Major challenges confronting the economy
Rising corruption, injustice, and unauthorized use of national wealth and authority
are the basic reasons behind the deteriorating economic condition, increasing
poverty, unemployment and other social problems in the country

By Osman Ghani

In the past few months, the economy has witnessed some positive trends such as the record production of cotton estimated at 13.5 million bales, reduction in current balance of payment account to $1.76 billion during July-Dec FY10, as compared to $7.85 billion in the same period last year, a slowly resurging stock market, positive growth of large scale manufacturing to 0.7 per cent in the first four months of FY10, after recording a fall in growth for 13 continuous months in a row, till June 2009 and SBP’s forecast of 3.3 per cent GDP growth. However, Pakistan’s economy is still confronted with some critical issues that need to be resolved immediately. On top of this are some natural factors such as the persistently long drought and water shortage, which are creating numerous problems for the agriculture sector. As per some latest estimates almost 36 million acres of fertile land has turned barren. Eight of the headworks have completely dried out as 80 per cent of agricultural land has no water. In Tarbella, only 10,000 cusec and in Mangla only 5,000 cusec of water is flowing at present. This is the lowest availability of water in Pakistan’s history. If this trend continues then 80 per cent of Pakistan’s farmland will not be in a position to grow crops in the coming seasons.

The water flow in Chenab has declined by 40 per cent to 6,000 cusecs presently from a 10 year average of about 10,000 cusecs, mainly because of construction by India of over a dozen hydropower projects upstream. Lower rainfall this year mainly because of the so called ‘El Nino’ effect has significantly contributed to reduced water flows, apart from reportedly unauthorised water use and construction of hydropower projects on the Indian side. India was irrigating about 800,000 acres in the Chenab area against 345,000 acres permissible under the 1960 Indus Water Treaty. India constructed more than a dozen hydropower projects and dams over Chenab alone, to generate 8,696 MW of electricity. This is going to cause a severe blow to the socio-economic condition of Pakistan. The SBP has also warned that the current fiscal year would witness a major decline in the growth of the agriculture sector as an unexpected drought condition would persist till the end of January. The farmers have been very disappointed with the water shortage and crop prices that caused a drop in rice and sugarcane production.

If rain is further delayed then the wheat output may fall by 15-20 per cent this year. Pakistan can produce 19-20 million tonnes of wheat this year, as compared to 24 million tonnes produced last year. Thus a shortfall of 4-5 million tonnes will lead to lack of wheat flour, putting the consumers at the mercy of unscrupulous profiteers and hoarders. The severe water shortage will also affect kharif and rabi crops in future.

In addition to this, another problem facing the economy is the rapidly growing internal and external debts.

During the last one and a half years, the overall national debt level has increased at an alarming rate. For example, domestic debts have increased from Rs3,266 billion in June 2008 to Rs4,293 billion in December 2009,or increased by 31.4 per cent. Similarly external debts have increased by 21 per cent in the same period. It is expected that Pakistan will avail a loan of $12 billion from the IMF and after that the external outstanding debt may surpass $75 billion by 2015. During the next four years, Pakistan will have to make huge repayments of external and domestic debts, consuming almost 60 per cent of its tax revenues. If the current trend of revenue generation continues, Pakistan’s entire revenue resources would be utilised by two heads of expenditure only, namely debt repayment and defence budget in the near future. On the other hand, due to persistent drought and closure of so many industrial units, as a result of

unsustainable cost of production, inefficiency, and plundering in some major public corporations, the revenue generation capacity in the economy will be decelerated. A major portion of Pakistan’s GDP in future will have to be used to repay the huge debts. Therefore, expenditure on education, health, sanitation and various other vital development programs will suffer because of that.

Roughly, half of government expenditures may be dedicated to fulfilling debt repayment obligations in the near future. In order to finance these payments, additional grants and loans would be required each year approximately totaling

25 per cent of revenues. This would prevent Pakistan from devoting significant resources to economic development or social improvement. As per latest SBP estimates Pakistan’s net domestic debt has increased by more than Rs.1027 billion during the last one and half years to Rs4293 billion. The increase in domestic debt was mostly due to a sharp rise of floating debts (Rs2184 billion).

Deeply linked to the massive debt the largest portion of Pakistan’s population now lives in poverty. With an average of about $2,600 dollars of GDP per person (adjusted for purchasing power parity), the average citizen is forced to live with very limited resources. This is reflected in the fact that about 34 per cent of the population lives below the poverty line, despite a mere 7 per cent unemployment. Pakistan’s lack of fiscal resources is yet another barrier against domestic and foreign investment. Pakistan lacks the resources to bring about positive economic development. Without positive economic outlook and further improvement in the law and order situation, Pakistan is unable to attract more local and foreign investors. But perhaps the greatest loss comes in the area of proper education for its large number of young population. Whether or not this is a direct result of Pakistan’s economic problems, it is undoubtedly connected. With so many resources directed towards the aforementioned debt repayment, educational improvements are given low priority. The previous governments in Pakistan did not attach due priority to proper education of its young generation and we are just harvesting the fruits right now. This is evident from Pakistan’s overall literacy rate of around 50 per cent including about 25 per cent for women. Low literacy rates are often observed with high population growth. A poorly educated population is unlikely to participate in family welfare activities in an effective manner. Secondly, a poorly educated populace makes Pakistan a poor choice for the foreign investors that it so desperately needs. Furthermore, the extremely low literacy rate among Pakistani women at 25 per cent lends itself to a society where most of them never enter the labourforce, creating fewer incentives for them to contribute towards economic growth. This is best illustrated by the fact that only about 27 per cent of Pakistan’s 170 million people make up the entire labourforce.

Rising corruption, injustice, and unauthorised use of national wealth and authority are the basic reasons behind the deteriorating economic condition, increasing poverty, unemployment and other social evils in the country. The hardship of the common man is increasing day by day. Corruption and nepotism are hindering prosperity and rapid development of the country. If Pakistan wants to minimize the sufferings of the common man, and maximise welfare of the 170 million people then it is necessary to address all these issues. Important sectors’ efficiency and productivity should be improved on a first priority basis.

Pakistan’s internal and external outstanding debts

Outstanding Debts  June 2008   June 2009          December 2009

(A)          Domestic debt (Rs in billion) 3266          3853          4293

          - Permanent debt    608          678          741

          - Floating debt          1637          1904          2184

          - Unfunded debt    1020          1271          1368

(B)      Total external debt ($ million)          44467          50759          53794*

*  Up to September, 2009

Source: SBP