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Economic Problems of Pakistan

In Pakistan, average income of the people is very low than the average income in
developed countries. The economic development of the country depends upon the export
of a few agriculture crops and some textile products. Rapid population growth is causing
the shortage of food and prices of consumer products are touching the record heights. The
economic concerns are ranged to a variety but following are some main concerns faced
by the economy of Pakistan:
Unemployment
An outstanding problem of Pakistan is high rate of un-employment, under-employment
and disguised-unemployment. More than 3.5 million people are unemployed in Pakistan.
One reason behind this high rate of unemployment is ever increasing population. There is
16 % underemployed and 20% disguised unemployed of total labor force. Unemployment
rate stood at 5.9% in 2013. This unemployment rate is greater in case of urban labor force
and the teenage labor force. Although measures have been taken to reduce the growth
rate of population in order to reduce the unemployed labor force but it still requires
extensive policies to cope with the unemployment rate.
Inflation
Another major economic issue that Pakistan is facing is Inflation. Inflation with
unemployment together cause stagflation which results in the contraction of supply. In
Pakistan, prices of consumer products are touching record heights. In 2013 the CPI
inflation rate stood at 7.8%, which is even higher in the case of food inflation. Excessive
money is facing few consumer goods causing the prices to go at peaks. Another reason
behind this can be the growth of population as demand for consumer goods is decreasing.
Although the inflation rate depicts the reducing trends in the recent years but it is still a
main issue in the development of Pakistan.
General Poverty and Low Living Standard
Poverty which is a curse for every economy is another main problem for the Pakistan.
This incidence of poverty seems to have increased since 2006 which is caused by the
slow growth rate of the economy since 2007, world recession and worsening law and
order situation. The massive floods and colossal devastation caused by them also
worsened the poverty situation. According to the World Bank report published in May
2013 60% of the Pakistans population is living below the poverty line which is even
higher in the rural areas of the country.
Low level of Productivity
The productivity level is very low in Pakistan as compared to developed countries.
Along some other reasons two key factors responsible for this lackluster performance are:
persistence of severe energy shortages and significant deterioration in law and order
conditions. Together, they have clouded the economic outlook, increased the risk
perception in the economy, and thus discouraged potential borrowers and businesses from
taking loans; especially fixed investment loans to expand their productive capacity. In
fact, most companies and sectors are operating much below their installed capacity. Other
causes are low labor efficiency, immobility of labor due to joint family system, cultural
and psychological factors leading to low level of productivity.
Dualistic Economy
The economy of Pakistan is characterized by dualism. Dualism refers to economic and
social division in the economy. In the case of dualism economy one is the market
economy and the other is the subsistence economy. Both the economies exist side by
side. One part of the economy is well developed and has ultra-modern facilities of the
world. But in some other areas the economy is primitive, backward and relies on the
traditional ways of getting things done. So economy of Pakistan consists of wealthy,
highly educated class with a large number of illiterate poor classes and Co-existence of
very high living standard with very low living standard.
Burden of Internal and External Debts
Very much like most under developed countries Pakistan is also very dependent on loans
and grants received by other nations. Amount of foreign loans is increasing as the years
pass. In addition to these foreign debts government is also excessive relying on the
banking system to finance its fiscal deficit. Moreover the higher government borrowing
from domestic banks to reduce its budget deficit is also increasing the internal debt. The
outstanding total public debts are Rs. 12024 billion (58.2% of GDP) and the value of
external debts and liabilities is $ 60.3 billion and services charges on all types of debts
are Rs. 730.733 billion during 2011-12, in Pakistan.
Problem of Fiscal Deficit
Another major issue for the economy of Pakistan is huge fiscal deficit. The consolidated
fiscal data for 2013 which has been released recently shows a fiscal deficit of 8.0 percent
of GDP or Rs 1834 billion. This is quite higher than the budgeted target of 4.7 percent.
The main reason behind this large fiscal deficit is the significant shortfall in tax collection
estimates of the Federal Board of Revenue (FBR). The provisional estimate indicates that
the FBR tax collection during 2013 has been only Rs1936 billion which is the lowest
year-on-year growth of 2.9 percent since 2002. In addition to this, higher expenditure on
account of subsidies, settlement of circular debt, and interest payments are other main
reasons for the large fiscal deficit in 2013.
Capital Deficiency
Shortage of capital is another major concern for the economy of Pakistan. This shortage
of capital gives birth to some other economic problems in the economy including low per
capita income, less savings and shrinked investments. These are the main problems which
can arise as a result of capital deficiency:
low per capital income
low rate of saving
low rate of investment
Inequalities of wealth
In addition to this, capital deficiency is also caused when economy tries to follow the
economic policies of advanced countries or when the amount of consumption is increased
in an economy.
Issues in Foreign Trade
Issues in foreign trade are another major concern in the economy. The gap between the
imports and exports of the country is getting wider and wider. We as a nation prefer to
use even the basic commodities of foreign countries rather than locally manufactured
goods even if they are of very low quality. So as a result the amount of imports gets
higher and the gap between the imports and exports gets even wider. Unless we do not
change this attitude of preferring the imported goods this gap between imports and
exports cant be filled.
No nation which strives to preserve its honor follows this kind of approach. The lower is
this gap between our export earnings and expenditure on imports the better it is for the
economy and that can be achieved only by expending our exports. Exports of Pakistan
mostly consist of raw materials which are very cheap as compared to the finished goods
which are imported by the economy.
Over Dependence on Agriculture
Although agriculture is not the major contributing sector in the GDP of Pakistan,
economy is still very much dependent on it. More than 60% population of Pakistan is
living in villages. So agriculture is the major occupation for the people living there.
Almost 67% of the population is directly or indirectly dependent upon the agriculture.
Agriculture is main source of employment for the people living in the villages. This over
dependence on a single sector depicts the problems in the economy.
Energy Crisis
The most severe challenge we face today is energy crisis and water shortages, and that is
not because we are not generating enough electricity or we are not having enough water.
45% of the people are stealing electricity for their use and other 55% have to pay for
these too in addition to their own consumption. Government has to pay almost 200 billion
for the subsidies in electricity from its already limited amount of resources.
Because of these power shortages our industry is at a disadvantage because they are
unable to fulfill the foreign orders because of these energy problems. In addition to
economic losses it also creates inconvenience for pursuing normal life. This problem has
already resulted in closure of many units which is deplorable and needs to be rectified at
the earliest.
Poor Law & Order situation and Terrorism
Economy always follows politics and politics remains the byproduct of law and order
situation prevailing in a country. After 9/11, internal and external problems for Pakistan
have been increased due to the Taliban issue. The economy, internal security
environment and social tranquility jolted badly due to such problems. Terrorism is a great
hurdle in our socio-economic prosperity, political stability, geo-strategic sustainability
and energy security. As a result the foreign investors are reluctant to invest in the
economy which is always on the edge of destruction.
High Costs of conducting Business
The cost of conducting business has gone very high which discourages the outsiders to
conduct business in our country. This increase in cost doesnt have any particular reasons
and is mainly due to lack of actions and decisions by the bureaucracy. There are lots of
problems for the investors who are trying to conduct business here. There is no land, no
water, no electricity, no gas and no roads are available for them to conduct the business.
Lack of coordination among various government agencies, innumerable laws and
regulations that are antiquated and outdated have proved to be serious impediments.

















Solutions

Comprehensive Tax Reforms
One of the main problems faced by the economy is Fiscal Deficit. So this deficit needs to
be taken care of. This fiscal deficit can be brought down by increasing the amount of
revenues for the government in the shape of taxes. There is an urgent need to initiate and
implement comprehensive tax reforms. Inflation tax and lack of credit for the private
sector are some examples of failure to undertake such reforms. The debt sustainability
analysis also suggests that containing the debt to GDP ratio at current level would require
the government to reduce its primary deficit to below 2 percent of GDP.
Moreover in some sectors like agriculture, tax structures need replenishments. Currently
in agriculture tax is imposed on the basis of possessed land. This tax should be imposed
on the basis of output level. Similarly General Sales Tax (GST) also requires revisions. In
addition to new tax reforms there is a need for strong tax collecting mechanism which
will ensure the fair and quick collection of tax revenues.
Reduction in Government Expenditures
Another way to cope with the problem of fiscal deficit is the reduction in government
spending. Because the problem of fiscal deficit is twofold it requires the necessary
arrangements on the both side, an increase in government revenues and reduction in
governments expenditures.
Major portion in the government spending consists of defence expenditures. A large
portion of the GDP is going to finance the defence activities. There is a need to cut these
expenditures to the limits that are possible. In addition to defence expenses another huge
expense for the government is the interest payments paid against the outstanding debt.
So, there is a need to look for some another source of financing to deal with the situation.
Similarly the unproductive expenditures on some public sector enterprises like PIA,
Railway etc. should also be reduced.


Controlling inflation
The problem of inflation is also to be taken care of. Government need to make policies in
order to get control of the inflation. These policies can be:
Demand side policies
Supply side policies
In Demand side Policies, Government can use monetary policy to increase interest rates
will help reduce the growth of Aggregate Demand in the economy. The growth will be
slow then which pull the inflation to lower limits. Higher interest rates reduce consumer
spending because: Increased interest rates increase the cost of borrowing, discouraging
consumers from borrowing and spending and increased interest rates make it more
attractive to save money.
Another option on the demand side can be the Fiscal Policy. Like the monetary policy,
fiscal policy can be used to reduce inflation. To reduce inflationary pressures the
government can increase tax and reduce government spending. This will reduce
aggregate demand.
On Supply side, deregulation and privatization policies can be used to increase the
productivity of the firms which will help to reduce the inflation in long run. Supply side
policies will be very useful in long run but these policies cant be used to get some
sudden results.

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