Recapitalization and restructuring/privatization and induction of professional management,
banking sector has been the most dynamic sector. Liberal entry requirements and huge market
potential given the current low financial penetration ratio have encouraged entry of global players.
Foreign investors are allowed to hold up to 49% of the foreign equity in the banking sector, while
banks with global Tier-1 capital is US$ 5 billion or more or institutions from the regional cooperation
organizations (ECO) can hold up to 100% foreign equity in a banking institution in Pakistan.
Companies acquired have to over the years be incorporated as wholly owned subsidiary or opening a
branch in Pakistan. Even in those cases where foreign equity up to 49% is permissible, a higher
percentage of foreign equity ownership is allowed by SBP on a case-to-case basis depending on the
strength of the incoming institution.
14. Companies have further benefited from access to private credit which grew at an average rate
of 25.5% for FY03-07. This growth has been supported by structural changes in banking sector which
is largely private sector run. Over the last five years, profitability of banking sector has surged
reaching $1.70 billion in 2007, return on equity growing to 20.0% by Sept 07 and net NPLs ratio
reducing to 2.3%. Capital market has benefited from the growth in stock market capitalization from
$7.51 billion to $65.9 billion by the end-2007 and rise in P/E ratios have attracted foreign portfolio
investment.
15. To promote competition and efficiency corporate tax rate has been lowered and trade has
been liberalized. Average tariffs are 7.6% and tariffs on import of plant, machinery & equipment for
industrial sector has been reduced to 5% and for agriculture sector to zero percent while 50% Initial
Depreciation Allowance is allowed. Nontariff barriers have been removed. Pakistan has Free Trade
Agreements with the People’s Republic of China, Sri Lanka, Malaysia, Iran and Mauritius; negotiations
are underway with Singapore and the Gulf Cooperation Council to be concluded in 2008, and
preferential trade arrangements are also underway with Afghanistan, Bosnia, Bangladesh, Canada,
Russian Federation, Serbia, Syria, Switzerland, Laos, Thailand, Indonesia etc.
16. Future prospects for economic sustainability depends on building momentum of
structural reforms – I will however dwell on the most strategic elements here.
17. Agriculture and food self sufficiency. With global commodity prices on the rise and
alternate uses of corn and other products as bio-fuels in vogue, enhancement of crop productivity and
area under cultivation will be critical for stabilizing food prices and curbing recourse to imports that
have induced fresh external vulnerabilities. Given also the country’s rich and diverse landscape,
Pakistan has good potential to serve the GCC and Middle East at large and exploit export potential of
its agro-based sector. Renewed efforts will need to be launched by the Government to improve yields
of major crops by intensifying research and extension, application of right type of seed and other
inputs and mechanization.
18. Comparative advantage in agriculture gives an edge in the development of agro-based
industry, value-addition chains and processing and packaging of products and offer huge potential for
growth and investment. Besides increasing value-addition, the Government has promoted private
sector involvement; except for setting procurement price for wheat – to maintain strategic reserves –
market-based pricing mechanism prevails for all agriculture produce. Efforts are underway for
transmission of pricing signals to farmers (e.g. through introduction of a commodity futures
market), development of crop insurance (particularly to encourage the raising of new cash crops
such as oilseeds) and improvement in transportation and storage infrastructure. The proximity
to the rich Middle East states, which are widely dependent on import of vegetable products, provides
a strong market for agriculture-based products. The ancillary requirements to boost agricultural
products exports also require massive investment in mass storage and transportation activities.
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