Many businesses are on a growth path. They did not have it so good in the past four years of military and quasi-military rule. Money is available cheap and in plenty. A stable exchange rate has reduced the cost of imported raw materials.

Huge inflow of earnings from overseas Pakistanis have created a vibrant market for stocks, real estate and consumer durables. Exports have picked up fast. Capacity utilization in traditional industries like cement and automobile have gone up. The NAB is no longer a major irritant.

Though the economy is primarily externally stimulated, the traditional dependence of foreign finance capital for strengthening existing businesses has been radically reduced.

Soaring corporate profits are creating savings and hiking capital accumumulation. It is unfolding a scenario for an investment-led growth provided the macro-economic policies are adjusted to help the process.

Companies have improved their financial health by replacing expensive debts by cheaper credit and by replacing old assets with new assets to increase productivity and earnings. Low interest rates have improved corporate balance-sheet.

Corporate profits grew by an average of 53.6 per cent in 2002 and 84.3 per cent in 2001. The trend has been further strengthened in the current fiscal.

The State Bank puts the overall corporate profits at Rs47 billion in 2002, Rs30.6 billion in 2001 and Rs16.6 billion in 2000.

But the key issue is whether these company earnings, savings and capital accumulation would go into development and productive activities, in commodity-producing sectors and in the real economy. The fixed investment has remained stuck around 13 per cent during last two fiscals. The overall investment to GDP ratio is 16 per cent, the lowest when compared to China, Malaysia, India, Bangladesh and Thailand. None of these countries have an investment ratio of below 20 per cent and the figure for China and Malaysia is twice or more than that of Pakistan. Many believe that the stagnation in investment can be explained by near absence in project financing. Those who have seen project finance and DFIs as the driving force, the lifeblood of early stages of industrialization in Pakistan and elsewhere refuse to believe that the concept of DFIs, as the reformers say, is dead. They contend that it is very much relevant because of difference in the operations between banks and DIFs.

One who has rich experience of project financing says that, “ the working of DFIs and banks differ. DFis work on a plan submitted by the sponsors and approve a loan on the basis of a plan and creation of future fixed assets. The assets continue to be created and an automatic mortgage system creates the security. Commercial banks have no such experience of this method and their system, procedure and the staff would like to see the assets, their physical verification and evaluation, to create a hypothecation or a pledge. Due to this basic difficulty, we can experience a slow growth in industrialization and consequent unemployment.”

Between 1950 and 1970, industrialization took place at a rapid pace for twofold reasons: the PIDC invested in areas where domestic private sector was shy to enter, and the running enterprises were disinvested to free capital for new investments. Project financing, initially by the PICIC and the IDBP, later swelled by creation of other DFIs. These DFIs had lines of credit from foreign countries and multilateral donors which later dried up or was offered at exorbitant rates of interest. The NIT provided equity by way of subscription to new projects. The ICP provided large bridge loans with underlying consortia arrangements. As greenfield projects could not go for public issue, the gap was bridged through loans and financing arrangements with consortia led by the ICP. The govt- SBP provided lines of credit to them.

Under the financial sector reforms, except for SME bank, the DFIs are to be totally eliminated. The NDFC and the Bankers Equity have been liquidated.The IDBP may be privatized or liquidated under the IMF advice. The non-performing loans and bad debts had made these unviable. They could not be resurrected without foreign money which was not available unlike commercial banks which were given funds by the World Bank to pay off the redundant staff.

The DFI concept is dead and project financing is a low priority with commercial banks. Instead, big companies are asked to raise funds from the capital market through equity or corporate bonds instead of bank borrowing. The policy has paid some dividends. Firms floated 21 TFC issues in fiscal 2003 amounting to Rs10.4 billion against 17 issues worth Rs9.5 bn in 2002. The growth of small and medium sized enterprizes (SMEs) is handicapped by inability of new entrepreneurs to float shares in the capital market and also for want of bank credit. This sector is under- served by the commercial banks. SME bank’s performance leaves too much to be desired.

There was a phenomenal growth in bank credit of Rs132.2 billion in fiscal 2003, over three times as compared to the previous year. “Where has this money gone, asks an entrepreneur and replies, “ much of it replaced expensive debts by cheaper loans.” Apart from the working capital, a bit of it may have gone into substituting old assets by new assets to improve productivity”, he concludes.

On the other hand, the banks prefer to focus on making profits in a buoyant stock market rather than on project financing.

To quote the State Bank, the banking sector has shown “exceptional performance” during FYs 2002 and 2003. Banks generated a substantial portion of their earnings through non-interest incomes including capital gains on equity investment and fixed income securities.” In nine months ending September 30, 2003, non-interest incomes of sampled banks, according to Investcap Securities, amounted to Rs10.6 billion, mainly on account of capital gains of Rs5.7billion, a surge of Rs4.8 billion over last year.

These developments forced the State Bank to come out with the Prudential Rules which, from January 2004, will restrict banks and DFIs from investing in listed and non-listed companies to 20 per cent of their equity except in case of Islamic banks whose limit has been set at 35 per cent. These institutions have one year’s time to comply.

The commercial banks prefer to subscribe to corporate bonds to project financing. The bonds can be sold to make profits and improve the balance-sheet.

Upto the 1970s, foreign finance capital fuelled domestic industrialization. This has dried up for industrialization. Now local business depended heavily on their own self- financing.The stocks of private loans and credits witnessed a decline of $198 million to reach $2 billion during fiscal 2003 from $2.5 billion two years ago. This has happened despite the unusually large inflow of $392 million mainly due to the disbursement of a long term loan to PIA and a $30 million textile sector loan. Private sector has also substituted its expensive foreign credits by rupee loans, under a facility allowed by the State Bank. It has resulted in pre-payments of loans totalling $79 million during FY 03.

The efforts to improve the corporate governance and the reforms carried out by the SECP have failed in attracting private and public limited companies to get listed at the stock exchanges.

There are 2903 public limited companies, 39,791 private limited companies and 647 foreign firms.The number of listed companies at the Karachi Stock Exchange was a mere 705 in May 2003 against 765 companies in 1999. A few of the pharmaceutical, textile and financial companies were merged but many have withdrawn because of the hassles of corporate governance reforms introduced by the SECP. A leading business house says that prior to these reforms, a company held four meetings in a year. Now it has to hold 20 meetings a year and so many forms to fill. Of the 1093 private limited firms, 28 public limited and 39 foreign outfits registered by SECP under the companies Ordinance in 2002, hardly anyone opted for listing.

In fact the new scrips that have brought much cheers from listing at the Karachi Stock Exchange are state-owned the National Bank of Pakistan and the Oil and Gas Development Corporation.

The opportunities for the private sector are also being squeezed by an expanding role of the welfare trusts sponsored by the three wings of the armed forces. A leading industrial house reckons a startling one-third of the organized sector is now controlled by army, navy, airfares and police foundations. They are in banking, leasing, insurance, power generation, real estate, social and physical and social infrastructure (schools, hospitals) and manufacture a wide range of popular food products. Fauji Fertilizer acquired the Pak-Saudi Fertilizer recently. It has majority stakes in Mari gas field. It is a serious bidder for PSO for which no private sector company has enough money to bid.It owns Fauji- Jordan Fertiliser company and has a dominant share in the domestic fertiliser market. The Air Force Foundation runs the Shaheen Airlines. Now, the State Bank has put the PIA in the private sector on account of US credit it has received for expanding its fleet.

Official policies appear to be squeezing rather than expanding the private sector.