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FY 1999: Pakistan |
II. ECONOMIC TRENDS AND OUTLOOK Major Trends and Outlook Since the late 1980s Pakistan has pursued a program of market-oriented economic adjustment, reform and development, including strong encouragement of foreign direct investment. Supported by the international financial institutions and bilateral donors, this program has aimed at enhancing macroeconomic stability, instituting structural reforms to promote private sector-and export-led industrial development, and reversing past neglect of key social sectors such as health, education and population planning. Pakistan has made considerable progress under this program, but the process has not been entirely even, and key challenges remain for its $67 billion economy. Specifically, governments have sought to reduce fiscal and external imbalances, reduce trade barriers, modernize the financial sector, privatize state-owned industries, reform the tax system, encourage private investment in the critical energy sector, and offer specific incentives to attract foreign investment, which is considered critical to the overall development effort. Moreover, governments from all the main political parties support these reformist, market-oriented policies. These efforts have enjoyed generous support from the IMF, in the form of an Enhanced Structural Adjustment Facility approved in February 1994 (subsequently suspended in February 1995 after the GOP reneged on its commitments) and a Stand-By Arrangement (SBA) in November 1995, which also was suspended in July 1996 due to non-compliance. The interim government of PM Meraj Khalid managed to resume the suspended SBA, but in March 1997, the GOP decided to end the SBA when it was clear it could not meet agreed targets. The new government elected in February 1997 successfully negotiated an Enhanced Structural Adjustment Facility (ESAF) and External Fund Facility (EFF) in October 1997. Various problems have kept Pakistan's progress below its potential. Floods, drought and pests hurt agricultural output in the early 1990s, and in the current fiscal year as well. Domestic political instability throughout the Bhutto administration and continuing ethnic and sectarian violence under the caretakers and the government of Nawaz Sharif who was elected February 3, 1997, have stunted foreign investment. And finally, policy inconsistency and weak implementation have, along with reports of improper official influence in business and economic decisions, dampened investor interest and economic growth in Pakistan. Pakistan's mixed economic performance reflects the interplay of these positive and negative trends. Real economic growth has been positive, but below government targets. Real GDP grew 5.2% in 1995-96, and 1.3% in 1996-97. In FY 1997-98, GDP growth is expected to improve to 5.4% against a target of 6.0%. Recent annual consumer inflation of 10-14% has been above historically modest single-digit rates. In 1996-97, however, consumer inflation is projected to decrease to about 9.0%. Fiscal slippages have led to difficulties in completing the IMF programs, however, Pakistan has been able to maintain an acceptable record with foreign creditors. New investment inflows, both portfolio and direct, at an all-time high in 1995-96, have nevertheless dropped substantially this year. Poverty remains a serious problem in Pakistan. Average per capita income was only $452 in 1996-97, and income and wealth are not equitably distributed. Given the low rate of GDP growth, per capita income will be flat or decline slightly this year. The population of 139 million is growing at almost 3% per year. While Pakistan's economic fortunes remain closely linked to cotton and the textile products made from it, the government has made some progress in diversifying the economy, and is committed to improving the quality of life for poorer citizens through the Social Action Program, a multi-year effort to raise education, health and sanitation standards. There are significant possibilities for U.S. and other foreign suppliers and investors in Pakistan. However, realizing these opportunities will require sound economic policies by the government as well as actions to improve political stability and better develop human resources. B. Principal Growth Sectors - Economic Growth After growing at an average rate of over 6% per year from 1980 to 1991, real GDP growth has slowed in the 1990's. Growth was 4.5% in 1993-94 due to a poor cotton crop and related setbacks in the textile industry. In 1994-95 growth hit 5.2 percent (target: 6.9%), and in FY 1995-96 GDP growth rate was 5.2% against a target of 6.5%. In FY 1996-97 GDP growth dropped to a record low of 1.3 against a target of 6.0 percent, as both agriculture and industrial production remained substantially lower than anticipated. Real GDP improved to 5.4 percent in 1997-98. The Pakistani economy is almost evenly divided between the commodity sector (51% of GDP) and the services sector (49 percent), shares that have held constant for about a decade. Sectoral shares in 1997-98 were estimated by the Ministry of Finance as follows: Commodity Sector 51.3 % of which: Agriculture 24.6 Manufacturing 18.3 Construction 3.7 Electricity & Gas Distribution 4.3 Mining 0.4 Services sector 48.7 % of which: Wholesale and Retail Trade 15.9 Transport, Storage & Communication 9.9 Public Administration & Defense 6.2 Ownership of Dwellings 5.7 Finance and Insurance 2.3 Other Services 8.7 - Agriculture Pakistan has one of the largest irrigation systems in the world and its increasing agricultural production has been tested in meeting the country's rapidly expanding food requirements. Despite some recent diversification, agriculture remains the dominant sector of the Pakistani economy, accounting for about 24.6% of GDP, half the employed labor force, and a large share of foreign exchange earnings, as well as providing the base for key industries such as textiles and sugar. Pakistan is a net exporter of agricultural commodities, despite annual imports of more than one billion dollars worth of wheat and edible oils. Pakistan has two principal crop seasons: the "kharif", which begins in April-June and ends October-December; and the "rabi", which begins in November-December and ends April-May. Wheat, cotton, sugarcane, and rice continue to be the major crops, accounting for nearly 90% of value added in the agricultural crop sector. On a much smaller scale Pakistan also grows barley, bajra (millet), jowar (sorghum), maize, gram (pulses), sunflowerseed, rapeseed, mustard, sesame, and tobacco. Agriculture's share in GDP has declined from 53% in 1949-50 to just about 24.6% in 1997-98. During 1997/98 the agriculture sector grew 5.9% against 0.06% in 1996/97. The incentives provided under the Prime Minister's Agricultural Package helped improve growth in this sector. The high growth is also attributed to a record production of major crops during 1997/98. In an effort to boost rural incomes the GOP annually reviews and increases the support prices of many commodities. The government has removed price subsidies on fertilizers, increased the availability of agricultural credit, and provided incentives for the import of agricultural machinery. The GOP agricultural priorities include; integrated development of agriculture and irrigation facilities, better land and water management practices, improvements in fertilizer use, pest management, research, diversification to higher-value crops and development of agro-industries. Wheat - Wheat accounts for nearly 38.8% of the cultivated area. During 1997-98 the GOP has made consistent efforts to increase acreage under wheat cultivation. Production of wheat during 1997/98 is estimated to have risen by 12% to 18.5 MMT. The record wheat crop is attributed to the increase in the support prices, disbursement of agricultural credit, provision of quality seed and regular supplies of irrigation water. Cotton - Cotton is an important cash crop for the farmers and a source of foreign exchange for Pakistan. During 1997/98 cotton production is estimated to be down 2.0% to 9.2 million (375 lb) bales compared to the previous year. The decrease in production was due to a 8.2% fall in cultivated area compared to last year. The decline is attributed to (a) pest problem on cotton crop (b) increase in plantation of sugarcane due to more than 45% increase in market price of cane and (c) static cotton prices during the last 3 years. In addition the cotton crop was damaged by unprecedented rains in October 1997 in the cotton growing areas of Punjab and Sindh. Rice - Rice is the second largest staple food crop in Pakistan and is a major export crop. The principal export varieties are long-grained non-glutinous aromatic "Basmati" rice grown in the Punjab and similar, but non-aromatic Irri-6 rice planted in Sindh province. Rice exports during 1997/98 were up 22% to 2.0 MMT compared to the last year. Area under rice during 1997/98 was up 3% to 2.316 million hectares, while production was up 1.35% to 4.364 MMT compared to last year. The increase in production was attributed to favorable weather conditions during the crop growing season, early start of monsoons in Punjab, and normal rainfall in Sindh province. sugarcane - Pakistan's sugar production depends almost entirely on sugarcane, although there is some production of sugar beet in the NWFP. Area under sugarcane in 1997/98 was up 18% at 1.14 million hectares compared to last year. This increase was because of better returns from sugarcane plantings as the support price of sugarcane was raised by 46% to Rs. 87.5 per 100 Kgs for the 1997/98 crop. Market prices were above the support level due to large-scale expansion in the sugar industry, resulting in excess capacity. The combination of these developments have provided an excellent incentive for farmers to increase acreage under sugarcane cultivation. sugarcane production in 1997/98 is estimated to have gone up 25 percent to 53 million tons compared to last year. The increase in production is due to an 18% increase in area and 6 percent improvement in yield compared to the previous year. Tobacco - Pakistan grows tobacco and produces tobacco products, but the market for domestic products is substantially undercut by smuggled goods. Despite these major leakages, the cigarette industry is a significant contributor to excise and sales tax revenues. Tobacco cultivation in 1997/98 was marginally up to 45,862 hectares compared to the year before. This was due to higher demand from cigarette companies and better prices paid by these companies. In 1997/98 tobacco production was up 7% to 86,279 MT compared to last year. The increase in tobacco production was due to a marginal increase in area and a 7% improvement in yield. About half of the total production is used for cigarette manufacturing and the remainder used in traditional ways of smoking (in hand-rolled cigarettes called birris, in water pipes, and as snuff). The major tobacco growing region is in the NWFP. Minor crops - Minor crops account for only 4.5% of total cultivated area; these include oilseeds (sunflower, soybean, safflower) chilies, pulses, potatoes, and onions. Fisheries - Pakistan's fishing industry is relatively modest, but has shown strong growth in recent years. The domestic market is quite small, with per capita annual consumption approximately 2.0 kilograms. About 80% of production comes from marine fisheries from two main areas, the Sindh coast (from Karachi to the Indian border), and the Mekran coast of Baluchistan. Ninety percent of the total is fish, with shrimp constituting the remainder. Inland fishing is quite rudimentary. During 1997/98 the fisheries sub-sector contributed about 1 percent to the GDP, about 4% to agricultural production, and 1.6% to Pakistan's total exports. During 1996/97, total production is estimated at 590 thousand tons of which 415 thousand tons is marine and the remaining 175 thousand tons is inland. About one third is consumed fresh, nine% frozen, eight percent canned, and about 43% used as fish meal. Pakistan's exports of fish and fish products have grown rapidly, from $94.4 million in 1989-90 to $168.4 million in 1997/98. The largest markets for Pakistan's fish are Japan, Singapore, the United Kingdom, and the U.S. A number of steps are being taken for promoting the marine culture of shrimp in ponds, focusing on the Keti Bundar area of the Thatta district of Sindh in an attempt to boost production and foreign exchange earnings. GOP is also strengthening infrastructure facilities, introducing aquaculture techniques. Packaging and processing technologies are quite basic; improvements could reduce perishability and increase the attractiveness and profitability of Pakistani fish exports. Livestock - Livestock accounts for 38% of the value added by the agricultural sector and 10% of the total GDP. Principal products are milk, beef, mutton, poultry, and wool. During 1997/98, livestock population increased 3.1% to 126.41 million compared to last year. Beef production in 1997/98 is estimated up 5% to 1,082,000 MT, mutton production up 7 percent to 1,075,000 MT, and milk production up 5% to 22,039 MT compared to 1996/97. The most notable recent growth has been in poultry production, following a series of government concessions and incentives (poultry production was up 13%, to 324 thousand tons, in 1997-98). In an effort to enhance milk and meat production, the GOP recently launched a comprehensive livestock development project with assistance from the Asian Development Bank. In addition, the GOP has broadened extension and artificial breeding services, rationalized animal health services, improved slaughterhouses, and introduced high yielding fodder varieties. Forestry - Forests in Pakistan constitute an area of 4.2 million hectares i.e. about 5% of total geographical area. One third of the forest area in Pakistan is productive and the remaining 2/3 is maintained for environmental stability. Principal forest products are timber for construction, furniture, and firewood. In 1997 timber consumption was estimated up 4.5 percent to 3.45 million cubic meters. Growing population and rising standards of living have led to an accelerating demand for timber, which is increasingly met by imports. In order to encourage imports duties on timber and wood products have been lowered to 10%. - Industry Pakistan, which had almost no large industrial units at the time of Partition in 1947, now has a fairly broad industrial base, and manufacturing accounts for about 18.0% of GDP. Industrial policy in Pakistan has undergone several distinct phases. During the 1950s, it followed a policy of import substitution backed by high tariffs and import controls. In the 1960s, Pakistan adopted an export promotion strategy but did not dismantle the structure of protection for domestic industry. In 1972, Pakistan made a major policy shift and nationalized many large industrial establishments and agricultural processing units, based on the Z.A. Bhutto government's concern about concentrated ownership. Since the 1970s, Pakistan has returned to its original policy emphasis on the private sector, although many industrial units remained under government ownership until the privatization initiatives which began in the late 1980s. A 1984 industrial policy statement by the government of General Zia-ul-Haq stated its commitment to a mixed economy in which the private sector was the engine of growth and the public sector served as an investor of last resort, preferably in joint ventures with the private sector. The privatization effort which began in the late 1980s under the first Benazir Bhutto administration represents the current phase of industrial policy. Cotton textile production is the single most important industry, accounting for about 18% of large-scale industrial employment. Cotton yarn, cotton cloth, made-up textiles, ready-made garments, and knitwear collectively accounted for nearly 60.0% of Pakistan's exports in 1997-98. Other important industries are cement, vegetable oil, fertilizer, sugar, steel, machinery, tobacco, paper and paperboard, chemicals, and food processing. The GOP is attempting to diversify the country's industrial base and to increase the emphasis on export industries. Small-scale and cottage industries are numerically significant but account for a relatively small proportion of the GDP, about 6.0%. (Small-scale industry includes facilities which employ fewer than 50 workers and cottage industries are industrial units in which the owner works and is aided by family members but employs no hired labor.) Manufacturing's share of GDP in 1997-98 was 18.3%, about the same as last year. The manufacturing sector registered a higher growth, 6.9% in 1997-98 compared to 1.19% achieved last year, mainly due to higher growth in large scale manufacturing and a good cotton crop. Public Industrial Sector - The public industrial sector, under the Production Wing of the Ministry of Industries and Production, comprises eight holding corporations which controlled 74 industrial units. A majority of these units have been privatized under the GOP's privatization program and the rest are to be sold off. The eight holding corporations include: Pakistan Steel; the State Cement Corporation; the National Fertilizer Corporation; Pakistan Automobile Corporation (PACO); Federal Chemical and Ceramics Corporation (FCCC); State Petroleum Refining & Petrochemical Corporation (PERAC); State Engineering Corporation (SEC); and the Pakistan Industrial Development Corporation (PIDC). These public sector units will continue to play a key role in certain sectors, such as heavy engineering, steel, automobile, petroleum and defense production. Textiles - The textile industry is the single most important manufacturing sector, accounting for an average of 40% of manufacturing employment, 62% of manufacturing exports, and 30% of manufacturing value added. Pakistan's textile industry produces cotton yarn, cotton cloth, made-up textiles and apparel. In order to reduce pressure on the demand for raw cotton, the polyester fiber and yarn industry has also grown significantly in recent years. Pakistan also has 12 jute mills with an installed capacity of 37,876 spindles and 1,946 looms. The industry produced 68,600 tons of jute products in 1997-98. Various government incentives have raised the total installed capacity to 8.3 million spindles and 145,000 rotors from about 8.2 million spindles and 143,000 rotors a year earlier. Despite recent efforts to induct high speed spindles, automatic cone winders, electronic splicers and other high-tech equipment the industry still is concentrated in the preliminary stages of processing. In general, large firms concentrate on spinning and weaving leaving garment-making to highly fragmented small to medium-scale producers. The number of textile units totaled about 503 in 1997-98. The textile industry needs to move to higher value-added production and to rationalize its operations in order to face the challenges and opportunities of the phased elimination of quotas as part of the Uruguay Round trade agreement. In the late 1980s, the GOP focused its industrial development resources on increasing spinning capacity; cotton yarn production rose substantially. Exports of cotton yarn in 1996-97 totalled 508 thousand tons, or $1.4 billion. The dominant products are coarse and medium count yarn. Concern about overcapacity led government-owned development finance institutions (DFIs) early in 1992 to suspend new loan commitments to the spinning sector. The spinning industry has a powerful lobby in the All Pakistan Textile Mills Association (APTMA). The weaving sector took a substantial time to recover from the impact of the government policies in the mid-1970s, when large mills were broken up into smaller entities generally capable of producing only low-quality goods. In the late 1980s, boom times and easy government credit led to renewed investment in the weaving sector (2,000 high-quality shuttleless looms came on stream between 1988 and 1993). The production of cloth and made-up articles of textiles (including towels, bedsheet, and similar items) grew rapidly. Exports of cotton cloth totaled $1.2 billion in 1996-97, an increase of 20% over the previous year. Knitwear has been Pakistan's largest single segment of garment exports, but finished goods have generally lagged yarn and cloth production. The GOP has proposed a series of measures to upgrade the garment sector, including modernization of facilities, and market research and sales promotion. Ready-made garment exports in 1996-97 totaled $671 million. Sugar - Refined Sugar production in 1997/98 is estimated up 38 percent to 3.66 MMT (raw value basis) compared to last year. Installed crushing capacity in the sugar industry is about 325,000 metric tons per day and the crushing season runs for about six months. There has been a rapid expansion in the sugar industry over the last five years; the number of mills has increased from 45 in 1988-89 to 76 in 1997-98, of which 39 are in Punjab, 31 in Sindh and 6 in the North West Frontier Province (NWFP). This has resulted in excess capacity. Sugar beets, grown in the NWFP, account for less than 0.5% of sugar production. The industry's principal product is refined sugar, although it also produces some liquid glucose, 90% of which is used by candy factories. Annual per capita consumption of sugar is high, estimated at 28 kgs per annum. (Production of high fructose corn syrup has been suspended since high corn prices and low sugar prices have made production inviable.) The GOP announces the support prices, at which the sugar mills may purchase sugarcane from the growers in the event of falling prices below this level. However, the current excess crushing capacity causes sugar mills to offer cane growers prices in excess of the support prices. The GOP has traditionally tried to regulate imports/exports by adjusting the duty and other tariffs. Food Processing and Consumer Products - Major segments include sugar, tea, aerated water, edible fats, dairy products, concentrates, juices, tobacco, detergents, and personal care products. Nearly all of these items are produced for domestic consumption. Iron and Steel - Pakistan Steel, with an annual capacity of 1.1 million tons, is Pakistan's only integrated steel plant. It is located near Port Bin Qasim, just east of Karachi, and its construction began in 1973 with Soviet technical assistance. Iron ore, manganese, and cocking coal for the plant are all imported. Pakistan Steel produces coke, pig iron, billets, hot and cold rolled coils and sheets, and galvanized sheets. The facility notched record production of over one million tons in 1993-94. That resulted in significant pre-tax profits for Pakistan Steel, which had been a chronic loss-maker for most of its history (in 1997-98, however, production of all major items declined by an average of 12.5%). Pakistan Steel has announced an ambitious expansion program, which would increase production capacity to three million tons by mid-1999. Fertilizer - Pakistan has 10 fertilizer units, of which four are in the private sector. At the end of 1997, they had a total annual capacity of 4,551 thousand tons. In 1997-98 overall production of fertilizer declined 2.3% to 3,019,478 million tons compared to 3,089,191 million tons during 1996-97. There is no domestic production of potassic fertilizers. Cement - Pakistan has 23 operating cement units, of which 19 are in the private sector. The total annual capacity of the industry is 13,029 thousand tons. Cement production in 1997-98 was about 3.8% lower than the previous year. Pakistan has large quantities of both limestone and gypsum and a large domestic market. Cement was one of the few industries with an established base in Pakistan at the time of independence in 1947, when there were five cement factories. Pakistan currently produces five types of cement: Portland grey, Portland slag, Sulphate resistant, Super Sulphate resistant, and White. Since Partition, demand has outstripped production and Pakistan has become a regular importer of cement. In 1972, the government of Prime Minister Z.A. Bhutto nationalized cement factories and consolidated them under the State Cement Corporation of Pakistan. The current privatization process has reversed that initiative. In order to promote growth in the cement sector, the GOP has allowed duty-free import of plant and machinery not manufactured locally. Demand weakened in 1997-98. Chemicals - Pakistan produces some basic chemicals, such as soda ash, caustic soda, and sulfuric acid. Production of soda ash in 1997-98 was 177,593 tons, and caustic soda 83,998 tons. Caustic soda is used in the textile, hydrocarbon refining, and soap industries; sulfuric acid is used in the textile, paper, fertilizer, and steel industries. Leather - Leather is a major and rapidly expanding export sector; exports grew at an annual compound rate of 21% over a recent five-year period, boosted by a range of government incentives. The leather and leather products industry is labor-intensive (directly employing more than 200,000 workers) and there are over 400 tanneries in Pakistan. The recent growth of the industry is due in large part to its successful progression from the export of raw hides and skins and semi-processed leather towards high value-added finished leathers and leather products (including leather jackets, gloves, footwear, and sporting goods). The tanning sector is concentrated in the Punjab, where units process primarily buffalo and cow hides; tanneries in the Sindh process primarily goat and sheep skins. The local market for leather is limited, and about 80% of production is exported. Exports of leather products totaled $588 million in 1996-97. More sophisticated machinery and productivity increases can be expected to further boost exports. Pollution is a serious problem for this industry. Electronics and Electrical Goods Industry - The electronics and electrical goods industry is basically a consumer products industry, making light bulbs and tubes, air conditioners, fans, refrigerators, freezers, televisions, radios, and other electrical appliances. The industry depends heavily on imported parts and components, although there have been somewhat successful efforts to increase the%age of domestic components. Vegetable Ghee/Cooking Oil - Vegetable ghee, hydrogenated vegetable oil, is the principal cooking medium in Pakistan. After the market outstripped the supply of milk-produced ghee, the vegetable ghee industry has grown rapidly (from two units in 1947 to more than 40 in 1998). The principal raw material is edible oil, the majority of which is imported palm oil. Pakistan suffers from a large and chronic gap between demand and domestic production of edible oils. Importing edible oil is an important task. It consumes a big portion of valuable foreign exchange. Pakistan remains a major importer of palm oil followed by soybean oil and sunflower oil. In MY 1996/97, Pakistan imported 205,672 MT of soybean oil, 3,836 MT of sunflower oil and 1070,000 MT of palm oil. Pharmaceutical - The more than 30 multinational pharmaceutical companies producing in Pakistan (of which twelve are U.S. firms) command over three quarters of the domestic market. Engineering Industry - Major engineering goods facilities include a heavy foundry and forge at Taxila in the Punjab (which produces castings and forging for the railway, heavy machinery, and automobile industries); the Heavy Mechanical Complex at Taxila (which produces industrial machinery); the Karachi Shipyard and Engineering Works (which builds and repairs ships as well as produces boilers); and the Pakistan Machine Tool Factory, established at Karachi in 1968 in collaboration with a Swiss firm (which produces precision machines, tools and automotive parts). - Energy: Pakistan's primary energy supply mix during the period July 1997 to March 1998 consisted of oil (46.31 pct.), natural gas (36.69 pct.), hydel (12.41 pct.), coal (4.34 pct.), and nuclear (0.25 pct.). The average crude oil production from July '97 to March '98 was 55,992 bpd. The production of natural gas during the same period was 1,922 mmcfd. Development of the energy sector is a high priority. Pakistan has faced chronic energy shortages and domestic energy demand has outstripped supply. From July 1997 to February 1998, the largest electricity consumption was domestic (41.00 pct.), followed by industry (25.91 pct.), agriculture (18.27 pct.), bulk supply and public lighting (10.30 pct.), and commercial (4.47 pct.). A series of new petroleum policies, announced in late 1991, September 1993, February 1994 and again in May 1997, have promised to boost investment in the oil and gas sector. The energy shortfall has been particularly acute in electricity generation. This has resulted in regular rotating power outages (load shedding) and forced many industries to develop their own alternative (and more expensive) power sources. In early 1994, the electricity shortage was estimated at 2,000-MW during peak load hours. The Government of Pakistan (GOP) at that time announced a policy inviting the private sector to develop power generation projects. In 1997-98 government pressure increased for financial concessions from the independent power projects. Investors have now received from the GOP letters of intent to terminate. Termination will lead to massive financial losses for the firms and further damage Pakistan's weak investment climate. Current Situation - Pakistan's electricity is supplied by two large state-owned utilities, the Water and Power Development (WAPDA), which supplies about 85.6 pct. of total electricity generated, and the Karachi Supply Corporation (KESC), 13.4 pct. WAPDA, headquartered in Lahore, has an installed generation capacity of 11,566-MW consisting of 58.28 pct. thermal, and 41.71 percent hydel. KESC, which generates and distributes electricity to Karachi and its suburbs as well as to the adjacent parts of Baluchistan, has an installed generating capacity of 1,525-MW. All of KESC's power is thermal. In addition, one 137-MW nuclear power plant and six private sector plants of a total installed generation capacity of 2,765-MW supply power to the national grid. However, government management of the power sector is considered very poor, line losses are huge, and corruption and over employment is rampant. Hydroelectric Power - WAPDA, the sole operator of hydro projects, has three large hydroelectric projects: Tarbela, with a total generating capacity of 3,478-MWs; Mangla, with total capacity of 1,000-MW, and Warsak with 240-MW. Together with 107-MW from scattered small hydro projects, the three major projects give WAPDA 4,825-MW of hydro power. Hydropower's drawback is its seasonal fluctuation. There is little rain from October to May when the demand for irrigation water is high, reducing the effective capability of hydroelectric units. Reservoirs can register up to a 45 pct. difference between wet and dry season water levels. Nevertheless, Pakistan has vast untapped hydro potential suitable for development. Thermal Power - In June 1998, WAPDA had 6,741-MW of thermal generating capacity. Most of WAPDA's thermal generating capacity comes from two large complexes: Guddu (1,657-MW of steam and combined cycle units), and Jamshoro (880-MW of oil-fired units). WAPDA's third large thermal unit, Kot Addu (1,603-MW), was partly privatized in March 1996, and its management handed over to the investor. KESC's generating capacity has been concentrated in the five-unit Bin Qasim Power Station (1050-MW) and the Korangi Thermal Power Station (382-MW). Nuclear Power - Pakistan produces approximately 0.25 pct. of its electric supply from its only operating nuclear power plant, the Karachi Nuclear Power Plant (KANUPP). KANUPP, which was constructed in the 1970s, uses Canadian technology, and has a gross generating capacity of 137-MW. A second nuclear plant of a gross generating capacity of 325-MW is under construction with Chinese technical assistance at Chashma, Punjab province. It is expected to be commissioned in Pakistan Fiscal Year (PFY) 2000. (Pakistan Fiscal Year begins July 1 and ends June 30.) Demand for Electricity - WAPDA's customer base has expanded from 311,596 in 1959-60 to 10.10 million in February 1997, an average annual compound growth rate of approximately 10.13 pct. KESC presently has 1.33 million customers. Electricity is still, however, available to less than half of the population. By February 28, 1998 WAPDA had electrified a total 65,473 villages under its Village Electrification Program. WAPDA's plans for PFY-1998 included the electrification of another 4,000 villages, but by February 1998 only 905 villages had been electrified. WAPDA plans to electrify another 4,000 villages in PFY 1999. Coal - Pakistan's coal reserves received a substantial boost from the discovery, with assistance from the U.S. Agency for International Development (USAID), of deposits estimated at 175 billion tons in the Thar desert. The country's total coal reserves are now estimated at 185 billion metric tons. Initial data suggest that the coal is minable and suitable for power generation. As an underground mineral resource, coal (and its extraction) falls within the jurisdiction of the provincial governments. The policy for development of Thar coal provides that its primary use will be to fuel large electric power plants built in tandem with the coal mines, and that development, ownership and operation of both mines and power plants will be in the private sector. The Thar coal field has enormous economic potential for Pakistan. - Minerals According to provisional data the mining sector registered a negative growth of 9.7% in 1997-98 against an increase of 1.8% in 1996-97. In 1997-98 the production of coal, crude oil, chalk, gypsum and rock salt declined while that of natural gas, china clay, chromite, and limestone increased. In line with the GOP's policy of promoting the privatization of state-owned assets, recent public sector investment in mining has been restricted to large projects with high cost and high risk. The principal example is the Saindak Copper and Gold Project in the Chagai district of northwestern Baluchistan. The $200 million Saindak Project, the first large-scale metal mining project in Pakistan, has been developed on a turnkey basis by the Metallurgical Construction Corporation of China. The project started commercial production in August 1995, and is expected to yield an average annual production of 15,000 tons of copper, 1.47 tons of gold, and 2.76 tons of silver over its 20-year life. The GOP announced its first ever national mineral policy in September 1995. The policy aims at increasing the contribution of the mineral sector by reducing the cost of exploration through a reduction of duties and taxes on imported machinery. GOP entities involved in the mineral sector include the Pakistan Mineral Development Corporation (PMDC), which operates four coal mines in Baluchistan and Sindh, three salt mines in the Punjab, two salt quarries in the NWFP, and a silica quarry in Sindh. The Geological Survey of Pakistan (GSP) is engaged in geological surveys and mapping. Other significant non-metallic mineral deposits include: gypsum in the Salt Range of the northern Punjab; sulphur in Baluchistan; marble in the NWFP; and china clay (kaolin) in the NWFP. Among metallic ores, chromite is produced on a commercial scale in Baluchistan. C. Government Role in the Economy Since the late 1980s, the GOP has been pursuing a gradual strategy of deregulation, reduction of the public sector role in the economy, and opening the economy to international competition. The government has sought to reduce its direct productive or controlling role, and instead focus on creating the conditions to foster private sector investment and activity. While it has made much progress in this effort, the state remains an important player in the Pakistani economy, especially in the financial sector. Government-owned industrial enterprises employ almost 46,000 workers and remain important in such key sectors as steel, engineering and agro-processing. - Monetary policy Recent monetary policy has been inconsistent but has been aimed at encouraging growth in the context of price stability. The GOP and State Bank of Pakistan (SBP, the central bank) are attempting structural reforms in an effort to move toward more indirect, market-based methods of monetary control along with greater autonomy for the SBP. Other GOP monetary reforms have included efforts to reduce concessional and government-directed credit schemes, enhance competition in the banking sector, and improve prudential regulation and supervision. State-owned development finance institutions, however, continue to make politically influenced lending decisions and, partly as a result, have weak balance sheets. Prudential regulations have occasionally been relaxed in ad hoc fashion to prop up loss-making public or private industries. The State Bank of Pakistan's autonomy was considerably strengthened with the passage of new banking laws in and the amendment of the State Bank Act by the PML government in May 1997. - Fiscal Policy A central element of Pakistan's economic reforms has been the effort to reduce persistent government budget deficits. However, little overall progress has actually been made so far and the current financial position of the country is precarious. Deficit reduction is constrained by rigidities in spending patterns and a weak tax base. Defense spending and debt repayments absorb 69% of total federal spending, leaving little for other basic government functions and improving the long-neglected social sectors. Meanwhile, the country has a very narrow tax base; perhaps one in one hundred Pakistanis pays income tax. The country has had to rely on import and excise taxes for a very high share of revenues, thus protecting inefficient industries and encouraging smuggling, and on official transfers from external creditors, primarily the World Bank, the Asian Development Bank and the Government of Japan. The GOP's medium-term adjustment program has aimed to broaden the tax base through extension to under-taxed sectors and reduction of exemptions; to shift from taxation of international trade to taxation of consumption; to move to market determination of administered prices; and to improve the productivity of public spending. Progress has been mixed. Agriculture remains very lightly taxed. A sales tax has been instituted but exemptions, often secured through political influence, remain common. Maximum import tariffs were reduced from 70% in 1994-95 to 65% in 1995-96, and to 45% in March 1997. Increases in utility charges have attempted to keep pace with actual costs, but fee collection remains a serious problem. - Privatization Privatization of many state-owned enterprises is another key element of Pakistan's reform program, and both major political parties support reducing the state's role in the economy via this process. In 1991 the GOP identified a group of 118 state-owned industrial units for privatization. Of these, 97 units have been sold off. Industrial units, including factories producing cement, chemicals, automobiles, food products, etc., have mainly attracted domestic private investors. The current treatment of foreign investors in the power sector will decrease investor confidence as well as privatization efforts. The GOP is continuing preparations at a much slower pace for at least partial privatization of a few state-owned banks, several energy utilities, and - the largest item of all - Pakistan Telecommunication Company Limited (PTCL), the state monopoly phone company. In most cases, the GOP aims to find "strategic investors" to buy 26% of these firms and gain management control. These privatization are very complex undertakings, since new regimes for regulation of private sector entities in these sectors are still being established. The GOP's implementing agency, the Privatization Commission, says it is proceeding carefully to ensure a transparent process. The government is benefiting from World bank technical assistance in this effort and has hired several foreign financial advisors to help with preparation. Foreign investors have shown interest in acquiring stakes in these firms but note that reliable independent audits would speed the bidding process. The GOP and public-sector unions have agreed on a generous relief package for employees of divested state-owned enterprises. Labor opposition to the privatization program has held up some privatization initiatives through legal action. D. Balance of Payments Situation - Foreign Exchange Policies and Reserves Pressure on Pakistan's balance of payments is also reflected in the decline of its foreign exchange reserves. The reserves which stood at a comfortable level of $2.7 billion (equivalent to 17 weeks of imports) at the end of June 1995, were down 22% to $2.1 billion (10 weeks of imports) on June 30, 1996. Forex reserves dropped nearly 50% to $1.1 billion by May 10, 1997 which was still enough to finance about 5 weeks worth of imports. In June 1998 foreign exchange reserves dropped below USD one billion under pressure of economic sanctions following India and Pakistan's nuclear tests. The GOP has continued policies to liberalize and deregulate the exchange and payments regime. The Pakistani rupee has been on a managed float since 1982. The U.S. dollar serves as intervention currency for fixing the exchange rate against a trade-weighted basket of currencies. The central bank sets the daily rate at which it will purchase and sell U.S. dollars in its dealings with authorized dealers. The rupee was made convertible on current account in July 1994. - Remittances from Overseas Workers Remittances from overseas workers have been a major source of foreign exchange earnings for Pakistan. They peaked at $2.89 billion in 1982-83, then dropped to $1.5 billion in 1995-96. In FY 1996-97 workers' remittances further dropped to $1.4 billion. The relative importance of workers' remittances, however, continues to decline. In the past ten years they have fallen from 10% of GDP to about 5%. - Foreign Trade The country's trade performance remained disappointing through FY 1997-98. The trade deficit at the end of first ten months (July-April) of 1997-98 stood at $1.3 billion, down 54.0% over the same period of the previous year. Exports grew 4.6% while imports dropped 12.9%. In 1996-97, Pakistan's foreign trade decreased 4.0% over the previous year. However, a sharper fall in imports, lowered the trade deficit to $3.3 billion. Both exports and imports decreased over the corresponding period of the previous year. Exports for 1996-97 totaled $8.1 billion compared to $8.3 billion in 1995-96. Imports in 1996-97 were $11.4 billion versus $12.0 billion in the previous year. Decline in export growth in 1996-97 was attributed mainly to a fall in exports of raw cotton, cotton yarn and rice. In 1996-97, the following countries were the largest recipients of Pakistani exports: the U.S. (17.7%); the UK (7.2%); Germany (7.5%); Japan (5.7%); Hong Kong (9.4%); United Arab Emirates (4.6%); France (2.9%); The Netherlands (3.3%). Imports, at 11.4 billion in 1996-97, decreased 5.0% over the previous year mainly due to reduced import of edible oils, tea, synthetic fiber and chemicals. In 1996-97, the following countries were the major sources of Pakistan's imports: the U.S. (12.0%); Japan (8.6%); Malaysia (4.7%); Germany (5.6%); Kuwait (6.9%); UK (5.0%); Saudi Arabia (6.0%); China (4.6%) E. Infrastructure Situation Ports - Pakistan has two significant seaports - Karachi and Port Qasim - and two proposed sites for future facilities - Gwadar and Pasni, both on Baluchistan's Makran Coast. Karachi is the main port, handling the majority of all dry and liquid cargo. Port Qasim, located 50 kilometers southeast of Karachi, is Pakistan's second deep sea port and was built for overflow from Karachi Port and to handle raw material imports for Pakistan Steel Mills. Pakistan's dry and liquid cargo increased from 30.2 million tons in 1992-93 to nearly 33.1 million tons in 1995-96. Similarly, containerized traffic was projected to increase to more than 623,000 TEUs (twenty-foot equivalent units) by 1997-98. To facilitate this expansion, the GOP plans to improve container handling berths at both Karachi and Port Qasim by constructing specialized integrated container terminals at Port Qasim and on Karachi's West and East Wharfs. The Port Qasim container terminal and a new oil terminal are to be constructed by the private sector. The GOP also plans acquisition of a bucket dredging plant, development of a modern warehousing complex in Karachi, and construction of a liquid products marine terminal at Karachi. In addition, the GOP proposes private sector participation in contract dredging to deepen navigational channels, and the construction of a water desalination plant and power station at the Karachi port. Railroads - Pakistan Railways, an autonomous agency under the Ministry of Railways, operates the railroad system. The system is primarily broad-gauge, but there are also segments of meter-gauge and narrow-gauge track. Over the past fifteen years, there has been a marked shift in freight traffic from rail to highways, a trend which the GOP hopes to stabilize and reverse. Railways carries about 15% of freight traffic and road vehicles 85%. The rail system comprises 781 stations and 45 halts. Rolling stock includes about 551 locomotives, 4,250 passenger coaches, and 32,000 freight cars. Pakistan Railways plans to improve railroad's share of long-haul freight traffic, to upgrade track to permit trains to operate at higher speeds, and to rehabilitate infrastructure in order to improve capacity utilization. Specific priorities include double-tracking; rehabilitating about 381 traction motors; procurement of diesel-electric locomotive engines; and manufacturing air-conditioned cars and diesel-electric locomotives at a recently opened factory at Risalpur in the NWFP, as well as upgrading telecommunications and signalling systems. Highways - The World Bank reports that Pakistan's road network is notable for its poor condition. About fifty% of the road network is unpaved and over two-thirds of paved arterial roads do not have enough carriageway width for two lanes. The majority of paved and unpaved roads are in poor condition. According to the World Bank, on average, poorly maintained roads can cause 30-40 percent higher transportation costs. At both federal and provincial levels, Pakistan provides insufficient funding for road maintenance. Over 80% of Pakistan's freight and passenger traffic travels by road. In June 1998, Pakistan had 236,041 kilometers of roads. The major north-south and east-west link is Lahore and Rawalpindi to Peshawar and carries over half of Pakistan's goods and passenger traffic. The National Highway Authority (NHA), established in 1991, has the major responsibility to plan, promote, organize and implement programs for construction, development, operation, repairs and maintenance of national highways and strategic roads. Plans, policies and budget of the NHA are approved by the National Highway Council headed by the Prime Minister. The Council controls, directs and regulates the affairs of the NHA. The GOP's key development priority in the highway sector is to upgrade and fill in gaps in the existing road network so the system can be more efficiently utilized. Proper maintenance of the network is a newly emphasized priority. Additional construction projects include completion of the Indus Highway, the dualization of the principal route (the N-5 National Highway), and construction of several inter-city expressways and by-passes. The Lahore-Islamabad motorway was opened for traffic on November 26, 1997. Air Transport - The GOP has opened the domestic aviation market to private sector competition. As of June 1998, three private carriers operate commercial flights. The national carrier, PIA, has a fleet of 47 planes (eight Boeing 747s, ten Airbus 300s, six Airbus 310s, six Boeing 737s, thirteen Fokker-27s, two DeHavilland Twin Otters, and two Boeing 707 freighters). PIA serves 37 domestic and 55 international destinations. The current private sector competition consists of Shaheen Airlines, a unit of the Shaheen Foundation (a foundation for retired air force officers), Aero Asia, part of the Karachi- based Tabani group of companies, and Bhoja Air. The GOP plans to continue modernizing and upgrading its civil aviation facilities. This includes construction of a new international airport at Lahore. New airports and improvements in runways are also planned for Islamabad, Peshawar, Karachi and other cities. PIA also projects that it will replace its early-generation 747s with newer wide bodies. Utilities - Two public utilities, the Water and Power Development Administration (WAPDA) and the Karachi Electric Supply Corporation (KESC) are responsible for electric power generation and distribution. However, the GOP has an inconsistent policy to bring private firms into the generation of power (for purchase and distribution by the public utilities). (See sections on Energy, and Privatization.) Telecommunications - In December 1990, Pakistan converted Pakistan Telephone and Telegraph (PTT) Department, which was directly controlled by the Ministry of Communications, into Pakistan Telecommunications Corporation, (PTC), and more recently into Pakistan Telecommunication Company Limited (PTCL), still the only provider of basic telephone services. The GOP plans to privatize PTC, by first selling 26% ownership to a "strategic investor", and then selling the rest after the firm is on a solid footing. The GOP has deregulated and privatized selected telecommunication services. At present there are three cellular mobile phone licensees; one radio paging company; seven card-phone licensees; seventy telex, facsimile and PABX service providers; two manufacturers of large digital exchanges; and eighteen data network operators in the private sector.[end of document]Note* International Copyright, United States Government, 1998 (or other year of first publication). 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