Economic challenges and their management

As stated in the ‘Overview of the Economy’ in the Pakistan Economic Survey, 2008-09, Pakistan’s economy is currently facing four major economic challenges, that is, deceleration in growth, rising inflation (particularly food inflation), a growing fiscal deficit, and the widening of the trade and current account deficits. The key to meeting all the above-mentioned challenges lies in boosting the country’s agricultural and industrial production.

Economic challenges and their management


Muhammad Ahmad and Dr. M. Ishaque

As stated in the ‘Overview of the Economy’ in the Pakistan Economic Survey, 2008-09, Pakistan’s economy is currently facing four major economic challenges, that is, deceleration in growth, rising inflation (particularly food inflation), a growing fiscal deficit, and the widening of the trade and current account deficits. The key to meeting all the above-mentioned challenges lies in boosting the country’s agricultural and industrial production. Since Pakistan’s economic sovereignty faces a threat from these problems at present, the campaign to boost the agricultural and industrial production will have to be launched on a top-priority basis.

The government needs to initiate necessary measures to boost the production of all major and minor agricultural crops, vegetables etc. A few measures were introduced in the federal budget 2008-09 but additional measures are needed in the light of future experience. The performance of the agricultural sector may be kept under regular monitoring to enable the government to take immediate remedial steps, if and when, necessary.

A significant increase in agricultural production would raise the country’s GDP growth and the revenue collection would also increase. Besides, sufficient production of the major and minor agricultural crops would help in bringing down food inflation provided that the government is able to check hoarding, profiteering and smuggling of edible items. Autarky in agricultural production would also help in reducing the imports and raising the exports of agricultural products. Also, it needs to be remembered that agricultural products such as cotton and sugarcane are used by our industrial sector. Thus, good performance of the agriculture sector should lead to good performance of the industrial sector, as well.

It is understood that some of the oil-producing nations in the Gulf and Middle East are presently concerned about their food security in view of shortage and high prices of edibles the world over. These countries want to purchase agricultural land in a number of countries including Pakistan, in order to grow agricultural crops on such land for use in their respective countries. The government may consider offering agricultural land (not possessed by any one) to such countries, either in return for oil or on the condition that a part of their agricultural production (say 20 per cent) would be left in Pakistan and not taken to the respective countries for use in those countries.

Self-sufficiency in food can bring immense benefits to the country, as explained in the preceding paragraphs. However, the performance of our agriculture sector still largely depends on weather. Besides, the agricultural products carry low value. It would, therefore, be necessary for the Government to focus simultaneously on boosting industrial production, in particular the production of high-value industrial items.

The country’s import bill, during the outgoing financial year 2008-09, is estimated at approximately $40 billion, whereas the exports are estimated at slightly above $19 billion. The unprecedented trade deficit of about $21 billion has already resulted in the decline of our foreign exchange reserves from $15 billion to $10-11 billion and increase in our external debt burden from $40 billion, a year ago, to $46 billion, at present. If we fail to pay immediate attention to this problem, the country’s foreign exchange reserves might disappear within the next two years or so and, at the same time, we would find ourselves in a deadly debt trap, from which it may not be easy to come out. One of the greatest sins of the previous government was that it saw the trade/current account deficit going up, year after year, and did practically nothing to remedy the situation.

The question is what should be done to bridge the massive export-import gap of nearly $21 billion? Even the best performance of the country’s agriculture sector could make a difference of not more than $4-5 billion, through reduction in imports and increase in exports of the agricultural products. What is to be done to meet the deficit of the remaining $16-17 billion?

A study of the exports and imports during the financial year 2007-08 shows that although exports registered an increase of 13.23 per cent during the year to reach $19.22 billion, the imports had surged by as much as 30.87 per cent to reach $39.96 billion, as a result of which the trade deficit had gone up to $20.7 billion. The imports reached the aforesaid unprecedented level mainly due to substantial increase in the oil import bill, resulting from the rise in the international oil prices. Another factor pushing up the import bill was the import of expensive wheat and cooking oil in large quantities. Among other significant imports were machinery and raw material. It would be observed that most of the imports were of an essential nature, which could not be done away with.

The remedy, therefore, lies in boosting the country’s industrial production and exports. In the first instance, efforts would no doubt be made to boost the textiles and small-scale manufacturing sectors. However, this would not be enough, in the present circumstances. We need to prepare a contingency plan to develop the country’s engineering goods industry, on a top-priority basis. Pakistan has a vast experience of manufacturing engineering goods ranging from electric fans, sewing machines and bicycles to tractors, light training aircrafts and tanks etc. However, an export-led growth of the local engineering goods industry could not so far be possible due to higher cost of production, which made our engineering goods uncompetitive in the foreign markets. While it may still not be possible to boost the export of our engineering goods due to the aforesaid reason, we may step up production of engineering goods for local use, under a contingency plan. We should increase the production of tractors, various types of machinery and other engineering goods for domestic use. This will provide us an opportunity to save billions of dollars, presently being spent on the import of mechanical and electrical goods and machinery. Once we sincerely start the development of our engineering goods industry, we would soon be able to reduce costs and improve quality and, in due course of time, may become an exporter of machinery and other engineering products rather than a net importer of these products.

In addition to developing our engineering goods industry, an effort may also be made to boost the exports of IT products. India has excelled in this field and its exports of IT products alone nearly equal our total exports. There is reportedly great potential in Pakistan, also, to develop this sector. All possible efforts should, therefore, be made to increase the exports of IT products, as quickly as possible. If the country could build the export of one or two high-ticket items such as engineering goods and IT products etc, it might be possible for us to turn our trade deficit into a surplus, in not too distant a future.

The government may, also, be advised to prepare a contingency plan for the conservation of imported oil. The international oil prices have already crossed the $140 a barrel mark and oil market analysts have expressed their apprehension that the same may climb up to$200-250 a barrel in the coming weeks and months. All possible efforts should, therefore, be made to cut the country’s oil consumption to the lowest possible level.

Since increased agricultural and industrial production would require marked improvement in electricity supply, the Government should expedite power generation from Thar coal. At the same time, construction of small and mega dams and power generation from wind and solar energy may, also, be expedited.

In order to meet the major economic challenges, the government may follow the under-mentioned action plan:

(1) All possible efforts should be made to boost agriculture/livestock and industrial production. Government should also focus on the development of engineering goods industry and the IT sector; (2) Power generation from coal and other alternative energy sources may be expedited; (3) A contingency plan should be prepared for the conservation of imported crude oil and domestic use of locally manufactured machinery and other engineering products; (4) Government should cut its non-development expenditure, in order to bring down its budget deficit. Borrowing from State Bank should also be avoided to bring down inflation to a manageable level; (5) The SBP should be fully supported in its efforts to bring down inflation and maintain exchange rate stability; and (6) A campaign should be launched by the government against hoarding, profiteering and smuggling to ensure the availability of all essential commodities to the consumer at reasonable prices.

Muhammad Ramzan Rafique
Muhammad Ramzan Rafique

I am from a small town Chichawatni, Sahiwal, Punjab , Pakistan, studied from University of Agriculture Faisalabad, on my mission to explore world I am in Denmark these days..

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