Chapter 1

Introduction

1.1 Introduction
Privatization—the sale of state-owned enterprise to the private sector is common
throughout the developing countries. Banking, electricity, oil and gas production,
health, education and transportation services are all frequently privatized by
governments. This trend began in 1980s in developed countries but now days it is
accepted in underdeveloped countries where natural resources are the main targets.
There are several reasons for privatization. First reason is to shed the enterprises that
are operating at a loss. The second is the hope that private sector will increase its
efficiency by advanced management services, better technologies and capital. The
third reason for privatization is its fiscal impact. The fourth reason in this regard is
due to privatization sale proceeds, which are used to retire debt and eliminate losses
of the public sector units. Fostering of competition and strengthening of capital
market are some other impacts of privatization. For example if all the government
cement factories were sold to different parties, there would be healthy competition.
Privatization also encourages foreign investment. It sometimes becomes controversial
when the government is going to privatize some essential services like water delivery
and electric power provision. Private sector may increase the enterprise efficiency, but
social objectives are ignored in the bargain such as keeping the cost of water
affordable or providing services in poor areas (Mehdi1991).

Some economists are of the view that privatization record looks good if
judged from economic point of view. They urge that it leads to greater efficiency
(Megginson and Netter 2001). For example electricity privatization in United
Kingdom had resulted in a permanent reduction of 5% per year in the cost of
electricity (Newbery and Pollitt 1997). Its need arises from the concerns over
efficiency with which the state can manage public enterprises or large and growing
claims of these enterprises on national budgets. In Pakistan its need coming from both
efficiency and managing the public enterprises. The policy of development through
private enterprise remained the mainstay of government of Pakistan since the last four

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decades. Privatization policy remained clear in the 1950s and in 1960s and was
adopted once again in the late 1970s.However the program got real energy in 1980s.
There have been two phases of privatization in Pakistan. The first tide is from 1992 to
1994 and the second from July 2001 to October 2002. In the first tied assets worth
Rs120 billion were divested while in the second phase Rs 65 billion were divested.
The consultant engaged by Asian Development Bank has indicated that only 22% of
the privatized units were performing well than before, 44% were at the same rank and
34% worse than before. The Govt decided to sell 26% stake in it at a price of US$ 15
million .10% share were sold for US$ 76 million and realized only US$ 291million
from the sale of 36% share. (Asian Development Bank Report 2003)

1.2 Problem Statement

Privatization is a significant instrument for the economic development of any

country. It is argued that privatization leads to greater efficiency in production and
less wastage of public resources and hence leads to greater production. Has the
privatization of public assets lead to greater efficiency? There is any change in the
revenue collection to the government due to Privatization. Privatization of public
assets led to greater responsibility and greater work attitude. Has privatization have
some impact on the growth of the county? Was privatization beneficial in the past and
will it be in the future? Will it stop wastage of resources in the country? These and
some other questions are the main concern of this thesis. This study will help both the
policy makers and the research scholars working in this field.

1.3 Objectives of the Study

The Main objectives of the study are:

1. To analyze the impact of privatization of banks on the Economic Growth of

the country.
2. To analyze the impact of privatization of banking system on profitability and
efficiency.
3. To evaluate privatization policies and public sector reforms by Government of
Pakistan since 1990.

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 4. To impart conclusion, suggestions, and some policy implications for the
development of privatization in the country.

1.4 Hypotheses

Hypotheses to be tested in this study are:

1. Privatization of Banks has a significant impact on the economic growth of the

country.
2. Efficiency of Banks is positively related with Privatization.
1.5 Research Methodology
The research methodology is of vital importance for research because it briefly
demonstrates how to attain the ultimate goal of the study. The Present research work
is an attempt to determine the causal influence of one variable on other and research
is a way of obtaining important facts and knowledge, so this attempt is a kind of
academic research. In order to examine the relationship between GDP and
privatization, the econometric models are established and tested by OLS regression
analysis utilizing SPSS.

The universe of the study is all privatized banks of Pakistan economy. The data is
collected from secondary sources, including, bank records, Govt and semi-Govt
publications. However, in some cases communication with bank officials are made
for unification and clarification of the data. As for as, the sampling procedure is
considered, Random sampling technique is used. Out of the total of seven privatized
banks, only three banks purposively selected are considered for assessing the impact
of privatization on the economic Growth.

1.6 Data Collection

To test the hypothesis, the secondary data is taken for both variables i.e. GDP
and Privatization. The data is taken for the period of 1990 to 2005. The amount of
money of privatization is taken as a proxy for privatization.

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1.7 Organization of the Research
The thesis has been organized into six chapters. Chapter 1 of the study
consists of introduction. Chapter 2 comprise of the Literature Review. Detailed
review of privatization policies have been presented in chapter 3. Chapter 4 discusses
Specification of Models. Performance and impact of privatized banks has been
discussed in chapter-5. Conclusions and recommendations are presented in chapter-6.

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Chapter 2
Review of Literature

2.1 INTRODUCTION
This section intends to highlight different studies conducted regarding
Privatization of Banks and its impact on Taxes, public sector enterprise productivity,
price stability, employment, economic growth, efficiency of banking system and
national debt. The detail of literature is given as under.
2.2 Review of the Relevant Literature
Kemal (1991) in his “Privatization of the public industrial enterprises in
Pakistan” stated that privatization is the belief that private sector units are more
efficient than public sector units. In study, which made a comparison between
public industrial enterprises and private firms producing similar goods, the
conclusion was that changing the ownership of industry from public to private
sector shows enormous increase in efficiency.
Abindra (1993) concluded from his work that, it could be said that the Private
Sector Enterprises are not only playing a prominent role in our daily life in terms of
fulfilling our necessary requirements of food, clothes and shelter. Conveyance and
various other services, such as petrol and power, but also by helping us to maintain
the balance of payment position in the country through export of goods and from
services so, it is clear that the private sector is expected to play an important role in
economic growth of a country.
Saunders and Sommariva (1993) analyze the difficulties of transitioning from
state control to a market system with specific reference to Eastern Europe. They
investigate alternative approaches for restructuring troubled commercial banks.
Beginning with a pure bankruptcy approach, which they reject as a viable alternative,
they address various restructuring approaches including recapitalization, “loan
hospitals” (bad bank approach), and various types of debt-for-debt and equity-for-
debt exchange. They also discuss the use of some of the approaches used in other
countries, like the Regional Trade Centre for the savings and loan debacle in the
United States. Their analysis demonstrates clearly the difficulty of managing and

5
dealing with only one problem in the bank privatization process, namely the troubled
loan issue in the monobank systems
Jomo (1994) pointed out that privatization can result in higher growth,
increased productivity and lower prices but only in a competitive framework. In a
monopolistic framework, however, producers restrict the output to maximize their
profits. By regulating the monopolies a producer may be forced to reduce price and
increase the level of output. The role of public sector banks and other financial
institutions in economic Development has been examined in many studies. There are
two broad views about Government involvement in financial systems around the
world, i.e., the ‘Development’ view and the ‘political’ view. The development view as
advocated by Gerschenkron (1962) states that governments could intervene through
their financial institutions to direct savings of the people towards developmental
sectors in countries where financial institutions are not adequately developed to
channel Resources into productive sectors. Gerashchenko’s view was part of a
broader Consensus in development economics that favored government ownership of
enterprises in strategic economic sectors. Realizing this importance of financial
Sector in economic development, governments in developing countries sought to
increase their ownership of banks and other financial institutions in the 1960s and
1970s, in order to direct credit towards priority sectors. Contrary to this view, in
recent years a new ‘political’ view of government Ownership has evolved which
asserts that state control of finance through banks and other institutions politicizes
resource allocation for the sake of getting votes or bribes for office holders and
thereby results in lower economic efficiency.
Batra and Narinder (1994) have of the view that in developing economies,
most of the private enterprises are in consumer goods. Most of the public utility
services are in public sector .They are monopolistic in nature.Thier is no system of
contracting out –public services in these countries. Contracting out public services is
bound to lead to decentralization. Most of the governments in developing countries
are not in a position to lesson their grip on public enterprises for various socio-
economic and political reasons. That’s why we found the focus on commercial
enterprises only as far as privatization is concerned in these countries. While the Govt

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in developed economies were in a position to offer attractive concessions to potential
buyers, the Govt of developing economies cannot do the same. This explains the pace
of privatization has been very slow in developing economies. In countries where
private sector is under-developed, it is difficult to find potential buyers. The third
world countries should not follow the path of privatization blindly .In such state of
affairs, a set of economic policies is of little relevance if in the absence of a
determined political movement bound together by a cohesive and dynamic ideology,
the will is lacking to implement them.
Shleifer and Vishny (1994) cited a number of examples that make it clear that
politicians used public enterprises to pursue their own political goals. One
straightforward way to do this is to give redundant jobs at state-owned enterprises to
political supporters. State-owned enterprises may also charge prices below marginal
cost to garner political support. Given these benefits, it seems unlikely that politicians
would ever relinquish government control. However, it may be that not all politicians
are alike. Shleifer and Vishny suggested that privatization occurs when politicians
who benefit from low taxes win out over those who benefit from subsidizing
supporters.
Batra and Narinder (1996) analyzed that privatization might be worth trying in
a few Cases as a means of shedding some unimportant or low-priority activities
which need not have been in the public sector at all in the first instance; and that it
might also be appropriate to try privatization if possible. In case of loss making
enterprises for which a package of remedial measures within the fold of the public
sector is not feasible. Clearly such instances must be very few. As for privatization as
a solution to the public sector efficiency problem it does not really solve but evades
the problem. It would be much better to try a partial privatization of style rather than
the privatization of ownership.
Kemal (1996) studied that regulation of industry to force a competitive
solution on the monopolist is generally taken as an optimum solution along with
privatization. However if regulation implies that it creates uncertainty for the
producers and the producers have even lower flexibility in decision-making even
as compared to public sector enterprises.

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 Shehzad (1996) examined the programme of state enterprise privatization
pursued by the government of Bangladesh since 1975, largely under the influence
and financial conditions of the aid agencies, has been subject to widespread
debate. In 1991, on the suggestion of the World Bank, the government of
Bangladesh formed the Privatization Board to ensure better outcomes of
privatization. This article investigates whether firms privatized under the auspices
of the Privatization Board up to 1996 were adding to the nation’s economic
growth or—as critics claimed — to individual families’ pockets. More
specifically, it examined whether enterprises privatized in 1991–96 reversed
previous losses and introduced better management controls, leading to increased
investment, productivity, and overall organizational effectiveness and efficiency.
The major findings are not supportive of privatization policy, indicating that the
performance of privatized enterprises has not improved significantly. Without
denying the economic problems of Bangladesh’s public enterprises, past and
present, the author questions the performance of privatized companies in terms of
their declining profitability and productivity; employment conditions and trade
union and individual rights; altered distributions of value added in absolute and
relative terms; and serious lack of financial transparency and accountability.
Abarbanell and Meyendorff (1997) describe Russia’s disbanding of
Zhilotsotsbank and the subsequent creation of its private successor, Mosbusinessbank,
in a way that left incumbent mangers largely in control of the bank’s strategy and
operations. They describe how the Russian government’s bank privatization and
deregulation policies have engendered a system that is 75 percent private and
surprisingly innovative—but also highly unstable. Finally, Snyder and Kormendi
(1997) describe the 1992 voucher privatization of Komercni Banka, the Czech
Republic’s largest bank, in a way that left the state in effective control of the
company’s operating and lending policies. These authors show that this decision to
pass up an opportunity to create a strong private bank and to harden budget
constraints for borrowers were to have lasting, negative consequences for the bank
and the nation.

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 Clarke and Cull (1997) found post-privatization improvements in both loan
portfolio quality and the efficiency with which they generate income. If provincial
policy makers were worried about the health of their financial sector and a growing
body of empirical research suggests a strong link between financial development and
economic growth.
George et al (1997) studied the political economy of bank privatization in
Argentina. The results strongly support the hypothesis that political incentives affect
the likelihood of privatization. It was found that those provinces with governors who
belonged to the fiscally conservative Partido Justicialista were more likely to
privatize; that fiscal and economic crises increased the likelihood of privatization; and
that poorly performing banks were more likely to be privatized. The hypotheses were
tested for a specific industry in a specific country making it possible to control for
enterprise performance and institutional characteristics. It seems reasonable that
similar results might hold in other industries and countries.
Meyendorff and Snyder (1997) studied the “transactional structures” of
banking privatizations in Central and Eastern Europe, which they define as having
three elements: (1) antecedent actions that determine the characteristics of the unit
being privatized; (2) ownership transfer and governance after privatization; and (3)
follow-on actions and ongoing government intervention. They note that most of the
governments in the region made similar policy choices when they began privatizing
their banking systems, which have proven highly influential over time. As examples,
most governments chose not to seriously break up the socialist monobank system, and
most severely restricted new competition particularly from foreign banks. For these
reasons, the former monobanks retain dominant market shares in most of the
transition economies almost a decade after reforms were initiated. Further, none of
the politically feasible ownership transfer methods (voucher privatization, insider
sales) brought in new capital or talent, so all the region’s banking systems remain
weak and noncompetitive. The prospect of EU membership in the foreseeable future
does, however, offer some hope that true restructuring might begin soon.
Bonin and Wachtel (1998) provide an excellent analysis of the difficulties of
achieving market based banking systems in transition economies. They emphasize

9
that bank privatization is only one step in the always painful process of disengaging
the state from virtually complete control over the banking system. In a later study
(1999) Bonin and Wachtel, these same authors examine the structure of the banking
sectors of six transition countries in which privatization of state-owned banks is well
advanced. Their most striking finding is that foreign banks now dominate banking in
Hungary, Poland, the Czech republic, Croatia and Bulgaria—and are making
substantial inroads in Romania. The rise of foreign bank ownership is at least partly a
result of the essential failure of domestic ownership to satisfactorily address the
financial problems of borrowers (especially State Owned Enterprises) in transition
countries or to impose hard budget constraints that would force these firms to
restructure. Commander, Dutz and Stern (1999) show that this failure to restructure
had an especially woeful impact on the post-privatization performance of firms in all
transition economies, but particularly the former Soviet republics.
Cook and Uchida (1998) decided that computing the cumulative proceeds
from the privatization as a percentage of the average GDP during that same period
would be a good way to measure the magnitude of privatization. Therefore, their
study is based on 63 developing countries that have the data required to compute the
magnitude of privatization. Aware of the fact that privatization variable could
possibly pick up the effects of other economic reforms, Cook and Uchida test and
conclude that there is no correlation between privatization and government budget
deficit nor is there a correlation between privatization and World Bank adjustment
loans. As Cook and Uchida begin to specify the control variable used in their study,
an obvious connection becomes apparent between Easterly’s (2001) work and theirs.
The task of selecting the right control variables is of the utmost importance since the
study should control for the initial economic, political, and social conditions in each
country. Such variables are the typical factors that affect economic growth. The
empirical results depend heavily on the control variables used in the regression
analysis, thus specifying them correctly is essential. Using the investment variable as
an example, it is possible that investment does not necessarily affect growth, as
Easterly and others have suggested. Instead, it is very possible that the causality is

10
reversed so that economic growth affects the amount of investment in a particular
economy.
Privatization Commission (1998) envisaged privatization leads to foster
competition, ensuring greater capital investment and modernanization, resulting in
enhancement of employment and provision of improved quality products and
services to the consumers and reduction in the fiscal burden.
Hasan (1998) was of the view that privatization have two basic outcomes,
reducing the national debt or to reduce fiscal deficit. Hasan had favored the first
that is reducing the overall government debt of the country. This would have a
more permanent impact and catch in the current and future governments.
Reducing today’s fiscal deficit with privatization receipts is only a temporary
policy.
Bertero and Rondi (2000) employed a sample of 150 Italian manufacturing
State Owned Enterprises (SOEs), with 1,278 firm-year observations, to examine
whether imposition of a hard budget constraint can improve SOE performance. They
exploit the fact that the fiscal environment became much tighter for Italian state
enterprises during the late 1980s, as budget deficits became larger and the public debt
reached unsustainable levels. They found that the State Owned Enterprises responses
to increased debt during the hard budget constraint period, 1988-93, is consistent with
financial pressure, but is not during the soft budget constraint period of 1977-87.
Only during the later period do firms respond to financial pressure by increasing total
factor productivity and reducing employment. In other words, when hard budget
constraints can be credibly imposed on State Owned Enterprises, they do promote
greater efficiency even in the absence of Ownership changes.
Reuter News Service (2000) reported the need to meet conditions for aid and
debt relief then becomes a primary incentive for developing country governments to
privatize. As a consequence of its connection to aid disbursement, privatization is
often rushed, with more attention focused on securing the deal than on the interests of
the end users. Competitive tendering may be compromised and alternatives ignored in
the rush to privatize to meet donor conditions

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 Barth et al (2001) Using cross country data on commercial bank regulation
and ownership from over 60 countries found that state ownership of banks is
negatively associated with bank performance and overall financial sector
development and does not reduce the likelihood of financial crises. Another study
[La Porta et al (2002)], based on data of government owned banks from 92
countries around the world, finds that government ownership of banks is high in
countries, which are characterized by “low levels of per capita income,
underdeveloped financial systems, interventionist and inefficient governments and
poor protection of property rights”. The study further finds evidence that
government ownership of banks is associated with slower subsequent financial
development, lower economic growth and especially lower growth of productivity.
Now Barth et al come to the question? How privatization can improve the
performance of a state owned enterprise (SOE)? Generally, the case for
privatization of state owned enterprises could be grouped around three main
themes, i.e., competition, political intervention and corporate governance. The
competition argument states that privatization will improve the operation of the
firm and the allocation of resources in the economy, if it results in greater
competition. Privatization can improve efficiency even without changing market
structure if it hinders interventions by politicians and bureaucrats who would like
to use the SOEs to further their political or personal gains. It is also argued that
corporate governance is weaker in state owned enterprises than in private firms
because of agency problems. “SOEs have multiple objectives and many principals
who have no clear responsibility of monitoring”. Another reason for State Owned
Enterprises (SOE’s) to have poorer corporate governance is the weak incentive
structure for managers to perform efficiently. They do not face a market for their
skills or the threat of losing their jobs for non-performance. Thus, “less
competition, greater political intervention and weaker corporate governance are
strong theoretical arguments against state ownership”.

Clarke, Cull and Peria (2001) used survey data from over 4,000 borrowers in
38 developing and transition countries during 1999 to examine whether foreign bank

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penetration reduces access to credit in developing countries. Their empirical results
strongly support the assertion that foreign bank penetration improves firms’ access to
credit. Borrowers in countries with high levels of foreign bank penetration tend to rate
interest rates and access to long-term loans as lesser constraints on enterprise
operations and growth than enterprises in countries with foreign penetration. The
authors also find that the benefits of enhanced credit availability apply to small and
medium sized businesses as well as large ones.
Clarke et al (2001) studied the extant evidence on foreign bank entry in
developing countries, while Berger (2003) performs a similar survey that also
includes developed economies. Clarke, et al show that foreign ownership increased
substantially in many developing countries between 1994 and 1999, and exceeded 30
percent of all banking assets in Peru, Venezuela, Argentina, the Czech Republic,
Poland, Chile and Hungary in 1999. In sum, the evidence clearly suggests that foreign
bank ownership is efficiency enhancing—at least in developing countries—and may
well be the default outcome for many national bank privatization programs.
Lizal and Svejnar (2001) examined strategic restructuring and new investment
performance of 4,000 Czech companies during 1992-98.They Develop and test a
dynamic model of restructuring and investment, allowing them to examine separable
impact of private versus public and domestic versus foreign ownership on
restructuring, as well as the importance of access to credit and a soft budget constraint
on firm investment. Lizal found that (1) foreign owned companies invest the most and
domestically owned cooperatives the least; (2) private firms do not invest more than
state-owned firms; (3) cooperatives and small firms are credit rationed; and (4) State
Owned Enterprises operate under a soft budget constraint.

Megginson and Netter (2001) explained that not all commercial bank
privatizations are similarly motivated. At least four reasons for bank privatization can
be identified in countries around the world. First, in formerly socialist economies,
privatization has occurred on a widespread scale in many industries. In these
situations, bank privatizations occur as part of the overall transitioning to a more
market-based economic system. However, these countries also provide the biggest

13
challenge to successful privatization because so much of the credit previously
provided by the monobank systems was granted to State Owned Enterprises, which
tend to be of very poor credit quality. As such, banks in transition economies tend to
be plagued with the greatest loan quality problems of all bank privatizations. Second,
in some countries there may be a program underway to de-nationalize the limited
number of sectors or firms that are state-owned. In such situations, privatization is
less likely to offer as great a challenge, at least in the loan quality area. Third, in some
economies there may be ongoing efforts to deregulate the overall financial system. In
this regard, bank privatizations are a necessary ingredient of the overall deregulation
effort. Finally, the governments in some countries may have the primary objective of
raising funds for the government itself. As such, banks may simply be one of the
vehicles in the “revenue privatization” motive.
Bayliss (2002) examined the effects on poverty privatization, an impact to
which donors have given little attention on their concern with efficiency and markets.
The analysis of the distributional impact of privatization activities draws on empirical
cases in the utilities sector in a wide range of developing economies, particularly in
Africa and Latin America. After a critical consideration of the World Bank position on
privatization strategies, and the arguments presented by donors on the pro-poor
effects of these economic reforms, the article turns to the negative distributional
effects. It is argued that privatization has demonstrably damaged the poor, whether
through loss of employment and income, or through exclusion from, or reduced
access to, basic services. This is mainly because private firms are principally
concerned with profits, prices and costs, and are highly selective as to sectors and
types of consumer. Meanwhile, the weakness of governance and regulatory capacity
in many developing countries lead to poor control of market abuses. The article
concludes by proposing that donors should take more account of local variations in
state-market relations, and be prepared to give consideration to alternative economic
strategies where privatization is not working as intended.
Bonin, Hasan and Paul Wachtel (2002) examine the impact of ownership
structure (state, private and foreign ownership) on bank performance in the six
transition economies of Bulgaria, Croatia, the Czech Republic, Hungary, Poland and

14
Romania. Their sample has 222 observations with financial and ownership data from
these six countries for the years 1999 and 2000. About three-quarters of the banks are
fully private and about 40 percent of these are completely foreign owned. Not
surprisingly, wholly foreign-owned banks tend to be created by Greenfield
investment, while the majority foreign-owned banks tend to be banks privatized to a
foreign strategic investor. Almost 60 percent of the banks in the region are at least
majority foreign-owned, while less than 15 percent remain majority state-owned.
These authors find robust evidence that profitability—measured by return on assets
and return on equity—is higher for fully private banks than for banks with some state
ownership, and is the highest of all for wholly foreign-owned banks. Foreign banks
also experience the most rapid increase in customer loans.
Cull, Matesova and Shirley (2002) examined the incentives that managers of
voucher-privatized Czech companies have to “tunnel” (strip assets out of companies
at the expense of outside shareholders) and “loot” their companies. Looting occurs
when firms face a soft budget constraint and managers are able to borrow heavily,
extract funds from the firm, and then default on the debt without penalty. They
employ a dataset with 1,017 observations from 392 companies spread nearly evenly
between 1994 and 1996. Half of the firms are voucher-privatized joint stock
companies (JSCs) while half are limited liability companies (LLCs). Controlling for
size, industry, capital intensity and initial leverage, they find that voucher-privatized
JSCs perform significantly worse than firms with concentrated ownership that had to
be purchased for cash. Investment fund-controlled JSCs under-perform all other
firms, including other JSCs, while fund-controlled JSCs also took on liabilities at a
much faster rate than other firms, indicating they were operating under a soft budget
constraint. Though not able to measure the activity directly, they concluded that the
evidence indirectly shows that looting was a widespread occurrence for many JSCs.
Srinivason (2002) presented that privatization and deregulation in South
Asia has not gone far and has run into problems, many of which could have been
anticipated. In particular, some of the expectations about the benefits of
privatization were either misplaced or were based on a lack of appreciation of the

15
severe constraints of political economy and governance that undercut the potential
benefits of privatization
World Bank (2002) reported the fact that proceeds from privatization is used
as a way to measure the levels of privatization in each country might negatively
impact the credibility of the empirical results. It is possible that developing countries
with underdeveloped regulatory systems may have enhanced proceeds from
privatization. Furthermore, proceeds from privatization could possibly be a
completely inaccurate measure of the magnitude of privatization, since different
methods of privatization result in different levels of proceeds. Additionally, Cook and
Uchida’s (2002) study does not control for the method of privatization that was used
in each country, which could potentially play a large role on the empirical results. In
fact, a World Bank analysis of the privatization in Eastern Europe suggests that the
means through which privatization is implemented has played a significant part in the
potential success of privatization in Eastern Europe.
Barth, Caprio and Levine (2003) used a new database on bank regulation and
supervision in 107 countries to assess the relationship between specific regulatory and
supervisory practices and banking- sector development, efficiency, and fragility. They
also examine the relationship between state ownership and these measures of
banking-sector development. They find that government ownership of banks is
negatively correlated with favorable banking outcomes and positively linked with
corruption. However, government ownership does not retain an independent, robust
association with bank development efficiency or stability when other features of the
regulatory and supervisory environment are controlled for. On the other hand, there is
certainly no evidence, even in weak institutional settings, that government-owned
banks are associated with positive outcomes
Megginson (2003) used empirical literature to examine bank privatization. He
begin by documenting the extent of, theoretical rationale for, and measured
performance of state-owned banks around the world, and then assess why many
governments have chosen to privatize their often very large state owned banking
sectors. The empirical evidence clearly shows that state owned banks are far less
efficient than privately owned banks, and that state domination of banking imposes

16
increasingly severe penalties on those countries with the largest state banking sectors.
On the other hand, there is little in the empirical record to suggest that privatization
alone transforms the efficiency of divested banks, especially when these are only
partially privatized. Privatization generally improves performance, but by far less
than is typically observed in studies of non-financial industries. An increasingly
common outcome of large-scale bank privatization programs is foreign ownership of
many nations’ banking sector, which evidence suggests is usually positive in an
economic sense, but problematic politically.
Majnoni, Shankar and Várheggi (2003) studied the dynamics of foreign bank
ownership in Hungary using a sample of 26 commercial banks active in the period
1994 to 2000. By the end of the year 2000, foreign controlled banks accounted for
over two-thirds of total banking assets in Hungary. They find that, after controlling
for the nature of investment Greenfield versus acquisition, management style and
duration of ownership, foreign banks are pursuing a lending policy that does not
differ significantly from domestic banks. Foreign banks are, however, able to achieve
consistently higher profitability levels.
Meyendorff and Snyder’s (2003) presented three case studies of specific bank
privatizations in transition economies. Abarbanell and Bonin (1997) study the 1993
privatization of Poland’s Bank Slaski in a mixed asset sale (to ING) and public
offering. They suggest that this experience show the benefits of attracting a strategic
foreign investor, but also highlight the drawbacks of pursuing this strategy too
obsessively.
Mohsin (2002) find out in recent years, there has been an increasing
discussion in policymaking and academic circles of the respective roles of public and
private investment in the growth process in developing countries. There appears to be
a general consensus now that these two components of investment can have a
differential impact on economic growth. For instance, public investment in
infrastructure and in human capital formation may increase the productivity of private
capital and be beneficial for growth. It can also, however, crowd out private
investment by using scarce resources and thus have an adverse effect on growth.
Thus, for policymakers in the developing world concerned with growth, it is not only

17
the total level of investment that matters, but also how it is split between its public
and private components. The empirical evidence on the relative effects of public and
private investment on growth has been limited. A number of recent studies have
concluded that private investment has a larger positive impact on growth than public
investment (Khan and Reinhart, 1990; Coutinhao and Gallo, 1991; Serven and
Solimano, 1990). However, since these studies have used relatively small samples of
countries and limited time periods, how robust this conclusion is, remains an open
question? Moreover, to answer the question a number of other important issues
related to differences in the two components of investment across developing country
regions or across countries in different income groups need to be investigated.
Finally, other determinants of growth such as human capital and macroeconomic
instability, which have received considerable attention in the recent literature, have to
be taken into account when assessing this issue.
Clarke et al (2003) using a combination of country case studies and cross-
country analyses concluded that privatization of banks improves performance as
compared to continued state ownership. However, continued state ownership even
in minority shares of privatized banks is found to have negative effects on their
performance. Privatization of state owned banks through public share offerings
produces lower gains than direct sales to strategic investors in countries where the
institutional environment is weak. Lastly, they find that the benefits accruing are
reduced if foreign banks are not allowed to participate in the privatization process.
Cornette et al (2003) examined performance differences between privately
owned and state-owned banks in sixteen Far East countries from 1989 through 1998.
They find that state-owned banks are significantly less profitable than privately
owned banks due to state banks’ lower capital ratios, greater credit risk, lower
liquidity and lower management efficiency. While the performance of all banks
deteriorated significantly at the beginning of the Asian economic crisis in 1997 and
1998, state banks’ performance deteriorated more than did that of private banks and
performance differences are most acute in those countries where government
involvement in the banking system is the greatest. Economic growth is also slower in
these countries, and there is less financial development.

18
 Otchere (2003) presented a comprehensive analysis of the pre and post
privatization performance of privatized banks and their rival banks in low and
middle-income countries. The author does not find any significant evidence of
improvements in have a higher proportion of bad loans and appear to be
overstaffed relative to their rivals, in the post privatization period. The continued
government ownership of privatized banks is found to be responsible for their
underperformance, as it hinders managers’ ability to restructure them effectively.
Using a comprehensive data set of bank privatizations in 101 countries during the
Period 1982-2000, Boehmer (2001) examine the economic and political factors
that are likely to effect government’s decision to privatize a state owned bank, in
both developing and developed countries.
Sapienza (2003) studies the effects of government ownership on bank lending
behavior-using information on the pricing of individual loan contracts between Italian
banks and customers over the period 1991 to 1995. He exploits the fact that all Italian
banks have access to an unusually detailed and informative database on corporate
borrowers, which negates the impact of differential credit evaluation skills on the loan
pricing decision. He further controls for within-sample differences by examining a
matched set of 110,786 company-bank-year observations of lines of credit extended
to 6,968 companies. 55,393 observations refer to borrowers from state-owned banks
and 55,393 refer to borrowers from privately owned banks. Sapienza finds that
borrowers from state-owned banks pay an average of 44 basis points less than do
borrowers from private banks. He also shows that the voting pattern of the region
where the loan is booked and the party of the state bank’s CEO significantly influxes
good.
Filipovic (2005) explained that privatization, a method of reallocating assets
and functions from the public sector to the private sector, appears to be a factor that
could play a serious role in the quest for growth. In recent history, privatization has
been adopted by many different political systems and has spread to every region of
the world. The process of privatization can be an effective way to bring about
fundamental structural change by formalizing and establishing property rights, which
directly create strong individual incentives. A free market economy largely depends

19
on well-defined property rights in which people make individual decisions in their
own interests. The importance of property rights is captured by economist Hernando
De Soto as he states, “Modern market economies generate growth because
widespread, formal property rights permit massive, low-cost exchange, thus fostering
specialization and greater productivity” (1996). Along with creating strong incentives
that induce productivity, privatization may improve efficiency, provide fiscal relief,
encourage wider ownership, and increase the availability of credit for the private
sector. This paper will analyze the effects and the influence of privatization on the
rate of economic growth, stimulated by the idea of people responding to incentives.
Ultimately, the goal of this paper is to evaluate and analyze the idea of privatization
as a possible factor of economic growth.
Filipovic (2005) concluded that the quest for economic growth in Third World
countries has received an enormous amount of attention over the past 50 years. The
poverty problem that plagues numerous countries around the world is a monumental
challenge for which we have yet to find the solution. Easterly powerfully captures the
significance of economic growth as he states, “Poverty is not just low GDP; it is
dying babies, starving children, and oppression of women and the downtrodden. The
well-being of the next generation in poor countries depends on whether our quest to
make poor countries rich is successful.” (Easterly, 2001). Theoretical analysis of
privatization suggests that incentives play a significant role in the potential success of
privatization as a factor of economic growth. In fact, privatization, accompanied by
appropriate structural reforms, creates incentives to improve economic efficiency,
increase investment, and adopt new technologies. Furthermore, the methods of
implementing privatization play an important role in creating the right incentives and
leading the way for the appropriate economic restructuring. It is essential to note that
the success of privatization largely depends on the government commitment to legal
and regulatory reforms. Cook and Uchida’s (2002) study suggests that the lack of
appropriate governmental reforms might be the cause for a negative relationship
between privatization and economic growth. Further research is necessary in order to
conclusively determine the benefits and the potential role of privatization in the
construction of the future economic policies. Although privatization is a fairly recent

20
economic policy aimed at promoting economic growth, it is safe to conclude that
privatization alone will not be the magical solution to the elusive quest for growth.
Freedman and Click (2005) highlighted the financial systems in developing
countries fail to mobilize domestic savings adequately and to allocate them to
firms and individuals that can use the funds most productively. Banks hold
substantial liquid assets while providing only modest or minimal lending to
private sector firms. It is very difficult for entrepreneurs to obtain a loan to launch
a business or for existing businesses to get a loan to expand their operations, and
productive economic activity is stifled by this widespread lack of access to credit.
If a modest portion of the billions in liquid assets maintained by banks were
prudently channeled to the private sector, many developing countries could
achieve substantially higher rates of return. The primary reasons for the lack of
private sector credit in developing countries include: (i) high reserve
requirements, (ii) deficiencies in the legal and regulatory environment,
particularly with respect to contract enforcement, (iii) crowding-out from fiscal
deficits, (iv) substantial asymmetric information and (v) the inadequate skills of
financial intermediaries. The tremendous scholarly work on finance and growth in
recent years and the comprehensive data presented in the World Bank’s annual
Doing Business reports have painted a clear picture of both the importance of
improving financial markets and the policy reforms that can lead to more efficient
financial systems. It is to be hoped that this picture can spur policy-makers to
undertake measures to improve contract enforcement and collateral laws,
encourage private credit bureaux and curtail fiscal deficits. Encouraging foreign
bank entry can be extremely valuable not only in improving access to credit but
also in generating support for the necessary reforms to establish effective contract
enforcement, sound collateral laws, and creditor rights and the sharing among
lenders of credit information. Such reforms can help unlock the untapped potential
of domestic credit markets to spur long-term growth in developing countries.

21
2.3 Summary of the Review
In this chapter it is tried to introduce many concepts and issues raised by
different authors in their research studies relating privatization and it’s Impact on
economic growth. It can be said that private Banks are more efficient than public
sector Banks, moreover privatization may lead to lower down prices, increase
productivity and increase revenue to Govt.Privatization also have an important role in
reducing fiscal deficit as well in public debt.

22
Chapter 3

Review of Privatization Policies in Pakistan

3.1 Introductions
This chapter intends to explore the brief background of privatization and
nationalization along with critical evaluation of different policies adopted by
Govt for privatization under various regimes.
3.2 Background of Nationalization and Privatization
Before the integration of Russian block, the whole world was divided into two
parts. One was the capitalistic block headed by USA and western European countries
whereas the 2nd block was led by the USSR and other East European countries, which
followed the communist socialist philosophy of the economy. The Russian framed the
Nationalization policy whereas the capitalist followed the privatization policy. Russia
and other Soviet Unions i.e. Tajikistan, Uzbekistan, Turkmenistan, Chechnya,
Bulgaria, Poland, Yugoslavia, East Germany, Czechoslovakia, Romania kept the
economic resources in the state hands and it managed the Economic activities and
their control. The capitalistic world composed of USA, Britain, West Germany,
France, Belgium, Netherlands and other West European countries disowned the
national enterprises and were kept in the private hands. (Mushtaq 1998)
The role of Govt in Privatization policies developed since
independence.Industralizationas was considered much important for economic
growth. For about last twenty years, industrial output was increased and economic
growth took the positive momentam.During 1960 Pakistan was considered as a model
of growth for other developing economies, However the expansion did not lessen
poverty trap. During 70’s and 80’s policy makers gave much attention to distribute
income equally. During 90’s Govt took the way of privatization to uplift the structure
of the economy.(Mirza 1995)
At the time of independence, Govt locked various Institutions to play an important role in
the development process.Stateownership was implemented only for military weapons,
electricity and railroad operations, telecommunication sector –fields remained unpleasant,

23
during early stages of partition to private investors. The remaining sectors were opened to
private investors.
The disturbance caused by separation of the economy from India, banning of some import
items and the termination of trade with India necessitated the motivation of private
investors.
Govt gave much attention to liberalize industrial policies in order to encourage
private investors. Some of the manufacturing units were established in the hand of
Govt.The policies of Govt during 50’s and 60’ has compressed the workers for
industrialization. A small group of people have dominancy on the industrial resources of
the economy, the Migrants who were largely traders and migrated to Pakistan during time
of independence. These muhajors initiated with trading firms, many of which got the status
of industry with the Govt policies during 50’s.
By having much of capital, the Muhojors accounted major part of manufacturing industry
during early stages of independence. During late of 60’s a debate about considerable
inequalities and income distribution of wealth and economic power problem provide a state
of dissatisfaction with economic conditions. Economists study during 1960 experienced
that 50 big industrial group owned 45% of the nations industrial assets and more than 60%
of private owned enterprises. The same industrial group also posses seven of the eighth
major commercial banks. The speech delivered by Dr.Mahboob-ul-Haq, the Chief
economist of planning commission in 1968 about the concentration of wealth in few hands.
He has of the opinion that the country economic growth shown little performance to uplift
the living standard of the common person and the trickle down approach to development
had only concentrated wealth in the hand of few industrial famiies.According to him
interruption of Govt. is required to correct the tendency rather than accumulation of wealth
in few hands. In response to his recommendation Govt took effective measures between
1968 and 1971 for settlement of minimum wage rates and tax reforms. However
implementation was not upto the mark. (Mirza 1995)
It was 1971 when Zulfiqar Ali Buhtto after coming into power made vital developmental
strategies than previous political powers. The down played economic planning and
research created many inconsistencies in decisions. In 1972 he publicized a major act
regarding multiple exchange rate system and also devalued the rupee by 57%.The act

24
greatly encouraged exports and controlled prices in economy.Devalution also caused a
serious problem in terms of trade between the industrial and agriculture sector. However
devaluation helped agriculture sector, particularly firms which have major market
surpluses, displacing labors and tenants resulted by mechanization , many of whom
migrated to urban areas to seek jobs in industries. In 1972 during Nationalization process
Butto Govt nationalized 32 major manufacturing plants. Iron & steel, motor vehicles,
manufacturing chemicals and cement are some of the industries which effected .Life
insurance companies,shiping companies and oil distributions firms, private banks and
cotton ginning were some others who were nationalized. Between 1971 & 1973
nationalization resulted a drop of 50% in private investment .During 1978 investments
were little more than one third of monitory year 1970.Private capital went into real estate
and to manufacturing sector especially to small scales. Industrial outputs slowed
considerably during 1977.During Bhutto Govt public sector expanded broadly, further
more the public companies were created for diversified operations and
functions.Nationalisation policy faced a lot of hurdles from capitalists. Brain drain worse
situation was highly controlled from Middle East countries by provision of max.wage rate
and fringe benefits to inhabitants of Pakistan. Investment in public industries arises
surpassing the private investment in1976. (Mahboob 1990).
Bhutto supported and strengthened the long term projects within country which can cherish
long term benefits in prosperity. Some of the projects were Highways on west bank of the
Indus River, Highway tunnel in the north, steel and iron plants. After 1977, military Govt
of Gen.Zia –ul- haq supported the privatization policy which goes on till late 1990’s for
achievements of economic growth. (Hassan 1992).
3.3 Privatization trends and development in Pakistan

Socio economic and political development of economy is based on privatization

policies. Like other developing economies Pakistan’s economic goals relate to efficiency
and production through better utilization and distribution of properly allocated resources of
private enterprises.Privitization is breeding competition which is increasing the
efficiency.Pakisatan policy of privatization of public companies also embarked on the
claims which urged for the return on national budget and Govt is giving a review to the

25
policies of privatization of public companies due to arrival of deficit situation and increase
of demand on national resources.
3.4 Privatization policy under Pakistan People’s party Govt(1988-90)

Under leadership of Muhtarma Benzir Buhtto the Pakistan people’s party Govt
decided to have the privatization programme in progress. Rothschild & sons limited in
April 1989 commissioned by Pakistan govt. to prepare and develop privatization
programmes.In response to their privatization report in august 1989 the govt. assigned a
committee for finance ministry in order to refine the privatization programme.Analytical
recommendation of finance ministry recommended that public participation and policies
which are immediately converted into practical implications, social welfare increment and
management of govt transformation into regulator; attraction of foreign investment
.Financial analysis report took under consideration Habib bank, Muslim commercial
bank ,International air lines, sui-southern gas , and Pakistan state oil. The aim of selling
these SOEs was to channel the saving of several thousands private investors into capital
market, which has currently an extremely narrow base of capital. During early, 1990 stock
market established well but need improvement. The recommendations of report were to
start privatization programmes with PIA and Sui-southern gas. In may 1990 , Govt offered
10% of PIA ‘s share at rate of 12.5%.Govt tried to match manifesto and policy but political
powers and military didn’t supported the policy fulfillment.(The news Feb9, 1996)

3.5 Privatization policy under the regime of Islamic Jamhori Ittehad (IJI)
Govt (1993)
In November 1990 Islamic Jamhori ittehad came in power. The main focus was
given to privatization programme began in 1990.This was consider one of the most
important component of economic reform in the country. The major focus was given to
reduce the persistent losses of state owned enterprises and to provide liberal environment,
intensely needed for economic growth.

3.5.1 Objectives of privatization programmes under IJI Govt

Following are the main objectives of the IJI government.

 To have efficient utilization of resources and reduce deficit in budget

26
  Creating liberalization policies
 Improvement in profit level of SOE’s
 To facilitate private sector with financial constraints.
 Reduce political intervention in economic affairs
 To have sound capital market
 To provide financial safety to employee
 Provide attractive foreign investment environment.
The main areas where privatization was needed were financial institution, banks,
Telecommunication and infra structural sectors. The Govt. identified to privatized 18
SOES and announced time to sell under the different forms of privatization. The govt. also
took the responsibility of social rehabilitation of exploited labors. Yellow taxi scheme and
various other training were launched to provide self employment for those workers who
were suffering from unemployment. Various analysts from related departments were hired
to evaluate the agenda of privatization .Members of privatization commission reviewed
reports of the analysts .After having clearness from members of privatization commission
reports for final approval were placed before cabinet.(Aziz 1996).
3.5.2 Privatization in the financial sectors:

Muslim commercial bank and Allied bank of Pakistan were privatized. MCB was
considered as the first bank which was privatized under IJI govt.In response of
privatization programmme of MCB, four bids were received in 1990, and for some
technical reason the evaluation committee did not recommended the highest bid. The
evaluation committee recommended third highest bidder M/S national group for this
transaction. Rejection of highest bid led controversy between state bank Governor and IJI
govt.On April 1991 the agreement was signed with Mansha group and subsequently the
management was transferred on April, 1991 after necessary payment. A total share of
Rs.110 million was offered to public which was considered 25% of total shares. According
to news papers reports the offered bid was not even covering the furniture of the bank. The
situation was different in case of ABL, the employee decided to buy it from Govt.In July
1990 about 7500 employees of ABL collected a sum of Rs.500 million for privatization
proceedes.In addition to investment banks the Govt. also granted permission for eight new

27
banks to be privitised.In September 1994 PPP Govt. added three new banks to be
diveseted.The purpose of privatization was to promote savings and investments in the best
interest of the economy.
(Ministry of Finance 1991-92).

3.5.3 Private Banks

 Bolan bank lmtd.
 First commercial bank
 Franklink commercial bank
 First habib bank lmtd
 First security bank ltd.
 Mehran bank ltd
 Republic bank ltd
 Sonerie bank ltd.
 Union bank ltd
 Muslim commercial bank ltd.
 Allied bank of Pakistan
 Kashmir bank

3.5.4 Privatization of industrial units

IJI Govt. advertised another one hundred units in 1990 for privatization; conditions
were relaxed in some cases. With in one month of acceptance bidders were required to pay
in cash 26% of bid value.240 bids wee received for 90 units. In case of Roti plant the bid
were higher than the reference price.(Ministry of finance 192-93)

3.5.5 Offer for sale of public units during July 1991

In case of some units no bid was received previously. In order to privatize these
units the Govt. relaxed terms and conditions in this regard. In table 3.1 we have advertised
value of units. The govt. took a bold step for economic reforms, deregulations,
liberalization and access for foreign investors. Economic reforms, especially privatization

28
programme led to boom in early 1990 because of which Govt. announced various form of
incentive to foreign investors.
Table 3.1
Sale of Public Unit

Public units Earnest Money Floor Price

Bala Engineering Ltd. 2.00 million Rs.24 per share

Bolan casting Ltd. 2.00 Rs.24

Mustekam Cement. 5.00 Rs 150

A & B Oil industries 1.00 Rs.90

Crescent Factory 1.00 Rs.86.5

Mubarikpur Rice mills 1.00 Rs.18

Naya Daur Motors Ltd. 5.00 Rs. 120

Thatta Cement 5.00 Rs. 25

Swat Elutriation Plant 1.00 Rs. 25

assets

Swat ceramics 1.00 Rs. 10

E & M oil mills Karachi 1.00 Rs. 70

Dir Forest industries 1.00 Rs. 200

(Source: The watan weekly, London July 25, 1992)

3.5.6 Achievements of IJI Govt.

It were about 69 public units which were privitized.Al-Ghazi tractors, Pak Suzuki
motors , MCB, Pak-China fertilizers, and Khyber vegetables Gee mills are successful
examples of privatization programme, in term of profit. (Wahab 1995).
MCB has increased Rs.6.2 million cash deposits over the first six months after the bank
was privitised.ABL is another example of improvement after privatization proceedes.The

29
chairman of ABL announced that the bank deposits increased by 200% after privatization.
(State bank report 1994).
The achievements were due to the following factors
 Facilitated provision of efficient services and awareness about the customers.
 Employee’s ownership plan has resorted efficient utilization of staff.
 Motivational forces and team work has achieved profitability.

3.5.7 Privatization trends towards public utilities

The PPP Govt. succeeded in privatization a 10% share of PIA.The intention of

Islamic Jamhori Ittehad Govt. was to sell Pakistan Tele communication corporation, Water
empower development authority, Pakistan railways ,which were four leading
monoplolies.The Govt. provided friendly environment for foreign investments. Build lease
and transferred scheme was launched to attract foreign investors. Telecommunication was
also developed by privatization process.Prvitization of Railways also contributed in
Pakistan development policies. Some of the best routes of railways were already sold and
which other are in loss are also about to sold. Four private airlines Aero Asia, Saheen
international, Bowja, and Hajweri were licensed for operations. (The News, Aigust, 1997).

3.6 Privatization Policy of PPP Govt.(1993-96)

Banzir Bhutto re-pledged the privatization commission on Nov, 1993,the cabinet
committee on privatization, in order to proceed the economic reform program. The
commission decided on the following categories for privtisation.Catagery (A) small scale
industries, Category (B) Large scale industries and Category(C) Utilities and sevices.The
scheduled was
 Category (A) through bidding
 Category (B) through stock market
 Category ( C) through strategic investors.
In case of large scales industries, it was announced that 26% would retain managerial
control. However in some specific enterprises they will be offered to private investors.
Following are the main principles which were constituted by the privatization commission
which must be followed for privatization progrmme and policies.

30
  Process of privatization must be transparent.
 Discourage monopoly control
 Process of prequalification in case of Banks privatization.
 Financial analysts will participate in the process.
 Competition arrival in privatized enterprises
 Privatization must be beneficial for major portion of the economy.
 Thermal generation will serve during privatization in power generation.
The overall objectives of the programme were
1. Improvement in efficiency and competition in entities propose to be
privatized.
2. To decrease financial burden on the state.
3. Stock market must get strength by increased numbers of share holders.
Until Oct., 1993 about 118 state owned enterprises were identified by the commission and
69 among those were sold through bidding. The first 18 units offered for sale were as
follow:
1. Hazara fertilizers
2. SWAT elutriation plant
3. Sargohda vegetable ghee
4. E and M oil mills
5. Marafco Industries ltd.
6. PNP rice mills.
7. Burma oil mills Karachi
8. Thatta cement Co.ltd.
9. Associated cement Co ltd.
10. General refectories.
11. Nowshehra chemicals.
12. Nowshehra PVC ltd.
13. Bela Engg. Ltd.
14. Republic motors.
15. Spinning machinery
16. Textile wending

31
 17. Lylpur chemicals and fertilizers
18. Harnai Woolen mills.
(Privatization commission report 1994).

3.7 Privatization policy of Military Govt. (1999-2005)

President Rafiq Tarar promulgated privatization commission ordinance on 28 Nov
2000.Following are the salient feature of the promulgation;
1. Proceeds of privatization are expected to meet Govt. debt for reduction of poverty.
2. Expeditor’s mechanism is required for resolution of disputes.
3. Previously established privatization commission was dissolved.
4. Commission is responsible for assets ,rights ,power, authorities and privileges , own
property movable or immovable, bank balance ,reserves, investments and other
interest and rights, in or arising out of such property , liabilities and obligations.
5. Chairman ,Secretary members and other staff of previous commission were allowed
to continue under the new ordinance ,2000
6. Commission shall:
 Provide guidelines on privatization policies to the cabinet.
 A comprehensive privatization programme for approval of the cabinet.
 Approval management, planning and implementation is done by cabinet.
 Facilitate legislation, which is approved by cabinet, on behalf of concerned
ministry in connection with privatization.
 Provide channels of implementation of privatization activities including
restructuring deregulation and post privatizations matters.
 Operational decision exercise on privatization matters.
 Deregulation, regulatory issues including of licensing and tariff rules and
other related issues pertaining to privatization programmes approved by
ancient.
 Provide directions and instructions to the privatized managements.
 Publicized privatization programmes activities.

32
  Proposed a regulatory frame work including strengthening of regulatory
authorities, to the cabinet for fair and independent regulations of each
sectors falling weighing the preview of privatization programmes.
 Advised the federal Govt and selection process of the chairman of
regulatory authority.
 Advised the federal Govt to discourage monopolies in process of
privatization
 Appoint consultants, advisors, lawyers in other staff.
 Approve and take decisions to implement pre-privatization restructuring.
 Invite application for the privatization and ensured why its possible for
participation.
 Evaluations of bids according to criteria.’
 Advised measures to the federal Govt for improvement of public enterprises
till their privatization
 Assist in the implementation of federal Govt. policies on deregulation and
advise the federal Govt on deregulating the economy to maximum possible
extent.
 The general management and administration of the affairs of commission
shall vest in the board of commission. It shall consist of chairman, secretary
and six other members. (Privatization commission ordinance 2000).
3.8 Discussion on different policies
The basic aim of different privatization policies under various regimes is to
achieve economic and social development .The main economic goals are increasing
productivity and efficiency through effective utilization of available resources by
private sector. Most of the difficulties faced by the public sector enterprises are
beyond their control. Almost all of these are heavily overstaffed because of political
compulsions. To provide more jobs can be met easily in public corporations decisions
to expand or modernize the machinery or technology of the enterprise are difficult to
push through the bureaucratic channels and the price policy is seldom within the
control of the enterprise or in line with market condition. Sales and marketing

33
strategies are naturally limited due to procedural limitations of the public sector. In
order to solve these problems privatization was considered a serious solution.

Under Pakistan Peoples Party Govt (1988-90) according to privatization

committee report privatization should be done through public participation, offered
opportunities to reduce borrowing requirement of Govt and to attract foreign
Investors. The report for privatization program recommended starting privatization
with Sui Southern and Pakistan International Airlines. The Govt tried her level best to
start privatization program but constraints didn’t allow the policy to implement.
In 1990 Islamic Jamhore Ittehad Govt headed by Nawaz Sharif to accelerate the pace
of economic development start privatization of state owned enterprises. Under the
agenda for privatization the main targeted areas were Industries, Banks and
telecommunication sector. The Govt also intended to undertake labor rehabilitation
program for surplus labours. The process for valuation of units to be privatized was
done by independent consultants and by charted accountants. After clearing the report
from commission that was placed before the cabinet for approval. The report assigned
115 units for privatization and the expected income from these units was projected
about Rs 30 billion, but only 69 units were privatized which resulted an amount of Rs
3.95 billion.

After the ending period of IJI Govt, the newly elected Govt of PPP headed by
Benazir Bhutto reconstituted the privatization commission (PC) and the cabinet
committee on privatization (CCP) in order to recognize and accelerate the economic
reform program. The newly constituted PC and CCP decided that privatization should
be transparent, efficient and for the benefit of all people. A total of 31 units were
offered for privatization out of which 13 were privatized. Income received after
selling these units was Rs 863.9 million
Under military Govt run by General Perviz Musharaf gave the same tempo to
privatization program, in order to enhance economic growth and alleviate poverty.
Uptil 2005 the Privatization commission have worked successfully and privatized
about 47 Units in various sectors and received Rs 240593.7 million. This enormous
figure showed that privatization in Pakistan is on increasing magnitude and will lead
the economy towards boom and prosperity in the future.

34
Chapter 4
Specification of Models

4.1 Introduction
This chapter is related with the specification of models for the analysis of the
study. Focus has been made to present details about specification, data collection and
definitions of variables.
4.2 Estimation Specification
4.2.1 Measurement of Changes in Bank Efficiency
Financial sector reforms during 1988-92 had affected banking sector
significantly. The establishment of newly private sector banks and eliminating
restrictions on the banking operations give institutions greater scope and incentives to
reduce cost and enhance revenue, might lead to monopoly rent. The expectations may
be that banking sector improves by these reforms. The important thing is to identify
the effect on already existing and state owned institutions, remained very important
and had to face different constraints as compared to newly entrants. Different
allowances must be provided to change the existing macroeconomic aspects for the
estimation of banking sector reforms, one needs first to be able to estimate the
frontier of most efficient practices prevalent at each point in time as a function of
relevant exogenous variables, and how far from this frontier are the efficiency levels
of different institutions or categories of institutions. One can then measure how the
frontier shifts over time (due to structural changes or movements in the exogenous
variables), and how the position of institutions relative to the frontier evolves. These
reforms produce different affects on cost efficiency; revenue efficiency, and

35
profitability, similar exercises need to be undertaken for each of these three concepts.
(Berger 1993)
The particular approach used here is to specify a relationship between profits,
costs or revenue and input and output prices that reflects optimizing behavior at the
frontier of efficient practices, and then to add terms that capture deviations from best
practices. One can then estimate how this frontier relationship is affected by the
financial sector reforms, and how these deviations, or measures of relative "X-
inefficiency," vary across institutions and over time. (Berger 1993)
For example, the standard profit function can be augmented and written in
logarithmic form as

ln (∏t + θ) = f (Pt, Wt, Zt, Vt) + ln Ut + ln t + ln Et (4.1)

Where
∏t = Profit of the bank
θ = Constant (To ensure that argument is positive)
Pt = Prices of fixed inputs at time t.
Wt = Prices of variable inputs at time t.
Zt = Prices of net outputs at time t.
Vt = Environmental & structural Variables.
Ut = Constant represent that reduction in bank profit due to
Persistent X- inefficiency.
Et = Random error

Based on this standard profit function, the relative inefficiency of bank b can
be measured as the ratio of the predicted profits of that bank to the predicted profits of
a best-practice bank facing the same prices, using the same netputs, and under the
same environmental conditions, net of random error. Specifically:

 
 exp  f  Pt , Wt , Z t , Vt   lnUˆ t   
t  
Inefficiency = 
 (4.2)
 
 Max exp  f  Pt , Wt , Z t , Vt   lnUˆ max   
 

36
Where
ˆ t  Estimate of  t
ˆ max = Estimate of  max
Û t = Estimate of U t
Û max = Estimate of U max

This measure of relative inefficiency can then be averaged across banks or a subset of
banks. (Berger 1993)
This measure of profitability assumes that the frontier and relative efficiency
are constant over time. Yet profitability and absolute profit efficiency will inevitably
change, in part because the financial sector reforms could shift the frontier and affect
efficiency in the banking sector. To address this issue, the relative X-inefficiency of
different banks or groups of banks can be measured by evaluating equation (4.2) in
various sub-periods. In addition, one can compare the position of the whole frontier
across periods. Denoting two periods of interest by s and t. one can start by from the
definition of the change in average productivity in terms of the efficiency frontier as:
ˆ t  X t 
 
ˆ s  X s 
Where
ˆ t  estimated profit at time t
ˆ s = estimated profit at time s
X t = explanatory variable at time t
X s = explanatory variable at time s

This change in profitability will reflect in part variation in the exogenous variables,
which might be termed business conditions. The change will also reflect shifts in
structural conditions, such as productivity and the nature of market competition,
which will be captured in the functional form of the profit function. To this end the
change in profitability can usefully be broken down as:
ˆ t  X t  ˆ t  X s 
   (4.3)
ˆ t  X s  ˆ s  X s 

37
 in equation 4.3 right hand side shows proportional change in profits due just
to changes in the exogenous variables, and assuming that the banking sector had
continued with the same practices, regulations, and so forth, as captured in the
estimated parameters of the profit equation. This term thus reflects the effect on
profitability of changes in business conditions from period s to period t, keeping
structural features fixed. The second term reflects the changes in technology and
market structure, keeping prices and other elements of business conditions fixed. Any
effects on profitability of the financial sector reforms should appear primarily through
this term. To obtain an overall measure of the changes, the various profit terms in
equation (4.3) are projected for all the banks in each sub-sample and then averaged.
The standard profit function is applicable if firms have to follow the market price and
output is changing and measurable, then the standard profit function is applicable. An
alternate profit function should be considered if the above mentioned conditions are
not fulfilled. This will be as;

ln  t     f  Yt ,Wt , Z t ,Vt   ln U t  ln t (4.4)

Where
Yt = output of the bank at time t

A measure of relative efficiency can be defined analogous to that for the standard
profit function, and the change in profitably over time can again be broken down into
the effects of changes in structural and business conditions. (Berger and Mester,
1997).
These reforms might affect significantly the profitability of the banking sector.
These reforms resulted in greater benefits to customers rather then the share holders.
Its affect should be considered on both cost and revenue. The cost function:

ln C t  f  Yt ,Wt , Z t , Vt   ln U C  ln  c (4.5)
Where
C t = Cost at time t.

38
has been the focus of numerous studies of bank efficiency. The cost function can be
estimated similarly to the profit function, efficiency can be measured in terms of best
practices to minimize cost. Specifically:
 
exp  f  Pt , Wt , Z t , Vt   l nUˆ min 
Cˆ min    Uˆ c min
CEf t  
ˆ
Ct  
 Uˆ t
exp  f  Pt , Wt , Z t , Vt   l nUˆ ct 
 
Where
CEft = Cost efficiency
Ĉmin = minimum estimated cost

Similarly, the indirect revenue functions:

ln Rt  f  Yt ,Wt , Z t ,Vt   ln U R  ln R (4.6)

for estimation of relative efficiency and to find change in revenue, the above equation
must be used. (Berger1993)

4.3 Sample Data and Variables

The data on various variables related to assets and liabilities of banks in
Pakistan must be obtained from related sources of State Bank. The whole sample is
divided into two sub-sample periods. One period ranges from 1981 to 1992. The
second period, when major reforms should have begun to take effect covered a time
period from 1992 to 2005. The data was collected from 33 commercial banks for
which time series data was available. On the basis of their operation and subjectivity
to different regulations, some banks were excluded. These include 7 public sector
banks, 22 foreign banks, and 4 private sector banks. The data set is used to define the
needed variables, namely, profits, revenue and costs; a measure of bank output;
relevant prices; and certain control variables. The variables used are summarized in
Table 4.1.

39
 Table 4.1
Variable Definitions and summary statistics 1

Mean Standard Minimum

Maximum deviation

PROF Profits/ Total assets 2.27 1.58 -2.05

9.19
COST Costs/ Total assets 5.55 1.90 1.67
12.1 REVS Revenues/Total assets 7.82 2.47
2.62 16.58
OUTP Earning assets/Total assets 55.59 13.13
14.93 93.32
INTR Interest receipts/Earning assets 11.34 0.96 9.86
13.53
INTC Interest costs/earning liabilities 6.36 0.73 5.38
8.43
OTHC Other costs/Earning liabilities 2.76 0.26 2.18
3.09
CPRS Capital and reserves/Total assets 3.91 2.13 0.65
17.44
DEPB Interbank borrowing/Deposits 21.26 29.05 0.00
235.47

1/ Based on full sample.

Table 4.1 shows abbreviations of the related variables and summary statistics
which is considered as a standard for comparison of estimated regression of the
present research work. The mean values of various variables which range between
2.17 and 65.59 shows that the bank should be considered efficient one of the mean
values preserve within the same brackets. Similarly standard errors are also given for
the same purpose. However, to have more simplification for decision makers
minimum and maximum values of standard errors are also given. For identification of
bank output, bank transaction services must be considered as a standard. Yet the
identification of bank inputs and output is not fully answerable is shown by its
earning assets which is the combination of Government securities, advances,
discounted bills, and other forms of investment. INTR shows total income obtained
from interest transactions divided by earnings. Similarly INTC provided

40
information’s regarding expenses of interest divided by liabilities of banks. No data
were available on the number of employees or the volume of fixed assets, so it was
not possible to measure labor costs per employee or facility costs per unit of property,
which might in any case vary between banks due to variations in quality. Moreover,
non-interest operating costs may be incurred mainly in providing no remunerated
services to depositors, that is, in obtaining funds as inputs.
OTHS shows other costs which are not mentioned in above explanation. For
analysis of SWN CPRS is abbreviated which is considered an alternate function for
deposits and inter-bank borrowings. The unit prices of inputs and outputs are assumed
to be the same for all banks (consistent with the assumption that banks are price
takers, at least in the market for inputs) and are therefore measured on an aggregate
basis, that is, by dividing aggregate receipts or expenses by aggregate quantities.
A number of variables were included to capture relevant environmental or
structural factors. Some experimentation suggested that the ratio of funds borrowed
from other banks (termed "due banks" in the data source) to deposits, which will be
denoted by DEPB, frequently added to the explanatory power of the model. This
variable captures differences between banks in the degree of specialization in retail
business; DEPB will tend to be low for a bank: with an extensive branch network
from which it can gather deposits and high for banks that concentrate on wholesale
business. When the model is estimated across the full sample, it was also useful to
include a dummy variable taking on the value of one during the second sub-period
(SP2), which allows at least the intercept to vary over time. Other candidate variables
that might proxy for environmental or structural factors include banks' market share,
their loan to deposit ratios, the real rate of growth of GDP, and official interest rates.
Results show that the estimated coefficients on above explained variables are
statistically significant.
To evaluate some variables through time series data shown in figure 4.1, the
average unit of cost and average unit of output are relatively stable at 6% and 11%,
respectively, during reforms but shows a positive momentum thereafter. The role of
non-interest cost was highly un-predictable to show the influence on cost, revenue
and on profit variables.

41
 Figure 4.1
Average unit Prices and Costs
Percent

Figures 4.2 and 4.3 are depicted to show costs and benefits of the various
banks. Financial market reforms showed a positive trend in costs and revenues for all
banks. Before reforms private banks and public sector banks both shows the same
level of performance. However, banks privatized during 1993 shows low level of
performance from revenue point of view. But quickly caught up more revenue per
unit when time proceeds. Figure 4.3 shows low level of capital for state-owned banks.
Last sub-periods shows that foreign banks have increased amount of capital as
compared to public sector and private sector local banks. In this tendency privatized
banks are not related for active participation perhaps their assets are too bad. A lower
risk rating than those of the other public sector banks, and therefore they needed less
capital and reserves. Figure 4.4 illustrates the path of the variables DEPB for the
various bank categories. In the pre-reform period the foreign banks were clearly
heavily dependent on inter-bank funding, but increased their access to deposits
thereafter. The public sector banks usually undertook little inter-bank borrowing; they
presumably could collect ample deposits from household’s and. enterprises and were
the source of funds for other banks. The private banks were, at least initially,
moderately active borrowers in the inter-bank market.

42
 Figure 4.2
Costs to Total Assets Ratios

Figure 4.4
“Due Banks” to Deposits Ratios (In percent)

43
4.4 Model Specification and Estimation
The available data is sufficient to allow the estimation of the various measures
of efficiency described above and the changes in these measures. The two profit
functions and the revenue and cost functions that form the basis for these measures
are made operational by adopting a translog functional form. The profit function Πt
=f (Pt, Wt, Zt, Vt) is used in equation (3.1) is assumed to take the form:

Where
Πt= Profit at time t
INTR= Interest-Asset Ratio
INTC= Interest Cost liability ratio
OTHC = Other Costs-Liabilities ratio
CPRS = Capital & Reserves-Asset ratio
DEPB = Borrowed funds to Deposit ratio
SP2 = Second sub-period 2

Which includes one output price, the two input prices, one netput, and all the cross
products, plus two variables capturing structural and environmental factors. For
alternate profit function revenue and costs are similar, shown on the right hand side of
the equation. When estimating over sub-periods, a more parsimonious specification is
needed, because the unit price terms are constant across banks in each year, and
therefore only a limited number of individual, industry-wide coefficients can be
identified. When the sample covers only a small number of years. Hence, for this
purpose the quadratic terms in unit prices (with coefficients P2, ~4, and P6 in the
profit function) were dropped. Even when the profit is negative but we are taking logs
of e as its value is 3.04.
There are various approaches to estimation of efficiency frontiers and X-
efficiency (Bauer, Berger, Ferrier, and Humphrey (1998) provide a recent overview),

44
the choice of technique used here was dictated by the available data set, which
consists of a panel with relatively few observations in some years. The variables that
are measured comprise mostly financial stocks and flows, rather than quantities (such
as number of employees), yet the possibility of errors in measurement must be
recognized. The “distribution free" approach seemed most suited to these
circumstances. Specifically, for each bank we take a dummy to capture the effect of
bank-specific deviations from optimizing behavior, and the equation is estimated
using a panel of data from a sub samples for which is assumed to be more stable.
In addition, it is interesting to trace the average behavior of some sub-set of
banks (say, those that are state-owned) over time. To this end, it is possible to find the
Average deviation from available information’s on significance test by assigning a
dummy variable.
Equation (4.1) (or the other analogous equations) represents an efficiency
frontier. Furthermore, a preliminary examination of the data suggested that the
distribution of residuals generally displayed leptokurtosis and, especially for the
profit functions, skewness. Because of the strong possibility that the errors will be
non-normally distributed, the least absolute deviation (LAD) estimator was used.
Examples of results obtained by Ordinary Least Squares (OLS) are reported for
comparison purposes.

45
Chapter 5
Estimation of Models

5.1 Introduction
This chapter reviews the analysis of the data sampled using econometric
techniques.
5.2 Background of Banking Sector and Privatization in Pakistan
In process of early privatization period two banks relatively of small size were
privatized. In Pakistan various local and foreign are working in competitive
environment to provide better facilities to customers. However, it is expected that
privatize banks should be in better position from performance point of view. Muslim
Commercial Bank and Allied Bank of Pakistan are among others which are privatized
earlier. To compare the performance of MCB with that of ABL, MCB is some what
better. Paid-up capital of MCB increased from Rs. 576 million in 1991 to Rs. 1820
million up till 1997. While during the same period the paid-up capital of ABL
increased from Rs. 272 million to Rs. 1063 million. From deposits point of view
MCB also shows a considerable progress as compared to that of ABL. Similarly profit
of MCBN was estimated about Rs. 531 million in 1995 while that of ABL was Rs.
1250 during the same period. For both banks this is higher if compare with pre-
privatization era. Privatization of thermal unit was about 26% of total shares. Profit of
thermal sector increased but one thing must be noted that this is due to price hike. The
increase in prices of electricity was a question mark on the welfare policy of the
government. However, sale of shares of PIA and telecommunications without any
disturbance in management system provide no improvement in level of efficiency in
the said organization.
In case of ABL, it was transferred to the bank management team resulting no problem
of unemployment. On the other hand side, MCB also suggested that no worker must
be displaced during privatization. In 1997 the salaries record of MCB showed an
amount of Rs. 2017 million while that of ABL was Rs. 1048 million which was about
50% high as compared to pre-privatized year 1991.

46
5.3 Estimation of Equations
To review profit, cost and revenue functions table 5.1 is depicted. Column 1 of
the table shows estimation procedure and abbreviation of various related variables to
find efficiency of banks. Similarly column 2 suggests profit function. To analyze
alternate profit functions column 3 is drawn. Column 4 and 5 shows cost functions
and revenue functions respectively, in first sub-periods. Higher value of R2 statistics is
observed in case of cost and revenue as compared with that of profit function.
However, the overall model is statistically significant. The fixed effects, which
provide a measure of relative efficiency, are always jointly highly significant. In the
first sub-period, banks with higher capitalization tend to be more profitable, primarily
due to lower costs (CPRS enters with a negative coefficient in the cost function), and
banks that rely on a large deposit base tend to be less profitable, as shown by the
negative coefficient on DEPB, perhaps because they are more heavily committed to
retail banking, where margins are lower, These effects seem to dissipate in the second
sub-period.
The third section of the table presents the results of OLS estimation for the
second sub-period. The R2 statistics (which OLS effectively maximizes) are only
slightly higher than those of the LAD estimates, while the Jarque-Bera and Shapiro-
Wilk test statistics for the normality of the error terms are all highly significant, which
suggests that LAD estimation is more appropriate for this data set than is OLS
estimation. The estimated coefficients usually have the same sign as the LAD
coefficients, but tend to be larger in absolute magnitude, and the standard errors are
also larger, so slightly fewer significant coefficients are found.
An indication of the robustness of the estimates is provided by the results for
the alternative profit function obtained under different specifications or samples,
which are reported in Table 5.1 (similar results were obtained for the other dependent
variables). The results obtained from the full sample resemble those from the first
sub-sample. Estimating the full specification including all the quadratic terms (which
is possible only with the added degrees of freedom in the full sample) yields a
number of additional significant estimated coefficients, but increases the R 2 statistic

47
 only slightly, so the parsimonious specification used generally in this paper seems
satisfactory for our purposes.

Table 5.1
Estimated Coefficients of Efficiency Frontier
First Sub-Period
Function Profit Alternate Profit Cost Function Revenue Function
Function Function

Dependent variable InPROF InCost InREVS

Estimation InPROF LAD LAD LAD
procedure LAD
Constant 8.318 -9.914 6.670 -8 .757
(19.884) (18.104) (18.691) (18.955)
LnINTR 2.083 …… …… ……
(0.912)*
LnINTR2 …… …… …… ……
LnOUTP …… -4.531 4.149 -1.914
(2.016)* (2.081)* (2.110)
LnOUTP2 …… 0.015 -0.079 -0.227
(0.120) (0.124) (0.125)***
LnINTC 2.337 -9.630 1.786 -9.607
(6.859) (6.312) (6.516) (6.608)
LnINTC2 …… …… …… ……
LnOTHC 1.019 2.773 5.381 -0.011
(5.319) (4.704) (4.856) (4.925)
LnOTHC2 …… …… …… ……
LnCPRS 1.248 3.058 -2.601 1.275
(1.411) (1.365)* (1.411)*** (1.431)
LnCPRS2 -0.005 0.032 0.074 0.008
(0.038) (0.045) (0.047) (0.047)
LnINTR.LnCPRS -1.118 …… …… ……
(0.756)
LnOUTP.LnINTC …… 0.006 1.309 0.684
(0.525) -0.542* -0.549
LnOUTP.LnOTHC …… -1.339 -0.141 -1.660
(0.388)** (0.400) (0.406)**
LnOUTP.LnCPRS …… -0.222 (0.030) 0.083
(0.141) (0.146) (0.148)
LnINTC.LnOTHC 0.779 -2.676 1.635 -2.127
(1.872) (1.615)*** (1.667) (1.691)
LnINTC.LnCPRS -0.462 -0.624 -0.079 -0.437
(0.485) (0.308)* (0.318) (0.323)
LnOTHC.LnCPRS 1.342 1.099 -0.702 0.736
(0.289)** (0.250)** (0.258)** (0.262)**

48
LnDEPB -0.076 -0.035 -0.024 -0.057
(0.014)** (0.013)** (0.013)*** (0.013)**
R2 0.655 0.677 0.715 0.644
Adjusted R2 0.594 0.615 0.661 0.576
SSR 5.206 4.816 2.920 2.640
SD dependent 0.324 0.324 0.333 0.318
variable
SE of regression 0.227 0.223 0.173 0.164
Mean absolute 0.097 0.095 0.078 0.083
residuals
No. of observations 140 140 140 140
F test fixed 4.430 4.580 2.150 4.488
effects=0
F (32.389) 0.000 0.000 0.000 0.000

* denotes significance at least at the 5 percent level;** denotes significance at least

the 1 percent level;
*** denotes significance at least the 10 percent level. Standard errors in parenthesis;
Table 5.1 (Continued)
Estimated Coefficients of Efficiency Frontiers
First Sub-Period
Function Profit Alternate Profit Cost Function Revenue Function
Function Function

Dependent variable InPROF InCost InREVS

Estimation InPROF LAD LAD LAD
procedure LAD
Constant -28.163 -234.316 -81.798 26.769
134.066 (86.471) (70.956) (75.843)
LnINTR 4.582 …. …. ….
(2.572)***
LnINTR2 … …. …. ….

LnOUTP … -5.306 1.409 -3.877

(9.848) (8.081) (8.638)
LnOUTP2 …. 0.078 -0.372 -0.129
(0.114) (0.064)** (0.100)
LnINTC -20.427 -97.953 -27.667 2.413
(48.569) (27.580)** (22.632) (24.190)
LnINTC2 …. …. …. ….

LnOTHC -10.560 -68.893 -21.551 9.479

(37.495) (24.452)** (20.055) (21.449)
LnOTHC2 …. …. … ….

LnCPRS -7.581 -6.582 13.362 5.382

49
 (6.055) 4.418 (5.412)** (3.647)
2
LnCPRS 0.055 0.035 -0.086 0.014
(0.050) (0.048) (0.039)* (0.042)
LnINTR.LnCPRS -0.963 …. … …
(1.278)
LnOUTP.LnINTC … -0.531 0.010 0.273
(0.666) (0.546) (0.584)
LnOUPT.LnOTHC …. -1.001 -0.511 -1.840
(2.424) (1.989) (2.326)
LnOUPT.LnCPRS …. 0.014 0.025 -0.186
(0.015) (0.086) (0.092)*
LnINTC.LnOTHC -5.625 -28.579 -7.794 1.667
(13.938) (8.029)** (6.588) (3.042)
LnINTC.LnCPRS -0.063 -0.477 1.385 0.472
(0.391) (8.828) (0.238)** (0.253)*
LnOTHC.LnCPRS -1.527 -1.424 2.679 0.964
(1.224) (1.022) (0.839)** (0.896)
LnDEPB 0.011 -0.029 0.023 -0.021
(0.021) (0.022) (0.017) (0.019)
R2 0.649 0.680 0.813 0.815
Adjusted R2 0.517 0.546 0.735 0.737
SSR 5.206 4.816 2.920 2.640
SD dependent 0.324 0.924 0.333 0.318
variable
SE of regression 0.227 0.223 0.173 0.164
Mean absolute 0.097 0.095 0.078 0.683
residuals
No of observation 140 140 140 140
F test fixed effects- 4.430 4.580 3.150 4.488
0
F (32.389) 0.000 0.000 0.000 0.000

Table 5.1 (Continued)

Estimated Coefficients of Efficiency Frontiers
First Sub-Period
Function Profit Alternate Profit Cost Revenue
Dependent variable Function Function Function Function
Estimation InPROF InPROF InCost InREVS
procedure LAD LAD LAD LAD
Constant -210.962 -340.118 156.226 -52.696
(231.525) (176.090)*** (147.709)
144.775
LnINTR 4.062 … … …
(4.868) … … ….
LnINTR2 … …. … …

50
LnOUTP … -5.888 9.187 -0.012
… (12.564) (10.711) (12.173)
LnOUTP2 … -0.044 -0.455 -0.308
… (0.166) (0.174)** (0.181)***
LnINTC -94.141 -143.372 67.277 -24.664
(84.245) (62.021)* (48.265) (47.976)
LnINTC2 …

LnOTHC -62.990 -99.808 49.690 -12.737

(64.856) (50.561)*** (42.284) (42.162)
LnOTHC2 … … … …

LnCPRS -21.039 -17.144 10.625 2.791

(10.841)*** (14.011) (5.208)* (5.664)
LnCPRS2 0.047 0.065 -0.166 -0.077
(0.110) (0.100) (0.078)* (0.074)
LnINTR.LnCPRS -1.108 … … …
(2.970) … …. ….
LnOUTP.LnINTC … -0.655 1.081 0.346
… (0.951) (1.068) (0.997)
LnOUPT.LnOTHC … -1.251 0.692 -1.077
… (3.090) (2.556) (2.942)
LnOUPT.LnCPRS … -0.084 0.088 0.017
… (0.251) (0.194) (0.184)
LnINTC.LnOTHC -26.870 -41.882 20.398 -6.693
(24.118) (18.140)* (14.256) (13.888)
LnINTC.LnCPRS -0.786 -1.083 1.166 0.451
(1.288) (0.926) (0.529)* (0.487)
LnOTHC.LnCPRS -4.730 -3.898 2.039 0.344
(2.618)*** (3.180) (1.193)*** (1.322)
LnDEPB -0.086 -0.094 -0.008 -0.036
(0.067) (0.072) (0.035) (0.039)
R2 0.730 0.736 0.859 0.839
Adjusted R2 0.628 0.626 0.800 0.771
SSR 3.953 3.859 2.177 2.271
SD dependent
0.324 0.859 0.333 0.318
variable
SE of regression 0.198 0.324 0.149 0.152
No.of observations 140 140 140 140
F test fixed effects
6.449 ** 6.069 ** 3.727 ** 5.297 **
=0
F(32, 389) 0.000 0.000 0.000 0.000
Jarque- Bera test 687.516 ** 565.327 ** 100.512 33.767 **
Shapiro-Wiik test 0.885 ** 0.888 ** 0.942 ** 0.964 **

51
 Table 5.1 (Continued)
Estimated Coefficients of Efficiency Frontiers
Full Sample Second Sub-Period
Alternative Profit Function Alternative Profit
Function
Function Short Full No fixed Bank Only public
Specification Specification effects Specific sector banks
ation
Dependent variable InPROF Ln PROF
InPROF In PROF
Estimation LAD Ln LAD
LAD LAD
procedure PROF
LAD

Constant -16.199 -13.145 -464.614 1.526 -372.169

(12.573) (14.125) (162.598) (4.156) (238.555)
LnINTR … … … … …

LnINTR2 … … … … …

LnOUTP 2.618 -1.680 -16.939 -0.517 4.030

(1.287) * (1.289) (19.423) (1.313) (39.477)
LnOUTP2 -0.074 -0.133 -0.066 0.069 -0.834
(0.069) (0.069)*** (0.164) -0.294 (0.911)
LnINTC -7.306 4.399 -192.379 (0.882) -143.303
(4.203)*** (4.697) (50.535) ** (61.983) *
LnINTC2 …. 3.562 …. 1.225
(0.642)
(0.692) **
*
LnOTHC -0.399 -12.433 -143.182 -101.811
(3.303) (6.6067) (45.792) ** (64.705)
LnOTHC2 -0.756 2.661
(0.717)
(1.033)
**
LnCPRS 1.883 1.830 5.896 0.008 0.626
(0.741) * (0.727) * (8.127) (0.047) (6.474)
LnCPRS2 -0.020 0.010 -0.146 -0.309
(0.023) (0.023) (0.050) ** (0.118) *
LnINTR.LnCPRS 0.094
(0.160)
LnOUTP.LnINTC 1.130 0.333 -3.070 -0.216 0.146
(0.107)
(0.252) ** (0.289) (1.295) * (2.884)
*
LnOUPT.LnOTHC -0.387 -1.066 2.498 -0.305 -0.987
(0.111 )
(0.319) (0.311) ** (4.747) (8.310)
**
LnOUPT.LnCPRS -0.050 0.020 0.445 0.217 -0.226

52
 (0.061) (0.060) (0.183) * (0.164) (0.222)
LnINTC.LnOTHC -0.659 -3.852 -58.649 0.429 -40.766
(0.122)
(1.069) (0.506) * (14.707) ** (18.446) *
**
LnINTC.LnCPRS -0.045 -3.396 -0.763 0.055 -0.340
(0.140) 0.148)** (0.545) (0.085) (0.408)
LnOTHC.LnCPRS 0.490 (0.852 -0.771 -0.003 0.080
(0.172) ** (0.170 ) ** (2.003) (0.023) (1.709)
LnDEPB -0.051 -0.033 0.007 0.061
(0.011) ** ( 0.011) ** (0.028) (0.069)
SP2 0.010 0.043
(0.031) (0.033)
R2 0.622 0.624 0.252 0.586 0.755
Adjusted R2 0.571 0.571 0.175 0.412 0.397
SSR 13.506 13.229 11.193 6.159 0.472
SD dependent
0.300 0.300 0.124 0.324 0.244
variable
SE of regression 1.199 0.19 0.298 0.251 0.190
Mean absolute
0.118 0.11 0.191 0.102 0.062
residuals
No. of observations 389 389 140 140 33
F test fixed effects
66.688 10.578 ** 2.635 ** 2.267 *
=0
F (32, 389) 0.000 0.000 0.000 0.044

When the fixed effects for the individual banks are excluded, the remaining
estimated coefficients tend to be larger in absolute terms and more significant; the R
statistic is cut by more than half. In contrast, when the alternative profit function is
estimated using bank specific prices, that is, unit costs based on the ratio of costs to
payable liabilities for each bank individually, many of the estimated coefficients are
smaller in absolute magnitude and less significant, while the overall R 2 statistic is
reduced modestly. Including only public sector banks in the sample does not yield
qualitative very different estimated coefficients, except that the fixed effects are
jointly much less significant. Suggesting that these groups of banks are relatively
homogeneous (although some individual coefficient estimates are significant).
5.4 Estimation of Relative Efficiency
From above explanation we can guess about cost, revenue and profit efficiency in
average deviation form. The results in table 5.2 suggest that the average deviations in
case of cost functions are less than that of profit functions. Average deviation values

53
suggest that these values remained fixed within banking system but vary outside
banks. From both revenue and cost side relative efficiency is persistent. From
profitability point of view public sector banks shows less achievements. Similarly,
cost efficiency is shown better in public sector banks rather than all banks in second
sub-period. For public sector banks level of profit from efficiency point of view is
less than general banking system. However, public sector banks achieved their mile
stone of profits over time, but their relative profit efficiency was disturbed by
increased costs. In second sub-period the efficiency measures suggests that their
standard errors are less than that of first sub-period, because some of the banks were
more successful in adoption of new circumstances.

Table 5.2
Estimated Average Profitability, Cost and Revenue X-inefficiency
(Standard errors in parentheses)

Profit Function Alternative Cost function

Revenue
Profit function
function
LAD Estimates
First sub-period

All banks 0.560 0.600 0.485 0.736

(0.108) (0.081) (0.303) (0.294)
Public sector banks 0.170 0.170 0.394 0.641
(0.038) (0.030) (0.062) (0.059)
Second sub-period
All banks 0.412 0.413 0.728 0.681
(0.225) (0.225) (0.120) 0.131) Public sector banks
0.197 0.180 0.609 0.608
(0.138) (0.142) (0.081) (0.106)

From the above table, it can be concluded that the results for ordinary least
square estimates and least square average deviation both are about similar. However,
in absolute terms profitability and efficiency considered to be lower in case of LAD
estimates. In case of OLS the standard errors are also high. Between the first and

54
second sub period’s public sector banks revenue situation is not good, while
efficiency is achieved in terms of cost suggested by OLS estimates.

Results provided information that the financial sector reforms and in case of new
entrant’s banks have no concrete influence on performance level. Public sector banks
utilizing low level of technology while privatized banks approaches to achieve
advanced technology and more technical workers for operations. To test this average
relative efficiency of public sector and private sector banks must be analyzed.
Table 5.3 provides a confirmation that public sector banks suffered from revenue as
well cost in-efficiencies. Even before financial sector reforms banks which are
privatized showed a considerable level of profits but the situations was the opposite in
case of cost. One of the main reasons for maximization of cost was that these banks
prepare plans which were mostly profit oriented. However, in case of foreign and
private local banks the profit level was somehow similar. The OLS and LAD values
are also similar in case of private and foreign banks.
5.5 Effect of Structural Factors and Market Conditions
The results obtained in above tables showed an indication of profit and loss of
various private and public banks over time. The performance of banking system
should not be blamed only for privatization but also for some other financial reforms,
which may be technology, new marketing channels, and changes in rate of interest
etc. table 5.4 shows effects of various market reforms on different variables
separately, for private as well for public owned banks. Between the first and second
sub-periods the average profitability of banks increased enormously. The effect of
structural changes is also positive in profitability level of banking system, while
results are too weak in case of market conditions.

55
 Table 5.3
Tests of significance of Sectoral Dummy variables
Profit Function Alternative Cost function
Revenue
Profit function
function
LAD Estimates

Public banks -0.438 -0.530 0.198 -0.305

(0.035)** (0.037)** (0.032)** (0.035)**
Public banks in 0.171 0.137 -0.043 0.163
Last sub-period (0.057)* (0.056)* (0.049) (0.054)**

Privatized banks 0.057 0.046 0.055 0.111

(0.042) (0.040) (0.035) (0.038)**
Privatized banks 0.255 0.311 0.282 0.341
in last sub-period (0.099)* (0.090)** (0.080)** (0.087)**

Private banks -0.007 0.019 -0.227 -0.114

(0.041) (0.038) (0.033)** (0.036)**

OLS Estimates

Public banks -0.436 -0.544 0.215 -0.232

(0.042)** (0.052)** (0.046)** (0.061)**
Public banks in last 0.109 0.185 -0.0111 0.106
Sub-period (0.083) (0.094)* (0.066)+ (0.084)

Privatized banks 0.077 0.048 0.072 0.090

(0.030)* (0.028)*** (0.033)* (0.034)**
Privatized banks in 0.266 0.253 0.300 0.360
Last sub-period (0.166) (0.165) (0.069)** (0.098)**

Private banks 0.041 0.039 -0.181 -0.121

(0.064) (0.061) (0.048)** (0.051)*
Standard errors in parentheses **denotes significance at 1% level,
* denotes significance at 5% level; *** denotes significance at 10%level,

Table 5.4
Decomposition of changes in profitability, Costs, and Revenue

56
 Profit Alternative Cost
Revenue
function profit function function
function

LAD Estimates

All banks
Total change 1.128 1.189 1.397 1.280
Attribute to market technology 1.343 1.207 1.127 1.129
and market structure
Attribute to market conditions 0.840 0.985 1.240 1.134
Public sector banks
Total change 1.563 1.589 1.211 1.219
Attribute to market technology 0.863 1.669 1.432 1.485
and market structure
Attribute to market conditions 1.811 0.952 0.864 0.821

OLS Estimates
All banks
Total change 1.131 1.130 1.383 1.312
Attribute to market technology 0.852 1.062 1.168 1.172
and market structure
Attribute to market conditions 1.327 1.064 1.184 1.120
Public sector banks
Total change 1.426 1.437 1.189 1.218
Attribute to market technology 0.928 1.709 1.273 1.329
and market structure
Attribute to market conditions 1.538 0.841 0.934 0.918
Standard errors in parentheses **denotes significance at 1% level
 denotes significance at 5% level; *** denotes significance at 10%level

Level of profit is not up to the mark because costs to generate revenues also
increased. Even when market conditions remain constant financial sector reforms
leads increase average cost. Similarly structural changes have the same positive
impact on revenue on banking sector. In this case too results of OLS and LAD are
near to similar. However OLS suggests that change in market structure will lead to
increase in costs despite fact that revenue also increases. While alternate profit
function suggest that profit is efficient due to structural changes in market.

5.6 Deficit Budget and Privatization

57
 Privatization has also played its role in deficit budget. Debt servicing is also
an important problem of modern economies, so privatization is assumed to solve this
problem upto some extent. International monetary fund sarts with structural
adjustment programs in 1988-89to reduce deficit in budget through efficie4nt
utilization of resources. So decrease in fiscal deficit in past privatization period is not
due to privatization only. When Pakistan signed three years structural adjustment
programe (1987-90), the deficit in budget increased upto 8% of gross domestic
product. In first two years of the programe deficit was about 6% of GDP.However in
subsequent years deficit in budget rises to 6.5% despite that during 1933 major
transactions of privatization took palce.privatization of banks and telecommunication
sector influence significantly deficit in budget. (Privatization Commission, 2006).
5.7
Privatization and Efficiency
Privatization leads to higher level of efficiency but the situation cannot be
observed always.Kemal and Naqvi(1994) have conclusion from their research work
that privatization didn’t lead to improvement in level of efficiency. However, kikeri
and Nellis(1992) have of the opinion that privatization lead to improve level of
efficiency, but in 25% cases the situation was against efficiency. From studies relating
to efficiency it can be concluded that privatization leads to reduce average cost, if
applicable in competitive framework. Privatization in competitive environment leads
to increase employment, production and decrease costs. However in a monopolistic
framework producer are taking decisions to control output to the level where marginal
cost exceed price. (Baumol 1996)
5.8 Efficiency and manufacturing
While comparing private sector enterprises and public sector enterprises in Pakistan
both sectors should low level of efficiency in competitive framework. Investment
efficiency employment, wages when compared in privatization and post privatization
era produce a complicated result because of the IMF structural adjustment
programme also implemented during the same period-pre privatization era was taken
from 1986 to 1991 while post privatization period (1992-1997) was taken for
comparison during the two time periods growth rate in GDP was about 5.4% and

58
6.3% respectively. The result in decrease in growth rate is attributed to fiscal and
monetary policies, rather than privatization programme.In case of Investment the
result is too much different. Investment falls from 5.5% to 1.8% in average term
during the same period. Analysis made by Kemal (1996) through regression line
suggest that return on fixed assets and efficiency are not co-related, the co-efficient
was significant in case of few industries while in rest (fertilizers, switchgears,
motorcycles and jeeps) the co-efficient were not significant. Common man would
benefit from privatization if price falls, besides if production decreases and price
increases it should be attributed that producers are using their monopoly power.
(Economic Survey of Pakistan 2005)

5.9 Privatization and Employment

Privatization leads to increase productivity which on other hand side produce
increase in employment, price and wages.While taking decision to privatize WAPDA
and Telecommunication sector would lead unemployment for about 500 thousand
labours.Praivatization may affect labour class from four different ways
1. In privatization excess labour should be send for home
2. In Oligopolistic market when privatization is applicable it will lead to reduce
the demand for labours
3. Private sector will use capital intensive technology
4. In some cases if more workers are hired but they may be on fixed contract.
The restructuring policy of Habib Bank and united Bank resulted unemployment
for a thousand of workers (Kemal 1993)
In post privatization period growth rate of employment was about 1.3% which
was about 2.3% in pre-privatization era while in case of large scale industries the
rate of unemployment was quite low when compared with small scale industries.
(Economic survey of Pakistan, 2005)
The data available on employment for large scale industries suggest that
privatization shows a decline in employment in all sectors except fertilizers,
where employment raises by about 12%.In textile industry about 66% workers

59
entered to the bracket of unemployment because of privatization, while in ghee
Industry about 45% workers lost their employment status.
The govt. and labour union signed an agreement in 1995 which states
1. There should be no disturbance in employment during first year of
privatization.
2. Workers who opting for golden handshake will be provided gratuity equals to
their four months salary.
3. Re-habilitation programme should be continued for unemployed workers.
4. Ten percent of the shares should be offered to the employees of the same
organization and
5. In case of bidding preference should be given to already existing labours.
As a result of the above agreement workers got job for one year and 63% workers
opted for golden handshake.
(Privatization Commission, 2005).

60
Chapter- 6
SWOT Analysis

SWOT analysis is a basic, straightforward model that provides direction and serves as
a basis for the development of marketing plans. It accomplishes this by assessing an
organizations strengths (what an organization can do) and weaknesses (what an
organization cannot do) in addition to opportunities (potential favorable conditions
for an organization) and threats (potential unfavorable conditions for an organization).
SWOT analysis is an important step in planning and its value is often underestimated
despite the simplicity in creation. The role of SWOT analysis is to take the
information from the environmental analysis and separate it into internal issues
(strengths and weaknesses) and external issues (opportunities and threats). Once this
is completed, SWOT analysis determines if the information indicates something that
will assist the firm in accomplishing its objectives (a strength or opportunity), or if it
indicates an obstacle that must be overcome or minimized to achieve desired results
(weakness or threat) (Marketing Strategy, 1998).
OR
SWOT Analysis is a strategic planning tool used to evaluate the Strengths,
Weaknesses, Opportunities, and Threats involved in a project or in a business venture.
It involves specifying the objective of the business venture or project and identifying
the internal and external factors that are favorable and unfavorable to achieving that
objective

We Can Also Write The SWOT as:

Strengths - Think about what your company does well. What makes you stand out
from your competitors? What advantages do you have over other businesses?
· Weaknesses - List the areas that are a struggle. What do your customers complain
about? What are the unmet needs of your sales force?
· Opportunities - Try to uncover areas where your strengths are not being fully
utilized. Are there emerging trends that fit with your company's strengths? Is there a
product/service area that you could do well in but are not yet competing?

61
· Threats - Look both inside and outside of your company for things that could
damage your business. Internally, do you have financial, development, or other
problems? Externally, are your competitors becoming stronger, are there emerging
trends that amplify one of your weaknesses, or do you see other threats to your
company's success?

Beginning List of SWOT Questions

Strengths
what is golden about your company?
What do you do well (in sales, marketing, operations, management)?
What are your assets?
What are your core competencies?
Where are you making money?
What experience do you have?

Weaknesses
what looks a bit rusty inside your company?
What do you need (customer service, marketing, accounting, and planning)?
Where do you lack resources?
What can you do better?
Where are you loosing money?

Opportunities
Where is the blue sky in your environment?
What new needs of customers could you meet?
What are the economic trends that benefit you?
What are the emerging political and social opportunities?
What are the technological breakthroughs?
Where niches have your competitors missed?

62
Threats
Where are the red alerts in your environment?
What are the negative economic trends?
What are the negative political and social trends?
Where are competitors about to bite you?
Where are you vulnerable?
More sophisticated analysis is called "minimax."
How to minimize while maximizing?
How to minimize while maximizing?

Pakistan’s Economy 1999/2000 – 2007/2008

An objective appraisal
. This paper attempts to present an objective appraisal of Pakistan’s economy for the
past 8 years by sifting facts from fiction, separating analysis from emotions,
Presenting the strengths and weaknesses of the economy in an even handed and
balanced Manner and drawing conclusions based on these facts and analysis rather
than Perpetuating popular rhetoric and half-truths. This paper is divided into three
sections – Facts, Analysis, Conclusion and looking ahead.
6.1 SECTION - I
FACTS
Legacy of the 1990s
2. After an impressive record of economic growth and poverty alleviation during the
980s Pakistan suffered serious setbacks in the 1990s in terms of most economic and
Social indicators. Economic growth rates decelerated, inflation rose to peak rates,
debt burden escalated substantially, macroeconomic imbalances widened and worst of
all the incidence of poverty almost doubled. Pakistan's credibility in the international
financial community was at its lowest ebb as successive agreements concluded with
the International Financial Institutions (IFIss) were not implemented. Confidence of
the local Investors was eroded when the hard earned foreign currency deposits of
resident and nonresident Pakistanis, accumulated over a long period of time, were

63
suddenly frozen. Foreign investors were unhappy as all the power purchase
agreements were being reexamined and criminal action was initiated against Hubco.
3. The annual growth rate during the 1980s was 6.3 per cent, which decelerated to 4.9
per cent during the first half of the 1990s, and further down to
4 per cent during the second half. While the agriculture sector showed remarkably
satisfactory performance and recorded higher growth than in the 1980s a major
setback occurred due to poor output by the manufacturing sector. As compared to an
average record of 8.2 per cent the sectoral growth witnessed a sharp fall to almost 4
per cent in the 1990s. The services sector also could not keep up its historical pace
and showed a relatively lower growth rate. Since this sector is a major source of
employment generation, particularly in the urban and non-farm rural areas, it can
easily be surmised that overall employment rate suffered as well.
4. Investment ratio moving in a downward direction since 1995 reached 13.9 per cent
in 1998-9. This backlog of investment made it even more difficult for the economy to
resume a higher growth path. Financing to achieve higher investment rate was also
problematic as foreign savings, which used to bridge the gap between national
savings and investment dried up in the wake of the May 1998 events.
5. The persistence of fiscal and external deficits led to accumulation of large domestic
and external debt throughout the decade. Total debt consequently rose from $20
billion in June 1990 to a peak of $43 billion in May 1998. Pakistan's external debt
reached 47.6 per cent of GDP, having grown at an average annual rate of 8.1 per cent
throughout the 1990s. The net present value of external debt as a percentage of
exports was estimated at 230 per cent in 1998-much higher than the safe limit of 150
per cent. 6. The burden of stock of external debt and foreign currency liabilities rose
from 258 per cent of total foreign exchange earnings in 1990 to 364 per cent in May
1998. The ratio of debt service payment due to foreign exchange earnings rose from
23.3 to above 40 per cent in the same period. These ratios clearly suggest that external
debt burden had become unsustainable.
7. Domestic debt growth was more rapid in the 1990s-13.7 per cent per annum, and
this was a direct consequence of liberalization of interest rate and the need to finance
growing fiscal deficit. Domestic debt accounted for 49.1 per cent of GDP.

64
8. The structural burden of overall public debt thus became more onerous. Public debt
grew from Rs. 802 billion in 1990 to Rs. 2971 billion in June 1999. As a percentage
of GDP the increase was 93.7 to 102 per cent, while as a proportion of revenue the
burden rose from 470 to 625 per cent. Public debt service claimed as much as 61 per
cent of total revenues in mid-1999 compared to 35.7 per cent in 1990 thus leaving
very little fiscal space for development expenditure.
9. The burgeoning burden of debt service was reflected in the. persistently high level
of fiscal deficit, above 7 per cent of GDP, while primary deficit began to slide from 2
per cent of GDP in 1990-5 to 0.3 per cent in 1995-9. The other major contributory
factors, besides the increased burden of debt servicing for fiscal imbalances, was
lower tax effort. Tax-GDP ratio had moved up to 14.4 per cent by 1994-5 but since
then it had consistently eroded and was down to 12.8 per cent by 1999-2000. As a
consequence of this twin menace, development expenditure took a major hit and
reached a low of 3 per cent of GDP from 8 per cent in the first half of the 1980s. The
crowding-in of private investment could not take place as the beneficial effect of
complementarity between private and public sector investment was not realized.
Current expenditure excluding debt service and defence had to be contained thus
squeezing social sector expenditures below the desirable level.
10. External sector deficit also jumped from 2.6 per cent of GDP in the 1980s to 4 per
cent in 1990s. A major factor responsible for this trend was stagnation of exports and
the loss of market share in world exports. In the first half of 1990s merchandise
exportsmained stuck at about $6.8 billion. Then there was a significant discrete jump
to $8.1billion in the fiscal year 1995 but this jump proved to be an aberration, and the
annual average in subsequent years hovered around $8.3 billion. This inability to
expand exports in a buoyant world trade environment caused a loss of market share
and made it more difficult to service external debt obligations. As foreign currency
deposits of resident and non-resident Pakistanis were readily available to finance the
current account deficit the policy makers were no longer pushed to take hard
decisions on restructuring and deforming the economy. Despite the utilization of this
ready source 'of financing, it may be recalled, the volume of external debt doubled
during this ten year period.

65
11. Incidence of poverty also doubled during this decade, from 18 to 34 per cent,
primarily due to lower growth, higher inflation and limited access by the poor to basic
social services. Although the multi-donor supported Social Action Programme was
intended to help Pakistan improve its education, health care, nutrition, water supply
and sanitation sectors the actual outcomes have been disappointing. Social indicators
lag behind other countries in the region, and are much lower than the countries with
similar per capita incomes.
Macroeconomic Stabilization period 1999/2000 – 2001/02
12. The most difficult challenge faced by the Military Government in October, 1999
was external liquidity problem i.e. its ability to meet its current obligations such as
imports of goods and service, its debt service obligations and other payments at the
same time .
13. After May 1998, the country had lost an important source of external liquidity i.e.
foreign currency deposits. Workers remittances through official channels were down
to $ 1 billion. Foreign investment inflows were less than $ 400 million oil import
prices had shot up from $ 14- $ 15 per barrel to $ 28- $ 30 per barrel and the oil
import bill had doubled from $1.3 billion to $ 2.6 billion in first one year. Despite
increase in the volume of textile exports, the unit value of exports were down by 7-10
percent on average.
14. There was thus a gap between external receipts and external payments of about $
2.5 billion to $ 3 billion annually for the next few years. To met this gap and keep the
wheels of the economy moving Pakistan had to get its debt service obligations
eschedule and find ways to obtain external debt rescheduling or relief was to have an
agreement with the IMF that was in good standing.
15. Pakistan therefore had to enter into a stand-by arrangement with the IMF in 2000
for nine month period followed by a three year Poverty Reduction and Growth
Facility (PRGF). For the first time in the history of Pakistan the IMF was able to
complete all the reviews successfully and released all the tranches on time. The
credibility of Pakistan vis a vis international financial institutions was restored setting
the stage for the re-profiling of Pakistan’s external debt owed to Paris Club. Contrary
to popular perceptions, Pakistan had reached an understanding with the IMF before

66
Sept.. 11, 2001 on the broad contours of debt stock re-profiling by Paris Club as it had
successfully implemented the 09 month stand by program and became eligible for the
medium term PRGF.
16. Out of Pakistan’s total external debt and foreign exchange liabilities of $ 37.8
billion at the end of the fiscal year 2001-01, Pakistan’s bilateral debt to Paris Club
was $ 12.5 billion. On December 13, 2001 Pakistan was able to re-profile this stock
of bilateral debt by reaching an agreement with Paris Club for repayment of ODA
component debt over a thirty eight years period with a grace period of 15 years and
non-ODA component of debt over twenty three years with a five year grace period. In
addition, the US an celled its bilateral debt by $ 1 billion after September 11, 2001.17.
The debt relief provided some fiscal space, allowed the government to reduce its
fiscal deficit, and stabilize the economy. In addition, Pakistan started receiving new
confessional loans from the IMF, World Bank and Asian Development Bank which
helped in financing the current account and fiscal deficits.
18. During the years 1999/2000 to 2001/02 the economy was able to achieve the
following results:-
• Fiscal deficit was reduced from 5.4 to 4.3 percent of GDP.
• Trade gap narrowed from $ 1.6 billion to $ 1.2 billion. Current account
balance turned surplus to $ 2.7 billion from a deficit of $ 1.9 billion.
• Workers’ remittances jumped 2.5 times from $ 1,060 million to about $ 2,400
million.
• FDI flows averaged $ 400 million annually.
• Re-profiling of bilateral debt stock resulted in a saving of debt servicing of $ 1
Billion annually.
• Repayment of $ 4.5 billion private, commercial and short term debt and
Liabilities reduced the stock of debt and thus extinguished future debt servicing
Obligations.
• IMF, World Bank, ADB and other donors provided concessional assistance of
About $ 2.5-3 billion annually while their hard term loans were repaid.
• Foreign exchange reserves held by State Bank of Pakistan rose from $ 991
Million FY 1999-2000 to $ 1.677 billion in FY 2000-01 and $ 4.333 billion by

67
FY 2001-02.
• Pakistan’s exports increased from $ 7.8 billion to $ 9.2 billion by June 2001.
• New foreign currency deposits of $ 2.1 billion were opened by resident and
Non-resident Pakistanis.
19. Table –I summarizes the changes in key macroeconomic indicators that have
taken place between 1998/99 and 2001/02.
Growth Acceleration period 2002/03-2006/07
20. Pakistan’s economic performance in this sub-period has been impressive in terms
of income per capita, employment generation and poverty reduction. As a result of
assignably high GDP growth rate of about 6.3 percent a year for five years the per
capita income in current dollar terms has risen to about $ 1000. GDP growth that was
3.1 Percent in 2001/02 rose to 7 percent in 2006/07. There is a general consensus that
Poverty was reduced during this period but the magnitute of reduction varies between
5 Percentage points to 10. Unemployment rate has also fallen from 8.4 percent to 6.5
percent and about 11.8 million new jobs were created in FY99-08 period. Gross and
net Enrolment at primary level have improved over these five years. Among the
health Indicators children immunization, incidence of diarrhea and infant mortality
have shown Favourable changes. - The stock of External debt and liabilities as
percentage of foreign exchange earnings has been reduced to 125 percent from 224
percent in 2001/02. As a percentage of GDP it is down to 28 percent from 46 percent.
The country’s debt servicing capacity improved considerably as debt servicing
declined sharply to 9 percent of foreign exchange earnings from 26 percent. - Foreign
exchange reserves rose to US $ 14 billion covering six months’ imports from $ 6.4
billion in FY02.- Exports of goods and services went up from $ 13.6 billion to $ 21.2
billion recording an increase of 55 percent. - Low interest rates that touched as low as
4 to 5 percent encouraged private investment and fuelled growth. Revenue growth
remained strong. Tax Revenues rose 14 percent annually doubling in five years. -
Fiscal deficit remained below or slightly above 4 percent of GDP, despite the post
earthquake relief and reconstruction expenditures. - Manufacture ng sector recorded
an increase in its share of GDP from 14.7% to 19.1% by FY07. - In productive sectors

68
growth was broad-based. The share of agriculture declined from 26% in FY00 to 21%
in FY07 while that of industrial sector to 27% from 23% over this period.
- Investment rate grew to 23% in FY07 after averaging around 18.6% over the
previous three years reflecting a 4.4 percentage point growth in investment /GDP
ratio. - There was a significant growth in foreign capital inflows, cumulatively
estimated to be around $ 3.5 billion over this period. The telecom sector ($ 4.6
billion), banking sector ($ 2.7 billion) and oil and gas sector ($ 1.4 billion) were the
major recipients of foreign direct vestment. - A six fold increase took place in workers
remittances through official channels that is et to reach $ 6.5 billion for FY08. The
foreign exchange companies that were brought under the regulatory framework of the
State Bank of Pakistan contribute another $ 3-4 billion of foreign exchange flows. -
Monetary policy was managed to kick start the economy when it was trapped in low
growth-low inflation equilibrium. The policy was subsequently tightened to put
inflationary pressures in check by lowering core inflation. However, inflation target
slipped due to the uptrend in the global commodity prices as well as inefficiencies of
wholesale and retail markets. - Private sector credit for financing fixed investment as
well as working capital grew at an average rate of 25.5% in this sub-period.
Profitability of banking sector surged reaching $ 1.7 billion in FY07. Net NPLs ratio
declined to 2.3 %. - Capital market capitalization reached $ 65.9 billion by end FY07
from $ 7.51 billion. 60 new IPOs were listed on Karachi Stock Exchange and 48
corporate debt bonds were also issued in this period. - Average tariffs have come
down quite appreciably. Tariffs on imports average 7.6 percent and tariff on imports
of plant, machinery and equipment for industrial sector has been reduced to 5% and
for agriculture sector to zero percent while 50% initial depreciation allowance is
permitted. Free Trade agreements have been concluded with China, Malaysia, Sri
Lanka, Iran and Mauritius.- Agriculture credit disbursement by banks multiplied six
fold and most of the credit went to small farmers. Similarly more than 1.2 million
borrowers have received micro finance loans without any collateral. - Pakistan’s
foreign exchange earnings almost tripled from $ 16.8 billion in FY00 to $ 46.0
billion. Excluding foreign loan disbursements and official grants the increase
recorded was from $ 14.3 billion to $ 42 billion. 21. Table-II presents a summary of

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the changes in key macroeconomic indicators over the seven year period 1999/2000-
2006/07.
Economic Regress 2007/ 08
22. The year 2007-08 has been a difficult year for Pakistan’s economy. It must be
conceded that the momentum of growth slowed down and a temporary derailment
from the track has taken place. What has happened to the economy in the last nine
months can be gleaned from the following facts:- - GDP growth rate will be below the
target and is likely to be in the range of 6-6.5 percent. - Fiscal deficit, if not contained
in the coming three months, will exceed 7-8 percent of GDP breaching the limit
prescribed in the Fiscal Responsibility Act. - A worsening trade imbalance is fuelling
external current account deficit to exceed 6 percent of GDP. - Foreign capital inflows
that are required to finance the current account deficit are running below last year’s
level and are unlikely to meet the financing requirement. - Inflationary pressures have
intensified largely due to exceptionally high food inflation that is hurting the poor and
the fixed income groups badly. Inflation may, in fact, cross 10 percent on year to year
basis. - The drawdown of foreign exchange reserves to meet the oil import bill is
creating pressures on Rupee-dollar exchange rates. - As public expenditures have
outpaced revenue collection the overnment borrowing from the State Bank of
Pakistan has jumped to a record Rs.359 billion during the first nine months of the
fiscal year compared to Rs.26 billion in the corresponding period of last fiscal year. -
The consequence of such excessive government borrowing has been a sharp growth
in money supply to 17.6 percent offsetting the Central Bank’s efforts to tighten
monetary policy. - In agriculture sector, cotton and rice crops have not performed well
and the wheat crop is also expected to be lower than last year’s actual production. A
combination of factors such as 20 percent decline in DAP off take, delay in
announcement of wheat support price and anticipated reduction in availability of
irrigation water do not make the prospects of a large wheat crop look bright. -
Growing food insecurity, now extending to almost one half of the population can be
exacerbated if the wheat procurement, import, storage, reserve and release
management are not handled properly. Deepening food crisis globally is likely to take
its toll on Pakistan too.- Electricity and gas load shedding due to shortages in

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generation will have adverse impact on manufacturing and export sectors of the
economy. Large Scale Manufacturing (LSM) growth in the first half of the fiscal year
has already slowed down to 4.2 percent – one half of the rate recorded in July-
December, 2006.

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6.3 SECTION – II
ANALYSIS
23. An analysis of developments during the three sub-periods has to isolate the impact
Of various factors on the economic performance and outcome. These factors are:
(1) Strength and weaknesses of economic strategy and policies pursued.
(2) External environment and exogenous shocks – favorable or unfavorable.
(3) Institutional capacity, governance and quality of economic management.
24. The analysis should essentially shed light on the question whether it was good
luck, good policies or good management or a mix of the three which led to the
economic outcomes in a particular period. The motivation behind such an analysis is
not to score points or point out finger and apportion the blame or take credit but to
understand as to what has worked well so far, what hasn’t worked and why and to
build the future policies and their implementation on the basis of the insights gained
from such an understanding.
25. The analysis presented in this section covers three sub-periods: (a) 1990s
(b999/2000-2006/07 and (c) 2007/08. The lumping together of the whole period
1999/2000-2006/07 stems from the premise that there was continuity and consistency
of policies initiated and implemented in this period. This sub-period is analyzed in
detail and the contribution all the three factors is presented here.
(a) 1990s
26. The evidence presented above clearly shows that the 1990s was a lost decade in
terms of stunted growth, increase in incidence of poverty, burden of debt, large fiscal
and current account imbalances, poor social indicators, higher rate of inflation. But in
all fairness the entire blame for this particular outcome cannot be laid on the
economic managers and policy makers of that time.
27. There are at least four main factors, which can be put forward as determinants of
the performance in the 1990s. First, political instability and frequent changes in
government followed by reversal of decisions taken by the preceding government
created environment of uncertainty, lack of predictability and discounting of policy
implementation of rogrammes and projects. Second, there was widespread
misgovernance by the two major political parties which alternated in ruling the

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country during this period. Personal, parochial and party loyalty considerations
dominated decision making; institutions were bypassed and individual whims and
fancies reigned Supreme with no checks and balances on discretionary excesses and
corruption. Third, here was lack of political will to take timely hard decisions. The
cumulative effect of avoiding and postponing such decisions and failure to correct the
distortions at the right time proved too costly. Fourth, there were unforeseen
exogenous shocks, for example, the Nuclear testing in May 1998 which shook
investors' confidence, accelerated flight of Capital, led to the imposition of economic
sanctions and disrupted external economic Assistance.
28. The economic sanctions imposed as a consequence of Pressler amendment and an
uneasy relationship with the International financial institutions throughout the 1990s
did not allow much room for maneuver to pursue structural reforms that were badly
needed for bringing the economy out of morass.
29. It must, however, be recognized that the decision taken by the PPP Government to
open power sector to private producers in 1994 that was widely criticized at that time
turned out to be both right as well as timely. The power shortages that have severely
hit Pakistan in the last few years would have been even worse if the capacity created
by independent power producers was not available. Similarly, the Nawaz Sharif
Government was criticized for constructing Lahore-Islamabad Motorway through
private-public partnership. Subsequent events have not only vindicated this decision
but the successor government initiated and completed several such projects.
(b) 1999/2000 – 2001/ 02
Policy Reforms
30. The highest priority of the Military Government was a major restructuring of the
country’s external debt portfolio in a way to bring it in alignment with its debt
servicing capacity. By re-profiling the stock of official bilateral debt through Paris
Club, ubstituting concessional loans for non-concessinal loans from international
financial institutions, pre-paying expensive loans and liquidating short term external
liabilities the government was successful in executing the strategy of external debt
management in a two to three year period. This restructuring of debt put Pakistan on a
firm footing as the debt and debt servicing ratios have been on a declining path and

73
the capacity to meet the future foreign exchange liabilities and obligations without
much difficulty has been enlarged. Pakistan was no longer vulnerable to external
shocks as it was in 1998 at the time of the nuclear tests. Although the assistance and
conditionalities agreed with the IMF were the pre-requisite for debt restructuring this
lowering of debt burden, in fact, made it possible for Pakistan to exit from the IMF
program well before the specified time. Pakistan became one of the few emerging
market economies that was able to make a successful transition from IMF programme
to international financial markets.
31. It must be clarified that it is not the absolute amount of debt that really matters. In
a growing economy this amount will continue to rise in absolute terms. What is
important to see is whether the burden of debt and debt servicing is rising, falling or
is stagnant in relation to the national income, foreign exchange earnings, exports and
government revenues. As Section-I clearly shows every indicator of debt and debt
servicing is recording a downward movement since, 2002. Realizing that debt
restructuring would prove short lived if it was not accompanied by macroeconomic
stabilization measures, structural reforms to remove microeconomic distortions and
improvement in economic governance the government initiated a reform program.
The main thrust of these reforms was to allow greater freedom to the private sector to
own, produce, distribute and trade goods and services while gradually withdrawing
the public sector from this arena. The role of the state in Pakistan was redefined as a
facilitator, enabler, protector and regulator rather than directly managing and
presiding over the commanding heights of the economy. Government intervention
was justified for social protection of the poor, provision of public goods,
infrastructure, Human Development, Science and Technology. Although the State has
not always adhered to the new role assigned to it and has shown dominance in actual
practice there is a political consensus in the country on the boundaries between the
public and private sectors.
32. Significant efforts were made in unilaterally liberalizing the trade regime. The
maximum tariff rate has declined to 25 percent; the average tariff rate stands at just 9
percent. The number of duty slabs were also been reduced to four. Quantitative import
restrictions have been eliminated except those relating to security, health, public

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morals, Religious and cultural concerns. The statutory orders that exempted certain
industries from import duties or provided selective concessions to privileged
individual firms were phased out and import duties on 4,000 items were reduced. A
number of laws have also Been promulgated to bring the trade regime in conformity
with World Trade Organization Regulations. These include anti-dumping and
countervailing measures and protection of Intellectual property rights. A stable
exchange rate policy helped maintain predictability and competitiveness of Pakistani
exports.
33. Concurrently with the debt restructuring, the country embarked on the fiscal
policy reforms and consolidation by raising tax revenues, reducing expenditures,
cutting down subsidies of all kinds and containing the losses of public enterprises.
Tax reforms were undertaken to widen tax base, remove direct contact between tax
payers and tax collectors, introduce value-added tax as the major source of revenue,
simplify tax administration and strengthen the capacity of the Central Board of
Revenue. Although hese reforms are still underway, the adoption of universal self
assessment followed by random audit of selected tax returns, automation and
reorganization of the tax machinery have begun to help improve tax collection. Tax-
GDP ratio in Pakistan is lower in comparison to other developing countries and has to
be raised in the next five years to reach the average level of comparator countries.
34. As one of the sources of fiscal problems was the losses and inefficiencies of
public enterprises the Government actively pursued an aggressive privatization plan
whose hurts was sale of assets to strategic investors. The sectors where most progress
has been made are oil and gas, banking, telecommunications and energy. Foreign
investors were encouraged to participate in the privatization process and a large
number of them have been successful. The transactions completed in the last five
years yielded $ 3 billion. The privatized banks are now contributing substantial sums
to the national exchequer as they have all become profitable.
35. There has been a major and perceptible liberalization of the foreign exchange
Regime. Foreign investors can set up their business in Pakistan in any sector of the
economy – agriculture, manufacturing real estate, retail trade, services, banking etc.,
bring in and take back their capital, remit profits, dividends, royalties and fees etc.,

75
without any prior approvals. Foreign companies are allowed to raise funds from
domestic banks and capital markets.
36. Financial sector reforms in Pakistan were accelerated in this period. The Central
Bank was granted autonomy and the control of the Ministry of Finance over banking
institutions was diluted. Net non-performing loans of the banking system were
brought own to less than 3 percent of total advances and loans, minimum capital
requirements Were raised to $100 million and the quality of new loans improved.
Mergers and consolidation of financial institutions have eliminated a number of
weaker players and the Range of products and services offered by the banks widened.
The privatization of Habib Bank, United Bank, and Allied Bank - three large
nationalized commercial banks of the country has transformed the banking sector into
an efficient, privately owned and managed sector but regulated by a strong and
vigilant Central Bank. The share of the private sector ownership of the banking assets
has risen to 80 percent and the banking sector is facing a healthy but strong
competitive environment. The banks are highly profitable and automation, on-line
banking and multiple channels of delivery have improved the efficiency of services in
response to market competition. The widening of the banking spreads, however,
remains an area of concern and shows that there are still in efficiencies in the system.
37. Banking System has started to meet the financing requirements of sectors such as
Agriculture, SME, salaried classes, and the poor who had no access in the past. The
rower base of the banking system has multiplied from over 1 million to 4.5 million
households in last five years. The middle and lower middle class consumers are now
enjoying car loans, mortgages, credit cards, consumer durables. Small farmers are
using bank credit for buying chemical fertilizers, certified seeds, insecticides, small
implements and hiring tractor services. Small and medium entrepreneurs are using
bank credit to expand their fabrication and manufacturing capacities and upgrading
technology. Landless labor and poor women in the rural areas are receiving micro
loans for poultry, small livestock, sewing machines, etc. The number of households
who have borrowed microfinance loans has gone up from almost zero to about 1.5
million. The out reach for small and medium enterprises, agriculture and

76
microfinance remains limited and has to be expanded particularly in the rural areas
and backward districts.
38. Deregulation of oil and gas, telecommunication, media and civil aviation sectors
have also brought about significant positive results. Oil and gas exploration activity
was tapped up and constant discovery and production from new gas fields operated
by private sector companies has added new capacity to meet the growing energy
needs of the country. Telecommunication has witnessed a boom since the private
sector companies were allowed licenses to operate cellular phones. One million new
cellular phone connections are being added every month and the number of phones
has already reached more than 70 million or a penetration rate of almost 50 percent.
Long distance international and local loop monopoly of Pakistan Telecommunications
Corporation has been broken and new licenses including for wireless local loop have
been issued. The customers are reaping rich dividends as the prices of phone calls -
local, long distance, international - are currently only a fraction of the previous rates.
Lower telecommunication costs and increased penetration have a favourable impact
on the productivity in the economy.
39. The success of the policies pursued in this period can be gauged from the fact that
Pakistan was able to regain its economic sovereignty from the IMF as early as 2004.
The economy was able to stand on its own feet and developed the capacity to
withstand external and internal shocks. Investor confidence was restored Pakistani.
Workers living broad used official channels to remit their earnings. International
financial institutions were forthcoming with their assistance because the country had
established credibility. International financial markets responded to Pakistan’s bond
and equity issues with great enthusiasm. Pakistan ranks high among South Asian
countries on the index of Ease of doing business although the rising costs, outages
and interruptions have added to the difficulties in last year or so.
40. The veracity of the above analysis can be verified by looking at the research
reports and analyses produced by the IMF, World Bank, ADB, J.P. Morgan, Deutsche
Bank, Merrill Lynch, Goldman Sachs. The upgradings that have taken place in
Pakistan’s credit worthiness by S&P and Moody’s between 2000 and 2007, the
inclusion of Pakistan in the emerging markets by the Economist in London and other

77
emerging market indices are a testimony to the growing importance of Pakistan’s
economy.
41. If the foundations of the economy were built on a slippery slope and on
propaganda and fudging of figures and not on sound fundamentals the globally
established and well respected financial institutions, fund managers and
multinationals would dare not invest a single penny in Pakistan. Nor Pakistani debt
and equity papers would have received such rousing reception in international
financial markets. After all, there is so much competition world wide for investors’
money. They voted with their dollars to come and invest, lend and do business in
Pakistan despite the horrible image that is propagated by the international media
everyday of the year.
42. It was also realized that these structural reforms are unlikely to be sustainable if
the economic governance structure is not put right. Although Pakistan has a long way
to go in improving governance some measures have been taken to move in this
direction.
Economic governance
43. The cornerstone of the governance agenda was the devolution plan which
transferred powers and responsibilities, including those related to social services from
the federal and provincial governments to local levels. Development effort is driven at
the local level by priorities set by elected local representatives, as opposed to
bureaucrats sitting in provincial and federal capitals. Devolution of power, with
passage of time and after overcoming initial teething problems will strengthen
governance by increasing decentralization, de-concentration, accountability and
people's participation in their local affairs. However, in the meanwhile the transition
has created its own set of dislocations and disruptions particularly in law and order
and security that needs to be addressed.
44. Other essential ingredients for improving economic governance are the separation
of policy and regulatory functions which were earlier combined within a ministry.
Regulatory\agencies have been set up for economic activities such as banking,
finance, aviation, telecommunications, power, oil, gas etc. The regulatory structures
are now independent of the ministry and enjoy quasi-judicial powers. The Chairman

78
and Board members enjoy security of tenure and cannot be arbitrarily removed. They
are not answerable to any executive authority and hold public hearings and
consultations with stakeholders. These regulatory authorities are still not fully
effective due to inadequate human resource base.
45. The National Accountability Bureau (NAB) was established under a new legal
framework as the main anti-corruption agency. A large number of high government
officials, politicians and businessmen were sentenced to prison, subjected to heavy
fines and disqualified from holding public office on charges of corruption after
conviction in the courts of law. Major loan and tax defaulters were also investigated,
prosecuted and forced to repay their overdue loans and taxes. Subsequent actions
taken in response to political expediency have tarnished to the image of NAB and
compromised its integrity.
46. Some important legislative and institutional developments that have taken in the
last few years will also help in economic governance. The bane of Pakistan’s
economic problems stemmed from fiscal indiscipline over a decade that plunged
Pakistan into a debt trap. This root cause had therefore to be surgically removed so
that it does recur in the future. A Fiscal Responsibility Law has been approved by the
Parliament, which keeps a lid on the government’s propensity to borrow their way
out. Debt / GDP ratio has to be reduced by 2.5 percentage points each year and the
Debt/ GDP ratio cannot exceed 60 percent. Any deviation has to be explained to the
Parliament and need its approval. This law will hopefully act as a major restraint on
fiscal recklessness in the future.
47. Monetary policy is now operated by an independent central bank keeping the
objective of price stability, financial stability and growth in mind. Although it
involves a fine balancing act and inflationary pressures have surfaced during the last
two years the Central Bank is committed to pursue a monetary policy that keeps
inflation under control. Indirect market- based policy instruments have replaced credit
ceilings, caps on deposit And lending rates, preferential treatment to government and
directed credit to priority Sectors. Interest rates and exchange rates are market
determined and credit allocation Decisions are made by the individual banks based on
objective criteria but guided by Prudential regulations.

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48. As the paragraphs on weaknesses and shortcomings would discuss there have
been many lapses on the part of the government particularly in 2007/08 in
management of the economy, hiatus in governance reforms and diversion of attention
from economic policy issues.
External Environment
49. In this period Pakistan had to suffer several external shocks. A prolonged drought
resulted in shortage of irrigation water for agriculture; the tensions with India led to
mobilization of troops on the border, the terrorist attacks on foreign nationals in
Karachi,
the Sept. 11 attacks on the World Trade Centre and the subsequent participation of
Pakistan in the war against terror had serious consequences for the economy.
50. A favorable external environment following September 11, 2001 played a highly
Supportive role in the sub period 2002/ 03 – 2006/ 07. Economic sanctions were
removed, ncreased bilateral and multilateral assistance flowed in, bilateral external
debt was restructured and re-profiled, workers’ remittances multiplied several fold,
foreign direct investment poured in large volumes and access to international capital
markets was established. The most controversial issue is that of impact of September
11, 2001 on the turn around of Pakistani economy. A fuller analysis of this event is
therefore quite critical.
Impact of September 11 Events.
51. A large number of observers and casual empiricists both within and outside
Pakistan have been making bold but untested assertion that it is the massive aid flows
and debt belief resulting from Pakistan’s participation in the war against terror after
September 11, 2001 that has been responsible for the large reserve accumulation and
economic turnaround. It is true that following this event workers’ remittances were
diverted from open market to inter bank, debt relief was provided and new loans and
grants were granted, official sanctions were removed, but there were also huge costs
incurred by Pakistan It is conveniently forgotten that thousands of innocent lives of
Pakistani soldiers and civilians have been lost, a deep sense of in-security prevails in
the country, foreign ravel advisories have discouraged visits of businessmen, tourists
and buyers, higher war risk premia are charged, shipping freights have gone up,

80
insurance premier on Pakistani goods have escalated and export orders have been
diverted. The frequency and ferocity with which suicide bombers are attacking the
political leaders, installations and targets has added to gravity of law and order
problem in the country. Export orders of more than $1 billion were cancelled right
after the event and the recovery has not yet taken place. As against continued growth
in exports in other countries of the region there has been a significant slow down in
Pakistani exports particularly textiles due to the uncertainty created in the minds of
buyers aboard and their limited exposure to the actual conditions. IT industry, that
was just taking off in 2001, has been badly hurt as all contracts for outsourcing were
cancelled. Pakistan is no longer on the radar screen of the global IT industry which is
expanding rapidly.
52. The data presented in Table-III shows that even if we assume the extreme case
that all official transfers, debt relief and all foreign loans/ credits represent the “gift”
of September 11 to Pakistan, this combined amount represents only 10% of total
Foreign Exchange Earnings of the Country in FY-06. At its peak in FY-02, the amount
of flows from foreign assistance was 21.6%. But this entire amount is not a direct fall
out of September 11 because Pakistan has been receiving foreign loans and grants
every year since the 1950s. For example, in FY-00 and FY-01, the two years prior to
September 11, 16 per cent and 19.9% of Foreign Exchange Earnings were received in
form of foreign loans and grants. The country had a positive overall balance and
positive current and capital account balances in FY 2000-01 much before September
11, 2001 occurred. Even in FY 1999-00 the deficit on overall balance was quite small
less than 1% of GDP. Pakistan’s reserves had started accumulating in FY 2000-01 and
SBP’s own reserves hadalmost doubled after paying off foreign currency deposits of
almost $1.7 billion to the non-resident and institutional holders and $.2.8 billion in
debt servicing to external creditors. Thus, this perception that every thing good that
has happened to the country is a direct consequence of September 11 is not only
incorrect but highly exaggerated for the reasons described below.
53. It should be recognized that any external financial relief such as provided in the
ftermath of Sept 11 would have dissipated quickly and thus remained temporary and
transitory in nature until it was accompanied by fundamental structural reforms that

81
clean up the economic landscape, unshackle the entrepreneurial energies of private
economic actors, lay the foundations for competitive markets under the vigilant eyes
of regulators and expand the productive and foreign exchange earning capacity of the
country. As pointed out earlier it would not have been possible to take advantage of
the benefits offered by Sept. 11 in absence of the reforms of financial sector,
liberalization of trade and tariff regime, improvement in tax policy and
administration, deregulation of oil and gas and telecom sectors and privatization of
state owned enterprises.
54. The data presented in Table-III clearly demonstrates that Pakistan’s foreign
exchange earning capacity has expanded from $ 15 billion annually to $ 46 billion
during the last six years or 33% of GDP from 20% of GDP. Contrary to popular
perception, it is the Pakistani businesses and nationals working abroad who provide
the bulk of the reign exchange earnings of the country. It is totally fallacious to argue
that if the foreigners particularly Americans withdraw their financial assistance then
the country ill be in dire trouble. About $ 30 billion are generated by Pakistani
businesses and nationals and the remaining amount accrues from foreign direct
investment, privatization and international markets. If this pattern of foreign exchange
earnings persist in the future the relative share of foreign assistance in form of grants
or loans from United States, other friendly bilaterals and multilaterals will continue to
decline and will become insignificant in the next 5-10 years.
55. In order to further evaluate the veracity of the assertions of the theory of
dependence of our economy on the US, four key indicators are selected (a) US
assistance as percent of Pakistan’s total budgetary expenditure (b) US assistance as
percent of Pakistan’s total foreign exchange receipts (c) US assistance as percent of
total current account receipts of Pakistan and (d) US assistance as percent of total
value of imports of Pakistan. These indicators have been carefully chosen to see as to
how much damage will accrue to our balance of payments and fiscal accounts if the
US for one reason or the other abruptly decides to withdraw its assistance of all types.
56. The results of this analysis shown in Table IV indicate that even under the worst
case scenario of zero aid flows and no reimbursements for logistics services rendered
in connection with the war on terror the diminution in foreign exchange receipts or

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budgetary resources would be insignificant - varying between 4.5% of total foreign
exchange receipts to 7.2% of total budgetary expenditures. The other two indicators
i.e. the proportions of total value of imports and current account receipts financed by
U.S. assistance account for 6.4 % and 5.8% respectively – not worrisome amounts.
The common held belief that Pakistan’s economic turnaround and sustained growth
has taken Place due to massive foreign assistance from the U.S. as a reward for
participation in the War against terror is un-substantiated by the above empirical
evidence.
WEAKNESSES AND SHORTCOMINGS
57. The main factor shaping the popular discourse in Pakistan that the benefits of the
growth have not been widely shared is poor implementation capacity arising from a
weak administrative structure in the country at all levels. Policy decisions are taken
but they are questioned, reopened, and their implementation is hampered
unnecessarily, delayed or slowed down at the bureaucratic level. Civil Service
Reforms, Judicial Reforms, Police Reforms along with effective devolution of powers
to local governments are badly needed in the country. The lack of access of the poor
to the basic public services arises due to pathy, indifference and corruption prevalent
among the civil servants who deal with public at large. A National Commission was
formed to come up with the proposals to reorganize the Government and to
restructure and invigorate the Civil Services. The Commission has completed its work
and finalized its report. Many of the problem in our day-to-day governance can be
resolved if the reforms proposed by the Commission are implemented faithfully.
58. The other burning issues which agitated the minds of most Pakistanis during this
up-period were (a) high inflation (b) dissatisfaction with privatization of state Ned
enterprises (c) growing income inequalities (d) energy shortages (e) food security.
These concerns are justified but there were cogent reasons behind each of these issues
59. The strong growth performance of these five years increased the incomes of the
addle class. Domestic consumption demand has been main driver of growth. As a
consequence the demand for more goods and services translated into higher imports
as well as shortages domestically in food, energy and other essential commodities.
Higher international prices of oil, food and other commodities have in fact, worsened

83
the situation. The rising demand due to increasing purchasing power of an expanding
middle class combined with international factors have intensified inflationary
pressures. Tight monetary policy pursued since 2005 did reduce core inflation but the
higher food inflation (food forms 40 percent of consumer basket) did not allow the
overall inflationary pressure to be mitigated. The average growth of 25% in imports
reflecting the increase in oil prices, higher machinery imports over FY 03-07 and
commodities out paced export growth of 13% leading to a widening external current
account deficit. Until FT07 capital inflows funded fully the external current account
deficit and helped in building foreign exchange reserves (growing by $ 5.6 billion
over FY 03-07) but the recent slowdown in inflows in causing anxiety. 60. During the
period FY2000-08 the Government sold off cumulatively almost $ 7 billion of assets
and eased pressure on its budgetary resources as it no longer underwrote the losses of
state owned companies and enterprises. For example, the Government had to inject
Rs.41 billion to recapitalize Habib Bank and United Bank when it was under its
control. After privatization not only the market value of the residual shares held by
the government has risen significantly but these banks are paying hefty dividends and
also taxes on their profits. The efficiency gains to the economy achieved after
privatization have not been studied and therefore its impact has not appreciated. The
Supreme Court judgment on Pakistan Steel Mills created some doubts about the
transparency of the process and it is necessary to make suitable changes in the law
and processes to allay these suspicious and fears once for all.
61. The growing income and regional inequalities do pose some serious problems.
This difference has arisen mainly due to the nature of the societal relationship that
under pin various parts of the country. Southern Punjab, Rural Sindh, Balochistan
outside Quetta, Northern and Southern districts of NWFP have not so far gained
much from development activities relative to others because of the stranglehold of
feudal and tribal traditions, remoteness and low literacy. The expanding inroads of
urbanization and the communication revolution are likely to dilute these negative
influences. In the meanwhile the Government took upon itself to invest heavily in
infrastructure and connectivity in Balochistan. It is expected that these projects, when
completed, will help in removing some of the constraints that impede the remote

84
areas of Balochistan from participating in the economy. Consultations with and
participation of local communities and stakeholders in the design and implementation
of these mega projects may set at rest ome of the resistance against these projects.
62. Energy shortages have resulted from a combination of factors such as
unanticipated high growth in demand, substantial hike in international oil prices, lack
of response from the private sector, convoluted tariff setting process, bureaucratic and
interagency turf fighting. Power shortages have inconvenienced the consumers and
also caused serious problems for the businesses. Some of the projects in pipeline
would be ready for commissioning in 2009 and ease the situation somewhat. The
negotiations with Iran and India for Iran-Pakistan-India gas pipeline have become
protracted and time onsuming. A number of problems have been resolved in last one
year but progress is till slow and has to be expedited.
63. Food security issues are certainly a source of worry because of global supply and
price shocks of main food staples. International prices of wheat have jumped 92
percent in last one year and rice prices have doubled. The Pakistani markets cannot
remain insulated from these shocks despite the best efforts of the government. Wrong
estimation of the surplus wheat crop last year led to erroneous decisions and the delay
in fixing the support price this year caused uncertainty in the minds of the growers.
The new Government has, however, taken decision to revise the support price and
also imports have been allowed. These steps should help, along with targeted
subsidies, in mitigating the hardships faced by the poor.
2007-08 Period
64. The trajectory of high growth trends has been disrupted in FY08 although all
ndications point to a 6 percent growth rate- quite respectable considering the severe
external and domestic shocks the economy has suffered. This below target growth in
FY08 does not call for despondency but for firm remedial action to put the economy
back on track. An unanticipated strength in food, oil and commodity prices is mainly
responsible for cost push driven inflation pressures in the economy and these
pressures further intensified due to strong aggregate demand amidst a continuing
fiscal stimulus. As a result, it is likely that the inflation would be in the range of 8-9
percent.

85
65. The widening fiscal and current account deficits continued to create complications
and add to inflationary pressure. Rise in fiscal deficit has more troubling implications
than the increase in the previous year. The support to aggregate demand due to fiscal
deficit contributed directly to a rise in monetary aggregates and rising inflationary
pressures, complicating monetary management and stoking the growth of the current
account deficit.
66. The combination of rising fiscal deficit and weak external receipts has pushed the
government borrowings from State Bank of Pakistan to record Rs.359 billion during
nine months of the FY08 compared to only Rs.26 billion in the corresponding period
of last fiscal year. This has been instrumental in sustaining the growth of broad money
for the period at 17.6 percent significantly offsetting the Central Bank’s efforts to
tighten monetary policy.
67. In agriculture sector, the disappointing performance of cotton and rice crops and
the likely shortfall in wheat crop would not allow achievement of the targeted growth
rate of 4.8 percent. Large scale manufacturing has been encountering relatively
slower growth due to strong increases in the international commodity prices, domestic
energy woes and dampened external demand for textile exports. Economic losses in
the aftermath of December 27,2007 have further weakened the chances of meeting
the annual target.
68. International financial market turmoil and the unprecedented increase in global
food and commodity prices have generated widespread financial costs and economic
risks. It is unclear as to how far these prices are likely to hike up. World wide
shortages of food and ban on exports of food staples by several countries present a
rather bleak picture.
69. The relative slowdown in foreign inflows to Pakistan triggered both by this
turmoil in international financial markets and protracted and complicated political
transition have put pressure on exchange rate, foreign exchange reserves and the
differential between the inter-bank and open market rates. 70. The momentum of
privatization that began to slow down in FY07 was almost lost in FY08 as none of the
intended transactions was completed. 61 state entities that were in the pipeline
remained untouched. On the other hand, the subsidies claimed by WAPDA, nd PIA

86
escalated substantially, the inter-enterprise circular debt that was completely
eliminated in the earlier years resurfaced again, payments to oil marketing companies
for price differential were delayed or only partially made and the independent private
roducers were not paid on time aggravating the energy shortages.
71. Food, oil products, power and gas tariffs were not fully passed through to
consumers in the wake of international price hikes accumulating large fiscal
imbalance. Support price for wheat was not announced on time and slight shrinkage
in area under wheat cultivation has been observed. Unprecedented increase in prices
of DAP and shortages of irrigation water have further exacerbated the situation. The
forecasts for 2008 wheat crop show non achievement of the postulated target. World
rice prices have doubled and the exporters are purchasing the rice.
72. The situation can be retrieved in the next twelve months or so if bold and
outrageous remedial actions are taken by the Government to rectify these imbalances
and anage the food and energy shortages in a prudent manner. The challenge is, of
course, quite formidable but it will earn kudos and good name for the government in
the coming years near the completion of the electoral cycle.

6.4 SECTION-III
73. The Military government which came to power in October, 1999 was faced with
four main challenges (a) heavy external and domestic indebtedness; (b) high fiscal
deficit and low revenue generation capacity; (c) rising poverty and unemployment;
and (d) weak balance of payments and stagnant exports. In addition, Pakistan was
perceived as a highly corrupt country with poor governance. Transparency
International survey ranked Pakistan as the second most corrupt country in 1996. The
situation was exacerbated by the initial negative reaction of the international
community to the military takeover of the varmint as well by the high expectations of
domestic populace, and the media, to hold those found guilty of corruption
accountable. Further, the lingering dispute with Independent Power Producers (IPPs)
particularly Hubco during the preceding three years had damaged the investor-
friendly image of Pakistan. The distrust engendered by the freezing of foreign

87
currency deposits of non-resident Pakistanis in May, 1998 had not yet been erased.
Thus investor confidence was at its lowest ebb.
74. Pakistan’s credibility was quite low with international financial institutions since
the track record of performance on agreements reached with them, over the preceding
ten years, was dismally poor. There was little empathy for Pakistan among these
institutions and bilateral creditor governments, while at the same time it was not in a
position to service its external debt obligations without immediate rescheduling. The
country faced a serious external liquidity problem as its reserves were barely
sufficient to buy three weeks imports, and could not possible service its short term
debt obligations. Workers, remittances were down by $500 million, foreign
investment flows had dwindled by $600 million, official transfers had turned negative
and Pakistan had no access to private capital markets.
75. In the domestic sector, the declining Tax-GDP ratio and inflexible expenditure
structure, whereby 80 percent of revenues were preempted to debt servicing and
defence, constrained the government’s ability to increase the level of public
investment.
76. It was against this backdrop of imminent default on external debt, and a heavy
debt servicing burden in the budget that the military government had to design a
strategy for economic revival in December, 1999.
77. The facts and the analysis presented above clearly show that Pakistan’s economy
has developed the strength and become resilient to withstand adverse shocks in
relation to the situation prevailing in the decade of 1990s. Major structural reforms
carried out between 1999/2000-2006/07, improvement in economic governance
particularly key institutions and timely decisions paved the way the turnaround and
built the resilience of the economy. The fiscal space created by sound economic
management as well as provision of international assistance allowed the Government
to raise the level of development expenditure five fold during this period i.e. from
Rs.100 billion annually in Y 99-00 to Rs.525 billion in FY 07-08. This massive
expansion in development outlay llowed completion of large projects such as Makran
Coastal Highway, Gawadar Deep Sea Port, Peshawar – Islamabad Motorway, Karachi
Northern By Pass, Mirani Dam, Lining of water courses, Raising of Mangla Dam

88
work on 90 other mega projects is in different phases of implementation and when
completed will bring large benefits of the economy. In the Education sector, the
allocation to Higher Education sub-sector was raised ten fold from Rs.3.8 billion in
2001-02 to Rs. 33.76 billion in 207-08. President’s Education Sector Reforms
program was launched at a cost of Rs.100 billion to achieve universal primary
education, strengthen science education and to promote public-private partnership.
Health indicators have shown considerable improvement and population growth rate
has decreased from 2.7% to 1.8%. This large public investment in infrastructure and
social services will start to pay dividends to the economy in the coming years.
78. No doubt that the economy has derailed from the track in 2007/08 but with proper
management it can be brought back to the track. Both international and domestic
factors have contributed to the setbacks, slippages and hence a deterioration in key
economic indicators. The government’s reluctance to make gradual adjustments in the
prices of oil, electricity and gas particularly in response to the changing international
conditions, the mismanagement of wheat situation, the postponement of new GDR
and bond issues, the slowdown in further reforms particularly in the area of
governance and devolution, the pre-occupation with political issues and judicial
crisis, the absence of effective social protection and social assistance framework
accentuated the inflationary pressures, amplified the imbalances on fiscal and external
current account, created shortages of wheat, electricity and gas and wrongly given a
widespread impression that the gains achieved in the previous seven years were
illusory in nature based on fudged facts and figures. Nothing can be far from the
truth. The seven year track record cannot be dismissed summarily as and it has been
verified by international financial institutions, international bond issuers, fund
managers, research analysts and foreign investors who have invested more than $ 14
billion in Pakistan’s economy. What is true that the original targets specified for
2007/08 are unlikely to be achieved and the economic outcomes are expected to be
much worse than what was anticipated and prescribed in the beginning of the fiscal
year. The motive for the understatement of domestic interest payments in the original
budget estimates can be questioned. Whether it was sheer incompetence or deliberate
attempt to put a lower number to contain fiscal deficit can be investigated,

89
ascertained and disclosed to the public at large. But the non-achievement of many
other targets and worsening of outcomes cannot be ascribed to across-the-board
suppression or concealment of facts or fudging of figures but to the indecision and
paralysis in management of the economy exhibited during the year by the previous
elected government and the caretaker government.
79. Some of the weaknesses manifested themselves in the recent months. The first
was inability to cope with the looming energy shortages. The plans and projects of
additional electricity generation, natural gas imports, alternative energy sources
remained unfulfilled at the same time when the government was pushing the demand
side through massive rural electrification, new gas connections, substantial increase in
the use of air conditions and gadgets by a rising middle class and liberal consumer
credit. Second the Government also did not develop a sound food security plan in
which subsidies were targeted towards the poor and vulnerable segments of the
population. Third, the Government did rightly increase public expenditures on
development particularly infrastructure and social sectors but in many cases the cost
overruns have delayed the benefits to the population.
80. The temptation to blame the previous governments should be tampered with
caution and not carried too far. To the extent that it raises doubts about the country’s
financial and economic integrity, weakens the capacity to raise funds to meet the
deficits and erodes investor confidence to bring in new investment the present
government will have to bear the consequences. While a clear account should be
place before the public the potential for the damage to the economy by indulging in
scoring political points or attributing motives should also be considered.
81. Finally, the question of sustainability of growth in the future has to be addressed
squarely. There is a legitimate concern among may quarters that the growth achieved
in the past five years is unsustainable as it was driven mainly by consumption
liberalization. The sequencing embedded in the economic strategy adopted in
December, 1999 Emphasized macroeconomic stabilization in the first phase, and
stepping up of growth in the next phase. It is quite possible that the first phase may
have extended a few years beyond FY 02 if the external circumstances had not taken
a turn for better. Different options were considered to kick start the economy that was

90
trapped in low level equilibrium of low growth and low inflation in FY 02. As the
country was faced with a heavy public debt burden and the aim of stabilization was to
bring fiscal deficit down the fiscal policy stimulus option was ruled out. The
improvement in financial intermediation Process and low inflation rate motivated the
policy makers to use monetary policy lever for the purpose of economic recovery.
Low cost of capital enabled the banks to extend credit to a large number of
businesses, SMEs, agriculture and also to the consumers for automobiles, mortgages
and consumers durables. Large increase in private sector credit enabled an expansion
in aggregate demand. Manufacturing industries which were perating at low capacity
got a boost due to rising consumer demand and some of them were able to attain
profitability because of the lowering of unit cost of production. Manufacturing sector
recorded growth of 14, 15.5 and 10 percent in FY 04, 05 and 06 up from 4.5 percent
in FY 02 and 6.9 percent in FY 03. As capacity was fully utilized in most industries
new investment was undertaken to respond to this rising demand. The total fixed
capital formation in manufacturing sector between FY 02 and FY 07 amounted to
Rs.1300 billion due to double digit annual growth. From Rs.140 billion in 1999/2000
the fixed investment level in 2006/07 jumped to Rs.404 billion. It is estimated that the
textile industry alone invested about Rs.300 billion in import of new machinery and
equipment during this period. Cement industry increased its capacity from 18 million
tons to 34 million tons while in 20000/01 only 9 million tons were sold. Along with
manufacturing, transport and communications sector was the recipient of investment
totaling Rs.1320 billion. As most of this investment is in various stages of
implementation the benefits will accrue over next five years at least. It is true that
complementary investment in power and gas was missing in this period eventually
leading to disruptive energy shortages and slow down in growth in the current year.
But the cumulative public and public and private sector investment of Rs.8053 billion
or US $ 134 billion made in the last eight years still has to add to output stream in the
coming years. Investment –GDP ratio had already moved up to 23 percent in FY 07 –
almost five percentage points higher than the average rate of 18 percent. Political
stability after 2008 elections should also confer some dividends in form of further
improvement in this investment ratio.

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82. A new dimension that has been introduced in the growth equation in the past one
year i.e high international food prices. If managed carefully and assiduously this price
boom can ensure food security for Pakistani citizens and also earn foreign exchange
through exports of surplus food staples. The rice export capacity has already exceeded
3 million tons and an average price of $ 800 /ton can fetch almost $ 2.4 billion.
Similarly, the wheat and maize crops have the potential of producing surpluses if
proper pricing and marketing incentives are provided to the farmers. In case it is
mishandled food shortages and price hikes can lead to riots like in other countries.
The big question mark about the sustainability of growth in the future is as to how
quickly and effectively the incoming government is able to tackle the issues of fiscal
and current account imbalances, reassure The foreign and domestic investors about
the direction of policies and governance and How the energy shortages are mitigated.
In case, the new budget takes appropriate remedial measures and the energy situation
improves in the coming year the country should be able to resume its path on the
growth trajectory that has it followed since FY03. The economic fundamentals
remain strong and only a course correction is needed.
Looking ahead
83. There is no doubt that the year 2007/08 was a difficult year for Pakistan’s
economy. The incoming government has indeed inherited a difficult financial
position. The momentum of economic growth has slowed down, macroeconomic
stability has derailed from the tracks, investor confidence is in a state of hiatus and
the tension between taking tough policy decisions to get the economy back on track
by reducing the imbalances and providing immediate relief to the poor and the vocal
fixed income earning classes poses serious political challenge for the incoming
government. Externally, the environment is not favorable either. Turbulent financial
markets, worldwide shortages of food, escalating prices of oil and commodities make
the task of economic management even more difficult. Internally political uncertainty,
recalcitrant bureaucracy, truculent terrorists and rent seeking businesses have
worsened the situation. 84. The first 100 days provide an excellent opportunity to
take tough decisions needed to get the economy back on track, ring fence the poor
and the fixed income groups by Providing targeted subsidies, communicate frequently

92
and constantly with the public Explaining the rationale and justification for the
decisions taken, the road map ahead and listen to the critics and commentators openly
without being defensive.
85. In the short term, the fiscal deficit has to be brought down by curtailing
unproductive expenditures, slowing down the development projects that have not yet
started and are not of critical nature, accelerating energy conservation and
generationprogrammes, taxing the capital gains in stock market earned through short
term trading, revaluing the urban property and recovering agriculture income tax from
land owners beyond a certain limit, imposing taxes on services that are outside the
net.
86. In the medium term, food and agriculture production, agro-processing industries,
marketing, storage and warehousing, transport, retail distribution have to be paid
highest priority along with agriculture credit, insurance, microfinance and upgrading
of rural infrastructure. Devolution to local governments to allocate resources and
manage their own affairs should be strengthened along with fundamental reforms in
the governance structure.
87. In the long term, the industrial and export structure have to be diversified into
more dynamic products such as engineering goods and services, steel, petrochemical
complex, oil refineries are the essential ingredients upon which the new structure is to
be based along with heavy investment in skilled and unskilled manpower
development.

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Statistical Tables Of Pakistan Economy (1996 - 2008)
Statistical Tables of Pakistan Economy
Table No. 1 - Macroeconomic Indicators (PKR Billion)
Years GDP Exports Imports Trade Deficit
1996 2,120.173 8.707 11.805 3.098
1997 2,428.312 8.320 11.894 3.574
1998 2,677.656 8.628 10.118 1.490
1999 2,938.379 7.779 9.432 1.653
2000 3,826.112 8.569 10.309 1.740
2001 4,209.873 9.202 10.729 1.527
2002 4,452.654 9.135 10.340 1.205
2003 4,875.648 11.160 12.220 1.060
2004 5,640.580 12.313 15.592 3.279
2005 6,499.782 14.391 20.598 6.207
2006 7,623.205 16.451 28.581 12.130
2007 8,723.215 16.976 30.540 13.564

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Chapter 7
Conclusion and Recommendations
7.1 Introduction
The conclusions of the study are given in this chapter. The chapter also provides some
suggestions and policy implication based on the results of the study.
7.2 Conclusions of the study
1 Main economic goals of different policies were to increase productivity and
efficiency through effective utilization of available resources by private sector.
Lots of problems were created by overstaffing because of political
compulsions. To solve these problems, privatization was considered as a
remedy.
2 In 1990 a report of privatization was placed before the cabinet for approval.
The report assigned 115 units for privatization and the expected income from
these units was projected about Rs. 30 billion, but only 69 units were
privatized which resulted an amount of Rs. 3.95 billion
3 During the period 1993-96, the Govt of PPP decided to privatize 31 units .Out
of which 13 were privatized. Income received by selling these units was Rs.
863.9 million.
4 In order to enhance economic growth and alleviate poverty the present Govt
led by General Musharraf gave the same tempo to the process of privatization.
Privatization commission has privatized about 47 units which resulted an
amount of Rs. 240593.7 million.
5 Due to privatization, Paid up capital of Allied Bank Limited increases up to
Rs.1063 million, while in case of Muslim Commercial Bank the increase was
about Rs.1820 million.
6 Due to Privatization Profit level of MCB increased up to Rs.531 million in
1996 while that was only Rs.100 in 1991 in pre-privatization period. Similar
was the case for ABL too, where Profit has increased from Rs.210 million to
Rs.1230 million during the same period.
7 Results suggested that due to privatization, privatized banks can exercise the
latest technology. However, there is a catching up in term of Costs.

109
 8 Public sector banks suffer in cost as well in revenue inefficiencies although
they improved their market credibility in the post-reform sub period. The
banks that privatized showed greater efficiency from revenue point of view.
9 Structural features positively change the profitability of banks where changes
in market condition lowered it only in privatized banks.
10 OLS and LAD results are mainly similar. However OLS suggested that
changes in technological and market structure were harmful for efficiency.
11 Due to privatization fiscal deficit reduces. The fiscal deficit was 8.5 % of
Gross Domestic Product (GDP) in1987-88. Due to structural adjustment
program deficit declined to 6.5 % in the subsequent periods.
12 Privatization resulted high level of Productivity and low level of Prices if
applied in competitive framework and also had a positive effect on
employment.
13 The private sector investment increase up to 9.4 % in 1997-98 but this is not
sufficient to fill the gap of Stat Investment. Sharp fluctuation in post
privatization period needs to be noted.
14 The fruits from privatization for a common man must be noticed if the price
falls but if enterprises using their monopolies then prices increases and output
falls.
15 Due to privatization improvement in productivity is achieved which leads to
high level of employment and wages.
16 Structural reforms related to Privatization lead a positive effect on banking
system for many economies especially in case of Pakistan.
17 Privatization showed a considerable increase in case of Investment. It was
estimated abut 4.7 % of GDP during 1993.From Production point of view it
showed relative importance in case of Chemicals, Fertilizers and Ghee
industries.
7.3 Recommendations
Being so important in creating employment, increasing production, improvement
in education, improvement in wages and salaries, the following measures are
suggested for further improvement in privatization.

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1. Privatization should provide its results in true sense if there is no political
compulsion in external as well in internal affairs of privatized enterprises.
2. Amount of privatized enterprises should be utilized in such a way to enhance
economic development.
3. Privatization of commercial banks resulted increase in costs so must need to apply
such policies, which reduce costs of such transactions.
4. Privatization should not be applied in case of monopoly in order to have a positive
impact on employment.
5. To meet the mission of economic growth efficiently, Privatization should be used
as a strategy.
6. To maximize performance of various enterprises, Privatization should be applied in
competitive framework.
7 In case of Privatization some people are loosing their Jobs. Their must be some
enterprises where these exploited labour force might get their livelihood.
8. When various enterprises undergone process of Privatization they must have to
ensure the health protection and restoration of the environment.
9. To manage newly Privatize enterprise efficiently the Govt must have to develop
new ways of thinking.
10. Privatization transaction must be of the form to balance costs and rewards.
11. Stakeholders should be involved in privatization process as it will add value and
improve outcomes.
12. Privatization affectees should be given alternative jobs so that productivity
and employment could be improved.
13. In case of Pakistan Privatization Commission should envisage various polices
to uplift the development status of the economy.

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