The Current Situation of Economy
By : Fida Karim
The economy of Pakistan has been a concern for
policy makers since the early days. The problems tend to increase by each
passing day and now they have reached to the maximum limit from where no
further loss can be experienced. The current situation is more alarming as the
growth rate has decreased, the economy has slowed down, the rupee has devalued
and the interest rate has increased which has caused to an increase in inflation.
The current fiscal year will be seen as a combination of low growth and high
inflation which is not good news for the population of 210 million. In other
words a decrease in growth means no job creation and thus higher unemployment.
Economist defines such situation as Stagflation.
This is a combination of stagnant economic growth, higher inflation and higher
unemployment. Economist considers this situation as more dangerous as it is
always a difficult choice for them to trade off between inflation and unemployment.
If they make policies designed to lower the inflation then it would be
difficult to control unemployment and policies designed to ease unemployment
rises inflation. Stagflation is also dangerous because with a low growth rate,
high inflation and higher unemployment consumer have less money to spend and
because of high inflation the worth of money decreases every passing day.
There are two theories that explain the causes of
Stagflation. The first theory describes that Stagflation is caused where there
is a sudden increase in the cost of oil the increase in the price of oil
increases the transportations cost and thus increases the overall prices of
goods and services which is inflation. The increase in prices leads to
decreases in job creation and thus increases unemployment. This type of
stagflation was observed in 1970s when there was a sudden increase in the
prices of oil which was due to the oil shocks after creation of OPEC. While the
second theory describes stagflation as a result of poorly made economic
policies and decisions. In case of Pakistan it is the second one which causes
this type ofsituation.
While the solution of stagflation should be
different and unique because it is more concerned with the structural changes
in the economy which means the traditional tools of monetary and fiscal policy
are ineffective in this case. As Stagflation is the sum of both inflation and
slow growth so the solution must deal with both of them..
For the growth in economy we need to introduce
structural reforms in almost every sector of the economy which contributes to
National output. The main reforms are needed in agricultural sector and
industrial sector which are the main export oriented sectors. Another solution
for slow growth is large federal deficit spending. The supply of money will
increase the aggregate demand of an economy and thus increases the growth rate.
The second solution is to increase the revenue of government which can be done
by increasing the tax net of the country by implementing reforms in FBR and
other such institutions .Thus the increase in revenue will help the government
to overcome the fiscal deficit of the country. The third aspect is to increase
the foreign direct investment in Pakistan. Like CPEC we need such other
investments which will help to boost the growth and economy of Pakistan.
To sum up the country faces severe crises in form of
inflation, slow growth rate, high unemployment, large fiscal and trade deficit
and balance of payment crisis. There is need of steps and reforms to overcome
these main issues and the economy desperately need stabilization. Although the
current government has introduced some reforms and policies that shows a
positive step towards stabilization of the economy but still a lot is needed in
this regard.
