STATE OF PAKISTAN ECONOMY

Dr. Pervez Hassan's address at a HIMS seminar
Aug 30 - Sep 05, 1999

By SHABBIR H. KAZMI

Dr. Pervez Hassan, former vice president of World Bank, said that during the last decade Pakistan witnessed a virtual decline in its GDP growth rate. This came down from an average of 7 per cent to around 3 per cent per annum in 1998-99. The main reason for the decline in growth rate is persistent reduction in development expenditures.

He was addressing the students and faculty members of Hamdard Institute of Management Sciences (HIMS) of Hamdard University.

He further mentioned: "For the decline in GDP growth rate the successive governments of the country are responsible. The mounting external debts and debt servicing, defense expenditure and dependence on external resources to meet annual expenditures are the main causes of reduction in development expenditure. The GDP growth during the regime of Zia-ul-Haq was almost double the rate achieved during the tenure of various elected governments. However, it was a common practice during Zia regime to sweep problems under the carpet and also that during his tenure Pakistan got exceptionally large amounts as aid and grants."

Referring to old days, Dr. Hassan said: "It is true that during the last ten years, the geo-political condition of the region has changed. Aid/grants and soft-term loans are no longer available and bulk of the loans now carry high interest rates. Pakistan is forced to borrow more to meet its debt servicing obligations. But, the real cause is that the country has not been able to utilize aid and soft-term loans efficiently. Even today the priorities are not fixed properly. Therefore, billions of dollars, being spent on infrastructure projects, may not help in any substantial way to accelerate GDP growth rate.

Referring to poor progress of economy, Dr. Hassan said: "Pakistan's export base is not diversified and the country is heavily depended on external resources to overcome trade deficit problem. The current situation demands immediate redefining of the priorities and complete restructuring of the system. While various industry specific and area specific incentives have failed in broadening the industrial base, they also proliferated inefficiency in the industrial sector. The result of this wide-spread inefficiency is that Pakistani manufacturers have lost the comparative advantage and they are not able to compete in the global markets.

The cotton, which was available at subsidized rates in the past, now has to be bought at international prices. The unchecked growth of spinning sector forces Pakistan to export nearly half of the quantity of yarn produced. While the spinners were provided all the conceivable incentives, weaving and processing sub-sectors were ignored to a large extent. Even the spinners, despite enjoying all the incentives, have failed to undertake BMR and integrate their units upwards. The result is that Pakistan still exports coarse counts of yarn, grey fabrics and low quality finished products.

Another phenomena affecting the manufacturing sector is poor capacity utilization in various industries. Not only textile industry suffers from low capacity utilization, PSF, sugar, cement and engineering industries have surplus capacity. This results in higher cost of production and manufacturers are not competitive.

Another reason is despite announcing very attractive policies to attract investment, bulk of flow of the foreign equity has remained confined to a few sectors. Poor implementation of policies and existence of various irritants, though said to be very small, have been considered to be various hurdles. The frequent changes in policies, adhocism and short-sightedness, not only irritates the foreign investors, but local investors are also reluctant to invest in projects having long pay-back periods.

Pakistan has been a highly protected market since its inception. The process of globalization and opening-up of Pakistan market has further highlighted the prevailing inefficiencies. To compete in the global markets, local manufacturers have to be cost competitive and their products have to be of superior quality. With the gradual phase-out of textile quota, unless Pakistani manufacturers optimize their expenditures and improve quality standards, they would find it very difficult to compete. Even those countries which do not produce cotton have emerged Pakistan's competitors.

Another important factor is that the yield of various crops in Pakistan in nearly half of the yield achieved in India which also has similar weather and soil conditions. Even various land reforms have failed in utilizing all the cultivable land. Water logging and salinity is fast eroding the fertile land. Therefore, unless efforts are made to improve the yield Pakistan can neither become self sufficient in food nor enhance proceed from cash crops.

The concluding remarks of Dr. Hassan were, "There is a need for improved corporate governance not only in the private sector but also in the public sector and the bureaucracy. Tax rates in the country cannot be further increased. The situation demands expansion in tax net. The laws of income tax should not be discriminatory. Any income, be it from manufacturing and trading or agriculture, should be taxed. Pakistan should not delay implementation of tax on income from agriculture."