The overall performance of the economy during FY02 was quite encouraging under the circumstances; real gross domestic product (GDP) grew by 3.6 percent compared to 2.5 percent in FY01, and was not very far from the 4.0 percent growth target for the year, despite the impact of economic shocks emerging from September 11 events. It is noteworthy that all key sectors contributed to the growth, although the services sector was dominant.

Agriculture was again hit by acute water shortages for the third successive year and, as a result, the crop sub-sector recorded a 0.1 percent decline even on the low base ofFYO 1. The weak performance of the major crops, in particular, is a matter of grave concern; it is worth noting that the growth figure could have been even worse, if not supported by the unexpectedly good sugarcane crop that mitigated much of the impact of declines in other key crops. In fact, the negative growth of the crops sub-sector partially cannibalized the contribution of the livestock sub-sector, which recorded a 3.4

percent rise in FY02 (a deceleration from the 4.9 percent seen in FY01). As a result, the agriculture sector recorded a growth of 1.4 percent against the 2.6 percent negative growth in FY01. Thus, even this weak recovery of the agriculture in FY02 owes almost entirely to the livestock sub-sector. The manufacturing sector fared better in FY02, recording a substantial 4.4 percent growth. While certainly lower than the 7.6 percent growth recorded in FY01, the resilience demonstrated by the sector in overcoming the impact of various prevalent economic and political uncertainties, is encouraging.However, it was the services sector that

overshadowed the overall GDP growth profile in FY02, rising 5.1 percent during the year vs. a target growth of 4.4 percent, and an increase of

4.8 percent in FYO 1. Interestingly, approximately half of the incremental value addition in FY02 is recorded by a single

component, i.e. defense and public services (see Table 2.1). Gross National Product (GNP) grew by 5.4 percent in FY02 compared to 2.5 percent last year. The increase in net factor income from abroad, mainly caused by the higher remittances, for the first time during the past eighteen years, brought GNP growth substantially ahead of growth in GDP.

National savings stood at 13.9 percent of GNP in FY02 compared to 15.3 percent of GNP last year; the lower ratio implies that there has been a decline in the marginal rate of savings during FY02.

Table 2.1: Sector-wise Growth Rates

Also, a 5.9 percent fall in gross fixed investment saw its ratio to GNP decline further to 12.2 percent in FY02 from 14.5 percent last year.

The performance of agriculture during FY02 was disappointing. The sector posted a weak recovery, growing only by 1.4 percent, even on the low base due to the 2.6 percent decline in FY01, owing almost entirely to a reasonableperformance of the livestock sub-sector (see Table 2.2) The crops sub-sector, the key contributor to overall agricultural growth, saw a lower fall in FY02, but this is no cause for celebration; it simply reflects that a further decline in rice was offset by an improved sugarcane crop,' leaving the overall FY02 production of key crops

stagnant around the poor FYO 1 levels. As in the previous year, water shortages proved to be the key culprit, with aggregate availability of surface water at canal heads declining further to 73.1 million acre feet against 81.1 million acre feet during FY01.

Fishing activities were higher during the year and made a good headway over the previous year's negative growth. Similarly, forestry also recorded positive growth. However, due to their small shares in value addition their overall contribution was insignificant. Clearly, the agricultural sector has lost much of the momentum from the annual average growth of 4.3 percent during the 1990s. In real terms, the FY02 value addition ofRs 166.3 billion has fallen even below the Rs 168.5 billion contributed by agriculture in FY00, pulling down the sector's share to 24 percent in FY02 from almost 26 percent in FY00. This decline in output, coupled with othernegatives such as a declining trend in farm output prices, increasing input costs, and lack of protection from volatility in market prices eroded farm incomes, leaving the rural populace precariously placed. This is clearly visible in the falling rural per capita real cash

Source : Economic Survey 2001-02

Table 2.3: Present Agriculture Scenario

value2 that, after showing an improvement in FY00, deteriorated by 4.4 percent and 0.4 percent in FY01 and FY02, respectively (see Table 2.3).

The timing of the decline in farm incomes is particularly unfortunate, since a coinciding surge in the prices of key farm inputs such as fertilizers and light diesel (fuel for tractors and tubewells) added to the cost of production. Faced with limited choices, farmers opted to cut down production expenses by curtailing the usage of fertilizer during FY02 (the urea off-take was 7.3 percent lower than in FY01).

Also, farmers seem to have deferred their expenses on development works such as purchase of tractors, installation of tubewells, development of land and watercourses, etc. In fact, they even showed less interest in undertaking developmental activities through bank borrowings. During FY02, farmers availed 13.9 percent less development credit compared to the previous year.

In years of better growth, capital formation in agriculture remains high, and vice versa. This is evident from the significant relationship that exists between the annual growth in agriculture and the real expenditures on capital formation by private sector in agriculture (see Figure 2.1). Except for FY99, when farmers were given incentives for purchasing tractors and installing tubewells, the relationship holds strongly. In FY02, farmers (particularly those depending only on crops) clearly could not make the necessary investment due to the shock of the large negative growth during FY01.

Contrary to private sector's trend, wide fluctuations have been observed in capital formation in agriculture by public sector; as a percent of total public sector investment, it ranged from a low of 0.7 in FY01 to a 3.7 percent figure for FY023. This volatility reflects the changes in the annual development plans each year. In each effort to reduce the fiscal deficit, the

immediate cut is placed on the size of the annual development plan, squeezing the already marginal allocation of funds for rural

development and the agriculture sector. The existing situation is thus the continuation of a trend that started after the first five-year plan (see Table 2.4).

Table 2.4 : shares of Agriculture in public sector expenditure

Source: FAO Report On Agriculture Strageties for the first Decade of New Millennium

Despite two years of negative growth major crops maintained their customary largest share in FY02, contributing more than 40 percent of the value addition (see Figure 2.2). However the decline in major crops not only overshadowed the progress of other sub-sectors of the agriculture, but also pushed down overall GDP growth. FY02 efforts to increase the production of major crops by ensuring the timely availability of fertilizers, pesticides and higher disbursement of credit fell prey to shortfall in canal-head water. As a result both, the area under cultivation and yields declined for most major crops.

During the year under review, among the four most important crops (with a 90.7 percent share in major crops), declines were recorded in the production of rice, cotton and wheat. Production of sugarcane, on the other hand, increased by 10.2 percent, supported by an increase in the area under cultivation, and higher per hectare yield. With a worsening of the water shortage in the later halfofkharif and the entire season ofrabi, the area under rice and wheat dropped, and this loss was compounded by yield declines (see Table 2.5). Another factor contributing towards a decline in the yield of rice was the substitution of high yield (but lower quality) rice with the low yield (higher quality) rice. For wheat, the decline in yield was mostly related to insufficient rains in the barani (rain fed) and hilly areas. The decline in yield of cotton crop, despite a rise in area under cultivation, resulted in a

smaller crop size. An attack ofbollworm in some of the cotton groing districts of Punjab and late

sowing in Sindh, due to water shortages, were among the main factors contributing to the fall in yields.

There has been a significant relationship between water availability and the area under cultivation of important crops except for the last two years when the area declined less proportionately than the

Table 2.5: Highlights of Important Major Crops - FY02

1: Per Hectare

Source: Economic Survey , 2001-02

shortage of irrigation water (see Figure 2.3). This happened on account of better water management by the authorities and greater resort to tubewell irrigation (see Box 2.1 on Role ofTubewells in Irrigation). Further, if taken by end-use classification, area under food-grains (wheat, rice, bajraJowar, maize and barley) declined by 3.6 percent followed by a 5.5 percent decline in production. By contrast, the area under sugarcane and cotton increased by 4.1 percent and 6.5 percent respectively, mainly on account of timely rains in early kharif and substitution of area from rice to cotton at some places.

It is interesting to note that the share of major crops in agriculture has fallen from 50.4 percent in FY92 to 40.1 percent in FY02, but it still sets the overall trend in agri-sector growth (see Figure 2.4). 2.2.2 Minor Crops

The less thirsty minor crops, in contrast to the major crops, succeeded in posting a 1 percent growth in FY02, compared to a marginal increase of 0.1 percent in F YO 1. With a 17 percent share in value addition, minor crops, after major crops and livestock, occupy the third place, in terms of the contribution to agriculture. By composition, the classification contains items such as pulses, vegetables, fruits and oilseeds (see Figure 2.5). With the highest share in minor crops, the fruits sub-sector is an important contributor to exports. During FY02, total fruit exports amounted to US$ 83.1 million compared to US$ 78.7 million in FY01 (see Special Section 2.2 on Fruits Production, Marketing and Export). Among other key minor crops, the production of onion and chilies declined during FY02 (see Table 2.6). Marketing weaknesses and fall in prices were the main factors behind the respective declines. In particular, transport and marketing bottlenecks resulted in significant onion production losses during FY01 and FY02. This discouraged growers, particularly in Balochistan.6 The setback to the production of chilies was on account of a sharp fall in prices during FY01 when the average retail price declined by 21.7 percent.

Table 2.6: Highlights of Important Minor Crops percentage change over last years

Source: Economic Survey , 2001-02

After signing the Indus Basin Treaty with India in 1960, Pakistan holds the right to use the water of three rivers, the Indus, Jhelum and Chenab. Their average annual flow was at 142 million acre feet (MAF) at the time the Treaty was signed.

However, the water flow has gradually declined. The canal head water supply, which was on average 105.6 million-acre feet (MAF) in 1990's, fell to 73.1 MAF in 2001-02, reducing water availability for Pakistani crops. Poor rains have compounded this problem in the last two years.

• In Rabi season FY02, water supply was 50.0 percent lower than the average availability (in FYO 1 the gap was 41.0 percent).

• The total flow in main rivers at 91.2 MAF in FY02 was significantly short of 131.7 MAF (the average annual flow during the past 24 years).

• Rainfall remained below normal levels with a decline of 8.8 percent during monsoon 2001 and a 43.2 percent fall during winter (January to March 2002). As a result, FY02 canal-head water availability was reduced by almost one-fourth compared to the average for the past ten years. The adverse affect of this grave water shortage was alleviated through (1) minimizing the water flow losses from canal-head to farm-gate, and (2) increasing water extraction through tubewells.Consequently, water channel losses were reduced to less than 5.0 percent in FY01 compared to 25.3 percent in FY99. Further, in FY01, for the first time in the past ten years, the area irrigated by canal-tubewells (installed in canal command areas) exceeded the area irrigated by canals (see Figure 2.1.1). The share of tubewells in total irrigation (other than canal-tubewells) is also rising; it increased from 15.3 percent in FY91 to 17.9 percent in FY01.

Installation of tubewells continued both in private and public sectors. During the past ten years, higher annual average growth at 6.2 percent has been observed in private tubewells compared to the 4.0 percent increase in public-sector tubewells. By the end of FYO 1, tubewells totaled 545.6 thousand, with private tubewells taking a 95.9 percent share. Consistent with number of tubewells, the ratio oftubewell irrigation to total irrigation is also rising (see Figure 2.1.2).

The high (and rising) ratio oftubewell irrigation suggests that tubewells may have helped significantly in avoiding a steep fall in the total area under cultivation, given that

during the past two years this was the only alternate water source that significantly compensated for canal water shortages. In fact, the shortfall in canal-irrigated area at

11 thousand hectares in FYO 1 was more than offset by an increase of 24 thousand hectares by tubewells. In FY02 again, the area under tubewell irrigation increased by another 24 thousand hectare, but could not fully offset the decline of 5 8 thousand

hectare in area under canal-irrigation. Although, tubewell-irrigation proved helpful in easing water scarcity during past two years, its sustainability is again peggedto rainfalls and the flow of water in rivers and canals that recharge the underground water reservoirs. In fact, excessive drawing of water during periods of drought causes a rapid depletion in the underground reservoirs and limits the usage and sustainability of tubewell-irrigation.The construction of small dams and water reservoirs by both, the private and public sectors, is essential to maintain underground water to the minimum levels necessary for the functioning of tubewells.

The increase in production ofoilseeds by 1.6 percent during FY02 could not bring any improvement in the domestic share of total availability of edible oil. At present, the domestic production ofoilseeds provides around 29 percent of the total domestic requirement.

2.2.3 Livestock

During FY02, livestock and poultry grew by 3.4 percent compared with 4.9 percent figure for FY01, with broad based growth in all sub-heads, their products and by-products. The highest growth was shown by the poultry sector both, in the number of birds and in the production of the poultry meat (see Table 2.7).

Table 2.7 : Livestock Population and Products

1: Include Layers, Broiers and breeding stock

2: Million Numbers

Source : Ministry of Foods , Agriculture and Livestock

percent in agriculture as against 28.8 percent in FY92. Similarly, value addition to real GDPalso increased during the period by around 77

percent. The extraordinary growth in FY96 is on account of the revision made in the value addition

based on the livestock census held in that year. While the livestock value added income showed steady increase, the variability in the output of other sub-sectors led to a volatility in its relative share in agriculture income (seeFigure 2.8)

A key reason for the robust growth in this sub- sector is the regular income livestock brings to farmers, providing critical financial support7, during periods when farmers face cash flow problems e.g. the inter-crop period. Also, while big farmers adopt livestock farming to diversify their sources of income, small farmers or landless rural households are attracted by the support it provides to their meager income from crops. In some rural areas women have been observed undertaking livestock farming to generate an independent income stream. Also, among the farming community, livestock heads are important assets and are often used as collateral; they therefore prefer to keep as many cattle heads as they can. Poultry is another fast growing activity. Commercial projects situated either in the outskirts of cities or towns account for most of poultry production. However, a meaningful share comes from rural poultry, which contributes around 10 percent of the production of day-old chicks. Interestingly, the number of layers produced by rural poultry substantially exceeds the production of commercially raised layers. During FY02, commercially produced layers were 18.4 million compared to 32.0 million raised through rural poultry. Milk accounts for two-thirds of livestock

products by value. Its share in value addition to GDP at current prices is higher than the contribution by any of the major crops. With the

continuation of steady annual increase in production, its share is expected to grow further (see Figure 2.9).

In addition to increase in incomes, the impetus to demand for livestock comes from the growing urbanization, and resulting change in dietary habits. In cities, people use higher quantity of food such

Source: Agricultural Statistics of Pakistan, 2000-01

as, e.g. mutton, beef, chicken, milk preparations, eggs and bakery products, than their counterparts in villages (see Table 2.8). Another factor supporting livestock growth in Pakistan is the demand for sacrificial animals for Eid-ul-Azha.

With higher incomes in urban areas, the domestic and commercial use of livestock products and byproducts, is on the rise. A comparison between outcomes of 'Household Integrated Economic Surveys' of 1990-91 and 1998-99 shows significant shift in the consumption pattern of meat and vegetables. Over the period, per capita consumption of mutton and chicken rose by 6.3 percent and 81.8 percent, respectively, while that of beef declined by 25.9 percent. Moreover, consumption of eggs registered an increase by 28.3 percent. On the other hand, per capita consumption of vegetables and pulses has declined by 22.9 percent and 26.3 percent. This, interestingly, shows strong evidence of changes in consumption pattern (more preference towards animal based foods) with changes in income and living standards. Despite a rise in domestic consumption, there is also a large potential for livestock exports to the Gulf and Middle Eastern region.

In low-income countries, about 11 percent of calories and 26 percent of protein are on average, derived from animal food, while these averages for developed countries are 27 and 56percent, respectively. In Pakistan, the daily per capita availability of calories and proteins is slightly better than the South Asian region, butlower than that of low-income countries (see Table 2.9) A comparison of per hectare yield of major crops and average production of milk per cow/buffalo in Pakistan with the world averages reveals that greater potential of growth lies in the

production of milk, the largest element in the non-farm sector. It will be noted that during FY02imports of milk and milk products amounted to Rs 435 million compared to Rs 633 million in FYO 1.

Recognizing the potential of livestock and poultry, government has announced a number of measures in the agricultural package, which are listed in the Appendix on Policy Measures for Agriculture.

The fishing activities cover commercial and subsistence fishing in ocean, coastal, offshore waters as well as in inland waters. During FY02, with the contribution of 3.6 percent to the value addition in agriculture, the fishing sub-sector grew by 4.0 percent against 3.7 percent decline last year. Total fish production both from inland and marine sources during the year was 654.5 thousand tons compared to 629.0 thousand tons last year. Similarly, exports offish and fish preparations also increased from 82.0 thousand tons last year to 84.5 thousand tones during FY02.

2.2.5 Forestry

Value addition through the forestry sub-sector, with a tiny share of 1.1 percent in agriculture sector, registered 1.1 percent growth in FY02 compared with 9.9 percent last year. As the value addition in forestry comes from the sale of timber, its growth in the present scenario is not encouraging because it leads to an increase in deforestation (for detail see Box 2.2 on Forests Development in Pakistan).

Table 2.9: Per Capital Availability of calories and protein

Source: World Development Indicators, 2001

Forests protect the fragile mountain ecosystem; fight against pollution, protect the watersheds and help greatly in abating floods and drought. In addition to being the main source of timber, fuel wood and resin, forests also fulfill the increasing grazing requirement for the cattle. The total area of forests being lost each year might not be very large but the impact on the remaining forests, their biodiversity, and their continued ability to perform their environmental functions and provision of economic goods could be much greater.

Forests constitute around 4.8 percent (4.2 million hectares) of the total land in Pakistan, which is very low as compared to the benchmark of 26 percent for developing countries. Pakistan has only 0.03 hectare of forest per capita, against a recommended level of 0.5 hectare for developing countrie.Pakistan's forests are mostly located in the northern parts of the country (40 percent in the NWFP, 15.7 percent in the Northern Areas, and 6.5 percent in the AJK), largely privately owned. Survey results indicate that 52 percent of timber and 90 percent of firewood comes from these private forests.

The Forest Act, 1927 and the Environment Protection Ordinance, 1983 provide legal support for protecting and conserving forests. Environmental protection and ecology are also included in the concurrent legislative list of Pakistan's 1973 constitution. In spite of all these measures, deforestation is taking place at a very high rate.

As a result, Pakistan is the third highest loser of forests among countries experiencing very high rates of deforestation8 (see Table 2.2.1). It must be remembered that Pakistan already has a large deficit in forest coverage compared to other countries of the region (see Figure 2.2.1).

Although regeneration and afforestation, are the only tools to mend the loss done by the deforestation, there are some

problems related to afforestation. Such forests have characteristics different from natural forests in their

species, composition complexity, biological diversity, and in the benefits they bring to the society; thus they are less profitable as compared to natural forests. Utmost efforts should,

therefore, be focused on conserving the natural forests. As the existing forests are widely scattered, it is very difficult to

detect illegal cutting of trees. Local population could have proved helpful in arresting illegal deforestation, but the lack of

awareness among the populace has not allowed the widespread promotion of Social Forestry in the country.

Agriculture credit has traditionally been used for purchasing inputs, and to finance developmental activities such as purchase of tractors, installation oftubewells, development of land, etc. The ratio of agricultural credit to agricultural GDP (at current factor cost), which was at 4.9 percent during 1990s, has improved to 6.3 percent during FY02. With the recent improvements in credit delivery e.g. the policy of revolving credit, de-zoning of the commercial banks' territory, etc., it has become easier for the farmers to manage their loan portfolio more effectively.9

Table 2.2.1: Deforestation Rate

Source: FAO Publication, 1997

Simultaneously, with the removal of the cap on mark-up rates10 and expansion in the scope of agricultural credit, it has become attractive for the commercial banks to lend to the agriculture sector, either directly or by using the branch network and expertise of Agricultural Development Bank of Pakistan."

In line with expectations, and consistent with policy changes made by the SBP during past two years, a robust growth of 17.1 percent was witnessed in the disbursement of credit during FY02 with a record amount of Rs 52.4 billion (see Table 2.10). The encouraging feature was the rising share of commercial banks in the overall disbursement to agriculture. Since the implementation of the changes in credit policy introduced in FYO 1, the share of commercial banks has risen sharply (see Figure 2.10). Province-wise distribution of credit reflects that Punjab with the largest area under crops takes the highest amount of credit, followed by Sindh, NWFP and Balochistan (see Figure 2.11). The situation becomes different when per hectare availability of credit is taken into account. Interestingly, Sindh takes the lead with an average disbursement of Rs 3,978 per hectare; next comes Punjab with Rs 2,890, followed by NWFP (Rs 1458/hectare) and Balochistan (Rs 937/hectare). This wide variation is mainly attributable to: (1) the financial position of farmers in the respective province, (2) variation in land holdings, (3) repayment position and track record, (4) interest of farmers towards institutional credit, and (5) concentration of agricultural activities.

A comparison of provincial credit demand computed on the basis of a methodology developed by SBP and the information provided by each of the respective provincial departments, shows that the share of Sindh in total credit demand is higher relative to its share in total cropped area. The functional distribution of credit showed that during FY02, around 83.0 percent of the total credit was disbursed for production

purposes, while the remaining was given for development purposes (see Table 2.10). The lower off

take in development credit, as pointed out earlier, was the outcome of a decline in farm incomes during FY02, which compelled the farmers to defer their capital expenditures.

Table 2.10: Purpose-wise Disbursement of Credit

million Rupees

Source: Agriculture Credit Department, SBP

The credit distribution by size of holding shows that the subsistence farmers were the major beneficiaries of institutional credit, in proportion to their share in overall land holdings (see Figure 2.12).

Consistent with the concerted recovery drive launched by banks, the recovery of agri-loans saw an improvement of 11.7 percent during FY02. In fact, the amount recovered, at Rs 53.5 billion, was even higher than the overall disbursement made during the year. This was the second successive year that recoveries remained greater than disbursements. During FY02, most of the loan recovery pertained to current dues, while the recovery of past due loans was weaker. Interestingly, this phenomenon is observable across all categories of banks (see Table 2.11). The above recovery pattern leads to the following conclusions: • Recent loaning was prudent, enabling higher recoveries on current dues. • Commercial banks have shown substantial improvement during FY02 by achieving more than 85 percent recovery of the dues, while the ADBP is still unable to recover almost a third of its current dues.

• Overall decline in recovery of past-due loans during FY02 reflected that the probability of recovery from the stock of old loans appears remote.

Net agriculture credit (disbursements less recovery) declined by Rs 1.0 billion during FY02 (see Table 2.12), but the outstanding amount increased from Rs 93.4 billion at end-June FY01 to Rs 101.5 billion in FY02, on account of accrued interest on past-due loans. It must be noted that with less than

Table: Recovery Performance

1: July- May

2:INcludes: NBP, HBL, MCB, UBL, and ABL

Source: Agriculture Credit Department , SBP

1: Net credit = disbursement minus recovery

2: Includes: NBP, HBL, MCB, UBL, and ABL

3: New private commercial banks started lending in FY02

Source: Agricultural Credit Department, SBP

100 percent recovery in current dues, and a deteriorating recovery ratio of past-due loans,12 the outstanding stock of agricultural loans will continue to grow. This will ultimately restrict banks' capacity to meet the increasing demand from the sector.

During FY02, an uncertain political and economic environment in the region affected industrial activities adversely; the total value added by industry rose to Rs 172.3 billion, representing a 2.8 percent growth - lower thanthe previous year's 3.1 percent growth (see Table 2.13). This slowdown was mainly caused by the weak performance of themanufacturing sector during FY02.

In fact, due to its large share in overall industrial value addition, the manufacturingsector typically accounts for most of variation in industrial growth.13 This was particularly true in FY02, when growth in value added bylarge-scale manufacturing (LSM) decelerated to just 4.0 percent compared to a growth of 8.6 percent in the preceding year.The uncertain situation that emerged during the

first half of FY02, resulted in low investor confidence as reflected in a decline ininvestment in LSM during FY02, despite a considerable improvement in the macroeconomic environment. During FY02, gross fixed capital formation in LSM recorded a sharp decline of 44.0 percent, causing a 5.9 percent fall in gross fixed capital formation by the industrial sector as a whole, for the first time in the last 20 years. There was also a drop in foreign direct investment (FDI) into LSM industries, other than textiles, leather and electronics.

FY02 also saw a considerable increase in focus on the development of small and medium enterprises (SMEs). However, its contribution to overall industrial value addition cannot be ascertained until the next survey of Small and Household Manufacturing Industries (SHMI) is conducted.14 The share of manufacturing in overall industrial value added grew marginally to 70.7 percent in FY02, at the expense of the other components (see Figure 2.13).

Table 2.13: Sectoral Growth of Industrial Value Added