No. E lOla (Reds-H) CONFIDENTIAL , , 67010 This report is restricted to those members of - - - 4 - 1 the staff to whose work it directly relates. - , INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT ECONOMIC REPORT ON PAKISTAN August 15, 1950 Economic Department Prepared by: A. Basch H. E. Tolley Map of Pal>::i stan ancl India Basic Statistics Summa~J and Conclusions I. Econ0mic Structure of Pakista~ 1 II. Development Program 6 III. Goverp~ent Finances 8 IV. l~oney and Banking 13 V. Balance of Trade and 3alance of PaJ~ents 20 VI. Cor.sequences of Pakistan's Decision Not to Devalue :ts Currency 24 APPEYDIX ]. Acreage and Pronuction of Principal A,c:ric'\ll'~llral Crops .A.P?ZTID:X 2 Yolume and Value of O·J.tpu.t of '!ndustries .A.P?EHJ)IX 3 Major :Budget Revenues AP?EHDIX 4 Commercial Trade Balance c: APPE11DIX .-' Pakistan's Bala;lce of Payments APPE\'DIX 6 Ar.alysi s of Pakistani s Export Trade i'J~. th Conntries Other Than India 191+8/L~9 and 1949/50 A?PE~mIX 7 Pakistan's Foreien Exchanf.'e Reserves on June 30, 1950 PAKISTAN Basic Statistics Area 360,,780 square miles Population (1948 est.) Unit Pakistan rupee Parity US 01 =Rupees 30318 ~alance-2F PaJ~~ (Excludine India) (Provisional Figures) (Rupees };iJlion) July 1948-June 19h9 ~L 1 949-June 192.£ '1,eceirts" Cur:!:'ent Account 812 979 Payments" Current Account 1323 1278 Deficit 511 299 Exports 1993 Commercial Imrorts 1'/08 1278 Government Imports ~116 337 Total Imports 212h 1615 Balance -131 -63 !}.udget 1949/50 (Rev.) 1950~2~.:.... (:Cstd Ordinary Receipts 754 753 Ordinary Expenditure 752 772 Capital Expenditure 542 385 (of Wllich defense Capital Outlay) (247) (250) Deficit (over-alJ_) 5ho h02 - 2 - ~__statistics (cont~ Public Debt (Rupees Million) Government Bonded Debt (Harch 31; 'i950) 8~9' Treasury Bills outstanding (Jan. 31, 1950) 125 External Debt to India (Est.) Indian 2000 Reserves Forei!.!n Assets (June 23, 1950) 1138.0 C?3u 2 • 7 mi11ion) SIDIMARY AND CONCLUSIOl'JS 1. Pakistan was established as an inde!lendent Dominion by the partition of the Indian Sub-Continent on Aucust 15, 1947. Of its estimated population of 80 million, around, It? million live in the very densely populated East Pakistan and around 33 million in Hest Pakistan. N10re than 80% of the working 9o:?u1ation is en::;aued in af~ri.culture. Pakistan norrnally has an overall BurpluG in breadgrc:dlis but sor:le deficit in sugar and a few other f ood items. Its acric'Jlture sup~lies a large export sur~lus of two il:lpo:,.~tant cash cro:::;s·--raw ~ute and rm'f cotton-..-and also a surplus of raYl '.'fOol, hides and sl~ins, and. tea. :fJakistan has a I'elativel;; s~1all industry. It h<.i.s 'GO import most of the industrial products, textiles beinc the lar::';"Gc, itom. 2. Paldskm IS econony is underdevelo:?ed by ','fe stern standards but various :)ossibilities for economic develol1nent exist. AGricultural production can be increased sub[~tar!tiall~.", by Dare r10(~ern ntethod.s cmd by irrtgation. Various aLricultural industries CLi.n 'ue for instance production of sugar and vezetable oil. Horeover', the country has possibilities for clGvelo:;~n13 or expandin[ a numbt:r of :1.n- rustries such as cotton, jute ,and paper industries and of incrras:1 ne its production of electrical power in connection with sorflC oi' the planned multi-pur~ose schemes. Since parti tioD SOT'1e Drogrcss has been made in developing i!lcustry eSled,ally cotton textiles, sug8.r, and veGetable oil ')roduct:i.on. The jute ca)aci ty has been sui)stanial- ly expanded. '70rk 0:1 various irl'isaU.on !)rojects has continued. ii 3. Real and financial resources which !night have gone into economic developTI:ent have been absorbed by defense 8XDenditures re- sultin[ from strained relations y.'ith India which have been a heavy burden on the country. They have domi.nated the Government budcets in 1948/49 and 1949/50 to the extent of 52% of the ovel'all ex!)~ndi.- ture of Rs. 1,185 million and of 60% of Rs. J,29h ;~lillion, respective1y. Funds available for econoP1ie develo9ment have been neee by this factor. The budgf;)t estimate for 19)0/51, which ShOYfS a deflc:Lt of Rs. 402 million, envisa[es a defense e~endl ture of Rs. 750 rdlJ ion which ap;ain re91'esents 64% of the overall budfetary e.x:pemllture of Hi:>. 1,157 million. Development cJr')E:mditure has been further roch1.cecl to Hs. 207 mHl:ton (aeainst Its. 29S million in the pr€Vi0 lS yeitr). 1 The Governr:1ent had no Great difficulty in financine- the deficit which to'~alled 11.s. 812 million in the last two fisca:. yoars because, in contrast to India, it ",ras al)le to raise aubsi;a~lti'i1t~!1ounts'bi,public borro'Vrin!;:. As a result, the Government balances y,rith the Central of about Its. 560 million were left I)ractical1y une hanged durirw this LI. The cue'rent balance of ;Xl;yments shows a sizable def:L~i t. DurinG the :,eriod July 1948 to June 1949 the ba1anc.6 of ,ra;yn:ents T,;ith countries other than India showell a deficit of 2s. 511 raillion (= :1153 1/ '11' Dl._ lon ) and a 81..1r:)lu8 with India estimated at Rs. 2117 f:ii11ion (= (/'·7h -------~----------------------------- Y Based on a statement :!repared by the Reserve Bank of India. - iii million) • Balance of trade ':ri th countries otiler than India has sub- stantially improved during the year July 1949-J~~e 1950. The .... defici t \.,as reducecl by nearly 50 per cent. HO\'leVer, although ex- ports to countries other than India have increased, trade ",i th rncia has declined so much that the overall foreign trade decreased pr0bably by one fourth as com~)ared \"i th a year before. 5. The balance of l::layments deficl t ,,,as financed b~T cra',.!i.ng on the country' e sterling bala::1ces. From October 191}8 to the enet of 1949 Pakistan's sterling balances "Jere reduced by all out ~ 36 million. They ilave further declined in the first half of 1950 and. ztoocl at about l" 8,5 million at the end of June 1950. Pakistan claims acPi- tional sterling balances of aroU::1d ~ 35 million from India. The total net deficit with the hard currency countries dur:i.l1tc 19L~8IL~9 equivalent to ;. 6 million, iv-as met 1y releases from the central reserve of the sterling area. 6. In Se;Jtember 1949 Pakistan decidecl not to devalue its C"l.l.T- reucy. Oonsequently, it has been necessary to act just to the '\-!orld market by bringing do,;m ex~)ort prices in local currency terms. T:lis is not an insuperable difficulty in a. country with a siml::lle economic structure SUC:1 as Pakistan, and '(.1here prices are relatively flexible. The prices of jute, cotton, a'1d tea haY8 dl?clined 'lntU Harch 1950 by 20%, 16%, and 15% respectively as compared >'Ti th the pre-devaluation iv level. In addition, as a result of a good harvest, prices of the staple foods, rice and wheat, are substantially 101'[er than last year's. Pakistan's position was, however, made more ciifficult by Indiafs refusal to recoenize the neVI :;remiu.11l of 4h% on the Pakistan rupee, y:hich resulted in a complete trade deadlock between India and Pakistan. Pakistan V'."as faced at once l'ri th the tas}: of re-or:i.enting nearly 60% of its commercial trade in order to find alternative markets for cotton, wheat, ra"l jute, hides and skins, and to purchase elsewhere many commodities regularly su!'plied by India. It may be estimated that as a result of the unsettled trade relations Pald.sta~ls pxports to Inc.ia drop~ed from Rs. 1,170 million in 1948/L:9 to Ra .. 501.~ million in 1949/50 and im'1orts from India from Rs. 8)0 million to less than Rs. 400 million. This decline could not be offset by increased trade outside India. Trade with the U.S. also declined durin:; the first five l"lonths of 1950. 7• As far as cotton is concerned, Paldstan has been able to ex- port outside India nearly its 1ihole export surplus; its cotton finds a good market even at a ~remium ~rice beca'lse it can be !,)urchaseci for sterling. Hoy,ever, of the LfOO"OOO tons of wheat !,)urchased for e:;::port by the Government of Paldstan" not more than lOO,OGO tons have been exported because of the high price. In the case of raw jute a really acute problem has arisen. In 1948/49 raw jute represented nearly 60 per cent of Pakistan's total exports. India has refused to pa~r the minimum price determined by t.he Government of Pakistan which, calculated at the mills at Calcutta, - v - would be about 20% hiGher than the I'1aximUla price fixed by the Gov- ernment of India. Pakistan hoped to increase substantially its jut.e salos out- side India. However" there are severe 9hysical limitations upon .. the quantity which can be baled and moved throueh the Port of Chitta- gong. In spite of various emergency measures, an immediate increase of the PortIs capacity above 2!-3 million bales is doubtful. Because on both sides a strone need for an arran£.:ement on jute was felt, a stopgap trade acreement was reached in April ~}roviding for the sale to India of 800,,000 additional bales of ray! jute, '7lot;tly of low quaE ty, at prices near the Indian maximura price. This l'Till bri.n.:: raw jute e:~orts to India to around 2 .!j.-2.5 million bales until the end of July, while ex;.;orts outside India lyil1 not exceed the 19L18/49 fi;::;ure of 1.9 million bales. Accordin~: to the latest unconfirmed estimates of Pakistan sources, this should leave the country with no undue carryover at the end of the season. But w'ithout exports to India, Pakistan would have been left wtth a vcr:'- large undisTlosable surplus in jute 'I'ri th inadequate storaze facili tios. 8. The trade acreemellt sizned in April is an ir.:)ortant stel) in solving one as:rect of the mutual d:Lfficulties. Ie, dealt, horrever, with only a fraction of the trade .?roblem confrontint; the two countries. In exchange for raw jute India was to ex.?ort to Pakistan jute manufactures, cotton textiles" veeetable oils and other manu- factures. But no mention was made of exports of ra1'J cotton from - vi Pakistan or coal fror:1 India. Furthermore, it is not possible to know at this stilee how this aC;reement has in fact wod:ed out. 9. If trade with India could be fully re-established and the • relations between PCtkistan and India became more normal, Pakistan "YQuld be able to concentrate on economic develo:9r-,ent. A Develol)- ment Board which was established in 1948 to coordinate the :,;lanning of economic development has so far a:.:proved 105 sche!Jes related primarily to irrieation" reclamation of land, l)roduction electrical power, building up the Chittaconc Port~ and to ostabl:Lshine of S0L16 industries. The Government intends to spend on development about • 300 million yearly durin::: the next five :rears. The Governnent's c.ssmnption that it will be able to find the YleCessary local financinc vdl1 be justified if the heavy milita:c'y expenditures decline. About hulf of the planned investnent cost vfould be in GovOY'IL'1lent hopes to I:Y..let a sUbstanttal !)oTtion of :;t fro:] loan.s. 10. L.S a con:;rehensive trade arrancoment and <.m i.r;-;:)l'oVC- ment of .901itical relations ydth India" Pakistan, ~'eljeved the ;?ressure of heav:r ext',,;rnal and internal defense e::<)onl:i tures-, be able to achieve an overall trade and balance of [la;;n:nents 81.1:::':;:lus, although this "'TQuld .9robably not suffice to finance imports for various development projects planned for the next .t'ew years. Af>sm:- ing cOI~Detitive 1 prices, the prospects fo::" the main Pa.dstan eX;~)Qrts vii appear favorable. A substantial trade surplus i.s :)robablc y~.:.. th the sterlinc area. P,ikistan 1 s trade poai tion with India is very stronc and an export surplus is very like 1;:.' India acain purchases the needed raw materials and food from Pakistan. Paldstan, whose only foreien debt is that to the Government of India estimated at Inclicm Rs. 2 to 3 billion" should be able to !)rovido I:, 3 Tai1lton to I:, 5 million annually for a debt service. Pakistan's balance of trade ,osition with the United staten, which shQ";vBd a deficit of ,,',>17.6 million in 1949 (it had a surl'lus ~~.G million in 1948), is not so favorable. The most imrortant e:;:l'ort j.tem is raw jute follov.red by wool, hides and skins, and cotton. Of the J949 e~orts raw jute accounted for (~l6.S million as conpal'e.cl to U.S. total im)orts of raw jute of ~~23.5 T1i1lion. Assunine that Paldstan 8u:):)lies the maj or :)art of the U. S. jute requj.rm;lents Tihich are estimated at. 350,000 to hoo,oOO bales yearly" ?artly replacin,:: the sup~')ly from India" and that it increat38S of SPY,lE; :;:;roducts, i)akistan I s B:~orts to the v. S. may reJ.ch~3C ni.Lion yearly in the near future. linen Pa}:is~,an has built its ,jute r-::Gls, it can be expected that some jute manui'actures \~jJ.l be to the U.S. either in cooperation or in competition 'with the Inclia<. industry. If exnorts of around 030 million are maintnined and i f Pakistan keeps control of im;'1orts from the U.S., 'it ma? achieve a f t S SUf;?1 us OJ. i', 3 . 11 . . • ] ,1 lon b a 1 ance 0_ pa::raen f' ',,) rlll.,._lon t;~ r' 0 .j/) illl. y' yearl lTI - viii - the near future 'which w-ould be available for servicin[ of a dol::"ar loan on the assumption that imnorts of ca!1ital :.:oods are financed by foreiEn loans. 11. Pakistan t G .:;>osi tion i"Tould be much less favorable should trade relations with India not be carried out at least to the o):tent of the temporary trade agreement. If a trade deadlocl~ should deveJ,09 .• which is unlikely, PaJdstan t s forei[')1 trade would be reduced in the near future and this would ljrobably brine about a dec~,ine in the standard of living in East Pakistan. The country Y!ould therefore have to intensify its efforts to increase trac,e vIith countries out- side India. It is doubtful that it would be possible to ex.:'ort out- side India more than 3 million bales of raw jute ::tn the near 'futUre and to finel markets for various other products usually purchased by India. The decline of exports might amount to as much as Rs. 1'.00 million (about ~:,l30 million) conIlared to the year 191..1.8/h9. At the same time Pakistan would have to ;Jurchase from Clistant sou:::,ces com- modities usually supplied by India. It is likely that under tJ:.'ese circumstances heavy defense ex:?endi ture "!m'elld continue, straining Pakistan's foreien assets and reducinz its 2bi~.it:T to .:!rovide lOGal financinG for development. Even with strict i:'l;?ort controls, a further reduction of sterling balances '7(m1([ ::;robably be necessar~T. This situation would require not only a re-orientation of foreign trade but also chances in Pakistan t s ::roduction. Jute Yiould be partially replaced by rice. Such a chance in structure 'wuld reo11i:('e ix - several years and put a heavy strain on the country's economic re- sources. Under those conditions the achievement of a surplus in the overall balance of pa;YTI.ents and in the dollar balance of pay- ments '1.'Tould renuire . . - not onJ.':r a shift in af"ricultural nroduction but ~ ala;, a very severe inport restriction system Y[hich would tend to substitute other sources of suppliesfb.r Indian sources and to reduce il'lports from the U.S., thus involving a considerable sloTrinc dmm development. 12. The sacrifices imposed upon by tbe trade deCidlock with India are thus hardly less than the sacrifices in.nosed ~. . UDon ... India. This is why a protracted period of the deadlock seeDS Ver~T unlikely. I. 2:CmTOIUC STHTJCTTm:: OF ?AKISTAl~ Introduction 1. Prutistan was established as an independent Dn~in!on by the partition of the Indian Sub-Continent on August 15 f 191j,7. It consists of ti'!O geographical units. se~oarated by more than 1,000 miles of Indian territor,y. Of the total area of 360,780 square miles, \llest Pakistan comprises 306,860 square miles, or ~t~::rpros::ma-'.:;ely 85~ of the total, and East Pakistan 53,920 square miles. The I)opi.l.- lation in 1948 i'las estimated at 80.2 million, of \-Thich 33 • .5 million were in West Pakistan and 46.7 million were in East Pakistan. The average density of population ,"as 870 per square mile i:::1. East Pa:::istan and 109 per square mile in "lest Pakistan. Although the ma,jori ty of the population is Moslem, Pru:istan has a minority of nearly 15 million Hindus. 2. Sovereignty over the Dominion of Paki stan 'Vtas transferred to the Pakistan Constituent Assembly, \'Jhich established. a ]Jro~risional government headed by a ?rime IUni ster (Liaquat Ali !Q1an) a"ld ten Cabinet tvtinisters. The Assembly has not yet completed a draft of a new consti tution for t~1.e Dominion. 3. The economy of Prur:istall is underdevelo~Jed ards, and by far the greater part of econOr1~.c <;l.~ti vi ty is 3.evoted to agriculture. At present more than 80% of the :,?opulation is engaged in agriculture. Pru::istan's economy has been essentially complementary to the economy of India. :Before parti tion PakistanI s agriculture fur- nished ra','l materj.als fer hlO of India's r:lost important industries (jute manufacturing and cotton textiles) as as a snrplus of \'!heat - 2- for food deficit areas of India. In return Pakistan received jute manufactures and cotton textiles as \1e11 as other essential commodi- ties such as coal, iron and steel, tobacco, sugar, ve~etable oil and a large number of manufactured goods. Until the Indo-Pakistan .. trade deadlock, 1.'Thich occurred after Paki stanl s recision !lot to devalue its currency in step NUh the pound. this bas:;.c lJattern remained substantially unchanged. Ho,"ever I Pakj. stan has maete some efforts. \-,hich have been intensified since the oA~inning of the dead- loCk, to become less dependent on India by diverting a ?,ro,.·Tinp pro:por- tion of its trade to overseas countries and b~T promoting various irv1"''"1tries, particularly consumer ~oods. A.E'ricultllre 40 Pakistan is, on balance, a food surplus cOlmtry. altho'u"1'h East 3engal has to import some rice frOM i'Jest Pakistan and abrop.fi. In i-rest Pal::istan a substantial part of the area under cultivation is irrigated. The 1949/50 w'heat harvest entted 'iii th a SUr-y111S of 1/2 million tons.. Substantial quanti ties of rai," sugar. cottc)nse(.;rJ, rape seed, mustard, and cinnamon are ~roduced, but only li~itec quantities of \'lhite sugar and edible oils. About 75.001) acre8 a.re 'l.nOer tea cultivation. Tea prod:u.ction '-las 16,000 tons in 19.1iB!49. Pakistan's annual export quota tmder t:t.s International Tea Agreement is nearly 17,000 tons. S. The tNo major ca~h eroIls are cottor~ and .iute. The lQ~9150 production of cotton i s estiT!late~ at 1.2 million bales '-Thich is sue- stantially beloN pre1-rar. Local consumption is esti.1'llated at 20().000 bales, - 3 - which leaves an export mlrplus of about 1 million bales this year. The major part of PaId stan IS cottor: is of the American type quality which is finding a ready rlarket even at a premium as "sterling" cotton compared to "dollar" cotton. 6. The jute acreage is controlled by the Government. In 19 1'+8/49 only 1.87 million acres of an al10tment of 2.6 million acres v!ere actually planted. Accr)rding to the latest estiT'late the production from this acreage '-Jas 4.5 million bales, 'II,hich is 0.5 to 1.0 million bales less than the :preViO\lS estimate. The 1949/50 acreage allotment has been reduced to about 1.7 million acres. 7. The country J!roduces around 25 million :pounds of 111001 a year (mainly carpet \.1001) and imports another 8 minion :POlLl1ds by land from nearby countries. Production of hides and skins is W~D­ stantial, but since Pakistan has only small tanneries \l1i th limited production capacity, most of the hides and skins are exported in their raw state. Minin,z. 8. Pakistrul t s mining industry is small. The production of coal i:!as 321.t ,OOO tons in 1949 (210,000 tons in 1939). Production of mineral oil vJas 823,000 barrels in 1949 (757,000 barrels in 1939). 'IIlhich represents a-oQnt 1/5 of the total consumytion. country has substantial de11os1 ts of gypsu.m, "rhich it intends to use for the production of ammonium s1l1:phate, and some sits of chr0~0te. Industries 9. PaJ::istan has 1,386 manufac",;urinE': and :)rocessing eetablish- ments employing 20 or :nore ,,,orkers; the total humber of em::?loyect therein is appro~rimately 172,000. The total value of art:i.c1es precessed -4_ or manufactured is estimated at Rs. 900-1,000 million yearly. 11 Agricultural industries including rice milling, vef"etable oil ]1'0- duction, cottO!l. ginning. jute presi"ing. etc., account for around one half of the total value. Among other industriesl cement. 909:.9, cotton ... textiles, small engineering, and the leather industry are the most im]?ortant. T1'io small 0:'1 refineries are located in the vicinity of Rat1alpindi in northern Punjab. The Government's Industrial Policy 10.. In its statement of policy i8~ued in December 1947 the Government made clear that it '''lill rely mainly on private enter:?!'i se for industrial development and operation. The Government reserved for itself (a) the production of arms and muni tions of "Jar, (b) ge!l.eration of hydro-electric pOi'ler, and (c) manufacture of raih!ay cars, tele- phones, telegraphs and '''ireless apparatus. IE the past most (If the leadin,,,: elements :1.n industry. as ,·rell as 1)anking alld trade, have been Parsees and Hindus. A'i'. a result,. the Government has acl.o~tJted the policy of (a) enoouraginf' pri vats investment by Pakistan 1Tati0nals and (b) establishing a li~ited n~~ber of enter~rises under Government 8llspices ";hen private capital is not forthcoming in a('eouate amount,s for the develoJJment of any partic'J.lar ind1:.stry of national j.m~)ort8nce •. As an encouragement to industrial developnent the Govern.~ent grants t.:tX exem:)tions &'1c1. s:gecial depreCiation allo"Jances to ne", enter~)ri ses dllr- ing their early years of operation •. In ad0ition the im~ort duty on 11 The volume and value of outpllt of t~le l)rincipal industries are gi ven in Ap:?snrlix 2. - 5- machinery has been reduced from lO~ to 5% ad valorem. Polic~ T01'rard Private Foreil"n Inve!'ltment 11. The Government's statement says that "Pakista..'1 ",ould \'!e1- come foreign capital seeking investment from a purel~r industrial and .. economic objective, and not claiming any special privileges. It Partici- pation of Pakistan Nationals must, h01·rever, be insurec and the Govern- ment considers that nationals of Pakistan should ordinarily be given the option to subscribe at least 51% of all classes of share capital and debentures in fourteen specif~ed industries, including cement~ cotton spinning and \\1eaving mills, heavy chemicals and dyestuffs, power alcohol. sugar. tanning, and leather. With regaro. to other indus- tries, an opportunity should normally be given to Pakistan rationals A to subscribe at least 30';.& of share capital end debentures. :But, in either case, if the GoverrJIDent is satisfied. that the requisite amount of indigenous capital is not forthcoming ,.ri th~n a. yeri0d of about six months, the balance might, \'lith its :)rior approval, 'be subscribed by foreign investors. The Gover~~ent stated in a supplementary statement of industrial policy "that the intention is to give such deci sions quickly and liberally ,·,here i t is clear that Pakistan capital has had every opportuni ty to subscribe and has failed to do so. II :TO estimate is available of the total value of foreign investment, !'lost of ltJhtch is British and Indian~ - 6- 12. Pakistan has substantial possibilities for increasing its agricultural production and developing various light industries. Agricultural production can be increased by add! tional irrigation and by soil conservation projects \·,hich are expected to bring some 5 million acres of ne'., land under cultivation. It can be further aUA;- mented, of course, by improving the efficiency of the methods of }ro- duction, marketing, and distribution. 13. With regard to industrial development, Paldstan is very anxious to become less dependent on imports, to process various of its raw materials, and to achieve a better balanced economy_ Because of the lack of coal, the country intends to develop a substantial hydro- generating capacity of about 150,000 kt1. of permanent po . ..,er. Since the partition, some progress has been made in developing industry. The capacity of the cotton piece goods industry has been nearly doubled: a large ue'.', sugar mill is nearing completion, Production of soap and vegetable oil is expanding and production of cigarettes has increase0. The Government plans to build a paper mill in East Bengal, and machinery for three jute mills has been ordered recently. Fertilizer production is also planned. The Government is enlarging the facilities of the Port of Chittagong and is carrying out the rehabilitation and ~oderni­ zation of the railways. The trade deadlock "lith India has accelerated various projects such as the development of the Port of Chittagong and the substantial increase of the jute baling facilities in East Pakistan. To coordinate the various projects and to assign priorities - 7- to them, a Development Board Vfas set u!l, as well as a Planning Advisory Board, in 1948. Later a separate liIinistry of EconorJic Affairs vras established to plan and coordinate the cla;';T-to-day activities of the other :m..tnistries, especially in the economic field; both t he Development Board and the Planning Advisory Board became The Develonment Board has so far acj'"ll'oved a nart of this new xiIi.nistl"lT. 4 u - 1/ lOS schemes requiring an outlay of Rs. 1,120 million.- The Gove:rn:ment proposes to spend on the development schemes about Rs. 300 million yea:rly durins the next five years. Roughly one half of the ammmt ,,!ould be incurred in local currency, one fourth in the ster]J.ng area, and one fourth in the dollar area. The Govern::.tent is confident that it will be able to find the necessary local currency, either from its present cash balances or fran ac1dit:tonal loans whick can be raised within the country. The Gove:r'ment is also of the opinion that it vrill be able to secure the necessary amount of sterling either from existing sterling balances or from the expected favorable balance of pa:~ents "dth the sterling area. It 'will be difficult, however, to rinance the dollar countel3Jart asnounting to about ~~25 million per annum. 14. The ;.:>rojects which have been approved by the Developnent Board relate primarily to the :?roduction of ele.::t:.::ical :;:J0wer, irriga- tioD projects, recl8,.'Tlation of land, innrove!:lent of railways, building of the Chittagonz Port, establishment of a paper nill, jute ni118, and a fertilizer factory. It is expected that increased production of food grain resultin;: from the aGricultural projects ':dll amount to 1,050,000 tons yearly a'1d that of other crops to 250,000 tons yearly. ---.-~-.~-.----- ------- 11 Exclusive of pro}Josed capital outlays on pl'ojects of the ~tailway Dept. and such projects as may be nnanced by Provinces from their own re- sources. 15. If the proposed projects are carried out, i t may be assumed that some of them \-,ill increase foreign exchange earnings lv-hile others \'1111 reduoe foreign exchange expenditure, How'ever, af) . the country's economy develops, new import needs "'ill arise which will partially offset the foreign exchange earnings or savin~s result- tng from the ~roposed projects. Public Finance 16. ::Budget for 1948/49 and 1949/5..9. For the last t'"0 f:i.scal years (April 1 - March 31) the Central Government budget sho~!s a defici t amounting to Rs. 812 million (Rs. 272 million in 19l18/ LI-9 and Rs. 540 million in 1949/50). (See taole oelo\1.) Revised ~~dget Revised Budget Estimate 191~8/49 Estimate 19,49/ SO (In Rs. Million) Revenue 589 754 Expenditure 581 222. SurTlus "6 2 Expenditure not met from revenu~, 602 542 Covered by special transactior-;L 220 Treasury bills to cover the sterling annuity purchase 194 Remaining deficit 272 540 Opening balance "li th the State Bank 558 918 Closing balance ,v-i th the State :Bank 918 559 11 :as. 119.:3 mi llion ''las ;racei ved from the U. K. as a payment of Pakistan's share of recoverable ergenniture and Rs. 90 million from India as payment for various purposes. - 9- 17. Of the overall (ordinary plus capital) expenditure in 1948/49 of Rs. 1,081 million (not including- the purchase of annuities for the payment of sterling pensions), expenditures on defense serv- ices represented Rs. 614 million, civil administration Rs. 104 million, • capital expenditure on development (other than defense capital outlay) Rs. 230 million, and debt service Rs. 25 million. In the 1949/50 budget, defense eD)enditures amounted to Rs. 756 million which is 60% of the total expenditure of Rs. 1,294 million. Capital expenditures, the major part of \-rhich _"ere l'1ans and advances to provincial govern- ments for development, were Rs. 295 million, civil administration Rs. 136 million, and the debt service Rs. l.!-3 million. 18. Income and corporation tax represented only around 11% to 12% of the total revenue, and customs and central excise duties more than 50% in both years. (See Appendix 3.) 19. The Government enco1111tered little difficulty in covering the sizeable defioi t of these tt'fO fiscal years \·ri thout borro1tJing from the Central Bank and "Ii thout reducing its current balances "Ji th the State Bank, which stood at Rs. 559 million on March 31, 1950, compared ,'lith Rs. 557 million at the beginning of the fiscal year 194F/49. While in 1948/49 the balances increased from the proceeds of loan$ floated in 1948, they "Tere reduced by Rs. 359 million in 1949/50. 20. The Government ,·ras able during 1948 to raise Rs. 760 mil- lion in five-to ten-year loa.~s (called permanent debt according to Pakistan nomenclature). All these loans were issued in the calendar year 1948. The requirement that banks and insurance companies - 10 - oneratinr in Pakistan invest a nart of their assets in Pakistan's .... 1/· "'OVerI1"nent securities-may exulain ...... ... to some extent the success achieved (. in floatinc this sUbstantial amount. Indian government bonds VTere accepted by the Government in :;ayment for Pakistan r:overnment securities. 1~ further issue of Rs. 100 million, "Nhich was subscribed by financial institutions, was floated in February 1950. 21. The 1950/51 Budge~. AS the table belov, shows, revenue in the 1950/51 budget is estimated at substantially the sa~e level as in the revised 1949/50 bUdget estimate. Ordinary ex.?enditures, hm'rever, are expected to increase by Rs. 19.5 ITLtllion over the last year, leav- ing a deficit of about Rs. 19 millj.on in the Ordinary Budget. Ordinary Budget (In Rs. l1illion) Revenue 753 Expenditure 7?2 Deficit 19 ----------------------- Revenue Expenditure Deficit Overall deficit 402 O?ening balance (on April 1, • 1950) 559 Closing balance (on March 31, 1951) 300 ------------_._._------_ - ----.. .. .......-......_- ---.- -... - ---.--- .. ~ ~ Insurance com.?anies recistered in Pakistan are required to invest the equivalent of 25% of their adjusted liabilities in Pakistan government securities. Companies not rep;istered in Pakistan must invest the equivalent of 33-1/3% of their liabilities in govern- ment securities. Scheduled bar~s are required to keep the equiva- lent of 75% of their liabilities invested in Pakistan. -11- 22. Defense remains the largest expen~iture item in both the Ordinary and Capital budgets. The defense outlay of Rs. 750 million represents 64~ of overall government expenditure. The Govern- ment in consequence has not been able to provide any substantial to amount for development purposes or to grant large loans and advances to the provinces. In the 1950/51 Capital Budget, aside from the Rs. 250 million defense outlay, the major expenditure items are: RaihIays--Rs. 70 million (an increase of Rs. 46 million compared to 1949/50); industrial development--Rs. 40 million (an increase of Rs. 28.8 million): and civil ,,,orks-_R s • 32.8 million (an increase of Rs. 3.2 million). Grants to provincial governments for dev81opment. hot"ever, Here reduced from Rs. 11.5 million to Rs. 5 million and loans and advances by the Oentral Government, from Rs. 190 million to Rs. 20 million. The reduction of the grants and loans to the provin- cial governments ,.,ill be seriously felt by the provinces because of the current strain on the1.r finances. Large outlays for the relief and rehabilitation of refugees have been a particulnrly heavy burden on the provinces t even though some financial aid for this purpose has been received from the Central Government. 23. Expenditures on civil administration are estimateo at Rs. 148 million and on debt service at Rs. 43 million. It is expected that the budgetary deficit itdll be covered bv substantial dra"Ting on the Government I s cash balances 1'1i th the State :Bank "l>lhich "l;rill be reduced from Rs. 559 million to Rs. 300 million. An issue of a new loan of Rs. 100 million plus proceeds from other items are expected - 12- to cover the rest. The current capital market for government bonds in Pakistan is favorable. I t is probable that the Government \·ii1l be in a posi tion to borro'\" more heavily than the budget estiTrJate indicated and that the Government ,\-,ill not, therefore, have to dra,,, .. dO','Tn its cash balances to the extent noted. Although the Government's fi seal policy has succeed.ed until nO l .,! to cover the defici tB ,·Ii thout resortlng to borro\·rin!'" from the State Eank, it must be kept in mind that various desirable investments had, to be postponed because of the defense expenditure 2)ressure on tile budget. ~rnment~ 24. Central. Government Internal Debt. At the end of Narch 1950, the total IJermanent (mediu;:]-term) deat 'tv-as Es. 859 million The market for gO'Ternment securiti es has been firm VIi th only slight fluctuations; for instance, the 3% loan 1960 "ras quoted. as lOl~ (yield 2.84]6) on A~)ri 1 1, 1949, l02i (yield 2.741) at the end of December 191}9 , and 102! (yield 2.72%) at the end of March 1950. The Govern- ment is not amortizing any of the germanent debt. Its yresent plans are to payoff outstanding issues by refuhding operations as they fall due" Treafmry b~.ll", Qutstan0.ing ,.,ere Rs. 125 million at the end of January 1950, of Hhich Rs. 104 million '.'!ere given to ti:le State Bank for sterling useC1 for the purchase of annuity for the ~)ayment of sterling pensions. 25. External Debt. Pakistan has no external debt other than that to the Oovernment of India. The final amount of this debt remains to be determinea. An estimate given by the Government of - 13 - 1/ Pakistan puts this debt at about Indian Rs. 2,000 million. (Last year the Government of India estimated that Pakistan's debt would be around Rs. 3,000 million). The debt is to be repaid in 50 annual equated instalments of prinCipal and interest combined, commencing August 15, 1952. No basis for an agreement has been reached until now on the compensation for the property left by the Indian refugees in Paki stan and Paki stan refugees in I ndi a. The amount s involved are large. IV. MOPEY Arm 3Ai1"{IKG ~ State Bank of Pakistan 26. The State Bank of Pakistan began operations on July 1, 1948, but Indian notes remained legal tender for several months e I t "'as agreed that the Reserve Bank of India "lOuld transfer to the State Bank of Pakistan the assets of its Issue Department consisting of gold, sterling securities, Indian rupee securities, and rupee coin in the ratio in 'lrlhich they ",ere held on June 30, 1948--in an amount equal to the value of Pakistan notes put into circulation from April 1, 1948, to June 30, 1948, plus the amount of Indian notes of two rupees or more encashed by the Bank of Pakistan from July 1, 1948, to June 30, 1949. and returned to the Reserve Bank of India. At the be~inning of July 1948, Pakistan notes in circulation amounted 11 This debt ,,,ould be made U:9 of the value of the assets. fi seal and financial. ",hich have been taken over by the Pakistan Government plus l7i% of the uncovered debt represented by the excess of liabilities over assets of the undivided Central Gover~~entt less the liabilities directly assumed by the Government of Pakistan. - 14- to Rs. 515.7 million. The total amount of India's notes encashed by the State Bank of Pakistan from July 1, 1948, to June 30, 1949, was Rs. 1,251.8 million. Pakistan's claims on the Issue Department of the Reserve Bank of India thus totalled Rs. 1,767.5 million. The Reserve Bank began the release of assets on September 30, 1948, and continued to do so up to r,~arch 1, 1949. The total am0unt of these releases was Rs. 1,276.7 million, consisting of sterling securities equivalent to Rs. 857 million: Indian ru~ee securities Rs. 340 mil- lion, gold equivalent to Rs. 42 million, and Indian a~d Pakistani coin Rs. 38 million. 27. After r4arch 1. 1949, the Reserve Bank of India "rithheld the release of further assets. The balance of Indian notes returned from Pakistan and a'l>,a1 ting adjustment is around Rs. 490 million. 28. The table below' Sh01;T8 the returns of the State Bank of Pakistan from March 4, 1949. to June 23. 1950. During this period no transfer of assets from India took place, and no more Indi~~ notes \-lere returned or replaced by Pakistani notes .. - 15 ~ Issue Department (million rupees) March 4 Sept.16 Sept.23 Ma.rch 31 June 23 1949 1249 1949 1950 1950 Notes in circulation 1787.8 1699.3 1699.5 1773.5 1722.1 Assets held in State BruL~ of Pakistan: 1/ Gold 36.6 42.07 42.07 42.07 42.07 Sterling securities 986.9 84204 585.3 675.3 670.9 Gover~~ent of India Securities 286.2 316.3 316.3 21ge7 144.2 Indian notes representing assets receivable from the Reserve Bank of India 420.9 431.8 431.8 431.7 431.7 Government of Pakistan securi- ties 50.0 7.6 264.7 361.3 416.1 Assets held "Ii th Reserve Bank of India pending transfer to Pakistan Gold 1.9 1.9 1 .. 9 1.9 1.9 Sterling securities 38.7 38.7 38.7 38.7 44.1 Government of India securities 15.3 15.3 15.3 15.3 10.0 Banking De~artment (million rupees) March 4 Sept.16 Sept.23 March 31 June 23 1942 19 49 1949 1950 19t.}0 Deposits: Central Government 760.8 630.0 614.3 616.1 493.4 Banks 139.8 244.5 223.8 111.9 153.9 Government 'I'reasury Bi lIs 108.7 104.8 104.8 104.8 101.5 Balance held outside of Pakistan 814.2 767.6 604.08 327.09 322.8 Investments 2J 90.3 115.8 273.05 348.2 330.7 11 The State Bank of Pakistan values its gold reserves substan~ially bela,,, the H4J)' rate (0.268601 grams per rupee). The gold reserve on June 23, 1950, valued at the IHF rate t'las a~Jl?roximately $26 million (Rs.86 million). Z/ The breakdown of this item, \,!hieh also contains Government of Pakistan securities, is not available. - 16 - 29. Notes in circulation remained, on the whole, unchanged dur- ing this period. The total money volume (currency in circulation plus 1/ deposits)- did not chanee substantially_ The latter increased from • 2,819 rr.illion in February 19h8 to Rs. 2,871 million in February 1950. In the period before devaluation sterling securities and bal- ances held abroad were reduced by Rs. 191 million (~57 million) and covernment deposits by Rs. 131 million. The bookkeeping loss result- inc from devaluation of the pound and the Indian rupee was covered by government securities given to the Bank. The rupee value of foreign assets declined accordingly. 30. The fi['ures shoninG movements after the sterlin~ de- valuation indicate a fl'.rther decline in sterling sec uri ties and bal- ances • "' d a broad ,,'Dount" he .L . 0 leS. 1 'B" ~ng t"'" 0 "11 " ( ", c iill ITll __ lon,»)~) ,.4 "l~' '\.oy the llon, end of }'Iarch 1950. Tlley were reduced only R -- .... ;:,. 8 m~ L ...1. Ill" on (;\2 ,i.- I ,.> .Lt. million) fron the end of March to June In a0dition to sterline, balances held abroad include about 138 rr:illion Indian rupees. 31. Pakistan obtained ~ 140 "1~~~.~V' from India following parti- tion. On June 30, 1950, Pakistan's sterling balances were h 34.9 2/ million. - Excluding around 1, 14 million, used for the :;::mrchase of British stores in Pakistan, and an annuity for the uayment of pensions, 1, ul million were required to meet the balance of payments deficit on current account until the end of June 1950. Host of the decline in sterlinc balances occurred durinc; 1949. The ratio of gold and sterling 3/ securities to notes in circulation l'!US 41% on June 23,- as comuared y:ith the legal requirer.1ent of 30% •. y Demand de90sitsof' the--State'-Dank -and the Scheduled Banks, less de- posits of the Central Goverr>..ment and the Scheduled Banks with the State Bank. y Pakistan's foreign exchange reserves on June 30, 1950, are shown in Aopendix 7. - 3/ The ratio would be 44% if the gold reserve were valued at the nlF rate. - 17 :.. 32. Pakistan has a pending claim on India for additional sterling balances of around ~ 35 million. Of this amount, about ;;, 27 million is for the red.emption of Indian notes in circulation • in stan at the time of parti tion, "lhile +., 8 million represent the sterling equivalent of Indian rupees held by the State Bank in Se:9tember 1949 in excess of the amount ?ro~rided for in Indo-Pakistan trg,de agreements. If Pakistan obtains the Fhole sum, its sterling reserves l'Till amount to about ~ 120 million. Sterling balances Arra!lJ'!:ementl'l 33. . 1949 f Paki stan had an For the :period July 1948 to JU.119 agreement \1i th Great :Britain according to "Thieh ;r. 5 nillion ~:!Ould be released from the • 2 Accoun't to the ~ro. 1 Account for current transactions, plus a further release of ;r. 5 million to r;:eet expendi- tures for the rehabilitation and resettlement of refugees. The U. K. agreed. to make the equivalent of ;r. 5 minion available :1.n harct cur- rency during thi s period. For the year 1949/50 a ne,v agreement \.ras reached ':lLereby *' 12 million \10ulel be released for current trans- actions and anott.er ;, 5 million for special requirements including the purchase s goods for the e;"8cution of caJ?i tal projects and rehabiE tation of refugees. With regarct to dollar releases from the central reserve of the sterling area, Pakistan agreed to restrict its expendi ture to $65 million, iofhich is 75;& of the 1948/49 expenditure. Since PakistanIs dollar earnings during the year ending June 1950 - 18 - are expected to be of the order of $30 million. Pakistan "Till be able to convert sterling in the amount of around $35 million. At present, negotiations are being concructed in London in regard to sterling releases in 1950/51. Commercial :Banks 34. Commercial ca~:s are the most important credit institutions in Pakistan. There has been a.."'l up\,Tard trend in both deposits and advances. Demand deposits, \\Thieh vlere Rs. 912 million a' the end of July 1948, stood at Rs. 981 million on June 2, 1950. Time deposits increased :from Rs. 161mElion at the end of July' 1948 to Rs. 198 million on June 2, 1950. The Scheduled Eanks are reruired to mair..tain \'lith the State Bank 5% of their demand deposits and 25b of their time deposits. 35. Tile banl:s have maintained de~osi ts vIi th the State Bank substantially above. the required miniIDtl.TJl. The advances .e;ranted by the Scheduled :Banks increased from Rs. 247 million at the end of July 1948 to Rs. 477 million on June 2, 1950, ,or by Rs. 230 million (they were Rs. 415 million at the end of March 1949)~ The main part of this increase occurred from July 1948 to January 1949. Other Financial Institutions 36. POEt Office SavinA'S :BanI::. According to the budget esti- mates a net increase of Po~t Office Savings ~ank deposits of Rs. 12 million was a~pected for 1949150, and of Rs. 12.5 million in 1950/51. The total amount of balances of the various types o£ small savings depoei ted 1:Tith the Post Office Savings Bal''ll: was Rs. 485 million on November 30, 1949. - 19 ... 37. National Bank of Pakistan. On November 8, 1949, the "lTational Bank of PakistanI! ,vas established: its authorized capt tal is Rs. 60 million. Not less than 25% of the capital is to be sub- scribed by the Oentral Governme~t. The scope of business of the Bank as defined in the Ordinance is very large, containing practically all transactions \'I'hich commer- cial banks ~ight be called upon to perform. It is intended that the Bank. also lend its support to other banks 't'!ith a view to the building up of a strong and bal~~ced baludng or~anization in the country. At the beginning the business of the Ban.1{:, which has opene~ six branches in East Pakistan, ,,,as conflnect to the financing of jute, bnt in May 1950 the Bank expanded its operatio~s to all normal banking functions. 38. lndustrial Finance Coruoration. This Corporation started functioning in July 1949. It has an authorized capital of Rs. 30 mil- lion, of which 51% is o~med by the Central Government. The puryose of this institution is to provide medium and long-term credits to industrial concerns. Up to the end of February 1950, the Oorporation sa..'1.ctioned loans to the ext~nt of Rs. 5.8 million to industrial - 20 - V. :BALANCE OF TRADE AJilD :BALAlifCE OF PA'YMENTS The Period July 1, 1948 - June 30, 1242 39. The balance of trade for this period, not including trade ,.,1 th India, shot-Is the follo\'Jing data: (in Rs. million) Exports 822 COMmercial Imports 877) ) 1,293 Government Imports 416) Deficit 471 A trade defici t ,.,as incurred ",i th the hard as "Tell as the soft cur- rancy area. 40. The balance of payments deficit on current account ",i th countries other than India amounted to Rs. 511 million ($153 mil- lion) 0 According to Indian statistics, Pakistan had a trade ~~rplus with India of Rs. 340 million (exports Rs. 1,171 million, imports • 831 million), and balance of payments surplus on current account of Rs. 247 million. On the basis of this data Pakistan's overall trade deficit would be reduced to Rs. 130 million and the balance of payments deficit to Rs. 264 mlll1on. If government imports ,.,ere excluded, balance of pa;rments 'I.'lou.1d sho'. . a surplus on current account. The sUI1')lus ,>Ii th India vras paid. in sterling to the extent of Rs. 119.5 million while the rest Nas retained by Pakistan in the form of Indian rupee balances. The deficit covered by Pa.1dstan t s drat'l- ing on its sterling balances 'vas Rs. 391.5 million (~ 29 million). The total net deficit "Tith the hard currency countries. eqllivalent - 21 - to about ~ 6 million, was met by releases from the central reserve of the sterling area. 41. The trade deficit in the year 1948/49 "11th countries other than India can be explained by the following factors: (a) The import policy '-las liberalized in August 1948 1n order to replenish consumer goods stocks ",hich were exhausted dur- ing the l-lar and in the period immediately preceding and follo'l.-ring partition. (b) Heavy purchases \lJere made by the Governm~nt, particu- 1arly for defense purposes. Government imports of machinery and stores amounted to Rs. 263 million. (c) A bad harvest, because of unprecedented floods in cer- tain grain surplus areas, necessitated imports of food grains. 42. E..-v::ports of ra\"l jute. ra\" cotton, hides and skins, tea, and ra,,'l \lTool rep:.-esented about 945'& of total exports during this period, as sho\"1n in the table belo",. Rs. Hillion Ra\'1 jute (to India Rs. 800 million) 1,19205 Ra,·, cotton (to India Rs. 158.6 million) 364 7 Q Hides and skins (to India Rs. 14.2 million) 48.5 Tea 42.4 Ra\'l \'1001 10·9 Total 1,679.0 On the import side the most important items "lere textiles. The share of capital goods in the total imports of Pakistan during this period was small. - 22 - The Period July 19h9-June 1950 43. The foreign exchange budget excluding India for this period indicated a deficit of Yl.s. 283 million, 'which is smaller than estimated [overnment imports. In September 19L~9 the Open General License was can- celled and a stricte!" control imposed, in ;?articular on imports from the dollar area, in order to safeguard the foreign exchange positiono Recently, import controls from the soft currency area have been relaxed because of an improved balance of trade. The provisional data for July 1949-June 1950, not including India, show that the trade deficit has been reduced to Rs. 269 million (= ~80 million) or to little more than half of the deficit of the previous year. Exports are estimated at Rs. 941 million, commercial imnorts Rs. 819 million, and government imports Rs. 337 mil- lion. The balance of payments deficit (exclulung India) has decreased to Us. 299 million (= ~90 million). (See Annendix 5). 44. Exports have increased chiefly because of substantially greater exports of cotton to countries other than India, Rs. 414 million (1.01 million bales) acainst Rs. 206 million (1+58,000 bales) in the previous period. Raw jute exports amounting to hS. 311 million (1.7 million bales) have remained below the total of the previous year (Rs. 393 million or 1.88 million bales). No great changes have taken place in the export of other corr.modities. In trade with India, Pakistan had an export sur- plus of Rs. 105 million in the second half of 19h9 (exports totalled Rs. 354 million, imports Rs. 249 million). In the first part of 1950 - 23 - exports to and imports from India were most probably not greater than Rs. 150 million each way. 1+5. The following table compares Pakistan's total trade for the two years. Figures for trade with India in 1949-50 are based on the ass~tions mentioned above. , I ~,/ 19h8-49- 1949-50 (RSe Million) Exports outs:l.de India 822 748 Exports to India 1,171 50h - Total Exports 1,993 1,552 -L4I -----..- --- ........... -.... . _-------_._- Comrnercia1 Im!"orts froIT' outside 877 879 India Commercial Inports 1'r)[:. India 831 399 Government Imports 416 337 ,----------- ---------- Total Imports 2,124 1,615 -519 ------------------------_._. This tentative table highlights particularly the effect of the trade deadlock with India which developed in September 19h9. h6. Although Pakista!1 su.cceeded in selling all its cotton out- • side India, its total exports have declined by one fourth. And _ _ _ _ _ _ _ .. _ _ _- . - . _ _ _ _ _ _ __________ • _ _ _. _ . - . . _ - . _ _ "" . . . . _ _ _ , _ _ _ . . . _ _ _ _ _ _ .w _ __ 11 Fieures for trade '\':i th India in 1948-49 and the second half of 1949, taken from a statement of the Res€rve Bank of India. - 24 - in spite of the high level of imports needed to substitute for Indian goods, total imports have declined by more than one fourth. Thus the • total value of Pakistan's trade has been reduced. b:r about 25% during this period although trade with India continued undiminished during July-8eptember 19h9. VI. THE C(lNSEQu}~NCES OF PAKISTAN'S DECISION ;'J0T TO DEVALUE ITS CU?J~EHCY 47. Pakistan decidetl not to follow the pound and has maintained its pre-dovaluation exchance rate of the rupee (Rs • .3~3l8 = U.S. ~l). EA-,laininc: this oed 8ion, the Finance 1;dnister of Pakistan stated in his budGet speech on :lIarch 1...3, 1950: !lIn the case Pakistan the balance of pa:rments position was not such as to necessitate devaluation, nor do our eX!Jorts which consist almost entirel~r raw materials admit of any appreciable expansion. On the other hand, the country is on the threshold i.ndustrial development necessitatinc the i17port of a large volmue of machinery and capital goods for years to come. Our decision" therefore, 'wou.ld enable us not only to obtain ca;'1ital goods from the dollar area at tho same prices as before but also at relatively cheaper :?r:Lces from other countries. 1I In consequence of this dec:i.sion Pakistan has had to adjust the prices - 25 - of its export commodities to the world market level. The price of raT[ jute, which had already declined before devaluation, dropped 20.7% from devaluation until March 26, 1950. The price of raw cotton declined about 16% durinC this period and the price of tea about 15%. Hovrever, thepr:'..ce of raw wool rose 16% and hides and sKins 13% in accordance with the price movements in the world markets. Very im'" portant was the price decline of rice from Rs. 33 per maund (82 pounds) in August 19L!9 to Rs. 18~ in March 1950. However, follOl"finc the trade deadlock with India, there nas a substantial )rice increase in com- modities regularly sUPDlied by India,; the price of Sray cotton cloth had increased 30% by the middle of Februa~J, the price of jute manu- factures 50%, of mustard oil 50%, and of tobacco about 19?~. The whole- sale price index in Karachi (1939=100) dropped from 37205 in December 1948 to 3!j4. 3 in June 1949, and stood at 314 in December 1949. The workinc class cost of living index (19h4 = 100) in Karachi declined from 153 in December 1948 to 11.[3 in December 1949. The information on the price development is not comprehensive enough to determine to what extent the needed price adjustrnerit has been carried out. The increase of Pakistan's 8XDorts outside of India in the first half of 1950 in- dicates that prices have not formed an obstacle to the export of most commodities, ~.r.rith the exception of Wheat. (See A9pendly. 6) • ... h8. The process of adjustment j1.as become ;:lore difficult because India has decided not to reco~nize the exchan~e rate of the Pakistan rupee at a 44% premium over the Indian ru;:;ee, and '.:'that &";lounts to a - 26 - trade deadlock did develop between the two nations, which has been nitlrrated onl:, to a small extent by a temporary trade agreement signed in April 1950. The Indo-Paldsta.l1 trade acreement signed in July 1949 provided for the exchange of the follovring goods duri.nc July 1949-June 1950: from Paldstan 4 million bales of raV1 jute, h50,000 bales of' raw cotton, and a very substantial quantity of h..i.des and skins, oilseeds, and wheat in case had an 8xport sur91us. Pakistan was to im- port from India around 2 million tons of coal, 150,000 bales of cotton textiles, 100,000 balos of cotton yarn, 70,000 tons of edible oils, 50,000 tons of .iute manufacture", 64,000 tons of steel, and various cheeical s. yJi th India accounted for nearly 60% of Pakistan t s comMercial trado. 1:Jith India stopninc its purchases, Pal~istan had. to find alternative for its cl1j.ef export commodities. The 19h9-50 harvest b:c'oLl:::ht a cro~ of ahout l.~~ million bales of cotton, 4~ million bales of ;jute, and an sur~lus of 500,000 tons of Ylheat. VIith to Government purchased 400,000 tons, thus easine the • Eoy;evr:r, only 100,000 tons of 'i'rheat we:::-e and :::-eHl8.ined in Pakistan because the c;.ovel'nrnent clid not want to sell below the ::!rice which i t had ~)aid (28. 9-4-0 per maund). Cotton been in the lliost favorable :;osi tinn because ?akistar.. cotton, beine for sterling, has been able to sell even at a ;;remium. .. t,he Pakistan had exported 862,000 bales of cotton of the total surplus of 1 million bales to countries other than "!" 27 ... India took only 22,000 bales. There is no doubt that Pakistan ",ill sell all the remaining cotton from last year's harvest. 49. The jute position is much more difficult. In 1948/49 Pakistan exported 1,900,000 bales to countries other than India, while India exported around .500,000 bales of ra,., jute. Pakistan author! ties esti ... mated optimistically the rai'r jute consumption outsic.e of India as high as 4 million bales and expected to sell substantially more ra,,, jute outside India than in 1948/h9. On October 2.5, 1949. liThe Jute Board lt was established to supervise all dealings in jute. The lrovernment has fixed a minimum price per maund of jute ranging from Rs. 21 to Re. 28. In addition, the Government was ready to buy jute through the newly established National Bank of ~akistan. but only small quantities of jute were purchased shortly after the establishment of The Jute Board. To ena-ole the direct ey.ports of ra1:J jute ",hich ;::;reviously had Moved via Calcutta, the Port of Chi ttagong had to be expanded rapictly and the jute baling facil! ties substantially increaseil. The capacity' of the Port has been greatly enlarged so that it I'las possible to ship around 200,000 bales of ,jute beginning December 1949 compared 1»Ji th onl:! 60,000 bales in the previous months. It is esti'11atet'l that ":i th the various emerGency installations the Port of Chittagong ca~ now handle at least 2~ million bales yearl;)7. It is expected that by the end of July 1. 9 million bales \.Iilling 2. 'l r;liJ.lion tons 46.0 a,l Suc;ar- hl,OOO tons 33.0 Cotton Ginning 1 million bales Tobacco 183 million dc;arettes 20.4 Alcohol & Alcoholic beverages bl Jute Pressing- 2 million bales 12.0 Fruit canning and bottling 6.5 Sub-total 481.2 other Industries Leather Shoes 12.5 million pairs 125.0 other leather 31.5 Cotton textiles 92 million yards and 8.6 89.0 million lJonncls of yarn ... ...------.--- -------- ~ -----,,-----~------ A new sugar with 50,000 tons calJacity is 0x::;ected to into production the current year. 'd Jute baling capacity is beine expanded to around h million bales. _ 2 - Value ~~dustry , Volume Annual (million.ru!?ees) Soap 50~300 tons 71.6 Cement 4oo~ooo tons 30.0 Rubber manufactures '1""-- lh.O Glass 7,200 tons 8.6 Chemicals includin~ 20,000 tons of 8.1 soda ash Paints and Varnishes 2,000 t.ons 3.2 Matches 52~,OOO Cross box.es c,I Others- 42.0 Sub-total _t~25.L- Grand Total 906.6 -_ ...----- - - -- ---,.~--------- ----.-~------".- sf Includes iron and steel fou,,"ldries, machine tools, scientific instrU:7lents" electrical equi;::>raent and s!)Qrts roods. Source l Pakistan Uinistry of Economic Affairs, Office MemoranduIil Iv/56/EP/49, dated February 1, 1950 • ... Aonendix ,- 3 Revised Revised Estimate Estimate Estimate 1948-49 19h9-)0 19)0-51 . - Customs 277 .0 347.) 315.0 Central excise duties 52.0 57.) 62.0 Income and corporation tax 65.0 90.0 95.0 Sales tax 35.0 60.0 60.0 Salt tax 33.0 25.0 26.0 Debt Servjce (mainly from railw"ays) 44.5 55.1 .~4 r' ". .""J Source: BudGet of the Central Goverrunent of Pakistan for 1949/)0 and 1950/51. Appendix 1i Commercial Trade Balance July 1, 1948-Jun~30j 1949 . (In Rs. million) Exnorts Imr)orts ....,;;.---- ~-- Total 1773 1286 /-487 ----~--.---~ .. ~-~ ( im1)orts bv India 1019 se~ on.ly) " h09 f610 funerican Account Countries 116 115 /- 1 Other hard. currency countries 173 hO 1133 Soft currency countri.es 464 721 -257 (United Kine:dom) (199) (362) (-163) Cornmercia::L Trade Balance Ju~y I-Decembe:r;:~ 31, 19Li~ T T) ( ~n '~1') ,·,s. r:l1..L.lon Exnorts --"~-- InrlOrts '* • Total 563 - 39 India (by sea only) 241 92 /- 149 AInerican Account countries 18 71 - 53 Other Hard currency countries 35 58 - 23 50ft currency countrj.es 230 342 - 112 (United Kingdom) (68) (160) (- 92) Source: Estimates preparect by the Pakistan Authorities. .. . Confidential Appendix 5 Paki ,s!a~.El :Balance of Paymenj;§. (With countries other than India) (Re. Million) Summary Errors & Net Investment Recei~ Payments :Balance Qmissions Disinvestment July-Sel?umber 1948 161.1 145.3 .{. 15.8 .{. 05.7 21.5 October-December 1948 140.4 323·9 -183.5 .{.41.7 -141.8 January~rch 1949 221.5 384.9 -167.9 - 31.7 -199.6 April-June 1949 254.1 462.4 -210.8 :L1:J~ -120.9 JulT~'\itI.~ 1949 777.1 1,323·5 -546.4 .{. 35.6 -510.8 July-September 1949 190.0 354.9 -164.9 .f. 04.1 -160.8 October-December 1949 176.7 258.0 - 81.3 .f. 15·3 - 66.0 January-March 1950 263.4 323·7 - 60.3 .;.. 39.2 .... 21.1 April-June 1950 (Est.) _£90.0 _ 341.1 - 51.1 - 51.1 July 1949-June 1950 920.1 1,277.7 -357.6 .j. 58.6 ....299.0 Source: Estimates prepared by the Pakista,n Authorities. " '. . Appendix 6 Ana1ysifl of_PakistanI s Export Trade 'Vi th Countries Othe:;:o Than India 1948-49 and 1949-50 (In millions of rupees) 1948.J!~ 1949-50 Q.u.a.'l tit;y: Va1·i;p. ~- Q,uani;it;)! Value Difference Jute Raw 1.88 million bales 393.0 1.7 million bales * 310.8 - 82.2 Cotton 458,000 bales 206.1 1,012,000 bales 414.0 .j. 208.0 Hides & Skins 35.1 27.0 8.1 Tea 42.4 46.0 .j. 3.6 Wool Raw 30.6 30.0 0.6 Miscellaneous _44.L '30.0 - 14.. 8 Tot5.1 752.0 857.8 Add export duties 70.0 90.0 GRAND 'I01'AL 822.0 947.8 .j. 125.8 *A further 200,000 bales are expected to be exported during July 1950 from 1949-50 crop. thus bringing total exports to countries other than India to a figure slightly hi€~er than that of the previous year. Source: Estimates prepared by the Pakistan Authorities. Appendix 7 PAKISTAN'S FOREIGN EXCHll.NGE RESERVES on JUNE 30, 1950 (All figures in millions of pounds sterling) .. .. A. §_~erling (i) VTi th State Bank and Authorized. Dealers (a) With St.ate Bank 84.9 (b) iJith Authorized :Uealers 6.1l (c) Balances with P::1kistQ.n :.~issions 3.0 (a:;prox.) and En:bassies Total to 94.3 .. , ( :UJ Sterling Due from India acainst return of Ind.ian notes from Pakistan 27.JI. Total (i) and (ii) 121.7 B. Gold (i) Held by State Bank at official I.i1.F .. rate 9.3 (ii) Due from India 2.gainst Indian notes returned from Pakistan 3.5 Total 12.8 C. Indian Re. holdings ~in _mi11i=.-..:?! P2~..9-s ~.!~ling) Indian Government Rupee Securities I", ) \.L Received from India by State Dan.1( 19.2 (ii) Due from India to state Bank 6.8 (iii) Held by GovernLent Total 1.6 27.6 - (continued on next p~e) Appendix 7 (cont.) Rupee Account with Rese:!:"Ve Bank ~~dinary Account (ii) Special Account 'I'otal Grand total A, B & C }.77 ,,4 million I)Ounds sterling tTote:- j>"bove fiGures exclude Indian Rupee holdi:lgs with banks in Pakistan and holdings of Indi.an Rupee securities in hands of p·cio1ic. Sot:LI'ce: Data subnitted by Pakistan Authorities • •