Economic Condition of Pakistan free essay sample

Economic condition of Pakistan For the past few years Pakistan has been following the technique of assessment of domestic oil value against the international oil value on a fortnight basis. About 85% of the oil required for domestic uses in Pakistan is imported. Back in the year 2004 various subsidies were given by the government on the oil price as an attempt to protect the citizens from the prospective record fuel costs. It was also an attempt to curb the rate of inflation prevalent in the country. Financing these subsidies, which by the way are considered a birthright by the population of these countries, is a major burden for an emerging economy. For instance according to the estimate of various prominent economists and analysts, that subsidy was costing Pakistan a whooping 14. 5 billion rupees per month. This amounted to around $232 million per month. Not surprisingly as a result the Pakistani government was under major financial stress. We will write a custom essay sample on Economic Condition of Pakistan or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Although it has to be acknowledged that recent increases in the industrys cost of production were largely due to rise in other input costs. Industry is paying more for oil and other imported raw materials and capital goods in line with rising international prices and utilities and transportation costs, and wage costs have risen due to the rise in minimum wages. Pakistan’s inflation accelerated in December as local wheat prices rose to a record, pushed up by smuggling of the grain to neighboring Afghanistan. Wheat prices in the Pakistan, the world’s sixth- largest consumer of the grain, have risen by more than 20 percent since November as the government’s failure to curb illegal exports led to a shortage in the domestic market. An 80-kilogram bag of wheat flour sold for a record 2,000 rupees ($32) on Jan. 7 after riots cut supplies. The inflation rate had already reached a record high in January 2008 accompanied by the increase in the consumer prices which leapt to an alarming rate of 11. 9 percent as compared to the previous record rate released by the Federal Bureau of Statistics. It was forecasted than by economists that inflation may climb further as riots which erupted after the Dec. 7 assassination of opposition leader and former Prime Minister Benazir Bhutto threaten supplies of wheat and other food staples. That may put pressure on the central bank to increase interest rates. All these factors led to the first ever increase in the price of gasoline and diesel in Pakistan in almost twenty two months. This increase took place on the 1st of March 2008 against the last increase that was witnessed in 2006 in the month of May. The price at that time was raised by 4. 2 percent. Before the current implementation of the increment in oil prices the nationwide price of gasoline was 53. 7 rupees per litre whereas the price of diesel was 32. 57 rupees per litre. The announcement regarding the increase in oil prices in Pakistan was made by The Oil and Gas Regulatory Authority. The new prices of gasoline and diesel were increased by 5 Pakistani rupees per litre and 3. 5 Pakistani rupees per litre respectively. The new prices came into effect on 1st March. In June 2008, the headline CPI (Consumer price Index) inflation reached a 30-year high of 21. percent YoY (Year over Year), while food inflation rose to record high of 32 percent. In SBPs (State bank of Pakistan) assessment, the share of structural weaknesses (like energy shortages, supply chain management issues, low productivity etc) dominate the supply side issues compared with the impact of monetary tightening. In order to offset oil prices shocks, the Saudi Government has reportedly decided to give Pakistan a 500 million-dollar grant instead of an oil import facility on one-year deferred payment. If the two countries had agreed on an oil credit facility on one year deferred payment, Saudi Arabia would be providing Pakistan a foreign exchange cushion of six billion dollars. This implicates that Saudi Arabia has agreed to extend a special oil facility to Pakistan (SOF) to the tune of USD $4. 82BN, roughly equating to 110,000 barrels of oil per day or 40 million barrels a year. Apart from this the UAE will continue to provide oil to Pakistan on extended payment terms. Besides, various Saudi companies have also agreed to invest billions of dollars in Pakistan’s infrastructure. The Saudi grant would be the second such concession during the current financial year as the Saudi government had provided 300 million dollars to Pakistan in March to control budgetary gaps. All these announcements should do a lot to boost Pakistan’s economic indicators. For one, it represents almost 50% of the trade deficit and almost instantaneously wipes out the bulk of it. For another, the FDI inflows as a consequence of infrastructure investments will, in the short term, provide additional US$ reserves and in the long term, will add significant capacity to the economy.