The economic environment
Economy of Pakistan
The Islamic Republic of Pakistan has a diverse economy and it consists of many industries such as textiles, chemicals, food processing, agriculture, etc. and is the 40th largest economy in the world. However, the economy of Pakistan has been suffering in the past many years from some of the factors such as internal political disputes, an increasing population, different levels of foreign investment, and an ongoing confrontation with its neighboring state i.e. India.
Balance of payment
Pakistan has been facing the problem of balance of payments since 1970’s basically due to the cost of the oil as it is one of the major import that have created an imbalance in the balance of payments. However, this problem was met by the growth of exports and also from the remittance that Pakistan got. Later in the 1980’s the percentage of remittance that Pakistan has been receiving declined.
The segments that have caused the current deficit to further increase are Pakistan’s textiles and apparel markets. The position of balance of payments further got affected in 1995 and 1996 due to the increase in imports by 16%, however, the exports just increased by 6%. Other than this, even the rupee was devalued by 11% in the year 1995 and 1996. This was done to encourage the exports in order to improve the balance of payments.
In 2000 and 2001, the exports of the commodities such as rice, raw cotton, fish, and manufactured items such as leather, carpets, sporting goods, and surgical instruments increased. (Zaidi,2000). In the same year, however the exports of petroleum products, and machinery also rose. According to the CIA, Pakistan’s exports in 2001 were $8.8 billion and the imports were $9.2 billion and this created a trade deficit of $399.9 million. (Zaidi,2000). Therefore, the balance of payments shows a bad picture about the economy of Pakistan.
The State Bank of Pakistan (SBP) increased the interest rates by 12% and this was done by increasing 150 basis points in a bid in order to reduce the increasing inflation and reduce the imports. Currently, the discount rate that is being offered by the SBP is 10.5 per cent. Other than this, the local banks were also asked by the SBP to maximize the rate of return on PLS deposits from 2.1% to 5%.
The governor of the State Bank Dr Shamshad Akhtar announced some of the major decisions at a Press conference that was held in Karachi. She insisted on increasing the Cash Reserve Requirement for all the deposits to the maturity of one year by 100 bps to 9.0 per cent and also to impose 35 per cent on the L/C margins on all imports. However, oil and some selective food items may come under the exceptional cases. (Sheikh, 2008).
Furthermore, she also asked the government to make changes in the Fiscal Responsibility and Debt Limitation Act, 2005 in order to incorporate appropriate provisions and to restrict the debt monetisation.
Even the Statutory Liquidity Requirement (SLR) was to be increased by 100 bps to 19 per cent of the total time and demand liabilities. This increase in CRR created an immediate impact on the interest rates as it dried up the excess liquidity.
The total affect of the increased of both the CRR and SLR increased the overall interest rates and this helped in generating more deposits. She also stated that all the banks have to pay a minimum profit rate of 5 per cent of Saving/PLS saving products and this was made valid from June 1, 2008. (Sheikh, 2008).
GDP and GNP
The GDP (purchasing power parity) in 2007 was $410 billion and the GDP (official exchange rate) in 2007 was $143.8 billion. The real growth of GDP was 6.4% and per capita growth was $2600. The GDP – composition by sector in the agriculture sector was 19.6%, 26.8% in the industrial sector and 53.7% in the services sector. (The World Factbook, n.d.).
Foreign exchange is the exchange of money in one currency for another and is traded in the foreign exchange markets. The IMF approved the government policies bolstered by foreign investment and also renewed access to global markets. The reserves of foreign exchange and gold in 2007 were $15.69 billion.
Even the US-Pak rupee conversion is high at the moment and this is bad for the imports of Pakistan.
Inflation is one of the biggest threats to the economy of Pakistan and it increased to 9% in 2005, however it reduced to 7.9% in 2006. The fuel prices especially the prices of petrol rose in 2008 by 12% and the central bank is trying hard to reduce inflation in the economy.
The figures shows that economy of Pakistan is in decline .One other reason is because it is greatly linked with US and if US economy is in recession then Pakistan will follow.
Moreover the balance of payment shows a very horrible picture of Pakistan and in order to avoid trade deficit, the current government is taking a lot of steps in controlling it, such as 50% sales tax on all imported luxury items. They have also tried to take some rebates from Saudi government so that the trade deficit could be reduced.
Interest rates have also increased in the recent years in order to curtail the increasing inflation in Pakistan. GDP and GNP have taken a huge hit also since March 2007 when the political turmoil started in the regime of Former President Pervez Musharraf.
The decline is GDP is also because of the shortage of electricity in Pakistan because of which all manufacturing firms have suffered huge losses. Inflation is all time high in Pakistan. The government is trying to control it but because of the recent hike in oil prices the government is unable to control it.
Although the future seems bright for business in Pakistan but still the current situation is not very good. It greatly depends on what kind of business you want to pursue at the current economic political situation. If one thinks about starting an export business, it would be a very good opportunity because the US-Pak rupee conversion is high at the moment so the returns on the export will be high too.
If you want to import things, then it will be very hard to succeed in the business because one of the reasons is that the rupee is depreciating against dollars and other currencies. The second reason is that the government has imposed restrictions over imports and the third factor is the inflation in Pakistan. People do not even have enough money in Pakistan to fulfill their needs so how would they able to buy goods from abroad.
Even for the other business one will have to see how these five things can affect them and considering them the decision of starting a business or not can be taken.
Sheikh,Z. (2008).SBP hikes interest rates. September 16, 2008. Retrieved from: http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/Politics/23-May-2008/SBP-hikes-interest-rates
The World Factbook. (n.d.). Pakistan. September 16, 2008. Retrieved from: https://www.cia.gov/library/publications/the-world-factbook/print/pk.html
Zaidi,A.S. (2000). Issues in Pakistan’s Economy. Oxford University Press-USA, Paperback.