2011

QASMS
CURRENT ECONOMIC SITUATION OF PAKISTAN
ASSIGNMENT NO:1

Group # 5 (BBA-1A)
Shahzaib Butt Sohail Ajmal Zain-ul-Abideen Waqas Khan Salman Ajmal Ismail Submitted to: Maam Zartasha

Dated: 25th Oct,

Current Economic Situation of Pakistan

General Overview

The economy of Pakistan is the 47th largest in the world in nominal terms and 27th largest in the world Pakistan has a semi-industrialized economy which mainly encompasses textiles, chemicals, food processing, agriculture and other industries. The economy of Pakistan is suffering with high inflation rates well above 26%. Due to inflation and economic crisis worldwide, Pakistan's economy reached a state of Balance of Payment crisis. Historically, Pakistan's overall economic output (GDP) has grown every year since a 1951 recession. But, until a few years ago, it has been characterized as unstable and unreliable, due to external and internal factors. Pakistan is the only country in South Asia that has recorded a lower rate of growth in the 1990s than in the preceding decades. In the preview of economic sanctions imposed on Pakistan in 1998, political instability, state-of-war with India, and most importantly the 11th September Crisis has not been able to hamper the country which these events has the potential.

Pakistan economic environment is affected by intensification of war on terror and deepening of the global financial crisis which penetrated into domestic economy through the route of substantial decline in Pakistans exports and a visible slowdown in foreign direct inflows. Pakistan economy continues to remain exposed to the vagaries of international developments as well as internal security environment. The intensity of the global financial crisis has further added to Pakistan predicament. Despite support from the IMF and other bilateral and multilateral donors, Pakistan external account remains exposed to a host of uncertainties.

Brief Overview on Economy of Pakistan

Pakistan economic growth faced a serious set back in fiscal year 2009 because of the depressed consumer credit market, slow progress of public sector programres, inflation, reduction in subsidies, security threat, instability in the state and energy crisis. Additionally, no attention was given to the agriculture sector. The exports declined by six percent and imports by 10 percent. The only thing that became a silver linning was the increment in remittances by 22%. Apart from ignorance, agriculture sector has shown credible results because of good weather. Major crops, wheat, rice and maize recorded impressive growth i.e 7.7% against the target of 4.5%. Live stock and poultry also add to GDP as there was no viral disease this year. Shortages of energy and power do not let the boom entered into the industrial sector. In addition the sanction applied by IMF on different sectors creating a hurdle. This resulted in unemployment and services sector decline. Because of security crisis the graph of investment do not take any surge. The beginning of declining in core inflation is a hopeful factor but the domestic inflation is on peak. There is a marginal improvement in health and educational sectors but the poverty in country rise Pakistan have the highest population growth. The largest population represents a large potential market for goods and services yet the condition are deplorable. Being an agro based economy Pakistan should focus on the development of agriculture department. Financial sector should be developed. Instead in focusing to much on macro financing, micro financing must be given a chance. Trade deficits should be reduced. This can only be done by eradicating the trust deficit, which will boost our exports as well as imports. It will also bring FDIs (Foreign Direct Investment) at home. There should be short term as well as long term policies. As Pakistans economy is dependent economy so it should be made strong enough to reject the foreign aid or loans on their conditions, which can directly or indirectly bring harm to the economy. Still the Government is unable to differentiate and reorganize the developed and non-developed budget. Solid fiscal policies should be made to give advantage to both, demander and supplier. This would also be beneficial for the skilled workers, who fly away from the land. Despite all these, there must be political, economic and social stability in the state. A proper accountability set up must be introduced to eradicate corruption as it leads to massive human deprecation. And the final solution of this problem is good governance. Growth and investment In growth and in investment we lost investor because of global economic situation, through financial markets which collapse the external demand for its exports and decline in availability of external capital to finance or invest in growth process of the country. According to global financial crisis was felt on market and investor confidence in many developing countries, including Pakistan, as banking systems and asset markets came under stress.

Economy In light of IMF (in relation with different Fiscal Year Reports /results)

Just as the dazzling sun comes out of dark clouds and the earth instantly shines in a flood of light, the IMF support package of $7.6 billion for Pakistan also resembled a silver lining in the cloud. The State Bank of Pakistan (SBP) has already received the first installment of $3.1 billion out of the IMF package, which has raised the countrys foreign exchange reserves to over $9 billion, out of which the government share is about $6 billion. The government is expected to receive another $4 billion to $5 billion soon from the World Bank (WB), Asian Development Bank (ADB) and Islamic Development Bank (IDB) etc. As a result of the help, support and loans, the countrys foreign exchange reserves will be strengthened and the threat of default on foreign debt obligations will be averted in the medium to short term. It is perhaps for the abovementioned reason that the international credit rating agency Moodys International has confirmed Pakistans B3 sovereign bond ratings while removing the review for possible downgrade. Pakistan was under great pressure at the start of the fiscal year (2008-09), when the international oil prices soared to $147 per barrel in July 2008. However, in the following months, the oil prices have gradually come down to as low as $40 a barrel which is a great relief to this country as it has to import nearly 80 per cent of its oil requirement from abroad. The local oil prices have, also, been revised downward by the Government for the benefit of the consumers who have no doubt heaved a sigh of relief. The local oil consumers are now looking forward to further downward revision of local oil prices as the international oil prices tumbled to below $40 a barrel yesterday. Some oil market analysts have predicted that it is possible that the crude oil prices may drop further, with the deepening of the global recession. In line with the international oil prices, the world commodity prices had also registered sharp decline during the last few months, although the FAO price index 2008 was still 28 per cent higher in October 2008, compared with October 2006. Nevertheless, the country has already started benefiting from the decline in the international commodity prices and items such as cooking oil and rice etc are now available to the consumer in the open market at lower prices than before. Although the inflation rate still remains at a higher level of 20 to 25 per cent, economic analysts and observers have expressed the view that the same is expected to register a decline in the coming months, as the drop in the world commodity prices has its full impact on the local market prices. Due to the sharp decline in the world crude oil prices, the countrys oil import bill should also come down from its higher level, which will be of immense help in bringing down the ballooning trade deficit. The countrys trade imbalance for July-November, 2008-09 stood at $8.7 billion 20 per cent higher than the trade deficit of $7.3 billion recorded for the corresponding period of previous year. However, there are clear indications that the trade deficit in the coming months may be considerably lower. Statistics released by the Federal Bureau of Statistics (FBS) have shown that the trade deficit in October 2008 was 4 per cent lower than the deficit recorded for September 2008, while the trade deficit for November 2008 was reportedly as much as 39 per cent lower, as compared to October 2008. In November 2008, the countrys exports had remained nearly unchanged at the previous months level, while the imports (in rupee terms) were 22 per cent lower in November 2008, as compared to October 2008. If the above-mentioned trend remains unchanged, the trade deficit in 2008-09 may reach a figure of $15-16 billion, as against the trade deficit of $20.7 billion recorded for 2007-08. However, the

government should try to reduce the trade deficit further by boosting exports and cutting the import bill through import substitution and higher tariffs on luxury imports. Fiscal Deficit So far as the fiscal deficit is concerned; the government is required to bring it down from the current higher level of 7.4 per cent to 4.3 per cent of the GDP, under the IMF package. The government is trying to reduce its borrowing from the SBP and bring down its development and non-development spending, in order to achieve the aforesaid objective. As regards revenue collection, although the tax collected this year so far is higher than last year, doubts have been expressed by the Federal Board of revenue (FBR) regarding meeting of the revenue collection target of Rs.1350 billion for 2008-09 because of the lackluster performance of the manufacturing sector and expected shortfall in import duty collection. The advisor to the PM on Finance Shaukat Tareen has given an indication of taxing agriculture, real estate and other potential sources and bringing more tax- payers in the tax-net in case the revenue collection falls short of the target. Some recent moves by the government have indicated that agriculture tax will not be an option under the new policies. It will remain tax-exempted as it has been for so long. However, change in the present economic policies will not be enough to thwart-off the economic ills so widely spread. Nevertheless, it is hoped that as a result of its efforts the government would be able to reduce its budget deficit to less than 5 per cent of the GDP which would be a step forward towards correcting the existing imbalances and achieving the badly-needed macroeconomic stability. GDP / GNP facts Pakistan is in a dire need of a reasonable GDP growth rate at the moment. This would help the government to spend on health, education, poverty alleviation, employment generation and other social services. However, the IMF, WB and SBP are projecting a growth rate of 3.5 per cent to 4.5 per cent only for Pakistan for 2008-09, in view of the problems facing the national economy together with the likely effects of the global recession on the countrys manufacturing sector and exports. Agriculture There is some good news in the agriculture sector. This years cotton crop that is better than last year and a bumper rice crop that may go up to six million tons. At the same time, all possible efforts have been made to have a bumper wheat crop of around 25 million tons. If the agriculture sector is able to record an impressive growth rate, the overall growth rate would also be higher. Secondly, keeping the current trend of home remittances in view, the country seems poised to receive a record income of around $6.5 billion from home remittances in 2008-09. If so, that would no doubt raise the countrys GNP and per capita income further. Over and above all that, the government is trying hard to attract foreign investment in a big way. It has in view a target of around $20 billion in foreign investment to be achieved within the next two years. Considering the willingness of UAE, China and some other friendly countries, the target may be difficult but not impossible to achieve.

Detailed Facts on Current Economic Conditions in Pakistan

Agriculture
In spite of structural shift towards industrialization, agriculture sector is still the largest sector of the economy with deep impact on socioeconomic set up. It is the source of the livelihood of almost 44.7 percent of the total employed labor force in the country. With the present contribution to GDP at 21.8 percent, agriculture sector is the mainstay of the rural economy around which socio-economic privileges and deprivations resolve. Agriculture Growth (Percent)
Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Agriculture 6.5 6.3 4.1 1.1 4.7 Major Crops 17.7 -3.9 7.7 -6.4 7.7 Minor Crops 1.5 0.4 -1.0 10.9 3.6

Fiscal Development
The main objective of Pakistan fiscal policy is sustained economic growth in unison with decline debt services, poverty alleviation, the creation of job opportunities and investment in physical and human infrastructure. It is unfortunate that fiscal space available during the last seven years (2000-2007) was not used to provide support to structural reform; instead, painful structural reforms were delayed. The current government decreases the 20 percent governmental expenses.

Money and Credit

Functioning of the financial markets, monetary stability and economic growth are closely related, due to the fact that monetary policy transmission signals work through the channels of financial markets and bank-based intermediation. Therefore an efficient financial system is a pre-requisite for stronger economic growth. For a successful financial system, financial intermediaries play a significant role, since they are critical lenders and borrowers.

Manufacturing
The manufacturing being the second largest sector of the economy bears significant importance 18.4 percent contribution to GDP. Overall manufacturing sector posted a negative growth rate of 3.3 percent during the current fiscal year against the target of 6.1 percent and 4.8 percent of last year. However, production in large scale manufacturing during July-Mar 2008-09 witnessed a broad-based decline of 7.7 percent against the revised growth target of negative 5.0 percent.

Capital Markets
Financial markets perform a key function in the form of intermediation by mobilizing savings from a large pool of small savers and channelizing these funds into productive investments by a generally much smaller number of borrowers. Trading in securities enables a match between the differing maturity preferences of lenders and borrowers. Stock markets also potentially endorse broad-basing of ownership of financial assets and the reallocation of funds among corporations and sectors. Moreover, a developed bond market helps in providing liquidity to domestic growth and credit expansion. (In 30 Jun 2008 the index rate of KSE was 12,289.03 and on 15 May 2009 it was 7,177.64).

Inflation
The rate of inflation is an important macroeconomic indicator and one of the key variables most central banks around the world scrutinize when setting their main policy rate. Pakistan is one of only a handful of countries that is still experiencing double-digit inflation. The surge in food and commodity prices witnessed during the start of fiscal year 2008-09 pushed the Consumer Prices Index (CPI) in Pakistan to a record level of 25.3 percent in August 2008, remaining above the 20 percent level up until February 2009. Now a day its about 12.3 percent.

Trade and Payments

The global economic downturn is affecting the Pakistan economy through three indirect channels: the sharp drops in oil prices, has led to sharp easing of import demand pressures; the contraction in global demand, trade, and related activity, is impacting adversely demand for exports and remittances from EU and US in particular; and constricted access to the international credit markets and lower investor appetite for risk is affecting capital inflows, depressing local asset prices, and reducing already low investment level. Pakistan economy needs an integrated policy to deal with external sector vulnerabilities like removing structural rigidities in the exports and imports sectors.

External And Domestic Debt

The government embarked upon a plan of Economic Stabilization to regain macroeconomic stability. The measures taken under this program by the government have placed the economy on the path to recovery. The support from the international Monetary Fund is a key impetus to this stabilization process. The effect of stabilization started accruing as the current account has recovered substantially and hemorrhage to foreign exchange reserves not only arrested but around $3.4 billion have been added to the reserves.

Education
Education is extensively regarded as a route to economic prosperity being the key to scientific and technological advancement. Hence, it plays a pivotal role in human capital formation and a necessary tool for sustainable socio-economic growth. Education also combats unemployment, confirms sound foundation of social equity, awareness, tolerance, self esteem, and spread of political socialization and culture vitality. It raises the productivity and efficiency of individuals and thus produces skilled manpower capable for leading the economy towards the path of economic development. Education also originates confidence which empowers people to defend their rights, improve health status and good governance in implementation of socio-economic policies.

Health And Nutrition

Pakistan requires progress in economic and policy sector to reduce the burden of diseases not simply in health care but much have to be done in agriculture, education, transportation, environment, public health sector and other relevant areas in order improve the nations overall health. The most immediate health problem of the country are: inadequate sanitation facilities, unsafe water, poor living conditions, poverty and low literacy rate with women being the worse affected whose lack of knowledge often render them and their children vulnerable to various diseases.

Population, Labor Force and Employment

Pakistan is facing a formidable challenge of tackling the issues of economic development and poverty reduction. In the wake of growing population, the need for food security and the provision of employment opportunities and housing are becoming a burden on the economy. Without population stabilization, addressing the critical issues, such a global warming, biodiversity, the environment, energy, food/water supplies, migration and security is extremely difficult. Total population in Pakistan is 163.76 million in 2008-09.

Poverty
The inadequacy of income to meet basic needs, low quality of life, denial of opportunities and choices basic to human development are different facets of poverty. The main objectives of government policies are to raise the standard of living and improve the socio-economic conditions of the people and thus reduce the incidence of poverty in the country.

Transport and Communication

Transportation network of any country is of vital importance to its development and affects all sectors through economic linkages. It ensures safe and timely travel encourages business activities and cuts down transportation costs while granting produces access to markets for their goods. A reliable transportation network also provides swift access to labor force and hence generates employment opportunities. It has been widely

recognized that economies with better road and communication networks are positioned more advantageously in terms of overall competitiveness as compared to economies having poor networks. Enhancements in transportation and telecommunication benefit industry, agriculture, and other services sectors as well as improving the standard of living of the general public, it is therefore, crucial that investments be made to develop and maintain an efficient network of transportation and telecommunication to ensure cost efficient integration of markets both domestically and internationally.

Energy
The world energy scenario during 2009-10 has been very eventful, same as Pakistan. International oil prices fluctuated widely, leaving all vulnerable oil import countries like

Pakistan under great stress. The volatile energy picture not only made major dents in the macroeconomic variables such as budget deficit, current account balance, inflation, exchange rates and foreign exchange reserves, but also eroded the purchasing power of poor on the back of rising prices of petroleum products. So the major impact has been experienced in the industrial and agriculture sector, because of energy shortfall. Energy consumption being an integral part of all the economic activities has also declined as a result of the economic slowdown.

Our Recommendations In our opinion, with due respect, our all political leaders, economists, writers and journalist are confused, either due to their ignorance or vested personal interests. They are mingling, economic systems, political systems, and social systems and comparing with wrong benchmarks and confusing the nation. It is just to understand that we have capitalistic economy and related taxation system that encourages concentration of wealth, this may be observed in any capitalistic economy. In its reaction, we observed socialistic economic system in Russia, this system encouraged equal distribution of wealth but discouraged to hard work and innovations, not based on realities and not matching to global village, so flopped. These both economic systems are purely based on human thoughts and discourage religious systems and affect our social systems and social justice and we regularly confuse and compare that why someone is giving less tax and has so much wealth, our economic/ taxation system is based on earning/income not on wealth then why we compare with wealth? And why we blame rich persons for concentration of wealth? And why we compare with Russia, chinas communism/socialism? Where every asset belongs to state/commune and state is responsible for bread and butter of every person. Capitalism encourages/protects capitalists/investors and discourages earnings/income and expenditures, and shows resultant impacts on social justice. So Allah Pak has granted us a divine economic system based on Zakat (tax on wealth not on income/expenditures) that encourages incomes, expenditures, investments, equal distribution of wealth and discourages concentration of wealth. and for god sake, we request to all scholars of society dont compare religion of Islam with other religions, Islam is complete code of life and has its own complete social, economic and judicial system and Islam dont discourage democracy, this is one of system of electing government, but Islam is not restricted to democracy of this type, this is only way to elect government, and is not in lieu of any economic system, social system and judicial system. We request humbly to all nation to adopt Islamic economic system based on Zakat, with its whole spirit" Islam is not only spiritual system; it is complete code of life. Currently, state is not collecting Zakat as per its spirit and generating its funds by cruel taxation system, so peoples of Pakistan pay taxes to government and voluntarily paying zakat to NGO,s. These NGO,s collecting billions of Rupees have parallel networks to Government and large portion of this revenue is wasted and is not spent according to its spirit and peoples of Pakistan bearing double taxation, while as per our religion collection of Zakat is responsibility of state. Pakistani nation is facing problems like corruption, concentration of wealth, and social injustice, this is due to our capitalistic economy that is affecting our social values and political system, other problems are resultant to this basic fault of our economic system.

Moreover, it is very difficult rather impossible to document every transaction of income and expense as compared to end result i.e wealth, therefore our taxation system gets support from indirect taxation and final tax regime and adds to opportunities for corruption, tax avoidance, inflation and unwarranted burden on the poor people i.e end consumer. This capitalistic economic system is tool of USA and its allies, by which they have controlled resources of the world and especially Islamic countries and has loyal advocates of this system in our ruling class. If this nation want true independence, then we must revive our economic system otherwise we will be helpless to avoid drone attacks and cases like Raymond and Aafia Siddique.

References

Economy of Pakistan, Article, federal bureau of statistics Pakistan. Current Economic Conditions, by Dr. Ishrat Hussain GDP / GNP analysis, by, Comsats MGT DEPT. Inflation Rates in Pakistan, Business Magazine 2010.