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Economic
growth in Pakistan: a story
of defined and undefined economic policies
From FY02, the economy picked up registering a real
growth of 3.11 per cent and peaked
in FY05 with a growth rate of 8.96 per cent. The question
is, what actually drove this growth This is a well
researched short paper looking at Pakistan’s economy
from more than one angle. The paper is being published in
two parts, part-I being produced here and part-II will
appear in next Monday’s issue of B&FR
By
Sebastian Samuel
The
extraordinary economic growth of Pakistan over the last
several years has been quite amazing. The real compounded
annual growth rate (CAGR) registered over the last 5 years
(FY03 to FY07) was 6.95 per cent, which is exceptional,
given that it was as low as 1.97 per cent in FY01. It was
a time when everyone was puzzled and talked about the
vicious cycle that Pakistan was in. Then, from FY02, the
economy picked up registering a real growth of 3.11 per
cent and peaked in FY05 with a growth rate of 8.96 per
cent. One should wonder what actually drove this growth.
But before we try to figure out the underpinnings of the
economic growth, it is pertinent to first discuss the
economic structure of Pakistan. (See Table-1)
Pakistan
is an agrarian economy. Though the figures above and the
recent wave of industrialisation may suggest otherwise,
agriculture still remains the most important sector of our
economy. And a very sensitive one as well! It, both
directly and indirectly, accounts for 65 per cent of the
export proceeds. Indirectly, because it is part of the
supply chain for a large portion of the manufacturing
sector. (See Table-2, 3 and 4)
The
textile sector accounts for 8-9 per cent of the total GDP,
and generates 51 per cent of the export revenues for
Pakistan, which is a huge number making it a very
important sector. This sector should be taken well care
of, because it makes the entire economy vulnerable, in
terms of deteriorating trade balance, to events that may
adversely affect textile productivity in Pakistan. This
sector is subject to high operating and financial
leverage. It accounts for 18 per cent of the total credit
disbursed in the economy, which is by and large the
highest among the lot. Companies that have high asset
turnover ratios, typically close to 1 or above, do better
than companies with lower asset turnover ratios (figure
1). Financial leverage in the range of 55-70 per cent
seems healthy because companies with debt in excess of
this have registered lower profit margins despite higher
asset utilisation rates.
The
revival of the textile sector hinges on two factors: (A)
Replacement of old with new more efficient plant &
machinery. (B) Self sufficiency in cotton crop.
It is
good that the government provided incentives to this
sector in the form of financing schemes for import of new
machinery, which would replace older machinery and thus
improve cost efficiencies. But the trend was short-lived.
The import of textile machinery has declined since FY05,
most probably as a result of withdrawal of the SBP LT-EOP
scheme and monetary tightening.
Another
area of concern is the quality and quantity of the cotton
crop produced in Pakistan. Despite being the fourth
largest producer of cotton in the world, Pakistan’s
yield per hectare is low; ranking 13th in the world and is
declining. Pakistan both imports and exports raw cotton.
Even in years, for example FY05, where the quantity of raw
cotton produced was more than what was consumed, Pakistan
imported raw cotton (export of raw cotton in years of
inadequate crop is a political issue and the government
should take it seriously and deal with it accordingly).
This is probably because the imported cotton is required
to produce knitted textile products, which is the most
value additive segment of textile products. The high cost
of imported cotton makes the knitted products produced in
Pakistan uncompetitive in the international market and
divests Pakistan from the natural import/export hedge and
thus, tends to widen the trade deficit. If at present the
production of medium and long staple cotton is not
possible then the government should encourage the
agriculture and bio-technology departments in Universities
to find a way to do it. Once this is done, the export
proceeds can increase substantially and can put the
textile and agriculture sector in the next round of
profitability and growth trajectory. The ginning out-turn
ratio of the cotton crop is low and thus, even in years of
bumper crop, necessitates import of expensive raw cotton.
Pakistan should keep increasing production of Bt (Bacillus
thuringiensis) cotton as a percentage of total cotton crop
because it has about 30 per cent higher yield than the
normal cotton crop and is also pest and virus resistant.
It has been successfully produced in USA, Australia,
China, India and other cotton producing countries,
therefore Pakistan has numerous examples to follow. (See
Table-5)
Our
economy over-relies on the agriculture and textile
sectors, which is precarious for the economy. The rest of
the industrial sector (excluding textiles) which is 17 per
cent of the GDP accounts for only 19 per cent of the
export receipts, whereas textile which is 9 per cent of
GDP accounts for 51 per cent. Such is the imbalance that
exists in the economic structure of Pakistan. This should
be disturbing and a cause of worry for those running the
show. There is no doubt about the fact that the government
should make great efforts to develop the manufacturing
sector so that the exports mix gets diversified. But, at
the same time it should not get lax in its attention to
the agriculture and textile sectors.
Much of
government’s focus so far has been on the Energy,
Communications and financial services sectors. FDI in
these sectors have accounted for 71 per cent of total FDI
between FY02 to H1FY08.
Energy
FDI
received for oil & gas exploration during the period
FY02-H1FY08 was US$ 2.37 billion (14 per cent of total FDI)
and FDI received for power was US$ 0.722 billion (4.4 per
cent of total FDI). The government, prodded by the ever
widening demand/supply gap, is currently concentrating
more on setting up thermal power (oil & gas) plants
– more than 90 per cent of FDI in the power sector was
allocated to thermal plants – because they are cheaper
to set up and have short gestation period. The benefit of
this policy is that given the current crisis, power can be
generated in a shorter time period at a comparatively
lower capital outlay. But the flip side is that these
plants have way more operating costs in terms of the cost
of the fuel consumed to generate electricity. The trade
balance would be adversely affected in the longer-term,
which would in turn affect all segments of the economy.
Hydel plants involve huge capital outlays and take the
longest time (as compared to oil and coal) to setup. They
have the lowest operating costs among the three which
translate into cheaper power and a better trade balance.
More dams mean a better irrigation system which in turn is
good for the agriculture sector. But the problem that has
always hindered the government from setting up hydel power
plants is the altercation that ensues between the
agriculture and the power sector on ‘how and when these
dams will be used’; the power companies like to have a
continuous flow of water, whereas the agriculture sector
does not because that could mean insufficient water supply
for crop cultivation when it is actually needed. Coal
power plants fit in between these two options. The capital
outlay for setting-up these plants is lower than hydel but
higher than thermal plants. The operating costs are higher
than hydel but lower than the thermal plants.
The
gestation period is lower than hydel but higher than
thermal plants. This could be a good option for the
government to follow, but no major headway has been made
yet. Nuclear plants have the cheapest operating costs but
they have international and safety constraints.
One
possible solution to the current crisis is the setting up
of captive units. Industrial consumption of electricity
accounts for 32 per cent of the total consumption. The
level of consumption would increase as the industrial
sector grows. The government should encourage industrial
units to have in-house power generation units, and make it
mandatory for these units to be powered either by coal or
alternate energy sources, specifically biomass. If the
industrial sector can become independent for their power
requirements a lot of pressure will be released and the
government can concentrate on developing a better and
longer-term power policy.
The
potential of power generation through wind should not be
underestimated. Ignoring it could be a big mistake that
the government can make. Countries like Portugal are
already investing in building wind farms.
These
plants are beneficial only if there is a continuous flow
of wind and therefore require to be set at places of high
altitude. Given the current lack of support infrastructure
in these places and high capital costs and gestation time
involved, this might not be possible for Pakistan for now.
But that should not bar the government from putting it as
one of its longer term targets.
Communications
The
telecommunication sector alone received FDI of US$ 5.76
billion (35 per cent of the total FDI in Pakistan) over
the period FY02-H1FY08. PTCL was a monopoly and was
therefore inefficient so there was significant room for
investment. Given the current tele-density of 51 per cent
the growth potential is still huge.
TABLE 1:
PER CENT CONTRIBUTION TO GDP
FY03
FY04
FY05
FY06
FY07
Average
(%)
(%)
(%)
(%)
(%)
(%)
Agriculture
24.02
22.89
22.37
21.31
20.91
22.30
Industry
23.61
25.54
26.28
25.88
25.83
25.43
Services
52.37
51.57
51.35
52.81
53.27
52.27
Source:
SBP & Federal bureau of statistics
TABLE 2:
EXPORT RECEIPTS
(Millions
of US$)
FY04
FY05
FY06
FY07
Average
%age share
Commodities
12,313
14,391
16,451
16,976
81%
% of total
receipts
82%
81%
81%
80%
Food
1,011
1,231
2,012
2,021
8%
% of total
receipts
7%
7%
10%
10%
Textiles
8,039
8,555
10,219
10,788
51%
% of total
receipts
54%
48%
51%
51%
Services
2,644
3,319
3,769
4,122
19%
% of total
receipts
18%
19%
19%
20%
Total
receipts
14,957
17,710
20,220
21,098
100%
Source:
SBP & Federal bureau of statistics
TABLE 3:
EXPORTS DIRECTLY/INDIRECTLY DEPENDANT ON AGRICULTURE
SECTOR
(Thousands
of US$)
Category
FY05
FY06
FY07
Food
items
1,231,045
2,011,805 2,021,066
Textile
8,555,211
10,218,656 10,787,960
Other
manufactures
917,953
1,084,792 917,808
Leather tanned
303,606 292,394
302,769
Leather
manufactured
526,774 722,553
546,091
Furniture
13,135
1,104
11,079
Molasses
74,438
43,592
28,088
Guar and Guar
products
- 25,149
29,781
Total
10,704,209
13,315,253 13,726,834
%age of
total export receipts
60%
66%
65%
Source:
SBP & Federal bureau of statistics
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