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Submitted by Dr. M Aslam on
An interesting article on Pakistan by Aneel Salman http://www.southasiaanalysis.org/papers36/paper3519.html Pakistan’s Economic Outlook and Priorities in 2009 Pakistan, a fragile economy, has been facing both economic and political crisis which predates the global financial crisis. Inflation, trade deficit, balance of payment, foreign exchange reserves, circular debt, poor performance of the banking sector and Karachi Stock Exchange and political instability have remained the key indicators of Pakistan’s economic crisis. Political and economic stability compliment each other, Pakistan is an interesting case since both are in crisis. Even though it’s democratic, there is still a strong rift between its army and the civil government. The war on terror has become a hanging sword-- the rate of suicide bombing increasing alarmingly. ------------------- There is a general consensus among Pakistani economists; the 2008 financial crisis has not affected Pakistan with a huge blow, the country has seen some worse situations but still survived. The economic conditions were never promising given the corruption, short term policies and political instability. Given the diversity and seriousness of problems Pakistan should work on strict time lines. Short term policies deal with terrorism and debt, medium term policies deals with energy crisis, Foreign Direct Investment (FDI), and water management. Higher education, regional integration and defense budget reduction should be the long-term objectives of Pakistan. ----------------------- Time lines and Priorities Short-term In order to avoid a major economic crisis, Pakistan government should solve two top urgent problems, war on terror and heavy debt burden. Terrorism War on terror cost Pakistan $6 billion economic losses during 2007-08 and $10 billion losses during 2008-09. In July 2009, Shah Mahmood Qureshi, Foreign Minister claimed that the war on terror already cost Pakistan $35 billion. The insurgency resulted in massive capital flight from Pakistan to the Gulf. The whole country is paying a heavy price for its social instability. Without social stability, everything is just paper talk. Government of Pakistan needs to quell the intifada and eliminate terrorism. There is still time and we need to re-assess our plans and strategies. Economic and diplomatic tools need to be utilized along with military force against Talibans. The series of terrorist attacks have left little option for the Government except for an army offensive against the militants in South Waziristan. The operation is having spillover effects-terrorist attacks in the urban hubs of Pakistan. As our soldiers head into this “waster land” the Government needs to monitor the movements of local Islamic groups, increase their secret information networks and take proactive counter terrorism measures. One way to END this war is to block the supply chain of Talibans and reach the source which is sponsoring this terrorism. Without financial resources no terrorist can implement any plan. There need to be strictly control and monitor the financial flows sponsoring these activities. Debt Debt is another chronic ailment for Pakistan. Circular debt problem has arisen and is seriously impacting the operations of Pakistan’s whole energy value chain. Current account deficits, getting new loans to pay old debts, defense expenditure and non developmental expenditures has put the country in economic crisis. An effective method for debt relief is transparency and restructuring of tax system. Pakistan lost $10 billion on tax evasion in 2008. If there is improvement in tax collection, it will greatly offset the national debt and deficit. Medium-term Medium term policies for Pakistan deals with energy, Foreign Direct Investment (FDI), and water security. Energy Crisis For past few years, Pakistan is facing unprecedented energy crisis. There is a shortage of about 3,500 Megawatt (MW) in the electric power. The energy consumption of Pakistan’s per capita is only 15 MMBtu, as compared to the world Average of 68 MMBtu. It is essential for Pakistan to increase its per capita energy availability and consumption to at least 50% of the world level to about 35 MMBtu in the medium term (2012- 2020). To meet the growing demand of energy and the target of 9700 MW generation by the year 2030, of the Government should speed up work on alternative sources of energy which are (i) Mega Wind Power Projects, (ii) Biodiesel, (iii) Bio Gas Projects, and (iv) Small Hydro projects. The Government needs to focus on green energy initiatives and energy saving technologies. It should hold itself accountable in making payments to IPPs, and encourage solar energy panels for houses and businesses. Foreign Direct Investment (FDI) Foreign direct investment in Pakistan showed more resilience and stood at $3205.4 million during the first ten months of the 2008 fiscal year as compared to $3719.1 million in the same period in 2007, therefore showing a decline of 13.8 percent. To address this issue, mid-term policy should focus on the security situation and offer competitive environment to investors. Pakistan can become a lucrative parking place for foreign companies given its growth potential. Tax incentives and reduction in tariffs should be offered to foreign companies as this will not only increase the industrial base of the country, but also increase the employment opportunities and develop human capital. Water Security Water management is a critical issue for Pakistan’s development challenges. Food security, energy production, economic growth, human health- water is the nexus. Pakistan is under water stress, since 1950s, water availability has dropped from 5,000 m³ to 1,500 m³ per capita and is expected to become “water scarce” (below 1,000 m³ per capita) by year 2035. Water supply and sanitation projects are no more taken as priority even though there is more awareness. Major international institutions like OECD, World Bank etc have reduced their development assistance in this area. Given the complex problems like inter and intra water conflicts among provinces/ India, reduction in water table and climate change, Government of Pakistan need to think of sustainable solutions for water management. Solutions need to be developed keeping in mind the ecological, social and economic costs. Adopting both hard and soft path solution is the way to go. Hard path solution- A comprehensive strategy is required to come out of this crisis. Investments in the sea water desalinization, state-of-the-art water-saving / purify technology are required. Kala Bagh dam needs to be built to solve the energy crisis and water-conserving infrastructure available for agriculture. Soft Path solution is a well planned, centralized managed system with small decentralized facilities. It’s a need based approach, focused on quality rather than quantity. It improves the productivity of water by a built in conservation system and using water as per requirement. Better water resources management is the strategic "threat minimiser" in adapting to climate change, a global threat. Long-term Higher education, regional integration and defense budget reduction should be the long-term objectives of Pakistan. Higher Education Pakistan has tremendous potential in the field of higher education. Intelligent and strategic investments could translate into a thriving economy, mainly driven by the service sector. Government of Pakistan (GoP) initiated a plan in 2002 to improve the higher education with the aim of transforming the economy into a knowledge-based economy. Since then there has been a twenty four percent increase in the higher education budget and sixty percent increase in the science and technology budget. This has begun to show some positive changes, including an annual growth of 60% in the software industry. Pakistan is a neighboring country of China and India, both top outsourcing destinations and thus advantages due to auspicious geographic location could be leveraged. Nevertheless the GoP has to show more commitment in these sectors. Merely making fiscal investments and lack of a clear policy and political support could derail the whole process. Regional Integration/Defense Budget Reduction The total spending on education in 2009-2010 budget is 0.8% whereas defense spending consumes 12%. Uneven distribution of budget in development and non development sectors does not guarantee long term economic stability. The economic priorities need to be reassessed. Regional integration is a secret recipe for the reduction in defense budget. Trading blocks needs to be developed and the maxim “Trade not Aid” should be the new motto. Global work force is developed with this policy which assures economic sustainability. Given the current situation we do not expect miracles but strong diplomatic relations with India and China guarantee national security, equitable distribution of budget spending on other sectors and positive TOT and BOP.