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Economic challenges face by
Pakistan economy and solutions.
ABSTRACT
After reading this chapter you will able to
understand what are the economy issues face by
Pakistan and what are the solutions to solve those
economic issues.
123
Table of contents
Contents
Table of contents............................................................................................................................. 0
Introduction:.................................................................................................................................... 2
An overview of Pakistan’s economy: ............................................................................................. 3
1.............................................................................Economic challenges face by Pakistan economy:
......................................................................................................................................................... 5
1.1. Huge amounts of debt servicing:...................................................................................... 6
1.2. Balance of payments’ deficit:........................................................................................... 7
1.3. Fewer saving and more consumption:.............................................................................. 9
1.4. Government spends more and collects less:..................................................................... 9
1.5. Our share in the world trade is shrinking:...................................................................... 10
1.6. High Load shedding in Pakistan: ................................................................................... 11
1.7. Natural disasters:............................................................................................................ 12
1.8. Bad governance in Pakistan: .......................................................................................... 14
2.......................................................................................... Solutions of economic crisis in Pakistan
....................................................................................................................................................... 14
2.1. Overcome on the energy crisis:...................................................................................... 14
2.2. Economic revival of State Owned Enterprises:.............................................................. 16
2.3. Improve the system of governance: ............................................................................... 17
2.4. Technological improvement for enhancing agricultural productivity: .......................... 18
2.5. Retain existing investments and attract new one. .......................................................... 18
2.6. Increase exports and decrease imports:.......................................................................... 19
2.7. Government should solve law and order issues:............................................................ 19
3....................................................................................................................................... Conclusion:
....................................................................................................................................................... 20
Introduction:
Economy is the most important sector which affects the every
sector of the life. No doubt, every country’s economy have some challenges, so that with
Pakistan. Now a day, Pakistan’s economy is facing a lot of challenges, like; balance of payment
is running in deficit, population is increasing so rapidly that, we are producing less and
consuming more, governance of Pakistan is not as good as those countries who are enjoying
economic prosperity, the budget of Pakistan has been running in deficit for many years, because
of, government spend more and earn less “or” the tax collection system is not much efficient that
the government can collect much taxes to fulfill their expenses, as Pakistan have borrowed huge
amount of money, so it has to pay a huge amount of money In order to pay interest expenses,
and the last but not the least Pakistan’s economy is also facing problems because of the IMF’s
policies which are implemented on Pakistan’s economy. As every problem have some
solutions, so the economy problems in Pakistan also have some solutions and recommendations.
There is only need to implement these solutions and recommendations in over economic policies,
if Pakistan successfully implements these solutions, then Pakistan’s economy will begin to move
towards prosperity and boom. Let’s discuss the problems, its solutions and recommendations one
by one.
An overview of Pakistan’s economy:
Let me give you a brief overview in simple terms as to what the structure of this economy
is? In 1947, Pakistan had 30 million people with per capita income of 100$. Agriculture
accounted for almost 50% of economic output with hardly any manufacturing, as all industries
were located in India. Therefore, it was unable to feed 30 million people and was dependent on
PL-480 imports from the USA. From thereon, Pakistan has come a long way. Today with 170
million people, our per capita income in 2008 was 1000$ which was ten times more. Pakistan is
the third largest exporter of rice in the world and producing enough food grains to feed its
people. 3 million tons of rice is exported every year by Pakistan which is surplus to our
requirements. Pakistan is also one of the five major textile producing countries in the world. So if
we measure in relation to where we were vis-à-vis structure of economy, agriculture has come
down from 50% to 20%. Therefore, out of total national income, agriculture’s contribution is just
20%, but instead of being deficient in food production, we are actually surplus and that is what
productivity means i.e. by using the same land you produce more from the same inputs, that is
how economic growth takes place. Agriculture is not only crops, within agriculture there has
been a significant change. Livestock, dairy, mutton, beef, poultry and similar other products is
50% of agriculture output in Pakistan. Pakistan also produces third largest quantity of milk in the
world. So within agriculture sector, there is a change i.e. major crops are only 36% of agriculture
value added and 14% are minor crops, fisheries, orchards, fruits and vegetables. Thus, we are
moving in a direction where the same land and same resources are being used more efficiently in
order to produce more. As a contrast, agriculture is only 2.5% in the US having a population of
300 million, out of which they not only feed the entire population, but also export to the rest of
the world. Therefore, it is important to understand that when it is said that agriculture is
producing/contributing more, it is the productivity of agriculture rather than the share of
agriculture in GDP. Manufacturing and industry now account for 25% of the income; when we
recall there was not even a single industry worth its name at the time of partition. So if we look
where we were and where we are, I think the justification for Pakistan in terms of betterment of
economic conditions of Muslims in this part is very strong. But where we have failed is that we
have not lived up to our potential. In 1969, Pakistan exports of manufactured goods were higher
than the combined exports of Indonesia, Malaysia, Philippines and Thailand. In 1960’s Korea
emulated Pakistan in its five years planning process. The tragedy is that even a country such as
Vietnam which was completely devastated by the war has now overtaken Pakistan. Ten years
ago, India which was way behind Pakistan (till 1990’s) is now way ahead. As an economist and
student of globalization, the biggest challenge is: how can we organize ourselves to reach that
position where at least we can be running not at the nine second a mile but at least ten second a
mile race which is going on in the global economy. Ten more important challenges facing
Pakistan’s economy are deliberated in the succeeding paragraphs. (Lecture delivered to the
participants of the Command and Staff Course at Command and Staff College Quetta).
1. Economic challenges face by Pakistan economy:
These are the few economic challenges face by the Pakistan:
o Huge amounts of debt servicing
o Balance of payments deficit
o Fewer savings and more consumption
o Government spends more and earn less
o Our share in the world is shrinking
o High load shedding
o Natural disasters
o Bad governance
o Terrorism
o Corruption
o Low education
o Stagflation
o Low investment
o More imports and less exports
o Low GDP
o LOW INCOME PER CAPITA
1.1. Huge amounts of debt servicing:
A recently produced data of the State Bank showed the country paid
$6.820bn as debt servicing in FY14, including $5.910bn as principal amount and $915m as
interest
This $7 billion debt is presenting great challenge to the economy of Pakistan. The main
cause of Pakistan’s budget deficit is the huge amounts of debt servicing.
The government, trapped in floods and political crisis, may face another serious turmoil
by the end of this fiscal year if IMF and other donors did not release the promised loans.
The gravity of the situation is visible in the wake of increasing trade gap, with no foreign
inflows, no release of installments from IMF and no interest of foreign investors in the country.
The disappointing foreign investment has developed another difficult situation under
which repatriation of profits and dividends on foreign investments have also reached close to
$1bn
Pakistan succeeded to borrow from international market, though at a very high rate, but it
boosted the country’s image, encouraging IMF and other donors to help Pakistan.
However, situation seems to have changed again as exports have dropped, and imports
jumped by 32pc in the first two months of the current fiscal year and rupee has lost 4pc value to
hit Rs102-3 against the dollar.
Though remittances are increasing at the rate of more than 12pc, it would not be enough
to absorb the future shocks.
Analysts believe that the first quarter of the current fiscal year could be a shock to
economic managers of the country as it would result in wide trade gap that could enlarge the
current account deficit. Trade deficit in August this year was $2.8bn which is 76pc higher than
August of last year.
The current account deficit in July was minus $454m, which was much higher than minus
125m of last year.
In FY14, the deficit was $2.97bn against $2.5bn in the previous year.
The July deficit shows that the trend was not favorable for an economy which is facing
many challenges (State Bank, 2014).
If Pakistan makes his tax collection system stronger and try to reduce his expenses, then
it may decrease the demand of borrowing .if Pakistan does so, it helps Pakistan to reduce the
burden of interest expenses. If Pakistan decrease the demand of borrowing then it enhance the
economic image of Pakistan. As economic position of Pakistan enhances so it encourages the
foreign investment and cash inflow.
1.2. Balance of payments’ deficit:
Pakistan is importing more and exporting less for many years,
so Pakistan’s balance of payments is running in deficit for many years. As Pakistan’s imports
are higher than its exports so the cash inflow in Pakistan is less than its outflow. Higher outflow
means Pakistan’s industries are earning less profit as compared to foreign industries, which
present great economic challenges.
80% of Pakistan’s imports is financing through our exports till 2007-2008. But now this
ratio goes down to 50%, now our 50% imports are financing through our exports. We have a
balance of payments ‘deficit of 50% which is increasing year by year. This is presenting a great
challenge to Pakistan economy.
Pakistan main exports are mineral fuels (19 percent of the total shipments), manufactured
goods (19 percent) and beverage and tobacco (13 percent). Others include: food and live animals
(11 percent), crude materials (11 percent), chemicals (11 percent), machinery (8 percent) and
miscellaneous articles (8 percent). Main export partners are United States (13.6 percent), China
(11 percent of the total export), United Arab Emirates (8.5 percent) and Saudi Arabia (8.5
percent) (http://www.tradingeconomics.com/pakistan/imports).
Main imports are mineral fuels (16 percent of the total imports) and manufactured goods
(16 percent). Others include: miscellaneous articles (12 percent), beverage and tobacco (12
percent), animal and vegetal oils and fats (10 percent), crude materials except fuel (9 percent),
chemicals (9 percent), machinery (8 percent) and food and live animals (7 percent). Main import
partners are China (19.7 percent of the total imports),), United Arab Emirates (12.1 percent),
Saudi Arabia (12 percent), United States (3.2 percent) and Kuwait (6.3 percent)
(http://www.tradingeconomics.com/pakistan/imports).
1.3. Fewer saving and more consumption:
In Pakistan, as the earnings of people is not
too much as compared to their expenses so people consume more and save less. As the savings in
Pakistan is less than consumption so investment rate in Pakistan is too low. Low investment
means low growth of economy. Investment provides capital to the industries and performs a key
role in the economy of any country. Low investment provided a great challenge to the economy
of Pakistan.
According to one survey every Pakistani consumes 85 from every hundred
rupees. This thing indicates that the saving rate is too low in Pakistan. In India the saving rate of
last year is 34%, while the saving rate of china is 50% for last many years which play a key role
in the success of china’s economy.
1.4. Government spends more and collects less:
The major issue of Pakistan’s economy is that the government of
Pakistan spends more than it earns, which force to government to run its budget in deficit. As
government spending is higher than its earning, so for fulfilling deficit of budget the government
has to borrow money, which presents another economic challenge in the form of debt servicing
payments. In 2013, Pakistan budget deficit is more than 7%, which means that Pakistan earnings
is 13% and its spending is 20%. The major spending of Pakistan economy is in the form of
education, infrastructure and most importantly in the form of defense expenses. According to one
survey Pakistan spends its 70-80% budget in the form of defense expenses.
Pakistan recorded a Government Budget deficit equal to 8 percent of the country's Gross
Domestic Product in 2013. Government Budget in Pakistan averaged 3.14 Percent of GDP from
1990 until 2013, reaching an all-time high of 8.80 Percent of GDP in 1990 and a record low of -8
Percent of GDP in 2013. Government Budget in Pakistan is reported by the State Bank of
Pakistan (http://www.tradingeconomics.com/pakistan/government-budget).
1.5. Our share in the world trade is shrinking:
In 1990s, the share of Pakistan
in the world trade is .2%, which remains now, .12%. This thing indicates that our share in
world trade is shrinking year by year. While if we look at the share of India in world trade then
we come to know that it has doubled its share in world trade till 1990-2010 by .7%-1.4%.our
exports are limited in some sectors like textile, wheat and rice. Our exports are limited to only
some countries, like, U.S, U.A.E, and Australia etc. As our share in the world economy is
shrinking year by year, so, it encourages us to import more and export less. This is presenting
great challenge to Pakistan economy.
1.6. High Load shedding in Pakistan:
Energy plays a role of backbone in the
industry of any economy. The most worst economic challenge face by Pakistan’s economy is
load shedding. Because of load shedding Pakistan’s economy face many challenges. Because of
load shedding the industries in Pakistan are shifting to other countries. Because of load shedding,
not only Pakistani investors but also the foreign investors are discourages to invest in Pakistan
.load shedding has destroyed the large businesses as well as small businesses. Energy crisis has
not only affected the general public but it also effected government indirectly. Because of
mobilization of businesses from Pakistan to other countries, government revenue decreases in the
form of tax collections. As the quantity of businesses decrease, so unemployment increases and
government has to pay more in the form of unemployment compensations. Due to load shedding
government spending also increases in the form of energy development plants.
Another challenge we face today is energy and water shortages, and that is not because
we are not generating enough electricity or we are not having enough water. With the losses of
KESC from the point it has generated to the point they realize the billing is 45%, so 55% people
are paying for those who are stealing the electricity. Government of Pakistan out of its own
limited resources is paying 200 billion rupees every year as subsidies for electricity. Our industry
is at a disadvantage that they get the orders from foreign countries but they cannot execute the
orders because there are electricity outages. In addition to economic losses it also creates
inconvenience for pursuing normal life. We have silting of our dams, but no additional dams
have been constructed since Tarbela in 1974. We have water course losses of about 20-25%.
Even after these losses, the water is inequitably distributed. The influential land lords are able to
take greater share of water from the canals as compared to poor farmers. Therefore, the
productivity of poor farmer is only one ton per acre as compared to 3 tons by large holders. If we
provide the water equitably to the small farmer, he would also be able to increase the
productivity from one to at least two tons resulting into additional income, increase in exports of
food grains, cotton and fruits and vegetables which will add to export earnings of Pakistan. With
the climate change taking place with all the glaciers in Himalayas which are going to melt, we
are going to have difficulties in future due to global warming
(http://iba.edu.pk/News/speechesarticles_drishrat/Pakistan_Economy_Challenges_Prospects.pdf)
.
1.7. Natural disasters:
Natural disasters also affects badly to the economy of Pakistan. Natural disasters like
earth quake, flood etc. affects very badly to the economic position of any country. When flood
comes, it destroys a large number of agricultural products, it disturbs your budget policies,
people got unemployed, and government has to increase its expenses to fulfill the needs of those
people who are affected in the natural disasters. Pakistan’s economy has been affected by natural
disasters for last many years. Pakistan has faced a lot of economic damage due to the natural
disaster.
Economic damages face by Pakistan:
Natural Disasters from 1980 - 2010
Overview
No of events: 138
No of people killed: 87,
053
Average killed per year: 2,8
08
No of people affected: 58,
098,719
Average affected per year: 1,8
74,152
Economic Damage (US$ X 1,000): 18,
402,814
Economic Damage per year (US$
X 1,000):
593
,639
(http://www.preventionweb.net/english/countries/statistics/?cid=129).
1.8. Bad governance in Pakistan:
Governance plays a key role in the economy of
any country. Pakistan’s economy is facing bad governance for many years. In Pakistan, bad
governance takes economy to the path of destruction. In 2008, in Pakistan the rate of poverty is
17.8% which has now increased to 40%.because of bad governance, now Pakistan is facing a
worst form of load shedding. Government has now lost his image in the world’s economy
because of his bad governance. Investment is flying away from Pakistan’s due to unfavorable
policies of Pakistan. Pakistani government has no able to make good policies to end the poverty
and terrorism.in the result of natural disasters Pakistan received many funds from all over the
world but due to bad governance in Pakistan government was not able to implement these funds
in righty place. Corruption was so high in Pakistan, because of corruption people have lost their
confidence on the institution so government no one is ready to invest in government institutions.
2. Solutions of economic crisis in Pakistan
2.1. Overcome on the energy crisis:
The fiscal year 2013-2014 started with continuous problems of power and gas shortages
along with other internal and external challenges. The energy crisis is partly due to the ever
increasing circular debt.
Any rational economic intervention with respect to Energy and Power generation would
require the following steps:-
 We should produce electricity by those resources which are renewable.
 Government should aware the people to buy those goods who are energy efficient.
 Government should aware people to control light consumption.
 Government should allow people to implement small plants on their homes for
producing electricity for their selves.
 A continuous monitoring, surveillance and audit of both Hydro and Thermal
Power generation units.
 A third party regulatory compliance of Independent Power Producers(IPP’s) on a
perpetual basis
 Monitoring of inventory so thefts and pilferages are prevented of furnace oil which
has led to lower numbers of power generation.
 Imposition of strict financial penalties on failure to conduct energy audits and poor
performance of power plants.
 Switch over to cheaper fuels to cut down the power generation rates and
subsequent removal of subsidy.
 Construction of new dams on the run of the river so as to ensure that there are no
floods during monsoon and the country is prepared to combat the water war placed
by India on Pakistan.
2.2. Economic revival of State Owned Enterprises:
The Economic survey of Pakistan reports that during FY12 and FY13 the power
Shortage became so severe that it wiped out 2% from the country’s GDP.
Agriculture, Manufacturing as well as Services sector performed below their capacity”.
In addition to the energy crisis, the below par performance of State Owned
Enterprises has been a major concern. The shady privatization of these state owned
enterprises in the past have actually led to worsening of economy and if the country goes
for another string of poorly executed privatization, the ethical standing of the government
would be lowered but the quality of life of the country would be lowered beyond repair.
Decline in Foreign remittances, depletion of reserves, and stagnant tax collections
all suggest that the economy needs more careful review and constant watch. If left
unattended the fiscal deficit will increase and result in lowering of GDP.
The government should increase the privatization in those sectors which are not in
more profits or which have fewer investments from public. If government wants to
increase the profits of such kind of institutions then it may privatize these sectors.
government should also do privatize the railway sector. Because if the
government privatize the railway sector then it will be able to collect private investment
.by the privatization of railway the workers of railway try to work more efficiently
because of the fair of firing from job and railway works more efficiently. The further
benefit of privatization is that people are begun to invest their money.
2.3. Improve the systemof governance:
Governance can play a key role in the economy of any
country. If government improves its governance then it can solve many economic problems. If
government takes hard measures to control corruption then we can improve our economy.
Because in corruption although government uses its resource4es but government does not take
the advantage of its resources because of the corruption which leads the government to increase
his expenses for those work which can be done in lesser amounts .government can improve his
governance in the sector of electricity. Because if the electricity issue solve by the policies of
government then more than half of the economic problems can be solved by the government. To
overcome the .energy crisis leads our economy to more investment, more production more
exports, more income, and more savings and at final more GDP.
Good governance can achieve by government by taking these steps:
 Government should appoint people in public service on merit
 Government should promote people on performance
 There should be equality in all people when government provide some opportunities
 Government should provide decent packages for grant living and for retirement for their
civil services officers.
 All People of executives’ positions should come through a competitive process.
 Government should aware the people efficiently whenever new policies are made.
 Services sectors of different problems should be improved.
 Government should introduce electronic hard ware and soft wares to be aware him of the
problems of people.
2.4. Technological improvement for enhancing agricultural productivity:
Agriculture plays an important role in
the economy of Pakistan. Pakistan can increase its GDP by technological improvements
in the agriculture sector. Pakistan now uses a very low standard technology in its
agricultural sector. If Pakistan improves his technology then Pakistan can increase its
production which leads the Pakistan’s economy to improve its production. By
technological change not only our agricultural production increase but also our industrial
products increases because of sufficient supply of raw material.
. The government of Pakistan needs to prioritize the agriculture sector. In year 2013,
the economy received insignificant support from farms income mainly from minor crop
and livestock whereas the major crops particularly cotton and rice failed to meet the
target but to some extent were compensated by the better crops of sugarcane and wheat.
2.5. Retain existing investments and attract new one.
The Overseas Investors Chamber of Commerce and
Industry (OICCI) expects that the new government can provide right environment and support to
Pakistan’s economy and the country can attract as much as $5 to $6 billion in foreign direct
investment annually.
The chamber is optimistic that the incoming government will set a clear and focused
direction to address key issues of governance, security, energy and inconsistent policy
implementation, which in the recent past has severely affected inflow of foreign direct
investment in the country.
In a statement issued on Wednesday, OICCI President Kimihide Ando, speaking on
behalf of foreign investors, expressed his confidence in the Government of Pakistan.
As the country moves towards a smooth transition of power at the Centre and in
provinces, Ando said the ongoing democratic process is creating a positive international
perception, which is partially reflected in the increasing foreign portfolio investment in the
country’s stock market (OICCI President Kimihide Ando).
2.6. Increase exports and decrease imports:
It is recommended that the government identify gaps and remove irritants
which has led to decrease in foreign inflow and increase in foreign outflows. Last
year, the Pakistan economy registered 23.5 % in oil and gas sector for foreign inflows
followed by Financial Business and Communications which attracted 18.1 and 10.6
percent, respectively. The outflow was observed in communications and power
sectors. Despite the global slowdown, the uptrend in KSE-100 index encouraged
foreign investment in stock market. The Karachi Stock Exchange (KSE) is expected
to however around 26,000 plus points. In capital market the major contribution came
from USA, UK and Hong Kong. (M. H., Alam, S., & Butt, M. S. (2003). Foreign
direct investment, exports and )
2.7. Government should solve law and order issues:
Along with other issues faced by Pakistani
people, Government’s major attention should be on improving the Law and Order situation in
Pakistan. The need of the hour is to improve the general Law and Order Situation with
special emphasis on economic hub of Pakistan being restored to peacetime. There are
extortion, ransoms, target killing, terrorism and bomb attacks which has not helped the cause
of economic revival and sustenance in Pakistan. (Burki, S. J. (2007). Changing perceptions,
altered reality: Pakistan’s economy under)
3. Conclusion:
Economic growth in Pakistan, like other countries of the world, is subjective to the
health of the world economy, but is principally reliant on domestic factors, policy, weather, and
the nature of state-economy relations. Pakistan may not have achieved macroeconomic stability,
sustainable economic structural reforms, or improved economic governance but it has resumed
the journey for poverty alleviation, improvement in health and education sector and may in the
days and years to come improve its current standing. Last but not the least the economic
performance for the year 2014 may not be that different than previous years as the monetary and
fiscal policies are somewhat still not in balance and the current government is prone to misuse
the critical concept of publishing new rupee notes. However if the Government is able to monitor
and provide leadership to the country in the domains of macro-economic stability, structural
reforms, good governance, strengthening of financial institutions , poverty reductions and
improvement in health and education, it may help Pakistan achieve its economic potential and
help earn a respectable place in the comity of nations.
Bibliography
(n.d.). Retrieved from http://www.tradingeconomics.com/pakistan/imports.
(n.d.). Retrieved from http://www.tradingeconomics.com/pakistan/imports.
(n.d.). Retrieved from http://www.tradingeconomics.com/pakistan/government-budget.
(n.d.). Retrieved from
http://iba.edu.pk/News/speechesarticles_drishrat/Pakistan_Economy_Challenges_Prospec
ts.pdf.
(n.d.). statement issued on Wednesday, OICCI President Kimihide Ando.
(n.d.). statement issued on Wednesday, OICCI President Kimihide Ando.
Burki, S. J. (2007). Changing perceptions, altered reality: Pakistan’s economy under. (n.d.).
http://www.preventionweb.net/english/countries/statistics/?cid=129. (n.d.).
Lecture delivered to the participants of the Command and Staff Course at Command and Staff
College Quetta. (n.d.).
M. H., Alam, S., & Butt, M. S. (2003). Foreign direct investment, exports and . (n.d.).
OICCI President Kimihide Ando. (n.d.).
state bank. (n.d.).
State Bank. (2014, September 14th). Published in Dawn.

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Economic challenges face by Pakistan"s economy and their solutions (1)

  • 1. Economic challenges face by Pakistan economy and solutions. ABSTRACT After reading this chapter you will able to understand what are the economy issues face by Pakistan and what are the solutions to solve those economic issues. 123
  • 2. Table of contents Contents Table of contents............................................................................................................................. 0 Introduction:.................................................................................................................................... 2 An overview of Pakistan’s economy: ............................................................................................. 3 1.............................................................................Economic challenges face by Pakistan economy: ......................................................................................................................................................... 5 1.1. Huge amounts of debt servicing:...................................................................................... 6 1.2. Balance of payments’ deficit:........................................................................................... 7 1.3. Fewer saving and more consumption:.............................................................................. 9 1.4. Government spends more and collects less:..................................................................... 9 1.5. Our share in the world trade is shrinking:...................................................................... 10 1.6. High Load shedding in Pakistan: ................................................................................... 11 1.7. Natural disasters:............................................................................................................ 12 1.8. Bad governance in Pakistan: .......................................................................................... 14 2.......................................................................................... Solutions of economic crisis in Pakistan ....................................................................................................................................................... 14 2.1. Overcome on the energy crisis:...................................................................................... 14 2.2. Economic revival of State Owned Enterprises:.............................................................. 16
  • 3. 2.3. Improve the system of governance: ............................................................................... 17 2.4. Technological improvement for enhancing agricultural productivity: .......................... 18 2.5. Retain existing investments and attract new one. .......................................................... 18 2.6. Increase exports and decrease imports:.......................................................................... 19 2.7. Government should solve law and order issues:............................................................ 19 3....................................................................................................................................... Conclusion: ....................................................................................................................................................... 20 Introduction: Economy is the most important sector which affects the every sector of the life. No doubt, every country’s economy have some challenges, so that with Pakistan. Now a day, Pakistan’s economy is facing a lot of challenges, like; balance of payment is running in deficit, population is increasing so rapidly that, we are producing less and consuming more, governance of Pakistan is not as good as those countries who are enjoying economic prosperity, the budget of Pakistan has been running in deficit for many years, because of, government spend more and earn less “or” the tax collection system is not much efficient that the government can collect much taxes to fulfill their expenses, as Pakistan have borrowed huge amount of money, so it has to pay a huge amount of money In order to pay interest expenses, and the last but not the least Pakistan’s economy is also facing problems because of the IMF’s policies which are implemented on Pakistan’s economy. As every problem have some solutions, so the economy problems in Pakistan also have some solutions and recommendations.
  • 4. There is only need to implement these solutions and recommendations in over economic policies, if Pakistan successfully implements these solutions, then Pakistan’s economy will begin to move towards prosperity and boom. Let’s discuss the problems, its solutions and recommendations one by one. An overview of Pakistan’s economy: Let me give you a brief overview in simple terms as to what the structure of this economy is? In 1947, Pakistan had 30 million people with per capita income of 100$. Agriculture accounted for almost 50% of economic output with hardly any manufacturing, as all industries were located in India. Therefore, it was unable to feed 30 million people and was dependent on PL-480 imports from the USA. From thereon, Pakistan has come a long way. Today with 170 million people, our per capita income in 2008 was 1000$ which was ten times more. Pakistan is the third largest exporter of rice in the world and producing enough food grains to feed its people. 3 million tons of rice is exported every year by Pakistan which is surplus to our requirements. Pakistan is also one of the five major textile producing countries in the world. So if we measure in relation to where we were vis-à-vis structure of economy, agriculture has come down from 50% to 20%. Therefore, out of total national income, agriculture’s contribution is just 20%, but instead of being deficient in food production, we are actually surplus and that is what productivity means i.e. by using the same land you produce more from the same inputs, that is how economic growth takes place. Agriculture is not only crops, within agriculture there has been a significant change. Livestock, dairy, mutton, beef, poultry and similar other products is 50% of agriculture output in Pakistan. Pakistan also produces third largest quantity of milk in the world. So within agriculture sector, there is a change i.e. major crops are only 36% of agriculture value added and 14% are minor crops, fisheries, orchards, fruits and vegetables. Thus, we are
  • 5. moving in a direction where the same land and same resources are being used more efficiently in order to produce more. As a contrast, agriculture is only 2.5% in the US having a population of 300 million, out of which they not only feed the entire population, but also export to the rest of the world. Therefore, it is important to understand that when it is said that agriculture is producing/contributing more, it is the productivity of agriculture rather than the share of agriculture in GDP. Manufacturing and industry now account for 25% of the income; when we recall there was not even a single industry worth its name at the time of partition. So if we look where we were and where we are, I think the justification for Pakistan in terms of betterment of economic conditions of Muslims in this part is very strong. But where we have failed is that we have not lived up to our potential. In 1969, Pakistan exports of manufactured goods were higher than the combined exports of Indonesia, Malaysia, Philippines and Thailand. In 1960’s Korea emulated Pakistan in its five years planning process. The tragedy is that even a country such as Vietnam which was completely devastated by the war has now overtaken Pakistan. Ten years ago, India which was way behind Pakistan (till 1990’s) is now way ahead. As an economist and student of globalization, the biggest challenge is: how can we organize ourselves to reach that position where at least we can be running not at the nine second a mile but at least ten second a mile race which is going on in the global economy. Ten more important challenges facing Pakistan’s economy are deliberated in the succeeding paragraphs. (Lecture delivered to the participants of the Command and Staff Course at Command and Staff College Quetta).
  • 6. 1. Economic challenges face by Pakistan economy: These are the few economic challenges face by the Pakistan: o Huge amounts of debt servicing o Balance of payments deficit o Fewer savings and more consumption o Government spends more and earn less o Our share in the world is shrinking o High load shedding o Natural disasters o Bad governance o Terrorism o Corruption o Low education o Stagflation o Low investment o More imports and less exports o Low GDP o LOW INCOME PER CAPITA
  • 7. 1.1. Huge amounts of debt servicing: A recently produced data of the State Bank showed the country paid $6.820bn as debt servicing in FY14, including $5.910bn as principal amount and $915m as interest This $7 billion debt is presenting great challenge to the economy of Pakistan. The main cause of Pakistan’s budget deficit is the huge amounts of debt servicing. The government, trapped in floods and political crisis, may face another serious turmoil by the end of this fiscal year if IMF and other donors did not release the promised loans. The gravity of the situation is visible in the wake of increasing trade gap, with no foreign inflows, no release of installments from IMF and no interest of foreign investors in the country. The disappointing foreign investment has developed another difficult situation under which repatriation of profits and dividends on foreign investments have also reached close to $1bn Pakistan succeeded to borrow from international market, though at a very high rate, but it boosted the country’s image, encouraging IMF and other donors to help Pakistan. However, situation seems to have changed again as exports have dropped, and imports jumped by 32pc in the first two months of the current fiscal year and rupee has lost 4pc value to hit Rs102-3 against the dollar. Though remittances are increasing at the rate of more than 12pc, it would not be enough to absorb the future shocks.
  • 8. Analysts believe that the first quarter of the current fiscal year could be a shock to economic managers of the country as it would result in wide trade gap that could enlarge the current account deficit. Trade deficit in August this year was $2.8bn which is 76pc higher than August of last year. The current account deficit in July was minus $454m, which was much higher than minus 125m of last year. In FY14, the deficit was $2.97bn against $2.5bn in the previous year. The July deficit shows that the trend was not favorable for an economy which is facing many challenges (State Bank, 2014). If Pakistan makes his tax collection system stronger and try to reduce his expenses, then it may decrease the demand of borrowing .if Pakistan does so, it helps Pakistan to reduce the burden of interest expenses. If Pakistan decrease the demand of borrowing then it enhance the economic image of Pakistan. As economic position of Pakistan enhances so it encourages the foreign investment and cash inflow. 1.2. Balance of payments’ deficit: Pakistan is importing more and exporting less for many years, so Pakistan’s balance of payments is running in deficit for many years. As Pakistan’s imports are higher than its exports so the cash inflow in Pakistan is less than its outflow. Higher outflow means Pakistan’s industries are earning less profit as compared to foreign industries, which present great economic challenges.
  • 9. 80% of Pakistan’s imports is financing through our exports till 2007-2008. But now this ratio goes down to 50%, now our 50% imports are financing through our exports. We have a balance of payments ‘deficit of 50% which is increasing year by year. This is presenting a great challenge to Pakistan economy. Pakistan main exports are mineral fuels (19 percent of the total shipments), manufactured goods (19 percent) and beverage and tobacco (13 percent). Others include: food and live animals (11 percent), crude materials (11 percent), chemicals (11 percent), machinery (8 percent) and miscellaneous articles (8 percent). Main export partners are United States (13.6 percent), China (11 percent of the total export), United Arab Emirates (8.5 percent) and Saudi Arabia (8.5 percent) (http://www.tradingeconomics.com/pakistan/imports). Main imports are mineral fuels (16 percent of the total imports) and manufactured goods (16 percent). Others include: miscellaneous articles (12 percent), beverage and tobacco (12 percent), animal and vegetal oils and fats (10 percent), crude materials except fuel (9 percent), chemicals (9 percent), machinery (8 percent) and food and live animals (7 percent). Main import partners are China (19.7 percent of the total imports),), United Arab Emirates (12.1 percent), Saudi Arabia (12 percent), United States (3.2 percent) and Kuwait (6.3 percent) (http://www.tradingeconomics.com/pakistan/imports).
  • 10. 1.3. Fewer saving and more consumption: In Pakistan, as the earnings of people is not too much as compared to their expenses so people consume more and save less. As the savings in Pakistan is less than consumption so investment rate in Pakistan is too low. Low investment means low growth of economy. Investment provides capital to the industries and performs a key role in the economy of any country. Low investment provided a great challenge to the economy of Pakistan. According to one survey every Pakistani consumes 85 from every hundred rupees. This thing indicates that the saving rate is too low in Pakistan. In India the saving rate of last year is 34%, while the saving rate of china is 50% for last many years which play a key role in the success of china’s economy. 1.4. Government spends more and collects less: The major issue of Pakistan’s economy is that the government of Pakistan spends more than it earns, which force to government to run its budget in deficit. As government spending is higher than its earning, so for fulfilling deficit of budget the government has to borrow money, which presents another economic challenge in the form of debt servicing payments. In 2013, Pakistan budget deficit is more than 7%, which means that Pakistan earnings is 13% and its spending is 20%. The major spending of Pakistan economy is in the form of
  • 11. education, infrastructure and most importantly in the form of defense expenses. According to one survey Pakistan spends its 70-80% budget in the form of defense expenses. Pakistan recorded a Government Budget deficit equal to 8 percent of the country's Gross Domestic Product in 2013. Government Budget in Pakistan averaged 3.14 Percent of GDP from 1990 until 2013, reaching an all-time high of 8.80 Percent of GDP in 1990 and a record low of -8 Percent of GDP in 2013. Government Budget in Pakistan is reported by the State Bank of Pakistan (http://www.tradingeconomics.com/pakistan/government-budget). 1.5. Our share in the world trade is shrinking: In 1990s, the share of Pakistan in the world trade is .2%, which remains now, .12%. This thing indicates that our share in world trade is shrinking year by year. While if we look at the share of India in world trade then we come to know that it has doubled its share in world trade till 1990-2010 by .7%-1.4%.our exports are limited in some sectors like textile, wheat and rice. Our exports are limited to only some countries, like, U.S, U.A.E, and Australia etc. As our share in the world economy is shrinking year by year, so, it encourages us to import more and export less. This is presenting great challenge to Pakistan economy.
  • 12. 1.6. High Load shedding in Pakistan: Energy plays a role of backbone in the industry of any economy. The most worst economic challenge face by Pakistan’s economy is load shedding. Because of load shedding Pakistan’s economy face many challenges. Because of load shedding the industries in Pakistan are shifting to other countries. Because of load shedding, not only Pakistani investors but also the foreign investors are discourages to invest in Pakistan .load shedding has destroyed the large businesses as well as small businesses. Energy crisis has not only affected the general public but it also effected government indirectly. Because of mobilization of businesses from Pakistan to other countries, government revenue decreases in the form of tax collections. As the quantity of businesses decrease, so unemployment increases and government has to pay more in the form of unemployment compensations. Due to load shedding government spending also increases in the form of energy development plants. Another challenge we face today is energy and water shortages, and that is not because we are not generating enough electricity or we are not having enough water. With the losses of KESC from the point it has generated to the point they realize the billing is 45%, so 55% people are paying for those who are stealing the electricity. Government of Pakistan out of its own limited resources is paying 200 billion rupees every year as subsidies for electricity. Our industry is at a disadvantage that they get the orders from foreign countries but they cannot execute the orders because there are electricity outages. In addition to economic losses it also creates inconvenience for pursuing normal life. We have silting of our dams, but no additional dams have been constructed since Tarbela in 1974. We have water course losses of about 20-25%.
  • 13. Even after these losses, the water is inequitably distributed. The influential land lords are able to take greater share of water from the canals as compared to poor farmers. Therefore, the productivity of poor farmer is only one ton per acre as compared to 3 tons by large holders. If we provide the water equitably to the small farmer, he would also be able to increase the productivity from one to at least two tons resulting into additional income, increase in exports of food grains, cotton and fruits and vegetables which will add to export earnings of Pakistan. With the climate change taking place with all the glaciers in Himalayas which are going to melt, we are going to have difficulties in future due to global warming (http://iba.edu.pk/News/speechesarticles_drishrat/Pakistan_Economy_Challenges_Prospects.pdf) . 1.7. Natural disasters: Natural disasters also affects badly to the economy of Pakistan. Natural disasters like earth quake, flood etc. affects very badly to the economic position of any country. When flood comes, it destroys a large number of agricultural products, it disturbs your budget policies, people got unemployed, and government has to increase its expenses to fulfill the needs of those people who are affected in the natural disasters. Pakistan’s economy has been affected by natural disasters for last many years. Pakistan has faced a lot of economic damage due to the natural disaster.
  • 14. Economic damages face by Pakistan: Natural Disasters from 1980 - 2010 Overview No of events: 138 No of people killed: 87, 053 Average killed per year: 2,8 08 No of people affected: 58, 098,719 Average affected per year: 1,8 74,152 Economic Damage (US$ X 1,000): 18, 402,814 Economic Damage per year (US$ X 1,000): 593 ,639 (http://www.preventionweb.net/english/countries/statistics/?cid=129).
  • 15. 1.8. Bad governance in Pakistan: Governance plays a key role in the economy of any country. Pakistan’s economy is facing bad governance for many years. In Pakistan, bad governance takes economy to the path of destruction. In 2008, in Pakistan the rate of poverty is 17.8% which has now increased to 40%.because of bad governance, now Pakistan is facing a worst form of load shedding. Government has now lost his image in the world’s economy because of his bad governance. Investment is flying away from Pakistan’s due to unfavorable policies of Pakistan. Pakistani government has no able to make good policies to end the poverty and terrorism.in the result of natural disasters Pakistan received many funds from all over the world but due to bad governance in Pakistan government was not able to implement these funds in righty place. Corruption was so high in Pakistan, because of corruption people have lost their confidence on the institution so government no one is ready to invest in government institutions. 2. Solutions of economic crisis in Pakistan 2.1. Overcome on the energy crisis: The fiscal year 2013-2014 started with continuous problems of power and gas shortages along with other internal and external challenges. The energy crisis is partly due to the ever increasing circular debt. Any rational economic intervention with respect to Energy and Power generation would require the following steps:-
  • 16.  We should produce electricity by those resources which are renewable.  Government should aware the people to buy those goods who are energy efficient.  Government should aware people to control light consumption.  Government should allow people to implement small plants on their homes for producing electricity for their selves.  A continuous monitoring, surveillance and audit of both Hydro and Thermal Power generation units.  A third party regulatory compliance of Independent Power Producers(IPP’s) on a perpetual basis  Monitoring of inventory so thefts and pilferages are prevented of furnace oil which has led to lower numbers of power generation.  Imposition of strict financial penalties on failure to conduct energy audits and poor performance of power plants.  Switch over to cheaper fuels to cut down the power generation rates and subsequent removal of subsidy.  Construction of new dams on the run of the river so as to ensure that there are no floods during monsoon and the country is prepared to combat the water war placed by India on Pakistan.
  • 17. 2.2. Economic revival of State Owned Enterprises: The Economic survey of Pakistan reports that during FY12 and FY13 the power Shortage became so severe that it wiped out 2% from the country’s GDP. Agriculture, Manufacturing as well as Services sector performed below their capacity”. In addition to the energy crisis, the below par performance of State Owned Enterprises has been a major concern. The shady privatization of these state owned enterprises in the past have actually led to worsening of economy and if the country goes for another string of poorly executed privatization, the ethical standing of the government would be lowered but the quality of life of the country would be lowered beyond repair. Decline in Foreign remittances, depletion of reserves, and stagnant tax collections all suggest that the economy needs more careful review and constant watch. If left unattended the fiscal deficit will increase and result in lowering of GDP. The government should increase the privatization in those sectors which are not in more profits or which have fewer investments from public. If government wants to increase the profits of such kind of institutions then it may privatize these sectors. government should also do privatize the railway sector. Because if the government privatize the railway sector then it will be able to collect private investment .by the privatization of railway the workers of railway try to work more efficiently because of the fair of firing from job and railway works more efficiently. The further benefit of privatization is that people are begun to invest their money.
  • 18. 2.3. Improve the systemof governance: Governance can play a key role in the economy of any country. If government improves its governance then it can solve many economic problems. If government takes hard measures to control corruption then we can improve our economy. Because in corruption although government uses its resource4es but government does not take the advantage of its resources because of the corruption which leads the government to increase his expenses for those work which can be done in lesser amounts .government can improve his governance in the sector of electricity. Because if the electricity issue solve by the policies of government then more than half of the economic problems can be solved by the government. To overcome the .energy crisis leads our economy to more investment, more production more exports, more income, and more savings and at final more GDP. Good governance can achieve by government by taking these steps:  Government should appoint people in public service on merit  Government should promote people on performance  There should be equality in all people when government provide some opportunities  Government should provide decent packages for grant living and for retirement for their civil services officers.  All People of executives’ positions should come through a competitive process.  Government should aware the people efficiently whenever new policies are made.  Services sectors of different problems should be improved.  Government should introduce electronic hard ware and soft wares to be aware him of the problems of people.
  • 19. 2.4. Technological improvement for enhancing agricultural productivity: Agriculture plays an important role in the economy of Pakistan. Pakistan can increase its GDP by technological improvements in the agriculture sector. Pakistan now uses a very low standard technology in its agricultural sector. If Pakistan improves his technology then Pakistan can increase its production which leads the Pakistan’s economy to improve its production. By technological change not only our agricultural production increase but also our industrial products increases because of sufficient supply of raw material. . The government of Pakistan needs to prioritize the agriculture sector. In year 2013, the economy received insignificant support from farms income mainly from minor crop and livestock whereas the major crops particularly cotton and rice failed to meet the target but to some extent were compensated by the better crops of sugarcane and wheat. 2.5. Retain existing investments and attract new one. The Overseas Investors Chamber of Commerce and Industry (OICCI) expects that the new government can provide right environment and support to Pakistan’s economy and the country can attract as much as $5 to $6 billion in foreign direct investment annually. The chamber is optimistic that the incoming government will set a clear and focused direction to address key issues of governance, security, energy and inconsistent policy implementation, which in the recent past has severely affected inflow of foreign direct investment in the country.
  • 20. In a statement issued on Wednesday, OICCI President Kimihide Ando, speaking on behalf of foreign investors, expressed his confidence in the Government of Pakistan. As the country moves towards a smooth transition of power at the Centre and in provinces, Ando said the ongoing democratic process is creating a positive international perception, which is partially reflected in the increasing foreign portfolio investment in the country’s stock market (OICCI President Kimihide Ando). 2.6. Increase exports and decrease imports: It is recommended that the government identify gaps and remove irritants which has led to decrease in foreign inflow and increase in foreign outflows. Last year, the Pakistan economy registered 23.5 % in oil and gas sector for foreign inflows followed by Financial Business and Communications which attracted 18.1 and 10.6 percent, respectively. The outflow was observed in communications and power sectors. Despite the global slowdown, the uptrend in KSE-100 index encouraged foreign investment in stock market. The Karachi Stock Exchange (KSE) is expected to however around 26,000 plus points. In capital market the major contribution came from USA, UK and Hong Kong. (M. H., Alam, S., & Butt, M. S. (2003). Foreign direct investment, exports and ) 2.7. Government should solve law and order issues: Along with other issues faced by Pakistani people, Government’s major attention should be on improving the Law and Order situation in Pakistan. The need of the hour is to improve the general Law and Order Situation with
  • 21. special emphasis on economic hub of Pakistan being restored to peacetime. There are extortion, ransoms, target killing, terrorism and bomb attacks which has not helped the cause of economic revival and sustenance in Pakistan. (Burki, S. J. (2007). Changing perceptions, altered reality: Pakistan’s economy under) 3. Conclusion: Economic growth in Pakistan, like other countries of the world, is subjective to the health of the world economy, but is principally reliant on domestic factors, policy, weather, and the nature of state-economy relations. Pakistan may not have achieved macroeconomic stability, sustainable economic structural reforms, or improved economic governance but it has resumed the journey for poverty alleviation, improvement in health and education sector and may in the days and years to come improve its current standing. Last but not the least the economic performance for the year 2014 may not be that different than previous years as the monetary and fiscal policies are somewhat still not in balance and the current government is prone to misuse the critical concept of publishing new rupee notes. However if the Government is able to monitor and provide leadership to the country in the domains of macro-economic stability, structural reforms, good governance, strengthening of financial institutions , poverty reductions and improvement in health and education, it may help Pakistan achieve its economic potential and help earn a respectable place in the comity of nations.
  • 22. Bibliography (n.d.). Retrieved from http://www.tradingeconomics.com/pakistan/imports. (n.d.). Retrieved from http://www.tradingeconomics.com/pakistan/imports. (n.d.). Retrieved from http://www.tradingeconomics.com/pakistan/government-budget. (n.d.). Retrieved from http://iba.edu.pk/News/speechesarticles_drishrat/Pakistan_Economy_Challenges_Prospec ts.pdf. (n.d.). statement issued on Wednesday, OICCI President Kimihide Ando. (n.d.). statement issued on Wednesday, OICCI President Kimihide Ando. Burki, S. J. (2007). Changing perceptions, altered reality: Pakistan’s economy under. (n.d.). http://www.preventionweb.net/english/countries/statistics/?cid=129. (n.d.). Lecture delivered to the participants of the Command and Staff Course at Command and Staff College Quetta. (n.d.). M. H., Alam, S., & Butt, M. S. (2003). Foreign direct investment, exports and . (n.d.). OICCI President Kimihide Ando. (n.d.). state bank. (n.d.). State Bank. (2014, September 14th). Published in Dawn.