Economic Crisis in Pak

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.......... ASSIGNMENT

ECONOMIC CRISIS IN PAKISTAN

Report By:

OSHAQUE ALI

Danyaal Naeem

Sadiqu Ali

Hassan Ali

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Table of Contents

ParticularsEconomic Crisis

Introduction of Pakistan Economic Crisis

Investment and Growth

Factors of Economy

Sectors Contribution

Fiscal Development

Money and Credit

Capital Markets

The Question Of Pakistan Economic Crisis

Current Economic Situation of Pakistan

Foreign trade, remittances, aid, Exports and investment

Current Account

Recommendations

Conclusion


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What is Economic Crisis?

Economic crisis occurs as the result of the heavy cost of war, unemployment and low

prices and low levels of trade and investment.

Introduction

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 accountremains exposed to a host of uncertainties.

That Pakistans economy has been performing at a level which is far below its assumed

potential, or its neighbours and other countries in the region are doing better, is a fact

which has been acknowledged by serious economists for some years now.

Even Bangladesh and Sri Lanka have better economic growth rates compared to

Pakistan, and more importantly, unlike Pakistans roller-coaster economy, countries in

the region are locking in to steady states of economic growth.

Pakistans economic growth pattern depicts highs of a few years, followed by troughs

the next few. For economists who want to understand Pakistans economy, an

explanation of why these trends persist and why other countries dont follow these

trends is an important area of inquiry.

There is also recognition amongst those Pakistani economists who are not employed by

the government, nor are apologists for it, that the economy has not been managed well

under the incumbent PPP government. Much of the criticism has appeared in the pressover the last few years is warranted.

The absence of an economic plan or vision, or any long-or medium-term policy, which

has been thought through, is the highlight of the economic team in Islamabad.


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The fact the team has changed so many times in less than four years is also an indication

of the confusion amongst political leaders and the lack of priority given to the economic

problems faced by Pakistanis.

The failure of this government and its economic team to address economic issues hasbeen much documented in the media and there is little disagreement over this claim.

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. The fiscal deficit is high and growing, inflation seems to bestuck at around 14 percent, investment is low, poverty has grown over the last five

years (though less than expected) and so on. Clearly, these indicators reveal an

economy, which is performing poorly.

While ideas about the informal sector or the black or underground economy abound,

there has been little research done on how Pakistans wide social and economic

networks allow families and individuals to live in world, which are often not on the

economists map. Similarly, what has also not been analyzed in recent years is how

remittances have allowed numerous families to weather the storms created by the

economists statistics of doom and gloom.

The economy of Pakistan has fallen up to this extent that it requires serious attentionand Endeavour to revive its state. The revival of economy means to bring the economyon track whereby country becomes self sufficient and economy self sustained to, eat itsinternal demands and fulfill foreign obligations. Sustained economy provides a balancein trade, potential of paying back foreign loans and gradual growth in gross domesticand national product. Rise in foreign exchange reserves, minimum inflation rate, stronglocal currency are a few indicators of a sustained economy whereas better social

indicators ref


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Factors Of Economy

Employment

The high population growth in the past few decades has ensured that a very large

number of young people are now entering the labor market. Even though it is amongthe seven most populous Asian nations, Pakistan has a lower population density thanBangladesh, Japan, India, and the Philippines. In the past, excessive red tape madefiring from jobs, and consequently hiring, difficult. Significant progress in taxation andbusiness reforms has ensured that many firms now are not compelled to operate in theunderground economy.

In late 2006, the government launched an ambitious nationwide service employmentscheme aimed at disbursing almost $2 billion over five years.

Mean wages were $0.98 per manhour in 2009.Rate of unemployment is 25%.

High inflation and limited wage growth have drawn more women into the workforce tofeed their families, in spite of cultural resistance and domestic abuse over the issue.

Revenue

Although the country is a Federation with constitutional division of taxation powers

between the Federal Government and the four provinces, the revenue department of the

Federal Government, the Federal board of Revenue, collects almost 95% of the entire

national revenue. The Federal Board of Revenue collected nearly one trillion rupees($14.1 billion) in taxes in the 20072008 financial year,[46]while it collected about 1558

billion ($18.3 billion) during FY 20102011. The revenue collection has hovered below

10% of the GDP for the past several years. The Federal Board of Revenue mainly relies

on indirect taxation, and most of the Income Tax is also collected indirectly, in the form

of withholding taxes.

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 days its roundabout 18 percent.
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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 demandpressures; 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.

Sectors of Economy

Industry

Pakistan's industrial sector accounts for about 24% of GDP. Cotton textile productionand apparel manufacturing are Pakistan's largest industries, accounting for about 66%of the merchandise exports and almost 40% of the employed labour forc .Other majorindustries include cement, fertilizer, edible oil, sugar, steel, tobacco, chemicals,machinery, and food processing.

The government is privatizing large-scale parastatal units, and the public sectoraccounts for a shrinking proportion of industrial output, while growth in overallindustrial output (including the private sector) has accelerated. Government policiesaim to diversify the country's industrial base and bolster export industries.


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Industries: textiles (8.5% of the GDP), fertilizer, cement, ,food processing,beverages, construction materials, clothing, paper products,shrimp

Industrial production growth rate: 6% (2005) Large-scale manufacturing growth rate: 19.9% (2005)

SME Sector

In Pakistan SMEs have a significant contribution in the total GDP of Pakistan, according

to SMEDA and Economic survey reports, the share in the annual GDP is 40% likewise

SMEs generating significant employment opportunities for skilled workers and

entrepreneurs. Small and medium scale firms represent nearly 90% of all the enterprises

in Pakistan and employ 80% of the non-agricultural labour force. These figures indicate

the potential and further growth in this sector.

Automotive industry

Pakistan is an emerging market for automobiles and automotive parts offers immense

business and investment opportunities. The total contribution of Auto industry to GDP

in 2007 is 2.8% which is likely to increase up to 5.6% in the next 5 years. Auto sector

presently, contributes 16% to the manufacturing sector which also is expected to

increase 25% in the next 7 years. Car ownership in Pakistan has risen by 40% per annum

since 2001.

CNG industry

As of 2010, Pakistan is one of the largest users of CNG (compressed natural gas) in the

world. Presently, more than 3,000 CNG stations are operating in the country in 99 cities

and towns, and 1000 more would be set up in the next two years. It has provided

employment to over 50,000 people in Pakistan. But now this excess use of this valuableresource in transport made the power sector very dangling.
http://en.wikipedia.org/wiki/Fertilizerhttp://en.wikipedia.org/wiki/Fertilizerhttp://en.wikipedia.org/wiki/Shrimphttp://en.wikipedia.org/wiki/Shrimphttp://en.wikipedia.org/wiki/Shrimphttp://en.wikipedia.org/wiki/Compressed_natural_gashttp://en.wikipedia.org/wiki/Compressed_natural_gashttp://en.wikipedia.org/wiki/Shrimphttp://en.wikipedia.org/wiki/Fertilizer


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Cement industry

In 1947, Pakistan had inherited four cement plants with a total capacity of 0.5 million

tons. Some expansion took place in 195666 but could not keep pace with the economic

development and the country had to resort to imports of cement in 197677 and

continued to do so till 199495. The cement sector consisting of 27 plants is contributing

above Rs 30 billion to the national exchequer in the form of taxes.

IT industry

Pakistans IT industry has been rising steadily since the last three years. A marked

increase in software export figures are an indication of this booming industrys

potential. The total number of IT companies increased to 1306 and the total estimated

size of IT industry is $2.8 billion. In 2007, Pakistan was for the first time featured in the

Global Services Location Index by A.T. Kearney and was rated as the 30th bestlocation for offshoring. By 2009, Pakistan had improved its rank by ten places to reach

20th.

Textile

The Textile Industry is dominated by Punjab. 3% of United States imports regardingclothing and other form of textiles is covered by Pakistan. Textile exports in 1999 were

$5.2 billion and rose to become $10.5 billion by 2007. Textile exports managed to

increase at a very decent growth of 16% in 2006. In the period July 2007 June 2008,

textile exports were US$10.62 billion. Textile exports share in total export of Pakistan

has declined from 67% in 1997 to 55% in 2008, as exports of other textile sectors grew.

The major reason of decline of textile export of Pakistan is the Govt unhealthy policies.

Sui Northern Gas Pipelines Ltd. (SNGPL) notified the textile mills to reduce the

supply of gas for five months. Head of All Pakistan Textile Association of Enterprises

Anis-ul-Haq has expressed concern about the decision: Now is the time to the textileindustry out of a three-year downturn. The demand for textile products is growing, and

if we are not able to fulfill our current orders, we will lose international buyers.

Monthly loss the textile industry because of interruptions in gas supply could reach

about U.S. $ 1 billion, or 4 $ 5 billion for the fiscal year ending June 20 next yeaes
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Mining

Pakistan is endowed with significant mineral resources and is emerging as a very

promising area for prospecting/exploration for mineral deposits. Based on available

information, the country's more than 6,00,000 km of outcrops area demonstrates varied

geological potential for metallic and non-metallic mineral deposits. Except oil, gas and

nuclear minerals regulated at federal level, minerals are a provincial subject, under the

constitution of the Islamic Republic of Pakistan. Provincial governments are responsible

for development and exploitation of minerals, besides, enforcing regulatory regime. In

line with the constitutional framework the federal and provincial governments have

jointly set out Pakistan's first National Mineral Policy in 1995, duly implemented by the

provinces, providing appropriate institutional and regulatory framework and equitable

and internationally competitive fiscal regime.

In the recent past, exploration by government agencies as well as by multinationalmining companies presents ample evidence of the occurrences of sizeable minerals

deposits. Recent discoveries of a thick oxidized zone underlain by sulphide zones in the

shield area of the Punjab province, covered by thick alluvial cover have opened new

vistas for metallic minerals exploration. Pakistan has a large base for industrial

minerals. The discovery of coal deposits having over 175 billion tones of reserves at

Thar in the Sindh province has given an impetus to develop it as an alternate source of

energy. There is vast potential for precious and dimension stones.

The enforcement of Mineral Policy (1995) has paved the way to expand mining sectoractivities and attract international investment in this sector. International mining

companies have responded favorably to the NMP and presently at least four are

engaged in mineral projects development.

Currently about 52 minerals are under exploitation although on small scale. The major

production is of coal, rock salt and other industrial and construction minerals. The

current contribution of the mineral sector to the GDB is about 0.5% and likely to

increase considerably on the development and commercial exploitation of Saindak &

Reco Diq copper and gold deposits (world's largest gold mine), Duddar zinc lead, Thar

coal and gemstone deposits.

Railways

A massive rehabilitation plan worth $1 billion over five years for Pakistan Railways has

been announced by the government in 2005. A new rail link trial has been established
http://en.wikipedia.org/wiki/Pakistan_Railwayhttp://en.wikipedia.org/wiki/Pakistan_Railway


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from Islamabad-Pakistan via Teharan-Iran Via Istanbul-Turkey .Furthermore it would

promote trade, tourism, and would also would serve as an effective link for the exports

to Europe (as Turkey part of Europe and Asia].

Electricity

For years, the matter of balancing Pakistan's supply against the demand for electricity

has remained a largely unresolved matter. Pakistan faces a significant challenge in

revamping its network responsible for the supply of electricity. While the government

claims credit for overseeing a turnaround in the economy through a comprehensive

recovery, it has just failed to oversee a similar improvement in the quality of the

network for electricity supply. Most cities in Pakistan receive substantial sunlight

throughout the year, which would suggest good conditions for investment in solar

energy. If the rich people in Pakistan are shifted to solar Engery that they should be

forced to purchase solar panels, the shortfall can be controlled. this will make the

economy boost again as before 2007.

Similar to other developing countries Pakistan can not plan or control its high

population growth. No politician or government official highlights Pakistan's wasted

opportunities in education and human development because population increase of

3.07 children born/woman and higher in earlier years greatly reduces government

ability to finance major new expansion and maintainance of electricity grid and free

education and health of Pakistanis.

Aviation

Pakistan International Airlines, the flagship airline of Pakistan's civil aviation industry,

has turnover exceeding $1 billion in 2005. The government announced a new shipping

policy in 2006 permitting banks and financial institutions to mortgage ships.

Private sector airlines in Pakistan include Airblue, which serves the main cities within

Pakistan in addition to destinations in the Gulf and Manchester in the United Kingdom.

The other private carrier is Shaheen Air International whose network covers the main

cities of Pakistan and the Gulf.

Banking, finance and insurance

A reduction in the fiscal deficit has resulted in less government borrowing in the

domestic money market, lower interest rates, and an expansion in private sector lending
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to businesses and consumers. Foreign exchange reserves continued to reach new levels

in 2007, supported by robust export growth and steady worker remittances.

Pakistan has been ranked 34 out of 52 countries in the World Economic Forum's first

Financial Development Report, which was released in Pakistan through the

Competitiveness Support Fund (CSF) in December, 2008. Under Factors, Policies and

Institutions pillar, Pakistan ranks 49th in institutional environment, 50th in business

environment and 37th in Financial Stability. In the Financial Intermediation Pillar

Pakistan ranks 25th in banks, 42nd in non banks and 17th in Financial Markets. Under

Capital Availability and Access, Pakistan ranks 33rd.

Pakistan's banking sector has remained remarkably strong and resilient during the

world financial crisis in 200809, a feature which has served to attract a substantial

amount of FDI in the sector. Stress tests conducted on June 2008 data indicate that the

large banks are relatively robust, with the medium and small-sized banks positioningthemselves in niche markets. Banking sector turned profitable in 2002. Their profits

continued to rise for the next five years and peaked to Rs 84.1 ($1.1 billion) billion in

2006.

The credit card market continued its strong growth with sales crossing the 1 million

mark in mid-2005. Since 2000 Pakistani banks have begun aggressive marketing of

consumer finance to the emerging middle class, allowing for a consumption boom

(more than a 7-month waiting list for certain car models) as well as a construction

bonanza.

The Federal Bureau of Statistics provisionally valued this sector at Rs.311,741 million in

2005 thus registering over 166% growth since 2000.

Ownership of dwellings

The property sector has expanded twenty-threefold since 2001, particularly in

metropolises like Lahore. Nevertheless, the Karachi Chamber of Commerce and

Industry estimated in late 2006 that the overall production of housing units in Pakistan

has to be increased to 0.5 million units annually to address 6.1 million backlog ofhousing in Pakistan for meeting the housing shortfall in next 20 years. The report noted

that the present housing stock is also rapidly aging and an estimate suggests that more

than 50% of stock is over 50 years old. It is also estimated that 50% of the urban

population now lives in slums and squatter settlements. The report said that meeting

the backlog in housing, besides replacement of out-lived housing units, is beyond the

financial resources of the government. This necessitates putting in place a framework to
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facilitate financing in the formal private sector and mobilise non-government resources

for a market-based housing finance system.

The Federal Bureau of Statistics provisionally valued this sector at Rs.185,376 million in

2005 thus registering over 49% growth since 2000.

Agriculture

In spite of structural shift towards industrialization, agriculture sector is still the largest

sector of the economy with deep impact on socio-economic 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.
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Manufacturing

The manufacturing being the second largest sector of the economy bears significant

importance 18.4 percent contribution to GDP. Overall manufacturing sector posted anegative 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.

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


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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


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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 thatinvestments 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 2008-09 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 slow down.

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.


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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).

The question of whether Pakistans economy is in crisis or in a free fall

The question of whether Pakistans economy is in crisis or in a free fall, has hit rock

bottom or is near an abyss, is a completely different matter. While the broader

accusations do implicate the incumbent governments role in creating the crisis, to

argue that Pakistans economy is where it is on account of this government is to ignore

many other factors, and much of the criticism of this government alone is a bit

disingenuous.

The overuse of the term crisis, and its other manifestations, not only detracts from real

debate about the economy but importantly, denudes the meaning of the term and de-

legitimizes it. How and when we use key concepts matters critically.

Pakistans economy is not in a crisis, nor on the verge of one. It has serious problems,

but a crisis is a much deeper affliction.

Greeces economy is in a crisis, Britains or Americas is not. The latter two are

struggling with high and growing unemployment, low growth, high debt- just like

Pakistan, but of course at a different level and of a much different nature-but this is not

a crisis.

Pakistans economy faced a huge crisis in 1998 following the nuclear tests for many

reasons but particularly due to the freezing of foreign currency accounts. But for most

of its existence, Pakistan has been caught in a trap of poor performance, as over the last

few years. A crisis, by any imagination, would look far worse than the present economic

indicators reveal.


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The fiscal deficit is high and growing, inflation seems to be stuck at around 14 percent,

investment is low, poverty has grown over the last five years (though less than

expected) and so on. Clearly, these indicators reveal an economy, which is performing

poorly.

While ideas about the informal sector or the black or underground economy abound,

there has been little research done on how Pakistans wide social and economic

networks allow families and individuals to live in world, which are often not on the

economists map. Similarly, what has also not been analyzed in recent years is how

remittances have allowed numerous families to weather the storms created by the

economists statistics of doom and gloom.

Current Economic Situation OfPakistan

At present the sorry state of the economy, tops the problems facing the country. Seeing

the horrible condition of economy some still suggest restoring to the begging bowl and

further subjugation of donor agencies as the only solution to it. Such an approach

cannot provide a way out; it aggravates the situation and amounts to commit suicide.

Therefore, present leadership has realized that there is no option but to reshape the

economic strategy altogether.

The economy of Pakistan has fallen up to this extent that it requires serious attentionand endeavor to revive its state. The revival of economy means to bring the economy on

track whereby country becomes self sufficient and economy self sustained to, eat its

internal demands and fulfill foreign obligations. Sustained economy provides a balance

in trade, potential of paying back foreign loans and gradual growth in gross domestic

and national product. Rise in foreign exchange reserves, minimum inflation rate, strong

local currency are a few indicators of a sustained economy whereas better social

indicators reflect its civic effects.

Developed economies are movers, developing economies are the followers and the

undeveloped economies have no say in the scheme of things. All economic conditionsare the certain result of policies. No economy can itself produce positive results. It is the

people and their action which steer the effects. The economy of Pakistan was not

doomed for disaster. It has been mismanaged up to this extent that the country has

virtually become bankrupt and made to dance on the tunes of the donor agencies as

Pakistan has bartered its freedom with them.

For the last thirteen years has been no noticeable addition to basic industries and the


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economic infrastructure of the country. Instead the number of sick industrial units

increases such year. The public sector is shrinking and suffering losses. Although

agriculture has helped the nation to survive but the sector itself is faced with crises. In

regard to oil, retrogassion has set in after a good progress.

Foreign trade, remittances, aid, and investment

Investment

Foreign direct investment (FDI) in Pakistan soared by 180.6 per cent year-on-year to

US$2.22 billion and portfolio investment by 276 per cent to $407.4 million during the

first nine months of fiscal year 2006, the State Bank of Pakistan (SBP) reported on April

24. During JulyMarch 200506, FDI year-on-year increased to $2.224 billion from only

$792.6 million and portfolio investment to $407.4 million, whereas it was $108.1 millionin the corresponding period last year, according to the latest statistics released by the

State Bank. Pakistan has achieved FDI of almost $8.4 billion in the financial year 06/07,

surpassing the government target of $4 billion.Foreign investment had significantly

declined by 2010, dropping by 54.6% due to Pakistan's political instability and weak law

and order, according to the Bank of Pakistan.

Pakistan is now the most investment-friendly nation in South Asia. Business regulations

have been profoundly overhauled along liberal lines, especially since 1999. Most

barriers to the flow of capital and international direct investment have been removed.

Foreign investors do not face any restrictions on the inflow of capital, and investment of

up to 100% of equity participation is allowed in most sectors. Unlimited remittance of

profits, dividends, service fees or capital is now the rule. Business regulations are now

among the most liberal in the region. This was confirmed by the World Bank's Ease of

Doing Business Index report published in September 2009 ranking Pakistan (at 85th)

well ahead of neighbours like China (at 89th) and India (at 133rd).

Pakistan is attracting an increasingly large amount of private equity and was the ranked

as number 20 in the world based on the amount of private equity entering the nation.

Pakistan has been able to attract a large portion of the global private equity investmentsbecause of economic reforms initiated in 2003 that have provided foreign investors with

greater assurances for the stability of the nation and their ability to repatriate invested

funds in the future.

Tariffs have been reduced to an average rate of 16%, with a maximum of 25% (except

for the car industry). The privatisation process, which started in the early 1990s, has
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gained momentum, with most of the banking system privately owned, and the oil

sector targeted to be the next big privatisation operation.

The recent improvements in the economy and the business environment have been

recognised by international rating agencies such as Moodys and Standard and Poors

(country risk upgrade at the end of 2003).

Foreign trade

Pakistan is a member of the World Trade Organization, and has bilateral and

multilateral trade agreements with many nations and international organizations.

Fluctuating world demand for its exports, domestic political uncertainty, and the

impact of occasional droughts on its agricultural production have all contributed to

variability in Pakistan's trade deficit.

In the six months to December 2003, Pakistan recorded a current account surplus of

$1.761 billion, roughly 5% of GDP. Pakistan's exports continue to be dominated by

cotton textiles and apparel, despite government diversification efforts. Exports grew by

19.1% in FY 200203. Major imports include petroleum and petroleum products, edible

oil, chemicals, fertilizer, capital goods, industrial raw materials, and consumer

products.

Past external imbalances left Pakistan with a large foreign debt burden. Principal and

interest payments in FY 199899 totaled $2.6 billion, more than double the amount paid

in FY 198990. Annual debt service peaked at over 34% of export earnings beforedeclining.

With a current account surplus in recent years Pakistan's hard currency reserves have

grown rapidly. Improved fiscal management, greater transparency and other

governance reforms have led to upgrades in Pakistan's credit rating. Together with

lower global interest rates, these factors have enabled Pakistan to prepay, refinance and

reschedule its debts to its advantage. Despite the country's current account surplus and

increased exports in recent years, Pakistan still has a large merchandise-trade deficit.

The budget deficit in fiscal year 199697 was 6.4% of GDP. The budget deficit in fiscalyear 200304 is expected to be around 4% of GDP.

In the late 1990s Pakistan received about $2.5 billion per year in loan/grant assistance

from international financial institutions (e.g., the IMF, the World Bank, and the Asian

Development Bank) and bilateral donors. Increasingly, the composition of assistance to

Pakistan shifted away from grants toward loans repayable in foreign exchange. All new
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U.S. economic assistance to Pakistan was suspended after October 1990, and additional

sanctions were imposed after Pakistan's May 1998 nuclear weapons tests. The sanctions

were lifted by president George W. Bush after Pakistani president Musharraf allied

Pakistan with the U.S. in its war on terror. Having improved its finances, the

government refused further IMF assistance, and consequently the IMF program wasended. The government is also reducing tariff barriers with bilateral and multilateral

agreements.

While the country has a current account surplus and both imports and exports have

grown rapidly in recent years, it still has a large merchandise-trade deficit. This deficit

amounted to over 15 billion in 2010. The budget deficit in fiscal year 20042005 was

3.4% of GDP. The budget deficit in fiscal year 200506 is expected to be over 4% of GDP.

Economists believe that the soaring trade deficit would have an adverse impact on

Pakistani rupee by depreciating its value against dollar (1 US $ = 60 Rupees (March

2006) ) and other currencies.

One of the main reasons that contributed to the increase in trade deficit is the increased

imports of earthquake relief related items, especially tents, tarpaulin and plastic sheets

to provide temporary shelter to the survivors of earthquake of October 8, 2005 in Azad

Jammu and Kashmir and parts of Khyber-Pakhtunkhwa, an official said. The rise in the

trade gap was also fuelled by high oil import prices, food items, machinery and

automobiles.

The Petroleum Ministry says that this year the bill of oil imports was expected to reach$6.5 billion against $4.6 billion in the last fiscal year, which is the main reason behind

the all-time high trade deficit.

The EU is the single largest trading partner of Pakistan absorbing over one-third of the

exports in 2003. In 2010, the EU accounted for 12.4% of Pakistani imports and 22.6% of

its exports.

Exports

Pakistan's exports increased more than 100% from $7.5 billion in 1999 to stand at $18billion in the financial year 20072008.

Pakistan exports rice, oranges, mangoes, furniture, cotton fiber, cement, tiles, marble,

textiles, clothing, leather goods, sports goods (renowned for footballs/soccer balls),

cutlery, surgical instruments, electrical appliances, software, carpets and rugs, ice

cream, livestock meat, chicken, powdered milk, wheat, seafood (especially
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shrimp/prawns), vegetables, processed food items, Pakistani-assembled Suzukis (to

Afghanistan and other countries), defense equipment (submarines, tanks, radars), salt,

onyx, engineering goods, and many other items. Pakistan produces and exports

cements to Asia and the Middle East. In August 2007, Pakistan started exporting cement

to India to fill in the shortage there caused by the building boom. Russia is a growingmarket for Pakistani exporters. In 2009/2010 the export target of Pakistan was US $20

billion. As of April 2011,Pakistans exports stand at US $25 billion.

External Imbalances

Pakistan suffered a merchandise trade deficit of $13.528 billion for the financial year

2006-7. The gap has considerably widened since 2002-3 when the deficit was only $1.06

billion.Services sector deficit for 20062007 stood at $4.125 billion which equals the

services export of $4.125 billion for the same year.

The combined deficit in services and goods stand at $17.653 billion which is approx83.5% of country's total export of $21.136 (Goods and services). The rise in the trade gap

has been attributed to high oil import bill, and rise in the prices of food items,

machinery and automobiles.

Current account

Current account deficit for 2006-7 reached $7.016 billion up by 41% over previous year's

$4.490 billion.

Since the beginning of 2008, Pakistan's economic outlook has taken a dramatic

downturn. Security concerns stemming from the nation's role in the War on Terror have

created great instability and led to a decline in FDI from a height of approximately $8

bn to $3.5bn for the current fiscal year. Concurrently, the insurgency has forced massive

capital flight from Pakistan to the Gulf. Combined with high global commodity prices,

the dual impact has shocked Pakistan's economy, with gaping trade deficits, high

inflation and a crash in the value of the Rupee, which has fallen from 601 USD to over

80-1 USD in a few months. For the first time in years, it may have to seek external

funding as Balance of Payments support. Consequently, S&P lowered Pakistans foreign

currency debt rating to CCC-plus from B, just several notches above a level that would

indicate default. Pakistans local currency debt rating was lowered to B-minus from BB-

minus. Credit agency Moodys Investors Service cut its outlook on Pakistans debt to

negative from stable due to political uncertainty, though it maintained the countrys

rating at B2.The cost of protection against a default in Pakistans sovereign debt trades
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at 1,800 basis points, according to its five year credit default swap, a level that indicates

investors believe the country is already in or will soon be in default.

The middle term however may be less turbulent, depending on the political

environment. The EIU hsd estimated that inflation should drop back to single digits in

2010, and that growth would pick up to over 5% per annum by 2011. However, the

unprecedented floods of 2010 which encapsulated 20% of Pakistan's land area, have

caused a monetary damage estimated to be in excess of $10bn, as a result of which real

growth is almost flat and EIU's original targets will have to be revised. Much like

previous natural disasters which have afflicted Pakistan, the floods of 2010 inflicted

damage of epic proportions. However, the philanthropic nature of Pakistani people and

widespread coverage by a fiercely independent and established media has proven yet

again that Pakistan is an incredibly resilient nation.

Economic aidPakistan receives economic aid from several sources as loans and grants. The

International Monetary Fund (IMF), World Bank (WB), Asian Development Bank

(ADB), etc. provides long term loans to Pakistan. Pakistan also receives bilateral aid

from developed and oil-rich countries.

The Asian Development Bank will provide close to $6 billion development assistance to

Pakistan during 20069.The World Bank unveiled a lending program of up to $6.5

billion for Pakistan under a new four-year, 20062009, aid strategy showing a

significant increase in funding aimed largely at beefing up the country'sinfrastructure.Japan will provide $500 million annual economic aid to Pakistan. In

November 2008, the International Monetary Fund (IMF) has approved a loan of 7.6

Billion to Pakistan, to help stabilize and rebuild the country's economy.

More recently the government of Pakistan received an economic aid of US $5bn dollars

out of which the US pledge of $1bn was described as a down-payment on the

previously announced $1.5bn already promised to Pakistan for each of the next five

years. The European Union promised $640m over four years, while reports said Saudi

Arabia had pledged $700m over two years. Overall Friends of Pakistan had pledged

$1.6 billion in aid, which would help Pakistan move forward on its way to self-reliance.

Remittances

The remittances of Pakistanis living abroad has played important role in Pakistan's

economy and foreign exchange reserves. The Pakistanis settled in Western Europe and

North America are important sources of remittances to Pakistan. Since 1973 the
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Pakistani workers in the oil rich Arab states have been sources of billions dollars of

remittances.

The 7 million strong Pakistani Diaspora, contributed US$11.2 billion to the economy in

FY2011.The major source countries of remittances to Pakistan include UAE, USA, Saudi

Arabia, GCC countries (including Bahrain, Kuwait, Qatar and Oman), Australia,

Canada, Japan, UK and EU countries like Norway, Switzerland, etc. .

The State Bank of Pakistan (SBP) has announced that remittances sent home by overseas

Pakistani workers have crossed the $10 billion mark for the first time in the countrys

history as the figure reached $10.1 billion in 11 months (JulyMay) of the current

financial year. The 11-month figure was $2.07 billion or 25 per cent more than $8.09

billion worth of remittances received in the same period of the previous year. In May,

overseas workers remitted over $1 billion, which was the third consecutive month that

remittances crossed this mark. The country received $1.05 billion, $1.03 billion and $1.05billion in March, April and May respectively. Citing reasons for the sharp increase in

remittances, analysts say that a crackdown on the illegal Hundi and Hawala money

transfer systems, swift processing and transfer of money by the banking channel and

incentives for overseas Pakistanis have encouraged them to utilise legal channels. The

flow of charity money after last summer floods has also given a boost to the remittances

this year, they say. In the JulyMay period, remittances from Saudi Arabia, UAE, USA,

GCC countries (including Bahrain, Kuwait, Qatar and Oman), UK and EU countries

were $2.38 billion, $2.33 billion, $1.86 billion, $1.18 billion, $1.09 billion and $320.93

million respectively. In comparison, remittances stood at $1.72 billion, $1.84 billion,$1.61 billion, $1.13 billion, $793.91 million and $229.74 million respectively in JulyMay

200910. Remittances received from Norway, Switzerland, Australia, Canada, Japan

and other countries during the 11 months amounted to $926.86 million against $740.96

million in the same period last year.
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Recommendations

Export promotion bureau and embassies/high commissions abroad should explore

markets for Pakistans products through trade shows, business delegations and

international advertising. Moreover, the export base should be broadened by exporting

software, handicrafts, fresh fruits, vegetables, fish, livestock and flowers etc. Suitable

arrangements for processing or packing of fish, fruits and vegetables should be made.

In order to counter the huge debts a "debt management committee" comprising

Ministers of commerce and finance, Chairman Privatization commission and governor

state bank of Pakistan should be formed. This committee will develop debt retirement

instruments independently having power to implement them in letter and spirit. The

committee should draft two separate policies for short term and long term debts.

The difference of US dollar and Pakistani rupee in official and open market rates should

be kept minimum and confident of the overseas Pakistani may be restored which was

shaken after freezing of foreign currency accounts in may, 1998. Steps may be taken to

attract investment from overseas Pakistanis and international investors.

New dams should be constructed to increase availability of water for irrigation

purposes, as irrigation water has a vital importance for better agriculture production.

The quantity and quality of irrigation water should be improved through desalting and

other water conservation techniques.

The tariff of electricity for agriculture purpose should be lowered to ensure at leaser

40% share of agriculture sector in consumption of power.

The health facilities provided by private and autonomous hospitals are not within thereach of the poor. The government should discourage commercialization of health and

ensure availability of adequate health facilities to all segments of society at reasonable

rates.

In the field of education a new policy broadly aiming at increasing literacy rate by

universalizing basic education, enforcing compulsory primary education, encouraging

private investment and increase in total expenditure on education up to 4 per cent of

gross national product is required to be implemented.

The construction of deep sea Gawadar and its connection to the rest of country should

be taken up at the earliest to facilitate exports from Baluchistan to provide transit for

trade of central Asian states and to get suitable share in international trade, making use

of ideal geographical location of Gawadar.

Another important recommendation is regarding information technology policy. This

policy mainly emphasized on human resource development and providing

infrastructure, should be announced and implemented at the earliest.


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So, conceived in this way, although a critical look at Pakistans economy presents a

gloomy picture. The above mentioned measures are hoped to stabilize the ship. Today

not only the country is burdened with heavy debt, it has also reached a stage where it

cannot simply move forward. Growth is stagnant where it cannot simply move

forward. Growth is stagnant. All other indicators too, look quite disappointing. Exportsare not satisfactory and revenue from taxation is not sufficient. Unemployment is

rapidly increasing. The overall scenario presents a dismal situation. This could be seen

from the fact that many times a default situation is emerged and it had to be faced by

making great sacrifices of national sovereignty and in addition a further rise on the debt

servicing front.

Conclusion

Dancing around the fire is not the solution to any problem. One should try to see

beneath surface in order to grasp an idea about the basic issue. Despite a stream

of strong words and announcements made by the past rulers of Pakistan,

nothing concrete has been done to introduce a proper economy revival plan.

Rather the situation has taken a quantum leap for the worse. If the present

economic drift and indifference continue, there is real possibility of an economic

collapse before elections which will overtake political events; posing a threat to

the so called democratic system itself it is, therefore, in the interest of the present

government to avoid this catastrophic situation.

Economic Crisis in Pak

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