5/27/2010. Ayesha Afzal Assistant Professor. Pakistan Economy. Economic Overview. Lahore School of Economics

Transcription

1 Ayesha Afzal Assistant Professor Economic Overview 1

2 Nominal GDP (2008): bil USD Population (2008):172.1 million Total Trade/GDP (2008): % Currency: Pakistani rupee Exchange regime: Managed float Largest merchandise export destination (2008): US (19.5 %) Main imports Machines & transport equip. Mineral fuels, etc Chemicals Labor force: million note: extensive export of labor, mostly to the Middle East, and use of child labor (2009 est.) Labor force by occupation: agriculture: 43% industry: 20.3% services: 36.6% (2005 est.) Unemployment rate: 15.2% (2009 est.) 13.6% (2008 est.) note: substantial underemployment exists 2

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6 Current Issues Pakistan, has suffered from decades of internal political disputes and low levels of foreign investment. Between , however, poverty levels decreased by 10%, development spending increased. Between , GDP growth in the 5 8% range was spurred by gains in the industrial and service sectors despitesevereelectricityshortfalls but growth slowed in and unemployment rose. Inflation remains the top concern among the public, jumping from 7.7% in 2007 to 20.8% in 2008, and 14.2% in Pakistani rupee has depreciated since 2007 as a result of political and economic instability. The Government agreed to an International Monetary Fund Standby Arrangement in November 2008 in response to a balance of payments crisis. The disbursement of IMF monies has provided ST liquidity and partially closed the financing gap. IMF package was recently augmented by USD 3.2bn to be used to plug the fiscal deficit projected at 4.9% of GDP for FY09/10. Textiles account for most of Pakistan's s export earnings, but Pakistan's failure to expand a viable export base for other manufactures have left the country vulnerable to shifts in world demand. 6

7 Weak demand for the important textile sector, plagued by serious power shortages, hampers growth and employment. The continued perception of Pakistan as a high risk market affects both portfolio and FDI flows pressuring the balance of payments. The power sector is in dire need of massive investment. The economy remains heavily reliant on foreign financing and donor support During 2009 current account strengthened and foreign exchange reserves stabilized tbili largely because of lower oil prices and record remittances from workers abroad. Long term challenges are expanding investment in education, healthcare, and electricity production, and reducing dependence on foreign donors. 7

8 AGRICULTURAL DEVELOPMENT When the tillage begins, other arts follow. The farmers therefore are the founders of human civilization. (Webster, D.) Ayesha Afzal Assistant Professor Introduction Important features of UDC s: Agriculture is the pre dominant sector Agriculture development forms part of an overall development plan Rate of economic growth is largely a function of the rate of growth of agriculture (contributes nearly 50% of their GDP) High gr rate at macro level has always been associated with a high gr rate in agricultural productivity 1

9 Development in agriculture and other sectors is clearly inter dependant and mutually supporting. Some kind of balance is required in inter sectoral growth if the allocation of scarce resources b/w these sectors is to be accomplished efficiently and if agriculture goals areto conform to national goals. (Mollet, 1984) Importance of Agriculture In 37 LIC s, agriculture accounts for about 50% of their GDP Absorbsnearly3/4 b th of their total lb labor force Contributes substantially to their exports In Pakistan: Backbone of the economy : 53% of GNP : 24% Absorbsb nearly 48.4% 4% of employed lb labor force, and 70% if indirect employment is taken into account Largest source of export earnings (rice, raw cotton and cotton based products) 2

10 Historical Perspective Man existed for 2 million years before the agricultural era, but was confined to caves Agricultural era, spanning over less than 100 centuries, revolutionized his status Glorious cultures and great civilizations prospered in the wake of development of agriculture Future survival of mankind largely hinges on the continuing development, vitality and dynamism of this sector. Adam Smith s Natural Order of Development As a country embarks on the road to economic development, its natural priority should be agriculture to make the development process sustainable Industrial development should succeed rather than precede agri development Commerce should be third in this order of importance 3

11 Adam Smith s Natural Order of Development Empirical evidence: England, USA, Japan vs. USSR Additional reasons: poverty eradication hinges on transforming agri into a dynamic sector and creating employment in the rural areas Demand for food is income elastic, and if not matched by a corresponding increase in food supply => inflation Role of Agriculture Surplus in Development Development is essentially the function of economic surplus the excess of production over consumption and its utilization for capital formation. Being the predominant sector in UDC s it is expected to play a leading role in the generation of this surplus How can surplus be raised? 4

12 Agriculture in Pakistan: Historical Perspective Agri assigned a low priority in the 1 st Plan ( ): 11% of total investable funds with a 2.5% agri target, compared to 28% for industry with a 12% gr target Agri growth rates not met by the end of the plan period =< stagnant sector Agriculture in Pakistan: Historical Perspective 2 nd Plan ( ): Gr rate of 3.4% realized in agri helped to meet other crucial targets in the field of exports, savings and prices. Agri assigned 24% of total funds compared to 26% to industry 3 rd Plan: Target of 5% gr rate almost met Allocation: 30% Setbacks: 65 war, suspension of US aid, popular agitation + political uncertainties, failed land reforms 5

13 Agriculture in Pakistan: Historical Perspective 4 th Plan ( ): Became redundant after the split up of the country Crop productivity either stagnated or started a downward slide Reasons: seed deterioration, decline in water use efficiency, low level of input use, water logging and salinity : partial recovery in agro; became almost self sufficient in wheat Unsustainable growth because of persistent bad weather. Agriculture in Pakistan: Historical Perspective 7 th Plan ( ): Inconsistent growth rates during the plan period : 6.9% gr rate 89 90: 3.03% : 9.5% 92 93: 5.28% Average growth rate during the Plan: 3.8% Negative gr rates in due to reverses in the production of major crops 6

14 Agriculture in Pakistan: Historical Perspective 8 th Plan ( ): Wide fluctuations due to an natural/climatic conditions Important recommendations made during 2 nd Benazir govt. ( ) by the Prime Ministers Task force on agriculture Nawaz Sharif govt. also announced incentive package for agriculture Agri policy geared towards productivity gains through h efficient use of key inputs such as irrigation, seeds, fertilizers, plant protection etc. Non Plan period ( ) 7

15 AGRICULTURAL PRICE POLICY Ayesha Afzal Assistant Professor AGRICULTURAL PRICE POLICY All in all, Pakistan s agriculture shows more positive response to market influences than superficial inferences drawn from its subsistence nature would lead the observer to expect. (Cummings, J.T.) 1

16 Introduction Govt s intervene to stabilize prices of agricultural goods to ensure a reasonable price to the consumer and producers Support Price? Procurement Price? Motivations: to safeguard the interests of both producers and consumers and moderate the impact of excessive fluctuations in output. Introduction Agricultural price policy encompasses both outputs as well as inputs, because these two tiers are interdependent Agricultural price policy: a policy of the government whereby it acts to influence or dt determine the prices of agricultural l outputs t and inputs. 2

17 Importance and Need 1. To remove uncertainty 2. To increase agricultural production 3. Keynesian arguments 4. Lag between agricultural prices and other prices 5. Lack of storage facilities 6. Stabilize the tempo of economic growth 7. Income disparitiesiti 8. To increase the standard of living Objectives 1. Stabilization of prices 2. Induce greater production 3. Supply of food to urban consumers at reasonable prices 4. Generate public revenues 3

18 Stabilization of prices Carried out through fixation of support prices bl below which h market ktprices are not allowed to fall Mechanism? Induce greater production Direct and positive correlation between argi prices and production Provide incentive to growers to bring more acreage under cultivation of a crop to expand production Supply responsiveness of agri output to changes in price prompted our govt to use this policy tool to increase production of certain agri commodities Time series data: stagnant prices accompanied with stagnant output 4

19 Reasonable food prices for urban consumers Rlti Relativelyl a more organized and vocal pressure group Absolute necessity for the survival of a political government Generate Public revenues Wide margin between procurement prices at which the government purchases the agricultural commodity, and the price at which they are exported Difference appropriated by the government Augments efforts of resource mobilization Implicit tax on agriculture?? 5

20 Agricultural output price policy in Pakistan output price policy refers to the fixation of procurement and support prices Food and cash crops included in the policy account for nearly 2/3 rd of the annual cropped acreage Early period characterized by the unwillingness of the govt. to use the output policy to expand production. Agricultural output price policy in Pakistan Resulted in frequent food shortages, esp. of wheat Increase in price of wheat => rippling effect, thus leading to an increase in the overall cost of living Govt. concerned with stability of prices for urban consumers rather than expanding frontiers of food prod during the early years. 6

21 Agricultural output price policy in Pakistan Table: rice and sugarcane prices also kept low. Establishes a direct and +ve relation between support prices and output. Next four decades: govt. successfully uses output price policy to increase the production of the 3 major crops of Pakistan. Price fixation process APComm responsible for reviewing and recommending support/procurement prices Recommendations forwarded to the Federal Ministry of Food, Agriculture and Cooperatives. Final approval accorded by the federal cabinet afterdiscussing i theproposals. 7

22 Price Fixation Criteria APComm takes into account the following: Cost of Production Parity index between competing crops Import Parity Price Export Parity Price Buffer Stocks Impact on Income Distribution Benefits big landlords at the expense of small farmers Support price policy serves to widen the gap in productivity between the large and small farmers Further worsens income inequalities between the rural rich and the poor Input price policy also favors big landlords => easier access to subsidized inputs such as seeds, fertilizer, machinery etc. 8

23 Input Price Policy Refers to government subsidies given on agricultural linputs such as fertilizers, improved seeds, pesticides, tubewells, electricity and agricultural machinery. Objectives? Superior to high output price policy, as even small farmers can benefit from it Input Price Policy Subsidization of technology ensures its speedy adoption Drawbacks? Cost of inputs is only a small part of the total cost of production Low input price may lead to unwanted substitutions (eg chem fertilizers instead of organic manure, K int tech, wastage of water) 9

24 Input Price Policy Subsidy on inputs should only be temporary Should not be continued indefinitely Objective: help farmers adopt new technology and expand production and income, thereby enabling them to stand on their own legs. Input price policy in Pakistan Subsidies can be classified into two categories from an operational point of view: Explicit subsidy: covers the difference between therealcostandthesubsidizedrateatwhich the input is supplied to the cultivator (eg fertilizer, pesticides) Implicit subsidy: concealed in concessional prices charged by the govt. for the provision of certain inputs, such as water rate, credit, electricity 10

25 Input price policy in Pakistan Subsidies can also be classified from the budgetary point ofview: Current subsidies: financed from revenue budget and are given on agri products used for consumption purposes, e.g wheat, sugar, edible oils etc Development subsidies are financed from development budget and are given on agri products used for dev purposes, e.g. tubewells, fertilizers, pesticides. Table Vital Trends in Subsidies Total subsidies as a %age of GDP: 1.3 3% Absolute amount on the rise Current subsidies as a % of total subsidies has shown a consistent upward trend Development subsidies as a % of total subsidies showing a downward trend 11

26 The Industrialization Process in Pakistan Ayesha Afzal Assistant Professor Introduction Irregular pattern of industrial development in the west Fundamental changes in the economies of the West Some market failures and imperfections also came forward Planned process of industrialization in UDC s 1

27 Industrial Planning in Pakistan Four phases: Import substitution ( ) Export Expansion ( ) The phase of Distributive Justice ( ) The return of functional Inequality ( ) Import Substitution Industrial Conference convened in December 1947 Take stock of existing industrial structure Asses and evaluate future potentials Formulate a statement of intents in the sphere of industrial planning and strategy 2

28 Import Substitution First Industrial Policy announced in April 1948 Guiding principal: i ImportSubstitution Promote industries using domestic raw material such as jute, cotton, hides and skin etc. Main feature of the 50 s: establishment and expansion of the large scale manu sector Result: between , growth rate of industry in Pakistan was amongst the highest in the world Import Substitution Major reliance on the private sector Public sector role limited to arms and ammunition, atomic energy, telephones and wireless apparatus etc. Credit institutions set up in 1948: PIFC and PICIC PIDC set up in 1952 Share of manufacturing in GDP: rose from 7.97% to 12.4% Contribution in employment: 9.6% to 13.43% 3

29 Import Substitution Effect on agriculture?? Agriculture was the sick man of economic development in Pak Low gr rate in agro => low gr rate of potential market for the growing manufacturing sector Entire economy growing slowly Import Substitution: Exchange Rate Customs union between India and Pakistan broken up Decision of non devaluation. Reasons? Korean War boom( ). Raw material prices go up. 1952: serious BOP crises due to fall in raw materials prices =>still no devaluation to facilitate import of capital good and machinery Trading more profitable than industry during the boom, but due to import controls, there were huge profits in industry after that 4

30 Import Substitution: Trade Policy Three aspects of our trade policy: Over valuation of the rupee relative to other currencies Use of quantitative controls on imports to regulate the level and consumption of imported goods Highly differentiated structure of tariffs on imports, and export taxes on the two principal agricultural exports. Controls speeded the process of structural change Consequences of Exchange Rate and Trade Policy Thetype ofprotective policy in place in Pakistan: 1. Produce anything that can be reasonably produced domestically 2. Once production has started domestically, ban imports of competing goods so as to save foreign exchange Very high incentives for domestic production were given to those items for which the domestic market was the smallest: luxury consumer goods and consumer durables 5

31 Export Promotion The industrial policy of 1959 was largely a reiterationof ti the 1948 policy Renewed emphasis on private enterprise and development of agro based industries (2 nd and 3 rd Plan) Decade of Development OR the Controversial Sixties? Export Promotion: Trade Policy Many controls disbanded => shift from direct controls to indirect controls Export Bonus Scheme Free List Why this Generous policy?? Functional Inequality and trickle down effect 6

32 Phase of Distributive Justice Main objective of the Industrial Policy of 1972: distributive justice and exploitation of country s economic resources for the maximum benefit of the common man Large scale nationalization Industrial strategy favored capital goods or heavy industry Comparison with 50 s: Higher GDP gr rate in the 70 s; higher manu growth in the 50 s; agri was somewhat the same Phase of Distributive Justice Share of private sector investment: down from 87.2% to 24.9%. Countered by increase in share of the public sector Main causes? Pattern of industrialization of the earlier decades Excessive protectionism diluted the growth potential of the large scale manu sector Oligopolistic market structure which led to sub optimal levels of production Deterioration in the quality of goods 7

33 Phase of Distributive Justice First phase of nationalization took place in the large scale manufacturing Later extended to vegetable oil sector and then to cotton ginning and rice milling Nationalization of banks and insurance companies followed Devaluation of the rupee: removed the subsidy that industrialists had received. Export Bonus scheme also abandoned 8

34 The Industrialization Process in Pakistan Ayesha Afzal Assistant Professor The Zia Years GDP growth 65% 6.5% Growth Rate of Manufacturing Manufacturing GDP growth rate 9.5% Large Scale Manufacturing grew at 18.2%p.a on avg Fifth 5 year plan target 12%, Sixth Plan 9% TFP Growth?? 1

35 Attempts at Revitalizing Industry Denationalization Heavy Chemical and Cement Industry were opened to the private sector Economic controls and regulations eased Fifth 5 year plan: High priority to industry that used indigenous raw material Islamization Islamic conditions to be applied to changing socio economic conditions The process involves a basic transformation of the entire society and intra social relationships in conformity with the tenets of Islam Social Justice in the distribution of income Elimination i i of interest These codes mainly existed on paper 2

36 The Public Private Private Sector Divide Initial Expectations: Denationalization!! However, The Public Sector employed 50,000 people Owners were willing to take back units if compensated for accumulated losses Rs. 40 bil. Investment was underway Gradual process preferred by the government Confidence Building Measures Denationalization of agricultural lindustries i tk taken over in 1976 BMR Instt. Of Development Econ. Japan says the regime only cashed on Bhutto s projects Decline in Public Sector Investment 3

37 Initiatives Undertaken Reduction in the list of negative industries i Reduction of tariffs on raw materials, intermediate and capital goods Introduction of a 3 year liberal trade policy The peg was removed Private Sector s share in investment went up Foreign Direct Investment 100% ownership is permitted Negative list historically included arms, currency printing etc. Land, irrigation, health, forestry, insurance etc. Petroleum sub sector allowed to export Today?? 4

38 Revisiting the phases Phase of ISI 1949/ PIFC, PIDC, PICIC Export Expansion Distributive Justice Return of functional inequality grafted with basic needs concern 1990 to date Large Scale Manufacturing Jul Mar07 Sugar Growth 12.5%, target 3% Sugar cane growth due to higher prices Reduced dependence on imports Price of sugar has declined Cement Growth 24.5% higher than 18.6% last year Capacity expansion Greater Export opportunities 5

39 Automobiles Production lowest since FY 03 Supply side constraints: capacity, failure to introduce new models Demand side constraints: more substitutes, higher interest rates, delay in delivery, premium on local vehicles Tractors: 7.9% vs. 16% Capacity constraints Tractor financing problems Imported tractors 6

40 ROLE OF PUBLICAND PRIVATE SECTORS IN INDUSTRIALIZATION Ayesha Afzal Assistant Professor Proponents of the Private Sector Classical economists Against government intervention Laissez faire Adam Smith s invisible hand These economists had suspicions against the efficacy of the role of the public sector 1

41 Proponents of the Private Sector The public sector is inherently inefficient. Flaws that it has: Wasteful expenditure Top heavy and corrupt administration Lower production levels Greater cost of production Lesser accountability of decision and actions Lesser accountability Economic history of the industrialized i d West bears evidence to the effectiveness of the private enterprise The Position of the UDC s UDC s face numerous setbacks which the now developed d countries ti did not face: UDC s are politically unstable and are disintegrated at a national level. Developed countries had a fair degree of political stability and national cohesion. Population explosion in UDC s tends to neutralize their economic development 2

42 The Position of the UDC s UDC s donot possess captive markets abroad; they face restrictive tariffs and quotas. The existence of regional trade blocs and common markets restrict their trade opportunities UDC s are short of time: they need to make rapid strides towards industrialization in the shortest possible time to meet the barest economic needs oftheir people. The19 th century sequence will probably not be repeated, and the public sector will play an important role in rapid industrialization of the UDC s (Buchanan) The Tasks for the Public Sector Investment in basic industries Development ofinfrastructure Imparting skill and training to manpower Initiating labor welfare projects Equitable dispersal of industries toreduce regional imbalances Promotion of exports Control of inflation Elimination of cartels and monopolies stimulating investment and capital accumulation 3

43 The Co existence of the Public and the Private Sector 1930 s: Keynes recommends an active role of the state after the Great Depression 1960 s: The Chicago Boys recommendations of state control is implemented in the LAC s Post debt crisis: rolling back of the state New wave in thinking: a peaceful and mutually beneficial i co existence of the twosectorsshould be achieved to accomplish the task of industrialization in UDC s Public and Private Sectors in Pakistan Both sectors have been in operation since independence, d but the emphasis has been shifting over time Five Phases 4

44 Phase 1: Private Sector as the Engine of Growth Pakistan starts from scratch in the industrial field 1948: Industrial Conference 1949: Industrial Policy Private sector expected to serve as the main engine of industrial growth Role of the public sector confined to 3 industries; the rest of the 27 were opened to the pvt sector Phase 2: Public Sector in the role of Gap filler and Catalyst. The private sector remained severely handicapped d Large exodus of Hindu entrepreneurs Lack of business and industrial experience amongst Muslims Lack of skilled manpower, financial resources and infrastructural facilities PIDC formed in 1952: invested in untapped areas, and sold the project to the private sector when it became operational and profitable. Completed 87 projects by

45 Phase 3: Rise of the Private Sector as a Pace Setter Industrial Policy of 1959: renewed emphasis laid on the central role of the private sector. Opened all industries to the private sector Assurance against nationalizations: the important clause that the government could takek over or participate ii in any industry vital to the security of the well being of the state was struck off. Phase 4: The Fall of the Private Sector Ayub s policies resulted in social and economic inequalities The private sector dominated the economy in vital fields. Bhutto nationalizes industries in 10 basic sectors under the Economic Reforms Order Economic rationale: state control over allocation of resources would promote the best interests of the poor Intellectual support: success of the Soviet Union and the socialist economic model practiced there. 6

46 Phase 5: Resurgence of the Private Sector Zia s govt takes steps to revive the confidence of the private sector Commissions set up to review the performance, policies and organizational structure of the public sector enterprises Large scale denationalization was neither desirable nor practicable Effortsmadetostrikeabalancebetweenthepublic and the private sectors Phase 6: Private Sector at its Peak This phase coincides with the demise of socialism ili at the international ti llevell Large scale privatization started in Pakistan Controversial cases: PSO, Pakistan Steel Mill, PTCL 7

47 WHY PRIVATIZATION IS NECESSARY FOR ECONOMIC GROWTH IN PAKISTAN? Ishrat Hussain 1970 s: massive redistribution of national assets from the private owners to the state Two decades later: Collapse of USSR => assertions and assumptions that led to nationalization were deeply flawed. Pakistan s public enterprises became a drain on the country s finances; retarded growth. Poor worse off!! Rs 100 bn. spent annually on plugging the losses of these corporations Employed thousands of supporters of political parties, and became a source of patronage, perks and privileges for ministers and bureaucrats. 8

48 The public avenues became an avenue for: loot and plunder Inefficient provision of services Production of sub standardstandard goods Example: getting a telephone connection required years not months, and that too with a sifarish Consequence: less than 3 million telephones installed since 1947 In 2004, under a deregulated environment, 6 to 7 million mobile phone connections were given to the citizens without any discrimination. Resentment against the private sector: Private entrepreneurs in Pakistan have earned rents, not profits. Permits, subsidies, licenses, preferred credit from banks, privileges. Entrepreneurs became rich not by their hard work, but by manipulation, connections, paying bribes, evading taxes, bypassing the rules, getting scarce foreign exchange quota s, rigging the market etc. Policy reforms introduced by the Sharif govt. in 1991: Liberalization, Deregulation and Privatization India: per capita income growing at 1% till 1991; increased to 4% since 1992 and poverty has also been declining ever since. 9

49 Role of the state and the market State Market Cope with market failures Provide an enabling environment for equitable development Promote healthy h competition Invest in infra structure and human dev Vehicles of efficient allocation and utilization of resources Decide what to produce, how much to produce, distribute and trade Economic rationale for privatization: Promotes efficient allocation of resources Optimal utilization of resources Make sound, timely and market responsive investment decisions Better service and standards Lower product prices or user charges Contribute to the expansion of the economy through taxes and dividends etc. 10

50 Arguments AGAINST privatization of profit making enterprises: Why fix it when it ain t broke? Protection of workers A better and more professional management can bring about the same results as under privatization. Reasons FOR privatizing them: The govt. should regulate businesses rather than run them The govt. should lay down the rules for businesses to operate and compete, monitor and enforce these rules and penalize those who break them. The govt. cannot be neutral if it owns a business itself, e.g. the aviation industry in Pakistan The case of PTCL 26% of the shares sold to the private investor, and thegovt.retainedt ti d62% of thesharesh 11

51 The Industrialization Process in Pakistan Ayesha Afzal Assistant Professor The Zia Years GDP growth 65% 6.5% Growth Rate of Manufacturing Manufacturing GDP growth rate 9.5% Large Scale Manufacturing grew at 18.2%p.a on avg Fifth 5 year plan target 12%, Sixth Plan 9% TFP Growth?? 1

52 Attempts at Revitalizing Industry Denationalization Heavy Chemical and Cement Industry were opened to the private sector Economic controls and regulations eased Fifth 5 year plan: High priority to industry that used indigenous raw material Islamization Islamic conditions to be applied to changing socio economic conditions The process involves a basic transformation of the entire society and intra social relationships in conformity with the tenets of Islam Social Justice in the distribution of income Elimination i i of interest These codes mainly existed on paper 2

53 The Public Private Private Sector Divide Initial Expectations: Denationalization!! However, The Public Sector employed 50,000 people Owners were willing to take back units if compensated for accumulated losses Rs. 40 bil. Investment was underway Gradual process preferred by the government Confidence Building Measures Denationalization of agricultural lindustries i tk taken over in 1976 BMR Instt. Of Development Econ. Japan says the regime only cashed on Bhutto s projects Decline in Public Sector Investment 3

54 Initiatives Undertaken Reduction in the list of negative industries i Reduction of tariffs on raw materials, intermediate and capital goods Introduction of a 3 year liberal trade policy The peg was removed Private Sector s share in investment went up Foreign Direct Investment 100% ownership is permitted Negative list historically included arms, currency printing etc. Land, irrigation, health, forestry, insurance etc. Petroleum sub sector allowed to export Today?? 4

55 Revisiting the phases Phase of ISI 1949/ PIFC, PIDC, PICIC Export Expansion Distributive Justice Return of functional inequality grafted with basic needs concern 1990 to date Large Scale Manufacturing Jul Mar07 Sugar Growth 12.5%, target 3% Sugar cane growth due to higher prices Reduced dependence on imports Price of sugar has declined Cement Growth 24.5% higher than 18.6% last year Capacity expansion Greater Export opportunities 5

56 Automobiles Production lowest since FY 03 Supply side constraints: capacity, failure to introduce new models Demand side constraints: more substitutes, higher interest rates, delay in delivery, premium on local vehicles Tractors: 7.9% vs. 16% Capacity constraints Tractor financing problems Imported tractors 6

57 An Introduction to the Service Sector Ayesha Afzal Assistant tprofessor The Service Sector Share in GDP= 53.3% Employs 44% (including construction) ti of the work force Cross country comparison: (share in GDP) Singapore : 65% Sri Lanka : 54% India : 52% Indonesia : 42% 1

58 Growth in Service : target 6.2% actual 7.9% Mi Main contributors: tib t Transport, Storage and Communication 5.6% Wholesale and Retail Trade 12% Finance and Insurance 21.8% Ownership of dwellings 3.5% Public Administration and Defense 0.8% Community and Social Sectors 5.4% Linkages with Other Sectors Backward Linkages 61.1% of the non factor inputs that are used by the service sector were purchased from commodity producing sectors. Of the total purchases from the commodity sectors Manufacturing 73.9% Construction 14.6% Electricity and Gas Sectors 7.7% Agriculture Sectors 3.3% 33% 76.5% of the services sectors made purchases from the commodity producing sectors 2

59 Forward Linkages Composition of sectors that purchased from the services sector Agriculture Mining and Manufacturing 70.2% Electricity and Gas Distribution 1% Construction 0.7% Wholesale and Retail Trade Gross Value Added increased by 8% , 5.9% Share in Services 34.6%, in GDP 18.1% Transport, Storage and Communication Average share in GDP ( ) 11.4% Communication i Technology: no. of cell phones reached hd their 2007 target much earlier LDI and WLL rates have declined due to de regulation 3

60 The IT Sector Stress on digitization by the government Heavy Investment by the education, health sector, private business and Industries Currently, 60,000 IT professionals with a turnover of Rs. 12 billion of which 15% is exported Finance and Insurance Banks, DFIs and Insurance Cos are responsible for the 98% of the value added d in this sector SBP is pursuing an accommodative policy Thus a diversified client base Housing and Construction: 90% financed by personal savings However, increased dbank kliquidity idi has hd had a positive ii impact Shortage of skilled man power Public Administration and Defense: Wages and Salaries of public officials 6.5% 5%of GDP Synonymous with governance and quality of service 4

61 Social Community and Personal Services: Charity Rs. 72 billion NGOs and awareness creation Education: Active private sector ,621 schools or 11.4% of all primary schools Enrollment : million, 30% of total enrollment Share of enrollment at secondary level is 23.1% Information and Communication Technology Need for a low cost, high bandwidth and high availability system Rapid growth in electronic designing, call centers and tourism services Currently lowest hourly per seat costs in Pakistan Engineering and Manufacturing Tourism 5

62 Overview of The Telecom Sector Pakistan s teledensity: 10.37% Gross subscribers of land dlines= mil. Mobile subscribers = million Contribution to GDP in % Contribution to the National Exchequer Post deregulation 341,622 jobs have been created pay phone and franchise vendors Facilitation by the Government Policies regarding deregulation, broadband, activation etc. have been passed. The government has reduced taxes from Rs to Rs 1000 to Rs 500( activation charges). 6

63 Financial Services and An Introduction to Poverty Factors behind Sustainable Growth of the Financial Sector Strengthening of the capital base Quality of Bank Assets has improved Earnings of the C. Bank have not arisen due to investment in real estate Wider Customer Base Privatization of nationalized commercial banks Rising interest rates, higher risk of default anticipated 1

64 Banks are fuelling speculative activities?? Are banks real estate buyers?? Risk mitigation by the State Bank of Pakistan. Human Resource Base is being upgraded. Technological up gradation also taking place. Pakistan Financial Services Sector; A Future Perspective By Dr. Shamshad Akhtar Pakistan s Financial Sector s scope and scale: Last 5 years the sector grew by 70% Banking sector grew faster than the non banking sector Market Capitalization of the stock exchange recently peaked at 44% of the GDP. Institutional Diversification post deregulation is evident from: Foreign portfolio inflows Proliferation of non bank financial institutions 2

65 Questions about Sustainability and Overheating. Pakistan s growth has been primarily driven by growth in consumption Macro imbalances have been higher than targeted levels Aggressive and renewed fiscal stimulus Inflationary pressures emerged due to an accommodative monetary policy Rising investment can be ascertained by: Rise in gross capital fixed formation, in real terms 9.8% and 20% of the GDP. Imports excluding crude oil and petroleum products have risen. Private Sector grew by 23% FDI (excl. privatization proceeds) grew Reinvestment of corporate profits MTDF anticipates an increase in the investement/gdp to 20.7% by FY10. 3

66 Financial Sector Assessment and Banking Review 06. Banking Sector s Profits are over $1billion generated by enhanced business volume, high yield assets and widening spreads NPL/Loans = 8% and Net NPL/Loans=2.1% Solvency position of Banks has improved Bank funds are used by the corporate sector, the performance of which remained satisfactory. Exposure of Banks to HH increased at a fast pace Developing Capacities to meet Requirements of Underserved Markets SBP is now providing : A prudential regulatory frameworkfor SMEs Framework for strengthening Risk Management(IRAF) Framework of stress testing to various factors. Encouraging greater depth and breadth in Equity markets. Stock market has benefitted from: Increasein investor confidence Supply of scrips has increased Foreign portfolio investment Efforts to strengthen regulatory framework 4

67 An Introduction to Poverty Conceptual Issues: poverty line?? Fundamental Concerns: Overall expenditure or item by item consumption Absolute or Relative? Temporary or Chronic? Household or individuals? 5