Research Paper on "Pakistan Economic System"

Research Paper 16 pages (4110 words) Sources: 3

[EXCERPT] . . . .

Pakistan Economy

Currently there is a great deal of economic instability throughout the world. Emerging markets are particularly susceptible to experiencing economic instability when global economies begin to falter. Emerging market economies are defined as "an economy with low to middle per capita income. Such countries constitute approximately 80% of the global population, and represent about 20% of the world's economies (Heakal). " There are various countries that are defined in this way and they vary in size (Heakal). For the most part emerging economies are viewed as those that have undergone reform and are beginning to emerge onto the international arena. For the most part economies that are growing rapidly are considered to be emerging markets (Heakal). Additionally emerging market economies are usually transitional in nature. That is, such economies are transitioning to an open market economy from a closed economy. Emerging market economies also undergo several types of reform including economic reform programs, capital market transparency, and reforms related to exchange rates. In most cases the emerging market is also receiving some assistance from a non-governmental organization such as the International Monetary Fund (IMF). Pakistan is one such Emerging market that has experienced many ups and downs while attempting to emerge into a competitor in the global market. Emerging markets are important to globalization because they provide further economic stability which allows for influxes on investment and improves the way of life for people living in the region.

The purpose of this discussion is to examine the economic system of Afghanistan. More specifically the research will investigate the threats, risks, opportunities that the Pakistani economy presents to the industrialized world from a financial perspective and in particular the United States.

Country Analysis

The region of the world now known as Pakistan dates back at least 5000 years to the Indus valley civilization. Pakistan is located in Southeast Asia and the country is located between Iran and Afghanistan on the west, China on the North and India to the East ("Pakistan"). Pakistan has the sixth largest population in the world with an estimated 177,276,594 people living in the country ("Pakistan"). The median age is 21.2("Pakistan"). There are several ethnic groups represented in Pakistan, the majority being at Punjabi 44.68%. In addition the Pashtun make up 15.42% of the population, Sindhi compose 14.1%, the Sariaki 8.38%, the Muhajirs 7.57%, the Balochi 3.57%, and all other ethnic groups represent 6.28% of the population ("Pakistan").

Ninety-five percent of the Pakistani population are Muslims with Sunni Muslims composing the majority at 75%. Shia make up the additional 20% of Muslims in the country and the remaining 5% is Christian ("Pakistan"). Punjabi and Sindhi are the most utilized languages in the country. As it relates specifically to the economy the United States Central Intelligence Agency explains that Pakistan is an ":underdeveloped country, has suffered from decades of internal political disputes and low levels of foreign investment. Between 2001-07, however, poverty levels decreased by 10%, as Islamabad steadily raised development spending. Between 2004-07, GDP growth in the 5-8% range was spurred by gains in the industrial and service sectors - despite severe electricity shortfalls - but growth slowed in 2008-09 and unemployment rose. Inflation remains the top concern among the public, jumping from 7.7% in 2007 to 20.3% in 2008, and 14.2% in 2009. In addition, the Pakistani rupee has depreciated since 2007 as a result of political and economic instability ("Pakistan")."

Geopolitical relevance

The location of Pakistan means that the country has significant geopolitical relevance. This is particularly true as it pertains to the countries of India and Afghanistan and the international interests that are present in both countries. The following paragraphs will discuss in more detail the geopolitical significance of Pakistan and the ways in which it effects Pakistan as an emerging market.

Conflict between India and Pakistan (Impact on Pakistan's Economy)

The conflict between India and Pakistan is well documented and has resulted in real economic impacts for both countries. At the heart of the conflict is the area known as Kashmir.

This conflict has left a lasting impact on both economies. Although India also suffers from a great deal of poverty, the Indian economy has also been able to grow and develop at a rapid pace over the last decade. One of the reasons for the differences between the Pakistani economy and the Indian economy has been the presence of infrastructure particularly as it pertains to communications systems and technology. Two of the areas that has been a source of great economic growth for India is technology and communications related industries. Some experts have also argued that the Hindu-Muslim conflict between the two nations has greatly hindered the ability of the two countries to work together in economic endeavors (Ganguly).

Proximity to Afghanistan

The location of Pakistan in relation to Afghanistan also means that it can and has acted as an ally to the United States and other countries. Following the terrorists attacks of September 11,2001 Pakistan became vitally important to the war on terror and remains so. In return for assisting the United States and her allies the United States vowed to assist Pakistan in the area of economic development.

Internal budget issues/Debt Structure

Public Debt

A major aspect of any economy is public debt which is composed of domestic debt and external debt. For fiscal year 2009-2010 public debt increased by Rs.1 trillion ($12 billion) in Pakistan. This increase in public debt was caused by the depreciation of the rupee against the dollar. In addition to the depreciation of the rupee the increase in public debt is attributed to payments for loans from the International Monetary Fund, and the World Bank. The article also explains that "The public debt in the first nine months (July-March) period grew by Rs.960 billion in the current fiscal. After including the IMF's tranche of $1.2 billion in May 2010, the public debt increased by over Rs 1,000 billion during the fiscal year ("Pakistan's public debt jumped $12 bn in 2009-10")."

In Pakistan domestic debt is inclusive of permanent debt, floating debt, and unfunded debt. Permanent debt refers to market loans, SLIC bonds, FIBs and Prize bonds ("Pakistans Internal Debt"). Floating debt refers to market treasury bills ("Pakistans Internal Debt"). Unfunded debt refers to Pakistan's National Savings Schemes ("Pakistans Internal Debt"). For the aforementioned fiscal year, "The domestic debt stood at Rs.4,325 billion and foreign loans in rupee terms were at Rs.4,597 billion. The domestic debt in the first nine months grew by Rs 620 billion, while the external loans in rupee term increased by Rs.340 billion in 2009-10, totalling up to Rs.960 billion ("Pakistan's public debt jumped $12 bn in 2009-10")."

External Debt is inclusive of public and publicly guaranteed debt, private non-guaranteed credits, central bank deposits, and loans due to the IMF ("Pakistans Internal Debt"). Although there were serious increases in the amount of public debt external loans decreased by $361 million ("Pakistan's public debt jumped $12 bn in 2009-10").

Like many other countries around the world Pakistan is also dealing with a budget deficit. According to Reuters the nation's budget deficit is likely to be as high as 5.5% of gross domestic product (GDP) for the fiscal year. This means that the budget deficit will go beyond the target of 5.1% ("Budget deficit to overshoot target"). This target was made by Pakistan with the agreement of the International Monetary Fund. The article explains that "There is now a fear that the budget deficit for the current fiscal year may go beyond 5.2% and may touch 5.5% ("Budget deficit to overshoot target")." The and increase in the projected deficit was due to spending related to security shortfalls in the amount of resources that were supposed to be provided by Pakistan's allies. This combined with decreases in the collection of revenue are responsible for the deficit.

Monetary Policy/Government Interference/Legal Structure

Monetary Policy

The State Bank of Pakistan has a released a recent report (May, 2010) on the current monetary policy in the country. According to this report the government will have to borrow heavily to have the budgetary support required to combat the unsustainable equation of revenues and expenditures in addition to tentative external borrowings ("Monetary Policy Decision"). In addition Pakistan's Federal Bureau of Revenue's (FBR) provisional tax collection figures were Rs1026 billion for the first ten months of the fiscal year ("Monetary Policy Decision"). This figure reflects the idea that in order to fulfill the annual target of Rs1380 billion, there must be a collection of Rs354 during the next two months. However such a collection would be difficult because there has only been an average of Rs102 billion for each of the ten months. Additionally even if Pakistan is able to reach this goal in the last two months "the FBR tax-GDP ratio is likely to be less than 10%, which is one of the lowest in the world ("Monetary Policy Decision")." Because this is the case the government missed the fiscal deficit target of 5.1% of GDP (as previously discussed).… READ MORE

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