Pakistan's Economy: Risks, Opportunities, and Emerging Market Analysis

Introduction

There is currently a great deal of economic instability throughout the world. Emerging markets are particularly susceptible to experiencing economic instability when global economies begin to falter. Emerging market economies are defined as economies "with low to middle per capita income. Such countries constitute approximately 80% of the global population, and represent about 20% of the world's economies" (Heakal). There are various countries defined in this way, and they vary considerably in size. For the most part, emerging economies are viewed as those that have undergone reform and are beginning to emerge onto the international arena. Economies that are growing rapidly are generally considered emerging markets (Heakal). Additionally, emerging market economies are usually transitional in nature — that is, they are transitioning from a closed economy to an open market economy. Emerging market economies also undergo several types of reform, including economic reform programs, capital market transparency, and reforms related to exchange rates. In most cases the emerging market is also receiving assistance from a non-governmental organization such as the International Monetary Fund (IMF). Pakistan is one such emerging market that has experienced many ups and downs while attempting to compete in the global market. Emerging markets are important to globalization because they provide further economic stability, which allows for influxes of investment and improves the quality of life for people living in the region.

The purpose of this discussion is to examine the economic system of Pakistan. More specifically, the research investigates the threats, risks, and opportunities that the Pakistani economy presents to the industrialized world from a financial perspective, with particular attention to the United States.

Country Analysis

The region of the world now known as Pakistan dates back at least 5,000 years to the Indus Valley civilization. Pakistan is located in South Asia, bordered by Iran and Afghanistan to the west, China to the north, and India to the east ("Pakistan"). Pakistan has the sixth largest population in the world, with an estimated 177,276,594 people ("Pakistan"). The median age is 21.2 years ("Pakistan"). There are several ethnic groups represented in Pakistan; the majority are Punjabi at 44.68%. In addition, the Pashtun make up 15.42% of the population, Sindhi 14.1%, Saraiki 8.38%, Muhajirs 7.57%, Balochi 3.57%, and all other ethnic groups 6.28% ("Pakistan").

Ninety-five percent of the Pakistani population are Muslim, with Sunni Muslims composing the majority at 75%. Shia Muslims make up the remaining 20% of Muslims, and 5% of the population is Christian ("Pakistan"). Punjabi and Sindhi are the most widely spoken languages in the country. As it relates specifically to the economy, the United States Central Intelligence Agency describes Pakistan as an "underdeveloped country [that] has suffered from decades of internal political disputes and low levels of foreign investment. Between 2001 and 2007, however, poverty levels decreased by 10% as Islamabad steadily raised development spending. Between 2004 and 2007, GDP growth in the 5–8% range was spurred by gains in the industrial and service sectors — despite severe electricity shortfalls — but growth slowed in 2008–09 and unemployment rose. Inflation remains the top concern among the public, jumping from 7.7% in 2007 to 20.3% in 2008, and 14.2% in 2009. In addition, the Pakistani rupee has depreciated since 2007 as a result of political and economic instability" ("Pakistan").

The location of Pakistan means that the country has significant geopolitical relevance. This is particularly true as it pertains to India and Afghanistan and the international interests present in both countries.

Geopolitical Relevance

The conflict between India and Pakistan is well documented and has resulted in real economic impacts for both countries. At the heart of the conflict is the region known as Kashmir. This conflict has left a lasting impact on both economies. Although India also suffers from considerable poverty, the Indian economy has been able to grow and develop at a rapid pace over the last decade. One of the reasons for the differences between the Pakistani and Indian economies has been the presence of infrastructure, particularly as it pertains to communications systems and technology. Two of the areas that have been a source of great economic growth for India are technology and communications-related industries. Some experts have also argued that the Hindu-Muslim conflict between the two nations has greatly hindered the ability of the two countries to collaborate in economic endeavors (Ganguly).

Pakistan's location in relation to Afghanistan also means that it has acted, and can continue to act, as an ally to the United States and other countries. Following the terrorist attacks of September 11, 2001, Pakistan became vitally important to the war on terror and remains so. In return for assisting the United States and her allies, the United States pledged to assist Pakistan in the area of economic development.

Internal Budget Issues and Debt Structure

A major aspect of any economy is public debt, which is composed of domestic debt and external debt. For fiscal year 2009–2010, public debt increased by Rs. 1 trillion ($12 billion) in Pakistan. This increase was caused by the depreciation of the rupee against the dollar. In addition to currency depreciation, the increase in public debt is attributed to loan repayments to the International Monetary Fund and the World Bank. As one report explains, "The public debt in the first nine months (July–March) grew by Rs. 960 billion in the current fiscal year. After including the IMF's tranche of $1.2 billion in May 2010, the public debt increased by over Rs. 1,000 billion during the fiscal year" ("Pakistan's public debt jumped $12 bn in 2009-10").

In Pakistan, domestic debt is inclusive of permanent debt, floating debt, and unfunded debt. Permanent debt refers to market loans, SLIC bonds, FIBs, and prize bonds ("Pakistan's Internal Debt"). Floating debt refers to market treasury bills ("Pakistan's Internal Debt"). Unfunded debt refers to Pakistan's National Savings Schemes ("Pakistan's Internal Debt"). For the aforementioned fiscal year, "The domestic debt stood at Rs. 4,325 billion and foreign loans in rupee terms were at Rs. 4,597 billion. Domestic debt in the first nine months grew by Rs. 620 billion, while external loans in rupee terms increased by Rs. 340 billion in 2009–10, totalling Rs. 960 billion" ("Pakistan's public debt jumped $12 bn in 2009-10").

External debt is inclusive of public and publicly guaranteed debt, private non-guaranteed credits, central bank deposits, and loans due to the IMF ("Pakistan's Internal Debt"). Although there were serious increases in the amount of public debt overall, external loans decreased by $361 million ("Pakistan's public debt jumped $12 bn in 2009-10").

Like many other countries around the world, Pakistan is also dealing with a budget deficit. According to Reuters, the nation's budget deficit was likely to be as high as 5.5% of gross domestic product (GDP) for the fiscal year, exceeding the target of 5.1% agreed upon with the IMF ("Budget deficit to overshoot target"). The projected overshoot was due to spending related to security shortfalls and gaps in resources that were supposed to be provided by Pakistan's allies, combined with decreases in revenue collection.

Conclusion

The purpose of this discussion was to examine the economic system of Pakistan and to investigate the threats, risks, and opportunities that the Pakistani economy presents to the industrialized world from a financial perspective, with particular attention to the United States. Overall, the research indicates that while Pakistan is an emerging economy that experienced considerable growth in the past, current economic conditions are challenging as a result of governmental failures and the decline in the global economy. One of the major issues impeding Pakistan's progress is the lack of proper infrastructure to attract investors. In addition, trade barriers make it difficult for other countries to engage in commerce with Pakistan.