Wednesday, 24 April 2013

Pakistan & Economicl Crisis

Pakistan’s economy is currently passing through the most difficult phase of its 
economic history. A robust economy has been transformed into a fragile one. Pakistan 
is not a unique case since a number of countries have broadly encountered similar 
economic challenges, implemented appropriate policies, and have restored self sustaining 
rapid growth with internal and external stability over the medium term. 

The business cycle of Pakistan’s economy has shown anomalous behavior over the last 
many years. The growth rate peaked at 9% cent in 2005 before hitting the bottom in 
2009. It improved a bit to 4.2% last year, which is not enough to impact the grave 
issues such as economic growth, unemployment and poverty. All the serious 
challenges Pakistan’s economy is undergoing include: the ever widening budget and 
trade deficits, galloping inflationary pressures, incessant increase in the level of 
poverty, power outages, water shortages, closure of industries, food insecurity, and 
relying heavily on domestic borrowing due to lower revenue collections, have all 
diverted our attention from addressing the national economic plight. On the one hand, 
war against terrorism, global recession, ethnic and sectarian strife as well as the 
deteriorating law and order situation in Baluchistan and Karachi are contributing to the 
fiscal and trade deficits in Pakistan. On the other hand, lower foreign assistance 
disbursements are compelling the government to rely heavily on deficit financing a 
tool that would further impact negatively on the country’s real productivity. 

Weak investment climate, infrastructure gaps, sovereign creditworthiness concerns, 
and large fiscal deficits continue to pose obstacles to a sustained improvement in 
investment activity and economic performance. Electricity and gas shortages for the 
industrial and agricultural sectors, macroeconomic challenges including fiscal deficits 
and high inflation, and security uncertainties, have hampered productive business 
activities. While industrial activity had picked up in the previous quarter to 6.5% 
higher than a year earlier, inadequate electricity and gas supplies continue to 
stagger this positive trend in the industrial sector.

The unavoidable conclusion is that Pakistan will have to go to the IMF for a bailout 
package and this may have to be done by the interim government. IMF will have its 
conditions but more significantly is likely to insist on political consensus on those 
conditions to make sure that the next government does not back out of the 
commitments. The US$ 2 billion in Coalition Support Funds (CSF) have helped sustain 
expenses so far but there is likely to be a balance of payment crisis in the latter half 
of 2013 because of reduced capital inflows, rising debt and declining reserves. The 
IMF would want Pakistan to change its reform-averse image and pull out of the 
policy paralysis induced by political instability and a dangerous internal security 
situation. Pakistan, right now, has a weak investment climate, widening 
infrastructure gaps, sovereign creditworthiness concerns, large fiscal deficits, a 
declining industrial and agriculture sector because of energy shortfalls, rising 
inflation, negative production capacity, macroeconomic challenges and a very 
serious internal security situation. This has to be seen against a GDP growth rate of 
6-7% in the period 2003-2007 and the fact that investment has reduced by one third 
in the period 2008-2012. On the positive side there has been a marginal pick-up in 
industrial output, a slight rise in exports and migrant remittances remain strong.

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