Until fairly recently Pakistan's economy was the foster child of highly indebted, unstable, and degenerating economies. It was full of puzzles and setbacks. The debt situation was worsening day by day with increasing fears of default. Not surprisingly, government deficit was speeding towards unsustainability.
High borrowing costs, inconsistent policies, and intrinsic inefficiencies made profitable investments extremely improbable if not impossible. Combined with an over-valued currency, rampant capital flight and declining workers' remittances there was the stigma of an alarmingly incredible government that repeatedly reneged on its announced policies.
The governance problem was the most appalling aspect of the entire situation. The vision to improve the economy was totally blurred as Pakistan repeatedly failed to honour concerted lending arrangements involving bilateral and multilateral creditors.
With a vision to completely overhaul the system, Pakistan prepared a medium-term macroeconomic framework that envisaged revival of the economy with the implementation of prudent and consistent policies.
On the fiscal front, it adopted a three-prong strategy that envisaged effective and improved resource mobilisation, expenditure management through restraint and prioritisation and reduction in debt burden by formulating fiscal responsibility and debt limitation law that has now been approved by the National Assembly.
Simultaneously, the 'home-grown' agenda of reforms also included adoption of the national anti-corruption strategy, financial sector reforms focusing on financial liberalisation and institutional strengthening and capital market reforms to promote corporate culture in the country that resulted into the establishment of the Securities and Exchange Commission.
The basic premise of the wide-ranging changes was to regain macroeconomic stability by reintroducing fiscal and financial discipline and correcting economic fundamentals. The era of stabilisation that stretched over a fairly long period was no doubt extremely painful, but it has been rewarding in the shape of long-term sustainability and economic viability of the country.
With unrelenting effort and commitment, Pakistan's economy is now well placed on the path of sustained growth. For the third year running, the economy has maintained it upsurge during the FY 04-05.
The rate of growth of 8.4% in real terms has been two-percentage point higher than the previous year. This has been the fifth time in Pakistan's 57-year history that the growth has exceeded the 8% mark. Previously, in FY 53-54 the GDP growth was 10.2%, it was 9.4% in FY 64-65, 9.8% in FY 69-70 and 8.4% in 1984-85.
The sharp increase in GDP during FY 04-05 was possible due to broad-based sectoral performance, particularly of the commodity producing sectors. After recording 14.1% growth during FY 03-04, the manufacturing sector maintained a healthy growth of 12.5% during FY 04-05. Similarly, riding on the success of cash and food crops, agricultural production registered one of highest growths of 7.5% after FY 95-96.
Finally, the services sector also contributed significantly towards the overall growth in GDP with 7.9% increase in its value addition. It is worth emphasising that at this rate Pakistan is now the third fastest growing economy in Asia after China, which enjoyed a sustained growth of over 9% during the last few years, and Singapore where last year's growth was 8.4%.
INDUSTRIAL GROWTH:
As indicated, the growth in GDP was broadbased during 2004-05 and the contribution of the industrial sector was significant. Despite a small deceleration in growth of industrial sector by about 2% points, it exceeded the target of 9.8% set at the beginning of the year by a fair margin. Comparatively stating, this rate of growth has not only exhibited an improved performance over past years, but it has been better than many countries in the region as well. The exceptions are China and India.
While analysing the growth, it has been observed that the most significant contribution of this robust performance came from the large-scale manufacturing (LSM), which approximately constitutes 3/4th of the value addition of the industrial sector. This was supplemented by the vibrant performances of the construction, and the mining and quarrying sectors. The rebound in construction was particularly significant, reflecting a reversal in growth from a negative 6.9% in 2003-04 to positive 6.2% during 2004-05.
Keeping in view the strong linkages of the construction sector with many LSM sub-sectors, this turn around probably had a downstream impact on overall LSM growth.
Conversely, the growth rate for electricity and gas distribution sub-sector slowed down from 21.1% in 2003-04 to only 2.1% in 2004-05. This was despite strong rise in electricity distribution during 2004-05. It probably reflects the base effect of exceptionally higher growth in the preceding year.
A further analysis confirms that the main drivers of growth within the LSM were textile, electronics - especially the household appliances, automobiles, and construction related industries. It is encouraging to note that supportive government policies for the textile sector have started to pay dividends in the shape of robust growth during 2004-05.
One such measure was the reduction in the import duties on textile machinery, which resulted into higher level of imports and, in turn, spurred textile production.
It is also relevant to add that within the textile sector, the record growth of 45.3% of ginned cotton was mainly due to the introduction of the zero-rating concept that improved liquidity of the stakeholders.
In the case of electronics and automobiles sub-sectors, consumer financing remained a key factor of high growth even though adjustment of duty structure has also contributed favourably. The electronics industries yielded a rise of 44.8% in production during 2004-05 compared to the 58.1% in the preceding year. The sustained strong demand for consumer electronics has also led to a 33.9% jump in FDI to this sector during the year.
The automobile sector has also benefited from the rising credit disbursement in the economy. The persistent and robust demand in the economy has attracted new producers into the domestic market, and as a result, the aggregate production of automobiles has gone up by 32.6% during 2004-05.
The concessions and incentives on the one hand and downward revision in tax and duty rates on the other have been responsible for the rapid growth in the housing and construction sector. Consequently, high growth was also registered in the allied industries such as cement, iron and steel, paint and varnish, glass sheet, wood etc.
The production of cement in particular recorded a 16.9% increase during 2004-05, which was marginally less than the 18.6% growth during 2003-04. In order to control supply side constraints and ease-up the pressure on cement prices, the government has recently allowed the private sector to import unlimited quantities of cement from any source without any customs duty and withholding tax.
On the back of strong growth in construction and automobiles sectors, the associated domestic demand for iron and steel also rose sharply. However, the rising demand was mainly met through a 109.7% rise in imports, as domestic production declined during 2004-05.
The fall in domestic production reflects the continued slowdown in ship-breaking industry as well as the impact of technical problems in the production line of Pakistan Steel. The strong domestic demand together with rising prices of steel in the international market has led to significant pressure on prices in the local market thereby aggravating the inflationary position in the country.
To sum up, it is interesting to observe that only five major industries exhibited acceleration in growth during 2004-05 against 11 during the PFY.
These industries included textile, petroleum products, tyre and tubes, wood-products and engineering goods. Among them, only textile and petroleum products have repeated their performance in the 2nd year running. On the other hand, 7 groups registered deceleration in growth in 2004-05 against only 3 in 2003-04. Finally, the growth declined in 3 industries during the current year compared to only one in the preceding years.
DIRECTION OF INVESTMENT AND TRADE POLICIES:
Pakistan is pursuing a policy of liberalisation and facilitation to promote investment and exports. The widely circulated salient features of the investment policy are reproduced in the following for ready reference.
LIBERAL INVESTMENT POLICY:
-- All the economic sectors are open to the foreign direct investment;
-- There is equal treatment to local and foreign investors;
-- Foreign investors are allowed to hold 100% of the equity of industrial projects;
-- There is no requirement to obtain 'No Objection Certificate', similarly no government sanction is required for setting up of industry, in terms of field of activity, location, and size except arms and ammunition, high explosives, radioactive substances, security printing, currency and mint, and alcoholic beverages and liquors;
-- An attractive package of tax/tariff incentives is available; and
-- Remittance of royalty, Technical and Franchise Fee, Capital Profits, Dividends are allowed.
Legal protection
-- All the investment is fully backed by the government of Pakistan and ample legal protection has been granted through
-- Foreign Private Investment (Promotion and Protection) Act, 1976;
-- Protection of Economic Reforms Act, 1992; and
-- Foreign Currency Accounts (protection) Ordinance, 2001.
Foreign exchange control
-- Full repatriation of capital, capital gains, dividends and profit is allowed;
-- The facility for contracting foreign private loans (which does not involve any Guarantee by the Government of Pakistan) is available to all those foreign investors, who make investment in sectors open to foreign investment, for financial cost of import plant and machinery required for setting up the project. However, loan agreements should be registered/cleared by the State Bank of Pakistan.
-- Foreign controlled manufacturing companies/concerns will be allowed unlimited domestic borrowing according to the requirements for working capital.
-- Authorised Dealers are authorised to grant rupee loans and credits to foreign controlled companies for meeting working capital requirements subject to observance of Prudential Regulations under the Banking Companies.
INVESTMENT AGREEMENTS (bilateral/multilateral):
-- Pakistan has signed Bilateral Agreements on Promotion and Protection of Investment with 46 countries. These agreements have very attractive features.
Agreement on the avoidance of double taxation
-- Pakistan has also signed Agreements on Avoidance of Double Taxation with 52 countries, including most of the countries of the developed world.
(To be continued)
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