Table II.8
Growth in the Production of Selected Industrial Items

R= Revised
P= Provisional
Source: Federal Bureau of Statistics

Cigarette manufacturing declined in the wake of decreased demand for domestic brands, due to high taxation and greater demand for smuggled brands; a similar situation affected tea blended. Whilst production of cooking oil posted a decline for the second consecutive year, imposition of import duties in FY98, and permission to import oil seed free of duty under the Oil Palm Development Pilot Project, succeeded in increasing domestic oil seed production and the extraction of edible oil. However, this increase in domestic production was insufficient to meet input requirements of the cooking oil industry, which experienced a 9.4 percent decline in the availability of edible oil in FY00. As an input in vegetable ghee and cooking oil, this fall in the availability of edible oil reduced the production of vegetable ghee by 1.4 percent in FY00, and a decline of 9.4 percent in the production of cooking oil. As there was a concerted effort to reduce the import of edible oil, this could be viewed as the cost of conserving precious foreign exchange.

Table II.9
Distribution of Growth of 96 Items

Source: Federal Bureau of Statistics

Cement production also showed negative growth rate of 3.3 percent during FY00, against positive growth of 2.9 percent last year. The cement industry has suffered from over-capacity since FY96 when production peaked at 9.6 million tons, a sharp increase from 7.9 million in FY95. Since then, this sector has been under considerable pressure from rising production costs, mainly on account of gas and furnace oil prices. The wholesale price of cement, in the wake of a surplus production, did not keep pace with the increase in production costs, which forced the cement industry to operate much below capacity. The problem in this sector was the rampant increase in capacity in FY95 that was largely financed by DFIs. Capacity utilization has fallen from 74.0 percent in FY99 to only 57.1 percent in FY00, primarily on account of the formation of a cartel to support retail prices.
Growth in automobile industry, especially light commercial vehicles and cars, was mainly affected by appreciation of Yen against Pak-rupee by 13.9 percent in FY00.

Other Sectors
Value-added by Mining and Quarrying grew by 7.7 percent during FY00 compared to 3.6 percent in the previous year; this is mainly on account of the increase in production of chromite, gypsum, lime stone, and crude petroleum (see Table II.10). Construction also grew by 6.2 percent against an equivalent decline of 6.3 percent in FY99. This strong performance was attributable to the fall in wholesale prices of building materials, the duty-free import of construction machinery, and the increase in Public Sector

Table II.10
Selected Mineral Items

Source: Federal Bureau of statistics

Development Program (PSDP) expenditures by 17.2 percent. Electricity and Gas Distribution grew by 7.8 percent against last year’s growth rate of 3.5 percent. Government efforts towards village electrification and substitution of natural gas for petroleum played a major role in increasing the value-added by this sector. During the first nine months of FY00, 864 more villages were electrified, thereby increasing the total number of villages with electricity from 67,183 in FY99, to 68,047 by the end of March 2000.

Public Sector Industries
As in previous years, the performance of public sector industries during FY00, other than Pakistan Steel Mills Corporation (PSMC), remained dismal. However, the rate of decline in production of these public sector industries (at constant prices of FY88) was only 1.8 percent during FY00, compared with 4.0 percent the year before. As shown in Table II.11, except State Engineering Corporation of Pakistan and National Fertilizer Corporation (NFC), the growth in production of the other five state-owned corporations was either zero or negative.

Table II.11
Production of Selected Public Sector Industries
(Rs million)

Source: Ministry of Industries and Production

Major declines were recorded in the production of Federal Chemicals & Ceramics Corporation (100 percent), Pakistan Industrial Development Corporation (99.1 percent), State Cement Corporation (24.8 percent) and Pakistan Automobile Corporation (6.7 percent). On the other hand, increases posted in FY00 by State Engineering Corporation of Pakistan and NFC, were 27.6 percent and 1.7 percent, respectively.

Net sales of public sector industries (excluding PSMC) increased by 3.8 percent during FY00, in stark contrast to a decline of 5.5 percent in FY99. Despite this impressive recovery in net sales, these corporations reported a loss of Rs 561.1 million; interestingly enough, during FY99, they managed to earn a pre-tax profit of Rs 2.0 billion despite the decrease in net sales. However, PSMC continued to post losses in FY00, while production value increased by 12.0 percent compared to a 5.0 percent decline last year.

Services
The services sector grew by 4.5 percent in FY00 compared with 4.1 percent in the preceding year. Sector-wise growth rates and shares are shown in Table II.1. Since growth in the agricultural sector spurs wholesale and retail trade, and transport, storage and communication, the forward linkages of bumper wheat, rice and cotton crops, brought about a modest recovery.

Wholesale and retail trade grew by 2.5 percent in FY00 compared with 2.1 percent last year. The value addition in this sector is measured using estimated margins earned by traders. The improvement witnessed during FY00 was on account of higher flow of commodities into the market, where it is estimated that the entire cotton crop, four-fifths of the rice crop and three-fifths of the wheat crop enter into wholesale and retail markets (for domestic consumption or export).

Transport, storage and communication grew by 3.9 percent in FY00 compared with 3.1 percent last year. This sector also enjoys forward linkages effects from commodity producing sectors and international trade, which are realized in terms of increased value addition through rail, road, marine and air transport; and telecommunication. Pakistan Telecommunication Company Limited (PTCL) and private telecom companies posted higher operating surpluses during FY00, which helped growth in this sector. Increase in freight through road transport also supported this growth.

Growth in finance and insurance fell to 6.9 percent in FY00 from 15.0 percent last year. The slower growth mainly stemmed from a slowdown in financial intermediation and investment activities of banks. As discussed in Chapter V, the banking system witnessed stagnant deposits, while credit disbursements to the non-government sector fell very sharply in FY00. Reduction in interest rates coupled with the government’s loan recovery and documentation drive, also played their parts in the slowdown in finance and insurance.

As expected, ownership of dwellings and community, social and personal services continued to grow by 5.3 and 6.5 percent, respectively, in FY00 as they have since FY86. These estimates are probably not realistic, since they are based on the Population Census of 1981 and the Survey of Establishment FY81. Given the sizeable share of these two sub-sectors in GDP (15.3 percent in FY00), there is a need to revise these estimates.

Public administration and defense grew by 5.6 percent in FY00 compared with 2.4 percent last year. The improvement is mainly associated with the increase recorded in pay/pension of government employees during FY00.

Savings
The national savings rate increased to 13.4 percent of GNP in FY00, from 11.2 percent a year earlier. This was made possible by an increase of 28.5 percent in national savings (at current market prices) during FY00 in contrast with a decline of 17.3 percent last year (see Table II.12). The improvement in savings was mainly attributable to deceleration both in the growth of consumption expenditure and the rate of inflation. Consumption expenditure registered a growth rate of 9.7 percent during FY00 compared with 13.0 percent last year, while the rate of inflation (in terms of CPI), also fell to 3.6 percent from 5.7 percent in FY99. The fall was more pronounced in private consumption expenditure, which grew by 8.4 percent in FY00 compared to 14.9 percent last year.

Better performance of the corporate sector also supported the rise in private savings. Out of 762 companies listed with the Karachi Stock Exchange (KSE), 470 companies declared dividends, showing an increase of 46.4 percent over last year. Had net factor income from abroad not declined by 48.0 percent in FY00, the increase in savings would have been much higher.  Inflow of worker remittances, which account for the bulk of net factor income from abroad, declined in FY00.

National savings financed 88.0 percent of gross total investment in FY00 compared with 74.9 percent last year. The resource gap (the difference between savings and investment rates) of 12.0 percent in FY00 was financed by foreign savings or net inflows of external capital. A pronounced drop of 48.1 percent in the net inflow of external capital was observed in FY00, in contrast with an increase of 33.0 percent last year. This decline is largely on account of limited IFI assistance, which resulted in a sharp increase in outflows in Pakistan’s capital account.

Table II.12
Savings and Investment
(at current prices)

P = Provisional
Note: Source of Gross Fixed Investment is FBS, while that of National Savings is P&D Division, GOP.

Investment
Gross fixed investment at current prices has been estimated at Rs 421.9 billion in FY00, depicting an increase of 9.5 percent as compared to the decline of 4.3 percent in the preceding year. Here, whilst the ratio of gross fixed investment to GNP merely increased from 13.4 percent in FY99 to 13.5 percent in FY00, private fixed investment rose by 9.4 percent to Rs 252.9 billion in FY00 against a decline of 11.6 percent last year. In line with its expansionary role in the economy, the private sector continued to account for the bulk of the investment activity during FY00, with an outlay of Rs 252.9 billion or 60.0 percent. The share of public sector investment in gross fixed investment stood at Rs 168.9 billion in FY00 or 40.0 percent of total fixed investment.

Gross fixed investment in real terms rose by 4.4 percent in FY00 against a decline of 7.9 percent last year. Details are shown in Table II.13. Investment grew in real terms during FY00, in the large-scale manufacturing, transport, storage and communication and services sectors in contrast with declines witnessed last year. The agriculture sector also witnessed an increase in real investment, albeit at a slower pace than last year. The share of wholesale and retail trade increased to 7.7 percent in FY00 from 1.2 percent in the preceding year. Investment by financial institutions declined, in contrast with the positive investment performance of this sector last year. Investment in mining and quarrying, electricity and gas distribution and construction continued to decline in FY00.

Table II.13
Growth of Real Fixed Investment
(at constant prices of 1980-81)

R = Revised
P = Provisional
Source: Federal Bureau of Statistics.

Investment activity in large-scale manufacturing sector was supported by a 2.4 percent expansion in the installed and working capacity of the textile industry during FY00 (July-March). Higher investment was also aided by enhanced availability of credit, lower lending rates and stronger profitability of this sector. Further, the increase in real investment in transport, storage and communication was aided by higher funds in PSDP, rehabilitation and improvement of railway system and increase in imports of buses, trailers and other vehicles by 40.5 percent, from US$31.9 million in FY99 to US$ 44.7 million in FY00. Agricultural investment was supported by subsidies to farmers on purchase of tractors. Further, development loans disbursed by ADBP increased by 2.2 percent during FY00. Import of agricultural machinery and implements also increased from US$ 27.4 million in FY99 to US$29.8 million in FY00. The rise in real investment was somewhat constrained by 8.7 percent due the lower allocation of PSDP for water resource development.

The decline in real investment in mining and quarrying continued for second year in row, in FY00. This has largely been on account of a reduction in PSDP allocation for mining in FY00 and limited exploration activities of private sector. Investment in this sector is concentrated on extraction and exploration of coal, natural gas and crude oil. Investment in electricity and gas distribution also witnessed a decline for the second consecutive year in FY00, although of a lower magnitude than the previous year, due to some investment in the public sector. The slowdown of investment in this sector in recent years may be largely attributed to the saturation of private investment in energy.

Investment activities during FY00 were also aided by a net inflow of foreign private direct investment to the tune of US$ 470 million. Chemicals, pharmaceuticals & fertilizer, food, beverages and tobacco, textiles, financial business and construction got the bulk of direct private foreign investment in FY00. A group-wise distribution is presented in Table II.14.

TableII.14
Foreign Private Direct Investment (Net)
(US $ million)

Source: State Bank of Pakistan.

Inadequate infrastructure, inefficient public enterprises, high input cost, regulatory weaknesses, policy disruptions, as well as governance problems, are the main factors hindering the inflow of foreign investment in Pakistan.