Industrial Policies & Developments Fiscal Year 2000 - 2006

EXECUTIVE SUMMARY
Pakistans economy continued to maintain solid pace of expansion for the fourth year in a row in the fiscal year 2005-06 despite facing headwinds from rising energy prices at $ 70-75 per barrel and the widespread damage caused by the earthquake of October 8, 2005. With economic growth at 6.6 percent in 2005-06, Pakistans economy has grown at an average rate of almost 7.0 percent per annum during the last four years and over 7.5 percent in the last three years, thus enabling it to join the exclusive club of the fastest growing economies of the Asian region. The government is privatizing large-scale parastatal units, and the public sector accounts for a shrinking proportion of industrial output, while growth in overall industrial output (including the private sector) has accelerated. Government policies aim to diversify the country's industrial base and bolster export industries. Pakistans economy overcame adverse pressures to achieve strong growth for the third successive year in FY06. Despite unexpectedly weak harvests of some key crops (cotton, sugarcane and wheat), the impact of the October 2005 earthquake, a tight monetary policy and an unprecedented rise in oil prices, real GDP growth remained strong at 6.6 percent during FY06. The growth momentum that Pakistan sustained for the last four years is underpinned by dynamism in industry, agriculture and services, and the emergence of a new investment cycle supported by strong credit growth. The prerequisites for a sustained economic growth appear to have gained firm footing during the last four year.

Sectoral Contribution to Real GDP Growth

The economic growth is broad-based and is shared by all the major sectors of the economy. However, major contribution towards growth has come from the services sector which has emerged as a new growth power house for some time. The commodity producing sectors (agriculture and industry) has contributed one-third of the GDP growth and service sector contributed the remaining two-third to the real GDP growth of 6.6 percent.
Term Paper Analysis of Pakistan Industries Fall 2006

Industrial Policies & Developments Fiscal Year 2000 - 2006 Composition of the GDP
The exclusive concentration of the successive governments to four major crops, namely, wheat, cotton, sugarcane and rice and no or little effort to increase yield per acre or no policy support to diversification of agriculture sector are mainly responsible for the decline in the share of this sector. During the last six years, the bulk of the impetus to growth is coming from the services and the manufacturing sector. The share of manufacturing in GDP has remained stagnant at around 16 percent for 33 years until 2002-03. Its contribution to GDP has surged only during the last three years - rising from 16.3 percent in 2002-03 to 18.2 percent in 200506. Almost two percentage points or 11.6 percent increase in just three years is an impressive performance. Within the services sector, almost all the components have raised their contribution over the last three and half decades but remained more or less stagnant since 2000-01. This simply suggests that the decline in the share of agriculture is fully compensated by the equal rise in the share of manufacturing with contribution from the services remaining more or less stagnant.

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Industrial Policies & Developments Fiscal Year 2000 - 2006

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

A - Commodity Producing Sector Agriculture Major Crops Minor Crops Livestock Fishing Forestry Sub Total Mining & Quarrying 8.6 3.4 12.0 0.4 0.7 25.1 1.3 8.0 3.1 12.0 0.3 0.7 24.1 2.4 8.2 3.0 11.8 0.3 0.7 24.0 2.5 Manufacturing Large scale Small scale Others Sub Total Construction Electricity & Gas Distribution TOTAL - A 10.5 4.0 1.4 15.9 2.4 3.4 48.1 10.4 4.1 1.4 15.9 2.4 3.0 47.8 10.6 4.2 1.5 16.3 2.4 2.4 47.6 B - Services Sector Transport, Storage and Communication Wholesale and Retail Trade Finance & Insurance Ownership of Dwellings Public Administration and Defense Other Services TOTAL - B GDP
(Constant factor Cost)

7.8 2.9 11.2 0.3 0.6 22.8 2.6

8.4 2.8 10.6 0.3 0.4 22.5 2.7

7.6 2.7 10.7 0.3 0.3 21.6 2.6

11.7 4.2 1.4 17.3 2.0 3.7 48.4

12.4 4.2 1.3 17.9 2.1 3.5 48.7

12.7 4.3 1.2 18.2 2.2 3 47.6

11.7 18.1 3.1 3.2 6.3 9.4 51.8 100

11.4 17.8 3.5 3.2 6.4 9.8 52.1 100

11.4 18.0 3.3 3.1 6.6 9.9 52.3 100

10.9 18.2 3.4 3.0 6.3 9.7 51.5 100

10.4 18.6 4 2.9 5.9 9.5 51.3 100

10.5 19.2 4.6 2.8 5.8 9.5 52.4 100

Sectoral Share of Various Sectors in Gross Domestic Product (At Constant Factor Cost)

Table of Contents

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Industrial Policies & Developments Fiscal Year 2000 - 2006

0. Refrences 1. Introduction 2. Background 2.1 Foundation Year of Pakistan Economy 2.2 Decade of Development 2.3 Bad Luck Years 2.4 Second Military Government 2.5 Era of Structural Adjustments 3. Executive Summary 3.1 Foundation Years of Pakistan Economy 3.2 Decade of Development 3.3 Years of Bad Management 3.4 Second Military Government 3.5 Era of Structural Adjustments 4. Industrial Policies (2000 to 2006) 4.1) 2000 2001 AD Industrial Policies 4.2) 2002 AD Industrial Policies 4.2) 2003 2004 AD Industrial Policies 4 4.2) 2005 AD Industrial Policies 4.2) 2006 AD Industrial Policies 8 5. Industrial Development (2000 to 2006) 6. Conclusion 7. Recommendations

2 2 3 3 3 4 5 6 6 6 7 7 8 8 8 8

8 8 8

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0. REFRENCES To prepare this report, references have been used from the following sources (not necessarily in this order):

0.1 Official Websites

State Bank of Pakistan Statistics Division, Government of Pakistan Ministry of Finance, Government of Pakistan Board of Investment, Government of Pakistan Central Board of Revenue Privatization Commission World Trade Organization: Pakistan National Clearing Company of Pakistan Limited Security and Exchange Commission of Pakistan Pakistan Software Export Board (PSEB) Central Board of Revenue: Pakistan's current trade policy Pakistan International: Chamber of Commerce

0.2 Financial Newspaper / Magazines

Business Recorder Karachi, Lahore, Islamabad based Business Newspaper Pakistan Economist Pakistan's leading Business & Economy Magazine Industrial Information Network Pakistani B2B and information portal Stockpk - Articles on the Stock Exchanges of Pakistan

0.3 Economy Profile Information

CIA-The World Fact Book, Pakistan Section Pakistan CPI Index United Nations Development Programme, Human Development Index Index of Economic Freedom, 2005 The Economist's Pakistan Fact Sheet The Economist Economic Data of Pakistan BBC Facts & Figures on Pakistan

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Industrial Policies & Developments Fiscal Year 2000 - 2006

1. INTRODUCTION
At the time of partition in 1947, Pakistan was inherited highly discouraging industrial assets. The newly created country commenced its industrial move in these hopeless economic and industrial circumstances Now, Pakistan is a self-sufficient nation in various manufactured goods. Nevertheless, it cant be denied also that Pakistan has not industrially developed, as it should have been during past 52 years. During this initial period, private sector of Pakistan was lacking not only in capital but also in experience and thereby it couldnt play its role that can be mentioned. To tackle this issue, the Government of Pakistan established PIDC1 (Pakistan Industrial Development Corporation) in 1952. This developed confidence among the industrialists and investors. After two decades, Pakistan achieved self-sufficiency in various consumer goods, but still was lacking in key raw materials like coke, steel and iron etc. In 1973, this dream was also culminated into reality and, with the technical and financial co-operation of former USSR, Pakistan Steel Mills was established and today this largest project of country has been supplying steel and other allied productions. With the nationalization policy of Zulfiqar Ali Bhutto government in October 1972 shattering the confidence of investors to a great extent, the industrial policies of 1984onwards caught hold of the sinking vessel of the economy of Pakistan. After the May 1998 nuclear achievements during the Sharrif Period, economic sanctions weakened the recovery in this sector. Factors like economic sanctions, side effects of the measures taken by the government to minimize the adverse effects of the sanctions, decline in domestic and foreign investment due to uncertain economic environment and lower demand for Pakistan exports caused by global economic recession, adversely effected the growth of industrial sector. Now the present Military government has assumed power with the majority concert and showing their keen interest in economic development. They have put economic revival as their first priority, therefore we should hope for better future. Some of the pessimists, with reference to the question of industrial development in Pakistan, are of opinion that no industrial development has taken place in Pakistan. These people are those who are habitual to see the dark aspect only. Quite possible that the industrial growth and development has not been as it should have been during 52 years. To decide upon whether industrial development has been satisfactory, we will have to consider the industrial structure that came to the lot of Pakistan in 1947. At the time of its emergence, only 34 small industrial units came to the lot of Pakistan with 26400 workers.

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Industrial Policies & Developments Fiscal Year 2000 - 2006

In 1949-50, the industrial share to the total GNP of Pakistan was only 7%5. After 1947, the areas, which fell in Pakistan, were merely raw material producing areas, which were providing the raw materials to those areas, which kept intact with India after the partition. East Pakistan (Now Bangladesh) was supplying jute to the factories of West Bengal because of having not a single jute mill. Punjab and Sindh were catering the needs for cotton for the textile mills of Ahmadabad, Banaras and Baroda. This in even distribution and development of industries even prior to the division of sub-continent took place because British rulers were having soft corner for Hindus and ill feelings for Muslims. After creation of Pakistan, when industrial assets were divided, Pakistan received the industrial units included cotton jinning, sugar, ice and rice husking units. The people were not industrial minded therefore, there was no supply of managerial peoples and entrepreneurs. In the undivided India, the owners of these units were Hindus, so after partition when they left for India, these units were either closed or merged. In this report, we will analyze economic development which has take place in Pakistan since 2000 AD to present. We shall also compare the necessary figures era wise so that the growth can be see in the more realistic and comparative manner.

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Industrial Policies & Developments Fiscal Year 2000 - 2006

2. ECONOMIC BACKGROUND
The process of evaluating the performance of a country over a period of more than five decades is both rigorous and difficult. However, if one wants to look into the matter, one must be able to view the history of economy as and when it occurred combined with the forces that lead to such a history.

2.1 Brief Economic History

Pakistan is a developing country with the world's sixth-largest population, and an economic growth rate that has been consistently positive since a 1951 recession. At purchasing power parity, Pakistan GDP in 2005 was estimated at approximately $393.4 billion, larger than that of Saudi Arabia, but slightly smaller than that of the Philippines. During much of its history, underdevelopment and poverty in parts of Pakistan - as well as fiscal mismanagement obscured the potential of a country with the resources and entrepreneurial skill to support rapid economic growth. However, the economy averaged an impressive growth rate of 6% per year during the 1980s and early 1990s. Throughout the Eighties, Pakistan was the third largest recipient of US developmental aid after Israel and Egypt. In the twentieth century overall, its economic growth rate was better than the world average, but imprudent policies led to a slowdown in the late 1990s. Since then, the Pakistani government has instituted wide-ranging reforms, and economic growth has accelerated in the current century. Pakistan's economic outlook has started to show positive signs and its manufacturing and financial services sectors have experienced rapid expansion. There has been a great improvement in its foreign exchange position and a rapid growth in hard currency reserves as a result of its current account surplus. This is a chart of trend of gross domestic product of Pakistan at market prices estimated by the International Monetary Fund with figures in millions of Pakistani Rupees
7000000 6000000 5000000 4000000 3000000 2000000 1000000 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

GDP (Millions of Rupees)

(Figure 2.a)

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Industrial Policies & Developments Fiscal Year 2000 - 2006

Industrial-sector growth, including manufacturing, was also above average. In the late 1960s, Pakistan was seen as a model of economic development around the world, and there was much praise for the way its economy was progressing. Later, economic mismanagement in general and fiscally imprudent economic policies in particular, caused a large increase in the country's public debt and led to slower growth in the 1990s. Two wars with India in 1965 and 1971 adversely affected economic growth in particular, the latter war brought the economy close to recession, although economic rebounded sharply until the nationalizations of the mid-1970s.

2.1 Musharaf Regime 2000 to 2006:

Pakistan's economic outlook has brightened in recent years in conjunction with rapid economic growth and a dramatic improvement in its foreign exchange position as a result of its current account surplus and a consequent rapid growth in hard currency reserves. In the last decade of the twentieth century, Pakistan had experienced severe fiscal imbalances its debt had grown rapidly during the 1990s. Although the country had been receiving IMF assistance, the government had difficulty meeting the conditionality of the IMF program, which was suspended in July 1999 and resumed later during the administration of Pervez Musharraf. Having improved its finances, Pakistan's government announced in 2004 that it would no longer require IMF assistance, and the assistance program ended in that year. The administration of President Pervez Musharraf sought and received debt relief in 2001 from international lenders, reducing its external debt from $32 billion to a discounted present value less than half of that. The government used Pakistan's surplus to prepay expensive debt and replace it with commercial debt, which it has been able to obtain at low interest rates as a result of its improved credit rating. Musharraf's economic agenda continues to include measures to widen the tax net, privatize public sector assets, and improve its balance of trade. Pakistan has made governance reforms, privatization, and deregulation the cornerstones of its economic revival.
7000000 6000000 5000000 4000000 3000000 2000000 1000000 0 200001 2001- 2002-3 200302 04 20042005 1985 1990 1995 2000 2005

GDP (Millions of Rupees)

Term Paper Analysis of Pakistan Industries Fall 2006

Industrial Policies & Developments Fiscal Year 2000 - 2006

Although it received a positive endorsement from international financial institutions such as the World Bank, the International Monetary Fund and the Asian Development Bank, as well as improved credit ratings from Standard & Poor's and Moody's, Pakistan has experienced a costly dearth of foreign direct investment. Pakistan's Prime Minister, Shaukat Aziz, has also been credited with Pakistan's economic turnaround Pakistan's current account surplus had put upward pressure on the Pakistani rupee, which rose from 64 rupees per dollar to 57 rupees per dollar. The State Bank of Pakistan (the central bank) stabilized the rise by lowering interest rates and buying dollars. After short-term Pakistani T-bond rates fell below 2%, with government borrowing having declined, banks greatly expanded their lending to businesses and consumers. Construction activity, sales of durable goods such as trucks and automobiles, and housing purchases have all jumped to record levels. Private sector credit expanded by 28.5% in 2003, and continues to expand despite monetary restraints the SBP imposed interestrate increases to moderate money supply and prevent "overheating". Despite rapid growth in domestic automobile manufacturing, imports have also risen to meet the increased demand. Major automakers, such as BMW, Toyota, and Honda have invested in manufacturing facilities in the country. Pakistan's nominal gross domestic product (GDP) in 1997 was US$ 75.3 billion. Five years later in 2002, the country's nominal GDP came down to US$ 71.5 billion. During this five-year period, the real GDP grew by a mere 3.0 per cent on an average. Pakistan government's debt was 82 per cent of its GDP in 2002. Over one-third of the government's revenue was being used up in making interest payments on the national debt. The near stagnant economy suddenly started showing miraculous growth in 2002 after lifting of economic sanctions imposed after Pakistan's 1998 nuclear tests . The economy grew at 5.1 per cent in 2003, 6.4 per cent in 2004 and 7.0 per cent in 2005. The US$ 72 billions economy of 2002 has swelled into a US$ 108 billion economy in 2005. During 1997-2002 Pakistan's average export growth has been 1.2 per cent per year and increased to 13 per cent per year during 2003-05. Pakistan's debt as a percentage of the GDP came down to 59 per cent in 2005 from 82 per cent in 2002. Pakistan government's interest payment as a percentage of revenue collection came down to 23 per cent in 2005 as compared to 35 per cent in 2002. According to the Asian Development Bank, the first half of FY2006 was marked by a slowdown in both industry and agriculture in Pakistan. Output of cotton declined by an estimated 10.9% from an all-time high of 14.6 million bales harvested in FY2005. Production of sugarcane, another major summer crop, is also estimated lower than last year. The growth of large-scale manufacturing slowed to 8.7% in the first quarter of FY2006 from 24.9% in the same period of last year, primarily due to capacity constraints and the high-base effect.
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Industrial Policies & Developments Fiscal Year 2000 - 2006

Among individual industries in the first quarter, growth of textiles tumbled to 7.2% from 29.6% year on year. Automobile assembly and electronics, which have shown the fastest expansion among sub-sectors in the last 2-3 years, also decelerated. Inflation accelerated in FY2005 after five years of price stability. Annual inflation, based on the CPI, more than doubled to 9.3% from 4.6 per cent, mainly because of higher food prices and rising house rents. Due to a sharp increase in domestic oil prices, transport costs also jumped. Core (nonfood, non-oil) inflation also doubled, from 3.7% to 7.4%. The GDP in the last seven years had almost doubled and had expanded to $130 billion and that the per capita income had also increased to $847 in 2006.

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Industrial Policies & Developments Fiscal Year 2000 - 2006

3. INUSTRIAL POLICIES 2000 - 2006

To evaluate the economic performance of a nation, one has to first have a good look at the industrial policies that has been made from time to time. These policies give a direction to the industries for their development while also focusing on the future of these industries. The economy of Pakistan, since 2000 AD, has seen shifts in the industrial policies any times. These changes were aimed to be made for the betterment of the industrial sector, but failures had also been made a part of such development. The industrial policies that Pakistan economy has been subjected to since 2000 AD is described below, on a year wise basis:

3.1) 2000 2001 AD Industrial Policy

To make financial help from International Monetary Fund (IMF), Pakistan had to restructure its industrial policies in 2000, so as to impress the IMF Conditionality. Some of the main policies of the time were. 1. Economic targets For the fiscal year 2000 2001, the governemt set the following targets. This being the first year of the Musharaf government, the target were set to impress the international community for a positive support to the 5th military regime of Pakistan. (a) Real GDP growth of at least 4.5 percent; (b) Average annual CPI inflation of about 6 percent, (c) Increment of official FOREX reserves to US$1.74 billion, (about 7.3 weeks of imports of goods) 2. Sustainable Growth: The growth momentum will be sustained by a pick-up in manufacturing growth, expecting the textile sector to remain high with favorable domestic supply and external demand conditions. Moreover, strengthened confidence should lead to a recovery in private investment. Inflation is expected to pick-up with the pass through of exchange rate and petroleum and gas price adjustments and the carry over effects of structural price increases (fuel, wheat issue price, and medicines). The external current account deficit is expected to remain at about 1.6 percent of GDP in 2000/01 3. Exchange Rate Objectives: A competitive, flexible, and market-based exchange rate will be highly important to achieve the external sector objectives. With the removal of the unofficial trading
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bands in the inter-bank market in July 2000, the inter-bank exchange rate of the Pakistan Rupee (PKR) against the U.S. Dollar (USD) depreciated by 12 % between end-May 2000 and October 25, 2000. Henceforth, the exchange value of the PKR will be determined by market forces. 4. Net Operational Revenue Complete financial performance of the seven large public sector enterprises (determined by net operational revenue including interest charges) is predictable the same for the coming year at about 0.8 % of GDP. With the exception of Pakistan Railways and Karachi Electricity Supply Corporation (KESC), all public sector enterprises are expected to remain profitable. 5. Restructuring of Public Enterprise The initiative to streamline, restructure, and corporatize public enterprises is in the process to meet at least the following objectives: To reduce the burden that enterprises place on budgetary resources & complicate budget execution, (b) To enhance their revenue potential of public sector enterprises. In a much wider perspective, the program also aims to improve the efficiency and services of public sector enterprises and prepare some of these enterprise for the process of Privatization.. 6. Privatization Schedule A precise time table has been drawn up by the Privatization Commission of Pakistan to head away with the privatization of banks and enterprises in gas, petroleum, power and the industrial sectors of the economy. Enterprises and financial institutions will be sold by holding of competitive bidding and through their listings of stock exchanges. 7. Export Financing Scheme The scope of the EFS has been narrowed considerably over the past year with the reduction in the list of items that are eligible to receive financing through the scheme. In particular, exports of yarn and low count fabrics ceased to be eligible for financing under the EFS from end-1999, and exports of grey cloth are presently under a transitional arrangement by which financing under the EFS will be available at a rate of 10% (compared to 8% for other eligible exports). The subsidy element of the EFS has narrowed considerably over the past two years as lending interest rates have declined. To avoid any widening of the subsidy in the near term, the EFS interest rate will be raised in line with developments in the average 6month Treasury bill yield during the previous quarter, starting from end-2000. (a)

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8. Trade Liberalization Countless measures have been underway in recent months to liberalize trade. Effective tariff rates, which were in excess of the maximum tariff of 35 %, have now been reduced to no more than 35%.

3.2) 2002 AD Industrial Policy

With the overall objective of further impressing the international donor agencies to pourin financial aid to Pakistan, the government of Pervaiz Musharaf continued with the objective of 2000 2001 AD Industrial Policies, adding some new strategies to the new years industrial policies. Musharraf's economic agenda since 2002 included measures to widen the tax net, privatize public sector assets, and improve its balance of trade. Pakistan made governance reforms, privatization, and deregulation the cornerstones of its economic revival. 1. With the privatization of public utilities and telecommunications took place, Pakistan aggressively cut tariffs and assisted exports by improving ports, roads, electricity supplies and irrigation projects. Islamabad doubled development spending from about 2% of GDP in the 1990s 2. International textile trade was liberalized to boost up Pakistani textile exports 3. USD/PKR exchange rate was Rs.59.7238/-, depreciating from Rs.61.9272/- in 2001. 4. The privatization process, beginning in the early 1990s, has gained momentum. Most of the banking system has now been privately owned, and the oil sector targeted to be the next big privatization operation. 5. Government also adopted Deregulation steps over the few preceding years to provide ample and favorable chances for investment, both local and foreign. 6. Continuity of economic policies 7. Improved governance and management of public funds. 8. Steady and sustainable improvement in the Economic fundamentals. 9. Reduction in tariff of raw material to lower cost and increase the competitiveness of local manufacturers.

3.3) 2003 - 2004 AD Industrial Policy

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With the continuation of the above mentioned policies of the 2002 AD, the economic instructors of the country made a new turn towards the policies. As indicated below, the new policies for 2003 2004 made more emphasis on the people and the small-business units rather than the larger corporations: 1. Export financing scheme All the scheduled banks are to provide credit facilities to exporters under Export Finance Scheme (EFS). As State Bank of Pakistan provides refinancing facility to banks, it replenishes the liquidity of the banking system. Since EFS is a marketdriven product, it is modified whenever there is a need to do so in order to facilitate the end users. Some of the recent modifications include the Reduction in documentation requirements, Greater role for commercial banks reengineering the role of SBP and a revised more simpler procedure for refund of fines under EFS. 2. Small-Medium Enterprise Sector Realizing the importance and potential of SME sector, State Bank of Pakistan has developed draft Prudential Regulations after extensive consultation and feedback from SME Bank, SMEDA and PBA. This new set of Prudential Regulation was to primarily focus on a mix of asset backed as well as cash flow based lending. Financial Institutions are also being encouraged to play a proactive role, work closely with management of SMEs and act as partners (in advisory capacity) rather than just as lenders. It is expected that introduction of new set of Prudential Regulations for SMEs within 2005 would result in a reasonable increase in financing to SMEs and play a pivotal role towards development of this sector in Pakistan. 3. Consumer financing Consumer financing has strong forward and backward linkages with the industrial and trading activities in the country. In order to promote such financing, banks have been allowed to provide facilities for purchase of consumer durables. The scope of consumer financing will also be broadened to include all consumer durables. The positive experience of auto financing supports the expectations that the middle class in the country would benefit considerably from these policies by having greater access to funds for acquisition of consumer durables through banks 4. House Financing With a burgeoning population, the housing market in Pakistan has always had great potential. One of the constraints in its growth was the non-availability of housing finance. State Bank will address this issue by promoting the concept of Housing Finance. A special Housing Finance Window will be created for refinancing to banks at concessional rates while the commercial banks are being encouraged to introduce

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new housing finance products. Activity on this front has already picked up and almost all the major commercial banks in Pakistan have launched related products. This initiative would provide continued support to the national economy, as there are nearly forty industries, which are likely to be positively affected by greater demand for related inputs and allied services. 5. Low cost and ample availability of credit to stimulate demand and investment 6. Both public and private sector are playing their due roles in accelerating the pace of economic development in the country.

3.4) 2005 AD Industrial Policy

1. Initiatives of High Industrialization The Ministry formed a core group of economists, businessmen and industrialists that got together and developed an industrialization strategy for rapid industrial growth in Pakistan. A coordinated approach to industrial strategy will work towards realizing the following core objectives: a) Ensure that investment is preferred over consumption in the pricing and resource allocation decisions regarding energy, transport interest and exchange rate policy, b) Make export orientation a top priority of industry, and (c) Establish a regulatory framework that facilitates SME growth. 2. Tariff rationalization 3. Increase the share of manufacturing in the GDP. A strategic framework for industrialization was made that rests on reducing the cost of doing business to attract private investment in industry. Recommendations spanning macroeconomic management, taxes and regulations, capital and land markets, contract enforcement, trade facilitation, securing industrys energy, transportation and other infrastructure needs and improving the quality of industrial work force were given.

4. Developing Export Processing Zones. The International Labor Organization has defined EPZs as "industrial zones with special incentives set up to attract foreign investors, in which imported materials undergo some degree of processing before being re-exported". EPZs have evolved from initial assembly and simple processing activities to include high tech and science parks, finance zones, logistics centers and even tourist resorts.

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Export Processing Zone Authority of Pakistan, currently has seven Export Processing Zones,

1) Karachi Export Processing Zone 2) Sialkot Export Processing Zone 3) Risalpur Export Processing Zone 4) Saindak Export Processing Zone 5) Reko Dek Export Processing Zone 6) Duddar Export Processing Zone 7) Gujranwala Export Processing Zone EPZA is presently working on expansion of Karachi Export Processing Zone (KEPZ) Phase II. 5. Intensification of Deletion Programme. The policy formulation blending of indigenous fuel ethanol programme was initiated. Two meetings on this issue were already held in this Ministry at Minister and Secretarys level. There was a plan to blend the 10% ethanol in petrol at initial stage; however, it will be increased with the passage of time. A task force was constitute comprising the representative of Ministry of Petroleum, National Resources, Ministry of Environment, representative of Oil Companies Advisory Committee, representative of Oil Refineries and the representative of Pakistan Sugar Mills Association to finalize the recommendations as soon as possible to blend the 10% ethanol with petrol. 6. Capacity expansion / product diversification. Pakistan Industrial Development Cooperation (PIDC) has contributed its share of Rs 50 million/- as its equity in the shareholding of Textile City being set up on an area of 1250 acres land in the Industrial Zone of Port Qasim, Karachi. 7. Provision of consumer goods at affordable prices: During the year 2004-05 the utility store Corporation added 19 new Utility Stores to its network, increasing the number of stores from 342 to 361 93 on 30th June 2005, an increase of 6%. 8. Operational performance of public corporations/ units. Overall net sale of State Engineering Corporation and its subsidiaries Units recorded RS. 3.6 billion during the year 2004-2005 as against Rs.2.3 billion in the preceding year 2003-04.

3.5) 2006 AD Industrial Policy

Ministry of Industries, Production and Special Initiatives have prepared the following policy measures for boosting up Industrialization in the country with the ultimate purpose of enhancing export and earning foreign exchange:

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1. Tariff Based System (TBS) for Automotive Sector. Government of Pakistan has decided to launch a Trim Compliant System to replace the existing deletion programme. Accordingly, Engineering Development Board initiated work and in a span of less than two years, EDB received various proposals on TBS from Pakistan Automotive Manufacturers Association (PAMA) with respect of cars, trucks, buses etc. After intensive and prolonged meetings/ discussions with the stakeholders, a complete system on TBS was finalized and a consolidated list was presented to CBR and formal announcement was made by the Finance Minister in the Budget Speech of 2006-07. 2. Registration/Revision/Updating of Locally Manufactured Goods (CGOI0/ 2003) Engineering Development Board initiated an exercise to revise / update the list of locally manufactured goods (CGO-10/2003) and their producers. EDB has also made a presentation to Central Board of Revenue regarding the web design and exercise taken to update /revision of the CGO. Recently new list of 206 companies with 799 products has been prepared and forwarded to CBR for inclusion in CGO. 3. Export Development Initiatives In line with the Mission of EDB, following Committees were constituted in EDB to look into the possibilities of exports from Pakistan: A. Refrigerators Committee for exports B. Motorcycle Committee for exports C. Energy Meter Committee for export D. Auto-parts Committee for exports. 4. Tariff Rationalization-2006-07 In continuation of the subject exercise during the last five years, EDB carried out tariff rationalization exercise for the Budget 2006-07. In this regard, 18 Subcommittees were constituted with Conveners from the Private Sector and various meetings were held with stakeholders as well as with CBR and Ministry of Commerce. 5. Trade Policy 2006-07 Tariff related recommendations will be prepared in close interaction with stakeholders. The recommendations will ensure that the stakeholders get the best value on their investments to the engineering sector in the country. 6. Policy Formulation - Steel Sector The basic work on the development of the Steel Policy has also been initiated and formalities are being completed to acquire the services of a consultant to conduct a market study of the Steel Sector. The proposal/recommendations of the consultant will form the basis for the Steel Policy and formal work on the development of the

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proposed Steel Policy will be initiated after receiving the consultants report on the market study. Selection of steel sector consultant is in process. 7. Policy Formulation - Auto Sector. Minister for Industries, Production and Special Initiatives has directed EDB to formulate Automotive Policy of the country to expand capacities and to provide a conductive environment to auto sector. In this regard a draft policy document was circulated to all stakeholders and a meeting in this regard was held in EDB in May 2006 in which a sub-committee was constituted to review the draft policy proposal. At present revised policy is under consideration of MOIP and various forums of the Government. 8. Modernization of Trucking and Trailer Sector. In pursuit of Government of Pakistan Policy of opening up of the national trade corridors, EDB was mandated to work out the road freight strategy with special focus on modernization of Trucking/Trailer sector to cater to the growing trade needs of the country as well as integration with the regional markets. Accordingly EDB has put up a strategy paper with various recommendations to modernize the present trucking fleet, replacement of the Bedford truck with the fuelefficient long haulage truck etc. 9. Study of the Automotive Vendors In view of the GOP efforts to internationalize the auto parts and accessories sector for its global positioning, a thorough and critical analysis of the current status and future potential of the Pakistan auto vendor industry is required. EDB has initiated a mapping study to take stock of the present economic state of the affairs, technology, production capacities, demand and supply, skill levels, regulatory and legislative environment in which vendor industry is operating. The study will also examine the key drivers of chains such as competition; supply chain management and value addition for enhancing export competitiveness of the sector. The proposed study is expected to be carried out by German Consultants M/S Senior Experten Services (SES). 10. Activities Related to SAFTA and Free Trade/ Agreements EDB remained actively involved in the negotiations of various South Asia Free Trade Area (SAFTA) and Free Trade Agreements (FTAs).

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Industrial Policies & Developments Fiscal Year 2000 - 2006

4. INUSTRIAL DEVELOPMENTS 2000 - 2006

. In the wake of the policy of privatization and deregulation most of the production units of PIDC have been privatized. Its roll has now been changed to that of a facilitator. In FY 2002-03, real growth in manufacturing was 7.7%. In the twelve months ending 30 June 2004, large-scale manufacturing grew by more than 18% compared to the previous twelve-month period. The textile and garment industry's share in the economy along with its contribution to exports, employment, foreign-exchange earnings, investment and value added make it Pakistans single largest manufacturing sector. The industry is comprised of 453 textile mills: 50 integrated units; and 403 spinning units, with 9.33 million spindles and 148,000 rotors, The capacity utilization was 83% for spindles and 47% for rotors during 2003.

4.1) Pakistan Steel Mills

During the year 2005-2006, Pakistan Steel operated on an average capacity of 60%, primarily on account of break-down of coke oven battery. The overall performance is as under:-

LSM pulled down the aggregate industrial growth during FY06. Growth in LSM production dropped from 15.6 percent in FY05 to 9.0 percent5 (see Figure 2.3) in FY06 and, as a result, industrial growth dropped to 5.9 percent during FY06, substantially lower than both, the 9.5 percent target for the year, and the 11.4 percent growth achieved in the preceding year.

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The deceleration in LSM growth is attributable to a number of factors, including the impact of the relatively poor cotton harvest, capacity constraints being faced by some major industries, as well as a small slowdown in demand amidst rising interest rates. Most of the remaining industrial sub-sectors also witnessed below target performance. Growth in small scale manufacturing stood at 9.3 percent against 7.5 percent, which indicates revision of data for the sector to include the contribution of cotton products, which constitutes 14 percent of small-scale production. Mining & quarrying sub-sector also witnessed deceleration, registering 3.8 percent growth, which is lower than the targeted 5.2 percent as well as impressive growth of 9.6 percent seen in FY05. This could be attributed to fall in the production of crude oil during FY06. Construction sector also witnessed deceleration, registering 9.2 percent growth which is significantly lower than the previous years 18.6 percent, although still very high keeping in view the base impact, and as compared to the targeted 7.5 percent. In fact, the construction sector is the only sub sector in industry that exhibited an above target performance. This impressive growth could be attributed to the boom in the real estate market, significant increase in Public Sector Development Program (PSDP), reconstruction activities in northern areas and higher FDI in the sector. Electricity & gas distribution sector witnessed a negative growth for FY06, which points towards a very serious issue of huge operating expenses in the sector in the form of increased input costs of gas and oil, and large line losses being incurred due to the security situation in Balochistan. In contrast with the commodity-producing sector, the services sector maintained its growth momentum during FY06, registering an impressive 8.8 percent growth, which is not only much higher than the 6.8 percent annual target, but also higher than the high growth of 8 percent seen in FY05 (see Figure 2.4). The provisional numbers for FY06 indicate that industrial growth17 stood at 5.9 percent YoY, substantially lower than the 11.4 percent YoY growth recorded during the preceding year. As in the previous year, most of the sub sectors of industry witnessed a deceleration in growth, but the deceleration in FY06 was much sharper (see Table).

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Growth of Industrial Value Added Economic Survey of Pakistan 2005 - 06 FY 03 FY 04 FY 05 FY 06 Manufacturing 6.9 % 14.0 % 12.6 % 8.6 % Large Scale 7.2 % 18.1 % 15.6 % 9.0 % Small & Household 7.5 % 7.5 % 7.5 % 9.3 % Slaughtering 2.9 % 2.4 % 2.4 % 2.4 % Mining & Quarrying 6.6 % 15.6 % 9.6 % 3.8 % Construction 4.0 % -10.7 % 18.6 % 9.2 % Electricity & Gas -11.7 % 56.8 % 3.5 % -8.4 % Industry 4.2 % 16.3 % 11.4 % 5.9 % However, the industrial growth estimate based on full year data is expected to be a little higher than the provisional number. In particular, available information suggests that the growth in large-scale manufacturing (LSM), which contributes about half of industrial value-addition, could reach 10.7 %. While this would still be lower than the 13.0 percent annual growth target for the year, it would nonetheless significantly boost overall real GDP growth, bringing it very close to the 7.0 percent annual target.

4.2) Large-Scale Manufacturing

The growth in large-scale manufacturing remained below the annual target during FY06, for the first time during the last four years (see Figure 2.36). The 13.0 percent target for FY06 was already lower than the 15.6 percent growth recorded in FY05 in recognition of: (1) the capacity constraints facing by some industries; (2) the impact of an expected rise in international oil prices, and; (3) continued monetary tightening. In fact, FY06 growth targets for a number of industries, having an aggregate weight of 41.5 percent in total LSM, were either negative or zero (see Table 2.15, Figure 2.37).

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Unfortunately, the rise in oil prices proved to be higher than anticipated, negatively impacting the growth in value-addition by the petroleum industry, while growth in two other key industries, textiles and sugar, was badly hit by relatively poor cotton and sugarcane harvests respectively. Given that these three sub-groups account for 50.1 percent of LSM, and that these performed well below expectations, the deceleration in LSM growth to 10.7 percent YoY in FY06 is not surprising.

In fact, it was better-than-anticipated performance of some of the smaller sectors that offset part of the drag from the poor performance of the sugar, textiles and petroleum product industries. These industries included the food, beverage & tobacco sub-sector industries (excluding sugar), electronics, automobiles and the leather, paper and board, chemicals and engineering industries.

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For example, within the food sector, tea blended is the only industry that observed acceleration in growth during the current fiscal year, with production rising by 5.1 percent as compared with 2.1 percent growth in FY05. The reduction in duty on tea import is probably the main factor for the growth in tea industry despite the rise in international tea prices during FY06. The reduction in the import duty on tea was probably an important factor in discouraging smuggling, thereby helping the growth of the formal sector. The cooking oil and vegetable ghee industries (with a 39 percent share in the food group) also registered reasonable growth rates of 13.4 percent and 9.4 percent respectively during FY06 even over the high growths of 19.1 percent and 18.0 percent respectively in FY05. The main reasons for sustained performance by these two industries included 1. Increased exports to Afghanistan 2. High domestic prices amidst relatively subdued international prices of edible oil and 3. Supportive measures taken by the government for vegetable ghee and cooking oil sub-sector. The strongest performance in the food group, however, was by the beverages industry. Although the growth decelerated in FY06, it was nonetheless quite strong at 34.5 percent compared with 37.0 percent growth in FY05. This robust increase in production was underpinned by continuing strong demand and a consequent increase in the pricing power of the industry. Indeed, average prices of beverages saw an increase of 14.2 percent on YoY during FY06. In addition to the strong demand, the rise in the production figures probably also included
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Improvement in reporting of production data, and A shrinking role of the small informal sector producers (mainly due to their inability to compete amidst increasing prices of inputs such as sugar).

The relative decline in FY06 production and higher international prices prompted sugar mills to hold back sugar sales in order to obtain better prices. This is evident in the fact that by June 30, 2006, the stocks outstanding with mills was 34.3 percent of the annual production. To put this in perspective, during the comparable time in FY05, sugar mills had sold their entire stock, even though demand had been lower, and production had been higher that year (see Figure 2.38). Another LSM sub-group that performed well during FY06 was the leather industry, which also saw acceleration in growth during FY06. During FY06 the output of leather sub-group rose by 5.8 percent as against a decline of 5.3 percent in last fiscal year. This acceleration was added by all three components of the leather industry (upper leather, sole leather and leather foot wear). The 33.6 percent rise in leather and leather products export was seen during FY06, appears to reflect the number of measures taken by the government24 to facilitate the domestic leather industry. The textile industry recorded a lower growth of 4.3 percent during FY06 as against a strong growth of 27.1 percent in the preceding year. This is partially due to high base effect smaller cotton crop and disruption in gas supply particularly in Dec 2005 captive power plants (CPP) in the areas of Punjab where various textiles units are located. This weak performance was the major factor for a fall in the contribution of textiles sub-sector in LSM sector to 13.7 percent in FY06 from 39.1 percent during FY05 (see Figure 2.40). Within the textiles sector, production of the cotton ginning industry fell by 12.3 percent in FY06 as compared with the 45.3 percent robust growth during FY05 (see Table 2.16).

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Encouragingly however, textile exports continued to perform well in the current fiscal year with 16.1 percent rise as against a modest 5.7 percent growth in the previous year. It is interesting to note that this growth has been achieved despite rising financial cost, high energy prices, and higher prices of cotton relative to FY05, a fall in exports prices amidst intense competition, loss of preferential access and disturbances in gas supply. This raises hopes that with higher cotton output, increase in investment (both foreign as well as domestic investment), sufficient credit availability and expansion in capacity utilization, the performance of the sector will improve in the coming year. However, competition pressures remain strong, as evident in the deceleration in growth of exports in recent months.

4.3) Infrastructure Industries Index

The Infrastructure Industries Index measures the performance of infrastructure industries, which consists of seven industries30 having a 26.2 percent weight in industrial sector of Pakistan. The index is composed of energy related industries (83.5 percent share) and construction allied industries (16.5 percent share) (see Figure 2.45B), which is a leading indicator of the performance of industrial sector. The index recorded 6.2 percent growth in FY06 as against 11.3 percent growth of FY05. The production of electricity and coal accelerated to 12.8 percent and 13.7 percent during FY06 compared with 10.3 and 2.6 percent growth respectively last year. The positive impact of these two industries was offset by the deceleration in the production of natural gas, cement and petroleum products and fall in the production of basic metal and crude oil production.

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