Economy of Pakistan - Essay Example

Macroeconomic Country Analysis on Pakistan Pakistan is a prominent country in South Asia. Particularly during the last couple of years, it's been in crucial ally of America in fighting against the Talibans and the forces led by Osama Bin Laden. But, the irony with Pakistan is that ever since its formation in 1947, it's been in news for all the wrong reasons. Pakistan has struggled to find a coherent identity and role since its creation. Events like taking over the reins of the democratically elected governments by Army, regular skirmishes with its neighbor India, increasing activities of some militant organizations have not really allowed the country to develop to its fullest potential. Country also faces the problems of illiteracy, and charges of Fiscal ineptitude. But despite such decelerating factors, Pakistan is on the path of growth with the new government of President Musharraf continuing with a reformist economic agenda, assisted by support from multilateral institutions. Pakistan's economic performance appears to be improving gradually. A thaw in the relations with India is also helping the country in economic progress. In the 2007 country profile Country-Watch points out that Pakistan is a developing nation with agriculture accounting for about 25 percent of its GDP, employing about 45 percent of the people (101). In recent years agriculture is declining as a percentage of total output with other economic activities picking up as well, but still agriculture sector remains the primary economic activity in Pakistan. A high annual population growth rate of two percent not matched with equal rise in opportunities and resources for the country, is also proving to be a big drain on its economy. Growth of economy and business prospects in a country depend mainly on., macroeconomic factors, political stability, economic liberalization, human resource development index and levels of corruption in the country. A stable business environment requires normalization of the fiscal position, with an increased tax base and a more transparent allocation of resources. A stable government helps in infusing confidence amongst investors. Recognizing the need for liberalization, Government of Pakistan is moving to increase the pace of privatization of state entities, and is removing a number of qualitative and quantitative import restrictions. Financial sector is also seeing a reduction in state involvement with the onset of more and more private banks (EIU, 31). Thanks to such efforts, after several years of declining economic growth, owing to political upheavals, Pakistan has registered good growth rate since 2002. GDP grew 5.5 percent in 2003, 7.1 percent in 2004, and 7 percent in 2005. Such sustained growth also resulted in developing the human resource index as well. Development in human resources is also critical factor in judging a country for investment purposes. Pakistan, a country with less than 50% literacy is still in the process of attaining the ratings that its neighbor India has already acquired. In fact lack of such development has prevented Pakistan from joining India in the lucrative software development, BPO and ITES sector (Country-Watch, 101). The human resources index suffers on account of high unemployment rate. A big percentage of Pakistan, especially women is unemployed because. EIU Statistics (40) point out that in 2000, the unemployment rate for young women was about twice that of the rate for young men. In 2005 the overall unemployment rate was 7.7 percent. The labor force grew at an annual average rate of 4.5% during the 1990s, but growth slowed to less than 3% in 2000-05. At end-December 2005 the labor force stood at 47.7m and the number of employed at 44m, leaving 3.7m (7.7% of the labor force) as unemployed. In addition there's substantial underemployment i.e. there are sectors like Agriculture which employ more people than are actually required. The agriculture sector has been the least tax paying one in this part of the subcontinent, due to couple of reasons ranging from lack of accurate data to political compulsions. Pakistan has never been in a comfortable position as far as its fiscal position is concerned. It had a narrow tax base with significant tax evasion and avoidance on the part of its citizens. The traditional arms race with India is also proving to be a big drain on Pakistan. Debt servicing and defense expenditure together absorb two-thirds of the federal government's budget. Unfortunately corruption is one of the main impediments in the development of South Asian region. Pakistan too scores very high in the corruption index. According to Transparency International Corruption Perceptions Index 2006, Pakistan is rated on of the most corrupt countries with a score of 2.2 out of 10. Most of the people interviewed to carry out this research said that Police and Political parties are the most corrupt ones. 27.5% of the people also felt that their government is not doing enough to fight the menace of corruption. Corruption and nepotism under both civilian and military rules have stymied innovation and competition, resulting in an increase in the direct costs to business. Another major issue for Pakistan is the phenomenal rise of Islamic Militants in Pakistan, over the last couple of years. Aid and abetment provided to terrorism by some elements within the Pakistani establishment, political unrest owing to sharp differences within the political class, drug peddling cases in the areas bordering Afghanistan prove to be big security concerns for a new investor. Though the regime of President Parvez Musharraf is trying very hard to present a modern outlook to the world, his efforts are yet to show credible output on the surface. The 9/11 terrorist attack on US has helped in transforming Pakistan's relations with US. Now Pakistan is seen as an important strategic partner in fighting against terrorism. Datamonitor the market research agency (19) indicated that the rate of inflation in Pakistan has shown a steady decline, from more than 10% per year in the mid-1990s, to under 4% in 2003. Consumer price inflation shot up again in 2005 to 9.1% of GDP. In recent days the decline in oil prices is proving to be helpful in controlling the inflation. Rise in inflation is generally attributed to lack of control in spending by the government. The budget deficit has been fairly high in past years owing to high levels of debt service and defense spending. The government deficit is decreasing as some progress has been made on the front of tax collection and the government of Pakistan has also received more outside aid as a token of appreciation for its assistance in fight against terrorism. The deficit for 2003 was 4.1 percent of GDP, compared to a deficit of 4.7 percent in 2002. In 2005, the deficit widened to 4.6 percent of GDP from 3.4 percent of GDP in 2004 due to spending associated with alleviating the affects of the earthquake of Oct. 8, 2005 (Country-Watch, 102). Lack of uniformity in growth further results in widening this gap. A high population without matching resources results in decelerating growth rates. Official estimates put the population of Pakistan at 156.9m in 2006. The family planning programmes appear to have been successful with declining population growth rate from over 3% per year in the early 1980s to just under 2% in 2006. This is a healthy sign for a nation like Pakistan (Pakistan government website). A major portion of Pakistanis continue to live in conditions of extreme poverty. Approximately one third of the population is estimated to live below the poverty line. In fact this number has shot up from one-fifth in the late 1980s. Poor economic performance often leads to an increase in poverty levels. Now the government is addressing the issue of poverty and illiteracy by increasing social expenditure, with support from the IMF, World Bank and others. Poverty leads to poor health services as well. But of late the government is taking steps to improve Pakistan's health services by increasing development spending on healthcare. In 2005-06 the government of Pakistan allocated Rupees 40bn (US$678m) to healthcare. Conservative estimates indicate that there is only one doctor for every 1,310 people in Pakistan. Improvement in healthcare services is also indicated by the increase in the registration of number of doctors. In 2005-06, over 118,160 doctors were registered in Pakistan, almost double the number a decade earlier. Similar increase was noticed in the registration of the number of nurses (EIU, 19). High population coupled with poverty leads to poor education system. About 97 percent of Pakistanis are Muslims. Islam pervades every facet of a Pakistani's life, from birth to death, and people believe their destiny is subject to the will of Allah (CultureGram, 2). Though the South Asian countries is general have the problem of poor education system, but Pakistan's education system is said to be amongst the most deficient and backward in Asia. EIU in its report clarifies that Emphasis on madrassas (Islamic schools) have not helped the education system much, instead it lead to a vertical division amongst the classes with elites preferring the high end schools followed by migration to other countries while the poor one's stuck on to the poorly developed Madrassas (19). But the present regime is doing its bit to improve the schooling system aswell. In Pakistan, the literacy rate in 2005-06 was 53%, with the male literacy rate (at 65%) much higher than that for females (40%). Pakistan now spends 2.1% of GDP on education (though far less than its counterparts in South Asia). Physical infrastructure, including roads, ports, air transport and telecommunications, form the core part of any economic activity and development. Pakistan has taken some notable steps in grooming confidence amongst investors. Some such steps indicate (EIU, 31); a. Pakistan's road network totaled 258,340 km in 2005-06, of which 165,762 km are 'high type' or good roads and 92,576 km of 'low type' or poor roads. b. The telecom field is performing well despite the bottlenecks. This sector has been successful in securing the requisite capital from private investors and commercial banks. The tele-density has also increased to 23.1% in 2005-06 from a mere 2.3% in 1999-2000. c. In recent years, there has been an increase in private vehicle ownership as well. Car production stood at 127,738 units in the first nine months of 2005-06 up from 100,213 units in the first nine months of 2004-05. This growth is a result of the easy availability of finances through banks and other leasing companies. d. Though there has been substantial increase in electricity output, but it still proved to be inadequate for the increase in population. Therefore, Pakistan faces serious energy shortages. Around 60% of the population, primarily in rural areas, still does not have access to electricity. The electricity supply companies suffer huge losses on account of electricity transmission and distribution losses. Major part of this T& D losses results from power theft. President Musharraf has acted swiftly to liberalize the foreign exchange market as well. Pakistan moved from a 'managed float system with dual exchange rates' (an official rate and a market determined inter-bank rate) to a 'unitary-rate managed float' in May 1999 as far as managing the foreign exchange market concerned. Subsequently it moved to a free float in July 2000. Higher interest rates were applied to support the currency, but even then in the immediate aftermath the free float saw a fall in the value of the Pakistani Rupee against the US dollar. More recently the pressure on currency seemed to ease a bit with the currency gaining appreciably against the dollar with strong capital inflows. Workers' remittances, the second largest source of foreign exchange inflow after exports, continue to maintain its rising trend. Workers' remittances totaled $ 3.63 billion during the first ten months (July - April) of the fiscal year 2005-06 ("Economic survey", Government of Pakistan website). Under the prevailing circumstances, Pakistan appears to be a one-man show, with most of the decisions being taken by President General Parvez Musharraf. At times the legal and bureaucratic arms confronted each other, but only to be prevailed by the dictates of General Musharraf. For example the EIU report states (9) that the Supreme Court of Pakistan took the view in 2002 that the Legal Framework Order (LFO) cannot be challenged through the courts, and that only parliament has the power to amend it or get rid of it altogether. General Musharraf's administration carried out 29 amendments to the constitution unilaterally through LFO issued on October 10th 2002, the day of the general election. Having gone through all these factors Pakistan doesn't appear to be a great destination for investment, as of now. But the initiatives undertaken by the present regime certainly promise to bring more good news for the economists and investors in near future. For this pace to sustain the political climate within the country requires being calm and resolute. It'd be therefore advisable for the willing investor to wait a while, observe the macro factors and then put his money. References: 1. Denise Youngblood Coleman, (Editor in Chief), CountryWatch, 'Pakistan: 2007 Country Review', Houston, Texas, 2007 2. Datamonitor, Pakistan: Country Profile-2005, New York, 2005 3. ProQuest, CultureGrams, 2007- World Edition: Islamic Republic of Pakistan, Michigan, 2007 4. Transparency International, The global coalition against corruption, Global Corruption Barometer, 2006, 19 Jan 2007, http://www.transparency.org/policy_research/surveys_indices/global/gcb 5. The information gateway to Pakistan, 2007, 19 Jan 2007, http://www.pak.gov.pk/ 6. Government of Pakistan, The official web gateway, 18 Jan 2007, http://www.pakistan.gov.pk/ Read More