ABSTRACT

After reading this chapter you will able to

understand what are the economy issues face by

Pakistan and what are the solutions to solve those

economic issues.

123

Economic challenges face by

Pakistan economy and solutions.
 Table of contents

Contents
Table of contents ............................................................................................................................. 0

Introduction:.................................................................................................................................... 2

An overview of Pakistan’s economy: ............................................................................................. 3

1.............................................................................Economic challenges face by Pakistan economy:

......................................................................................................................................................... 5

1.1. Huge amounts of debt servicing:...................................................................................... 6

1.2. Balance of payments’ deficit:........................................................................................... 7

1.3. Fewer saving and more consumption:.............................................................................. 9

1.4. Government spends more and collects less:..................................................................... 9

1.5. Our share in the world trade is shrinking: ...................................................................... 10

1.6. High Load shedding in Pakistan: ................................................................................... 11

1.7. Natural disasters: ............................................................................................................ 12

1.8. Bad governance in Pakistan: .......................................................................................... 14

2.......................................................................................... Solutions of economic crisis in Pakistan

....................................................................................................................................................... 14

2.1. Overcome on the energy crisis: ...................................................................................... 14

2.2. Economic revival of State Owned Enterprises:.............................................................. 16

 2.3. Improve the system of governance: ............................................................................... 17

2.4. Technological improvement for enhancing agricultural productivity: .......................... 18

2.5. Retain existing investments and attract new one. .......................................................... 18

2.6. Increase exports and decrease imports: .......................................................................... 19

2.7. Government should solve law and order issues: ............................................................ 19

3....................................................................................................................................... Conclusion:

....................................................................................................................................................... 20

Introduction:

Economy is the most important sector which affects the every

sector of the life. No doubt, every country’s economy have some challenges, so that with

Pakistan. Now a day, Pakistan’s economy is facing a lot of challenges, like; balance of payment

is running in deficit, population is increasing so rapidly that, we are producing less and

consuming more, governance of Pakistan is not as good as those countries who are enjoying

economic prosperity, the budget of Pakistan has been running in deficit for many years, because

of, government spend more and earn less “or” the tax collection system is not much efficient that

the government can collect much taxes to fulfill their expenses, as Pakistan have borrowed huge

amount of money, so it has to pay a huge amount of money In order to pay interest expenses,

and the last but not the least Pakistan’s economy is also facing problems because of the IMF’s

policies which are implemented on Pakistan’s economy. As every problem have some

solutions, so the economy problems in Pakistan also have some solutions and recommendations.
There is only need to implement these solutions and recommendations in over economic policies,

if Pakistan successfully implements these solutions, then Pakistan’s economy will begin to move

towards prosperity and boom. Let’s discuss the problems, its solutions and recommendations one

by one.

An overview of Pakistan’s economy:

Let me give you a brief overview in simple terms as to what the structure of this economy

is? In 1947, Pakistan had 30 million people with per capita income of 100$. Agriculture

accounted for almost 50% of economic output with hardly any manufacturing, as all industries

were located in India. Therefore, it was unable to feed 30 million people and was dependent on

PL-480 imports from the USA. From thereon, Pakistan has come a long way. Today with 170

million people, our per capita income in 2008 was 1000$ which was ten times more. Pakistan is

the third largest exporter of rice in the world and producing enough food grains to feed its

people. 3 million tons of rice is exported every year by Pakistan which is surplus to our

requirements. Pakistan is also one of the five major textile producing countries in the world. So if

we measure in relation to where we were vis-à-vis structure of economy, agriculture has come

down from 50% to 20%. Therefore, out of total national income, agriculture’s contribution is just

20%, but instead of being deficient in food production, we are actually surplus and that is what

productivity means i.e. by using the same land you produce more from the same inputs, that is

how economic growth takes place. Agriculture is not only crops, within agriculture there has

been a significant change. Livestock, dairy, mutton, beef, poultry and similar other products is

50% of agriculture output in Pakistan. Pakistan also produces third largest quantity of milk in the

world. So within agriculture sector, there is a change i.e. major crops are only 36% of agriculture

value added and 14% are minor crops, fisheries, orchards, fruits and vegetables. Thus, we are
moving in a direction where the same land and same resources are being used more efficiently in

order to produce more. As a contrast, agriculture is only 2.5% in the US having a population of

300 million, out of which they not only feed the entire population, but also export to the rest of

the world. Therefore, it is important to understand that when it is said that agriculture is

producing/contributing more, it is the productivity of agriculture rather than the share of

agriculture in GDP. Manufacturing and industry now account for 25% of the income; when we

recall there was not even a single industry worth its name at the time of partition. So if we look

where we were and where we are, I think the justification for Pakistan in terms of betterment of

economic conditions of Muslims in this part is very strong. But where we have failed is that we

have not lived up to our potential. In 1969, Pakistan exports of manufactured goods were higher

than the combined exports of Indonesia, Malaysia, Philippines and Thailand. In 1960’s Korea

emulated Pakistan in its five years planning process. The tragedy is that even a country such as

Vietnam which was completely devastated by the war has now overtaken Pakistan. Ten years

ago, India which was way behind Pakistan (till 1990’s) is now way ahead. As an economist and

student of globalization, the biggest challenge is: how can we organize ourselves to reach that

position where at least we can be running not at the nine second a mile but at least ten second a

mile race which is going on in the global economy. Ten more important challenges facing

Pakistan’s economy are deliberated in the succeeding paragraphs. (Lecture delivered to the

participants of the Command and Staff Course at Command and Staff College Quetta).
 1. Economic challenges face by Pakistan economy:

These are the few economic challenges face by the Pakistan:

o Huge amounts of debt servicing

o Balance of payments deficit

o Fewer savings and more consumption

o Government spends more and earn less

o Our share in the world is shrinking

o High load shedding

o Natural disasters

o Bad governance

o Terrorism

o Corruption

o Low education

o Stagflation

o Low investment

o More imports and less exports

o Low GDP

o LOW INCOME PER CAPITA

 1.1. Huge amounts of debt servicing:

A recently produced data of the State Bank showed the country paid

$6.820bn as debt servicing in FY14, including $5.910bn as principal amount and $915m as

interest

This $7 billion debt is presenting great challenge to the economy of Pakistan. The main

cause of Pakistan’s budget deficit is the huge amounts of debt servicing.

The government, trapped in floods and political crisis, may face another serious turmoil

by the end of this fiscal year if IMF and other donors did not release the promised loans.

The gravity of the situation is visible in the wake of increasing trade gap, with no foreign

inflows, no release of installments from IMF and no interest of foreign investors in the country.

The disappointing foreign investment has developed another difficult situation under

which repatriation of profits and dividends on foreign investments have also reached close to

$1bn

Pakistan succeeded to borrow from international market, though at a very high rate, but it

boosted the country’s image, encouraging IMF and other donors to help Pakistan.

However, situation seems to have changed again as exports have dropped, and imports

jumped by 32pc in the first two months of the current fiscal year and rupee has lost 4pc value to

hit Rs102-3 against the dollar.

Though remittances are increasing at the rate of more than 12pc, it would not be enough

to absorb the future shocks.

 Analysts believe that the first quarter of the current fiscal year could be a shock to

economic managers of the country as it would result in wide trade gap that could enlarge the

current account deficit. Trade deficit in August this year was $2.8bn which is 76pc higher than

August of last year.

The current account deficit in July was minus $454m, which was much higher than minus

125m of last year.

In FY14, the deficit was $2.97bn against $2.5bn in the previous year.

The July deficit shows that the trend was not favorable for an economy which is facing

many challenges (State Bank, 2014).

If Pakistan makes his tax collection system stronger and try to reduce his expenses, then

it may decrease the demand of borrowing .if Pakistan does so, it helps Pakistan to reduce the

burden of interest expenses. If Pakistan decrease the demand of borrowing then it enhance the

economic image of Pakistan. As economic position of Pakistan enhances so it encourages the

foreign investment and cash inflow.

1.2. Balance of payments’ deficit:

Pakistan is importing more and exporting less for many years,

so Pakistan’s balance of payments is running in deficit for many years. As Pakistan’s imports

are higher than its exports so the cash inflow in Pakistan is less than its outflow. Higher outflow

means Pakistan’s industries are earning less profit as compared to foreign industries, which

present great economic challenges.

 80% of Pakistan’s imports is financing through our exports till 2007-2008. But now this

ratio goes down to 50%, now our 50% imports are financing through our exports. We have a

balance of payments ‘deficit of 50% which is increasing year by year. This is presenting a great

challenge to Pakistan economy.

Pakistan main exports are mineral fuels (19 percent of the total shipments), manufactured

goods (19 percent) and beverage and tobacco (13 percent). Others include: food and live animals

(11 percent), crude materials (11 percent), chemicals (11 percent), machinery (8 percent) and

miscellaneous articles (8 percent). Main export partners are United States (13.6 percent), China

(11 percent of the total export), United Arab Emirates (8.5 percent) and Saudi Arabia (8.5

percent) (http://www.tradingeconomics.com/pakistan/imports).

Main imports are mineral fuels (16 percent of the total imports) and manufactured goods

(16 percent). Others include: miscellaneous articles (12 percent), beverage and tobacco (12

percent), animal and vegetal oils and fats (10 percent), crude materials except fuel (9 percent),

chemicals (9 percent), machinery (8 percent) and food and live animals (7 percent). Main import

partners are China (19.7 percent of the total imports),), United Arab Emirates (12.1 percent),

Saudi Arabia (12 percent), United States (3.2 percent) and Kuwait (6.3 percent)

(http://www.tradingeconomics.com/pakistan/imports).
 1.3. Fewer saving and more consumption:

In Pakistan, as the earnings of people is not

too much as compared to their expenses so people consume more and save less. As the savings in

Pakistan is less than consumption so investment rate in Pakistan is too low. Low investment

means low growth of economy. Investment provides capital to the industries and performs a key

role in the economy of any country. Low investment provided a great challenge to the economy

of Pakistan.

According to one survey every Pakistani consumes 85 from every hundred

rupees. This thing indicates that the saving rate is too low in Pakistan. In India the saving rate of

last year is 34%, while the saving rate of china is 50% for last many years which play a key role

in the success of china’s economy.

1.4. Government spends more and collects less:

The major issue of Pakistan’s economy is that the government of

Pakistan spends more than it earns, which force to government to run its budget in deficit. As

government spending is higher than its earning, so for fulfilling deficit of budget the government

has to borrow money, which presents another economic challenge in the form of debt servicing

payments. In 2013, Pakistan budget deficit is more than 7%, which means that Pakistan earnings

is 13% and its spending is 20%. The major spending of Pakistan economy is in the form of
education, infrastructure and most importantly in the form of defense expenses. According to one

survey Pakistan spends its 70-80% budget in the form of defense expenses.

Pakistan recorded a Government Budget deficit equal to 8 percent of the country's Gross

Domestic Product in 2013. Government Budget in Pakistan averaged 3.14 Percent of GDP from

1990 until 2013, reaching an all-time high of 8.80 Percent of GDP in 1990 and a record low of -8

Percent of GDP in 2013. Government Budget in Pakistan is reported by the State Bank of

Pakistan (http://www.tradingeconomics.com/pakistan/government-budget) .

1.5. Our share in the world trade is shrinking:

In 1990s, the share of Pakistan

in the world trade is .2%, which remains now, .12%. This thing indicates that our share in

world trade is shrinking year by year. While if we look at the share of India in world trade then

we come to know that it has doubled its share in world trade till 1990-2010 by .7%-1.4%.our

exports are limited in some sectors like textile, wheat and rice. Our exports are limited to only

some countries, like, U.S, U.A.E, and Australia etc. As our share in the world economy is

shrinking year by year, so, it encourages us to import more and export less. This is presenting

great challenge to Pakistan economy.

 1.6. High Load shedding in Pakistan:

Energy plays a role of backbone in the

industry of any economy. The most worst economic challenge face by Pakistan’s economy is

load shedding. Because of load shedding Pakistan’s economy face many challenges. Because of

load shedding the industries in Pakistan are shifting to other countries. Because of load shedding,

not only Pakistani investors but also the foreign investors are discourages to invest in Pakistan

.load shedding has destroyed the large businesses as well as small businesses. Energy crisis has

not only affected the general public but it also effected government indirectly. Because of

mobilization of businesses from Pakistan to other countries, government revenue decreases in the

form of tax collections. As the quantity of businesses decrease, so unemployment increases and

government has to pay more in the form of unemployment compensations. Due to load shedding

government spending also increases in the form of energy development plants.

Another challenge we face today is energy and water shortages, and that is not because

we are not generating enough electricity or we are not having enough water. With the losses of

KESC from the point it has generated to the point they realize the billing is 45%, so 55% people

are paying for those who are stealing the electricity. Government of Pakistan out of its own

limited resources is paying 200 billion rupees every year as subsidies for electricity. Our industry

is at a disadvantage that they get the orders from foreign countries but they cannot execute the

orders because there are electricity outages. In addition to economic losses it also creates

inconvenience for pursuing normal life. We have silting of our dams, but no additional dams

have been constructed since Tarbela in 1974. We have water course losses of about 20-25%.
Even after these losses, the water is inequitably distributed. The influential land lords are able to

take greater share of water from the canals as compared to poor farmers. Therefore, the

productivity of poor farmer is only one ton per acre as compared to 3 tons by large holders. If we

provide the water equitably to the small farmer, he would also be able to increase the

productivity from one to at least two tons resulting into additional income, increase in exports of

food grains, cotton and fruits and vegetables which will add to export earnings of Pakistan. With

the climate change taking place with all the glaciers in Himalayas which are going to melt, we

are going to have difficulties in future due to global warming

(http://iba.edu.pk/News/speechesarticles_drishrat/Pakistan_Economy_Challenges_Prospects.pdf)

1.7. Natural disasters:

Natural disasters also affects badly to the economy of Pakistan. Natural disasters like

earth quake, flood etc. affects very badly to the economic position of any country. When flood

comes, it destroys a large number of agricultural products, it disturbs your budget policies,

people got unemployed, and government has to increase its expenses to fulfill the needs of those

people who are affected in the natural disasters. Pakistan’s economy has been affected by natural

disasters for last many years. Pakistan has faced a lot of economic damage due to the natural

disaster.
 Economic damages face by Pakistan:

Natural Disasters from 1980 - 2010

Overview

No of events: 138

No of people killed: 87,

053

Average killed per year: 2,8

08

No of people affected: 58,

098,719

Average affected per year: 1,8

74,152

Economic Damage (US$ X 1,000): 18,

402,814

Economic Damage per year (US$ 593

X 1,000): ,639

(http://www.preventionweb.net/english/countries/statistics/?cid=129).
 1.8. Bad governance in Pakistan:

Governance plays a key role in the economy of

any country. Pakistan’s economy is facing bad governance for many years. In Pakistan, bad

governance takes economy to the path of destruction. In 2008, in Pakistan the rate of poverty is

17.8% which has now increased to 40%.because of bad governance, now Pakistan is facing a

worst form of load shedding. Government has now lost his image in the world’s economy

because of his bad governance. Investment is flying away from Pakistan’s due to unfavorable

policies of Pakistan. Pakistani government has no able to make good policies to end the poverty

and terrorism.in the result of natural disasters Pakistan received many funds from all over the

world but due to bad governance in Pakistan government was not able to implement these funds

in righty place. Corruption was so high in Pakistan, because of corruption people have lost their

confidence on the institution so government no one is ready to invest in government institutions.

2. Solutions of economic crisis in Pakistan

2.1. Overcome on the energy crisis:

The fiscal year 2013-2014 started with continuous problems of power and gas shortages

along with other internal and external challenges. The energy crisis is partly due to the ever

increasing circular debt.

Any rational economic intervention with respect to Energy and Power generation would

require the following steps:-

 We should produce electricity by those resources which are renewable.

 Government should aware the people to buy those goods who are energy efficient.

 Government should aware people to control light consumption.

 Government should allow people to implement small plants on their homes for

producing electricity for their selves.

 A continuous monitoring, surveillance and audit of both Hydro and Thermal

Power generation units.

 A third party regulatory compliance of Independent Power Producers(IPP’s) on a

perpetual basis

 Monitoring of inventory so thefts and pilferages are prevented of furnace oil which

has led to lower numbers of power generation.

 Imposition of strict financial penalties on failure to conduct energy audits and poor

performance of power plants.

 Switch over to cheaper fuels to cut down the power generation rates and

subsequent removal of subsidy.

 Construction of new dams on the run of the river so as to ensure that there are no

floods during monsoon and the country is prepared to combat the water war placed

by India on Pakistan.
2.2. Economic revival of State Owned Enterprises:

The Economic survey of Pakistan reports that during FY12 and FY13 the power

Shortage became so severe that it wiped out 2% from the country’s GDP.

Agriculture, Manufacturing as well as Services sector performed below their capacity”.

In addition to the energy crisis, the below par performance of State Owned

Enterprises has been a major concern. The shady privatization of these state owned

enterprises in the past have actually led to worsening of economy and if the country goes

for another string of poorly executed privatization, the ethical standing of the government

would be lowered but the quality of life of the country would be lowered beyond repair.

Decline in Foreign remittances, depletion of reserves, and stagnant tax collections

all suggest that the economy needs more careful review and constant watch. If left

unattended the fiscal deficit will increase and result in lowering of GDP.

The government should increase the privatization in those sectors which are not in

more profits or which have fewer investments from public. If government wants to

increase the profits of such kind of institutions then it may privatize these sectors.

\government should also do privatize the railway sector. Because if the

government privatize the railway sector then it will be able to collect private investment

.by the privatization of railway the workers of railway try to work more efficiently

because of the fair of firing from job and railway works more efficiently. The further

benefit of privatization is that people are begun to invest their money.

 2.3. Improve the system of governance:

Governance can play a key role in the economy of any

country. If government improves its governance then it can solve many economic problems. If

government takes hard measures to control corruption then we can improve our economy.

Because in corruption although government uses its resource4es but government does not take

the advantage of its resources because of the corruption which leads the government to increase

his expenses for those work which can be done in lesser amounts .government can improve his

governance in the sector of electricity. Because if the electricity issue solve by the policies of

government then more than half of the economic problems can be solved by the government. To

overcome the .energy crisis leads our economy to more investment, more production more

exports, more income, and more savings and at final more GDP.

Good governance can achieve by government by taking these steps:

 Government should appoint people in public service on merit

 Government should promote people on performance

 There should be equality in all people when government provide some opportunities

 Government should provide decent packages for grant living and for retirement for their

civil services officers.

 All People of executives’ positions should come through a competitive process.

 Government should aware the people efficiently whenever new policies are made.

 Services sectors of different problems should be improved.

 Government should introduce electronic hard ware and soft wares to be aware him of the

problems of people.
 2.4. Technological improvement for enhancing agricultural productivity:

Agriculture plays an important role in

the economy of Pakistan. Pakistan can increase its GDP by technological improvements

in the agriculture sector. Pakistan now uses a very low standard technology in its

agricultural sector. If Pakistan improves his technology then Pakistan can increase its

production which leads the Pakistan’s economy to improve its production. By

technological change not only our agricultural production increase but also our industrial

products increases because of sufficient supply of raw material.

. The government of Pakistan needs to prioritize the agriculture sector. In year 2013,

the economy received insignificant support from farms income mainly from minor crop

and livestock whereas the major crops particularly cotton and rice failed to meet the

target but to some extent were compensated by the better crops of sugarcane and wheat.

2.5. Retain existing investments and attract new one.

The Overseas Investors Chamber of Commerce and

Industry (OICCI) expects that the new government can provide right environment and support to

Pakistan’s economy and the country can attract as much as $5 to $6 billion in foreign direct

investment annually.

The chamber is optimistic that the incoming government will set a clear and focused

direction to address key issues of governance, security, energy and inconsistent policy

implementation, which in the recent past has severely affected inflow of foreign direct

investment in the country.

 In a statement issued on Wednesday, OICCI President Kimihide Ando, speaking on

behalf of foreign investors, expressed his confidence in the Government of Pakistan.

As the country moves towards a smooth transition of power at the Centre and in

provinces, Ando said the ongoing democratic process is creating a positive international

perception, which is partially reflected in the increasing foreign portfolio investment in the

country’s stock market (OICCI President Kimihide Ando).

2.6. Increase exports and decrease imports:

It is recommended that the government identify gaps and remove irritants

which has led to decrease in foreign inflow and increase in foreign outflows. Last

year, the Pakistan economy registered 23.5 % in oil and gas sector for foreign inflows

followed by Financial Business and Communications which attracted 18.1 and 10.6

percent, respectively. The outflow was observed in communications and power

sectors. Despite the global slowdown, the uptrend in KSE-100 index encouraged

foreign investment in stock market. The Karachi Stock Exchange (KSE) is expected

to however around 26,000 plus points. In capital market the major contribution came

from USA, UK and Hong Kong. (M. H., Alam, S., & Butt, M. S. (2003). Foreign

direct investment, exports and )

2.7. Government should solve law and order issues:

Along with other issues faced by Pakistani

people, Government’s major attention should be on improving the Law and Order situation in

Pakistan. The need of the hour is to improve the general Law and Order Situation with
 special emphasis on economic hub of Pakistan being restored to peacetime. There are

extortion, ransoms, target killing, terrorism and bomb attacks which has not helped the cause

of economic revival and sustenance in Pakistan. (Burki, S. J. (2007). Changing perceptions,

altered reality: Pakistan’s economy under)

3. Conclusion:

Economic growth in Pakistan, like other countries of the world, is subjective to the

health of the world economy, but is principally reliant on domestic factors, policy, weather, and

the nature of state-economy relations. Pakistan may not have achieved macroeconomic stability,

sustainable economic structural reforms, or improved economic governance but it has resumed

the journey for poverty alleviation, improvement in health and education sector and may in the

days and years to come improve its current standing. Last but not the least the economic

performance for the year 2014 may not be that different than previous years as the monetary and

fiscal policies are somewhat still not in balance and the current government is prone to misuse

the critical concept of publishing new rupee notes. However if the Government is able to monitor

and provide leadership to the country in the domains of macro-economic stability, structural

reforms, good governance, strengthening of financial institutions , poverty reductions and

improvement in health and education, it may help Pakistan achieve its economic potential and

help earn a respectable place in the comity of nations.

 Bibliography

(n.d.). Retrieved from http://www.tradingeconomics.com/pakistan/imports.

(n.d.). Retrieved from http://www.tradingeconomics.com/pakistan/imports.

(n.d.). Retrieved from http://www.tradingeconomics.com/pakistan/government-budget.

(n.d.). Retrieved from

http://iba.edu.pk/News/speechesarticles_drishrat/Pakistan_Economy_Challenges_Prospec

ts.pdf.

(n.d.). statement issued on Wednesday, OICCI President Kimihide Ando.

(n.d.). statement issued on Wednesday, OICCI President Kimihide Ando.

Burki, S. J. (2007). Changing perceptions, altered reality: Pakistan’s economy under. (n.d.).

http://www.preventionweb.net/english/countries/statistics/?cid=129. (n.d.).

Lecture delivered to the participants of the Command and Staff Course at Command and Staff

College Quetta. (n.d.).

M. H., Alam, S., & Butt, M. S. (2003). Foreign direct investment, exports and . (n.d.).

OICCI President Kimihide Ando. (n.d.).

state bank. (n.d.).

State Bank. (2014, September 14th). Published in Dawn.