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Deteriorating economic conditions of Pakistan.

Today Pakistan is almost bankrupt and foreign donors have also refused to provide any more aid until Pakistani government cuts its defence expenditure. If the Pakistani government decides not to cut defence expenditure then the only other option it has is to keep on printing currency which will result into even higher inflation. Inflation is running at about 20 per cent according to many estimates. And my own prediction is that inflation can reach 100 per cent a year in 2 to 3 years. This means that price of every thing will double every year.

As an economist, I will like to inform the reader of the deteriorating economic condition of Pakistan and what impact that might have on him or her. Pakistani government is acquiring debt at the rate of Rs. 60,000 per second. And what is the government doing with this debt and other revenues raised by the government! Of every Rs. 100 that the government raises in revenues from taxes and custom duties etc., Rs. 40 are paid as interest on the debt that Pakistani governments have taken in the past. Rs. 40 are being spent on defence, while another Rs. 10 are spent on civilian administration. The remaining Rs. 10 are spent on education and training, health and nutrition, water supply, population planning, women development, rural development, science and technology, and building of roads, bridges, dams, etc., combined. To spend such a meager portion (only 10 per cent) of the budget on the 120 million people of Pakistan shows how "messed up" the priorities of our government are.

The enormous debt that Pakistan has taken in the past and present has not been spent on important development issues like health, education, and infrastructure, but mainly on defence. Pakistan spends less than 2 per cent of its budget on education and less than 1 per cent on health. The rest of the world by comparison spends about 20 per cent on health and education. As a result of low spending, 75 per cent of Pakistanis are illiterate and about 50 per cent do not have access to health care facilities and clean drinking water. Pakistan is ranked 116 of 127 countries in education and 100 of 127 countries in health by World Bank and IMF.

The biggest national security threat to Pakistan, in my opinion, is that of financial bankruptcy. In the worst scenario, financial bankruptcy can force government to close public schools and hospitals and temporary power shortages might become permanent. Moreover, clean drinking water might not be available to the people. Some tests conducted recently by international scientists showed that drinking water in Pakistan, in villages as well as major cities like Lahore, Rawalpindi, and Karachi, is contaminated with bacteria, chemicals, and lead. Studies have shown that lead can cause mental abnormalities, especially in children. Also, Pakistani government might even fail to pay its own employees. This is what happened in Zaire just recently where soldiers started looting and shooting after not getting paid due to lack of funds, killing thousands including the French minister to that country.

I recognize the legitimate defence requirements of the military, however, Pakistan cannot afford to spend more than what it earns. Pakistan's defence expenditure of about 40 per cent of revenues is one of the highest in the world. The rest of the world (including India) spends less than 20 per cent of its revenues on defence. This excessive defence spending has drained Pakistan's economy and has undermined our national security. Other countries that spend a high percentage of their budget on military include the former Soviet Union, Iraq, Yugoslavia, Ethiopia, and Somalia. Their experiences prove that economic weaknesses and military adventures only result in misery and tragedy to the people and destruction to the country involved. The best defence for any country is a strong economy. In surveys undertaken in US, a majority of Americans considered Japan instead of Soviet Union as the bigger threat. Why do they fear Japan - a country with a small military force and no nuclear weapons more than the former Soviet Union - a country with the largest military force in the world and 30,000 nuclear weapons! Because they understand that in this era economic soundness can do a country far more good than a large military machine. Soviet Union used to spend about 40 per cent of its resources on military but the military failed to save a country that was economically weak.

It is time that we change our priorities from non-productive defence expenditures to productive expenditures such as health, education, infrastructure, etc. Increase in productive expenditures today will help the economy grow in the future and therefore, more revenues can be raised by the government. This will in turn allow for increase in defence spending in the future without putting undue burden on the economy.

Today Pakistan is almost bankrupt and foreign donors have also refused to provide any more aid until Pakistani government cuts its defence expenditure. If the Pakistani government decides not to cut defence expenditure then the only other option it has is to keep on printing currency which will result into even higher inflation. Inflation is running at about 20 per cent according to many estimates. And my own prediction is that inflation can reach 100 per cent a year in 2 to 3 years. This means that price of every thing will double every year. Similar excessive government spending and mismanagement has resulted in inflation rates of 1000 per cent or more in Latin American countries in the past, and former Soviet Union even today. Many people in Pakistan do not understand how inflation is going to affect them. It is the duty of the economists and journalists to provide people with information that they need to defend themselves against inflation. Here I will provide a brief overview of inflation.

Lets say you can buy a pair of shoes today for Rs. 100. Instead you feel that the government is offering you an attractive interest rate of 15 per cent and decide to invest your Rs. 100 in a bank or a government savings certificate. Your Rs. 100 will become Rs. 115 after one year. However, if inflation rate is 100 per cent, the price of that pair of shoes will be increased to Rs. 200 from Rs. 100 in the same time period. Therefore, you have actually lost a significant portion of your investment. You would have been better off buying the pair of shoes today. With 15 per cent interest rates and about 20 per cent inflation rate even today people are actually losing the value of their money in banks without even knowing it.

If you invest your Rs. 100 at 15 per cent for 5 years, it will become Rs. 200 at the end of 5 years. However, your Rs. 200 will be worthless than Rs. 10 if inflation is running at 100 per cent. Many people in Pakistan keep their money at home rather than in a bank. They will suddenly find that their money is worth only a small fraction of what it was just a year or two before. Millions of people can loose their life time savings this way in a matter of a couple of years, all because of mismanagement and excessive government spending by the bureaucrats.

There are ways an ordinary person can reduce, if not eliminate, the impact of inflation on his/her money. One way is that instead of putting money in a bank or a government savings scheme invest the money in some business. If the investor does not have the know-how or time for a business, invest in the stock market. Studies have shown that business profits do not drop significantly with inflation because firms can increase the price of their products. Another way to protect against inflation is to buy something material rather than keeping cash. Property might not be the best investment to buy as the real value of property might fall during inflationary periods. Yet another way is to keep the money in a foreign currency, say dollars instead of rupees. Today $4 is equal to Rs. 100. However, with 100 per cent inflation there is a very good possibility that $ 4 will equal Rs. 200 after a year. And a final thing that people can do, and certainly should do, is to put pressure on the government to set its priorities straight. Cut defence and civilian government spending, privatize white elephants like WAPDA, PIA, Railways etc., and use this money to pay off the huge debt Pakistan owes before it becomes too late to avoid destruction of the country.
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Author:Waheed, Amjad
Publication:Economic Review
Date:Feb 1, 1993
Words:1444
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