Macroeconomics Report

Economic situation of Pakistan:

Pakistan is facing one of its worst economic conditions. From the advent of Pakistan, our
economy has attained stability for very short spans. The first stability which we have
witnessed was during the 60’s era. That was the time when Pakistan’s top Economist has
dveloped Five years Economic Plans. That was very successful economic structure. Even
other counties has acknowledge that structure. South Korea has not only appreciated that but
also has implemented that in their country.

But after that unfortunately Pakistan never has seen such prospect in the Economy. Nobody
followed that plan and then our Economy has deteriorated constantly.

Here we will try to analyze economy of Pakistan. We will try to historically evaluate different
Economic Indicators of Pakistani Economics and then try to jaw down the problems of it.
From there we will move toward providing solutions of those problems.

The Indicator which we have chosen is:

• AGRICULTURE

• MANUFACTURING

• COMODITY PRODUCING SECTOR

• SERVICE SECTOR

• BALANCE OF TRADE

• INFLATION

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Agriculture:

The Agriculture sector continues to play a central role in Pakistan’s economy. It is the second
largest sector, accounting for over 21 percent of GDP, and remains by far the largest
employer, absorbing 45 percent of the country’s total labour force. Nearly 62 percent of the
country’s population resides in rural areas, and is directly or indirectly linked with agriculture
for their livelihood. The Agriculture sector’s strong linkages with the rest of the economy are
not fully captured in the statistics. While on the one hand, the sector is a primary supplier of
raw materials to downstream industry, contributing substantially to Pakistan’s exports, on the
other, it is a large market for industrial products such as fertilizer, pesticides, tractors and
agricultural implements.

(http://www.finance.gov.pk/survey/chapter_10/02_Agriculture.pdf)

Major Crops of Pakistan:

Crop: Era’s Productions

Wheat 1980’s 12.5 million Tons

1990’s 17.0 million Tons

2000 20.8 million Tons

2010 23.9 million Tons

Rice 1980’s 3.3 million Tons

1990’s 3.9 million Tons

2000 5.2 million Tons

2010 6.9 million Tons

Sugarcane 1980’s 33.1 million Tons

1990’s 44.6 million Tons

2000 50.5 million Tons

2010 49.4 million Tons

Cotton 1980’s 6.3 million Bales

1990’s 9.7 million Bales

2000 11.6 million Bales

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2010 12.7 million Bales

Now if we analyze the previous data regarding Agriculture of Pakistan then it will be evident
that Agriculture is one of the major sources of GDP for our Economy. Approximately 22-
24% of our GDP is covered by Agriculture. So this shows the importance of it in our
Economy.

As per data:

Historical growth performance Years Percent

Agriculture Growth

1960’s 5.1%

1970’s 2.4%

1980’s 5.4%

1990’s 4.4%

2000’s 3.2%

2009-10 -3.7%

This data clearly shows that our Agriculture Sector deteriorated constantly from the advent of
Pakistan. We all know that Pakistan economy is agro based economy and majority of our
population lives in rural areas where the only economic activity is farming and cultivation.
Similarly more than 60% of our labour force lives in these areas. Considering this if the
agricultural sector do not grow on constant bases then this inevitably leads to worsen the
economic activity of our country as well as living standard of our major labour force.

This further shows that even knowing the fact that agriculture is our major source for
generating employment , higher revenue, increasing agricultural export and attaining a
leading position in agricultural sector of the world, our economist never focused on the
betterment and advancement of this sector and this is evident from the data as well. What
ought to be the case is that we should introduce a technological evolution in this sector. We
never focused on increasing per hector productivity on scientific basis. Our farmers are still
following traditional practices in this sector.

Secondly our economist and government seriously never tried to provide farmers better
technology by which not only per hector productivity would increase but also the quality of
our agricultural product enhanced.

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Keeping this in view our government and our economist should focus on the development of
this sector. Research should be encouraged for this sector. Bio-Technology should be
introduced in this field. All other agricultural countries are now moving toward Bio-
Technology and Bio-Genetics. Secondly uncultivated land should be changed into cultivated
lands.

Enhancement of this sector would mean that the extra burden which is on Manufacturing
Sector, will be shorten up. This will also lessen up the unemployment rate which is now
reaching to 5.5% per annum.

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Manufacturing Sector:

Manufacturing sector as per Economic Survey of Pakistan is the third largest contributor in
GPD. Around 18% of our GDP comes from this sector and around 13% of whole labor forces
is associated with this sector. This means that this sector has a vital importance in the
economy of Pakistan.

Our Manufacturing Sector is composed of two major components. Large Scale

Manufacturing and the second is Small Scale Manufacturing.

The main contributors to LSM (Large Scale Manufacturing) growth were: Automobiles,
Tires & Tubes, Leather Products, Electronics, Fertilizers, Non‐Metallic Minerals Products,
Pharmaceuticals, and Engineering Products While Cottage industry and small industry make
Small Scale Manufacturing.

As per data:

Historical growth performance Years Percent

Manufacturing Growth

1960’s 9.9%

1970’s 5.5%

1980’s 8.2%

1990’s 4.8%

2000’s 7.0%

2001 9.3%

2002 4.5%

2003 6.9%

2004 14.0%

2005 15.5%

2006 8.7%

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2007 8.3%

2008 4.8%

2009 -3.7%

2010 5.2%

Now if we analyze the data then it would appears from that initially Manufacturing sector
was performing very well but then it start declining and in 1990’s reached at its lowest to
4.8%. but then afterward 2000 the manufacturing sector again started flourishing and reached
historical height of 15.5%.

The basis reason for this boom in manufacturing sector was the increase in overall Investment
particularly in Fixed Investment.

As the investment increases, it impact directly appears on manufacturing sector. As

manufacturing sector flourishes with it GDP also increases of Pakistan.

Large Scale Manufacturing:

Large scale manufacturing was on declining trend for past five years. From 2004 till the end
of 2008. The part of LSM in manufacturing sector reached its bottom in 2008 when the LSM
growth declined to -8.2% per annum.

But after 2008, in 2009 and this fiscal year again large scale manufacturing started increasing.
Now it on 4.4%. This decline from these figures as well. Steel products (‐26.9%), petroleum
products (‐5.9%), followed by sugar (‐3.5%), paper & paper board (‐2.9%), textiles (‐0.5%)
and chemicals (‐0.2%).

The reasons for this decline were several. The steel production in Pakistan declines because
of the corruption scandals of Pakistan Steel Mills. This was backed by the overall increase in
the price of Iron Ore. As far as petroleum is concerned then petroleum industry was facing
Circular debt.

All these affects are due to bad or weak economic policy. If the economic policy is on the
right track then one won’t be observing this decline in the sector.

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Unemployment:

The current situation of our country regarding the employment is that for year 2010 our
population become 166.5 million so within the country here we have good human resource to
contribute in our GDP through our labour force. The current country labour force is 55.8
million people in which 52.7 millions of people are rendering their services and contributing
in our economy. Still 30 million of people within the labour employment pool are
unemployed. So 30 million people are very much important human resource that could
contribute in our country development. Through the data we can say that maximum
unemployed rate is happen in year 2003-2004 which was 8.3%and then it start to fall to 5.2%
till year 2008-2009 while little increase in 2009-2010 with 5.5%.

The labour force level is related with some factor that would be effect the country
employment and unemployment level. If we look at the total investment according to the rate
of change of GDP. The employment level of the country is very much effected by the total
investment to rate of change of GDP. We analyzed that employment level within the country
is proportionate to the total investment as % of GDP if the total investment increases the
employment decreases while the unemployment decreases simultaneously. So change in % of
GDP regarding total investment would effect the Pakistani human resource in employment
pool .

Few reasons of unemployment in Pakistan

There are many reason s of unemployment in our country. But few of them are very much
considerably such as, Nonstop increasing population in Pakistan ,continuous bad condition of
law and order situation has also play its part to stop the economy growth, practically Karachi
is the biggest revenue generating city in our country but now investor are not interested to
invest their funding in Pakistan. As we see the biggest example of lacking law and order
situation in Pakistan in last Moharram-ul-haram that few people burn all of our biggest whole
sale market in Karachi. Our educational system is also responsible for high level of
unemployment, government has not better planning and even no suitable investment in
educational area. Lack of infrastructure facilities, especially in the field of energy,
telecommunication and transportation also prevent the industrialist from setting up new
industries. Large scale smuggling which has flooded the market with cheaper goods poses a
serious threat to the development of local industry. Tight bureaucratic control on the
economy, inadequate credit facilities and complex tax system are also some important factors
that are creating hurdles in the way of private sector investment in industrial projects. In
Pakistan, tax system is not satisfactory. Ratio of direct taxes is more than indirect taxes. Tax
evasion is common. Due to less income from the taxes, government cannot start
developmental projects. If there is no investment, then from where public would find jobs.
On the other side if government takes step to increase indirect taxes, it would also affect
investment and ultimately employment level. Fiscal and monetary policies are also
responsible for unemployment. In view of fiscal policy, Pakistan has less funds to invest in
job providing projects. Every annual budget shows deficit. Through the monetary policy if
the government increases the rate of interest, it discourages the investors from getting loans.

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Since 1947, Pakistani rulers got loans from IMF, World Bank and many other sources. Such
loans were not utilized honestly. Current external debt of Pakistan is more than 50 billion
dollar. Government has to allocate a big amount for the repayment of loans with interest. So
due to less resources for developmental projects there is unemployment.

Ref: http://ezinearticles.com/?Pakistan-Unemployment---Causes-and-Solutions&id=1246798

http://www.opfblog.com/8449/reasons-for-growing-unemployment-in-pakistan/

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Fiscal Policy

Fiscal policy is a tool which is used by national governments to influence the direction of the
economy, generally with the goal of promoting economic health and growth. Fiscal policies
can be approached in a variety of ways, and they tend to vary as heads of state change,
because different people have their own approaches to economic issues. Nations must strike a
balance with their fiscal policies, so that they benefit the economy without being perceived as
too interfering. The underlying component of fiscal policy is the government's budget, which
determines how much it will spend on various goods and services. The amount of the budget
is usually tied to tax revenues and other sources of income for the government. In a nation
with a neutral fiscal policy, the budget and the tax revenues are equal, while expansionary
policies create a budget deficit, because the government is spending more than it takes in.
Contractionary or tight policies, by contrast, create a surplus, as tax revenues exceed budget
expenditures.

During the situation, Pakistan is not using its overall resources efficiently that might be the
reason the concern people are not able to develop a better fiscal policy and monetary policy
as well. Pakistan is a country where people are not properly follows the law and order
situation and our politicians are also taking advantage of their authority. Pakistan is a country
where feudalism still going on. The industrialist who have better relation with tax collection
department, they cut off heavy amount of the tax on behave of their relationship.
Unfortunately since the Pakistan became an independent state till today, there’s no any
decade that Pakistan might not faced the deficit. Its basically a government responsibility that
how to design the fiscal policy to cushion the country economy. As we see the deficit
condition since last 5 or 6 decades this also create an inflationary impact in our economy due
to some reason. When government expenditures are exceed and government can not cover tax
revenue or nontax revenue then, obviously government come up with few different solutions
such as increases in tax that directly impact as inflation, and government start borrowing
externally or internally from commercial banks, and or some time print new currency that’s
the worst part for inflation point of view for any country. The country average revenue since
last 5 decades is around 11.5%, and if we look at the average revenue for last 10 year since
2000 to 2010 it’s around 10.5%. The thing is for noticed that if we look at our country
situation since last 10 year, this is obvious that our country faces alot of trouble regarding
terrorist activities but still in these 10 years a lot of international investment come and reside
in country pool. Since last 10 year Pakistan has got more than billions of investment to
developed new sector or new industries then how we can collect the tax revenue in these 10
year less than 5 decades.

If we look at the private investment in the total investment the private investment shot up to
high investing in the region from 2001 till 2008. This may help us to analyze that where is
our government lack in collecting taxes, if we look tax collection revenue from year 2000 till
2010, so this data does not reflect that in this time period the private sector invest this much a
lot of investment.

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According to our opinion our country faces continuously deficit due to following reasons
which are shown below.

1. Increase in terrorist activities in country.

2. Lack of saving habits.
3. Increase in population.
4. Lack of fiscal discipline.
5. Political instability.
6. Low output of agricultural sector.
7. Tax evasion and corruption.
8. Increase in non-productive expenditure.

Fiscal policy as % of GDP(MP)

Years Total Tax Non- Total Current Development Overall

Revenue Revenue Tax Expenditur Expenditure Expenditure Deficit
Revenue e

1960 13.1 - - 11.6 - - 2.1

1970 16.8 - - 21.5 - - 5.3

1980 17.3 13.8 3.5 24.9 17.6 7.3 7.1

1990 17.1 13.4 3.7 24.1 19.4 4.7 6.9

2000 14.2 10.6 3.7 18.7 15.4 3.5 4.5

1999- 13.5 10.7 2.8 18.8 16.5 2.5 5.4

2000

2000- 13.3 10.6 2.7 17.4 15.5 2.1 4.3

2001

2001- 14.2 10.9 3.3 18.3 15.9 2.8 4.3

2002

2002- 14.9 11.5 3.4 18.5 16.3 2.2 3.7

2003

2003- 14.3 11.0 3.3 16.7 13.5 3.1 2.4

2004

2004- 13.8 10.1 3.7 17.2 13.3 3.9 3.3

2005

2005- 14.2 10.6 3.6 18.5 13.6 4.8 4.3

2006

2006- 14.9 10.2 4.7 19.1 14.9 4.9 4.3

2007

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2007- 14.6 10.6 4.4 22.2 18.1 4.4 7.6

2008

2008- 14.5 9.5 5.1 19.9 16.0 3.8 5.2

2009

2009- 14.7 10.9 4.0 19.6 15.4 4.1 4.9

2010

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Import and Export

There is no country in the world that produce all the commodities it needed. The balance of
trade is the relationship between a nation’s imports and exports of goods and services. The
country must need to import those items from other countries and also export those goods
that are abundant in the country.

Pakistan’s merchandise trade deficit improved by 13.9 percent in July‐April 2008‐09 from $
14,218 million to $ 12,238 million during July‐April 2009‐10. Unlike last year when the
decline in trade deficit was mainly contributed by massive fall in import expenditures due to
decline in international prices, this year’s improvement in trade deficit remained broad based,
with both exports and imports contributing to the decline.
Exports recorded growth of 8.0 percent during July‐April 2009‐10 on the back of recovery in
export markets of the country, exchange rate depreciation, and improved production of crops.
Moreover, during July‐April 2009‐10, export receipts of the country surpassed the full year
official target of 6.0 percent exports growth for 2009‐10. Exchange rate depreciation, reduced
imports prices and slower domestic demand remained the major factors behind the decline in
imports during the period under review. The import bill of the country decreased by 2.8
percent during July‐April 2009‐10 over the comparable period of last year.

(Ministry Of Finance , Governement Of Pakistan)

Pakistan also needs to import some of the goods in order to meet its requirements. Pakistan
mostly import petroleum product to meets it energy requirements. Apart from petroleum
products, Pakistan also imports textile machinery, trucks, automobiles, computers, electronics
items, pharmaceutical products, defense equipments etc. Pakistan total imports accounting
from $28.12 billion. The sharp increase in the import is in the import of sugar from $27.7
million to $191.2 million in 2009-2010.

The export of Pakistan consists of rice, fruits, cement, titles, marble, textile, clothing, leather
goods, sports goods specially footballs, surgical instruments, carpets, rugs etc. Pakistan total
exports amounted $ 15.9 billion. Pakistan exports increase from $14.7 billion to $ 15.9 billion
which is a 8% growth as compared to -3.0% last year. The trade deficit improved from $14.2
billion to $12.2 billion which is 13.9% improvement.

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For decade, Pakistan imports are higher than export and the gap is getting wider year by year.
From 1950 the country exports are much lower than imports and had a deficit of balance of
trade from 1973 to 2010. This will resultantly have negative current account to remain
dependent on foreign donors and creditors t of its shortfalls of balance of payment. The debt
burden and social development deterrioted to such an extent that today our foreign debt are
standing at 44.5 billion and would reach to a new level of $52 billion when further loan is
received from IMF.

Through the high import are due to rising oil prices in the international market and high food
import bills are chief reason for the current rise in account deficit but there are some other
reason for the rising current trade deficit.

The first reason for the trade deficit is the worsening energy crisis. The country is facing
energy shortages and long spell of load shedding. Pakistan has already weak production base
and the situation is more worsen by energy crisis. Around 35% of textile units have been
closes because of shortage of electricity while a sizable number of industries are likely to be
closed. The export target set for $20 billion seems difficult to achieve in the ongoing fiscal
year 2009-10 as the total exports of the country have managed to reach $12.4 billion in first
eight months of current fiscal year.

The second reason for widening trade deficit is the fast growing imports and exports are
moving up slowly. Since the local producer are not able to produce the enough goods and
service to satisfy the demand of local population. Further lowering of tariff as per IMF and
WTO requirement has actually led to an increase in imports and an infiltration of consumer
goods produced in the developed world. The other reason for the increasing trade deficit is

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the low growth of agriculture in the country. Pakistan is the 5th largest sugarcane producing
country in the world and the country is importing 1.25 million metric ton of sugar.

The Pakistan is also self sufficient in producing gas and major chuck of the gas for
consumption came from SUI, Baluchistan. But due to the policy of the last government,
where lots of CNG Pump are introduced without the proper planning increase the gas
shortage in the country. The country is facing a huge shortage of gas and in the Punjab and
Khyber Pakhtunkhuwa region there is a shortage for gas in the textile industry. Textile is
main source of revenue for the country and give around $7.9 Billion in exports.

Inflation

After declining for much of calendar 2009, inflationary pressure has intensified of recent on
account of a number of adverse developments. From a low of 8.9 percent in October 2009,
year‐on‐year Consumer Price Index (CPI) inflation has accelerated to 13.3 percent as of April
2010 (Figure 6.1). Food inflation has remained elevated in the past few months, stabilizing at
around 14.5 percent (from 7.5 percent in October 2009), while the rate of change in prices of
Non‐Food items has been recorded at 12.2 percent for April (from 10 percent in October).
Core inflation, defined as inflation in the non‐food, non‐energy (NFNE) component of the
CPI basket, has reversed its path of moderate decline, and stood at 10.6 percent in April. On a
period‐average basis, overall inflation was recorded at 11.5% for July to April. For the
corresponding period in 2008‐09, average inflation stood at 22.3%. The refueling of
inflationary pressure is evident in all major price indices, with the Wholesale Price Index
(WPI) inflation rising steeply, from 0.3% in August 2009 to 22% in April 2010. Similarly,

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the Sensitive Price Index (SPI) has recorded a 16.7% year‐on‐year increase for April, versus
6.7% in October 2009 (Figure 6.2).

(Ministry of Finance, Government of Pakistan)

The major reason for the current inflation in Pakistan is due to the increase in the prices of
food and energy in the international market. The prices of major food items and oil have
increased sharply in last few years. The oil has reach around $150 barrel in last year and the
effect of it is increased inflation. The oil is major tool of inflation in Pakistan. Whenever the
price of petroleum product increase, there is a sharp increase in price of commodities
specially food item. The another reason for the increase in inflation is the hoarding by the
mill owners and big trader specially in the case of sugar. The Pakistan is the 5th largest sugar
producer and its is importing sugar from other countries to meet its local demand. Same is the
case for wheat and milk.

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Some of the factors that have contributed to the spike in inflationary pressure over the past
two years include:
• The weakening of the Rupee over the past two years
• Increase in the domestic procurement price for wheat
• Residual Aggregate Demand pressures in the economy emanating from substantial
transfers to the rural economy on account of an unprecedented government‐run
commodity procurement program, and a healthy increase in worker remittances

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• The “washing out” of a favourable base effect is now exerting a negative influence on
the inflation comparison from year‐ago levels, and is likely to intensify over the next
few months

The current inflation is not is a demand pull inflation, it’s a cost pull inflation because in the
case of the demand pull inflation, when the purchasing power of the people of the country
increase they will start demanding the product more and moves towards luxuries good. But in
the case of Pakistan the current situation is not good in terms of purchasing power, the
people’s purchasing power decreases a lot and the basic reason for the increase in the prices
are due to the increase in prices of commodities in the international market. Like in the case
of petroleum, the international oil price are increasing and this will also effecting prices of
petroleum in Pakistan.

Another reason for cost pull inflation is the increase in price of energy sector. Due to the
shortfall and debt faced by the power generation companies, the government is also
increasing prices of electricity.

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