Liberally provided to the industrial sector by both the commercial banks & the specialized credit institutions
- FOREIGN AIDS AND LOANS
Foreign aid and loans received from friendly countries, played a dominant role in industrial and economic development of Pakistan. Without such aid the remarkable growth in that era could not be possible
- FOREIGN INVESTMENTS
Liberal policies in tax concession and other measures taken by government, the inflow of capital increased
According to state bank of Pakistan foreign private investments increased
Trade deficit in the early times was financed by the foreign aid
In hope that as development proceeds and income rises, not only the country capacity to save increases and the initial gap between investment and domestic saving rates be bridged, but also that a sufficient level of export surplus would be created to discharge the debt obligation incurred earlier.
This hope was never realized. The result was that the balance of payment position grew increasingly worse with the progress of development planning in the country.
At the beginning of the first five-year plan, about 19% of Pakistan’s import and 35% of its development expenditure were being financed by foreign aid.
At the end of the plan period, these proportions had risen to 31% & 38% respectively.
Halfway through the second plan, these proportions had shoot up to 56 and 42 percent respectively.
It was not realized at the time that such heavy dependence on foreign resources even for development purposes could cause serious balance of payment difficulties in the future.
In 1967-68 foreign aid was financing 50% of imports and 34% of development expenditures.
As the demand for credit in the private sector expanded, commercials banks deposit mobilization could not keep up with the demand.
More specifically the bank credit increased from RS 1.65 billion in 1959-60 to Rs 13.56 billion, an 8.2 times
Commercial banks borrowing which was nominal up to 1959-60 increased substantially, from Rs. 338 million in 1960-1, it jumped to Rs.1698 Million in 1968-9.
As schedule banks continued to increase their borrowing from the state bank, schedule bank’s heavy borrowing from the SBP was not viewed favorable as they used this fund to finance government bank borrowing.
The Indian aggression in 1965 had implications for the economy, including monetary policy.
There was a significant interruption in the inflow of foreign assistance, which in the past had significantly contributed high growth rate, particularly in the industrial sector and private investment.
Also budget deficit rose from Rs. 2.1 billion in 1964-65 to Rs 5.2 billion in 1966-67.
Difficulties created by Indian aggression were compounded by an extraordinary deficiency, which affected the country’s main crops for two years.
Thus in 1966-67 the growth rate of economy slowed down to 3.1% the lowest in ten-year period ending 1969-70.