Showing posts with label Economic meltdown in Pakistan. Show all posts
Showing posts with label Economic meltdown in Pakistan. Show all posts

Thursday, May 26, 2011

Pakistan's Economic Downturn - Causes and Effects

Pakistan's Economic Downturn - Causes and Effects

Pakistan is experiencing the worst economic crisis and downturn. It was worsened in the past recent years. When the country unable to sustain it's economic growth due to the major domestic reasons and also global recession implications. Poor economic conditions, planning and poverty rise more and more every year. The capital flight already happened to its much extent from the country to outside. Oil import bill continues to haunt Pakistan's balance of payments with huge amounts of worth billions of dollars imports added at one side while lesser amount of exports from Pakistan to the foreign world naturally creates unfavorable balance of payments and high trade deficit. Investors from Pakistan fled amidst of more economic fears. While the high inflation turned into stagflation contributed a lot in economic crisis in the country. Another big factor which contributed is terrorism and militancy in the country which shaken confidence of investor and businesses. These problems can be still resolved if responsible authorities and government acts responsibly now with a clear path to follow for improving the current economic conditions. The causes and effects of economic downturn are as follows.

Causes and Effects of Economic Downturn

One of the biggest worries for Pakistan economy is once again increasing oil prices. Which left the country no way but to increase oil prices domestically. Although, the government faced and is facing much resistance from the peoples and from politicians, but infact, no way is actually there which can allow the government not to increase the prices.

Increasing food prices and shortage of food products is also becoming a huge problem now because of low yields from the agricultural lands and sources of the country. Poor management of food related matters and ignored agricultural sector by the government contributing also to this. Despite of the fact that Pakistan is an agricultural country. Smuggling of food from Pakistan to Afghanistan made the food shortage in the country even worst. We can easily see anywhere longer lines for buying and taking food related ingredients are now common in the rural areas as well as cities.

Terrorism in the country especially in the big cities created fear among the peoples and common man that what will happen now, what will be their future? Contributed to already ailing Pakistan economy to more extent which also triggered most capital outflow. Investment from foreign sources in few years back was more than $700, 63 million dollars but afterwards it remained only $329 million according to last quarter of 2008 estimate.

Political instability also played its role always in decline trend of the economy because political stability is important for any economy and its activities to flourish smoothly but unfortunately Pakistan lacks this and faces most of the time political uncertainty.

Tax Culture: The tax culture in Pakistan is poorly administered and developed. The most of big and large sectors do not pay taxes to the government or pay less while most of the taxes are being paid by the salaried and middle class. They pay taxes regularly along with some business sectors but big part is still not in the tax umbrella. Also no agricultural tax is here due to no commitment in the policy makers to do this.

Uncontrolled Growth : In Pakistan, almost every government didn't paid its needed attention to production related matters and enhancing it for local market and its consumption which resulted in the need of more and more goods imports from abroad and higher dependency on other countries.

Infectivity of Poverty Reduction Programs: Pakistan tried various poverty reduction programs and schemes of different types and kinds in different decades but they do not proved significantly effective in Pakistan due to various factors involved in it such as rapidly increasing population hampers the efforts and only short term policies with less commitment. Less effective education system and also unskilled labor and population unable them to work effectively and efficiently.

Electricity and Gas Shortage: Electricity and Gas shortage in the country is also creating havoc for industries in Pakistan. Long hours of load shedding of electricity and gas throughout the country restricting the industries to work smoothly and completely and to produce the goods for catering local needs as well as foreign orders also creates other problems such as industry losing its customers and orders and ends up at last in closing of industry.

Price hike and Inflation: In last years the inflation in Pakistan had reached its record high 25% percent. Though it is not there right now but it is still at very much higher levels which is hurting the economic growth overall. Inflation increased due to the State Bank borrowing, higher food prices domestically, increasing prices of food commodities at international levels, increasing oil prices both domestically and internationally, Poor growth in manufacturing sector and non effective supply of goods and services and specially devaluation of Rupee PKR contributed to price hike and inflation a lot.

Miscellaneous causes: The high volumes imports from the other countries actually destroyed Pakistan's own industry and manufacturing sector which resulted in unemployment. Less and illiterate peoples and human resource is less capable and productive. Conflicts, high rate of fast increasing population created more burdens for economy and as well as burden created by debts.

Security & Law & Order Issue : Terrorist activities, acts of militancy and terrorism, extremism, rising rates of crimes including street crimes, robbery, theft acts and extortion related activities and others also created sense of insecurity in peoples as well as in investors results none of them sure about anything to happen and created uncertainty.

The following is the causes and how economic crisis of Pakistan started its buildup.

Mohsin Khan of Peterson Institute advised Pakistan Government. Here are his views.

"The situation for the Pakistan economy is pretty grim. Unfortunately it is—it’s almost as if the government didn’t learn anything from that experience. What is happening is the following: You’ve got very slow growth, maybe around 2 to 3 percent for a variety of reasons, but we can go into that later. Inflation [is] rising very rapidly and the cause is exactly what was happening in 2008. You have an increase in food prices and in energy prices. The government refuses, or actually in this case, had to back down from increasing domestic gasoline prices in line with international oil prices, which meant that essentially it had to subsidize the public, which it did do.

The cost of that subsidy is rising day by day as oil prices stay high and domestic prices are kept below international prices, and the fiscal deficit rises. The expansion in the fiscal deficit is then financed primarily by the government borrowing from the central bank, which is akin to printing money. So it’s pumping liquidity into the system and that’s leading to higher inflation.

This is exactly what happened in 2008, which in fact led to the Pakistanis asking the IMF for a program of economic assistance alone. The ongoing IMF program has been suspended because Pakistan was not able to meet the conditions that the IMF had set for them, including on the size of the fiscal deficit and certain other actions like introducing a new or revised general sales tax, which is sort of like a VAT [value-added tax].

The government just recently, in fact this past week, said it tried to push this through but found such political opposition that it decided not to go through with it. So that’s off the table.

He throws up certain figures:

By my reckoning, the fiscal deficit in the budget was 4.7 percent of GDP. It’s going to be around 8 percent if this continues…… The figures coming out right now show growth of between 2 and 2.5 percent, with inflation easily above 20 percent—it could be 25 percent."

Effects of Economic Downturn - Government of Pakistan now must needs to shift its focus to economic condition of the country and need to take necessary steps now to avoid from worsening. They need to workout also on law and order situation throughout the country to improve it because this is the only way by the confidence of peoples as well as the investors can be restored. Inflation needs to be eased up in the economy and brought under control. Different business which makes cartels to increase the prices needs to be dealt strictly for curbing the inflation and price hikes. Political stability needs to be established now. Government must needs to take steps to resolve the energy and power shortage. Security situation needs much improvement overall. The economic downturn and slowdown already started its effects to be shown commonly and everyone can feel and see these effects. The power shortages throughout country are increasing public anger and everyday protests are happening everywhere against load shedding of electricity and gas. These power shortages and load shedding also affects industries to greater extents. The industrial sector is unable to conduct its production efficiently now and this is also increasing cost of production. Similarly, textile industry sector is also experiencing slowdown in the economy as well as downturn. Facing same kind of problems like other industries. Automobile sector is also hit by economic downturn and its sales are almost dropped up to 50%. Also, the unemployment is on rising and workers who were laid-off are increasingly protesting against job losses.

The thing is, Pakistan is a country with non serious rulers. Most of them are incompetent and irresponsible. The problems of the country including both threats that are originating internally and external threats can be managed by a serious administration and governments which is serious and responsible towards the country and not their own motives. Also the peoples of Pakistan needs to starts thinking and working for the country and not for only themselves if the nation building process to be successful.

(Analysis and Article is written by Ayaz Ahmed RN)

Pakistan's Economic Downturn - Causes and Effects