Economy Of Pakistan
TOPICS:
·
Economic Development
·
Agricultural Development
·
Industrial Development
·
Foreign
Trade
·
Transport and Communication
·
Foreign Aid and Economic Assistance
·
Budgeting
·
Banking And Finance
·
Economic Planning
Economic
Development
Definition of Economic Development
Economic development is a process of economic transition involving
structural transformation of an economy through industrialization, raising
gross national product and per capital income.
According to Lewis,
Economic development means increase in output per head.
According to Micheal Todaro,
Economic development must be conceived of as a multi-dimensional process
involving major changes in social structures, people’s attitudes, national
institutions, acceleration of economic growth and reduction of inequality.
According to Kindleberger,
Economic development means an increase in output of goods and services in the
economy.
It is more important than economic growth because economic development is more
comprehensive process than economic growth. Economic growth is a quantitative
term as it represents quantitative increase in the production of goods,
services and factors of production, whereas economic development is a qualitative
terms as it indicates continuous increase in real national income and
structural changes in the economy of a country.
Definition of Economic Growth
Economic growth means more production of goods and services growth is measured
in terms of an increase in real gross national product (GNP or GDP) or an
increase in per capital income.
According to Micheal Todaro,
Economic growth is a steady process by which the productive capacity of an
economy increases overtime to bring rising levels of national output and
income.
Objectives
Objectives of Economic
Development
1. Increase of supply of food, clothing, health and education facilities.
2. Increase in standard of living of the people.
3. Increase in leisure, political freedom and equal opportunities of life.
4. Increase in capital formation that is new buildings and industries.
Measurement
Measurement of Economic
Development
Previously four methods including, national income method, per capital income
method, welfare method and social indicators method were used for the
measurement of economic development of a country but non of them provided an
acceptable answer.
According to Prof.
Todaro,
The Human Development Index method, which is prepared by United Nations
Development Program is the best method, which should be adopted by the nations
and organizations.
This method includes the opportunities for education, health, income,
employment, environment and economic freedom.
Measurement of Economic Growth
1. Increase in the real gross national product.
2. Increase in the real per capital income.
3. Increase in the general welfare of the masses.
4. Increase in social, economic and human development.
Factors
Factors Needed For
Economic Growth
Ability of an economy to produce more goods and services depends on the following
factors:
1. An increase in stock and quality of its capital goods.
2. An increase in quantity and quality of its labor force.
3. An increase in quantity and quality of its natural resources.
4. An efficient use of factor inputs so as to maximize their contribution to
the expansion of output, through improved productivity.
5. Development and introduction of innovative techniques and new products i.e.
technological progressiveness.
6. An increase in level of demand to ensure full utilization of the increased
productive capabilities of the economy.
Achievement of a high rate of economic growth is one of the main objectives of
macro economic policy. The significance of economic growth lies in its
contribution to the general prosperity of the community. Growth is desirable
because it enables the community to consume more goods and services. It also
contributes to the provision of a greater quantity of social goods and services
such as health and education, thereby improving real standard of living of the people.
Govt. can stimulate growth process by increasing current spending in the
economy through tax cuts by Fiscal policy and by increasing money supply and
reducing interest rates by adopting Monetary policy.
Economic Factors
Economic Factors Needed
For Economic Development
1. Natural Resources
Natural resources are one of the three main factors of production the other two
are labor and capital. Natural resources include area of land, forests, rivers,
climate and mines. If a country is rich in better quality of all natural
resources, it will develop economically at a fast speed.
2. Capital Formation
It is the process of adding net physical capital stock of an economy. Capital
formation creates productive potential for future production. Capital formation
has three stages namely
·
savings
·
financial institutions
and capital market for mobilization of savings
·
act of investment in
machinery and buildings.
3. Specialization
Output is greater as a result of specialization. Specialization enables an
economy to use its scarce resources more efficiently, thereby producing larger
volume of goods and services. It increases the rate of economic development of
a country.
4. Technology
Inventions and innovations reduce manufacturing and distribution costs.
Technological progress serves to change cost conditions in the long run; thus
technological changes play an important role in the economic development.
5. Transport and Communication
Efficient communication facilities increase the production capacity of all
sectors of the economy. It reduces cost of production, increases mobility of
goods within and outside the country.
6. Entrepreneurship
If an entrepreneurship is capable, skillful and trained then out put of his
organization will be greater. Entrepreneurship results in the introduction of
new types of output, new techniques and new sources of supply of inputs for
business and industry.
Non-Economic Factors
1. Social Values and Attitudes
It includes culture, religion and life style of a society. Some societies are
orthodox and do not like material approach of life. Religion does not allow
them to keep themselves busy day in and day out for material prosperity. Most
societies believe in festivals and different cultural ceremonies. They do not
prefer to save money; hence savings rate reduces too much. In such societies
material gains are not appreciated.
2. Political Stability
Strong and stable Governments can prepare five-year development plans, they can
enforce monetary and fiscal policies and change social attitudes and
institutions, which may be progressive one. The frequent changes in Govt. setup
results in the lack of concrete economic policy decisions.
3. Administrative Efficiency
Educated, trained, skillful and hardworking Govt. officers can push development
of a country at a very fast speed, whereas untrained administration of a
country retards the economic development.
4. Economic Freedom
Private ownership of resources and maximum freedom to deploy these resources in
line with profit signals create strong incentives to work hard. If every body
is allowed to participate in economic activity, then due to competition the
rate of economic development will increase.
5. Right of Private Property
Private ownership of the means of production results in the increase in supply
of goods and services. In order to own and accumulate profit and property,
people work hard, thus trade and business activity flourishes.
Difference between Economic Development and Growth
Economic Development
Economic development is a qualitative term as it indicates continuous increase
in the real national income and structural changes in the economy of a country.
It means increase in output of goods and services in an economy. Economic
development is more important than economic growth because economic development
is wider and more comprehensive process than economic growth. Economic
development is a process of economic transition involving structural
transformation of an economy through industrialization, raising GNP and per
capital income.
Economic Growth
Economic growth is a quantitative term as it represents quantitative increase
in production of goods and services in an economy. Economic growth is a steady
process by which the productive capacity of an economy increase overtime to
bring about rising levels of national output and income. Economic growth is the
name of more production. Growth is measured in terms of an increase in real
gross national product (GNP/GDP) over time or an increase in per capital income
Agricultural Development
Importance
Importance of Agriculture
Agriculture is backbone and the largest sector of Pakistan’s economy, which
plays a very important role in its development. It provides food i.e. wheat,
rice, pulses, vegetables, fruit and other items for growing population of the
country. Nearly 22% of total output (GDP) and 44.8% of total employment is
generated in agriculture. It contributes substantially to Pakistan’s
exports.Agriculture also contributes to growth as a supplier of raw materials
to industry as well as market for industrial products.
Performance of agriculture during the year 2005-06 has been weak because its
crops sector particularly major crops could not perform up to the expectations.
Growth in the agriculture sector registered a sharp recovery in 2006-07 and
grew by 5.0 percent as against the preceding year’s growth of 1.6 percent.
Agriculture employs 30% of work force. Country’s 67% population lives in
villages. It contributes about 25% to GDP. It provides raw material such as
cotton, sugarcane, tobacco, cottonseed, edible oil seeds, citrus fruits,
leather, wool, wood and other items for various industries. Major crops
accounting for 35.2% of value added in agriculture, registered a decline of 3%
as production of two of the four major crops, namely cotton and sugarcane has
been significantly less for a variety of reasons including excessive rains at
the time of sowing, high temperature at flowering stage, late harvesting of
wheat crop, strong base effect (cotton) and incidence of frost, damaging
sugarcane crop in the month of January 2006. Pakistan’s agriculture has been
suffering, off and on, from severe shortage of irrigation water in recent
years.
Main Features
Main Features of
Agriculture
1. Main source of food supply.
2. Provides employment opportunities.
3. Major source of national income.
4. Provides raw material for industries.
5. Good market for agricultural machinery and equipment.
6. Market for fertilizers, pesticides and insecticides.
7. Main sour of foreign exchange earnings.
8. Expands industrial goods market.
Major Agricultural Crops
Major Agricultural Crops
There are two principal crop seasons in Pakistan, namely Kharif, sowing season
begins in April-June and harvesting during October-December and Rabi, which
begins in October-December and ends in April-May. Rice, sugarcane, cotton,
maize, bajra and jowar are Kharif crops, whereas, wheat, gram, tobacco,
rapeseed, barley and mustard are Rabi crops. Major crops wheat, rice, cotton
and sugarcane account for 90.1 percent of the value added in the major crops.
1. Cotton
Cotton is not only an export-earning crop but also provides raw material to the
local textile industries. Pakistan is one of the largest cotton producing and
consuming countries in the world. Under the WTO post quota scenario, the
country appears to have the potential of becoming a leading force in the
worldwide cotton and textile market place. There is also growing realization in
the country that future gains in value added from cotton are only possible
through qualitative improvement in raw cotton. Cotton accounts for 8.6 percent
of the value added in agriculture and about 1.9 percent in GDP.
Factors responsible for the decline in cotton production include:
·
Excessive rain at the
time of sowing.
·
High temperature at
flowering stage.
·
Late wheat harvesting resulting
in decline of area under the crop.
·
Pest attack in some
cottons growing areas of Punjab and Sindh.
2. Rice
Rice is an important food cash crop. It is also one of the main export items of
country. It accounts for 5.7 percent of the total value added in agriculture
and 1.2 percent to GDP. Area and production target of rice for the year 2006-07
were set at 2575 thousand hectares, 0.2 percent higher than the target and 4%
higher than last year. The size of the crop estimated at 5438 thousand tons,
2.0 percent lower than the last year and 4.5 percent lower than the original
target.
3. Sugarcane
Sugarcane crop serves as a major raw material for production of white sugar and
gur. Sugarcane crop is highly water-intensive and an important crop. Sugar
production in the country mostly depends on this crop, though a small quantity
of sugar is also produced from sugar beet. Its share in value added of
agriculture and GDP are 3.5 percent and 0.7 percent respectively.
The higher sugarcane production is the result of increase in area, timely rains
and judicious application of fertilizer, improvement in cultural practice,
better management and attractive prices offered by the millers.
4. Wheat
What is the main staple diet of country’s population and largest grain crop of
the country. It contributes 14.4 percent to the value added in agriculture and
3.0 percent to GDP. Area and production target of wheat for the year 2006-07
were set at 8459 thousand hectares and 22.5 million tons respectively. Wheat
was cultivated on an area of 8494 thousand hectares, showing 1.0 percent
increase over last year and 0.4 percent increase over the target. The size of
wheat crop is, however provisionally estimated at 23.52 million tons, highest
wheat production in the country’s history, which is 10.5 percent higher that
last year and 4.5 percent higher than the target. Higher production is due to
following reasons.
·
The certified wheat seed
availability was 50,000 tons more than last year to 2,17,000 tons.
·
The urea fertilizer
availability for Rabi crop was 4.714 tons, which was more than the area
requirements of 2.9 million tons for Rabi. Moreover subsidy was extended to
phosphatic and potassic fertilizers. The price of 50 kg. bag of these
fertilizers were reduced by Rs. 250 and further to Rs. 400 per bag to promote
balanced use of fertilizers.
·
The water availability
for Rabi was 31.2 million acre feet. This was an improvement of 3.7 percent
over the last year Rabi water use of 30.1 million acre feet.
·
Last year the
agricultural credit disbursement to farmers was Rs. 130 billion. This year
credit availability has been increased to Rs. 160 billion. The banks were also
instructed to focus on small and medium scale growers for credit disbursement.
Minor Agricultural Crops
Minor Agricultural Crops
1. Oilseeds
The major oilseed crops include cottonseed, rapeseed/mustard, sunflower and
canola etc., the total availability of edible oils in 2005-06 was 2.905 million
tons. Local production stood at 0.793 million tons which accounts for 27
percent of total availability while the remaining 73 percent was made available
through imports. During 2006-07 local production of edible oil is provisionally
estimated at 0.855 million tons. During this period, 2.201 million tons edible
oil was imported and 0.349 million tons edible oil was recovered from imported
oilseeds. The total availability of edible oil from all sources amounted to
3.405 million tons during 2006-07.
2. Other Minor Crops
The production of two pulses namely mung and masoor were higher by 21.5 percent
and 17.9 percent respectively during 2006-07. However production of mash
decreased by 3.6 percent. The main reason for decline in production of mash as
compared to last year has been the shortfall of area dedicated to the crop,
which declined by 4.6 percent. The production of potato was significantly
higher by 67.2 percent and stood at 2622.3 thousand tons while it was 1568
thousand tons last year. However the production of onion decreased by 14.3
percent mainly due to 16.5 percent reduction in corp area. The production of
chilies is decreased by 49.6 percent as 32.4 percent area of the crop decreased
due to excessive rains in Sindh.
Problems
Problems of Agriculture
1. Old Methods of Cultivation
Primitive methods of cultivation i.e., use of wooden Hul, Phaora, Sohaga and
Bail (Oxen) cannot increase output. It is therefore the need of the day that
our farmers should use tractors, threshers, bulldozers and tube-wells.
2. Shortage of Finance
Our farmer is poor. In order to meet his demand he borrows money from relatives,
friends and money lenders at a very high interest rate. Due to shortage of
finance he cannot adopt new methods of cultivation.
3. Lack of Irrigation Facilities
Development and progress of agriculture is based on regular supply of
sufficient quantity of water. Rains in Pakistan are uncertain and
unpredictable, whereas irrigation system is unsatisfactory. Inadequate water
supply through irrigation system, i.e., from wells, ponds and canals are
causing low agriculture productivity.
4. Under Utilization of Cultivation Land
The total area of Pakistan is 80 million hectares out of which 22 million
hectares of land i.e. 25% land is being cultivated. Due to various reasons a
greater potion of land is not used for cultivation purpose, that’s why our
agriculture output is low. We should bring a greater portion of land under the
use of agriculture.
5. Uneconomic Holdings
It means small area of land, which is uneconomical to cultivate. Due to
inheritance system, land is divided and subdivided into small pieces, making it
uneconomical to cultivate. Small and scattered holdings produce less output.
6. Concentration of Land Ownership
In Paksitan, Jagirdars and Zamindars who one majority of land area live in big
cities and do not take much interest in the development of agriculture. They
give their lands to landless people for cultivation on the basis of heavy Lugan
and Batai (some agreed proportion of output). Since a greater portion of output
goes to the zamindars and very less is left to small and poor peasants, they
get frustrated and do not take interest to raise productivity.
7. Inadequate Supply of Inputs
Our farmers uses poor quality seeds. Due to lack of finance and ignorance he do
not use fertilizers, insecticides, pesticides, improved high yielding seeds and
modern machinery, therefore his output keeps on decreasing.
8. Water Logging and Salinity
With the continued use lands have become waterlogged and saline. Excess and
salty water is very harmful for production of agricultural goods. This
situation is decreasing area of cultivatable land.
9. Soil Erosion
Winds and floods take away fertility of land, causing the land sandy and
barren, thus output decreases drastically.
10. Natural Calamities
Heavy rains, floods, droughts, hailstorms and pest attacks are frequent in our
agricultural sector causing heavy damages to the standing crops.
11. Insufficient Infrastructure
Stores, power supply and road facilities are very less, which hampers
development of agriculture sector. Produce is stored on open places, which is destroyed
due to rain, winds and insects.
12. Absence of Regulated Markets
Markets are far away and there is no transport with the farmers. It is very
difficult to carry the products to far-flung markets therefore farmers are
forced to sell their produce at a low price to the local commission agents.
13. Lack of Education and Training
Our farmer is uneducated and untrained. He does not know the latest multiple
cropping, pest, control equipment, the use of technology and other modern
farming practices. All this results decrease in output per hectare.
14. Improper Agriculture Research
Research facilities in agricultural sector result in the development of better
quality seeds, modern storage facilities, economical use of water, cheap
fertilizers, effective low cost insecticides and locally produced cheap
machinery. Due to shortage of funds proper research is not being carried out in
this field.
15. Lack of Alternative Occupations
In case of failure of crop due to some reason, our farmers become distressed.
They live from hand to mouth and their source of income dries down. There is
lack of agro-based industries such as dairy, poultry and livestock farms, which
may increase income of farmers during off-season.
Measures
Measures for Improving Agricultural
Marketing
1. Department of Agricultural Marketing
Government has established Agricultural Marketing Department in order to
improve marketing system of agricultural crops. Department surveys the
agricultural marketing and prepares its recommendations for provincial
departmental. It also develops agricultural cooperative marketing.
2. Construction of Farm to Market Roads
Government is constructing roads and bridges to link farms with markets in
order to reduce time and cost of transportation. Quick and easy accessibility
of markets will increase income of farmers and their economic position will
improve.
3. Price Awareness
Govt. through newspapers, radio and television is providing information to
farmers about current prices of different crops, fertilizers, insecticides and
other inputs, which are prevailing in different markets and cities. Special
programs are being broadcast regularly for awareness about modern techniques of
cultivation. Modern methods of cultivation are being taught through TV programs.
4. Big Stores and Cold Storages
Stores and cold storages are being constructed in regulated markets so that the
farmers output may not be destroyed. These facilities also help in stabilizing
prices of the produce. Tax concessions are given to those who construct stores.
5. Regulated Markets and Uniform Weight Measurements
Regulated markets are being set up and uniform weights and measurement system
has been introduced so that the farmers may not be cheated and they may get the
proper return of their produce. In regulated markets, Market Committee system
has been introduced which controls and solve these problems. Moreover attention
is being paid on standards and grade of the produce.
6. Education and Training
Main cause of all evils in agricultural sector is lack of education and
training of farmers. Govt. has started providing education/training facilities
about modern methods of cultivation and marketing of agricultural output. Staff
of regulated markets is being trained in order to manage marketing system in a
decent manner.
Industrial Development
Importance
Importance of Industries
Industries play a dominant role in the economic development of a country.
Western countries enjoy all comforts and luxuries of life due to higher
productivity of goods and services in their countries. This is due to
industrialization. Unfortunately there were no industries when Pakistan came
into being but now wit the efforts of Govt. and the people there is an
improvement in this regard however more is required to be done.
The overall manufacturing sector continued on its strong positive trend during
the current fiscal year 2006-07. Overall manufacturing recorded and impressive
and broad based growth of 8.45 percent in 2006-07, against last year’s growth
of 9.9 percent. Large scale manufacturing account for 69.5 percent of overall
manufacturing registered an impressive growth of 8.75 percent in the current
fiscal year 2006-07 against last year’s achievement of 10.68 percent. There has
been a slight decline in growth in the manufacturing sector due to multiple
reasons like reduced production of cotton crop, sugar shortage, steel and iron
problems and the last but not the least global oil prices. All of these reasons
contributed to reduced growth in 2006-07 but high levels of liquidity in the
banking system, an investment friendly interest rate environment, a stable
exchange rate, low inflation, comfortable foreign exchange reserves, stronger
domestic demand for consumer durables and high business confidence among other
things will again boost the manufacturing sector growth rate up to a reasonable
level.
Main Industries
Main Industries of
Pakistan
1. Textile Industry
The share of textile industry in the economy along with its contribution to
exports, employment, foreign exchange earnings, investment and value added
makes it the single largest manufacturing sector. It contributes around around
8.5% to GDP, employs 38% of total manufacturing labor force and contributes
between 60-75% to total merchandise exports. Pakistan is one of the largest
textile exporters in the world. The variety of products ranges from cotton yarn
to knitwear. Garment made-ups and bed wear are most important export products
with an export value of about $1.35 billion each. Knitwear, ready-made garments
and cotton yarn also have important shares in total exports. Major importers of
textile products are USA, European Union, UAE and Saudi Arabia.
2. Automobile Industry
The auto industry growing is fast and may soon begin to achieve economies of
scale. The tremendous rise in automobile demand has resulted in increased
production, giving a healthy impetus to industrial output and generating over
1,50,000 direct employment opportunities besides contributing tax revenue to
the Govt. since 2001-02 the automobile market is growing rapidly by over 40%
per annum. Long-term investment friendly policies of Govt. and up-gradation of
production facilities considered as pre-requisite by experts.
3. Fertilizer Industry
In order to promote the use of fertilizer. Govt. offered various incentives,
which ultimately resulted in excessive demand for fertilizer. The fertilizer
use in Pakistan is a growth story in the field of agriculture. Presently they
are 10 manufacturing units in operation. Out of these, four units are located
in public sector and six are in private sector. The average annual growth of
the fertilizer sector is at 6% per annum. Its share in GDP is 0.5%.
4. Paint and Varnish Industry
There are 22 units in organized and 400 units in unorganized sector for the
manufacture of paints and varnishes. The per capital consumption of paints in
Pakistan is low. The demand for paints and varnishes is rising due to the
resurgence of housing and construction sector.
5. Cement Industry
Cement industry has shown significant growth. At the moment there are 27 cement
manufacturing units in the country. The boost during the period in the
performance of cement industry activity is because of high level of
construction activity in country and increased development expenditure of the
government.
6. Home Appliance Industry
Production of television, refrigerators, deep freezers and air conditioner has
almost doubled in the last three years. The pace of growth in demand for home
appliances is the direct result of the banks and leasing companies policy of
consumer financing package. Many dealers have initiated their own schemes of
easy installments, which is further increasing demand.
Economic Development
Importance of Industries
in Economic Development
1. Increase in National Income
Progress of industrial sector of the country results greater production of
goods and services. Output of goods and services is known as GDP. Increase in
national income increases per capital income of the people. Higher per capital
increases general welfare of people and standard of living of masses improves.
2. Increase in Employment Opportunities
Industries create may types of employment opportunities. Disguised unemployment
prevailing in agricultural sector is removed as labor moves for jobs to the
cities. Increase in employments results increased savings, which is utilized
for further investment in industries.
3. Increase in Productive Capacity
Industrialization increases productive potential. Specialization results in
mass production of superior quality goods at a cheaper cost. Greater employment
opportunities increase income; income increases demand for goods for goods and
services and increases in demand increases investment in industries and other
sectors of economy. Effective demand through acceleration principle increases
investment and a small investment through multiplier effect increases national income
many times and in order to meet demand of people productive capacity develops.
4. Development in Agriculture
Agriculture is backbone of the economy of Pakistan whereas agriculture itself
depends upon the progress of industries. Industries produce all inputs that are
needed by agriculture such as fertilizers, insecticides and machinery etc.
Agricultural output such as cotton, sugarcane, edible oils, fruits, tobacco etc
becomes input for industries. All these factors increase income of farmers.
Thus agriculture and industries are inter-dependent sectors of economy.
5. Increase in Government Revenue
Industries provide revenue to the Govt. through different sources such as tax
on the profit of the company, income tax, sales tax, excise duty, import duty,
export duty. Thus industries provide a greater proportion of taxes to the Govt.
6. Improvement in Balance of Payments
Exports of industrial goods increases foreign exchange earnings. Likewise
processing of raw material reduces expenditure on imports and foreign exchange
earnings improve balance of payments of Pakistan.
7. Economic Stability and Political Domination
Arms, ammunitions, communication appliances, vehicles and other defense
requirements are produced by domestic industries, which make defense of Pakistan
strong. Industrialization provides economic and political stability. It
provides name and fame in international community. Hence a political domination
is achieved.
Industrial Development
Measures for Industrial
Development
1. Industrial Trading Estates
Government has established industrial trading estates where the entire basic
infrastructure such as road, communication, water, gas, power, banks, police
protection etc., has been provided. Most famous industrial estate of Pakistan
is Sindh Industrial Trading Estate.
2. Technical Training Centers
In order to remove shortage of technical labor, Govt. has established
Polytechnic Institutes and colleges in various industrial cities.
3. Tax Concession
In order to develop industrial sector, Government has granted tax holidays and
concessions to the industries.
4. Research Institutes
For progress and development of industries Government has established many
research institutes, which are directly or indirectly assisting industrial
sector. The most important research institutes are Pakistan council of
Scientific and Industrial Research, Central Testing Laboratories and Pakistan
Standard Institute.
5. Protection Policy
In order to protect new and infant industries, Government has adopted the
protection policy for new industries i.e., Goods, which are produced by the
local industry are not allowed to be imported, so that local industry may grow
quickly.
6. Export Processing Authority/Zones
Separate export processing zones have been established where those industries
are established which are engaged in production of exportable goods. Entire
infrastructure is made available their and all facilities are given to these
industries in order to increase export earnings of the country.
7. Export Promotion Bureau
This Government department helps in the exports of locally produced goods by
arranging exhibition, seminars and inviting prospective foreign investors. It
also arranges exhibitions of Pakistani products in international markets and
disseminates different types of information for progress and development of
industrial sector.
8. Provision of Industrial Credit
In order to meet loan requirement, both in local and foreign currency, Govt.
has established many financial institutions such as Industrial Development Bank
of Pakistan, Pakistan Industrial Credit and Investment Corporation., Investment
Corporation of Pakistan, National Investment Trust etc.
9. Investment-Friendly Rate of Interest
Government has reduced rate of interest so that the investors may feel happy to
borrow and invest in industrial sector. Low rate of interest increases margin
of profit thus businessmen establishes more industries in the country.
10. Revival of Sick Industries
Many industries, which had were closed, are now being revived. Their dues of taxes,
loans and interest etc have been drastically reduced and they are now being put
into operation. This is being done so that the industries may become prosper
and export earnings of the country may increase.
11. Privatization Policy
Most of the State owned industries are inefficient and are running in losses,
when these will be transferred to private sector, their administration will
improve and non-development expenditures decrease to a greater extent, their
efficiency will increase and such industries will be converted into profitable
ventures.
Small-Scale Industries
Importance of Small-Scale
Industries
1. Use of Local Machinery and Local Raw Material
Small industries can be set up easily because no technical and administrative
expertise and training is required. Since in it local machinery and local raw
material is used therefore no foreign exchange is required.
2. Employment Opportunities
These industries provide greater employment opportunities to local people. The
disguised unemployment is reduced and migration of people towards cities for
search of jobs is reduced. Since unemployment person can get job in small
industries, the rate of dependent persons is reduced.
3. Increase in Standard of Living
These industries provide job opportunities, income of people increases, which
result in the increase in standard of living. These also reduced income
disparity between the rich and the poor.
4. Increase in Export Earnings
Foreigners heavily demand goods produced by small industries, which results in
the increase in foreign exchange earnings of Pakistan. These enterprises
increase name and fame of Pakistan in international market.
5. Act as By-Product and Subsidiary Industries
Small industries purchase wasted raw material of large industries to be used in
their own production process, thus they increase income of large-scale
industries. These industries manufacturing nuts, bolts and spare parts required
by large industries at a very low price, hence both of them are benefited with
each other.
6. Expansion in Home Market
SMEs produce goods keeping in view needs and requirement of local market
therefore home market is expanded. Increased supply of goods increases business
activity and national income. With increase in output the prevailing high rate
of inflation can be controlled.
7. Diversification in Industrial Products
Goods using different types of material result in diversification of product.
Different varieties of goods are produced according to the demand of different
customer’s purchasing power.
Privatization Policy
Privatization Policy
Privatization is a process by which Govt. owned factories and services are
transferred to private sector by their sale. Foreign investors can also
purchase these industries and services. In order to sale Govt. enterprise open
bids are invited from private sector. In some cases shares of the enterprises
are sold through Stock Exchanges. Deregulation means reducing the rules and
regulations and to make investment easy for local and foreign investors. Now
any foreign national can set up his business anywhere in Pakistan without under
going a complicated procedure of government permission. Privatization process
varies somewhat depending on the nature of the asset being privatized, on the
proportion of shares being offered for privatization and on whether a transfer
of management is involved. Privatization Commission prepares the summary
justifying the need for privatizing the property and the regulatory framework.
Once endorsed by the Board of Privatization Commission, it is submitted to
Cabinet for approval.
Advantages of Privatization
Advantages of
Privatization
1. Increase in efficiency and Profitability
Most Govt. industries and services are inefficient and running in losses, when
these will be transferred to private sector, their administration will improve
and non-development expenditures will be reduced, their efficiency will
increase and will be converted into profitable ventures.
2. Increase in Foreign Investment and Export Earnings
Privatization will increase foreign investment when foreigners will purchase
them. Their production will increase which will more foreign exchange for
Pakistan and if these enterprises are set up by foreign loans, these loans will
be repaid out of the sale proceeds, which will reduce the burden of foreign
loans.
3. Broaden the Base of Share Capital and Stock Market
Sale of enterprises through stock exchanges will broaden the base of share
capital hence stock market will develop, because general public will be in
position to purchase their shares and investment opportunities for general
public will increase.
4. Decrease in Political Pressure
There are always political pressures on Govt. owned industries, banks and other
institutions for employment of political workers and loan facilities from
banks. When these enterprises will go in the hands of private owners then these
illegal pressures will be reduced to a great extent.
5. Use of Latest Technology and Know-How
Private domestic investors and foreign investors will adopt latest technology and
know-how for the increase in output and their profits. This will result in the
increase in national product, thus national income of the country will grow.
6. Decrease in Deficit Budgeting and Increase in Infrastructure
Govt. enterprises usually run into losses and to keep them going. Govt.
provides funds every year. After privation, Govt. need not to resort to deficit
financing and the funds provided to these enterprises will be utilized for
construction of social infrastructure of the economy.
Disadvantages of Privatization
Disadvantages of
Privatization
1. Increase in Tax Evasion
Private sector generally tries to avoid payment of taxes. Thus privatization of
enterprises will result in the decrease of tax income.
2. Concentration of Wealth
Privatization of large industrial units and services sector such as banks and
insurance companies will increase concentration of wealth in private hands. It
means only rich people will reap the fruits of industrialization and the
society will be divided between “haves and have-nots”.
3. Exploitation by Private Sector
Privatization will result in exploitation by rich people. They may charge more
prices for their goods and services. They may terminate workers to reduce cost
of production. Thus different types of exploitation may be started and the
concept of welfare state for Pakistan will be jeopardized.
4. National Security Endangered
Telecommunication, Civil Aviation (Airlines) and railways if privatized then it
would be a security risk for the country.
Natural Resources
Natural Resources
National resources are backbone for the industrial development of a country.
These resources play a dominant role in accelerating in the pace of progress
and prosperity. Economic development of an economy is not possible without the
availability of natural resources. Natural resources are divided into minerals,
forests and hydle power/energy.
1. Mining and Quarrying
Pakistan has a widely geological frame work, ranging from pre-Cambrian to the
present that includes a number of zones hosting several metallic minerals,
industrial minerals, precious and semi-precious stones. Although many effort
have been made in developing geological products, institutional, academic and
Research and Development infrastructure, much remains to be done to enable this
sector to take full advantage of its endowment. As a result of various efforts
devoted for the development of mineral sector, resources of several minerals
have been discovered over the last many decades, including world class
resources of lignite coal deposits at Thar, Sindh, porphyry copper-gold
deposits in Chagai, Balochistan, Iron ore deposits at Dilband, Balochistan,
Lead-zinc deposits in Duddar, Balochistan, gypsum, rock salt, limestone,
dolomite, china clays etc in the Indus Basic, ornamental and construction stones
in the various parts of the country and about 30 different gems and precious
stone deposits in northern Pakistan.
Mineral industry in Pakistan shows that over the last few decades this sector
has been allocated very small amount – 0.45% to 2.46% of the total public
sector expenditure since first five year plan reflecting its contribution to
Gross National Product (GNP) of just around 0.5%. The mineral resources of a
country are valuable means and measures of its economic and industrial growth.
These are still more important for Pakistan because of its favorable geological
environment and a large number of mineral resources in the country. Considering
that substantial scope exists for the development uncertainties, it requires
Government support and recognition of mineral sector.
The Govt. is fully committed to making the mineral sector in Pakistan one of
the most profitable for the country. During the current fiscal year, mining and
quarrying sector has registered a growth rate of 5.7 percent as against 4.58
percent of last year. The increased growth was propelled by strong growths
recorded in magnetite-30%, dolomite-26.1%, Limestone-25.2% and chromites. To
make this sector thrive more in the upcoming year the Govt. has already started
various initiatives which is evident from the discovery and development of
world class copper-gold deposits in Chagai, Balochistan by Australian Firms
that would fetch $500 million to $600 million per year during the lives of
these mines Development of Thar Coal field, one of the largest good quality
lignite deposits in the world on completion, would provide additional source of
energy.
2. Mines and Mineral Development Department
This department was created in Sindh in 2001 in pursuance of the National
Mineral Policy, 1995. The department has taken all necessary steps for further
establishing its field office. The province of Sindh has large quantities of
minerals. In all there are 24 minerals which are being mined at present. The
province also has large quantities of coal and granite reserves. The granite
area which was previously inaccessible has now been connected with Karachi by
network of roads and other facilities like Rest House etc. It is also proposed
that Granite Park should be established at Nagarparkar. Karunjhar Range of
Mountains in Nagarparkar has huge reserves of granite and other rock types of
extractable thickness which has the potential to compete the international
market.
Mineral Resources
Mineral Resources of
Pakistan
1. Natural Gas
Natural gas is used in domestic cooking, thermal power stations and steel
furnaces and as a raw material for fertilizer industry and in CNG kits for
transport purpose. It is used almost in every industry. It is found in Sui,
Attock, Pirkoh and Kandhkot.
2. Petoroleum
Petroleum or Crude, oil is used in transport, power-generating stations, in
iron and steel furnace Petroleum is known as black liquid gold. Of the total
requirement only 40 percent is produced with the country and the rest is
imported from abroad. Crude oil is found at Jhelum, Rawalpindi, Badin, Attock
and Mianwali.
3. Coal
Coal is used in thermal power station and in furnaces for making bricks. About
80 percent of cement industry has now switched over to indigenous coal from
furnace oil that has saved considerable foreign exchange being spent on the
import of furnace oil. Quality of coal is not very good. It is available at
Dandot, Makerwal, Harnai, Lakhra (Sindh). The coalfield in the Sindh province
has huge coal resources of about 175 billion tones. In view of the anticipated
shortfall of electricity and other energy resources during the next 10 years,
the maximum utilization of coal would be required in power generation and
gasification. To ascertain commercial viability of mining coal from Thar
(Sindh), German consultants have completed a mining feasibility on a specific
block in Thar Coalfield.
The coalfields in the Sindh province have coal resources estimated at 175
billion tones. Due to high cost of imported energy, government has decided to
enhance the share of coal in the over all energy mix from 5 percent to 19
percent by 2030. Over 80 percent of coal was consumed by the brick kiln
industry thus reducing the supply available for power generation. Approximately
80 percent of cement industry has also switched over to indigenous coal from
furnace oil that has saved considerable foreign exchange being spent on the
import of furnace oil. The conversion of cement industry from furnace oil to
coal has generated a demand for 2.5 to 3.0 million tons coal per annum.
4. Chromites
Chromite is used in making engineering tools and stainless steel. It is found
at Chaghi, Muslim Bagh, Malakand and Zhob.
5. Copper
Copper is used in electrical equipment, power and communication transmission
lines. It is found at Sandak, Chaghi.
6. Gypsum
Gypsum is used in the manufacture of cement, fertilizers and Plaster of Paris.
It is found at Hazara, Kohat, D.G.Khan and Dandot.
7. Iron Ore
Iron ore is used in making steel and engineering products. Quality of iron ore
is not of good standard. It is found at Kalabagh, Chitral, Hazara, Makerwal and
Khuzdar.
8. Rock Salt
Rock salt is used for cooking as well as in the manufacture of soda ash. It is
also used in textile and tanning industries. It is found at Khewra, Warcha and Kalabagh.
9. Marble and Granite
Marble is used for decoration in construction industry. It is available in
great quantities at various places of the country.
10. Lime Stone
Limestone is used in manufacture of cement, bleaching powder and glass and
paint industries. It has rich deposits in the country. Lime stone is found at
Hyderabad, Potohar and at Khewra Salt range.
Forest Resources
Forest Resources of
Pakistan
Forests play a very important role in the economy of a country. There is
shortage of forests in Pakistan. Pakistan has 4.01 million hectares covered by
forests, which is about 5 percent of the total land area. Eighty-five percent
of this is a public forest, which includes 40 percent coniferous and scrub
forests on the northern hills and mountains. The balance is made up if
irrigated plantations and Riverain forests along major rivers on Indus plains,
mangrove forests on the Indus delta and trees planted on farmlands. Though the
forest resources are meager, it plays an important role in Pakistan’s economy
by employing half a million people and fulfills one-third of the nation’s
energy needs. Forest and Rangelands support about 30 million herds of
livestock. Forestry sector plays an important role in soil conservation,
regulates flow of water for irrigation and power generation, reduction of
sedimentation in water conveyances and reservoirs, employment and maintenance
of ecological balance.
Total forests area of Punjab, NWFP, Sindh and Balochistan is 0.48, 1.33, 0.84
and 1.36 million hectares respectively. Pakistan being an agricultural country
relies on sustained supplies of water and fertile soil. This is only possible
when our forests and watersheds in the high hills are intact. Pakistan being a
forest deficient country is facing timber and fire wood shortage to the tune of
about 29 million cubic meters. There is need to increase the area under tree
cover, not only to meet material needs of growing population but also to
enhance environmental and ecological services being provided by the forests.
Importance of Forests
Importance of Forests in
the National Economy
1. Raw material for paper, sports, silk, furniture and tanning industries.
2. Medical herbs and seeds for pharmaceutical industries.
3. Recreation facilities for tourism and camping.
4. Timber/woof for fire.
5. Reduce floods intensity.
6. Increase fertilizer of land.
7. Provide employment opportunities.
8. Causes rains.
9. Control soil erosion.
10. Fodder for cattle.
11. Provide employment opportunities.
12. Chemicals such as turpentine oil.
13. Leaves of forests provide natural fertilizers.
14. Forests are great source of recreation, natural beauty and attraction.
Energy
Energy
Pakistan’s economy has been growing at an average rate of 7.6 percent per annum
and the government is making efforts to sustain the momentum going forward.
Knowing well that there exists strong relationship between economic growth and
energy demand government is making efforts to address the challenges of rising
energy demand. These include import of piped natural gas from Iran and
Turkmenistan, import of LNG, increase in oil and gas exploration in the
country, utilizing 175 billion tones of Thar coal reserves, setting up of new
nuclear power plants, exploiting the affordable alternate energy resources and
overhauling existing power generation plants to enhance their generation
capacity. In addition to increasing supply, there is a need to promote
efficient use of energy resources as well. At present Pakistan meets its energy
requirement of over 75 percent from domestic resources, around 50.4 percent of
its energy need is met by the indigenous gas, 28.4 percent by domestic and
imported oil and 12.7 percent by hydro electricity. Coal and nuclear
contribution to energy use is limited to 7% and 1% respectively. While the
widening of energy supply and demand gap remains a challenge for Pakistan, it
also provides viable investment opportunities for both local and international
investors.
Main Energy Sources
1. Hydel power.
2. Natural gas.
3. Petroleum.
4. Coal.
5. Atomic Energy.
Importance of Power/Energy
1. No industry can run without power/energy. All machines require energy to
operate them.
2. No agricultural machine can function without it. Tube wells, tractors,
trolleys, threshers all require energy i.e. electricity, diesel or petrol.
3. No transport and communication service such as trucks, cars, railways or
aero plane can operate without energy/petrol/diesel etc.
4. No domestic appliances such as electric bulbs, television, fridge, juicer
and blenders can function without the use of energy/electricity.
Causes of Unemployment
Causes of Unemployment
Population of Pakistan is about 154 million whereas the growth rate of
population is about 2.6 percent per year. The total labor force is 47.67
million, out of which 44.01 million, is employed and 3.66 million is
unemployed. The main cause of unemployment is as under:
1. High Population Growth Rate
Due to rapid increase in population unemployment rate is increasing very fast.
2. Low Rate of Investment
In Pakistan, per capital income is very low, therefore savings are very low,
hence investments are less. Due to low investment are employment opportunities
are not coming up.
3. Mechanization of Agriculture
Agriculture is under process of mechanization. Machines are replacing labor and
creating unemployment. Migration from villages to cities is also a cause of
increase in unemployment, as cities have already reached to the saturated level
and could not absorb new job seekers.
4. Sick Industries and Privatization
Industries are facing many problems. Many of them are at the verge of collapse
due to lack of availability of imported raw material, short of demand in local
market, reduction in their exports and competition with foreign imported goods.
Number of sick industries is increasing day by day which is causing
unemployment in the country. Moreover due to privatization policy of the government,
state owned industries are being sold out to private sector, where labor is
being reduced thus causing unemployment in the country.
5. Decrease in Foreign Employment Opportunities
Due to war between Iraq and Kuwait, attack on Afghanistan and Iraq economic
crises in Middle East and in other European countries, Pakistani workers have
been removed from their jobs thus creating unemployment situation in the
country
Foreign Trade
Foreign Trade of Pakistan
Foreign Trade of Pakistan
Pakistan has recorded laudable export performance during the last several
years, with exports growing at an average rate of almost 16 percent per annum
over the last four years 2002-03 to 2005-06. Given the importance of export in
the economic transformation of any nation, the ability to achieve strong
export-led growth has become a recurring theme in policy making in Pakistan.
The strong export growth in Pakistan benefited a great deal from the rapid
improvement in the international trading environment, which in turn was the direct
consequence of the most ambitious and successful round of multilateral trade
negotiation in Uruguay under aegis of the General Agreement on Tariffs and
Trade (GATT). This trade negotiation succeeded to a great extent in bringing
down tariff barriers, particularly in the international trading environment.
Pakistan’s import growth slowed to a normal level in the current fiscal after
surging at an average rate of 29 percent per annum during the last four years.
Four years of strong economic growth strengthened domestic demand which
triggered a consequential pick up in investment. The rise in investment demand
led to a massive surge in imports. Though Pakistan continued to maintain its
strong growth momentum. import growth has decelerated to its trend level for a
variety of reasons including the pursuance of tight monetary policy during the
year. The lower growth in imports is likely to improve trade deficit from 9.5
percent of GDP last to 9 percent this year. However current account deficit is
expected to be around 5 percent of GDP as against 4.4 percent last year.
Importance of Foreign Trade
Importance of Foreign
Trade of Pakistan
1. Export of Raw Material and Semi Finished Goods
Pakistan’s exports consist of raw material and semi-finished goods, which fetch
very little price in international market. Most dependence of export is on
cotton, cotton textile products and basmati rice, whereas production of these
goods depends upon natural factors. If natural circumstances go against the
cultivation of cotton and rice then export earnings reduce drastically.
2. Import of Machinery and Industrial Raw Material
Pakistan’s imports consist of machinery, industrial raw material, vehicles,
medicines, electronic goods and other value added items. The prices of these
items are increasing in international market. Therefore the total import bill
is increasing day by day.
3. Import of Agricultural Products
Pakistan is an agricultural country but to our ill fate we import many
agricultural food items such as soyabean oil, palm oil, tea, pulses, spices and
many times sugar and wheat from other countries thereby increasing our import
bill.
4. Increased Use of Petroleum Products
In Pakistan number of motor vehicles and other means of transports are
increasing. Similarly due to industrialization, use of machinery is increasing.
All these factors are increasing demand of petrol and petroleum products,
prices of which are rapidly increasing in the international market, causing
increase in the Pakistan’s import bill.
5. Import of Services and Other Invisible Expenditures
Most of the export and import trade of Pakistan is carried on by foreign
shipping companies, as our shipping industry is not developed and we do not
have many cargo ships. Similarly foreign banks and insurance companies render
their services in international trade. Thus lot of foreign exchange is spent on
such service charges.
6. Limited Trade Relations
Pakistan has very limited trade relations. Most of the trade is being carried
out with UK, USA, Japan, Europeans Union and Middle East.
7. International Trade by Private Sector
Private sector is dominating international trade of the country. Businessmen
themselves are finding export markets by sending their representatives for
trade negotiations and trade.
8. Unfavorable Balance of Payments
Balance of Trade is usually against Pakistan. Pakistan’s exports earnings from
raw cotton, textile goods, rice, leather and surgical products are very less
where as expenses on imports of machinery, industrial raw material, petrol and
on electronic goods are greater. Pakistan receives less and pays more, which
makes its balance of trade unfavorable.
Balance of invisible is always against Pakistan. It is a statement of
Pakistan’s use of foreign ships, insurance companies and banks for which
Pakistan has to make payments in foreign currency. Pakistani does not have
ships, banks and insurance companies abroad, which may perform services and
earn foreign exchange. The drain of foreign exchange is too much on this
account.
Balance of Payments is always against Pakistan. It is a statement of a
country’s trade (visible) and financial transactions (invisible) with the rest
of the world. Since both the above balances are against Pakistan, therefore
final balance of payments is also against it. This is being balanced by
borrowings from World Bank, IMF and friendly countries. Unfavorable balance of
payment increases the debt liability of Pakistan.
9. Unfavorable Terms of Trade
Terms of Trade are a price index, which shows a country’s exported goods prices
relative to its imported goods prices. It is prepared by taking an index of
prices received for export and an index of prices for imports and then export
prices are divided by import prices. An improvement in a country’s terms of
trade occurs if its export prices rise very slowly whereas import prices rise
fast.
Major Exports of Pakistan
Major Exports of Pakistan
1. Raw cotton, Textile products and Cotton yarn.
2. Rice.
3. Leather and leather products.
4. Carpets and rugs, Tents.
5. Synthetic textiles.
6. Surgical instruments.
7. Sports goods.
8. Readymade garments.
9. Vegetable, fruit and fish.
10. Engineering goods.
11. Chemicals and Pharmaceutical products.
Exports of Pakistan
Exports were targeted at $18.6 billion or 12.9 percent higher than last year.
Export of food group declined by 3.5 percent. This declined is caused by a 2.6
percent and 14.3 percent decline in exports of rice and fruits. Export of rice
declined due to lesser production caused by adverse weather condition which
kept the domestic price higher. It was more profitable to sell within the
country than to export. Exports of textile manufactures grew by 0.2 percent.
Prominent among these are export of knitwear 13.9 percent, readymade garments
6.8 percent, made up articles 8.9 percent, cotton yarn 4.6 percent and towels
2.6 percent. Exports of other textile materials registered a high double digit
growth of 17.2 percent. Export of raw cotton, cotton cloth and bed wear on the
other hand registered a decline.
Direction of Exports of Pakistan
Although Pakistan trade with a large number of countries its exports are
however highly concentrated in few countries including USA, Germany, Japan, UK,
Hong Kong, Dubai and Saudi Arabia which account for one-half of its exports.
The United States is largest export market for Pakistan, accounting for 28.4
percent of its exports followed by UK and Germany. Japan is fast vanishing as
export market for Pakistan as its share in total exports has been on decline
for one decade, reaching less than one percent from 5.7 percent a decade ago.
Pakistan needs to diversify its exports not only in terms of commodities but
also in terms of markets. Heavy concentration of exports in few commodities and
few markets can lead to export instability. Other issues which need to be
addressed include low value added and poor quality, obsolete use of machinery
and technology, higher wastage of inputs adding to the cost of production, low
labor productivity, little spending on research and development, export houses
lacking capacity to meet bulk orders, inability to meet requirements of
consumers I terms of fashion and design, non-adherence to contracted quality
and delivery schedule, lack of marketing techniques etc.
Major Imports of Pakistan
Major Imports of Pakistan
1. Machinery.
2. Petroleum.
3. Chemicals.
4. Vehicles and spare parts.
5. Edible Oil.
6. Wheat.
7. Tea.
8. Fertilizers.
9. Plastic material.
10. Paper Board
11. Iron ore and steel.
12. Pharmaceutical products.
Imports of Pakistan
Pakistan’s imports are also highly concentrated in few items namely, machinery,
petroleum and petroleum products, chemicals, transport equipment, edible oil,
iron and steel, fertilizer and tea. These imports accounted for 73% of total
imports during 2006-07. Among these categories machinery, petroleum/petroleum
products and chemicals accounted for 53.4% of total imports.
Direction of Imports of Pakistan
Pakistan’s imports are highly concentrated in few countries. Over 40 percent of
them continue to originate from just seven countries namely, the USA, Japan,
Kuwait, Saudi Arabia, Germany, UK and Malaysia. Saudi Arabia is emerging as
major supplier to Pakistan followed by the USA and Japan. The shares of USA and
Japan, with some fluctuations, exhibited a declining trend because of the shift
in the import of machinery/capital goods and raw materials to other sources. On
the other hand, the share of Pakistan’s imports from Saudi Arabia has been
rising due to higher imports of POL products. Malaysia share has shown rising,
as well as, falling trends over the years mainly on account of fluctuations in
palm oil prices
Improvement in Balance of Payments
Measures for Improvement
in Balance of Payments
1. Increase in Exports by Providing Different Incentives
First important step for improving balance of payments of Pakistan is to
increase its exports. It is suggested that following steps should be adopted in
this regard.
·
Decrease in cost of
production, for which interest rate for new industries should be reduced.
·
Cost of transport particularly
railway freight should be minimized.
·
Custom duties on the
export-oriented industries should be reduced.
·
Cost of transport
particularly railway freight should be minimized.
·
Modern techniques of
production should be used.
·
Instead of exporting raw
material, value added goods should be produced and exported.
·
Those industries should
be encouraged and set up which use locally produced raw material.
·
Labor productivity should
be enhanced by imparting education, training and providing different types of
facilities of life.
·
Goods of different
varieties keeping in view the demand and requirement of foreigners should be
developed, produced and exported.
2. Decrease in Imports by Setting up Key Industries
Second important requirement for improving balance of payments is to decrease
imports. It is suggested that after adopting following steps imports will be
decreased.
·
Import substitution
industries should be set up.
·
For production of edible
oils, seeds should be grown locally.
·
Tea consumption should be
discouraged.
·
Production of food grains
such as wheat should be increased.
·
Import of luxurious items
should be banned or heavily taxed.
·
Basic and key industries
should be developed which can produce machinery and spare parts for
manufacturing industries.
3. Increase in Invisible Earnings
Thirdly, for improving balance of payments expenses on invisibles are to be
decreased and to increase exports. After adopting following steps, invisibles
balance can be improved.
·
National shipping company
should be strengthened for assisting the international trade. Freight charges
of this company will become a source of saving of foreign exchange.
·
Domestic commercial banks
and insurance companies should be strengthened and be given task for
facilitating Pakistan’s international trade.
·
Expenses on our embassies
abroad, which involve foreign exchange should be reduced. VIP culture should
put to an end and unnecessary tours and medical expenditure of high government
officers and politicians in foreign countries hospital should be disallowed.
·
Foreign countries visits
by the general public should be discouraged in order to save the precious
foreign exchange of the country.
·
The efficiency of Trade
Attaches of Pakistan Embassies should be improved. It is their duty to do their
best for developing markets of Pakistani products in the countries they are
posted.
4. Search of New Markets
Fourth important requirement for improving the balance of payments is the
expansion of trade relations. After adopting the following steps trade
relations will be expanded.
·
Govt. officials and
business community should participate in trade fairs arranged by foreign
countries.
·
Trade Agreements with
different countries should be made.
·
Seminars and Trade
Exhibition should be arranged within country in which foreign delegates should
be invited to participate.
·
Booklets, brochures,
pamphlets about Pakistani products and economy of Pakistan should be
distributed to foreign business community.
·
Research for marketing
should be conducted.
5. Quality and Packaging of International Standard
Exportable Goods should be of international standard; their packaging should
meet the same standard. Good packaging provides safety and security of the
product and is not destroyed during handling and shifting process.
6. Revival and Restoration of Sick Industries
Sick industries should be revived. This will increase output of industrial
goods, which will result in the decrease of prices. The cheap goods will become
a good market for buyers and they will import more from Pakistan, thus the
export proceeds of the country will increase.
7. Foreign Joint Ventures
Pakistan’s exports can be pushed up after collaboration of foreign investors.
The foreign partners have more contacts in foreign markets and in order to
increase profitability of industry, foreign partners will market the products
in their countries hence Pakistan’s exports will increase.
8. Promotion of Labor Intensive Industries
Small and cottage industries are labor-intensive. Products utilizing more cheap
labor with have a comparative cost advantage which will help in decrease in
cost. Industries such as, leather goods, readymade garments, surgical
instruments sports goods should be developed for export purpose.
How Pakistan’s Export can be Increased
How Pakistan’s Export can
be Increased
1. Diversification of Exports.
2. Trade facilitation.
3. Increased market access.
4. Enhancing export competitiveness by reducing cost of doing business.
5. Capacity building on WTO and trade negotiations.
6. Developing export of services.
7. Improving compliance of quality infrastructure.
8. Techno-legal proposals.
1. Focus on Neglected
Regions/Countries
Trade policy aimed at focusing on neglected regions/countries. The Ministry of
Foreign Affairs in consultation with the Ministry of Commerce has appointed
Honorary Counsels General in important cities of the region to focus on trade
matters to boost export. In this regard the Board of EMDF has approved the
funds for Pakistan’s Embassies to hire local marketing executives to be funded
from Export Market Development Fund. This aspect already stands implemented.
2. Marketing Efforts in
USA and European Union
Another important point of the current trade policy was to boost trade with USA
and EU. For this purpose, Market Company for EU and Consultants for USA have
been hired and this aspect has also been implemented.
Transport and Communication
Transport and Communications
Transport and
Communications
A well functioning transport and communication system is a critical
pre-requisite for a country’s development. Investment in the infrastructure
directly affects economic growth through many changes such as allowing
producers to find the best markets for their goods, reducing transportation
time and cost and generating employment opportunity. In addition, efficient
transport and communication systems also have effects and allow adoption of
latest production techniques such as just-in time manufacturing.
A strong efficient and affordable infrastructure is a critical element of good
investment climate. Transport and Communication are important elements of
infrastructure services and are essential in maintaining economic growth and
competitiveness. Transport and communication sector in Pakistan, account for
about 11% of GDP, 16% of fixed investment, 6% of employment and 15% of the
public sector development program.
Transport Includes
·
Roads
·
Railways
·
Air Transport
·
Shipping
Communication Includes
·
Postal Service
·
Telegraph-telegram
·
Telephone
·
Radio Broadcasts
·
Television
·
Information
Technology-Computer
Importance
Importance of Transport
and Communications
1. Helps in the expansion of internal and foreign trade.
2. Increases employment opportunities.
3. Increases government revenues.
4. Develops unity and brotherhood among the people.
5. Helps in the improvement of law and order situation.
6. Stabilizes the price level.
7. Reduces cost of production of goods.
8. Helps in the expansion of education.
9. Maintains the sound defense of the country.
10. Develops the political awareness.
Importance of Road Transport
Importance of Road
Transport
Road transport is backbone of Pakistan’s transport system, accounting for 90
percent of national passenger traffic and 96 percent of freight movement. Over
the past ten years, road traffic, both passenger and freight, has grown much
faster than the country’s economic growth. The 9518 km long National Highway
and Motorway network contributes 3.7% of total road network and carries 90% of
Pakistan’s total traffic.
National Highway
Authority
NHA is making concerted effort to develop an efficient, safe and convenient
transportation and communication network to meet the growing needs of the
country. It is also encouraging the private sector to complement the efforts in
accelerating the development of transport and communications network and for
improvement in accessibility and delivering of the services provided,
encouragement of tourism and bringing about the qualitative improvements life style
of masses in particular. Present highway network is burdened by immense traffic
and is not sufficient to meet the demanding requirements. Consolidation,
preservation and improvement of existing highway asset are needed. Gradual
extension of network is equally important to develop remote areas for better
connection between economic and social population centers of Pakistan, instill
inter provincial harmony and also improve cross-border transport and personal
mobility of masses.
Importance of Water Transport
Importance of Water
Transport in Economic Development
Water transport is a cheap of transportation. Capital goods, heavy machinery
and bulk raw and finished goods can easily and cheaply be transported from and
out of the country to the foreign countries. Its importance can be judged from
the following facts.
1. Increase in Economic Activity
If country has a sufficient and sound infrastructure in the form of ports and
waterways, the economic activity increases because many ships with tons of
goods move in and out of harbors of the country.
2. Increase in Foreign Exchange
Water transport increases the foreign trade, as it increases the imports and
exports of merchandise from one to the other parts of the world. International
trade flourishes and trading partners are benefited a lot.
3. Decrease in Transportation Cost
Transportation cost reduces too much. Thus goods become cheap which improves
the international trade between the various nations of the world.
4. Increase in Government Revenue
When foreign trade increases, it not only benefits general public, but it also
becomes a great source of revenue for the government by way of customs duties.
5. Increase in Employment Opportunities
Too many people get jobs in shipping industry, as well as in loading the goods
from the ships. Thus directly and indirectly lots of jobs are created. This
increase the general welfare of the people of the country.
6. Increase in Foreign Investment
Foreign countries shipping offices are opened and investments in infrastructure
facilities are set up, which causes an increase in the foreign investment of
the country.
Ports and Shipping
Ports and Shipping
1. Karachi Port Trust
The steady and continuous progress made by Karachi Port Trust has helped boost
the national economy. The existing port facilities appear to be inadequate to
handle the growing cargo at the port. In order to address these constraints,
the KPT has launched a number of projects, which are at different stages of
execution. As the new generations of container ships come on board, KPT is
taking initiatives to be able to cater to the even higher capacity fifth and
sixth generation ships. This involves the development of 10 deep draught berths
with the total cost of cost $1087 million.
2. Port Qasim
Port Qasim is fast becoming a major contributor to national economy of Pakistan
with an impressive growth in port operations. Cargo handling increased from
16.8 million ton to 19.7 million ton over the corresponding period last year.
Port Qasim Authority is currently pursuing a large number of projects for
capacity enhancement and industrialization, attracting foreign direct
investment and undertaking major infrastructure development to enhance its
efficiency.
3. Pakistan National Shipping Corporation
PNSC manages 15 vessels with a total capacity of 6,36,182 dwt. The existing
fleet consist of 10 multi-purpose cargo vessels, 4 Aframax crude oil tankers
and one Panavax bulk carrier vessel which were acquired PNSC’s own resources.
The four Aframax oil tankers are participating in national and regional crude
oil trade. PNSC has carried crude oil cargoes for India, Bangladesh and
Srilanka. The corporation is continuing with its efforts to add more vessels at
a cost about US$150 million out of which US$135 million is being arranged
through foreign financing.
4. Gwadar Port
The Gwadar port would be an integral component of trade corridor for Central
Asian states, China and the gulf as 60 percent of oil and gas is done through
this route. A deep sea port like Gwadar is already attracting global attention
and once it is fully developed with all supporting facilities required to handle
trans-shipment and trade. Gwadar will become one of the important gateways to
prosperity for the people of Pakistan. Some experts even estimate that Pakistan
could earn up to US$ 60 billion per annum of transit trade when Gwadar Port is
fully developed and operational.
5. National Trade Corridor
In order to create a growth-facilitating infrastructure a major initiative
namely the National Trade Corridor has been launched, to revamp the whole
transport sector including ports, roads, railways, aviation etc. A framework to
develop and improving the North South Corridor has been incorporated in it. The
framework takes a holistic and integrated approach to reduce the cost of doing
business in Pakistan by improving the trade and transport logistics chain and bringing
it up to international standards. The initiative is in line with Medium Term
Development Framework. The Government’s strategy to establish a multi-modal
transport system is based on emphasis on asset management with consolidation,
up gradation, rehabilitation and maintenance of the existing system, enhanced
private sector participation in transport and use of modern technology to
increase sector efficiency. The strategy aimed at enhancing regional
connectivity to improve links to the Central Asian States, Iran, Afghanistan
and India. With the development of the North-South and East West trade links,
energy and industrial corridors with China, Central Asian Republics,
Afghanistan and Iran would also be developed.
Basic theme of the National Trade Corridor Improvement Program is decreasing
the cost of doing business through improvements in the trade logistics. Basic
thrust would be to get results through short term, long term measures. In the
short term, quick results would be achieved with small investments through
policy interventions, systematic and procedural improvement, reducing costs and
time and eliminating red-tapism. Long term measures include higher investments
on infrastructure, deep-rooted institutional reforms to ensure sustainability
at conductive environment for pragmatic investment by the private sector.
An efficient and well-integrated transport system facilities the development of
a competitive economy and creates vast opportunities to reduce poverty. It also
ensures safely in mobility and augments regional connectivity. The National
Trade Corridor will also boost the merging trade and business status of the
Gwadar port.
Foreign Aid and Economic Assistance
Introduction
Foreign economic assistance is a provision of financial and
physical forms of assistance to the developing countries for strengthening
their economies.
Different terms of foreign economic assistance/loans are as unders:
1. Bilateral aid means when one country provides loan to another country.
2. Multilateral aid, when loans or Aid is provided by international agencies
such as World Bank, International Finance Corporation, I.M.F., International
Development Agency, Asian Development Bank, Islamic Development Bank, Pakistan
Development Forum.
3. Tied aid is given provided machinery or raw material is purchased from loan
given country.
4. United aid is given without any pre-condition, borrower can use it according
its needs and requirements and from any country.
5. Food aid is provided in terms of wheat, rice etc to overcome food shortage.
6. Technical Assistance is consultancy services, technical expertise and
installation of heavy projects etc.
7. Grants are given on humanitarian grounds for help in famine, floods and
earthquake, which are not to be repaid to donor country.
8. Soft loan is repaid after 25 years and interest rate is from 1% to 3%.
9. Hard loan is paid with 25 years and interest rate is more than 3%.
10. Project Aid/Assistance loan is give for completion on one particular
project.
11. Direct foreign investment means foreign countries companies invest in
industrial and services projects in Pakistan for the sake of profit.
Advantages of Foreign Aid
Foreign economic assistance is very important for economic
development of Pakistan. The advantages or benefits of such assistance are as
under:
1. Foreign Loan Bridges Saving Gap and Balance of Payments
In Pakistan due to low national income and poverty, per capital income is very
low hence rate of savings is very low. Low savings rate cannot help in capital
formation and economic development. Similarly imports are greater than exports
therefore there is always deficit in balance of payments. Foreign loan, aid not
only bridges domestic savings gap but also helps in overcoming balance of
payments problem.
2. Development Requirements are Met
Pakistan wants to develop agriculture, industry, power and natural resources of
the country but due to lack of foreign exchange, required technology could not
be imported. Foreign aid and loan facilities help Govt. to import the required
technology and basic raw material with which different sectors of economy can
develop and due to utilization of modern machines productivity is enhanced.
Thus productivity of various sectors of economy increases.
3. Establishment of Modern Economic and Social Infrastructure
Economy of a country cannot grow without the presence of economic
infrastructure i.e., availability of gas, power, transport and communication.
Similarly social infrastructure (i.e., education, training and health
facilities), is also essential. These infrastructure facilities require local
and foreign capital, which is very limited in Pakistan. Foreign aid helps
government to establish these infrastructures. When construction and other
development activities are started in the country, these generate employment
opportunities for the people.
4. Level of Technological Increases
With the help of foreign aid which is in the way of technical collaboration or
project aid, modern machines are used, which produce super quality goods in
greater numbers. Hence by using goods of high quality consumers are benefited.
5. Meeting Emergencies
Foreign aid helps Pakistan in emergencies. Whenever there is an earthquake,
flood or some other natural calamities, Food Aid program provides Pakistan
different types of food items such as wheat, dry milk etc.
6. Defense Modernization
Pakistan wants to modernize its defense capabilities, which can only be
possible provided foreign aid is available. Modern Fighter Planes, F-16 and
other modern warfare technology can only be secured with the help of foreign
aid and loan, as Pakistan do not have sufficient foreign exchange to finance
this crucial requirement of the country.
7. Increase in Tax Revenue
When foreign loan is utilized for established of industries and social
overheads then economic activities grow, goods and services are produced,
foreign trade is increased, all these factors increase Govt’s income through
different tax sources.
Disadvantages of Foreign Aid
Foreign economic assistance and Foreign Aid result in the
following disadvantages.
1. Increase in Foreign Aid’s Debt Servicing
Pakistan has already borrowed too much foreign loans and is still borrowing.
Now in order to pay interest Pakistan is. Thus debt burden is continuously
increasing.
2. Increase in Production Cost
In results in the increase in the cost of project because of interest, heavy
remuneration and other fringe benefits, which are given to foreign experts.
3. Habit of Dependence on Foreign Loan and Misuse of Aid
Aid receiving countries including Pakistan do not exert and do not make
policies to develop their economy with their own domestic resources. They do
not pay attention for development of technology. They just become entirely
dependent on others. Major portion of aid particularly commodity aid is
misappropriated by the concerned Government officials.
4. Exploitation by Donor Countries
Sometimes loan giving countries interfere in the defense and foreign affairs of
Pakistan. That’s why it is said that there are always political strings
attached to the bilateral loans.
5. Commodity Aid Discourages Domestic Agriculture Output
When aid is in terms of commodity such as wheat etc, which many times is
provided at a very nominal price, discourages local production of that
commodity because of higher cost of production within the country. This
situation discourages local agricultural production.
6. Dependence of Imported Raw Material from Donor Country
If donor country has assisted in establishing imported substitution industry
then raw material for the industry will have to be imported from loan given
country otherwise industry will not continue its production because particular
raw material is not available locally. This causes heavy foreign exchange
burden on economy.
7. Project Tied Loans for Less Priority Projects
Sometimes a donor country may give project tied loans for those projects which for
the time being may not be on the priority list of borrower and may not be very
much feasible. In this way donor can burden the economy of borrower country
because principal amount as well as interest has to be paid while project is
not needed and is not worth while.
8. Savings Investment and Balance of Payments Gaps
Pakistan is obtaining foreign aid for bridging gap between domestic savings and
investment and also to improve balance of payments position but till now it has
not been able to accomplish this task, rather both gaps are continuously
increasing.
9. Proportion of Tied Aid and Severity of Hard Terms Increased
As the time passes by, it is becoming difficult for Pakistan to obtain foreign
aid. The donor countries have increased terms of aid by raising rate of
interest and the repayment period has reduced. Too much sureties and guarantees
are not demanded from Pakistan by donor countries.
Foreign Private Investment
Foreign private investment or foreign direct investment is very
helpful for the economic development of a host country provided they operate
within certain restriction, which are given below:
Advantages of Foreign
Trade Investment
1. Limits on profit repatriation should be fixed.
2. Foreign investment should have a joint venture with the local partners.
3. Foreign investors should export certain proportions of their products.
4. Monopoly control/anti-cartel laws should be enforced on foreign investors.
Disadvantages of Foreign
Trade Investment
1. Profits/royalties are remitted which increases burden on balance of payment
of Pakistan.
2. Foreign companies have superior products dominate local market therefore
growth of local enterprises suffer a lot.
3. Foreigners establish their factories in big cities for want of protection
but it creates economic disparity between rural and urban areas of the country.
4. Foreigners develop friendship with politician and bureaucrats, they provide
respectable jobs to their sons and relatives and then use their economic power
in influencing government polices to their advantage.
5. Foreign companies having large capital and modern technology operate on
monopolistic situation thus exploit consumers by charging heavy prices.
6. Stimulate inappropriate consumption patterns through advertising, such as
KFC. Pepsi Cola and Walls and Mobile phones.
7. Stimulate inappropriate consumptions patterns through advertising, such as
KFC, Pepsi cola and Walls and Mobile phones.
8. Foreign private investment increases foreign exchange liability on imported
raw material.
Budgeting
Fiscal Policy
Fiscal Policy
Fiscal policy of Govt. of Pakistan primarily deals with levels and composition
of taxation, spending and borrowing by Government. Fiscal policy encompasses
several fundamental policy issues, including the proper role and size of the
State, role of Government in promoting growth, creating jobs, social
development and redistribution of benefits of economic growth, nature and
extent of public services and fairness between the present and the future
generations.
Government’s fiscal policy has both micro and macroeconomic objectives.
Micro Economic Objectives
It includes an improved distribution of income and wealth, equitable access to
social services, meeting the basic needs of poor, promoting investment in
public goods and enhancing efficiency with which public and private sectors
produce goods and services and their responsiveness to the needs of consumers.
Macro Economic Objectives
It relate to evolution of economy as a whole, national income and output,
inflation and balance of payments. Fiscal policy must also ensure that level
and structure of taxes promote equality and redistribution and do not interfere
unduly in people’s investment and consumption decisions.
Central objective of govt. economic policy therefore, is to build a strong
economy with a view to creating employment opportunities for all and improve
the standards of living of the people of Pakistan. The policies pursued thus
far have injected fiscal discipline, reduced the country’s debt burden, created
a stable macroeconomic environment, revived economic activity and most
importantly have created a strong platform of economic stability which is vital
for building prosperity and achieving social justice. Economic stability allows
business, individuals and the government to plan more effectively for the
long-term improvement in the quantity and quality of investment. The Government
is committed to locking in stability and investing in the country’s future,
enabling it to meet the challenge and rise to the opportunities of the global
economy.
A sound fiscal policy is essential for preventing macroeconomic imbalances and
realizing the full growth potential. Pakistan has witnessed serious
macroeconomic imbalances in 1990s mainly on account of its fiscal profligacy.
Persistence of large fiscal deficit resulted in unsustainable levels of public
debt, adversely affecting country’s macroeconomic environment. Pakistan
accordingly paid a heavy price for its fiscal indiscipline in terms of
deceleration in economic growth and investment and the associated rise in
poverty. Considerable efforts have been made to inculcate financial discipline
by pursuing a sound fiscal policy. Pakistan’s hard earned macro economic
stability is underpinned by fiscal discipline.
Importance of Fiscal Policy
1. Attainment of maximum welfare of common man.
2. Increase in the employment opportunities.
3. Equitable distribution of national wealth.
4. Development of rural areas and reduction in disparity.
5. Control on inflation/price level.
6. Provision/development of health/education facilities.
7. Reduction in non-development expenditure.
8. Encouragement of private investment.
9. Fuller utilization of national resources.
10. Improvement in balance of payments position.
Taxation System of Pakistan
Taxation System of Pakistan
Tax policy is concerned with the design of a tax system that is capable of
financing the necessary level of public spending in the most efficient in the
equitable way possible. An efficient tax system should raise enough revenue to
finance essential expenditures without recourse to excessive public sector
borrowing and raise the revenue in ways that are equitable and that minimize
its disincentive effects on economic activities. In developing countries,
including, Pakistan, the establishment of effective and efficient tax system
faces some formidable challenges. The first of these challenges is structure of
economy that makes it difficult to impose and collect certain taxes. Economy of
Pakistan is often characterized by a large share of agriculture in total output
and employment, by large informal sector activities and occupations by many
small establishment by a small share of wages in total national income and so
on. All these characteristics reduce the possibility of relying on certain
taxes such as income tax and to a much lesser extent on sales tax.
The structure of economy of Pakistan in association with low literacy and how
human capital makes it difficult to develop a good tax administration. The
staff of tax administration is not well educated and well trained, resources to
pay good salary and to buy necessary equipment are limited, the tax payers have
limited ability to keep accounts, the use of modern communication network is
limited, it is difficult to create an efficient tax administration. The
consequence of this situation is that Pakistan; often end up with too many
small tax sources, too heavy reliance on foreign trade taxes and relatively
insignificant use personnel income taxes. The non-availability of reliable statistics
from the business makes it even more difficult for tax administration to assess
the potential taxes that need to be collected. Uneven income distribution is
also a major constraint in Pakistan’s efficient tax system. To generate higher
tax revenue, the top deciles are supposed to be taxed significantly more
proportionality than low deciles. But economic and political powers are
concentrated in the top deciles, which makes the task of tax department rather
more difficult to collect taxes from top deciles/rich people. This is one major
reason that the number of income tax payers in Pakistan is very low.
Principles of Tax Policy
1. Widening the tax base by reducing exemptions, incentives and
concessions.
2. Reducing multiplicity of rates.
3. Lowering tax rates.
4. Shifting the incidence of tax burden from production to consumption.
5. Moving away from excessive reliance on manufacturing.
6. Taxing all value additions including services.
7. Enhancing neutrality between present and future consumption.
8. Reengineering business process of tax system to overcome the culture of tax
avoidance and evasion.
9. Change in tax administration.
Deficit Financing
Deficit Financing
Deficit budget means that Govt. expenditure is more than its income from taxes
and fee etc. Resources for deficit budget are met by borrowing, which is called
Deficit Financing. In Pakistan deficit financing is needed because development
programs require huge finance whereas domestic savings and income from taxes
are not sufficient enough for this purpose. Increasing savings habits,
population control, elimination of corruption, decrease in non-productive
expenditure and increase in agricultural and industrial products and remove
budget deficit.
Reasons for Deficit Financing in Pakistan
1. Increase in development programs.
2. Lack of saving habits.
3. Increase in population.
4. Lack of fiscal discipline.
5. Political instability.
6. Low output of agricultural sector.
7. Tax evasion and corruption.
8. Increase in non-productive expenditure.
Advantages of Deficit Financing
Advantages of Deficit
Financing
Govt. uses borrowed money for increase in social and economic infrastructure
such as schools, hospitals, power projects, dams, canals and a host of other
development programs, which helps in the improvement and productivity of
various sectors of economy. This expenditure of Govt. increases money supply,
which increases price level in the economy. Increases in prices, increases
profit margins of industrialists, who in order to gain profit further accelerate
their investment. New factories are established and capital formation
increases. Govt. expenditure and private capital formation creates more jobs
opportunities in the economy. Increase in employment increases demand for goods
and services and on the other side it fosters saving as well, which again is
utilized for further investment. Thus cycle of progress and prosperity keeps on
moving ahead.
Disadvantages of Deficit Financing
Disadvantages of Deficit
Financing
There is always a time lag between Govt. investment and the output from the
projects. Increase in supply of money creates inflation, by which poor people
are badly affected. Their purchasing power reduces to a greater extent whereas
profit margin of businessmen increases. Society is divided between haves and
have-not. Increase in prices of domestic goods causes imports of cheaps goods
whereas domestically produced goods high prices reduces the export earnings,
which results in the adverse balance of payments position. Cost of production of
industrial goods increases with the increase in prices of raw material etc.,
therefore foreign investment in the country becomes less attractive.
Banking And Finance
Monetary Policy
Monetary Policy
The development of financial markets and institutions is a critical and
inextricable part of the economic growth. Financial sector deepening (financial
development that includes not only an expansion in the financial sector, but
also an improvement in institutions so that the financial system can allocate
capital to its more productive uses more efficiently) and economic growth are
empirically linked. The banking sector of Pakistan was nationalized and public
sector financial institutions were expanded during the early 1970s, based on
the objectives of directing banking activities towards national socio-economic
objectives and ensuring complete security of depositor’s funds. The dominance
of the public sector in banking sector and non-bank financial institutions,
coupled with centralized policies marked with administered interest rates,
domestic credit controls, high reserve requirements, use of captive banking
system to finance large budgetary requirements of the government and controls
on international capital flows were responsible for deterioration of financial
institutions and their inability to play a vital role in economic growth of the
country.
Monetary Policy stance of the State Bank of Pakistan has undergone considerable
changes over the last several years switching from an easy to a broadly
accommodative stance and then from a gradual tightening to an aggressive
tightening stance till date.
Tight Monetary Policy pursued during the year slowing down the credit growth to
private sector from 19.8 to 12.4 percent. The volume of credit also declined
substantially in the same period clearly suggested that the policy stance has
considerable success in shaving off excess demand in the economy. The impact of
tight monetary was felt considerably in textiles, cement, commerce and personal
loans. However, other factors also contributed to slower growth in private
sector including credit from non-banking financial institutions, availability
of foreign private loans and issuance of corporate bonds in international
capital market by private sector companies, mergers and acquisition in the
banking industry and continuous monitoring by the State Bank of Pakistan of the
personal loans not being used for speculative activities.
Money Market
Money Market
Money market of Pakistan is engaged in short term lending and borrowing of
money. To take one example a company with surplus short-term funds might
deposit these funds with its bank, which in turn uses, the money to purchase
treasury bills issued by the State Bank of Pakistan. Money market links the
following three institutions.
1. Banks and all other financial institutions.
2. Companies and trading firms.
3. Central Bank.
State Bank continued to exercise tight monetary policy and therefore it
intervened quite frequently in the inter bank money market to achieve the
desired results. Tight money market conditions were also reflected in rising
interest rates in the secondary market, particularly the short-term rates as 6
month and 12 months. Tight market conditions also led the commercial banks to
raise the average deposit rate thus general deposits are benefited. Strong
demand for Treasury bills continued in the current fiscal year also. State Bank
accepted Rs. 688.8 billion from primary market of treasury bills during the
nine months of current year compared to Rs. 1052.0 billion in the last year (12
months).
Capital Market
Capital Market
Capital market play crucial role in investment promotion and economic
development of a country. To make Pakistan’s capital market an attractive
window for potential investors govt. has taken a number of initiatives to
streamline the taxation system especially on dividend income of foreign
investors, extension of tax exemption on capital gains and permission for the
private sector to launch open-end mutual funds etc. As a result of successful
implementation of the successive reform measures the capital market has been
growing by leaps and bounds and has emerged as one of the important pillars of
the economy.
The pace of country’s privatization program has gathered greater momentum as a
number of public sector banks and corporations have been privatized while some
other are in pipeline. Under new privatization strategy, government is selling
off its shares of state controlled enterprises by listing them on the bourses as
well as a view to broadening and deepening capital markets. The low interest
rate environment of the last three years has been a positive development for
the country’s stock markets as investors seeking higher returns entered the
markets with a bang; causing boom in stock exchanges.
The improved performance of stock market can mainly be attributed to consistent
and transparent economic policies resulting in strong economic growth, a
successful privatization processes attracting foreign investors in prestigious
organization like PTCL and National Refinery, sound monetary policy of State
Bank, maintenance of fiscal discipline and capital market reforms including
development measures introduced by stock exchanges with full support of
Securities and Exchanges omission of Pakistan. The privatization of government
units through bourses helped to broad base the equity ownership to a
significant level.
There are several factors that contributed to the bullish sentiment in stock
markets during the last several years. These factors includes:
1. Speedy privatization process.
2. Attracting foreign investors in prestigious organizations like PTCL and
National Refinery.
3. Early resolution of the IPP issue.
4. Allowing foreign investor to repatriate their funds without any restrictions.
5. Reduction in the interest rates by the banks.
6. Recovery of outstanding/over due loans.
7. Rescheduling of foreign debts and prepayment of the expensive foreign loans.
8. Continuous improvement in economic fundamentals such as economic growth,
sound monetary and fiscal policies with fiscal deficit under control.
9. Higher revenue collection.
10. Lower inflation.
11. Rising export earnings and stable exchange rate.
12. Declining debt burden and higher industrial growth.
13. Efficiency in trade through automation and curbing insider trading.
14. Strengthening the structure of the Security Exchange Commission of
Pakistan.
As a result of these important development capital and stock markets in
Pakistan grew by leaps and bounds during the last seven years and emerged as
one of the best performing markets in emerging economies
Mutual Funds
Mutual Funds
Mutual Fund is an institution established for investing a pool of funds in
various type of securities/shares for the benefit of investors. A small investors
is unable to diversify his portfolio of funds simply because of high investment
required for diversification. Mutual funds provide a means of diversification
of investment by small investors. Initially mutual fund collects funds from
small investors and when sufficient funds are gathered, and then they are
invested into securities of different types, thus diversifying the portfolio. A
management company manages a mutual fund. A Portfolio Manager, whose
responsibility is to satisfy the desire of the investors, manages the portfolio
of mutual fund. The fund manager invests money on behalf of the investors. The
fund manager is paid a management fee. If there is a profit or gain on
investments, it belongs to the investors. In case there is a loss, it is also
borne by the investors.
Types of Mutual Funds
Types of Mutual Funds
1. Open-End Mutual Funds
An open-end fund does not have a fixed pool of money. In it subscription and
redemption of shares are allowed on a continuous basis. The price at which the shares
of open-end funds offered for subscription and redemption is determined by net
asset value after adjusting for any sales load or redemption fee. In Pakistan
there exist 13 open-end mutual funds listed at Karachi Stock Exchange.
2. Close-End Mutual Funds
A closed-end fund has a fixed pool of money, which is collected when the fund
is set up. In it shares are initially offered to public and traded in secondary
market. The trading usually occurs at a slight discount to the net asset value.
Now mutual fund managers have developed a variety of investment products to
cater for the requirement of investors having different needs.
A mutual fund can generate profits from three different sources i.e.,
·
dividend
·
capital gains
·
appreciation of share
price
Mutual fund generates income from dividends received from other
joint stock companies whose shares the fund holds. A mutual fund uses this
dividend income to distribute dividend to its own stockholders. The capital
gain generated by mutual fund is also used to pay dividends to investors of the
fund. Mutual funds also increase investment of their shareholder through
appreciations of share price of mutual fund. In Pakistan there exists 23
close-end mutual funds listed at Karachi Stock Exchange. There is tremendous growth
potential for mutual funds as vehicle to maximize their earnings from
share-market. Commercial banks and insurance companies have also emerged as big
institutional investors. Government also provides safety nets to the investors
by regulating the mutual fund business.
Pakistan’s Mutual Funds sector is still at the nascent stage and has yet to
achieve mainstream status. The regulators along with the institutions need to
promote international best practices and corporate governance, spread consumer
awareness and maintain investors confidence, Pakistan’s mutual fund industry is
witnessing exceptional growth owing to upturn in the country’s economy.
Initially the market was dominated by public entities like ICP, NIT but with
the emergence of private sector assets managers, the mutual fund sector is
heading in the right direction. Currently mutual funds accounts for only 2.4
percent of the country’s GDP compared to 6 percent for India and 69 percent for
the USA. Mutual fund accounts for 16.5 percent of Pakistan’s national savings
Economic Planning
Economic Planning
Economic Planning
Economic planning is the making of major economic decisions – what and how much
is to be produced and to whom it is to be allocated by the conscious decision
of a determine authority on the basis of a comprehensive survey of the economic
system as a whole. Planning is a technique for achieving certain self-defined
and pre-determined goals laid down by a central planning authority. It is a
conceiving, initiating, regulating and controlling economic activity by the
State according to set priorities with a view to achieving well-defined
objectives within a given time. It is planning alone which can guarantee quick
economic growth in under-developed countries.
Objectives of Economic Planning
Objectives of Economic
Planning
1. Increase in the Rate of Economic Development
One of the most important objectives of Economic Planning is to increase the
rate of economic development. Capital formation should be carried out. Infrastructure
facilities should be extended and social overhead such as education, technical
training and health facilities should be increased. Planning in Pakistan should
be done keeping in mind that country is populous and there are too many people
looking for jobs, hence labor intensive projects should be given priority,
which will absorb labor force and employment opportunities will increase.
Increase in employment will increase national income and per capital income.
Standard of living of people will raise and rate of domestic savings will
increase.
2. Diversification of Economy
All sectors of economy should be given proper importance. No sector of economy
should be neglected. Pakistan is an agrarian country, the development of
industry of Pakistan depends upon agriculture, therefore more emphasis should
be given to agriculture. Since population is too much and it is further
increasing at a fast rate, therefore production of food grains should be
increased.
3. Price Stability
Increase in price level hits the poor and fixed income people very much,
whereas decrease in price reduces profit margins of the businessmen, which
causes reduction in investment. One economic planning is to maintain the price
stability. Through planning equal distribution of national wealth be made. The
society should not be divided between “Haves and Have-nots”
4. Higher Standard of Living
Economic Planning should ensure that good education; technical training and
better medical facilities are available to all the people of the country. Every
one should be provided a reasonable accommodation. Thus policy should standard
of living of the masses.
5. Improving Balance of Payments
All out efforts should be done under planning that balance of payments
continues to improve. Export oriented and import substitutions industries
should be given importance. Luxurious goods should be banned and small and
agro-based industries should be given concessions and facilities. Imports
should be reduced and export increased, in order to improve foreign exchange
earnings. Dependence on foreign aid and grants should be curtailed.