Macroeconomic Challenges In Pakistan

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Register to read the introduction… Pakistan is a politically unstable country. From 1990, the government has started to follow an open economy policy. Since 2000, the government has begun to remove barriers to foreign trade and investment, reform the financial system, ease foreign exchange controls, and privatize state-owned enterprises. According to State Bank of Pakistan (2004), economic mismanagement and fiscally imprudent economic policies caused a large increase in the public debt and led to fall in the foreign currency reserves in the 1990s.

Pakistan is a low income country with uneven distribution of wealth. As a result there are two classes: rich and poor. Rich are very rich and poor are very poor. This dual economic structure, besides other implications, has resulted in low saving rates. In case of Pakistan, we cannot strictly apply the principle that with uneven distribution of income the savings rate will be high. That principle is based on the assumption that the rich class has a very high MPS. But the upper class in Pakistan has a very high consumption (on luxuries) and relatively low savings. The poor class cannot save because of their low income. As a result, the savings rates in Pakistan are amongst the lowest in the world. This lack of savings is supposed to be one of the basic structural macroeconomic problems faced by the country. Table III shows the saving rates and trends of
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Also, as can be seen from the table, due to the economic and political instability and higher foreign interest rate, people prefer to save outside Pakistan and the foreign savings rates are going upward. Low savings are an important reason why the actual rate of development has been below the potential rate of development. It has been responsible for increasing our dependency on external savings in the form of loans, investments and grants to an extent that it now impinges on our economic sovereignty. Low savings are leading to low investment, low productivity and then back to low real …show more content…
RESULT
China and India weigh in as #2 and #4 largest economies respectively, in the world (adjusted for purchasing power parity), with 21% of global GDP. Their combined spending on infrastructure is estimated to be $3 billion per day and their 2008 – 2017 savings rates will be well in excess of the largest developed nations hence these trends are likely to continue presenting opportunities for both the government and financial-services providers to channel those savings productively.
While, for Pakistan the situation is not very bright, as a large savings-investment gap is not desirable for the country in the long run because of its negative impact on macro-economic stability. It results in accumulation of national debt and puts additional burden on the country’s balance of payments in terms of mounting debt servicing. And the prevailing rates of investment and savings in Pakistan are not adequate to support future economic growth at the socially necessary rate of 7 per cent per annum Pakistan therefore has no alternative but to make determined efforts to raise significantly its national savings and investment

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