SBP Governor observed that Pakistan has fully liberalized its incentive framework

Aug 21 - Aug 27, 2006

The World Bank has placed Pakistan amongst the leading economic reformers of the world and the top one in South Asia in its report "Doing Business in 2006". Such compliments are naturally encouraging the economic managers as well as helping build up the image of the country.

Pakistan's economic turnaround supported by a strong GDP growth rate has provided the reason for its placement amongst the fastest growing economies. Generally speaking, the agriculture and the large scale manufacturing sectors are considered as the mainstay of the Pakistan economy, yet the performance of the agriculture and manufacturing sectors are usually subject to the weather conditions and market performance, respectively.

However, one of the most significant contributors to our $120 billion GDP has been identified is the buoyant services sector, which contributes the largest share of 32- 40 percent to the GDP. The important factor in the services sector is that it contributes a knowledge-based support. As far as investment sector is concerned the policy has been evolved in a manner that investing in Pakistan not only facilitates production but also provides opportunities to make exports to the Middle East and Central and South Asian markets.

Dr. Shamshad Akhtar, Governor of State Bank of Pakistan, while expressing her views on overall economic scenario and GDP growth in Pakistan, observed that Pakistan has fully liberalized its incentive framework. All economic sectors are open to foreign investment, foreign investors are allowed to hold 100% foreign equity in all economic sectors, barring very few exceptions, and there is equal treatment given to local and foreign investors with flexibility to easily remit royalty, technical & franchise fee, capital, profits, dividends etc.

No government sanction is required for setting up any industry, in terms of field of activity, location, and size. Tourism, housing and construction sector, computer software and information technology (IT) have been declared as industries and provided a set of tax incentives.

In agriculture, it is worth mentioning that Pakistan attained self-sufficiency in major crops a long time back. Notwithstanding, disruptions in production are inevitable given the uncertain weather conditions as well as low yields which require far reaching efforts in research and extension and appropriate use of inputs that have benefited from the rise in agriculture credit and fertilizer input use.

More exploitation of water resources is critical to ensure timely supplies of water.

In agriculture, significance of livestock, poultry and dairy products is visible and encouraging. The former accounts for 46.8 % (FY05) of agricultural value added and about 10.7 % of the GDP, while providing livelihood to one third of the population, and the latter produces 28 billion liters of milk a year, whose value is more than that of the combined value of wheat and cotton.

Although the manufacturing sector grew at 18% and 15%, respectively, in the preceding two years, decline in its growth rate is notable. The performance of this sector is impacted by some of the structural issues typical of Pakistan's manufacturing sector. Manufacturing sector is now beginning to slowly diversify and modernize itself. Presently, almost three-fourths of the production stems from the large-scale manufacturing sector.

Dr. Shamshad Akhtar in a recent address has observed that the key contributor in the economy is the textile and apparels group, though chemicals, petroleum, engineering, tyres and tubes, fertilizers, cement, and automobile and durable white goods are adding capacities and are likely to boost industrial production.

SME policy and enhanced flow of credit for this segment would eventually enhance the linkages of this sector. Most notable is the concern regarding trade deficit that is to range around $8.2 billion in FY06. Almost 45% of the increase in trade deficit for FY06 stemmed from the rise in import bill for crude oil and petroleum products. Demand pressures are likely to grow further as the government accelerates social and infrastructure programs and segments of population and businesses benefit from the FY07 fiscal package. Ambitious infrastructure sector programs are absolutely needed as businesses are set to grow, capacities are being enhanced, new industries and sectors are being opened up and development of industrial parks and additional EPZs are in the offing. After a span of price stability, Pakistan continues to face inflationary pressures that emerged in late 2004 in response to an accommodative monetary policy. Thus far effective monetary management and administrative measures to ease product supplies have controlled inflation which is now well within single digit.

With demand pressures expected to grow, SBP will continue to pursue monetary tightening but there will be need to strike an appropriate balance between promoting economic growth and price stability. Over the medium term, Pakistan is well positioned to deal with these emerging trends effectively. Rising investment demand is confirmed by the rise in gross fixed capital formation over the last two years by 29.6% in nominal terms and by about 9.8% in real terms. This has raised investment levels to Rs 1.42 trillion, equivalent to 20% of GDP and is likely to result in a reversal of the declining trend observed in the preceding years.

Private investment accounts for two thirds of the fixed gross capital formation. The rise in imports, excluding crude and POL products, grew by 35%. The rise in private sector credit, while decelerating, still grew by 19% in FY06 despite rising interest rates. Foreign direct investment flows, excluding privatization proceeds, also contributed to the rise in investment.

High corporate profits have largely been reinvested in industry and there is a high degree of self-financing taking place. All spadework undertaken in the last few years hopefully would now pay off as approved or lined up industrial and infrastructure investments take off.

The Medium Term Development Framework (MTDF) anticipates a rise in the investment/GDP ratio of 20.7% by 2010. Early indications are that both domestic and foreign investors are upbeat about the future prospects, and there are already investment commitments that lined up from Gulf states.

During its economic transition, Pakistan will have to develop capacities to tolerate and finance the required level of trade deficit, as fresh investments will bring in additional import demand. Over this period, leveraging non-debt foreign flows will be critical to finance and sustain the external current account deficit. Growth prospects for Pakistan are fairly promising. However, sustainability of investment trends would, among others, depend on Pakistan's success in improving the infrastructure, business climate by removing investment constraints, ensuring continuity in financial reforms coupled with strong vigilance of credit growth, and achieving success in curbing inflationary pressures and tendencies within manageable levels.