KEY ISSUES IN INDUSTRY

IN PAKISTAN.

 JAMEEL AHMED
 BBA 4TH SEMESTER
 ROLL NO: BBA-12
 SUBJECT: ANALYSIS OF PAKISTAN ECONOMY.
 TEACHER: MA’AM KANIZ FATIMA
 DATE: 25/03/2021
 1950s
 Phenomenal growth witnessed in the industrial sector (large
scale manufacturing):
 1950-1954 (23.6%)
 1954-1958 (13.6%)

Major reasons:
I. Started from a non-existent industrial base.
II. Helpful Government policies.
III. Import substitution based growth.
IV. Main focus on consumer goods.
V. High profit margins.
VI. Protection given to industry through high tariff walls.
VII. Availability of ready markets.
VIII. Korean war provided the much needed investment capital.
IX. Industrialization efforts were increased by PIDC (Pakistan industrial
development corporation).
X. Availability of industrial credit through financial institutions.
 1960s
 Large scale manufacturing continued to grow the 1960s:
 1958-1964 (13.3%)
 1965-1970 (10.4%)
Major reasons:
I. Continuity of economic policies.
II. Trade liberalization policies including Bonus Voucher Scheme, free list (4-50
items), OGL, etc.
III. Witnessing an increase in foreign aid ( from 2.5% of GDP in the 1950s to 7% of
GDP in the 1960s)
IV. An impressive growth rates achieved in all sectors of the economy including
agriculture.
 1970s
 A significant reduction took place in large-scale manufacturing due
to bad management ( nationalization, massive devaluation, etc.)
and bad luck factors i.e. disintegration of the country, floods, crop
failure, pest attacks, etc.)

 The large scale manufacturing (1971-77) recorded a growth: 1.7%

 Increased growth of small-scale manufacturing (1970-19770) :
7.3%
 1980s
 Comeback to very impressive growth in manufacturing
and other sectors.
 1977-1986: manufacturing GDP grew at an annual average growth rate of 9.5%
 Investment in medium and large-scale industry grew at an average rate of 18.2%
 Private sector investment expanded at 15.6%
Main reasons:
I. Continuity of economic policies for 11 years.
II. Heavy industrial projects established during the 1970s.
III. Revival of confidence of the private sector ( privatization, incentives, etc.)
IV. Increase in remittances equaling $3 billions (1982-83)
V. Increased in foreign aid/reserve inflows as a result of Pakistan’s role in the
Afghan war.
VI. An increase in the average share of investment in GDP, which rose to 20% in
1977.
VII. Increased public sector investment ( averaging 11.6% of the GDP)
Emergence of small-scale sector.
 The small-scale sector experiencing a significant growth rates
( annual average growth rates)
 1950-1962 : 2.3%
 1963-1970 : 2.9%
 1971-1977 : 7.3%
 1977-1989 : 8.4%
 1990s- onwards : 5.3%

I. Small-scale sector became more dynamic than large-scale sector

II. A shift took place from large-scale sector to small-scale sector particularly in
textiles
III. The manufacturing growth has experienced a consistent rise in the last 5
decades, though there have been fluctuations.
Small-scale manufacturing sector
 Small-scale sector in Pakistan is an informal sector, which is by far more:
 Dynamic
 Exhibiting significant growth rates in employment, output and contribution to
value added
 It has dominated employment in the construction, wholesale & retail trade,
hotels, transport, communication and storage industries in the urban areas.
 In 1972-73, the formal sector dominated urban employment in manufacturing
but by 1984-85, the informal sector began to dominate urban manufacturing.
 In the urban manufacturing sector, as many as 98% of manufacturing units
were in the small-scale unregistered units.
 In terms of urban manufacturing employment, 51.4% worked in the informal
sector while only 48.6% were in the formal sector.
EMERGENCE AND GROWTH OF
SMALL-SCALE SECTOR
 1961-65 : Mechanization of agriculture (Green Revolution)
 1967-70 : introduction of green revolution technologies
 In 1960: units producing small diesel engines and water pumps
hardly existed
 In 1961: in Daska ( near Sialkot) there were a few machine
shops.
 In 1965: there were more than 120 machine shops in Daska large
units employing 6000 labor force started producing small diesel
engines and water pumps
 In 1968: there were 20,000 power looms producing cloth in the
non-mill sector in the Punjab province.

contd.
Emergence and growth of small-scale
sector (Contd.)
 Demand for farm machinery resulted from the significant growth rate of
agriculture sector after the green revolution.
 Perhaps the single most important factor in the increase in the SSI growth rate in
the 1970s was ‘massive devaluation of 1972’ and ‘abandoning of multiple
exchange rate’, which led to a flourishing environment for SSI to grow.

 During Bhutto’s regime, the Government’s role in promoting the SSI

as:
I. Government credit to SSI increased by 122% between 1972-1974 which had
further increased in 1976.
II. Devaluation also helped in putting up industrial plants costing less than Rs.
200,000, to be freely imported against cash.
III. Due to lack of fear of nationalization, the private sector was more attracted
towards SSI.
IV. Another catalyst was the passing of the “cottage industries act of 1972”, after
which the textile sector was badly affected and led to fragmentation.
Issues affecting the small scale sector
(SSS)
1) The SSS (small enterprises and household units) appear to be expanding more
rapidly.
2) The SSS provides employment to the majority urban work force.
3) The SSS comprises of informal units (labor intensive).
4) Capital intensity in real terms is growing more rapidly in the formal sector.
5) The SSS does not have economies of scale.
6) The SSS also experience lack of availability of formal source of credit due to
lack of collateral, lengthy procedures and paper work involved in the formal
credit procedure.
7) The SSS also lacks product quality.
8) Being in the informal sector, the SSS also evades the tax net.
Finance for small-scale sector
 Financial market in Pakistan is shallow as firms rely on retained earnings to
finance their working capital and investment needs. A survey found that 57% of
new investment by SMEs and 67% of their working capital comes from retained
earnings.
 The SMEs are considered as riskier borrowers in the financial system.
 The loan disbursement procedures, high interest rates and collateral requirements
that raise the cost to access to credit for SMEs is utterly discouraging.
 Illiterate entrepreneur, who usually don’t maintain book keeping, business
accounts etc.
 Collateral precautionary measures, which the SMEs lack the necessary collateral.
 86% of the SMEs surveyed had not acquired a bank loan.
 All units were unregistered which technically restricted them from qualifying for
credit from the formal banking sector.
The textile industry and its crisis
 The textile sector holds a very important position in Pakistan’s economy in terms
of employment and value added, but especially in the contribution the industry
makes to exports.
 It has the highest manufacturing value added for any industry in the
manufacturing sector, contributing 26 percent. About one third of the entire
manufactured employment was in the textile sector.
 In terms of exports, approximately 30% of Pakistan’s total exports came from
cotton textiles in 1990/1, up from 20% in 1982/3.
 Cotton yarn’s contribution to exports increased from 10 to 18% between 1982
and 1990.
 Pakistan’s textile industry has lost its relatively more prominent position of the
1960s and 1970s, and today holds a little less than 2% of world market.
 According to a study by the institute of developing economics, the negative
productivity in the textile and garment sector is mainly the result of
fragmentation (the cottage industries act ) of the industry, shifting from large-
scale to smaller-scale units.
Efficiency in the textile sector
 Textile processing is a technology-oriented business which requires
capital-intensive technology, but most of Pakistan’s machinery in
this sector is more than fifteen years old and requires a major
overhaul to upgrade it to quality and modern standards.

 Pakistan’s exports have a low share of value-added goods, which

continues to increase. This means that while Pakistan has a higher
share in the low value-added segment of the market, its export
earnings will remain low unless the textile industry diversifies and
moves into the high value added, quality garments and made-ups
sector.
Failure of public sector
 Today, the conventional wisdom is that, as far as intervention by the
government is concerned, “less is better”. So, in many ways the existence of
public sector industries is itself in question, and with the increased pace of
privatization taking place in most countries, including Pakistan.
 One of the reasons why the privatization process is proceeding at such a pace is
that there is a strong belief that public sector enterprises are insufficient, costly
to run, poor performers and a major drain on the exchequer.
 The main expansion of public enterprises took place under the government of
Zulfiqar Ali Bhutto following his nationalization program in 1972.
 The role of public enterprises in 1960s and 1979s was mainly to supplement
and assist the private sector, which was considered to be the leading vehicle of
industrial development. The 1972 nationalization process reversed that trend,
with the public sector taking the lead.
 In the period 1972/77 the role of the public sector was considerably expanded,
and by 1977 the government was heavily involved in finance and insurance,
manufacturing, transportation and communication and energy. It had also
entered the construction, trade and commerce, mining, and agriculture sectors.
Failure of public sector (Cont’d.)
 The governments since 1991, have been trying to get rid of the public
enterprises in any ways and at any cost. One might have the impression that the
state was burdened by these loss-making, insufficient units and wanted to rid
itself of them as soon as possible and at any price.
 No doubt the public enterprises did very well in the Z.A.Bhutto’s and Zia’s early
era.
 Last but not the least, the dominant view in public policy circles, both
independent and government, is that the public sector is a major burden on the
exchequer, that the state-owned enterprises are always mismanaged, cesspools
of corruption, inefficient and loss-making and hence they should be privatized.
 It was hard for someone to give the actual performance of such enterprises,
especially in Pakistan, it does become a case for the defense of such institutions
and organizations, especially when public perception also supports such claims.
Failure of public sector (Cont’d.)
 The losses of SOEs have increased in recent years and are now estimated to be
worth 1.5% to 2% of the GDP. This is mainly due to poor governance,
mismanagement, mounting corruption, and inappropriate policies coupled with
flawed internal structures.
 ADB’s flagship annual economic publication 2012, highlights public sector
losses as one of the major factors impeding growth in the Pakistan.
 The annual losses at the SOE’s are attributed to a mix of inappropriate
governance, corruption, inefficiency, and flawed policy.
 For example:
 The losses of SOEs peaked in 2011 when their performance reached the lowest
ebb in Pakistan’s history, threatening the economic viability of the state.
Pakistan railways, PIA, Pakistan steel mills, Pakistan Agriculture Storage and
services corporation (PASSCO), and utility stores corporation continue
gobbling up additional funds, making no money of their own.
 The privatization process.
 A large-scale privatization effort was launched in November 1990 by Nawaz
Sharif government when the disinvestment and deregulation committee was
established to identify the enterprises to be privatized and to make
recommendations on how the process should take place.
 First, Benazir Bhutto’s government paid lip service to the concept and said that
it would privatize the state-owned sector, but no manufacturing industry was
targeted for disinvestment and not much in the form of privatization actually
took place.
 The reason that the government gave for the slow pace of privatization was ‘that
it wanted to conduct an exercise that was transparent, well-conceived, and
broad-based’.
 Most critics felt that the government was dragging its feet and lacked the
commitment and political will to carry the policy through.
 Establishment of Privatization Commission in January 1991, which was to
supervise the privatization process.
The privatization process ( Cont’d.)
 The mandate of the commission included the valuation of public enterprises that
were to be privatized, based on the assessments made by the independent
consultants, and the implementation of the bidding process and the supervision
of the transfer of the units to the private sector.
 In October 1991, government advertised all 105 industrial units for immediate
sale.
 Attempts were made to make the entire privatization procedure more
‘transparent’ and effective.
 One of the reasons for privatization has been the need to raise revenue.
 Privatization is being undertaken partly to offset declining budgetary revenue
and partly to compensate for government investment shortfalls.
 It was hoped that liberalizing the economy and opening it up to competitive
pressures will encourage private investment.
Steel mills privatization case.
 Pakistan Steel mills was put up for sale or privatization on 31st of march 2006.
 After 22 years of its full commercial operations in 1984, Pakistan’s only
integrated steel mills in the public sector.
 The steel mill was passed on to a consortium of foreign and local investors at
a price that is being called “peanuts” and a “no price at all” by employees
unions, stock brokers, and independent economists.
 One day before the bidding of Pakistan steel mills, market analysts were
valuating the worth of real estate only (4,546 acres of land on which various
units of steel mill are constructed) was estimated at Rs. 27 billion in march
2006. because there are many infrastructures other than the machinery of the
mills are built i.e. 110 km metaled road, 70 km railway track, a 165 MW
electric power generation station, a water treatment plant and a jetty.
 But on 31st march, all these assets were given to an investors’ consortium for
Rs. 21.68 billion ($362 million).
 An stock broker offered an immediate payment of Rs. 30 billion for Pakistan
mills.
Steel mills privatization case (cont’d).
 The consortium that won the bidding includes a Saudi group Twairqi, a Russian
group M. Magnitogorsk iron and steel works, Arif Habib and Siddique sons.
 The formal procedure was not followed in case of steel mills privatization,
usually the PM presides over the cabinet meeting on privatization and then the
privatization commission issues letter of approval only after the CCOP has
considered all the aspects of the successful bid.
 There is no report as to who was appointed as the financial consultants and who
carried out the valuation of the assets.
 The ‘mother industry’ if it comes under the control of a group that is alien, it is
fraught with all consequences.
 Different social, labor, political human rights and religious leaders expressed
their reservations on the privatization of steel mill in a session held by the
Labor Education Foundation. The speakers on the occasion pointed out that Rs.
300 billion worth concern had been handed over to the private sector parties at
a throw-away price of Rs. 21.75 billion. They claimed that under a pre-planned
conspiracy, it had handed over to some favorite parties.
Steel mills privatization case (cont’d).
 They wondered that auction, which the privatization commission had taken one
whole year to prepare for, lasted just 30 minutes.

 Quoting a statement of the PS finance director, they said “that the mills had a
cash and bank balance of Rs. 12 billion”. They also revealed that just one month
before the privatization, as many as 80 brand new vehicles were purchased for
the mills.

 They said that the PS was maintaining a production capacity of 98% and its
profit was on the increase every year. They questioned the justification for the
sale of the PS when the factory was functioning well, its workers making no
major demand and the mills paying over Rs. 9 billion per year tax.
 The energy crisis
 Energy crisis from 2008 onwards has affected the industrial sector in particular
and the economy overall.
 Estimates suggested that between 2-3 % of GDP was lost each year on account
of power shortages.
 While electricity is now a major component in the most economic activities,
and hence all economic activities have suffered.
 ADB reported in early April 2012, that the absence of energy was the main
constraint for economic growth, and suggested that better load-management
was required to minimize the commercial losses. ADB estimated that ‘losses
arising from power and gas shortages held down GDP growth by 3-4 % points
in FY 2011/12.
 Improved management of power resources could ameliorate predictability of
load-shedding to allow the private sector to better schedule work and minimize
costs.
 The energy crisis
 Abid Bukhari in his assesment argues, that the energy crisis is hitting the
industry at multiple levels: energy tariffs increases are forcing businesses with
low margins and those who are unable to generate their own power (i.e. SMEs)
close down; unannounced load-shedding and voltage fluctuations damage
machinery worth millions of dollars.
 Akmal Hussain summarizes the energy crisis in Pakistan into following three
facts:
 (1) 82% of total electricity production is now oil-based when oil prices are
increasing. Consequently, the average cost of electricity has become so high that
the government simply does not have the fiscal capacity to provide the subsidy
necessary to supply electricity at a price which most consumers can afford.
 (2) the 2nd problem is billions of rupees unpaid electricity bills by the provincial
governments, semi-autonomous corporations, and federal government
departments. The recovery of this shortfall prevents the government from paying
its dues to the independent power producers who are then forced to cut back
production.
 The 3rd problem is of theft (30%) and use of obsolete transmission technology.
 Issues of industrial sector in Pakistan.
 Some of the major problems that industrial sector in Pakistan is facing are given
below.
 Frequent power shortfall: for industries power is like blood running through the
veins of a living beings. As long as power is regularly supplied to industries, they
run smoothly and result in the increase of industrial output and ultimately increase
in the foreign exchange of a country. In Pakistan unfortunately energy crisis has
not only affected the life of an ordinary man but the very work and production of
industries.
 Government’s Policies: industrial sector growth depends upon government
policies. Unfortunately the government of Pakistan has yet not decided whether
her economy be industrial or agricultural in nature. Agriculture is a major source
of labor force in the country. Despite these facts the government is trying to take
the country towards industrialization. Due to this confusion the government is
unable to formulate flexible policies for the growth and development of industries
in the country.
Issues of industrial sector in Pakistan.
 Poor commercialization policy: most of our industrial goods do not make to
international markets. Poor commercialization policy is one of the major
reasons of this problem.
 Technical incapability: industrial sector of Pakistan is also facing the
problem of technical incapability. This means two things;
• Our industries lack the capability to manufacture some of the important
intermediate goods that are used for making final goods such as cars,
computers, railways etc.
• Our industries also lack the capability to bring new ideas (innovation) and
manufacture goods that world have never seen before.
 Lack of capital: industries in Pakistan also lack enough capital in the shape
of money that can be used to expand and developed the industry. Power
shortfall, more taxes and less production result in the fewer sales of goods
that causes capital insufficiency.
Issues of industrial sector in Pakistan.
 Political instability: political instability is a major problem of Pakistan which
has not only affected industrial production and growth but also many other
working bodies of the country. Due to political instability the government is
unable to implement its policies.
 Problems of industrial labors: though industrial labor class in Pakistan has
many problems and in some industries they have not even access to basic
rights but they are also a major cause of low industrial production. Labors in
some industries go on strikes frequently when their demands are not fulfilled.
Causes of problems of industrial sector
in Pakistan.
 Some of the major causes of the discussed problems are given below.

 Lack of political will: one of the major causes is the lack of political will of the
government and its ministers to take important steps for the development of
industrial sector in the country. This lack of political will is either due to
incompetency of the government or due to lack of interest.

 British biased policies: British government in India before partition due to their
biased behavior towards Muslims of the subcontinent intentionally avoided the
construction and development of in Muslims majority areas. Due to this reason
Pakistan after independence had only 34 industrial units out of 921 operating in the
United India. After independence Pakistan took a fresh start of the construction of
industrial sector in the country.
 Government incompetency: government inability to formulate vibrant policy and
to solve the problems faced by industrial sector of the country of time is a major
problem in itself. Most of the times government tests different policies which result
in the devastation of a sector.
Causes of problems of industrial sector in
Pakistan. (cont’d)
 Confused cabinet: government in Pakistan is also sometimes seemed
confused because of different interests of each member of the cabinet. Those
ministers whose families have agricultural background take more interests in the
development of agriculture sector and vice versa.

 Brain drain: the flow of learned and skilled people out of the country is
also a major problem that our industrial sector is facing. Due to brain drain our
industrial sector is facing technical incapability.
 THANK YOU FOR YOUR
ATTENTION, DO ASK IF YOU
HAVE ANY QUESTIONS IN
YOUR MINDS!