Major Issues in Pakistan

Economy
Economics Paper II
Lecture 12
National Officers Academy Islamabad
Issues mentioned in our syllabus are:
1. Energy crisis
2. Corruption
3. Bad governance
4. Debt accumulation & Dependency
5. Unemployment
6. Income inequality
7. Inflation
8. Fiscal and trade deficit
9. Balance of Payment issues
10. Shortage of irrigation water
Energy crisis in Pakistan
Energy Crisis in Pakistan
• The largest single drain on Pakistan’s economy
• This crisis stems from a fuel mix transformation initiated two decades
ago when power generation came to rely more on imported furnace
oil than hydropower.
• increased power generation costs, coupled with the high proportion
of line losses, have led to the need to increase tariffs, while causing
losses to power generation, transmission and distribution companies.
• Given rise to the phenomenon of circular debt in the energy sector
Energy Crisis in Pakistan cont…
• Slippages in the payment of bills (particularly on the part of public
institutions) trigger a chain of delayed payments for imported furnace oil,
natural gas or other inputs to the thermal generation system
• Energy crisis is a significant drain on the government’s resources, with
energy subsidies taking up a substantial part of the federal budget.
• Under an International Monetary Fund agreement of September 2013 the
government is committed to clearing the circular debt
• Adjusting tariffs to improve resource allocation and encourage
conservation
• Implementing fuel policies aimed at ensuring natural gas supplies to power
plants.
Energy Policies & Profile of Pakistan
• The Government of Pakistan, has unveiled a number of initiatives to facilitate the
public’s access to energy, spur economic expansion, and find a solution to the
energy issue.
• The initiatives include:
The National Power Policy 2013
• The policy aimed to develop a power production, transmission, and distribution
system that was effective and could fulfill the requirements of the populace while
boosting the economy of the nation in a cost-effective and sustainable way.
• Power Generation Policy 2015
• The fundamental goal of policy was to have enough cheapest available power
production capacity while emphasizing the use of domestic resources, enabling
all parties engaged in the trade, and protecting the environment.
Alternative and Renewable Energy Policy 2019
• The major objective of the 2019 policy was to:
• Encourage and support the nation’s development of renewable
resources.
• To satisfy the nation’s needs
• Pakistan produces a very small fraction of its total oil output.
• The production of domestic oil is restricted by technical, budgetary,
and technological limitations.
• According to the most recent figures, the cost of oil imports surged
from July through April of FY 2022 from US$8.69 billion to US$17.03
billion, a 95.9% rise.
Cont,..
• Oil is becoming more costly due to rising global oil prices and the
severe devaluation of the Pakistani rupee, which is putting pressure
on the country’s external sector and worsening its trade imbalance.
• In July and April of FY2022, imports of LNG (liquefied natural
gas) increased by 82.90% in value, while imports of liquefied
petroleum gas (LPG) increased by 39.86%.
• Pakistan is also using nuclear technology to produce electricity, and
its share is rapidly growing.
• During the period of July–March FY2022, the gross capacity of nuclear
power plants rose by 39% to 3,530 MW, delivering 12,885 million
units of energy to the national grid.
Reasons for the Looming Energy Crisis in Pakistan
1. Decreasing gas supply and dependence on oil
2. Unrealistic power tariffs (low investments)
3. Low payment recovery
4. Inefficient revenue collection
5. Overpopulation, over usage
6. Economic and political instability
7. Fluctuation of oil prices in international market
8. Faulty distribution system
9. Aging of equipment
10. Mismanagement of resources
11. Silting of dams
Impact of Energy Crisis on Pakistan’s Economy
• On people

• On Economy
Cont,..
• The industrial sector has also been severely damaged by the energy crisis.
• The manufacturing processes of several major and small-scale industries have
been stifled by it. Due to the continuous energy constraint, the supply of gas and
electricity to the industry was shut off. The South Asian country is experiencing a
severe economic crisis, with energy imports being hampered by rampant
inflation, a depreciating rupee, and shrinking foreign exchange reserves.
• Textiles are the industry most impacted. According to government statistics, the
home sector’s demand for energy has increased this season as a result of the
heatwave, resulting in a shortage of almost 7,000 megawatts—or one-fifth of
Pakistan’s generation capacity—on several days this month.
• Pakistan’s important textile sector, which sells everything from denim to bed linen
to markets in the US and Europe and makes up 60% of the nation’s exports, has
been negatively impacted by the electricity deficit. According to Qasim Malik, vice
president of the Chamber of Commerce in Sialkot, “the textile sector is in a
situation of emergency.
What’s the Way Forward?

Reduce Energy
Use
Less Demand
Its Gap in
Demand and
Develop New
Energy supply
More Supply
Short Term Plans
1. Increase in numbers of IPPs- Policy Options
• Reactivate Closed Power Stations
• Renew Power Distribution system
• Import Electricity Till crisis
2. Reduce Transportation Energy use
• Use hydro vehicles
• Use public transportation
3. Reduce industrial energy use
Mid Term Plans

Switch from non

Installation of
renewable to Improve Public Private
solar, wind, Bio-gas
renewable energy Equipment Partnership
and wind projects
resources
Long Term Plan
1. Developing and installing coal based power houses
2. Initiate energy agreements with friendly countries
3. Exploration of more oil ,Gas , & Coal fields
4. Upgradation in training courses for engineers
5. Develop new Energy
6. More Research and Development
Any Case /success story of solution to Energy
crisis?
Generation capacity in California By source
Income Inequality :Examples and How It's
Measured
• What Is Income Inequality?
• Income inequality is how unevenly income is distributed throughout a population.
• The less equal the distribution, the higher income inequality is
• Income inequality—the gap between the richest and poorest people in the world—is
rising at a rate that engenders growing fury among the less privileged.”
• Income inequality V/S wealth inequality
• Income inequality is often accompanied by wealth inequality(which is the uneven
distribution of wealth)
• Populations can be divided up in different ways to show different levels and forms of
income inequality such as income inequality by gender or race.
• Different measures, such as the ”Gini –Coefficient” can be used to analyze the level of
income inequality in a population.
FACTORS GIVING RISE TO INCOME
INEQUALITIES
• The four main factors that govern personal income distribution
include:
1. Distribution of assets
2. Functional income distribution
3. Transfers from other households, government and rest of the
world; and
4. Tax and expenditure structure of the government.
5. Inequality Trap- Rich remain rich
Causes of Income Inequality
 How to measure income inequality ?
• Gini Coefficient
• Invented by Italian statistician
• Corado Gini
An equality diagonal represent perfect Equality:
At every point, cumulative population
equals cumulative income
A- equal diagonal population=income
B-Lorenz curve
C- difference between equality and reality
Lorenz curve
• A Lorenz curve is a graphical representation of the distribution of income
or wealth within a population.
• It graphs percentiles of the population against cumulative income or
wealth of people at or below that percentile.
• Lorenz curves, along with their derivative statistics, are widely used to
measure inequality across a population.
• The Lorenz curve is a central piece in calculating the Gini coefficient, a
mathematical representation of inequality levels.
• Because Lorenz curves are mathematical estimates based on fitting a
continuous curve to incomplete and discontinuous data, they may be
imperfect measures of true inequality
What does extreme inequality do to society?

Hinders Stifles
Corrupt Fuels Squanders Thwarts
economic social
politics crime talent potential
growth mobility
Measures Suggested In And To Improve
Income Distribution
1. Accelerating Economic Growth While Maintaining Macroeconomic
Stability
2. Improving Governance And Devolution
3. Investing In Human Capital
4. Targeting The Poor And The Vulnerable
5. Micro Finance
6. Khushal Pakistan Program/ Tameer-e-Pakistan Program
7. Other Social Safety Nets
The social safety nets for the vulnerable
currently available in Pakistan
• The social safety nets for the vulnerable currently available in Pakistan
include: Workers Welfare Fund (WWF)
• Food Support Program
• Employees Old Age Benefit (EOBI)
• Pakistan Bait-ul-Mal (PBM) and Zakat Fund.
• The Poverty Reduction Strategy aims to strengthen the existing
mechanism of cash transfers through Zakat, and the social protection
system of EOBI and health care through Employees Social Security
Institutions
Some other measures to reduce income
inequality
1. Rural sector development
2. Small & Medium Enterprises (SME)
3. Housing and Construction
4. Income Generation Programme
5. Social Protection
6. Human Resource Development
7. Land Distribution
Conclusion
“It is not great wealth in a few individuals that
proves a country is prosperous, but great general
wealth evenly distributed among the people . . .
It is the struggling masses who are the
foundation [of this country]; and if the
foundation be rotten or insecure, the rest of the
structure must eventually crumble.”

(VICTORIA WOODHULL)
First Woman To Run For President Of The United States, 1872)
Fiscal Deficit
• Concept
• When the government spends more than its total income, such a
situation is called a fiscal deficit.
• How Fiscal debt is calculated?
• It is calculated by subtracting the total income from the total
expenditure and is either expressed in absolute terms or as a
percentage of the GDP (Gross Domestic Product)
• It is an indication of the total borrowings needed by the government.
While calculating the total revenue, borrowings are not included
What is the difference between fiscal deficit
and budget deficit?
• The higher the amount the Fiscal Deficit, the higher will be the borrowed
amount.
• Thus, the Budgetary deficit is the only difference between all the receipts
and all the expenses in both terms, that is revenue and capital account of
the government.
• Current Fiscal Deficit of Pakistan
• Pakistan’s fiscal deficit nears Rs1 trillion in first quarter of FY23
• In a report published by the Finance Division, the net revenue during the
first quarter (July-September) stood at Rs2.01 trillion
• However, the net expenditure amounted to Rs2.82 trillion during the first
three months.
Fiscal &Trade Deficit
• Causes of Deficit Financing in Pakistan
• The main causes of deficit financing in Pakistan are:
• Increase in government expenditure:
• The government expenditures both development and non development are increasing as
time passes.
• The government has not been able to meet the expenditure by its revenues.
• Ineffective budget deficit:
• There are ineffective fiscal policies implemented in Pakistan and fiscal indiscipline also
result the public debt.
• Fiscal deficit: The average fiscal deficit in 1990s was 7% of GDP.
• The public debt increased from 66% of GDP in 1980 that almost 100% by the mid of
2000.
• In 2004-2005 the fiscal deficit was 3.3% of GDP however; it increased to 4.2% in 2006-
2007.
Cont,..
• Low saving:
• The people of Pakistan are consumption oriented. Due to high
consumption rate the saving ratio was lower than 16%.

• Rapid population growth:

• The rapid population growth also a main cause to slow down the
economic activity of a country. According to economic survey of
2007-2008 the population growth was 1.8%.
Cont,..
• Weak revenue mobilization
• Huge borrowings
• Non-developmental expenditures
• Tax Evasions & tax avoidance
• High levels of income and wealth inequality
• Increase in subsidies and financial support
• Poor performance of public sector
• Unplanned major expenses
• Increase in interest Payment
• Higher defense expenditures
Impacts of Deficit Financing
• May result in inflation in the economy
• Discourage Foreign Investment in the country
• Borrowing of additional funds for payment of interest and repayment
of debt
• Debt trap
• Hampers the future growth
• Foreign Dependence
• Hardening of interest rate
• Decline in Spending on health and expenditure
Ways to reduce Fiscal Deficit
• Proper distribution system
• Raising import taxes and prices of petroleum Products
• Cutting down expenses on govt. non developmental expenditures
• More Public investment
• Borrowing from domestic sources
• Borrowing from external sources
• Deficit financing (printing of new currency)
• Disinvestment of public sector enterprises
• Reform in tax structure
• Reduce Public Expenditure
• Increase duties on imported and domestic goods
• Curb Black money
Trade Deficit
• What Is a Trade Deficit?
• A trade deficit occurs when a country's imports exceed its exports
during a given time period.
• The amount by which a cost of country’s import exceeds its exports
• It is also referred to as a negative balance of trade (BOT)
• The balance can be calculated on different categories of transactions:
goods “merchandise”, services, goods and services.
• Balances are also calculated for international transactions—current
account, capital account, and financial account.
• Trade deficit = import expenses – export expenses
Causes And Consequences Of Trade Deficit In
Pakistan
• Causes:
• Lower Tariffs / Trade Barriers
• When government signs a new trade deal and reduces tariffs it
creates competition.
• Foreign imports become cheaper and much more competitive. As a
result, consumers may switch to imported alternatives.
• They may be both cheaper and of higher quality.
Low Productivity
• When a nation experiences low productivity growth in relation to
others, it can find itself become less competitive.
• As other nations become more productive, they are able to produce
goods at a lower cost.
• In turn, it makes their goods cheaper compared to domestic
suppliers.
• As a result, we can see a trade deficit develop as consumers shift
towards cheaper and more productive importers.
Trade balance’s effects upon a nation's GDP
• Exports directly increase and imports directly reduce a nation's
balance of trade (i.e. net exports).
• A trade surplus is a positive net balance of trade, and a trade deficit
is a negative net balance of trade.
• balance of trade being explicitly added to the calculation of the
nation's gross domestic product using the expenditure method of
calculating gross domestic product (i.e. GDP)
• trade surpluses are contributions and trade deficits are "drags" upon
their nation's GDP
• foreign made goods sold (e.g., retail) contribute to total GDP.
Local Companies producing goods in other
countries
Consequences of Trade Deficit
• More imports, less exports leads to inflation
• Less industrial growth
• More unemployment in the country
• Discourage local industry
 Inflation
• DEFINITIONS
• INFLATION
• A continuous increase in the general price level of goods and services in the
economy.
• DEFLATION
• A decrease in the general price level of goods and services in the economy.
• STAGFLATION
• The condition in an economy where it experiences high unemployment and
rapid inflation simultaneously.
• DISINFLATION
• A reduction in the rate of inflation.
CALCULATION

• INFLATION RATE = CPI 2007 – CPI 2006 X 100%

• CPI 2006
• where,
• CPI = Consumer Price Index
Demand Pull Inflation
Cost Push Inflation
Effects of Inflation
Measures to control Inflation
• Direct Control Measures
• Price control and rationing
• Anti hoarding campaign
• Compulsory savings
• Monetary Policy Measures
• OMO
• RRR
• Raising Discount Rate
• Raising interest rate
• Currency Demonetization
• Management of credit
• No Deficit Financing
Fiscal Policy Measures to control Inflation
• Decrease in govt.expenditures
• Increase in taxes
• Reduce expectations and speculations
• Running different saving schemes
• Export and import duties
• Establishing Price stabilization boards
• Establishing Price review committees
• Efficient Price Commissions
BOP Issues in Pakistan
• Limited Export Capacity
• Fewer Export items are available
• Export of semi manufactured and low value goods
• Consumption oriented society
• Unfavorable TOT
• Unfavorable attitude of developed countries
• Inflation
Unrestricted Import Needs
• Imports of Machinary and raw materials
• Import oriented industries
• Oil Bill
• Huge import of invisible goods
• Foreign Debt
• Measures to address BOP Issues

• More exports
• Start labor intensive industries
• Export of high tech goods
• Raise quality of exportable goods
• Vibrant export Marketing industries
• More export of services
• Control of immoral practices
• Liberal trade policies
• More access to international Markets
Measures to reduce imports
• Import only essential items
• Stability of exchange rate
• Substitute for imported items
• Control on consumption of imported goods
• Control of smuggling