PAKISTAN ECONOMY

LECTURE 4

End Of Ayubs Era

Agitation against Ayub due to

Inability to create jobs

Accumulation of wealth in few hands

Yahya imposed martial law

Elections were held Mujeeb got majority
in East and Bhutto in West
Civil War
Dec1971 ??

Years 1971-1977

Bhuttos Experiment with

Socialism

MAIN FEATURES

INTRODUCTION

Pakistan had lost a whole province of 70 million,

56 percent of the total population
Left only with the four Provinces of West
Pakistan
Bhutto took steps to revitalize the economy,
industry and agriculture
3rd Constitution
In 1972, he signed the Simla Agreement

He negotiated the return of the 90,368 prisoners of

war and a peaceful settlement with India.

Major Policy Change

Nationalization of Industry, insurance and banking,

ECONOMIC GROWTH
From 1970 to 77 the growth rate of economy
averaged 3.8% compared to the 1960s
Reasons:

Separation of the East Pakistan

Poor weather conditions?
And technical problems which delayed the
availability of water from Tarbela dam
Oil price shock?

During Bhuttos period, the adverse impact of higher oil prices on the
balances of payments averaged about US $700 to US $800 mill annually

WHAT SAVED PAKISTAN?

Large scale inflows of foreign capital and

remittances after 1973 cushioned the impact
of the steep rise in the oil import bill.

Debt relief was given to Pakistan , two third of the

debt payments of US $ 650 million , due in 1974-77
were wiped off.
Official Grants (aid to Pakistan from western
industrial nations and multilateral banks) were
resumed in 1974.
Loans from Middle East Oil Exporting Countries total
$ 1.2 billion during 1974-78 on concessional terms,
helped to cushion the adverse impact of oil increase.

Macroeconomic Management

FOREIGN TRADE ADJUSTMENT

No major decline in Exports

Cotton

and rice were sold below the

international prices to East Pak in 1960s which
depressed real XR.
Real Devaluation in 1972facilitated shifts to
international markets
Boom in intl economy & commodity market
increased exports

Macroeconomic
Management

PATTERN OF GROWTH
Growth in GDP in 1973 was 7.1 and in 1974
were 3.4.

Sources: Construction, public admin, defense and

service sector
real investment expanded by 50% between 197273 and 1976-77 and the rate of investment as per
GDP recovered from a low of less than 13% to over
19% over the four year period.
Military expenditures
Beginning of boom in workers remittances

Macroeconomic
Management

FINANCIAL INVESTMENT
Domestic investment financed from???
Domestic savings???

External TOT, worsening fiscal situation,

reduced incentives for private sector
investment
Workers remittances: 4% of GDP
supplemented

Macroeconomic
Management

EXTERNAL DEBT PROBLEM

debt service ratio to foreign exchange

earnings had risen steadily from 10% on 196065 to nearly 20% in 1969-70.
debt service payments due in 1971-2 would
have absorbed over 40% of Pakistans foreign
exchange earnings during that year.
Assistance from Abroad: foreign assistance
commitments and disbursements reached the
record of average level over US $1.2 bill annually
during the years 1974-5 to 1976-8.

Macroeconomic
Management

BUDGET DEFICITS

Explosive growth
The budget deficit averaged over 8% of GDP
compare with fiscal deficits of 2-3% of GDP in
the 50s and 4-5% in the 60s.
Inflationary financing of the budget averaged
well over 3% of GDP during 1972-3 and 19767 while government revenue account deficit
was close to 2% of GDP

Macroeconomic
Management

TAX POLICY
Collection from incomes and corporate
tax during the 70s did not exceed 1% of
GDP.
The essential inelasticity of tax system
remained intact with its heavy
dependence on indirect taxes and
especially certain duties.
there was only a marginal improvement
in total federal and provincial tax
revenues from 10.6% of GDP in 1972-73

Macroeconomic
Management

INFLATIONARY PRESSURE

Fiscal deficit
Imported inflation
Devaluation
EFFECTS???

Macroeconomic Management

EXCHANGE RATE AND TRADE POLICY

The serious distortion caused by the system of multiple

exchange rates which prevailed since January 1959 were
finally recognized when the government decided to devalue
the rupee from Rs.4.76 per dollar, to Rs.11 per US dollar in
May 1972.
The Export Bonus Scheme was also abolished at the same
time.
raised export prices of the primary products sharply by a
range of 30 to 80% and high export duties were introduced
to mop up windfall profits.
anti exports and anti agriculture biases of policy
Custom revenues as percentage of GDP increased from 2.7
in 1971-2 to 5.2% in 1973-4 and remained high during the
subsequent years.

Macroeconomic
Management

PRICE AND SUBSIDY POLICIES

Explicit subsidies in the budget constituted about 3%

of GDP in 1974-5 to 1975-6 but dropped to 1.6% of
GDP in 1976-7.
bulk of direct subsidy sale of wheat to consumers
but fertilizer and pesticides were also sizable.
The indirect subsidies were mainly on the energy
products where prices were not fully adjusted
upwards, the difference being absorbed either
through reduced tax revenue on petroleum products
or lower rate of return on electricity production by
WAPDA.

Macroeconomic
Management

ENERGY PRICES
Import cost of ______had increased by
300%
Gas prices kept low
After 1973, development surcharges
were used to _________ the sale of
kerosene and diesel oil.
In 1970 energy consumption expanded
30% faster than growth in GNP with
obvious adverse consequences for the
balance of payments.

Nationalization

Economic Reform Order issued on January 3,

1972, major industries were nationalized.

The Ministry of Production, which incorporated

the Board of Industrial Management, was
established to oversee industry.

Break the power of the approximately twenty

elite families who had dominated the nation's
economy during the Ayub Khan period.

5 Waves

LABOR POLICY
Speedy and just settlement of
disputes
Fair share in profits
Labor legislation set high minimum
wages and fringe benefits
Trade unions were strengthened
Participation in the management of
industry
Initially only applied to firms with 10

Public Investments

Share of Public investment increased from 49%

in 1969-70 to 70 % in 1976-77
Public Sector development Spending:
1971-2 4.7% of GDP
1977 11.7% of GDP
Spending

on Tarbela

Highways
Nuclear

processing plants at Chashma

Spending on infrastructure
Spending on less developed programs

Role of Planning

Planning commission??
Abandonment of __________
Civil Service Reforms

Land Reforms

The land reforms were announced in

March 1972.
The individual ceiling on land holding
was reduced from 36,000 produce
index(500 acres of irrigated land) to
15,000 produce index units, and further
reduced to 12,000 units(150 acres of
irrigated land).
New rules for the tenants were laid down
and the burden of taxation was shifted to
landlords.

Social Services

EDUCATION
outlined an ambitious Programme of
educational development including

free and universal education up to class VIII,

strengthening of technical education,
teachers welfare,
improvement in the quality of education,
and an educational Programme for women in
the rural areas.

Social Services

Total government expenditures on

education increase from Rs.0.8 million in
1971-2 to Rs.2.8 million in 1976-7 which
represented increase in real terms of
around 50% over the period.
Female education at the primary level did
relatively well in the Bhuttos period as
females accounted for 36% of growth in
the primary school enrollment and 55%
of growth in teachers during 1972-7.

Social Services

HEALTH
A comprehensive health policy announced in 1972
outlined an ambitious Programme of

extension of health facilities to rural areas,

expansion of medical education,
and shift to the production of generic drugs to avoid
the soaring prices of brand named medicines.

The centre price of scheme was the Basic Health

Unit, which was to serve between 8,000 and
15,000 people as a sub unit of a larger rural health
centre
As a proportion of GDP the growth in health sector
was from 0.4% in 1971-2 to 0.8% in 1976-7.

FACTS & FIGURES

(1971-77)

GDP growth rate fell to 3.8 percent between 1971-77

The total government expenditure on education increased from

1.6% to 2% of GNP over 1972-77

The ratio of taxes to GNP improved to 12% in late 1970s

Rural poverty incidence fell from 54% in 1969-70 to 41% in 1979

Domestic Savings avg < 8%

Current Account Deficit average 6.5% of GDP

Inflation fell from 25 percent in FY 1972 to 6 percent in FY 1976.

Assignment

Comment on the macroeconomic

policies under Bhuttos Era. (10)
Discuss Bhuttos experiment with
socialism giving special attention to his
nationalization and labor policy. (10)

PAKISTAN ECONOMY
Lecture 5

1977-1988
Return to 1960s Policy

MAIN FEATURES

INTRODUCTION

General Zia-ul-Haq imposed martial law in

March 1977

Zia took over with the declared purpose of

resolving the rift between Bhuttos Peoples
Party and the combined opposition to hold free
and fare elections within 90 days.

Bhutto then charged with the murder of a

political opponent was found guilty in March
1978 and hanged on 4th April 1979.

What helped Zia prolong his Rule?

Efforts to Islamize society to strengthen his

political support.

Soviet occupation of Afghanistan

Zia extended the role of the army in governance

through extensive use of military intelligence

Economy under Zia enjoyed a high and

sustained rate of growth

GROWTH TRENDS
Growth Rates(% per annum)

1977-83

1983-88

1977-88

4.2

3.5

3.9

10.2

8.2

9.2

Other

8.6

7.9

GDP at factor cost

6.7

6.2

6.6

GNP per capita

4.4

1.9

3.3

Agriculture
Manufacturing

WORKER REMITTANCES

Worker Remittances
Selected Years

U.S $ in Millions

As %age of GDP

1972-3

136

2.1

1976-7

578

3.8

1982-3

2886

10.1

1987-8

2013

5.2

1982-81

1848

4.1

1983-4

1445

2.3

EXPORT AND INDUSTRIAL GROWTH

Industrial growth under Zia was impressive as

manufacturing sector growth over 1977-88 averaged
over 9% as compared to 3.7% in 1972-77.

Large scale manufacturing grew even faster than the

small scale.

Private sector investment in manufacturing grew by

9.5% per annum during 1978-83

MAIN REASONS

Large public sector investments which started in

Bhuttos resulted in major increases in steel, cement
fertilizer and vehicle production

Incentives
for
manufactured
exports
were
strengthened by the introduction of a flexible
exchange rate policy after 1982, by increasing the
standard rates of rebate of custom duty and sales
tax for exports

The investment climate for the private sector was

improved by providing guarantees against future
nationalization, clearer demarcations of activities
between the public and the private sector and
additional tax concessions

EXCHANGE RATE

The rupee was devalued from Rs.9.90 per US dollar

to Rs. 11.84 in 1982 and then gradually depreciated
to Rs. 18 per US dollar by the end of 1988

This real devaluation assisted the overall export

expansion of 7-8% per annum during the period and
contributed in a significant way in reducing the
relative dependence on worker remittances

By 1988 exports were more than double the level of

remittances

TRADE POLICY
The industrial zone was established in the late
1970s

Attract foreign investment

Speed up flow of modern technology
Provide more job opportunities
Raise skill and management standards and
provide exporters a base for the production in an
environment free from import duties

The results were however disappointing as

exports from the zone were relatively small.

SLOW GROWTH IN INVESTMENT

The low rate of investment in the 1980s was due to the

failure to mobilize sufficient domestic resources in the
public sector for development as foreign savings declined

Gross fixed capital formation as a percentage of GDP

averaged about 17% during 1977-88, below the level of
17.5% in 1967-77

Insufficient attention given to longer term requirements of

water, energy and transport also meant that toward the
end of the 1980s there were few large projects in the pipe
line that would normally have helped the momentum of
growth in 90s.

TAX SYSTEM

The inelasticity of the system witnessed during the

1960s and 1970s persisted in the 1980s.

Substantial additional taxation undertaken in 197980 and 1986-87 yielded only marginal improvement
in tax as GNP to tax ratio increased from nearly 12%
in 1978-79 to 13.3% in 1987-88.

Direct taxes continued to account for fraction of total

revenue and, the dependence on foreign trade taxes
became greater.

The problem with the elasticity of the tax system

was compounded by the generous use of tax
holidays.

TAX SYSTEM

The level of income and corporation tax revenue at

1.6% of GDP in 1987-88 was not only low, but also
had not increased over the previous decade.

Exemption of agricultural incomes from taxation was

another actor in the elasticity of tax revenue.

Keeping domestic wheat, rice and cotton prices low,

the government was able to benefit the urban
consumer and the industrialists at the cost of the
agricultural producer.

NON DEVELOPMENT SPENDING

Government expenditure had grown by from 10-11% to

27% of GDP

Defense expenditures increased from 5. to 7% of GDP

over the period

Real defense spending increased by 9.2% per annum

over 1977-88, real development spending increased only
by 3.2% per annum.

The army was Zias main constituency and he made sure

that he continued to enjoy its strong support.

Real Growth in Public Spending (Per cent per annum)

1977-88

1988-97

Defence

9.2

1.6

Development

3.2

-2.8

15.8

7.9

Other

9.1

4.1

Total

2.8

Interest

RISING DEBT BURDEN

Interest payments had become the fastest growing

element in government expenditures during 1977-88,
rising from 1.9% of GDP in 1976-77 to 4.9% of GDP in
1987-88

Domestic debt increased from 20.38% of GDP in mid

1981 to 42.9% of GDP in mid 1988.

There was a much higher reliance on government

borrowing from non-bank sources at relatively high
interest rates of 14-15% per year
A greater reliance on non inflationary sources of
financing meant that credit creation in the public
sector and the overall rate of monetary expansion
slowed down sharply in Zia period.

AGRICULTURE

The government price policies after 1980

improves agriculture incentives, especially for
wheat.

The agricultural growth since the early 1980s

also benefited from strong growth in live stock.

The livestock grew annually by 5.5% in the 80s

and further continued.

ISLAMIZATION OF ECONOMY

Islamic Economic System introduced in

February 1980

Two most important measures of Islamizing the

economy were
The industrialization of the Zakat
Introduction of interest free banking

ZAKAT

Under the Zakat Ordinance, most financial assets in the

Banking system and saving instruments were made subject
to 2.5% deduction annually on account of Zakat.

By 1987-88, Zakat collections deducted at source were Rs.

1.9billion and had risen further to Rs. 2.6 billion by 1988-89

Even assuming that all the benefits went to the lowest 20%
income households and that the administration expenses
were minimal, the Zakat donation would have augmented
the income of this group by only 2%.

Zakat deduction of 2.5% per annum, from which foreign

currency deposits are exempt, provides a strong
disincentive to hold rupee assets

INTEREST FREE BANKING

Islamization also affected the interest rate

policy. Technically all lending and deposit rates
were by 1988 set on profit and loss sharing

The move to profit and loss sharing as such as

did not make big difference to the process of
financial deepening that is increase in share of
monetary assets to GDP

AFGHAN WAR IMPLICATIONS

Strengthening of US Pak relationship

Huge amount of foreign assistance coming into

Pakistan

Drug Trafficking

Emergence of Kalashnikov culture

Afghan Refugees

Mujahideen , the future Taliban's

Facts & Figures (1977-88)

Economic growth averaged 6.6% per annum

The agriculture growth increased to 4% in 1977-88 from

2% in 1972-77

Pakistans manufactured exports increased fourfold from

US $1.3 billion 1980 to US $ 5.6 billion in 1983.

Reduction in the overall fiscal deficit to an average of less

than 6% of GDP during the fiscal years 1980-83. By 1986
the deficit had aging risen of above 8% and stood at 8.5%
of GDP in the final year of Zias rule

Primary school enrollment during 1977-88 expanded at an

annual rate of only 4%, only moderately faster than the
growth rate of the population.