When the country was created in 1947, there were no industries, and few banks or mercantile firms. Since that time, industrial production has risen significantly. In 1998, industry accounted for about 26% of the GDP, compared with only 7% in 1950. Thanks in part to significant expansion of power facilities, largely in the Indus basin, the pace of economic development was particularly rapid during the 1980s. For most of the decade, the annual GDP growth rate averaged 6.5%, reflecting an expansion of over 4% annually in the agricultural sector and over 7% in value added in the industrial sector.
Despite expansion of the industrial sector in the 1990s, Pakistan’s economy remained dominated by agriculture. About 70% of export revenues were generated by agriculture or agriculture-based manufactures, with cotton alone accounting for about 60% of the total. However, over the next couple of decades the structure of the Pakistani economy changed from a mainly agricultural to a strong service base. Agriculture as of 2010 accounts for only 21.2% of the GDP. Even so, according to the United Nations Food and Agriculture Organization, Pakistan produced 21,591,400 metric tons of wheat in 2005, more than all of Africa (20,304,585 metric tons) and nearly as much as all of South America (24,557,784 metric tons).
Between 2002 and 2007 there was substantial foreign investment in Pakistan’s banking and energy sectors. Other important industries include clothing and textiles (accounting for nearly 60% of exports), food processing, chemicals manufacture, iron and steel. There is great potential for tourism in Pakistan, but it is severely affected by the country’s instability. Pakistan’s cement is also fast growing mainly because of demand from Afghanistan and from the domestic real estate sector. In 2013 Pakistan exported 7,708,557 metric tons of cement. In 2012 and 2013, the cement industry in Pakistan became the most profitable sector of the economy.
Pakistan is a rapidly developing country and is one of the Next Eleven, the eleven countries that, along with the BRICs, have a high potential to become the world’s largest economies in the 21st century. Pakistan would become the 18th largest economy in the world by 2050 with a GDP of £2.32 trillion (Goldman Sachs, 2015). A 2013 report published by the World Bank positioned Pakistan’s economy at 24th largest in the world by purchasing power and 45th largest in absolute dollars. It is South Asia’s second largest economy, representing about 15.0% of regional GDP.
The textile industry enjoys a pivotal position in the exports of Pakistan. Pakistan is the 8th largest exporter of textile products in Asia. This sector contributes 9.5% to the GDP and provides employment to about 15 million people or roughly 30% of the 49 million workforce of the country. Pakistan is the 4th largest producer of cotton with the third largest spinning capacity in Asia after China and India, and contributes 5% to the global spinning capacity. China is the second largest buyer of Pakistani textiles, importing £1.062 billion of textiles last fiscal. Unlike U.S. where mostly value added textiles are imported, China buys only cotton yarn and cotton fabric from Pakistan. In 2012, Pakistani textile products accounted for 3.3% or £0.744bn of total United Kingdom’s textile imports, 12.4% or £3.20bn of total Chinese textile imports, 2.98% or £2.07bn of total United States’ textile imports, 1.6% or £0.61bn of total German textile imports and 0.7% or £0.617bn of total Indian textile imports.
Banking in Pakistan is competitive and profitable. There are 6 full-fledged Islamic banks and 13 conventional banks offering products and services. Islamic banking and finance in Pakistan has experienced phenomenal growth. Islamic deposits – held by full-fledged Islamic banks and Islamic windows of conventional banks at present stand at 9.7% of total bank deposits in the country.
According to the World Bank, in 2003 remittances from citizens working abroad totalled £2.756 billion or about £18 per capita and accounted for approximately 4.8% of GDP. Foreign aid receipts amounted to £742 million or about £4 per capita and accounted for approximately 1.3% of the gross national income (GNI). The World Bank reports that in 2003 household consumption in Pakistan totalled £42.12 billion or about £284 per capita based on a GDP of £57.2 billion, measured in current £ rather than PPP. Household consumption includes expenditures of individuals, households, and nongovernmental organizations on goods and services, excluding purchases of dwellings.
It was estimated that for the period 1990 to 2003 household consumption grew at an average annual rate of 4.0%. In 2001 it was estimated that approximately 45% of household consumption was spent on food, 19% on fuel, 6% on health care, and 5% on education. It was estimated that in 2001 about 32% of the population had incomes below the poverty line.
Unemployment and underemployment are major problems. Although in 2005, unemployment was estimated at 6.6%, underemployment is known to be substantial. In addition, Pakistan’s workforce is marked by the widespread export of labour, most of which is to the Middle East, and the use of child labour. There are sizable numbers of Pakistani workers in the Middle East and European countries, most of them from the poor regions of Pakistan’s NWFP. There are also several million refugees from Afghanistan who have become part of the Pakistan labour force in those regions and in Karachi.
Energy And Power
Pakistan’s economy has continued to struggle with underemployment, slow economic growth, and high inflation. Expensive energy sources, circular debt, and insufficient transmission and distribution systems have caused a major energy crisis. According to the Asian Development Bank, prolonged power shortages have cut GDP by about 2%. Pakistan’s government has indicated that addressing the energy crisis is a top priority. The Pakistani government has proposed plans to increase domestic production and exploration of hydrocarbons, increase natural gas imports, diversify the installed capacity mix of electricity generation, improve domestic energy efficiency standards, phase out natural gas subsidies, and resolve the circular debt issue in the energy industry.
Roughly 62% of the Pakistan’s population uses biomass for cooking (about 112 million people) due to inadequate electricity and gas supply.
Pakistan is a net importer of crude oil and refined products. Crude oil imports grew an annual 11% from July 2013 to March 2014, according to Pakistan’s statistics. In 2014, the country produced 98,000 barrels per day (b/d) of total oil, up from a below 70,000 b/d before 2012. Most of the increase in oil production stems from additional discoveries and production of condensates from the Tal block.
Oil consumption has grown over time and averaged 437,000 b/d in 2013. Pakistan currently has six oil refineries, running mostly on imported crude oil, and a total crude oil distillation capacity of 186,000 b/d.
The Oil and Gas Development Company Limited (OGDCL) dominates Pakistan’s oil and natural industry. The Pakistani government owns a majority share in OGDCL, with the remainder owned by the public. BP and Eni are the leading foreign oil firms operating in Pakistan. Natural gas accounted for an estimated 32% of Pakistan’s primary energy supply in 2012, second only to biomass and waste, according to the International Energy Agency. Dry natural gas production has grown by more than 80% over the past decade, from 809 billion cubic feet (Bcf) in 2002 to 1,412 Bcf in 2013. However, according to a report by the Pakistan government, Pakistan faced a natural gas shortfall of 912 Bcf in 2013. Natural gas shortages have forced citizens to use firewood for heat, leading to vast deforestation issues. According to the World Bank only 2.1% of Pakistan has forest cover compared with 23% in India.
Pakistan’s domestic natural gas reserves are declining, and Pakistan currently lacks the infrastructure to import more gas. Pakistan holds sizeable shale gas reserves of 105 trillion cubic feet (Tcf), according to the EIA’s Technically Recoverable Shale Oil and Shale Gas Resources report published in 2013, and the Pakistani government has provided investment incentives for shale gas development. However, companies face many challenges to develop such resources because of complex geography, environmental constraints, and low natural gas prices in Pakistan.
Pakistan’s main natural gas producers include Pakistan Petroleum Ltd. (PPL) and OGDCL, as well as international companies such as BP, ENI, OMV, and BHP. The leading gas distributors are Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipelines (SNGP).
The Pakistani government supports the construction of the Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline. The TAPI pipeline has the multilateral agreements and financial support necessary to move forward. However, the TAPI pipeline faces serious geopolitical and security concerns and the start construction is uncertain. China has agreed to fund and build a natural gas pipeline from Iran to Pakistan following the end of international economic sanctions imposed against Iran as a result of its nuclear program.
In July 2014, the Pakistani government approved the construction of three LNG terminals, including the Engro Elengy LNG Terminal. The first shipments of LNG began to arrive at the terminal in July 2015, via a floating, storage and regasification unit (FSRU).
Electricity net generation increased from 69 billion kilowatthours (kWh) in 2001 to 93 billion kWh in 2012. However, according to the Pakistani government, available capacity was only 85% of installed capacity in 2012, and utilization rates for power plants were less than 60%. As a result, according to the latest International Energy Agency estimates, less than 70% of the Pakistani population had access to electricity in 2012, with 56 million people without access to electricity. The electricity industry faces problems with power generation theft, insufficient collection rates, line losses, high natural gas subsidies, the high cost of furnace oil used in place of natural gas, and insufficient natural gas supply. These problems have resulted in the poor financial position of generation companies, leading to widespread power shortages.
Electricity price subsidy is another issue that keeps the Pakistani government trapped in a system of circular debt. According to the Pakistani Ministry of Finance, depending on the fuel source the state utility may charge the consumer less than half of the cost of producing the electricity, which leaves the utility unable to pay for additional fuel.
The fuel supply and payment issues have forced many of the power plants to run below peak capacity. White the installed capacity of Pakistan is 23,500 MW, the available capacity is a mere 14,000 MW which is far short of the 17,000 MW average annual electricity demand.
During the 1960s and 1970s, light industry expanded rapidly, especially textiles, sugar refining and fertilizers. Large government investments in the 1970s established the country’s first large-scale ship-building and steel milling operations; the production of chemical fertilizers was also given special government support. The Pakistan Industrial Development Corp., established in the early 1980s with IDA credit, developed industrial estates for small- and medium-scale industries, assisting their occupants in obtaining credit, raw materials, technical and managerial assistance, access to production facilities, as well as marketing support.
Despite steady overall industrial growth during the 1980s, the sector remains concentrated in cotton processing, textiles, food processing and petroleum refining. In 1992, the government began auctioning off majority control in nearly all public sector industrial enterprises, including those manufacturing chemicals, fertilizers, engineering products, petroleum products, cement, automobiles, and other industrial products requiring a high level of capital investment, to private investors. In 1995, however, the speed of privatization began to slow as the sale of some large state-owned units were stalled and postponed.
In 2002, the public industrial sector, under the Production Wing of the Ministry of Industries and Production consisted of eight public holding companies—Pakistan Steel, the State Cement Corporation (PACO), Federal Chemical and Ceramics Corporation (FCCC), State Petroleum Refining and Petrochemical Corporation (PERAC), State Engineering Corporation (SEC), the Pakistan Industrial Development Corporation (PIDC), the state fertilizer corporation, and Pakistan Automobile Corporation.
The majority of the 74 production enterprises controlled by these holding companies have been privatized, and most of those remaining are scheduled to be sold. The public sector continues to dominate in steel, heavy engineering, automobiles, petroleum and defence-related production.
Science And Technology
Pakistan has made notable advances in nuclear technology since the 1980s, when its Atomic Energy Commission (AEC) developed a nuclear plant for electric power generation and research programs. The AEC’s three nuclear centres for agricultural research have employed nuclear techniques to improve crop varieties. Six nuclear medical centres provide diagnosis and treatment of patients with radioisotopes produced from Pakistan’s own uranium resources.
In May 1998, Pakistan conducted nuclear weapons tests in the desert of the Chagai Hills in response to Indian testing earlier that month. Five nuclear bombs were fired on 28 May and a sixth on 30 May. The Karachi Export Processing Zone (EPZ), established in 1980, has attracted foreign capital investment in advanced technologies. Another EPZ has been proposed for Lahore. EPZ now include those for computer assembly and parts manufacture, television assembly, other electrical and electronic products, and engineering.
Scientific learned societies include the Pakistan Academy of Science (founded in 1953 at Islamabad), the Pakistan Association for the Advancement of Science (founded in 1947 at Lahore), and the Scientific Society of Pakistan (founded in 1954 at Karachi). The Pakistan Council for Science and Technology is the chief government advisory body. The Pakistan Council of Scientific and Industrial Research and the Pakistan Medical Research Council (both in Karachi), and the Pakistan Agricultural Research Council (in Islamabad) promote research in their respective fields.
In 1996, Pakistan had 28 universities and colleges offering courses in basic and applied sciences. These now number 128, 70 of which are state universities and the rest private universities.
In 2013, Quacquarelli Symonds (QS), the UK based universities ranking agency included Quaid-e-Azam University Islamabad (119), National University of Science and Technology Islamabad (120), the Agha Khan University Karachi (151) and the Lahore University of Management Sciences Lahore (191) in the top 200 universities in the world.
The government supervises the supply and pricing of essential commodities, including fruits, vegetables, livestock, and dairy products, and has established several cooperative marketing and distribution organizations. Foreign goods are brought in by large importing concerns, centred at Karachi, and distributed to retailers through many intermediaries. Large supermarkets and department stores are slowly developing in the nation but very few international brands are visible in this sector. Chain stores for clothing have become popular in major cities, with shops carrying locally produced goods. Most retail establishments are small or medium-sized, owned by a family or an individual.
Banks are customarily open from 9 am to 1 pm, Mondays through Thursdays and Saturdays, and from 9 am to 12 pm on Fridays. Private businesses usually operate from 9 am to 5 pm, Mondays through Thursdays and Saturdays, and from 9 am to 12 pm on Fridays. Most businesses are closed on Sunday. During Ramadan, shorter hours are observed. Many international firms are also closed on Saturdays.
Banking And Securities
The central banking institution is the State Bank of Pakistan (SBP), established in 1948 at Karachi and with branches in the larger cities. The government holds 51% of the bank’s paid-up capital; 49% is held by corporations, societies, and individuals. The State Bank has exclusive responsibility for the issuance of currency; it is the financial agent of the central and provincial governments, and is responsible for the flotation and management of the public debt.
As of 2002, there were 44 commercial banks and 36 nonbanking financial institutions (NBFI’s) in Pakistan. Of the commercial banks, 25 were domestic (with over 7,000 branches) and 19 were foreign (with 78 branches). The nation’s largest commercial banks were nationalized in 1974 and regrouped under five state banking institutions: the National Bank of Pakistan, Habib Bank, United Bank, Muslim Commercial Bank, and Allied Bank of Pakistan. The government-controlled banking system thus comprised all but a few of the nation’s banks and accounted for a large share of total bank deposits and outstanding domestic credit.
The state provides credit through the Agricultural Development Bank of Pakistan and the House Building Finance Corp. Industrial loans are made available through the Pakistan Industrial Credit and Investment Corp. (established in 1957), the Industrial Development Bank of Pakistan (1961), and the National Development Finance Corp. (1973). There are stock exchanges at Lahore, Karachi, and Islamabad, with Karachi accounting for a major share of the business.
Pakistan’s life insurance sector, nationalized in 1972, operated under the aegis of the State Life Insurance Corp. and Postal Life Insurance until 1992, when the government opened it to private sector participation. Foreign companies are no longer barred from the life insurance business, but they are restricted to minority ownership. Private companies function in nonlife insurance areas, but the government insurance business is controlled by the National Insurance Corp.
Pakistan lives predominantly by foreign trade, and its import tariffs and export tariffs are essentially revenue-producing. The national government does not levy income tax on agricultural income. As of 2015, Pakistan had a corporate tax rate of 33%. There also a 1% tax on turnover.
A sales tax of 15% is levied on the value of goods. However there are exemptions for certain items and for certain classes of people. Established proportions of the various taxes levied by the federal government are distributed to the provincial governments. In addition, the provinces collect, for their exclusive use, taxes on land revenue, immovable property, vehicles, professions and services, and mineral rights, as well as excise taxes. Municipalities and other local governments also levy taxes.
Customs And Duties
Pakistan’s customs tariffs bring in the largest single share of national revenue. Most dutiable items are subject to ad valorem duties that range from 0–30%. There is, in many cases, a 15% sales tax on imported goods (food, raw materials, and capital goods are exempt from this tax). Alcohol is levied at a rate up to 65%, but can be as high as 225%. However, maximum rates average at around 35%.
Tariffs are levied on major items of export, but these rates are subject to change as measures are taken to encourage or discourage the export of raw materials.
Most major cities contain chambers of commerce and there are numerous employers’ associations, such as the All-Pakistan Textile Mills Association, the Pakistan Carpet Manufacturers’ and Exporters’ Association, and the Pakistan Shipowners’ Association. There are also professional associations representing a variety of fields, particularly technical and scientific fields.
The Islamic community is represented by several flourishing organizations, and other religious communities, such as the Zoroastrians, have their own groups. The Pakistan Historical Society, the Scientific and Cultural Society of Pakistan, and the Research Society of Pakistan all serve to promote interest and study in national and Islamic culture.
National youth organizations include the Baloch Student Organization, the Pakistan Progressive Student Alliance, the Adventure Foundation of Pakistan, Junior Chamber, the Pakistan Boy Scouts Association, and the YMCA/YWCA. National women’s organizations include the All Pakistan Women’s Association, the Pakistan Association for Women’s Studies, the Pakistan Federation of University Women, the Women’s Resource Center, and the Revolutionary Association of the Women of Afghanistan.
The Business Environment
For policy makers, knowing where their economy stands in the aggregate ranking on the ease of doing business is useful. Also useful is to know how it ranks relative to comparator economies and relative to the regional average. The rankings are benchmarked to June 2015 and based on the average of each economy’s distance to frontier (DTF) scores. The distance to frontier score benchmarks economies with respect to regulatory practice, showing the absolute distance to the best performance in each indicator. An economy’s distance to frontier score is indicated on a scale from 0 to 100, where 0 represents the worst performance and 100 the frontier.
Starting A Business
Formal registration of companies has many immediate benefits for the companies and for business owners and employees. Legal entities can outlive their founders.
Formally registered companies have access to services and institutions from courts to banks as well as to new markets. And their employees can benefit from protections provided by the law.
The ranking of economies on the ease of starting a business is determined by sorting their distance to frontier scores for starting a business. This ranking compares the procedures required for an entrepreneur to start up and formally operate an industrial or commercial business, as well as the time and cost to complete these procedures and the paid in minimum capital requirement. These scores are the simple average of the distance to frontier scores for each of the component indicators.
Access to reliable and affordable electricity is vital for businesses. To counter weak electricity supply, many firms in developing economies have to rely on self supply, often at a prohibitively high cost. Whether electricity is reliably available or not, the first step for a customer is always to gain access by obtaining a connection.
Globally, Pakistan stands at 157 in the ranking of 189 economies on the ease of getting electricity.
Ensuring formal property rights is fundamental. Effective administration of land is part of that. If formal property transfer is too costly or complicated, formal titles might go informal again. And where property is informal or poorly administered, it has little chance of being accepted as collateral for loans—limiting access to finance.
Two types of frameworks can facilitate access to credit and improve its allocation: credit information systems and borrowers and lenders in collateral and bankruptcy laws. Credit information systems enable lenders’ rights to view a potential borrower’s financial history (positive or negative)—valuable information to consider when assessing risk. And they permit borrowers to establish a good credit history that will allow easier access to credit. Sound collateral laws enable businesses to use their assets, especially movable property, as security to generate capital – while strong creditors’ rights have been associated with higher ratios of private sector credit to GDP.
Globally, Pakistan stands at 133 in the ranking of 189 economies on the ease of getting credit.
Effective commercial dispute resolution has many benefits. Courts are essential for entrepreneurs because they interpret the rules of the market and protect economic rights. Efficient and transparent courts encourage new business relationships because businesses know they can rely on the courts if a new customer fails to pay. Speedy trials are essential for small enterprises, which may lack the resources to stay in business while awaiting the outcome of a long court dispute.
This indicator measures the time and cost for resolving a standardized commercial dispute through a local first-instance court. In this Pakistan fares at 151 in the ranking of 189 economies on the ease of enforcing contracts.
A robust bankruptcy system functions as a filter, ensuring the survival of economically efficient companies and reallocating the resources of inefficient ones. Fast and cheap insolvency proceedings result in the speedy return of businesses to normal operation and increase returns to creditors. By clarifying the expectations of creditors and debtors about the outcome of insolvency proceedings, well-functioning insolvency systems can facilitate access to finance, save more viable businesses and sustainably grow the economy.