Issues in Pakistan Economy - ECO610 VU

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11
Issues in Pakistan Economy

54
ECO610

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22
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nt
lta
n su
Co
ic
m
de
ca
A
U

Munazza Ahmed
V

Department of Management Sciences

Virtual University of Pakistan

1
 Issues in Pakistan Economy - ECO610 VU

Course Outline

Module Topics
Introduction

4
1- Structural Transformation

11
Structural Transformation
Laying the Foundation

54
Decade of Development
The bad luck years

2
22
2nd Military Regime
Structural Adjustment

32
Democratic Transition
Conclusion

0
2- Agriculture Sector of Pakistan Agriculture Sector

nt Agriculture before British Rule

lta
Impact of British colonialism
su
Feudal or Capitalist?
n

Green Revolution
Co

Land Reforms

Issues in Agriculture
ic

3- Industrial Sector of Pakistan Industrial Sector of Pakistan

m

Phase 1 (1947-1958)
de

Second Phase (1958-1968)

ca

Third Phase (1969-1977)

A

Fourth Phase (1977-1988)

U

Structural Adjustment
V

Key Issues in Industry

4- Public Finance and Fiscal Policy Structure of Government

2
 Issues in Pakistan Economy - ECO610 VU

Structure of Taxation

Issues in Taxation

4
Debt and Deficits

11
Pakistan's Fiscal deficit

54
Domestic and Foreign Debt Crises

2
5- Monetary Policy and Monetary Management Financial Sector of Pakistan

22
Monetary management of Pakistan

32
Financial Liberalization and its Consequences

0
Monetary Expansion and Inflation

nt Inflation Trends
lta
The Low Savings Rate
su

6- Balance of payment and Trade Regimes Pakistan's Foreign Trade; Early Years
n

Pakistan's Foreign Trade; Development

Co

Decade

New Government’s Trade Policy (1972-1977)

ic

Liberal Trade Regime and Structural

m

Adjustment
de

Foreign Exchange Rate

ca

World Trade Organization (WTO) and

Globalization
A

7- IMF and Structural Adjustment Programs (SAP) Structural Adjustment Programs and IMF:
in Pakistan Historical Perspective SAP: Implementation
and Achievements
U
V

3
 Issues in Pakistan Economy - ECO610 VU

MODULE 1
Structural Transformation
GDP per…

4
2500

11
2000
1500

54
1000
500

2
0

22
0 32
GDP per capita
nt
lta
30000
su

20000
10000
n
Co

0
Pakistan South
Korea
ic
m

Abbreviations
de

GDP: Gross Domestic Product

ca

FDI: Foreign Direct Investment

FY: Fiscal Year
A

CPEC: China Pakistan Economic Corridor

GSP: Generalized System of Preferences
U

EU: European Union

PPP: Pakistan People’s Party
V

PML-N: Pakistan Muslim League-Nawaz

IFPRI: International Food Policy Research Institute
AEDB: Alternative Energy Development Board

4
 Issues in Pakistan Economy - ECO610 VU

IPPs: Independent Power Producers

LOIs: Letters of Intent
MW: Mega watt
CNG: Compressed Natural Gas

4
11
Outline

54
Democratic
Transition
New Military

2
(2007 –
Regime present)
Structural

22
(1999-2008)
Adjustment
The Second Era (1988 –
Military 1999)
The Bad Luck Regime

32
Years (1971- (1977-1988)
The Decade 1977)
of
Laying the Development
Foundation

0
(1958-1968)
(1947-1958)

nt
lta
Structural Transformation at a Glance
n su
Co
ic
m

Subsistence
Farming
Structural Diversified
Economy
Transformation
de
ca
A
U

Agenda
V

• To evaluate the performance of our country over a period of about seven

decades

5
 Issues in Pakistan Economy - ECO610 VU

• A brief overview to understand Pakistan economy’s structural

transformation
• Own development narrative

4
Sectoral contributions to GDP at the time of independence;

11
– Agriculture 53% (65% labor force involved)
– Manufacturing 7.8%

54
– Trade 11.9%

2
22
0 32
nt
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Sectoral contributions to GDP today;
su

– Agriculture 19.5% (42.3% labor force involved)

– Industrial Sector 20.88%
n

– Services sector 59.59%

Co

Contribution to GDP 1949

ic
m
de

Others
27% Agriculture
ca

Trade 53%
12%
A

Manufacturing
U

8%
V

6
 Issues in Pakistan Economy - ECO610 VU

Contribution to GDP 2017

Agriculture

4
19%

11
Service Sector

54
60% Industrial sector
21%

2
22
32
The huge transformation in economic, social and hence political power from the
agriculturist towards an urban and rural middle class. One of the key indicators

0
highlighting the extra ordinary structural transformation of Pakistan over the time
period.

nt
70 years of Development
lta
Or
7 Decades of Pakistan’s Economy
n su

Pakistan today is less than half of the country it was in 1947 with reference to its
Co

population. (Since 55 % of the population lived in East Pakistan).

Geographically West Pakistan was 6 times more than East Pakistan.
Huge contributions to society and economy by east Pakistan.
ic
m

Laying the Foundations (1947-1958)

Features
de

• Predominantly agrarian
• Undeveloped and newly independent nation
ca

• Little industry, few services

A

• Absence of economic infrastructure

• Adverse international conditions
U

• Precarious domestic situation (with millions of refugees)

V

• Attempts of bureaucracy to keep Pakistan on its feet

• Lack of capital
• Colombo Plan launch 1951 (Rs.2600 million)

7
 Issues in Pakistan Economy - ECO610 VU

• Provision of very basic necessities

• Building an economic base by state sector

Policy Success

4
• Ban on Imports of cotton textiles and Luxury goods

11
• Emphasis on Industrial Growth
• Manufacturing Sector Growth 34% (1952-54)

54
• Korean War (1950-1953)

2
22
Policy failure
• Decline in agricultural growth rate (1951-1958)
• Severe floods in the Sindh and Punjab (1948)

32
• Deficit financing throughout 1950’s

0
The Decade of Development (1958-1968)

nt
Military takeover by General Ayub Khan in October 1958.
lta
Features
• Considerable Economic growth
su

• Economic policy-making Focus

• Model Capitalist Economy
n

• High growth rate in manufacturing

Co

• Progress in Agriculture sector (5% p.a)

• Increase in Exports
ic

• Inflow of American Aid

• Indus Water Treaty
m

• Water & Power Investments

de

• 1965 War
• Economic & political tensions grew between the two wings
ca
A

Policy Success
• Economic and social reforms
U

• Increase in Investment (three-fold )

• Technological breakthrough in Agriculture (5% p.a)
V

• Coordinated economic policies

• Price stability

8
 Issues in Pakistan Economy - ECO610 VU

• Regional Disparities (Industry and Agriculture in Central Punjab, Industry in

Karachi)
• Feeling of East Pakistan of Utter neglect → Demand for full economic
autonomy

4
• Income Inequality (concentration of economic power, few families acquired

11
most of the national wealth)
• Perpetuation of Industrial & Trade policies

54
• Functional Inequality (as social sector was neglected)
• Education sector

2
• Health Sector

22
• Little increase in real wages

32
An Assessment

0
Commitment to Development
Development momentum disrupted by 1965 War

nt
(  Foreign Aid,  Defence spending,  Investment)
lta
Growing Economic Disparity
An era with exceptionally successful period of economic management.
su

The Bad Luck Years (1971-1977)

n

This era brought fundamental structural and institutional changes is social, economic
Co

and political sectors.

Features
• Nationalization (Manufacturing industries, Banking, Insurance, Education
ic

etc.)
m

• 1973 oil price shock → Balance of Payment worsened

• Devaluation Pakistani rupee → Foreign exchange earnings 
de

• Worldwide recession → Exports

ca

• Massive floods 1973 and 1974

• Worst Inflation
A

• Fiscal deficit widened further

U

Policy Success
V

• Foreign exchange earnings 

• Investment in Big industrial units 
• Land and labor Reforms
9
 Issues in Pakistan Economy - ECO610 VU

• Private sector investment 

• Worst Inflation (15% p.a.) → Real Incomes 
• GDP growth 
•  Expenditure on defence and administration → Budget deficit

4
•  Development expenditure → employment

11
• Socialism experiment leaves negative impact

54
Second Military Regime

2
Military takeover by General Zia-ul-Haq in July 1977.

22
The second Military Government (1977-1988)

32
Features
• Improvement in growth rate
• Decline in Poverty

0
• Decline in unemployment
• Liberal economic policies
nt
lta
• Higher industrial growth
• Domestic debt Increases
su

• Defence spending Increased

• Development spending neglected
n

• Fiscal deficit
Co

Policy Success
ic

• Two major initiatives of last tenure started paying off in this regime; i.e.
• Mega projects (such as Tarbela dam)
m

• Pakistani expatriates sent abroad

de

• Inflow of foreign remittances 

• Foreign Aid  (Afghan War) (these two factors ease the fiscal pressure)
ca

• Islamic interest free banking System

• GDP growth  (4.9% to 6.6%)
A

• Agriculture growth 
• Manufacturing growth 
U

• Domestic saving rate (below 10%)

V

• Exports as a percentage of GDP (below 10%)

• Inadequate investment in social & economic infrastructure
• Negative public saving
10
 Issues in Pakistan Economy - ECO610 VU

• Declining public investment

• Domestic debt explosion (large interest payment and fiscal deficit)
• Neglect of development spending
National saving/GDP (16%) But used to finance large fiscal deficit

4
Fiscal deficit a result of;

11
• Non-developmental expenditure 
• Tax revenue/GDP ration 

2 54
Structural Adjustment Era

22
Structural Adjustment Era started in 1988 (democratically elected regime).

32
The Era of Structural Adjustment: (1988-1999)
Features

0
• Democracy (4 General elections)
• Political Instability
• Corruption in governance
nt
lta
• Law & order situation
• In-efficient state-owned Banks
su

• Debt crises
• Economic liberalization
n

• Structural adjustment program (IMF & World Bank)

Co

Policy Success
ic

• Economic Reforms 1991

• Privatization of state-owned enterprises & Banks
m

→ Expenditure on subsidies

de

• Energy Policy (private power policy of 1994)

• Debt crises
ca

• Rising unemployment (development expenditure declined)

• External deficit 
A

• Worst Inflation
• GDP growth 
U

• Poverty 
V

• Declining private investment

• Macroeconomic instability

11
 Issues in Pakistan Economy - ECO610 VU

New Military Regime

Military took over the Government in October 1999.

New Liberalism, Dictatorship (1999-2007)

4
Features

11
• Most sanctioned country (Post 1998)
• GDP growth 

54
• Foreign exchange reserves 
• Budget deficit 

2
• Unemployment rate 

22
• Real state development
• Modern services sector

32
• Foreign Direct Investment 

0
Policy Success

nt
• Government formulated comprehensive set of reforms for;
• Reviving the economy
lta
• Establishing institutional basis to improved governance
• Substantial improvement in macroeconomic indicators
su

• Investment rate  (17.2% of GDP in 2001 to 23% in 2006)

n

• Foreign direct investment  (Investor confidence)

Co

• GDP per capita  (3.9% in 1999 to 6% till 2007)

• Stock Exchange performance 
• (Best performing equities market)
ic

• Education sector expanded (Record allocations for science and technology,

m

education sectors)
de

• Modern services sector development results in job creation

ca

Policy failure
• Continued widespread poverty
A

• Shortage of basic services

• Dependency on foreign inflow (Afghan War)
U

• Free media / press

V

• Investment in consumer products & domestic services cannot be basis of long-

term sustainable growth.

12
 Issues in Pakistan Economy - ECO610 VU

Analysis
Economically this era embarked the achievement of many milestones and
demonstrated excellent growth rates.

4
Democratic Transitions (2007 onwards)

11
Democratic Government started after General Elections in 2008.
Features

54
(2008-2013)
• Declining GDP Growth

2
• Inflation increases

22
• Global Financial Crisis
• Rising foreign debt

32
• Rampant Corruption
• Rising Unemployment

0
• Falling FDI
• Energy crises
nt
lta
(2013-2018)
• GDP Growth improvement
su

• Budget deficit 
• Private sector confidence improved
n

• Inflation 
Co

• Improvement in Tax collection

• Imports 
ic

• Current account deficit 

• Debt Burden 
m
de

Policy Success
• FBR tax revenue 
ca

• Energy crises (up to 33000MW)

• Average inflation (4% in last five years)
A

• CPEC
U

• War on terror
V

Policy failure
• Short term policies
• External debt
13
 Issues in Pakistan Economy - ECO610 VU

• Circular debt highest (Rs 922 billion)

• (Rs. 120 bn 2010)
• Strategic Trade Policy Framework (STPF)

4
Analysis

11
• 32 Years of Military Government (3 times of different military governments)
• 38 Years of democratic government (4 times of democratically elected

54
governments)
• Healthy growth around 5% (falling trend since 1988) *39th poorest nation in

2
22
world
• Highly dependent on Aid and foreign assistance
• Capitalist development (Role of private sector is important)

0 32
nt
lta
n su
Co
ic
m
de

• Lowest performers in the South Asia Region on human development

ca

indicators, especially in education

• Lowest female labor force participation rates in the region
A

• Tax-to-GDP ratio, at 12.4 percent, is one of the lowest in the world

• Corruption (score 32/100)
U

• Pakistan being blessed with;

V

• Skilled labor
• Sufficient natural endowments
• Could have grown much more.
14
 Issues in Pakistan Economy - ECO610 VU

MODULE 2
Agriculture Sector of Pakistan
Introduction

4
Agriculture is the second largest sector of Pakistan’s Economy. Around 20%

11
towards GDP. 42.3% labor force employed. Basic supplier of raw material to

54
Industry (Such as Textile & Sugar). Agriculture performance has been
unsatisfactory. Its attributable basically to;
• Traditional methods

2
• Lack of motivation

22
• Lack of research

32
• Natural disaster (like pets attacks & floods)

0
Outline

nt Development of
lta
Agriculture Before
British Rule
n su

A Historical Impact of British

Co

Account Colonialism
ic

Feudal or
Green Revolution
m

Capitalist
de

Agriculture Sector
ca

Land Reforms
A
U

Critical Issues
V

15
 Issues in Pakistan Economy - ECO610 VU

Agenda
Briefly narrate the history of agriculture development in Pakistan from the pre-

4
colonial Mughal times and examine the consequences of British rule.

11
A Historical Account

54
Summarize the changes that have taken place over three centuries and conclude
with a picture of the agriculture sector at the time of independence in 1947. The

2
development of Agriculture before the consolidation of British Rule.

22
Two school of thoughts;

32
1. Pre-colonial India was Stagnant society, Colonial Impact brings
modernization and Development.

0
2. Underdevelopment in south Asian sub-continent is result of colonial impact.

nt
India was a pre-capitalist social formation before the British Rule. Under the
lta
Mughal Rule all land was owned by the King alone.
• No private property in Land
su

• Permission for use granted by king

n
Co

Mansabdars or Jagirdars
• Part of the ruling class who were supposed to maintain armies to serve the
emperor.
ic

• Paid salaries in cash or commonly given Jagirs

m

• transferred from one area to another

de

• responsible for collecting revenues from the peasants

ca

• officials rather than feudal lords

A

Zamidars
U

• Appointed by the emperor

V

• responsible for collecting revenues on behalf of King

• influential individuals from village

16
 Issues in Pakistan Economy - ECO610 VU

• Local lord / master

• Presided over all the social and judicial matters at the village
• Did not own the land

4
11
Khalisa Lands
• Revenue sent to the state directly

54
• No question of land being inherited by either the peasants family or the

2
zamidars

22
• No occupancy rights
• Zamidars and jagirdars assert authority over assigned tracts of land

32
• In 1707 (death of Aurangzeb) Mughal empire began to Decay

0
• Central authority weakened

nt
• Zamindars and Jagirdars became more strong where they could
lta
• Tried to strengthen their claims on land and hold on the peasants
n su

The Impact of British Colonialism

Co

In the middle of 18th century, colonial expansion started in south Asia and by end
of the century British established direct or indirect control over the greater part of
its land. The Impact of British rule brings three institutional changes which had
ic

important consequences.
m

1. Institution of Private Property

de

It was introduced in late eighteenth and early nineteenth century

ca

2. A Legal System
A

It was established with reference to the ownership of property

3. An Efficient Government
U

It systematized / settled multiple claims of land which emerged after decline of

V

Mughal empire

17
 Issues in Pakistan Economy - ECO610 VU

As a result, the power of the landlord over the peasant was dissolved and re-
structured Economic and political power separated.
In 1793, in Bengal; Property rights given to revenue collectors / zamindars (who

4
had taken land possession), ensuring the revenue collection.

11
In 1843, Sindh was taken over by the British Empire. The ryotwari system was
established for land. A system in which State was landlord and the occupant was

54
its ryot / tenant. Occupant was given Heritable and Transferable rights. Payment
of land revenue was basic condition.

2
22
The British granted ownership rights of large tracts of land (as Jagirs) to the
influential as they provided some kind of service to the British rulers. These

32
owners became land lords of Sindh.
The Impact of British Colonialism

0
Steps by British rulers;
1. Introduction of monetary tax
nt
lta
• Tax on cultivated land as well as on fallow land
su

2. Agriculture commercialization
n

• Emergence of agricultural market

Co

• Product selling in market

3. Process of building canals (late 1870’s)
ic

4. Proprietary rights were given to self-cultivators (1912)

m

RESULT:
de

• Greater integration of Rural economy with rest of Indian sub-continent as a

result Agricultural commercialization.
ca

• Agricultural development on Capitalistic lines.

A

• Cropped area  (grew)

U

• Marketable agricultural Product  (grew)

V

• Land held by usurers under mortgages (emergence of debt market)

18
 Issues in Pakistan Economy - ECO610 VU

In 1947, Punjab had 42% land with landlords and 58% was on lease. Sindh had
80% land with landlords.
FEUDAL OR CAPITALIST?

4
British colonialism-initiated capitalism in agriculture in the region.

11
• Absence of Agriculture revolution

54
• Economic expansion & modernization
• Quantitative increase (not qualitative)

2
22
• Greater integration (monetization)

32
Capitalist form of agriculture did not emerge on significant scale so conclusion is
clear Agriculture remained feudal or at least pre-capitalist.

0
According to many scholars, British instituted capitalism.
• Private ownership of land
nt
lta
• Emergence of agricultural market
• Rights of alienation & transfer
su

• Introduction of legal system

n
Co

• Establishment of official sources of credit

• Protection of rights of land users
ic

• Greater interaction & integration between town and country

m

• Quantity of crops grew (exported as well)

de

• Wage labor emergence

• Setting up of agricultural zones
ca

These arguments are enough to support for Pre-capitalist to Capitalist type of

A

Agriculture
U

GREEN REVOLUTION
V

Most important events in Pakistan's agricultural history are Green Revolution

occurred in mid-1960s. Green revolution is significant increase in agricultural
productivity resulting from the introduction of technology package of high yield

19
 Issues in Pakistan Economy - ECO610 VU

varieties (HYV) seeds, chemical fertilizers and pesticides. This results in major
changes in economic, social and political structure of the country.
1949-1958 1.43% annual (agriculture was stagnant in 1950s)

4
1959- 1964 3.7% annual

11
1965-1970 6.3% annual

54
Increase in growth took place in

2
TWO phases;

22
1960-1964 → Increase in irrigation facilities (tube wells)
→

32
1965-1970 Use of high yielding variety of seeds, pesticides and fertilizers.
Complete technology package of;

0
• Water
• Seed (two HYVs)
nt
lta
• Fertilizer
su

• Pesticides
n

Most important ingredient in the technology package was water.

Co

Green Revolution was a resounding success, however there arise various issues as
a result.
ic

➢ Issue of the tube wells

m

➢ Issue of mechanization (tractors)

de

➢ Regional & Income disparities

The Issue of the tube wells
ca

1960 → few hundred

A

1968 → 75000
U

1975 → 1,56,000
V

But there arise three major issues in this regard.

The Issue of the tube wells

20
 Issues in Pakistan Economy - ECO610 VU

1. Highly concentrated in canal colony districts of Punjab (91% in 1968). Very

little tube well development outside Punjab. Even the middle level peasants
could not afford its cost.
2. Large public subsidies were given for this investment. (Fuel, installation cost,

4
and maintenance)

11
3. Developed by landowners having more than 25 acres of land due to size and
cost of tube wells. (70% of tube wells with big farmers)

54
Mechanization Issue (Use of tractors)

2
1960 → 2000 tractors

22
1968 → 18,909 tractors

32
But Most tractors were owned by the land lords with more than 100 acres of land.
(38% in Multan division)

0
Regional & Income Disparities
▪ Installation of tube wells
nt
lta
▪ Tractorization
su

▪ Access to credit
n

Inaccessible to poor farmers hence the result is interregional and income

Co

disparities.
Since the NWFP and south eastern part of Sindh had inadequate access to water
ic

and the HYV technology

m

Thus, Landowners owning 50 to 100 acres of land, almost all of them from Punjab,
produced “Pakistan’s Green Revolution”
de

LAND REFORMS
ca

Land reforms is changing the pattern of land possession to stop the concentration
of land, by reallocation of land between landless / small land owners by taking land
A

from large land owners.

U

Pakistan had a long history of land reforms starting in 1947, focusing then nature
V

of tenancy and structure of land holdings.

The objective of land reforms was to put ceilings on landholdings and supposed to
be an attempt to change tenancy regulations.

21
 Issues in Pakistan Economy - ECO610 VU

➢ 1959 Land Reforms

➢ 1972 Land Reforms
➢ 1977 Land Reforms

4
11
1959 Land Reform Features
• A ceiling of 500 acres of irrigated and 1000 acres of unirrigated land

54
• Tenants already cultivating lands

2
• Permanent ownership to occupants

22
• Compensation was paid (Rs. 5/ per PIU)

32
• Resumed land to be sold to landless tenants

0
Critical analysis;
• Many landlords benefited by getting compensation for their poor-quality
land.
nt
lta
• By 1967, only 50% of the resumed land had been sold
su

• 20% from this half of the resumed land was sold to landless tenants
n

• 80% of this land was auctioned to rich farmers and civil, military officials.
Co

1972 Land Reform Features

• A ceiling of 150acres of irrigated and 300 acres of unirrigated land.
ic

• Permanent ownership to occupants.

m

• No compensation was paid.

de

• Resumed land to be given to landless tenants free of cost.

ca

• Pending dues of 1959 land reforms were written off for tenants.
A

Critical analysis;
• Only 42% land was resumed in Punjab, 59% in Sindh.
U

• 0.6 million acres land resumed (far less than 1959 figure).
V

• 1% of the landless tenants and small owners benefited.

1977 Land Reform Features
22
 Issues in Pakistan Economy - ECO610 VU

• A ceiling of 100acres of irrigated and 200 acres of unirrigated land.

• Permanent ownership to occupants.
• Compensation was paid (Rs. 30/ per PIU)

4
• Agricultural Income Tax to replace the land revenue. The irrigated land of

11
25 acres or less, and the un-irrigated land of 50 acres or less were exempted.

54
• CONCLUSION

2
Land reforms were always controversial. It was argued that they were un-Islamic

22
and that they violate the right to own, use and enjoy property as protected by the
constitution. The reforms did not yield the expected results due to variety of

32
reasons.
CRITICAL ISSUES IN AGRICULTURE SECTOR OF PAKISTAN

0
Introduction
Story of Agriculture
nt
lta
• Process of change
su

• Nature of Change
n

How social and economic relations have changed over time.

Co

ISSUES
• Agriculture Price Policy
ic

• Agricultural Credit
m

• Mechanization
de

• Agriculture Income tax

ca

• The water Crisis

A

• Land Reforms
Agriculture Price Policy
U

Government can play critical role in determining what, and how much to produce
V

through pricing policy. A good agricultural pricing policy can be defined as one
which can act as an incentive to produce certain goods in required quantities.

23
 Issues in Pakistan Economy - ECO610 VU

National Commission of Agriculture report 1988;

✓ Low food grain prices
✓ Export duties on cotton

4
✓ Fixed prices of wheat and rice

11
✓ Inter-districts and inter-provinces restrictions

54
✓ Low prices of vegetable ghee

2
✓ Agriculture commodity import

22
An extensive structure of agricultural input subsidies was evolved covering;
(1960’s,1970’s)

32
o Fertilizers

0
o Seeds
o Plant protection
nt
lta
o Tube wells
su

o machinery
n

Agriculture suffered from output price policies and large farmers get most out of
Co

input price subsidies

Agricultural Credit
ic

❑ Formal sources of credit

m

• Complex procedures
de

• Limited access
❑ Informal sources of credit
ca

• Simpler
A

• Flexible (little collateral)

U

Issues related to Mechanization

V

Agriculture Income tax

Taxation is an Economic and Political Issues

24
 Issues in Pakistan Economy - ECO610 VU

Economic → Revenue collection to manage budget.

Political → some lobbies resist and some demand taxation.
Analysis

4
• Large number of direct, indirect and hidden taxes

11
• Agricultural income rises (Population and input cost rises)

54
• Higher taxation → less saving for investment in agriculture

2
• Agricultural income rises → more area under cultivation

22
The Water Crises

32
• Key factor behind success of green revolution was sufficient water
availability but Pakistan’s irrigation system has deteriorated with time and

0
result is ‘Water Crises’.

nt
• Pakistan does not have adequate reservoir capacity
lta
• Canal water causing water logging and salinity
• No proper drainage system with irrigation infrastructure
su

• Inequality of power
n
Co

• Insufficient maintenance of irrigation system

Issues related to Land Reforms
ic

Already discuss in Land Reforms.

m
de
ca
A
U
V

25
 Issues in Pakistan Economy - ECO610 VU

MODULE 3
INDUSTRIAL SECTOR OF PAKISTAN
Introduction

4
Generally, Industrialization implies “Growth and Development”.

11
At the time of independence, Pakistan had no industries to speak of, no industrial

54
raw material, no significant industrial or commercial groups.
By the mid 1960’s, Pakistan was considered model developing country with

2
22
phenomenal industrial growth.
During 1951 to 1955, the manufacturing sector grew annually at 34%. (One of the

32
highest growth rates witnessed in the world)

0
Outline

nt
lta
n su

INDUSTRY
Co
ic

Process of Key Issues in

m

Process of
Industrialization Industrialization Pakistan’s
de

(1947-1977) (1977 till present) Industrial Sector

ca
A
U
V

PROCESS OF INDUSTRIALIZATION (1947-1977)

THREE PHASES

26
 Issues in Pakistan Economy - ECO610 VU

• First phase is period 1947-58

• Second phase is 1958-1968
• Third phase is 1969-1977

4
11
First phase is period 1947-58
Industrial Policy of April 1948

54
Features:

2
• Extreme industrial backwardness

22
• No jute mill (with 75% of worlds jute production)

32
• Few textile mills (Huge cotton production)

0
• Pakistan blessed with considerable economic resources

nt
1949-1958 → Growth rate of industry in Pakistan was most rapid in the world.
(Large scale manufacturing growth 23.6% between 1949-1954)
lta
1950’s → Establishment and expansion of large-scale manufacturing sector.
su

Economic development and Investment Tools in the first decade

n

• The impact of Exchange Rate

Co

• The Trade Policy Regime

• Import Substitution Industrialization
ic
m

The impact of Exchange Rate

• September 1949, Pound sterling, currencies of numerous countries as well as
de

India were devalued. But Pakistan did not follow.

ca

To,
A

✓ Announce the world Pakistan’s independent economic policy

✓ Sell raw material (jute) at higher price and import machinery at lower price
U

• Pakistan government imposed some controls on imports and exports to manage

V

trade.
• India suspended trade with Pakistan in September 1949.

27
 Issues in Pakistan Economy - ECO610 VU

As a consequence, Pakistan;
✓ Either devalue the currency
✓ Find alternative market3

4
• Due to Korean war Pakistan make spectacular profits on its exports.

11
• 1952, The price of cotton and Jute fell but government decided not to devalue.

54
Instead, government put physical controls on imports and exports.

2
The decision NOT to Devalue currency started Pakistan on the road to industrial

22
and economic development.
The Trade Policy Regime

32
Analysis;

0
• Collapse of Korean Boom (1952)
• Fall in export prices
nt
lta
• Balance of payment deteriorated
su

• Controls and restrictions were imposed on trade

Pakistan’s Trade Policy aspects;
n
Co

• Overvaluation of rupee
• Use of quantitative controls on imports
ic

• Highly differentiated structure of tariffs on imports and export taxes

m

Import Substitution Industrialization

de

The exchange rate and trade policies adopted by Pakistan leads to Import
ca

Substitution Industrialization.
Protective Policy:
A

• Produce anything that reasonably can be produced

U

• Ban on import of domestically produced goods

V

Import Substitution Industrialization

28
 Issues in Pakistan Economy - ECO610 VU

Due to Highest protection (consumer goods) → Import substitution progressed

easily and rapidly.
Imports of capital goods & non-agricultural industrial goods only, government

4
played major role in determining the nature and structure of industry.

11
Second phase period 1958-68

54
Economic policies of the first decade initiated an era of industrial growth and
development. This laid the foundation for the decade of development between

2
1958-1968. Growth rates in large scale manufacturing, Agriculture and GDP

22
showed astonishing trends over the ten years between 1958-1968.
Examine the nature of development through;

32
• Growth rates

0
• Policies pursued
• Consequences of policies
nt
lta
Growth Rates
su

High growth rates in large scale manufacturing continued in the first few years of
this decade (growth rate around 17% annual). Even after 1965, manufacturing
n

sector growth remained above 10%.

Co

Trade Policies
1. Many controls on trade were disbanded.
ic

2. New trade policy 1959 shifted away from direct controls to indirect controls
m

3. Export Bonus scheme (EBS) launched in 1959.

de

4. Import Licensing scheme replaced with Open General License (OGL) in

ca

1961.
5. Introduction of “Free List” scheme.
A

6. Focus on Import liberalization.

U

7. New Import controls introduced

V

Analysis

29
 Issues in Pakistan Economy - ECO610 VU

• Import liberalization would not have been possible without increase in

foreign aid.
• Export Bonus scheme compensated overvalued exchange rate and boosted

4
export.

11
• Due to overvalued exchange rate, it became cheaper to import machinery.

54
Consequences
• Impact of EBS, import licensing and liberalization strategy was considered

2
“Dramatic” on Industrial Development.

22
• Large Scale manufacturing growth increased from 8% (1955-60) to 17%

32
(1960-65).
• In 1965, Pakistan’s manufactured exports were greater than the combined

0
manufactured exports of south Korea, Turkey, Thailand and Indonesia.
Conclusion
nt
lta
Foreign Aid  → Imports 
su

Both industrial production and investment responded well to liberalization of

imports.
n
Co

Export Bonus Scheme (EBS) encouraged the export of manufactured goods.

Third phase period 1969-77
ic

Last phase ends with rise in inter regional disparities and income inequalities
particularly between East and West Pakistan.
m

New democratic government inherited new Pakistan defeated in war by India in

de

December 1971.
ca

Analysis
A

• Socialism concept was responsible for dismal growth rates and highest rates
of Inflation.
U

• Bad Economics and poor policies were responsible for poor economic
V

performance

30
 Issues in Pakistan Economy - ECO610 VU

• Many ‘bad luck factors’ also causes played a critical role in causing
economy to grow at below trend rates.
Major steps / Economic Policies

4
• Nationalization of all basic industries and financial institutions. Nationalization

11
policy has three aspects;

54
1. All those means of production that are generators of industrial advancement
must be taken in public hands

2
2. All enterprises of national economy infrastructure must be in public

22
ownership.

32
3. Institutions dealing with medium of exchange (banking and insurance) must
be nationalized.

0
• The party’s promises to urban organized labor were fulfilled within six months

nt
of coming to power through the labor reforms (1972).
lta
• Devaluation of Pakistani rupee by 131 percent.
• Banking reforms May 1972, State Bank of Pakistan extends controls over
su

scheduled banks.
n

• Export Bonus Scheme (EBS) was abandoned.

Co

Bad Luck Factors

• August 1973 → Massive floods hit Pakistan
ic

• October 1973 → Increase in international petroleum prices

m

• World recession as a result of OPEC price rise

de

• Huge failure of cotton crop (25%)

ca

• 1976-77 → Worst floods in Pakistan's History

A

Consequences of factors
U

• Nationalization measures results out to complete reversal of public and

V

private investment. (In 1974/75 Private sector investment was only 15 % of

its level in 1970 while public sector investment rose to 75% from only 5% in
the same time period).

31
 Issues in Pakistan Economy - ECO610 VU

• Private sector had lost all trust in government.

• Inflation reaches to peak level due to oil price rise.
• Oil price rise wiped out positive balance of trade (gains from devaluation).

4
• Floods and pest attacks damaged crops severely.

11
• Failure of cotton crop 1974/75.

54
Critical Review

2
• Generally economic performance remains poor /economic stagnation

22
• Lack of fiscal and monetary discipline;

32
• High budget deficit
• Monetary growth and inflation

0
• Period of domestic and international turmoil

nt
It was more external (Bad luck) factors than Bad management which resulted the
lta
poor economic growth rates.
su

PROCESS OF INDUSTRIALIZATION (1977 till present)

n

Introduction
Co

Last Era was characterized by poor policies, bad management and various bad luck
factors which results into overall poor performance of the economy. This Era
started in 1977 with the military rule in the country.
ic

Fourth phase period 1977-88

m

Features
de

• Pakistan’s manufacturing sector became more capital intensive between

ca

1975-1986.
A

• There is little employment growth in almost all industries between 1975-

1986.
U

• 1980’s has been a period of relatively high growth in manufacturing.

V

• This time period has the first ever industrial policy, formulated and
executed.

32
 Issues in Pakistan Economy - ECO610 VU

• Overall performance of the economy in this period was phenomenal.

Analysis
• Change in government in 1977 brings a change in industrial strategy.

4
• Most important concern of the government was to restore private sector

11
confidence and motivation in order to revive investment in industry.

54
• Government made the decision that the private sector was to play the leading
role in the industrial sector.

2
22
Steps taken
• Sep 1977, Denationalization of number of agro based industries.

32
• Dec 1977, number of basic and heavy chemical and cement industries were

0
opened to private sector.

nt
• March 1978, Tax holidays and incentives to encourage industrial activity in
the less developed regions of country.
lta
• June 1978, Export rebates were given.
su

• Fifth five-year plan 1978/79 was launched (third & fourth plan were lost)
n

• Return of assets seized and nationalized in the last regime.

Co

• Sixth five-year plan 1983-88 marks the process of deregulation and

liberalization.
ic

• A ‘negative list’ was introduced to encourage foreign trade.

m

• Manufactured exports were given rebates, import facilities, income tax

de

concessions to encourage exports.

ca

• Distinguishing measure of this government was Islamization (Islamic laws

were enacted, commissions formed and economy was brought under Islamic
A

laws and principles).

U

On the whole the manufacturing sector in Pakistan has recorded impressive growth
rates during the 1977-88 period.
V

The Age of Structural Adjustment 1988 Onwards

Introduction
33
 Issues in Pakistan Economy - ECO610 VU

The political and economic background of the role that the IMF and world bank
began to play in Pakistan’s economy after 1988 through Structural Adjustment
program.

4
Seventh five-year plan (1988-93) under the instructions of IMF and World bank set

11
ambitious targets for overall reforms in industrial sector.
Industrial sector Reforms

54
• Further Deregulation

2
• Liberalizing the economy

22
• Privatization

32
• Tariff Reforms

0
• Regulation of foreign Investment

nt
Under the three-year agreement (1988-1991) with the IMF, the industrial policy
outlined. Some points are as follows;
lta
• Deregulating business decisions
su

• Enhancing export incentives

n

• Reducing level of protection

Co

• Reducing the list of restricted imports

• Divesting the shares of public sector companies to private sector
ic
m

Industrial sector Reforms Review

• The world bank in its review program (1991) felt that economy responded
de

well to policy reforms.

ca

• Progress in implementing structural reforms to promote private sector

activity has been exceptional.
A

• Manufacturing sector managed impressive 7.4% growth (1991).

U

• World bank and IMF have concluded that three-year structural adjustment
V

program (1993) went well especially in industrial sector.

Industrial sector in 1990’s

34
 Issues in Pakistan Economy - ECO610 VU

• Manufacturing sector growth rate fell from 8.21% average annual to 4.8%
average in 1990’s.
• In 1996-97 industrial sector growth was minus 0.1 %.

4
• 1999-2000 industrial sector growth was only 1.5%.

11
• Industrial sector in 1990’s only reconfirmed the deteriorating condition of

54
the industry in the country.
Analysis of Industrial sector in 1990’s

2
22
• All the governments relying on private sector to lead Pakistan on higher
levels of industrial development.

32
• It’s not surprising the public investment reduced.

0
• Disturbing fact is that the private investment (as a percentage of GDP) also

nt
fell.
• But public investment was higher 9.2% (as a percentage of GDP) than
lta
private investment 7.8% (as a percentage of GDP).
su

Industrial sector in 2000’s

n

• Most of the investment and manufacturing indicators improved substantially

Co

after 1990’s.
• Both total investment and fixed investment grew at higher rates.
ic

• Main motor of investment was private sector with almost three times higher
m

as much as public investment (12.6% as compared to only 4.8%)

• This trend marks a very clear shift in the dynamics of investment in
de

Pakistan.
ca

Summary
A

• Industrial sector has suffered since neo-liberal structural adjustment program

was initiated in 1988.
U

• It was only after 9/11 that growth rates in the industrial sector, in investment,
V

and of the economy picked up.

35
 Issues in Pakistan Economy - ECO610 VU

• Growth and investment in Pakistan depend on incentives to the private

sector and on supportive conditions in which private sector is willing to
invest.

4
Key Issues in Industry in Pakistan

11
• Trends in Industrial sector
• The Small-Scale Manufacturing Sector

54
• The Textile Industry

2
22
• Public Sector Industry
• The Privatization Process

32
• Efficiency in Industrial Structure

0
• The Energy Crisis
Trends in Industrial sector
nt
lta
• No industrial base in the beginning
su

• 1950’s Extraordinary industrial growth rate

n

• 1960’s Large Scale Manufacturing shows exceptional growth

Co

• 1970’s Substantial reduction in Industrial growth

• 1980’s Impressive annual average growth in manufacturing
ic

• 1990’s growth in industry again fell down

m

• 2000’s revival in industrial growth after 9/11

de

Trends in Industrial sector

ca

• The industrial and manufacturing growth of Pakistan witnessed roller coaster

A

• boom / bust trend throughout the time.

U

• Population increases in this time but employment in formal manufacturing

sector did not increase.
V

• Small scale sector grew in 1980’s, captured the increase in labor force.
The Small-Scale Manufacturing Sector
36
 Issues in Pakistan Economy - ECO610 VU

• Small scale sector plays an increasingly important role in Pakistan's

economy.
• In urban manufacturing sector 98% of the manufacturing units were small

4
scale unregistered firms.

11
• Employment elasticity in the small-scale sector is amongst the highest in all
the sectors.

54
Issues affecting Small Scale Sector

2
• State policy has been very biased in favor of the large-scale manufacturing

22
sector, whereas small scale sector was treated with contempt.

32
• State played no real role in explicitly promoting the small-scale sector.
• Banking sector was also unhelpful and discouraging to small scale informal

0
units.

nt
• With regard to utilities provided to large scale manufacturing, the small-
lta
scale sector was treated with “hands off” policy.
The Textile Industry
su

• The textile sector holds a very important position in Pakistan’s economy in

n

terms of;
Co

• Employment
• Value-added
ic

• Contribution of this sector towards exports

m

• Highest manufacturing value added (26%) 2005/06.

de

• One third (1/3rd) of the entire manufactured employment in textile.

ca

Issues in the Textile Industry

A

• Textile was highly concentrated amongst few industrial houses.

U

• Number of installed spindles has been growing, whereas the percentage of

working spindles has been lower than 1950’s and 1960’s.
V

• Only 66% of installed capacity is being utilized in the loom sector (number
of working looms is one fifth of that in the 1950’s and 1960’s).
37
 Issues in Pakistan Economy - ECO610 VU

• Negative productivity in the textile and garment sector is the result of

fragmentation of the industry from large scale to small scale units.
Public Sector Industry

4
• Role of the government has been reduced

11
• Public sector enterprises are;

54
• Inefficient
• Costly to run

2
• Poor performers

22
• Drain on exchequer

32
Public Sector Industry
• Pakistan Industrial Development Corporation (PIDC) established in 1952

0
played very important role in fulfilling its objectives. Its role was leading the
private sector in industrialization.
nt
lta
• In 1972-77 the role of the public sector was considerably expanded. By 1977
government was involved in finance, manufacture, transport &
su

communication, construction, energy etc.

• After 1977 the role of the public sector began to diminish.
n
Co

• Public sector enterprises besides responding to pure market criteria have

social and political responsibilities and motives.
ic

• Public sector industries performed far better than the overall manufacturing
m

sector during 1972-77.

• The efficiency levels across industries are independent of the locus of
de

ownership.
ca

• By 1990 much has been changed in public policy after Structural

A

Adjustment Program.
The Privatization Process
U

• The disinvestment and deregulation committee were established in 1990 to

V

identify the units for privatization.

38
 Issues in Pakistan Economy - ECO610 VU

• This committee identified 109 industrial units & four out of five nationalized
banks to be privatized at earliest opportunity.
• The privatization commission replaced this committee in 1991, with the

4
following functions;

11
• Valuation of public enterprises

54
• Implementation of the bidding process
• Supervision of the transfer of the units to private sector.

2
•

22
Since privatization program was corner stone of government’s economic
policy, so it improved its legal and administrative procedures.

32
• But this privatization process was severely criticized;

0
• Lack of transparency / Corruption

nt
• Incorrect bid evaluation process
lta
• Inadequate attention to new management
• Favoritism, as the units transferred to the management with no previous
su

experience
n

• Inconsistency in process
Co

Public and private investments are essentially complementary in nature; and that
while private investment holds the greatest promise in areas of productive
ic

efficiency, its success depends on public investment which provides an efficient

infrastructure.
m

The Energy Crises

de

• An important factor having its impact on industrial sector as well as on

ca

economy as a whole is energy crisis in Pakistan.

• The ongoing energy crises has crippled Pakistan’s industry and economy. It
A

is hitting the industry at multiple levels;

U

• Energy tariff increases

V

• Un announced load shedding

• Voltage fluctuations

39
 Issues in Pakistan Economy - ECO610 VU

• Unavailability harms productivity of workers

The Energy Crises Reasons
• Growing gap between the rising demand and supply of energy

4
• Rising burden of circular debt

11
• Lack of maintenance

54
• Line losses (power theft)

2
• Billions of rupees of unpaid bills

22
• Inappropriate energy generation mix

32
The Energy Crises consequences

0
• In industrial cities such as Karachi, Lahore, Gujranwala and Faisalabad,
thousands of units have shut down or are operating at the bare minimum
level.
nt
lta
• Energy crises resulted in huge capital flight (investments have shifted
elsewhere).
su

• Loss of thousands of jobs due to reduced industrial and commercial

n

activities.
Co
ic
m
de
ca
A
U
V

40
 Issues in Pakistan Economy - ECO610 VU

MODULE 4
PUBLIC FINANCE AND FISCAL POLICY

4
STRUCTURE OF THE GOVERNMENT

11
Major function of the government is to Tax the people.


54
This collected revenue is used for;

2
• Running of the government

22
• Provision of Law and Order
• Defense of the country

32
• Infrastructure

0
• Social development
✓ A well-defined constitutional frame work determines the nature of resource

nt
mobilization and the responsibilities of each of the different tiers of
lta
government.
✓ It has undergone changes time to time.
su

✓ Radical changes after 7th NFC awards and 18th amendment in 2010.
n

NATIONAL FINANCE COMMISSION (NFC)

Co

• It is a body constituted by president of Pakistan to divide the revenue sharing

formula for divisible pool of resources to be made available from federal to
the provincial governments.
ic

• NFC is supposed to announce an award every five years, based on which

m

divisible pool is determined.

de

Two major hallmark developments;

ca

• NFC awards came into force on July 2010 for a period of five years and it
enhances significantly the share of provinces in the federal divisible pool.
A

• The 18th amendment to the constitution of Pakistan. With this, the concurrent
U

list of the constitution stands abolished, devolving the functions to the

V

provincial government.

41
 Issues in Pakistan Economy - ECO610 VU

The federation of Pakistan is governed by the constitution of Pakistan and all its
amendments thereafter. In this context functions of the government are defined as
per following tiers of government.
• Federal Government

4
11
• Provincial Government
• Local Government

54
FEDERAL GOVERNMENT FUNCTIONS

2
22
• Regulatory functions
• Service functions

32
• Defense

0
• External Affairs
• Currency
nt
lta
• Stock Exchanges
su

• National Highways
• Roads & Railways
n
Co

CONCURRENT LEGISLATIVE LIST INCLUDES FOLLOWING

FUNCTIONS
• Social welfare
ic
m

• Population planning
de

• Tourism
• Education
ca

(These functions to be performed by federal or provincial government, or both)

A

RESIDUAL FUNCTIONS
U

• Agricultural extension
V

• Irrigation
• Justice

42
 Issues in Pakistan Economy - ECO610 VU

• Police
• (These were primarily the responsibility of Provincial Government)
Existence of local governments was not a formal part of constitution.

4


11
Local governments were extension of provincial governments.

54


2
District government system was implemented in 2001.

22


32
Under this system, the districts continued to rely on federal transfer.
• Local governments had been expected to keep their revenues and resources

0
in check.
• To self-finance their expenditures
nt
lta
While,
• Provincial governments were given free hand by the federal government.
su

STRUCTURE OF THE TAXATION

n
Co

State institutions involved in the taxation system

• Legislative
ic

• Executive
m

• Judiciary
de

LEGISLATIVE:
ca

It is done in parliament, to impose different taxes such as;

• Income tax Act of 1922, Income tax ordinance 1979 and Income tax
A

ordinance 2001
U

• Sales Tax Act 1990

V

• Federal Excise Act 2005

• Etc.

43
 Issues in Pakistan Economy - ECO610 VU

EXECUTIVE
These are tax authorities to administer taxes with efficiency and effectiveness.
• Finance minister and finance secretary

4
• Federal board of revenue (FBR)

11
(These authorities appoint subordinates, makes rules, issue notifications etc.)

54
JUDICIARY

2
• Its role is to interpret the laws to ensure fair implementation of them.

22
(Its members are appointed by federal government)

32
Prior to 18th amendments, Federal government used to collect taxes & duties as per
federal legislative list.

0


nt
Provincial governments had delegated some of their legislative functions to local
lta
government.

su

Local governments collected residual taxes that provincial government did not
n

collect.
Co

Provincial governments collected taxes that the federal government did not
ic

collect.
m

According to 1973constitution, almost all the major taxes with real revenue
de

potential, were with federal government.


ca

Although
A


U

After the 18th amendment there has been change in this structure.
V

SOURCES OF REVENUE RECEIPTS OF GOVERNMENT

• Proceeds from taxation

44
 Issues in Pakistan Economy - ECO610 VU

• Net revenue of commercial departments

• Interest on loans (by the federal government)
• Return on Investment (by the federal government)

4
• Receipts by administrative ministries (of federal government)

11
• Surcharges on petroleum and natural gas

54
• Dividends

2
FEDERAL GOVERNMENT REVENUE RECEIPTS

22
• Tax revenue

32
• Direct taxes

0
• Indirect taxes
• Non tax revenue
nt
lta
TAX REVENUE
• Direct taxes
su

(Income tax, capital value tax, worker’s welfare tax, etc.)

n

• Indirect taxes
Co

(Sales tax, Customs, Federal excise, etc.)

ic

NON-TAX REVENUE
m

State banks profit, dividends from OGDCL, profits from Pakistan

telecommunication authority, PSO etc.
de

Prior to 18th amendment and the 7th NFC awards, about 90-93% of resources were
ca

generated at federal level whereas only 7% by the provinces.

A

Issue of resource mobilization / taxation;

• Provincial level
U

• Federal level
V

Key systems and problems of federal tax system;

• Low and stagnant tax to GDP ratio
45
 Issues in Pakistan Economy - ECO610 VU

• Stagnant around 11 to 12 percent

• Major reason behind high budget deficit
• Over dependence on indirect taxes

4
• Almost 80% share in revenue

11
• Higher excess burden of taxation

54
• More indirect taxes on international trade

2
• It has promoted inefficiency

22
• Encouraged unlawful trade

32
• Wide range of exemptions, concessions and tax evasion.

0
• Less than 60% imports actually pay duty.
• Consequently, tax rates are pitched high.
nt
lta
• Taxation has complex laws and procedures.
• The common perception is one of high-level corruption.
su

Prior to 1st structural adjustment program (1988), world bank identified two issues;
n
Co

• Resource mobilization
• Budget deficit
ic

The world bank report argued;

m

• Pakistan’s Tax base needs to be strengthened to increase resource

de

mobilization.
• There is need to increase the share of direct taxes in total tax revenue.
ca

• There is need to change the structure in case of indirect taxes.

A

• There is need to cut excessive number of exemptions.

U

Situation prior to 18th amendment and NFC award;

V

• 90% of the revenue was collected at federal level.

• 10% revenue through local and provincial government.

46
 Issues in Pakistan Economy - ECO610 VU

• Delivery of social services (such as education, health, water supply and

sanitation etc.) lies with provincial and local government.
• Provincial government deficit financing filled through grants-in-aid or loans

4
by federal government.

11
• Provincial government access resources from divisible pool of federal taxes
for recurring accounts.

54
1991 NFC awards;

2
• Federal government stopped such payments to provincial governments.

22
• Rather,

32
• There was greater pressure on provincial governments to self-finance their
expenditures.

0
Problems in provincial resource mobilization structure 2010 (identified by
Aisha Ghaus and Asif Iqbal)
nt
lta
• Limited scope of resource mobilization
su

• Poor tax administration

n

Provincial government unable to exploit the;

Co

• Agriculture income tax

• Tax on value added in services sector
ic

• Capital gains on immovable property

m

• Low growth in Tax revenue due to low elasticity of provincial taxes.

de

• No greater fiscal effort by provinces (due to access to revenue deficit grants

ca

from provincial governments)

A

Change in provincial governments resource mobilization strategy (since 1991

NFC awards)
U

Provincial governments adopted “diversified resource mobilization strategy” by;

V

• Removing exemptions
• Focusing most on existing taxes

47
 Issues in Pakistan Economy - ECO610 VU

• Expanding the tax net

Consequently,
→ There was considerable increase in provincial tax revenue.

4
• Investigation by government agencies confirmed that there are hundreds of

11
thousands of multi-millionaires in Pakistan who enjoy luxurious lifestyles

54
but don’t pay tax.
• There is strong interest group behind every tax concession or exemption.

2
22
• FBR expects to fetch good revenue through amnesty scheme.
DEBTS AND DEFICITS

32
Fiscal / Budget deficit

0
• The difference between total revenue and total expenditure of the
government is fiscal deficit.
nt
lta
• It is an indication of the total borrowings needed by the government.
• Among all other economic issues, fiscal deficit is most talked in developing
su

and developed countries.

n

• According to world bank and IMF fiscal deficit is single most important
Co

policy variables that effects the rest of the economy.

• The importance of fiscal deficit is even higher in case of developing
ic

countries.
m

• There is general consensus that large current deficits are not sustainable.
de

• Direct policy action is required to tackle deficit problem.

ca

Consequences of Deficit
• Debt problem
A

• Inflation
U

• Foreign dependence
V

• Discourage investment
• Decrease in spending on important social services
48
 Issues in Pakistan Economy - ECO610 VU

• Etc.
• Fiscal deficits have strong implications.
• Many observers found strong relationship between the deficits and many

4
macroeconomic performance variables.

11
In fact,

54
• The relationship between deficits and other macroeconomic variables
depends on the source of deficit financing.

2
22
Two main sources of deficit financing;
• Domestic borrowing

32
• External borrowing

0
In case of Pakistan, it has been argued;

nt
• Fiscal deficit is cause behind most other economic problems of the country.
lta
• Debt is also termed as very serious problems of the economy.
su

Pakistan is having enormous pressure on its limited fiscal resources due to serious
domestic economic problems.
n
Co

Any effort for restoring our economy has “elimination of deficit” as first points on
its agenda.
International financial institutions also stress over solution to the problems of fiscal
ic

deficit.
m

DEBT a burden?
de

• One view is that one should “not” borrow as the present generations will get
ca

benefit by using services provided currently and future generations will have
to pay the cost.
A

• Second view is that there will be greater intergenerational equity by

borrowing now and passing part of the cost of capital outlay to future.
U

• Hence “deficit” and “debt” whether burden or not being decided by the
V

manner, in which public debt is spent.

49
 Issues in Pakistan Economy - ECO610 VU

• USA world’s largest debtor nation shows growth despite rising deficits and
debts.
• In case of Pakistan, deficits grew due to excessive non-developmental

4
expenditures and large tax cuts, hence the debt becomes the burden over

11
future generations.
PAKISTAN’S FISCAL DEFICIT

54
Critical Concerns Regarding Pakistan’s Fiscal Deficit

2
Structural adjustment program (1988-2013) identified reduction of fiscal deficit as

22
the key component and most other measures revolve around this objective.

32
World bank constantly emphasized the importance of debt reduction in Pakistan.
During 1980’s, world bank mentioned that Pakistan’s long-term growth is at stake

0
due to its large deficits (8% of GDP)
Main features of Pakistan's Fiscal Deficit
nt
lta
1. Deficit in budget (expenditure exceeds revenue)
su

2. High growth in current expenditure (total revenue is not sufficient to meet

even current expenditure of the budget)
n

3. Defense expenditure (although it has been falling in recent years but defense
Co

expenditure used to be higher than developmental expenditure)

4. Interest payments (more than half of the annual expenditure is taken up by
ic

defense and interest payments)

m

5. Source of debt (Domestic debt is higher than the foreign debt)

de

6. Domestic debt (Domestic debt is higher than the foreign debt, main source is
non-bank borrowing)
ca

Trends in Fiscal Deficit

A

1980’s → around 8% of GDP

U

1990’s → around 7% of GDP

V

2000’s → around 4.5% of GDP

2010 → around 6.2% of GDP

50
 Issues in Pakistan Economy - ECO610 VU

2016 → around 4.6% of GDP

According to IMF Deficit in Pakistan is responsible for;
• Growing Inflation

4
• Crowding out of private investment

11
• Falling growth rate

54
• Current account deficit

2
Views of IMF and World bank (1980 – 1997)

22
• Fiscal deficits were quite high than international standards.

32
• Deficits in Pakistan have been quite gentle.

0
• Country’s macroeconomic performance has been good

nt
• Inflation in Pakistan also performed well
lta
• Even economic growth of the country was better
su
According to IMF and World bank, Pakistan's fiscal deficit must be brought down
to sustainable level for long term macroeconomic development.
n

Sustainable Deficit
Co

A deficit level that permits an acceptable level of economic expansion while

ensuring price stability and debt accumulation with reasonable debt servicing ratio.
ic

The figure which is considered to be sustainable is 4% of the GDP.

m

CRITICAL CONCERNS
de

• Issue of spending and redistribution

ca

• Patterns of Defense spending

A

• Defense spending was lower in military regime than democracy.

• Concerns regarding developmental expenditure.
U

• Underreported and informal economy (GDP is under reported as much as 40%)

• Budget deficit relates to the role and distribution of public expenditure
V

Governance Issue

51
 Issues in Pakistan Economy - ECO610 VU

• Rampant corruption at all levels.

• Misuse of tax payers money.
• Unfair use of political power.

4
• Generally, the conventional economists and advisers of international

11
agencies concludes that fiscal deficit in unwanted and bad for the economy.

54
• According to them it’s the most important statistic to analyse the health of
the economy.

2
22
• Fiscal deficit has been perceived continuing problem in Pakistan.
• Fiscal policy is considered critical failure in case of Pakistan.

32
THE DOMESTIC AND FOREIGN DEBT CRISES

0
• Pakistan has been taking significant amounts of domestic and foreign debt to

nt
finance its budget and current account deficits.
lta
• And to support major energy and infrastructure development projects as part
of China Pakistan Economic Corridor (CPEC)
su

• Over one-third of this public debt is external debt denominated in US

n

dollars, Euros and other hard currencies.

Co

• Pakistan’s total debt and liabilities (TDL) consist of public debt and private
debt.
ic

• Total stock of outstanding debt and liabilities on June 30, 2017 stood at 79%
m

of GDP.
• Gross public debt accounted for 85% of the total outstanding (67.2% of
de

GDP)
ca

• Remaining 15% is the private debt mostly to borrowers outside the country.
A

Total debt and liabilities are made up of borrowings in Rupees from SBP, banks,
National saving schemes, prize bonds, sukuk etc.
U

Borrowings in foreign currency, from multilateral institutions such as the World

V

bank, ADB, bilateral countries or international financial markets.

Three types of Domestic Debt

52
 Issues in Pakistan Economy - ECO610 VU

• Floating debt
• Unfunded debt
• Permanent debt

4
11
FLOATING DEBT
• Short term

54
• Cash credit & Treasury Bills

2
• Commercial bank and State Bank.

22
UNFUNDED DEBT

32
• Medium term

0
• General public
• National saving scheme instruments
nt
lta
PERMANENT DEBT
• Long term
su

• Insurance companies & commercial banks

n
Co

• Maturity between 7 to 20 years

It is said that Pakistan’s debt problem arises in 1980’s when government was
ic

spending far more money than it was receiving.

Nominal public debt grew from around Rs. 155 billion to Rs. 802 billion in 1990’s.
m
de

But while deficit & accumulated debt was high the growth was impressive.
It was 1996-1999 when public debt rose very sharply…515% of government
ca

revenues to 625%.
A

REASONS & CONSEQUENCES

Reasons;
U

• Fallen Growth
V

• Falling Revenues

53
 Issues in Pakistan Economy - ECO610 VU

• Frequent change in government

CONSEQUENCES;
• Difficulty in debt servicing

4
• Higher interest rates (20% p.a)

11
DEBT CRISES

54
• 1980’s development expenditure was 40% of total government spending.

2
• 1990’s domestic debt crises.

22
• 2000’s development expenditure declined to 13% of total government

32
spending.
• “The increase in the share of interest payments has come at the cost of

0
development

nt
• Pakistan faced serious crises of debt at both fronts i.e. domestic and foreign.
lta
• In Jan 2000 debt reduction and management committee (DRMC) was
su
formed.
• The committee released a report called debt reduction and management
n

strategy (DRMS).
Co

Debt reduction and management strategy (DRMS)

• Causes of excessive debt
ic

• Solution and possibilities for alleviating debt

m
de

Reasons for High debt (DRMS)

• Persistent and large deficit
ca

• Large current account deficit

A

• Stagnant and declining government revenues in real terms

U

• Stagnant and declining exports

V

• Rising cost of borrowing

• Careless and waste full use of borrowed resources

54
 Issues in Pakistan Economy - ECO610 VU

• According to DRMS report it was current account balance of payment which

was unsustainable and caused both types of debt to accumulate.
• During 1990’s

4
• Current account balance was 4.8% of GDP on average and rises to 6%.

11
• Decline in foreign exchange earnings (decline in exports and remittances)

54
• Devaluation of rupee

2
FOREIGN AID

22
• Pakistan receiving considerable foreign aid to contribute in growth and
poverty reduction.

32
But

0
• Foreign aid inflow is used to finance consumption

nt
• As a result, savings declined “No contribution in growth”
lta
PRINCIPAL FACTORS BEHIND PAKISTAN’S HIGH DEBT (SAKIB
SHERANI)
su

• Declining national savings

n
Co

• Lack of fiscal discipline

• Declining tax revenue (as %age of GDP) 1990’s & 2000’s.
ic

• Political interference
• Weak institutions
m
de

CONCLUSION
▪ Debt servicing is eating away revenues for development and other
ca

expenditures.
A

▪ Pakistan (unlike other countries) had the problem of domestic and external
debt both (1990).
U

▪ Reforms and Structural Adjustment had an important role to aggravate this

V

crisis.

55