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The Initial Phase 1947 -1958
Presented by : Maham FaiyazI.D # 6889
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Introduction
The presentation is divided into the following
parts:
Problems faced at the time of partition Economic and Financial Development
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Events 1947 - 1958
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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 rawmaterial 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.
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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.
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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 toutilize it.
Abundant production of hides and skins, wool, sugarcane,
tobacco.
Pakistansconsiderable resources in minerals, petroleum andpower 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.
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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 itsoperation directed and controlled from New Delhi until June,
1948.
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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 nomore than 10 per cent of the total paid-up capital
and revenues of undivided India.
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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
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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 systemof banking.
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Economic and Financial
Development
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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.
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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.
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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 ofPakistan's exports
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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
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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 exportsconsisting of jute and
cotton rose by 109%.
BOP improved.
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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
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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 policiescontinued as if nothing had changed.
In 1952 jute and cotton prices fell, as did exportearnings and Pakistan was facing a serious balance of
payments crisis and sharply falling reserves
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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 suchcommodities 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 theirprices.
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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
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And so began the process
of industrialization in Pakistan
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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
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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
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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.
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Industrial Development
Import substituting industrialization
Import substitution progressed easily and very rapidly in thoseindustries 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
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Industrial Development
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Industrial Development
Results
Towards the end of the 1950s, Pakistan was in a position to
produce export surplusesas well.
foreign exchange could be savedregardless of cost, and its
desire to produce domestically almost anything that
technologically could be produced.
Private sector initiativein 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.
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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 facedwith the huge task of establishing a banking system after the
collapse at the time of partition
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Rehabilitation of Banking System & setting up of SBP
Several Banks and Financial Institutions were set up.
MCBin 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
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Setting Up Of PIDC 1952-53
Private industrialists were not very keen to invest.
Large number of set up by the PIDC in the area ofcement, pharmaceuticals, iron and steel which were
then over to the private sector.
Major objective was to help
establish industries which were
handed the private sector when
they were completed
A i lt S t N l t d th t
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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.
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"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 theCabinet or the "Economic Committee of the
Cabinet".
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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.
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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 rivalinstitution.
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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.
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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.
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Monetary Policy
Bulk of the credit was used by the government to meet its expenditures; it was used to financeforeign 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.
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Monetary Policy
71%
24%
5%
Percentage Share in Total Credit
1950-51 to 1959-60
Government Sector Private Sector Other Items
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Issues In Monetary Management
Monetary policy gave
importance to asset side
of the banking systemand up to 1960 bulk of
monetary expansion was
on account of credit to the
government sector- used
75% of the bank creditduring 1948-58
Size of private sector was
small and banks were
very conservative inlending so the private
sector used only 25% of
the total bank credit
during 1947-58
Public sector Private sector
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Issues In Monetary Management
Period Private
sector
Governme
nt sector
Other
items
Total
bank
credit
1951-55 12.8% 73.25% 14% 100%
1956-60 23.95% 70.98% 5% 100%
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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.