Economic Outlook for 2012
Despite all its tall claims and ambitious plans, Pakistan has entered 2012 with not much in sight to look forward to on the economic horizon. Efforts to correct the course in key areas have not been much to write home about. Monumental institutional resistance, bureaucratic delays and rampant corruption have served to weaken management of public finances. What has added to this dismal situation is the out of date economic structure which has failed in overcoming institutional resistance and bureaucratic delays and the overall economic progress has fallen far short of achieving the desired results.
As an impoverished and underdeveloped country, Pakistan has suffered from decades of internal political disputes and low levels of foreign investment. Between 2001-07, however, poverty levels decreased by 10 percent, as the country managed to steadily raise its development spending. In the 2004-07 period, Pakistan’s GDP growth was in the 5 to 8 percent range which spurred gains in the industrial and service sectors. However, with the onset of financial discipline in the ensuing period, growth slowed down in 2008-09 and unemployment levels rose quite drastically.
It is a matter of top concern for the country that inflation continues to rise, climbing from 7.7 percent in 2007 to more than 13 percent in 2010. In addition, the Pakistani rupee has depreciated since 2007 as a result of political and economic instability and today trades at Rs. 90 or more against the US dollar. The government agreed to an International Monetary Fund Standby Arrangement in November 2008 in response to a balance of payments crisis. During 2009-10 the current account situation strengthened and foreign exchange reserves stabilized, largely because of lower oil prices and record remittances from overseas Pakistanis. Agricultural output was, however, severely affected by the floods in 2010 and 2011 and contributed to a jump in inflation, with reconstruction costs further straining the limited resources of the government. Textiles account in a big way for Pakistan’s export earnings, but the country’s failure to expand other viable export alternatives has made it vulnerable to shifts in world demand. Pakistan’s other long-term challenges include need for higher investment in education, healthcare and electricity production and reduced dependence on foreign aid.
The country also continues to be ensnared in a power and fuel crisis which simply refuses to go away. This is negatively impacting prices of all essential goods while the country’s export performance, which has been highly encouraging in the current fiscal, may face a downtrend leading to reduced foreign exchange earnings. The country is already facing a severe reduction in foreign direct investment which is direly needed for acceleration of economic activity and revival of the employment situation. The dismal economic outlook will tend to be further aggravated by the onset of national elections which are likely to take place in 2012. This will prevent the government from taking difficult economic decisions forcing it to continue depending on artificial bailouts to resuscitate the economy and meet tax shortfalls through borrowing and arbitrary tax measures