Chapter 1.

Growth and Investment

Pakistan Economic Survey 2002-03

Chapter 1. Growth and Investment

1. Growth and Investment

The outgoing fiscal year 2002-03 has witnessed a sharp recovery in economic growth accompanied by equally impressive performance of agriculture and large-scale manufacturing. Other significant achievements have been the impressive growth in per capita income, both in rupee and dollar terms, and national savings reaching new heights exceeding total investment and suggesting a large surplus in the current account balance. When viewed at the backdrop of inhospitable external environment and uncertain geo-political situation Pakistan's growth performance has been impressive in 200203. This year has witnessed major corporate scandals and bankruptcies in the United States, resulting in bursting of the equity market bubble; rising uncertainties in the run up to war in Iraq, causing oil prices to rise sharply, and recent outbreak of Severe Acute Respiratory Syndrome (SARS) virus badly economic The world affecting scene economic business created outlook environment in Asia. There developments on international uncertainties. The real GDP at factor cost was originally targeted to grow by 4.5 percent in 2002-03, with agriculture and manufacturing growing by 2.5 percent and 5.8 percent, respectively. The growth target was largely dependent on recovery in agriculture, manufacturing, rapid growth in exports and higher level of investment. All three major sectors of the economy namely, agriculture, Table 1.1 documents the growth manufacturing and services responded positively to the incentives embodied in economic revival program and comfortably surpassed the growth targets. The real GDP at factor cost grew by 5.1 percent and was supported by a 4.2 percent, 7.7 percent and 5.3 percent growth in agriculture, manufacturing and services, respectively. The real GDP at market prices recorded an impressive growth of 5.8 percent as against a growth of 2.9 percent last year. performance of selected regional economies in 2000-03. The performance of the major growth poles of the world economy (US, Japan and Euro Area) are likely to remain subdued with Japan and Euro Area economies growing by less than 1.0 percent in 2002-03. The United States is expected to perform better as compared with last year. Developing countries as a whole is expected to grow by 4.6 percent. China and Korea in Asian region are expected to be the star performers with growth exceeding 6.0 percent. With the exception of Thailand, the other ASEAN countries are projected to grow by less than 5.0 percent. Barring Iran, the other countries in the Middle East are almost stagnating. In Africa, no country could achieve 5.0 percent growth in 2002-03. In South Asia, Pakistan is the only country which achieved more than 5.0 percent growth in 2002-03. Two points need to be noted as far as Pakistan's growth performance is concerned. Firstly, when compared with major economies of different parts of the world, Pakistans growth performance has been impressive. Secondly, in a subdued global economic environment, an impressive recovery in growth simply displays Pakistan's greater resilience to external shocks.

remained subdued and global trade remained sluggish during the outgoing fiscal year.

Table 1.1

Chapter 1. Growth and Investment Regional Growth Performance Real GDP Growth (%)

Region/Country World GDP Euro Area United States Japan Germany Canada Developing Countries China Hong Kong SAR Korea Singapore

2000-01 4.7 3.5 3.8 2.8 2.9 4.5 5.7 8.0 10.2 9.3 9.4 ASEAN 4.9 8.3 4.6 4.4 South Asia 5.4 5.9 6.0 2.2 Middle East 4.9 1.4 5.2 5.1 Africa

2001-02 2.3 1.4 0.3 0.4 0.6 1.5 3.9 7.3 0.6 3.0 -2.4

2002-03 3.0 0.8 2.4 0.3 0.2 3.4 4.6 8.0 2.3 6.1 2.2

Indonesia Malaysia Thailand Philippines

3.4 0.4 1.9 3.2

3.7 4.2 5.2 4.6

India Bangladesh Sri Lanka Pakistan

4.2 5.3 -1.4 3.4

4.4 4.4 3.7 5.1

Saudi Arabia Kuwait Iran Egypt

1.2 -1.1 5.7 3.5

2.1 -0.9 6.0 2.0

Algeria Morocco Tunisia Nigeria Kenya South Africa Source: World Economic Outlook (IMF), April 2003.

2.4 1.0 4.7 3.9 -0.1 3.5

2.1 6.5 5.2 2.8 1.2 2.8

3.1 4.5 1.9 0.5 1.2 3.0

Chapter 1. Growth and Investment

Fig-1: Real GDP/GNP Growth

10 9 8 7 6 5 4 3 2 1 0

8.4

6.1

% Growth

5.7 4.9 4.2 4.0 3.5 2.8 3.8 5.1

1980's

1990-I
GDP Growth

1990-II

2000-02

2002-03

GNP Growth

The growth in real GNP continued to decelerate during the 1990s declining from an average of 5.7 percent in the 1980s to an average of 4.2 percent in the first half, and 3.5 percent in the second half of the 1990s. During the first three years (2000-03) of the new decade, the real GNP grew at an average of 5.4 percent. Most importantly, the real GNP registered a handsome growth of 8.4 percent in 2002-03 as against 5.3 percent last year, mainly on account of 472.2 percent increase in net factor income from abroad, which, in turn, is the result of a sharp increase in the inflow of workers remittances and foreign direct investment in the country [See Fig-1.1]. With population growing by 2.1 percent, the real per capita GNP at market price increased by 6.6 percent in 2002-03 as against an increase of 2.1 percent last year. Notwithstanding the strong recovery in growth to 5.1 percent in 2002-03 from 3.4 percent last year, the fact remains that Pakistans economic growth decelerated in the 1990s for a variety of reasons, including worsening of macroeconomic environment, serious lapses in implementation of stabilization policies and

structural reforms, adverse law and order situation, inconsistent policies, and poor governance. As against an average growth rate of 6.1 percent in the 1980s, the real GDP growth slowed to an average of 4.9 percent in the first half, 4.0 percent in the second half of the 1990s. Economic growth remained depressed for first two years (2000-02) of the new decade averaging 2.8 percent. Unprecedented drought and the events of 9/11 have been responsible for keeping the growth depressed during 2000-02. Fiscal year 2002-03 exhibits a turnaround in growth [See Fig1]. The real challenge would now be to sustain this growth momentum. The manufacturing sector grew by an average annual rate of 8.2 percent in the 1980s, slowed to an average of 4.7 percent in the first half and further to 2.4 percent in the second half of the 1990s. However, it performed well during last three years by growing at annual average rate of 7.0 percent per annum. In fact, over the last decade, the large-scale manufacturing lost almost three-fourth of its growth momentum. The services sector also slowed from an average of 6.6 percent in the 1980s to 5.1 percent in the first half

Chapter 1. Growth and Investment and further to 4.0 percent in the second half of the 1990s, losing one-third of its growth momentum during the 1990s. It started regaining its growth Table 1.1 Growth Performance of Real Sector Item Unit 1980s 1990-95 1995-00 A. GDP GROWTH RATE % 6.1 4.9 4.0 a. Agriculture % 4.1 4.2 4.9 b. Manufacturing % 8.2 4.8 3.2 c. Large-scale Manufacturing % 8.2 4.7 2.4 d. Services % 6.6 5.1 4.0 As % B. TOTAL INVESTMENT 18.7 19.5 17.1 of GDP a. Fixed Investment 17.0 18.0 15.3 b. Public Investment 9.2 8.6 6.4 c. Private Investment As % of GDP 7.8 14.8 7.7 9.4 14.9 13.9 8.9 12.7 momentum during last three years by growing at an average rate of 4.7 percent. [See Table 1.1].

2000-03 3.6 0.5 7.0 7.7 4.7 15.2 13.4 4.9 8.5 17.0

2002-03 4.9 4.2 7.7 8.7 5.3 15.5 13.1 4.5 8.6 19.2

C. NATIONAL SAVING a. Domestic Saving

13.8 15.7 14.7 Source: Federal Bureau of Statistics

Persistence of large fiscal and current account deficits during the 1980s have been the underlying cause of macroeconomic instability, which in turn affected investment and impeded growth during the 1990s. Resultant accumulation of huge public debt put strain on development expenditure because of downward rigidity of current expenditure and structural weaknesses of tax administration that handicapped extra resource mobilization. The public sector investment has significant importance as a growth stimulus in developing countries like Pakistan. Under pressure from the resource crunch, the decline in public investment was inevitable. Total and fixed investment as percentage of GDP declined in the 1990s. Total investment and fixed investment averaged 18.6 percent and 16.8 percent of the GDP, respectively in the 1980s; declined to 17.1 percent and 15.3 percent respectively in the second half of the 1990s. The decline was mainly originated from public sector investment which averaged 9.1 percent of GDP in

1980s but declined to 6.4 percent of GDP in the second half of the 1990s. It is well-known that a stable macroeconomic environment is prerequisite to higher investment and growth. For an investment friendly environment and sustainable growth, a stable macroeconomic environment is the key and its core elements include low inflation, sustainable budget deficit, realistic exchange rates, appropriate real interest rates, and consistency in economic policy. These were exactly the things which were ignored in macroeconomic policy making during the 1990s. National saving rate also witnessed a decline from an average of 14.7 percent in the 1980s to 12.7 percent in the second half of the 1990s. Even with low investment rates, the current account showed large deficits during the 1990s. There was a shift by the end of the 1990s to finance investment from domestic sources instead of foreign resources. [See Table-1.1]. National savings as percent of GDP witnessed considerable improvement during the last three years (2000-03)

Chapter 1. Growth and Investment and averaged 17.1 percent of GDP. The rise in national savings owes mainly to the significant turnaround in the current account balance. A. Commodity Producing Sector Having discussed the overall growth and investment scenarios in the backdrop of structural problems being faced by the economy in the recent past, it is essential to have an insight of the growth performance of various components of gross national product for the outgoing fiscal year 2002-03. The performance of the various components of national income over the last two The commodity-producing sector grew by 4.8 percent in 2002-03 as against 2.7 percent last year. Although, the improvement has mainly come from manufacturing sector but agriculture also contributed positively to this recovery [See Table 1.2]. decades along with most recent three years, are summarized in Table 1.2.

Table 1.2 Growth Performance of Components of Gross National Product (% Growth At Constant Factor Cost) 1980s 1990s 2000-01 2001-02 2002-03 Commodity Producing Sector 6.5 4.3 0.2 2.7 4.4 1. Agriculture 5.4 4.5 -2.7 -0.1 4.2 - Major Crops 3.4 4.1 -10.3 -1.8 5.8 - Minor Crops 4.1 3.9 -0.1 -1.8 0.4 - Livestock 5.3 6.3 5.3 3.7 2.9 - Fishing 7.3 3.5 -3.7 -12.0 16.6 - Forestry 6.4 6.5 9.6 -1.3 8.9 2. Mining & Quarrying 9.5 2.9 4.8 3.7 9.5 3. Manufacturing 8.2 4.0 8.2 5.0 7.8 - Large Scale 8.2 3.5 9.5 4.9 8.7 - Small Scale 8.4 5.3 5.3 5.3 5.3 4. Construction 4.7 2.6 -0.4 4.3 3.4 5. Electricity & Gas Distribution 10.1 7.7 -17.4 8.5 -3.9 Services Sector 6.6 4.6 4.8 4.1 5.3 6. Transport, Storage and Communications 6.2 5.2 2.6 1.1 3.1 7. Wholesale & Retail Trade 7.2 3.4 5.4 2.3 7.3 8. Finance & Insurance 6.0 4.9 11.1 8.1 -1.4 9. Ownership of Dwellings 7.9 5.3 5.3 5.3 5.3 10.Public Administration & Defence 5.4 3.2 1.1 6.5 5.2 11.Services 6.5 6.5 6.5 6.5 6.5 12.GDP (Constant Factor Cost) 6.1 4.4 2.2 3.4 5.1 13.GNP (Constant Factor Cost) 5.5 3.9 2.3 5.3 8.4 Source: Federal Bureau of Statistics and Economic Advisers Wing. i) Agriculture The performance of agriculture in the recent past has remained subdued owing to the catastrophic drought which engulfed the entire country for three consecutive years. The travails of water shortages persisted even during 2002-03; however the extent of shortage was relatively less detrimental. Consequently, agriculture grew by 4.2 percent in 2002-03 as against almost flat growth of

Chapter 1. Growth and Investment last year and target of 2.5 percent. The improved growth performance of agriculture is attributable to impressive recovery in the performance of major crops. Major crops accounting for 41 percent of agriculture value added grew by 5.8 percent as against a decline in value addition for the last two consecutive years and a target of fractional growth of 0.3 percent for 2002-03. Major crops including wheat, sugarcane, and rice witnessed increase in production by 5.5 percent, 8.3 percent, and 15.4 percent, respectively. However, the production of cotton witnessed a decline of 3.8 percent during 2002-03. This is the third year in a row when the value addition in cotton crops has declined. [See Chapter-2 for details] The growth in value addition of Minor crops which contribute 16 percent of value addition in agriculture grew marginally by 0.4 percent in 2002-03 as against the growth target of 3.5 percent growth and decline of 1.8 percent last year. The minor crops include cereals, vegetables, fruits, condiments, oil seeds, fodder and others. Within minor crops, the production of all three major pulses witnessed tremendous growth due to introduction of new varieties of seeds. However, increase in production of important minor crops like chilies, pulses, oil seeds and onion could not boost the overall growth of minor crops. Livestock sub-sector which account for 39 percent of overall value addition in agriculture has witnessed a modest growth of 2.9 percent in 2002-03 as compared with the target of 4.0 percent for the year and actual achievement of 3.7 percent last year. The lower growth owes to decreasing use of draught power and adjustments for inputs in the sub-sector. The production of milk, egg and mutton are estimated to have gone up by 2.9, 2.3 and 2.9 percent, respectively. The fisheries sector The overall manufacturing sector grew by 7.7 percent as against the target of 5.8 percent and last years achievement of 5.0 percent. Large scale manufacturing sector accounting for 71.2 percent of overall manufacturing, recorded an impressive and broad based growth of 8.7 percent, as against the target of 6.0 percent and last years growth of 4.9 percent. This is the second highest growth rate recorded during the last 13 years (the first one is 9.5 percent in 2000-01). Improvements in macroeconomic environment, sharp recovery in exports, and the availability of consumer financing iii) Manufacturing The output in the mining and quarrying sector has surpassed the target of 2.5 percent and grew by 9.5 percent in 2002-03 as against 3.7 percent last year. The value added in crude oil increased by 2.8 percent and in natural gas it has risen by 6.5 percent. However, the value addition in coal decreased by 2.5 percent, inspite of the fact that cement industry has started using coal as a major source of energy which has fuelled the domestic demand of coal. The principal mineral which has shown enormous growth include barite (33.3 percent), lime stone (20.3 percent), gypsum (33.9 percent), and chromites (50 percent). The minerals with negative growth include sulphur (7.0 percent), dolomite (3.0 percent), and magnisite (7.4 percent). ii) Mining & Quarrying witnessed a growth of 16.6 percent as against a decline of 12.0 percent last year and yearly target of 4.0 percent growth. Components of fisheries such as marine fishing and inland fishing, contributed to overall increase in value added in the fisheries sub-sector. The value addition in forestry sub-sector has increased by 8.8 percent as compared to a decline of 1.3 percent last year. The production of timber and firewood also went up by 8.8 percent each.

Chapter 1. Growth and Investment at reasonable interest rates have been responsible for strong performance of large-scale manufacturing. Over the last three years (2000-03), the large-scale manufacturing has registered an average growth of 7.7 percent per annum. Major industries that registered positive growth include sugar (13.6 percent), cement (20.5 percent), petroleum products (2.2 percent), cooking oil (6.8 percent), jeeps & cars (51.6 percent), LCVs (57.6 percent), cotton yarn (8.1 percent), paper & board (15.7 percent), soda ash (12.9 percent), motorcycles (33.5 percent), nitrogenous fertilizer (4.2 percent) and motor tyres (16.0 percent). Ten out of eleven major industrial groups posted positive growth while only leather products group registered negative growth. The individual industries that depicted negative growth include: sulphuric acid (5.4 percent), phosphatic fertilizer (27.8 percent), paints & varnishes (63.7 percent), beverages (18.3 percent), cigarettes (7.1 percent), vegetable ghee (7.0 percent), foot wear (6.2 percent), and cotton ginned (4.7 percent). Small-scale manufacturing maintained its historical growth of 5.3 percent in 2002-03. Construction sector grew by 3.4 percent as against 4.3 percent last year and yearly target of 4.0 percent. The government has identified housing and construction sectors as one of the major drivers of growth and likely to announce various measures in the Federal Budget 2003-04 to encourage activities in this sector. Electricity and gas distribution sector registered a decline of 3.9 percent as against an impressive growth of 8.5 percent last year and yearly target of 4.3 percent. This is the only sub-sector in commodity producing sector which registered a negative growth. B. Services Sector The Services Sector has been growing at a (2.7 The greater contribution to real GDP growth of 5.1 percent came from services sector percentage points). Industrial sector contributed 1.4 percentage points with major share coming from manufacturing sector (almost entire). As evident from Table 1.3, almost 53 percent contribution to growth (2.7 percentage point out of 5.1 percent of real GDP growth) has come from services sector followed by industrial sector (27 percent) and agriculture (20 percent). Last year, services sector contributed 59 percent and 41 percent contribution came from industrial sector. Agricultural contributed negatively to the last years growth. This suggests a balanced contribution from all the three sectors to this years growth. The contribution of each sector to growth is summarized in Table-1.3: Sectoral Contribution to Real GDP Growth Finance and insurance sub-sector remained depressed as far as value addition is concerned. The sub-sector registered a decline of 1.4 percent in value addition during 2002-03 as against the target of 5.0 percent positive growth and last years actual achievement of 8.1 percent growth. Public administration and defence has depicted a growth of 5.2 percent as against 6.5 percent last year. Two minor sectors that is, ownership of dwellings and social services, have maintained their estimated growth of 5.3 percent and 6.5 percent, respectively. faster pace than commodity producing sector of the economy for quite sometime. The trend remained unchanged even during 2002-03 as the services sector grew by 5.3 percent as against 4.1 percent of last year. Within this sector, the wholesale & retail trade and transport, storage and communication sub-sectors grew by 7.3 percent and 3.1 percent, respectively as against 2.3 percent and 1.1 percent of last year.

Chapter 1. Growth and Investment Table 1.3 Sectoral Contribution to the GDP growth (Percentage Points) Sector 2000-01 2001-02 2002-03 Agricultue -0.7 -0.02 1.0 Industry 0.6 1.4 1.4 Services 2.3 2.0 2.7 Real GDP (Fc) 2.2 3.4 5.1 Source: Federal Bureau of Statistics. Sectoral Shares in GDP The composition of the Gross Domestic Product has remained more or less unchanged during the decade of the 1990s. However, it has undergone considerable changes over the last three decades. The share of commodity-producing sectors declined from 61.6 percent in 1969-70 to 49.3 percent in 2002-03 while the share of services sector increased from 38.4 percent to 50.7 percent during the same period. Within commodityproducing sector, the share of agriculture has declined substantially from 38.9 percent in 196970 to 23.6 percenta decline of almost 15.3 percentage points in three decades but on the other hand the share of manufacturing has remained more or less stagnant in the vicinity of 17 to 18 percent over the last three decades. The share of manufacturing sector increased from 16.7 percent in 1998-99 to 18.4 percent in 2002-03, suggesting an increase of 1.7 percentage points in three years. This implies that the services sector has gained at the expense of the ground lost by the agricultural sector. [See Table 1.4] Within Services sector the pattern has remained more or less the same for the last three decades with the exception of changes in the share of transport, storage and communication which expanded from 6.3 percent in 1969-70 to 9.9 percent in 200203. The details are given in Table 1.4:

Table 1.4 Sectoral Share of Various Sectors in Gross Domestic Product

(At Constant Factor Cost)

(Percent) Commodity Producing Sector 1. Agriculture - Major Crops - Minor Crops - Livestock - Fishing - Forestry 2. Mining & Quarrying 3. Manufacturing - Large Scale - Small Scale 4. Construction 5. Electricity & Gas Distribution Services Sector 6. Transport, Storage and Communication 7. Wholesale and Retail Trade 8. Finance and Insurance 9. Ownership of Dwellings 10.Public Administration and Defence 11.Other Services 12.GDP (Constant Factor Cost) P) Stands for provisional. 1969-70 61.6 38.9 23.4 4.2 10.6 0.5 0.1 0.5 16.0 12.5 3.5 4.2 2.0 38.4 6.3 1998-99 51.1 25.4 10.3 4.9 9.2 0.9 0.1 0.5 17.1 12.1 5.0 3.4 4.7 49.1 10.2 2000-01 49.7 24.7 10.0 4.1 9.3 0.9 0.3 0.5 17.7 12.5 5.2 3.4 3.6 50.3 10.3 2001-02 49.4 23.9 9.5 3.9 9.4 0.7 0.3 0.5 17.9 12.7 5.3 3.4 3.7 50.6 10.0 2002-03(P) 49.3 23.6 9.6 3.8 9.2 0.8 0.3 0.5 18.4 13.1 5.3 3.3 3.4 50.7 9.9

13.8 15.2 15.3 15.2 15.5 1.8 2.5 2.5 2.6 2.4 3.4 5.9 6.1 6.2 6.2 6.4 6.1 6.4 6.6 6.6 6.7 9.0 9.7 10.0 10.1 100.0 100.0 100.0 100.0 100.0 Source: Economic Advisers Wing, Finance Division

Chapter 1. Growth and Investment Per Capita Income The real per capita income grew at an average rate of 1.4 percent per annum in the 1990s because of relatively slower growth in real GDP. Sharp acceleration in real per capita income was witnessed during the last three years. As against an annual average rate of 1.4 percent in the 1990s, the real per capita income grew at an average rate of 3.1 percent per annum during the last three years (2000-03) while it grew by 6.6 percent during 2002-03. At current prices, per capita income grew by 12.3 percent in 2002-03 as against 6.3 percent last year. Appreciation of exchange rate further enhanced the growth of per capita income in dollar terms. The per capita income in dollar terms increased from $ 419 in 2001-02 to $492 in 2002-03 an increase of 17.4 percent. The developments in per capita income are given in Table 1.5.

Fig-2: PER CAPITA INCOME 17.4

20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4

% Growth

5.6 3.1 1.5 0.5 -2.7 1990-I 1990-II 2002-03

6.6 4.2

2002-03

Rupee (1980-81 Price)

US $

Table 1.5 Growth in Per capita Income Per Capita Per Capita Per Capita Income at Income at Income at % % % 1980-81 current current US $ Growth Growth Growth Prices Prices (Rs) (Rs) 1990-91 4639 0.7 9546 14.4 426 9.2 1991-92 4826 4.0 10853 13.7 439 3.1 1992-93 4778 -1.0 11674 7.6 453 3.2 1993-94 4813 0.7 13271 13.7 443 -2.2 1994-95 4951 2.9 15552 17.2 508 14.7 1.5 13.3 5.6 1990-I (Avg.) 1995-96 5016 1.3 17059 9.7 513 1.0 1996-97 4927 -1.8 18983 11.3 493 -3.9 1997-98 4924 -0.0 20415 7.5 473 -4.1 1998-99 4992 1.4 21899 7.3 438 -7.4 1999-2000 5073 1.6 22811 4.2 441 0.7 0.5 8.0 -2.7 1990-II (Avg.) 2000-01 5089 0.3 24248 6.3 415 -5.9 2001-02 5214 2.5 25767 6.3 419 1.0 2002-03 5558 6.6 28933 12.3 492 17.4 2000-03 (Avg.) 3.1 8.3 4.2 Note: The per capita income is based on GNP market prices. Source: 1) Federal Bureau of Statistics 2) Economic Adviser Wing

Chapter 1. Growth and Investment Resources and Uses The total availability of resources in the economy are estimated at Rs.4041.6 billion at current market prices as against Rs.3578.5 billion last year, thereby registering an increase of 12.9 percent. The resource availability is comprised of Rs.4018.1 billion worth of Gross Domestic Product at market prices and Rs.180.8 billion from net factor income from abroad, adjusted with Rs.157.1 Table 1.6 Resources and Uses (Rs. Billion) Resources and Uses Resources GDP (Current Factor Cost) Net Indirect Taxes GDP (Market Price) Net Factor Income from Abroad GNP (Market Price) Net External Resource Inflow Uses Total Investment Fixed Investment Changes in Stocks Total Consumption 2001-02 3578.5 3377.1 251.6 3628.7 32.0 3660.7 -82.2 3578.5 534.1 476.1 58.0 3044.4 2002-03 4041.6 3709.7 308.5 4018.1 180.6 4198.7 -157.1 4041.6 620.9 526.3 94.6 3420.7 % Change 12.9 9.8 22.6 10.7 464.4 14.7 91.1 12.1 16.3 10.5 63.1 12.4 billion current account surplus. On the uses side enormous increase of 63.1 percent is witnessed in changes in stocks component mainly because of the carry-over stocks of sugar and wheat. Both fixed and total investment is likely to increase by 10.5 percent and 16.3 percent in the year under review. The consumption is also likely to go up by 12.4 percent. Resources and uses with break-down of components are given in Table.1.6:

Source: Planning & Development Division. Savings and Investment Total investment rose substantially to 15.5 percent of GDP in 2002-03 as against 14.7 percent last year stagnant while at 13.1 fixed investment of remained In an percent GDP. environment of unutilized capacity available with different industry, investment by private sector will rise only gradually. In this year, the capacity utilization of leading industries has gone up and there are expectations that investment may start rising from the next fiscal year.

Chapter 1. Growth and Investment

Figure-3: Savings-Investment Gap (As % of GDP)

22 21 20 19 18 17 16 15 14 13 12 11 10
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

Total Investment
Public sector investment marginally declined to 4.5 percent in 2002-03 from last years level of 4.8 government's greater space private sector percent. This was in line with conscious policy decision to create for the private sector. As such, the investment rose from 8.3 percent in

National Savings
privatizations has reduced the level and scope of public sector investment through state enterprises, and many sectors once thought to natural monopolies are now been exposed competition. Public resources formerly used subsidize loss-making SOEs can potentially be to to be

2001-02 to 8.6 percent in 2002-03. The level and composition of public sector investment has changed over the past two decades. The wave of

used where the private sector is unlikely to invest enough. Table-1.7 reflects changing patterns of saving and investment during the last five years.

Table 1.7 Structure of Savings and Investment

(As Percent of GDP)

Description Total Investment Changes in Stock Gross Fixed Investment - Public Investment - Private Investment Foreign Savings National Savings Domestic Savings Note: (P) stands for provisional 1998-99 15.6 1.6 13.9 6.0 7.9 3.9 11.7 12.9 1999-2000 16.0 1.6 14.4 6.0 8.4 1.9 14.1 15.6 2000-01 2001-02 2002-03 (P) 15.5 14.7 15.5 1.6 1.6 2.4 13.9 13.1 13.1 5.5 4.8 4.5 8.4 8.3 8.6 0.9 -2.3 -3.7 14.6 17.0 19.2 16.1 16.1 14.7 Source: Economic Advisers Wing

Chapter 1. Growth and Investment The contribution of national savings to the domestic investment efforts is indirectly the mirror image of the extent of foreign savings required to meet investment demand. National savings as percent of GDP rose from 17.0 percent in 2001-02 to 19.2 percent in 2002-03 mainly on account of a significant improvement in the current account balance which eliminated the need for recourse to foreign savings to finance domestic investment. It is note-worthy that national saving rate has increased by 7.8 percentage points since 1998-99. National savings, when adjusted for net income from abroad, gives us domestic savings which stood at 15.0 percent of GDP in 2002-03 as against 16.1 percent of GDP last year. This is because of massive increase in net factor income from abroad during current fiscal year. During the last three years (2000-03) domestic savings as percent of GDP averaged 15.7 percent as against an average of 13.9 percent in the 1990s.

Chapter 2. Agriculture

2. Agriculture
Agriculture sector being the lynchpin of the countrys economy continues to be the single largest sector and a dominant driving force for growth and development of the national economy. It accounts for 24 percent of the GDP and employs 48.4 percent of the total work force. Agriculture contributes to growth as a supplier of raw materials to industry as well as a market for industrial products and also contributes substantially to Pakistans exports earnings. Almost 67.5 percent of countrys population are living in rural areas and are directly or indirectly linked with agriculture for their livelihood. Any improvement in agriculture will not only help countrys economic growth to rise at a faster rate but will also benefit a large segment of the countrys population. Table 2.1 Agriculture sector has grown at an average rate of 4.5 percent per annum during the decade of the 1990s (Table-2.1) . The growth, however, has fluctuated widely rising by as high as 11.7 percent and declining by 5.3 percent. Over the last three years in general but the first two years (2000-01 and 2001-02) of the new millennium in particular, Pakistan has witnessed crippling drought which badly affected its agriculture. Overall agricultural growth turned negative for these two years (See Table 2.1). The travails of water shortage persisted even during 2002-03, however the extent of shortage was relatively less. Notwithstanding shortage of water, Agriculture grew by 4.2 percent in 2002-03 (See Table 2.1).

Agriculture Growth
(Percent) Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 Average of 1990s 2000-01 2001-02 2002-03 (P) Agriculture 4.96 9.50 -5.29 5.23 6.57 11.72 0.12 4.52 1.95 6.09 4.54 -2.64 -0.07 Major Crops 5.69 15.48 -15.60 1.24 8.69 5.96 -4.33 8.27 -0.02 15.42 4.08 -9.79 -1.83

Minor Crops
3.51 2.37 3.95 12.62 6.91 4.89 0.94 8.13 4.23 -9.10 3.84 0.11 -1.82

Chapter 2. Agriculture 4.15 P= Provisional. 5.80 0.41

Fig-1: AGRICULTURE GROWTH

20 15 10 5 0 91-92 -5 -10 -15 -20
Agri Major Crops Minor Crops

92-93

93-94

94-95

95-96

96-97

97-98

98-99

99-00

00-01

'01-02

'02-03(P)

As stated earlier, water shortages continued, though with lesser intensity, during 2002-03. The canal head withdrawal in Kharif 2002 and Rabi 2002-03 seasons significantly increased by 14.9 percent and 35.7 percent, respectively over Kharif 2001 and Rabi 2001-02. Winter rainfall (January-March, 2003) which was also higher by 4.2 percent against the normal rainfall of same period, ended the shortage of water for the Rabi Crop 200203. Moreover, heavy snowfall on the mountains during winter, 2003 would help fill the countrys water reservoirs and alleviate water shortages to a greater extent for the Kharif Crops 2003. On the whole, the water situation in the current fiscal year appears better than last year but remains in short supply compared with the normal supplies. [More on this issue can be found under sub-section irrigation]. The relatively better availability of

agriculture value added, registered a sharp recovery and grew by 5.8 percent against the decline of 1.8 percent last year. Minor crops, contributing 16 percent to agricultural value added, depicted positive growth of 0.4 percent against a negative growth of 1.8 percent last year. Livestock the second largest contributor to overall agriculture value added (contributing 39 percent), grew by 2.9 percent in 2002-03 as against 3.7 percent in 2001-02. Fisheries has shown a remarkable growth of 16.6 percent against the negative growth of 12 percent last year. On the other hand, forestry also registered a significant growth of 8.8 percent as against a negative growth of 1.3 percent last year. The situation of major crops for the last five years is presented inTable-2.2. I. Crop Situation

irrigation water has had positive impact on overall agricultural production this year and the agriculture growth is estimated at 4.2 percent as compared with negative 0.1 percent during 2001-02. Major crops, accounting for 41 percent of

There are two principal crop seasons in Pakistan, namely the "Kharif" the sowing season of which begins in April-June and harvesting during October-December; and the "Rabi", which begins in October-

Chapter 2. Agriculture

December and ends in April-May. Rice, "Kharif" and "Rabi" crops is discussed in the sugarcane, cotton, maize, bajra and jowar are ensuing pages. Kharif" crops while wheat, gram, tobacco, rapeseed, barley and mustard are "Rabi" crops. Major crops, such as, wheat, rice, cotton and sugarcane account for 90 percent of value added in major crops. The value added in major crops accounts for 41 percent of value added in overall agriculture. Thus, the four major crops (wheat, rice, cotton, and sugarcane), on average, contribute 37 percent to value added in overall agriculture. The minor crops account for 16 percent of value added in overall agriculture. The performance of the Table 2.2 Production of Major Crops
(000 Tonnes) Year 1998-99 1999-00 2000-01 2001-02 2002-03 (P) Cotton (000 bales) 8790 (-4.3) 11240 (27.9) 10732 (-4.5) 10613 (-1.1) 10211 (-3.8) Sugarcane 55191 (3.9) 46333 (-16.0) 43606 (-5.9) 48042 (10.2) 52049 (8.3) Rice 4674 (7.9) 5156 (10.3) 4803 (-6.8) 3882 (-19.2) 4478 (15.4) Maize 1665 (9.8) 1652 (-0.8) 1643 (-0.5) 1664 (1.3) 1758 (5.6) Wheat 17856 (-4.5) 21079 (18.0) 19024 (-9.7) 18227 (-4.2) 19235 (5.5)

P: Provisional.(July-March) *: Figures in parentheses are growth rates a) Major Crops:

Source: Ministry of Food, Agriculture and Livestock. Federal Bureau of Statistics. agriculture and about 2.9 percent of GDP. In addition to providing raw material to the local textile industry, the surplus lint cotton is also

i) Cotton:
Cotton is the main cash crop which contributes substantially to the national income. It accounts for 11.7 percent of value added in

Chapter 2. Agriculture exported. Production of cotton is provisionally estimated at 10211 thousand bales for 2002-03, which is 3.8 percent lower than last year. The pest attack and shortage of irrigation water in the early Kharif season are mainly responsible for lower

production. Cotton was cultivated on the area of 2796 thousand hectares, which was 10.3 percent lower than last year (3116 thousand hectares). Area, production and yield of cotton for the last five years are given in Table 2.3.

Table 2.3 Cotton, Area, Production and Yield

Area Year 1998-99 1999-00 2000-01 2001-02 2002-03 (P) (000 Hectare) 2923 2983 2927 3116 2796 % Change -1.2 2.0 -1.9 6.5 -10.3 Production (000 Bales) 8790 11240 10732 10613 10211 % Change -4.3 27.9 -4.5 -1.1 -3.8 Yield (Kgs/Hec) 511 641 623 579 621 %Change -3.0 25.4 -2.8 -7.1 7.2

P=Provisional (July-March).

Source: Ministry of Food, Agriculture and Livestock Federal Bureau of Statistics.

Fig-2: Cotton production (000 bales)

14000 13000 12000 11000 10000 9000 8000 7000 6000 5000
90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03(P)

ii) Rice:
Rice is an important food cash crop. It is also one of the main export items of the country. It accounts for 6.8 percent in value added in agriculture and 1.7 percent in GDP. Production of rice during 2002-03 is provisionally estimated at 4478 thousand tonnes, which is 15.4 percent higher than last year. Rice was cultivated on an area of 2226 thousand hectares, showing an increase of 5.3 percent over the last year. The yield per hectare is also higher by 9.6 percent. The higher production is due to improved water availability during the months of May, June and July 2002 which placed a good impact on the growth of rice crop. Area, production and yield of rice for the last five years are given in Table 2.4.

Table 2.4
Area, Production and Yield of Rice Year (000 Hectare) 1998-99 1999-00 2000-01 2424 2515 2377 Area % Change 4.6 3.8 -5.5 Production (000 % Tonnes) Change 4674 5156 4803 7.9 10.3 -6.8 Yield (Kgs/Hec) 1928 2050 2021 % Changes 3.1 6.3 -1.4

Chapter 2. Agriculture 2001-02 2002-03 (P) 2114 2226 -11.1 5.3 3882 4478 -19.2 15.3 1836 2012 -9.1 9.6

P: Provisional (July-March).

Source: Ministry of Food, Agriculture and Livestock. Federal Bureau of Statistics. farmers to grow more sugarcane. The area, production and yield per hectare for the last five years are given in Table 2.5.

Fig-3: Rice production (000 Tonnes)

5500 5000 4500 4000 3500 3000 2500 2000

90-91

91-92

92-93

93-94

94-95

95-96

96-97

97-98

98-99

99-00

00-01

01-02

iii) Sugarcane:
Sugarcane crop is a highly water intensive and yet an important cash crop. Sugar production in the country mostly depends on this crop, though a small quantity of sugar is also produced from sugarbeet. Its shares in value added in agriculture and GDP are 6.2 percent and 1.5 percent, respectively. Sugarcane was cultivated on an area of 1086 thousand hectares during the current fiscal year, showing an increase of 8.6 percent over the last year. The size of the sugarcane crop is provisionally estimated at 52049 thousand tonnes which is higher by 8.3 percent, as compared with last year. The higher production is the result of increase in area, judicious application of fertilizer and water, improvement in cultural practices and better management. Timely payment received by the growers during last year also induced the

Table 2.5 Area, Production and Yield of Sugarcane

Year 1998-99 1999-00 2000-01 2001-02 Area (000 Hectare 1155 1010 961 1000 % Change 9.4 -12.6 -4.9 4.1 Production (000 Tonnes) % Change 55191 3.9 46333 -16.0 43606 -5.9 48042 10.2 Yield (Kgs/Hec.) 47784 45874 45376 48042 % Change -5.0 -3.9 -1.1 5.9

'02-03(P)

Chapter 2. Agriculture 2002-03 (P) 1086 P: Provisional. (July-March)

8.6

52049

8.3

47927

-0.2

Source: Ministry of Food, Agriculture and Livestock. Federal Bureau of Statistics.

Fig-4: Sugarcane production (000 Tonnes) 60000 55000 50000 45000 40000 35000 30000
90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 '02-03(P)

iv) Wheat:
Wheat is the main staple food of the countrys population and largest grain crop of the country. It contributes 12.5 percent to the value added in agriculture and 3.1 percent to GDP. Wheat

was cultivated on an area of 8069 thousand hectares, showing 0.1 percent increase over last year. The size of the wheat crop is provisionally estimated at 19235 thousand tonnes which is 5.5 percent higher than last year. The yield per hectare also increased by 5.4 percent. Wheat production target was originally fixed at 19.75 million tonnes. However, as a result of the mid-February 2003 country-wide heavy rain which brought 0.35 MAF additional water to Tarbella and 1.1 MAF to Mangla reservoirs, the wheat production target was revised upward to 20.63 million tonnes. The recent estimates of wheat production is much lower than the revised target because the crop was affected by aphid and rust attacks in the wheat growing areas as well as high temperature stress at grain formation affected the productivity of the wheat crop. The area, production and yield for the last five years are given in Table 2.6.

Table 2.6 Area, Production and Yield of Wheat

Area Year (000 hectares) % Change -1.5 2.8 -3.3 -1.5 0.1 Production Yield (000 % (Kgs/Hec.) % Changes tonnes) Change 17858 -4.5 2170 -3.0 21079 18.0 2491 14.8 19024 -9.7 2325 -6.7 18227 -4.2 2262 -2.7 19235 5.5 2384 5.4 Source: Ministry of Food, Agriculture and Livestock. Federal Bureau of Statistics

1998-99 8230 1999-00 8463 2000-01 8181 2001-02 8058 2002-03 (P) 8069 P= Provisional.(July-March).

Chapter 2. Agriculture
Fig-5: Wheat production (000 Tonnes) 22000 20000 18000 16000 14000 12000 10000
02-03(P) 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02

v) Other Major Crops Except bajra, jowar and barley all other major crops have registered increases over the last years production. The production of bajra, jowar and barley is provisionally estimated to decrease by 12.5 percent, 9.9 percent and 8.0 percent respectively. The production of gram, rapeseed & mustard, maize and tobacco grew by 61 percent, 7.2 percent, 5.6 percent and 0.4 percent, respectively. The details are given in Table 2.7.

Area and Production of Other Major Kharif and Rabi Crops 2001-02 Crops KHARIF: Maize Bajra Jowar RABI: Gram Barley Rapeseed & Mustard Tobacco Area (000 hectares) 942 417 358 Production (000 tonnes) 1664 216 222 2002-03(P) Area (000 hectares) 970 313 325 Production (000 tonnes) 1758 189 200

Table 2.7

%Change in production

5.6 -12.5 -9.9

934 111 269

362 100 221 94.5

960 103 284

582 92 237

61 -8.0 7.2

49.3 P= Provisional (July-March).

49.5 94.9 0.4 Source: Ministry of Food, Agriculture and Livestock. Federal Bureau of Statistics. was made available through imports. During 200203, local production of edible oil is provisionally estimated at 0.634 million tonnes which is higher by 4.6 percent than last year. During this period, 0.971 million tonnes of edible oil was imported and 0.155 million tonnes of edible oil was recovered from imported oilseeds. Total availability of edible oil from all sources amounted to 1.76 million tones during July-March (2002-03). Production of oilseed

b) Minor Crops i) Oilseed: The major oilseed crops include cottonseed, rapeseed/mustard, sunflower and canola etc. Total availability of edible oils in 2001-02 was 2.089 million tonnes. Local production stood at 0.606 million tonnes which accounted for 29 percent of the total availability while the remaining 71 percent

Chapter 2. Agriculture crops during 2001-02 and 2002-03 is given in Table

2.8.

Table 2.8
Area and Production of Major Oilseed Crops 2001-02 Area (000 Acres) Cottonseed Rapeseed/ Mustard Sunflower Canola Others Total Oil P= Provisional 7772 572 281 122 Production Seed (000 Tonnes) 3612 188 197 73 Oil (000 Tonnes) 433 60 Area (000 Acres) 6669 649 2002-03 (P) Production Seed (000 Tonnes) 3451 217 Oil (000 Tonnes) 414 69

79 371 260 99 29 223 136 52 05 606 634 Source: Pakistan Oilseed Development Board. Production of potato decreased by 1.1 percent while that of onion estimated to increase by 17.1 percent. The production of chillies is estimated to have increased by 12 percent in 2002-03 over the last year . Details are given in Table 2.9.

ii) Other Minor Crops:

The production of all the three major pulses have increased this year. Production of Mash has increased by 22.3 percent, followed by Mung (16.5 percent) and Masoor (8.0 percent) during 2002-03.

Table 2.9 Area and Production of Other Minor Crops

2001-02 Crops Masoor Mung Mash Potato Onion Chillies Area (000 hectares) 46.1 219.2 45.7 101.5 105.6 84.5 Production (000 tonnes) 26.2 115.4 27.8 1721.7 1385.0 93.3 2002-03(P) Area (000 hectares) 45.8 261.4 58.3 99.7 106.4 47.4 Production (000 tonnes) 28.3 134.4 34.0 1701.9 1622.0 104.5 %Change in production 8.0 16.5 22.3 -1.1 17.1 12.0

P= Provisional (July-March).

Source: Ministry of Food, Agriculture and Livestock. Federal Bureau of Statistics. Fertilizer is the major farm input in agricultural production. Domestic production of fertilizer during the first nine months (July-March 2002-03) of the current fiscal year has depicted a

II. Farm Inputs

i) Fertilizer:

Chapter 2. Agriculture decrease of 1.3 percent. On the other hand, the import of fertilizer increased by 45.8 percent, therefore, the total availability of fertilizer is higher

by 9.3 percent in the current year. The off take of fertilizer was also higher by 4.3 percent. The details are given in Table 2.10.

Table 2.10 Production and Off-take of Fertilizer ('000' N/tonnes) Year 1998-99 1999-00 2000-01 2001-02 2001-02 (P) 2002-03 (P) Domestic Production 1886.0 2263.0 2298.0 2285.6 1716.1 1694.0 % Change 9.1 20.0 1.5 -0.5 -1.3 Import 860.0 662.8 579.0 626.0 500.0 729.0 % Change 20.5 -22.9 -7.0 8.1 45.8 Total 2746.0 2925.8 2877.0 2911.6 2216.1 2423.0 % Change 12.5 6.5 -1.7 1.2 9.3 Offtake 2583.8 2833.4 2966.0 2929.0 2196.4 2291.0 % Change -1.2 9.7 4.7 -1.2 4.3

P= Provisional (July-March).

Source: National Fertilizer Development Centre. 03, 197.5 thousand tones of improved seed was procured while 147.6 thousand tones of improved seed was distributed, which was 11.9 percent higher than the same period of 2001-02.

ii) Improved Seed:

Quality seed of improved varieties is the key to enhance agricultural productivity. Seed has the unique position among the various agricultural inputs because the effectiveness of all other inputs mainly depend on the production potential of seeds. Federal Seed Certification & Registration Department regulates the quality during flow of seed from breeder to growers. The Department performs its functions through seventeen Seed Testing Laboratories and Field Offices, established in various ecological zones of the country. To provide certified crop seeds to the growers in public sector, Seed Corporation in Punjab and Sindh, Departments of Agriculture in Baluchistan and NWFP have been entrusted the task of seed production, processing and marketing. In private sector 394 seed companies including five multinationals have been allowed for certified seed production, processing and marketing. With the induction of private sector into seed business, improved seed availability has increased by 16.5 percent over the seed requirement in 2001-02. During (July-March) 2002-

iii) Mechanization:
Pakistan food security and agriculture surpluses for export at competitive prices require efficient development and utilization of agricultural resources. Cost of production of various crops are not competitive due to low productivity mainly due to inefficient farming practices. Farm operations being time specific, demand precision to optimize the efficiencies of agriculture inputs for higher productivity. The future challenges of free market economy and faster globalisation have further necessitated modernization of agricultural machinery through transfer of latest, efficient and cost effective technology to farming system. Efficient use of scarce agriculture resources and accelerated agriculture mechanization is, therefore, vital and demands for a comprehensive strategic planning for the future. In consideration of role of precision in farm operations, the use of machinery has been

Chapter 2. Agriculture encouraged through provision of credit availability. No significant increase in prices of locally manufactured tractors compared with last year has been noticed as there has been only an increase of 1.8 to 6.4 percent in the sale prices of some tractors.

However, prices of universal tractors Model U-640 and U-530 decreased marginally by 0.5 and 0.9 percent, respectively. Prices of various tractors are given in Table 2.11.

Table 2.11 Price of Locally Manufactured Tractors

(In Rupees) Tractor Model MF-240 (50-H.P) MF-260 (60 H.P) MF-375E(75 H.P) MF-385(85 H.P) FIAT-480 (55-H.P) FIAT-640 (75-H.P) KOREAN LT-400D UNIVERSAL U-640(65 HP) UNIVERSAL U-530 (53-H.P) 2001-02 313,000 375,000 490,000 585,000 320,000 459,000 435,000 439,000 320,000 2002-03 320,000 399,000 499,000 599,000 320,000 459,000 435,000 436,800 317,000 % Change 2.2 6.4 1.8 2.4 -0.5 -0.9

Source: Ministry of Food, Agriculture and Livestock.

iv) Plant Protection:

The plant protection measures help in increasing the per hectare yield by protecting crops from damages because, without effective protection against the attack of pests and diseases, the beneficial outcome of other inputs may not be realized either. In this connection, Department of Plant Protection provides facilities, such as, Locust Survey and Control, Aerial pest Control, Pesticide Registration and Testing etc. while private sector carries plant protection measures including ground sprays. During July-March 2002-03, 18.6 and 30.4 thousand tonnes of agricultural pesticides were imported and locally formulated.

Pakistan still suffers from wastage of a large amount of water in the irrigation process. Besides, during the last three year the country had experienced severe shortage of water. The total inflow of irrigated water averaged at 130.92 million acre feet (M.A.F.) during the last 25 years (1977-78 to 2002-03). Against this level of average inflow, the flows in major rivers have declined to 111.66 MAF in 2002-03 or by 14.7 percent. The canal head withdrawals averaged at 98.69 MAF during 1977-78 to 2002-03, but it declined to 87.84 MAF in 2002-03, thus registering a decline of 11 percent. During the monsoon season (July-September), the average rainfall has been 126.4 mm historically but during the monsoon season of 2002, the rainfall averaged 59.6 mm, suggesting a decline of 52.8 percent. However, during winter (January to March 2003), the actual rainfall received was 69.3 mm while the average rainfall during this period has been 66.5 mm indicating an increase of 4.2 percent over average rainfall. The details are in Table 2.12 (a&b).

v) Irrigation:
Efficient irrigation system is pre-requisite for higher agricultural production. It helps increase the cropping intensity. Despite the existence of good irrigation canal net work in the world,

Chapter 2. Agriculture

Table 2.12 (a) Irrigation Water Situation

Million Acre Feet Average 1977-78 to 2002-03 130.92 98.69 2002-03 111.66 87.84 Shortage 19.26 10.85 % Shortage -14.7% -11.0%

Inflow Canal withdrawals

Source: Indus River System Authority.

Table 2.12 (b) Rainfall Recorded During 2002-03

(In Millimeter)

Average Actual Shortage (-)/excess (+) % Shortage (-)/excess (+)

Monsoon Rainfall Winter Rainfall (Jul-September) (January-March) 126.4 66.5 59.6 69.3 - 66.8 + 2.8 - 52.8 + 4.2 Source: Pakistan Meteorological Department

Due to the above normal winter rainfalls of 2003, the water availability situation both for Rabi 200203 and Kharif 2003 crops have improved. The canal head withdrawals in kharif 2002 (April-September) has increased by 14.9 percent and stood at 62.83 million acre feet (MAF), as compared to 54.66 MAF

during the same period last year. During the Rabi season 2002-03 (Oct-March), the canal head withdrawals increased significantly by 35.7 percent, as it went up to 25.01 MAF compared to 18.43 MAF during the same period last year. Province-wise details are given in Table 2.13.

Table 2.13
Canal Head Withdrawals (Below Rim Station) (Million Acre Feet (MAF) Provinces Punjab Sindh Baluchistan NWFP (CRBC) Kharif (Apr-Sep) 2001 27.24 24.47 2.11 0.84 54.66 Kharif (Apr -Sep) 2002 32.12 27.63 2.20 0.88 62.83 % Change in Kharif 2002 over 2001 17.9 12.9 4.3 4.8 14.9 Rabi (Oct-Mar) 2001-02 9.81 7.10 0.91 0.61 18.43 Rabi (Oct -Mar) 2002-03 13.87 9.72 0.93 0.49 25.01 % Change in Rabi 2002-03 over 2001-02 41.4 36.9 2.2 -19.7 35.7

Total

Source: Indus River System Authority.

vi) Agricultural Credit:

Credit requirements of the farming sector have been increasing over the years with the rise in

Chapter 2. Agriculture the use of fertilizer, pesticides and mechanization and hike in their prices. In order to cope with the increasing demand for agricultural credit, Institutional Credit to the farmers is being provided through Zarai Taraqiate Bank Limited (ZTBL), formerly known as Agricultural Development Bank of Pakistan (ADBP); Commercial Banks, Cooperatives and Domestic Private Banks. Of these, the ZTBL provides the lion share of the total credit disbursement followed by Commercial Banks. The agricultural loans extended to the farming community during (July-March), 2002-03, are discussed below:

to play an effective role in the development of agriculture.

d) Loan Under One Window Operations

Since 1997, ZTBL has launched One

a) Production and Development Loans

Agricultural loans amounting to Rs.37.6 billion were disbursed during July-March, 2002-03, as against Rs.35.0 billion during the corresponding period last year, thereby registering an increase of 7.5 percent. Supply of agricultural credit by various institutions since 1997-98 to 200203 (July-March) is given in Table 2.14

b) Loan to Small Farmers

The Zarai Taraqiate Bank Limited (ZTBL), disbursed Rs.16.2 billion to small farmers having upto 25 acres of land during the first nine months of FY 2002-03. Availability of credit to this category now constitutes 83.8 percent of total agricultural credit provided by the bank.

c) Loans for Newly Identified Priority Items

For the financial year 2002-03, Rs.4075.0 million have been allocated for priority items mainly for enhancement and improvement of irrigation facilities, various varieties of orchards, on farm godowns/storages, production loans for improved seeds, horticulture and Micro Credit etc. During 2002-03 (July-March), loans of Rs.1480.0 million have been disbursed for these priority items

Chapter 2. Agriculture Window Operation to provide credit facilities, particularly to small farmers, to cater for input requirements at their door step. Thus, during peak sowing season of both Rabi and Kharif Crops, One Window Operation is launched with the collaboration of Provincial Governments, Revenue Officials and Postal Authorities. Agriculture Pass Books are issued at spot to the intending borrowers, their land record is entered and loans are sanctioned at focal points whereas payments are released on the very next day from the concerned branch. During 2002-03 (July-March), loans of Rs.2565.6 million have been disbursed through One Window Operation.

e) Revolving Finance Scheme

Under this scheme, an annual loan limit is sanctioned to a borrower, based on his input credit requirements for both Rabi and Kharif Crops. This limit remains operative for a period of 3 years (six cropping season) without any afresh procedural requirement and documentation. Under this scheme Rs.7386.6 million was disbursed during (July-March) 2002-03. Thus 48% of total production loan i.e Rs.15374.6 million has been disbursed through this scheme.

Table 2.14 Supply of Agricultural Credit by Institutions (Rs. in million)

Year 1997-98 1998-99 1999-00 2000-01 2001-02 2001-02 (JulyMarch) 2002-03 (JulyMarch) 22353.6 30176.0 24423.9 27610.0 29108.0 20161.8 19346.5 ZTBL* 6109.7 7236.0 9312.5 12055.0 17486.1 11298.5 14375.9 Commercial Banks 4928.9 5440.0 5951.2 5124.2 5273.7 3107.3 3217.8 Cooperatives 578.5 434.6 679.3 Domestic Private Bank 33392.2 42852.0 39687.6 44789.2 52446.3 35002.2 37619.5 Total Rs. Million 28.3 -7.4 12.8 17.1 7.5 %Change

* ZTBL formerly ADBP. III. Forestry Forests are the lungs of any country. Forests play an important role in land conservation, regulated flow of water for irrigation and power generation, reduction of sedimentation in water channels and reservoirs and maintenance of ecological balance. Forest cover in Pakistan consists of about 4.8 percent of its total land mass. Eighty five percent of this is public forests which includes 40 percent coniferous and scrub forests on the

Source: Ministry of Food, Agriculture and Livestock. State Bank of Pakistan. northern hills and mountains. The balance is made up of irrigated plantations and Riverain forests along major rivers on the Indus plains, mangrove forests on the Indus delta and trees planted on farmlands. Total forests area of Punjab, NWFP, Sindh, Baluchistan, Azad Kashmir and Northern areas is 0.69, 1.21, 0.92, 0.33, 0.42, and 0.66 million hectares, respectively. Though the forest resource is meager, it plays an important role in Pakistans economy by employing half a million people and providing one-third of the nations energy needs.

Chapter 2. Agriculture Forests and Rangelands support about 30 million herds of livestock, which contributes more than US$ 400 million Pakistans annual export earnings. During the year 2002-03, forests have contributed 298.79 thousand cubic meters of timber and 490.50 thousand cubic meters of firewood as compared to 274.53 thousand cubic meters timber and 450.95 thousand cubic meters firewood in 2001-02. Forestry Sector Master Plan had been prepared in 1992-93 for a period of 25 years which is being updated through Asian Development Bank assisted project. Forestry data is being updated through field oriented studies which will be useful in future strategic planning for the Development of forestry in the country. Tree planting campaigns are launched every year in the spring and monsoon season. During spring and monsoon season year 2002, 106.46 million saplings (Spring 66.75 and Monsoon 39.71 million) were planted. In order to promote efficient utilization and assessment to recover the full utilization of goods and services provided by the forests, Government of Pakistan has prepared National Forest Policy 2002 which covers all renewable natural resources i.e. forests, watersheds, rangelands, biodiversity and their habitats. The policy envisages to eliminate the fundamental causes of forests depletion through active participation of all the stakeholders. The goal of this national forest policy is to foster sustainable development of natural resources, rehabilitation of its environment and enhancement of sustainable livelihoods of communities. A mega project in forestry sector named Rachna Doab Afforestation Project was started in July 1995 at a cost of Rs.485.4 million. The main objective of this project is afforestation for the purpose of camouflage and concealment which is very important for strategic point of view. During 2002-03, Rs.60.0 million were allocated to conclude the on-going activities towards achievements of afforestation targets. Tarbela Watershed Management Project sponsored by the Ministry of Environment is an ongoing project at a total cost of Rs.689.0 million, to which Rs.34.188 million were allocated during FY 2002-03.The main objectives of the project include; soil and water conservation, extension of forests, appropriate land use, improvement of environment and uplift of socio-economic conditions of people. During the fiscal year 2002-03, 14.5 acres of nurseries have been raised, 2576 acres planted, 7,086 acres afforestation maintained and 27 management/utilization plans have been prepared with the total expenditure of Rs.23.932 million till March, 2003. IV. Livestock and Poultry a) Livestock Livestock is an important sector of

agriculture in Pakistan, which accounts for 39 percent of agricultural value added and about 9.4 percent of the GDP. Its net foreign exchange earnings were to the tune of Rs.51.5 billion in 200102, which is almost 11.4 percent of the overall export earnings of the country. The role of livestock in rural economy may be realized from the fact that 30-35 million rural population is engaged in livestock raising, having household holdings of 2-3 cattle/buffalo and 5-6 sheep/goat per family

Chapter 2. Agriculture deriving 30-40 percent of their income from it. The livestock include: cattle, buffalos, sheep, goats,

camels, horses, asses and mules. Population of livestock for the last five years is given in Table 2.15.

Table 2.15 Livestock Population Nos.)

Species Cattle Buffalo Sheep Goat Camels Horses Asses E: Estimated. 1998-99 21.6 22.0 23.9 45.8 0.8 0.3 3.8 1999-00 22.0 22.7 24.1 47.4 0.8 0.3 3.8 2000-01 22.4 23.3 24.2 49.2 0.8 0.3 3.9 2001-02 22.8 24.0 24.4 50.9 0.8 0.3 3.9

(Million
2002-03(E) 23.3 24.8 24.6 52.8 0.8 0.3 4.1

Source: Ministry of Food, Agriculture and Livestock (Livestock Wing) production for the last five years are shown in Table 2.16.

The livestock production includes: milk, beef, mutton, poultry meat, wool, hair, bones, fats, blood, eggs, hides and skins. The livestock

Table 2.16 Livestock Products

Products Milk Beef Mutton Poultry Meat Wool Hair Bones Fats Blood Eggs Hides Skins E= Estimated Units 1998-99 1999-00 25566.0 986.0 649.0 327.1 38.9 17.9 324.0 120.6 40.9 7321.0 7.6 37.2 2000-01 26284.0 1010.0 666.0 339.0 39.2 18.6 331.4 123.5 41.8 7505.0 7.8 38.2 2001-02 27031.0 1034.0 683.0 355.0 39.4 19.3 339.4 126.5 42.9 7679.0 7.9 39.2 2002-03 (E) 27811.0 1060.0 702.0 370.0 39.7 19.9 347.6 129.7 44.0 7860.0 8.2 40.3

(000 Tonnes) 24877.0 " 963.0 " 633.0 " 310.0 " 38.7 " 17.3 " 316.3 " 117.8 " 34.4.0 Million Nos. 8261.0 " 7.5 " 36.3

Source: Ministry of Food, Agriculture & Livestock (Livestock Wing). associated with poultry production activities in one way or the other. Government is providing all possible incentives to develop it at an accelerated pace. The production of commercial and rural poultry is given in Table 2.17.

b) Poultry Poultry production has emerged as a good substitute of beef and mutton. Its importance can be judged from the fact that almost every family in rural areas and every fifth family in urban areas are

Chapter 2. Agriculture

Table 2.17
Production of Commercial Poultry and Poultry Products Production Day Old Chick Layers Broilers Breeding Stock Poultry Meat Eggs E: Estimated Units Million No's " " " (000 Tonnes) Million No's 2001-02 334.3 18.4 264.4 6.2 266.8 4423.0 2002-03 (E) 350.5 19.3 227.2 6.5 279.5 4632.0

Source: Ministry of Food, Agriculture & Livestock (Livestock Wing). institutions. Expatriate personnel of the Units will be allowed to import food items and other consumable without any duty/taxes, subject to maximum limit of $2,000 per person per year. Import of breeding stock will be allowed subject to the import duty of 10 percent. Locally manufactured machinery will be provided credit. Parts and Components upto 5 percent of initial C&F value of imported plant and equipment shall be imported at 10 percent duty, if imported together with the plant. The export of livestock products has been allowed. & livestock

The production of rural poultry for 2001-02 and 2002-03 are given in Table 2.18.

Table 2.18 Rural Poultry (Million Nos.)

Production Day Old Chick Cocks & Cockribs Layers E: Estimated 2001-02 32.0 9.0 32.0 2002-03 (E) 33.5 9.4 33.6 -

Source: Ministry of Food, Agricul -ture & Livestock ( Livestock Wing).

For promotion of livestock and poultry, the government has provided the following incentives in the agricultural package: Imported plant and equipment not manufactured locally shall be subject to custom duty of 10 percent, with complete exemption from sales tax. Capital structure of projects in agro-food industry will be entitled to debt-equity ratio of 70:30. Projects will be entitled for financing by all banks and development finance

The imported plant and equipment

not

manufactured locally, shall be subject to custom duty of 10 percent with complete exemption from sales tax. Following measures have also been taken to meet Sanitary and Phytosanitary (SPS) requirements under WTO for quality assurance and to improve exports of livestock and livestock products:

Chapter 2. Agriculture the total fish production is estimated at 665,850 m. Establishment of abattoirs are encouraged in the private sector; The National Veterinary Laboratory is under construction for drug residue testing in the livestock products. This will ensure quality in exported products; Steps have been taken to improve sanitary and hygiene conditions of animal casing processing units in the country; The Government is taking a number of steps to improve fisheries sector. A number of initiatives are also being taken by the Federal and Provincial Fisheries Departments which, inter-alia, include strengthening of extension services, diversification of fishing efforts, development of value added products, enhancement of per capita tonnes. Of which, share of marine sector is 480,000 m. tonnes and inland contribution is 185,850 m. tonnes.

consumption and up-gradation of socio-economic A project titled Strengthening of condition of the fishermen's community. Marine Veterinary Services in Pakistan Rinderpest Eradication Fisheries Department is also executing a project, Program has been launched during the fiscal year 2002-03. namely, "Establishment of a Hatchery Complex for V. Fisheries Fishery plays an important role in Pakistan's economy and is considered to be an important source of livelihood for the coastal inhabitants. Apart from marine fisheries, inland fisheries (comprising of rivers, lakes, ponds, dams etc) are also very important source of animal protein. Fisheries' share in GDP, though very little contributes substantially to the national income through export earnings. During the period JulyMarch 2002-03, 58356 m. tonnes valued at Rs.5.2 billion fish and fishery products were estimated to be exported to Japan, USA, UK, Germany, Middle East, Sri Lanka, China etc. During the same period, _____________________________ Production of Fish/Shrimp Seeds" which will play a vital role for the development of fish/ shrimp farming. The total number of persons engaged in fisheries sector during 2002-03 is estimated at 365,000. Out of which, 138,000 persons (37.8 percent) were engaged in marine sector and 227,000 persons (62.2 percent) in inland fisheries, whereas the persons engaged in fisheries sector in 2001-02 were 363,000 persons137,000 (37.7 percent) in marine and 226,000 (62.3 percent) in inland fisheries.

Chapter 3. Manufacturing Mining and Investment Policies

3.Manufacturing, Mining and Investment Policies

Manufacturing sector is the second largest individual sector of the economy accounting for 18 percent of the Gross Domestic Product (GDP). The activity in the manufacturing sector is comprised of large-scale and small & medium manufacturing sector. The performance of this very important sector in general and large-scale manufacturing in particular, has been lackluster at best in 1990s owing to host of problems like tariff reforms and escalating utility prices. In the backdrop of higher growth of 8.2 percent in the 1980s, the growth rate of 4.0 percent in 1990s was disappointing. Fiscal year 2002-03 besides 200001 has become the best performing year for manufacturing sector since 1987-88. This year has seen manufacturing registering a stellar growth of 7.7 percent with major contribution coming from large-scale manufacturing which recorded 8.7 percent growth. The industry seems to have adjusted itself with the challenges emanated from trade and tariff rationalization of the 1990s and increased input cost due to escalating utility tariff. The large-scale manufacturing was originally targeted to grow by 6.5 percent in 2002-03 but the target was surpassed by a wide margin. Pakistans overall manufacturing sector registered a growth of 7.7 percent and large-scale manufacturing grew by 8.7 percent during the current fiscal year. The improvement in the domestic demand and better macroeconomic environment have caused in significant turnaround in the manufacturing sector. The turnaround in the large-scale manufacturing which started in 2000-01 continued to exhibit a rising trend barring brief interval in the last fiscal years (October ,November and February 2001-02). The events of September 11 and their aftermath adversely affected the performance of this sector during this period. With the exception of these three months the growth performance depicted smart recovery during the last three years. One of the significant development in the current fiscal year has been that the growth is broad-based and touched almost all industrial groups. The main contributors to this impressive growth of 8.7 percent in July- March, 2002-2003 over the corresponding period of last year are automobile group (49.8 percent), food, beverage & tobacco group( 8.5 percent) textiles & apparel group (5.2 percent), paper & board (15.7 percent), metal product, machinery & equipment (18.4 percent), and tyres & tubes (16.2 percent). Ten out of eleven groups registered positive growth while leather product is the only group that registered negative growth [See Table 3.1]. Individual items that registered positive growth are cotton cloth (1.5 percent), cotton yarn (8.1 percent) in textiles group; cooking oil (6.8 percent) and sugar (13.6 percent) in food, beverages and tobacco groups; nitrogenous fertilizer (4.2 percent) and soda ash (12.9 percent) in chemical & pharmaceutical group, cement (20.5 percent) in non-metallic mineral products group and Jeeps & Cars (51.6 percent) and LCVs (57.6 percent) in automobile group. The individual industries which show negative growth include vegetable ghee (7.0 percent), cigarettes (7.1 percent), cotton ginned (4.7 percent), phosphatic fertilizer (27.8 percent) and footwear (6.2 percent). The production performance of selected items is given in Table 3.2.

Table 3.1 Group-Wise Growth Performance (July-March) (Percent) Group Food, Beverages & Tobacco (Sugar) Textile and Apparel Leather Products Paper & Board Chemicals, Rubber & Plastics Petroleum Group 2001-02 6.1 (9.2) 4.4 -3.5 2.8 0.1 18.7 2002-03 8.5 (13.6) 5.2 -6.6 15.7 3.9 2.2

Chapter 3. Manufacturing Mining and Investment Policies Tyres & Tubes 5.9 Non-Metallic Mineral Products 1.2 Basic Metal Industries -4.7 Metal Products, Machinery & Equipment 3.3 Automobile 2.8 Overall Growth 4.0 * Includes cement Source: Economic Adviser Wing, Finance Division 16.2 20.0* 9.1 18.4 49.8 8.7

Table 3.2 Production of Selected Industrial Items of Large-scale (July-March) Item Units 2000-01 Cotton Yarn Cotton Cloth Sugar Nitrogenous Fertilizer Phosphatic Fertilizer Vegetable Ghee Cooking Oil Cement Cigarettes Jeep& Cars Tractors L.C.V Motorcycles/Scooters Bicycles Paper & Paper Board T.V Sets Motor Tyres Billets 000 tones Mln.Sq. Mtr 000 tones 000 N. tones 000 N tones 000 tones 000 tones 000 tones Bln. Nos. Nos. Nos. Nos. Nos. 000 Nos. 000 tones. 000 Nos. 000 Nos. 000 tones 1721.0 490.2 2955.9 2004.7 292.2 834.8 106.5 9674 58.2 40032 32553 6965 117858 569.6 531.1 97.4 884 414.7 2001-02 1794.0 555.6 3246.6 2095.9 140.5 774.4 135.3 9935 55.3 41171 24331 8491 133334 546.4 547.8 77.7 911 412.0 2001-02 1344.1 416.1 2905.2 1561.7 112.8 601.0 95.0 7071 39.0 28166 15339 5537 94108 393.6 240.4 340.0 670 275.6 2002-03 1452.3 422.4 3263.9 1627.0 81.5 559.2 101.5 8518 36.2 42691 17870 8727 125625 460.2 278.2 541.0 777 314.2 % Change 8.1 1.5 13.6 4.2 -27.8 -7.0 6.8 20.5 -7.1 51.6 16.5 57.6 33.5 16.9 15.7 59.1 16.0 14.0

Chapter 3. Manufacturing Mining and Investment Policies Refrigerators Soda Ash 000 Nos. 000 tones 272.3 217.9 313.8 215.2 195.0 187.6 240.0 211.8 23.1 12.9

Source: Federal Bureau of Statistics EVALUATION OF SELECTED INDUSTRIES OF new capacity and up-gradation of the existing LARGE SCALE MANUFACTURING (LSM). Textile Industry production base. The textile vision 2005 maintained that at the initial phase heavy investment will be needed to create additional capacity in the apparel industry; however, the apparel sector only received 36 percent of Textile products are a basic human requirement the targeted investment during last three years. Bulk of next only to food. Inspite of the governments efforts to the investment to the extent of 56 percent went to the diversify export as well as industrial base, the textile traditional spinning sector which is three times higher remains the backbone of industrial activity in the than envisaged in the textile vision 2005. The textile country. Its share in the economy, in terms of GDP, sector received $ 1.5 billion worth of investment during exports, employment, foreign exchange earnings, the last three years. investment and contribution to the value added in industry; make it the single largest determinant of the The brighter side of the investment in this growth in manufacturing sector with 46 percent share in sector is the heavy investment in the air jet weaving overall manufacturing activity. The demand for textiles segment where actual disbursement has already in the world is around $18 trillion. Pakistan has surpassed the target with a fair margin of 55 percent. emerged as one of the major cotton textile product Such investment would not only modernize this sector supplier in the world market and its share in world yarn but would likely to fuel value addition in the coming trade is about 30 percent while its share in cotton cloth years. However, grey area of the whole investment trade is about 8 percent. However, overall share of composition has been below target inflows in the water textile exports from Pakistan is around one percent. The jet weaving sector. The tremendous inflow of share of textile in Pakistans exports earnings is 68 investment in the sector is likely to enable Pakistan percent at its present worth of exports is around $ 7 textile industry to face formidable challenge of lifting billion. The value addition in the sector account for 9 the remaining vestiges of quota restrictions as stipulated percent of GDP and it employ 38 percent of industrial in the Agreement on Textiles and Clothing (ATC) after workers. During the last three years, Pakistans textile 2005. Foreign direct investment (FDI) in the textile sector is preparing itself to face the challenges of the sector doubled to US $23.1 million in Jul-March 2002-03 post-quota regime in 2005. as against US $ 10.5 million in the corresponding period Investment Trend in Textile Sector The year under review witnessed tremendous inflow of investment in value added expansion and BMR. The textile vision 2005 besides providing a road map to enhance exports of textile products, also set benchmark investment requirements for the creation of of last year. During the current fiscal year the textile sector showed greater resilience to lower cotton crop and performed well as far as production is concerned. After suffering stagnation for 5 year, textile exports started improving, especially the value added product

Chapter 3. Manufacturing Mining and Investment Policies performed well in export markets. The profiles of Table 3.3 below:various components of textile industry are given in the Table 3.3 Installed Capacity of Textile Industry July-March % Change 2001-02 Number of Mills Installed Capacity (000 Number) Spindles Rotors Looms 8726.0 145.0 10.1 9173.0 144.0 10.2 5.1 -0.7 1.0 348.0 2002-03 361.0 3.7

Working Capacity (000 Numbers) Spindles Rotors Looms 7113.0 63.0 4.4 7578.0 66.7 3.4 6.4 5.9 -22.7

Source: Textile Commissioner Organization Performance of Ancillary Textile Industry The production of cotton yarn increased to Textile production is comprised of cotton 1452.3 thousand tones in July-March 2002-03 as against ginning, cotton yarn, cotton fabric, fabric processing 1344.1 thousand tones in the comparable period of last (grey-dyed-printed), home textiles, towels, hosiery & year, thereby, registering a growth of 8.1 percent. The knitwear and readymade garments. The textile industry export of cotton yarn witnessed modest improvement consists of large-scale organized sector and unorganized both in quantity and value term during July-March cottage / small & medium units. The performance of 2002-03. The quantity and value of yarn export various ancillary textile industries is evaluated as increased by 3.2 percent and 2.8 percent, respectively. under:The international price of yarn continued to remain A. Cotton Spinning Sector. depressed for third consecutive year. This is not a mean achievement, especially when a shift is taking place The spinning sector has emerged torch-bearer from lower to higher value added export products. of revitalization of textile sector. At present, it is comprised of 453 textile mills (50 composite units and B. Weaving & Made-up Sector. 403 spinning units) with 7.6 Million spindles and 67 thousand rotors in operation with capacity utilization at The patterns in weaving and made-up sector 83 percent in spindles and 47 percent in rotors, during comprised of hosiery, garments, towels, canvas, and July- March, 2002-03. bedwear are different from spinning sector. The

Chapter 3. Manufacturing Mining and Investment Policies weaving and made-up sector has three different subThe production of cotton cloth in the mill sector has increased marginally by 1.5 percent during Julysectors in weaving viz. integrated, independent weaving units, and power looms units. The installed March 2002-03 while non-mill sector registered a and effective capacities in the sector are given in the phenomenal growth of 14.6 percent in the same period. The export of cotton cloth witnessed tremendous Table 3.4. increase of 18.0 percent during July-March 2002-03 in value terms however, in quantitative terms, the increase Table 3.4 Installed and Capacity Worked in Weaving was 7.4 percent, which is because of almost 10 percent increase in unit value of cotton fabrics in the Sector (Nos.) international market. The sector served as the main Effective/ Installed strength for the down stream industry like bedwear, Category Capacity Capacity Worked made-ups and garments. a) Integrated 10249 4947 D. Textile Down-Stream Industry

Textile Units

readymade garments. IMF has acknowledged the The problems of power looms centered on the importance of the sector in a report and concludes that poor technology, scarcity of quality yarn and lack of Pakistan should seek to shift emphasis on textile and institutional financing for its development from the clothing to higher value added items. The government unorganized to an organized sector. The government has already incorporated this suggestion in Textile has realized that textile and clothing sector is one sector Vision 2005. The performance of the down stream that offer good prospects for diversification away from sectors is evaluated below: traditional commodity exports, for entry into the area of manufactures, for absorption of large pools a) of Hosiery Industry. There are about 15,000 knitting manpower, for crossing the big divide between the rural machines working in the country to manufacture and urban sectors, for poverty alleviation and for 5.5 million pieces of knitwear with approximately gender empowerment. The government under Textile 60 percent capacity utilization. The sector is not Vision 2005 has focused more on providing credit and only catering for domestic demand, but also has other facilitative support to diversify the products, export potential. There is greater reliance on the especially to cater the needs of the high value added development of this industry because of high sector like garment industry. The textile industry value addition content in the form of knitwear. invested substantially in BMR for improving The locally manufactured machinery is production quality and moving towards more value supplemented with liberal imports under addition during the last two years. However, the textile different modes and export oriented capacity is industry still need around $ 1.5 billion worth of being developed to earn much needed foreign investment for BMR and expansion over the next two exchange. Exports from this sector have years to meet the challenges which are likely to emerge witnessed tremendous increase of 32 percent in in the post-quota regime beginning from January 2005. value terms and 44 percent in quantity terms and added $ 793 million to the foreign exchange C. Cotton Cloth earnings during July-March 2002-03 as compared

b) Independent Weaving Units 23652 22000 c) Power Loom Sector 225258 190000 Total 259159 216947 Source: Textile Commissioner Organization.

The down-stream industry is the most dynamic segment of the textile industry and a major contributor to export earnings. The major products are hosiery, towel, bedwear, canvas and tents, cotton bags and

Chapter 3. Manufacturing Mining and Investment Policies to $ 682 million during the same period of last d) year. The impressive growth in exports of knitwear is achieved despite 8.3 percent decline in the unit value in the international market. b) Readymade Garments. The garment industry provides highest value addition in the textile Tarpaulin & Canvas. The production capacity of this highest raw cotton-consuming sector is 100 million sq. meters. This is a low value added subsector. The sector recorded 6.0 percent increase in value of exports and 4.4 percent increase in quantity terms which imply slight upward adjustment in the unit value of exports. This

sector. This sector is distributed in small, medium sector is mainly export based and 90 percent of its and large-scale units, most of them, having 50 production is exported. machines and below. The sector is comprised of 600 large and 4500 small units. This sector is E. Filament Yarn Manufacturing Industry attracting considerable investment and many There are 25 units engaged in manufacturing of new units are coming up in the organized sector every year. This sub-sector is facing multi- three kinds of filament yarn, namely acetate rayon yarn dimensional problems like high value addition in (one unit with capacity to manufacture 3 thousand competing countries and inelasticity of the sector tones), nylon filament yarn (3 units with installed in shifting the burden of increased prices of yarn, capacity of 2 thousand tones) and polyester filament cotton cloth or other inputs to the end user. yarn (21 units with installed capacity of 95 thousand Against all these odds, the sub-sector has witnessed substantial growth of 25.8 percent in terms of value of exports but in quantity terms, the exports from the sector witnessed a decline of 10.2 percent. The sector received windfall gains due to 40.0 percent increase in the unit value during July-March 2002-03 over the comparable period of last year. The sector contributed $ 800.5 tones). The total installed capacity of all these units is 100 thousand tones, against which it produced approximately 78 thousand tones per annum. In Pakistan, generally blending ratio of cotton yarn and blended yarn is on lower side as compared to the international standards. However, there is a shift is taking place from 100 percent cotton yarn to blended yarn in the spinning sector. Recently, hosiery sector has

million in this period as against $ 636.2 million in started consuming synthetic Yarn for export of knitted garments which are contributing in high value addition the comparable period of last year. as well as diversification in exportable products. c) Towel industry. This industry is comprised of about 400 units supported by 6500 towel looms in F. Art Silk and Synthetic Weaving Industry the country in both organized and unorganized The art silk and synthetic weaving industry is sector. The industry is capable of producing 55 mostly concentrated in the informal sector and million Kgs towels per annum. It is mainly an export-based industry with lower demand from generally it is operated as family owned power loom domestic market. Its growth primarily depends units comprising of 8 to 10 looms. There are on exploration of export outlets. The year under approximately 90,000 power looms in operation to review is the best performing year for this prepare synthetic yarn in the country. About 30,000 industry like other segments of textile sector and looms are engaged in production of blended yarn and its exports increased by 18.8 percent in quantity 60,000 looms are producing filament yarn. The export terms and by 26.5 percent in value terms, during of synthetic textile increased by 14.9 percent in terms of July-March 2002-03. quantity and 26.6 percent in terms of value during JulyMarch 2002-03 over the comparable period of last year. This industry, like others in textile sector has also

Chapter 3. Manufacturing Mining and Investment Policies experienced decline in unit value of exports by 4.7 comparable period of last year while the production of percent. The importance accorded to SMEs by the cooking oil stood at 0.1 million tones as against 0.095 government would go a long way in promoting this sort million tones in the same period. of industry. I. Sugar Industry G. The Fertilizer Industry The sugar industry is comprised of 77 mills Fertilizer is one of the key inputs used in with ability to produce 5.5 million tones of refined agricultural production. There are 10 fertilizer units operating in the country (Five units are in Punjab, three in Sindh and two in NWFP) with an installed capacity of 5.6 million tones, out of which nitrogenous fertilizer has a capacity of 4.9 million tons and phosphatic fertilizer has production capacity of 0.7 million tons. Out of these 10 units, five are in private sector with an installed capacity of 3.7 million tons and five are in sugar. Out of these 77 mills, 38 are located in Punjab, 32 in Sindh 6 in NWFP, and one in AJK. The production capacity has almost doubled against the annual sugar requirement for consumption as a result of addition of 25 new mills to the capacity during one decade. The industry is confronted with inefficiency in production, partly contributed by the quality and quantity of sugarcane availability. The sugar season is over in May

public sector with capacity of 1.9 million tons. With and the latest estimates showed production of 3.7 revival of agricultural growth, the production of million tones as against 3.2 million tones in the last year, fertilizer has also witnessed an increase of 2.5 percent thereby showing an increase of 15.6 percent. The sugar and stood at 3.9 million tones during July-March 200203 as against 3.8 million tones in the corresponding period of last year. The production of fertilizer like urea and ammonium nitrate increased by 3.5 percent industry is confronted with low recovery rate and inefficient cost structure. There is dire need to improve sugar recovery rate by adopting most modern techniques for cultivation of sugarcane. There was a

and 4.2 percent respectively while the production of slight improvement in recovery rate during the year nitro phosphate and super phosphate declined by 1.0 under review but it was because of late beginning of the percent and 10.5 percent, respectively, during July crushing season. March 2002-03 over the corresponding period of last year. H. Vegetable Ghee J. Cement Industry

There are 24 cement units in the country with total installed capacity of 17.7 million tones. The production activity in ghee and cooking oil Out of these 24 units, 4 units are in the public production is now entirely concentrated in the private sector and 20 units are in the private sector. The sector after privatization. The industry is comprised of production capacity has doubled from 8.9 million 155 units both in organized and unorganized sectors, tones to 17.7 million tones during the last 6 to 7 and employing 37,700 persons. The overall installed years. During this period, demand only increased by 27 percent from 7.7 million tons to 9.8 million capacity of the ghee and cooking oil industry is tons. High prices owing to inefficiencies in estimated at 2.7 million tones. The ghee production is production and cartel formation by the substituted with cooking oil production for quite manufacturers, substantial decline in PSDP during sometime. Therefore, the ghee production has decline the 1990s and slowdown of economic activity were by 7.0 percent while that of cooking oil went up by 6.8 the major factors which impeded growth in demand percent in Jul-March 2002-03. The ghee production is for cement. The total production of cement is estimated at 0.56 million tones during July- March 2002- recorded at 8.5 million tones during July-March 03 as against 0.60 million tones produced in the 2002-03 as compared to 7.1 million tones in the

Chapter 3. Manufacturing Mining and Investment Policies

same period of last year, showing an increase of 20.5 percent. The boost in cement production is because of the rising construction activity in the country, reconstruction activity in Afghanistan and increasing development expenditure by the government.
K. Automobile Industry There are 18 automobiles manufacturing units in assembling business which is supported by 850 units manufacturing auto parts. The auto industry and down stream vendor industry employs more than one lac people. The performance of automobile industry has been the best during the

year under review. The impressive recovery touched almost every segment of the auto industry. The auto industry is the fore-runner of the tremendous growth in large-scale industry. During the current fiscal year the automobile industry has registered enormous growth owing to declining interest rates, persistent inflow of home remittances, cheaper and easy availability of car financing and changes in model. The car industry registered a growth of 51.4 percent during JulyApril 2002-03, followed by trucks (103 percent), buses (32.7 percent), LCVs (57.9 percent), tractors (10.5 percent) and motorcycles (48.6 percent). The installed capacity of the major components of automobile sector and production is given in Table 3.5.

Table 3.5 Installed and Operational Capacity of Automobile Industry (Numbers) Item Inst. Capacity 2001-02 2001-02 200203 49280 1608 1186 9969 20680 139851 51.4 103.0 32.7 57.9 10.5 48.6 July-April % Change

Cars Trucks Buses LCVs Tractors Motorcycles

122000 12500 1900 28000 33000 340000

41071 1141 1099 8491 24331 133334

32552 792 894 6315 18708 94108

Source: Federal Bureau of Statistics.

REVIVAL OF SICK UNITS

The sick units are inimical to development of financial institutions. The sick units were

responsible for increase in non-performing loans during the 1990s and resultantly, the financial sector has reached on the verge of collapse. The government has formed Corporate Industrial

Chapter 3. Manufacturing Mining and Investment Policies Restructuring Corporation (CIRC) with a mandate to revive or dispose off 868 sick units through open public. These units in the private sector were identified by the CIRC in consultation with the concerned banks as these units were closed for many years and owed over Rs. 107 billion to the nationalized commercial banks (NCBs) and development financial institutions (DFIs). The CIRC has disposed of 33 cases worth Rs.4.7 billion in two years of its inception against an outstanding debt of Rs.60 billion in 339 sick units. After return/ withdrawal of around 139 cases worth 32.8 billion, a total of 161 accounts worth Rs.21.3 billion were finally acquired by the CIRC. On the province basis, 161 accounts acquired by the CIRC included 59 in Punjab, 90 in Sindh, 10 in NWFP and two in Balochistan. Of the total 65 cases disposed-off by the CIRC, 31 belonged to NWFP, 32 in Sindh and two in NWFP. Furthermore, out of the 65 cases disposed off by the CIRC, 33 cases were auctioned (23 were sold in Punjab and 10 in Sindh). The strategy to auction the irretrievable sick industrial units, is the last ditch attempt by the Table 3.6 Performance of Public Sector Industries The size of Public sector industries shrank from twelve holding corporations with 116 manufacturing units before the start of Privatization in 1990-91, to seven corporations with 27 units including two joint ventures under the administrative control of Ministry of Industries in 2003. During the period under review, these public sector industries continued to operate within the general economic policy framework of focusing on optimal utilization of existing capacities and adhering to cost efficiency. Key performance indicators present the following picture of performance during July-June, 2002-03 (8 months actual & 4 months projected) in comparison to the same period last year. government to solve the twin problems of sick industries and non- performing loans of the NCBs/ DFIs. The CIRC has so far acquired 161 units, of which forty-one cases worth Rs.5.2 billion had no assets at all and120 units involving Rs.16.1 billion are being prepared for disposal. CIRC is in the process of acquiring 39 cases worth Rs.5.3 billion. PUBLIC SECTOR INDUSTRIES.

(Excluding Pak Steel)

(Rs. In Million) Item Production Value* Net Sales Pre-Tax Profit Taxes and Duties No. of Employees * At constant prices of 1992-93. 2001-02 6398 11358 110 2762 8793 2002-03 ** 6128 10817 141 2519 7580 % Change -7.1 -5.0 28.2 -8.7 -13.8

Source: EAC, Ministry of Industry & Production

Chapter 3. Manufacturing Mining and Investment Policies ** Actual for 8 months (July- Feb) and expected for 4 months (Mar- June)

Production Value
Production value (at constant prices of 1992-93) of all operational units (excluding Pakistan Steel) is expected to decline by 7.1 percent over the last year. Production value of National Fertilizer Corporation (NFC) projected to decline by 3.8 percent, followed by the State Cement Corporation (SCCP) (58 percent). Decline in production was mainly due to continual stoppage/ interruption of natural gas supply. The remaining two corporations namely, the State Engineering Automobile an increase percent and Corporation (SEC) and the Pakistan Corporation (PACO) have projected in their production value by 8.4 40 percent, respectively. Production

the net sales value increase by 24.7 percent (from Rs.2.0 billion to Rs 2.4 billion) during 2002-03.
Pre- Tax Profit/ (Loss)

During 2002-03, an aggregate profit of Rs.141 million (excluding Pakistan Steel) is expected as against an aggregate profit of Rs.110 million reported last year. Only two corporations namely, NFC & PACO have projected profit during the current year, whereas SEC & SCCP are estimated to have suffered losses in this year. Though NFC has shown profit but its profit has declined from Rs.586 million last year to Rs.325 million this year. The decline in profit is attributed to increase in input costs. The SCCP and SEP have shown losses in their pre-tax profits. Employment
Total number of employees enrolled with all units (excluding Pak Steel), by end June, 2003 is estimated at 7,580 as compared to 8,793 on end

activity at Sindh Engineering depicted an increase of 40 percent while Heavy Mechanical Complex (HMC) witnessed slight improvement of 0.5 percent.

Net Sales June Net sales (excluding Pakistan Steel) of all 2002. The number of employees has dropped in operational units are estimated at Rs. 10.8 billion SEC, SCCP, NFC and PACO. for 2002-2003 as against Rs. 11.4 billion in last Overall Performance of Public Sector Industries year, showing a decline of 5.0 percent. NFC and SCCP have reported a decline in its sales value (Including Pakistan Steel) from Rs.7.5 billion and Rs.1.2 billion to Rs.6.9 billion and Rs.0.7 billion, respectively thereby showing decline of 7.8 percent and 45.0 percent. Overall performance of public sector The net sale value of PACO registered an industries (including Pakistan Steel) has shown improvement of 16.0 percent - from Rs. 686.0 some improvement as summarized in Table 3.7. million to Rs. 800 million and in the case of SEC,
Table 3.7 Performance of Public Sector Industries (Overall) Rs. In Million) Description Production Value* 2001-02 15693 2002-03** 16111 % Change 2.7

Chapter 3. Manufacturing Mining and Investment Policies Net Sales Pre-Tax Profit Taxes and Duties No. of Employees 25841 212 5412 24756 31237 791 7059 21010 20.9 274.0 31.0 -15.0

* At constant prices of 1992-93. Source: Expert Advisory Cell, ** Actual for 8 months (July- Feb.) and estimated for 4 months (Mar-June) Performance of Pakistan Steel Pakistan Steel is the first integrated iron & steel works project in Pakistan. It was established with the objective of enhancing domestic availability of basic raw material for engineering and construction industries. It facilitated establishment of downstream steel industries in the country. The production capacity of Pakistan Steel is 1.1 million tons of raw steel per annum with built-in potential to expand its capacity to over 3 million tones per annum. The Steel Mill is producing coke, pig iron, billets, hot rolled coils/sheets, cold rolled coils/sheets, formed sections like channels, angles, galvanized sheets etc. The year under review is the best performing year in the chequered history of Pak steel. In this year Pak Steel touched several milestones like registering highest ever record of net sales at Rs.20 billion, productivity growth improved to 66 per ton per employee as against historical record of 36 per ton per employee and received ISO-9001 certification for quality products. Pakistan Steels performance had witnessed many ups and downs during its fifteen years of history. It was characterized with low production, low capacity utilization, low sales and high losses, surplus manpower, increased liabilities, poor work discipline, lack of culture of accountability and bad public image. Inspite of precarious conditions, nothing was done to improve the situation. Pakistan steel has undergone a serious over-hauling to deviate from the past and its current strategy is more focused on increase in profitability with lesser investment. The performance of 2002-03 is an indication of revival of Pakistan Steel. The performance of Pakistan Steel (based on major performance indictors) during the period 2002-03 is summarized in the Table 3.8:

Table 3.8 Performance of Pakistan Steel (Rs. in Million) Item Production Value * Net Sales Pre-tax profit Taxes & duties No. of employees *At constant prices of 1992-93. 2001-02 9094 14483 102 2650 15963 2002-03 (Proj.) 9982 20419 650 4541 13430 % Change 10.0 41.0 538.0 71.0 -16.0

Source: Expert Advisory Cell, M/o Ind. & Prod.

Chapter 3. Manufacturing Mining and Investment Policies and Medium Enterprises Development Authority Pakistan steel is also catering for the needs of 22 downstream units in Karachi along with 21 (SMEDA) has been reinvigorated and re-organized to located in different parts of the country. The provide technical assistance to potential small investors. downstream industries are basically producing SMEs still face difficulties in coping with skilled value added engineering goods such as steel pipes workers requirement, regulation and business (small, medium and large diameter), seamless environment issues, infrastructural problems like poor pipes, wire rod and baling hoops, small sections, electricity supply, poor technology, access to raw reinforcement bars, slag cement, slag wool, material (especially imported) and inadequate automotive parts etc. marketing. Following organizations are involved in SMALL AND MEDIUM ENTERPRISES (SMEs) promotion of small and medium industries in the provinces: Small and Medium Enterprises (SMEs) constitute 90 percent of businesses in Pakistan. SMEs i) Punjab Small Industries Corporation comprise of heterogeneous activities but its active ii) Sindh Small Industries Corporation presence in services and manufacturing is felt iii) NWFP Small Industries Development Board prominently because of large-scale manufacturing and iv) The Directorate of Small Industries Balochistan corporate sectors limitations in catering all national demand for goods and services. SMEs represent a These organizations have significant component of Pakistans economy in terms infrastructure like industrial estates, vocational training of value addition and employment generation. SMEs institutes and funds. But, unfortunately, these play critical role in manufacturing sector by providing provincial organizations have not made any dent in 80 percent of industrial employment, contributing 30 promotion of small industries. The precarious percent to GDP and generating one-fourth of the conditions in industrial estates and vocational sectors export earnings. Its contribution to value added institutions are never facilitative in promotion of small in manufacturing sector has risen from 27 percent in industries. The government has added a professional 1980-81 to 35 percent in 1997-98 but its share in body like SMEDA to revitalize the small and medium employment in the manufacturing sector declined from 85 percent in 1980-81 to 83 percent. This implies industrial sector. SMEDA is not only working for the productivity improvements in the last two decades. It uplift of small and medium enterprises in the country provides employment at lesser cost and its capital but also completed studies on various crucial sectors for requirement is also low. Pakistan economy like textile, leather, agriculture & livestock, fisheries, light engineering and transport. There is growing recognition SMEDA is also working on issues, which confront SMEs of the importance of SMEs in economic development, and preparation of regulatory and fiscal policy options but the policy framework has remained biased against to facilitate the sector. Although, the role of SMEDA the sector. However, for the last three years the has in development of the sector has not yet provided government has brought SMEs on the forefront of the evidence of considerable improvement but it has policy making and declared it one of the four drivers of prepared pre-feasibility studies of 8 projects and is the economy. The growth of small-scale industry is working on 38 more projects. SMEDA is also engaged mainly hampered by the non-availability of credit with international donors to obtain their cooperation facility in the past. Realizing this constraint, the and expertise in development of SMEs. government has opened two specialized micro-credit banks namely, khushhali bank and SME bank. Small

Chapter 3. Manufacturing Mining and Investment Policies FOREIGN INVESTMENT The inflow of foreign investment in Policies in the 1990s in developing countries have emphasized upon greater encouragement and mobilization of non-debt creating private capital flows for reducing reliance on debt flows as the vehicle for generating external resources. Foreign direct investment (FDI) being the single largest component of private leading capital to flows has contributed to the investment and growth in developing countries, technological improvements, reduction in poverty and improvement in the living standards. The distribution of these flows has, however, remained uneven. The countries that have received the lion share of the surge in FDI flows during 1990s are the ones that followed open trade and investment regime, maintained macroeconomic stability, had large markets, a predictable institutional environment without excessive red-tapism has remained firm in place, and possessed reasonably improved physical and human infrastructure. The countries that lagged behind in attracting FDI are the ones that faced macroeconomic instability, pursued inconsistent economic policies, had relatively poor physical and human infrastructure, and bureaucracy not responding to the initiatives with conviction. Pakistan has introduced wide-ranging reforms to attract the inflow of foreign investment. Where does Pakistan stand today? The improvement in the countrys macroeconomic environment and upward revision of the economys international credit ratings are the distinct advantages which can help in attracting inflow of foreign investment. Pakistan is expecting dividends from factors like political stability, conducive macroeconomic environment, growing investment market, and greater profits security and of the of continuity Pakistan has been declining since 1995-96 for a

economic policies.

Chapter 3. Manufacturing Mining and Investment Policies variety of reasons including : the saturation of investment in power sector; the East Asian financial crises of 1997; economic sanctions and freezing of foreign currency accounts of May 1998; the IPP and the HUBCO issues, particularly the way it was handled in the past; low levels of foreign exchange reserves and threat of default on Table 3.9 Inflow of Net Foreign Private Investment (FPI) (Million US $) Country Direct USA UK UAE Germany France Hong Kong Italy Japan Saudi Arabia Canada Netherland Others Total 326.4 30.3 21.5 11.2 -6.9 2.8 0.1 6.5 1.3 3.5 -5.1 92.6 484.7 2001-02 Port folio -1.7 -32.4 -4.2 0.3 20.6 0.2 0.1 2.7 -0.8 5.2 -10.0 Total 324.7 -2.1 17.3 11.2 -6.6 23.4 0.1 6.7 1.4 6.2 -5.9 97.8 474.7 JulyMarch 2001-02 Direct Portfolio 164.1 22.6 15.9 8.6 1.5 2.2 4.1 2.1 3.0 -6.5 69.8 287.4 -10.0 -18.3 1.9 0.1 14.1 0.2 0.1 2.7 -0.8 7.1 -2.9 Total 154.1 4.3 17.8 8.6 1.6 16.3 4.3 2.2 5.7 -7.3 76.9 284.5 Direct 163.5 202.7 112.7 2.8 2.2 4.6 0.2 11.5 32.6 0.4 2.7 122.3 658.2 2002-03 Portfolio 0.6 -11.3 1.6 -5.2 0.3 -0.4 0.3 0.9 19.7 6.5 Total 164.1 191.4 114.3 2.8 2.2 -0.6 0.2 11.8 32.2 0.7 3.6 142.0 664.7 external payments obligations; and disarrayed relations with the International Financial Institutions(IFIs). Over the last three years the government has succeeded in removing various irritants which affect business and investment climate.

Source: State Bank of Pakistan The emerging trend in the inflow of foreign investment is encouraging as it has already started picking-up this year. It is likely that foreign investment will reach one billion dollars mark by the end of the current fiscal year. Foreign direct investment has more than doubled in the first nine months (July-March, 2002-03), the net foreign investment stood at US $ 664.7 million as against US $ 284.5 million, thereby, showing an increase of 133.6 percent. (see Table 3.10 )

Table 3.10 Inflow of (FDI) Foreign Direct Investment (In Main Economic Group) (Million US $) Economic Group 1. Power 2.Chemical, Pharmaceutical 1999-2000 67.4 119.9 2000-01 40.3 26.3 2001-02 36.4 17.8 JulyMarch 2001-02 2002-03 32.6 28.1 11.5 85.6

&

Chapter 3. Manufacturing Mining and Investment Policies Fertilizer 3. Construction 4. Mining & Quarrying, Oil and Gas 5.Food, Beverages & Tobacco 6. Textile 7. Trade, Transport, Storage & Comm. 8. Machinery other than electrical 9. Electronics 10. Financial Business 11.Petro-Chemical & Refining 12. Cement 13. Others Total 21.1 79.7 49.9 4.4 38.6 4.6 2.3 29.6 12.0 0.1 40.3 469.9 12.5 84.7 45.1 4.6 94.7 2.5 2.8 -34.9 8.7 15.2 20.0 322.4 12.8 9.9 11.1 274.8 121.7 137.2 -5.1 -8.0 5.6 18.4 10.5 23.1 68.3 36.6 119.0 10.5 0.4 15.9 14.8 4.5 3.6 13.3 201.8 5.0 2.4 2.8 0.4 0.4 0.5 25.9 41.7 42.1 484.7 287.4 658.2 Source: State Bank of Pakistan

Foreign Direct Investment (FDI) increased by 129 percent and stood at US $ 658.2 million during July-March, 2002-03 as against US $ 287.4 million for the same period in the previous year. The United Kingdom accounts for 30.8 percent of FDI inflows, followed by U.S (24.8 percent), U.A.E (17.1 percent) and Saudi Arabia (5.0 percent). FDI inflow from UK and UAE is extra-ordinarily high because of purchasing of 15 percent stakes of United Bank by UK based Bestway group and UAE based Abu Dhabi group for $ 208 million. The remaining amount of inflow is unevenly distributed among various countries. The groupwise break-up shows that financial business has accounted for largest slice of the FDI at 30.6 percent while with 20.8 percent of stake was attracted by Mining & Oil and gas exploration. The power sector which has remained apple of the eye of the investors for some year only accounted for 4.3 percent stake in FDI. Trade, transport, storage and communication group get 18.1 percent of the slice while chemical, pharmaceutical & fertilizer group account for 13.0 percent stake. Textile industry received 3.5 percent of FDI inflow. Group-wise break of FDI inflow is given in Table 3.10. THE PRIVATIZATION PROGRAMME

present government recognized it as part of its economic policy for restructuring and revitalization of the economy. Privatization in Pakistan is both attractive and rewarding for potential investors. The program for transfer of the ownership of public assets is unambiguously predicated on the principle of reducing its direct participation in commercial activities. The minimization of governments role in economic activity reinforces the need for regulation in strategic areas and the design of appropriate policies in order to ensure that the functioning of the economy is not distorted and those benefits are distributed in an equitable manner. In its early phase, privatization was very abrupt and rapid but the momentum was lost. The reason for slow progress on privatization during the second half of the 1990s lay in an inhospitable enabling environment, legal challenges to privatisation, public opposition to privatization, and lack of adequate regulatory frameworks for the privatisation of utilities. Recognizing this, government for the last three years focused and made strong progress on: Restoring and enhancing investor

confidence by improving the macroeconomic climate and resolving investor disputes. promulgating a Privatisation Commission Ordinance to provide legal cover to tackle issues like investors confidence,

Subsequent governments have attached high priority to the privatisation process in the 1990s but the

Chapter 3. Manufacturing Mining and Investment Policies transparency and distribution of proceeds restructuring and strengthening the Privatisation Commission to make it a leaner, more transparent and more effective institution the last two months. During November, 2002 to March, 2003, government's remaining shares in POL, Attock Refinary Ltd. and DG Khan Cement have been divested through Stock Exchange which fetched Rs. 2.9 billion.

Privatization is a complex and demanding reform and every stage requires utmost appointing the Chairman as Minister for Privatisation to enhance the stature of transparency and high level of managerial, financial and privatisation and facilitate the technical expertise. A number of major privatization privatisation process transactions including PSO, OGCL, PTCL, Habib Bank, KESC, and Pak-Arab Fertilizer have been brought to a establishing or strengthening regulatory very advance stage. This implies on changing of focus frameworks. from the privatization of the more straightforward hiring top class financial advisors. industrial transactions to those involving the transfer of management control in services such as banking, improving the public's understanding of transport and utilities. This requires sensitive decisions privatisation rationale and process via on pricing, restructuring and rightsizing. During the last seminars, interviews, publications, and a three years the privatisation efforts with the laying of revamped website. ground work for the successful marketing of these major transactions faced formidable challenges due to A comprehensive privatisation program some event which delayed few privatisation for the short and medium terms was prepared while transactions. The recent performance of the stock keeping with the economic environment and investment market and the improvement of the fiscal and monetary conditions. Privatization Commission Ordinance, 2000 position of the government auger well for the success of increases the accountability of the PC, and allocates 90 the privatization process. With several major percent of privatisation proceeds towards debt privatisation transactions on the cards, the outlook for retirement and 10 percent towards poverty alleviation 2003-2004 appears bright and positive. programs. Pursuant to said Ordinance, various sets of MINING & QUARRYING. Rules & Regulations have been notified. Pakistan Telecommunication Authority (PTA), National Electric The mining and quarrying sector grew by 9.5 Power Regulatory Authority (NEPRA), Natural Gas percent during 2002-03 as against 3.7 percent last year. Regulatory Authority (NGRA) and Oil & Gas This is because of concerted effort by the government to Regulatory Authority (OGRA) has started functioning boost this very important sector which play pivotal role to build credible expertise within these sectors on in economic development by providing basic raw urgent basis. material to key industries of the country. Various regional geological surveys, conducted in the recent The existing Privatisation Programme is past, have confirmed the great potential of Pakistan in progressing satisfactorily. Till March, 2003, 128 the privatisation transactions had been completed and metallic minerals like copper, gold, silver, platinum, chromites, iron, lead and zinc. As regards industrial proceeds of Rs.97 billion were realized. This includes 22 minerals there is a vast potential of multi-coloured transactions for Rs.35 billion from October 1999 to granite, marble and other dimensional stones of high March, 2002. In addition, 15 industrial units were quality for export purpose. But due to resource excluded from the Privatization Programme either for constraint and non availability of high-tech the mineral liquidation or being non-privatisable. The Cabinet development could not grew up to the potential. Its Committee on Privatization (CCOP) and Board of the meager share of just 0.5 percent in the GDP does not Privatisation Commission were re-constituted during

Chapter 3. Manufacturing Mining and Investment Policies fully reflect the actual potential of the sector. Presently The contribution in the growth of mining & about 50 minerals are under exploitation. Major mineral quarrying sector came from coal and natural gas which products are coal, rock salt, other industrial and grew by 4.0 percent and 3.1 percent respectively. The construction mineral. extraction of some important minerals is given in table3.11: Table 3.11 Extraction of Principal Minerals July-March Minerals Coal Natural Gas Crude Oil Chromites Dolomite Gypsum Limestone Magnetite Rock Salt Sulphur Baryte Units of the quantity Million tones 000 MMCFT Mln. Barrels 000 tones 000 tones 000 tones 000 tones 000 tones 000 tones 000 tones 000 tones 2000-01 3.3 24.8 21.1 16 352.7 364 10.9 4.6 1394 17.4 28 2001-02 3.5 26.2 23.2 16 312.9 328 9.8 4.6 1359 22.6 21 2001-02 2.5 19.5 17.2 10 251.4 230 6.4 2.7 988 15.8 15 2002-03 2.6 20.1 18.2 15 243.8 308 7.7 2.5 994 14.7 20 % Change 4.0 3.1 5.8 50.0 -3.0 33.9 20.3 -7.4 0.6 -7.0 33.3

Source: Federal Bureau of Statistics. At present, the value addition is concentrated implementation of National Mineral Policy to attract for in four principal minerals like gypsum, sulpher, crude foreign investment. In difficult environment FDI oil, and natural gas. These minerals account for most of remains apple of the eye of foreign investors for the last the overall value addition of the mineral sector. The three years. The FDI inflow in Mining and Quarrying value addition in the sectors of gypsum has notably Sector is given in the above table 3.12. gone up by 34 percent, while the extraction of sulpher declined by 7 percent. From the table 3.11, it is evident Table 3.12 that during the year under review, the overall growth of FDI Inflow in Mining and Quarrying the mineral sectors depicts positive trend. In order to accelerate the development of Year U % Share FDI S $ mineral resources in the country, a National Mineral million Policy is being implemented in letter and spirit during 1997-98 9 16.5 last three years. The fiscal incentives and regulatory 9.1 framework is reinvigorated to attract foreign 1998-99 1 23.9 investment. The government has accorded high priority

Chapter 3. Manufacturing Mining and Investment Policies 12.8 7 9.7 2000-01 8 4.7 2001-02 2 74.8 2002-03* 1 37.2 * (July - March,) 1999-00 17.0 26.3 54.7 20.8 Source: Economic

Advisor Wing The Foreign Direct Investment (FDI) in the Mining and Quarrying sectors was 17.0 percent in 19992000, but since then it has started increasing. Its share in total FID inflow however peaked at 54.7 percent in 200102, as against 26.3 percent in 2000-01. Nevertheless, it has become the first largest recipient of FDI inflow in 2001-02. During July-March 2002-03, its share declined substantially but it is still one of the major recipients of FDI inflow. Many foreign companies are involved in preparation of feasibilities, oil exploration and development work in the field of mining and quarrying.

Chapter 4. Income Distribution and Poverty __________________

Chapter 4. Income Distribution and Poverty

4. Income Distribution and Poverty

I. Poverty Global Perspective

decades. Per capita private consumption growth in developing countries has averaged about 1.4 percent a year between 1980 and 1990 and 2.4 percent between 1990 and 1999. So millions have left behind the yoke of poverty and despair. Unfortunately, the reality is more complex, and progress is less satisfactory. Population in the developing world has grown rapidlyfrom 2.9 billion people in 1970 to 5.1 billion in 1999 -- and many have been born into poverty. The number of people below the international poverty line declined by a mere 1 per cent per year between 1990-99; decreasing from 1.3 billion people to 1.1 billion. Furthermore, poverty trends for most regions showed little or no progress. The incidence of income-poverty remained largely unchanged in sub-Saharan Africa (SSA), Latin America and the Caribbean (LAC) and in the Middle East and North Africa (MENA). Actually, the number of income-poor in these three regions combined increased by about 7 million people each year between 1990 and 1999. Regional trends show that the decline in global poverty was driven by East Asia (EA) between 1993-96 and by South Asia (SA) in 1996-99. At the United Nations Millennium

Poverty is hunger, lack of shelter being sick and not being able to see a doctor, not being able to go to school and not knowing how to read. Poverty is not having a job. Poverty is losing a child to illness brought about by unclean water. Poverty is powerlessness, lack of representation and freedom. Poverty has many faces, changing from place to place and across time, and has been described in many ways. The proportion of the developing world's population living in extreme economic poverty -- defined as living on less than $1 per day (in 1993 dollars, adjusted to account for differences in purchasing power across countries) -- fell from 32 to 25 per cent between 1990 and 1999, according to the latest estimates [World Bank, 2002]. The simple extrapolation of this trend to the year 2015 results in a headcount index of about 16 per centindicating that the world is on track for reaching the global goal of halving poverty between 1990 and 2015. Substantial improvements in social indicators have accompanied growth in average incomes. Infant mortality rates have fallen from 107 per 1,000 live births in 1970 to 59 in 1999. On average, life expectancy has risen by four months each year since 1970. Growth in food production has substantially outpaced that of population. Governments report rapid progress in primary school enrollment. Adult literacy has also risen, from 53 percent in 1970 to 74 percent in 1998. And gender disparities have narrowed, with the female-male difference in net enrollment rates decreasing from 11 percent in 1980 to 5 percent in 1997. The developing world today is healthier, wealthier, better fed, and better educated. Living standards have risen dramatically over the last

Summit in September 2000, world leaders placed development agenda by adopting the Millennium Development Goals, commonly known as MDGs, which set clear targets for reducing hunger, disease, illiteracy, environmental degradation and discrimination against women by 2015. The international development community has adopted halving extreme poverty by 2015 as a central goal. To accelerate progress toward this

Chapter 4. Income Distribution and Poverty goal, both developed and developing countries will have to join hands together to generate stronger economic growth complemented by actions to enhance the capability of poor people to participate effectively in growth process. For developing countries, they need to improve investment maintain climate in their countries and macroeconomic stability, improve poverty during the 1980s was lost during the 1990s when poverty continue to rise in the 1990s.Yet there was considerable debate on the consistency, measurement and methodology of poverty accepted indicators. poverty The line I-PRSP at the noted time that which Pakistan did not have an official and wellcontributed to the debate. In preparation for the PRSP, the

governance, and invest more on their poor people. These efforts of developing countries must be complemented by stronger support from developed countries; in particular through increased market access for developing country exports, debt relief, and increase in the volume, predictability and effectiveness of aid. Both developed committed and to developing undertake countries their have respective Government of Pakistan has deliberated on the poverty related data and concurs with the IPRSP regarding the broad trends in the incidence of poverty. The Planning Division, during this period has adopted an official poverty line based on a caloric norm of 2350 calories per adult equivalent per day1. The poverty line based on minimum caloric requirement of 2350 calories per capita per day approximates per capita expenditure of Rs. 670 per month in 1998-99 and
II. Poverty and Inequality in Pakistan

responsibilities in Monterrey and Johannesburg to achieve the MDGs.

rising to Rs. 748 per month in 2000-01. To facilitate in comparisons with existing measures, the Planning Division has estimated a series of poverty estimates from 1986-87 to 2000-01 based on the respective HIES data bases. These estimates are reported in Table 4.1.

Poverty

has

many

dimensions

Pakistan. The poor in Pakistan have not only low incomes but they also lack access to basic needs such as education, health, clean drinking water and proper sanitation. The latter undermines their capabilities, limits their opportunities to secure employment, results in their social exclusion and exposes them to exogenous shocks. The vicious cycle of poverty is accentuated when the governance structures exclude the most vulnerable from the decision making process. Pakistans Poverty Reduction Strategy Paper (PRSP) has noted that while the extent and depth of poverty measured through different approaches varies depending upon the indices used and definition adopted, there was considerable agreement over the trends in poverty over recent years. There was broad consensus that the momentum gained in the fight against

The caloric norm in urban areas is 2150 calories and 2450 calories in the rural areas. * The Head count ratio is based on the new estimated National Poverty Line of Rs. 748.56 per capita per month at the prices of 2000-01 PIHS Survey

Chapter 4. Income Distribution and Poverty Table 4.1 Trends in Poverty: Head Counts Ratio (Percent) 1986-87 Pakistan Urban Rural 29.1 29.8 28.2 1987-88 29.2 30.3 29.3 1990-91 26.1 26.6 25.2 1992-93 26.8 28.3 24.6 1993-94 28.7 26.9 25.4 1996-97 29.8 22.6 33.1 1998-99 a 30.6 20.91 34.67 2000-01 b 32.1 22.67 38.99 2003 c 31.8 22.39 38.65

Source: Planning Commission. a: The Head count ratio is based upon the officially notified national poverty line of Rs. 673.54 per capita per month at the prices of 1998-99 PIHS Survey. b: The Head count ratio is based upon the officially notified national poverty line of Rs. 748.56 per capita per month at the prices of 2000-01 PIHS Survey. c: Head Count ratio based on the post enumeration survey of PIHS 2000-01, with 5% representative sample covering 726 households out of the original sample size of 14536 households, was conducted in February 2003.

According to the new official poverty line, it is inferred that the incidence of poverty has declined between 1986-87 to 1990-91, falling from 29 percent to 26 percent. Subsequently the trend in poverty was reversed. Between 1992-93 and

2000-01, poverty increased by about 5 percentage points to 32 percent with the biggest jump in poverty taking place in 1993-94. One of the key reasons for the rise in poverty in 2000-01 has been the crippling drought which severely damaged

Head Counts Ratio Trend 35 30 25 20 15 10 5 0 1986-87 1987-88 1990-91 1993-94 1996-97 1998-99 2000-01 Years 2003 29.1 26.1 26.6 28.7 29.8 30.6 32.1 31.8

Pakistans agriculture. Overall agriculture instead of growing, in fact shrank by 2.6 percent in 200001. Almost 68 percent people of Pakistan live in

rural area and overwhelming majority of them depend directly or indirectly on agriculture for their livelihood. Recent estimates, based on 5

Chapter 4. Income Distribution and Poverty percent sample (726 households out of the total sample size of 14536) of the PIHS, conducted in February 2003, show a marginal decline in poverty. It appears that the rising trend in poverty has been arrested and the process of decline in poverty has just begun. What is required now is to sustain the growth momentum and enhance spending on social sector to make a credible dent in poverty. Economic growth accompanied by macroeconomic stability remains critical for Pakistan to reduce poverty. At the household level, growth serves to reduce poverty and better enables households to send their children to school and obtain proper nutrition and health care. At the macro level, growth generates greater resources which can finance improved coverage and quality of education, health, water and other services. Growth itself will depend on many Table 4.2 Trends in Income Inequality Percentage Share of Income Ratio of highest GDP Growth 20% to lowest 20% Rate Lowest Middle Highest 20% 60% 20% 1979 7.4 47.6 45.0 6.1 5.5 1984-85 7.3 47.7 45.0 6.2 8.7 1985-86 7.6 48.4 44.0 5.8 6.4 1986-87 7.9 48.5 43.6 5.5 5.8 1987-88 8.0 45.3 43.7 5.5 6.4 1990-91 5.7 45.0 49.3 8.6 5.6 1992-93 6.2 45.6 48.2 7.8 2.3 1993-94 6.5 46.3 47.2 7.3 4.5 1996-97 7.0 43.6 49.4 7.1 1.9 1998-99 6.2 44.1 49.7 8.0 4.2 Source: Federal Bureau of Statistics, Ministry of Finance Note: Data beyond 1998-99 are not available. It can be inferred that during the 1980s, the period of relatively higher growth rate, the percentage share of income of lowest 20 percent increased from 7.3 percent to 8 percent, while the percentage share of middle 60 percent and highest 20 percent decreased from 47.7 percent to 45.3 percent and from 45 percent to 43.7 percent respectively. On the other hand, during the latter half of the 1990s, a period of sluggish economic growth, the percentage share of lowest 20 percent declined from 7.0 percent to 6.2 percent, middle 60 percent from 43.6 percent to 44.1 percent. It is pertinent to note the increase for the highest 20 percent during the same era, from 47.2 percent to 49.7 percent. Consequently the income gap that declined during the 1980s, showed an increasing Year Household Gini coefficient 0.373 0.369 0.355 0.346 0.348 0.407 0.410 0.400 0.400 0.410 factors including investment climate and

increased opportunities for trade access to developed markets but also, a healthy, better educated and more productive labour force.
Income Distribution

Over the years, the pattern of income distribution, measured in terms of Gini Coefficient and household income share of the lowest and the highest 20 percent for rural and urban areas respectively in Pakistan, has been mixed and moderate. The Gini Coefficient of household income had been around 0.35 or below since the 1960s, reaching 0.407 in 1990-91 and 0.410 in 1998-99. The ratio of highest 20 percent to lowest 20 percent of household income gives the income gap. Table presents the trend summary.

Chapter 4. Income Distribution and Poverty trend during 1996-97 to 1998-99. The Gini coefficient also projects the same trend-line. This economic disparity during late 1990s had its foundations upon weak macroeconomic management, persistence of huge fiscal and current account deficits and consequent unsustainable debt burden, deteriorating governance and declining savings and investment, outcomes. Further breakdown into urban and rural categories implies that poverty has an accelerating partiality in rural areas while income distribution in the urban areas improved slightly. The Gini coefficient corroborates this trend. human development and social

Table 4.3 Household Income Distribution (Rural-Urban) Rural Share Gini Coefficient Lowest Highest 20% 20% 1979 8.3 41.3 0.32 1984-85 7.9 42.8 0.34 1985-86 7.9 40.0 0.33 1986-87 8.0 39.0 0.32 1987-88 8.8 40.0 0.31 1990-91 6.0 47.4 0.41 1992-93 7.0 44.8 0.37 1993-94 7.4 43.1 0.40 1996-97 7.3 49.3 0.41 1998-99 6.9 46.8 0.40 Note: Data beyond 1998-99 are not available.
III. Determinants of Poverty

Year

Urban Share Lowest 20% Highest 20%

Gini Coefficient

6.9 48.0 0.40 7.0 47.7 0.38 7.5 45.0 0.35 7.9 44.0 0.36 6.4 48.1 0.37 5.7 50.5 0.39 6.1 48.9 0.42 6.7 47.1 0.35 7.6 47.0 0.38 6.0 50.0 0.33 Source: FBS HIES Data, Ministry of Finance access to justice and empowerment, inaccessibility of capital, increase in unemployment, and weak service delivery. Poverty reduction strategic framework factors in the following issues: For growth to reduce poverty, it must emanate from sectors that have greater potential to generate employment. In this context the strategy called for rapid growth in agriculture, small and medium industries, housing and construction, Information Technology sectors. and the

The formulation of the poverty reduction strategy has benefited from the participatory process and effective consultations with diverse range of stakeholders including federal, provincial and district governments, NGOs, and civil society. The participatory process has been further enriched by social mobilization at the grassroots level through the rural support programs spread over 49 districts, in setting priorities and improving implementation. To supplement, the Participatory Poverty Assessment has been conducted at 54 field sites in very poor areas across all four provinces, FATA, NA and AJK. Key reasons for poverty identified were lack of education and skills, high incidence of health problems, rise in population, lack of

Since various forms of poverty in Pakistan were acute, these required targeted policy interventions to provide quick relief through short-term employment opportunities, social safety nets and financial assistance.

Chapter 4. Income Distribution and Poverty reduce poverty, articulated in the Interim Poverty Additional income alone would not eliminate poverty unless the causes of poverty were addressed. Hence the need to improve access to basic needs such as primary education, preventive health care, population welfare services, in order to win the fight against poverty. Improvement in public service delivery required resources and improvement in governance. Involvement of the poor in the formulation of these policies and management of their affairs was critical in attaining the objectives of the strategy, and there was need to forge a broadbased alliance with civil society and the private sector in this regard. The participatory process must broaden in the formulation of the full PRSP, resulting in consultations at district, provincial and national levels to elicit views, share experiences and understand expectations of the stakeholders. There was need for a strong program of monitoring and capacity development, as well as impact assessment. Availability of adequate resources for poverty reduction programs was important in determining the effectiveness of the strategy. Detailed costing of proposed initiatives would be completed in the preparation of the provincial PRSPs.
IV. Poverty Reduction Strategy

Reduction

Strategy

Paper

(I-PRSP).

Poverty

reduction has taken center stage of Pakistans development policy framework recognizing that poverty alleviation is not merely a by-product of the growth process. The strategy aims to provide an integrated focus on a diverse set of factors that impact poverty, and to meet the twin challenges of reviving broad based equitable growth and reducing poverty. Building upon the poverty reduction strategy in I-PRSP and benefiting from the participatory process, the democratically elected Government of Pakistan has strengthened its efforts to attack poverty. Pakistans poverty reduction strategy now articulates a more comprehensive framework including policies for rural development, gender issues, employment and the environment. The rural development program also is embedded a more in the focused targeted human interventions pillar of the strategy. The approach incorporates development strategy that recognizes the central role of the provinces and local governments in achieving human development goals. The Poverty Reduction Strategy of the Government of Pakistan is now based on the following five pillars. (Detailed strategic action plans relating to each sector have been described in relevant chapters of the PRSP document). a) Accelerating economic growth and

maintaining macroeconomic stability Reform efforts geared at maintaining fiscal discipline, rule based fiscal policy, tax and tax administration reforms, financial sector reforms, trade liberalization, investment augmenting building climate regulatory and privatization, framework, and

Amid the

growing of

recognition Pakistan

that

the a

incidence of poverty was increasing in Pakistan, Government adopted comprehensive strategy in November 2001 to

supportive infrastructure. b) Investing in human capital

Chapter 4. Income Distribution and Poverty Major thrust sectors include comprehensive reforms in education including education, health and population capacity building for service delivery National Commission on special welfare, through Human e) Improving governance Important reforms are Political and Administrative devolution, Fiscal Decentralization, Access to Justice, Civil Service Reforms, Freedom of Information Act, and Anti Corruption Strategy. V. Trends in PRSP Expenditures

The following table gives the expenditure details on pro-poverty expenditures. Although the government has institutionalized the Medium These include Small & Medium Enterprises, Term Budgetary Framework (MTBF) in its fiscal Micro Finance, Public Works Program and budgetary regime, adhering to the (Tameer-e Pakistan Program, Khushal macroeconomic targets as envisaged in the MTBF, Pakistan program, Drought Emergency Relief however with regards to poverty outlays, the government is committed to raising its budgetary Fund), Rural Development including expenditures atleast by over 0.2 percent of GDP agriculture, irrigation, livestock and fisheries per annum starting FY 2001-02. This reflects a and rural electrification, and Housing significant shift from past budgetary performance Finance. when anti-poverty public expenditures declined by an average of 0.25 percent of GDP per annum, d) Expanding social safety nets during 19952000. Ensuring that these expenditures rise over the medium term while Primary programs are Zakat Program, Food fiscal adjustment also takes place is a significant Support Program, Employees Old Age challenge. The government will be spending Rs. Benefits Institution, Private Sector Pension 161 billion on pro-poor expenditures during the Fund, and Indigenous Philanthropy. current fiscal year. Table 4.4 Pro-Poor budgetary Expenditures (Rs in million) c) Augmenting targeted interventions Sectors

Development, and involvement of private sector through public-private partnerships and NGOs.

FY 2000-01 FY 2001-02
Roads, highways & bridges Water Supply & Sanitation Education Health Population planning Social Security & other Welfare Natural Calamities & Disasters Irrigation Land Reclamation Rural Development Food Subsidies Food Support Program TOTAL 8,332 4,497 56,536 17,508 1,588 1,576 912 8,154 1,380 11,415 9,390 1,061 122,349 6,340 4,644 66,290 19,211 1,331 3,664 189 10,133 1,838 12,325 5,513 2,017 133,495

July-Mar 2002-03
5,043 1,988 51,280 13,457 1,798 797 293 8,179 1,097 9,982 3,200 1,256 98,370 Source: Monthly Civil Accounts

In addition to the government's anti-poverty

expenditures a significant amount of public

Chapter 4. Income Distribution and Poverty resources are aimed at providing social protection to the poorest segments of society. Through recent government initiatives such as Food Support Program (FSP), Khushal Pakistan Program (KPP), and land transfers the government has significantly increased assistance to those most in need. Social safety transfers by the government are divided into three broad categories, which include: cash transfers, in-kind transfers, and public-works programs. Government Programs in this regard are Zakat, Food Support Program (FSP), Employees' Old Age Benefits Institutions (EOBI), and micro-credit disbursements by Khushali Bank (KB), Pakistan Poverty Alleviation Fund (PPAF) and the Agricultural Development Bank of Pakistan (ADBP). . Table 4.5 Pro-Poor Non budgetary Expenditures (Rs in million) Sectors FY 2000-01 Zakat disbursements 1,829 EOBI disbursements 1,261 Micro-credit disbursements 577 TOTAL 3,667 Land distributed (Acres) 153,197 SOCIAL SAFETY NETS (Number of beneficiaries) Food support program 1,136,546 Zakat 930,223 EOBI 100,384 Micro-credit 48,252 Temporary employment (KPP) 400,916 State land recipients 14,419 Total No. of beneficiaries 2,606,445 FY 2001-02 5,169 1,366 1,215 7,750 53,803 2,200,916 1,700,189 103,231 148,728 270,333 3,144 4,365,657 July-Dec 2002-03 2,731 777 1,986 5,494 2,538 1,009,330 617,000 132,000 225,000 318,089 310 1,010,932

Table 4.6 Pro-Poor budgetary Expenditures (Past Trends) Sectors Roads, highways & bridges Water Supply & Sanitation Education Health Population planning Social Security & other Welfare Natural Calamities & Disasters Irrigation Land Reclamation Rural Development Food Subsidies Food Support Program TOTAL FY 1996-97 4,644 4,953 42,604 13,434 1,858 2,434 222 9,847 419 3,091 10,101 0 93,607 FY 1997-98 5,174 6,100 49,084 14,731 1,974 1,947 214 9,722 541 3,552 7,339 0 100,378 FY 1998-99 6,043 5,294 49,406 15,547 2,593 2,022 1,074 9,147 815 4,852 7,097 0 103,890 FY 1999-00 5,134 5,553 54,002 17,342 3,439 2,069 1,243 8,274 939 6,513 9,850 0 114,358

Chapter 4. Income Distribution and Poverty Table 4.7 PRSP EXPENDITURES PRSP Non-Budgetary Expenditures (2002-2006) BASELINE PROJECTIONS (Actuals) (Based upon FY 2001-02 actual expenditures) FY 2001-02 FY 2002-03 FY 2003-04 FY 2004-05 FY 2005-06 Rs. Mill % GDP Rs. Mill % GDP Rs. Mill % GDP Rs. Mill % GDP Rs. Mill % GDP 5,169 0.13 9,545 0.23 9,650 0.21 9,258 0.19 5,401 0.10

Zakat System Social Security 1,366 0.03 1,489 0.03 1,608 0.03 1,753 0.03 1,894 0.03 (EOBI) Micro credit 1,588 0.04 3,354 0.08 5,823 0.13 9,288 0.19 13,858 0.26 TOTAL 8123 0.21 14,389 0.22 17,081 0.42 20,299 0.48 21,153 0.40 SOURCE: Zakat: Ministry of Religious Affairs; Social Security: Employees Old Age Benefit Institution; Housing Finance: State Bank of Pakistan; Micro credit: Khushali Bank, PPAF, ZTBL The following table presents the recommended budgetary expenditures at the rate of 0.2 percent allocations for 2006-07 with the base year of GDP per annum. allocations being for 2000-01, increasing pro-poor Table 4.8 Future projections for Pro-Poor Budgetary Expenditures
PRSP EXPENDITURES BASELINE (Actuals) FY 2001-02 Rs. in % GDP Millions 36,836 0.99 96,659 2.59 133,495 3.58 6,340 4,644 PROJECTIONS (Based upon FY 2001-02 actual expenditures) FY 2002-03 FY 2003-04 FY 2004-05 Rs. in % Rs. in % GDP Rs. in % GDP Millions GDP Millions Millions 44,573 1.10 53,366 1.20 60,621 1.25 116,957 2.88 134,267 3.02 154,407 3.18 161,529 3.98 187,633 4.23 215,028 4.42 MARKET ACCESS AND COMMUNITY SERVICES 0.17 7,671 0.19 8,807 0.20 10,128 0.21 0.12 5,619 0.14 6,451 0.15 7,419 0.15 FY 2005-06 Rs. in % GDP Millions 68,965 1.29 177,568 3.33 246,533 4.62 11,647 8,531 0.22 0.16

Development Current TOTAL Roads, Highways & Bridges Water Supply and Sanitation Education Health Population Planning Social Security and Welfare Natural Calamities & other Disasters Irrigation Land Reclamation Rural Development Food Subsidies Food Support Program TOTAL

HUMAN DEVELOPMENT INPUTS

66,290 19,211 1,331 3,664 189 1.78 0.52 0.04 0.10 0.01 80,211 23,245 1,611 4,433 229 1.97 0.57 0.04 0.11 0.01 92,082 26,686 1,849 5,090 263 2.07 0.60 0.04 0.11 0.01 105,894 30,688 2,126 5,853 302 2.18 0.63 0.04 0.12 0.01 121,779 35,292 2,445 6,731 347 2.28 0.66 0.05 0.13 0.01

10,133 1,838 12,325 5,513 2,017 133,495

0.27 0.05 0.33 0.15 0.05 3.58

RURAL DEVELOPMENT EXPENDITURES 12,261 0.30 14,076 0.32 2,224 0.05 2,553 0.06 14,913 6,671 2,441 161,529 0.37 0.16 0.06 3.98 17,120 7,658 5,000 187,633 0.39 0.17 0.11 4.23

16,187 2,936 19,688 8,807 5,000 215,028

0.33 0.06 0.40 0.18 0.10 4.42

18,615 3,377 22,642 10,128 5,000 246,533

0.35 0.06 0.42 0.19 0.09 4.62

Source: Ministry of Finance VII. Monitoring and Evaluation Mechanisms

Chapter 4. Income Distribution and Poverty Well targeted anti-poverty outlays and social transfers are essential ingredients of a comprehensive poverty reduction strategy. The real test of public expenditures lies in their impact. One of the central components of the PRSP is creation of a system to monitor the implementation reduction and outcome The PRSP of poverty policies. monitoring Nevertheless, information/ data sources for

intermediate indicators in Pakistan are not readily available and reporting systems are not tuned for quick reporting in some cases. However, as part of the governments anti-poverty efforts, information systems are being developed/strengthened to track intermediate indicators, their measurement methodologies, definitions, and sources for timely and accurate review of policy interventions through a comprehensive consultative process as detailed above. This process is being pushed further as the baseline information/ data on education and health sector intermediate indicators has been finalized. Core Welfare Indicators questionnaire (CWIQ) survey will be conducted for the first time to capture data at the district level for intermediate indicators in social sectors to determine baselines and it will then be updated on annual basis. While the monitoring framework can help identify efficiency of the policies, additional work will be needed to understand why policies could not yield the desired output. Making these judgements will typically necessitate more indepth studies, focused on specific questions and using a different approach (such as detailed analysis at district level particularly when primary health care is now the responsibility of the district governments). VIII. Risks and Challenges in implementation

framework includes a set of indicators that track policy inputs, their outputs and progress towards intended policy outcomes. (pro-poor expenditures) PRSP input process have been clearly

articulated and a system to monitor these expenditures on a quarterly basis is in place. To monitor outcome with and the impact provinces in human line development, the government has established in conjunction and Ministries, a comprehensive set of intermediate and impact indicators that can be tracked on a short/medium term and long term basis, linking public expenditures with results on the ground been developed with participation of provincial governments. These expenditures are in line with the governments macroeconomic framework and have been protected and tracked over the medium term. Key measures taken to strengthen the monitoring institutional Management and evaluation system & include Health monitoring Information through System Education

Management Information System, annual Core Welfare Indicators Questionnaire survey for third party validation of 13 intermediate indicators in social sectors & to monitor improvement in service delivery, Pakistan Integrated Household Survey every 3rd Year to monitor outcomes, establishment of PRSP secretariats in Provinces, and formation of National Steering Committee for It needs to be appreciated that effective implementation of Pakistans Poverty Reduction Strategy comes with some risks and challenges. Firstly, the efficacy of reform agenda will require pro-active collaboration among many ministries and agencies in the context of avowed

continuation of reform program and policies by the elected governments. Monitoring the review and policy adjustment. performance will be a major undertaking since Regular information on intermediate indicators there are gaps in information available. is a valuable guide for evaluating the efficiency of Developing a reliable and comprehensive public policies and the use of public funds. database for monitoring and evaluation of PRSP

Chapter 4. Income Distribution and Poverty process is a multi year undertaking. Secondly, since the PRSP approach is an innovative initiative in the provincial governments, and the provincial monitoring units are at a nascent stage having capacity constraints, therefore capacity building will need to be addressed quickly. Thirdly, the implementation of programs under the decentralized and autonomous system of district governments may be made consistent with the agreed set of preferences of the district government vis--vis the provincial and federal priorities. A mechanism should be in place to address any such divergence. Fourth concern is the continued support of Pakistans international development partners in development process in Pakistan as waning interest could jeopardize the significant progress made over the last three and a half years. The success of poverty reduction strategy will critically depend on its effective implementation, constant evaluation of its impact and regular feedback to policy makers for appropriate adjustment in the policy and institutional regime.

Chapter 5. Fiscal Development

__________________

5. Fiscal Development
Introduction
percent, leaving only 36 percent revenues to be spent on development program in general and social sector in particular; defense, civil Sound fiscal policy fosters macroeconomic administration, etc. It was a difficult task to stability, which in turn, is the cornerstone of any finance developmental activities of the successful efforts to increase private sector development Government with such a meager resources. and economic growth. Economic growth on the other hand, is the single most important factor influencing No wonder, the development budget poverty. Sound fiscal policy should therefore be continued to shrink from 6.5 percent of GDP to 3.0 regarded as a key component of any poverty reduction percent during the same period. Both physical strategy. Like many other developing countries, fiscal profligacy has been the main underlying cause of macroeconomic instability in Pakistan during the 1990s, which, in turn, has impeded the medium-to-long run economic growth prospects. Persistence of large fiscal deficit (on average, 7% of GDP) resulted in sharp accumulation of public debtrising form Rs 928 billion in 1990-91 to Rs 3231 billion in 1999-2000. As percentage of GDP, public debt increased from 91.3 percent to 103.0 percent during the same period. As percentage of total revenue, public debt rose from 541 percent to 630.4 percent. The debt servicing liability continued to rise as a result of unsustainable rise in public debt. In 1990-91, almost 38 percent of total revenues were consumed to finance debt servicing and by 1999-2000 it reached almost 64 and human capital deteriorated sharply over the years, due mainly on account of declining public sector investment. Private sector investment also declined for two reasons. Firstly, as a result of persistently large fiscal deficits and the associated rising stock of public debt, interest rates remained high during the 1990s and crowded out private sector investment. Being complementary in nature, a decline in public sector investment caused private sector investment to decline as well. Consequently, the overall investment rate decelerated during the 1990s and ultimately reduced economic growth relative to potential. When a country sustains such a large fiscal deficit for such a long period of time, it is bound to face serious debt problem and associated decline in investment and growth, and consequent rise in poverty. This underlines the importance of a credible fiscal policy for achieving higher investment and growth.

Chapter 5. Fiscal Development serious economic distortions.

Various attempts were made in the past to Inequitable: treat individuals and business in achieve fiscal consolidation. Despite imposition of similar circumstances differently. new taxes, additional tax measures, and curtailment Tax administration and enforcement of non-essential expenditures, these efforts did not Unfair: are selective and skewed in favour of achieve fiscal consolidation, as Pakistan continued those with the ability to defeat the to sustain large fiscal deficit (on average, 7.0 % of system. GDP). Although fiscal consolidation could not be The combined effects of these weaknesses achieved, structure of taxes did improve over the resulted in low and stagnant tax-to-GDP ratio on years (More on this issue later). Why past attempts the one hand and low tax elasticity and buoyancy could not achieve desired results? The answer lies on the other. The low and stagnant tax- to-GDP with Pakistan's tax structure. ratio compelled successive governments to generate resources through surcharges and non-tax Like in most developing countries revenues [see table 5.1]. Pakistan's tax structure has suffered from several weaknesses. These are:
Complex: difficult to administer and comply with. unresponsive to growth and discretionary policy measures. In other words, elasticity of taxes was in general, less than unity.

Inelastic:

Inefficient: raises little revenue but introduce Table 5.1 Fiscal Indicators as Percent of GDP (MP) Overall Fiscal Deficit Total Expenditure Current Development* Total Rev. Revenue Tax NonTax

Year

GDP Real Growth

Chapter 5. Fiscal Development 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00** 2000-01** 2001-02** 2002-03 (BE) * 5.4 7.6 2.1 4.4 5.1 6.6 1.7 3.5 4.2 3.9 2.2 3.4 5.1 8.8 7.5 8.1 5.9 5.6 6.5 6.4 7.7 6.1 6.6 5.2 5.2 4.6 25.7 26.7 26.2 23.4 22.9 24.4 22.3 23.7 22.0 22.5 21.0 22.8 22.2 19.3 19.1 20.5 18.8 18.5 20.0 18.8 19.8 18.6 20.3 18.9 19.3 18.1 6.4 7.6 5.7 4.6 4.4 4.4 3.5 3.9 3.4 3.2 2.1 3.5 4.1 16.9 19.2 18.1 17.5 17.3 17.9 15.8 16.0 15.9 16.3 16.2 17.2 17.6 12.7 13.7 13.4 13.4 13.8 14.4 13.4 13.2 13.2 12.9 12.9 13.2 13.8 4.2 5.5 4.7 4.1 3.5 3.5 2.4 2.8 2.7 3.4 3.3 4.0 3.8

Public Sector Development Program plus surplus/

Source: Finance Division, (Budget Wing)

deficit of autonomous bodies. B.E: Budget Estimates. ** Fiscal deficit figure for these years is after adjustment of statistical discrepancy.

Figure-1: Revenue-Expenditure Gap (As % of GDP)

30 29 28 27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

Revenue

Expenditure

On the expenditure side, it is a fact that over the years the structure of current expenditure has become inflexible. Large resources were pre-

empted by expenditure of essential and obligatory character, such as debt servicing. Almost 64 percent of total revenues were devoted to debt servicing

Chapter 5. Fiscal Development alone, leaving little room for economizing Realizing the weaknesses of Pakistans tax structure a concerted effort was launched some three and a half years ago. The government began to launch a wide-ranging tax and tariff reform on the one hand and fiscal transparency on the other, with a view to reducing tax rates, broadening the tax bases to hitherto untaxed or under taxed sectors, and shifting the incidence of taxes from imports and investment to consumption and incomes. The reduction in tax rates was intended to stimulate investment and production on the one hand and promote voluntary tax compliance on the other. Broadening of tax bases was intended to ensure fair distribution of tax burden among various sectors of the economy. Without going into the details as well as to conserve space, all these reforms are documented in Box-I.

expenditure. Although, the total expenditure-toGDP ratio exhibited a declining trend in the 1990s, this decline has occurred primarily at the cost of development expenditure. Decline in development spending has not only caused deterioration in human and physical infrastructure but has also constrained the future growth potential of the country. Persistently large fiscal imbalances therefore raised two major concerns. First, the rising trend in the interest burden on public debt threatened the sustainability of the macroeconomic stance. Second, servicing the country's public debt puts large claims on government resources, which reduced the Government's capacity to spend on key development activities. In addition, it also created a need for higher taxation which undermined efficiency.

FISCAL REFORM

Chapter 5. Fiscal Development Box-I FISCAL REFORMS INTRODUCED DURING LAST THREE YEARS TAX REFORMS All tax whitener schemes eliminated. Tax survey and documentation exercise undertaken. This exercise added 234,189 new income tax payers and 34000 sales tax payers to the tax base. Wealth tax abolished. To give an end to multiplicity of taxes, number of taxes at the federal and provincial level has reduced. Grass roots reforms in tax administration started. A two-tier agricultural income tax introduced. GST broadened and streamlined. In order to ensure expeditious Sales Tax refund payments, while ensuring no inadmissible payments, the Sales Tax Automated Refund Repository (STARR) has been set up. This will help in development of paper less (Electronic) receipt, processing and sanction of refund claims. To create taxpayer friendly environment a new income tax ordinance on universal self assessment basis with system selected audits, minimal exemptions, and more equitable rates have been introduced. For effective dispute resolution mechanism, tax ombudsmans office established. Developing an automated assessment and valuation system Large taxpayer unit has been established in Karachi Medium taxpayer unit established in Lahore A model medium taxpayer unit has started working in Lahore to test the re-engineered income tax system TARIFF REFORMS Public announcement of tariff rationalization, spread over 2001-03: Maximum tariff brought down to 25 percent in 2002-03 from 92 percent a decade ago. Number of tariff slabs reduced from 13 to 4 in the same period. Minimizing the use of excise duties in tariffs. Promulgation of anti-dumping law consistent with WTO. Import liberalization measures adopted for agricultural and petroleum products. Restrictions on agriculture exports removed. A Pilot Customs Administration Reform Project would be established by November 2003. FISCAL TRANSPARENCY The government is already on road to Accountable Fiscal Management Framework (AFMF) that specifies assurances of accountability and transparency of fiscal management. Fiscal responsibility law is expected to be put before the parliament by end-June 2003. Separation of audit and accounts: legislative measures adopted. Formation of ad-hoc public accounts committees at federal and provincial level. Establishment of new system of financial controls and budgeting. Publication of fiscal reports verified by the AGPR. Fiscal reform unit established. Greater public access to fiscal data has been ensured through publication of quarterly fiscal reports.

Chapter 5. Fiscal Development

TAX ADMINISTRATION REFORM

Tax administration plays a vital role in the success or failure of any attempt to reform taxation. Corruption and tax evasion are widespread, especially in developing countries. Tax collection system designed to eradicate corruption and evasion has mostly failed, indicating that these problems are structural in nature. The main reason for this failure is that most tax administrations systems have been influenced by the structure of tax systems in developing countries. In fact, tax structure and tax administration are interdependent and should be considered as such. Tax administration plays a crucial role in determining the real (or effective) tax system, as opposed to the statutory tax system. Indeed, there is a growing conviction among tax policy specialists in developing countries that policy change without administrative change is nothing, and that, it is critical to ensure that changes in tax policy are compatible with administrative capacity. It is therefore, generally argued that tax administration is tax policy in developing countries. There are many lessons that can be learnt from other countries experiences where they have tried to improve tax administration. First, an essential pre-condition for the reform of the tax administration is the simplification of the tax system to ensure that it can be applied effectively in the generally low compliance contexts of developing countries. Second, there is a need for a strategy for the successful reforms of the tax administration. Strategy in this context simply

means a comprehensive plan that assigns clear priorities to the tasks that must be performed, tailored to the available resources. Third ingredient for successful reform of tax administration is a strong commitment to reform at both policy-making and managerial levels, as well as a certain degree of technical competence. The best reform strategy applied to the most simplified system will fail if there is a lack of political will to implement it. While some crucial initial technical support can sometimes be obtained from foreign experts, a critical core of local expertise is needed to take full advantage of such assistance. Even more important is the presence of a managerial team fully committed to taking the steps necessary to improve the quality of tax administration, with full political support of the highest authorities. Successful tax administration reforms must have these three main ingredients, that is, simplification, strategy, and commitment. There is, however, no single set of prescriptionsno secret recipethat once introduced, will ensure improved tax administration in any country. Developing countries exhibit a wide variety of tax compliance levels, reflecting not only the effectiveness of their tax administrations but also taxpayers attitude towards taxation and towards government in general. It should be emphasized that gimmicks or quick fixes are not of much use in resolving tax administration problems. It is time consuming and requires patience. The goal of tax administration is to foster voluntary tax compliance. Tax compliance will increase if there is an effective tax administration. Taxpayers will comply better if they believe that failure to pay due taxes entails substantial risk of

Chapter 5. Fiscal Development being penalized in a relatively severe fashion. In a country where the degree of compliance is low, the ability of the tax administration to impose effective penalties is perhaps the best way to shape the behaviour of taxpayers. The crucial test of an effective tax administration is that how effectively it deals with unregistered, stop filing, tax evaders, and delinquent taxpayers. If tax compliance is to improve, the tax administration must have effective action to deal with these shortfalls. Fully cognizant of the fact that the success of tax reform would depend on the effectiveness/efficiency of tax administration, the Government of Pakistan approved a medium-term program for reforming tax administration in November 2001. Since then, major efforts have been made to improve tax administration. Some of the milestones already achieved under tax administration reform are summarized below: i) Re-organization of CBR Headquarters on functional lines CBR was administrated on cylindrical basis in the past where policy and operational functions were performed by the same Member. Five new Members from private sector have been recruited to look after the specialized skills like taxpayer education, audit, information technology, fiscal policy, and human resource management. Establishment of Large Taxpayer Unit Large Taxpayer Unit (LTU) has been established from July 1, 2002 at Karachi, encompassing all the three domestic taxes i.e. sales tax, central excise duty, and income tax. The unit has 300 Karachi based large taxpayers and covers 50% of the revenue of the country's largest city. Its performance has so far been impressive and has encouraged the government to set up another LTU in Lahore in February 2004. iii) Medium Taxpayer Unit A model Medium Taxpayers Unit (MTU) has started working in Lahore w.e.f. October, 1, 2002 to facilitate taxpayers. Five such MTU will be set up in Karachi, Rawalpindi Peshawar, Quetta and Islamabad by July 2004. Universal Self Assessment System Universal Self-Assessment System (USAS) is the corner stone of the reform strategy of CBR. While sales tax is already on self assessment basis, income tax has also been brought under the USAS through the Income Tax Ordinance 2001. The government is currently examining the process to bring custom collection also under self assessment coupled with audit based on risk assessment for various classes of taxpayers. Customs Administration Reform (CARE) The existing cumbersome manual system is highly personalized, involving 34 verifications and 62 steps. There is a face to face contact between taxpayer and tax collector and the taxpayer have to bear extra cost on account of inefficiency of the system. CBR has developed a Custom Administration Reform Plan (CARE) and has decided to start a pilot project to test the new approach for imports and exports. The Karachi International Container Terminal (KICT) which clears 25% of imports through Karachi sea port has been selected as the pilot site. Sales Tax Automated Repository (STARR) Project Refund

iv)

v)

ii)

vi)

Chapter 5. Fiscal Development The reengineering and automation of sales tax refund system has been identified as essential component of the reform of sales tax. The software has been developed and central data base office has been established. The implementation of the first phase has been completed and the system is being evaluated and reviewed for the development and implementation of the second phase of the project. The second phase will be implemented by July, 2003 and on its completion the sales tax refund system will be transformed into a simpler, fully automated, risk based system, enabling quick refund and identifying high risk cases for scrutiny and audit. vii) Taxpayers Facilitation Centers With a view to promote voluntary compliance in a self assessment system of tax administration, taxpayer education and facilitation has been given a priority. All the laws, rules, circulars have been placed on website. Taxpayer facilitation centers are being established. By July 2004, 5 to 7 taxpayers facilitation centers at the various stations of the country will be established. Income Tax Organization Structure The existing structure of income tax, which is circle based where all administrative, judicial, legal and enforcement powers are exercised by one person is being replaced by a functional system. A new income tax organizational structure containing functions of taxpayer service, information processing, audit, enforcement, collection, legal, information technology, HRM and internal control has been developed and is being presently tested at MTU in Lahore. A home grown automated reengineered Tax Management System has also been developed which will drastically reduce the locations as well the personnel in the income tax organization. The strategy revolves around information technology based processes. The implementation of IT software and hardware, and efficient use of technology is aimed at achieving the objective of minimum taxpayer interface and to allow the tax administration to be taxpayer friendly while reducing compliance costs. The reform of tax administration is not only focusing on a change in skills but major efforts are underway to transform the organizational culture. Significant improvements in human resource management function are in hand. These include (i) HR audit, (ii) Implementing new and effective decision making processes, (iii) Competency /Skill enhancing training programs, (iv) Improved compensation package, and (v) Redundancy planning and sequencing.

OUTCOMES OF REFORMS
The wide-ranging tax and tariff reform as well as reform in tax administration have started paying dividends. Tax collection by the Central Board of Revenue (CBR) has picked up, overall budget deficit as percentage of GDP has declined, revenue deficit has been narrowed, and primary surplus has increased. Consequently, public debt, both in absolute term as well as in percentage of GDP has declined. Pakistan is now moving towards fiscal consolidation but much more efforts will be needed to achieve consolidation on a sustained basis During the last four years, the CBR has collected Rs. 152 billion more revenue or tax collection has increased by 49.3 percent. The overall fiscal deficit which averaged almost 7.0 percent of

viii)

Chapter 5. Fiscal Development GDP during the 1990s, has been reduced to 4.6 percent in 2002-03. Revenue deficit (the difference between total revenue and total current expenditure), a measure of government dis-saving, has been narrowed from 3.0 percent of GDP to 1.0 percent. Improvement in revenue deficit would increase national savings which, in turn, would reduce the country's dependence on foreign savings to finance domestic investment. Primary balance (total revenue minus non-interest total expenditure) remained in surplus to the extent of 1.5 percent of GDP. Revenue efforts should be assessed in terms of the objective of improving the underlying structure of the tax system, to place the public finances on a permanently sound basis. An improved tax structure would reduce the dead weight loss associated with raising a given amount of revenue. Reduction in relative share of trade taxes and increases in the relative shares of taxes on income and consumption could be taken as evidence of an improvement in the tax system. Notwithstanding improvements in various fiscal indicators, Pakistan has also witnessed significant changes in its tax structure. As a result of reforms, the structure of taxes has undergone considerable changes since the beginning of the 1990s. Firstly, the share of direct taxes in total taxes (collected by the CBR) increased from 18 percent to 32 percentalmost doubled in 13 years (See table 5.2). Accordingly, the share of indirect taxes declined from 82 percent to 68 percent during the same period. Even within the indirect taxes, dramatic changes have taken place. Collection from custom duty used to account 45 percent of total tax collection and 55 percent of indirect taxes in 1990-91. Its share has now been reduced to 13 percent and 19 percent, respectively. This is the result of the tariff reform implemented by the successive governments since 1990-91. The share of sales tax on the other hand increased dramatically from 14.4 percent to 45 percent in total taxes and from 17.6 percent to 66 percent in indirect taxes during the same period. Central excise as a tax is loosing its importance and gradually being faded out. Its shares in total taxes and indirect taxes were 22.5 percent and 27.5 percent, respectively in 1990-91. These have now been reduced to 10.3 percent and 15.2 percent, respectively during the same period (See Table 5.2).

Table 5.2 Structure of Federal Tax Revenue Tax Revenue As % of Direct GDP Taxes (Rs. Billion) Break-up of Indirect Taxes Central Custom Sales Excise

Year

Total (CBR)

Indirect Taxes

Chapter 5. Fiscal Development 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03(B.E) 111.0 142.0 153.2 172.5 226.0 268.0 282.0 293.7 308.5 346.6 392.3 403.9 460.6 11.0 12.0 11.0 11.0 12.0 13.0 12.0 11.0 10.0 11.0 11.3 11.1 11.5 50.0 16.0 25.0 (54.9) (17.6) (27.5) 62.0 21.0 30.0 (54.9) (18.6) (26.5) 61.5 23.5 31.5 (52.7) (20.2) (27.1) 64.2 30.4 34.5 (49.7) (23.5) (26.9) 77.0 43.0 44.0 (47.0) (26.2) (26.8) 89.0 50.0 51.0 (46.8) (26.3) (26.9) 86.0 56.0 55.0 (43.7) (28.4) (27.9) 74.5 53.9 62.0 (39.1) (28.3) (32.6) 65.3 72.0 60.8 (33.0) (36.3) (30.7) 61.6 116.7 55.6 (26.4) (49.9) (23.7) 65.0 153.6 49.1 (24.3) (57.4) (18.3) 47.8 166.6 47.2 (18.3) (63.7) (18.0) 59.0 205.7 47.5 (18.9) (65.9) (15.2) .Source: Central Board of Revenue ] are shares in total taxes while the figures in parentheses ( ) are individual taxes in taxes. 20.0 [18.0] 29.0 [20.4] 36.7 [24.0] 43.4 [25.1] 62.0 [27.4] 78.0 [29.1] 85.0 [30.1] 103.3 [35.0] 110.4 [35.8] 112.6 [32.5] 124.6 [31.8] 142.5 [35.3 ] 148.5 [32.2] 91.0 [82.0] 113.0 [79.6] 116.5 [76.0] 129.1 [74.9] 164.0 [72.6] 190.0 [70.9] 197.0 [69.9] 190.4 [65.0] 198.1 [64.2] 234.0 [67.5] 267.7 [68.2] 261.6 [64.7] 312.2 [67.8]

Note: Figures in square brackets [ shares of the indirect

Fig-2: Federal Tax Collection (1990-91 & 2002-03) (% Share)

Chapter 5. Fiscal Development

1990-91

Direct Tax 18.0%

2002-03
Custom 15.0% Direct Tax 31.1%

Custom 45.0%

Sales Tax 15.0%

C.Excise 10.1%

C.Excise 22.0%

Sales Tax 43.8%

The pace of changes in tax structure, particularly in indirect taxes, gained considerable momentum over the last four years. The share of custom collection declined from 33 percent to 19 percent while the share of central excise declined from 31 percent to 15 percent since 1998-99. On the other hand, the share of sales tax increased from 36 percent to 66 percent. The basic philosophy of tax and tariff reform has been to move away from investment and production based taxes to income (direct taxes) and consumption (sales tax) based taxes. Pakistan has succeeded to a considerable extent in changing the composition of its taxes but much more effort will be needed to enhance the share of direct taxes in total taxes.

commitment to fiscal discipline. Prolonged commitment to fiscal discipline can only come from a rule-based fiscal policy. The rule basically represents the constraints and prevents government taking fiscally irresponsible route. For a country like Pakistan which remained fiscally irresponsible for a very long period of time, a rule-based fiscal policy is absolutely necessary for achieving long-run fiscal sustainability. Pakistan has already drafted a rule-based fiscal policy, enshrined in a Fiscal Responsibility Law, and will be presented to the Parliament before the end of the current fiscal year for legislation.

CONSOLIDATED BUDGETS (FEDERAL & PROVINCIAL) IN 2002-03

As stated earlier, persistence of large fiscal deficit has been the major source of macroeconomic instability in Pakistan during the 1990s. On average, Pakistan sustained a budget deficit of 7.0 percent of GDP. As a result of sustained efforts, fiscal deficit has

Although tax reform and reforms in tax administration have started paying dividends in terms of higher tax collection, fiscal consolidation requires prolonged

Chapter 5. Fiscal Development been on declining trend since 1999-2000. Fiscal deficit percent of GDP. As a result of prudent fiscal declined to 5.2 percent in 2000-01 and remained stable at management and better tax enforcement, Pakistan this point in 2001-02. Further fiscal consolidation was succeeded in achieving the fiscal deficit target of 4.6 envisaged for 2002-03 with a fiscal deficit target of 4.6 percent of GDP in 2002-03 [See Table 5.3 for details]. Table 5.3 Consolidated Budget (Federal and Provincial) (Rs. Billion) 2000-01 (P.A.) 553.0 441.5 422.5 392.3 30.2 0.0 19.0 111.4 717.9 645.7 479.0 234.5 131.2 70.7 42.6 166.7 72.2 89.8 14.8 -179.7 179.7 120.7 59.0 -33.0 92.0 0.0 2001-02 (R.E) 624.1 478.1 459.3 403.9 54.3 1.1 18.8 146.0 826.2* 700.2 524.6 245.3 149.0 56.3 74.0 175.6 125.9 126.2 -13.0 -189.1* 189.1 82.8 97.9 12.9 85.0 8.4 2002-03 (M.B.E) 706.1 553.3 530.2 458.9 66.8 4.5 23.1 152.8 892.5 728.8 543.7 212.3 158.0 57.9 115.5 185.1 163.7 134.0 -186.4 186.4 102.5 71.9 -29.2 101.1 12.0 % Change 13.1 15.7 15.4 13.6 23.0 22.9 4.7 8.0 4.1 3.6 -13.5 6.0 2.8 56.1 5.4 30.0 6.3 -

A. Total Revenue a) Tax Revenue i) Federal - CBR - Surcharges - Other ii) Provincial b) Non-Tax Revenue B. Total Expenditure a) Current Expenditure i) Federal - Interest - Defense - Civil Govt. - All Others ii) Provincial b) Development Expenditure PSDP** c. Statistical Discrepancy C. Overall Fiscal Deficit Financing i) External ii) Domestic - Bank - Non-Bank - Privatization Proceeds

Total Revenue - Tax Revenue - Non-Tax Revenue Total Expenditure Current Expenditure - Interest Payment - Defense PSDP C. Overall Fiscal Deficit

As % of GDP (mp) 16.2 17.2 12.9 13.2 3.3 4.0 21.0 22.8 18.9 19.3 6.9 6.8 3.8 4.1 2.6 3.5 5.2 5.2

17.6 13.8 3.8 22.2 18.1 5.3 3.9 3.3 4.6

Chapter 5. Fiscal Development GDP at Market Price (Rs Bln)

P.A: M.B.E: * **

3423

3629

4018

10.7

Provisional Actual Source: Finance Division, (Budget Wing) Modified Budget Estimates One off expenditure of Rs.52 billion (Rs.32 billion for KESC recapitalization and Rs.20 billion for CBR bonds) is not being included. A statistical discrepancy of Rs. 13 billion is adjusted for OFD calculation. The difference between development expenditure and Public Sector Development Program (PSDP) is the net lending to PSEs.

Chapter 5. Fiscal Development Total revenue is estimated at Rs.706.1 billion in collection increased by 15.0 percent, this increase 2002-03 as against Rs.624.1 billion last year, thereby, largely come from sales tax and custom duty. has registering an increase of 13.1 percent. This increase Direct taxes on net basis stood at Rs. 109.5 billion mainly emanates from substantial increase in federal which is only 1.0 percent higher than last year. The and provincial tax revenues which grew by 15.4 percent overall sales tax on net basis stood at Rs.154.1 and 22.9 percent, respectively. The consolidated tax billion which is 19.9 percent higher than last year in receipts grew by 15.7 percent while non-tax revenue the same period. More importantly, sales tax grew by modest 4.7 percent. The slower growth of noncollected from domestic economic activity grew by tax revenue is because of decline in the profits of State percent, showing an increased level of economic 29 Bank of Pakistan. The profits of SBP declined because it activity in the country. The higher level of economic actively pursued the sterilization policy to neutralize the activity is also reflected by increased demand for monetary impact of massive inflow of foreign exchange. imported goods, including raw materials for The consolidated (federal and provincial) tax revenue consumer and capital goods. Sales tax collection at constitutes 78.9 percent of the total revenues and 21.1 import stage shows an increase of 18.0 percent. The per cent of non-tax revenues. The federal tax receipts total refund/rebate on sales tax was 16.3 percent consist of revenue collected by the Central Board of higher than last year. It may be pointed out that last Revenue (CBR), surcharges (gas and petroleum), and year's refund /rebate was extra-ordinary high as some other minor collections. CBR Revenue government had decided to clear backlog. The 16.3 percent higher refund/rebate on sales tax over the last years extra-ordinary refund/rebate is a matter of serious concern. This is also true for direct taxes The CBR sustained the momentum of tax where the refund is higher by 35.8 percent over the collection generated in the last quarter (April-June) of years extra-ordinary high refund. There is a last 2001-02 and the first quarter (July-September) of the need to examine the higher refund/rebate during current fiscal year (2002-03) when it grew by 16.1 percent current fiscal year. the and 16.6 percent, respectively. Net tax collection during the first ten months (July-April) of the current fiscal year The net collection of central excise stood at (2002-03) stood at Rs 352.1 billion against the target of Rs Rs.35.5 billionalmost same as of last year. 351.0 billion, thus surpassing the target by a small margin Stagnation in growth in central excise is mainly due (See Table 5.4). As against the target growth of 14.0 the transfer of several major revenue spinners to percent, tax revenue grew by 15.0 percent in the first ten (e.g. POL product) to custom duty. Six major months of the current fiscal year. The overall refund stood revenue spinners (cigarettes, cement, natural gas, at Rs. 68.3 billion which is 1.6 percent lower than POL same period. The analysis of individual taxes reveals interesting developments. While overall tax products, beverages and beverages unusually higher refund of last year (Rs.69.4 billion) in the concentrates) have contributed around 88 percent to the total central excise collection during July-April, 2002-03. The collection on account of custom duty stood at Rs 53.0 billion on net basis, registering an increase of 59.4 percent. This impressive growth in

Chapter 5. Fiscal Development custom collection is realized even when the maximum duty rate was slashed from 30 percent to 25 percent, duty rates on over 2500 tariff lines were reduced, and Pakistani rupee was appreciated by 3.8 percent during the first ten months of the current fiscal year. It is important to point out that as a result of tariff reforms, the average custom duty rates on total imports as well as dutiable imports have fallen to as low as 9.1 percent and 15.6 percent, respectively.

Table 5.4 Federal Tax Revenue Collection During July-April, 2002-03 (Rs. Billion) July-April 2001-02 A. Direct Tax Gross Refund/Rebate Net B. Indirect Tax Gross Refund/Rebate Net B.1 Sales Tax Gross Refund/Rebate Net B.2 Central Excise Gross Refund/Rebate Net B.3 Customs Gross Refund/Rebate Net Total Tax Collection Gross Refund/Rebate 375.53 69.40 420.42 68.32 11.95 -1.56 59.12 25.87 33.25 68.60 15.59 53.01 16.03 -39.75 59.44 35.91 0.01 35.89 35.63 0.18 35.46 -0.76 888.89 -1.21 162.02 33.51 128.51 193.11 38.98 154.12 19.18 16.32 19.93 257.05 59.40 197.65 297.34 54.75 242.59 15.67 -7.83 22.74 118.47 9.99 108.48 123.09 13.57 109.52 3.89 35.76 0.95 July-April 2002-03 % Change

Chapter 5. Fiscal Development Net 306.13 352.10 15.02

Source: Central Board of Revenue Table 5.5 Month-Wise Tax Collection, 2002-03 (Rs. Billion) Months Direct Tax Sales 12.3 14.5 16.9 15.0 16.2 17.3 16.6 13.6 16.6 15.0 154.1 Indirect Taxes Central Excise 2.6 3.5 3.6 3.4 3.4 3.4 3.8 3.6 4.1 4.1 35.5 Custom 3.9 4.6 4.9 4.7 4.3 5.3 6.0 5.3 6.3 7.8 53.0 Total 18.8 22.6 25.4 23.1 23.9 26.0 26.4 22.5 27.1 27.0 242.6 Total Tax Collection % Change Over Last Year

July Aug Sep. Oct. Nov Dec. Jan. Feb. March April July-April

4.8 7.0 11.8 11.5 7.9 18.7 10.8 10.6 11.5 14.9 109.5

2001-02 2002-03 19.7 23.6 19.8 26.8 29.6 10.7 31.0 37.2 19.6 33.2 34.6 4.2 24.9 31.8 12.9 39.0 44.7 27.7 32.8 37.2 14.6 27.6 33.1 13.4 34.9 38.6 19.6 36.3 41.8 14.9 306.1 352.1 15.0 Source: Central Board of Revenue

The overall performance of tax collection during the first ten months of the current fiscal year has been quite encouraging. This is the first time in many years that the CBR has over performed and this performance was not achieved by holding refunds or over reporting the revenue figures (the revenue collection numbers are now reconciled regularly with the offices of AGPR and SBP before their publication). The improved revenue collection, especially in the areas of domestic sales tax and custom duties, is a clear indication of the pick up in domestic economic activity. The on-going reform in tax administration is also responsible for better performance of revenue collection. If the performance of the first ten months is of any indication it is highly probable that the CBR is going to achieve the target of Rs 460 billion in the current fiscal year.

Total Expenditure
Expenditure on the other hand was prudently managed. Total expenditure is estimated at Rs.892.5 billion which is 8.0 percent higher than last year. Out of the consolidated expenditure of Rs.892.5 billion for 2002-03, the current expenditure is estimated at Rs.728.8 billion (81.7 percent of total expenditure) while development expenditure (PSDP) amounted to Rs.134.0 billion (15 percent of total outlay). As shown in Table-5.3, the current expenditure which was 19.3 percent of GDP last year has declined to 18.1percent in the current year. There are three major components of current expenditure, namely, interest payments, defense, and expenditure on civil administration.

a) Interest Payments

Chapter 5. Fiscal Development stands at Rs.57.9 billion which is 2.8 percent higher Interest payments is the single largest item of total as well as current expenditures. Its share in total expenditure declined from 34.7 percent in 2000-01 to 31.6 percent in 2001-02 and further to 27.1 per cent in 2002-03. Its share in current expenditure, however, dropped from 38.6 percent in 2000-01 to 37.3 per cent in 2001-02 and further to 33.2 per cent in 2002-2003. In absolute term, interest payment which was of Rs.261.0 billion in 2001-02 declined to Rs. 241.8 billion a reduction of 13.5 percent.[See Table 5.3]. This decrease is attributed to the proper debt management and sharp decline in interest rates. This decrease should be seen in the context of an average increase of almost 15 percent per annum during the second half of the 1990s. than last year. It has accounted for 7.9 percent of current expenditure and 1.4 percent of GDP during 2002-03 as against 8.0 percent of current expenditure and 1.6 percent of GDP last year.

d) Provincial current expenditure

Provincial current expenditure grew by 5.4 percent in 2002-03increasing from Rs.175.6 billion to Rs.185.1 billion. However, provincial current expenditure as percentage of total expenditure has been declining during the last three years declining from 23.2 percent in 2000-01 to 21.3 percent in 2001-02, and further to 20.7 per cent during 2002-03. As percentage of GDP, provincial current expenditure has declined from 4.9 percent in 2000-01 to 4.8 percent in 2001-02 and further to 4.6 per cent in 2002-03.

b) Defense expenditure
Defense expenditure in 2002-03 was budgeted at Rs.158.0 billion against the last year figure of Rs. 149.0 billion thus showing an increase of 6.0 per cent over last year. It was budgeted to decline marginally in terms of percentage of GDP from 4.1 percent to 3.9 percent. It may be pointed out that defense spending has been continuously declining over the last one decade. Defense expenditure was 6.3 percent of GDP in 1990-91 and was targeted to decline to 3.9 percent in 2002-03. Similarly, defense expenditure was 25 percent and 32 percent of total and current expenditures, respectively in the beginning of the 1990s but was targeted to decline to 16.4 percent and 20.0 percent of total and current expenditures, respectively in 2002-03.

Public Sector (PSDP)

Development

Programme

The size of the Public Sector Development Programme (PSDP) during the current fiscal year is projected to increase by 6.3 percent over the last year. The approved overall size of the current years PSDP is projected at Rs.134 billion as against Rs. 126.2 billion of last year's. Of this, Rs. 90 billion are for Federal and Rs. 44 billion for provinces. At least 40 per cent of the resources have been provided for social sectors. PSDP also supports the government reforms intended to improve public expenditure management in the social sectors and movement from good to effective governance. The developments in revenue and

c) General Administration
The third major component of current expenditure is expenditure on General Administration. Expenditure under this item

expenditure sides, as described above, led to an overall fiscal deficit of Rs.186.4 billion or 4.6 percent of GDP. This revenue- expenditure gap is financed through external and domestic sources. Out of the

Chapter 5. Fiscal Development gap of Rs.186.4 billion, financing from external sources amounted to Rs.102.5 billion or 55 percent. The remaining gap of Rs.83.9 billion or 45 percent is financed from domestic sources. Within domestic sources, financing from non-bank sources amounted to Rs.101.1 billion while Rs.29.2 billion are allocated for retirement of debt to banking system, and Rs.12.0 billion would be amassed through privatization proceeds. FEDERAL BUDGET, 2002-03 revenue (Rs.130.1 billion). The tax revenue is to increase by 15.4 percent mainly because of better tax administration and reforms in the CBR (Central Board of Revenue). The CBR revenue is estimated to grow by 13.6 percent on net basis. The share of provinces is Rs. 193.5 billion which is 10.6 per cent higher than revised estimates for 2001-02. The net federal tax revenue receipts are estimated at Rs.452.5 billion. Total expenditure of Rs.707.4 billion is estimated to be higher by 13.6 percent than last year. Total development expenditure is estimated at Rs. 119.7 billion which are 21.9 per cent higher than that of the previous year. The notable thing about the federal budget is that revenue is made to grow at a faster pace than expenditure and interest payments have come down substantially [See Table 5.6].

As shown in table 5.6, the budgeted federal gross revenue receipts of Rs.660.3 billion for 2002-03 are 13.1 percent higher than revised estimates of Rs.584.0 billion in 2001-02. These revenue receipts comprise tax revenues (Rs.530.2 billion) and non-tax

Table 5.6

Federal Government Budget 2001-02 and 2002-03

2001-02 (R.E) Rs. % Share Billion 459.3 403.9 54.3 124.7 584.0 524.6 245.3 149.0 56.3 98.2 98.4 -0.2 622.8 78.6 69.2 9.3 21.4 100.0 84.2 39.4 23.9 9.0 15.8 15.8 0.0 100.0 2002-03 (M.B.E) Rs. Billion 530.2 458.9 66.8 130.1 660.3 543.7 212.3 158.0 57.9 119.7 90.0 29.7 707.4 % Share 80.3 69.5 10.1 19.7 100.0 76.9 30.0 22.3 8.2 16.9 12.7 4.2 100.0 % Change 2002-03/ 2001-02 15.4 13.6 23.0 4.3 13.1 3.6 -13.5 6.0 2.8 21.9 -8.5 13.6

Item A. Tax Revenue - CBR Revenue - Surcharges B. Non-Tax Revenue Total Revenue (A+B) DD. Current Expenditure - Interest Payments - Defence - Civil Administration - PSDP - Net Lending R.E: Revised Estimates

E.E. Development Expenditure

F. F. Total Expenditure (D+E)

Source: Finance Division, (Budget Wing)

Chapter 5. Fiscal Development M.B.E: Modified Budget Estimates.

PROVINCIAL BUDGETS
The total outlay of four provincial budgets for 2002-03 stood at Rs. 325.1 billion, which is 15.4 percent higher than the outlay of last year (Rs. 281.8 billion). The N.W.F.P witnessed highest increase of 46.7 percent in budget outlay over last year (Rs. 40.7 billion), followed by Punjab (10.5 percent). Baluchistan increased The overall provincial Sindh (11.9 percent) and However, budget outlay of marginally by 1.4 percent. revenue receipts for 2002-03

receipts and amounted to Rs.261.6 billion which is higher by 19.4 percent and non-tax revenue is estimated at Rs.32.5 billion which is 45 percent higher than last year. Out of total budget outlay of Rs. 325.1 billion, 82.4 percent went to current expenditure and 17.6 percent to development expenditure. In spite of declining share of development expenditure in total expenditure, the allocations for development expenditure are higher by 12.3 percent over last year while current expenditure is to grow by 16.0 percent. The main components of the Provincial budgets, 2001-02 and 2002-03 are presented in Table-5.7.

are estimated at Rs. 294.1 billion, which are 21.8 percent higher than last year. Tax revenue accounted for 88.9 percent of overall revenue

Table.5.7

Provincial Budgets At a Glance

(Rs. billion)
Punjab Item 200102 (R.E) 11.6 87.9 3.3 102.8 9.4 112.2 101.52 3.2 17.9 5.3 124.7 200203 (B.E) 12.0 97.4 19.0.1 28.4 9.2 137.6 117.1 20.7 12.9 7.8 137.8 Sindh 200102 (R.E) 7.4 50.7 7.8 65.9 4.4 70.3 77.7 11.0 1.6 9.4 88.7 200203 (B.E) 8.5 56.5 16.0 81.0 4.4 85.4 84.8 14.5 1.5 13.0 99.3 N.W.F.P 200102 (R.E) 2.0 19.8 3.9 25.7 7.9 33.6 32.0 8.7 4.5 4.2 40.7 200203 (B.E) 2.0 22.1 3.9 28.0 17.9 45.9 46.1 13.6 3.1 10.5 59.7 Baluchistan 200102 (R.E) 0.5 16.7 7.5 24.7 0.7 25.4 19.8 8.1 0.1 8.0 27.9 200203 (B.E) 0.5 17.5 6.2 24.2 1.0 25.2 19.8 8.5 0.1 8.4 28.3 Total 200102 (R.E) 21.5 175.1 22.5 219.1 22.4 241.5 230.8 51.0 24.1 26.9 281.8 200203 (B.E) 23.0 193.5 45.1 261.6 32.5 294.1 267.8 57.3 17.6 39.7 325.1

Provincial Taxes Share in Federal Taxes All Others Total Tax Revenues Non-Tax Revenues Total Revenues a) Current Exp. b) Development Exp. i) Dev.Rev.Account ii) Dev.Cap.Account Total Exp. (a+b)

Source: Finance Division, (PF Wing) SLIPPAGES ON REVENUE AND EXPENDITURE DURING LAST THREE YEARS

Slippages on targets are quite normal through-out the world. The interdependence and

Chapter 5. Fiscal Development global integration has made the job of forecasting even more difficult. The achievement of targets is subject to prevalence of normalcy in many tangible and intangible variables. There are inherent problems in the structure of the economy also but many external and internal developments do affect projections in both ways. During the last three years some slippages from the original budgeted figures have taken place. The course of events did influence the actual outcome. The first year of the period under review (1999-2000) witnessed massive swing in expenditure and relatively lower slippage on the revenue side. The years target was fixed on the assumption of considerable increase in the tax revenue as a result of tax survey and documentation drive. On the expenditure side the government has retired its debt with the financial institution to strengthen them. The fiscal deficit target was over-ambitious at 3.6 percent of GDP. This was a Herculean task to reduce deficit this magnitude. The reform needed due time to pay dividend. In the year 2000-01, catastrophic drought badly affected agriculture as well as overall economic growth. The economy grew by 2.2 percent almost equal to population growth rate. The revenue stream from external trade badly affected and shortfall in revenue demanded prudence to prevail on expenditure side. Policy makers were extra cautious about the target of fiscal deficit in the backdrop of last years experience and Table 5.8 Slippages in Revenue-Expenditure (Rs. Billion) 1999-2000 Budget Actual % age Estimat Outco Variati es me on Budget Estima tes 2000-01 Actual Outco me % age Variati on Budget Estima tes 2001-02 Actual Outco me % age Variati on consequently, expenditure was sliced considerably to meet the fiscal deficit target. The fiscal deficit just finished near the target.

The fiscal year 2001-02 was an extraordinary year. Pakistan economy in general and world economy in particular faced formidable challenges in post 9/11 developments and war on terrorism. Pakistan was forced to divert extra amount on defense spending due to tension on its eastern borders. Even in the face of extra-ordinary developments, fiscal prudence prevailed and slight slippages have taken place on both revenueexpenditure sides. However, the outcome of fiscal deficit was close to the target [See Table 5.8]. In general, over ambitious revenue target and exogenous shocks (both external and internal) have been responsible for the slippages in revenueexpenditure accounts.

Items

Chapter 5. Fiscal Development A. Total Revenue Receipts (Net) Total Expenditure Overall Deficit Fiscal Deficit As % of GDP

570.9

536.8

-5.97

608.6

553.0

-9.97

657.9

624.1

-5.1

683.7

743.6

8.76

770.7

717.9

-5.75

844.8

826.2

-2.2

112.8 3.3

206.8 6.4

162.1 4.6

179.1 5.2

186.9 4.9

-189.1 5.2

PUBLIC DEBT
The persistence of large fiscal and current account deficit for extended period of time covering two consecutive decades (1980s and 1990s) has had its manifestation through the unprecedented rise in public debt. By the end of the decade of the 1990s, Pakistans domestic as well as external debt reached alarming proportions and posed great danger to the economic future of the country. While the debt problems were in the making for decades, no serious efforts were made to slow down the pace of rapid accumulation of both domestic and external debt. By late 1990s, Pakistan already entered in a debt trap situation. The causes of rapid growth in domestic and external debt are multifaceted. They included: (i) persistence of large fiscal (7% of GDP) and current account (almost 5% of GDP) deficits; (ii) imprudent use of borrowed resources such as wasteful government spending, undertaking of low priority development projects, and poor implementation of foreign aided projects; rising real cost of government borrowing (both domestic and foreign); stagnant exports; and declining real government revenues. Another source of rising

debt has been the changing nature of composition of debtthat is, from grant and soft term assistance to hard term loans.

Chapter 5. Fiscal Development

Figure-3: Trends in Public Debt (As % of GDP)
120 115 110 105 100 95 90 85 80 75 70
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 2002-03

Pakistan public debt grew by an average rate of 18 percent and 15 percent per annum in the 1980s and 1990s. Resultantly in terms of as percentage of the GDP, public debt was 55.9 percent in 1980, increased to 92 percent in 1990, and crossed 100 percent by mid-2000. By any standard, Pakistan public debt became unsustainable and the growing debt servicing liability made fiscal adjustment more difficult. Public debt consists of debt payable in rupee and debt payable in foreign exchange. Over the last two decades, the share of public debt in rupee increased from 38.5 percent to almost 49 percent by mid-2000. On the other hand, public debt payable in foreign exchange declined from 61.5 percent to 51.2 percent during the same period. [See Table 5.9]. Public debt payable in rupee has increased in absolute term from Rs 1.71 trillion last year to Rs 1.74 trillion during the outgoing fiscal year, however, as percentage of the GDP, it has declined from 47.2 percent to 43.5 percenta decline of almost 4 percentage points in one year is simply remarkable.

Debt payable in foreign exchange stood at Rs 96 billion in 1980, increased to Rs 428 billion in 1990 and shoot-up to almost Rs 1.7 trillion by mid-200. As percentage of the GDP, debt payable in foreign exchange stood at 34 percent in 1980, increased to 49 percent in 1990, and further to 52.6 percent by mid-2000. As a result of sharp depreciation of exchange rate (17%) in 2000-01, debt payable in foreign exchange in rupee term jumped from Rs 1.7 trillion or 52.6 percent of the GDP to Rs. 2 trillion or almost 59.2 percent of GDP by end June, 2001. During the outgoing fiscal year 2002-03, the government has not only succeeded in arresting the rising trend in external debt but exchange rate appreciation has also helped in reducing debt payable in foreign exchange by more than Rs 85 billion. It stood at Rs 1.9 trillion or 47.2 percent of GDP in 2002-03, thus registering a decline of more than 7 percentage point of the GDP in one year. The rising stock of public debt has had serious implications for debt service obligations. Since public debt is to be serviced in rupee, its relation with government revenues is an important indicator of debt burden. Public debt was 317 percent of total revenues in 1980

Chapter 5. Fiscal Development increased to 505 percent by 1990, and was 679 percent in 2001. It has now been reduced to 515.9 percent in 2002-03 [See Table 5.9].

It was the realization that some two years ago, a formal debt reduction strategy was launched by the government for the first time in the countrys history. The main features of the strategy included among others; the reduction in fiscal and current account deficits, reduction in cost of borrowing, and strong financing support on concessional terms from the IFIs. Considerable progress has been made towards addressing Pakistans debt problem during the last two years. Fiscal deficit has been reduced to 5.2 percent of GDP in 2001-02 from an average of almost 7 percent in the 1990s and further to 4.6 percent in 2002-03. Current account balance has

turned surplus in 2001-02 and projected to remain in surplus in 2002-03, against an average deficit of almost 5 percent of GDP in the 1990s. As a result of the overall decline in the term structure of interest rate, the cost of borrowing from both the domestic and external sources has declined. The Paris club debt rescheduling has not only provided substantial debt relief to Pakistan but has also opened avenue for it to achieve debt substantially. The government has also set up a Debt Office in the Ministry of Finance to institutionalize its debt management capability. The progress towards stabilizing the countrys debt situation during the last two and half years in general and during the first nine months of the current fiscal year in particular, is presented below in Table 5.9.

Table 5.9

Public Debt
(Rs billion) 1980 59.8 (38.5) [21.5] 95.6 End June 1990 373.6 (46.6) [42.8] 427.6 2000 1575.9 (48.8) [50.0] 1655.1 2001 1728.0 (46.0) [50.5] 2025.8 2002 1711.3 (46.3) [47.2] 1983.5 2003* 1744.3 (47.9) [43.5] 1898.2

Debt Payable in Rupees@ As % of i) Public Debt ii) GDP Debt Payable in Foreign Exchange As % of i) Public Debt (61.5) (53.4) (51.2) (54.0) (53.7) (52.1) ii) GDP [34.4] [48.9] [52.6] [59.2] [54.7] [47.2] Total Public Debt 155.4 801.2 3231.0 3753.8 3694.8 3642.5 GDP (MP) 278.2 873.8 3147.2 3423.1 3628.7 4018.1 Total Revenue 49.0 158.8 512.5 553.0 624.1 706.1 Public Debt As % of (i) GDP (MP) 55.9 91.7 102.7 109.7 101.8 90.7 (ii) Total Revenue 317.1 504.6 630.4 678.8 592.0 515.9 Source: Debt Reduction and Management Committee Report and D.M Wing Finance Division. * End March @ Excluding FEBC, FCBC, US dollar bearer certificates and Special US dollar bonds. DOMESTIC DEBT

Chapter 5. Fiscal Development

The nomenclature of domestic debt in end of March 2003, it stood at Rs 1770.6 billion. Pakistan consists of permanent debt (medium and In other words, during the first nine months (Julylong-term), floating debt (short-term) and un- March) of the current fiscal year, domestic debt in funded debt (mostly national saving scheme- absolute term rose only by Rs 13.0 billion or by related). Persistence of large fiscal deficit in the 0.7 percent. As percentage of GDP, domestic debt 1990s has caused domestic debt to grow at an has declined from 52.6 percent in 2000-01 to 48.4 astronomical rate. During the decade of the percent in 2001-02 and is projected to decline 1990s, domestic debt grew at a rate of more than further to 44.1 percent in 2002-03. It may be seen 16 percent per annum. Considerable improvement from the table that the pace of accumulation of on fiscal side during the last three years has domestic debt has been brought to a naught. succeeded in not only arresting the rising trend in Maintenance of fiscal discipline on the one hand domestic debt but it has actually declined in and declining cost of financing fiscal deficit on absolute term. As shown in Table 5.10, domestic the other, will help Pakistan achieve a sustainable debt stood at Rs 1799 billion in 2001-02, it level of domestic debt during the next five years. declined to Rs 1757.6 billion in 2000-01 (a
The trend in domestic debt over the last

reduction of Rs 41.7 billion or 2.3%), and at the six years is summarized in Table-5.10

Table 5.10
Domestic Debt
(Rs billion) 1997-98 Total Domestic Debt - Permanent @ 1199.7 286.6 1998-99 1452.9 317.4 1999-00 1641.4 324.6 2000-01 1799.2 349.4 2001-02 1757.6 407.6 2002-03 (End March) 1770.6 417.1

Chapter 5. Fiscal Development (23.9) 473.9 (39.5) 439.2 (36.6) 44.8 (21.8) 561.6 (38.7) 573.9 (39.5) 49.4 (19.8) 647.4 (39.4) 669.4 (40.7) 52.2 (19.4) 737.8 (41.0) 712.0 (39.5) 52.6 (23.2) 557.8 (31.7) 792.1 45.1) 48.4 (23.5) 504.6 (28.6) 848.9 (47.9) 44.1

- Floating - Unfunded Total Debt as % of GDP @

Figures in parentheses ( ) are percent shares in total debt. Source: Finance Division, (D.M Section) Including FEBC, FCBC, US dollar bearer certificates and Special US dollar bonds. The composition of domestic debt has

floating and unfunded debt. A decline by 11 undergone considerable changes in the last five percentage points in the share of floating debt has years. There is a rapid increase in unfunded debt, as been compensated by almost similar increase in its share in total domestic debt has increased from unfunded debts share. The attractive real rates of 36.6 percent in 1997-98 to 45.1 percent in 2001-02. By return on the various instruments of the National end March 2003, its share has further risen to 47.9 Saving Schemes (NSS) were responsible for the percent of the domestic public debt. The rapid increase in unfunded debt as compared with attractiveness of the returns on the NSS is mainly permanent debt which grew at a much slower pace responsible for tremendous increase in unfunded (4.7 percent per annum). The unfunded nature of debt. this debt and its untapped manner of mobilization During the 1990s, the share of permanent has severely complicated the management of debt in total domestic debt remained stagnant at 23- Pakistans domestic debt. There is a need to re24 percent while a shift has taken place between examine this issue.

Table 5.11
Domestic Debt & Interest Payment Domestic Outstanding Debt (Rs.bln) Interest Payment (Rs.bln) Tax Rev. Total Rev. Interest Payment (As % of) Total Exp. Current Exp. GDP (mp)

Year

Chapter 5. Fiscal Development 1990-91 448.2 1991-92 531.5 1992-93 615.3 1993-94 711.0 1994-95 807.7 1995-96 920.3 1996-97 1056.1 1997-98 1199.7 1998-99 1452.9 1999-00 1642.4 2000-01 1799.2 2001-02* 1757.6 2002-03** 1812.2 * Provisional Actual 35.7 50.3 62.7 77.5 77.9 104.5 126.5 167.5 175.3 210.2 188.5 189.5 172.0 27.5 30.6 35.2 37.2 30.2 34.2 39.0 47.2 44.9 51.8 42.7 39.6 31.1 20.8 21.7 26.0 28.4 24.1 27.5 32.9 39.0 37.4 41.0 34.1 30.4 24.4 13.7 18.2 3.5 15.6 21.9 4.2 18.0 23.0 4.7 21.3 26.4 5.0 18.2 22.5 4.2 20.2 24.7 4.9 23.4 27.3 5.2 26.4 31.6 6.3 27.1 32.0 6.0 29.6 33.5 6.7 26.3 29.2 5.5 22.9 27.1 5.2 19.3 23.6 4.3 Source: Finance Division (Budget wing)

**

Budget Estimates.
subsequently declined to 5.2 percent of GDP in 2001-02 and it is further projected to decline to 4.3 per cent of GDP by the end of 2002-03. It is now consuming 24.4 percent of total revenue and accounting for 23.6 percent of current and 19.3 percent of total expenditure during 2002-03.

The growing burden of domestic debt is shown in Table 5.11. Interest payment on domestic debt continued to increase during the 1990s at an average rate of 20.0 percent per annum. As percentage of GDP, interest payment on domestic debt has increased from 3.5 percent in 1990-91 to 6.7 percent in 1999-2000. But interest payments

______________________

Chapter 6. Money and Credit

6. Money and Credit

A judicious use of monetary instruments such as discount rate, liquidity ratio, open market operations and credit plan allocations can help achieve some of the basic macroeconomic objectives such as price and exchange rate stability and sustained growth of the real GDP. Keeping these objectives in view, the monetary policy pursued by the State Bank of Pakistan in recent years has undergone a major transformation. This transformation is reflected in its expansionary and accommodative stance brought about by the continuous reduction in the interest rates and government securities. Over the last three years, the monetary policy stance has been flexible as per ground realities. For example, monetary policy stance remained tight during the fiscal year 1999-2000 and 2000-01 to keep inflation under control, and bring stability in exchange rate. This policy stance has been eased since 2001-02 to promote investment and growth and has continued during the current financial year as well. The monetary policy has been more receptive with the acceleration of foreign exchange inflows of Overseas Pakistani Workers. This has massively improved the net foreign assets of the entire banking system and foreign exchange reserves position, which, in turn initiated the process of rupee appreciation for the first time in the economic history of Pakistan. rupee-dollar parity, which had appreciated by 6.7 percent during July-March 2001-02, showed a subdued appreciation of 3.8 percent during JulyMarch 2002-03. The SBP also took a number of policy measures to fine tune monetary policy, boost exports, ensure availability of adequate and timely credit to growers/farmers, promote consumer financing, and improve governance of the financial system. The SBP has also continued with its policy of sterilization to contain growth of reserve money. As a major step of easy monetary policy, the State Bank has reduced the discount rate five times since July 2001, leading to a cumulative cut of 650 basis points. As a result, the weighted average lending rates of commercial banks have declined from 13.12 percent in June 2002 to 8.26 percent in March 2003. The State Bank has recently reduced interest rate under the export finance scheme by 0.5 percent and now the rate is 3.5 percent per annum. The excess liquidity in the banking system resulted in all time low (1.65%) T. Bill rate -- lower than inflation and deposit rates. This may have a negative impact on the balance sheets of banks.

Credit Plan, 2002-03

The emphasis of the monetary policy has been on avoiding any abrupt appreciation of Pak rupee, market driven exchange rate and interest rate policies. The underlying rational for this policy was to stimulate non-inflationary environment for investment, moderate rupee appreciation and preserve export competitiveness. This strategy has worked well and therefore, The SBP has continued with its flexible monetary policy stance during 2002-03. The Original Credit Plan was targeted the money supply (M2) to grow by 10.8 percent which was consistent with the projected economic growth target of 4.5 percent and inflation target of 4.0 percent. Net foreign assets (NFA) for the banking

Chapter 6. Money and Credit system (which primarily capture the external sector developments), were projected to contribute Rs 91.5 billion or 48.2 percent to overall monetary expansion by the end of the fiscal year in anticipation of massive foreign exchange inflows. The net domestic assets (NDA) of the banking system were expected to increase by Rs 98.5 billion, or to contribute 51.8 percent to overall monetary expansion. Private sector credit was projected to expand by Rs 94.7 billion, while all major and minor public sector enterprises (PSEs) were allocated Rs 20 billion. Government sector was anticipated to demonstrate improved fiscal discipline, as it was to retire Rs 14.2 billion on account of budgetary support and Rs 3.0 billion in respect of commodity operations. In view of the massive inflow of foreign exchange earnings and more than projected retirement by the government sector, Original Credit Plan 2002-03 was revised in February 2003. In the Revised Credit Plan, monetary expansion target was increased from 10.8 percent to 16.0 percent, mainly to accommodate the ever highest build up of NFA, which increased from the original target of Rs 91.5 billion to Rs 271.0 billion. Domestic credit target on the other hand was slashed from Rs 98.5 billion to only Rs 10.5 billion, wherein credit to government sector was targeted to retire Rs 44.2 billion and non-government was projected to receive a credit of Rs 70.2 billion. 9.3 percent (or Rs 142.5 billion) in the same period last year. Monetary expansion during the first nine months of the fiscal year was 78.1 percent of the full year revised target. This is mainly due to massive inflow of foreign exchange in the country. The NFA of the banking system amounted to Rs 278.6 billion in the first nine months of the current fiscal year as against Rs 110.7 billion in the same period last year. The NFA has already surpassed the full year revised target of Rs 271.0 billion by 2.8 percent. Massive foreign exchange inflows in the shape of home remittances, speedy repatriation of export proceeds, increased flow of FDI and financial assistance from the IFIs are responsible for the phenomenal growth of the NFA during the period under review. Unlike previous years trend, the NDA of the banking system depicted an unusual decline of Rs 58.7 billion during the first three quarter of the outgoing fiscal year. This massive decline was witnessed despite a significant flow of Rs 107.2 billion in the commercial banks credit to the private sector. Decline in NDA was mainly shared by a massive contraction of credit of Rs 154.0 billion both by government sector (Rs 89.4 billion) and other items (Rs 64.7 billion) as against a very meager contraction of Rs 7.7 billion by these two sectors in the same period last year. Net government borrowing however, remained on track mainly on account of improved performance of tax collection and maintenance of fiscal discipline. Government borrows from the banking system to finance its budget deficit and commodity procurement operations (e.g. wheat, rice etc.). During July-March 2002-03 total government borrowings showed a retirement of Rs 89.4 billion, compared to a retirement of Rs 23.4 billion in the same period last year. Of the total, government retired Rs 52.5 billion on account of budgetary support as against a

Monetary and Credit Development

Against the revised Credit Plan for the fiscal year 2002-03, money supply (M2) grew by 12.5 percent (or Rs 219.9 billion) during the first nine months of the current fiscal year as against

Chapter 6. Money and Credit marginal retirement of Rs 1.0 billion during the comparable period last year. Availability of more than budgeted external financing, improved tax collection as a result of better tax administration and dwindling of debt servicing burden due to debt re-scheduling were some of the factors that caused improvement in budgetary borrowings. There was also a marked shift in the composition of budgetary borrowing from the banking system. In fact, State Banks monetary management prompted government to take full advantage of low interest rates. As a result, the government borrowing for budgetary support shifted from SBP to scheduled banks. The government retired Rs 220.1 billion to SBP and borrowed Rs 175.0 billion from scheduled banks during July-March 2002-03. In the corresponding period last year, the Government had retired only Rs 71.5 billion to State Bank and borrowed Rs 70.5 billion from scheduled banks. Government also retired a larger amount of Rs 40.0 billion to schedule banks (borrowed to support commodity operations), compared with a retirement of Rs 22.6 billion in the corresponding period last year. The larger retirement was made against wheat (Rs 37.9 billion) followed by rice (Rs 1.1 billion). Advances for sugar, seeds and edible oils also showed marginal retirement of Rs 0.2 billion, Rs 0.3 billion and Rs 0.6 billion respectively. Bank credit to non-government sector comprises credit extended by commercial banks to PSEs (i.e. WAPDA, KESC, OGDC, PTCL, PIA, Pak Steel etc.) and private sector. Total credit to PSEs showed a retirement of Rs 4.8 billion during the first nine months of the current fiscal year compared with a nominal retirement of Rs 0.05 billion in the same period last year. Break-up of credit to PSEs shows that autonomous bodies availed Rs 5.8 billion from the commercial banks during the period under review as compared with Rs 3.3 billion during the same period last year. Within these autonomous bodies, the KESC was the largest borrower (Rs 6.7 billion) followed by the PIA (Rs 6.0 billion). Other autonomous bodies retired in net terms with a heavy retirement of Rs 4.5 billion by WAPDA and Rs 1.2 billion by Pakistan Steels. Smaller PSEs, on the other hand, showed a retirement of Rs 8.6 billion during JulyMarch 2002-03 compared with a retirement of Rs 1.9 billion in the corresponding period last year. Credit utilization by the private sector almost doubled during the period under review, compared to the corresponding period of last year. The easy monetary policy stance followed by cuts in discount rate and decline in the average lending rates along with improvements in the fundamentals of the economy resulted in the escalation of credit to private sector. Bank credit to private sector expanded by Rs 107.2 billion during July-March 2002-03 compared to an expansion of Rs 54.0 billion in the corresponding period last year. Commercial banks extended credit to the extent of Rs 98.0 billion, which was more than 100 percent than the amount disbursed by commercial banks in the corresponding period last year. Specialized banks, on the other hand, disbursed less credit i.e. Rs 4.0 billion compared with Rs 6.2 billion disbursed last year. The SBP credit to other financial institutions also showed a retirement of Rs 5.3 billion, as against a larger retirement of Rs 14.4 billion in the same period last year. Banks continued to finance important segments of the private sector. The Cotton financing excluding Cotton Export Corporation (CEC) amounted to Rs 36.4 billion up to March 22, 2003, compared with Rs 30.5 billion last year. Disbursement of agricultural credit for production and development purposes by Zeri Taraqiati Bank (former ADBP), Punjab Provincial Cooperative Bank (PPCB) and commercial banks amounted to Rs 34.1 billion during July-February 2002-03, compared with Rs 32.0 billion in the same period last year. Credit for export finance declined although the magnitude of retirement was less than last year. The retirement under Export Financed Scheme amounted to Rs 8.9 billion compared with Rs 14.9 billion during the same period last year. Despite significant reduction in

Chapter 6. Money and Credit the export finance rate, retirement of credit under (ending June 2003), compared to 15.4 percent in the scheme could be attributable to self-financing last year. However, the inflation is projected to by the exporters or other cheaper sources. remain stable and not to deviate from the annual target of 4.0 percent because of strong rupee. The In view of rising inflows of foreign exchange, money supply is projected to increase by 16 percent during the current fiscal year
Table 6.1 Factors Causing Changes in Monetary Assets

main factors causing changes in monetary assets are given in Table-6.1.

(Rs billion) Sector/Factor Credit Plan Target 2002-03 Original 98.5 -16.2 -14.2 -3.0 1.0 114.7 0.0 114.7 94.7 20.0 0.0 0.0 0.0 91.5 190.0 (10.8) Revised 10.5 -44.2 -29.2 -16.0 1.0 70.2 0.0 70.2 50.2 20.0 0.0 0.0 -15.5 271.0 281.5 (16.0) Actual 2002-03 2001-02 (July-March) (July-March) -58.7 31.8 -89.4 -52.5 -39.4 2.5 95.4 5.8 89.6 107.2 -9.1 -3.2 -5.3 -64.7 278.6 219.9 (12.5) -23.4 -1.0 -22.6 0.2 39.5 3.3 36.2 54.0 -1.9 -1.5 -14.4 15.7 110.7 142.5 (9.3)

Domestic Credit i) Government Sector Borrowing(Net) - Net Budgetary Support - Commodity Operations - Effect of Zakat Fund

ii) Non-Government Sector - Autonomous Bodies - Net credit to Private Sector & PSCEs a) Private Sector b) PSCEs c) PSEs SP. A/C debt repayment with SBP d) Other financial institutions iii) Other Items (net)

Foreign Assets (net) Total Monetary Expansion (M2) - (A+B) (Growth Rate %)

Source: State Bank of Pakistan. Impact of Sterilization on Money Supply & Prices In the post-September 11 scenario, Pakistan enjoyed a substantial improvement in foreign exchange inflows especially sharp rise in

Chapter 6. Money and Credit remittances leading to appreciation of Pak rupee. However, in order to avoid any abrupt appreciation of Pak rupee, SBP had to intervene to mop up excess forex supply from the inter-bank forex market. The SBP made net purchases of $7.9 billion during the period from September 2001 to March 2003 and as a result, it injected Rs 474 billion into the banking system. The SBP used the sterilization instrument for neutralizing the monetary impact of forex purchases on money supply, price expectations and exchange rate. The liquidity injections due to forex purchases were however, largely mopped up through Treasury Bills (TBs) auctions and retirement of SBP holdings of government papers. The sterilization has a direct impact on Reserve Money (RM) and money supply, as it has caused reduction in NDA of the SBP through offloading government papers held by it to the scheduled banks. Therefore, increase in NFA was offset by corresponding reduction in NDA so that reserve money remained on target. During the first nine months of the current fiscal year, the SBP has injected Rs 257 billion (against net purchases of $4.4 billion) into the banking system but 70.4 percent of that injection (Rs 181 billion) has been sterilized primarily through auctioning of the government papers. As a result, the stock of reserve money (RM) with ongoing sterilization has grown only by 13.0 percent; which otherwise would have risen by 44.0 percent. Similarly the money supply (M2) expanded by 12.5 percent during this period. If the reserve money had not been curtailed through sterilization, the M2 would have grown by 43.5 percent having sever implications for the economy in terms of higher inflation and erosion in Pakistans export competitiveness. 2002-03, consumer price inflation remained low at 3.4 percent against the annual target of 4.0 percent. However, appreciation of Pak rupee has also contributed towards lower inflation through cheaper imports. The SBP intervention to sterilize has also arrested the abrupt appreciation of Pak rupee from 6.7 percent in JulyMarch 2001-02 to 3.8 percent in JulyMarch 2002-03. Other wise, it would have eroded the Pakistans export competitiveness in the international markets and also have damaged the export oriented industries.

The sterilization also involved some cost, which was to be borne by the SBP. It is the difference between higher earnings foregone on offloaded T bills and lower returns on SBP investment of foreign exchange. Moreover, SBP has also to bear the loss due to increase in the revaluation cost resulting from appreciation of Pak rupee against US dollar. Resultantly, it had reduced the profit of SBP, which is also a loss to the government, as it is transferable to the government. However, government will gain on account of lower borrowing cost and lower domestic debt servicing due to lower interest rates. The principal benefits of the SBP purchases from the inter-bank foreign exchange market coupled with on-going sterilization include the containment of monetary expansion, low inflation, maintenance of export competitiveness and lower cost of bank borrowing by the government. Components of Monetary Assets (M2)

The components of monetary assets (M2) include: (i) currency in circulation, (ii) demand deposits, (iii) time deposits, (iv) other deposits (excluding IMF A/C, counterpart), and (v) The sterilization has helped in containing residents foreign currency deposits. The developments in these components during the inflation by checking the unusual growth of money supply. During the first three-quarters of

Chapter 6. Money and Credit first nine months of the current fiscal year are presented below (Table-6.2).. Currency in Circulation: Currency in circulation, is the most liquid form of money supply. In the first nine months of the current fiscal year, currency in circulation increased by 13.4 percent (Rs 58.0 billion), as against 15.6 percent (Rs 58.6 billion) in the same period last year. As on 31st March 2003, currency in circulation constituted 24.8 percent of money supply (M2), compared to its share of 26.0 percent in the comparable period of last year (Table-6.2). The currency in circulation follows a seasonal pattern determined jointly with the interaction of calendar and Islamic Hijra months. It starts to grow with the seasonal disbursement of credit to private sector (from September) and peaks usually in November or during the month in which Eid falls.

Table 6.2
Stock of Components of Monetary Assets (M2) Items Currency in Circulation Demand Deposits with banks(a) Other Deposits(b) with SBP Time Deposits with banks(a) Residents Foreign Currency Deposit Money Supply (M2) As Percent of M2 Currency in Circulation Demand Deposits Other Deposits Time Deposits Residents Foreign Currency Accounts (RFCD) M2/GNP (MP) Note: a) b) Average (90s) 225.1 (12.1) 212.5 (13.5) 5.6 (15.2) 328.6 (18.6) 119.2 (57.0) 890.9 (15.3) 26.3 24.7 0.7 36.9 12.4 43.9 End June 2001 375.5 (5.6) 374.7 (-0.2) 11.3 (41.9) 610.5 (11.2) 154.2 (37.1) 1526.0 (9.0) 24.6 24.6 0.7 40.0 10.1 45.3 2002 433.8 (15.5) 429.2 (14.5) 13.8 (22.6) 727.1 (19.1) 157.4 (2.1) 1761.4 (15.4) 24.6 24.4 0.8 41.3 8.9 (Rs billion) End March 2002 2003 434.1 491.8 (15.6) (13.4) 401.9 (7.3) 11.3 (-0.2) 670.7 (9.9) 150.7 (-2.2) 1668.6 (9.3) 26.0 24.1 0.7 40.2 9.0 548.4 (27.8) 3.5 (-74.6) 813.7 (11.9) 123.8 (-21.4) 1981.2 (12.5) 24.8 27.7 0.2 41.1 6.2

48.1 45.6 47.2 Source: State Bank of Pakistan.

Figures in parentheses represent growth in percent. Excluding inter-bank deposits, deposits of government and foreign constituents. Excluding IMF A/C No. 1 & 2 and SAF Loan Account, Counterpart Funds and Deposit of foreign governments, central banks, international organizations and deposits of money bank.

Chapter 6. Money and Credit

Demand Deposits with Scheduled Banks: Scheduled banks demand deposits increased by 27.8 percent (Rs 119.2 billion) during July-March 2002-03, as compared to their growth of 7.3 percent (Rs 27.2 billion) only in the comparable period last year. Main factor responsible for the sharp increase in demand deposits as well as currency in circulation is the rise in the reserve money during the first nine months of the current fiscal year. Reserve money (RM) increased by 13.0 percent during the first three-quarters of the outgoing fiscal year. This increase in reserve money is due to the extra-ordinary increase in the net foreign assets. Had there been no sterilization through auctioning of the government papers, RM would have risen by 44.0 percent, thus further increasing the level of CC and DD. The outstanding stock of demand deposits was Rs 548.4 billion as on end March 2003, representing 27.7 percent of the M2 stock. On the corresponding date of last year, the demand deposits constituted 24.1 percent of M2. Time Deposits: Time deposits of scheduled banks increased by 19.1 percent in 2001-02 as against 11.2 percent in 2000-01. In the first nine months of 2002-03, time deposits increased by 11.9 percent (Rs 86.6 billion), as against 9.9 percent (Rs 60.2 billion) in the comparable period of last year. As on end March 2003, time deposits constituted 41.1 percent of M2, as compared to 40.2 percent on the corresponding date of last year. It may be
Table 6.3

noted that despite continuous decline in the weighted average (W.A.) deposit rate time deposits have been increasing in the current fiscal year. This indicates that despite negative real return the depositors still put their trust in the commercial banks for safety of their money. Currency Deposits Ratio (CDR): The currency deposit ratio (CDR) has been rising steadily after reaching as low as 29 percent in fiscal year 199798 reflecting the dis-intermediary role of the freeze on foreign currency deposits. Since June 2001, CDR [CC/(DD+TD+RDFC)] has risen from 32.96 percent in June 2001 to 33.02 percent in June 2002 and further to 33.10 percent in March 2003. The upward trends in CDR appear to support the view that the jump in remittances in the country in the recent months has captured at least part of the normal (informal or formal) forex flows in to Pakistan. Another interesting observation stems from the liquid reserves to money supply (LRM) ratio. This ratio is a measure of monetary stability and is used to assess the vulnerability of domestic interest rates to fluctuations in the countrys external account. The LRM has been increasing since June 2000, which may be an indication of stable financial sector in the country. The LRM, which was only 5 percent in June 2000, increased to 16.8 percent in June 2002 and further to an all time high of 28.2 percent in March 2003 (Table: 6.3).

Key Indicators of Pakistans Financial Development Years 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 M2/GDP 37.6 35.9 40.1 38.9 39.0 41.0 41.9 33.7 37.7 M1/M2 70.3 69.5 66.1 63.4 64.7 63.9 66.5 68.7 72.6 DD+TD/M2 66.2 67.2 68.3 67.7 68.9 69.6 68.4 67.0 65.3 TD/M2 29.7 30.5 33.9 36.6 35.3 36.1 33.5 31.3 29.0 (Percent) LRM 9.5 7.1 15.1 12.6 4.6 6.6 5.7 3.0 2.6

Chapter 6. Money and Credit 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 July-March 2001-02 2002-03 39.9 39.2 41.7 44.4 44.7 43.8 43.3 43.8 45.1 43.6 44.5 44.6 48.5 46.0 49.3 70.0 70.4 66.2 59.9 55.1 51.0 51.3 42.1 39.8 50.2 52.8 49.9 49.8 50.8 52.7 65.6 65.1 69.3 71.2 73.0 73.3 74.3 76.8 77.4 77.5 74.6 75.4 75.4 74.0 75.2 29.6 31.5 31.6 34.6 35.9 36.0 36.7 36.7 37.1 40.3 39.2 40.0 41.3 3.3 3.3 5.0 1.8 9.9 10.2 7.4 4.5 3.3 6.3 5.0 7.9 16.8

40.2 14.6 41.1 28.2 Source: State Bank of Pakistan. While there is no standard method to measure financial the 1980s and the 1990s. This clearly indicates that of deepening, the most widely used indicator is the ratio of Pakistans economy is more monetized and the banking M2 to GDP. This ratio indicates how monetized an sector is more important today than two decades ago. economy is and how important are its banks. The Other indicators of financial deepening, such as, the M2/GDP ratio has increased significantly over the last ratio of total deposits to M2, and time deposits to M2, 23 years rising from 37.6 percent in 1980-81 to 39.2 have also improved. percent in 1990-91. With the introduction of financial sector reform since early 1990s, the ratio has been Measures of Money Supply and their Behaviour increasing every year. During the decade of 1990s, average M2/GDP was 43.4 percent, which increased to The annual trends of M1, M2 and M3 since 44.6 percent in 2000-01, and 48.5 percent in 2001-02. As June 1991 to June 2002 and up to March 2003 are on 31st March 2003, the M2/GDP ratio was recorded at given in Table-6.4. 49.3 percent, which is the highest in the last two decades
Table 6.4

Stocks of Monetary Aggregates (Rs billion) End Period Stock June 1991 June 1992 June 1993 June 1994 June 1995 June 1996 June 1997 June 1998 June 1999 June 2000 Money Supply & Monetary Assets (M1) (M2) (M3) 265.1 400.6 569.40 302.9 505.6 679.2 327.8 595.4 777.3 358.8 703.4 923.4 423.1 824.7 1083.6 448.0 938.7 1246.3 443.6 1053.2 1430.1 480.3 1206.3 1696.8 643.0 1280.5 1913.4 739.0 1400.6 2137.2 (Percentage Change) (M1) (M2) (M3) 10.4 17.4 12.9 14.2 26.2 19.3 8.2 17.8 14.4 9.4 18.1 18.8 17.9 17.2 17.3 5.9 13.8 15.0 -1.0 12.2 14.8 8.3 14.5 18.6 33.9 6.2 12.8 14.9 9.4 11.7

Chapter 6. Money and Credit

Average 1990s
2000-01 2001-02

761.4 876.8 847.2 1043.8

1526.0 1761.4 1668.6 1981.2

2313.9 2640.9 2506.9 2934.7

12.2 3.0 15.2 11.3 19.0

15.3 9.0 15.4 9.3 12.5

15.6 8.3 14.1 8.3 11.1

End March
2002 2003

Source: State Bank of Pakistan & E.A. Wing, Finance Division. Monetary aggregate of M1 consists of the outstanding stock of currency in circulation, demand deposits of scheduled banks and other deposits with the State Bank of Pakistan. Money compared to 9.3 percent in the same period last year. The broadest monetary aggregate, M3, has increased by 11.1 percent during the first 3 quarters of 2002-03, as compared to 8.3 percent in the comparable period last year. Higher growth in M3 is attributable both to higher growth of M2 and net accrual of National Saving Schemes (NSS). The M3 supply of M2 definition consists of M1 plus is dominated primarily by M2 and NSS deposits. Since outstanding stock of time deposits of scheduled 1994-95, the share of NSS in absolute term has been rising, banks and outstanding stock of RFCDs. The main fuelling M3 growth. In June 1995, the shares of M2, NSS, and two organizations (NDFC and Co-operative Bank) in components of M3 include: outstanding stock of M3 were 76.1 percent, 23.6 percent, and 0.3 percent M2, outstanding deposits of national saving respectively. In June 2001, M2/M3 declined sharply to 65.9 schemes (NSS), and outstanding deposits of percent while NSS/M3 increased to 33.9 percent. In June 2002, M2/M3 increased to 66.7 percent while NSS/M3 Federal Banks for Cooperatives. declined to 33.2 percent. In March 2003, M2/M3 again increased to 67.5 percent while NSS/M3 came down to 32.4 During the first nine months of the current fiscal percent. Higher growth in M2 in the first nine months of the year, while M1 has increased by 19.0 percent (Rs 166.9 current fiscal year was attributed mainly to the huge forex billion), as against an increase of 11.3 percent (Rs 85.8 inflows in the country. billion) in the comparable period last year, M2 has recorded a growth of 12.5 percent during the period under review,

BOX-1

Monetary Policy Monetary and Credit Control Measures, 2002-03

I. In July 2002, SBP appointed some banks as Primary Dealers for the financial year 2002-03 including; Habib Bank Limited, National Bank of Pakistan, Union Bank Limited, Citi Bank, ABN-Amro Bank, American Express Bank, and Standard Chartered Bank. II. On July 9, 2002 the State Bank amended Prudential Regulations XXVIII and made banks/NBFIs free to decide the rate of return on deposits mobilized under FE 25.

Chapter 6. Money and Credit III. To promote consumer financing in Pakistan, banks were allowed in July 2002 to provide financing facilities to general public for purchase of consumer durable provided their consolidated borrowings for this purpose from the bank does not exceed Rs 100,000/-. To promote E-Commerce and to facilitate the consumers by providing them access to their funds through the existing two ATM Switch Networks operated and managed by Muslim Commercial Bank (M-Net) and ABN-AMRO Bank (Shared ATM Switch Network), it was decided in August 2002, that all scheduled banks, which are not currently connected to either of the two Switches should join or come to an agreement with any of the two Switch system latest by December 31, 2002. V. In August 2002, the State Bank advised banks to further enhance the scope of Agricultural Loan Scheme and ensure availability of adequate & timely credit to growers/farmers. In order to streamline processing of the cases involving refund of fines recovered under EFS and make the system more transparent, the State bank prescribed a procedure on 31 st August, 2002 and advised all banks to properly circulate the same amongst their branches dealing with the Export Finance Scheme/cases. VII. The State Bank, on 4th September 2002 set up a permanent desk for dollar/rupee swap to use as a new tool of monterey management. On September 9, 2002, the State Bank sent the copy of Master Swap Agreement to all banks for signature and advised them to return the same to the SBP latest by end of September 2002. VIII. Having received representations regarding imposition of fines from exporters for nonfulfillment of their export orders as per respective schedules due to adverse global effects and other abnormal situations with specific reference to Pakistan, the State Bank, in September 2002, made certain relaxations in Export Finance Scheme. IX. Effective from 16th September 2002, the maximum profit to be earned by a financial institution on financial assistance to be extended under part-A (Local Sales) of the Scheme for financing Locally Manufactured Machinery was reduced from 11% to 10% p.a. and SBP refinance rate from 9% to 8%. X. In October 2002, the State Bank advised banks that the auction of Government of Pakistan Market Treasury Bills (MTBs) would continue to be conducted on alternative Wednesdays. However, 6-months MTBs would be offered in One Auction and remaining Maturities MTBs in the Other Auction.

IV.

VI.

Chapter 6. Money and Credit XI. Effective 14th October, 2002, the State Bank also allowed certain relaxations to the exporters of Hosiery/Knitwears, Rice and Hand Knotted Carpets under Part-II of the Export Finance Scheme. XII. On 14th October 2002 the State Bank of Pakistan issued Prudential regulations for Microfinance Institutions/Banks replacing the existing Microfinance Bank Rules, 2000 with the objective to ensure that the MFIs/MFBs operate in a safe and prudent manner. These Regulations would be applicable on operations of Micro-finance Banks/Institutions, including Khushhali Bank. XIII. To facilitate banks to deal with loans in loss category, which were outstanding on the books of banks since long and for which the probability of recovery was almost negligible, the State Bank of Pakistan advised banks on October 15, 2002 a new set of guidelines developed in consultation with the banks and Federation of Pakistan Chambers of Commerce and Industry (FPCCI).

XIV.

Effective from 18th November 2002, the minimum rate of return to be paid by recipients of financing facilities from State Bank for meeting temporary liquidity shortages and SBP 3-day Repo facility against Government of Pakistan Market Treasury Bills and Federal/Pakistan Investment Bonds was reduced from 9 percent to 7.5 percent on annual basis. On December 3, 2002, the State Bank issued an updated Branch Licensing Policy to the banks for implementation and consolidating all the instructions previously issued relating to Branching Licensing Policy and Automated Teller Machines (ATM). In order to promote Islamic Banking in Pakistan, on 1 st January, 2003, State Bank advised banks which are interested in establishing scheduled Islamic Commercial Banks in the private sector subsidiaries or stand alone branches for Islamic banking to apply to Director, Banking Policy Department within the policies prescribed by SBP.

XV.

XVI.

XVII.

On 17th January 2003, State Bank of Pakistan issued a consolidated and updated version of the instructions to be followed by banks with regard to margin restrictions.

XVIII. Effective from 1st February 2003, the State Bank reduced the rate of mark up for commodity operations of the Government and other agencies from 12% to 9.5% per annum. As regards the rate of mark up on wheat procurement by the private sector, it was advised that banks might provide financing facility to the private sector on a marketbased rate of mark up linked with T. bill rate.

Chapter 6. Money and Credit

XIX.

Under the legal framework for micro-finance institutions, the Microfinance Banks/institutions can undertake mobile banking operations. The guidelines, interalia, provided for opening of Service Centers within a specified radius of the licensed branch, with prior permission from SBP.

XX.

The State Bank, on February 24, 2003, clarified to banks that export refinance facility may be allowed against export of Henna Powder under the Export Finance Scheme.

XXI.

In order to improve efficiency in the credit appraisal process of banks/DFIs, on February 25, 2003, State Bank of Pakistan informed banks of making Credit Information Bureau (CIB) facilities online in collaboration with Pakistan Banks Association (PBA).

XXII.

In the wake of significant changes in the financial sector, the State Bank on February 25, 2003 advised all banks/DFIs for an updated list of financial institutions regulated by the State Bank.

XXIII.

In order to resolve the disputes that may arise between the borrowers and the banks/DFIs, the State Bank formed a Committee on 10 th March 2003 to extend their fullest support to the said Committee to ensure early resolution of dispute.

XXIV. With the consolidation and strengthening of financial sector in the country, the State bank on March 12, 2003 issued minimum guidelines to be followed by banks/DFIs uniformly to structure and discipline the process of merger/amalgamation or local incorporation of banks. XXV. Effective from 15th March 2003 the maximum profit to be earned by a financial institution on financial assistance to be extended under part-A (Local Sales) of the Scheme for financing Locally Manufactured Machinery (LMM Scheme) was reduced from 10 percent to 7 percent and refinance rate from 8 percent to 5 percent.

Auction of Pakistan Investment Bonds (PIB) Since the introduction of market oriented monetary policy in the late 1980s, the SBP has been pursuing open market operations (OMOs) in order to manage government debts and reserve money. In June 1998, the SBP introduced Market Treasury Bills (T. Bills) of 3 months, 6 months and

12 months maturity. The T. Bills are now the main instruments of OMOs. The fixed schedule of fortnightly OMOs was dismantled in July 2001 to give the SBP more flexibility in managing market liquidity. The move underlined the OMOs primary role as a liquidity management tool rather than an indicator of the SBPs monetary stance. During the previous two fiscal years, the

Chapter 6. Money and Credit SBP often moved to inject liquidity into the market through OMOs in order to facilitate the commercial banks in their lending activities to the private sector. However, this support was not required during the outgoing fiscal year, as more than sufficient liquidity was available with the banking system even after credit to the private sector, picked-up from mid-November 2002. It may be noted that while the SBP was transacting forex swap, in net terms, this transaction did not mop-up any rupee liquidity from the market during 2002-03. On the other hand, foreign exchange purchases by the SBP remained a major source of rupee injection (about Rs 76 billion after sterilization). The weighted average (W.A.) rates of return on 6 months and 12 months T. Bills were as high as 15.41 percent and 16.00 percent, respectively on July 15, 1998 (Table-6.5). Thereafter, these rates witnessed mixed trends of movement. They came down as low as 7.23 percent and 7.78 percent on July 27, 2000 but again went up as high as 12.88 percent and 12.93 percent, respectively on June 28, 2001. To improve the investment environment in a tangible manner and attract foreign investors, the government decided to gradually and effectively reduce the T. Bills rates during 2001-02 alongwith rationalization of the rate of returns on the national savings schemes. Accordingly, the T. Bills rates of 6 months and 12 months maturity started coming down sharply since the beginning of the 2001-02. The rate of 6-months T. Bills witnessed a reduction of 645 basis points and 12 months, a reduction of 596 basis points respectively in 2001-02. During the first threequarters of the outgoing fiscal year, they witnessed further cut by 476 basis points and 436 basis points respectively. As a result of sharp decline in 6 months T. Bill rate, the export refinance rate has also declined by 950 basis points to 3.5 percent since July 2001. Sharp reductions in T. Bills rate and discount rate are expected to spur investment activities in the economy.

Table 6.5 Auction of Market Treasury Bills (W.A. Yield) 1998-03 (Percent) Date 6 Months 12 Months 15-07-1998 15.41 16.00 30-06-1999 13.17 13.08 01-12-1999 10.16 10.89 19-04-2000 7.13 7.59 27-07-2000 7.23 7.78 05-10-2000 10.47 10.91 12-12-2000 10.96 11.49 22-03-2001 11.55 11.95 30-05-2001 11.60 11.99 28-06-2001 12.88 12.93 26-07-2001 11.58 11.98 22-08-2001 10.47 10.82 31-10-2001 8.50 9.00 28-11-2001 8.26 8.74 27-12-2001 7.93 8.40 23-01-2002 6.35 6.82 06-02-2002 5.64 6.38 30-05-2002 6.43 6.97 11-07-2002 6.27 6.82 August 2002 6.40 6.94 October 2002 6.34 6.87 December 2002 4.32 4.36 February 2003 3.19 3.60 March 2003 2.09 2.66 April 2003 1.65 2.61 Source: State Bank of Pakistan During 2001-02, the usual pressures on the forex market were absent which provided sufficient space to the SBP to improve the conduct of OMOs. As a result, strong demand for T. Bills was seen in 2001-02. The strong demand for T. Bills continued unabated during the current fiscal year also. This enabled the SBP to mobilize Rs 508.2 billion from the primary market of T. Bills during the first nine months of the current fiscal

Chapter 6. Money and Credit year as compared to Rs 211.8 billion in the same period last year. During July-March 2002-03, 42.2 percent of the bid amount (Rs 1204.1 billion) was accepted by the SBP, as compared to 47.6 percent in the same period last year. A total of Rs 1326.4 billion was offered including Rs 1204.1 billion under T. Bills of 3 months, 6 months and 12 months maturity and Rs 122.3 billion under Pakistan Investment Bonds (PIBs). Out of this, an amount of Rs 551.9 billion was accepted including Rs 508.2 billion under T. Bills and Rs 43.6 billion under PIBs. Both offered and accepted amounts were higher by 109.1 percent and 94.7 percent in the first nine months of the current fiscal year as compared to the amount offered and accepted in the same period last year. (Table-6.6).

Fig 1: Rate of Return on T.Bills (1998-03)

17 15 13 11 9 7 5 3 1

6 Months

12 Months

Table 6.6 Purchase and Sale of T.Bills (Rs billion) 2001-02 (July-March) 1. Market Treasury Bills (MTBs) a) 3 Months b) 6 Months c) 12 Months Total MTBs 2. Pakistan Investment Bonds(PIBs) a) 3 Years Maturity Offered 104.6 197.6 144.4 446.6 36.5 Accepted 61.5 98.2 52.1 211.8 16.2 10.4 W.A. Rate 8.8 9.1 9.2 2002-03 (July-March) Offered 69.7 624.3 510.1 1204.1 20.1 Accepted 28.7 307.5 172.1 508.2 7.7 5.4 W.A. Rate 3.9 4.2 4.8

Chapter 6. Money and Credit b) 5 Years Maturity c) 10 Years Maturity Total (PIBs) Grand Total (Growth) 37.3 114.0 187.8 634.4 15.7 39.7 71.6 283.4 11.2 12.2 37.7 64.6 122.3 1326.4 (109.1%) 11.2 24.7 43.6 551.9 (94.7%) 6.0 6.8

Source: State Bank of Pakistan

Interest Rate Environment

After pursuing a tight monetary policy in the previous years, the State Bank of Pakistan introduced a liberal monetary policy since the beginning of 2001-02 with a view to bolster investment activities in the country. This was done with the introduction of a two pronged strategy i.e. gradually lowering down the T. Bills rates and rationalising the deposits rates of the National Savings Schemes (NSS). This duel approach also continued in the current fiscal year. However, despite reduction in the T. Bills rates and NSS rates credit flow to the private sector was not forthcoming till November 2002. The sharp increase in credit off-take actually started after 150 basis points reduction in the discount rate on November 18, 2002. The weighted average lending rates of commercial banks have declined from 13.7 percent in June 2001 to 8.26 percent in March 2003 as a result of the successive cut in SBP

discount rate of 650 basis points since 2001-02 to 7.5 percent. At the same time, the weighted average deposit rate has also declined from 5.0 percent to 2.81 percent during the same period (see Tables-6.7, 6.8 & Fig:2). Thus, 5.48 percentage point cut in lending rate was made possible by cutting down deposit rate by 2.19 percentage points by commercial banks. The discount rate cuts to the extent of 650 basis points have yet to produce desirable result in bringing the spread (the difference between the average lending and deposit rates) down to an acceptable level of 3.0 percent. The spread between the lending rates and the deposit rates is one of the best yardsticks to measure the efficiency of the banking sector. This spread has, in fact, increased in Pakistan from 5.5 percent in 1994-95 to 8.4 percent in 2001-02. It is, nevertheless, encouraging to note that banking spread has considerably declined in the first nine months of 2002-03, from 8.4 percent in June 2002 to 5.45 percent by March 2003 (Table-6.7 and Fig.3). The spread is expected to come down further in the remaining months of the current fiscal year.

Table 6.7 Interest Rate Structure in the Country (Percent) (July 2000 to March, 2003) Lending Rate 13.30 12.66 13.22 13.97 13.95 13.88 14.23 Deposit Rate 6.80 6.63 6.58 6.57 6.65 6.52 6.37 Spread 6.50 6.03 6.64 7.40 7.30 7.36 7.86 (Weighted Average Rate) Libor T. Bills 6.887 7.23 6.831 7.38 6.761 8.14 6.721 11.00 6.678 10.92 6.208 10.96 5.361 10.96

July 2000 August 2000 September 2000 October 2000 November 2000 December 2000 January 2001

Chapter 6. Money and Credit June 2001 December 2001 March 2002 June 2002 July 2002 August 2002 September 2002 October 2002 November 2002 December 2002 January 2003 February 2003 March 2003 * April 2003.
Figure-2 Weighted Average Monthly Lending and Deposit Rates (July 2000 to March, 2003)

13.74 13.45 11.97 13.12 12.17 11.56 11.96 11.48 10.66 10.31 9.95 9.36 8.26

5.00 5.62 5.30 4.73 4.02 4.31 3.93 3.97 3.87 3.60 3.21 3.04 2.81

8.74 3.827 12.88 7.83 1.983 7.93 6.67 2.332 6.44 8.39 1.948 6.44 8.15 1.863 6.40 7.15 1.815 6.40 8.03 1.751 6.37 7.51 1.618 6.34 6.79 1.471 4.76 6.71 1.383 3.84 6.74 1.383 3.19 6.32 1.270 2.09 5.45 1.262 1.65* Source: State Bank of Pakistan

14 12 10 8 6 4 2
July, 2000 Aug-00 Sep-00 Oct-00 Nov-00 Dec-00 Jan-01 Jun-01 Dec-01 Mar-02 Jun-02 Jul-02 Aug-02 Sep-02 Oct-02 Nov-02 Dec-02 Jan-03 Feb-03 Mar-03

Spre ad

Deposit Rate

Lending Rate

The reduction in lending rate was more privatized banks from 13.01 percent to 9.89 percent and pronounced in the case of foreign banks, which reduced private banks from 12.41 percent to 9.54 percent. their rates by 290 basis points since July 2002 to 7.86 However, the lending rate of specialized banks showed percent by end February 2003. Pakistani banks reduced only marginal reduction during the period, which stood their lending rate by 283 basis points to 9.79 percent. 14.02 percent at end February 2003, compared with at Among Pakistani banks, the NCBs reduced their 14.14 percent in July 2002. In order to boost exports, the lending rate from 12.67 percent to 9.97 percent, State Bank also reduced rates under Export Finance

Chapter 6. Money and Credit Scheme and for export sales under scheme for Locally March 2003, reflecting a reduction of 300 basis points Manufacture Machinery (LMM). These rates are linked since July 2002. The decline in overall interest rate with the yield on 6 months TBs and SBP fix refinance structure in Pakistan is consistent with the global rate on monthly basis. These rates also showed decline in interest rate. The LIBOR was as high as 6.887 significant reduction. The SBP refinance rate, which was percent in July 2000. It has declined sharply to as low as 6.5 percent in July 2002, reduced to 3.5 percent only in 1.26 percent in March 2003.
Table 6.8

Lending and Deposit Rates (Percentage) Weighted average lending rate Nominal June 1995 June 1996 June 1997 June 1998 June 1999 June 2000 June 2001 13.7 14.4 14.6 15.6 14.6 14.0 13.7 13.1 8.3 Real 0.7 3.6 2.8 7.8 8.9 10.4 9.3 9.6 4.9 Weighted average deposit rate Nominal 8.2 8.2 8.5 8.4 8.0 5.9 5.0 4.7 2.8 Real -4.8 -2.6 -3.3 0.6 2.3 2.3 0.6 1.2 -0.6 Difference between lending & deposit rate Nominal 5.5 6.2 6.1 7.2 6.6 8.1 8.7 8.4 5.5 Real 5.5 6.2 6.1 7.2 6.6 8.1 8.7 8.4 5.5

June 2002 March 2003

The nominal deposit rates after increasing marginally from 8.2 percent in June 1995 to 8.5 percent in June 1997, gradually declined to 4.7 percent in June 2002 and further to 2.8 percent in March 2003. The weighted average lending rate on the other hand increased from 13.7 percent in 1994-95 to 14.0 percent in 1999-00. However, since July 2001, the W.A. lending rate started coming down which stood at 13.1 percent in June 2002 and 8.3 percent in March 2003. Real deposit rates were negative during 1995-97, as real lending rates did not move with the movement in inflation rate. The main factors responsible for stagnancy in deposit rates were: increased administrative cost of financial institutions, overstaffing and increasing volume of nonperforming loans and defaults. After showing positive trend during 1998-2002, the real deposit

rate was negative in the current fiscal year, although the spread between lending and deposit rate has come down from 8.39 percent in June 2002 to 5.45 percent in March 2003. This indicates that depositors are not getting genuine returns on their savings with banks. Performance of Banks

As a corollary of reforms in the banking sector, the number of loss making domestic bank branches continued to decline in the current fiscal. The number of domestic banks branches which were 7280 in June 2002, reduced to 7150 in March 2003. The number of foreign bank branches also came down from 78 in June 2002, to 75 in March 2003 (Table-6.9 and Fig: 3).

Chapter 6. Money and Credit exchange inflows in the country. Low premium between the kerb and inter bank exchange market has induced the overseas Pakistanis to use the official means for remitting foreign exchange. Total investment of all scheduled banks have also increased from Rs 471.3 billion in June 2002 to Rs 723.5 billion in March 2003, showing an unprecedented increase of Rs 252.3 billion or by 53.5 percent. Highest increase in net investment was recorded in the case of denationalized commercial banks (Rs 127.4 billion) followed by nationalized commercial banks (Rs 68.1 billion) and Private banks (Rs 55.1 billion). Gross NPLs of the scheduled banks have increased from Rs 234.7 billion in June 2002 to Rs 242.2 billion in March 2003. Gross NPLs of NCBs and foriegn banks have declined during the period under review, while gross NPLs of DNCBs, private banks and specialized banks have increased. The SBP/Government have continued to encourage privatization of NCBs and merger of the weak financial institution with the large and sound financial institutions in the current fiscal year. It is worth mentioning that UBL was privatized in December 2002.

During the first nine months of the outgoing fiscal year, total assets of all the scheduled banks have increased by Rs 215.6 billion -- from Rs 1848.8 billion in June 2002 to Rs 2064.5 billion in March 2003 or by 11.7 percent. During the first nine months of 2002-03, there was an increase of Rs 29.7 billion in the net advances of the scheduled banks, which increased from Rs 810.1 billion in June 2002 to Rs 839.8 billion in March 2003 or by 3.7 percent. In the comparable period last year, net advances of the scheduled banks actually declined by Rs 15.2 billion. Net advances of the scheduled banks showed increase during the current fiscal year, except in the case of NCBs and specialized banks. The strong growth in net credit was a very welcome development for the banking industry, which had been forced by the continuing decline in interest rates (particularly on government securities), amidst increased market liquidity. Scheduled banks deposits have increased by Rs 192.7 billion in the same period, i.e., from Rs 1412.9 to Rs 1605.6 billion or by 13.6 percent. Higher deposits of the scheduled banks in the current fiscal year resulted partly due to extraordinary foreign
Table 6.9

Branches of Domestic & Foreign Banks June 98 i) Domestic Banks ii) Foreign Banks iii) Total 8049 81 8,130 June 99 7973 85 8,058 June 2000 7871 78 7,949 June 2001 7272 80 7352 June 2002 7280 78 7358 (Numbers) March 2003 7150 75 7225

Source: State Bank of Pakistan.

Chapter 6. Money and Credit

Fig-3: Branches of domestic & foreign banks
81 85 78

of specialized banks have increased by Rs 6.1 billion or 24.5 percent. Similarly net NPLs of DFIs have also registered an increase of 9.4 percent during the same period.
75

80

Numbers

78

8049

7973

Micro Finance (MF) and Khushali Bank

7202

7871 7272

The Government of Pakistan has launched a Micro Finance Sector Development Programme (MSDP) to reduce poverty in the
7150

Domestic Banks

Foreign Banks

Recovery of Defaults and Non-Performing Loans Loan defaults continuous to be one of the major problems of our banking system in general and Nationalized Commercial Banks and DFIs in particular, adversely affecting their growth and profitability. Net non-performing loans (NPLs) of all commercial banks, specialized banks, and DFIs have however, declined marginally during the ongoing fiscal year and stood at Rs 106.13 billion in December 2002, as against Rs 106.86 billion in June 2002. Net NPLs of all commercial banks have declined by 9.5 percent, from Rs 76.78 billion in June 2002 to Rs 69.45 billion in December 2002. Among the domestic banks, net NPLs of Nationalized Commercial Banks has markedly declined by 24 percent, from Rs 44.23 billion in June 2002 to Rs 33.62 billion in December 2002. Similarly net NPLs of private banks have come down from Rs 13.47 billion in June 2002 to Rs 11.73 billion in privatized banks percent, from Rs 22.54 billion in December 2002. Net NPLs have however, increased by 17.48 billion in June 2002 to December 2002. Net NPLs of 29 Rs of

country. The main objective of the programme is to provide a stable sectoral environment and creating institutional capacity to retail micro finance services to the poor. The Asian Development Bank is sponsoring the programme with soft lending of US $ 150 million. Khushhali Bank (KB) is the first micro finance bank established under the MSDP umbrella. It is a joint venture between public and private sector financial institutions. The share capital of the bank is Rs 5 billion. Its paid up capital of Rs 1.7 billion has been subscribed by 16 commercial banks, 14 private, including 2 foreign, and 2 public sector banks. The KB is designed to bridge the significant demand and supply gap in the micro finance market and increase the presently negligible outreach (5%) to the potential client base comprising over 6 million poor households in Pakistan. Within a period of just over 2 years of its commercial launch, the KB has established a network of 31 branches and 57 service centers in 35 districts across the country. The banks service delivery design combines global industry standards and indigenous practices. The KB lending is group/community-based through strengthening of the social collateral and peer pressure. Services are delivered at clients' doorsteps. The bank has serviced over 100,000 loans and disbursed Rs 1.2 billion across 75,000 poor households. Women

foreign banks which were very negligible, have declined by 2.7 percent during July-December 2002-03. During the first half of 2002-03, the NPLs

Chapter 6. Money and Credit constitute 35 percent of Banks clientele. The 70 percent of portfolio is spread against small sized farming and 30 percent against micro enterprise development. The KB has also mobilized nearly Rs 100 million in community savings. Nearly 80 percent on the lending activity remains in the rural areas and 20 percent in the urban areas with loans for agricultural inputs and live stocks, forming the major part. Currently, the KB generates savings at community level. In terms of credit and saving operations, the bank projects to access to over 560,000 households i.e. nearly 10 percent market by 2006. By the year 2006, net outstanding loans are projected at Rs 7.430 billion and deposits at Rs 1.74 billion. The banks social sector services package includes women development, capacity building services for skills development and provision of basic infrastructure services as health, education, drinking water, sanitation, communication etc. In order to fund social sector interventions, the bank has access to two endowment funds, namely, Microfinance Social Development Fund (MSDF) and Community Investment Fund (CIF), established at the State Bank of Pakistan. The CIF resources are used to provide grants up to Rs 150,000 for community level infrastructure development schemes. Under the social sector services package, the bank has so far mobilized 90,793 households into 10,707 Community Organizations (COs) of which 3,889 COs are female. All COs were provided with basic training in various skills. Community based infrastructure development operations were recently launched across network, projecting completion of over 1000 small development schemes in 2003. A Risk Mitigation Fund of $ 5 million has been set up to provide support to borrowers for replacement of income generating assets lost due to natural calamities as floods, droughts etc. As a part of safety net mechanism, a Deposit Protection Fund of $ 5 has also been established to provide insurance cover to small savers of Khushhali Bank. First Micro Finance Bank Limited The First Micro Finance Bank (MFB) Limited was granted license in January 2002 to operate as a country wide MFB in the private sector, under the MFIs Ordinance 2001. The bank has a paid-up capital of Rs 660 million. The bank has so far established a network of 10 branches, 7 in Northern Area and 1 each in Karachi, Islamabad and Rawalpindi. It has mobilized deposits/savings of more than Rs 112.95 million and extended loans of Rs 75 million to 2387 clients. SME Bank SME Bank Ltd was established in January 2002 by the Government of Pakistan to exclusively cater to the needs of the SME sector. The bank was created to address the needs of the niche market with specialized financial products and services that will help stimulate SME development in the country. The Government of Pakistan is the major shareholder. The bank is actively engaged to serve the SME sector by providing credit facilities and business support services all over the country. The bank provides financial assistance in the shape of working capital, medium long term financing, leasing, program lending etc. It also provides technical assistance and support in areas of management, product innovation and development, quality control, acquisition of new technology, product positioning and marketing and development of bankable business proposals. The bank has introduced specialized financial products and programme lending schemes under the brand name of Hunarmand

Chapter 6. Money and Credit Pakistani that cater to a variety of credit needs for the SMEs. A large number of SMEs will now be financed under programme lending approach including fan manufacturing cutlery manufacturing surgical instruments doctors & dentists clinics women entrepreneurs CNG stations; auto looms (upgradation of power looms) and furniture manufacturing. Another four Hunarmand Pakistani Schemes for motorcycle rickshaw fruits and vegetables fisheries (boats & processing) OEM (original equipment manufacturers) will be introduced shortly. With the above stated initiatives, the bank envisages financing of over 4000 SMEs involving financial assistance of Rs 2.00 billion during the year 2003. It is expected that the business plan _____________________________ and lending activities initiated by the bank will go a long way in promoting the SME sector so as to enable it to significantly contribute toward achieving GDP growth target of 4.5 percent and supplement the recent initiatives of the Government to reduce unemployment and level of poverty in the country.

Chapter 7. Capital Market

7. Capital Market
equity market. The market has clearly attracted genuine Capital market is the heart and soul of the investment as is evidenced by the fact that actual settlement financial sector. It is a vehicle whereby capital is has risen from about 1 to 2 percent of trades in the early part deployed from sources where it is in excess to the year 2000 to around 10 to 15 percent now. Although equity of issues have not picked up, there has been a significant sources where it is in short supply. The capital market increase in debt capital issues, the aggregate amount of new facilitates; (i) mobilization and intermediation of private capital listed in the last two years being as much as Rs 30 savings, and (ii) allocation of medium and long-term billion etc. In Pakistan, the Karachi Stock Exchange is playing a central and critical role in shaping the savings and financial resources for investment through a variety of investment climate as it is the main window to ensure that the debt and equity instruments of both private and public market continues to grow and generate interest of investors sectors. It plays a crucial role in mobilizing domestic both within the country and abroad. resources and in channeling them efficiently to the most Pakistans stock markets have remained productive investments. The level of capital market buoyant during the outgoing fiscal year 2002-03. development is thus an important determinant of a The Karachi Stock Exchange, KSE-100, has countrys level of savings, efficiency of investment, and witnessed a phenomenal growth in the first ten and half months of the current fiscal year, rising ultimately of its rate of economic growth. An efficient from 1770.1 points in June 2002 to 2902.4 points in capital market can also provide a wide range of April 2003 and thereafter to an all time magic high attractive opportunities for both the domestic and figure of 3003.4 points on May 16, 2003, foreign investors. registering an increase of 69.7 percent during the period under review as compared to a rise of 33.0 percent in the same period last year. The Pakistan has now a capital market with high degree milestone was achieved because of the of integrity and transparency in terms of price discovery and trade settlement. The observance of enhanced accounting governments macroeconomic policies, standards, reliable audits, institutional strengthening and strengthened macroeconomic indicators, and the capacity building of the Securities and Exchange Commission confidence of both local and foreign investors on of Pakistan (SEC) have been the hallmark of the capital countrys economic policy and on the KSE. the market reform program. Pakistan is today largely compliant The aggregate market capitalization of the KSE with International Organization of Securities Commissions has also surged 62.5 percent, rising from Rs 407.6 (IOSCO) 30 principles of securities regulation. The market billion to Rs 662.5 billion during this period. In friendly measures introduced during the last three and half terms of US dollar, the market capitalization has years had a significant impact on investor confidence and the increased by 73.0 percent, rising from $ 6.63 stock market is no longer viewed as having any resemblance billion to $ 11.47 billion during the current fiscal with a casino, attracting only die-hard speculators. The year until May 16, 2003. In terms of GDP (MP), structural changes brought about by the government have the been quite successful in restoring investors confidence in the aggregate market capitalization has jumped

Chapter 7. Capital Market from 11.2 percent to 16.5 percent during the same period. Yet another indicator of impressive performance of the Karachi Stock Exchange has been an extraordinary surge in monthly turnover of shares from 2.4 billion in 2001-02 to 4.0 billion during July-April of 2002-03. It may be noted that the average daily turnover of shares has increased from 74.3 million in 2001-02 to 104.7 million in the first two quarters of 2002-03 and further to 243.1 million shares in the third quarter of 2002-03. After recording impressive performance in 2001-02 the KSE-100 index resumed its upward movement by second week of August 2002 amids rumors of strong corporate earnings by some index heavy weights (Lever Brothers, Shell Pakistan, PSO, Adamjee Insurance, HUBCO and PTCL). The KSE index increased by 14.0 percent or 249 points in the first quarter, 33.8 percent or 683 points in the second quarter and by 0.5 percent or 14 points in the third quarter of 200203. During April-May 16, 2003, KSE Index has further increased by 10.6 percent or 288 points. The spectacular performance in the stock market during the outgoing year is attributable to a number of factors: (i) investment friendly policies being pursued by the government for revival of the national economy and restoring the confidence of the investors, (ii) substantial improvements in economic fundamentals, (iii) relatively cheap market valuations and the declining returns on alternative investments, (iv) huge forex reserves, rescheduling/write-off of debts by some big donor countries, especially the USA, (v) huge build-up of rupee liquidity driven in large by continuing forex inflows into Pakistan, that also pulled down interest rates, (vi) strong presence of energy stocks in the market as energy sector enjoys about 30 percent weight in the KSE100 share index and serves as one of the key drivers of the market, (vii) expectations of early privatization of some state enterprises and banks, (viii) policies on privatization, liberalization and deregulation have encouraged private investments having a profound effect on the activity of the stock market and (ix) the increased interest of foreign investors in the stock market. The upward movement has also been accelerated because of a democratically elected pro-reform government firmly in place since mid-December 2002. Moreover an emerging stable and improved bilateral relations between Pakistan and India has created a renewed bullish fervour in the month of May 2003. The Central Depository Company of Pakistan (CDC) is now an integral part of the stock market in Pakistan and has completed five and half years of its operations. Over the years, the depository has been providing state-of-the-art settlement system. This has tremendously helped in promoting efficiency and transparency in the capital market. The National Clearing and Settlement System (NCSS) was launched on December 24, 2001 and the number of securities trades at NCSS is being gradually increased. The CDC also has a comprehensive arrangement with NCSS. The CDC continues to diversify its operations by adding more features and functionalities, which are synergetic to its core activity. During the year 2001, the CDC handled the first electronic de-merger of ICI Pakistan into two entities. Currently CDC is the trustee of three open-end mutual funds. These are: Pakistan Stock Market Fund, Pakistan Income Fund and United Money Market Fund. Currently, CDC has about 7,000 investor accounts, having more than 1.2 billion securities. The implementation of T+3 settlement system has resulted in increased settlement volume, despite a 20 percent reduction in transaction fee effective from November 2001. The monthly trends of the leading stock market indicators are given in Table 7.1 and Fig: 1 (a) and (b)..

Chapter 7. Capital Market

Table 7.1

Leading Stock Market Indicators on KSE (KSE Share Index: November 1991=1000) 2001-02 Months KSE Index (end month) Market Capitalization (Rs billion) (end month) 311.3 314.9 282.8 340.2 326.2 292.9 345.0 390.0 427.9 424.7 383.3 407.6 353.9 Turnover of Shares (bn) 1.2 1.5 0.7 3.6 1.8 0.9 3.7 4.1 3.9 3.0 2.6 2.0 2.4 KSE Index (end month) 1787.6 1974.6 2018.8 2278.5 2285.9 2701.4 2545.1 2509.4 2715.7 2902.4 3003.4* -

July 1228.9 August 1258.4 September 1133.4 October 1406.1 November 1358.2 December 1273.1 January 1620.2 February 1766.0 March 1868.1 April 1899.0 May 1663.3 June 1770.1 Average 1520.4 * May 16, 2003

2002-03 (July-May) Market TurnCapitalization over of (Rs billion) Share (end month) (bn) 412.5 1.6 450.8 3.1 458.3 2.7 535.4 4.3 513.6 3.9 588.4 6.8 554.8 9.1 542.2 2.1 603.0 2.7 637.0 4.4 662.5* 1.9* Source: Karachi

Fig 1. (a) Monthly KSE Share Index

3200 3000 2800 2600 2400 2200 2000 1800 1600 1400 1200 1000

Jul(01-02)

Stock Exchange

Aug

Sept

Oct

Nov

Dec

Jan

KSE Share Index

Feb

Mar

Apr

May

Jun

Aug

Sept

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May 16, 03

Jul(02-03)

Chapter 7. Capital Market

Fig 1. (b) Market Capitalization in KSE

700 650 600 550 500 450 400 350 300 250 Jul(01-02) Aug

Rs. Billion

It would not be out of place to mention that as a result of the unprecedented boom in Karachi Stock Exchange during the calendar year 2002, it was declared as the best performing market in the world. The surge in Pakistans equity markets during 2002 is undoubtedly the results of a significant turnaround in the economy in general and external accounts in particular. During July-May 12, 2002-03 the Karachi Stock Exchange has also remained the best performing market among the leading stock markets in the world. As documented in Table 7.2 and Fig:2, out of 13 leading stock markets in the world, the KSE

Regional Markets Index Change in USD during July-May 12, 2002-03 (Index level in USD) Index Level in Respective Currencies % Change in USD 12 May 2003 30 June 2002 Pakistan 2973.31 1770.12 74.60 Sri Lanka 844.29 711.36 17.32 Malaysia 633.95 646.32 -1.91 Indonesia 473.93 505.01 -2.67 Thailand 383.49 389.10 -3.33 India 2942.78 3244.70 -5.96 Philippine 1061.40 1156.35 -11.06 China 1531.87 1732.76 -11.59 Singapore 1327.42 1552.98 -12.55 Hong Kong 9155.57 10598.55 -13.61 Korea 631.04 742.72 -14.15 Taiwan 4261.02 5153.71 -20.14

Sept

Oct

Nov

Dec

Jan

Table 7.2

Feb

Mar

Market Capitalization

share index increased by 74.6 percent in terms of US dollar during July-May 12, 2002-03. The stock market of Sri Lanka posted a gorwth of 17.3 percent. The other 11 leading world stock markets recorded negative growth ranging from 1.9 percent (Malaysia) to 20.7 percent (Japan). With profitability in US dollar, standing at 74.6 percent, Pakistan has been the most profitable market in the region followed by Sri Lanka (17.3%) during the period under review. All other markets of Asia Pacific Region registered significant losses.

Apr

May

Jun

Aug

Sept

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May 16, 03

Jul(02-03)

Chapter 7. Capital Market Japan 8221.12 10621.84 -20.72 Source: Elixir Securities Pakistan

Fig-2: Regional Markets Index ( % Change) during Jul-May 12, 2002-03

80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 -5 -10 -15 -20 -25

% Change in US $

Over the past three and half years, the Securities & Exchange Commission of Pakistan (SEC) has been taking measures to restore confidence of the investors both foreign and domestic in the capital market of Pakistan. The SEC ensures that the market functions in a smooth and transparent manner and is also vigilantly observing the market. Its regulatory mechanisms aim to minimize elements of systemic risk and other possible defaults on the one hand and promotes institutional strengthening/capacity BOX

Policy Measures and Progress a) Improvements in Governance In March 2002, the Security and Exchange Commission of Pakistan (SEC) has introduced the first Code of Corporate Governance for Pakistan, which was subsequently made part of the listing regulations of the three stock exchanges (Karachi, Lahore & Islamabad).

Pakistan

Srilanka

Malaysia

Indonesia

Thailand

Philippine

China

Singapore

Hong Kong

Korea

Taiwan

Japan

India

building of various segments of the capital market on the other. The SEC has been actively pursuing a reform agenda since 2001 for the capital market. In this connection, several initiatives were taken to further enhance market efficiency and investors confidence. The SEC carried out some amendments in the Article of Association of the stock exchanges to address sensitive issues, such as, conflict of interest in the management of bourses an Undisclosed Trading System where the identity of the buyer and seller are not

Chapter 7. Capital Market

disclosed. This is aimed at discouraging a herd culture where small investors try to mirror the activities of larger players in the hope of speculative gains rather than

investing on the basis of stock fundamentals. Some important policy initiatives introduced by the SEC during 2002-03 are given in the box below;

In order to further improve the governance of the stock exchanges, the SEC has directed the stock exchanges to reconstitute their Boards such that five directors are elected from amongst the members by the general body of the exchange, four non-member directors to be appointed by the SEC and the Chairman to be elected by the Board from amongst the non-member directors. For the expeditious resolution of investor complaints, the SEC has approved a two-tier arbitration procedure for the Karachi Stock Exchange (KSE), under which all claims and disputes exceeding Rs 0.5 million, which are not amicably settled otherwise, should be referred to the Advisory and Arbitration Committee (AAC).

b) Risk Management Measures In order to minimize market manipulation and ensuring a healthier and more transparent capital market, the SEC, in February 2002, approved the Regulations for Short Selling under Ready Market, 2002. In order to further strengthen risk management at the exchanges, the Commission directed the stock exchanges to make some changes in the carry over transactions. SEC ordered some amendments in the Article of Association of the stock exchanges to address the sensitive issues, such as, conflict of interest in the management of bourses. Another important development in the stock market is the implementation of Undisclosed Trading System. On October 7, 2002, the KSE launched this trading system where the identity of the buyers and sellers is not disclosed. All Carry Over Transactions (COT) are to be for a period of 10 days in order to mitigate the potential risk of the sudden withdrawal of massive funds from badla operations. The SEC introduced an amendment in the Companies Ordinance 1984, under which the companies are now required to present their quarterly accounts to shareholders within one month of the respective quarter-end. Moreover, the penalty for the non-compliance of the provisions relating to auditing was increased from Rs 2,000 to Rs 100,000.

Chapter 7. Capital Market A take over law proposed by the SEC was promulgated on November 1, 2002. Another significant reform was introduced in the Badla market. Badla providers were required to commit their funds to the market for 10 days. This is aimed at preventing an artificial liquidity crunch due to an abrupt withdrawal of financing from the market. The Commission has directed the stock exchanges to ensure that the Investor Protection Fund and the Clearing House Protection Fund are fully funded by June 30, 2007. The Market Monitoring & Surveillance Wing (MSW) has been set up within the Commission to facilitate initiatives in risk management. The MSW has two specific functions - monitoring the systematic risk at exchanges, and surveillance to detect general or specific instances of market abuse.

c) New Products/Developments
In order to regulate futures trading in the provisionally listed securities, in February 2002, the Commission approved the Regulations for Futures Trading in provisionally Listed Companies, 2002, for the KSE. In May 2002, the Commission approved, in principle, the concept of an Over-theCounter (OTC) market and the stock exchanges are currently in the process of drafting necessary regulations. The Commission has approved the establishment of National Commodities Exchange Limited (NCEL), for trading in future contract in commodities. The NCEL is the first demutualized exchange and will be sponsored by the three stock exchanges of Pakistan. The Commission has established a Vigilance Cell, which serves as a forum for protection of the small investors. The Cells priority is to eliminate basic anomalies in the stock exchanges business systems, procedures and relevant laws. During July-March 2002-03, 348 complaints were received out of which 177 have been resolved. The Commission has published a series of Investor Guides to educate existing and potential investors about investment risks and rewards, importance of financial planning, and the rights and responsibilities of investors, as well as the recourse available to them.

Sectoral Performance

During the first nine months of the outgoing fiscal year, the KSE price index and aggregate market capitalization have increased by

Chapter 7. Capital Market 53.4 percent and 47.9 percent respectively, as against their increase of 36.7 percent and 26.1 percent in the same period last year. Total turnover of shares on KSE was 36.2 billion in the first nine months of 2002-2003 as compared to 21.5 billion in the same period last year. Funds mobilized by the KSE during this period amounted to Rs 23.1 billion as compared to Rs 13.3 billion in the same period last year. All the 12 major trading groups on the KSE (cotton and other textiles, pharmaceuticals & chemicals, engineering, auto & allied, cables and electric goods, sugar and allied, paper and board, cement, fuel and energy, transport and communication, banks and other financial institutions, and miscellaneous) recorded positive growth in their share indices, ranging from 1.7 percent (cement) to 79.8 percent (auto & allied). During the calendar year 2002, total profit before taxation of the 12 trading groups amounted to Rs 90.9 billion as compared to their before taxation profit of Rs 62.6 billion in 2001. Performance of leading trading groups and companies for the first nine months of the outgoing fiscal year is discussed below (Tables 7.3 to 7.5).

Table 7.3

Sectoral Performance on Karachi Stock Exchange (Percent) Sector General Index July-March (Growth%) 2001-02 2002-03 2.7 5.0 21.1 34.0 14.3 32.1 3.1 15.7 26.0 20.6 21.5 11.7 8.2 18.3 36.7 26.6 32.6 79.8 19.2 24.3 32.9 1.7 44.0 57.7 28.6 22.2 32.8 53.4 Market Capitalization July-March (Growth %) 2001-02 2002-03 8.0 15.2 19.7 30.5 23.7 2.2 -3.0 25.0 53.4 44.1 12.7 41.5 21.9 26.1 0 73.0 45.9 107.1 30.8 12.5 25.7 15.9 54.7 74.1 33.1 AMC (Rs billion)*

Cotton and other Textiles 1 . 2. Chemicals & Pharmaceuticals 3. Engineering 4. Auto & Allied 5. Cables and Electrical Goods 6 Sugar & Allied . 7. Paper & Board 8. Cement 9. Fuel & Energy 10. Transport & Communication 11. Banks other Financial Institutions 12. Miscellaneous 13. Overall/Total 14. KSE Index * End March 2002 and 2003.

2002* 41.5 57.4 2.0 9.8 2.2 4.4 5.7 15.7 114.8 79.8 54.3

2003* 47.3 87.8 3.0 21.1 3.1 5.1 8.2 18.3 161.6 122.0 73.2

16.6 40.5 52.2 47.9 427.9 603.0 0 0 0 Source: State Bank of Pakistan

Cotton and Other Textiles: In this group, there are three sub-groups: (a) textile spinning, (b) textile weaving & composite, and (c) other textiles. There were 231 companies listed with KSE

under this group. The share index of cotton and other textile recorded a growth of 5.0 percent during the first nine months of the current fiscal year as compared to a growth of 2.7 percent in the same period

Chapter 7. Capital Market last year. Its market capitalization increased by 15.2 percent or by Rs 6.2 billion during July-March 2002-03 as compared to a rise of 8.0 percent (Rs 3.1 billion) in the same period last year. Chemicals & Pharmaceuticals: A total of 37 companies were listed with KSE under this group at end December 2002. During the first nine months of the current fiscal year, its share index increased by 26.6 percent as compared to an increase of 21.1 percent in the comparable period of last year. Its market capitalization stood at Rs 87.8 billion on 31st March 2003, showing a marked increase of 73.0 percent over June 2002 and 53.0 percent over March 2002. Auto and Allied: A total of 25 companies were listed with the KSE under this group at the end of December 2002. During the outgoing fiscal year, auto and allied group showed the best performance so far among the 12 leading groups listed with the KSE. Its share index increased by 79.8 percent, while its market capitalization increased from Rs 10.2 billion in June 2002 to Rs 21.1 billion in March 2003, recording a spectacular growth of 107.1 percent. The group ranked top both in the growth of share index and market capitalization on KSE. Sugar and Allied: Under this group, a total of 38 companies were listed with the KSE with a market capitalization of Rs 5.1 billion. Sugar and allied group is a minor player in the stock market although it has a weight of 8.6 percent in the production index of major industries. During the first three quarters of the current fiscal year, the share index of sugar and allied posted a growth of 24.3 percent as compared to a rise of 3.1 percent in the comparable period last year. Its market capitalization, however, increased by 12.5 percent. Cement: At the end of 2002, there were 22 cement companies listed with the KSE. Its market capitalization stood at Rs 18.3 billion on March 31, 2003. Unlike the previous year performance of this group remained sluggish in the current fiscal year. Its share index has posted a growth of 1.7 percent only as compared to a growth of 26.0 percent in the same period last year. Its market capitalization has increased by 15.9 percent, as against a growth of 53.4 percent in the same period last year. Fuel & Energy: A total of 25 companies were listed with the KSE with a market capitalization of Rs 161.6 billion as of 31 st March 2003 constituting 26.8 percent of aggregate market capitalization (AMC). During the first nine months of the current fiscal year, its share index increased by 44.0 percent and market capitalization increased by 54.7 percent, as compared to their growth of 20.6 percent and 44.1 percent respectively, in the same period last year. The group is one of the major players on the KSE. Energy sector has been identified as the engine of growth along with 3 other sectors, (agriculture, small and medium enterprises, and information technology) by the government. Hence its unprecedented growth is expected to promote more investment activities in the economy. Transport & Communication: At the end of 2002, there were 9 companies of this group listed with the KSE. Its market capitalization increased to Rs 122.0 billion

Chapter 7. Capital Market on March 31, 2003, from Rs 70.1 billion in June 2002, recording a growth of 74.1 percent during the first three quarters of 2002-03. Its market capitalization constituted 20.2 percent of the aggregate market capitalization (AMC) in March 2003 putting it as a major player on the KSE. Its share index increased by 57.7 percent in the period under review. The combined market capitalization of fuel and energy, and transport & communication was Rs 283.6 billion on March 31, 2003, which constituted 47.0 percent of AMC as compared to 45.5 percent on the corresponding date of last year. Banks & Other Financial Institutions: This is the second largest group in respect of companies listed with the KSE. In December 2002, a total of 187 companies were listed with the KSE. There are 4 sub groups in this group: banks & investment companies, modarabas, leasing companies, and insurance. During the current fiscal year, the share index and market capitalization of this group has increased by 28.6 percent and 33.1 percent respectively. Its market capitalization increased from Rs 55.0 billion in June 2002 to Rs 73.2 billion in March 2003. Miscellaneous: The miscellaneous group includes five sub-groups: jute, food & allied, glass & ceramics, vanaspati & allied, and others. In December 2002, a total of 98 companies were listed with the KSE. Its share index and market capitalization posted growth of 22.2 percent and 16.6 percent respectively in the first nine months of the current fiscal year, as compared to their growth of 8.2 percent and 22.0 percent respectively in the same period last year. In December 2002, 711 companies were listed on Karachi Stock Exchange, including 231 companies in cotton and other textile, 187 in banks and financial institutions, 98 in miscellaneous group etc. In the calendar year 2002, number of dividend paying companies was 306, as compared to 314 in 2001. 422 companies were making profit, listed with the KSE in 2002 as compared to 423 in 2001. However during 2002 only 187 companies were shown as loss-making as compared to 226 in 2001. In 2002, the total before taxation profit of 12 trading groups, listed with KSE, amounted to Rs 90.9 billion as compared to a total pretaxation profit of Rs 62.6 billion in 2001, thus showing a growth of 45 percent. Transport and communication earned a pre-taxation profit of Rs 33.9 billion in 2002 compared to its pre-taxation profit of Rs 27.1 billion in 2001. Banking and other financial institutions recorded a pre-taxation profit of Rs 20.1 billion in 2002 as compared to Rs 7.0 billion in 2001 recording a jump of 187 percent. Similarly pre-taxation profit of chemicals & pharmaceuticals witnessed an unprecedented increase of 268 percent, which rose from Rs 2.5 billion in 2001 to Rs 9.2 billion in 2002. Pre-taxation profit of cotton and other textiles slashed down from Rs 9.0 billion in 2001 to Rs 6.9 billion in 2002. Similarly pre-taxation profit of fuel and energy also come down from Rs 9.7 billion in 2001 to Rs 7.4 billion in 2002. In 2001, three groups incurred pre-taxation losses including engineering, sugar and allied, and cement. However, during 2002 only one group (sugar & allied) incurred a pre-taxation losses of Rs 0.5 billion. Infact, sugar and allied was the only group, which incurred pre-taxation loss both in 2001 and 2002. The group-wise number of companies and their performance is given in Table-7.4.

Chapter 7. Capital Market

Table 7.4 Companies Listed on KSE and their Before Taxation Profits

S. No

Name of Sector

1. 2. 3. 4. 5, 6. 7. 8. 9. 10. 11. 12.

Cotton & other Textile Chemical & Pharmaceutical Engineering Auto & Allied Cables & Electric Goods Sugar & Allied Paper & Board Cement Fuel & Energy Transport & Communication Bank & Financial Institutions Miscellaneous Total

No. of Before TaxCompanies ation Profit 2001 (Rs billion) 2002 2001 2002 250 231 9.0 6.9 39 16 25 14 38 14 21 26 08 195 101 747 37 13 25 12 38 14 22 25 09 187 98 711 2.5 -0.05 2.7 0.4 -0.7 1.2 -1.7 9.7 27.1 7.0 5.5 62.6 9.2 0.01 4.6 0.6 -0.5 1.7 0.4 7.4 33.9 20.1 6.6 90.9

Dividend Paying Companies 2001 2002 97 22 04 10 04 13 07 05 17 04 95 36 314 82 23 05 13 04 14 07 09 16 03 93 37 306

Profit Making Companies 2001 2002 142 25 06 15 06 15 11 07 19 04 127 126 26 08 15 05 17 10 12 18 06 130

Loss making Companies 2001 2002 67 10 05 08 03 22 02 12 05 03 54 68 09 03 06 03 20 02 08 05 01 34

The business on KSE is primarily influenced by some selected big companies including; Hub Power, PTCL, Pakistan State Oil etc. During the first three quarters of the current fiscal year, combined turnover of shares of seven big companies (Hub Power, PTCL, PSO, Sui Northern, FFC Jordan, and National Bank) was 6.78 billion, which constituted 18.7 percent of the total turnover of shares on KSE. These seven companies earned profit after taxation of Rs 34.5 billion in the current fiscal year up to March 2003 as compared to their after taxation profit of Rs 29.6 billion in the same period last year. Out of Rs 34.5 billion after taxation

46 49 35 28 423 422 226 187 Source: Karachi Stock Exchange profit, the PTCLs share was Rs 19.8 billion representing 57.5 percent of the seven big companies. In the first nine months of 2001-02, the PTCLs after taxation profit (Rs 18.15 billion) represented 61.3 percent of the seven companies. The average price-earning ratio of the seven big companies has increased from 6.67 percent in 200102 to 7.35 percent in the current fiscal year. This is indicative of the fact that business environment in the current fiscal year has improved over the last year. (Details in Table 7.5 while a profile of the KSE is given in Table 7.6).

Table 7.5 Performance of Some Selected Blue Chips on KSE

Name of Company Hub Power PTCL PSO Sui Northern FFC Jordan National Bank Total/Average

Billion of Shares (JulyMarch) 2001-02 2002-03 1.16 1.16 3.77 3.77 0.14 0.17 0.50 0.50 0.33 0.37 6.27 0.81 0.37 6.78

Profit after Tax (JulyMarch) Rs billion 2001-02 2002-03 10.86 7.29 18.15 19.81 2.25 3.19 1.34 1.89 -3.43 0.46 29.63 1.13 1.15 34.46

P/E Ratio (July-March) 2001-02 2.66 4.06 9.98 5.23 2002-03 5.52 4.61 10.92 6.46

-0.66 7.99 18.76 8.59 6.67 7.35 Source: Karachi Stock Exchange

Chapter 7. Capital Market

Table 7.6

Profile of Karachi Stock Exchange 1999-2000 2000-01 2001-02 a) ew Companies Listed b) Fund Mobilized (Rs Billion) c) Listed Capital (Rs Billion) 1 8.9 236.4 48.1 202.1 392 4 3.6 235.7 29.2 122.5 339.2 4 15.2 291.2 29.1 158.6 407.6

2002-03 (July-March) 1 23.1 299.3* 36.2 243.4 637.0*

d) Turnover of Share ( Billion Nos) e) Average daily Turnover of Share (in million) f) Aggregate Market Capitalisation (Rs Bilion)

* April 2003. Bullish business trends have also been witnessed during the outgoing fiscal year at the other two stock exchanges namely, the Lahore and Islamabad Stock Exchanges. The turnover of shares on Lahore Stock Exchange (LSE) during July-March 2002-03 was 19.5 billion compared to 11.7 billion shares in the same period last year. Total paid up capital with the LSE increased from Rs 246.3 billion in June 2002 to Rs 282.7 billion in March 2003. The LSE index, which was 297.5

Source: Karachi Stock Exchange. points in June 2002, increased to 496.6 points in March 2003. Market capitalization in LSE has increased from Rs 393.3 billion in June 2002 to Rs 595.8 billion in March 2003. Two new companies were listed during July-March 2002-03, as compared to four in the same period last year. The amount of fund mobilized at LSE by way of subscription was Rs 1.7 million in the first nine months of the outgoing fiscal year. A profile of LSE is given in Table-7.7.

Table 7.7

Profile of Lahore Stock Exchange

1999-2000 a) New Companies Listed b) Fund Mobilized (Rs Billion) c) Listed Capital (Rs Billion) d) Turnover of Share (Billion Nos) e) LSE Index f) Market capitalization (Rs bln) 2 0.4 207.7 16.4 372.0 365.9 2000-01 3 2.5 226.2 7.8 273.5 325.7 2001-02 3 14.2 246.3 18.3 2002-03 (July-March) 2 1.7 282.7 19.5

297.5 496.6 393.3 595.8 Source: Lahore Stock Exchange

Chapter 7. Capital Market

The turnover of shares on the Islamabad Stock August 1992 and within ten years, it has developed Exchange (ISE) was 1.30 billion during July-March into a vibrant, efficient and stable market. Today, the 2002-03 as compared to 1.32 billion during the same ISE is one of the premiers Stock Exchanges of the period last year. The ISE price index has increased country known for the highest standard for from 4684.0 points in June 2002 to 5924.5 points in March 2003, recording a growth of 26.5 percent. No new companies were listed and no fund was mobilized in ISE during the first nine months of the current fiscal year. The ISE started functioning in transparency in its operations, excellent risk management, dynamic market technology and lowest overall costs of listing. A profile of ISE is given in Table 7.8.

Table 7.8 Profile of Islamabad Stock Exchange

1999-2000 a) New Companies Listed b) Fund Mobilized (Rs billion) c) Listed Capital (Rs billion) d) Turnover of Share (In Billion Nos) e) ISE Index 0 0 3.1 5327.2 2000-01 5 0.8 183.3 1.4 4374.2 increasing interest of compared popularity 2001-02 1 3.7 183.4 1.70 2002-03 (July-March) 0 0 228.2 1.3

4684.0 5924.5 Source: Islamabad Stock Exchange number of TFC issues shows the the investors in debt instruments as to equity issues. TFCs are gaining among investors due to a number of

Total funds mobilized during July-March 2002-03 in the two stock exchanges (KSE & LSE) amounted to Rs 24.8 billion, as compared to Rs 17.7 billion in the same period last year. Total turnover of shares in the three stock exchanges during the first three-quarters of the current fiscal year was 56.9 billion, compared to 34.5 billion in the same period last year, recording an increase of 64.9 percent. During the period under review, 17 companies offered Term Finance Certificates (TFCs) to the public in aggregate amounting to Rs 9.831 billion; whereas one company with paid-up capital of Rs 1.377 billion and 2 companies with paid up capital of Rs 0.100 billion were listed on the Karachi and Lahore Stock Exchanges, respectively. Furthermore, during the period under review, GOP disinvested additional shares of NBP amounting to Rs 0.373 billion. The

factors viz. (i) attractive and guaranteed return and safety of principal amount invested; (ii) substantial fall in returns under various National Saving Schemes; and (iii) restrictions imposed on institutional investors for investing in NSS. Development Finance Institutions (DFIs) During 2001-02, the DFIs sanctioned total loans of Rs 4.6 billion against which they disbursed Rs 2.9 billion. In the first nine months of the current fiscal year (2002-03), sanctions and disbursements of loans by the DFIs for fixed investment finance to the private industrial sector were Rs 3.8 billion and Rs 1.9 billion respectively.

Chapter 7. Capital Market The loans sanctioned and disbursed by the special banks during 2001-02 amounted to Rs 11.4 billion and Rs 11.3 billion, while, during the first nine months of the current fiscal year, their sanctions and disbursements amounted to Rs 8.2 billion and Rs 8.1 billion, respectively. In 2001-02, investment banks total sanctions and disbursements were Rs 4.8 billion and Rs 4.4 billion. In the first nine months of the current financial year, their sanctions and disbursements were recorded at Rs 4.3 billion and Rs 3.8 billion. Islamic banks sanctioned and disbursed Rs 4.0 billion and Rs 2.5 billion during 2001-02 while these were Rs 0.94 billion and Rs 2.21 billion during the first nine months of 2002-03. Total sanctions and disbursements of housing finance companies (HFCs) amounted to Rs 0.2 billion and Rs 0.10 billion respectively in 2001-02. During the first nine months of 2002-03, these were Rs 0.8 billion and Rs 0.5 billion respectively. The leasing companies sanctioned an amount of Rs 13.7 billion out of which they disbursed Rs 13.6 billion while modarabas sanctioned Rs 5.0 billion and disbursed Rs 4.9 billion, respectively during JulyMarch 2002-03. National Savings Schemes (NSS) The Central Directorate of National Savings (CDNS) is an attached department of the Finance Division and performs deposit bank functions by selling government securities through a network of 366 savings centers, spread all over the country. Till 1971, the activities of National Savings Department were merely promotional in nature where, post offices and commercial banks were operative agents for investment purposes. From 1972 onward NSS is engaged in the operations of various savings schemes through its own branches network. As of March 31, 2003, there were about 4.3 million investors with National Saving Schemes (NSS). The on-going savings schemes currently in operation are Defence Savings Certificates, Special Savings Certificates/ Accounts, National Deposit Certificates, Savings Account, Regular Income Certificates, Mahana Amdani Accounts, and Prize Bonds. A new saving scheme entitled Pensioners Benefit Account was launched during the current fiscal year. During the fiscal year 2001-02, net deposits with National Saving Schemes increased to Rs 91.4 billion from Rs 51.1 billion in 2000-01. Out of Rs 91.4 billion, Rs 36.4 billion, (39.8%) were mobilized by Special Saving Certificates (Registered), Rs 22.0 billion, (24.1%) by Defence Saving Certificates, Rs 11.0 billion, (12.0%) by Regular Income Certificates, and Rs 11.6 billion, (12.7%) by Prize Bonds (Table 7.9 & Fig:3).

Table 7.9 Net Accruals by National Savings Schemes

1999-00 41.2 (43.1) 19.4 (20.3) 2000-01 16.6 (32.5) 9.4 (18.4) 2001-02 22.0 (24.1) 36.4 (39.8) July-March 2001-02 2002-03 13.2 14.7 (26.0) (19.9) 21.5 (42.4) 41.3 (55.8) (Rs Billion) % Change 5.1 19.8

1. 2.

Defence Saving Certificates Special Saving Certificates Registered

Chapter 7. Capital Market 3. 4. 5. 6. Regular Income Certificates Special Saving Accounts National Prize Bonds Others Grand Total 26.1 (27.3) 5.5 (5.8) -0.03 (-0.03) 3.4 (3.6) 8.6 (16.8) 3.6 (7.0) 10.4 (20.3) 2.5 (4.9) 11.0 (12.0) 4.3 (4.7) 11.6 (12.7) 6.1 (6.7) 91.4 (100) 7.8 (15.4) -0.2 (-0.4) 6.9 (13.6) 1.5 (3.0) -11.9 (-16.1) 2.9 (3.9) 18.0 (24.3) 9.0 (12.2) -6.3 6.1 17.5 50.7

95.5 51.1 (100) (100) Note: Figures within brackets represent share to total.

50.7 74.0 8.4 (100) (100) Source: Directorate of National Savings.

Fig-3: Net Accruals of NSS

50 36.4 40 41.3

(Rs Billion)

30 20 10 0 -10 -20 2000-01 16.6 9.4

22

14.7

10.4 8.6

18

11

11.6

-11.9
2001-02 2002-03 July-March

Def.Sav.Cert.

Spl.Saving Certificates

Regular Income Certificates

National Prize Bonds

During the first nine months of the current fiscal year, total net accruals under NSS amounted to Rs 74.0 billion, as against the net receipts of Rs 50.7 billion in the same period last year. Special Savings Certificates (Registered) with Rs 41.3 billion and 55.8 percent share in the total net NSS accruals, gave the best performance during the first nine months of the current fiscal year, followed by National Prize Bonds (24.3%) and Defence Saving Certificates (19.9%). However, unlike previous year, there was an actual decline of 6.3 percent (Rs 11.9 billion) in the case of Regular Income Certificates. The decline in

Regular Income Certificates was due to huge withdrawal from this scheme. Huge withdrawal from the Regular Income Certificates may be due to some comparatively better package available with other schemes including the newly launched Pensioners Benefit Account. It may be noted that deposits with Regular Income Certificates are taxable while in the case of some other schemes such as; Defence Saving Certificates, Special Saving Certificates and Pensioners Benefit Account (which mobilized bulk of the net deposits in 2002-03) accruals exceeding Rs 150,000 are taxable only.

Chapter 7. Capital Market other deposit schemes. Since the weighted average real deposit rates of the schedule banks remained low (around 2.8%), the NSS still offers the most attractive rate of returns to the depositors. This is the main reason why net accruals under the NSS have increased by 46.0 percent in the first nine months of 2002-03, over the same period of last year. Returns on National Savings schemes, which are linked with respective maturity yields on PIBs, have declined significantly since July 2001. For example, yield on Defence Savings Certificates declined by 497 basis points to 10.03 percent while return on 3 years Special Saving Certificates has shrunk by 403 basis points to 8.67 percent. More importantly, the weighted average return on National Savings Schemes has declined from the average of 15.8 percent in 1995-2000 to 12.3 percent by end June 2002 and further to 8.8 percent by end March 2003---a decline of 700 basis points in about three years (Table 7.10). The 6-month Treasury Bills rate has also declined significantly since June 2001, indicating the easing of monetary stance by the SBP. The 6 months T. Bills rate was as high as 12.88 percent in June 2001 but declined to as low as 1.65 percent in April 2003---a decline of 1123 basis points in just 21 months. As a result of sharp decline in months T. Bills rate, the export refinance rate has also declined by 950 basis points from 13.0 percent in July 2001 to 3.5 percent in March 2003.

The newly launched Pensioners Benefit Account specifically meant for the retired employees with ten years maturity. Profit on the scheme is payable on monthly basis reckoned from the date of deposit. The account can only be opened by a pensioner. The account can be opened with a minimum deposit of Rs 10,000/and maximum deposit of Rs 1.0 million. Monthly profit of Rs 920/- is payable on a deposit of Rs 100,000/-, which works to 11.04 percent rate of return p.a. This rate is applicable on the accounts opened during the period from 1st January 2003 to 30th June 2003. The investment is exempt from compulsory collection of Zakat at source. These accounts can be opened only at the National Savings Centres. The Government of Pakistan has reviewed the rate of return on National Savings Schemes in July 2002 and in January 2003. The return on Defence Savings Certificates has been fixed at 10.03 percent per annum (on maturity). The nominal deposit rates for saving schemes, which are presently in operation with NSS ranged between 5.0 percent (Savings Account) to 13.4 percent (Khas Deposit Schemes) with a weighted average rate of 8.8 percent. With an inflation rate of only 3.4 percent, the real deposit rates during July-March 2002-03 ranged between 1.6 percent (Saving Accounts) to 7.64 percent (Pensioners Benefit Account) with a weighted average real rate of 5.4 percent. In the current year, the real rates of return under the NSS were still attractive as compared to

Table 7.10 Nominal and Real Deposit Rates on Savings Schemes During 1995-2003

Scheme (Maturity)

1995-2000 Nominal Real Rate(p.a.) Rate

2000-01 Nominal Real Rate (p.a.) Rate

2001-02 Nominal Real Rate(p.a.) Rate

2002-03 Nominal Real Rate Rate (p.a.)

Chapter 7. Capital Market 1. 2. 3. Defence Saving Certificates(10 Years) National Deposit Scheme (7 Years) Special Savings Certificate, Registered (3 Years) Special Savings Certificate, Bearer (3 Years) Regular Income Certificates (5 Years) Khas Deposit Scheme (3 Years) Mahana Amdani Accounts (7 Years) Saving Accounts (Running Accounts) Pensioners Benefit Account (10 Years) 16.6 13.0 16.6 8.7 5.1 8.7 15.0 13.0 12.7 10.6 8.6 8.3 14.1 13.0 12.7 10.6 9.5 9.2 10.03 13.00 8.67 6.63 9.60 5.27

4.

14.0

6.1

12.4

8.0

12.4

8.9

12.36

8.96

5. 6. 7. 8. 9.

16.1 13.4 14.9 11.4 10.8 15.8

8.2 5.5 7.0 3.5 2.9 7.9

12.5 13.4 12.3 7.8 6.0 12.6

8.1 9.0 7.9 3.4 1.6 8.2

12.5 13.4 12.3 7.8 6.0 12.3

9.0 9.9 8.8 4.3 2.5 8.8

9.12 13.42 10.41 5.00 11.04 6.00 8.8

5.72 10.02 7.01 1.60 7.64 2.60 5.4

10. Prize Bonds (Running Account) Weighted Average

Source: Directorate of National Savings, Finance Division. Average inflation was 7.9% during 1995-2000, 4.4% during 2000-2001; 3.5% during 2001-02 and 3.4% during July-March 2002-03. Reforms of the NSS In an attempt to restructure the National Savings Organization on modern lines, computerization process is underway. Procedure of maintenance of record at National Savings Centres has been revised threadbare to ensure proper maintenance of record and to make it computer friendly. In this regard, National Savings Hand Book Vol-II has also been reviewed besides revision of national savings Hand Book Vol-I. About 150 National Savings Centres have been shifted to new buildings in proper localities with commodious accommodation. Pensioners Benefit Account has been introduced to facilitate the retired officials. The Special Savings Certificates and Defence Savings Certificates have been launched in the United Arab Emirates for the benefit of the Overseas Pakistanis and to strengthen the reserves position of the Government of Pakistan. Training Institute of National Savings has been reactivated by

Chapter 7. Capital Market establishing therein a computer lab and arranging computer-training courses for the officials of of National Savings accounts and the work is expected to be completed in line with the

National Savings Organization. Due attention and commitment of the Federal Government with the importance is being given to the job of automation International agencies. ______________________

Chapter 8. Inflation

8. Inflation
Introduction policy should be to bring inflation down to single digit and keep it there.

It has often been suggested that a stable conducive macroeconomic environment environment for private Several costs of high and variable inflation have been identified. These costs typically arise from distortions in economic decision-making arising from high or variable inflation rates and result in lower levels of output than would otherwise be the case. High inflation is also a regressive and arbitrary tax, the burden of which is typically borne disproportionately by those in Prices on the average can be rising, falling, or stable. Inflation is a process of rising prices. Inflation rate is measured as the percentage change in the average level of prices. Inflation rate rises and falls over the years but it rarely becomes negative. If the inflation rate is negative, it means the average price level is falling which is not good for the economy. A recent study suggests that some level of inflation is essential for promoting growth and investment. In other words, there exists a threshold beyond which inflation exerts a negative effect on growth. The threshold is lower for industrial than for developing countries. Notwithstanding the existence of a threshold the goal of the macroeconomic Four different price indices are published in Pakistan: the consumer price index (CPI), the wholesale price index (WPI), the sensitive price index (SPI) and the GDP deflator. The CPI covers the retail prices of 375 items in 35 major cities and reflects Price Indices fixed income group and poor. Maintaining low and stable inflation should be seen as a necessary part of the poverty alleviation strategy. The key point is that price stability is not an end in itself; it is essential for sustaining higher economic growth - the single most important factor influencing poverty. promotes growth by providing a more investment. Being the key component of a stable macroeconomic environment low and stable inflation assumes greater importance. It is, therefore, essential that inflation rate be kept stable even when it is low.

Chapter 8. Inflation roughly the cost of living in the urban areas. The WPI covers the wholesale price of 97 major items prevailing in the city of origin of commodities. The SPI covers prices of 53 essential items accounting for 51.6 percent of the expenditure of those households whose monthly income ranges from Rs.3000 to Rs.12000 per month. In most countries, the main focus for assessing inflationary trends Table 8.1 Price Indices in Pakistan is placed on the CPI, because as stated above, it most closely represents the cost of living. In Pakistan, the main focus is placed on CPI as a measure of inflation because it is more representative with wider coverage of 375 items in 71 markets of 35 cities of the country. The details are documented in Table-8.1.

Base Year 2000-01=100 Features CPI Cities covered Markets covered Items covered Number Groups of Commodity 35 71 375 10 106,500 Four All Categories combined Monthly SPI 17 51 53 10,404 Rs.3000/Mo nth 3(Urban)

Base Year 1990-91= 100 WPI 16 16 97 5 1210 -

Number of Quotations Income Groups Occupational Groups

Reporting Frequency

Monthly Weekly Source: Federal Bureau of Statistics

Inflation During the 1990s.

Pakistan has sustained a doubledigit inflation between 9.8 to 13.0 percent during the first seven years of the 1990s. Not

Chapter 8. Inflation surprisingly, one of the critical years of the 1990s, mainly on account of 5.3 percent food inflation and 6.1 percent nonfood inflation. Non-food inflation was mainly driven by the prices of POL products and the associated rise in transport charges.

macroeconomic issues in Pakistans policy arena during those periods has been as to how to put inflation under effective control. The persistence of a double-digit inflation along with large fiscal deficit (7.0% of GDP) has been the major source of macroeconomic imbalances in the 1990s. There has been a general agreement that lax fiscal management resulting in the excessive growth in money supply, the supply side bottlenecks, the adjustment in government administered prices, the imported inflation (pass through of exchange rate adjustment), escalations in indirect taxes, and inflationary expectations have the major factors responsible for the persistence of a doubledigit inflation during most period of the 1990s.

Inflationary pressures have continued to diminish over the last three years mainly on account of tight monetary policy, prudent fiscal management, and improved supply of food items in the country. Although the exchange rate adjustments and the rise in international price of POL products have put upward pressures on inflation but these pressures were countered by the tight monetary policy fully supported by fiscal stance and improvement in the supply situation in the country. During the last three years (2000-01 2002/03) overall inflation averaged 3.7 percent as against

Both food and non-food inflation contributed to the persistence of the doubledigit inflation. Food and non-food inflation averaged 12.2 percent and 10.7 percent, respectively during the seven years of the 1990s [Table 8.2]. Inflation slowed to an average of 5.7 percent in the remaining three

double-digit inflation during most period of the 1990s. As stated earlier, the decline in overall inflation owe heavily to a low (3.1%) food years. inflation, as non-food inflation averaged 4.3 percent during the last three

Table 8.2 Inflationary Trends* (% Change) CPI

Chapter 8. Inflation Overall Year Inflation Food Inflatio n 1 2 . 9 1 0 . 6 1 1 . 7 1 1 . 3 1 6 . 7 1 0 . 1 1 1 . 9 7 . 7 5 . 9 2 NonFood Inflatio n 1 2 . 4 1 0 . 5 7 . 8 1 1 . 2 9 . 3 1 1 . 5 1 1 . 7 8 . 0 5 . 6 5 . 1 1 . 7 9 . 8 7 . 4 1 6 . 4 1 6 . 0 1 1 . 1 1 3 . 0 6 . 6 6 . 4 1 . 1 2 . 6 1 0 . 5 1 0 . 7 1 1 . 8 1 5 . 0 1 0 . 7 1 2 . 5 7 . 4 6 . 4 1

WPI

SPI

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 (July-April) Average of 1990s Average of 1990-97 Average of 19982000 Average of 2000-01 2002/03

1 2 . 7 1 0 . 6 9 . 8 1 1 . 3 1 3 . 0 1 0 . 8 1 1 . 8 7 . 8 5 . 7 3 .

Chapter 8. Inflation 6 4 . 4 3 . 5 3 . 3 9 . 7 1 1 . 4 5 . 7 3 . 7 . 2 3 . 6 2 . 5 3 . 1 1 0 . 1 1 2 . 2 5 . 3 3 . 1 0 5 . 3 4 . 5 3 . 4 9 . 3 1 0 . 7 6 . 1 4 . 3 8 6 . 2 2 . 1 6 . 1 1 0 . 0 1 2 . 2 4 . 9 4 . 8 Source: Federal Bureau of . 8 4 . 8 3 . 4 3 . 7 9 . 9 1 2 . 0 5 . 2 4 . 0

* Inflation based on CPI and SPI are at Statistics 2000-01 base.

Chapter 8. Inflation

Fig - 1: 1nflationary Trend

18 16 14 12 10 8 6 4 2 0 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 1990-91 '01-02 02-03(Jul-Apr)

CPI

FOOD

NON-FOOD

Chapter 8. Inflation Inflation During 2002-03 important to note that during July 1-May 15, 2002-03, 22 adjustments in prices of petrol Inflation averaged at 3.3 percent during JulyApril 2002-03. The low level of inflation in the midst of 12.5 percent increase in money supply is the result of better supply situation of essential commodities, appreciation of exchange rate, prudent fiscal management and continued sterilization of monetary impact of massive foreign exchange inflows. Food and non-food inflation have been estimated at 3.1 percent and 3.4 percent, respectively as against 2.1 percent and 4.4 percent respectively in the corresponding period of last year [See Table-8.3]. The higher increase in food inflation over the comparable period of last year is attributable to increase in prices of wheat, wheat flour, rice basmati, meat, tea, vegetable ghee and cooking oil. The increase in vegetable ghee and cooking oil is the result of increase in international price of palm oil and imposition of GST on the local manufacturing of ghee in the Federal Budget 2002-03. As shown in Table 8.4, out of 19 widely consumed daily items the prices of 9 items have declined in the range of 3.8 percent (Chicken Farm) to 51.5 percent (potato). At the same time, the prices of 10 items have increased in the range of 2.7 percent (Fresh Milk) to 15.8 percent (tea). It may be noted that prices of all the four types of pulses (Masur, Moong, Mash and Gram) have declined because of increase in their production. Accordingly, the contribution of food inflation in overall inflation is estimated at 38.1 percent in 2002-03 as against 25.1 percent last year. have taken place - 13 times the prices were raised and 8 times reduced while one time it remain unchanged. On July 1, 2002 the price of petrol was Rs.33.71/Litre and on May 16, 2003 it stood at Rs.28.88/Litre - a decline of 14.3 percent. The prices of petroleum product and its various grades including kerosene oil fluctuated moderately during the fiscal year 2002-03. The prices of the various components of petroleum products generally witnessed a rising trend but reached at all time high on March 16, 2003 as a result of the continuous escalation of POL prices in the international market. During the last four adjustments the prices of POL products declined sharply across the board. Most importantly, the price of petrol which stood at Rs.37.11/Litre on March 16, 2003 declined to Rs.28.88/Litre on May 16, 2003 a decline of Rs.8.23/Litre or 22.2 percent. Similarly, the price of diesel (HSD) declined from Rs.25.93/Litre to Rs.19.91/Litre a decline of Rs.6.02/Litre or 23.2 percent during the same period. The price of Kerosene declined from Rs.24.62 to Rs.18.53 a decline of Rs.6.09/Litre or 24.7 percent. Contrary to the general perception, the government has judiciously passed on the benefit of lower international prices of POL products to the people by lowering the Slower increase in non-food domestic price of these products [See Table8.5 and Fig-2]. The contribution of non-food inflation is estimated at 61.3 percent which is lower than last year (77.5%). Within nonfood inflation, almost one-half contribution has come from fuel & lighting and transport and communication.

inflation as compared with last year resulted mainly on account of lesser increase in fuel and lighting group (8.5% as against 9.6% of last year) and transport & communication group (5.5% as against 7.1% last year). It is

Chapter 8. Inflation Table 8.3 Changes in CPI According to Commodity Group Commodity Groups Weight 2001-02 CPI Food Non-Food Apparel, Textile House Rent Fuel & Lighting Household Transport Recreation Education Cleaning Medicare 2002-03 100.0 3.4 3.3 40.3 2.1 3.1 59.7 4.4 3.4 6.1 3.2 3.3 23.4 2.9 0.7 7.3 9.6 8.5 3.3 3.7 3.1 7.3 7.1 5.5 0.8 7.2 0.4 3.5 N.A 4.7 5.9 2.0 4.9 2.1 1.8 3.8 Source: Federal Bureau of Statistics Table 8.4 Prices of Essential Commodities (Rs.) Items Wheat Wheat Flour Rice Basmati Masur Pulse Moong Pulse Mash Pulse Gram Pulse Beef Mutton Sugar Milk Fresh Veg. Ghee Veg. Ghee (Loose) Cooking Oil Tea Chicken (Farm) Red Chilies Onion Potatoes Unit Kg Kg Kg Kg Kg Kg Kg Kg Kg Kg Ltr 2.5Kg Kg 2.5Ltr 250Gm Kg Kg Kg Kg 2000-01 8.2 9.8 15.1 37.0 29.9 46.5 29.3 54.8 106.6 27.2 17.6 154.9 44.9 156.5 53.8 51.6 66.5 10.5 9.5 2001-02 8.3 9.7 15.5 38.4 34.4 44.3 34.9 55.2 111.5 22.9 17.9 169.2 49.2 171.0 57.0 52.0 78.3 9.6 11.4 July 2002 8.2 9.7 16.9 36.2 32.3 41.8 34.4 56.9 116.2 22.3 18.1 183.3 53.3 183.6 57.0 60.2 83.6 11.0 12.8 April % Change 2003 Apr 03/Jul 02 8.8 7.8 10.3 5.8 18.4 9.2 34.9 -3.9 29.9 -7.3 35.8 -14.4 27.6 -19.7 64.7 13.7 132.2 13.8 19.8 -11.0 18.6 2.7 198.7 8.4 55.9 4.9 202.9 10.5 66.0 15.8 57.9 -3.8 71.0 -15.1 6.6 -40.0 6.2 -51.5 Source: Federal Bureau of Statistics July-April (% Change) %age Point Contribution (July-April) 2001-02 2002-03 3.4 25.1 77.5 5.7 20.2 20.6 3.5 15.3 1.8 0.0 3.8 1.1 3.3 38.1 61.3 6.0 4.6 18.7 3.1 12.1 0.1 4.9 8.6 2.4

Chapter 8. Inflation Table 8 5 Prices of Various POL Products Effective from Fortnight 1-Jul-02 16-Jul-02 1-Aug-02 16-Aug-02 1-Sep-02 20-Sep-02 2-Oct-02 16-Oct-02 1-Nov-02 16-Nov-02 1-Dec-02 16-Dec-02 1-Jan-03 16-Jan-03 1-Feb-03 16-Feb-03 1-Mar-03 16-Mar-03 1-Apr-03 16-Apr-03 1-May-03 16-May-03 MS RON 87 33.71 33.59 33.84 33.94 34.32 34.66 34.66 35.64 35.21 32.18 30.25 31.02 32.50 32.64 32.96 34.51 35.74 37.11 33.27 30.58 30.13 28.88 HOBC 38.19 38.07 38.33 38.40 38.79 39.13 39.13 40.11 39.70 36.65 34.35 35.02 36.41 36.55 36.83 38.41 39.65 41.11 37.32 34.60 34.17 32.40

(Rs./Litre)

Kerosene HSD * LDO 17.08 19.41 16.18 17.22 19.35 16.25 17.64 19.08 16.16 17.60 19.08 15.97 18.41 19.48 16.65 18.61 19.76 16.93 18.61 19.76 16.93 19.27 20.98 17.83 19.23 21.98 17.88 18.95 21.38 16.64 18.95 20.01 16.16 19.26 20.22 16.24 20.70 21.14 17.60 20.62 21.72 17.53 21.32 21.72 18.30 22.90 22.82 19.58 23.81 25.05 20.47 24.62 25.93 20.95 21.06 24.53 18.64 19.02 21.28 16.69 19.25 20.23 16.38 18.53 19.91 16.09 Source: Oil Companies Advisory Committee * Hydrocarbon Development Institute of Pakistan

Fig-2: Prices of Petroleum Products

42 40 38 36 34 32 30 28 26 24 22 20 18 16 14 12 10

Rs./Litre

MS Ron 87

HOBC

Kerosene

HSD

LDO

Chapter 8. Inflation The month-wise analysis of inflationary trend as documented in Table-8.6 suggests that overall inflation continued to exhibit a broadly declining trend since July 2002. On year-on-year basis the overall inflation stood at 4.0 percent in July 2002 but declined to 2.2 percent in April 2003. Food inflation decelerated from 5.8 percent to 0.5 percent by March 2003. Non-food inflation on the other hand continued to rise because of the rising trend in oil prices. It has started declining since March 2003.

Table 8.6 Monthly Inflation Rate (% Change) 2001-02 2002-03 Food Non Food CPI Food Non Food 0.5 5.9 4.0 5.8 2.6 2.4 5.6 3.7 4.7 2.8 1.3 4.9 3.7 4.7 2.8 1.9 4.3 3.5 3.6 3.4 1.4 3.6 3.1 2.6 3.5 1.3 3.7 3.3 2.6 4.0 1.8 3.7 3.4 2.6 4.0 2.5 3.9 3.5 2.6 4.1 3.8 4.5 2.2 0.5 3.5 4.2 4.1 2.2 1.2 3.1 3.4 4.3 4.8 4.2 Source: Federal Bureau of Statistics

Period Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

CPI 5.0 4.4 5.1 4.6 5.4 5.1 4.7 4.6 4.2 4.0 3.6 2.5

2000-01 Food Non Food 4.2 5.6 3.0 5.6 3.9 6.0 4.2 4.9 5.8 5.1 4.9 5.2 4.2 5.1 4.2 4.9 3.8 4.5 3.3 4.5 2.1 4.8 -0.6 5.0

CPI 3.5 4.2 3.3 3.3 2.6 2.6 2.9 3.3 4.2 4.2 3.9 4.4

Fig-3: Monthwise Inflation Rate (CPI)

7.2 6.2 5.2 4.2 3.2 2.2 1.2 0.2 -0.8

Inflation

Food

Non-Food

Inflation by Income Groups

Chapter 8. Inflation It is always interesting to know the various inflation rates faced by different income groups. To assess the impact of inflation on consumers belonging to different income groups, the CPI is constructed for four income groups, namely Rs.3000, Rs.5000, Rs.12000 and above Rs.12000 per month. Data for the first ten months (July-April) of the current fiscal year show that as against overall inflation of 3.3 percent, the lowest income group experienced 3.1 percent inflation while all other groups faced more or less the same overall inflation (3.3%). The people in low-income groups spend a major portion of their incomes on food items. Since food inflation has remained low as compared with non-food inflation, therefore, the lowest income group faced relatively lower inflation as compared with those in higher income groups [See Table-8.7 and Fig 4].

Period 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 (Jul-Apr)

Overall CPI 10.8 11.8 7.8 5.7 3.6 4.4 3.5 3.3

Table 8.7 Inflation Rate by Income Groups Upto Upto Upto Rs.3000 Rs.3001-5000 Rs.5001-12000 10.6 10.7 10.8 11.7 11.9 11.8 7.9 7.8 7.9 5.6 5.6 5.9 3.2 3.4 3.8 4.5 4.3 4.5 3.0 4.9 3.4 3.1 3.4 3.3

Above 12000 11.3 11.6 8.0 6.2 4.5 4.7 3.6 3.3

Source: Federal Bureau of Statistics

Fig-4: Inflation by Income Groups
14 12 10 8 6 4 2 0 95-96 96-97 97-98 98-99 99-00 00-01 '01-02 02-03 (Jul-Apr)

3000

3001-5000

5001-12000

above 12000

Wholesale Price Index (WPI)

is significantly higher than the increase of 2.1 percent last year. To this increase, maximum contribution was The WPI, on average basis, increased by 6.1 made by the fuel & lighting group (15.7 percent), percent during July-April, 2002-03. This increase in WPI followed by raw material (9.4 percent), and

Chapter 8. Inflation manufacturing group (2.6 percent). The larger increase indices of certain important items like cotton, cotton in the index of fuel & lubricant at 15.7 percent against yarn, vegetable ghee etc. have increased at higher rate 3.5 percent last year is mainly attributable to increase in during the current fiscal year than last year[See Tableprices of POL products. The increase in the prices of raw 8.8]. material has mainly been due to the fact that price Table 8.8 Components of WPI Commodity Groups (% Change) %age Point Contribution (JulyWeight April) 2001-02 2002-03 2001-02 2002-03 100.0 2.1 6.1 2.1 6.1 45.8 1.8 3.0 39.9 22.7 54.2 2.3 8.7 60.9 77.3 8.8 0.5 9.4 2.2 13.5 15.3 3.5 15.7 25.8 39.6 25.5 2.2 2.6 27.6 11.0 4.6 0.5 1.2 1.1 0.9 Source: Federal Bureau of Statistics July-April

WPI Food Non-Food Raw Material Fuel & Lubricants Manufacturers Building Materials

Sensitive Price Indicator (SPI)

Price stabilization measures are important when there are unusual variations in the prices. Presently, the The SPI is used to capture the movement in government in commensurate with its policy of prices of 53 essential items, consumed by the urban decontrol, deregulation and liberalization, believes in households with income of Rs.3000-Rs.12000 per month. tackling the inflationary pressures through economic The increase in SPI during the first ten months of the measures rather than formal price control. However, current fiscal year (July-April) 2002-03 is estimated at 3.7 close vigilance is kept on unusual rise in prices through percent against 3.2 percent last year mainly due to the weekly meetings of the Kitchen Items Committee, now increase in prices of some basic food items such as called the Sensitive Items Price Committee (SIPC) and wheat (7.8%), wheat flour (5.8%), rice basmati (9.2%), through the weekly meetings of the ECC of the Cabinet. mutton (13.8%), beef (13.7%), vegetable ghee (8.4%), Other measures in the realm of supply augmentation, cooking oil (10.5%) and tea (15.8%). Much of the reduction in import duty to facilitate larger imports, increase in prices of wheat is attributable to its lower improved marketing practices, timely distribution, production (-4.2%) in 2001-02. The increase in Meat coordination with private sector and persuading prices is due to increasing demand and vegetable ghee traders/ manufacturers to refrain from unfair practices is due to imposition of GST on local manufacturing of undertaken to ensure price stability in the country. are ghee as well as substantial increase in the international The above analysis clearly suggests that the price of palm oil. However, prices of some basic food Government has succeeded in keeping inflation not items like sugar, pulses, red chillies, chicken (Farms), only low but it is much lower than the target (4.0%) for onion and potatoes have shown significant decline upto this fiscal year. The increase in prices of daily the range of 52% on account of improved supply consumable items have also remained low. In many position of these items [See Table-8.4 for details]. cases the prices of some essential items have fallen when compared with last year. In some cases the price Price Stabilization Measures have increased as well. This is the normal practice in any economy. The whole idea of the countrys monetary and fiscal policy is not to maintain negative inflation

Chapter 8. Inflation (decline in general price level) but to keep inflation at in future, inflation rate should remain within the range low level. The government has succeeded in keeping of 3 to 4 percent. Keeping inflation at low level should inflation low (3.3%) during the current fiscal year. Even be regarded as protecting the poor from inflation tax. _____________

Chapter 9. Trade and Payments

9. Trade and Payments

Notwithstanding difficult external achieving 85.5 percent of export target for the year. In other words, the country was able to earn $ 1525.6 million more in exports, of which main share goes to textile manufactures ($ 983.0 million or 64.4%). Further analysis reveals that during this period (July-April) primary commodities exports grew by 26.0 percent. Within primary commodities, export of rice increased by 22.9 percent. Pakistan was also able to export raw cotton and wheat worth of $ 46.5 million and $ 106.1 million, respectively. Exports of textile manufactures stood at $ 5644.8 million (almost 64% of total exports), as compared with $ 4661.9 million in the same period last year, thereby registering an increase of 21.1 percent. Within textile manufactures, exports of cotton cloth, knitwear, bedwear, towels and readymade garments were up in the range of 16.3 percent (cotton cloth) to 37.2 percent (bedwear). More importantly, the exports of cotton cloth, knitwear, bedwear and towels also grew in quantity term in the range of 6.7 percent (cotton cloth) to 41.9 percent (knitwear) with bedwear and towels growing by 25.7 percent and 19.9 percent, respectively. Exports of other manufactures registered a growth of 10.4 percent with engineering goods, chemicals & pharmaceutical products, petroleum products and sports goods showing tremendous potential of exports. Exports of carpets & rugs and leather & leather manufactures continue to show a declining trend [See Table 9.1]. environment characterized by subdued global economic activity, sluggish world trade, rising international uncertainty, price of oil and geopolitical balance of Pakistans external

payments improved significantly during the outgoing fiscal year 2002-03. Both exports and imports picked up, workers remittances touched new heights, surplus in current account further increased, rupee gained strength and appreciated by almost 4 percent, and foreign exchange reserves crossed $ 10 billion and provided much needed stability in the exchange rate. With the strengthening of external balance of payments, Pakistans improved suggested macroeconomic considerably. that a It stable environment has often has been

macroeconomic

environment promotes growth by providing a more conducive environment for private sector investment. There is no reason as to why an improved macroeconomic environment created by external balance of payments should not deliver strong growth this year and even more stronger over the medium-term. Trends in Exports Exports were targeted at $ 10.347 billion for the fiscal year 2002-03 13.3 percent higher than last year ($ 9.135 billion). Exports during July-April, 2002-03 grew by 20.8 percent and stood at $ 8849.7 million as against $ 7324.1 million of the same period last year, thereby

Chapter 9. Trade and Payments Table 9.1 Structure of Exports ($ Million) JULY-APRIL Particulars A. Primary Commodities Rice Raw Cotton Fish & Fish Preparation Fruits Wheat B. Textile Manufactures Cotton Yarn Cotton Cloth Knitwear Bedwear Towels Readymade Garments C. Other Manufactures Carpets, Rugs & Mats Petroleum Products Sports Goods Leather Tanned Leather Manufactures Surgical Goods & Medical Instruments Chemicals & Pharmaceutical Products Engineering Goods D. Others Total * Provisional A variety of reasons contributed towards healthy growth in exports, prominent among those are substantial expansion in volume terms resulting from increased textile quota/grater market access in the European Union, sharp reduction in the refinance rate under Export Finance Scheme and value addition in textile manufactures. Given the trends in exports during 2002-03* 825.1 450.7 46.5 110.6 69.0 106.1 5644.8 791.9 1057.0 875.3 1010.9 279.3 880.2 1667.4 183.5 153.3 254.5 189.0 309.7 116.8 208.3 54.0 712.4 8849.7 2001-02 654.6 366.7 16.1 106.8 70.5 48.3 4661.9 767.4 908.9 672.1 736.9 214.8 708.9 1509.7 192.1 93.5 234.4 189.4 318.2 118.9 114.7 38.6 497.9 7324.1 % Change 26.0 22.9 188.8 3.6 -2.1 119.7 21.1 3.2 16.3 30.2 37.2 30.0 24.2 10.4 -4.5 63.9 8.6 -0.2 -2.7 -1.8 81.6 39.9 43.1 20.8

Source: Federal Bureau of Statistics. July-April 2002-03, the current years export target ($10.347 billion) is likely to be surpassed.

Exports during the first ten months (JulyApril) of the current fiscal year have increased by $ 1525.6 million in absolute term over the corresponding period of last year. The major

Chapter 9. Trade and Payments

contributors to this additional export earnings have or 14.1%), primary commodities ($ 170.5 million been textile manufactures ($ 983.0 million or or 11.2%) and other manufactures ($ 157.6 million 64.4%), followed by other exports ($ 214.5 million or 10.3%) [See Table 9.2 and fig.1].
Table 9.2 Major Contributors to Additional Export Earnings (July-April, 2002-2003 *) Net Increase $ Million 1525.6 170.5 983.0 157.6 214.5 % Contribution 100.0 11.2 64.4 10.3 14.1

Exports Additional Export Earnings -Primary Commodities - Textile Manufactures - Other Manufactures - Others * Provisional

Source: FBS & E.A.Wing, Finance Division

Fig-1: Major Contributors to Additional Export Earnings (July-April, 2002-03)

Primary commodities 11.2%

Others 14.1%

Other Manufactures 10.3% Textile Manufactures 64.4%

Chapter 9. Trade and Payments months of last year. Exports averaged $ 885.0

Month-Wise Exports
The month-wise exports during JulyApril, 2002-03 (first ten months) than the remained consistently higher corresponding

million per month during this period as against $ 732.4 million of the comparable period last year. In other words, on average, exports have been higher by $ 152.6 million per month during this period [See Table 9.3 and fig.2]. ($ Million)

Table 9.3 Month-Wise Exports Month July August September October November December January February March April * Monthly Average 2001-02 683.9 780.5 800.2 759.9 711.1 722.2 699.6 654.9 725.8 786.0 732.4 2002-03 816.7 902.8 869.0 891.7 854.1 863.2 946.5 776.4 935.6 993.7 885.0

Fig-2: Month Wise Exports

1100 1000 900 800 700 600 500

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

2001-02

2002-03

* Provisional Concentration of Exports Pakistan's exports are highly concentrated in few items/groups namely, cotton, leather, rice, synthetic textiles and sports goods. These five categories of exports accounted for about 79 percent of total exports during 2001-02. Among these categories, cotton group alone contributed 59.4 percent, followed by leather (6.8%), rice (4.9%), and synthetic textiles (4.5%). These four items together accounted for 75.6 percent of total export earnings. The degree of concentration of these items/groups during 2001-02 remained

Source: Federal Bureau of Statistics close to the last years level except that of synthetic textiles whose share declined by 1.4 percentage points due to decline in its quantity and unit price. Furthermore, almost all the export earnings of cotton group have originated from textile and clothing. Such a high degree of concentration of exports in few items is a major source of instability in export earnings. A poor cotton crop seriously affects total export proceeds, as it has been observed several times in the past. The annual percentage shares of major export commodities are given in Table 9.4.

Table 9.4 Pakistan's Major Exports (Percentage Share) Commodity Cotton Leather Rice
Synthetic Textiles

90-91 61.0 9.1 5.6 5.7 2.2

91-92 61.3 8.6 6.0 6.1 2.0

92-93 59.8 9.3 4.7 7.4 1.9

93-94 57.9 9.2 3.6 9.5 2.9

94-95 58.7 8.0 5.6 7.1 3.2

95-96 64.1 7.2 5.8 5.2 2.8

96-97 61.3 7.7 5.6 6.1 3.7

97-98 58.7 6.7 6.5 7.2 4.4

98-99 59.1 6.9 6.9 5.1 3.3

99-00 61.0 6.3 6.3 5.3 3.3

00-01 58.9 7.5 5.7 5.9 2.9

01-02 59.4 6.8 4.9 4.5 3.3

Sports Goods

Chapter 9. Trade and Payments Commodity SubTotal Others Total 90-91 83.6 16.4 100.0 91-92 84.0 16.0 100.0 92-93 83.1 16.9 100.0 93-94 83.1 16.9 100.0 94-95 82.6 17.4 100.0 95-96 85.1 14.9 100.0 96-97 84.4 15.6 100.0 97-98 83.5 16.5 100.0 98-99 81.3 99-00 82.2 00-01 80.9 01-02 78.9

Composition of Exports The composition of Pakistans exports has changed significantly over the years. The principal changes have been the steep fall in the shares of primary & semi-manufactured exports and equally sharp increase in the share of manufactured exports. The share of primary commodities, semi-manufactures and manufactured goods in the year 2001-02 depicted

19.1 18.7 17.8 21.1 100.0 100.0 100.0 100.0 Source: Ministry of Commerce. the same trend and remained at 11 percent, 14 percent and 75 percent, respectively. During July-March of the current fiscal year (2002-03), the share of primary commodities increased by one percentage point to 12 percent, semimanufactures slipped by three percentage points and settled at 11 percent and the share of manufactured goods moved upward from 75 percent to 77 percent over the same period last year [See Table 9.5].

Table 9.5 Composition of Exports ( Rs. Million) Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 99-2000 2000-01 2001-02 July-March 2001-02 2002-03 * * Provisional If semi-manufactures and manufactured goods are taken together, 88 percent of export earnings during July-March, 2002-03 originated from manufactured exports and only 12 percent from primary commodities. The changing composition of exports suggests that Pakistan is no longer a country that relies heavily on the Total Exports 138,282 171,728 177,028 205,499 251,173 294,741 325,313 373,160 390,342 443,678 539,070 560,947 404,846 461,479 Primary Commodities Value 25,820 32,645 26,133 21,321 28,113 47,852 36,452 47,357 45,143 53,833 67,783 60,346 44,289 52,703 % Share 19 19 15 10 11 16 11 13 12 12 13 11 11 12 Semi-Manufactures Value 33,799 36,731 36,507 48,748 62,624 63,802 66,889 64,683 70,288 68,208 81,288 80,438 58,702 52,528 % Share 24 21 21 24 25 22 21 17 18 15 15 14 14 11 Manufactured Goods Value 78,663 102,352 114,388 135,430 160,436 183,087 221,972 261,120 274,911 321,637 389,999 420,163 301,855 356,248 % Share 57 60 64 66 64 62 68 70 70 73 72 75 75 77

Source: Federal Burea u of Statistics primary commodities exports for foreign exchange earnings. However, Pakistan still relies heavily on the labour intensive and low value added exports. Direction of Exports

Chapter 9. Trade and Payments Pakistan is trading with large number of countries but its exports are highly concentrated in few countries. Slightly above one-half of Pakistan's exports went to seven countries namely, USA, Germany, Japan, UK, Hong Kong, Dubai and Saudi Arabia. Among these countries, the share of Pakistan's exports to USA has been rising while that of Japan has exhibited a continuous decline, mainly on account of a protracted recession in the Japanese economy. The share of exports to Germany, UK, Hong Kong and Saudi Arabia remained almost stagnant with some fluctuations over the years. By and large, the same trend continued during 2001-02 with the exception of export share to Dubai. The share of exports to Dubai has increased by 2.6 percentage points because of higher exports of textile manufactures. [See Table 9.6].

Table 9.6 Major Export Markets of Pakistan (Percentage Share) Country USA Germany Japan UK Hong Kong Dubai Saudi Arabia Sub-Total Other Countries Total 52.3 100.0 49.2 100.0 47.2 100.0 44.7 100.0 49.7 100.0 48.5 100.0 45.3 100.0 47.5 100.0 46.6 100.0 45.0 100.0 48.2 100.0 45.1 100.0 9091 10.8 8.9 8.3 7.3 6.0 2.8 3.6 47.7 9192 12.8 7.1 8.3 6.6 7.3 4.4 4.3 50.8 9293 13.9 7.8 6.8 7.1 6.6 5.9 4.7 52.8 9394 14.4 8.0 8.0 7.8 7.3 6.3 3.5 55.3 9495 16.2 7.0 6.7 7.1 6.6 4.0 2.7 50.3 9596 15.5 6.8 6.6 6.4 9.1 4.7 2.4 51.5 9697 17.7 7.5 5.7 7.2 9.4 4.6 2.6 54.7 9798 20.5 6.3 4.2 6.9 7.1 5.0 2.5 52.5 9899 21.8 6.6 3.5 6.6 7.1 5.4 2.4 53.4 9900 24.8 6.0 3.1 6.8 6.1 5.7 2.5 55.0 0001 24.4 5.3 2.1 6.3 5.5 5.3 2.9 51.8 0102 24.7 4.9 1.8 7.2 4.8 7.9 3.6 54.9

Source: Ministry of Commerce higher by $ 1854.5 million to meet the domestic requirements which were mainly the outcome of additional imports spending on machinery ($ 594.7 million) and POL products ($ 457.7 million). Further analysis reveals that food group accounting for only 8.1 percent of total imports, grew by 21.1 percent, primarily on account of substantial increase (48.4%) in imports of palm oil (mainly due to 39.2 percent increase in its import price) and soyabean oil to meet its domestic

Trends in Imports
Imports were targeted at $ 11.1 billion for the fiscal year 2002-03 7.4 percent higher than last year ($ 10.340 billion). Imports grew by 22.5 percent and stood at $ 10099.5 million during July-April 2002-03 as against $ 8244.9 million of the corresponding period last year, thereby achieving 91.0 percent of the target set for the year. The overall import bills of the country was

Chapter 9. Trade and Payments consumption requirement. Import of machinery was up by 35.6 percent, showing the signs of pick up in domestic economic activity. Almost onefourth of imports are petroleum group which were up by 20.6 percent the rise was attributed to the higher import price of both the petroleum crude and petroleum products. All other groups of imports have also registered significant growth during July-April 2002-03 [See Table 9.7]. Non-oil imports as well as non-oil non-food imports were up by almost 23 percent. This is yet another indicator of the pick up in domestic economic activity.

Table 9.7 Structure of Imports ($ Million) JULY-APRIL Particulars A. Food Group Wheat Unmilled Soyabean Oil Palm Oil Sugar Pulses B. Machinery Group Power Generating Machinery Textile Machinery Const. & Mining Machinery Electrical Mach. & Apparatus Agricultural Machinery C. Petroleum Group Petroleum Products Petroleum Crude D. Textile Group Synthetic Fibre E. Agri/Other Chemicals Group Fertilizer F. Metal Group Iron & Steel G. Miscellaneous & Others Total Excluding Petroleum Group 2002-2003* 813.0 28.7 41.9 441.2 1.7 98.6 2266.8 215.7 405.5 76.9 168.4 27.6 2683.4 1473.3 1210.1 183.5 76.5 1744.8 212.1 402.2 325.3 2005.8 10099.5 7416.1 2001-2002 671.1 43.7 9.9 297.3 23.0 108.0 1672.1 165.2 336.1 91.1 99.6 11.8 2225.7 1222.1 1003.7 154.7 60.9 1496.0 157.1 367.0 285.3 1658.3 8244.9 6019.2 % Change 21.1 -34.3 323.2 48.4 -92.6 -8.7 35.6 30.6 20.6 -15.6 69.1 133.9 20.6 20.6 20.6 18.6 25.6 16.6 35.0 9.6 14.0 21.0 22.5 23.2

Chapter 9. Trade and Payments JULY-APRIL Particulars Excluding Petroleum & Food Groups * Provisional Imports during the first ten months (JulyApril) of the current fiscal year increased in absolute terms by $ 1854.5 million over the corresponding period last year. The major contributors to this additional import bill have been machinery group ($ 594.7 million or 32.1%) 2002-2003* 6603.1 2001-2002 5348.1 Source: Federal Bureau of Statistics followed by petroleum group ($ 457.7 million or 24.7%), agricultural/chemicals group ($ 248.8 million or 13.4%) and food group ($ 141.9 million or 7.7%). The details are given in Table 9.8 and fig-3. % Change 23.5

Table 9.8 Major Contributors to Additional Import Bill (July-April, 2002-2003 *) Net Increase $ Million 1854.5 141.9 594.7 457.7 28.7 248.8 35.1 347.6 Source: FBS & E.A.Wing, Finance Division % Contribution 100.0 7.7 32.1 24.7 1.5 13.4 1.9 18.7

Imports Additional Import Bill - Food - Machinery - Petroleum - Textile - Agricultural/Chemicals - Metal - Miscellaneous & Others * Provisional

Chapter 9. Trade and Payments

Fig-3: Major Contributors to Additional Import Bill (July-April, 2002-03)

Food 7.7%

Misc.& Others 18.7% Metal 1.9%

Agri/Chemicals 13.4%

Machinery 32.1%

Textile 1.5% Petroleum 24.7%

Month Wise Imports

The month-wise imports during July-April, 200203 remained consistently higher than the corresponding months of last year. Imports averaged $ 1009.9 million per month during this

period as against $ 824.5 million of the comparable period last year. In other words, on average, imports have been higher by $ 185.4 million per month during this period. The monthly imports are tabulated in Table 9.9 and fig-4.

Table 9.9 Month-Wise Imports ($ Million) Month July August September October November December January February March April * 2001-02 791.6 937.9 774.5 838.3 825.3 707.7 854.8 738.1 886.6 890.1 2002-03 927.2 969.3 880.3 1018.0 960.2 1032.6 1053.1 918.7 1270.5 1069.6 Fig-4: Month Wise Imports
1350 1250 1150

($ Million)

1050 950 850 750 650 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr

2001-02

2002-03

Chapter 9. Trade and Payments Month Monthly Average * Provisional 2001-02 824.5 2002-03 1009.9
1350 1250 1150

Fig-4: Month Wise Imports Source: Federal Bureau of Statistics

($ Million)

1050

Pakistan had to spent $ 730.9 million 950 more over last year on the import of major items during July-April, 2002-03 due to higher import 750 prices prevailing in the international market [See Table 9.10]. Had the unit values of these import 650 Jul items remained at the last years level, the imports would have been lower at $ 9368.6
Aug Sep 850

million, as against $ 10099.5 million, and the import growth would have been 13.6 percent instead of 22.5 percent as achieved during the first ten months of the current fiscal year.
Oct Nov Dec Jan Feb Mar Apr

2001-02

2002-03

Table 9.10 Additional Import Bill as a Result of the Rise in Import Prices July-April 2002-03 * ($ Million) Commodity Soyabean Oil Palm Oil Petroleum Products Petroleum Crude Fertilizer Plastic Material Medicinal Products Iron & Steel Total * Provisional Actual Imports 41.9 441.2 1473.3 1210.1 212.1 342.0 170.8 325.3 Imports at Last Years Prices 26.5 317.0 1215.1 1009.5 168.5 324.0 158.6 266.6 Additional Bill 15.4 124.2 258.2 200.6 43.6 18.0 12.2 58.7

4216.7 3485.8 730.9 Source: FBS & E.A.Wing, Finance Division imports during 2001-02. Among these categories, machinery, petroleum & petroleum products and chemicals accounted for almost 60.1 percent of total imports. Considerable structural changes have taken place in some categories of imports over the years. The share of machinery has declined on account of sliding investment but during 2000-01 and 2001-02 its share has increased due to higher imports of power generating machinery, electrical & textile machinery and construction & mining machinery. The share of

Concentration of Imports
Pakistan's imports are highly

concentrated in few items namely, machinery, petroleum & petroleum products, chemicals, transport equipments, edible oil, iron & steel, fertilizer and tea. These eight categories of imports accounted for 75.2 percent of total

Chapter 9. Trade and Payments chemicals depicted a gradual rising trend, while that of petroleum and petroleum products picked up mainly on account of rising domestic Table 9.11 Pakistan's Major Imports (Percentage Share)
Commodities

demand and higher international prices [See Table 9.11].

90-91 20.5 22.2 12.8 6.7 5.3 3.3 3.5 2.2 76.5 23.5 100.0

91-92 27.0 15.0 13.1 9.0 4.4 3.5 2.8 1.9 76.7 23.3 100.0

92-93 24.3 15.5 12.5 12.5 5.9 3.2 2.5 2.1 78.5 21.5 100.0

93-94 22.0 16.1 14.4 9.7 5.7 3.8 3.1 2.2 77.0 23.0 100.0

94-95 22.8 15.3 14.0 5.9 9.6 3.6 1.2 1.8 74.2 25.8 100.0

95-96 21.6 16.8 15.6 4.7 7.3 4.1 2.9 1.4 74.4 25.6 100.0

96-97 23.1 19.0 13.4 4.7 5.1 3.9 3.2 1.1 73.5 26.5 100.0

97-98 18.9 15.5 15.7 4.8 7.6 3.2 2.1 2.2 70.0 30.0 100.0

98-99 17.9 15.5 16.6 5.7 8.7 3.1 2.8 2.4 72.7 27.3 100.0

99-00 13.9 27.2 17.5 5.5 4.0 3.0 1.9 2.0 75.0 25.0 100.0

00-01 19.3 31.3 20.0 4.0 3.1 2.6 1.6 1.9 83.8 16.2 100.0

01-02 17.1 27.1 15.9 4.8 3.8 3.3 1.7 1.5 75.2 24.8 100.0

Machinery * Petroleum & Products Chemicals @ Transport Equipments Edible Oil Iron & Steel Fertilizer Tea Sub-Total Others Total

* excluding transport equipments @ Excluding fertilizer

Source: Ministry of Commerce

Composition of Imports
The composition of Pakistans imports has not witnessed any appreciable change over the years. The share of raw material for consumer goods in the total imports continued to be higher. On the other hand, the share of raw material for capital goods was minimum. The share of capital goods exhibited a declining trend mainly because of slow down of investment in the country. The share of consumer goods over the time remained flat.

During the current fiscal year (JulyMarch, 2002-03), the share of consumer goods declined by two percentage points and came to 10 percent while the share of raw material for consumer goods remained flat at 55 percent. However, due to higher imports of machinery, the share of capital goods increased from 27 percent to 29 percent, whereas the share of raw material for capital goods did not show any change during

Chapter 9. Trade and Payments this period and remained at 6 percent. The details are given in Table 9.12.

Table 9.12 Composition of Imports (Rs. Million) Total Imports 171,114 229,889 258,643 258,250 320,892 397,575 465,001 436,338 465,964 533,792 627,000 634,630 455,177 530,125 Capital Goods Value 56,303 96,453 108,993 97,301 112,305 140,405 169,774 139,618 146,450 140,045 157,091 176,702 123,424 155,725 % Share 33 42 42 38 35 35 37 32 31 26 25 28 27 29 Raw Material For Capital Goods Value 11,621 15,167 14,304 15,692 16,754 22,541 22,259 23,344 25,646 30,712 34,371 39,038 28,779 30,269 % Share 7 7 6 6 5 6 5 5 6 6 6 6 6 6 Consumer Goods Value 76,290 88,791 99,290 110,291 148,419 180,539 202,379 195,528 220,563 287,801 345,770 346,865 249,376 290,554 % Share 44 38 38 43 46 45 43 45 47 54 55 55 55 55 Consumer Goods Value 26,900 29,478 36,056 34,966 43,414 54,090 70,589 77,848 73,305 75,234 89,768 72,025 53,598 53,550 % Share 16 13 14 13 14 14 15 18 16 14 14 11 12 10

Year

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 99-2000 2000-01 2001-02 Jul-Mar 2001-02 2002-03 * * Provisional

Direction of Imports Pakistans major imports are coming from few countries. Slightly below one-half of Pakistans imports continue to originate from seven countries namely, USA, Japan, Kuwait, Saudi Arabia, Germany, UK and Malaysia. By and large, the relative shares of imports originating from these countries have remained almost the

Source: Federal Bureau of Statistics same during 2001-02. The share of Japan exhibited a declining trend because of the shift in the import of machinery/capital goods from other sources. On the other hand, the shares of Pakistans imports from Kuwait and Saudi Arabia have been rising with some fluctuations because of the growing share of POL products in total imports. Import share of Malaysia has been fluctuating over the years mainly on account of fluctuations in palm oil prices [See Table 9.13].

Table 9.13 Major Sources of Imports (Percentage Share) Country U.S.A. Japan Kuwait 9091 11.8 13.0 0.7 9192 10.5 14.3 0.9 9293 9.4 15.9 3.3 9394 10.6 11.8 5.3 9495 9.4 9.6 5.8 9596 8.9 10.7 6.4 9697 12.0 8.6 6.9 9798 11.2 7.8 5.6 9899 7.7 8.3 5.9 9900 6.3 6.3 12.0 0001 5.3 5.3 8.9 0102 6.7 5.0 7.1

Chapter 9. Trade and Payments Saudi Arabia Germany U.K. Malaysia Sub-Total Other Countries Total 6.2 7.3 4.9 4.0 47.9 52.1 100.0 5.2 8.0 5.5 4.2 48.6 51.4 100.0 5.4 7.4 5.2 5.1 51.7 48.3 100.0 5.4 7.7 4.9 5.5 51.2 48.8 100.0 4.9 6.8 5.1 8.8 50.4 49.6 100.0 5.9 5.8 4.4 7.2 49.3 50.7 100.0 6.0 5.6 5.0 4.7 48.8 51.2 100.0 6.1 5.2 4.1 7.1 47.1 52.9 100.0 6.8 4.1 4.3 6.7 43.8 56.2 100.0 9.0 4.1 3.4 4.3 45.4 54.6 100.0 11.7 3.5 3.2 3.9 41.8 58.2 100.0 11.6 4.3 3.4 4.4 42.5 57.5 100.0

Trade Balance
The deficit in trade balance during 2001-02 narrowed significantly by 21.1 percent declining from $ 1527 million or 2.6 percent of GDP (200001) to $ 1205 million or 2.0 percent of GDP. The improvement was attributed to lower imports of petroleum group ($ 554 million) and sugar ($ 228 million) which caused total imports to decline by

Source: Ministry of Commerce 3.6 percent in the previous year (2001-02). However, for the current fiscal year 2002-03, trade deficit was targeted at $ 753 million. During the first ten months of 2002-03, trade deficit stood at $ 1249.8 million, as against $ 920.8 million in the comparable period last year, showing a deterioration of 35.7 percent [See fig.5].

3574

Fig-5: Trends in Trade Deficit

3128

3500 3000
2348

3098

8 7 6
5.7 1653 1740

1488

1490

1527

2000 1500 1000 500 0

1761

4.8

4.9

5
1250

3.3

3.4

1205

3.7

4 3 2 1 0

2.4

2.8

2.8

2.6 2.0

01-02

01-02 (JulApr)

921

Trade Deficit

As % of GDP

The deterioration of $ 329 million during July-April, 2002-03 was mainly on account of sharp increase in the import price of petroleum products & crude which increased by 21.2 percent and 19.9 percent, respectively due to build-up in oil reserves, necessitated by the fear of Iraq war.

Excluding petroleum groups increase, the trade deficit posted an improvement of 14.0 percent or $ 128.8 million. Given the buoyant nature of domestic economic activity, higher than targeted increase in trade deficit is quite natural.

02-03 (JulApr)

90-91

91-92

92-93

93-94

94-95

95-96

96-97

97-98

98-99

99-00

00-01

As % of GDP

2500

US $ Million

2257

6.1

Chapter 9. Trade and Payments

Terms of Trade
The terms of trade with base year 1990-91

(equal to 100) remained flat at 90.8 during 2001-02 as compared to 91.0 of 2000-01. However, the terms of trade during July-March, 2002-03 has worsened by 12.1 percent and stood at 80.7 over the level of 91.8 recorded in the same period last year. The deterioration in terms of trade is the obvious result of sharp increase in unit prices of petroleum products and crude in the international market. The export unit value index during this period reflected a decline of 8.6 percent while import unit value index showed a buoyancy of 3.9 percent. [See Table 9.14]. The trend depicted by the terms of trade is also shown in fig.6.

Table 9.14 Unit Value Indices and Terms of Trade (Base year 1990-91 = 100) Unit Value Indices Exports 119.9 123.5 142.9 168.6 185.4 204.8 245.6 258.4 253.8 271.5 271.2 272.7 249.1 Imports 131.9 133.5 141.2 164.2 185.5 201.7 198.9 223.3 259.0 298.4 298.6 297.0 308.7

Year 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 99-2000 2000-01 2001-02 July-March 2001-02 2002-03 * * Provisional.

Terms of Trade 90.9 92.5 101.2 102.7 99.9 101.6 123.5 115.7 98.0 91.0 90.8 91.8 80.7

Source: Federal Bureau of Statistics

Chapter 9. Trade and Payments

Fig-6: Terms of Trade (base year 90-91=100)

130 120 110 100 90 80 70
1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 99-2000 2000-01 2001-02 2001-02 (JulMar) 2002-03 (JulMar)

Trade Policy The trade policy for the current fiscal year (2002-03) was premised on the principle of maximum participation of all the stakeholders for the promotion of trade and industrial growth. Its framework has ensured consistency of policies with minimum government intervention. The trade policy is guided by market driven forces and also aimed at to further liberalize & deregulate the economy and provide incentives for reducing the cost of doing business in Pakistan. The focus has been placed on macro-economic stability, especially in terms of inflation, interest rates and exchange rate, with a view to expand and diversify the countrys export base both market-wise and product-wise. The salient features of the policy, 2002-03 are summarized below:
Freight subsidy up to 25 percent for new products and new markets.

Registration requirement for exporters and importers has been waived and monetary limits on exports of samples enhanced from $ 5,000 to $ 10,000.

Export of wheat and its milling products has been allowed. Export of petroleum products allowed to private sector. Import duty of 15 percent on import of finished leather has been abolished to facilitate leather exports.

To make export of gems and jewellery easier, the condition of purchase up to $ 10,000 and provision of encashment certificate has been removed, as well as value addition requirement of export of bangles reduced to 5 percent.

Chapter 9. Trade and Payments Export of old machinery allowed subject to no refund of import levies or duty drawback. Export of carpets in baggage allowed without production of foreign exchange encashment certificate. Amount of security deposit with Export Promotion Bureau for export of cotton reduced from 3 percent to 2 percent. Duty draw back made permissible on all exports made in foreign exchange to Afghanistan via land route except items on negative list. Pakistan Export Finance Guarantee Agency has been set up in the private sector to facilitate SMEs to access financing for working capital. Agricultural Produce Cess at the rate of 0.5 percent on agricultural exports withdrawn. The maximum tariff rate has been brought down to 25 percent and the number of tariff slabs have been reduced from 5 to 4. Ban on the import of machinery more than five years old has been lifted. Import of second-hand or used surgical equipments like dialysis machines, reverse osmosis equipments and other electro-medical equipments not more than five years old has been allowed. Condition of continuous stay abroad of last six months for importing vehicle by overseas Pakistanis under Transfer of Residence Scheme has been relaxed by allowing 30 days break in Pakistan. The condition of registration in the name of the importer to import vehicle under Transfer of Residence Scheme has been reduced from two years to one year prior to his/her departure to Pakistan. A motor cycle or scooter has been allowed to be imported upon transfer of residence provided that there shall be no entitlement to import a vehicle. Import of gold and silver in bulk has been allowed to all subject to importers own foreign exchange. Import of mobile phones has been allowed. Industrial consumers have been allowed to import machinery and parts up to value of $ 30,000 against bank draft without opening of letter of credit.

Balance of Payments
A sustained improvement was witnessed in the balance of payments position of Pakistan during 2001-02 when the deficit in current account amounting to $ 513 million (2000-01) turned into surplus by $ 1338 million or 2.3 percent of GDP (excluding official transfers) - with official transfers, the surplus was much higher at $ 2744 million. The substantial improvement, that is,

Chapter 9. Trade and Payments reversal from deficit to surplus was attributed to a combination of factors. A marked reduction of 76.8 services account on the one hand and significant improvement in private transfers including workers remittances on the other, the current account balance percent in trade deficit (f.ob.) was witnessed, (without official transfers) registered a surplus of $ 2562 which was attributed to negative growth in million (or 3.7% of projected GDP) in the first nine months of the current fiscal year as against a surplus of $ 1014 imports caused by lower POL and sugar imports. million in the same period last year an increase of 152.7 Buoyancy was observed in the inflow under percent. With official transfers, the surplus in current private transfers which depicted an increase of 9.0 account jumps to $ 4375 million as against a surplus of $ 2227 million in the same period last year an increase of percent and aggregated at $ 4249 million. Buoyant 96.4 percent. The deficit under services account posted a trend in private transfers was largely attributed to significant contraction of $ 745 million or 41.7 percent, 119.8 percent increase in workers remittances. exclusively on account of 52.7 percent rise in aggregate receipts. The trade balance deteriorated because of higher Moreover, deficit on account of services (net) imports of machinery and rise in unit prices of POL & narrowed by 16.7 percent or $ 525 million due edible oil. The higher imports of machinery were essential mainly on account of 38.5 percent increase in for pick up in domestic economic activity. The private aggregate receipts. The long term capital (net) transfers in this period were significantly up by 40.1 percent to $ 4215 million resulting from impressive increase of improved markedly by $ 1109 million. 98.6 percent in workers remittances. The flow under long Consequently the year ended with a sound build term capital (net) increased significantly by 73.0 percent up of $ 2792 million in foreign exchange reserves. and aggregated at $ 751 million. Thus, the first three quarters (July-March) of the current fiscal year 2002-03 ended with a strong build up of $ 4038 million in foreign The current account balance during July-March, exchange reserves [See Table 9.15]. 2002-03 continues to remain in surplus. Notwithstanding, the deterioration in trade balance, the improvement in Table 9.15 Balance of Payments ($ Million) Components Trade balance Exports (fob) Imports(fob) Services (net) Private transfers (net) Workers remittances Current account balance Excluding official transfers Including official transfers Long term capital (net) Changes in reserves (- = Increase) P: Provisional 2000-01 -1269 8933 -10202 -3142 3898 1087 -513 326 171 -1001 2001-02 -294 9140 -9434 -2617 4249 2389 1338 2744 1280 -2792 July-March 2001-02 2002-03 (P) -206 -610 6658 7761 -6864 -8371 -1788 -1043 3008 4215 1627 3230 1014 2227 434 -1749 2562 4375 751 -4038

Source: State Bank of Pakistan.

Chapter 9. Trade and Payments

Workers Remittances
Workers remittances during 2001-02 ended up with impressive growth of 119.8 percent and aggregated at $ 2.389 billion, as against $ 1.087 billion recorded during 2000-01. For the current fiscal year (2002-03), the workers remittances were targeted at $ 2.873 billion 20.3 percent higher than last year. During the first nine months (July-March), the target for the whole year was already achieved. Remittances during this period amounted to $ 3.230 billion, as against $

1.627 billion in the same period last year thus registering an increase of 98.6 percent. Remittances have averaged $ 358.9 million during the first nine months and if this trend continues, total remittances for the fiscal year 2002-03 are likely to be $ 4.3 billionhighest ever in the countrys history [See Table 9.16]. Monthly remittances which used to hover in the range of $ 75 85 million during 2000-01 now averaging $ 359 million in the current fiscal year, showing a quantum jump, never experienced before [See fig7].

Fig-7: Month-Wise Workers Remittances (July,2000 to March,2003)

450 400 350

($ Million)

300 250 200 150 100 50 0 2000-Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2001-Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2002-Jul Aug Sep Oct Nov Dec Jan Feb 2003-Mar

Table-9.16 Workers Remittances ($ million) Months July August September October November December January February 2002-03 305.44 286.07 335.09 377.18 351.74 363.19 383.22 342.77 2001-02 84.74 87.91 91.19 185.35 259.87 189.49 180.52 233.85 % Change 260.44 225.41 267.46 103.50 35.35 91.67 112.29 46.58

Chapter 9. Trade and Payments March July-March Total Remittances including Hajj and War Compensation (July-March) With 29.2 percent share in total or 356.41 3101.11 3230.08 20.6 227.17 1540.09 1626.62 56.89 101.36 98.58

Source: State Bank of Pakistan percent of the total remittances.

remittances, the United States has emerged as the single largest source of cash remittances. Remittances from the US amount to $ 943.2 million or up by 95.0 percent over the corresponding period of last year. Remittances from the UAE are next in line with $ 665.9 million

Remittances from the UAE are also up by 91.4 percent against the corresponding period of last year. Remittances from Saudi Arabia are at $ 422.8 million or 13.1 percent of the total and are higher by 63.2 percent [See Table 9.17].

Table 9.17 Country-Wise Workers Remittances ($ Million) July-March Country I. Cash Bahrain Canada Germany Japan Kuwait Norway Qatar Saudi Arabia Sultanat-e-Oman U.A.E. (Abu Dhabi, Dubai, Sharjah, Others) U.K. U.S.A. Other Countries II. Encashment and Profit * Total (I + II) 2002-03 3200.63 53.30 11.17 17.97 6.35 184.43 6.54 66.79 422.75 69.21 665.88 197.45 943.21 555.58 29.45 3230.08 % Share 1.65 0.35 0.56 0.20 5.71 0.20 2.07 13.09 2.14 20.61 6.11 29.20 17.20 0.91 100.00 2001-02 1586.68 27.37 17.26 8.15 3.70 60.31 4.83 22.30 258.96 44.69 347.87 103.51 483.80 203.93 39.94 1626.62 % Share 1.68 1.06 0.50 0.23 3.71 0.30 1.37 15.92 2.75 21.39 6.36 29.74 12.54 2.45 100.00

* Encashment and Profit in Pak. Rs. of Foreign Exchange Bearer Certificates & Foreign Currency Bearer Certificates. Main factors contributed to the sharp increase in the inflow of remittances include; significant improvements in economic

Source: State Bank of Pakistan

fundamentals,

confidence

of

the

expatriate

Pakistanis on the economic management of the country, better exchange rate offered in the inter-

Chapter 9. Trade and Payments bank market as against the open market, aggressive marketing of Pakistani banks in foreign countries and motivating the people to send their remittances through banking channel, and crackdown on hundi/hawala system in the Middle East and other parts of the world. Foreign Exchange Reserves The foreign exchange reserves have dividend. The rising trend continued and foreign exchange reserves stood at $ 10.377 billion on end April, 2003 sufficient to finance around 11 months of imports. Since July 31, 2002 and until April 30, 2003, Pakistan has added $ 3.352 billion in its foreign exchange reserves. By the end of the fiscal year 2002-03, Pakistans gross reserves are likely to be around $ 11 billion. Pakistan has added $ 7.109 billion (till end April, 2003) in its reserves since July 31, 2001 [See Table 9.18 and fig.8]. With the impressive build up in reserves, Pakistan is in a position to meet any abnormal shock on external front.

crossed the $ 10 billion mark, for the first time in the history of Pakistan on 7th March, 2003. The governments macroeconomic policies that have been pursued over the last three years have paid

Table 9.18 Foreign Exchange Reserves End Period ($ Million) Month July, 01 August September October November December January, 02 February March April May June July August September October November December January, 03 February March April Reserves 3268.3 3373.4 3304.2 3594.7 4399.9 4814.2 4907.3 5111.9 5235.1 5292.3 5566.0 6259.5 7025.3 7543.6 8200.8 8547.2 9016.6 9335.4 9503.9 9625.4 10307.0 10377.2

Fig-8: Reserves - End Period

12000

10000

8000

($ Million)

6000

4000

2000

0 Oct Jul Nov Dec Jun Oct Nov Jan, 02 Dec Aug Sep Aug Sep Jan, 03 Apr Feb Feb Mar Jul, 01 May Mar Apr

Source: State Bank of Pakistan

Chapter 9. Trade and Payments Exchange Rate The exchange rate of Euro against Rupee The free-floating exchange rate system, which was adopted from July 21, 2000, remained operative during the current fiscal year 2002-03. The continued build up in foreign exchange reserves, surplus in current account balance and increased inflow of remittances through banking channel has strengthened Pakistani rupee viz. US dollar both in inter-bank foreign exchange market and in open market. The inter-bank exchange rate per US dollar averaged Rs. 57.7757 during April 2003, as against Rs. 59.7907 averaged during July 2002 [See Table 9.19 & fig.9], thereby showing an appreciation of 3.49 percent. In the open market, Pak rupee also gained strength during this period and appreciated by 3.25 percent. has gradually gained strength. Pak-rupee exchange rate in terms of one unit of Euro during January, 2002 averaged at Rs. 53.2444 which picked to an average of Rs. 59.3382 in July, 2002. In the month of April, 2003, the average parity rate of Euro was further up at Rs. 62.7277. Thus, Pak-rupee depreciated viz. Euro since the beginning of the current fiscal year and untill April, 2003 by 5.40 percent mainly because the Euro zone currency (Euro) has emerged as a single preferred currency for the local as well as for the global investors. The movement of Pakrupee exchange rate versus one unit of US dollar and Euro is given in Table 9.19 and fig.9.

Table 9.19 Average Exchange Rate ($/Rs and Euro/Rs)

Month January, 02 February March April May June July August September October November December January, 03 February March April

$/Rs 60.2011 60.1611 60.1020 60.1232 60.1253 60.1246 59.7907 59.5102 59.2578 59.0530 58.5852 58.4162 58.1828 58.0811 57.8675 57.7757

Euro/Rs 53.2444 52.3240 52.6262 53.2157 55.1108 57.3807 59.3382 58.1881 58.1051 57.9203 58.6465 59.6908 61.8154 62.5791 62.4554 62.7277
65 64 63 62 61 60 59 58 57 56 55 54 53 52 51 50

Fig-9: Average Exchange Rate

($/Rs and Euro/Rs)

(Rupees)

Oct

Jul

Nov

Dec

Mar

Jun

Jan, 02

Jan, 03

May

Feb

Feb

Mar

Apr

Aug

Dollar

Sep

Euro

Source: State Bank of Pakistan ______________________

Apr

Chapter 10. Foreign Economic Assistance

10. Foreign Economic Assistance

Pakistans external debt, by the end of the an average deficit of almost 5 percent of GDP in 1990s, has reached alarming proportions and the 1990s. As a result of the overall decline in the posted great danger to the economic future of the term structure of interest rates, the cost of

country. The debt crisis was essentially triggered The Paris Club debt rescheduling has provided by the unsustainability of the level of current substantial debt relief to Pakistan and also opened account deficits and pattern of their financing in the an avenue to achieve debt sustainability. The 1990s. During 1990-99, Pakistan ran current government has also set up a Debt Office in the account deficits [despite accruals of Resident Ministry of Finance to institutionalize its debt Foreign Currency Deposits (RFCDs) of $ 6.8 management capability. The progress towards billion] totaling $ 24.4 billion or at an average rate stabilizing the countrys debt situation for the last of 4.8 percent of GDP. If accruals to RFCDs are three years in general and during the current treated as borrowing rather than earnings, the fiscal year (2002-03) in particular, is presented cumulative current account deficit during 1990-99 was $ 31.2 billion or over 6 percent of GDP. This Total Stock of External Debt means that about one-third of total investment was And Foreign Exchange Liabilities financed from external borrowing as against a little over 20 percent in the 1980s. The level of current Pakistans total stock of external debt and account deficit that Pakistan ran in the 1990s was foreign exchange liabilities stood at $ 21.9 billion not sustainable even with a rapid expansion in the in 1990 and reached almost $ 38 billion by endexports. Thus, the debt service payments were not June 1999, thus registering a growth of 6.5 percent possible without exceptional assistance from the per annum. Following a credible strategy of debt International Financial Institutions (IFIs) as well as reduction over the last three years, Pakistan has not debt rescheduling.
Considerable progress has been made towards addressing Pakistans debt problem during the last three years. Current account balance has turned surplus in 2001-02 and is also projected to remain in surplus in 2002-03, against below:

borrowing from external sources have declined.

only succeeded in arresting the rising trend in external debt and foreign exchange liabilities but also succeeded in reducing them. External debt and foreign exchange liabilities have been reduced by $ 1.386 billion in two years, ending June 2002. During the first nine months (July-March) of the

Chapter 10. Foreign Economic Assistance

current fiscal year 2002-03, Pakistan has also worth of debt and liabilities [See Table-10.1 and succeeded in reducing another $ 0.949 billion fig-1].
External Debt and Foreign Exchange Liabilities ($ Billion) Item
1.Public & Publicly Guaranteed Debt A. Medium & long term (Paris Club, Multilateral & other Bilateral) B. Other medium & long term (Bonds, Military & Commercial)

Table 10.1

1990 18.2 14.7 2.7

1999 28.3 25.4 1.6

End June 2000 2001 27.862 28.145 25.359 2.373 25.586 2.302

End March

2002 29.235 27.276 1.776

2003 ** 29.381 28.133 0.991

C. Short term (IDB) 0.8 1.3 0.130 0.257 0.183 0.257 2. Private Non-guaranteed Debt 0.3 3.4 2.842 2.450 2.226 2.029 3. IMF 0.7 1.8 1.550 1.529 1.939 2.069 Total External Debt (1 through 3) 19.2 33.5 32.254 32.124 33.400 33.479 4. Foreign Exchange Liabilities * 2.7 4.1 5.664 5.015 3.132 2.104 - Foreign Currency Accounts (2.1) (1.4) (1.7) (1.1) (0.4) (0.0) 5.Total Debt and Liabilities (1 through 4) 21.9 37.6 37.918 37.139 36.532 35.583 Official Liquid Reserves 0.989 1.679 4.329 9.085 6. Net Debt and Liabilities 36.929 35.460 32.203 26.498 Source: Debt Management Committee Report (1990 and 1999) & State Bank of Pakistan (from 2000 onward) * Foreign Exchange Liabilities from 2000 onward are inclusive of National Debt Retirement Program & SWAP ** Provisional

Fig-1: External Debt and Foreign Exchange Liabilities (End-June)

40 35 30 25 20 15 10 5 0
2000 2001
Total Debt and Liabilities

($ billion)

2002

2003 (Jul-Mar)

Net Debt and Liabilities

It is important to note that Pakistan has not only succeeded in reducing external debt but at the same time built-up substantial foreign

exchange reserves. In other words, total external debt and foreign exchange liabilities when adjusted for SBP liquid reserves stood at $ 36.929

Chapter 10. Foreign Economic Assistance billion by end June 2000. The net debt and liabilities have further been reduced to $ 26.498 billion by end March 2003a reduction of $ 10.431 billion in less than three years [See Table10.1 and fig-1]. As percentage of GDP, external debt and liabilities stood at 64 percent in end June 1999; declined to 60.2 percent in end June 2002; and projected to decline to 50.4 percent by end June 2003. More importantly, the net external debt and liabilities have declined from 60.8 percent of GDP in end June 2000 to 53.1 percent in end June 2002 and is projected to decline to 37.9 percent by end June 2003. Medium and Long Term Stock of External Debt The medium and long term external debt has accumulated annually by almost one billion US dollar in the 1990s because of large current account deficits and heavy external borrowing. It, however, remained flat at around $ 25 billion per annum during 1998-99 to 2000-01 it did not show any appreciable increase due to reliance on short term borrowings. For the current fiscal year (July-March, 2002-03), the disbursed and out provisionally been estimated at $ 28.4 billion, as compared to $ 27.2 billion of last year (2001-02), thereby showing a growth of 4.4 percent during Medium and long term debt as percent of GDP

In order to achieve sustainability of external standing external debt (medium & long term) has debt, the government is contemplating to pre-pay

some of the expensive debts. The Debt Office of the first three quarters of the current fiscal year. the Ministry of Finance is currently engaged in during 2001-02 was 46.1 percent, as against 43.7 identifying expensive debts and examining their increase in debt to GDP ratio is attributed to terms and conditions associated with pre-mature
addition of capitalized interest in debt stock as a result of first two debt rescheduling agreements percentage of export earnings during 2001-02 was 297.9 percent as compared to 278.3 percent of 2000-01, which is significantly higher than the sustainable limit of 225 250 percent. The debt as
28365

percent of the preceding year (2000-01). The

payments. Beginning from the next fiscal year, the concluded with the donors [See fig-2]. The debt as government would like to start pre-paying the expensive debts.
30000

25423

25359

25608

27215

Fig-2: Debt Outstanding (Medium & Long Term)

60.0 55.0 50.0 45.0 40.0 35.0 30.0

22117

22292

25000
20322

22509

22844

15000

10000 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-2000 2000-01 2001-02 2002-03 (Jul-Mar)

15471

17361

20000

25.0

Debt Outstanding

As % of GDP

(As % of GDP)

($ Million)

19044

Chapter 10. Foreign Economic Assistance percentage of GDP and export earnings during 2002-03 is expected to be about 42 percent and 274 percent, respectively.

The debt service payments in the current Pakistan approached Paris Club thrice for fiscal year, 2002-03 are projected to increase by 18.0 percent to $ 1416 million, as against the seeking debt relief/debt rescheduling on its external bilateral debt. The first debt rescheduling payment of $ 1200 million of last year (2001-02) agreement was reached in January, 1999 for $ 2.4 due to higher cost and lower maturity of the previous loans. However, due to the debt relief during January 1, 1999 to 29th February, 2000 (resulting from rescheduling of debt) from the Paris (including debt service payments arrears from Club and Non-Paris Club donors/countries, the July, 1998). The second debt rescheduling debt servicing has significantly dropped. [See fig- agreement was signed in January, 2001 for debt 3]. Debt servicing as a percent of GDP has declined service payments falling due during the period from 3.3 percent in 2000-01 to 2.0 percent during from March 1, 2000 to September 30, 2001. The 2001-02. As percentage of export earnings, debt amount of debt relief under this agreement was $ 1.7 billion. These two reschedulings were flow servicing also declined from 21.3 percent in 2000rescheduling which limit rescheduling to the debt 01 to 13.1 percent in 2001-02, which is within the servicing (principal plus interest) falling due sustainable limit of 20 25 percent. The debt within a specified period (consolidation period) servicing as percentage of GDP and export which usually coincides with a countrys earnings during 2002-03 is expected to be about programme with the IMF. The flow rescheduling 2.1 percent and 13.7 percent, respectively. provides temporary relief, as after the
consolidation period, the magnitude of debt Fig-3: Debt Service Payments
($ Million)
3000 2500
1746 2136 2265 2353

billion, covering debt service maturities due

servicing reverts to the former high level. The issue of debt overhang is only deferred and not resolved.

2042

1961

1648

1530

2000
1513 1316

1512

The third rescheduling agreement was

1416 1200

1500 1000 500 0

negotiated with the Paris Club in December, 2001. Unlike the previous two reschedulings, the third one received stock treatment which takes into account the entire outstanding stock (principal plus accumulated arrears) and reprofiles it to over an extended period of time. The stock treatment is rare as it is restricted by the Paris Club to only Highly Indebted Poor Countries (HIPC). Pakistan

99-2000

2000-01

2001-02

Debt Service Payments

Rescheduling of Debt

2002-03

90-91

91-92

92-93

93-94

94-95

95-96

96-97

97-98

98-99

Chapter 10. Foreign Economic Assistance has been the fourth Non-HIPC country to get stock treatment of its debt beside Egypt, Poland and Yugoslavia. It is important to note that Pakistan did not seek standard Paris Club terms such as Houston, Naples or Cologne, rather it negotiated special terms which were Pakistan specific. It is also important to note that multilateral debts are not reschedulable and that only the bilateral Paris Club debt received stock treatment during the third rescheduling. The third rescheduling agreement debt is owed directly by the governments or their public sector agencies while the Non-ODA debt is advanced by financial institutions, suppliers/exporters and the private sector and is guaranteed either directly by their governments or their appropriate institutions. The ODA rescheduled debt will be repayable over a period of 38 years including 15 years of grace period and carries an interest rate as favourable as per under the original contracts whereas Non-ODA rescheduled debt is to be repaid over a period of 23 years including 5 years of grace period at an appropriate market rate. The deferred debt in respect of post cut off date loans will be repaid in 4 consecutive equal semi-annual instalments starting from May 31, 2005 and ending on November 30, 2006. As a result of the third debt rescheduling, an estimated relief of $ 1.2 billion to $ 1.5 billion will accrue annually in payments of debt servicing on external debt in the medium term during the years 2001-02 to 2004-05. This would have favourable effect on the balance of payments as well as on external/financial position of the economy. This coupled with fresh disbursements from multilateral (IMF, ADB and World Bank) and bilateral creditors (USA, U.K, Japan & Saudi Arabia, etc) , not only the balance of payments but also the reserve position and credit rating of the country has improved. provides rescheduling of Pakistans total bilateral public and publicly guaranteed debt of over one year maturity, outstanding as on November 30, 2001. The total stock of bilateral debt, eligible for debt rescheduling, was estimated at $ 12.5 billion, outstanding as on November 30, 2001 (including the debt service payments in arrears and the amount of previously rescheduled debt). The Paris Club also agreed to defer 100 percent of the amount of principal and interest due and not paid as on November 30, 2001 and those falling due during December 1, 2001 to June 30, 2002 in respect of loans, signed after September 30, 1997 (post cut-off date loans) including deferment of 100 percent of the amount of moratorium interest on rescheduled debt due during November 30, 2001 to June 30, 2002 as well as 20 percent of the amount of moratorium interest due during July 1, 2002 to June 30, 2003 and July 1, 2003 to June 30, 2004. Out of the total debt of $ 12.5 billion, the Official Development Assistance (ODA) debt consists of $ 8.5 billion (68%) and Non-Official Development Assistance (non-ODA) debt of $ 4.0 billion or 32 percent (approximately). The ODA

The Paris Club creditors, Denmark and Commonwealth Development Corporation of U.K. have waived off their entire outstanding debt of $ 18.4 million and $ 29.5 million respectively, while Netherlands has given remission in debt service

Chapter 10. Foreign Economic Assistance

payments falling due during October 2001 to have been signed except that of Republic of Korea December 2002, equivalent to $ 14.3 million and and Russian Federation which are under USA has cancelled an amount of $ 1.0 billion of finalization) and $ 0.071 billion have been deferred their debt. Thus, total cancellation of debt comes to in respect of post cut-off date loans. These amounts $ 1.062 billion. Total amount of $ 11.550 billion also include Non-Paris Club creditors. The has been rescheduled (all the bilateral agreements country-wise detail is given in table 10.2.

Chapter 10. Foreign Economic Assistance Table 10.2 Country-Wise Rescheduling / Restructuring of External Debt ($ Million) S.No Country Amount Rescheduled 35.019 53.634 392.913 6.122 1544.141 1171.207 180.649 4561.119 81.101 32.547 80.006 160.061 72.839 1994.686 10.525 143.254 812.336 11332.159 7524.233 3807.926 11332.159 Amount Cancelled 18.438 14.354 1000.000 29.481 1062.273 1062.273 1062.273 Amount deferred for 5 years 0.064 2.745 3.007 0.579 3.427 6.067 3.621 19.510 2.510 17.000 19.510 Total

A. Paris Club 1 Austria 2 Belgium 3 Canada 4 Denmark 5 Finland 6 France 7 Germany 8 Italy 9 Japan 10 Netherlands 11 Norway 12 Spain 13 Sweden 14 Switzerland 15 U.S.A. 16 U.K. 17 Russian Federation 18 Republic of Korea A. Total ODA Non-ODA Total: ODA + Non-ODA B. Non-Paris Club 1 Saudi Fund 2 China 3 Kuwait 4 CZECH 5 Turkish Eximbank B. Total ODA Non-ODA Total: ODA + Non-ODA ODA (A + B) Non-ODA (A + B) G. Total

35.019 53.634 392.913 18.438 6.122 1544.205 1173.952 180.649 4564.126 96.034 35.974 80.006 160.061 72.839 3000.753 43.627 143.254 812.336 12413.942 8589.016 3824.926 12413.942

53.346 119.009 41.024 4.018 217.397 124.575 92.822 217.397 7648.808 3900.748 11549.556

1062.273 1062.273

51.602 51.602 51.602 51.602 2.510 68.602 71.112

53.346 119.009 41.024 4.018 51.602 268.999 124.575 144.424 268.999 8713.591 3969.350 12682.941

Source: Economic Affairs Division

Chapter 10. Foreign Economic Assistance Note: All the bilateral agreements have been signed except that of Republic of Korea and Russian Federation which are under finalization.

Foreign Aid-Commitments The commitments of foreign aid has exhibited a declining trend over time, especially in the second half of the 1990s, declining from $ 3025 million in 1994-95 to $ 1759 million in 1996-97 because of decline in the global saving and subsequent poor international aid environment.

Economic sanctions further clouded the aid commitments which declined to as low as $ 665 million in 1999-2000. Nevertheless, the restoration of relationships with the International Financial Institutions (IFIs) improved the environment for the aid commitments. During the current fiscal year (2002-03), these are expected to be $ 2299 million [See Table 10.3].

Table 10.3 Commitments of Aid by Use

($ Million) 199495 2714 311 3 279 29 3025 199596 2219 462 57 395 10 2681 199697 1351 408 1 405 2 1759 199798 776 1330 751 578 1 2106 199899 1382 837 650 185 199900 260 405 0 403 200001 193 916 914 0 200102 1138 2350 2288 41 200203 (E) 1202 1097 1090 0

I. Project Aid II.Non-Project Aid a) Non-Food b) Food Aid c) Relief Assistance for Afghan Refugees

Total (I + II) E: Estimated

2 2 2 21 7 2219 665 1109 3488 2299 Source: Economic Affairs Division 1999-2000. However, with the restoration of relationships with the International Financial Institutions, the aid disbursements (programme loans) have improved. During the current fiscal year (2002-03), a sum of $ 1851 million is expected to be disbursed. The position of disbursements by type and use is summarized in table 10.4.

Foreign Aid-Disbursements
Like commitments, the disbursements of foreign aid with some fluctuations have also continued to decline over the years as a result of poor international aid environment. The disbursements have declined from $ 2565 million in 1995-96 to $ 1428 million in

Table 10.4 Disbursements of Aid by Use

($ million) 1995-96 I. Project Aid II. Non-Project Aid a) Non-Food 2151 414 21 1996-97 1821 412 1 1997-98 1552 1249 626 1998-99 1620 822 550 99-2000 1110 318 125 2000-01 919 680 678 2001-02 640 1676 1624 2002-03 (E) 807 1044 1027

Chapter 10. Foreign Economic Assistance 1995-96 b) Food Aid c) Relief Assistance For Afghan Refugees Total (I+II) E: Estimated 383 1996-97 409 1997-98 622 1998-99 270 99-2000 191 2000-01 0 2001-02 31 2002-03 (E) 10

10 2565

2 2233

1 2801

2 2442

2 2 21 7 1428 1599 2316 1851 Source: Economic Affairs Division

Debt Service Payments and Net Transfers The increased liability of debt service payments has squeezed the net inflow of foreign resources. The net transfers of aid in the 1990s averaged at $ 534 million per annum. They were as high as $ 853 million or 36 percent of gross disbursements in 1991-92 but turned negative by $ 34 million in 1996-97 due to lesser disbursements and relatively more growth in debt service payments. However, the net transfers improved to $ 910 million (37% of gross disbursements)

during 1998-99 due to lower debt servicing, resulting from debt rescheduling but turned negative again to the extent of $ 364 million in 2000-01 due to economic sanctions and lower disbursements. However, the net transfers once again improved substantially to $ 1095 million (48% of gross disbursements) in 2001-02 due to exceptional support from USA and G-8 countries after 11 September. The projection of net transfers for current fiscal year 2002-03 is $ 428 million or 23 percent of gross disbursements. The annual details are given in table 10.5 and fig-4.

Debt Servicing and Net Transfers

Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 99-2000 2000-01 2001-02 2002-03 (E) Gross Disbursements* 2045 2366 2436 2530 2571 2555 2231 2800 2440 1426 1597 2295 1844 Debt Servicing ** 1316 1513 1648 1746 2042 2136 2265 2353 1530 1512 1961 1200 1416 Net Transfers (N.T) 729 853 788 784 529 419 (-) 34 447 910 (-) 86 (-)364 1095 428 ($ million) NT as % of Gross Disbursements 36 36 32 31 21 16 (-) 1 16 37 (-) 6 (-)23 48 23

Table 10.5

* Excluding relief assistance for Afghan refugees Source: Economic Affairs Division. ** Excluding interest on short-term borrowings, IMF charges and Euro Bonds. Data since 1999-2000 onward is inclusive of IMF & bonds. E. Estimated.

Chapter 10. Foreign Economic Assistance

Fig-4 : Net Transfers as Percent of Gross Disbursements
60 50 40 30 20 10 0 -10 -20 -30 99-2000 2000-01 2001-02 2002-03 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99

NT as % of Gross Disbursements

Sources of Aid

The major sources of foreign economic assistance to Pakistan have been the Consortium, NonConsortium and Islamic Countries. Among these, the Aid-to-Pakistan Consortium, that is, 'Pakistan Development Forum' (including assistance from Consortium sources under outside Consortium arrangements) is the largest source of economic assistance to Pakistan. The share of Consortium sources in total commitments during 2002-03 is likely to be 85.1 percent. Likewise the share of Consortium sources in the total disbursements during the current fiscal year (2002-03) is expected to be 80.4 percent. The source-wise commitments and disbursements are summarized in table 10.6.

Sources of Foreign Aid * Commitments % 2002-03 Share (E) 78.9 1957 10.6 210 9.9 126 99.4 2293 0.6 100.0 6 2299 % Share 85.1 9.1 5.5 99.7 0.3 100.0 Disbursements % 2002-03 Share (E) 94.3 1488 1.9 199 2.9 157 99.1 1844 ($ million) % Share 80.4 10.7 8.5 99.6

Table 10.6

2001-02 Consortium Non-Consortium Islamic Countries Sub Total Relief Assistance For Afghan Refugees Total 2751 369 347 3467 21 3488

2001-02 2184 43 68 2295

21 0.9 7 0.4 2316 100.0 1851 100.0 Source: Economic Affairs Division * Excluding short-term credits of one and less than one year maturity. E: Estimated 2001-02 due to difficulties in counterpart Project Vs Non-Project Aid financing. The share of non-project aid on The share of project aid in the 1990s the other hand increased from 42.5 percent averaged 73 percent per annum or $ 1736 in 2000-01 to 72.4 percent during 2001-02 million with annual fluctuation in the range due mainly to higher disbursements of the of 55-84 percent. The share of non-project aid programme loans of World Bank and Asian during the same period fluctuated even Development Bank. The project aid and nonmore widely (16-45 percent) and averaged at project aid during the current fiscal year 27 percent per annum ($ 637 million). The (2002-03) has been estimated at $ 808 million share of project aid during 2000-01 was 57.5 (43.7%) and $ 1043 million (56.3%) percent, which declined to 27.6 percent in respectively [See Table 10.7 and fig-5].

Table 10.7 Disbursement of Project and Non-Project Aid

($ Million) Year Project Aid % Share Non-Project Aid % Share Total

Chapter 10. Foreign Economic Assistance Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 99-2000 2000-01 2001-02 2002-03 * * Estimated Project Aid 1,408 1,766 1,895 1,961 2,079 2,151 1,821 1,552 1,620 1,110 919 640 808 % Share 65.3 71.5 76.0 76.9 80.0 83.9 81.5 55.4 66.3 77.7 57.5 27.6 43.7 Non-Project % Total Aid Share 748 34.7 2,156 705 28.5 2,471 598 24.0 2,493 588 23.1 2,549 521 20.0 2,600 414 16.1 2,565 412 18.5 2,233 1249 44.6 2,801 822 33.7 2,442 318 22.3 1,428 680 42.5 1,599 1676 72.4 2,316 1043 56.3 1,851 Source: Economic Affairs Division

Fig-5: Disbursements of Project & Non-Project Aid

3000 2500

($ Million)

2000 1500 1000 500 0 99-2000 2000-01 2001-02 2002-03 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99

Total

Project Aid

Non-Project Aid

Composition of Aid The composition of aid over the years has considerably changed from grants and grant type assistance to hard term loans. The share of grant and grant type foreign assistance in total commitments was 80 percent during the First Five Year Plan (1955-60) but dropped to 46 percent during the Second Plan (1960-65) and continued to decline thereafter, averaging 32 percent during the Third Plan (1965-70) and 10 percent during the Fourth Plan (1970-75). However, due to the relief assistance for Afghan Refugees, its share increased to about 22 percent during the Fifth Plan (1978-

83) and remained almost the same during the Sixth Plan (1983-88). The share of grants and grant type assistance continued to exhibit a declining trend thereafter and averaged at 16 percent during the Seventh Plan (1988-93). It was only 9 percent during Eighth Plan (1993-98). It however, increased to 13 percent in 1998-99 and further to 18 percent during 1999-2000 but declined again to 4 percent during 2000-01 due to economic sanctions and poor aid environment. However in 2001-02, it again increased to 31 percent of total commitments due to higher inflow of assistance from donor agencies and during the current fiscal year (2002-03), it is expected to be only 15 percent.

Chapter 10. Foreign Economic Assistance Terms of Loans and Credits

credits have significantly become harder over the The terms of bilateral foreign loans and years. The terms and conditions of the loans and credits were soft during the 1960s and 1970s, as compared to the terms of the 1950s. During the 1980s and 1990s, these terms have been made somewhat more harder. The rate of interest, which averaged at about 4.6 percent during the 1950s, declined to 3.3 percent during the 1960s and 3.6 percent during the 1970s, but increased to 4.8 percent and 4.4 percent during the 1980s and 1990s, respectively. The payment period of the loans/credits during the 1950s was 21 years with a grace period of 2 years, which improved to 30 years with a grace period of 7 years during the 1960s, but reduced to around 25 years with a grace period of 6 years during the 1970s. Repayment period, however, improved to 28 years including a grace period of 7 years in the 1980s but declined to 21 years including a grace period of 6 years during the 1990s. During 2000-01, the repayment period was 24 years including a grace period of 6 years. The terms of loans and credits became harder as not only the grant element has become quite insignificant but the aid also became donors driven i.e. on the pre-specified terms and conditions of the donors. Furthermore, the commercial loans were available only on higher interest rates. By and large, the hardening of terms identified by higher average interest rates and lower average maturity periods of the loans have adversely affected Pakistan's external debt servicing.
________________________

Chapter 11. Education

11. Education
Introduction
Education is an essential tool for Human Resource Development and a necessary ingredient for sustainable socio-economic growth. Pakistan started with a very low education profile but today a lot has been achieved. Literacy rate, counted by number of people 'who could read only' in 1951, was 16% has now been calculated on the basis of those 'who are able to read with understanding and can write a short statement' is 51.6% in 2003. The number of primary schools increased from about 8000 in 1947 to around 170000 in 2003. Gross enrolment at this level increased from 0.77 million to about 20 million. The number of elementary/secondary schools, colleges and universities has correspondingly increased. However, there is still a lot to be done in order to make Pakistan a prosperous country. The challenges of the 21st Century could be faced through identifying issues, developing strategies and operational programmes in Education sector. Ten Year Perspective Development Plan 2001-11 and Three Year Development Programme 2001-04 have been prepared in this context. Expansion of education is dependent on fiscal resources. During the last decade of the outgoing millennium however, adverse macroeconomic conditions and keen inter-sectoral competition for public funds seriously impaired the government's ability to continue expanding education. At the highest policy level within the government, it is readily conceded that investment in education contributes to the accumulation of human capital, which is essential for higher incomes and sustained economic growth. Education, especially basic (primary and lower-secondary) education helps reduce poverty by increasing the productivity of the poor, by reducing fertility and improving health, and by equipping people with the skills they need to participate fully in the society. More generally, education helps strengthen civil institutions and build national capacity and good governance in the implementation of sound economic and social policies. Despite this awareness, major challenges remain to increase access to education, to improve equity, to improve quality, and to commit resources for educational reform. Delays in reforming the education system to keep pace with economic structure will most likely hinder Pakistan's economic prosperity. Conversely, timely reforms can pay off in terms of economic growth and poverty reduction, as is evident from the experience of East Asian countries who have generally invested heavily in basic human capital, both male and female. Education has a positive impact on individual earnings and also yields substantial externalities: parents education and mother's literacy and education are associated with low infant mortality rates, higher enrollment and achievement rates of children and less gender differences in enrollment of children. Pakistan is facing the challenges of coverage and quality in education. The gender-gap has narrowed slightly due partly to decline in male enrollment at secondary level in public sector schools who have shifted into private options. There are also significant differences across provinces with decline in enrollment in Sindh and Baluchistan in public sector education.

Chapter 11. Education Problems to ensure quality education are widespread. These are acknowledged at all levels and encompass teacher shortage and absenteeism, minimal supervision, poor infrastructure and shortage of teaching materials. While Social Action Programme (SAP) succeeded in increasing the number of schools, inadequate attention was given to quality education including teacher's availability and teacher's accountability. This rendered many schools non-functional. The growth in private schooling estimated at 30% of total provision, especially in rural areas, suggests that there is considerable demand for quality education.
Literacy Rate, Population and GDP Growth

National Literacy Campaign (Integrated approach to comprehensive Literacy and Poverty Reduction) has been launched through out the country. The campaign envisages making 13.5 million people literate to enhance the literacy rate to 60% by 2005. Around 270,000 adult literacy centers would be open for this purpose.

The table and figures showing literacy rate, change by percentage point, population growth and GDP growth from 1991 to 2003 are given below Table-11.1 and figure-I).

Literacy rate is estimated to be 51.6% in 2002-03. Under the Education Sector Reforms, Table 11.1 Literacy Rate - Population and GDP Growth Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Literacy Rate 34.9 36.0 37.2 38.4 39.6 40.9 42.2 43.6 45.0 47.1 49.0 50.5 51.6 Change by Percentage Point 1.1 1.2 1.2 1.2 1.3 1.3 1.4 1.4 2.1 1.9 1.5 1.1 Population Growth GDP growth

2.63 5.4 2.60 7.6 2.56 2.1 2.51 4.4 2.47 5.1 2.43 6.6 2.38 1.7 2.34 3.5 2.29 4.2 2.24 3.9 2.22 2.4 2.16 3.6 2.10 5.1 Source: Federal Bureau of Statistics Ministry of Education.

Chapter 11. Education

Fig-1: Literacy Rate

55 50 45 40 35 30 25 20 15 10 5 0 1991
Gender Education

NWFP, of the total 93 upgraded institutions, 80% are girls and mixed schools. Furthermore all 50% Gender disparity in primary and secondary development allocations are being provided to girls education exists in low income countries. The schools. Ministry of Education has a special desk gender gap, on average, stood at 11 percentage Gender in the Education For All (EFA) Wing for points at the primary level and 19 percentage points facilitating: for at the secondary level. The gap is widest in several Asian countries as well as in several Africa and the Gender sensitization and training. Middle Eastern countries. Eliminating gender gaps Development of research, survey and in basic education/literacy is the cornerstone of data tools/systems to analyze gender Government of Pakistan Policy for social issues and ensure the application of development in general and in education in pertinent sex-disaggregated data. particular. Ministry of Education has a policy Gender-responsiveness in planning, framework in place to advance gender equality in implementing, monitoring & evaluating, education. Each target is gender disaggregated in and gathering of lessons learned. Education Sector Reforms(ESR) and Education For All (EFA) Programs. Diverse programs and Communication, information -sharing strategies have been developed, ranging from and problem-solving on gender and education issues. compensatory programs such as stipends at middle and secondary levels, free textbooks and school Experience sharing between government nutrition support to girls schools. Initiatives in and non-government stakeholders in Public Private Partnerships such as school upeducation. gradation program in the afternoons has resulted in a higher coverage for girls at middle, secondary and National Education Policy 1998-2010. higher secondary levels. Of the 6240 schools upgraded in Punjab and NWFP, 3787 or 60.76% Gross enrolment ratio at primary level will are girls schools, and 18% are mixed schools. This be program is an outstanding example of addressing increased to 105% by year 2020 and gender equity in Pakistan for non-elite groups. In Compulsory Primary Education Act will be

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Chapter 11. Education Assessment System, revamping of Science promulgated and enforced in a phased manner. Full Education facilities, establishing technical utilization of existing capacity at the basic level has institutions, improving quality of education at all been ensured by providing for introduction of levels. Total size of the Plan is estimated at Rs.192 double shift in existing school of basics education. billion including federal provision of Rs.54 billion. One model secondary school will be set up at each Ten Year Perspective Plan 2001-11 and Three The district level. A definite vocation or a career will be Year Programme 2002-05 propose to increase the introduced at secondary level. It would be ensured literacy rate to 59% (69% for male & 47% for that all the boys and girls, desirous of entering female) by 2005. It is estimated that during 200203, secondary education, are enrolled in secondary about 3.2 million additional population of age 10+ will become literate through primary schools. Curriculum for secondary and higher education. To equip the teachers and students of secondary will be revised and multiple textbooks Madaris with latest knowledge of Science and will be introduced. The participation rate will be Information Technology, it is intended to increased from 31% to 48% by 2002-03. Both introduce formal subjects in willing Madaris. The formal and non-formal means shall be used to Federal Government will provide financial provide increased opportunities for in-service assistance to these Madaris for salaries of teachers, books, computers and teachers training etc. training to the working teachers, preferably at least once in five years. To evolve an integrated system It is estimated that during 2002-03 gross of national education by bringing Deeni Madaris participation rate at Primary level will increase and modern schools closer to each stream in from 85% to 88% (Male from 97% to 99% and curriculum and the contents of education Nazira Female from 72% to 76%). At Middle level gross Qur'an will be introduced as a compulsory participation rate is estimated to increase from component from grade I-VIII while at secondary to 59% (Male from 57% to 60% and Female 57% level translation of the selected verses from the from 46% to 49%). At Secondary level the participation rate is estimated to increase from Holy Qur'an will be offered.
Ten Year Development Plan

Ten Year Perspective Plan 2001-11 and Three Year Development Programme 2002-05 have been prepared on the basis of National Education Policy 1998-2010 to address the issues of low literacy and participation rates at various levels of education, quality of education, limited options for technical/vocational education and low participation of private sector. The Plan proposes new initiatives for achieving accelerated literacy rate, opening/upgrading of primary/secondary schools, Teachers training projects, Establishment of National Education

38% to 40% (Male from 45% to 47% and Female from 31% to 34%). Technical Education is being introduced at district level. Technical stream at Secondary level is also under implementation. A virtual university has been established. Model university ordinance has been approved. Information Technology (IT) facilities have been provided to universities. In order to improve access and quality of Higher Education, Higher Education Commission has been set up to formulate policies, guiding principles and priorities for higher education institutions for promotion of socio-economic development of the country.

Chapter 11. Education

Private Sector Educational Institutions

higher education with a focus on science and technology and research in Pakistan. The plan aims at increasing access to higher education from 2.6 percent to 5 percent with substantial contribution from the private sector, establishing Endowment Funds in engineering universities in the public sector, shifting emphasis from humanities to science and technology, and introducing IT education in all public universities. To bring institutional improvement, a model University Ordinance is under consideration that regulates university structures. The government has also established a Virtual University with affiliate campuses. There are 96 universities/degree awarding institutions in the country as against 48 in 1999. The Government has begun additional funding and performancebased incentives to universities to implement their modernization program. Priority will be given to investments in the areas of (a) institutional capacity building to strengthen administration and management capacity at the national, provincial and university levels, (b) upgrading of professional and academic skills of faculty relevant to teaching and learning; (c) quality inputs to make the teaching and learning environment more effective; and developing linkages with industry in Pakistan. Access to higher education shall be expanded to at least 5% of the age group 17-23 by the year 2010. Merit shall be the criterion for entry into higher education. Access to higher education, therefore, shall be based on entrance tests, reputed degree colleges shall be given autonomy and degree awarding status. Split Ph.D programs shall be launched in collaboration with reputed foreign universities and at the minimum, 100 scholars shall be annually trained under this arrangement. All quota/reserve seats shall be eliminated. Students from backward areas, who clear entry tests, would compete amongst themselves.

There shall be regulatory bodies at the national and provincial levels to regulate activities and smooth functioning of privately-managed schools and institutions of higher education through proper rules and regulations. A reasonable tax rebate shall be granted on the expenditure incurred on the setting-up of educational facilities by the private sector. Matching grants shall be provided for establishing educational institutions by the private sector in the rural areas or poor urban areas through Education Foundations. Existing institutions of higher learning shall be allowed to negotiate for financial assistance with donor agencies in collaboration with the Ministry of Education. Educational institutions to be set up in the private sector shall be provided (a) plots in residential schemes on reserve prices, and (b) rebate on income tax, like industry. Schools running on non-profit basis shall be exempted from all taxes. Curricula of private institutions must conform to the principles laid down in the Federal Supervision of curricula, Textbooks and Maintenance of Standards of Education Act, 1976. The fee structure of the privately managed educational institutions shall be developed in consultation with the government.
Higher Education

The development of strong institutions of higher education and quality research are crucial for sustained education and economic development. Pakistan's public and private universities except a few are confronted with lack of resources, ineffective governance and institutional weaknesses. The Government has dissolved university grants commission and has established a Higher Education Commission (HEC) under an Ordinance in 2002 to strengthen

Chapter 11. Education A major development in higher education is the establishment of the Higher Education Commission which was established on 14th August, 2002. The Commission has replaced the University Grants Commission which will pursue the following broad objectives: increasing access to higher education from 2.6% to 5% by 2005. Increasing enrolment from 100,000 to 200,000 students by 2005. Private sector to raise its share of enrolment to 40% of the total by 2005. Increasing allocation to higher education from 0.39% to 1% of GDP by 2005. Increasing allocation for research through an Endowment Fund. Shift from Humanities to Science & Technology from current 70:30 ratio to 50:50 by 2005. Up gradation of social sciences programs and staff development accordingly. Introducing IT Education in all public universities. Introducing a one year honors course after Bachelor's Degree and/or a three years Master's Program. IT Education facilities provided to 27 universities. An Ordinance on Higher Education Commission (HEC) has been promulgated and HEC established. Model University Ordinance approved for better governance and management of Public Sector Universities. Virtual University established.

Information Technology

Information technology has been extended to over 4000 educational institutions including schools in collaboration with private sector and programs in large-scale teacher training. Provincial Skill Development Centers and |Institutes of Technical Education are providing training to students and youth in different computer courses to meet the market demand. A program is underway to train federal ad provincial government employees in IT skills. Computers shall be introduced in

secondary schools in a phased manner. School curriculum shall be revised to include recent developments in information technology. Education Sector Reforms (ESR). Education Sector Reforms (ESR) program is designed in the long term perspective of National Education Policy (1998-2010) and Ten Year Perspective Development Plan (2001-2011). ESR is strategically positioned in the objective conditions prevailing in the country. Education planning and management has been devolved from the Federal and Provincial Governments to the District Governments. Much of the action

Achievements

Expansion from 48 Universities in 1999 to 77 in 2002, includes 35 public sector universities. Rs.1 billion spent on shift from Humanities to S&T in higher education. Rs.1 billion Endowment Fund for promotion of research, for Engineering Universities.

Chapter 11. Education concerning education lies in the communities, tehsils and districts. Educational planning and decision-making will now take place where the action is. Centralized systems and distanced planning will be replaced by governance which is people and learner-centered. Not only will this make the system more objective and rational but also more efficient. ESR is a comprehensive sector-wide program for increased access, enhanced equity and improved quality at all levels of education. The quality aspects of education are addressed through modernization of curricula, up gradation of teacher training and reforms of examinations. A National Education Assessment System within the school system is being established to carry out assessment of students' achievement to be used as a basis for improvement of policy and planning, and teacher training. A comprehensive package of education sector reforms (ESR) with medium term targets (2001-05) has been finalized through a consultative process with over six hundred partners. ESR has linked with four concurrent macro level initiatives, which include Devolution, the Interim Poverty Reduction Strategy Paper, SAP II restructuring and the National Commission on Human Development (NCHD). The major thrust areas of ESR are: i) National Literacy Campaign-Integrated approach to Poverty Reduction; Mainstreaming Madrassahas; Universal Primary/Elementary Education (EFA); Improving the quality of Education: Curriculum Reforms, Teacher Education and Training Examination Reform and Assessment; v) Technical Stream at level/Technical Education; Higher Education Sector; and Public Private Partnership. Secondary

vi) vii)

The six thrust areas have been enhanced to seven including mainstreaming of Madaris.

ii) iii)

iv)

Chapter 11. Education The ESR targets for each Sub-Sector are given in Table-11.2.

Table-11.2 Education Sector Reform Targets (2001-2005) Sub-Sector 2001 Literacy(Percentage) 49% Gross Primary Enrolment (percentage) 83% Net Primary Enrolment (Percentage) 66% Middle School Enrolment (percentage) 47.5% Secondary School Enrollment (Percentage) 29.5% Higher Education Enrolment (percentage) 2.6% Technical Stream Schools (Nos) 100 77 Polytechnics/Mono-technics (Nos) 148 Madaris Mainstreaming (Nos) 200 Public-Private Partnerships (Nos) ESR Programmes have been launched in all Provinces and Federal Areas under Devolution Plan. The Education Sector Reforms (ESR) Action Plan (2001-2005) is a blend of home grown initiative. Changing technology and economic reforms are creating dramatic shifts in the structure of the country's economy. The rapid increase in knowledge and the pace of changing technology raise the possibility of sustained economic growth with prospects of increased human resource demand. These developments have created two key priorities for education, it must meet the country's growing demand for adaptable workers who can readily acquire new skills, and it must support the continued expansion of knowledge.

Target 2005 60% 100% 76% 55% 40% 05% 1100 160 8000 26000

alleviation and promote public private partnerships. The Reforms focus on improvement of planning procedure, resource mobilization and utilization through a sector wide approach to develop all subsectors within the macro level framework including institutional reforms at all levels of governments engaged in planning and service delivery for quality education. A vocational technical education stream is being introduced at secondary education level. ESR Financial Requirements for 2001-05

The original ESR package was of Rs.55.5 billion for the years 2001-04. The duration of this package has been extended to 2001-05 to The ESR is linked to Education For All accommodate President's Programs viz (EFA) goals up to 2001-15. The Reforms seek to Mainstreaming Madaris and setting up Monoenhance education entitlement for poverty technics/Polytechnics at Tehsil level. Therefore, the cost estimates have increased to Rs.100 billion (Table 11.3).
Table 11.3 Financial Requirements for Education Sector Reforms Action Plan 2001-05* Programs Literacy Campaign Elementary Education Secondary Education Technical education College/Higher education 2001-02 0.8 4.0 1.0 0 1.0 2002-03 2.0 9.0 3.0 3.0 3.0 2003-04 2.5 10.0 3.0 5.0 3.0 2004-05 3.0 11.0 3.0 7.0 3.0 (Rs. In Billion) Total % 8.3 8.3 34.0 34 10.0 10 15.0 15 10.0 10

Chapter 11. Education Mainstreaming Madaris Public-private partnership Quality Assurance Total 0 0.1 1.0 7.9 5.0 0.2 2.0 27.2 5.0 0.2 2.0 30.7 4.0 14.0 14 0.2 0.7 0.7 3.0 8.0 8 34.2 100 100 Source: Ministry of Education

*: Education Sector Reforms, Action Plan 2001-05. Education For All (EFA) -

Education For All refers to the global commitment to ensure that by 2015 all children would complete primary education of good quality (Universal Primary Completion), and that gender disparity would be eliminated in primary and secondary education preferably by 2005 and no later than 2015. This commitment was made at the World Education Forum in Dakar, Senegal in April 2000 and reaffirmed in the Millennium Declaration in New York in September 2000. The Government of Pakistan is attaching top priority of EFA. The country has ten year Perspective Development Plan (2001-11) to visualize the long term macroeconomic and sectoral growth strategies, Poverty Reduction and Human Development is the priority area of the Plan. Sector-wide development approach covering all the sectors of education has been adopted under the Perspective Plan. In order to address the EFA implications linkage plan focusing on development of other sectors of Education has also been prepared.
Nearly 80% of the ESR covers different goals of Education for All by 2015, reducing illiteracy by 50 percent with a focus on reducing the gender gap by 2015, life skills and learning opportunities for youth and adults; and early childhood education. The targeted groups for EFA goals belong to disadvantaged communities with minimal opportunities. These groups are highly vulnerable, without access to learning facilities, or public sector facilities, which are functioning at sub-optimal levels. -

Integrated non-formal education provision to different age groups where there is no education provision: sensitive to gender and development approaches for disadvantaged girls and boys, women and men (including child labour). Non-formal programs to target nomads, reverine communities and women and children in prison and darul amans. Early childhood provision in targeted schools for improved "Katchi" programs. Shelterless schools given buildings at elementary level. Primary schools upgraded to elementary level especially for girls in far-flung areas and under-developed districts. Incentives to be provided such as free textbooks, school nutrition, scholarships and loans to students in both government and NGO institutions.

Skill training of out of school youth in the evening. Linkages of technical stream and model technical high schools to micro-credit and poverty alleviation programs.

Each sub sector of EFA targets the socially excluded groups through.

Chapter 11. Education Linkages of women's literacy programs and technical high schools to micro-credit and poverty alleviation programs. Grant of charter to private universities to incorporate provision for scholarship to meritorious needy students. Public sector higher institutions to

become equitable in their fee schedules. Free meal and nutrition to girls under Tawana Pakistan Program.

Funds required for the EFA Sectors under primary education, adult literacy and early childhood education are given in the table-11.4.

Table 11.4 (Rs. In million) EFA Sectors a) Primary Education 37,870 21,640 59,510 16,582 36,857 53,439 2,450 4,345 6,795 10,202 52,690 62,892 16,775 41,246 58,021 3,075 10,500 13,575 14,966 64,810 79,776 17,811 50,705 68,516 6,375 21,000 27,375 Phase-1 (2001-02 to 2005-06) Phase-II (2006-07 to 2010-11) Phase-III (2011-12 to 2015-16)

Development Recurring Total b) Adult Literacy Development Recurring Total c) Early Childhood Education Development Recurring Total

Source: National Plan of Action, Ministry of Education, Islamabad. Given the existing level of financing through the PSDP (Rs.2604 million for 2002-03), it is unlikely that the resources required for achieving the above targets would become available. The pattern of national education budget for the years 1995-96 to 2002-03 is given in the Table-11.5.

Table 11.5 National Education Budget During (1995-96 to 2002-03) (Rs. In billion) Year 1995-96 1996-97 Recurring Budget 39.610 40.536 Development Budget 2.585 1.968 Total Education Budget 42.195 42.504 % of GDP 2.00 2.62

Chapter 12. Health and Nutrition 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 46.100 46.979 51.572 54.396 64.975 67.270 2.984 2.427 2.430 1.966 2.500 2.604 49.084 49.406 54.002 56.362 67.475 69.874 2.34 2.40 1.7 1.6 1.9 1.7

Source: Ministry of Education __________________________

Chapter 12. Health and Nutrition

12. Health & Nutrition

Heath is a priority area of Government meet the recurring expenditure, malnutrition activities. The high correlation between the particularly among the children and women of expenditures on health and productivity in developing reproductive age and suffering from the worse effects of countries like Pakistan is enough to emphasize the Malaria, Tuberculoses, AIDS and Drug Abuse are the importance of increasing health services as an aid to major areas of serious concern. The low level of life growth. Hence in the health sector, poverty and ill expectancy (63 years), high child mortality rate health needed to be brought into sharp focus. Provision (110/1000) and high population growth rate at 2.1 of better health facilities to improve the standard of percent provides the basis for rethinking of our national living of the people in the country has been the health priorities and points out to the need for better paramount aim of the efforts in this sector. In Pakistan, health care and preventive services. The government in health infrastructure has developed significantly over recent years has started giving due priority to health the years. However, the improvement so far made is far planning by increasing the health allocation and trying from impressive. A number of inadequacies such as out prioritized programmes with special focus on unhygienic living conditions, spread of health facilities, particular diseases. scarcity of potable water, paucity of capital resources to Table 12.1 Social Indicators Country Life Expectancy Infant Mortality Mortality Rate Population Year 2000 Rate per 1000 under 5 per 1000 Avg. Annual (%) Year 2000 Growth 1990-2001 Pakistan 63.0 83.3 110.0 2.5* India 63.0 69.2 88.0 1.8 Sri Lanka 73.0 15.0 18.0 1.3 Bangladesh 61.0 60.0 83.0 1.8 Nepal 59.0 73.6 105.0 2.4 China 70.0 32.0 39.0 1.0 Bhutan 62.0 57.6 2.9 Thailand 69.0 27.9 33.0 0.9 Philippines 69.0 30.7 39.0 2.1 Malaysia 73.0 7.9 11.0 2.4 Indonesia 66.0 40.9 51.0 1.6 Source: World Development Report 2003 *: Population growth rate for 2002-03 is estimated at 2.1%. Comparative selected indicators (Table 12.1) on in Pakistan is not up to the mark in relation to other life the quality of life in Pakistan reflects that the quality of regional countries and emphasize to the need of taking

Chapter 12. Health and Nutrition all necessary measures to ensure better health services country. The present national infrastructure of health and improvement in quality of life by spending more on facilities with 906 hospitals, 4590 dispensaries, 550 Rural health. Health facilities Health Centres, 5308 Basic Health Units and 98264 hospital beds (see Table 12.2) compare well with other developing countries. However, the availability of one

Doctor for 1466 persons, one Dentist for 29405 people, Both the pubic and private sectors are providing one Nurse for 3347 and one Hospital bed for 1517 medical facilities in the country. Medical facilities are persons reflect poorly on the health status of the constantly increasing in the country. The benchmarks of various physical facilities and health manpower are as under: Table 12.2 Health Facilities

Health Manpower Registered doctors Registered dentists Registered nurses Population per Doctor Population per Dentist Population per Nurse

Upto 2000-01 91,823 4,175 37,528 1,529 33,629 3,732

Upto 2001-02 96,248 4,622 40,019 1516 31579 3639

Upto 2002-03 101,635 5,068 44,520 1,466 29,405 3,347 Source: Ministry of Health

Physical Targets and Achievements During 2002-03

manpower development targets covers the output of 3700 Doctors, 250 Dentists, 2300 Nurses, 5000 Paramedics and 500 Traditional Birth Attendants

The health sector performances in term of (TBAs). Under the preventive programme, 8 million physical infrastructure i.e. rural health centres, basic children were to be immunized and 19 million packets health units and hospital beds has been encouraging. Oral Rehydration Salt (ORS) were to be distributed of The targets for health sector during 2002-03 include the during 2002-03. The achievements have been largely in establishment of 40 Basic Health Units (BHUs), 8 Rural the vicinity of the targets .The health programmes Health Centres (RHCs), Upgradation of 20 existing during the year has realized 63-96 percent of its physical Rural Health Centres (RHCs), 30 Basic Health Units targets. Physical targets and achievements in the health (BHUs) and addition of 1600 hospital beds. The sector during 2002-03 are given in Table 12.3.

Chapter 12. Health and Nutrition Table 12.3 Physical Targets and Achievements During 2002-03

Targets Sub-Sector (Nos)

Estimated Achievem ents (Nos)

Achieveme nts (%)

A. Rural Health Programme i. New Basic Health Units (BHUs) ii. New Rural Health Centres (RHCs) iii. Upgradation of existing RHCs iv. Upgradation of existing BHUs B. Beds in Hospitals/RHCs/BHUs C. Health Manpower Development i. Doctors ii. Dentists iii. Nurses iv. Paramedics v. Training of TBAs vi. Training of LHWs D. Preventive Programme i. Immunization (Million Nos) ii. Oral Rehyderation Salt (ORS) (Million Packets)

40 8 20 30 1600

25 5 15 25 1400

63 63 75 83 88

3700 250 2300 5000 500 17000 8.0 19.00

3500 200 2000 4500 480 17000 7.5 18.00

95 80 89 90 96 100 93 95

Source: Planning & Development Division

Health Expenditure

In Pakistan both the public and private spending on health is very low. However, over the years they have steadily been increased. During the years

Chapter 12. Health and Nutrition under review (2002-03), the total expenditure on health showing an increase of 13.4 percent over last year and is estimated at Rs.28.814 billion (Rs.6.609 billion works out to be 0.7 percent of GNP [See Table 12.4]. development and Rs.22.205 billion as recurring)

Table 12.4 Health and Nutrition Expenditure (Million Rs.) Fiscal Year Development Expenditure 5741 6485 6077 5492 5887 5944 6688 6609 Public Sector Expenditure Change (%) As % of GNP

1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

(Federal Plus Provincial) Current Total Expenditure Expenditure 10614 16355 35.3 0.8 11857 18342 12.2 0.8 13587 19664 7.2 0.7 15316 20808 5.8 0.7 16190 22077 6.1 0.7 18337 24281 9.9 0.7 18717 25405 4.7 0.7 22205 28814 13.4 0.7 Source: Planning & Development Division (LHWs) living in their own localities. The programme is currently being implemented with strength of 70,000 LHWs and 3,000 Lady supervisors nationwide mainly in rural areas and urban slums of the country. These workers are providing services to their communities in the field of child health, nutrition, family planning and treatment of minor ailments. The scope of LHWs has been enlarged to include the wider concept of Reproductive Health. LHWs will be involved in vaccination of women and children under the EPI. This will augment the activities of the Expanded Programme of Immunization. In view of effectiveness of the LHWs at the grass root level, the government has decided to utilize their services in many other public health programmes. At present, the

Health Programme To maintain the expansion of health facilities, a number of health programmes have been undertaken. These programmes address to the various health problems such as Malaria, Tuberculoses (T.B), AIDS, Drug Abuse and Malnutrition and have made good progress. Work for expanded programme of immunization is in progress. The number of reported polio cases have been reduced. The TB DOTS programme has been expanded to 46 Districts and the annual parasite incidence (API) of Malaria has been reduced to 0.69/1000 population in 2002. 1. National Programme for Family Planning & Primary Health Care The programme aims at delivering basic health services at the door steps of the unprivileged segment of the society through deployment of Lady Health Workers

Chapter 12. Health and Nutrition National Programme is covering 50% population. This programme is expanding in a phased manner and by the year 2005, the target of 100,000 LHWs in the field will be achieved. With this strength, LHWs will be covering 90% of the target population. 2. Expanded Programme of Immunization The programme with total cost of Rs.5,367 million for the period 1999-04 mainly aims at reducing mortality by immunizing children of 0-11 months and women of child bearing age and with this end in view providing vaccination against six vaccine preventable diseases to 5 million children annually with immunization coverage at 77% for children and 50% for expected mothers. Almost all the Lady Health Workers (LHWs) in 57 districts have been trained as vaccinators. The polio eradication efforts have been intensified through the surveillance for disease detection and improved quality campaigns, and as a result, there has been a significant progress. During the current year upto April 2003, the number of reported cases throughout the country has been reduced to only 18 against 76 in 1999, and 32 in 2002. Hepatitis B has been introduced in the EPI regime with the help of grant assistance from Global Alliance for Vaccination and Immunization (GAVI). Apart from Hepatitis B, the GAVI is also providing grant assistance of US$ 33 million for the improvement of EPI infrastructure in the provinces and another US$ 11 million for injection safety.

3.

National AIDS Control Programme HIV/AIDS as epidemic has now been understood not as a health issue but as a major threat to human security. The disease continues to spread everywhere including Pakistan. The objectives of the AIDS/HIV prevention programme are to prevent HIV transmission, reduce morbidity associated HIV/AIDS, promote safe blood transfusion and establish surveillance system. The programme strategies include creating awareness among the public through information, education and ensuring safe blood transfusion. The Government has prepared an enhanced National AIDS Control Programme costing Rs.2.8 billion, including assistance from the World Bank. A provision of Rs.250.0 million (Rs.100.0 million for ongoing National AIDS Prevention Programme and Rs.150.0 million for the Enhanced Programme) has been made during the current financial year 2002-03. This constitutes a 100% increase in the budget for combating HIV/AIDS in the country. 47 Surveillance Centres have been established where 3.3 million test for HIV/AIDS have been performed. During the year, 1741 infected and 231 AIDS cases reported to National AIDS Control Programme against 3.526 million tests carried out uptill 30th September, 2002 and more than 5722 spots (TV & Radio) have been shown till February 2003. Posters, leaflets, guidelines and brochures have been printed and distributed.

4.

Malaria Control Programme

Chapter 12. Health and Nutrition The efforts aimed at preventing and treating malaria by the Government has resulted in low level of malaria. A project, costing Rs.253.0 million, based on roll back malaria strategy is in progress. The Annual Parasite Incidence (API) has been reduced to 0.69/1000 in 2002 as against 0.74/1000 in the year 2001. Districts implementation plans for roll back malaria have been finalized in 19 high risk districts. 5. T.B. Control Programme Pakistan has the 8th highest T.B. burden globally. The government has included T.B. Control Programme in the priority list of the health programmes and has reaffirmed its pledge to reduce the burden of tuberculoses in the country. The estimated prevalence is around 1.5 million patients and every year 250,000 new persons are infected with T.B. The incidence of sputum positive Tuberculoses in the country is 81/100,000. The programme aims to control T.B. through DOTS strategy with the objectives of achieving 85% cure rate, and 70% detection rate, and reducing T.B. cases by providing technical assistance, and development of health education. The programme was approved at Rs.66.733 million for 2000-01 to 2003-04. However, it was revised at Rs.159 million after receiving an additional allocation of Rs.121 million. During the year 2002-03 a total allocation of Rs.63.000 million has been made for T.B. Control Programme. Main achievements of the programme includes coverage of 47 districts under DOTS strategy, DOTS coverage is being expanded and has increased to 50% and iii) under the Global Drug Facility (GDF) the first tranche of drugs for 150,000 T.B patients has been received. 6. Women Health Project The project aims at improving the health, nutrition and social status of women and girls by developing Women-Friendly Health Systems in 20 districts of Pakistan. The project has been launched throughout the country with total outlay of Rs.3750 million and support from the Asian Development Bank. Its specific objectives are to: i) Expand basic womens health interventions to under-served population. Develop women friendly district health systems providing quality womens health care from the community to first referral level including care. emergency obstetric

ii)

Strengthen the capacity of health institutions and develop human resources to improve womens health in the long-term.

Cancer Treatment Programme At present 13 nuclear medical centres are providing diagnosis and treatment facilities to the 80% population of the cancer patients with most modern facilities available at these centres. The major disciplines available in these nuclear medical centres are (a) nuclear medicines and radioimmunoassay and (b) oncology and radiotherapy. The nuclear medicine deal with the diagnosis and treatment of various diseases while

Chapter 12. Health and Nutrition oncology and radiotherapy deals with the treatment of reduction has also been initiated. Cooperation between cancer. More than 320,000 patients were attended Pakistan and Iran on the prevention of drug trafficking during the year 2002-03 and about 133,592 patient were drug abuse has helped in reducing drug trafficking and provided proper treatment as well as follow-up. across borders. A similar understanding has also been reached between Pakistan, Saudi Arabia, Egypt, China, Poland, Russian Federation and the Central Asian States. A strict ban on poppy cultivation has maintained during the year and the poppy crop wherever cultivated The drug abuse addiction has emerged as is being destroyed with the help of Law Enforcement a major health hazard, affecting the socio-economic life of Agencies. the nation. Thousands of productive youth have been rendered un-functional by narcotic drug abuse. In view Area development projects in Bajaur, Mohmand Drug Abuse of the sharply upward trend in prevalence of drug and Khyber Agencies are under implementation. These abuse, it is considered a matter of high priority to projects aim at eradication of poppy cultivation by educate the nation on the adverse effects of drug abuse.providing alternative means of income to the poppy growers in those agencies. Besides, under the Border Effective steps have been initiated by the Security Project, an amount of US$ 4.5 million was government for prevention of drug trafficking and drug allocated to enhance mobility, surveillance and abuse. A five years Drug Abuse Control Master Plan is communication capacities of the Anti Narcotics Force. under implementation. A mass awareness programme has been launched through the use of radio, newspapers The statistics regarding seizure of narcotics by and pamphlets to inform and alert the general public of Law Enforcement Agencies during the period from the the necessity for community awareness and action. A July 2002 to March 2003 are given as follows:community participation project for drug demand Table 12.5 Cases of Narcotics Opium 540 551 1644

Items 1. No. of Cases 2. No. of Defendants 3. Drug Seized (Kgs.)

Heroin 5167 5210 11608

Charas 26536 26647 4784

Source: Narcotics Control Division Food and Nutrition Pakistan encompasses a spectrum of deficiencies for which the most devastating are the deficiencies of iron,

iodine and vitamin A. Together they contribute to a Nutritional adequacy is one of the key great deal of morbidity and ill health and as such leads determinants of the quality of human resources. Despite health consequences, adding burden to an to the rapid progress made in food production [See Table individuals resource in capabilities and lack of ones 12.6] and processing, mal-nutrition continues to be full participation in the social and economic activities. a major area of concern for public health. The problem of Programme aims at reduction of infant mortality and mal-nutrition in developing countries including low birth weight babies; better child and maternal

Chapter 12. Health and Nutrition health care; promotion of breast feeding; and prevention of night blindness, and iodine deficiency diseases. Micronutrient Deficiency Control Programmes The major component of nutrition is The objective of improvement of nutrition through Primary Health Care is to improve in qualitative terms the nutritional status of women, girls and infants by providing and expanding more PHC nutritional services. More than 70,000 Lady health Workers working at village level provided services for micronutrient supplementation and counseling on growth promotion, maternal and child nutrition, breast feeding and complementary feeding on regular basis. As part of the PHC component of nutrition, nutrition information, education and communication activities have been started. Training of health professionals regarding health/nutrition education focussing on nutrition problems of women and children and their remedies has started.

Nutrition in Primary Health Care (PHC)

micronutrients deficiencies e.g. Iodine, Iron, Vitamin A. Various programmes remained under implementation during the year are summarised as under:a. Control of Iodine Deficiency Disorder The project aims to eliminate Iodine Deficiency Disorders (IDD) through universalising Iodized Salt by promoting its use among population and households. b. Control of Iron Deficiency through Flour Fortification To overcome the iron deficiency anemia, a feasibility study for wheat flour fortification with iron for the roller mills is under way. The study has four trials viz. production, stability and acceptability, bio-availability and community-based efficacy trials. Vitamin A

Community Nutrition Programme i. Fortification of edible oil/ghee The quality aspects for Vitamin A fortification of ghee/oil are going to be adopted to ensure a. necessary vitaminisation in ghee/oil by the producers. ii. Vitamin A Supplementation Vitamin A supplementation of children from 6 months to five years of age is being implemented as regular part of National Immunization Days (NIDS and Sub-NIDS) to protect them from infections. Breast Feeding Promotion and Protection The aim of this programme is to create awareness among the masses, particularly mothers, about the importance of exclusive breast feeding of infant for first six months and appropriate supplementary feeding along with breast feeding subsequently upto 2 years to reduce malnutrition in infants and children. As part of the early child hood protection, breast-feeding, promotion and

Chapter 12. Health and Nutrition protection remained in progress. More hospitals have been declared Baby Friendly Hospitals, Lactation Management Curriculum was revised/upgraded incorporating recent advances in the technical knowledge and needs of the target groups which would be used in future training programmes. This programme addresses widespread malnutrition in girls co-instituting almost 45% of population which will pay dividends in short and long term. Awareness would be created within communities about the need for balanced nutrition at critical periods of life such as pregnancy and early child hood. 26 poor districts in 4 provinces have been selected with 5000 girls schools to cover 500000 school girls (5-12 programme has been initiated. years). The

b)

Tawana Pakistan Project, School

Nutrition Package for Girls

Table 12. 6 Food Availability Per Capita 89-90 95-96 97-98 98-99 156.9 6.2 26.4 121.1 21.4 2.2 11.4 159.7 5.9 32.8 147.3 17.9 2.2 11.6 171.0 6.8 31.2 148.0 18.2 5.1 12.3

Items

Cereals 139.3 147.1 164.7 Pulses 13.9 6.3 5.4 Sugar 17.1 28.7 27.0 Milk 107.0 94.8 107.6 Meat 9.8 13.7 17.3 Eggs 0.2 1.2 2.1 Edible 2.3 6.3 10.3 Oil Caloric & Protein Availability (Per Capita) Calories per day (Number) Protein per day (Gms) E. Estimated 2078 62.8 2301 61.5 2534 65.47

Year/ Units Kg Kg Kg Ltr Kg Dozen Ltr

49-50

79-80

99-2000 163.5 7.2 26.4 148.8 18.7 5.1 11.1

2000-01 (E) 164.9 7.0 30.8 149.6 18.8 5.2 11.2

2001-02 (T) 149.3 6.1 26.1 150.8 18.9 5.2 11.3

2522 67.38

2655 68.37

2728 71.85

2625 70.00

2706 71.74

2306 67.00

Source: Planning & Development Division

Chapter 13. Population, Labour Force, and Employment

13.Population, Labour Force, and Employment

With population growing at 2.1percent per annum and addition of 3.1 million persons every year, Pakistan faces a formidable challenge of tackling the issue of economic development and poverty reduction. Such sizeable addition to the population, not only dilutes the results of the development efforts but also creates unsustainable level of demand on already scarce resources to cater for the needs of the population. This also imposes restraints on efforts for improving the living conditions of the population. In the past, high pushed population the growth has significantly population below implications for provision of schooling, healthcare and other basic amenities of life for the coming decades. Almost one third of Pakistanis are living below poverty line. The impact of population growth on poverty is obvious, since poorer families, especially women and marginalized groups bear the burden of a large number of children with relatively fewer resources, further adding to the spiral of poverty and deterioration in the status of women. Thus, large part of the population is constrained to live in poor housing and sanitation conditions, with lack of access to safe drinking water. In particular, the income poverty leads to pressure on food consumption and adversely affects caloric intakes. This adds to malnutrition in poorer families and contributes to high levels of child and maternal morbidity and mortality. Furthermore, the rapid population growth also contributes to environmental degradation and depletion of natural resources, data shows that during last three decades, developing countries with lower fertility and slower population growth have seen higher productivity, more savings and more investments. Investments in population welfare programme, education and health sectors have contributed substantially Pakistan has been facing the ever-largest adolescent population, because of its high level of fertility over the last few decades, (decline in fertility is a very recent phenomenon). The adolescent population, in the age group of 15-24, as it enters into its reproductive phase embodies potential population growth for several decades. It constitutes population momentum with serious With population of 149 million (2003), Pakistan ranks at 7th position in terms of World's addressing to high fertility declines. Therefore, should population growth

poverty line. If current trend persists, Pakistan's population will reach 217 million by the year 2020. Based on present growth patterns and trends, the economy would not be able to sustain the growing pressure of population and resultant deterioration in quality of life will foil government's recent efforts for social uplift. The high population growth is, therefore, a matter of national concern. Hence, the thrust for improvement in quality of life, social uplift and economic development can be augmented by improving the effectiveness of population welfare program.

undoubtedly be magna cartae of the overall planning perspective. The need to pursue an effective population program at all levels can neither be ignored nor exaggerated.

Chapter 13. Population, Labour Force, and Employment population size. It is encouraging to note that the demographic transition has started and the growth rate is estimated to decline to 1.8 percent by mid 2004. The country has to amass additional resources to feed, cloth and provide various services to population The population of the country has marked with considerably high proportion of young age, high dependency ratio and big size. The increasing number of population has resulted in low level of human development, low savings & investment ratios, low labour force participation rate and low per capita income. Hence, Pakistan is classified among the lowincome countries. Family planning programs have been pursued in the country since 1950s. The frequent changes in program strategies and inconsistent political support remained main impediments in the way of its successful implementation. Ministry of Population Welfare have formulated an Interim Population Sector Perspective Plan 2012. Due to demographic transition, the share of old age population has declined by 1.5 percentage points. This change in demographic structure owes heavily to a steady decline in population growth since 1981. With further slow down in population growth, Pakistan may see its shares of working-age population to rise while that of young age population decline. Demographic transition provides an opportunity for raising economic growth and increasing prosperity. Pakistan may succeed in mobilizing sufficient capital (investment) and use it efficiently with the rising working-age population but this will depend largely on government's The current population growth is still high (2.1percent) and the government is making every effort to reduce it to 1.8 percent by 200304 as per country's Interim Poverty Reduction Strategy Paper (IPRSP). The various population planning programmes launched by the Government have effectively contributed in slowing the population growth rate. Realizing the importance of improving the country's social indicators in general and education in particular the government has prepared a medium-to-long run program with a view to educating its citizen under the Education for All Program. Pakistan has experienced an accelerated population growth rate. It's population has increased from 32.5 million (1947) to an estimated 149 million in 2003. In 1951 the population of the country was 33.7 million, which has increased to 85.1 million by 1981 and further to about 149 million by 2003. In other words, it has quardruppled in the last 52 years. The population is increasing but at a sliding scales i.e. from 3.06 percent to 2.1 percent per annum. However during the last 25 years, the adult literacy has increased from 26.2 percent in 1981 to 51.6 percent in 2003. The population growth and literacy rates since 1981 to 2003 are comparatively given in Table 13.1.
Population Size and Literacy Rate

socio-economic policies. If the workforce is better educated, it will be better placed to contribute to economic growth. If government's macroeconomic policies are such that lead to job creation, the country will more likely to realize the potential benefits of demographic transition in terms of higher economic growth.

Chapter 13. Population, Labour Force, and Employment

Table 13.1 Population Growth and Literacy Rates (1981 to 2003) Mid Year Total Population (Million) Growth Rate (%) Literacy Rate (%) Rate % Change 1981 85.10 3.06 26.2 1982 87.67 3.63 26.2 0 1983 90.30 2.99 27.1 3.4 1984 92.96 2.95 27.9 3.0 1985 95.67 2.90 28.8 3.2 1986 98.41 2.86 29.8 3.5 1987 101.18 2.82 30.7 3.0 1988 103.99 2.77 31.7 3.3 1989 106.84 2.73 32.7 3.2 1990 109.71 2.69 33.8 3.4 1991 112.61 2.63 34.9 3.3 1992 115.54 2.60 36.0 3.2 1993 118.50 2.56 37.2 3.3 1994 121.48 2.51 38.4 3.2 1995 124.49 2.47 39.6 3.1 1996 127.51 2.43 40.9 3.3 1997 130.56 2.38 42.2 3.2 1998 133.61 2.34 43.6 3.3 1999 136.64 2.29 45.0 3.2 2000 139.76 2.24 47.1 4.7 2001 142.86 2.22 49.0 4.0 2002 145.96 2.16 50.5 3.1 2003 149.03(E) 2.10 51.6 2.2 E: Estimated Source: Population Census Organization & Ministry of Planning & Dev. Division .
Fig-1: Trends in Population Growth

4 3.8 3.6 3.4 3.2 3 2.8 2.6 2.4 2.2 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

% Growth

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Fertility, rates.

Mortality and Infant Mortality

Chapter 13. Population, Labour Force, and Employment The high rate of population is also due to decline in mortality rate, owing to elimination of epidemic diseases. The decline in mortality rates can also be attributed to improved water supply, drainage and other social services. However the fertility has shown a modest decline over the recent years. The crude death rate (CDR) of Pakistan is estimated at 8 (per hundred thousand live births), consequently every year about seventeen thousand of new born babies become motherless. The life expectancy in Pakistan is 63 years. The major reasons for the slow decline of mortality rate in Pakistan include complications of pregnancies, repeated pregnancies and births. The other major killers are accidents in adults, cardiovascular diseases and cancer in the elders. indicators i.e. Total Fertility Rate (TFR), Crude Birth Rate (CBR), Crude Death Rate (CDR), Infant Mortality Rate (IMR) and Maternal Mortality Rate (MMR) and life expectancy in the country.

Table No.13.2 Selected Demographic Indicators. Indicators Total Fertility Rate (TFR) Crude Birth Rate (CBR) Crude Death Rate Infant Mortality Rate (IMR) Maternal Mortality Rate (MMR) (per 100 thousand live birth) Life Expectancy Male} Female} Year (2003) 4.3 27.3 8 83 350-435 63

Source: Population Census Organization &

Despite considerable decline in total mortality in Pakistan, the infant mortality has Ministry of Planning & Dev. Division. been quite high. It is estimated at 83 per thousand live births in 2003. The major reasons for high rate of infant and child mortality are diarrhea and Population Distribution: neumonia. Table -13.2 reflects the demographic The population of Pakistan is unevenly distributed over it's four provinces (Punjab, Sindh. NWFP AND Baluchistan) and Federally Administered Tribal Areas (FATA) and Federal Capital Islamabad. Table-13.3 reflects province and area wise population. Table No13.3 Province-wise Population, Land Area and Percent Distribution 1951, 1981, 1998 and 2003 (Population in Thousand) Province Area Sq. Year Year Year Year Kms 1951 1981 1998 (2003) A PAKISTAN 796096 33816 84453 130,600 149,030(E) (100) (100) (100) (100) (100) i) PUNJAB 205344 20557 47292 72,585 82,710(E) (25.8) (60.8) (56.1) (55.59) (55.5) ii) SINDH 140914 6054 19229 29.991 34,240(E) (17.7) (17.9) (22.6) (22.97) (22.97) iii) NWFP 74521 4587 11061 17,577 20,170(E) (9.1) (13.6) (13.1) (13,3) (13.54)

Chapter 13. Population, Labour Force, and Employment iv) v) vi) BALUCHISTAN FATA Islamabad 347190 (43.6) 27220 (3.4) 906 (0.1) 1187 4332 6,510 7,450(E) (3.5) (5.1) (4.99) (5) 1337 2199 3,138 3,420(E) (3.9) (2.6) (2.4) (2.3) 94 340 799 1,040(E) (0.3) (0.4) (0.61) (0.7) Source: Population Census Reports & Planning Commission. Islamabad (capital) to 21 persons in Baluchistan province. The most populous province is Punjab having a population density of 398 persons per sq.km followed by NWFP (267), Sindh (240), FATA (125) and Baluchistan (21).

E: Estimated
Population Density

Table 13.4 reflects that population density has increased from 43 (1951) to 185 (2003) persons per sq.km. During the year 2003, the population density ranges between 1137 persons per sq.km in

Table No13.4 Province Wise Population Density Province (Area Kms) A i) ii) iii) iv) v) vi) Pakistan Punjab Sindh N.W.F.P Baluchistan FATA Islamabad 1951 (Density) 1981 (Density) 1999 (Density) 2003 (Density)

(43) (106) (164) (185) (100) (230) (353) (398) (43) (135) (213) (240) (62) (148) (235) (267) (3) (12) (19) (21) (81) (115) (125) (125) (104) (376) (881) (1137) Source: Population Census Reports and Planning Commission estimates.
Population Size and Growth

Urban-Rural Distribution: The migration from Rural areas to Urban cities in the country is on rise. The urban population at the time of independence (1947) was 5 million (15.4%) which had increased to 23.84 million (28%) in 1981 and further to 42.445 million (32.5%) in 1998. During 1981 to 1998, the total population increased by 55 percent whereas the urban and rural population increased by 60 percent and 40 percent, respectively. However during 2003, the urban and rural population distribution is estimated to be 89.7 million (61 %) and 53.3 million (39%) respectively.

The population of Pakistan recorded an increase of 57.02 percent over the last 17 years i.e. 1981-98. If we go back further, the intercensal increase was 29.01,52.31 and 27.09 percent during 1972-81, 1961-72 and 1951-61, respectively. Overall the population of Pakistan has increased four times since the first population census of Pakistan in 1951. According to the 1998 Population Census, the population below 15 years is 43.4 percent of the total population, a little less than in 1981 when it was 44.5 percent. Out of these, 14.8 percent are below 5 years of age including 2.3 percent infants.

Chapter 13. Population, Labour Force, and Employment The population of persons of 65 years and above is 3.5 percent. The population of working age group, i.e. 15 to 64 years thus comes to 53.1 percent, a little higher than half of the total population.
Household Size

household size of rural and urban areas in Pakistan is 6.5 and 7.4 respectively .

Population Distribution by Administrative Unit

The population of Pakistan is unevenly distributed among its administrative units. The Punjab province has the largest population share of 55.62 percent while Islamabad Capital Territory has the smallest population share, i.e. 0.61 percent. The population share of Sindh, NWFP and Balochistan is 22.99, 13.41 and 4.96 percent respectively (Table-13.5).

The average household size for Pakistan as a whole is 6.8 persons in 1998. The household size varies among all administrative units of Pakistan. The highest household size in 9.3 in FATA followed by 8.0 in NWFP and 6.9 in Punjab province. The household size of Balochistan and Sindh provinces is 6.7 and 6.0 respectively. The

Table 13.5 Area, Density and Household Size By Administrative Units, 1998. Admn. Unit Pakistan NWFP FATA PUNJAB SINDH BALOCHISTAN ISLAMABAD Area(Sq.Km.) 796096 47521 27220 205345 140914 374190 906 Population (Percent) 100 13.41 2.40 55.62 22.99 4.96 0.61 Population Density 166 238 117 358 216 19 889 Household Size 6.8 8.0 9.3 6.9 6.0 6.7 6.2

Source: Ministry of Population Census Organization Population Welfare Programme Pakistan still has an unacceptably high rate of growth compared to other developing countries. The Government of Pakistan is therefore, attaching the highest priority to lower the population growth rate (PGR) from its current level (2.1%) to 1.8 percent per annum by the year 2004.The Population Policy is specifically designed to achieve social and economic revival by curbing rapid population growth and thereby reducing its adverse consequences for

development. It is intended to achieve a reduction in dependency ratios, to alleviate pressures on dwindling resources and help in poverty reduction. The Population Policy has several wide-ranging consequences for the economy, human rights and the long-term prosperity of Pakistan. The young population, under 15 years of age, will be focused. The youth will be informed about the consequences of rapid growth of population. Concerted efforts would be made

Chapter 13. Population, Labour Force, and Employment for behavioural change of the males and to put more responsibility on this segment of the society. Population Sector Perspective Plan (2012) are the following:i) An important hallmark of an Interim Population Sector Perspective Plan, 2012 is the seriousness of government to ensure responsibility for family planning services delivery through all infrastructure outlets of the health departments and other provincial line departments. The Plan focuses its attention on leading a nation-wide effort to contain population growth through a comprehensive multi-sectoral program with the requisite political commitment and administrative priority. The overall vision of the Plan/ Population Policy is to address various dimensions of population issues in an informed, voluntary and coordinated manner by Government, NGOs, Private Sector and Civil Society. In nutshell, the Population Policy sets out a broad framework and provides futuristic vision to achieve the ultimate aim of reducing poverty and raising the quality of life of the common man and woman. As a follow up of International Conference on Population and Development (ICPD) decisions, a package of reproductive health has already been introduced to target population. A comprehensive reproductive health (including family planning) approach has been adopted. A holistic approach for population welfare program will be focused to ensure community participation. Decrease the population growth rate to 1.82% in 2004 and 1.6% by the 2012. Achieve a replacement level of fertility (2.1) by the year 2020. Increase contraceptive prevalence rate (CPR) to 43% in 2004 and to 57% in 2012. Increase Program coverage to 76% in 2004 and 100% by the 2010. Sustain increase in "age at marriage" of girls and ensure a reduction in population momentum through delay in marriage, fertility decline and changes in birth spacing patterns which should reduce proportion of under 15 population from 40% to 30%.

ii) iii)

iv)

v)

Major Activities Pursued During 2002-03

(a)

Service Delivery Infrastructure:

The envisaged service delivery during 2002-03 comprises programme outlets and service units of Provincial Line Department (PLDs), target group institutions, private sector undertaking civil society initiative. The entire network consists of 1,911 family welfare centers (FWCs), 106 Reproductive Health Services (RHS) 'A' Centres, 151 Mobile Service Units (MSUs), 500 outlets of Target Group Institutions (TGIs), 7584 outlets of Provincial Line Departments (PLDs) including those Provincial Health Departments. Through these service delivery outlets, population welfare program offers wide range of family planning services including motivation, counseling, full choice of contraceptives and contraceptives surgery. To augment the family

Major

Objectives

of

Population

Welfare

Programme
The main objectives of the Population Welfare Program, envisaged in Interim

Chapter 13. Population, Labour Force, and Employment planning component of National Project for Primary Health Care & Family Planning 11000 Village Based Family Planning Workers (Female) working under Ministry of Population Welfare have been transferred to Ministry of Health to form a unified cadre of Family Health Workers. The responsibility to involve males in family planning at the grass root level is being envisaged to be handled by male workers. With the existing work of about 1343 male workers, there is need to expand the male village based family planning workers to 7000 covering every union council. (b) Social Marketing of Contraceptives. Capacity building activities cover clinical and non-clinical training at various levels. These include 18 month basic training of 700 Family Welfare Workers/ Counsellors, 3-month training of 75 Field Officers, Short-term training of 700 Medical Personnel of Provincial Line Departments and Target Group Institutions and others, advance-on-the job training of around 1200 Paramedics of the programme and 265 paramedics of NGOs. In addition, 65 faculty members of Training Institutes will also be imparted training by June, 2003. Similarly NonClinical training activities are geared to update knowledge, understanding and skills of the programme personnel working in the field. At the same time, social mobilization is undertaken through orientation workshops, for elected representatives, functionaries of other departments and community based groups. A cadre of male mobilizers is being introduced at union councils involvement. (e) (c) Advocacy and Information Education and Communication. level to enhance male

Social marketing activities are complementing the efforts of Population Welfare Program in providing conventional and hormonal contraceptives at subsidized rates to the low and middle income groups of population in the urban and peri-urban areas of the country. The interim results are encouraging and continued donor support for the program is expected.

Monitoring and Evaluation

According to various surveys, awareness about Family Planning is almost universal (around 97%)but the contraceptives use rate is only 33%. There is still a wide gap between knowledge and practice and the unmet need for family planning is 33%. The challenge is to reach couples with unmet need and convert them into service users. Focus is on regional and local programs for presenting messages in local context. Messages and media are being developed for specific groups and potential new users. (d) Capacity Building

Monitoring of the programme activities being a regular process is undertaken under management information system (MIS) through field monitoring and by holding review sessions. This has further been intensified through surprise visits by Officers from the Ministry of Population Welfare and by team of provincial monitoring and evaluation cells to various categories of service delivery outlets. The emphasis of the programme is to reach the desirous couples for meeting their service needs. In this context, a mapping exercise has been completed to systematically extend coverage, improve access in order to avoid duplication and fill the gaps. National standards

Chapter 13. Population, Labour Force, and Employment for family planning have been formulated and disseminated to service providers to improve quality of care. Trainings/orientations have been accelerated to ensure application of the prescribed standard for improving quality of services. (g) Financial Utilization The ADP allocation in respect of

Population Welfare Program during 2002-2003 is Rs. 2200.0 million against which an expenditure of Rs.516.0 million has been incurred up to December 2002 and fund utilization shall gear up in the 3rd and 4th quarter as per past trend. LABOUR FORCE AND EMPLOYMENT On the basis of estimated population of 149 million for mid-year 2003 and the participation rate of 28.97 percent, the total labour force comes to 42.75 million. Of this 29.69 million or 69.45 percent is in the rural areas and 13.06 million or 30.55 percent in the urban areas. Distribution of labour force from 1995 to 2003 is given in Table-13.6.

(f)

Research Programme

Research Programme is executed by National Institute of Population Studies (NIPS), based at Islamabad, is an autonomous body assigned the responsibility of undertaking interdisciplinary research, impact studies of the population welfare programme, dissemination of information, training special surveys and action oriented research focus is on population and development, reproductive health and family planning. Table13.6 Rural-Urban Labour Force Year Labour Force Million Annual Growth 1995 33.60 1996 34.43 2.5 1997 36.84 7.0 1998 38.88 5.5 1999 39.80 2.4 2000 40.13 0.8 2001(E) 41.00 2.2 2002(E) 41.84 2.0 2003(E) 42.75 2.2 E:Estimated.
Labour Force Participation Rate

Million

Rural

% Share

Million

Urban

% Share

23.37 69.55 10.23 30.45 23.83 69.21 10.60 30.79 25.56 69.38 11.28 30.62 27.31 70.24 11.57 29.76 27.95 70.23 11.85 29.77 27.88 69.47 12.25 30.53 28.48 69.46 12.52 30.54 29.07 69.50 12.77 30.50 29.69 69.45 13.06 30.55 Source: Labour Force Surveys of respective years. 30 percent (29.8) percent in rural areas and 27.1 percent in urban areas). CAR was 27.5 percent in 1994-95. It increased to 28.7 percent in 1996-97 and to 29.4 percent in 1997-98 but has slightly declined to 29 percent in 1999-2000. Similarly RAR was 41.2 percent in 1994-95 and increased to 43

In Pakistan, labour force participation is estimated on the basis of Crude Activity Rate (CAR) and Refined Activity Rate (RAR). The CAR is percentage of labour force in total population and the PAR is the percentage of labor force in population of persons 10 years of age and above. According to the Labour Force Survey, 1999-2000, the labour force participation rate (CAR) is almost

Chapter 13. Population, Labour Force, and Employment percent in 1996-97. It slightly increased to 43.3 percent in 1997-98 but has declined to 42.8 percent in 1999-2000. agriculture is a family profession in rural areas. The female labuor force participation rate is far less as compared to male participation rate and as such their participation in economic activities is also low. The crude and refined labuor force participation rates by area and sex for 1994-95, 1996-97, 1997-98 and 1999-2000 are given in Table13.7.

Inter-comparison of rural and urban participation rates reveal that labour force participation rates are higher in rural areas as compared to urban areas because Pakistan's economy is mainly agrarian and that the Table 13.7 Labour Force Participation Rates By Area and Sex (percent) Year Crude Activity Rate(CAR) Refined Activity Rate(RAR) Pakistan Rural Urban Pakistan Rural Urban 1999-2000 Both Sexes 29.0 29.8 27.1 42.8 54.1 38.1 Male 47.6 48.2 46.5 70.4 73.1 65.0 Female 9.3 10.7 6.3 13.7 16.1 8.8 1997-98 Both Sexes 29.4 30.6 27.0 43.3 46.4 37.7 Male 48.0 48.4 47.1 70.5 73.4 65.2 Female 9.4 11.5 5.3 13.9 17.4 7.4 1996-97 Both Sexes 28.7 29.4 27.1 43.0 45.1 38.9 Male 47.0 47.2 46.5 70.0 71.8 66.5 Female 9.0 10.5 5.9 13.6 16.3 8.4 1994-95 Both Sexes 27.5 28.0 26.1 41.2 43.1 37.0 Male 45.9 46.0 45.7 69.1 71.3 64.3 Female 7.6 8.7 4.9 11.4 13.2 7.0 Source: Labour Force Surveys of respective years. Employment Situation 11.78 million in 2003. Similarly rural employment increased from 27.05 million in 2002 to 27.63 Employed labour force is defined as all million in 2003. Employment increased at a rate of persons of ten years of age and more who worked 2.2 percent in 2003 compared to 2.1 percent in at least one hour during the reference period and 2002. were either "paid employees" or "self employed". Based on this definition, the total number of Distribution of employed labour force by employed labour force in 2003 is estimated at urban/rural areas from 1995 to 2003 is given in 39.41 million compared to 38.57 million in 2002. table-13.8. The total number of employed persons in urban areas has increased from 11.52 million in 2002 to Table 13.8 Employed Labour Force by Area Year Employed Labour Force Annual Growth (%) Rural Urban

Chapter 13. Population, Labour Force, and Employment No.(M) 1995 1996 1997 1998 1999 2000 2001 2002 2003 31.80 32.58 34.59 36.59 37.46 36.99 37.79 38.57 39.41 2.5 6.2 5.8 2.4 -1.3 2.2 2.1 2.2 22.25 22.69 24.12 25.95 26.56 25.95 26.50 27.05 27.63 % Share 69.97 69.64 69.73 70.92 70.88 70.15 70.15 70.13 70.11 No.(M) 9.55 9.89 10.47 10.64 10.90 11.04 11.29 11.52 11.78 % Share 30.03 30.36 30.27 29.08 29.12 29.85 29.85 29.87 29.89

Source: Calculations of Employed Labor Force and its Rural Urban break-up is based on the Labour Force Surveys of the respective years.

Employed Labour Force by Sectors.

Agriculture Sector is the largest employer and employs 19.08 million or 48.42 percent of total employed in 2003. This sector employed 17.29 million persons in 1998 and its relative share was 47.25 percent. Similarly the relative share of manufacturing & Mining had increased from 10.15 percent in 1998 to 11.55 percent 2003. In contrast i.e. the share of agriculture has increased by 1.17percentage point in the last 5 years. The relative share of employed labour force in the finance, insurance and social services sector which

was 16.23 in 1998 has declined to 15.02 percent in 2003. The share of trade sector has also decreased from 13.87 percent in 1998 to 13.50 percent in 2003. However the share of manufacturing sector has increased from 10.15 percent in 1998 to 11.55 percent in 2003. The construction sector, and transport sector absorbed 6.26 percent and 5.48 percent, respectively in 1998. Compared to it, their relative share in 2003 declined to 5.78 percent and 5.03 percent, respectively. Employed labour Force by sectors for 1998 and 2003 along with its sectoral share is presented in Table-13.9.

Table 13.9 Employed Labour Force By Sectors (No. in million) Sector No. Agriculture Manufacturing & Mining Construction Wholesale & Retail Trade Transport Finance, Insurance, Community & Social Services Others Total 17.29 3.71 2.29 5.08 2.01 5.94 0.27 36.59 1998 % Share 47.25 10.15 6.26 13.87 5.48 16.23 0.76 100.00 No. 19.08 4.55 2.28 5.32 1.98 5.92 0.28 39.41 2003 % Share 48.42 11.55 5.78 13.50 5.03 15.02 0.70 100.00

Chapter 13. Population, Labour Force, and Employment Source: Labor Force Survey 1999-2000.
Employment by occupation

Looking at employment by major occupational groups, agriculture sector's role is again conspicuous. The data given in Table-13.10 for 1998 and 2003 reveals that major portion of the employed persons consists of skilled agricultural and fisheries workers. The share of this occupational group was about 40 percent in 1998 and has slightly increased to 40.03 percent in 2003. The next occupational group consists of elementary unskilled occupations. Its share was 20.13 percent in 1998 but has declined to 18.13 percent in 2003. The share of craft and related trades workers group was 12.71 percent in 1998

but has increased to 15.05 percent in 2003. The plant and machine operators group comprised 3.68 percent of employment in 1998 but its share in total employed persons have gone down to 3.29 percent in 2003. The shares of service and sales workers group, and professionals group have gone down from 6.02 percent in 1998 to 4.58 percent in 2003 and from 3.03 percent in 1998 to 2.21 percent in 2003, respectively. However, the share of legislators and managers group has increased from 9.76 percent in 1998 to 11 percent in 2003. Similarly the share of technicians group has also increased from 2.92 percent in 1998 to 4.17 percent in 2003.

Table 13.10 Employed Persons by Major Occupational Groups Major Occupational Groups 1998 2003 No. % Share No. % Share Legislators, senior officers & managers 3.57 9.76 4.33 11.00 Professional, 1.11 3.03 0.87 2.21 Technicians & associate professionals 1.07 2.92 1.65 4.17 Clerks 0.67 1.84 0.61 1.55 Service workers and shop & market sales 2.20 6.02 1.80 4.58 workers. Skilled agricultural and fishery workers. 14.60 39.91 15.78 40.03 Craft and related trades workers 4.65 12.71 5.93 15.05 Plant & machine operators & assemblers. 1.35 3.68 1.29 3.28 Elementary (unskilled occupations) 7.37 20.13 7.15 18.13 Total: 36.59 100.00 39.41 100.00 Source: Labour Force Surveys 1997-98 & 2003 on Labour Force Survey, 1999-2000 Unemployment seeking work i.e. had taken specific steps in a specified period to seek paid employment or selfUnemployment is defined as all persons employment. According to this definition, about ten years of age and above who during the period 3.34 million persons in the labour force are under reference were (a) without work i.e. were estimated as unemployed in 2003 compared to not in paid employment or self-employed, (b) 3.27 million in 2002. Unemployed labour force currently available for work i.e. were available by urban/rural areas from 1995 to 2003 is given for paid employment or self-employment and (c) in Table 13.11. Table 13.11 Unemployed Labour Force by Rural/Urban Area

Chapter 13. Population, Labour Force, and Employment Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 Unemployed Labour Force Unemployment Rate(%) Total Rural Urban Total Rural Urban 1.80 1.12 0.68 5.37 4.80 6.90 1.85 1.14 0.71 5.37 4.80 6.90 2.25 1.44 0.81 6.12 5.65 7.17 2.29 1.36 0.93 5.89 4.98 7.95 2.34 1.39 0.95 5.89 4.98 7.95 3.14 1.93 1.21 7.82 6.94 9.92 3.21 1.98 1.23 7.82 6.94 9.92 3.27 2.02 1.25 7.82 6.94 9.92 3.34 2.06 1.28 7.82 6.94 9.92 Source: Labour Force Surveys of the respective years. The above table reveals that year, 2001-2002. As a result of implementation of the annual development programme/schemes, a large number of job opportunities would be created in the country. The SMEs are labour intensive and encompass a wide range of activities, size, structure, productivity and input use. The SME development is a critical target of the Government for generating jobs on a large scale. In order to promote SME sector, the Government has established a Small and Medium Enterprise Development Authority (SMEDA) in 1999 to meet the needs of SMEs and work for the growth of this sector. The focus of these initiatives is on four areas namely availability of credit reduction in the cost of doing business, up-gradation of technology and marketing of products in the international markets. It is hoped that this will have a positive impact on the job creation capacity of the SME sector. SME Bank was established on 1st January 2002 with a mission to support and develop SME Sector in Pakistan by providing financial assistance and business support. It also provides financial assistance to women for selfemployment and also extends its cooperation in the areas of management, product innovation and

unemployment has increased from 5.89 percent in 1998 to 7.82 percent in 2003. Similarly unemployment in rural areas which was 4.98 percent in 1998 has risen to 6.94 percent in 2003 and urban unemployment has enhanced from 7.95 percent in 1999 to 9.92 percent in 2003.
EMPLOYMENT PROMOTION POLICES

The government has fully acknowledged prospective repercussions of growing unemployment in the country and has taken several steps to create job opportunities. Some of the important employment promotion measures are given below: Realizing that a sound base of economic development and its faster growth has a direct bearing on the growth of employment, the Government has taken various steps for reviving the economy and accelerating the pace of economic growth. These include, Revitalization of Agriculture Sector, Development of Small and Medium Enterprises Sector, Oil and Gas, and Information Technology and Construction Sector. An allocation of Rs.134 billion has been made for the year 2002-03 in the Public Sector Development Programme which is higher by Rs.7 billion or 5.2 percent, compared to Rs127 billion in the previous

Chapter 13. Population, Labour Force, and Employment development, quality control, acquisition of new technology and product positioning and marketing. As a result of its activities, around 2000 job opportunities were created in the SME Sector. Self-employment is an important vehicle for arresting the rising trend in unemployment. Emphasis is being placed on income generation activities for promotion of self-employment at the grass root level. Khushhali Bank has been established to provide loans up to Rs.30,000/- to poor people to set up their own business. The operation of the Bank would be spread in every district and loans given by it will generate employment for the unemployed. By the end of December, 2002, the Bank had its branches in 26 districts and had disbursed loans amounting to Rs.883.77 million in 52,766 cases. As a result 316,596 persons had benefited. Khushhall Pakistan Programme is the Government's principal social intervention aimed at generating employment through undertaking public works in the country. The programme includes (a) building farm to market roads, (b)undertaking water supply schemes (c) lining of water channels and de-silting of canals (d) provision and renovation of civic amenities in rural and urban areas and village electrification etc. The schemes under the programme are identified and selected at the district level through active community participation. During the period 2000-02, temporary jobs were provided to about 6,70,000 individuals. Technical/vocational training enhances employability of the work force. At present training capacity of 68024 trainee places for men and 54638 places for women are available in the country. Based on the changing trends in the labour market domestically and internationally and the demand for industry-wise and sectorwise skilled labour, the existing technical training curricula are being revised. Under the new training policy, women are being encouraged to participate in the training programme of the country to bring them in the mainstream through the formal and informal apprenticeship training. Further initiatives are being undertaken to involve the private sector more actively in expanding technical/vocational training in line with labour market needs. During the current financial year 2002-03 (up to February, 2003), as many as 1,26,418 persons have proceeded abroad for employment through the Bureau of Emigration & Overseas Employment and Overseas Employment Corporation. Compared to the financial year 200102, the persons who went abroad for employment were 1,16,067. Keeping in view the increasing trend in manpower export, the target for the year 2003-04 has been fixed at 1,50,000 workers, provided there is no big setback in the geopolitical situation in the region. During the fiscal years 2003-04, the Bureau of Emigration & Overseas Employment plans to open two new offices of Protectorates of Emigrants in Multan and Malakand Divisions to facilitate intending emigrants of these less developed areas in seeking employment abroad. The Overseas Employment Corporation (OEC) will explore new opportunities and avenues for employment of Pakistani manpower in South Korea for employment of general workers, USA for employment of nurses and Europe for employment of doctors and nurses. OEC has appointed a consultancy firm for promotion of manpower export in the public sector. It is expected that with the implementation

Chapter 13. Population, Labour Force, and Employment of the consultants report the export of manpower from OEC would increase to between 4000-6000 workers in the years ahead. With a view to facilitate Pakistanis in seeking employment abroad in professional/highly skilled areas, the Overseas Employment Corporation has established a data bank for the interested emigrants and has launched the "CV-on-Line Scheme for Overseas Employment Promotion". Information Technology (IT) has been included as one of the four priority sectors selected for unleashing the growth process in the country. An IT policy has been announced under which four areas have been identified which include human resource development, telecommunication, legal framework for IT Sector and marketing support for IT sector. The Ministry of Science and Technology has prepared a programme to meet high level manpower needs in science and technology. In this connection, vocational training programme to produce over100,000 professionals in Technology has been launched. Information

With a view to lessening the suffering of poorest segments of the population, Pakistan Poverty Alleviation Fund (PPAF) was set-up in April, 2000. Up to 31st December,2002, the PPAF has made disbursement of Rs.2590 million to 739,416 beneficiaries in 75 districts through 34 partner organizations in the country. Disbursement has been made towards credit and enterprise development, community physical infrastructure and human/institutional development. So far 2735 such projects have been initiated which were community identified, locally managed and locally run. Implementation of these programmes and projects helped in reducing poverty and creating job opportunities in the country.

___________________

Chapter 14. Transport and Communications

14. Transport and Communications

Transport and communications and the services that flow from it are prerequisite to attaining economic growth and improving countrys productive capacity. An efficient transport and communications network contributes to productivity improvement and reduction in production costs, whereas inefficient network hinders economic growth and social development. It has been widely recognized that economies with better road and communications network are positioned more advantageously in terms of overall competitiveness, compared to economies having poor network. Because performance indicators vary significantly by transport mode, roads, highways, railways, airlines, ports and shipping have been identified for analysis. recent years as better roads and improved vehicles performance have revolutionized overland transport. Secondly, on many routes with high traffic, this is the only feasible method of mechanized transport. Finally, as the pace of economic development quickens, the importance of transport costs declines, and there is greater concern for improved services.

Pakistan has a road network covering 251,845 kilometers including 151,028 high types and 100,817 low types of roads. The total roads which were 170,823 KM in 1990-91, increased to 251,661 in 2001-02 and further to 251,845 KM in 2002-03 or by 47.4 percent. During the out going fiscal year, the length of high typed roads have increased by 1.5 percent over the last year but the length of low type roads has declined by 1.9 percent. In other words, the low type roads have A. ROAD NETWORK A marked and nearly universal trend has been converted into high type roads. This has developed towards road transport for at least been made possible under the Khushal Pakistan three reasons. Firstly, the economy and reliability Program. The annual growth of roads in Pakistan of road transport has increased very rapidly in since 1990-91 to 2002-03 is given in Table 14.1 and Fig-1. Table 14.1 Length of Roads (Kilometers) Fiscal High Type Low Type Total Year Length %Change Length %Change Length % Change 1990-91 86,839 83,984 170,823 1991-92 95,374 9.8 87,335 4.0 182,709 7.0 1992-93 99,083 3.9 90,238 3.3 189,321 3.6 1993-94 104,001 5.0 92,816 2.9 196,817 4.0 1994-95 111,307 7.0 96,338 3.8 207,645 5.5 1995-96 118,428 6.4 99,917 3.7 218,345 5.2 1996-97 126,117 6.5 103,478 3.6 229,595 5.2 1997-98 133,462 5.8 107,423 3.8 240,885 4.9 1998-99 137,352 2.9 110,132 2.5 247,484 2.7 1999-00 138,200 0.6 110,140 0 248,340 0.3 2000-01 144,652 4.7 105,320 -4.4 249,972 0.7 2001-02* 148,877 2.9 102,784 -2.4 251,661 0.7 2002-03* 151,028 1.5 100,817 -1.9 251,845 0.1 * Estimated Source: Ministry of Communications

Chapter 14. Transport and Communications

Fig-1: Length of Roads

2001-02

2002-03

custodian of 17 National Highways, Motorways and Strategic Roads. Road transport is the dominant mode of transport for the people and for the goods in Pakistan. The large segment of the society prefer to take journey through road networks. The National Highways Network consisting of 8,845 Km is 3.5 percent of the total road length in Pakistan. The government has decided to increase the present National Average Road Density from 0.23 km/sq. km areas to 0.3 km/sq. km areas. The present status of the main road projects is given in the Box-1

Kilometers

90-91

91-92

92-93

93-94

94-95

95-96

96-97

97-98

98-99

99-00

Hight Type Road

Low Type Road

National Highway Authority (NHA)

The NHA is Pakistans premier road management and regulatory agency. It is Box-1 the Road Projects A) National Highway Projects N-5 Karachi-Lahore-Peshawar-Torkhum Highway The whole N-5 has been dualized except Hala-Moro (114 Km) and Rahim Yar Khan Trinda Muhammad Pinnah (80 Km). Hala-Moro section has almost been completed whereas progress on Rahim Yar Khan-Trinda Muhammad Pinnah section is 85 percent. N-10 Makran Coastal Road (653 Km). The project is 653 km in length is to be completed within a period of 3 years instead of 6 years originally planned. The period of construction is reduced to synchronized with deep-sea port. N-15 Kaghan Valley Road (175 Km) The construction work on 175-Km is in progress and near to completion. N-25 Karachi-Khuzdar-Quetta-Chaman Highway (816 Km). The highway is being widened and improved to international standards. Wad-KhuzdarSorab (160 Km), Uthal-Bela (69 Km), Sorab-Kalat (74 Km) sections have been completed. N-35 Hassanabdal-Gilgit-Khunjrab (803 Km) The Work on Thakot-Chillas-Khunjrab has been completed.

00-01

Chapter 14. Transport and Communications N-40 Lakpass-Dalbandin-Nokundi-Taftan (610 Km) The improvements work on Dalbadin-Nokundi (200 Km) section have been completed N-45 Nowshera-Dir-Chitral Highway (309 Km) Improvements have been planned and rehabilitation will be taken up soon. N-50 Quetta (Kuchlac)-Muslim Bagh-Zhob-D.I.Khan Highway (528 Km) About 67 percent civil work of D.I.Khan Mughal Kot section has been completed. Expected completion date is March 2004. N-55 Indus Highway (1265 Km). Work on up gradation of Phase-I & II from Kotri-Manjhad (58 Km), Manjhad Sehwan (70 Km), Karappa Chowk-Badabher (51 Km), Ratodero-Ghauspur (98 Km), Ghauspur-Shorinullah (76 Km), Shorinullah-Rajanpur (96 Km), D.G.Khan-Retra Jn. (113 Km), Retra Jn.- Malana Jn. (85 Km), Serai Gambila-Karak (60 Km) and Karak-Karapa Chowk (36 Km) have been completed. Construction work on 30 Km Kohat Tunnel Project (1.88 Km tunnel and 28 Km access roads) is in advance stage of completion and 92 percent progress is achieved. The project is expected to be completed by July 2003. N-65 Sukkur-Sibi-Quetta Highway (385 Km) The civil work is in progress. The construction/replacement of existing steel bridges of N-65 have been completed N-75 Islamabad-Muzaffarabad Road (90 Km) Additional Carriageway from Barakahu to Satra Mile (5 Km) completed Work on Satra Mile to Lower Topa dual carriageway (43 Km) is in progress, 42 percent work completed. Expected completion date is December 2003. B) Motorway Projects M-I Islamabad-Peshawar Motorway (154 Km) Civil work about 27 percent has been completed. M-2 Lahore-Islamabad Motorway (367 Km) M-2 is operational since 1997. M-3 Pindi Bhattian-Faisalabad Motorway (52 Km) The construction work on Pindi Bhattian-Faisalabad Motorway (M-3) is in full swing. The project more than half is completed. Expected completion date is July 2003. C. Miscellaneous Projects Karachi Northern Bypass (56.8 Km) The project includes widening & improvement of 18-Km existing road, construction of 38.8 Km new 2-lane bypass road, construction of three flyovers, construction of 90m bridge over Lyari River and construction of two interchanges. Project will be completed by April 2004. Layri Express way (16.5 Km) The project includes construction of 2-lane 16.5 Km long carriageway. 8+8 flyovers and four interchanges. Construction work is in full swing. The project will be completed by October 2004.

Chapter 14. Transport and Communications Bund Road Lahore The project is substantially complete. The project is being financed by NHA from its own resources through toll revenue. Kohat Tunnal Link Road The project includes construction of 2-lane 7.5 Km link road between Kohat Tunnel Road & Kohat Dara Adam Khail Road. Work has been started. Ghazi Ghat Bridge Rehabilitation work on Ghazi Ghat Bridge has been completed Sukkar Bypass including 1.6 Km long bridge on River Indus (11.5 Km) Completed Chiniot Bridge Project Completed. Tall-Parachinar (75 Km) Completed. Khuzdar to Khori Completed. Ratodero-Shahdadkot-Quba Saeed Khan Completed. Abbottabad-Nathiagali-Barian-Murree Road Completed. Rawalpindi Urban Area Project The Work completed on Qasim Market- Golra More, Golra More- M-2 interchange and Pir Wadhai Round about. Installation of Tool Plaza A fee-for-use culture in the country has been introduced. Toll Plazas at 47 points all over the country have been established.

B. PAKISTAN RAILWAYS The comprises network 7,791 of route Pakistan Railways 577

by the Government, an investment of Rs. 44 billion for five years (2000-05) was approved for Railway Sector. However this was included in an over-all plan for 10 years for which Rs. 109.00 billion was visualized. The Perspective Plan includes rehabilitation of infrastructure, rolling stock, communication system as well as modernization of three main constituents of Railways Operation viz infrastructure, rolling stock and communication, through transfer of technology from China. It is also planned to increase the speed of passenger & freight trains, once infrastructure over the system is improved. kilometers,

locomotives, 1,901 passenger coaches and 23,939 freight wagons up to end of March 2003. The Pakistan railways have introduced non stop express trains in different routes including comfortable passenger coaches. The Karakoram Express, Karachi Express and Shalimar Express Rails are operating between Lahore-Karachi sections as non stop trains, while another new train namely Jaffar-Jamali (Rawalpindi-Quetta) Express has also been started. In addition to structural and management changes introduced

Chapter 14. Transport and Communications An amount of Rs.6,922 million has been provided for development programme for the year 2002-03. The major activities include: rail renewal of 128 Kms and sleeper renewal of 217 Kms, procurement of 40 of 15 locomotives, coaches, procurement passenger coaches under the scheme of rehabilitation of 240 passenger coaches (scheme completed) and rehabilitation of 100 passenger coaches under another project of rehabilitation of 450 passenger coaches, rehabilitation of 40 bridges on main and branch lines and doubling of 16 Kms of track from Lodhran- Khanewal via Multan. The performance of Pakistan Railways can be seen from Table- 14.2

rehabilitation of 22 locomotives, procurement of material for fitment of roller bearings to 1,340 freight wagons, rehabilitation of 38 passenger

Fiscal Year

Route Kilometers

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 July-March 2001-02 2002-03* *Provisional

8,775 8,775 8,775 8,775 8,775 8,775 8,775 8,775 7,791 7,791 7,791 7,971 7,791 7,791

Table 14.2 Performance of Pakistan Railways Number of Freight Freight passengers carried Tones Km carried (Million (Million) (Million) tones) 84.9 7.7 5,709 73.3 7.6 5,962 59.0 7.8 6,180 61.7 8.0 5,938 67.7 8.1 6,711 73.6 6.8 5,077 68.8 6.4 4,607 64.9 6.0 4,447 64.9 5.4 4,330 68.0 4.8 3,612 68.8 5.9 4,520 69.0 5.9 4,688 49.2 52.0 4.0 4.4 3,341 3,397

Locomotives (No.)

Freight wagons (No) 34,851 30,369 29,451 29,228 30,117 26,755 25,213 24,275 24,456 23,906 23,893 23,893

753 752 703 676 678 622 633 611 596 597 610 577

610 22,192 577 23,939 Source: Ministry of Railways

The Pakistan Railways have improved its services both for passengers and luggage handling. A sign of improvement is visible from the continuous increase in the earnings which have increased by 43.3 percent during 1998-99 and 2001-02. During July- March 2002-03, the gross earnings increased by 12.7 percent over the same period last year. The details of earnings are given in Table- 14.3 and Fig-2.

Table-14. 3 Earnings of Pakistan Railways. (Rs. Million) Year Earnings % change 1998-99 1999-00 2000-01 2001-02 July9,310 9,889 11,938 13,340 6.2 20.1 11.7

Chapter 14. Transport and Communications March 2001-02 2002-03

Rs. Billion

9,572 10,783

12.7
16 14 12 10 8 6 4 2 0 Fig-2: Earning of Pakistan Railway

Source: Ministry of Railways.

During the last 12 years (1990-2002), the share of Railways, both in respect of passenger traffic and freight traffic has declined from 13.5 percent to 9 percent and from 14 percent to 4.1 percent, respectively. However, the Pakistan Railways has registered an impressive recovery in 2000-01 when its freight

1998-99

1999-2000

2000-01

2001-02

2002-03 (JulMar)

Chapter 14. Transport and Communications traffic has grown by 25 percent, as against an average decline of 4.8 percent per annum in the 1990s. A positive growth of 3.7 percent has also been maintained in 2001-02. Furthermore, as against an average decline in passenger traffic by 0.7 percent per annum during the 1990s, the passenger traffic of Pakistan Railways has increased by 5.9 percent in 2000-01 and further by 6.3 percent in 2001-02. A positive trend has also been recorded during July-March 2002-03 in both the passenger traffic and freight traffic by registering an increase of 1.4 percent and 1.7 percent, respectively over the same period of last year. Maintaining a positive growth for three successive years can be attributed to the wide range of improvements made by the Pakistan Railways in the quality of services, timeliness, and cleaniless. This trend is reported in Table 14.4 and Fig-3 & Fig-4.

Table 14.4 Trend of Passengers Traffic and Freight Traffic (Road vs Rail) Passenger Traffic(Million passenger Km) Freight(Million Ton KM) Road 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 (Jul-Mar) 2001-02* 2002-03* *Provisional 128,000 131,352 135,000 137,037 146,132 154,566 163,751 173,857 185,236 196,692 208,370 209,381 157,037 161,919 %Change 2.6 2.8 1.5 6.6 5.8 5.9 6.2 6.5 6.2 5.9 0.5 3.1 Rail 19,964 18,158 17,082 16,385 17,545 18,905 19,114 18,774 18,980 18,495 19,590 20,820 14,867 15,071 %Change -9.0 -5.9 -4.1 7.1 7.8 1.1 -1.8 1.1 -2.6 5.9 6.3 1.4 Road 35,211 41,536 53,719 71,596 75,770 79,900 84,345 89,527 95,246 101,261 107,085 108,818 81,613 81,843 % Change 18.0 29.3 33.3 5.8 5.5 5.6 6.1 6.4 6.3 5.7 0.2 0.3 Rail 5,709 5,962 6,180 5,938 5,661 5,077 4,607 4,447 3,967 3,612 4,520 4,688 3,341 3,397 %Change 4.4 3.7 -3.9 -4.7 -10.3 -9.3 -3.5 -10.8 -8.9 25.0 3.7 1.7

Fiscal Year

Source: Ministry of Railways & Ministry of Communications

Chapter 14. Transport and Communications Fig-3: Trend of Passenger Traffic

250 40 35 200 30 25

(Billion Passenger Km)

150

Road
20

100

Rail
15 10 5

50

1990-91

2001-02

01-02(Jul-Mar)

91-92

92-93

93-94

94-95

95-96

96-97

97-98

98-99

99-00

00-01

Fig-4: Trend of Freight

120 100 10 9 8 7 6 60 40 20 0 5 4 3 2 1 0

(Billion Ton Km)

80

02-03(July-Mar)

Road Rail

1990-91

2001-02

00-01

01-02(Jul-Mar)

91-92

92-93

93-94

94-95

95-96

96-97

97-98

98-99

99-00

C. CIVIL AVIATION AUTHORITY (CAA) In spite of the adverse effects of September 11, 2001 events on the global and national air traffic and the attendant decline in revenues, the CAA has continued to undertake developmental work and also completed a number of projects. The construction of a New Terminal Complex, Lahore has been completed at the cost of Rs. 10.3 billion. This terminal can

handle 6.5 million passengers per annum. Rahim Yar Khan and Bahawalpur airports have been upgraded for operation of B-747 and B-737 aircrafts, respectively. The up-gradation of Gwadar and Turbat airports is in progress. Construction of New Islamabad International Airport on Build, Operate and Transfer (BOT) basis is being processed. The construction of Sialkot International Airport in the private sector is also in progress. A new Automatic Flight

2002-03 (July-Mar)_

Chapter 14. Transport and Communications Inspection System is in the final stage of completion. According to the CAA, the number of aircrafts movements and passenger traffic from all the countrys airports were 0.091 and 5.2 million, respectively. Pakistan International Airline (PIA) During the first nine months (July- March 2002-03) of the current fiscal year, the PIAs network covered 23 domestic and 28 international stations. The capacity of both the passenger and traffic has increased by 1.8 percent and 1.5 percent, respectively as compared to the same period of last year. The airline has earned Rs. 8,764 million per kilometers (RPKs), against Rs. 8,633 million/ RPKs in the corresponding period of last year. Domestic traffic in terms of RPKs has increased by 3.2 percent over last year. Overall traffic is up by 1.5 percent. A total of 3.387 million passengers have been carried as compared to 3.385 million passengers in the preceding year. During July- March 2002-03, freight traffic has improved by 6.5 percent over the same period of last year. Freight load factor is up by 59.0 percent, as compared to 57.1 percent in the previous year. The improvement is significantly evidenced on the domestic routes where freight traffic has increased by 17 percent over the same period of last year. Closure of Indian airspace since January 1, 2002 has resulted in suspension of PIA flights to Delhi, Mumbai, Khatmandu, Dhaka and Colombo. While flights to Bangkok, Hong Kong, Singapore, Manila and Tokyo have also become highly uneconomical. The PIAs aircraft fleet as on 31st March, 2003 consisted of 4 Boeing 747-200s, 6 Boeing 747-300s, 8 Airbus A300B4s. 6 Airbus A 310s, 7 Boeing 737-300s, 11 Fokker F-27s and 1 Twin Otter. During the first three quarters of the current financial year, the airline has exercised its purchase option on five Boeing 747300 aircrafts already on lease from Cathay Pacific Airways. A sixth Boeing 747300 aircraft from Cathay Pacific Airways was also inducted in 2002. Syndicated Murabaha financing of US was arranged $ 70 million through Pakistani Bankers Consortium for the purchase of six Boeing 747300 aircraft. The airline is pursing a long term fleet modernization plan which envisages induction of eight Boeing 777 family aircraft over the next 5 years. PIA continues to focus on technological innovation to improve its operation and customer service, particularly the Ticketing & Reservation System in order to restrict the possible misuse/malpractices by the agents. The financial result for the year 2002 (January-December) presents a significant turn around in the airlines fortune. There is a pre-tax profit of Rs. 2,111 million, as against a loss of Rs. 1,882 million in the 2001. This improvement has been achieved as a result of various measures initiated after June2001, despite the fact that the global economy in general and the Airline industry in particular, has been passing through a turmoil period. The financial performance of the PIA is reported in Table 14.5 and Fig-5.

Table 14.5 Financial Performance of PIA ( Rs. Million) Year Items 2002 2001

Chapter 14. Transport and Communications Revenue Cost & Expenditure Profit/Loss Before Tax 43,674 41,563 2,111 43,608 45,490 (1,882) Source: PIA

Fig-5: Financial Performance of PIA

47,000 42,000 37,000 32,000 27,000 22,000 17,000 12,000 7,000 2,000 -3,000

(Rs Million)

Revenue
2002

Cost & Expenditure

2001

Profit/Loss Before Tax

D.PORTS & SHIPPING

established an annual cargo handling record of over 26.692 million with zero waiting time of vessels in 2001-02. During the first nine months of current financial year (JulyMarch 2002-03), port has handled 20.011 million tons of cargo which is slightly less by 0.2 percent against the corresponding period of last year (20.057 million tons). The traffic handled at Karachi Port during last twelve years is as under:-

(a) Karachi Port Trust

Karachi Port has made a steady and continuous progress in its various sectors to boost the national economy. It has

Table 14.6 Cargo Handled at Karachi Port Year 1990-91 1991-92 1992-93 1993-94 1994-95 Imports 14,714 15,266 17,256 17,610 17,526 %Change 3.8 13.0 2.1 -0.5 Exports 3,995 5,186 4,914 4,959 5,572 %Change 29.8 -5.2 0.9 12.4 Total 18,709 20,453 22,170 22,566 23,098 (000 Tonnes) % Change 9.3 8.4 1.8 2.3

Chapter 14. Transport and Communications 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 July-March 2001-02 2002-03 18,719 18,362 17,114 18,318 18,149 20,064 20,330 15,265 15,380 6.8 -1.9 -6.8 7.0 -0.9 10.5 1.3 0.8 4,862 5,113 5,570 5,735 5,613 5,918 6,362 4,792 4,631 -12.7 5.2 8.9 3.0 -2.1 5.4 7.5 -3.4 23,581 23,475 22,684 24,053 23,762 25,981 26,692 20,057 20,011 2.1 -0.4 -3.4 6.0 -1.2 9.3 2.7 -0.2

Source: Karachi Port Trust

The KPT is committed to provide facilities at par with the modern age requirement, for which a number of projects have been formulated for phased implementation, financed through its own resources. The execution of the projects together with improvement in cargo and ship handling operations would enable the port to effectively meet the future requirement of shipping and cargo handling traffic. These projects include deepening of channel, refurbishment of oil Pier-II, procurement of new floating crafts, and expansion of Keamari Groyne Complex. The ground breaking ceremony for refurbishment of oil Pier-II has been held on b) Port Qasim 29th April 2003. The terminal will have a

Fig-6: Cargo Handled at Karachi Port

000 Tonnes

90-91

91-92

92-93

93-94

94-95

95-96

96-97

97-98

98-99

99-00

2001-02(Jul-Mar)

2000-01

Import

Export

capacity to handle 8 to 12 million tons per The performance of Port Qasim Authority annum of POL and non POL products. With has been impressive during July- March 2002-03. the reconstruction of Oil Pier-II, the annual A cargo volume of 12.32 million tones was handling capacity of Karachi Port has handled during the period under review, as increased from 24 to 28 million tonnes. against 9.44 million tones during the Apart from the above development schemes, corresponding period of last year, showing an the KPT has offered a number of projects to increase of 30.5 percent. A congenial atmosphere private sector. has been developed to boost box trade at the port. Consequently, box trade surpassed all the pervious handling targets and registered an increase of more than 75 percent during the first nine months of the current financial year 2002-03 over the same period last year. The ship callings have also registered an increase of 25 percent and

'2002-03(Jul-Mar)

'2001-02

Chapter 14. Transport and Communications stood at 520 during July-March-2002-03, as compared to 415 during corresponding period of last year. On financial account, the accomplishments are equally parallel. The Authority has earned a net profit of Rs. 830.74 million during July.-March 2002-03, showing an increase of around 133 percent when compared with Rs. 356.62 million in the corresponding period last year. Evenly important is the fact that the net surplus of Rs. 830.74 million is 149 percent higher than the target set for the current financial year 2002-03. c) Gwadar Port The port is geographically located at Gwadar East Bay, about 460 k.m. from Karachi and has immense strategic and political significance. The port will play a vital role in making Pakistan economically sound, it would serve as a link between the East and the West. The project would give a welcome fillip to economic activity and help to improve the quality of the local people. The port would step up trade and development activities, generate employment, and help attract investment. It will be developed in two phases. The port would be capable of handling ships of 30,000 DWT Bulk carriers and 25,000 DWT container vessels. The port is being built with Chinese assistance and will be completed in three years, ending March, 2005. The Phase-II will be implemented under BOT basis. It will comprise 10 additional berths, including 3 dedicated container terminals that includes one bulk grain terminals with capacity handling vessel upto 100,000 DWT and two oil berths for vessels upto 200,000 DWT. d) Pakistan National Shipping Corporation (PNSC) The PNSC is the National Flag Carrier of Pakistan. Its main objective is to maintain a commercially viable sea link between Pakistan and its major trading partners. It also helps in maintaining and stabilizing freight rates charged by the other carriers and provides a strategic link in the case of emergencies. The fleet strength of the PNSC during July-March 2002-03 was 13 vessels with a deadweight capacity of 229,579 tons. Estimated revenue was approximately Rs. 3,826.00 million. The corporation has handled all kinds of cargoes including Rice, Fertilizer, Iron Ore, Coal and Wheat. During the first nine months of the current fiscal year, the PNSC has transported a total of 5.6 million tons of cargo including 4.6 million tons of Crude Oil and 0.23 tons of Rock Phosphate. The long term prospects for the company appear to be reasonably good. The PNSC is actively in the market for purchase of 2/3 Aframax tankers which will boost the gross tonnage under Pakistan flag. e) Dryports Beside the seaports and airports, eight dryports have been established all over Pakistan. The basic idea behind dryports proceeds from the premise that trade and industry located far away from sea ports/border posts, should be provided import and export facilities at the doorsteps of the business community in order to enable it to participate in the countrys international trade more actively and conveniently. Dryports infrastructure also makes it possible to organize an uninterrupted flow of imports and exports from the door of the consignor to the door of the consignee which is very essential for facilitation of the countrys international trade in the globalized world. It also places much emphasis on supply chain management. Besides, operation of inland container depots (ICDs) also gets facilitated in the vicinity of dryports which makes it possible to reduce the cost of import and exports.

Chapter 14. Transport and Communications The proposal for dryports in Pakistan was first mooted by the Federal Ministry of Industries in 1967. The Ministry had proposed to establish inland dryports at a number of upcountry destinations. In 1968, the Lahore Chamber of Commerce and Industry demanded assignment of priority to Lahore for establishment of the first dryport in the country. The Lahore dryport was accordingly established in 1973. The decade of the Seventies was spent in watching the progress of Lahore dryport project which left much to be desired in its operational success. The basic problem was inefficient transport of dryport cargo from Karachi to Lahore. With the introduction of National Logistic Cell (NLC) in the transport sector in the early Eighties, the Lahore dryport started functioning well. Thus the demand for dryport facilities increased exponentially from almost all the potential cities which had a sizable workload of import and export business. As a result, the National Logistic Cell (NLC) established the second dryport of the country at Hyderabad in 1984. In 1985, the enlightened exporters of Sialkot established the first-ever dryport facility at Sambrial in the private sector on self help basis. This dryport was established at the central city of Sambrial to effectively serve the entire triangular region comprising Gujranwala, Gujrat and Sialkot - a region which is also known as the Export Triangle of Pakistan. Afterwards, Pakistan Railways established dryports at Multan and Peshawar in 1986; at Quetta in 1987 and at Chaklala (Rawalpindi) in 1990. Faisalabad dryport was established in the private sector in 1994. The performance of dry ports shows that the custom duty collected at the dry ports has increased by 6 percent and 5 percent during 199899 and 1999-2000, respectively. However, the collection of custom duty has declined by 9 percent and 16 percent during the 2000-01 and 2001-02 respectively. On the other side, the total value of imports has registered a mix trend. Table 14.7 indicates the performance of dry ports.

Table 14.7 Performance of Dryports Fiscal Year Imports Total value 1997-98 1998-99 1999-00 2000-01 2001-02 July-March 2002-03 85,574 80,315 71,344 73,917 78,562 65,115 % change -6.1 -11.2 3.6 6.3 Custom duty collected value 16,343 17,323 18,147 16,551 13,868 9,483 % change 6.0 4.8 -8.8 -16.2 (Rs. Million) Exports Total value 99,975 100,781 113,603 130,785 146,257 % change 0.8 12.7 15.1 11.8

115,809 Source: Central Board of Revenue

E) INFORMATION TECHNOLOGY (IT) Information technology (IT) has assumed unprecedented importance in the global economic arena. In Pakistan, Government is according a high priority to this sector. One of the

prerequisites for ensuring sustained growth of the industry is the provision of a definite framework consisting of policy, legislative, financial, and operational guidelines, which can provide a stable umbrella for growth. Thus, the government is the main facilitator, enabler, and promoter of the IT

Chapter 14. Transport and Communications sector. The vision of the Policy is to harness the potential of Information technology as a key contributor to development of Pakistan. A broadbased involvement of the key stakeholders is a must for its sustainable development. Core IT Policy strategies have been proposed under BOX-2 E-Governance: The first ever Citizens Portal of the Government of Pakistan has been launched on test/trail basis. Web sites of 34 Ministries/Divisions and 3 special purpose web sites have been developed and connected with the portal. ATM network has been provided to facilitate low income federal government employees. Seven Ministries are to be connected on Local Area Network (LAN). A project has been initiated by E-Government Directorate to train probationary officers in the field of IT. This would enable officers to make use of the tools of IT to increase efficiency. Projects like computerization of arms licenses, computerization of registration, crime several focused areas: (i) E-Government, (ii) IT Industry Development, (iii) IT Education at Schools/College Level and (iv) Targeted IT HRD Development as per Market Request. The new developments in the IT sector are given in Box-2

control and FIR online are under implementation. Pakistan Computer Bureau is being strengthened to provide technical assistance and bring uniformity in the architecture of nation wide applications. IT Industry Development Program: Pakistan Softwear Export Board (PSEB) has organized exhibitions in collaboration with ITCN to promote software industry of Pakistan. PSEB has implemented a pilot project for industrial automation. The main outcomes of the project are demand for IT Industry, better productivity tools for conventional industry and employment opportunities for IT professionals. PSEB has implemented ISO 9001 certification project to improve the product quality of IT Industry. An internship project has been implemented to enhance the skill of young graduates and establish a better linkage between IT Industry and Educational Sector. 4 IT parks have been established in the public sector. In these IT Parks, high-speed

bandwidth is brought to the premises, data network within the building is set up and managed and space is rented out at affordable rates. Human Resource Development: Infrastructure Support for Degree and Post Degree Level IT Education Educational Intranet: Developed to provide high speed connectivity to 56 UGC recognized universities. Multimedia Platform: The project will set up a Multimedia Asset Management system capable of storing, compiling and content over digital satellite broadcast television, internet and cable television channels. IT Education at School & College Level

Chapter 14. Transport and Communications Computer laboratories have been set up in 25 Federal Government Schools and Collages, 25 PAF Schools and Colleges, 23 F.G Colleges and 20 Cantt Garrison Schools through a project. Computers labs and other resources have been provided to Government college Lahore and Lahore College for Women. Computer labs have also been established in two colleges for men and two colleges for women in Northern Areas. Cadet College Sanghar and Military College Jhelum have been facilitated with the

computer labs and other resources. Targeted IT HRD Training Professional training will be provided to 1400 Inter-Networking (Cisco) engineers. PGD program will be arranged for students from Baluchistan. 760 students trained in Legal Transcription. 1104 students trained in Medical Transcription. 536 students trained in Quality Control.

i) Electronic Government Directorate: The government has set up an Electronic Government Directorate (EGD) under the Ministry of IT & Telecommunications. EGD will prepare and implement all e-government projects at federal level, prepare standards for IT sector activities and provide technical support to different provincial and federal organizations. Financial year 2002-03 is a milestone in the history of E-government in Pakistan. The first ever Information and Services web portal called PAKISTAN GOV (www.pakistan.gov.pk) was launched in October 2002. By the end of February 2003, more than 1.3 million viewers had visited the portal.

The IT action plan is an integral part of the IT Policy. It aims at promotion of information and communications technologies (ICT) through development in the following areas: (i) Provision of ICT infrastructure in the country. a) Provision of sound physical infrastructure like telephone and internet system. b) Provision of legal infrastructure viz. necessary law to encourage and protect electronic transaction. c) Improve quality and quantity of IT students at university level. d) Encouraging local IT Industry by providing incentives and job opportunities. Introducing ICT in government organizations so that quality of public services is enhanced through efficiency and speed of delivery of services and bringing in transparency in government operations. Encouraging e-Commerce.

ii) Pakistan Computer Bureau:

(ii)

(iii)

Pakistan Computer Bureau completed the training of 6000 Federal Govt. Employees at Islamabad/ Rawalpindi and 6800 Provincial Govt. employees at their

Chapter 14. Transport and Communications Provincial Headquarters. Training of Govt. officials is a regular activity of Pakistan Computer Bureau which also extends advisory services to government department for selection of hardware/software and related matters. Pakistan Computer Bureau is undertaking a number of projects: (i) Provision of 2000 I.T. Teachers in computer science and establishment of 1500 Computer Laboratories in High Schools, Higher Secondary Schools and Intermediate Colleges in all the Provinces including AJ & K. (ii) The introduction of I.T. in district administration which will initially include the computerization of Land Records and Vehicle Registration etc. A few selected Districts will be taken up as pilot project. Market is continuously expanding and taking on new dimensions. New areas of Information technology are being discovered and software companies are diversifying their businesses. On the other hand, the talent in Pakistan is looking for assistance, support and resources to implement their ideas in the IT field. The PSEB has also set up a one-window operation Business Response Unit (BRU). It is a one stop information source to the foreign and local investors in the IT sector. According to IT Division, the export of Software stood at $ 18.2 million in fiscal year 1999-2000 has reached $ 20.1 million in 2001-02, showing an increase of 10 percent. During JulyFebruary of the current financial year 200203, the export of software has reached $ 14.6 million.

iii) Pakistan Software Export Board (PSEB):

iv) Pakistan Telecommunication Company Limited (PTCL)

The PTCL network consists of 99 percent digital switching system exchanges, Optical Fiber Cable Backbone, subsidiaries routes, long distance media, digital radio systems, satellite communications and alternate arrangements. It has international Gateway exchanges at Karachi and Islamabad. International communication revenue is an appreciable source of PTCL earnings. The PTCL is provider of infrastructure for connectivity for internet system providers (ISPs), data network operators, software exporters, educational institutions, universities, corporate customers and other users. Its tariffs have been reduced by 25 percent on international calls during 2001-02 and are expected to be reduced further in 2002-03. Tariff has been reduced by 60 percent on international IP bandwidth, 10 to 68 percent on Lower than one MB, and 70 percent on domestic lease circuits. For promotion of Information Technology, 1,350 cities/towns/ villages have been provided Internet facility, upto March, 2003, compared to 850 cities/towns/villages in June 2002 showing an

Pakistan Software Export Board (PSEB) is undertaking various initiatives for the development of IT industry capability in Pakistan. In the domestic market, the PSEB has launched a program, namely Automation of Domestic Manufacturing Industy to automate 100 manufacturing units from various industries sectors. It is working on the standardization and quality improvement programs. The Project Standardization of Pakistani Software Industry-ISO has been launched for the certification of 80 software companies. The PSEB is managing Software Technology Parks (STPs) in major cities of Pakistan. The STPs are equipped with the top class Internet bandwidth facilities. The company can have the facility within 48 hours. In addition to this, 24 hours technical support is also available for the smooth execution of the IT business. The International Software

Chapter 14. Transport and Communications increase of 58.8 percent. Promotional traffic has been introduced for ISPs, Software exporters and educational institution/universities working in the country. The PTCL has launched its domestic and International Pre-Paid Calling Card Service (Intelligent Network) in the country during 2000-01, since its commissioning, the intelligent network system at Islamabad, Lahore and Karachi has met tremendous success. So far 9.73 million cards have been floated in the market. Pakistan Telecommunication network is expending each year, thus providing telephone access to rural and urban communities in record time. Total telephone lines installed by March 2003 were 4.6 million as against 3.6 million up to June 2002 last year, showing an increase of one million telephone connections or 27.8 percent.

cities i.e Faisalabad, Gujranwala, Hyderabad, Islamabad, Karachi, Lahore, Multan, Peshawar, Quetta and Sialkot. The Mobile Phone Service (Ufone) has been launched in 60 cities/ towns and highways. Its customer base is 425,978 which is expected to increase further even in future.

Paknet, an Internet Service provider (ISP), is a subsidiary of the PTCL. The PTCL has installed Internet Exchanges (PIE) at Rawalpindi, Lahore and Karachi, comprising of high-end routers, multi-services switches, firewalls and proxy services etc. The details of bandwidth with capacity and total A system with a capacity of 110,000 numbers of ISPs are given in Table 14.8: Mail Boxes has been installed at 10 major
Table 14.8 Bandwidth Capacity Bandwidth capacity Mega Byte 94.65 70.62 63.29 228.56

Name of station Karachi Lahore Rawalpindi Total

Total number of ISPs 81 60 66 207 Source: PTCL

v)Pakistan Telecommunication Authority (PTA) Pakistan

whole of Telecom sector. Deregulation policy is in final stages and to be announced shortly .In the Year 2002-03, the PTA has

Telecommunication moved forward to encourage the telecom Authority is promoting the telecom sector operators and transfer of technology. In this since 1996. The Authority is responsible for regard, reduction in royalty of Internet regulating the establishment, operation and services provider (ISP) from 4 to 0.7 percent maintenance of telecommunication system of the gross revenue, for card payphone and It service and cellular mobile service it was promotes and protects the interest of users of from 4 to 2 percent and 4 to 1.5 percent telecommunication services. Pakistan under respectively. Similarly with the launching of World (WTO) prepaid connection of U-Fone, the mobile commitment is now ready to deregulate the phones have reached 2 million by end of Trade Organization provision of telecom services.

Chapter 14. Transport and Communications

March 2003, as against 1.2 million upto June, Makran Coast to bring the people of the area 2002, showing a growth of 66.7 percent. The to the National mainstream of development. introduction of new services technology advancement in in terms of The Corporation will set in own gateway the sector exchanges to provide international

including the broadband Internet services connectivity to its designated customers and General Packet Radio Services (GPRS) during 2003-04 and will introduce/provide facility, which also include Internet calling cards for exclusive use by its connectivity on the mobile phone . The PTA customers. It will also set up pay card has issued 2,861 licenses for telecom services phones at the premises of its designated up till March 2003, 153 licenses for card customer. provider, for non-voice and vice data provide NTCs state-of-the-art support Data to efor payphone service, 125 for Internet services Communication Network has started infrastructure

communication network services 20 and 25 governance initiatives of the Government licenses were issued respectively. The PTA during 2002-03 which is in the process of has also issued 8 Audio tax licenses, 6 expansion and provision of Internet facilities satellite license, 12 trunk radio licenses and 9 to federal ministers and their regional store & forward fax service license, video offices. In December 2002, allocated spatial conference 1, electronic information service slot of 380, the PAKSAT has been placed at 125 and 25 data communication network the telecom services of the country through services. vi) National Telecommunication Corporation (NTC) National satellite. During the year 2003-04, an estimated 1000 designated subscribers of NTC have also been planned to be covered through wireless Local loop. Network

Telecommunication management system is responsible for the Corporation has an installed capacity of management, on real time basis, of the 78,000 lines with 60,000 working connections. exchanges and the surrounding network. The Corporation plans to expand the Network manager reduces the negative network to 100,000 installed lines during effectives of over load & faults in the 2003-04 which will provide a total number of network, through efficient utilization of 80,000 working connections. All NTC network resources and capacity. It provides exchanges are digital, which are linked to an efficient and reliable solution for the each other through Optical fiber (OFC) management of EWSD nodes. media and digital radio system (DRS). The Corporation is also in process for establishment of Optical Fiber back bone on
F) ELECTRONIC MEDIA

Chapter 14. Transport and Communications Radio Pakistan broadcasts programmes for its a) Pakistan Television Corporation Limited (PTV) PTV is providing quality entertainment, education and information to inform and educate the people through wholesome entertainment and to inculcate in them a greater awareness of their own history, heritage, current problems and development as well as knowledge of the world at large. The PTV is operating with three Channels in the country. The Re-broadcast Centers are extending TV Signal to remote areas of the country. The Government has desired to extend the TV signal by setting up Re-broadcast Centers in Baluchistan at Noushki (Chaghai), Wadh, Qilla Saifullah and Ziarat, in Sindh at Umerkot and in AJ&K. A TV Station at Muzaffarabad and 7 RBCs at Kotli, Rawala-Kot, Bagh, Plandri, Bhimber, Neela Butt and Mirpur. The PTV has started 24 hours transmission on PTV-1 with effect from 11th February 2003. This is in addition to news on the hour every hour and views and current affairs available round the clock on PTV-World. b)Pakistan Broadcasting Corporation (PBC) Pakistan Broadcasting Corporation (PBC) has been playing a very important role in promoting national integration, projecting Government policies at home & abroad, providing information, education & entertainment to the people. The PBC has a total 25 broadcasting stations in all parts of Pakistan. listeners at home and abroad round the clock in national, regional and other languages of Pakistan as well as 15 foreign languages in its Home, World and External Services with the availability of its programmes in 56 countries of Asia, Africa and Europe. Radio Pakistan has launched an exclusive entertainment channel FM-101 since 1998. All big cities of the country are linked in the network. FM services are also available on Motorway. The Central News Organization (CNO) puts 142 News Bulletins of the different durations in 33 languages daily keeping the listeners informed for latest happenings in the country and around the world. G. PAKISTAN POST OFFICE

Pakistan Post Office is a state enterprise dedicated to providing wide range of postal products and public services. It is the premier national postal communication service holding together a vast country with a large population. As a true emblem of federation, it is committed to serving every one, every day and every where. It provides postal facilities through a net work of 12, 267 post offices across the country. The department is providing various traditional postal services to the consumers at a reasonable price. Its vast network of post offices in every nook and corner of the country is of crucial importance. To meet the modern requirements of rapid communication the Pakistan Post Office has Planned to modernize all services functions by providing integrated computing facilities at all GPOs/ HOs.

________________________

Chapter 15. Energy

15. Energy
At present, over a billion people in the industrialized countries use some 60 percent of the worlds commercial energy supply, while 5 billion people living in the developing countries consume the remaining. Many of these people live in the During the last twelve years (1990-91 to 2001-02), average consumption of the petroleum products showed upward trends. On average, the energy consumption has increased by 4.6 percent per annum. As regards the consumption of gas, it

developing countries and a large number of increased by 3.5 percent per annum. Similarly, the them are poor. The poor, in particular, need consumption of electricity increased by 4.9 to be provided with a minimum amount of goal, the energy needs to be produced and percent. However the consumption of coal, which wide fluctuation in its annual consumption, has recorded an annual growth of energy at an affordable price. To achieve this showed

supplied at least cost. In fact, efficient energy 1.2 percent only. The annual trend of energy use plays an important role in the social and consumption since 1990-91 to 2001-02 is given in economic development. It contributes, for example, to slow down population growth, and reduce pollution and environmental pressures. Table 15.1. The consumption of gas and coal during the first nine months (July-March) of the current fiscal year have increased by 7.8 percent and 5.2 percent, respectively over the corresponding period of last year. A. PETROLEUM PRODUCTS During the first three quarters of the current fiscal year, the household, agriculture, and other Govt. Sector showed declines in the use of petroleum products to the extent of 12.3 percent, 16.8 percent and 43.0 percent respectively, for a variety of reasons including the availability of alternative and relatively cheaper fuels in the form of natural gas and LPG; and declined in demand of aviation fuels (JP-4 & JP-1) as airline industry faced decline in traffic. However, the Energy Consumption industry and power sectors have recorded

Energy sector in Pakistan comprises power, gas, petroleum and coal. Total primary energy supplies measured in terms of tones of oil equivalent (TOE) in 2001-02 were 45.2 million. The oil, natural gas, electricity and coal provide 41.3 percent, 42.9 percent, 11.2 percent and 4.6 percent, respectively of the total primary energy supplies. The power and gas sector accounts for 3.6 percent of GDP in 2001-02.

Chapter 15. Energy substantial increase in the consumption of diesel, LDO and fuel oil. The annual growth in the consumption of petroleum products by major sectors and their relative shares since 1990-91 to 2002-03 are given in Table 15.2 and Table 15.3, respectively.

Table 15.1

Annual Energy Consumption

Petroleum Products Fiscal Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Avg.(12 years) Jul-Mar 2001-02 2002-03 (000 tones) 9,961 10,983 12,012 13,225 13,960 15,601 15,606 16,624 16,647 17,768 17,648 16,960 % Change -0.1 10.3 9.4 10.1 5.6 11.8 0.0 6.5 0.1 6.7 -0.7 -3.9 4.6 2.7 Gas (mmcft) 465,338 486,631 511,526 550,769 546,788 582,868 597,799 607,890 635,832 714,744 777,610 824,604 % Change -17.6 4.6 5.1 7.7 -0.7 6.6 2.6 1.7 4.6 12.4 8.8 6.0 3.5 7.8 Electricity (Gwh) 31,534 33,878 36,493 37,381 39,619 41,924 42,914 44,572 43,296 45,586 48,584 50,622 % Change 9.6 7.4 7.7 2.4 6.0 5.8 3.4 3.9 -2.9 5.3 6.6 4.2 4.9 1.2 Coal (000 M.T) 3,054 3,099 3,267 3,534 3,043 3,638 3,553 3,159 3,461 3,168 3,095 3,328 % Change 1.5 5.4 8.2 -13.9 19.6 -2.3 -11.1 9.6 -8.5 -2.3 7.5 1.2 5.2

12,333 12,665

624,058 673,034

40,010 40,472

2,328 2,450

Source: Hydrocarbon Development Institute of Pakistan.

Table 15.2
Consumption of Petroleum Products Year 9091 9192 9293 9394 9495 House holds 944 614 622 590 585 596 510 499 493 477 % Change -15.4 -35.0 1.3 -5.1 -0.8 1.9 -14.4 -2.2 -1.2 -3.2 Industry 1,148 1,369 1,480 1,653 1,889 2,416 2,141 2,081 2,140 2,116 % Change -11.5 19.3 8.1 11.7 14.3 27.9 -11.4 -2.8 2.8 -1.1 Agri. 265 281 287 308 269 250 269 245 249 293 % Change -7.6 6.0 2.1 7.3 -12.7 -7.0 7.6 -8.9 1.6 17.8 Trans. 4,841 5,619 6,107 6,414 6,646 7,136 7,172 7,364 7,864 8,308 % Change 3.4 16.1 8.7 5.0 3.6 7.4 0.5 2.7 6.8 5.6 Power 2,434 2,775 3,158 3,902 4,215 4,786 5,110 6,054 5,526 6,228 % Change 11.2 14.0 13.8 23.6 8.0 13.5 6.8 18.5 -8.7 12.7 (000 tones) Other % Govt. Change 328 -17.7 323 -1.5 357 10.5 357 0 355 -0.6 417 17.5 404 -3.2 381 -5.7 376 -1.3 346 -8.0

Chapter 15. Energy 9596 9697 9798 9899 9900

200001 200102 JulMar 200102 200203

451 335 260 228

-5.5 -25.7 -12.3

1,924 1,612 1,228 1,442

-9.1 -16.2 17.4

255 226 173 144

-13.0 -11.4 -16.8

8,158 8,019 5,857 5,906

-1.8 -1.7 0.8

6,488 6,305 4,443 4,732

4.2 -2.8 6.5

372 464 372 212

7.5 24.7 -43.0

Source: Hydrocarbon Development Institute of Pakistan. As regards the average sectoral shares, followed by power sector (31.5 percent), industry (12.4 transport sector was the largest consumer of the percent), household (4.1 percent), agriculture (1.9 petroleum products and accounted for 47.5 percent, percent) and others Govt. (2.6 percent).(Table 15.3).

Table 15.3 Consumption of Petroleum Products

(Percentage Share) Year House holds Industry Agriculture Transport Power Other Govt.

Chapter 15. Energy 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Avg.(12 years) Jul-Mar 2001-02 2002-03 9.5 5.6 5.2 4.5 4.2 3.8 3.3 3.0 2.9 2.7 2.6 2.0 4.1 2.1 1.8 11.5 12.5 12.3 12.5 13.5 15.5 13.7 12.5 12.9 11.9 10.9 9.5 12.4 9.8 11.4 2.7 2.6 2.4 2.3 1.9 1.6 1.7 1.5 1.5 1.6 1.4 1.3 1.9 1.4 1.1 48.6 51.2 50.8 48.5 47.6 45.7 45.9 44.3 47.2 46.8 46.2 47.3 47.5 47.5 46.3 24.4 25.3 26.3 29.5 30.2 30.7 32.7 36.4 33.2 35.0 36.8 37.2 31.5 36.0 37.4 3.3 2.9 2.9 2.7 2.5 2.7 2.6 2.3 2.3 1.9 2.1 2.7 2.6 3.0 1.7

Source: Hydrocarbon Development Institute of Pakistan. B. CONSUMPTION OF GAS Table 15.4 gives the annual change in the consumption of gas by various users since 1990-91 to 2002-03. The sectoral consumption of gas in 2001-02 exhibits a mix trend. The relative shares of gas consumption by various users during the last twelve years are documented in Table 15.5. Power sector has emerged as the largest consumer of gas (34.5 percent), followed by fertilizer (24.2 percent), industrial (18.9 percent), households (17.8 percent), commercial (2.9 percent) and cement (1.7 percent). It may be noted that the share of power sector in consuming gas is rising continuously since 1998-99. The power sector is gradually reducing its dependency on imported fuel oil because of its escalating prices. The consumption of gas during the first nine months of 2002-03 also exhibits a rising trend. The consumption of gas by power sector increased by 14 percent while industrys consumption grew by 10.7 percent followed by household (6.7 percent) (Table 15.4).

Table 15.4 Consumption of Gas (Billion cft)

Year House Hold % Change Comm Ercial % Chang e Cement % Change Fertili Zer % Chang e Power % Chang e Indus trial % Chang e

Chapter 15. Energy

90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 67 71 76 82 97 110 115 134 131 139 141 144 119 127 11.1 6.0 7.0 7.9 18.3 13.4 4.5 16.5 -2.2 6.1 1.4 2.1 12 13 14 15 16 17 18 19 21 22 21 22 17 17 10.4 8.3 7.7 7.1 6.7 6.3 5.9 5.6 10.5 4.6 -4.5 4.8 13 12 12 10 7 8 9 12 8 9 8 7 * * 62.9 -7.7 0.0 -16.7 -30.0 14.3 12.5 33.3 -33.3 12.8 -11.1 -12.5 108 101 119 144 142 150 150 148 167 177 175 178 131 131 -0.6 -6.5 17.8 21.0 -1.4 5.6 0.0 -1.3 12.8 6.0 -1.1 1.1 176 194 187 198 181 186 194 179 184 230 288 315 231 263 4.3 10.2 -3.6 5.9 -8.6 2.8 4.3 -7.7 2.8 25.0 25.0 9.4 89 96 103 101 104 111 110 115 121 135 139 151 122 135 2.9 7.9 7.3 -1.9 3.0 6.7 -0.9 4.5 5.2 11.6 3.0 8.6

00-01 01-02
Jul-Mar

01-02 02-03

6.7

0.0

0.0

13.9

10.7

*included in Industrial Sector Table 15.5

Source:Hydrocarbon Development Institute of Pakistan

Consumption of Gas (Percentage Share) Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Average (12 years) July-March 2001-02 2002-03 Households 14.3 14.5 14.8 14.9 17.8 18.9 19.3 22.1 20.7 19.6 18.2 17.6 17.8 Commercial 2.6 2.7 2.8 2.8 2.9 2.9 3.1 3.1 3.4 3.0 2.7 2.7 2.9 Cement 2.8 2.4 2.3 1.8 1.2 1.3 1.5 2.0 1.3 1.2 1.2 0.9 1.7 Fertilizer 23.2 20.8 23.4 26.2 25.9 25.8 25.2 24.3 26.3 24.8 22.8 21.7 24.2 Power 37.9 39.8 36.5 35.9 33.1 32.0 32.4 29.4 28.9 32.2 37.2 38.5 34.5 Industrial 19.1 19.7 20.1 18.3 19.0 19.1 18.4 18.9 19.1 18.9 17.9 18.5 18.9

19.2 18.8 * Included in Industrial Sector.

2.7 2.6

C. ELECTRICITY CONSUMPTION

* 21.0 37.2 19.7 * 19.4 39.0 20.1 Source: Hydrocarbon Development Institute of Pakistan. Tables 15.6 and 15.7 show the position of electricity consumption since 1990-91 to 2002-03. On average, the household sector has been the largest

Chapter 15. Energy consumer of electricity, accounting for 40.7 percent of 2002-03, the overall consumption of electricity has the total electricity consumption, followed by industrial increased due to installation of new connections, (31.1 percent), agriculture (14.5 percent), commercial incentive package offered to industrial consumers and (5.5 percent), other government sector (7.5 percent) and accurate meter reading. (Table-15.6). street light (0.7 percent). During the first 9 months of

Table 15.6 Consumption of Electricity By Sectors

(000 GWH) House hold Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 JulyMar Gwh 10.4 11.4 13.2 14.0 15.6 17.1 17.8 18.8 19.4 21.4 22.8 23.2 16.8 17.0
% Chang e

Commercial Gwh 2.1 2.1 1.7 1.8 1.9 2.2 2.2 2.3 2.4 2.5 2.8 3.0 2.1 2.3 % Change 5.5 0 -19.0 5.9 5.6 15.8 0 4.5 4.3 5.2 12.0 7.1 9.5

Industrial Gwh 11.2 12.3 13.0 12.6 12.5 12.1 11.9 12.3 12.0 13.2 14.3 15.1 11.1 12.1 % Change 8.8 9.8 5.7 -3.1 -0.8 -3.2 -1.7 3.4 -2.4 10.0 8.3 5.6 8.1

Agriculture Gwh 5.6 5.8 5.6 5.8 6.2 6.7 7.0 6.9 5.6 4.5 4.9 5.6 4.1 4.3 % Change 11.8 3.6 -3.4 3.6 6.9 8.1 4.5 -1.4 -18.8 -19.9 8.9 14.3 4.9

Street Light (Total) Gwh % Change 297 298 324 378 390 387 224 239 213 212 0.3 8.7 16.7 3.2 -0.8 -42.1 6.7 -10.9 -0.5 -

Other Govt. Gwh 2.1 2.1 2.6 2.8 3.0 3.3 3.4 3.9 3.6 3.6 3.5 3.5 2.7 4.6 *
% Chang e

11.2 9.6 15.8 6.1 11.4 9.6 4.1 5.6 3.2 10.3 6.5 1.8 1.8

19.2 00 23.8 7.7 7.1 10.0 3.0 14.7 -7.7 0 -2.8 0.0 70.4

2001-02E 2002-03E

E-Estimated *Included traction - : not available

Source:Hydrocarbon Development Institute of Pakistan. Table 15.7 (Percentage Share)

Consumption of Electricity(Sectoral Shares)

Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02 Average (12 Years)

Households 33.0 33.8 36.1 37.7 39.3 40.9 41.4 42.1 44.8 47.1 46.9 45.9 40.7

Commercial 6.6 6.3 4.7 4.8 4.9 5.2 5.2 5.2 5.5 5.6 5.7 5.8 5.5

Industrial 35.6 36.3 35.7 33.8 31.6 29.1 27.9 27.6 27.9 28.9 29.5 29.9 31.1

Agriculture 17.8 17.3 15.4 15.4 15.8 15.9 16.5 15.5 12.9 9.9 10.1 11.1 14.5

Street Light 0.8 0.8 0.8 0.9 0.9 0.9 0.5 0.5 0.4 0.4 0.7

Other Govt. 6.9 6.2 7.1 7.4 7.5 7.9 8.0 8.6 8.2 7.9 7.3 6.9 7.5

Chapter 15. Energy July-March 2001-02 45.4 2002-03 E 42.2 E-Estimated *Including traction Energy Supply The annual trends of primary energy supplies and their per capita 5.7 5.8 30.0 11.0 0.7 7.2 29.4 10.8 0.3 11.4* Source: Hydrocarbon Development Institute of Pakistan.

availability, measured in tons of oil equivalent (TOE) since 1990-91 to 2002-03 are given in Table 15.8 and Fig-1& Fig-2

Table 15.8 Primary Energy Supply and Per Capita Availability

Energy Supply Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 July-March 2001-02 2002-03 E TOE- Tons of oil equivalent E:Estimated Million TOE 28.469 30.475 32.953 34.778 36.062 38.746 38.515 40.403 41.721 43.223 44.456 45.237 33.751 34.412 7.0 8.1 5.5 3.7 7.4 -0.6 4.9 3.3 3.6 2.9 1.8 2.0 %Change 0.253 0.264 0.278 0.286 0.290 0.304 0.295 0.302 0.305 0.309 0.311 0.310 0.231 0.231 4.4 5.4 2.9 1.2 4.9 (3.0) 2.5 1.0 1.2 0.6 (0.4) 0 Per Capita Availability (TOE) % Change

Source: Hydrocarbon Development Institute of Pakistan.

Chapter 15. Energy

Fig-1: Energy Supply (Million TOE)
0.32 50 0.31 45 40 35 30 0.26 25 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 2000-01 2001-02 0.25 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 2000-01 2001-02 0.3 0.29 0.28 0.27

Fig-2: Per Capita Availability (TOE)

Chapter 15. Energy The supply of primary energy increased from ever-growing annual demand for energy. The energy 28.469 million TOE in 1990-91 to 45.237 million TOE in supplies have also increased from 33.751 million TOE in 2001-02 or by 59 percent and per capita availability from 2001-02 (July March) to 34.412 million TOE in 2002-03 0.253 TOE to 0.310 TOE or by 22.5 percent. Because of (July-March) or by 2 percent, but no change in the per the increase of primary energy supplies, its per capita capita availability. The supply of primary energy by availability recorded a rising trend over the decade of various sources of energy as well as their rates of the 1990s, which greatly helped consumers meet their increase are given in Table 15.9.

Table 15.9 Composition of Energy Supplies

Crude Oil Year Mln. Barrel s 51.7 52.4 51.3 51.4 48.2 52.1 49.8 50.4 52.6 53.3 73.6 75.1 % Change 13.3 1.4 -2.1 0.2 -6.2 8.1 -4.4 1.2 4.4 1.3 38.0 2.0 -1.7 (bcf)* Gas % Change 4.1 6.2 6.0 7.0 0.6 6.1 4.7 0.3 6.4 9.9 4.8 7.7 5.0 Petroleum Products (Mln.T) % Change 10.3 11.2 12.3 13.7 14.2 16.0 15.9 16.9 16.8 17.9 18.7 18.4 6.3 8.7 9.8 11.4 3.6 12.7 -0.6 6.3 -0.6 6.5 4.5 -1.8 Coal (Mln.T) % Change 8.9 17.9 -6.5 7.0 -10.9 14.6 -6.4 -6.8 7.3 -9.1 2.5 4.9 Electricity
(000Gwh)

(a) 41.0 45.4 48.7 50.6 53.5 56.9 59.1 62.1 65.4 65.7 68.1 72.4

% Change 9.1 10.7 7.3 3.9 5.7 6.4 3.9 5.1 5.3 0.5 3.7 6.3

90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02
Jul-Mar

518.5 550.7 583.5 624.2 628.2 666.6 697.8 700.0 744.9 818.3 857.4 923.8 690.1 724.6

3.9 4.6 4.3 4.6 4.1 4.7 4.4 4.1 4.4 4.0 4.1 4.3

01-02 58.1 02-03P 57.1 *: Billion cubic feet a: Gega Walt hour (P)Provisional a) Crude Oil :

13.1 3.1 52.0 13.3 1.5 3.2 3.2 54.4 4.6 Source: Hydrocarbon Development Institute of Pakistan.

barrels per day during same period last year, showing an increase of 0.8 percent. During the period under review, 22,439 (35%) barrels per day were produced in northern region and 42,466 (65%) barrels per day in southern region, as against 21,136 (33%) barrels and 43,225 (67%) barrels per day respectively, during the same

The remaining recoverable reserves of crude oil as of 1st April, 2003 were estimated at 302 million barrels in the country. The average crude oil production during July-March 2002-03 was 64,907 barrels per day, as against 64,361

Chapter 15. Energy period last year. Production of crude oil during July- March 2002-03 and corresponding period of Table 15.10 the last year is given in Table 15.10.

Average Production of Crude Oil

Region Northern Region - OGDCL - OPI - POL - PPL Southern Region - OGDCL - BP(Pakistan) - PPL - BHP - OMV/LASMO Total: 2001-02 21,500 8976 1299 8915 2310 41798 11451 29639 100 566 42 63,298 July-March 2001-02 21,136 8823 1113 8788 2412 July-March 2002-03 22,439 8281 1621 9323 3214 (Barrels per day) % Change 6 (6.1) 45 6 33.2

43,225 42,466 (2) 11311 13341 18 31172 28407 (9) 116 90 (22.4) 626 554 (12) 74 64,361 64,907 0.84 Source: Ministry of Petroleum and Natural Resources. increase of almost 5 percent. Main companies

B) Natural Gas As of April 1st 2003, the recoverable reserves of natural gas have been estimated at 28.3 trillion cubic feet. The average production of natural gas during July-March 2002-03 was 2,648 million cubic feet per day, as against 2,526 mmcfd during the same period last year, showing an

currently engaged in oil and gas production activities are OGDCL, PPL, POL, OPI, LASMO, BHP, MGCL, BP (PAKISTAN), OMV and TULLOW. Table 15.11 shows the natural gas production during 2001-02, and July-March 200203 and corresponding period of last year.

Table 15.11

Average Production of Natural Gas

(mmcft) Company LASMO MGCL OGDCL OPI POL PPL 2001-02 65 410 733 06 46 905 July-March 2001-02 64 411 744 5 46 915 July-March 2002-03 76 427 731 7 40 888 % Change 18.8 3.9 (1.7) 40.0 (13.0) (3.0)

Chapter 15. Energy BP (Pakistan) BHP TULLOW OMV Total: 213 92 30 61 2,561 209 226 8.1 94 89 (5.3) 27 28 3.7 11 136 1136.4 2,526 2,648 4.8 Source: Ministry of Petroleum and Natural Resources. drilling activities of the public and private sector companies, engaged in the exploration and development of wells, with achievements for the corresponding period of last year.

c) Drilling Activities During July-March 2002-03, altogether 52 wells have been drilled, including 13 wells of the OGDCL in the public sector. Table 15.12 gives the

Table 15.12
Sector Public Sector (OGDCL) Exploratory Appraisal/Dev Private Sector Exploratory Appraisal/Dev Total: Drilling Activities (Achievement) 2001-02 July-March July-March 2001-02 2002-03 10 6 13 7 3 34 7 27 44 3 3 12 01 % Change 117 300 (66.7)

26 39 50 5 12 140 21 27 28.6 32 52 62.5 Source: Ministry of Petroleum and Natural Resources transmission capacity of SNGPL will increase from 1050 MMCFD to about 1500 MMCFD or by 42.9 percent and of SSGCL from 700 MMCFD to 1000 MMCFD i.e. also by 42.9 percent. e) Liquefied Petroleum Gas (LPG) Presently about 1000 tons/day LPG is being produced locally. There are 29 LPG companies, marketing the indigenous and imported LPG. The government is making efforts to ensure availability of domestic and imported LPG at competitive and viable prices in far flung rural areas where supply of natural gas through pipelines is not economically feasible. The government has deregulated the allocation and

d) Gas Infrastructure Development Plan. As per present Governments direction, the two gas utility companies, namely, SNGPL and SSGCL have embarked upon gas infrastructure development projects to enhance their gas handling capacity for the transportation of 928 MMCFD gas expected to be available from the new fields. This additional available gas would be used mainly for replacement of furnace oil in power plants to save foreign exchange. These infrastructure augmentation plans of SNGPL/SSGCL are being completed in two phases, entailing huge capital outlay i.e. at an estimated cost of Rs.20,243 million. On completion of the infrastructure development project, the

Chapter 15. Energy price of LPG with effect from 15th September 2000 with a view to keep the price at a reasonable level. f) Compressed Natural Gas (CNG) The use of CNG in automotive vehicles is being encouraged to reduce pressure on petroleum imports and improve environment. The government intended to promote CNG in the transport sector as an alternate fuel. More than 1,052 licenses for installation of CNG stations have been issued. So far 362 stations have been established in different parts of the country. These include 358 in private and 4 in public sector. More than 300 stations are under construction in the private sector. Up to March 2003, over 300,000 vehicles have been converted on CNG as compared to 240,000 vehicles last year, showing an increase of 25 percent. The use of this indigenous fuel will help in saving foreign exchange and make positive effects on environment by reducing pollution level. Incentives for investment in CNG business are being offered to private sector. During the period July-March 2002-03, over 150 provisional permissions/licenses for setting up CNG stations have been issued. g) Performance of Major Oil and Gas Companies: (i) OGDCL Oil and Gas Development Company Limited (OGDCL) is the largest oil exploration and production (E&P) company in the Pakistan. Since inception to March 2003, the OGDCL has drilled 176 exploratory wells and 229 development wells. As of March 2003, the OGDCL is producing 21,613 barrels of oil per day, 731 million cubic feet per day of gas, 186 metric Table 15.13 OGDCLs Physical Performance tons per day of LPG and 44 metric tons per day of sulphur. The companys remaining recoverable reserves as of December, 2002 comprised 10.05 trillion cubic feet of gas and 145 million barrels of oil. The OGDCLs average oil production including non-operated JVs was 29,318 barrels of oil per day and 882 MMCFD gas. The OGDCL has implemented a number of major projects for the developments of oil and gas field including Dhodak gas field, Qadirpur gas field, Pirkoh and Uch gas fields, Nandpur and Panjpir gas fields. Since March 2002, the OGDCL has made eight oil and gas discoveries in Sindh province. Initial production testing results gave a combined flow of 2,872 barrels of oil/condensate per day and 48.3 million cubic feet per day of gas. These discoveries are being appraised to determine their full potential and will help country to save millions of dollar in foreign exchange. The physical performance of the OGDCL is given in Table-15.13:

Chapter 15. Energy

July-March 2001-02 S.No. 1. Name of Activity No. of Wells spudded i) Exploratory ii) Development iii) Drilling Meterage (Meter) Production* i) Oil (US Barrels)

July-March, 2002-03

% Change

3 3 16,654 5,533,906 (20,197) 206,897 (755) 50,741 (185)

12 01 43,315 5,922,059 (21,613) 200,217 (731) 50,944 (186)

300 (67) 160 7

2.

ii)

Gas MMcft

(3)

iii)

LPG (Tonnes)

0.4

iv)

Sulphur (Tonnes)

*Figures in brackets show daily average production.

13,533 12,083 (11) (49) (44) Source: Oil and Gas Development Company Ltd.

(ii) Sui Northern Gas Pipelines Limited (SNGPL) The principal task of the Company is transmission and distribution of natural gas in Punjab, NWFP, AJK and the Federal Capital. During July-March 2002-03, the SNGPL has given connection to 108 industrial, 1,780 commercial and 75,299 domestic consumers, bringing the progressive total number of customers to 2,621 industrial, 38,054 commercial and 2.1 million domestic, respectively. The SNGPL has so far supplied gas to 141 towns in Punjab, NWFP, AJK and the Federal Capital. (iii) Sui Southern Gas Company Limited (SSGCL) Sui Southern Gas Company Limited (SSGCL) covers the natural gas supply to the provinces of Sindh & Balochistan. Its core

activities comprise of transmission & distribution of natural gas, designing and implementing gas transmission & distribution projects and supporting cross boarder pipelines through Interstate Gas Systems Limited while the none core business activities cover manufacturing of domestic gas meters and gas training institute. The SSGCL has so far supplied gas to 735 towns/villages of Sindh and Baluchistan. During the period July-March 2002-03, the company has connected 130 industrial, 625 commercial, and 40,984 domestic consumers, bringing the total number of industrial 2,360, commercial 17,493 and domestic 1.6 million respectively. Power Sector With the normal demand-growth rate, WAPDA will face shortages of 500 MW in the year 2005-06 and further to 5,529 MW by the year 2010. To fill the upcoming shortfall, the

Chapter 15. Energy Government of Pakistan (GOP) has announced a Policy for Power Generation Projects 2002 for attracting private investors. The main thrust of the policy is on the exploitation of indigenous resources. Investors response to the policy is encouraging. Twelve companies have already shown interest in setting up power plants, having cumulative generating capacity of 1,915 MW promising investment in the country for more then US$ 2 billion. The Policy has been announced with a view to meet the energy demand of the country through exploitation of indigenous resources. The salient features of the policy are presented in Box-1:

Box-1 General/Administrative: Applicable for projects in private sector, public sector and through private-public partnership. One Window facility to be provided at federal level by Private Power and Infrastructure Board (PPIB) for all projects above 50 MW Capacity. Provinces to manage the investment for projects upto 50 MW capacity. For projects above 50 MW, the provinces would be the main drivers and catalysts for marketing and coordinating projects with PPIB. Hydel projects to be implemented on Build-Own-Operate-Transfer (BOOT) and thermal projects on Build-Own-Operate (BOO) or BOOT basis. Implementation of projects through solicited and unsolicited proposals. For hydel and indigenous fuels and renewable projects, unsolicited proposals to be permitted from sponsors in the absence of feasibility studies for the projects. For competitive bidding selection process will involve prequalification, issuance of Request of Proposals (RFP) bidding evaluation and award. For solicited proposals, tariff will be determined through International competition Bidding (ICB) and for proposals on raw sites, tariff will be determined through negotiations. For indigenous coal and gas based projects, integrated power generation proposals can be furnished. GOP will guarantee the terms of executed agreements including payment terms. Availability of standardized security agreements.

Financial Regime: Permission for power generation companies to issue corporate registered bonds. Permission to issue shares at discounted prices to enable venture capitalists to be provided higher rates of return proportionate to the risk. Permission for foreign banks to underwrite the issue of shares and bonds by the private

Chapter 15. Energy power companies to the extent allowed under the laws of Pakistan. Non-Residents are allowed to purchase securities issued by Pakistani companies without the State Bank of Pakistans permission and subject to the prescribed rules and regulations. Abolition of 5 percent limit on investment of equity in associated undertakings. Independent rating agencies are operating in Pakistan to facilitate investors in making informed decisions about the risk and profitability of the project companys Bonds/ Term Finance Certificate (TFCs). Fiscal Regime: Customs duty at the rate of 5 percent on the import of plants and equipment not manufactured locally. No levy of sale tax on such plants, machinery and equipment, as the same will be used in production of taxable electricity. Exemption from income tax including turnover tax and withholding tax on imports; provided that no exemption from these taxes will be available in the case of oil-fired power projects. Exemption from Provincial and local taxes and duties. Repatriation of equity along with dividends is freely allowed subject to the prescribed rules and regulation. Parties may raise local and foreign finance in accordance with regulations applicable to industry in general. GOP approval may be required in accordance with such regulations. Maximum indigenization shall be promoted in accordance with GOP policy. Non-Muslims and Non-Residents shall be exempted form payment of Zakat on dividends paid by the Company.

Transfer of Complex: The ownership of hydel projects would be transferred to the GOP at his end of concession period. Hydrological Risk: For projects with a capacity above 50 MW, power purchaser will bear the risk of availability of water. Environmental Consideration: The environmental guidelines have to be met as per Pakistan Environmental Protection Act (PEPA).

i) Electricity Generation i) Installed Capacity

The Water and Power Development Authority (WAPDA), Karachi Electric Supply Corporation (KESC), Karachi Nuclear Power Plant

Chapter 15. Energy (KANUPP) and Chashma Nuclear Power Plant are the four main public sector organizations, involved in power generation, transmission and distribution of electricity in the country. The Independent power projects (IPPs)__ the private sector entities are also involved in power generation. The bulk of the installed capacity of WAPDAs power system comprising of Northern, Upper, Lower Sindh and Quetta power markets stood at 9,694 MW, hydel 5,009 MW (51.7 percent) and thermal 4,685 MW (48.3 percent) during July-March, 200203, followed by the IPPs (5,816 MW) or 32.8 percent and KESCs (1756 MW) or 9.9 percent and Karachi and Chashma Nuclear Power Plants (462 MW). The total installed capacity stood at 17728 MW during JulyMarch 2002-03, there by registering an increase of 0.2 percent. In the total installed capacity, the share of WAPDA system has been 54.7 percent followed by the IPPs at 32.8 percent, KESC at 9.9 percent, and nuclear at 2.6 percent during the fiscal year 2002-03. Within the WAPDA system, the shares of thermal and hydel were 48.3 percent and 51.7 percent respectively. The details are given in Table 15.14:

Table 15.14 Total Installed Generation Capacity

Name of Power Company WAPDA Hydel Thermal IPPs Nuclear KESC Installed Capacity 2001-02 9930 5009 4921 5549 462 1756 % Share 56.1 50.4* 49.6* 31.4 2.6 9.9 100 Installed Capacity 2002-03 9694 5009 4685 5816 462 1756 % Share 54.7 51.7* 48.3* 32.8 2.6 9.9 (MW) % Change (2.4) 0.0 (4.8) 4.8 0 0

Total 17697 * Share in WAPDA system

17728 100 0.2 Source: Hydrocarbon Development Institute of Pakistan hand, the share of thermal has increased from 48.2 percent to 68.7 percent during the same period but it has declined to 65.3 percent in the first nine months of current fiscal year. It may be noted that in 1960 the share of hydel was 70 percent while that of thermal was only 30 percent. The ratio has changed to 58 percent (hydel) and 42 percent (thermal) in 1980. By 2001-02 the ratio has changed to 31.3 percent and 68.7 percent respectively. Since electricity generated through

ii) Electricity Generation The trend in the composition of electricity generation between hydel and thermal since 1992-93 is given in Table-15.15. It can be seen that the share of hydel has continuously declined while that of thermal has been rising constantly. The share of hydel was almost 52 percent in 199293 and declined to 31.3 percent in 2001-02. It has slightly increased to 34.7 percent in the first nine months of the current fiscal year. On the other

Chapter 15. Energy thermal is much more expensive than hydel, therefore, the massive shift to thermal has made electricity expensive in Pakistan. For reducing the cost of electricity, it is essential that we make effort to reverse the contribution of hydel and thermal in medium-to-long-run.

Table 15.15
Electricity Generation (Million kWh) Year Hydel Percentage share 51.8 45.8 49.6 47.5 41.1 41.4 41.8 34.3 29.5 31.3 Thermal 19,680 22,960 23,268 25,653 29,924 31,199 31,235 36,972 41,196 41,804 Percentage share 48.2 54.2 50.4 52.8 58.9 58.6 58.2 65.7 70.5 68.7 Total 40,791 42,396 46,126 48,859 50,782 53,259 53,683 56,259 58.455 60,863

1992-93 21,111 1993-94 19,436 1994-95 22,858 1995-96 23,206 1996-97 20,858 1997-98 22,060 1998-99 22,448 1999-2000 19,287 2000-01 17,259 2001-02 19,059 (July-March) 2002-03 15,999 Includes purchase from IPPs.

34.7 30,110 65.3 46,109 Source: Water and Power Development Authority iii) Growth in Electricity Consumers

Fig-3: Electricity Generation by WAPDA

70 60 50
Billion KWH

The number of consumers has

23.3 25.7 29.9 31.2 31.2 37 41 41.8

40 30 19.7 23 20

increased due to rapid urbanization, extension of electricity grid supply to unelectrified areas and rural/village electrification. The number of consumers has increased to 13.0 million by March, 2003, as compared to 12.7 million in 2001-02 or by 2.4 percent. Table-15.16 indicates the annual trend since 1992-93 to 2002-03.

23.2 20.9 22.1 22.5 19.3 10 21.1 19.4 22.9 17.2 19

0
92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 2000-01 2001-02

Hydel

Thermal

Table 15.16
Consumers by Economic Groups Year 1992-93 1993-94 1994-95 General 7.9 8.3 8.7 Industrial 0.2 0.2 0.2 Agriculture 0.1 0.1 0.2 (Million) Total 8.2 8.6 9.1

Chapter 15. Energy 1995-96 1996-67 1997-98 1998-99 1999-00 2000-01 2001-02 July-March 2002-03 9.1 9.5 9.9 10.4 11.2 11.8 12.3 12.6 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 9.5 9.9 10.2 10.8 11.6 12.2 12.7

0.2 0.2 13.0 Source: Water and Power Development Authority iv) Village Electrification The rural/village electrification programme is an integral part of the total power sector development in order to increase the productive capacity and socio-economic standard of 70 percent of population living in the rural areas. The number of villages electrified has increased to 73,063 by March 2003, as per growth given in Table-15.17 and Fig.5.

Fig-4: Total Electricity Consumers (Nos. Million) 14 13 12 11 10 9 8 7 6 5

92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 2000-01 2001-02

Village Electrification
Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Target 2,070 4,500 2,000 5,000 4,000 4,000 4,000 1,852 -

Table 15.17 (Number) % Growth 11.6 12.3 8.7 3.9 2.1 1.9 1.6 2.3 2.4 2.1

Realization * 4,824 5,283 6,243 4,957 2,441 1,383 1,232 1,109 1,595 1,674 1502

Progressive Total 45,644 50,927 57,170 62,127 64,568 65,951 67,183 68,292 69,887 71,561 73,063

July-March
2002-03 *Including FATA

Source: Water and Power Development Authority

Chapter 15. Energy

Fig.5 Village Electrification (000 Nos).
80 70 60 50 40 30 20 10 0 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 2000-01 2001-02

62.1 57.2 50.9 45.6

64.6

66

69.9 71.6 67.2 68.3

v) Electricity consumption by Economic Groups The sectoral consumption of electricity by economic groups identifies the domestic group as the largest consumer of electricity during JulyMarch 2002-03 by accounting 44 percent, followed by industrial (28.8 percent), agriculture (12.7 percent ), bulk supply (9.2 percent), commercial (5.3 percent) and traction (0.02 percent). Table 15.18 and Fig-6 shows electricity consumption by economic groups since 1992-93 to 2002-03.

Table 15.18
Electricity Consumption by Economic Groups Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 July- March 2002-03 Domestic 35.9 37.2 38.4 40.8 40.5 41.5 43.6 46.4 46.1 45.5 44.0 Commercial 4.2 4.1 4.3 4.6 4.6 4.5 4.7 4.9 4.9 5.1 5.3 Industrial 34.9 32.8 30.3 28.7 26.3 26.0 25.6 26.3 27.1 28.0 28.8 Agriculture 17.9 17.9 17.8 18.4 18.2 17.5 14.3 11.0 11.3 12.3 Bulk Supply & Public Lighting 7.1 7.9 9.3 7.4 10.4 10.5 11.8 11.3 11.3 9.2 (% Share) Traction 0.1 0.1 0.1 0.1 0.1 0.04 0.04 0.04 0.04 0.03

12.7 9.2 0.02 Source: Water and Power Development Authority.

Fig-6 Electricity Consumption by Economic Groups (% Share)

1992-93
Bulk Supply & Public Lighting 7.1% Agriculture 17.9% Domestic 35.9%

2001-02
Bulk-Sup.& Pub. Lighting 9.2% Agriculture 12.3% Domestic 45.5% Industrial 28.0%

Industrial 34.9% Commercial 4.2%

Commercial 5.1%

Chapter 15. Energy vi) Power Losses Despite considerable efforts, the power losses have not been reduced appreciably. The WAPDA has invoked vigorous technical and administrative measures to improve operational and management efficiency to reduce power losses and thefts. The transmission and distribution (T & D) losses were 25.8 percent during 2001-02 but slightly declined to 25.6 percent during the first nine months of current financial year . Table 15.19 shows the annual trend of power losses since 1992-93 to 2002-03.

Table 15.19
WAPDA Power Losses (Percent) Year Auxiliary Consumption 2.3 2.6 2.6 2.9 2.4 2.0 1.7 2.1 2.0 2.2 2.1 T&D Losses* 21.1 21.6 21.4 21.5 21.7 23.9 25.8 25.1 23.8 23.6 Total 23.4 24.2 24.0 24.4 24.1 25.9 27.5 27.2 25.8 25.8

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 July- March 2002-03 * T&D = Transmission and Distribution

23.5 25.6 Source: Water and Power Development Authority and Balloki, planned to be completed in 2006 and 2007, respectively.

vii) Power Development Programme The optimal utilization of hydroelectric potential is accorded priority in the overall power development programme. The projects which will be constructed under the Vision-2025 Programme are Golan Gol (106MW), Khan Khwar (72 MW), Allai Khwar (121 MW), Duber Khwar (130 MW) and Jinnah (96 MW). These projects are planned to be completed by 2008. In order to meet the power demand in the coming years, the WAPDA has proposed to install two high efficiency combined cycle power plants on natural gas of 450 MW each at Faisalabad

h) Karachi Electric Supply Corporation Ltd. (KESC) The installed capacity of KESC's various generating stations remained at 1,756 MW during July-March of the current financial year, 2002-03. The policy for power projects 2002-03 has recently been announced by the Government. The KESC is pursuing to seek permission to undertake power projects, so that the increasing gap between demand and supply could be minimized. During first nine months of current financial year 2002-03, the KESC generated 6,381 million kWh from its

Chapter 15. Energy own sources, as compared 6,448 million kWh in the same period last year, showing a decline of 1 percent due to carrying out of major overhauling/rehabilitation works on some of the KESC's units. imports from The total energy made available various agencies, including to KESC system, after taking into account the auxiliary consumption, stood at 9,005 million kWh during July-March 2002-03, as against 8,664 million kWh in the same period last year, thus registering a growth of 4 percent. The Bin Qasim Power Station, the largest power plant of KESC, has been converted to gas. As a result of this conversion, 1,760 million kWh were generated on gas at the Bin Qasim Power Station, compared to 1,275 million kWh in the same period last year, showing an increase of 38 percent. The Tapal Energy Limited and Gul Ahmed Energy limited are the two independent power projects (IPPs) which are hooked to the KESC System, with an aggregate capacity of 262.17 MW. The energy contributed by these two IPPs, during the period under review, was 1,232 million kWh, representing more than 14 percent of the total energy supplied to the KESC system. The KESCs T&D losses increased marginally to 39.8 percent from 39.5 percent in the same period last year. The KESCs income has, however, increased from Rs. 28.9 billion in 2000-01 to Rs. 30.7 billion in 2001-02, registering an increase of 6.6 percent but its expenditure has also recorded an increase of 7.6 percent in the same period. i). Nuclear Power Energy Pakistan Atomic Energy Commission (PAEC) made a beginning in the field of nuclear power production in 1971 by establishing a 137 MW Karachi Nuclear Power Plant (KANUPP). During July-March 2002-03, the KANUPP has The share of coal in the overall commercial energy requirements of the country at the time of Pakistans independence was about 60 percent but with the advent of natural gas in 1952, the utilization had gradually reduced. Currently, the share of coal in the overall energy mix is less than 5 percent. Owing to discovery of large coal field having 175 billion tons resource potential at Thar, the government has decided to enhance the share of coal in the overall energy mix from 5 percent to 20 percent by the end of decade. With the pragmatic government policies, the cement industry is in the process of switching over the indigenous coal from furnace oil that would save 50 percent foreign exchange being spent on import of coal. It would also generate demand of about 2.5 million tons coal/annum in the country by 2005. Almost all the energy consumed in the cement industry is now being generated by a mix of imported and indigenous coal. E. NATIONAL ELECTRIC POWER REGULATORY AUTHORITY (NEPRA) generated 235.9 million kWh of electricity, raising the life time generation to 10.7 billion kWh. A second nuclear power plant has been built at Chashma (CHASNUPP) having a gross capacity of 325 MW, generated 885 million kWh of electricity during July-March 2002-03. Both the power plants are working according to safety standards set by the Pakistan Nuclear Regulatory Authority. The successful functioning of KANUPP and CHASNUPP has given the country great confidence and a sense of direction to plan more nuclear units in future in a manner that would progressively lead to a high degree of selfreliance. D. COAL

Chapter 15. Energy NEPRA regulates in conformance with the objectives of providing safe, reliable, efficient and affordable electric power to the country. During July-March 2002-03, the NEPRA granted generation licence to three WAPDA successor generation companies. The KESC was also granted a generation licence. The Transmission License to National Transmission and Dispatch Company (NTDC) was granted on December 31, 2002. This licence also provides a road map for the transitional phases of the competitive market structure. The NEPRA has also determined a Multi Year Tariff formula for the KESC which is a investors in privatized KESC while the excessive returns to be adjusted in tariff reductions in favour of consumers. Thus the objective is to induce the KESC to achieve efficiencies in delivery and production of electric power. Moreover during July - March 2002-03, the NEPRA has determined one WAPDA related and one KESC related tariff petition. In addition the NEPRA has also determined three WAPDA related and one KESC related rate of adjustments under Automatic Tariff Adjustment formula (ATA). The NEPRA has established a Consumer Affairs Division to address the complaints, lodged

forward looking rate adjustment mechanism, by the consumers against utility companies. designed to provide reasonable return to the ____________________________

Chapter 16. Environment and Housing

16. Environment and Housing

I. Environment
The efforts to address the environmental concerns at policy, planning, and development level which gained momentum with the establishment of a high level inter-ministerial and multi-stakeholder committee, called Pakistan Environment Protection Council (PEPC) under the chairpersonship of the President of Pakistan in 1993, remained active during the fiscal year 200203. During the last decade, Pakistan has made diligent progress in institutional strengthening and capacity building of policy and planning institutions, environmental awareness, and the promulgation of environmental legislation, National Environment Quality Standards (NEQS), and the establishment of environmental tribunals. The energy sector introduced lead-free petrol and since July 2002, all refineries in the country are supplying lead-free petrol and promoting clean fuels including CNG. However, rehabilitation and improvement of biophysical environment and enforcement of environmental remained rather slow. legislation been made mandatory for public sector development projects. To implement NEAP, the Government of Pakistan signed a NEAP Support Program (NEAP-SP) with the UNDP in October 2001. Under NEAP-SP, the Ministry of Environment, Local Government and Rural Development is planning to undertake projects in the following six sub-programs over the next five years: i. ii. iii. iv. v. vi. Policy coordination and environmental governance; Pollution control; Ecosystems management and natural resources conservation; Energy conservation and renewables; Dry land management conservation; Grassroots initiatives. and water

During the fiscal year 2002-03, institutional arrangements to implement NEAPSP were carried out, including the constitution of the Programme Steering Committee (PSC), establishment of the Programme Management and Implementation Unit (PMIU), as well as constitution of various Sub-Programme Implementation Committees (SPICs) etc. To achieve the objectives of the NEAP, the representatives of non-governmental sector, civil society organizations, and environmental advocacy groups are included in SPICs. Pakistan has also revived its environmental commitments during the World Summit on Sustainable Development (WSSD: August 26 to September 4, 2002).

The PEPC has approved the National Environment Action Plan (NEAP) for improving the state of environment in Pakistan. The major objectives of NEAP are to achieve a healthy environment, and sustainable livelihood by improving the quality of air, water and land with civil society cooperation. In this regard, Initial Environmental Examination (IEE) and Environment Impact Assessment (EIA) have also

Chapter 16. Environment and Housing The country assessment report for WSSD focused on the 300,000 vehicles to CNG, pollution load in many protection of atmosphere; integrated approach to the urban centers has started declining. planning and management of land resources; combating deforestation development; and drought; sustainable mountain agriculture; promoting sustainable Table 16.1 Index of Motor Vehicles on the Road (1980=100)

conservation of biological diversity; environmentally Vehicle Type Motor the oceans. NEAP can be one of the means to implement Year Cycles/ Rickshaws Total the WSSD commitments. To be consistent with National Scooters Environmental Action Plan (NEAP), pollution in air, 1981 113 105 111 water and land are discussed in the ensuing pages. 1982 131 108 124 1983 147 113 138 1984 180 116 167 Impact of Pollution 1985 202 118 189 a. Air 1986 228 120 211 Air pollution levels in Pakistans most 1987 243 121 227 populated cities are among the highest in the 1988 261 123 245 1989 284 126 270 world and climbing, causing serious health 1990 311 129 292 impacts. The levels of ambient particulates 1991 335 132 310 smoke particles and dust, which cause respiratory 1992 397 145 361 disease are generally twice the world average 1993 434 158 389 and more than five times as high as in industrial 1994 467 167 414 1995 506 176 445 countries and in Latin America (See Asian 1996 549 185 477 Environmental Outlook, 2001). Auto and 1997 598 195 513 industrial emissions are the main source of dirty 1998 641 259 544 air. The average compound growth of vehicles in 1999 691 284 581 2000 735 292 627 Pakistan is about 12% per annum. Over the last 2001 744 295 635 two decades, the total number of motor vehicles 2002 (E) 755 299 644 on the road has jumped from 0.8 million to 4.0 Source: Sustainable Development Policy Institute million showing an overall increase of more than (SDPI). 500 % (WSSD Country Assessment Report, MOE Note: Base year numbers of motorcycles, 2002). Motorcycles and rickshaws, due to their scooters, rickshaws and total vehicles on two-stroke engines, are the most inefficient in the road in thousands were 287.6, 32.0 burning fuel and contribute most emissions. and 682.2 Fortunately, the rickshaws have only tripled in (E) Estimated. numbers, but motorcycles and scooters have gone sound management of biotechnology and protection of up more than seven fold in the last two decades (Table 16.1). However, 28.7% of the total vehicles on the road are running on CNG. With improved design of new car engines and conversion of The combustion of coal is another main contributor of air pollution. The three main uses of coal are power, brick-kilns and domestic. Since 1998-99, coal use has decreased gradually for all the three abovementioned purposes, which is a healthy sign. However,

Chapter 16. Environment and Housing coal is being replaced by natural gas that should be used Source: Sustainable Development Policy Institute in a sustainable manner and the focus should be to explore renewable energy sources. As indicated in E: Table-16.2, the coal consumption in the power sector Note: was steady from 1991-92 to 1994-95 but it increased by (SDPI). Estimated. Base Year Consumption value was 24,603; 3,025,520; and 3785 tonnes for power brick-

almost ten fold in 1995-96 due to the ten-fold increase in kilns & domestic respectively. the use of coal for thermal electricity generation. A study by the Pakistan Medical However, over the last four years, the use of coal in Association indicates that the growth in traffic power sector is gradually decreasing. Likewise, for and dirty fuels have already had an adverse domestic consumption, it increased by 211 percent in impact. In Pakistan, sulphur in diesel and furnace 1996-97 over 1995-96 and since then there is oil is 1 percent and 3 percent as compared to 0.05 a considerable reduction (almost eight time reduction) in 0.5 and 0.5 1.0 percent for other countries of its usage for domestic purposes. Moreover, run-offs from chemical insecticides, fertilizers and solid wastes generated in urban and rural areas are other important source of environmental pollution. A study of the Ministry of Environment estimated that 47,920 tonnes of waste are generated daily and only 53.6 percent are collected while the rest lies around. Even the waste collection system and dumping sites are inadequate. Table 16.2 Index of Consumption of indigenous coal by sector (1990-91=100) Year Power 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 (E) 160 190 177 165 1,621 1,430 1,408 1,688 1,415 837 773 Sector Brick kilns 101 106 115 99 107 105 93 101 93 95 70 Domestic 180 85 87 85 82 255 53 34 26 26 26 the region, respectively. The ministry of Petroleum and Natural Resources has planned to phase out sulphur from diesel by first introducing the sulphur content from 0.5% to 0.05%. According to WHO guidelines, the amount of sulphur dioxide (SO2), carbon monoxide (CO) and Ozone (O3) in the atmosphere are well below danger levels. However, the particulate matter in the atmosphere is well above safety levels across all the major industrial cities in the Punjab. Table 16.3 shows the rapid pace of increase in air emissions over two decades between 1977-78 and 1997-98 across the major commodity producing sectors. The average increase in sulphur dioxide (SO2) across all the sectors was twenty-three fold over these two decades. Similarly, nitrogen oxides (NOx) increased twenty-five fold in the power sector and carbon dioxide (CO2) increased an average of four fold across all the sectors.

b. Water
Safe fresh water supplies are at risk in many areas of Pakistan. Pakistan exceeds the threshold of high water-stress conditions, which occur when the ratio of use to availability exceeds 40 percent (AEO, 2001). Various

Chapter 16. Environment and Housing estimates have been made over the years in connection with water quality. The National Environmental Quality Standards (NEQS) are used as a reference point to compare how the average quality of water fares on various parameters. On most counts (including temperature, pH content, total dissolved solids and biological Oxygen demand), the water is safe.

Table 16.3 Estimated Air Pollutants from various economic sectors Sector 1977-78 1997-98 CO2 SO2 NOx CO2 SO2 NOx Industry 12308 19 N.A 53429 982 N.A Transport 7068 52 N.A 18987 105 N.A Power 3640 4 3 53062 996 76 Domestic 16601 5 N.A 39098 40 N.A Agriculture 845 5 N.A 6368 40 N.A Commercial 1726 11 N.A 4261 25 N.A N.A Not applicable Source: Sustainable Development Policy Institute CO2 Carbon dioxide SO2 Sulphur dioxide NOx Nitrogen Oxides However, in terms of total suspended solids (TSS), the counts are much above the NEQS across the board and for chemical oxygen demand (COD), they are above the NEQS for Ravi and the Hadyara Drain. In terms of fecal coliform, for which traces should be zero in drinking water, the actual presence is millions of times greater than acceptable levels. Water pollution has three main sources: bacterial and organic liquids and solids from domestic sewage; toxic metals, organic, acidic, and other polluting industrial discharges; and agro-chemical pollution in the form of fertilizers and pesticides run-off from agricultural lands. The irrigation run-off feeds into surface water and also seeps into sub-soil waters. As crops do not utilize all the chemicals, tubewells and pumps draw this up in turn as source of drinking water. The growing incidence of salinity also contributes to the deteriorating quality of ground water, with excessive amounts of salt in the water rendering it impotable. Untreated industrial effluents and untreated disposal of solid wastes intensify the problem. A study conducted by the Sindh Environmental Protection Agency (EPA) indicates that the industrial pollution levels are higher for major industries in Pakistan, including chemical, tanneries, textile, sugar, fertilizer and oil and ghee. The effluents are way above than NEQS on all account including Biological Oxygen Demand (BOD), Chemical Oxygen Demand (COD), Total Suspended Solids (TSS) and Total Dissolved Solids (TDS). Industrial pollution levels and National Environmental Quality Standards are detailed in Table- 16.4.

Chemical Tanneries Textile Sugar

BOD (mg/I.) 1400-9800 800-1680 800-8500 100-1100

Table 16.4 Industrial Pollution level COD (mg/I.) 2300-18640 1020-2367 1610-16500 200-1896

TSS (mg/Tj) 950 298 1900 2850

TDS (mg/I.) 38000 9104 9680 17300

Chapter 16. Environment and Housing Fertilizer Oil and ghee NEQS BOD COD TSS TDS 400-610 460-1470 80 860-1650 9720 1260-3280 576 15462 150 150 3500 Source: Sustainable Development Policy Institute

c.

=Biological Oxygen Demand = Chemical Oxygen Demand = Total Suspended Solids = Total Dissolved Solids

Land

Pakistan is one of more than 100 countries of the world affected by desertification, which is resulting in environmental degradation, loss of soil fertility, biodiversity and reduction in land productivity. Pakistan comprises 79.61 million hectare (ha) of land, of which 59.45 million has been surveyed. Of the total reported area, approximately 22.15 million (ha) is total cropped area, 24.36 million (ha) is not available for cultivation, while 9.15 million (ha) is culturable waste. The cropped area registered about 19 percent increase from 1980-81 to 1997-98, i.e., about one percent each year, while it decreased from 23.04 million hectares in 1997-98 to 22.15 million ha in 2001-2002. The recent trends indicate that Pakistan is approaching its physical limits, resulting in the indiscriminate use of chemical fertilizers and pesticides to grow more out of already degrading land. The trend to sow the cultivatable area more than once is increasing, and area sown more than once increased from 5.71 million hectare in 1990-91 to 6.71 million hectares in 2001-02 indicating an increase of 17.5 percent. The impact of land degradation varies among different geographical regions of Pakistan. North mountains are the major source of water for countrys two major reservoirs: Tarbela and Mangla Dams. However, due to heavy soil erosion, these reservoirs are silting up, thus reducing the capacity of power generation and availability of irrigation water. Barani lands are subject to heavy soil erosion, primarily due to

improper land use by crop cultivation, livestock grazing, and illegal removal of vegetation cover. Deserts have acute problem of shifting sand dunes and salinity. The irrigated areas are infected with twin menace of water logging and salinity. Underground water resources in western dry mountains of Baluchistan are shrinking due to overexploitation of the meager quantity of water for horticulture and crop cultivation. The arid coastal strips and mangrove areas are under increased environmental stress from reduced fresh water flows, sewage and industrial pollution and over exploitation of other natural resources.

Forests are the lungs of any country. Forests play an important role in land conservation, regulated flow of water for irrigation and power generation, reduction of sedimentation in water channels and reservoirs and maintenance of ecological balance. The area under forests has increased steadily since 1990-91 with little fluctuations, however the overall increase in the forests area in 2001-02 is higher by 10.1 percent over 1990-91 (Table-16.5). Although Pakistan has limited area under forest cover, yet 11.25 percent of the total land area is protected as national parks, wild life sanctuaries or game reserves while a rough percentage recommended by the experts is 12 percent. It has been pointed out in the report of Sustainable Development Policy Institute that Baluchistan and NWFP, which require more protection, have only 6 percent of their land protected while Punjab has 16

Chapter 16. Environment and Housing percent protection. For Pakistan, currently the real issue is not the amount of land demarcated as a protected area but the poor management of the areas already protected. Table 16.5 Forest Area (Ml. Hectares) 3.46 3.47 3.48 3.45 3.60 3.61 3.58 3.60 3.60 3.78 3.77 3.81 10.1 countries. Under the Montreal Protocol, the Ozone Depleting Substances (ODS) based industry such as Chloro Floro Carbons (CFC)) under renovation and consumption of ODS will be eventually phased out by the year 2005. % Increase/ Decrease 0.3 0.3 -0.9 4.3 0.3 -0.8 0.6 5.0 -0.3 1.1 Government has imposed a ban on the import of used ODS-based equipment, and maximum duties are levied on import of new CFC based equipment. Pakistan is also responding to UN

Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02

Framework Convention on Climate Change by preparing national Green Houses Gases (GHG) inventories. Several projects aiming at mitigation of climate change and adaptation to changing climate are in the pipeline, which will be implemented with the technical and financial assistance of developed country parties to the Convention. Some initiatives have been launched under the UN Convention on Biological Diversity and UN Convention on Desertification such as preparation of Biodiversity Action Plan (BAP) and Desertification Combat Action Plan. However, the pace of implementing international obligations is not up to the mark, which is largely due to lack of in-country capacity and partial fulfillment of commitments by the developed countries. Environment Sector Programs/Projects During the fiscal year 2002-03, major projects are under implementation in the following programs areas;

% Increase in 2001-02 over 1990-91 Source:Ministry of Food, Agriculture and Livestock. Status of Pakistan in global and regional partnership on environment To become join signatory international to many efforts for

conservation of natural resources, Pakistan has international Conventions/Protocols/Agreements. Pakistan as signatory to these international protocols and conventions, is meeting various obligations with the technical and financial assistance of developed

i. Institutional Strengthening, Building, Mass Awareness

Capacity

Institutional strengthening is an on-going process and has been made an important component of all development projects in environment sector. Capacity building of the project implementing agencies and other

Chapter 16. Environment and Housing functionaries involved in policymaking, planning, law enforcement, and monitoring of environmental activities has been an important area of investment by different donors. Specific PSDP project include Strengthening of Forestry Wing at the Federal Level for sustained monitoring of the implementation of Forestry Sector Master Plan, for which an amount of Rs.11.0 million was allocated during 2002-03. The NGOs and other environmental pressure groups have largely undertaken mass awareness campaigns.

iii. Fuel Efficiency in Road Transport

The Ministry of Environment/ENERCON is implementing Fuel Efficiency in Road Transport Sector (FERTS) Project at a total cost Rs.230.4 million. The UNDP is providing grant assistance worth Rs.220.5 million to this project. The project aims at improving fuel efficiency and curtailing noxious emissions from Transport Sector through digital tuning of gasoline and diesel vehicles. A total of 15 digital tune-up stations have been established in four provinces. During 2002-03, Rs.15.81 million were allocated to the Fuel Efficiency in Road Transport. The Revolving Loan Fund worth US$ 3.0 million has been established for financing purchase of tuneup equipment. Until March 2003, Rs.8.11 million have been utilized against PSDP 2002-03.

ii. Forestry and Watershed Management

A mega project in forestry sector, named Rachna Doab Afforestation Project started in July 1995 at a cost of Rs.485.4 million. During 2002-03, Rs.60.0 million were allocated to conclude the ongoing activities towards achievements of afforestation targets. Tarbella Watershed Management Project sponsored by Ministry of Environment is an on-going project at a total cost of Rs.689.05 million, to which Rs.34.2 million were allocated. The main objectives of the project include; soil and water conservation, extension of forests, appropriate land use, improvement of environment and uplift of socioeconomic conditions of people i.e., poverty alleviation. During the fiscal year 2002-03, 14 acres of nurseries have been raised, 2576 acres planted, 7086 acres afforestation maintained and 189 training/exchange visits have been conducted with the total expenditure of Rs.32.9 million till March, 2003. Ministry of Water & Power is implementing another watershed project named Mangla Watershed Management Project at a total cost of Rs.168.99 million. During the current fiscal year, Rs.30.0 million were allocated to this project and about 3640 acres/avenue miles of planting/afforestation have been completed with the total expenditure of Rs.18.2 million until March, 2003.

iv. Industrial Efficiency and Environmental Management Sector Development Program

The project is designed to undertake a comprehensive study and analysis of environmental impact and issues in the industrial sector including status of National Environment Quality Standards (NEQS) implementation. The project was approved by the CDWP in September 2000 at a capital cost of Rs.52.00 million to be financed by the Technical Assistance of the Asian Development Bank (ADB). The project has not yet started because ADB has not released the funds. However, an amount of Rs.12.00 million in foreign exchange has been allocated in the PSDP 2002-03.

Chapter 16. Environment and Housing II. Housing Sector urban population is increasing at a faster pace than the total population which is likely to continue in the future as well. Housing is one of the fundamental human needs as every family requires a roof. Provision of house to every family has become a major issue as a result of rapid population growth and massive rural to urban migration. According to the 1998 census, about 32.5% of Pakistans population lives in metropolitan or urban areas, which means that every third Pakistani is living in a city or town. The projected rate is 45.4% for 2010, attesting to the high rate of urbanization. The number of cities with a population over a million people increased from three in 1981 to seven in 1998. Towns and cites with a population above 100,000 increased from 29 in 1981 to 50 in 1998. The current trend suggests that Table 16.6 According to 1998 Population and Housing Census of Pakistan, there were over 19.3 million housing units in the country as compared to 12.6 million enumerated in 1980, showing an increase of 53.2 percent. Of the total (19.3 million) housing units, 67.7 percent were in rural and 32.3 percent in urban areas, nearly 15.6 million or 80.8 percent were owned, 1.7 million or 9.0 percent rented, and 2.0 million or 10.2 percent rent free. The percentage of owned housing units were higher in the rural areas compared to the urban areas. However, the percentage of rented houses was significantly higher at 23.2 in urban as compared to only 2.3 percent in the rural areas, as reflected in Table 16.6.

Housing Units by Tenure

(In million) Census 1998

Tenure
i) All types

All Areas

Rural

Urban

19.3 (100) ii) Owned 15.6 (80.8) iii) Rented 1.7 (9.0) iv) Rent Free 2.0 (10.2) Note: The figures in parenthesis are percent shares

13.1 6.2 (100) (100) 11.4 4.2 (87.1) (67.6) 0.3 1.4 (2.3) (23.2) 1.4 0.6 (10.6) (9.2) Source: Population & Housing Census 1998

On the basis of the World Banks recommended occupancy rates of 6 persons per house, the total number of required

housing units in the country would be roughly 24.8 million by the end of June 2003, based on the population of 149 million at

Chapter 16. Environment and Housing present. According to one estimate

(National Housing Policy), the country Fortunately, the general conditions in the needs an additional supply of 570,000 units per annum while the actual supply does not country are quite conducive to achieving a rapid exceed 300,000. Thus there is a net shortfall growth in the construction industry. The country of 270,000 units per annum and the backlog is witnessing stable macroeconomic environment and a foundation has been laid for sustained high is increasing every year.

growth in the medium term. However, one major area that has lagged behind is the housing finance, a critical input required for the promotion The rate of construction of new of construction industry. In developed countries, dwellings needed to meet the growing on an average, housing finance (outstanding demand has been falling far short of stock) represents over 25% of GDP (US, 53%; requirement. Therefore, the present government appreciating the gravity of situation and realizing the linkage of this important sector with the construction European Union, 36%). In the developing countries the corresponding numbers are 21 percent for Malaysia, 16 percent for Thailand, 12 percent for Chile, 7 percent for Morocco, 5.5 industry and its potential to generate percent for Tunisia, 4-5 percent for Brazil and employment, decided to revitalize it as a Mexico, 3 percent for Srilanka and Iran and 2.2 vehicle for economic revival. Accordingly, percent for Bangladesh. Ministry of Housing and Works formulated a new National Housing Policy 2001, taking In contrast, the number is hardly 1% of into consideration the multifarious problems GDP in Pakistan. This low number does not including housing shortage, lack of housing represent any lack of demand. Instead it is finance, non-existence of foreclosure laws, function of absence of a properly organized lack of planning, outdated building and approach to housing finance, hitherto rather high zoning regulations, etc. The major emphasis interest rates, and somewhat lack of competition of the policy is on resource mobilization, in the financial sector. There are also other

land availability, incentives for home significant constraints in housing sector that either ownership, incentives to developers and increase the cost of transaction or increase risks constructors and promotion of research and for the lender to unmanageable levels (poor development activities to make construction record/retrieval of property rights, high stamp cost effective. The main objective of the duties, bureaucratic delays, corruption, policy is to create affordability, especially, disorganized state of the real estate market, etc.). for the middle and low income groups. One Therefore, realizing the slump in the housing of the cornerstones of the policy is to ensure construction of housing for the poor and needy and housing for the majority of rural population through the use of different market and feeling the need to revive the economy of this important sector and narrow the

backlog, the government has assigned a high priority to promoting the housing finance sector. instruments like free land, cross-subsidy and To facilitate this sector, a number of steps have concessionary finance etc. been taken which include:

Chapter 16. Environment and Housing The i) present program involves

Tax incentives were provided to home owners construction of approximately 4564 housing in the form of tax deductibility of mark ups (up units/apartments in 4 major urban centers of Karachi, to Rs.100,000 per annum) on home loans; Lahore, Islamabad and Peshawar at an estimated cost of Rs.5.0 billion. The execution of this program has been The legal framework for the loan recovery of entrusted to the Pakistan Housing Authority. financial institutions has been further streamlined and strengthened through The work has been awarded to leading promulgation of Financial Institutions construction companies of Pakistan and the design (Recovery of Finances) Ordinance, 2001; and responsibility rests with leading designers. Leading construction managers are carrying out construction Through a more effective macroeconomic management. This combination ensures proper management the government has succeeded designing, provision of proper facilities and, above all, in reducing the general interest rates in the quality construction and timely completion. Generally, country. This will provide an opportunity for over 78 percent of work has been completed. banks and other financial institutions to Due to this initiative of the Government,

ii)

iii)

iv)

provide more affordable mortgage loans. State Bank of Pakistan has issued guidelines for banking companies to undertake asset securitization, increased the lending limit for

substantial employment has been created. It is estimated that approximately 8,000--10,000 labourers and skilled workers are working on various projects including more than 500 Professional Engineers and Architects. In

such loans to Rs.5 million and allowed banks addition, this has also provided an incentive to the 40 to issue long-term debts to facilitate financing downstream industries including cement, steel, of housing loans; electrical industries, piping etc. v) The House Building Finance Corporation (HBFC) - the countrys largest specialized were housing finance provider has been put under a new and professional Board of Directors and management with a mandate to restructure the institution in to a commercially viable and self-sustaining entity with reliance on subsidized official sources of funding. Eventually, HBFC will have to compete in the market for business and resources at institutions; vi) par with private sector For the financial year 2002-03, Rs.535.55 million allocated in the Housing Sector

HBFC Act was amended to enable it to provide sharia-complaint housing finance product, which has now been introduced.

Chapter 16. Environment and Housing under PSDP of Ministry of Housing and Works. Out of Foundation to acquire three sub-sectors of G-14 i.e. (G480 housing units 450 units are expected to be 14/2-3-4) for housing scheme for government completed by June, 2003. employees. Land acquisition process has been initiated in these sub-sectors. Ministry of Housing and Works gave approval to Federal Government Employees Housing

________________________

Chapter 16. Environment and Housing Annexure 1

CONTINGENT LIABILITIES
Contingent liabilities are costs which the government will have to pay if a particular event occurs. These are obligations triggered by a discrete but uncertain event. Relative to government policies, the probability of a contingency occurring and the magnitude of the required public outlays are exogenous (such as natural disasters) or endogenous (such as implications of market institutions and government programs for moral hazard in markets). Contingent liabilities therefore not yet recognized as direct liabilities. However, contingent government liabilities are associated with major hidden fiscal risks. A common example of a contingent liability is a governmentguaranteed loan. At the time a guarantee is entered into there is no liability for the government, since this is contingent on the borrower failing to repay the loan as contracted. However, in the event of default, the lender can invoke the guarantee and the government will be obliged to repay the amount of the loan still outstanding. At that point, the contingent liability will become an actual liability of government, and a payment must be made. These liabilities support specific policy objectives by creating financial incentives, without an immediate financial outlay. However, when these contractual guarantees or non-contractual commitments are realized, the government faces significant fiscal costs at the expense of other outlays. Thus analysis of countrys fiscal position is incomplete if it skips over obligations made by the government outside the budget. The following framework highlights the two types of contingent liabilities. Contingent liabilities grow with weaknesses in the financial sector, macroeconomic policies, regulatory and supervisory system, and information disclosure.

Explicit Contingent Liabilities: These are specific government obligations defined by a contract or a law. The government is legally mandated to settle such an obligation when it becomes due.

Guarantees for borrowing and obligations of provincial governments and public or private entities. Umbrella guarantees for various loans (SME loans, agriculture loans) Guarantees for trade & exchange rate risks Guarantees for private investments State insurance schemes.

Chapter 16. Environment and Housing Implicit Contingent Liabilities: These represent a moral obligation or expected burden for the government not in the legal sense, but based on public expectations and political pressures. Defaults of provincial governments and public or private entities on non-guaranteed debt and other obligations. Liability clean-up in entities being privatized Bank failures Disaster and relief financing. Failure on other non-guaranteed funds.

Explicit Contingent Liabilities: Explicit contingent liabilities legally oblige government to make a payment if a specific event occurs. Because their fiscal cost is invisible until they are triggered, contingent explicit liabilities represent a hidden subsidy, blur fiscal analysis, and can drain future government finances. Nevertheless, government guarantees and financing through government guaranteed institutions are more politically attractive than budget support even if they are more expensive later. The budgetary cost of these legal obligations during FY 2001-02 amounted Rs. 23.60 billion, in FY 2002-03 Rs. 16.18 billion and projected at Rs. 15.54 billion during FY 2003-04. These comprise payments made on account of contractual guarantees issued on Ghee Corporation of Pakistan (GCP), Rice Export Corporation of Pakistan (RECP), Trading Corporation of Pakistan (TCP), Cotton Export Corporation (CEC) and Saindak bonds; Pakistan Steel Mills Corporations liability payments contractually assumed by Government; payments to oil refineries on account of guaranteed rates of return; and payments to FFC Jordan on account of 1989 Investment Policy pertaining to fertilizer industry. Key organizations with explicit and implicit

guarantee structure have been discussed below. The following table analyses the trend.

PIA: During FY 2002-03, an amount of Rs 1.7 billion has been given for fleet renewal and Rs. 1.7 billion have been paid out as interest (equity) to the restructured loans and Term Finance Certificates to PIA. GOP has guaranteed interest payments (restructured loans and TFCs) for five years starting FY 2001-02.

Railways: During FY 2002-03, an amount of Rs. 4.98 billion has been paid on account of debt servicing liability (Government guaranteed loans) and Rs. 3.12 billion on account of other operational shortfalls. WAPDA: GOP is injecting into WAPDA Rs. 26.4 billion through subsidy, Rs. 21 billion on account of non-recovery of loans and Rs. 2.7 billion as fresh loans, totaling to Rs. 50.1 billion during FY 2002-03. An anticipated amount for FY 2003-04 comes out to be Rs. 35 billion. KESC: GOP has injected fresh equity amounting to Rs. 6.1 billion and loans/subsidy payments of Rs. 20.3 billion during FY 2002-03. Budget estimates for FY 2003-04 amount to Rs. 16.9 billion subsidy.

Explicit Liabilities (Cash outflow streams from federal budget)

Chapter 16. Environment and Housing

Enterprise

2001-02

2002-03

2003-04

GCP, RECP, TCP & CEC (GOP guaranteed) 4.70 5.20 4.90 Saindak Metal Limited (GOP guaranteed) 2.00 2.30 1.80 Pakistan Steel Mills (GOP guaranteed) 0.90 0.80 0.75 PIA (Interest on GOP guaranteed TFCs and loans) 1.70 1.66 Oil Refineries (GOP guaranteed) 9.00 FFC Jordan (GOP guaranteed) 1.00 0.70 1.05 Utility Stores Corporation (GOP guaranteed) 0.30 Pakistan Engineering Company (GOP guaranteed) 0.19 0.18 Peoples Steel Mill (GOP guaranteed) 0.75 0.31 Pakistan Railways (GOP guaranteed debt servicing) 6.00 4.98 4.90 TOTAL (Rs in billion) 24.35 16.18 15.54 Source: Ministry of Finance. Figures for FY 2004 are budget estimates. In consonance with the Macroeconomic and the Markets expect government support far beyond Medium Term Budgetary Framework adopted by its legal obligation if financial stability is at risk. the Government and containing risk exposure, a These include governments quasi-fiscal activities policy of limiting guarantees and risk analysis of including mainly the bail-outs of strategically contingent liabilities has been institutionalized. important State Owned Enterprises and the nonDuring FY 2002-03, the Government has issued performing loans of banking sector. Through guarantees equivalent to Rs.16.18 billion that is robust financial sector reforms, prudent monetary 31.5% lower than FY 2001-02. Additionally, management and strengthening of State Bank of Governments Fiscal Responsibility Law, pending Pakistans regulatory role, the nonperforming Cabinets approval and to be enacted before June loans of the banking sector stand at Rs.266 billion 30, 2003, proposes specific limits on contractually as on December 2002. These were Rs. 258 billion binding guarantees (i.e. explicit contingent as on June 30, 2002 and Rs. 279 billion as on June liabilities) including those in rupee lending, 30, 2001 respectively. bonds, rates of return, output purchase It can be inferred from the above table agreements and other claims that may threat that Water and Power Development Authority future fiscal stance of the Government. (WAPDA), Karachi Electric Supply Corporation (KESC), and Pakistan Railways have been the Implicit Contingent Liabilities: largest drain on the budget. Financial Improvement Plans of the two power utilities are Implicit contingent liabilities are not currently under implementation to curtail these officially recognized until a failure occurs. The outflows. Privatization of KESC and successful triggering event, the amount at risk, and the corporatization of WAPDA in the years ahead required government outlay are uncertain. In would eventually plug these financial leakages. most countries the financial system is the most serious contingent implicit government liability.

Impact of implicit contingent liabilities on the federal budget

Enterprise WAPDA subsidy WAPDA non recovery of loans WAPDA new loans KESC Equity (injection of fresh equity) KESC shortfall in debt servicing 2001-02 13.5 22.00 3.3 83.20 4.00 2002-03 26.4 21.0 2.7 6.1 2003-04 15.0 20.0 -

Chapter 16. Environment and Housing KESC Loans 9.2 3.7 KESC Subsidy (Cash shortfall) 11.1 13.2 Utility Stores Corporation 0.15 0.15 0.15 Karachi Shipyard (GOP investment) 0.30 Pakistan Railways (Other operational shortfalls) 3.12 3.01 Equity in Government Holdings Private Ltd 3.0 1.0 PIA (Fleet Renewal) 1.7 3.5 TOTAL (Rs in billion) 126.45 84.47 59.56 Source: Ministry of Finance. Figures for FY 2004 are budget estimates. Guarantees Issued (Explicit and Implicit liabilities) As % of GDP Rs in billion 150.80 100.65 75.10 4.04% 2.47% 1.34%

Fiscal Year

2001-02 2002-03 2003-04 (Budget Estimates)

Chapter 16. Environment and Housing Annexure-II

TAX EXPENDITURES
While taxes are an essential source of revenue for all state economies, the manner in which they are imposed varies widely from country to country. Tax expenditures are provisions in the tax code, such as exclusions, deductions, credits, and deferrals that are designed to encourage certain kinds of activities or to aid taxpayers in special circumstances. When such provisions are enacted into the tax code, they reduce the amount of tax revenues that may be collected. In this sense, the fiscal effects of a tax expenditure are just like those of a direct government expenditure. Some tax expenditures involve a permanent loss of revenue, and thus are comparable to a payment by the government; others cause a deferral of revenue to the future, and thus are comparable to an interest-free loan to the taxpayer. Tax expenditures include exemptions from the tax base, allowances deducted from gross income, tax credits deducted from tax liability, tax rate reductions, and tax deferrals (such as accelerated depreciation). Since tax expenditures are designed to accomplish certain public goals that otherwise might be met through direct expenditures, it seems reasonable to apply to tax expenditures the same kind of analysis and review that the budget appropriation receives. It is essential to distinguish between those provisions of the tax code that represent tax expenditures and those that are part of the "basic structure" of a given tax. The basic structure is the set of rules that defines the tax; a tax expenditure is an exception to those rules. In general, most taxes have a series of features that define their basic structure. These features are a base on which the tax is levied, such as net income, or a particular class of transactions; a taxable unit, such as a person or a corporation; a rate, to be applied to the base; a definition of the geographic limits of the state's exercise of its tax jurisdiction; and provisions for the administration of the tax. The estimates of total tax expenditures in Pakistan for FY 2002-03 come around Rs. 17.5 billion. The figure signifies vast improvement over the previous years when the total tax expenditures stood at Rs. 31 billion during FY 2000-01 and Rs. 25 billion during FY 2001-02. Details for the FY 2002-03 are discussed below: Income Tax: Section 53 of the Income Tax Ordinance 2002 empowers the Federal Government to exempt from tax any income or classes of income, or person. However, these powers were sparingly exercised by the Government as it is following a conscious policy of not only phasing out the existing exemptions gradually but also not to allow fresh ones. As a result thereof, fifty-one exemptions form the Part-I of the Second Schedule and four rebates available under the First Schedule were withdrawn through Budget 2002. Categories of exemptions listed in Part-I of the Second Schedule to the Income Tax Ordinance 2001 are broadly as under:

a)

Exemption related to pensions,

provident funds and superannuation funds b) Exemption of interest on

borrowings from external sources c) Exemption to non-profit charitable,

religious and welfare activities d) Exemption to non-profit

educational institutions

Chapter 16. Environment and Housing

e)

Exemption

relating

to

electric It may be noted that exemption expenditure

power generation f) Unexpired period to tax holidays

for industrial undertaking.

Total number of exemptions under the aforesaid categories contained in Part-I of Second Schedule to the Ordinance 2001 is 114. The cost of these exemptions (excluding agricultural income that is liable to tax under the relevant Provincial Agricultural Income Tax Laws) is Rs. 6.8 billion.

merely relates to National Savings Schemes interest income in respect of investment which has been made up to the year ending June 30, 2001, pensions, provident fund and superannuation fund. Furthermore, exemption related to charitable activities and non-profit educational institutes are common in both developed and developing countries. Similar is the position with regards to basic threshold of income for charging tax. Following is the estimated cost of exemptions if FY 2002-03 compared to FY 2001-02 and FY 2000-01 respectively.

Table 1 Income Tax Expenditure

(Rs. billions) Estimated Revenue Loss FY 2000-01 FY 2001-02 FY 2002-03 1 Pensions 0.7 0.7 0.7 2 Allowances 1.0 1.1 1.1 3 Income from funds (eg NIT Units) 0.6 0.6 0.6 4 NSS interest income 3.2 2.9 2.7 5 Other interest income 0.1 0.1 0.1 6 Capital gains 0.9 0.9 0.9 7 Sector & enterprise specific exemptions 0.7 0.7 0.7 8 Agricultural Income 4.0 3.2 * TOTAL 11.2 10.2 6.8 * Income tax on agricultural income is now a provincial subject. Income tax thereon is being levied by the concerned Provincial Governments. Accordingly, the cost of the exemptions has not been included in FY 2002-03. No Major Income Tax Expenditure Items Sales Tax: Key exemptions on Sales Tax are food items (wheat, grain, pulses and edible oils excluding palm oil and soybean oil). In addition to food items, exemptions also include phosphatic fertilizer, information technology equipment and pharmaceutical products. As per international practices, the bulk of such items cannot be taxed, for example food grains etc. Cost of Sales Tax exemption is estimated to be around Rs. 10.37 billion for FY 2002-03.

Table 2 Sales Tax Expenditure

(Rs. billions) No Major Sales Tax Expenditure Items Estimated Revenue Loss

Chapter 16. Environment and Housing FY 2000-01 1.00 0.00 2.00 4.00 1.30 4.00 0.80 0.10 0.00 13.20 FY 2001-02 0.00 0.00 2.10 4.30 1.50 0.60 0.00 0.10 0.00 8.60 FY 2002-03 0.55 0.35 2.30 4.60 1.75 0.69 0.00 0.10 0.05 10.37

1 2 3 4 5 6 7 8 9

Retailers (includes those in turnover scheme) Turnover manufacturers Domestically produced edible oils Pharma (excluding life saving drugs) Tractors and other agri machinery Fertilizers Pesticides Others (eg. agri-seeds, cattle feed) Exemption on supply of locally manufactures machinery to petroleum sector TOTAL

Central Excise: Tax expenditures involved on account of Central Excise is relatively minimal vis--vis other taxes. Cost of Central Excise exemptions for the FY 2002-03 is around Rs. 8.0 million. This exemption was granted to Aga Khan Development Network on the purchase of cement for its on going projects of human development work in Northern Areas and Sindh province. Customs:

raw material and components i.e plant, machinery and equipment imported by high tech industry, priority and value added industries, imports for energy sector projects, exemption to exploration and production companies including OGDC exemption for WAPDA, and imports by CNG companies. Some of these exemptions are on account of international commitments and contractual obligations.

Table 3 provides the break-up of key Customs exemptions are mainly given on exemptions in customs duties over the years:

Table 3 Exemption in Customs Duties

No Old SRO No & Date Existing SRO No & Date 439(I)/2001 18-06-01 361(I)/2002 18-06-01 Description of SRO (Rs. Billion) Estimated Revenue Loss FY FY 2001-02 2002-03 0.627 0.327

369(I)/2000 17-06-00 400(I)/97 31-05-97

Conditional exemption of customs duty on import of plant, machinery and equipment not manufactured locally Exemption of customs duty on import of machinery, equipment, materials specialized vehicles, accessories, spares and chemicals as are not manufactured locally, if imported by exploration and production companies including OGDC

0.637

0.0

Chapter 16. Environment and Housing 367(I)/94 09-05-94 367(I)/94 09-05-94 Exemption of customs duty as is in excess of 10% ad val. On machinery equipment materials etc imports for petroleum sector projects General conditional exemption 1.215 2.037

555(I)/98 12-06-98

4 5 6 7

504(I)/94 09-06-94 24(I)/96 08-01-96 557(I)/97 28-07-97 38(I)/98 21-01-98

444(I)/2001 18-06-01 358(I)/2002 15-06-2002 357(I)/2002 15-06-2002

2.214 0.048

1.438

Partial exemption of customs duty on raw materials sub-components as are not manufactured locally of specified goods Exemption of customs duty on machinery and equipment and construction materials Exemption of whole of customs duty and sales tax on import of machinery, equipment on conversion kits and cylinders, if imported by CNG companies during the period commencing from November 01, 1997 to October 31, 2002.

0.025

0.438

438(I)/2001 18-06-2001 38(I)/98 21-01-98

0.393 0.263

0.275 0.194

TOTAL

5.422

4.709

Following is the consolidated summary of tax expenditures showing percentage

increase/decrease for the FY 2002-03 compared to previous years.

Table 4 Summary of Tax Expenditures (Tax Wise)

(Rs. Billion) Cost of Exemptions FY FY % FY FY % Change 2000-01 2001-02 Change 2001-02 2002-03 Income Tax 11.20 10.20 -8.92% 10.20 6.80 -33.3% Sales Tax 13.20 8.60 -34.84% 8.60 10.37 20.6% Customs Duties 6.20 5.42 -12.74% 5.41 4.71 -13.0% Central Excise 0.50 0.50 0.00% 0.50 0.01 -98.0% TOTAL 31.10 24.72 -20.54% 24.71 21.89 -11.4% Note: Since quantification of Tax Expenditures is subjective and estimated, therefore there is slight variance in the provisional tax expenditure numbers reported in Economic Survey 2001 and 2002. Type of Tax

Table 5
Summary of Major Tax Expenditures for FY 2002-03 (Item Wise) No 1 2 3 Major Tax Expenditure Items Pharmaceutical (excluding life savings drugs) NSS interest income Domestically produced edible oils (Rs. Billion) Estimated Revenue Loss FY 2003 4.60 2.70 2.30

Chapter 16. Environment and Housing 4 5 6 7 8 9 Import of machinery, equipment materials etc Tractors and other agriculture machinery General conditional exemption Allowances Capital gains Pensions TOTAL ___________________________ 2.04 1.75 1.44 1.10 0.90 0.70 17.53