
to remain fiscally responsible.
In Pakistan, the successive governments remained
fiscally irresponsible for a long period. A rule-based fiscal policy
is absolutely necessary for achieving long-run fiscal sustainability.
The government has already announced a policy, enshrined in a Fiscal
Responsibility Law. Announcement of a policy or promulgation of a law
is not sufficient. The government must follow the policy in letter and
spirit and avoid popular policies to achieved sustained growth.
The sustained high growth of large scale
manufacturing over the last three years simply reflects the relatively
higher capacity utilization rates at the backdrop of improved
macroeconomic environment. Until and unless the excess capacity is
utilized to a larger extent, investment rate may not accelerate in the
short-term. A stable macroeconomic environment is still a
pre-requisite even to encourage higher utilization of capacity in the
Reducing poverty and improving social indicators
are the other challenges. Poverty should not be viewed in terms of low
income alone. Lack of access to education, health, clean drinking
water and proper sanitation are also the various dimensions of poverty
and need to be addressed rigorously.
Sound macroeconomic policies are not an end in
themselves they simply indicate government's commitment. While
Pakistan has achieved a broad-based economic recovery but maintaining
the growth rate is a must. Recent estimates may suggest a marginal
decline in poverty but poverty alleviation cannot be achieved without
investing more and more in creating new manufacturing facilities and
Macroeconomic stability and the blanket investment
policy cannot help in convincing the investors to make long-term
commitments in Pakistan. The GoP must come up with sector-specific
policies, remove the existing irritants and restore confidence of
local investors. Unless local investors are willing to make long-term
commitment, Pakistan should not expect any large-scale foreign direct
Last but not the least, the country still suffer
from negative perception. The key factors adding to this negative
perception are law and order situation and the ongoing political
confrontation. Despite the US terming Pakistan its best friend, it
does approve travel of US citizens to Pakistan.