ARTICLE (June 04 2010): Private Sector plays a pivotal role in strengthening the socio-economic growth of the country and the private sector can only flourish and create employment opportunities if the environment in which it operates is conducive to business. Since its inception in 1947, Pakistan has relied on the private sector as the primary producer of goods and services.
The early 1970s, however, witnessed a crippling shift towards a command economy and a subordinated private sector manifested through a policy of nationalisation. The 1980s and onwards witnessed a reversal of this paradigm and the private sector again began to emerge and lead investment and economic activity.
The government has pursued a strategy of privatisation, deregulation, liberalisation and good governance to promote private sector development. However, macroeconomic instability and political turmoil and uncertainty stood in the way of the successful implementation of this strategy. Under a new government in 2008, major structural, governance, and economic reforms began to be implemented with a focus on generating macroeconomic stability and creating an environment to encourage the private sector to become the growth engine in the economy. The Privatisation Act 2000, creation of the Ministry of Privatisation and Investment, setting up of a Board of Investment, legislative changes to the State Bank of Pakistan (SBP) Act empowering the SBP/SBP Central Board to formulate, conduct and implement monetary policy, the creation of a Monetary and Fiscal Board to ensure formal monetary and fiscal policy co-ordination, and a Fiscal Responsibility and Debt Limitation Act 2005 mandating reduction in revenue deficit and reducing total public debt, were important steps that underscored the government's recognition of the importance of macroeconomic stability and a clear and transparent legislative framework to support a conducive business environment in the country.
The improved economic conditions and investment climate generated both the fiscal space as well as opportunities for private sector led economic growth through acceleration of the process of privatisation, enhanced private sector investment, and greater foreign direct and portfolio investment. As a result of the successful experience with privatisation, in Pakistan today, over 77% of the commercial banking sector, 100% of the textile and telecommunications sector, and a significant part of the cement, sugar, automobile and fertiliser sector are in the private sector.
Within infrastructure development, besides telecommunication, the private sector has been active in the power sector. It is a major contributor to power generation and has also entered the electricity distribution sector after the privatisation of the Karachi Electric Supply Company (KESC). Upstream and downstream oil and gas remains a mix of public and private sector entities.
However, key public sector entities, including the Oil and Gas Development Corporation Limited (OGDCL), Pakistan Petroleum Limited (PPL) and Pakistan State Oil (PSO) are all on the government's privatisation list. Gas distribution is also slated for privatisation.
Pakistan faces a number of significant challenges that are dampening its economic growth. The global credit crunch, energy shortages, a deteriorating security situation and a stalled economic reform agenda all discourage investment. The current energy crisis produces rolling blackouts of eight to 16 hours a day across the country. The 43 percent of the population, which works in the agriculture sector, only produce 21 percent of the GDP, well below their potential.
There are several obstacles, which are the impediments for enhancing the level of private sector in our country such as macroeconomic stability achieved in recent years has been critical in restoring private sector's confidence and catalysing greater foreign and domestic private investment. But in FY08, the macroeconomic situation deteriorated significantly because of the impact of higher oil and food prices and delayed policy response by the government in view of the difficult political conditions and the transition to a new government that affected the reforms in the country. The result has been burgeoning trade, current account, and fiscal deficits, a high rate of inflation, massive devaluation of rupee, major draw-down of foreign reserves to finance the deficits in an environment of weak capital inflows, and a rising level of domestic and foreign debt. Macroeconomic fundamentals need to be protected and economic stability restored to ensure the continuity of the present growth momentum based on sustained levels of private sector activity and investment.
Private sector investment and growth in recent years has been mainly based in the services sector, especially telecommunications and financial sectors. Pakistan's manufacturing base over the years has remained narrow with a concentration of investment in capacity enhancements and upgradation of facilities largely only in the traditional textile sector. This sector accounts for 46% of the total industrial output and contributes 60% to Pakistan's total exports.
Such a high reliance on one single sub-sector to deliver on industrial development is of concern. The situation also raises the issue of whether Pakistan can sustain economic growth with a primarily services sector oriented growth momentum without a corresponding deepening and broadening of its manufacturing and industrial base. A structural transformation of the economy that focuses on development of the commodity-based sectors, including industry and agriculture, is needed to ensure long-term sustained economic growth.
The enabling environment for private sector development needs to be further strengthened within an improved policy and regulatory framework that consists of a defined industrial policy, competitive policy, an investment strategy, and stronger and capacitated regulatory institutions in key sectors of the economy. As one example of the latter, there is a need to strengthen the capacity of the Securities and Exchange Commission with respect to regulating the non-bank financial sector, including the insurance sector.
A key constraint to private sector's growth is the critical infrastructure deficit, particularly in the power sector. The demand-supply gap for power has increased substantially over the years without a corresponding increase in public and private investment in power generation and strengthening of transmission and distribution systems. There is a need for accelerated investments in the sector alongside reforms and a strengthened regulatory and policy environment leading to uninterrupted and sufficient availability of power for industrial, commercial, and domestic use.
The private sector is being considered by the government as an increasingly significant partner in the financing and delivery of infrastructure in the power and other sectors. However, policy, legal and structural frameworks allowing public-private partnerships need to be developed and strengthened in many key sectors including, power, transport and water to encourage private sector's participation in infrastructure provision.
Pakistan provides good protection to investors, but lacks efficient contract enforcement structures, which complicate and increase the cost of doing business. Together with ineffective property rights regulations, low effectiveness of public sector agencies, weak regulatory mechanisms, and overall security situation, these governance-related bottlenecks retard Pakistan's international competitiveness. In addition, inefficiencies and rigidities in the land and labour markets remain major constraints for greater growth and dynamism of the private sector.
Lack of human resource development and availability of educated, healthy and skilled labour are big issues in the competitiveness and growth of Pakistan's private sector. This results in distortions in terms of factor utilisation by sectors, contributes to unemployment and lowers factor productivity.
Despite some financial deepening, Pakistan's capital markets still lack financial instruments and institutions, specialising in long-term debt, project, and infrastructure finance. This constraint has far reaching impacts for private sector's participation in infrastructure development and is one of the key reasons for slow industrial growth and a narrow industrial base.
The private sector itself faces major tasks of introducing improved business operational procedures, strengthening corporate governance and accountability to shareholders, diversifying into non-traditional sectors to take advantage of international markets conditions, and adopting modern technology and raising the quality of human resources for higher productivity and value added.
The present government is giving high priority to redress the problems faced by the private sector included energy shortage, high utility tariffs, regressive taxation, high interest rate and surging inflation, which are the major impediments in expanding business activities. Resolution of these issues will enable the country to arrest the growing trade imbalance.
Instead of looking for enhanced inflow of foreign aid, the government is striving for mobilisation of domestic resources through progressive taxation, manufacturing for import substitution and export of high value added goods in order to achieve sustainable development.
(atifnoorkhan007@yahoo.com)
Source: http://www.brecorder.com/index.php?id=1064550&currPageNo=1&query=&search=&term=&supDate=
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