The Initial Phase 1947 1958

Presented by : Maham Faiyaz I.D # 6889

Introduction
The presentation is divided into the following parts: Problems faced at the time of partition Economic and Financial Development

Events 1947 - 1958

Problems faced at the time of Partition

With the birth of a new state, every thing came to a grinding halt. The industrial base was virtually non existent. We were producers of some of the major items of raw material but did not have the processing facilities, the new state also woefully lacked in administrative, entrepreneurial, business and financial expertise. Means of transport and communication were in shambles. Millions of unexpected refugees swarmed the new state and required rehabilitation at an enormous cost.

Influx of Refugees
Till the end of 1955 it is estimated that about 7 million refugees entered West Pakistan (in East Pakistan it was 1.25 million) as compared to about 5.6 million Hindus and Sikh refugees who had left Pakistan for India.
The extent of the impact of the refugee influx on the local population can be gauged by the fact that (according to the 1951 census) the migrants, as a percentage of the total population of Karachi, were 55 per cent and, in the case of the Punjab, 25.6 per cent.

Non Existent Industrial Base

Statement of Industrial Policy of April 1948,stated: A country producing nearly 75 per cent of the world's production of jute does not possess a single jute mill. There is an annual production of over 15 lac [1.5 million] bales of good quality cotton, but very few textile mills to utilize it. Abundant production of hides and skins, wool, sugarcane, tobacco. Pakistans considerable resources in minerals, petroleum and power remain untapped. In laying down any policy of industrialization, note has to be taken of these deficiencies and handicaps, and a concerted effort made to overcome them.

Collapse of Banking System

The banking and financial sector suffered a similar fate due to partition, which had eventually collapsed because of migration of Non Muslims to India who had dominated the Banking System Pakistan had no central bank or banking system worth the name. The Reserve Bank of India, which was legally a common property of both India and Pakistan, continued to operate as a currency and banking authority for Pakistan, and had its operation directed and controlled from New Delhi until June, 1948.

Collapse of Banking System

United India had 3,496 branches of scheduled banks, but only 631 were located in the areas that were to become Pakistan (East and West). The paid-up capital and reserves of these banks amounted to no more than 10 per cent of the total paid-up capital and revenues of undivided India.

Collapse of Banking System

Of the 631 branches before partition, only 213 were functioning when Pakistan came into being. The paid-up capital and reserves decreased from to a mere 1.5 per cent after partition.

A year later, when the State Bank of Pakistan was established, the number of branches of scheduled banks had dwindled to only 195, of which only 65 existed in Pakistan

Collapse of Banking System

The Hindus migrated to India with all economic activity coming to a standstill. With a large number of commercial banks ceasing to function, sources of all types of credit for trade, commerce, and agriculture dried up.

The only scheduled bank that remained in Pakistan was the Muslim-owned Australasia Bank - too small and ill-equipped to handle the business. The acute shortage of skilled staff was a key factor in inhibiting the evolution of even a basic system of banking.

Economic and Financial Development

Trade relations with India

PAKISTAN - net importers of industrial goods from India - produced agricultural commodities, such as cotton, wheat, and jute In 1948/9, Pakistan's major trading partners were India and the UK, which together accounted for 67 per cent of Pakistan's trade, and Pakistan, along with both these countries, was a member of the sterling area.

Non Devaluation Decision in 1944

Reasons One reason why this decision was taken was to announce to the world that Pakistan was an independent country and did not mimic Indian economic policy. Other reasons were to continue to sell raw jute to India (since Pakistan had no jute mills) at a now higher price, and to be able to import machinery and capital goods at a cheaper price.

Non Devaluation Decision in 1944

Consequences India punished the newly-born Pakistan by suspending trade between the two countries and refusing to accept Pakistan's independent stand.

1948/9, India imported 55.8 per cent of Pakistan's exports

Non Devaluation Decision in 1944

Options available Pakistan would have been forced: to devalue, as was the motive for Indian trade suspension or Pakistan would need to hurriedly find alternative markets for its exports. Neither decision was easy

The onset of Korean War in 1950

Countries began stock piling and storing raw materials and as demand for them increased so did their price. Jute and cotton were both in heavy demand and Pakistan was able to make spectacular profits on its exports.

India and Britain now no longer reigned supreme as Pakistan was able to diversify into new areas

Pakistani exports consisting of jute and cotton rose by 109%. BOP improved.

Liberal Import Policy

Government liberalized trade to the extent that by June 1951 as much as 85 per cent of the imports- were virtually without licence, importable on the Open General Licence System (OGL).

India also recognized Pakistan's new exchange rate, and trade was resumed after a suspension of eighteen months, but on a smaller scale than earlier

End of Korean War and Depression In Export Earnings

By mid 1951 world prices of raw materials began to decline and export earnings also saw a decrease. But Pakistan was too slow to react, and policies continued as if nothing had changed. In 1952 jute and cotton prices fell, as did export earnings and Pakistan was facing a serious balance of payments crisis and sharply falling reserves

Imposition of Controls after War

As it did in 1949, the government decided not to devalue and instead imposed very strict exchange controls and a set of physical controls on imports and exports. Export taxes on jute and cotton were raised as a result Exporters of such commodities received low rupee prices. The probable reason for not devaluing in 1952 despite deterioration in the balance of payments was that capital goods were now needed to start the process of industrialization and devaluation would have raised their prices.

Industrial Development
Background
The Korean War export boom resulted in traders and merchants amassing considerable amounts of wealth. Conversion of merchant capital into industrial capital due to collapse in prices. With controls imposed on imports, especially on consumer goods the Prices of these goods increased sharply in the domestic market which changed the terms of trade in favor of industry and against agriculture

 And so began the process of industrialization in Pakistan

Industrial Development
The Trade Policy Three major aspects: overvaluation of the rupee relative to other countries use of quantitative controls on imports to regulate the level and composition of imported goods highly differentiated structure of tariffs on imports, and export taxes on the-two principal agricultural exports: jute and cotton

lower tariffs on intermediate and capital goods tight controls over the import of luxuries controls on other consumer goods easier access to capital goods and industrial raw materials

Industrial Development
Import licensing system as exchange-saving device Direct quantitative controls were dominant in setting prices and incentives. Through their substantial impact on relative prices, these controls speeded the process of structural change both by imposing the inducements to invest in various industries and by transferring substantial amounts of income to industrialists who reinvested them in the profitable manufacturing sector

Industrial Development
Import substituting industrialization The policy pursued can be put simply as follows: Produce anything that can be reasonably produced domestically. Once production has started domestically, ban imports of competing goods so as to save foreign exchange.

Industrial Development

Import substituting industrialization

Import substitution progressed easily and very rapidly in those industries that had the highest protection, i.e. consumption goods, and those that had cheap and ready access to domestically produced, primarily agricultural, raw materials, such as cotton, jute and leather

Industrial Development

Industrial Development
Results Towards the end of the 1950s, Pakistan was in a position to produce export surpluses as well. foreign exchange could be saved regardless of cost, and its desire to produce domestically almost anything that technologically could be produced. Private sector initiative in economic growth. The annual returns on investment ranged from 50 to 100 per cent in the early 1950s, but dropped to between 20 and 50 per cent in the latter part of the decade.

Rehabilitation of Banking System & setting up of SBP

State Bank of Pakistan (SBP), which took over central banking from the Reserve bank of India (RBI) with effect from July 1, 1948 The payments system was strengthened by establishing the National Bank of Pakistan (NBP) The State Bank of Pakistan began operations on 1 July 1948 and became the sole note-issuing authority but the government of Pakistan at that time had no note printing press to print them on. The State Bank of Pakistan was faced with the huge task of establishing a banking system after the collapse at the time of partition

Rehabilitation of Banking System & setting up of SBP

Several Banks and Financial Institutions were set up. MCB in 1947 NBP (National Bank of Pakistan) was set up in 1949. The role of the National Bank of Pakistan until June 1950 was restricted to financing jute operations. ADFC (Agricultural Development Finance Corporation Act) was set up in 1952. It was set up to meet credit needs of the agriculturalists and to provide long term finance for the purchase of mechanical and other equipment. PIFC (Pakistan Industrial Finance Corporation) was set up in 1949. Important task was to make medium and long-term credit available to industrial concerns in Pakistan

Setting Up Of PIDC 1952-53

Major objective was to help establish industries which were handed the private sector when they were completed

Private industrialists were not very keen to invest. Large number of set up by the PIDC in the area of cement, pharmaceuticals, iron and steel which were then over to the private sector.

Agriculture Sector was Neglected growth rate 1.2%

The industrial sector, mostly agro-based continued to obtain supplies of agricultural raw material prices at prices far below the world prices.

The government ensured that the prices of agricultural commodities continued to remain low through combination of price controls and export duties on agricultural products.

"Development Board" was established in 1948 under the Minister for Economic Affairs, with Secretaries of development ministries as members. D.B was directly answerable to the Cabinet or the "Economic Committee of the Cabinet".

The COLUMBO plan - 1951-7

Published in 1951 Six Year Development Plan, a collection of projects, rather than a serious planning exercise, without any sectoral growth rates or production targets or a macro framework. No Aggregate targets were mentioned for the economy as a whole nor was there any attempt to relate particular projects to overall targets.

The First Five Year Plan

Planning Board had serious problems: shortage of staff the absence of statistical data An uncertain status in the government and resentment from other strongly entrenched Ministries and Departments particularly the Ministry of Finance and the State which regarded it as a rival institution.

The First Five Year Plan

For these reasons that the First Five Year plan could not be published till April 1957, two years after the First Plan period. It was officially published as late as March 1957 and was never given approval by the legislature. After the two years had passed, it was exceedingly difficult to follow the strategy as outlined Plan document. One major factor contributed towards this was the frequent changes of political governments during this period.

Monetary Policy
One of the objectives of money policy was to develop the various aspects of financial sector particularly the banking system. In the early years of the country's economic history size of private sector was small and banks were very conservative in lending so the private sector used only 25% of the total bank credit during 1947-58. Government used 75% of the bank credit during 1948-58.

Monetary Policy
Bulk of the credit was used by the government to meet its expenditures; it was used to finance foreign trade and commerce. Though the private sector got very small parts of the bank credit. The number of branches of the commercial banks expanded in the 1950s, these banks continued to mobilize increasing domestic saving and also supplied credit to domestic industries. In 1952 the total advances made to different sectors were from: 38% by Pakistani banks 22% by Indian banks 40% by foreign banks In 1953, 48% of all advances by banks were focused on commercial activity. The bulk of loans were utilized in financing the wholesale and retail trade of the country. Advances were made: 16% to manufacturing One third for metal products and one fifth for textiles. Not surprisingly, a greater share of credit was extended to West Pakistan to East Pakistan.

Monetary Policy
Percentage Share in Total Credit 1950-51 to 1959-60
Government Sector Private Sector Other Items

5% 24%

71%

Issues In Monetary Management

Public sector
Monetary policy gave importance to asset side of the banking system and up to 1960 bulk of monetary expansion was on account of credit to the government sector- used 75% of the bank credit during 1948-58

Private sector
Size of private sector was small and banks were very conservative in lending so the private sector used only 25% of the total bank credit during 1947-58

Issues In Monetary Management

Period

Private sector 12.8% 23.95%

Governme nt sector 73.25% 70.98%

Other items 14% 5%

1951-55 1956-60

Total bank credit 100% 100%

Conclusion
Between 1949 and 1958 the growth rate of industry in Pakistan was amongst the most rapid for any country in the world. Large-scale manufacturing grew at a phenomenal 23.6 per cent between 1949 and 1954, and afterwards, by the still very impressive 9.3 per cent up to 1960. With industry growing at high rates, there was' a reverse picture in the agricultural sector. The most developed areas within the year 1948 to 1958, was the rehabilitation of the banking sector which improved gradually because most of the banks were dominated by non Muslims of United India. Investments in education and health were minimal and they had very low priority in the total development expenditure. This era also marked the reason for the now independent Bangladesh, because of the biasness showed by the government to West Pakistan.